Court Finds No Fraud In Executive Failure to Speak About Stock Performance

>US District Judge Joan Humphrey Lefkow of the US District Court for the Northern District of Illinois found the defendants did not have a duty to speak about the future performance of the company when employee Kimberly Bors traded her phantom stock shares for restricted stock shares that became worthless after the company went bankrupt.   Thus, the court dismissed the plaintiff’s fraudulent misrepresentation claims.

“[The plaintiff’s complaint] does not support a claim for promissory fraud,” Lefkow wrote.   “[The plaintiff] makes no explicit allegations of broken promises and only implicitly alleges that the defendants broke their promise that [the company] would be ‘given enough time and cash’ …. to accomplish a turnaround.”  

Case History

Bors worked for Outboard Marine Corp. (OMC) from 1995 until 2000. In 1996, Bors was granted 10,000 shares of phantom stock.   Following a change of control in the company that allowed the shares to be exercised, Bors asked two of the company’s executives, David Jones Jr and Andrew Hines, whether she could exercise her phantom stock.

According to Bors, Jones and Hines told her not to cash out, but offered her the option of rolling her phantom shares of stock into restricted shares of the new OMC stock on a tax-free basis.   When OMC declared bankruptcy in 2000, Bors’s restricted shares became worthless.   Bors filed suit for fraudulent misrepresentation.

Court Ruling

>The court turned to the elements of fraud by omission that are necessary under Illinois law: concealment of a material fact, with the intent to deceive and that the plaintiff was unaware of the concealed fact and would have acted differently had the plaintiff known.   Additionally, under Illinois law, the party accused of concealing the material fact must have had the opportunity and duty to speak.   It is to this last point that Outboard Marine points to in asking the court to dismiss the claim with which the court agrees.

“In this case, the statements and alleged omissions of Jones and Hines did not create a duty to speak on this ground for two reasons,” the court found. “Initially the statements referred to future events, specifically the defendants’ five-year plan to turn around OMC that they expected to culminate in an initial public offering of OMC stock at $50 or more per share.”   Yet, under Illinois law, “statements that relate to contingent events, expectations or probabilities, rather than present facts,” will not support claims of fraud, the court said.   Thus, the statements that Jones and Hines made “did not create a duty to speak.”  

>Further, “Bors was not justified in relying on oral statements made prior to her execution of the [Unit Grant Agreement] and thus, even if the statements created misapprehension, the defendants had no duty to speak,” the court ruled.

The case isBors v. Duberstein, Northern District of Illinois, No. 03 C 4636.