Giuliano v. Brian Ferdinand, Case No. 16-10202 (KG)
| Decision Date | 06 June 2018 |
| Docket Number | Case No. 16-10202 (KG),Adv. Pro. No. 17-50662 (KG) |
| Parties | In re: LIQUID HOLDINGS GROUP, INC., et al., Debtors. ALFRED T. GIULIANO, in his capacity as chapter 7 trustee, Plaintiff, v. BRIAN FERDINAND, BRIAN M. STORMS, RICHARD SCHAEFFER, KENNETH D. SHIFRIN, JAY H. BERNSTEIN, DARREN C. DAVY, DAVID R. FRANCESCANI, WALTER F. RAQUET, THOMAS R. ROSS, VICTOR R. SIMONE, JR., DENNIS A. SUSKIND, ALLAN B. ZAVARRO, SANDLER O'NEIL & PARTNERS, L.P., FERDINAND HOLDINGS LLC, LT WORLD LIMITED, LLC, ROBERT KELLER, CMK HOLDINGS, LLC, SCHAEFFER HOLDINGS, LLC and SHAF HOLDINGS, LLC, Defendants. |
| Court | U.S. Bankruptcy Court — District of Delaware |
(Jointly Administered)
Re: D.I. 66, 68, 70, 73, 77, 82, 85
OPINION1Alfred T. Giuliano, in his capacity as chapter 7 trustee (the "Trustee"), brings this adversary proceeding against Brian Ferdinand ("Ferdinand"), Brian M. Storms ("Storms"), Kenneth D. Shifrin ("Shifrin") (Ferdinand, Storms and Shifrin collectively, the "Officer Defendants"), Jay H. Bernstein ("Bernstein"), Darren C. Davy ("Davy"), David R. Francescani ("Francescani"), Walter F. Raquet ("Raquet"), Thomas R. Ross ("Ross"), Victor R. Simone, Jr. ("Simone"), Dennis A. Suskind ("Suskind"), Allan B. Zavarro ("Zavarro") (Schaeffer, Bernstein, Davy, Francescani, Raquet, Simone, Suskind and Zavarro collectively, the "Director Defendants") and Robert Keller ("Keller") in their individual capacities as officers and directors of Liquid Holdings Group, LLC ("Liquid" or the "Company"). The Trustee additionally brings this action against Sandler O'Neil & Partners, L.P. ("Sandler"), Ferdinand Holdings LLC, LT World Limited, LLC, CMK Holdings, LLC, Schaeffer Holdings, LLC and SHAF Holdings, LLC (together with all other parties listed above, the "Defendants"). The Trustee claims that through lopsided acquisitions, a fraudulent initial public offering (the "IPO") and a fictitious recording of revenue and customers, Defendants intentionally perpetuated the illusion of Liquid as a financially viable entity while looting the Company for their own benefit.
Defendants moved to dismiss the Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, made applicable by Bankruptcy Rule 7012 (the "Motion" or "Motions"). There are seven Motions on behalf of the Defendants.
On January 17, 2012, Ferdinand, Schaeffer and Keller (collectively the "Founders") created Liquid to act as a holding company that could provide integrated trading, risk management and accounting tools to the financial services community.3 Compl. ¶¶ 27, 30, 105. To grow the Company and eventually push it toward the IPO, the Founders began in earnest to acquire entities. Compl. ¶ 30. Between April 2012 and September 2012, Liquid acquired eight separate entities (the "Acquisition Spree")4. See Compl. ¶¶ 32-83. Following the Acquisition Spree, each entity acted as a subsidiary to Liquid as it prepared to consummate an initial public offering. Compl. ¶¶ 81-83. To properly prepare for the IPO, Liquid hired Storms as its CEO on December 1, 2012. Compl. ¶ 83.
From its inception, Liquid relied heavily on money from two sources. The first source was QuantX, a company which operated by allocating capital to certain investment managers who would then make investment decisions and be paid a percentage of the profits.5 Compl. ¶¶ 84-86. QuantX was Liquid's primary customer throughout nearly the entirety of Liquid's existence, accounting for upwards of 75% of Liquid's software licensing revenues at times. Compl. ¶¶ 90, 94.
Liquid obtained its second source of money through investments primarily from one individual, Douglas Von Allmen ("Von Allmen"), who engaged in several transactions with Liquid in return for shares of the Company. Compl. ¶ 96-97. This relationship began in June 2012 with Von Allmen signing a $12.5 million subscription agreement for 1,239,986 shares of Liquid stock. Compl. ¶¶ 96-97.
With funding from Von Allmen and an alleged customer base in place, Liquid sought to raise capital by filing its initial S-1 in contemplation of an IPO on April 11, 2013.6 Compl. ¶ 105. In its S-1, Liquid made the following representations:
Compl. ¶ 105. On July 9, 2013, Liquid filed an amended registration statement with the SEC indicating a Proposed Maximum Offering Price of $63.25 million for 5 million shares, representing $12.65 per share. Compl. ¶ 107. Two days before the IPO, Liquid dropped its proposed offer to $53.13 million for 4.2 million shares through a second amended registration statement, still representing $12.65 per share. Compl. ¶ 108. Liquid's IPO opened on July 26, 2013, and closed on July 31, 2013. Compl. ¶¶ 111, 114. Through the IPO, Liquid sold 3,175,000 shares at $9.00 per share, yielding $26.7 million. Compl. ¶ 111. In total, Liquid received net proceeds of $17.3 million (following commissions and offering-related expenses.)7 Compl. ¶ See Compl. 111-17. Of the $26.7 million, Ferdinand and Von Allmen purchased $16.2 million worth of shares. Compl. ¶ 112. Moreover, Von Allmen and Liquid entered into a pre-IPO agreement (the "Pre-IPO Deal") in which Von Allmen received an additional 732,292 shares at no cost, bringing his total purchase price down to $6.31 per share. Compl. ¶ 113, 118. Following payment to company insiders to repay loans, stock repurchases, etc., Liquid was left with $14.76 million, far below the $60 million number it anticipated. See Compl. 111-17.
Notwithstanding the disappointing IPO, Liquid reported in its second quarter 10-Q that the total Units used by customers had risen from 351 to 385 (despite the customer base falling from 25 to 23)8. Compl. ¶ 121. Of the 385 Units, QuantX accounted for 79%. Id. The apparent positive trend in customer growth continued through Liquid's third quarter, where on November 14, 2013, it reported the customer base increased from 23 to 27, with total Units increasing from 385 to 455. Compl. ¶ 124. Again, QuantX accounted for a high percentage of Units, this time representing 83%. Id.9
As Liquid progressed into 2014, it began to see the dangers of its reliance on QuantX. On February 4, 2014, Shifrin emailed Storms to inform him that Liquid was about to request payment from QuantX for the December 2013 receivable, which had not been satisfied. Compl. ¶ 132. On March 28, 2014, Storms wrote to Ferdinand stating that QuantX had an outstanding payment of $500,000 due to Liquid. Compl. ¶ 137. Ferdinand responded by telling Storms that QuantX was "having a terrible quarter and will break if it's stretched any further[,]" to which Storms replied that QuantX was "a major piece of [Liquid's] revenue and if it's really month to month combat then [Liquid has] a major problem." Id. The QuantX issues were apparent to Ferdinand, who was informed that equity in QuantX was down to $4.3 million, notwithstanding the $500,000 on call and a cross-guarantee of a $4 million loan to one of Ferdinand's affiliated entities. Compl. ¶ 136. On April 14, 2014, Shifrin again emailed Storms advising him that QuantX still owed Liquid $263,000 from receivables in February, as well as a $250,000 risk enterprise fee due at the beginning of each quarter. Compl. ¶ 140. Storms responded with concerns regarding the enterprise risk payments, which he believed had not been paid, and that it should not be a day to day responsibility of Liquid's to inform QuantX of what it owed. Compl. ¶ 140-41.
Due in part to the fracturing relationship between QuantX and Liquid, Ferdinand resigned from Liquid's Board and from his position as Head of Corporate Strategy on April 18, 2014, but agreed to provide services to Liquid as an "independent contractor" going forward while remaining at the helm of QuantX. Compl. ¶ 142-44. Upon his resignation, Ferdinand agreed to a lock-up agreement (the "Lock-Up Agreement") with Liquid indicating he would not sell or transfer any of his Liquid shares for a one-year period. Compl. ¶ 142. Despite devoting nearly all of his attention to QuantX, Ferdinand was not able to help the company meet its required payments, and QuantX continued to fall behind. See Compl. ¶¶ 148-152.
With QuantX continuing to miss payments, Liquid sought to raise capital elsewhere and issued a second IPO (the "Second IPO") on May 15, 2015. Compl. ¶ 153. Liquid sold 32 million shares at $1.25 per share, representing a 45% discount to the then-current market price of $2.30 per share. Id. The Second IPO did nothing to solve Liquid's liquidity issues, and in fact sent the market price of Liquid's stock plummeting. Id. Liquid responded by attempting to cut costs in other ways such as switching audit companies (from KPMG to Grant Thornton) and asking Davy and Ross to resign from the Board. Compl. ¶¶ 166-67. Liquid also fired Shifrin on October 24, 2014, replacing him with Peter Kent ("Kent"). Compl. ¶ 169. Even with these issues and the inability to recover payments due from QuantX, Liquid released information on October 30, 2014, stating that it had 129 customers, with 95 of them contributing to GAAP revenue and 34 under contract and expected to contribute to further revenue. Compl. ¶ 172....
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