Reddy et al v. LongFin Corp. et al
Filing
167
OPINION AND ORDER....The plaintiffs September 13, 2019 motion for relief from the July 29 Opinion is denied. The plaintiffs request for leave to amend their complaint also is denied. (Signed by Judge Denise L. Cote on 11/15/2019) (gr)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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IN RE LONGFIN CORP. SECURITIES CLASS
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ACTION LITIGATION
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18cv2933(DLC)
OPINION AND
ORDER
APPEARANCES:
For the plaintiffs:
Eduard Korsinsky
Christopher J/ Kupka
Levi & Korsinsky, LLP
55 Broadway, 10th Fl.
New York, NY 10006
Donald J. Enright
Elizabeth K. Tripodi
John A. Carriel
Levi & Korsinsky LLP (DC)
1101 30th, St., NW, Ste. 115
Washington, DC 20007
For defendant Network 1:
Jeffrey J. Imeri
Marshall Dennehey Warner Coleman & Goggin, P.C.
88 Pine St., 21st Fl.
New York, NY 10005
DENISE COTE, District Judge:
On September 13, 2019, the lead plaintiffs in this class
action filed a motion seeking relief from this Court’s July 29,
2019 Opinion and Order pursuant to Rule 60(b), Fed. R. Civ. P.,
and for leave to file a Third Amended Complaint (the “proposed
TAC”) pursuant to Rule 16(b), Fed. R. Civ. P.
See In re Longfin
Corp. Sec. Class Action Litig. (In re Longfin II), No. 18cv2933
(DLC), 2019 WL 3409684 (S.D.N.Y. July 29, 2019) (the “July 29
Opinion”).
The July 29 Opinion granted defendant Network 1
Financial Securities, Inc.’s (“Network 1”) motion for
reconsideration of this Court’s April 11, 2019 Opinion and Order
(the “April 11 Opinion”) 1 and dismissed Network 1 from this
litigation.
Familiarity with the July 29 Opinion and the April
11 Opinion is assumed.
For the following reasons, the
plaintiffs’ September 13 motions are denied.
Background
This federal securities class action, filed on April 3,
2018, is brought against defendants Longfin Corp. (“Longfin”),
Andy Altahawi (“Altahawi”), other Longfin executives and
insiders on behalf of investors who purchased Longfin’s stock,
and Network 1.
Network 1 is a registered broker-dealer.
Altahawi, who was Longfin’s secretary for much of the period at
issue in this suit, was a registered representative in Network
1’s office from 2014 to 2015.
Network 1 acted as Longfin’s
underwriter for the stock offering that gave rise to this
litigation.
This class action is one of several stockholder suits filed
in the wake of an investigation of Longfin by the Securities and
Exchange Commission (“SEC”).
On April 4, 2018, the SEC filed
suit against Longfin and its executives and insiders (the “April
See In re Longfin Corp. Sec. Class Action Litig. (In re Longfin
I), No. 18cv2933 (DLC), 2019 WL 1569792 (S.D.N.Y. Apr. 11, 2019)
1
2
4 SEC Action”), and shortly thereafter acquired a court order
freezing $27 million in proceeds from sales of Longfin Class A
stock. 2
See Sec. & Exch. Comm’n v. Longfin Corp., 316 F. Supp.
3d 743 (S.D.N.Y. 2018).
The SEC filed a second action against
Longfin and its founder, Venkata S. Meenavalli (“Meenavalli”),
on June 5, 2019 (the “June 5 SEC Action”). 3
See Sec. & Exch.
Comm’n v. Longfin Corp., No. 19cv5296 (S.D.N.Y. filed June 5,
2019).
Network 1 is not named as a defendant by the SEC in
either of these lawsuits.
I.
Procedural History
The lead plaintiffs in this class action filed a First
Amended Complaint (“FAC”) on July 27, 2018.
On August 14, a
scheduling order was issued directing the plaintiffs that,
should the defendants move to dismiss the FAC, they would have
until October 5 to decide whether to further amend their
complaint in response to the motion to dismiss.
The plaintiffs
were advised that it was unlikely that they would be granted any
further opportunity to amend.
On September 12, 2018, the
plaintiffs’ time to decide whether it would oppose any motion to
dismiss or file an amended complaint was extended to October 26.
On August 6, 2019, the April 4 SEC Action was closed, following
the entry of final judgments against each defendant.
2
On September 26, 2019, default judgment was ordered against
Longfin in this case. The June 5 SEC Action is still pending
against Meenavalli.
3
3
On September 25, 2018, Network 1 moved to dismiss the FAC
for failure to state a claim pursuant to Rule 12(b)(6), Fed. R.
Civ. P. 4
On October 26, the plaintiffs decided that they would
stand on their FAC.
On April 11, 2019, Network 1’s motion to
dismiss the claim brought against it under Section 12(a)(1) of
the Securities Act of 1933 (the “Securities Act”) was granted,
but its motion to dismiss the plaintiffs’ claim that Network 1
committed fraud in violation of Section 10(b) of the Securities
Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78j(b),
and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5,
was denied.
On April 24, 2019, Network 1 moved for reconsideration of
the April 11 Opinion.
On June 6, Network 1 filed a letter
requesting judicial notice be taken of the new complaint filed
by the SEC against Longfin and Meenavalli on June 5, which did
not name Network as a defendant.
At a June 21 conference, the
plaintiffs requested that they be permitted to amend their
complaint in light of the June 5 SEC Action.
In light of this
request, the plaintiffs were permitted to amend their complaint
to add verbatim sections of the SEC’s complaint, as well as to
fix typographical errors in the FAC.
Longfin, as well as the other co-defendants in this case, also
sought dismissal of this action in separately filed motions.
4
4
On June 28, 2019, the plaintiffs filed a Second Amended
Complaint (“SAC”).
The additional allegations in the SAC were
considered in the July 29 Opinion granting Network 1’s motion
for reconsideration and dismissing Network 1 from this case.
See In re Longfin II, 2019 WL 1569792, at *1.
II.
The July 29 Opinion
The July 29 Opinion concluded that the plaintiffs had
failed to state a claim against Network 1 under Section 10(b) of
the Exchange Act or Rule 10b-5, because they had not adequately
pleaded scienter.
Id. at *4-5.
In order to state a claim
against Network 1, the plaintiffs had to establish that Network
1, the lead underwriter for Longfin’s Regulation A+ (“Reg A+”)
offering, was aware or recklessly disregarded that a significant
number of Longfin shares had not been validly issued pursuant to
a Reg A+ exemption from securities registration requirements and
thus should not have been publicly traded. 5
Id. at *2.
To establish scienter, the plaintiffs alleged the
following.
On December 6, 2017, the penultimate day of the Reg
A+ offering, Longfin had transferred Longfin shares to Longfin
officers and directors for no consideration (the “December 6
Shares”), in order to meet the NASDAQ’s listing requirement that
a company have at least 1,000,000 publicly-held shares (i.e. not
For a description of a Regulation A+ offering, see Longfin, 316
F. Supp. 3d at 748-49.
5
5
directly or indirectly held by a company officer or director).
The SAC further alleged that, on December 7, 2017, Network 1
requested from Longfin’s secretary, Altahawi, a “list of people
that invested” and “proof of Funds received.”
According to the
SAC, Altahawi then provided Network 1 with a list of 24
individuals who received the December 6 Shares.
Based on this
sequence, the SAC asserted that Network 1 “must have known” that
some of the individuals on this list were associated with
Longfin and thus did not count toward the NASDAQ’s listing
requirement.
The SAC also alleged that Network 1 “must” have known that
the Longfin officers and directors had not paid for the December
6 Shares.
According to the SAC, in response to Network 1’s
December 7 request, Altahawi also gave Network 1 “bank
statements purporting to contain payment information” for the
stockholders who had invested in Longfin.
Around December 21,
when seven of the stockholders who purchased December 6 Shares
asked Network 1 to open brokerage accounts for them, Network 1
again requested confirmation that they had paid for their
shares.
The SAC alleged that Altahawi again provided Network 1
with “bank statements purporting to show their purchases.”
The
SAC further alleged that two escrow accounts used in connection
with the Reg A+ offering and Longfin’s own PNC Bank account
“contained no evidence of payments for the shares issued on
6
December 6, 2019” by the December 6 stockholders. 6
Thus, the
plaintiffs argued that they had established that Network 1 knew
or should have known that no consideration had been received for
the December 6 Shares.
The July 29 Opinion determined that these allegations did
not adequately plead Network 1’s scienter.
Id. at *4.
The SAC
had not provided any particularized allegation to support its
assertion that Network 1 would have known that the individuals
on the list of 24 December 6 stockholders were Longfin insiders.
Id.
The SAC also did not contain allegations linking the bank
statements provided to Network 1 with the three accounts -- the
two escrow accounts and Longfin’s PNC Bank account -- that
contained no evidence of payments for the December 6 Shares.
Id.
The July 29 Opinion thus concluded that the inference that
Network 1 had been lied to was stronger than the inference that
it knew the December 6 Shares were not validly issued.
III.
Id.
The Instant Motion
On September 13, 2019, the plaintiffs moved for relief from
the July 29 Opinion pursuant to Rule 60(b)(2), Fed. R. Civ. P.
and for leave to amend their complaint pursuant to Rule 16(b),
The SAC also alleged that, on January 2, 2018, in response to
another request for payment confirmation from Network 1,
Meenavalli wrote a letter to Network 1 in which he “falsely
stated” that the December 6 stockholders had paid for the shares
“by transferring funds into Longfin’s ‘corporate accounts.’” In
re Longfin II, 2019 WL 3409684, at *3.
6
7
Fed. R. Civ. P.
The motion became fully submitted on November
1.
Discussion
Pursuant to Rule 60(b)(2) a court “may relieve a party or
its legal representative from a final judgment, order, or
proceeding” where the party presents “newly discovered evidence
that, with reasonable diligence, could not have been discovered
in time to move for a new trial under Rule 59(b).”
P. 60(b)(2).
Fed. R. Civ.
To succeed under Rule 60(b)(2), the movant must
meet an “onerous standard” by demonstrating that
(1) the newly discovered evidence was of facts that
existed at the time of trial or other dispositive
proceeding, (2) the movant must have been justifiably
ignorant of them despite due diligence, (3) the
evidence must be admissible and of such importance
that it probably would have changed the outcome, and
(4) the evidence must not be merely cumulative or
impeaching.
United States v. Int'l Bhd. of Teamsters, 247 F.3d 370, 392 (2d
Cir. 2001) (citation omitted).
“Relief under Rule 60(b) is
generally not favored and is properly granted only upon a
showing of exceptional circumstances.”
Ins. Co. of N. Am. v.
Pub. Serv. Mut. Ins. Co., 609 F.3d 122, 131 (2d Cir.
2010) (citation omitted).
The plaintiffs argue that the following is “newly
discovered” evidence that satisfies the standard of Rule
60(b)(2): (1) monthly statements for three of Longfin’s TD bank
8
accounts for periods between summer 2017 through December 31,
2018 (the “TD bank accounts”); (2) Longfin’s general ledger for
the period January 1, 2018 through November 29, 2018; (3) the
control log of Longfin’s transfer agent for Longfin’s Class A
common stock (the “Control Log”), as of December 21, 2017; (4)
monthly statements for the Longfin escrow account at Key Bank
entitled “Colonial Transfer Co. Inc. Escrow #10” for the period
July 24, 2017 through December 31, 2017 (the “Key Bank escrow
account”); and (5) the record of wire transfer transactions to
and from the Longfin escrow account established by Continental
Stock Transfer & Trust.
The plaintiffs have failed to meet the Rule 60(b)(2)
standard.
Little of the relevant evidence is newly discovered.
In any event, none of this evidence is “of such importance that
it probably would have changed the outcome” of Network 1’s
dismissal.
Int’l Bhd. of Teamsters, 247 F.3d at 392 (citation
omitted).
Rather, the evidence is “cumulative” of the evidence
already relied upon by the plaintiffs in the SAC.
Id. (citation
omitted).
To start, much of the plaintiffs’ “new” evidence has no
relation to Network 1.
The only “new” evidence cited in the
plaintiffs’ proposed additions that concern Network 1 are the
Control Log, the TD bank accounts, and the Key Bank escrow
account.
As the plaintiffs seek relief from the July 29
9
Opinion’s determination that the SAC did not establish Network
1’s scienter, only evidence pertaining to Network 1 could
“change the outcome” of the July 29 Opinion.
omitted).
Id. (citation
Thus, the Control Log, the TD bank accounts, and the
Key Bank escrow account are the only “new” evidence that
deserves consideration under Rule 60(b)(2).
The plaintiffs rely on the Control Log to demonstrate that
Network 1 knew that Longfin stock had been transferred to
Longfin insiders, and thus was improperly counted toward the
1,000,000 publicly-held shares necessary for listing on the
NASDAQ.
They contend that the Control Log listed the Longfin
insiders who had received the December 6 Shares, and that
Altahawi gave Network 1 the Control Log on December 7.
But, the
plaintiffs acknowledge that they already had access to the
Control Log entries as of December 7, 2017. 7
The Control Log also does not give rise to the inference
that Network 1 knew that Longfin was impermissibly counting
shares transferred to Longfin insiders toward the 1,000,000
publicly-held shares required by the NASDAQ.
The plaintiffs
already alleged in the SAC that Altahawi had provided Network 1
All that is “new” about the Control Log that the plaintiffs
have “discovered” for purposes of this motion is that the
Control Log now extends through December 21, 2017. As the only
entries relied upon by the plaintiffs to allegedly establish
Network 1’s scienter pre-date December 7, their discovery of
additional entries is irrelevant.
7
10
with a “list” of 24 December 6 stockholders.
2019 WL 1569792 at *2.
In re Longfin II,
The July 29 Opinion concluded that
Network 1’s possession of this list did not create an inference
that Network 1 also knew that the individuals identified therein
were Longfin insiders.
Id. at *4.
The fact that the plaintiffs
now have recognized this list as Longfin’s Control Log does not
change this determination.
The plaintiffs also rely on the TD bank accounts and the
Key Bank escrow account to establish that Network 1 knew that
Longfin stock had been transferred to Longfin insiders for no
consideration.
Log.
This evidence fares no better than the Control
In the SAC, the plaintiffs already alleged that certain
Longfin bank and escrow accounts did not contain evidence of
payment.
The SAC also alleged that Network 1 had received bank
statements as payment confirmation.
The SAC did not allege,
however, that the bank statements received by Network 1 were the
same ones that did not evidence payment.
On this basis the July
29 Opinion declined to infer that Network 1 knew that payments
had not been made.
Id.
Here, the plaintiffs cite additional
bank and escrow accounts that also do not show evidence of
payment.
But, the plaintiffs still do not link these accounts
to those that were received by Network 1.
These statements
therefore do not give rise to the inference that Network 1 knew
that no payment had been made for the December 6 Shares.
11
The plaintiffs do not explain how their “new” evidence
fills the gaps identified in the July 29 Opinion.
Instead, in a
conclusory manner, plaintiffs state that the evidence
demonstrates that Network 1 had “actual knowledge” that Longfin
insiders were being counted as public stockholders in
applications submitted to the NASDAQ.
The plaintiffs also argue that their new allegations, apart
from those that rely on “newly discovered” evidence, remedy the
deficiencies identified in the July 29 Opinion. 8
But, to meet
the standards of Rule 60(b)(2), it is the new evidence, not
other, already available evidence, that must be “of such
importance that it probably would have changed the outcome.”
Int’l Bhd. of Teamsters, 247 F.3d at 392.
The plaintiffs cite
no law to the contrary.
Finally, the plaintiffs argue that they are entitled to
relief from the July 29 Opinion because they should have been
permitted to amend their complaint after it was dismissed.
The
plaintiffs cite no law to suggest that a court performing a Rule
60(b)(2) analysis should consider whether a plaintiff was
In their proposed TAC, the plaintiffs have added allegations
that the Underwriting Agreement and Amended Underwriting
Agreement between Longfin and Network 1 contained a schedule of
“Lock-Up Parties” who were Longfin directors and officers,
including several individuals who were on the Control Log
allegedly provided to Network 1 on December 7, 2017. As the
plaintiffs recognize, neither the Underwriting Agreement nor the
Amended Underwriting Agreement are “new evidence.”
8
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permitted to amend its complaint following a ruling on a motion
to dismiss.
The plaintiffs also acknowledge that a court should
not consider whether leave to amend is appropriate under Rule
16(b), Fed. R. Civ. P., unless the court has concluded that a
plaintiff has met the standard of Rule 60(b)(2).
In any event, the plaintiffs were not entitled to have
Network 1’s claim dismissed without prejudice.
The plaintiffs
were given numerous opportunities and extensions to amend their
complaint in response to the deficiencies identified by Network
1 in its motion to dismiss and motion for reconsideration.
The
plaintiffs initiated this action on April 3, 2018 and were given
until October 26, 2018 to decide whether to pursue a second
amended complaint.
The plaintiffs were warned that they were
unlikely to have a further opportunity to amend.
Still, on June
21, 2019, the plaintiffs were again afforded the opportunity to
amend their complaint to add allegations from the June 5 SEC
Action, which they did on June 28.
In opposing Network 1’s
motion to dismiss and motion for reconsideration, Network 1
neither requested that dismissal be without prejudice nor
presented a proposed third amended complaint to cure the
deficiencies identified by Network 1.
“[N]o court can be said
to have erred in failing to grant a request that was not made.” 9
In their reply brief, the plaintiffs argue that they
“explicitly requested, but were denied, leave to amend at the .
9
13
Cruz v. FXDirectDealer, LLC, 720 F.3d 115, 126 (2d Cir. 2013)
(citation omitted).
Conclusion
The plaintiffs’ September 13, 2019 motion for relief from
the July 29 Opinion is denied.
The plaintiffs’ request for
leave to amend their complaint also is denied.
Dated:
New York, New York
November 15, 2019
____________________________
DENISE COTE
United States District Judge
. . June 21 [conference].” At the June 21 conference, the
plaintiffs requested leave to amend to plead facts asserted in
the June 5 SEC Action. The plaintiffs’ request to amend in
order to add facts from the June 5 SEC Action was granted, but,
to avoid the undue delay and expense that would come from
another round of briefing, the plaintiffs were instructed to
only add allegations that came from the SEC’s complaint
verbatim. In their Rule 60(b) motion, the plaintiffs have
proposed adding allegations that did not come out of the June 5
SEC Action. This is the first time in this lengthy litigation
that the plaintiffs have made this request.
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