Promise Easy Limited v. Chulso Moon

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
PROMISE EASY LIMITED, )
)
Plaintiff/Counterclaim )
Defendant, )
)
v. ) C.A. No. 12438-CM
)
CHULSO MOON, JS YOON MEMORIAL )
CANCER RESEARCH INSTITUTE, LLC, )
FORECAST GENETICS, INC., )
FORESECAST GENETICS HOLDING CO., )
INC., PROSPECT GENETICS, INC., )
PROSPECT RESEARCH, INC., and )
PROSPECT OPERATIONS, INC., )
)
Defendants/Counterclaim )
Plaintiffs. )
POST-TRIAL MEMORANDUM OPINION
Date Submitted: June 5, 2023
Date Decided: August 10, 2023
John G. Harris, Peter C. McGivney, BERGER HARRIS LLP, Wilmington, Delaware;
Counsel for Plaintiff and Counterclaim Defendant Promise Easy Limited.
Julia B. Klein, KLEIN LLC, Wilmington, Delaware; Counsel for Defendants and
Counterclaim Plaintiffs Chulso Moon, JS Yoon Memorial Cancer Research Institute, LLC,
Forecast Genetics, Inc., Forecast Genetics Holding Co., Inc., Prospect Genetics, Inc.
Prospect Research, Inc., and Prospect Operations, Inc.
McCORMICK, C.
Dr. Chulso Moon convinced Promise Easy Limited to invest up to $2 million to
develop and commercialize a test to diagnose individuals at high risk for breast cancer.
Among other things, Dr. Moon represented to Promise Easy that he could commercialize
this test within 18 months of receiving the first $500,200 advance and that the test would
achieve an accuracy level of at least 95%. Dr. Moon provided information about the cost,
timing, and viability of the diagnostic test, which, before the investment, was indefinitely
stuck in the research phase. Dr. Moon stated that he already had relationships, agreements,
and laboratory facilities in place that would enable speedy passage through the regulatory
hurdles standing between his test and commercialization. Promise Easy took the bait and
advanced $500,200. Dr. Moon took the money but failed to deliver. Promise Easy noticed
breach and brought this suit against Dr. Moon and his entities, alleging violations of the
Delaware Securities Act, breach of express and implied contractual provisions, and
fraudulent inducement. At trial, Promise Easy proved that Dr. Moon knew that much of
what he represented to Promise Easy was false and that he breached his contractual
obligations. This post-trial decision enters judgment in favor of Promise Easy on most of
its claims.
I. FACTUAL BACKGROUND
Trial took place by Zoom over two days. As reflected in the Joint Schedule of
Evidence submitted by the parties, the record comprises 60 joint trial exhibits, trial
testimony from three fact witnesses, and deposition testimony from the same three fact
witnesses.1 These are the facts as the court finds them after trial.
A. Dr. Moon Presents His Research To NYG Capital.
Dr. Chulso Moon is an oncologist with a medical degree from Seoul National
University in South Korea and a Ph.D from Johns Hopkins University in human genetics
and molecular biology.2 Dr. Moon’s resume is extensive and impressive. After obtaining
his Ph.D, he did a combined residency and fellowship program in oncology, and he has
since taught cancer biology and clinical oncology at Johns Hopkins.3 Dr. Moon began
conducting independent research in 2001, and he eventually founded his own independent
research foundation, Defendant JS Yoon Memorial Cancer Research Institute (“JS Yoon”),
on behalf of his mother who died of breast cancer.4 Dr. Moon’s area of research involves
developing tests for genetic and other biomarkers of cancer.5 He has published more than
40 articles and given over 60 presentations on this research.6
One such presentation kicked off the events in this lawsuit. In January 2015, Dr.
Moon presented his research to New York Global Capital (“NYG Capital”) in New York
1
See C.A. No. 12438-CM, Docket (“Dkt.”) 128 (Joint Schedule of Evid.). This decision
cites to: trial exhibits (by “JX” number); the trial transcript, Dkts. 90–91 (by “Trial Tr. at”
page, line, and witness); and the deposition transcripts of Chulso Moon, Benjamin Wey,
and Warren Raiti (by the deponent’s last name and “Dep. Tr. at” page and line).
2
Trial Tr. at 233:8–234:3 (Moon).
3
Id. at 234:4–19 (Moon).
4
Id. at 234:23–235:8 (Moon).
5
JX-34 at 5–6.
6
Trial Tr. at 235:9–13 (Moon).
2
City.7 NYG Capital’s CEO and founder Benjamin Wey, General Counsel James Baxter,
and Assistant General Counsel Warren Raiti attended the January 2015 presentation.8 One
of Dr. Moon’s good friends, Larry Agulnick, had set up the meeting.9
Wey and Raiti understood Dr. Moon’s presentation to be a pitch for funding.10
According to Wey and Raiti, Dr. Moon presented that he had developed a test that was
“100 percent fully tested by Johns Hopkins University” with a “95 percent effective rate in
detecting breast cancer.”11 Dr. Moon represented that research on the test was complete
and that the “product was done, ready for commercialization, going to the FDA, marketing,
and sales.”12
Dr. Moon, meanwhile, testified that he viewed the meeting as an opportunity to
present his research and develop a potential relationship, whether or not that ultimately
resulted in funding.13 From Dr. Moon’s perspective, he was merely presenting on his two
7
Id. at 158:24–159:4 (Moon); id. at 341:21–23 (Wey).
8
Id. at 343:9–12 (Wey).
9
Id. at 152:15–153:5 (Moon); id. at 342:11–19 (Wey).
10
Id. at 107:1–17 (Raiti); id. at 341:21–342:2 (Wey).
11
Id. at 344:4–13 (Wey); see also id. at 22:13–22 (Raiti) (testifying that Dr. Moon
presented that the test had “a very, very high sensitivity and specificity for the identification
of particular genetic mutation that he could link to breast cancer, something like 96 and 97
percent, respectively”).
12
Id. at 344:17–23 (Wey); see also id. at 22:23–23:4 (Raiti) (“[T]he status of the project
was effectively ready for Stage II clinical trials and that once Stage II clinical trials were
completed and even potentially before, that it would be relatively easy to obtain FDA
510(k) approval for the -- for what would be the genetic test.”).
13
Id. at 238:5–239:2, 318:4–14 (Moon).
3
years of breast cancer biomarker research that he hoped could one day be used to develop
a commercially viable breast cancer genetic test kit, though no such kit yet existed.14
In what will become a common theme in this decision, Dr. Moon’s recall of what
happened is not the most reliable one. Dr. Moon was incentivized to paint his research in
the rosiest light possible. Wey and Raiti were willing to trust Dr. Moon’s assurances.15
Wey and Raiti did not have the expertise necessary to understand all the science underlying
Dr. Moon’s presentation,16 and it does not make sense that they would have conjured the
precise testing and “effective rate” percentages from thin air. Wey and Raiti’s testimony
as to Dr. Moon’s representations at this initial meeting are thus more credible.
B. NYG Capital Conducts Due Diligence And Signs A Term Sheet.
Based on Dr. Moon’s presentation, Wey decided to get the ball rolling on an
investment. In Wey’s own words, he was “enamored” with Dr. Moon and his research,
and Wey saw a joint venture as an opportunity to help women worldwide.17 Wey also saw
14
Id. at 153:22–156:5 (Moon).
15
Id. at 32:14–15 (Raiti) (“I mean, we relied on Dr. Moon for pretty much everything.”);
id. at 357:14–19 (Wey) (“Q. Did you rely on the information that Dr. Moon provided to
you during these meetings? A. Absolutely. I trusted him immensely.”)
16
Id. at 26:16–21 (Raiti) (“I’m not a geneticist. I’m not a Ph.D biologist. You tell me,
right? How does this work and what are we looking into?”); id. at 358:14–20 (Wey) (“The
document and the related data came 100 percent from Dr. Moon and also his assistant,
Annie. Keep in mind we’re businesspeople; we are not scientists.”).
17
Id. at 357:14–358:6 (Wey).
4
it as a good business opportunity; he testified that Dr. Moon presented that the project could
eventually be worth more than $2 billion.18
At trial, Wey characterized NYG Capital’s services as business consulting and
private equity investing.19 It is unclear to what extent NYG Capital invested its own funds
as opposed to connecting financers to potential investments. Both Wey and Raiti described
NYG Capital as a “brand.”20 According to Wey, NYG Capital would act as “an investor
or as investor’s representative in New York,” evaluate potential projects, and then
“introduce the project to a particular investor that we may have interest in.”21 Raiti testified
that NYG Capital was co-branded with an Asian company called NYGG Asia, and that
NYGG Asia often invested in projects recommended by NYG Capital.22 As a result, much
of NYG Capital’s efforts were expended in the due diligence stage, and then it would “go
to see some of our investor network when the deal becomes real.”23
In the case of Dr. Moon’s research, however, both Wey and Raiti testified that the
NYG group was not interested in a direct investment, and so NYG Capital sought to
18
Id. at 356:17–24 (Wey).
19
Id. at 340:24–341:4 (Wey).
20
Id. at 12:20–13:3 (Raiti); id. at 348:3–6 (Wey).
21
Id. at 348:6–19 (Wey); see also id. at 13:4–9 (“They were advisory companies. They
did business advisory work. And they also worked with investors in Asia to look at
different projects and make investments.”).
22
Id. at 12:20–14:2 (Raiti) (“So in part, it was identifying opportunities for the NYGG
Asia, so Jim [Baxter] and Ben [Wey] would look for different companies or opportunities
in the markets in the U.S. to basically identify for purposes of coordinating with NYGG
Asia. And NYGG Asia would make investments or not.”).
23
Id. at 348:6–19 (Wey).
5
connect Dr. Moon to other potential investors.24 After the January 2015 presentation, Raiti,
and to a lesser extent Wey, worked with Dr. Moon to conduct due diligence.25 Over the
course of several months, Raiti and Dr. Moon spoke frequently over the phone to hammer
out the logistics of developing Dr. Moon’s research into a commercially viable testing kit.26
Dr. Moon consulted with his personal attorney as to the terms of a potential investment.27
On March 26, 2015, the parties entered into an Investment Term Sheet for Definitive
Agreement (the “Term Sheet”).28 The Term Sheet contemplated that Dr. Moon would form
Prospect Genetics, Inc. as a Delaware corporation.29 Prospect Genetics would wholly own
Prospect Research, Inc., an entity that held the venture’s intellectual property rights, and
Prospect Medical Testing, Inc., which would be the operating entity (all together,
“Prospect” or the “Company”).30 NYG Capital had not yet nailed down investors for the
project, so the Term Sheet identified NYG Capital or its assignee as the “Investor.”31 The
Term Sheet committed the Investor to providing a $2 million line of credit to Prospect
24
Id. at 17:2–11 (Raiti); id. at 348:6–19 (Wey).
25
Id. at 14:9–19 (Raiti); id. at 353:1–355:9 (Wey).
26
Id. at 29:6–30:17 (Raiti); id. at 159:9–16 (Moon).
27
Id. at 159:11–21 (Moon).
28
JX-3 (“Term Sheet”).
29
Id. at 1.
30
Id.
31
Id.; see also Trial Tr. at 348:3–23 (Wey) (“So at the point that this document was entered,
we would not have known the specific name or the investors or the amount to be precise
because it was still preliminary.”).
6
Genetics.32 The Term Sheet was conditioned on a later-executed credit agreement.33 Dr.
Moon signed the Term sheet in his individual capacity, as President and Chairman of
Prospect Genetics, and as President of JS Yoon.34 Baxter signed on behalf of the Investor.35
C. The Parties Execute The Transaction Documents.
Raiti and Dr. Moon continued to communicate almost every night and on weekends
through the spring of 2015 to flesh out the details of the joint venture.36 Dr. Moon testified
that he spent over a hundred hours communicating with Raiti about the project. 37 Wey
testified that he met with Dr. Moon at least six times during this period.38
At the same time, Wey tried to connect the project to interested investors. He
pitched the investment to Roger Li, Wey’s friend and colleague of 20 years, in Beijing after
the January 2015 presentation.39 Li took an interest, and he formed Promise Easy as a
British Virgin Islands registered entity to carry out the investment.40 Li was a director of
32
Term Sheet at 1.
33
Id.
34
Id. at 5.
35
Id.
36
Trial Tr. at 28:5–18 (Raiti); id. at 266:7–15 (Moon).
37
Id. at 163:14–165:18 (Moon).
38
Id. at 346:20–347:6 (Wey).
39
Id. at 349:3–8, 384:6–9 (Wey).
40
Id. at 341:5–20, 347:7–17 (Wey).
7
Promise Easy, and Wey served as Promise Easy’s United States representative. 41 In this
role, Wey updated Li on developments in diligence.42
These months-long negotiations culminated in the execution of a Convertible Note
Purchase Agreement on May 29, 2015 (the “NPA”).43 Contemporaneously and pursuant
to the NPA, Prospect Genetics issued a $2 million Convertible Promissory Note to Promise
Easy (the “Promissory Note”).44 The NPA governed the terms of Promise Easy’s
investment in Prospect.45 Dr. Moon signed the NPA as President of Prospect Genetics and
JS Yoon.46 Dr. Moon also signed the NPA individually and in his capacity as the sole
stockholder of Forecast Genetics Holding Company, Inc. and Forecast Genetics, Inc., the
entities Dr. Moon used to hold his 100% stake in Prospect Genetics.47 Li signed the NPA
on behalf of Promise Easy.48 Section 9.14 of the NPA requires Dr. Moon, Prospect, and
41
Id. at 341:16–20 (Wey).
42
Id. at 364:20–365:7 (Wey).
43
JX-8 (“NPA”).
44
JX-9 (“Promissory Note”).
45
NPA § 1.1; see also Trial Tr. at 349:16–19 (Wey) (“This was the definitive investment
agreement between the investor and the investment target.”).
46
NPA at 17–18.
47
Id. at 18–19; see also Trial Tr. at 161:2–3 (Moon) (“It was a holding company that was
made by my lawyer.”). Dr. Moon testified that he did not know the difference between the
two Forecast Genetics entities. Moon Dep. Tr. at 209:11–210:18. The entities’ separate
roles do not alter the outcome here, and this decision refers to Forecast Genetics, Inc. and
Forecast Genetics Holding Company, Inc. together as “Forecast Genetics.”
48
NPA at 19.
8
JS Yoon to indemnify Promise Easy for “any and all claims, damages, losses, liabilities
and reasonable expenses” that Promise Easy incurred from a breach of the NPA.49
The NPA contains five other provisions relevant to this dispute. First, it sets out the
purpose of the funding and defines a timeline for completion. Second, it establishes the
method for distributing funds and the conditions constituting default. Third, it requires Dr.
Moon to license a particular provisional patent to Prospect. Fourth, it requires Prospect to
enter a Consulting Agreement to retain Dr. Moon’s services. Fifth, it requires Dr. Moon
to execute a Security Agreement to collateralize the NPA. This decision refers to the NPA,
the Promissory Note, and the related ancillary documents as the “Transaction Documents.”
1. The Product Timeline
Section 1.2 of the NPA states that Prospect Genetics shall use the funds from
Promise Easy
to complete clinical and other research and product
development of a U.S. Food and Drug Administration (FDA)
approved prognostic breast cancer genetic screening test and
test kit, based on DNA sequencing and related scientific
discoveries and intellectual properties for all stages and aspects
of breast cancer detection in high risk patients (the “Test”),
together with associated overhead, operational, and
administrative costs as each may be approved in advance by
the Purchaser (collectively, the “Permitted Uses”)[.]50
49
Id. § 9.14.
50
Id. § 1.2.
9
Section 1.2 also requires that expenditures be “in accordance with the budget and
milestones provided in the product timeline attached hereto.”51 This provision refers to the
Product Timeline Budget Summary (“Product Timeline”), attached as Exhibit B to the
NPA.52 The Product Timeline represented the culmination of Raiti and Dr. Moon’s
conversations about the logistics of transforming Dr. Moon’s research into a commercially
viable product.53 Dr. Moon, with the help of his assistant Annie John, supplied Raiti with
the inputs for the Product Timeline.54 Raiti took these estimates, and through several
iterations, finalized them into the Product Timeline.55 The Product Timeline indicated that
the project could be completed in 18 months at a total cost of $1,986,658.56
At trial, the parties hotly contested the Product Timeline’s purpose and utility.
According to Wey, the investors needed a concrete budget and timeline to provide
corresponding funding, and the Product Timeline served that purpose.57 According to
Raiti, all of the timeline and budget milestones came from Dr. Moon, and the final Product
51
Id.
52
JX-10 (“Product Timeline”).
53
Trial Tr. at 28:5–29:5 (Raiti); id. at 266:7–15 (Moon).
54
Id. at 26:22–27:4 (Raiti); id. at 165:8–21 (Moon); id. at 358:12–359:13 (Wey).
55
Id. at 26:22–27:10 (Raiti); id. at 169:10–11 (Moon); see, e.g., JX-5 (May 4, 2015 email
from Dr. Moon to Raiti incorporating Dr. Moon’s edits to Raiti’s proposed draft).
56
Product Timeline at 2.
57
See Trial Tr. at 359:24–360:13 (Wey) (“We never understood that to be estimate.
Investors never understood that to be an estimate. We understand this [] process is ironclad
in stone. . . . It wasn’t a start-up venture. It was a private equity, mature investment to
commercialization. That was it. That’s why this was part of the [] definitive investment
document.”).
10
Timeline was supposed to represent Dr. Moon’s best estimates for how the project would
proceed.58 Meanwhile, Dr. Moon testified that he repeatedly told Raiti and his personal
attorney that the numbers he supplied for the Product Timeline were unattainable “bare
bones” estimates that assumed a best-case scenario without any hiccups.59
The evidence supports Wey and Raiti’s testimony. Wey testified that Promise Easy
was reticent to invest more than $2 million.60 The Promissory Note’s principal amount of
$2 million and the NPA’s aggregate limit of $2 million reflect that Promise Easy did not
anticipate expenses deviating wildly from the Product Timeline.61 Raiti had no experience
in breast cancer biomarker diagnostic research, and he necessarily relied on Dr. Moon’s
expertise to draft the Product Timeline.62 The Product Timeline does not list ranges of
timing or cost suggesting that the estimates were on the low range, and nowhere does it
state that it is a best-case estimate.63 Dr. Moon admitted this at trial.64
58
Id. at 29:6–39:19 (Raiti).
59
See, e.g., id. at 180:7–21 (Moon) (“It is a general accepting out of common sense in
scientific community that any budget can be bare bones and [] on any biotechnical
document, we have to assume that this can be changed any time because . . . we have to
sign certain development agreement here, but this is my best guess and the best scenario.”).
60
Id. at 352:3–5, 360:20–361:12 (Wey).
61
Promissory Note at 1; NPA § 1.1.
62
Trial Tr. at 26:22–27:10 (Raiti).
63
See Product Timeline.
64
Trial Tr. at 180:2–4 (Moon).
11
Dr. Moon testified that his personal attorney drafted the Transaction Documents and
that he reviewed the documents with his attorney before signing them.65 Dr. Moon also
copied his personal attorney on emails containing Dr. Moon’s revisions to the Product
Timeline,66 and Dr. Moon testified that “everything went to my lawyer” in preparing the
Transaction Documents.67 In Section 3.11 of the NPA itself, Dr. Moon on behalf of
Prospect agreed that the Transaction Documents, plus any information given in connection
with those documents, did “not contain any untrue or inaccurate statement of a material
fact or omit to state a material fact necessary in order to make the statements contained
therein not misleading in the light of the circumstances under which they were made.”68
It is hard to infer on these facts that the NPA does not reflect Dr. Moon’s
representation that the Product Timeline was an attainable estimate of the project’s
progress.
2. Distribution And Default Terms
Section 1.1 of the NPA outlines the scope of Prospect Genetics’ line of credit from
Promise Easy. In exchange for the Promissory Note, Promise Easy agreed to issue an
initial advance of at least $500,000 (the “Initial Advance”).69 Thereafter, Prospect Genetics
65
Id. at 180:5–181:11, 200:10–22 (Moon).
66
See, e.g., JX-5.
67
Trial Tr. at 161:6–9 (Moon).
68
NPA § 3.11.
69
Id. § 1.1.
12
could request “Additional Advances,” which when aggregated with the Initial Advance
could not exceed $2 million.70
Section 1.3 provides that Prospect Genetics could request Additional Advances by
providing written notice to Promise Easy ten days before the requested disbursement (a
“Notice of Drawdown”).71 Dr. Moon had to include details in the Notice of Drawdown
that identified the permitted uses of the funds to further testing kit development.72 If the
Notice of Drawdown requested funds “for one or more Permitted Uses and is consistent
with the Product Timeline,” and Prospect had not breached any of its contractual
obligations, then Promise Easy could not unreasonably withhold its approval of the
Additional Advance.73 If Dr. Moon satisfied the requisite conditions for an Additional
Advance and Promise Easy denied the request, then Dr. Moon could deliver a notice of
default.74
3. Patent Licensing Agreement
Section 2.3(a) of the NPA required Dr. Moon to contemporaneously execute a
Patent License Agreement, attached as Exhibit C to the NPA.75 The Patent License
Agreement granted Prospect Research a license to Dr. Moon’s provisional patent for his
70
Id.
71
Id. § 1.3.
72
Id.
73
Id.
74
Id.
75
Id. § 2.3(a).
13
genetic sequencing method, which formed the basis of the breast cancer screening kit.76
The patent was held by JS Yoon.77 The Patent License Agreement gave Prospect Research
a “non-transferrable, worldwide, royalty-free, perpetual, exclusive right and license to use
the Licensed IP Rights in the Field of Use to research, develop, and/or commercialize the
Test.”78 The “Licensed IP Rights” included Dr. Moon’s provisional patent, any
improvements he made thereon, and any additional discoveries or data arising from Dr.
Moon’s continued research.79 Dr. Moon could only terminate the Patent License
Agreement after providing thirty days’ written notice of Prospect Research’s material
breach of the agreement.80
Dr. Moon executed the Patent License Agreement individually and on behalf of JS
Yoon.81
4. Consulting Agreement
Section 2.3(c) of the NPA required that Dr. Moon execute an individual Consulting
Agreement for his continued role at Prospect, attached as Exhibit E-1 to the NPA.82 Dr.
Moon’s Consulting Agreement defined his services as “all activities, efforts and actions
76
JX-11 (“Patent License Agr.”).
77
Trial Tr. at 166:24–167:2 (Moon).
78
Patent License Agr. § 2.1
79
Id. § 1.1.
80
Id. § 12.2.
81
Id. at 14; Trial Tr. at 166:24–167:2 (Moon) (“Q. Was the patent filed in your name? A.
It was filed under the name of JS Yoon, patent holder. I was inventor.”).
82
NPA § 2.3(c).
14
necessary and sufficient to complete the items listed in the Product Timeline.” 83 Prospect
paid Dr. Moon $20,000 per month in exchange for his services. 84 Dr. Moon’s Consulting
Agreement automatically terminated after eighteen months.85 Dr. Moon testified that he
understood his responsibilities under the Consulting Agreement as providing “all clinical
and scientific items, while Warren Raiti works as details in terms of legal contract or the
details necessary to execute the finance.”86
5. Security Agreement
Section 2.3(b) of the NPA required the parties to execute a Security Agreement,
attached as Exhibit D to the NPA.87 Execution of the Security Agreement was a condition
precedent to Promise Easy’s disbursement of any funds under the Promissory Note.88
Under the Security Agreement, Prospect granted Promise Easy “a security interest in and
to the Collateral (as hereinafter defined) to secure the Loans.”89 The Security Agreement
defined “Collateral” to include virtually all of Prospect’s assets, including machinery,
intellectual property, and trade secrets.90 This Collateral secured Dr. Moon and Prospect’s
83
JX-58 (“Dr. Moon Consulting Agr.”) at 7.
84
Id. § 3.1.
85
Id. § 2.
86
Trial Tr. at 195:8–13 (Moon).
87
NPA § 2.3(b).
88
JX-12 (“Security Agr.”) at 1.
89
Id.
90
See id. §§ 2(a)–(l).
15
obligations under the Transaction Documents.91 The Security Agreement also contains an
indemnity provision requiring Prospect to indemnify Promise Easy for any damages from
breaches of the Security Agreement.92 Dr. Moon signed the Security Agreement on behalf
of Prospect, and Li signed on behalf of Promise Easy.93
D. Prospect’s First Month
The transaction closed on June 1, 2015, setting the venture in motion. Dr. Moon,
Raiti, Wey, Annie John, and Baxter served as the initial board of directors (the “Board”),
with Baxter as chairman.94 Dr. Moon was named CEO, and Raiti was appointed CFO.95
Promise Easy distributed an Initial Advance of $500,200 into Prospect’s bank account on
June 10, 2015.96
The Product Timeline contemplated that, in the first month of the project, Dr. Moon
and Prospect would accomplish milestones in five categories: independent review board
(“IRB”) sites in Montana and Wyoming; IRB sites through a Contract Research
Organization (“CRO”); lab setup; DNA sequencing; and patent application.
First, under the Product Timeline, Dr. Moon was supposed to coordinate with his
colleagues to set up three IRB sites in Montana and Wyoming to collect patient samples
91
Id. §§ 3(a)–(b).
92
Id. § 14.
93
Id. at 13.
94
Trial Tr. at 85:20–22 (Raiti); id. at 299:4–15 (Moon); id. at 362:2–14 (Wey).
95
Id. at 68:21–69:13 (Raiti); id. at 335:3–5 (Moon); id. at 362:2–14 (Wey).
96
JX-31 (“Prospect Bank Statement”) at 2.
16
for Dr. Moon’s research.97 IRB sites are physical locations monitored by physicians to
oversee research sample collection and ensure compliance with established protocols.98
Dr. Moon had been in Montana since January 2015, and he remained there through the end
of June.99 Dr. Moon testified that, during this time, he talked to three physicians about
assisting with the IRB sites, though they did not ever reach any formal agreement.100
Second, the Product Timeline required Prospect to sign a contract with Total CRO
Clinical Trial Management in Dallas, Texas (“Total CRO”) to set up six or seven more IRB
sites for sample collection.101 The Product Timeline estimated that the Total CRO contract
would cost $525,000, “all inclusive” of expenses for a comprehensive list of services.102
Dr. Moon testified that he arrived at this figure based on conversations with a lead doctor
at Total CRO, who told Dr. Moon that the project could be completed at that price.103
According to Raiti, however, when he called Total CRO to implement Dr. Moon’s
arrangement, Total CRO “didn’t have any idea what I was talking about” and told him that
97
Product Timeline at 10.
98
Trial Tr. at 129:19–130:5 (Raiti) (“IRB sites were basically organizational components
where you would be able to oversee the collection of samples. . . . So whether it’s a buccal
swab or a blood sample, those were the sites where that would be collected. And I believe
the IRB board, [] were doctors who would oversee that data and, to my understanding,
supervise it and make sure that it was conducted in a scientifically defensible way.”).
99
Id. at 198:23–199:9 (Moon).
100
Id. at 208:7–210:22 (Moon).
101
Product Timeline at 8.
102
Id.
103
Trial Tr. at 248:20–251:7 (Moon).
17
the “proper price for an ask like the one that I was making was at least twice, if not more,
of what we were indicating that they had agreed to.”104 Dr. Moon admitted at trial that that
there was no documentation memorializing his purported agreement with Total CRO.105
Raiti then had to “brutally renegotiate” the Total CRO contract, and the final agreement
did not include the full host of services originally promised in the Product Timeline.106
Third, the Product Timeline required Prospect to lease a suitable lab space, which
required a deep-chill freezer to maintain samples, advanced security to protect the samples,
and tracking systems to connect samples to their corresponding patients.107 Dr. Moon also
recommended, and the Product Timeline dictated, that Prospect hire a full-time lab
technician.108 According to the Product Timeline, one of Dr. Moon’s colleagues would
accept the role at a 20–30% discount.109 Raiti testified that Dr. Moon had suggested they
rent a space in Baltimore from the Abell Foundation, with whom Dr. Moon had a prior
relationship.110 Raiti claimed that Dr. Moon described this lab space as “turnkey,” meaning
that they “were told by Dr. Moon that the prerequisite operational facilities to accomplish
all of these different pieces were in place.”111 When Raiti contacted the Abell Foundation
104
Id. at 44:4–45:4 (Raiti).
105
Id. at 321:22–322:3 (Moon).
106
Id. at 45:5–47:14 (Raiti).
107
Product Timeline at 12; Trial Tr. at 273:6–275:6 (Moon).
108
Product Timeline at 12; Trial Tr. at 60:9–22 (Raiti).
109
Product Timeline at 12.
110
Trial Tr. at 60:9–61:23 (Raiti).
111
Id. at 54:1–10, 64:10–18 (Raiti).
18
to set up the space, however, they told Raiti that this purported arrangement did not exist,
and that Dr. Moon owed $8,000 in outstanding fees to the Foundation that Prospect needed
to pay before any discussions could move forward.112 Even if the fees were paid, the space
would still require substantial construction.113 Without the lab space, there was no reason
to hire the lab technician.114 Although Dr. Moon testified that Raiti’s expectations for the
lab were unrealistic, Dr. Moon was the one who provided the inputs to the Product
Timeline.115
Fourth, the Product Timeline envisioned that Prospect would contract with AI
Biotech within the first month to extract and sequence DNA from Dr. Moon’s existing
patient samples.116 Prospect did execute such a contract with AI Biotech on July 1, 2015,117
and Raiti testified that the AI Biotech agreement accurately reflected the costs estimated
by Dr. Moon in the Product Timeline.118
Fifth, the Product Timeline required that Dr. Moon retain counsel to submit a patent
application for Dr. Moon’s new research.119 Dr. Moon testified that he had existing patent
112
Id. at 60:9–61:23 (Raiti).
113
Id. at 62:21–64:9 (Raiti).
114
Id. at 60:9–22 (Raiti).
115
Id. at 273:13–275:13 (Moon).
116
Product Timeline at 3.
117
JX-15 (AI Biotech Agreement).
118
Trial Tr. at 34:1–9 (Raiti).
119
Product Timeline at 14.
19
counsel for JS Yoon, and that he contacted the same counsel begin work on the new
application.120
E. Wey Steps Down From Prospect’s Board.
As the project continued, Dr. Moon learned more details about Wey. In 2014, one
of Wey’s former employees had filed a sexual harassment suit against him.121 The case
gained substantial media attention before it was voluntarily dismissed.122 Dr. Moon
testified that, while he was in Montana, his colleagues raised the allegations against Wey
as a potential sticking point for their collaboration.123 According to Raiti, once Dr. Moon
learned about the pending litigation against Wey, Dr. Moon became “obsessed” with the
allegations and no longer wanted to cooperate on a project associated with Wey.124 At trial,
Dr. Moon disputed this characterization, but he admitted that the allegations concerned
him.125
Dr. Moon stirred some of the trouble himself by telling Montana colleagues his
misguided belief that Wey was the investor behind Promise Easy, at which point they
searched Wey’s name and found information on the sexual harassment lawsuit.126 Dr.
120
Trial Tr. at 194:24–195:3 (Moon).
121
Id. at 372:16–373:9 (Wey).
122
Id. at 375:18–20 (Wey); see also JX-23, JX-26, JX-30 (articles reporting on lawsuit).
123
Trial Tr. at 260:17–261:11 (Moon).
124
Id. at 83:23–84:16 (Raiti).
125
Id. at 303:11–306:1 (Moon).
Trial Tr. at 272:6–23 (Moon); see id. at 261:1–11 (Moon) (“[The colleague] asked about
126
who is investor. I said it is [] a Mr. Ben Wey with NYGG. And who are they? So I talked
20
Moon testified that he misunderstood Wey’s early efforts in diligence as predicating an
investment by NYG Capital, and Dr. Moon assumed that the venture was funded entirely
with Wey’s own money.127 The NPA did not include any mention of Wey or NYG Capital,
however, and none of the Transaction Documents mentioned either party.128
Wey resigned from the Board at the end of June 2015.129 Wey and Raiti credibly
testified that Wey’s resignation stemmed both from his desire to focus on the pending
litigation and his understanding that, having connected Prospect to funding, his role had
been fulfilled.130 A June 10, 2015 email from Wey supports the latter narrative—Wey
wrote, “[t]his company will now be run by professionals (Dr. Moon being the CEO and
Warren Raiti being the CFO).”131 Li took Wey’s place on the Board.132
According to Dr. Moon, this was the first time he learned of Li’s existence. 133 Dr.
Moon testified that he continued to believe through trial that Wey personally funded the
to him about he is investor located in Wall Street. And one day he came to me and showed
me all of the negative news, and he expressed my concern, saying that this is a very small
community and, you know, people all talk with each other.”).
127
Id. at 158:8–17, 298:22–299:24 (Moon).
128
See, e.g., NPA at 1 (listing only Promise Easy Limited as the NPA purchaser);
Promissory Note at 1 (listing only Promise Easy Limited as the purchaser of the Promissory
Note); Security Agr. at 1 (listing only Promise Easy Limited as the secured party).
129
Trial Tr. at 114:19–115:5 (Raiti); id. at 311:6–12 (Moon); id. at 362:15–20 (Wey).
130
Id. at 135:20–136:2 (Raiti); id. at 362:2–14 (Wey).
131
JX-7 at 1.
132
Trial Tr. at 291:7–15 (Moon).
133
Id. at 300:7–10 (Moon).
21
investment into Prospect.134 Raiti, however, testified that he repeatedly explained Wey’s
role to Dr. Moon, and Dr. Moon himself served on the Board with Li, who was connected
to the actual investor.135
F. Prospect Fails To Meet Milestones Through The Summer Of 2015.
The venture strained as the months wore on. The main tension concerned the
division of labor between Raiti and Dr. Moon.
Raiti testified extensively and credibly about the tireless hours he devoted to getting
Prospect off the ground.136 Raiti felt as though he was performing one hundred percent of
Dr. Moon’s job “for many months.”137 Raiti was in consistent contact with Total CRO and
with the Abell Foundation trying to iron out the details of their contracts with Prospect.138
Raiti testified that Dr. Moon was hard to reach during this period, and that when Raiti could
get Dr. Moon on the phone, Dr. Moon was restless and agitated.139
134
Id. at 298:16–299:24 (Moon).
135
Id. at 86:4–8 (Raiti) (“Q. [D]id you ever explain to Dr. Moon what Mr. Wey’s role was
in the transaction or, I guess, more appropriately, what his role wasn’t in the transaction?
A. Yeah, many times.”); see id. at 86:14–20 (Raiti) (testifying that he told Dr. Moon, “Ben
was not a part of the project. He wasn’t on the board. There was no involvement. This
certainly came up later as well after the indictment in 2015.”).
136
Id. at 76:2–83:2 (Raiti).
137
Id. at 80:21–24 (Raiti); see also id. at 73:13–18 (Raiti) (“And so I very much got stuck
in the middle trying to develop something with basically an absentee CEO in a field that
was -- I mean, to say it’s not my expertise is an understatement or a gross understatement.
And it was a lot of work.”).
138
Id. at 74:2–8, 78:17–22 (Raiti).
139
Id. at 72:14–74:8 (Raiti).
22
Meanwhile, Dr. Moon testified that he was on a “break” between April and
September 2015.140 According to Dr. Moon, he only worked 20–30% of his normal hours
during this period, which he spent at a part-time job on the East coast.141 Dr. Moon
continued to receive his $20,000 monthly compensation pursuant to the Consulting
Agreement.142
By the end of August, the third month of the project, most of the Product Timeline
milestones were unmet. Dr. Moon’s Montana and Wyoming IRB sites were supposed to
be set up and receiving samples; no such IRB sites had been established, nor would they
ever be.143 Total CRO was supposed to have six or seven functional IRB sites; no such
IRB sites existed, nor would they ever, and the protocol for running them had not even
been established.144 The lab was to be operational and running Dr. Moon’s proposed study;
Prospect had not yet prepared an adequate lab space, and it never retained a lab
technician.145 AI Biotech was supposed to have a completed its genome sequencing report;
140
Id. at 212:1–4 (Moon).
141
Id. at 199:6–15, 212:1–11 (Moon).
142
Prospect Bank Statement at 1–2.
143
Compare Product Timeline at 10, with Trial Tr. at 189:20–22 (Moon) (“Q. So you did
not set up any IRB sites? A. I did not.”).
Compare Product Timeline at 8, with Trial Tr. at 46:7–48:13 (Raiti) (“[T]hey did not
144
complete the protocol. No independent review board sites were ever set up.”).
145
Compare Product Timeline at 12, with Trial Tr. at 81:23–82:4 (Raiti) (“And then with
regard to the lab, there was equipment and other things that were necessary as the
construction project that we had undertaken with that was developing. So in order to take
the lab to the next phase, equipment and all of the other materials would have been
necessary. But at that point it was a little bit silly because the whole thing was off track.”).
23
according to Dr. Moon, only 80% of that work had been completed.146 The lone part of
the project on track was the patent application, and that was because Dr. Moon’s only task
for the first seven months was to contact the patent counsel he had already retained for JS
Yoon.147
G. Prospect Faces Setbacks In September 2015.
In September 2015, Wey was indicted for securities fraud, wire fraud, and money
laundering in connection with reverse merger transactions he executed between Chinese
and United States companies.148 Although the Department of Justice later voluntarily
dismissed the charges,149 these allegations sent Dr. Moon’s concerns into overdrive.
According to Raiti, this news prompted Dr. Moon to decide: “I’m not going to work
with anything having to do with Ben Wey.”150 Dr. Moon corroborated this narrative,
testifying that under his belief that Wey was financing the project, he was “really
scared.”151 Raiti testified that Dr. Moon was considering refinancing the Promissory Note
through a different source.152 These refinancing options never came about.153
146
Compare Product Timeline at 3, with Trial Tr. at 271:18–272:5 (Moon).
147
Product Timeline at 14; Trial Tr. at 194:24–195:3 (Moon).
148
Trial Tr. at 375:6–17 (Wey); JX-23 (September 10, 2015 article discussing charges).
149
Trial Tr. at 375:6–17 (Wey).
150
Id. at 89:7–12 (Raiti); see also id. at 305:21–24 (Moon) (“I do not want to have a
situation working certain project on which money is involved in wire fraud, which is very
serious crime, as far as I know.”).
151
Id. at 300:23–301:21 (Moon).
152
Id. at 89:13–24 (Raiti).
153
Id. at 90:16–91:24 (Raiti).
24
Then, on September 11, 2015, Annie John was terminated because “she became a
substantial risk to the business.”154 Prospect paid her a $10,000 termination fee.155 Dr.
Moon testified that she had become increasingly concerned about working with Wey after
the sexual harassment allegations and indictment.156
H. Promise Easy Denies Prospect’s Request For Additional Funds.
It became clear in September through October 2015 that Prospect would soon burn
through the entire Initial Advance.157 On October 5, 2015, Dr. Moon submitted a Notice
of Drawdown to Promise Easy, requesting an Additional Advance of $498,175 pursuant to
the NPA.158 The requested funds included $60,000 for three months of Dr. Moon’s
consulting fees, $12,000 to hire Dr. Moon’s proposed lab technician, $60,000 to retain
patent counsel, and $20,000 for Dr. Moon to contact research institutions to set up IRB
sites.159 The Notice of Drawdown tied each expense to a line item in the Product Timeline,
and $349,425 of the requested expenses related to milestones that were supposed to be
completed in the project’s first four months.160 By this time, the project was in its fifth
month.
154
JX-33 at 6.
155
Id.
156
Trial Tr. at 296:13–298:5 (Moon).
157
Id. at 81:6–18 (Raiti); id. at 202:2–15 (Moon).
158
JX-32 (“Notice of Drawdown”).
159
Id. at 1–2.
160
Id.
25
On October 5, Li emailed Baxter, Dr. Moon, and Raiti questions concerning the
Notice of Drawdown.161 On October 9, Baxter emailed Li a memorandum addressing Li’s
concerns.162 The memo stated that “Prospect Genetics, Inc. has made moderate but
encouraging progress since it was funded in May, 2015.”163 As support, the memo stated
that Total CRO had “completed a clinical trial protocol,” a prerequisite to opening the IRB
sites.164 This was only partially true. While Total CRO had completed a draft protocol, it
had not been finalized, and Total CRO never ultimately provided a finalized protocol.165
The memo acknowledged that no IRB sites had been established, which it blamed on
“concerns over the recent media coverage regarding Benjamin Wey.”166 The memo
acknowledged that the AI Biotech progress was not up to speed, that the lab space was not
ready, and that Annie John had been terminated.167 The memo concluded: “In sum, it is
likely that the project will be delayed by 3–5 months. The ability of Prospect to remain on
161
Though Li’s email is referenced in the trial record, it was not submitted by the parties
as a joint exhibit. See JX-33 (October 9, 2015 email from Baxter to Li stating, “Attached
is a memo from Prospect Genetics, Inc. responding to your questions and comments and
request for information in your October 5 email.”) (“Oct. 9, 2015 Email”).
162
Id.
163
Id. at 3.
164
Id.
165
Trial Tr. at 47:15–19 (Raiti); id. at 189:1–7 (Moon) (“[Total CRO] did provide the draft
protocol, but that is not enough to go to IRB and open the site. They want to see the final
protocol.”).
166
Oct. 9, 2015 Email at 5.
167
Id. at 5–6.
26
budget for each aspect of the project going forward is unknown with respect to those
Product milestones that have not been reached or fully tested.”168
In the cover email to the memo, Baxter noted that Li was considering suing
Prospect.169 Baxter wrote, “I think that would be the worst thing that could be done from
the standpoint of you [Li], Ben and Prospect.”170
The parties dispute who led Promise Easy’s response to the Notice of Drawdown.
The NPA required Raiti as CFO to sign off on Dr. Moon’s request.171 Raiti testified that
he intended to approve the request, but that Baxter and Wey encouraged him to stop the
project from “bleeding money.”172 Dr. Moon testified that Baxter was the one who drafted
the Notice of Drawdown and led the charge in getting Prospect more funding.173 Based on
Baxter’s contemporaneous memo and email to Li defending the Additional Advance, Dr.
Moon’s narrative is more plausible. It seems likely that Raiti faced pressure from Wey and
Li to avoid doling out more of Promise Easy’s money. Raiti admitted at trial that he was
worried about exposure to personal liability if Promise Easy sued Prospect.174 It makes
sense that Raiti would try to appease Wey and Li in the interim to avoid that outcome.
168
Id. at 6.
169
Id. at 2.
170
Id.
171
NPA § 1.3 (“Each Notice of Drawdown shall be . . . signed by the Chief Financial
Officer (‘CFO’) of the Company and by Dr. Moon.”).
172
Trial Tr. at 88:1–14 (Raiti).
173
Id. at 216:11–217:6 (Moon).
174
Id. at 123:8–20 (Raiti).
27
Irrespective of motivations, Raiti did not approve the requested funds in the Notice
of Drawdown.175 Shortly thereafter, in mid-October 2015, Raiti resigned as CFO.176
Baxter filled his role.177 When Promise Easy failed to disburse the Additional Advance
requested in the Notice of Drawdown, Prospect sent a Notice of Purchaser Default on
October 30, 2015.178 Baxter executed the document as CFO.179
I. Promise Easy Notices Breach.
Raiti continued to serve as a director and COO of Prospect after he stepped down
as CFO.180 Raiti focused on finding new financers for the project so that Promise Easy
could walk away.181 After failing to do so, Raiti formally left Prospect in February 2016.182
Meanwhile, on November 9, 2015, Dr. Moon refiled the provisional patent covered
by the Patent License Agreement in his own name, rather than under JS Yoon.183
175
Id. at 121:12–21 (Raiti).
176
Id. at 114:11–15 (Raiti).
177
Id. at 121:3–5 (Raiti).
178
JX-37 (“Notice of Purchaser Default”).
179
Id.
180
See JX-38 at 1 (November 18, 2015 email from Raiti signing off as “Chief Operating
Officer, Director”).
181
See JX-39 (texts between Raiti and Dr. Moon’s personal attorney discussing meetings
with potential financers).
182
Trial Tr. at 76:8–12 (Raiti).
183
Id. at 333:14–20 (Moon).
28
On May 3, 2016, Promise Easy delivered notice to Prospect that it was in current
and ongoing breach of the NPA.184 Promise Easy claimed that Prospect was in breach of
three major provisions.185 First, Promise Easy claimed that Prospect had made “untrue and
inaccurate statements of material fact in the Product Timeline” in breach of the
representations and warranties provision in Section 3.11 of the NPA.186 Second, Promise
Easy claimed that Prospect had failed to enforce Dr. Moon’s obligations under the
Consulting Agreement as required by Section 5.1(g) of the NPA.187 Third, Promise Easy
stated that Prospect had improperly transferred the provisional patent in violation of the
Patent License Agreement and in violation of Section 5.1(b) of the NPA.188
184
JX-41 (“Notice of Breach”).
185
The Notice of Breach also states that Prospect has breached by failing to “obtain key
man life insurance Dr. Moon within 30 days of Closing in Violation Section 5.11 of the
Agreement[].” See id. Promise Easy did not raise this breach as a basis for liability in
post-trial briefing.
186
Id.; see also NPA § 3.11 (“[T]his Agreement (including all schedules and exhibits
hereto), together with all other information provided by any of the Prospect Group to the
Purchaser in connection with the transactions contemplated hereby and by any other
Transaction Document does not contain any untrue or inaccurate statement of a material
fact or omit to state a material fact necessary in order to make the statements contained
therein not misleading in the light of the circumstances under which they were made[.]”).
187
Notice of Breach; see also NPA § 5.1(g) (prohibiting Prospect from taking actions to
“[a]mend, waive or modify any term of the Patent License Agreement [or] any of the
Transaction Documents” without Promise Easy’s consent).
188
Notice of Breach; see also NPA § 5.1(b) (prohibiting Prospect from taking actions to
“[c]onvey, sell, lease, transfer or otherwise dispose of (collectively, ‘Transfer’), any
material part of its or its subsidiaries’ business or property (including intellectual property),
other than Transfers in the ordinary course of business” without Promise Easy’s consent).
29
J. This Litigation
Promise Easy filed the Complaint in this action on June 9, 2016, against Dr. Moon,
JS Yoon, Forecast Genetics, and the Prospect entities (collectively, “Defendants”).189 The
Complaint asserts five counts:
• In Count I, Promise Easy alleges that Dr. Moon, Forecast Genetics, and
Prospect Genetics violated the Delaware Securities Act by misrepresenting
the Product Timeline, which induced Promise Easy to enter the NPA.
• In Count II, Promise Easy seeks a declaratory judgment that Dr. Moon, JS
Yoon, and Prospect breached the Transaction Documents, that they must
indemnify Promise Easy for the Initial Advance and any losses incurred
thereafter, and that Prospect Research must assign Promise Easy its rights
under the Patent License Agreement.
• In Count III, Promise Easy alleges that Dr. Moon breached his Consulting
Agreement.
• In Count IV, Promise Easy alleges that Dr. Moon and Prospect breached the
implied covenant of good faith and fair dealing by demanding the Additional
Advance in bad faith.
• In Count V, Promise Easy alleges fraudulent inducement against Dr. Moon
for materially representing the inputs to the Product Timeline.
Promise Easy sought declaratory relief, rescissory damages, actual and compensatory
damages, and attorneys’ fees and expenses.
In their Answer and Counterclaim, Defendants asserted a single count for breach of
the NPA against Promise Easy for failing to provide the Additional Advance requested in
the Notice of Drawdown.190
189
Dkt. 1.
190
Dkt. 13.
30
The parties forewent dispositive motion practice and participated by Zoom in a two-
day trial on March 29 and 30, 2021.191 Post-trial briefing proceeded in fits and starts as the
parties repeatedly attempted to resolve their dispute without this court’s intervention. The
parties entered six different post-trial briefing scheduling orders before ultimately asking
that this court hold the deadlines in abeyance pending settlement discussions on January
26, 2022.192 After these efforts failed, the parties started back up again by filing a new
scheduling order in August 2022, then filed six amended scheduling orders so that the
parties could continue settlement negotiations.193 Ultimately, the parties filed their opening
post-trial briefs in December 2022 and concluded the process in January 2023.194 By then,
Defendants had agreed to drop their counterclaim.195 The court heard post-trial oral
argument on June 5, 2023.196
191
Dkts. 90–91.
192
Dkts. 92, 94, 96, 98, 100, 102, 103.
193
Dkts. 106, 108, 110, 112, 114, 116, 118, 119, 120, 122.
Dkt. 123 (“Pl.’s Opening Post-Trial Br.”); Dkt. 124 (“Defs.’ Opening Post-Trial Br.”);
194
Dkt. 126 (Pl.’s Answering Post-Trial Br.); Dkt. 127 (“Defs.’ Answering Post-Trial Br.”).
195
Defs.’ Answering Post-Trial Br. at 1 n.2.
196
Dkt. 131 (June 5, 2023 Hr’g Tr.).
31
II. LEGAL ANALYSIS
This legal analysis proceeds in five parts, addressing each count from the Complaint
in order. In each claim, Promise Easy bears the burden of proving its claims by a
preponderance of the evidence.197
A. Promise Easy Proved A Violation Of The Delaware Securities Act.
In Count I, Promise Easy claims that Dr. Moon, Forecast Genetics, and Prospect
Genetics violated the Delaware Securities Act through misrepresentations in the Product
Timeline that induced Promise Easy to purchase the Promissory Note.198
The Delaware Securities Act authorizes a private cause of action for the purchaser
of a security against the seller if the seller makes an untrue statement or omission regarding
the security.199 The buyer can sue to recoup the principal amount on the security, plus
197
See S’holder Representative Servs. LLC v. Gilead Scis., Inc., 2017 WL 1015621, at *15
(Del. Ch. Mar. 15, 2017) (“To succeed at trial, Plaintiffs, as well as Counterclaim-
Plaintiffs, have the burden of proving each element . . . of each of their causes of action
against each Defendant or Counterclaim-Defendant, as the case may be, by a
preponderance of the evidence.” (internal quotation marks omitted)).
198
The Promissory Note is governed by the laws of Delaware. See JX-9 § 12.
199
See 6 Del. C. § 73-605(a)(2) (“Any person who: . . . . Offers . . . a security by means of
any untrue statement of a material fact or any omission to state a material fact necessary in
order to make the statement made, in the light of the circumstances under which they are
made, not misleading (the buyer . . . not knowing of the untruth or omission), and who does
not sustain the burden of proof that the person did not know, and in the exercise of
reasonable care could not have known of the untruth or omission, is liable to the person
buying . . . the security from . . . him or her, who may sue either at law or in equity to
recover the consideration paid for the security, together with the interest at the legal rate
from the date of payment costs, and reasonable attorneys’ fees, less the amount of any
income received on the security, upon the tender of the security, or for damages if he or
she no longer owns the security.”).
32
interest and attorneys’ fees.200 The Delaware Securities Act defines the unlawful act as
making “any untrue statement of a material fact or [] omit[ting] to state a material fact
necessary in order to make the statements made, in the light of the circumstances under
which they are made, not misleading” in connection with the sale of a covered security.201
Defendants respond to Count I in two ways. They first contend that the Promissory
Note does not constitute a “security” within the purview of the Delaware Securities Act.
They next contend that Promise Easy has failed to carry its burden of proving a violation
of the Act.
1. The Promissory Note Was A “Security” Under The Delaware
Securities Act.
The Delaware Securities Act defines a covered “security” to include “any note,”
“unless the context otherwise requires.”202 In determining whether a note is a security,
Delaware courts apply the test established by the United States Supreme Court in Reves v.
Ernst & Young.203 Under Reves, calling an instrument a “note” creates a rebuttable
presumption that it is a qualifying security.204 Once this presumption applies, the seller
bears the burden of proving that the note was not a qualifying security.205
200
Id.
202
Id. § 73-103(a)(23).
203
494 U.S. 56 (1990); see also Boo’ze v. State, 846 A.2d 237, 2004 WL 691903, at *1
(Del. Mar. 25, 2004) (TABLE) (adopting Reves standard).
204
Fletcher Int’l, Ltd. v. ION Geophysical Corp., 2012 WL 1883040, at *8 (Del. Ch. May
23, 2012).
205
Id.33
The presumption can be rebutted in two ways. First, a seller can demonstrate that a
note is not a security if it falls into a judicially crafted list of instruments that are “not
properly viewed as securities”:
(1) a note delivered in consumer financing, (2) a note secured
by a mortgage on a home, (3) a short-term note secured by a
lien on a small business or some of its assets, (4) a note
evidencing a character loan to a bank customer, (5) a short-
term note secured by an assignment of accounts receivable, (6)
a note which simply formalizes an open-account debt incurred
in the ordinary course of business and (7) notes evidencing
loans by commercial banks for current operations.206
Second, even if a note does not fall within one of the seven enumerated categories
above, “if, after engaging in a multi-factor test, the note bears a ‘family resemblance’ to
one of the instruments on the list, then it is not a security.”207 The “family resemblance”
analysis requires comparing the note to the seven enumerated categories along four factors:
(1) the motivations of the parties to enter into the note (whether
they were for investment purposes); (2) the note’s plan of
distribution (whether it was for common trading); (3) the
reasonable expectations of the investing public (that such was
an investment); and (4) whether there is other non-Securities
Act protection available to the alleged victims.208
206
Id.207
Verizon Commc’ns Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 2021 WL
710816, at *8 (Del. Super. Feb. 21, 2021) (citing Reves, 494 U.S. at 65; Boo’ze, 846 A.2d
237, at *2–3).
208
State v. Attarian, 2014 WL 4782859, at *2 (Del. Super. Sept. 8, 2014).
34
“No one factor is dispositive as they are considered as a whole,” and the test “necessarily
becomes highly individualized to the facts of the particular case.”209
The Promissory Note states that it is a “10% Convertible Promissory Note.”210 This
creates a rebuttable presumption that the Promissory Note is a covered security.
Defendants do not contend that the Promissory Note falls within any of the seven
enumerated categories under Reves.211 This leaves the “family resemblance” factors as
Defendants’ only option to show that the Promissory Note is not a covered security. None
of these factors supports Defendants’ position.
Under the first factor, the trial record supports a finding that Dr. Moon, Prospect,
and Promise Easy’s motivations were to create an investment. Defendants argue that
Wey’s personal interest in breast cancer research and desire to work with Dr. Moon imply
that the funding was primarily a commercial loan. To the contrary, Promise Easy had
demonstrable profit motives behind its funding—Wey testified that Dr. Moon presented
that the project could eventually be worth more than $2 billion.212 This fact also weighs in
Promise Easy’s favor on the third factor, as Promise Easy’s reasonable expectation was
that it would reap a profit from funding Dr. Moon’s research.
209
Fletcher, 2012 WL 1883040, at *9 (citing Thomas Lee Hazan, The Law of Securities
Regulation § 1.6(14) (4th ed. 2002)).
210
Promissory Note at 1.
211
See Defs.’ Opening Post-Trial Br. at 28–30.
212
Trial Tr. at 356:17–24 (Wey).
35
The second and fourth factors further support this conclusion. As to the second
factor, Defendants argue that the fact that the Promissory Note was never transferred is
evidence that it was not freely transferable. Though Defendants are factually correct that
the note was never transferred, nothing in the Promissory Note prohibited Promise Easy
from transferring it to third parties, and in fact Dr. Moon sought other financers to purchase
Promise Easy’s obligation. Under the fourth factor, while the Security Agreement may
have initially provided some extra-statutory protection through collateralization, as
discussed below, Dr. Moon’s refiling of the patents in his own name threatened that
collateral.
In sum, Defendants have failed to rebut the presumption that the Promissory Note
was a security covered by the Delaware Securities Act.
2. Promise Easy Proved The Elements Of Its Delaware Securities
Act Claim.
To show that a defendant violated Section 73-201(2) of the Delaware Securities Act,
a plaintiff must prove that the defendant: “(1) made a misstatement or omission (2) of
material fact (3) with scienter (4) in connection with a purchase or sale of a security (5)
upon which the plaintiff . . . relied and (6) that reliance proximately caused the plaintiff's
(or other person’s) injury.”213
213
Hubbard v. Hibbard Brown & Co., 633 A.2d 345, 349 (Del. 1993); see also XComp,
Inc. v. Ropp, 2002 WL 1753168, at *5 (Del. Ch. July 19, 2002) (listing same elements);
Van Roy v. Sakhr Software Co., 2014 WL 3367275, at *3 (Del. Ch. July 8, 2014) (listing
same elements).
36
Promise Easy proved factors (1), (2), (4), (5), and (6). The Product Timeline formed
the basis of the parties’ obligations in the NPA, and Dr. Moon testified that these goals
were never actually achievable. These misstatements, or the omission of Dr. Moon’s
characterization as “bare bones,” were material because the Product Timeline drove every
obligation in the NPA: how to measure Dr. Moon’s performance; when Promise Easy had
to make distributions; and when Dr. Moon could notice default. As found above, the
Promissory Note and NPA fall within the statutory definition of the “sale of a security.”
And as to reliance, the Product Timeline was the method of communicating expectations
of the investment to Promise Easy, and Promise Easy naturally relied on those expectations.
Promise Easy’s reliance on Dr. Moon’s misrepresentations proximately caused it to enter
into the failed investment. Defendants’ argument to the contrary, that Wey’s indictment
doomed the project, is specious: Dr. Moon failed to meet any of the milestones in the
Product Timeline, even those unrelated to relationships allegedly harmed by the allegations
against Wey.
The remaining element, scienter, requires closer examination. In interpreting the
“antifraud” provisions of the Delaware Securities Act, the Delaware Supreme Court has
noted that they are virtually identical to the antifraud provisions in SEC Rule 10b-5.214 As
a result, state and federal courts in Delaware have applied a “knowingly” standard to claims
214
See Hubbard, 633 A.2d at 349 (“Thus, both federal and state antifraud provisions share
the goal of protecting investors by preventing deception.”).
37
under the Delaware Securities Act.215 Since the statute targets deception, it makes sense to
apply the same mental state standard to the antifraud provision as common law fraud: “a
misrepresentation must be made either knowingly, intentionally, or with reckless
indifference to the truth.”216
The civil remedial provision of the Delaware Securities Act, Section 73-605, flips
the burden of proof, imposing liability where a seller defendant “does not sustain the
burden of proof that the [seller] did not know, and in the exercise of reasonable care could
not have known of the untruth or omission.”217 This court has interpreted an identical
Pennsylvania state antifraud provision to mean that a plaintiff need not plead scienter, but
that the plaintiff risks not recovering if the defendant can meet its burden of showing that
it exercised reasonable care.218 In this case, it is a distinction without a difference: Promise
Easy has proven that Dr. Moon, acting on behalf of Prospect, knowingly misrepresented
the Product Timeline inputs, which negates a finding that he did not know of their falsity
despite exercising reasonable care.
215
See XComp, 2002 WL 1753168, at *2 (describing findings of the Securities
Commissioner of the State of Delaware that individual had violated the Delaware
Securities Act by making “knowingly false” statements); Van Roy, 2014 WL 3367275, at
*5 (applying Delaware common law fraud analysis to dismiss Delaware Securities Act
claims).
216
Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 143
(Del. Ch. 2004).
217
6 Del. C. § 73-605(a)(2).
218
Kronenberg v. Katz, 872 A.2d 568, 599–600 (Del. Ch. 2004).
38
Both direct and circumstantial evidence support this outcome. Dr. Moon testified
that he knew that the project could feasibly take up to 36 months or more to complete,219
that a $2 million budget was “too tight,”220 and that the Total CRO contract could cost up
to $1 million.221 Dr. Moon supplied the inputs and ultimately signed the Transaction
Documents stating that the project could be completed in 18 months, within a $2 million
budget, based on an agreement with Total CRO to perform its services for $525,000.
Promise Easy has proven that Dr. Moon knew these statements to be false when he made
them.
The surrounding circumstances and incentives further support this finding. Raiti,
Wey, and others on the investment side relied on Dr. Moon’s specialized expertise to create
the Product Timeline. It would not make sense for Promise Easy to agree to invest a
maximum of $2 million under the Promissory Note, while knowing that the project could
far exceed that estimate. Meanwhile, Dr. Moon needed funding to continue his research
and to supplement his part-time working income. Dr. Moon had an incentive to sugarcoat
the likely timeline and costs to encourage Promise Easy to make its investment. Once the
checks were signed, Dr. Moon went on a “break,” and he never completed any of the tasks
in the Product Timeline. Promise Easy has proven that Dr. Moon knowingly
misrepresented the Product Timeline to induce Promise Easy to invest.
219
Trial Tr. at 165:17–21 (Moon).
220
Id. at 168:2–16 (Moon).
221
Id. at 176:14–18 (Moon).
39
Promise Easy has thus proven a violation of the Delaware Securities Act. Under
Section 73-605(a)(2), Prospect Genetics is liable for this violation as the seller of the
Promissory Note.222 Section 73-605(b) imposes joint and several liability on “[e]very
person who directly or indirectly controls a seller or buyer liable under subsection (a).”223
Dr. Moon, through his controlled entities (Forecast Genetics), held 100% of Promise
Easy’s outstanding shares. Prospect Genetics, Dr. Moon, and Forecast Genetics are thus
jointly and severally liable for the award of damages under the Delaware Securities Act,
which allows Promise Easy to “recover the consideration paid for the security, together
with the interest at the legal rate from the date of payment costs, and reasonable attorneys’
fees.”224 Promise Easy represented that the sum of its $500,200 principal payment, interest,
costs, and attorneys’ fees was $715,911.25 by the time of post-trial briefing.225 Counsel
shall submit an updated form of order and affidavit reflecting its final calculation for this
court’s approval.
B. Promise Easy Is Entitled To Declaratory Relief.
In Count II, Promise Easy seeks a declaratory judgment that Defendants breached
the Transaction Documents. Typically, the party seeking to enforce a contract must prove
222
See 6 Del. C. § 73-605(a)(2).
223
Id. § 73-605(b).
224
Id. § 73-605(a)(2).
225
Pl.’s Opening Post-Trial Br. at 33.
40
each element of its breach of contract claim by a preponderance of the evidence.226 “Under
Delaware law, the elements of a breach of contract claim are: 1) a contractual obligation;
2) a breach of that obligation by the defendant; and 3) a resulting damage to plaintiff.”227
Promise Easy contends that Defendants violated myriad provisions in the
Transaction Documents. Promise Easy seeks to enforce its right to indemnification for all
of its losses related to Defendants’ breaches under Section 9.14 of the NPA. Promise Easy
also seeks to enforce its right to have the patents reassigned in a manner consistent with
the Patent License Agreement.
Defendants raise two arguments in response: that the count for declaratory relief is
duplicative of Promise Easy’s contract claims, and that any breach was excused under the
frustration of purpose doctrine due to Wey and Raiti’s conduct.
First, Defendants say that Promise Easy’s requested declaratory judgment is entirely
duplicative of its contract claims in Counts III and IV, discussed in more detail below. This
position oversimplifies Promise Easy’s requested relief in the declaratory judgment. The
declaratory judgment seeks separate relief than the other counts. A finding of breach of
the NPA expands Promise Easy’s potential recovery to include JS Yoon under Section
9.14. The requested declaratory judgment also would require Defendants to indemnify
Promise Easy for all related losses. Finally, the requested declaratory judgment requires
226
See Dermatology Assocs. of San Antonio v. Oliver St. Dermatology Mgmt. LLC, 2020
WL 4581674, at *19 n.214 (Del. Ch. Aug. 10, 2020).
227
H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 140 (Del. Ch. 2003).
41
Dr. Moon to reassign the patents consistent with the Patent License Agreement. In other
words, the declaratory judgment is necessary to wholly resolve the dispute between the
parties of this case and avoid future litigation.
Defendants argue in a single conclusory sentence that there is “no evidence that Dr.
Moon breached the NPA or other Transaction Documents.”228 This decision resolves the
claims in a similarly summary fashion.
Under the Patent Licensing Agreement, Dr. Moon and JS Yoon granted an indefinite
license of the provisional patent to Prospect Genetics, with Promise Easy as a third-party
beneficiary. The document explicitly references the provisional patent that was then held
by JS Yoon. By refiling the patent in his own name, Dr. Moon effectively and unilaterally
withdrew the licensed patent from the agreement. Dr. Moon does not allege that any of the
conditions justifying termination were met in this instance, and thus terminating the
applicable patent was a breach.
In Section 3.11 of the NPA, Defendants agreed that all information in the NPA and
its exhibits was not false or materially misleading. Defendants, through Dr. Moon, made
misleading statements as to the feasibility of the Product Timeline in breach of Section
3.11.
In Section 5.1(g) of the NPA, Prospect covenanted not to “[a]mend, waive or modify
any term” of the Transaction Documents.229 By condoning Dr. Moon’s failure to complete
228
Defs.’ Opening Post-Trial Br. at 53.
229
NPA § 5.1(g).
42
milestones in the Product Timeline, Prospect effectively waived or modified Dr. Moon’s
obligations under the Consulting Agreement in breach of Section 5.1(g).
In other words, Promise Easy is entitled to a declaratory judgment that Defendants
breached the Transaction Documents.
Second, Defendants contend that any breach is excused under the frustration of
purpose doctrine. Defendants’ argument on this point was also raised in a single sentence
in their post-trial opening brief.230 This argument is unconvincing, particularly as to actions
that were entirely within Dr. Moon’s own control, like reassigning the patents.
Summing it up, Promise Easy is entitled to its proposed declaratory judgment, with
the caveat that Promise Easy cannot collect a double recovery for the same conduct. But
to the extent that the declaratory judgment encompasses relief with a greater scope than
that already awarded, Promise Easy is entitled to that relief.
C. Promise Easy Proved That Dr. Moon Breached The Consulting
Agreement.
In Count III, Promise Easy claims that Dr. Moon breached the Consulting
Agreement. The legal standard for breach of contract applied to Count II also applies to
Count III.
Section 1 of the Consulting Agreement requires Dr. Moon to complete:
[A]ll efforts, actions and activities necessary and sufficient to
complete the development and commercialization of the Test
as defined in the Convertible Note Purchase Agreement and all
230
Defs.’ Opening Post-Trial Br. at 53 (“And even if the Court finds that a breach occurred,
it should also find that the breach was excused under the doctrine of frustration of purpose
because Plaintiff’s own agents frustrated the purpose of the Transaction Documents.”).
43
attachments and exhibits thereto, which are incorporated
herein by reference. Such services include, but are not limited
to, all activities, efforts and actions necessary and sufficient to
complete the items listed in the Product Timeline.231
Promise Easy contends that Dr. Moon took his compensation under the Consulting
Agreement without performing any of the required services.
As this decision has already discussed, Dr. Moon did not definitively complete any
tasks within the Product Timeline. In fact, Dr. Moon testified that he was on a “break” for
the first four months of the project. Meanwhile, Dr. Moon continued to receive his full
$20,000 monthly compensation under the Consulting Agreement. By failing to do “all
activities, efforts and actions necessary and sufficient to complete the items listed in the
Product Timeline,” Dr. Moon breached the Consulting Agreement.
Defendants argue that any breach should be excused because Promise Easy and its
agents frustrated the Transaction Documents’ purpose by denying Dr. Moon’s request for
an Additional Advance. The frustration of purpose doctrine applies when: “(1) there is
substantial frustration of the principal purpose of the contract; (2) the parties assumed that
the frustrating event would not occur; and (3) the [d]efendant is not at fault.” 232 “In all the
cases holding that the promisor was discharged from duty by impossibility of performance
or frustration of purpose, it has been assumed that the promisor was not himself the
231
Consulting Agr. § 1.
232
Level 4 Yoga, LLC v. CorePower Yoga, LLC, 2022 WL 601862, at *26 (Del. Ch. Mar.
1, 2022) (quoting CRS Proppants LLC v. Preferred Resin Hldg. Co., LLC, 2016 6094167,
at *7 (Del. Super. Sept. 27, 2016)).
44
responsible cause of the impossibility or frustration.”233 Frustration of purpose is “very
difficult to invoke,” and Delaware courts are “extremely reluctant to allow parties to
disavow obligations that they have agreed to.”234
Defendants did not brief the elements of frustration of purpose. Regardless, they
have failed to demonstrate that Dr. Moon was not at fault for Promise Easy’s refusal to
disburse funds. The trial record shows that Promise Easy denied the Additional Advance
after Dr. Moon was unable to meet any of the contemplated deadlines in the first months
of the project. Defendants cannot now invoke the doctrine after stoking the fire themselves.
Promise Easy has proven that Dr. Moon breached the Consulting Agreement.
D. Promise Easy Failed To Prove That Dr. Moon Breached The Implied
Covenant Of Good Faith And Fair Dealing.
Promise Easy argues that Dr. Moon’s demand of the Additional Advance, while he
simultaneously planned to terminate the project, was taken in bad faith. Under Promise
Easy’s theory, the Notice of Drawdown was pretextual so that Dr. Moon could deliver a
notice of default and prevent Promise Easy from exercising its conversion right under the
NPA.
The implied covenant of good faith and fair dealing requires that a party vested with
discretion under a contract exercise its discretion reasonably, in good faith, and not in an
unreasonable or arbitrary way that would destroy the counterparty’s right to receive the
233
Martin v. Star Publishing Co., 126 A.2d 238, 242–43 (Del. 1956).
234
Wal-Mart Stores, Inc. v. AIG Life Ins. Co., 2005 WL 5757652, at *6 (Del. Ch. July 27,
2005).
45
fruits and benefits which they reasonably expected to receive under the contract. 235 The
implied covenant cannot be invoked to override the express terms of the contract.236
Moreover, rather than constituting a free floating duty imposed on a contracting party, the
implied covenant can only be used conservatively “to ensure the parties’ ‘reasonable
expectations’ are fulfilled.”237 The implied covenant is a limited remedy.238 Its application
is a “cautious enterprise.”239
Section 1.3 of the NPA provides that Prospect Genetics can request Additional
Advances “at any time.”240 While Promise Easy alleges that Dr. Moon should have known
that the request would not be granted, the only requirement to make a request under the
NPA is that the Additional Advance be requested “for one or more Permitted Uses” and be
“consistent with the Product Timeline.”241 Further, some of Dr. Moon’s most credible
testimony suggested that it was Baxter’s idea to submit a request for an Additional Advance
235
See, e.g., Miller v. HCP Trumpet Invs., LLC, 194 A.3d 908, 2018 WL 4600818, at *1
(Del. 2018) (TABLE), reargument denied (Oct. 9, 2018) (noting that “the mere vesting of
‘sole discretion’” does not relieve a party of its “obligation to use that discretion
consistently with the implied covenant of good faith and fair dealing”).
236
Dave Greytak Enters., Inc. v. Mazda Motors of Am., Inc., 622 A.2d 14, 23 (Del. Ch.
1992) (“[W]here the subject at issue is expressly covered by the contract, or where the
contract is intentionally silent as to that subject, the implied duty to perform in good faith
does not come into play.”).
237
Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 442 (Del. 2005).
238
Id. at 441.
239
Nemec v. Shrader, 991 A.2d 1120, 1125 (Del. 2010).
240
NPA § 1.3.
241
Id.
46
to keep the project alive. Promise Easy failed to show that the request was so unrelated to
legitimate needs of the project as to violate the implied covenant of good faith and fair
dealing.
E. Promise Easy Proved Fraudulent Inducement.
Under Delaware law, the elements for fraudulent inducement are:
(1) [T]hat a defendant made a false representation, usually one
of fact; (2) with the knowledge or belief that the representation
was false, or with reckless indifference to the truth; (3) with an
intent to induce the plaintiff to act or refrain from acting; (4)
that plaintiff's action or inaction was taken in justifiable
reliance upon the representation; and (5) damage to the
plaintiff as a result of her reliance on the representation.242
This exercise mirrors the Delaware Securities Act analysis above. Dr. Moon
provided the false inputs behind the Product Timeline while knowing that the estimates
were unattainable. Dr. Moon made the misrepresentations to induce Promise Easy to
provide funding, which Promise Easy did in justifiable reliance on Dr. Moon’s expertise in
the field. Promise Easy has proven that it was damaged by its investment, which it still has
not recovered.
Promise Easy has proven its claim for fraudulent inducement.
F. Available Remedies
Promise Easy is entitled to compensatory damages, including return of the Initial
Advance, interest, costs, and attorneys’ fees. Promise Easy is also entitled to declaratory
relief as discussed herein, including enforcing its right to indemnification under the NPA.
242
In re Swervepay Acq., LLC, 2022 WL 3701723, at *6 (Del. Ch. Aug. 26, 2022).
47
Promise Easy is not entitled to rescissory damages as an equitable remedy because they
have failed to show that compensatory and declaratory relief do not provide them an
adequate remedy at law.
III. CONCLUSION
Judgment is entered in favor of Promise Easy as to Counts I, II, III, and V of the
Complaint. Judgment is entered in favor of Defendants as to Count IV of the Complaint.
Counsel shall submit a form of order implementing this decision within ten business days
after its publication.
48