[00:00:00] Speaker 00:
Good morning.

[00:00:02] Speaker 00:
May it please the court.

[00:00:03] Speaker 00:
My name is Stefan Love and I'm here on behalf... We can just give people a chance to settle in here before your time starts.

[00:00:09] Speaker 00:
Apologies.

[00:00:10] Speaker 02:
No, no.

[00:00:11] Speaker 02:
It's okay.

[00:00:12] Speaker 02:
All right.

[00:00:13] Speaker 02:
You may begin.

[00:00:13] Speaker 02:
Thank you.

[00:00:15] Speaker 00:
Good morning.

[00:00:16] Speaker 00:
May it please the court.

[00:00:17] Speaker 00:
My name is Stefan Love and I'm here on behalf of Plaintiffs Appellants and I'm reserving five minutes for rebuttal.

[00:00:26] Speaker 00:
The jury found the defendants liable for intentional fraud, breach of fiduciary duty, and negligent misrepresentation, but the district court decided as a matter of law the jury could not consider plaintiff's request for lost profits as damages or for punitive damages.

[00:00:46] Speaker 00:
That was error and plaintiffs are entitled to a trial on those issues.

[00:00:51] Speaker 00:
I'll start with the lost profits ruling.

[00:00:54] Speaker 00:
The ruling was twofold.

[00:00:56] Speaker 00:
The district court decided that certain expert testimony on the amount of lost profits was speculative and inadmissible.

[00:01:07] Speaker 00:
And the district court also decided the entire issue would be kept from the jury.

[00:01:13] Speaker 00:
So it's important when we're analyzing this to keep these two aspects of the ruling distinct.

[00:01:19] Speaker 00:
When it comes to the exclusion of the expert testimony, the district court abused its discretion in ruling that this testimony was speculative.

[00:01:27] Speaker 00:
There was nothing speculative about it.

[00:01:29] Speaker 00:
The expert started from undisputed facts regarding the performance of Arcsoft and its shares and amounts of shares held by different individuals and entities from the time of this buyout right on through its successful IPO.

[00:01:46] Speaker 00:
What the district court, I believe, was getting at was that the expert assumed for the purpose of calculation that plaintiffs would have been able to hold their shares, retain them, and sell them after the IPO.

[00:02:01] Speaker 00:
And the district court, and I think defendants as well, are

[00:02:05] Speaker 00:
under the mistaken view that by forming that assumption, because the expert formed that assumption, plaintiffs had to prove that they would have participated in this exact same IPO.

[00:02:20] Speaker 02:
Let me ask you about the expert testimony.

[00:02:25] Speaker 02:
Can Mr. Eichmann's $300 million loss profit testimony be considered expert testimony if the assumptions were provided by counsel?

[00:02:41] Speaker 02:
It seems like there might be expertise involved in that calculation or that there would be.

[00:02:47] Speaker 02:
So help me understand that and especially

[00:02:52] Speaker 02:
Did it account for all the variables that could have arisen?

[00:02:56] Speaker 02:
I'm having trouble seeing that, so I'm going to give you an opportunity.

[00:03:00] Speaker 00:
Absolutely.

[00:03:00] Speaker 00:
So the assumption of plaintiffs retaining their shares actually comes, it was given to the expert by plaintiffs council.

[00:03:07] Speaker 00:
but it comes from California law of lost profits.

[00:03:11] Speaker 00:
It's widely accepted that when the defendant's own wrongdoing has made it impossible to precisely calculate lost profits, the plaintiff can offer a reasonable approximation, and California case law tells us the defendant's own profits

[00:03:28] Speaker 00:
are a reasonable approximation of the plaintiff's lost profits when the wrongdoing excluded the plaintiff from a business opportunity.

[00:03:36] Speaker 00:
So that's where that assumption came from.

[00:03:38] Speaker 00:
Now, when it comes to the numbers at play and the calculations, the expert brought his expertise to bear by wading through a very lengthy IPO prospectus, restructuring agreement, by calculating capitalization of ARKSOFT at different points,

[00:03:56] Speaker 00:
And it was math, ultimately, but it was the kind of math that's very helpful to a jury to understanding a reasonable approximation of lost profits.

[00:04:07] Speaker 02:
But wasn't the buyout predicated on the shareholders being brought out?

[00:04:14] Speaker 00:
So Deng, one of the defendants here, did testify that the new investors, Huatai, this major Chinese investment bank, among others, required all old shareholders to be bought out.

[00:04:28] Speaker 00:
That was Deng's testimony.

[00:04:31] Speaker 00:
Now, Your Honor's question gets to actually the other part of proving lost profits.

[00:04:39] Speaker 00:
There's a predicate showing that plaintiffs need to make to be entitled to ask for lost profits at all.

[00:04:45] Speaker 00:
That's a finding that there was proximate causation of some lost profits.

[00:04:53] Speaker 00:
But that is a jury determination.

[00:04:56] Speaker 00:
And it was one that this jury was not permitted to decide.

[00:04:59] Speaker 00:
So absolutely, on the one hand, we have Deng's testimony, contested, that new investors required plaintiffs to be bought.

[00:05:08] Speaker 03:
You say that's contested, but what is it contested with?

[00:05:10] Speaker 00:
Well, our posture here is reviewing district court ruling on a factual issue.

[00:05:17] Speaker 00:
So a reasonable juror

[00:05:20] Speaker 00:
who makes all inferences in favor of plaintiffs and could also reject all of defendants' evidence.

[00:05:28] Speaker 00:
The reasonable jury here... Hey, wait, wait, wait, wait, wait.

[00:05:31] Speaker 03:
Reading between the lines of that answer, it seems like there is no counter-evidence.

[00:05:35] Speaker 03:
It's that evidence and then nothing else.

[00:05:39] Speaker 00:
Specifically as to what these new investors told Deng?

[00:05:43] Speaker 00:
Yes.

[00:05:44] Speaker 00:
That's right.

[00:05:44] Speaker 00:
We don't have any direct evidence of that because Deng was keeping all plaintiffs unaware of all of its dealings with Huatai.

[00:05:51] Speaker 03:
Even if a jury didn't believe Deng's testimony, what are they going to do with that?

[00:05:54] Speaker 03:
They have nothing else to fill the gap.

[00:05:57] Speaker 00:
I disagree.

[00:05:58] Speaker 00:
The jury here, and the question now for this, we're talking now about

[00:06:02] Speaker 00:
approximate causation of some lost profits.

[00:06:06] Speaker 00:
The amount is a separate question to do with this expert.

[00:06:09] Speaker 00:
When it comes to approximate causation of some lost profits, we ask, could a reasonable juror find that plaintiffs could have participated in some profitable IPO reasonably comparable, substantially similar to the IPO that it actually underwent?

[00:06:28] Speaker 00:
And again, the posture this court assumes is that that jury is rejecting all of defendant's evidence.

[00:06:37] Speaker 03:
And then you want the jury to make a judgment call about what could have happened in the future with no evidence.

[00:06:43] Speaker 00:
There's not no evidence.

[00:06:45] Speaker 00:
There is evidence that this IPO was first conceived of nine months before the buyout.

[00:06:53] Speaker 00:
That's when Deng started talking to Huatai, the most significant sponsor of this thing, on one phone, talking to Chan on the other phone, never letting the two be aware of each other.

[00:07:04] Speaker 00:
That's when Arksoft Performance started to turn around.

[00:07:07] Speaker 00:
These are pre-buyout events.

[00:07:10] Speaker 00:
they indicate ARKSOFT had extraordinary potential to undergo a profitable IPO before the buyout even took place.

[00:07:20] Speaker 00:
From that evidence, and also from evidence regarding ARKSOFT's business, let me just give an example of that.

[00:07:30] Speaker 00:
The core of ARKSOFT's business financially

[00:07:32] Speaker 00:
is cell phone camera processing software.

[00:07:36] Speaker 00:
We have dual camera software, single camera software.

[00:07:39] Speaker 00:
Arcsoft was coming to dominate this market before the buyout, before plaintiffs were knocked out.

[00:07:47] Speaker 00:
Plaintiffs weren't told about that, but that's what Arcsoft was doing.

[00:07:50] Speaker 02:
What's your best case on why, in your view,

[00:07:57] Speaker 02:
to support your view that the district court abused its discretion in saying that, in preventing this, I guess ultimately preventing this $300 million amount to come out because in the district court's view it might mislead the jury.

[00:08:15] Speaker 00:
The first case to cite would be the Elosu case.

[00:08:18] Speaker 00:
It's the Ninth Circuit decision from 2022.

[00:08:21] Speaker 00:
It's cited in the briefs.

[00:08:23] Speaker 00:
And this is a case where this court held a district court, abused its discretion in excluding expert testimony as speculative.

[00:08:36] Speaker 00:
The reason the district court in that case excluded the testimony was because the district court found fault with the expert's assumptions.

[00:08:45] Speaker 00:
This court held that's not a decision for the district court to make, that's a decision for the jury to make.

[00:08:51] Speaker 00:
The expert needs to have foundation but not corroboration for the assumptions that they make.

[00:08:58] Speaker 00:
And that's a quote from Elisu, foundation not corroboration.

[00:09:02] Speaker 00:
This district court made the exact same mistake, and it was an abuse of discretion to exclude this testimony.

[00:09:10] Speaker 03:
Can we shift gears a little bit?

[00:09:12] Speaker 03:
We have a number of issues to get to, so I want to make sure that we cover a couple of other things.

[00:09:16] Speaker 00:
By all means.

[00:09:16] Speaker 03:
So on the punitive damages question, it seems to me that that's going to boil down to what the definition of fraud is and this heightened standard for when punitive damages are appropriate.

[00:09:28] Speaker 03:
And as I understand California law, we've got a different definition of fraud for purposes of just stating a tort claim, an intentional tort claim, and then for the punitive damages standard.

[00:09:39] Speaker 03:
There is a statutory definition for how we think about fraud in terms of punitive damages.

[00:09:44] Speaker 03:
You agree with that?

[00:09:45] Speaker 00:
Yes.

[00:09:46] Speaker 03:
I read these two definitions, and it looks like the intent element is slightly different.

[00:09:51] Speaker 03:
For just a claim, you have to have intent to defraud.

[00:09:55] Speaker 03:
And for punitive damages, you have to have intent to injure.

[00:09:59] Speaker 00:
Defrauding is a form of injury, and the case law makes this clear.

[00:10:03] Speaker 03:
There isn't some... What California case do you have that specifically addresses these two definitions and says they mean the same thing?

[00:10:11] Speaker 00:
There would be the case of Miller, that's a 1976 long-standing Court of Appeal decision, cited in the briefs, which says, quote, proof of the cause of action for fraud is adequate basis for awarding punitive damages.

[00:10:28] Speaker 00:
There is no extra intent required.

[00:10:32] Speaker 00:
And defendant's briefing does not cite any case

[00:10:36] Speaker 00:
saying there's an extra intent required.

[00:10:39] Speaker 00:
What we have instead are a number of cases that say the intent to defraud suffices to give you punitive damages.

[00:10:48] Speaker 03:
So if that's true, I'm going to go back and I looked at Miller, but I'll go back and look at it again.

[00:10:52] Speaker 03:
If that's true, it begs the question, why did California provide a specific statutory definition for fraud for punitive damages if it just meant the same thing as a fraud action?

[00:11:04] Speaker 03:
Like that specific provision seems to be completely useless if that's the state of California law.

[00:11:11] Speaker 00:
I suppose it might be.

[00:11:14] Speaker 00:
I'll just say one more case to the court.

[00:11:16] Speaker 00:
This would be the Roddenberry case.

[00:11:18] Speaker 00:
This is another Cal Court of Appeal decision.

[00:11:20] Speaker 03:
I read that case this morning.

[00:11:21] Speaker 03:
I think it's completely off point because that case is about the difference, the line between a contract action and a tort action.

[00:11:28] Speaker 03:
when sort of the theory of fraud is at issue.

[00:11:30] Speaker 03:
It doesn't talk at all about this statute that defines fraud for purposes of whether punitive damages are appropriate.

[00:11:36] Speaker 00:
But it does say in that case that the plaintiff proved intent to defraud as an element of concealment.

[00:11:44] Speaker 00:
And it does say that concealment liability supported the award of punitive damages.

[00:11:49] Speaker 03:
I don't think it says that.

[00:11:51] Speaker 00:
I would invite your honor to reread the case.

[00:11:54] Speaker 03:
Can you tell me what page it says that I'll go back and look at?

[00:11:56] Speaker 03:
Like I said, I read it this morning, and I think it's an analysis of when something becomes tort liability as opposed to just contract liability.

[00:12:08] Speaker 03:
And it goes in depth about that and California's policy choices.

[00:12:16] Speaker 03:
I just don't see an analysis at all.

[00:12:17] Speaker 00:
Let me also offer

[00:12:21] Speaker 00:
an analogy between the language of the statute, 3294, which is the punitive damages statute, and the instructions here and the case law.

[00:12:29] Speaker 00:
The punitive damages statute says fraud means intentional concealment.

[00:12:35] Speaker 00:
That would be one component of fraud.

[00:12:38] Speaker 00:
And that is describing

[00:12:40] Speaker 00:
intent in the sense of volition.

[00:12:42] Speaker 00:
This wasn't an accidental concealment.

[00:12:45] Speaker 00:
And the second prong would be with the intention of thereby, and again I'm quoting the statute, depriving a person of property or legal rights or otherwise causing injury.

[00:12:56] Speaker 00:
So you have to have an intent behind the act you committed, in this case concealment.

[00:13:04] Speaker 00:
glossing the statute.

[00:13:05] Speaker 00:
You have the intentional concealment, that's from the statute, and then the intention, again to quote, of depriving a person of property or otherwise causing injury.

[00:13:16] Speaker 00:
So there needs to be an intention to cause some kind of harm.

[00:13:20] Speaker 00:
Now the intent to defraud is harm.

[00:13:24] Speaker 00:
Defrauding a person is harming them.

[00:13:26] Speaker 00:
And the defendants, again, have not pointed out any case saying you need to show something else besides intent fraud, the form of intent built into intentional fraud.

[00:13:41] Speaker 00:
That's not enough.

[00:13:43] Speaker 00:
And there is no case that says that.

[00:13:44] Speaker 00:
And we have the Miller case, proof of cause of action for fraud is an adequate basis for awarding punitive damages.

[00:13:52] Speaker 00:
It couldn't be clearer.

[00:13:53] Speaker 00:
This is a state law issue, but the state courts have spoken on it clearly.

[00:13:59] Speaker 00:
Now the other point on this, just so I can get this out before I step back, would be the evidence.

[00:14:05] Speaker 00:
Let's assume I'm right on the standard.

[00:14:08] Speaker 00:
At that point, the question becomes, could a reasonable jury have found clear and convincing evidence of intentional fraud?

[00:14:18] Speaker 00:
Because this was kept from the jury altogether, again, we make all reasonable inferences in favor of plaintiffs.

[00:14:26] Speaker 00:
Again, we reject all of defendants' contrary evidence, just as a reasonable jury could.

[00:14:32] Speaker 02:
Even if the expert testimony is not allowed.

[00:14:40] Speaker 00:
Oh, well here we're talking about punitive damages.

[00:14:43] Speaker 00:
Right.

[00:14:44] Speaker 02:
And since the court granted... So you wouldn't rely on the expert testimony at all for the punitive?

[00:14:50] Speaker 00:
In other areas, but as far as the amount of lost profits goes, that's not a component.

[00:14:57] Speaker 02:
I just wanted to make sure that I understood your argument.

[00:15:01] Speaker 00:
We have the fact that Deng concealed from plaintiffs the involvement of Huatai, this major Chinese investor, which began months before the buyout.

[00:15:15] Speaker 00:
And despite the fact, Deng is working closely with this company.

[00:15:19] Speaker 00:
He's telling Chan, oh, it's just some small investors.

[00:15:22] Speaker 00:
There's no institutional investor involved.

[00:15:25] Speaker 00:
This is fraudulent concealment.

[00:15:27] Speaker 00:
The jury found it was.

[00:15:29] Speaker 00:
We have the first half of 2017 quarterly financial statements of ARKSOFT.

[00:15:36] Speaker 00:
They show better performance than previous statements.

[00:15:39] Speaker 00:
Deng shared these with the new investors.

[00:15:43] Speaker 00:
He concealed them from plaintiffs.

[00:15:47] Speaker 00:
There's more, which is listed in the briefs.

[00:15:49] Speaker 00:
The point is a reasonable juror could readily find clear and convincing evidence of intentional fraud based on these facts, and therefore punitive damages should have gone to the jury.

[00:16:01] Speaker 00:
I'm going to reserve the balance of my time unless there's a fine.

[00:16:03] Speaker 02:
Even though the jury came back with not finding for intentional misrepresentation.

[00:16:08] Speaker 00:
Ah, well, I'll quote the California Supreme Court.

[00:16:12] Speaker 00:
California has long viewed fraud as being equally blameworthy, whether accomplished through affirmative misrepresentation or concealment.

[00:16:23] Speaker 00:
That's the Radigan v. Uber case just decided last year.

[00:16:27] Speaker 00:
There's no difference in culpability for concealment versus misrepresentation.

[00:16:33] Speaker 00:
And that's frankly a misstatement, or at least a mistaken insinuation,

[00:16:37] Speaker 00:
of defendant's briefing.

[00:16:39] Speaker 03:
Before you sit down, I have one last question.

[00:16:41] Speaker 03:
The non-statutory exception argument related to California Corporation's Code, Section 1312,

[00:16:52] Speaker 03:
Are you wanting us to certify?

[00:16:54] Speaker 03:
I'm not clear what the parties want us to do there.

[00:16:56] Speaker 03:
Do you want us to certify that issue or no?

[00:16:58] Speaker 00:
There's absolutely no need to certify it.

[00:17:00] Speaker 00:
The job of this court on that issue is to decide the issue as it imagines the Cal Supreme Court would have.

[00:17:07] Speaker 00:
And here we have the California Supreme Court in the Steinberg decision, in dicta, it's true, but delineating cases where the plaintiff knows about the fraud at the time of the buyout versus doesn't.

[00:17:19] Speaker 03:
But California cases after Steinberg have interpreted that to say that the California Supreme Court is leaving the question open.

[00:17:25] Speaker 00:
That's right.

[00:17:26] Speaker 03:
So it's an open question.

[00:17:28] Speaker 00:
In a literal sense, it is.

[00:17:30] Speaker 00:
It is inconceivable to me, and perhaps to you as well, that the California Supreme Court would decide a rule whereby successfully concealing your fraud at the time of the buyout means you get away with it scot-free.

[00:17:44] Speaker 00:
And that's the implication of defendant's rule.

[00:17:47] Speaker 02:
And is it your position that if Section 1312 applies, then that would be dispositive of the whole case?

[00:17:55] Speaker 00:
If Section 1312 applies, yes, that would keep the state law claims out, but there would still be the federal claims, which are briefed.

[00:18:04] Speaker 00:
Federal claims?

[00:18:05] Speaker 00:
Federal securities fraud claims.

[00:18:06] Speaker 02:
But you didn't plead your federal securities claims?

[00:18:09] Speaker 00:
We did plead them, and we adequately plead them in the second amended complaint.

[00:18:13] Speaker 00:
Well, no, you didn't plead them in your third amended complaint.

[00:18:15] Speaker 00:
That's right, because we had already pleaded them adequately in the second, and the district court imposed unnecessary conditions on... And so this goes to your argument that you should be entitled to have

[00:18:25] Speaker 02:
to replete or to have replete?

[00:18:30] Speaker 00:
This all assumes that the court is going to go with defendants and hold something that no court has ever held, that the defendant successfully concealed their fraud and therefore plaintiffs are without a remedy.

[00:18:41] Speaker 00:
If the court wants to hold that way, then yes, plaintiffs are entitled to pursue federal security claims which are not barred by Section 1312.

[00:18:52] Speaker 02:
Okay, thank you.

[00:19:01] Speaker 01:
Good morning, Your Honors, and may it please the Court, Kathleen Hartnett for defendants.

[00:19:06] Speaker 01:
I might just start.

[00:19:07] Speaker 01:
I was going to clear away maybe some of the affirmative issues first and then talk about 1312 to the extent the panel would like that.

[00:19:15] Speaker 01:
On the federal securities issue, just to put that to rest, there was a third amendment to complain after discovery where they replud the state fraud but chose not to include the federal securities claim.

[00:19:27] Speaker 01:
There was nothing barring them from doing that.

[00:19:29] Speaker 01:
So not only did they fail to replede,

[00:19:31] Speaker 01:
at the pleading stage, they also failed to replede after having an opportunity to develop evidence.

[00:19:36] Speaker 01:
So that's sort of doubly waived, and we believe there'd be no chance of that ever coming back.

[00:19:41] Speaker 01:
On the appreciation damages point, I think the court seems to have been familiar with the record, so I don't need to belabor it, but I just wanted to sort of make clear there was not a judgment as a matter of law barring this theory of damages.

[00:19:56] Speaker 01:
In fact, what happened at the trial was that

[00:19:58] Speaker 01:
Our clients made a motion in limine to actually bar the theory as a matter of law, citing 1312.

[00:20:03] Speaker 01:
The court denied motion in limine three and said, no, if they lay a foundation for appreciation damages, they can have the expert testify about that.

[00:20:13] Speaker 01:
What happened then was the plaintiffs put on their case.

[00:20:16] Speaker 01:
We at trial filed a motion to exclude Mr. Eichmann's appreciation damages for not having the evidentiary foundation, the points the court already has identified in terms of whether a buyout would have even

[00:20:28] Speaker 01:
stopped if he hadn't agreed to the buyout whether an IPO would have happened.

[00:20:32] Speaker 01:
So that was put to the court.

[00:20:34] Speaker 01:
And then the court in an order issued the same night as the party's briefing said, I have some concerns about the foundation.

[00:20:40] Speaker 01:
Here are some questions that could be asked of the witnesses to make sure we develop that record.

[00:20:45] Speaker 01:
Sorry, the record on what?

[00:20:47] Speaker 01:
Sorry, this is about the foundation for the appreciation damages.

[00:20:51] Speaker 01:
There was not some sort of a two-step process or like a judgment of a matter of law on one hand and then something else otherwise.

[00:20:57] Speaker 01:
It was always understood, is there anything in this record that would support either the fact of or the amount of lost profits?

[00:21:05] Speaker 01:
And the court kind of went out of its way through that order on the evening in the middle of trial to say, here are some questions that you would need to put before the

[00:21:14] Speaker 01:
put some evidence in to allow this, the parties presented that, and then there was no evidence that came in to support the theory.

[00:21:21] Speaker 01:
And it was at that point, and that's why I just wanted to make sure the court is aware of it.

[00:21:25] Speaker 01:
And this is at the, basically the court had asked during the colloquy with plaintiffs council, there's no other evidence on this point.

[00:21:34] Speaker 01:
after giving them the chance to put it in.

[00:21:35] Speaker 01:
And this is at 1 ER 16 and 17.

[00:21:38] Speaker 01:
And the plaintiff's counsel said, no.

[00:21:41] Speaker 01:
So this was not a situation where the court sought to take it away from the jury or made some legal ruling that would be disputable.

[00:21:47] Speaker 01:
This was simply an application of normal Daubert procedure, which was that you have to lay a foundation if there's going to be a factual assumption underlying your opinion.

[00:21:56] Speaker 01:
Otherwise, it's simply speculation and unreliable.

[00:21:59] Speaker 01:
And I think it would be an entirely different situation

[00:22:02] Speaker 01:
if the expert at hand had been some expert in Chinese markets and IPOs and had been able to concoct a but-for world in which plaintiffs would actually have been able to be part of some IPO.

[00:22:13] Speaker 01:
But that wasn't at all the nature of this expert.

[00:22:15] Speaker 01:
It was simply someone doing math, trying to show what the difference would be if the plaintiffs had been able to cash out in the IPO or not.

[00:22:23] Speaker 01:
I hope that clarifies that, but I do think the fact that the court was paying attention to this issue and saw it as a simple evidentiary issue should not be complicated now by legal arguments about

[00:22:32] Speaker 01:
a two-step analysis that were not part of the proceedings below.

[00:22:36] Speaker 01:
On the punitive damages point, moving to that, I think the court is honed in on what I believe is the key issue in this case, which is whether, well, there's two.

[00:22:46] Speaker 01:
One is whether or not the California statute requires more than what the jury instructions did here, and then two, what is the meaning of the clear and convincing evidence standard.

[00:22:55] Speaker 01:
I believe that

[00:22:57] Speaker 01:
as the plaintiffs themselves have conceded in their brief at 41 and at 64 and 65, we're right, there is something more.

[00:23:06] Speaker 03:
So I looked up the Miller case while he was talking, and it says, insofar as the words oppression, fraud, or malice in the statute defining the standard for punitive damages are in the disjunctive, proof of the cause of action for fraud is itself an adequate basis for awarding damages.

[00:23:26] Speaker 03:
So that would seem to be that they're not different.

[00:23:29] Speaker 01:
Yes, that is their best possible case, Your Honor, and what the court here did is actually reviewed Miller, and I think what else is important in Miller is further up than that, or maybe below.

[00:23:39] Speaker 01:
The court actually instructed the jury, rejected the jury instructions in that case for fraud, and instructed the jury that the true intention of the fraud in that case, Miller, was to deny the payment of the benefits to lawfully due plaintiff.

[00:23:53] Speaker 01:
And so I think it does actually depend

[00:23:55] Speaker 01:
And that's what the court was doing here.

[00:23:57] Speaker 01:
The district court was carefully parsing the difference between the jury instruction, which required an intent to deceive for concealment, but not an intent to harm.

[00:24:05] Speaker 01:
It required harm, but not an intent.

[00:24:07] Speaker 01:
And it was saying there's a delta between that and an intent to harm.

[00:24:11] Speaker 01:
And an example of that would be, and I think is kind of what actually is the situation in this case, there may have been what was an intentional failure to provide information in the sense that the

[00:24:20] Speaker 01:
party knew they were not providing it, but they weren't providing it to harm the other party.

[00:24:25] Speaker 01:
They weren't providing it to cause harm.

[00:24:28] Speaker 01:
They thought that was actually going to be a good thing for the other party.

[00:24:30] Speaker 01:
People were going to get the benefit of the buyout.

[00:24:33] Speaker 01:
That's what actually taking a step back here for this judge who had presided over this lengthy proceeding and amendment of the complaint, a long trial, I think what the judge saw bear out is what actually happened with the jury verdict.

[00:24:45] Speaker 01:
There was a technical violation.

[00:24:47] Speaker 01:
a directed verdict that two quarters of 2017 financials should have been provided and weren't.

[00:24:53] Speaker 01:
And so that was a duty to disclose as a fiduciary and didn't happen.

[00:24:57] Speaker 01:
But not this affirmative case of massive misrepresentations, hiding buyers, all these other things.

[00:25:03] Speaker 01:
And so I think what the court did was say, it matters here because the jury was essentially directed to find an intent to deceive, but that wouldn't necessarily entail an intent to harm and deprive

[00:25:15] Speaker 01:
the plaintiffs of property.

[00:25:16] Speaker 02:
What about Radegan?

[00:25:18] Speaker 02:
Sorry?

[00:25:18] Speaker 02:
Radegan, the Radegan case.

[00:25:21] Speaker 01:
Yes, Your Honor.

[00:25:22] Speaker 01:
Let me pull that up.

[00:25:25] Speaker 01:
I think that and the other, let me just make sure I address that directly for you.

[00:25:30] Speaker 02:
It seems like it shows that intent to defraud is sufficient

[00:25:37] Speaker 01:
Well, defraud is different than deceive.

[00:25:39] Speaker 01:
I know I sound like I'm... So help me understand that.

[00:25:42] Speaker 01:
Defraud means the whole cause of action.

[00:25:44] Speaker 01:
So if the jury instruction here had said there was an intent to harm as opposed to just harm, that would be a different case.

[00:25:51] Speaker 01:
So the whole cause of action together is a deprivation of a legal right.

[00:25:54] Speaker 01:
But all that had to be found and all that was found in this case for us to be held liable under concealment was that there was a duty disclosed and intentional failure not to provide that.

[00:26:07] Speaker 01:
That was the deception.

[00:26:09] Speaker 01:
And so I think what the judge here really took it seriously, he went back and said, that's a delta between

[00:26:15] Speaker 01:
The plaintiffs did not have to actually prove that we intended to harm the plaintiffs.

[00:26:19] Speaker 02:
Although, I got to tell you, Radigan seems to suggest that Project Concealment could suffice for punitive damages.

[00:26:28] Speaker 01:
I mean, your argument is that, oh... Well, I think that case makes clear that fraud in the concealment and fraud affirmative are both equally wrong, but it doesn't really go to the specific question of what's the quantum needed to get to punitive damages under California law.

[00:26:43] Speaker 01:
So as a broad principle, we don't disagree that fraud, you know, affirmative misrepresentations and concealment both are fraud.

[00:26:51] Speaker 01:
That's how they put the main point here.

[00:26:52] Speaker 01:
And that's why I feel like the district judge did such a careful job looking at the record here was they put the parties on notice about this delta.

[00:27:00] Speaker 01:
It asked the parties to not submit jury briefing.

[00:27:03] Speaker 01:
It wanted to know what was the actual evidence supporting an intent to harm as opposed to intent to deceive.

[00:27:11] Speaker 01:
And I think other examples of where that delta would, you know, come into play is in this case it was more of an intentional failure to provide something but not an intent to harm.

[00:27:21] Speaker 01:
You could have a white lie, something that was, you know, never meant to hurt anyone but was actually a deceit.

[00:27:26] Speaker 01:
So there is a sensible line, a sensible space there.

[00:27:30] Speaker 01:
And beyond that I would just say the clear and convincing standard does do work in all of these cases.

[00:27:33] Speaker 01:
It's very clear that the clear and convincing standard needs to do work.

[00:27:37] Speaker 01:
It's important.

[00:27:38] Speaker 01:
It's what the California legislature provided.

[00:27:40] Speaker 01:
And here, looking at the full, and I know it's hard for you to do this now with this large, voluminous record.

[00:27:45] Speaker 01:
I think this judge who sat through this and saw it and saw what was promised and what was ultimately before the jury was concerned that no reasonable juror could come to a clear and convincing conclusion that there had been an intent to harm.

[00:27:58] Speaker 01:
I also would just point out on the First Alliance case, I do think the opposing counsel had said that we don't have any case showing that this delta matters.

[00:28:06] Speaker 01:
The First Alliance case, they just said, oh, the judge misunderstood that.

[00:28:09] Speaker 01:
That was an aiding and abetting case.

[00:28:11] Speaker 01:
Not at all.

[00:28:12] Speaker 01:
What the judge did with First Alliance, which is this court's case, is it looked and said, oh, there's a person that's aided and abetted a fraud.

[00:28:19] Speaker 01:
That means they have to have been part of the fraud.

[00:28:22] Speaker 01:
And yet there, they still look to see whether or not there was an intent to harm above the mere fact of aiding and abetting.

[00:28:28] Speaker 01:
So the point is, just because you've been found liable of a fraud offense, you have to actually look at the offense that you've been found liable for and figure out if there is a delta.

[00:28:37] Speaker 01:
But I don't think we think the delta does all the work here.

[00:28:40] Speaker 02:
Talk to me about Steinberg.

[00:28:41] Speaker 02:
I think that you cite that in support of your case.

[00:28:50] Speaker 02:
Isn't that case distinguishable where the shareholders allegedly didn't know about the fraud until after the reorganization already happened?

[00:28:59] Speaker 01:
Thank you, Your Honor.

[00:28:59] Speaker 01:
And I think just to be clear, our main point here on this appeal is that the judge's evidentiary rulings were sound and that we should have an affirmance there.

[00:29:08] Speaker 01:
We did feel the need to bring up 1312 as our cross appeal because that is our position and we believe is correct under the law.

[00:29:14] Speaker 01:
It may seem draconian.

[00:29:16] Speaker 01:
But I do think that looking at the statute itself and how Steinberg itself reasoned was that the place to channel all of this worry about unfairness is into an appraisal proceeding that happens at the time of the buyout.

[00:29:32] Speaker 01:
And I think the question really is,

[00:29:34] Speaker 01:
What would the Supreme Court do?

[00:29:36] Speaker 01:
And we look to that for the California Supreme Court's decisions.

[00:29:40] Speaker 01:
We look at the Court of Appeal decisions.

[00:29:42] Speaker 01:
And then you have to be, if you're going to do something other than that, I think the standard, even as cited in their brief, is that you'd have to be certain to a certainty that they would do something different.

[00:29:52] Speaker 01:
I think the state of the law is sturgeon.

[00:29:53] Speaker 01:
As you may know, it was in the 80s before Steinberg.

[00:29:58] Speaker 01:
Categorically, no, that was a fraud case.

[00:30:00] Speaker 01:
And the Court of Appeal, the lower court said,

[00:30:02] Speaker 01:
There's no fraud exception to 1312.

[00:30:05] Speaker 01:
Then in Steinberg, they were asked to revisit that.

[00:30:07] Speaker 01:
And in the facts of that case, all the facts were known.

[00:30:11] Speaker 01:
That was the assumption of the majority.

[00:30:13] Speaker 01:
The question then is, there's not a counter rule.

[00:30:16] Speaker 01:
There's been no case.

[00:30:17] Speaker 01:
No case has found an exception to 1312 based on concealed fraud.

[00:30:22] Speaker 01:
I'm having trouble with that.

[00:30:24] Speaker 02:
No, I know, and I understand it's uncomfortable because it does feel... And it may be, but I just want to be able to ask you these questions.

[00:30:33] Speaker 02:
So in your view, based on 1312, minority shareholders have no remedy other than appraisal under the statute?

[00:30:43] Speaker 01:
That's correct.

[00:30:44] Speaker 01:
And that's definitely the rule.

[00:30:46] Speaker 01:
And the question really is, okay, if they didn't... So what would be... Is there any...

[00:30:50] Speaker 01:
any concealment rule.

[00:30:51] Speaker 02:
I think the... And I guess just to be clear about my concern over this is you're saying that minority shareholders can't recover damages ever even in cases of criminal fraud?

[00:31:08] Speaker 02:
Well, Your Honor, I... Even when that fraud was impossible to discover before the reorganization?

[00:31:15] Speaker 02:
Okay, and that's a very fair point.

[00:31:17] Speaker 02:
Yes.

[00:31:19] Speaker 01:
I'm not going to stand here and just reiterate 1312, the bright line.

[00:31:22] Speaker 01:
I think the question really would then be, okay, say the Supreme Court of California were to get a different case.

[00:31:27] Speaker 01:
They certainly have not adopted the rule that you have to know all the facts, and they put the burden on us in this case.

[00:31:33] Speaker 01:
So we think that the way the district court here drew that line for what the exception would be was problematic.

[00:31:38] Speaker 01:
It put the burden on us to show that they knew all material facts.

[00:31:42] Speaker 01:
We could imagine a case, and I think this is kind of taking from Steinberg itself, there they said they weren't concerned with the claim that the defendants were concealing the terms of the merger.

[00:31:51] Speaker 01:
So if you've got a fake merger documents, they weren't the real ones.

[00:31:56] Speaker 01:
They didn't accurately describe the terms of the merger.

[00:31:59] Speaker 01:
That did not happen here.

[00:32:01] Speaker 01:
If, for some reason, you had deceived the plaintiff into not knowing that they had dissenters' rights, that they didn't have the appraisal available, that didn't happen here.

[00:32:09] Speaker 01:
They knew.

[00:32:11] Speaker 01:
We could see reading in a discovery rule, kind of akin to how you read into a statute of limitations, did you have reason to suspect some basis to inquire?

[00:32:20] Speaker 01:
So I think at the end of the day, otherwise you kind of got 1312, which as the dissent said in Steinberg, does seem draconian and potentially out of step with our times, but it was passed in the 30s.

[00:32:31] Speaker 01:
It was reaffirmed in the 70s with adding an exception, but not adding this exception.

[00:32:35] Speaker 01:
And it's never been applied to allow a fraud claim, even a concealment claim.

[00:32:40] Speaker 01:
Even though some courts have left open that opportunity that possibility.

[00:32:43] Speaker 02:
I know you're clear about it, but say Just assume we might be unclear about it would we certify?

[00:32:52] Speaker 01:
So I mean we clearly we'd like finality in this case is as part of the whole point of 1312 to start So I think we are and the other side hasn't asked for that I do think a narrower way you could reach this without if you don't want to

[00:33:03] Speaker 01:
Impose this draconian rule and not be fully confident of it would be was there enough here a reason to know or inquire further Here the person was clearly aware of their dissenters rights.

[00:33:13] Speaker 01:
That's not in dispute, and I want to just make sure I direct you that without Changing California law which I'm not sure is our role Look I mean I think we believe in our position in the brief that we actually I know opposing counsel said he'd be shocked if they adopted the rule that we're proposing but we actually think that's what the statute says that's what

[00:33:33] Speaker 01:
That's what Sturgeon held.

[00:33:35] Speaker 01:
And then Steinberg did not overrule that.

[00:33:37] Speaker 01:
Steinberg was asked to overrule Sturgeon in full, and it didn't.

[00:33:40] Speaker 01:
So I think we think that actually current California law bars the claim, and there's not a substantial certainty that the California Supreme Court will rule.

[00:33:46] Speaker 01:
Right.

[00:33:46] Speaker 03:
So I mean, if we read the history the way that you're describing to us, I'm a little bit puzzled by the suggestion that we could just sort of wave our hand over this and say that,

[00:33:56] Speaker 03:
There's a claim there, but you didn't prove it.

[00:33:58] Speaker 03:
To even say that suggests that California law is different than what you're proposing actually is.

[00:34:04] Speaker 01:
I know you have the harder job here than me in terms of just kind of, I mean, I do think it's plausible that you could just, we were akin to a discovery rule or something that was in a statute where you truly were deprived of any basis or awareness of your ability to exercise the rights.

[00:34:20] Speaker 01:
There could be some case like that, maybe.

[00:34:22] Speaker 01:
where the fraud was actually, and that's why we go back to Steinberg for that principle, that's Steinberg at 689, where the person was, he says, this was not a place where you were unaware of your right to an appraisal, or you were deceived about that, and you're not, you know, that wasn't a claim where they were misrepresenting the terms of the merger.

[00:34:38] Speaker 01:
It's clear that the plaintiff knew what he was agreeing to, agreed to it, and knew they had rights and didn't exercise them, and we feel like at least in that case, that would not be one where the California Supreme Court would allow a 1312 exception.

[00:34:50] Speaker 02:
And play this out for me.

[00:34:51] Speaker 02:
So at some point, it's determined that 1312 applies here.

[00:35:00] Speaker 02:
Is that dispositive of this whole case?

[00:35:02] Speaker 02:
It is.

[00:35:04] Speaker 01:
So that would be our, I mean, the evidentiary issues would sort of be at that point beside the point that the action would be barred, the proper thing to do, and would be to have brought the appraisal at the time of the buyout.

[00:35:15] Speaker 01:
And also, just to be clear, both Steinberg, all the cases, make clear that you can actually

[00:35:19] Speaker 01:
channel these arguments about fraud and unfairness into those proceedings to help get a higher market value for the shares.

[00:35:27] Speaker 01:
So there's a place for those claims.

[00:35:28] Speaker 01:
They don't fall out of the world.

[00:35:29] Speaker 01:
They just go into the appraisal proceeding.

[00:35:33] Speaker 01:
So I think it really comes down to what's, you know, it does sound maybe unfair, but the case has clearly embraced that.

[00:35:39] Speaker 01:
Steinberg embraced that and still made the decision it did.

[00:35:42] Speaker 01:
But otherwise, you really allow someone to participate in a buyout, even if they could have inquired further, gotten more information here.

[00:35:48] Speaker 01:
people didn't ask questions, they didn't really inquire further, and then come back later, years later, when a successful IPO happens and asked to have a windfall.

[00:35:57] Speaker 01:
And to be clear, I think that's exactly the type of situation where it's hard to picture a counter rule that doesn't incentivize investors to always come up with a claim later on that they would have known more or they would have done the appraisal if they only knew it was going to turn into the next big thing.

[00:36:11] Speaker 01:
And so that's exactly why the rule makes sense, even if it does seem harsh.

[00:36:15] Speaker 01:
And at least in this case, it's not unfair.

[00:36:18] Speaker 01:
And we do go through this in our brief.

[00:36:20] Speaker 01:
And I would just direct you to our fourth brief, the fourth brief at 20 to 21, that at the trial

[00:36:26] Speaker 01:
Mr. Chan himself testified that he thought that the information statement was incomplete.

[00:36:32] Speaker 01:
He didn't like that it didn't have an independent valuation, and he thought the deal was terrible.

[00:36:37] Speaker 01:
So if he thought all those things at the time of the buyout, what California law directed him to do was to go file an appraisal action rather than wait, accept the 250% return, and then later on, once this honestly highly contingent IPO eventually happened on a newly invented exchange in China,

[00:36:55] Speaker 01:
with a new corporation, come back and say, I want to reap the rewards of that.

[00:37:03] Speaker 01:
Sorry, if I haven't.

[00:37:04] Speaker 02:
It just seems Steinberg, in that case, if I'm correct, because there was a lot of cases here, the plaintiff was aware of all the facts leading to his cause of action.

[00:37:20] Speaker 01:
That's what the assumption was in Steinberg.

[00:37:22] Speaker 01:
And that's why it's important to say that Steinberg certainly

[00:37:25] Speaker 01:
do the counter rule because the question then would be how many facts would be enough to put a person on notice to do the appraisal.

[00:37:32] Speaker 01:
And it certainly doesn't seem to us in the face of 1312's absolute bar and the legislature not having acted for so long that we would say it would be a big exception for concealed fraud.

[00:37:43] Speaker 01:
It would have to be some sort of an inquiry, if at all, into whether there was enough on the record for that plaintiff to have

[00:37:49] Speaker 01:
And here, the plaintiff could have and should have done more.

[00:37:52] Speaker 01:
If they were dissatisfied, they took the deal because they liked it at the time.

[00:37:55] Speaker 01:
This is implausible, but yet miraculous IPO eventually happens, and now they want the money.

[00:38:01] Speaker 02:
But it's clearly they weren't aware of some of the facts here.

[00:38:06] Speaker 02:
I mean, it seemed like the jury made a determination on that.

[00:38:09] Speaker 01:
Well, and that's where there's a key point that's more on our evidentiary piece.

[00:38:12] Speaker 01:
The jury, and this is in the jury instructions right after the concealment instruction, was directed that it was a failure

[00:38:19] Speaker 01:
essentially a deception, an actionable deception to not have provided two quarters of financial statements.

[00:38:27] Speaker 01:
That was the only thing that was viewed to be as a matter of law required.

[00:38:30] Speaker 01:
A lot of this other information, and this is in many of the cases, this does not require, you know, you still have to ask questions.

[00:38:37] Speaker 01:
Here are the people that were investing who were shell companies of chance, didn't even read the information.

[00:38:43] Speaker 01:
And so the point is that this does not create a free, this is not a broader duty to disclose everything you know.

[00:38:48] Speaker 01:
It really is about providing the accurate terms of the merger and making sure the person knows that if they don't like the price, they can dissent.

[00:38:54] Speaker 01:
And this goes all the way back to that Beachwood case, that early case.

[00:38:57] Speaker 01:
Basically, you don't have a right to more than just being cashed out at fair market value at the time of buyout.

[00:39:03] Speaker 01:
And that's just kind of what the law has been since the 30s.

[00:39:06] Speaker 01:
And it's, in our view, still that today.

[00:39:10] Speaker 01:
Thank you.

[00:39:11] Speaker 02:
Thank you very much, Ms.

[00:39:13] Speaker 02:
Harnett, for your oral argument presentation.

[00:39:17] Speaker 02:
I think you have some rebuttal time.

[00:39:20] Speaker 00:
Very short time.

[00:39:25] Speaker 00:
Regarding punitive damages, defendants say Deng wasn't providing this information, and that was for plaintiffs' benefit.

[00:39:34] Speaker 00:
It was good for them to hide this information from them.

[00:39:38] Speaker 00:
Deng never meant to harm the plaintiffs.

[00:39:41] Speaker 00:
Those sound like a closing argument in a trial deciding whether the fraud here was intentional and whether it was done on a clear and convincing evidentiary standard.

[00:39:53] Speaker 00:
That's a jury issue.

[00:39:54] Speaker 00:
We need a trial on punitive damages.

[00:39:57] Speaker 00:
Turning to Section 1312 and the appraisal remedy, the reasoning of Steinberg helps us understand this as well.

[00:40:07] Speaker 00:
Steinberg says,

[00:40:08] Speaker 00:
When the plaintiff knows about the wrongdoing at the time of the restructuring appraisal is adequate because quote then appraisal facilitates vindication of the shareholders claim of misconduct.

[00:40:25] Speaker 00:
In other words appraisals adequate when you can go ahead and litigate your fraud at the time of the appraisal.

[00:40:33] Speaker 00:
If you don't know

[00:40:34] Speaker 00:
core information, material information, the involvement of a major Chinese investment bank, the truth about financial performance, the truth about customer numbers growing, sales growing.

[00:40:47] Speaker 00:
If you don't know any of that, if it's been successfully concealed from you, as this jury found, you can't possibly vindicate your rights within an appraisal proceeding.

[00:40:57] Speaker 00:
So there is no way appraisal would be an adequate remedy for a shareholder in plaintiff's position.

[00:41:04] Speaker 02:
Thank you.

[00:41:05] Speaker 02:
Thank you, Mr. Love.

[00:41:06] Speaker 02:
Appreciate your argument presentation in this case.

[00:41:09] Speaker 02:
Lee versus Arcsoft is now submitted and we are adjourned.

[00:41:14] Speaker 02:
Thank you all very much.