Chancellor Kathaleen St. J. McCormick issued a post-trial opinion in favor of the sellers, who were represented by Raines Feldman Littrell, Michelman & Robinson and Barnes & Thornburg, and a letter decision partially granting fee-shifting sanctions.
The selling side of a clearing firm merger have secured a two-part victory in the Delaware Court of Chancery, with the court making two key findings: that the sellers weren’t required to indemnify $15.2 million loss and that the buyers misled the court during discovery.
Chancellor Kathaleen St. J. McCormick issued a post-trial opinion on Nov. 7 in favor of the sellers, who were represented by Raines Feldman Littrell, Michelman & Robinson and Barnes & Thornburg, and a letter decision partially granting fee-shifting sanctions against Axos Financial and the affiliates named as defendants.
Through the merger in question in the case, COR Clearing, a clearing firm that serves as an intermediary in securities transactions, was acquired by Axos Financial for $80 million and became Axos Clearing. The deal closed in January 2019.
“This is as complete a victory as it gets,” said Seth Darmstadter of Raines Feldman Littrell, first-chair trial counsel for parties on the COR Clearing side.
In March 2019, Scott Reynolds, a principal at Spartan Securities Group, which the clearing company worked with as a trade-away introducing broker-dealer, was caught in a short squeeze and ultimately lost the clearing company $16.6 million, $1.4 million of which Spartan covered.
In May 2020, the sellers filed their complaint asking the Court of Chancery to declare they didn’t
have a duty to indemnify the Axos buyers for the remaining $15.2 million loss under the merger agreement, that the $7.5 million outstanding principal withheld as notes from the merger consideration should not be reduced, and that the buyers are responsible for paying that outstanding principal.
A four-day trial was held in May 2024, and the court heard post-trial argument this May.
The case focused on whether the sellers had breached the section of the merger agreement that requires them to have been legally compliant, including compliance with FINRA rules, since June 30, 2015.
McCormick concluded the buyers hadn’t shown the clearing company was missing control systems that would have prevented the loss associated with Reynolds, and they could have prevented that loss with the controls in place but decided not to.
Overall, she wrote, they hadn’t proven any lack of controls or procedures caused the loss. Attorneys with Sheppard, Mullin, Richter & Hampton and Gordan Rees Scully Manskuhani represented the Axos buyers and did not immediately respond for comment.
McCormick’s letter decision partially granting the sellers’ motion for fee-shifting sanctions ordered the buyers to pay fees and expenses the sellers incurred when litigating several discovery-related motions, concluding that the buyers misrepresented to the court the confidentiality status of certain documents from FINRA arbitration.
“The court recognized our clients were right on the facts and law and that they had to navigate serious litigation misconduct to get there,” said Raines Feldman Littrell partner Matthew Lasky.
FINRA ultimately found Reynolds solely responsible for the loss and ordered him to pay more than $17 million to the clearing company, an amount which had not been paid at the time of the Chancery trial.
Throughout litigation, McCormick wrote, the buyers referred to transcripts from the arbitration and documents produced in arbitration as one category subject to a protective order, when in actuality the former wasn’t under the same confidentiality restrictions—a detail the sellers learned on the eve of trial when finding that testimony from the arbitration had been publicly filed as part of a case in a New York state court.
“Sellers are entitled to fees and costs, but only so much as to ‘deter repetition of the conduct or comparable conduct by others similarly situated,'” McCormick wrote. “The FINRA arbitration transcripts were not ‘fatal’ to buyers’ indemnification claim, as sellers argue. But buyers’ lack of candor created unnecessary expenses, requiring sellers to engage in motion practice three times to access documents that had no confidentiality designation and were not subject to any protective order.”
McCormick declined to impose sanctions for the section of the sellers’ motion that stated the buyers’ position in arbitration directly contradicted what they told the court, writing that while they “walked a very fine line,” the positions the buyers took in the two proceedings can be interpreted as not entirely inconsistent.
The decision gives plaintiffs’ counsel seven days to present a fee petition that details fees and costs for five categories of motion practice.