Dubin v. EF Hutton Group, Inc.

Decision Date07 September 1988
Docket NumberNo. 88 CIV. 0876 (PKL).,88 CIV. 0876 (PKL).
Citation695 F. Supp. 138
PartiesJames David DUBIN, Plaintiff, v. The E.F. HUTTON GROUP INC., E.F. Hutton & Company Inc., Defendants.
CourtU.S. District Court — Southern District of New York

Royer, Shacknai & Mehle, Washington, D.C., for plaintiff; Roger W. Mehle, of counsel.

Willkie Farr & Gallagher, New York City, for defendants; Louis A. Craco, Jonathan P. Wolfert, Jonathan D. Bassett, of counsel.


LEISURE, District Judge:

In early December 1987, Shearson Lehman Brothers Holdings Inc. entered into a negotiated agreement to merge with E.F. Hutton Group Inc. On December 7, 1987, Shearson commenced a tender offer for Hutton. The offer, as amended, closed at midnight on January 12, 1988. Thereafter, Shearson acquired ninety percent of the outstanding shares of Hutton common stock, and the contemplated merger was consummated on April 29, 1988.

This action is brought by plaintiff James David Dubin, a former E.F. Hutton Senior Vice President whose employment was terminated by Hutton on December 16, 1987, allegedly in anticipation of the Shearson-Hutton merger. In this action, plaintiff seeks to recover the value of 10,000 shares of Hutton stock, from Hutton's Equity Ownership Plan, allegedly owed to him pursuant to the terms of his employment agreement with the firm. Plaintiff has alleged five causes of action under the federal securities laws, including (I) failure to register the relevant securities in violation of Section 12(1) of the Securities Act, 15 U.S.C. § 77l(1); (II) securities fraud in violation of Section 12(2) of the Securities Act, 15 U.S.C. § 77l(2); (III) securities fraud in violation of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a); (IV) securities fraud in violation of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. 240.10b-5; and (V) securities fraud in violation of Section 15(c)(1) of the Exchange Act, 15 U.S.C. § 78o(c)(1), and SEC Rule 15c1-2, 17 C.F.R. 240.15c1-2. Plaintiff also has made two pendent state law claims for common law fraudulent misrepresentation and common law breach of contract.

The defendants have now moved, pursuant to Fed.R.Civ.P. 12(b)(1) and 12(b)(6), to dismiss the complaint for failure to state a claim under the federal securities laws.


Plaintiff alleges as follows1:

Plaintiff James David Dubin is a New York resident. Defendants E.F. Hutton & Company, Inc. ("Hutton") and the E.F. Hutton Group, Inc. ("EFH") are Delaware corporations with principal places of business in New York. Hutton is a registered broker-dealer under Section 15 of the Exchange Act, 15 U.S.C. § 78o.

On or about March 4, 1987, Richard S. Locke, an Executive Vice President of EFH and a Senior Executive Vice President and Managing Director of Hutton, contacted plaintiff by telephone to solicit his interest in employment with Hutton. At that time, plaintiff was employed as an Executive Vice President of Wertheim Schroeder & Co., Inc. Plaintiff worked in New York as head of Wertheim Schroeder's public finance department.

Plaintiff met Locke on March 6, 1987, to discuss Locke's employment proposal. During this meeting, Locke indicated that he wished to hire plaintiff to oversee Hutton's Public Power and Resource Recovery Group, which operated within Hutton's Public Finance Division. In order to persuade plaintiff to join Hutton, Locke offered not only a higher salary and bonus than plaintiff was receiving from Wertheim Schroeder, but also offered plaintiff 10,000 shares of EFH stock, which would be "awarded to Dubin under Hutton's Equity Ownership Plan ... immediately upon his employment." Complaint at ¶ 7. Plaintiff had no equity interest in Wertheim Schroeder. Locke told plaintiff that the Hutton Equity Ownership Plan stock that he was being offered "would be subject to periodic vesting over six years, so that plaintiff's continued employment with EFH for that time was necessary for him ultimately to receive all 10,000 shares." Complaint at ¶ 8. Locke allegedly represented that "all 10,000 of Dubin's shares would vest if there were a takeover of Hutton by another owner." Complaint at ¶ 9. According to the Complaint, this representation allayed plaintiff's concern about a possible loss of stock in the event his employment were to be terminated in connection with such a takeover.

Plaintiff did not accept Locke's offer of employment at the March 6 meeting, but told Locke he would consider the offer. On March 10, 1987, another inconclusive meeting between plaintiff and Locke took place. The discussion on that day focused on the bonus component of plaintiff's proposed compensation. On March 11, 1987, Locke made a new employment offer to plaintiff by telephone, the terms of which were identical to those of the March 6 offer, except that the bonus was higher. Plaintiff accepted the employment offer at that time.

On March 16, 1987, plaintiff received a letter from Locke, dated March 12, which confirmed the terms of the employment offer plaintiff had accepted. The letter stated, in relevant part:

I am pleased to confirm my offer to you to join E.F. Hutton as Senior Vice President, responsible for the Public Power Group of our Public Finance Division and reporting directly to me.
You will receive a base salary of $150,000 annually, and a guaranteed bonus of $400,000 for your first year of employment payable in the first quarter of 1988. We are recommending that the Compensation Committee of Hutton's Board of Directors approve your participation in our Equity Ownership Plan for an award of 10,000 deferred shares and 5,000 stock options. Of course, you will also be entitled to participate in all our officer-level benefits programs, which are described in the enclosed summary.

See Complaint, Exhibit A. With respect to the Equity Ownership Plan, the benefits summary attached to Locke's letter stated:

Equity Ownership Plan (EOP): As a key executive, you are eligible to participate in the EOP as recommended by management and approved by the Compensation Committee of the Board. This Plan is designed to align our executives' objectives with those of our shareholders, and to reward individual and team performance on a long term basis. The EOP provides for grants, which vest over a six year period, of (1) Equity Options granted as either incentive stock options (ISOs) or non-qualified options (NQSOs), and/or (2) Equity Shares which may be granted as restricted stock, deferred stock or deferred stock units.

See Complaint, Exhibit A.

As of March 16, 1987, plaintiff commenced his employment at Hutton. Up to this point, plaintiff was not furnished with a copy of the Equity Ownership Plan, a prospectus of the Plan, or any written description of the Plan, other than that contained in the benefits summary. Plaintiff claims that his only other knowledge of the Plan came from what Locke had told him during the discussions leading to his employment.

On June 22, 1987, plaintiff received an inter-office memorandum from John Tuosto of Hutton, see Complaint, Exhibit C, advising plaintiff that on April 3, 1987, the Compensation Committee of EFH's Board of Directors had awarded him 5,000 deferred shares as an Equity Grant under the Equity Ownership Plan, and a "Nonqualified Equity Option" of 2,500 shares at $41.75 per share. The award of deferred shares represented one-half of plaintiff's total award eligibility under the plan, and the memorandum indicated that plaintiff "will be eligible to receive the remaining fifty percent over the next five years." A prospectus for the Plan, dated May 6, 1985, and an "Equity Grant Agreement" relating to the Plan, accompanied the memorandum. The prospectus provided that equity shares of the type plaintiff had been awarded would vest after six years, and that vesting of such shares would be accelerated for all holders in the event of a Hutton "change of control." The prospectus also provided for a cash payment of a "change of control price" to holders of such shares within thirty days of the date of the change of control. The prospectus stated, however, that the Board of Directors could vote to determine that a change in ownership would not be considered a "change of control" for purposes of the Equity Ownership Plan. The prospectus also provided that an "audit committee" appointed by the Board of Directors could, "in its discretion, accelerate or otherwise amend the time or times any or all outstanding equity options are exercisable, any or all equity shares vest, and any or all periods of deferral end, except that no such acceleration or amendment will adversely affect the rights of any participant without the consent of such participant." See Complaint, Exhibit C.

On November 6, 1987, plaintiff's responsibilities at Hutton were increased when he assumed managerial control of the Public Enterprise Group, made up of the Public Power/Resource Recovery Group and the New Products Group.

On December 3, 1987, Shearson Lehman Brothers Holding Inc. and EFH announced that Shearson would takeover EFH, through a tender offer to be made by a Shearson subsidiary and a subsequent merger of that subsidiary into EFH. Both the tender offer, when consummated, and the merger, when approved by Hutton shareholders, would have constituted "changes of control" under the Plan. However, pursuant to the terms of a merger agreement between Shearson and EFH, Hutton's Board of Directors became required to determine that the prospective tender offer and ensuing merger not be regarded as "change of control" events for purposes of universal automatic vesting under the Equity Ownership Plan. Hutton's Board of Directors had made the "no change of control" determination required by the merger agreement on December 2, thereby purportedly nullifying the otherwise automatic vesting of all equity interests under the Plan. The Compensation Committee of Hutton's Board of Directors did vote, in this regard, that ...

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