Boyce v. Soundview Technology Group, Inc.

• Decision Date: 29 September 2006
• Docket Number: Docket No. 05-1685-cv.
• Parties: Mark BOYCE, Plaintiff-Appellant, v. SOUNDVIEW TECHNOLOGY GROUP, INC. (formerly known as Wit Capital Group, Inc.), Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

464 F.3d 376

Mark BOYCE, Plaintiff-Appellant, v. SOUNDVIEW TECHNOLOGY GROUP, INC. (formerly known as Wit Capital Group, Inc.), Defendant-Appellee.

Docket No. 05-1685-cv.

United States Court of Appeals, Second Circuit.

Argued October 24, 2005.

Decided September 29, 2006.

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Thomas A. Reed, Boston, MA (Holtz and Reed, LLP; Frederick R. Kessler, Wollmuth Maher & Deutsch LLP, New York, NY, of counsel), for Plaintiff-Appellant.

Kevin T. Rover, Leza M. DiBella, New York, N.Y. (Morgan, Lewis & Bockius LLP, of counsel), for Defendant-Appellee.

Before: OAKES, POOLER, and SOTOMAYOR, Circuit Judges.

OAKES, Senior Circuit Judge:

Appellant Mark Boyce ("Boyce") appeals a jury's damages award, based on the breach of a stock option agreement, arguing that because of erroneous evidentiary rulings and erroneous jury instructions by the district court, the damages awarded are less than those to which Boyce is entitled.

For the reasons stated below, the damages judgment is vacated and the case remanded for a new trial on damages consistent with this opinion.

I. Background

A. Boyce's Employment with Defendant-Appellee

Plaintiff-Appellant Boyce is a former consultant of Defendant-Appellee Wit Capital Group, Inc.¹ ("Wit" or "the Company"), a company established to be the world's first investment bank and brokerage firm dedicated to arranging the offering and trading of securities through the Internet. Wit was founded in April 1996 by Andrew Klein, a former securities lawyer. Boyce began his consultation work for Wit on February 20, 1997. Like other employees of the Company, to entice him to join and in lieu of a large salary, Boyce was offered a stock option agreement in the Company as part of his compensation package. Stock option agreements offered to employees linked a portion of the employees' compensation to Wit's prospects for success. Under his stock option agreement, Boyce was given the option to purchase 800,000 shares of Wit stock at an exercise price of $1.00 per share. The exercise period for the option was ten years, except that, if terminated, Boyce had one year within which to exercise. In addition to other terms of employment, Boyce and Klein memorialized Boyce's stock option in a memorandum entitled "Working with WIT Capital"; the memo was signed and dated February 20, 1997, by both Boyce and Klein. Relevant to the discussion here, the fourth paragraph of the memo outlined the terms of Boyce's stock option. Continuing, the tenth paragraph of the memo, entitled "Termination," stated, inter alia: "The stock option grant (need draft copy of Incentive Stock Option Agreement) may be exercised within one year if my employment services and/or consulting relationship with the Company terminates completely."

After he made several requests, in early October 1997, Boyce finally received two copies of the Incentive Stock Option Agreement ("ISOA"). Significantly, the terms of the termination provision under the ISOA were markedly different than those previously agreed upon by Klein; the new provision read, inter alia:

8. Termination of Services. (a) In the event that (i) the Company or any subsidiary or parent thereof terminates your services with such entity "for cause" or (ii) you terminate your services with such entity for any reason whatsoever (other than as a result of your death or "disability" (within the meaning of Section 22(e)(3) of the Code)), the Option may only be exercised within one month after such termination, and only to the same extent that you were entitled to exercise the Option on the date your services [sic] was so terminated and had not previously done so.

Despite directions to sign and return the ISOA, Boyce never did so.²

In May 1998, Boyce's employment with Wit was terminated. He did not exercise his stock option at that time.

B. Wit's Initial Public Offering

Thereafter, Wit engaged in a series of private placements:³ between September 17, 1998, and November 19, 1998, Wit sold almost 6 million shares of series C stock at $1.00 per share to a small group of individual and institutional investors; between November 19, 1998, and March 8, 1999, Wit sold over 21 million shares of series D stock at $1.50 per share to both individual and institutional investors; and on March 26, 1999, Wit sold over 16.6 million shares of series E stock at $1.50 per share to The Goldman Sachs Group. Toward the end of its selling period of the series D stock, on February 11, 1999, Wit's board of directors agreed to seek public financing. On March 12, 1999, Wit issued a press release stating its intention to launch an initial public offering ("IPO") that it hoped to complete during the second quarter of the year; there was no indication regarding the amount of money Wit sought to raise nor any indication of the price at which Wit anticipated its stock to be offered.

On March 18, 1999, Wit filed a Form S-1 Registration Statement ("S-1") with the Securities and Exchange Commission ("SEC").⁴ Between its March 12th press release and its March 18th SEC filing, Wit's board of directors met several times to discuss various aspects of the IPO, such as the amount of money to be raised, the valuation of the company, and the choice of an underwriter of the IPO. Despite these meetings, though, Wit's March 18th S-1 did not include a per share public offering price or the number of shares to be offered through the IPO. It did, however, indicate a "proposed maximum aggregate offering price" of $80 million, with this figure supposedly being employed to estimate the registration fee. The Company's board of directors also met on April 1, 1999, at which time it resolved to sell up to 8,740,000 shares of common stock in its IPO. Minutes from the April 1st board meeting also evidence, "[t]he Board discussed the potential pricing range and pricing of shares in the IPO," and establish "[i]t was determined to adopt and appoint a Pricing Committee of the Board to assist in negotiating and approve the final pricing terms of the IPO with the managing underwriters."

Given the flurry of IPO-related activities and "the fact that the company . . . had investors that were putting money into the company and were going to take the company public, and the fact that the stock was going to be worth a lot more when it went public," Boyce decided to exercise his option to buy 800,000 shares of Wit stock at the $1.00 per share strike price. Thus, on March 31, 1999, Boyce sent the Company an $800,000 check together with an option exercise form. On April 5, 1999, Wit rejected Boyce's check and exercise form, informing Boyce that his attempted exercise was untimely as he had not exercised the option within 30 days of his termination.

Wit successfully brought the Company public on June 4, 1999; the Company sold 7.4 million shares of stock at $8.37 per share, raising $80 million. Wit's stock closed at $14.875 per share on its first day of public trading.

C. The Law Suit and Trial

On March 27, 2003, Boyce filed suit against Wit, alleging it was liable for breach of contract resulting from its April 5, 1999, refusal to allow Boyce to exercise his option. A focal point of the lawsuit became the value of Wit's stock. Significantly, both before and during the trial, Boyce sought to introduce evidence regarding the Company's stock valuation that was dated after April 5, 1999. For example, Boyce sought to introduce Wit's second amended S-1 filed with the SEC on May 4, 1999 (hereinafter, the "amended S-1"); documents showing the price of Wit's stock the day of its IPO, June 4, 1999; documents showing the range of prices at which Wit's common stock was publicly traded in 2003; expert testimony from an appraisal specialist who concentrated in the valuation of corporations, and who, at a hearing,⁵ testified that, in making his valuation he considered the IPO offering price⁶ as a "very good measure as to the market's perception of the fair value of the stock." Wit filed several motions in limine, seeking the exclusion of post-April 5, 1999, evidence. Ruling on the motions, the district court decided that, although it would allow evidence showing what "knowledgeable investors anticipated the future conditions and performance [of the company] would be at the time of the breach," it would not allow in any evidence related to events after April 5, 1999. The district court indicated it would take a "restrictive" view of Boyce's valuation expert; Boyce then expressed an intention to call his expert for rebuttal purposes, not as a principal witness.

In his case-in-chief, Boyce testified in his own behalf. He also called Lloyd Feller, Wit's senior vice president and co-general counsel; Feller testified, inter alia, that when he joined Wit in March 1999, he knew the Company was contemplating an IPO. Feller also testified that, as part of his compensation package, he was given stock options for which the Company gave him a loan so he could exercise those options. Boyce's counsel questioned Feller about the $80 million figure contained in the Company's preliminary S-1 filing, its amended S-1 filing, and in the final prospectus. Feller testified that the figure was a placeholder that eventually turned out to be the amount of money the Company raised.

When Boyce sought to introduce the Company's amended S-1 into evidence, the defendant objected and the objection was sustained. The district court refused admission of the amended S-1 because it was dated after April 5, 1999, despite containing financial information from before that date. In fact, when Boyce requested the admission of only the first page of the amended S-1 identified as rebuttal evidence, the judge characterized the $80 million figure as a "wishfulness number." The judge also limited Boyce's examination of Feller to Feller's pre-April 5th knowledge of the amount of money Wit sought to raise in its IPO. With his examination of Feller thus stymied, Boyce...