Court Opinion

ID: 4346480
Source: CourtListenerOpinion
Date Created: 2018-12-03 14:07:10.870256+00
Date Added: 2024-06-11T14:20:45.321932
License: Public Domain

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

GREAT HILL EQUITY PARTNERS IV,          )
LP, GREAT HILL INVESTORS LLC,           )
FREMONT HOLDCO, INC., and               )
BLUESNAP, INC. (F/K/A PLIMUS),          )
                                        )
                  Plaintiffs,           )
                                        )
      v.                                ) C.A. No. 7906-VCG
                                        )
SIG GROWTH EQUITY FUND I,               )
LLLP, SIG GROWTH EQUITY                 )
MANAGEMENT, LLC, AMIR                   )
GOLDMAN, JONATHAN KLAHR,                )
HAGAI TAL, TOMER HERZOG,                )
DANIEL KLEINBERG, IRIT SEGAL            )
ITSHAYEK, DONORS CAPITAL                )
FUND, INC., and KIDS CONNECT            )
CHARITABLE FUND,                        )
                                        )
                  Defendants.           )

                        MEMORANDUM OPINION

                       Date Submitted: August 7, 2018
                       Date Decided: December 3, 2018

Gregory V. Varallo, Rudolf Koch, and Robert L. Burns, of RICHARDS, LAYTON
& FINGER, P.A., Wilmington, Delaware; OF COUNSEL: Stephen D. Poss and
Adam Slutsky, of GOODWIN PROCTER LLP, Boston, Massachusetts, Attorneys
for Plaintiffs.

William B. Chandler III, Ian R. Liston, and Jessica A. Hartwell, of WILSON
SONSINI GOODRICH & ROSATI, P.C., Wilmington, Delaware; OF COUNSEL:
Mark A. Kirsch, Scott A. Edelman, Aric H. Wu, Jeremy W. Stamelman, and Laura
K. O’Boyle, of GIBSON, DUNN & CRUTCHER LLP, New York, New York,
Attorneys for Defendants SIG Growth Equity Fund I, LLLP, SIG Growth Equity
Management, LLC, Amir Goldman, Jonathan Klahr, Donors Capital Fund, Inc., and
Kids Connect Charitable Fund.
Lewis H. Lazarus and Meghan A. Adams, of MORRIS JAMES LLP, Wilmington,
Delaware; OF COUNSEL: Peter N. Flocos and Joanna A. Diakos, of K&L GATES
LLP, New York, New York, Attorneys for Defendants Tomer Herzog and Daniel
Kleinberg.

David S. Eagle and Sean M. Brennecke, of KLEHR HARRISON HARVEY
BRANZBURG LLP, Wilmington, Delaware; OF COUNSEL: Michael K. Coran,
William T. Hill, Monica Clarke Platt, and Gregory R. Sellers, of KLEHR
HARRISON HARVEY BRANZBURG LLP, Philadelphia, Pennsylvania, Attorneys
for Defendants Hagai Tal and Irit Segal Itshayek.

GLASSCOCK, Vice Chancellor
      This matter involves the acquisition of a California company, Plimus, by a

private equity firm, Great Hill. Plimus’s business was to facilitate transactions

between online retailers of digital goods and credit card holders. Under Plimus’s

model, it operated as a “reseller;” where a retail buyer made an online purchase,

Plimus would first constructively “acquire” the product from the retailer, and receive

payment for that retailer from payment processors with whom Plimus had

contractual relationships.    Those payment processors, in turn, had contractual

relationships with the credit card companies and their banks. The service or product

would be delivered directly to the credit card holder/purchaser from the online

merchant. The arrangement allowed the payment processors—PayPal being a well-

known example—to deal with a single reseller, Plimus, with which they had a

relationship, rather than trying to contract with the large number of small retailers,

known in the business as “long-tail” vendors, occupying this market. The system

works so long as the retailers deliver a satisfactory product. If they do not, the credit

card companies are responsible to their card holders for “chargebacks,” cancellation

of debt incurred by the card holder for fraudulent or misrepresented services or goods

provided by the retailers. In such cases, the banks and card companies impose

contractual “fines” on the payment processors, which, in turn, implicates the

relationship of the processors with facilitators/resellers like Plimus. In other words,

if the reseller handles transactions from retailers whose business practices engender

                                           1
excessive chargebacks, the contractual relationship between the reseller and the

payment processor will be strained or ruptured. Without such relationships, the

reseller cannot exist.

         In 2011, Great Hill bought Plimus. It valued Plimus based on diligence

performed before the sale, management projections, and representations and

warranties made in the Merger Agreement.                    After the purchase, Plimus’s

performance was disappointing.             Great Hill sued the individual defendants,

principals and stockholders of Plimus, alleging breaches of the representations and

warranties, and fraud and fraudulent inducement, primarily relating to the

Defendants’ knowledge that excessive chargebacks endangered Plimus’s business

model. The matter was bifurcated, and trial of the Defendants’ liability ensued.

What follows is my post-trial determination of certain issues of liability.

         Directly below is a full plate of facts. The litigants and their counsel will no

doubt find self-interest—pecuniary or professional—relish sufficient to the

consumption thereof.          Casual readers, I fear, will strain at the swallowing.1

Following that, I address the facts in light of tort law and the contractual provisions

at issue. I find that certain of the Defendants are liable for indemnification for losses

arising from certain breaches of the representations and warranties, and that

1
    As though, in Holmes’ memorable phrase, eating sawdust without butter.

                                                2
Defendant Hagai Tal committed fraud by failing to disclose the threatened

termination of Plimus’s relationship with one payment processor, PayPal.

                                   I. BACKGROUND

       Trial took place over ten days, during which thirteen witnesses gave live

testimony. The parties submitted over two thousand exhibits and lodged fifty-eight

depositions. The following facts were stipulated by the parties or proven by a

preponderance of the evidence.2

       A. Plimus Is Founded, and SGE Invests in the Company

       Defendants Tomer Herzog and Daniel Kleinberg (the “Founders”) founded

Plimus in 2002.3 Before the closing of the merger that gave rise to this litigation,

Plimus was a California corporation headquartered in Fremont, California.4 Plimus

provided payment solutions that allowed online merchants to sell digital products to

buyers.5 Specifically, Plimus operated as an e-commerce reseller: the company took

title to an online merchant’s products just before a sale, serving as the merchant of

record in the transaction with the consumer.6 To process credit card transactions

with consumers, Plimus entered into contractual relationships with third-party

2
  To the extent there was conflicting evidence, I have weighed the evidence and made findings
based on the preponderance of the evidence. In an attempt at brevity—relatively speaking—I have
often omitted from this Background discussion testimony in conflict with the preponderance of
the evidence. In such cases, I considered the conflicted testimony, and rejected it.
3
  Joint Statement of Undisputed Facts (“JSUF”) ¶ 44.
4
  Id. ¶ 43.
5
  Id. ¶ 64.
6
  Id. ¶ 66.

                                              3
payment processors, including PayPal Pro and Global Collect.7 For their part, the

payment processors maintained relationships with acquiring banks, which were

members of credit card networks and thus authorized to process transactions

involving the networks’ credit cards.8

       From 2002 to 2008, Plimus did well, achieving significant revenue growth.9

For the first few years after the founding, Herzog and Kleinberg ran the company.10

Both Herzog and Kleinberg are software engineers,11 and by 2007 or 2008, they had

decided to bring in “professional help” to manage Plimus.12 Given their software

backgrounds, they felt they were not “up to the task of taking [the company] even

further.”13 Thus, in 2008, Herzog asked Defendant Hagai Tal, who served as a

consultant for a Plimus client, to help sell the company. 14 Tal met with potential

buyers, but he eventually came to the conclusion that Plimus should not yet be sold.15

Instead, Tal offered to find an investor who would purchase a fifty percent stake in

7
  Id. ¶¶ 65, 102, 104.
8
  Id. ¶ 65.
9
  Trial Tr. 2348:9–15 (Herzog); id. at 2469:6–22 (Kleinberg).
10
   Id. at 2347:16–2348:1 (Herzog).
11
   JSUF ¶¶ 7, 9.
12
   Trial Tr. 2350:21–2351:2 (Herzog).
13
   Id. at 2469:17–18 (Kleinberg).
14
   JSUF ¶ 45.
15
   Id. ¶ 46.

                                               4
the company.16 Following that investment, Tal would run Plimus and position it for

an eventual sale.17

       Around that time, Tal was introduced to Defendant Jonathan Klahr, a

managing director at Defendant SIG Growth Equity Management, LLC (“SGE”). 18

Klahr was impressed by Tal’s “vision for [Plimus],”19 and Tal identified Defendant

SIG Growth Equity Fund I, LLLP (“SIG Fund”) as a potential investor.20 Following

a sales process run by Tal,21 SIG Fund, which was managed by SGE,22 agreed in

June 2008 to purchase a forty-five percent stake in Plimus.23 SGE/SIG Fund’s

purchase of these shares valued Plimus at $41 million.24

       Before it made its investment, SGE conducted due diligence on Plimus; as

part of that process, it contacted Paymentech, one of the company’s payment

processors.25 Indeed, SGE hired a “payment expert” to review Plimus’s contract

with Paymentech.26 That expert opined that the contract was “not as favorable as

we would like.”27 Among other things, the expert found that the rates were too high,

16
   Id.
17
   Id.
18
   Id. ¶¶ 19, 22; Trial Tr. 1877:16–19 (Klahr).
19
   Trial Tr. 1878:2–13 (Klahr).
20
   JSUF ¶ 47.
21
   Trial Tr. 2351:10–20 (Herzog).
22
   Trial Tr. 1747:11-17 (Klahr).
23
   JSUF ¶¶ 48, 57.
24
   Id. ¶ 49. SGE also invested through a participating preferred security. Id. ¶ 50.
25
   Trial Tr. 1878:14–1879:8 (Klahr).
26
   Id. at 1879:1–2 (Klahr).
27
   JX 6, at 2.

                                                 5
and that the termination provisions were unfavorable to Plimus.28 When Klahr

received this report in March 2008, he summarized its contents as follows: “In brief,

‘we got screwed.’”29 Plimus management was also concerned about the Paymentech

relationship, and around this time the company informed Paymentech of “a desire

among executive management to have a fresh look at the relationship.”30

       In July 2008, Tal became Plimus’s CEO and a member of its Board of

Directors, which also included Herzog, Kleinberg, Klahr, and Defendant Amir

Goldman, a managing director at SGE.31 As part of its investment in Plimus, SGE

entered into an earn-out agreement with Tal, under which he would earn a

transaction bonus if Plimus was sold.32 Herzog and Kleinberg likewise entered into

an earn-out agreement with Tal, and while neither side disputes that an agreement

existed, the parties to the earn-out agreement later came to disagree about how much

Tal was owed under it.33

       Consistent with SGE’s investment philosophy,34 Klahr and Goldman attended

Plimus board meetings and assisted management with strategic issues, but they did

28
   Id.
29
   Id. at 4.
30
   JX 8, at 2.
31
   JSUF ¶¶ 11, 12, 21–22.
32
   Id. ¶ 55.
33
   JX 18; Trial Tr. 1498:6–1499:22 (Tal); Trial Tr. 2325:4–24 (Herzog); Trial Tr. 2423:11–21
(Kleinberg).
34
   Trial Tr. 1858:1–1859:18 (Klahr).

                                             6
not manage the company on a day-to-day basis.35 Likewise, by 2009, Herzog and

Kleinberg were no longer involved in Plimus’s daily operations.36 The four directors

relied on Plimus’s management, primarily Tal, to raise issues that required their

attention.37

       B. The Failed Silver Lake Deal

       Plimus continued to do well under Tal’s leadership, achieving EBITDA of

$2.9 million and $4.6 million in 2009 and 2010, respectively. 38 In late-2009 and

early-2010, Tal began to express a desire to sell Plimus to a large private equity

firm.39 Tal supported a sale because he wanted personal liquidity and thought a large

private equity firm could provide Plimus, which he would continue to lead, with

“operational assistance” and “additional capital.”40

       In March 2010, Plimus executed a term sheet with Silver Lake Partners

(“Silver Lake”), a private equity firm.41 Silver Lake proposed to acquire Plimus at

a valuation of $92 million, and the parties agreed to a forty-five day exclusivity

period.42      Silver Lake eventually grew concerned about Plimus’s declining

performance, which Klahr attributed to the company’s decision, in the first quarter

35
   Id. at 1907:12–1909:11 (Klahr); id. at 2063:20–2065:3 (Goldman).
36
   Id. at 2353:1–14 (Herzog); id. at 2469:23–2470:12 (Kleinberg).
37
   Id. at 2064:20–2065:3 (Goldman); id. at 2290:2–5 (Herzog); id. at 2473:1–2474:7 (Kleinberg).
38
   JX 307, at 8.
39
   Trial Tr. 1864:7–9 (Klahr); id. at 1960:22–1961:5 (Goldman).
40
   Id. at 1864:8–9 (Klahr); id. at 1962:7–20 (Goldman).
41
   JX 59.
42
   Id. at 3; JX 82.

                                               7
of 2010, to terminate vendors that produced large numbers of chargebacks.43 A

chargeback takes place when a customer disputes a charge on her credit card directly

with her card issuer, and the card issuer charges back the transaction to the acquiring

bank.44 The acquiring bank “then deducts the value of the transaction from the

merchant’s account and refunds the amount to the issuer, so that a credit can be

issued to the consumer.”45 This contrasts to a situation where a buyer raises a dispute

directly with the merchant, leading to the merchant initiating the refund.46

       Silver Lake had not completed its diligence by the end of the forty-five day

exclusivity period, and it asked Plimus for an extension.47 Klahr took this as a sign

that Silver Lake “fe[lt] no pressure” and was “not serious.”48 Klahr also thought

Silver Lake’s offer undervalued the company, writing in an e-mail that “we cannot

knowingly sell an asset for less than what we estimate to be the market price.”49

Klahr’s view rested on his perception that the market had improved since the Silver

Lake offer came in, and that “there [wa]s pressure from within SIG not to sell at this

43
   Trial Tr. 1770:19–22 (Klahr); JX 121.
44
   JSUF ¶ 67.
45
   JX 1129 ¶ 22.
46
   Trial Tr. 2870:10–19 (Moran). Sellers of digital goods may generate a relatively higher number
of chargebacks because there is no physical product to return and, in many cases, no physical store
to which one can return that product. Id.
47
   Id. at 1865:5–10 (Klahr).
48
   JX 82, at 1.
49
   Id.

                                                8
price.”50 Thus, Plimus declined to extend Silver Lake’s exclusivity period.51 Tal

disagreed with this decision,52 and Silver Lake was disappointed by Plimus’s refusal

to extend exclusivity.53 Silver Lake attempted unsuccessfully to re-engage on the

potential transaction.54

       Goldman and Klahr later discussed how to present the failed Silver Lake deal

to their colleagues at SGE. Klahr initially proposed the following account: “Plimus

received firm acquisition interest from . . . Silverlake in the form of a term sheet. A

term sheet was signed however the transaction was not consummated due to drop in

revenue run rate as a result of terminating the more problematic vendors.”55

Goldman insisted on changing the story, because he did not want to say that the “deal

wasn’t consummated because of performance – want to keep it as if it was us who

killed it (the chagai version).”56 Klahr agreed with Goldman: “Worse - if we end up

doing a deal at a lower price we look like chumps - whereas if we keep the real story

we make it clear that this opportunity wasn’t real . . . .”57 Nevertheless, while Klahr

50
   Id.
51
   JX 97, at 1; Trial Tr. 1865:8–12 (Klahr).
52
   Trial Tr. 1480:15–1841:4 (Tal); id. at 1867:19–22 (Klahr).
53
   JX 97.
54
   JX 97; JX 2006.
55
   JX 123, at 1.
56
   Id.
57
   Id.

                                                9
acknowledged that Plimus had had a disappointing second quarter in 2010, he also

believed that revenue and earnings would rebound in the third and fourth quarters.58

       After the Silver Lake deal fell through, Plimus turned to a potential acquisition

of JourneyEd, an online software company.59 Therefore, in September and October

2010, Klahr did not think a sale of the company was feasible in light of the pending

transaction with JourneyEd and the disappointing second quarter results.60 But the

JourneyEd acquisition eventually fell through when a competitor of Plimus acquired

the company.61 On the bright side, Plimus’s numbers rebounded from the losses

previously caused by terminating the problematic vendors.62 Thus, in November

2010, Plimus decided to engage investment bankers to run a formal sales process.63

Three investment banks, including Raymond James, gave presentations to the

Plimus Board of Directors about a possible sale of the company.64 On November

22, 2010, Plimus selected Raymond James to serve as the company’s investment

banker for the sales process.65 A little over one week later, Plimus and Raymond

James executed a letter agreement formalizing the engagement.66

58
   JX 88, at 1.
59
   Trial Tr. 1971:18–23 (Goldman).
60
   JX 133; JX 139.
61
   Trial Tr. 1971:24–1972:7 (Goldman).
62
   Id. at 1776:9–12 (Klahr).
63
   Id. at 1972:8–11 (Goldman).
64
   JSUF ¶ 107.
65
   Id. ¶ 109.
66
   Id. ¶ 111.

                                          10
       C. The Formal Sales Process Begins, and Great Hill Enters the Picture

       The same day that Plimus and Raymond James executed the engagement

letter, Jonathan Steele of Raymond James received the “first buyer call” for Plimus

from Great Hill, a private equity firm that in 2011 managed over $2.7 billion in

capital.67 The call came from Nicholas Cayer, who told Steele that he had “been

pursuing Hagai [Tal] for a while and really likes the business.”68

       Cayer was one of five members of the Great Hill team for the Plimus

transaction; the others were Matthew Vettel, Christopher Busby, Daniel Madden,

and William Hurley.69 Busby served as the “deal quarterback,” overseeing the due

diligence and analyzing the Plimus investment opportunity.70 Cayer ran diligence

projects and was the primary author of the deal team’s diligence memo.71 Vettel was

the only Great Hill partner on the deal, though his role in the diligence was

minimal.72 Finally, Madden and Hurley were the junior members of the deal team;

they conducted financial and business analyses of Plimus.73

       Once Raymond James was formally engaged, it began working with Plimus

management to prepare marketing materials, including a confidential information

67
   JX 161, at 2; JX 429, at 2. I refer to Plaintiffs Great Hill Equity Partners IV, LP, and Great Hill
Investors LLC collectively as “Great Hill.”
68
   JX 161, at 2.
69
   JSUF ¶ 119.
70
   Id. ¶ 120.
71
   Id. ¶ 121.
72
   Trial Tr. 785:18–20 (Vettel).
73
   Id. at 843:7–13 (Cayer).

                                                 11
memorandum (“CIM”).74 Tal, Goldman, and Klahr provided information on Plimus

to Raymond James to be used in the CIM and other materials.75 Raymond James

also worked with Plimus management to compile a list of potential buyers. 76 One

of those potential buyers was Great Hill, which signed a non-disclosure agreement

with Plimus around February 2, 2011.77 Over fifty other potential buyers signed

non-disclosure agreements with the company.78

       On February 23, 2011, Raymond James sent Great Hill the Plimus CIM.79

The CIM claimed that Plimus was “experiencing robust growth across its seller base,

transactions, revenue and EBITDA driven by favorable market trends and its

defensible position.”80 The CIM also touted the company’s “strong visibility into its

future revenue growth.”81 The information in the CIM was important to Great Hill,

which was impressed by (among other things) the company’s strong revenue

growth.82

74
   Steele Dep. 49:22–51:3.
75
    Steele Dep. 50:4–50:23; Trial Tr. 1482:12–19, 1488:20–1489:3 (Tal); Trial Tr. at 1784:3–
1786:2 (Klahr); JX 213, at 1; JX 230, at 1.
76
   Steele Dep. 51:13–22.
77
   JSUF ¶ 118.
78
   JX 304, at 2.
79
   JX 241, at 1.
80
   Id. at 8.
81
   Id. at 19.
82
   Trial Tr. 41:1–13, 61:1–62:16, 62:17–63:2 (Busby).

                                            12
       On March 15, 2011, Great Hill submitted a non-binding preliminary bid for

Plimus.83 The bid valued Plimus at between $95 million and $105 million.84 Sixteen

other potential buyers submitted preliminary bids,85 and each bidder was invited to

meet in-person with Plimus management and perform additional due diligence.86

Around this time, Raymond James created a virtual data room containing

information and documents related to Plimus.87

       Plimus management made a presentation to Great Hill on March 30, 2011.88

In the presentation, Plimus claimed that it “carefully monitor[ed] the performance

of [its] seller base and w[ould] ‘cleanse’ any that have a negative perception,

consistent issues with buyers or high chargeback ratios.”89 The presentation also

noted that in the second quarter of 2010, the company had removed several sellers

that generated above-average numbers of chargebacks.90           According to the

presentation, while the removals “decreased total sales,” they led to an “increase[]

[in] EBITDA as [Plimus] avoided any future negative impact from consistently

having chargebacks.”91

83
   JSUF ¶ 122.
84
   Id.
85
   JX 324, at 3–5.
86
   Trial Tr. 64:6–65:4 (Busby).
87
   JSUF ¶¶ 124–25.
88
   Id. ¶ 123.
89
   JX 307, at 52.
90
   Id.
91
   Id.

                                        13
       In mid-April, Great Hill (along with the other bidders) received access to the

data room,92 and continued to meet with Plimus management.93 On April 13, 2011,

Great Hill submitted a revised bid for Plimus at a valuation range of $110 million to

$115 million.94 Only five of the seventeen preliminary bidders submitted revised

bids; of those five, three reduced their bids, one made the same bid, and one (Great

Hill) increased its bid.95        General Atlantic, which reduced its bid, appeared

concerned that Plimus was “just a way in which the smaller/long-tail ‘grimier’ guys

can find a merchant account and get their higher chargebacks bundled into a

portfolio.”96 “Long-tail” vendors are defined in the CIM as “single proprietor,

home-based businesses.”97 Another potential purchaser that reduced its bid thought

Plimus’s recent numbers were “inflated by lower quality . . . clients that ultimately

might get purged if chargebacks creep up.”98

       The deadline for final bids was May 18, 2011.99 Before it made its final bid,

Great Hill analyzed the top 400 sellers on Plimus’s platform. 100 Cayer asked Madden

and Hurley to evaluate the “quality / sustainability of the sellers you profiled,” asking

92
   JSUF ¶ 125.
93
   Id. ¶ 130; Trial Tr. 64:6–65:4 (Busby).
94
   JSUF ¶ 129.
95
   JX 324, at 3.
96
   JX 378.
97
   JX 241, at 8.
98
   JX 387.
99
   JSUF ¶ 131.
100
    JX 347.

                                             14
whether they were “real businesses with real websites in real industries.”101 Hurley

reported that most of the websites he examined “seemed either very sketchy or

small/outdated.”102 Madden agreed with Hurley that “there were plenty of sketchy

sites,” but he also found “plenty of legit ‘long-tail’ business such as Fx trading

strategies, language translation, high-tech programming tools, and run of the mill

utility software.”103 At trial, Cayer testified that these analyses focused on whether

Plimus’s clients had sustainable business models, and not on whether they complied

with credit card association rules.104 The credit card associations, such as Visa and

MasterCard,105 issue three broad categories of rules: brand rules to protect the card

association’s reputation; chargeback rules to protect consumers (and merchants)

from fraudulent transactions; and compliance rules to ensure compliance with

government and regulatory rules, such as anti-money laundering rules, prohibitions

on the sale of illegal goods and services, and protection of intellectual property

rights.106

       Great Hill submitted a final bid for Plimus on May 18, 2011, which valued

the company at $115 million.107 No other party submitted a final bid by the May 18

101
    Id. at 1.
102
    Id.
103
    Id.
104
    Trial Tr. 862:4–13 (Cayer).
105
    JX 1129, ¶ 15.
106
    Id. ¶ 23.
107
    JSUF ¶ 132.

                                         15
deadline.108    Two days after submitting its final bid, Great Hill learned from

Raymond James that Plimus had missed its projected EBITDA for the first quarter

of 2011 by over $200,000 (approximately thirteen percent of the projected

EBITDA).109       Raymond James reassured Great Hill that “confidence in the

projections for the remainder of 2011 has never been higher.”110 Busby told

Raymond James that the EBITDA miss did not “change [Great Hill’s] proposal,”

because Great Hill was “more buying into the vision and the larger picture.”111

Furthermore, Raymond James reported that Busby expressed these views without

Raymond James having to “put any of this in focus for [Busby].” 112 Along with the

financial results for the first quarter of 2011, Plimus also shared with Great Hill a

draft disclosure schedule,113 intended to accompany the prospective merger

agreement. Busby told Raymond James that “on first review [Great Hill] didn’t

envision any show stoppers or items that couldn’t be structured around.”114

       On May 26, 2011, Great Hill signed a letter of intent (the “Letter of Intent”)

to acquire Plimus for $115 million.115 Great Hill conditioned the acquisition on

108
    JX 397, at 1.
109
    JX 413, at 22–23; JX 415.
110
    JX 413, at 22.
111
    JX 415.
112
    Id.
113
    JX 413, at 2–20.
114
    JX 415.
115
    JSUF ¶ 133.

                                         16
“completion of customer calls and customary legal, accounting, technology and

insurance due diligence on Plimus.”116

       D. The Paymentech Saga

       The Plimus acquisition did not close until September 29, 2011.117 Many

events relevant to this case took place between the signing of the Letter of Intent and

closing. Before turning to the remainder of the sales process, however, I pause to

describe one component of the purported fraudulent scheme—Plimus’s disclosure

on the end of the company’s relationship with Paymentech—which primarily

involved events that took place before the Letter of Intent was signed.

               1. The Paymentech Relationship Prior to February 2011

       As noted above, by early 2008, Plimus had begun to have reservations about

its relationship with Paymentech, one of the company’s payment processors.

Between 2008 and 2010, Plimus entered into contractual relationships with several

other payment processors, including Global Collect, Payvision, PayPal Pro, and

Moneybookers.118 During this period, Plimus continued to be dissatisfied with

Paymentech. For example, Defendant Irit Segal Itshayek, Plimus’s Vice President

of Financial Strategy and Payment Solutions, testified that Paymentech’s fees did

not reflect the number of transactions Plimus was actually routing through

116
    JX 429, at 4.
117
    JSUF ¶ 152.
118
    Id. ¶¶ 102–05.

                                          17
Paymentech.119       Indeed, in September 2010, Plimus met with a Paymentech

representative and discussed, among other things, “Fee Increases – What can be done

to reduce the impact on Plimus.”120 According to Klahr, Plimus management’s

unhappiness with Paymentech was “a constant theme” in Plimus management’s

discussions with him.121

       In November 2010, at the beginning of the formal sales process, Plimus told

Steele of Raymond James that the company “was looking to move away from

Paymentech to Wells Fargo.”122 Later, on January 19, 2011, Steele told one of his

colleagues to refrain from reaching out to Paymentech as part of the auction process,

because Tal had “been moving processing away from them real-time.”123 The

breaking point for the Plimus-Paymentech relationship came in the same time

period, when Paymentech informed Plimus that it would stop processing Plimus

transactions outside the United States, Canada, and the European Union, including

areas in which Plimus did significant business.124 When he learned this, Tal told

Itshayek, “[b]asically they don’t support our model anymore.”125 Tal and Itshayek

119
    Trial Tr. 1381:11–24 (Itshayek); see also, e.g., JX 147.
120
    JX 136, at 2.
121
    Trial Tr. 1922:12–21 (Klahr).
122
    Steele Dep. 280:5–9.
123
    JX 207, at 1; see also Steele Dep. 541:9–545:12.
124
    JX 212, at 3–6; Trial Tr. 1388:5–20 (Itshayek); Trial Tr. 1925:11–17 (Klahr).
125
    JX 212, at 6.

                                               18
thus concluded that Plimus needed to end its relationship with Paymentech.126 The

then-current contract with Paymentech was to terminate in September 2011.127

       Paymentech had its own reasons to be frustrated with Plimus. Paymentech

had informed Plimus on multiple occasions in 2010 alone that Plimus was failing to

comply with various credit card association rules.128 Indeed, in January 2011,

Paymentech informed Itshayek and Tal that while it was “committed to providing

you will [sic] new pricing . . . at this time we need to remain focused on resolution

of existing compliance concerns.”129 Paymentech explained that “these issues could

result in large fines to Plimus and can also put Chase Paymentech at risk.”130

              2. The Paymentech Relationship Ended

       On February 4, 2011, Paymentech sent a letter to Tal informing him that it

was terminating its processing relationship with Plimus.131 The letter explained the

decision as follows:

       As you are aware, Paymentech has previously informed Plimus, on
       multiple occasions, of Plimus’[s] breach of the Agreements [with
       Paymentech]. Those breaches include, without limitation, submitting
       cross border transactions from countries for which Paymentech has no
       license, acting as an aggregator without a license to do so, and
       violations of Association rules regarding the unauthorized sale of
       Intellectual Property (as defined by the Associations). As you are also

126
    Trial Tr. 1390:15–1391:7 (Itshayek); Trial Tr. 1611:7–1612:8 (Tal); JX 3055.
127
    JX 1, at 3; see also JX 413, at 7.
128
    E.g., JX 49; JX 50; JX 57; JX 63; JX 67; JX 78; JX 112; JX 115.
129
    JX 198, at 2.
130
    Id. at 1.
131
    JX 218.

                                              19
       aware, Plimus has failed to cure such breaches for a period of time in
       excess of 30 days.132

The letter indicated that Paymentech would establish a reserve account of

approximately $535,000 from funds otherwise payable to Plimus, to cover Plimus’s

anticipated liability.133

       Of the specific reasons Paymentech gave for termination, at least one was

inaccurate: Paymentech had fined Plimus in 2010 for failing to register as a Member

Service Provider in relation to MasterCard.134 Thereafter, Plimus registered and was

approved on January 27, 2011, which cured the aggregator issue before February 4,

2011.135

       The same day the termination letter was sent (or shortly before), Tal spoke to

a Paymentech representative on the phone.136 The Paymentech representative told

Tal that Paymentech needed to terminate the relationship; Tal responded that “we

also have the same interest, and it’s fine with us not to continue working together.”137

Tal responded in writing to Paymentech’s termination letter on February 11, 2011.138

He expressed “surprise[] at [the] suggested termination date” of May 5, and he

complained about the “abrupt letter and demand to terminate the agreement with

132
    Id.
133
    Id.
134
    JX 143; JX 148.
135
    JX 214; Trial Tr. 1347:4–23 (Itshayek).
136
    Trial Tr. 1611:3–17 (Tal).
137
    Id. at 1611:20–1612:4 (Tal).
138
    JX 227.

                                              20
such short notice.”139 According to Tal, Paymentech’s actions would “have a

dramatic negative impact on Plimus.”140 Thus, Tal asked Paymentech for a sixty-

day extension on the termination date and assistance in “mak[ing] the transition as

smooth as possible.”141 Notably, Tal did not request in this letter that Paymentech

reverse its decision to end its processing relationship with Plimus; instead, he sought

only additional time to prepare for the transition away from Paymentech.142

        Paymentech responded by letter on February 14, 2011.143 It agreed to extend

the termination date to June 20, but it emphasized that Plimus was “still not in

compliance with respect to the issues surrounding cross-border acquiring and India

transactions.”144 Paymentech did not reference the previous allegations of acting as

an unlicensed aggregator or unauthorized sales of intellectual property.145 “Cross-

border acquiring,” in this context, is the processing of transactions that are wholly

internal to a foreign country; in other words, both the buyer and the seller (but not

the processor) reside in the foreign country. The “cross-border acquiring” issues had

begun in December 2010, when Visa told Paymentech that the Reserve Bank of India

had informed Visa that Paymentech was engaged in cross-border acquiring in India

139
    Id. at 1.
140
    Id.
141
    Id.
142
    Id.
143
    JX 231.
144
    Id.
145
    Id.

                                          21
without a license, relating to its processing of Plimus transactions involving Indian

vendors and Indian customers.146 Plimus argued that there was no cross-border

acquiring because Plimus was the merchant of record; therefore, the transactions

should be considered to be between Plimus, which was based in the United States,

and the Indian customers.147 Itshayek believed that this issue led Paymentech to

cease processing any Plimus transactions outside the United States, Canada, and the

European Union.148

       Apparently unsatisfied with Plimus’s progress in remedying the cross-border

acquiring issues, Paymentech informed Plimus in another letter on March 1, 2011

that, despite its agreement to extend its relationship with Plimus through the end of

June, it would now terminate the agreement effective March 7.149 After further

discussions between the two parties, Paymentech agreed in a letter dated March 3,

2011 to extend the termination date to March 21.150 Paymentech also wrote in this

letter that “MasterCard has indicated it intends to impose substantial fines against

Paymentech for Plimus’[s] noncompliance” and therefore Paymentech planned to

hold “all of Plimus’[s] settlement proceeds in a reserve account.”151 Tal responded

on March 4, 2011. While noting appreciation for Paymentech’s flexibility on the

146
    JX 174; JX 194.
147
    JX 172; Trial Tr. 1385:15–1387:2 (Itshayek).
148
    Trial Tr. 1389:17–1390:9 (Itshayek).
149
    JX 250.
150
    JX 257.
151
    Id.

                                              22
termination date, Tal stated that “implementing both the disconnect from

[Paymentech’s] services as well as the move to a new processor” in the time frame

provided meant that Plimus would be “expending tremendous engineering

resources,” which represented a “huge challenge,” even with the time extension.152

Tal also wanted to state, for the record, “that it is still not very clear why Plimus is

being thrust into this sudden disconnect . . . we are doing nothing differently than

what we did for the last 4.5 years . . . . Thus we cannot accept the unilateral

declaration that we are in breach of our agreement.”153 Despite this, Tal concluded

that Plimus would be “happy to re-engage with Paymentech in the future.”154 The

processing relationship between Paymentech and Plimus ended on March 21,

2011.155

      As part of its termination of Plimus, Paymentech put Plimus on the Master

Card Alert to Control High-Risk Merchant list or “MATCH” list on February 25,

2011, providing the reason code “Violation of MasterCard Standards.”156 The

MATCH list serves as a system to alert processors to problematic merchants, and

when processors terminate merchants, they often place them on the list.157 When, in

152
    JX 260, at 1.
153
    Id. at 2.
154
    Id.
155
    JSUF ¶ 89.
156
    JSUF ¶ 94; JX 244.
157
    Trial Tr. 2561:10–2561:20, 2570:12–19, 2574:4–2575:22 (Layman); id. at 2882:19–2883:18
(Moran).

                                           23
turn, processors add merchants, MasterCard recommends that the processor check

the MATCH list; if the merchant appears on the MATCH list, that is a red flag that

the merchant may present a high risk.158 Processors generally conduct more detailed

review of a merchant as a result of finding it on the list.159 However, appearing on

the MATCH list does not preclude a merchant from being added by a processor;160

indeed, Plimus added new processor relationships after being added to the list by

Paymentech.161 Plimus, like all other merchants, does not have access to the

MATCH list.162       Plimus was unaware that it had been added to the list by

Paymentech, and was unaware of the reason given: violation of MasterCard

standards.

              3. The Plimus Board Learned of the End of the Paymentech
              Relationship and Plimus Recovered Its Reserve Account

       The Plimus Board first learned of the end of the Paymentech relationship in

early-March 2011. Tal called Klahr in early March to inform him of the end of the

Paymentech relationship.163 Tal cited problems with processing transactions in India

and noted that Paymentech was holding a substantial sum of money in a reserve

account.164 Goldman also knew by March 7, 2011, on which date he e-mailed Tal

158
    Id. at 2561:10–15, 2653:13–21 (Layman); id. at 2883:11–18 (Moran).
159
    Id. at 2562:1–15 (Layman); id. at 2883:7–2885:19 (Moran).
160
    Id. at 2652:2–6 (Layman); id. at 2883:19–2884:14 (Moran).
161
    JSUF ¶¶ 178, 179.
162
    Trial Tr. 2882:9–12 (Moran).
163
    Id. at 1925:5–22 (Klahr).
164
    Id.

                                             24
asking for the relevant Paymentech correspondence.165 Plimus’s legal counsel,

Perkins Coie, become involved, and on March 18, 2011, Ralph Arnheim of Perkins

Coie sent Paymentech a letter addressing the reserve account that Paymentech was

holding, which at that time totaled approximately $2.7 million.166 Perkins Coie also

served as Plimus’s deal counsel throughout the sale process.167

      On March 18, 2011 Tal subsequently provided Goldman and Klahr with

copies of the letters dated February 4, February 11, February 14, and March 1.168 On

March 20, Klahr asked Tal to forward relevant documents to Herzog and Kleinberg,

and also asked Tal to set up a call for Goldman and Klahr to speak with Arnheim.169

Goldman and Klahr had several conversations regarding Paymentech with Tal

throughout March; after the March 20 call, Goldman and Klahr waited for Perkins

Coie to report back on the end of the Paymentech relationship.170

      Klahr provided the Paymentech letters to Herzog and Kleinberg on March 22,

2011.171 Herzog and Kleinberg initially discussed the Paymentech termination

among themselves.172 They were worried that the termination could drive up costs

165
    JSUF ¶ 85; JX 262.
166
    JSUF ¶ 87; JX 284.
167
    JSUF ¶¶ 114, 137.
168
    JSUF ¶ 86; JX 283.
169
    JX 285.
170
     Trial Tr. 1787:22–1791:20, 1792:21–24, 1926:10–1927:19, 1934:13–19 (Klahr); id. at
2197:22–2198:15 (Goldman); JX 268; JX 285.
171
    JSUF ¶ 90.
172
    JSUF ¶ 92.

                                          25
and depress Plimus’s financial performance.173 This initial worry was based in part

on a misunderstanding of the other processing relationships Plimus had in place.174

After talking to Tal later on March 22, 2011, Herzog reported to Kleinberg that Tal

had said there was nothing to worry about and that Plimus had other processors.175

At that point, Herzog and Kleinberg felt their duty as directors had been satisfied

and that no further inquiry was necessary.176

       In his initial letter on March 18, 2011 to Paymentech, Arnheim noted that he

represented Plimus “in connection with Paymentech’s unilateral termination” and

that he was seeking a return of the $2.7 million reserve account that Paymentech was

holding.177 In their March 30, 2018 response, Paymentech explained the amount of

the reserve account; roughly $500,000 was for estimated chargeback exposure, and

the remaining amount, over $2 million, was for threatened fines by the credit card

associations and a “substantial fine” threatened by the Reserve Bank of India.178

During April 2011, Perkins Coie continued to engage with Paymentech, in one

instance reporting back that when asked for specifics, the Paymentech representative

“wasn’t entirely sure” of the reason fines were threatened.179                By mid-April,

173
    JX 179, at 205–208 (lines 2272–2280).
174
    Trial Tr. 2306:13–2307:1 (Herzog).
175
    JX 179, at 51 (line 2295).
176
    Trial Tr. 2391:19–2392:15 (Herzog); id. at 2421:11–2422:14, 2486:22–2488:3 (Kleinberg).
177
    JX 284.
178
    Paymentech wrote that the fine threatened by the Reserve Bank of India alone could exceed $1
million. JX 305.
179
    JX 312.

                                              26
Paymentech agreed to release all the amounts held for threatened fines, leaving

$500,000 to $600,000 in the reserve account for chargeback exposure.180 In an April

18, 2011 e-mail, Klahr commented to Goldman that the return of the majority of the

reserve account is “a positive outcome[, which] [s]hows that they are backtracking

and indicates the issue is relatively minor.”181

       In a May 11, 2011 e-mail, Arnheim wrote to Klahr that the Paymentech

termination “is looking increasingly ‘ordinary course’” and that Paymentech had

“confirmed the associations (Visa and [MasterCard]) are not asserting fines as

previously suggested.”182 Therefore, by the time Great Hill signed the Letter of

Intent on May 26, the Paymentech relationship had officially terminated, and

Paymentech had returned the majority of the reserve account and confirmed there

would be no fines.

       E. Great Hill Conducts Due Diligence: The Paymentech Disclosure, Vendor
       Terminations, and Plimus Chargebacks

       After signing the Letter of Intent on May 26, 2011,183 Great Hill began its due

diligence. Great Hill hired Kirkland & Ellis LLP (“K&E”) to serve as its deal

counsel in connection with the merger.184               K&E conducted due diligence,

180
    JX 318; JX 325. Paymentech used a formula based on historical data to calculate the reserve
amount necessary to cover chargeback exposure and held this amount for 180 days, which was the
amount of time that customers had to claim a chargeback. JX 318.
181
    JX 325.
182
    JX 366.
183
    JSUF ¶ 133.
184
    Id. ¶ 136.

                                              27
interviewed Plimus management, drafted legal documents, and maintained contact

with Plimus’s deal counsel, Perkins Coie.185 Great Hill also hired several consultants

to aid in the due diligence process. PricewaterhouseCoopers LLP (“PwC”) was

hired to conduct financial, tax, and information technology due diligence.186 PwC

also had a division of payment processing experts who conducted due diligence on

Plimus’s policies, procedures, and payment processing relationships.187 Greenwich

Strategies was hired to conduct due diligence on Plimus’s vendor clients.188 And the

Gerson Lehrman Group was hired to locate industry experts for Great Hill to consult

during due diligence.189

       Plimus maintained its company counsel, Perkins Coie, as its deal counsel.190

Perkins Coie, Raymond James, and Plimus management together were responsible

for responding to due diligence requests.191 Within Plimus management, Plimus’s

CFO Assi Itshayek (“Assi”)192 was largely in charge of responding to diligence

requests because the majority of requests related to information controlled by his

office; Assi would ensure that the portions of diligence requests outside his control

185
    Id. ¶ 137.
186
    Id. ¶ 134.
187
    Id. ¶ 135.
188
    Id. ¶ 138.
189
    Id. ¶ 139.
190
    Id. ¶¶ 114, 137.
191
    Trial Tr. 1887:13–19 (Klahr).
192
    I refer to Assi Itshayek (“Assi”) by first name to avoid confusion with Defendant Irit Segal
Itshayek (“Itshayek”); no disrespect is intended.

                                              28
were received by the proper member of Plimus management.193 While Klahr and

Goldman had no role in responding to diligence requests, they, along with SGE in-

house counsel Jason Wolfe, did review and comment on documents related to the

merger.194 Herzog and Kleinberg played no role in the due diligence process or the

drafting of merger documents.195

       Between May 26, 2011 and August 3, 2011, when the initial merger

agreement was signed, the Great Hill deal team and its representatives conducted

on-site visits to Plimus’s headquarters in Fremont, California and Plimus’s office in

Israel, had in-person meetings with Plimus management at Great Hill’s offices in

Boston, and were in contact with Plimus management via phone and e-mail.196

Based on its due diligence investigation, the Great Hill deal team prepared a due

diligence memo that it presented to Great Hill’s partners on July 11, 2011.197

       The events significant to this litigation related to due diligence of Plimus’s

business during this time period were: a legal disclosure on the end of the

Paymentech relationship; on-site meetings at Plimus’s offices where Plimus’s

policies and payment processor relationships were reviewed; PayPal’s notice to

193
     E.g., Trial Tr. 1268:5–1272:14, 1280:18–24, 1283:22–1285:20 (Itshayek); id. at 1456:19–
1458:20 (Tal).
194
    E.g., id. at 1781:19–1786:2, 1806:23–1808:8 (Klahr); id. at 1950:1–1951:4, 2107:6–2117:24
(Goldman).
195
    Id. at 2284:14–2286:6 (Herzog); id. at 2340:13–24 (Kleinberg).
196
    JSUF ¶ 140.
197
    Id. ¶ 141.

                                             29
Plimus to terminate a vendor and the subsequent termination of an additional sixteen

vendors; Plimus’s responses to Great Hill’s diligence requests; and Great Hill’s due

diligence presentation to the Great Hill Partners.

               1. The Paymentech Disclosure

       On May 3, 2011, another Perkins Coie attorney wrote to Arnheim that both

SGE and Assi had asked Perkins Coie why the correspondences related to the end

of the Paymentech relationship (the “Paymentech Termination Letters”) were not in

the data room.198 In a May 4, 2011 e-mail to Tal, Arnheim wrote, “I am fine

disclosing it now. I think its been contained to a small enough issue that I don’t feel

its material,” but Arnheim wanted to make sure he and Tal were in synch.199 Tal

responded “I am also fine with this, I need to think about ways to communicate

this.”200 Arnheim maintained in his deposition that the Paymentech Termination

Letters were subsequently placed in the data room.201 Tal, Goldman, and Klahr all

testified that they believed the Paymentech Termination Letters had been released to

the data room.202 While Itshayek had posted materials to the data room early in the

bidding process, she was asked to stop in April 2011.203 Itshayek did not visit the

198
    JX 343, at 1. I note that the attorney referred to them as “the correspondence with Paymentech
regarding the payment dispute.” Id.
199
    Id.
200
    Id.
201
    Arnheim Dep. 354:19–356:10, 357:2–361:11, 362:25–364:12, 367:24–370:7.
202
     Trial Tr. 1612:9–1613:17 (Tal); id. at 1931:5–1932:3 (Klahr); id. at 2198:22–2199:14
(Goldman);
203
    Id. at 1229:2–1230:6 (Itshayek).

                                               30
data room after that time and had no subsequent knowledge of its contents.204 As an

objective fact, the Paymentech Termination Letters were not in the data room.205

       As part of the sales process, Perkins Coie drafted a disclosure schedule to

accompany the prospective merger agreement. This draft disclosure schedule

included a disclosure on Paymentech’s termination of Plimus in the “Legal

Proceedings” section; Plimus had deployed its legal counsel to obtain release of the

Paymentech reserve account, and Paymentech still retained the amount held for

chargeback exposure. Arnheim circulated the draft to Klahr on May 11, 2011.206

This draft legal disclosure stated that “Paymentech notified Plimus that it was

terminating the agreements governing” the relationship, and that “Paymentech’s

stated basis for the termination was Plimus’[s] alleged breach of the agreements and

the related rules promulgated” by Visa and MasterCard.207 It went on to detail the

initial large reserve account, the subsequent release of the majority of this account,

and the confirmation that the card associations would not be assessing any fees.208

Klahr approved this draft legal disclosure, writing “[t]his feels fine to me.”209

Perkins Coie then shared the draft legal disclosure with Assi and Raymond James in

204
    Id.
205
    Id. at 1496:19–24 (Tal).
206
    JX 365.
207
    Id.
208
    Id.
209
    JX 366.

                                         31
a May 13, 2011 e-mail.210 Assi forwarded this e-mail to Tal and asked “Di[d] you

go over it? Please confirm you feel OK with it.”211

       Tal and Charlie Born, Plimus’s Vice President of Marketing, discussed the

legal disclosure related to Paymentech, and other disclosures in the disclosure

schedule on May 13, 2011.212 Born then prepared for Tal a new draft disclosure on

Paymentech based on their discussions.213 This alternative disclosure, with some

insignificant edits, replaced Perkins Coie’s original draft disclosure in the draft

disclosure schedule, which was then shared with Great Hill on May 20, 2011.214

Therefore, the legal disclosure that Great Hill received read, in pertinent part, that:

       [Plimus] and Paymentech . . . entered into an exclusive . . . Agreement
       . . . . [which] was scheduled to be renewed in September 2011.
       However, in early 2011, [Plimus] decided that it did not want to
       continue working with [Paymentech] under the then negotiated terms
       . . . . [Plimus] then attempted to negotiate modified terms . . . . However,
       [Paymentech] refused . . . . In February and March 2011, [Paymentech]
       encountered issues related to the Royal Bank of India . . . .
       [Paymentech] asked Plimus to make specific changes to the Company’s
       platform . . . . Since [Plimus] did not feel this would in its best interests,
       [Plimus] and [Paymentech] instead mutually agreed to terminate the
       agreement . . . . As of May 13, 2011, [Paymentech] continues to hold a
       reserve of approximately $500,000 to cover future potential refunds and
       chargebacks . . . .215

210
    JX 370.
211
    JX 374.
212
    JX 379.
213
    Id.
214
    JX 379; JX 381; JX 413.
215
    JX 413, at 7–8.

                                            32
The legal disclosure on the Paymentech termination was later removed and did not

appear in the disclosure schedule that accompanied the initial merger agreement.216

       Great Hill was aware that Plimus’s relationship with Paymentech had ended

in March 2011.217 When Great Hill and its representatives conducted on-site due

diligence at Plimus’s offices, they discussed the end of the Paymentech relationship

with Tal and Itshayek,218 and reviewed Plimus’s contract with Paymentech.219 These

discussions were consistent with the description of the end of the Paymentech

relationship in the legal disclosure, i.e. that a decision to leave Paymentech had been

made prior to the expiration of their relationship, that pricing had consistently been

an issue, and that the inability to process transactions in India was the primary reason

the relationship ended when it did.220 Itshayek did not provide the Paymentech

Termination Letters directly to PwC during these discussions, nor did anyone else

from Plimus.221 Based on her discussions with PwC during on-site diligence,

Itshayek had the impression that PwC had not seen the Paymentech Termination

Letters. 222 As a result, Itshayek gave hard copies to Tal to show PwC, which Tal in

216
    JX 648, at 9.
217
    JSUF ¶ 95.
218
    Trial Tr. 138:4–139:16, 140:10–142:1 (Busby); id. at 894:6-18, 907:6–18 (Cayer).
219
    JX 582, at 46.
220
    Trial Tr. 138:4–139:16 (Busby); id. at 894:6–18, 907:6–18 (Cayer); id. at 1395:11–1396:18
(Ithshayek); id. at 1497:1–17 (Tal).
221
    Id. at 112:8–113:1 (Busby); id. at 943:6–15 (Cayer); id. at 1165:17–1166:10, 1228:18–1230:8
(Itshayek).
222
    Id. at 1228:3–17 (Itshayek).

                                              33
turn offered to PwC before PwC left. 223 However, PwC did not accept the hard

copies at that time because PwC believed that the letters could be otherwise

obtained.224 Great Hill did not attempt to reach out to Paymentech as part of the due

diligence process.225

              2. The Due Diligence Request and On-Site Meetings

       On June 2, 2011, Great Hill sent Tal a written due diligence request, which

listed, among other things, requests under the title “Compliance.” Great Hill’s

“Compliance” due diligence requests included a request for “any communications

received from any of the Major Credit Card Companies reporting any

noncompliance,” and another request for a description of any fines or penalties paid

in connection with such communications.226 Plimus had disclosed that it paid

$610,000 in “One-Time Expenses” in 2010, including a $250,000 for “Credit Card

Association Fines.”227 On June 9, 2001, Cayer told Busby that “the company was

charged $250k last year by V/M through Paymentech for excessive chargebacks;”

Cayer had asked Tal for documentation but had been told “the amount was deducted

from the Paymentech invoice directly and [Tal] did not have additional

documentation.”228 The June 2, 2011 diligence request also asked for information

223
    Id. at 1230:7–1232:14 (Itshayek); id.at 1496:24–1496:18 (Tal).
224
    Id. at 1230:7–1232:14 (Itshayek); id.at 1496:24–1496:18 (Tal).
225
    Cayer Dep. 36:21–24; Vettel Dep. Tr. 113:3–6.
226
    JX 447, at 11–12.
227
    JX 463.
228
    JX 463, at 1.

                                               34
on the eight hundred vendors terminated by Plimus in the first quarter of 2011, as

disclosed in Plimus’s CIM.229

       During their June 2011 on-site diligence meetings, PwC met with Tal and

Itshayek on-site at Plimus’s office in California. In October 2010, Itshayek had been

given responsibility over Plimus’s processor relationships; as such, she was the

appropriate person to discuss processor relationships with PwC.230                      Itshayek

provided PwC with several recent monthly processor statements and went through

them with PwC during these meetings, but Itshayek did not provide processor

statements for all months of 2010.231 The processor statements contained all the

granular information on Plimus’s processor relationships; they included data on

processed transactions and on fines Plimus paid, including the amount, where it

came from, and the reason for the fine.232 These processor statements that Itshayek

provided reflected that Plimus had paid $250,000 in fines to Paymentech in 2010,

229
    Plimus’s CIM noted that Plimus had terminated a group of eight hundred “underperforming
sellers,” who generated high chargebacks and engaged in business models that “were not attractive
to the Company’s . . . payment processing partners.” JX 241, at 59 n.4. Great Hill’s June 2, 2011
diligence request asked for Plimus to “describe the types of activities that caused the 800
referenced sellers to be removed from the Company’s platform, how the Company became aware
of such activities, and whether the Company has had or expects to have any liability in connection
with such sellers/activities.” JX 447, at 12.
230
    Trial Tr. 1142:24–1145:18, 1156:5–12, 1300:6–20 (Itshayek). Itshayek had worked for Great
Hill since March 2008; she served as Chief Financial Officer from July 2008 until October 2010,
and took on the role of Vice President of Financial Strategy and Payment Solutions from April
2010 until she left Plimus in January 2012. JSUF ¶ 13. However, the overlap in positions from
May 2010 to October 2010 was a technicality, as Itshayek was on leave during that time, and she
actually assumed her new role when she returned. Trial Tr. 1142:24–1144:2 (Itshayek).
231
    JX 582, at 23; Trial Tr. 1158:11–6, 1161:6–7 (Itshayek).
232
    Trial Tr. 1157:23–1158:6 (Itshayek).

                                               35
primarily related to Visa. Approximately $225,000 was for excessive chargebacks

related to Visa, and the remaining $25,000 was for a failure to register as a Member

Service Provider (“MSP”) related to MasterCard.233 Plimus had also paid fines in

addition to the described $250,000 for excessive chargebacks in relation to

MasterCard in 2010.234 During these in-person meetings, Itshayek “went through

whatever happened with Visa and MasterCard throughout the years [sic] of 2010”

and “showed . . . PwC that [Plimus was] over the excessive chargeback program

both in MasterCard and in Visa.”235

       The credit card associations had “excessive chargeback monitoring programs”

for merchants designed to incentivize these merchants to reduce their

chargebacks.236 Generally, merchants entered the programs when their chargeback

ratio exceeded a certain threshold for a number of consecutive months.237 After that

point, the merchant would be charged a fine per chargeback (on top of already paying

the amount of the chargeback and a fee), and the amount of the fine per chargeback

would increase the longer the merchant remained in the program.238 Once the

233
    Id. at 1106:4–1133:22 (Itshayek).
234
    Id. at 1152:12–1155:8 (Itshayek).
235
    Id. at 1165:21–1166:4 (Itshayek).
236
    Id. at 2557:15–23 (Layman).
237
    Id. at 1412:17–1417:12 (Itshayek); id. at 2557:15–23 (Layman); JX 582, at 23; JX 601, at 38;
JX 1129 ¶¶ 34, 35; JX 1130 ¶¶ ¶18, 19.
238
    Trial Tr. 1412:17–1417:12 (Itshayek); Trial Tr. at 2557:15–23 (Layman); JX 582, at 23; JX
601, at 38. In fact, MasterCard’s fine remained flat over time. Romano Dep. 299:14–18, 301:11–
17.

                                              36
chargeback ratio fell below the threshold, the merchant would generally be removed

from the excessive chargeback program.239 The key metric was the chargeback ratio,

which was generally calculated by dividing the number of chargebacks in a month

by the total number of transactions in the same month.240 Visa and MasterCard

calculated the chargeback ratio slightly differently; MasterCard used the previous

month’s transaction volume to calculate the chargeback ratio.241                      Visa and

MasterCard would place merchants in excessive chargeback monitoring programs if

the merchant’s chargeback ratio for United States transactions exceeded one percent

for two consecutive months.242

          Technically, Plimus’s vendors generated the chargebacks, but under Plimus’s

reseller model, Plimus was the merchant of record. As a result, from the viewpoint

of the credit card associations and processors, the chargebacks were generated by

Plimus, and they calculated a chargeback ratio for Plimus as a whole. Paymentech

notified Plimus of excessive chargebacks for Visa and MasterCard in February

2010.243       Plimus subsequently entered both Visa and MasterCard’s excessive

chargeback monitoring programs in April 2010.244 Plimus exited both programs in

239
      Romano Dep. 300:17–301:23; JX 582, at 23; JX 1129 ¶ 35.
240
      Trial Tr. 1356:7–16, 1408:10–24 (Itshayek); JX 601, at 38; JX 1129 ¶¶ 34, 35; JX 1130 ¶¶ 18,
19.
241
    Trial Tr. at 1356:7–16, 1408:10–24 (Itshayek); JX 601, at 38; JX 1129 ¶ 34; JX 1130 ¶ 18.
242
    JSUF ¶ 68.
243
    Id. ¶¶ 69, 70.
244
    Id. ¶ 71.

                                                 37
July 2010.245 Plimus, as it disclosed to Great Hill, passed all the fines and fees

associated with chargebacks to the vendors who had generated them, and Plimus

even made a profit in the process.246       Part of Plimus’s value proposition was

proprietary software that automated the routing of transactions through different

processors to minimize processing costs.247 During PwC’s visit, Itshayek told PwC

that in order to lower chargebacks, it would sometimes proactively refund their

vendor’s customers so they would not ask for chargebacks, and it would also route

transactions to spread out chargebacks among different processors.248

      On June 10, 2011, PwC followed up on the previous day’s conversations with

Assi and Itshayek, and asked that certain documents be added to the data room,

including a specific request for Itshayek to add “all information related to the $250k

MC fine, as well as any other association related warnings/fines.”249 The processor

statements that Itshayek had reviewed with PwC reflected the fines that Plimus had

paid but not did not necessarily include all relevant detail.         Plimus did not

communicate directly with the card companies or the acquiring banks; instead, those

institutions communicated with Paymentech, which in turn communicated with

Plimus. When Paymentech notified Plimus that Plimus had violated card network

245
    Romano Dep. 299:5-9, 300:14-301:7, 302:14-304:6; JX 124; JX 138; Trial Tr. 1349:14–
1350:13 (Itshayek).
246
    JX 307, at 52; JX 582, at 1; JX 601, at 37.
247
    Trial Tr. 934:7–23 (Cayer); id. at 1363:14–1364:3 (Itshayek).
248
    Tr. 1353:24–1356:1 (Itshayek); JX 582, at 18.
249
    JX 470; JX 474.

                                          38
rules and would be fined, sometimes Paymentech would attach the actual

correspondence that Paymentech itself had received from the card associations,

sometimes Paymentech would only copy and paste sections of the card association

letter into their notifications to Plimus, and other times would provide none of the

original correspondence.250 Neither Itshayek nor anyone else from Plimus provided

to Great Hill or PwC, either during or after the June 2011 meetings with PwC, any

of the particular correspondence Plimus had received from Paymentech associated

with the Visa or MasterCard fines levied against Plimus for excessive chargebacks

or the fine for failure to register as an MSP.251

       Based on their due diligence review, PwC prepared a report for Great Hill.252

In their report, PwC wrote:

       The one-time expenses provided by the Company indicate a $250k item
       for “credit card association fines.” Management was only able to
       provide the processor statements reflecting the fines over a period of
       several months, which total $250k.
       It appears that the Company was fined for experiencing a chargeback
       ratio of greater than 1%. Management has asserted that they have not
       incurred additional fines since this time (2010). However, there was no
       formal communication from the associations clearly defining the nature
       of the fines. Communication on the matter was limited to the Company
       and the processor account manager, Paymentech.253

250
    Trial Tr. 1118:4–1118:15 (Itshayek).
251
    Trial Tr. 1118:19–1131:6 (Itshayek).
252
    JX 582.
253
    JX 582, at 23.

                                           39
PwC added that “the Company should consider a more proactive approach to dealing

with the card associations on these matters.”254

       PwC had also reviewed and discussed with Plimus management various

Plimus policies and procedures, including those on adding new vendors and risk

monitoring.255      PwC reported that Plimus “delays the majority of the seller

underwriting process until the point at which the seller is most likely to begin

processing to avoid unnecessary underwriting expenses.”256                      In line with this

approach, Plimus used a “self-serve” model for adding “long-tail” vendors, in which

the vendors logged onto the Plimus website and filled out an application.257 While

there was some initial fraud control,258 these vendors could start processing almost

immediately after opening an account and before any substantial fraud review.259

       According to Plimus’s operational procedures, which were provided to Great

Hill, Plimus initially screened new vendors for violations of “Plimus terms of use

and prohibited items policy,” and “whenever [Plimus] receive[d] an alert from a

processing partner relating to a Plimus seller or product . . . [Plimus] react[ed] based

254
    Id.
255
    Trial Tr. 887:8–894:5 (Cayer).
256
    JX 582, at 21. In PwC’s report, the “underwriting process” is depicted in three stages: first, the
application, where there is initial screening; second, integration, where there is additional
screening; and third, processing and ongoing monitoring, where there is daily and monthly review.
257
    Id. at 20.
258
    JX 457, at 35–36; JX 582, at 20.
259
    Plimus’s “initial” and “additional” fraud screenings involved verifying the e-mail address and
website of the vendor and manually reviewing the vendor’s first five transactions. JX 457, at 35–
37; JX 582, at 20.

                                                 40
on the partner’s requirements and the Plimus policy and procedure.”260 Plimus

monitored its vendors on a monthly basis for excessive chargebacks and copyright

infringement issues.261 With respect to copyright infringement, K&E noted in their

report to Great Hill that Plimus “occasionally receives notices by third party

copyright holders in the ordinary course,” and in K&E’s experience Plimus’s

compliance procedures were “common for business operating in this space.”262 The

vendors Plimus’s systems identified for fraud and high chargebacks could then be

subject to removal.263 Cayer acknowledged that Great Hill’s diligence showed some

of Plimus’s vendors could avoid meaningful chargeback review and termination for

30 days, and in some cases even months.264

              3. Plimus Terminated 17 “Biz Opp” Vendors in June 2011

       In March and April 2011, Plimus added new vendors who had left a

competitor, ClickBank,265 including a vendor called GoClickCash.266 GoClickCash

and several other of these new vendors were known as business opportunity, or “biz

opp,” vendors and were involved in “get rich quick” schemes. There was some

worry within Plimus that these “biz opp” vendors could be problematic,267 and by

260
    JX 457, at 35–37.
261
    JX 582, at 20.
262
    JX 596, at 48–49.
263
    JX 307, at 52.
264
    Trial Tr. 1027:3–1029:24 (Cayer).
265
    JSUF ¶ 169.
266
    Trial Tr. 1360:18–1361:11 (Itshayek).
267
    E.g., JX 317, at 4–5; JX 383.

                                            41
May 2011, they were already producing high chargebacks.268 PayPal, which was

processing most of Plimus’s United States transactions by this time through Plimus’s

PayPal Pro account,269 raised concern about these types of vendors on a June 2, 2011

call with Plimus.270 On subsequent call on June 16, 2011, PayPal told Itshayek that

Plimus should terminate GoClickCash; PayPal had been notified by the card

associations that GoClickCash had been identified as a “get rich quick” scheme,

which violated card association rules.271               Plimus immediately terminated

GoClickCash272 and decided to terminate similar vendors;273 after an internal review,

Plimus came up with a list of sixteen additional vendors to terminate.274 While

Plimus and PayPal continued to communicate regularly, it was not until an August

2011 phone call that PayPal suggested that there may be a fine related to

GoClickCash,275 and it was not until September 22, 2011 that PayPal informed

Itshayek definitively that a $200,000 fine would be imposed.276

       During phone calls on June 23, 2011 and June 29, 2011, Great Hill was

informed that Plimus had terminated GoClickCash and the other sixteen similar

268
    JX 368.
269
    JSUF ¶ 168.
270
    JX 475.
271
    JX 499; Trial Tr. 1168:7–1171:3, 1197:17–1203:2 (Itshayek).
272
    JX 499.
273
    JX 501, JX 502.
274
    JX 510; JX 547.
275
    Trial Tr. 1191:2–1191:17 (Itshayek).
276
    JX 827, at 3.

                                             42
vendors.277 Itshayek told Great Hill that PayPal had brought GoClickCash to

Plimus’s attention and that Plimus had taken the initiative to identify and terminate

the other sixteen similar vendors.278 Itshayek also disclosed to Great Hill that the

termination of these vendors was likely to negatively affect chargeback ratios going

forward.279 Even though Plimus had terminated these vendors, their customers

would continue to request refunds from the card associations over the next few

months, generating chargebacks.            Plimus would then have the chargebacks

associated with these terminated vendors without the benefit of any offsetting

transactions.280 Given this dynamic, chargeback ratios often became a greater

problem after problematic vendors were terminated.281

       Great Hill was aware that the terminated biz opp vendors represented 10.6%

of the year-to-date transaction volume of Plimus, and that four of the top five year-

to-date volume vendors had been terminated.282 As part of the due diligence process,

Tal went to Great Hill’s offices in Boston on June 27. The following day he sent an

e-mail to Busby and noted that “open items” included “CB details. (lets setup a call)

[sic]” and “list of account [sic] that we closed or [sic] planning to close.”283   In

277
    JX 524; JX 536; JX 549; JX 571.
278
    JX 549; Trial Tr. 1179:16–1183:8 (Itshayek).
279
    JX 601, at 37; Trial Tr. 1032:6–22 (Cayer).
280
    Trial Tr. 1410:11–1411:3 (Itshayek).
281
    Id.
282
    JX 547; JX 585.
283
    JX 564.

                                              43
advance of a June 29, 2011 call, Tal provided Great Hill with a spreadsheet

containing historical chargeback data dating back to 2010 for Plimus’s Paymentech

and PayPal Pro accounts, a recent daily chargeback report, and a recent “bad vendor”

report.284 Great Hill claimed it viewed the termination of the seventeen vendors, on

balance, as a positive; Busby testified that it demonstrated that Plimus had systems

for identifying and removing high-chargeback merchants, which outweighed, in

Great Hill’s view, the negative impact on the financial performance of the business

in the near term.285

              4. Plimus Responded to Great Hill’s Due Diligence Request and Due
              Diligence Ends

       On June 18, 2011, Plimus submitted a preliminary response to Great Hill’s

June 2 written diligence requests.286 This response indicated that a large number of

the requests were still “in process.”287 Specifically, in response to the request for

communications from the card companies reporting non-compliance and the request

for description of any fines paid in connection with such communications, Plimus

wrote that the “Company will provide if further review of its records results in

responsive documents.”288 Subsequently, on June 25, 2011, Plimus provided a

284
    JX 562; JX 564. The daily chargeback report showed the month-to-date chargeback ratio for
each processor by card network. See e.g., JX 641. The bad vendor report listed the Plimus vendors
with the highest numbers of chargebacks. Trial Tr. 1409:10–1410:10 (Itshayek).
285
    Trial Tr. 255:7–18 (Busby).
286
    JX 507.
287
    Id.
288
    Id. at 17.

                                               44
substantial update to its June 18 response (although some requests were still in

process).289 Regarding the request for communications from the major credit card

companies, Plimus maintained the response that Plimus “will provide if further

review of its records results in responsive documents.”290 Regarding the request for

a description of fines paid, Plimus wrote “[t]he Company paid $250,000 for an

excessive chargeback monitoring program in 2010 due to [an] increase in

chargebacks related to the Company’s poker chip vendors. As discussed below, all

such vendors have been removed.”291

       Great Hill had sought additional information with respect to the termination

of these poker chip vendors, as Plimus referenced in its response to the request for a

description of fines. Plimus wrote in its diligence response that the eight hundred

vendors, terminated in the first quarter of 2010, were: “[p]arty poker chip vendors,

underperforming utility software vendors, and certain online services with high rate

[sic] of dissatisfaction.”292   The vendors had been terminated for issues with

“excessive customer disputes and chargeback activity” and “business models that

were not attractive to [Plimus’s] . . . payment processors.”293 Plimus wrote in its

289
    JX 553.
290
    Id. at 58.
291
    Id.
292
    Id. at 59
293
    JX 241, at 59 n.4.

                                         45
diligence response that: “The Company became aware of these issues upon

reviewing each vendors’ chargeback history.”294

       With due diligence complete, the Great Hill deal team drafted a due diligence

memo and set out to make a presentation to the Great Hill partners. Despite

testifying at trial that Great Hill viewed the June 2011 termination of seventeen

vendors as a net positive, in early July 2011, as the Great Hill deal team prepared its

due diligence memo, it was considering reducing the purchase price from $115

million to $100 million because of the removal of those vendors.295 It included this

recommendation in a draft of the due diligence memo. However, the Great Hill deal

team decided to continue with the original purchase price and removed this

recommendation from the final version of the due diligence memo submitted to the

Great Hill partners.296 Great Hill was confident that the growth of both new sellers

and the growth of an existing seller, Wix, would mean that Plimus could still achieve

Great Hill’s original financial projections for the fourth quarter of 2011, which was

the basis for its purchase price.297

       Wix sold “do it yourself” website building and hosting services, for which it

charged a monthly subscription fee.298 At the time of the due diligence memo,

294
    JX 553, at 59.
295
    JX 3040, at 3; JX 3045, at 3; Trial Tr. 452:11–15 (Busby).
296
    JX 601, at 4; Trial Tr. 452:16–453:2 (Busby).
297
    Trial Tr. 452:16–453:22 (Busby).
298
    JX 601, at 27.

                                               46
Plimus managed only a portion of these subscription payments for Wix, but it

expected to manage all of Wix’s transactions by the end of second half of 2011.299

Great Hill projected that Wix would represent sixteen percent of Plimus’s volume in

the fourth quarter of 2011, making it Plimus’s largest vendor.300 Vettel and Cayer

actually met with Wix as part of the due diligence process.301 Great Hill also noted

in its due diligence memo that projected transaction volume growth for Plimus in

2012 was “due to expected growth from Wix and MyHeritage,” another large

subscription service company.302 Plimus was actively seeking more enterprise/large

business clients like Wix, a process that required dedicated sale staff, unlike its

“long-tail” vendors that onboarded themselves.303

              5. The Great Hill Deal Team Presented to Great Hill Partners on July
              11, 2011

       The Great Hill deal team presented their due diligence memo to the Great Hill

partners on July 11, 2011. The due diligence memo included the termination of

GoClickCash and similar vendors; the memo tied the termination of these “bad”

sellers to high chargebacks and graphed historical chargeback ratios for Plimus, as

a whole, from June 2009 to June 2011.304 The graph indicated that Plimus had

299
    JX 601, at 33.
300
    JX 604, at 33.
301
    Trial Tr. 455:15–24 (Busby). During Great Hill’s diligence check with Wix, Busby was able
to verify Plimus’s expectations as to Wix. Id. at 455:20–24 (Busby).
302
    JX 601, at 24. MyHeritage provided online genealogy services. Id. at 27.
303
    Trial Tr. 666:2–667:9 (Vettel).
304
    JX 601, at 37.

                                             47
exceeded a general one percent chargeback ratio threshold for much of 2010, the

ratio had fallen below one percent in 2011, and that it had increased above one

percent in June 2011 because of the termination of the seventeen vendors in that

month. Great Hill wrote of the June 2011 increase in chargebacks that “management

believes Plimus will not trigger excessive aggregate chargebacks for >3 consecutive

months, and thus does not expect to be fined by Visa/MasterCard.”305 The final

version of the presentation to the Great Hill partners made no mention that the Great

Hill deal team had considered reducing the sales price because of the same issue.306

       The due diligence memo, as mentioned, highlighted Wix and its role in

projections for Plimus going forward. The due diligence memo also included

statements on Plimus’s vendor quality and risk monitoring systems. The memo

listed as vendor risks, “[vendor] experiences high level of chargebacks due to bad

product or services,” and “[vendor] shifts business to unacceptable vertical.”307 The

memo also noted that Plimus’s “self service” vendors had high quarterly churn

rates.308 Great Hill was not concerned about the high churn rate because Plimus

305
    Id.
306
    Id. at 3.
307
    Id. at 19. The Great Hill deal team also listed as a threat in their “SWOT analysis” of Plimus
that “[f]raudulent sellers use the Plimus platform to conduct illegal activities or offer products with
services that have a high number of chargebacks.” Id. at 47.
308
    Id. at 23

                                                 48
added new vendors at a high rate, and because the vendors Plimus retained showed

growth.309

       Based on the due diligence memo and the presentation by the Great Hill deal

team, Great Hill’s investment committee voted unanimously to proceed with the

transaction.310

               6. Chargeback Ratios in June and July 2011 Exceeded One Percent

       Chargeback ratios were calculated monthly and Plimus could calculate its

ratio month-to-date using its own data, but it would not receive a formal notification

that it had exceeded a chargeback threshold until the month was complete.311

Accordingly, PayPal told Plimus in July 2011 that it had exceeded a one percent

chargeback ratio in June for both Visa and MasterCard.312 Great Hill knew and had

expected that Plimus would exceed the one percent chargeback ratio for both card

networks in June, given the termination of the “biz opp” vendors.313 During the end

of June and the beginning of July, Great Hill had multiple conversations with

Itshayek and Tal regarding chargebacks.

       On July 5, 2011, Tal provided Great Hill information on chargebacks for

PayPal Pro for both Visa and MasterCard, showing previous months’ chargeback

309
    Trial Tr. 930:13–931:8 (Cayer).
310
    Id. at 731:22–732:12 (Vettel).
311
    Id. at 1287:21–1288:21 (Itshayek).
312
    JSUF ¶ 172.
313
    Trial Tr. 148:8–13 (Busby); id. at 1032:6–18 (Cayer).

                                               49
ratios and providing projections for July and August.314 In the first table Tal

provided, the chargeback ratio for June exceeded one percent for both Visa and

MasterCard, projections for July and August showed chargeback ratios for both

months exceeding one percent for both Visa and MasterCard.315 Another table titled

“Missing Transactions” added transactions from Wix’s expected ramp up; with these

extra transactions the chargeback ratio for Visa was still projected to be above one

percent in July but then fall below one percent in August, and the chargeback ratio

for MasterCard was projected to be below one percent for both months.316

       On July 27, 2011, Itshayek e-mailed Busby to tell him that Plimus did not

expect the PayPal Pro chargeback ratio to exceed one percent for July for either Visa

or MasterCard.317 Busby replied immediately, “great news.”318 This was the last

direct contact Itshayek had with the Great Hill deal team until after closing.319

       On July 31, 2011 an internally-generated Plimus report showed the PayPal

Pro chargeback ratio for MasterCard was over one percent for July.320 On August

3, Great Hill signed the initial merger agreement, which included an indemnification

314
    JX 588.
315
    Id. at 3.
316
    Id.
317
    JX 634. As of July 27, 2011 the chargeback ratio for both Visa and MasterCard through PayPal
Pro was roughly 0.77%. JX 634; see also JX 641.
318
    JX 635.
319
    Trial Tr. 1311:11–1312:8 (Itshayek).
320
    JX 641. The report showed that MasterCard reached a one percent chargeback ratio on July
28. Id.

                                              50
provision specifically for fines related to excessive chargebacks. 321 The following

day PayPal e-mailed Plimus to inform Plimus that it had exceeded a one percent

chargeback ratio with PayPal Pro for MasterCard in July, the second consecutive

month for MasterCard.322

       F. Tal’s Earn-Out Dispute and Roll-Over Negotiations

       Tal was integral to Great Hill’s acquisition of Plimus, as Great Hill was, in

effect, buying into Tal’s vision of the company.323 Parallel to the due diligence

process, Great Hill and Tal negotiated the terms of his continued employment. Great

Hill wanted Tal to demonstrate his commitment by rolling over a large portion of

his merger proceeds into equity in the new Plimus (the “Roll-Over”). According to

the Letter of Intent, which Tal signed, “GHP will require the management team to

re-invest at least 50% of their after-tax net equity proceeds (GHP estimated at $4

million) unless otherwise agreed upon.”324 Tal’s proceeds from the merger were

composed of the equity he owned in Plimus (which Great Hill was buying) and

transaction bonuses that SGE and the Founders had previously agreed to pay Tal in

the event of a sale. Tal’s liquidity directly following the merger was then determined

by his combined merger proceeds less the amount of the Roll-Over.325

321
    JSUF ¶ 142; JX 649, at 70.
322
    JSUF ¶ 173.
323
    Trial Tr. 693:20–694:2 (Vettel).
324
    JX 428, at 2.
325
    Trial Tr. 1504:14–20 (Tal).

                                         51
              1. Tal Entered Into Earn-Out Agreements with SGE and the Founders
              when SGE/SIG Fund Bought into Plimus in 2008

       Just as Great Hill wanted Tal to maintain an ownership stake in Plimus after

the acquisition,326 SGE had wanted Tal to invest his own money into Plimus when

SGE/SIG Fund bought in,327 which Tal did.328 Additionally, as part of the SGE

investment in 2008, SGE and Tal entered into an earn-out agreement (the “SGE

Earn-Out”), sometimes referred to as a “side letter.”329 Under this agreement, if

Plimus was later sold, SGE would pay Tal a transaction bonus, calculated as a

percent of SGE’s profit on the sale, with the percent of profit paid to Tal to vary

according to how much profit SGE made.330

       Tal separately, but relatedly, entered into earn-out agreements with Herzog

and Kleinberg in 2008. Tal and the Founders exchanged e-mails on the subject, and

Tal used the SGE earn-out agreement as a basis for the agreement with the

Founders.331 Both sides believed that they had reached an agreement in 2008 (the

“Founders’ Earn-Out”); however, at the time of the sales process in 2011, no signed

agreements could be found.332 Klahr was aware of the Founders’ Earn-Out,333 and

326
    Id. at 639:21–640:4 (Vettel).
327
    JX 11; JX 481.
328
    JX 11; Trial Tr. 1824:14–1826:1 (Klahr).
329
    JSUF ¶ 55.
330
    Id. ¶ 56.
331
    JX 14; JX 17; JX 18.
332
    JX 14; JX 17; JX 18; JX 3000; Trial Tr. 1498:6–1499:2, 1557:6–1560:4 (Tal); Trial Tr. 2325:6–
24, 2355:23–2357:13, 2383:13–23 (Herzog); Trial Tr. 2423:11–21, 2496:1–13 (Kleinberg).
333
    JX 26.

                                               52
understood the agreement to be that the Founders together would pay Tal a

transaction bonus equal to a twenty percent discount to the amount SGE would pay

Tal.334

               2. Tal and the Founders Disagreed Over the Conditions of Their 2008
               Earn-Out Before and After Executing the Letter of Intent

          At some time before May 11, 2011, Tal, Kleinberg, and Herzog discussed

proposed deals and the resulting earn-out payments;335 at this time, the bidding

process was ongoing and Great Hill had yet to submit its final bid. In a May 11,

2011 e-mail to Tal, Kleinberg summarized a dispute that had arisen on the subject:

Tal believed that the Founders’ Earn-Out entitled him to a twenty percent discount

to what SGE would pay him; whereas Kleinberg and Herzog believed the Founders’

Earn-Out was for a twenty percent discount of the percentages SGE was using to

calculate the SGE earn out; those discounted percentages were then supposed to be

applied to the profit Kleinberg and Herzog would make on a sale.336 Tal immediately

forwarded the e-mail to Goldman,337 who forwarded it to Klahr, who noted that it

“feels kind of ugly.”338 Tal responded to Kleinberg on May 14, 2011, stating that he

334
    JX 26; JX 146; Trial Tr. 2167:7–13 (Goldman).
335
    JX 361, at 1.
336
    Id. In other words, the Founders believe their earn-out was based on the SGE earn-out, in the
sense that the structure was the same, but replaced with the Founders’ profits and lower
percentages. Tal believed the earn-out from the Founders was based on the SGE earn-out, in the
sense that the amount of the SGE earn-out was used as a base for the Founders’ earn-out by simply
applying a twenty percent discount.
337
    JX 364.
338
    Id.

                                               53
understood the earn-out agreement differently, that the money from the earn-out

would be his only income from a deal, and that without it he had limited interest in

a deal.339 At a deal price of $115 million, the SGE Earn-Out entitled Tal to roughly

$2.5 million.340 At that price, the two interpretations of the Founders’ Earn-Out

resulted in very different transaction bonuses; under Tal’s interpretation he would

be owed eighty percent of $2.5 million, or $2 million, from the Founders; this

compared with (at most) $500,000 under the Founders’ interpretation.341

       On May 14, 2011, Kleinberg and Herzog discussed among themselves

potential replies to Tal’s e-mail and vented their initial concerns. Notably, Kleinberg

wrote to Herzog that “once he understands what he gets from us, maybe then he can

go and ask Johnny for more (schita [or blackmail] money).”342 The Founders

determined that SGE had to be apprised of the dispute.343 Kleinberg accordingly

sent Tal an e-mail, in which he wrote that Klahr should be involved because “a

‘black-mail’ style sentence like ‘if you don’t give me money I don’t want the deal’

is something the entire board needs to hear.”344 Tal responded to the e-mail with

surprise at the word “black-mail” and informed Kleinberg that he had updated

339
    JX 410, at 3.
340
    JX 146; Trial Tr. 2167:7–13 (Goldman).
341
    JX 386, at 2–3; JX 509.
342
    JX 386, at 1.
343
    Id.
344
    JX 410, at 2.

                                             54
Goldman since the first e-mail.345 Tal also separately wrote to Herzog and expressed

his discomfort with Kleinberg’s e-mail and stated that “this wasn’t my intention at

all.”346

       Goldman then stepped in to mediate the dispute. During the mediation,

Herzog and Kleinberg accepted that Tal was not attempting to black-mail them, but

rather, that the dispute was an honest disagreement on the interpretation of the

Founders’ Earn-Out.347 While Goldman told Herzog and Kleinberg that Tal’s

interpretation was reasonable,348 the Founders remained unwilling to adopt it and

pay Tal substantially more than they believed the correct (i.e. their) interpretation

entitled Tal to.349 On June 19, 2011, Kleinberg e-mailed Goldman and Klahr; he

told them that the Founders were not willing to pay more, and wrote that, if Tal

needed to leave money in the company, “he never could have found a better deal for

himself . . . [as] he will have a nice % of stock in the new company which is already

worth a lot of money and will be much more.”350 The next day, Goldman asked the

Founders whether their dispute was worth disrupting the sale and costing both SGE

345
    JX 410, at 1.
346
    JX 3021, at 2.
347
    Trial Tr. 2382:11–2383:4 (Herzog); id. at 2511:19–2512:11, 2513:22–2514:14 (Kleinberg).
348
    Before the dispute SGE’s interpretation of the Founders’ Earn-Out was the same as Tal’s. JX
146; Trial Tr. 2167:7–13 (Goldman). Although Goldman came to understand that “there was a
reasonable difference of opinion” on the interpretation, Goldman “felt [Tal] should get what was
due to him.” Trial Tr. 2013:7–2015:12, 2170:14–2171:23 (Goldman).
349
    JX 509.
350
    Id. at 4.

                                              55
and the Founders more than the difference between the earn-out interpretations.351

In response, the Founders again expressed that they “wouldn’t be surprised if at the

end of the Plimus saga [Tal] ends up with more money than us” and restated their

unwillingness to give Tal more money. The Founders also wrote “if the deal is not

meant to happen, I’m sure a better one will come at some point,”352 and ended by

telling Goldman and Klahr that if they did not feel Tal was being paid enough, then

they should “feel free to chip in.”353

       Despite these hard negotiations, the Founders agreed to pay Tal more money.

By June 28, 2011, the Founders agreed to a resolution of the Founders’ Earn-Out

with Goldman. Under the resolution, the Founders would each pay Tal $625,000,

which is more than they believed they owed under the Founders’ Earn-Out, but still

less than Tal believed he was owed.354 SGE agreed to make up the difference by

paying Tal an additional $750,000.355 Under the resolution, Tal would not receive

more than he had maintained consistently that he was owed in total under those same

side letters.356 This resolution effectively solved the dispute over the Founders’

351
    Id.
352
    Id. at 3.
353
    Id.
354
    JX 569, at 1.
355
    Id.
356
    Trial Tr. 2171:9–16 (Goldman).

                                         56
Earn-Out once it was presented to Tal;357 Tal did not ask for additional earn-out

money afterward.

              3. SGE Cautioned Tal on Negotiating the Roll-Over

       Tal negotiated his Roll-Over with Great Hill in June 2011, at the same time

Goldman mediated the Founders’ Earn-Out dispute. Under the May 26, 2011 Letter

of Intent, Plimus’s management team agreed to invest at least fifty percent of their

after-tax net equity proceeds as equity in the post-Merger company.358 However,

Tal wanted to negotiate this provision and gain more liquidity by rolling over less

equity.359    Tal, an Israeli citizen, also had several other concerns, including

remaining in the United States and the personal tax implications of his stock sale.360

       On June 8, 2011, in connection with the Roll-Over, Tal provided Great Hill

with a spreadsheet created by SGE in October 2010.361 The spreadsheet showed that

at a price of $115 million, SGE would pay Tal $2.5 million and the Founders would

pay Tal $2 million under their respective side letters.362 Great Hill had asked for that

information to determine how much Tal would be rolling over into equity. In a June

12, 2011 e-mail, Klahr gave Tal some advice on the Roll-Over, writing that “the

357
    JX 569.
358
    JSUF ¶ 158.
359
    JX 481; JX 566.
360
    JX 566 (“I also need to stay in the company and the US for longer than I planned”); Trial Tr.
508:4–509:4 (Busby).
361
    JX 465.
362
    Id.

                                               57
things management ask for are a big indicator for investors . . . A big emphasis on

liquidity is generally a big indication [management] aren’t believers . . . Please think

and consider your requests to your new potential partners very carefully.”363 On

June 26, in advance of Tal’s meeting with Great Hill in its Boston offices, Goldman

wrote to Tal that he was still working with the Founders to resolve the Founders’

Earn-Out dispute and that Tal should “go easy on pushing the greathill [sic] guys.

They won’t say anything to you, but I [guarantee] you that every time you push on

the liquidity issue you are sending them a signal that you don’t believe in the

business or aren’t committed,” and that “I’m not sure the alternative of no deal is a

great one for any of us.”364

              4. The Earn-Out and Roll-Over Converged and Are Solved

       On June 28, 2011, after meeting with Great Hill in its Boston offices, Tal

wrote an e-mail to Goldman to tell him that the meeting had gone well.365 Tal also

addressed the issue of Founders’ Earn Out and wrote, “I see no reason to compromise

on this subject and that is mainly because of your promise to me that we are on the

same boat when it come[s] to the exit.”366 Tal further stated that he was sure he

earned his commission “even if you guys do not read the contract some [sic] way I

363
    JX 481.
364
    JX 566.
365
    Id.
366
    Id.

                                          58
do.”367 Tal continued, writing “GHP is buying Plimus for the vision and the future

that the team and I are creating . . . So in fact, I am not getting more than 50% of my

money in this process, and I also need to stay in the company and in the US for

longer time than I planned, and all this for you guys to get your money.” 368 In a

different June 28, 2011 e-mail, Tal followed up with Busby regarding his meeting

with Great Hill and noted that the “new contract and roll over” for management was

still an “open item.”369

        Goldman and Klahr discussed how to respond to Tal’s e-mail on June 28,

2011. Klahr suggested they “let him cool down a little,” and “if he calls give him

the improved offer and tell him we have tried our hardest but that the new offer is

contingent on him taking what is on the table from GHP,” and that “if he blows up

the deal he looses [sic] big in lots of ways, the chief of them being financially.” 370

Goldman wrote in response, “He ain’t blowing up this deal. But I do feel like

slapping him back now rather than later.”371

        Goldman and Tal did talk on June 28, 2011, and Goldman presented the

resolution to the Founders’ Earn-Out to Tal.        Goldman reported to Steele of

Raymond James that Goldman had “settled the ‘side letter’ issue with [Tal],” that

367
    Id.
368
    Id.
369
    JX 564.
370
    JX 570, at 1.
371
    Id.

                                          59
the Founders had each “agreed to give [Tal] $625k . . . [and] SGE will make up the

additional $750k to get him to his $2M goal from these guys in addition to our

current side letter.” 372 Goldman told Steele that Tal “has also agreed that he’ll stop

negotiating his deal with GHP and move on.”373 Steele responded that he had just

spoken to Tal who had also told him things were resolved.374 Steele “also spoke to

GHP and they just echoed that Monday’s session went well, they are working

towards signing and from their perspective they had alignment with [Tal] so felt like

they were done there.”375 On June 29, 2011, Goldman reported to the Founders that

Great Hill had flagged Tal’s Roll-Over as the major remaining open item, that

Goldman had presented the resolution to the Founders’ Earn-Out to Tal, and that Tal

“has agreed that given [that] solution [] that he will sign up for that deal and stop

negotiating with GHP.”376

       During this animated dispute over the Founders’ Earn-Out, at Tal’s June 27,

2011 meeting with Great Hill, Vettel had asked Tal what was left to prevent closing.

In response, Tal told Vettel that there was an issue with Tal’s side letters. When

asked what Great Hill could do to help, Tal told Vettel that they could call

Goldman.377 Vettel did call Goldman on June 28, 2011; this was the only time that

372
    JX 569.
373
    Id.
374
    Id.
375
    Id.
376
    JX 573.
377
    Trial Tr. 1569:12–1574:13 (Tal).

                                          60
Great Hill and SGE had any direct contact.378 During the call, Vettel identified the

main outstanding issue on the deal as Tal’s Roll-Over and noted that Tal, in turn,

was having an issue with his side letters. Vettel then asked Goldman to help resolve

the issue and Goldman replied that he believed they had a solution.379 The Founders’

Earn-Out issue was resolved that same day. On June 30, Tal wrote an e-mail to

Vettel with the subject line “thanks” and the body “for the call with SIG !!,” to which

Vettel responded, “I hope you get the issue resolved quickly.”380 In other words,

despite testimony to the contrary, Great Hill was aware of the Founders’ Earn-Out

dispute and its relationship to Tal’s Roll-Over prior to entering into the initial merger

agreement.

       While the Founders’ Earn-Out issue was resolved in principle by the end of

June 2011 and was formalized during the month of July,381 Tal’s Roll-Over

negotiations continued to be an issue for several weeks, at least in regard to the

specific mechanics. On July 20, 2011, Goldman provided Steele with an updated

spreadsheet that detailed the new breakdown of Tal’s earn-out agreements, which

Steele then provided to Great Hill.382 The new spreadsheet reflected the resolution

to the Founder’s Earn-Out; compared to the spreadsheet Tal had originally provided

378
    JX 3030; Trial Tr. 694:3–696:5 (Vettel); Trial Tr. at 2182:22–2184:10 (Goldman).
379
    Trial Tr. 2184:11–2185:15 (Goldman).
380
    JX 575.
381
    JX 576; JX 598.
382
    JX 623.

                                              61
to Great Hill, Tal’s total earn-out remained virtually the same.383 Steele wrote to

Goldman that Great Hill wanted the information in order “to try to understand what

[management] is getting in totality.”384

       The fact that the Roll-Over issue had not yet been fully resolved irritated

Goldman. In a separate July 20, 2011 e-mail, Goldman wrote to Tal, in reference to

a phone call, “I didn’t understand what you were saying -- you promised us when

we agreed to increase your side letter that you would roll at least $3m or even all

your stock. Why is this even an issue? . . . What is going on? Why can’t we close.”385

Arnheim of Perkins Coie e-mailed Goldman on July 21, 2011 and told him that Tal

had not yet agreed to the Roll-Over.386 Arnheim also detailed how he expected Tal’s

Roll-Over to be structured to account for the side letter payments; the expected

structure of the Roll-Over was complex given Tal’s various holdings in preferred

shares, vested and unvested common shares, and common share options, and all the

associated tax consequences.387 Goldman responded to Arnheim on the same day

and asked him to tell Tal that “SGE’s position is that it’s additional funds to his side

letter . . . was contingent on him agreeing to roll $3m . . . . [Tal] told us he agreed

with this . . . . He also represented to us that he would stop negotiating with GHP on

383
    There was a small difference attributable to rounding, as the new spreadsheet used the entire
number and the previous spreadsheet was in millions.
384
    JX 620.
385
    JX 616.
386
    JX 624, at 1.
387
    Id.

                                               62
the issue.”388 It is also clear from a July 23, 2011 e-mail between Busby and Tal

that, at least, the details of the roll-over still had not been fully resolved by then.389

       The ultimate result of the e-mails and calls and accusations of blackmail is

that Tal was paid the total earn-out he anticipated before Great Hill ever submitted

its final bid. Furthermore, at the end of the negotiations with Great Hill, Tal agreed

to roll over fifty percent of his merger proceeds, as originally envisioned in the Letter

of Intent. In fact, Tal put more than fifty percent of his merger proceeds into the

new company; he left an additional portion of his merger proceeds in Plimus as a

secured promissory note,390 although this was primarily for tax purposes.

       G. From the Signing of the Initial Merger Agreement to Closing

       Following the Letter of Intent and due diligence review, Great Hill agreed to

acquire Plimus at a purchase price of $115 million.391 The Plimus Board of Directors

held a telephonic meeting on August 2, 2011, in which they approved the merger.392

Great Hill was also given log-in credentials to Plimus’s reporting portal on that day,

which allowed direct access to certain Plimus data.393 An initial merger agreement

was signed on August 3, 2011, accompanied by a disclosure schedule.394 Following

388
    Id.
389
    JX 628.
390
    JSUF ¶ 159.
391
    Id. ¶ 34. The exact structure of the transaction is not relevant.
392
    JX 646.
393
    JX 645.
394
    JSUF ¶ 35.

                                                  63
the initial merger agreement, Cayer visited Plimus’s offices on August 16 and 17 to

meet with Tal.395 Cayer was working on financial projections for Plimus.396 Cayer

and Tal continued to correspond regarding financial projections throughout

September.397 Great Hill was particularly focused on Wix, the vendor that was

projected to constitute a substantial portion of Plimus’s future transaction volume.

Wix, however, was not ramping as expected, and as a result, Great Hill reduced

projections for Plimus’s transaction volume and EBITDA projections for the fourth

quarter of 2011.398      On September 15, Cayer sent Great Hill’s latest Plimus

projections to Tal, which reflected lower EBITDA projections in the near term

compared to what had been presented to Great Hill partners in the due diligence

memo.399

       While the initial merger agreement was dated August 3, 2011, the merger did

not close until September 29, 2011.400 Closing was delayed because Tal needed a

new visa to continue working in the United States and Great Hill did not want to

close before they were sure he had obtained one and could act as CEO of the new

395
    JX 3057.
396
    JX 687.
397
    E.g., JX 3062.
398
    JX 667; JX 687; JX 701; JX 737; JX 738; JX 3062.
399
    JX 601, JX 3062.
400
    JSUF ¶ 152.

                                             64
company.401 Great Hill was aware of the visa issue before signing the initial merger

agreement, but felt comfortable signing it regardless.402

             1. Plimus Continued to Exceed a One Percent Chargeback Ratio for
             MasterCard through PayPal Pro

      Plimus had three separate PayPal accounts: a PayPal Wallet account, a PayPal

Israel account, and a PayPal Pro account. PayPal Wallet was an alternative payment

method, under which consumers entrusted PayPal with their financial information

and PayPal then provided payment directly, so that the merchant never saw the

consumer’s financial information.403 PayPal Wallet stored consumers’ financial

information, which made it more convenient for consumers to transact.404 Plimus’s

own PayPal Wallet account allowed it to accept payments from consumers’ PayPal

Wallet accounts.405 Plimus’s PayPal Israel account was also a PayPal Wallet

account, but for international, primarily Israeli, transactions, and was maintained

separately from the PayPal Wallet account.406 By comparison, Plimus’s PayPal Pro

account was simply a payment processing account, largely indistinguishable from

the service provided by Plimus’s other payment processors.407 Plimus opened its

401
    JX 628, at 2.
402
    Id.
403
    Trial Tr. 912:20–913:23 (Cayer); id. at 2567:4–15 (Layman).
404
    Id. at 2566:1–2567:3 (Layman).
405
    Id.
406
    JX 329, at 58–63; Trial Tr. 1308:9–20, 1310:11–13 (Itshayek); Trial Tr. 1651:23–1652:10
(Dangelmaier); JX 582, at 46.
407
    JX 29.

                                            65
PayPal Wallet account in 2002,408 its PayPal Pro account in 2009,409 and its PayPal

Israel account in 2010.410

       After the end of the Paymentech relationship, PayPal Pro became Plimus’s

top processor by volume, and its only United States-based processor.411 However,

Plimus could process transactions in the United States through its non-United States-

based processors.412 Tal viewed PayPal Pro as a “gap solution.”413 Plimus planned

to register as an Internet Payment Service Provider, which would allow Plimus to

work around the processors and deal directly with acquiring banks.414 Plimus also

worked to add more United States-based processors.415 Plimus did add another a

United States-based processor, Litle, during September 2011 before closing.416

Great Hill was aware and supportive of both initiatives.417

       On August 4, 2011, PayPal informed Plimus that Plimus had exceeded a one

percent chargeback ratio for MasterCard for July 2011, the second consecutive

month.418 Plimus did not exceed a one percent chargeback ratio for Visa in July.419

408
    Trial Tr. 1308:4–1309:6 (Itshayek); JX 329, at 31–50.
409
    JX 29; JX 329, at 51–57.
410
    JX 329, at 58–63.
411
    JSUF ¶ 168; Trial Tr. 392:17–393:11 (Busby).
412
    Trial Tr. 183:21–187:22 (Busby); id. at 1421:2–21 (Itshayek); id. at 1676:4–8 (Dangelmaier).
413
    JX 460, at 2.
414
    JX 582 at 18; JX 707, at 100.
415
    Trial Tr. 182:23–183:7 (Busby); id. at 910:4–17 (Cayer).
416
    JSUF ¶ 178.
417
    Trial Tr. 182:23–183:7 (Busby); JX 460, at 2; JX 707, at 100.
418
    JSUF ¶ 173; JX 654.
419
    JX 641.

                                              66
During an August 11, 2011 call with PayPal, PayPal told Plimus that if the

chargeback ratio for MasterCard exceeded one percent for a third month, PayPal

could issue a 30-day termination notice and thus end its relationship with Plimus.420

Jason Edge, a Payment Assistant at Plimus, memorialized this call in an e-mail to

Tal, writing “Paypal will issue a 30 day notice to potentially shut down Plimus’[s]

ability to process on the Pro account unless numbers improve.”421

       On August 15, 2011, Edge e-mailed PayPal in reference to the August 11 call;

he detailed Plimus’s efforts to reduce chargebacks, which included mass refunds to

the customers of vendors that were suspended in June and July. 422 In addition to

mass refunds, Plimus also manually rerouted transactions in an attempt to reduce the

chargeback ratio,423 a practice known as “load balancing.”424 By routing more

transactions through PayPal Pro, Plimus could reduce the chargeback ratio by

increasing the number of transactions, the denominator in the chargeback ratio.425

Neither mass refunds nor load balancing was explicitly prohibited by card

420
    JX 670.
421
    Id.
422
    JX 679.
423
    JX 690; JX 695.
424
    Trial Tr. 2558:23–2559:12 (Layman).
425
    Id.

                                          67
association rules at the time.426 PayPal was aware that Plimus was load balancing,

but did not raise any formal objection to the practice to Plimus.427

       Despite these efforts, PayPal continued to threaten termination, and in mid-

August 2011, it explained to Plimus that the chargeback ratio for August would be

determinative. Itshayek memorialized an August 18, 2011 call with PayPal, writing

to thank them for an earlier call and stating that “[u]ntil today, it was our

understanding that September will be the crucial month and not August” and that

Plimus had concentrated its efforts on reducing September chargebacks.428

According to PayPal internal e-mails, PayPal also threatened termination in calls

with Plimus on August 19, August 26, and September 1.429 However, based on

previous experience with other processors, neither Tal nor Itshayek believed that a

third month of excessive chargebacks would actually result in a thirty-day

termination letter.430

       Separately, on August 16, 2011, Itshayek received a request from PayPal for

information on a Plimus vendor, Home Wealth Solutions, which PayPal said Visa

was requesting because the vendor’s chargeback ratio was 1.65%.431

426
    Trial Tr. 2589:13–21 (Layman). While the Plaintiffs disapprove of the practice of mass refunds,
they do not contend that issuing mass refunds violated credit card association rules.
427
    JX 756, at 2.
428
    JX 692, at 2.
429
    JX 693, at 1; JX 702; JX 754, at 4.
430
    Trial Tr. 1416:23–1417:23 (Itshayek); id. at 1604:6–1605:6 (Tal).
431
    JSUF ¶ 175; JX 681.

                                                68
       The chargeback ratio for Visa through PayPal Pro did not exceed one percent

in August 2011,432 however, Plimus exceeded the one percent chargeback ratio

threshold again for MasterCard in August.433                 Itshayek e-mailed PayPal on

September 9, 2011 to memorialize a call PayPal had with Tal. In the e-mail, Itshayek

summarized the events and chargeback ratios of the past few months, and ended by

telling PayPal, “we would highly appreciate receiving one additional month to prove

the actions taken by Plimus to reduce and control [the chargeback] ratio and general

risk.”434 Plimus did not receive a thirty-day termination letter in September,435 and

PayPal did not notify Plimus of any further plans or threats to terminate any of

Plimus’s PayPal accounts during the rest of the month.436 However, Plimus and

PayPal continued to communicate. In one instance in late September, PayPal

reviewed a list of Plimus vendors and recommended that certain vendor categories

be “shut down if [Plimus] want[ed] to keep [their] relationship with [PayPal].”437 I

find that at the time of closing, Tal and Itshayek did not believe PayPal would

terminate Plimus’s PayPal Pro account, and believed that Plimus’s chargeback ratio

for MasterCard would not exceed one percent for September.438 An internal PayPal

432
    See e.g., JX 731; JX 857.
433
    JX 731.
434
    Id.
435
    JX 828 (PayPal did not issue a termination notice to Plimus until October).
436
    JX 754, at 4; Trial Tr. 1418:11–1419:11 (Ithshayek).
437
    JX 771 (emphasis added).
438
    JX 731; Trial Tr. 1590:20–1591:13 (Tal).

                                               69
e-mail sent on September 29, 2011 reflected that an official decision on whether to

terminate Plimus had not been made as of that date.439

       Great Hill did not receive a specific update on Visa or MasterCard chargeback

ratios for PayPal Pro after Itshayek’s July 27, 2011 e-mail, in which she wrote that

Plimus did not expect the July chargeback ratios to exceed one percent. Great Hill

concedes that it also did not ask for updates on these specific ratios after that e-mail.

Great Hill did, however, continue to track Plimus’s aggregate chargeback ratio and

calculated it from Plimus’s materials (such as the “huge excel files”) that Great Hill

had been provided with.440 The information they received and reviewed in these

materials did not provide the detail necessary to calculate the chargeback ratios by

processor and region, which were the relevant chargeback ratios for PayPal Pro

purposes. 441 However, in an August 26, 2011 e-mail, Madden (of Great Hill) noted

to Cayer that Plimus’s aggregate chargeback ratio in July continued to exceed one

percent.442 This did not prompt further inquiry by Great Hill into Plimus’s current

chargeback ratio status.

       Throughout August and September 2011 Great Hill paid close attention to the

transactions of new vendors and paid particularly close attention to Wix, which was

439
    JX 810.
440
    The “huge excel files,” so called because they were very big, were monthly reports detailing all
Plimus vendors in that month and their volume/transaction data. Trial Tr. 388:15–389:8 (Busby).
441
    Id. at 392:1–13 (Busby).
442
    JX 710; Trial Tr. 391:10–392:16 (Busby).

                                                70
still not ramping as expected.443 The slower ramp in Wix had caused Great Hill to

revise down Plimus’s projected EBITDA for the third quarter of 2011.444 The

slower-than-expected ramp worried Great Hill. For example, after Cayer reported

the September 2011 Wix run rate to Busby, Busby wrote “You’re killing me. Is there

any good news?” to which Cayer replied, “This is my life…I have lost sleep (and

hair) on these volume trends.”445 The Wix ramp up had been a key assumption in

Tal’s July 5, 2011 chargeback tables, which anticipated chargeback ratios to fall

below one percent in July and August.

              2. Tal and Busby Met in Israel in September

       Tal and Busby met in Israel on September 13, 2011.446 Plimus was hosting

an industry conference in Israel, and Busby attended at Tal’s invitation.447 During

the conference, Busby briefly met the representative for Plimus’s PayPal Israel

account, Oded Zehavi.448 This was Great Hill’s only contact with PayPal pre-

closing, and Great Hill never attempted to reach out to PayPal formally during due

diligence.449 At trial, Tal’s and Busby’s recollections of the trip differed materially.

Tal testified that during this trip he informed Busby: (1) that PayPal had threatened

443
    JX 667; JX 687; JX 737.
444
    JX 687.
445
    JX 737.
446
    JSUF ¶ 174.
447
    Trial Tr. 160:18–161:4 (Busby).
448
    Id. at 161:5–162:6 (Busby).
449
    Id. at 754:19–757:8 (Vettel).

                                          71
to terminate the PayPal Pro account; (2) that Tal did not believe they would actually

terminate that account; and (3) that they had other processors even if PayPal did

terminate.450 Tal also testified that he provided Busby with a further update on

PayPal by phone a few days before closing.451

       Busby’s recollection is entirely different. He testified that he was not told of

any threatened PayPal termination, either in Israel or in a call prior to closing,452 but

that he did remember discussing the PayPal-Plimus relationship in Israel. According

to Busby, he and Tal discussed Plimus’s goal of adding more processors, at which

point Busby asked Tal for an assurance that Plimus would still keep PayPal as a

processor, to which Tal agreed.453

       I find neither Tal nor Busby’s accounts credible. It is not credible that Tal

told Busby that PayPal, Plimus’s principal account, threatened termination and that

Busby did nothing to alert the rest of the Great Hill deal team or Great Hill’s deal

counsel. Busby’s testimony also lacks credibility. Specifically, I find it unlikely

that in the course of a discussion limited to adding processors, Busby demanded an

assurance from Tal that Plimus would maintain its PayPal relationship, despite the

fact that (per Busby) he had no reason to suspect that the Plimus-PayPal relationship

450
    Id. at 1599:2–1600:14 (Tal).
451
    Tal testified that he told Busby on this call that Plimus’s chargebacks through PayPal looked
good for the month of September and that he continued to believe there would be no termination.
Id. at 1601:15–1603:3 (Tal).
452
    Id. at 122:17–22, 159:8–160:14 (Busby).
453
    Id. at 164:12–165:16 (Busby).

                                               72
was in doubt. Furthermore, as discussed below, Busby’s muted response when he

ultimately learned that PayPal had terminated Plimus suggests that Busby already

knew there was, at least, some issue with the PayPal relationship. Most likely, I find,

Tal disclosed to Busby that Plimus and PayPal were having some dispute, but did

not disclose the extent of the issue or that it involved explicit threats of termination.

This disclosure, accompanied with a comment on the availability of other

processors, prompted Busby to seek assurance that the PayPal relationship would be

maintained. The lack of a complete disclosure also fits with Tal’s own misplaced

confidence at that time that PayPal would not, in fact, terminate its relationship with

Plimus.

               3. SGE Organized a Bring Down Call on September 12, 2011

       In preparation for closing, Klahr and Wolfe organized a “bring down call”

with Plimus management for September 12, 2011.454 The purpose of the call was to

see if there had been any changes to the business between signing the initial merger

agreement and the upcoming closing that would require the disclosure schedule,

which had accompanied the initial merger agreement, to be amended.455                           On

454
    JX 730. The call was also referred to in the organizing e-mail as a “breaches of representations
call.” Id.
455
    Id.; Trial Tr. 1910:9–1911:2 (Klahr).

                                                73
September 9, 2011, Klahr circulated a list of questions for the upcoming bring down

call, which Klahr made clear that all Plimus management were required to review.456

       Tal was unable to participate in the call.457 However, Tal spoke with Itshayek

in advance of the bring down call, and they identified three business issues

responsive to Klahr’s list of questions: (1) a potential fine related to GoClickCash,

(2) PayPal’s termination threats, and (3) the recent request from PayPal for

information on Home Wealth Solutions.458             Tal and Itshayek determined that

Itshayek, who would be participating in the call, should bring up only the request for

information on Home Wealth Solutions.459 They agreed that Itshayek should not

bring up the PayPal threats or the potential fine for GoClickCash because Plimus

had not yet received formal notices for either.460 Importantly, Tal also told Itshayek

that he would bring up both issues personally with Great Hill prior to closing.461

       Itshayek did as discussed, and during the bring down call, she raised only

Home Wealth Solutions.462 Klahr followed up with Itshayek about Home Wealth

Solutions.463   Itshayek forwarded the PayPal e-mail she had received on the

456
    JX 732.
457
    Trial Tr. 1372:12–21 (Itshayek). Most likely because Tal would be traveling to Israel for
Plimus’s conference.
458
    Id. at 1375:3–1378:10 (Itshayek).
459
    Id.
460
    Id.
461
    Id.
462
    JX 744; Trial Tr. 1378:23–9 (Itshayek); Trial Tr. 1914:20–1915:24 (Klahr).
463
    JX 758; Trial Tr. 1915:14–1916:15 (Klahr).

                                             74
vendor,464 which was in turn forwarded onto to Perkins Coie,465 who provided it to

K&E on behalf of Great Hill.466 The supplemental disclosure schedule attached to

the amended merger agreement467 included a disclosure which stated that Plimus had

received an information request regarding Home Wealth Solutions.468               The

supplemental disclosure schedule did not, however, reference the potential

GoClickCash fine or the threatened PayPal termination.469

       Itshayek had been notified during an August call with PayPal that a fine might

be imposed on Plimus due to a MasterCard inquiry related to GoClickCash.470 On

September 22, 2011, after the bring down call, PayPal informed Itshayek that a

$200,000 fine would, in fact, be imposed regarding GoClickCash.471 Itshayek shared

this information with Tal.472 Although Tal testified that, on a call with Busby a few

days prior to closing, he informed Busby of the GoClickCash fine,473 the

supplemental disclosure schedule did not reference this fine or GoClickCash.474

464
    JX 761.
465
    JX 762.
466
    JSUF ¶ 175; JX 766.
467
    JSUF ¶ 152.
468
    JX 797, at 6.
469
    Id.
470
    Trial Tr. 1191:2–1191:17 (Itshayek).
471
    JSUF ¶ 176.
472
    Id.
473
    Trial Tr. 1601:15–1603:21, 1607:12–24 (Tal).
474
    JSUF ¶ 177.

                                              75
       Tal and Itshayek did not raise PayPal Pro excessive chargebacks, the

GoClickCash fine, or PayPal’s threats of termination to the Plimus Board of

Directors.475 As a result, Goldman, Klahr, Herzog, and Kleinberg were unaware that

Plimus had exceeded one percent chargeback ratios in June, July, or August 2011,

or that Plimus was being fined related to GoClickCash.476 They were similarly

unaware that PayPal had threatened termination of Plimus’s account.477 The Plimus

Board of Directors did not a hold another meeting after the August 2, 2011 meeting

approving the initial merger agreement.478

       H. The Deal Closes

       The Parties entered into the Amended Agreement and Plan of Merger (the

“Merger Agreement”) on September 29, 2011. At issue in this action are four

representations and warranties in the Merger Agreement, and the provisions related

to indemnification.

              1. Relevant Representations and Warranties in the Merger Agreement

       Article 3 of the Merger Agreement lists representations and warranties.479

Section 3.09, titled “Financial Statements,” includes the representation that

475
    Trial Tr. 1425:15–1426:13 (Itshayek); id. at 1616:8–1617:3 (Tal).
476
     Id. at 1811:10–1812:2, 1814:8–24, 1906:13–16 (Klahr); id. at 2069:19–23, 2196:20–23
(Goldman); id. at 2401:12–2402:12 (Herzog); id. at 2490:21–2491:11, 2522:7–20 (Kleinberg).
477
    Id. at 1816:11–1817:5 (Klahr); id. at 2102:9–12 (Goldman); id. at 2401:12–2402:12 (Herzog);
id. at 2490:17–20, 2523:1–4 (Kleinberg).
478
    Id. at 2490:7–12 (Kleinberg).
479
    JX 796, at 31–49.

                                              76
“[n]either the Company nor any of its Subsidiaries, taken as a whole, have any

material liabilities or obligations (whether accrued, absolute, contingent,

unliquidated or otherwise, whether or not known, whether due or to become due and

regardless of when asserted),” with certain exceptions.480

       Under Merger Agreement Section 3.16, titled “Contracts,” all contracts to

which Plimus was a party were required to be listed in the disclosure schedule that

accompanied the Merger Agreement, except for certain contracts that did not meet

minimum thresholds.481 As to the contracts that were required to be listed, Section

3.16 included a representation that:

       Neither the Company nor any Subsidiary of the Company, nor, to the
       Company’s Knowledge, any of the other parties thereto, is in default in
       complying with any material provisions thereof, nor has the Company
       or any of its Subsidiaries received written notice of any such default,
       and, to the Knowledge of the Company, no condition or event or facts
       exist which, with notice, lapse of time or both, would constitute a
       default thereof on the part of the Company . . . . There is no material
       dispute under any Contract required to be disclosed in Section 3.16 of
       the Disclosure Schedule.482

Plimus’s contract with PayPal was among those listed in the disclosure schedule.483

       In Section 3.23, “Certain Business Practices,” of the Merger Agreement, there

is a representation that:

480
    JX 796, at 37–38.
481
    Id. at 42–43.
482
    Id. at 43.
483
    JX 648, at 18–19.

                                         77
       The Company . . . is and has been in compliance with the bylaws and
       operating rules of any Card System(s), the Payment Card Industry
       Standard (including the Payment Card Industry Data Security
       Standard), the operating rules of the National Automated Clearing
       House Association, the applicable regulations of the credit card
       industry and its member banks regarding the collection, storage,
       processing, and disposal of credit card data, and any other industry or
       association rules applicable to the Company . . . in connection with their
       respective operations.484

Section 3.26, “Significant Customers; Suppliers,” contains the representation that:

       There are no suppliers of products or services . . . that are material to
       [the Company’s] business with respect to which alternative sources of
       supply are not general available on comparable terms and conditions in
       the marketplace. No supplier of products or services to the Company .
       . . had notified the Company . . . that it intends to terminate its business
       relationship with the Company . . . .485

               2. Indemnification Provisions in the Merger Agreement

       Article 10 of the Merger Agreement addresses “Certain Remedies.” Section

10.01, defines the survival period of the representations and warranties of the Merger

Agreement; the four representations and warranties restated above are included in

“all other representations and warranties . . . [which] terminate on the date which is

twelve (12) months following the Closing Date.”486             Section 10.02 is titled

“Indemnification Obligations; Claims,” and details the indemnification obligations

of “Effective Time Holders.” 487 An “Effective Time Holder” is defined, in pertinent

484
    JX 796, at 47–48.
485
    Id. at 49.
486
    Id. at 68.
487
    Id. at 69.

                                           78
part, as “each holder of Company Capital Stock as of immediately prior to the

Effective Time.”488 Under Section 10.02(a),

          Subject to the terms of this Article 10, after the effective time, each
          Effective Time Holder, individually as to himself, herself or itself only
          and not jointly as to or with any other Effective Time Holder, shall
          indemnify Parent and the Surviving Corporation and each of their
          respective Subsidiaries and Affiliates, and each of their respective
          directors, officers . . . (each a “Parent Indemnified Person”) against
          such Effective Time Holder’s Pro Rata Share of any actual loss,
          liability, damage, obligation, cost deficiency, Tax, penalty, fine or
          expense, … (collectively, “Losses” and individually” a “Loss”) which
          such Parent Indemnified Person suffers, sustains or becomes subject to,
          as a result of, in connection with or relating to: (i) any breach by the
          Company of any representation or warranty of the Company set forth
          herein, in any Disclosure Schedule or in the Company Closing
          Certificate; (ii) any breach by the Company of any of the covenants or
          agreements of the Company set forth herein to be performed on or
          before the Effective Time . . . ; or (iii) any fines, penalties or similar
          assessments imposed against the Company . . . for violating applicable
          credit card association policies, procedures, guidelines or rules with
          respect to excessive chargebacks or similar recurring payments during
          the period between the Agreement Effective Date and the one year
          anniversary of the Closing Date, by a credit card association, card-
          issuing bank, other credit card issuer or third-party payment processor
          with respect to, and only to the extent of, transactions occurring prior
          to the Closing Date.489

          Section 10.03, titled “Certain Limitations,” provided a limitation on

indemnification liability of Effective Time Holders for breaches of the

representations and warranties, and states, “in no event shall the Effective Time

Holders’ aggregate liability for Losses pursuant to Section 10.02(a)(i) . . . exceed, in

488
      Id. at 12.
489
      Id. at 69.

                                             79
the aggregate, the Escrow Amount, subject to the other terms of this Article 10.”490

The Escrow Amount of $9.2 million491 was funded by withholding a pro rata share

of each Effective Time Holder’s merger consideration,492 and would be held for the

Escrow Period (twelve months after closing)493 or until any prior claims were finally

adjudicated.494 Under Section 10.03(b):

       The Escrow Amount will be the sole source of funds from which to
       satisfy the Effective Time Holders’ indemnification obligations under
       Section 10.02(a)(i) . . . . In no event shall any individual Effective Time
       Holders’ liability for Losses pursuant to Section 10.02(a)(i) . . . exceed,
       in the aggregate, the lesser of (x) such Effective Time Holder’s Pro Rata
       Share of the Escrow Amount, or (y) as to each and any claim for
       indemnification under Section 10.02(a)(i) . . . , such Effective Time
       Holder’s Pro Rata Share of the Losses relating to such claim, subject to
       the other terms of this Article 10.495

Under Section 10.04, “Effect of Knowledge,” of the Merger Agreement:

       By virtue of this Agreement, each Effective Time Holder agrees that
       Parent’s rights to indemnification for the express representations and
       warranties set forth herein are part of the basis of the bargain
       contemplated by this Agreement; and Parent’s rights to indemnification
       shall not be affected or waived by virtue of . . . any knowledge on the
       part of the Parent of any untruth of any such representation or warranty
       of the Company expressly set forth in this Agreement, regardless of
       whether such knowledge was obtained through Parent’s own

490
    Id. at 71.
491
    Id. at 13.
492
    Id. at 22. “Pro Rata Share” is defined as the percentage of Total Outstanding Common Shares
held by the Effective Time Holder as of the Effective Time. Id. at 17.
493
    Id. at 22.
494
    Id. at 74.
495
    Id. at 71.

                                              80
       investigation or through disclosure by the Company or another Person
       . . . .496

Finally, under Section 10.10, “Exclusive Remedy:”

       Following the Closing, except (a) in the case of fraud or intentional
       misrepresentation (for which no limitations set forth herein shall be
       applicable), . . . , the sole and exclusive remedies of the parties hereto
       for monetary damages arising out of, relating to or resulting from any
       claim for breach of any covenant, agreement, representation or
       warranty set forth in this Agreement, the Disclosure Schedule, or any
       certificate delivered by a party with respect hereto will be limited to
       those contained in this Article 10.497

               3. The Merger Closed on September 29, 2011

       On September 29, 2011, the Merger Agreement was executed and the merger

was closed.498 Tal, Goldman (as managing director of both SGE and SIG Fund),

Herzog, and Kleinberg were all signatories to the Merger Agreement.499 The merger

was funded by approximately $90 million in cash from Great Hill, $23 million in

debt financing from Madison Capital Funding LLC, and $3 million in equity that

Tal rolled over.500 As envisioned in the Merger Agreement, $9.2 million was

deposited in an escrow account, where it remains today. 501 On July 20, 2011, in

anticipation of the merger, SGE donated preferred shares in Plimus to two charities,

Defendants Kids Connect Charitable Fund and Donors Capital Fund, Inc. (the

496
    Id. at 72.
497
    Id. at 74–75.
498
    JSUF ¶ 152.
499
    JX 796, at 84, 87–91.
500
    JSUF ¶ 153.
501
    Id. ¶¶ 154, 155.

                                          81
“Charity Defendants”).502    Therefore, Kids Connect and Donors Capital were

“Effective Time Holders,” as defined by the Merger Agreement. Itshayek, Tal,

Goldman on behalf SIG Fund, Herzog, Kleinberg, and representatives of Kids

Connect and Donors Capital all executed letters of transmittal for their stock in

Plimus.503

       Itshayek received $355,227 in merger proceeds, of which $35,997 is held in

the escrow account.504 Tal received $5,274,775 in merger proceeds; $478,656 is

held in escrow, $3,000,000 was rolled over, and $678,505 was left with Plimus in

the form of a promissory note.505 In this context, “merger proceeds” does not include

the payments Tal received from his side letter agreements. SIG Fund received

$49,908,911 in merger proceeds, $3,323,060 is held in escrow.506 Herzog and

Kleinberg both received $21,170,686 in merger proceeds, and $1,972,611 of each of

their respective merger proceeds is held in escrow.507 Kids Connect received

$2,201,317 in merger proceeds, $146,569 of which is held in escrow, and Donors

Capital received $8,482,419 in merger proceeds, $605,068 of which is held in

escrow.508

502
    Id. ¶ 58.
503
    Id. ¶¶ 144–150.
504
    Id. ¶ 157.
505
    Id. ¶ 159.
506
    Id. ¶ 160.
507
    Id. ¶¶ 161, 163.
508
    Id. ¶¶ 165–66.

                                         82
       I. Plimus Post-Merger Events

       Plimus was renamed BlueSnap after the transaction closed;509 for simplicity I

will continue to refer to the post-closing entity as Plimus. PayPal notified Plimus on

September 30, 2011 that the fine related to GoClickCash would appear on its

processor statement as “MasterCard Violation-July 2011.” 510 Plimus asked for more

detail on October 6, and PayPal, for the first time,511 told Plimus that the underlying

violation was a BRAM (or “Business Risk Assessment and Mitigation”) violation,512

which are considered severe violations.513 Plimus asked PayPal for the actual

MasterCard notice; a PayPal risk analyst instead prepared a short letter on PayPal

letterhead that stated, with little detail, that PayPal was debiting Plimus $200,000 for

a BRAM violation related to GoClickCash.514 At trial, the Plaintiffs’ and the

Defendants’ industry experts disagreed whether the underlying violation was, in fact,

a BRAM violation.515 In any event, PayPal considered the violation to be a BRAM

violation, but did not share this perspective with Plimus until October 6, 2011.

509
    Trial Tr. 240:12–241:2 (Busby).
510
    JX 827, at 3.
511
    In internal e-mails, PayPal had previously referred to the GoClickCash violation as a BRAM
violation, but October 6 was the first time that PayPal told Plimus it was such. JX 756.
512
    JX 827, at 2.
513
    Violations of MasterCard’s BRAM program are considered very serious threats to a merchant’s
relationship with their processors, the acquiring banks, and the card networks. Trial Tr. 2542:16–
2543:21 (Layman); id. at 2877:8–18, 2890:4–8 (Moran).
514
    JX 839; JX 3065, at 1–4. The PayPal risk analyst denied having a copy of the notice; however,
internal e-mails showed he was provided one. JX 827, at 1; JX 819.
515
    Based on this original notice, the violation does not appear to be a BRAM violation; for
example, the MasterCard notice in fact details two different violations, and does not use the term
BRAM or cite the MasterCard rule numbers specifically defined as BRAM. Apparently, payment

                                               83
       Plimus’s PayPal Pro chargeback ratio for MasterCard in September 2011 did

not exceed one percent.516 Nonetheless, on October 7, 2011, PayPal sent Plimus a

notice of termination, thereby ending its relationship as Plimus’s largest processor.

Following a call with Itshayek, PayPal sent a formal notice in the afternoon of

October 7, 2011. According to the formal notice, “upon review your account poses

an unreasonably high risk exposure to PayPal.”517 PayPal chose to terminate

Plimus’s PayPal Pro account, and it also terminated Plimus’s other PayPal accounts;

PayPal Wallet and PayPal Israel, and set a termination date for all three accounts of

November 11, 2011.518 Itshayek informed Tal of the termination on October 7,519

and eventually forwarded the e-mails and notices to Tal on October 9, 2011.520

       On the day PayPal terminated its relationship with Plimus, Tal was flying back

from a business trip to Germany, and he did not receive notice of the PayPal

termination until his flight landed in California on Friday, October 7, 2011, when he

spoke with Itshayek.521 Tal observed the Jewish holiday of Yom Kippur from the

experts disagree on exactly what a “BRAM violation” is. The Plaintiffs’ payment expert testified
at trial that the two violations detailed in the notice were not specifically defined as BRAM
violations, but in his opinion were considered as severe and, again, while not defined in the rules
as such, were considered by the industry to be violations of a broader group that the industry
referred to as “BRAM Rules and Standards.” Trial Tr. 2542:10–2543:3, 2582:5–2587:16
(Layman); Id. at 2877:8–2880:14 (Moran).
516
    JX 857; Trial Tr. 1591:7–10 (Tal).
517
    JX 828, at 1.
518
    Id. at 4–6.
519
    Trial Tr. 1594:17–1595:5 (Tal).
520
    JX 832.
521
    JX 3088; Trial Tr. 1594:22–1595:5 (Tal).

                                                84
night of October 7, 2011 to sundown on October 8, 2011, and conducted no business

during that period.522 In the late afternoon of October 7, 2011, Busby had sent an e-

mail to Tal, seeking to schedule a Tuesday meeting to follow-up on Tal’s European

business trip.523 Tal responded to this e-mail on Sunday, October 9, 2011. In this e-

mail Tal confirmed a Tuesday time for this meeting and added “We got a termination

letter from PayPal meeting them tomorrow to get more update.”524 Busby responded

by e-mail on Monday, October 10, 2011, “Ok. Let’s discuss on Tuesday. Are we on

schedule with Litle? Do you anticipate any issues in finding a North American

processing solution?”525 Plimus had entered into a processing agreement with Litle,

another United States-based payment processor, by that point.526                    Busby was

referring to replacing PayPal Pro with Litle.

       Testimony at trial from Tal and Busby regarding Great Hill’s reaction to the

PayPal news is irreconcilable. Busby testified that he received the news in a

“shocking call” from Tal while driving “on the Mass Pike, westbound, near the

522
    Trial Tr. 1595:6–1596:20 (Tal).
523
    JX 834, at 2. Busby first sent an e-mail earlier in the day to request this meeting. Tal had
responded to this e-mail: “Let’s do that and other issues like asknet and budget on Monday.” Busby
then wrote back that Monday was a holiday and their offices would be closed. Busby said he was
nonetheless available Monday but suggested Tuesday would be better, so that Vettel could join
the call. Busby ended his e-mail with “Hope the travels back from Europe went well.” JX 834;
JX 3087.
524
    JX 834, at 1.
525
    Id.
526
    JSUF ¶ 178.

                                               85
Brighton exit,”527 before he received Tal’s e-mail.528 As a result, Busby testified, his

response to Tal’s e-mail was muted, because Tal had already informed him by phone

of the termination.529 According to Busby, he was shocked when he received the

news by phone. Tal, by contrast, denies that any such termination call took place.530

I do not find Busby’s testimony about this termination call credible.531 I instead find

that Tal first notified Busby about the PayPal termination via e-mail, a finding

consistent with the text of the e-mail. I note that I have already found that Tal did

not disclose PayPal’s termination threats to Busby in Israel or in phone calls prior to

527
    Trial Tr. 157:3–15, 222:16–23 (Busby).
528
    Id. at 156:23–157:2, (Busby). Busby testified that he then called Vettel and Cayer to relay the
news. Id. at 157:23–158:9; 554:8–560:13 (Busby). Vettel testified the call from Busby gave him
a “sickening feeling.” Id. at 652:3–653:8 (Vettel). Cayer also remembers how his “stomach
churned” when he received the call from Busby with news of the termination. Id. at 971:5–974:2
(Cayer).
529
    Id. at 220:2–224:17 (Busby).
530
    Id. at 1588:4–14, 1595:11–15, 1596:16–20 (Tal).
531
    Busby does not remember the date or time of the call, only that he was most likely driving home
from work. Id. at 202:2-203–4 (Busby). Busby testified that he immediately called Vettel, who in
turn testified he received a call from Busby but similarly could not remember the date and time of
this follow-on call. Id. at 801:11–19 (Vettel). Cayer also testified to receiving a follow on call and
guessed it was around a week after closing, which, if taken literally, would place the call before
PayPal terminated Plimus on October 7. Id. at 971:5–13 (Cayer). If Busby’s testimony is to be
believed, the phone call could only have occurred after the Friday October 7, 2011 notice of
termination and before Busby’s Monday October 10, 2011 response to Tal’s e-mail. Phone records
produced for the trial do not show any phone calls from Tal’s work or cell phones to Busby after
the termination letter was received on October 7 and before Busby’s October 10, 2011 response.
While I find that this call did not take place before Busby’s October 10 response, Busby is, most
likely, truthfully recollecting a call that took place after October 10. According to Tal and Busby’s
e-mail exchange, Tal planned to meet PayPal the following day. Tal no doubt updated Busby after
this meeting, at which point Busby would have found out that the termination was real, despite
Tal’s misplaced confidence and belief that his connection to senior officials at PayPal would save
the relationship; and that the termination involved all Plimus’s PayPal accounts, which was not
made clear in Tal’s initial e-mail.

                                                 86
closing, but I find that Tal did disclose some level of problem with PayPal to Busby

in Israel, which would explain Busby’s muted response.532 In other words, before

Tal’s e-mail, Busby was aware that PayPal’s relationship with Plimus was troubled,

but was unaware of PayPal’s threats to terminate because Tal had withheld those

threats from Great Hill.

       Plimus’s PayPal Pro and PayPal Wallet accounts terminated in November

2011;533 Plimus’s PayPal Israel account was not terminated until December 2011.534

Plimus temporarily lost the ability to accept PayPal Wallet as a payment method. In

January 2012, Plimus released a workaround, where Plimus’s vendors would create

their own PayPal Wallet accounts, and then turn them over to Plimus to manage.535

The loss of PayPal as a processor and the temporary loss of PayPal wallet as a

payment method affected Plimus’s ability to do business. It also hurt Plimus’s

reputation, as it followed on the heels of the loss of Paymentech.              Additionally,

PayPal placed Plimus on the MATCH list on November 14, 2011, with reason code

“Excessive Chargebacks.”536

532
    Tal’s PayPal termination e-mail to Busby did not explain that the PayPal termination applied
beyond the PayPal Pro account to the PayPal Wallet and PayPal Israel account. JX 834. The lack
of this critical information further explains Busby’s muted response.
533
    Trial Tr. 1057:24–1058:4 (Cayer).
534
    Trial Tr. 1058:5–7 (Cayer); JX 883, at 2.
535
    JX 950.
536
    JX 921, at 5–6.

                                              87
      PayPal was not Plimus’s only stumbling block after closing. Plimus entered

into an agreement with Merchant e-Solutions, a payment processer, and began

processing transactions by November 13, 2011.537 Merchant e-Solutions terminated

Plimus on January 5, 2012, and added Plimus to the MATCH list under reason code

“Violation of MasterCard Standards.”538 In a letter “To Our Partners,” Great Hill

gave an annual report for the year ending on December 31, 2011, in which Great

Hill noted that “Plimus was the only portfolio company to experience decline in

valuation, as the company removed a number of high-risk clients from its payments

platform, resulting in a negative short-term impact.”539 Great Hill wrote that Plimus

had been terminated by PayPal and Merchant e-Solutions, “related to MasterCard

violations by certain Plimus clients. Specifically, Plimus’[s] platform had been used

by two customers to sell fraudulent ‘get-rich-quick’ schemes.”540 According to

Great Hill, Plimus took “several corrective actions, including the immediate removal

of a number of high-risk customers (which account for approximately 10% of

volume),” which meant that Plimus fell short of its processing volume expectations.

Great Hill wrote, “despite the near-term financial impact, our original investment

thesis [in Plimus] remains intact and the longer-term prognosis for the business

537
    JSUF ¶¶ 179–80.
538
    Id. ¶¶ 181–82.
539
    JX 922, at 2.
540
    Id. at 4.

                                         88
remains highly favorable.”541 Great Hill also disclosed that Plimus’s “financial

performance has resulted in a financial covenant breach in Q4’11.”542

       A business summary report of Plimus’s performance in the fourth quarter of

2011 similarly noted the termination by two processors, which related to two Plimus

customers who sold fraudulent “get rich quick” schemes.543 The summary noted that

Plimus took corrective action following the processor terminations, including a

January 2012544 Plimus purge of approximately 500 vendors in “higher-risk

merchant categories (auction/bid, forex software, media download, and virtual

currency) and stopped accepting new merchants in these categories.”545 In the

summary, Great Hill noted that Plimus also changed its onboarding process, which

added more review before new vendors could begin processing transactions.546

Great Hill wrote that “the impact of these events and the decision to remove the

higher-risk customers resulted in a decline in processing volume in December versus

expectations, and we anticipate lower volumes into 2012.”547 In the business

summary report of Plimus’s performance in the first quarter of 2012, Great Hill

noted that Plimus’s “key processing relationships appear to be stabilized.”548

541
    Id.
542
    Id.
543
    JX 968.
544
    JX 2108, at 3.
545
    JX 968.
546
    Id.
547
    Id.
548
    JX 926.

                                         89
       Tal was fired as CEO in August 2012.549 Great Hill filed this action on

September 27, 2012, two days before the funds held in escrow were scheduled to be

released. Additionally, SGE has not yet paid Tal the SGE Earn-Out.550 The result

of this litigation could affect SGE’s profit on the sale of Plimus, which is in turn

used to calculate Tal’s transaction bonus.551

       Great Hill made the decision to invest $20 million into Plimus during 2012

and 2013.552 Plimus received an additional $28 million of funding in 2014, of which

$15 million came from outside investor Parthenon Capital Partners.553 In 2014,

Plimus largely abandoned the reseller model and was instead forced to operate as a

payment facilitator.554     Processors and acquiring banks preferred the payment

facilitator model,555 which, compared to the reseller model, mandated much greater

transparency on the identity of Plimus’s vendors.556

       J. Procedural History

       The Complaint in this action was filed on September 27, 2012. Since then,

this Court has issued written Opinions on November 15, 2013,557 November 26,

549
    Trial Tr. 1060:23–1061:4 (Cayer).
550
    Id. at 1447:23–1448:9 (Tal).
551
    Id. at 1448:10–23 (Tal); id. at 2206:12–2207:6 (Goldman).
552
    JX 927; JX 1035; JX 1036.
553
    JX 1055.
554
    Trial Tr. 1674:10–1675:2 (Dangelmaier).
555
    Id. at 1709:22–1710:5 (Dangelmaier).
556
    Id. at 1673:18–1675:2 (Dangelmaier).
557
    Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch.
2013).

                                             90
2014,558 and July 26, 2017.559 For a complete procedural history, I refer the reader

to those Opinions. The matter was bifurcated, and trial on the Defendants’ liability

took place over ten days from November 29, 2017 to December 12, 2017. I heard

Post-Trial Oral Argument on August 7, 2018.

                              II. LEGAL ANALYSIS

      The Plaintiffs allege that Tal, Itshayek, Goldman, and Klahr committed fraud

and fraudulent inducement in selling Plimus to Great Hill. The Plaintiffs further

allege that Herzog, Kleinberg, the SIG Fund, and SGE (as well as Goldman and

Klahr if they are not implicated in the fraud) aided and abetted this fraud, and that

all the Defendants, except the two Charity Defendants, committed civil conspiracy.

Great Hill seeks indemnification against Tal, Itshayek, Herzog, Kleinberg, SIG

Fund, SIG Management, and the Charity Defendants for the losses it suffered as a

result of breaches of the representations and warranties in the Merger Agreement.

Furthermore, Great Hill argues that, given the alleged fraud, indemnification should

not be limited to the escrow fund established by the Merger Agreement, and that

liability should attach to all indemnifying defendant regardless of their participation

in or knowledge of the alleged fraud. Finally, the Plaintiffs bring unjust enrichment

558
    Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 2014 WL 6703980
(Del. Ch. Nov. 26, 2014).
559
    Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 2017 WL 3168966
(Del. Ch. July 26, 2017).

                                          91
claims against Tal, Itshayek, Herzog, Kleinberg, SIG Fund, and the Charity

Defendants. Liability and damages were bifurcated, and this Opinion addresses

issues of liability only, assuming damages. Much of this action is based on the fraud

and fraudulent inducement claims; I turn to them first.

          A. The Fraud and Fraudulent Inducement Claims Against Goldman, Klahr,
          Tal, and Itshayek

          While the Plaintiffs, unhelpfully, argue in briefing that the “fraud in this action

was extensive, and cannot be recounted in full here,” they “highlight [] four major

interrelated components” of the fraud.560             The Plaintiffs highlight: (1) the

Paymentech termination, (2) Plimus’s history of violations and risk monitoring

systems, (3) the dispute over the Founders’ Earn-Out, and (4) PayPal’s notices of

violations and threats to terminate.

                 1. The Legal Standard

          The Plaintiffs allege that Goldman, Klahr, Tal, and Itshayek (the “Fraud

Defendants”) fraudulently induced Great Hill to bid for Plimus, enter into the Merger

Agreement, and close the transaction. The Plaintiffs similarly allege that Goldman,

Klahr, Tal, and Itshayek committed fraud on the same grounds. Under Delaware

560
      Pls. Opening Post-Tr. Br. 162.

                                              92
law, the elements of fraudulent inducement and fraud are the same.561 The elements

of fraud are:

       (1) a false representation, usually one of fact, made by the defendant;
       (2) the defendant's knowledge or belief that the representation was
       false, or was made with reckless indifference to the truth; (3) an intent
       to induce the plaintiff to act or to refrain from acting; (4) the plaintiff's
       action or inaction taken in justifiable reliance upon the representation;
       and (5) damage to the plaintiff as a result of such reliance.562

It is beneficial to first expand on several of these elements before applying them to

the facts of this case.

       A false representation is not only an “overt misrepresentation”—that is, a

lie—but can also be a “deliberate concealment of material facts, or [] silence in the

face of a duty to speak.”563         The Plaintiffs allege that the Fraud Defendants

committed all three types of false representation at various times. To show active

concealment, a plaintiff must prove that the defendant “took some action affirmative

in nature designed or intended to prevent, and which does prevent, the discovery of

facts giving rise to the fraud claim, some artifice to prevent knowledge of the facts

or some representation intended to exclude suspicion and prevent inquiry.” 564              A

561
    Trascent Mgmt. Consulting, LLC v. Bouri, 2018 WL 4293359, at *12 (Del. Ch. Sept. 10, 2018);
Smith v. Mattia, 2010 WL 412030, at *5 n.37 (Del. Ch. Feb. 1, 2010); Haase v. Grant, 2008 WL
372471, at *2 (Del. Ch. Feb. 7, 2008).
562
    E.I. DuPont de Nemours & Co. v. Fla. Evergreen Foliage, 744 A.2d 457, 461–62 (Del. 1999);
Stephenson v. Capano Dev., Inc., 462 A.2d 1069, 1074 (Del. 1983); see also Trascent Mgmt.
Consulting, 2018 WL 4293359, at *12.
563
    Stephenson v. Capano Dev., 462 A.2d 1069, 1074 (Del. 1983).
564
    Metro Comm. Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.3d 121, 150 (Del. Ch.
2004) (quoting Lock v. Schreppler, 426 A.2d 856, 860 (Del. Super. 1981)).

                                              93
duty to speak can arise before the consummation of a business transaction, when a

party to that transaction acquires information that the speaker “knows will make

untrue or misleading a previous representation that when made was true.”565

       After showing that a false representation was made, a plaintiff must show that

the defendant had knowledge of the falsity of the representation or made the

representation with reckless indifference to the truth. The Plaintiffs here allege that

Goldman and Klahr, given their access to information and their duties as directors,

made representations on several occasions with such reckless indifference. Ordinary

negligence is insufficient to show reckless indifference; the Plaintiffs must show, for

example, that Goldman and Klahr “consciously ignored specific warning signs”

related to alleged issues.566

       Having shown a false representation and knowledge of the falsity, a plaintiff

must show that the defendants intended for the plaintiff to rely on the false

representation.     To establish this requisite scienter, a plaintiff can show the

defendants either “committed the misstatement recklessly or with intent.”567 In this

context, recklessness is “an extreme departure from the standards of ordinary

care.”568 Recklessness or intent can be shown through circumstantial evidence.569

565
    In re Wayport, Inc. Litig., 76 A.3d 296, 323 (Del. Ch. 2013) (quoting Restatement (Second) of
Torts § 551 (1977)).
566
    Metro Comm. Corp. BVI, 854 A.3d at 147.
567
    Deloitte LLP v. Flanagan, 2009 WL 5200657, at *8 (Del. Ch. Dec. 29, 2009)
568
    Id. (quoting In re Digital Island Sec. Litig., 357 F.3d 322, 332 (3d Cir. 2004)).
569
    Id.

                                               94
For example, in Deloitte LLP v. Flanagan, a partner at an accounting firm was

accused of trading in the securities of his clients and making fraudulent

misrepresentations about this trading.570 At the summary judgment stage in Deloitte

LLP, this Court found that there was a reasonable inference of scienter based on the

“magnitude of unauthorized trades, the incredibly prescient trading in those clients

for which [the defendant] had material nonpublic information, along with his misuse

of the Trading & Tracking system.”571 The timing of misrepresentations is also

informative, especially when made during a due diligence investigation.572 Facts

that establish a motive and opportunity to commit common law fraud can also be

used to establish scienter.573

       To commit fraud, not only must a defendant have intended for the plaintiff to

rely on a false representation, but the plaintiff must have taken, or refrained from,

action in justifiable reliance upon that representation. This reliance element of fraud

has several facets. As an initial matter, the plaintiff must have actually relied.574 For

example, “a party who gains actual knowledge of the falsity of a representation,

structures a contract to address the risk of loss associated with the false

570
    Id., at *1.
571
    Id., at *8.
572
    Paron Cap. Mgmt., LLC v. McConnon, 2012 WL 2045857, at *6 (Del. Ch. May 22, 2012).
573
    Deloitte LLP, 2009 WL 5200657, at *8.
574
    “To prove common law fraud, the recipient of the false representation ‘must in fact have acted
or not acted in justifiable reliance’ upon it.” Universal Enter. Grp., L.P. v. Duncan Petroleum
Corp., 2013 WL 3353743, at *14 (Del. Ch. July 1, 2013) (quoting NACCO Industries, Inc. v.
Applica Inc., 997 A.2d 1, 29 (Del. Ch. 2009)).

                                               95
representation, and proceeds to closing cannot claim justifiable reliance.”575 This

Court sometimes explicitly separates from justifiable reliance the requirement that

reliance be reasonable.576 A plaintiff’s diligence efforts can be evidence that her

reliance on a false representation was reasonable because she made efforts to verify

the representation and discovered no reason to doubt its truth. 577 The fact that a

plaintiff’s diligence efforts do not uncover fraud does not render such efforts

unreasonable, especially when the fraud was intentionally hidden.578 Whether

reliance is justifiable is an objective standard. 579 In addition to being reasonable,

justifiable reliance also “requires that the representations relied upon involve matters

which a reasonable person would consider important in determining his course of

action in the transaction in question.”580 In other words, a plaintiff can be said to

“rely” on a matter only when it is material to the action she takes, or from which she

forbears. For such a reliance to be actionable, the inducing “representation must not

575
    Id.
576
    See e.g., Stephenson v. Capano Dev., 462 A.2d 1069, 1074 (Del. 1983) (“the plaintiff [at
common law] had to demonstrate that he reasonably or justifiably relied on the defendant's
statements”); Standard General L.P. v. Charney, 2017 WL 6498063, at *12 (Del. Ch. Dec. 19,
2017) (“To prove fraud under Delaware law, a party must show, among other things, reasonable
reliance on a false representation.”).
577
    Paron Cap. Mgmt., LLC, 2012 WL 2045857, at *7.
578
    Cobalt Operating LLC v. James Crystal Enters., LLC, 2007 WL 2142926, at *28 (Del. Ch. July
20, 2007).
579
    Trascent Mgmt. Consulting, LLC v. Bouri, 2018 WL 4293359, at *12 (Del. Ch. Sept. 10, 2018).
580
    Craft v. Bariglio, 1984 WL 8207, at *8 (Del Ch. Mar. 1, 1984).

                                              96
only be material, but must concern ‘an essential part of the transaction.’”581 Relying

on this understanding of the law, I turn to the Plaintiffs’ allegations of fraud.

             2. The Paymentech Termination

      Paymentech communicated the termination of its business relationship with

Plimus via letters to Plimus of February 4, February 14, March 1, and March 3, 2011.

The Plaintiffs allege that Great Hill was not provided with these four Paymentech

termination letters, and that because the letters were responsive to due diligence

requests, including the June 2, 2011 diligence request, the omission was a “deliberate

concealment of material facts” sufficient to support a finding of fraud. 582 The

Plaintiffs further argue that a May 18, 2011 legal disclosure that described the

termination as “mutual” was a fraudulent misrepresentation. They point out that an

accurate disclosure was part of an early draft disclosure schedule prepared by

Perkins Coie, and note that this accurate disclosure was removed from the draft

disclosure schedule that was provided to Great Hill. I turn first to the alleged

concealment of the termination letters.

581
    E.I. DuPont De Nemours & Co. v. Fla. Evergreen Foliage, 744 A.2d 457, 462 (Del. 1999)
(quoting Nye Odorless Incinerator Corp. v. Felton, 162 A. 504, 512 (Del. 1931)).
582
    Stephenson v. Capano Dev., 462 A.2d 1069, 1074 (Del. 1983).

                                           97
                         a. Tal, Itshayek, Goldman, and Klahr Did Not Knowingly
                         Conceal the Paymentech Termination Letters from Great Hill

          All the Fraud Defendants argue that the Paymentech termination letters were

disclosed. Nevertheless, the Plaintiffs have shown that Great Hill never received

them—neither during nor after the bidding process. The Plaintiffs argue generally

that the “Fraud Defendants concealed material information;”583 however, they make

no specific allegations beyond the fact that Great Hill never received the letters.

SGE, and therefore Goldman and Klahr, noticed that the letters were not in the data

room in early May and asked Perkins Coie to release them, and expressed an

understanding that the Paymentech termination had been resolved and was ordinary

course. Goldman and Klahr subsequently believed that the letters had been released

to the data room. As a result, Goldman and Klahr had no knowledge of the omission

of the letters, nor were they recklessly indifferent to the omission, as they had no

responsibility regarding the data room or responding to diligence requests. Itshayek

did have responsibility to respond to diligence requests that were directed to her, but

she also believed that the letters had previously been placed in the data room.

Itshayek told Tal that she believed PwC had yet to see the letters in June, when PwC

performed on-site diligence. She gave physical copies to Tal, which he offered to

PwC. PwC, however, declined to take the documents from Tal, because it, too,

583
      Pls. Opening Post-Tr. Br. 166.

                                            98
believed that the letters were available in the data room. Tal has similarly maintained

that he believed the letters were in the data room, and this belief is corroborated both

by his assent to their release to the data room when Perkins Coie asked for his

permission to do so, and by his offer of the documents to PwC. Therefore, I find

that none of the Fraud Defendants intentionally concealed these documents. No

finding of fraud, therefore, can be based on failure to provide the Paymentech

correspondence to Great Hill.

                    b. The Representation Describing the Paymentech Termination
                    As “Mutual” Was False

         Tal, Itshayek, Goldman, and Klahr had all reviewed the Paymentech

termination letters; the Plaintiffs, therefore, argue that the Fraud Defendants all knew

that the legal disclosure on the Paymentech termination in the May 18, 2011 draft

disclosure schedule—describing the termination as “mutual”—was affirmatively

false.    The Plaintiffs further contend that the disclosure constituted active

concealment. This disclosure described the termination as “mutual;” it did not reveal

that Paymentech initiated the termination and that it had provided alleged violations

of card association rules as the basis for termination. The Fraud Defendants maintain

that the disclosure made by Plimus is a truthful and accurate depiction of the

Paymentech termination. I disagree. While the termination was “mutual” in the

sense that Plimus did not care to oppose it, Paymentech clearly initiated the

termination. Despite Plimus’s reasons to be dissatisfied with Paymentech, which it

                                          99
truthfully shared with Great Hill, Plimus had no incentive to prematurely end the

relationship, which was due to expire in September 2011. On the other hand,

Paymentech could incur risk when Plimus routed its transactions through

Paymentech. In this regard, Paymentech was worried specifically about the risk of

cross-border transactions in India, where it did not have a license to process such

transactions. Therefore, Paymentech did have an incentive to end the relationship

when it did, and the description of the end of the relationship as “mutual” is a false

representation.

       The Plaintiffs argue not only that the disclosure was false, but also that Tal,

Itshayek, Goldman, and Klahr actively concealed the “real reasons” for the

Paymentech termination, which the Plaintiffs allege were “improper business

practices and poor risk management.”584 The Plaintiffs, quoting Corporate Property

Associates 14 Inc. v. CHR Holding Corporation,585 argue “that active concealment

can be established by showing that defendants made a ‘representation intended to

exclude suspicion and prevent inquiry.’”586 The Plaintiffs further claim that outside

the disclosure, Tal and Itshayek continued the active concealment when they told

Great Hill during the diligence process that Plimus had decided to leave Paymentech.

584
    Id. at 162–63.
585
    Corp. Prop. Assocs. 14 Inc. v. CHR Hldg. Corp., 2008 WL 963048, at *7–8 (Del. Ch. Apr. 10,
2008)
586
    Pls. Opening Post-Tr. Br. 163.

                                            100
      As an initial matter, the legal disclosure predated on-site diligence, during

which time PwC and Great Hill did, in fact, ask more questions about the

Paymentech relationship. The Defendants have shown that Plimus had long been

unhappy with Paymentech’s service and rates, and when Paymentech stopped

supporting transactions outside the US, Canada, and the European Union, Plimus

made a decision not to renew the relationship when it expired later in the year. All

of this was disclosed to Great Hill.

      Furthermore, as described above, there was no attempt to conceal the

Paymentech correspondence, which Tal, Itshayek, Goldman, and Klahr believed had

been released to the data room. It is possible that the Fraud Defendants intended

their misleading disclosures to distract attention away from the letters—perhaps

even preempt their review—and thus conceal the “real” reason for the Paymentech

termination. However, the “real” reason for the termination was shared with Great

Hill; it was the incompatibility of Paymentech and Plimus around transactions

outside the US, Canada, and the European Union. Therefore, it is far more likely

that the intent of the Fraud Defendants was to supplement and provide context to the

end of the Paymentech relationship beyond what was in the Paymentech termination

letters, which the Fraud Defendants believed had been disclosed. As a result, I find

that there was no active concealment by the Fraud Defendants. Nonetheless, the

                                        101
representation that the end of the Paymentech relationship was “mutual” was

false.587

                      c. Tal, Goldman, and Klahr Knew the “Mutual” Termination
                      Representation Was False

       I turn next to the Plaintiffs’ argument that Tal, Itshayek, Goldman, and Klahr

had knowledge that the representation in the legal disclosure was false. Tal clearly

had such knowledge, because he authored the legal disclosure and was intimately

familiar with the Paymentech termination.               Furthermore, his comment, when

approving the release of the Paymentech termination letters, that he “need[ed] to

think about ways to communicate this,” foreshadows the disclosure he then crafted

as an attempt to spin the termination in a misleadingly positive light. While Itshayek

also knew Paymentech had taken the first step in terminating the relationship, the

Plaintiffs do not allege that she helped draft, review or even that she saw the

disclosure that Tal prepared. As a result, Itshayek did not have the requisite

knowledge that the disclosure was false to support a fraud claim against her.

       Goldman and Klahr, by contrast, knew that Paymentech had taken the

initiative in ending the relationship. They, along with SIG Fund’s in-house counsel,

reviewed and even supplied edits to the draft disclosure schedule. Furthermore,

587
    Having found a false statement, I will not dwell further on the sometimes “prosciutto-thin
distinctions” between the various theories of false representation. Corp. Prop. Assocs. 14 Inc.,
2008 WL 963048, at *8 (referring to the difference between the theories of fraud by silence in the
face of a duty speak and fraud by active concealment).

                                              102
Goldman and Klahr both saw the previous draft of the legal disclosure prepared by

Perkins Coie, which stated that Paymentech had notified Plimus that it was

terminating the relationship based on alleged breaches. Goldman and Klahr argue

that they lacked knowledge of the representation’s falsity because they relied on

management and counsel, and that the description of the termination was consistent

with their understanding of the end of the relationship based on what management

had told them. The Plaintiffs have shown that Goldman and Klahr were at least

recklessly indifferent. It is true that Goldman and Klahr honestly did believe the end

of the relationship was, in a sense, “mutual.” Nonetheless, they had investigated the

Paymentech termination in their capacity as directors, they knew that it was

Paymentech who had ended the relationship, and they approved a disclosure that

said otherwise. Therefore Tal, Goldman, and Klahr had knowledge of the false

representation describing the Paymentech termination as “mutual.”

                   d. The Intent Behind the False Representation

      The Plaintiffs spill much ink commenting on what they consider the enormity

of the Fraud Defendants’ behavior. They argue that the failure of the Silver Lake

deal and the Fraud Defendants’ purported belief that Plimus’s business was about to

tank, together support every inference that the Fraud Defendants’ intent was to

mislead Great Hill in order to facilitate a quick sale. Without addressing every

allegation, suffice it to say that the record convinces me to the contrary on the

                                         103
Plaintiffs’ theory of motive. The Fraud Defendants ultimately had confidence in

Plimus’s viability and profitability.        Nonetheless, it is clear that the Fraud

Defendants believed the deal with Great Hill was advantageous to them, and wished

it to close. Tal wanted liquidity and new investors with the capital to support roll-

ups going forward;588 SGE believed in supporting management, including through

sale,589 and the deal price met its profit goals;590 the Founders, who are accused of

aiding and abetting the alleged fraud, wanted to cash out.591 Therefore, I find that

the Fraud Defendants generally intended for Great Hill to rely on the disclosures and

the representations in order to facilitate the sales process, merger agreement, and

closing. That is sufficient to my finding that Tal created the disclosure stating that

the Paymentech termination was mutual, with the intent that Great Hill believe it in

support of the sale closing, and that Goldman and Klahr approved the misleading

disclosure for the same reasons.

       To reiterate, the Fraud Defendants believed that the Paymentech termination

letters were released to Great Hill, therefore they could not have seriously intended,

through the legal disclosure, to cover up the contents of those letters. Furthermore,

the main purpose of the disclosure was to provide information on ongoing legal

588
    Trial Tr. 1622:7–10 (Tal), id. at 1864:4–1864:11 (Klahr).
589
    Id. at 1864:12–1864:19 (Klahr).
590
    Id. at 1863:17–1864:3 (Klahr).
591
    JX 179, at 162–64 (lines 1881–1927), 195–96 (lines 1877–1906), 202–04 (lines 2155–2185).

                                            104
proceedings, not to detail the end of business relationships. However, a description

of the termination as “mutual” was untrue and constitutes a false representation. It

is also too far from the truth to be accidental; rather, it is an attempt to frame the end

of the relationship in a misleading way and to have Great Hill rely on that framing.

Therefore, I find that Tal, Goldman, and Klahr intended for Great Hill to rely on the

description of the Paymentech termination as “mutual,” and turn to the next element,

justifiable reliance.

                        e. There Was No Justifiable Reliance Because the False
                        Representation on the Paymentech Termination Was Not
                        Material

       Goldman and Klahr identified the Paymentech relationship to be

disadvantageous to Plimus when they conducted their own due diligence in 2008.

After Tal informed Goldman and Klahr of the Paymentech termination in 2011,

Goldman and Klahr pushed Plimus to involve legal counsel, Perkins Coie, in the

Paymentech termination. Perkins Coie found that the termination was “ordinary

course,” achieved a release of the majority of the reserve account of Plimus’s funds

held by Paymentech to cover potential fines, and confirmed that no fines would

result from the alleged violations in the original termination letter. Tal, Goldman,

and Klahr all knew by the time the legal disclosure to Great Hill was made that

Paymentech had released the majority of the reserve account and would not pursue

fines or additional action for the alleged violations. The real point of friction

                                          105
between Plimus and Paymentech was the cross-border transactions in India, which

Paymentech refused to continue supporting, and which Plimus refused to stop

transacting. The legal disclosure identified the cross-border issue as the main reason

for the end of the Paymentech termination. Tal and Itshayek truthfully disclosed this

information to Great Hill and its representatives during on-site diligence, in addition

to disclosing truthfully the other reasons Plimus had to be dissatisfied with the

relationship.

      Great Hill, therefore, knew before closing that Plimus had previously had a

disadvantageous contract with Paymentech, that Paymentech had decided to stop

supporting certain cross-border transactions, and that as a result of that decision the

Plimus-Paymentech relationship ended.           What was not disclosed was that

Paymentech had taken the definitive step to end the relationship and had also

justified the termination with alleged violations that it did not thereafter pursue. To

show justifiable reliance, the Plaintiffs must show that “the representations relied

upon involve matters which a reasonable person would consider important in

determining his course of action in the transaction in question,”592 and “concern ‘an

essential part of the transaction.’”593 In other words, the Plaintiffs must show that

592
   Craft v. Bariglio, 1984 WL 8207, at *8 (Del Ch. Mar. 1, 1984).
593
   E.I. DuPont De Nemours & Co. v. Fla. Evergreen Foliage, 744 A.2d 457, 462 (Del. 1999)
(quoting Nye Odorless Incinerator Corp. v. Felton, 162 A. 504, 512 (Del. 1931)).

                                          106
Paymentech’s initiation of the termination and certain alleged violations cited by

Paymentech were material information.

      The relationship between Paymentech and Plimus became unworkable for

both parties and ended before Great Hill offered to buy Plimus. Paymentech was no

longer available to Plimus to process transactions as part of Plimus’s business. This

information was material, and was accurately and timely disclosed to Great Hill.

What was concealed by the misleading disclosure was that Paymentech initiated the

termination. In the context of this case, that fact was not material, notwithstanding

the Plaintiffs’ assertions to the contrary. The additional fact that Paymentech had an

incentive to end the relationship before it came to a natural close does not materially

add to the information that Great Hill had regarding this relationship. The cross-

border transaction dispute that ended the relationship was known to Great Hill. The

other allegations made by Paymentech were, I find, pretextual, and cannot have been

material to Great Hill; they resulted in no actual fines and no further investigation

by Paymentech. Given that Great Hill understood both that the Paymentech-Plimus

relationship had ended and the reason therefor, the concealed information did not

addresses an essential part of the transaction. Great Hill knew it was buying a Plimus

that did not have Paymentech as a processor, and knew the primary reason why

Paymentech was no longer a processor.

                                         107
      The Plaintiffs seek to establish the materiality of the concealed information

by puffing up the importance of Paymentech to Plimus. Paymentech was Plimus’s

largest supplier, but it supplied commodity processing services, which could be (and

were) easily replaced at the time. While the accelerated termination posed a

“challenge” for Plimus, it was a temporal technical challenge of transitioning to new

processors in a short period of time. Tal correctly downplayed the seriousness of

the loss of Paymentech to the Plimus Board of Directors given Plimus’s other

processing relationships. Fundamentally, moreover, the importance of Paymentech

to Plimus is irrelevant to the materiality of the fact that Paymentech unilaterally

discharged Plimus, given Great Hill’s accurate understanding as of the time of the

transaction.    I find, therefore, that the Fraud Defendants’ misrepresentations

regarding Paymentech cannot support liability for fraud.

               3. Plimus’s History of Violations and Risk Monitoring Systems

      The Plaintiffs allege that the Fraud Defendants misrepresented the quality of

Plimus’s business by hiding a long history of violations (including violations related

to PayPal Pro after the initial merger agreement was signed), and by fabricating

Plimus’s risk monitoring prowess. In 2010, Paymentech fined Plimus on many

occasions. Almost all the fines related to excessive chargebacks, and one fine related

to acting as an aggregator without a license, a situation that Plimus subsequently

remedied. During 2011, Plimus exceeded allowed chargeback ratios for PayPal Pro,

                                         108
and, before closing, was apprised that PayPal would levy a fine regarding Plimus’s

vendor GoClickCash, although the actual notice was not received until after closing.

Plimus’s payment processor (in this situation, either Paymentech or PayPal) would

e-mail Plimus when Plimus exceeded chargeback ratios, entered into excessive

chargeback programs, or otherwise violated card network rules and regulations.

These e-mails were not provided to Great Hill. The e-mails at least contained a

description of the problem, and sometimes included language copied and pasted

from a notice the processor received from the card networks—in some cases, they

even included the whole notice. The Plaintiffs point out that the e-mails were

responsive to diligence requests, and the response they received indicated that no

such communications existed. That response on Plimus’s behalf, per the Plaintiffs,

was fraudulent.

      In terms of Plimus’s risk monitoring and vendor termination policies and

systems (collectively, “risk monitoring systems”), the Plaintiffs claim that the Fraud

Defendants represented that Plimus had “robust” and “proactive” risk monitoring

systems. The Plaintiffs argue that these representations were made in presentations

given by Plimus management and were reinforced by management after the

termination of seventeen vendors in 2011.          The Plaintiffs allege that these

representations were false because the mass vendor terminations in 2010 and 2011

were initiated by Plimus’s processors, and did not arise from Plimus’s own internal

                                         109
risk monitoring. The Fraud Defendants argue that no written materials describe their

risk monitoring systems as “robust” or “proactive;” rather, the management

presentation said only that Plimus monitors the performance of sellers and

“cleanse[s] sellers with negative perception, consistent issues with buyers or high

chargeback ratios.”594 They contend that this was a truthful statement. The Fraud

Defendants therefore maintain that they made no misrepresentation regarding

Plimus’s risk monitoring systems. I first turn to the allegations concerning the risk

monitoring systems, and then analyze whether the failure to provide notice of

violation e-mails sent by Plimus’s processors was fraudulent.

                       a. The Fraud Defendants Did Not Make Any False
                       Representations on Plimus’s Risk Monitoring Systems, and In
                       Any Event, Great Hill Did Not Justifiably Rely on the
                       Representations They Allege Were Fraudulent

          Plimus’s written policy on risk review, disclosed to Great Hill, states that

Plimus reviews vendors for violations of Plimus’s terms of use and for copyright

infringement, and will react to alerts from processors “based on the [processor’s]

requirements.”595 This written policy is consistent with Plimus’s termination of

vendors in 2010 and 2011.

          In terms of the 2010 vendor terminations, Plimus had received notices from

Paymentech, its processor, that Plimus as a whole was exceeding the one percent

594
      JX 307, at 52.
595
      JX 457, at 35.

                                          110
chargeback ratio ceiling. These were not individualized notices specific to each

Plimus vendor with chargebacks over one percent.596 Plimus then identified and

terminated certain vendors with high chargebacks in order to reduce the Plimus-wide

chargeback ratio and exit the excessive chargeback programs. There is no indication

that prior to their termination these vendors—which were primarily “poker chip”

vendors—violated Plimus’s terms of use. The Plaintiffs point to a June 25, 2011

diligence disclosure, which stated that “the Company became aware of these issues

upon reviewing each vendors’ [sic] chargeback history.”597         According to the

Plaintiffs, this was a false representation, because it conveyed the impression that

Plimus’s own internal procedures led to this review, which in fact arose based on

communication from the processor.         Nothing about the disclosure, however,

suggests that the review was independent of communications with Paymentech, and

the disclosure is not otherwise inconsistent with Plimus’s disclosed written policies.

Accordingly, I find that the Fraud Defendants did not make false representations in

Plimus’s written statements—either in the CIM or disclosures around vendor

termination—about Plimus’s risk monitoring systems. The Plaintiffs’ allegations

against Goldman and Klahr stem only from their involvement in drafting

management presentations and reviewing the diligence disclosure. Since these do

596
      See, e.g., JX 37.
597
      JX 553, at 24.

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not contain false representations, the Plaintiffs have failed to show fraud against

Goldman and Klahr in relation to Plimus’s risk monitoring systems.

          The Plaintiffs’ claims against Tal and Itshayek regarding Plimus’s risk

monitoring systems, on the other hand, also allege that Tal and Itshayek made oral

representations on the strength and proactivity of the risk monitoring systems during

meetings and phone calls with Great Hill. In particular, the Plaintiffs allege that

Itshayek told Great Hill that the 2011 termination of sixteen vendors was the result

of Plimus’s risk monitoring systems.598 This statement, however, was not false.

Plimus terminated seventeen vendors during that particular vendor purge. Itshayek

testified credibly that she told Great Hill that the 2011 vendor termination started

with a PayPal notice on one vendor, GoClickCash, and that Plimus then identified

sixteen similar vendors and terminated them also. While Plimus may have felt that

the sixteen similar vendors would cause problems with PayPal in light of PayPal’s

initial notice, it was still Plimus who identified the sixteen problematic vendors, and

Plimus who decided to terminate the additional vendors based on the assessment of

the risk imposed on Plimus. Itshayek’s description of the termination is therefore

consistent with Great Hill’s own account and matches Plimus’s written policy on

risk monitoring. Therefore, at least in regard to the particular termination of the

seventeen vendors in 2011, there was no false representation.

598
      Pls. Opening Post-Tr. Br. 172.

                                         112
       Assuming that the Plaintiffs could demonstrate that Plimus’s risk monitoring

systems and policies were mischaracterized to Great Hill because Tal and Itshayek

allegedly described these systems and policies as “robust” or “proactive,” the

Plaintiffs are unable to demonstrate justifiable reliance on these statements. PwC,

on Great Hill’s behalf, investigated Plimus’s vendor monitoring systems, among

much else. In fact, PwC’s resulting diligence report to Great Hill states that Plimus

should be more “proactive” in dealing with chargebacks.599 PwC’s report also

detailed the self-service onboarding process by which vendors enrolled themselves

as Plimus clients. In PwC’s own words, Plimus “delay[ed] the majority of the seller

underwriting until the point at which the seller is most likely to begin processing.”600

Additionally, Cayer testified that he understood before closing that vendors could

onboard themselves and avoid scrutiny for months. Therefore, Great Hill’s own

diligence disclosed the limited extent to which Plimus could be said to have a

“robust” or “proactive” risk monitoring system.601 Furthermore, Great Hill was

aware that Plimus engaged in sporadic large-scale purges of vendors, as opposed to

continuous small-scale terminations consistent with proactive risk monitoring.

Given their own diligence findings, the Plaintiffs could not justifiably rely on Tal

599
    JX 582, at 23.
600
    Id., at 21.
601
    I make no determination whether the terms “robust” or “proactive,” if false, were sufficiently
definitive to constitute fraud.

                                              113
and Itshayek’s allegedly false representations regarding Plimus’s risk monitoring

systems.

                       b. The Plaintiffs Have Not Shown Justifiable Reliance on False
                       Representations Made About Plimus’s History of Violations

          I next turn to Plimus’s failure to provide Great Hill with documentation

concerning excessive chargebacks. Paymentech’s (and later PayPal’s) notices

regarding chargebacks and other violations were provided to Plimus, accompanied

by varying levels of detail as to the nature and consequences of the chargebacks.

These documents were requested by Great Hill as part of its diligence, but were not

turned over to Great Hill; Itshayek testified as much at trial. Furthermore, despite

Tal and Itshayek possessing these notices, Plimus’s June 18, 2011 and June 25, 2011

responses to Great Hill’s diligence request implied that no such notices existed. The

PwC report states that, regarding the $250,000 in fines that were disclosed, PwC was

told that Plimus received “no formal communication from the associations clearly

defining the nature of the fines.”602

                             i. Plimus’s Disclosure of Only $250,000 In Fines and
                             Plimus’s Representation That Plimus Did Not Have
                             Communications on Violations Are False
                             Representations

          Plimus did not report to Great Hill all the fines it received in 2010. Instead,

Plimus reported only $250,000 in fines. The Plaintiffs correctly aver that the

602
      JX 582, at 23.

                                            114
disclosure on the amount of the fines constitutes a false representation because it

implies that Plimus paid only $250,000 in fines in 2010. At trial, the Plaintiffs

showed that the $250,000 figure constituted the fines Plimus paid for Visa excessive

chargebacks in 2010 and a MasterCard violation for acting as an aggregator without

a license, and did not include the fines Plimus paid in 2010 for MasterCard excessive

chargebacks. Furthermore, it was false for Plimus to represent in diligence responses

that no communications from Paymentech or PayPal regarding violations existed

when, in fact, they did. The Plaintiffs argue that all the Fraud Defendants committed

actionable fraud by these actions, and that they all violated a duty to speak when

Plimus updated its response to Great Hill’s diligence request without changing its

response that no violation-related communications existed. Since the disclosure of

only $250,000 in fines and the omission of communications on violations

(collectively, “Plimus’s history of violations”) constitute false representations, I

discuss next which Fraud Defendants had knowledge of the false representations.

                          ii. Only Tal and Itshayek Had Knowledge that the
                          Representations on Plimus’s History of Violations Were
                          False

      The Plaintiffs contend that Tal, Itshayek, Goldman, and Klahr all had

knowledge of the false representations on Plimus’s history of violations. Tal and

Itshayek were recipients of the various violation notices from processors throughout

2010 and 2011, did not provide them as sought in Great Hill’s diligence requests,

                                        115
and therefore knew when they participated in the drafting of the relevant disclosure

that it was false to represent that no such notices existed. Additionally, they were at

least recklessly indifferent to the falsity of the $250,000 figure, which they were

aware did not include all 2010 fines. Goldman and Klahr were copied on the

disclosure requests and were involved in the drafting of the merger agreement, which

included a representation that Plimus “is and has been in compliance”603 with card

network rules. However, Goldman and Klahr did not possess the 2010 notices from

Paymentech and were not informed of any notices from PayPal, and they

furthermore were not responsible for diligence requests. As directors, Goldman and

Klahr did not manage Plimus’s day-to-day operations (and were not expected to),

which included managing payment processor relationships. The Plaintiffs point out

that Goldman and Klahr were copied on e-mails containing the diligence responses.

Even if I were to assume that Goldman and Klahr actually read the diligence

responses, that does not show that they knew the representations were false, given

their limited knowledge of day-to-day operations. For a similar reason, Goldman

and Klahr cannot be found to have had knowledge of, or to have been recklessly

indifferent to, these false representations in the Merger Agreement; they had no

reason to doubt the representations being made, but rather were entitled to rely on

their counsel and Plimus management in this respect. I find that only Tal and

603
      JX 796, at 47–48.

                                         116
Itshayek knowingly made false representations or concealments, in satisfaction of

the second element of fraud. I next turn to scienter.

                                iii. Tal and Itshayek Intended for Great Hill to Rely on
                                the False Representations Concerning Plimus’s History
                                of Violations

          The Plaintiffs argue that Tal and Itshayek can be presumed to have the

requisite scienter, given the magnitude of misleading statements and omissions. The

Plaintiffs make this argument on intent as to fraud in general and for all the Fraud

Defendants, but it seems particularly focused here, where tens of notices on Plimus

violations were responsive to diligence requests, yet were not provided. The

Plaintiffs argue that Tal and Itshayek intended for Great Hill to rely on the false

representations in order to create the illusion that Plimus was in “good standing with

the credit card companies.”604 I previously found that the record satisfied, in general,

the Fraud Defendants’ intent to rely, based on a desire to facilitate the transaction,

but I pause to add a few words on that general intent in the specific context of

Plimus’s history of violations.

          The Plaintiffs’ argument for intent to rely is somewhat undercut by the fact

that Itshayek shared Plimus’s processor statements with Great Hill, which reflected

that Plimus had paid at least $250,000 in fines to Paymentech in 2010. Processor

statements were monthly statements of all financial transactions between a processor

604
      Pls. Opening Post-Tr. Br. 184.

                                              117
and Plimus, including fines and fees paid by Plimus to the processor. Furthermore,

Tal and Itshayek disclosed Plimus’s June 2011 PayPal chargeback issues to Great

Hill. Both of these actions runs counter to the Plaintiffs’ theory that Tal and Itshayek

were trying to create an illusion of a company in good standing. However, despite

Tal and Itshayek’s willingness to discuss chargebacks with Great Hill, they withheld

the actual notices that underlined those chargeback issues, even when PwC sent a

specific diligence request for such notices after its on-site visit. Furthermore, the

representation that Plimus had no such notices was reiterated with each update to

Plimus’s response to Great Hill’s due diligence request—responses that were

reviewed or drafted, in pertinent part, by Tal and Itshayek. This belies innocent

mistake.

      At trial, Itshayek admitted that the notices from Paymentech were responsive

to Great Hill’s requests and defended her oversight only by claiming that the

processor statements should have been sufficient. Given the amount of notices

extant, the fact that those notices were known to Tal and Itshayek, and that there

were multiple prompts and opportunities to share them—including a specific

request—I find that Tal and Itshayek were at a minimum reckless when they omitted

the notices. Tal and Itshayek had a duty to share the notices, which they disregarded,

and they falsely represented that no such documents existed with the intent that Great

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Hill consummate the transaction. I find the intent requirement satisfied, and turn to

reliance.

                          iv. Great Hill Did Not Justifiably Rely on the False
                          Representations About Plimus’s History of Violations

      I find that Great Hill cannot have relied on the false representations about

Plimus’s history of violations, nor could Great Hill have reasonably believed that

Plimus was always a company in good standing with the card associations, based on

Tal and Itshayek’s false representations and omissions. The PwC report and Great

Hill’s own due diligence memo to its partners show that Great Hill was aware that

Plimus exceeded chargeback ratios throughout 2010 and in June 2011. The PwC

report created for Great Hill states that chargebacks demonstrate non-compliance

and could result in fines, as does Great Hill’s own due diligence memo. As a result,

the Plaintiffs have failed to show actual reliance on the omission of the various

communications with Paymentech regarding fines and violations in 2010, which

would have simply confirmed Great Hill’s understanding. The Plaintiffs have not

demonstrated justifiable reliance on the exact amount of fines paid in 2010, the

affirmatively false representation that documents explaining the fines and violations

did not exist, nor on Tal’s and Itshayek’s silence when the due diligence responses

were updated without correcting the original false representations. Any information

provided to Great Hill in that regard would have been cumulative.

                                        119
       Turning to the communications on subsequent fines in 2011, Great Hill was

alerted that Plimus exceeded chargeback ratio thresholds for PayPal in June 2011.

While Tal and Itshayek told Great Hill in late July that they did not expect July

chargeback ratios to exceed one percent, I note that modeling that Tal had previously

provided to Great Hill informed Great Hill that Plimus’s exceeding this threshold

was a real possibility.605 The Plaintiffs argue that Tal’s and Itshayek’s expectation

proved to be wrong, and that Great Hill was not informed once those chargebacks

exceeded one percent for July and August. Neither did Great Hill ask to be so

informed. Great Hill had reason to not be overly concerned with chargebacks, as

they had asked for and received an indemnity provision in the merger agreement

specifically for fines for excessive chargebacks related to pre-closing issues.606

Based on Great Hill’s actual knowledge of Plimus’s extensive history with

chargebacks and Great Hill’s bargained-for indemnity for fines related to pre-closing

chargebacks issues, I find that there was no justifiable reliance on false

representations about Plimus’s history of violations and compliance with card

605
    Tal provided Great Hill with tables in early July 2011, which contained historical chargeback
data and chargeback projections for July and August 2011. The tables projected that chargeback
ratios would exceed one percent in July and August for both Visa and MasterCard without added
transactions from an expected ramp up in volume from Wix. JX 588, at 3.
606
    A known risk addressed by indemnification cannot be used to support a claim of fraud. See
Universal Enter. Grp., L.P. v. Duncan Petroleum Corp., 2013 WL 3353743, at *14 (Del. Ch. July
1, 2013).

                                              120
network rules. As a result, the Plaintiffs have not proven fraud against Tal and

Itshayek in relation to Plimus’s history of violations.

                    c. Other Miscellaneous Fraud Allegations Also Fail, Either
                    Because They Are Not False or Because There Was No
                    Justifiable Reliance

      It is appropriate here to deal with several other miscellaneous

misrepresentations and omissions that the Plaintiffs allege, which did not seem to be

cabined within any of the four categories of alleged fraud in particular. The previous

discussion primarily revolved around chargeback violations; however, the Plaintiffs

also point to other “violations” or practices, which they say were not disclosed and

which reflected poor business quality or poor processor relationships. The violations

or practices included mass refunds, IP infringement, volume shifting/load balancing,

and a BRAM violation.

      To the extent I understand the allegation, the Plaintiffs appear to argue that

Plimus engaged in mass refunds and volume shifting to avoid excessive

chargebacks, and that this practice should have been disclosed. Mass refunds and

volume shifting/load balancing have already been described, and I will simply repeat

that the evidence does not show that these were violations of card association rules

at the time. Therefore, Plimus was not required to disclose the practices as rule

violations. The Plaintiffs do not point to any affirmative misrepresentations in

regard to mass refunds or volume shifting/load balancing.

                                         121
       The Plaintiffs also complain about disclosures on IP infringement. Plimus

was often sent inquiries about IP infringement, and Great Hill, through its deal

counsel, was aware that Plimus received such notifications on an ordinary basis, and

that such notices were common in Plimus’s industry. I find that the Plaintiffs have

failed to demonstrate any misrepresentation with respect to IP infringement.

       A BRAM violation, as described in more detail infra, is considered by

processors and the credit card associations to be among the most serious of

violations.     In terms of the alleged BRAM violation in connection with

GoClickCash, Plimus was not informed that PayPal considered Plimus’s facilitation

of GoClickCash transactions to be a BRAM violation until after closing. The Fraud

Defendants could not misrepresent or hide something of which they were unaware,

pre-closing. However, Plimus was aware, pre-closing, that PayPal would assess a

fine against Plimus for a violation related to GoClickCash; I will address this non-

disclosure when I review the PayPal component of the alleged fraud.

       The Plaintiffs also contend that the Defendants made representations about

the growth of the company, the visibility of financial performance, and the quality

of vendors. To the extent that these statements were projections or expectations,

there was no reliance.607 Furthermore, the Plaintiffs have not made serious claims

607
   “The law has always been skeptical about grounding fraud claims in projections of future events
for the obvious reason that the fact that a prediction might not come true does not mean the
projection was not made in good faith and also because it is unreasonable to place much weight

                                              122
that any such projections were not made in good faith. With respect to vendor

quality, the Plaintiffs appear to contend that Plimus concealed or misrepresented the

fact that many of its vendors’ businesses were of questionable validity. Great Hill,

however, knew before the transaction that the vast majority of Plimus’s vendors

were “long-tail” vendors, and that there was frequent churn of these vendors. Great

Hill did an extensive review of these vendors, even noting which ones might be

fraudulent. The purpose of the review was a point of contention at trial; Busby

testified that Great Hill’s review only concerned the sustainability of vendor’s

businesses, and that he did not ask his analysts for judgments on vendor’s legitimacy.

Regardless, Great Hill’s analysts made such judgments. Furthermore, in their due

diligence memo, Great Hill identifies vendors in “unacceptable vertical[s]” as a

risk.608   As already discussed, Great Hill was aware that Plimus’s onboarding

process allowed vendors—including illegitimate vendors—to potentially transact

business through Plimus for months before discovery. This was the case with the

“biz opp” vendors that were terminated in 2011, which, given the resulting financial

impact, Great Hill lamented at the time.609 In other words, Great Hill was well aware

of Plimus’s business model, including the quality of the vendors. Given how much

on such statements.” Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 2005 WL 5757652, *12 (Del. Ch.
Apr. 1, 2005).
608
    JX 601, at 3.
609
     The termination of these “get rich quick” scheme vendors negatively impacted Plimus’s
projected transaction volume and EBITDA. Given the financial impact, the Great Hill deal team
considered—and ultimately rejected—lowering the transaction price.

                                             123
Great Hill knew and accepted about Plimus’s vendor quality, Great Hill cannot

establish justifiable reliance on any misrepresentations that may have been made

regarding vendor quality.

             4. The Dispute Over Tal’s Earn-Out Agreement with the Founders

      As laid out in the Background section of this Memorandum Opinion, Tal had

earn-out agreements with SGE and the Founders, which provided for payment of

incentive funds to Tal upon sale of Plimus (under certain conditions). The terms of

the Founders’ Earn-Out agreement were ambiguous. During the bidding process, a

dispute arose between Tal and the Founders over the interpretation of the Founders’

Earn-Out. The dispute was resolved shortly before the initial merger agreement was

signed. The Plaintiffs originally argued that the existence of a dispute between Tal

and the Founders over the Founders’ Earn-Out was not disclosed. The Plaintiffs

have abandoned this claim in light of the evidence to the contrary, but continue to

argue that the substance of the dispute was not disclosed, and that the partial

disclosure was materially misleading.

      The substance of their argument can be divided into two parts. First, the

Plaintiffs claim that Tal had to be bribed to support the deal and to stay with Plimus

after closing, and that settlement of the Founders’ Earn-Out dispute in Tal’s favor

was, in fact, the bribe. The facts of this alleged blackmail and bribery were not

disclosed, which, according to the Plaintiffs, amounts to fraud. The Plaintiffs’

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second, related theory is that it was fraudulent for the Fraud Defendants to conceal

the fact that the resolution of the Founders’ Earn-Out dispute was made “contingent”

on Tal capitulating in his Roll-Over negotiations with Great Hill. However, I find

no fraud in regard to the Founders’ Earn-Out dispute.

      I address the “blackmail” claims first. If Goldman and Klahr needed to bribe

Tal to support the deal, then it could certainly be a false representation to omit this

information. However, it is clear that the ultimate restructuring of the side letter

payments was the result of an honest business dispute over the interpretation of the

original agreements, and not the result of Tal demanding funds to conceal his lack

of faith in Plimus. There was no false representation in this regard. The Plaintiffs

seize on the Founders’ initial reactions to their earn-out dispute with Tal. Tal knew

that the Founders supported a sale, and the Founders’ first reaction was that Tal was

leveraging this knowledge, to negotiate “blackmail” or “schita” payments to ensure

his support. Goldman and Klahr ultimately made up a part of the difference between

Tal’s understanding of his entitlement under the Founders’ Earn-Out, and that of the

Founders; the Plaintiffs characterize this as “hush money” payments to Tal. The

Plaintiffs argue that Tal did not believe in Plimus and that he demanded this hush

money in order to support the deal with Great Hill, which (per the Plaintiffs) would

be especially unattractive to Tal in light of the requirement that he roll over fifty

                                         125
percent of his merger proceeds into equity in Plimus after the sale. The facts,

however, are to the contrary.

      When first accused of blackmail by the Founders, Tal immediately denied that

such was his intention. Tal stoutly maintained to the Founders that he was entitled

to the money he was demanding under his reading of the Founders’ Earn-Out. While

Tal frequently complained about being expected to participate in the Roll-Over, none

of his communications with the Founders or the SGE Defendants suggest that he had

any doubts about Plimus or its business prospects. Critically, Tal’s interpretation of

the Founders’ Earn-Out arose early in the sale process, when the bidding was still

ongoing and the identity of the buyer, and any roll-over requirements, had not yet

materialized. Throughout the sales process, that interpretation never changed. Tal

never asked for more than he originally and consistently maintained he was owed.

      Goldman, when apprised of the dispute, stepped in to mediate between Tal

and the Founders. Goldman believed that, given Tal’s work in building Plimus, his

interpretation of the side letter agreement should be honored in good faith.

Throughout Goldman’s mediation with the Founders on the dispute, no party

expressed doubt in Plimus or implied that Tal had such doubts. In fact, the Founders

clearly believed in Plimus and its prospects (to the point that they were willing to

walk away from the Great Hill deal) and believed that Tal would benefit from the

deal, given his equity interest in the new company. In other words, the Founders

                                         126
viewed Tal’s Roll-Over as a good opportunity for Tal. Therefore, they believed he

should not be insistent on receiving the Founders’ Earn-Out, as he would be well

compensated financially in any event. It is therefore clear that there was no

“blackmail” to disclose.

      Perhaps acknowledging the weakness of the “blackmail” claim, the Plaintiffs

argue derivatively that it was fraud not to disclose that the Founders’ Earn-Out

resolution offered to Tal was made “contingent” on Tal ending negotiations on the

Roll-Over with Great Hill. The Plaintiffs argue that, regardless of the existence of

any blackmail, the contingent nature of the settlement was material, and was omitted

and concealed. The Fraud Defendants do not dispute that they considered the

resolution of the Founders’ Earn-Out disagreement in Tal’s favor as requiring him

to accept Great Hill’s terms for the Roll-Over; they acknowledge that they were

trying to facilitate the closing of the transaction.

      Having already found that no blackmail took place, however, I do not find an

intent by the Fraud Defendants to conceal information from Great Hill. It is obvious

that the earn-out payments and the Roll-Over were intimately linked for Tal. That

is because together, they determined his liquidity post-closing, and the amount of

the side letter payments would itself have a bearing on the amount of the Roll-Over.

Not only was this obvious in retrospect, but it was also known to Great Hill at the

time. Tal met with Great Hill in their Boston offices on June 27; Great Hill identified

                                           127
Tal’s new employment contract as the only remaining obstacle to closing, and Tal

disclosed that an earn-out dispute prevented him from ending negotiations on that

employment contract. I find that Vettel of Great Hill then called Goldman and asked

him to resolve Tal’s earn-out dispute, so that Great Hill could, in turn, resolve Tal’s

employment contract and Roll-Over.610 After this call, Goldman presented Tal with

the resolution that Goldman had mediated with the Founders. As a result, Great Hill

was aware that the resolution of Tal’s earn-out dispute was contingent on Tal ending

negotiations on his Roll-Over. Given this information, I do not find any false

representation, either through omission or through concealment, with regard to the

Founders’ Earn-Out or the Roll-Over.

               5. PayPal’s Notice of Violations and Threats to Terminate

       The most serious allegations of fraud involve PayPal’s relationship with

Plimus. In relation to the PayPal termination, the Plaintiffs allege fraud through the

failure to disclose, and/or the active concealment of: PayPal’s notice of violations

and fines; Plimus’s efforts to address chargebacks and other violations with PayPal;

Plimus’s practice of reactive vendor termination; and PayPal’s threats to terminate.

610
    I find Vettel’s testimony to the contrary not credible. Vettel testified he did call Goldman but
only as a “reference check” on Tal, and that the reference check was the only thing they discussed.
This is inconsistent with the preponderance of the evidence, as set out in the Background section
of this Memorandum Opinion.

                                               128
The Plaintiffs also claim that representations in the Merger Agreement were

affirmatively false in light of PayPal’s threats.

       I first deal with PayPal’s notices of chargeback problems, management’s

efforts to address those problems through load balancing and mass refunds, the

GoClickCash BRAM Violation, and Plimus’s policy of reactive vendor termination.

I have already found that the Plaintiffs have not shown fraud as to notices of

chargebacks, the practices of load balancing and mass refunds, and representations

about business quality and risk management systems. I also found that there was no

misrepresentation as to the BRAM Violation because Tal and Itshayek (and the other

Fraud Defendants) were unaware, pre-closing, that PayPal considered the

GoClickCash violation to be a BRAM violation. At issue here, then, are the alleged

failure to disclose that PayPal was fining Plimus related to GoClickCash and the

failure to disclose that PayPal was threatening to terminate its relationship with

Plimus.

                    a. Not Disclosing PayPal’s Termination Threats and the
                    GoClickCash Fine Constitute False Representations

      The communications that led up to the PayPal termination show that PayPal’s

threats to terminate were tied primarily to excessive chargebacks. However, in its

ultimate termination letter, PayPal claimed that Plimus brought too much risk to

PayPal generally without citing specifics. Internally, PayPal talked about Plimus’s

GoClickCash BRAM Violation and PayPal terminated Plimus the day after it told

                                          129
Plimus that that the GoClickCash violation was a BRAM Violation. Internal

communications also show that PayPal was aware that Plimus was practicing load

balancing and mass refunds. As I found earlier, those practices were not rule

violations, but PayPal internally found them problematic. However, PayPal did not

reprimand Plimus externally for employing mass refunds and load balancing, and

the Plaintiffs have not shown that the Fraud Defendants were aware that these

practices were disfavored.

      PayPal began to threaten termination of its relationship with Plimus in August

2011 and continued to make threats into September 2011, although it did not follow

through on its threats prior to closing. Tal and Itshayek did not believe that PayPal

would actually terminate Plimus. While the Plaintiffs allege generally a violation of

a duty to disclose and active concealment, they only argue specifically the violation

of two representations in the Merger Agreement. The Plaintiffs allege that the Fraud

Defendants made misrepresentations by asserting that they were in compliance with

card network rules while not disclosing the GoClickCash fine, and by representing

that no suppliers had threatened termination even though PayPal had made several

such threats throughout August and September 2011.

      Tal testified that he disclosed the GoClickCash fine in a phone call with Busby

only a few days prior to closing. To recap, I found this assertion was not credible

because the supplemental disclosure schedule contained no reference to

                                        130
GoClickCash.611 Additionally, I found that Tal disclosed some level of problems

with PayPal to Busby in Israel, but that this disclosure did not include PayPal’s

credible threats of termination. The failure to disclose the fine and the termination

threats are false representations. Tal had a duty to disclose them to Great Hill, and

to the extent they were not included in representations made in the Merger

Agreement, those representations are also false.

                      b. Only Tal Knew of the False Representations Regarding
                      PayPal

       Other than Tal, the Fraud Defendants are not implicated in these

misrepresentations. Only Tal had actual knowledge of the falsity. Goldman and

Klahr organized a bring down call prior to closing, specifically to inform SGE of

any need to update the disclosure schedule that would accompany the Merger

Agreement. Tal and Itshayek spoke before this call and agreed not to disclose the

possibility of a GoClickCash fine or the PayPal termination threats. Tal told

Itshayek that he would personally disclose these issues to Great Hill. Given Tal’s

assurance, Itshayek had no reason to believe that, to the contrary, these facts would

be withheld from Great Hill. For this reason, Itshayek cannot be charged with

knowledge that Tal ultimately did not make the necessary disclosures. Tal did have

611
    By contrast, the parties made sure to include a last-minute disclosure on Home Wealth
Solutions, which was only a third-parties’ request for information. Therefore, it is not plausible
that Great Hill learned of an actual fine and inadvertently or innocently proceeded to closing
without adding the fine into the disclosure schedule.

                                              131
knowledge of the false representations because he knew the information would not

be presented during the bring down call and did not thereafter inform Great Hill.

      Goldman and Klahr were not previously informed of any chargeback issues

related to PayPal, a fine related to GoClickCash, or of termination threats by PayPal.

Thus, Goldman and Klahr had no knowledge of the parlous state of Plimus’s

relationship with PayPal. Moreover, they were not recklessly indifferent to such

issues, as evidenced by their own efforts via the bring down call to inform

themselves of any outstanding issues prior to closing. As a result, the Plaintiffs have

shown only that Tal had knowledge of the false representations on Plimus’s issues

with PayPal.

                    c. Tal Intended for Great Hill to Rely on the Non-Disclosure of
                    the PayPal Issues

      Tal was set to continue as CEO of Plimus after the merger. As I have

previously alluded, I am not persuaded by the Plaintiffs’ arguments that Tal lacked

faith in the business. However, Tal wanted the merger to go forward, as it had

advantages for him personally—he could become CEO of a better-capitalized

company and would personally benefit from the earn-outs and the liquidity that he

would realize from the sale. Tal testified that, despite its threats, he thought PayPal

would not terminate Plimus. He believed that he could resolve the issues between

PayPal and Plimus post-closing.        I believe that testimony.     Nonetheless, he

undoubtedly recognized that Plimus’s problems with PayPal could have a negative

                                         132
effect on the merger. Therefore, and in line with the general intent I found when

discussing the Paymentech termination, I find that Tal intended for Great Hill to rely

on Tal’s false representations in order to induce Great Hill to proceed with the

transaction.

                     d. Great Hill Justifiably Relied on Tal’s False Representations

       Great Hill’s reliance on these false representations was actual and justified.

PayPal’s termination threats were material information.                PayPal Pro was a

commodity processing service, similar to Paymentech.                However the loss of

Paymentech was disclosed, only certain details, which I found not material, were

concealed. I find, by contrast, the possibility of losing a second major processor in

a matter of few months to be material to a prospective buyer. Furthermore, unlike

with Paymentech, Plimus was not ambivalent to the PayPal relationship, and the loss

of PayPal would mean a major disruption to Plimus’s business. And Tal knew that

the grounds raised by PayPal—excessive chargebacks—were an ongoing problem

for Plimus.612

       Great Hill’s reliance on Plimus’s failure to disclose the PayPal problems was,

I find, reasonable. The Fraud Defendants point out that Great Hill did not itself

contact PayPal as part of its due diligence. Great Hill had completed its due

612
   Paymentech’s termination notice used pretext to end the relationship. Plimus’s chargeback
problems with Paymentech had long been resolved, and Great Hill was aware of those problems.
By contrast, the problems with PayPal were ongoing and were largely undisclosed to Great Hill.

                                            133
diligence and signed the merger agreement before any PayPal termination threats

were made. Thus, Great Hill could not have discovered these termination threats

through pre-signing diligence. After the initial merger agreement was signed, the

largest factor delaying closing was Tal’s immigration visa. During this time, Great

Hill could rely on Tal, as the SGE and Founder Directors did, to raise issues that

required their attention.         Plimus was contractually bound to disclose this

information, and Great Hill was entitled to rely that disclosures were not knowingly

false. Given this dynamic and the materiality of PayPal’s threats, I find that the

Plaintiffs have shown justifiable reliance.613

       The findings above are sufficient to a finding of liability against Tal for

fraud/fraudulent inducement. While damages are an element of fraud, the quantum

of damages here awaits further litigation.

       B. Aiding and Abetting the Fraud

       The Plaintiffs allege that Herzog, Kleinberg, and all the SGE Defendants614

(the “Aiding and Abetting Defendants”) aided and abetted the fraud committed by

Tal (and, per the Plaintiffs, Itshayek, Goldman, and Klahr). The Plaintiffs argue that

that SGE and SIG Fund are imputed with the knowledge and actions of Goldman

and Klahr, who are their agents. To impose liability for aiding and abetting,

613
    Nothing in this finding should be read as preventing any Defendant from pointing to the extent
of Great Hill’s diligence review as relevant to their unjust enrichment claims.
614
    Those are SGE, SIG Fund, and Goldman and Klahr, whom I have found did not commit fraud.

                                              134
Plaintiffs must show that: (1) there is an underlying fraud; (2) which the aiding and

abetting defendants had knowledge of that fraud; and that (3) they provided

substantial assistance.615

       The Plaintiffs failed to show fraud related to the Paymentech termination,

Plimus’s history of violations and risk management systems, and the dispute over

the Founders’ Earn-Out. While the Plaintiffs demonstrated fraud in relation to the

PayPal termination, neither Herzog, Kleinberg, Goldman, nor Klahr were aware that

PayPal was threatening termination. The Plaintiffs argue that under Delaware law,

aiding and abetting liability can be imposed when a defendant lacks knowledge but

is recklessly indifferent to the fraud.616 The Aiding and Abetting Defendants

disagree with Plaintiffs’ assertion. The issue is moot, as I find that the Aiding and

Abetting Defendants were also not recklessly indifferent to the PayPal termination

threats; consistent with their practice as directors, they expected management to raise

issues to the Board as necessary. As a result, the Plaintiffs have not shown that the

Aiding and Abetting Defendants had knowledge of fraud related to the PayPal

termination.

615
    LVI Grp. Invs., LLC v. NCM Grp. Hldgs., LLC, 2018 WL 1559936, at *14 (Del. Ch. March 28,
2018).
616
    Pls. Opening Post-Tr. Br. 188 (citing Anderson v. Airco, Inc., 2004 WL 2827887, at *4 (Del.
Super. Nov. 30, 2004).

                                             135
       For the sake of completeness, I add that the Plaintiffs are also unable to show

substantial assistance on the part of the Aiding and Abetting Defendants. The

Plaintiffs have failed to demonstrate any assistance to Tal in the sole area in which I

have found fraud, involving the end of the PayPal relationship.

       C. Civil Conspiracy

       The Plaintiffs’ sole argument for civil conspiracy is that, “if Plaintiffs prove

aiding and abetting liability, they will have necessarily proved civil conspiracy.”617

They rely on comments I made in my earlier Memorandum Opinion, deciding the

Defendants’ Motion to Dismiss in this case.618 As I have found that the Plaintiffs

have not proven aiding and abetting liability, I find they have not proved civil

conspiracy.

       D. Indemnification

       A claim for indemnification based on the breach of a representation and

warranty is a claim for breach of contract.619 A breach of contract claim, in turn,

requires: “(1) a contractual obligation; (2) a breach of that obligation by the

defendant; and (3) a resulting damage to the plaintiff.”620 It is worth noting the

617
    Pls. Opening Post-Tr. Br. 188 n.73.
618
    Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 2014 WL 6703980, at
*22 (Del. Ch. Nov. 26, 2014)
619
    See, e.g., Hudson’s Bay Co. Luxembourg, S.A.R.L. v. JZ LLC, 2011 WL 3082339, at *2 (Del.
Super. July 26, 2011).
620
    Cedarview Opportunities Master Fund v. Spanish Broad., Inc., 2018 WL 4057012, at *6 (Del.
Ch. Aug. 27, 2018) (citation omitted).

                                            136
fundamental difference between the showing necessary for contractual

indemnification and that required for fraud. For indemnification, the Defendant’s

scienter requirement is absent. Moreover, the Plaintiffs need not show reasonable

reliance; here, in fact, the parties agreed that even the Plaintiffs’ prior “knowledge

. . . of any untruth of any such representation or warranty of [Plimus] expressly set

forth in [the Merger Agreement], regardless of whether such knowledge was

obtained through [Great Hill’s] own investigation or through disclosure by

[Plimus],” is no bar to an indemnification claim.621

       The Plaintiffs’ indemnification claim requires some parsing. As an initial

matter, the claim is brought against Tal, Itshayek, Herzog, Kleinberg, SIG Fund, SIG

Management, and the Charity Defendants (the “Indemnification Defendants”).

Indemnification claims were not brought against Goldman and Klahr, who were not

shareholders of Plimus (although Goldman signed the Merger Agreement as

representative of SIG Management and SIG Fund). Itshayek and the Charity

Defendants were not parties to the Merger Agreement, but they executed letters of

transmittal, in which they represented they had read the Merger Agreement and

agreed to be bound by its provisions.622 Tal, SIG Fund, Herzog, and Kleinberg

similarly signed such letters of transmittal.623 As a result, the Plaintiffs have shown

621
    JX 796, at 72.
622
    JSUF ¶ 144; JX2030 at 2, 5, 9; JX790 at 2, 5, 9.
623
    JX336 at 1, 4, 8; JX791 at 2, 5, 9; JX794 at 6; JX795 at 1, 4, 8.

                                                137
that contractual obligations on the part of the Indemnification Defendants run to

Great Hill.

       The Plaintiffs allege that four representations and warranties in the Merger

Agreement were breached. They interpret the indemnity provisions in the case of

fraud to impose indemnification liability beyond the escrow amount on all parties

who executed letters of transmittal, regardless of their participation in or knowledge

of that fraud. Although the Indemnification Defendants admit indemnification

liability for three fines related to pre-closing Plimus activity,624 they contest the other

alleged breaches; moreover, they argue that the correct interpretation of the

indemnity provisions does not extend liability for fraud beyond actual tort-feasors.

               1. The Defendants Have Breached Certain of the Representations and
               Warranties in the Merger Agreement

                       a. The Indemnification Defendants Did Not Breach the
                       Representation on “Material Liabilities or Obligations”

       The Plaintiffs allege that the Indemnification Defendants breached the

representation in Section 3.09 of the Merger Agreement that there were no

undisclosed “material liabilities or obligations.”625                   The Plaintiffs argue

specifically626 that Plimus’s revenue and profits, as represented in the disclosure

schedule attached to the Merger Agreement, were inflated because they included

624
    Post-Tr. Answering Br. Defs. Tal and Itshayek 106.
625
    JX 796, at 37.
626
    The Plaintiffs also argue generally (and late in a 200-page brief) that “fundamental” flaws were
concealed, but for support, they simply point at substantially all of their facts section.

                                               138
vendors that were later terminated and did not reflect the loss of PayPal. Given that

these vendors “had to be terminated after Plimus’s repeated violations of the Card

Network rules lest the company lose every payment processor,”627 I assume the

Plaintiffs are referring to the five hundred vendors that Plimus terminated in January

2012, post-merger.

          I note at the outset that characterizing the loss of PayPal as breaching a duty

to disclose “liabilities or obligations” is a strained interpretation of Plimus’s

contractual duties. At the time of closing, PayPal had threatened to terminate its

relationship with Plimus, but had yet to make a definitive decision; furthermore, Tal

did not believe that PayPal would actually terminate. Fundamentally, there was no

known or unknown material liability related to the loss of PayPal at the time of

closing.

          Similarly, the post-closing termination of five hundred vendors in January of

2012, four months after closing, was not a material liability that existed at the time

of closing. An unrealized threat to a business model is not a “liability.” The

Plaintiffs cite an internal Plimus e-mail sent on September 26, 2011 that summarized

a call with a PayPal representative, in which the representative identified certain

product categories prohibited by PayPal and considered high risk by the card

627
      Pls. Opening Post-Tr. Br. 201.

                                            139
networks. 628 According to the representative, Plimus should “shut down [these

vendors] if [Plimus] want[ed] to keep [its] relationship with [PayPal].”629 The

categories identified did include several categories of vendors that Plimus later

terminated in January 2012. However, the fact that these categories should be shut

down to “keep” PayPal suggests that PayPal was not lost as of September 26, 2011,

only three days before closing. Moreover, while Plimus ultimately terminated these

categories in January 2012, it did so not to keep PayPal, but in an effort to regain

PayPal. Plimus’s efforts to recoup PayPal, in any event, cannot be considered a

material liability at the time of closing, when Plimus had yet to even lose PayPal.

Additionally, the Plaintiffs’ argument that Plimus must have recognized this need to

discharge the vendors or “lose every processor” pre-closing is misplaced. The

Plaintiffs have not shown that Plimus’s relationships with its other processors were

in any way, known or unknown, strained prior to closing, or that Plimus’s other

processors had made similar demands to remove certain vendors. Therefore, to the

extent the five hundred vendors were terminated to save Plimus’s other processor

relationships, the termination was not a material liability at closing. For these

reasons, I find that the Indemnification Defendants have not breached Section 3.09

of the Merger Agreement.

628
      JX 771; Pls. Post-Tr. Reply Br. 42 n.21.
629
      JX 771; Pls. Post-Tr. Reply Br. 42 n.21.

                                                 140
                       b. The Representations Concerning Compliance With Contracts

          Next, the Plaintiffs allege that the Indemnification Defendants breached the

representations in Section 3.16 of the Merger Agreement, by representing that

Plimus was not in “default in complying” with all contracts, nor in “dispute”

regarding those contracts.630 The Plaintiffs assert that Plimus was in default of, or

in dispute regarding its contract with PayPal. Again, this is a strained construction

of the representations at issue. Plimus was not in “default” of, nor in a contractual

“dispute” under, its contract with PayPal, although pursuant to that contract it was

assessed a fine and threatened with termination of the PayPal relationship. In any

event, any breach of this Representation and Warranty is duplicative of the breaches

of the representations concerning supplier relationships and compliance with card

system rules, as discussed below. Any resulting indemnification will also be the

same.       Therefore, I discuss these allegations in regard to those breaches of

Representations and Warranties, below.

                       c. The Indemnification Defendants Have Breached             the
                       Representation on Compliance with Card System Rules

          The Plaintiffs also argue that the Indemnification Defendants breached the

representation in Section 3.23 of the Merger Agreement that Plimus “is and has been

in compliance with the bylaws and operating rules of any Card System(s).”631 The

630
      JX 796, at 42.
631
      Id. at 47.

                                          141
Plaintiffs point to the numerous violation notices that Plimus received from

Paymentech and PayPal.

       The Indemnification Defendants admit that the compliance representation was

breached, but only with respect to three fines from PayPal relating to pre-closing

transactions. These, the Indemnification Defendants concede, demonstrate that

Plimus had not been in compliance with card system rules.632 The three fines were

for excessive chargebacks in July, excessive chargebacks in August, and the fine

related to GoClickCash. The Plaintiffs have not shown any additional fines or

violations with regard to PayPal.633 As a result, the Indemnification Defendants have

breached this representation, as it relates to the three identified violations through

PayPal.

       Next, the Plaintiffs point to Plimus’s failure to disclose violations in

connection with Paymentech.           Again, Plimus warranted that it “has been” in

compliance with card system rules, a representation that was untrue with respect to

Paymentech given, among other things, its excessive chargeback issues in 2011. It

is true that any fines related to the Paymentech violations were paid before closing

and the Paymentech relationship ended before the bidding process was even

complete. As a result, the Plaintiffs will, perhaps, have difficulty showing any

632
   Post-Tr. Answering Br. Defs. Tal and Itshayek 106.
633
    In fact, the Plaintiffs do not specifically state any violations when alleging breach of this
representation, and instead unhelpfully cited to certain of their fact sections generally.

                                              142
damages with respect to Paymentech violations. That inquiry, however, is for

another day. The Indemnification Defendants have breached Section 3.23 of the

Merger Agreement.

                       d. The Indemnification Defendants Breached the Representation
                       on Relationships with Suppliers

          Finally, the Plaintiffs argue that, because PayPal threatened termination, the

Indemnification Defendants breached the representation in Section 3.26(b) of the

Merger Agreement that “[n]o supplier of products or services . . . has notified the

Company . . . that it intends to terminate its business relationship with the

Company.”634 The Indemnification Defendants argue that they did not breach this

representation because Plimus did not receive a termination notice prior to closing,

and because PayPal’s internal communications showed that a definitive decision

regarding termination was not made prior to closing. Plimus, however, was aware

of the PayPal representatives’ declarative statements that PayPal would send a

termination notice once certain conditions were met.           Section 3.26(b)’s plain

language does not require a notification of termination; only a notification of an

intent to terminate. PayPal representatives expressed such an intent to terminate in

e-mails and calls to Plimus in August and September 2011. As a result, the

Indemnification Defendants have breached Section 3.26(b).

634
      JX 796, at 48.

                                           143
                  2. The Fraud Exception Provision Does Not Allow Uncapped
                  Indemnification Liability for the Fraud of Others

          Pursuant to Section 10.03 of the Merger Agreement, the Defendants’

indemnity liability for breaches of representations and warranties is limited to the

lesser of their pro rata share of losses caused by such breaches and their pro rata

share of the escrow amount.635 The Exclusive Remedy clause in Section 10.10 of

the Merger Agreement maintains that the sole and exclusive remedies for breaches

of the Merger Agreement are those found within Article 10, “except in the case of

fraud or intentional misrepresentation (for which no limitations set forth herein shall

be applicable).”636 The Plaintiffs argue that in the case of fraud, this provision

removes the cap on indemnity liability, and imposes this uncapped indemnity

liability on all the Indemnification Defendants even for the fraud of others; that is,

even upon those parties both innocent and ignorant of any fraud. The Plaintiffs

argue that the provision is unambiguous, that a different reading would render

certain language illusory, and that their interpretation is reasonable in light of the

real-world context. They note correctly that Delaware embraces a contractarian

outlook. As a result, per the Plaintiffs, the Indemnification Defendants who were

selling stockholders, known in the Merger Agreement as Effective Time Holders

(“ETHs”)—having agreed to unlimited liability for the frauds of others—must be

635
      Id. at 71.
636
      Id. at 74–75.

                                         144
held to their bargain in the Merger Agreement. According to the Plaintiffs, this

applies to the ETHs equally, that is, to the charitable interests who were donees of

stock equally with the fraudsters.

       As part of a prior Motion to Dismiss, certain Defendants previously sought a

ruling, as a matter of law, that the Exclusive Remedy clause “simply exempts from

the indemnification limitations in Section 10 any recovery in tort from fraudsters.”637

In my 2014 Opinion on the Motion to Dismiss, I declined to address the meaning of

the Exclusive Remedy clause, noting that any decision at that time would not result

in dismissing the entire count. Accordingly, I did not make a finding on whether or

not the language was ambiguous on its face.638 However, as the Defendants point

out, I wrote that “I tend to agree that the Moving Defendants’ reading is

commercially reasonable,” and the issue “would be helpfully illuminated by

evidence of the parties’ intent.”639 Because I have found above that Tal committed

fraud when he did not disclose PayPal’s termination threat, I must now grapple with

the Exclusive Remedy clause.

       I must first determine whether the Agreement, read as a whole, is ambiguous

as to remedies available here. The pertinent provisions are set out below. In light

637
    Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 2014 WL 6703980, at
*26 (Del. Ch. Nov. 26, 2014).
638
    Id. at *27.
639
    Id. In any event, evidence of the parties’ intent was presented at trial but was limited to self-
interested recitations by the Defendants concerning their subjective intent, and is not helpful here.

                                                145
of this language, I turn to the issue of ambiguity. “[A] contract is ambiguous only

when the provisions in controversy are reasonably or fairly susceptible of different

interpretations or may have two or more different meanings . . . . The true test is not

what the parties to the contract intended it to mean, but what a reasonable person in

the position of the parties would have thought it meant.”640 The Plaintiffs point to

Section 10.10, which mandates that the limited indemnification obligations of

Section 10 to be the buyer’s exclusive remedy for damages, “except . . . in the case

of fraud or intentional misrepresentation (for which no limitations set forth herein

shall be applicable).”641 According to the Plaintiffs, this language is unambiguous;

in case of fraud, all sellers agreed to personally indemnify the buyer for all damages,

“without limits.” The argument that Section 10.10 unambiguously provides such

liability fails at inception; even when read in isolation, Section 10.10 does not

address whose fraud will trigger the provision. The Plaintiffs’ argument fails for a

more fundamental reason as well: I must construe the contract as a whole,642 and in

doing so, it is clear that the language quoted exempts fraudsters from the benefits of

the negotiated limits on liability.

640
    Rhone-Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del. 1992).
641
    JX 796, at 74–75.
642
    See, e.g., Chicago Bridge & Iron Company N.V. v. Westinghouse Elec. Co. LLC, 166 A.3d 912,
926–927 n.61 (Del. 2017); Northwestern Nat. Ins. Co. v. Esmark, Inc., 672 A.2d 41, 43 (Del.
1996); E.I. du Pont de Nemours and Co., Inc. v. Shell Oil Co., 498 A.2d 1108, 1113 (Del. 1985).

                                             146
          In Article 10, the parties agreed to a carefully thought-out liability scheme on

the part of the ETHs. Section 10.02 sets out the ETH’s indemnification obligations.

ETHs agreed to indemnify the buyer for the pro rata amount of all losses, as defined

in the Section. Section 10.02(c) limits such liability to claims brought by notice on

the ETHs during the contractual limitation period, made with specified detail.

Section 10.03 then places limitations on claims against ETHs:

          (a)(ii) in no event shall the [ETH]’s aggregate liability . . . exceed, in
          the aggregate, the escrow amount . . . .

          (b) The Escrow Amount will be the sole source of funds from which to
          satisfy the [ETH]’s indemnification obligations . . . . In no event shall
          any individual ETH]’s liability for Losses . . . exceed, in the aggregate,
          the lesser of (x) such [ETH]’s Pro Rata Share of the Escrow Amount,
          or (y) . . . [the] Pro Rata Share of the losses.”643

          The provisions detailed above demonstrate a thoughtful, bargained-for

liability scheme for ETHs—the parties agreed that losses from breaches of

representations and warranties would be indemnified from a fund, which would be

created from the sale proceeds of the ETH’s, and that such fund would represent the

limit on ETH liability. Section 10 contained benefits for the buyer as well. For

instance, Section 10.04 preserved the buyer’s rights of indemnification for breaches

of representations and warranties, even if the buyer was aware of the falsity of the

643
      JX 796, at 71.

                                             147
representation when made.644 In this context, however, what is important is that the

ETHs agreed to be liable without fault for violations of representations and

warranties by Plimus management, at an amount capped by the escrow. Section

10.10 must be read in this context.

       Section 10.10 provides that indemnification is the “sole and exclusive

remedy” running to the buyer for “breach of any covenant, agreement, representation

or warranty set forth in this Agreement;” remedies are “limited to those contained in

this Article 10.”645 Three exceptions are carved out from the exclusivity of the

indemnification remedy, of which two are not applicable here. The third involves

fraud, for which damages are not “limited to those contained in this Article 10;”

instead, in case of fraud or intentional misrepresentation, “no limitations set forth

herein shall be applicable.”646 The question, then, is the meaning of the fraud

exception. In light of the contractual liability scheme as a whole, I find the meaning

unambiguous.

       The ETHs agreed to set up an escrow fund. They agreed that damages for

breaches of representations and warranties would be paid from this fund, regardless

644
    The Merger Agreement provides such rights of indemnification “are part of the basis of the
bargain contemplated . . . and shall not be affected or waived by virtue of . . . any knowledge on
the part of [the buyer] of any untruth of such representation or warranty . . . regardless of whether
such knowledge was obtained by [the buyer’s] own investigation . . . [and] whether such
knowledge was obtained before or after the execution” of the Agreement. Id. at 72.
645
    Id. at 74–75.
646
    Id.

                                                148
of any fault on the part of an individual ETH and regardless of pre-contractual notice

of the falsity of the representations on the part of the buyer. This limited liability

made sense from the point of view of the ETHs, since many of them would have

limited or no opportunity to verify the representations and warranties personally. It

also made sense from the point of view of the buyer, since it had a ready fund from

which to be made whole in the event of a breach. The buyer could attempt, through

due diligence, to insulate itself from harm exceeding the amount in escrow. It could

not, however, reasonably anticipate fraud. Thus, it is unremarkable that while

liability was “limited to” the Article 10 indemnification, in case of fraud “no

limitations set forth herein” applied. This clause permitted the buyer to bring an

action against tort-feasors for damages outside of Article 10, as the Plaintiffs have

done here. This reading is consistent with Section 10.03(b), which provides that the

“Escrow Amount will be the sole source of funds from which to satisfy the [ETH]s’

indemnification obligations . . . .”647

          The Plaintiffs, however, seek to expand the benefits of their bargain. They

seek to convert a remedy “limited to” indemnification—except in the event of fraud,

in which case “no limitations” are applicable—into something else altogether. They

interpret the language as something akin to “in case of fraud, buyer may proceed in

indemnification, without showing fault against indemnitors, and with no limit on

647
      Id. at 71 (emphasis added).

                                          149
amount.” To my mind, this is simply not a reasonable reading of section 10.10. The

ETHs exposed themselves to indemnification liability for breaches of

representations and warrantees, without regard to fault, even in cases where the

buyer knew the truth of the misrepresentation before contracting; however, the ETHs

strictly limited the amount of that liability. I find that to read the Merger Agreement

as making the ETH’s strict-liability exposure limitless does not comport with the

language of the contract, nor does it comport with the closely-written liability

scheme the parties created.648 I find the language unambiguous: the Plaintiffs may

seek indemnification for breaches; their right to recover is limited to indemnification

under the contract from the escrowed funds, except in case of fraud, in which case

they are free to pursue their remedies in tort as well.

       The Plaintiffs contend that this eviscerates their bargain, and that it is against

public policy because it encourages the ETHs to benefit by turning a blind eye to

fraud. Neither argument is persuasive. In case of fraud, the Plaintiffs are entitled to

indemnification as well as any recovery in tort—that is what they bargained for. And

tort-feasors, including the fraudsters and those who conspired with them or aided

648
   “[T]he meaning which arises from a particular portion of an agreement cannot control the
meaning of the entire agreement where such inference runs counter to the agreement’s overall
scheme or plan.” E.I. du Pont de Nemours and Co., Inc. v. Shell Oil Co., 498 A.2d 1108, 1113
(Del. 1985).

                                           150
and abetted the fraud, do not escape liability under my plain reading of the Merger

Agreement.

          E. Unjust Enrichment

          The Plaintiffs bring an unjust enrichment claim against Tal, Itshayek, Herzog,

Kleinberg, SIG Fund, and the Charity Defendants. The Plaintiffs argue that such a

claim is not precluded by the Merger Agreement because that Agreement does not

fully define the relationship between the Plaintiffs and the Defendants.649 The

Plaintiffs point in this regard to the side letter payments and to the fact that Itshayek

and the two Charity Defendants were not parties to the Merger Agreement.

Furthermore, the Plaintiffs argue that unjust enrichment is a viable remedy when the

contract itself constitutes unjust enrichment.

          Unjust enrichment is a purely equitable cause of action and remedy. It

involves the unjust retention by one party of a right or property of another, in a

manner that is obnoxious to equity in a fundamental way, and where the plaintiff

lacks a remedy at law. In order to vindicate a claim for unjust enrichment, a plaintiff

must show (1) gain by one party; (2) loss by another; (3) that the gain and loss are

related; (4) that the first party has retained the gain without justification; and (5) the

absence of a remedy at law.650

649
      Pls. Opening Post-Tr. Br. 210.
650
      Nemec v. Shrader, 991 A.2d 1120, 1130 (Del. 2010).

                                              151
            The Plaintiffs aver that, absent breaches of contract and fraud in connection

with their purchase of Plimus, they would have avoided the sale, or paid less. They

allege that the overpayment has been retained by certain Defendants, which warrants

equitable relief. The Plaintiffs face a formidable barrier to recovery under a theory

of unjust enrichment, because our courts have consistently held that a plaintiff may

not pursue unjust enrichment “aris[ing] from a relationship governed by

contract”651—here, the Merger Agreement. In any event, it would be premature, and

risk an advisory opinion, to address potential entitlement to recovery under a theory

of unjust enrichment here. This matter is bifurcated, with a trial on damages yet to

come. I found it efficient to determine liability under tort and contract theories, to

assume damages, and to set aside a determination of the extent of damages, if any,

for another phase. Tort and breach of contract are legal causes where a plaintiff must

demonstrate actionable behavior; they also impose the obligation to demonstrate

damages arising from that actionable behavior before recovery. Unjust enrichment,

however, is fundamentally different. In an action for unjust enrichment, loss and

related gain are the marrow of the cause of action itself. Therefore, I decline to

address unjust enrichment until the record is complete on damages.

651
      Id.

                                             152
                                 III. CONCLUSION

      For the forgoing reasons, I find that the Plaintiffs have shown that Tal is liable

for fraud, and that the Plaintiffs are entitled to restitution for breaches of certain

representations and warranties, in an amount capped by the funds in escrow. Issues

of damages remain to be tried.

                                         153