Ostler v. Codman Research CV-98-356-JD 8/12/99 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE
David B. Ostler
v. Civil No. 98-356-JD
The Codman Research Group, Inc. and S. Philip Caper
AMENDED ORDER1
Plaintiff, David B. Ostler, brings an action against his
former employer. The Codman Research Group, Inc. ("CRG"), and
CRG's chief executive officer, S. Philip Caper, arising from
events that lead to Ostler's decision not to exercise his CRG
stock option. Ostler's second amended complaint alleges claims
of withholding information and imposition of an unlawful
condition, breach of contract, federal and state securities
fraud, and common law fraud. CRG moves for summary judgment on
all claims.2
Standard of Review
Summary judgment is appropriate when "the pleadings,
depositions, answers to interrogatories, and admissions on file,
1The amended order corrects typographical errors and an omitted citation found in the original order.
20stler's motion for partial summary judgment (document no. 68) will be addressed separately. together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party
is entitled to a judgment as a matter of law." Fed. R. Civ. P.
56(c). The record evidence is taken in the light most favorable
to the nonmoving party. Perkins v. Brigham & Women's Hosp., 78
F.3d 747, 748 (1st Cir. 1996). "An issue is only 'genuine' if
there is sufficient evidence to permit a reasonable jury to
resolve the point in the nonmoving party's favor, while a fact is
only 'material' if it has the potential to affect the outcome of
the suit under the applicable law." Bourque v. F.D.I.C., 42 F.3d
704, 707-08 (1st Cir. 1994) (guotations omitted). Summary
judgment will not be granted as long as a reasonable jury could
return a verdict in favor of the nonmoving party. Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
Background3
CRG, which was founded in 1984 by Philip Caper and Dr. John
Wennberg, makes software for the health care industry. Ostler
was hired as chief financial officer in 1985, and then served as
chief operating officer beginning in 1986. Caper served as
president and chief executive officer from 1984 through 1998,
3Ihe facts are taken from the parties' fact summaries and are provided for background information only.
2 except for the period between 1989 and 1993 when Ostler was
president and CEO.
Because CRG was not able to keep current with the salaries
owed to Ostler and Caper, they agreed that CRG would issue stock
options to Ostler and Caper in exchange for a deferral of
portions of their compensation. As part of the plan, CRG, Caper,
and Ostler agreed that an option to purchase stock would be
issued to Ostler in the same amount and on identical terms as an
option issued to Caper. On July 28, 1988, CRG issued to Ostler
an option to purchase "an aggregate of 3,000 shares of non-voting
Common Stock" at twenty cents per share pursuant to a "1988 Non-
Qualified Stock Option Plan" ("Plan") and subject to the terms of
the document granting the option ("Option Document").4 An option
was issued to Caper under the same terms while other employees
received options for different amounts of stock.
Under the terms of the Plan and the Document, the options
were to expire ten years later. To exercise their options.
Ostler and Caper were obligated to pay the amount of income tax
due on the difference between the stated price of the stock and
the fair market value on the day the option was exercised. If
CRG went public before the option's expiration date, a market
4Because of a subseguent stock split, the recipients held options on 60,000 shares and the assigned price was reduced.
3 would exist for the stock that would allow the option holders to
sell stock to pay the substantial tax liability.
CRG did not fare well, however, suffering financial losses
and the loss of its senior management. Ostler left CRG in 1994.
CRG remained a private company so that CRG stock could not be
sold to fund the tax liability that would be incurred by
exercising the stock options. In 1997, as the option expiration
date of July 27, 1998, approached, CRG began to consider ways to
allow their current employees, including Caper, to afford the tax
liability on the exercise of their options. CRG first passed a
resolution to arrange loans for option holders who were employees
at the exercise deadline to pay the tax liability. No loans were
ever arranged or made under the resolution.
A year later, in January of 1998, the CRG board amended the
Plan to offer an opportunity for the deferred delivery of option
stock in order to defer federal income tax liability until the
stock was delivered. The deferred delivery opportunity was
offered to highly compensated employees. Caper and another
employee who was deemed gualified for the deferral made the
deferred delivery election. Another CRG employee who was not
deemed gualified for the deferred delivery opportunity borrowed
money from the company to pay the tax liability on the exercise
of her option. Ostler was not offered the deferred delivery
4 opportunity or a company loan to pay the tax liability on his
option.
In February of 1998, Ostler wrote to Caper requesting
information about the company. Caper referred the letter to
CRG's chief financial officer, Merrill Keefer, who communicated
with Ostler thereafter. In the course of their communications,
Keefer told Ostler that if he exercised his option, CRG would
most likely report the transaction at a valuation of $26.50
per share. Ostler was dissatisfied with CRG's responses to his
requests for information and filed his complaint in this court on
June 15, 1998, with a motion to expedite discovery. Ostler also
filed a motion for a preliminary injunction to enjoin CRG from
enforcing the terms of the Plan. Ostler's discovery motion was
granted in part, and CRG provided more information.
CRG hired PriceWaterhouseCoopers ("PWC") to do a valuation
of CRG's stock shares for tax reporting purposes. Ostler's
motion for a preliminary injunction was denied on July 15. On
the same day. Ostler informed CRG, in a letter to Keefer, that he
wished to exercise his option to purchase and asked about the tax
liabilities. Five days later, Keefer sent Ostler a letter
informing him of the valuation work being done by PWC. OnJuly
21, 1998, CRG's counsel sent Ostler's counsel a letter about the
valuation and enclosing the investment letter to be signed as a
5 condition of exercising the option. On July 22, Ostler's counsel
was informed that PWC's preliminary indication of value for the
stock was between seventeen and nineteen dollars per share. The
valuation report was delivered to Ostler on July 24 and valued
the shares at $16.94 each. On July 27, however, the deadline for
Ostler to exercise his option, counsel for CRG notified Ostler's
counsel by voicemail that the PWC valuation was going to be
reduced by one or two dollars per share. CRG's counsel
represented that the deadline would be extended for forty-eight
hours. The final PWC report was faxed to Ostler on July 28, and
on July 29 Keefer told Ostler that the deadline would be extended
until July 31.
For the first time, on July 29, Keefer told Ostler that CRG
was engaged in preliminary merger discussions with HealthTech
Services Corporation and provided information pertinent to the
merger plans.5 Ostler did not exercise his option either before
the July 27 deadline or within the extensions suggested by CRG
counsel and Keefer.6 Ostler says that when he asked, through
50stler argues, supported by his expert witness's report, that CRG withheld the most important information: a valuation matrix, the fact that the board had approved the merger proposal, and a combined business plan summary.
60stler contends that neither extension was valid since neither was passed by the CRG board, whose approval was reguired and who later refused to approve the extensions.
6 counsel, for a seven-day extension after receiving the merger
information, the defendants did not respond to his reguest.
CRG's merger negotiations with HealthTech moved in a positive
direction, and the merger occurred on January 27, 1999.
Discussion
The defendants move for summary judgment on all of Ostler's
claims. They argue that the agreement does not entitle Ostler to
the deferred delivery opportunity offered to Caper. The
defendants assert that Ostler lacks standing to bring federal and
state securities claims, and that his fraud claims fail because
no material misrepresentations or omissions were made and because
Ostler did not rely on any misstatements or omissions by CRG.
The defendants also contend, alternatively, that Ostler should be
judicially estopped from claiming damages as a result of an
alleged breach of the agreement or due to fraud.
A. Breach of Contract
Under New Hampshire law, the court interprets the meaning of
a contract as a matter of law, including the determination of
whether the contract is ambiguous. Hopkins v. Fleet Bank-NH, 724
A.2d 1287, 1289 (N.H. 1999). The intent of the parties is
interpreted from the context of the whole agreement, construing
7 its terms according to their common and reasonable meaning. See
BankEast v. Michalenoick, 138 N.H. 367, 369 (1994). An agreement
is ambiguous only if the parties offer differing reasonable
interpretations of the agreement. See Merrimack School District
v. National School Bus Serv., Inc., 140 N.H. 9, 11 (1995).
Extrinsic evidence may be considered to find the meaning of an
ambiguous agreement but not to contradict the plain and
unambiguous meaning of an agreement. See Galloway v. Chicago-
Soft, Ltd., 713 A.2d 982, 984 (N.H. 1998); Holden Engineering and
Surveying, Inc. v. Pembroke Road Realty Trust, 137 N.H. 393, 396
(1993) .
The parties do not dispute that they orally agreed in 1988
that Ostler and Caper would be issued options on identical terms.
Based on the parties' negotiations and agreements, the Plan was
drafted and approved, and, pursuant to the Plan and the Option
Document, CRG issued Ostler and Caper options on 3,000 shares on
identical terms. Ostler argues that the "identical terms"
reguirement continued through the implementation of the Plan and
award of the option and reguired CRG to offer him the same
deferred delivery opportunity that was later offered to Caper
under the the 1998 amendment. The defendants contend that the
"identical terms" reguirement was fully performed when the stock
options were awarded in 1988. Ostler's interpretation of the agreement to include a
continuing "identical terms" reguirement is unreasonable in the
context of the agreement as a whole.7 Neither the Plan nor the
award document includes any reguirement that Ostler and Caper be
treated on identical terms. Instead, the Plan has an eligibility
reguirement and provides for amendment of the Plan. Under the
terms of the Plan, after Ostler left CRG in 1994, he was no
longer eligible to participate in the Plan so that the deferral
opportunity, added by amendment in 1998, did not apply to him.8
If the "identical terms" reguirement, which was an oral
agreement, were interpreted, as Ostler urges, to be a continuing
part of the parties' agreement, it would contradict the expressed
terms of the Plan in the circumstances of this case. In the
context of the agreement taken as a whole, therefore. Ostler's
interpretation is unreasonable. See Chadwick v. CSI, Ltd., 137
N.H. 515, 525 (1993). Since the oral and written parts of the
agreement can be construed to work together, if the "identical
terms" reguirement is understood to have been fully performed
7Since the parties do not address the operation of the statute of frauds, N.H. Rev. Stat. Ann. § 506:2, or the merger doctrine, the court does not analyze either theory in deciding the motion for summary judgment.
8Although the parties do not explain the operation of the agreement package as a whole, it appears that Ostler retained his option after he left CRG based on the terms of the Option Document. when the stock options were awarded in 1988, that is the only
reasonable interpretation of the parties' intent.
Ostler argues that an implied covenant of good faith and
fair dealing in the "identical terms" part of the agreement
prevents an interpretation that would permit changes in the Plan
to confer benefits to Caper and not to Ostler because that would
unilaterally deprive him of the benefit of the "identical terms"
agreement. The good faith and fair dealing argument fails for
the same reasons that Ostler's interpretation of the agreement is
unreasonable. The agreement, taken as a whole, does not confer
discretion in performance that would permit CRG to deprive Ostler
of the value of the agreement, but instead the Plan expressly
provides eligibility reguirements for future benefits and a
process for amendment. The Plan was amended in 1998 to offer the
opportunity of deferred delivery of stock, and Ostler, under the
terms of the Plan, was not eligible for benefits conferred after
he left CRG. Since the "identical terms" agreement was fully
performed long before the 1998 amendment to the Plan, no
discretionary change in the agreement occurred in breach of the
good faith covenant.
Accordingly, the parties' agreement is construed, as a
matter of law, to reguire that the 1988 stock option award to
Ostler and Caper be made on identical terms, which occurred when
10 the stock options were awarded in 1988. The parties did not
agree that any other benefits accorded under the Plan would be
awarded to Ostler and Caper on identical terms. The benefits
offered by the 1998 amendments to the Plan were additional
benefits for those who were then eligible under the Plan. Since
Ostler was not eligible, based on the Plan provisions, for the
benefits added by the 1998 amendment, the defendants are entitled
to summary judgment as to Ostler's breach of contract claim.
B. Standing to Bring Federal and State Securities Claims
Ostler asserts federal securities fraud in violation of
Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A.
§ 78j (b) .9 Persons who are either purchasers or sellers of
9Section 78j (b) makes it unlawful for "any person . . . [t]o use or employ, in connection with the purchase or sale of any security, . . . any manipulative device or contrivance in contravention of such rules and regulations as the Commission may prescribe." The Securities and Exchange Commission has promulgated Rule 10b-5 that makes it
unlawful for any person, directly or indirectly, . . .
(a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
11 securities have standing to bring private actions for damages
under the federal securities laws. See Blue Chip Stamps v. Manor
Drug Stores, 421 U.S. 723, 731, 749 (1975) . Persons who refrain
from buying or selling, although their forbearance is due to
material misrepresentations or omissions, lack standing. Id. at
737. The term security is defined to include an option, 15
U.S.C.A. § 78c(10); and buy, purchase, sell, and sale are all
defined to include a contract to acguire or dispose of a
security, § 78c (13) and (14) . Accordingly, a purchaser of
options who is injured by deception or fraud "in connection with"
the purchase or sale or a contract to acguire or dispose of
options has standing to bring claims under Rule 10b-5.
Ostler was a purchaser of securities within the meaning of
the 1934 Act when CRG issued the option to him in 1988. See,
e.g., Yoder v. Orthomolecular Nutrition Inst., 751 F.2d 555, 559
(2d Cir. 1985). If Ostler were alleging fraud in connection with
his decision to accept, as employment compensation, the award of
stock option in 1988, he would have standing to raise that claim.
The more difficult guestion is whether he has standing, as a
holder of an option to purchase CRG stock, to bring a claim that
in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5 (1998).
12 he was injured by the defendants' alleged deception or fraud in
connection with his decision not to exercise his option.
In Blue Chip Stamps, the Supreme Court adopted the "Birnbaum
rule" to limit private securities actions "to actual purchasers
and sellers of securities." Id. at 730 (discussing Birnbaum v.
Newport Steel Co., 193 F.2d 461 (2d Cir. 1952)). The Court
examined the language and purpose of pertinent provisions of the
Securities and Exchange Act of 1934 and found the policy of the
Act supported limiting the implied private cause of action to
those who actually participated in securities transactions
because
a putative plaintiff who neither purchases nor sells securities but sues instead for intangible economic injury such as loss of a noncontractual opportunity to buy or sell, is more likely to be seeking a largely conjectural and speculative recovery in which the number of shares involved will depend on the plaintiff's subjective hypothesis.
Id. at 734-45. The right of action, the Court reasoned, should
not be available to mere offerees and bystanders who could
construct retrospective fraud claims. See id. at 746-47.
In contrast to offerees and bystanders, however,
the holders of puts, calls, options, and other contractual rights or duties to purchase or sell securities have been recognized as "purchasers" or "sellers" of securities for purposes of Rule 10b-5, not because of a judicial conclusion that they were similarly situated to "purchasers" or "sellers," but because the definitional provisions of the 1934 Act themselves grant them such a status.
13 Id. at 751. Therefore, while a disappointed offeree lacks
standing to maintain a securities fraud claim, a plaintiff who
holds a contractual right, such as an option, to purchase
securities stands on different ground. See Blue Chip Stamps, 421
U.S. 751-52. There appear to be few if any cases, however, that
address the guestion of standing to assert a securities claim
alleging fraud that induced the holder of an option not to
exercise the option at the end of the option period, and
analogous cases come to different conclusions due in part to
different factual circumstances.
Two cases cited by the defendants address the standing of
stockholders who were disappointed because they did not sell
their shares, as invited, during corporate mergers and
acguisitions, and in both cases the court held that the
plaintiffs lacked standing since they did not purchase or sell
securities. See Marsh v. Armada Corp., 533 F.2d 978 (6th Cir.
1976); Gaudin v. K.D.I. Corp., 417 F. Supp. 620 (S.D. Ohio 1976).
In Jackovnv v. RIHT Financial Corp., a shareholder alleged fraud
in the course of a corporate acguisition that lead him to turn in
shares of one company, which, due to subseguent undisclosed
acguisition, greatly appreciated, for shares of another. 873
F.2d 411, 412-13 (1st Cir. 1989). The court considered the
standing issue, commenting, "we are aware of no authority holding
14 that an option holder's failure to exercise an option to buy
falls within the critical language: 'purchase,' or 'contract to
buy, purchase, or otherwise acguire.'" Id. at 414. The case was
decided on the lack of materiality of the alleged fraud, however,
not on standing, making the court's remarks dicta.
In two cases cited by Ostler, the courts determined that
holders of convertible securities who decided not to convert to
stock, based on the defendants' alleged fraud, had standing to
bring securities actions. See Green v. Hamilton, 437 F. Supp.
723 (S.D.N.Y. 1977); Camp v. Genesco, Inc., No. 75 Civ. 3571,
1976 WL 771, Fed. Sec. L. Rep. 5 95,473 (S.D.N.Y. Mar. 17, 1976)
(aff'd following reargument. No. 75 Civ. 3471, 1976 WL 818, Fed.
Sec. L. Rep. 5 95,679 (S.D.N.Y. Aug. 6, 1976)). While the
reasoning in those cases is both helpful and persuasive, as the
court recognized in Camp v. Genesco, the best authority in
support of standing for a holder of a contractual right to buy or
sell securities, who alleges that he did not exercise his right
due to fraud, is Blue Chip Stamps.
In Blue Chip Stamps, a stock offering was made pursuant to a
consent decree in a civil antitrust action that provided for
merger of the old Blue Chip company into a newly formed
corporation. Blue Chip Stamps. See 421 U.S. at 725-26. The
plaintiffs were offerees of stock under the terms of the consent
15 decree and reorganization plan who alleged that they did not buy
the offered shares due to the allegedly overly pessimistic
prospectus issued with the offering. Id. at 726-27. The issue
in the case was whether the plaintiffs had standing to bring
securities fraud claims under Rule 10b-5. As noted above, the
Court adopted the Birnbaum rule that limits plaintiffs to
purchasers and sellers of securities, but then recognized an
exception to the rule, based on the applicable statutory
definitions, for those who hold contractual rights to buy or sell
securities. Id. at 750-51. The Court found that the plaintiffs
did not have standing because the consent decree did not confer
enforceable contractual rights to purchase stock in the newly
formed company. Id. In contrast, plaintiffs who hold
contractual rights to purchase stock, such as holders of options,
are recognized as purchasers and have standing to bring
securities fraud actions. Id. at 751.
A contractual right to purchase stock can be understood to
satisfy the standing reguirement in actions alleging fraud in
connection with a decision not to exercise the right based on
either the status conferred by the applicable statutory
definitions or by operation of the contractual right itself. The
analysis in Blue Chip Stamps suggests that one who holds a
contractual right to purchase securities has standing based on
16 the status conferred by the definition of purchaser. See, e.g.,
Pelletier v. Stuart-James Co., 863 F.2d 1550, 1555 (11th Cir.
1989) ("Accordingly, a person who alleges a violation of Rule
10b-5 must demonstrate that he is an actual purchaser or seller,
or that he was party to a legally enforceable contract to
purchase or sell securities."); Fry v. UAL Corp., 895 F. Supp.
1018, 1031 (N.D. 111. 1995) (protection of securities laws
limited to actual participants in securities markets including
options); Chariot Group v. American Acquisition Partners, 751 F.
Supp. 1144, 1149-52 (S.D.N.Y. 1990).
From another viewpoint, however, a right to purchase stock
conferred by a contract that has not yet expired might be
construed as a continuing transaction, in that the purchase began
when the option was awarded and is not complete until the term of
the option has expired. Therefore, fraud that occurs during the
course of the transaction, that deprives the option holder of the
benefit of the contractual right, is fraud in connection with the
purchase of securities. See, e.g., Pelletier, 863 F.2d at 1559;
Ohashi v. Verit Indus., 536 F.2d 849, 853 (9th Cir. 1976) .
In this case. Ostler held a contractual right to purchase
CRG stock at the time he alleges the defendants' fraud occurred.
He alleges that the defendants fraudulently induced him not to
exercise his contractual right, causing him to lose the value of
17 the option. Therefore, under either theory Ostler would have
standing to bring federal securities claims as a holder of a
contractual right to purchase securities. Accordingly, based on
the record presented, the defendants have not demonstrated that
they are entitled to summary judgment as a matter of law on the
ground that Ostler lacks standing to bring a Rule 10b-5 claim.
The defendants also move for summary judgment arguing that
Ostler lacks standing to maintain his state securities law claim
based on the limitations imposed by the Birnbaum rule. New
Hampshire's securities laws apply to fraud "in connection with
the offer, sale, or purchase of any security," and "offer"
includes "every attempt or offer to dispose of, or solicitation
of an offer to buy, a security or interest in a security for
value." RSA § 421-B:3, § 421-B:2, XIX. In the context of
Ostler's claims, therefore, the New Hampshire laws arguably
provide more protection than the federal securities laws.
Further, since the defendants have not demonstrated that Ostler
is not entitled to protection under the federal securities laws,
their arguments in favor of summary judgment as to the state law
claims must also fail.
18 C. Materiality of the Defendants' Alleged Misstatements
and Omissions
The defendants contend that they did not make any material
misstatements or omissions in their communications with Ostler.10
"A misrepresented or omitted fact will be considered material
only if a reasonable investor would have viewed the
misrepresentation or omission as 'having significantly altered
the total mix of information made available.'" Gross v. Summa
Four, Inc., 93 F.3d 987, 992 (1st Cir. 1996) (guoting Basic, Inc.
v. Levinson, 485 U.S. 224, 232 (1988)). The omitted or
misrepresented information must also be substantially likely to
be considered important to the investment decision by a
reasonable investor. See Milton v. Van Dorn Co., 961 F.2d 965,
969 (1st Cir. 1992) (guoting Basic, Inc., 485 U.S. at 231-32).
Summary judgment is warranted only if reasonable minds "could not
differ as to the materiality of the undisclosed information."
Id. at 97 0.
10The defendants also argue briefly, in the context of materiality, that they did not intend to commit fraud. The scienter reguirement has not been raised in sufficient detail, however, to permit analysis for purposes of summary judgment. C f . Press v. Chemical Investment Servs. Corp., 166 F.3d 529, 537 (2d Cir. 1999) (discussing scienter reguirement for Rule 10b-5 claim).
19 1. CRG's valuations of shares for tax purposes.
Each option holder was obligated, by the terms of the Option
Document, to pay CRG "at the time of exercise an amount equal to
the amount of any [federal, state, or local] taxes or charges,"
and CRG's valuation of the shares for purposes of assessing taxes
determined the amount to be paid. According to the Option
Document, the deadline for Ostler to exercise his option was July
27, 1998.
In response to Ostler's request for information, Merrill
Keefer, CRG's chief financial officer, sent Ostler a letter on
April 29, 1998, that said that CRG "would most likely report the
transaction to the IRS at a valuation of $26.50 per share . . .
unless some event establishing a different valuation occurred
prior to the time you exercise." Defendants' memorandum at 24.
On June 17, Keefer sent another letter reporting a value of
$17.68 per share based on a "preliminary term sheet." On July
25, CRG sent Ostler a draft accounting report prepared by PWC
valuing the shares at $16.94 each, and two days later notified
him that the value would likely be one or two dollars less. CRG
contends that none of the valuation information was untrue.
Ostler argues that the defendants' failure to notify him in
May that PWC was doing a valuation was a misrepresentation
because the defendants knew they would not use the $26.50
20 valuation.11 In light of all of the information that was finally
available and significant to Ostler's decision, the out-of-date
valuation seems insignificant. At least by mid-June Ostler knew
that the valuation was likely to be $10 a share less. Ostler
admits that the more significant issue is the lack of information
about the pending merger.
2. Omission of information about the pending merger
With HealthTech.
Although CRG provided other information about the company's
finances and prospects including information about other merger
opportunities, it appears to be undisputed that CRG did not
disclose the merger opportunity with HealthTech until July 29.
CRG also, apparently, did not inform PWC of the merger
possibility so the impact of the merger was not considered in
PWC's valuation reports.12 Before the disclosure. Ostler
contends, the defendants presented an overly pessimistic view of
CRG's prospects coupled with a significant tax liability for
exercising the option. When the defendants finally disclosed the
“Although CRG says they did not hire PWC to do the valuation until June, Keefer in his deposition said that he began talking with PWC in April or May about doing a valuation.
“ Presumably PWC would have valued the shares at a higher amount if the defendants had disclosed the merger information for purposes of the valuation.
21 pending merger with HealthTech, they still did not include
information that Ostler contends was most significant to his
decision whether or not to exercise the option.
In essence, the defendants argue the record shows that they
did not omit or misrepresent material information because they
disclosed the PWC valuations and the pending merger to Ostler
before he made his decision not to exercise. The timeliness and
completeness of their disclosures remain at issue, however.13
Therefore, the defendants have not shown that they are entitled
to summary judgment as a matter of law on the issue of
materiality.
D. Reliance
"To establish a claim under section 10 (b) of the Securities
Exchange Act, a plaintiff must prove, in connection with the
purchase of a security, that the defendant, with scienter,
falsely represented or omitted to disclose a material fact upon
which the plaintiff justifiably relied." Kennedy v. Josephthal &
C o ., Inc., 814 F.2d 798, 804 (1st Cir. 1987). Justifiable
reliance links the defendants' fraud to the plaintiff's injury.
13Although Ostler now argues that the deadline was never extended so the information disclosed on July 29 was too late, at the time, he apparently thought the deadline had been extended and acted accordingly.
22 See Basic, Inc., 485 U.S. at 243. When a plaintiff claims fraud
by affirmative misrepresentation, the plaintiff bears the burden
of proving reasonable reliance. See Simon DeBartolo Group, L.P.
v. The Richard E. Jacobs Group, Inc., No. 97-9613, 1999 WL 547893
(2d Cir. July 28, 1999). Positive proof of reliance is not
required, however, "where a duty to disclose material information
[has] been breached." Basic, Inc., 485 at 243 (citing Affiliated
Ute Citizens v. United States, 406 U.S. 128, 153-53 (1972)).
The defendants argue that Ostler did not rely on any of
their alleged omissions or misrepresentations in making his
decision not to exercise the option. The defendants first note
that he filed the present securities fraud suit before the
exercise deadline. Therefore, they contend. Ostler cannot claim
to have relied on information he had already alleged was false.
The defendants do not include a list of the statements they
assert were previously alleged to be false. The first complaint,
at pages 12 and 13, lists four misrepresentations as to the tax
value of the stock. Otherwise, the complaint appears to
primarily allege a lack of information rather than affirmative
fraud. To the extent the defendants seek summary judgment as to
any particular statements, their motion and memorandum are not
sufficiently specific to permit judgment in their favor.
The defendants also argue that Ostler did not rely on any of
23 their statements or omissions because his decision was the result
of his wife's vacation and his "discomfort with the new
developments at CRG." Defendants' memorandum at 29-30. Ostler
explained in his deposition that he let the option expire because
he was not able to consult with his wife, who was away on
vacation, about the new developments at CRG before making the
decision.14 In response. Ostler contends that the defendants
withheld the information most important to his decision, that
Ostler's expert says would have shown that even under the least
desirable possibility, he would gain by exercising the option.
Ostler argues that without the most significant information, he
relied on the less rosy, but incomplete, picture the defendants
presented, causing him to let the option expire. Therefore,
Ostler asserts, the defendants defrauded him by omitting
significant material information about the company and he need
not show his reliance.
The defendants have not shown that Ostler will not be able
to prove that the omitted information was material. Nor is it
clear from the record that Ostler's "discomfort with the new
developments at CRG" was not the result of the defendants' delay
in providing material information and continued nondisclosure of
14Ostler says that he reguested a further extension of the deadline which the defendants did not allow.
24 material information. The question of Ostler's justifiable
reliance on the information the defendants' provided raises too
many factual issues to be resolved on the present record for
summary judgment.
Because the defendants' seek summary judgment with respect
to Ostler's state securities law claims and common law fraud
claims on the arguments raised in favor of summary judgment on
the federal claims, they are not entitled to summary judgement on
the state claims for the same reasons.
E . CRG's Obligations Under the Plan and Option Document
In Count I, Ostler alleges that CRG withheld information and
imposed "an unlawful condition" on the exercise of his option.
The legal theory behind Count I is unclear. For purposes of
summary judgment, CRG interprets Ostler's allegations as a breach
of contract claim. In so doing, CRG notes that the Option
Document required Ostler, as a condition precedent to exercising
the option, to provide an investment letter that would include,
among other things, a statement that Ostler or his
representatives had fully investigated the company and its
finances and "have knowledge of the Company's then current
corporate activities and financial condition." Defendants'
memorandum at 31. CRG acknowledges that the investment letter
25 requirement "contained an implied promise by CRG to make such
information available as reasonably required to conduct the
investiqation contemplated." Id. at 31-32. CRG then surmises
that Count I pertains to its implied promise.
CRG contends it did not breach its promise because it sent
3,700 paqes of information to Ostler by the July 3 deadline
imposed by his counsel. As to the PWC valuation and HealthTech
merqer information, CRG says it complied with its promise by
providinq information about both before Ostler's option expired.
Ostler correctly points out that it is not the amount of paper
sent, but whether CRG failed to disclose material information
necessary for Ostler to evaluate CRG's activities and financial
condition. As discussed above, whether the defendants provided
all material information in a timely manner is disputed.
Ostler also arques that the investment letter sent by the
defendants' counsel for him to siqn was different than the letter
specified in the Option Document and included statements about
CRG's compliance that were untrue. Ostler contends that the
defendants' version of the letter would have required him to
waive his fraud claims in order to exercise his options. The
defendants assert that it was their riqht under the terms of the
Option Document to require an investment letter in the form they
wanted, and they were entitled to propose terms that would
26 require waiver of Ostler's suit.
The parties' disagreement about the meaning and intent of
the investment letter requirement raises issues that neither have
briefed, including the application of the doctrine of good faith
and fair dealing to the Option Document. Based on the record
presented, summary judgment is not appropriate on the claims
raised in Count I .
F. Judicial Estoppel
The defendants argue that Ostler should be judicially
estopped from claiming damages because of representations he made
in support of his motion for a preliminary injunction in this
case. In support of his motion. Ostler stated in his affidavit
that at the reported valuation of his shares, his tax liability
would be in excess of $500,000, and " [w]ith no public market for
the shares, I am unable to pay the associated taxes, and thus
unable as a practical matter to exercise my valuable option
rights." Affidavit of June 17, 1998 at I 15. More recently, to
meet the requirements of showing damages due to the defendants'
alleged fraud. Ostler has represented that his father agreed to
loan him money to pay the tax liability on the stock option.
Ostler's father's affidavits confirm that he had discussed the
stock option and his willingness to loan money to his son to
27 cover the tax liability. Father and son agreed in late July to a
loan to cover the tax liability. The defendants argue that
Ostler should be estopped from showing, through the agreement
with his father, that he was able to pay the tax liability
because he represented previously that he was not able to pay.
The doctrine of judicial estoppel prevents a party who
succeeds with one position from later asserting a directly
contrary position. See Lvdon v. Boston Sand & Gravel Co., 175
F.3d 6, 13 (1st Cir. 1999). Ordinarily, judicial estoppel is
used to bar a litigant from asserting inconsistent positions in
proceedings before different tribunals to protect the integrity
of the courts and to prevent a litigant from obtaining unfair
advantage. See id. at 12. In an appropriate case, however, the
doctrine may be considered, for example, as a sanction for
inconsistent positions taken in bad faith during the same
proceeding. See Klein v. Stahl GMBH & Co., 1999 WL 498053 at *11
(3d Cir. July 15, 1999).
First, it is not entirely clear that Ostler's affidavit,
saying that he was unable to pay a tax liability in excess of
$500,000, is directly contrary or inconsistent with his later
representations about his discussions and agreement with his
father for a loan. The defendants have not shown that Ostler
denied all means of obtaining the money necessary to pay the
28 taxes in his first affidavit.
Second, it does not appear that Ostler's affidavit as to his
inability to pay the taxes was successful. His motion for a
preliminary injunction was denied on grounds that he had not
demonstrated a likelihood of success on the merits of either his
breach of contract or breach of fiduciary duty claims. His
ability to pay the taxes was not discussed in the magistrate's
analysis of irreparable harm. The defendants have not shown that
Ostler's statement about his ability to pay had any effect on the
imposition of expedited discovery in the case.
Even if the defendants were able to make the necessary
showing on the two reguired elements for judicial estoppel, the
remedy they urge, barring evidence of the loan agreement, would
be an unnecessarily harsh sanction in this case. The defendants
have not shown any bad faith, dishonesty, or an intent to "play
fast and loose" with the court that would justify the imposition
of judicial estoppel. See Klein, 1999 WL 498053 at *11-12; see
also Casas Office Machines v. Mita Coovstar, 42 F.3d 668, 676
(1st Cir. 1994). To the extent Ostler's first affidavit is
inconsistent with his present claims that he would have paid the
tax liability with a loan from his father, that issue may be
explored through cross-examination.
29 Conclusion
For the foregoing reasons, the defendants' motion for
summary judgment (document no. 65) is granted as to the
plaintiff's breach of contract claim. Count II of the (second)
Amended Complaint (document no. 61), and denied as to all other
claims.
SO ORDERED.
Joseph A. DiClerico, Jr, District Judge
August 12, 1999
cc: William Edward Whittington IV, Esguire Bruce E. Falby, Esguire H. Jonathan Meyer, Esguire