On December 31, 2018, the Honorable Kevin McNulty of the United States District Court for the District of New Jersey denied in part and granted in part Defendants’ motion to dismiss, allowing the bulk of Plaintiffs’ Securities Exchange Act of 1934 (“Exchange Act”) claims to move forward against certain officers and directors of the now bankrupt software service and risk management technology provider that catered to the securities and hedge fund industry, Liquid Holdings Group, Inc. (NASDAQ: LIQD), as well as its initial public offering (IPO) underwriter, Sandler O’Neill & Partners.
The officers and directors who Plaintiffs allege engaged in self-dealing and other Exchange Act violations include Brian M. Storms, Liquid’s Chief Executive Officer; Kenneth D. Shifrin, Liquid’s Chief Financial Officer; Brian Ferdinand, founder, director, Head of Corporate Strategy, and Vice Chairman of the Board; and Richard Schaeffer, Liquid’s Chairman of the Board, among others.
On September 21, 2015, Cohen Milstein and co-counsel filed a federal securities class action against certain directors and officers of the now-bankrupt software service and risk management technology provider that catered to the securities and hedge fund industry, Liquid Holdings Group, Inc. (NASDAQ: LIQD), as well as Liquid’s initial public offering (IPO) underwriter, Sandler O’Neill & Partners, on behalf of purchasers of Liquid securities at the time of Liquid’s IPO on July 26, 2013 and on the public market between July 26, 2013 and September 24, 2015, inclusive, for violations of the Securities Act of 1933 (“Securities Act”) and the Exchange Act.
Liquid was purportedly formed with the intention of being the holding company to acquire and own software, risk management, and analytics companies specializing in securities trading in order to pursue an IPO. Plaintiffs, however, claimed that Liquid served as a fraudulent vehicle for the sole purpose of enriching its officers and directors.
Specifically, Plaintiffs charged Defendants with violations of the Securities Act and Exchange Act, including self-dealing, undisclosed insider transactions, inflated customer counts, reliance on capital infusions from insiders, and dependence on a single related-party customer, QuantX Management LLP, a private UK-based trading firm. Plaintiffs further allege that Defendants perpetuated the fraud through not properly disclosing these dealings in Liquid’s offering documents and in subsequent public statements.
Based on internal emails obtained from Liquid’s bankruptcy proceedings, Plaintiffs alleged that Defendants acted with scienter and knowingly priced and sold Liquid’s stock to the public during its IPO at a wildly inflated price, unhinged from reality. Specifically, Plaintiffs allege that Defendants made false and misleading representations regarding Liquid’s primary source of revenue, QuantX, formerly known as Liquid Trading International LLP. QuantX, which accounted for 75% of Liquid’s software licensing revenue and which Plaintiffs claim was being funded by a Liquid insider, was unable to pay Liquid the money it owed, unbeknownst to investors. When the truth about these facts became public, Liquid’s stock price fell, injuring investors.
Other emails, Plaintiffs have claimed, reveal the pre-IPO transfer of 732,292 shares of common stock to a Liquid insider, at a price below the IPO price, and the decision by Liquid officers and directors not to disclose the transaction in the Company’s Registration Statement filed with the SEC, despite its counsel’s advice to do so. Still other emails reveal multiple multi-million-dollar loans to insiders in order to purchase Liquid stock, among other transactions.
Plaintiffs claim that these emails demonstrate that Defendants actively engaged in a concerted plan to conceal material information about Liquid’s financial condition from investors as well as auditors.
Plaintiffs further alleged that Defendants negligently included and/or failed to correct untrue statements not only in Liquid’s Registration Statement at the time the Company conducted its IPO, but in subsequent public statements.
Liquid filed a notification with the SEC in March 2015, indicating it was expecting to report a net loss of approximately $48.8 million for the year ended December 31, 2014. In May 2015, after reviewing an investigative report prepared by an outside law firm, Liquid’s external auditors demanded that its audit committee conduct a full investigation.
On October 28, 2015, NASDAQ suspended and eventually delisted Liquid’s common stock. Liquid subsequently filed for bankruptcy on January 27, 2016. On February 25, 2016, the U.S. Bankruptcy Court for the District of Delaware converted Liquid’s bankruptcy from a Chapter 11 case to a Chapter 7 case to liquidate assets.
The case name is: Robert De Vito, et al. v. Liquid Holdings Group, Inc., Case No. 2:15-cv-06969-KM-JBC, U.S. District Court, District of New Jersey