Pasternack v. Shrader

16-217(L)
Pasternack v. Shrader
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
August Term, 2016
(Argued: December 15, 2016 Decided: July 13, 2017)
Docket Nos. 16-217 (Lead), 16-218 (Con)
- - - - - - - - - - - - - - - - - - - -x
BRUCE PASTERNACK,
Plaintiff-Appellant,
REGINALD BOUDINOT, PAUL KOCOUREK,
Consolidated-Plaintiffs-Appellants
- v.-
RALPH W. SHRADER, C.G. APPLEBY, SAMUEL R. STRICKLAND, JOSEPH E.
GARNER, DENNIS O. DOUGHTY, FRANCIS J. HENRY, CHRISTOPHER M.
KELLY, DANIEL C. LEWIS, JOSEPH W. MAHAFFEE, JOHN D. MAYER,
PATRICK F. PECK, BOOZ ALLEN HAMILTON INCORPORATED, GARY D.
AHLQUIST, MARTIN J. BOLLINGER, LLOYD W. HOWELL, JR., WILLIAM C.
JACKSON, PAMELA M. LENTZ, ERIC A. SPIEGEL,
Defendants-Counter Claimants-Appellees,
EXPLORER COINVEST LLC, EXPLORER HOLDING CORPORATION,
EXPLORER INVESTOR CORPORATION, CREDIT SUISSE SECURITIES (USA)
LLC,
Consolidated-Defendants,
DEANNE M. AGUIRRE, SHUMEET BANERJI, PETER BERTONE, CHRISTIAN
BURGER, HEATHER L. BURNS, MARK J. GERENCSER, DAVIG G. KNOTT,
HELMUT MEIER, HORACIO D. ROZANSKI, JOE SADDI, DOUGLAS G.
SWENSON, STEVEN B. WHEELER, CARLYLE GROUP, CARLYLE PARTNERS
V, L.P.,
Defendants.
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Before: WINTER, JACOBS, and POOLER, Circuit Judges.
Retired officers of Booz Allen Hamilton (“Booz Allen”) allege that they
received insufficient payment in connection with Booz Allen’s sale of a division
to another company. They sue Booz Allen and others in the United States
District Court for the Southern District of New York (Kaplan, J.), asserting
liability under the Employee Retirement Income Security Act of 1974 (“ERISA”),
29 U.S.C. § 1001 et seq., the Racketeer Influenced and Corrupt Organizations Act
(“RICO”), 18 U.S.C. § 1961 et seq., federal securities law, and common law. Each
claim was resolved adversely to plaintiffs, either by dismissal or by denial of
leave to amend. We affirm the district court’s dismissal of the ERISA claims
because the plan through which Booz Allen distributed its stock to plaintiffs is
not an employee pension benefit plan within the meaning of ERISA. However,
we vacate the judgment to the extent that it denied the motion by one plaintiff for
leave to amend to add securities-fraud claims. Leave to amend was denied on
the ground that the claim was waived by a release, and on the ground of delay.
That release, however, is unenforceable by virtue of Section 29(a) of the Securities
Exchange Act of 1934, and there is no other sustainable basis on which to deny
leave to amend. As to all the remaining claims, we affirm.
2
MARK M. ELLIOTT (Jared R. Clark on the
brief), Phillips Nizer LLP, New York, NY,
for Plaintiff-Appellant Bruce Pasternack.
MICHAEL Q. ENGLISH, Finn Dixon &
Herling LLP, Stamford, CT, for Plaintiff-
Appellant Reginald Boudinot.
Mark Kelly, Kelly & Hazen, New York, NY,
for Consolidated-Plaintiffs-Appellants
Reginald Boudinot and Paul Kocourek.
J. SCOTT BALLENGER (Everett C.
Johnson, Jr., J. Christian Word, Sarah A.
Greenfield, and Jonathan Y. Ellis on the
brief), Latham & Watkins LLP,
Washington, DC, for Defendants-Counter
Claimants-Appellees.
JACOBS, Circuit Judge:
The plaintiffs are retired officers of Booz Allen Hamilton, a privately-held
corporation. Bruce Pasternack, Reginald Boudinot, and Paul Kocourek allege
that they were improperly denied compensation when, after their retirement,
Booz Allen Hamilton sold one of its divisions to the Carlyle Group (the “Carlyle
Transaction”). They sued Booz Allen Hamilton and several of its officers
(collectively “Booz Allen”), as well as various individuals and entities involved in
the Carlyle Transaction. Numerous amended complaints were filed by each
plaintiff. On appeal, we review the legal sufficiency of various claims under the
Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001 et
seq., the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18
U.S.C. § 1961 et seq., federal securities law, and common law. In general, all
three plaintiffs allege that Booz Allen improperly discriminated among different
Booz Allen officers and violated the duties of due care, loyalty, and good faith, in
3
violation of ERISA. Kocourek separately argues that Booz Allen fraudulently
induced him and others to sell Booz Allen stock at prices below fair value, in
violation of federal securities regulations and other law.
The United States District Court for the Southern District of New York
(Kaplan, J.) dismissed the ERISA claims on the ground that Booz Allen’s stock-
distribution program was not a pension plan within the meaning of ERISA, and
denied as futile leave to amend to “augment” the ERISA claims with new
allegations. The RICO claims were dismissed on the ground that they were
barred by the Private Securities Litigation Reform Act of 1995 (“PSLRA”), see 18
U.S.C. § 1964(c). Kocourek’s request to amend his complaint to add securities-
fraud claims was denied on the grounds of futility and undue delay. It appears
that the district court did not directly address Kocourek’s proposed common law
claims; so Kocourek asks us to remand to the district court for reconsideration of
those claims. No other claim is before us on appeal.
We affirm the district court in all respects save one. We vacate the
judgment of the district court to the extent it denied Kocourek leave to amend to
add securities-fraud causes of action, and we remand the case to the district court
to consider those claims.
I
Booz Allen is a privately-owned corporation that operates in all material
respects like a partnership. The company has no outside investors, avoids
outside debt, and is wholly owned by its officers, who are referred to internally
as partners.
A
Booz Allen allocates its stock via its Stock Rights Plan (the “SRP”). For
purposes of this opinion, Booz Allen stock can be classed as “common stock” or
“Class B stock,” although the actual operation of the SRP is more complicated.
The SRP operates as follows. In an officer’s first participation year, the officer is
given the option to purchase a block of shares, of which 10% is common stock
4
and 90% is Class B. The officer pays book value for the common stock tranche,
and a nominal amount for the Class B tranche. In each successive year, the
officer exchanges some of the Class B stock for common stock, so that the
percentage of common stock in the initial grant increases annually by 10%. Thus,
at the end of the second year, the block is composed of 20% common stock and
80% Class B stock; at the end of the third year, 30% common and 70% Class B;
and so on, until at the end of ten years, the block is 100% common stock. The
officer pays for the incremental conversions to common stock at the price of half
of book value at the time of the initial grant.
A new, parallel, ten-year process begins every year, as the officer
continuously receives new amounts of both common stock and Class B stock.
When an officer separates from Booz Allen, the disposition of the officer’s
remaining Class B stock depends on how the officer leaves. If the officer is
terminated for cause or leaves the company before retirement, the officer loses
the right to exchange the Class B stock for common stock and must return the
Class B stock to Booz Allen. If the participant retires with Booz Allen’s approval,
all outstanding Class B stock may be converted into common stock. Retirees are
allowed to continue holding their stock for two years into retirement, after which
Booz Allen has the option of repurchasing the retiree’s common stock at the
current book value.1 Common stock and Class B stock have voting rights in the
management of Booz Allen, and the common stock pays a small annual dividend.
As a matter of policy, the only owners of Booz Allen stock are the company
itself and its partners. Partners can sell their stock only to Booz Allen. Although
at least one SRP policy document states that partners may sell their common
stock back to Booz Allen at any time, the plaintiffs allege that partners were
effectively unable to do so until retirement.
The SRP is a lucrative arrangement that allows participants to realize
handsome profits when they sell their common stock. The relevant measure of
1
Officers or their estates are also given the right to hold the stock for two
additional years upon disability or death.
5
the common stock’s worth is its book value, i.e., Booz Allen’s net assets divided
by the number of outstanding shares of common stock. The company undertakes
to increase the actual book value of the common stock by 10% annually, and has
done so every year since 1978. Participants buy shares either at book value
(measured at the time of the initial grant) for the 10% portion of the annual grant
composed of common stock, or at half of book value (again measured at the time
of issuance) for the remaining 90% of those shares that begin as Class B stock and
convert to common stock over the ensuing nine years. Because the book value
appreciates at a compounded rate of 10% annually, the current book value in any
year will be higher than the purchase price--generally much higher. A
participant who received an initial grant of 100 shares in 2001, with a book value
of $100 per share, would ultimately pay $5,500 by 2010 to receive 100 shares of
common stock, which by then would be worth $23,579--a 329% return on
investment with nominal risk.
B
Plaintiffs Pasternack, Boudinot, and Kocourek are all former officers of
Booz Allen. They retired with the company’s blessing in 2004, 2005, and 2007,
respectively. They all participated in the SRP.
C
In 2008, Booz Allen sold its Government Contracting Division to an
affiliate of the Carlyle Group. The Carlyle Transaction was approved by a
supermajority of Booz Allen stockholders (i.e., participants in the SRP). Then-
current stockholders received $763 per share of common stock, an amount far in
excess of book value.
At the time of the Carlyle Transaction, Pasternack and Boudinot had no
common stock because Booz Allen exercised its option under the SRP to re-
purchase their shares two years after their retirement. Since Kocourek’s two-year
post-retirement period had not elapsed, Kocourek still held common stock, which
he sold in the Carlyle Transaction for approximately $20 million.
6
D
The three plaintiffs filed individual complaints in 2009. Initially, there was
no allegation that the SRP was governed by ERISA; but each complaint was
amended (with the defendants’ consent) to add ERISA claims. The three
complaints were consolidated.
Most of the claims in the consolidated complaint were dismissed on
motion, including the ERISA claims and RICO claims. Plaintiffs’ motion for leave
to amend their ERISA claims was denied. Kocourek’s separate request for leave
to add securities-fraud claims was denied on the grounds of futility and undue
delay. A few other claims, not before us on appeal, were dismissed at summary
judgment.
All three plaintiffs appeal the dismissal of the ERISA-based claims, which
were dismissed on the ground that the SRP was not covered by ERISA. The
plaintiffs also appeal the denial of their motion to amend their ERISA claims.
Kocourek separately appeals from the district court’s dismissal of his RICO
claims and the denial of leave to amend to add securities-fraud claims. Kocourek
also seeks to revive his common-law claims for breach of fiduciary duty.
II
The district court did not reach the merits of the ERISA claims because it
concluded that the plaintiffs failed to allege facts demonstrating that the SRP is
covered by ERISA. We agree.2
The plaintiffs assert that the SRP is an ERISA-protected “employee pension
benefit plan,” defined as:
2
Because we review de novo both the original dismissal and the denial of
leave to amend based on futility, our analysis here considers factual allegations
contained in both the original and proposed complaints. See Apotex Inc. v.
Acorda Therapeutics, Inc., 823 F.3d 51, 59 (2d Cir. 2016); Panther Partners Inc. v.
Ikanos Commc’ns, Inc., 681 F.3d 114, 119 (2d Cir. 2012).
7
[A]ny plan, fund, or program . . . to the extent that by its express
terms or as a result of surrounding circumstances such plan, fund, or
program--
(i) provides retirement income to employees, or
(ii) results in a deferral of income by employees for
periods extending to the termination of covered
employment or beyond,
regardless of the method of calculating the contributions made to the
plan, the method of calculating the benefits under the plan or the
method of distributing benefits from the plan.
29 U.S.C. § 1002(2)(A).
As the Fifth Circuit has observed, this statutory provision is “not to be read
as an elastic girdle that can be stretched to cover any content that can conceivably
fit within its reach.” Murphy v. Inexco Oil Co., 611 F.2d 570, 575 (5th Cir. 1980).
The question is whether the reach of § 1002(2)(A) extends to the SRP.
As the district court found, the SRP has little to do with retirement. Rather,
as described in an internal Booz Allen memorandum discussing the SRP, it is the
means of ensuring that Booz Allen is entirely “owned by the partners, with no
outside control,” and that the firm “not use long-term debt for working capital
needs.” J. App’x at 613. Since every enterprise must raise capital somehow, the
obvious recourse was for “[p]artners [to be] responsible for providing the firm
with adequate capital.” Id. Partners “me[t] their financial obligation to the firm
by annually investing cash via the [SRP],” which “provide[d] the working capital
necessary to operate the firm.” Id.
To maintain ownership by current partners over time, Booz Allen needed a
way to return capital to partners who leave. The SRP does this by having the
company buy out the ownership stake accumulated by a separating partner. This
process ensures a renewing stream of capital, allows for the creation of new
8
partners, accounts for the separation of present partners, maintains ownership
exclusivity by partners, and achieves independence from outside debt.
The particulars of the SRP appear unique: Booz Allen is a large corporation
that distributes stock in a way that makes the corporation operate like a
partnership. But the driving principle behind the arrangement is unexceptional.
At bottom, the SRP is akin to the financing mechanism utilized by ordinary
partnerships and by other enterprises in which capital is contributed to a venture
in exchange for an ownership stake.
The question remains whether the SRP is an employee pension benefit plan
within the meaning of 29 U.S.C. § 1002(2)(A). The two subparagraphs of that
section set out independent tests to determine whether a plan is protected by
ERISA. We begin with the second subparagraph, which extends ERISA coverage
to plans that “result[] in a deferral of income by employees . . . to the termination
of covered employment.” 29 U.S.C. § 1002(2)(A)(ii).
The SRP does not qualify under this test because “income” is not
“deferred.” The salient benefit that an SRP participant receives in exchange for a
capital injection is an ownership stake in Booz Allen. And because Booz Allen is
owned entirely by its officers, that ownership stake entails the right to actively
direct the management of the enterprise. Those benefits accrue during the SRP
participants’ tenure at Booz Allen, not at retirement. True, the ownership stake
can be liquidated into cash only after retirement, but the dominant benefits are
the ownership stake in the enterprise and the corresponding rights of
management--and these rights were exercised before retirement and ended with
the retirement process. We do not think that the statute, which speaks of a
“deferral of income . . . to the termination of covered employment,” is meant to
include instances in which benefits enjoyed before retirement were converted to
cash after retirement. Such benefits were not “deferred.”
No doubt, there are arrangements in which the distinction is blurry
between the grant of stock as deferred income and the deployment of present
assets to acquire a working share in a business. In this case, however, the
distinction is crisp and unambiguous. The plaintiffs received present benefits
9
rather than a deferral of income.3
Nor does the SRP constitute an employee pension benefit plan under the
statute’s alternative test, which extends ERISA coverage to plans that “provide[]
retirement income to employees.” 29 U.S.C. § 1002(2)(A)(i). The statutory phrase
“provides retirement income” does not cover every instance in which a person
cashes out an investment after retirement, even though a participant will have
anticipated this income when planning for retirement. The very fact that the
provision is an alternative to § 1002(2)(A)(ii), which explicitly asks whether a plan
“results” in deferred income, suggests that the phrase “provides retirement
income” considers the plan’s primary purpose rather than its result. See
Murphy, 611 F.2d at 575 (noting that “[t]he words ‘provides retirement income’
patently refer only to plans designed for the purpose of paying retirement
income”).
The primary purposes of the SRP are to provide working capital for the
company and maintain management’s control of it. True, SRP participants
receive cash when they sell their shares after retirement. However (as described
above), each participant had already received and enjoyed the present benefit
from their contributions before retirement. The later receipt of cash on sale of the
asset after retirement does not mean that the SRP “provides retirement income”
within the meaning of the statute. Moreover, as an internal Booz Allen
memorandum states, “[l]iquidation of stock at retirement is a return of capital
rather than a source of retirement income.” J. App’x at 839. The SRP’s primary
purpose is simply not the provision of retirement income.
Consequently, the SRP satisfies neither test of 29 U.S.C. § 1002(2)(A). Our
analysis and conclusion finds support in the Department of Labor regulation
3
Our holding does not foreclose the possibility that an award of restricted
stock to employees--which by definition confers an ownership stake in a
business--might count as deferred income within the meaning of ERISA. We
expect such instances to be rare. In this case, we decide only that ERISA does
not extend to circumstances in which stock is distributed so as to make an
enterprise operate along the lines of a partnership without silent partners.
10
which states that “partnership buyout agreements . . . will not be subject to title I
[of ERISA].” 29 C.F.R. § 2510.3-3(b) (full text in the margin).4 “[T]itle I” of ERISA
includes 29 U.S.C. § 1002(2)(A), which describes “employee pension benefit
plans.” Consequently, partnership buyout agreements are not employee pension
benefit plans. Because Booz Allen’s re-purchase of an SRP participant’s stock is
in effect a partnership buyout agreement, the SRP is not an “employee pension
benefit plan.” And since the plaintiffs’ sole claim to ERISA coverage is that the
SRP is an employee pension benefit plan, the ERISA causes of action fail.
To be sure, the regulation purports to apply only to “partnership buyout
agreements,” and Booz Allen is structured as a corporation. But the underlying
principle controls. By its terms the regulation suggests that it should be
interpreted flexibly: it speaks of “a general principle which can be applied to a
large class of plans to determine whether they constitute employee benefit
plans.” 29 C.F.R. § 2510.3-3(a). The Booz Allen arrangement is self-evidently a
4
29 C.F.R. § 2510.3-3(b) states in full (italics added):
Plans without employees. For purposes of title I of [ERISA] and this
chapter, the term “employee benefit plan” shall not include any
plan, fund or program, other than an apprenticeship or other
training program, under which no employees are participants
covered under the plan, as defined in paragraph (d) of this section.
For example, a so-called “Keogh” or “H.R. 10" plan under which
only partners or only a sole proprietor are participants covered
under the plan will not be covered under title I. However, a Keogh
plan under which one or more common law employees, in addition
to the self-employed individuals, are participants covered under the
plan, will be covered under title I. Similarly, partnership buyout
agreements described in section 736 of the Internal Revenue Code of 1954
will not be subject to title I.
Section 736 of the Internal Revenue Code speaks generally of “[p]ayments
made in liquidation of the interest of a retiring partner.” 26 U.S.C. § 736(a), (b).
We have no difficulty in concluding that SRP payments fit that description.
11
way to finance the company’s operations by contributions of capital from persons
who own and direct it. In this respect, Booz Allen officers are analogous to
partners (and function as partners in many other respects as well). Although the
SRP involves the purchase of corporate stock, it functioned as a partnership
buyout in all respects material to this appeal. The principle embodied in 29
C.F.R. § 2510.3-3(b), that a partnership buyout is not covered by ERISA, confirms
the intuitive conclusion that ERISA does not extend to agreements such as the
SRP.
The Ninth Circuit has also concluded that the Booz Allen SRP is not
covered by ERISA, though it got there by another route. Rich v. Shrader, 823
F.3d 1205 (9th Cir. 2016). We decline to follow the Ninth Circuit’s analysis, but it
is quite evidently a product of the same insight: that the Booz Allen arrangement
is principally a mechanism for raising capital for the running of the enterprise by
its active managers, rather than a plan for their retirement.5
In sum, the SRP neither “(i) provides retirement income” nor “(ii) results in
a deferral of income . . . to the termination of covered employment.” 29 U.S.C.
§ 1002(2)(A). Since the SRP is therefore not an “employee pension benefit plan”
within the meaning of ERISA, the district court correctly dismissed all of the
plaintiffs’ claims that depended on a finding that the SRP was covered by ERISA.
5
In determining whether a plan is an “employee pension benefit plan,” the
Ninth Circuit held that “the paramount consideration is whether the primary
purpose of the plan is to provide deferred compensation or other retirement
benefits.” Rich, 823 F.3d at 1210. We do not think that this purpose-based test
adequately accommodates one of the statutory tests of 29 U.S.C. § 1002(2)(A).
Subparagraph (ii) extends ERISA coverage to any plan that “results in a deferral
of income by employees.” The word “results” calls for an effects-based inquiry
rather than one based on purpose. In any event, we agree with the Ninth Circuit
that the SRP has little to do with retirement; instead, it is a means to capitalize the
firm without the need for outside debt.
12
III
The district court dismissed Kocourek’s RICO claims and common law
claims and denied leave to amend to add securities-fraud claims. We conclude
that the district court should have allowed Kocourek leave to amend his
complaint to add securities-fraud causes of action. We otherwise affirm the
district court’s dismissal of Kocourek’s claims.
A
Among the reasons advanced by the district court for denying Kocourek’s
motion to add securities-fraud claims is that Kocourek waived his right to assert
them, and that amendment would be futile. We review that ruling de novo.
Panther Partners Inc. v. Ikanos Commc’ns, Inc., 681 F.3d 114, 119 (2d Cir. 2012).
Since Kocourek still had shares when the Carlyle Transaction was done, he
was eligible to profit from it, and did. In order to receive a payout from the
Carlyle Transaction, stockholders were required to sign a “Letter of Transmittal”
(the “Letter”), surrendering their shares. The district court determined that the
following clause in the Letter (the “Release Clause”) waived Kocourek’s claims:
The undersigned . . . to the fullest extent permitted by applicable
law, hereby releases and forever discharges [Booz Allen and its
affiliates, directors and officers] . . . from any and all claims,
demands, proceedings, causes of action . . . whether known or
unknown, suspected or unsuspected . . . by reason of, relating to or
arising from the fact that the undersigned is or was a stockholder of
[Booz Allen] . . . or any other rights with respect to or with a value
derived from or other interest in any equity of [Booz Allen] . . . .
J. App’x at 1028-29.
Kocourek does not dispute that he signed the Letter, or that the wording
recites the waiver of the securities claims he is asserting. Instead, he argues that
the Release Clause is invalidated by § 29(a) of the Securities Exchange Act of 1934
13
(codified at 15 U.S.C. § 78cc(a)):
Any condition, stipulation, or provision binding any person to waive
compliance with any provision of [the Exchange Act] or of any rule
or regulation [promulgated] thereunder . . . shall be void.
15 U.S.C. § 78cc(a).
This antiwaiver provision generally invalidates blanket releases of liability
that accompany the purchase or sale of securities. Accordingly, “we do not give
effect to contractual language . . . purporting to be a general waiver or release of
[securities-fraud] liability altogether.” Vacold LLC v. Cerami, 545 F.3d 114, 122
(2d Cir. 2008). “The statutory framework of the 1933 and 1934 Acts compels the
conclusion that individual securityholders may not be forced to forego their
rights under the federal securities laws due to a contract provision.” McMahan
& Co. v. Wherehouse Entm’t, Inc., 65 F.3d 1044, 1051 (2d Cir. 1995). Relatedly, in
Harsco Corporation v. Segui, we upheld (in the face of a § 29 challenge) a
contractual clause that limited the representations upon which the purchaser
could bring a fraud claim, but we did so only after observing that the purchaser
“ha[d] not waived its rights to bring any suit resulting from this deal.” 91 F.3d
337, 344 (2d Cir. 1996) (emphasis added).
The Letter was essentially a contract for the sale of Kocourek’s securities,
and the Release Clause purported to waive all claims arising from Kocourek’s
status as a Booz Allen stockholder. It is therefore invalid, absent an exception to
the general rule that blanket releases accompanying the sale of securities are
void.
Booz Allen argues that there is such an exception. The company contends
[1] that § 29(a) applies only to “anticipatory” waivers of compliance, [2] that
Kocourek’s agreement here was a “retrospective” release from liability, and [3]
that such retrospective releases are not voided by § 29(a).
14
The cases Booz Allen cites for this proposition, however, all arose out of
agreements in which the parties settled existing or contemplated litigation.6 Booz
Allen is correct that a waiver signed in the context of a settlement agreement may
release securities-fraud claims. See, e.g., Locafrance U.S. Corp. v. Intermodal Sys.
Leasing, Inc., 558 F.2d 1113, 1114-15 (2d Cir. 1977). And it is certainly possible
that a release signed outside the context of settlement could serve the same
function. See Goodman v. Epstein, 582 F.2d 388, 394, 402-403 & n.42 (7th Cir.
1978); Moseman v. Van Leer, 263 F.3d 129, 133-34 (4th Cir. 2001).
But such instances, properly understood, are not “exceptions.” “What the
antiwaiver provision of § 29(a) forbids is enforcement of agreements to waive
‘compliance’ with the provisions of the statute.” Harsco, 91 F.3d at 343 (quoting
Shearson/Am. Express Inc. v. McMahon, 482 U.S. 220, 228 (1987)). The sale of
securities conditioned on the buyer’s complete release of the seller would in
effect license non-compliance with the securities laws, in violation of § 29(a).
A release signed in the context of negotiations to settle an alleged securities
violation cannot be said to “waive compliance” with the securities laws; the
aggrieved party receives an agreed remedy for an alleged securities violation,
and that remedy satisfies “compliance” with the securities laws. “The federal
securities laws do not compel persons harmed by acts violating provisions of the
laws to seek their remedies only through litigation.” Murtagh v. Univ.
Computing Co., 490 F.2d 810, 816 (5th Cir. 1974); see also Construction and
application of . . . § 29(a) of Securities Exchange Act of 1934, 26 A.L.R. Fed. 495(quotation set out in the margin7). Under the same analysis, a release signed
6
See Binstein v. Haven Indus., Inc., No. 74 Civ. 4792, 1978 WL 1121, at *7-8
(S.D.N.Y. Oct. 26, 1978); Locafrance U.S. Corp. v. Intermodal Sys. Leasing, Inc.,
558 F.2d 1113, 1114-15 (2d Cir. 1977); Petro-Ventures, Inc. v. Takessian, 967 F.2d
1337, 1338 (9th Cir. 1992); Facebook, Inc. v. Pac. Nw. Software, Inc., 640 F.3d 1034,
1039-40 (9th Cir. 2011).
7
The courts have held that where an agreement between a seller and
a purchaser of securities is executed . . . as a part of a contract for the
15
outside a settlement context might be enforceable because the releasor would
essentially be using an alleged securities violation as a bargaining chip to receive
some remedial benefit. In short, as a general principle, whenever a party offers
consideration to another in order to remedy an alleged violation of the securities
laws, acceptance of that offer in exchange for a release of securities-fraud claims
is tantamount to establishing “compliance” with the securities laws. Such
contracts do not run afoul of § 29(a).
There may be exceptions to this general rule. We have suggested that a
release of securities-fraud claims in settlement negotiation is valid only when
“signed in a commercial context by parties in a roughly equivalent bargaining
position and with ready access to counsel.” Locafrance, 558 F.2d at 1115; see also
Harsco, 91 F.3d at 344 (upholding non-reliance clause after determining that both
parties “were sophisticated business entities negotiating at arm’s length”). But
we need not explore the parameters of this rule because, as explained below, it is
clear that Kocourek ‘s execution of the Release Clause had nothing to do with
satisfaction of a pre-existing securities claim.8
sale of the securities, and where the agreement provides that the
purchaser . . . releases the seller from liability . . . the agreement is
void under the nonwaiver provisions of [the federal securities laws].
However, the courts have held that where a seller and a purchaser
of securities agree that the purchaser, in settlement of an existing
controversy between him and the seller . . . releases the seller from
liability under such antifraud provisions of the acts, such agreement
is not void as a matter of law . . . .
26 A.L.R. Fed. 495.
8
There may be more leeway to release claims in settlement negotiations than
in other contexts. The Ninth Circuit, for example, held that a release signed as
part of an agreement to settle a case that did not originally involve securities-
fraud claims was sufficient to bar the releasor from later asserting securities-
fraud claims that it had discovered after the settlement. Petro-Ventures, Inc. v.
Takessian, 967 F.2d 1337, 1338, 1343 (9th Cir. 1992). That decision emphasized
that the settlement negotiation was designed to “establish[] a general peace.” Id.16
Booz Allen points out that, before Kocourek signed the Letter, he had
retained counsel and threatened to sue Booz Allen over a dispute involving its
shadow stock program (a counterpart of the SRP for officers working abroad),
and that within five days of signing the Letter, Kocourek filed suit on those
claims in New York state court.
However, although the Release Clause may have ended that litigation, it is
clear that that litigation had no influence or bearing on the applicability of the
Release Clause here.9 Booz Allen sent the Letter to all eligible shareholders; each
shareholder was required to sign the Release Clause before taking a payout for
the Carlyle Transaction; and the amount of each payout depended solely on the
number of shares held. In short, though Kocourek received $20 million by
signing the Letter and selling his shares, no part of the transaction constituted
consideration (in whole or part) for a securities claim.
Consequently, the Release Clause is voided by § 29(a) to the extent it
purports to release Kocourek’s securities fraud claims.
Although the Release Clause does not bar Kocourek’s securities-fraud
claims, it does prevent him from asserting his common law and RICO claims.
Harsco observed that the plaintiff’s “§ 29 argument, if successful, would only
warrant reversal on the federal securities fraud claims. Section 29's [e]ffect, if
any, does not extend to the common law claims.” 91 F.3d at 343 n.6. We
therefore affirm the dismissal of Kocourek’s common law claims.
Harsco likewise mandates the dismissal of Kocourek’s RICO claims. The
RICO statute, as amended by the PSLRA, states that “no person may rely upon
any conduct that would have been actionable as fraud in the purchase or sale of
securities to establish [RICO liability].” 18 U.S.C. § 1964(c). Kocourek therefore
attempts to premise RICO liability on predicate acts that do not sound in
at 1342. Because there was no settlement agreement in this case, we need not
consider this issue.
9
Booz Allen does not argue that the state-court proceeding precludes
Kocourek from asserting that § 29(a) voids the Release Clause.
17
securities fraud. But the Release Clause categorically effected waiver of all claims
other than securities fraud. The combined effect of the PSLRA and Kocourek’s
execution of the Release Clause forecloses his RICO claims.
B
The district court independently denied Kocourek’s request to add
securities-fraud claims on the ground of undue delay. We review that
determination for abuse of discretion. Block v. First Blood Assocs., 988 F.2d 344,
350 (2d Cir. 1993).
Leave to amend should be “freely give[n] . . . when justice so requires.”
Fed. R. Civ. P. 15(a)(2). “The rule in this Circuit has been to allow a party to
amend its pleadings in the absence of a showing by the nonmovant of prejudice
or bad faith.” AEP Energy Servs. Gas Holding Co. v. Bank of Am., N.A., 626 F.3d
699, 725 (2d Cir. 2010) (quoting Block, 988 F.2d at 350). A litigant may be
“prejudiced” within the meaning of the rule if the new claim would: “(i) require
the opponent to expend significant additional resources to conduct discovery and
prepare for trial; (ii) significantly delay the resolution of the dispute; or (iii)
prevent the plaintiff from bringing a timely action in another jurisdiction.” Block,
988 F.2d at 350. However, “[m]ere delay, . . . absent a showing of bad faith or
undue prejudice, does not provide a basis for a district court to deny the right to
amend.” Id. (quoting State Teachers Ret. Bd. v. Fluor Corp., 654 F.2d 843, 856 (2d
Cir. 1981)). Nor can complaints of “the time, effort and money . . . expended in
litigating [the] matter,” without more, constitute prejudice sufficient to warrant
denial of leave to amend. Id. at 351.
The denial of leave to amend, based solely on delay and litigation expense,
was an abuse of discretion. The district court’s explanation cited the years of
litigation and concluded: “[The] defendants have spent a vast amount of money
litigating the sufficiency of various complaints in this case. This is not something
unworthy of consideration. It is surely prejudice . . . .” J. App’x at 1317. But
delay (and its necessary consequence, litigation expense) does not, without more,
constitute undue prejudice. Block, 988 F.2d at 350-51. Perhaps it should; but it
does not. Moreover, essentially no discovery has been undertaken in this case;
Kocourek’s proposed amended complaint would be the first complaint to be
18
considered after the district court decided a motion to dismiss; and it does not
appear that there is any allegation of untimeliness based on a scheduling order.10
Under the circumstances, amendment should not be precluded on the ground of
untimeliness.
C
The district court also dismissed Kocourek’s securities-fraud claims as
futile because the “allegations in the proposed amended complaint do not come
remotely close to pleading fraud with the particularity required by [Federal Rule
of Civil Procedure] 9(b) and the Private Securities Litigation Reform Act [the
‘PSLRA’].” J. App’x at 1319. However, the district court did not sufficiently
explain why the allegations were deficient under the heightened pleading
standards of Rule 9(b) and the PSLRA--presumably because the district court had
already concluded that Kocourek’s claims were untimely and waived.
But there is no need to parse Kocourek’s allegations here. “Complaints
dismissed under Rule 9(b) are ‘almost always’ dismissed with leave to amend.”
Luce v. Edelstein, 802 F.2d 49, 56 (2d Cir. 1986); see ATSI, Commc’ns., Inc. v.
Shaar Fund, Ltd., 493 F.3d 87, 108 (2d Cir. 2007) (“District courts typically grant
plaintiffs at least one opportunity to plead fraud with greater specificity when
they dismiss under Rule 9(b).”). Kocourek presented his proposed securities-
fraud claims to the district court a single time (on his motion to amend). At a
minimum, Kocourek should be allowed on remand to plead with greater
specificity. As to the merits, we have no view.
10
“Where . . . a scheduling order governs amendments to the complaint,” and
a plaintiff wishes to amend after the scheduling deadline has passed, the plaintiff
must satisfy both [Federal Rules of Civil Procedure] 15 and 16 to be permitted to
amend. See Holmes v. Grubman, 568 F.3d 329, 334-35 (2d Cir. 2009); see also 3-16
Moore’s Federal Practice - Civil § 16.13 (2016). As a practical matter, that means
that where a schedule has limited the time to amend a complaint, the plaintiff
who wants to amend must satisfy Rule 16 by showing “good cause” to modify
the scheduling order. See Fed. R. Civ. P. 16(b)(4). Because this issue was not
raised by Booz Allen, we need not consider its applicability here.
19
D
Booz Allen also argues that Kocourek’s securities-fraud claims are time-
barred. The claims here are subject to a five-year statute of repose. In general,
statutes of repose impose stricter timeliness requirements than statutes of
limitation. For example, the time limit for a statute of limitations is measured
from the time the plaintiff discovers or should have discovered the injury,
whereas the time limit for a claim subject to a statute of repose is measured from
the last culpable act of the defendant (meaning that the plaintiff’s discovery of
the injury is irrelevant for a statute of repose). Statutes of limitation are normally
subject to equitable tolling; statutes of repose normally are not. See generally
CTS Corp. v. Waldburger, 134 S. Ct. 2175, 2182-84 (2014).
Booz Allen argues that Kocourek’s claim is untimely because he did not file
his amended complaint within the statute of repose. Although Kocourek had
filed his motion to amend within that time period (with the proposed amended
complaint attached), Booz Allen argues that is insufficient.
Under Booz Allen’s theory, a plaintiff that requests leave to amend a
complaint years in advance of the expiration of the statue of repose would still be
barred from bringing the suit if the district court sat on the motion for years
without fault of the plaintiff. However, for purposes of a statute of repose, when
a plaintiff moves for leave to amend to add claims within the limitations period
and attaches a proposed amended complaint to the motion, the claims are timely.
Cf. Rothman v. Gregor, 220 F.3d 81, 96 (2d Cir. 2000) (“When a plaintiff seeks to
add a new defendant in an existing action, the date of the filing of the motion to
amend constitutes the date the action was commenced for statute of limitations
purposes.” (quoting Nw. Nat’l Ins. Co. v. Alberts, 769 F. Supp. 498, 510 (S.D.N.Y.
1991)).
CONCLUSION
For the foregoing reasons, we vacate the judgment of the district court to
the extent it denied Kocourek’s request for leave to amend his complaint to add
claims sounding in securities fraud. We remand to the district court to allow
Kocourek to amend his complaint. In all other respects, the judgment is affirmed.
20