Cottam v. Global Emerging Capital Group, LLC

Background

The opinion contains the court’s findings of fact and conclusions of law after a one-day bench trial held by videoconference on March 8, 2021. The trial concerned damages on John Cottam’s breach-of-contract claim and the defendants’ affirmative defense of waiver.

Cottam invested $870,000 under a subscription agreement for shares in 6D Acquisitions. The agreement provided that those shares would be converted on a one-for-one basis into shares of 6D Global Technologies. Based on the agreement, Cottam purchased 2,900,000 shares. After two reverse stock splits, however, he received 420,290 shares, or 6.9 times fewer than the number he purchased.

Before trial, the court had granted Cottam summary judgment on liability for the breach-of-contract claim but denied summary judgment on damages. The court had also denied summary judgment on waiver because a factual dispute remained about whether Cottam voluntarily and intentionally gave up his right to additional shares or damages. The securities-fraud claim and all claims against Tejune Kang had previously been resolved in the defendants’ favor. At trial, Cottam represented himself and testified on his own behalf. The defendants presented Paul Hinton as an expert witness.

Motion to Exclude Cottam’s Testimony

The defendants moved to strike Cottam’s testimony, arguing that he was offering expert testimony without the necessary qualifications. The court denied the motion. Because this was a bench trial, the court stated that it could admit testimony and assign it whatever weight was appropriate. The court found that Cottam’s testimony about share prices, trading volumes, and the basic mathematics of dilution was helpful and did not require specialized economic or financial knowledge.

Damages Analysis

Under New York law, the usual measure of damages for the failure to deliver stock is the stock’s market value when the breach occurred, adjusted for relevant factors such as restrictions on selling the stock, market liquidity, and the company’s financial condition. A plaintiff must first establish the fact of damages and then provide a stable foundation for a reasonable estimate of the amount.

The court found that Cottam established the fact of damages because he did not receive 2,479,710 shares to which he was entitled. But the court found that he did not establish a reliable estimate of their value. Cottam reasoned that the additional shares should have reduced the stock price by 17%, producing a requested award of $19,621,000. The court found that this approach addressed dilution but did not reasonably measure the effects of the six-month restriction on selling the shares, the stock’s thin trading and resulting illiquidity, or 6D Global Technologies’ financial condition and instability.

The court rejected Cottam’s position that these factors should be ignored because their effects were impossible or highly speculative to calculate. The court stated that the record did not provide a sufficiently stable basis for determining the market value of the missing shares on September 29, 2014, the date of the breach. The court also stated that expert testimony was not automatically required, but that the combined factors in this case may have made expert testimony the practical way to establish a reliable damages calculation. Cottam had not retained an expert or otherwise provided a reasonable method for quantifying those factors.

Disposition

The court denied Cottam’s request for $19,621,000 in damages and awarded him $1 in nominal damages. Nominal damages are a small amount awarded when a legal violation or breach is established but the amount of actual loss cannot be proven with sufficient certainty. Because the court declined to award the requested damages, it did not address the defendants’ waiver defense. The Clerk was directed to enter judgment for Cottam for $1 and close the case.