Jury hits 'Net startup with $177 million verdict

By John D. Tuerck Virginia Lawyers Weekly, Page B-3, January 13, 2003

An Alexandria jury awarded the largest verdict in Virginia history when it found that an online tutoring company had defrauded 13 investors and sales consultants.

The jury found that TutorNet.com Inc., a Northern Virginia company, misrepresented its financial strength and potential and failed to deliver promised public stock.

The 13 plaintiffs were drawn from a pool of about 135 prospective plaintiffs, said Alexandria attorney Bernard J. DiMuro, who joined the plaintiff's legal team as local counsel after venue was moved from Texas to Virginia.

"These were test plaintiffs," DiMuro said.

The award comprised about $70 million in compensatory and $110 million in punitive damages.  Any recovery, however, is delayed while the parties fight through a slew of post-trial motions.

A key issue is the earlier dismissal of Primus Telecommunications Group, an investor that owned 19.9 percent of the company as a defendant.  The exact ownership figure is important, DiMuro explained, because with 20 percent ownership, the presumption would have been that Primus controlled TutorNet.com.

"Our allegations were that Primus was essentially controlling TutorNet.com and had essentially become the principal of TutorNet," DiMuro said.

Primus had assisted in establishing TutorNet.com investing $400,000 in exchange for 19.9 percent of the new company's IPO stock.  Under an agreement, Primus could then purchase up to  51% of TutorNet.com and control the company.

Primus also established a wholly owned subsidiary called TutorNet.com Services Inc.  Finally, the company informed Internet giant America Online that it had partnered with tutorNet.com and was supporting the  startup company.

As a viable enterprise, then, Primus was the most tempting target; "TutorNet.com, as a private company, is defunct,"  DiMuro said.

The plaintiff relied on several different theories to include Primus as a plaintiff, including the assertion that Primus aided and abetted in common law fraud; that the two companies had formed a partnership; and that Primus had engaged in conspiracy.

U.S.District Judge Leonie M. Brinkema, however, ruled that Primus was not a proper defendant and dismissed the company from the suit.  If Brinkema affirms that ruling after reading the parties’ post-trial motions, DiMuro said he will revisit the issue on appeal.

DiMuro has little hope that additional litigation can be  averted, as the parties’ positions have hardened.

“Settlement negotiations have bogged down,” he said.

Pulling the case together

When the Alexandria firm of DiMuro, Ginsberg & Mook combined with two Houston firms and a Washington, D.C. firm, the lawyers knew they had to find a way to divide the duties of putting on such a huge case; it went to trial with 3,000 exhibits and the testimony of about 20 witnesses.

“Small firms can handle these cases if they team up,” DiMuro told Virginia Lawyers Weekly in August.

DiMuro’s office served as a data dump of sorts for the case, using its document-storage and retrieval and word-processing systems.  “It consumed the physical space,” he said.

The effort paid off, as the plaintiffs’ team put on evidence that tutorNet.com had misled the plaintiffs on the strength of its financial backing.

The company had claimed, for example, that prominent companies such as America Online, Pretiss Hall, ToysRUs, Quaker Oats and Coca-Cola had agreed to revenue-generating contracts.  In fact, say DiMuro, the companies were merely advertising or marketing for TutorNet.com.

In addition, the company contended that it had an arrangement with a group of about 70,000 churches that had agreed to purchase revenue-generating tutorships DiMuro, however, said the arrangement netted no more than $140,000.

Finally, the company said it had been endorsed by an array of celebrities, including Arnold Schwarzenegger, Demi Moore, Barbara Streisand and Khalia Ali, the daughter of former heavyweight champion Muhammad Ali.

The plaintiffs’ team also worked to show that promised public stock was  never delivered to the plaintiffs.  They contended that only two of TutorNet.com’s founders and a few select employees had received the stock.

“They didn’t get any stock,” DiMuro said, “to this day, they didn’t get any stock.”

The trial started June 19 and lasted seven days.  On Aug. 15, the jurors found that tutorNet.com and its officers had committed federal securities fraud and common law fraud.  They also found a breach of fiduciary duty with respect to the failure to deliver shares of stock to the investors.  Finally, they found a breach of contract and fraud with respect to deliver shares of stock to the company’s sales consultants.

DiMuro had hoped to include corporate officers and certified public accountants from the pool of eligible jurors, but the defense was able to strike the prospective jurors.

Nevertheless, DiMuro suspects that the post-Enron environment played a role in the jury’s verdict.

“The jury got extremely angry,” he said.

In a press release issued after the verdict, DiMuro said, “This really should send a message to corporate America, big and small, that corporate integrity had become paramount.  Eight jurors struck a bow for the little guy today.”

In another release, DiMuro said the lesson was that “imprecise or inflated statements to potential investors about the strength of revenues can be seen as half-truths; moreover, casual use of the word ‘partnership’ by Internet companies to describe  business relationships creates serious legal implications and potential consequences.

“Corporate leadership and investor relations personnel need to be well-trained to clearly communicate and represent the true nature of revenues and affiliations to novice and sophisticated investors,” the release added.