Opinion
17 Civ. 4756 (JPC) (GWG)
05-10-2022
ASHLEY DESVARIEUX et al., Plaintiffs, v. AXIOM HOLDINGS, INC., Defendant.
ORDER
GABRIEL W. GORENSTEIN, UNITED STATES MAGISTRATE JUDGE
This securities fraud action was brought by Ashley Desvarieux on behalf of herself and all other purchasers of stock in defendant Axiom Holdings, Inc. (“Axiom”) between October 14, 2016 and June 19, 2017. This Court has already granted default judgment to plaintiffs on liability. See Order dated March 11, 2021 (Docket # 91). The matter has now been referred to the undersigned for a damages inquest. See Order dated December 3, 2021 (Docket # 105). For the following reasons, judgment should be entered for plaintiffs in the amount of $1,420,000, plus prejudgment interest running from June 19, 2017 to the date judgment is entered.
Background
On June 22, 2017, plaintiffs filed a complaint against Axiom and Curtis Riley, the Chief Executive Officer, Chief Financial Officer, and Director of Axiom. See Complaint, filed June 22, 2017 (Docket # 1) (“Comp.”), at 1, 6. The complaint alleges violations of Section 10(b) of the Exchange Act, codified at 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated under that section. See id. ¶¶ 45-54. The complaint alleges that Axiom made material misrepresentations regarding a merger that Axiom announced with CJC Holdings, Ltd., a Hong Kong corporation whose subsidiaries operate hydroelectric power stations in China, but which did not come to fruition, resulting in a fall in Axiom's stock price and losses to its shareholders. See Id. ¶¶ 4, 45-50.
Plaintiffs' claims against Curtis Riley were later dismissed with prejudice. See Order dated September 16, 2021 (Docket # 102).
Axiom never responded to the complaint. On July 7, 2020, the Court granted the lead plaintiffs motion for class certification in advance of entry of default judgment, see Order dated July 7, 2020 (Docket # 66), and issued an order authorizing plaintiffs to file a motion for default judgment, see Order dated July 7, 2020 (Docket # 67). On January 21, 2021, plaintiffs filed a motion for default judgment against Axiom. See Motion for Default Judgment, filed Jan. 21, 2021 (Docket # 79). On January 22, 2021, the Court ordered Axiom to show cause why default judgment should not be entered against it. See Order dated January 22, 2021 (Docket # 84). Axiom did not appear at the Court's hearing on the order to show cause. See Transcript of Proceedings held on February 23, 2021 (Docket # 88). At the hearing, the Court placed on the record its findings that Axiom had notice of the filing of this case and that plaintiffs' submissions sufficiently established a basis for finding a default. See id. at 15-17. The Court then issued an order granting default judgment against Axiom as to liability. See Order dated March 11, 2021. It later issued an order approving a schedule for giving notice to the class. See Order dated May 7, 2021 (Docket # 95).
The case was referred to the undersigned for an inquest on damages. (Docket # 105). The Court then issued a scheduling order directing plaintiffs to file proposed findings of fact and conclusions of law. See Scheduling Order for Damages Inquest, filed Dec. 3, 2021 (Docket # 106) (“Scheduling Order”). On January 18, 2022, plaintiffs filed proposed findings of fact and conclusions of law. See Plaintiffs' Proposed Findings of Fact and Conclusions of Law, filed Jan. 18, 2022 (Docket # 107) (“Proposed Findings”); Declaration of Murielle J. Steven Walsh in Support, filed Jan. 18, 2022 (Docket # 108) (“Walsh Decl.”). Plaintiffs have also filed an Expert Report of Steffen Hennig in support of their proposed findings. See Expert Report of Steffen Hennig, dated Jan. 17, 2022, annexed as Ex. 1 to Walsh Decl. (“Hennig Report”). Plaintiffs' proposed findings and the Hennig Report were served on Axiom. See Affidavit of Service, filed Jan. 20, 2022 (Docket # 110). Axiom did not file any submission in response.
Damages
In their proposed findings, plaintiffs seek damages for their sole claim against Axiom, which alleges violations of Section 10(b) of the Exchange Act. See Proposed Findings at 1. In an inquest, “[t]he district court must . . . conduct an inquiry in order to ascertain the amount of damages with reasonable certainty.” Credit Lyonnais Sec. (USA), Inc. v. Alcantara, 183 F.3d 151, 155 (2d Cir. 1999). This inquiry requires the district court to: (1) “determin[e] the proper rule for calculating damages on . . . a claim, ” and (2) “assess[] plaintiff's evidence supporting the damages to be determined under this rule.” Id. Plaintiffs bear the burden of establishing their entitlement to the amount of damages they seek. See Trs. of Local 813 Ins. Tr. Fund v. Rogan Bros. Sanitation Inc., 2018 WL 1587058, at *5 (S.D.N.Y. Mar. 28, 2018). While a court must “take the necessary steps to establish damages with reasonable certainty, ” Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105, 111 (2d Cir. 1997), a court need not hold a hearing “as long as it ensure[s] that there [is] a basis for the damages specified in [the] default judgment, ” Fustok v. ContiCommodity Servs., Inc., 873 F.2d 38, 40 (2d Cir. 1989). Here, the Court's Scheduling Order notified the parties that the Court may conduct the inquest into damages based upon the written submissions of the parties, but that a party may seek an evidentiary hearing. See Scheduling Order ¶ 3. No party has requested an evidentiary hearing. Moreover, the Court finds that a hearing is unnecessary as plaintiffs' submissions provide a sufficient basis for an award of damages and have not been contested.
To recover damages for violations of Section 10(b) and Rule 10b-5, a plaintiff must show “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804, 809-10 (2011) (quoting Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 37-38 (2011)). Because default judgment has already been entered against Axiom, we need only consider “whether plaintiffs have provided a sufficient basis for the court to reasonably ascertain their out-of-pocket losses.” Rose v. RAHFCO Mgmt. Grp., LLC, 2016 WL 8461193, at *3 (S.D.N.Y. Dec. 21, 2016), adopted, 2017 WL 933117 (S.D.N.Y. Mar. 7, 2017).
“Traditionally, economic loss in Section 10(b) cases has been determined by use of the ‘out-of-pocket' measure for damages. Under that measure, ‘a defrauded buyer of securities is entitled to recover only the excess of what he paid over the value of what he got.'” Acticon AG v. China N.E. Petroleum Holdings Ltd., 692 F.3d 34, 38 (2d Cir. 2012) (quoting Levine v. Seilon, 439 F.2d 328, 334 (2d Cir. 1971)). “The purpose of the out-of-pocket measure of relief is to restore the plaintiff to the position he was in before the fraud.” CAMOFI Master LDC v. Riptide Worldwide, Inc., 2012 WL 6766767, at *13 (S.D.N.Y. Dec. 17, 2012) (punctuation omitted); accord 15 U.S.C. § 78t-1(b)(1) (total amount of damages recovered “shall not exceed the profit gained or loss avoided in the transaction or transactions that are the subject of the violation”).
The Private Securities Litigation Reform Act of 1995 (“PSLRA”), Pub. L. No. 104-67, 109 Stat. 737 (1995), caps the amount of damages available in a securities fraud action. The relevant provision states that
in any private action . . . in which the plaintiff seeks to establish damages by reference to the market price of a security, the award of damages to the plaintiff shall not exceed the difference between the purchase or sale price paid . . . by the plaintiff for the subject security and the mean trading price of that security during the 90-day period beginning on the date on which the information correcting the misstatement or omission that is the basis for the action is disseminated to the market.15 U.S.C. § 78u-4(e)(1). “In essence, this provision ‘does not calculate damages based on the single day decline in price, but instead allows the security an opportunity to recover' over a period of 90 days.” Acticon, 692 F.3d at 39 (quoting In re Veritas Software Corp. Sec. Litig., 496 F.3d 962, 967 n.3 (9th Cir. 2007)). However, “if the mean trading price during the 90-day period is less than the plaintiff's purchase price, then the plaintiff may recover out-of-pocket damages up to the difference between her purchase price and the mean trading price.” Id. (quoting In re Mego Fin. Corp. Sec. Litig., 213 F.3d 454, 461 (9th Cir. 2000)).
As noted, the principal evidence advanced by plaintiffs to substantiate their claim for damages is the expert report of Steffen Hennig. Hennig is a founding partner of Fideres Partners LLP, an economic consulting firm specializing in, among other matters, securities fraud litigation. See Hennig Report ¶¶ 1-2. Hennig previously served as a director at the Royal Bank of Scotland and as an Assistant Vice President at Deutsche Bank. Id. ¶ 3. He holds an MSc in Mathematics from the University of Erlangen, Germany, and an MSc in Financial Engineering and Quantitative Analysis from the ICMA Centre at the University of Reading, United Kingdom. Id. ¶ 4. Hennig's report opines on three issues relevant to the amount of damages to which plaintiffs are entitled:
[1] the economic materiality of the misrepresented information;
[2] whether Defendant Axiom Holdings, Inc.'s (“Axiom”) misstatements and omissions described in the Class Action Complaint dated June 22, 2017 (the “Complaint”) and sustained by Court's Order dated March 11, 2021 (Dkt. No. 91), were the proximate
cause of alleged losses suffered by the Class; and
[3] per-share damages under [Section 10(b)] for investors who purchased or otherwise acquired Axiom stock during the Class Period, if any, due to Axiom's misrepresentations and omissions.Id. ¶ 10.
Hennig first noted that Axiom's misrepresentations about the merger were material to the damages suffered by plaintiffs, as was established by virtue of the default. See ¶ 13. Axiom's Q3 2016 10-Q report, 2016 10-K report, and Q1 2017 10-Q report each contained misrepresentations regarding the prospects for consummation of the merger between Axiom and CJC Holdings, Ltd. See id. ¶¶ 30-38. Hennig cited to academic literature regarding the effects of cancelling previously announced mergers, including literature specific to the context of reverse mergers of Chinese firms, as supporting the notion that these misrepresentations would have been material to investors. See id. ¶¶ 23-29. Hennig also highlighted news reports that “[e]mphasized the [i]mportance” of the prospective merger. See id. ¶¶ 39-43.
Axiom issued a corrective disclosure about the merger through a June 19, 2017 press release, which announced that Axiom had received a subpoena from the SEC. See Comp. ¶ 7. On that date, Axiom's stock price fell by $0.26, or 21.98%. See Hennig Report ¶ 51. Hennig could find no other negative information specific to Axiom that would have produced the 21.98% decline in stock price that Axiom suffered on June 19, 2017. Id. ¶¶ 58-60.
Hennig set forth his calculation of the damages suffered by different groups of Axiom investors. For shares purchased during the class period (i.e., between October 14, 2016 and June 19, 2017, see Comp. ¶ 1) and held until at least June 19, 2017, Hennig calculates the per-share damages as $0.26. See Hennig Report ¶ 68. Hennig also addresses whether the limitation on damages imposed by the PSLRA operates to reduce plaintiffs' damages here. During the 90-day period following June 19, 2017, the date on which Axiom issued its corrective disclosures, the mean price per share was $0.52. See Id. Any plaintiff whose purchase price was under $0.52 per share is thus not entitled to damages. See Acticon, 692 F.3d at 39. For this reason, Hennig concludes that purchasers of Axiom stock on December 9, 2016, are not entitled to any damages. See Hennig Report ¶ 68(iii)-(v). Because the stock price fell to $0.48 on that date, which is less than the mean share price during the 90 day lookback ($0.52), these investors “experienced no absolute loss after the corrective disclosure, and are excluded from the damage estimate.” Id. ¶ 68(v). Hennig does not identify any other date during the class period on which the price of Axiom stock fell below $0.52, and thus only December 9, 2016 purchasers have their recovery cut off by the PSLRA.
Hennig then proceeded to utilize a trading model to calculate class-wide damages for the class period, as he did not have access to individual investor trading data. See id. ¶ 69. Hennig explained that he used a “Two-Trader Model, ” which he identifies as a “commonly applied” model, to simulate the activities of market participants during the class period and to determine the amount of class-wide damages based on the per-share damages figure. See id. ¶¶ 77-85. Using this method, where some investors are assumed to be active and others passive, Hennig estimated class-wide damages as $1,420,000. See id. ¶¶ 71, 83.
Axiom has defaulted and therefore has not provided any evidence to suggest that there is a defect in the calculations and methodology advanced by plaintiffs. Having reviewed the proposed findings of fact and conclusions of law advanced by plaintiffs, and having assessed the reasoning and methodology utilized by expert Steffen Hennig, the Court accepts the uncontested opinion of Hennig that the damages suffered by the class totaled $1,420,000. Accordingly, plaintiffs should be awarded $1,420,000 for damages associated with Axiom's violations of Section 10(b).
Prejudgment Interest
Plaintiffs also seek an award of prejudgment interest at the post-judgment interest rate set forth in 28 U.S.C. § 1961. See Proposed Findings at 17-19.
“The decision whether to award prejudgment interest and its amount are matters confided to the district court's broad discretion, and will not be overturned on appeal absent an abuse of that discretion.” Com. Union Assur. Co. v. Milken, 17 F.3d 608, 613 (2d Cir. 1994). In determining whether to grant an award of prejudgment interest, courts look to several factors: “(i) the need to fully compensate the wronged party for actual damages suffered, (ii) fairness and the relative equities of the award, (iii) the remedial purpose of the statute involved, and/or (iv) such other general principles as are deemed relevant by the court.” Frommert v. Conkright, 913 F.3d 101, 109 (2d Cir. 2019) (punctuation omitted). “An award of prejudgment interest may be appropriate when a plaintiff recovers out-of-pocket damages for a defendant's violation of § 10(b) of the Securities Act.” In re Longfin Corp. Sec. Class Action Litig., 2020 WL 4345731, at *4 (S.D.N.Y. July 29, 2020).
Axiom has not appeared in this matter and thus has not opposed an award of prejudgment interest. We agree with plaintiffs that an award of prejudgment interest will serve to ensure that plaintiffs are fully compensated for the damages they suffered, and will further the remedial purposes of the securities laws. See SEC v. Muraca, 2019 WL 6619297, at *9 (D. Mass. Dec. 5, 2019) (“If a court does not order prejudgment interest, a defendant who has violated securities law receives an ‘interest-free loan' on the profits he has made through his fraud”). We also conclude that considerations of fairness do not counsel against such an award.
Plaintiffs argue that the Court should utilize the statutory interest rate for post-judgment interest set forth in 28 U.S.C. § 1961. See Proposed Findings at 19. “[N]o federal statute controls the rate of prejudgment interest.” Sec. Ins. Co. of Hartford v. Old Dominion Freight Line, Inc., 314 F.Supp.2d 201, 203 (S.D.N.Y. 2003). Courts have endorsed the use of the postjudgment interest rate in § 1961 in calculating prejudgment interest “unless the trial judge finds, on substantial evidence, that the equities of the particular case require a different rate.” W. Pac. Fisheries, Inc. v. SS President Grant, 730 F.2d 1280, 1289 (9th Cir. 1984); see Royal & Sun All. Ins., PLC v. E.C.M. Transp., Inc., 2015 WL 5098119, at *9 (S.D.N.Y. Aug. 31, 2015) (awarding prejudgment interest at the statutory post-judgment interest rate in § 1961); St. Paul Fire & Marine Inc. Co. v. Schneider Nat. Carriers, Inc., 2006 WL 1292375, at *2 (S.D.N.Y. May 11, 2006) (same); Sec. Ins. Co. of Hartford, 314 F.Supp.2d at 203 (same). Not having been presented with arguments or evidence suggesting a different interest rate would be more appropriate, we agree that § 1961 should control the rate of prejudgment interest in this case.
Section 1961 provides that “[i]nterest shall be calculated . . . at a rate equal to the weekly average 1-year constant maturity Treasury yield, as published by the Board of Governors of the Federal Reserve System, for the calendar week preceding[] the date of the judgment.” 28 U.S.C. § 1961(a).
Plaintiffs argue that any award of prejudgment interest should be calculated from the last day of the class period. This request is consistent with case law. See, e.g., Longfin, 2020 WL 4345731, at *4 (awarding prejudgment interest beginning on the last day of the class period). Accordingly, plaintiffs should be awarded prejudgment interest from June 19, 2017 to the date judgment is entered at a rate equal to the weekly average 1-year constant maturity Treasury yield.
Post-Judgment Interest
Plaintiffs also seek post-judgment interest, see Proposed Findings at 19-20, to which they are presumptively entitled, see Schipani v. McLeod, 541 F.3d 158, 165 (2d Cir. 2008) (“[W]e have consistently held that an award of postjudgment interest is mandatory.”); accord In re Puda Coal Sec. Inc. et al. Litig., 2017 WL 65325, at *17 (S.D.N.Y. Jan. 6, 2017), adopted, 2017 WL 511834 (S.D.N.Y. Feb. 8, 2017). The post-judgment interest rate set in 28 U.S.C. § 1961 applies.
Accordingly, plaintiffs should be awarded post-judgment interest from the date final judgment is entered to the date the judgment is satisfied at a rate equal to the weekly average 1-year constant maturity Treasury yield.
Conclusion
For the foregoing reasons, plaintiffs should be awarded damages in the amount of $1,420,000.00 with pre- and post-judgment interest from June 19, 2017, to the date judgment is satisfied, to be calculated by the Clerk at the post-judgment interest rate in effect during the relevant period.
In their motion seeking entry of a default judgment against Axiom, class counsel reserved the right to file a motion for attorney fees and expenses after final judgment is entered. See Memorandum in Support of Motion for Default Judgment, filed Jan. 21, 2021 (Docket # 80), at 25. This reservation was reiterated in plaintiffs' proposed findings of fact and conclusions of law. See Proposed Findings at 20-21. We therefore do not address an award of attorney fees and expenses.
PROCEDURE FOR FILING OBJECTIONS TO THIS REPORT AND RECOMMENDATION
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties have fourteen (14) days (including weekends and holidays) from service of this Report and Recommendation to file any objections. See also Fed.R.Civ.P. 6(a), (b), (d). A party may respond to any objections within 14 days after being served. Any objections and responses shall be filed with the Clerk of the Court. Any request for an extension of time to file objections or responses must be directed to Judge Cronan. If a party fails to file timely objections, that party will not be permitted to raise any objections to this Report and Recommendation on appeal. See Thomas v. Arn, 474 U.S. 140 (1985); Wagner & Wagner, LLP v. Atkinson, Haskins, Nellis, Brittingham, Gladd & Carwile, P.C., 596 F.3d 84, 92 (2d Cir. 2010).
While not legally required, the plaintiffs are directed to mail copies of this Report and Recommendation to the defaulting defendants at their last known addresses and to file proof of service thereof within 7 days. If they are unable to do so, they shall inform the Court by letter filed on ECF by the same date.