In Re Longfin Corp. Securities Class Action Litigation

Background

This securities class action arose from an alleged scheme involving Longfin Corp.’s initial public offering under Regulation A+. The opinion states that Longfin issued 409,360 shares as part of a sham transaction to obtain a Nasdaq listing. After obtaining the listing, the defendants allegedly made false and misleading statements about Longfin from December 2017 through March 2018, causing the company’s share price to rise as high as $142.82. Longfin insiders and affiliates sold shares during that period and profited.

The class action complaint asserted claims under Sections 12(a) and 15(a) of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, including Rule 10b-5. The opinion states that the lead plaintiff ultimately sought damages under Section 10(b), not Section 20(a).

Procedural History

Defaults were entered against Longfin on January 4, 2019; against Venkata Meenavalli and Vivek Ratakonda on April 4, 2019; and against Suresh Tammineedi on June 12, 2019. Network 1 Financial Securities, Inc. was dismissed from the action, and Dorababu Penumarthi and Andy Altahawi were later dismissed without prejudice. The class was certified on May 14, 2020.

On January 3, 2020, the lead plaintiff moved for default judgment against the four defaulting defendants. The defendants did not oppose the motion. The court also directed the lead plaintiff to explain why the requested class damages exceeded the investor-harm figure reported in related government enforcement proceedings. The lead plaintiff responded that the government had calculated unlawful gains for disgorgement, while the class sought investors’ out-of-pocket losses.

Default Judgment and Damages

A default judgment is a judgment entered when a defendant fails to defend. The court explained that entering a default generally treats the complaint’s factual allegations—other than the amount of damages—as admitted. The court must still determine whether those facts establish a legal basis for liability. The court concluded that the allegations in the second amended complaint established liability against the four defaulting defendants.

Damages are not automatically accepted merely because a defendant defaulted. Instead, the court must determine the proper damages rule and decide whether the plaintiff’s evidence supports the amount with reasonable certainty. The court found that the lead plaintiff’s declarations, exhibits, and expert report provided a sufficient basis to calculate damages, so no evidentiary hearing was required.

The court applied the traditional out-of-pocket measure for Section 10(b) damages: the difference between what investors paid and the value they would have received absent the fraud. The expert calculated that Longfin’s stock was artificially inflated by between 55% and 89% during the class period. The court accepted the resulting damages calculation and awarded the class $223,037,680. It explained that the government’s $27 million estimate measured investor harm differently because it sought disgorgement rather than the class’s out-of-pocket damages.

Interest and Disposition

The lead plaintiff requested prejudgment interest beginning December 13, 2017. The court instead awarded prejudgment interest beginning April 6, 2018, because the class included investors who purchased stock through April 6 and the plaintiff had not explained why interest should begin before that date. The court awarded prejudgment interest at the rate set by 28 U.S.C. § 1961 through entry of judgment, and post-judgment interest at the same statutory rate until the judgment is satisfied.

Judge Denise Cote granted the January 3, 2020 motion for default judgment. Judgment was entered in favor of the class and against Longfin Corp., Suresh Tammineedi, Venkata Meenavalli, and Vivek Ratakonda, jointly and severally, for $223,037,680, plus the specified prejudgment and post-judgment interest.