Abdo v. Fitzsimmons
| Decision Date | 17 February 2021 |
| Docket Number | Case No. 17-cv-00851-TSH,Case No. 17-cv-01232-TSH |
| Parties | JOHN E. ABDO, et al., Plaintiffs, v. MICHAEL FITZSIMMONS, et al., Defendants. RISING TIDE I, LLC, et al., Plaintiffs, v. MICHAEL FITZSIMMONS, et al., Defendants. |
| Court | U.S. District Court — Northern District of California |
This securities fraud action arises from Plaintiffs' investment in a technology company, Delivery Agent, Inc., which went bankrupt, causing Plaintiffs to lose tens of millions of dollars. Plaintiffs maintain that they were led to invest in Delivery Agent by misrepresentations by officers and directors of the company as to several significant problems that eventually prevented the company from having an initial public offering and doomed it. Pending before the Court is Defendants' Motion for Summary Judgment. Abdo ECF No. 201/Rising Tide ECF No. 197. Plaintiffs filed an Opposition and Defendants filed a Reply. Having considered the parties' positions, relevant legal authority, and the record in this case, the Court GRANTS IN PART and DENIES IN PART Defendants' Motion.
The following factual summary provides an overview of the background of the case. The Court will add details relevant to particular issues as needed.
Plaintiffs Rising Tide I, LLC and Rising Tide II, LLC (collectively, "Rising Tide" or "RT") are venture capital funds managed by Ossama Hassanein.1 Plaintiff John E. Abdo is an individual investor and trustee of the two Plaintiff trusts (collectively, "Abdo"). Between June 2014 and April 2016, Plaintiffs invested nearly $35 million in Delivery Agent, Inc. ("Delivery Agent" or the "Company") through a series of securities purchases.
Delivery Agent was a private e-commerce and marketing company founded in the early 2000s. Defendant Michael Fitzsimmons was the Company's founder and CEO and Chairman of its Board of Directors (the "Board"). Defendant Peter Lai was President and Chief Operating Officer ("COO") until about January 2015. Defendant James Peters joined the Board as an outside director in Fall 2014, became the Company's President and COO effective January 5, 2015, and became an inside member of the Board as of March 2015.
By early 2014, the Company had raised more than $100 million from venture capital funds and strategic investors, including from four investors which placed on the Board four of the Defendants: Souheil Badran, Christian Borcher, Peter Goettner, and Marc Yi. Defendant Ernest Del was another outside member of the Board, as was Defendant Christopher Power, chairperson of the Board's Audit Committee. Together, these six were the Board's outside directors (the "ODs").
Starting in early 2014, the Company began marketing itself as having developed a "proprietary technology" that would allow television viewers to purchase products from their smart TVs using their remote controls. The technology, referred to as "television commerce" or "t-commerce," was designed to allow a consumer to engage with live TV through an overlay onthe TV screen to transact and purchase products and services seen in programming. Decl. of Sarah E. Peterson ISO Pls.' Opp'n ("Peterson Decl.") Ex. 72; Peterson Decl. Ex. 75, Tr. of Dep. of Christopher Lee2 ("Lee Dep.") at 15:14-17:14.
Delivery Agent's first public exhibition of its t-commerce technology took place on February 2, 2014 during Super Bowl XLVIII. The Company was hired by Zenith Media Services, Inc. on behalf of client H&M to deploy the technology in connection with a commercial for a line of H&M underwear sponsored by soccer star David Beckham. Delivery Agent's overlay was supposed to appear at the bottom of the commercial and allow viewers with smart TVs to order the briefs with their remotes. However, things didn't go as planned, and when the ad with the underwear ran, the overlay failed to trigger as expected on the majority of TV sets. Peterson Decl. Ex. 97, Tr. of Dep. of Mac Hagel at 49:12-51:12; Lee Dep. at 127:3-129:8. Shortly after the Super Bowl debut, Lai (then president and COO) informed Fitzsimmons (CEO) that only three of 600 pieces of merchandise had been purchased by the viewing public through the Company's platform. Fitzsimmons responded by telling Lai to "buy every pair" and within hours of the commercial's airing over 472 of the 600 pieces had been purchased by Delivery Agent employees.
The day of the Super Bowl, Delivery Agent's Chief Strategy Officer ("CSO") Gabe Greenberg told H&M and Zenith that "we sold out all 1,100 items we had in stock." The following day, the Company issued a press release quoting Fitzsimmons as stating that the event was "a great campaign" and "kicked-off a new paradigm for advertising, fundamentally changing the discipline by making television advertising actionable and measureable." At about the same time, several members of Company's senior management, including Lai, were busy fabricating sales and viewer engagement data to send to H&M and Zenith to support the falsehood that the launch of the t-commerce platform had been a great success and that merchandise had "sold out."
On or about February 7, 2014, a non-executive Delivery Agent employee approached the Company's CFO, Michael Novelly, and its general counsel, Mark Smith, to report his involvement in the fabrication of data to be sent to H&M. That same day, Smith notified directors Borcher, Goettner, and Power of the allegations and convened an Audit Committee meeting for the following day. He told them that the subject of the meeting pertained to a matter of fraud related to a presentation called H&M David Beckham Super Bowl Campaign Recap that had been sent to H&M, its agency, and potential Series F investors, that "[i]t came to our attention that the figures in the [] presentation were fraudulently prepared," and that "[u]pon our discovery of this matter, we conducted a preliminary internal investigation and learned that this matter concerns some members of senior management."
The meeting on February 8 was attended by Borcher, Goettner, Power, Smith and others. At the meeting, the Committee instructed Smith and the head of HR to lead an internal investigation into the allegations. The Committee also instructed Fitzsimmons to focus on raising money from investors because the Company was in dire financial straits. On February 14, the Company's CFO emailed the ODs and notified them that a potential investor had "backed out" of its commitment to make a $12 million investment and that if Delivery Agent did not receive $4 million from insiders within five days, "the Company will run out of cash" and "we would need to discuss certain wind down scenarios." And on February 28, Fitzsimmons advised Badran, Borcher, Goettner, Yi and others that Delivery Agent "barely made payroll today."
Smith and the head of HR began their investigation shortly after the February 8 meeting, and the full Board was notified of the investigation. By mid-February, the Audit Committee members—Power and Novelly—knew that Fitzsimmons was implicated in the misconduct connected to the H&M Super Bowl ad. On March 12, 2014, internal investigators including Smith completed their investigation and on March 13 the findings were presented in a written report to Audit Committee members, including Borcher, Goettner and Power, and to Delivery Agent's outside counsel Latham & Watkins ("Latham"). Peterson Decl. Ex. 107. The report's findings confirmed that Fitzsimmons had ordered Lai to purchase unsold merchandise to create the illusionof a "sell out." On March 27, Smith emailed the investigation report to Borcher, Goettner, Yi, and Power. Power presented the investigative findings to Delivery Agent's auditor, Deloitte & Touche ("Deloitte"). Deloitte found the report unsatisfactory and said that it would not restart audit services until a second investigation was completed by an independent, outside firm. On March 26, 2014, the Board instructed the Audit Committee to retain outside law firm Bergeson, LLP to conduct that investigation.
On June 18, 2014, Bergeson presented a 76-page report to the Board, Peterson Decl. Ex. 145 at 49:6-14, and Power advised Deloitte of the results of the investigation in early July. Deloitte subsequently informed Delivery Agent's Board that it would not resume auditor services unless all those who participated in the fraud, including Fitzsimmons, Lai, and other members of senior management, were removed from positions of authority within the Company. Deloitte told the Company it could not accept "management representations" from Fitzsimmons required to issue audit reports. On July 9, Power emailed Borcher, Yi, Goettner, Del, and Badran to update them on his meeting with Deloitte, telling them that Deloitte He went further, telling them that it was "not likely at this point" that Deloitte would "continue as auditors." On about July 17, 2014, Deloitte advised Power that it was "walking away," that it was unwilling to rely on "certain reps from management," and that it would not "consent to releasing or publishing" its 2012 audit report. Deloitte wouldn't be willing to reissue its 2012 audit opinion unless new management was put in place and it could "perform additional procedures to try and get comfortable that there was no other items that might have been influenced by Fitzsimmons that would have impacted" Delivery Agent's reporting. Peterson Decl. Ex. 16, Tr. of Dep. of Timothy de Kay ("Deloitte Dep.") at 119:2-120:1. On July 29, the Board unanimously voted to terminate Deloitte.
Following the Board's termination of Deloitte, Deloitte refused...
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