Phansalkar v. Andersen Weinroth Co.

Full title: Rohit Phansalkar, Plaintiff, v. Andersen Weinroth Co., L.P., AW Co., Inc.…

Court: United States District Court, S.D. New York

Date published: Nov 1, 2001

00 Civ. 7872 (SAS) (S.D.N.Y. Nov. 1, 2001)

Opinion

00 Civ. 7872 (SAS)

November, 2001

For Plaintiff: Andrew J. Rossman, Esq., Samidh Guha, Esq., Sapna Mirchandani, Esq., Akin, Gump, Strauss, Hauer Feld, L.L.P., New York, New York.

For Defendants: Jaculin Aaron, Esq., Daniel Schimmel, Esq., Shearman Sterling, New York, New York.

OPINION AND ORDER

SHIRA A. SCHEINDLIN, U.S.D.J.

I. INTRODUCTION

Anderson Weinroth Co., L.P., is an investment banking firm. G. Chris Andersen and Stephen D. Weinroth are partners at this firm. Rohit Phansalkar was an investment banker at the firm from February 1998 until July 2000.¹ In September, 2000, Andersen Weinroth Co., AW Co., Inc., Andersen and Weinroth (collectively "AW") filed suit against Phansalkar. In October, 2000, Phansalkar filed suit against AW. On June 29, 2001, the two actions were consolidated. In a conference held by this Court on July 23, 2001, the case was bifurcated for trial purposes. The first phase of the trial addressed the following issues: (1) Phansalkar's claims regarding his shares of Millenium Cell (the "MCEL Shares"); (2) the amount of damages arising from these claims; (3) AW's defenses to these claims; (4) whether Phansalkar is liable to AW for any of its affirmative defenses; and (5) Phansalkar's defenses to AW's affirmative defenses. See JPTO ¶ 8.

1 Both parties agree that Phansalkar held the title of 'partner' while at AW but disagree as to whether he was actually a partner or simply an employee. See Joint Pre-Trial Order ("JPTO") ¶¶ 6a.2, 6b.7. For the purposes of this litigation, AW has stipulated that it will not dispute Phansalkar's contention that he was not actually a partner of AW. See id. For consistency and convenience, this decision will use the word 'partner' to refer to all AW employees who received the title 'partner'.

With respect to the MCEL Shares, Phansalkar alleges that: (1) AW unlawfully converted Phansalkar's 637,902 shares of MCEL by redistributing those shares from Phansalkar to Andersen and Weinroth; (2) in the alternative, Andersen and Weinroth breached their contract with Phansalkar to deliver the 637,902 shares to him; or (3) in the alternative, Andersen and Weinroth were unjustly enriched by retaining the MCEL Shares despite having previously accepted Phansalkar's payment for them. See id. ¶ 2.A.

With respect to the MCEL Shares, AW contends that: (1) Phansalkar's interest in MCEL was subject to vesting and that Phansalkar left AW before his interest vested; (2) Phansalkar's claims are barred by his acts of disloyalty, disobedience, self-dealing and other misconduct in violation of his duties as an employee and agent of AW; and (3) assuming AW entered into any contract or undertaking to sell Phansalkar an interest in MCEL, these agreements are voidable as a result, inter alia, of Phansalkar's fraud and deceit in concealing or failing to disclose information he had a duty to disclose, mutual mistake, and unilateral mistake. See id. ¶ 2a.A.

Jurisdiction is based on 28 U.S.C. § 1332 because Phansalkar and AW are citizens of different states and the amount in controversy exceeds $75,000, exclusive of interest and costs.

Personal jurisdiction is established pursuant to the New York long-arm statute, N.Y. C.P.L.R. § 302(a)(1), because the claims at issue arise from business that the parties transacted in New York. The Court also has personal jurisdiction over Andersen and Weinroth because they are residents of New York. Venue is proper in this district pursuant to 27 U.S.C. § 1391(a)(2) because a substantial part of the events or omissions giving rise to Phansalkar's claims occurred in this district. The parties agree that New York law controls.

A ten-day non-jury trial was held between September 4, 2001 and September 26, 2001.²

2 The proceedings were interrupted mid-trial by the tragic events of September 11, 2001.

II. FACTUAL BACKGROUND

The following facts are essentially uncontested.

A. Overview of AW

AW is a limited liability partnership founded by Andersen and Weinroth in 1996. It is a small firm that finds and creates investment opportunities for AW and its partners. See Transcript of Testimony of G. Chris Andersen ("Andersen Tr.") at 114; Transcript of Testimony of Stephen D. Weinroth ("Weinroth Tr.") at 798-99; Transcript of Testimony of Rohit Phansalkar ("Phansalkar Tr.") at 1026; Transcript of Testimony of Alan Brumberger, an AW partner, ("Brumberger Tr.") at 745. Investors in AW deals include both AW partners and outside investors. See Andersen Tr. at 116-117; Brumberger Tr. at 745-46; Phansalkar Tr. at 1010-11. AW receives fees arising out of the transactions in which it participates in the form of, among other things, cash fees, options, warrants, and/or carried interests (a percentage of the investors' profits). See Andersen Tr. at 144; Phansalkar Tr. at 1058-1059. Partners at AW generally do not receive a salary. See Andersen Tr. at 116. However, the firm pays for the partners' overhead and expenses and partners are provided with the opportunity to invest in AW deals and receive a portion of the non-cash compensation (generally securities) the firm receives from transactions (the "Partner Allocations"). See Andersen Tr. at 116-117; Transcript of Testimony of James Rawlings, an AW partner, ("Rawlings Tr.") at 506-507; Brumberger Tr. at 746. All decisions regarding the compensation of the partners are made jointly by Andersen and Weinroth. See Andersen Tr. at 116-17; Phansalkar Tr. at 1013, 1016.

AW's non-partner staff receive a salary, a discretionary bonus, and the opportunity to participate in an equity pool set up by the firm (the "Employee Pool"). See Andersen Tr. at 116. The securities in the Employee Pool represent either a portion of the carried interest awarded to the firm for a particular deal or, if there is no carried interest, a portion of the securities purchased by Andersen, Weinroth or other investors involved in the deal. See Exhibit ("Ex.") P09Y; Andersen Tr. at 327. Staff interests in the Employee Pool are subject to vesting: secretaries interests vest over two years and all other employees' interests vest over three years. See Andersen Tr. at 337; Phansalkar Tr. at 1017, 1019-22; Ex. P09Y.

Several AW employees serve as directors on companies with which AW does business. See Ex. P100. Having an AW representative on the board helps AW to monitor the companies for which it organizes investments. See Andersen Tr. at 132; Phansalkar Tr. at 1691. When AW employees serve on corporate boards, the expenses associated with board meetings (e.g. travel, food, hotel) are billed to AW as firm expenses. See Brumberger Tr. at 779-80; Phansalkar Tr. at 1688. AW reimburses the employee from its own funds and then seeks reimbursement from the company. See id. AW does not provide insurance or indemnification for its employees who serve on company boards See Brumberger Tr. at 783-84; Phansalkar Tr. at 1023-24, 1799-1800.

B. Phansalkar Joins AW

Phansalkar joined AW in or about February 1998. See JPTO, Undisputed Facts ("Undisputed Facts") ¶ 1. Phansalkar was given the title of "partner" although he was not legally a partner. See Ex. P02K; Phansalkar's Contentions ("Phansalkar Cont."), JPTO ¶ 6b, 6; AW's Contentions ("AW Cont."), JPTO ¶ 6a, 2. At that time, the other persons denominated "partners" at AW were Andersen, Weinroth and non-party Brumberger; subsequently, Rawlings joined the firm and was denominated a "partner." See Phansalkar Cont. 7; Andersen Tr. at 112; Rawlings Tr. at 500; Brumberger Tr. at 745; Weinroth Tr. at 797. AW agreed that, in addition to the Partner Allocations received by other AW partners, Phansalkar would receive an annual salary of $250,000. See Phansalkar Tr. at 1015-17; Andersen Tr. at 116-17, 126; Ex. P02K.

B. Relevant Events During Phansalkar's Employment at AW

1. Zip Transaction

Zip Global Network, Ltd. ("Zip") was a company based in India that was developing a payphone network in India. See Andersen Tr. at 129; Phansalkar Tr. at 1036-38. In 1999, Phansalkar introduced AW to an investment opportunity involving Zip. See Undisputed Facts ¶ 2. Phansalkar was the primary senior person at AW involved in that transaction. See Brumberger Tr. at 781; Phansalkar Proposed Findings of Facts ("Phansalkar Prop. Facts") ¶ 51. In mid-1999, AW raised approximately $10 million for Zip from AW partners and outside investors obtained by AW (the "Zip Transaction"). See Phansalkar Tr. at 1038-39, 1044. The Zip Transaction was funded through AW Zip, LLC ("AW Zip"), a vehicle created to invest in Zip. See Phansalkar Prop. Facts ¶ 52; AW Proposed Findings of Fact ("AW Prop. Facts") ¶ 22.

The Zip transaction closed in September, 1999. See Andersen Tr. at 129; Phansalkar Tr. at 1047. As a result of the Zip Transaction, AW Zip held 2,789,699 shares of Zip as well as options or warrants to purchase 1,171,429 shares of Zip. See Ex. P08W. AW received a cash fee for the transaction, as well as 600,000 warrants to purchase stock in Zip Telecom, an affiliate of Zip, for $2.58 per shares. See Weinroth Tr. at 870; Phansalkar Tr. at 1040-42; Ex. 306.

AW Zip also received the right to designate two directors to the Zip Board of Directors. See Phansalkar at 1047; Ex. P0W8. Phansalkar was selected to serve as one of AW Zip's designees to the Zip Board of Directors. See Ex. P0W8; Brumberger Tr. at 782; Phansalkar Tr. at 1047-48. Phansalkar was told that he would receive a $2,500 director's fee from Zip (the "Zip Fees"). See Phansalkar Tr. at 1050. In his capacity as a Director of Zip, Phansalkar also received (1) 40,000 options to purchase shares of Zip (the "Zip Options") and (2) the opportunity to purchase 600 shares of Zip Telecom Holdings, Ltd., a Zip affiliate (the "Zip Shares"). See Phansalkar Tr. at 1049-50, 1701; Exs. P08W, P08U, 139. When Phansalkar left AW, the firm selected Brumberger to replace him as AW Zip's designee to the Zip board. See Brumberger Tr. at 752-53; Phansalkar Tr. at 1704.

3. Osicom Private Placement

In 1999, Phansalkar introduced AW to an investment opportunity in Osicom Technologies ("Osicom"), a publicly traded technology company. See Andersen Tr. at 134-35; Phansalkar Tr. at 1056. The partners at AW were concerned about negative publicity related to Osicom's CEO, Chairman and founder, Par Chadha. See Andersen Tr. at 136, 142-43; Brumberger Tr. at 753; Phansalkar Tr. at 1061-64. Nevertheless, they decided to proceed with the investment.

On November 5, 1999, Phansalkar, on behalf of AW, and Par Chadha, on behalf of Osicom, entered into an engagement letter whereupon AW agreed to assist Osicom with a $7.5 million private placement of 679,483 newly-issued shares of Osicom common stock (the "Osicom Private Placement"). See Ex. P09A; Phansalkar Tr. at 1059-62; Andersen Tr. at 140. Pursuant to the engagement letter, AW would receive a cash fee of 4% of the transaction amount for the Osicom Private Placement as well as the right to nominate a person to the Osicom Board of Directors. See Ex. P09A; Phansalkar Tr. at 1060, 1065. AW also agreed to assist Osicom in identifying senior officers and directors for Osicom, its affiliates and subsidiaries. See Ex. P09A; Phansalkar Tr. at 1059-62; Andersen Tr. at 140.

FIBR Holdings, LLC ("FIBR"), a limited liability company, was created to pool the capital for the Osicom Private Placement. See Andersen Tr. at 140; Phansalkar Tr. at 1018, 1056-58; Ex. P01E. FIBR purchased 679,483 shares, or a 6% stake, in Osicom. See Ex. P04R. The Osicom Private Placement was consummated in December, 1999. See Undisputed Facts ¶ 3. Of the $7.5 million raised for the Osicom Private Placement, no funds came from direct investments by AW or any AW partners. See Phansalkar Tr. at 1018, 1056-57; Andersen Tr. at 143-44.

As a result of the Osicom transaction, AW earned a $300,000 cash fee and a carried interest of 20% of the profits resulting from FIBR's investment. See Undisputed Facts ¶ 3; Andersen Tr. at 144. In addition, FIBR Holdings was granted the right to designate one member to the Osicom Board of Directors. See Ex. P04R at 9; Andersen Tr. at 145; Phansalkar Tr. at 1065, 1067. On or about January 6, 2000, Phansalkar was appointed to the Osicom board as the designee of FIBR. See Undisputed Facts ¶ 4; Phansalkar Tr. at 1705.

In return for his service as a director of Osicom, Phansalkar was granted options to purchase 35,000 shares of Osicom common stock (the "35,000 Osicom Options"). See Phansalkar Tr. at 1067, 1070; Phansalkar Prop. Facts ¶ 94; AW Prop. Facts ¶ 62. Phansalkar also received directors fees of $3,000 for his attendance at Osicom board meetings (the "Osicom Directors' Fees"). See Phansalkar Prop. Facts ¶ 94; AW Prop. Facts ¶ 62. Phansalkar never reported his receipt of the Osicom Directors Fees or the 35,000 Osicom Options to AW. See Andersen Tr. at 146; Phansalkar Tr. at 1070-71, 1706.

4. Phansalkar's Headway Investment

In 1999, AW purchased a block of 500,000 shares in Headway, a public company (the "Headway Transaction"). See Ex. 200. Phansalkar paid $50,000 to purchase some of these shares (the "Headway Shares"). See id.; Phansalkar Prop. Facts ¶ 119; AW Prop. Facts ¶ 97. No vesting condition applied to Phansalkar's Headway Shares. See Undisputed Facts ¶ 6.

5. Phansalkar's 1999 Compensation

In December 1999, Phansalkar was advised of his Partner Allocations for transactions consummated by AW in 1999. See Phansalkar Tr. at 1079; Weinroth Tr. at 811; Ex. P11A. Phansalkar was allocated 20% of the warrants that AW received from the Zip Transaction, 17.5% of the carried interest in the Osicom Private Placement, and 7.5% of AW's interest in Treasure Master (another transaction AW completed in 1999). See Ex. P11A.

Around this time, Andersen and/or Weinroth also informed Phansalkar that AW would discontinue his $250,000 salary as of 2000. See Weinroth Tr. at 844; Phansalkar Tr. at 1084.

Phansalkar expressed his dissatisfaction with his Partner Allocations and the decision to discontinue his salary. See Weinroth Tr. at 864-65; Phansalkar Tr. at 1084. He also informed Andersen and/or Weinroth that he was considering leaving AW. See Phansalkar Tr. at 1088-89; Weinroth Tr. at 864-65.

6. The Millenium Cell Investment

In late 1998, AW committed to provide $1 million in equity for the development of MCEL, a small unit of GP Strategies Corporation ("GP Strategies") that was working on a concept for using sodium borohidryde as a source for hydrogen fuel. See Weinroth Tr. at 815, 817; Andersen Tr. at 320-21, 323. Investors in this first round of financing included both AW partners and outside investors (the "Original Investors"). See Andersen Tr. at 322-23. Andersen, Weinroth, Brumberger and Rawlings were all Original Investors and made their investment in their individual capacities. See Andersen Tr. at 321-324; Weinroth Tr. at 812-813; Ex. 13; Phansalkar Tr. at 1098; Phansalkar Prop. Facts ¶ 122. AW itself did not invest in the transaction. See Andersen Tr. at 325; Phansalkar Tr. at 1802. Phansalkar was offered the opportunity to invest in MCEL but declined at that time. See Phansalkar Tr. at 1098; Andersen Tr. at 323.

Andersen, Weinroth, Brumberger, Rawlings and Russell Steward, another AW employee, all served on the MCEL board of directors, with Andersen serving as Chairman and Steward serving as Secretary. See Andersen Tr. at 323-24; Exs. P050, P05P. The Original Investors contributed some of their personal holdings of MCEL stock to AW's Employee Pool. See Andersen Tr. at 327; Ex. P09Y.

Around December 1999, Andersen and Weinroth once again offered Phansalkar the opportunity to invest in MCEL (the "MCEL Offer"). See AW Prop. Facts ¶ 46; Phansalkar Prop. Facts ¶ 128. They offered to sell up to $100,000 worth of MCEL from their own positions at the same initial cost basis paid by the Original Investors (the "Original Price"). See AW Prop. Facts ¶ 46; Phansalkar Prop. Facts ¶¶ 128, 130. Phansalkar told Andersen and Weinroth that he would consider their offer. See Andersen Tr. at 328-30, 445; Weinroth Tr. at 823; Phansalkar Tr. at 1099-1100.

In January or February 2000, Phansalkar agreed to purchase a $60,000 interest in MCEL. See AW Prop. Facts ¶ 48; Phansalkar Prop. Facts ¶ 139. On or about February 16, 2000, Phansalkar wrote two checks for $30,000 in connection with MCEL, one for Andersen and one for Weinroth. See Undisputed Facts ¶ 8; Ex. P01A. Andersen and Weinroth accepted Phansalkar's payments and deposited the checks in their respective personal bank accounts. See id.

At the time Phansalkar purchased his MCEL Shares, MCEL had begun preparations for an Initial Public Offering ("IPO") which was expected to occur shortly. See AW Prop. Facts ¶ 49(c); Phansalkar Prop. Facts ¶ 140. In February, 2000, MCEL conducted a second round of interim financing to raise $500,000. See Ex. P050; Andersen Tr. at 358-59; Phansalkar Prop. Facts ¶¶ 154, 228; AW Prop. Facts ¶ 49(k). Each of the Original Investors invested at the Original Price. See Ex. P050; Rawlings Tr. at 519-20, 523; Andersen Tr. at 358-59, 445; Phansalkar Prop. Facts ¶¶ 154, 230. In May 2000, MCEL conducted another round of private financing that raised approximately $2.2 million. See Undisputed Facts ¶ 12.

In or about May 2000, Steward asked Phansalkar to identify any designees to whom he wished to transfer some of his MCEL Shares. See Transcript of Testimony of Russell Steward ("Steward Tr.") at 1872; AW Prop. Facts ¶ 59; Phansalkar Prop. Facts ¶ 241. Phansalkar instructed Steward that he wanted to designate portions of his MCEL Shares to various individuals. See AW Prop. Facts ¶ 59; Phansalkar Prop. Facts ¶ 242.

On May 25, 2000, MCEL filed an S-1 form with the SEC in anticipation of undertaking an IPO (the "MCEL S-1"). See Undisputed Facts ¶ 13; Ex. P03U. It indicates the number of shares and percentage ownership for principal shareholders, including Andersen and Weinroth. See Ex. P03U. Andersen and Weinroth's holdings do not reflect the 637,902 shares claimed by Phansalkar. See Undisputed Facts ¶ 14; Ex. P03U.

7. Sorrento Private Placement

In early 2000, Phansalkar worked on a private placement for Sorrento, a subsidiary of Osicom (the "Sorrento Private Placement"). See Phansalkar Prop. Facts ¶¶ 171-174; AW Prop. Facts ¶ 73. Sorrento Holding, LLC ("Sorrento Holdings"), a limited liability company, was created to pool investments for the Sorrento Private Placement. See Andersen Tr. at 140; Phansalkar Tr. at 1093. Sorrento Holdings invested $6.5 million in the Sorrento Private Placement, none of which came from AW. See Exs. 305, 306, P12M; Phansalkar Tr. at 1094. AW made a direct investment of $1.5 million in the Sorrento Private Placement to acquire 275,230 Sorrento shares. See Undisputed Facts ¶ 9. Half of that amount came from a loan, and the remainder came from personal investments by all of the AW partners. See id. Phansalkar personally invested $60,000 in the deal. See id. Phansalkar's Sorrento investment was not subject to vesting. See Andersen Tr. at 292; Phansalkar Tr. at 1097. To date, AW has not delivered any Sorrento shares to Phansalkar. See Undisputed Facts ¶ 10.

The Sorrento Private Placement closed on or about March 1, 2000. As a result of the Sorrento Private Placement, AW received a fee of 5%, or $1.95 million, which it chose to take in the form of Series A Preferred Shares. See Phansalkar Tr. at 1091-92, 1314; Transcript of Testimony of Lorretta Loomie, an AW employee ("Loomie Tr.") at 559-60; Exs. 305, 306, P12M. AW was also entitled to a carried interest of 20% on the profit earned on the investment made by Sorrento Holdings. See Phansalkar Tr. at 1093; Exs. 305, 306. AW was also awarded warrants and/or options for its effort in finding officers and directors for Sorrento. See Phansalkar Tr. at 1062, 1787-88; Andersen Tr. at 118; Exs. 305, 306, 200.

After the Sorrento Private Placement, Andersen was appointed to the Sorrento Board of Directors and Phansalkar was appointed to the Sorrento Advisory Board. The Sorrento Option Plan reflects a grant of 100,000 options to all Sorrento Board Members, including Andersen, as well as 300,000 options to Phansalkar in his capacity as a member of Sorrento's Advisory Board (the "300,000 Sorrento Options"). See AW Prop. Facts ¶¶ 83, 95; Phansalkar Prop. Facts ¶ 194; Ex. 343. The Sorrento Option Plan was approved by the Sorrento Board at a meeting held on April 6, 2000 (the "April 6th Board Meeting"). See AW Prop. Facts ¶ 85; Phansalkar Prop. Facts ¶¶ 194, 192.

8. Entrada Transaction

In Spring 2000, AW was involved in a transaction involving Sync Research, Inc. ("Sync") and Entrada Networks, a business unit of Osicom (the "Entrada Transaction"). See AW Prop. Facts ¶ 100; Phansalkar Prop. Facts ¶ 207. The Entrada Transaction involved a private placement of Sync shares to outside investors (the "Sync Private Placement"), followed by a merger of Entrada Networks into Sync (the "Sync/Entrada Merger"), thus forming a new company called Entrada Networks (the "merged entity"). Upon the Sync/Entrada Merger, Sync shares were converted into shares of the merged entity.

An investment vehicle called Entrada Holdings, LLC ("Entrada Holdings") was set up to pool funds for the Sync Private Placement. See Phansalkar Prop. Facts ¶ 206; AW Prop. Facts ¶ 100. On May 12, 2000, Entrada Holdings purchased $2.2 million worth of Sync shares. See Ex. P14J. The Sync/Entrada Merger was completed prior to August 31, 2000. See Undisputed Facts ¶ 11.

In the Entrada Transaction, AW earned a cash fee equal to a percentage of Entrada Holdings' investment in the Sync Private Placement and a 20% carried interest on the profits earned by Entrada Holdings. See Phansalkar Prop. Facts ¶ 211; Exs. 306, P14J. The transaction documents also provided that if the Sync/Entrada Merger were not completed by August 31, 2000, Entrada Holdings would be entitled to a seat on the Sync Board of Directors. See Undisputed Facts ¶ 11; Ex. P14J. Because the Sync/Entrada Merger was completed by August 31, 2000, Entrada Holding never received a seat on the Sync board. See Undisputed Facts ¶ 11.

On May 19, 2000, Sync filed an SEC document stating its intention to appoint Phansalkar to the board of directors of the merged entity. See Ex. 257. On June 15, 2000, prior to the Sync/Entrada Merger, Osicom granted Phansalkar options to purchase 50,000 shares of the merged entity subject to the completion of the Sync/Entrada Merger (the "50,000 Entrada Options"). See AW Prop. Facts ¶ 108; Phansalkar Prop. Facts ¶ 221; Ex. 296. In August, 2000, Osicom appointed Phansalkar to the board of directors of the merged entity. See AW Prop. Facts ¶ 107; Phansalkar Prop. Facts ¶ 215. He assumed this position following the Sync/Entrada Merger. See Phansalkar Prop. Facts ¶ 216; AW Prop. Facts ¶ 107. In September 2000, the merged entity granted 100,000 options to Phansalkar in his capacity as a Director of the company (the "100,000 Entrada Options"). See Phansalkar Prop. Facts ¶ 216; AW Prop. Facts ¶ 107.

9. AW's Loan to Phansalkar

In or about April 2000, Phansalkar asked AW for a loan of $100,000. See Phansalkar Tr. at 1676; Weinroth Tr. at 831. Andersen and Weinroth agreed to this loan, which became due in 2000. See Weinroth Tr. at 831; Phansalkar Tr. at 1668, 1124.

C. Phansalkar's Departure From AW

In early June, 2000, Phansalkar notified Andersen that he had been offered the position of Chairman and CEO of Osicom. See Undisputed Facts ¶ 15. Andersen responded favorably, telling Phansalkar that the offer "sounded to [him] like it was good thing. It would be good for Osicom. It would be good for the investors and it would be good for [AW]. . . ." Andersen Tr. at 159; see also Phansalkar Prop. Facts ¶ 269; Andersen Prop. Facts ¶ 111. Phansalkar informed Andersen that he believed his work at Osicom would take approximately 18 to 24 months, and Andersen encouraged Phansalkar to return to AW after his tenure at Osicom. See Phansalkar Prop. Facts ¶¶ 270, 275; AW Prop. Facts ¶ 111.

On or about June 6, 2000, Phansalkar orally accepted the Osicom Offer. See AW Prop. Facts ¶ 110; Phansalkar Prop. Facts ¶ 272. On June 9, 2000, he signed an employment agreement with Osicom. See Phansalkar Prop. Facts ¶ 273; AW Prop. Facts ¶ 110; Ex. P02H. Phansalkar's employment agreement stated that he would receive an annual salary of $250,000. See Exs. P02H, P04K.

It also stated that, in the event of a successful acquisition of Osicom, Phansalkar would receive a cash fee of 1/4% of the transaction value if the deal closed within a six-month period. See id.; Phansalkar Prop. Facts ¶ 266; AW Prop. Facts ¶ 150(k).

The employment agreement also stated that Phansalkar would receive options to purchase 450,000 shares of Osicom common stock (the "450,000 Osicom Options"). See Ex. P04K.

2. The June 19th Memo

Upon Phansalkar's resignation from AW, Phansalkar and Andersen made an effort to memorialize the terms of Phansalkar's interests in AW deals and other items regarding his departure from AW. See Andersen Tr. at 160; Phansalkar Tr. at 1120. On or about June 19, 2000, Andersen drafted a memo to file which was then typed by his secretary and given to Phansalkar (the "June 19th Memo"). See Phansalkar Prop. Facts ¶ 302; AW Prop. Facts ¶ 114; Ex. 305. Phansalkar made several handwritten comments on the Memo and faxed it back to Andersen's secretary who incorporated the comments into the Memo. See Phansalkar Prop. Facts ¶¶ 303, 306; AW Prop. Facts ¶ 114; Ex. 303. There are several versions of the Memo with handwritten comments made by Phansalkar. See Exs. 303, 306, P01I.

The June 19th Memo discusses Phansalkar's interests in various AW deals. See id.; Ex. 305. All versions of the Memo reiterate Phansalkar's deal allocations for 1999 transactions: 20% of the warrants that AW received from the Zip Transaction, 17.5% of the carried interest in the Osicom Private Placement, and 7.5% of AW's interest in Treasure Master. See id. All versions of the Memo state that Phansalkar contributed $50,000 to the purchase of 500,000 "gross shares" of Headway, and that his "investment of $60,000 [in the Sorrento Private Placement] results in direct ownership of 8% of shares remaining after repayment of debt, fees and expenses etc." Id. All versions of the Memo include a provision drafted by Andersen stating that part of the firm's interest in the Sorrento transaction is the 100,000 directors' options he and Phansalkar each received. See id. None of the revisions proposed by Phansalkar mention his ownership of additional options in the companies listed in the Memo. See id. In all versions of the Memo, there are blank spaces with respect to the following terms: (1) Phansalkar's share allocations for the 2000 Sorrento Transaction; (2) Phansalkar's interest in the "directors and officers warrants and options" resulting from the Sorrento deals; and (3) Phansalkar's allocations for the Entrada Transaction. Andersen also left a blank space for the "total expenses related to the share acquisition" for the Headway transaction. Id.

Andersen drafted Paragraph Four of the Memo, which discusses MCEL. He wrote:

4. MILLENNIUM CELL

In December, 1999 Steve I agreed to sell 637,902 shares to RP from our own positions for $60,000. In May, 2000 AW sold shares for the company at $2.90/share. Based on that price 637,902 shares would have been $1,849,916. Upon the conclusion of the IPO now in registration (est. price of $10.00 or $6,379,020 value) the shares will be distributed.

Id. Phansalkar made no revisions to this paragraph. See id.

Andersen drafted Paragraph Ten which he titled: "Vesting of holdings and other ongoing items." Id. Paragraph 10(i), drafted by Andersen, states:

i. Vesting should continue so long as you are at Osicom since we should consider that "of service" to AW. When you wind that up, you should come back.

Id.; see also Andersen Tr. at 471; Phansalkar Tr. at 1128-29.

Phansalkar made no revision to the heading of Paragraph Ten or to Paragraph 10(i). See id. However he did draft another paragraph, Section 10(ii), which states:

ii. At year end 1999 SDW and GCA informed UP that monthly cash compensation to RP is being eliminated as of 1/1/2000 therefore, all vesting for transactions will be immediate if UP elects to leave AW.

Ex. 305. The Memo does explicitly state which investments are subject to vesting, but the parties agree that Phansalkar's cash investments in Headway and Sorrento were not subject to vesting. See Undisputed Facts ¶ 6; AW Prop. Facts ¶ 118; Phansalkar Prop. Facts ¶ 323.

3. Decision to Remove Chris Andersen From

Sorrento Board Around May or June 2000, Phansalkar learned that the board of directors of Sorrento's parent company, Meret (also an Osicom subsidiary), had decided to remove Andersen from the Sorrento Board. See AW Prop. Facts ¶¶ 137, 138; Phansalkar Tr. at 1141, 1670. Phansalkar did not inform Andersen of the decision at this time. See Phansalkar Tr. at 1671; Andersen Tr. at 301. In late June, in a telephone conversation with Phansalkar, Andersen inquired about any changes to the Sorrento Board and Phansalkar mentioned the planned removal of Andersen. See Phansalkar Prop. Facts ¶¶ 242, 344; AW Prop. Facts ¶ 139; Andersen Tr. at 301-302, 488; Phansalkar Tr. at 1144. Phansalkar also informed Andersen of the Board's decision to replace Andersen with Greg Grodhaus and to replace Georges Wanet, another director, with Phansalkar. See Andersen Tr. at 301-302; Phansalkar Tr. at 1144. Andersen was angered and accused Phansalkar of trying to replace him on the Board. See Andersen Tr. at 301; Phansalkar Tr. at 1144. Phansalkar denied this accusation and said he thought that Chadha had already informed Andersen of these proposed changes. See Andersen Tr. at 301; Phansalkar Tr. at 144.

4. Reallocation of Phansalkar's MCEL Shares and the MCEL IPO

In June or July 2000, Weinroth instructed Steward to redistribute Phansalkar's MCEL Shares to himself and Andersen. See Steward Tr. at 1880; Andersen Tr. at 354; Weinroth Tr. at 938; Phansalkar Prop. Facts ¶ 356. The MCEL IPO took place on August 9, 2000. See Ex. 345. Three million shares were sold at an initial price of $10 per share.³ See id.; McAntee Tr. at 877. Morgan Keegan Co., the lead underwriters for the IPO, required MCEL to provide lock-up agreements from a number of shareholders.⁴ See Exs. 344, 345, 339; McAntee Tr. at 877, 880; Weinroth Tr. at 831.

3 This number excludes the options allocated to the underwriters. See Transcript of Testimony of Neal McAntee, analyst for Morgan Keegan Co., ("McAntee Tr.") at 877.

4 The lock-up agreements prohibited the shareholders from selling their shares for a specified amount of time following the IPO.

Phansalkar was never asked to sign a lock-up agreement and Phansalkar never asked if he was expected to sign a lock-up agreement. See AW Prop. Facts ¶ 161; Phansalkar Prop. Facts ¶ 371; Phansalkar Tr. at 1216-1217; Ex. 344.

In a letter dated September 6, 2000 (the "September 6th Letter"), Andersen wrote to Phansalkar: "As we have discussed and as Stephen reiterated in your recent conversation, you are aware that you have no position in Millennium Cell." Ex. PO1C; see also Undisputed Facts ¶ 16.

In that letter, Andersen also informed Phansalkar that AW would offset the $60,000 Phansalkar paid for his MCEL interest against the $100,000 Note. See Undisputed Facts ¶ 16; Ex. P01C. To date, AW has not delivered any MCEL Shares to Phansalkar.

5. Sorrento IPO

When he was employed at AW, Phansalkar conveyed to AW and other investors that Osicom was moving towards an IPO for Sorrento. See Exs. 88, 115, 127; Phansalkar Tr. at 1306; AW Prop. Facts ¶ 74. In July and August 2000, while employed at Osicom, Phansalkar participated in negotiations with Bear Sterns, the lead underwriters for the planned Sorrento IPO, regarding the placement of Osicom's shares of Sorrento in a voting trust (the "Voting Trust Agreement"). See Phansalkar Prop. Facts ¶ 288; AW Prop. Facts ¶¶ 150, 151. In August 2000, Bear Sterns went to its commitment committee to get final approval to do the IPO. See AW Prop. Facts ¶ 150(o); Phansalkar Prop. Facts ¶ 289. Bear Sterns decided not to go forward with the IPO at that time. See Ex. P17V; AW Prop. Facts ¶ 150(o); Phansalkar Prop. Facts ¶ 291. Instead of pursuing the Sorrento IPO, Osicom completed a transaction which combined the Sorrento and Osicom boards. See AW Prop. Facts ¶¶ 144, 150(f),(g),(p); Phansalkar Prop. Facts ¶ 291; Phansalkar Tr. at 1184-85.

III. FINDINGS OF FACT

The following constitutes the Court's findings of fact with respect to relevant contested issues.

A. Phansalkar's MCEL Contentions

1. AW's Vesting Policy for Partners

Phansalkar contends that he was unaware of any vesting policy with respect to partners. See Phansalkar Tr. at 1017-18, 1020. This contention is rejected. Phansalkar knew that at least some of his interests in AW transactions were subject to vesting. Throughout the June 19th Memo, Phansalkar made a number of changes to ensure that the language correctly characterized the relevant interests. See Phansalkar Tr. at 1261; Exs. 303, 305, 306, P01I. However, Phansalkar did not delete the vesting provision drafted by Andersen or otherwise indicate that he thought his interests were not subject to vesting. See id. Instead, he suggested an additional provision that also used the term 'vesting'.⁵ See Ex. 305; Phansalkar Tr. at 1136.

5 Phansalkar claims that he thought that "vesting" referred to the "monetization" of investments before they were vested. Id. at 1133-34. However, this explanation is unconvincing because Phansalkar clearly knew there was a difference between 'vesting' and 'monetization.' As a seasoned investment banker, Phansalkar was quite aware of what the term "vesting" meant. See Phansalkar Tr. at 1244-45. Indeed, at his deposition, Phansalkar stated that at his prior job he received interests that were not subject to vesting but which would only be distributed when they were "monetized." See id. at 1277-79.

Under AW's vesting policy for partners, Partner Allocations would vest over three years. See Andersen Tr. at 337-38; Weinroth Tr. at 811-812, 844-45; Rawlings Tr. at 504; Brumberger Tr. at 758-60, 763-64. Although the vesting policy for partners was not reduced to writing, the few partners at this small firm knew about and understood the policy. See id. Partner allocations would continue to vest as long as a partner remained at the firm, with one-third vesting at the end of each year. See Weinroth Tr. at 845.

However, an interest would immediately vest if there was a "liquidity event," such as an IPO. See Andersen Tr. at 337; Brumberger Tr. at 758; Weinroth Tr. at 846.

2. Phansalkar Considered the MCEL Offer a Bargain

Phansalkar contends that he paid fair market value for his MCEL Shares. See Phansalkar's Supplemental Trial Memorandum ("Phansalkar Supp. Tr. Mem.") at 9-10. AW contends that he paid a bargain price because, at the time of his purchase, the market price for those Shares was significantly greater than the Original Price. See AW Prop. Facts ¶ 49.

When Phansalkar purchased the MCEL Shares, MCEL was still a development stage company, see McAntee Tr. at 890-92; Phansalkar Tr. at 1102-03; but it had met or exceeded its milestones and the technology was progressing, see Andersen Tr. at 324-25; Weinroth Tr. at 819-20, 827; Rawlings Tr. at 509. Because the markets were enthusiastic about fuel cell companies, see McAntee Tr. at 889-90, MCEL was taking steps to prepare for a potential IPO, see Exs. P05N, P050; Andersen Tr. at 326; Transcript of Testimony of Alan Gottesman, consultant who helped draft MCEL business plan, ("Gottesman Tr.") at 314-319; McAntee Tr. at 883, 887; Transcript of Testimony of William Osborne, MCEL investor, ("Osborne Tr.") at 593-94. Phansalkar testified that he was aware that MCEL was taking steps towards an IPO. See Phansalkar Tr. at 1660.

MCEL's progress and prospects were widely discussed at partner meetings and throughout the AW offices, because nearly all the AW partners and employees had an interest in the company. See Andersen Tr. at 326. Moreover, Phansalkar testified that, before making his decision to purchase the MCEL Shares, he consulted with Rawlings and Steward about MCEL's progress and prospects. See Phansalkar Tr. at 1102-03; Rawlings Tr. at 513-14. In response to his inquiry, Rawlings told Phansalkar "it was an obvious yes decision." Rawlings Tr. at 513.

Phansalkar testified that he was "very selective" when choosing whether or not to invest in AW deals, and refused the opportunity to invest in a number of AW deals, including transactions in which he was involved. Phansalkar Tr. at 1027. He testified that one of the reasons he refused to invest in MCEL at the outset was the high level of risk associated with the company. See id. at 1098-99. By December 1999, however, he believed the opportunity to invest in MCEL at the Original Price was "a good deal." Id. at 1657. He testified that, although the MCEL investment was "far from a done deal," and still involved substantial risk, the company now had "a lot of promise" and was "slightly less risky" than it had been when he was offered the opportunity to invest in the past. Id. at 1102, 1651-1652. Accordingly, when Phansalkar invested in MCEL, he believed he was purchasing his shares at a below market price.

3. The MCEL Offer was Made to Phansalkar in Connection with his Service at AW

AW contends that the MCEL Offer was made to Phansalkar in recognition and consideration of his service at AW. See AW Cont. 50. Phansalkar contends that the MCEL Offer was "personal" in nature and that it was made because MCEL was in dire need of additional funding. See Phansalkar Prop. Facts ¶¶ 127, 131.

Phansalkar testified that the MCEL Offer was made to him in the meeting at which he was informed of his 1999 compensation. See Phansalkar Tr. at 1646-47. He testified at his deposition, and agreed at trial, that MCEL was held out as one of the "potential benefits" of staying on at AW. Id. at 1644-45. Weinroth did not recall the offer being made as part of Phansalkar's 1999 compensation, or in response to Phansalkar's expression of dissatisfaction with his 1999 compensation. See Weinroth Tr. at 865-66. Nevertheless, Andersen and Weinroth both testified that the offer was made to provide Phansalkar with an incentive to stay at AW and in contemplation of Phansalkar staying on at the firm. See Weinroth Tr. at 826-27, 962, 992; Andersen Tr. at 329-331, 348-50. Both Andersen and Weinroth testified that the offer was made in consideration of Phansalkar's status and service as a partner and in contemplation of him remaining at the firm. See Andersen Tr. at 348-50; Weinroth Tr. at 962.

Phansalkar himself admitted that, around December 1999, AW was anxious to keep him at AW. He testified that the Sorrento Private Placement was expected to be quite lucrative for the firm and that if he had left AW the firm might have lost the Sorrento deal. See id. at 1089-91, 1793-94. He admitted that the "the option to invest in companies like [MCEL]" was a benefit of being at AW, and that such opportunities were considered "pluses" or "goodies" of working at AW. Id. at 1766-68.

Based on the totality of the credible evidence, I find that Andersen and Weinroth offered Phansalkar the opportunity to invest in MCEL at the Original Price because he was an employee at AW and they wanted to encourage him to stay at AW. If Andersen and Weinroth merely sought to raise funds for MCEL, they would have made the same offer to a number of potential investors at this time. To the contrary, Phansalkar was the only person who was not an Original Investor who was ever offered the opportunity to purchase at the Original Price. See Andersen Tr. at 334; Weinroth Tr. at 822; Brumberger Tr. at 757; Phansalkar Tr. at 1656.

4. Phansalkar's MCEL Shares Were not Subject to Vesting

AW claims that Phansalkar's MCEL Shares were subject to vesting and that he forfeited those Shares when he left AW prior to the MCEL IPO. See Andersen Tr. at 612-13, 331-32, 342, 337; Weinroth Tr. at 822. Phansalkar insists that he owned the MCEL Shares outright and that he was never told that his MCEL Shares, or any other cash investment, would be subject to vesting. See Phansalkar Tr. at 1101, 1103, 1026, 1088-89, 1099. Phansalkar's testimony is credible for the following reasons:

First, in the history of AW, no other cash investment had been subject to vesting. See Weinroth Tr. at 923; Andersen Tr. at 344-45; Rawlings Tr. at 517; Brumberger Tr. at 769-70; Loomie Tr. at 555. It is undisputed that no vesting condition applied to the only other cash investments Phansalkar made in an opportunity obtained from AW — namely, his purchase of Headway shares and his cash investment in Sorrento. See Undisputed Facts ¶ 6; Andersen Tr. at 156-157, 353-354.

Second, there is no writing articulating any vesting requirement with regard to the MCEL Shares. See Andersen Tr. at 334, 356-57; Weinroth Tr. at 926-929. AW made it a habit of memorializing the terms of other investments in writing. See Ex. 200. Indeed, the Headway transaction and the Sorrento transaction — Phansalkar's other cash purchases of shares from AW — were memorialized in writing. See id. If, as Andersen contends, the MCEL transaction was "different," "without precedent," and "a special exception," one would expect the terms of the transaction to be memorialized in some writing. Andersen Tr. at 332, 341. However, there is no contemporaneous writing reflecting a vesting condition.

Nor do subsequent documents mention a vesting condition with respect to Phansalkar's MCEL Shares. AW maintained schedules indicating ownership interests in MCEL ("MCEL Ownership Schedules").⁶ See Steward Tr. at 1843; Exs. P01B, P04B, P04D. The MCEL Ownership Schedules dated May 19, 2000 and May 31, 2000 reflect Phansalkar's "shares owned" as being 637,902 shares. See Exs. P01B, P04B; Steward Tr. at 1862, 1871. The schedules include several footnotes explaining conditions applicable to particular investors. See Exs. P01B, P04B. However, there are no footnotes next to Phansalkar's name or his designees' names, and no indication on the Schedules that Phansalkar's or his designees' interests are subject to different rules or conditions than other investors. See id.; Steward Tr. at 1962. Steward, who maintained the Schedules, was never instructed that any vesting condition applied to Phansalkar's shares. See Steward Tr. at 1858.⁷

6 Prior to the MCEL IPO, the schedules were the only documents that tracked ownership in MCEL. See Steward Tr. at 1843, 1851. Although maintained by Steward, the information reflected in these schedules was provided by AW partners and no Schedule was distributed outside the firm without being reviewed and approved by an AW partner. See id. at 1846-48, 1854. These Schedules were provided to investment bankers and lawyers who prepared SEC filings for MCEL. See id. at 1844-46.

7 Andersen testified that share ownership figures in the MCEL Schedules and the preliminary registration statement were not intended to show current ownership, but to reflect what the share ownership would be as of the IPO. See Andersen Tr. at 455-56. However, the evidence presented at trial is contrary to this assertion. Steward, who served as Secretary of MCEL, testified that the schedules specifically use the word "actual amounts" to indicate that the amounts listed do not include shares that might be owned in the future, such as options. See Steward Tr. at 1863. Steward also testified that he believed that the MCEL Schedules reflected Phansalkar's share ownership at that point in time. See id. at 1868.

Similarly, the MCEL S-1 filed on May 25, 2000, gives no indication that Phansalkar's MCEL Shares are subject to vesting. Andersen and Weinroth both testified that the S-1 was designed to disclose all potential interests in MCEL. See Andersen Tr. at 456-57; Weinroth Tr. at 934-35.

Accordingly, the MCEL S-1 contains a footnote explaining that Andersen and Weinroth's reported shareholdings do not reflect an additional 75,000 options that would be granted upon adoption of a stock option plan. See Ex. PO3U; Andersen Tr. at 458; Weinroth Tr. at 925. However, there is no footnote or other indication that Phansalkar's MCEL Shares would be added to Andersen's and Weinroth's shareholdings if Phansalkar were to leave the firm before they vested. See Ex. P03U.

Third, documents dated after Phansalkar's departure from AW indicate that Phansalkar retained his ownership interest in MCEL despite leaving the firm. Between June 5, 2000 and June 19, 2000, several versions of a list entitled "Millenium Cell Inc. Shares of Common Stock" were emailed from attorneys at Baker McKenzie, counsel for MCEL, and Steward. See Ex. P03E. These lists, which the attorneys referred to as charts of "common stock ownership," all reflect Phansalkar's MCEL interest and designations of shares to friends and family. See id. Similarly, an email from Steward to the attorneys, dated June 15, 2000, indicates that Phansalkar still owns a 2.69% percent interest in MCEL. See id.; Steward Tr. at 1879.

The June 19th Memo also indicates that Phansalkar continued to own his MCEL Shares after he left AW. Andersen drafted the June 19th Memo after Phansalkar left the firm.

Nevertheless, he wrote that Phansalkar's MCEL Shares "will be distributed" upon completion of the IPO. Exs. 303, 305, 306, P01I. This statement indicated Andersen's belief that Phansalkar owned his MCEL Shares outright.

Fourth, while vesting conditions are generally used to give employees the incentive to remain at the firm, attaching a vesting condition to Phansalkar's MCEL Shares would not have created an incentive for him to stay at AW for a significant period of time. At the time Phansalkar purchased his MCEL Shares, AW thought that the MCEL IPO would occur within a few months. See Andersen Tr. at 348.

Pursuant to AW's vesting policy, the IPO would be a "liquidity event" which would cause the immediate vesting of any interests subject to AW's vesting policy. See Andersen Tr. at 347-48; Weinroth Tr. at 874. As a result, a vesting condition would only induce Phansalkar to stay at AW for a short period.

Fifth, given the imminence of the MCEL IPO, Phansalkar would not have left AW when he did had he believed his MCEL Shares were subject to vesting. See Phansalkar Tr. at 1775. Phansalkar testified that there was no specific time-frame within which he had to join Osicom.⁸ See Phansalkar Tr. at 11140-1141. Len Hecht, a Director of Osicom and a member of the Compensation Committee, agreed that no such time-frame existed. See Hecht Tr. at 1426.

8 Len Hecht, who was a Director of Osicom and a member of the compensation committee at this time, testified that when Phansalkar was negotiating his employment agreement with Osicom he never mentioned that he would be forfeiting his MCEL Shares if he joined Osicom. See Transcript of Testimony of Leonard Hecht ("Hecht Tr.") at 1427.

Although joining Osicom would give Phansalkar an interest in any future Sorrento IPO, at that time the MCEL IPO appeared more certain than a Sorrento IPO. See Phansalkar Tr. at 1774-75. MCEL had already filed a preliminary registration statement, whereas Sorrento had not. See id. In addition, Sorrento had already attempted an IPO which was aborted at the last minute. See id. Therefore, Phansalkar's decision to leave AW just a few months prior to the planned MCEL IPO is further evidence that he did not believe his MCEL Shares were subject to vesting.

5. Phansalkar Sold 252,000 of His MCEL Shares to Arthur Kowaloff

Phansalkar testified that his investment with MCEL was a "co-investment" with his friend Arthur Kowaloff and that Kowaloff paid him $25,000 for a 25/60 interest in the deal. See Phansalkar Tr. at 1109-1110, 1652-53; see also Kowaloff Stipulation, Trial Tr. at 1839. Accordingly, an MCEL Ownership Schedule dated May 31, 2000, indicates that 252,000 of Phansalkar's 637,902 MCEL Shares are designated for Kowaloff.⁹ See Ex. P04B. Based on this evidence, I find that Phansalkar sold 252,000 MCEL Shares to Kowaloff and that, after that sale, Phansalkar only owned 385,902 MCEL Shares.¹⁰

9 While 25/60 is equal to 41.7%, the May 31, 2000 MCEL Ownership Schedule indicates that Kowaloff was allocated 39.5% of Phansalkar's MCEL Shares. See Ex. P04B. Because I have found that the shares recorded on the MCEL Ownership Schedules reflect actual ownership in MCEL, those figures are used in this decision.

10 The May 31st MCEL Ownership Schedule indicates that Phansalkar owns 325,102 MCEL Shares because a total of 60,800 of his shares have been designated to individuals other than Kowaloff. See Ex. P04B. Because AW has not proven, nor argued, that Phansalkar sold these 60,800 shares to other individuals, it is presumed that Phansalkar continued to own those 60,800 shares. See AW Prop. Facts ¶ 170 (claiming that at the time of the IPO Phansalkar owned 637,902 shares less the amount he sold to Kowaloff).

6. Phansalkar Was First Informed About the Redistribution of his MCEL Shares in the September 6th Letter

Phansalkar contends that he was first informed that his MCEL Shares had been reallocated when he received the September 6th Letter from Andersen, which was sent just five days prior to the filing of AW's complaint. See Phansalkar Prop. Facts ¶ 373; Ex. P01C; Phansalkar Tr. at 1153, 1218. AW contends that Phansalkar knew that he no longer owned his MCEL Shares once he left AW and that Weinroth reminded him about this fact in a telephone conversation prior to the IPO. See AW Prop. Facts ¶¶ 160, 161. Phansalkar's testimony is credible for the following reasons: First, because Phansalkar owned his MCEL Shares outright, he had no reason to believe that he had forfeited those Shares by leaving AW prior to the IPO. See supra Part III.A.4. Indeed, a few days before the IPO, Phansalkar indicated his belief that he still owned the MCEL Shares when he wrote in a letter to Weinroth: "Hope the Millenium offering is proceeding as planned and better than expected."¹¹ Ex. 342; see also Phansalkar Tr. at 1149. Second, Phansalkar received no written correspondence from Andersen or Weinroth mentioning their reallocation of the MCEL Shares, and no one from AW informed Phansalkar that his name had been removed from the MCEL Ownership Schedules. See Phansalkar Tr. at 1150, 1153, 1218; Steward Tr. at 1883-84. Third, at the time of the IPO, neither Andersen nor Weinroth had returned to Phansalkar the $30,000 he paid to each of them for his MCEL Shares. See Weinroth Tr. at 830-31; Andersen Tr. at 339.

11 AW contends that Phansalkar's conduct indicated that he knew he did not own the MCEL Shares once he left AW. See AW Prop. Facts ¶ 160. AW points to the fact that Phansalkar did not inquire as to why he was not asked to sign a lock-up agreement, as were all of the other original investors. See Weinroth Tr. at 830. However, because Phansalkar was no longer at AW when the lock-up agreements were signed, he had no reason to know that all the other investors were signing lock-up agreements. Even if he could have expected that original investors would be required to sign lock-up agreements, it is reasonable to assume that he would "not go volunteering to sign a lock-up" that would have been to his detriment. Phansalkar Tr. at 1217. AW also points to the fact that Phansalkar did not demand the delivery of his MCEL Shares after the IPO, whereas he did demand the delivery of his Headway Shares around this time. See Weinroth Tr. at 830; Phansalkar Tr. at 1666-67; Ex. 470. Given the fact that Phansalkar's demand for his Headway Shares was sent on August 18, 2000, more than eight months after his purchase of those shares, his failure to demand his MCEL Shares just nine days after the MCEL IPO does not prove anything about his understanding of whether or not he owned those Shares. See Ex. 470.

7. The June 19th Memo

Phansalkar contends that Andersen reviewed and approved his revisions to the June 19th Memo and that there were no material issues left open in that Memo. See Phansalkar Prop. Facts at ¶¶ 305, 307. This contention is rejected. There is no evidence that Andersen agreed to Phansalkar's proposed changes, see Andersen Tr. at 161, 300; no one ever signed the Memo; and Phansalkar never spoke to Weinroth about the Memo, see Weinroth Tr. at 843; Phansalkar Tr. at 1228.

Nor is it likely that Andersen or Weinroth would have agreed to all of Phansalkar's proposed revisions, since several of those suggestions were completely incongruous with Andersen's first draft. Despite the fact that there were substantial brokerage commissions associated with the Headway transaction, see Andersen Tr. at 291; Ex. 200, Phansalkar proposed an additional sentence that would read "there are no expenses associated with this transaction," Ex. 306; see also Phansalkar Tr. at 1247-48. Pursuant to proposed section 10(i), Phansalkar would have become vested in interests in AW deals which he would otherwise have lost, in full or in part, when he left the firm. See Weinroth Tr. at 844-47. It was suggested that vesting continue while Phansalkar worked at Osicom because such work was "of service" to AW and Andersen expected Phansalkar to return to AW after his tenure at Osicom was complete. Andersen Tr. at 170-171; 304-05.

Pursuant to Phansalkar's proposed section 10(ii), all of Phansalkar's interests in AW deals would vest upon his departure from AW. This provision is completely contradictory to Andersen's proposed section 10(i). See Andersen Tr. at 172; Phansalkar Tr. at 1138 ("[It] does seem to say two different things."). Whereas Section 10(i) would give Phansalkar an incentive to return to AW, section 10(ii) would provide no such incentive. See Andersen Tr. at 172.

Finally, the June 19th Memo leaves material terms relating to AW's ownership positions, expenses outstanding, and Phansalkar's allocations completely blank, and there is no way to determine from the document how those terms would be finalized.¹² See Exs. 303, 305, 306, P01I. Therefore, I find that the parties never agreed on the terms of the June 19th Memo.

12 Phansalkar claims that Andersen and Weinroth had promised that his allocations for deals consummated in 2000 would be between 30% and 40% and that he agreed that they had discretion to fill in the blanks with any number in this range. See Phansalkar Tr. at 1121-27. There is no support for this contention. Andersen and Weinroth never testified that such an agreement existed, Andersen never mentioned this purported agreement in the June 19th Memo and, despite making many revisions to that Memo, Phansalkar never added a provision indicating that such an agreement existed.

B. AW's Allegations of Disloyalty

1. AW's Policy With Respect to Board Fees and Options

AW contends that all compensation received by AW employees who served on corporate boards was to be contributed to the firm, and that Phansalkar knew about this policy. See AW Prop. Facts ¶¶ 24-29. Phansalkar contends that he never understood that he had an obligation to disclose to AW options he received in return for serving on corporate boards. See Phansalkar's Prop. Facts ¶ 383.

I find that, pursuant to AW's policy, all directors' compensation awarded to AW employees belonged to the firm. See Andersen Tr. at 122-123; Rawlings Tr. at 500-501; Brumberger Tr. at 746-47; Loomie Tr. at 548-49; Weinroth Tr. at 999-1000; Ex. 19. This policy was first articulated to Phansalkar when he joined the firm and was reiterated in two memos distributed by Weinroth. The policy was also evident in two memos regarding Andersen's Sorrento Options.

When Andersen discussed the possibility of Phansalkar joining AW, he described the way the firm was managed and financed. See Andersen Tr. at 122-126. As part of this conversation, Andersen informed Phansalkar that board fees and in-kind compensation received by directors was one of the only reliable sources of revenue for the firm. See id. at 124. He explained that he and Weinroth contributed all director fees to the firm. See id. at 124-125. Andersen also explained that when he had received options for his board service, and those options were sold, he contributed the profits to the firm. See id. at 136. Rawlings and Brumberger both testified that, when they joined AW, they were also told that any compensation they received as directors would belong to the firm. See Brumberger Tr. at 746-47; Rawlings Tr. at 500-501.

In or around June 8, 1999, Weinroth distributed a memo addressed to Andersen, Rawlings, Brumberger and Phansalkar ("June 8th Memo").¹³ See June 8 Memo, Ex. 19. In this Memo, Weinroth states that both he and Andersen contribute all their director fees and options to the firm and that the firm policy was that all directors fees received by the partners should be contributed to the firm. See id.

13 Phansalkar claims that he never saw the June 8th Memo. See Phansalkar Tr. at 1213. This testimony is not credible because:

(1) Rawlings and Brumberger received the memo, see Rawlings Tr. at 500-04; Brumberger Tr. at 747; (2) Phansalkar's secretary testified that she gave him the memo, see Transcript of Testimony of Margaret Salacan, Phansalkar's secretary, ("Salacan Tr.") at 728-30, 739; (3) Phansalkar testified that he did not have problems receiving interoffice memos and typically read them, see Phansalkar Tr. at 1731-32; and (4) Phansalkar received and responded to Weinroth's January 28th Memo regarding director compensation, see id. at 1210-11; Ex. P100.

The June 8th Memo also states that "all options granted to any [partners] as directors of companies on which we serve should also be contributed to AW." Ex. 19. Because such options are not always freely transferable, each partner could maintain the options in his own name. See id.

However, the options needed to be reported to the firm so that, when the options were "realized," the "economic value" of those options would belong to the firm. Id.

In a memo dated January 12, 2000 ("January 12th Memo"), Weinroth again addressed the topic of corporate directorships. See Ex. P100. Phansalkar testified that he received and responded to this Memo. See Phansalkar Tr. at 1210-11; see also Ex. P100. This Memo, sent to AW "staff", once again explains that Weinroth and Andersen made it a practice to contribute all their directors' fees and option grants to the firm. See Ex. P100. The Memo then requests that each recipient report his or her directorships and any directors' fees related to these positions to Virginia West, Weinroth's secretary. See id. The Memo does not explicitly request that recipients report options received as a result of their directorships. See id. However, Brumbereger, Rawlings and Loomie all testified that they understood the Memo as requiring them to disclose all types of director compensation, including options. See Loomie Tr. at 548; Rawlings Tr. at 538; Brumberger Tr. at 749. In response to this Memo, Phansalkar indicated that he served on the Osicom board and the Zip board and that, while Zip paid him $2,500 per year in directors' fees, he was not sure if Osicom paid directors' fees. See Ex. 100; Phansalkar Tr. at 1068.

The fact that directors' options were considered an asset of the firm was also evident in two other memos distributed to Phansalkar. In a memo dated March 16, 2000, Weinroth noted that "other potential investments in Sorrento are the 100,000 options [Andersen] gets as a director." See Ex. 200. In addition, Andersen noted in the June 18th Memo that the firm's interest in Sorrento included the 100,000 options that he and Phansalkar each received for serving on the Sorrento board. See Ex. 306. Phansalkar admits that he carefully reviewed and commented upon the June 18th Memo, but he made no change to this sentence. See Phansalkar Tr. at 1275; Exs. 305, 306.

2. Phansalkar's Zip Options and Zip Shares

AW contends that Phansalkar held his position on the Zip Board on AW's behalf and that he received the Zip Options and Zip Shares as a representative of AW. See AW Cont. 28; AW Prop. Facts ¶ 33. They further contend that Phansalkar failed to disclose and intentionally concealed from AW the Zip Options and Zip Shares. See AW Cont. 28, 29; AW Prop. Facts ¶ 31. Phansalkar contends that he served on the Zip Board as the representative of AW Zip, not AW, and that he had no obligation to turn over any directors' compensation to AW Zip. See Phansalkar Cont. 11; Phansalkar Prop. Facts ¶¶ 57-59, 65. Phansalkar further contends that he made no effort to conceal his Zip Options and Zip Shares because he disclosed them to Loomie. See Phansalkar Cont. 11.

Phansalkar concedes that his Zip Options and Zip Shares were awarded to him in his capacity as a director of Zip and that he served as the designee of AW Zip. See Phansalkar Tr. at 1049-50, 1071. He further testified that AW Zip was created by AW for the sole purpose of investing in the Zip Transaction, that it had no other purpose than to hold the investments in the Zip Transaction, that it was managed by AW partners, and that it was run from the AW offices. See Phansalkar Tr. at 1043-44, 1690-91.

Accordingly, AW partners were responsible for choosing Phansalkar as AW Zip's designee on the Zip Board. See Andersen Tr. at 131-33; Brumberger Tr. at 752-53; Phansalkar Tr. at 1-47-48, 1736-38. Phansalkar also testified that he attended Zip Board meetings on AW's time, reported to AW on some of the contents of those meetings. See Phansalkar Tr. at 1214, 1687-88, 1690-91. Moreover, Phansalkar submitted expense reports to AW for his attendance at Zip Board meetings, see id., when he knew that AW only compensated him for "business-related expenses," Ex. P02K. When Phansalkar was awarded his Zip Options, the documents memorializing that grant required that notices regarding the Options be sent not only to Phansalkar, but also to Brumberger at AW's offices and to AW's outside counsel. See Ex. P08U.

Finally, when Phansalkar left AW, Phansalkar did not contest AW's decision to remove him from the Zip Board and replace him with Brumberger. See Brumberger Tr. at 752-53; Phansalkar Tr. at 1704. Based on this evidence, I find that Phansalkar served on the Zip Board as a representative of AW and that the compensation he received as a director of Zip was awarded to him as a representative of AW.

Phansalkar testified that he never explicitly told AW that he had been granted the Zip Options or the Zip Shares.¹⁴ See Phansalkar Tr. at 1691, 1706-07. However, the Zip Options were referred to in the Minutes of the Zip Board Meeting for October 15, 1999 (the "Zip Board Minutes"), which Phansalkar made no effort to hide from AW. See Ex. P08W.

14 Phansalkar does not assert that he disclosed the Zip Shares to AW or that information about those shares was available to AW. The only document AW produced with regard to these shares was a short email from the CFO of Zip to Phansalkar. See Ex. 134.

Phansalkar made copies of all documents pertaining to Zip, including the Zip Board Minutes, and gave them to Loomie. See Loomie Tr. at 547-48, 652-63; Phansalkar Tr. at 1053. Thus, Loomie testified that she had seen the Zip Board Minutes and was aware of the grant of the Zip Options to Phansalkar prior to his leaving the firm.¹⁵ See Loomie Tr. at 563. The Zip Board Minutes were also kept in an unlocked file cabinet in the hallway at AW's offices. See id. at 564; Phansalkar Tr. at 1053. When Phansalkar left AW, he left behind this document along with the rest of the Zip files. See Loomie Tr. at 577-78; Phansalkar Tr. at 1053; Ex. P08U (produced by AW for trial). Nevertheless, AW was not aware of Phansalkar's Zip Options and Zip Shares while he was employed at AW. See Andersen Tr. at 133-34; Brumberger Tr. at 749-51. Andersen's draft of the June 18th Memo makes no mention of Phansalkar's Shares and Options, which he would have included if he had known about them. See Ex. 205. Thus, although AW has not shown that Phansalkar intentionally concealed his Zip Options and Zip Shares, I find that he nonetheless failed to disclose them to AW.

15 Loomie testified that she understood that the firm's policy was that all directors' options belonged to the firm. See Loomie Tr. at 548. She testified that, at the time she learned about Phansalkar's Zip Options, she did not believe that he had violated this policy because her understanding was that "options are normally in a director's name and eventually they would have been turned over" to the firm. Id. at 564.

3. Phansalkar's 35,000 Osicom Options and Osicom Directors' Fees

AW contends that Phansalkar received the 35,000 Osicom Options and the Osicom Directors' Fees in his capacity as a representative of AW to the Osicom Board. See AW Prop. Facts ¶¶ 62-63. AW further contends that Phansalkar did not disclose to and intentionally concealed from AW these Options and Fees. See AW Prop. Facts ¶ 62; AW Cont. 5, 6, 8. Phansalkar contends that he received the 35,000 Osicom Options and the Osicom Directors' Fees in his personal capacity and that he made no effort to conceal his Osicom Options. See Phansalkar Prop. Facts ¶¶ 94, 95.

Phansalkar admits that he received the Osicom Options and Directors' Fees in return for his service on the Osicom Board and that he served on the Osicom Board as the FIBR designee. See Phansalkar Prop. Facts ¶¶ 91, 94; Phansalkar Tr. at 1067. AW was the managing partner and sole voting member of FIBR. See Ex. P01E at 16; Andersen Tr. at 145. In this capacity, AW was the indirect or beneficial owner of FIBR's Osicom shares, and shared the power to vote and dispose of these shares with FIBR, Andersen, Weinroth and Phansalkar. See Ex. P01E. Accordingly, AW was responsible for choosing the nominee for the FIBR board seat. See Andersen Tr. at 145; Phansalkar Tr. at 1065. Phansalkar attended Osicom Board meetings on AW's time and submitted expense reports to AW for his attendance at Osicom Board meetings. See Phansalkar Tr. at 1697-88. Based on this evidence, I find that Phansalkar's Osicom Shares were granted to him as a representative of AW, rather than in his personal capacity.

Phansalkar testified that he received the 35,000 Osicom Options in or about January 6, 2000, and that he received the Osicom Directors' Fees for meetings attended around April, May, and June of that year. See Phansalkar Tr. at 1706. Yet he did not report the Osicom Options in response to Weinroth's January 28th Memo,¹⁶ see Ex. P100; Phansalkar Tr. at 1706, and he did not revise the June 19th Memo to reflect the Osicom Options or Fees. See Exs. 303, 305, 306, P010.

16 Phansalkar testified on direct examination that he did not have any information about any Osicom options when he responded to the January 28 Memo, but then admitted on cross-examination that the 35,000 Osicom options were awarded in or about January 6, 2000. See Phansalkar Tr. at 1071, 1706.

Phansalkar's ownership of at least some of the 35,000 Osicom Options was made public in two SEC filings. See Exs. P06Z, P01E; Phansalkar Tr. at 1068. An SEC filing dated April 21, 2000, indicates that Phansalkar is the direct owner of "14,068 shares" of Osicom common stock. Ex. P01E. Osicom's Form 10-K, filed May 4, 2000, states in a footnote that Phansalkar owns "exercisable options to acquire 14,583 shares of [Osicom] common stock." Ex. P06Z; see also Phansalkar Tr. at 1069. The reference to 14,583 shares of stock in these documents refers to that percentage of Phansalkar's 35,000 Osicom Options that had vested and were therefore exercisable at that time. See Phansalkar Tr. at 1069-70. Nevertheless, AW was not aware of these Options. Had Andersen known of Phansalkar's 35,000 Osicom Options (or his Osicom Fees) he would have mentioned them in the June 19th Memo, but he did not do so. See Ex. 306. Accordingly, although AW has not shown that Phansalkar intentionally concealed his 35,000 Osicom Options or Osicom Fees, I find that he failed to disclose them to AW.

4. Phansalkar's 450,000 Osicom Options

AW contends that Phansalkar obtained the 450,000 Osicom Options from an AW client when he was employed by AW and that he failed to disclose these Options to AW. See AW Cont. 5; AW Prop. Facts ¶ 66. Phansalkar contends that he received these Options in his capacity as CEO and Chairman of Osicom after he left AW. See Phansalkar Prop. Facts ¶ 274.

The 450,000 Osicom Options were extended to Phansalkar in his Offer Letter from Osicom, dated May 22, 2000, but they were not granted to him until he signed his Employment Contract on June 9, 2000. See Exs. P04K, P02H. As the Offer Letter explains, the Options were offered to Phansalkar "[a]s an Osicom Technologies, Inc., employee" and as one of "the employee benefits." Ex. P02H. Although Phansalkar's Employment Agreement indicates that the 'grant date' for the Osicom Options was May 22, 2000, a date before Phansalkar accepted the Osicom Offer or resigned from AW, see Ex. B to Ex. P04K, this was simply the date for establishing the strike price for the options, see Phansalkar Tr. at 1207; Hecht Tr. at 1429. Therefore, I find that Phansalkar was granted his 450,000 Osicom Options in his capacity as CEO and Chairman of Osicom and, had he not assumed this position, he would not have received those Options. See Phansalkar Tr. at 1207, 1209; Hecht Tr. at 1429-30.

5. Phansalkar's 300,000 Sorrento Options

AW contends that it was only aware that Phansalkar was granted 100,000 Sorrento options and that Phansalkar intentionally hid the remaining 200,000 Sorrento options from the firm. See AW Cont. 7. Phansalkar contends that he did not hide the grant of the 300,000 Options from AW because Andersen was in attendance at the meeting where the Sorrento Board approved those options. See Phansalkar Cont. 8.

I find that, as a Sorrento Board member, Andersen was made aware of the grant of 300,000 Sorrento options to Phansalkar. AW concedes that Andersen participated in the April 6th Board Meeting at which the Board approved the Sorrento Option Plan. See AW Prop. Facts ¶ 91; see also Hecht Tr. at 1440. A package of board materials in connection with the April 6th Board Meeting included a copy of Sorrento's Option Plan which indicated the grant of 300,000 options to Phansalkar. See P01K. The board package was sent to all board members, including Andersen.¹⁷ See Trial Testimony of Oren Shaffer, former President and CEO of Sorrento, ("Shaffer Tr.") at 278.

17 AW points to the June 19th memo as proof that it was only aware that Phansalkar received 100,000 Sorrento Options and that Phansalkar hid the remaining 200,000 options. See Ex. 306. If this document shows anything, it shows that AW was aware that Phansalkar received options from Sorrento, and it provides evidentiary support for Phansalkar's contention that, despite the grant of 300,000 options, Sorrento only delivered 100,000 of those options to him. See Phansalkar Prop. Facts ¶ 197; Phansalkar Tr. at 1171-72.

Phansalkar was also at the April 6th Board Meeting and received the board package for that meeting. See Ex. 251; Salacan Tr. at 1922-23, 1925. He knew Andersen was a board member and must have known that Andersen was also in attendance at that meeting. Therefore, I also find that Phansalkar reasonably believed that Andersen knew of this option grant. See Phansalkar Tr. at 1174.

6. Offer of a Board Seat in the Entrada Transaction

The parties agree that, in or around April 2000, during the conference call regarding negotiations between AW and Sync, Sync officers made an offer of a board seat (the "Conference Call Offer"). See Loomie Tr. at 543; Phansalkar Tr. at 1195. They also agree that Phansalkar declined that board seat without discussing it with Andersen or Weinroth. See Andersen Tr. at 343; Phansalkar Tr. at 1613. AW contends that the Conference Call Offer was an offer to AW for a board seat on Entrada Networks and that Phansalkar turned it down without informing AW because he was secretly working to secure a seat for himself on the Entrada Networks Board. See AW Prop. Facts ¶¶ 102-105. Phansalkar contends that AW was never offered a seat on the Board of Entrada Networks, that the Conference Call Offer was an offer for him personally to sit on the Sync Board, and that he turned it down because a conflict could arise if he were to serve on the Boards of Sync and Osicom. See Phansalkar Prop. Facts ¶¶ 218, 219.

Based on the evidence adduced at trial, I make the following findings of fact:

a. AW has not proven by a preponderance of the evidence that the Conference Call Offer was for a seat on the Entrada Networks Board. The offer was made by representatives of Sync and Phansalkar testified that the offer was for a Sync Board seat. See Phansalkar Tr. at 1195-96. AW produced no credible evidence to the contrary.¹⁸

b. The Conference Call Offer was made to AW generally, not to Phansalkar. The Offer was conveyed to Phansalkar during his negotiations on behalf of AW. Moreover, Phansalkar's deposition testimony that he "declined to be a director or anyone being a director of Sync" indicates that he knew the offer was made to AW generally. Phansalkar Tr. at 1620.

c. Phansalkar declined the offer of a Sync Board seat without inquiring whether another AW partner or a designee of AW could fill that position. Phansalkar explained that he would have a conflict if he were to accept a Sync Board seat because he also served on the Osicom Board, which was in negotiations with Sync regarding the Sync/Entrada Merger. See Phansalkar Tr. at 1195-96. But, given the fact that Phansalkar originally sought a Sync Board seat for AW (which he did not pursue), see Ex. 219; Phansalkar Tr. at 1636-37, and that he ultimately obtained a contingent Sync Board seat for Entrada Holdings, there was no credible reason for his turning down a Board seat for AW at this time.

d. Phansalkar secured his Entrada Networks Board seat while employed at AW without disclosing this opportunity to AW or securing an Entrada Networks Board seat for AW or Entrada Holdings.¹⁹ See Phansalkar Tr. at 1629, 1632-33; Ex. 257.

18 AW offered only Loomie's testimony that she assumed the offer was for an Entrada Networks Board seat. See Loomie Tr. at 584-85.

19 Phansalkar testified that he was not offered the Entrada Networks Board seat during negotiations with Sync, but that he was approached by Sync about the Board seat in the week between May 12, 2000, when the Sync/AW deal closed, and May 19, 2000, when Sync filed the S-4 with the SEC. See Phansalkar Tr. at 1631-32. Not only is it unlikely that the offer, acceptance and drafting of the statement for the S-4 occurred in this short term period, but it is irrelevant. Phansalkar conceded that when he secured an Entrada Networks Board seat for himself he did not do anything to secure that opportunity for AW or Entrada Holdings. See Phansalkar Tr. at 1629.

7. The 50,000 Entrada Options

AW contends that Phansalkar received the 50,000 Entrada Options from Osicom when he was an employee at AW and was representing AW on the Osicom Board, and that he did not disclose these options to AW. See AW Cont. 19-20. Phansalkar contends that he received the 50,000 Entrada Options in connection with his employment at Osicom. See Phansalkar Prop. Facts ¶ 221.

AW's argument is based solely on the fact that the document granting Phansalkar his 50,000 Entrada Options is dated June 15, 2000, when he was still employed by AW. See Ex. 296. But, as I have noted earlier, the grant date for the options is simply the date for establishing the strike price for those options. See Phansalkar Tr. at 1207; Hecht Tr. at 1429. Contrary to AW's argument, the June 15th grant date supports Phansalkar's position that the 50,000 Entrada Options were granted in contemplation of his joining Osicom because they were granted within a week of his signing the employment agreement with Osicom. Thus, I find that the 50,000 Entrada Options were granted to Phansalkar in connection with his employment at Osicom and that he would not have received those options had he not left AW to join Osicom. See Hecht Tr. at 1420-31; Phansalkar Tr. at 1203-04.²⁰

20 The document states that the 50,000 Options are being awarded to "Rohit Phansalkar, a Director of Osicom" but there is no indication that the Options were granted to him in recognition of his service on the Board or in his capacity as a Director. Ex. 296.

8. The 100,000 Entrada Options

AW contends that Phansalkar received the 100,000 Entrada Options as a result of diverting an opportunity for an Entrada Networks Board seat away from AW when he was an employee of AW. See AW Cont. 21. This contention is rejected because: (1) Phansalkar received his 100,000 Entrada Options in his capacity as a Director of Entrada Networks; (2) Phansalkar did not serve on the Entrada Networks Board as a representative of AW, see Phansalkar Tr. at 1197-98; (3) AW was never offered a seat on the Board of Entrada Networks, see supra Part II.B.6; and (4) Phansalkar received his Options after he left AW.

9. The Decision to Remove Andersen From the Sorrento Board

AW claims that Phansalkar intentionally concealed the decision to remove Andersen from the Sorrento Board because he planned to replace Andersen on the Board. See AW Cont. 14. Andersen testified that he first learned of the planned removal from Oren Schaffer and that Phansalkar only mentioned it when Andersen probed him about changes to the Sorrento Board. See Andersen Tr. at 301. Phansalkar did not contest Andersen's testimony. He admitted that did not take affirmative steps to inform Andersen of the Board's decision, but explained that he had believed that the Board's decision was conveyed to Andersen by Chadha, the CEO and Chairman of Osicom at that time. See Phansalkar Tr. at 1142, 1670-71.

When Phansalkar realized that Andersen had not been informed by Chadha, he explained the planned changes to the Sorrento Baord, including Andersen's removal. See Andersen Tr. at 301-302; Phansalkar Tr. at 1144. In addition, Phansalkar offered convincing evidence that he was chosen to replace another director, Georges Wanet, and that Gregory Grodhaus was the person chosen to replace Andersen on the Board, see id. at 1144, 1671; Ex. 100A, and that the Sorrento Board had specific concerns about Andersen's Board service that led them to seek his removal, see Hecht Tr. at 1441. Accordingly, I find that AW has not proven this allegation by a preponderance of the credible evidence.

10. Phansalkar's Activities with Regard to the Sorrento Private Placement

AW contends that, unbeknownst to AW at the time, Phansalkar was working to advance the interests of Chadha and himself rather than AW and the other investors in the Sorrento Private Placement. See AW Prop. Facts ¶ 76; AW Cont. 11. Phansalkar contends that he acted in good faith with respect to the Sorrento Private Placement. See Phansalkar Prop. Facts ¶¶ 293-94. AW has not proven, by a preponderance of the credible evidence, that Phansalkar's actions with respect to the Sorrento Private Placement were contrary to AW's interests.

In a letter from Phansalkar to Par Chadha dated January 20, 2000, Phansalkar described terms proposed by another investor, Telcom Ventures, as "completely one-sided" and advised Chadha to seek the advice of counsel. Ex. 121; see also Phansalkar Tr. at 1331, 1335. In a letter to Telecom Ventures, Phansalkar responded to the proposed terms by stating "we propose" a common stock transaction rather than the preferred stock transaction they had suggested. Ex. 127. AW contends that these letters show that Phansalkar was considering Osicom's interests over those of the investors, including AW. See AW Prop. Facts ¶ 76. But Phansalkar was not simply expected to represent the investors. As Andersen testified, Osicom was paying AW a fee for "doing all the things" required "in putting a deal together," including finding investors and helping to structure the deal. Andersen Tr. at 147; see also Phansalkar Tr. at 1314. Thus, I find that Phansalkar's comments in these letters were not contrary to AW's interests, because he was trying to bring both sides closer together to get a deal done that was "acceptable to both sides and fair to both parties." Phansalkar Tr. at 1314, 1316.

AW also contends that, at the time Phansalkar was supposed to be working to further the interests of AW in the Sorrento Private Placement, he was engaged in discussions with Chadha about joining Osicom and the rewards he would receive if he were to do so. See AW Prop. Facts ¶ 78. AW has failed to prove this allegation by a preponderance of the credible evidence. The earliest document relating to Phansalkar's possible employment at Osicom is an offer letter dated May 22, 2000. See Ex. P02H. AW presented no evidence that serious employment discussions were taking place prior to this date, let alone while Phansalkar was negotiating the Sorrento Private Placement.²¹

21 Phansalkar admitted that, at some piont in February 2000, he expressed to Chadha that he was contemplating leaving AW and that Chadha suggested Phansalkar could join Osicom. See Phansalkar Tr. at 1330-31, 1885-86. But Phansalkar explained that this was not a "discussio[n]" and that there were no employment negotiations at this time. See id. at 1386.

AW also asserts that when Phansalkar negotiated the Sorrento Private Placement he failed to obtain certain terms for the Series A preferred shareholders, including AW. See AW Prop. Facts ¶ 79. The Court finds that, regardless of whether Phansalkar negotiated the best possible deal for AW, Andersen was aware of and approved all of the deal terms. Phansalkar and Andersen discussed the terms of the Sorrento Private Placement, see Andersen Tr. at 148-49; Phansalkar Tr. at 1782, and Andersen ultimately was responsible for approving the final deal, see Andersen Tr. at 1938.²² Moreover, as a member of the Sorrento Board, Andersen had access to information about the transaction and was involved in approving the deal. See Andersen Tr. at 1938; Phansalkar Tr. at 1096, 1157; Hecht Tr. at 1436-37; Deposition of John Lines, former General Counsel and Secretary of Osicom, read into trial transcript at 2017.

22 Andersen testified that he did not know the details of the deal terms, but this testimony is dubious given AW's interest in the deal as both a facilitator and an investor, Andersen's personal financial interests in the deal, and the fact that Andersen was responsible for granting final approval.

Accordingly, AW has not proven by a preponderance of the credible evidence that, in negotiating the Sorrento Private Placement, Phansalkar was secretly working to advance the interests of Osicom rather than those of AW.

11. Phansalkar's Actions Regarding the Sorrento IPO

AW contends that Phansalkar made false and misleading representations to AW about Osicom's intention to pursue an IPO and that Phansalkar helped to undermine the Sorrento IPO. Even if AW is correct that Osicom was reluctant to cede control over Sorrento, or that the IPO moved slower than AW had expected, or that Phansalkar was simultaneously considering alternative transactions involving Sorrento while pursuing the IPO, AW has not produced any compelling evidence that Phansalkar intended to undermine the IPO.

There is, in fact, significant evidence that Phansalkar believed that Osicom was willing to enter into a voting trust agreement and that Phansalkar diligently pursued the IPO. First, Phansalkar, Hecht, Richard Jacobson, general counsel for Sorrento, and Davinder Sethi, an Osicom Board member at the time, all testified that Osicom was willing to enter into an appropriate voting trust in order to get the IPO done, and that Phansalkar worked diligently get the IPO done. See Hecht Tr. at 1448-49; Transcript of Testimony of Richard Jacobson ("Jacobson Tr.") at 1505-06, 1514; Transcript of Testimony of Davinder Sethi ("Sethi Tr.") at 1353-56; Phansalkar Tr. at 1183, 1340-42. Second, the minutes from Osicom Board Meetings held in July and August, 2000, indicate that the Osicom Board remained "willing to execute an appropriately drafted Voting Trust Agreement if necessary to complete the IPO process," and that Phansalkar was explicitly "authorized to continue to negotiate the terms of a Voting Trust agreement with counsel to the Underwriters." Ex. 100E; see also Ex. 100D ("[The Board] reaffirmed its willingness to enter into a voting trust agreement . . . if such action was necessary in order to obtain approval for the IPO of Sorrento, and management was instructed to continue negotiations."); Jacobson Tr. at 1512-1514. Third, Sorrento's earlier efforts towards an IPO gave Phansalkar reason to believe that Osicom would enter into such an agreement. In March 2000, Sorrento was prepared to file its S-1 which included a voting trust agreement. The IPO was aborted at the last minute because the lead underwriters, Salomon Smith Barney, lost their lead research analyst and did not feel comfortable going forward at that time. See Andersen Tr. at 672; Shaffer Tr. at 229-31.

Fifth, in an effort to launch the IPO, Phansalkar worked with Jacobson to obtain Chadha's signature on two agreements that would have gone a long way towards separating Chadha from Sorrento. See Ex. P100G; Jacobsen Tr. at 1532-34. Finally, Phansalkar had a financial incentive to get the Sorrento IPO done.²³ He owned a number of options in Osicom and Sorrento that would be quite valuable after the IPO. See Phansalkar Tr. at 1178; Hecht Tr. at 1452-53; Sethi Tr. at 1353-56.

23 AW contends that Phansalkar had an incentive not to pursue the Sorrento IPO because, unbeknownst to AW, he was promised an investment banking fee of 1/4% of the consideration received by Sorrento in the event of a merger. See AW Prop. Facts ¶ 150(k). However, this so-called "fee" was actually a provision in Phansalkar's employment agreement which was offered "in lieu of a severance package." Hecht Tr. at 1432. Hecht explained that, if Phansalkar were to sell Osicom to a strategic partner, he would eliminate his own job. See id. Thus, this provision ensured that, as CEO and Chairman of Osicom, Phansalkar would seriously consider and pursue attractive offers from strategic partners.

III. CONCLUSIONS OF LAW

A. Phansalkar's Claims

1. Conversion of Phansalkar's MCEL Shares²⁴

24 Because I have concluded that Phansalkar has proven his claim for conversion, I need not address his alternative claims of breach of contract and unjust enrichment.

a. Legal Standard

Conversion is the unauthorized dominion over another person's personal property in interference with that person's legal title or superior right of possession. See Lopresti v. Terwilliger, 126 F.3d 34, 41 (2d Cir. 1997); ESI, Inc. v. Coastal Power Prod., 995 F. Supp. 419, 433 (S.D.N Y 1996); Bankers Trust Co. v. Cerrato, Sweeney, Cohn, Stahl Vaccaro, 590 N.Y.S.2d 201, 202 (1992). To maintain a claim for conversion, a plaintiff must show: (1) the property subject to conversion is "a specific identifiable thing;" (2) plaintiff had "ownership, possession or control" over the property before its conversion; and (3) defendant "exercised an unauthorized dominion over the thing in question, to the alteration of its condition or to the exclusion of the plaintiff's rights." Briarpatch Ltd., LP v. Geisler Roberdeau, Inc., 148 F. Supp.2d 321, 327 (S.D.N.Y. 2001); see also Pioneer Commercial Funding Corp. v. United Airlines, Inc., 122 B.R. 871, 883 (S.D.N Y 1991) (citing Independence Discount Corp. v. Bresser, 365 N.Y.S.2d 44, 46 (2d Dep't 1975)). Where the property allegedly converted is an intangible interest, such as shares of stock, the first element is fulfilled if that interest is "merged in, or identified with, some document." In re Chateaugay Corp., 156 B.R. 391, 400 n. 10 (S.D.N.Y. 1993); see also Iglesias v. Hoyt, 848 F.2d 362, 364 (2d Cir. 1988); Phansalkar v. Andersen Weinroth Co., L.P. (Phansalkar I), No. 00 Civ. 7872, 2001 WL 987917, at *5 (S.D.N Y Aug. 29, 2001) (Scheindlin, J.) (holding that "conversion may apply to intangible interests, such as shares of stock, that are identified in documents other than stock certificates"); Pioneer, 122 B.R. at 885 (sustaining an action for conversion of accounts receivables that were identified in defendant's accounting entries).

b. Analysis

Phansalkar has proven that AW wrongfully converted his MCEL Shares.²⁵ First, Phansalkar's MCEL Shares are embodied in and identified by the MCEL Ownership Schedules. Prior to the MCEL IPO, the MCEL Ownership Schedules were the only documents reflecting investors' interests in MCEL. The Schedules, which were prepared and maintained by AW, list the names, shares and percentage ownership of MCEL investors and identify Phansalkar as the owner of 637,902 Shares of MCEL. Because the MCEL Ownership Schedules identify real assets owned by MCEL investors, including Phansalkar, they identify a specific and identifiable piece of property that may be the subject of conversion. See Phansalkar I, 2001 WL 987917, at *6; Pioneer, 122 B.R. at 885.

25 AW suggests that Phansalkar's claim is more appropriately characterized as a breach of an alleged agreement to deliver stock certificates to him than a claim for conversion. See AW's Pre-Trial Mem. at 37 n. 8 (incorporating by reference the arguments made in AW's Memorandum of Law in Support of its Motion for Partial Summary Judgement at 7). This Court is well aware of the New York rule that "an action for conversion cannot be validly maintained where damages are merely being sought for breach of contract." ESI, Inc., 995 F. Supp. at 433; see also Matzan v. Eastman Kodak Co., 521 N.Y.S.2d 917, 917 (4th Dep't 1987). Nonetheless, many courts have found the remedy for withholding of stock to be in conversion, rather than breach of contract. See, e.g., Kubin v. Miller, 801 F. Supp. 1101, 1118 (S.D.N.Y. 1992) (holding that plaintiff could sustain claim for conversion of shares diverted to defendant and entities he owned); Mahaney v. Walsh, 44 N.Y.S. 969, 971 (4th Dep't 1897) (recognizing cause of action for conversion where plaintiff never received stock certificate); Stimmel v. Weiner, No. 89 C 6510, 1991 WL 117928, at *3 (N.D.Ill. June 25, 1991) (holding that plaintiff could maintain claim for conversion of shares where no stock certificate was received); Connelley v. Estate of Dooley, 422 N.E.2d 143, 147 (Ill.App.Ct. 1981) (holding that plaintiff could maintain claim for conversion of shares evidenced by signed minutes from a meeting); Payne v. Elliot, 54 Cal. 339 (1880) (recognizing cause of action for conversion where plaintiff never received stock certificate).

Second, the evidence shows that, upon purchasing his MCEL Shares from AW, Phansalkar owned his MCEL Shares outright, with the attendant right to control those Shares. Phansalkar's right to control his Shares is evidenced by the fact that AW provided him the opportunity to assign shares to friends and family and recorded those designations on the MCEL Ownership Schedules.

Third, AW has exercised unlawful dominion over Phansalkar's MCEL Shares to the exclusion of his ownership rights. In June or July 2000, Phansalkar was the rightful owner of his MCEL Shares. Nevertheless, AW unilaterally removed Phansalkar from the MCEL Ownership Schedules and redistributed his MCEL Shares to Andersen and Weinroth. Phansalkar did not authorize this redistribution and AW did not inform him of the redistribution at that time. To this day, AW refuses to give him those shares. AW's actions constituted an unauthorized exercise of dominion to the exclusion of Phansalkar's rights.²⁶

26 This Court has previously held that "under New York law, a claim for conversion of intangible interests embodied in a tangible document need not allege conversion of the document itself." Phansalkar I, 2001 WL 987917, at *6.

2. Breach of Contract

Phansalkar contends that AW breached the provisions of the June 19th Memo by withholding his MCEL Shares.²⁷ See Phansalkar Pre-Trial Mem. at 20-21. This claim fails because, contrary to Phansalkar's contention, that Memo is not a "fully binding preliminary agreement".²⁸ Phansalkar Pre-Trial Mem. at 20 (quoting Adjustrite Sys., Inc. v. GAB Bus. Serv., Inc., 145 F.3d 543, 548 (2d Cir. 1998)). a. Legal Standard Under New York law, a "fully binding preliminary agreement" is created when "the parties agree on all the points that require negotiation (including whether to be bound) but agree to memorialize their agreement in a more formal document." Adjustrite Sys., 145 F.3d at 548. Such an agreement "binds both sides to their ultimate contractual objective in recognition that, 'despite the anticipation of further formalities,' a contract had been reached." Id. (quoting Teachers Insur. Annuity Assoc. v. Tribune Co., 670 F. Supp. 491, 498 (S.D.N.Y. 1987)). The parties may demand performance of the transaction even if the formal instrument is never executed. See Adjustrite Sys., 145 F.3d at 548.

27 Phansalkar's allegations also include a claim for breach of an oral agreement to sell him $60,000 worth of MCEL Shares. See Phansalkar Pre-Trial Mem. at 13-14, 19-20. The Court need not address this claim, which Phansalkar argues as an alternative to his conversion claim, because it has already found that AW committed conversion. In any case, this claim would fail because the Court has found that AW completed a sale of MCEL Shares to Phansalkar and that Phansalkar owned those shares upon completion of the sale.

28 Phansalkar has not alleged that the June 19th Memo is a final agreement.

The key to determining whether a writing is a fully binding preliminary agreement, rather than a mere proposal or agreement to agree, is "the intent of the parties: whether the parties intended to be bound, and if so, to what extent." Id. at 548-49. Generally, courts look solely at objective signs of intent, and do not consider subjective evidence of intent. See id. at 549 (citing Rule v. Brine, Inc., 85 F.3d 1002, 1010 (2d Cir. 1996); Winston v. Mediafare Enter.Corp., 777 F.2d 78, 80 (2d Cir. 1986)). When determining the parties' intent, a court must consider the following factors: (1) whether there has been an express reservation of the right not to be bound in the absence of a final writing; (2) whether there has been partial performance of the alleged contract; (3) whether all of the terms of the alleged contract have been agreed upon; and (4) whether the agreement at issue is the type of contract that is usually committed to a final writing. See id.

b. Analysis

"The first factor, the language of the agreement, is the most important." Adjustrite Sys., 145 F.3d at 549 (quotation marks omitted). Here, the language of the June 19th Memo strongly supports the conclusion that it was not a fully binding preliminary agreement. The Memo includes no words of contract or agreement. Nor does it provide any manifestation that the parties were bound by its terms. In addition, the Memo does not provide a signature line for the parties to manifest their acceptance of the purported agreement. While there is no express language reserving AW's or Phansalkar's right not to be bound, "[t]he fact that the [a]greement contains no express reservation of the right not to be bound is not dispositive." Id. at 550 n. 7.

The second factor — partial performance of the alleged agreement — favors Phansalkar. Phansalkar's departure to join Osicom and AW's distribution of Headway Shares to Phansalkar constitute partial performance of obligations described in the Memo.

The third factor — the existence of open items — weighs strongly in favor of AW. The Memo leaves the following terms open: (1) Phansalkar's share allocations for the Sorrento transactions consummated in 2000; (2) Phansalkar's interest in the directors' and officers' warrants and options resulting from the Sorrento deals; (3) Phansalkar's allocations for the Entrada Transaction; (4) the "total expenses related to the share acquisition" for the Headway Transaction. Exs. 303, 306, P01I. To determine whether omitted items are essential to a contract, New York courts have adopted "a flexible approach," looking at the "broad framework" of the alleged agreement. Adjustrite Sys., 145 F.3d at 550 (citing Shann v. Dunk, 84 F.3d 73, 79 (2d Cir. 1996)). The "broad framework" of the June 19th Memo was an attempt by Andersen and Phansalkar to memorialize Phansalkar's interests in AW deals and other terms of his departure from AW. The omitted terms relate to Phansalkar's allocations for the transactions AW completed in 2000, a year when he did not receive a salary, and were clearly of great value to him. Hence, the omitted provisions were essential to the contract.

The fourth factor also weighs in favor of AW. The Memo discusses Phansalkar's interest in various multi-million dollar transactions, his primary source of compensation, and the terms of his departure from his job. These issues are of the type that ordinarily would be committed to a formal contract.

To summarize, three of the four factors strongly point to the conclusion that the parties did not intend to be bound by the June 19th Memo. Furthermore, I have already found that the parties never agreed on the terms of the Memo. Accordingly, the June 19th Memo is not a "fully binding preliminary agreement" and Phansalkar does not have a breach of contract claim based on that Memo.²⁹

29 The Court need not address Phansalkar's unjust enrichment claim because it is pled as an alternative to the conversion and breach of contract claims and the Court has already found that AW committed conversion.

B. AW's Affirmative Defenses

1. Breach of Employee Duty to Employer

AW asserts that Phansalkar is not entitled to his MCEL Shares because he must forfeit his right to compensation from AW as a result of his misconduct while employed by the firm. See AW Pre-Trial Mem. at 24. It claims that Phansalkar breached his duty to the firm by secretly retaining directors' compensation belonging to AW, and by engaging in other conduct that was adverse to the firm's interests.³⁰ See id. at 24-28.

30 AW's contention that Phansalkar's "assistance in Chada's schemes" was in conflict with his duties to AW, see AW Pre-Trial Mem. at 28, is rejected based on my findings that AW has not proved any misconduct by Phansalkar with respect to the Sorrento Private Placement, Andersen's Sorrento Board seat, or the Sorrento IPO.

a. Legal Standard³¹

31 AW alleges that Phansalkar's conduct with respect to the board compensation he received from Zip, Osicom, Sorrento and Entrada breached the terms of his employment agreement by violating AW's policy regarding directors' fees and options, and breached his obligations under established industry standards. See AW Pre-Trial Mem. at 26-28. Because these claims are simply alternative arguments that Phansalkar was a "faithless employee," they are incorporated into the Court's analysis of AW's claim that Phansalkar breached his duties to his employer.

Under New York law, an employee owes his employer a duty of loyalty and good faith. See Western Elec. Co. v. Brenner, 392 N.Y.S.2d 409, 411 (1977); Maritime Fish Prods., Inc. v. World Wide Fish Prods., Inc., 474 N.Y.S.2d 281, 285 (1st Dep't 1984). "An employee is prohibited from acting in a manner 'which is inconsistent with his . . . agency or trust and is bound to exercise the utmost good faith and loyalty in the performance of his or her duties'." Butler, Fitzgerald Potter v. Beggans, No. 93 Civ. 2588, 1994 WL 463966, at *2 (S.D.N.Y. Aug. 23, 1994) (quoting Krause v. Gelman, 580 N.Y.S.2d 740, 650 (1st Dep't 1992)); see also Adams Book Co. v. Ney, No. 97-CV-4418, 1998 WL 564384, at *5 (E.D.N.Y. June 30, 1998); Maritime Fish Prods., 474 N.Y.S.2d at 285. But it is "not enough that [the employee] refrain from harming his employer." Maritime Fish Prods., 474 N.Y.S.2d at 286. He also has an "affirmative duty at all times to act in his employer's best interests." Butler, 1994 WL 463966, at *2; Maritime Fish Prods., 474 N YS.2d at 286.

b. Analysis

i. Phansalkar's Directors' Compensation³²

32 In response to AW's duty of loyalty claims, Phansalkar contends that AW has not shown, as it must, that his "outside business activities" caused him to (1) decrease the work he did for AW; (2) misappropriate special knowledge he gained as an employee for AW; or (3) compete with AW. Phansalkar Pre-Trial Mem. at 33-37 (citing Westwood Chem. Co. v. Kulick, 570 F. Supp. 1032, 1040 (S.D.N.Y. 1983)). This Court has specifically found that the services performed by Phansalkar as a Zip Board member, an Osicom Board member, and a Sorrento Advisory Director were not "outside business activities" but were performed in his capacity as a representative of AW, and that the offer of an Entrada Networks Board seat was obtained during a period when Phansalkar was working on the Entrada/Sync merger as a representative of AW. Because these were not "outside business activities," Phansalkar has cited the wrong legal standard.

As part of his duty of loyalty, "an employee must not seek to acquire indirect advantages from third persons for performing duties and obligations owed to his employer." Rodgers v. Lenox Hill Hosp., 657 N.Y.S.2d 616, 617-18 (1st Dep't 1997) (quoting Western Elec., 392 N.Y.S.2d at 411 (citing Restatement of Agency 2d §§ 388, 403)). "[I]t is likewise basic that absent an agreement otherwise, an employee who makes a profit or receives a benefit in connection with transactions conducted by him on behalf of his employer is under a duty to give such profit or benefit to his employer, whether or not it was received by the employee in violation of his duty of loyalty." Id. (citing Restatement of Agency 2d §§ 388, 403).

Phansalkar's Zip Options, Zip Shares, Osicom Fees and Osicom Options were 'benefits' he received in his capacity as AW's representative to the Zip and Osicom Boards. His failure to disclose these items to AW constituted a breach of his duty to the firm. The mere fact that Loomie knew about the Zip Options does not prove that AW received sufficient notice of these Options because disclosure to a junior employee who has "no authority to employ, discharge, or make contracts for [AW] or compensation on behalf of [AW]" does not amount to disclosure to the firm. See Lamdin v. Broadway Surface Adver. Corp., 272 N.Y. 133, 138 (1936).

Similarly, the fact that the Zip Board minutes mentioning the 40,000 Options were available in unlocked file cabinets in the AW offices does not satisfy Phansalkar's "affirmative duty" to disclose these benefits to AW. Butler, 1994 WL 463966, at *2; Maritime Fish Prods., 474 N.Y.S.2d at 286. AW's allegation that Phansalkar breached his duty to AW by failing to disclose the 300,000 Sorrento Options, is rejected because I have already found that Andersen was made aware of the option grant to Phansalkar and that Phansalkar reasonably believed that Andersen knew of the grant. Phansalkar was under no duty to continually remind Andersen of this grant.³³ Similarly, AW's allegation that Phansalkar breached his duty by failing to disclose or remit the 50,000 Entrada Options or the 100,000 Entrada Options is rejected because I have already found that those options were not received in his capacity as an AW representative.

33 AW cites Lamdin for the proposition that Phansalkar was himself required to disclose the option grant to AW, even if AW already knew of the grant (via Andersen). See AW Prop. Law ¶ 14. Lamdin is inapplicable because that case only held that an employee's disclosure to another employee did not constitute disclosure to the employer itself. See 272 N.Y. at 138.

ii. Board Seats Offered During the Entrada Transaction

As part of his duty of loyalty, an employee has "an obligation to communicate any business opportunity to [his employer]," and may not take that business for himself for his profit "without the express consent and approval of his employer." Maritime Fish Prods., 474 N.Y.S.2d at 286; see also Botnick v. Duck Corp., 700 N.Y.S.2d 143, 145 (1st Dep't 1999) (holding that employee breached duty of loyalty to company by failing to disclose venture capital firm's offer to invest in the company). As an AW employee, Phansalkar had a duty to disclose to the firm the offer of a Sync Board seat as well as the offer to him personally of an Entrada Networks Board seat. He did not disclose these opportunities to AW, but instead declined the Sync Board seat and accepted the Entrada Networks Board seat for himself without AW's consent. Therefore, Phansalkar breached his duties to AW with respect to these opportunities.

2. Conversion

AW asserts that Phansalkar illegally converted the directors' compensation he received from Zip, Osicom and Entrada. See AW Pre-Trial Mem. at 30. This claim must fail because AW's entire defense is premised on its contention that Phansalkar's fees, shares and options were never given to the firm. Thus, AW cannot prove that it ever had "ownership, possession or control" of any of the directors' compensation it seeks from Phansalkar. Briarpatch Ltd., LP., 148 F. Supp.2d at 327 (S.D.N.Y. 2001); see also Pioneer, 122 B.R. at 883.

3. Fraud

AW asserts that any agreement to provide compensation to Phansalkar, including his interests in MCEL, is voidable as a result of fraud. See AW Pre-Trial Mem. at 38. The elements of fraudulent inducement are: (1) a false representation of a material fact; (2) scienter; and (3) reliance. See Xuchang Rihetai Human Hair Goods Co., Ltd. v. Hanyu Int'l USA, Inc., No. 00 Civ. 5585, 2001 WL 883646, at *5 (S.D.N.Y. Aug. 7, 2001); Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Worley, 690 N.Y.S.2d 57, 61 (1st Dep't 1999). With respect to the directors' compensation that Phansalkar failed to disclose to AW — namely, his Zip Options, Zip Shares, 35,000 Osicom Options, and Osicom Fees — I have found that AW did not prove that he intentionally concealed this compensation from the firm. As for the offer of a Sync Board seat and an Entrada Networks Board seat, AW has proffered no evidence that Phansalkar took steps to hide those offers from anyone at the firm.³⁴ Accordingly, AW has failed to prove the scienter element of fraud and its claim must fail.

34 Even if AW had proven that Phansalkar intentionally concealed the Board seat offers from the firm, these events took place after Phansalkar purchased his MCEL Shares. Therefore, AW could not prove that it relied on these misrepresentations when it offered and sold the MCEL Shares to Phansalkar.

4. Mutual or Unilateral Mistake

AW asserts that it is entitled to seek rescission or restitution with regard to its agreement to sell MCEL Shares to Phansalkar because of mutual or unilateral mistake of fact. See AW Pre-Trial Mem. at 36-37. According to AW, the MCEL Shares were offered to Phansalkar on the assumption that he was a partner at AW and Phansalkar's "new contention that he was not a partner requires that these benefits be returned." Id. at 36. The Court will not entertain this argument for two reasons. First, AW has stipulated for purposes of this litigation that it will not dispute Phansalkar's contention that he was not actually a partner of AW. See JPTO ¶¶ 6a.2, 6b.7. Second, there could be no mistake of fact regarding Phansalkar's status at AW because Andersen and Weinroth were well aware that they never amended the firm's limited partnership agreement to name Phansalkar as a partner. AW's only possible mistake would be mistake of law — i.e., their apparent assumption that calling someone a 'partner' makes it so as a legal matter.

C. Phansalkar's Counter Defenses³⁵

35 The Court need not address Phansalkar's argument that AW ratified his receipt of 300,000 Sorrento Options, see Phansalkar Pre-Trial Mem. at 42-43, because it has already denied AW's claims regarding those Options. Nor must the Court address Phansalkar's argument regarding AW's standing to assert its claims for his director's compensation. See id. at 37-40. Phansalkar argues that these claims belong to the LLC entities on whose behalf he served on corporate boards, not AW, see id., but I have already found, as a matter of fact, that Phansalkar served on the relevant corporate boards as a representative of AW.

1. Waiver

Phansalkar claims that AW has waived its right to options Phansalkar received for his board service. See Phansalkar Pre-Trial Mem. at 40-41. Under New York law, waiver is "the intentional relinquishment of a known right with both knowledge of its existence and an intention to relinquish it." In re Seamans Furniture of Union Square, No. 96 Civ. 4268, 1996 WL 741604, at *4 (S.D.N.Y. Dec. 27 1996); see also General Motors Accept. Corp. v. Clifton-Fine Cent. Sch. Dist., 85 N.Y.2d 232, 235 (1995). The party asserting waiver bears the burden of proof. See In re Seamans Furniture of Union Square, 1996 WL 741604, at *4. Waiver may be established by either affirmative conduct or by failure to act which evinces "an intent not to claim a purported advantage." General Motors Accept. Corp., 85 N.Y.2d at 235. But in either case, the "waiver must be clear, unmistakeable and without ambiguity." Civil Service Employees Assoc., Inc., Local 1000, AFSCME, AFL-CIO v. Kinsella, 599 N.Y.S.2d 671, 673 (3d Dep't 1993); see also Port Distrib. Corp. v. Pflaumer, 880 F. Supp. 204, 211 (S.D.N.Y.), aff'd, 70 F.3d 8 (2d Cir. 1995).

Phansalkar asserts that AW's intent to waive its rights is manifest in two ways: (1) the firm did not enforce its policy with respect to directors' options; and (2) Andersen and Weinroth ignored their duty to remit directors' options. See Phansalkar Pre-Trial Mem. at 41. Phansalkar's argument is belied by the facts. At various points during his tenure at the firm, AW informed Phansalkar of its policy regarding fees and options. In addition, Weinroth's March 16th Memo explicitly identified Andersen's 100,000 Sorrento Options as one of the firm's "other potential investments in Sorrento," Ex. 200, and Andersen's draft of the June 18th Memo asserts that the options received by Phansalkar and himself for serving on the Sorrento Board are part of the firm's interest in Sorrento, see Ex. 306. Therefore, Phansalkar has not proven that AW clearly and unambiguously intended to waive its rights with respect to his directors' options.

2. Estoppel

Phansalkar also claims that AW should be equitably estopped from asserting any claims to his directors' options because, prior to this litigation, AW neither discussed the firm's policy regarding directors' options with him, nor procured his agreement to this policy. See Phansalkar's Pre-Trial Mem. at 43. The doctrine of equitable estoppel is used to protect a party "who has detrimentally altered his position in reliance on [another party's] misrepresentation or failure to disclose some material facts." United States v. William Crow Constr. Co., 826 F. Supp. 647, 656 (E.D.N.Y. 1993) (citing U.S. v. Aetna Ins. Co., 923 F.2d 1521, 1526 (11th Cir. 1991)). "The basic elements of estoppel are: (1) material misrepresentation; (2) reliance; and (3) damage." Starter v. Starter, 170 F.3d 286, 294 (2d Cir. 1999). AW has not made a material misrepresentation to Phansalkar nor has it failed to disclose any material information to Phansalkar regarding its policy on directors' options. There is no evidence that anyone at AW told Phansalkar that he had a right to retain the directors' options he received as the firm's representative on a company board. In fact, AW explicitly informed Phansalkar of its policy on several occasions. Therefore, AW is not estopped from asserting its claims with respect to Phansalkar's directors' options.

D. Damages

1. AW's Remedy for Phansalkar's Acts of Disloyalty

AW argues that, pursuant to New York's faithless servant doctrine, Phansalkar's acts of disloyalty caused him to forfeit all compensation and benefits received from AW, including his MCEL Shares. See AW Pre-Trial Mem. at 29-30.

a. Legal Standard

Under New York's faithless servant doctrine, "one who owes a duty of fidelity to a principal and who is faithless in the performance of his or her services is generally not entitled to recover compensation, whether commissions or salary." Royal Carbo Corp. v. Flameguard, Inc., 645 N.Y.S.2d 18, 18 (2d Dep't 1996); see also Peregrine Myanmar Ltd. v. Segal, No. 95 Civ. 8286, 1996 WL 572211, at *6 (S.D.N.Y. Oct. 4, 1996); Feiger v. Iral Jewelry, Ltd., 394 N.Y.S.2d 626, 626 (1977); Bon Temps Agency Ltd. v. Greenfield, 622 N.Y.S.2d 709, 710 (1st Dep't 1995). Compensation must be forfeited even if "the services were beneficial to the principal," and even if "the principal suffered no provable damage as a result of the breach of fidelity by the agent." Feiger, 394 N.Y.S.2d at 626; see also Peregrine Myanmar, 1996 WL 572211, at *6; see also Miller v. Brown Harris Stevens, Inc., 617 N.Y.S.2d 773, 774 (1st Dep't 1994).

b. Analysis

Phansalkar argues, first, that forfeiture cannot apply to his MCEL Shares because the Shares were not 'compensation'. See Phansalkar Pre-Trial Mem. at 46. Even if the MCEL Shares are 'compensation', Phansalkar urges the Court to apply a "transaction-by-transaction rule of apportionment" which would only require him to forfeit the compensation earned on specific faithless transactions. See id. at 46-47. According to this method of apportionment, Phansalkar argues, his MCEL Shares need not be forfeited. Id. at 47.

i. Phansalkar's MCEL Shares Were Compensation

New York law does not explicitly define the term "compensation" for purposes of the faithless servant doctrine, though it clearly includes both commissions and salary. See Royal Carbo Corp., 645 N.Y.S.2d at 18; Peregrine Myanmar Ltd., 1996 WL 572211, at *6. There is a general "presumption that any beneficial payment to an employee beyond his salary is intended as additional compensation." Van Dusen v. Commissioner of Internal Revenue, 166 F.2d 647, 650 (9th Cir. 1948). The federal tax laws treat shares of stock sold to an employee at a bargain price as compensation. See Commissioner of Internal Revenue v. Lo Bue, 351 U.S. 243, 247 (1956). In Lo Bue, the United States Supreme Court explained:

Since the employer's transfer of stock to its employee for much less than the stock's value was not a gift, it seems impossible to say it was not compensation . . . When assets are transferred by an employer to an employee to secure better services, they are plainly compensation. It makes no difference that the compensation is paid in stock rather than in money.

Id. Similarly, the federal securities laws treat the "opportunity to purchase securities at a discounted price" as compensation. United States v. Ostrander, 999 F.2d 27, 30 (2d Cir. 1993) (quoting United States v. Deutsch, 451 F.2d 98, 114 (2d Cir. 1971)). Indeed, the Second Circuit has held that when the opportunity to purchase securities is "offered only to a few" and the employee "clearly believe[s] [it] to be a good buy," the opportunity is compensation regardless of whether the purchase price is actually below market value. Ostrander, 99 F.2d at 30.

Here, Phansalkar was offered the opportunity to purchase MCEL Shares at a discounted price, and he clearly thought this offer was a "good deal". Phansalkar Tr. at 1657. Because Andersen and Weinroth made this opportunity available to Phansalkar in his capacity as an AW employee and as a means of encouraging him to stay at the firm, the MCEL Shares were part of his 'compensation'.³⁶ See Lo Bue, 351 U.S. at 247; Ostrander, 99 F.2d at 30.

36 The fact that the MCEL Shares came from Andersen and Weinroth's personal holdings, as opposed to the firm's holdings,
is irrelevant because they were sold to induce Phansalkar to provide his services to the company. See Van Dusen, 166 F.2d at 649 (holding that the fact that the president of the company, rather than the company itself, granted stock options to employee was "immaterial" as long as stock options were intended as compensation). Nor is it relevant that two non-AW employees were also offered the opportunity to purchase MCEL Shares at the Original Price, because these non-AW employees were Original Investors. See Phansalkar Post-Trial Mem. at 4.
Phansalkar urges the Court to consider his actual tax behavior with respect to the MCEL Shares as evidence that he did not consider those Shares to be compensation. See Phansalkar Post-Trial Mem. at 4-8. The problem is that none of his factual claims regarding his tax behavior were mentioned, let alone proven, at trial.

b. Apportionment of Forfeited Compensation

i. Legal Standard

Older New York case law suggested a strict rule against apportioning forfeiture of compensation. See Musico v. Champion Credit Corp., 764 F.2d 102, 113 (2d Cir. 1985) (citing Lamdin, 272 N.Y. at 133; Murray v. Beard, 102 N.Y. 505, 508 (1886)). More recently, New York courts have allowed the apportionment of forfeiture to those time periods during which an employee was disloyal. See id. (citing, e.g., Maritime Fish Prods., 474 N.Y.S.2d at 287; St. James Plaza v. Notey, 463 N.Y.S.2d 523, 526 (1983)).

In Musico v. Champion Credit Corp., the Second Circuit announced that New York law allows for apportionment of forfeited compensation not only as to time periods but also as to specific tasks. See 764 F.2d at 113-14. In Musico, the parties had apportioned various tasks under four separate agency agreements. See id. at 114. Defendant's misconduct related only to the tasks set out in two of those agreements and "ha[d] neither tainted nor interfered with the completion of" the tasks identified in the other two agreements. Id. The court found this situation distinguishable from earlier New York cases which had imposed complete forfeiture because, while those cases "concerned breaches of duty which had tainted all the dealings between the parties," this case involved a breach of duty that "did not extend to or taint all the dealings between the parties." Id. (citing Troustine v. Bauer, Pogue Co., 244 F.2d 379, 383 (2d Cir. 1944)).³⁷ Thus, the Court held that it was proper to apportion the forfeited compensation to only those transactions tainted by Defendant's disloyalty and that Defendant would not lose compensation for properly completed tasks. Id. at 113-14.

37 In Troustine, the Second Circuit condoned a similar approach to forfeiture, holding that it was within the district court's discretion to limit an agent's forfeiture to compensation received for tasks carried out improperly. See 244 F.2d at 383.

Musico's transaction-by-transaction method of apportionment was applied several years later in Sequa Corp. v. GBJ Corp., No. 91 Civ. 8675, 1996 WL 745338, at *79, *99 (S.D.N.Y. 1996), aff'd in part, reversed in part on other grounds, 156 F.3d 136, 147 (2d Cir. 1998), where an employee was only required to forfeit compensation related to his one improperly performed task. In Sequa, the defendant, a financial consulting firm, and the plaintiff, a defense contractor, entered into a consulting agreement whereby defendant identified and secured financing for certain transactions sought by plaintiff. Although plaintiff alleged that defendant had engaged in a "wide-ranging scheme" to defraud the firm, the district court found that defendant's conduct was only "tainted" with respect to a "single area" of the agreement.³⁸ Id. at *79. The court rejected Plaintiff's argument that, pursuant to the faithless servant doctrine, this isolated breach required defendant to forfeit all rights to compensation during the term of the agreement. See id. Instead, the Court applied Musico's transaction-by-transaction method of apportionment to limit forfeiture to the fees defendant would have received for the particular transaction in which he was found to be disloyal. See id. at *79, *99.

38 Specifically, the court found that defendant's broker had breached his fiduciary duty to plaintiff through the use of a falsely worded document in one of several transactions performed under the consulting agreement. See Sequa, 1996 WL 745338, at *79.

The district court in Sequa recognized that some courts "have been strict in finding forfeiture of all compensation during periods of disloyalty when an employee engaged in a continuing practice or enterprise of fraud against the principal." Id. at *99, n. 29 (citing Soam Corp. v. Trane Co., 608 N.Y.S.2d 177, 178 (1st Dep't 1994); Bon Temps, 584 N.Y.S.2d at 825-26; InterPool Ltd. v. Patterson, 874 F. Supp. 616, 620-22 (S.D.N.Y. 1995)). However, it distinguished the case at bar because the proven disloyalty "was so isolated and exceptional that it [could not] be said that [defendant] behaved disloyally for a measurable or significant period of time." Id. at *79. Accordingly, the district court held:

Unlike those cases finding a broad forfeiture of compensation, Defendants here did not engage in a continuing and ongoing scheme in violation of their fiduciary duties; rather, the violation was aberrational and limited, and thus, the forfeiture should be appropriately limited.

Id.

The Second Circuit upheld the district court's application of the transaction-by-transaction method of apportionment in Sequa. See Sequa, 156 F.3d at 147. First, the Court of Appeals reaffirmed its holding in Musico, stating that in Musico,

[W]e discerned a possible relaxation of New York's strict rule demanding forfeiture of all of a faithless servant's compensation during the entire agency relationship, in favor of a rule of apportionment under which only the fees related to the "specified items of work" as to which the agent acted faithlessly would be forfeited.

Id. (quoting Musico, 764 F.2d at 112-13) (emphasis in original). Second, the court held that, "[b]ecause the New York Court of Appeals ha[d] not repudiated" Musico's holding, the district court properly relied on that case's sanctioning of the transaction-by-transaction method of apportionment. Id. Third, the Second Circuit recognized that Musico represents a "relatively generous interpretation of New York Law" which stands in a "somewhat tenuous posture" until the New York Court of Appeals explicitly approves its methodology.³⁹ Id.

39 Defendant contended that the forfeiture rule should be further relaxed to require that the amount forfeited be proportionate to the harm caused by his faithlessness. Because of the "somewhat tenuous posture" of Musico, the court declined to further relax the forfeiture rule by adopting this "rule of proportionality." Sequa, 156 F.3d at 147.

AW suggests that, to the extent that Musico and Sequa permit a transaction-by-transaction approach to forfeited compensation, there is "a tension between New York's strict forfeiture rule" and the Second Circuit case-law "which must be resolved in favor of the strict forfeiture rule." See AW Post-Trial Mem. at 5 n. 2 (citing Interpool, 874 F. Supp. at 622 n. 5). But the cases cited by AW for the proposition that New York imposes a strict rule of complete forfeiture are distinguishable from Musico and Sequa. Bon Temps involved an employee at a placement agency who not only diverted fees belonging to her employer, but also established a separate company in direct competition with her employer while still in his employ.⁴⁰ See 584 N.Y.S.2d at 826. In Soam Corp., defendant was hired for the sole purpose of representing plaintiff manufacturer in the sale of goods for a particular project. See 608 N.Y.S.2d at 162-63. His disloyalty stemmed from his promotions and sales for, and receipt of commissions from, plaintiff's direct competitor on that project. See id. As noted by the Sequa court, both Bon Temps and Soam Corp. involved a continuous and wide-ranging scheme that tainted the entire employment relationship. See Sequa, 1996 WL 745338, at *99 n. 29.

40 The Interpool court interpreted Bon Temps as holding that "faithless employee was not entitled either to retain the commissions improperly diverted or to be paid commissions for placing other [clients] in transactions in which there was no claim of disloyalty." Interpool, 874 F. Supp. at 622. However, this interpretation misconstrues the allegations of disloyalty in that case because the defendant employee also secretly engaged in direct competition that tainted her entire relationship with her employer.

Here, the Musico/Sequa approach to forfeiture is consistent with New York cases which have limited complete forfeiture to situations where the employee's disloyalty affects the employment relationship in a "material and substantial way." Sundland v. Korfund Co., Inc., 20 N.Y.S.2d 819, 822 (1st Dep't 1940). In the early case of Turner v. Kouwenhoven, 100 N.Y. 115 (1885), the New York Court of Appeals stated the following pertinent rule:

Cases may no doubt arise where the dishonesty of the servant is of such a character as would justify the conclusion that his contract had been violated in a most material and substantial part, and to an extent which would bar any recovery whatever; but the act in such cases, to bar a recovery must be misconduct and unfaithfulness which substantially violates the contract of service.

Id. at 120 (emphasis added). The New York courts continue to cite this proposition approvingly. See, e.g., Abrahmason v. Dry Goods Refolding Co., 166 N.Y.S. 771, 773 (1st Dep't 1917) (holding that "[d]ishonesty on the part of the servant may not in itself constitute a defense to an action for wages," but that an employee cannot recover compensation for disloyalty "which permeates the employe's [sic] service in its most material and substantial part") (emphasis added); Bompane v. Enzolabs, Inc., 608 N.Y.S.2d 989, 993 (Sup.Ct. Suffolk Co. 1994) ("[T]he pertinent rule regarding 'dishonesty of the servant,' stated long ago, is that to bar recovery the employee's act must be 'misconduct and unfaithfulness which substantially violate * * * the contract of service'.") (asterisks in original); Pictoral Films v. Salzburg, 106 N.Y.2d 626, 530-31 (Sup.Ct. N.Y. Co. 1951) (holding that, for an employee to forfeit all compensation, "the dishonesty must be of such a character as would justify the conclusion that the contract of employment was violated 'in a most material and substantial part'") (quoting Turner, 100 N.Y. at 120); Bravin v. Fashion Week, Inc., 342 N.Y.S.2d 971, 975-76 (Civ.Ct. Suffolk Co. 1973) ("[An] employee's right to compensation for past services rendered may not be defeated by claims of wrongdoing, unless the conduct complained of substantially violates the contract of service.") (quotation marks excluded).

ii. Analysis

Under the Musico/Sequa approach, the transaction-by-transaction apportionment of forfeiture is appropriate where (1) an employee did not engage in a "wide-ranging scheme" to defraud his employer, Sequa, 1996 WL 745338, at *79, and (2) the incidents of disloyalty "did not extend to or taint all the dealings between the parties," Musico, 764 F.2d at 114 (citing Troustine, 244 F.2d at 383). This is just such a case.

Phansalkar's only misdeeds were his failure to disclose to AW his receipt of Zip Options, Zip Shares, 35,000 Osicom Options and Osicom Directors' Fees, as well as his failure to inform AW that a Sync Board seat was offered to AW during negotiations over the Entrada Transaction and an Entada Networks Board seat was offered to Phansalkar while he was employed at AW. But I have found that Phansalkar did not take steps to conceal any of his board compensation from AW or conceal his activities from AW. I have also found that AW has not proven any misdeeds by Phansalkar with respect to his 450,000 Osicom Shares, his service as an Advisory Director to Sorrento, his acceptance of the position of CEO and Chairman of Osicom, his Entrada Options, the Sorrento Private Placement, the decision to remove Andersen from the Sorrento Board, or the Sorrento IPO. Thus, Phansalkar committed isolated misdeeds that did not constitute a 'scheme' to defraud the firm.

Moreover, Phansalkar's isolated misdeeds did not permeate his service at AW or taint his other transactions while at the firm. Phansalkar brought a number of attractive deals to AW. At a minimum, his efforts resulted in the firm's receipt of substantial cash fees for the Zip Transaction, the Osicom Private Placement, the Entrada Transaction and the Sorrento Private Placement (although AW chose to take this fee in stock). Furthermore, AW has not alleged any misconduct by Phansalkar with respect to his MCEL Shares. To the contrary, it proffered evidence that Phansalkar was "extremely helpful" in raising funds for the May 2000 round of private financing and that he helped the firm solicit underwriters for the MCEL IPO. Rawlings Tr. at 527-28; see also Ex. 172.

Because Phansalkar did not engage in a scheme to defraud AW and his isolated misdeeds did not permeate his entire employment relationship, I find that the transaction-by-transaction method of apportioning forfeited compensation is appropriate in this case. See Musico, 764 F.2d at 114; Troustine, 244 F.2d at 383; Sequa, 156 F.3d at 147; Sequa, 1996 WL 745338, at *79. Because Phansalkar's disloyal conduct in no way tainted his involvement in MCEL, the MCEL Shares should not be forfeited. See id.

AW argues that transaction-by-transaction apportionment is not appropriate because Phansalkar's compensation was not apportioned by specific tasks. See AW Post-Trial Mem. at 4-5. AW cites InterPool Ltd. v. Patterson for the proposition that Musico only applies where an employee's compensation has been specifically apportioned by contract to specific tasks. See AW Post-Trial Mem. at 4-5 (citing Interpool, 874 F. Supp. at 621). It then explains that, whereas Musico involved four separate agency agreements, this case involves a single contract of employment which governed the relationship between the parties. See id.

In Interpool, defendant was a salesman for plaintiff corporation and breached his fiduciary duties to plaintiff by selling to customers in which he had a undisclosed interest and appropriating customer opportunities that belonged to plaintiff. See Interpool, 874 F. Supp. at 617. Defendant argued that, pursuant to Musico, he was only required to forfeit compensation received for the specific sales that were tainted by his breach. See id. at 620. The district court rejected defendant's contention, explaining that, whereas Musico involved four separate agency agreements, defendant's employment was governed by a single contract with plaintiff.⁴¹ See id. at 621. According to the Interpool court, Musico stands for the narrow proposition that "the agent is entitled to retain compensation only for properly performed tasks for which compensation is specifically apportioned by contract." Id.

41 The court rejected defendant's contention that a commission arrangement inherently apportions compensation on a transaction-by-transaction basis. See Interpool, 874 F. Supp. at 621.

Interpool is inapplicable for two reasons. First, Interpool is distinguishable on its facts. While Interpool involved an employee's "continuing practice or enterprise of fraud against" his employer, Phansalkar's acts of disloyalty were isolated and limited. Sequa at *99 n. 29 (citing Interpool, 874 F. Supp. at 620-22). Second, to the extent that Interpool limits the transaction-by-transaction method of forfeiture to situations where an employee works under separate agency agreements, its holding is inconsistent with the Second Circuit's subsequent decision in Sequa in which a single agreement governed the agency relationship between the parties. See Sequa, 156 F.3d at 147.

2. Phansalkar's Conversion Damages

a. Legal Standard

Phansalkar cites Schultz v. Commodity Futures Trading Comm'n, 716 F.2d 136, 141 (2d Cir. 1983), for the proposition that the measure for wrongful conversion of stock is the higher of: (1) the stock's value at the time of conversion; or (2) the stock's highest intermediate value between notice of conversion and a reasonable time thereafter. See Phansalkar Pre-Trial Mem. at 27. He claims that he first learned about the conversion on September 6, 2000, and that a "reasonable time" thereafter would be about 30 to 60 days. See Phansalkar Proposed Conclusions of Law ("Phansalkar Prop. Law") ¶ 9. Accordingly, Phansalkar argues that he is entitled to damages at the price of $24 per share (the closing price for MCEL stock on September 26, 2000) which would afford him over $16 million. See Phansalkar Pre-Trial Mem. at 28.

Phansalkar's reliance on the Schultz methodology is misplaced. First, Schultz is easily distinguished. Whereas Schultz involved stocks that were marketable at the time of conversion, Phansalkar's MCEL Shares would have been subject to an 180-day lock-up agreement as well as sales restrictions imposed by the securities laws (see infra). See Lucente v. International Bus. Mach. Corp., 146 F. Supp.2d 298, 304 (S.D.N.Y. 2001) (refusing to apply Schultz methodology to restricted securities); Commonwealth Assoc. v. Palomar Med. Tech., 982 F. Supp. 205, 212 (S.D.N.Y. 1997) (refusing to apply the Schultz analysis where investor could not immediately repurchase his converted securities upon learning of the conversion).

Second, as the Schultz court explained, damage awards should place the injured party "in the position he would have been in had not his rights been violated," but should not create a "windfall." Schultz, 716 F.2d at 139-40 (quoting Galigher v. Jones, 129 U.S. 193, 200 (1889)). The conversion theory of damages allows a plaintiff to "recover from the defendant some prospective profit that may have accrued after the wrongful act" by assuming that plaintiff would have sold his shares at the highest price available to him. Scully v. US WATS, 238 F.3d 497, 510 (7th Cir. 2001). By setting damages at this price, however, the theory generally overcompensates plaintiffs because it is unlikely that every plaintiff would have had the "clairvoyance to sell when the stock hit its peak." Tamari v. Bache Co. (Lebanon) S.A.L., 838 F.2d 904, 907 (7th Cir. 1988). In this case, application of the Schultz methodology would further overcompensate Phansalkar by permitting him to receive the highest price that MCEL stock attained during a period when his particular MCEL Shares could not have been sold. This Court will not allow such a "windfall." Cf. Schultz, 716 F.2d at 141 (prohibiting plaintiff from receiving a price he showed no desire to realize when he could have). Therefore, the proper measure of Phansalkar's damages is the highest price Phansalkar could have attainted for his alienable MCEL Shares within a reasonable time after AW's conversion. See Lucente, 146 F. Supp.2d at 304. b. Analysis At the time of AW's conversion, Phansalkar owned 385,902 MCEL Shares. These shares would have been subject to the 180-day lock-up agreement required by the underwriters, but the more significant restrictions are those imposed by Rule 144 of the Securities Act of 1933. Pursuant to Rule 144, the purchaser of restricted securities is subject to a one-year holding period during which he may not resell those shares.⁴² See 17 C.F.R. § 230.144(d)(1). The one-year holding period commences upon payment of the full purchase price. See id. The rule defines "restricted securities" as "[s]ecurities acquired directly or indirectly from the issuer, or from an affiliate of the issuer, in a transaction or chain of transactions not involving any public offering." 17 C.F.R. § 230.144(a)(3)(i). An "affiliate" is "a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such issuer." 17 C.F.R. § 230.144(a)(1). Determination of whether a person is in 'control' is a question of fact and depends on the totality of the circumstances, including an appraisal of the influence the individual has on the management and policies of a company. See United States v. Corr, 543 F.2d 1042, 1050 (2d Cir. 1976); SEC v. Cavanagh, 1 F. Supp.2d 337, 366 (S.D.N.Y. 1998). Stock ownership is but one aspect of control; a person may have control over a company even though he does not own a majority of the voting stock. See id.

42 Specifically, Rule 144 sets conditions which, if met, permit those persons to whom the Rule applies to sell securities without incurring the status of underwriters or participants in a distribution of securities.

Phansalkar payed for his MCEL Shares on February 16, 2000. At that time, Andersen and Weineroth were both directors of MCEL and each held a large ownership position in the company. Moreover, the entire MCEL Board was composed of AW employees. Therefore, Andersen and Weinroth were clearly in 'control' of MCEL and were thus 'affiliates' of MCEL under Rule 144(a)(1). As a result, the MCEL Shares they sold to Phansalkar were 'restricted securities' under that Rule. Because Phansalkar's MCEL Shares were 'restricted', they were subject to Rule 144's one-year holding period and could not have been sold in a public or private transaction until February 16, 2001.⁴³

43 Phansalkar could not have tacked his holding period onto those of Andersen and Weinroth, which began when they payed for their MCEL interests in January 1999. See In re Kirby, Exchange Act Release no. 10-177, 2000 WL 1787908, at *14 (Dec. 17, 2000) ("No such tacking will be permitted where the seller has purchased from an affiliate of the issuer whose presence in the chain of title will trigger the commencement of a new holding period.").

Following the expiration of the one-year holding period, Phansalkar's MCEL Shares would have been subject to the volume restrictions imposed by Rule 144(e)(2). Pursuant to Rule 144(e)(2), the number of shares that may be sold by a non-affiliate during any three-month period following the expiration of his one-year holding period is limited to an amount equal to the greater of one percent of the outstanding common stock or the average weekly trading volume of that stock in the preceding four weeks. See 17 C.F.R. § 230.144(e)(1)(2). As of February 16, 2001, there were approximately 27 million MCEL shares outstanding. See Transcript of Testimony of Robert Korajczyk, Phansalkar's damages expert, ("Korajczyk Tr.") at 1570. Therefore, Phansalkar would have been permitted to sell approximately 270,000 (one percent of 27 million) of his MCEL Shares between February 16, 2001 and May 15, 2001, and the remaining 115,902 shares between May 16, 2001 and August 15, 2001.⁴⁴ The highest market price for MCEL stock in these respective time periods was $10.91 (May 4, 2001) and $12.70 (May 21, 2001).⁴⁵ See Ex. 478. Thus, damages for AW's conversion of Phansalkar's MCEL Shares is the sum of $2,945,700.00 and $1,471,955.40, which totals $4,417,655.40 excluding prejudgment interest.

44 At this time, one percent of the outstanding shares was greater than the average weekly trading volume of MCEL Shares in the preceding four weeks. See Ex. 478; AW Prop. Facts ¶ 163 (noting that MCEL stock was not actively traded during this time period).

45 AW argues that the Court should take into consideration the fact that Phansalkar's attempt to sell such a large number of shares on any given day would have the effect of significantly depressing the market price, particularly given the notice requirements of Rule 144. See AW Prop. Facts ¶¶ 172-175. However, AW cites no case where a court has calculated damages for conversion of shares by predicting the effect that a hypothetical sale or purchase of the converted shares would have on the market price.

3. Prejudgment Interest

In a diversity case, the availability of prejudgment interest is a substantive issue governed by state law. See Campbell v. Metro. Property and Cas. Ins. Co., 239 F.3d 179, 186 (2d Cir. 2001). New York law states, in relevant part:

Interest shall be recoverable upon a sum awarded because of a breach of performance of a contract, or because of an act or omission depriving or otherwise interfering with title to, or possession or enjoyment of, property, except that in an action of an equitable nature, interest and the rate and date from which it shall be computed shall be in the court's discretion.

N Y C.P.L.R. § 5001(a). In actions at law that fall within the purview of the statue, prejudgment interest is recoverable "as a matter of right." Rose Assoc. v. Lenox Hill Hosp., 695 N.Y.S.2d 1, 69 (1st Dept. 1999); In re Liquidation of New York Surety Co., 728 N.Y.S.2d 915 (Sup. Ct. Nassau Co. 2001). Although section 5001(a) does not explicitly mention 'conversion', courts have found it applicable to actions that sound in conversion. See Nagoya Venture Ltd. v. Bacopulos, No. 96 Civ. 9317, 1999 WL 311918, at *4 (S.D.N.Y. May 18, 1999) (awarding prejudgment interest on wrongfully diverted funds); Phillips v. Catania, 592 N.Y.S.2d 998, 999 (1993) (awarding prejudgment interest in conversion action); Eighteen Holding Corp. v. Drizin, 701 N.Y.S.2d 427, 428-29 (1st Dep't 2000) (awarding prejudgment interest on wrongfully withheld money); Cf. Distillator Son., Inc. v. Smith, 249 N.Y.S. 525 (Mun. Ct. 6th Dist. 1931) (holding, prior to statute, that plaintiff in conversion case is entitled to prejudgment interest as "a matter of law."). Therefore, Phansalkar is entitled to prejudgment interest on the damages resulting from AW's unlawful conversion.

Section 5001(b) states that prejudgment interest must be computed from "the earliest ascertainable date the cause of action existed, except that interest upon damages incurred thereafter shall be computed from the date incurred." N.Y. C.P.L.R. § 5001(b). Where damages were incurred at various times, prejudgment interest is computed "upon each item from the date it was incurred or upon all of the damages from a single reasonable intermediate date." Id. Here, Phansalkar's damages were incurred on the day he could have sold his MCEL Shares for maximum profit but was prevented from doing so because of AW's wrongdoing. Thus, prejudgment interest on the profits lost on 270,000 shares ($2,945,700.00), will be computed as of May 4, 2001 and prejudgment interest on the profits lost on the remaining 115,902 shares ($1,471,955.40) will be calculated as of May 21, 2001. This interest will be calculated by the clerk of the court at a rate of 9% per annum. See N.Y. C.P.L.R. §§ 5001(c), 5004.

4. Punitive Damages

Phansalkar's claim for punitive damages on his converted MCEL Shares is denied. See Phansalkar Additional Proposed Conclusions of Law ¶ 6. In a tort action where no harm is aimed at the general public, New York law only permits punitive damages if "the very high threshold of moral culpability is satisfied." Giblin v. Murphy, N.Y.S.2d 54, 56 (1988); see also Action S.A. v. Marc Rich Co., 951 F.2d 504, 509 (2d Cir. 1991) (punitive damages available for tort claims involving "gross, wanton, or willful fraud or other morally culpable conduct" even if that conduct is not directed at the general public) (quotation omitted); Blank v. Baronowski, 959 F. Supp. 172, 179 (S.D.N.Y. 1997). As explained by the New York Court of Appeals, punitive damages are reserved for those "cases where the wrong complained of is morally culpable, or is actuated by evil and reprehensible motives, not only to punish the defendant but to deter him, as well as others who might otherwise be so prompted, from indulging in similar conduct in the future. . . ." Walker v. Sheldon, 223 N.Y.S.2d 488, 491-92 (1961). While AW's conversion of Phansalkar's MCEL Shares was intentional, and perhaps vindictive, its actions do not meet the level of moral turpitude and outrageousness that would justify an award of punitive damages. Moreover, the size of the damage award owing to Phansalkar will undoubtedly deter AW, as well as others, from engaging in similar conduct in the future.

IV. CONCLUSION

For the foregoing reasons, I find that AW unlawfully converted Phansalkar's 385,902 MCEL Shares. I further find that Phansalkar's failure to disclose certain directors' compensation and Board seat opportunities breached his duty of loyalty and good faith to AW. However, I have determined that these isolated misdeeds did not constitute a scheme to defraud AW or so taint his employment relationship as to warrant forfeiture of his MCEL Shares. Accordingly,

(1) AW's claim that Phansalkar's acts of disloyalty require him to forfeit his MCEL Shares is DENIED.

(2) It is ORDERED that Phansalkar recover:

(a) judgment in his favor against AW in the amount of $4,417,655.40;

(b) interest on $2,945,700.00, at the rate of nine percent (9%) per annum from May 4, 2001 to the date of judgment; and

(c) interest on $1,471,955.40, at the rate of nine percent (9%) per annum from May 21, 2001 to the date of judgment; to be calculated by the Clerk of the Court, as allowed by law.

(3) It is further ORDERED that AW recover judgment in its favor against Phansalkar for an amount, to be determined at a later date, representing the compensation Phansalkar earned on the specific transactions where he was disloyal.

SO ORDERED: