United States District Court, E.D. Michigan, Southern Division
Anthony P. Patti, United States Magistrate Judge.
Gershwin A. Drain, United States District Judge.
Avomeen Holdings, LLC initiated this securities fraud action
on November 14, 2017, alleging violations of Securities and
Exchange Act Rule 10(b) and SEC Rule 10b-5. Dkt. No. 1. In
addition, Plaintiff raises several claims arising under state
before the Court is Defendants Shri Thanedar and Chemreal,
LLC's Motion for Summary Judgment. Dkt. No. 28. The Court
will resolve the matter without a hearing. See E.D.
Mich. LR 7.1(f)(2). For the reasons set forth below, the
Court will DENY the Motion [#28].
action arises out of an Equity Purchase Agreement, under
which Defendant Thanedar sold Plaintiff a majority interest
in Avomeen, LLC (hereinafter “Avomeen”) __ a
chemical testing laboratory. Dkt. No. 1, p. 1 (Pg. ID 1). In
July 2016, Plaintiff furnished and Defendant Thanedar
accepted a Letter of Intent (“LOI”) to purchase
Avomeen for a pre-adjustment sale price of $30 million, plus
an earn-out of up to $5 million depending on the
company's 2016 EBITDA.Id. Under the LOI, the
transaction was subject to several conditions precedent,
including a four-month period of accounting and business due
asserts that in pre-close discussions with its
representatives, Defendant Thanedar made several
representations that proved to be inaccurate. Id. at
p. 9 (Pg. ID 889). Most glaring, Defendant Thanedar
represented that the vast majority (90% or more) of
Avomeen's revenue for a given month was recognized upon
100% completion of a project for a client. Id. He
noted only three types of projects that fell outside of this
general rule. Id. at p. 10 (Pg. ID 890). After the
sale was completed, however, Defendant Thanedar revealed that
it was Avomeen's practice that “projects that
[were] 90% or more completed in a month [were] billed in the
end of that month.” Dkt. No. 32-21, p. 3 (Pg. ID 1095).
Kolbert, who reported directly to Defendant Thanedar, asserts
that Thanedar made this change in September 2016 in order to
inflate monthly revenue for certain months leading up to the
sale of Avomeen. Dkt. No. 32-15, pp. 5-6 (Pg. ID 1061-62).
But Plaintiff's expert witness__ Certified Public
Accountant J. Bradley Sargent __ suggests Avomeen's
improper reporting practices manifested much earlier.
See Dkt. No. 28-13, p. 24 (Pg. ID 456). Namely,
between October 1, 2015 and September 30, 2016, Avomeen had
been pulling revenue from future months into present months
to create a false appearance of steady growth. See
Id. at pp. 24-27 (Pg. ID 456-59). This practice, which
Sargent likened to a Ponzi scheme, led to an estimated $634,
530 in improperly recognized revenue during that twelve-month
period. See id.
point prior to close, the parties agreed to modify the terms
of the original LOI. Dkt. No. 28-11. Rather than pay a base
price of $30 million with a potential $5 million earn-out,
Plaintiff would now pay a guaranteed price of $33.6 million.
Id. Plaintiff asserts that the purpose of this
change was to avoid potential disputes about what items fell
inside or outside of the final adjusted EBITDA calculation.
Dkt. No. 32-3, p. 5 (Pg. ID 969). Further, that it felt
comfortable with this change because Avomeen had reported
strong revenue earnings for several months in a row.
Id. Defendants, in contrast, characterize this
change as a reduction in price, and maintain that the
reduction was prompted by concerns that Avomeen would not
meet its revenue goal for the month of October, and
consequently, its projected EBITDA for the year. Dkt. No. 28,
p. 14 (Pg. ID 275).
case, Avomeen did enter into a revenue slump beginning in
October 2016. Id. at p. 13 (Pg. ID 274). One of
Plaintiff's representatives testified that they were
expecting Avomeen's revenue for the months of October and
November to be close to $1 million, as opposed to the $800,
000 and $900, 000 actually generated. Dkt. No. 28-4, p. 5
(Pg. ID 319). Still, Plaintiff opted to move forward with the
purchase and the parties closed their transaction on November
7, 2016. Id.; Dkt. No. 32, p. 8 (Pg. ID 888).
Plaintiff purchased Avomeen's securities for $33.6
million and is now the majority owner of the company.
Id. Defendant Chemreal, LLC -- an entity controlled
by Defendant Thanedar __ continues to hold a minority
interest in the company.
brings the instant suit, asserting it was induced into
overpaying for Avomeen due to alleged misrepresentations by
Defendant Thanedar surrounding Avomeen's monthly revenue
earnings. Plaintiff contends that it suffered damages in the
range of $6, 995, 077 to $7, 980, 445. Id. at p. 17
(Pg. ID 897).
Rule of Civil Procedure 56(c) empowers a court to grant
summary judgment if “there is no genuine issue as to
any material fact and the moving party is entitled to
judgment as a matter of law.” Cehrs v. Ne. Ohio
Alzheimer's Research Ctr., 155 F.3d 775,
779 (6th Cir. 1998). The evidence and all reasonable
inferences must be construed in the light most favorable to
the non-moving party. Matsushita Elec. Indus. Co., Ltd.
v. Zenith Radio Corp., 475 U.S. 574, 587 (1968). There
is a genuine issue of material fact “if the evidence is
such that a reasonable jury could return a verdict for the
nonmoving party.” Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248 (1986). Mere allegations or
denials in the non-movant's pleadings will not suffice,
nor will a mere scintilla of evidence supporting the
non-moving party. Id. at 248, 252. Rather, there
must be evidence on which a jury could reasonably find for
the non-movant. Id. at 252.
Plaintiff has Standing to Assert a Rule 10b-5 Claim.
initial matter, Defendants assert that Plaintiff lacks
standing to bring a claim under Rule 10b-5. Defendants put
forth several arguments, none of which are persuasive.
10b-5 prohibits ‘mak[ing] any untrue statement of
material fact' in connection with the purchase or sale of
securities.” Janus Capital Grp, Inc. v. First
Derivative Traders, 564 U.S. 135, 137-38 *2011).
“A party bringing a private action for money damages
under Rule 10b-5 must be an actual purchaser or seller of
securities.” Grubb v. Fed. Deposit Ins. Corp.,
868 F.2d 1151, 1159 (10th Cir. 1989) (citing Blue Chip
Stamps v. Manor Drug Stores, 421 U.S. 723, 731-33
(1975)). “[I]t is not the case that plaintiffs must
allege some direct communication with [the
defendants] to state a claim under § 10(b).”
Benedict v. Cooperstock, 23 F.Supp.2d 754, 758 (E.D.
Mich. 1998). Rather, “[s]ection 10(b) specifically
provides that persons may not engage in prohibited conduct
‘directly or indirectly.'” Id. In
short, “plaintiffs must allege that [the defendants]
made a false or misleading statement (or omission) in
connection with the sale of a security that [they] knew or
should have known would reach investors, and that the
plaintiffs relied on it and were damaged.” Id.
(citing Anixter v. Home-Stake Prod. Co., 77 F.3d
1215, 1226 (10th Cir. 1996)).
Defendants cannot dispute that Plaintiff was the purchaser of
Avomeen's securities. Indeed, Plaintiff holds a majority
interest in the company and incurred over $16 million in debt
in connection with the transaction. See Dkt. No. 32,
p. 8 (Pg. ID 888). While Defendants argue that Plaintiff is
simply a holding company, and that High Street Capital
(private equity fund) was the underlying financer, the cases
on which Defendants rely do not support their position that
Plaintiff lacks standing. To the contrary, these cases, at
best, stand for the proposition that a de facto investing
entity may have standing to bring suit in addition to a
holding company. See, e.g., Grubb, 868 F.2d
at 1159-62, n.11 (recognizing for purposes of standing a suit
filed on behalf of holding company and underlying
addition, Plaintiff has alleged facts suggesting Defendants
made misleading statements in connection with the sale of
Avomeen, and that Plaintiff relied on those statements and
was damaged as a result. Though Defendants argue that the
alleged misrepresentations were made to High Street Capital,
and not directly to Plaintiff, a claim under Rule 10b-5 does
not require proof of direct communication. See
Benedict, 23 F.Supp.2d at 758. Plaintiff can rely on
Defendants' communications with High Street Capital
because Defendants knew their ...