Aquino v. Alexander Capital LP

Background

This civil fraud case concerns Inpellis’s failed 2015 initial public offering. The bankruptcy trustee assigned the claims to Convergent Distributors of Texas, which asserted breach-of-contract, fraud, and fraudulent-inducement claims against Alexander Capital, LP, and the other defendants. The court had previously granted and denied portions of both sides’ summary-judgment motions, leaving claims for trial.

The prior summary-judgment ruling held that the failure of Inpellis’s offering and its later business failure were caused by the Securities and Exchange Commission’s stop order, investigation, and settlement—not by the defendants’ alleged conduct. The court had also held that Inpellis could not have been fraudulently induced to enter the Second Engagement Agreement because it already knew that Alexander Capital could not conduct a firm-commitment offering at that time. At the same time, the court had found that the First Engagement Agreement was materially misleading as a matter of law because it implied that Alexander Capital could conduct that type of offering, while leaving a factual dispute about whether the defendants acted with intent to defraud.

Motion for reconsideration

The court denied Convergent’s motion for reconsideration in its entirety. It rejected Convergent’s request to pursue up to $75 million in “lost business” damages because Convergent identified no overlooked controlling authority or evidence, had not made its proximate-causation argument during summary-judgment briefing, and failed on the merits. The court reaffirmed that the SEC’s actions and settlement, rather than Alexander Capital’s alleged fraud or breach, proximately caused the offering’s failure and Inpellis’s subsequent losses.

The court also declined to reconsider its conclusions about the disclosures in Inpellis’s offering statement. It held that Convergent was bound by its prior admission that Inpellis made the relevant omissions in reliance on its counsel, not Alexander Capital. The court further held that the record did not create a triable issue showing that Alexander Capital caused the offering’s failure.

The court rejected reconsideration of the ruling concerning the Second Engagement Agreement. The court had found that Inpellis knew Alexander Capital could not conduct a firm-commitment offering when that agreement was signed, so Inpellis could not have relied on contract language suggesting otherwise. The court also clarified that its earlier refusal to grant summary judgment for Convergent on scienter—the requirement of fraudulent intent—was not a finding for the defendants. A factual dispute remained, and Convergent could try to prove fraudulent intent at trial.

Motion for an adverse-inference instruction

The defendants sought an adverse-inference instruction based on the failure to preserve Inpellis’s computer server and its electronic records. An adverse-inference instruction permits a factfinder to draw a negative conclusion from lost or destroyed evidence. The court found that the trustee failed to take reasonable steps to preserve apparently irreplaceable electronic information and that the loss likely prejudiced the defendants.

The court nevertheless denied the request for an adverse-inference instruction. Under Federal Rule of Civil Procedure 37(e)(2), such an instruction requires a finding that the party acted with the intent to deprive another party of information for use in the litigation. The court found that the trustee’s conduct was negligent and possibly grossly negligent, but the record did not support a finding of intentional deprivation. The denial was without prejudice to the defendants seeking other appropriate relief under Rule 37(e)(1), including measures concerning particular evidence, arguments about the missing information, or other trial-related instructions. The court also declined at that time to decide whether to exclude the plaintiff’s expert analysis or award related fees and costs.

Motion to strike the jury demand

The defendants moved to strike Convergent’s jury demand based on a provision in a 2016 settlement agreement between Inpellis and Alexander Capital. That provision broadly stated that the parties knowingly, intentionally, and irrevocably waived jury trial in any action, suit, or proceeding brought by one party against another.

The court enforced the waiver and granted the motion to strike the jury demand. It rejected Convergent’s argument that another settlement provision restored the right to a jury if the settlement was not fully performed. The court also rejected the argument that the waiver applied only to disputes about reimbursement of expenses. It concluded that the waiver broadly covered the claims in this case, which arose from the same facts, and that the agreement was not an adhesion contract because the parties were sophisticated and represented business parties.

Disposition

The court denied Convergent’s motion for reconsideration in its entirety; denied the defendants’ motion for an adverse-inference instruction, without prejudice to seeking other appropriate spoliation relief in pretrial motions or at trial; and granted the defendants’ motion to strike the jury demand. The scheduled trial will proceed as a bench trial.