New Concept Energy, Inc. v. Gentile et al

Filing 258

OPINION AND ORDER adopting with modifications 223 Report and Recommendations. The October 6, 2023 Report is adopted with the modifications described above. Avalon is awarded $6,235,908. New Concept is awarded $6,102,002. The plaintiffs shall submit revised prejudgment inter est calculations by February 16, 2024. (Signed by Judge Denise L. Cote on 2/5/2024) (vfr)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
:
AVALON HOLDINGS CORP.,
:
:
Plaintiff,
-v:
:
GUY GENTILE and MINTBROKER INTERNATIONAL, :
LTD.,
:
:
Defendants.
:
:
----------------------------------------- X
:
NEW CONCEPT ENERGY, INC.,
:
:
Plaintiff,
:
-v:
:
GUY GENTILE and MINTBROKER INTERNATIONAL, :
LTD.,
:
:
Defendants.
:
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APPEARANCES:
For the plaintiffs:
Law Office of David Lopez
David Lopez
171 Edge of Woods Road, PO Box 323
Southampton, NY 11968
Miriam Tauber Law
Miriam Deborah Tauber
885 Park Avenue 2A
New York, NY 10075
For the defendant Guy Gentile:
Olshan Frome Wolosky LLP
Thomas James Fleming
1325 Avenue of the Americas
New York, NY 10019

18cv7291 (DLC)
18cv8896 (DLC)
OPINION AND ORDER

DENISE COTE, District Judge:
Plaintiffs Avalon Holdings Corp. (“Avalon”) and New Concept
Energy, Inc. (“New Concept”) each brought an action against
defendants Guy Gentile and Mintbroker International, Ltd.
(“Mintbroker”) for disgorgement of short-swing profits pursuant
to § 16(b) of the Securities Exchange Act of 1934 (the “Act”).
15 U.S.C. § 78p(b).

Section 16(b) requires a beneficial owner

of more than ten percent of a company’s shares to disgorge
profits obtained from a short-swing sale.

On April 8, 2022, the

Honorable Vernon S. Broderick granted summary judgment for the
plaintiffs, finding that the defendants had exceeded the 10%
threshold and must disgorge short-swing profits to each
plaintiff.

Avalon Holdings Corp v. Guy Gentile and MintBroker

International, Ltd., 597 F.Supp.3d 640 (S.D.N.Y. 2022) (“Gentile
SJ”).
Judge Broderick then referred the matter to Magistrate
Judge Robert Lehrburger for determination of the amounts due to
plaintiffs.
17, 2022.

This case was reassigned to this Court on August
On November 29, 2022, these actions were stayed as to

Mintbroker due to liquidation proceedings in the Bahamas.

After

extensive briefing and a two-day evidentiary hearing, Judge
Lehrburger issued the report and recommendation on October 6,
2023 (“Report”) and recommended, as to Gentile, that Avalon be

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awarded $6,235,908, New Concept be awarded $6,102,002, and
prejudgment interest be awarded to each plaintiff.

Plaintiffs

submitted objections to the Report on October 8, and Gentile
submitted objections on November 3.

Plaintiffs submitted their

response on November 21, and Gentile submitted a reply on
December 6, 2023.
The crux of Gentile’s objections to the Report is that some
of the trades were made on behalf of clients; that for those
trades, he cannot be considered a “beneficial owner” under §
16(b); and that the damages calculated in the Report should
therefore be reduced.

The plaintiffs seek to correct one

typographical error in the Report and an award of attorneys’
fees.

For the following reasons, the Report’s conclusions are

adopted with the modifications described below.
Background
This Opinion assumes familiarity with the Report and prior
Opinions issued in this case and summarizes only the facts
necessary to rule on Gentile’s objections to the Report.

See

Avalon Holdings Corporation v. Gentile, 2019 WL 4640206
(S.D.N.Y. Sept. 24, 2019) (“Gentile MTD I”); Gentile SJ; Avalon
Holdings Corp. v. Gentile, 2023 WL 4744072 (S.D.N.Y. Jul. 25,
2023) (“Gentile MTD II”).

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Gentile was the director of Mintbroker, a day-trading
broker-dealer firm that was registered under the securities laws
of the Bahamas and has since been liquidated by Bahamian
authorities.

In 2018, Mintbroker acquired enough stock to

become a beneficial owner of more than 10% of Avalon and of New
Concept, both of which trade on the New York Stock Exchange.
Mintbroker acquired all the stock at issue through Interactive
Brokers (“Interactive”), a clearing firm.

Mintbroker purchased

1,922,095 shares in Avalon on June 15, 2018, traded the stock
thousands of times, and reduced its Avalon holdings to zero by
August 21, 2018.

Mintbroker purchased 1,073,713 shares of New

Concept stock on May 14, 2018, engaged in thousands of trades,
and sold all of its shares by September 25, 2018.
Mintbroker filed Schedule 13D “Beneficial Owner Reports” in
connection with its trading in both Avalon and New Concept
stock.

Both Schedule 13D reports represented that the “source

of funding for the purchase of the Shares was the general
working capital of Mintbroker together with margin borrowing”
and stated that the purpose of acquiring as much stock as it did
was “an attempt to gain control over [Avalon/New Concept] and
replace its board of directors with the near-term goal of
selling the assets of [Avalon/New Concept].”

Gentile, by virtue

of his relationship to Mintbroker, represented that he “may be

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deemed to indirectly beneficially own (as that term is defined
in Rule 13d-3 under the Exchange Act of 1934, as amended) those
Shares which Mintbroker had owned” and that he ”disclaim[ed]
beneficial ownership of all such Shares for all other purposes.”
Avalon filed its complaint on August 13, 2018, and amended
the complaint on September 28.
on October 1, 2018.

New Concept filed its complaint

Both actions allege that the defendants

violated § 16(b) and request disgorgement of the profits
defendants obtained from that trading.

Defendants filed motions

to dismiss in both actions, which Judge Broderick denied on
September 24, 2019.

Gentile MTD I.

Meanwhile, the Securities Commission of the Bahamas (“SCB”)
asked Gentile to appear for a meeting with regulators.
meeting occurred on September 12, 2019.

That

On September 18, the

SCB issued a letter to Gentile accusing Mintbroker of failing to
trade any securities on behalf of clients and instead
“recording” client orders internally in a manner akin to a Ponzi
scheme with no transaction having been entered on the market.
On September 23, Gentile left the Bahamas and gave directives to
close down Mintbroker such that by the end of October or early
November 2019, the office was closed and only a few employees
remained.

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Plaintiffs issued discovery requests to the defendants on
October 16, 2019, including interrogatories asking about the
extent to which, if at all, Mintbroker’s trading of Avalon or
New Concept shares was on behalf of clients.

Plaintiffs also

subpoenaed records from a variety of entities, including
Interactive, which produced its trading records.
On November 27, 2019, Mintbroker surrendered its license to
operate in the Bahamas.

The plaintiffs, concerned with the lack

of more detailed trading records and other supporting
documentation produced by Gentile and Mintbroker, raised the
issue with Judge Lehrburger, who held a discovery conference on
January 22, 2020.

At that conference, defense counsel

repeatedly assured Judge Lehrburger that Mintbroker had produced
all relevant trading documents and that Gentile had done a
diligent search and that there were no other records.

Counsel

also stated that the Mintbroker account with Interactive “was a
proprietary trading account” and that “Mr. Gentile was in charge
of that account and placed the trades.”

At no point did defense

counsel suggest that any of the trading at issue was on behalf
of Mintbroker customers or that customers would have relevant
information.
Gentile was deposed on February 24, 2020.

He testified

that he did not know for a fact that all trades reflected in the

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produced records were Mintbroker’s proprietary trades and that
it was possible that the records might have included client
trades.

Defense counsel suggested that client trades would be

reflected in a comparison of the Interactive records with
Mintbroker’s 13D beneficial ownership filings.

Neither counsel

nor Gentile suggested that determining the extent of any trades
on behalf of clients would require review of other records not
yet produced.
In March 2020, the SCB placed Mintbroker in provisional
liquidation.

A discovery conference was held before Judge

Lehrburger on April 23, 2020 to discuss plaintiffs’ request to
compel defendants to produce a copy of a thumb drive that,
according to Gentile, held all of Mintbroker’s files.

To

resolve the issue of what data was reflected in the Interactive
records and obviate the need for production of the thumb drive,
defendants offered, and the parties ultimately agreed, to enter
into a stipulation on May 13, 2020, identifying the Interactive
trading account as Mintbroker’s “proprietary” trading account
and confirming the accuracy of the Interactive records.

The

defendants agreed to the term “proprietary” to negate the need
for discussion of client accounts “which we know you want to be
clear about.”

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In June 2020, the defendants responded to requests for
admission, admitting that “no trades reported in the Avalon
Schedule 13D were executed in or on behalf of Managed Accounts
held for the benefit of third-party customers or clients of
Mintbroker.”
In August 2020, both sets of parties filed for summary
judgment, relying on the Interactive records.

The defendants

did not make any argument that the trading reflected in those
records included trades for which they were not the beneficial
owners because the trades had been executed for orders placed by
customers.

By December 2021, Mintbroker was placed into

official liquidation.
On April 8, 2022, Judge Broderick granted plaintiffs’
motions for summary judgment.

Judge Broderick found that there

was no genuine dispute of fact that 1) Mintbroker and Gentile
were beneficial owners of the shares of Avalon and New Concept,
as reflected in the Interactive records; 2) the defendants had
investment power over the shares; and 3) the defendants had
pecuniary interests in the shares because they had the
opportunity to and did profit from them.

Gentile SJ at 655-56.

Judge Broderick referred the case to Judge Lehrburger to
determine “the exact period of time that Defendants were more-

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than-10% beneficial owners, as well as the calculation of
damages.”

Id. at 656-657.

After the matter was referred to Judge Lehrburger, the
plaintiffs filed motions for judgment seeking disgorgement of
$6,235,098 to Avalon and $6,102,002 to New Concept, along with
prejudgment interest.

The plaintiffs based their calculation on

the Interactive records, using the standard lowest-in, highestout method.

See, e.g., Analytical Surveys, Inc. v. Tonga

Partners, L.P., 684 F.3d 36, 51 (2d Cir. 2012).
The defendants responded by seeking leave to introduce
hundreds of pages of new records (the “Post-Discovery Records”)
purportedly establishing which trades were proprietary and which
trades were actually client trades not reflecting beneficial
ownership by Mintbroker.

This letter was filed on May 20, 2022

-- nearly four years after Avalon filed its complaint, two and a
half years after the plaintiffs issued their discovery requests,
and two years after the defendants stipulated that the accounts
reflected in the Interactive data were proprietary accounts held
by Mintbroker, of which Gentile was sole owner.
Gentile’s excuse for the late production of these documents
-- which purportedly came from the same thumb drive of which
plaintiffs had sought production in April 2020, see 18cv7291
(ECF No. 55) -- was that during the provisional liquidation,

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which began on March 5, 2020, he could not legally access
Mintbroker records.

Gentile claimed that after plaintiffs were

granted summary judgment, he reached out to Mintbroker’s IT
manager, Stephen Darville, to ask whether he had access to
Mintbroker’s trading records; Darville did, and provided them to
Gentile’s experts.

Darville later stated at a deposition that

on December 27, 2019, Mintbroker’s chief compliance officer
instructed Stephen Darville, Mintbroker’s IT manager, to
maintain and make a copy of Mintbroker’s records and deliver
them to Gentile’s and Mintbroker’s attorneys in the Bahamas.
The Report first addressed whether the Post-Discovery
Records, and testimony and opinions about them, should be
excluded.

Judge Lehrburger found that Gentile’s assertion that

some of the Interactive trading was non-proprietary was barred
by the law of the case and that, in any event, the records and
expert testimony on which Gentile now sought to rely are
unreliable.

Thus, Judge Lehrburger calculated the damages

amount based on all trades reflected in the Interactive records,
and recommended that Avalon be awarded $6,235,908 in disgorged
profits, New Concept be awarded $6,102,002 in disgorged profits,
and prejudgment interest be awarded to each plaintiff.

These

recommendations are adopted with the modifications described
below.

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Discussion
When deciding whether to adopt a report, a court “may
accept, reject, or modify, in whole or in part, the findings or
recommendations made by the magistrate judge.”
636(b)(1)(C).

28 U.S.C. §

A district court must “determine de novo any part

of the magistrate judge’s disposition that has been properly
objected to.”

Fed. R. Civ. P. 72(b); see Miller v. Brightstar

Asia, Ltd., 43 F.4th 112, 120 (2d Cir. 2022).

To the extent,

however, that the party “makes only conclusory or general
objections, or simply reiterates the original arguments, the
[district court] reviews the Report and Recommendation only for
clear error.”

Miller, 43 F.4th at 120.

Gentile has made five objections to the Report.

None have

merit.
I.

Pecuniary Interest
Gentile’s first objection is that the Report failed to

consider his pecuniary interest in the subject transactions.
This objection is without merit.

Judge Lehrburger expressly

noted that the result of the calculation “would be no different
under the ‘pecuniary interest’ standard.”

Report at 5 n.2.

And, as the Report also notes, Judge Broderick found that the
defendants failed to create a genuine dispute that they had a

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pecuniary interest in the trading as that term is defined in
Rule 16a-1(a)(2).
II.

Gentile SJ at 655-56.

Post-Discovery Records, Expert Witnesses
Gentile’s second objection is that the Report erred by

refusing to consider the Post-Discovery Records and related
testimony, and improperly excluded Gentile’s expert witnesses.
That objection is overruled.

The Report correctly found that

Gentile’s damages theory based on those records was
fundamentally incompatible with the summary judgment decision,
which held that “the trading records demonstrate that
[defendants] successfully sold thousands of shares that they
bought at a much lower price, and Defendants have failed to
create a genuine dispute that they have not reaped the profits
between the purchase price and the sale price.”

Id. at 656.

The “trading records” referred to are the Interactive records;
further, Gentile’s Rule 56.1 statements did not dispute that the
accounts in question were proprietary accounts.

Gentile’s

calculations, based on the Post-Discovery Records, would result
in zero disgorgeable profits as to New Concept, a result that is
inconsistent with Judge Broderick’s finding of liability as to
both companies.
When a court “has ruled on an issue, that decision should
generally be adhered to by that court in subsequent stages on

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the same case, absent cogent and compelling reasons to the
contrary.”

JLM Couture, Inc. v. Gutman, --- F.4

th

---, 2024 WL

172609, at *6 (2d Cir. Jan. 17, 2024) (citation omitted).
Compelling reasons to revisit a decision include “an intervening
change in law, availability of new evidence, or the need to
correct a clear error or prevent manifest injustice.”

Doe v.

East Lyme Board of Education, 962 F.3d 649, 662-63 (2d Cir.
2020) (citation omitted).
The Post-Discovery Records are not “new evidence.”

As is

amply demonstrated by the record, Gentile could have obtained
the records had he exercised a modicum of diligence.

As Judge

Lehrburger noted, Gentile voluntarily shut down Mintbroker after
plaintiffs had served their discovery requests.

It was not

until March 5, 2020 -- when the BSC placed Mintbroker under
provisional liquidation -- that Gentile lost direct control over
Mintbroker’s records.

Further, Darville testified that he had

provided a copy of the thumb drive to Gentile’s own attorney in
December 2019.
Nor would “manifest injustice” result from refusing to
reopen the evidentiary record.

Gentile repeatedly represented

that all records had been produced and that other records did
not exist or were merely duplicative of what had been produced.
Gentile also stipulated that the accounts in the Interactive

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records were proprietary to Mintbroker and did not represent any
client trades.

The plaintiffs and the Court were entitled to

rely on those representations.
The Report also correctly excluded the testimony of
Gentile’s experts.

One expert testified that he got

“comfortable” that certain accounts in the Interactive records
were in fact customer accounts “based on having looked at some
unspecified number of unspecified account numbers in a ‘master
file’ that Defendants did not produce and for which [the expert]
did not make any record.”

This does not reflect “reliable

principles and methods” or “sufficient facts or data” as
required by Fed. R. Civ. P. 702.

Nothing “in either Daubert or

the Federal Rules of Evidence requires a district court to admit
opinion evidence that is connected to existing data only by the
ipse dixit of the expert.”

General Electric Company v. Joiner,

522 U.S. 136, 146 (1997).

The second expert “made no effort to

verify or test the accuracy, completeness, [or] validity of” the
Post-Discovery Records and thus his testimony is not based on
sufficient facts or data.
III. Short-Swing Profits Calculation
As to the Report’s calculation of short-swing profits,
Gentile “makes only conclusory or general objections, or simply
reiterates the original arguments” made before Judge Lehrburger.

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Miller, 43 F.4th at 120.

Because no clear error exists in the

Report’s calculation, that portion of the Report is adopted.
See id.
IV.

Pre-Judgment Interest
In awarding pre-judgment interest, the Report observed that

such an award is generally made but is discretionary.

The

report weighed the relevant factors and found it would be fair
and equitable to award interest here.
Gentile objects to the Report’s recommended award of
prejudgment interest because it would be “unfair and inequitable
to award prejudgment interest for at least three reasons.”

The

first of those reasons -- that “there is zero evidence that Mr.
Gentile himself had any pecuniary interest in many of the trades
at issue” -- is false, as explained above.

The second, that

Gentile had no role in reviewing or preparing the Schedule 13D
forms, is belied by the fact that his signature appears on the
Schedule 13D forms.

Finally, Gentile’s argument that he did not

try to derail this litigation or act in bad faith can be swiftly
rejected.

As the Report confirms, the record reflects that

Gentile did not violate § 16(b) inadvertently and repeatedly
delayed this litigation through his machinations.

Gentile’s

objection to the award of prejudgment interest is overruled.

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