McIntosh v. Katapult Holdings, Inc.

Background

Gina McIntosh brought this proposed securities class action individually and for a class of investors against Katapult Holdings, Inc. and Lee Einbinder, Howard Kurz, Orlando Zayas, Karissa Cupito, and Derek Medlin. The case asserted claims under Sections 10(b), 14(a), and 20(a) of the Securities Exchange Act of 1934.

The proposed class covered people or entities that purchased or acquired Katapult securities between June 15, 2021, and August 9, 2021, or beneficially owned or held FinServ Acquisition Corp. common stock as of May 11, 2021, and were eligible to vote at FinServ’s June 7, 2021 special meeting. The allegations concerned statements and omissions about Katapult’s business, competition from prime lenders, and its 2021 financial guidance. After Katapult announced a second-quarter 2021 net loss and withdrew its full-year guidance, its share price fell more than 56 percent on August 10, 2021, according to the allegations summarized by the court.

In an earlier ruling, Judge J. Paul Oetken granted in part and denied in part the defendants’ motion to dismiss. That ruling dismissed the Section 10(b) and Rule 10b-5 claim, the Section 20(a) claim based on it, and the claims against Cupito and Medlin. The Section 14(a) claim remained. The parties later exchanged information, participated in mediation, and agreed to settle before briefing on certification of a litigation class.

Settlement and Proposed Class

The settlement provided for a $2.5 million payment by the defendants, consisting of $1,775,000 in cash and an additional component valued at $725,000 consisting of Katapult common stock and/or cash. The allocation plan provided for pro rata distribution of the net settlement proceeds. It used different calculations for investors with Section 10(b)-related claims and investors with Section 14(a)-related claims, and weighted the Section 10(b)-related claims at 50 percent because those claims had been dismissed and could be revived only through a successful appeal of the earlier dismissal ruling.

The court certified the proposed class for settlement purposes. It found that the requirements concerning the number of class members, common questions, typical claims, and adequate representation were met. It also found that common issues predominated and that a class action was the superior method for resolving the dispute in the settlement context.

Fairness Analysis

The court applied Federal Rule of Civil Procedure 23, which requires a class settlement to be fair, reasonable, and adequate. It also considered the factors commonly used to assess settlement fairness, including the complexity and expected duration of the litigation, the risks of proving liability and damages, the reaction of class members, the risks of maintaining the class, and the settlement’s value compared with possible recovery through continued litigation.

The court found the settlement process procedurally fair because experienced counsel investigated the claims, exchanged information, engaged in motion practice, and negotiated at arm’s length with the assistance of a mediator. More than 12,000 notices were sent to potential class members. The court stated that no potential class member objected or opted out as of the fairness hearing.

The court also found the settlement substantively fair. It emphasized the risks of proving scienter, loss causation, liability, and damages; the possibility that expert testimony would be disputed; the risk that class certification could be contested; and the cost and delay of further litigation and a possible appeal. The $2.5 million settlement represented 5.22 percent of the class’s estimated maximum damages, which the court found within a reasonable range under the circumstances.

Fees, Costs, and Incentive Awards

The court granted the request for attorneys’ fees equal to one-third of the settlement fund, or $833,333.33. It found the request reasonable under both the percentage-of-the-fund method and a lodestar cross-check. Counsel reported spending 1,096.8 hours on the case, producing a lodestar of $814,237.50 and a multiplier of 1.02.

The court also granted $44,131.99 in litigation costs, supported by documentation for expenses including expert fees, notice costs, computerized research, copying, and travel. It granted an $8,000 incentive award to Matis Nayman and a $2,000 incentive award to Felipe de Castro Luna based on their reported work assisting with the litigation and settlement.

Disposition

The motion for final approval of the settlement, plan of allocation, and settlement-class certification was GRANTED. The motion for attorneys’ fees, reimbursement of litigation expenses, and incentive awards was also GRANTED. Judge Katharine H. Parker approved the settlement and related relief without deciding the ultimate merits of the alleged securities-law violations.