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`C.A. No. 2023-1060-NAC
`PUBLIC VERSION FILED:
`May 7, 2024
`
`D1 JASPER HOLDINGS LP, D1 SPV
`JL MASTER LP, JAY BLOCKER
`LTD., JAY DOMESTIC LLC, GCCU
`II LLC, TOCU XX LLC, OC II FIE
`VIII LP, JL SPV HOLDINGS, LLC,
`EMS J-INV LLC, DISRUPTIVE
`TECHNOLOGY SOLUTIONS XIV,
`LLC, DISRUPTIVE TECHNOLOGY
`SOLUTIONS XVI, LLC–SERIES A,
`DISRUPTIVE TECHNOLOGY
`SOLUTIONS XVI, LLC–SERIES B,
`and DISRUPTIVE TECHNOLOGY
`SOLUTIONS XVI, LLC–SERIES C,
`Plaintiffs,
`
`v.
`JUUL LABS, INC. and JL TAO LLC,
`Defendants.
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`PLAINTIFFS’ PROPOSED POST-TRIAL FINDINGS OF FACT
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`I.
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`The Parties and Relevant Non-Parties. 1
`1.
`Plaintiffs D1 Jasper Holdings LP, D1 SPV JL Master LP, Jay Blocker
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`Ltd., Jay Domestic LLC, GCCU II LLC, TOCU XX LLC, OC II FIE VIII LP, JL
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`1 Subject to the resolution of any evidentiary objections, the record in this action consists
`of the facts to which the parties stipulated in the Pre-Trial Stipulation and Order (D.I. 234)
`(the “PTO”); the deposition transcripts lodged with the Court; the trial testimony and
`exhibits used at trial; the exhibits cited in the parties’ pre-trial briefs (D.I.s 223, 224, 238,
`and 239); and the exhibits cited in the parties’ opening and answering post-trial briefs. The
`trial transcript is cited as “[Last Name] Tr. __.” Deposition transcripts are cited as “[Last
`Name] Dep. __.”
`
`EFiled: May 07 2024 04:32PM EDT
`Transaction ID 72927000
`Case No. 2023-1060-NAC
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`SPV Holdings, LLC, EMS J-INV LLC, Disruptive Technology Solutions XIV, LLC,
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`Disruptive Technology Solutions XVI, LLC–Series A, Disruptive Technology
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`Solutions XVI, LLC–Series B, and Disruptive Technology Solutions XVI,
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`LLC– Series C (“Plaintiffs”) are investment vehicles affiliated with or managed by
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`D1 Capital Partners (“D1”), Sculptor Capital Management (“Sculptor”), Pacific
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`Investment Management Company (“PIMCO”), GCM Grosvenor (“GCM”), EMS
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`Capital (“EMS”), and Disruptive Technology Advisers (“DTA”). 2
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`2.
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`Plaintiffs purchased convertible notes from defendant JUUL Labs, Inc.
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`(“JUUL” or the “Company”) in 2019 and/or 2020 pursuant to a Note Purchase
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`Agreement, dated August 2, 2019 (the “NPA”), and a Note and Warrant Purchase
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`Agreement, dated February 3, 2020 (the “NWPA”).3 A convertible note is a debt
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`security that can be converted into equity in circumstances prescribed by the
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`governing note purchase agreement. 4
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`3.
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`In 2007, Adam Bowen and James Monsees co-founded Ploom, Inc.
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`(“Ploom”), which developed vaporization devices. 5 Ploom was subsequently
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`2 PTO ¶¶ 9-16.
`3 Id. Because, as described herein, the relevant NPA and NWPA terms are substantially
`identical, references may be made only to the NWPA for simplicity.
`4 Goldstein Dep. 16:19-25.
`5 Bowen Dep. 19:5-18, 20:2-6, 22:8-17.
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`2
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`renamed Pax Labs, Inc. (“Pax”).6 The JUUL e-cigarette was developed at Pax.7 In
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`2017, JUUL was created through a spin-off transaction with Pax. 8 JUUL is a
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`Delaware corporation headquartered in Washington, D.C. 9 JUUL manufactures
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`electronic nicotine delivery systems. 10
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`4.
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`Bowen is a co-founder of JUUL11 and, through entities including PHR
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`Investments LLC (“PHR”), is one of its largest stockholders.12 He was a JUUL
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`director and employee until his resignation on July 10, 2023. 13 As of December
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`2022, Bowen owned 2.61% of JUUL,14 which stake increased to 2.90% as of August
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`2023, 15 and to 13.01% after October 27, 2023, the date of the initial closing of the
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`financing at issue in this case (the “Insider Financing”).16 Bowen formed PHR
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`Investments LLC (“PHR”) in order to participate in the Backstop Agreement and
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`subsequently the Insider Financing.17 There is no dispute that Bowen controls
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`PHR. 18
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`6 Id.
`7 Bowen Dep. 21:16-19; Monsees Dep. 13:9-17.
`8 Monsees Dep. 13:9-20; Bowen Dep. 22:8-17.
`9 PTO ¶ 6.
`10 Id. ¶ 29.
`11 Bowen Dep. 19:5-11.
`12 JX-1166 at cell V3556.
`13 JX-835 at 2; JX-841; JX-845; Bowen Dep. 24:22-26:16.
`14 JX-693 (native).
`15 JX-933 at 11.
`16 JX-1166 at cells V36-V37, V3556, V4061-V4062.
`17 Bowen Tr. 296:10-297:9.
`18 Id. 297:13-14; JX-1189 at 7 (Resp. No. 3).
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`5. Monsees is a co-founder of JUUL and, through entities including JLI
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`Invest, LLC (“JLI Invest”), is one of its largest stockholders.19 Monsees was a JUUL
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`director until his resignation in March 2020. 20 As of December 2022, Monsees
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`owned 2.61% of JUUL,21 which stake increased to 2.90% as of August 202322 and
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`to 8.96% after the initial closing of the Insider Financing.23 Monsees’s investment
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`vehicle JLI Invest was formed in order to participate in the Backstop Agreement and
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`Insider Financing.24 Monsees is the sole manager of JLI Invest, which is wholly
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`owned by the Monsees Living Trust (SP), of which Monsees is a Trustee.25 It is
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`undisputed that Monsees controls JLI Invest. 26
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`6.
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`Riaz Valani has been an investor in and director of JUUL and its
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`predecessor entities since 2007, 27 entering with an investment of “hundreds of
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`thousands of dollars.”28 He is JUUL’s largest stockholder, including through the
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`entity BIH Fund 2 LLC (“BIH Fund 2”). 29 According to JUUL’s cap tables, as of
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`19 Bowen Dep. 19:5-8; JX-150 at 4; JX-933 at 11; JX-1166 at cells V1879, V2105, V4354;
`Monsees Tr. 309:13-16.
`20 PTO ¶ 17.
`21 JX-693 (native).
`22 JX-933 at 11.
`23 JX-1166 at cells V1879, V2105, V4354.
`24 Monsees Tr. 319:9-14, 321:18-21.
`25 JX-621 at 3, 8-9.
`26 JX-1189 at 7 (Resp. No. 2).
`27 Valani Dep. 23:13-17; Valani Tr. 88:8-12.
`28 Valani Dep. 25:5-9.
`29 Valani Tr. 86:13-20; JX-1166 at cells V578-V579, V3572-V3573, V3708.
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`December 2022, Valani owned 10.76% of JUUL.30 His stake increased to 11.97%
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`in August 202331 and to approximately 25% after the initial closing of the Insider
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`Financing.32 Valani has invested in JUUL through multiple investment vehicles,
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`including Ploom Investment, LLC (“Ploom Investment”), Ploom Investment II, LLC
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`(“Ploom Investment II”), BIH Fund LLC (“BIH Fund”), 33 and BIH Fund 2. 34
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`7.
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`BIH Fund 2 is beneficially owned by Valani and his family. 35 BIH
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`Fund 2 is managed by Gwendolyn Moy, whom Valani hired more than a decade ago
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`as an employee of Valani’s Global Asset Capital, which manages investments
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`exclusively for Valani and his family.36 Valani testified that he could not identify a
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`single instance in which he recommended that Moy take an action with respect to
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`BIH Fund 2 that she declined. 37
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`8.
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`Nick Pritzker invested in JUUL in 2011 through a trust for his benefit38
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`and joined JUUL’s Board of Directors (the “Board”) in 2013. 39 Pritzker’s trusts
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`made additional investments in JUUL in 2015 and 2017, per Pritzker’s
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`30 JX-693 (native).
`31 JX-933 at 11.
`32 JX-1166 at cells V578-V579, V3572-V3573, V3708.
`33 JX-933 at 11.
`34 Valani Tr. 86:13-20.
`35 Id. 87:12-14.
`36 Valani Dep. 20:14-22, 27:8-16, 42:4-5.
`37 Id.173:11-14.
`38 Pritzker Tr. 174:8-12.
`39 Id. 176:6-12.
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`recommendation.40 Pritzker is JUUL’s second-largest stockholder, owning 7.52%
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`of JUUL as of December 2022, 41 8.36% as of August 2023, 42 and approximately
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`22% after the initial closing of the Insider Financing.43 Pritzker invests exclusively
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`through family-owned trusts and investment vehicles and does not hold investments
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`in his own name. 44 With respect to JUUL, Pritzker has invested through the entities
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`JL Special LLC (“JL Special”) and JL Tao LLC (“JL Tao”). 45
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`9.
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`Defendant JL Tao was created in January 2020 to purchase JUUL notes
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`“on behalf of Nick [Pritzker].”46 JL Tao’s ownership and management underwent
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`significant restructuring leading up to the Insider Financing. Until June 2023, JL
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`Tao was owned by a trust whose sole beneficiary was Pritzker, but it is now owned
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`by a trust whose beneficiaries are Pritzker’s children.47 Further, until September
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`2023, JL Tao was managed by Tao Capital Management (a branch of Pritzker’s
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`family office, 48 of which he was chairman and principal until May 202349).50 In
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`40 Pritzker Tr. 175:17-176:5.
`41 JX-693 (native).
`42 JX-933 at 11.
`43 JX-1166 at cells V2103-V2104.
`44 Pritzker Tr. 180:14-181:4; Perkovich Tr. 531:1-17; Pritzker Dep. 82:17-25; see also
`Perkovich Dep. 137:12-15.
`45 JX-933 at 11.
`46 JX-306 at 6.
`47 Pritzker Tr. 228:24-229:12.
`48 Id. 226:9-18.
`49 Id. 226:19-227:1.
`50 Perkovich Tr. 522:5-18.
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`September 2023, Perkovich, the long-time lead executive of Pritzker’s family
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`office, 51 and Kurt Hunsberger, who had been managing dozens of Pritzker family
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`trusts for years, 52 were installed as JL Tao’s managers.53 Pritzker hired Perkovich
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`in 2013 to be the president of Tao Capital, Pritzker’s family office, a role in which
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`Perkovich served until his recent retirement. 54
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`10. Bowen, Monsees, Valani, and Pritzker are collectively referred to
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`herein as the “Insiders.”
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`II. D1 Negotiates a Note Purchase Agreement with JUUL, Obtaining
`Significant Protections for Noteholders.
`In mid-December 2018, tobacco conglomerate Altria Group purchased
`11.
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`35% of JUUL’s stock for approximately $12.8 billion.55 The Board, on which each
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`of Pritzker, Valani, Bowen, and Monsees served at the time,56 distributed $11.8
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`billion in dividends to its stockholders.57 Only $200 million of the $12.8 billion
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`remained on JUUL’s balance sheet. 58
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`51 Perkovich Tr. 525:23-526:14.
`52 JX-968 at 1, 6; Pritzker Tr. 228:13-21; Perkovich Tr. 529:1-6.
`53 Perkovich Dep. 17:21-24; Pritzker Tr. 228:13-19.
`54 Pritzker Tr. 212:14-23; Perkovich Tr. 475:12-18, 525:23-526:14.
`55 Valani Tr. 88:22-89:2; see also JX-29; Crosthwaite Dep. 19:15-21, 20:9-21.
`56 Valani Tr. 161:2-8.
`57 Id. 89:3-91:17; Pritzker Tr. 177:3-5.
`58 JX-1495 (native) at ‘Summary’ C10.
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`12. Valani received approximately $2.61 billion from the Altria dividend,
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`through Ploom Investment, Ploom Investment II, and his personal holdings. 59
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`13. Pritzker received approximately $1.83 billion from the Altria dividend,
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`through JL Special.60 JL Special was then managed by Pritzker and Perkovich61 and
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`held in a trust for the benefit of Pritzker’s children,62 although JUUL’s cap tables
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`made no mention of that entity and simply listed Pritzker as the relevant
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`stockholder. 63
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`14. Bowen received approximately $505 million from the Altria
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`dividend. 64
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`15. Monsees received approximately $464 million from the Altria
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`dividend. 65
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`16.
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`Just months after Altria’s $12.8 billion investment, JUUL needed
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`additional financing. 66
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`59 JX-1495 (native) at ‘Shares’ K77, K79, K85, K142, K172, K421, K641, K907, and
`K929.
`60 Id. (native) at ‘Shares’ K230, K699-700, and K935-936.
`61 See JX-24; Perkovich Tr. 483:16-21.
`62 Pritzker Tr. 243:13-244:7.
`63 See, e.g., JX-114 at 2.
`64 JX-1495 (native) at ‘Shares’ K94.
`65 Id. (native) at ‘Shares’ K288.
`66 Valani Tr. 91:18-21.
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`17.
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`In May 2019, representatives of JUUL met with JP Morgan to discuss
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`a potential financing through the issuance of convertible notes.67 JP Morgan advised
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`JUUL that investors would demand that outside investors lead a qualified financing
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`in which the notes could be converted. 68
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`18. Soon thereafter, JUUL began conversations with lead investor and
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`negotiator D1. D1 principal Daniel Sundheim and JUUL director Zach Frankel
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`primarily negotiated the fundamental business deal.69 Although Frankel is currently
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`a JUUL director, JUUL did not call Frankel as a witness at trial. 70
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`19. D1 recognized that JUUL faced various business risks, including
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`significant regulatory risk, and thus understood that JUUL may need to raise capital
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`while “in a more distressed situation.”71 D1 was aware there was a risk that the notes
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`could be converted at a valuation below the valuation floor contemplated by the
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`notes, resulting in a mark-to-market loss. 72 But, so long as the investment “was
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`made by independent third parties in an arm’s-length transaction” making an
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`economically rational judgment, then the notes would be converted to equity only in
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`situations where JUUL obtained “a substantial amount of capital” and where
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`67 JX-32 at 2-3.
`68 Kadapakkam Tr. 447:22-448:5; see also JX-32 at 2.
`69 Sundheim Tr. 14:5-15:21.
`70 Kadapakkam Tr. 445:21-446:1.
`71 Sundheim Tr. 11:3-22.
`72 Id. 11:3-12:3; Goldstein Tr. 256:6-21.
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`objective parties determined that the investment was attractive and that JUUL had
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`“very bright” prospects.73 The notes also provided downside protection in that
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`noteholders would retain their seniority in the capital structure if the Company could
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`not obtain significant outside funding triggering conversion. 74
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`20. Sundheim and Frankel thus agreed at the outset that to effect a forced
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`conversion, the triggering transaction would need to be “truly an arm’s length
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`transaction,” involving third-party independent investors who would be
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`economically motivated to place an objective valuation on the Company. 75
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`21. Following Sundheim’s discussions with Frankel, JUUL sent D1 a first
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`draft of the NPA term sheet reflecting JP Morgan’s advice and the business deal that
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`the parties had reached. The initial term sheet thus provided that a Qualified
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`Financing must be led by a “new investor.”76
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`22.
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`JUUL subsequently replaced the phrase “new investor” with language
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`that identified JUUL’s “top three [stockholders] by percentage ownership”: Altria,
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`Valani, and Pritzker. 77
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`73 Sundheim Tr. 12:4-14:4.
`74 Sundheim Dep. 269:3-24.
`75 Sundheim Tr. 13:10-15:17; see also Goldstein Tr. 254:13-257:7.
`76 JX-33 at 5.
`77 Herbert Dep. 29:10-30:2; see also Kadapakkam Tr. 410:7-15; JX-42 at 6.
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`23. D1, however, sought a threshold that would pick up “all of [JUUL’s]
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`largest investors.”78 Thus, D1 rejected JUUL’s proposal and inserted broader
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`language that prevented any investors owning more than 5% of JUUL’s stock from
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`effecting a Qualified Financing.79 D1 proposed this change based on its
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`understanding that Pritzker and Valani owned more than 5% of JUUL’s stock; the
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`language thus would capture Pritzker, Valani, and additional substantial investors.80
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`24. D1’s understanding was based on information provided by JUUL.
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`Before the execution of the NPA, JUUL provided investors with capitalization tables
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`showing that Pritzker and Valani owned more than 5% of JUUL’s stock. 81 For
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`example, one such cap table that shows JUUL’s major shareholders as of June 30,
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`2019, represented that Valani and Pritzker owned 12.25% and 8.60% of JUUL,
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`respectively. 82 The cap tables made no mention of any investment vehicles. 83
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`78 Kadapakkam Tr. 411:17-412:17.
`79 JX-46 at 16; Sundheim Tr. 21:15-22:12.
`80 Sundheim Tr. 21:10-14, 21:24-22:12.
`81 See, e.g., JX-114 at 2; see also Sundheim Tr. 23:11-25:15 (discussing JX-114); JX-150
`at 4; Goldstein Tr. 258:7-260:18 (discussing JX-150).
`82 See JX-114 at 2.
`83 See id.; Sundheim Tr. 23:11-16, 24:15-25:15; Goldstein Tr. 259:17-260:18; JX-114 at 2;
`JX-150 at 4.
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`25. The cap tables tracked the discussions that the prospective noteholders
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`had with JUUL representatives, who consistently referred to Pritzker and Valani as
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`JUUL’s major stockholders, without mention of any investment vehicles. 84
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`26. When the NPA was being negotiated, Pritzker’s investment was held in
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`JL Special, a vehicle owned by a trust for the benefit of Pritzker’s children.85 The
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`cap tables provided to investors by JUUL contained no mention of JL Special,
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`naming only Pritzker as a JUUL stockholder. 86
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`27. The parties additionally agreed that a Qualified Financing also had to
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`meet the requirements of a “Capital Raising Transaction.”87 JUUL sought to define
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`narrowly the types of stock issuances that would be excluded from a Capital Raising
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`Transaction, defining it as an issuance of stock that excluded shares issued to
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`JUUL’s employees, directors, consultants, and advisors that were not to be used for
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`general working capital purposes.88 D1 broadened the exclusion to cover any
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`issuances of stock to JUUL’s employees, directors, consultants, and advisors,
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`84 Sundheim Tr. 25:16-26:14; Goldstein Tr. 260:15-18, 270:11-24.
`85 See Pritzker Tr. 177:6-14, 243:11-244:11, 244:18-20.
`86 E.g., JX-114 at 2; JX-150 at 4.
`87 Sundheim Tr. 18:20-19:17.
`88 JX-50 at 10-11, 14.
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`regardless of the purpose of the proceeds. 89 At the time of the negotiations, the
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`Insiders were each directors, and Bowen and Monsees were employees. 90
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`28. The parties eventually agreed on contractual language in the NPA
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`capturing the business deal they had previously reached. 91 In pertinent part,
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`Section 1.36 of the NPA defines a “Qualified Financing” as a “Capital Raising
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`Transaction” (a separately defined term, as discussed further below) “with total net
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`proceeds in cash to the Company in amount equal to at least $500 million … at least
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`$400 million of which is attributable to purchases by investors that do not own more
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`than five percent of the outstanding shares capital stock of the Company on a fully-
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`diluted basis as of immediately prior to the initial closing of such Capital Raising
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`Transaction[.]”92 Sundheim explained that this definition is “directly related” to the
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`business deal reached by the parties and ensures that any investors leading a
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`Qualified Financing “are truly … independent third parties [who] would not be
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`making the investment solely to benefit existing investment[s].”93
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`29.
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`In turn, Section 1.6 of the NPA defines a “Capital Raising Transaction,”
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`in relevant part, as “a transaction or series of related transactions in which the
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`89 JX-55 at 23.
`90 See supra ¶¶ 4-8.
`91 Sundheim Tr. 15:18-21, 26:15-19.
`92 JX-1 at 5 (§1.36).
`93 Sundheim Tr. 17:16-18:14.
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`Company sells capital stock of the Company to investors for cash, in all cases
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`excluding … shares issued to employees or directors of, or consultants or advisors
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`to the Company or any of its subsidiaries.”94
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`30. The NPA was executed in August 2019.95 JUUL raised approximately
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`$800 million. 96
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`III. The Noteholders Provide Another Round of Financing on the Condition
`That Valani and Pritzker Invest Alongside Them.
`In the fall of 2019, JUUL hit several roadblocks, leading it to turn back
`31.
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`to the noteholders for additional funding.97 By November 2019, the JUUL device
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`was banned in several jurisdictions, and JUUL stopped marketing its most popular
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`pod flavor, mint, which accounted for “about 70 percent of [JUUL’s] business at the
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`time.”98
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`32.
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`In late November, Kadapakkam and Crosthwaite met with D1 to
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`discuss a new financing round.99 D1 conveyed that it “felt that it was important”
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`that Pritzker and Valani, “who had taken a substantial amount of money out of the
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`company in the form of [the Altria] dividends reinvest money back into the company
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`94 JX-1 at 2 (§1.6).
`95 JX-1 at 1, 35-42.
`96 JX-1197 at 3.
`97 Valani Tr. 93:1-8; Kadapakkam Tr. 427:4-10.
`98 Kadapakkam Tr. 427:2-10; JX-172 at 2.
`99 JX-172 at 1-3.
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`to show support.”100 D1 relayed its growing frustration that the Insiders had “tak[en]
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`out billions and were unwilling to put in a faction of that when the company need[ed]
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`it most.”101 Further, D1 explained that it would be a “terrible message to everybody
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`if” Pritzker and Valani, who had “more at stake here than anyone else on the cap
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`table,” did not “invest at least $100m in this round.”102
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`33. D1 and other investors thus insisted that Pritzker and Valani, along with
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`other JUUL directors, invest $100 million alongside them in any additional financing
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`round.103 Both Pritzker and Valani understood that their investment was a condition
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`of the investors’ participation. 104
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`A. The Company Forms a Note Financing Committee to Allow Valani
`and Pritzker to Invest in the 2020 Note Financing.
`34. To facilitate Valani’s and Pritzker’s investment, JUUL’s Board formed
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`a “2020 Note Financing Committee” of Bowen and Monsees.105 The co-founders
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`were tasked with deciding “whether to permit certain members of the Board”—
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`100 Sundheim Tr. 28:9-21.
`101 JX-213 at 2; see also JX-217.
`102 JX-213 at 2-3.
`103 Id. at 2 (“Riaz and Nick have more at stake here than anyone else on the cap table.”);
`JX-291; JX-292 at 1-2; Monsees Tr. 319:22-320:8; Sundheim Tr. 28:13-29:4.
`104 Pritzker Tr. 178:20-179:12; Valani Tr. 93:1-94:11.
`105 Monsees Tr. 320:9-12; see also JX-291; JX-292.
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`namely, Pritzker, Valani, and Harold Handelsman106—to purchase notes “through
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`their affiliated funds.”107
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`35. After Bowen and Monsees approved,108 Valani purchased $60 million
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`of the 2020 notes through a newly created entity called BIH Fund, while JL Tao,
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`another new LLC, purchased $30 million of the 2020 notes “on behalf of”
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`Pritzker.109 When Kadapakkam asked Valani “what structure” he was “planning to
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`use” to invest, Valani said it was “[j]ust an LLC we created – think its called BIH
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`fund.”110 Perkovich likewise confirmed that JL Tao was the “new entity for the cap
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`table” that would make “the convertible note contribution on behalf of Nick.”111
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`36.
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`JUUL told D1 that it had satisfied its condition that Pritzker and Valani
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`individually invest in the 2020 notes. 112
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`37. On February 3, 2020, the day of the closing of the NWPA, 113 JUUL
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`sent to Sculptor an “allocation spreadsheet” representing that Pritzker and Valani
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`were investing through “BIH Fund [Riaz]” and “JL Tao [Nick].”114
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`106 JX-291.
`107 JX-292.
`108 JX-302 at 2.
`109 Valani Tr. 94:3-11; Pritzker Tr. 179:13-180:13; JX-300 at 2; JX-306 at 6; JX-308
`(native).
`110 JX-300 at 2.
`111 JX-306 at 6.
`112 Sundheim Tr. 29:2-4.
`113 JX-2.
`114 JX-308 and native; see also JX-319 and native.
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`38.
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`JUUL documented Pritzker’s participation in the 2020 note financing
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`internally as well, noting in its records that “JL Tao” was “Nick,” as late as
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`September 2023. 115
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`B. The Conversion Mechanics of the 2020 Note Financing Were
`Substantively Identical to Those of the 2019 Financing.
`39. Upon the closing of the NWPA on February 3, 2020, JUUL issued
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`approximately $1.5 billion in notes, of which $800 million were issued in exchange
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`for the 2019 notes. 116
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`40. The conversion mechanism in the NWPA is substantially identical to
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`that in the NPA with limited exceptions. For example, the NWPA lowered the
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`valuation cap and valuation floor for conversion in light of the Company’s bleaker
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`prospects117 and provided that, for the first 36 months following the NWPA’s
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`execution, the notes could not be automatically converted at a valuation below the
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`floor. 118
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`41.
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`In addition to the other protections surrounding conversion discussed
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`above, Section 3.1 of the Notes requires that JUUL provide “at least ten (10) days’
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`115 JX-992 (native).
`116 JX-2 at 57-59.
`117 Sundheim Tr. 27:13-28:3; see JX-2 at 9-10 (§1.64).
`118 Sundheim Tr. 72:3-6; see JX-2 at 7 (§1.43).
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`advance notice” of the initial closing of any transaction purporting to be a Qualified
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`Financing, which notice must “include a summary of the principal terms thereof.”119
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`42. Before the closing of the 2020 note financing, JUUL sent noteholders
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`cap tables identifying the investors that owned 5% or more of the Company.120
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`Again, they named Pritzker and Valani as JUUL’s largest individual stockholders,
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`with no mention of their entities. 121
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`IV. JUUL’s Liabilities Push It to the Brink of Bankruptcy.
`43. Over the last several years, JUUL has faced substantial litigation and
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`regulatory troubles that have personally implicated the Insiders. The popularity of
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`e-cigarettes, particularly among minors, has garnered the attention of the Food and
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`Drug Administration (“FDA”), Congress, and State Attorneys General.122 For years,
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`JUUL has been accused of creating and furthering a youth nicotine epidemic.123 As
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`of 2022, thousands of lawsuits had been filed nationwide against JUUL for its sales
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`and marketing practices.124 JUUL also faced a federal multi-district litigation (the
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`“MDL”) which consolidated many of those cases. 125 Monsees, Bowen, Valani, and
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`119 JX-2 at 63 (Ex. A, §3.1).
`120 JX-148 at 3; JX-150 at 4.
`121 Id.
`122 JX-642 at 95-102.
`123 Valani Tr. 96:11-17.
`124 JX-642 at 81-84; Pritzker Tr. 183:3-5; Barse Tr. 356:21-357:5.
`125 JX-642 at 82.
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`Pritzker were named as individual defendants in the MDL, including on claims of
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`federal racketeering and, as Valani testified, “a lot of claims beyond RICO.”126
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`44.
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`In June 2022, the FDA issued a Marketing Denial Order (“MDO”)
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`against JUUL, rejecting
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`its Pre-Market Tobacco Product Applications
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`(“PMTAs”). 127 Although the MDO was stayed, its issuance severely disrupted
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`JUUL’s business. Crosthwaite approximated that JUUL lost about 20% of its value
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`as a result. 128
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`45.
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` The MDO, coupled with the ongoing MDL and JUUL’s deteriorating
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`financials, pushed JUUL into crisis mode. Beginning in mid-June 2022, the Board
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`met multiple times each week, holding nearly 40 meetings through September.129
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`Of primary concern was whether JUUL’s cash on hand would satisfy the minimum
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`liquidity threshold required by JUUL’s term loans. 130 The Board was advised at the
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`end of July that there was a “high risk of” tripping the covenant in August131 and
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`again in September. 132
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`126 JX-324 ¶¶ 22-24, ¶¶ 26-28; Valani Tr. 96:21-23, 97:21-23, 122:18-24; Pritzker
`Tr. 181:24-182:10.
`127 Crosthwaite Tr. 556:15-22.
`128 Id. 559:20-560:4.
`129 See, e.g., JX-339; JX-345; JX-349; JX-354; JX-452.
`130 E.g., JX-343 at 2; JX-349 at 4; JX-350 at 4.
`131 JX-382 at 4.
`132 JX-406 at 3; JX-416 at 3; JX-423 at 2.
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`19
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`46.
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`In summer 2022, JUUL’s Board was repeatedly briefed on “essentially
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`two viable options” going forward: (1) a strategic transaction with Altria or (2) a
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`Chapter 11 filing. 133 JUUL and Altria extensively negotiated potential deal
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`structures, including an acquisition of JUUL or an IP licensing deal, 134 with deal
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`values from $6 to $7 billion. 135 On September 26, Altria notified JUUL that it was
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`no longer interested in pursuing a transaction. 136
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`47.
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`In August 2022, JUUL remained at risk of breaching the minimum
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`liquidity covenants of its term loan.137 JUUL also was fast approaching its first MDL
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`trial, scheduled to begin in November 2022 in San Francisco, a venue JUUL
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`perceived as hostile.138 But JUUL never seriously considered going forward with
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`the trial due to the potential risks. 139 The Insiders, personally named as defendants,
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`discussed their “shared personal concern” about the lawsuits and the resulting
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`“personal strife” amongst themselves. 140
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`133 JX-404 at 4; JX-371 at 4-5.
`134 JX-357 at 4; JX-406 at 4.
`135 Crosthwaite Dep. 113:2-114:12; see also JX-719.
`136 JX-432.
`137 Crosthwaite Tr. 560:17-561:2; see also, e.g., JX-350 at 4.
`138 Goldstein Tr. 265:15-266:13; Goldstein Dep. 72:3-73:9.
`139 Sundheim Tr. 34:4-12.
`140 Monsees Tr. 307:5-16, 308:1-309:12.
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`20
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`48. One way for JUUL to avoid the trial was by filing for bankruptcy,
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`which would result in a stay of parallel litigation against JUUL.141 In October 2022,
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`two new directors joined JUUL’s Board, David Barse and Paul Aronzon (together,
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`“the Independent Directors”), to evaluate a potential Chapter 11 filing. 142
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`49. Some senior executives, including Crosthwaite, favored that path.
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`Sundheim testified that Crosthwaite told him that a Chapter 11 filing “would be the
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`best outcome for everybody,” including because bankruptcy would allow JUUL to
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`free itself from certain non-compete agreements it had with Altria and because
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`bankruptcy would “minimize the liabilities of the company, most of which were in
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`the form of potential legal settlements.”143 Crosthwaite—who observed the trial,
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`including Sundheim’s testimony, as JUUL’s corporate representative—did not deny
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`conveying this view to Sundheim, instead testifying that his views on bankruptcy
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`underwent “an evolution.”144
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`50. Pritzker and Valani opposed a Chapter 11 filing. In addition to being
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`JUUL’s top equity holders, Pritzker and Valani faced personal liability in the MDL.
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`Pritzker admitted that a JUUL bankruptcy filing would have had serious personal
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`
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`141 Barse Tr. 357:1-9.
`142 Id. 352:11-17.
`143 Sundheim Tr. 33:3-34:3.
`144 Crosthwaite Tr. 569:6-22.
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`21
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`consequences,145 and Valani likewise acknowledged that bankruptcy was against his
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`interest “as a shareholder and as a director.”146 In particular, if JUUL managed to
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`stay the MDL through a bankruptcy filing, the San Francisco trial could have
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`nevertheless proceeded against
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`the
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`individual defendants—the
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`Insiders
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`themselves.147 A bankruptcy filing might also have put at risk the Insiders’ right to
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`indemnification from JUUL,148 an issue that Pritzker and Valani discussed with their
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`counsel. 149
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`51. There also was a risk that the Insiders’ Altria dividends would be
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`clawed back as part of a bankruptcy proceeding—a risk that Pritzker and Valani
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`understood.150 Indeed, JUUL obtained a tolling agreement for claims related to the
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`Altria dividends from Valani, his entities BIH Fund 2 and Ploom Investment,
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`Bowen, and Pritzker’s entities JL Tao and JL Special. 151 And, JUUL executives
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`145 Pritzker Tr. 182:11-14. Bowen also acknowledged that a JUUL bankruptcy would have
`had consequences for him as an equity holder. Bowen Dep. 104:22-105:16 (agreeing that
`equity holders have lower priority than creditors in a bankruptcy). Bowen claimed not to
`understand the tolling agreement he had signed with JUUL in connection with claims
`related to the Altria dividends, Bowen Dep 107:17-110:22, or to remember the implications
`of bankruptcy for his right to indemnification from JUUL, id. 105:18-106:1.
`146 Valani Tr. 101:22-102:6.
`147 Pritzker Tr. 182:15-23; Valani Tr. 102:7-16.
`148 Pritzker Tr. 183:9-21; Valani Tr. 104:9-12.
`149 Pritzker Tr. 183:22-24; Valani Dep. 102:3-8.
`150 Pritzker Tr. 184:16-185:5; Valani Tr. 102:17-103:13.
`151 JX-4 at 1; see also JX-562 at 3 (Valani and Pritzker’s joint counsel at Skadden
`“confirmed that Riaz and Nick would sign up” for tolling “immediately”).
`22
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`likewise conveyed Pritzker and Valani’s concerns about potential clawbacks of the
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`Altria dividends to PIMCO principal Gabe Goldstein. 152
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`V. Valani and Pritzker Refinance JUUL’s Term Loan Through the Same
`Financial Vehicles Used to Participate in the Insider Financing.
`52. To avoid default and a bankruptcy filing, JUUL, Pritzker, and Valani
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`effected a term loan refinancing through a Credit Agreement between JUUL as the
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`borrower and BIH Fund 2 and JL Tao as the lenders.153 These were the same entities
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`that later participated in the Backstop Agreement154 and the Insider Financing. 155
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`53. At a September 26 Board meeting, Crosthwaite “provided an update on
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`re-financing of the Company’s current term loan, noting that a re-financing by a
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`group of Company insiders was a viable option.”156 Those insiders were Valani and
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`Pritzker.157 Before the Board meeting that evening, Moy, Valani’s employee,158
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`emailed Valani and Pritzker’s attorneys at Skadden, 159 copying Perkovich, and
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`152 Goldstein Tr. 266:23-267:22.
`153 JX-461 at 18, 155; Valani Tr. 121:2-8; Pritzker Tr. 186:7-187:2.
`154 JX-657 at 48.
`155 JX-14.
`156 JX-432 at 2; see also JX-442 at 4 (“Mr. Pritzker went on the record” at a Board meeting
`to state that “he was involved in the ongoing term loan lender situation”).
`157 JX-1189 at 22 (Nos. 48 and 49).
`158 Valani Tr. 112:23-113:1.
`159 Id. 113:13-23; Pritzker Tr. 211:7-9.
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`23
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`informing them that “Riaz and Nick verbally confirmed to KC (the CEO) that they
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`will fund.”160 Valani acknowledged at trial that “we did fund.”161
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`54. Later that evening, a WilmerHale attorney emailed JUUL’s attorneys
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`at Kirkland & Ellis, identifying himself as “represent[ing] Nick Pritzker and Riaz
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`Valani.”162 According to WilmerHale, JUUL had “requested that Mr. Pritzker and
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`Mr. Valani consider providing a new term loan,” the proceeds of which JUUL would
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`use to pay off the existing term loan and thus “avoid an imminent default.”163
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`WilmerHale relayed that “Mr. Pritzker an