Facts

Hermann Hegels, 65 and retired, Hartmut Schafer, a 41-year-old orthodontist, and Roland Graves, 58 and retired, invested a total of $690,000 in Esyon Corp., a broadband company, to purchase what they thought were 230,000 shares of stock at $3 per share. Plaintiffs contended that John Harwer, Esyon's president-designate as well as a promoter of its stock, instructed the men to wire the money to an account held by Cayman Computer Alliance Corp. Several months later, the men discovered that Esyon shares were selling for between $.50 and $1. They were given additional shares of stock after complaining. They later discovered that most of their money never reached Esyon, but rather was diverted by Harwer to pay off a judgment entered against him in another case. The plaintiffs contended that Esyon CEO Bob Hong, secretary and treasurer Jesse Hong, and director John Gauthier convinced the plaintiffs not to act against Harwer by promising to recover the funds and allow the plaintiffs to rescind the transaction. The plaintiffs also contended that Esyon executives also promised to take legal action against Harwer. These contentions were denied by the defendants. The Hongs and Gauthier recovered the funds from Harwer, but used them to repay themselves for personal loans they had made to the company, instead of allowing the plaintiffs to rescind. Additionally, instead of taking legal action against Harwer, the executives rehired him to handle stockholder relations. The plaintiffs contended that the money should have been provided to them and they should have been allowed to rescind the deal. The plaintiffs argued that the executives should have taken legal action against Harwer and not permitted him to be involved with the company in any manner.

PLAINTIFFÆS CONTENTIONS:
The investors sued Esyon Corp., Harwer, the Hongs and Gauthier, alleging
fraud, negligent misrepresentation, conversion, breach of contract, breach of fiduciary duty, California
Securities Fraud, constructive fraud, breach of California Securities Law, breach of the implied covenant of
good faith and fair dealing, and negligence. They voluntarily dismissed the conversion claim. Judge David
Thompson dismissed the California Securities Law claim due to the statute of limitations. Default judgments
were entered against additional named defendants Cayman Computer Alliance Corp., and C-Net Cottesloe
Corp.
The plaintiffs contended that Harwer made misrepresentations about the true price of the shares as well as various
aspects of the company's operations. They also claimed that the Hongs, Gauthier, and Esyon were responsible
for Harwer's fraudulent actions because they made him an agent of the company and ratified his fraud by
keeping the recovered funds that Harwer had diverted. They also contended that the defendants were negligent
in their supervision of Harwer and in rehiring him.

DEFENDANTSÆ CONTENTIONS:
The defendants denied that they had any duty of supervision or that Harwer
was ever hired in the first instance or rehired in the second instance. Harwer argued that he was misled by the
other defendants about the true price of the stock. He admitted misusing the money to pay off his own debt, but
claimed that he intended to repay the portion he used after he became president of Esyon. He also argued that
his eventual return of the money to Esyon relieved him from liability.
The other defendants claimed that they were not responsible for Harwer's deceptive acts, that they never
authorized him to lie about the stock price or other aspects of the business, that repayment of their bona fide
loans to the company was within their managerial discretion, that they had the discretion to rehire Harwer, and
that Harwer was a "crook" who was solely to blame.

Settlement Discussions

The plaintiffs demanded $1,000,000 before trial.

Damages

The investors sought $690,000. They also sought punitive damages, contending that all defendants acted with malice, oppression or fraud. The defense contended that all of the Esyon investors, including the Hongs and Gauthier, lost all or most of their investment money.

Result

The plaintiff was awarded $690,000, plus costs and interest.

Other Information

The jury found that the defendants acted with malice, oppression or fraud, but awarded no punitive damages. Nevertheless, the jury found Harwer liable for the full amount of the award. Judge Thompson denied the defense request for a new trial or a judgment notwithstanding the verdict on May 17, 2005. He awarded prejudgment interest on June 3. He entered judgment on July 12. The plaintiffs sought to impose liability against defendant Bob Hong on the basis of a theory of "alter ego." This equitable issue was tried before the judge, outside the presence of the jury, and alter ego liability was denied. The jury also found that an "accord and satisfaction" was reached between Harwer and the plaintiffs wherein the plaintiffs agreed to give up their claims against Harwer if they received additional shares of stock in Esyon and Harwer deposited the entire $690,000 of other investment in the company. An appeal has been filed and is pending.

Deliberation

five days

Poll

12-0

Length

20 days