VeroBlue Farms USA Inc. v. Canaccord Genuity LLC

VeroBlue Farms USA Inc. v. Canaccord Genuity LLC (2d Cir.) Successfully defended dismissal of fraud claim against investment bank. Joe's argument begins at 14:15.

Transcript

Unofficial transcript for users of mofo.com

Speaker 1 (00:00):

Your argument in the following matter, VeroBlue Farms v. Canaccord Genuity, 21-2465.

Speaker 2 (00:20):

Thank you. Okay.

Speaker 1 (00:34):

Hold on a second. Okay.

Jeffrey Babbin (00:49):

Thank you, Your Honors. And may it please the court.

Jeffrey Babbin (00:53):

The district court here granted the motion to dismiss on the basis of three defenses. I’d like to discuss those three defenses in this order, if I may: the in pari delicto defense, the release, and the Exculpation clause in Canaccord’s engagement agreement. With respect to the in pari delicto defense, which is an equitable issue where we waive facts, Your Honor, the Kirschner case, which is the key important case under New York law, says that these are case-specific issues, and you do not impute the bad acts of the corporation’s agents to the plaintiff when the corporation is actually the agent’s intended victim.

Speaker 4 (01:38):

Counsel, who is plaintiff? Who is—

Jeffrey Babbin (01:40):

Yes. The plaintiff is VeroBlue Farms USA.

Speaker 4 (01:38):

Who are they?

Jeffrey Babbin (01:40):

It is an aquaculture company that was founded by these individuals who then brought in outside—

Speaker 4 (01:50):

I know that. But who makes up the plaintiff now?

Jeffrey Babbin (01:53):

There is the remaining—when the founders were fired. And further, the remaining board of a company that is undergoing the—

Speaker 4 (02:05):

The remaining board is the plaintiff here?

Jeffrey Babbin (02:07):

Essentially, we take direction from the president, Norm McCowen, and the board of directors, Your Honor.

Speaker 4 (02:14):

And they’re the plaintiff?

Jeffrey Babbin (02:15):

And they’re the plaintiff. And in fact, the Northern District of Texas case, I think it’s important because there the same company, VBF, was allowed by federal district judge to sue the founders, to treat the founders as somebody as entities separate from VBF for corporate waste and mismanagement.

Speaker 4 (02:35):

Did they try to do that here?

Jeffrey Babbin (02:37):

Well, this—

Speaker 4 (02:38):

When the case was transferred, that part was left in Texas?

Jeffrey Babbin (02:41):

That part is going forward, Your Honor. In fact, it’s survived motions to dismiss. They replead it and satisfied Rule 9B, and there’s discovery ongoing. And what’s unusual about this case, Your Honor, is that there is discovery going on. And Canaccord, knowing that this case could potentially be reinstated, got permission to participate in the discovery in the Texas case to not only attend depositions, but ask questions in the depositions. So we are actually now litigating the case against Canaccord, despite the dismissal here, and that’s why we asked, rather than dismissal on the pleadings where there are real issues of fact here, we should be entitled to take that and at least get to the summary judgment stage if they were to move for summary judgment. Well, what’s happening, or—

Speaker 4 (03:26):

I have another question, Counsel. I slogged through the complaint in this case.

Jeffrey Babbin (03:30):

Yes.

Speaker 4 (03:31):

It’s long, many exhibits. Could you tell me succinctly what VeroBlue alleges that Canaccord did?

Jeffrey Babbin (03:41):

Yes, Your Honor. So we allege there’s two parts to this, and a lot of the complaint is about the founder’s conduct, and the reason for that is because Canaccord is alleged to have given substantial aid, material aid, in terms of aiding and abetting and entering into a conspiracy.

Speaker 4 (03:55):

Is that part of this case?

Jeffrey Babbin (03:57):

Yes, Your Honor.

Speaker 4 (03:58):

Those are the Texas?

Jeffrey Babbin (03:57):

That is the cause of action against Canaccord because those were severed and transferred here, and the detail was in large part because of the Rule 9B arguments that were made when the case was originally in Texas, including Canaccord—it made a Rule 9B motion. But when it was transferred, we thought it was best to nip that in the bud, even though we believe 9B doesn’t even apply to allegations of conspiracy and aiding and abetting, and that there’s certainly more than enough detail here.

Jeffrey Babbin (04:34):

It’s sort of ironic that they complain about the detail while also making rule 9B arguments. Again, with respect to the in pari delicto, numerous cases have found that the adverse interest exception to imputing the corporate misdeeds of the agents cannot be rejected on the pleading as Kirschner itself is a case where the harm to the company came from the revelation of the fraud, not the fraud itself, but here, our allegations, and we can prove this, that VBF is essentially rotting from the inside from the start, never had a chance to thrive, that VBF was the victim all along. I mean, even Dr. Fitzsimmons, who gave reports to the founders from the get-go understood that this was a failed venture and technology. There was no conceivable benefit. This is not a case where we are weighing benefits and detriments in terms of a net negative.

Speaker 5 (05:32):

I’m sorry. I thought the whole point of the fraud was to bring money into the company?

Jeffrey Babbin (05:36):

Yes, Your Honor. But—

Speaker 5 (05:37):

So how is that not the situation where, at least in part, the punitive agent is acting, at least in part, for the benefit of the principal?

Jeffrey Babbin (05:51):

Because, Your Honor, the evidence will show that there was no possibility of this company succeeding. So what happened in this—

Speaker 5 (05:58):

So you’re saying there’s a difference between short-term and long-term interest? You’re saying bringing money into the company was in the company’s—was against the company’s interest? Answer the question first.

Jeffrey Babbin (06:05):

Yes.

Speaker 5 (06:05):

Are you saying that bringing investors’ money to the company was against the company’s interest?

Jeffrey Babbin (06:13):

Yes, Your Honor, because all of the money, whether either lined the founder’s pockets and what didn’t line the founder’s pockets was dissipated and became corporate waste to the amount of $80 million. And that is what we allege. And the Conway case, which is the most recent decision of the New York Appellate Division First Department, says that just because there’s a corporate existence doesn’t mean there’s a benefit. And that speculation of a benefit cannot defeat the adverse interest exception. Let the fact finder decide that here, if there was ever any benefit, given the evidence—

Speaker 5 (06:52):

Would you address the release, please?

Jeffrey Babbin (06:55):

Sure, Your Honors. The release, Your Honor, New York law protects a company from contracts induced by fraud, including a release, if the fraud is separate from the conduct being released. But moreover, Your Honor and well—

Speaker 5 (07:10):

Well, the fraud has to be between the two parties to the release, right?

Jeffrey Babbin (07:13):

That is well—the fraud, no, Your Honor. That is the—they cite the Nash case and the Loti case. But—

Speaker 5 (07:24):

So if you and I enter into a release, and I have not defrauded you and you have not defrauded me, you’re saying that somebody else defrauding you could void our contract?

Jeffrey Babbin (07:38):

In these circumstances, yes. Where you have been alleged to be aiding and abetting that fraud, you are not—

Speaker 5 (07:45):

The fraud in the formation of the release?

Jeffrey Babbin (07:48):

Correct, Your Honor, these are not innocent people. So in the Loti and in the Nash Case—

Speaker 5 (07:52):

I’m putting this at innocent in general. What’s the fraud that Canaccord conducted with respect to the release?

Jeffrey Babbin (08:03):

The fraud, Your Honor, the separate fraud here—

Speaker 5 (08:05):

No, I’m not—I’m talking about the fraud. Is there fraud? Let me ask you this. Maybe we’re talking about—

Jeffrey Babbin (08:09):

There was a fraudulent concealment claim, not a fraud claim against Canaccord.

Speaker 5 (08:13):

With—okay. So are you alleging that your counterparty committed fraud in connection with the formation of the release? My understanding is that you’re saying no, there was a separate fraud not conducted by Canaccord in connection with the creation of release. Am I misunderstanding that?

Jeffrey Babbin (08:36):

That is correct, Your Honor, that there was a separate fraud, but a fraud that they were certainly took part in, in terms of aiding and abetting, and were aware of and gave material assistance to—

Speaker 1 (08:49):

But not a fraud directly related to the formation of the release?

Jeffrey Babbin (08:53):

But, Your Honor, that is correct. But the Southern District of New York, in two recent cases—New York law.

Speaker 5 (08:58):

Yeah, but they don’t bind us. They don’t really bind us.

Jeffrey Babbin (09:01):

Well, I understand, but they are—

Speaker 1 (09:03):

Is there a New York Court of Appeals case that supports your contention that the separate fraud analysis would apply in this context where it’s a third party?

Jeffrey Babbin (09:18):

I don’t have a case that’s directly on point. But you have the Southern District of New York interpreting New York law as providing—

Speaker 5 (09:26):

Yeah. But that’s what we do, too.

Speaker 1 (09:27):

No, I understand. Is there a bureau court appeals, is there actually—

Jeffrey Babbin (09:30):

The central—

Speaker 1 (09:30):

Is there an appellate division case that supports your view?

Jeffrey Babbin (09:37):

Your Honor, it’s really based on the fact that Centro did not specifically say that in terms of that the release that fraud has to be between the releasee and the releaser and the principles that the district court judges in the Ramiro Aviles case and the Platinum Beachwood case understood as being equitable. Because if what the district court judge said in Ramiro Aviles, I should say that considerations of equity militate against allowing an unscrupulous fiduciary to double down on a breach by taking the additional step insulating its third-party co-conspirator from any liability for the breach. And—

Speaker 5 (10:25):

But those were fraud claims between the prinicpal and the fiduciary, right?

Jeffrey Babbin (10:29):

But those are claims against the Wells Fargo—

Speaker 5 (10:32):

Before you get to the “but,” just confirm for me whether—I may be wrong, but my recollection is that Centro involved a release of unknown fraud claims between the prinicpal and the fiduciary. Is that correct? Or is that not correct?

Jeffrey Babbin (10:49):

That is correct. But Centro says that of when—where wrongdoing was suspected and still chose to unwind the relationship. The facts here are more like the Southern District cases, which apply New York law, where there was no suspicion whatsoever. It wasn’t until the outside investors started to become suspicious and ultimately were able to find that there was wrongdoing, fire the founders, and were able to sue the founders. And they should be able to, in these circumstances, sue the co-conspirators or the aiders and abettors, as well.

Speaker 5 (11:25):

Could you address the New York Appellate Division case against Loti.

Jeffrey Babbin (11:30):

Yes.

Speaker 5 (11:30):

That said that to invalidate a contract, the alleged fraud must be between the parties to the contractor release, not between a party and his or her agent.

Jeffrey Babbin (11:39):

But, Your Honor, that was a case where, and similar to the Nash case, where these were personal injury settlements where the plaintiff said that my agent, my lawyer, defrauded me into entering into this. So the defendant in those cases that settled were completely innocent, in a sense.

Speaker 5 (11:57):

So you’re saying though, when New York, I mean, again, it’s the Appellate division, which is highly persuasive authority. It’s not as binding as the Court of Appeals, but when they articulate that legal principle in those terms, you’re saying we should not apply that principle, that we should deduce that they didn’t really—that they only meant that principle to apply in a limited set of factual circumstances.

Jeffrey Babbin (12:19):

Well, they only voiced it in the particular facts of that case. And of course, Centro doesn’t just simply make a decision without addressing the facts of that case that showed that they looked very carefully at the relationship and what was suspected and not suspected. Here, there was fraudulent concealment allegations against the founders and against Canaccord, and in fact, because Canaccord—we have substantial allegations, which we think we should be able to develop and further in evidence that they were manipulating financial models knowingly. They knew that this was a company that was destined for bankruptcy but still put information and chose particular financial models and put information into what’s called the data room in order to have this company and help the founders who they had multiple business relationships with outside of even this one relationship. We can show there were multiple business relationships and wanted to be able to just simply keep that relationship going so that there would be, but we know that there was corporate waste. The founders never invested their own money.

Speaker 1 (13:30):

What did your client get out of this release?

Jeffrey Babbin (13:33):

I’m sorry, Your Honor. What?

Speaker 1 (13:34):

What benefit did your client get from the release?

Jeffrey Babbin (13:37):

Yes. So there was a fee dispute. And what’s interesting about the fee dispute is that they released—there was a decision that they would pay a certain amount to Canaccord.

Speaker 1 (13:47):

What benefit—I’m not interested in what was interesting about it. What benefit did your client get from the release?

Jeffrey Babbin (13:50):

From the release, Your Honor—

Speaker 1 (13:51):

Yes.

Jeffrey Babbin (13:52):

—was that Canaccord would not sue for even more fees. Yes. And what’s interesting though, about their suit—

Speaker 1 (14:03):

So you’ve reserved a few minutes for the rebuttal?

Jeffrey Babbin (14:05):

Yes, Your Honor.

Speaker 1 (14:06):

We’ll hear from Mr. Palmore.

Jeffrey Babbin (14:08):

Of course. Thank you.

Speaker 1 (14:09):

Thank you.

Joseph Palmore (14:14):

Thank you, Your Honor. May it please the court, Joseph Palmore for Canaccord Genuity. At bottom, the plaintiff’s claim is incoherent. They allege that Canaccord defrauded VBF by using VBF’s own information to trick VBF about VBF’s own operations. And they said Canaccord did this by including that information in representations made to third-party potential investors who didn’t invest. The district court correctly characterized this claim as on the line between frivolous and long shot, but found no reason, no need to determine whether it stated a claim because it found that there were three independent bases for dismissing it at the threshold. I’d like to start with in pari delicto, where my friend on the other side started. New York law couldn’t be any clearer that in pari delicto is quite a robust doctrine in New York, and it clearly applies here unless there’s an exception because the claim here is that Canaccord didn’t stop VBF from committing wrongdoing.

Joseph Palmore (15:14):

And Kirschner couldn’t be clearer about how narrow the adverse interest exception is. And if you read Kirschner, which was on certification from this court, the court entertained various possibilities of loosening the adverse interest exception and rejected every single one of them. And they said that will apply only if the conduct by the agent was wholly in his own interest, and there was no benefit at all to the principle. Here, VBF has pled itself out of that exception. There is paragraph after paragraph in the complaint, we collect them at pages 44 and 45 of our brief, where the complaint says that this alleged fraud brought money into the company and allowed it to continue operating. That’s the heart of the complaint. They say—

Speaker 1 (16:08):

May ask about the other part of the allegations as I understand it, but you can correct me if I’ve mischaracterized those allegations. That in part, the founders “line their own pockets,” to use Mr.Babbin’s terms. Why doesn’t that fit into the adverse interest exception?

Joseph Palmore (16:26):

It doesn’t for a couple reasons. One, Your Honor, they don’t allege that Canaccord had anything to do with that. In fact, they affirmatively allege that Canaccord didn’t. But just as important, there are two different categories of wrongdoing and two different categories of damages. If you look at paragraph 62 of the complaint, that makes that clear. That’s on JA68.

Speaker 1 (16:38):

I’m sorry, what?

Joseph Palmore (16:39):

JA68, paragraph 62, the complaint talks about two categories of damages. One is from this alleged looting, and the second is from the alleged misrepresentations, which they allege that Canaccord had something to do with. And then if you follow along to JA70, paragraph 67, seeks damages for the looting that say five to 10 million. Paragraph 68 seeks damages for the misrepresentations.

Speaker 4 (17:16):

Are these allegations that your client did these things?

Joseph Palmore (17:20):

There’s no allegation that our client had anything to do with the looting. They do allege that our client had something to do with the misrepresentations. But the point I’m trying to make is—

Speaker 4 (17:21):

But not the fraud?

Joseph Palmore (17:23):

Not—well, certainly not the looting. And what I’m—

Speaker 1 (17:36):

That’s the aider and abettor?

Joseph Palmore (17:36):

Pardon me?

Speaker 1 (17:37):

That’s an aider and abettor. That’s the allegation.

Joseph Palmore (17:40):

That’s the allegation. I think it’s flawed for separate reasons we can talk about. But the point about the two categories is that shows in quite stark language that a big portion, in fact, the large majority of their claims involve money that came into the company and that helped it continue running. And they say if the truth had been known by VBF query, how that could have been if the founders were the CEO and the entire board, but they say if the truth had been known, the company would’ve shut down. Kirschner says that if the alleged misconduct brings capital into the company to allow it to continue operating, then the adverse interest exception doesn’t apply. And the first department in the conduct—

Speaker 4 (18:26):

As bad as Canaccord was, they helped the company? Is that what you’re arguing?

Joseph Palmore (18:32):

Well, I’m—that that’s their allegation, right? Their allegation is that Canaccord defrauded VBF somehow in league with the founders. It hard to articulate what it is.

Speaker 4 (18:43):

Those basic questions of Mr. Babbin, I had a hard time figuring out who did what to whom in this case. Who did what? Why are—why is Canaccord being sued? Who is VBF? You have to explain that a little better to me because it seems like a morass, and I read that complaint.

Joseph Palmore (19:04):

Your Honor, we have had that question ourselves for years. The plaintiff here is the company suing Canaccord, the investment banker, for defrauding the company by tricking it into relying on its own information. It is difficult to understand.

Speaker 4 (19:23):

Stop me before I kill again?

Joseph Palmore (19:25):

Something like that. And I think that’s why in pari delicto, this is a heartland in pari delicto case.

Speaker 1 (19:31):

You say that, but there is this—the problem, at least for me, in connection with that doctrine, is there allegations of the founders looting their own or lining their own pockets, looting for their benefit. And that arguably, at this stage, might fit into the adverse interest exception.

Joseph Palmore (19:52):

I disagree, Your Honor, for a couple reasons. One is there’s no allegation that Canaccord had anything to do with that. They allege that it didn’t. Second, if you look at the first department’s decision in Concord, there was looting there, also. And nonetheless, the adverse interest exception did not apply. And that goes to the rationale of Kirschner. If there’s a conflict of interest, so you have a corrupt agent that’s bringing money in both to kind of keep the company running and also because they want to skim some off of the top. They have a conflict of interest. Kirschner says that the adverse interest exception does not apply in that situation. And I think Kirschner is critical in another respect because what Kirschner says is that the adverse interest exception to in pari delicto applies exactly as it would, if, for instance, a company was sued for the acts of its agents by a third-party investor.

Joseph Palmore (20:45):

So here, imagine one of these investors sued. That’s not who the plaintiff is. The plaintiff is VBF. But imagine if an investor sued and said I was tricked into investing in the fish farm. As I understand, because of Kirschner, the position of VBF is VBF would not be liable because they would say we’re not responsible for the actions of our agents because the adverse interest exception applies. Our CEO, our entire board of directors, that’s on them, not on us. I think just to state that shows how wrong it is, and what Kirschner says is that we’re not going to expand the adverse interest exception on the in pari delicto side of the house. We’re going to keep it exactly the same as it would be if the principal were sued. And of course, VBF would be liable for the actions of the so-called founders, the CEO and the board of directors if it was sued because they were the agents chosen by VBF for the very same reasons the adverse interest exception doesn’t apply.

Speaker 5 (21:40):

Could you turn to the release?

Joseph Palmore (21:41):

Yes, Your Honor. So the release is quite broadly worded. It applies to all claims known and unknown, suspected and unsuspected, contract and tort. That conduct here falls right into the heartland of it. And under New York law, the only way to avoid this release and some of the court’s questions to my friend went to this, is to show fraudulent inducement of the release by Canaccord. Nash, Lodi are directly on point. And Nash, the principal there who was a client said, “I didn’t sign that release. My lawyer forged my name.” And the first department said, “Sorry, that was not fraud by the counterparty. Maybe you have a claim against the lawyer.” Here, VBF has a claim, and they’re pursuing against the founders. They said that doesn’t void the release as against the counterparty. So they make no allegation that Canaccord fraudulently induced this release. They don’t really even make an allegation if you look at the complaint about how the founders fraudulently induced the release.

Speaker 5 (22:44):

That’s the Texas case, right?

Joseph Palmore (22:46):

That’s the Texas case, which is ongoing. And if you look at the paragraphs in the complaint about seeking rescission of the release, the reason they say the release should be rescinded is because they say VBF didn’t know about all this fraud that happened, the fraud that they’re now suing about, including this Michael’s email and all the rest. But New York law is quite clear. This is Centro, this is Belafonte, that the failure to disclose the fraud that underlies the actual complaint, the released fraud, doesn’t invalidate the fraud. If it did, you could never release unknown claims.

Speaker 5 (23:20):

Can I just ask procedurally to confirm what I think is your position, that if we were to agree with you on the validity of the mutual release, that would be dispositive of the entire appeal?

Joseph Palmore (23:35):

Yes. These are three independent grounds that the district court found. And of course we haven’t even addressed the engagement agreement hasn’t even come up. But that’s yet another reason to affirm here because this falls right within the heartland of that, as well, that it made, and it stood to reason, that VBF would be responsible for the reliability and accuracy of the information about fish farming and that the generalist investment banker, Canaccord, which played a different role, would not be held liable for any inaccuracies in that information. And—

Speaker 5 (24:08):

Thank you. Thank you very much.

Joseph Palmore (24:09):

Thank you, Your Honor.

Speaker 5 (24:12):

Mr. Babbin. Mr. Babbin, would you mind just addressing the same question I just asked your colleague, which is, if for some reason we were to agree with the appellee’s position on the mutual release, would that be dispositive of the appeal?

Jeffrey Babbin (24:30):

It would. Each of these release—each of these defenses itself is fully dispositive. But it’s interesting, Your Honor, is that in the Romero Aviles case, they found both that the adverse interest exception was plausible, as well as equitable principles with respect to invalidating a release. So these are related in a sense that, yes, they’re independent, but the facts are related. And beyond just the separate fraud, New York law does have broad, equitable principles, which we also have a separate section of our brief against unfair contracts where there’s really no ability to learn the extent of the injuries. And that’s what was relied on in those cases. And so that’s a whole another separate area. And if there’s any question about New York law, I know Your Honor said, well, that’s a district court decision.

Jeffrey Babbin (25:20):

I think that, once we have a full record, I didn’t ask for certification because I thought New York law was straightforward here, but if there’s a question about the parameters of these issues, once we have a full record after some discovery, I think it’d be easier to apply these principles. And if there’s still some question, we can always—the court could always decide to—district court or this court could always decide to certify. Let me just mention, it’s not just the corporate looting. It was the entire corporate waste. Means that there was no benefit. And they facilitated that. They manipulated marketing models. They backed into the numbers. There’s evidence that they juiced the numbers that allowed all of this activity to take place. Beyond just lining—all of the corporate management, if they had not been involved, we can show more likely than not that this company—that the $80 million would not have dissipated.

Jeffrey Babbin (26:29):

Let me just mention, there was a mention of the exculpation clause. If I can just very briefly, this is a contract. There’s duties under the contract can’t override tortious conduct, and Canaccord did its own due diligence, which it was required to do. There’s a conflict as to the meaning of this contract, the only information that they reasonably relied on. And when they got information from the leading aquaculture expert, what did they do with respect to that? Not one iota. It wasn’t like they got other expert opinions saying, “Well, this is a good model for this company.” No, they did nothing. They went along. And that’s why, Your Honor, there’s a relationship between all three of these defenses. The same facts underlie equitable principles, which under New York allow us to develop this evidence and pursue our causes of action. Thank you.

Speaker 1 (27:02):

Thank you very much. We’ll reserve decision.