On July 13, 2017, the United States Court of Appeals for the Second Circuit vacated a part of a district court decision denying a plaintiff’s motion to amend a complaint to add securities fraud claims based on a contractual release of claims on the ground that “blanket releases” from compliance with federal securities laws were barred by the anti-waiver provision of the Securities Exchange Act of 1934 (the “Exchange Act”). Pasternack v. Shrader, et al. No. 16-217 (2d Cir. July 13, 2017). This provision provides that “[a]ny condition, stipulation, or provision binding any person to waive compliance with any provision of [the Exchange Act] or any rule or regulation [promulgated] thereunder . . . shall be void.” 15 U.S.C. § 78cc(a).
Plaintiff Paul Kocourek, a retired officer of Booz Allen Hamilton (“Booz Allen” or the “Company”), along with two other retired officers of Booz Allen, initially brought claims under the Racketeer Influenced and Corrupt Organizations Act (“RICO”) and the Employee Retirement Income Security Act of 1974 (“ERISA”) based on allegations they were denied compensation when the Company sold one of its divisions to the Carlyle Group. Kocourek, who still held shares at the time of the sale, separately sought to amend the complaint to add a claim under the Exchange Act based on the allegation Booz Allen fraudulently induced him to sell Company stock at prices below fair value. Judge Kaplan of the United States District Court for the Southern District of New York dismissed the RICO and ERISA claims and further held Kocourek could not amend his complaint to add claims under the Exchange Act because, at the time he surrendered his shares, he signed a letter that included the following release language: “[t]he 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] . . . .”
The Second Circuit vacated the district court’s denial of Kocourek’s leave to amend, holding that the anti-waiver provision of the Exchange Act “forbids enforcement of agreements to waive ‘compliance’ with the provisions of the statute.” In so doing, the Second Circuit distinguished the release Kocourek signed from releases signed in connection with agreements to settle existing or contemplated litigation, explaining that a release signed in the context of a settlement does not “waive compliance” with securities laws. Instead, the aggrieved party is receiving an agreed remedy for a claimed securities violation. In contrast, a sale of securities conditioned on a complete release such as the one signed by Kocourek “would in effect license non-compliance with the securities laws, in violation of § 29(a).” The Second Circuit did hold, however, that the release provision prevented Kocourek from asserting common law and RICO claims.
The decision lends some clarity to the scope and enforceability in the Second Circuit of release language often included in securities sales agreements between sophisticated parties, including confirming that “blanket” releases will not be enforceable as against securities fraud claims to the extent the language could be read to permit prospective non-compliance with the securities laws.
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