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EXHIBIT D
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SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
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CASSEL SHAPIRO,
Petitioner,
Index No: 653706/2023
-against-
MURCHINSON LTD, BPY LIMITED and
NOMIS BAY LIMITED,
Respondents.
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MEMORANDUM OF LAW IN FURTHER SUPPORT OF
PETITION TO CONFIRM ARBITRATION AWARD AND IN
OPPOSITION TO RESPONDENTS’ MOTION TO VACATE
Petitioner Cassel Shapiro (“Petitioner” or “Shapiro”), by and through his attorneys, The
Roth Law Firm, PLLC, hereby submits this Reply Memorandum of Law in Further Support of
Petitioner’s Petition to Confirm Arbitration Award and in Opposition to Respondents’
Murchinson Ltd, BPY Limited and Nomis Bay Limited’s (collectively “Respondents”) Cross
Motion to Vacate, as follows.
PRELIMINARY STATEMENT
The Award of attorneys’ fees is proper and must stand for two separate and independent
reasons. First, while Respondents are in denial, there is no question but that they violated
FINRA Rule 12212(a). Second, the entire litigation and Respondents’ actions were
unquestionably in bad faith. The relevant portion of the Award states as follows:
Claimants are jointly and severally liable for and shall pay to Shapiro the sum of
$150,000.00 in attorneys’ fees pursuant to Rule 12212(a) of the Code of
Arbitration Procedure, ReliaStar Life Ins. Co. of N.Y. v. EMC Nat. Life Co., 564
F.3d 81, (2d Cir. 2008), and Synergy Gas Co. v. Sasso, 853 F.2d 59 (2d Cir.
1988).
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See Petition, Exhibit A.
Rule 12212(a) is clear in that it provides that attorneys’ fees may be awarded for a
violation of any provision of the FINRA Code. The FINRA Code includes Rule 12507 (b),
which requires all parties to act in “good faith” during discovery. This provision of the Code
defines "good faith” as “a party must use its best efforts to produce all documents or information
required or agreed to be produced. If a document or information cannot be produced in the
required time, a party must establish a reasonable timeframe to produce the document or
information.” In the two cases cited in the relevant paragraph of the award, ReliaStar Life Ins.
Co. of N.Y. v. EMC Nat. Life Co., 564 F.3d 81, (2d Cir. 2008) and Synergy Gas Co. v. Sasso, 853
F.2d 59 (2d Cir. 1988) the Second Circuit upheld an award of attorneys’ fees against a party who
engaged in bad faith during the arbitration.
As detailed herein, Respondents’ conduct during discovery was egregious, in violation of
FINRA Code (Rule 12507 (b)) and consistent with the attorney fee awards in ReliaStar and
Synergy Gas. Respondents’ conduct included hiding the documents underlying their claim (they
were Claimants in the underlying arbitration) through trial, ignoring their own stipulation to
produce these documents to resolve a motion to compel to produce these documents, causing the
Chair to issue a dozen subpoenas of brokerage firms on the eve of trial for the documents
Respondents hid, and then for the “chef’s kiss” attempting to use summaries of the hidden
documents at trial.
Notwithstanding the clear bad faith conduct, Respondents make the astonishing argument
there was no underlying law upon which the Award is based and that, despite being aware of
their numerous failures to comply with FINRA Rule 12212 (a) by failing to conduct discovery in
good faith in violation of FINRA Rule 12507 (b), they fully complied with every provision of the
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FINRA code. Respondents also completely ignore ReliaStar and Synergy Gas, as they must,
only mentioning these two cases in a short footnote.
Because the Award is “unreasoned,” none of the parties to this special proceeding can
determine whether the bad faith upon which the Panel relied was in discovery or in the
commencement of a frivolous arbitration; or both! Nor can the Court. What can be concluded,
however, is that because Respondents engaged in bad faith discovery and violated Rule 12212(a)
and Rule 12507(b), they are unable to demonstrate that the Award consciously disregarded the
law and are unable to ascertain the precise reasoning for the Award, the motion to vacate must be
denied and the Award confirmed.
By this reply and opposition memorandum, Shapiro addresses the issues raised by the
cross motion. That is, Shapiro sets forth Respondents numerous violations of the FINRA Code
by acting in bad faith. Second, Petitioner provides the Court with the underlying law, which is
squarely applicable, pursuant to which FINRA panels award legal fees and/or sanctions for
parties engaging in bad faith. But first, Petitioners are forced to address the equally frivolous
argument that there was no basis for the award as well as Respondents tortured recitation of the
underlying facts that were proven at the hearing of this matter.
In short, Respondents (Claimants at the time) commenced the underlying FINRA
arbitration based exclusively on a single line from a WhatsApp message stating that a multi-party
complicated sale of unregistered, restricted placement agent warrants exercisable for restricted
common stock was “done.” Annexed to the Roth Affirmation, dated September 29, 2023, as
Exhibit B (the “Roth Aff.”) is the Stmt. of Claim (“SOC”) ¶¶ 1, 10. And, by their opposition
papers to the motion to confirm, Respondents continue to argue that the one text constitutes a
binding, enforceable agreement between the parties, even though: (i) Respondents provided
Shapiro – before the “done” text was even sent or received – a comprehensive warrant purchase
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agreement that they indicated had to be negotiated; (ii) the parties continued to negotiate with
counsel on each side, both before and after the text, plainly indicating their intention not to be
bound absent execution of multiple written agreements, which never occurred; (iii) the draft
warrant purchase agreement itself that was prepared by Respondents’ counsel and circulated by
Mr. Zogala, the sole principal of each of Respondents, indicated on its face that it would become
valid and legally binding only when executed and delivered, which did not happen; (iv) the
WhatsApp message lacked any material terms found in industry-standard warrant purchase
agreements, including the identity of the numerous buyers, the identity of the numerous sellers,
material representations and warranties, escrow-related details and mechanics, depository and
payment mechanics, dispute resolution steps, and the requisite approval of the issuer of the
securities to have been transferred or the opinion of its counsel as to the permissibility of the
transfer; (v) even Zagola confirmed, after the “done” text, that he would first have to speak to
counsel; and (vi) the escrow agreement, also provided by the Respondent and required by all
parties, had not ever been fully negotiated. Simply, neither document was ready for execution.
Indeed, the warrant purchase agreement failed at any time to list the proper sellers or buyers of
the restricted security.
Further, by the FINRA Arbitration SOC, Respondents were in the ridiculous position of
finding themselves having to ignore their own draft warrant purchase agreement, which they sent
to the sellers even before the WhatsApp message at issue was sent. The draft agreement and a
draft escrow agreement explicitly required by Respondents were in the process of being
negotiated and revised by the parties and their legal counsel at the time the Respondents
commenced the arbitration.
If that were not enough, Respondents never anticipated that the “done” text message was
binding as, in response, Mr. Zogala, on behalf of Respondents, stated that the transaction was not
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consummated because he still needed to “chat with Dave to update him,” indicating that
Respondents needed to consult with their legal counsel, Dave Danovitch, Esq., to continue the
incomplete drafting and negotiation process. 1 Exh. A: 172: 9-15. From the date of the “done”
text message for the following weeks, the parties, with the assistance of their respective counsel,
continued to exchange several drafts of the warrant purchase and escrow agreements that
contained dozens of red-lined changes from both sides. Exh. A: 192:17-25. Most significantly,
during this time, Respondents sought to change the material terms of the potential deal. In the
end, it is indisputable that draft agreements were never finalized or executed by any party.
Respondents, thereafter, went radio silent, only to reappear close to two weeks later when
the price of the underlying stock sharply rose, making the economics of the deal far better for them.
Exh. A:244: 14-15 – 245:1-5. During the interim, thinking that Claimants had abandoned the deal,
the sellers exercised their warrants. To be clear, at no point did any of the parties partially perform
under the purported deal or take steps that would evidence the existence of an agreement. Rather,
Respondents did nothing. They never placed the money in escrow. They never even delivered
money for the warrants. Exh A: 190:4. Nor did they even tender any consideration. Even after
Respondents returned and tried to resuscitate the transaction, their attorneys continued to question
material terms. In short, there was at no time a binding agreement.
Further, Respondents put on an expert who, remarkably, had no familiarity with the type
of underlying security being traded. That is, while he testified that billions of dollars are traded
on a handshake or verbally, he had no knowledge as to how the type of security had to be
trading, agreeing that in his 20 years of being in the business, he is “not used to” private
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Annexed as Exhibit A to the accompanying affirmation of Richard Roth, dated September 29, 2023 are the
transcripts of the first day of the proceeding (the parties did not have a court reporter but Respondent converted the
audio files from the hearing into a transcription of certain days that was used by the parties). The cites to those
transcript pages are referred to herein as “Exh. A:[page number]:[line number].”
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placement warrants and could not comment on whether they had to be sold with or without an
agreement. Shapiro’s expert, on the other hand, was clear; affirmatively stating that when it
comes to a transaction of this type, involving the secondary sale of unregistered restricted
securities by and between multiple investors in reliance upon an exemption from registration,
there had to have been a formal signed writing. Shapiro’s expert, well versed in this particular
transaction, went on to testify that the material terms of the transaction besides price and quantity
are tailored to the underlying warrants themselves, and the parties need to address all the relevant
representations and warranties and the steps to ensure that they can actually transfer the warrants
upon closing of the deal. If that were not enough, Respondents, days prior to the transaction
in issue, had entered into a very similar agreement with the same security and the same
warrant and not until that transaction was executed did they effectuate the sale. Thus, at all
times Respondents were fully aware that the sale of warrants could take place only once the ink
was dry and various third parties - including the original issuer of the securities - had blessed the
transaction.
As for Respondents claims in the FINRA arbitration, they sought damages for breach of
contract as a result of selling the same securities “short” before even receiving the WhatsApp text.
And Respondents concealed that short sale from Shapiro. The net result is that, in bad faith,
Respondents sought damages for transactions both hidden from Shapiro and that predated their
alleged contract with Shapiro. Despite their petty attempt to claim “done” was a contract, it’s the
timing of the text that’s actually relevant: that the Respondents took a risk shorting securities
before receiving the “done” text precludes them from seeking any damages, even assuming there
was an agreement, which clearly there was not. As the Panel found, Respondents argument was
wholly inconsistent with their own acts and omissions and that, as a result, the claim had no basis
in law, fact, or industry practice, and was in bad faith. Indeed, the seminal case that was presented
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to the FINRA Panel, Yenom Corp. v. 155 Wooster Street, Inc., 23 A.D.3d 259 (1st Dep’t 2005)
(hereinafter “Yenom”), held that in the identical situation where a draft agreement was presented
for signature that had identical language, not only was the draft agreement unenforceable, but the
plaintiff, the proponent of the draft agreement, was sanctioned for their frivolous argument! By
their cross motion, Respondents fail to even address, thereby wholly ignoring, that authority.
FACTUAL BACKGROUND
A. The Parties
Aegis is a FINRA member firm and is a retail and institutional broker-dealer located in
New York City. Mr. Eide is, among other things, the founder and Chief Executive Officer of
Aegis. Mr. Shapiro is a former Senior Managing Director who worked on the management team
at Aegis responsible for private equity investment banking and venture capital financing.
Zogala is a trader at Murchinson, a global investment firm located in Toronto, Ontario,
Canada. Exh. A:32: 10-18. BPY and Nomis are offshore private funds affiliated with
Murchinson. Exh. A:34:10-12, 13-16.
Although styled as a customer dispute, Respondents were indisputably not clients of
Aegis and were not when the preliminary negotiations about a potential deal were occurring.
Rather, the abandoned deal related to personal securities held by Shapiro and the Robert J. Eide
Pension Plan (the “Eide Pension Plan”), an entity not named in this action. Respondents
wrongly named Mr. Eide and Aegis despite the fact that neither were intended parties to the
abandoned deal. Exh. A.: 25:23-24. Eide and Aegis, never even potential sellers of the restricted
security, were thus dismissed during the proceeding. While Shapiro was not dismissed by a
motion, the Panel had serious questions as to any personal liability he would have, so it decided,
rather than summarily dismiss him, to hear his testimony in the matter before rendering a
decision.
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B. Preliminary Negotiations of Potential Warrant Purchase Transaction
The evidence conclusively revealed that in approximately early 2021, Shapiro met Zogala
through his senior partner Adam Stern (“Stern”), Head of Private Equity Banking at Aegis, and
CEO of SternAegis Ventures, the management team at Aegis responsible for private banking and
venture capital financing. They began to discuss a potential deal to sell at a discount to implied
market price several unregistered restricted placement agent warrants to purchase common stock
of Hydrofarm Holdings Group, Inc. (“HYFM”), the vast majority of which were to be sold by
Mr. Stern and a smaller proportion to be sold by others, including Mr. Shapiro.
Importantly, after this initial introduction, on January 10, 2021, it was Zogala on behalf
of Respondents who first circulated a draft warrant purchase agreement for the potential deal to
Stern and Shapiro. Exh. A:138: 6-9. The draft included several blank placeholders for material
terms still to be negotiated, including the names of the sellers, the names of the purchasers, the
quantity of warrants (including at two different strike prices, $8 and $16), the prices, and other
terms.
That draft also included reciprocal representations that: “This Agreement, when executed
and delivered by the buyer, will constitute a valid and legally binding obligation of the Buyer,
enforceable against Buyer in accordance with its terms” and “This Agreement, when executed
and delivered by the Seller, will constitute a valid and legally binding obligation of the Seller,
enforceable against Seller in accordance with its terms” subject to exceptions not relevant here.
The parties never edited this language. The draft further included a merger clause that provided:
Entire Agreement. This Agreement represents the entire agreement
of the parties hereto and thereto with respect to the matters
contemplated hereby and hereby, and there are no written or oral
representations, warranties, understandings or agreements with
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respect thereto except as expressly set forth herein and therein.
After receiving the draft agreement, Shapiro wrote to Zogala that he would send a redline
once counsel finished reviewing. Exh. A: 139:5-6. In the meantime, Shapiro and Zogala
scheduled a call to continue to discuss the potential transaction. It is also indisputable that the
parties approached negotiations by proceeding on two separate, parallel tracks. Legal counsel
for both parties, with the respective parties’ input, reviewed and edited numerous versions of the
draft warrant purchase agreement and escrow agreement while Shapiro and Zogala continued to
negotiate the economic terms of the potential deal. Exh A:143: 5-10. The parties’ understanding
was clear that at some point both tracks would hopefully coalesce on a signed, sealed, and
delivered deal.
The evidence at the hearing demonstrated that despite the preliminary nature of these
initial discussions, and unbeknownst to Shapiro, Respondents, utilizing various brokerage
accounts, sold short 45,660 shares of HYFM free trading stock on January 11, 2021, before the
“done” text was even sent. Exh. A:161: 11-13. Had Shapiro known about these short sales, it
would have impacted the way in which the sellers evaluated and negotiated the economics and
pricing for the potential deal. It also would have impacted the terms of the draft agreements
themselves, including representations and warranties that would have addressed the short sale.
Put simply, Respondents knew there was a substantial likelihood that the disclosure of these
important omitted facts would have been viewed by Shapiro as having significantly altered the
total mix of information made available to him about the potential transaction and, with that
knowledge, concealed their prior shorting of the same security. Indeed, disclosure of these
material facts may well have caused Shapiro to discontinue negotiations from the beginning.
Rather than ever disclosing the short positions, the evidence revealed that the representations that
Zogala made during the parties’ negotiations indicated that he was trying to purchase warrants to
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create a long position and, therefore, actively misled Shapiro.
From January 11, 2021 to January 19, 2021, the parties continued to engage in the
preliminary, dual-track negotiations. When Shapiro circulated a redlined version of the warrant
purchase agreement on January 12th, he enclosed a draft escrow agreement as well. Exh.
A:200:5. In addition to making other edits to the draft warrant purchase agreement, the sellers
revised the merger clause section as follows (additions in red underline). Other than defining the
draft agreements collectively as “Transaction Documents” (edits in blue), Claimants never made
any additional edits to this provision:
Entire Agreement. This Agreement, together with the Escrow
Agreement (collectively, the “Transaction Documents”), represents
the entire agreement of the parties hereto and thereto with respect to
the matters contemplated hereby and hereby, and there are no
written or oral representations, warranties, understandings or
agreements with respect thereto except as expressly set forth herein
and therein.
During this period of time, counsel for both parties reiterated that the draft agreements
remained subject to review by their clients. Zogala repeatedly indicated that he understood
counsel to continue to be involved in finalizing the parties’ potential deal. Indeed, Zogala did
precisely this on January 12th immediately after the “done” WhatsApp message that Claimants
contend constitutes a “written agreement” (Exh. B: SOC ¶ 10): “ty, will chat with Dave [his
attorney] after the call to update him.”
The evidence at the hearing also revealed that during this period of preliminary
negotiations, the parties changed material terms of their agreements multiple times, as
summarized below:
• Sellers: As discussed above, initially, the primary purpose of the potential
deal was to sell Stern’s HYFM warrants, and a smaller portion of warrants
held by others including Shapiro. By January 13th, the parties identified
the potential sellers as Stern, Shapiro, and Eide. Later that day, Eide had
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been replaced with the Eide Pension Plan. By January 19th, Respondents
demanded that selling parties be changed to just Shapiro and the Eide
Pension Plan. Respondents decided not to purchase Stern’s warrants after
learning in their own ongoing due diligence of a contractual lock-up period
that applied to these warrants because he was a former director of HYFM.
As of January 19th, the last day the parties exchanged a draft escrow
agreement, the sellers were still listed as Shapiro and Eide.
• Purchasers: Shapiro initially understood the potential purchaser to be
either Zogala and/or Murchinson where Zogala purported to work.
Respondents subsequently disclosed that the potential purchasers would not
be Zogala or Murchinson, but rather two offshore funds, BPY and Nomis.
• Warrant Quantities and Prices: From January 11th to 19th, the warrant
quantities and prices negotiated continued to change. At Zogala’s request,
they initially focused on warrants with a strike price of $16, based on
quantities that assumed Stern, Shapiro, and the Eide Pension Plan would all
be sellers. After Respondents decided to not purchase Mr. Stern’s warrants,
the parties pivoted and began to negotiate $16 and $8 strike price warrants
of varying quantities and prices. The parties never populated the draft
warrant purchase agreement or escrow agreement with final quantity or
purchase price for the warrants. Instead, these terms remained placeholders.
• “Big Boy Language”: The parties went back and forth on whether, and in
exactly what terms, they would warrant that they were “sophisticated”
parties in the draft warrant purchase agreement. These provisions referred
to as “big boy language” were important for several reasons. As a general
matter, they provide clarity as to the parties’ roles in the transaction,
including Respondents’ responsibility to make an educated decision
regarding entering the transaction. Moreover, because of Shapiro’s
familiarity and ongoing business relationship with HYFM, it was crucial for
him to obtain Respondents’ agreement that they understood Shapiro might
possess nonpublic information about HYFM. Respondents’ original draft
contained no “big boy” language, and after Shapiro inserted it, the parties
modified this provision multiple times throughout the negotiation process.
• Escrow Provisions: From the inception of the negotiations, Shapiro made
clear to Zogala that an escrow agreement was an integral part of the
contemplated, fully-integrated transaction. The initial draft warrant
purchase agreement contained no escrow provision, nor the necessary
separate escrow agreement. Counsel for the sellers added escrow
provisions to the warrant purchase agreement and proposed a separate
escrow agreement. The parties negotiated various changes to these over the
course of the ensuing week. The draft escrow agreement in contemplation
when negotiations ended allowed the sellers to unilaterally terminate it if
purchasers did not deposit the requisite funds into escrow within two days
of signing.
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C. Respondents Walked Away Without Finalizing the Proposed Transaction
For a twelve-day period from January 19th to February 1, 2021, immediately following
these negotiations, all communications between the parties ceased. No one circulated an updated
version of the warrant purchase agreement with any final quantities or prices for the warrants or a
final escrow agreement. No one executed the draft warrant purchase agreement or escrow
agreement.
During this period, neither party gave any indication they believed that they had struck an
enforceable agreement, which makes sense given the incomplete negotiations and drafts. Though
Respondents contended that they entered into a binding agreement through the WhatsApp message
“done” (Exh. B: SOC ¶ 10) on January 12th, the evidence demonstrated that their behavior after
abandoning the transaction was inconsistent with their alleged intent to be bound that they claimed
after the fact. Indeed, the sellers never revised the transaction documents to reflect the supposed
deal much less asked the sellers about the status of the draft deal documents, tendered payment for
the securities supposedly purchased, or inquired about delivery of those securities.
After preliminary negotiations ended without execution of the draft transaction agreements
and Respondents by all appearances abandoned the potential deal, Shapiro and the Eide Pension
Plan opted to exercise their warrants on a cashless basis in late January into early February 2021,
rather than sell the warrants.
D. Claimants Came Back to the Table, Evidencing the Lack of Any Agreement
There was no outreach from Respondents until February 1, 2021, when not coincidentally,
the stock price of HYFM began to rise rapidly. Exh. A: 244:17-19. HYFM stock would climb to
an all-time high in mid-February 2021. Prior to this point in time, the HYFM stock price had been
trading at close to the break-even price for the warrants. Although the sellers did not know of
Respondents’ short position in real time, the evidence revealed that the rising stock price provided
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them an incentive to endeavor to collapse their short position by purchasing and exercising the
warrants.
On the afternoon of February 1, 2021, counsel for Respondents wrote to sellers’ counsel:
“Hi Steve, Based on the below I think we’re agreed on the numbers. You have the most recent
turn of the docs; could you please populate the latest draft of the purchase agreement with the
agreed numbers and send the same across for our review?” This message was out of the blue, but
it plainly referenced the incomplete transaction documents as a necessary prerequisite for
finalizing a deal. Later that afternoon, Zogala again acknowledged the incomplete deal documents,
messaging Shapiro on WhatsApp: “Was chatting with our counsel and the last turn of the docs was
with you guys. Looking to get that wrapped up and wired out your way, or the deposit anyway.
Can you make sure that gets done? Figured you’d want your money as well!”
The next day, on February 2, 2021, counsel for Respondents wrote again: “Following up
on Natalie’s email from yesterday. In addition, we have some additional questions regarding the
placement agent warrants that we’d like to discuss today.” Zogala sent Shapiro a message later
that morning on WhatsApp, stating that the back office needed the “contract finished”: “Can we
get this wrapped up today? Back office has the confirm on the trade but they want the contract
finished up as well for month end rec.” Exh A: 248:14-15.
In response, counsel for the sellers responded by email that day: “My understanding is that
the sellers no longer wish to proceed with these transactions at this time.” Counsel for the sellers
reiterated again by email later that day: “[A]lthough negotiations were at one point ongoing, those
preliminary and non-binding discussions ceased and thus no definitive agreement was reached
between our clients. We would consider any other conclusion to be baseless and frivolous.”
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E. Respondents Threaten Suit and Eventually Commence the FINRA
Proceeding
In October 2021, prior to filing the SOC, Respondents sent a draft version of the statement
of claim threatening suit to Shapiro, claiming there was a “written agreement” with him to sell the
warrants and seeking damages for breach of the parties’ alleged agreement and for other claims.
According to the draft Statement of Claim, the seller was only Shapiro. The draft SOC is annexed
as Exhibit A to the Answer, Counterclaims Third Party Claims. Roth Aff., Exh. C1.
On December 29, 2021, Respondents commenced the FINRA arbitration, claiming that
there were now three sellers in the agreement, Eide, Aegis and Shapiro. Thus, even until the date
of the filing of the Statement of Claim, Respondents did not know the parties to the alleged
agreement they were trying to enforce! And even the draft and filed Statements of Claims had
different causes of action. One of those causes of action, violation of FINRA Rule 2110, is not
even a cognizable cause of action in New York or under FINRA rules.
On March 4, 2022, Respondents filed their answer with counterclaims/third-party claims
for fraud and for attorneys’ fees, costs, and disbursements. Annexed to the Roth Affirmation is
Respondents’ Amended Answer, Counterclaims and Third Party Claims, which specifically seek
legal fees and provide numerous basis for the panel to so award. See Exh. C at 15-21.
F. Discovery – Some of the Violations By Respondents
Remarkably, Respondents argue that there was no basis for the Panel to conclude that
they violated FINRA Rule 12212(a). Specifically, by their memorandum of law, they assert:
Rule 12212(a) … does not provide a basis for an attorneys fee award; it authorizes
FINRA arbitrators to sanction parties before it on only two explicitly stated
grounds, “for failure to comply with any provision of the [Arbitration ] Code, or
any order of the panel . . . .” But the Panel at no time found – in its Award or in
the course of the Hearings – that Murchinson had violated a provision of the
Arbitration Code or any of the Panel’s orders.
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Respondent’s Memo of Law, page 2. In so arguing, Respondents ignore the numerous code and
rule violations throughout the hearing.
First, according to FINRA Rule 12507 (b), Respondents were obligated to comply with
discovery as follows:
(2) A party must act in good faith when complying with subparagraph (1)
of this rule. "Good faith" means that a party must use its best efforts to
produce all documents or information required or agreed to be produced. If
a document or information cannot be produced in the required time, a party
must establish a reasonable timeframe to produce the document or
information.
There is no question that Respondents failed to comply with discovery. Indeed, as was discussed
before the Panel at the hearing, Respondents – who sued because they claimed they shorted stock
from their own accounts– would not even produce any monthly statements of those accounts,
each of which were requested in discovery by Shapiro. And at the hearing, it reached a point
where counsel for Shapiro had to explain to the Panel “I've never been in a situation where up to
the date of hearing, the claimant who's suing has not provided the monthly statements” upon
which they were seeking over $2.865 million in damages. Exh. A:92:10-12.
But that is not all. Because of Respondents utter failure to comply with discovery, which
was brought to the attention of the Panel, Shapiro was forced to forward counsel for Respondents
a letter setting forth the gross deficiencies (Roth Aff., Exh E) and even a motion to compel, that
was presented to the Panel. Roth Aff., Exh. F. Respondent’s continued to refuse to produce
documents. Finally, counsel for the parties reached an agreement on what was to be produced.
Roth Aff., Exhibit F. That agreement, that was filed on the FINRA portal, which means that it
was before the entire Panel, encapsulates the agreement regarding discovery wherein
Respondents were to produce a series of basic documents by February 17, 2023.
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Respondents simply failed to do so. As a result of Respondents failure to comply with
discovery, Shapiro was forced to subpoena each and every brokerage firm with whom
Respondents had accounts to obtain that basic and pivotal information, including but not limited
to: (i) Bloomberg, LP; (ii) PNB Paribas; (iii) Dash Securities; (iv) Merrill Lynch Securities; (v)
Bloomberg Canada; (vi) Oppenheimer Securities; (vii) Clear Street Securities; and (ix) BOFA
Securities. And because FINRA Rules require that subpoenas only be issued by the Chairman of
the FINRA Panel, Shapiro was forced to barrage the Chairman with subpoenas to issue, which he
did each time. Accordingly, literally up to the commencement of the hearing, the Chairman was
issuing subpoenas for basic information material to Respondents’ claims that Respondents
refused to produce and Shapiro was scrambling around to gather it from the subpoenaed
brokerage firms.
The issue, which came up on numerous occasions during the hearing both on and off the
record, included this extended exchange when Respondents’ counsel tried to show Respondent a
document they failed to produce, which simply displeased the Chairman and the entire Panel:
MR. ROTH: No, no, no, no, no. Let me make it very clear. To refresh everyone's -
- the Chairman's recollection, we made a motion to compel. We took a long time
because we were trying to resolve the case. It didn't resolve. We then reached an
agreement in February where they said they were going to produce all the
documents underlying these securities, and we were waiting. Three weeks went
by, we got no monthly statements -- even though they're their monthly statements
from Merrill Lynch, from Dash, from BOFA, Clear Street, from Oppenheimer. I
know they had securities all over the street. We got nothing, which led to me
scrambling to get the subpoenas to you last week because I'd been expecting this
by agreement.
So, I still never got a monthly statement. This is the first -- I probably had
hundreds of arbitrations. I've never been in a situation where up to the date of
hearing, the claimant who's suing has not provided the monthly statements. So, I
have a problem when they selectively pick and choose. I did subpoena them, and I
just got it a couple days ago. In fact, I got a subpoena today that I'm scrambling to
get something before the other hearing.
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Preview
FILED: NEW YORK COUNTY CLERK 01/09/2024 04:27 PM INDEX NO. 653706/2023 NYSCEF DOC. NO. 51 RECEIVED NYSCEF: 01/09/2024 EXHIBIT D FILED: NEW YORK COUNTY CLERK 01/09/2024 09/29/2023 04:27 01:50 PM INDEX NO. 653706/2023 NYSCEF DOC. NO. 51 35 RECEIVED NYSCEF: 01/09/2024 09/29/2023 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK ---------------------------------------------------------------------x CASSEL SHAPIRO, Petitioner, Index No: 653706/2023 -against- MURCHINSON LTD, BPY LIMITED and NOMIS BAY LIMITED, Respondents. ---------------------------------------------------------------------x MEMORANDUM OF LAW IN FURTHER SUPPORT OF PETITION TO CONFIRM ARBITRATION AWARD AND IN OPPOSITION TO RESPONDENTS’ MOTION TO VACATE Petitioner Cassel Shapiro (“Petitioner” or “Shapiro”), by and through his attorneys, The Roth Law Firm, PLLC, hereby submits this Reply Memorandum of Law in Further Support of Petitioner’s Petition to Confirm Arbitration Award and in Opposition to Respondents’ Murchinson Ltd, BPY Limited and Nomis Bay Limited’s (collectively “Respondents”) Cross Motion to Vacate, as follows. PRELIMINARY STATEMENT The Award of attorneys’ fees is proper and must stand for two separate and independent reasons. First, while Respondents are in denial, there is no question but that they violated FINRA Rule 12212(a). Second, the entire litigation and Respondents’ actions were unquestionably in bad faith. The relevant portion of the Award states as follows: Claimants are jointly and severally liable for and shall pay to Shapiro the sum of $150,000.00 in attorneys’ fees pursuant to Rule 12212(a) of the Code of Arbitration Procedure, ReliaStar Life Ins. Co. of N.Y. v. EMC Nat. Life Co., 564 F.3d 81, (2d Cir. 2008), and Synergy Gas Co. v. Sasso, 853 F.2d 59 (2d Cir. 1988). 1 1 of 31 FILED: NEW YORK COUNTY CLERK 01/09/2024 09/29/2023 04:27 01:50 PM INDEX NO. 653706/2023 NYSCEF DOC. NO. 51 35 RECEIVED NYSCEF: 01/09/2024 09/29/2023 See Petition, Exhibit A. Rule 12212(a) is clear in that it provides that attorneys’ fees may be awarded for a violation of any provision of the FINRA Code. The FINRA Code includes Rule 12507 (b), which requires all parties to act in “good faith” during discovery. This provision of the Code defines "good faith” as “a party must use its best efforts to produce all documents or information required or agreed to be produced. If a document or information cannot be produced in the required time, a party must establish a reasonable timeframe to produce the document or information.” In the two cases cited in the relevant paragraph of the award, ReliaStar Life Ins. Co. of N.Y. v. EMC Nat. Life Co., 564 F.3d 81, (2d Cir. 2008) and Synergy Gas Co. v. Sasso, 853 F.2d 59 (2d Cir. 1988) the Second Circuit upheld an award of attorneys’ fees against a party who engaged in bad faith during the arbitration. As detailed herein, Respondents’ conduct during discovery was egregious, in violation of FINRA Code (Rule 12507 (b)) and consistent with the attorney fee awards in ReliaStar and Synergy Gas. Respondents’ conduct included hiding the documents underlying their claim (they were Claimants in the underlying arbitration) through trial, ignoring their own stipulation to produce these documents to resolve a motion to compel to produce these documents, causing the Chair to issue a dozen subpoenas of brokerage firms on the eve of trial for the documents Respondents hid, and then for the “chef’s kiss” attempting to use summaries of the hidden documents at trial. Notwithstanding the clear bad faith conduct, Respondents make the astonishing argument there was no underlying law upon which the Award is based and that, despite being aware of their numerous failures to comply with FINRA Rule 12212 (a) by failing to conduct discovery in good faith in violation of FINRA Rule 12507 (b), they fully complied with every provision of the 2 2 of 31 FILED: NEW YORK COUNTY CLERK 01/09/2024 09/29/2023 04:27 01:50 PM INDEX NO. 653706/2023 NYSCEF DOC. NO. 51 35 RECEIVED NYSCEF: 01/09/2024 09/29/2023 FINRA code. Respondents also completely ignore ReliaStar and Synergy Gas, as they must, only mentioning these two cases in a short footnote. Because the Award is “unreasoned,” none of the parties to this special proceeding can determine whether the bad faith upon which the Panel relied was in discovery or in the commencement of a frivolous arbitration; or both! Nor can the Court. What can be concluded, however, is that because Respondents engaged in bad faith discovery and violated Rule 12212(a) and Rule 12507(b), they are unable to demonstrate that the Award consciously disregarded the law and are unable to ascertain the precise reasoning for the Award, the motion to vacate must be denied and the Award confirmed. By this reply and opposition memorandum, Shapiro addresses the issues raised by the cross motion. That is, Shapiro sets forth Respondents numerous violations of the FINRA Code by acting in bad faith. Second, Petitioner provides the Court with the underlying law, which is squarely applicable, pursuant to which FINRA panels award legal fees and/or sanctions for parties engaging in bad faith. But first, Petitioners are forced to address the equally frivolous argument that there was no basis for the award as well as Respondents tortured recitation of the underlying facts that were proven at the hearing of this matter. In short, Respondents (Claimants at the time) commenced the underlying FINRA arbitration based exclusively on a single line from a WhatsApp message stating that a multi-party complicated sale of unregistered, restricted placement agent warrants exercisable for restricted common stock was “done.” Annexed to the Roth Affirmation, dated September 29, 2023, as Exhibit B (the “Roth Aff.”) is the Stmt. of Claim (“SOC”) ¶¶ 1, 10. And, by their opposition papers to the motion to confirm, Respondents continue to argue that the one text constitutes a binding, enforceable agreement between the parties, even though: (i) Respondents provided Shapiro – before the “done” text was even sent or received – a comprehensive warrant purchase 3 3 of 31 FILED: NEW YORK COUNTY CLERK 01/09/2024 09/29/2023 04:27 01:50 PM INDEX NO. 653706/2023 NYSCEF DOC. NO. 51 35 RECEIVED NYSCEF: 01/09/2024 09/29/2023 agreement that they indicated had to be negotiated; (ii) the parties continued to negotiate with counsel on each side, both before and after the text, plainly indicating their intention not to be bound absent execution of multiple written agreements, which never occurred; (iii) the draft warrant purchase agreement itself that was prepared by Respondents’ counsel and circulated by Mr. Zogala, the sole principal of each of Respondents, indicated on its face that it would become valid and legally binding only when executed and delivered, which did not happen; (iv) the WhatsApp message lacked any material terms found in industry-standard warrant purchase agreements, including the identity of the numerous buyers, the identity of the numerous sellers, material representations and warranties, escrow-related details and mechanics, depository and payment mechanics, dispute resolution steps, and the requisite approval of the issuer of the securities to have been transferred or the opinion of its counsel as to the permissibility of the transfer; (v) even Zagola confirmed, after the “done” text, that he would first have to speak to counsel; and (vi) the escrow agreement, also provided by the Respondent and required by all parties, had not ever been fully negotiated. Simply, neither document was ready for execution. Indeed, the warrant purchase agreement failed at any time to list the proper sellers or buyers of the restricted security. Further, by the FINRA Arbitration SOC, Respondents were in the ridiculous position of finding themselves having to ignore their own draft warrant purchase agreement, which they sent to the sellers even before the WhatsApp message at issue was sent. The draft agreement and a draft escrow agreement explicitly required by Respondents were in the process of being negotiated and revised by the parties and their legal counsel at the time the Respondents commenced the arbitration. If that were not enough, Respondents never anticipated that the “done” text message was binding as, in response, Mr. Zogala, on behalf of Respondents, stated that the transaction was not 4 4 of 31 FILED: NEW YORK COUNTY CLERK 01/09/2024 09/29/2023 04:27 01:50 PM INDEX NO. 653706/2023 NYSCEF DOC. NO. 51 35 RECEIVED NYSCEF: 01/09/2024 09/29/2023 consummated because he still needed to “chat with Dave to update him,” indicating that Respondents needed to consult with their legal counsel, Dave Danovitch, Esq., to continue the incomplete drafting and negotiation process. 1 Exh. A: 172: 9-15. From the date of the “done” text message for the following weeks, the parties, with the assistance of their respective counsel, continued to exchange several drafts of the warrant purchase and escrow agreements that contained dozens of red-lined changes from both sides. Exh. A: 192:17-25. Most significantly, during this time, Respondents sought to change the material terms of the potential deal. In the end, it is indisputable that draft agreements were never finalized or executed by any party. Respondents, thereafter, went radio silent, only to reappear close to two weeks later when the price of the underlying stock sharply rose, making the economics of the deal far better for them. Exh. A:244: 14-15 – 245:1-5. During the interim, thinking that Claimants had abandoned the deal, the sellers exercised their warrants. To be clear, at no point did any of the parties partially perform under the purported deal or take steps that would evidence the existence of an agreement. Rather, Respondents did nothing. They never placed the money in escrow. They never even delivered money for the warrants. Exh A: 190:4. Nor did they even tender any consideration. Even after Respondents returned and tried to resuscitate the transaction, their attorneys continued to question material terms. In short, there was at no time a binding agreement. Further, Respondents put on an expert who, remarkably, had no familiarity with the type of underlying security being traded. That is, while he testified that billions of dollars are traded on a handshake or verbally, he had no knowledge as to how the type of security had to be trading, agreeing that in his 20 years of being in the business, he is “not used to” private 1 Annexed as Exhibit A to the accompanying affirmation of Richard Roth, dated September 29, 2023 are the transcripts of the first day of the proceeding (the parties did not have a court reporter but Respondent converted the audio files from the hearing into a transcription of certain days that was used by the parties). The cites to those transcript pages are referred to herein as “Exh. A:[page number]:[line number].” 5 5 of 31 FILED: NEW YORK COUNTY CLERK 01/09/2024 09/29/2023 04:27 01:50 PM INDEX NO. 653706/2023 NYSCEF DOC. NO. 51 35 RECEIVED NYSCEF: 01/09/2024 09/29/2023 placement warrants and could not comment on whether they had to be sold with or without an agreement. Shapiro’s expert, on the other hand, was clear; affirmatively stating that when it comes to a transaction of this type, involving the secondary sale of unregistered restricted securities by and between multiple investors in reliance upon an exemption from registration, there had to have been a formal signed writing. Shapiro’s expert, well versed in this particular transaction, went on to testify that the material terms of the transaction besides price and quantity are tailored to the underlying warrants themselves, and the parties need to address all the relevant representations and warranties and the steps to ensure that they can actually transfer the warrants upon closing of the deal. If that were not enough, Respondents, days prior to the transaction in issue, had entered into a very similar agreement with the same security and the same warrant and not until that transaction was executed did they effectuate the sale. Thus, at all times Respondents were fully aware that the sale of warrants could take place only once the ink was dry and various third parties - including the original issuer of the securities - had blessed the transaction. As for Respondents claims in the FINRA arbitration, they sought damages for breach of contract as a result of selling the same securities “short” before even receiving the WhatsApp text. And Respondents concealed that short sale from Shapiro. The net result is that, in bad faith, Respondents sought damages for transactions both hidden from Shapiro and that predated their alleged contract with Shapiro. Despite their petty attempt to claim “done” was a contract, it’s the timing of the text that’s actually relevant: that the Respondents took a risk shorting securities before receiving the “done” text precludes them from seeking any damages, even assuming there was an agreement, which clearly there was not. As the Panel found, Respondents argument was wholly inconsistent with their own acts and omissions and that, as a result, the claim had no basis in law, fact, or industry practice, and was in bad faith. Indeed, the seminal case that was presented 6 6 of 31 FILED: NEW YORK COUNTY CLERK 01/09/2024 09/29/2023 04:27 01:50 PM INDEX NO. 653706/2023 NYSCEF DOC. NO. 51 35 RECEIVED NYSCEF: 01/09/2024 09/29/2023 to the FINRA Panel, Yenom Corp. v. 155 Wooster Street, Inc., 23 A.D.3d 259 (1st Dep’t 2005) (hereinafter “Yenom”), held that in the identical situation where a draft agreement was presented for signature that had identical language, not only was the draft agreement unenforceable, but the plaintiff, the proponent of the draft agreement, was sanctioned for their frivolous argument! By their cross motion, Respondents fail to even address, thereby wholly ignoring, that authority. FACTUAL BACKGROUND A. The Parties Aegis is a FINRA member firm and is a retail and institutional broker-dealer located in New York City. Mr. Eide is, among other things, the founder and Chief Executive Officer of Aegis. Mr. Shapiro is a former Senior Managing Director who worked on the management team at Aegis responsible for private equity investment banking and venture capital financing. Zogala is a trader at Murchinson, a global investment firm located in Toronto, Ontario, Canada. Exh. A:32: 10-18. BPY and Nomis are offshore private funds affiliated with Murchinson. Exh. A:34:10-12, 13-16. Although styled as a customer dispute, Respondents were indisputably not clients of Aegis and were not when the preliminary negotiations about a potential deal were occurring. Rather, the abandoned deal related to personal securities held by Shapiro and the Robert J. Eide Pension Plan (the “Eide Pension Plan”), an entity not named in this action. Respondents wrongly named Mr. Eide and Aegis despite the fact that neither were intended parties to the abandoned deal. Exh. A.: 25:23-24. Eide and Aegis, never even potential sellers of the restricted security, were thus dismissed during the proceeding. While Shapiro was not dismissed by a motion, the Panel had serious questions as to any personal liability he would have, so it decided, rather than summarily dismiss him, to hear his testimony in the matter before rendering a decision. 7 7 of 31 FILED: NEW YORK COUNTY CLERK 01/09/2024 09/29/2023 04:27 01:50 PM INDEX NO. 653706/2023 NYSCEF DOC. NO. 51 35 RECEIVED NYSCEF: 01/09/2024 09/29/2023 B. Preliminary Negotiations of Potential Warrant Purchase Transaction The evidence conclusively revealed that in approximately early 2021, Shapiro met Zogala through his senior partner Adam Stern (“Stern”), Head of Private Equity Banking at Aegis, and CEO of SternAegis Ventures, the management team at Aegis responsible for private banking and venture capital financing. They began to discuss a potential deal to sell at a discount to implied market price several unregistered restricted placement agent warrants to purchase common stock of Hydrofarm Holdings Group, Inc. (“HYFM”), the vast majority of which were to be sold by Mr. Stern and a smaller proportion to be sold by others, including Mr. Shapiro. Importantly, after this initial introduction, on January 10, 2021, it was Zogala on behalf of Respondents who first circulated a draft warrant purchase agreement for the potential deal to Stern and Shapiro. Exh. A:138: 6-9. The draft included several blank placeholders for material terms still to be negotiated, including the names of the sellers, the names of the purchasers, the quantity of warrants (including at two different strike prices, $8 and $16), the prices, and other terms. That draft also included reciprocal representations that: “This Agreement, when executed and delivered by the buyer, will constitute a valid and legally binding obligation of the Buyer, enforceable against Buyer in accordance with its terms” and “This Agreement, when executed and delivered by the Seller, will constitute a valid and legally binding obligation of the Seller, enforceable against Seller in accordance with its terms” subject to exceptions not relevant here. The parties never edited this language. The draft further included a merger clause that provided: Entire Agreement. This Agreement represents the entire agreement of the parties hereto and thereto with respect to the matters contemplated hereby and hereby, and there are no written or oral representations, warranties, understandings or agreements with 8 8 of 31 FILED: NEW YORK COUNTY CLERK 01/09/2024 09/29/2023 04:27 01:50 PM INDEX NO. 653706/2023 NYSCEF DOC. NO. 51 35 RECEIVED NYSCEF: 01/09/2024 09/29/2023 respect thereto except as expressly set forth herein and therein. After receiving the draft agreement, Shapiro wrote to Zogala that he would send a redline once counsel finished reviewing. Exh. A: 139:5-6. In the meantime, Shapiro and Zogala scheduled a call to continue to discuss the potential transaction. It is also indisputable that the parties approached negotiations by proceeding on two separate, parallel tracks. Legal counsel for both parties, with the respective parties’ input, reviewed and edited numerous versions of the draft warrant purchase agreement and escrow agreement while Shapiro and Zogala continued to negotiate the economic terms of the potential deal. Exh A:143: 5-10. The parties’ understanding was clear that at some point both tracks would hopefully coalesce on a signed, sealed, and delivered deal. The evidence at the hearing demonstrated that despite the preliminary nature of these initial discussions, and unbeknownst to Shapiro, Respondents, utilizing various brokerage accounts, sold short 45,660 shares of HYFM free trading stock on January 11, 2021, before the “done” text was even sent. Exh. A:161: 11-13. Had Shapiro known about these short sales, it would have impacted the way in which the sellers evaluated and negotiated the economics and pricing for the potential deal. It also would have impacted the terms of the draft agreements themselves, including representations and warranties that would have addressed the short sale. Put simply, Respondents knew there was a substantial likelihood that the disclosure of these important omitted facts would have been viewed by Shapiro as having significantly altered the total mix of information made available to him about the potential transaction and, with that knowledge, concealed their prior shorting of the same security. Indeed, disclosure of these material facts may well have caused Shapiro to discontinue negotiations from the beginning. Rather than ever disclosing the short positions, the evidence revealed that the representations that Zogala made during the parties’ negotiations indicated that he was trying to purchase warrants to 9 9 of 31 FILED: NEW YORK COUNTY CLERK 01/09/2024 09/29/2023 04:27 01:50 PM INDEX NO. 653706/2023 NYSCEF DOC. NO. 51 35 RECEIVED NYSCEF: 01/09/2024 09/29/2023 create a long position and, therefore, actively misled Shapiro. From January 11, 2021 to January 19, 2021, the parties continued to engage in the preliminary, dual-track negotiations. When Shapiro circulated a redlined version of the warrant purchase agreement on January 12th, he enclosed a draft escrow agreement as well. Exh. A:200:5. In addition to making other edits to the draft warrant purchase agreement, the sellers revised the merger clause section as follows (additions in red underline). Other than defining the draft agreements collectively as “Transaction Documents” (edits in blue), Claimants never made any additional edits to this provision: Entire Agreement. This Agreement, together with the Escrow Agreement (collectively, the “Transaction Documents”), represents the entire agreement of the parties hereto and thereto with respect to the matters contemplated hereby and hereby, and there are no written or oral representations, warranties, understandings or agreements with respect thereto except as expressly set forth herein and therein. During this period of time, counsel for both parties reiterated that the draft agreements remained subject to review by their clients. Zogala repeatedly indicated that he understood counsel to continue to be involved in finalizing the parties’ potential deal. Indeed, Zogala did precisely this on January 12th immediately after the “done” WhatsApp message that Claimants contend constitutes a “written agreement” (Exh. B: SOC ¶ 10): “ty, will chat with Dave [his attorney] after the call to update him.” The evidence at the hearing also revealed that during this period of preliminary negotiations, the parties changed material terms of their agreements multiple times, as summarized below: • Sellers: As discussed above, initially, the primary purpose of the potential deal was to sell Stern’s HYFM warrants, and a smaller portion of warrants held by others including Shapiro. By January 13th, the parties identified the potential sellers as Stern, Shapiro, and Eide. Later that day, Eide had 10 10 of 31 FILED: NEW YORK COUNTY CLERK 01/09/2024 09/29/2023 04:27 01:50 PM INDEX NO. 653706/2023 NYSCEF DOC. NO. 51 35 RECEIVED NYSCEF: 01/09/2024 09/29/2023 been replaced with the Eide Pension Plan. By January 19th, Respondents demanded that selling parties be changed to just Shapiro and the Eide Pension Plan. Respondents decided not to purchase Stern’s warrants after learning in their own ongoing due diligence of a contractual lock-up period that applied to these warrants because he was a former director of HYFM. As of January 19th, the last day the parties exchanged a draft escrow agreement, the sellers were still listed as Shapiro and Eide. • Purchasers: Shapiro initially understood the potential purchaser to be either Zogala and/or Murchinson where Zogala purported to work. Respondents subsequently disclosed that the potential purchasers would not be Zogala or Murchinson, but rather two offshore funds, BPY and Nomis. • Warrant Quantities and Prices: From January 11th to 19th, the warrant quantities and prices negotiated continued to change. At Zogala’s request, they initially focused on warrants with a strike price of $16, based on quantities that assumed Stern, Shapiro, and the Eide Pension Plan would all be sellers. After Respondents decided to not purchase Mr. Stern’s warrants, the parties pivoted and began to negotiate $16 and $8 strike price warrants of varying quantities and prices. The parties never populated the draft warrant purchase agreement or escrow agreement with final quantity or purchase price for the warrants. Instead, these terms remained placeholders. • “Big Boy Language”: The parties went back and forth on whether, and in exactly what terms, they would warrant that they were “sophisticated” parties in the draft warrant purchase agreement. These provisions referred to as “big boy language” were important for several reasons. As a general matter, they provide clarity as to the parties’ roles in the transaction, including Respondents’ responsibility to make an educated decision regarding entering the transaction. Moreover, because of Shapiro’s familiarity and ongoing business relationship with HYFM, it was crucial for him to obtain Respondents’ agreement that they understood Shapiro might possess nonpublic information about HYFM. Respondents’ original draft contained no “big boy” language, and after Shapiro inserted it, the parties modified this provision multiple times throughout the negotiation process. • Escrow Provisions: From the inception of the negotiations, Shapiro made clear to Zogala that an escrow agreement was an integral part of the contemplated, fully-integrated transaction. The initial draft warrant purchase agreement contained no escrow provision, nor the necessary separate escrow agreement. Counsel for the sellers added escrow provisions to the warrant purchase agreement and proposed a separate escrow agreement. The parties negotiated various changes to these over the course of the ensuing week. The draft escrow agreement in contemplation when negotiations ended allowed the sellers to unilaterally terminate it if purchasers did not deposit the requisite funds into escrow within two days of signing. 11 11 of 31 FILED: NEW YORK COUNTY CLERK 01/09/2024 09/29/2023 04:27 01:50 PM INDEX NO. 653706/2023 NYSCEF DOC. NO. 51 35 RECEIVED NYSCEF: 01/09/2024 09/29/2023 C. Respondents Walked Away Without Finalizing the Proposed Transaction For a twelve-day period from January 19th to February 1, 2021, immediately following these negotiations, all communications between the parties ceased. No one circulated an updated version of the warrant purchase agreement with any final quantities or prices for the warrants or a final escrow agreement. No one executed the draft warrant purchase agreement or escrow agreement. During this period, neither party gave any indication they believed that they had struck an enforceable agreement, which makes sense given the incomplete negotiations and drafts. Though Respondents contended that they entered into a binding agreement through the WhatsApp message “done” (Exh. B: SOC ¶ 10) on January 12th, the evidence demonstrated that their behavior after abandoning the transaction was inconsistent with their alleged intent to be bound that they claimed after the fact. Indeed, the sellers never revised the transaction documents to reflect the supposed deal much less asked the sellers about the status of the draft deal documents, tendered payment for the securities supposedly purchased, or inquired about delivery of those securities. After preliminary negotiations ended without execution of the draft transaction agreements and Respondents by all appearances abandoned the potential deal, Shapiro and the Eide Pension Plan opted to exercise their warrants on a cashless basis in late January into early February 2021, rather than sell the warrants. D. Claimants Came Back to the Table, Evidencing the Lack of Any Agreement There was no outreach from Respondents until February 1, 2021, when not coincidentally, the stock price of HYFM began to rise rapidly. Exh. A: 244:17-19. HYFM stock would climb to an all-time high in mid-February 2021. Prior to this point in time, the HYFM stock price had been trading at close to the break-even price for the warrants. Although the sellers did not know of Respondents’ short position in real time, the evidence revealed that the rising stock price provided 12 12 of 31 FILED: NEW YORK COUNTY CLERK 01/09/2024 09/29/2023 04:27 01:50 PM INDEX NO. 653706/2023 NYSCEF DOC. NO. 51 35 RECEIVED NYSCEF: 01/09/2024 09/29/2023 them an incentive to endeavor to collapse their short position by purchasing and exercising the warrants. On the afternoon of February 1, 2021, counsel for Respondents wrote to sellers’ counsel: “Hi Steve, Based on the below I think we’re agreed on the numbers. You have the most recent turn of the docs; could you please populate the latest draft of the purchase agreement with the agreed numbers and send the same across for our review?” This message was out of the blue, but it plainly referenced the incomplete transaction documents as a necessary prerequisite for finalizing a deal. Later that afternoon, Zogala again acknowledged the incomplete deal documents, messaging Shapiro on WhatsApp: “Was chatting with our counsel and the last turn of the docs was with you guys. Looking to get that wrapped up and wired out your way, or the deposit anyway. Can you make sure that gets done? Figured you’d want your money as well!” The next day, on February 2, 2021, counsel for Respondents wrote again: “Following up on Natalie’s email from yesterday. In addition, we have some additional questions regarding the placement agent warrants that we’d like to discuss today.” Zogala sent Shapiro a message later that morning on WhatsApp, stating that the back office needed the “contract finished”: “Can we get this wrapped up today? Back office has the confirm on the trade but they want the contract finished up as well for month end rec.” Exh A: 248:14-15. In response, counsel for the sellers responded by email that day: “My understanding is that the sellers no longer wish to proceed with these transactions at this time.” Counsel for the sellers reiterated again by email later that day: “[A]lthough negotiations were at one point ongoing, those preliminary and non-binding discussions ceased and thus no definitive agreement was reached between our clients. We would consider any other conclusion to be baseless and frivolous.” 13 13 of 31 FILED: NEW YORK COUNTY CLERK 01/09/2024 09/29/2023 04:27 01:50 PM INDEX NO. 653706/2023 NYSCEF DOC. NO. 51 35 RECEIVED NYSCEF: 01/09/2024 09/29/2023 E. Respondents Threaten Suit and Eventually Commence the FINRA Proceeding In October 2021, prior to filing the SOC, Respondents sent a draft version of the statement of claim threatening suit to Shapiro, claiming there was a “written agreement” with him to sell the warrants and seeking damages for breach of the parties’ alleged agreement and for other claims. According to the draft Statement of Claim, the seller was only Shapiro. The draft SOC is annexed as Exhibit A to the Answer, Counterclaims Third Party Claims. Roth Aff., Exh. C1. On December 29, 2021, Respondents commenced the FINRA arbitration, claiming that there were now three sellers in the agreement, Eide, Aegis and Shapiro. Thus, even until the date of the filing of the Statement of Claim, Respondents did not know the parties to the alleged agreement they were trying to enforce! And even the draft and filed Statements of Claims had different causes of action. One of those causes of action, violation of FINRA Rule 2110, is not even a cognizable cause of action in New York or under FINRA rules. On March 4, 2022, Respondents filed their answer with counterclaims/third-party claims for fraud and for attorneys’ fees, costs, and disbursements. Annexed to the Roth Affirmation is Respondents’ Amended Answer, Counterclaims and Third Party Claims, which specifically seek legal fees and provide numerous basis for the panel to so award. See Exh. C at 15-21. F. Discovery – Some of the Violations By Respondents Remarkably, Respondents argue that there was no basis for the Panel to conclude that they violated FINRA Rule 12212(a). Specifically, by their memorandum of law, they assert: Rule 12212(a) … does not provide a basis for an attorneys fee award; it authorizes FINRA arbitrators to sanction parties before it on only two explicitly stated grounds, “for failure to comply with any provision of the [Arbitration ] Code, or any order of the panel . . . .” But the Panel at no time found – in its Award or in the course of the Hearings – that Murchinson had violated a provision of the Arbitration Code or any of the Panel’s orders. 14 14 of 31 FILED: NEW YORK COUNTY CLERK 01/09/2024 09/29/2023 04:27 01:50 PM INDEX NO. 653706/2023 NYSCEF DOC. NO. 51 35 RECEIVED NYSCEF: 01/09/2024 09/29/2023 Respondent’s Memo of Law, page 2. In so arguing, Respondents ignore the numerous code and rule violations throughout the hearing. First, according to FINRA Rule 12507 (b), Respondents were obligated to comply with discovery as follows: (2) A party must act in good faith when complying with subparagraph (1) of this rule. "Good faith" means that a party must use its best efforts to produce all documents or information required or agreed to be produced. If a document or information cannot be produced in the required time, a party must establish a reasonable timeframe to produce the document or information. There is no question that Respondents failed to comply with discovery. Indeed, as was discussed before the Panel at the hearing, Respondents – who sued because they claimed they shorted stock from their own accounts– would not even produce any monthly statements of those accounts, each of which were requested in discovery by Shapiro. And at the hearing, it reached a point where counsel for Shapiro had to explain to the Panel “I've never been in a situation where up to the date of hearing, the claimant who's suing has not provided the monthly statements” upon which they were seeking over $2.865 million in damages. Exh. A:92:10-12. But that is not all. Because of Respondents utter failure to comply with discovery, which was brought to the attention of the Panel, Shapiro was forced to forward counsel for Respondents a letter setting forth the gross deficiencies (Roth Aff., Exh E) and even a motion to compel, that was presented to the Panel. Roth Aff., Exh. F. Respondent’s continued to refuse to produce documents. Finally, counsel for the parties reached an agreement on what was to be produced. Roth Aff., Exhibit F. That agreement, that was filed on the FINRA portal, which means that it was before the entire Panel, encapsulates the agreement regarding discovery wherein Respondents were to produce a series of basic documents by February 17, 2023. 15 15 of 31 FILED: NEW YORK COUNTY CLERK 01/09/2024 09/29/2023 04:27 01:50 PM INDEX NO. 653706/2023 NYSCEF DOC. NO. 51 35 RECEIVED NYSCEF: 01/09/2024 09/29/2023 Respondents simply failed to do so. As a result of Respondents failure to comply with discovery, Shapiro was forced to subpoena each and every brokerage firm with whom Respondents had accounts to obtain that basic and pivotal information, including but not limited to: (i) Bloomberg, LP; (ii) PNB Paribas; (iii) Dash Securities; (iv) Merrill Lynch Securities; (v) Bloomberg Canada; (vi) Oppenheimer Securities; (vii) Clear Street Securities; and (ix) BOFA Securities. And because FINRA Rules require that subpoenas only be issued by the Chairman of the FINRA Panel, Shapiro was forced to barrage the Chairman with subpoenas to issue, which he did each time. Accordingly, literally up to the commencement of the hearing, the Chairman was issuing subpoenas for basic information material to Respondents’ claims that Respondents refused to produce and Shapiro was scrambling around to gather it from the subpoenaed brokerage firms. The issue, which came up on numerous occasions during the hearing both on and off the record, included this extended exchange when Respondents’ counsel tried to show Respondent a document they failed to produce, which simply displeased the Chairman and the entire Panel: MR. ROTH: No, no, no, no, no. Let me make it very clear. To refresh everyone's - - the Chairman's recollection, we made a motion to compel. We took a long time because we were trying to resolve the case. It didn't resolve. We then reached an agreement in February where they said they were going to produce all the documents underlying these securities, and we were waiting. Three weeks went by, we got no monthly statements -- even though they're their monthly statements from Merrill Lynch, from Dash, from BOFA, Clear Street, from Oppenheimer. I know they had securities all over the street. We got nothing, which led to me scrambling to get the subpoenas to you last week because I'd been expecting this by agreement. So, I still never got a monthly statement. This is the first -- I probably had hundreds of arbitrations. I've never been in a situation where up to the date of hearing, the claimant who's suing has not provided the monthly statements. So, I have a problem when they selectively pick and choose. I did subpoena them, and I just got it a couple days ago. In fact, I got a subpoena today that I'm scrambling to get something before the other hearing. 16 16 of 31 FILED: NEW YORK COUNTY CLERK 01/09/2024 09/29/2023 04:27 01:50 PM