cohen kaye suit

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BTXN 150 (rev. 11/10) In Re: § § § § § § § § § Latitude Solutions, Inc. Debtor(s) Case No.: 1246295rfn11 Chapter No.: 11 Carey D. Ebert Plaintiff(s) Adversary No.: 1404107rfn vs. Howard Miller Appel et al. Defendant(s) CIVIL CASE COVER SHEET The JS 44 civil cover sheet and the information contained herein neither replace nor supplement the filing and service of pleadings or other papers as required by law, except as provided by local rules of court. This form, approved by the Judicial Conference of the United States in September 1974, is required for the use of the Clerk of Court for the purpose of initiating the civil docket sheet. I. (a) PLAINTIFF Carey D. Ebert DEFENDANT Michael Gustin, Jeffery Wohler, John Paul Dejoria, Harvey N. Klebanoff, Helen Klebanoff, Howard Miller Appel, Earnest A. Bartlett, III, Bellcreast Advisors, LLC, Capital Growth Investment Trust, Capital Growth Realty, Inc., Deborah Cohen, Matthew J. Cohen, DIT Equity Holdings, Virginia Dadey, DeRosa Family Trust, FEQ Realty, LLC, Michael Garnick, Vernon Ray Harlow, Hawk Management Group, Inc., Island Capital Management, LLC, KWL Exploration and Development, Inc., Moggle, LLC, RMS Advisors, Inc., SLD Capital Corp., TSS Investments, Inc. (b) County of Residence of First Listed Party: (EXCEPT IN U.S. PLAINTIFF CASES) County of Residence of First Listed Party: (IN U.S. PLAINTIFF CASES ONLY) (c) Attorney's (Firm Name, Address, and Telephone Number) John C. Anderson Anderson Firm, LLC Post Office Box 82982 Baton Rouge, LA 70884 (225) 2521645 (225) 6157598 (fax) [email protected] Patrick N. Broyles Broyles Law Firm, LLC 12345 Perkins Road, Bulding Two Baton Rouge, LA 70810 (225) 6632223 (225) 2081670 (fax) [email protected] Joseph E. Cullens, Jr. Walters, Papillion, Thomas, Cullens, LLC 12345 Perkns Road, Building One Baton Rouge, LA 70810 (225) 2363636 (225) 2363650 (fax) [email protected] Robin Eric Phelan Haynes & Boone, LLP 2323 Victory Avenue, Suite 700 Dallas, TX 752197673 (214)6515612 (214)2000649 (fax) [email protected] Attorney's (If Known) Defendants Michael Gustin, Jeffery Wohler, and John Paul Dejoria Attorney: Joseph Randolph Burton Burleson, LLP 700 Milam, Ste. 1100 Houston, TX 77002 (713) 3581762 (713) 3581766 (fax) [email protected] Defendants Harvey N. Klebanoff and Helen Klebanoff Attorney: Mark Joseph Petrocchi Griffith, Jay & Michel, LLP 2200 Forest Park Blvd. Ft. Worth, TX 76110 (817) 9262500 (817) 9262505 (fax) [email protected] All other Defendants Pro Se II. BASIS OF JURISDICTION 1 U.S. Government Plaintiff 2 U.S. Government Defendant 3 Federal Question (U.S. Government Not a Party) 4 Diversity (Indicate Citizenship of Parties in Item III) III. CITIZENSHIP OF PRINCIPAL PARTIES Citizen of This State 1 1 Incorporated or Principal Place of Business In This State 4 4 Citizen of Another State 2 2 Incorporated and Principal Place of Business In Another State 5 5 Citizen or Subject of a Foreign Country 3 3 Foreign Nation 6 6 IV. NATURE OF SUIT 422 Appeal 28 USC 158 423 Withdrawal 28 USC 157 890 Other Statutory Actions Case 4:15-cv-00225-O Document 1 Filed 03/24/15 Page 1 of 6 PageID 1

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Cohen, Kaye and others sued in connection with Latitude bankruptcy

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BTXN 150 (rev. 11/10)In Re: §

§§§§§§§§

Latitude Solutions, Inc.

Debtor(s) Case No.: 12−46295−rfn11 Chapter No.: 11

Carey D. Ebert Plaintiff(s) Adversary No.: 14−04107−rfn

vs.Howard Miller Appel et al.

Defendant(s)

CIVIL CASE COVER SHEET

The JS 44 civil cover sheet and the information contained herein neither replace nor supplement the filing and service of pleadings or other papers as required by law,except as provided by local rules of court. This form, approved by the Judicial Conference of the United States in September 1974, is required for the use of the Clerk ofCourt for the purpose of initiating the civil docket sheet.

I. (a) PLAINTIFFCarey D. Ebert

DEFENDANTMichael Gustin, Jeffery Wohler, John Paul Dejoria, Harvey N.Klebanoff, Helen Klebanoff, Howard Miller Appel, Earnest A.Bartlett, III, Bellcreast Advisors, LLC, Capital Growth InvestmentTrust, Capital Growth Realty, Inc., Deborah Cohen, Matthew J.Cohen, DIT Equity Holdings, Virginia Dadey, DeRosa FamilyTrust, FEQ Realty, LLC, Michael Garnick, Vernon Ray Harlow,Hawk Management Group, Inc., Island Capital Management, LLC,KWL Exploration and Development, Inc., Moggle, LLC, RMSAdvisors, Inc., SLD Capital Corp., TSS Investments, Inc.

(b) County of Residence of First Listed Party:(EXCEPT IN U.S. PLAINTIFF CASES)

County of Residence of First Listed Party:(IN U.S. PLAINTIFF CASES ONLY)

(c) Attorney's (Firm Name, Address, and Telephone Number)John C. AndersonAnderson Firm, LLCPost Office Box 82982Baton Rouge, LA 70884(225) 252−1645(225) 615−7598 (fax)[email protected]

Patrick N. BroylesBroyles Law Firm, LLC12345 Perkins Road, Bulding TwoBaton Rouge, LA 70810(225) 663−2223(225) 208−1670 (fax)[email protected]

Joseph E. Cullens, Jr.Walters, Papillion, Thomas, Cullens, LLC12345 Perkns Road, Building OneBaton Rouge, LA 70810(225) 236−3636(225) 236−3650 (fax)[email protected]

Robin Eric PhelanHaynes & Boone, LLP2323 Victory Avenue, Suite 700Dallas, TX 75219−7673(214)651−5612(214)200−0649 (fax)[email protected]

Attorney's (If Known)Defendants Michael Gustin, Jeffery Wohler, and John Paul DejoriaAttorney:

Joseph Randolph BurtonBurleson, LLP700 Milam, Ste. 1100Houston, TX 77002(713) 358−1762(713) 358−1766 (fax)[email protected]

Defendants Harvey N. Klebanoff and Helen Klebanoff Attorney:

Mark Joseph PetrocchiGriffith, Jay & Michel, LLP2200 Forest Park Blvd.Ft. Worth, TX 76110(817) 926−2500(817) 926−2505 (fax)[email protected]

All other Defendants Pro Se

II. BASIS OF JURISDICTION

1U.S. GovernmentPlaintiff 2

U.S. GovernmentDefendant 3

Federal Question(U.S. GovernmentNot a Party) 4

Diversity(Indicate Citizenshipof Parties in Item III)

III. CITIZENSHIP OF PRINCIPAL PARTIES

Citizen of This State 1 1Incorporated or Principal Placeof Business In This State 4 4

Citizen of Another State 2 2Incorporated and Principal Placeof Business In Another State 5 5

Citizen or Subject of aForeign Country 3 3 Foreign Nation 6 6

IV. NATURE OF SUIT

422 Appeal 28 USC 158 423 Withdrawal 28 USC 157 890 Other Statutory Actions

Case 4:15-cv-00225-O Document 1 Filed 03/24/15 Page 1 of 6 PageID 1

V. ORIGIN

1 Original Proceeding 2Removed from StateCourt 3 Remanded from Appellate Court 4

Reinstated orReopened

5Transferred fromanother district 6

MultidistrictLitigation 7

Appeal to District Judge fromMagistrate Judgment

VI. CAUSE OF ACTION

Cite the U.S. Civil Statute under which you are filing (Do not cite jurisdictional statutes unless diversity):28 USC 157

Brief description of cause:Motion to withdraw reference

VII. REQUESTED IN COMPLAINT:

CHECK IF THIS IS A CLASS ACTION UNDER F.R.C.P. 23 DEMAND $CHECK YES only if demanded in complaint:

JURY DEMAND: Yes No

VIII. RELATED CASE(S) IF ANYJudge: Docket Number:

DATED: 3/24/15 FOR THE COURT:Tawana C. Marshall, Clerk of Courtby: /s/Karyn Rueter, Deputy Clerk

Case 4:15-cv-00225-O Document 1 Filed 03/24/15 Page 2 of 6 PageID 2

BTXN 138 (rev. 03/15)

UNITED STATES BANKRUPTCY COURTNORTHERN DISTRICT OF TEXAS

In Re: §§§§§§§§§§§§§§§§§

Latitude Solutions, Inc.

Debtor(s) Case No.: 12−46295−rfn11 Chapter No.: 11

Carey D. Ebert Plaintiff(s) Adversary No.: 14−04107−rfn

vs.Howard Miller Appel et al. Civil Case No.:

Defendant(s)

Carey D. EbertPlaintiff(s)

vs.Michael Gustin, Jeffery Wohler, John Paul Dejoria,Harvey N. Klebanoff, Helen Klebanoff, Howard MillerAppel, Earnest A. Bartlett, III, Bellcreast Advisors,LLC, Capital Growth Investment Trust, Capital GrowthRealty, Inc., Deborah Cohen, Matthew J. Cohen, DITEquity Holdings, Virginia Dadey, DeRosa Family Trust,FEQ Realty, LLC, Michael Garnick, Vernon RayHarlow, Hawk Management Group, Inc., Island CapitalManagement, LLC, KWL Exploration andDevelopment, Inc., Moggle, LLC, RMS Advisors, Inc.,SLD Capital Corp., TSS Investments, Inc.

Defendant(s)

NOTICE OF TRANSMITTAL REGARDING WITHDRAWAL OF REFERENCE

I am transmitting:

One copy of the Motion to Withdraw Reference (USDC Civil Action No. − DNC Case) NOTE:A Status Conference has been set for April 27, 2015 at 1:30 p.m., in Room 204, 501 W. 10thStreet, Fort Worth, TX 76102 before U.S. Bankruptcy Judge Nelms . The movant/plaintiff,respondent/defendant or other affected parties are required to attend the Status Conference.One copy of: .

TO ALL ATTORNEYS: Fed.R.Bankr.P. 5011(a) A motion for withdrawal of a case or proceeding shall be heard bya district judge, [implied] that any responses or related papers be filed likewise.

DATED: 3/24/15 FOR THE COURT:Tawana C. Marshall, Clerk of Court

by: /s/Karyn Rueter, Deputy Clerk

Case 4:15-cv-00225-O Document 1 Filed 03/24/15 Page 3 of 6 PageID 3

BTXN 116 (rev. 07/08)

UNITED STATES BANKRUPTCY COURTNORTHERN DISTRICT OF TEXAS

WITHDRAWAL OF REFERENCE SERVICE LIST

Transmission of the Record

BK Case No.: 12−46295−rfn11

Adversary No.: 14−04107−rfn

Received in District Court by:

Date:

Volume Number(s):

cc: Russell F. NelmsLaurie ReaKaryn RueterAttorney(s) for Appellant

Plaintiff Carey D. Ebert

John C. AndersonAnderson Firm, LLCPost Office Box 82982Baton Rouge, LA 70884(225) 252−1645(225) 615−7598 (fax)[email protected]

Patrick N. BroylesBroyles Law Firm, LLC12345 Perkins Road, Bulding TwoBaton Rouge, LA 70810(225) 663−2223(225) 208−1670 (fax)[email protected]

Joseph E. Cullens, Jr.Walters, Papillion, Thomas, Cullens, LLC12345 Perkns Road, Building OneBaton Rouge, LA 70810(225) 236−3636(225) 236−3650 (fax)[email protected]

Robin Eric PhelanHaynes & Boone, LLP2323 Victory Avenue, Suite 700Dallas, TX 75219−7673(214)651−5612(214)200−0649 (fax)[email protected]

Case 4:15-cv-00225-O Document 1 Filed 03/24/15 Page 4 of 6 PageID 4

Defendant Michael Gustin

Joseph Randolph BurtonBurleson, LLP700 Milam, Ste. 1100Houston, TX 77002(713) 358−1762(713) 358−1766 (fax)[email protected]

Defendant Jeffery Wohler

Joseph Randolph BurtonBurleson, LLP700 Milam, Ste. 1100Houston, TX 77002(713) 358−1762(713) 358−1766 (fax)[email protected]

Case 4:15-cv-00225-O Document 1 Filed 03/24/15 Page 5 of 6 PageID 5

Defendant John Paul Dejoria

Joseph Randolph BurtonBurleson, LLP700 Milam, Ste. 1100Houston, TX 77002(713) 358−1762(713) 358−1766 (fax)[email protected]

Defendant Harvey N. Klebanoff

Mark Joseph PetrocchiGriffith, Jay & Michel, LLP2200 Forest Park Blvd.Ft. Worth, TX 76110(817) 926−2500(817) 926−2505 (fax)[email protected]

Defendant Helen Klebanoff

Mark Joseph PetrocchiGriffith, Jay & Michel, LLP2200 Forest Park Blvd.Ft. Worth, TX 76110(817) 926−2500(817) 926−2505 (fax)[email protected]

Defendant Howard Miller Appel, Earnest A. Bartlett, III, Bellcreast Advisors, LLC, Capital Growth InvestmentTrust, Capital Growth Realty, Inc., Deborah Cohen, Matthew J. Cohen, DIT Equity Holdings, Virginia Dadey,DeRosa Family Trust, FEQ Realty, LLC, Michael Garnick, Vernon Ray Harlow, Hawk Management Group, Inc.,Island Capital Management, LLC, KWL Exploration and Development, Inc., Moggle, LLC, RMS Advisors, Inc.,SLD Capital Corp., TSS Investments, Inc.

Pro Se Defendants

Case 4:15-cv-00225-O Document 1 Filed 03/24/15 Page 6 of 6 PageID 6

Randy Burton State Bar No. 03479050 [email protected] Trent L. Rosenthal State Bar No. 17282300 [email protected] Landon Speights State Bar No. 24063014 [email protected] Burleson LLP 700 Milam Street, Suite 1100 Houston, Texas 77002 (713) 358-1700 Counsel for Defendants Jeffery Wohler, Michael Gustin, and John Paul DeJoria

UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF TEXAS FORT WORTH DIVISION

In re:

LATITUDE SOLUTIONS, INC.

Debtor

Chapter 11 Case No.: 12-46295-rfn-11

LATITUDE SOLUTIONS, INC. Plaintiff,

v. HOWARD APPEL, ERNEST A. BARTLETT, III, MATTHEW J. COHEN, RMS ADVISORS, INC., CAPITAL GROWTH REALTY, INC., CAPITAL GROWTH INVESTMENT TRUST, DIT EQUITY HOLDINGS, KWL EXPLORATION AND DEVELOPMENT, INC., VIRGINIA DADEY, BELLCREST ADVISORS, LLC, DEBORAH COHEN, HAWK MANAGEMENT GROUP, INC., FEQ REALTY, LLC, HARVEY KLEBANOFF AJKJA HARVEY KAYE, HELEN KLEBANOFF, MOGGLE, LLC, ISLAND CAPITAL MANAGEMENT, LLC, TSS INVESTMENTS, INC., VERNON RAY

Adversary No. 14-04107-rfn

Case 4:15-cv-00225-O Document 1-1 Filed 03/24/15 Page 1 of 171 PageID 7

2

HARLOW, JEFFERY WOHLER, MICHAEL GUSTIN, WILTOMO REDEMPTION FOUNDATION, SLD CAPITAL CORP., DeROSA FAMILY TRUST, WILLIAM BELZBERG REVOCABLE LIVING TRUST, MICHAEL GARNICK, and JOHN PAUL DeJORIA

Defendants.

MOTION TO WITHDRAW REFERENCE MADE TO A U.S. DISTRICT JUDGE PURSUANT TO LOCAL RULE 5011 AND 28 U.S.C.A. § 157(D)

AND DEMAND FOR JURY TRIAL

TO: THE HONORABLE UNITED STATES DISTRICT COURT

1. Defendants MICHAEL GUSTIN, JEFFERY WOHLER, AND JOHN PAUL

DEJORIA (collectively, the “Movants”), by and through their counsel, Burleson LLP, hereby

move to withdraw reference of this adversary proceeding under Local Bankruptcy Rule 5011 and

28 U.S.C.A. § 157(d) and on the grounds set forth in the Memorandum of Law and Brief (the

“Memorandum of Law”) filed concurrently herewith in support of this Motion to Withdraw

Reference (the “Motion”).

2. Movants expressly do not consent to the entry of final judgments or orders by the

Bankruptcy Court in this adversary proceeding, and expressly state that the matters are non-core,

nor are they related to or arising under a case under title 11 of the United States Code. The

Movants are entitled to a jury trial on these claims under the Seventh amendment to the U.S.

Constitution and applicable law. Movants do hereby demand a jury trial on all issues on which

they are entitled to a jury trial under the U.S. Constitution.

3. By signing and filing this Motion, Movants are not waiving any rights they may

have to contest subject matter or personal jurisdiction, or otherwise waiving any right or remedy

available to them, including, without limitation, the right to move to dismiss the Complaint filed

against them in this Adversary Proceeding,

Case 4:15-cv-00225-O Document 1-1 Filed 03/24/15 Page 2 of 171 PageID 8

3

WHEREFORE, Movants request that the reference of this adversary proceeding to the

Bankruptcy Court be withdrawn, that this adversary proceeding be transferred to the United

States District Court for this district, that the Bankruptcy Court transfer all pleadings related to

the Adversary Proceeding to the Clerk for the District Court, and that Movants have such other

relief as may be just and appropriate.

Respectfully submitted, /s/ Randy Burton Randy Burton State Bar No. 03479050 [email protected] Trent L. Rosenthal State Bar No. 17282300 [email protected] Landon Speights State Bar No. 24063014 [email protected] Burleson LLP 700 Milam Street, Suite 1100 Houston, Texas 77002 (713) 358-1700 Counsel for Defendants Jeffery Wohler, Michael Gustin, and John Paul DeJoria

CERTIFICATE OF SERVICE

The undersigned, an attorney, hereby certifies that the above and foregoing motion was

served on counsel for Plaintiffs on this 23rd day of March, 2015, by either the Court’s ecf system

or United States Mail, first class, postage prepaid.

/s/ Randy Burton Randy Burton

Case 4:15-cv-00225-O Document 1-1 Filed 03/24/15 Page 3 of 171 PageID 9

4

CERTIFICATE OF CONFERENCE

Prior to the filing of this Motion to Withdraw Reference, the undersigned counsel

verbally requested in a face-to-face meeting with Trustee’s Counsel on Tuesday, March 10,

2015, that Trustee’s Counsel agree to a motion to withdraw the reference of this adversary

proceeding (by the district court.) Trustee’s Counsel stated that they would get back to Movant’s

counsel. Not having received a response, the undersigned counsel, again, requested whether

Trustee’s Counsel would agree to a motion to withdraw the reference via electronic mail, on

Saturday, March 14, 2014. On Monday, March 16, 2015, Trustee’s Counsel stated that “We are

discussing your request to withdraw the reference and will reply to you soon.” As of the date of

the filing of the attached Motion to Withdraw Reference, the undersigned attorney has received

no response from Trustee’s Counsel concerning Trustee’s agreement to withdraw reference or

oppose it.

/s/ Randy Burton Randy Burton

Case 4:15-cv-00225-O Document 1-1 Filed 03/24/15 Page 4 of 171 PageID 10

Randy Burton State Bar No. 03479050 [email protected] Trent L. Rosenthal State Bar No. 17282300 [email protected] Landon Speights State Bar No. 24063014 [email protected] Burleson LLP 700 Milam Street, Suite 1100 Houston, Texas 77002 (713) 358-1700 Counsel for Defendants Jeffery Wohler, Michael Gustin, and John Paul DeJoria

UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF TEXAS FORT WORTH DIVISION

In re:

LATITUDE SOLUTIONS, INC.

Debtor

Chapter 11 Case No.: 12-46295-rfn-11

LATITUDE SOLUTIONS, INC. Plaintiff,

v.

HOWARD APPEL, ERNEST A. BARTLETT, III, MATTHEW J. COHEN, RMS ADVISORS, INC., CAPITAL GROWTH REALTY, INC., CAPITAL GROWTH INVESTMENT TRUST, DIT EQUITY HOLDINGS, KWL EXPLORATION AND DEVELOPMENT, INC., VIRGINIA DADEY, BELLCREST ADVISORS, LLC, DEBORAH COHEN, HAWK MANAGEMENT GROUP, INC., FEQ REALTY, LLC, HARVEY KLEBANOFF AJKJA HARVEY KAYE, HELEN KLEBANOFF, MOGGLE, LLC, ISLAND CAPITAL MANAGEMENT, LLC, TSS INVESTMENTS, INC., VERNON RAY HARLOW, JEFFERY WOHLER, MICHAEL GUSTIN, WILTOMO

Adversary No. 14-04107-rfn

Case 4:15-cv-00225-O Document 1-1 Filed 03/24/15 Page 5 of 171 PageID 11

ii

REDEMPTION FOUNDATION, SLD CAPITAL CORP., DeROSA FAMILY TRUST, WILLIAM BELZBERG REVOCABLE LIVING TRUST, MICHAEL GARNICK, and JOHN PAUL DeJORIA, Defendants.

MEMORANDUM OF LAW AND BRIEF IN SUPPORT OF MOTION TO WITHDRAW REFERENCE MADE TO A U.S. DISTRICT JUDGE

PURSUANT TO LOCAL RULE 5011 AND 28 U.S.C.A. § 157(D) AND DEMAND FOR JURY TRIAL

Case 4:15-cv-00225-O Document 1-1 Filed 03/24/15 Page 6 of 171 PageID 12

iii

TABLE OF CONTENTS Table of Contents ........................................................................................................................... iii Table of Authorities ....................................................................................................................... iv Procedural Facts ...............................................................................................................................1 Summary of Argument ...................................................................................................................5 Legal Standards for Withdrawal of Reference.................................................................................6 Mandatory Withdrawal ....................................................................................................................7 Permissive Withdrawal ....................................................................................................................9 Cause Exists for Permissive Withdrawal of the Reference ...............................................13 1. Efficient Use of Judicial Resources .......................................................................13 2. Delay and Cost to the Parties .................................................................................14 3. Uniformity of Bankruptcy Administration ............................................................15 4. Prevention of Forum Shopping ..............................................................................15 5. Other Factors, such as Jury Trial Demand .............................................................15 6. Reference to Appendix ..........................................................................................16 Certificate of Service .....................................................................................................................17 Certificate of Conference ...............................................................................................................17

Case 4:15-cv-00225-O Document 1-1 Filed 03/24/15 Page 7 of 171 PageID 13

iv

TABLE OF AUTHORITIES Cases Commodity Futures Trading Comm'n v. Schor,

478 U.S. 833, 106 S.Ct. 3245, 92 L.Ed.2d 675 (1986) ............................................... 11, 12 Dev. Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP,

462 B.R. 457 (S.D.N.Y. 2011) .................................................................................... 13, 14 Executive Benefits Insurance Agency v. Arkison (In re Bellingham

Insurance Agency, Inc.), 702 F3d. 553 (9th Cir. 2012) ................................................ 9, 11 Granfinanciera, S.A. v. Nordberg,

492 U.S. 33, 109 S. Ct. 2782, 106 L. Ed. 2d 26, 18 Fed. R. Serv. 3d 435 (1989) .............. 5 In re Baldwin-United Corp.,

57 B.R. 751, 14 Bankr. Ct. Dec. (CRR) 361 (S.D. Ohio 1985) ...................................... 7, 8 In re BP RE, L.P.,

735 F.3d 279 (2013), 58 Bankr.Ct.Dec. 187, Bankr. L. Rep. P 82, 534 ..................... 11, 12 In re Castlerock Properties,

781 F.2d 159 (9th Cir. 1986) ............................................................................................ 13 In re Cinematronics,

916 F.2d 1444 (9th Cir. 1990) .......................................................................................... 14 In re Frazin,

732 F.3d at 319 ................................................................................................................. 12 In re Galaz,

765 F.3d 426 (2014) Bankr. L. Rep. P 82,697 ............................................................ 12, 13 In re White Motor Corp.,

42 B.R. 693, 12 Bankr. Ct. Dec. (CRR) 235, 11 Collier Bankr. Cas. 2d (MB) 993, 5 Employee Benefits Cas. (BNA) 2169 (N.D. Ohio 1984) ................................................... 7

Michigan Milk Producers Ass'n v. Hunter,

46 B.R. 214, 12 Collier Bankr. Cas. 2d (MB) 166, Bankr. L. Rep. (CCH) P 70310, 1985-1 Trade Cas. (CCH) P 66475 (N.D. Ohio 1985) ................................................................. 8

Northern Pipeline Construction Co. v. Marathon Pipe Line Company,

102 S.Ct. 2858, 458 U.S. 50 (1982) .............................................................................. 6, 10

Case 4:15-cv-00225-O Document 1-1 Filed 03/24/15 Page 8 of 171 PageID 14

v

Sec. Farms v. Int'l Bhd. Of Teamsters, Chauffers, Warehousemen & Helpers, 124 F.3d 999 (9th Cir. 1999) ......................................................................................... 9, 13

Stern vs. Marshall,

564 U.S. 2 (2011), 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) ............. 3, 6, 9, 10, 11, 12, 14 Waldman v. Stone,

698 F.3d 910(6th Cir.2012), ................................................................................. 10, 11, 12 Statutes 11 U.S.C. § 548(a)(1)(A) and (B) ................................................................................................... 2 11 U.S.C. § 544(b) .......................................................................................................................... 2 11 U.S.C. § 550 ............................................................................................................................... 2 28 U.S.C. § 157(c)(2) .................................................................................................................... 12 28 U.S.C. §157(b)(2) ..................................................................................................................... 10 28 U.S.C.A. § 1334(a) .................................................................................................................... 6 28 U.S.C.A. § 157 ......................................................................................................................... 12 28 U.S.C.A. § 157(a) ...................................................................................................................... 6 28 U.S.C.A. § 157(d) .............................................................................................................. 1, 7, 8 F.S.A. § 726.101 et seq. .................................................................................................................. 2 Nev. Rev. Stat. Ann. § 112.140 et seq., (2) .................................................................................... 2 Rules Local Bankruptcy Rule 5011 ...................................................................................................... 1, 6 Fed. R. Bankr. P. 7012 .............................................................................................................. 8, 12 Fed. R. Civ. P. 12 ........................................................................................................................ 4, 8

Case 4:15-cv-00225-O Document 1-1 Filed 03/24/15 Page 9 of 171 PageID 15

Page 1

MEMORANDUM OF LAW AND BRIEF IN SUPPORT OF MOTION TO WITHDRAW REFERENCE MADE TO A U.S. DISTRICT JUDGE

PURSUANT TO LOCAL RULE 5011 AND 28 U.S.C.A. § 157(D) AND DEMAND FOR JURY TRIAL

TO: THE HONORABLE UNITED STATES DISTRICT COURT

Defendants MICHAEL GUSTIN, JEFFERY WOHLER, and JOHN PAUL DEJORIA

(collectively, the “Movants”), by and through their counsel, Burleson LLP, file their Memorandum

of Law and Brief (“Memorandum of Law”) in support of their Motion to Withdraw Reference

under Local Bankruptcy Rule 5011 and 28 U.S.C.A. § 157(d), filed concurrently herewith, and in

support thereof, state:

PROCEDURAL FACTS

1. On November 9, 2011, Latitude Solutions, Inc. (the “Debtor”) filed a voluntary

petition under Chapter 7 of Title 11 of the United States Code (the “Bankruptcy Code” or “Code.”)

2. On March 26, 2013, the Unofficial Committee of Certain Shareholders of the

Debtor (the “Committee”) filed a motion to convert the Chapter 7 case to a Chapter 11 under the

Bankruptcy Code and to retain the current trustee, Carey Ebert, as the Chapter 11 trustee (the

“Trustee.”)

3. On April 4, 2013, the motion to convert the bankruptcy case from Chapter 7 to

Chapter 11 was heard. On April 5, 2013, the Order Granting Motion to Convert Case was entered.

4. On November 9, 2014, the Trustee, in her representative capacity and on behalf of

the Debtor, initiated the Original Complaint and Demand for Jury Trial as an adversary proceeding

against the Movants and numerous other defendants, both individuals and corporate entities (the

“Adversary Proceeding,”) alleging, inter alia, that the defendants, collectively, engaged in: (1)

Fraudulent Transfers under 11 U.S.C. §§ 544(b) and 550 of the Bankruptcy Code, the Florida

Uniform Fraudulent Transfer Act, F.S.A. § 726.101 et seq., or, alternatively, the Nevada Uniform

Case 4:15-cv-00225-O Document 1-1 Filed 03/24/15 Page 10 of 171 PageID 16

Page 2

Fraudulent Transfer Act, Nev. Rev. Stat. Ann. § 112.140 et seq., (2) Fraudulent Transfers under

§§ 548(a)(1)(A) and (B) and 550(a) of the Bankruptcy Code; (3) Breaches of their Fiduciary

Duties, (4) Aiding and Abetting the Breaches of others’ Fiduciary Duties, (5) Common Law Fraud,

(6) Conspiracy to Commit Common Law Fraud, (7) Aiding and Abetting others’ Common Law

Fraud, (8) Actual Damages; (9) Punitive Damages; and, (10) Attorneys’ Fees (the “Claims.”) This

Complaint was never served upon any defendant.

5. On February 13, 2015, the Trustee filed her First Amended and Restated Adversary

Complaint against the Movants and others (the “Complaint”) under which no causes of action were

added to the Original Complaint.

6. No Disclosure Statement or Chapter 11 Plan of Reorganization has yet been filed

in this case. The case has been pending for over 2 years. Reorganization does not appear likely.

7. By the Adversary Proceeding, the Trustee has asserted causes of action that are a

mixed combination of core and non-core state law claims. All of these causes of action with the

exception of the Fraudulent Transfer claims are state law claims; namely, the claims for Breaches

of their Fiduciary Duties, Aiding and Abetting the Breaches of others’ Fiduciary Duties, Common

Law Fraud, Conspiracy to Commit Common Law Fraud, Aiding and Abetting others’ Common

Law Fraud, and for Actual and Punitive Damages and Attorneys’ Fees. The bankruptcy process

is not implicated at all by these non-core claims whatsoever, which could have all been filed in

State Court.

8. As such, with the sole exception of the Fraudulent Transfer claims, the remaining

claims raised in the Complaint are all non-core claims and are totally unrelated to the Debtor’s

Chapter 11 case.

Case 4:15-cv-00225-O Document 1-1 Filed 03/24/15 Page 11 of 171 PageID 17

Page 3

9. More importantly, even the core claims of fraudulent transfers have nothing to do

with Movants because Movants received no such transfers. The 4-page Addendum to Trustee’s

Complaint identifies in great detail each and every fraudulent transfer for each defendant in this

Adversary Proceeding, except for the Movants. The Complaint provides the following information

concerning said defendants fraudulent transfers: (1) Cash; (2) Cash Transfer Dates; (3) Shares; (4)

Share Transfer Dates; (5) Minimum Est. Actual Share Value at Issuance; (6) Est. Value of All

Issues (sic) Shares; (7) Warrants; and (8) Warrant Transfers. For the Movants, on the other hand,

the Trustee cannot show and does not show any information for Movants, only the statement: “To

be determined.” Accordingly, the Trustee has not even alleged a valid fraudulent transfer claim

against Movants because the Trustee has not identified any transfers to the Movants. Therefore,

with respect to Movants, all of the claims raised should be considered non-core, and not related to

or arising under a title 11 case.

10. Clearly, for this reason alone, the Claims against the Movants are distinguishable

from those against the other defendants and have no basis as bankruptcy law causes of action, such

as fraudulent transfer. Moreover, the tort claims alleged by Trustee against Movants and the other

defendants predicated upon alleged Securities Fraud violations are much better addressed by the

District Court. The Bankruptcy Court simply does not have subject matter jurisdiction over these

claims, and under Stern vs. Marshall, 564 U.S. 2 (2011), 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011)

does not have the authority to enter a valid final judgment or order on these claims.

11. Alternatively, because the Complaint on its face and in substance alleges claims

which will require consideration of both Title 11 and other laws of the United States regulating

organizations or activities affecting interstate commerce such as the alleged Securities Fraud

violations implicating the laws of the States of Florida, Nevada, Texas and, perhaps, other states,

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Movants have filed for Withdrawal of the reference of this Adversary Proceeding. These

Securities Fraud claims purport to affect shareholders and creditors located in numerous states not

yet identified.

12. Accordingly, Movants file the Motion as for a threshold determination prior to

answering Trustee’s Complaint, challenging the Bankruptcy Court’s subject matter jurisdiction of

this proceeding and Movants demand a jury trial. Movants note that the Trustee has also requested

a jury trial, and, the Trustee is surely aware that the Bankruptcy Court cannot conduct a jury trial

without consent of all the parties. Movants expressly do not consent to allow the Bankruptcy Court

to conduct a jury trial.

13. Concurrently herewith, Movants have also filed a Motion to Dismiss this Adversary

Proceeding under Rule 12(b) of the Federal Rules of Civil Procedure.

14. The Motion is filed as an initial pleading by the Movants in this Adversary

Proceeding and is seeking to withdraw the reference. By filing this Motion to Withdraw

Reference, Movants are not consenting to the Bankruptcy Court’s subject matter jurisdiction over

them, and reserve all of their arguments set forth in their various Motions to Dismiss and other

motions. This pleading is expressly subject to the jurisdictional arguments raised. This pleading

is not any general submission to the jurisdiction of the Bankruptcy Court and specifically denies

that the Bankruptcy Court has jurisdiction over the Claims against Movants. Movants also deny

that the claims raised against them are core claims.

15. The Movants have simultaneously filed with this motion a Demand for a Jury Trial,

by which they have demanded a jury trial. Movants do hereby demand a jury trial on all issues on

which they are entitled to a jury trial under the U.S. Constitution. Notably, the Trustee has already

requested a jury trial as well.

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16. The Movants expressly do not consent to the Bankruptcy Court’s exercise of

subject matter jurisdiction or the entry of final judgments or orders in this Adversary Proceeding

and expressly state that the Claims against them are non-core and are unrelated to and not arising

under a case under Title 11 of the United States Code. Movants are entitled to a jury trial on these

claims as a matter of constitutional right under the Seventh amendment to the U.S. Constitution

and applicable law. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S. Ct. 2782, 106 L. Ed.

2d 26, 18 Fed. R. Serv. 3d 435 (1989).

17. Movants believe that it would be a more efficient use of judicial resources to have

the District Court hear all matters in connection with the Complaint as it relates to the claims

against the Movants. Additionally, since the causes of action against Movants are non-core or

essentially non-core, the District Court is the better forum to hear all matters in connection with

the Complaint. And, since the Bankruptcy Court does not have subject matter jurisdiction over

these claims and cannot conduct a jury trial, it only makes sense that the Court withdraws the

reference to the District Court.

SUMMARY OF ARGUMENT

18. The District Court should promptly withdraw the reference of this adversary

proceeding for all purposes. Movants request that the Bankruptcy Court make that

recommendation to the District Court. Contemporaneously with the filing of this Memorandum of

Law and Brief in Support of Motion to Withdraw the Reference, Movants filed their Motion to

Withdraw Reference with the Clerk of the United States Bankruptcy Court but directed to the

United States District Court for the Northern District of Texas (the “Defendant’s Motion to

Withdraw Reference”) in accordance with Local Bankruptcy Rule 5011-1.

19. In the Complaint, the Trustee has raised claims that are fundamentally or expressly

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non-core, private claims against Movants that do not arise out of and/or are not related to Latitude

Solutions, Inc.’s chapter 11 case. Northern Pipeline Construction Co. v. Marathon Pipe Line

Company, 102 S.Ct. 2858, 458 U.S. 50 (1982). The Adversary Proceeding against Movants

involves solely state law claims between the Debtor and non-debtor entities that have no close

nexus to the bankruptcy case whatsoever. Under Stern vs. Marshall, the Bankruptcy Court does

not have subject matter jurisdiction over these claims and cannot enter final judgments or orders,

and the Bankruptcy Court does not have constitutional authority to enter final judgments or orders

on these claims. The Trustee and Movants have also requested a jury trial, which the Bankruptcy

Court cannot conduct. These claims against the Movants are entirely different than claims raised

by the Complaint against the other defendants for recovery of fraudulent transfers.

LEGAL STANDARDS FOR WITHDRAWAL OF REFERENCE

20. United States District Courts have original (though not exclusive) subject matter

jurisdiction of all Bankruptcy Code cases pursuant to 28 U.S.C.A. § 1334(a). District Court

jurisdiction extends to all civil proceedings “arising under” and “arising in or related to”

Bankruptcy Court jurisdiction over cases involving a debtor under Title 11. Such jurisdiction is

derived from 28 U.S.C.A. § 157(a), which grants the district court authority to refer all bankruptcy

cases, as well as proceedings arising in or related to a case under Title 11, to the Bankruptcy Court.

21. Because the District Court has original jurisdiction over all bankruptcy cases, it also

has the following power and duty:

The district court may withdraw, in whole or in part, any case or proceeding referred under this section, on its own motion or on timely motion of any party, for cause shown. The district court shall, on timely motion of a party, so withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce.

(Emphasis added.) 28 U.S.C.A. § 157(d). Thus, withdrawal of reference is mandatory where an

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action requires consideration of both bankruptcy law and non-bankruptcy federal law affecting

interstate commerce. Furthermore, a proceeding is subject to withdrawal in both core and noncore

proceedings. In re White Motor Corp., 42 B.R. 693, 12 Bankr. Ct. Dec. (CRR) 235, 11 Collier

Bankr. Cas. 2d (MB) 993, 5 Employee Benefits Cas. (BNA) 2169 (N.D. Ohio 1984).

MANDATORY WITHDRAWAL

22. The conditions which must be met before mandatory withdrawal is appropriate are

as follows:

First, the person seeking withdrawal must be a party to the proceeding; Second, the motion to withdraw the reference must be timely filed; and, Third, resolution of the proceeding must require consideration of both of the Bankruptcy Code and of non-bankruptcy federal statutes regulating interstate commerce.

In re Baldwin-United Corp., 57 B.R. 751, 14 Bankr. Ct. Dec. (CRR) 361 (S.D. Ohio 1985).

23. In the case at bar, the first requirement, that the movant be a party to the proceeding,

is fulfilled in that Movants JOHN PAUL DEJORIA, JEFF WOHLER, and MIKE GUSTIN have

been named as defendants in this adversary proceeding.

24. The second requirement of timeliness is fulfilled if the motion to withdraw

reference was made as promptly as possible in light of the developments in the bankruptcy

proceeding.” Id. This motion is filed on or within the time established for the filing of Movants

answers or file a Fed. R. Bankr. P. 7012/ Fed. R. Civ. P. 12(b) motions. Indeed, many courts are

far more lenient with regard to what constitutes timely filing. Given that Movants’ Motion to

Withdraw Reference has been filed shortly after the filing of the Trustee’s Amended Complaint

where the original Complaint was never served on any defendants and was within the time

specified for the filing of Movants’ answers, Movants’ Motion to Withdraw Reference is clearly

made in timely fashion.

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25. The third requirement states that the resolution of the proceedings requires

consideration of both bankruptcy law and non-bankruptcy federal laws regulating interstate

commerce. In interpreting § 157(d), courts have required that the non-bankruptcy federal law be

a “substantial and material consideration” in the resolution of the proceeding. Baldwin, 57 B.R.

at 757; Michigan Milk Producers Ass’n v. Hunter, 46 B.R. 214, 12 Collier Bankr. Cas. 2d (MB)

166, Bankr. L. Rep. (CCH) P 70310, 1985-1 Trade Cas. (CCH) P 66475 (N.D. Ohio 1985).

Furthermore, the non-bankruptcy federal statutes must be necessary for the resolution of a case or

proceeding and not simply a consideration in the proceeding. Michigan Milk, 46 B.R. at 216. The

Trustee has pled a number of state-based tort claims against Movants. In addition, the Trustee has

alleged – though not formally pled – numerous violations of federal securities fraud statutes related

to the illegal trading of stock in publicly-traded companies by various of the defendants, though

not the Movants, including: (1) allegations that certain the defendants received “consulting” fees

for bringing investors to and running a publically traded corporation (¶ 27); (2) “LSI was paying

Appel, a convicted securities fraud felon, illegal commissions in the form of cash and/or LSI stock,

all in direct violation of applicable law and SEC rules and regulations” (¶ 294); and, (3) “the self-

dealing, insider trading, pattern of fraud, and alleged breach of securities fraud laws alleged herein

against the Director and Officer Defendants” (¶ 299).

PERMISSIVE WITHDRAWAL

26. The District Court may withdraw the reference, in whole or in part, for cause

shown, such as the efficient use of judicial resources, delay and costs to the parties, uniformity of

bankruptcy administration, prevention of forum shopping and other factors. Sec. Farms v. Int’l

Bhd. Of Teamsters, Chauffers, Warehousemen & Helpers, 124 F.3d 999, 1008 (9th Cir. 1999).

Other relevant factors include whether the case is core, or non-core, and whether a jury trial has

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been requested. While a Bankruptcy Court may hear a non-core proceeding, it may not enter final

judgment on such matters absent consent of all parties and the Bankruptcy Court shall submit

proposed findings of fact and conclusion of law to the district court, which shall enter appropriate

findings of fact and conclusions of law after de novo review.

27. Under the rationale of Stern v. Marshall, a bankruptcy court cannot enter a final

judgment on a cause of action traditionally within the judicial power of an Article III Court and

does not have the constitutional authority to do so with respect to private, state-law-based rights.

While not specifically applicable here, in the recent 9th Circuit opinion, Executive Benefits

Insurance Agency v. Arkison (In re Bellingham Insurance Agency, Inc.), 702 F3d. 553 (9th Cir.

2012), the 9th Circuit considered Stern v. Marshall as it related to a Bankruptcy Court’s authority

to enter a final order in a fraudulent transfer action, and held that, in that case, consent to the entry

of such final judgment by the Bankruptcy Court may be implied from the conduct in the litigation,

such as where the defendant filed a proof of claim. In this instance, the proof(s) of claim, if any,

filed by Movants are irrelevant to the adjudication of the Claims raised by the Trustee in her

Complaint. The 9th Circuit upheld the expansive view of Stern v. Marshall that a bankruptcy court

cannot adjudicate cases involving private (not public) rights. Additionally, in evaluating whether

or not to withdraw the reference, the Court should consider whether, under Stern v Marshall,1 the

bankruptcy court is constitutionally empowered to adjudicate the causes of action alleged in the

underlying complaint.

28. In 2013, the Fifth Circuit, interpreting Stern v. Marshall, emphasized the

significance of guarding Article III powers, citing Northern Pipeline Construction Co. v. Marathon

1 In Stern, the Supreme Court held that the bankruptcy court’s power to enter final judgments on matters is not co-extensive with what 28 U.S.C. §157(b)(2) considers “core,” and some matters considered core cannot be finally adjudicated in the Bankruptcy Court where they involve only private rights that will not necessarily be determined in ruling on a proof of claim filed against the estate, unless all parties consent. Id. at 2594.

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Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982)2:

When a suit is made of “the stuff of the traditional actions at common law tried by the courts at Westminster in 1789,” Northern Pipeline, 458 U.S. at 90, 102 S.Ct. 2858 ... (Rehnquist, J., concurring in judgment), and is brought within the bounds of federal jurisdiction, the responsibility for deciding that suit rests with Article III judges in Article III courts. The Constitution assigns that job—resolution of “the mundane as well as the glamorous, matters of common law and statute as well as constitutional law, issues of fact as well as issues of law”—to the Judiciary. Id., at 86–87, n. 39, 102 S.Ct. 2858 ... (plurality opinion).

Turning to whether the bankruptcy court had the constitutional authority to enter final judgment, we are bound to apply Stern, which held that, regardless of statutory authority, the bankruptcy court did not have the constitutional authority to enter a final judgment on claims that are so deeply at the heart of the federal judiciary’s Article III powers and are not necessary to the resolution of the bankruptcy estate. “What is plain here is that this case involves the most prototypical exercise of judicial power: the entry of a final, binding judgment by a court with broad substantive jurisdiction, on a common law cause of action, when the action neither derives from nor depends upon any agency regulatory regime.” Stern, 131 S.Ct. at 2615. Construing Stern, the Sixth Circuit convincingly reached a similar conclusion involving non-core claims in Waldman v. Stone, 698 F.3d 910, 919 (6th Cir.2012), cert. denied, ––– U.S. ––––, 133 S.Ct. 1604, 185 L.Ed.2d 581 (2013): “[W]hen a debtor pleads an action arising only under state-law, as in Northern Pipeline; or when the debtor pleads an action that would augment the bankrupt estate, but not ‘necessarily be resolved in the claims allowance process[,]’ [Stern,] 131 S.Ct. at 2618; then the bankruptcy court is constitutionally prohibited from entering final judgment.”

In re BP RE, L.P., 735 F.3d 279, 286 (2013), 58 Bankr.Ct.Dec. 187, Bankr. L. Rep. P 82,534,

29. However, while the Fifth Circuit agreed with the Sixth and Ninth Circuits position

that the bankruptcy courts lacked the constitutional authority to enter final judgment on state-law

claims, the Fifth Circuit strongly disagreed with the Ninth Circuit on whether individual litigants

in bankruptcy may cure the constitutional deficiency merely by agreeing to waive their rights to

2 In Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), which had held the 1978 Bankruptcy Act unconstitutional, the Court found: “In short, there is no doubt that the bankruptcy judges created by the Act are not Art. III judges.” N. Pipeline, 458 U.S. at 61, 102 S.Ct. 2858. This was not cured by The Bankruptcy Code enacted in 1984.

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be heard by an Article III court:

...[We] must address whether BPRE’s consent to have its claims heard in bankruptcy court cures the constitutional deficiency. We adopt the compelling and thorough reasoning of Waldman, which held that parties cannot consent to such circumvention of Article III that impinges on the structural interests of the Judicial Branch.9 Waldman was the first post-Stern appellate decision *287 to address consent as it relates to the bankruptcy court’s constitutional authority.10 The Sixth Circuit persuasively rejected the notion that the constitutional issue could be waived. In Waldman, the court looked both to Stern and to Commodity Futures Trading Comm’n v. Schor, 478 U.S. 833, 106 S.Ct. 3245, 92 L.Ed.2d 675 (1986), concluding that this issue implicates Article III’s structural interests. Article III, Section 1 not only seeks to preserve individual litigants’ right to an independent judiciary but also “serves as an inseparable element of the constitutional system of checks and balances.” Waldman, 698 F.3d at 917 (quoting Schor, 478 U.S. at 850, 106 S.Ct. 3245). The court rejected the theory that, because the bankruptcy courts are part of the Judicial Branch, there was no threat of encroachment but only a waivable personal right. Id. at 917–18. We acknowledge that the Ninth Circuit’s opinion in Executive Benefits is in conflict on the issue of consent. We do not dispute that parties may waive constitutional rights, Schor, 478 U.S. at 848–49, 106 S.Ct. 3245, but Executive Benefits disregards the critical structural interests underlying Article III. It does so by reasoning that Stern allowed waiver...That line of reasoning in Executive Benefits misses the mark, however, because Stern determined only that Pierce had waived the issue of statutory authority, see Stern, 131 S.Ct. at 2608, and did not reach the constitutional issue as to waiver.

...Allowing bankruptcy courts to enter final judgments on state-law claims that are not necessary to address the bankruptcy issues confers the “essential attributes of judicial power” on non-Article III courts. Where a structural interest is triggered, “the parties cannot by consent cure the constitutional difficulty for the same reason that the parties by consent cannot confer on federal courts subject-matter jurisdiction beyond the limitations imposed by Article III, § 2.” Schor, 478 U.S. at 851, 106 S.Ct. 3245. “When these Article III limitations are at issue, notions of consent and waiver cannot be dispositive because the limitations serve institutional interests that the parties cannot be expected to protect.” Id.

30. More recently, the 5th Circuit reiterated its position on waiver with In re Galaz, 765

F.3d 426 (2014) Bankr. L. Rep. P 82,697. In Galaz, the Firth Circuit held that even with the

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express or implied consent of the parties, a bankruptcy court may not enter a final judgment on

private, state court based claims because they are non-core claims, merely “relating to” the

bankruptcy:

While Section 157 gives bankruptcy courts statutory authority to enter final judgment on specific bankruptcy-related claims, “Article III of the Constitution prohibits bankruptcy courts from finally adjudicating certain of those claims.” Id. at 2168. “Congress may not bypass Article III simply because a proceeding may have some bearing on a bankruptcy case; the question is whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process.” Stern, 131 S.Ct. at 2618. Thus, “when a debtor pleads an action arising only under state-law, ... or when the debtor pleads an action that would augment the bankrupt estate, but not ‘necessarily be resolved in the claims allowance process [,]’ then the bankruptcy court is constitutionally prohibited from entering final judgment.” Waldman, 698 F.3d at 919 (quoting Stern, 131 S.Ct. at 2618). Accord In re BP RE, 735 F.3d at 285. The district court treated Lisa’s TUFTA [Texas Uniform Fraudulent Transfer Act] claim as being “related to” the bankruptcy rather than a core bankruptcy claim. We agree with this characterization. The court went on, however, to hold that the bankruptcy court had authority to enter a final judgment based on the Appellants’ implied consent. 28 U.S.C. § 157(c)(2); Bankr.Rule 7012; Memo Op., Galaz v. Galaz, No. 11–00425 (W.D. Tex. April 17, 2012). This court’s later decisions in In re Frazin and In re BP RE are at odds with the district court’s consent rationale. Each of these cases holds that according to Stern, the parties’ express or implied consent cannot cure the constitutional deficiency that results from circumventing, or diminishing, the Article III structural protections for the federal judiciary. In re BP RE, 735 F.3d at 286–87 (relying on Waldman, 698 F.3d at 917, 918); In re Frazin, 732 F.3d at 319.

In re Galaz, 765 F.3d 426, 432 (2014), Bankr. L. Rep. P 82,697

CAUSE EXISTS TO WITHDRAW THE REFERENCE

31. The claims raised against Movants in the Complaint are all clearly non-core, and

are not related to the bankruptcy case. Moreover, as stated above, the alleged core claims of

fraudulent transfer against Movants have no foundation since they are “To be determined”

according to Debtor’s own pleadings. An analysis of each of the factors that support permissive

withdrawal of the reference is as follows:

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1. Efficient Use of Judicial Resources. The Claims raised in the Complaint

against Movants have nothing to do with the claims raised in the underlying lawsuit. The

primary factor in deciding a motion to withdraw the reference is whether the bankruptcy

court has authority to finally determine claims underlying the Motion to Withdraw the

Reference. Dev. Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP, 462 B.R. 457,

469 (S.D.N.Y. 2011). Historically, this was determined by examining the core versus non-

core distinction of the claims and whether there was a timely demand for a jury trial.3 Id.

Judicial efficiency is promoted by withdrawing the reference for those matters that are non-

core since non-core claims are subject to de novo review. In re Castlerock Properties, 781

F.2d 159, 162 (9th Cir. 1986). “Efficiency is enhanced by withdrawing the reference when

non-core issues predominate.” Security Farms, 124 F.3d at 1008. “Inasmuch as a

bankruptcy court’s determination on non-core matters are subject to de novo review by the

district court, unnecessary costs could be avoided by a single proceeding in the district

court.” Castlerock, 781 F.2d at 162. The Ninth Circuit has held that it was an abuse of

discretion not to withdraw the reference when there is a non-core matter and a timely jury

demand. In re Cinematronics, 916 F.2d 1444, 1451 (9th Cir. 1990). After Stern v.

Marshall, the following additional analysis is required to determine the advantages and

disadvantages of leaving the underlying Complaint before the Article I court or moving it

to an Article III court: whether (1) the rights being adjudicated are public rights or (2) the

rights being adjudicated will necessarily be resolved in ruling on a creditor’s proof of claim,

or (3) the parties unanimously consent to the bankruptcy court adjudicating their claims.

Development Specialists, Inc. at 467. Here, we are dealing with tort claims against Movants

3 Movants have concurrently herewith filed their demand for a jury trial and non-consent to adjudication by the Bankruptcy Court.

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not involving any proof of claim or any bankruptcy law, and, the parties have not consented

to entry of final judgments by the Bankruptcy Court. Additionally, based on the rationale

and arguments raised in the Movants’ Motions to Dismiss and related Motions, which are

incorporated herein for all purposes, the Complaint against Movants should be dismissed

for lack of subject matter jurisdiction. The Bankruptcy Court lacks subject matter

jurisdiction, and, there are no other grounds for jurisdiction in the District Court, i.e. no

federal question and no “related to” or “arising under” a bankruptcy case jurisdiction. For

that reason, once the reference is withdrawn, the District Court should dismiss the

Complaint on the grounds set forth in Movants’ Motion to Dismiss assuming the

Bankruptcy Court has not already granted such relief prior to withdrawal of the reference.

2. Delay and Cost to the Parties. If the Bankruptcy Court were to hear the

case, it would only be able to submit proposed findings of fact and conclusions of law to

the District Court for de novo review. Movants would thereafter be required to file a

response to the proposed findings and conclusions, which would consume time and cost.

Moreover, since two Courts would be required to consider the same issues, there would

obviously be delay involved. There could also be further delays associated with appeals

from the District Court orders, essentially causing a review by three Courts of the same

issue. The request for jury demand by both the Trustee and Movants makes it more

economical for this Court to consider the case from the start and familiarize itself with the

issues in preparation for the jury trial for which it must conduct.

3. Uniformity of Bankruptcy Administration. The claims raised in the

Complaint against Movants are all non-core and not “arising from” or “related to” the

bankruptcy case. Therefore, consideration of the claims by the Bankruptcy Court will not

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improve the uniformity of bankruptcy administration since the claims against Movants deal

with state law created rights, not bankruptcy law. Withdrawal of the reference will not

interfere with the bankruptcy case, which has numerous other unrelated adversary

proceedings pending as well.

4. Prevention of Forum Shopping. Movants are not forum shopping. They

are just requesting that the Court that would be in a position to conduct the jury trial hear

the case from beginning to end.

5. Other Factors, such as Jury Trial Demand. Obviously this is an

important factor because the Bankruptcy Court is not in a position to conduct a jury trial.

Assuming the claims are not dismissed on jurisdictional grounds as requested in the Motion

to Dismiss, it makes sense for the Article III Court to consider these state law created

claims. They have nothing to do with the bankruptcy. Both the Trustee and Movants have

requested a jury trial.

6. Reference to Appendix. In further support of this Motion to Withdraw

Reference, Movants present the following pleadings filed in the captioned adversary case,

which shall constitute an appendix and exhibits to the Motion to Withdraw Reference:

(i) Movants’ Motion to Dismiss Under Rule 12 of The Federal Rules of Civil Procedure as Made Applicable to Adversary Proceedings Under Rule 7012 of The Federal Rules of Bankruptcy Procedure, and Memorandum of Law and Brief in Support Thereof; and,

(ii) First Amended and Restated Adversary Complaint, filed on February

13, 2015, Doc. 10.

WHEREFORE, for the reasons stated herein, Movants request that the reference of this

adversary proceeding to the Bankruptcy Court be withdrawn, that this adversary proceeding be

transferred to the United States District Court for this district, that the Bankruptcy Court transfer

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all pleadings related to the Adversary Proceeding to the Clerk for the District Court, and that

Movants have such other relief as may be just and appropriate.

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Respectfully submitted, /s/ Randy Burton Randy Burton State Bar No. 03479050 [email protected] Trent L. Rosenthal State Bar No. 17282300 [email protected] Landon Speights State Bar No. 24063014 [email protected] Burleson LLP 700 Milam Street, Suite 1100 Houston, Texas 77002 (713) 358-1700 Counsel for Defendants Jeffery Wohler, Michael Gustin, and John Paul DeJoria

CERTIFICATE OF SERVICE

The undersigned, an attorney, hereby certifies that the above and foregoing motion was

served on counsel for Plaintiffs on this 23rd day of March, 2015, by either the Court’s ecf system

or United States Mail, first class, postage prepaid.

/s/ Randy Burton Randy Burton

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APPENDIX I

MOVANTS’MOTION TO DISMISS UNDER RULE 12 OF THE FEDERAL RULES OF CIVIL PROCEDURE

AS MADE APPLICABLE TO ADVERSARY PROCEEDINGS UNDER RULE 7012 OF THE FEDERAL RULES

OF BANKRUPTCY PROCEDURE, AND MEMORANDUM OF LAW AND BRIEF IN SUPPORT THEREOF

1

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1

Randy BurtonState Bar No. [email protected] L. RosenthalState Bar No. 17282300 [email protected] SpeightsState Bar No. [email protected] LLP700 Milam Street, Suite 1100Houston, Texas 77002(713) 358-1700

Counsel for Defendants Jeffery Wohler, Michael Gustin, and John Paul DeJoria

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF TEXAS

FORT WORTH DIVISION In re:

LATITUDE SOLUTIONS, INC.

Debtor

Chapter 11

Case No.: 12-46295-rfn-11

LATITUDE SOLUTIONS, INC.Plaintiff,

v.

HOWARD APPEL, ERNEST A. BARTLETT, III, MATTHEW J. COHEN, RMS ADVISORS, INC., CAPITAL GROWTH REALTY, INC., CAPITAL GROWTH INVESTMENT TRUST, DIT EQUITY HOLDINGS, KWL EXPLORATION AND DEVELOPMENT, INC., VIRGINIA DADEY, BELLCREST ADVISORS, LLC, DEBORAH COHEN, HAWK MANAGEMENT GROUP, INC., FEQ REALTY, LLC, HARVEY KLEBANOFF AJKJA HARVEY KAYE, HELEN KLEBANOFF, MOGGLE, LLC, ISLAND CAPITAL MANAGEMENT, LLC, TSS INVESTMENTS, INC., VERNON RAY HARLOW, JEFFERY WOHLER, MICHAEL GUSTIN, WILTOMO REDEMPTION

Adversary No. 14-04107-rfn

2

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2

FOUNDATION, SLD CAPITAL CORP., DeROSA FAMILY TRUST, WILLIAM BELZBERG REVOCABLE LIVING TRUST, MICHAEL GARNICK, and JOHN PAUL DeJORIA

Defendants.

MOTION TO DISMISS UNDER RULE 12 OF THE FEDERAL RULES OF CIVIL PROCEDURE AS MADE APPLICABLE TO ADVERSARY PROCEEDINGS UNDER

RULE 7012 OF THE FEDERAL RULES OF BANKRUPTCY PROCEDURE

TO: THE HONORABLE UNITED STATES BANKRUPTCY JUDGE

DEFENDANTS JEFFERY WOHLER, MICHAEL GUSTIN, AND JOHN PAUL

DeJORIA (collectively, the “Movants”), by and through their counsel, Burleson LLP, move to

dismiss the claims pleaded against them in this matter. As grounds, the Movants would

respectfully submit that (1) this Court lacks subject matter jurisdiction; (2) that the Plaintiff,

Chapter 11 Trustee Carey Ebert (hereinafter “Trustee”), has failed to plead her causes of action

with the specificity required under federal law; (3) the Trustee has failed to state claims upon

which relief can be granted; and (4) on the other grounds set forth in the Memorandum of Law

and Brief (the “Memorandum of Law”) filed concurrently herewith in support of this Motion to

Dismiss (the “Motion”).

Movants expressly do not consent to the entry of final judgments or orders by the

Bankruptcy Court in this adversary proceeding, and expressly state that the matters are non-core,

nor are they related to or arising under a case under title 11 of the United States Code. The

Movants are entitled to a jury trial on these claims under the Seventh amendment to the U.S.

Constitution and applicable law. Movants do hereby demand a jury trial on all issues on which

they are entitled to a jury trial under the U.S. Constitution.

By signing and filing this Motion, Movants are not waiving any rights they may have to

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contest subject matter or personal jurisdiction, or otherwise waiving any right or remedy

available to them, including, without limitation, the right to move to dismiss the Complaint filed

against them in this Adversary Proceeding,

WHEREFORE, Movants request that all counts of the Plaintiff’s Amended Complaint

alleged against Defendants MICHAEL GUSTIN, JEFFERY WOHLER, and JOHN PAUL

DeJORIA be dismissed with prejudice and that Movants have such other relief as may be just

and appropriate.

Respectfully submitted,

/s/ Randy Burton Randy Burton State Bar No. 03479050 [email protected] Trent L. Rosenthal State Bar No. 17282300 [email protected] Speights State Bar No. 24063014 [email protected] LLP 700 Milam Street, Suite 1100 Houston, Texas 77002 (713) 358-1700

Counsel for Defendants Jeffery Wohler, Michael Gustin, and John Paul DeJoria

CERTIFICATE OF SERVICE

The undersigned, an attorney, hereby certifies that the above and foregoing motion was

served on counsel for Plaintiffs on this 23rd day of March, 2015, by either the Court’s ecf system

or United States Mail, first class, postage prepaid.

/s/ Randy Burton Randy Burton

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UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF TEXAS

FORT WORTH DIVISION

In re:

LATITUDE SOLUTIONS, INC.

Debtor

Chapter 11

Case No.: 12-46295-rfn-11

LATITUDE SOLUTIONS, INC.Plaintiff,

v.

HOWARD APPEL, ERNEST A. BARTLETT, III, MATTHEW J. COHEN, RMS ADVISORS, INC., CAPITAL GROWTH REALTY, INC., CAPITAL GROWTH INVESTMENT TRUST, DIT EQUITY HOLDINGS, KWL EXPLORATION AND DEVELOPMENT, INC., VIRGINIA DADEY, BELLCREST ADVISORS, LLC, DEBORAH COHEN, HAWK MANAGEMENT GROUP, INC., FEQ REALTY, LLC, HARVEY KLEBANOFF AJKJA HARVEY KAYE, HELEN KLEBANOFF, MOGGLE, LLC, ISLAND CAPITAL MANAGEMENT, LLC, TSS INVESTMENTS, INC., VERNON RAY HARLOW, JEFFERY WOHLER, MICHAEL GUSTIN, WILTOMO REDEMPTION

Adversary No. 14-04107-rfn

Randy BurtonState Bar No. [email protected] L. RosenthalState Bar No. 17282300 [email protected] SpeightsState Bar No. [email protected] LLP700 Milam Street, Suite 1100Houston, Texas 77002(713) 358-1700

Counsel for Defendants Jeffery Wohler, Michael Gustin, and John Paul DeJoria

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FOUNDATION, SLD CAPITAL CORP., DeROSA FAMILY TRUST, WILLIAM BELZBERG REVOCABLE LIVING TRUST, MICHAEL GARNICK, and JOHN PAUL DeJORIA,Defendants.

MEMORANDUM OF LAW AND BRIEF IN SUPPORT OF DEFENDANTS JEFFERY WOHLER, MICHAEL GUSTIN, AND JOHN PAUL DeJORIA’S MOTION TO

DISMISS UNDER RULE 12(B) OF THE FEDERAL RULES OF CIVIL PROCEDURE AS MADE APPLICABLE TO ADVERSARY PROCEEDINGS UNDER RULE 7012 OF

THE FEDERAL RULES OF BANKRUPTCY PROCEDURE

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TABLE OF CONTENTS

Table of Contents ........................................................................................................................... iii

Table of Authorities .........................................................................................................................v

I. Summary ..............................................................................................................................1

II. Introduction ..........................................................................................................................2

III. Failure of Pleadings .............................................................................................................5

Standard of Review ..............................................................................................................5

Federal Rules of Civil Procedure Rule 9(b) .............................................................5

Federal Rules of Civil Procedure Rule 12(b)(6) ......................................................6

A Summary of the Allegations Regarding the Movants ......................................................7

Fraudulent Transfers ............................................................................................................9

Fraud Claims ......................................................................................................................10

Punitive Damages and Attorney’s Fees .............................................................................11

Argument ...........................................................................................................................11

The Trustee’s Pleadings Fail to Allege Facts Sufficient to Plead a Claim Against the Movants..............................................................................................................................11

Fraudulent Transfer ............................................................................................................13

Fraud ..................................................................................................................................13

IV. Lack of Subject Matter Jurisdiction under FRCP 12(b)(1) ................................................14

Summary of Argument ......................................................................................................17

Legal Standards for Dismissal for Lack of Subject Matter Jurisdiction ............................18

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iv

V. Consent Not Sought ...........................................................................................................22

VI. Demand for Jury Trial ........................................................................................................22

VII. Jurisdiction .........................................................................................................................22

VIII. Conclusion .........................................................................................................................22

Certificate of Service .....................................................................................................................23

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TABLE OF AUTHORITIES

Case Page Ashcroft v. Iqbal,

556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) .................................................... passim Bell Atl. Corp. v. Twombly,

550 U.S. 554 (2007) .............................................................................................. 6, 7, 12, 13, 14Bramlett v. Med. Protective Co. of Fort Wayne, Ind.,

855 F.Supp.2d 615 (N.D.Tex.2012) ........................................................................................... 6Commodity Futures Trading Comm'n v. Schor,

478 U.S. 833, 106 S.Ct. 3245, 92 L.Ed.2d 675 (1986) ....................................................... 20, 21DiLeo v. Ernst & Young,

901 F.2d 624 (7th Cir.1990) ....................................................................................................... 5Executive Benefits Insurance Agency v. Arkison (In re Bellingham Insurance Agency, Inc.,

702 F3d. 553 (9th Cir. 2012) ....................................................................................... 18, 20, 21Granfinanciera, S.A. v. Nordberg,

492 U.S. 33, 109 S. Ct. 2782, 106 L. Ed. 2d 26, 18 Fed. R. Serv. 3d 435 (1989) .............. 17, 22In re BP RE, L.P.,

735 F.3d 279 (2013), 58 Bankr.Ct.Dec. 187, Bankr. L. Rep. P 82,534 ........................ 20, 21, 22In re Frazin,

732 F.3d at 319 ......................................................................................................................... 22In re Galaz,

765 F.3d 426 (2014) Bankr. L. Rep. P 82,697 .................................................................... 21, 22Interspan Distribution Corp. v. Liberty Ins. Underwriters, Inc.,

CIV.A. H-07-1078, 2008 WL 905354 (S.D. Tex. Mar. 31, 2008) ............................................ 13Melder v. Morris,

27 F.3d 1097 (5th Cir.1994) ....................................................................................................... 5Northern Pipeline Construction Co. v. Marathon Pipe Line Company,

102 S.Ct. 2858, 458 U.S. 50 (1982) .............................................................................. 18, 19, 20Ridge at Red Hask, L.L.C. v. Schneider,

493 F.3d 1174 (10th Cir. 2007) ................................................................................................ 13Southland Sec. Corp. v. Inspire Ins. Solutions Inc.,

365 F.3d 353 (5th Cir.2004) ....................................................................................................... 5Stern vs. Marshall,

564 U.S. 2 (2011), 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) ............................................. passimTuchman v. DSC Commc'ns Corp.,

14 F.3d 1061 (5th Cir.1994) ....................................................................................................... 5U.S. ex rel. Lemmon v. Envirocare of Utah, Inc.,

614 F.3d 1163 (10th Cir. 2010) ................................................................................................ 14Waldman v. Stone,

698 F.3d 910(6th Cir.2012), ......................................................................................... 20, 21, 22

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Williams v. WMX Techs., Inc., 112 F.3d 175 ........................................................................................................................... 5, 6

Statutes

28 U.S.C.A. § 157 ......................................................................................................................... 2128 U.S.C.A. § 157(a) .................................................................................................................... 1828 U.S.C. §157(b)(2) ..................................................................................................................... 1928 U.S.C. § 157(c)(2) .................................................................................................................... 2228 U.S.C.A. § 157(d) .................................................................................................................... 1728 U.S.C.A. § 1334(a) .................................................................................................................. 18

Rules

Federal Rules of Bankruptcy Proceedure Rule 7012 ............................................................ 1, 2, 22Federal Rules of Civil Procedure Rule 8 ................................................................................ 13, 14Federal Rulce of Civil Procedure 8(a)(2) ..................................................................................... 1,6Federal Rules of Civil Procedure Rule 9 .................................................................................. 2, 14Federal Rules of Civil Procedure Rule 9(b) .......................................................................... 1, 5, 14Federal Rules of Civil Procedure Rule 12 .............................................................................. 1, 2, 5Federal Rules of Civil Procedure Rule 12(b)(1) ......................................................................... 1, 5Federal Rules of Civil Procedure Rule 12(b)(6) ..................................................................... 1, 6, 7Local Bankruptcy Rule 5011 ........................................................................................................ 17

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MEMORANDUM OF LAW AND BRIEF IN SUPPORT OF DEFENDANTS JEFFERY WOHLER, MICHAEL GUSTIN, AND JOHN PAUL DeJORIA’S MOTION TO

DISMISS UNDER RULE 12(B) OF THE FEDERAL RULES OF CIVIL PROCEDURE AS MADE APPLICABLE TO ADVERSARY PROCEEDINGS UNDER RULE 7012 OF

THE FEDERAL RULES OF BANKRUPTCY PROCEDURE

TO THE HONORABLE UNITED STATES BANKRUPTCY JUDGE:

DEFENDANTS JEFFERY WOHLER, MICHAEL GUSTIN, AND JOHN PAUL

DeJORIA (collectively, the “Movants”), by and through their counsel, Burleson LLP, move to

dismiss the claims pled against them in this matter. As grounds, the Movants would respectfully

submit that the Plaintiff, Chapter 11 Trustee Carey Ebert (hereinafter “Trustee”), has failed to

plead her causes of action with the specificity required under federal law, the Trustee has failed to

state claims upon which relief can be granted, the Bankruptcy Court lacks subject matter

jurisdiction over this adversary proceeding, and the only appropriate remedy is dismissal. In

further support of the motion, Movants would state:

I. SUMMARY

1. This Motion is filed pursuant to Rules 12(b)(1) and 12(b)(6) of the Federal Rules

of Civil Procedure, as made applicable to bankruptcy cases by Rule 7012 of the Federal Rules of

Bankruptcy Procedure. As set forth below, this Court lacks subject matter jurisdiction as it does

not have the constitutional authority to enter judgments or final orders on these non-core claims

under the rationale of Stern vs. Marshall.

2, Trustee has alleged two counts of Fraudulent Transfer (Counts One and Two ¶ 334-

357). As a species of fraud, Federal Rules of Civil Procedure Rule 9(b) dictates that the Trustee

must “state with particularity the circumstances constituting fraud or mistake,” and, Rule 8(a)(2)

mandates a “statement of the claim showing that the pleader is entitled to relief.” By failing to

allege a single example of a fraudulent transfer committed by Movants, Trustee did not comply

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with these rules. Attachment One to the Trustee’s Amended Complaint lists numerous allegations

of fraudulent transfer, but none against Movants. Instead, in reference to the Movants, Attachment

One merely states “To be Determined.” Trustee has wholly failed to state a claim against the

Movants pursuant to Rule 12 of the Federal Rules of Civil Procedure, as made applicable to

bankruptcy cases by Rule 7012 of the Federal Rules of Bankruptcy Procedure; accordingly,

Trustee’s fraudulent transfer causes of action against Movants should be dismissed with prejudice.

3. Further, Trustee’s entire action is premised on the allegation that certain persons –

not Movants - perpetrated a fraudulent “pump-and-dump” scheme against the Debtor Latitude

Solution, Inc. (“LSI”). Accordingly, every one of Trustee’s claims (Fraudulent Transfer, Common

Law Fraud, Conspiracy, Aiding and Abetting, Breach of Fiduciary Duty, Punitive Damages and

Attorney’s Fees) sounds in fraud, and, the Trustee must plead “with particularity the circumstances

constituting fraud.” Movants are entitled to, but did not receive, the “who, what, when, where,

and how.” Trustee failed to meet the well-established pleading specificity required under federal

law; consequently, the Trustee’s claims against Movants should be dismissed pursuant to Rule

Nos. 9 and 12 of the Federal Rules of Civil Procedure, as made applicable to bankruptcy cases by

Rule 7012 of the Federal Rules of Bankruptcy Procedure.

II. INTRODUCTION

This lawsuit arises out of a fraudulent pump-and-dump scheme… (¶1 Amended Complaint)

4. This matter arises from the wrongdoing of Defendants Howard Appel, Matthew

Cohen, and a group of co-conspirators intent on perpetrating a pump-and-dump scheme on LSI.

For the most part, that wrongdoing by Mr. Appel, Mr. Cohen, and their co-conspirators is well

pleaded in “Act One” of Trustee’s Amended Complaint (¶ 120 – 180). However, in an attempt to

maximize recovery for the LSI’s bankruptcy estate at all cost, Trustee has also chosen to pursue

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an incredibly tenuous case against the Movants for an obvious reason. If Trustee had wanted to

bring a legitimate case against LSI’s Board of Directors, she could have sued all of the board

members, but she did not. Instead, she chose to sue one particular board member and his two close

associates. It is no secret that Movant John Paul DeJoria is a very wealthy individual and Jeffery

Wohler and Michael Gustin are his close associates. This has resulted in Trustee’s dogged pursuit

of Mr. DeJoria as the proverbial pot of gold at the end of the rainbow.

5. Presumably, the Trustee has every email, every accounting document, and every

contract ever signed by LSI at her disposal, yet is unable to produce a single piece of hard evidence

proving Movants Jeffery Wohler, Michael Gustin, or John Paul DeJoria participated in the pump-

and-dump scheme perpetrated on LSI. In fact, if Trustee sought to be fair, she could easily provide

this court with: (a) accounting documents that prove that the Movants never offered for sale nor

sold a single share of LSI stock, (b) emails from Defendant Howard Appel exonerating John Paul

DeJoria, or, (c) praise for the fact that the Movants spent hundreds of thousands of dollars of their

own money investigating Howard Appel, Matthew Cohen, and their known associates and

submitting the evidence from that investigation to the DOJ, FBI, and SEC. But the Trustee does

not seek to do the right or fair thing. The Trustee knows that “[t]he pump-and-dump orchestrated

and executed by the Appel/Bartlett Group was in full swing when DeJoria and the [Movants] got

involved in LSI” (Amended Complaint ¶ 180) but still chooses to bring this action (which is

tantamount to extortion) against the Movants.

6. When LSI filed for bankruptcy, Mr. DeJoria was the largest shareholder and a

significant creditor of LSI. By all accounts, he is far and away the largest victim of the pump-and-

dump scheme. Rather than protect his interests alongside the other shareholders and creditors or

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attempt to bring the true perpetrators to justice, the Trustee has chosen to sue Mr. DeJoria and his

close associates simply because he has a large bank account.

7. The Trustee would have this Court believe that Appel/Bartlett group is a

sophisticated group of “serial securities manipulater(s)” capable of orchestrating a massive fraud

against shareholders and creditors. At the same time, she contends, only the Movants knew or

should have known about this sophisticated scheme. In fact, like the other shareholders and

creditors, Movants were completely unaware of the fraud despite their best efforts and intentions

to protect LSI. Indeed, Movants lost more money, time and energy attempting to salvage LSI than

anyone. Though they turned evidence of the insider trading and other securities fraud concerning

Howard Appel, Ernest Bartlett, Matt Cohen, and others, over to the federal authorities, they alone

among the so-called “Second Board” have been pegged by the Trustee as breaching their fiduciary

duty to the Company. It defies logic that the Movants are parties to this case for any other reason

than Mr. DeJoria’s net worth.

8. In the Trustee’s Amended Petition, she attempts to paint all 27 Defendants with a

broad brush, often equating the Movants in with those who perpetrated the pump-and-dump

against LSI. Again, Trustee does not have a scintilla of evidence – because none exists – that

Movants participated in the pump and dump scheme.

9. The poverty of pleadings related to Trustee’s allegations of Fraudulent Transfer

(Amended Complaint Counts 1 and 2), Breach of Fiduciary Duty (Counts 3 and 4), and Fraud

(Counts 5, 6 and 7), perpetrated by the Movants is only one of the reasons that Trustee’s claims

are so dubious. Unlike where insiders are directly involved, directly participating, and directly

sharing ill-gotten gains amongst themselves, the Trustee’s case against the Movants is based on

non-specific allegations of non-conduct by unspecified people. The Trustee has not merely

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generalized about the Movants’ conduct; the Trustee has generalized about the universe of conduct

by all actors, irrespective of whether there is any actual evidence of any actual conduct by that

particular defendant. Stated simply, Trustee has failed to specify how the claims in her Amended

Complaint apply to the Movants and the Movants’ purported fraudulent conduct. Thus, the Trustee

has not stated a claim against the Movants,

10. Additionally, for the reasons set forth below, the Complaint should be dismissed

under Rule 12(b)(1) of the Federal Rules of Civil Procedure as this Court’s lacks subject matter

jurisdiction and does not have the constitutional authority to enter final judgments or orders on

these non-core claims under the rationale of Stern vs. Marshall.

III. FAILURE OF PLEADINGS

Standard of Review

Federal Rules of Civil Procedure Rule 9(b)

11. Federal Rules of Civil Procedure Rule 9(b) provides that “[i]n alleging fraud or

mistake, a party must state with particularity the circumstances constituting fraud or mistake.”

Under Rule 9(b), a complaint alleging fraud must specify the “time, place, and contents of the false

representations, as well as the identity of the person making the misrepresentation and what [that

person] obtained thereby.” Tuchman v. DSC Commc'ns Corp., 14 F.3d 1061, 1068 (5th Cir.1994).

A plaintiff must “specify the statements contended to be fraudulent, identify the speaker, state

when and where the statements were made, and explain why the statements were fraudulent.”

Southland Sec. Corp. v. Inspire Ins. Solutions Inc., 365 F.3d 353, 362 (5th Cir.2004) (quoting

Williams v. WMX Techs., Inc., 112 F.3d 175, 177–78 (5th Cir.1997)). In other words, the “who,

what, when, where, and how.” Melder v. Morris, 27 F.3d 1097, 1100 n. 5 (5th Cir.1994) (citing

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DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.1990)). This Rule should be applied “with

force, without apology.” Williams, 112 F.3d at 178.

Federal Rules of Civil Procedure Rule 12(b)(6)

12. In deciding the Movants’ Motion to Dismiss under Rule 12(b)(6), the Court

evaluates the sufficiency of the Trustee’s complaint “by accepting all well-pleaded facts as true,

viewing them in the light most favorable to the plaintiff.” Bramlett v. Med. Protective Co. of Fort

Wayne, Ind., 855 F.Supp.2d 615, 618 (N.D.Tex.2012). To survive the Movants’ motion, the

Trustee must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atl.

Corp. v. Twombly, 550 U.S. 554, 570 (2007). “A claim has facial plausibility when the plaintiff

pleads factual content that allows the court to draw the reasonable inference that the defendant is

liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173

L.Ed.2d 868 (2009). “The plausibility standard is not akin to a ‘probability requirement,’ but it

asks for more than a sheer possibility that a defendant has acted unlawfully.” Id. (quoting Twombly,

550 U.S. at 556); see also Twombly, 550 U.S. at 555 (“Factual allegations must be enough to raise

a right to relief above the speculative level.”) “[W]here the well-pleaded facts do not permit the

court to infer more than the mere possibility of misconduct, the complaint has alleged—but it has

not ‘shown’—‘that the pleader is entitled to relief.’ “Iqbal, 556 U.S. at 679. “Threadbare recitals

of the elements of a cause of action, supported by mere conclusory statements do not suffice.” Id.

at 678. Furthermore, under Rule 8(a)(2), a pleading must contain “a short and plain statement of

the claim showing that the pleader is entitled to relief.” Although the pleading standard Rule 8

announces does not require detailed factual allegations, it demands more than labels and

conclusions. Iqbal, 556 U.S. at 678. “[A] formulaic recitation of the elements of a cause of action

will not do.” Id.

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13. A motion to dismiss should be granted pursuant to Rule 12(b)(6) if the Trustee is

unable show enough facts to set forth a plausible claim for relief. See Twombly, 550 U.S. at 547.

Put differently, the Trustee is not entitled to speculate that evidence may later come to exist, or

that because there is evidence as to other non-parties, there might be evidence as to the Movants.

Instead, the Trustee must proffer clear allegations of actions or omissions on the part of the

Movants, and clearly state the basis of their grounds for relief. As pleaded, the Trustee’s Amended

Complaint does not constitute the sorts of allegations regarding the Movants required by our

Supreme Court’s settled precedent.

A Summary of the Allegations Against the Movants

14. Trustee’s Amended Complaint consists of rote pleadings that have been used

against twenty seven (27) different Defendants, coupled with a few speculative allegations directed

at Movants Jeffery Wohler, Michael Gustin, and John Paul DeJoria that have absolutely nothing

to do with fraud, fraudulent transfers, or the pump-and-dump scheme. Accordingly, in

summarizing the allegations against the Movants below, Movants first describe the allegations that

are factually-based and directed towards the members of the Movants individually, then

summarize the non-specific, conclusory allegations at the end of the Amended Complaint.

15. While there is fleeting mention of the Movants throughout the other parts of the

Amended Complaint, the “Keystone Kops” – a derogatory term used by the Trustee to belittle the

Movants – primarily star in “Act Two.” “Act Two” (¶ 181 – 300) proves three things; first, the

Trustee has full access to LSI’s emails and documents; second, the Trustee is well versed in the

inner workings of LSI; and, third, that Trustee does not have a scintilla of evidence to establish her

allegations of fraud or fraudulent transfer against the Movants. In 120 paragraphs, spanning 37

pages, Trustee painstakingly lays out her version of the facts. Misconstrued as they may be, the

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facts as she has alleged them, do not place Jeffery Wohler, Michael Gustin, or John Paul DeJoria

on notice of a single Fraud or Fraudulent Transfer claim. Without belaboring the court with an

analysis of every paragraph, the Movants find only two broad-stroke allegations of fraud that could

be deemed applicable to them. Both alleged broadly against “Defendants”:

¶246. The failure of Defendants to act timely and decisively to end these fraudulent practices and run LSI like a publically traded corporation must be run, constitutes fraud, breach of fiduciary duty, and squander of corporate assets.

¶ 277. For Defendants to allow Appel and Bartlett to run LSI is fraud, a gross violation of their fiduciary to LSI, and inexcusable conduct that warrants punitive damages.

The term “Defendants” is not specific. Paragraph 110 of the Amended Complaint defines

“Defendants” as:

“Defendants” shall refer to and mean all named defendants: Howard Miller Appel, Ernest A. Bartlett, III, Harvey N. Klebanoff a/k/a Harvey Kaye, Helen Klebanoff, V. Ray Harlow, Matthew Cohen, Hawk Management Group, Inc., Deborah Cohen, Virginia Dadey, Jeffrey Wohler, Michael Gustin, John Paul DeJoria, RMS Advisors, Inc., Capital Growth Realty, Inc., Capital Growth Investment Trust, Bellcrest Advisors, LLC, DIT Equity Holdings, Inc., KWL Exploration and Development, Inc., Moggle Investors, LLC k/n/a Virtual Piggy, Inc. (a/k/a Oink), FEQ Realty, LLC, Wiltomo Redemption Foundation, TSS Investments, Inc., SLD Capital Corp., DeRosa Family Trust, William Belzberg Revocable Living Trust, and Michael Garnick. (Emphasis Added)

16. Assuming for a moment that both ¶246 and ¶ 277 refer to Jeffery Wohler, Michael

Gustin, and/or John Paul DeJoria, individually, it is readily apparent that the Trustee believes that

a claim for breach of fiduciary duty and a claim for fraud are one and the same. Thus, they should

be held to the same standard of pleading. While it is true that perpetrating a fraud against LSI

could be considered a breach of fiduciary duty; that is not what the Trustee has alleged. The

Trustee seems to have alleged the opposite; a breach of fiduciary duty is inherently fraud.

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Obviously that blanket assumption is not supportable under Texas, Florida, or federal law, and for

the purposes of this Motion to Dismiss, does not rise to the pleading standards required for fraud.

17. The Trustee’s fraud claims are as follows:

Count One (¶ 334-345) Avoidance and Recovery of Fraudulent Transfers; Count Two (¶ 346-357) Avoidance and Recovery of the Fraudulent Transfers; Count Five (¶ 373-378) Fraud Against All Defendants;Count Six (¶ 379-381) Conspiracy to Commit Fraud Against All Defendants; Count Seven (¶ 382-386) Aiding and Abetting Fraud Against All Defendants; and Count Eight (¶ 387 - 394) Punitive Damages and Attorneys’ Fees.

Fraudulent Transfers

18. Trustee’s Fraudulent Transfer Claims specifically state that they pertain to Movants

but include no specific allegations against them. Trustee makes numerous allegations against the

“Appel/Bartlett Group”1 and “Insider Defendants2” (Movants is included in “Insider Defendants”);

however, Trustee does not properly apprise any of the Movants of the acts they allegedly

committed which Trustee believes constitutes a Fraudulent Transfer.

19. The centerpiece of the Trustee’s Fraudulent Transfer Claims, and the sole exhibit

to the Amended Complaint, is titled: “Attachment One: Fraudulent Transfers from LSI to

Appel/Bartlett Group and Insider Defendants.” Attachment One attempts to list an allegation of

1 “Appel/Bartlett Group” shall refer to and mean Howard Appel, Earnest J. Bartlett, III, Matthew J. Cohen, Harvey Klebanoff a/k/a Harvey Kaye, Helen Klebanoff, V. Ray Harlow, Virginia Dadey, Deborah Cohen, Hawk Management Group, Inc., RMS Advisors, Inc., Capital Growth Realty, Inc., Capital Growth Investment Trust, Bellcrest Advisors, LLC, DIT Equity Holdings, Inc., KWL Exploration and Development, Inc., Moggle, LLC, FEQ Realty, LLC, Wiltomo Redemption Foundation, TSS Investments, Inc., SLD Capital Corp, DeRosa Family Trust, William Belzberg Revocable Living Trust, and Michael Garnick. 2 “Insider Defendants” shall refer to and mean Howard Appel, Earnest J. Bartlett, III, Matthew J. Cohen, Deborah Cohen, Harvey Klebanoff a/k/a Harvey Kaye, Helen Klebanoff, Vernon Ray Harlow, Jeffery Wohler, Michael Gustin and John Paul DeJoria. (Emphasis added)

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Fraudulent Transfer for every member of the Appel/Bartlett Group and Insider Defendants except

for the Movants. For each of the Movants Defendants, Attachment One simply reads: “To Be

Determined.”

20. A fraudulent transfer is a specific event and cannot be alleged in the abstract.

Trustee fails to provide any information with respect to a single allegation of fraudulent transfer

against the Movants. Essentially, Trustee has alleged that the Movants Defendants have received

a transfer of something of value from LSI, but, Trustee does not know what, if anything, was

transferred, and will presumably provide that information to the Movants at a later date. The

fraudulent transfer allegation against Movants is clearly a failure to state a claim and must be

dismissed.

Fraud Claims

21. Trustee’s Fraud claims (¶ 373-386) take generalities to the extreme, accusing

“Defendants” of everything from lying to stock manipulation but never stating a single allegation

with any specificity.

22. Fraud Counts Five (Common Law Fraud) and Seven (Aiding and Abetting) contain

an introductory paragraph stating “[Trustee] repeats and realleges each and every allegation set

forth in the foregoing paragraphs as if fully set forth herein” (¶ 373 & 382); Count Six (Conspiracy)

does not. Regardless, as previously explained, the “previous paragraphs” fail to alert the Movants

to any fraud that has been alleged against them. As required by federal law, the “who, what, when,

where, and how” was never provided to the Movants. Accordingly, the Fraud Claims against the

Movants should be dismissed.

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Punitive Damages and Attorney’s Fees

23. To the extent the Trustee’s claim for Punitive Damages and Attorney’s Fees sounds

in fraud, the Trustee must plead “with particularity the circumstances constituting fraud.”

Accordingly, a favorable ruling from the court on this motion would necessitate a dismissal of

Trustee’s Claim for Punitive Damages and Attorney’s Fees. Notwithstanding Trustee’s unfounded

and unplead allegations (concerning the Movants) of gross negligence (¶ 338) and reckless conduct

(¶390), it is clear that each claim is predicated upon the fraudulent pump-and-dump scheme

perpetrated against LSI by some “Defendants:”

¶ 391. Plaintiff alleges that, upon a showing of clear and convincing evidence, Defendants have been guilty of oppression, fraud or malice, express or implied, directed at LSI, its shareholders, and its creditors, all whom were exposed to such conduct, and were damages by the same.

24. Because Trustee’s pleadings never give the Movants the “Who, What, When,

Where, and How” required – likely because the Trustee does not have a scintilla of evidence that

the Movants Defendant played a role in the pump-and-dump scheme – Trustee’s claim for Punitive

Damages and Attorney’s Fees must be dismissed alongside Trustee’s other fraud claims.

Argument

25. The Trustee’s claims, including Trustee’s Breach of Fiduciary Duty claims (Counts

Three and Four,) repeatedly sound in fraud. Trustee’s Fraudulent Transfer claims relate either to

two- or four-year claims, and appear to either arise out of the pump-and-dump scheme or the lack

of equivalency of exchange at the time the transfers were made. Further, Trustee’s Fraud claims

are simply attached to their Breach of Fiduciary Duty allegations. At no point are these claims

pleaded with any specificity as it relates to the Movants. All Fraud claims against Movants should,

therefore, be dismissed.

The Trustee’s Pleadings Fail to Allege Facts Sufficient to Plead a Claim

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Against the Movants

26. Counts One and Two of the Amended Complaint nominally allege elements of

claims associated with fraudulent, unspecified transfers that Trustee believes she may find against

the Movants. These claims are wholly insufficiently pled under either Twombly or Iqbal. In

different ways, Twombly and Iqbal impose a substantial burden on Trustee to allege the facts

underlying their claims with additional clarity and specificity.

27. In Twombly, the Court noted that a proper pleading “requires more than labels and

conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Bell Atl.

Corp. v. Twombly, 550 U.S. 544, 546. Iqbal, a few years later, observed that a plaintiff’s

complaint must set forth more than “recitals of the elements of a cause of action, supported by

mere conclusory statements.” Ashcroft v. Iqbal, 556 U.S. 662. The burden is neither onerous nor

unreasonable, and, this Amended Complaint, though extremely long, is short on actual allegations

of fraud, especially fraudulent transfer, against the Movants.

28. A complaint must be dismissed, as a matter of law, when it fails to allege “enough

facts to state a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 570. “A claim

has facial plausibility when the plaintiff pleads factual content that allows the court to draw the

reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 129 S/Ct at

1949 (internal citation omitted). If a plaintiff cannot nudge the claims “across the line from

conceivable to plausible,” the complaint must be dismissed. Id. at 570.

29. Before reaching the ultimate question of whether there is a viable claim arising

from “what is left over” and the conclusions and legal contentions are rejected, this Court should

rejected the possibility of speculation as a basis for a surviving claim:

The mere metaphysical possibility that some plaintiff could prove some set of facts in support of the pleaded claims is insufficient; the complaint must give the court

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reason to believe that this plaintiff has a reasonable likelihood of mustering factual support for these claims.

Interspan Distribution Corp. v. Liberty Ins. Underwriters, Inc., CIV.A. H-07-1078, 2008 WL

905354, at *8 (S.D. Tex. Mar. 31, 2008) (citing Ridge at Red Hask, L.L.C. v. Schneider, 493 F.3d

1174, 1177 (10th Cir. 2007)). While the Twombly/Iqbal rule does not require extraordinary

specificity in ordinary claims, it does set aside speculation and conclusion and focuses on facts. A

plaintiff’s allegations must be enough that, if assumed to be true, the plaintiff plausibly not just

speculatively has a claim for relief.

30. As Iqbal explained, the District Court must embark on a two-step inquiry. First, the

Court must identify those allegations that are nothing more than legal conclusions and therefore

“not entitled to the assumption of truth”; and, then, second, consider whether the factual allegations

“plausibly suggest an entitlement to relief.” Iqbal, 129 S.Ct. at 1951. As part of the first step, the

Court should not accept as true “[t]hreadbare recitals of the elements of a cause of action, supported

by mere conclusory statements...” Id., 129 S.Ct. at 1949. Such allegations should be disregarded

for the purposes of this analysis.

Fraudulent Transfer

31. In the Amended Complaint, Trustee did not list a single allegation of fraudulent

transfer against the Movants. Trustee attempts to reserve the right to sue for transfers that are not

known by simply stating “To be Determined.” Of course, it is Trustee’s duty to know such things,

not speculate about them, and Counts One and Two should be deemed waived given the passage

of the applicable statutes of limitations, Trustee’s ample opportunity to amend her complaint to

state such claims, and the prejudice to the Movants inherent in Trustee reservation of the right to

sue them for “some” transfers at some point in the future. Trustee does not meet the Twombly/Iqbal

threshold. Rule 8 “demands more than an unadorned, the-defendant-unlawfully-harmed me

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accusation,” Iqbal, 129 S.Ct. at 1949. Because the Trustee has not done so, the claims must be

dismissed.

Fraud

32. While Trustee’s Fraud allegations (Counts Five, Six, and Seven) deal directly with

Common Law Fraud, there is no question that Plaintiff’s Fraudulent Transfer (Counts One and

Two), and Punitive Damages and Attorney’s Fees (Count Eight) Claims arise under, or directly

relate to, fraud. Accordingly, Trustee failed to plead said counts with the requisite specificity

required under federal law, and all counts should be dismissed. Simply stated, the Trustee never

gives the Movants the “Who, What, When, Where, and How” – because the Trustee does not have

a scintilla of evidence that the Movants Defendant played a role in the pump-and-dump scheme,

the minimum for a satisfactory pleading of a fraud allegation.

33. The Federal Rules of Civil Procedure require that the circumstances constituting

the alleged fraud be pleaded with particularity. FED. R. CIV. P. 9(b). “Though Twombly and Iqbal

clarified [Rule] 9(b)’s requirements, the Rule’s purpose remains unaltered; namely, to afford

defendant fair notice of plaintiff’s claims and the factual ground upon which they are based.” U.S.

ex rel. Lemmon v. Envirocare of Utah, Inc., 614 F.3d 1163, 1172 (10th Cir. 2010)

34. Here, the Trustee does not specifically allege any fraudulent conduct by the

Movants, and instead, assumes that broad allegations of Breach of Fiduciary duty, and a reference

to “To be Determined” will suffice. This does not constitute the sort of specificity required by Rule

8 or Rule 9; accordingly, the Trustee’s complaint should be dismissed with prejudice.

IV. LACK OF SUBJECT MATTER JURISDICTION

The Bankruptcy court lacks the constitutional authority to finally adjudicate the claims against Movants under Stern v. Marshall, and, therefore, lacks Subject Matter Jurisdiction.

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35. By the Adversary Proceeding, the Trustee has asserted causes of action that are a

mixed combination of core and non-core state law claims. All of these causes of action with the

exception of the Fraudulent Transfer claims are state law claims; namely, the claims for Breaches

of their Fiduciary Duties, Aiding and Abetting the Breaches of others’ Fiduciary Duties, Common

Law Fraud, Conspiracy to Commit Common Law Fraud, Aiding and Abetting others’ Common

Law Fraud, and for Actual and Punitive Damages and Attorneys’ Fees. The bankruptcy process

is not implicated at all by these non-core claims whatsoever, which could have all been filed in

State Court.

36. As such, with the sole exception of the Fraudulent Transfer claims, the remaining

claims raised in the Complaint are all non-core claims and are totally unrelated to the Debtor’s

Chapter 11 case. These claims could have no conceivable effect on the outcome of the bankruptcy

case, and there is no related to jurisdiction either.

37. More importantly, even the core claims of fraudulent transfers have nothing to do

with Movants because Movants received no such transfers. The 4-page Addendum to Trustee’s

Complaint identifies in great detail each and every fraudulent transfer for each defendant in this

Adversary Proceeding, except for the Movants. The Complaint provides the following information

concerning said defendants fraudulent transfers: (1) Cash; (2) Cash Transfer Dates; (3) Shares; (4)

Share Transfer Dates; (5) Minimum Est. Actual Share Value at Issuance; (6) Est. Value of All

Issues (sic) Shares; (7) Warrants; and (8) Warrant Transfers. For the Movants, on the other hand,

the Trustee cannot show and does not show any information for Movants, only the statement: “To

be determined.” Accordingly, the Trustee has not even alleged a valid fraudulent transfer claim

against Movants because the Trustee has not identified any transfers to the Movants. Therefore,

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with respect to Movants, all of the claims raised should be considered non-core, and not related to

or arising under a title 11 case.

38. Clearly, for this reason alone, the Claims against the Movants are distinguishable

from those against the other defendants and have no basis as bankruptcy law causes of action, such

as fraudulent transfer. Moreover, the tort claims alleged by Trustee against Movants and the other

defendants predicated upon alleged Securities Fraud violations are much better addressed by the

District Court. The Bankruptcy Court simply does not have subject matter jurisdiction over these

claims, and under Stern vs. Marshall, 564 U.S. 2 (2011), 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011),

the Bankruptcy Court does not have the authority to enter a valid final judgment or order on these

claims.

39. Alternatively, the Bankruptcy Court lacks subject matter jurisdiction over this

matter because the Complaint on its face and in substance alleges claims which will require

consideration of both Title 11 and other laws of the United States regulating organizations or

activities affecting interstate commerce such as the alleged Securities Fraud violations implicating

the laws of the States of Florida, Nevada, Texas and, perhaps, other states. These Securities Fraud

claims purport to affect shareholders and creditors located in numerous states yet to be identified.

40. Accordingly, Movants file their Motion to Dismiss as for a threshold determination

prior to answering Trustee’s Complaint, challenging the Bankruptcy Court’s subject matter

jurisdiction of this proceeding and Movants demand a jury trial. Movants note that the Trustee

has also requested a jury trial, and, the Trustee is surely aware that the Bankruptcy Court cannot

conduct a jury trial without consent of all the parties. Movants expressly do not consent to allow

the Bankruptcy Court to conduct a jury trial.

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41. Concurrently herewith, Movants have also filed a Motion to Withdraw Reference

under Reference under Local Bankruptcy Rule 5011 and 28 U.S.C.A. § 157(d).

42. The Motion to Dismiss is filed as an initial pleading by the Movants in this

Adversary Proceeding and is seeking a dismissal of all of Trustee’s claims with prejudice. By

filing this Motion to Dismiss, Movants are not consenting to the Bankruptcy Court’s subject matter

jurisdiction over them, and reserve all of their arguments as set forth in this Motion to Dismiss and

other motions. This pleading is expressly subject to the jurisdictional arguments raised. This

pleading is not any general submission to the jurisdiction of the Bankruptcy Court and specifically

denies that the Bankruptcy Court has jurisdiction over the Claims against Movants. Movants also

deny that the claims raised against them are core claims.

43. The Movants have simultaneously filed with this motion a Demand for a Jury Trial,

by which they have demanded a jury trial. Movants do hereby demand a jury trial on all issues on

which they are entitled to a jury trial under the U.S. Constitution. Notably, the Trustee has already

requested a jury trial as well.

44. The Movants expressly do not consent to the Bankruptcy Court’s exercise of

subject matter jurisdiction or the entry of final judgments or orders in this Adversary Proceeding

and expressly state that the Claims against them are non-core and are unrelated to and not arising

under a case under Title 11 of the United States Code. Movants are entitled to a jury trial on these

claims as a matter of constitutional right under the Seventh amendment to the U.S. Constitution

and applicable law. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S. Ct. 2782, 106 L. Ed.

2d 26, 18 Fed. R. Serv. 3d 435 (1989).

Summary of Argument

45. In her Complaint, the Trustee has raised claims that are fundamentally or expressly

non-core, private claims against Movants that do not arise out of and/or are not related to Latitude

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Solutions, Inc.’s chapter 11 case. Northern Pipeline Construction Co. v. Marathon Pipe Line

Company, 102 S.Ct. 2858, 458 U.S. 50 (1982). The Adversary Proceeding against Movants

involves solely state law claims between the Debtor and non-debtor entities that have no close

nexus to the bankruptcy case whatsoever. Under Stern vs. Marshall, the Bankruptcy Court does

not have subject matter jurisdiction over these claims and cannot enter final judgments or orders,

and the Bankruptcy Court does not have constitutional authority to enter final judgments or orders

on these claims. The Trustee and Movants have also requested a jury trial, which the Bankruptcy

Court cannot conduct. These claims against the Movants are entirely different than claims raised

by the Complaint against the other defendants for recovery of fraudulent transfers which, as stated

above, do not pertain to Movants.

Legal Standards for Dismissal For Lack of Subject Matter Jurisdiction

46. United States District Courts have original (though not exclusive) subject matter

jurisdiction of all Bankruptcy Code cases pursuant to 28 U.S.C.A. § 1334(a). District Court

jurisdiction extends to all civil proceedings “arising under” and “arising in or related to”

Bankruptcy Court jurisdiction over cases involving a debtor under Title 11. Such jurisdiction is

derived from 28 U.S.C.A. § 157(a), which grants the district court authority to refer all bankruptcy

cases, as well as proceedings arising in or related to a case under Title 11, to the Bankruptcy Court.

47. Under the rationale of Stern v. Marshall, a bankruptcy court cannot enter a final

judgment on a cause of action traditionally within the judicial power of an Article III Court and

does not have the constitutional authority to do so with respect to private, state-law-based rights.

While not specifically applicable here, in the recent 9th Circuit opinion, Executive Benefits

Insurance Agency v. Arkison (In re Bellingham Insurance Agency, Inc.), 702 F3d. 553 (9th Cir.

2012), the 9th Circuit considered Stern v. Marshall as it related to a Bankruptcy Court’s authority

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to enter a final order in a fraudulent transfer action, and held that, in that case, consent to the entry

of such final judgment by the Bankruptcy Court may be implied from the conduct in the litigation,

such as where the defendant filed a proof of claim. In this instance, the proof(s) of claim, if any,

filed by Movants are irrelevant to the adjudication of the Claims raised by the Trustee in her

Complaint. The 9th Circuit upheld the expansive view of Stern v. Marshall that a bankruptcy court

cannot adjudicate cases involving private (not public) rights. Additionally, in evaluating whether

or not to withdraw the reference, the Court should consider whether, under Stern v Marshall,3 the

bankruptcy court is constitutionally empowered to adjudicate the causes of action alleged in the

underlying complaint.

48. In 2013, the Fifth Circuit, interpreting Stern v. Marshall, emphasized the

significance of guarding Article III powers, citing Northern Pipeline Construction Co. v. Marathon

Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982)4:

When a suit is made of “the stuff of the traditional actions at common law tried by the courts at Westminster in 1789,” Northern Pipeline, 458 U.S. at 90, 102 S.Ct. 2858 ... (Rehnquist, J., concurring in judgment), and is brought within the bounds of federal jurisdiction, the responsibility for deciding that suit rests with Article III judges in Article III courts. The Constitution assigns that job—resolution of “the mundane as well as the glamorous, matters of common law and statute as well as constitutional law, issues of fact as well as issues of law”—to the Judiciary. Id., at 86–87, n. 39, 102 S.Ct. 2858...(plurality opinion).

Turning to whether the bankruptcy court had the constitutional authority to enter final judgment, we are bound to apply Stern, which held that, regardless of statutory authority, the bankruptcy court did not have the constitutional authority to enter a final judgment on claims that are so deeply at the heart of the federal judiciary’s Article III powers and are not necessary to the resolution of the bankruptcy estate. “What is plain here is that this case involves the most prototypical exercise of

3 In Stern, the Supreme Court held that the bankruptcy court’s power to enter final judgments on matters is not co-extensive with what 28 U.S.C. §157(b)(2) considers “core,” and some matters considered core cannot be finally adjudicated in the Bankruptcy Court where they involve only private rights that will not necessarily be determined in ruling on a proof of claim filed against the estate, unless all parties consent. Id. at 2594.4 In Northern Pipeline Construction Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), which had held the 1978 Bankruptcy Act unconstitutional, the Court found: “In short, there is no doubt that the bankruptcy judges created by the Act are not Art. III judges.” N. Pipeline, 458 U.S. at 61, 102 S.Ct. 2858. This was not cured by The Bankruptcy Code enacted in 1984.

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judicial power: the entry of a final, binding judgment by a court with broad substantive jurisdiction, on a common law cause of action, when the action neither derives from nor depends upon any agency regulatory regime.” Stern, 131 S.Ct. at 2615.

Construing Stern, the Sixth Circuit convincingly reached a similar conclusion involving non-core claims in Waldman v. Stone, 698 F.3d 910, 919 (6th Cir.2012), cert. denied, ––– U.S. ––––, 133 S.Ct. 1604, 185 L.Ed.2d 581 (2013): “[W]hen a debtor pleads an action arising only under state-law, as in Northern Pipeline; or when the debtor pleads an action that would augment the bankrupt estate, but not ‘necessarily be resolved in the claims allowance process[,]’ [Stern,] 131 S.Ct. at 2618; then the bankruptcy court is constitutionally prohibited from entering final judgment.”

In re BP RE, L.P., 735 F.3d 279, 286 (2013), 58 Bankr.Ct.Dec. 187, Bankr. L. Rep. P 82,534,

49. However, while the Fifth Circuit agreed with the Sixth and Ninth Circuits position

that the bankruptcy courts lacked the constitutional authority to enter final judgment on state-law

claims, the Fifth Circuit strongly disagreed with the Ninth Circuit on whether individual litigants

in bankruptcy may cure the constitutional deficiency merely by agreeing to waive their rights to

be heard by an Article III court:

...[We] must address whether BPRE’s consent to have its claims heard in bankruptcy court cures the constitutional deficiency. We adopt the compelling and thorough reasoning of Waldman, which held that parties cannot consent to such circumvention of Article III that impinges on the structural interests of the Judicial Branch.9 Waldman was the first post-Stern appellate decision *287 to address consent as it relates to the bankruptcy court’s constitutional authority.10 The Sixth Circuit persuasively rejected the notion that the constitutional issue could be waived.

In Waldman, the court looked both to Stern and to Commodity Futures Trading Comm’n v. Schor, 478 U.S. 833, 106 S.Ct. 3245, 92 L.Ed.2d 675 (1986), concluding that this issue implicates Article III’s structural interests. Article III, Section 1 not only seeks to preserve individual litigants’ right to an independent judiciary but also “serves as an inseparable element of the constitutional system ofchecks and balances.” Waldman, 698 F.3d at 917 (quoting Schor, 478 U.S. at 850, 106 S.Ct. 3245). The court rejected the theory that, because the bankruptcy courts are part of the Judicial Branch, there was no threat of encroachment but only a waivable personal right. Id. at 917–18.

We acknowledge that the Ninth Circuit’s opinion in Executive Benefits is in conflict

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on the issue of consent. We do not dispute that parties may waive constitutional rights, Schor, 478 U.S. at 848–49, 106 S.Ct. 3245, but Executive Benefits disregards the critical structural interests underlying Article III. It does so by reasoning that Stern allowed waiver...That line of reasoning in Executive Benefits misses the mark, however, because Stern determined only that Pierce had waived the issue of statutory authority, see Stern, 131 S.Ct. at 2608, and did not reach the constitutional issue as to waiver.

...Allowing bankruptcy courts to enter final judgments on state-law claims that are not necessary to address the bankruptcy issues confers the “essential attributes of judicial power” on non-Article III courts.

Where a structural interest is triggered, “the parties cannot by consent cure the constitutional difficulty for the same reason that the parties by consent cannot confer on federal courts subject-matter jurisdiction beyond the limitations imposed by Article III, § 2.” Schor, 478 U.S. at 851, 106 S.Ct. 3245. “When these Article III limitations are at issue, notions of consent and waiver cannot be dispositive because the limitations serve institutional interests that the parties cannot be expected to protect.” Id.

50. More recently, the 5th Circuit reiterated its position on waiver with In re Galaz, 765

F.3d 426 (2014) Bankr. L. Rep. P 82,697. In Galaz, the Firth Circuit held that even with the

express or implied consent of the parties, a bankruptcy court may not enter a final judgment on

private, state court based claims because they are non-core claims, merely “relating to” the

bankruptcy:

While Section 157 gives bankruptcy courts statutory authority to enter final judgment on specific bankruptcy-related claims, “Article III of the Constitution prohibits bankruptcy courts from finally adjudicating certain of those claims.” Id.at 2168. “Congress may not bypass Article III simply because a proceeding may have some bearing on a bankruptcy case; the question is whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process.” Stern, 131 S.Ct. at 2618. Thus, “when a debtor pleads an action arising only under state-law, ... or when the debtor pleads an action that would augment the bankrupt estate, but not ‘necessarily be resolved in the claims allowance process [,]’ then the bankruptcy court is constitutionally prohibited from entering final judgment.” Waldman, 698 F.3d at 919 (quoting Stern, 131 S.Ct. at 2618). Accord In re BP RE, 735 F.3d at 285.

The district court treated Lisa’s TUFTA [Texas Uniform Fraudulent Transfer Act] claim as being “related to” the bankruptcy rather than a core bankruptcy claim. We agree with this characterization. The court went on, however, to hold that the

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bankruptcy court had authority to enter a final judgment based on the Appellants’ implied consent. 28 U.S.C. § 157(c)(2); Bankr.Rule 7012; Memo Op., Galaz v. Galaz, No. 11–00425 (W.D. Tex. April 17, 2012). This court’s later decisions in In re Frazin and In re BP RE are at odds with the district court’s consent rationale. Each of these cases holds that according to Stern, the parties’ express or implied consent cannot cure the constitutional deficiency that results from circumventing, or diminishing, the Article III structural protections for the federal judiciary. In re BP RE, 735 F.3d at 286–87 (relying on Waldman, 698 F.3d at 917, 918); In re Frazin, 732 F.3d at 319.

In re Galaz, 765 F.3d 426, 432 (2014), Bankr. L. Rep. P 82,697

51. For these reasons, defendant asks the Court to grant defendant's motion to dismiss

Trustee's suit for lack of subject-matter jurisdiction and award Movants just costs as allowed by

law.

V. CONSENT NOT SOUGHT

52. Because of the dispositive nature of the relief requested, and in accordance with the

Local Rules of the Northern District of Texas, the Movants did not seek concurrence in the relief

sought from counsel for the Trustee.

VI. DEMAND FOR JURY TRIAL

53. Movants hereby demand a jury trial on all issues on which they are entitled to a

jury trial under the U.S. Constitution.

VII. JURISDICTION

54. The Movants expressly do not consent to the Bankruptcy Court’s exercise of

subject matter jurisdiction or the entry of final judgments or orders in this Adversary Proceeding

and expressly state that the Claims against them are non-core and are unrelated to and not arising

under a case under Title 11 of the United States Code. Movants are entitled to a jury trial on these

claims as a matter of constitutional right under the Seventh amendment to the U.S. Constitution

and applicable law. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S. Ct. 2782, 106 L. Ed.

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2d 26, 18 Fed. R. Serv. 3d 435 (1989).

VIII. CONCLUSION

WHEREFORE, for the reasons stated herein, Movants request that all counts of the

Plaintiff’s Amended Complaint alleged against Defendants MICHAEL GUSTIN, JEFFERY

WOHLER, and JOHN PAUL DeJORIA be dismissed with prejudice and that Movants have such

other relief as may be just and appropriate.

Respectfully submitted,

/s/ Randy Burton Randy Burton State Bar No. 03479050 [email protected] Trent L. Rosenthal State Bar No. 17282300 [email protected] Speights State Bar No. 24063014 [email protected] LLP 700 Milam Street, Suite 1100 Houston, Texas 77002

(713) 358-1700

Counsel for Defendants Jeffery Wohler, Michael Gustin, and John Paul DeJoria

CERTIFICATE OF SERVICE

The undersigned, an attorney, hereby certifies that the above and foregoing motion was

served on counsel for Plaintiffs on this 23rd day of March, 2015, by either the Court’s ecf system

or United States Mail, first class, postage prepaid.

/s/ Randy Burton Randy Burton

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APPENDIX II

FIRST AMENDED AND RESTATED ADVERSARY COMPLAINT,

FILED ON FEBRUARY 13, 2015, DOC. 10

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J. E. Cullens, Jr. (admitted pro hac vice) Walters, Papillion, Thomas, Cullens LLC 12345 Perkins Road, Building One Baton Rouge, LA 70810 (225) 236-3636

Patrick N. Broyles (admitted pro hac vice) Broyles Law Firm LLC 12345 Perkins Road Building Two, Suite 203 Baton Rouge, LA 70810 (225) 663-2223

John C. Anderson (admitted pro hac vice) Anderson Firm, LLC Post Office Box 82982 Baton Rouge, LA 70884 (225) 252-1645

Robin E. Phelan Haynes and Boone, LLC2323 Victory Avenue Suite 700 Dallas, TX 75219 (214) 651-5000

Special Counsel for Carey Ebert, as Trustee for Latitude Solutions, Inc.

UNITED STATES BANKRUPTCY COURTNORTHERN DISTRICT OF TEXAS

FORTH WORTH DIVISION

In re:

LATITUDE SOLUTIONS, INC. Chapter 11

Debtor Case No.: 12-46295-rfn-11

CAREY D. EBERT, AS TRUSTEE FOR LATITUDE SOLUTIONS, INC.

Plaintiff,

v.

HOWARD APPEL, ERNEST A.BARTLETT, III, MATTHEW J. COHEN,RMS ADVISORS, INC., CAPITAL GROWTH REALTY, INC., CAPITAL GROWTH INVESTMENT TRUST, DIT EQUITY HOLDINGS, KWL EXPLORATION AND DEVELOPMENT, INC., VIRGINIA DADEY,BELLCREST ADVISORS, LLC, DEBORAH COHEN, HAWK MANAGEMENT Adversary No. 14-04107-rfnGROUP, INC., FEQ REALTY, LLC, HARVEY KLEBANOFF A/K/A HARVEY

Case 14-04107-rfn Doc 10 Filed 02/13/15 Entered 02/13/15 14:37:15 Page 1 of 104

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KAYE, HELEN KLEBANOFF, MOGGLE,

LLC, ISLAND CAPITAL MANAGEMENT,LLC, TSS INVESTMENTS, INC., VERNON RAY HARLOW, JEFFERY WOHLER, MICHAEL GUSTIN, WILTOMO REDEMPTION FOUNDATION, SLD CAPITAL CORP., DeROSA FAMILY TRUST,WILLIAM BELZBERG REVOCABLE LIVING TRUST, MICHAEL GARNICK, and JOHN PAUL DeJORIA

Defendants

FIRST AMENDED AND RESTATED ADVERSARY COMPLAINT

This action is brought by Plaintiff, Carey D. Ebert, as Trustee (“Trustee”) for the Chapter

11 estate of the Debtor, Latitude Solutions, Inc. (“LSI”), against Defendants Howard Appel,

Earnest A. Bartlett, III, Matthew J. Cohen, Harvey Klebanoff a/k/a Harvey Kaye, Helen Klebanoff,

Vernon Ray Harlow, RMS Advisors, Inc., Capital Growth Realty, Inc., Capital Growth Investment

Trust, DIT Equity Holdings, Inc., KWL Exploration and Development, Inc., Moggle, LLC,

Virginia Dadey, Bellcrest Advisors, LLC, Deborah Cohen, Hawk Management Group, Inc., FEQ

Realty LLC, Jeffery Wohler, Michael Gustin, Island Capital Management, LLC, TSS Investments,

Inc., Wiltomo Redemption Foundation, SLD Capital Corp., DeRosa Family Trust, William

Belzberg Revocable Living Trust, Michael Garnick, and John Paul DeJoria.

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TABLE OF CONTENTS

INTRODUCTION..........................................................................................................................6

JURISDICTION AND VENUE ....................................................................................................8

PARTIES ........................................................................................................................................9

THE PLAINTIFF .......................................................................................................................9

THE DEFENDANTS...............................................................................................................10

Howard Miller Appel ......................................................................................................10 Ernest A. Bartlett, III ......................................................................................................14 Harvey N. Klebanoff .......................................................................................................16 Helen Klebanoff .............................................................................................................17 Vernon Ray Harlow ........................................................................................................18 Matthew Cohen ...............................................................................................................19 Deborah Cohen ...............................................................................................................20 Hawk Management Group, Inc. ......................................................................................20 Virginia Dadey ................................................................................................................20 Bellcrest Advisors, LLC .................................................................................................21 Jeffrey Wohler ................................................................................................................21 Michael Gustin ................................................................................................................22 John Paul DeJoria ...........................................................................................................23

APPEL AND BARTLETT RELATED ENTITIES ................................................................25

ISLAND CAPITAL MANAGEMENT, LLC..........................................................................27

DEFINED TERMS ..................................................................................................................28

FACTUAL ALLEGATIONS ......................................................................................................29

SUMMARY .............................................................................................................................29

ACT ONE: THE BAD COPS .................................................................................................32

The Early Years ..............................................................................................................32 Cohen, Kaye, and Appel .................................................................................................33 LSI Subsidiaries ..............................................................................................................34 Latitude Energy Services, LLC.......................................................................................35BAMCO, Texas Midstream, Freedom Pipeline and Red Mountain Resources .............37 Behind the Curtain: The Appel Show ............................................................................39 The Appel Pump-And-Dump: An Overview ..................................................................40 The Fraudulent Transfers ................................................................................................40

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The Pumps ......................................................................................................................43 The Cross-Trades ............................................................................................................43 “The DTC Sheets” ..........................................................................................................45

ACT TWO: THE KEYSTONE COPS ...................................................................................47

The Second Board Knowingly Partners with “Nice Guys” Appel, Bartlett, and Cohen .....................................................................................................................47

DeJoria Loans $2,000,000 to His Friends, Appel and Bartlett .......................................49 LSI is the Victim—Not DeJoria .....................................................................................52 Appel Will Not Allow LSI Share to Trade Without His Permission ..............................55 DeJoria Joins LSI’s Board as a “Non-Liable Director” ..................................................56 Jose Lugo Verifies the Corruption ..................................................................................57 The “Email of Concern” .................................................................................................62 “Who is This Animal?” ...................................................................................................63 The “Stock Transfers” Spreadsheet ................................................................................64 The Second Board Knows that LSI is Being Controlled by the Appel/Bartlett

Group .....................................................................................................................65 The Second Board Plays Both Sides ...............................................................................66 Cohen’s Sexual Harassment ...........................................................................................67 The March 14, 2012, Fax ................................................................................................68 The Keyston Cops Catch, Then Excuse, Cohen’s Insider Trading.................................72 Appel, Bartlett, and DeJoria Use LSI to Suit Their Own Interests .................................74 Wohler Claims that DeJoria Made Him Do It ................................................................75 Gross Incompetence, Lack of Internal Controls, and Oversight .....................................77

ACT THREE: THE GOOD COP ...........................................................................................80

Director and CEO Jerry J. Langdon Blows the Whistle .................................................80 The Second Board Settles on Putting LSI into Bankruptcy ............................................85 The Second Board Hopes to Cover Their Tracks ...........................................................85

CLAIMS FOR RELIEF ..............................................................................................................88

COUNT ONE: Avoidance and Recovery of Fraudulent Transfers Under Sections 544(B) and 550 of the Bankruptcy Code and The Florida Uniform Fraudulent Transfer Act, F.S.A. §726.101, et seq., or, alternatively, The Nevada Uniform Fraudulent transfer Act, Nev. Rev. Stat. Ann. §112.140, et seq.

Against the Appel/Bartlett Group and the Insider Defendants (Appel, Bartlett,Kaye, Helen Klebanoff, Harlow, Cohen, Deborah Cohen, Dade, Wohler, Gustin, DeJoria, and all of the “Appel and Bartlett Related Entities”)..................88

COUNT TWO: Avoidance and Recovery of the Fraudulent Transfers Under Sections 548(a)(1)(A) and (B) and 550(a) of The Bankruptcy Code

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Against the Appel/Bartlett Group and the Insider Defendants (Appel, Bartlett, Kaye, Helen Klebanoff, Harlow, Cohen, Deborah Cohen, Dade, Wohler, Gustin, DeJoria, and all of the “Appel and Bartlett Related Entities”) .......................................91

COUNT THREE: Breach of Fiduciary Duty Against the Director and Officer Defendants (Cohen, Kaye, Harlow, Wohler, Gustin, and DeJoria) ................................93

COUNT FOUR: Aiding and Abetting Breach of Fiduciary Duty Against All Defendants (Appel, Bartlett, Kaye, Helen Klebanoff, Harlow, Cohen, Deborah Cohen, Dadey, Wohler, Gustin, DeJoria, all of the “Appel and Bartlett Related Entities,” and Island Capital Management, LLC) ...........................................................95

COUNT FIVE: Fraud Against All Defendants (Appel, Bartlett, Kaye, Helen Klebanoff, Harlow, Cohen, Deborah Cohen, Dadey, Wohler, Gustin, DeJoria, all of the “Appel and Bartlett Related Entities,” and Island Capital Management, LLC) ................................................................................................................................97

COUNT SIX: Conspiracy to Commit Fraud Against All Defendants (Appel, Bartlett, Kaye, Helen Klebanoff, Harlow, Cohen, Deborah Cohen, Dadey, Wohler, Gustin, DeJoria, all of the “Appel and Bartlett Related Entities,” and Island Capital Management, LLC) .........................................................................................................98

COUNT SEVEN: Aiding and Abetting Fraud Against All Defendants (Appel, Bartlett, Kaye, Helen Klebanoff, Harlow, Cohen, Deborah Cohen, Dadey, Wohler, Gustin, DeJoria, all of the “Appel and Bartlett Related Entities,” and Island Capital Management, LLC) .........................................................................................................99

COUNT EIGHT: Punitive Damages and Attorneys’ Fee Claims Against All Defendants (Appel, Bartlett, Kaye, Helen Klebanoff, Harlow, Cohen, Deborah Cohen, Dadey, Wohler, Gustin, DeJoria, all of the “Appel and Bartlett Related Entities,” and Island Capital Management, LLC) .........................................................100

JURY DEMAND ........................................................................................................................101

PRAYER FOR RELIEF............................................................................................................102

ATTACHMENT ONE

FRAUDULENT TRANSFERS FROM LSI TO APPEL/BARTLETT GROUP AND INSIDER DEFENDANTS (four page document)

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INTRODUCTION

1. This lawsuit arises out of a fraudulent pump-and-dump scheme perpetrated by two

groups of corporate insiders and co-conspirators who all misused the Debtor, Latitude Solutions,

Inc., and its subsidiaries (“LSI”), its shareholders, and its creditors. The first group of insiders (the

“First Board”), created LSI, paid themselves with LSI’s cash, acquired upwards of 50% of its

freely tradable shares, and sold them piecemeal in a pump-and-dump. The second group (the

“Second Board”), corporate fiduciaries all, partnered with them in the hope of taking the original

pump-and-dump program global. Controlling both Boards from the shadows was the

Appel/Bartlett Group, a group led by Howard Appel (“Appel”), a serial securities manipulator who

had previously been convicted of securities fraud and who had a lengthy track record of corporate

stock manipulation. Knowing full well that LSI, a publically traded corporation, was being run by

a den of securities fraudsters, the Second Board deliberately disregarded the plunder that was

taking place, and knowingly allowed the pillage to continue under their watch. Instead of trying

to save the company from the Appel/Bartlett Group, the Second Board acted purely in their own

self-interests, grossly mismanaged LSI's business, and squandered corporate assets, all while

talking out of both sides of their mouth. Out of one side of their proverbial mouth, the Second

Board allowed Appel to continue running LSI and praised Appel for extracting money from

unsuspecting investors. The Second Board then wasted the capital on extravagant expenses and

ill-advised business prospects designed to market LSI, not conduct legitimate business activities.

Yet out of the other side their proverbial mouth, they demonized the First Board and the

Appel/Bartlett Group and went to great lengths to investigate and document their fraudulent

scheme, so that if LSI were to bleed to death, they could lay all of the blame on Appel and the First

Board, conveniently diverting attention away from themselves. All the while LSI sank deeper in

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debt. When the pump-and-dump scheme seized up and the well ran dry, the Second Board put

LSI into Chapter 7 and submitted a dossier on Appel and his lackey, Matt Cohen (a founder of LSI

and its CFO until almost the end), to the Department of Justice, in the hope that the Second Board’s

allegations of wrong-doing against Appel and Cohen would shield them from their own culpability

in causing LSI's failure. In reality, the First Board and the Second Board were partners in crime,

and their combined fraud and corporate waste caused LSI to fail, leaving creditors with potentially

more than $40 million in debt.

2. The Trustee brings claims against the Defendants (i) to recover the value of LSI’s

assets awarded to purported, former “consultants” of LSI (the “Consultant Defendants”) and others

at the direction of certain LSI Directors and Officers, namely Harvey Kaye, Matthew Cohen, and

V. Ray Harlow, (the “First Board”); (ii) to avoid transfers pursuant to § 108, 544(b), 546, 547 and

548 of the Bankruptcy Code, Fed. R. Bankr. P. 7001(1), Fla. Stat. Ann. § 726.101 et seq. (or,

alternatively, Nev. Rev. Stat. Ann. § 112.140 et. seq; (iii) to preserve and recover such transfers,

or the value of such transfers, from the Defendants, or from any other person or entity for whose

benefit the transfers were made, pursuant to § 550(a)(1) and 551 of the Bankruptcy Code and Fla.

Stat. Ann. § 726.109 (or, alternatively, Nev. Rev. Stat. Ann. § 112.220); (iv) equitable

subordination of certain claims pursuant to § 510 of the Bankruptcy Code; and (v) for all other

relief under applicable statutory and common law theories of avoidance and recovery.

3. The Trustee brings state-law claims against the various Defendants as identified

herein, seeking all recoverable compensable and punitive damages, caused by Defendants’ breach

of fiduciary duty, aiding and abetting breach of fiduciary duty, gross mismanagement and self-

dealing, fraud, aiding and abetting fraud, conspiracy, corporate waste, negligent misrepresentation,

and unjust enrichment.

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4. During the course of this action, Plaintiff may learn (through discovery or

otherwise) of additional fraudulent transfers, and it is Plaintiff’s intention to avoid and recover all

transfers made by the Estate of any interest of the Estate in property to, or for the benefit of, the

Insider Defendants or any other transferee. Plaintiff reserves the right to amend this Complaint

to include: (i) further information regarding the transfers described herein, (ii) additional transfers,

(iii) additional defendants, and/or (iv) additional causes of action that may become known to

Plaintiff at any time during this action, through formal discovery or otherwise, and for such

amendments to relate back to filing of this Complaint.

JURISDICTION AND VENUE

5. The United States Bankruptcy Court for the Northern District of Texas (the

“Bankruptcy Court”) has jurisdiction over this adversary proceeding under 28 U.S.C. §§ 157 and

1334 and the Standing Order of the United States District Court for the Northern District of Texas

referring to the Bankruptcy Judges in this District all cases and proceedings arising under title 11

of the United States Code (the “Bankruptcy Code”). The causes of action alleged herein arise

under, arise in, or are related to the above-styled and numbered Chapter 11 case.

6. This adversary proceeding constitutes a “core” proceeding as defined in 28 U.S.C.

§ 157(b)(2) to the extent of certain of the causes of action alleged by the Plaintiff and is non-core

with respect to those causes of action which constitute related proceedings. Because the Plaintiff

has requested a jury trial Plaintiff consents to the entry of final orders and judgments by the

Bankruptcy Judge, pursuant to Rule 7008 of the Federal Rules of Bankruptcy Procedure only to

the extent that such consent is compatible with the jury trial rights of the Plaintiff and does not

consent to the exercise of such authority by the Bankruptcy Judge if the exercise of such authority

is not compatible with the jury trial rights of the Plaintiff.

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7. Venue in the Northern District of Texas is proper under 28 U.S.C. § 1408 and 1409

because this adversary proceeding arises under, arises in, and is related to the above-styled and

numbered case commenced under the Bankruptcy Code.

8. On November 9, 2012, LSI filed a voluntary petition under Chapter 7 of the

Bankruptcy Code. (Doc. No. 1)

9. On April 5, 2013, LSI’s bankruptcy proceeding was converted from Chapter 7 to a

Chapter 11 bankruptcy. (Doc. No. 106)

10. On April 5, 2013, the Court ordered the United States Trustee to appoint a Trustee

for this case. (Doc. No. 108)

11. On April 11, 2013, the Court ordered the appointment of Carey Ebert as Trustee.

(Doc. No. 111)

PARTIES

THE PLAINTIFF

12. The Plaintiff, Carey D. Ebert, is Trustee (“Trustee”) for the Chapter 11 estate of

Latitude Solutions, Inc., a publically-traded corporation.

13. LSI is a Nevada corporation which, during the time of its operations relevant to this

proceeding, had its principal place of business in Boca Raton, Florida. In approximately August

2012, LSI allegedly moved its principal executive offices to Fort Worth, Texas, just prior to

seeking bankruptcy protection on November 9, 2012. Upon information and belief, LSI did not

conduct extensive business from its Texas office, other than preparing for bankruptcy.

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THE DEFENDANTS

HOWARD MILLER APPEL

14. Howard Miller Appel is an adult citizen of Pennsylvania. Appel’s tortious actions

alleged herein were directed at LSI and its operations in the State of Florida.

15. Mr. Appel’s sordid history of illegal acts in the securities arena spans roughly

twenty-five years. As more fully alleged herein, Appel’s fraud committed against LSI is yet

another example of history repeating itself.

16. In 1989, a brokerage firm party owned by Appel, named Bailey, Martin & Appel,

Inc. was accused of stock manipulation by acquiring 70 percent of the stock of Northgate Industry,

a shell corporation with no assets. After acquiring this Northgate Industry stock at 20 cents per

share, the brokerage firm later increased the price of the stock to $3.00 per share by buying and

selling shares despite "limited wholesale and retail demand for the stock. By way of settlement,

the National Association of Securities Dealers (“NASD”)1 fined the brokerage $50,000 and

suspended both the brokerage and its owners from the Association.

17. In 1991, Bailey, Martin & Appel, Inc. and Howard Appel were each fined $125,000

by the NASD for further wrongdoing. Appel was also barred from association with any member

of the NASD in any capacity. The NASD found that the brokerage firm, through Appel, effected

principal sales of equity securities, agency cross transactions, and municipal securities to public

customers at unfair prices. According to the findings, the firm, acting through Appel, failed to

make certain disclosures on confirmations and sold unregistered shares of common stock to

customers. In addition, the NASD found that the firm, acting through Appel, sold limited

1 In 2007, the NASD became the Financial Industry Regulatory Authority (“FINRA”) through the consolidation of NASD and the member regulation, enforcement and arbitration operations of the New York Stock Exchange.

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partnership interests on an “all or none” basis and caused funds to be disbursed from the escrow

account before the contingency was met. The findings also stated that the firm, acting through

Appel, failed to comply with NASD rules concerning options accounts, failed to maintain a

program of written supervisory procedures, failed to maintain accurate books and records, and

filed inaccurate FOCUS reports. Furthermore, the NASD determined that the firm did not record

on its order tickets the names of the dealers contacted and the quotations received for transactions

in non-NASDAQ securities.2

18. In 2003, Appel was implicated in another securities fraud scheme. The plaintiff

company contended that, although Appel had no official relationship with the defendant company,

Net Value Holdings, Inc., he effectively controlled it through affiliated individuals and entities.

The plaintiff further contended that Appel, and others, artificially inflated the stock prices of

companies controlled by Appel and sold their own stock at high profits and thereafter allowed the

stock prices to plummet, rendering worthless other shareholders' investments. Although the court

concluded that the plaintiffs reliance upon the defendant's representations was not reasonable, the

court provided enlightening details of some of Appel's methodology used in prior dealings:3

Neither in negotiations leading up to plaintiff's investment in NETV nor in the stock purchase agreement itself did defendants mention any connection between NETV and Howard Appel, who since 1991 had been barred by the NASD for life from associating with any member of that organization in any capacity. Disbarment of Appel for life came about, in part, because of his sale of unregistered securities to customers. Plaintiff later learned that defendant's CEO Panzo had had a long history of collaborating with Appel in various investment schemes. Further, through a series of affiliated entities and individuals Appel played a significant role in NETV's founding, financing and particularly, in its control.

2 See NASD Disciplinary Actions Report (August 1991).3 Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc., 343 F.3d 189, 193-194 (2d Cir. 2003) disapproved of by Glidepath Holding B.V. v. Spherion Corp., 590 F. Supp. 2d 435 (S.D.N.Y. 2007).

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* * *

Appel, through an affiliated company, would acquire control of a public shell corporation and exercise that control to install defendant Panzo as a director or a senior officer, because Appel himself, on account of his past record, could not be a director of a public company. With Panzo in a top management position, the company would transfer substantial quantities of stock or warrants to Appel and Panzo’s affiliates, either in a sale transaction, or in payment for purported consulting or investment banking services, or as a finder’s fee in anticipation of a merger. Then the two men – through extraordinarily complex corporate legal maneuvers, often by way of subsidiaries of the companies of which they were principals, such as reverse mergers, stock exchanges between public and private corporations, reverse stock splits, a bewildering list of corporate name changes, and other corporate devices – would end up with large amounts of stock or warrants to purchase stock. Appel affiliates would then sell the securities at a relatively high price, generating large profits for Appel and Panzo. Subsequently, these companies' stock became virtually worthless.

NETV itself was similarly created through a merger of a public shell corporation with a private company largely owned by persons who were affiliated with Appel, and who also had participated as shareholders in eight other Panzo–Appel ventures. After the merger, these persons became NETV shareholders, and additional quantities of NETV stock were first transferred to and later sold by another Appel affiliate.

As will be described in greater detail below, if one were to substitute “LSI” for “NETV” and

“Cohen” for “Panzo” in the above-quotation, one would have a concise description of Appel’s

modus operandi, and how he manipulated LSI and its directors for his own personal gain.

19. In 2004, Appel was charged with conspiracy to commit securities fraud, and

conspiracy to commit money laundering in relation to a stock manipulation scheme of over the

counter stocks. The U.S. Attorney charged that Appel, and others, would obtain large blocks of

stock of thinly traded over the count stocks for little or no consideration and deposit them into

secret nominee accounts at various brokerages. Further, the U.S. Attorney charged that Appel paid

secret kickbacks to brokers, in the form of cash and free stock, in exchange for the brokers causing

their clients to purchase blocks of the stock from Appel and others at artificially inflated prices.

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Mr. Appel ultimately pled guilty to both counts and received two one year and one day sentences

(concurrent) and was ordered to pay $2.8 million in restitution. In July 2011, a time during which

Appel was interacting with LSI and its stock, he paid $1.5 million in restitution to the court. Upon

information and belief, Appel obtained this money through the fraud committed against LSI with

the help of other defendants named in this suit.

20. In yet another, more recent securities fraud scheme, Appel served as an authorized

representative and secretary of Bamco Gas, LLC (“Bamco”), a private, manager-managed

Delaware LLC formed in 2004 to, inter alia, acquire exploration and development assets in the

Texas Gulf Coast Region. Through a number of affiliated companies controlled by Appel,

including 1025 Partners, LP; RMS Advisors; DHH Resources; RMS Gas, LLC; and PHT Gas,

LLC, Appel was the single largest Principal Member with control of Bamco, owning 27.29% of

that company.

21. Following an extensive investigation into Bamco, the Arkansas Securities

Commission found that Appel and Bartlett committed securities fraud by withholding material

facts and information necessary to render private placement memoranda relating to Bamco not

misleading. On July 9, 2013, the Arkansas Securities Commissioner issued a public Cease and

Desist Order directed to Appel and Bartlett ordering them to refrain from violating applicable laws,

rules, and regulations surrounding the sale of securities.

22. As was the case with his dealings with LSI, Appel’s significant involvement and

control of Bamco through numerous affiliated entities was hidden from the outside investors and

creditors of LSI, and certainly, Appel’s long-history of adverse legal and regulatory history were

not disclosed to outside investors or creditors of LSI.

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23. Appel served his prison time for securities fraud violations from June 12, 2008,

through April 24, 2009. His involvement with LSI began either when he was still in prison or

shortly after his release.

24. It is the habit or routine practice of Appel to engage in conduct which violates the

laws, rules, and regulations surrounding the sale and purchase of securities.

25. Appel is a convicted felon and serial securities fraud violator.

26. Appel was, at all times relevant to this proceeding, an “insider” of LSI, as that term

is defined by the Bankruptcy Code, given that he was in de facto control of LSI, the Debtor.

27. Appel, Bartlett, DeJoria, and/or entities with which they are associated have been

involved in a myriad of complex securities offerings spanning an undetermined period of time; it

is the habit or routine practice of Appel, Bartlett, and DeJoria to do business together in such a

manner.

ERNEST A. BARTLETT, III

28. Earnest Ancin Bartlett, III (“Bartlett”) is an adult citizen of Arkansas. Bartlett’s

tortious actions alleged herein were directed at LSI and its operations in the State of Florida.

29. Bartlett was a broker-deal agent with E.F. Hutton & Co., Inc. from 1986-1987, and

with Prudential-Bache Securities, Inc. from 1987-1988. Through a decision rendered on June 14,

1989, the National Association of Securities Dealers (“NASD”) (n/k/a FINRA), censured Bartlett,

fined him $15,000.00, and barred him from association with any NSDA-registered broker-dealer

in any capacity. NASD found that Bartlett exercised discretionary power over three customer

accounts and purchased and sold securities without the prior written consent of the customers.

Additionally NASDA found that Bartlett used high-pressure sales tactics and made exaggerated

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and misleading statements to customers to solicit their business. Bartlett also failed to respond to

NASD’ requests for information pursuant to the NASD Rules of Fair Practice.

30. At all material times herein, Bartlett served as the president and principal of FEQ

Investments, Inc. (“FEQ Investments”), a Delaware corporation which served as the manager of

FEQ Gas, LLC (“FEQ Gas”), a manager-managed Delaware LLC for which Bartlett also served

as principal. Bartlett, along with Appel, was a principal interest holder with control of Bamco,

owning some 8.32% of this company through his FEQ entities.

31. As alleged in detail supra, the Arkansas Securities Commission found that Appel

and Bartlett committed securities fraud by withholding material facts and information necessary

to render private placement memoranda relating to Bamco not misleading, and on July 9, 2013,

the Arkansas Securities Commissioner issued a public Cease and Desist Order directed to Appel

and Bartlett ordering them to refrain from violating applicable laws, rules, and regulations

surrounding the sale of securities.

32. According to the Cease and Desist Order issued by the Arkansas Securities

Commissioner in the Bamco matter, on the day that Appel entered prison in 2008, he sent an email

to individuals trying to reach him to either email him or coordinate with Bartlett, as he would be

“tough to reach.”

33. Bartlett is a serial securities fraud violator with close ties to Appel.

34. It is the habit or routine practice of Bartlett to engage in conduct which violates the

laws, rules, and regulations surrounding the sale and purchase of securities.

35. Bartlett was, at all times relevant to this proceeding, an “insider” of LSI, as that

term is defined by the Bankruptcy Code, given that he was in de facto control of LSI, the Debtor.

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36. Appel, Bartlett, DeJoria, and/or entities with which they are associated have been

involved in a myriad of complex securities offerings spanning an undetermined period of time; it

is the habit or routine practice of Appel, Bartlett, and DeJoria to do business together in such a

manner.

HARVEY N. KLEBANOFF

37. Harvey N. Klebanoff a/k/a Harvey Kaye (“Kaye”) is an adult citizen of Florida.

Kaye’s tortious actions alleged herein were directed at LSI and its operations in the State of

Florida.

38. Kaye was the CEO of LSI from 2009 – January 18, 2012, and was instrumental in

propagating the LSI pump-and-dump.

39. Kaye served on the Board of Directors of LSI from its inception until April 22,

2012.

40. Kaye was employed by LSI and received an excessive salary during his

employment with LSI.

41. Like other defendants involved in the scheme to loot LSI, Kaye has a history of

violating securities laws and market manipulation in particular.

42. In 1974, Kaye was barred from the securities industry by the Securities and

Exchange Commission. The sanctions were based on findings that Kaye and his business associate

“manipulated the prices and markets of several securities, caused an investment company over

which they had control to purchase securities to its detriment without disclosing the adverse factors

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attendant to such investments, and in connection with sales of various securities to customers made

misrepresentations regarding their market prices and investment qualities.”4

43. Kaye was also the owner and managing member of Gulfstream Capital Group, L.C.

(“Gulfstream”). Upon information and belief, Gulfstream Capital Group, L.C. is the alter ego of

Kaye. In regulatory filings signed by Kaye, Gulfstream is described as a “merchant banking,

consulting and financial advisory organization, which provides advisory and corporate finance

services to both public and private companies.”5 Gulfstream operated out of its office located at

190 NW Spanish River Blvd., Suite 101, Boca Raton, FL 33431 – the same address as LSI. Kaye

regularly conducted LSI business and received substantial funds from LSI through Gulfstream.

For example, LSI’s 2011 Form 10-KA states that during the year ending December 31, 2010, Kaye

received total compensation from LSI in the amount of $183,789. Of this amount, only $89,451

was paid to Harvey Kaye directly, whereas $94,338 was paid to Gulfstream Capital Group, owned

by Harvey Kaye. Likewise, during 2009, $154,782 of Kaye’s compensation as CEO and President

of LSI was paid to Gulfstream. Only $5,000 of his compensation was paid to Kaye directly.

44. Kaye was, at all times relevant to this proceeding, an “insider” of LSI, as that term

is defined by the Bankruptcy Code, given that he was a director and officer of LSI, the Debtor.

HELEN KLEBANOFF

45. Helen Klebanoff is an adult citizen of Florida, and was, for all relevant times, the

spouse of Harvey N. Klebanoff. Helen Klebanoff’s tortious actions alleged herein were directed

at LSI and its operations in the State of Florida.

4 SEC News Digest, Issue 74-60, (March 27, 1974).5 LSI Form 10-KA, filed May 20, 2011. Gulfstream is referenced as Gulfstream Capital Group, Inc. in regulatory filings. However, emails sent by Kaye in 2099 and thereafter on LSI-related business reference Gulfstream Capital Group, L.C. Upon information and belief, Gulfstream Capital Group, Inc. is Gulfstream Capital Group, L.C.

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46. Helen Klebanoff was, at all times relevant to this proceeding, an “insider” of LSI,

as that term is defined by the Bankruptcy Code, given that she was a relative of Harvey N.

Klebanoff, a director and officer of LSI, the Debtor.

VERNON RAY HARLOW

47. Vernon Ray Harlow (“Harlow”) is an adult citizen of Florida. Harlow’s tortious

actions alleged herein were directed at LSI and its operations in the State of Florida.

48. Harlow was the Chief Operating Officer of LSI and Latitude Energy Solutions,

LLC (“LES”), from approximately August 17, 2011, until January 16, 2012, and was instrumental

in propagating the LSI pump-and-dump.

49. Harlow was employed by LSI and received an excessive salary during his

employment with LSI and LES.

50. Prior to and during his involvement with LSI, Harlow was the CEO and Director

of Maverick Oil & Gas, Inc. (“MAVO”), an infamous energy business based in Fort Lauderdale,

Florida that reportedly lost over $100 million, had its securities registration revoked by the SEC

on March 4, 2013, “for the protection of investors,” and upon information and belief, was, not

surprisingly, partially funded by Appel and Bartlett.

51. LSI’s attorney performed a background check on Harlow at Cohen’s request and

made a few observations:

...Some points of interest you may wish to consider…[Harlow] allowed his 1.6 million dollar house to go into foreclosure in 2003 and a foreclosure judgment was issued. In 1990 he had a $110,000 judgment against him from the FDIC…both are financial issues that concern me. In 2005 he turned around and bought a home for 1.45 million.... Corporate records indicate a number of entities he either owns or controls as director or officer including IDC Palm Energy, LLC (since 2008), HMH Energy, Inc. (1984-2009), Hyde Oil and Gas (1982-2009), Harlow & Teutsch (since 2009), Champion Group Capital (2008-2009), etc…the list is included…..numerous entities…many for only a year or so...

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52. Harlow became involved in LSI through his overlapping business dealings with

Appel. Harlow, Appel, Bartlett and Mike Teutsch (one of Harlow’s business partners) owned 30%

of LES.

53. Harlow was, at all times relevant to this proceeding, an “insider” of LSI, as that

term is defined by the Bankruptcy Code, given that he was a director and officer of LSI, the Debtor.

MATTHEW COHEN

54. Matthew Cohen (“Cohen”) is an adult citizen of Florida. Cohen’s tortious actions

alleged herein were directed at LSI and its operations in the State of Florida.

55. Cohen was the Chief Financial Officer (“CFO”), Secretary, and Treasurer of LSI

from approximately 2009 until July 3, 2012.

56. Cohn served as a director of LSI from approximately 2009 until July 3, 2012.

57. With the possible exception of Appel, Cohen’s fraudulent conduct described herein

was the most blatant and most instrumental in propagating the LSI pump-and-dump.

58. Cohen’s tenure, fraud, and breach of fiduciary duty spanned almost the entire

existence of LSI.

59. Cohen was Appel’s proxy, his insider at LSI who provided Appel and Bartlett all

of the inside information regarding LSI they needed to fuel the pump-and-dump.

60. Cohen was employed by LSI and received an excessive salary during his

employment with LSI.

61. During his employment with LSI, and while he served on the Board of Directors,

Cohen allegedly sexually harassed and molested a subordinate, female employee and improperly

provided inside information to Appel and Bartlett. Through the influence of Appel, Bartlett, and

DeJoria, among others, Cohen was never fired for cause because of his abhorrent conduct. Instead,

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he remained as CFO and director, continued to be paid his excessive salary, and may have even

been rewarded with a favorable severance package that was negotiated on his behalf by Appel.

Furthermore, the well-being of the thinly-capitalized LSI was significantly damaged by the

excessive legal fees incurred and paid by LSI to defend itself and Cohen regarding this sexual

harassment suit, all to the detriment of LSI, its shareholders, and its creditors.

62. Cohen was, at all times relevant to this proceeding, an “insider” of LSI, as that term

is defined by the Bankruptcy Code, given that he was a director and officer of LSI, the Debtor.

DEBORAH COHEN

63. Deborah Cohen is an adult citizen of Florida, and was, for all relevant times, the

spouse of Matthew Cohen. Deborah Cohen’s tortious actions alleged herein were directed at LSI

and its operations in the State of Florida.

64. Deborah Cohen was, at all times relevant to this proceeding, an “insider” of LSI, as

that term is defined by the Bankruptcy Code, given that she was a relative of Cohen, a director and

officer of LSI, the Debtor.

HAWK MANAGEMENT GROUP, INC.

65. Hawk Management Group, Inc. is a Florida corporation, with its principal place of

business in Florida. Hawk Management Group, Inc. is closely affiliated with and effectively

controlled, either through ownership or managerial or operational control or otherwise, by Cohen.

VIRGINIA DADEY

66. Virginia Dadey (“Dadey”) is an adult citizen of New York. Dadey’s tortious

actions alleged herein were directed at LSI and its operations in the State of Florida.

67. Dadey was employed by LSI and received an excessive salary during her

employment. Upon information and belief, Dadey was LSI’s Financial Representative.

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68. Dadey has known and been business associates with Howard Appel and/or Bartlett

for a long time.

69. Dadey cooperated, conspired with, and was used by Appel to acquire and exploit

inside information from Dadey which she learned through her association and/or manipulation of

Cohen.

BELLCREST ADVISORS, LLC

70. Bellcrest Advisors, LLC, is a New York Limited Liability Company, with its

principal place of business in New York. The members of this LLC are unknown at this time, but

Dadey is its registered agent, and upon information and belief, its top executive. Bellcrest

Advisors, LLC is closely affiliated with and effectively controlled, either through ownership or

managerial or operational control or otherwise, by Dadey.

JEFFREY WOHLER

71. Jeffrey Wohler (“Wohler”) is an adult citizen of California. Wohler’s tortious

actions alleged herein were directed at LSI and its operations in the State of Florida.

72. Wohler served on the Board of Directors of LSI from January 20, 2012 until

November 9, 2012, when LSI filed for bankruptcy protection and all of its directors resigned.

73. Wohler was President and interim CEO of LSI from January 2012 until May 2012,

and served as President and CEO from July 3, 2012 until August 28, 2012.

74. Wohler was employed by LSI and received an excessive salary during his

employment.

75. Wohler has known and been a business associate of John Paul DeJoria for

approximately thirty years.

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76. Wohler was hand-picked by DeJoria initially to conduct due diligence of LSI in

relation to DeJoria’s initial involvement and investment in LSI in early 2011.

77. Wohler was chosen by DeJoria to serve as the interim CEO of LSI during the

purported transition from the First Board to the Second Board.

78. Wohler was, at all times relevant to this proceeding, an “insider” of LSI, as that

term is defined by the Bankruptcy Code, given that he was a director and officer of LSI, the Debtor.

MICHAEL GUSTIN

79. Michael Gustin (“Gustin”) is an adult citizen of Texas. Gustin’s tortious actions

alleged herein were directed at LSI and its operations in the State of Florida.

80. Gustin served on the Board of Directors of LSI from January 20, 2012, to

November 9, 2012, when LSI filed for bankruptcy protection and all of its directors resigned.

81. Gustin was employed by LSI and received an excessive salary during his

employment.

82. Gustin has known and been a business associate of John Paul DeJoria for

approximately thirty years.

83. Gustin was hand-picked by DeJoria initially to conduct due diligence of LSI in

relation to DeJoria’s initial involvement and investment in LSI in early 2011.

84. Gustin was chosen by DeJoria to serve as a director of LSI during the purported

transition from the First Board to the Second Board.

85. Gustin was, at all times relevant to this proceeding, an “insider” of LSI, as that term

is defined by the Bankruptcy Code, given that he was a director and officer of LSI, the Debtor.

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JOHN PAUL DEJORIA

86. John Paul DeJoria (“DeJoria”) is an adult citizen of Texas. DeJoria’s tortious

actions alleged herein were directed at LSI and its operations in the State of Florida.

87. DeJoria served on the Board of Directors of LSI from October 21, 2011 until

September 20, 2012, and was LSI’s principal shareholder at the time of its collapse.

88. DeJoria first invested money into LSI in April 2011; at the time of LSI’s

bankruptcy, he owned more that approximately 15% of LSI’s outstanding stock, more than any

other single shareholder, but roughly the same percentage as the Appel/Bartlett Group controlled

while they were defrauding LSI.

89. DeJoria is a celebrity business personality with a reported net worth of more than

$3 billion. DeJoria is best known for being the co-founder and owner of the Paul Mitchell studios

and line of hair products (John Paul Mitchell Systems, Inc.); DeJoria reportedly owns 70% of

Patron Spirits Company (Patron Tequila), among other businesses. DeJoria is also a close friend

and business associate of at least Ernest Bartlett, if not Howard Appel.

90. DeJoria has a history of investing in other companies with Bartlett and Appel.

91. In 2004, a TSX Venture Daily Bulletin reports that DeJoria purchased a convertible

debenture ($300,000 face value) and 750,000 warrants from Touchstone Resources, Ltd.

(“TCH.U”) for $200,000, with a “finder’s fee” of 150,000 shares being paid to Ernest Bartlett.

Touchstone Resources USA, Inc. became Cygnus Oil and Gas Corporation (“CYNS.PK”), a

corporation that the SEC identifies as one having connections to DeJoria, Bartlett, and Appel

92. In 2007, an SEC Form S-3 filed by Cytomedix, Inc. (“CMXI”)(n/k/a Nuo

Therapeutics) lists DeJoria as the owner of 1,504,999 shares (or 4.7%), FEQ Gas, LLC (a Bartlett

company) as the owner of 1,156,200 shares (or 3.5%), FEQ Investments, Inc. (a Bartlett company)

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as the owner of 1,037,900 shares (or 3.2%), and William F. Miller, the Goldman Sachs financial

advisor who knows DeJoria, Appel, Bartlett, and Langdon, as discussed infra, as the owner of

632,850 shares (or 2.0%).

93. In 2009, Virtual Piggy, Inc. (“VPIG.OB”), went public under the name Moggle,

Inc. According to SEC filings, early shareholders of Virtual Piggy, Inc. included Capital Growth

Trust, whose trustee was Vicki Appel, a close relative of Howard Appel; and FEQ Realty, LLC

and FEQ Gas, LLC, whose president is Ernest A. Bartlett, III. DeJoria, through a family trust, also

was and may still be a major shareholder in Virtual Piggy, Inc.

94. At the October 31, 2011, Annual Shareholders’ Meeting of LSI, after DeJoria

became a director of the corporation, DeJoria told the audience: “[What] really excited me about

this [LSI] technology [was] when my dear friend, Ernest Bartlett, first presented it to me, I thought,

‘Wow! It’s pretty cool – but is it real?’ So I took my friend Michael Gustin of 27-years and sent

him to check out the technology. He came back and said, “J.P., it is really real. This is the real

thing.’ He had no second thoughts . . . I want to get involved in this because it is a good thing.”

95. DeJoria was, at all times relevant to this proceeding, an “insider” of LSI, as that

term is defined by the Bankruptcy Code, given that he was a director and controlling shareholder

of LSI.

96. Appel, Bartlett, DeJoria, and/or entities with which they are associated have been

involved in a myriad of complex securities offerings spanning an undetermined period of time; it

is the habit or routine practice of Appel, Bartlett, and DeJoria to do business together in such a

manner.

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APPEL AND BARTLETT RELATED ENTITIES

Upon information and belief, each of the following corporations, company's, individuals,

and/or trusts actively and knowing participated in cross-trading shares among the Appel/Bartlett

entities in furtherance of the pump-and-dump and is closely associated with Bartlett and/or Appel:

97. RMS Advisors, Inc. is a Nevada corporation, with its principal place of business

in Nevada. RMS Advisors, Inc. is closely affiliated with and effectively controlled, either through

ownership or managerial or operational control or otherwise, by Appel.

98. Capital Growth Realty, Inc. is a Delaware corporation, with its principal place of

business in Delaware. Capital Growth Realty, Inc. is closely affiliated with and effectively

controlled, either through ownership or managerial or operational control or otherwise, by Appel.

99. Capital Growth Investment Trust is a trust with its principal place of business in

Pennsylvania, whose Trustee is Vicki Appel, a close relative of Howard Appel. The identity of all

individuals associated with this trust is unknown. Capital Growth Investment Trust is closely

affiliated with and effectively controlled, either through ownership or managerial or operational

control or otherwise, by Appel.

100. DIT Equity Holdings, Inc. is a Delaware corporation, with its principal place of

business in Delaware. DIT Equity Holdings, Inc. is closely affiliated with and effectively

controlled, either through ownership or managerial or operational control or otherwise, by Appel.

101. KWL Exploration and Development, Inc. is a Delaware corporation, with its

principal place of business in Delaware. KWL Exploration and Development, Inc. is closely

affiliated with and effectively controlled, either through ownership or managerial or operational

control or otherwise, by Appel.

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102. Moggle, LLC is a Delaware Limited Liability Company, which upon information

and belief, is related to Moggle Investors, LLC k/n/a Virtual Piggy, Inc. (a/k/a Oink) a Delaware

corporation, with its principal place of business in Delaware. The identity of all members of these

LLCs are unknown. Moggle, LLC and Moggle Investors, LLS k/n/a Virtual Piggy, Inc. are closely

affiliated with and effectively controlled, either through ownership or managerial or operational

control or otherwise, by Appel and/or Bartlett.

103. FEQ Realty, LLC is an Arkansas limited liability company, with its principal place

of business in Arkansas. The identity of all members of this LLC is unknown. FEQ Realty, LLC

is closely affiliated with and effectively controlled, either through ownership or managerial or

operational control or otherwise, by Bartlett.

104. Wiltomo Redemption Foundation, is an unincorporated foundation with its

principal place of business in Pennsylvania. The identity of all individuals associated with this

foundation is unknown. Wiltomo Redemption Foundation is closely affiliated with and effectively

controlled, either through ownership or managerial or operational control or otherwise, by Bartlett.

105. TSS Investments, Inc. is a Nevada corporation with its principal place of business

in Nevada. TSS Investments, Inc. is closely affiliated with and effectively controlled, either

through ownership or managerial or operational control or otherwise, by Appel and/or Bartlett.

106. SLD Capital Corp. is a Pennsylvania corporation with its principal place of

business in Pennsylvania. SLD Capital Corp. is closely affiliated with and effectively controlled,

either through ownership or managerial or operational control or otherwise, by Appel.

107. DeRosa Family Trust is a trust with its principal place of business in California,

whose Trustee is currently unknown. The identity of all individuals associated with this trust is

unknown. Upon information and belief, DeRosa Family Trust is closely affiliated with and

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effectively controlled, either through ownership or managerial or operational control or otherwise,

by Appel and/or Bartlett.

108. William Belzberg Revocable Living Trust is a trust with its principal place of

business in California, whose Trustee is William Belzberg. The identity of all individuals

associated with this trust is unknown. Upon information and belief, William Belzberg Revocable

Living Trust is closely affiliated with and effectively controlled, either through ownership or

managerial or operational control or otherwise, by Appel and/or Bartlett.

109. Michael Garnick is an adult citizen of Pennsylvania. Upon information and belief,

Michael Garnick is closely affiliated with and effectively controlled or otherwise significantly

influenced by Appel and/or Bartlett.

ISLAND CAPITAL MANAGEMENT, LLC

110. Island Capital Management, LLC is a Delaware Limited Liability Company with

its principal place of business in Florida. Island Stock Transfer is a division of Island Capital

Management, LLC, and Island Capital Management, LLC does business as Island Stock Transfer.

The members of this LLC are unknown at this time. Island Capital Management, LLC d/b/a Island

Stock Transfer was the transfer agent used by LSI to effectuate and record the transfer of

certificated LSI shares certificates and book entry shares in a series of convoluted, manifestly

illegal cross-trades by and between the First Board, the Appel/Bartlett Group and the Consultant

Defendants for purposes of (a) perpetrating and hiding the pump-and-dump and market

manipulation that was taking place, (b) laundering shares owned by First Board, the Appel/Bartlett

Group and the Consultant Defendants; (c) transferring shares to Cede and Co. (DTC) so that the

First Board, the Appel/Bartlett Group and the Consultant Defendants could sell shares on the open

market and reap huge gains, and (d) concealing the identities of the First Board, the Appel/Bartlett

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Group and the Consultant Defendants as ultimate beneficiaries of the shares. These trades,

discussed below, were patently fraudulent, and Island Stock Transfer willingly and knowingly

caused them to happen and kept direct communication with Cohen, and sometimes even with

Appel.

DEFINED TERMS

As used herein, the following terms are defined as follows:

“Appel/Bartlett Group” shall refer to and mean Howard Appel, Earnest J. Bartlett, III, Matthew J. Cohen, Harvey Klebanoff a/k/a Harvey Kaye, Helen Klebanoff, V. Ray Harlow, Virginia Dadey, Deborah Cohen, Hawk Management Group, Inc., RMS Advisors, Inc., Capital Growth Realty, Inc., Capital Growth Investment Trust, Bellcrest Advisors, LLC, DIT Equity Holdings, Inc., KWL Exploration and Development, Inc., Moggle, LLC, FEQ Realty, LLC, Wiltomo Redemption Foundation, TSS Investments, Inc., SLD Capital Corp, DeRosa Family Trust, William Belzberg Revocable Living Trust, and Michael Garnick.

“Appel and Bartlett Related Entities” shall refer to and mean RMS Advisors, Inc., Capital Growth Realty, Inc., Capital Growth Investment Trust, DIT Equity Holdings, Inc., KWL Exploration and Development, Inc., Moggle, LLC, FEQ Realty, LLC, Wiltomo Redemption Foundation, TSS Investments, Inc., SLD Capital Corp, DeRosa Family Trust, William Belzberg Revocable Living Trust, and Michael Garnick.

“Director and Officer Defendants” shall refer to and mean Matthew J. Cohen, Harvey Klebanoff a/k/a Harvey Kaye, Vernon Ray Harlow, Jeffery Wohler, Michael Gustin, and John Paul DeJoria.

“Debtor” shall refer to and mean Latitude Solutions, Inc. and its subsidiaries.

“Defendants” shall refer to and mean all named defendants: Howard Miller Appel, Ernest A. Bartlett, III, Harvey N. Klebanoff a/k/a Harvey Kaye, Helen Klebanoff, V. Ray Harlow, Matthew Cohen, Hawk Management Group, Inc., Deborah Cohen, Virginia Dadey, Jeffrey Wohler, Michael Gustin, John Paul DeJoria, RMS Advisors, Inc., Capital Growth Realty, Inc., Capital Growth Investment Trust, Bellcrest Advisors, LLC, DIT Equity Holdings, Inc., KWL Exploration and Development, Inc., Moggle Investors, LLC k/n/a Virtual Piggy, Inc. (a/k/a Oink), FEQ Realty, LLC, Wiltomo Redemption Foundation, TSS Investments, Inc., SLD Capital Corp., DeRosa Family Trust, William Belzberg Revocable Living Trust, and Michael Garnick.

“First Board” shall refer to and mean defendants, Matthew J. Cohen and Harvey Klebanoff a/k/a Harvey Kaye.

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“Insider Defendants” shall refer to and mean Howard Appel, Earnest J. Bartlett, III, Matthew J. Cohen, Deborah Cohen, Harvey Klebanoff a/k/a Harvey Kaye, Helen Klebanoff, Vernon Ray Harlow, Jeffery Wohler, Michael Gustin and John Paul DeJoria.

“LSI” shall refer to and mean Latitude Solutions, Inc. and its subsidiaries.

“Plaintiff” shall refer to and mean Carey D. Ebert, as the Trustee for the Chapter 11 estate of the Debtor, LSI.

“Second Board” shall refer to and mean Jeffery Wohler, Michael Gustin, and John Paul DeJoria.

“Trustee” shall refer to and mean Carey D. Ebert, the Trustee for the Chapter 11 estate of the Debtor, Latitude Solutions, Inc.

FACTUAL ALLEGATIONS

Summary

111. This adversary proceeding arises out of an elaborate scheme to pillage LSI, the

wanton and reckless indifference of, and self-dealing by, those who breached their fiduciary duties

owed to LSI, and the actions of those who aided and abetted the fraudsters and/or LSI’s fiduciaries

in breaching their fiduciary duties. The pump-and-dump scheme was carried out between LSI

insiders and a group of individuals with a history of securities fraud convictions.

112. In a typical pump-and-dump, corporate insiders in a micro-cap give themselves

stock in a company, intentionally manipulate the stock’s price through press releases, marketing,

and illegal trades, and then unload their shares at extravagant profits before letting the company

die. However, the pump-and-dump perpetrated on LSI had a twist: unlike a typical pump-and-

dump where the company is essentially a sham enterprise, LSI actually had real technology for the

purification of water in the oil and gas industry and other industries that, were it not for the

Defendants’ actions, would have generated tremendous value for the company.

113. LSI’s core products were mobile water-remediation units (housed on large trailers)

that could be transported to its customer’s site (either a well site, fracking site, waste-water

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treatment location, etc.), and then used to purify contaminated water. According to LSI’s

promotional materials, which were used throughout LSI’s existence by all Defendants, LSI’s

proprietary “Electro-Precipitation™” (EP) technology provided a “cost effective, highly efficient,

and environmentally sustainable means of treating the large amounts of contaminated water

resulting from various oil and gas, energy and mining extraction projects worldwide.” LSI’s

products were also used to purify water in the maritime industry, mining and industrial field, food

industry (e.g., poultry processing plants, seafood processing plants, etc.), and others.

114. The first generation of LSI’s products were manufactured and supplied to LSI by

IP Automation, Inc., a Colorado-based engineering firm established in 1998; IP Automation, Inc.

is a significant creditor of LSI which has asserted a claim herein against the Debtor for more than

$1.3 million. The second generation of LSI’s products were manufactured and supplied to LSI by

Jabil Circuit, Inc., a Delaware corporation with manufacturing employees in 90 plants in 23

countries around the world; Jabil Circuit, Inc. is a significant creditor of LSI which has asserted a

claim herein against the Debtor for over $9.5 million.

115. By causing LSI to spend millions designing and building water-remediation units,

the Defendants brought another layer of sophistication to their scheme. By weaving their pump-

and-dump into a company with actual products and viable technology, they were better able to

cover up their fraud and sell LSI to outside investors on the open market. The technology also gave

the schemers a fall back: if despite their actions, the company were to succeed, they could emerge

from the pump-and-dump holding millions of shares in a company with global reach and long-

term promise.

116. But rather than focus on building a successful company based on viable technology,

the schemers used the story of LSI’s proprietary “Electro-Precipitation™” water remediation

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technology to bring cash into the company only to take it for themselves. They paid each other

excessive salaries and consultant fees in the form of stock, warrants and cash for which effectively

nothing was done in return. They traded LSI stock among themselves in a series of bewildering

transactions designed to launder their shares and manipulate the stock’s price by controlling the

supply and demand and trading volume. At the same time, they pumped the stock of the company

through the issuance of multiple press releases and interest blogs. All of this was done to bleed

the corporation of its cash, squander its assets, and steal stock and warrants to the detriment of

LSI. By working in concert with LSI’s directors and officers, the Appel/Bartlett Group caused

LSI to pay them with millions of shares of LSI, LSI warrants and cash despite having done nothing

to deserve such lucrative payments.

117. The Second Board, who became involved in LSI in early 2011 and started to

manage LSI in early 2012 (or at least made attempts to manage it), knew of the ongoing pump-

and-dump, but did not stop it and did not attempt to rid LSI of the Appel/Bartlett Group. In fact,

the Second Board, led by DeJoria, allowed Cohen to remain as the CFO of LSI until almost the

very end and allowed the Appel/Bartlett Group to control LSI every step of the way. Deliberately

and through abject incompetence, the Second Board permitted the pump-and-dump to continue

until an outside, independent director not affiliated with Appel, Bartlett, or DeJoria, insisted on

blowing the whistle on LSI.

118. The LSI story consists of three acts. Act One: “The Bad Cops,” the First Board

and the Appel/Bartlett Group create and profit from a pump-and-dump. Act Two: “The Keystone

Cops,” the Second Board, through their complicity and abject incompetence, effectively partner

with the Appel/Bartlett Group and allow the pump-and-dump to continue. Act Three: “The Good

Cop,” the outside, independent director, Jerry Langdon, blows the whistle on this fraud and, in

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effect, forces the Second Board to put LSI in bankruptcy and blame everything on the First Board

in the hopes of covering their tracks.

119. In essence, all of the Defendants, including the First Board and the Second Board,

treated LSI as if it was their own private plaything, not the publically traded corporation it was.

ACT ONE: THE BAD COPS

THE EARLY YEARS

120. The predecessor corporation to LSI was originally incorporated in 1983 in Idaho,

purportedly to acquire and develop mineral claims located in the Miller Mountain Mining District

near Idaho City, Idaho. The original venture ultimately failed. In March 2007, the predecessor

corporation changed its corporate domicile from the State of Idaho to the State of Nevada by

effecting a change of domicile merger with a Nevada corporation named Genex Biopharma, Inc.

that was created in October 2005; the name of the surviving Nevada Corporation was changed to

GMMT, Inc. In July 2009, the Articles of Incorporation of this entity were amended to change the

corporate name to Latitude Solutions, Inc. In July 2009, a reverse stock split of all issued and

outstanding shares of common stock on a one share for 23.1975 shares basis occurred. As a result

of the stock split, the number of shares of LSI’s issued and outstanding common stock was

decreased to approximately 500,000 shares.

121. From mid-2008 to early-2009, GMMT sold approximately 1.8 million shares

through private placement at $0.25, raising roughly $363,000.

122. On or about March 24, 2009, GMMT entered into agreements to acquire 6709800

Canada, Inc. d/b/a GpsLatitude, Trinity Solutions, Inc. and Latitude Clean Tech Group, Inc.

(“LCTG”) through its wholly-owned subsidiary, GMMT Acquisitions, Inc. Under the terms of the

agreements, GMMT Merger, Inc. acquired 50% of the issued and outstanding shares of 6709800

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Canada d/b/a GpsLatitude and 100% of all the stock in Trinity Solutions, Inc. and Latitude Clean

Tech Group, Inc. GMMT Acquisitions then merged with and into GMMT Merger, with GMMT

Merger, Inc. being the surviving corporate entity. Purportedly in consideration for the acquisition,

the stockholders of GMMT Merger were issued 19.5 million shares of common stock, post split,

to reflect the 1 share for 23.1975 shares ratio.

123. Upon completion of the acquisitions, GMMT Merger changed its corporate name

to Latitude Solutions, Inc.

COHEN, KAYE, AND APPEL

124. The connection between Appel, Bartlett, Kaye and Cohen goes back to at least

2008.

125. On March 27, 2008, Kaye was copied on an email from Jan Rowinski (who was to

become LSI’s Executive Vice President) to Robert Gauthier attaching a “teaser sheet” and

“executive summary” for Gauthier’s company, Nutraxis. Nutraxis is a Canada-based company

that sells over-the-counter dietary supplements, including one called “GSH Complex®” which the

company has marketed on its website as providing protection against the Ebola virus.

126. The original email from Rowinski to Robert Gauthier instructed Gauthier to send

the Nutraxis “investment packages” to Howard Appel, who had just been sentenced to serve 366

days in prison for securities fraud and conspiracy to commit money laundering. Rowinski also

told Gauthier to send an investment package to Kenneth Koock, who later became a “consultant”

of LSI and was paid roughly $160,000 from LSI’s coffers.

127. Kaye forwarded this email four days later to Cohen to review for “useful items,”

presumably so that they could create similar marketing material for GMMT, Inc. (“GMMT”).

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LSI SUBSIDIARIES

128. Over the course of LSI’s existence, Defendants created and used numerous LSI

subsidiaries to funnel money and, in general, were used to cloud the true ownership and operational

control of LSI. LSI’s complex and confusing web of subsidiary and affiliated entities, most if not

all of which did not engage in meaningful operations, is further evidence of defendants’ bad faith.

129. As of January 2011, LSI had three subsidiaries: (1) Latitude Clean Tech Group,

Inc.; (2) 6709800 Canada, Inc. d/b/a GpsLatitude; and (3) Trinity Solutions, Inc.

130. In approximately February 2011, another related company, Latitude Energy

Services, LLC (“LES”) was formed by Appel, Bartlett, Harlow and others; 70% of LES was

originally owned by LSI, and the remaining 30% by Appel, Bartlett, Harlow and others; see

discussion, infra.

131. Upon information and belief, at or around the time that John Paul DeJoria first

became involved with LSI, in approximately mid-2011, other “Latitude” related companies were

either formed or renamed; specifically: Latitude Resource Group, Inc.; Latitude Industrial Water

Solutions, Inc.; Latitude R&D, Inc. Prior to approximately January 2012, these “Latitude” related

companies were primarily run by Matthew Cohen, Harvey Kaye a/k/a Klebanoff, Warren Blasland,

and/or others. After approximately January 2012, these “Latitude” related companies were

primarily run by Matthew Cohen, Jeffrey Wohler, and/or others.

132. Upon information and belief, at or around the time that John Paul DeJoria first

became involved with LSI, in approximately mid-2011, several “Water the World” entities were

either formed or renamed; specifically: Water the World, LLC and Water the World with Latitude.

These “Water the World” entities were primarily run by Jeffrey Wohler, Mike Gustin, Matthew

Cohen, and/or others, and were controlled by John Paul DeJoria.

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133. Beginning in the summer or fall of 2011, LSI formed a number of international

“Latitude” companies for the ostensible purpose of spreading and profiting from the core LSI

technology around the world; specifically: Latitude Water Solutions, B.V. (Dutch); Latitude

Worldwide, B.V. (Dutch); and WWW, UK, PLC (Frankfurt Exchange). The original and ultimate

principals of these foreign entities are unknown; however, according to various organizational

charts found within LSI’s business records, and upon information and belief, the same individuals

who owned, managed, and controlled all of the other “Latitude” and “Water the World” entities

also ran these foreign entities.

134. At the end of the day, the complexity of these interrelated and affiliated “Latitude”

companies is staggering – especially for a business that had a relatively modest revenue stream.

135. Upon information and belief, none of these “Latitude” companies ever had

meaningful operations and no such services were ever provided worldwide.

LATITUDE ENERGY SERVICES, LLC

136. According to regulatory filings, Latitude Energy Services, LLC (“LES”) was

organized in the state of Nevada on February 8, 2011. LSI has a 70% equity ownership in LES. In

filings with the SEC, Kaye disclosed that the remaining 30% equity ownership is owned by “third

party entities” but did not mention the identities of those third parties: FEQ Realty, LLC (controlled

by Earnest Bartlett); DIT Equity, LLC (controlled by Howard Appel); Moondog, LLC (controlled

by Ray Harlow); and Logoly Farms, LLC (controlled by Mike Teutsch). FEQ, DIT, Moondog and

Logoly Farms were four of the five managers of LES. LSI was the fifth manager.

137. According to regulatory filings, LES was to “provide water remediation services to

the Oil, Gas and Energy industries worldwide utilizing innovative and patented technologies

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developed by its majority equity owner, Latitude Solutions, Inc. ("LSI") and its subsidiary

companies.”

138. Upon information and belief, LES never had meaningful operations and no such

services were ever provided worldwide.

139. According to regulatory filings, LES (Nevada) was dissolved on or about January

20, 2012, by the Second Board of LSI because of “the administrative expenses associated with the

subsidiary.” According to records on file with the Florida Secretary of State, Latitude Energy

Services, LLC (Nevada) was converted to a Florida limited liability company on February 6, 2012.

Upon information and belief, Appel and Bartlett continued to profit from LES well after it was

converted to a Florida LLC.

140. Despite having been in existence for less than a year and having had no meaningful

operations, LES racked up at least $950,000 in payroll expense that was paid by LSI from LSI’s

operating account to numerous employees. Harlow alone made over $160,000 in 2011. Upon

information and belief, significant sums were funneled back to Appel and Bartlett as well.

141. For example, pursuant to an employment agreement dated February 1, 2011,

between LES and Harlow, LES was to pay Harlow $12,500 per month ($150,000 per year), plus

62,500 shares of stock and 62,500 warrants. And pursuant to an employment agreement dated

June 1, 2011, between LSI and Harlow, LSI was to pay Harlow $17,500 per month ($210,000 per

year), 900,000 warrants. All told, LSI and LES was to pay Harlow $30,000 per month ($360,000

per year), plus 62,500 shares of stock and 62,500 warrants. And did LSI receive comparable value

from Harlow in exchange for this generous executive salary? According to defendant Wohler,

who would become a director and CEO of LSI in 2012: “Ray Harlow, as we soon discovered, was

a liar. He would tell us that he was in a particular stage of a dialogue with [a given customer, but]

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. . . we would find out that Ray was lying about it, that they weren’t anywhere near close to signing

a deal. And it was one of the many reasons why we fired him.”

BAMCO, TEXAS MIDSTREAM, FREEDOM PIPELINE AND RED MOUNTAIN RESOURCES

142. In 2008, Bamco Gas, LLC (“Bamco”), an entity controlled by Bartlett and Appel,

sold subordinate debentures to investors to raise money for the acquisition of a 45% interest in

Freedom Pipeline, LLC (“Freedom Pipeline”). These debentures were sold without disclosing to

investors that Jedco Properties, LLC (“Jedco”) held a $7.8 million promissory note secured by the

assets of Freedom Pipeline (the “Jedco note”). Bamco was placed in receivership in May of 2009

for failing to deposit all its revenues with the trustee for the debentures, and Bartlett and Appel

were ordered by the Arkansas Securities Commissioner to cease and desist from committing

further securities fraud. Bartlett’s step-son-in-law, Alan Barksdale, was the successor receiver for

Bamco.

143. Texas Midstream Acquisition Corp., LLC (“Texas Midstream”) was formed and

used by the Appel/Bartlett Group to acquire Freedom Pipeline’s assets by purchasing the Jedco

note in a foreclosure sale and then transferring the assets to Red Mountain Resources, Inc.

(“RMR”), which was also controlled by Appel, Bartlett and their associates. Kaye and Koock

initially were the managers, but Koock resigned in March of 2011 and Cohen assumed his interest.

Texas Midstream had the same Boca Raton business address as LSI. Its operations – mainly emails

and document exchanges – were conducted out of LSI’s office using LSI email addresses.

144. Texas Midstream ultimately acquired the Jedco note in a foreclosure sale for the

purchase price of $3,566,500, without competing bids, on November 1, 2011.

145. Red Mountain Resources, Inc. was previously named Teaching Time, Inc.

(“Teaching Time”).

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146. Teaching Time was a Florida corporation formed on January 19, 2010. According

to its last quarterly financials filed with the SEC before changing its name, Teaching Time

described itself as a development stage company incorporated “to design, develop, and market

instructional products and services for the corporate, education, government, and healthcare e-

learning industries.” It was to be “committed to high quality instructional design and educational

new media development, and provide a core set of deliverable programs, courses, and learning

objects for the distance education, distributed learning, and e-learning markets.” Teaching Time

also reported that it had $10,300 in assets and a net loss of $11,351 from its date of inception.

Teaching Time’s sole officer and director was Lisa Lamson.

147. On February 2, 2011, Lamson resigned from Teaching Time and the company

changed its name to Red Mountain Resources, Inc. That same day, Ray Harlow, Kenneth J. Koock

(an LSI director at the time), Lynden B. Rose (also an LSI director at the time) and Paul Vassilakos

took seats on RMR’s board.

148. From the moment Red Mountain Resources changed its name, it had extensive ties

to members of the Appel/Bartlett Group and other major LSI investors, including Bartlett, Capital

Growth Investment Trust, William Belzberg, SST Advisors, Inc., Michael Garnick, Bill Miller,

and Fiordaliso Investments Ltd., the initial shareholder of RMR. Fiordaliso is based in Turks and

Caicos and is controlled by David Stevenson, see infra. Michael Littman, who represented LSI on

various matters, including securities regulatory compliance, also represented RMR in the Freedom

Pipeline deal.

149. According to Red Mountain Resources’ 2011 10-K, its name change came about

when “[d]uring the first quarter of 2011, the Company’s management reviewed its progress in

pursuit of [Teaching Time’s] business plan and determined that it was no longer in the best interest

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of the Company to pursue such an business plan and began to look to identify new corporate

opportunities in the energy industry.” RMR explained that, as a result of this reflective moment,

it “chang[ed] the direction of its business plan and...subsequently changed its name to Red

Mountain Resources, Inc. to better reflect its current business plan. Red Mountain Resources, Inc.,

a Florida corporation, is an independent, growth oriented, energy company that intends to acquire

and develop oil and gas properties.” Teaching Time purportedly shifted its business from designing

and developing educational products to “oil and gas exploration, development, production,

gathering and transportation...in the Permian Basin in New Mexico & Texas and onshore Gulf

Coast of Louisiana & Texas.”

150. In fact, Red Mountain Resources was crafted by the Appel/Bartlett Group using

Teaching Time’s shell to roll up and acquire assets from Texas Midstream (i.e., Freedom Pipeline)

and other entities connected with or controlled by the Appel/Bartlett Group, including The

StoneStreet Group, Inc., Black Rock Capital, LLC and Bamco Gas, LLC.

BEHIND THE CURTAIN: THE APPEL SHOW

151. From 2010 – 2012, Howard Appel ran LSI through back channels, hidden from the

public eye. His primary contact on the inside was Matt Cohen, the Chief Financial Officer of LSI.

However, Appel also knew Kaye from prior business dealings.

152. From 2010 – 2012, Cohen took instructions directly from Appel on all LSI-related

matters. Cohen also funneled inside information to Appel to assist him in defrauding LSI and

furthering his pump-and-dump. For his part in furthering the fraud, Cohen was rewarded with a

$215,934.00 (not less than $180,000.00) base salary paid by LSI and corporate credit cards, plus

millions of shares of LSI stock and cash paid by LSI to Cohen’s shell company, Hawk

Management Group, Inc.

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153. The emails exchanged between Appel and Cohen during this time establish a

pattern of this fraud, all as more fully alleged herein.

THE APPEL PUMP-AND-DUMP: AN OVERVIEW

154. In order to control the market for LSI, manipulate stock prices, and, ultimately, to

make millions of dollars trading LATI, the Appel/Bartlett Group needed to control a large block

of LSI’s stock. Beginning in 2010 and continuing through at least 2011, the Appel/Bartlett Group

aggressively acquired millions of shares of LSI. They accomplished this in at least two ways: (a)

purchasing certificated shares of LATI both from the corporation and from other investors in

private transactions, well below market prices, and (b) receiving millions of shares and warrants

in LATI under the guise of compensation for services rendered pursuant to bogus “consulting

agreements.”

THE FRAUDULENT TRANSFERS

155. In complete dereliction of their fiduciary duties, the First Board authorized LSI to

enter into written and verbal agreements, sometimes called “consulting agreements,” “finder’s

agreements” or “employment agreements” (collectively, “Consulting Agreements”), with the

Appel/Bartlett Group, the Insider Defendants, and others.6 Then, pursuant to these Consulting

Agreements, LSI transferred millions in LSI’s cash, stock and warrants to the Appel/Bartlett Group

and the Insider Defendants without receiving reasonably equivalent value in return (the

“Appel/Bartlett Group Transfers” and the “Insider Transfers,” respectively). The Appel/Bartlett

Group Transfers and the Insider Transfers were all modes, direct or indirect, absolute or

6 Several individuals have been sued by the Trustee in separate adversary proceedings for recovery of Consultant Transfers and are referred to as “Consultant Defendants.”

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conditional, voluntary or involuntary, of disposing of or parting with, LSI’s assets or property, or

LSI’s interest in an asset or property.

156. The Appel/Bartlett Group Transfers and the Insider Transfers were done in

furtherance of the fraudulent pump-and-dump scheme orchestrated by the Appel/Bartlett Group

and with the actual intent to hinder, delay and defraud LSI’s then present and future creditors. LSI

handed out cash, shares and warrants worth millions of dollars to the Appel/Bartlett Group and the

Insider Defendants “like candy at Halloween”7 at prices well below their value and market price

and for less than reasonably equivalent value. The Appel/Bartlett Group Transfers and the Insider

Transfers were in exchange for the Appel/Bartlett Group and the Insider Defendants’ efforts in

keeping the pump-and-dump alive and provided no benefit to LSI. The Appel/Bartlett Group

Transfers and the Insider Transfers were also illegal to the extent they were commissions paid to

persons and entities acting as unlicensed securities brokers for finding investors for LSI. At the

time of the Appel/Bartlett Group Transfers and the Insider Transfers, the sum of LSI’s debts

exceeded its assets at a fair valuation, LSI was generally not paying its debts as they became due,

LSI was engaged or was about to engage in a business or a transaction for which the remaining

assets of LSI were unreasonably small in relation to the business or transaction, and LSI reasonably

should have believed that it would incur debts beyond its ability to pay as they became due.

157. Cohen touched upon the true nature of these consulting agreements in an email

exchange with Bob Carter, an LSI “consultant,” on October 6, 2011. Carter asked Cohen to have

his agreement renewed with an award of 100,000 warrants. For Cohen, this was like looking the

gift horse in the month. Cohen responded:

7 From the draft fax dated March 14, 2012, from Wohler to DeJoria

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Subsequent to my discussions with Harv [sic] with respect to your consulting agreement renewal, I feel that your request for 100,000 warrants is egregious and more so shows a very greedy part of you. Do I need to review all the favorable agreements and favors that we did on your behalf.

Consulting agreements, finders agreements, accepting subscriptions at a heavily discounted amount, at the most opportune time where the company presented a risk free investment as it had plenty of money and a proven technology.

You should put yourself in my position as I still take heat on those aforementioned agreements executed on your behalf.[...]

158. Cohen forwarded Appel his email to Carter. Appel replied, “F--kin A!! Bravo and

start speaking up a lot more buddy. We’re 110% behind you and the clown show HAS to stop!!”

Even Appel, who was getting paid millions in stock and cash through FEQ Realty’s consulting

agreement with LSI for bringing his people to the trough, referred to Carter’s deal as a “clown

show.”

159. After the Appel/Bartlett Group and the Insider Defendants received their LSI shares

and/or warrants, they typically traded them among themselves as part of the Appel/Bartlett

Group’s master plan to stockpile huge blocks of LSI shares in order to control the market for LSI

shares and manipulate the stock’s price before selling them on the open market.

160. The Appel/Bartlett Group and the Insider Defendants are believed to have made

millions of dollars from the Appel/Bartlett Group Transfers and the Insider Transfers, at the

expense of LSI and its present and future creditors. Although the precise amount of cash, stock

and warrants comprising the Appel/Bartlett Group Transfers and the Insider Transfers is as of yet

unknown, Attachment One, appended hereto and referenced as if copied here in extenso, styled

Fraudulent Transfers from LSI to the Appel/Bartlett Group and Insider Defendants, identifies the

Appel/Bartlett Group Transfers and the Insider Transfers, and estimates the approximate,

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minimum value of these fraudulent transfers, the sum of which Plaintiff seeks to recover as

damages herein.

THE PUMPS

161. The Appel/Bartlett Group and the Insider Defendants pumped LSI to the general

public through numerous press releases, public statements and meetings, marketing, websites and

internet blogs believed to be controlled by Kaye All of this was designed to make LSI sound like

it was signing contracts and on the brink of exploding into a world-wide leader in water

remediation. In reality, many of the newly touted business opportunities and other announcements

were not accurate. However, the carefully crafted news, and the timing of the dissemination of

such news, was enough to cause the public to trade LSI’s shares at high prices so that the

Appel/Bartlett Group could make huge gains on the open market. LSI, on the other hand, did not

benefit from the increased share prices, as stock was not being issued at these prices. Rather, it

was being issued to the Appel/Bartlett Group and the Insider Defendants well below market price.

THE CROSS-TRADES

162. Once the Appel/Bartlett Group had LSI stock certificates in the hands, they engaged

in a fraudulent scheme of systematic cross-trading between numerous entities and individuals

controlled by the Appel/Bartlett Group and their business associates. Typically, multiple

Appel/Bartlett co-conspirators were involved on one or both sides of the deal, causing convoluted

cancellations and issuances of multiple stock certificates in a single transaction. All of this was

done by design to accomplish at least three goals: (a) they were able to manipulate the sale price

of LSI shares by trading amongst themselves at pre-arranged prices; (b) they were able to hide the

huge positions they held in LSI from regulators and the general public among the various multi-

tiered shell corps, trusts, closely-help businesses and individuals they controlled; and (c) they were

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able to hide the money trail by laundering shares in and out of issued and cancelled stock

certificates.

163. Ultimately, the vast majority of the physical stock certificates acquired by the

Appel/Bartlett Group were cancelled, registered with DTC and recorded by Island Capital

Management, LLC d/b/a Island Stock Transfer in the stock transfer journal as book entries in the

name of Cede & Co. as nominee for DTC. From there, the Appel/Bartlett Group’s interests in LSI

were traded electronically on the open market, with only their broker-dealers having record of their

transactions and the number of shares owned by them. This allowed them to continue manipulating

the market for LSI and put them in the perfect position to dump their shares on unsuspecting public

investors at a moment’s notice.

164. Many of the stock certificates acquired by the Appel/Bartlett Group had restrictive

legends and could not be DTC-eligible until the legend was removed. In these instances, the

Appel/Bartlett Group primarily would use a lawyer out of Hawaii, Robert Deiner, who would issue

opinion letters at a moment’s notice authorizing the removal the legends from the certificates.

Cohen paid Deiner for his services with LSI’s money, even though LSI was not a party to the

transactions. The sales were to or between members of the Appel/Bartlett Group, and they harmed

LSI, in part, by diverting the majority of its tradable shares into one faction. These obviously

suspect trades, orchestrated by Cohen, Appel, Bartlett, Kaye and other members of the

Appel/Bartlett Group, and willingly carried out by Island Stock Transfer Company, at times in

direct communication with Appel, ultimately put LSI in the hands of the Appel/Bartlett Group.

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THE DTC REPORTS

165. The Depository Trust Company, or DTC, is one of the world’s largest securities

depositories and acts as a clearinghouse to process and settle trades of unrestricted “book entry”

securities. i.e., freely-tradable securities whose ownership is recorded electronically.

166. Appel controlled an enormous number of LSI shares and LSI’s investors, and

consequently, he knew which broker-dealers were holding these shares in their accounts for

various investors. But in order to better carry out his scheme to manipulate LSI’s share price and

control the market, Appel needed inside information. DTC Security Position Reports (“DTC

reports”) were an important source of such information.

167. DTC reports provide valuable information on the position holdings of broker-

dealers in the issuer’s security at a specified point in time and are only available to issuers, trustees,

and authorized third-party agents. By having access to the DTC reports for LATI, Appel was able

to know how many LSI shares were being traded on a given day among broker-dealers that held

LATI in DTC-registered accounts. The DTC reports also could be cross-referenced with LSI’s

stock transfer journal to identify investors moving shares into a margin account. With the DTC

reports, Appel was able to plan and coordinate the cross-trades with his co-conspirators, ensure

that his people were doing what they were supposed to do to effectuate the fraud, and rein them in

if they were trading without his permission.

168. Appel’s only access to DTC reports for LSI was from inside LSI. Cohen was the

person inside LSI that fed DTC reports to Appel, and he did so on a regular basis.

169. On April 26, 2011, Cohen emailed Appel’s assistant, Cecile Dibona, and asked her

for help with “procuring DTC listings.”

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170. The next day, Dibona asked for clarification. Cohen responded to her email, typing

his answers behind her questions:

[Dibona] So I’m clear – are you looking to receive the DTC sheets weekly? [Cohen] That’s correct. [Dibona] If so, who at latitude do you want to receive them. [Cohen] That would be me. [Dibona] I will need their email address. [Cohen] You have it. [Dibona] Let me know and I can take care of that today. Thanks. [Cohen] THANK YOU!!!

171. Later that day, Dibona registered LSI with DTC so that Cohen could begin collected

the DTC reports.

172. The following Monday, May 2, 2011, Dibona emailed Cohen requesting the DTC

reports; Appel was asking for them:

Matt, would you please email or fax last weeks dtc sheets to howard? His email is [email protected] and his fax is 610-828-0884. Thanks.

173. Cohen responded, “Once I request it, I will comply.”

174. The next day Cohen emailed Appel and Dibona the DTC Security Position Report

on LATI for April 1, 2011.

175. Each daily DTC report cost $120 to obtain. When Appel requested DTC sheets for

the entire month of September, Cohen realized that it was going to cost $2,700 to obtain the reports.

After that, Cohen subscribed annually.

176. As alleged herein, Appel continued to request DTC reports from Cohen over the

next 12 months, both through his assistant and directly. He then shared his information with other

investors in his fold.

177. For example, on October 10, 2011, Appel emails Cohen, writing “I’m catching

major sh-t from everyone who wants answers!! Got to have those dtc reports ASAP!!!” On

December 5, 2011, Appel sends Cohen an email with only the subject line: “need to see last week's

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dtcs ASAP. got to see whos [sic] f---ing us NOW.” And again on December 10, Appel emails

Cohen, asking “Can we get the dtc repts today? I really need to see who's out there asap.”

178. On February 12, 2012, Appel emailed Cohen and asked him for DTC reports on

two companies: “Need dtcs for last week for lati and rdmp.” RDMP is the stock ticker for Red

Mountain Resources.

179. Cohen was obedient in providing Appel with the insider information he was

requesting.

180. The pump-and-dump orchestrated and executed by the Appel/Bartlett Group was

in full swing when DeJoria and the Second Board got involved in LSI.

ACT TWO: THE KEYSTONE COPS 8

THE SECOND BOARD KNOWINGLY PARTNERS WITH “NICE GUYS” APPEL, BARTLETT, AND COHEN

181. Although the fictional Keystone Cops are reputed for their gross incompetence, the

Keystone Cops here, LSI’s Second Board, were more than grossly incompetent in their

management of LSI: they knowingly partnered with securities fraud criminals, knowingly allowed

the Appel/Bartlett Group to continue to exploit and run LSI, and knowingly did not complain

publically about the Appel/Bartlett Group until it was in the Second Board’s self-interest to do so

and it was too late for LSI.

182. The Second Board’s knowing participation in the Appel/Bartlett Group’s fraud

constitutes a conspiracy to commit fraud, self-dealing, and is a gross violation of the Second

Board’s fiduciary duty of loyalty, good faith, and care to LSI, its shareholders, and its creditors.

8 The Keystone Cops (often spelled "Keystone Kops") were fictional incompetent policemen, featured in silent film comedies in the early 20th century. The term has since come to be used to criticize any group for its gross incompetence.

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183. There should be no doubt that DeJoria was well aware of Appel and Bartlett’s

involvement and their well-documented history of securities fraud before he even considered

getting involved in LSI.

184. DeJoria was introduced to LSI through his financial advisor, Bill Miller, and his

close friend, Bartlett, in early 2011.

185. DeJoria initially dispatched his long-time and close business associates, Gustin and

Wohler, to do his due diligence of the corporation and report back to him.

186. In a March 17, 2011, email, as the founders of LSI do their own due diligence on

DeJoria and Gustin, Harlow informed Cohen that “John Paul [DeJoria] is the guy I was thinking

of. He has a history with Howard [Appel] and Ernst [Bartlett] and is Patron Tequila.”

187. DeJoria’s first investment in LSI occurred in April of 2011, when he purchased

2,000,000 shares for $0.50/share, plus 2,000,000 warrants at a strike price of $1.25. This

$1,000,000 investment was followed by another investment of $500,000, again at $0.50 per share,

with 1,000,000 warrants at a strike price of $1.25.

188. In a June 3, 2011, email to Gustin and Ken Holmes, Wohler explains:

As it relates to Howard Appel, I have never met the man but his history in the financial sector seems more than a bit tarnished and according to Mike [Gustin], he was not the person who introduced us to LSI. Ernest Bartlett called Mike [Gustin] on a recommendation from his brother about LSI. Mike then called John Paul [DeJoria] who told Mike to get his @#$ down to Colorado Springs and evaluate the deal. . . . John Paul loaned Howard [Appel] and his group $1 million dollars and secured his loan with their LSI stock.

189. In the spring or early summer of 2011, Wohler commissioned a private

investigation company called Specialty Resources Group to conduct thorough background checks

on Appel, Bartlett, and Harlow. On June 20, 2011, formal reports regarding Appel, Bartlett, and

Harlow were generated and given to Wohler. In short, this private investigation and these reports

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disclose that Appel and Bartlett are security fraud veterans will long histories of being on the

wrong side of the law.

190. After providing these revealing reports regarding Appel, Bartlett, and Harlow to

DeJoria, Wohler shared his understandable concerns with DeJoria on June 29, 2011; in Wohler’s

own words:9

Mike Gustin and I met with John Paul [DeJoria] . . . [and] revealed our concerns about LSI complete lack of interest in the character of Howard [Appel], et al to John Paul. He stated that they were all nice guys . . . .

Wohler also reports being told in July 2011 that Cohen informed him that “Ray [Harlow] and

Howard [Appel] were the ‘tails wagging the dog’ for LSI.”

191. Unlike the many shareholders who invested in LSI and the creditors who did

business with LSI, DeJoria, Wohler, and Gustin knowingly got into bed with Appel, Bartlett,

Harlow, and Cohen when they decided to “rescue” LSI. Rather than clean up LSI, unfortunately,

DeJoria, Wohler, and Gustin knowingly partnered with Appel, Bartlett, and Cohen to continue

wasting LSI’s assets and business opportunities all to the detriment of LSI and its creditors.

DEJORIA LOANS $2,000,000 TO HIS FRIENDS, APPEL AND BARTLETT

192. On April 19, 2011, DeJoria agreed in writing to loan $2,000,000 to Appel, Bartlett

and K. David Stevenson, who controlled Fiordaliso Investments, Ltd. and Fenmore Consultants

Ltd., investors in LSI and cross-traders with the A/B Group Stevenson, through his various

entities, was also a major investor in Maverick Oil & Gas, Inc.

193. This $2,000,000 promissory note, states, in its entirety, as follows:

Dear JP

9 Emphasis added.

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Further to your text and our previous fax, please see below our new terms –

1. Loan amount US $2,000,000.

2. Security to be 3,000,000 shares of Latitude. The shares of Latitude will either be physically delivered to Veronika or the CFO of Latitude will acknowledge that once the shares of Latitude are issues they will be sent to Veronika to hold as collateral pursuant to the terms of this letter.

3. Repayment amount $3,000,000.

4. Repayable in 90 days from receipt of funds.

5. Option to extend by borrowers for a further 30 days for an extra 100,000 shares of Latitude systems.

6. If not fully extended the loan is to be repaid in shares or cask by no later than 120 days from receipt of funds.

Sincerely,

_/s/_K. David Stevenson _/s/__Howard Appel _/s/ Ernest Bartlett__

194. This money was not loaned to LSI. DeJoria, Appel and Bartlett had a side deal.

195. In order to get their loan, Appel and Bartlett needed to provide DeJoria with a letter

from Cohen, LSI’s CFO, confirming that their 3,000,000 shares (which they did not own) would

be sent to DeJoria to hold as collateral. On April 20, 2011—the next day—Appel emailed Cohen:

Matt, please put the letter below on your letterhead and email to veronikaj@;pms.com and fax to 512-263-:

John Paul DeJoria

Dear John Paul,

I am writing this letter to confirm that I have been instructed by the shareholders listed below to send to Veronika Judish at your offices in Beverly Hills the share certificates they will own in Latitude Solutions ("LSI") once the shares have been issued by the transfer agent for LSI in the amounts listed below:

DIT Equity Fund 1,400,000

FEQ Realty LLC 1,100,000

Capital Growth Realty 250,000

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Wiltomo Redemption Foundation 250,000

Total 3,000,000

We anticipate that these shares will be issued and sent to Veronika within the next few weeks. Please let me know if you have any questions.

Sincerely,

Matthew CohenChief Financial OfficerLatitude Solutions

196. On April 21, 2011, Cohen’s assistant sent this letter, signed by Cohen, to DeJoria’s

assistant just as Appel commanded. Appell, Bartlett and Stevenson then received their $2,000,000.

197. As alleged infra, Appel and Bartlett ultimately were issued their shares, without

consideration. However, they did not send them to DeJoria.

198. By the end of August, DeJoria still had not been paid back his $2,000,000 loan and

the $1,000,000 interest payment. DeJoria dictated an email sent by his assistant, Veronika Judish,

to Stevenson and Appel on August 30, 2011, with a request that they forward it to Bartlett:

Dear David, Howard and Ernest:

The agreement you signed for me was the 19th of April, 2011. The money was transferred the following day. The agreement was for 90 days, which would have been July 20th with a 30 day extension for 100,000 shares. Total due 120 days after receipt of funds. My friends, it has been over 120 days. Would you be so kind as to immediately wire my $3 Million or immediately notify Latitude to transfer 3 million of your shares in my name.

I am sure it was an oversight on your behalf. I would appreciate if you would handle this immediately since it is delinquent. Look forward to receiving the $3 Million or verification for the 3 million shares transfer to my name today or tomorrow.

Peace, love and happiness:

John Paul DeJoria

199. The next day, Veronika Judish sent another dictated email from DeJoria, only this

time it was addressed to Harvey Kaye: “Harvey… I am calling the note. Please register the 3

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million shares that they have authorized you to hold into my entity. Please transfer the shares into

JP’s Nevada Trust, trustee Tom Grimmett.” But DeJoria’s deal was not with LSI. It was with

Appel, Bartlett and Stevenson.

200. Nevertheless, DeJoria received an additional 3,000,000 shares of LSI. However,

they did not come from Appel and Bartlett. They were new shares issued by LSI.

LSI IS THE VICTIM – NOT DEJORIA

201. Although DeJoria invested millions of dollars into LSI, once his money was

transferred to LSI, it became LSI’s capital – not DeJoria’s. Although DeJoria may have treated

LSI as if he owned it because he was its largest shareholder, as a director of LSI, DeJoria’s

fiduciary duty was to the corporation—not to himself or any of his “nice guy” friends or fellow

board members. It is not DeJoria who lost money in LSI, but LSI who lost money and business

opportunities because of Defendants’—including DeJoria’s—breach of fiduciary duties, self-

dealing, and squander of corporate assets.

202. Presumably as a reward for getting their friend DeJoria to invest in LSI, Appel and

Bartlett were paid 1,440,000 shares and $1,440,000 warrants for “consulting services” at $1.50 per

share.

203. However, these shares were not issued directly to Appel or Bartlett. They were not

even issued solely to FEQ Realty, even though it was the only “consultant” identified in the

pertinent consulting agreement with LSI. On June 8, 2011, Earnest Bartlett sent Matt Cohen the

following email: “matt, pursuant to our consulting agreement with latitude, please find attached a

list of transferees for the issuance of 1,440,000 shares and 1,440,000 warrants. let me know if

theres [sic] any problem. thanks, ernest.” Bartlett attached a document explaining that FEQ’s

shares and warrants were to be issued as follows:

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COMMON SHARES:

Shareholder Number of Shares

Wiltomo Redemption Foundation 250,000EIN/SSN: 45-1197621 630 W. Germantown Pike Suite 180 Plymouth Meeting, PA 19462

Capital Growth Realty, Inc. EIN/SSN: 02-0589195 250,000 630 W. Germantown Pike Suite 180 Plymouth Meeting, PA 19462

TSS Investments, Inc. 40,000EIN/SSN: 27-5379684 600 W. Germantown Pike Suite 400 Plymouth Meeting, PA 19462

Gerald Appel 10,000EIN/SSN: 026-24-4335 7161 Promenade Dr. 201E Boca Raton, FL 33433

Corporate Consulting International Group, Inc. 30,000EIN/SSN: 11-3455742 277 Great River Road Great River, NY 11739

FEQ Realty, LLC 100,000EIN/SSN: 14-1926913 24224 Kanis Road Little Rock, AR 72223

DeRose Family Trust d/t/d 11/18/86 220,000PO Box 8082 Rancho Santa Fe, CA 92067 069-38-3882

William Belzberg Revocable Living Trust, d/t/d 10/5/84 100,000c/o Westminster Capital9665 Wilshire Blvd, Ste M

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Beverly Hills, CA

Michael Garnick 340,0001590 Stocton Road Meadowbrook, PA 19046 209-50-5559

RMS Advisors 100,000630 W. Germantown Pike, Suite 180 Plymouth Meeting, PA 19462 68-0525114

TOTAL SHARES: 1,440,000

WARRANTS:

FEQ Realty, LLC 620,000EIN/SSN: 14-1926913 24224 Kanis Road Little Rock, AR 72223

Capital Growth Investment Trust 621,000EIN/SSN: 23-7780195 13 Pasho Street Andover, MA 01810

Kendra Altman 33,000266 19th StreetSanta Monica, CA 90402 549-57-4181

Greggory Belzberg 33,0009140 St. Ives Drive Los Angeles, CA 90069 549-57-3144

Elana Belzberg 33,0009036 Cynthia Street West Hollywood, CA 90069 549-57-7135

RMS Advisors 100,000630 W Germantown Pike, Ste 180 Plymouth Meeting, PA 19462 68-0525114

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TOTAL WARRANTS: 1,440,000

204. RMS Advisors, Capital Growth Investment Trust, Capital Growth Realty, Inc.,

Wiltomo Redemption Foundation and TSS Investments, Inc. are controlled by Howard Appel.

205. FEQ Realty is controlled by Earnest Bartlett. Gerald Bartlett is Earnest Bartlett’s

son.

206. DeRosa Family Trust, William Belzberg Revocable Living Trust, the Belzberg

family, and Michael Garnick are all, upon information and belief, related to either Appel and/or

Bartlett.

207. Appel and Bartlett needed to spread their shares among various entities and persons,

but the original consulting agreement pursuant to which the shares and warrants were issued was

between FEQ Realty and LSI. So Appel drafted an amended consulting agreement that gave FEQ

Realty the right to have its shares issued to whomever it liked. Appel circulated the amended

agreement to Cohen in multiple drafts between June 28 and July 16, 2011 before it was signed.

208. It was through these types of stock awards and the elaborate scheme to amass

millions of LSI shares that Kaye and Cohen handed over LSI to the Appel/Bartlett Group.

APPEL WILL NOT ALLOW LSI SHARES TO TRADE WITHOUT HIS PERMISSION

209. Running a pump-and-dump required that Appel not only monitor and control the

price and movement of the stock, but that he also keep his co-conspirators happy. Appel was

continually insistent on getting DTC sheets from Cohen so that he could determine not only who

was trading LSI, but who might be about to trade LSI. If LSI shares were being sold without

Appel’s permission, he did everything he could to put a stop to it.

210. One such instance occurred in November of 2011, when LATI saw end-of-the-

week spikes in trading volume. For example, 14,600 shares were traded on November 10, whereas

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84,200 shares were traded on Friday, November 11 – an almost six-fold increase in trading volume

in one day.

211. On November 23, 2011, Appel sent the following email to Cohen, establishing that

Appel was in charge of controlling LSI’s stock price for a group of co-conspirators, and that Cohen

and Kaye were knowing participants in the scheme:10

Harvey has to talk to his guys and make sure they're not piling out here. A few of your good old buddies have been banging the shit out of the stock over the last few days and its causing a huge problem. if [sic] this keeps up for a few more days of constant and unfettered selling this will end up back at $1.50-2 and you can forget raising any money for this company at $2. At which case we'll have a real problem with any of our guys who paid $2 for their private placement stock over the last few months.

212. Cohen responded later that evening with two words: “Got cha.”

213. The exchange described above between Appel and Cohen is an agreement between

co-conspirators to manipulate the price of LSI stock.

DEJORIA JOINS LSI’S BOARD AS A “NON-LIABLE DIRECTOR”

214. DeJoria first loaned or invested money in LSI in April 2011. After doing his due

diligence, investing more money into LSI, and sending his long-time friends and business

associates, Wohler and Gustin, to investigate LSI, on October 7, 2011, DeJoria accepted LSI’s

invitation to join its Board of Directors. LSI’s Schedule 13D filed with the SEC sometime after

November 1, 2011, reports that DeJoria was appointed to LSI’s board on October 21, 2011.

215. In his hand-written note to Harvey Kaye, signed and dated by DeJoria on “7 Oct

2011,” wherein he accepts LSI’s invitation to join its board of directors, DeJoria writes: “Thank

10 Emphasis added.

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you, Please make sure I’m a non-liable Director! [peace sign, heart shape, smiley face]” (emphasis

in original).

216. After performing almost a year of due diligence regarding LSI, DeJoria was either

convinced that he could take Appel’s pump-and-dump worldwide, or was convinced that he could

export and profit from LSI’s water-remediation technology around the globe – or both.

217. Regardless of DeJoria’s true motives, once he effectively took over the reins of LSI

as the leading director and largest, controlling shareholder, he owed a fiduciary duty to LSI and its

shareholders and creditors to run a real business.

218. Between the time that DeJoria agreed to serve on the board and October 26, 2011,

when his appointment was made public, more than 500,000 shares were deposited into brokerage

accounts, most if not all held by the Appel/Bartlett Group and their associates. This is according

to the daily DTC sheets that Cohen was sending Appel. Trading volume from October 6 through

the 25th spiked several times.

219. Unfortunately, instead of running LSI like a publically traded corporation must be

run, DeJoria knowingly condoned Cohen’s regular practice of feeding inside information to the

Appel and Bartlett Group, allowed Appel to continue to run the corporation, and refused to clean

up the blatantly obvious problems with LSI’s management and wasteful practices.

JOSE LUGO VERIFIES THE CORRUPTION

220. In November of 2011, Mike Gustin purportedly engaged Jose Antonio Lugo, Jr.

(“Lugo”) to give advice on DeJoria’s participation as a LSI Board Member. Although Lugo’s

exact credentials are not known at this time, he was described by Wohler in sworn testimony as a

“financial analyst” who “lives in Madrid, Spain.”

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221. In a memo titled “Latitude Solutions Consulting Work Performed and to be

Performed” emailed on February 28, 2012, Lugo recounts the first time he was engaged by Gustin,

writing in part:

I received a telephone call from Mike [Gustin] with concerns about John Paul DeJoria being elected to Board of Directors questions regarding accepting such appointment and concerns about previous acts of Board. My advice was not to have JPD accept Directorship as I was concerned about possible previous acts of Board that may neutralize JPD from taking action against Board for possible wrong doing and not acting in a prudent manner.

This was good advice that went unheeded.

222. Lugo was formally retained on January 30, 2012. The consulting agreement signed

between Lugo and Gustin o/b/o LSI states in part that Lugo was being retained to “review all

issuances of securities and to whom” to determine “if the appropriate payment was made to the

company.” The consulting agreement also lists the following duties to be undertaken by Lugo:

- Work with the CFO of the company and have him provide other documents so that we can have a defined list of presumed violations so that if we have any inquiry into the future or any problem with a shareholder we are prepared to give answers immediately and stop any potential action against the company if possible.

- I will review all of the transfer agent documents to make sure if there are any other violations

- Substantiate any of the rumors regarding Investor Relation firms being paid substantial amounts of stock for their work in the marketplace and make sure it was all properly done

223. In the memo circulated on February 28, 2012, Lugo writes that he was asked to

“take an overall look at the company transfer records, possible violations of securities laws by

certain individuals and to get an idea of who is making money on the stock dealing of the company

when the company is going broke.”

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224. On February 12, 2012, Lugo sent Gustin an email containing his initial findings

from the investigation into the LSI stock transfers:11

Dear Jeff,

I have examined all of the documents from Island Stock Transfer Company and not all of the beneficial owners of stock are reflected and I believe that we must ask for a list of all "Book Entries" which include DWAC, etc.

I discovered this when I was researching a name that was on the Stock Transfer Journal but not on the "List Stop" and listed on the "List of Certificates" and the reason is that when the transfer agent makes a book entry they are crediting a broker dealer with the stock and at the same time making an entry for DTC (Depository trust company NY) in which no physical certificate is issued but only done by electronic entry (Book Entry).

The name I was looking for is Clariden Leu AG who happens to have an address in Zurich, Switzerland and there is a 500,000 shares issued by "Book Entry" on August 11, 2011 and the stock came from Capital Growth Investment Trust.

The movement of stock is as follows:

Aladin Gaston certificate number 208 in the amount of 1,608,750 was transferred into 4 different names as follows:

Capital Growth Investment Trust 500,000 shares certificate number 929

FEQ Realty, LLC 250,000 shares “Book Entry” electronic no certificate number

RMS Advisors Inc. 150,000 shares “Book Entry” electronic no certificate number.

Aladin Gaston 708,750 shares “Book Entry” electronic no certificate number

Total of all of the above is 1,608,750 so these entries balance on the records of the transfer agent.

Now Capital Growth Investment Trust surrenders certificate number 929 and there is a "Book Entry" to Clariden Leu AG, Zurich Switzerland, in the amount of 500,000 shares.

Why is all this important?

I believe that Capital Growth Investment Trust and many other entities listed below, is a nominee for Howard [Appel], and the Book Entry to Clariden Leu AG is the

11 All emphasis is original to the document.

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account of Howard in Zurich in the amount of 500,000 shares. In addition, I believe that Feq Realty LLC and RMS Advisors is also Howard. The address of Feq Realty and RMS Advisors is the same located at 630 W Germantown Pike Ste 180, Plymouth Meeting PA 19462. The address for Capital Growth Investment is different and is located at 13 Pasho Street, Andover, MA 01810.

At this point in time, this is all theory and I believe the following other entities and or persons are also Howard.

Wiltomo Redemption FoundationCapital Growth Realty, Inc.TSS Investment, Inc. address differentDIT Equity Holdings, LLCKWL Exploration & Development Interactional Corporate ManagementFiordaliso Ltd different address Claniden Leu AG different address RMS Advisors Janice Thoroski different address Excelsius Capital Partners, Inc.Independence Avenue different addressJacques Faguy different addressDeworth H Williams different addressSLD Capital Corp different address Ray Lee which is really Kyung Won Lee as per conversation with Matt Cohen Moggle Investors LLC with TSS Investors LLC signing for Moggle Investors which I have seen document with such signatures.

I need a fast as possible a list of all Book Entries from the transfer agent and we are going to see a very interesting story. In addition, I will bet that the volume in the common stock of the company was higher than usual at the time the Book Entries were made by the transfer agent for persons or corporations that I believe is Howard.

Please order a list of all BOOK ENTRIES from the transfer agent and when we examine the print out we will see a very interesting story.

Thanks,

Jose

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225. Lugo also summarized his findings in a memorandum created and emailed to

Gustin on February 27, 2012, titled “Howard Appel: Confidential Report for Mike Gustin.” In it,

Lugo writes:12

When I was ask to review certain transactions regarding Howard Appel and the manner in which he conducted his business one step removed from LATI I did find certain facts which seem to be disturbing. I believe that Howard had certain investors purchase shares in the private placement that were in some way reserved for Howard or better said a prearranged agreement to sell their holdings at a fixed price sometime in the future no matter what the market price maybe at the time of sale. There are many transactions that Howard purchased shares at $1.00 per share when the quoted market price was substantially higher. In some transactions whereby Howard purchased shares at $1.00 per share when in fact the market price was $3.50 per shares therefore discounting the shares by well over 70%.

This is not normal and if I were a regulator I could probably prove a manipulation type of transactions to benefit Howard. Transactions with this type of discount is not normal, and in my opinion not good. I have been advised by Matt Cohen that the investor was not a seasoned investor or an investor that has little or no knowledge of stock market, and therefore accepted a discount as referred to above. This is not a good answer as all of the investors were required to fill out a questioner when they subscribed to the shares in the private placement of LATI. I believe if there is ever a period of time in the future that a regulator were to ask questions of the investors who sold there [sic] shares to Howard at deep discount, there [sic] story may not be what Howard would expect as when an investor is under oath and is being questioned by the SEC or Justice they are going to tell the truth and not commit perjury. Howard could have some serious problems if such an investigation were to start.

I do not have proof of what have reported but I do have sufficient experience to read between the lines and the transactions that I discovered do not smell good.

Respectfully submitted,

Jose Lugo

226. As it turns out, Lugo was correct. However, when Lugo asked Cohen (Appel’s co-

conspirator) whether Appel’s purchase of shares from other shareholders at a deep discount was

12 Emphasis added.

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prearranged, Cohen insinuated that Appel had merely ripped the investors off. Whether pre-

arranged or a deliberate scheme to take shares from unwitting investors, Cohen was instrumental

in making these trades happen.

THE “EMAIL OF CONCERN”

227. No later than February 11, 2012, the Second Board knew that Cohen was feeding

Appel insider information on LSI.

228. On or about February 10, 2012, Cohen asked Island Stock Transfer to provide him

with a breakdown of which LSI shareholders owned non-restricted shares. Cohen needed this

information to give to Appel.

229. Jake Metzler at Island Stock Transfer obliged Cohen’s request, sending him several

attachments that, together, identified every LSI shareholder, the number of restricted shares and

non-restricted shares owned by each shareholder, the date and amount of each stock transaction,

and the total number of non-restricted shares that were freely tradable on the open market. Cohen

forwarded the attachments to Appel by email the same day.

230. On Saturday, February 11, 2012, Nancy Greco, LSI’s office administrator, was

looking for suspicious emails on LSI’s server and found the email Cohen had sent to Appel the

previous day. She copied it and sent the email and attachments to Jeff Wohler, who then forwarded

it to Gustin, Link, and Jose Lugo. The subject line of her email read “Email of concern.”

231. During her weekend search of LSI’s email server, Greco found more emails linking

Cohen and Appel, converted them to PDFs, emailed them to herself and, upon information and

belief, shared these emails and attachments with members of the Second Board as well.

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“WHO IS THIS ANIMAL?”

232. One of the emails Greco discovered was an email string between Appel and Cohen

on December 21, 2011 with the subject line “FW: Latitude.” The string begins with an email

from Katie Messinger at Island Stock Transfer requesting that Cohen authorize the removal of

restrictive legends on two LSI stock certificates. As was Cohen and Appel’s customary practice,

Cohen forwarded Island Stock Transfer’s email to Appel, letting him know that another LSI

shareholder was trying to free up shares to trade on the open market. Cohen wrote, “Add him to

the list.”

233. By this time, Appel was becoming incensed that shareholders were potentially

trading LSI without his blessing. He responded immediately to Cohen, asking “Who is this

animal?”

234. As it turns out, Cohen knew of the shareholder. He responded, “Happens to be a

great guy. Came in early when we needed the money. He is a very high level retired New York

City detective that is tied in big time with the NY judicial system.”

235. Appel wrote back, “Can we get him on side at ascendiant? Who should be talking

to him?” Cohen replied, “Harvey and I will take care of [him].”

236. Ascendiant Capital Markets, LLC (“Ascendiant”) is a brokerage firm located in

Irvine, CA. It held LSI shares in brokerage accounts for members of the Appel/Bartlett Group,

including FEQ Realty, Moggle Investors and the William Belzberg Revocable Living Trust, and

Wohler and Gustin knew this.

237. Approximately two weeks before this email string was discovered by Greco, Gustin

and Wohler had learned from Lugo that Ascendiant was the biggest seller of LSI stock. Lugo sent

Gustin the following email on January 27, 2012:

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Dear Mike,

ASCENDIANT CAPITAL MARKETS

This broker is located in Florida and California sold for there (sic) clients 4,000,000 shares of LATI. They were the biggest seller. I would like to find out who is this firm and who has the connection at LATI with this firm. I believe it will be interesting to find out the answers to my questions. The 4,000,000 shares could be equal to 8 to 12 million dollars if my numbers are correct.

Jose

Three days later, Gustin forwarded Lugo’s email to Wohler.

THE “STOCK TRANSFERS” SPREADSHEET

238. On Monday, February 13, 2012, Appel met with members of the Second Board.

One of the topics of discussion was Appel’s control over LSI and the trading of its stock. Indeed,

Lugo had even prepared a document titled “Questions for Howard Appel” for the Second Board

in preparation for their meeting with Appel.

239. Howard Appel prepared his own set of documents for the meeting. One was a

spreadsheet unassumingly titled “Stock Transfers,” which he emailed to Cohen in draft and final

form and asked him to print out and bring to the meeting on February 13.

240. Greco found these emails as well during her weekend search of LSI’s server, and

she emailed them to herself with the subject line “print.” Upon information and belief, Greco

provided the Second Board with these emails and the “Stock Transfers” spreadsheet.

241. Howard Appel’s “Stock Transfers” spreadsheet purports to list every member of

the Appel/Bartlett Group and the number of shares purchased by each. The following information

comes directly from the spreadsheet:

total historic shares purchased by Bartlett/Appel group 8,808,644

private purchases 4,090,833

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shares deposited into system and sold thru brokerage accts 3,148,852 shares deposited but under lock up agreement 1,568,959

8,808,644

242. Appel specifically identifies the members of what he refers to as the “Bartlett/Appel

Group” who took part in amassing nearly nine million shares of LSI, including several of the

Defendants: Moggle Investors, Michael Garnick, FEQ Realty, Capital Investment Trust, and RMS

Advisors.

243. According to Appel’s calculations and the figures provided by Island Stock

Transfer to Cohen, as of February 10, 2012, Appel and Bartlett together had required at least 47%

of all freely tradable LSI shares – and over 14% of all outstanding LSI shares. These figures do

not take into account Kaye and Cohen’s holdings.

THE SECOND BOARD KNOWS THAT LSI IS BEING CONTROLLED BY THE APPEL/BARTLETT GROUP

244. Given Lugo’s investigation and reported findings to Gustin and Wohler, and the

emails and attachments uncovered by Greco and shared with her superiors, the Defendants had

more than compelling evidence of Appel’s exploitation of corporate assets, insider trading, and his

de facto control over the corporation no later than February of 2012. In short, the Second Board

knew that LSI was being held hostage by a convicted felon and his associates.

245. Despite this actual knowledge, however, Defendants took no steps to stop these

injurious and illegal practices. Defendants made no effort to break the chains and free LSI of the

Appel/Bartlett Group. And Defendants certainly did not inform shareholders and creditors that

the Appel/Bartlett Group was controlling LSI and manipulating its stock prices.

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246. The failure of Defendants to act timely and decisively to end these fraudulent

practices and run LSI like a publically traded corporation must be run, constitutes fraud, breach of

fiduciary duty, and squander of corporate assets.

THE SECOND BOARD PLAYS BOTH SIDES

247. Instead of inciting appropriate corporate action by Defendants, the Lugo

investigation and report led Wohler and Gustin, and possibly DeJoria, to play both sides. That is,

rather than either use this evidence of fraud against Cohen and Appel directly, or deciding to

debunk or refute this evidence, Wohler and Gustin decide to do both at the same time.

248. For example, regarding Appel’s getting paid some $350,000 by LSI through a

“consulting agreement” for bringing investors to LSI, Wohler explained in sworn testimony that

such payments to Appel for consulting work were “unjustified, as were most of the consulting

agreements. I mean I think the number exceeds 20, which is extraordinarily high number for a

pink sheet startup company to have outstanding. I mean these were consulting agreements to

people that never showed up, as in they didn’t do anything.” Wohler testified that Lugo’s

investigation supported this conclusion.

249. However, a document drafted by Lugo, and believed to have been edited and

circulated by Wohler, completely contradicts everything that Lugo had written to Gustin just three

days earlier:

Howard Appel Compensation

The compensation received by Howard Appel and his group was in my opinion justified and earned as a result of their efforts in assisting Latitude Solutions, Inc. in acquiring equity funding in the amount of $12,000,000. The compensation received was in the form of common stock and warrants issued to Mr. Appel and his group along with cash payments of approximately $350,000 which, in my opinion, were not excessive.

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Howard Appel’s expertise in the placement of large blocks of common stock being sold in the market place were very helpful in maintaining an orderly market for the company’s common stock being traded in the United States. Large blocks of common stock that certain shareholders wished to sell were negotiated and purchased by the Appel group. This purchase of stock and monies earned by them did not involve the company and therefore the compensation realized should not be addressed as it did not affect the financial statements of the company.

If any other detail is required, please contact me at your convenience.

Dated this 15 day of February, 2012

Jose Antonio Lugo

250. Lugo’s sudden change of heart came two days after the meeting between Appel and

the Second Board. This document and the sentiment it carries exemplifies how the Second Board

was playing both sides, leaving them the option to either use Appel to raise capital and pump the

stock, or turn on Appel and play the victim. The document also establishes that the Second Board

knew Appel had cornered the market and was, in Lugo’s words, “maintaining an orderly market

for the company’s common stock being traded in the United States” – i.e., Appel was manipulating

pricing and controlling the sale of LSI’s stock.

COHEN’S SEXUAL HARASSMENT

251. On or about February 5, 2012, a female secretary employed by LSI, Carly Singer

(“Singer”), openly accused Cohen, her superior, of sexual harassment, sexual assault, and sexual

battery. Ultimately, Singer would file a federal complaint against both LSI and Cohen seeking

compensable damages for this alleged sexual harassment, assault, and battery. On November 21,

2013, a professional arbitrator awarded compensatory damages against LSI in favor of Singer of

$550,000, and punitive damages against LSI and in favor of Singer of $100,000, resulting in a total

judgment, including attorneys’ fees and interest of $851,081.55.

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252. Consistent with Wohler’s contradictory dealings with LSI, although he considered

Cohen to be a “predator” and guilty of the sexual harassment charges leveled against him by

Singer, Wohler and the rest of the board of directors of LSI maintained Cohen’s CFO position at

LSI, maintained Cohen’s seat on the board of directors, and did not terminate his employment and

directorship until July 2012.

253. Indeed, rather than fire Cohen for cause immediately and force him to retain

separate counsel on his own nickel, defendants kept paying Cohen his regular salary, attempted to

negotiate a lucrative severance package for Cohen in the summer of 2012, and paid for the same

counsel to represent both Cohen and LSI regarding Singer’s sexual harassment suit. The terms of

this severance package were even negotiated with LSI by Howard Appel o/b/o Cohen.

254. Although the Second Board was very critical of Cohen’s activities when LSI filed

bankruptcy in November 2012, when Cohen was actively involved in insider trading, actively

assisting Appel manipulate the market, and actively assaulting LSI employees—all to the

detriment of LSI—Wohler, Gustin, and DeJoria actually helped Cohen continue his gross

malfeasance.

THE MARCH 14, 2012, FAX

255. In a draft fax letter dated March 14, 2012, from Wohler to DeJoria, Wohler recounts

prior events concerning the illegal acts of the Appel/Bartlett Group, infighting between the Second

Board and the Appel/Bartlett Group, and DeJoria’s knowledge of critical issues facing the

company – issues that the entire Board should have addressed immediately but instead ignored,

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focusing instead on attacking the Appel/Bartlett Group and continued squandering of corporate

assets.13

256. This letter is dated more than a month after Jose Lugo informed Wohler in writing

that he believed Appel had obtained more than 2.1 million shares of LSI through various entities

and had transferred these shares into a broker-dealer account, ostensibly so that the shares could

be traded on the open market – all clear indicia of a scheme to defraud LSI.

257. Most of the letter focuses up on an apparent disagreement between DeJoria on the

one hand and Wohler, Mike Gustin, and Ken Link on the other concerning the number of shares

to Wohler, Gustin and Link for their service on the Board. Wohler writes:

Regarding the spreadsheet listing share allocation to Mike, Ken and myself, we were insulted by your comment to both me and Mike that we attempted to “slip one in” and “attempted get one by you” and that what we did “was wrong.” I have heard you tell people on more than one occasion that Mike Gustin is one of the most honest people you know. During the character assignation [sic] time with LSI where Howard, Earnest, Ray Harlow and rest were discrediting Mike, you stood up and defended your partner of over 25 years with passion. So when you accused us to trying to slip one by you on our share allocation it was hurtful and uncalled for.

* * *

We were surprised when you brought it up and Harvey, Lynden and Matt immediately agreed to disregard the [board] resolution each of them had already approved. Talk about wishy-washy lack of backbone people. We were shocked not so much about your desire to offer us something other than that which they had approved but that they couldn’t wait to agree with you.

258. Wohler then attempts to justify his stock award by comparing it to what the

Appel/Bartlett Group received for securing DeJoria’s investment in LSI, proving that the entire

Second Board was well aware of, and indeed did not disapprove of, the outrageous, fraudulent

stock issuances and cash payments made by LSI to the Appel/Bartlett Group that Wohler knew

13 This letter contains handwritten edits believed to have been made by Wohler, Gustin and/or Link. The quotes to the letter contain these edits. Bold italics have been added for emphasis.

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had occurred. Wohler was not mad about the fact that the Appel/Bartlett Group had been given

millions of shares for bringing in investors – he was incensed that he, Gustin and Link we not

receiving the same favorable treatment:

We didn’t just pick numbers out of the sky. We arrived at the number of shares after careful consideration and evaluation of what Howard’s Group received for your investment of $8.8 million, knowing what we had done to save the company. In addition, we knew we were not going to take shares from the Company treasury. These shares were going to come from shares allocated by Harvey inappropriately. We had already clawed back 750,000 shares from Harvey and had asked Warren Blasland for 750,000 as well.

259. Even more, Wohler claims in his letter that everyone— the Appel/Bartlett Group,

the First Board, and the Second Board, including DeJoria, knew that the shares and cash that went

to the Appel/Bartlett Group should have gone to Gustin but that they (Wohler, Gustin and Link)

“did not fight it.” Instead, Wohler, Gustin and Link wanted the same reward:

We all know that your investment came as a direct result of Mike’s positive endorsement of the LSI technology; not Ernest or Howard's recommendation. LSI issued 880,000 shares plus $350,000 cash [to the Appel/Bartlett Group] for your investment which should have gone to Mike. Once we found out about this misallocation of shares, we didn't fight it. We did insist we would be compensated for any future funds from you or anyone else we brought to the table. In addition to Howard's group receiving those shares and cash, they also were issued another 1,575,000 shares for other money raised.

260. According to Wohler, the Appel/Bartlett Group received a grand total of 2,455,000

shares of LSI stock and $350,000 in cash for bringing DeJoria and other investors into LSI. All

of this was paid to the Appel/Bartlett Group pursuant to their “consulting” agreement with LSI’s

First Board.

261. However, Wohler does not stop here. He goes on to justify the shares he is asking

for and incriminates the First Board for dolling out shares to bogus consultants who performed no

actual services to LSI:

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We are not going to fight you on this issue but we would certainly feel a lot better about the twelve hour days, six to seven days a week, moving away from our families, and literally saving this company and your substantial investment from certain death if you would at least acknowledge that we are all honest hard working guys without an agenda to sneak around you and get shares that we are earning as opposed to most of the other 41 consulting agreements. Harvey Kaye handed out LSI shares like candy at Halloween, without any expectation of performance.

262. After attacking the First Board and the Appel/Bartlett Group for having fleeced

LSI, Wohler turns to the topic of Matt Cohen and characterizes Cohen’s service as CFO as

“criminal negligence.” Wohler also solidifies the level of control that Appel and Bartlett had over

LSI. In short, Appel and Bartlett wanted Cohen to stay with LSI despite Cohen’s deliberate

disregard for the best interests of LSI, to which he owed fiduciary duties.

You have indicated to Mike and I that you believe Matt should be removed as CFO and board member. Yesterday Matt told me that he was advised by Howard and Ernest that his position was firm with LSI. They told him that they had spoken with you and that you agreed. Could you please clarify for us what your position is on Matt. As additional information, LSI has already expended over twenty thousand dollars on legal, IT costs and staff time. We anticipate that number will exceed the $75,000 deductible stated in our insurance policy. Jabil has strongly indicated that they don't believe Matt is capable of moving the company forward from a financial standpoint. His negligence in never raising a flag about LSI's financial position is criminal. It is our collective opinion that Mr. Cohen can never stay on as CFO.

263. Of course, the reason the Appel/Bartlett Group wanted Cohen to stay on as CFO

was simple: Cohen was feeding Appel insider information so that the Appel/Bartlett Group could

manipulate stock prices and trading volume and continue their pump-and-dump at LSI’s expense.

And DeJoria, faced with the option of following Wohler's advice and firing Cohen and cutting

Appel and Bartlett out of LSI affairs, or following the desires of his friend, the "good guys" Appel

and Bartlett, DeJoria chose Appel, Bartlett, and Cohen.

264. Wohler concludes by pointing the finger directly at Kaye, accusing him of the “dire

condition” of LSI when the Second Board took over:

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The disruptive influence of people like Harvey Kaye cannot be allowed to continue. He needs to be removed from the board immediately. He is a prime target for us clawing back shares. Harvey currently owns over 4.8 million shares. Let us never forget that he is directly responsible for the dire condition of the company when we took over. Bear in mind he has absolutely refused to take ANY RESPONSIBILITY for the failure of this company. Instead he will tell anyone that LSI was “the best managed company in America.” That is a direct quote.

265. This last paragraph on Wohler’s letter is telling. The Second Board believed Kaye

was responsible for the dire condition of LSI. Given their knowledge of the Appel/Bartlett Group’s

influence over LSI, and the First Board in particular, the Second Board should have taken

immediate steps to sever all ties to the Appel/Bartlett Group and remove both Kaye and Cohen.

Keeping Kaye and Cohen on the Board, and allowing Cohen to continue to serve as CFO, defies

all reason in light of Wohler’s account. And given that Wohler characterizes LSI as being in a dire

condition as early as January of 2012, the Second Board should have taken measures to stop the

squandering of LSI’s assets. This did not happen. In fact, the Second Board continued to blow

LSI’s cash reserves on First-Class airfare, cross-country and international commutes, chauffeurs

and corporate cars, luxury water-front condos, and ill-advised business ventures.

THE KEYSTONE COPS CATCH, THEN EXCUSE, COHEN’S INSIDER TRADING

266. On May 7, 2012, roughly three months after the Second Board learned that Cohen

and Appel were engaging in insider trading, Wohler sent Cohen a memo in which he formally

accuses Cohen of leaking insider information to Appel and being his lackey, writing in part:

You habitually have passed on confidential information to Howard Appel and others. i.e. the Westwater deal where you secretly negotiated a potential deal with Mitch Burroughs and Howard to acquire an interest in the project without consulting the Executive Committee or the Board. Here again this was in direct conflict with the company's ongoing dialog with Mr. Burroughs. This interference with our business objectives to the benefit of third parties was inappropriate and outside the scope of your authority.

* * *

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You submitted financial information to Mr. Langdon without the Executive Committee/Board's prior approval. Additionally, you took direction and action on the instruction and advice of an individual who lacks the authority to act on behalf of the company (Howard Appel).

* * *

You ordered Martin to meet with Mr. Langdon take him on all sales calls and inspect the unit at Energen without authority to do so from the Executive Committee. You again were acting on the direction of Howard Appel who has no authority whatsoever to direct company activity or deployment of resources.

267. The very next day, May 8, 2012, Wohler sent an email to Appel which solidifies

Appel’s role in pumping LSI and further establishes Wohler’s self-serving plan to work both sides

in order to maximize his chances of making money without regard to LSI:14

Good results on our press release. One of the guys we met in Texas just bought 150,000 shares.

Work your magic Mr. Appel and bring me some money please!

268. Wohler did not care how Appel raised money, or whether what Appel was doing

was illegal (which he knew) as long as the money was coming in. Eighteen minutes later, Wohler

emails Appel again, and referring to the $150,000 Appel raised, writes:

Hell I don't care where it comes from just so it comes. Good work.

269. So, in the dysfunctional and incompetent world of LSI, one day Appel was persona

non-grata, and the very next day he was the “magician” who could pump illicit money to LSI

anytime he wanted.

14 Emphasis added.

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APPEL, BARTLETT, AND DEJORIA USE LSITO SUIT THEIR OWN INTERESTS

270. DeJoria, Appel, and Bartlett ran the show. Speaking to Wohler at the March 2,

2012, meeting of the Executive Committee, Appel (whose presence at such a meeting is strange

enough) candidly explained:

Ernest [Bartlett] and I are not on an Org. Chart but neither of us want to be there but in fact I believe we have a legitimate voice to raise because we have to deal with this shit every day. . . My agenda is the same as yours. I am the one who answers every day . . . you are CEO but me and JP [DeJoria] have all the money in this. This [finding a new CEO for LSI] is not a CEO responsibility. Ernest [Bartlett] and I all day long takes calls. I will respect what everyone says but JP [DeJoria] needs to tell me what we need to accomplish here. All due respect . . . if you are interim CEO it is irrelevant if you meet him.

Translation: DeJoria, Appel, and Bartlett will select LSI’s CEO and run this corporation as we see

fit; sit down and be quiet, Mr. Wohler.

271. Appel attended Executive Committee meetings of LSI. Appel negotiated severance

packages with exiting directors or executives of LSI, like Harlow and Cohen. Appel had input

regarding how best to handle the sexual harassment claim against Cohen and LSI. Appel asked to

recommend new CEOs for LSI. Although deliberately hidden from public view, Appel was the

de facto CEO and Chairman of LSI.

272. In an email dated March 20, 2012, COO Martin Donegani openly asked Wohler:

“Who are Bill [Miller] and Howard [Appel]? Can they control the BOD? Somebody needs to end

this, such a damned waste of time.” Of course, as was well know by this time to Defendants,

Appel, Bartlett, and DeJoria did in fact control the board of directors of LSI.

273. In an email dated August 14, 2012, Bill Rhea, who became LSI’s CEO after

Wohler’s resignation, writes that given “the voluminous number of emails to Appel et al disclosing

non-public information strongly suggest that Appel et al were operating the company remotely.”

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274. Outside counsel advising LSI at the time (August 2012) agreed that “Appel was

operating the company remotely. The emails I forwarded . . . support that Appel was calling the

shots. Harvey [Kaye] routinely forwarded emails and communicated about contracts, and other

developments to Howard [Appel].”

275. Even Wohler, when summarizing his history at LSI for outside counsel, wrote in

August 2012: “I didn’t realize the extent of control that Howard [Appel] had over the company

until we arrive on the scene in Boca Raton” in or around January 2012.

276. Convicted securities fraud felons who have been permanently barred from selling

securities or having anything to do with publically traded corporations like LSI, should not be

receiving “consulting” fees for bringing investors to the corporations—much less running a

publically traded corporation.

277. For Defendants to allow Appel and Bartlett to run LSI is fraud, a gross violation of

their fiduciary to LSI, and inexcusable conduct that warrants punitive damages.

WOHLER CLAIMS THAT DEJORIA MADE HIM DO IT

278. Although Wohler now claims that he wanted to get rid of Cohen and cut off ties to

Appel and Bartlett in as early as January 2012, if not sooner, when confronted with either serving

the best interests of LSI, its shareholders, and creditors or serving the wishes of DeJoria, Wohler

consistently chose to place DeJoria’s interests above those of LSI.

279. As Wohler essentially confessed in an email dated August 17, 2012:15

I am also more than concerned about backlash since we have been attempting to circle the wagons on Howard since day one but John Paul has thwarted us on every single occasion. To the point where he refused to acknowledge board minutes mentioning wrong doing of The Appel group. I tried to fire Matt Cohen for numerousdocumented issues with JP's authority and then Howard, Ernest would call him and

15 Emphasis added.

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he would force me to rescind the firing. I kid you not. Howard was even invited to a board meeting in Austin in May where John Paul wanted him to hear what was going on in the company. I was appalled but JP was paying the bills and refused to acknowledge the clear wrongdoing of all of these people. Virginia Dadey is another example of JP lack of belief of her clear violations of SEC rules of soliciting for commissions without a FINRA license. Jim Smith and I wrote this up and JP still wanted us to pay her an additional $167,000 in commissions because she has a handicapped child and she earned the commission. Ultimately he agreed to let her go without compensation but it was a very disruptive battle.

I could go on for days with the stories but the bottom line is that I know I will be a target for multiple lawsuits and other than shitty D & O coverage I am exposed. I doubt JP will want to cover my costs of defending myself and the time and energy required when he was the one who asked me to aid in taking over this pile of crap to begin with In order to protect his interest. Hell I have even deferred my compensation for the past two months to save money while I work every day managing this company. I am not the only one not being compensated. Bill Rhea, Mike Gustin, Ken Link are all deferring their fees.

Something is very wrong with this picture.

Although Wohler may have felt “forced,” “appalled,” and “thwarted,” by DeJoria’s conduct, in the

final analysis, he violated his fiduciary duties to LSI and allowed DeJoria to protect the

Appel/Bartlett Group at the direct expense of LSI and its creditors.

280. As outside counsel advised Wohler and others in August 2012 as LSI contemplated

bankruptcy:16

I remain VERY concerned about the Howard Appel issues. The stories about forgiveness of Appel’s past transgressions and that he is a changed man seems to reflect a widespread—if not pervasive—indifference to Appel’s involvement through various “proxies” in the daily operations of LSI. Appel’s modus operandi that has resulted in prior criminal and civil cases against him and the companies he was similarly involved with is virtually identical to what has occurred with LSI.

This outside counsel goes on to describe the many ways how the board of LSI will probably be

sued for their various violations of their fiduciary duties regarding their failure to act, “the

16 Emphasis in original.

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continuing misrepresentations,” the “collusion” with Appel’s fraud, and other potentially

actionable conduct.

281. Wohler’s duty of good faith, loyalty, and due care was owed to LSI—not DeJoria.

Unfortunately, Wohler served DeJoria—not LSI.

GROSS INCOMPETENCE, LACK OF INTERNAL CONTROLS, AND OVERSIGHT

282. The fiduciary duty that the Director and Officer Defendants owe to the corporation

they serve is well-settled. The Director and Officer Defendants owed LSI and its shareholders the

fiduciary obligations of good faith, loyalty, and due care.

283. Each Director and Officer Defendant owed to LSI and its shareholders the fiduciary

duty to exercise good faith and diligence in the administration of the affairs of the corporation. In

addition, the Director and Officer Defendants owed a duty to LSI and its shareholders to implement

adequate internal controls and procedures and to assure that the financial condition and business

prospects of the publically-traded corporation were reported truthfully and accurately. Further,

the Director and Officer Defendants owed a duty to ensure that the corporation complied with all

applicable state and federal laws, and that the corporation’s financial statements were prepared and

presented in accordance with GAAP.

284. Because LSI was insolvent at all relevant times, the Director and Officer

Defendants owed these fiduciary duties to the legitimate creditors of LSI as well.

285. Upon information and belief, at all relevant times, LSI utilized QuickBooks to

manage its financial affairs.

286. Also upon information and belief, LSI implemented no other financial software to

control its books and records.

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287. Upon information received and to the extent such efforts were undertaken at all,

LSI utilized manually-maintained spreadsheets to consolidate the financial performance of

numerous subsidiaries of LSI and their collective operations.

288. Also upon information and belief, at least defendant Cohen, if not others, had carte

blanche to edit LSI’s books, records, and financial reports, as CFO of LSI.

289. LSI did not maintain any “checks and balances” to ensure that the information

provided by Cohen and LSI to third parties was complete, fair and accurate.

290. In fact, in letter dated April 2012 from LSI’ outside accountants, Mallah Furman,

addressed to the board of directors and management of LSI, the director defendants were informed

in writing that these CPAs considered “certain matters involving internal control and its operation”

to have “significant deficiencies or material weaknesses” according to the Public Company

Oversight Board.

291. As is laid bare by the specific allegations made in this Complaint, the Director and

Officer Defendants had actual and/or constructive knowledge of liability-creating activities and/or

omissions of the corporation that should have been disclosed.

292. The Director and Officer Defendants had a duty, by proper diligence, to keep

informed of facts which the corporate books and records would have disclosed, and to assure that

any statements made to the public regarding LSI, through press releases, SEC filings, or otherwise,

are accurate and truthful, and do not contain any material misstatements of fact or material

omissions of fact.

293. The Director and Officer Defendants engaged in a sustained and systemic failure

to exercise oversight—such as an utter failure to attempt to assure that a reasonable information

and reporting system existed at LSI. The Director and Officer Defendants named herein utterly

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failed to implement a risk reporting or information systems or controls; or, in the alternative,

having implemented such a system of risk reporting, information systems or controls, the Director

Defendants named herein consciously failed to monitor or oversee its operations.

294. Additionally, upon information and belief, LSI was paying Appel, a convicted

securities fraud felon, illegal commissions in the form of cash and/or LSI stock, all in direct

violation of applicable law and SEC rules and regulations.

295. Additionally, upon information and belief, LSI was paying Bartlett, who was

previously reprimanded and sanctioned by the SEC, illegal commissions in the form of cash and/or

LSI stock, all in direct violation of applicable law and SEC rules and regulations.

296. Additionally, upon information and belief, LSI was paying Virginia Dadey, an

unlicensed broker and known, long-time associate of Appel and Bartlett, illegal commissions in

the form of cash and/or LSI stock, all in direct violation of applicable law and SEC rules and

regulations.

297. Defendants knew of these illicit practices and chose to disregard them by

knowingly participating in this scheme, or in the alternative, Defendants were grossly negligent

and derelict in their duty owed to LSI by not discovering and ending these egregious practices at

LSI.

298. Given the magnitude and duration of the Director and Officer Defendants’ alleged

wrongdoing, and their utter failure to implement any internal controls regarding corporate

mismanagement, including accurate financial reporting, this failure of the defendant directors to

act constitutes a lack of good faith.

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299. Given the nature of the self-dealing, insider trading, pattern of fraud, and alleged

breach of securities fraud laws alleged herein against the Director and Officer Defendants, this

failure to act constitutes a violation of their duty of loyalty.

300. The Director and Officer Defendants violated their fiduciary duties and abdicated

their oversight responsibilities that they owed to LSI. As a result, the corporation has been

subjected to the possibility of being a defendant in securities fraud lawsuits and is bankrupt. As a

further result, upon information and belief, LSI is the subject of a SEC investigation and possibly

other law enforcement investigations.

ACT THREE: THE GOOD COP

DIRECTOR AND CEO JERRY J. LANGDON BLOWS THE WHISTLE

301. Jerry J. Langdon (“Langdon”) is a respected business executive with more than

forty (40) years of experience in the energy industry. Prior to joining LSI, Langdon served as the

Chief Administrative and Compliance Officer of Energy Transfer Partners, a $10 Billion +

company specializing in the transportation of natural gas and related services.

302. In early May 2012, a retired CPA, colleague, and friend of Langdon, George

McDaniel (“McDaniel”), suggested that he meet with Robert Miller (“Miller”), a Goldman Sachs

investment advisor and associate of both Langdon and McDaniel, about a company called LSI.

Prior to this date, Langdon had never heard of, much less been involved with LSI. Upon

information and belief, Miller has been a long-time associate of Appel, Bartlett, and DeJoria.

303. On or about May 2, 2012, Langdon had dinner with McDaniel, Miller, and Appel

at a restaurant in Houston to talk about LSI. Prior to this date, Langdon did not know and had

never dealt with Appel in any way.

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304. After being told of LSI’s promising technology and DeJoria’s involvement with

LSI, Langdon expressed interest in the possibility of working with LSI in some capacity.

305. After this dinner, Langdon researched Appel and discovered some of his history of

securities fraud violations. Langdon initially was not interested in getting involved in a company

associated with Appel; however, when Appel called Langdon on or about May 4, 2012, to discuss

the possibility of Langdon being hired as the Chairman and CEO of LSI, Langdon warmed to the

possibility of joining LSI—subject to him doing sufficient due diligence. At the end of this

discussion, Appel called DeJoria on his cell phone and had him talk directly to Langdon about this

possibility.

306. From Langdon’s perspective, Appel and DeJoria were working closely together on

behalf of LSI to recruit him as Chairman and CEO.

307. Langdon next talked to Cohen who had forwarded him some of LSI’s financial

statements. Soon thereafter, Langdon spoke to Wohler who insisted that he sign a non-disclosure

agreement regarding the financials and told him to communicate only with him (Wohler) going

forward.

308. As part of his due diligence, Langdon eventually met with Mike Gustin and others

at LSI. Langdon travelled to both sites in Texas and Florida to see LSI’s water units in place: in

operation in Texas and in Jabil’s warehouse in Florida. In short, after conducting research,

communicating with LSI’s management team, meeting with Jabil executives, and making site

visits over the course of about two weeks, Langdon concluded that although LSI’s financial

situation was dire, with the commitment of DeJoria and new management in place, LSI’s

technology was commercially viable.

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309. On May 15, 2012, Langdon travelled from Boca Raton to Austin with DeJoria on

his private jet. Initially Langdon intended to decline joining LSI, but during the 2.5 hour flight,

DeJoria convinced Langdon that he was committed to do whatever it took to make LSI successful.

Based upon DeJoria’s personal commitment, Langdon agreed to join LSI as its Chairman and

CEO.

310. On May 21, 2012, Langdon was approved by the Board of Directors to be the new

Chairman and CEO of LSI.

311. Langdon was introduced to Bartlett for the first time on May 22, 2012, the day after

he joined LSI. From Langdon’s perspective, DeJoria, Bartlett, and Appel were all working closely

together in and with LSI; i.e., DeJoria, Bartlett, and Appel were running the corporation.

312. Although Langdon was told of some of the problems facing LSI before he accepted

his appointment to the board, he was not told about LSI’s practice of providing inside information

to outsiders like Appel on a regular basis.

313. Given his substantial experience and background as regulatory compliance officer,

unlike defendants, Langdon took these allegations of insider trading very seriously and engaged

outside counsel, the law firm of Akin and Gump, to investigate this matter further.

314. Langdon was not the only board member who wanted to do the right thing. In one

email at this time, director Bill Brennan, who was independent of the First Board and the Second

Board (and joined LSI in the spring of 2012) asked, “Where do we stand as far as Appel and all

affiliates and the complete disassociation with them so we can start clean and run the company

without any interference that have apparently had from an individual who is a convicted felon.”

This action should have obviously taken place long before then.

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315. When Langdon reported this outside investigation led by Akin Gump to DeJoria,

he became angry. DeJoria wanted “consultants”—presumably like Lugo—to conduct such an

internal investigation, not outside counsel. According to Langdon, at one point, DeJoria “asked

me why I just didn’t fire Wohler and Gustin and get on with fixing the company.”

316. For DeJoria to suggest to Langdon that he should fire his close business associates

of more than twenty-five (25) years, Wohler and Gustin, in the hope of preventing Langdon from

bringing outside attorneys into LSI to review its business practices, speaks volumes.

317. Concerned that an independent, reasonable, and objective attorney would probably

conclude that defendants were breaching their fiduciary duties to LSI, if not committing outright

securities fraud, defendants, including DeJoria, were not happy about Langdon’s investigation.

318. Ultimately, in late June 2012, Langdon met with Akin Gump attorneys, Wohler,

and others to discuss these various matters in Houston. According to Langdon, the “conclusion

following the more than 3.5 hour meeting was that there were clearly issues that needed to be

investigated and that there was likely disclosure issues that needed to be addressed and possibly

disclosed.”

319. After Langdon raised concerns about possible liability and reported this conclusion

to DeJoria, DeJoria confided in Langdon that he (DeJoria) “could not possibly be liable for

anything that he did not know about the Appel/Bartlett/Dadey group, and that he wanted us to

schedule a Board meeting the next day so he could resign as lead director.” Langdon did not share

DeJoria’s belief in his innocence or lack of responsibility. In fact, given the extensive

communications between DeJoria and the other defendants regarding the nature and extent of the

inside information being shared between Cohen and Appel, not to mention how poorly the

company was being managed and the wasteful practices of Wohler, Gustin, and Cohen, is it

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probable that DeJoria knew of Appel and Bartlett’s scheme, and embraced it. DeJoria certainly

did not do anything to stop it.

320. In fact, as Langdon was leaving LSI, DeJoria told him that he (DeJoria) would not

put any more money into LSI unless and until Appel did. Rather than satisfy the duty of good

faith, fair dealing, loyalty, and care that DeJoria owed to LSI, at the end, he opted to allow Appel,

the convicted felon, to decide whether LSI would receive any more capital or not.

321. If DeJoria, Wohler, and Gustin really wanted to distance LSI from Appel and

Bartlett, they would not be using them to recruit CEOs, raise money, spearhead business

opportunities, capitalize the enterprise, and, in effect, run the company.

322. Langdon formally resigned his position and directorship at LSI on June 28, 2012.

323. After his departure, Wohler asked Langdon if LSI could issue a press release

explaining that Langdon resigned to pursue philanthropic pursuits in conjunction with DeJoria’s

“Water the World” effort. Since this was not true, Langdon objected. On July 10, 2012, defendants

issued the materially false press release anyway. According to Langdon, this false press release

“confirmed the blatant disregard for the SEC rules, the truth, its investors, and my integrity.

Furthermore it confirmed that I made the right decision to resign.”

324. Nothing Langdon, the “Good Cop,” observed or experienced during his short, 39-

day tenure at LSI, convinced him that LSI’s technology was not commercially viable. According

to Langdon, “it was clear that the technology that LSI had in place wasn’t a complete solution. It

needed some tweaking and—but it was—it was clear to me that Jabil and others were working on

those tweaks and that eventually they would resolve it.”

325. The Bad Cops used and abused LSI through their pump-and-dump. The Keystone

Cops allowed the Bad Cops to maintain control over LSI and continue with business as usual. The

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Good Cop, seeing the potential of LSI's technology while simultaneously recognizing the

corruption and incompetence of its management, resigned when confronted with a leading director

and controlling shareholder, DeJoria, who told him one thing, but did another.

THE SECOND BOARD SETTLES ON PUTTING LSI INTO BANKRUPTCY

326. Faced with Langdon’s refusal to go along with the status quo, while staring at the

very real possibility that the First Board’s pump-and-dump and the Second Board’s complicity in

allowing Appel and Bartlett to continue the scheme under their watch would become public (i.e.,

that the SEC would become aware of the situation), Defendants chose to lower the curtain on LSI

by opting for bankruptcy. Instead of pushing Appel and Bartlett out of the front door, Defendants

acted in their own self-interest and tip-toed out the back.

327. Furthermore, Defendants chose to blame everything that went wrong at LSI on

Appel and Cohen, conveniently overlooking the very prominent role that they and Bartlett played

in killing the corporation.

THE SECOND BOARD HOPES TO COVER THEIR TRACKS

328. As DeJoria, Wohler, and Gustin were turning the proverbial lights out at LSI, and

as found in a written memorandum purportedly given to the Department of Justice and/or the SEC

at or around the time LSI filed bankruptcy, “Cohen has systematically provided material nonpublic

information to Appel. The emails also appear to demonstrate that Cohen considered Appel as his

boss. . . . The evidence may ultimately show that Cohen worked in concert with [sic] to artificially

inflate the value of LSI stock by appraising Appel when LSI stock would be coming to market and

ensuring that they were locked-up or sold in off the book deals prior to becoming available.”

Although LSI hoped to cast Cohen and Appel as the scapegoats for the gross mismanagement and

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plundering of LSI, as alleged in detail herein, DeJoria, Wohler, and Gustin knew of and actively

participated in Cohen and Appel’s scheme.

329. Furthermore, as specifically alleged by LSI at the time of its bankruptcy:

1. On or about May 8, 2012, James B. Smith, the current Chief Financial Officer of Latitude Solutions Inc., had a conversation with Cohen detailing Cohen’s purposeful delivery of nonpublic company reports to Howard Appel. In an affidavit prepared by Mr. Smith on May 11, 2012, Mr. Smith memorialized his conversation that included the following, “Matt then explained to me that he would deliver both reports on a weekly basis to Howard Appel for his review…”

2. Between April 2011 and June 2012, Cohen, the former Chief Financial Officer of Latitude Solutions Inc., sent numerous emails containing nonpublic reports to Appel. Attached under Exhibit B, are 38 emails that include 39 nonpublic reports sent to/received by Appel.

3. Between December 2011 and March 2012, Cohen, the former Chief Financial Officer of Latitude Solutions Inc., forwarded numerous emails from Island Stock transfer to Appel. These emails contained requests for removal of the restrictive legends from LSI certain stock certificates. Appel often responded by indicating the need to determine who controlled that investor and the need to “corral” them.

4. Between May 2011 and February 2012, Cohen the former Chief Financial Officer of Latitude Solutions Inc., forwarded, and even asked for Mr. Appel’s comments, on LSI press releases, in advance of their release to the public. Attached under Exhibit D are 3 examples of such occurrences.

5. Between June and December 2011, Cohen and Appel exchanged hundreds of e-mails. Certain emails may suggest an attempt to manipulate the Latitude Solution Inc. stock. Attached under Exhibit E are six examples of such emails.

(references to Exhibits A-E omitted).

330. At the time of its initial bankruptcy filing, LSI alleged that Cohen, from at least

April 2011 through June 2012, violated at least six (6) criminal / civil securities fraud violations:

18 U.S.C. §1348 (Sarbanes-Oxley Act of 2002)—Securities Fraud; 18 U.S.C. §1341 (Sarbanes-

Oxley Act of 2002)—Mail Fraud; 18 U.S.C §1343 (Sarbanes-Oxley Act of 2002)—Wire Fraud;

18 U.S.C. §1349(Sarbanes-Oxley Act of 2002)—Criminal Conspiracy; 18 U.S.C. §2—Aiding and

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Abetting; 17 C.F.R. §§243.100 et seq. (Regulation FED—Improper Disclosures; 18 U.S.C.

§1956—Money Laundering.

331. It has also been suggested that the Second Board opted for bankruptcy so that either

they and/or the Appel/Bartlett Group could acquire the LSI technology for themselves. The Vice

President of Sales and Marketing of LSI, Peter Letizia, has testified under oath that “I happen to

know from the owners of Natural Shrimp [one of LSI’s customers], they . . . actually signed draft

agreements under Water the World [not LSI] with millions of dollars in pro formas attached. So

again, my problem with this you, again, have a responsibility as officers of Latitude Solutions to

represent the property, intellectual property and clients in the best interest of the shareholders and

creditors, and instead, you’re trying to take the company bankrupt. Your intent is to take the

company bankrupt. Your intent is to go private, and then you are now using that intellectual

property . . . and you’re using that technology for your own contract and your own purposes while

you’re still representing LSI.” If Mr. Letizia’s allegations are accurate, such self-dealing is a gross

violation of a director’s duty of good faith and loyalty.

332. Although the Second Board initially contemplated seeking Chapter 11 bankruptcy

protection following Langdon’s resignation, the Second Board ultimately sought Chapter 7

protection when it filed herein on November 9, 2012. The decision to seek liquidation rather than

reorganization further suggests that the Second Board was trying to cover their tracks.

333. By highlighting Cohen and Appel’s fraud, DeJoria, Wohler, and Gustin hoped to

hide their complicity and excuse their culpability.

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CLAIMS FOR RELIEF

COUNT ONE:

Avoidance and Recovery of Fraudulent Transfers Under Sections 544(b) and 550 of the Bankruptcy Code and the Florida Uniform Fraudulent Transfer Act, F.S.A. § 726.101 et

seq., or, alternatively, the Nevada Uniform Fraudulent Transfer Act, Nev. Rev. Stat. Ann. § 112.140 et seq.

Against the Appel/Bartlett Group and Insider Defendants

(Appel, Bartlett, Kaye, Helen Klebanoff, Harlow, Cohen, Deborah Cohen, Dadey, Wohler, Gustin, DeJoria, and all of the “Appel and Bartlett Related Entities”)

334. Plaintiff repeats and realleges each and every allegation set forth in the foregoing

paragraphs as if fully set forth herein.

335. The Consultant Agreements, the Appel/Bartlett Group Transfers and the Insider

Transfers were made with and to Appel/Bartlett Group and the Insider Defendants with the actual

intent to hinder, delay and/or defraud LSI’s then present and future creditors insofar as the transfers

of cash, stock and warrants were illegal and part of the Appel/Bartlett Group’s scheme to rob LSI

of its cash and stock, control the flow of information and the movement of LSI’s stock, and

manipulate share prices in order to sell their LSI shares on the open market at significant gains.

336. Several factors listed in listed in Fla. Stat. Ann. § 726.105 support a finding that the

Consultant Agreements, the Appel/Bartlett Group Transfers and the Insider Transfers were made

with the actual intent to defraud LSI’s then present and future creditors, including the following:

a. Appel/Bartlett Group Transfers and the Insider Transfers were to Insiders.

b. The illegality of the Appel/Bartlett Group Transfers and the Insider

Transfers was concealed;

c. Before certain Appel/Bartlett Group Transfers and the Insider Transfers

were made, LSI had been sued or threatened with suit;

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d. LSI removed assets and property through the Appel/Bartlett Group

Transfers and the Insider Transfers; and

e. The Appel/Bartlett Group Transfers and the Insider Transfers occurred

shortly before or shortly after a substantial debt was incurred by LSI.

337. LSI did not receive reasonably equivalent value in exchange for entering into the

Consultant Agreements and making the Appel/Bartlett Group Transfers and Insider Transfers to

the Appel/Bartlett Group and the Insider Defendants. To the contrary, LSI was greatly damaged

by entering into the Consultant Agreements and making the Appel/Bartlett Group Transfers and

Insider Transfers. By knowingly and willingly entering into the Consultant Agreements with LSI,

accepting the Appel/Bartlett Group Transfers and Insider Transfers and re-selling their LSI shares

on the open market at massive gains, the Appel/Bartlett Group and the Insider Defendants helped

hold LSI hostage to a pump-and-dump and aided and abetting the First Board and the Second

Board in breaching their fiduciary duties to LSI, which caused LSI to sustain millions of dollars in

damages.

338. LSI did not receive reasonably equivalent value in exchange for the Appel/Bartlett

Group Transfers and Insider Transfers it made to the Appel/Bartlett Group and the Insider

Defendants.

339. Upon information and belief, the sum of LSI’s debts exceeded its assets at a fair

valuation at the time of the Appel/Bartlett Group Transfers and Insider Transfers it made to the

Appel/Bartlett Group and the Insider Defendants.

340. At the time of the Consultant Transfers, LSI was generally not paying its debts as

they became due.

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341. At the time of the Appel/Bartlett Group Transfers and Insider Transfers, LSI was

engaged or was about to engage in a business or a transaction for which the remaining assets of

LSI were unreasonably small in relation to the business or transaction.

342. At the time of the Appel/Bartlett Group Transfers and Insider Transfers, LSI

reasonably should have believed that it would incur debts beyond its ability to pay as they became

due.

343. Pursuant to 11 U.S.C. § 544(b), the Appel/Bartlett Group Transfers and Insider

Transfers described above are avoidable by LSI’s creditors holding claims allowable under 11

U.S.C. § 502.

344. Plaintiff seeks to recover the full value of the funds, assets, and LSI’s interest in the

assets comprising the Appel/Bartlett Group Transfers and the Insider Transfers from the

Appel/Bartlett Group, the Insider Defendants and all subsequent transferees who took any portion

of the funds, assets, and LSI’s interest in assets comprising the Appel/Bartlett Group Transfers and

the Insider Transfers not in good faith.

345. Attachment One, appended hereto and referenced as if copied here in extenso,

styled Fraudulent Transfers from LSI to the Appel/Bartlett Group and Insider Defendants,

identifies the Appel/Bartlett Group Transfers and the Insider Transfers, and estimates the

approximate, minimum value of these fraudulent transfers, the sum of which Plaintiff seeks to

recover as damages herein.

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COUNT TWO:

Avoidance and Recovery of the Fraudulent Transfers Under Sections 548(a)(1)(A) and (B) and 550(a) of the Bankruptcy Code

Against the Appel/Bartlett Group and Insider Defendants

(Appel, Bartlett, Kaye, Helen Klebanoff, Harlow, Cohen, Deborah Cohen, Dadey, Wohler, Gustin, DeJoria, and all of the “Appel and Bartlett Related Entities”)

346. Plaintiff repeats and realleges each and every allegation set forth in the foregoing

paragraphs as if fully set forth herein.

347. Certain Appel/Bartlett Group Transfers and the Insider Transfers occurred within

two years prior to the Petition Date (Two-Year Appel/Bartlett Group Transfers and Insider

Transfers).

348. The Two-Year Appel/Bartlett Group Transfers and Insider Transfers were made to

the Appel/Bartlett Group and the Insider Defendants with the actual intent to hinder, delay and/or

defraud LSI’s then present and future creditors insofar as the transfers of cash, stock and warrants

were illegal and part of the Appel/Bartlett Group’s scheme to rob LSI of its cash and stock, control

the flow of information and the movement of LSI’s stock, and manipulate share prices in order to

sell their LSI shares on the open market at significant gains.

349. Several traditional “badges of fraud” support a finding that the Two-Year

Appel/Bartlett Group Transfers and Insider Transfers were made with the actual intent to defraud

LSI’s then present and future creditors, including the following:

a. The Two-Year Appel/Bartlett Group Transfers and Insider Transfers were

to Insiders.

b. The illegality of the Two-Year Appel/Bartlett Group Transfers and Insider

Transfers was concealed;

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c. Before certain Two-Year Appel/Bartlett Group Transfers and Insider

Transfers were made, LSI had been sued or threatened with suit;

d. LSI removed assets and property through the Two-Year Appel/Bartlett

Group Transfers and Insider Transfers; and

e. The Two-Year Appel/Bartlett Group Transfers and Insider Transfers

occurred shortly before or shortly after a substantial debt was incurred by

LSI.

350. LSI did not receive reasonably equivalent value in exchange for entering into the

Consultant Agreements and making the Two-Year Appel/Bartlett Group Transfers and Insider

Transfers to the Appel/Bartlett Group and the Insider Defendants. To the contrary, LSI was greatly

damaged by entering into the Consultant Agreements and making the Two-Year Appel/Bartlett

Group Transfers and Insider Transfers. By knowingly and willingly entering into the Consultant

Agreements with LSI, accepting the Two-Year Appel/Bartlett Group Transfers and Insider

Transfers and re-selling their LSI shares on the open market at massive gains, the Appel/Bartlett

Group and the Insider Defendants helped hold LSI hostage to a pump-and-dump and aided and

abetting the First Board and the Second Board in breaching their fiduciary duties to LSI, which

caused LSI to sustain millions of dollars in damages.

351. LSI did not receive reasonably equivalent value in exchange for the Two-Year

Appel/Bartlett Group Transfers and Insider Transfers it made to the Appel/Bartlett Group and the

Insider Defendants.

352. Upon information and belief, the sum of LSI’s debts exceeded its assets at a fair

valuation at the time of the Two-Year Appel/Bartlett Group Transfers and Insider Transfers it

made to the Appel/Bartlett Group and the Insider Defendants.

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353. At the time of the Consultant Transfers, LSI was generally not paying its debts as

they became due.

354. At the time of the Two-Year Appel/Bartlett Group Transfers and Insider Transfers,

LSI was engaged or was about to engage in a business or a transaction for which the remaining

assets of LSI were unreasonably small in relation to the business or transaction.

355. At the time of the Two-Year Appel/Bartlett Group Transfers and Insider Transfers,

LSI reasonably should have believed that it would incur debts beyond its ability to pay as they

became due.

356. Plaintiff seeks to recover the full value of the funds, assets, and LSI’s interest in the

assets comprising the Two-Year Appel/Bartlett Group Transfers and the Insider Transfers from

the Appel/Bartlett Group, the Insider Defendants and all subsequent transferees who took any

portion of the funds, assets, and LSI’s interest in assets comprising the Two-Year Appel/Bartlett

Group Transfers and the Insider Transfers not in good faith.

357. Attachment One, appended hereto and referenced as if copied here in extenso,

styled Fraudulent Transfers from LSI to the Appel/Bartlett Group and Insider Defendants,

identifies the Appel/Bartlett Group Transfers and the Insider Transfers, and estimates the

approximate, minimum value of these fraudulent transfers, the sum of which Plaintiff seeks to

recover as damages herein.

COUNT THREE:

Breach of Fiduciary Duty Against the Director and Officer Defendants

(Cohen, Kaye, Harlow, Wohler, Gustin, and DeJoria)

358. Plaintiff repeats and realleges each and every allegation set forth in the foregoing

paragraphs as if fully set forth herein.

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359. The Director and Officer Defendants owed LSI, its shareholders, and its creditors

fiduciary duties of loyalty, including the exercise of oversight as pled herein, due care, and the

duty to act in good faith and in the best interests of LSI.

360. Because LSI was insolvent at all relevant times, the Director and Officer

Defendants owed these fiduciary duties to the legitimate creditors of LSI as well.

361. The Director and Officer Defendants breached their fiduciary obligations in the

following, non-exclusive, ways:

a. They caused and/or allowed LSI to misrepresent the financial condition and business prospects of the corporation, and they failed to correct LSI’s publicly-reported financial results and guidance;

b. They knowingly permitted Appel and Bartlett to control and manage LSI without regard to the best interests of the corporation;

c. They knowing abused or allowed abuse of positions in the corporation for their own personal gain and to the detriment of LSI, its creditors, and its shareholders, and engaged in continuous self-dealing;

d. They failed to fulfill their fiduciary obligation to manage LSI with the best interests of the corporation in mind;

e. They knowingly paid illegal commissions to non-licensed brokers for selling securities;

f. They knowingly paid excessive salaries, professional service fees, and consulting fees, as alleged herein, without receiving appropriate value to the corporation;

g. They failed to implement or cause to be implemented internal controls that would have prevented the wrongdoing alleged with particularity herein;

h. They committed corporate waste by paying or allowing to be paid excessive compensation to themselves and using the corporation’s assets to support their own unnecessary expenses, while at the same time exposing the corporation to millions of dollars in liabilities and costs;

362. The Director and Officer Defendants allowed their fellow officers and directors to

exercise unsupervised and unrestrained authority over the corporation.

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363. The Director and Officer Defendants failed to exercise any oversight over the

corporation’s financial affairs.

364. The Director and Officer Defendants, in breaching both their duty of loyalty and

duty of care, showed a conscious disregard for the best interests of the corporation.

365. As a direct and proximate result of the foregoing failures of the Director and Officer

Defendants to perform their fiduciary obligations, the Debtor, its shareholders, and its creditors

have sustained substantial, compensable and punitive damages for which the Director and Officer

Defendants are liable.

366. The compensable damages proximately caused by the Director and Officer

Defendants’ conduct include, but are not limited to, damages in the form of lost profits, damages

in an amount reasonably calculated to pay defrauded investors who have claims against the Debtor

as a result of Defendants’ conduct (potentially as much as $40 million or more), the return or

restitution of all sums fraudulently transferred to any of the Defendants or entities related to them,

disgorgement of all profits, benefits and other compensation obtained by Defendants, punitive

damages, damages for deepening insolvency (in the alternative), and all costs and disbursements

of this action, including reasonable attorneys’ fees, accountants’ and experts’ fees, costs, and

expenses incurred by the Debtor herein.

COUNT FOUR:

Aiding and Abetting Breach of Fiduciary Duty Against All Defendants

(Appel, Bartlett, Kaye, Helen Klebanoff, Harlow, Cohen, Deborah Cohen, Dadey, Wohler, Gustin, DeJoria, all of the “Appel and Bartlett Related Entities,” and Island Capital

Management, LLC)

367. Plaintiff repeats and realleges each and every allegation set forth in the foregoing

paragraphs as if fully set forth herein.

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368. As set forth more fully above, the Director and Officer Defendants breached their

fiduciary duties owed to LSI, it shareholders, and its creditors.

369. At all relevant times, each of the Defendants were knowing participants in, and

gave substantial assistance or encouragement to, the breach of fiduciary duties and gross

mismanagement perpetrated by the Director and Officer Defendants that permeated the day-to-day

management of LSI, all as set forth herein.

370. Each of the Defendants knowingly assisted, actively participated in, and/or failed

to perform his/her/its obligation to monitor against and prevent, inter alia: (i) the gross

mismanagement of the corporation; (ii) the improper diversion of funds out of the corporation; (iii)

the failure to pay the corporation’s proper creditors; (iv) the publication of materially false

information regarding LSI and its affairs to the investing public, LSI shareholders and potential

shareholders, and actual and potential creditors of LSI; (v) the failure to disclose the involvement

in LSI of Appel and Bartlett and/or the extent of such involvement; (vi) the payment of illegal

commissions; and (vii) the failure to disclose the full amount of the corporation’s obligations.

371. As a direct and proximate result of the foregoing conduct, the Debtor, its

shareholders, and its creditors have sustained substantial, compensable and punitive damages for

which the Defendants are liable.

372. The compensable damages proximately caused by the Defendants’ conduct include,

but are not limited to, damages in the form of lost profits, damages in an amount reasonably

calculated to pay defrauded investors who have claims against the Debtor as a result of Defendants’

conduct (potentially as much as $40 million or more), the return or restitution of all sums

fraudulently transferred to any of the Defendants or entities related to them, disgorgement of all

profits, benefits and other compensation obtained by Defendants, punitive damages, damages for

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deepening insolvency (in the alternative), and all costs and disbursements of this action, including

reasonable attorneys’ fees, accountants’ and experts’ fees, costs, and expenses incurred by the

Debtor herein.

COUNT FIVE:

Fraud Against Defendants All Defendants

(Appel, Bartlett, Kaye, Helen Klebanoff, Harlow, Cohen, Deborah Cohen, Dadey, Wohler, Gustin, DeJoria, all of the “Appel and Bartlett Related Entities,” and Island Capital

Management, LLC)

373. Plaintiff repeats and realleges each and every allegation set forth in the foregoing

paragraphs as if fully set forth herein.

374. Defendants defrauded LSI, its shareholders, and creditors by utilizing a seemingly

unending series of misrepresentations and lies to make the publically traded corporation appear

more financially sound and commercially viable than it was. In reality, the market price of LSI’s

shares were consistently manipulated by Defendants.

375. Defendants intended that LSI’s creditors and investors rely upon their

misrepresentations in conducting business with LSI.

376. LSI, its shareholders, and its creditors relied upon the misrepresentations made by

Defendants in continuing to conduct business with, and extend credit to, LSI.

377. LSI and its creditors suffered compensable damages as a direct and proximate result

of Defendants’ scheme to defraud LSI, its shareholders, and its creditors, and manipulate the

market.

378. The compensable damages proximately caused by the Defendants’ conduct include,

but are not limited to, damages in the form of lost profits, damages in an amount reasonably

calculated to pay defrauded investors who have claims against the Debtor as a result of Defendants’

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conduct (potentially as much as $40 million or more), the return or restitution of all sums

fraudulently transferred to any of the Defendants or entities related to them, disgorgement of all

profits, benefits and other compensation obtained by Defendants, punitive damages, damages for

deepening insolvency (in the alternative), and all costs and disbursements of this action, including

reasonable attorneys’ fees, accountants’ and experts’ fees, costs, and expenses incurred by the

Debtor herein.

COUNT SIX:

Conspiracy to Commit Fraud Against All Defendants

(Appel, Bartlett, Kaye, Helen Klebanoff, Harlow, Cohen, Deborah Cohen, Dadey, Wohler, Gustin, DeJoria, all of the “Appel and Bartlett Related Entities,” and Island Capital

Management, LLC)

379. As described herein, the Defendants conspired with one another to commit an

intentional or willful act to deceive, mislead, fraudulently induce, and cause damage to LSI, its

shareholders, and its creditors. Defendants agreed to defraud Plaintiffs and did in fact execute

their agreement to deceive, mislead, and damage LSI, its shareholders, and its creditors.

380. Defendants' conspiracy caused LSI, its shareholders, and its creditors to sustain

compensable damages; furthermore, as co-conspirators, Defendants are jointly and severally liable

unto Plaintiff for the entirety of all recoverable damages.

381. The compensable damages proximately caused by the Defendants’ conduct include,

but are not limited to, damages in the form of lost profits, damages in an amount reasonably

calculated to pay defrauded investors who have claims against the Debtor as a result of Defendants’

conduct (potentially as much as $40 million or more), the return or restitution of all sums

fraudulently transferred to any of the Defendants or entities related to them, disgorgement of all

profits, benefits and other compensation obtained by Defendants, punitive damages, damages for

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deepening insolvency (in the alternative), and all costs and disbursements of this action, including

reasonable attorneys’ fees, accountants’ and experts’ fees, costs, and expenses incurred by the

Debtor herein.

COUNT SEVEN:

Aiding and Abetting Fraud Against All Defendants

(Appel, Bartlett, Kaye, Helen Klebanoff, Harlow, Cohen, Deborah Cohen, Dadey, Wohler, Gustin, DeJoria, all of the “Appel and Bartlett Related Entities,” and Island Capital

Management, LLC)

382. Plaintiff repeats and realleges each and every allegation set forth in the foregoing

paragraphs as if fully set forth herein.

383. As set forth above, Defendants defrauded and conspired to defraud LSI, its

shareholders, and its creditors by utilizing a seemingly unending series of misrepresentations and

lies to make the publically traded corporation appear more financially sound and commercially

viable than it was. In reality, the market price of LSI’s shares were consistently manipulated by

Defendants.

384. Although Plaintiff alleges that all Defendants were active, knowing participants in

this fraudulent scheme and conspiracy, to the extent that any Defendant lacked sufficient

knowledge of this fraudulent scheme to be held liable for either fraud or conspiracy to commit

fraud, it is hereby alleged, in the alternative, that any such Defendant substantially assisted in this

pattern of fraud, and is therefore liable unto Plaintiff for aiding and abetting fraud.

385. LSI and its creditors suffered compensable damages as a direct and proximate result

of Defendants’ aiding and abetting the fraud committed against LSI, its shareholders, and its

creditors, to manipulate the market.

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386. The compensable damages proximately caused by the Defendants’ conduct include,

but are not limited to, damages in the form of lost profits, damages in an amount reasonably

calculated to pay defrauded investors who have claims against the Debtor as a result of Defendants’

conduct (potentially as much as $40 million or more), the return or restitution of all sums

fraudulently transferred to any of the Defendants or entities related to them, disgorgement of all

profits, benefits and other compensation obtained by Defendants, punitive damages, damages for

deepening insolvency (in the alternative), and all costs and disbursements of this action, including

reasonable attorneys’ fees, accountants’ and experts’ fees, costs, and expenses incurred by the

Debtor herein.

COUNT EIGHT:

Punitive Damages and Attorneys’ Fee Claim Against All Defendants

(Appel, Bartlett, Kaye, Helen Klebanoff, Harlow, Cohen, Deborah Cohen, Dadey, Wohler, Gustin, DeJoria, all of the “Appel and Bartlett Related Entities,” and Island Capital

Management, LLC)

387. Plaintiff repeats and realleges each and every allegation set forth in the foregoing

paragraphs as if fully set forth herein.

388. Defendants’ intentional or grossly negligent conduct described herein is so

egregious that it warrants the imposition of an award of punitive damages pursuant to applicable

law, either according to Florida Statute § 768.72. et seq.; Nevada Revised Statute § 42.001, et seq.;

and/or Texas Civ. Prac. & Rem. Code Ann. § 41.003, et seq.

389. Plaintiff alleges that, upon a showing of clear and convincing evidence, Defendants

had actual knowledge of the wrongfulness of their conduct and the high probability that damage

to LSI, its shareholders, and its creditors would result and, despite that knowledge, intentionally

pursued that course of conduct, resulting in said damage.

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390. Plaintiff alleges that, upon a showing of clear and convincing evidence,

Defendants’ conduct was so reckless or wanting in care that it constituted a conscious disregard or

indifference to the rights of LSI, its shareholders, and its creditors, all whom were exposed to such

conduct, and were damages by the same.

391. Plaintiff alleges that, upon a showing of clear and convincing evidence, Defendants

have been guilty of oppression, fraud or malice, express or implied, directed at LSI, its

shareholders, and its creditors, all whom were exposed to such conduct, and were damages by the

same.

392. Plaintiff alleges that, upon a showing of clear and convincing evidence, the

damages sought by LSI, its shareholder, and its creditors herein, were caused by Defendants’ fraud,

malice, and/or gross negligence.

393. Plaintiff is entitled to, and hereby demands, an award for all of plaintiff’s reasonable

attorneys’ fees incurred in bringing this action against Defendants, whether based upon an

applicable contract, statute, law, or as a matter of equity.

394. Plaintiff demands and prays for all punitive damages that are reasonable and just

against all Defendants under the facts pled herein.

JURY DEMAND

395. Plaintiff demands a trial by jury.

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PRAYER FOR RELIEF

WHEREFORE, Plaintiff prays for relief and judgment, as follows:

a. Against the Defendants, jointly and severally, and in favor of Plaintiff for the amount of all actual, compensable, and equitable damages sustained by Plaintiff and prayed for herein, because of the Defendants’ breaches of fiduciary duties, fraud, self-dealing, abuse of control, gross mismanagement, waste of corporate assets, including lost profits, attorneys’ fees, accounting fees, investigation expenses and other costs and expenses incurred in connection with the LSI’s restatement, any SEC investigation and any securities class action lawsuits;

b. Awarding damages for deepening insolvency resulting from Defendants’ breaches of fiduciary duties, fraud, self-dealing, abuse of control, gross mismanagement, waste of corporate assets, including attorneys’ fees, accounting fees, investigation expenses and other costs and expenses incurred in connection with the LSI’s restatement;

c. Awarding Plaintiff an amount reasonably calculated to pay defrauded investors who have claims against the debtor of potentially as much as $40 million or more. The cutoff date for filing claims has not yet been set. The Debtor has been damaged because it would not have incurred these obligations but for the actionable conduct of the Defendants described herein;

d. Avoiding any fraudulent transfers made by LSI to the Defendants and any subsequent transferees not in good faith and recovering any such transferred property for the benefit of these estates and their proper creditors;

e. Awarding extraordinary equitable and/or injunctive relief as permitted by law, equity and state statutory provisions sued hereunder, including attaching, impounding, imposing a constructive trust on or otherwise restricting the proceeds of the Defendants’ trading activities or their other assets so as to ensure that Plaintiff has an effective remedy;

f. Awarding to LSI restitution from the Defendants, and ordering disgorgement of all profits, benefits and other compensation obtained by these Defendants;

g. Awarding to LSI costs and disbursements of the action, including reasonable attorneys’ fees, accountants’ and experts’ fees, costs, and expenses;

h. Awarding punitive damages and all other just and appropriate relief related to the misconduct—including fraud and misrepresentation—set forth in this Complaint;

i. Granting such other and further relief as the Court deems just and proper.

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Filed on: February 13, 2015.

Respectfully submitted,

/s/ J. E. Cullens, Jr.__________________________________________J. E. Cullens, Jr. (admitted pro hac vice) WALTERS, PAPILLION, THOMAS, CULLENS, LLC12345 Perkins Road, Building One Baton Rouge, LA 70810 (225) 236-3636 [email protected]

/s/ Patrick N. Broyles__________________________________________Patrick N, Broyles (admitted pro hac vice) BROYLES LAW FIRM LLC 12345 Perkins Road Building Two, Suite 203 Baton Rouge, LA 70810 (225) 663-2223 [email protected]

/s/ John C. Anderson __________________________________________John C. Anderson (admitted pro hac vice) ANDERSON LAW FIRMPost Office Box 82982 Baton Rouge, LA 70884 (225) 252-1645 [email protected]

/s/ Robin E. Phelan __________________________________________Robin E. PhelanHAYES BOONE, LLC2323 Victory Avenue, Suite 700 Dallas, TX 75219 (214) 651-4512 [email protected]

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CERTIFICATE OF SERVICE

I hereby certify that a copy of the foregoing FIRST AMENDED AND RESTATED

ADVERSARY COMPLAINT was served on all counsel of record herein via the Court’s electronic

notification system on this 13th day of February, 2015.

/s/ J. E. Cullens, Jr. __________________________________________ J. E. Cullens, Jr.

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DEFENDANT CASH CASH TRANSFER DATES SHARES SHARE TRANSFERDATES

MINIMUM EST. ACTUALSHARE VALUE AT

ISSUANCE

EST. VALUE OF ALL ISSUESSHARES

WARANTS WARRANTTRANSFER DATE

FEQ Realty, LLC $150,000.00 8/10/2011 50,000 3/22/2011 $3.00 $150,000.00 1,440,000 6/10/2011

$200,000.00 10/18/2011 666,666 4/25/2011 $1.45 $966,665.70100,000 6/10/2011 $1.94 $194,000.00170,000 8/4/2011 $3.34 $567,800.0050,000 8/25/2011 $3.50 $175,000.00120,000 1/19/2012 $1.47 $176,400.00

Howard Miller Appel $100,000.00 3/4/2011 To be determined

Capital Growth Realty, Inc. 250,000 6/10/2011 $1.94 $485,000.00 To be determined

Harvey Kaye $120,000.00 2012 (est.) 2,023,960 7/31/2009 $3.90 $7,893,444.00 To be determined

$277,380.60 2011 (income) 750,000 6/16/2011 $1.97 $1,477,500.00$5,000.00 2011 (misc income)

$1,000.00 2011 (misc income)

$183,789.00 2010 (income)

$159,782.00 2009 (income)

$5,000.00 1/29/09

Attachment One: Fraudulent Transfers from LSI to Appel/Bartlett Group and Insider Defendants

$7,638.82 2/24/09

$4,323.78 7/17/09

$1,396.51 9/16/09

$1,055.91 12/21/09

$3,480.51 12/21/09

$80.00 3/9/10

$5,240.03 8/27/10

$5,240.03 10/13/10

$7,500.00 11/23/10

$2,500.00 12/28/10

$25,000.00 3/3/11

$700.00 3/14/11

$1,065.28 3/28/11

$30,000.00 4/4/11

$18,438.34 4/5/11

$750.00 4/6/11

$750.00 5/9/11

$67.80 5/9/11

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DEFENDANT CASH CASH TRANSFER DATES SHARES SHARE TRANSFERDATES

MINIMUM EST. ACTUALSHARE VALUE AT

ISSUANCE

EST. VALUE OF ALL ISSUESSHARES

WARANTS WARRANTTRANSFER DATE

$750.00 6/7/11

$750.00 7/15/11

Helen Klebanoff 2,023,960 7/31/2009 $3.90 $7,893,444.00 To be determined

Matt Cohen 6/21/2011 750,000 $1.99 $81,022.85 To be determined

$225,642.94 2011 (income) 6/6/2012 10,000 $1.26 $51,743.16$11,000.00 2011 (misc income)

$98,328.64 2012 (income)

$13,593.76 2012 (misc income)

$193,724.00 2010 (income)

$146,000.00 2009 (income)

$25,000.00 5/2/12

$3,000.00 11/4/08

$5,000.00 11/19/08

$5,000.00 12/8/08

$3,000.00 12/22/08

$5,000.00 1/16/09

$6,000.00 1/28/09

$2,500.00 2/4/09

$3,500.00 2/13/09$3,500.00 2/13/09

$500.00 2/13/09

$2,500.00 3/6/09

$5,000.00 3/12/09

$4,500.00 3/27/09

$500.00 3/27/09

$500.00 4/7/09

$5,500.00 4/13/09

$3,000.00 5/18/09

$300.00 6/4/09

$2,500.00 6/15/09

$2,250.00 7/20/09

$2,500.00 9/7/10

$7,500.00 11/22/10

$2,500.00 12/23/10

$10,000.00 2/4/11

$5,000.00 2/25/11

$700.00 3/8/11

$7,796.14 4/1/11

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DEFENDANT CASH CASH TRANSFER DATES SHARES SHARE TRANSFERDATES

MINIMUM EST. ACTUALSHARE VALUE AT

ISSUANCE

EST. VALUE OF ALL ISSUESSHARES

WARANTS WARRANTTRANSFER DATE

$750.00 4/6/11

$750.00 5/9/11

$750.00 6/7/11

$750.00 7/15/11

Hawk Management Group 1,283,333 7/31/2009 $3.90 $5,004,998.70 To be determined

Vernon Ray Harlow $123,750.00 2011 wages 195,229 4/25/2012 $1.18 $230,370.22 To be determined

$4,687.50 2012 wages

$432.68 2012 unknown

$21,197.66 2011 bonus

$25,000.00 2011 misc

$3,750.00 2012 misc

$4,717.50 7/15/11

$15,000.00 5/1/12

$15,000.00 5/2/12

$15,000.00 5/30/12

$15,000.00 6/29/12

$6,250.00 2/2/11

$6,250.00 2/15/11

$6,250.00 2/28/11$6,250.00 2/28/11

$6,250.00 3/15/11

$20,000.00 3/30/11

DIT Equity Holdings, LLC 600,000 06/08/11 $1.94 $1,164,000.00 To be determined

100,000 06/08/11 $1.94 $194,000.00310,500 6/8/2011 $1.94 $602,370.0075,000 7/26/2011 $3.20 $240,000.0050,000 8/25/2011 $3.50 $175,000.00666,666 4/25/2011 $1.15 $766,665.90

RMS Advisors, Inc. 103,500 08/25/11 $3.50 $362,250.00 To be determined

100,000 03/22/11 $3.00 $300,000.00100,000 06/10/11 $1.94 $194,000.00

KWL Exploration $31,549.30 4/20/11 to 11/14/11 To be determined

TSS Investment, Inc. 500,000 4/25/2011 $1.15 $575,000.00 To be determined

Page 3 of 4

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DEFENDANT CASH CASH TRANSFER DATES SHARES SHARE TRANSFERDATES

MINIMUM EST. ACTUALSHARE VALUE AT

ISSUANCE

EST. VALUE OF ALL ISSUESSHARES

WARANTS WARRANTTRANSFER DATE

DeRose Family Trust D/T/D 11/18/86 220,000 6/10/2011 $1.94 $426,800.00 To be determined

William Belzberg Revocable Living Trust 760,000 3/22/2010 $3.90 $2,964,000.00 To be determined

100,000 6/10/2011 $1.94 $194,000.00

Wiltomo Redemption Foundation 250,000 6/10/2011 $1.94 $485,000.00 To be determined

Virginia Dadey $39,000.00 2011 wages To be determined

$12,347.14 2011 expenses

$39,612.25 2012 wages

$3,250.00 2012 severance

$19,627.58 2012 expenses

$5,687.50 2012 misc

100,000 3/22/2011 $3.00 $300,000.00

50,000 9/6/2011 $3.73 $186,500.00

Michael Garnick 340,000 6/10/2011 $340,000.00 To be determined

500,000 4/25/2011 $500,000.00

Jeffery Wohler To be determined To be determined To be determined

Michael Gustin To be determined To be determined To be determined

John Paul DeJoria To be determined To be determined To be determined

Total $2,570,623.20 $35,316,974.53

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Randy Burton State Bar No. 03479050 [email protected] Trent L. Rosenthal State Bar No. 17282300 [email protected] Landon Speights State Bar No. 24063014 [email protected] Burleson LLP 700 Milam Street, Suite 1100 Houston, Texas 77002 (713) 358-1700 Counsel for Defendants Jeffery Wohler, Michael Gustin, and John Paul DeJoria

UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF TEXAS FORT WORTH DIVISION

In re:

LATITUDE SOLUTIONS, INC.

Debtor

Chapter 11 Case No.: 12-46295-rfn-11

LATITUDE SOLUTIONS, INC. Plaintiff,

v. HOWARD APPEL, ERNEST A. BARTLETT, III, MATTHEW J. COHEN, RMS ADVISORS, INC., CAPITAL GROWTH REALTY, INC., CAPITAL GROWTH INVESTMENT TRUST, DIT EQUITY HOLDINGS, KWL EXPLORATION AND DEVELOPMENT, INC., VIRGINIA DADEY, BELLCREST ADVISORS, LLC, DEBORAH COHEN, HAWK MANAGEMENT GROUP, INC., FEQ REALTY, LLC, HARVEY KLEBANOFF AJKJA HARVEY KAYE, HELEN KLEBANOFF, MOGGLE, LLC, ISLAND CAPITAL MANAGEMENT, LLC, TSS INVESTMENTS, INC., VERNON RAY HARLOW, JEFFERY WOHLER, MICHAEL GUSTIN, WILTOMO REDEMPTION FOUNDATION, SLD CAPITAL CORP., DeROSA FAMILY TRUST, WILLIAM

Adversary No. 14-04107-rfn

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BELZBERG REVOCABLE LIVING TRUST, MICHAEL GARNICK, and JOHN PAUL DeJORIA,

Defendants.

DEMAND FOR JURY TRIAL

TO: THE HONORABLE UNITED STATES DISTRICT COURT

Defendants MICHAEL GUSTIN, JEFFERY WOHLER, and JOHN PAUL DEJORIA

(collectively, the “Movants”), by and through their counsel, Burleson LLP, file their Demand for

Jury Trial, and in support thereof, state:

1. Movants hereby demand a jury trial on all issues on which they are entitled to a

jury trial under the U.S. Constitution.

2. The Movants expressly do not consent to the Bankruptcy Court’s exercise of

subject matter jurisdiction or the entry of final judgments or orders in this Adversary Proceeding

and expressly state that the Claims against them are non-core and are unrelated to and not arising

under a case under Title 11 of the United States Code. Movants are entitled to a jury trial on

these claims as a matter of constitutional right under the Seventh amendment to the U.S.

Constitution and applicable law. Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S. Ct.

2782, 106 L. Ed. 2d 26, 18 Fed. R. Serv. 3d 435 (1989).

3. Movants note that the Trustee has also requested a jury trial, and, the Trustee is

aware that the Bankruptcy Court cannot conduct a jury trial without consent of all the parties.

Movants expressly do not consent to allow the Bankruptcy Court to conduct a jury trial.

Case 4:15-cv-00225-O Document 1-1 Filed 03/24/15 Page 170 of 171 PageID 176

Respectfully submitted, /s/ Randy Burton Randy Burton State Bar No. 03479050 [email protected] Trent L. Rosenthal State Bar No. 17282300 [email protected] Landon Speights State Bar No. 24063014 [email protected] Burleson LLP 700 Milam Street, Suite 1100 Houston, Texas 77002 (713) 358-1700 Counsel for Defendants Jeffery Wohler, Michael Gustin, and John Paul DeJoria

CERTIFICATE OF SERVICE

The undersigned, an attorney, hereby certifies that the above and foregoing motion was

served on counsel for Plaintiffs on this 23rd day of March, 2015, by either the Court’s ecf system

or United States Mail, first class, postage prepaid.

/s/ Randy Burton Randy Burton

Case 4:15-cv-00225-O Document 1-1 Filed 03/24/15 Page 171 of 171 PageID 177