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FIH, LLC v. Foundation Capital Partners, LLC

United States District Court, D. Connecticut

January 31, 2018

FIH, LLC, Plaintiff,


          Janet Bond Arterton, U.S.D.J.

         In this action for violation of § 10(b) of the Securities Exchange Act of 1934, the Connecticut Securities Act, and related state common law claims, Plaintiff moves [Doc. # 174] for summary judgment on all claims related to one set of alleged affirmative misrepresentations, and Defendants cross-move [Doc. ## 173, 176, 178, 179] for summary judgment on all claims. For the reasons set forth below, the Court DENIES Plaintiff's Motion for Summary Judgment as to Defendants' February 3, 2014 pipeline statements, and GRANTS Defendants' Motions for Summary Judgment as to Plaintiff's federal claim. The Court declines to continue to exercise supplemental jurisdiction over Plaintiff's remaining state-law claims, which are dismissed for lack of subject matter jurisdiction.

         I. Background

         Second Amended Complaint Allegations

         Plaintiff filed its Second Amended Complaint on May 10, 2016 (“SAC” [Doc. # 88].) The SAC alleges that Plaintiff FIH, “[i]n reliance upon Foundation's and the individual defendants' representations . . . purchased $6.75 million worth of interests in Foundation[.]” (Id. at 2.) According to the SAC, the individual defendants “misrepresented Foundation's prospects and management[]” by knowingly misrepresenting that “Foundation was capable with its then-existing management of making three to four investments a year in hedge fund GP [general partner] interests.” (Id.) The SAC alleges that in fact, “[e]ach defendant knew that Foundation had not been making any progress towards closing on hedge fund GP targets” and also knew that this would not change due to Defendant Dean Barr's incompetence, financial irresponsibility, lack of contacts to develop leads, and “functional inability to tell the truth[, ]” combined with Barr's family feud with Defendant Meehan. (Id. at 2-3 (internal quotation marks omitted).) Barr and Meehan were the founders of Foundation and were married to sisters, but had developed a “dysfunctional rift and animus” related to Barr's failing marriage. (Id. at 3.)

         Defendant Dean Barr was the managing partner and managing principal of Foundation. (Id. at 5.) Defendant Joseph Meehan was a partner, managing principal, and the Chief Operating Officer. (Id.) Defendant Thomas Ward was a partner, principal, manager, and Head of Distribution. (Id.) Defendant Joseph Elmlinger was a partner, principal, and Head of Risk and Structuring. (Id.)

         In February 2014, Foundation made available Due Diligence Materials to FIH that “cited fourteen specific targets delineated by their code names: Projects Lake, Apex, Corvette, Granite, Breakout, Pilot, Centaur, Pound, Tensor, Mainstay, Yale, Halo, Gun, and Bronco[]” and that “represented that non-disclosure agreements had been signed with the target hedge funds in Projects Lake and Granite.” (Id. at 14.) The February Due Diligence materials, in a section entitled “Investment Pipeline” list the projects, with the following introductory description: “Below is the current representative FCP pipeline, including those with which the firm is in active discussions. This pipeline has become increasingly active in recent months as a result of industry recovery, manager interest, regulatory reform and the presence of relatively few potential buyers.” (Ex. B to SAC [Doc. # 89-1 at 33].)

         One of the pipeline items listed is “Project Apex.” (Id.) On January 22, 2014, Defendant Barr had “emailed FIH an update on Project Apex and represented, ‘I believe we can move expeditiously on this deal.'” (SAC ¶ 73.) On February 3, 2014, Barr also wrote in an email to FIH that “[o]ur pipeline continues to expand with real [and] immediate deals.” (Id. ¶ 74.)

         The SAC alleges that “on at least two occasions, FIH's agent asked both Barr and Meehan- the two most senior people in Foundation's leadership-if their relationship as brothers in law, especially in light of Barr's divorce from Meehan's wife's sister, posed a threat to their ability to work together.” (Id. ¶ 83.) According to the SAC, “[e]ach answered unequivocally no, and each insisted that they could maintain a professional relationship with the other[, ]” with “Barr ma[king] this representation in a phone call with FIH's representative on December 5, 2013[, ]” and “Meehan mak[ing] this representation in a separate phone call with FIH's representative” on the same day. (Id. ¶ 84.) FIH contends that “[a]t the time the statements were made, [Barr and Meehan] had a deep hatred for each other that made Foundation's leadership dysfunctional[, ]” and that “their relationship was so hostile that Meehan stated, only a couple of weeks after FIH's Investment was finalized, that he was ‘unlikely to stay' at Foundation under the current leadership model[, ] [b]ut Meehan did not make this known to FIH prior to its Investment.” (Id. ¶ 89.)

         Finally, the SAC alleges that Barr falsely told FIH that there were no concerns to be had about him, including about his background or personality, before FIH invested their money in Foundation.[1] (Id. ¶ 91.)

         FIH alleges that after completing their investment in Foundation, “[t]he dismal truth about Foundation's deal pipeline was revealed” by the disclosure of “internal Foundation documents entitled ‘Project Activity Logs.'” (SAC ¶ 143.) Project Activity logs “were internal documents which listed hedge fund targets in Foundation's pipeline under three categories: Live Deals, Prospects, and Dead Projects.” (Id.) “For each hedge fund target, the Project Activity Log was updated to reflect progress in columns named ‘recent activity/notes, ' ‘next steps' and ‘process milestones.' ” (Id.) According to the SAC, “[t]he Project Activity Logs served as an internal diary of the progress made by Foundation on each of the targets to date and . . . were distributed to Foundation's employees - including the individual defendants - for discussion at weekly meetings to discuss movement on the pipeline as demonstrated in the Project Activity Logs.” (Id.) The SAC alleges that “FIH did not have access to the Project Activity Logs until after the Investment had been made[:] The first version [FIH] received was on March 4, 2014 and was dated March 3, 2014, and this version included historical information on all of Foundation's prospects up to that date.” (Id. ¶ 144.) FIH contends that the Project Activity Logs “demonstrated the falsity of the specific target representations made by the individual defendants.” (Id. ¶ 147.)

         Similarly, FIH alleges that after its investment was finalized, the “truth [came] out” regarding Foundation's leadership rift and the threats that Barr posed to the company. (Id. ¶ 166-93.)

         The SAC includes six counts, as follows:


         Counts I, III, and IV require a showing of scienter, while Counts II and V require showing only negligence. The following charts show the alleged false statements and counts remaining in the case after the Order on the Motion to Dismiss and the Order Granting Motion for Reconsideration [Doc. # 77]:

         Alleged False Statements Remaining After Order on Motion to Dismiss

Alleged False Statements

Party(ies) Claim Asserted Against

1. Statement in February Due Diligence Materials that “the current representative [Foundation] pipeline . . . has become increasingly active in recent months”

Barr, Meehan, Elmlinger, Ward

2. Barr/Meehan statement that their relationship with one another posed no threat to their ability to work together

Barr, Meehan

3. Barr failure to update FIH regarding his statement that Foundation had a green light to pursue Project Apex and he believed Foundation could “move expeditiously on this deal”

4. Barr statement that “[o]ur pipeline continues to expand with real, immediate deals”

5. Barr statement that there was nothing “FIH needed to know about [his] background or personality” and no other matters concerning him that FIH should know about before proceeding with an investment


         Claims and Parties Asserted Against


Asserted Against

Count I: Violation of § 10(b) of the Exchange Act (scienter)

• All Defendants (as to Statement 1, above)

• Barr and Meehan (as to Statement 2, above)

• Barr only (as to Statements 3-5, above)

Count II: Violation of the Connecticut Securities Act (negligence)

• All Defendants (as to Statement 1, above)

• Barr and Meehan (as to Statement 2, above)

• Barr only (as to Statements 3-5, above)

Count III: Intentional Misrepresentation (scienter)

• All Defendants (as to Statement 1, above)

• Barr and Meehan (as to Statement 2, above)

• Barr only (as to Statements 3-5, above)

Count IV: Fraudulent Inducement (scienter)

• All Defendants (as to Statement 1, above)

• Barr and Meehan (as to Statement 2, above)

• Barr only (as to Statements 3-5, above)

Count V: Negligent Misrepresentation (negligence)

• All Defendants (as to Statement 1, above)

• Barr and Meehan (as to Statement 2, above)

• Barr only (as to Statements 3-5, above)

Count VI: Unjust Enrichment

• All Defendants

         Expert Discovery Dispute

         On September 26, 2016, less than a month before the then-scheduled close of discovery date, the Court conducted a telephonic status conference ([Doc. # 134]) that had originally been scheduled as a pre-filing conference. Two weeks prior to the status conference, Defendant Meehan, with the consent of all parties, moved to extend the discovery deadline and the deadline for filing dispositive motions forward 60 days, explaining that the “parties have scheduled seven (7) depositions through the end of October[, ]” “responses to various third party subpoenas remain outstanding[, ]” and “based on responses to said third party subpoenas, more depositions are likely to be scheduled in this matter.” (Consent Mot. for Extension of Time [Doc. # 130].) Discovery had been scheduled to close on October 17, 2016, and Defendant Meehan, on consent of all parties, thus requested that discovery be extended through December 16, 2016. (Id.)

         At the September 26, 2016 status conference, the Court and the parties discussed the reasons necessitating the extension of the discovery deadline, and the Court specifically inquired whether it was still the case that no parties anticipated using experts. (Transcript of September 26, 2016 Telephonic Status Conference, Ex. H to Barr Supp. Aff. [Doc. # 182-8] at 7.) Plaintiff's counsel stated “I believe that's true your Honor, for us, speaking for the plaintiff.” (Id.) Counsel for Defendant Meehan stated that for his part, “[t]hat may not be true any longer[, ]” noting that “[w]e may have an expert on the issue of reasonable reliance on the part of the plaintiff as a sophisticated investor[]” and that “we're still grappling [with] whether we want one.” (Id. at 7-8.) In response, the Court noted that “if discovery is to be completed by [the extended deadline of] December 16th, that includes deposition of your expert. If that includes deposition of your expert, you're going to have to serve your expert report by mid November.” (Id. at 8.) Counsel for Defendant Meehan requested additional time for expert disclosure and deposition, which the Court expressly denied. (Id. at 8-9.) As the Court noted:

I don't think that's going to work. I'm looking at your motion that says that this is - - you want 60 days, up to and including December 16th. And that's what I'm prepared to give. But I'm not prepared to have you run in an expert at the last minute that's going to postpone the rest of the schedule because the dispositive motions have to be filed by January 14th.”

(Id. at 9.) The following day, pursuant to that colloquy with counsel on the record, the Court granted the Consent Motion for Extension of Time and issued a “final Scheduling Order” that provided that “[a]ll discovery, including any expert discovery, will be completed by 12/16/16.” (September 27, 2016 Scheduling Order [Doc. # 135].)

         On November 21, 2016, counsel for FIH withdrew their appearance, and on November 29, 2016, FIH's current counsel entered their appearance. ([Doc. ## 139, 144.]) On December 12, 2016, Plaintiff moved, with consent of all parties, for an extension of time that would move the close of discovery from December 16, 2016 to January 23, 2017, with a corresponding change in the deadline for the filing of dispositive motions and change in the trial ready date. ([Doc. # 149].) The motion made no mention of Plaintiff's or any other party's intention to disclose any experts, but under the Court's instructions on the record of September 26, 2016, the deadline to do so had already passed a month previously. On the same date as the motion for extension of time, the parties filed a joint status report, which similarly omitted any reference to any party's intention to disclose experts. ([Doc. # 150].) The following day, the Court granted the motion for extension of time. ([Doc. # 151].) Discovery closed on January 23, 2017.

         On January 24, 2017, Defendant Ward e-filed a letter, labeled as a “Notice, ” requesting a telephonic status conference relating to expert discovery. (Ward Letter Regarding Late Expert Disclosure (hereinafter “Ward Letter”) [Doc. # 160 at 1].) Ward noted that “[d]uring the status conference on September 26, 2016, [the Court] asked whether any of the parties intended to utilize expert witnesses.” (Id.) “Plaintiff's counsel stated that Plaintiff had no such intention.” (Id.) The Court then “imposed a deadline of mid-November 2016 for the disclosure of expert reports, if any[, ]” and “[n]one of the parties disclosed experts by the Court-ordered deadline.” (Id.) Ward continues:

On December 12, 2016, Plaintiff filed a Consent Motion for Extension of Time seeking to extend the discovery deadline from December 16, 2016 to January 23, 2017. Plaintiff's counsel made no reference whatsoever to the disclosure of an expert during scheduling discussions or in the Consent Motion. Similarly, Plaintiff did not raise the issue of expert disclosure during the telephonic conference with the Court on December 14, 2016.
At 11:52 PM last night, eight (8) minutes prior to the expiration of the discovery deadline, Plaintiff served an expert report on all defendants. According to the disclosure, Plaintiff's expert will testify on the elements of materiality and reasonable reliance, both of which have been elements of Plaintiff's claims and, in turn, Defendants' affirmative defenses, since the inception of this case. Defendants object to this expert disclosure as untimely both because it was served after the mid-November 2016 deadline for expert disclosure and because it was served just minutes prior to the close of all discovery, thus making it impossible for Plaintiff's proposed expert to be deposed prior to the deadline for the completion of all discovery.

(Id. at 1-2.) Plaintiff responded that the operative Scheduling Order stated that “All discovery, including expert discovery, will be completed by 12/16/16” and that “[n]o ‘mid-November' deadline appears in the Order.” (Pl.'s Resp. to Ward Letter [Doc. # 161 at 1].) Plaintiff asserts in a footnote that “FIH's current counsel first appeared in this case on November 21, 2016, and is not aware of any mid-November deadline being imposed” for expert discovery but “acted in good faith by notifying Defendants of FIH's intent to identify an expert less than 60 days after appearing.” (Id. at 1 n.1.) Second, Plaintiff notes that the consent motion to move the discovery deadline from December 2016 to January 2017 calls for moving the deadline for “‘[a]ll discovery, including expert discovery[, ]'” such that “the agreed-upon schedule called for expert discovery through January 23.” (Id. at 1.) Third, Plaintiff notes that “FIH notified Defendants in its December 7, 2016 Responses and Objections to document requests that Plaintiff was still ‘decid[ing]' whether or not ‘to use any expert witness' and, if so, would make ‘Rule 26(a)(2)' disclosures[, ]” and that “Defendants did not object at that time.” (Id.) Similarly, Plaintiff notes that on January 19, 2017, “FIH also notified Defendants . . . that ‘Plaintiff . . . intends to imminently identify an expert witness for this action, ' and asked to ‘discuss a schedule' for Defendants to ‘provide a rebuttal expert and/or conduct' a deposition.” (Id. at 1-2.) Finally, Plaintiff notes that the parties had already agreed that “several other discovery items [were] going forward beyond January 23, 2017” such that “Defendants' position essentially amounts to claiming that FIH should be precluded from providing an expert report before discovery closes, even as substantial fact discovery is proceeding after the discovery deadline.” (Id. at 2.) The parties contest, in the cross-motions for summary judgment, whether Plaintiff's expert report should be considered as part of the record on the motions or not.

         The Instant Motions ...

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