In re Navidea Biopharmaceuticals Litig.

A pharmaceuticals company, Navidea, sued its former CEO, Michael Goldberg, for, among other things, breach of contract and for a declaratory judgment establishing the contractual rights and obligations of the parties. These issues related to an agreement reached between the parties in settlement of their dispute. This resulted in counterclaims by Goldberg. Goldberg submitted for testimony of damages Terry Lee Orr, CPA. In this matter, the company sought to exclude Orr’s testimony and, absent his exclusion, to present its own expert, William F. Murray, CPA, as a rebuttal expert. Goldberg sought to exclude the testimony of Murray. The court excluded portions of Orr’s testimony and denied the exclusion of Murray as a rebuttal expert. The arguments of the experts primarily dealt with the “damages” to Goldberg based on the company’s failure to issue some shares under the agreement and delayed issuance of other shares. Additionally, Goldberg argued he was due shares for a subsidiary of the company, MT, based on an antidilution provision in the agreement.

Background.

Goldberg’s expert, Terry L. Orr, CPA. Orr is a Texas CPA with a B.S. in accounting and 35 years of experience. He is a member of the AICPA and its Forensic Valuation Services Section. Goldberg was retained to provide specialized knowledge regarding the attributes of shares under Reg. D and antidilution provisions commonly incorporated into commercial contracts. “Orr’s assignment also included providing the appropriate valuation of Navidea and MT shares ‘that were to be issued’ to Goldberg under the August Agreement.”

Orr also discussed the restriction provisions of Rule 144 and the impact on Goldberg’s shares issued under the agreement and the additional shares to be issued that have not been issued. Orr concluded that “Goldberg did not receive for which he bargained.” 

In sum, Orr reached the following opinions:

• The legend on the shares issued under the Aug. 14, 2018, agreement were not authorized under Reg. D;

• “Navidea failed to issue shares due to Dr. Goldberg on January 2, 2019, under the terms of the August 14th Agreement”;

• “When the August Agreement was executed, Navidea intended to initiate [a] reverse split of stock”; and

• Goldberg suffered damages “by not getting the Navidea shares issued as anticipated.”

William F. Murray. Murray is a CPA/ABV in Connecticut. Goldberg sought to exclude portions of Murray’s report. Goldberg’s motion focused specifically on Murray’s opinion that Orr should have applied a blockage discount because Navidea’s shares are thinly traded. “Murray utilized a ‘private placement model’ based on a proprietary ‘multiple regression analysis’ developed by his firm, MPI, called the ‘MPI Restricted Stock Study.’” The model accounted for a multiple of variables. Murray determined a blockage discount of 44.3% on the 13.5 million shares that were eligible to be sold on Feb. 14, 2019, and a 19.2% discount on 500,000 shares eligible on Feb. 14, 2019. Murray calculated that damages would total $1,873,651.

Orr’s damages opinion.

Orr was to testify that the Navidea shares in question did not comply with Regulation D or the August 14 agreement. Goldberg asserted that Regulation D was relevant because Navidea failed to issue 23.5 million shares under regulation as the August agreement required. Navidea also argued that Orr was not qualified to testify on federal securities laws, his opinions were inadmissible legal opinions, and Orr’s damages used unreliable methodologies, speculation, and faulty assumptions.

Orr was barely qualified to offer an expert opinion.

Orr’s experience with Regulation D was limited to auditing and reviewing financial statements of public companies. “Because Orr ‘does not claim to have ever worked for the SEC or have any experience with Regulation D, Rule 144 of Form S-8 from a compliance perspective,’ the Company argues that he cannot offer any opinion with respect to those SEC regulations or topics.” However, “[t]he Court may admit expert testimony if the witness is ‘qualified as an expert by knowledge, skill, experience, training, or education.’ (Fed. R. Evid. 702). The qualification requirement is to be ‘liberally construed.’” (Johnson & Johnson Vision Care, Inc. v CIBA Vision Corp.) Though Orr was not a securities compliance expert, he must maintain an understanding of SEC filing requirements and disclosures. Orr took continuing education courses to stay current and became familiar with Regulation D. The court found it a close call but found that Orr was qualified to testify. 

Orr’s testimony was limited to characteristics of restricted securities, restrictive legends, the process by which legends were removed, and one of Orr’s preferred methods of calculating damages caused by the Company’s alleged breach of contract.

Orr is precluded from testifying about the August agreement and compliance vel non with Regulation D.

Courts in this Circuit had held that, while experts can opine on an issue of fact within the jury’s province, they may not give legal conclusions based on those facts. Orr may not testify as to compliance with SEC regulations, whether Goldberg was a control person, nor the propriety of restrictive legends.

Orr also cannot testify as to whether Regulation D allowed or required certain legends placed on the shares, nor whether the agreement was complied with and whether it prohibited the inclusion of restrictive legends on the stock.

Orr’s damages calculation was admissible in part.

Orr’s presplit methodology was not admissible. Navidea argued that none of the Navidea stock would have been tradeable until after the reverse split. The court agreed that Orr’s presplit methodology was irrelevant. “Orr posits that that the 23.5 million shares were not available for Goldberg to sell until after the April 2019 reverse stock split.” There was, therefore, no relevance to the value of the 23.5 million shares. There was no relevance to any damages related to those shares.

Orr’s calculation of damages based on the earliest possible salable date was admissible. Orr described three methods of determining Goldberg’s damages factoring in Navidea’s reverse stock split. His second method was to assume “the highest share price during a period of high-volume trading after Navidea released its Good News 8-K in May 2020.” This method produced damages of $5,816,250, a per-share value of $4.95. Navidea described this as “the savvy investor” method. Navidea argued that this method contravened Delaware case law. The Delaware Supreme Court in Duncan determined that the measure of damages was “the difference between (1) the highest intermediate price of the shares during a reasonable time at the beginning of the restricted period, which functions as an estimate of the price that the stockholders would have received if they had been able to sell their shares, and (2) the average market price of the shares during a reasonable period after the restrictions were lifted,” which reflected the residual value of the shares after the breach was cured. Because Goldberg had yet to receive any shares, the second part of the formula was zero. Thus, Orr opined that Goldberg’s damages were the high price for the entire restricted period. Unfortunately, that does not square with Delaware law. “The ‘highest intermediate’ price is, therefore, the highest price during a ‘reasonable period’ after the shares were wrongfully restricted.” There is no basis for Orr’s determination of a reasonable period.

Given that Goldberg would not have held any shares at the market peak of Aug. 3, 2020, Orr’s value as of that date was irrelevant and thus inadmissible. All else being inadmissible, that left Orr’s calculation using the share price of each tranche at the earliest possible date each would have been salable. That aspect of his damages was admissible.

Orr’s opinion regarding damages Navidea’s purported breach caused with respect to the Macrophage shares was inadmissible. Navidea challenged Orr’s opinion on Goldberg’s alleged damages from Navidea’s alleged breach of contract associated with the issuance of Macrophage shares, arguing his opinion was irrelevant and speculative.

The court agreed. Orr attempted to use the market valuation methodology. As to a proposed transaction with investors for MT, it was apparent to Orr that control will remain with Navidea. Orr assumed that the investors would have received a 46% interest for a $25 million investment, thus a 5% interest would be worth $2.717 million. But Goldberg was to receive voting shares, which would be worth more. Orr’s opinion relied on one flimsy opinion after another, arriving at a nonspecific conclusion. Orr’s opinion on the failure to issue the Macrophage shares was speculative and nonadmissible.

Murray’s rebuttal.

Murray was a managing director with the consulting firm MPI. Navidea retained him to provide a rebuttal to the Orr report. He was expected to rebut Orr’s damages opinion because he did not apply a DLOM on Goldberg’s block of Navidea stock. He used a multivariable regression analysis based on a peer-reviewed study his firm conducted to determine a DLOM rate, but he did not offer any affirmative position of damages. Goldberg argued that Murray’s methodology was not relevant or reliable. Each of his arguments went to the weight and not the admissibility, and, therefore, his motion to exclude Murray’s rebuttal was denied. Goldberg was free to cross-examine Murray on any deficiencies he found in the Murray report. Murray’s report was admissible.