They rely heavily on this Court's recent McLaughlin decision
that an employee-participant in a compulsory, noncontributory
option plan was not a Section 10(b) securities purchaser. See
76 F. Supp.2d 539, 544-45. Plaintiffs answer that, unlike
McLaughlin where plaintiff "did not receive her options as part
of a bargained-for exchange that required her to make an
affirmative investment decision," they repeatedly negotiated with
CUC to remain as Interval employees in return for favorable
option modifications and chose to remain with the company based
on these changes. Am. Compl. ¶ 6 ("Plaintiffs and others
similarly situated agreed to remain employees of post-Divestiture
Interval due to the modification of their rights and obligations
with respect to the Options"); Pl. Brf. at 6. Plaintiffs assert
that this bargain was first reflected in the August 1997 letter
sent to Interval employees. Defendants counter that the August
letter, though apparently the subject of some negotiation by Mr.
Nash on behalf of optionholders, did not result in any actual
changes. They look to section 5.2 of the October 1997 SPA which
made no mention of the August letter and unilaterally modified
the Interval/CUC options to provide that employee stock options
were "to vest and be exercisable for a period ending on the date
which is one year from the date following the closing date." Am
Compl. ¶ 37. Defendants also claim that plaintiffs gave no value
for these modifications by simply remaining in Interval's employ.
Noncontributory plan: Was there a "quid pro quo"?
To "purchase or sell" stock options, employee-purchasers must
"give up a specific consideration in return for a separable
financial interest with the characteristics of a security."
Foltz v. U.S. News & World Report, Inc., 627 F. Supp. 1143,
1157-58 (D.D.C. 1986) (citing International Brotherhood of
Teamsters v. Daniel, 439 U.S. 551, 559, 99 S.Ct. 790, 796, 58
L.Ed.2d 808 (1979)). Conversely, "[w]hen an employee does not
give anything of value for stock other than the continuation of
employment nor independently bargains for such stock," there is
no "purchase or sale" of securities. See McLaughlin,
76 F. Supp.2d 539, 544 (citing Compass Group PLC, SEC No-Action
Letter, 1999 WL 311797 (May 13, 1997)).
Plaintiffs rely on cases in which an employee was found to have
"purchased or sold" stock options in return for labor. See,
e.g., Yoder v. Orthomolecular Nutrition Institute, Inc.,
751 F.2d 555, 560 (2d Cir. 1985); Rudinger v. Insurance Data
Processing, Inc., 778 F. Supp. 1334 (E.D.Pa. 1991); Pl. Brf. at
6. These decisions are based on the concept that the options are
"a quid pro quo offered to induce plaintiff to enter into the
employ of [defendant]." Collins v. Rukin, 342 F. Supp. 1282
(D.Mass. 1972). Plaintiffs' pleadings in the present case,
however, do not fall within these precedents. Unlike Yoder and
Rudinger, where the employee changed his employment status in
return for individually bargained-for compensation including
stock options, the Wyatt plaintiffs remained as at-will
Interval employees with the same responsibilities and
compensation they had pre-divestiture.*fn2 See generally
McLaughlin, 76 F. Supp.2d 539, 544-45 (discussing Yoder and
Rudinger). Their circumstance does not change even if the Court
adopts plaintiffs' argument that the rejected August proposal
granted certain modifications to those who remained in the
employment of Interval for three months following divestiture.
Consequently, plaintiffs do not plead the existence of any
"specific consideration" or added value that they each provided
pre-divestiture period traceable to the option modifications.
See Bauman v. Bish, 571 F. Supp. 1054, 1064 (N.D.W.Va. 1983)
(finding no purchase or sale because "participants [in the option
plan] gave up no tangible, definable, specific value in exchange
for the stock"). Plaintiffs have not plead that they "changed
[their] way of life and [their] job — in return for the stock and
stock options available through the plan." Dubin v. E.F. Hutton
Group, Inc., 695 F. Supp. 138, 146-47 (S.D.N.Y. 1988); see also
Yoder, 751 F.2d at 560 (finding that employee "part[ed] with his
or her established way of life in return for a contract to issue
stock").*fn3 Neither did plaintiffs "g[i]ve up part of their
[existing] compensation package-a specific percentage of their
wages-in exchange" for the option modifications. See Hood v.
Smith's Transfer Corp., 762 F. Supp. 1274, 1290 (W.D.Ky. 1991).
Rather, it appears from the complaint that their compensation
remained the same, possibly supplemented by certain bonuses. Am.
Compl. Ex. B. Thus, "[l]ooking at the economic realities, it
seems clear" that, at most, these employees "sold" their labor
primarily to obtain a livelihood, not to make an investment. See
Daniel, 439 U.S. at 560, 99 S.Ct. 790.
Compulsory plan: Was there a voluntary "investment decision"?
To resay, an employee-participant in a compulsory,
noncontributory option plan is not a purchaser of securities
under Section 10(b). See McLaughlin, 76 F. Supp.2d 539, 544-45.
The Court has concluded that the Wyatt plaintiffs fail to plead
that they contributed anything of value in return for the
modifications. See supra Part B.1(a). The remaining issue is
whether the modifications were involuntary or "compulsory."
A hallmark of a "voluntary" plan is the ability of the employee
to make an "investment decision" to acquire the stock options.
See generally McLaughlin, 76 F. Supp.2d 539, 544 (citing Bauman
v. Bish, 571 F. Supp. 1054 (N.D.W.Va. 1983)) (an option plan is
compulsory where there is no affirmative investment decision by
the individual employee). "Where an employee or potential
employee acquires the right to options as part of his or her
bargained-for compensation, courts will infer that the employee
made an intentional decision to `purchase' the options." Id.
76 F. Supp.2d 539, 543 (citing Yoder v. Orthomolecular Nutrition
Institute, Inc., 751 F.2d 555, 560 (2d Cir. 1985); Rudinger v.
Insurance Data Processing, Inc., 778 F. Supp. 1334, 1338 (E.D.Pa.
1991)). Specifically, there must be an "individual affirmative
decision to give up a particular consideration in return for a
financial interest." See Childers, 688 F. Supp. at 1363
(emphasis added). See generally Mario Baeza & Laura Taylor,
The Applicability of Federal Securities Laws to Employee
Bargained-For ESOPs, 680 PLI/Corp. 703, 709-13 (Feb. 1990).
Despite the absence of any cognizable quid pro quo,
plaintiffs argue that the option modifications were "voluntary,"
in that they each made an affirmative "investment decision" to
accept the modified options. For support, they rely upon the
December 10, 1997 letter which arguably gave them the ability to
accept or reject the modifications later embodied in section 5.2
of the final SPA. Am. Compl. ¶ 43 (stating that plaintiffs chose
to accept the modifications but four other employees did not);
Ex. D at 2. This argument mischaracterizes what constitutes a
voluntary "investment decision."
When a group of employees is offered options (or option
modifications), an eligible employee does not make an individual
affirmative "investment decision"
if he or she chooses either to participate in the plan or to
reject it. Cf. Childers v. Northwest Airlines, Inc.,
688 F. Supp. 1357, 1363 ("Plaintiffs' participation was an incident of
employment and their only choice would have been to forego the
receipt of benefits entirely"); see also Isquith v. Caremark
Int'l, Inc., 136 F.3d 531, 534 (7th Cir.), cert. denied,
525 U.S. 920, 119 S.Ct. 274, 142 L.Ed.2d 226 (1998). Such is the case
here. The only alternatives available were pre-ordained by CUC.
Plaintiffs did not make any "individual affirmative
decision[s]" to trade "particular consideration in return for a
financial interest" merely because they plead that they could
have accepted a different form of modification. See Childers,
688 F. Supp. at 1363 (emphasis added).
In another attempt to enforce the argument that each made an
"investment decision," plaintiffs point to the negotiations
conducted on their behalf by Craig Nash; they remonstrate that
they had the ability to shape the terms of their plan rather than
merely accept or reject offered modifications. This argument is
overbroad. Even if the terms of a collective option plan are
bargained for by a representative on behalf of potentially
participating employees, a plan is not voluntary. See, e.g.,
Daniel, 439 U.S. at 553, 99 S.Ct. 790 (declining to find a sale
where union representatives negotiated the terms of an employee
option plan). The admittedly collective bargaining here negates
the existence of any individual, voluntary investment decision.
The option modifications were "guaranteed" to any who chose to
take them, see Dubin, 695 F. Supp. at 145; plaintiffs could
either accept or reject them and had nothing to do in return.
C. Section 20(a) Claims
Section 20(a) of the Exchange Act creates liability for
"controlling persons" in a corporation, 15 U.S.C. § 78t(a), and
imposes joint and several liability upon anyone who "controls a
person liable under any provision of" the Securities Exchange Act
of 1934. To maintain a claim under Section 20(a), the plaintiff
must establish (1) an underlying violation by a controlled person
or entity, (2) that the defendants are controlling persons, and
(3) that they were "in some meaningful sense culpable
participants in the fraud." Rochez Brothers v. Rhoades,
527 F.2d 880, 885 (3d Cir. 1975) (quoting Lanza v. Drexel & Co.,
479 F.2d 1277, 1299 (2d Cir. 1973)); see also McLaughlin,
76 F. Supp.2d 539, 548, 550 n. 5.
Plaintiffs plead underlying violations of Section 10(b) of the
Exchange Act by Cendant, the controlled entity, and allege that
various defendants acted as "controlling persons" of Cendant
within the meaning of Section 20 of the Exchange Act. The Court,
however, need not address these allegations. Plaintiffs' Section
10(b) claims, necessary underpinnings of Section 20(a) status,
have been dismissed for lack of standing. It follows then that
plaintiffs' Section 20(a) claims must be and are dismissed. See
Gunter v. Ridgewood Energy Corp., 32 F. Supp.2d 166, 178-79
(D.N.J. 1998); see also generally Shapiro v. UJB Financial
Corp., 964 F.2d 272, 279 (3d Cir. 1992); Kennilworth Partners
L.P. v. Cendant Corp., 59 F. Supp.2d 417, 430 (D.N.J. 1999);
McLaughlin, 76 F. Supp.2d 539, 548.
Defendants Cendant, E & Y, E. Kirk Shelton, Walter A. Forbes,
and Christopher McLeod's motions to dismiss the complaint's
Section 10(b) claims are granted. Defendants E & Y, E. Kirk
Shelton, Walter A. Forbes, and Christopher McLeod's motions to
dismiss plaintiffs' Section 20(a) claims are granted.
Defendants, Cendant Corporation ("Cendant"), Ernst & Young LLP
("E & Y"), E. Kirk Shelton, Walter A. Forbes, and Christopher
McLeod, move to dismiss the amended complaint filed against them
by plaintiffs, Jan Wyatt, Randy Kupper, and Maria L. Rodriguez,
on behalf of themselves and all others similarly situated. Having
heard oral argument on January 24, 2000 and for good cause shown;
It is on this day of January, 2000:
ORDERED that defendants' motions to dismiss the complaint's
Section 10(b) claims are granted, it is further
ORDERED that E & Y, E. Kirk Shelton, Walter A. Forbes, and
Christopher McLeod's motions to dismiss plaintiffs' Section 20(a)
claims are granted.