In re Citigroup, Inc.
| Decision Date | 24 July 2008 |
| Docket Number | No. 07-1150.,No. 06-2565.,06-2565.,07-1150. |
| Parties | In re CITIGROUP, INC. Capital Accumulation Plan Litigation Richard H. Gilmore, on behalf of himself and all others similarly situated, Plaintiff, Appellant, v. Citigroup, Inc.; Citifinancial, Inc.; Travelers Group Inc.; Salomon Smith Barney Inc.; Salomon Smith Barney Holdings Inc.; Smith Barney Inc.; Salomon Brothers, Inc.; Primerica Financial Services, Inc.; ABC Corps., 1-100; John Does, 1-100, Defendants, Appellees. Jerrold E. Slutzky, on behalf of himself and all others similarly situated, Plaintiff, Appellant, v. Smith Barney Inc.; Salomon Brothers, Inc.; Citigroup Inc.; Travelers Group Inc.; Salomon Smith Barney Holdings Inc.; Salomon Smith Barney Inc.; Primerica Financial Services, Inc., Defendants, Appellees. |
| Court | U.S. Court of Appeals — First Circuit |
Bruce H. Nagel with whom Nagel Rice, LLP was on brief, for appellants.
Preeta D. Bansal with whom Thomas J. Dougherty, David S. Clancy, Kara E. Fay, William P. Frank, Sarah E. McCallum, and Skadden, Arps, Slate, Meagher & Flom, LLP were on brief, for appellees.
Before LIPEZ and HOWARD, Circuit Judges, and GELPÍ,* District Judge.
Invoking contract and other state common law claims, appellants Jerrold E. Slutzky and Richard H. Gilmore challenge appellee Citigroup, Inc.'s Capital Accumulation Plan ("CAP"), which gives certain employees the option of receiving part of their compensation as Citigroup stock, awarded at a discounted rate. The dispute arises over the provisions of that plan that require a participating employee to forfeit his unvested shares, and his equivalent monetary wages foregone to purchase those shares, if he voluntarily leaves the company before those shares have vested. Just two of many such challenges filed around the country, Slutzky's action, which originated in the Circuit Court for the Thirteenth Judicial Circuit of Florida, and Gilmore's action, which originated in federal district court in Georgia, were consolidated into a Multi-District Litigation proceeding administered in the District of Massachusetts. The district court dismissed all of appellants' claims, several on a motion to dismiss for failure to state a claim and the remainder on summary judgment.
After reviewing the terms of the CAP contract agreed to by appellants, we conclude that the forfeiture provisions are unambiguous, and thereby enforceable. That conclusion controls the disposition of the other claims as well. Thus, we affirm the district court's rejection of appellants' claims.
First adopted by the predecessor of Citigroup, Inc. in 1989, the CAP was, and remains, available to certain eligible financial and managerial employees of Citigroup and Citigroup's majority-owned subsidiaries.1 Designed to retain and motivate employees, the CAP offers an eligible employee the opportunity to receive restricted shares of Citigroup stock at discounted prices on a tax-deferred basis in lieu of cash compensation.2 The shares are subject to a two- or three-year vesting period after being awarded. During this period, the participating employee may not sell, assign, or otherwise transfer his shares. The participant is, however, entitled to receive regular dividends or dividend equivalents during the course of the restricted period and shall have the right to direct the vote of his shares. After the vesting period has lapsed, the employee receives the stock free of restrictions. If the employee resigns before his shares have vested, he forfeits both the non-vested restricted shares and the equivalent amount of compensation that he diverted to purchase those shares.3 The non-vested shares are subsequently cancelled and revert back to Citigroup.
Appellees maintain that the CAP provides substantial benefits to participating employees. They cite three specific benefits. First, a CAP participant receives stock at a 25% discount. Second, a plan participant may defer taxes on compensation invested in the CAP, pursuant to § 83 of the Internal Revenue Code, until after the purchased shares vest. Finally, a participant who receives restricted stock is entitled to dividends or dividend equivalents during the vesting period, and may also vote his shares.
This case initially involved challenges to two versions of the CAP program: the "payroll" program and the "bonus" program. Although the district court addressed these two plans separately below, the appellants do not raise any separate arguments in their brief with respect to the bonus program. Accordingly, we limit our discussion to the payroll program. Under the general terms of the payroll program, an eligible participant may elect to receive a portion of his earned compensation (typically between 5% and 25%), or none at all, in the form of restricted shares of Citigroup. The shares are purchased at a 25% discount from market value twice a year, with the market value calculated by averaging the month-end closing prices of the stock on the Composite Transaction Tape of the New York Stock Exchange for the six months preceding the month in which the awards are granted. The initial grant of stock under the CAP does not involve the physical delivery of the stock certificates to the participant. Instead, there is a book entry in the participant's name. If a participant voluntarily terminates his employment anytime during the six-month period when a portion of his monetary compensation has been forgone, but the restricted shares have not yet been purchased, the participant receives back his diverted monetary compensation, without interest.4 CAP participants divert approximately $300 million annually into the plan and, between 1996 to 2000, Citigroup retained approximately $365 million as a result of the CAP forfeitures.5
To participate in the payroll program, an eligible employee must initially sign an election form ("Election Form"), and must complete the form again for each six-month accrual period in which he wishes to divert a portion of his compensation to purchase restricted stock. Participation in the program is entirely voluntary. An eligible employee may decide to receive none of his compensation as stock. The Election Form contains specific language addressing the forfeiture of unvested shares and diverted funds in the event a participant voluntarily terminates his employment. One version of the form signed by Slutzky in 1993 states: 6
Prior to receiving the Election Form, an eligible employee also receives a CAP prospectus (the "Prospectus"), which includes an annex that sets forth the full terms of the CAP. On the issue of forfeiture, one version of the Prospectus states: "In the event a Participant voluntarily terminates his or her employment ... prior to the expiration of the Restricted Period, such Participant will forfeit all rights to his or her Restricted Stock."7 The next paragraph of the same Prospectus then highlights the distinction between an employee who voluntarily terminates his employment and one who is involuntarily terminated without cause or retires. It states: "A Participant who is involuntarily terminated without Cause prior to the expiration of the Restricted Period or who `retires' from employment ... will forfeit his or her Restricted Stock and receive in return, without interest, a cash payment equal to the amount of his or her compensation that had been paid in the form of Restricted Stock (without taking into account the benefit of any discount applied to the price of the Restricted Stock)." The language of the annex is nearly identical to that of the Prospectus.
After each six-month accrual period has ended and the restricted stock is awarded, the participating employee receives a Restricted Stock Award Agreement (the "RSAA"), which confirms the award of restricted stock to him and provides additional CAP terms. The RSAA also contains specific language addressing the forfeiture of non-vested shares. One version of the agreement provided to Slutzky states that "[i]f the Participant voluntarily terminates employment or if the Participant is involuntarily terminated for Cause, the Participant shall forfeit his or her Restricted Stock."8 The next paragraph of the same agreement, like the Prospectus, then highlights the distinction between an employee who voluntarily terminates his employment and one who is involuntarily terminated without cause. It reads: "If the Participant is involuntarily terminated without Cause or retires from employment, but does not fall within the definition of Retirement, the Participant shall forfeit his or her Restricted Stock and receive in return, without interest, a cash payment equal to the portion of his or her annual compensation that had been paid in the form of such forfeited Restricted Stock."
This multi-district litigation consists of two independent challenges to the CAP's forfeiture provisions. The first challenge was filed in Florida by Slutzky, a former employee of Smith Barney, Inc., who represents a class of similarly situated plaintiffs. Slutzky was employed by Smith Barney in Tampa, Florida as a financial consultant, and was later promoted to Vice President of Investments. He voluntarily terminated his employment in 1996 after electing to participate in the CAP payroll program from 1993 until 1995. During that time, he signed several Election Forms, agreeing to receive anywhere from 0-10% of his compensation in the form of restricted stock. When he left the company in 1996, some of his...
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