Defendants Were Not Guilty Of Fraud When They Allowed Departing Employee To Keep Stock Options As Part Of A Package But Did Not Warn Him That The Company Was In Economic Trouble
SMITH v. DUFFEY (August 3, 2009)
Jack Smith sold his company and its intellectual property to Dade Behring, Inc. He received, as part of the consideration, options to purchase 20,000 shares of Dade Behring stock. He soon left the employ of the company. He agreed to accept $1.4 million in cash, while retaining his options. A few months later, the company entered bankruptcy. Smith's options were extinguished as part of its reorganization. Smith sued several officers of the company, alleging that they had a duty to disclose at the time of this termination agreement the fact that the company would soon enter bankruptcy. The district court dismissed his fraud claim for failure to state a cause of action. Smith appeals.
In their opinion, Judges Cudahy, Posner and Kanne affirmed. The Court stated that when the fraud alleged is the failure to disclose something, the plaintiff must establish the presence of a duty. A duty can arise in a fiduciary relationship. In the absence of relationship, it can arise when silence would be misleading because of some other statement made by the defendant. Here, the Court concluded that the defendants did not say anything that lulled Smith into thinking the company was doing well. In fact, the Court noted that the defendants advised Smith that the company was in trouble and was seeking an "exit strategy." The Court concluded that Smith's claim was without merit.
