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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
PATRICK EGAN, individually and on behalf of
TRADINGSCREEN, INC., 10 Civ. 8202 (LBS)
Plaintiff, MEMORANDUM
& ORDER
v.
TRADINGSCREEN, INC., TRADINGSCREEN
BROKERAGE SERVICES, LLC, PHILIPPE
BUHANNIC, SPREADZERO HOLDINGS INC.,
and SPREADZERO LLC,
Defendants.
SAND, J.
Plaintiff Patrick Egan brings this action against Defendants TradingScreen, Inc.
and TradingScreen Brokerage Services, LLC (collectively “TradingScreen”), SpreadZero
Holdings Inc. and SpreadZero LLC (collectively “SpreadZero”), and Philippe Buhannic.
Plaintiff brings claims under the Dodd–Frank Wall Street Reform and Consumer
Protection Act, 15 U.S.C. § 78u–6, the Securities Exchange Act of 1934, 15 U.S.C. §
78j(b), and various statutes and causes of action under New York and Delaware law. In a
decision dated May 4, 2011, this Court held that Plaintiff had not alleged claims under
the Dodd-Frank Act or the Securities Exchange Act sufficient to survive Defendants’
motions to dismiss for failure to state a claim. The Court afforded Plaintiff the
opportunity to replead his claims, and Plaintiff filed an amended complaint on May 18,
2011. Defendants have renewed their motions to dismiss.
For the following reasons, Defendants’ motions are granted.
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I. Background
The factual background of this case is fully set forth in this Court’s Opinion and
Order dated May 4, 2011. Egan v. Tradingscreen et al., No. 10 Civ. 8202 (LBS), 2011
WL 1672066 (S.D.N.Y. May 4, 2011) (“Egan I”). A brief summary follows.
Defendant TradingScreen, Inc. is a financial software business, and Defendant
TradingScreen Brokerage Services, LLC (“TSBS”) is a broker-dealer affiliated with it.
Defendant Buhannic is Chief Executive Officer of both TradingScreen, Inc. and TSBS.
Plaintiff was hired by TradingScreen in August 2003. In early 2009, Plaintiff learned that
Defendant Buhannic was diverting TradingScreen’s corporate assets to another company
which he solely owned, Defendant SpreadZero. By late 2009, Plaintiff concluded that
Buhannic’s activities were costing TradingScreen hundreds of thousands of dollars and
posing a threat to its business. In January 2010, Plaintiff reported Buhannic’s activities
to the President of TradingScreen, Michael Chin, who passed the information to members
of TradingScreen’s Board of Directors not controlled by Buhannic (the “Independent
Directors”). The Independent Directors hired Latham & Watkins LLP (“Latham”) to
conduct an internal investigation. In March 2010, Latham issued a report confirming
Plaintiff's allegations. On March 15, Buhannic gained control of the Board and prevented
the Independent Directors from forcing his resignation. Buhannic fired Plaintiff on
August 2, 2010, and told Plaintiff that he would not receive TradingScreen’s customary
severance package of one month’s pay for every year worked or the opportunity to cash
out his stock options.
Plaintiff filed his original Complaint in this action on October 29, 2010, and filed
a First Amended Complaint (“FAC”) on November 19, 2010. Defendants
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TradingScreen, SpreadZero, and Buhannic each filed motions to dismiss the Amended
Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) on December 22, 2010.
This Court issued an Opinion and Order granting Plaintiff leave to amend his Complaint
on May 4, 2011. Plaintiff filed a Second Amended Complaint (“SAC”) on May 18,
2011. Defendants filed their renewed motions to dismiss on June 14, 2011.
Plaintiff alleges that he is entitled to relief under the Securities Whistleblower
Incentives and Protection provisions of the Dodd–Frank Wall Street Reform and
Consumer Protection Act, 15 U.S.C. § 78u-6. Specifically, he invokes the statute’s
private cause of action for whistleblowers alleging retaliatory discharge or other
discrimination. Id. § 78u–6(h)(1)(B)(i). Plaintiff also contends that Defendants
TradingScreen, TSBS, and Buhannic violated Section 10(b) of the Securities Exchange
Act of 1934, 15 U.S.C. § 78j(b), because they allegedly made various misrepresentations
to him concerning his purchases and options of TradingScreen stock and the terms and
conditions of his employment. Plaintiff also pleads a number of New York and Delaware
statutory and common law claims against various Defendants, some individually and
some derivatively on behalf of TradingScreen.
II. Legal Standard
On a motion to dismiss, a court reviewing a complaint will consider all material
factual allegations as true and draw all reasonable inferences in favor of the plaintiff. Lee
v. Bankers Trust Co., 166 F.3d 540, 543 (2d Cir. 1999). “To survive dismissal, the
plaintiff must provide the grounds upon which his claim rests through factual allegations
sufficient to raise a right to relief above the speculative level.” ATSI Commc’ns Inc. v.
Shaar Fund, Ltd., 493 F.3d 87, 93 (2d Cir. 2007) (internal quotation marks omitted).
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Ultimately, the plaintiff must allege “enough facts to state a claim to relief that is
plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 547 (2007). “The tenet
that a court must accept as true all of the allegations contained in a complaint is
inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action,
supported by mere conclusory statements, do not suffice.” Ashcroft v. Iqbal, 129 S.Ct.
1937, 1949 (2009). Allegations of fraud must meet the heightened pleading standard of
Federal Rule of Civil Procedure 9(b), which requires that the plaintiff “state with
particularity the circumstances constituting fraud.” Fed. R. Civ. P. 9(b).
III. Discussion
A. Dodd-Frank Act Claims
In Egan I, this Court found that Plaintiff’s alleged cooperation with the Latham
attorneys could have met the Dodd-Frank Act’s definition of “acting jointly” to provide
information to the United States Securities and Exchange Commission (“SEC”), 15
U.S.C. § 78u-6(a)(6), but that Plaintiff had failed to plead facts showing that transmission
of this information to the SEC actually took place.1 Plaintiff was granted “leave to
amend the Second Cause of Action in the Complaint to plead facts supporting his
knowledge, heretofore on information and belief, that Buhannic’s conduct was reported
1 Defendants cite two developments since this Court issued Egan I that allegedly clarify the phrase “acting
jointly” in the securities whistleblower provisions of the Dodd-Frank Act. 15 U.S.C. § 78u-6(a)(6). First,
the SEC adopted final rules for implementing certain whistleblower provisions of the Act. Securities
Whistleblower Incentives and Protections, 76 Fed. Reg. 34,300 (June 13, 2011) (to be codified at 17 C.F.R.
§§ 240.21F-1 to 240.21F-17). These rules require that reports submitted by a whistleblower “be
accompanied by sworn certifications by the whistleblower and counsel.” Id. at 34339. Defendants argue
that Plaintiff could not have acted jointly with the Latham attorneys because he did not follow these
procedures. Defendants are mistaken, for these requirements apply only to disclosures filed anonymously
with the SEC. See id. (“[T]he requirement of a certification by the whistleblower or, in case of anonymous
submission, the whistleblower’s counsel, is sufficient to deter false or meritless submissions.”) (emphasis
added). As before, “the agency here has not spoken on the precise question involved in this case.” Egan I,
2011 WL 1672066, at *8. Second, the United States Court of Appeals for the Ninth Circuit ruled that
individuals who reported information to the media with the expectation that it would ultimately be reported
to some federal authority were not whistleblowers. Tides v. Boeing Co., 644 F.3d 809, 815 (9th Cir. 2011).
However, this case involved disclosures to the media; no such disclosures took place in the instant case.
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to the SEC.” 2011 WL 1672066 at *10. Plaintiff now contends that he has pleaded facts
creating a strong inference that Buhannic’s conduct was actually reported to the SEC.2
On April 29, 2011, Defendant TradingScreen submitted to this Court a letter from
David Brodsky, a partner at Latham, stating that the firm did not report to the SEC any
information concerning its internal investigation of TradingScreen in 2010. This post-
argument submission was not brought properly before the Court in Egan I. 2011 WL
1672066, at *9 n.7. Plaintiff now explicitly cites this correspondence in the SAC,
conceding that Latham did not report Plaintiff’s allegations to the SEC. SAC ¶ 98.
Instead, Plaintiff now alleges that the Latham letter did not indicate whether anyone
acting jointly with Plaintiff reported Defendant Buhannic’s conduct to the SEC, or
whether anyone including Latham reported Buhannic’s conduct to another law
enforcement authority. SAC ¶ 100. Out of these questions, and his additional
allegations, Plaintiff offers an alternative theory that some party reported his disclosures
to the SEC.
Plaintiff now alleges that Technology Crossover Ventures (“TCV”), a private
equity firm with a 35% stake in TradingScreen, was trying to sell its interest to an outside
investor around the time of his dismissal. SAC ¶¶ 43, 97. Two of TradingScreen’s board
members were selected by TCV. Id. ¶ 97(v). These board members were aware of
2 In an affidavit, Plaintiff also claims that he directed a relative to report Defendant Buhannic’s conduct to
the Internal Revenue Service, and that this disclosure was protected activity under 15 U.S.C. § 78u-
6(h)(1)(A)(iii)’s incorporation of 18 U.S.C. § 1513(e) into the Dodd-Frank Act. Egan Aff. ¶¶ 9–16; Pl.
Mem. Opp. Mot. D. at 13–14. However, these allegations do not appear in the SAC. Affidavits making
claims outside the complaint are not cognizable on a Rule 12(b)(6) motion. Healthcare Ass’n of New York
State, Inc. v. Pataki, 471 F.3d 87, 94 (2d Cir. 2006). Plaintiff argues that the affidavit is nevertheless
admissible because Defendant SpreadZero moves to dismiss under Fed. R. Civ. P. 12(b)(1), and on such
motions, a court may consider evidence outside the pleadings. Robinson v. Gov’t of Malaysia, 269 F.3d
133, 140-41 (2d Cir. 2001). However, Defendant SpreadZero moved under Rule 12(b)(1) because Plaintiff
only alleged state claims and not federal claims against it, whereas Plaintiff raised federal claims against
the other Defendants who moved under Rule 12(b)(6). The mere presence of state claims alongside federal
claims does not transform a Rule 12(b)(6) motion into a Rule 12(b)(1) motion. Therefore, this Court will
not consider the allegations in Plaintiff’s affidavit.
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Plaintiff’s allegations against Defendant Buhannic, id. ¶ 39, and allegedly confronted him
with the results of the Latham report on March 12, 2010. Id. ¶ 44. The TCV board
members allegedly had a strong incentive to disclose Buhannic’s activities, since if they
sold TradingScreen securities while concealing his activities, they would be liable for
securities fraud. Id. ¶ 97(vi). At the same time, disclosure of Buhannic’s activities would
make it difficult to monetize their investment; therefore, the TCV directors did not want
outsiders to know about these matters. Id. ¶ 5, 44. Accordingly, instead of firing
Buhannic, they attempted to reach an “amicable resolution” with him, asking him to
return to the board on March 15 so that they offer him the opportunity to remain at
TradingScreen while resigning as CEO and from the Board. Id. ¶ 5, 44, 79. Even after
Buhannic seized control of the Board on March 15, the TCV-controlled directors still
sought to unseat him. Id. ¶ 97(vii). These allegations, Plaintiff contends, create a
“powerful inference” that Buhannic’s conduct was reported to the SEC, presumably at
the direction of the TCV board members. Pl. Mem. Opp. Mot. D. at 15.
Plaintiff is mistaken. In granting him leave to amend the FAC, this Court advised
him that “[s]uch amendment will be effective only if it supports knowledge of actual
transmission to the SEC.” 2011 WL 1672066, at *10. He proposes that the TCV-
controlled directors had an incentive to report Defendant Buhannic’s conduct to the
SEC,3 but he has still failed to allege that an individual or entity actually reported
3 The Court notes that Plaintiff’s own allegations are contradictory and do not support the inference that the
TCV-controlled directors had an incentive to report Buhannic’s conduct to the SEC. Plaintiff alleges that
the directors associated with TCV wanted to remove Defendant Buhannic before TCV’s interest in
TradingScreen was sold, and without outside publicity. See SAC ¶ 5, 44. On the other hand, he claims that
TCV sought “new leverage to force the CEO out by reporting that CEO’s misconduct to the SEC.” Pl.
Mem. Opp. Mot. D. at 16. The exercise of that leverage—the actual disclosure of Buhannic’s activities to
the SEC—would have attracted the kind of unwelcome outside publicity that would have jeopardized the
sale of TCV’s interest. Indeed, Plaintiff alleges that when Buhannic’s activities were in fact disclosed to
TradingScreen’s potential buyers, they withdrew. SAC ¶ 137. In sum, Plaintiff’s allegations establish that
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Buhannic’s conduct to the SEC. To address this difficulty, Plaintiff surmises “on
information and belief” that some unnamed individual or individuals acting jointly with
Plaintiff reported to the SEC “or other law enforcement officials.” SAC ¶ 95. Far from
remedying the inadequacies of the FAC, this pleading recapitulates them, by alleging
transmission to the SEC “on information and belief” without facts that establish a basis
for this belief.
Plaintiff himself states in the SAC that he cannot allege facts showing actual
transmission of his disclosures to any law enforcement official, and does not himself
know whether any such transmission took place. In responding to Latham’s April 29,
2011 letter stating that it did not report Plaintiff’s disclosures to the SEC, Plaintiff
requested the opportunity to ask Latham if it reported its findings to anyone else, if any
other parties reported the firm’s findings to the SEC, whether Latham reported
Buhannic’s conduct to any other law enforcement official, and the basis for Latham’s
knowledge of what its attorneys did in connection with Plaintiff’s claims. SAC ¶ 100.
These questions indicate that Plaintiff does not know if his disclosures were transmitted
to the SEC, and if so, who transmitted them.
Plaintiff fails to allege facts showing whether the unidentified person or persons
who allegedly reported his disclosures were acting jointly with the TCV directors,
Plaintiff, or some other parties. Instead, he contends that “whoever did do the reporting
would have been situated identically to Latham for the purposes of Dodd-Frank’s
whistleblower protections.” Pl. Mem. Opp. Mot. D. at 16. This claim is insufficiently
pleaded. In Egan I, this Court found that Plaintiff had “adequately pleaded” his claim
the TCV directors had an incentive to threaten Buhannic with disclosure to the SEC, but also had a
disincentive to carry out the threat.
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that he was “acting jointly” with Latham because he had made “specific allegations”
stating that “Latham was retained on Plaintiff’s initiative, and his disclosures provided
the basis for its investigation.” 2011 WL 1672066, at *8. The SAC abandons these
allegations and substitutes a vague and inadequately pleaded theory that Plaintiff was
“acting jointly” with some party, 15 U.S.C. § 78u-6(a)(6), but without identifying that
party and offering only speculation as to his or her motives. As a result, the Second
Amended Complaint fails to state the facts necessary to adequately allege that the
unnamed individual or individuals mentioned in the SAC were “acting jointly” with
Plaintiff under the Dodd-Frank Act. Id.
In sum, Plaintiff’s Second Amended Complaint fails to adequately allege a claim
under the Securities Whistleblower Incentives and Protection provisions of the Dodd-
Frank Act. Accordingly, Plaintiff’s Second Cause of Action is dismissed.
B. Securities Exchange Act Claims
In Egan I, this Court found that Plaintiff’s allegations of securities fraud under his
Fourth Cause of Action did not satisfy the heightened pleading standards of the Private
Securities Litigation Reform Act, 15 U.S.C. §§ 77z-1, 78u-4, and Fed. R. Civ. P. Rule
9(b). 2011 WL 1672066 at *10-13. The Court granted Plaintiff leave to amend his
securities fraud claims to show “knowledge concerning the vesting provisions of his
Stock Options and Grants, the contract with TradingScreen that contained these
provisions, the loss in value of his 100 shares, and the circumstances surrounding the
alleged misrepresentation that Buhannic would be asked to resign.” Id.
Plaintiff alleges claims under Section 10(b) of the Securities Exchange Act and
the rule implementing the statute, SEC Rule 10b–5. In order to state a securities fraud
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claim under Section 10(b), a “plaintiff must establish that the defendant, in connection
with the purchase or sale of securities, made a materially false statement or omitted a
material fact, with scienter, and that the plaintiff's reliance on the defendant's action
caused injury to the plaintiff.” ECA, Local 134 IBEW Joint Pension Trust of Chicago v.
JP Morgan Chase Co., 553 F.3d 187, 197 (2d Cir. 2009) (internal quotation marks and
citation omitted).
In the SAC, Plaintiff brings securities fraud claims based on four transactions: (1)
Plaintiff’s purchase of 100 shares of TradingScreen common stock on March 25, 2010;
(2) Plaintiff’s acquisitions of common stock on April 1, 2008 and March 2, 2010, totaling
7,280 shares; (3) Plaintiff’s acquisition of options to purchase 42,125 shares of common
stock on April 1, 2005, April 1, 2006, and March 1, 2007; and (4) Plaintiff’s acquisition
of 60,000 shares of restricted common stock after September or October 2006.
i. 100 Shares Purchased on March 25, 2010
Plaintiff claims that in purchasing 100 shares of TradingScreen stock on March
25, 2010, he relied on two misrepresentations. First, he alleges that on March 9, 2010,
two TradingScreen directors, David Roscoe and Robert Trudeau, told Plaintiff that they
would fire Defendant Buhannic. SAC ¶ 132. Second, Roscoe and Piero Grandi, another
member of TradingScreen’s board, sent Plaintiff an email at 4:40 p.m. on March 19
stating that Plaintiff and other key executives would not be fired without prior approval
of the Board. Id. ¶ 55. According to Plaintiff, both statements were misrepresentations
when they were made; TradingScreen’s board had determined by March 15 that it would
neither fire Defendant Buhannic nor interfere with his power to fire employees. Id. ¶¶
45–46, 137. Plaintiff pleads loss causation with respect to these shares and
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misrepresentations by claiming that TradingScreen was in negotiations with potential
buyers, and that those buyers walked away when it was revealed that Buhannic would
remain as CEO. Id. ¶ 137. As a result, Plaintiff claims, the value of TradingScreen’s
shares dropped by at least 15%. Id.
Plaintiff’s amended allegations remain insufficient to survive Defendants’ motion
to dismiss because he has not adequately pleaded scienter. “In order to plead scienter
adequately under the PSLRA, a plaintiff must plead ‘with particularity facts giving rise to
a strong inference that the defendant acted with the required state of mind.’” ECA, 553
F.3d at 198 (quoting 15 U.S.C. § 78u-4(b)(2)). “To qualify as ‘strong’” under the
PSLRA, “an inference of scienter must be more than merely plausible or reasonable—it
must be cogent and at least as compelling as any opposing inference of nonfraudulent
intent.” Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007) (quoting
15 U.S.C. § 78u-4(b)(2)). “[W]hile Rule 9(b) permits scienter to be demonstrated by
inference, this must not be mistaken for license to base claims of fraud on speculation and
conclusory allegations. An ample factual basis must be supplied to support the charges.”
O’Brien v. Nat’l Prop. Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1991) (internal
citations omitted).
Here, Plaintiff’s factual allegations cannot support the various alternative and
contradictory inferences of scienter that he offers. First, with respect to the March 9,
2010 discussion, he alleges that Roscoe and Trudeau told him that they would fire
Defendant Buhannic, SAC ¶ 132, but that the Board actually did not intend to fire him
because that would jeopardize the sale of TradingScreen. Id. ¶ 135. However, Plaintiff
also alleges that to resolve the dispute amicably and protect the impending sale, the
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Board had resolved to ask Buhannic to resign as a Board member and CEO, id. ¶¶ 44, 78,
and that Board members continued their efforts to unseat him even after he gained control
of the Board on March 15, 2010. Id. ¶ 45, 97(vii). Reading these allegations in the light
most generous to Plaintiff, they only permit the inference that on March 9, Roscoe and
Trudeau misleadingly stated to Plaintiff that they would force Buhannic to leave
TradingScreen altogether, when in fact the Board intended to remove him as CEO and
Board member while retaining him as a TradingScreen employee. This misstatement, if
it occurred, does not give rise to an inference of scienter, because Buhannic’s removal as
CEO and Board member would have deprived him of the ability to fire Plaintiff even if
Buhannic were permitted to remain at TradingScreen. Plaintiff’s own allegations
establish that the Board intended to deprive Buhannic of the power to fire Plaintiff.
Therefore, Roscoe and Trudeau’s statement on March 9, 2010 was not made with the
intent to defraud Plaintiff.
Moreover, Plaintiff offers contradictory allegations and inferences regarding the
motives of the TCV-controlled directors. He proposes that TCV reported Buhannic’s
conduct to the SEC because such a report “would have . . . increased the chance that Mr.
Buhannic could be terminated for cause.” Id. ¶ 97(viii); Pl. Opp. Mem. at 16. But he
also offers the conflicting inference that “the two TCV directors had . . . decided to offer
Mr. Buhannic the opportunity to remain at TradingScreen” to facilitate TCV’s efforts to
monetize its investment. Pl. Opp. Mem. at 3; SAC ¶¶ 135–36. In light of these
inconsistent allegations and theories, the only plausible inference is that the Board sought
to remove Buhannic as CEO and Board member, and thus did not make any fraudulent
statements to Plaintiff on March 9, 2010.
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With respect to the March 19, 2010 email, Plaintiff also offers inadequate
allegations and inferences. He claims that Roscoe and Grandi’s promise that he would
not be fired absent Board approval was false because they “[e]ither . . . did not confirm
this promise with Mr. Buhannic . . . or Mr. Buhannic lied about his intentions.” SAC ¶
112. Neither of these allegations is consistent with an inference of scienter. If Buhannic
lied to Roscoe and Grandi, then the latter did not intentionally deceive Plaintiff; if Roscoe
and Grandi neglected to confirm their promise with Buhannic, this act does not show a
motive to deceive Plaintiff. To furnish an inference of scienter, Plaintiff proposes that
TradingScreen made the March 9 and 19 statements to Plaintiff so that the company’s top
employees would remain to train their replacements, even though the board would not
protect them from Defendant Buhannic. SAC ¶ 113; Pl. Opp. Mem. at 7. However, this
inference is inconsistent with Plaintiff’s other allegations. He does not claim that he
trained any replacements before or after Defendant Buhannic fired him on August 2,
2010; on the contrary, he alleges that Buhannic himself hired and trained his
replacements in the months before firing him. SAC ¶ 50. Moreover, this inference is
facially implausible. The Board could not expect Plaintiff to train a replacement if he had
been assured that he would not be fired, and such an assurance would give Plaintiff no
reason to train his replacement after he had been fired. In any event, this generalized
inference has no basis in the particular allegations of this case, and is potentially relevant
to any situation involving a change in corporate leadership. Therefore, Plaintiff’s
allegations do not support an inference of scienter with regard to the March 19, 2010
email, and his Section 10(b) claim fails with respect to the 100 shares purchased on
March 25, 2010.
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ii. Options to Acquire 42,125 Shares
During his time at TradingScreen, Plaintiff acquired options to purchase 42,125
shares of TradingScreen common stock. He acquired these options on April 1, 2005,
April 1, 2006, and March 1, 2007. SAC ¶¶ 25, 61. In Egan I, this Court ruled that these
transactions were not purchases of securities under Section 10(b) because they were
inducements for him to continue his employment with TradingScreen, and only
inducements for an employee to accept employment in the first place may constitute
purchases of securities under the federal securities laws. 2011 WL 1672066 at *11.
Plaintiff now claims in one paragraph of the SAC that he “earned and purchased” these
stock options, SAC ¶ 26, but offers no factual allegations stating that the options were
somehow purchased rather than granted by TradingScreen. He does not identify which
options were allegedly purchased and which were granted, or the consideration that he
paid for the options he allegedly purchased. Elsewhere, the SAC states that Plaintiff was
“awarded” these options. SAC ¶ 61. Plaintiff does not plead new allegations claiming
that his stock options were anything other than options awarded as employment
compensation. Therefore, this Court reaffirms its holding that Plaintiff’s options to
acquire 42,125 shares are not purchases under Section 10(b).
iii. 7,280 Shares Acquired in 2008 and 2010
In the FAC, Plaintiff alleged that he was granted shares of restricted common
stock in TradingScreen on April 1, 2008, April 1, 2009, and March 2, 2010, totaling
67,280 shares. FAC ¶ 59. In response to this Court’s holding in Egan I that these
transactions were not purchases under Section 10(b), 2011 WL 1672066 at *11, the SAC
alleges that two of these transactions were stock purchases. On April 1, 2008 he
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allegedly purchased 5,135 shares for $78,000 of his bonus money, and on March 2, 2010
he purchased 2,145 shares for $44,000 of his bonus money, for a total of 7,280 shares.4
SAC ¶¶ 29, 122. To explain his new description of these transactions as purchases,
Plaintiff claims that he was given the choice of receiving his bonus in cash, restricted
common stock, or a combination of the two. SAC ¶¶ 25, 29. Plaintiff contends that
because he used his cash bonus to purchase stock, these transactions constituted
purchases of securities under Section 10(b).
Plaintiff’s claims are without merit. While some of Plaintiff’s allegations in the
Second Amended Complaint describe these stock transactions as purchases, see, e.g.,
SAC ¶¶ 11, 122, 126, 128, other allegations continue to describe them as grants under the
TradingScreen Stock Incentive Plan. See, e.g., SAC ¶ 63 (“Also under the Stock
Incentive Plan, Mr. Egan was awarded 67,280 shares of restricted common stock . . .”).
The simple substitution of “purchased” for “granted” in the SAC does not, by itself,
transform stock grants into purchases within the meaning of Section 10(b).
Plaintiff’s attempt to explain this substitution—his claim that he purchased the
stock with his bonus money—also fails to adequately allege that these purchases are
cognizable under the statute. The proper inquiry for determining whether stock awarded
as employee compensation is covered by Section 10(b) does not depend on the
mechanism by which the employee elects to receive a percentage of his compensation as
stock.5 Instead, it depends on whether the stock was offered as an incentive for an
employee to accept employment. As this Court held in Egan I, an acceptance of stock
4 The remaining 60,000 shares Plaintiff originally described as Stock Grants, presumably acquired through
the April 1, 2009 transaction, are discussed infra Part III.B.iv.
5 Defendant TradingScreen has submitted an affidavit purporting to contain documents governing
Plaintiff’s executive compensation plans, as evidence against Plaintiff’s claims. For the reasons stated
supra note 2, the Court disregards this submission.
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options and grants in exchange for continued employment does not constitute the
purchase of a security. 2011 WL 1672066, at *11 (citing Dubin v. E.F. Hutton, 695 F.
Supp. 139 (S.D.N.Y. 1988); Fishoff v. Coty, No. 09 Civ. 628 (SAS), 2009 WL 1585769,
at *6 (S.D.N.Y. 2009)). Therefore, Plaintiff’s new allegations in the SAC merely
establish that he had the ability to choose the percentage of his compensation awarded as
stock grants or as cash. They do not change the fact that both his cash and stock grants
were awarded as employment compensation under the Stock Incentive Plan—a fact he
himself alleges. SAC ¶ 63. Accordingly, this Court reaffirms its holding that Plaintiff’s
receipt of stock grants from TradingScreen on April 1, 2008 and March 2, 2010 does not
constitute the purchase of a security under Section 10(b).6
iv. Remaining 60,000 Shares
In the Second Amended Complaint, Plaintiff offers a new theory of securities
fraud to account for his remaining 60,000 shares. He now alleges that in September or
October 2006, he was offered a position by the banking firm Crédit Agricole. In an effort
to keep him at TradingScreen, Defendant Buhannic allegedly promised Plaintiff that he
would be given an opportunity to acquire a significant amount of TradingScreen common
stock. SAC ¶ 124. At some point thereafter, Plaintiff received 60,000 shares of common
stock and became a partner of TradingScreen. Id. ¶¶ 28, 126. He alleges that Buhannic
knew this misrepresentation was false at the time it was uttered. Id. ¶ 126.
6 In litigating the first Motion to Dismiss in this case, Plaintiff argued that he acquired the Stock Options
and Grants as part of the Employee Stock Incentive Plan when he was offered employment in 2003. While
Plaintiff does not renew this argument on the instant motion to dismiss, the Court reaffirms its holding that
to the extent Plaintiff acquired any stock options or grants in 2003, these cannot form the basis of a
securities fraud claim because they were acquired before any of Buhannic’s alleged misconduct took place.
Egan I, 2011 WL 1672066, at *11.
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Plaintiff is mistaken. He again attempts to draw an analogy with Dubin, which
held that a plaintiff who accepted stock and stock options in conjunction with an offer of
employment engaged in the purchase of a security. 695 F. Supp. at 146. He now argues
that his acceptance of the 60,000 shares in exchange for rejecting the Crédit Agricole
offer is analogous to accepting stock options in conjunction with a new offer of
employment, rather than accepting stock options in exchange for continued employment.
As discussed supra Part II.B.iii, only the former qualifies as a stock purchase under
Section 10(b).
The rejection of an outside offer of employment to remain with one’s existing
employer does not amount to the acceptance of a new offer of employment under Dubin.
The key to the inquiry in Dubin was that the plaintiff “did exchange something of
tangible value—he changed his way of life and his job—in return for the stock and stock
options” he received. Id. at 145. Here, Plaintiff did not change his way of life and his
job in exchange for the 60,000 shares. Instead, he remained in the same job, and
“continued employment is not a cognizable contribution” for the purchase of a security.
Fishoff v. Coty, 2009 WL 1585769, at *6.
In sum, Plaintiff’s Second Amended Complaint fails to adequately allege a claim
of securities fraud under Section 10(b) of the Securities Exchange Act and SEC Rule
10b-5. Accordingly, Plaintiff’s Fourth Cause of Action is dismissed.
C. State Law Claims
“The district courts may decline to exercise supplemental jurisdiction over a
claim” if, inter alia, “the district court has dismissed all claims over which it has original
jurisdiction . . . .” 28 U.S.C. § 1367(c)(2). Having dismissed all of Plaintiff’s federal
Case 1:10-cv-08202-LBS Document 51 Filed 09/12/11 Page 16 of 17
claims, this Court declines to exercise supplemental jurisdiction over the pendent state
law claims, and will not reach the merits of those claims.
IV. Conclusion
For the foregoing reasons, Defendants' motions to dismiss are granted. The Clerk
is directed to close the case.
SO ORDERED.
Dated: September L, 2011
New York, NY
U.S.D.l.
17
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