United States District Court, N.D. Illinois, Eastern Division
[Copyrighted Material Omitted]
For Paul Simons, an individual, Plaintiff, Counter Defendant: William Allen Woolley, LEAD ATTORNEY, Bilal Zaheer, Edwards Wildman Palmer LLP, Chicago, IL; Teresa A Sullivan, Schopf & Weiss LLP, Chicago, IL.
For Ditto Trade, Inc., an Illinois corporation, Ditto Holdings, Inc., a Delaware corporation, Joseph Fox, an individual, Defendants, Counter Claimants: Daniel P. Shapiro, Dawn Marie Canty, LEAD ATTORNEYS, Jennifer Cecelia Ryan, Katten Muchin Rosenman, LLP, Chicago, IL.
MEMORANDUM OPINION AND ORDER
Hon. Harry D. Leinenweber, United States District Judge.
Defendant Ditto Holdings, Inc. (" Holdings" ) is the parent of Defendant Ditto Trade, Inc. (" Trade" ), and is a Broker-Dealer, registered with the Securities Exchange Commission (the " SEC" ). The Plaintiff, Paul Simons (" Simons" ), is the former Chief Executive Officer (" CEO" ) of Trade and was a member of the Board of Directors of Holdings. Before joining Trade, Simons had spent twenty-five (25) years in the financial industry, including stints as Managing Director of Wealth Management at Credit Suisse and as a Managing Director of Merrill Lynch.
In January 2013, Simons was recruited by Defendant Joseph Fox (" Fox" ), co-founder of the Ditto companies and CEO of Holdings, to serve as CEO of Trade. To help Simons decide whether to join Trade, Fox provided, detailed information relating to the Ditto entities' current and historical financial picture, its business model, strategic initiatives, and technology investments. Based on this information Simons agreed to join Trade as CEO and Holdings as Executive Vice President, and to accept a compensation package that was to be comprised of 10% salary and 90% equity in the form of options to purchase Trade stock. The compensation package agreed upon consisted of a salary of $120,000 per year plus options to purchase 1.5 million shares of Trade's common stock at an exercise price of $0.70 per share, with the options vesting ratably over four years.
During the latter half of 2013, while reviewing company records, Simmons discovered evidence which he believed raised serious concerns regarding company expenditures, and serious law violations on Fox's part. His review of records also led him to conclude that Fox had supplied him with false and misleading financial information upon which his compensation package was based. He concluded that Fox had overstated 2012 revenues by a factor of four, had drastically understated expenses, and some of the " strategic initiatives" and " technology investments" did not exist. Accordingly, he believed the equity component of his compensation was substantially overvalued at the time he accepted the offer of employment.
Believing that some of the alleged financial irregularities indicated potential violations of federal and state securities laws, Simons reported his concerns to Holdings' Board. Simons also reported his concerns to the SEC. As a result, the Defendants took swift revenge and Simons was barred from his office, terminated as CEO by Trade, removed from Holding's Board, terminated from his position as Executive Vice President of Holdings, and denied both the delivery of his restricted stock and the right to exercise his fully vested options. As a result of the forgoing, Simons has filed a 14-Count Complaint. The Defendants have moved to dismiss six of the counts: Count II, Common Law Retaliation against Fox; Count IV, Common Law Fraud; Count V, Fraud under Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5; Count VI, Section 20(b) of the Act against Fox; Count VIII, Breach of Contract-Stock Option; and Count XII, Indemnification.
The Defendants have also filed Counterclaims against Simons, alleging that, prior to Simons' termination, he had been scheming to drive out existing senior management and take over the companies and once his scheme was thwarted, he set out to destroy the companies and set up a competing enterprise. His method was to access confidential company information in violation of his confidentiality agreement, and use the information, with deliberate indifference, to accuse executives, including Fox, of wrongdoing and to publish the information both inside and outside the companies, and specifically to publish to the companies' investors and shareholders. He also sent his information to Ditto's investment banker causing him to withdraw. He also contacted the PGA and gave it false information that prevented a relationship from developing. Then Simons sought to buy out Fox and other investors at discount prices. Failing to do so he began soliciting investors to fund a venture to compete with Ditto in violation of his non-compete agreement. The result of his actions was to diminish the value of Ditto. Count I of ...