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08/11/95 HARVEY L. PEGRAM v. WILLIAM J. HEBDING

August 11, 1995

HARVEY L. PEGRAM
v.
WILLIAM J. HEBDING



Appeal from Marshall Circuit Court. (CV-89-438). William D. Jetton, TRIAL JUDGE.

Houston, Maddox, Kennedy, Ingram, Cook, and Butts, JJ., concur. Shores, J., concurs in that portion of the judgment reversing in part, and Dissents from that portion affirming in part.

The opinion of the court was delivered by: Houston

HOUSTON, JUSTICE.

The plaintiff, Harvey L. Pegram, appeals from a judgment entered on a directed verdict for the defendant, William J. Hebding, in this action to recover damages based on allegations of fraud and intentional interference with an employment contract. We affirm in part, reverse in part, and remand.

The evidence, viewed in a light most favorable to Pegram, see First Financial Insurance Co. v. Tillery, 626 So. 2d 1252 (Ala. 1993) (discussing the well-established standard for reviewing directed verdicts), indicates the following: In 1983, Pegram, Hebding, and another person left their management positions with another company to found Comptronix Corporation, a contract manufacturer of diversified electronics products and assemblies. Pegram, who was experienced in material management and procurement, assumed responsibility for the purchasing and receiving of materials at Comptronix. For over five years, Pegram sat on Comptronix's board of directors and served as executive vice president in charge of material management and procurement for the company. During that same time, Hebding, who had become Comptronix's chief executive officer and chairman of its board of directors, took care of the accounting and financial aspects of the business.

In April 1989, as preparations were being made for a public offering of Comptronix stock, the underwriters of the offering required Pegram and other high level management employees to sign employment contracts with the company. Pegram's contract provided, in pertinent part, that he would "serve as Executive Vice President of the Company or in any other comparable position as the Board of Directors may from time to time determine" and that he would "have such powers and duties as are customarily associated with such position." The contract also provided that Pegram's employment could be terminated for "Cause or for any other reason." Included within the contract's definition of "Cause" were "acts of dishonesty or fraud ... harmful to the Company." Pegram's experience and position within the company were highlighted during Comptronix's campaign to impress investors.

Also in 1989, Pegram and Hebding began to develop personal and professional differences regarding Comptronix. Pegram questioned Hebding's handling of certain stock transactions by Comptronix employees. Also about this same time, Pegram and Hebding discussed whether Comptronix should disclose certain information to investors in connection with the company's public stock offering, which was to occur in May 1989. Pegram had learned that one of the company's primary customers, Conners Peripherals, Inc. ("Conners"), was considering taking most of its business "overseas." Pegram expressed concern that this information might be material information that should be disclosed to potential investors under applicable securities laws. Hebding asked Pegram to get his contact person within Conners to reassure potential investors, as well as the underwriters of the stock offering, that it was not anticipating taking its business elsewhere. Pegram refused. Pegram did learn from his contact within Conners that Conners anticipated doing some business with Comptronix. Hebding eventually told Pegram that, in his opinion, the information was not material, and Comptronix did not mention in its offering documents the possibility of a substantial reduction in business with Conners. Comptronix did later issue a press release in August 1989, announcing "that it [had] received less than anticipated orders from another major customer for disk drive products." The customer referred to in the press release was Conners. Comptronix subsequently issued another press release in October 1989, stating in pertinent part:

"Comptronix Corporation [previously] announced that it had received less than anticipated orders from a major customer for disc drive products. Today, the Company announced that it expects orders from this customer to

decline even further...."

The customer referred to in this press release was also Conners.

Shortly after the public stock offering, Hebding, over Pegram's objections and for a reason not apparent to Pegram, unilaterally transferred Pegram from his position as vice president in charge of material management and procurement to the position of vice president in charge of sales and marketing, an area in which Pegram had had far less experience. This transfer, which was accompanied by a raise in Pegram's salary, was not immediately approved by the company's board of directors. However, the board later passed a resolution confirming Pegram's new position. Although Hebding characterized Pegram's transfer as a "promotion," Pegram, in his previous position, had supervised approximately 44 employees; he supervised only one in his new position.

Agreeing to assume his new position under protest, Pegram sued Comptronix in August 1989, seeking a declaration of his rights under his employment contract. Pegram alleged that his new position was not comparable to his previous one with respect to his overall management responsibilities. Pegram also sought damages from Hebding for fraud and intentional interference with his employment contract. In connection with his fraud claim, Pegram alleged that Hebding had misrepresented at the time the company was formed in 1983 that the three founders would "hold positions of equal rank and salary" and that they would "make all major decisions on a consensual basis"; and, in connection with his claim alleging intentional interference with his employment contract, he alleged that Hebding had improperly used his position at Comptronix to demote Pegram.

After learning about Pegram's lawsuit, Hebding required Pegram to check in with him at the beginning of each week and to provide him with a detailed accounting of what he intended to do that week; to check in with Hebding's secretary during the week; and to report to Hebding at the end of the week and to provide a detailed accounting of what he had done that week. This "checking in" had not been a requirement of Pegram's previous position. Hebding also prohibited Pegram from contacting Conners, even though Pegram had worked with Conners for a number of years, and prohibited him from contacting any of the company's existing customers, and he told Pegram to spend his time on the road looking for new customers. Approximately three weeks after Pegram filed his complaint, Comptronix's board of directors placed him on administrative leave. In a specially called meeting in late December 1989, the board of directors terminated Pegram's employment for "cause" after it was presented with a report from a Tennessee lawyer; that lawyer had been hired by Hebding to investigate a sale of stock by Pegram. He had concluded that there was sufficient evidence of illegal insider stock trading on Pegram's part to justify terminating his employment contract. Hebding presided over that meeting. The report was the culmination of an investigation that Hebding and Comptronix had initiated into a stock sale that Pegram had made in September 1989, after Pegram and others within the company had become aware that Conners might take most of its business elsewhere. The thrust of the investigation concerned whether Pegram had sold his stock without the public's being made aware of the probable future reduction in Conners's business. The underwriting agreement that had been executed in connection with Comptronix's public stock offering prohibited company insiders from selling any of their stock until 120 days after the offering. Following the expiration of the 120-day period, and after the company's August press release announcing a reduction in sales to a "major customer," Pegram sold some of his stock through his broker. Pegram had twice obtained approval for the sale from Comptronix's secretary and general counsel, as he was required to do by company policy. However, the Tennessee lawyer had not been made aware that Pegram had obtained the approval for the stock sale from the company's general counsel. The report that was submitted to the board specifically noted that Pegram had sold his stock shortly before the October 1989 press release and that Pegram had represented in a form filed with the Securities and Exchange Commission that he was not aware of any nonpublic material information that could adversely affect the value of the stock. Conspicuously absent from the report was any mention of the general counsel's approval of the sale; of the August 1989 press release (which was made before Pegram sold his stock); or of the fact that Hebding and others within the company had originally concluded that the Conners information was not material. Hebding had prohibited the lawyer from talking with Pegram. The lawyer spoke with only two persons within Comptronix before presenting his report to the board -- Hebding and the company's general counsel -- and he relied on information supplied primarily by Hebding.

Pegram was not informed before the board meeting that he was suspected of insider stock trading. Pegram was allowed to see the report that was submitted to the board; however, he was not permitted to retain a copy of it. Pegram was not allowed to be present when the board voted on his termination. Following the meeting, in which Hebding voted to discharge Pegram, Hebding had an armed security guard escort Pegram to his automobile, refusing at that time to allow him to collect his personal belongings. Pegram's ouster from the premises was done in such a way as to afford an opportunity to ...


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