A three-judge panel in the U.S. Court of Appeals for the Fifth Circuit has tossed all but $400,000 of a $21 million judgment that found business celebrity billionaire John Paul DeJoria and three other defendants breached their fiduciary duty to the now-bankrupt Fort Worth-based company, Latitude Solutions Incorporated.
The judgment followed a 2017 jury trial in Fort Worth that stemmed from a lawsuit brought by LSI’s bankruptcy trustee, Carey Ebert. In the complex, multi-part decision, the panel ruled unanimously that evidence presented at trial was insufficient to support damages, or that the damages were too indirect to give Ebert standing.
Ebert had alleged that former LSI chief financial officer Matthew Cohen and DeJoria, an LSI investor/director, breached their fiduciary duty to the company by allowing fellow defendant Howard Appel to play a key role at the company despite his history as a convicted, repeat offender of securities fraud. Appel did not purchase or sell any shares of LSI stock, but served as a business consultant and raised capital for the company.
The jury ruled in Ebert’s favor, and also found that Appel and his business associate, Earnest Bartlett, aided and abetted Cohen’s breach of fiduciary duty, which included entering a key deal with an outside company as part of a “pump and dump” securities scheme.
Ebert alleged that LSI, a company putatively formed to commercialize water decontamination technologies, was from its outset part of an elaborate securities fraud. Key to the scheme, the trustee alleged, was a $9.95 million 2011 contract with Jabil, Inc. to manufacture remediation equipment for LSI. That contract with Jabil, a reputable multi-billion dollar company, created the perception that LSI was a serious, stable company, which allowed Cohen and other stockholders to sell LSI stock at inflated prices, the trustee had alleged.
DeJoria, best known for co-founding the Paul Mitchell hair products and The Patrón Spirits Company, claimed he got involved with LSI due to his philanthropic interest in bringing affordable clean water to third world economies. He served as a director and his $11 million investment in the company was the sole source of capital for LSI in 2012, the appeals court noted.
The Fifth Circuit Panel, which included Judges Rhesa Hawkins Barksdale, Leslie Southwick and Catharina Haynes, reversed all but $400,000 in damages claimed against Cohen for a stock sale. The panel remanded the issue of exemplary damages back to the trial court.
Houston McGuireWoods partner Tom Farrell handled oral argument for DeJoria. Washington, D.C. lawyer Jonathan Franklin of Norton Rose Fulbright argued for Ebert, while Arkansas solo practitioner Kenneth Shemin argued for Appel, Bartlett and Cohen.
The case is No. 18-10832 In the matter of Latitude Solutions, Inc., Debtor and Carey Ebert, Appellee v. John Paul DeJoria, et al., Appellants