The opinion of the court was delivered by: Kevin Nathaniel Fox, United States Magistrate Judge
REPORT AND RECOMMENDATION
TO THE HONORABLE WILLIAM H. PAULEY III, UNITED STATES DISTRICT JUDGE
In this action, plaintiffs Peter C. Tosto ("Tosto"), Thomas Telegades ("Telegades"), Tellerstock, Inc., Investor Relations, Inc., and Consolidated Asset Management, Inc. (collectively "plaintiffs") allege common law fraud against defendants John Zelaya ("Zelaya"), Anthony Leavitt ("Leavitt"), Capital International Holdings, Inc. ("Capital International"), Capital International Securities Group ("CISG"), CIH, Inc. ("CIH"), and Capital Investment Holdings ("Capital Invest"); breach of fiduciary duty against defendants David Gothard ("Gothard") and Advanced Lighting Solutions, Inc. ("AVLS"); aiding and abetting breach of fiduciary duty against defendants Zelaya, Leavitt, Capital International, CISG, Capital Invest and SPC, Inc. ("SPC"); and breach of contract against defendants CISG, AVLS, Zelaya and Capital Invest.
The Complaint was filed on December 8, 1999. On February 4, 2000, Zelaya, Capital International, CISG, CIH, Capital Invest and SPC (collectively "Capital defendants") served an answer. However, as the litigation progressed, the Capital defendants failed to respond to plaintiffs' discovery demands. The Capital defendants' counsel then moved to be released from the obligation of continuing to represent them. The motion was granted, and the Capital defendants were ordered to obtain new counsel and to appear at a conference on June 22, 2001. The Capital defendants failed to appear at the conference.
Thereafter, your Honor ordered that a default judgment be entered against the Capital defendants.*fn1 The matter was then referred to the undersigned to conduct an inquest and to report and recommend the amount of damages, if any, to be awarded to plaintiffs against the Capital defendants. The Court directed plaintiffs to file and serve proposed findings of fact and conclusions of law and an inquest memorandum setting forth their proof of damages, costs of this action, and their attorneys' fees. Each of the Capital defendants was directed to file and serve opposing memoranda, affidavits and exhibits, as well as any alternative findings of fact and conclusions of law he or it deemed appropriate, and to state whether a hearing was requested for the purpose of examining witnesses.
Plaintiffs served and filed an affidavit in support of their inquest submission, proposed findings of fact and conclusions of law, and the declaration of plaintiff Telegades in support of the inquest submission. Defendant Zelaya submitted a declaration in opposition to plaintiffs' inquest submission.
Plaintiffs' submissions aver that they are entitled to $2,197,121.45 in contract damages; $2,197,121.45 in damages for fraud; punitive damages in an amount to be determined by the Court; $150,673.25 in attorneys' fees; and $12,875.37 in costs.
For the reasons set forth below, I recommend that plaintiffs be awarded $1,682,638.33 in compensatory damages, and prejudgment interest, to be calculated at the statutory rate of 9% per year, accruing on December 8, 1999.
Based on submissions by the plaintiff, the Complaint filed in the instant action — the allegations of which, perforce of defendants' default, must be accepted as true, except those relating to damages, see Cotton v. Slone, 4 F.3d 176, 181 (2d Cir. 1993); Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty Corp., 973 F.2d 155, 158 (2d Cir. 1992) — and the Court's review of the entire court file maintained in this action, the following findings of fact are made:
Tosto is a citizen of the state of Georgia; he was a shareholder of Investor Relations, Inc., and an officer of Tellerstock, Inc. and Investor Relations, Inc. Telegades is a citizen of the state of New York, and an officer and director of Consolidated Asset Management, Inc. Tellerstock, Inc. was a corporation formed and existing under the laws of the state of Delaware. Tellerstock, Inc. is not operating. Investor Relations, Inc. was a corporation formed and existing under the laws of the state of Utah. Investor Relations, Inc. is not operating. Consolidated Asset Management, Inc. is a corporation formed and existing under the laws of the state of New York. It has its principal place of business at Wappingers Falls, New York.
Zelaya is a citizen of the state of Florida. At all relevant times, Zelaya was secretary and director of Capital International, president, secretary and sole director of CISG, and president of CIH. Zelaya also was, or is, president and secretary of Capital Invest, and vice president, treasurer and sole director of SPC.
Capital International is a corporation formed and existing under the laws of the state of Florida. It has its principal place of business at One Southeast Third Avenue, Miami, Florida. Capital International is the holding company for defendants CISG and CIH.
CISG is a Florida corporation with its principal place of business at One Southeast Third Avenue, Miami, Florida. CISG is or was a registered broker-dealer and a subsidiary of Capital International. CISG is a Nevada corporation with its principal place of business in Nevada. CIH is a subsidiary of Capital International and the parent company of Capital Invest. Capital Invest is a Florida corporation with its principal place of business at One Southeast Third Avenue, Miami, Florida. Capital Invest is the parent company of SPC. SPC is a Nevada corporation with its principal place of business at 3773 Howard Hughes Parkway, Las Vegas, Nevada.
AVLS is a publicly traded company which, in November 1997, was attempting to develop and market commercially a new type of electronic billboard. AVLS had been attempting to raise money for several years. In late 1996, AVLS entered into an agreement with CISG whereby CISG agreed to make a series of public offerings of AVLS stock in return for a role in managing the company.
On November 5, 1997, AVLS commenced a lawsuit against plaintiffs, one of whom had been a director of AVLS; AVLS sought damages and injunctive relief. At the time the lawsuit was filed, plaintiffs owned a total of 601,228 shares of AVLS. AVLS moved for a preliminary injunction to prevent plaintiffs from trading the shares. The court ordered a temporary restraining order against plaintiffs to prevent them from trading the shares. Thereafter, before the preliminary injunction motion could be decided, AVLS and plaintiffs entered into a settlement agreement (the "Settlement Agreement"), which resolved the lawsuit.
The Settlement Agreement, which was fully executed on January 21, 1998, required Capital Invest to cause the formation of SPC as a limited liability corporation.*fn2 SPC was to be formed for the sole purpose of holding and selling plaintiffs' AVLS shares. Specifically, SPC was required to hold plaintiffs' shares until April 13, 1998, and then trade them for a period of twelve months. In addition, SPC was required to make monthly payments to plaintiffs, along with a possible balloon payment at the end, resulting in a total payment to plaintiffs of $1,878,837.50 by April 13, 1999. For its part, Capital Invest agreed to maintain sufficient collateral to ensure that this amount was paid. Plaintiffs contend that, by executing the Settlement Agreement, Zelaya represented and warranted that Capital Invest would maintain assets in the amount of $1,878,835.50 until at least April 13, 1999.
Plaintiffs assert that defendants CISG, Capital Invest, SPC and AVLS committed numerous events of default under the Settlement Agreement. Among other things, plaintiffs contend, these defendants failed to cause the formation of SPC promptly, failed to sell any of plaintiffs' shares, failed to provide monthly reports on trading activity, and failed to make all of the monthly payments due under the Settlement Agreement. Although a total of $73,818.75, purportedly derived from monthly trading activity, had been paid to the plaintiffs as of August 1998, this represented less than the amount required to be paid by that date under the terms of the Settlement Agreement. Moreover, although proper notice was given, none of these events of default was cured timely. Consequently, pursuant to the terms of the Settlement Agreement, plaintiffs were entitled to, inter alia, the return of all of the shares of AVLS stock that remained unsold and, if the shares were not returned promptly, an entry of judgment against Capital Invest and SPC.
As of August 24, 1998, only a portion of the shares had been returned and this portion was not in "free trading" form. Consequently, on September 3, 1998, plaintiffs obtained a court order requiring the return of all of the shares and their conversion into free trading form. However, even then, not all of the shares were returned. As a result, on September 17, 1998, the New York State Supreme Court, New York County, entered judgment for the plaintiffs in the amount of $1,805,203.80 against Capital Invest and SPC. This sum reflected the amount due under the Settlement Agreement ($1,878,837.50) less the amount previously paid to plaintiffs under that agreement ($73,818.75). Plaintiffs contend that interest has been accruing, at the statutory rate of 9%, since the date of judgment. To date, no portion of the judgment has been satisfied.
A total of 580,603 AVLS shares ultimately were returned to the plaintiffs. Plaintiffs aver that, by the time the shares were finally returned, and any trading restrictions had been removed, the market price of the shares had dropped from $3.00 per share to less than $1.00 per share. On October 1, 1998, plaintiffs state, the shares underwent a "one-for-three reverse stock split" in an effort to raise the price per share. However, this method of attempting to effect an increase in the price per share of the stock proved unsuccessful.
Plaintiffs state that after the shares were returned to them, the shares became the subject of a private sale at a price of approximately $0.10 per share. In his declaration, Telegades avers that he did not conduct the private sale and has never seen any documents concerning the sale. He states: "Nor, as far as I know, were any proceeds ...