California Stock Option Disputes

In the state of California, stock options are often viewed as a form of compensation akin to wages, especially when granted as part of an employment package. However, the treatment of stock options can vary based on the circumstances under which they’re awarded and the specific terms of employment agreements. As such, their categorization can sometimes be the center of shareholder agreement disputes.

What Are Some Common Stock Option Violations and Legal Disputes?

Stock option disputes can arise from a long list of scenarios. Here are some common violations and disputes.

Breach of Fiduciary Duty

A fiduciary duty is a heightened duty of loyalty and care that certain people, like directors, officers, or agents, owe to others. A breach of fiduciary duty arises when these individuals act in a manner inconsistent with this obligation.

This can manifest in several ways, such as:

• Misappropriating company funds for personal use;
• Engaging in self-dealing, where the fiduciary benefits at the expense of the principal;
• Failing to act in the best interests of the company or shareholders;
• Not disclosing conflicts of interest.

The implications of such breaches can lead to both civil and, in some cases, criminal consequences.

Market Manipulation

Market Manipulation is an umbrella term for strategies that traders might use to deceive other traders about the supply or demand of a stock.

Forms of market manipulation can include:

• Painting the Tape: This involves creating artificial trading activity to influence the price of a security.
• Wash Trading: Selling and repurchasing the same or substantially similar stock to generate activity and give an illusion of interest in the stock.
• Quote Stuffing: Rapidly placing and canceling orders to confuse or slow down other traders.

Market manipulation disrupts the fair and efficient operation of financial markets.

Insider Trading

When individuals with access to non-public, material information about a company’s stock use that information to trade, they are engaging in insider trading.

Examples include:

• A CEO selling their company shares before the announcement of poor quarterly results;
• A friend acting on a tip from an insider, even if the insider did not trade themselves.

Insider trading undermines the principle that all investors should have equal access to information.

Churning

Brokers have a responsibility to act in the best interests of their clients. Churning occurs when, for the primary purpose of generating commissions, a broker excessively trades in a client’s account.

Indicators include:

• A high volume of trades that don’t align with the client’s investment objectives;
• Buying and selling the same security repeatedly without a clear financial reason.

Churning erodes investment returns and can harm the financial health of the investor’s portfolio.

Malpractice

In the financial world, malpractice refers to the failure of professionals, like financial advisors or brokers, to uphold the standards of their profession, resulting in harm to their clients.

Instances of malpractice can include:

• Recommending unsuitable investments not aligned with a client’s risk tolerance;
• Failing to adequately inform clients of the risks associated with a particular investment;
• Misrepresentation or omission of pertinent facts about an investment.

Victims of financial malpractice can often pursue legal remedies to recover their losses.

What Are the Legal Consequences for a Stock Option Violation in California?

The legal penalties for stock option violations can vary depending on the nature and extent of the violation, the amount of money involved, and whether the violation was intentional or negligent.

Some possible penalties are:

• Civil lawsuits: The company, its shareholders, or the government may sue the violator for damages, restitution, disgorgement, injunctions, or other remedies.
• Criminal charges: The violator may face criminal prosecution by federal or state authorities for both misdemeanors and felony charges such as securities fraud, tax evasion, wire fraud, mail fraud, or other crimes. The penalties may include fines, imprisonment, forfeiture of assets, or other sanctions.
• Administrative actions: The violator may face disciplinary actions by regulatory agencies such as the Securities and Exchange Commission (SEC), the Internal Revenue Service (IRS), or the California Franchise Tax Board (FTB). The actions may include audits, investigations, sanctions, revocations, suspensions, or disqualifications.

If you are involved in a stock option violation, consult an experienced California attorney who can advise you on your legal rights and options.

Do I Have Any Remedies Under California Law for a Stock Option Violation?

Yes, individuals who believe they have been wronged due to a stock option violation can pursue remedies under California law. These can include:

Seeking Restitution

Restitution is grounded in the principle of unjust enrichment; it ensures that one party isn’t unjustly benefited at the expense of another. When it comes to financial malpractice:

• Restitution aims to restore the victim to the position they would have been in had the wrongful act not occurred.
  For victims of stock option violations, this could mean recovering lost profits or the return of original investments that were mishandled or misappropriated.
• The exact amount of restitution can vary based on factors such as market conditions, duration of the violation, and the extent of financial loss.

Punitive Damages

Punitive damages go beyond mere compensation. Instead, they serve a dual purpose:

• Penalization: Unlike compensatory damages that are meant to make the victim whole, punitive damages are designed to punish the wrongdoer for particularly egregious or malicious conduct.
• Deterrence: By imposing a financial penalty, the courts aim to deter both the specific wrongdoer and others in similar positions from engaging in such conduct in the future.

To award punitive damages, courts often require a higher standard of proof, like demonstrating that the wrongdoer acted with malice, oppression, or fraud.

Reformation of Shareholder Agreements

Shareholder agreements govern the rights and obligations of shareholders and are critical to the smooth operation of a corporation. When disputes arise due to ambiguity or deceptive clauses:

• Clarification: Courts can step in to reform (modify) the agreement to more clearly represent the intended terms or to rectify any misleading language.
• Protection: The reformation ensures that shareholders are protected from future disputes or misunderstandings arising from the same unclear terms.
• Consent: Typically, the courts would respect the parties’ original intentions when reforming an agreement. It’s less about rewriting the agreement and more about ensuring that its terms are clear and enforceable.

While these remedies provide potential avenues for relief, the success of any legal action often depends on the specifics of the case and the quality of evidence presented.

Should I Hire a California Lawyer if I Was Misled About My Company’s Stock Options?

Absolutely. Stock options, representing a significant component of many compensation packages, are not only a valuable asset but also a complex part of employment and financial law.

If you believe you’ve been misled about your company’s stock options or have encountered violations such as insider trading, market manipulation, or breach of fiduciary duty, securing representation from an experienced California attorney is not just advisable, it’s imperative.

Whether it’s seeking restitution, pursuing punitive damages, or reforming shareholder agreements, an attorney will guide you on the most suitable course of action aligned with your specific circumstances and best interests.

Given the potential financial implications and the intricacies of the law surrounding stock options, having an attorney by your side is advised. LegalMatch can connect you with the right California employment lawyer tailored to your unique situation, ensuring that you’re not just represented but represented by the best.