Campbell v National Media Corp

Fed. Sec. L. Rep. P 98,449
United States District Court, E.D. Pennsylvania.

William H. CAMPBELL,
v.
NATIONAL MEDIA CORPORATION and John J. Turchi, Jr.
No. CIV. A. 94-4590.
Nov. 3, 1994.

MEMORANDUM

DALZELL.
Plaintiff William H. Campbell brings this action under the Securities Exchange Act of 1934 against his former employer and its Chief Executive Officer for an alleged scheme to induce him to purchase stock of his corporate employer. Defendants move to dismiss and/or for summary judgment on the grounds that Campbell did not actually purchase any stock, did not allege actual damages, and, in any event, has asserted time-barred claims. We will deny the motion.

Background

This action arises out of a grant of stock options to a corporate executive. Over the course of his employment, Campbell was awarded several options to purchase the stock of his employer, defendant National Media Corporation, as compensation for his work as corporate secretary and vice-president for investor relations. Complaint, ¶¶ 13, 16, 22-25, 65. In particular, Campbell executed an employment agreement with National Media on May 6, 1992 which, inter alia, provided that: 7. Options. The Company will issue to Executive options to purchase at least 50,000 shares (the "Shares") of the Company's common stock $.01 par value pursuant to the Company's 1991 Stock Option Plan. These options shall expire five years from the date hereof and shall be exercisable as follows: (i) 16,667 shares upon execution of this Agreement (ii) 16,667 shares upon completion of the first year (iii) 16,666 shares upon completion of the second year May 6, 1992 Employment Agreement, appended to Declaration of Craig A. Streem, at Motion to Dismiss and/or for Summary Judgment, Exhibit C.

In January 1994, National Media, whose shares are traded on the New York Stock Exchange, was the target of a hostile takeover attempt by a competitor, ValueVision. Complaint, ¶ 70. According to Campbell, in order to entrench his control of National Media, defendant John J. Turchi, Jr., National Media's largest shareholder, Chairman of the Board, President and CEO, ordered Campbell to exercise the first two years of his stock options pursuant to the May 6, 1992 employment agreement. [FN1] Id., ¶¶ 1, 78. Since Campbell did not have the funds required to exercise two years' worth of options at $5.125 per share, he executed a promissory note to National Media for $170,836.00 on January 13, 1994, and National Media, in turn, loaned him the money for the stock purchase. Id., ¶¶ 82, 84; January 13, 1994 Promissory Note, appended to Declaration of Craig A. Streem, at Motion to Dismiss and/or for Summary Judgment, Exhibit A. The note permitted Campbell at any time to tender the shares of stock to the holder of the note in full satisfaction of the obligations of the note. Id. On April 6, 1994, the note was amended to provide that Campbell could no longer tender his shares in satisfaction of his debt. April 6, 1994 Amendment to Promissory Note, appended to Declaration of Craig A. Streem, at Motion to Dismiss and/or for Summary Judgment, Exhibit B.

Campbell alleges that he would not have exercised his options in January of this year but for Turchi's misrepresentations: "Defendant Turchi misrepresented that National Media would 'lend' Plaintiff the" money necessary to exercise his options, Complaint, ¶ 82; and "Defendant Turchi misrepresented to Plaintiff, in Defendant Turchi's office in Philadelphia, that if Plaintiff exercised these options at no cost to Plaintiff, that Defendant Turchi would direct National Media's Board of Directors to grant substantial stock options to Plaintiff, as well as further stock and cash consideration, for his loyalty to Defendant National Media after defeating ValueVision's hostile offer for control." Id., ¶ 83. 

In April of 1994, ValueVision terminated its hostile takeover attempt. Complaint, ¶ 86. Two months later, Campbell demanded that Turchi and National Media grant him additional stock options for his loyalty to the company, as Turchi had previously promised. Id., ¶ 90. Rather than honor his demand, National Media allegedly wrote to Campbell advising him that they assumed he had resigned from National Media and that he would have to repay the money he borrowed in accordance with the promissory note he executed. Id., ¶¶ 91-92.

On July 28, 1994, Campbell brought this action seeking in excess of $1.3 million in compensatory and punitive damages. Complaint ¶¶ 3, 94. Count I alleges a violation of Securities Exchange Commission Rule 10b-5 and § 10(b) of the Securities Exchange Act of 1934 by Turchi and National Media for inducing Campbell to purchase stock in National Media through misrepresentations and omissions of material facts. Id., ¶¶ 95101. Counts II to VI allege claims under Pennsylvania state law. Id., ¶¶ 108, 120, 128, 137, 143. Turchi moved to dismiss Count I for failure to state a claim upon which relief may be granted or, in the alternative, for summary judgment, and to decline to exercise our supplemental jurisdiction over the state law counts if we grant the motion as to Count I. National Media has joined Turchi's motion.

Relevant Standards

When considering a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), we must of course take all allegations contained in the complaint as true and construe them in a light most favorable to the plaintiff. H.J. Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 249 (1989); Rocks v. City of Phila., 868 F.2d 644, 645 (3d Cir.1989). When deciding a 12(b)(6) motion, if "matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56". Fed R. Civ. P. 12(b). Summary judgment is, in turn, appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). An issue is "genuine" only if there is a sufficient evidentiary basis on which a reasonable jury could find for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). A factual dispute is "material" only if it might affect the outcome of the suit under governing law, id. at 248, and all inferences must be drawn, and all doubts resolved, in favor of the non-moving party. United States v. Diebold, Inc., 369 U.S. 654, 655 (1962); Gans v. Mundy, 762 F.2d 338, 341 (3d Cir.), cert. denied, 474 U.S. 1010 (1985).

Legal Analysis

Defendants rely upon three arguments in their motion to dismiss and/or for summary judgment: (1) Campbell does not allege the purchase or sale of a security; (2) Campbell does not allege actual damages; and (3) Campbell's claims relating to acquisitions of shares of the company in 1989 are time- barred. Motion to Dismiss and/or for Summary Judgment, at 4-9. We address each argument in turn.

Section 10(b) of the Securities Exchange Act of 1934 prohibits the use of "any manipulative or deceptive" scheme "in connection with the purchase or sale of any security". 15 U.S.C. § 78j(b). Securities Exchange Commission Rule 10b-5, promulgated pursuant to § 10(b), forbids the making of "any untrue statement of material fact" in connection with the purchase or sale of securities. 17 C.F.R. § 240.10b-5. Both actions require a purchase or sale of a security as a predicate to an action. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, reh'g denied, 423 U.S. 884 (1975).  The 1934 Act defines the terms in question: "[t]he terms 'buy' and 'purchase' each include any contract to buy, purchase, or otherwise acquire." "The terms 'sale' and 'sell' each include any contract to sell or otherwise dispose of." 15 U.S.C. § 78c(a)(13) & (14). 

Defendants assert that the May 6, 1992 employment agreement, whereby National Media promised to issue to Campbell options to purchase 50,000 shares over three years pursuant to the company's 1991 stock option plan, does not constitute a "purchase" within the meaning of the Securities Exchange Act because Campbell did not offer any specific consideration for the granting of the options. Motion to Dismiss and/or for Summary Judgment, at 6. They contend that the employment agreement merely gave Campbell the right to purchase shares in the company, but that Campbell was never required to exercise those options. Id.

An employment contract whereby an employee exchanges his services in return for stock options has been held to constitute a purchase within the meaning of the 1934 Act. Yoder v. Orthomolecular Nutrition Institute, Inc., 751 F.2d 555, 561 (2nd Cir.1985) (holding that an employment agreement between a plaintiff employee and a defendant corporation that contains stock options can constitute a purchase under Rule 10b-5); Rudinger v. Insurance Data Processing, Inc., 778 F.Supp. 1334, 1338-39 (E.D.Pa.1991) ("An agreement exchanging a plaintiff's services for a defendant corporation's stock constitutes a 'sale' under the terms of the Securities Exchange Act."); Sanzone v. Phoenix Technologies, 1990 WL 50732, p. 14, 1990 U.S. Dist. LEXIS 4656, p. 13 (E.D. Pa. April 19, 1990) ("if established at trial, the purported agreement exchanging plaintiff's services as an employee for defendant corporation's stock constitutes a 'sale' under the terms of the Securities Exchange Act."). At this stage, we cannot on this record negate Campbell's employment contract, with option terms central to it, as a § 10(b) "purchase", 
given the elasticity of that term under the 1934 Act.

Defendants also claim that Campbell's exercise of his options to purchase shares in January 1994 does not constitute a "purchase". Motion to Dismiss and/or for Summary Judgment, at 78. They assert that National Media, and not Campbell, provided the funds to purchase the shares and that Campbell merely signed a promissory note. Id. Furthermore, since Campbell was free at any time (until the amendment of the note on April 6, 1994) to tender his shares back to the company in full payment of the note, Campbell did not provide any consideration and thus cannot be considered a purchaser. Id. 

The Supreme Court has expressly held that a pledge of stock to secure a loan is a "sale" of securities, Rubin v. United States, 449 U.S. 424, 431 (1981). This is an unsurprising result since the statute on its face forbids fraud "in connection with" the purchase or sale of securities. Superintendent of Ins. v. Banker's Life and Casualty Co., 404 U.S. 6, 12 (1971) ("Section 10(b) must be read flexibly, not technically and restrictively."). Campbell alleges, and now has taken an oath, to the effect that he was duped into executing a $170,000 note to exercise options that gained him 33,334 shares of National Media common stock that he would not, but for the alleged fraud, have bought. This is a quintessential 10b-5 claim. The interposition of an option contract between a buyer and the later acquisition of shares does not change this underlying 10b-5 reality, and it is settled that fraud "in connection with" the exercise of options is actionable under § 10(b). One-O-One Enterprises, Inc. v. Caruso, 848 F.2d 1283, 1288 (D.C.Cir.1988) (per Ginsburg, J.); Cf. Blue Chip Stamps, supra, 421 U.S. at 750-51. 

In addition, defendants move to dismiss and/or for summary judgment on the grounds that Campbell did not allege any actual damages. Motion to Dismiss and/or for Summary Judgment, at 8-9. This argument follows from their previous contention: if Campbell did not give any consideration for the options in May 1992 and did not pay to exercise the options in January 1994, then, as a matter of logic, he cannot claim damages from either purchase. Id. at 8. We agree with defendants that actual damages are an element of a securities fraud action, 18 U.S.C. § 78bb(a), Affiliated Ute Citizens v. United States, 406 U.S. 128, 155, reh'g denied 407 U.S. 916, and reh'g denied, 408 U.S. 931 (1972); however, we disagree with their premise that Campbell did not "purchase" any securities within the meaning of § 10(b) and Rule 10b-5. In any event, Campbell does allege actual damages: "[p]laintiff has suffered substantial damages in excess of $1.3 million." Complaint, ¶ 94. [FN2] Since we hold that Campbell purchased shares both in May 1992 and January 1994, he may proceed to a jury to try to prove his actual damages.

Finally, defendants claim that all of Campbell's claims relating to his acquisition of shares in 1989 are barred by the statute of limitations. Motion to Dismiss and/or for Summary Judgment, at 9. As previously stated, Campbell bases his security fraud action entirely on the May 6, 1992 and January 1994 stock transactions, Response to Motion to Dismiss and/or for Summary Judgment at 8, n. 3, and defendants' argument on this point is irrelevant.
An appropriate Order follows.

ORDER
AND NOW, this 3rd day of November, 1994, upon consideration of defendants' motion to dismiss for failure to state a claim and/or for summary judgment, and in accordance with the accompanying Memorandum, it is hereby ORDERED that the motion is DENIED.

FN1. Although the complaint chronicles certain stock purchases and grants of options as long ago as 1989, Campbell freely admits that "[p]laintiff has made no claim for securities fraud for its (sic ) purchase of stock in 1989. Plaintiff's claims for security fraud arise from the May 1992 and January 1994 agreement to purchase shares." Response to Turchi's Motion to Dismiss and/or for Summary Judgment, at 8 n. 3, and at 11.

FN2. It is worth noting that yesterday's closing price of National Media common stock was $4.50, below option price Campbell paid of $5.125.