Avalon Holdings Corp. v. Gentile

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AVALON HOLDINGS CORP., Plaintiff, v. GUY GENTILE and MINTBROKER INTERNATIONAL, LTD., Defendants.

NEW CONCEPT ENERGY, INC., Plaintiff, v. GUY GENTILE and MINTBROKER INTERNATIONAL, LTD., Defendants.

Nos. 18cv7291 (DLC), 18cv8896 (DLC)

United States District Court, S.D. New York

February 5, 2024

For the plaintiffs: Law Office of David Lopez, Miriam Tauber Law Miriam Deborah Tauber

For the defendant Guy Gentile: Olshan Frome Wolosky LLP Thomas James Fleming

OPINION AND ORDER

DENISE COTE, DISTRICT JUDGE

Plaintiffs Avalon Holdings Corp. ("Avalon") and New Concept Energy, Inc. ("New Concept") each brought an action against defendants Guy Gentile and Mintbroker International Ltd. ("Mintbroker") for disgorgement of short-swing profits pursuant to § 16(b) of the Securities Exchange Act of 1934 (the "Act"). 15 U.S.C. § 78p(b). Section 16(b) requires a beneficial owner of more than ten percent of a company's shares to disgorge profits obtained from a short-swing sale. On April 8, 2022, the Honorable Vernon S. Broderick granted summary judgment for the plaintiffs, finding that the defendants had exceeded the 10% threshold and must disgorge short-swing profits to each plaintiff. Avalon Holdings Corp v. Guy Gentile and MintBroker International, Ltd., 597 F.Supp.3d 640 (S.D.N.Y. 2022) ("Gentile SJ") .

Judge Broderick then referred the matter to Magistrate Judge Robert Lehrburger for determination of the amounts due to plaintiffs. This case was reassigned to this Court on August 17, 2022. On November 29, 2022, these actions were stayed as to Mintbroker due to liquidation proceedings in the Bahamas. After extensive briefing and a two-day evidentiary hearing Judge Lehrburger issued the report and recommendation on October 6, 2023 ("Report") and recommended, as to Gentile, that Avalon be awarded $6,235,908, New Concept be awarded $6,102,002, and prejudgment interest be awarded to each plaintiff. Plaintiffs submitted objections to the Report on October 8, and Gentile submitted objections on November 3. Plaintiffs submitted their response on November 21, and Gentile submitted a reply on December 6, 2023.

The crux of Gentile's objections to the Report is that some of the trades were made on behalf of clients; that for those trades, he cannot be considered a "beneficial owner" under § 16(b); and that the damages calculated in the Report should therefore be reduced. The plaintiffs seek to correct one typographical error in the Report and an award of attorneys' fees. For the following reasons, the Report's conclusions are adopted with the modifications described below.

Background

This Opinion assumes familiarity with the Report and prior Opinions issued in this case and summarizes only the facts necessary to rule on Gentile's objections to the Report. See Avalon Holdings Corporation v. Gentile, 2019 WL 4640206 (S.D.N.Y. Sept. 24, 2019) ("Gentile MTD I"); Gentile SJ; Avalon Holdings Corp v. Gentile, 2023 WL 4744072 (S.D.N.Y. Jul. 25, 2023) ("Gentile MTD II").

Gentile was the director of Mintbroker, a day-trading broker-dealer firm that was registered under the securities laws of the Bahamas and has since been liquidated by Bahamian authorities. In 2018, Mintbroker acquired enough stock to become a beneficial owner of more than 10% of Avalon and of New Concept, both of which trade on the New York Stock Exchange. Mintbroker acquired all the stock at issue through Interactive Brokers ("Interactive"), a clearing firm. Mintbroker purchased 1,922,095 shares in Avalon on June 15, 2018, traded the stock thousands of times, and reduced its Avalon holdings to zero by August 21, 2018. Mintbroker purchased 1,073,713 shares of New Concept stock on May 14 2018, engaged in thousands of trades, and sold all of its shares by September 25, 2018.

Mintbroker filed Schedule 13D "Beneficial Owner Reports" in connection with its trading in both Avalon and New Concept stock. Both Schedule 13D reports represented that the "source of funding for the purchase of the Shares was the general working capital of Mintbroker together with margin borrowing" and stated that the purpose of acquiring as much stock as it did was "an attempt to gain control over [Avalon/New Concept] and replace its board of directors with the near-term goal of selling the assets of [Avalon/New Concept]." Gentile, by virtue of his relationship to Mintbroker, represented that he "may be deemed to indirectly beneficially own (as that term is defined in Rule 13d-3 under the Exchange Act of 1934, as amended) those Shares which Mintbroker had owned" and that he "disclaim[ed] beneficial ownership of all such Shares for all other purposes." Avalon filed its complaint on August 13, 2018, and amended the complaint on September 28. New Concept filed its complaint on October 1, 2018. Both actions allege that the defendants violated § 16(b) and request disgorgement of the profits defendants obtained from that trading. Defendants filed motions to dismiss in both actions, which Judge Broderick denied on September 24, 2019. Gentile MTD I.

Meanwhile, the Securities Commission of the Bahamas ("SCB") asked Gentile to appear for a meeting with regulators. That meeting occurred on September 12, 2019. On September 18, the SCB issued a letter to Gentile accusing Mintbroker of failing to trade any securities on behalf of clients and instead "recording" client orders internally in a manner akin to a Ponzi scheme with no transaction having been entered on the market. On September 23, Gentile left the Bahamas and gave directives to close down Mintbroker such that by the end of October or early November 2019, the office was closed and only a few employees remained.

Plaintiffs issued discovery requests to the defendants on October 16, 2019, including interrogatories asking about the extent to which, if at all, Mintbroker's trading of Avalon or New Concept shares was on behalf of clients. Plaintiffs also subpoenaed records from a variety of entities, including Interactive, which produced its trading records.

On November 27, 2019, Mintbroker surrendered its license to operate in the Bahamas. The plaintiffs, concerned with the lack of more detailed trading records and other supporting documentation produced by Gentile and Mintbroker, raised the issue with Judge Lehrburger, who held a discovery conference on January 22, 2020. At that conference, defense counsel repeatedly assured Judge Lehrburger that Mintbroker had produced all relevant trading documents and that Gentile had done a diligent search and that there were no other records. Counsel also stated that the Mintbroker account with Interactive "was a proprietary trading account" and that "Mr. Gentile was in charge of that account and placed the trades." At no point did defense counsel suggest that any of the trading at issue was on behalf of Mintbroker customers or that customers would have relevant information.

Gentile was deposed on February 24, 2020. He testified that he did not know for a fact that all trades reflected in the produced records were Mintbroker's proprietary trades and that it was possible that the records might have included client trades. Defense counsel suggested that client trades would be reflected in a comparison of the Interactive records with Mintbroker's 13D beneficial ownership filings. Neither counsel nor Gentile suggested that determining the extent of any trades on behalf of clients would require review of other records not yet produced.

In March 2020, the SCB placed Mintbroker in provisional liquidation. A discovery conference was held before Judge Lehrburger on April 23, 2020 to discuss plaintiffs' request to compel defendants to produce a copy of a thumb drive that, according to Gentile, held all of Mintbroker's files. To resolve the issue of what data was reflected in the Interactive records and obviate the need for production of the thumb drive, defendants offered, and the parties ultimately agreed, to enter into a stipulation on May 13, 2020, identifying the Interactive trading account as Mintbroker's "proprietary" trading account and confirming the accuracy of the Interactive records. The defendants agreed to the term "proprietary" to negate the need for discussion of client accounts "which we know you want to be clear about."

In June 2020, the defendants responded to requests for admission, admitting that "no trades reported in the Avalon Schedule 13D were executed in or on behalf of Managed Accounts held for the benefit of third-party customers or clients of Mintbroker."

In August 2020, both sets of parties filed for summary judgment, relying on the Interactive records. The defendants did not make any argument that the trading reflected in those records included trades for which they were not the beneficial owners because the trades had been executed for orders placed by customers. By December 2021, Mintbroker was placed into official liquidation.

On April 8, 2022, Judge Broderick granted plaintiffs' motions for summary judgment. Judge Broderick found that there was no genuine dispute of fact that 1) Mintbroker and Gentile were beneficial owners of the shares of Avalon and New Concept, as reflected in the Interactive records; 2) the defendants had investment power over the shares; and 3) the defendants had pecuniary interests in the shares because they had the opportunity to and did profit from them. Gentile SJ at 655-56. Judge Broderick referred the case to Judge Lehrburger to determine "the exact period of time that Defendants were more- than-10% beneficial owners, as well as the calculation of damages." Id. at 656-657.

After the matter was referred to Judge Lehrburger, the plaintiffs filed motions for judgment seeking disgorgement of $6,235,098 to Avalon and $6,102,002 to New Concept, along with...