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RIZZO v. MACMANUS GROUP

March 30, 2001

RAYMOND S. RIZZO, PLAINTIFF,
V.
THE MACMANUS GROUP, INC., CLARION MARKETING & COMMUNICATIONS, INC., ROY BOSTOCK AND CRAIG BROWN, DEFENDANTS.



The opinion of the court was delivered by: Pauley, District Judge.

MEMORANDUM AND ORDER

Factual Background

The following facts are drawn from the complaint and documents incorporated by reference into the complaint.

From early 1987 through July 1989, Rizzo held the position of chairman and chief executive officer of Clarion, a marketing consulting firm and wholly owned subsidiary of MacManus, a privately-held advertising and marketing communications holding company. (Compl. ¶¶ 1, 14, 31.) Clarion employed Rizzo through a series of three employment agreements, the latest agreement engaging him as chief executive officer through December 31, 2001. (Compl. ¶ 14.) Rizzo's employment could not be terminated unless at the direction of the Clarion board of directors "for cause." (Compl. ¶ 15.) In connection with his employment, Rizzo acquired 15,000 shares of MacManus stock, redeemable upon his termination or otherwise alienable at a set formula tied to retained earnings. (Compl. ¶¶ 18-19.)

Rizzo had a falling out with MacManus's management in 1998. Defendants Bostock, MacManus's chief executive officer, and Brown, its chief operating and financial officer, made known to Rizzo their dissatisfaction with Clarion's financial performance. (Compl. ¶¶ 40-41.) As a consequence, Rizzo was replaced by Lance Smith as chief executive officer of Clarion but continued his employment as chairman. (Compl. ¶ 21.) Initial attempts in April 1998 to negotiate a severance package failed. (Compl. ¶ 42.) In the spring of 1999 Smith, authorized by Bostock and Brown, renewed Clarion's efforts to negotiate with Rizzo and in September of that year presented Rizzo with a severance agreement terminating his employment contract two years early on December 31, 1999 and guaranteeing certain payments and benefits. (Compl. ¶¶ 24, 26, 29, 32, 45.) The severance agreement provided that Rizzo's 15,000 shares of MacManus stock would be redeemed for five cents per share, totaling $750. (Compl. ¶¶ 4, 25.) The severance agreement also provided that Rizzo would serve as a consultant until December 31, 2000. (Compl. ¶ 31.)

In 1998 and 1999, rumors circulated about a possible merger between MacManus and Leo Group, another privately-held advertising and marketing communications company. (Compl. ¶ 22.) Bostock repeatedly denied those rumors to the press and internally to Rizzo and other MacManus employees, assuring that MacManus intended to remain private and was not for sale. (Compl. ¶¶ 2, 22-23, 27.) In describing Bostock's denials of the rumors, the complaint quotes a portion of a July 16, 1999 article in Campaign, a British magazine of limited circulation, that gives superficial treatment to the prospects of MacManus merging or being acquired. (See Compl. ¶ 22; see also Ex B. to Decl. of John T. Brennan dated April 14, 2000.) Although cited only as a contextual reference — there is no allegation that Rizzo either read or relied upon the content of the article — defendants use this article as a fulcrum for their motion to dismiss. Thus, it is worth summarizing the salient points of the piece for purposes of the legal discussion to follow.

The article, titled "The Kings of Madison Avenue," featured Bostock and reported on industry speculation that MacManus "is up for a deal" as a result of the relaxation of the conflicts policy of one of its main clients, Proctor & Gamble. Prefaced with the disclaimer that it had "no revelations to report," the article stated that the nearest it "ever got to a scoop" was "a highly promising moment as [Bostock] veered towards talk of `deal-making within the next three years but not before the end of this one.'" The article touched upon the subject of failed merger discussions in 1998 between MacManus and Leo Group and of future consolidation in the industry. In this regard, it quoted Bostock as saying: "But I think the speculation is far, far ahead of the facts. We've been part of the speculation, with Interpublic, but there have been no discussions between us. . . . Nope, no, absolutely no discussions, period."

Prior to signing the severance agreement, Rizzo alleges that he discussed with Smith whether MacManus intended to remain a private company. (Compl. ¶ 27.) Specifically, Rizzo alleges that he asked Smith about contemplated transactions through 2001, such as the sale of the company, that he should know about before signing the agreement. (Compl. ¶ 27.) According to the complaint, Smith replied that he understood based on conversations with Bostock and others that no such transactions were contemplated in the near future. (Compl. ¶ 27.) When Rizzo allegedly stated that he nevertheless wanted to meet with Bostock and Brown, Smith told Rizzo not to bother because it "will only hamper negotiations and will serve no need." (Compl. ¶ 27.) In response to further questions about the designated stock sale period, which dated back to January 1, 1999, Smith allegedly told Rizzo that he did not believe MacManus "was planning anything that would or should make [him] suspicious about his stock repurchase" and that Brown is "inflexible" on the repurchase date. (Compl. ¶ 27.) Smith also allegedly advised Rizzo "not [to] worry about it because they cannot put anything together from nothing before the end of the year." (Compl. ¶ 27.)

Rizzo signed the severance agreement on September 30, 1999. (Compl. ¶ 27.) On November 3, 1999, MacManus merged with Leo Group. (Compl. ¶ 3.) In December 1999, MacManus advised its employee stockholders that the surviving entity of the MacManus-Leo Group merger, called BDM, intended to go public in 2001 and that, in connection with the merger, MacManus would repurchase up to 40% of each employee's stock for $992 per share. (Compl. ¶ 4.) As a result of the merger and planned public offering, Rizzo contends that his 15,000 shares of stock are worth in excess of $14.8 million. (Compl. ¶ 4.)

Rizzo avers that at the time he was negotiating his severance agreement with Smith, defendants were aware but failed to disclose a number of material, nonpublic facts evidencing that MacManus had reached an advanced stage of its plan to merge or be acquired, or a combination of both, and entered merger discussions with several companies. (Compl. ¶¶ 5, 33.) First, Rizzo claims that several months prior to September 30, 1999, MacManus secretly hired Morgan Stanley & Company to advise it on how to structure the company to make it a more attractive candidate for merger or acquisition. (Compl. ¶¶ 5, 33.) Second, Rizzo claims that prior to September 30, 1999, MacManus already had been approached by several potential merger partners and had reached an advanced stage of negotiations with the Interpublic Group. (Compl. ¶¶ 5, 34.) Third, it is alleged that by mid-September 1999, Bostock was discussing a potential merger with clients of MacManus to see if they had any objection and was touting the possible merger as a means to induce other employees to remain with the company; specifically, on September 24, 1999, Bostock purportedly told a senior MacManus executive to stay with the company because within six months MacManus would close a deal that Bostock guaranteed would place a value on the executive's stock of at least $600 to $800. (Compl. ¶¶ 5, 35.) Fourth, in late September 1999, Bostock received a call from the chief executive officer of Leo Group who advised Bostock of his company's interest in merging with MacManus. (Compl. ¶¶ 5, 36.)

Penultimately, Rizzo avers that had he been advised of the true facts, he would not have signed the severance agreement and redeemed his stock and, instead, either would have negotiated a higher payment for the stock or remained as an employee for the duration of his term of engagement. (Compl. ¶ 6.) Rizzo submits that defendants defrauded him by misrepresenting that the value of his stock was only five cents per share, by affirmatively advising him that MacManus would not be involved in any substantial corporate transactions in the near future, by failing to correct Bostock's prior statements concerning MacManus's intent to remain private, and by omitting to disclose the negotiations with potential merger partners and acquirors and contemplated public offering. (Compl. ¶ 50.) Rizzo asserts that defendants acted consciously because they knew of the status of his negotiations with Clarion and failed to disclose material, nonpublic information and, moreover, were motivated by a desire to end his employment without fully compensating him. (Compl. ¶¶ 38-39.)

Discussion

On a motion to dismiss pursuant to Rule 12(b)(6), a court typically must accept the material facts alleged in the complaint as true and construe all reasonable inferences in a plaintiffs favor. Grandon v. Merrill Lynch & Co., 147 F.3d 184, 188 (2d Cir. 1998). A court should not dismiss a complaint for failure to state a claim unless "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitled him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Gant v. Wallingford Bd. of Educ., 69 F.3d 669, 673 (2d Cir. 1995). This Court may consider documents that are incorporated by reference in the pleadings. San ...


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