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stating that the remedy for fraudulent transfer "is to rescind, or set aside, the allegedly fraudulent transfer, and cause the transferee to return the transferred property to the transferor"
Summary of this case from Feltman v. Tri-State Emp't Serv., Inc. (In re TS Emp't, Inc.)Opinion
10 Civ. 4020 (CM) (JLC)
12-17-2012
CAMOFI MASTER LDC and CAMHZN MASTER LDC, Plaintiffs, v. RIPTIDE WORLDWIDE, INC (f/k/a Shea Development Corp.), BRAVERA, INC. (n/k/a RTWW Business Services, Inc.), IP HOLDINGS OF NEVADA, INC., INFORMATION INTELLECT, INC., FRANCIS E. WILDE, MATRIX HOLDINGS, LLC, THOMAS E. WHEELER, E. JOSEPH VITETTA, JR., and RICHARD CONNELLY, Defendants.
REPORT AND RECOMMENDATION
JAMES L. COTT, United States Magistrate Judge.
To The Honorable Colleen McMahon, United States District Judge:
Plaintiffs CAMOFI Master LDC ("CAMOFI") and CAMHZN Master LDC ("CAMHZN") (collectively, "Plaintiffs") bring this action against Defendants Riptide Worldwide, Inc. ("RTWW"), Bravera, Inc. ("Bravera"), IP Holdings of Nevada, Inc. ("IP Holdings"), Information Intellect, Inc. ("Information Intellect"), Matrix Holdings, LLC ("Matrix"), and Francis E. Wilde ("Wilde") (collectively, the "Defaulting Defendants"), as well as Thomas E. Wheeler ("Wheeler") and E. Joseph Vitetta, Jr. ("Vitetta") (collectively, with the Defaulting Defendants, "Defendants"). Plaintiffs assert claims for breach of contract, securities fraud, common law fraud, and fraudulent conveyance arising out of a 2007 loan and securities purchase agreement between Plaintiffs and RTWW. Each of the Defaulting Defendants has failed to answer or otherwise respond to the Complaint. The Court previously granted default judgment in the amount of $17,132,373.34 against RTWW, Bravera, IP Holdings, and Information Intellect on the breach of contract claims. Plaintiffs now move for default judgment against the Defaulting Defendants on the fraud and fraudulent conveyance claims, and for an award of damages in the amount of $19,965,937.29. As set forth below, I recommend the Court grant the motion for default judgment in part and deny it in part, and deny the request for damages without prejudice to renewal upon a more developed record.
I. BACKGROUND
It is well-settled that a defendant who fails to answer or otherwise oppose a complaint is "deemed to have admitted all well-pleaded allegations in the complaint pertaining to liability." Finkel v. Romanowicz, 577 F.3d 79, 81 n.1 (2d Cir. 2009) (citing Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty Corp., 973 F.2d 155, 158 (2d Cir. 1992)). Accordingly, the following facts, which are drawn from the Complaint and written instruments annexed thereto, see Fed. R. Civ. P. 10(c), are established for the purpose of determining liability of the Defaulting Defendants. Familiarity with the Court's prior Decision and Order Denying Defendants' Motion to Dismiss, Camofi Master LDC v. Riptide Worldwide, Inc., No. 10 Civ. 4020 (CM), 2011 WL 1197659 (S.D.N.Y. Mar. 25, 2011) (Dkt. No. 43) ("Camofi I"), and the November 9, 2011 Form of Default Judgment (Dkt. No. 55) is assumed.
A. Factual Background
Plaintiffs are two Cayman Islands limited duration companies. (Complaint dated May 14, 2010 ("Compl") ¶¶ 11-12 (Dkt. No. 1)). RTWW is a Nevada corporation whose stock trades on the Pink Sheets under the symbol "RTWW." (Compl. ¶ 13). Wilde is RTWW's Chief Executive Officer and Executive Chairman of the Board of Directors. (Compl. ¶ 17). Wheeler is RTWW's Executive Vice President of Mergers and Acquisitions and Vice Chairman of the Board of Directors, and previously served as RTWW's President. (Compl. ¶ 19). Vitetta is RTWW's Executive Vice President and Corporate Secretary, and previously was its Senior Vice President and Corporate Secretary. (Compl. ¶ 20). Bravera, Information Intellect, and IP Holdings (collectively, the "Subsidiary Defendants") are wholly-owned subsidiaries of RTWW. (Compl. ¶¶ 14-16). Matrix is a corporation alleged to be wholly-owned and controlled by Wilde. (Compl. ¶ 18).
According to the Complaint, RTWW was incorporated in 2005 under the name Shea Development Corporation, but changed its name to Riptide Worldwide, Inc. in 2008. (Compl. ¶ 13). Presumably for this reason, the transaction documents at issue in this case name Shea Development Corporation, not RTWW, as the relevant counter-party.
1. The Securities Purchase Agreement
In April 2007, RTWW contracted to purchase Bravera and Riptide Software, Inc., a custom software company, as part of a plan to transition RTWW's business into a global information technology and business process management company. (Compl. ¶ 27). To finance these acquisitions, RTWW commenced discussions with Plaintiffs regarding Plaintiffs' possible investment in RTWW. (Compl. ¶ 29). Thereafter, in July 2007, RTWW and Plaintiffs entered into a Securities Purchase Agreement ("SPA") under which Plaintiffs agreed to loan RTWW approximately $7.25 million, to be used solely for the purpose of acquiring Riptide Software and Bravera. (Compl. ¶ 32). In return, RTWW issued to Plaintiffs two senior secured notes in the aggregate amount of $7.25 million, shares of RTWW's common stock, and warrants entitling Plaintiffs to purchase additional shares of RTWW's common stock. (Compl. ¶¶ 31-32). As security for the loan, RTWW granted Plaintiffs a priority lien on all of the assets of RTWW and its subsidiaries (the "Collateral"). (Compl. ¶ 49). RTWW's subsidiaries each guaranteed the loan. (Compl. ¶¶ 46, 49).
The agreements encompassed by the SPA were memorialized in a set of transaction documents ("Transaction Documents") that included: (1) the SPA (Declaration of Jay S. Auslander in Support of Motion for Default Judgment dated December 21, 2011 ("Auslander Decl."), Ex. A (Dkt. No. 68-1)); (2) a Senior Secured Note issued to CAMOFI in the amount of $5,777,777.78, and a Senior Secured Note issued to CAMHZN in the amount of $1,444,444.44 (collectively, the "Notes") (Auslander Decl., Exs. B & C (Dkt. Nos. 68-2 & 68-3)); (3) Common Stock Purchase Warrants entitling CAMOFI to purchase 10,238,000 shares of RTWW common stock and CAMHZN to purchase 2,559,500 shares of RTWW common stock (collectively, "the Warrants") (Auslander Decl., Exs. D & E (Dkt. Nos. 68-4 & 68-5)); (4) a Subsidiary Guarantee signed by Wilde on behalf of Information Intellect, Riptide Software, and Bravera (Auslander Decl. Ex. F (Dkt. No. 68-6)); (5) a Security Agreement signed by Wilde on behalf of RTWW, Information Intellect, Riptide Software, and Bravera (Auslander Decl., Ex. G (Dkt. No. 68-7)); (6) a Registration Rights Agreement by which RTWW agreed to register the issued shares of common stock and the Warrants with the Securities and Exchange Commission ("SEC") (Auslander Decl., Ex. H (Dkt, No. 68-8)); and other related agreements. (See SPA at 5-6).
Under the Notes, RTWW was required to make quarterly interest payments commencing on October 1, 2007, and monthly interest and principal payments commencing on January 1, 2008. (Compl. ¶ 36; see also Notes at 5-6). However, RTWW defaulted on these payment obligations "almost immediately subsequent to execution of the Transaction Documents by failing to make any and all required principal and interest payments when due and payable as required by the Notes." (Compl. ¶ 65). Though the Notes matured on March 13, 2010, the only payment Plaintiffs have received under the Notes to date is two checks from Matrix dated October 30, 2008, in the aggregate amount of $750,000. (Compl. ¶ 71).
Although the Complaint alleges that RTWW failed to make "any and all required" payments when due, the general counsel to Plaintiffs' investment advisor, who has submitted a declaration in support of Plaintiffs' application for damages, states that RTWW made three interest payments on the Notes (on July 13, July 31, and August 31, 2007) in the aggregate amount of $197,857.13, and defaulted thereafter. (See Declaration of Michael Loew in Support of Motion for Default Judgment dated December 21, 2011 ("Second Loew Decl.") ¶¶ 10, 17 (Dkt. No. 69)).
2. The Alleged Misrepresentations
a. Misrepresentations Prior to Execution of the SPA
Plaintiffs allege that in the weeks leading up to the execution of the SPA, Defendants knowingly misrepresented the financial condition and business prospects of RTWW and its subsidiaries in order to induce Plaintiffs to enter the SPA. (Compl. ¶ 58). The Complaint identifies three misrepresentations in particular. First, in Section 3.1(aa) of the SPA, a section entitled "Solvency," RTWW allegedly represented to Plaintiffs that, after receipt of the loan from Plaintiffs and "application of [its] proceeds," the "fair saleable value of the assets of [RTWW and the RTWW Subsidiaries, as a whole] exceeds the amount that will be required to be paid on or in respect of [their] existing debts and other liabilities . . . as they mature." (Compl. ¶ 59; SPA § 3.1(aa)). Plaintiffs contend that this representation (the "solvency representation") was false because the value of the assets of RTWW and its subsidiaries on the date of the loan was "far less" than $7.25 million. (Compl. ¶ 60). Plaintiffs further state that Defendants knew that the solvency representation was false because RTWW failed to ensure that its pro forma balance sheet contain at least $3.5 million in cash, and failed to secure at least $4 million of additional equity in RTWW, both of which were closing conditions under the SPA. (Compl. ¶ 60).
Second, Plaintiffs contend that Defendants knowingly misrepresented and/or failed to disclose that certain "guaranteed" contracts between the RTWW subsidiaries and third parties "did not represent a fixed and determinable stream of income that could secure repayment of the Notes." (Compl. ¶ 61). Third, Plaintiffs allege that a 2007 Agreement and Plan of Merger between RTWW and Riptide Software, presumably produced by RTWW to Plaintiffs during the due diligence period, falsely stated that RTWW would cause Riptide Software to pay approximately $800,000 of Riptide Software's outstanding tax liability with the Internal Revenue Service following completion of the merger, and that Riptide Software's former shareholders would reimburse Riptide Software out of funds received from RTWW on repayment of notes issued in connection with the merger. (Compl. ¶ 62). Plaintiffs assert that the merger agreement was knowingly false in this respect because, at the time the Transaction Documents were executed, RTWW lacked sufficient resources to pay off the notes held by Riptide Software's former shareholders, and Riptide Software lacked the resources to make the agreed-upon payment to the IRS. (Compl. ¶ 63). Ultimately, Riptide Software did not make the tax payment to the IRS and its tax liability grew to approximately $2 million, "greatly reducing [Riptide Software's] value." (Compl. ¶¶ 63-64).
b. Misrepresentations After RTWW Defaulted on the
Plaintiffs also allege that in 2008 and 2009, after RTWW defaulted on its payment obligations under the SPA, Defendants made false assurances regarding RTWW's readiness to make payments under the Notes. (Compl. ¶¶ 66-70). For example, on February 19, 2008, in response to two emails from Plaintiffs regarding past-due interest and principal payments, Richard Connelly, RTWW's former chief financial officer, allegedly stated that payment would be made following the completion of funding RTWW was seeking to secure. (Compl. ¶ 68). On March 2, 2008, Wilde sent Plaintiffs an email promising that RTWW was "receiving money into the company this week to catch up" on payments; that RTWW was "in a position to close the sale" of one of its business units; and that the "majority of the proceeds . . . w[ould] be paid to [Plaintiffs] Monday or Tuesday, depending on when they hit our account." (Compl. ¶ 69). On March 31, 2008, Wilde sent Plaintiffs another email reporting that RTWW would close on a business transaction that week, and RTWW would be in a position to make a payment to Plaintiffs by the end of the week. (Compl. ¶ 70). However, no payments were made. (Id.).
Though Connelly was initially named as a defendant in this case, he was dismissed by stipulation of the parties in September 2010. (Stipulation and Order dated September 3, 2010 (Dkt. No. 15)).
On April 18, 2008, allegedly in reliance on these representations, Plaintiffs entered into a further agreement with RTWW under which they agreed to waive their SPA default remedies on the condition that RTWW did the following: (1) pay $2 million to Plaintiffs by April 25, 2008; (2) repay all outstanding principal and interest by scheduled payments on May 15, June 15, and June 30, 2008; and (3) issue additional common stock purchase warrants to Plaintiffs. (Compl. ¶¶ 72, 75-76; Auslander Decl. Ex. I (the "Waiver Agreement") (Dkt. No. 68-9)). In a Form 8-K filed with the SEC on April 24, 2008, RTWW stated that it would obtain funds to make the payments under the Waiver Agreement from the issuance of preferred stock pursuant to a $15 million stock purchase agreement with Matrix. (Compl. ¶¶ 77-78). However, RTWW did not make any of the agreed-upon payments or issue the warrants. (Compl. ¶¶ 79-80).
Under the terms of the Waiver Agreement, RTWW's breach of the Waiver Agreement reinstated RTWW's default under the SPA and restored Plaintiffs' right to exercise all default remedies under the original agreements. (Compl. ¶ 73).
Thereafter, Defendants allegedly continued to make false assurances of imminent payment to Plaintiffs. For example, in an email dated May 15, 2008, Wilde purportedly advised Plaintiffs that RTWW expected to receive the proceeds from a deal by "late Thursday or early Friday," and "as the money starts coming in," he would "start doing wire transfers [to Plaintiffs.]" (Compl. ¶ 84). These wire transfers were never made. (Compl. ¶ 83). On September 2, 2008, Wilde copied Plaintiffs' counsel on an email stating that he expected funds to arrive in a Morgan Stanley account held by Matrix the following day, and would send $8.5 million to Plaintiffs within the next two days. (Compl. ¶¶ 86-87). On September 5, 2008, an RTWW employee forwarded Plaintiffs an email from Wilde confirming the deposit of $20 million into RTWW's accounts. (Compl. ¶ 87). On September 11, 2008, Wilde advised Plaintiffs' counsel that he had "confirmed that Morgan Stanley has the deposits" and would ensure "that the money gets released for delivery to you ASAP." (Compl. ¶ 89). On September 30, 2008, Wilde wrote an email to Plaintiffs' counsel stating that RTWW would wire funds to Plaintiffs according to the following schedule: $2.5 million by October 1, 2008; $2.5 million on October 7, 2008; and $5 million by October 10, 2008. (Compl. ¶ 90). Again, none of the promised payments were made. (Id.).
On October 24, 2008, Plaintiffs sent RTWW a Notice of Intent to Foreclose on the Collateral. (Compl. ¶ 94). Plaintiffs then received two checks dated October 30, 2008 from Matrix in the aggregate amount of $750,000. (Compl. ¶ 94). This payment was followed by an October 31, 2008 email from Wilde stating that RTWW had closed two deals and would make further payment soon. (Compl. ¶ 91). On November 10, 2008, Wilde emailed Plaintiffs that "Friday was a blockbuster day for us. We have 9 opportunities that are in various stages of closing today." (Compl. ¶ 92). However, in February 2009, after RTWW failed to make any further payments, Plaintiffs sent Wilde a second Notice of Intent to Foreclose on the Collateral. (Compl. ¶ 96). Thereafter, Wilde purportedly continued making unfulfilled promises of payment, including statements that RTWW had just closed a deal and would be paid $5 million that week; that Plaintiffs should "hang on" because payments "will come very soon"; and that RTWW would soon receive funds that it would immediately convey to Plaintiffs for 40 weeks "until everything is paid!" (Compl. ¶¶ 100-101).
Plaintiffs allege that "none of these supposed deals were real, as Defendant Wilde well-knew" (Compl. ¶ 93), but that such representations were made "in furtherance of Defendants' plan to induce Plaintiffs not to exercise their rights of foreclosure under the Transaction Documents and Waiver Agreement." (Compl. ¶ 95). Plaintiffs contend that they relied on Defendants' false assurances of payment, and therefore did not accelerate the loan or commence foreclosure proceedings until September 2009, which allowed Defendants to "use the Collateral for their own benefit, thereby significantly impairing Plaintiffs' rights and the value of the Collateral." (Compl. ¶ 104).
On May 12, 2009, after receiving no further payment from RTWW, Plaintiffs' counsel sent a letter to RTWW's Board of Directors advising that Plaintiffs intended to commence foreclosure proceedings against the assets of RTWW and its subsidiaries. (Compl. ¶ 101). In mid to late 2009, Plaintiffs "foreclosed on Riptide Software, which by then was the sole remaining asset of value of RTWW." (Compl. ¶ 27; see also id. ¶¶ 101, 102).
3. The Alleged Wrongful Conveyances
Plaintiffs contend that, during the time that RTWW was in arrears on its debt, Wilde, Wheeler, Vitetta, and Connelly increased their own salaries and took $40,000 bonuses based on "claimed financial success" in causing RTWW and its subsidiaries to exceed projected pre-tax earnings in 2008. (Compl. ¶ 105). Plaintiffs aver that such claimed financial success was false. (Id.). Plaintiffs also allege that Defendants made payments in excess of amounts earned to the law firm Dunnington, Bartholow & Miller LLP, of which Wilde's brother-in-law is alleged to be a partner. (Compl. ¶ 106). Without specifying when these payments were made, Plaintiffs claim that these bonus payments, salary increases, and payments of legal fees were made without fair consideration or any legitimate purpose, and constituted a fraudulent conveyance under New York Debtor and Creditor Law. (Compl. ¶¶ 171-190).
B. Procedural Background
On May 14, 2010, Plaintiffs filed a Complaint asserting six counts of breach of contract, two counts of federal securities fraud, one count of common law fraud, and three counts of fraudulent conveyance, and claiming damages of "at least 19 million" on each count. (Dkt. No. 1). The Defaulting Defendants did not file appearances or respond to the Complaint. In September 2010, Wheeler and Vitetta appeared pro se and moved to dismiss the fraud and fraudulent conveyance claims against them pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. (See Dkt. Nos. 21, 35, 36, 39-41). On March 23, 2011, the Court found that the Complaint adequately pleaded claims of common law fraud, securities fraud, and fraudulent conveyance against Wheeler and Vitetta, and denied their motions to dismiss. See generally Camofi I, 2011 WL 1197659, at *7-12.
Meanwhile, on September 13, 2010, Plaintiffs informed the Court that the Defaulting Defendants had accepted service of the Complaint by email to RTWW's corporate counsel on June 4 and June 9, 2010, and, having failed to appear in the action, were in default. (Endorsed Letter from Kimberly Reilly to Judge McMahon dated Sept. 13, 2010 ("Endorsed Default Letter") at 2 (Dkt. No. 20); see also Auslander Decl., Exs. 3 & 4 (emails from Bruce Haglund to Jessica Taran and Jay Auslander confirming acceptance of email service on behalf of defendants) (Dkt. Nos. 68-12 & 68-13)). The Court then granted Plaintiffs leave to move for default judgment. (Endorsed Default Letter at 1). On December 6, 2010, the Clerk of the Court certified that the Defaulting Defendants had not answered or otherwise moved with respect to the Complaint, and entered the fact of their default into the Clerk's record of the case. (See Auslander Decl., Ex. 6 (Dkt. No. 68-15)).
In addition to service by email, Plaintiffs also personally served the summons and Complaint on RTWW, Wheeler, Vitetta, Connelly, and Matrix. (See Dkt. Nos. 17-19, 32-33).
In April 2011, approximately five months after the Clerk entered default against each of the Defaulting Defendants, the Court received a faxed letter from Wilde explaining that RTWW and its prior management lacked sufficient resources to retain counsel in order to defend against the suit. In response, the Court issued an Order warning Wilde that if he did not enter an appearance, he would be in default and risk having a default judgment entered against him. (See Dkt. No. 44). Wilde then requested an extension of the deadline to respond to the Complaint in order to obtain legal counsel, which the Court granted. (Endorsed Letter from Francis E. Wilde to Judge McMahon dated April 14, 2012 (Dkt. No. 45)). However, Wilde did not thereafter answer the Complaint or otherwise appear to defend against the suit.
On May 6, 2011, Plaintiffs moved for default judgment against RTWW and the Subsidiary Defendants on counts one through six of the Complaint, seeking a total of $17,132,373.34 in damages for breach of the various Transaction Documents, plus costs and attorneys' fees. (Motion for Default Judgment filed May 6, 2011 ("First Default Judgment Motion") (Dkt. No. 46); Declaration of Michael Loew in Support of Motion for Default Judgment dated March 25, 2011 ("First Loew Decl.") ¶ 4 (Dkt. No. 48)). On November 9, 2011, the Court granted the First Default Judgment Motion and entered judgment in the amount of $17,132,373.34 against RTWW and the Subsidiary Defendants, plus attorneys' fees and costs in the amount of $43,274.49. (Form of Default Judgment dated November 9, 2011 ("First Default Judgment") (Dkt. No. 55)).
Presently before the Court is Plaintiffs' motion for default judgment against the Defaulting Defendants as to counts seven through twelve of the Complaint. (See Notice of Motion for Default Judgment filed March 1, 2012 (Dkt. No. 67); Memorandum of Law in Support of Plaintiffs' Motion for Default Judgment filed March 1, 2012 ("Pl.'s Mem.") (Dkt. No. 70)). Plaintiffs served the motion and supporting papers on the Defaulting Defendants, as demonstrated by affidavits of service filed with the Court on February 7, 2012. (See Dkt. No. 60-65). The Defaulting Defendants have not responded to the motion. On May 29, 2012, Judge McMahon referred the motion to me for a report and recommendation. (Dkt. No. 73).
II. DISCUSSION
A. Applicable Standards
1. Default Judgment Standards
A default judgment may be awarded in accordance with Rule 55 of the Federal Rules of Civil Procedure "[w]hen a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend" against an action. Fed. R. Civ. P. 55(a). "Rule 55 sets forth a two-step process for an entry of default judgment." GuideOne Specialty Mutual Ins. Co. v. Rock Community Church, Inc., 696 F. Supp. 2d 203, 208 (E.D.N.Y. 2010) (citing Enron Oil Corp. v. Diakuhara, 10 F.3d 90, 95-96 (2d Cir. 1993)). First, the movant must file an affidavit demonstrating that the party against whom default judgment is sought has been properly served and has failed to defend, upon which the clerk of the court enters the party's default into the record. See id.; Fed. R. Civ. P. 55(a); Local Rule 55.1. "Second, after the clerk of the court enters default against a party, if that party fails to appear or otherwise move to set aside the default pursuant to Rule 55(c), the court may enter default judgment." GuideOne Specialty Mut. Ins. Co., 696 F. Supp. 2d at 208 (citing Fed. R. Civ. P. 55(b)).
"Under the case law interpreting [Rule 55(b)], the default establishes [a defendant's] liability . . . as long as the complaint has stated a valid cause of action." Kuruwa v. Meyers, 823 F. Supp. 2d 253, 256 (S.D.N.Y. 2011) (citing City of New York v. Mickalis Pawn Shop, LLC, 645 F.3d 114, 137 (2d Cir. 2011); Bambu Sales, Inc. v. Ozak Trading Inc., 58 F.3d 849, 854 (2d Cir. 1995)). "In light of [the defendant's] default, a court is required to accept all of the [plaintiff's] factual allegations as true and draw all reasonable inferences in its favor." Finkel, 577 F.3d at 84, However, "a default is not an admission of damages, which must be established in a separate evidentiary proceeding." Id. at 83 n.6 (citing Greyhound Exhibitgroup, Inc., 973 F.2d at 158).
2. Pleading Standards
A civil pleading generally must consist of "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a). The Supreme Court has interpreted this language to require "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Camofi I, 2011 WL 1197659, at *5 (citing Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009)).
Claims of fraud must also satisfy a heightened pleading standard by describing "the circumstances constituting fraud" with particularity. Fed. R. Civ. P. 9(b). In the Second Circuit, "in order to comply with Rule 9(b), 'the complaint must: (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.'" Lerner v. Fleet Bank, 459 F.3d 273, 290 (2d Cir. 2006) (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175 (2d. Cir. 1993)). In addition, "although Rule 9(b) provides that '[m]alice, intent, knowledge, and other condition of mind of a person may be averred generally,' . . . the Second Circuit has held that the plaintiff must allege enough facts to support 'a strong inference of fraudulent intent.'" Leemon v. Burns, 175 F. Supp. 2d 551, 556-57 (S.D.N.Y. 2001) (citing Ganino v. Citizens Utils. Co., 228 F.3d 154, 169 (2d Cir. 2000) (other citations omitted)). "Furthermore, a complaint alleging fraud against multiple defendants must state the allegations specifically attributable to each individual defendant." Id. at 556 (citing DiVittorio v. Equidyne Extractive Indus., 822 F.2d 1242, 1247 (2d Cir. 1987); Rich v. Maidstone Fin., Inc., No. 98 Civ. 2569 (DAB), 2001 WL 286757, at *6 (S.D.N.Y. Mar. 23, 2001)). "A complaint may not simply clump defendants together in vague allegations to meet the pleading requirements of Rule 9(b)." Rich, 2001 WL 286757, at *6 (citation and internal punctuation marks omitted).
Federal private securities fraud claims must also comport with the heightened pleading standard imposed by the Private Securities Litigation Reform Act ("PSLRA"), 15 U.S.C. § 78u-4(b). The PSLRA codified the Rule 9(b) standard previously adopted by the Second Circuit, and requires that a private securities fraud plaintiff "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2); see, e.g., Camofi I, 2011 WL 1197659, at *6; Leemon, 175 F. Supp. 2d at 556. The Supreme Court has interpreted "strong inference" of fraudulent intent to mean an inference of scienter that is "more than merely plausible or reasonable," but that is "cogent and at least as compelling as any opposing inference of nonfraudulent intent." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007). The PSLRA also requires that "to allege control person liability under § 20(a), Plaintiffs[] must allege some level of culpable participation at least approximating recklessness in the section 10(b) context." In re UBS Auction Rate Sec. Litig., No. 08 Civ. 2967 (LMM), 2009 WL 860812, at *3 (S.D.N.Y. Mar. 30, 2009) (citing Lapin v. Goldman Sachs Grp., Inc., 506 F. Supp. 2d 221, 248 (S.D.N.Y. 2006)) (internal punctuation omitted).
3. Standard Governing Damages
"It is well-settled in this Circuit that even after a default judgment is entered against defendants, 'the allegations in the complaint with respect to the amount of the damages are not deemed true." Gutman v. Klein, No. 03 Civ. 1570 (BMC) (RML), 2010 WL 4916722, at *6 (E.D.N.Y. Nov. 24, 2010) (quoting Credit Lyonnais Sec. (USA), Inc. v. Alcantara, 183 F.3d 151, 155 (2d Cir. 1999)). Instead, a plaintiff "bears the burden of establishing [an] entitlement to recovery and thus must substantiate [its] claim with evidence to prove the extent of damages." Dunn v. Advanced Credit Recovery Inc., No. 11 Civ. 4023 (PAE) (JLC), 2012 WL 676350, at *2 (S.D.N.Y. Mar. 1, 2012) (citing Greyhound Exhibitgroup, 973 F.2d at 158), adopted, 2012 WL 1114335 (S.D.N.Y. Apr. 3, 2012). "In determining damages not susceptible to simple mathematical calculation, Federal Rule of Civil Procedure 55(b)(2) gives courts discretion to determine whether an evidentiary hearing is necessary or whether to rely on detailed affidavits or documentary evidence." Dorn v. Berson, No. 09-CV-2717 (ADS) (AKT), 2012 WL 1004907, at *3 (E.D.N.Y. Mar. 1, 2012) (citing Action S.A. v. Marc Rich & Co., Inc., 951 F.2d 504, 508 (2d Cir. 1991)), adopted, 2012 WL 1004905 (E.D.N.Y. Mar. 23, 2012). "Even in the absence of a hearing, however, the district court cannot simply rely on the plaintiff's statement of damages; there must be a basis upon which the court may establish damages with reasonable certainty." House v. Kent Worldwide Mach. Works, Inc., 359 F. App'x 206, 207 (2d Cir. 2010) (citing Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105, 111 (2d Cir. 1997)). "Magistrate judges and district courts have interpreted this to mean that, even when the defendant defaults and is not present to object, damages must be based on admissible evidence." Id. (citations omitted).
B. Default Judgment on Counts 7 through 12
Plaintiffs have satisfied the procedural prerequisites for the entry of default judgment by obtaining the Clerk's certificate of default, and serving their default judgment motion on each of the Defaulting Defendants. (See Dkt. Nos. 60-65; Auslander Decl., Ex. 6 (Dkt. No. 68)). Therefore, the Court must determine whether the Complaint states a claim in counts 7 through 12 against each of the Defaulting Defendants. "This task is simplified by the fact that this Court has previously ruled on the sufficiency of [the] claims" as to Wheeler and Vitetta in Camofi I, a ruling that "provide[s] substantial guidance as to the sufficiency of the claims against [the Defaulting Defendants]." In re Crazy Eddie Sec. Litis., 948 F. Supp. 1154, 1161 (E.D.N.Y. 1996).
1. Section 10(b) Claims
In count 7 of the Complaint, Plaintiffs allege that each of the Defaulting Defendants violated § 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5(b), by making material misrepresentations in connection with the SPA. (Compl. ¶ 150). As noted, private securities fraud actions under Rule 10b-5 are subject to the heightened pleading requirements of Rule 9(b) and the PSLRA. In re Take-Two Interactive Sec. Litig., 551 F. Supp. 2d 247, 259-60 (S.D.N.Y. 2008). "In order to state a claim under Rule 10b-5 for material misrepresentations, 'plaintiffs must allege that [each of the Defaulting Defendants] (1) made misstatements or omissions of material fact; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) upon which plaintiffs relied; and (5) that plaintiffs' reliance was the proximate cause of their injury.'" Id. at 260 (quoting Lentell v. Merrill Lynch & Co., 396 F.3d 161, 172 (2d Cir. 2005)).
In its previous ruling denying Wheeler and Vitetta's motion to dismiss, the Court focused primarily on the SPA's solvency representation, which Plaintiffs allege was materially false because "the value of the assets of RTWW and the RTWW Subsidiaries . . . on the date of execution of the SPA was far less than $7.25 million, the amount of the Loan." (Compl. ¶ 60). See Camofi I, 2011 WL 1197659, at *7-9. The Court held that this alleged misrepresentation could be attributed to Wheeler and Vitetta under the group pleading doctrine, which supplies a narrow "exception to the requirement that the fraudulent acts of each defendant be identified separately in the complaint," and instead permits a plaintiff to "rely on a presumption that statements in . . . group-published information[] are the collective work of those individuals with direct involvement in the everyday business of the company." Id. at *6 (citing Polar Int'l Brokerage Corp. v. Reeve, 108 F. Supp. 2d 225, 237 (S.D.N.Y. 2000); In re BISYS Sec. Litig., 397 F. Supp. 2d 430, 438 (S.D.N.Y. 2005) (quotation marks omitted)). The Court concluded that the group pleading doctrine applied to Wheeler and Vitetta based on their "high level positions" as President and Senior Vice President of RTWW, and their status as "corporate insiders with active daily roles in the relevant companies or transactions." Id. at *8 (citations omitted). The Court also held that Wheeler and Vitetta's positions and presumptive access to RTWW's financial information supported a strong inference that they acted with scienter in misrepresenting RTWW's solvency. Id. at *9-10 (the "most plausible inference to be drawn from [Wheeler and Vitetta's] positions is that they had access to the company's financial records and . . . were familiar with Riptide Worldwide's day-to-day financial outlook, and, as such, should have known that the company was misrepresenting its ability to repay the loan in the Transaction Documents").
The Court's ruling did not explicitly address whether the Complaint satisfies the other elements of a Rule 10b-5 claim—namely reliance, proximate causation, damages, and the requirement that a material misstatement at issue be made "in connection with" the purchase or sale of a security. However, the Complaint does satisfy these elements by alleging that: (1) Plaintiffs relied on RTWW's financial representations in deciding to enter the SPA (Compl. ¶¶ 8, 57, 149); (2) RTWW's undercapitalization relative to its debt ultimately impaired the value of Plaintiffs' investment (Compl. ¶¶ 2, 10, 63-65); and (3) the solvency representation was made in connection with Defendants' issuance of the Notes, shares of common stock, and warrants to purchase common stock, each of which constitute "securities" under the Exchange Act. See, e.g., Freudenberg v. E*Trade Fin. Corp., Nos. 07 Civ. 8538, 07 Civ. 8808, 07 Civ. 9651, 07 Civ. 10400, 07 Civ. 10540, 2008 WL 2876373, at *6 n.2 (S.D.N.Y. July 16, 2008) (Exchange Act "security" includes "'any note [with a maturity date exceeding nine months], stock . . . or any . . . warrant or right to subscribe to or purchase, any of the foregoing'") (citing 15 U.S.C. § 78c(a)(10)).
The Court's reasoning in concluding that the Complaint states a Rule 10b-5 claim against Wheeler and Vitetta applies equally if not with greater force to Wilde, who was RTWW's CEO at all relevant times and allegedly played a central role in communicating with Plaintiffs about the SPA. (Compl. ¶¶ 17, 30, 69-70, 84, 86-87, 90-92, 99-100). Thus, the representations in the SPA may be attributed to Wilde under the group pleading doctrine. Camofi I, 2011 WL 1197659, at *6. In addition, Wilde signed the SPA on behalf of RTWW (see SPA at 31), and therefore, the representations in the SPA may be attributed to Wilde directly. See, e.g., In re Atlas Air Worldwide Holdings, Inc. Sec. Litig., 324 F. Supp. 2d 474, 487 (S.D.N.Y. 2004) (representations in company's financial statements could be attributed to corporate signatories to such statements) (citation omitted). Wilde's high-level position and frequent correspondence with Plaintiffs regarding RTWW's finances also support an inference that he had equal or greater access to RTWW's financial information than did Wheeler and Vitetta, and thus also acted with scienter in misrepresenting RTWW's solvency. Therefore, the Complaint states at least one actionable claim of securities fraud against Wilde based on the solvency representation.
Plaintiffs also allege that during the weeks leading up to the SPA's execution, Defendants misrepresented the business prospects of RTWW and its subsidiaries, and falsely stated that RTWW would cause Riptide Software to pay off its tax liabilities to the IRS. (Compl. ¶¶ 61-63). However, because Plaintiffs have not identified precisely what statements were made on these issues, by whom, in what context, or when, I conclude that such allegations do not satisfy the particularity requirements of Rule 9(b). See Lerner, 459 F.3d at 290 (Rule 9(b) requires plaintiff to specify the statements alleged to be fraudulent, identify where and when the statements were made, and by whom, and explain why such statements were fraudulent). In addition, Plaintiffs base their Rule 10b-5 claims on allegedly false statements in an SEC Form 8-K filed by RTWW in 2008, and on false assurances of payment by Wilde, Connelly, and other agents of RTWW between February 2008 and April 2009. (Compl. ¶¶ 77-94, 145). However, these statements occurred after the SPA and related agreements were executed, and therefore could not have affected Plaintiffs' investment decision. See Roer v. Oxbridge Inc., 198 F. Supp. 2d 212, 226 (E.D.N.Y. 2001) ("It is well settled that a statement cannot be fraudulent under Rule 10b-5 if it did not affect an investment decision of the plaintiff.") (citations and internal punctuation omitted). Although a few of these alleged misrepresentations preceded the 2008 Waiver Agreement, which involved the transaction of additional warrants, Plaintiffs have not identified damages uniquely flowing from that agreement, or demonstrated that the Waiver Agreement fundamentally changed the nature or risk of Plaintiffs' initial investment so as to constitute a "new" securities transaction. See Panos v. Island Gem Enters., Ltd., 880 F. Supp. 169, 179 (S.D.N.Y. 1995) (touchstone of whether there has been a new security transaction is "whether there has occurred such significant change in the nature of the investment or in the investment risks as to amount to a new investment") (quoting Gelles v. TDA Indus., Inc., 44 F.3d 102, 104 (2d Cir. 1994) (internal quotation marks omitted)). Therefore, neither the statements made in the April 2008 Form 8-K nor the assurances of payment in 2008 and 2009, as pled, support a separate claim for securities fraud.
This conclusion, as well as the Court's prior holding that the Complaint states a Rule 10b-5 claim against Wheeler and Vitetta, also necessitates a finding that the Complaint states a Rule 10b-5 claim against RTWW. This is so because the solvency representation was made by agents of RTWW on RTWW's behalf, and the scienter of Wilde, Wheeler, and Vitetta may be imputed to RTWW for the purposes of finding liability under Rule 10b-5. See, e.g., In re Merck & Co., Inc. Sec., Derivative, & "ERISA" Litig., MDL No. 1658 (SRC), 2011 WL 3444199, at *29 (D.N.J. Aug. 8, 2011) (scienter of corporate officers imputed to corporation such that complaint stating securities fraud claim against corporate officers acting on behalf of corporation also stated securities fraud claim against corporation) (citing Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 195 (2d Cir. 2008)). Therefore, the Complaint states a claim against RTWW under Rule 10b-5.
However, Plaintiffs have not stated a Rule 10b-5 claim against the Subsidiary Defendants or Matrix. The only allegation in the Complaint related to any claim of fraud against the Subsidiary Defendants is that Section 3(e) of the Subsidiary Guarantee, signed by Wilde on behalf of the Subsidiary Defendants, incorporates by reference the representations and warranties of RTWW in the SPA, including RTWW's solvency representation. (Compl. ¶ 45). This allegation is insufficient to state a claim of securities fraud against the Subsidiary Defendants. As discussed, the solvency provision of the SPA warranted, inter alia, that, "[b]ased on the financial condition of the Company [defined to include RTWW and its subsidiaries] as of the closing date after giving effect to the receipt . . . and application of the proceeds [of the loan,] the Company's fair saleable value of its assets exceeds the amount that will be required to be paid on . . . [its] existing debts and other liabilities . . . as they mature." (SPA ¶ 3.1(aa); see also Compl. ¶ 59). Plaintiffs allege that RTWW knew this representation was false because RTWW failed to ensure that its pro forma balance sheet contain at least $3.5 million in cash and failed to secure at least $4 million of additional equity, both of which were conditions of closing. (Compl. ¶ 60). However, section 3(e) of the Subsidiary Guarantee affirms only the "representations and warranties of [RTWW] set forth in the [SPA] as they relate to such Guarantor." (Guarantee at 5 (emphasis added)). The Complaint does not articulate why the solvency provision was knowingly false as to each Subsidiary Defendant.
More importantly, the Subsidiary Defendants were not parties to the SPA, and neither Section 3(e) of the Subsidiary Guarantee, nor any of the allegations in the Complaint, suggest that the Subsidiary Defendants had ultimate authority over the content of RTWW's representations and warranties in the SPA. Therefore, Plaintiffs have not alleged that the Subsidiary Defendants "made" the solvency representations (or any other actionable misrepresentation) as that term has been interpreted by the Supreme Court. See Janus Capital Grp. Inc. v. First Derivative Traders, 131 S. Ct. 2296, 2302 (2011) ("For purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it."); see also In re Take-Two Interactive Sec. Litig., 551 F. Supp. 2d at 268 (alleged falsehoods in parent company's disclosures were inadequate to support securities fraud claim against subsidiary because complaint averred "no facts tending to show that the [subsidiary] Defendants had control over the information disclosed by [the parent company]" or that parent company's alleged falsehoods "originated in previous intentional falsehoods propagated by the [subsidiary] Defendants") (citing In re Marsh & Mclennan Cos. Sec. Litig., 501 F. Supp. 2d 452, 480 (S.D.N.Y. 2006) and In re Alstom SA Sec. Litig., 406 F. Supp. 2d 433, 464 (S.D.N.Y. 2005)).
I note that although Wilde purportedly signed the Subsidiary Guarantee on behalf of the Subsidiary Defendants as their "Chairman," the Complaint does not allege that Wilde held any official role with respect to the Subsidiary Defendants that would authorize him to act on their behalf or permit the Court to impute his knowledge to them. (See Compl. ¶ 17).
Finally, as Plaintiffs do not identify a single misrepresentation by Matrix, Plaintiffs have not stated a Rule 10b-5 claim against Matrix. Accordingly, I recommend that the Court grant Plaintiffs' motion as to RTWW and Wilde, but deny it as to the Subsidiary Defendants and Matrix as it relates to count 7.
2. Section 20(a) Claim
As to count 8, Plaintiffs seek default judgment against Wilde for control person liability under Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). "'To establish a prima facie case of control person liability, a plaintiff must show (1) a primary violation by the controlled person, (2) control of the primary violator by the defendant, and (3) that the defendant was, in some meaningful sense, a culpable participant in the controlled person's fraud.'" In re Tronox, Inc. Sec. Litig., 769 F. Supp. 2d 202, 207 (S.D.N.Y. 2011) (citing ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 108 (2d Cir. 2007)). "Control" is defined as the "power to direct or cause the direction of the management and policies of a person." 17 C.F.R. §240.12b-2. "Culpable participation" is established by alleging scienter on the part of a controlling person to the extent that it would satisfy § 10(b) and Rule 10b-5. See In re Am. Intern. Grp., Inc. 2008 Sec. Litig., 741 F. Supp. 2d 511, 535 (S.D.N.Y. 2010) ("allegations of scienter necessarily satisfy the culpable participation requirement") (citing In re AOL Time Warner, Inc. Sec. & ERISA Litig., 381 F. Supp. 2d 192, 235 (S.D.N.Y. 2004)) (internal punctuation omitted).
As discussed, the Complaint states a primary violation by RTWW and raises a strong inference that Wilde acted with scienter, thereby permitting a conclusion for pleading purposes that Wilde was a culpable participant in RTWW's fraud. The Complaint also amply alleges that Wilde exercised control over RTWW. Not only was he the CEO and Executive Chairman of RTWW's Board of Directors at all relevant times, he also personally signed each of the Transaction Documents on RTWW's behalf, and is alleged to have played a central role in negotiating and executing the SPA and related agreements. (Compl. ¶ 17; see also SPA at 31; Notes at 14; Warrants at 13; Subsidiary Guarantee at 10; Security Agreement at 20; Registration Rights Agreement at 13;Waiver Agreement at 9). Therefore, the Complaint states a claim of control person liability against Wilde under § 20(a) of the Exchange Act. See, e.g., S.E.C. v. First Jersey Securities, Inc., 101 F.3d 1450, 1473-74 (2d. Cir. 1996) (president, CEO, and sole shareholder of primary violator liable under § 20(a) where he exercised "hands-on management" and "orchestrat[ed] the Firm's unlawful acts").
3. Common Law Fraud Claims
As to count 9, Plaintiffs seek default judgment against each of the Defaulting Defendants for common law fraud under New York law. "Claims of common law fraud must also meet the heightened pleading requirement of Rule 9(b)." Camofi I, 2011 WL 1197659, at *10 (citing Filler v. Hanvit Bank, 156 F. App'x 413, 416 (2d Cir. 2005)). "A claim for common law fraud under New York law requires facts demonstrating by clear and convincing evidence: (1) a material misrepresentation or omission of fact; (2) made with knowledge of its falsity (i.e., scienter); (3) reasonable reliance on the part of the plaintiff; and (4) damages caused by the misrepresentation or omission." Gov't Employees Ins. Co. v. Infinity Health Prods., Ltd., No. 10-CV-5611 (JG) (JMA), 2012 WL 1427796, at *5 (E.D.N.Y. Apr. 6, 2012) (citing Schaifer Nance & Co. v. Estate of Warhol, 119 F.3d 91, 98 (2d Cir. 1997)), adopted, 2012 WL 1432213 (E.D.N.Y. Apr. 25, 2012). As each element of common law fraud is also an element of a Rule 10b-5 material misrepresentation claim, the Complaint states a claim against RTWW and Wilde for common law fraud for the reasons identified above. See Camofi I, 2011 WL 1197659, at *10 (common law claims sufficiently pled for "the same reason that Plaintiffs' federal securities fraud claims are sufficiently pled"). However, the Complaint does not state a claim of common law fraud as to the Subsidiary Defendants or Matrix as it identifies no misrepresentations by those defendants. Accordingly, I recommend that the Court grant Plaintiffs' motion as to RTWW and Wilde, but deny it as to the Subsidiary Defendants and Matrix as it relates to count 9.
4. Fraudulent Conveyance Claims
As to counts 10 through 12, Plaintiffs seek default judgment as to Wilde, RTWW, and the Subsidiary Defendants for violations of New York's Debtor and Creditor Law sections 274, 275, and 276. In order to state a claim for fraudulent conveyance under sections 274 and 275, a plaintiff must allege that there is a conveyance without fair consideration and that (1) "as a result of the transfer in question, the transferor is left with unreasonably small capital to conduct its business (§ 274)"; or (2) "as a result of the transfer in question, the transferor intends or believes that it will incur debt beyond its ability to pay (§ 275)." Drenis v. Haligiannis, 452 F. Supp. 2d 418, 428 (S.D.N.Y. 2006) (citing N.Y. Debt. & Cred. Law §§ 274-75); see also Camofi I, 2011 WL 1197659, at *12. As intent to defraud is not an element under sections 274 or 275, such claims are not subject to the heightened pleading requirement of Rule 9(b). Camofi I, 2011 WL 1197659, at *12 (citing Scantek Med., Inc. v. Sabella, 583 F. Supp. 2d 477, 497 (S.D.N.Y. 2008); Drenis, 452 F. Supp. 2d at 428).
Under section 276, Plaintiffs must plead that a defendant has transferred property with actual intent to hinder, delay, or defraud its creditors. N.Y, Debt. & Cred. Law § 276. Therefore, claims under section 276 are subject to Rule 9(b), but the intent to defraud may be inferred from circumstantial evidence. Camofi I, 2011 WL 1197659, at *11 (citing Sharp Int'l Corp. v. State St. Bank & Trust Co., 403 F.3d 43, 56 (2d Cir. 2005)).
In this case, each of Plaintiffs' fraudulent conveyance claims is based upon allegations that RTWW awarded undeserved bonuses and salary increases to Wilde, Wheeler, Vitetta, and Connelly, and paid the law firm of Dunnington, Bartholow & Miller LLP in excess of amounts legitimately earned. (Compl. ¶ 105-06). Fraudulent conveyance claims under New York law must be brought against those "who participate in the fraudulent transfer of a debtor's property and are transferees of the assets and beneficiaries of the conveyance." Stochastic Decisions, Inc. v. DiDomenico, 995 F.2d 1158, 1172 (2d Cir. 1993) (emphasis added) (citing FDIC v. Porco, 75 N.Y.2d 840, 842 (1990) (per curiam)). "Thus, the transferor of the property—that is, the debtor—is not the proper defendant in a fraudulent conveyance claim. Nor may a claim be brought against parties who . . . did not benefit from [the transfer]." Amusement Indus., Inc. v Midland Ave. Assocs, LLC, 820 F. Supp. 2d 510, 527 (S.D.N.Y. 2011) (citing Brenner v. Philips, Appel & Walden, Inc., No. 93 Civ. 7838 (JFK), 1997 WL 33471053, at *5 (S.D.N.Y. July 22, 1997)). Although Plaintiffs have not addressed this point in their papers, RTWW and the Subsidiary Defendants were not transferees and did not stand to benefit from the alleged conveyances. Therefore, Plaintiffs have not stated a fraudulent conveyance claim against them.
Although these allegations are made "on information and belief," they are deemed admitted by virtue of Defendants' default. See J & J Sports Prods., Inc. v. Imperial Lounge & Sports Bar Inc., No. CV 08-2061 (ENV) (MDG), 2012 WL 1356598, at *3 (E.D.N.Y. Mar. 30, 2012) (allegation deemed admitted even though alleged on information and belief) (citations omitted), adopted, 2012 WL 1372250 (E.D.N.Y. Apr. 19, 2012).
However, Plaintiffs have stated a claim for fraudulent conveyance against Wilde. The Court previously found that the Complaint states a claim against Wheeler and Vitetta under sections 274-276 of the New York Debtor and Creditor Law based on Plaintiffs' allegations that they received unwarranted salary increases and bonuses at a time when RTWW was in arrears on its debt to Plaintiffs. Camofi I, 2011 WL 1197659, at *11-13. Wilde is also alleged to have received a salary increase and bonus while RTWW was in default on its debt to Plaintiffs. Therefore, for the reasons articulated in the Court's previous decision, Plaintiffs have also stated a claim against Wilde for fraudulent conveyance under sections 274-276. See Camofi I, 2011 WL 1197659, at *11-12. Accordingly, I recommend that the Court grant Plaintiffs' motion as to Wilde but deny it as to RTWW, the Subsidiary Defendants, and Matrix, as it relates to counts 10 through 12.
C. Damages
As a threshold matter, it is well settled that "'[a] plaintiff seeking compensation for the same injury under different legal theories is . . . only entitled to one recovery.'" Hettinger v. Kleinman, 733 F. Supp. 2d 421, 449 (S.D.N.Y. 2010) (quoting Indu Craft, Inc. v. Bank of Baroda, 47 F.3d 490, 497 (2d Cir. 1995)). "In such cases where a Plaintiff is seeking compensation for the same injury under multiple theories, the proper measure of damages is the one that represents the greater recovery." Dorn, 2012 WL 1004907, at *6 (citing Magee v. U.S. Lines, Inc., 976 F.2d 821, 822 (2d Cir. 1992)). Plaintiffs have not explained why the award of damages entered in connection with the First Default Judgment is insufficient to make them whole for the conduct alleged in the Complaint.
Moreover, to support their request for fraud damages, Plaintiffs have submitted only the declaration of Michael Loew, General Counsel to Plaintiffs' investment advisor, Centrecourt Asset Management LLC. (See generally Second Loew Decl.). Although Loew states that his declaration is based on "personal knowledge" (id. ¶ 1), it consists primarily of mathematical calculations based on the amount of the loan, and the interest, penalty, and liquidated damages rates set forth in the default provisions of the SPA, the Notes, and the Registration Rights Agreement. (See id. ¶¶ 5-18). Crunching these numbers (but without explaining why liquidated damages and contractual penalties represent actual losses due to fraud or fraudulent conveyance), Loew concludes that CAMOFI has sustained $16,818,056.52 in damages, and CAMHZN has sustained $3,147,880.77 in damages "as a result of the Defaulting Defendants' fraudulent acts." (Id. ¶¶ 5, 12).
Loew submitted his first declaration in support of Plaintiffs' prior motion for default judgment on the contract claims alleged in the Complaint. (Dkt. No. 48).
1. Plaintiffs Have Not Established Fraud Damages
Plaintiffs have not addressed the cognizable methods for measuring damages for securities fraud, none of which coincide with Loew's calculations. Securities fraud damages are "ordinarily . . . based on out-of-pocket losses[.]" In re Crazy Eddie Sec. Litig., 948 F. Supp. at 1165 (citations omitted); see also Acticon AG v. China N.E. Petroleum Holdings Ltd., 692 F.3d 34, 38 (2d Cir. 2012) ("Traditionally, economic loss in Section 10(b) cases has been determined by use of the 'out-of-pocket' measure for damages.") (citations omitted). The out-of-pocket measure entitles a defrauded buyer of securities "'to recover only the excess of what he paid over the value of what he got.'" Acticon AG, 692 F.3d at 38 (citing Levine, 439 F.2d at 334). Put another way, such damages measure "the price paid for the security less the security's value on the date of the transaction and absent any fraud[.]" In re UBS Auction Rate Sec. Litig., 2009 WL 860812, at *4. The purpose of the out-of-pocket measure of relief is "to restore the plaintiff to the position he was in before the fraud." Id. (citing Panos, 880 F. Supp. at 176). "Out-of-pocket losses is also the rule for damages caused by common law fraud." In re Crazy Eddie Sec. Litig., 948 F. Supp. at 1165 (citing First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 768 (2d Cir. 1994)).
However, out-of-pocket damages are not the only permissible measure of recovery. In order to accommodate "the wide variety of factual predicates to § 10(b) claims, courts have utilized their discretion to endorse several different compensatory damages theories," including gross economic loss and benefit of the bargain damages. Panos, 880 F. Supp. at 176 (citing Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 154-55 (1972) (disgorgement); Levine v. Seilon, Inc., 439 F.2d 328, 334 (2d Cir. 1971) (out-of-pocket damages); Osofskv v. Zipf, 645 F.2d 107, 114 (2d Cir. 1981) (benefit-of-the-bargain damages); Esplin v. Hirschi, 402 F.2d 94, 105 (10th Cir. 1968) (consequential damages); Rolf v. Blyth, Eastman Dillon & Co., Inc., 570 F.2d 38, 49 & n.21 (2d Cir. 1978) (gross economic loss or rescissionary damages)). Gross economic loss or "rescissionary" damages "are based on the difference between the price paid [for the security] and the price received on resale, rather than on the excess of the purchase price over the actual value of the stock." Barrows v. Forest Labs., Inc., 742 F.2d 54, 57 n.7 (2d Cir. 1984) (citing Clark v. John Lamula Investors, Inc., 583 F.2d 594, 603-04 (2d Cir. 1978)). Benefit-of-the-bargain damages measure the "difference between the value of what was bargained for and the value at the time [of the transaction] of what was received." Id. at 57.
"The choice of any one theory [of damages] over another . . . depends on how the court characterizes the transaction and the fraud." Panos, 880 F. Supp. at 176. However, "appropriate grounds for damages in § 10(b) actions are not limitless, and courts have required plaintiffs to choose between rescinding a transaction and being paid restitution on the one hand and holding the defrauder to the bargain and recovering out-of-pocket losses resulting from the fraudulent transaction on the other hand." Id. at *4 (citing Randall v. Loftsgaarden, 478 U.S. 647, 662 (1986)). In particular, section 28(a) of the Exchange Act limits recovery for violations of the Exchange Act to "actual damages." 15 U.S.C. § 78bb(a)(1). This "limitation serves to bar speculative recoveries, but otherwise contemplates that district courts will use discretion to fashion a measure of damages appropriate for the circumstances." In re UBS Auction Rate Sec. Litig., 2009 WL 860812, at *3 (citation omitted).
In this case, Loew's calculation of more than $19 million in damages is grounded, inter alia, in the liquidated damages and penalty provisions of the SPA, which the parties agreed would be triggered only in the event that RTWW did not fulfill its payment obligations as expected. Therefore, this calculation reflects neither the expected value of Plaintiffs' investment (in accordance with a benefit-of-the-bargain measure), nor Plaintiffs' "actual damages" (in accordance with an "out of pocket" or "gross economic loss" measure). In fact, in calculating the damages attributable to fraud, Loew uses the same methodology he used to calculate the damages attributable to RTWW's breach of the SPA in connection with the First Default Judgment motion. (Compare First Loew Decl. ¶¶ 6, 13, and Second Loew Decl. ¶¶ 6, 13). Plaintiffs' memorandum of law in support of their motion does not address why such a contract-based methodology is the appropriate measure of damages for fraud, and Plaintiffs have not provided any further evidence that would permit the Court to calculate fraud damages in accordance with any of the legally cognizable methodologies discussed above. Accordingly, on the present record, the Court is unable to ascertain either securities or common law fraud damages with "reasonable certainty."
For example, Plaintiffs have not calculated the expected value of their investment at the time of the SPA, or the actual value of their investment at that time, or the present value (if any) of the shares of RTWW common stock issued in connection with the SPA. (See Compl. ¶¶ 31, 55). Plaintiffs have not assigned any value to Riptide Software, which Plaintiffs acquired in 2009 as a result of foreclosure proceedings. (Compl. ¶¶ 35, 102). Plaintiffs also have not submitted any documentary evidence to support their claim of damages.
2. Plaintiffs Have Not Established Fraudulent Conveyance Damages
Plaintiffs' moving papers also do not address the proper method of calculating damages for fraudulent conveyance. "The proper remedy in a fraudulent conveyance claim is to rescind, or set aside, the allegedly fraudulent transfer, and cause the transferee to return the transferred property to the transferor." Grace v. Bank Leumi Trust Co. of N.Y., 443 F.3d 180, 189 (2d Cir. 2006) (citing Geren v. Quantum Chem. Corp., 832 F. Supp. 728, 736-37 (S.D.N.Y. 1993)). Because Plaintiffs claim that RTWW made unlawful transfers to Wilde in the form of an undeserved salary increase and a $40,000 bonus, the appropriate remedy is to require Wilde to return the transferred property to RTWW, such that RTWW, in turn, can pay its outstanding debt to Plaintiffs. Id. However, Plaintiffs do not specify the amount of Wilde's salary increase, and they provide no admissible evidence as to the alleged $40,000 bonus. Therefore, Plaintiffs have not met their evidentiary burden to prove the amount of unlawfully conveyed property with reasonable certainty so as to permit the Court to award damages as to counts 10 through 12.
The Complaint alleges "at least $ 19 million" in damages stemming from the fraudulent conveyance claims, which is the same amount claimed in every other count of the Complaint, with the exception of count 4. (See Compl. at Prayer for Relief).
Based on the foregoing, I recommend that the Court deny Plaintiffs' motion to the extent that it seeks an award of damages, without prejudice to Plaintiffs making a more detailed evidentiary showing of damages specifically attributable to fraud and fraudulent conveyance (should they believe it is worthwhile to do so). Should Plaintiffs elect to renew their motion for damages related to counts 7 through 12, they should provide specific admissible evidence to support their request, as well as legal briefing to support their theory of damages as to each claim (and if applicable, any claim for punitive damages, prejudgment interest, or additional attorneys' fees).
As against RTWW, it is not clear why Plaintiffs would choose to further litigate the amount of damages attributable to fraud, as such a measure may well be less than the amount of damages already awarded to Plaintiffs for breach of contract. See Dorn, 2012 WL 1004907, at *6 ("[T]he breach of contract theory yields the highest recovery and since the Court finds that Plaintiff is entitled to that amount, the Court need not analyze the other theories [including securities fraud] for which Plaintiff seeks a lesser amount of recovery."). However, the Court has not yet awarded a default judgment against Wilde, and therefore it may be appropriate for Plaintiffs to renew their request for damages against him.
III. CONCLUSION
For the reasons stated, I recommend the Court grant Plaintiffs' motion for default judgment as to Wilde with respect to counts 7 through 12, grant the motion as to RTWW with respect to counts 7 and 9, and deny the motion in its entirety as to the Subsidiary Defendants and Matrix. I further recommend that the Court deny Plaintiffs' application for an award of damages, without prejudice to renewal upon the submission of sufficient evidence to support such an award.
PROCEDURE FOR FILING OBJECTIONS
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties shall have fourteen (14) days from service of this Report to file written objections. See also Fed. R. Civ. P. 6. Such objections, and any responses to such objections, shall be filed with the Clerk of Court, with courtesy copies delivered to the chambers of the Honorable Colleen McMahon and to the chambers of the undersigned, United States Courthouse, 500 Pearl Street, New York, New York, 10007. Any requests for an extension of time for filing objections must be directed to Judge McMahon, FAILURE TO FILE OBJECTIONS WITHIN FOURTEEN (14) DAYS WILL RESULT IN A WAIVER OF OBJECTIONS AND WILL PRECLUDE APPELLATE REVIEW. 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); 28 U.S.C. § 636(b)(1); Fed. R. Civ. P. 72. Dated: New York, New York
December 17, 2012
/s/_________
JAMES L. COTT
United States Magistrate Judge