A federal appeals panel is mulling whether billionaire John Paul DeJoria, recidivist securities fraudster Howard M. Appel and two other defendants should have to pay $21.4 million in damages arising from the looting and bankruptcy of a Texas company.
Three judges from the U.S. Court of Appeals for the 5th Circuit heard oral arguments in the case last month.
A jury found in July 2017 that Matthew J. Cohen, the former chief executive of Latitude Solutions Inc. (formerly OTC: LATI), and DeJoria, a director and large shareholder, breached their fiduciary duty to the wastewater-treatment company.
The jurors also found that DeJoria, Appel and Ernest A. Bartlett III, one of Appel’s longtime associates, aided and abetted Cohen’s breach of fiduciary duty.
The suit was brought in U.S. District Court in Fort Worth, Texas by the bankruptcy trustee overseeing Latitude Solutions’ estate. The five-day trial and the resulting eight-figure verdict got little, if any, mainstream media attention, despite DeJoria’s celebrity status as the co-founder of the John Paul Mitchell hair-care company and the Patron Tequila empire.
DeJoria, Appel and Bartlett were the subjects of an earlier Sharesleuth investigation involving questionable activities at another small public company, Virtual Piggy Inc., now Rego Payment Architectures Inc. (OTC: RPMT).
The Justice Department brought fraud charges against Appel last year, alleging that he manipulated the shares of Virtual Piggy and another penny-stock company, Red Mountain Resources Inc. (formerly OTC: RDMP).
Appel pleaded guilty to a single count of conspiracy to commit securities fraud and was sentenced in December to five years in prison. He is incarcerated in Maryland.
The Securities and Exchange Commission brought a parallel civil case, alleging manipulation at those two companies and a third, Rio Bravo Oil Corp. (OTC: RIOB).
Appel consented to the entry of a judgment in September 2018 that permanently enjoined him from future violations of federal securities laws, including making false statements and manipulating share prices.
THE LATITUDE SOLUTIONS CASE
Latitude Solutions’ bankruptcy trustee, Carey D. Ebert, alleged that Cohen and DeJoria breached their fiduciary duty by enabling Appel to play key behind-the-scenes roles at the company, even though they knew he was a convicted felon and stock manipulator.
Elbert argued that Appel surreptitiously influenced corporate actions at Latitude Solutions and engaged in fraudulent stock transactions to temporarily boost the company’s share price.
Appel was not an officer or director of Latitude Solutions, and had been barred from participating in the sale or marketing of securities because of his previous criminal and civil violations.
He provided services to the company under the guise of a consulting agreement it had with one of Bartlett’s entities, FEQ Realty Inc. That firm also figured into the Virtual Piggy case.
An expert testified that Appel and Bartlett collected more than $5 million in profits by acquiring shares from Latitude Solutions at a deep discount and then selling them on the open market.
The company, meanwhile, squandered millions on its unsuccessful attempt to develop a commercially viable wastewater-treatment system. It filed for protection from creditors in U.S. Bankruptcy Court in Fort Worth in 2012.
Latitude Solutions initially sought liquidation, listing assets of $1.2 million in assets and $16.3 million in liabilities. The case was later converted to a Chapter 11 reorganization.
Ebert uncovered the apparent wrongdoing at Latitude Solutions and filed a civil action in 2015, seeking to recover millions from insiders and certain other parties she believed benefited financially from those activities.
After two years of legal wrangling over dismissal motions by Cohen, DeJoria, Appel, Bartlett and others, the case went to trial. The jury ruled in favor of the trustee and against the four main defendants. Ebert dropped the others from the case right before the trial.
The jury found that Cohen and DeJoria breached their fiduciary duties, and set the damages at $6.5 million for Cohen and $1.5 million for DeJoria.
The jury found that DeJoria, Appel and Bartlett aided and abetted Cohen’s breach. It set damages at $2.5 million each for Appel and Bartlett, and $400,000 for Cohen, based largely on the gains they received from their stock sales.
The jury also found that the harm that Cohen, DeJoria and Appel caused to the company was the result of gross negligence or malice. It set additional damages at $2 million for Cohen, $1 million for DeJoria and $5 million for Appel.
The cumulative judgments totaled $21.4 million.
The defendants argued in filings with the U.S. Court of Appeals in New Orleans that Latitude Solutions’ bankruptcy trustee lacked the standing to pursue a breach of fiduciary claim; Ebert noted that they never raised that objection before or during the trial.
She added that the trustee has standing because the defendants caused Latitude Solutions to take on millions in debt it had no hope of repaying, part of the effort to generate favorable news that would help boost the company’s share price.
The appellants also argued in their appeal that the judgment should be reversed because Texas law does not recognize a claim for damages related to aiding and abetting a breach of fiduciary duty. Ebert countered that DeJoria did not raise that issue until after the verdict was rendered, and that Appel and Bartlett did not make any objections on that front.
DeJoria, Appel and Bartlett also have raised questions about whether the jury and lower court erred by finding them jointly and severally liable for Cohen’s breach of fiduciary duty, and the $6.9 million in damaged assigned to his actions.
The bankruptcy trustee argued that attorney’s for the defendants essentially accepted the theory of joint liability when the two sides were preparing the instructions for the jury.