United States District Court, S.D. Florida
OPINION AND ORDER
M. MIDDLEBROOKS, UNITED STATES DISTRICT JUDGE
at trial the allegations of a complaint fall far short of
their promise. It happened here. The accusations of fraud,
misrepresentation, and violations of generally accepted
accounting principles (GAAP) made against three individual
officers of a bankrupt technology start-up turned out to be
post-hoc rationalizations for a bad loan. The lender knew the
risks of the loans and its own actions and internal documents
disprove its claims.
an action for fraudulent misrepresentation, negligent
misrepresentation, and civil conspiracy brought by Plaintiff
Hercules Capital, Inc. ("Hercules") against
Defendants Daniel Gittleman ("Gittleman"), David
Barclay ("Barclay"), and Howard A. Kwon
("Kwon") (collectively, "Defendants").
Hercules alleges that Defendants, individually and as
employees of non-party OpenPeak, a software company,
conspired to intentionally or negligently make false
misrepresentations to Hercules, a venture debt lender, as to
the financial state of OpenPeak and the viability of its
products between January and October 2014. Hercules alleges
that it relied on these material misrepresentations in
deciding to take certain actions with regard to its loan to
OpenPeak. On November 13, 15-17, and 27-29, and December 1, 1
held a bench trial. Based on the documentary and testimonial
evidence presented, I make the following findings of fact and
conclusions of law.
FINDINGS OF FACT
Hercules Capital. Inc.. A Venture Debt
Hercules Capital, Inc. ("Hercules") is a citizen of
Maryland and California, a business development company
("BDC"), and self-described "venture debt
lender" that specializes in loans to high-growth,
innovative venture-backed companies in the technology and
life-science industries. (Henriquez Testimony).
Henriquez ("Henriquez") is the Chairman and Chief
Executive Officer ("CEO") of Hercules. (Henriquez
Testimony). Scott Bluestein ("Bluestein") was the
Chief Credit Officer ("CCO") and became the Chief
Investment Officer ("CIO") of Hercules during the
period relevant to this matter. (Bluestein Testimony). April
Young ("Young") was the Managing Director for
Hercules' Mid-Atlantic Practice, and was responsible for
identifying and initially reviewing investment opportunities,
including with OpenPeak. (Young Testimony). Mark Roesler
("Roesler") was a Portfolio Credit Manager at
Hercules from October 2013 through June or July of 2016.
(Roesler Testimony). Mr. Roesler worked on the OpenPeak
account from 2013 through 2015. (Id.). John Eggbeer
("Eggbeer") was a Principal at Hercules, where he
has worked from October 2011 to the present. Mr. Eggbeer
worked to source, evaluate, structure, and close venture debt
opportunities, and he worked on the OpenPeak account between
2014 and 2016. (Eggbeer Testimony).
primarily lends money to "development-stage
companies" that are not generating revenue and are
"burning cash" by consuming working capital as they
try to increase sales. (Henriquez Testimony; Young
Testimony). When Hercules decides to invest in a
development-stage company, the company is generally 3-5 years
away from generating any meaningful revenue, and 4-7 years
from generating any meaningful Earnings Before Interest,
Taxes, Depreciation, and Amortization ("EBITDA").
(Henriquez Testimony). The typical company that Hercules
invests in has been in existence for 2-3 years, and has gone
through approximately 2 rounds of capital equity fundraising.
(Id.). A borrower's historical revenue figures
or projected revenues are not Hercules' focus in deciding
whether to make a loan or in how Hercules calculates a
borrower's value. (Henriquez Testimony; Young Testimony).
In order to account for differences in risk among borrowers,
Hercules adjusts interest rates and the fee structure of the
loan. (Henriquez Testimony). Interest payments and fees are
the biggest sources of Hercules' income. (Id.).
When everything goes well, Hercules' business is
lucrative; the loans in this case had interest rates of 12%
and the fees were quite high. (Id.; Tr. Exs. 5, 6,
primary thing that Hercules considers when deciding whether
to make a loan is the company's enterprise value, which
is what the company is projected to be worth over time and
what the company could be sold for in the future. (Young
Testimony). Hercules prioritizes a company's enterprise
value because that is how Hercules gets repaid on its loan.
(Id.). For repayment, Hercules relies on its
borrowers acquiring subsequent infusions of equity or junior
debt, or the occurrence of an "exit event, "
meaning an acquisition by another company or a public
offering. (Id; Bluestein Testimony). The vast
majority of companies that Hercules invests in are refinanced
or acquired. (Young Testimony).
making or restructuring a loan, Hercules relies on the
information included in a "New Deal Request
Memorandum" ("New Deal Memo"), an internal
Hercules document prepared by the "Deal Team" and
"Credit Team" at Hercules for review by the
"Investment Committee." (Henriquez Testimony;
Bluestein Testimony). The Investment Committee decides to
approve or deny a loan based on the information contained in
the New Deal Memo. (Henriquez Testimony; Bluestein
Testimony). In drafting the New Deal Memo, Hercules conducts
due diligence and relies on factual information provided by
the borrower. (Bluestein Testimony; Eggbeer Testimony;
Henriquez Testimony). Hercules considers information from
interviews and representations of management, historical and
projected financial information, key investors and partners,
and the composition of the borrower's Board of Directors.
(Bluestein Testimony; Eggbeer Testimony; Henriquez
Testimony). New Deal Memos outline the terms of the proposed
loan, give a "background and situation overview" of
the company and its financial situation, analyze the
potential returns for Hercules, discuss factors in support
and risks of the loan, and detail key income statement
drivers. (See Trial Exhibit 168) (hereinafter,
"Tr. Ex."). The memos contain historical and
projected financial information provided by the prospective
borrower, including the balance sheet and cash flows, which
Hercules calls the "Management Case." (See
Tr. Exs. 168, 180; Young Testimony).
also calculates its own projections for the financial
performance of the borrower, called the "HTGC
Case." (See Tr. Exs. 168, 180; Young
Testimony). The HTGC Case is based on the borrower's
financial history and projections, but Hercules
"sensitizes" the financial projections to show what
the financials of the company would be given
"ordinary-course delays." (Eggbeer Testimony).
Hercules changes certain assumptions underlying the
Management Case and attempts to take into account the
borrower's financial track record, ability to accurately
project future revenue and growth, the borrower's
customers, types of revenue, and factors outside of the
company's control. (Eggbeer Testimony). Hercules also
considers what will likely happen to the borrower based on
its experience with development-stage companies. (Bluestein
OpenPeak, the borrower
is a now-bankrupt software company. Defendant Daniel J.
Gittleman, a citizen of Florida, was the Chairman and CEO of
OpenPeak during all times relevant to this dispute.
(Gittleman Testimony). Defendant Howard A. Kwon, a citizen of
Florida, was Vice President and General Counsel of OpenPeak
during all times relevant to this dispute. (Kwon Testimony).
Defendant David Barclay, a citizen of Washington, was an
Executive Vice President of OpenPeak, and led OpenPeak's
finance department beginning in 2013, but did not hold the
title of CFO. (Pretrial Stip. at 7).
individuals who held roles in OpenPeak's finance
department testified at trial. Glen Farmer
("Farmer") was OpenPeak's Finance Director from
July 2014 through August 2015. (Farmer Testimony). Mr.
Barclay was Mr. Farmer's supervisor. (Id.). Mr.
Farmer was involved in preparing the financial statements for
OpenPeak and in discussions about how to recognize revenue
pursuant to OpenPeak's agreements. (Id.). Steven
Richards ("Richards") was the Vice President of
Corporate Development and Finance at OpenPeak and worked
there from July 2011 through May 2014. (Richards Testimony).
Mr. Richards supervised Brian Hronsky and Trish Pikus, and he
reported to Mr. Barclay. Mr. Richards did operational finance
at OpenPeak, including managing the books and building
financial forecast models. (Id.). Brian Hronsky
("Hronsky") was a Controller in the Finance and
Accounting Department at OpenPeak from January through June,
2014. (Hronsky Testimony). Mr. Hronsky is a CPA (Certified
Public Accountant) and was supervised by Mr. Richards.
OpenPeak officers involved in the technical operations of
OpenPeak's software also testified at trial. Lloyd
Silvern ("Silvern") worked at OpenPeak from
February 2010 until approximately November 2015, and during
the relevant time period he was responsible for monitoring
the Toggle license provisioning process with AT&T.
(Silvern Testimony). Andy Aiello ("Aiello") was the
Chief Operations Officer ("COO") of OpenPeak, and
was employed by OpenPeak from 2005 through 2016. (Aiello
Testimony). Mr. Aiello was responsible for driving the
engineering of OpenPeak's software products, including
the software architecture and building, code reviews, and
quality testing. (Id.). He supervised OpenPeak's
software engineers and reported to Mr. Gittleman.
Hercules' Initial Loan to OpenPeak: 2012 MLSA- the Cisco
March 30, 2012, OpenPeak entered into a $15 million secured
credit facility with Hercules through a Master Loan and
Security Agreement (the "2012 MLSA") with a
maturity date of June 30, 2015. (Tr. Ex. 1). The 2012 Senior
Term Debt was collateralized by all the assets of OpenPeak,
excluding OpenPeak's intellectual property assets but
including any proceeds from the sale of any intellectual
property assets. (Pretrial Stip. at 5-6).
the 2012 MLSA, OpenPeak covenanted, represented and warranted
to Hercules (collectively, the "Warranties") that:
No event has had or would reasonably be expected to have a
Material Adverse Effect has occurred and is continuing ....
No information, report, or Advance Request, [or] financial
statement. . . furnished by or on behalf of Borrower to
Lender. . . contained or contains any material misstatement
of fact or omitted or omits to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading at
the time such statement was made or deemed made.
Additionally, any and all financial or business projections
provided by Borrower to Lender were prepared in good faith
based upon assumptions to be reasonable at the time ....
[U]naudited interim and year-to-date financial statements as
of the end of such month[, quarter, and year] . . . have been
prepared in accordance with GAAP ....
(Tr. Ex. 1 at 13, 16-17). OpenPeak was also required to
provide Hercules with monthly, quarterly, and annual
"Compliance Certificates" signed by OpenPeak's
CEO or CFO certifying that OpenPeak's accompanying
financial statements complied with the Warranties, including
that they were prepared in accordance with Generally Accepted
Accounting Principles (GAAP). (Tr. Ex. 1 at 16-17; Young
Testimony). "Advance Request" Forms submitted by
OpenPeak to Hercules to obtain funds pursuant to the loan
agreement also reaffirmed the Warranties. (Pretrial Stip. at
6). Upon receipt of monthly, quarterly, and annual financial
statements, Hercules inputted the financial information into
its own system, PMR, to monitor and track the financial
condition of all of its portfolio companies, including
OpenPeak. (Roesler Testimony).
entered into the 2012 MLSA with OpenPeak in large part due to
OpenPeak's strong relationship with Cisco Systems
("Cisco") and development of the CIUS Tablet for
Cisco. (Young Testimony; Tr. Ex. 168 at 1). However, within
six weeks of loaning the $15 million to OpenPeak, Cisco ended
the relationship and cancelled the CIUS Tablet. (Young
Testimony; Tr. Ex. 168 at 1). Ms. Young testified that as a
result of Cisco's decision to "end-of-life" the
CIUS tablet, "the company that [Hercules] had invested
in initially was really no longer the company that we had
invested in." (Young Testimony). Hercules' other
motivations for entering into the 2012 MLSA included Mr.
Gittleman's prior business success and the strength of
OpenPeak's Board of Directors, which included former
Apple CEO John Scully, and other prominent businessmen Mort
Topfer and Tom Hill. (Eggbeer Testimony; Bluestein
Testimony). Hercules does not contend or allege that there
was any wrongdoing in connection with the 2012 MLSA.
OpenPeak's Business Changes
March 2012, OpenPeak's business was to develop and sell
end-to-end telecommunications and data services for
hardware-based systems. (Pretrial Stip. at 5). After the
cancellation of the Cisco tablet, OpenPeak shifted its focus
to Advanced Device Application Management ("ADAM")
software for mobile telecommunications devices. ADAM
incorporated multiple software components that allowed
companies to securely permit employees to use their own
mobile devices in the workplace. (Pretrial Stip. at 5). This
was called "Bring Your Own Device"
("BYOD") software. (Gittleman Testimony). The ADAM
software had three components, including (1) applications
that ran on an end-user's mobile device, like an email
application, (2) security software for the applications on
the mobile device, and (3) a server that had an
administrative console and device interface. (Aiello
Testimony). Using OpenPeak's software, an individual, or
"end user, " would be able to use their own mobile
phone to download an OpenPeak-created mail application
through which they could securely send and receive their
work-related email. (Id.). OpenPeak was a
"white-label" company in that it did not sell its
products under its own brand name, but customized its product
to its customers' brand and to fit its customers'
needs. (Barclay Testimony; Tr. Ex. 26 at 14). OpenPeak's
major customers included RIM ("Blackberry") and
AT&T. (Tr. Exs. 25, 168, 180).
OpenPeak's Master Resale Agreement with AT&T
April 3, 2012, OpenPeak entered into a Master Resale
Agreement ("2012 MRA") with AT&T for an ADAM
product that AT&T referred to as "Toggle."
(Pretrial Stip. at 5; Tr. Ex. 13). Pursuant to the 2012 MRA
and subsequent agreements between AT&T and OpenPeak,
AT&T would buy permissions or "licenses" from
OpenPeak to use the Toggle software. (Aiello Testimony).
AT&T distributed some of the Toggle licenses internally,
but would primarily sell or otherwise distribute the Toggle
licenses to its enterprise customers. (Id.).
Enterprise customers were typically large companies to which
AT&T provided other services. (Id.). When
AT&T sold Toggle licenses to an enterprise customer,
AT&T would make a request for those licenses to be
provisioned to that enterprise customer through the Toggle
server. (Id.). The Toggle server processed Toggle
license provisioning requests to AT&T's enterprise
customers. (Id.). If the process worked as intended,
AT&T's order would automatically be sent to the
Toggle server, which would then automatically process the
request and ensure that the enterprise customer's
administrator had access to the newly provisioned licenses.
(Id.). In this scenario, OpenPeak played no role in
provisioning the licenses. (Id.).
Toggle server was unable to understand the AT&T order for
licenses, OpenPeak would work with AT&T to manually input
the order into the Toggle server. (Id.). The Toggle
software that accepted orders and provisioned licenses was
located, at different times, on AT&T's cloud-based
offering, Silver Lining, or on Amazon's servers.
(Id.). Once the enterprise customer had access to
the provisioned Toggle licenses, the enterprise
customer's administrator could determine exactly which
employees, or end users, at the enterprise customer would
receive an invitation to use the license. (Id.).
OpenPeak did not have any control over which employees or
"end users" got the Toggle license or whether the
end user chose to activate the Toggle license.
(Id.). An end user who received a Toggle license
would then be able to use Toggle applications on their own
mobile devices, downloaded from App Stores on Apple, Android,
or Blackberry. (Id.).
software products, including ADAM, were subject to rigorous
internal testing, including by AT&T. (Id.). At
one point, AT&T sent Accenture to OpenPeak to assess the
rigorousness of OpenPeak's software testing. Accenture
rated OpenPeak's testing as a 3.5 on a scale between 1
(worst) to 5 (best), which means that OpenPeak had a
reliable, repeatable testing process. (Id.). A
rating of 2 or 2.5 would be good for a start-up company
similar to OpenPeak. (Aiello Testimony). In addition,
AT&T did scalability tests of OpenPeak's software at
regular intervals, with three or four rounds of scalability
testing over a few years. (Id.). Mr. Aiello was not
aware of any scalability concerns among AT&T's
enterprise customers using the Toggle product.
(Id.). OpenPeak's software consistently passed
all of AT&T's scalability tests. (Id.).
The 2012 MLSA Restructuring
Q3 2013, Hercules rated OpenPeak a "3" on its scale
for monitoring the credit risks of its loans to borrowers.
(Tr. Ex. 161 at 1). The scale assigned a value between 1 and
5 to the credit risk of a borrower, with 5 being the riskiest
credit. (Roesler Testimony). A credit rating of "3"
meant that OpenPeak was a "watch-rated credit."
(Tr. Ex. 161 at 1; Roesler Testimony). The rating also meant
that Hercules projected OpenPeak would either need to raise
capital or have a liquidity event within three to six months
for the company to survive. (Roesler Testimony). Hercules
monitored companies with a credit rating of 3 or higher more
closely than it did its other portfolio companies with better
credit ratings. (Id.).
November 2013, AT&T invested $15 million dollars in
OpenPeak. (Gittleman Testimony). As of December 31, 2013,
OpenPeak had approximately $10.8 million in cash and
receivables. (Pretrial Stip. at 6). At that time, the
outstanding balance due to Hercules on the 2012 Senior Term
Debt was approximately $9.3 million, not including a $1, 125
million end-of-term fee. (Id.).
OpenPeak's Interest in Restructuring
beginning of 2014, OpenPeak sought to restructure 2012 MLSA
to gain additional capital from Hercules, extend the
interest-only payment period, and extend the maturity date on
the loan. (Bluestein Testimony). It is not uncommon for
Hercules to work with a borrowing company to amend, modify,
or restructure a loan to give the borrower an opportunity to
advance of the potential restructuring, Mr. Barclay updated
Ms. Young and Mr. Eggbeer at Hercules on the status of
OpenPeak's products, its relationship with AT&T,
actual financial statements for Q4 2013, and financial
projections for 2014. (See Tr. Exs. 25-27). On
January 13, 2014, Mr. Barclay stated in an email to Hercules
that OpenPeak's "major partners have now completed
their full launch of the products in late  ¶
4." (Tr. Ex. 25; Pretrial Stip. at 7). On or before
January 20, 2014, Mr. Barclay asked for and received
projections from AT&T as to AT&T's forecasted
license sales for Toggle in 2014. (Barclay Testimony; Tr. Ex.
283). In an email sent to Mr. Barclay, AT&T projected
Toggle license sales of 50, 500 in Ql 2014, 221, 000 in Q2
2014, 293, 500 in Q3 2014, and 297, 500 in Q4 2014, for a
total of 850, 000 projected Toggle license sales in 2014.
(Tr. Ex. 283).
January 22, 2014, Mr. Barclay sent Ms. Young and Mr. Eggbeer
an email, attaching a spreadsheet with OpenPeak's revenue
forecast for 2014. (Tr. Ex. 26). The spreadsheet represented
OpenPeak's projected financial metrics, including license
sales and revenue derived therefrom. (Pretrial Stip. at 7-8;
Tr. Ex. 26). Mr. Barclay relied on AT&T's projected
license sales for 2014 in formulating the financial
projections that he sent to Hercules. (Barclay Testimony; Tr.
Ex. 283, 26 at 3). OpenPeak's financial projections
forecasted that OpenPeak would sell AT&T 861, 467 Toggle
licenses by the end of 2014. (Tr. Ex. 26 at 3; Barclay
Testimony). The January 22 email also attached a PowerPoint
presentation which stated that the "AT&T internal
sales quota" is "860, 000 licenses in 2014."
(Tr. Ex. 26 at 15). The PowerPoint also represents that
Toggle "[l]aunched in Q4 2014" at AT&T, and
that "AT&T has already rolled [Toggle] out to over
40k of 100k targeted internal users." (Id.).
relied on these sales and financial projections in evaluating
whether to restructure the 2012 MLS A by including them in
its "Management Case" section of the March 2014 New
Deal Request Memo ("March 2014 NDRM"). (Eggbeer
Testimony; Bluestein Testimony; Tr. Ex. 168; Tr. Ex. 26 at
2-6). These financial statements directly tied OpenPeak's
forecast revenue from AT&T Toggle sales to its projected
number of Toggle license sales to AT&T. (Pretrial Stip.
January zy, zuih, ivir. oarciay emanea ivir. tggoeer ana ms.
Young witn a lew more slides" that OpenPeak had been
working on. (Tr. Ex. 27 at 1). The attached PowerPoint
presentation includes a slide that reiterated OpenPeak's
earlier representation that AT&T's Toggle license
sales quota was 860, 000 licenses for 2014. (Tr. Ex. 27 at
20). The slides also represented to Hercules that beginning
February 6th, AT&T would offer Toggle to its customers
for free pursuant to AT&T's "Golden Ticket"
program. (Tr. Ex. 27 at 19; Eggbeer Testimony). The Golden
Ticket method was an AT&T promotion whereby AT&T
subsidized Toggle and gave it to customers at no cost in
order to promote the sale of other AT&T services.
(Gittleman Testimony; Young Testimony). By selling licenses
to its enterprise customers, AT&T sought to tighten its
relationship with those enterprise customers by providing
them with a new service. (Gittleman Testimony; Young
Testimony; Eggbeer Testimony).
February 11, 2014, Mr. Gittleman and Mr. Barclay met with
Hercules' CEO Manuel Henriquez, CIO Scott Bluestein, John
Eggbeer, and April Young at Hercules' office in Palo
Alto, California to discuss a potential restructuring of the
2012 MLSA. (Pretrial Stip. at 8; Tr. Ex. 28, 29). The next
day, Mr. Henriquez entered his notes from the meeting into a
Hercules database. (Tr. Ex. 29 at 3-4). Mr. Henriquez
recounted that Mr. Gittleman and Mr. Barclay "outline[d]
their request for Hercules to consider extending both a new
interest only period as well as re-upsize additional capital
to the company." (Id. at 3). Mr. Henriquez also
wrote that the "AT&T annual sale quote for new
sub[scriptions] ¶ 864, 000 at $50/sub which equates to
an annual forecast of approximately $43 million in revenues.
As incredible as that sounds, this company has yet to deliver
on its many prior sales forecasts." (Id.). Mr.
Henriquez did not rely on Mr. Barclay and Mr. Gittleman's
representations and required the Deal Team at Hercules to
verify the statements. (Henriquez Testimony). Mr. Henriquez
described AT&T's expected sales ramp up of Toggle
licenses to 864, 000 licenses, which closely tracks the
projections that AT&T provided to OpenPeak (Tr. Ex. 283;
Barclay Testimony), and the resulting increase in
OpenPeak's projected revenue. (Tr. Ex. 29 at 3; Henriquez
Testimony; Eggbeer Testimony). Mr. Henriquez noted that Mr.
Barclay and Mr. Gittleman expressed interest in a new credit
facility from Hercules that included interest-only payment
periods and new capital, and that he replied that he would be
happy to consider it if OpenPeak demonstrated
"traction" with their product. (Tr. Ex. 29 at 4).
Mr. Henriquez also stated his belief that despite Mr. Barclay
and Mr. Gittleman's rosy projections, (1) OpenPeak would
run out of cash by late April or early May, (2)
OpenPeak's uncertain outlook depends on gradual increases
in license sales, and (3) "the next 60 days are critical
for the company." (Id.).
on February 12, 2014, Mr. Bluestein proposed a deal structure
that would require injecting a small amount of additional
capital in OpenPeak, but would enable OpenPeak to refinance
all its existing obligations under the 2012 MLS A (including
the back-end fee), extend OpenPeak's repayment terms,
lower its monthly loan payments, and give it the opportunity
for interest-only payment periods. (Tr. Ex. 29 at 3;
Bluestein Testimony). This proposal provided the general
structure of the March 24, 2014 loan restructuring
("2014 ARMLSA"). (Tr. Ex. 5; Bluestein Testimony;
see Tr. Ex. 168).
Hercules' Motivations to Restructure
same time that Mr. Gittleman and Mr. Barclay were inquiring
about restructuring the 2012 MLS A, Hercules was evaluating
its borrowers as loan restructuring candidates so that it
could generate fee income to raise earnings for its Ql 2014
financial statements. (Henriquez Testimony; Tr. Exs. 166,
February 14, 2014, Mr. Henriquez sent an email to Mr.
Gittleman following up on OpenPeak's request for a new
loan, and stating that he has "a strong incentive to
make this offer BUT it must close before March 15th,
thereafter less interested." (Tr. Ex. 72). Two days
later, Mr. Henriquez sent an email to senior members of
Hercules with the subject line: "time to harvest some
earnings for Ql 2014 - guys no reason to hide behind the
facts, we are in deep crap for Ql 2014 earnings given our new
originations and fundings so far in Ql 2014." Mr.
Henriquez goes on to mention OpenPeak as a "Major
restructuring potential candidate." (Tr. Ex. 166). In
the same email, Mr. Henriquez stated that he is "looking
for a minimum of $2 to $3 million in fee or interest income
by the end of March." Mr. Henriquez continued,
"Guys, we can't miss earnings i [sic] need all hands
on deck to ensure that we are not going to miss earnings. It
will kill what we have all worked so hard to build. Dig
through your portfolios, scrub every deal, turn over every
rock. ... So honestly, i [sic] need everyone's help. We
need earnings, find some pennies for me please."
March 4, 2014, Mr. Henriquez followed-up on his request for
major restructuring candidates when he sent an email to Mr.
Bluestein and other members of Hercules' senior
management with the subject line: "Any updates on the
major restructuring or material modifications." In the
body of the email, Mr. Henriquez asked "Where are we on
. . . Open peak [sic]" and continued "Please send
an update and the potential dollars being generated by the
restructure." (Tr. Ex. 167 at 5). Jessica Barron,
Hercules' Chief Financial Officer, responded to the email
and included a chart that listed the amount of income that
would be generated from each restructuring deal or material
modification, along with the corresponding increase on a per
share earnings basis. (Id. at 4). OpenPeak was
listed on the chart. (Id.). The chart stated that a
projected OpenPeak restructuring would generate $396, 119 in
income for Hercules, amounting to an earnings increase of $0,
007 per share. (Id. at 4).
March 2014 New Deal Request Memo
light of both OpenPeak's and Hercules' desire to
restructure the 2012 MLSA, Hercules began its internal
process for approving the loan restructuring. On March 10,
2014, Hercules and OpenPeak, through Mr. Kwon, signed a Term
Sheet that outlined the essential terms of the restructuring
agreement. (Tr. Ex. 4). On March 11, 2014, Mr. Bluestein sent
an email to the Hercules Investment Committee, copying other
members of the OpenPeak Deal Team at Hercules and attaching
the New Deal Memo to restructure the 2012 MLS A ("March
2014 NDRM"). (Tr. Ex. 168). In the email, Mr. Bluestein
wrote that the March 2014 NDRM reflects "an effort to
get a restructuring / new debt facility in place that makes
sense for the Company while at the same time protects and
compensates [Hercules] appropriately. ... [I] am obviously
supportive of this proposal." (Tr. Ex. 168 at 1).
Bluestein outlined a proposal whereby Hercules would commit a
new $15 million loan to OpenPeak, divided into two tranches.
(Tr. Ex. 168 at 1). In the First Tranche, due upon signing,
Hercules would loan OpenPeak $10.5 million that included (1)
satisfying all remaining principle and interest due and the
$1, 125 million back-end fee of the 2012 MLS A, (2) a $200,
000 "new facility fee" to Hercules for the new
loan, and (3) approximately $518, 000 in new capital
investment. (Id.). The restructured loan would be
repaid on a new 36-month term, and contained a financial
covenant whereby OpenPeak was required to raise at least $15
million in new equity by the end of May, with at least $5
million coming no later than April, or else there would be an
automatic event of default. (Id.). The Second
Tranche was a $4.5 million loan that would only become
available if OpenPeak met certain performance milestones.
(Id. at 1, 9).
March 2014 NDRM attached to Mr. Bluestein's email
outlined the terms of the proposed restructuring and made
several observations regarding the state of OpenPeak.
(Id. at 3-20). In the Background and Situation
Overview section, Hercules recognized that "Since
funding, the Company has struggled to grow revenues following
the cancellation of the Cisco CIUS tablet."
(Id. at 3). That section also noted the
"significant strain" on OpenPeak's liquidity
from the 2012 MLSA's current amortization rate, and the