In Re Longfin Corp. Securities Class Action Litigation

Background

This securities class action was brought on behalf of investors who purchased Longfin Corp. stock. The defendants included Longfin, Andy Altahawi, other Longfin executives and insiders, and Network 1 Financial Securities, Inc. Network 1 was Longfin’s underwriter for the stock offering involved in the case.

The plaintiffs’ claims against Network 1 included a claim under Section 12(a)(1) of the Securities Act of 1933 and a fraud claim under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. In an April 11, 2019 order, the court granted Network 1’s motion to dismiss the Section 12(a)(1) claim but denied its motion to dismiss the Section 10(b) and Rule 10b-5 claim. The court later reconsidered that ruling. In its July 29, 2019 opinion, the court dismissed Network 1 from the litigation because the plaintiffs had not adequately pleaded scienter—meaning facts showing that Network 1 knew of, or recklessly disregarded, the alleged misconduct.

Plaintiffs’ Motions

On September 13, 2019, the lead plaintiffs moved under Rule 60(b)(2) of the Federal Rules of Civil Procedure for relief from the July 29 opinion based on allegedly newly discovered evidence. They also sought permission under Rule 16(b) to file a Third Amended Complaint.

The plaintiffs identified several categories of evidence, including:

- monthly statements for three Longfin bank accounts; - Longfin’s general ledger; - the control log maintained by Longfin’s stock-transfer agent; - statements for a Longfin escrow account at Key Bank; and - wire-transfer records involving another Longfin escrow account.

The plaintiffs argued that this evidence showed Network 1 knew that Longfin insiders had received shares for no payment and that those shares had been improperly counted as publicly held shares for Nasdaq listing purposes.

Rule 60(b)(2) Analysis

The court described Rule 60(b)(2) relief as requiring proof that the evidence existed during the earlier proceeding, could not have been discovered despite reasonable diligence, was admissible and important enough probably to change the result, and was not merely cumulative or intended only to attack credibility. The court also noted that relief under Rule 60(b) is generally disfavored and is granted only in exceptional circumstances.

The court held that the plaintiffs did not satisfy this standard. Much of the evidence was not newly discovered. The court further held that none of the evidence was important enough to probably change Network 1’s dismissal and that the evidence was cumulative of the evidence previously presented in the Second Amended Complaint.

The court focused on three categories of evidence that potentially concerned Network 1: the control log, the bank-account statements, and the Key Bank escrow-account statements. As to the control log, the plaintiffs acknowledged that they already had access to the relevant entries as of December 7, 2017. The court held that identifying the previously cited list of stockholders as the control log did not cure the earlier failure to allege particular facts showing that Network 1 knew those individuals were Longfin insiders.

As to the bank and escrow records, the court noted that the plaintiffs had already alleged that certain accounts did not show payments and that Network 1 had received bank statements as payment confirmation. The plaintiffs still did not connect the newly cited accounts to the statements Network 1 received. The court therefore held that the records did not support an inference that Network 1 knew that no payment had been made for the shares.

The court also rejected the plaintiffs’ reliance on other proposed allegations, including allegations based on the underwriting agreements, because Rule 60(b)(2) required the new evidence itself—not evidence already available to the plaintiffs—to be important enough probably to change the outcome.

Request to Amend

The court separately denied leave to file the proposed Third Amended Complaint. The plaintiffs argued that the court should have allowed them to amend after Network 1 was dismissed. The court found that the plaintiffs had already received several opportunities and extensions to amend, including a later opportunity to add allegations from a Securities and Exchange Commission complaint. The court stated that the plaintiffs’ proposed new allegations went beyond the limited amendment allowed at that time and that this was the first time during the lengthy litigation that they had made this broader request.

The court also noted that Network 1 had not requested that the dismissal be without prejudice and had not submitted a proposed amended complaint addressing the deficiencies identified in its motions. The court concluded that the plaintiffs were not entitled to the requested further amendment.

Disposition

Judge Denise Cote denied the plaintiffs’ September 13, 2019 motion for relief from the July 29 opinion. The court also denied the plaintiffs’ request for leave to amend their complaint. This order was procedural: it addressed whether the plaintiffs could obtain relief from the earlier dismissal and file another complaint, rather than deciding the underlying securities-fraud claim on the merits.