Opinion
19-CV-3782 (GBD) (RWL)
08-04-2023
MICROBOT MEDICAL, INC., Plaintiff, v. JOSEPH MONA, Defendant.
REPORT AND RECOMMENDATION
TO HON. GEORGE B. DANIELS: MOTION FOR SUMMARY JUDGMENT ON DEFENDANT'S COUNTERCLAIM
ROBERT W. LEHRBURGER, UNITED STATES MAGISTRATE JUDGE.
This action began when Plaintiff Microbot Medical, Inc. (“Microbot”) sued Defendant Joseph Mona (“Mona”) under § 16(b) of the Securities Exchange Act of 1934 (the “Act”), 15 U.S.C. § 78j(b), alleging that Mona was required to disgorge profits from his purchase and sale of securities during a period of months when he became a beneficial owner of more than 10% of Microbot securities. Mona counterclaimed, alleging that Microbot violated § 10(b) of the Act, 15 U.S.C.§78j(b), and Rule 10b-5, promulgated thereunder and codified at 17 C.F.R. § 240.10b-5, by making twelve material misstatements or omissions on which Mona relied to purchase Microbot stock.
The Court granted Microbot's Motion for Judgment on the Pleadings on its § 16(b) claim, awarding Microbot $484,614.30. The Court also granted Microbot's Motion to Dismiss Mona's counterclaim but granted Mona leave to replead with respect to three statements made by investor-relations consultants retained by Microbot. In repleading, Mona would have to show that he relied on the statements and that the statements were misrepresentations that caused his loss.
Mona filed an Amended Counterclaim attempting to cure the pleading deficiencies with respect to the three statements, and the parties continued with discovery. Following the end of discovery, Microbot moved for summary judgment dismissing Mona's counterclaims. That motion is now fully briefed and ripe for decision. For the reasons that follow, I recommend granting Microbot's motion.
This background is based on Microbot's Rule 56.1 Statement (“Pl. 56.1,” Dkt. 211), Mona's Rule 56.1 Statement (“Def. 56.1,” Dkt. 218), Mona's reply to Microbot's Rule 56.1 Statement (“Def. Reply 56.1,” Dkt. 219), the affirmation of Microbot's attorney Miriam Tauber (“Tauber Aff.,” Dkt. 212), the declaration of Mona's attorney Adam C. Ford (“Ford Decl.,” Dkt. 217), all exhibits attached thereto, and prior proceedings in this action. References are also made to Mona's Amended Counterclaim (“Am. CC,” Dkt. 128). Pursuant to the standard for summary judgment, the Court resolves all ambiguities and draws all reasonable inferences in favor of Mona as the nonmoving party.
A. The Factual Record
Before setting forth the relevant facts, the Court addresses the parties' submissions pursuant to Local Rule 56.1, which requires parties to file statements of material fact that they contend are disputed or undisputed.
To a large extent, Mona does not dispute the facts set forth in Microbot's Rule 56.1 Statement. Mona does dispute some of Microbot's characterizations of the record, contending that the documents quoted or referenced speak for themselves. (E.g., Def. Reply 56.1 at ¶¶ 15, 17-19, 24, 27, 29, 34, 36-37, 52-53, 58-61, 63, 76.) In other instances, Mona does not dispute the asserted fact but instead disputes its “materiality” or “inferences” that may be drawn from it. (E.g., id. at ¶¶ 10, 21-22, 25, 32, 35, 37, 4142, 44-50, 62, 64, 66.) In no instance, however, does Mona cite to the record, except implicitly when he states that a particular document referenced by Microbot speaks for itself. Other than the latter, such unsupported responses are insufficient to create a disputed fact. See, e.g., Industrial Quick Search, Inc. v. Miller, Rosado & Algois, LLP, No. 13-CV-5589, 2018 WL 264111, at *2 n.4 (S.D.N.Y. Jan. 2, 2018) (“the Court will not consider disputed statements in Defendants' 56.1 Statement to which Plaintiffs objected or denied but failed to provide a specific citation to admissible evidence as required by Local Rule 56.1(d)”) (citing Feis v. United States, 394 F. App'x. 797, 799-800 (2d Cir. 2010)); U.S Information Systems, Inc. v. International Brotherhood of Electrical Workers, No. 00-CV-4763, 2006 WL 2136249, at *3 (S.D.N.Y. Aug. 1, 2006) (“A non-moving party cannot create a factual dispute merely by denying a movant party's factual statement; rather, the non-moving party must identify controverting evidence for the court”). While the Court appropriately could entirely disregard Mona's unsupported denials for that reason alone, the Court does not do so. Based on the Court's review of the record, the outcome is the same either way.
In addition to responding to Microbot's asserted statements of fact as to which there is no dispute, Mona submitted a Statement Of Additional Material Facts. (Dkt. 218.) Microbot moves to strike that document in its entirety, both because it “consists entirely of quotations from documents that are not in dispute or else describes (and mischaracterizes) facts that are not in evidence or at issue in this case, and which are entirely extraneous to Microbot's motion.” (Dkt. 226 at 4.)
“A party seeking to strike a Rule 56.1 statement bears a heavy burden, as courts generally disfavor motions to strike.” Christians of California, Inc. v. Clive Christian New York, LLP, No. 13-CV-275, 2014 WL 3407108, at *2 (S.D.N.Y. July 7, 2014) (internal quotation marks omitted). “Courts use a scalpel, not a butcher knife in resolving such motions.” Trustees of Local 8A-28A Welfare Fund v. American Group Administrators, No. 14-CV-1088, 2017 WL 3700899, at *1 (E.D.N.Y. Aug. 25, 2017) (internal quotation marks omitted). Nevertheless, courts have granted motions to strike portions of Rule 56.1 Statements that are irrelevant. See, e.g., Faulkner v. Arista Records LLC, 797 F.Supp.2d 299, 306-07 (S.D.N.Y. 2011) (striking portions of defendant's Rule 56.1 Statement that “are not relevant to the analysis ... [to] [a] motion[] for summary judgment”). In this instance, the Court declines to strike Mona's Statement Of Additional Material Facts but will disregard his immaterial factual assertions that have nothing to do with the statements at issue on Microbot's motion for summary judgment. Specifically, the Court will disregard Mona's assertions relating to the Sabby lawsuit and the Alpha transaction. (See Def. 56.1 ¶¶ 4-20, 26-27.)
B. Factual Background
Microbot creates and commercializes micro-robotic medical technologies. (Tauber Aff., Ex. 10 at MBOT0215-23.) A key component of its business plan is the Self Cleaning Shunt (“SCS”) for the treatment of hydrocephalus. (Id. at MBOT0201-02, MBOT0207, MBOT0223.) On May 31, 2017, Microbot announced that it had received a patent on the SCS prototype. (Ford Decl., Ex. F.) That same month, Microbot entered into agreements with Integra Consulting LLC (“Integra”) for Integra “to consult with [Microbot] regarding communications and public relations with existing shareholders, broker dealers and other investment professionals, as to [Microbot's] current and proposed activities.” (Tauber Aff., Ex. 7 at MBOT0001.) Both Jeremy Roe (“Roe”) and Tony Altavilla (“Altavilla”) worked for Integra and consulted for Microbot. (Def. Reply 56.1 ¶ 12.)
Hydrocephalus is the buildup of fluid in the cavities deep within the brain. See Hydrocephalus, MAYO CLINIC, https://www.mayoclinic.org/diseases-conditions/hydrocephalus/symptoms-causes/syc-20373604 (last visited July 25, 2023).
Mona held a brokerage account through Alliance Investment Management, Ltd. (“Alliance”). (Tauber Aff., Ex. 3.) He authorized his son, Marcus Mona, to trade securities from the account on his behalf. (Joseph Mona Deposition Transcript (“Joseph Dep.”), Tauber Aff., Ex. 4 at 11; Marcus Mona Deposition Transcript (“Marcus Dep.”), Tauber Aff., Ex. 5 at 17, 38, 43, 124.) Mona established the account in Jamaica to circumvent the Financial Industry Regulatory Authority's (“FINRA”) Pattern Day Trading (“PDT”) rule.(Marcus Dep. at 16.) The PDT rule “requires a broker to identify, from observation of activity, a pattern day trader and impose on that person more stringent margin rules than the rules applying to those not so designated. It is designed, in the words of FINRA, to protect U.S. traders from losses that can occur when trading on margin. It can be avoided by becoming a non-U.S. trader.” (Def. Reply 56.1 ¶ 45.) The rule would have applied to Mona, who is a day trader (Id. ¶ 74; see generally Mona's trading records (“Trading Records”), Tauber Aff., Ex. 1), if he had established the account in the U.S. instead of in Jamaica.
Although the Defendant is Joseph Mona, Marcus's father, when asked about the case in deposition, Joseph generally was unaware of any facts of this case and even that judgment had been entered against him. (See Joseph Dep. at 10-11, 13-16, 18-19, 2425.) The primary actor was Marcus, who opened the account and engaged in all the trades for the account. As used herein, Mona refers to both Joseph and Marcus Mona, except where distinguishing between them is relevant.
According to FINRA, “[d]ay trading refers to a trading strategy where an individual buys and sells (or sells and buys) the same security in a margin account on the same day in an attempt to profit from small movements in the price of the security. ... [Y]ou're considered a pattern day trader if you execute four or more ‘day trades' within five business days - provided that the number of day trades represents more than 6 percent of your total trades in the margin account for that same five business day period.” See Day Trading, FINRA, https://www.finra.org/investors/investing/investment-products/stocks/day-trading (emphasis omitted) (last visited July 25, 2023).
Mona first traded Microbot stock on December 16, 2016, when he purchased and sold 3,000 shares. (Trading Records at row 2.) However, he only started actively trading the shares on or about May 31, 2017 at $3.67 per share, the day Microbot announced the SCS patent. (Id. at row 6.) He then proceeded to buy and sell thousands of Microbot shares at a time, executing numerous trades buying and selling thousands or tens of thousands of shares in any given day. Mona even executed multiple trades within a period of minutes or even seconds. (See generally Trading Records.)
In early August 2017, Marcus was concerned about Microbot's low stock price and that a major investor was “unloading shares at a brisk pace.” (Ford Decl., Ex. N at ECF 3.) On August 7, 2017, when Microbot shares were trading at about $1.15 per share (Trading Records at rows 220-21), Mona reached out to and spoke privately by phone with Roe. During their conversation, among other statements, Roe said that “the shares are going to get to $10.” (Def. Reply 56.1 ¶ 14; Marcus Dep. at 70-71, 76.) Roe also made other statements - that Microbot stock was “lightning in a bottle” and that Roe had just purchased 10,000 shares in Microbot - that Mona alleged to be false, but which the Court dismissed as non-actionable. (See Dkt. 59 ¶ 66; Dkt. 104 at 5, 26, 46-47.) During the ensuing week, August 7 to 14, 2017, Mona bought 130,729 additional shares in the company. (Trading Records at rows 220-39.)
Even before August 7, 2017, and prior to any of the alleged misrepresentations made by Microbot's consultants, Mona had already accumulated 395,589 shares of Microbot. (Id. at row 219.) Consistent with Mona's day-trading strategy, he executed more than 200 buy and sell transactions during that period. (Id. at rows 2-219.) On August 2, 2017, the last day he engaged in trading activity prior to August 7, 2017, Mona executed six trades, all of them purchases, totaling 29,589 shares. (Id. at rows 214-19.)
On August 14, 2017, Mona listened in on an investor conference call during which Microbot's Chief Executive Officer, Harel Gadot (“Gadot”), made several statements that Mona claimed in his initial counterclaim were false and on which he relied in purchasing Microbot stock. Those statements included: representations that Microbot had sufficient capital to fund operations for the following 24-30 months; that Microbot was five years ahead of its competition; and that Microbot shares were “extremely cheap.” (Dkt. 59 ¶¶ 54-55, 59, 62.) As with some of Roe's statements, Mona's claims based on Gadot's statements were dismissed as non-actionable.
On August 15, 2017, Mona started to sell and buy hundreds of thousands of Microbot shares until his next conversation with one of the Integra consultants (id. rows 240-411), which took place on October 2, 2017. (Def. Reply 56.1 ¶ 14; Marcus Dep. at 81.) In that call, Mona spoke with Altavilla, who told Mona that Gadot was “out in Minneapolis on business, meeting with two Fortune 500 companies.” (Def. Reply 56.1 ¶ 14; Marcus Dep. at 81.) Prior to his call with Altavilla, Mona had been on a buying streak from September 26 to 27, 2017, executing 44 transactions, 43 of them purchases, purchasing a net total of 328,171 shares. (Trading Records at rows 367-410.) In the three days of trading immediately preceding his call with Altavilla, i.e., from October 3 to 5, 2017, Mona engaged in 59 transactions, 57 of them sales, selling a net 323,000 shares. (Id. at rows 412-69.) Before his second call with Altavilla eight days later, Mona reduced his Microbot holdings from 973,000 shares to 674,500 shares. (Id. at rows 411-98.)
The next call with Altavilla took place on October 10, 2017, when Altavilla told Mona that he expected Microbot “to sign an SCS partnership any day.” (Def. Reply 56.1 ¶ 14; Marcus Dep. at 81.) Later that day, Mona purchased 409 Microbot shares at $1.30 per share. (Trading Records at row 499.) But Mona's next trade was not until October 27, 2017, when he purchased 30,000 shares of Microbot in four transactions at prices progressing from $1.13 to $1.11 to $1.10 per share. (Id. at rows 500-03.) During the next several months, Mona bought and sold Microbot stock in more than 150 transactions and increased his holdings from 705,359 shares to 1,642,009 shares as of March 29, 2018. (Id. at rows 504-662.) By that time, Microbot was trading at $0.67 per share. (Id. at row 662.)
Microbot's 56.1 Statement initially refers to only one call with Altavilla at which both statements at issue were made. (Pl. 56.1 ¶¶ 12, 14). Elsewhere, both Microbot and Mona refer to two calls with Altavilla (Pl. 56.1 ¶ 63; Def. 56.1 ¶ 46), as did Mona at his deposition (Marcus Dep. at 81). The composite of Mona's trading records submitted by Microbot on summary judgment identifies two separate calls, one on October 2, 2017, and the other on October 10, 2017. (Trading Records at rows 411, 499.) The Court therefore deems it undisputed for purposes of this motion that there were two calls between Mona and Altavilla.
On April 2, 2018, Microbot filed its 2017 10-K, which, according to Mona, “compel[led] the conclusion” that there was no meeting between Gadot and two Fortune 500 companies and no imminent SCS partnership. (Def. Reply 56.1 ¶ 68.) Gadot was in fact in Minneapolis on October 24, 2017, but not meeting with Fortune 500 companies. (Tauber Aff., Ex. 9 at MBOT0019-21; Marcus Dep. at 85.) Despite the April 2, 2017 disclosure, Mona continued, again through a mix of buy and sell transactions, to increase his Microbot holdings from 1,672,009 shares on April 3, 2018 to 2,390,000 shares on August 9, 2018. (Trading Records at rows 663-746.) In that period, the price of Microbot stock steadily rose from $0.64 per share to a high of $1.01 per share (with some downturns in between) and back down to $0.64 per share. (Id. at rows 663, 711, 746.)
“A 10-K is a comprehensive report filed annually by a publicly-traded company about its financial performance and is required by the U.S. Securities and Exchange Commission (SEC). ... Some of the information a company is required to document in the 10-K includes its history, organizational structure, financial statements, earnings per share, subsidiaries, executive compensation, and any other relevant data. . The SEC requires this report to keep investors aware of a company's financial condition and to allow them to have enough information before they buy or sell shares in the corporation, or before investing in the firm's corporate bonds.” Will Kenton, 10-K: Definition, What's Included, Instructions, and Where to Find it, INVESTOPEDIA, https://www.investopedia.com/terms/1/10-k.asp (last visited July 29, 2023).
On September 5, 2018, Microbot enacted a reverse stock split, diluting each shareholder's holdings by a factor of 15. (Id. at row 747; Marcus Dep. at 74-78, 93, 10607, 122.) After the split, Mona thus owned 159,333 Microbot shares, representing 5.47% of the company's outstanding stock. (Trading Records at row 747.)
“A reverse stock split is a type of corporate action that consolidates the number of existing shares of stock into fewer (higher-priced) shares. A reverse stock split divides the existing total quantity of shares by a number such as five or ten, which would then be called a 1-for-5 or 1-for-10 reverse split, respectively.” Akhilesh Ganti, Reverse Stock Split: What It Is, How It Works, Examples, INVESTOPEDIA, https://www.investopedia.com/terms/r/reversesplit.asp (last visited July 29, 2023).
Between the date of the stock split on September 5, 2018 and January 14, 2019, Mona executed another 181 buy and sell transactions, increasing his shares to 370,000. (Id. at rows 747-928.) By on or about November 14, 2018, Mona crossed the 10% beneficial ownership threshold subjecting him to § 16(b)'s provisions. (Def. Reply to 56.1 ¶¶ 4, 75, 77; see also Trading Records at rows 875-78.)
Mona ultimately obtained ownership of over 12% of Microbot shares as of January 9, 2019. (Trading Records at rows 923-24.)
On November 8, 2018, Microbot filed its S-1 disclosure, followed by an amendment on November 26, 2018. (Id. at rows 852, 915; Marcus Dep. 100-03.) As explained by Mona, Mirobot's S-1 disclosed that “they were going to dilute shareholders to the tune of ... 6 million additional shares”; that was “the straw that broke the camel's back”; and he “los[t] faith in the company.” (Marcus Dep. at 100-03.) Over three days, from January 14 to 16, 2019, Mona made more than 340 trades, most of them sales, and reduced his Microbot holdings to zero. (Trading Records at rows 929-1270.) During approximately the first 250 of those trades, Mona was able to sell Microbot stock starting at a price of $3.02, rising to a high of $19.14, and ending with a sale price of $10.83. (Id. at rows 929, 1187, 1270.)
An S-1 is “the initial registration form for new securities required by the SEC for public companies that are based in the U.S. Any security that meets the criteria must have an S-1 filing before shares can be listed on a national exchange, such as the New York Stock Exchange. Companies usually file SEC Form S-1 in anticipation of their initial public offering (IPO). Form S-1 requires companies to provide information on the planned use of capital proceeds, detail the current business model and competition and provide a brief prospectus of the planned security itself, offering price methodology and any dilution that will occur to other listed securities.” Will Kenton, SEC Form S-1: What It Is, How to File It or Amend It, INVESTOPEDIA, https://www.investopedia.com/termssec-form-s-1.asp (last visited July 28, 2023).
Mona made eight relatively small buy and sell transactions between January 23, 2019 and February 19, 2019, again netting out at zero. (Id. at rows 1271-78.) Mona exited Microbot stock entirely on February 19, 2019, with a net loss of approximately $150,000. (Def. Reply 56.1 ¶ 56; Marcus Dep. at 109-10.) Between December 16, 2016, when Mona purchased his first shares of Microbot, to his final sale on February 19, 2019, Mona executed approximately 1,278 trades of Microbot stock. (Trading Records at row 1278.)
C. Procedural Background
On April 28, 2019, Microbot filed its Complaint against Alliance under § 16(b) of the Act, alleging that, from approximately November 16, 2018 to approximately January 14, 2019, Alliance was a 10% beneficial owner of Microbot securities and profited from purchases and sales of those securities within a period of less than six months in contravention of the Act and, therefore, Alliance had to return the profits realized from these short-swing trades. (See Dkt. 1.)
On June 5, 2019, before Alliance responded to Microbot's Complaint, Microbot filed its First Amended Complaint (“FAC”) (Dkt. 13), which reasserted its § 16(b) claim but added a claim for injunctive relief under § 13(d) of the Act, seeking to compel Alliance to disclose its Microbot beneficial ownership and trading history in further detail. Alliance's Answer to the FAC (Dkt. 21), filed on August 16, 2019, indicated that an unidentified client of Alliance was the true “beneficial owner” of the shares reported by Alliance. Discovery revealed that client to be Joseph Mona. (Pl. 56.1 ¶¶ 3, 35.)
Section 13(d) of the Act requires a person or group of persons acquiring beneficial ownership of more than 5% of a voting class of a company's equity securities registered under § 12 of the Act to file a Schedule 13D with the SEC reporting the acquisition and other information (such as the filer's identity, funding, and purposes) within ten days after the purchase. See Schedules 13D and 13G, SEC, https://www.investor.gov/introduction-investing/investing-basics/glossary/schedules-13d-and-13g (last visited Dec. 18, 2020).
Alliance then filed a motion for summary judgment dismissing Microbot's § 16(b) claim against it. (Dkt. 38.) Microbot submitted a Second Amended Complaint on November 18, 2019 against both Alliance and Joseph Mona, dropping its § 13(d) claim but alleging that one or both of the Defendants engaged in short-swing trading while a statutory insider of the company. (Dkt. 44.) On December 3, 2019, Alliance renewed its Motion for Summary Judgment. (Dkt. 45.)
On February 4, 2020, Mona filed his Answer and Counterclaim, asserting the affirmative defenses of “unclean hands” and “windfall,” as well as a § 10(b) and Rule 10b-5 counterclaim against Microbot. (Dkt. 59.) The counterclaim alleged that Mona was “fraudulently induced” to acquire his more-than 10% ownership position in Microbot due to material misstatements by Microbot representatives and then “forced” to sell his shares “to avoid significant financial harm.” (Id. ¶ 10.) Specifically, he alleged that material misstatements were made (1) in Microbot's filings with the U.S. Securities and Exchange Commission (“SEC”), (2) during investor conference calls with Gadot, and (3) during calls with Roe and Altavilla. (Id. at 1.) On March 6, 2020, Microbot filed a motion for judgment on the pleadings with respect to its § 16(b) claim against Mona, as well as a motion to dismiss Mona's counterclaim. (Dkt. 80.)
On August 18, 2020, I issued a Report and Recommendation addressing Alliance's motion for summary judgment (Dkt. 97), which Judge Daniels adopted on September 17, 2020 (Dkt. 98). The order granted Alliance's motion, which left Mona as the sole defendant in the case.
On December 18, 2020, I issued a second Report and Recommendation (Dkt. 104), which Judge Daniels adopted on March 30, 2021 (Dkt. 106). That order granted Microbot's motion for judgment on the pleadings on its § 16(b) claim. The Court also granted Microbot's motion to dismiss Mona's affirmative defenses and counterclaim. Regarding the counterclaim, the Court found that the allegedly material misstatements on which Mona relied were puffery, mere opinion, time-barred, not attributable to Microbot, or otherwise barred by the Public Securities Litigation Reform Act (“PSLRA”). (Dkt. 104 at 27.) Mona was granted leave to replead with respect to only three statements: Roe's statement of August 7, 2017 that Microbot stock was going to get to $10, and Altavilla's statements in October 2017 that Gadot was in Minneapolis meeting two Fortune 500 companies and that Altavilla expected Microbot to sign a partnership any day. (Id. at 4950.)
Judgment was entered against Mona in the amount of $484,614.30 on March 31, 2021. (Dkt. 107.) Execution on the judgment has been stayed pending resolution of the counterclaim. (Pl. 56.1 ¶ 28 (referencing Dkts. 134, 152).)
On May 7, 2021, Mona submitted a Proposed Amended Counterclaim. (Dkt. 115.) At a conference held on June 16, 2021, the Court noted that the Proposed Amended Counterclaim did not “isolate the three statements as being actionable unto themselves and not just as this mixture of unactionable and actionable statements.” (Dkt. 183 at 32.) Mona's counsel stated that they would revise the counterclaim accordingly. (Id.)
Mona filed his Amended Counterclaim on June 23, 2021. (“Am. CC,” Dkt. 128). On December 7, 2022, Microbot requested leave to file a motion for summary Judgment on Mona's counterclaim, stating that the motion would focus on the elements of reliance and loss causation. (Dkt. 201.) After receiving direction from the Court (Dkt. 202), Microbot filed the instant motion on February 21, 2023 (Dkt. 209). On April 11, 2023, Mona filed his opposing papers (Dkts. 216-219), and on May 2, 2023, Microbot filed its reply (Dkt. 226). The matter has been referred to me for a Report and Recommendation. (Dkt. 213.)
LEGAL STANDARDS
A. Summary Judgment
To obtain summary judgment under Federal Rule Of Civil Procedure 56, the movant must show that there is no genuine dispute of material fact. Fed.R.Civ.P. 56(a). The Court may grant summary judgment “only if no reasonable trier of fact could find in favor of the nonmoving party.” Sutera v. Schering Corp., 73 F.3d 13, 16 (2d Cir. 1995); accord Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2511 (1986).
The moving party bears the initial burden of identifying “the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553 (1986). The moving party may demonstrate the absence of a genuine issue of material fact “in either of two ways: (1) by submitting evidence that negates an essential element of the non-moving party's claim, or (2) by demonstrating that the non-moving party's evidence is insufficient to establish an essential element of the non-moving party's claim.” Nick's Garage, Inc. v. Progressive Casualty Insurance Co., 875 F.3d 107, 114 (2d Cir. 2017) (quoting Farid v. Smith, 850 F.2d 917, 924 (2d Cir. 1988)).
The opposing party must then come forward with specific evidence establishing the existence of a genuine dispute. Anderson, 477 U.S. at 248, 106 S.Ct. at 2510; Geyer v. Choinski, 262 Fed.Appx. 318, 318 (2d Cir. 2008) (summary order). Where the nonmoving party “fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial,” summary judgment must be granted. Celotex, 477 U.S. at 322, 106 S.Ct. at 2552; accord El-Nahal v. Yassky, 835 F.3d 248, 252 (2d Cir. 2016).
In assessing the record to determine whether there is a genuine issue of material fact, a court must resolve all ambiguities and draw all factual inferences in favor of the nonmoving party. Anderson, 477 U.S. at 255, 106 S.Ct. at 2513 (“[t]he evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor”). The Court must “eschew credibility assessments.” Smith v. Barnesandnoble.com, LLC, 839 F.3d 163, 166 (2d Cir. 2016) (internal citation marks omitted). However, conclusory statements or mere allegations are not sufficient to defeat summary judgment. Anderson, 477 U.S. at 248, 106 S.Ct. at 2510. Summary judgment thus may be granted “where the nonmovant's evidence is conclusory, speculative, or not significantly probative.” Zeno v. Pine Plains Central School District, No. 07-CV-6508, 2009 WL 1403935, at *2 (S.D.N.Y. May 20, 2009) (citing Anderson, 477 U.S. at 249-50, 106 S.Ct. at 2510-11); see Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356 (1986) (finding that, if there is nothing more than a “metaphysical doubt as to the material facts,” summary judgment is proper).
B. Section 10(b) and Rule 10b-5
Section 10(b) of the Act makes it unlawful to “use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe.” 15 U.S.C. § 78j(b). The implementing regulation, Rule 10b-5, states in relevant part,
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange ... [t]o employ any device, scheme, or artifice to defraud, ... [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or ... [t]o engage in
any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.17 C.F.R. § 240.10b-5.
To sustain a claim under §10(b) and Rule 10b-5, a plaintiff must prove the following elements: “(1) a material misrepresentation (or omission); (2) scienter, i.e., a wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance ...; (5) economic loss; and (6) loss causation, i.e., a causal connection between the material misrepresentation and loss.” Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 34142, 125 S.Ct. 1627, 1631 (2005) (internal quotation marks, citations, and emphasis omitted); accord Carpenters Pension Trust Fund of St. Louis v. Barclays PLC, 750 F.3d 227, 232 (2d Cir. 2014). Microbot's Motion for Summary Judgment on Mona's counterclaim focuses on two of those elements: reliance and loss causation. (Dkt. 202.)
Mona devotes much of his opposition brief to addressing elements other than reliance and loss causation. Because Microbot's motion is not predicated on those other elements, the Court does not address them. It bears mentioning, however, that there appears to be an additional basis for granting summary judgment to Microbot with respect to Roe's statement. In previously dismissing Mona's claim concerning Roe's statement that “the shares were going to get to $10,” this Court determined that the claim was a forward-looking economic projection that could not be the basis for a claim unless Mona could prove that Roe knew, or reasonably believed, that the statement was false or misleading. (Dkt. 104 at 46-47.) The Amended Counterclaim makes only a conclusory allegation of Roe's knowledge without the particularity required by the PSLRA, 15 U.S.C. § 78u-4(b)(2). (See Am. CC ¶ 34 (alleging that "Roe's confident prediction that the share price would rally and increase by 1000 percent (from $1 to $10) was a falsehood made with knowledge that there were no facts or financial projections that could possibly support such a share trajectory"). In any event, the Court has not come across any evidence in the record indicating that Roe knew or reasonably believed his $10-statement to be false or misleading. Accordingly, the claim is subject to dismissal. See 15 U.S.C.§ 78u-5(c) (PSLRA safe-harbor provision); Slayton v. American Express Co., 604 F.3d 758, 766 (2d Cir. 2010). Because the parties have not briefed the issue for the instant motion, however, the Court does not base its recommendation on that ground.
DISCUSSION
Microbot argues that there is no genuine dispute that Mona did not rely on (1) Roe's statement from August 7, 2017 that “the shares are going to get to $10,” (2) Altavilla's statement from October 2, 2017 that Gadot was “in Minneapolis, meeting two Fortune 500 companies,” and (3) Altavilla's statement from October 10, 2017 that Microbot was “expected to sign an SCS partnership any day.” Microbot further argues that Mona cannot establish loss causation for any of the statements. As discussed below, the Court finds that there is a genuine dispute of material fact as to whether Mona relied on Roe's statement and Altavilla's second statement; that Microbot has indisputably established that Mona did not rely on Altavilla's first statement; and that, regardless, Mona cannot establish loss causation for any of the statements. Microbot thus is entitled to summary judgment on Mona's counterclaim in its entirety.
A. Reliance
1. Legal Principles Of Reliance
“Reliance by the plaintiff upon the defendant's deceptive acts is an essential element of the § 10(b) private cause of action.” Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804, 810, 131 S.Ct. 2179, 2184 (2011) (internal quotation marks omitted). “Reliance provides the requisite causal connection between a defendant's misrepresentation and a plaintiff's injury.” Lickteig v. Cerberus Capital Management, L.P., 589 F.Supp.3d 302, 326-27 (S.D.N.Y. 2022) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 243, 108 S.Ct. 978, 989 (1988)). “The traditional (and most direct) way a plaintiff can demonstrate reliance is by showing that he was aware of a company's statement and engaged in a relevant transaction - e.g., purchasing common stock - based on that specific misrepresentation.” Lickteig, 589 F.Supp.3d at 327 (citing Erica P. John Fund, 563 U.S. at 812, 131 S.Ct. at 2186).
In cases in which a plaintiff relies on a defendant's misstatement that constitutes public information, the Supreme Court has adopted a “fraud-on-the-market” theory, which creates a presumption of reliance that the defendant must overcome. See Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, 568 U.S. 455, 462, 133 S.Ct. 1184, 119293 (2013). “The presumption, however, is just that, and can be rebutted by appropriate evidence.” Id. (internal quotation marks and brackets omitted). In cases where the fraud-on-the-market theory is inapplicable, the burden is on the plaintiff to sufficiently plead reliance. “To prove reliance, the plaintiff must show that but for the misstatement or omission, she would not have transacted in the security.” GAMCO Investors, Inc. v. Vivendi, S.A., 927 F.Supp.2d 88, 97-98 (S.D.N.Y. 2013), aff'd sub nom. GAMCO Investors, Inc. v. Vivendi Universal, S.A., 838 F.3d 214 (2d Cir. 2016) (emphasis in original) (citing ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 106 (2d Cir. 2007) (“Transaction causation [i.e. reliance] only requires allegations that but for the claimed misrepresentations or omissions, the plaintiff would not have entered into the detrimental securities transaction”) (internal quotation marks and citations omitted)).
The parties agree that the instant dispute is not a fraud-on-the-market case. (Pl. Mem. at 5; Def. Mem. at 25.) Mona must therefore prove that “but for” Roe and Altavilla's statements, he “would not have transacted in” Microbot stock. GAMCO Investors, 927 F.Supp.2d at 97-98. Microbot, however has the burden on this motion to show that there is no genuine dispute of material fact as to whether Mona relied on any of the statements. Microbot meets that burden for Altavilla's first statement, but not for Roe's statement or Altavilla's second statement.
“Pl. Mem.” refers to Plaintiff's Brief In Support Of Microbot's F.R.C.P. 56 Motion For Summary Judgement, filed at Dkt. 210.
“Def. Mem.” refers to Defendant Mona's Opposition To Plaintiff's Motion For Summary Judgement, filed at Dkt. 216.
2. Roe's Statement
Mona alleges that he relied on Roe's August 7, 2017 statement that “the shares are going to get to $10” because, in the week following Roe's statement, August 7 to 14, 2017, he purchased 130,729 shares of Microbot. (Def. Mem. at 11; Trading Records at rows 220-39.) There is evidence in the record that Mona relied on Roe's statement. In his deposition, he states that, when “Roe said the stock was going to 10 ... I believed [him].” (Marcus Dep. at 67.) Of course, belief alone does not prove that Mona acted on that belief. But a reasonable inference can be drawn that Mona relied on the statement from the fact that he executed 18 consecutive purchases of Microbot stock during the week immediately following his discussion with Roe. See Silvercreek Management, Inc. v. Citigroup, Inc., 346 F.Supp.3d 473, 504 (S.D.N.Y. 2018) (finding that the plaintiffs purchasing securities later the same day after a call in which one of the defendants' representative made a misrepresentation constituted “a sequence of events that provides a strong basis from which a jury could infer an awareness that the information Randell provided would be relied upon for a particular purpose by Plaintiffs' in further of that purpose”) (internal quotation marks and brackets omitted).
In asserting that there is no genuine issue of material fact that Mona did not rely on Roe's statement, Microbot advances three arguments: (1) Mona “improperly conflates [his] reliance on a combination of ‘actionable and non-actionable' statements by Roe” (Pl. Mem. at 8-9), (2) Mona engaged in a “buying streak ... a week before his alleged conversation with Roe” (id. at 9), and (3) Mona started selling shares the week after speaking with Roe so that between August 14 and October 2, 2017, “Mona sold a total of 372,374 Microbot shares” (id.). None of these arguments demonstrate an absence of a genuine issue of material fact as to whether Mona relied on Roe's statement; rather, they contribute to there being a dispute.
For its first argument, Microbot points to Mona's Amended Counterclaim as demonstrating that Mona asserts reliance based upon a combination of actionable and non-actionable statements. Specifically, Mona alleges that he was “induced” to purchase Microbot stock by Roe's actionable statement that “the shares are going to get to $10” and Roe's non-actionable statement that he had “just purchased an additional 10,000 shares in the company,” which the Court previously dismissed for lack of any allegation that the statement was false. (Am. CC ¶ 33; Dkt. 104 at 46.) There are two problems with Microbot's argument. First, the current posture of the case is summary judgment, not the pleading stage. What matters at this juncture is the evidence of record. See Gachette v. Metro-North Commuter Railroad Co., 804 Fed.Appx. 65, 68 (2d Cir. 2020) (a movant “cannot rest on allegations in the pleadings and must point to specific evidence in the record to carry its burden on summary judgment”) (quoting Salahuddin v. Goord, 467 F.3d 263, 273 (2d Cir. 2006)).
To be sure, a moving party may cite to the non-moving party's pleading as evidence of what was plead.
Second, in the very next paragraph of the Amended Counterclaim, Mona isolates Roe's $10 statement as a basis for his reliance: Mona states that “Roe's confident prediction that the share price would rally and increase by 1000 percent (from $1 to $10) was a falsehood made with knowledge that there were no facts or financial projections that could possibly support such a share trajectory. ... The only fair inference is that Roe made the false statement ... because he wanted to entice Mona with the prospect of making millions. And Mona was convinced. In the ensuing week from August 7 to 14, 2017, Mona bought approximately 100,000 additional shares in [Microbot].” (Am. CC ¶ 34.) Mona thus ties his purchasing more than 100,000 Microbot shares specifically to his reliance on Roe's $10-statement. Moreover, even if Mona relied on different statements, some actionable and some not, it will be up to the factfinder to decide the extent to which, if at all, Mona relied on any one particular statement.
In contending that Mona may not rely “on a combination of actionable and non-actionable statements by Roe,” Microbot cites to Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161, 177 (2d Cir. 2005). (Pl. Mem. at 8-9.) However, Lentell's proscription on combining actionable and non-actionable statements relates specifically to loss causation, not reliance, and was made in the context of stock ratings for which “risk of price volatility . [was] apparent on the face of the [risk rating]”. Lentell, 396 F.3d at 175 n.4, 176-77. As discussed below, Microbot has demonstrated the absence of any genuine dispute about loss causation.
For its second no-reliance argument, Microbot contends that Mona cannot show that he relied on Roe's statement because, prior to his conversation with Roe, which allegedly induced Mona to buy Microbot stock, he already had executed several buy transactions. (Pl. Mem. at 9.) The week before his August 7, 2017 call with Roe, Mona executed six trades, all of them purchases, totaling 29,589 shares. (Trading Records at rows 214-19.) In the months prior to August 2017, Mona also both bought and sold tens of thousands of shares in numerous transactions, just as he did immediately following the week of August 7 to 14, 2017. (Trading Records at rows 6-219, 240-77.) There are periods of time in the months following the week of August 7 to 14, 2017 when Mona sold more shares than he purchased, but there also are other periods in that window where Mona brought more than he sold. Over time, Mona steadily increased his holdings. For instance, from the time of his call with Roe to his first call with Altavilla 51 days later on October 2, 2017, Mona increased his Microbot holdings from 400,089 shares to 974,181 shares. (Id. at rows 220-411.)
Microbot does not identify any cases in which a court held that a plaintiff could not claim reliance because he followed a general investment strategy or trajectory of buying stock and then, separately and at a specific juncture, was induced to buy a certain amount of additional shares in reliance on a defendant's specific misrepresentation. In In re Vivendi Universal, S.A. Securities Litigation, cited by Microbot, the court explained that a defendant may “rebut[] [a] presumption of reliance by showing that plaintiffs would have transacted in securities notwithstanding any inflation in their market price caused by fraud.” 123 F.Supp.3d 424, 436 (S.D.N.Y. 2015) (internal quotation marks omitted). The defendant thus could “pick off” a member of the class action because that member, Thompson, “relied on his own careful assessments of Vivendi's assets and liquidity position, drawing largely from his familiarity with the company's assets and tapping into resources unavailable to the average investor. Even had Thompson known about the fraud, it would not have mattered to him: he said that he was ‘right the whole time' about his calculations and assessments and ‘was not misled' about Vivendi's debt.” Id. (internal citations omitted). Whether Mona would have purchased Microbot stock “even had he known about the fraud” pursuant to his day-trading strategy is a disputed issue of fact.
In arguing that Mona cannot “spell out a credible claim of reliance,” Microbot also cites to the following three cases: Moelis v. ICH Corp., No. 85-CV-6941 , 1987 WL 9709 (S.D.N.Y. Apr. 16, 1987), Jones v. Intelli-Check, Inc., 274 F.Supp.2d 615 (D.N.J. 2003), and In re Safeguard Scientifics, 216 F.R.D. 577 (E.D. Pa. 2003). (Pl. Mem. at 8.) Those cases, however, are inapt. Moelis is distinguishable because the plaintiff did “not contend that he was in any sense deceived by the inflated financial statements when he made his January 14, 1985 short sale. To the contrary, his short sale was motivated by his perception of the fraud: he went short because the Barron's article had made him aware of the overstatements.” Moelis, 1987 WL 9709 at *4. In contrast, Mona asserts reliance not based on disclosure of the fraud but rather on being induced by the consultants' misrepresentations. Jones is distinguishable for the same reason. 274 F.Supp.2d at 634. Similarly, the court in In re Safeguard Scientifics found that defendants rebutted the presumption of reliance for the lead plaintiff in the class because he “increased his holdings in Safeguard stock even after public disclosure of the fraud.” 216 F.R.D. At 582. Mona's response to disclosure of the alleged fraud is discussed further below in the context of loss causation.
Similarly, in GAMCO Investors, Inc., also cited by Microbot, the court held that “GAMCO cannot claim that it reasonably relied on the market price of Vivendi securities if it knew that the securities' price was inflated by fraud, but purchased them anyway”. 917 F.Supp.2d at 258. Here, with respect to Roe's statement, Microbot has not presented any evidence that Mona knew of the fraud but nevertheless purchased Microbot stock. A reasonable trier of fact thus could conclude that, although Mona employed a day-trading strategy, purchased Microbot securities five days before his call with Roe, and both brought and sold shares in the weeks following his call, he nevertheless relied on Roe's statement to make “some shorter-term buys” by purchasing an additional 130,729 shares. (Marcus Dep. at 69.)
Third, Microbot points to the fact that, between August 14, 2017, a week after his conversation with Roe, and October 2, 2017, the date of his first call with Altavilla, Mona sold 372,374 Microbot shares. (Pl. Mem. at 9; Trading Records at rows 235-410.) Within the same time frame, however, he purchased 845,507 shares, resulting in a net increase of more than 470,000 shares. (Trading Records at rows 235-410.) Again, these facts do not indisputably undermine Mona's argument that he relied on Roe's statement. Mona did in fact purchase 130,729 shares of Microbot the week after their call, and Microbot cites no authority suggesting that following an investment strategy that includes both purchases and sales is inconsistent with an instance of reliance. A jury could reasonably find that Mona purchased 130,729 shares in reliance on Roe's statement. Summary judgment thus is not warranted with respect to Mona's reliance on Roe's statement.
3. Altavalla's First Statement
Mona asserts that, “[d]uring the period August 2017 to May 2018, in reliance on the Roe and Altavilla statements, ... [Mona] accumulated approximately 1.69 million shares.” (Def. Reply 56.1 ¶ 59; Marcus Dep. at 83-84.) But a closer look at Mona's trading records demonstrates the absence of any genuine dispute that he did not rely on the first Altavilla statement of October 2, 2017 that CEO Gadot was “out in Minneapolis on business, meeting with two Fortune 500 companies.” Prior to this first call with Altavilla, Mona had been on a buying streak from September 26 to 27, 2017, engaging in 44 transactions, 43 of them purchases, and buying a net total of 328,171 shares. (Trading Records at rows 367-410.) As with the Roe statement, the fact that Mona purchased shares immediately preceding Altavilla's first statement does not automatically preclude Mona's ability to establish reliance.
However, in the three days immediately after the first call with Altavilla - when Mona should have been buying if he was in fact induced by Altavilla's statement to purchase shares as he claims - he executed 59 transactions, 57 of them sales, selling a net 323,000 shares. (Id. at rows 412-69.) And in the eight-day period between his first and second calls with Altavilla, Mona sold a net of 298,500 shares. (Id. at rows 411-98.) As Mona was buying shares before his first conversation with Altavilla and then immediately started selling after the call, no reasonable trier of fact could find that Mona relied on Altavilla's statement to purchase Microbot stock. Accordingly, summary judgment should be granted in Microbot's favor with respect to Altavilla's first statement.
4. Altavilla's Second Statement
The same cannot be said for Mona's reliance on Altavilla's second statement of October 10, 2017 that Microbot was going to “sign an SCS partnership any day.” In contrast to his behavior following his first call with Altavilla, Mona did in fact buy securities immediately after their second call. The same day as their call, Mona purchased 409 Microbot shares. (Id. at row 499.) Mona's next trade was not until October 27, 2017, when he purchased 30,000 shares of Microbot in four transactions. (Id. at rows 500-03.). He then continued buying, with the exception of three sales totaling approximately 4,000 shares, from November 6 to December 11, 2017. (Id. at rows 500-50.) As a result, from October 27 to December 11, 2017, Mona increased his Microbot holdings by 346,024 shares. (Id.)
A reasonable juror could conclude that Altavilla's second statement to Mona led Mona to enter a period of purchases. It will be for Mona to explain why there was a gap of more than two weeks between Altavilla's second statement and Mona's string of purchases. The jury may well conclude that, given the passage of time or presence of intervening events, Mona did not rely on Altavilla's second statement. But Microbot has not established Mona's lack of reliance as undisputed. Thus, as with Roe's statement, summary judgment should be denied with respect to Mona's reliance on Altavilla's second statement.
5. Microbot Has Not Established The Absence Of Disputed Fact That Mona's Reliance Was Reasonable
The Second Circuit requires that “a plaintiff's reliance on the defendant's misrepresentation must have been reasonable in order for the claim to proceed.” Ashland Inc. v. Morgan Stanley & Co., 652 F.3d 333, 337 (2d Cir. 2011). In analyzing whether reliance is reasonable, courts should consider several factors: “(1) [t]he sophistication and expertise of the plaintiff in financial and securities matters; (2) the existence of longstanding business or personal relationships; (3) access to the relevant information; (4) the existence of a fiduciary relationship; (5) concealment of the fraud; (6) the opportunity to detect the fraud; (7) whether the plaintiff initiated the stock transaction or sought to expedite the transaction; and (8) the generality or specificity of the misrepresentations.” Lickteig, 589 F.Supp.3d at 327 (citing Ashland, 652 F.3d at 338).
As the Second Circuit's list of factors suggests, the reasonableness inquiry is fact intensive. Mona aptly characterizes the issue as “‘a classic factual determination.” (Def. Mem. at 22 (citing Lickteig, 589 F.Supp.3d at 327).) See In re Eugenia VI Venture Holdings, Ltd. Litigation, 649 F.Supp.2d 105, 119 (S.D.N.Y. 2008), aff'd sub nom. Eugenia VI Venture Holdings, Ltd. v. Glaser, 370 Fed.Appx. 197 (2d Cir. 2010) (“The question of whether a party's reliance was reasonable is always nettlesome because it is so fact- intensive, ... and ordinarily a question of fact to be determined at trial”) (internal quotation marks and citations omitted). That does not mean, however, that summary judgment is never appropriate when reasonable reliance is at issue. As one court put it, when “the Court is more than satisfied by the voluminous and exhaustive discovery in this case . that no question of fact remains,” the Court may make a determination as to reasonable reliance, even at the summary judgment stage. In re Eugenia VI Venture Holdings, 649 F.Supp.2d 105 at 119; see also Charney v. Zimbalist, No. 07-CV-6272, 2015 WL 4597538, at *4 (S.D.N.Y. July 30, 2015), aff'd sub nom. Charney v. Wilkov, 734 Fed.Appx. 6 (2d Cir. 2018).
Addressing only one of the relevant enumerated factors, Microbot argues that Mona's reliance was indisputably unreasonable because Mona was a sophisticated day trader who “routinely reviewed the company's public filings in detail.” (Pl. Mem. at 11.) Microbot adds that Mona engaged in an “excessively risky” investment strategy. (Id.) Neither of those contentions, alone or together, indisputably establishes that Mona's reliance was unreasonable.
Microbot asserts that “Mona described himself in his account paperwork as an [‘]experienced investor' and ‘portfolio manager'” (id. at 10), and, according to his deposition, “he routinely reviewed the company's public filings in detail” (id. at 11 (citing to Marcus Dep. at 65-66 (stating that he regularly checked Microbot's website for new filings)). As a result, “Mona's purported reliance on price predictions and oral representations by the . [c]onsultants that were not supported by the [Microbot's] financials or disclosures is unreasonable as a matter of law.” (Pl. Mem. at 11.) Microbot then cites to three cases in which the Second Circuit did not find sophisticated investors' reliance to be reasonable as plead: Ashland, 652 F.3d 333; Emergent Capital Investment Management, LLC v. Stonepath Group, Inc., 343 F.3d 189 (2d Cir. 2003); and Hunt v. Alliance North American Government Income Trust, Inc., 159 F.3d 723 (2d Cir. 1998). The relevant facts in each of those cases, however, are materially different than those here.
In Ashland and Hunt, the Second Circuit held that the sophisticated investors could not claim reasonable reliance on defendants' misrepresentations because there existed, at the time they made their investments, publicly-available filings undermining the misrepresentations. See Ashland, 652 F.3d at 335 (“We affirm the district court's dismissal on the ground that sophisticated investors like appellants cannot plead reasonable reliance on Morgan Stanley's alleged misrepresentations in light of Morgan Stanley's publicly-filed statement explicitly disclosing the very liquidity risks about which appellants claim to have been misled); Hunt, 159 F.3d at 730 (“Any investor with minimal diligence ... should have discovered the truth about the Fund's risks by consulting the prospectuses”) (internal quotation marks omitted).
That is not so here, and Microbot does not cite to any evidence to the contrary. At the time that Mona purchased Microbot shares based on Roe and Altavilla's statements in August and October 2017, no public filings controverted Roe's statement that “the shares are going to get to $10” or Altavilla's statement that Microbot was “expected to sign an SCS partnership any day.” Rather, as the evidence indicates, the filings by which Mona came to believe that the statements were false came later, with Microbot's 10-K issued on April 2, 2018 (Def. Reply 56.1 ¶ 68) and its S-1 disclosure of November 8, 2018, later amended in December 2018. (Marcus Dep. 100-03; see Trading Records at rows 852, 915).
Emergent Capital is distinguishable because it did not involve purchase of stock through public trading but instead a single private investment for which the investing company represented that it could “readily evaluate the risks of the transaction” and failed to obtain a particular representation in the stock purchase agreement it entered into. See 343 F.3d 189, 196 (“Consequently, having been told that NETV's largest investment was its $14 million purchase of an equity interest in Brightstreet, Emergent should have protected itself by insisting that this representation be included in the stock purchase agreement. Given NETV's extensive contractual representations about other matters, appellant's sophistication, and the size of the transaction, Emergent's failure to do so precludes as a matter of law a finding of reasonable reliance upon defendants' misrepresentations about Brightstreet”). Mona's experience in day-trading stock undoubtedly imbues him with a degree of sophistication and experience, but it is for the factfinder to weigh the extent and impact of those attributes. (See Marcus Dep. at 11-12 (denying that he is a “sophisticated” stock trader).)
Microbot's second argument focuses on Mona's overall investment strategy and its degree of risk. Microbot contends that “[i]t is inherently unreasonable for Mona to claim that he deliberately executed an investment strategy deemed excessively risky for him in reliance on representations made by the . [consultants;” the risky strategy being Mona's engaging in day-trading while “evading the ... ‘PDT' Rule.” (Pl. Mem. at 10-11.) Assuming that Mona's siting his account in Jamaica to avoid the PDT's restrictions protecting daytraders made trading riskier, Microbot fails to tie that fact to the reasonableness or lack of reasonableness of Mona's reliance on representations made by Roe and Altavilla. For instance, Microbot nowhere explains how subjecting Mona to the PDT Rule would have affected Mona's decision to buy in the wake of Roe and Altavilla's statements as distinct from possibly affecting the amount or frequency of his purchases.
Microbot also cites again to Ashland, 652 F.3d 333 for support. (Id. at 11.) But the case remains no less distinguishable. To reiterate, while the Second Circuit underscored the riskiness of the investment in that case, it faulted Ashland, among other reasons, for failing to review an “SEC-mandated statement [that] explicitly disclosed the very liquidity risks about which [Ashland] claim[s] to have been misled.” Ashland, 652 F.3d at 338. Microbot does not contend that the PDT Rule “disclosed the very ... risks” about which Mona was misled.
In short, Microbot has not established an absence of a genuine issue of material fact as to whether Mona reasonably relied on Roe's statement and Altavilla's second statement. As discussed next, however, Microbot is nevertheless entitled to summary judgment on Mona's counterclaim because Mona cannot establish loss causation for either statement.
B. Loss Causation
Mona's opposing brief barely addresses loss causation even though it is one of the two bases undergirding Microbot's motion. Indeed, Mona devotes only two skimpy paragraphs to the issue, the majority of which is citation to case law. (Def. Mem. at 2425.) The sole fact that Mona offers in support of loss causation is that “Mona exited Microbot stock entirely on February 19, 2019, with a net loss of $150,954.” (Id. at 25.) Mona also states in conclusory fashion that Microbot obtained its judgment pursuant to § 16 of the Act “based on” Microbot's “lies.” (Id. at 24.) Those assertions utterly fail to raise a triable issue of fact supporting loss causation.
1. Principles Of Loss Causation
In addition to reliance, a plaintiff pursuing a § 10(b) private cause of action must prove “loss causation, i.e., a causal connection between the material misrepresentation and the loss.” Dura Pharmaceuticals, 544 U.S. at 342, 125 S.Ct. at 1631 (emphasis omitted); see also In re Vivendi, S.A. Securities Litigation, 838 F.3d at 260 (loss causation is “the causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff”) (citing Lentell, 396 F.3d at 172).
Loss causation differs from reliance or transaction causation. “Like reliance, transaction causation refers to the causal link between the defendant's misconduct and the plaintiff's decision to buy or sell securities,” whereas “[l]oss causation, by contrast, is the causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff,” Emergent Capital, 343 F.3d at 197 (first citing Castellano v. Young & Rubicam, Inc., 257 F.3d 171, 179 (2d Cir. 2001), then citing Suez Equity Investors, L.P v. Toronto-Dominion Bank, 250 F.3d 87, 96 (2d Cir. 2001)).
To prove loss causation, plaintiffs must show “‘that the subject of the fraudulent statement or omission was the cause of the actual loss suffered.'” Carpenters Pension Trust Fund of St. Louis, 750 F.3d at 232 (quoting Suez Equity Investors, 250 F.3d at 95). If “the relationship between the plaintiff's investment loss and the information misstated or concealed by the defendant [is] sufficiently direct, loss causation is established; but if the connection is attenuated, or if the plaintiff fails to demonstrate a causal connection between the content of the alleged misstatements or omissions and the harm actually suffered, a fraud claim will not lie.” Lentell, 396 F.3d at 174 (internal alterations, quotation marks, and citations omitted).
Loss causation typically is proven “either by [demonstrating] (a) ‘the existence of cause-in-fact on the ground that the market reacted negatively to a corrective disclosure of the fraud;' or (b) ... ‘that the loss was foreseeable and caused by the materialization of the risk concealed by the fraudulent statement.'” Carpenters Pension Trust Fund, 750 F.3d at, 232-33 (citing In re Omnicom Group, Inc. Securities Litigation, 597 F.3d 501, 511, 513 (2d Cir. 2010)) (emphasis in original); see also Heller v. Goldin Restructuring Fund, L.P., 590 F.Supp.2d 603, 623 n.16 (S.D.N.Y. 2008) (“[t]here are several possible methods of pleading loss causation, including ‘direct causation,' ‘materialization of risk,' and ‘corrective disclosure'”) (citing In re Initial Public Offering Securities Litigation, 544 F.Supp.2d 277, 289 (S.D.N.Y. 2008)).
In order to establish corrective disclosure, plaintiffs must prove “a disclosure of the fraud by which ‘the available public information regarding the company's financial condition [was] corrected,'” Carpenters Pension Trust Fund, 750 F.3d at 233 (quoting In re Omnicom Group, 597 F.3d at 511), “and that the market reacted negatively to the corrective disclosure,” Carpenters Pension Trust Fund, 750 F.3d at 233 (citing Lentell, 396 F.3d at 175). “That is, when a [plaintiff maintains] that misstatements and omissions were exposed by a corrective disclosure, ‘[the] plaintiff must point to a statement that, because it corrected a prior falsehood, precipitated a change in the security's price causing his loss.'” DoubleLine Capital LP v. Odebrecht Finance, Ltd., 323 F.Supp.3d 393, 456 (S.D.N.Y. 2018) (quoting In re China Organic Securities Litigation, No. 11-CV-8623, 2013 WL 5434637, at *7 (S.D.N.Y. Sept. 30, 2013)).
To demonstrate loss causation by materialization of risk, a plaintiff must “show that ‘the loss was foreseeable and caused by the materialization of the risk concealed by the fraudulent statement.'” DoubleLine Capital, 323 F.Supp.3d at 456 (quoting In re Omnicom, 587 F.3d at 613). “Under this theory, a misstatement or omission is ‘the proximate cause of an investment loss if the risk that caused the loss was within the zone of risk concealed by the misrepresentations.'” DoubleLine Capital, 323 F.Supp.3d at 456 (quoting Lentell, 396 F.3d at 173).
Some courts have conflated materialization of the risk and corrective disclosure. See, e.g., Plumbers & Pipefitters National Pension Fund v. Orthofix International N.V., 89 F.Supp.3d 602, 620 (S.D.N.Y. 2015) (“The plaintiff argues that the defendants' misstatements or omissions first materialized on July 29, 2013, when Orthofix announced that it would be delaying the release of its financial statement for the second quarter of 2013 in order to review matters relating to revenue recognition for prior periods”) (internal quotation marks omitted); In re Lululemon Securities Litigation, 14 F.Supp.3d 553, 587 (S.D.N.Y. 2014), aff'd, 604 Fed.Appx. 62 (2d Cir. 2015) (“lead plaintiff posits a theory that connects the ... departure to the materialization of a risk lead plaintiff concedes was disclosed in company filings as to the importance of key executives, which caused the stock price to decline”).
2. No Direct Causation
Mona argues that the Roe and Altavilla statements “were the direct cause” of his economic loss. (Def. Mem. at 24.) He claims that “he los[t] over $150,000 in direct losses from trading in [Microbot] shares.” (Id.) That's it. No further analysis or explication. Not only is the “direct cause” statement conclusory, but it demonstrates the absence of proof of loss causation. Mona attributes his overall economic loss from 1,278 trades over 21 months to three statements among many, including ones that the Court previously has dismissed as non-actionable for various reasons, and on which Mona claimed to have relied. Yet now Mona claims that his entire economic loss is due only to the three statements that were replead. The Court is not aware of any case, and Mona has not cited to any case, that finds loss causation under such circumstances.
The closest Mona comes to articulating a theory of loss causation is in the Amended Counterclaim, where he connects Microbot's public disclosures in 2018 with revealing the falsity of the alleged misrepresentations - i.e., a corrective disclosure theory. But, as discussed below, however Mona's theory of loss causation is couched, there is no evidence of loss causation by which Mona's economic loss can be attributed to any of the three statements at issue.
3. Roe's Statement
Mona suggests that Roe's statement from August 7, 2017 that “the shares are going to get to $10” was corrected by Microbot's S-1, filed on November 14, 2018, and two amendments to it, filed on December 17, 2018 and December 31, 2018. According to Mona, Microbot's S-1 form and the subsequent amendments had “the clear implication ... that Microbot's statements about the financial health of the [c]ompany and the bright prospects of an unobstructed competitive landscape and lucrative partnership deals were false.” (Am. CC ¶¶ 51-53; see also Marcus Dep. at 100-01.) Mona continues that “[a]fter a trade on January 15, 2019, Mona held less than 6,000 shares of Microbot stock. By that time, he had lost approximately $100,000 since [Roe] made the material misrepresentation on August 7, 2017 about the stock going to $10.” (Am. CC ¶ 54.)
Microbot argues that the S-1 and its amendments should not even be considered corrective filings because they “do not relate to the alleged [consultant] representations.” (Pl. Mem. at 15.) Microbot cites four cases for the proposition that if a disclosure does not reveal any relevant truth about a defendant's misrepresentation than it does not quality as “corrective” and cannot establish loss causation. See Liana Carrier Ltd. v. Pure Biofuels Corp., 672 F. App'x. 85, 90 (2d Cir. 2016); Janbay v. Canadian Solar, Inc., No. 10-CV-4430, 2012 WL 1080306, at *15 (S.D.N.Y. March 30, 2012); In re Omnicom Group, Inc. Securities Litigation, 597 F.3d at 512-13 & n.5; Greenberg v. Crossroads, 364 F.3d 657, 668 (5th Cir. 2004). That argument has some appeal - Mona nowhere claims, and no evidence before the Court shows, that Microbot's S-1 made any statement correcting Roe's statement that Microbot's stock was going to get to $10. Yet neither Microbot nor Mona submit the S-1 and its amendments as an exhibit or discuss them in any detail that would enable the Court to weigh whether they do or do not “correct” Roe's statement. Even though Microbot may very well be right, for present purposes, and drawing all reasonable inferences in Mona's favor, the Court assumes that the S-1 filings can be deemed to “correct” Roe's statement for the reason Mona asserts.
Although Mona identifies a corrective disclosure and alleges losses around the time of the disclosure, as Microbot correctly points out, Mona does not show that Roe's statement “caused the value of his shares to depreciate ... when he decided to sell his shares on January 14, 2019, after he alleges [its] fraud ‘became known.'” (Pl. Mem. at 13; see also id. at 14 (“Mona's claimed losses are similarly untied to the [consultants'] representations. Mona asserts that he lost over $100,000 between the time of his first purchase in reliance on the [consultants] in August 2017, and the time he sold the last share of Microbot stock he then owned, on January 16, 2019. . But Mona does not claim that his losses were caused by the [consultants] under any theory of loss causation -- he does not allege that the value of his shares depreciated when risks concealed by the [consultants] materialized, or when their fraud was revealed”).
Mona merely alleges a false statement, a corrective disclosure and, separately, a composite loss from 1,278 trades. He does not present any evidence of how “the market reacted negatively to the corrective disclosure.” Carpenters Pension Trust Fund, 750 F.3d at 233 (citing Lentell, 396 F.3d at 175); see also Seagrape Investors LLC v. Tuzman, No. 19-CV-9736, 2020 WL 5751232, at *16 (S.D.N.Y. Sept. 25, 2020) (“The Complaint is devoid of allegations demonstrating that such purportedly false and misleading statements were the cause of the actual loss suffered or, in other words, that any economic harm that [plaintiff] suffered occurred as a result of the alleged misrepresentations”) (internal quotation marks and citations omitted, emphasis in original). In other words, there is no evidence by which Mona can demonstrate the crucial “causal connection” piece of loss causation. In the absence of proof that the S-1 and its amendments “corrected a prior falsehood,” i.e., Roe's statement, and “precipitated a change in the security's price causing his loss,” Mona's loss causation argument fails as a matter of law. DoubleLine Capital LP, 323 F.Supp.3d at 456 (quoting In re China Organic Securities Litigation, 2013 WL 5434637, at *7.
Mona summarily dismisses loss causation cases cited by Microbot as irrelevant because they involved fraud-on-the-market theory of reliance, whereas Mona claims reliance based on direct misrepresentations made to him personally. (Def. Mem. at 25.) That distinction, however, is inapt with respect to loss causation. As discussed above, Mona's own allegations attempt to connect his losses to revelation of the “fraud” by Microbot's public filings.
Moreover, Microbot has established an absence of a genuine dispute of material fact that Mona did not in fact suffer any loss when the S-1 and its amendments became known. To the contrary, he made money. Mona alleges that he lost over $100,000 between the time of Roe's statement, i.e., August 7, 2017, and shortly after the S-1 and its amendments were filed, i.e., mid-January 2019. (Am. CC ¶¶ 51-54.) However, from January 14 to 16, 2019, shortly after the corrective disclosures were filed and when Mona was selling shares, Microbot's share price was rising. Mona sold Microbot stock starting at a price of $3.02, rising to a high of $19.14, and ending with a sale price of $10.83. (Trading Records at rows 929, 1187, 1270.)
As Microbot correctly observes: Mona “began to sell all of his shares as the market price of Microbot steadily rose.” (Pl. Mem. at 16.) Therefore, Mona indisputably did not lose money when the corrective disclosures became known; instead, he made money, which is fatal to his fraud claim. See In re Barclays Bank PLC Securities Litigation, No. 09-CV-1989, 2017 WL 4082305, at *20 (S.D.N.Y. Sept. 13, 2017) aff'd, 756 F. App'x. 41 (2d Cir. 2018), as amended (Nov. 20, 2018) (“The Court cannot find ... a single section 10b-5 case in which the plaintiff prevailed on a motion to dismiss when the stock price increased after an announcement revealing an alleged fraud”) (quoting Waters v. General Electric Co., No. 08-CV-8484, 2010 WL 3910303, at *8 (S.D.N.Y. Sept. 29, 2010)); In re China Organic Securities Litigation, 2013 WL 5434637, at *8 (“Where, as here, a reduced share price was within the zone of risk of the allegedly concealed information, but no loss occurred upon the revelation of this information, a claim must be dismissed ... for failure to plead loss causation”) (internal quotation marks and citations omitted).
At his deposition, Mona claimed that even with the rise in price during January 2019, he still lost money overall because those trades took place after the reverse stock split, which lowered the value of each share. (Marcus Dep. at 121-22.) Mona's response is inapt; the relevant point is that Microbot's stock price rose instead of declined following revelation of the alleged fraud, and Mona made money in the immediate wake of that revelation.
4. Altavilla's Second Statement
Similarly, Mona cannot demonstrate loss causation from Altavilla's second statement. Mona suggests that Altavilla's statement of October 10, 2017 that Microbot was expected “to sign an SCS partnership any day” was corrected twice: First, when Microbot's 10-K issued on April 2, 2018, which “compel[led] the conclusion that a meeting between Gadot and two Fortune 500 companies to partner on promoting and selling SCS was a complete falsehood. Microbot was in no position to be entering into some kind of joint venture ... when ... it had not even completed animal studies of its prototype ... [or] obtain[ed] FDA clearance or approval” (Am. CC ¶ 39; see also Def. Reply 56.1 ¶¶ 6869)); and, second, with the S-1 and its amendments, filed in November and December 2018, discussed above, which “clear[ly] impl[ied] . that . the . lucrative partnership deals were false” (Def. Reply 56.1 ¶ 78).
Nor is there any evidence to support a finding of loss causation with respect to Altavilla's first statement. The Court does not set forth that analysis as it already has determined, as explained above, that Mona cannot survive summary judgment because of the absence of reliance on Altavilla's first statement.
To the extent Altavilla's SCS partnership statement was corrected by the S-1 and its amendments, Microbot is entitled to summary judgment as to loss causation for this statement for the same reasons set forth for Roe's statement. And to the extent Altavilla's statement was corrected by the 10-K filed in April 2018, Microbot is still entitled to summary judgment because there is no evidence by which a reasonable juror could find the requisite loss causation.
Mona asserts that the end result of his cashing out of his Microbot holdings was a net loss of approximately $150,000 over the period of time since May 2017 when he began day-trading Microbot shares in earnest. (Def. Mem. at 25.) But Mona does not assert any specific losses following Microbot's 10-K filing. Mona does say that, “[d]uring the period August 2017 to May 2018,” the month after the 10-K was filed, he “accumulated approximately 1.69 million shares, representing a 331% increase in his holdings.” (Am. CC ¶ 43.) That, however, goes to reliance, not loss causation. As stated above, pleading loss causation via the corrective-disclosure theory requires showing a corrective disclosure, a resulting economic loss, and the causal connection between the two, such as a change in share price. See DoubleLine Capital LP, 323 F.Supp.3d at 456 (quoting In re China Organic Securities Litigation, 2013 WL 5434637, at *7). The undisputed evidence fails to do that.
After the 10-K filing, Mona continued to amass Microbot stock holdings from 1,672,009 shares on April 3, 2018 to his peak of 2,390,000 shares on August 9, 2018, just prior to the reverse stock split. (Trading Records at rows 663-746.) As with the period following Microbot's S-1 filing, Mona incurred no losses during the post-10-K filing period. The price of Microbot stock steadily rose from $0.64 per share to a high of $1.01 per share (with some downturns in between) and back down to $0.64 per share. (Id. at rows 663, 711, 746.)
The only time that the stock price went below $0.64 was on April 3 and 4, 2018, when Mona purchased 30,000 shares at $0.64 and over 65,000 shares in three trades at prices of $0.59, $0.60, $0.62. (Id. at rows 663-66.) In the next transaction following those purchases, Mona sold approximately 3,500 shares at a price of $0.72, thus making money in the immediate wake of the 10-K filing. (Id. at rows 667-68.) Over the ensuing weeks, Mona continued to follow that pattern, buying shares and then selling shares at a higher price. (Id. at rows 669-746.) As with Roe's statement, Mona indisputably did not lose money when the disclosures purportedly correcting Altavilla's statement became known; instead, he made money, which eliminates his fraud claim. In re Barclays Bank PLC Securities Litigation, 2017 WL 4082305, at *20; In re China Organic Securities Litigation, 2013 WL 5434637 at *8.
CONCLUSION
For the foregoing reasons, I recommend that the Court GRANT Microbot's motion for summary judgment, and that Mona's counterclaim be dismissed with prejudice.
DEADLINE FOR OBJECTIONS AND APPELLATE REVIEW
Pursuant to 28 U.S.C. § 636(b)(1) and Federal Rules Of Civil Procedure 72, 6(a), and 6(d), the parties have fourteen days to file written objections to this report and recommendation. Such objections shall be filed with the Clerk of Court, with extra copies delivered to the Chambers of the George B. Daniels, United States Courthouse, 500 Pearl Street, New York, New York 10007, and to the Chambers of the undersigned, 500 Pearl Street, New York, New York 10007. Failure to file timely objections will result in waiver of objections and preclude appellate review.
SO ORDERED.