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JEFFREY F. RYAN (SBN 129079)
FILEDNW
SAN MATEO (301
LAW OFFICES OF JEFFREY F. RYAN 1
JUN g 3 2017
The Fitzpatrick Building
2000 Broadway Street
Redwood City, CA 94063
Phone: (650) 924—8343
jeff@jeffreyryanlaw.com
Attorney for Plaintiffs FRED H. GEISLER & NORMAN C. FLEMING
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IN THE SUPERIOR COURT OF THE STATE OF CALIFORNIA
\O FOR THE COUNTY OF SAN MATEO
10 CIVIL DIVISION-SOUTHERN BRANCH
11 FREDH GEISLER, MD ,..PhD an 1nd1v1dual CAME 1 ll 0 2 8 8 5
and NORMAN C FLEMING, an individual,
12 directly, and derivatively on behalf of VERIFIED COMPLAINT FOR:
RHAUSLER, INC, a California Corporation,
13 1. INTENTIONAL
MISREPRESENTATION
Plaintiffs,
14 2. FRAUD AND DECEIT
v. 3. BREACH OF FIDUCUIARY
15 DUTY
TERRY J JOHNSTON, an individual, KATIE 4. CONVERSION
16 SIMS, CPA, an individual, ROBERT JOHN S. CONVERSION
GLYNN, JR, an individual, 3COR IVIEDICAL, 6. CONSPIRACY TO COMMIT
17 INC, a California Corporation, TEDAN BREACH OF FIDUCIARY
SURGICAL INNOVATIONS, LLC, a Texas DUTY
18 Limited Liability Company, and DOES 1 to 7. AIDING AND ABETTING
25, TWO TORTS
19 Defendants, 8. IMPOSITION OF
CONSTRUCTIVE TRUST
20 and RHAUSLER, INC., a California 9. FALSE REPORTS
Corporation, 10. ACCOUNTING
21 Nominal Defendant. ) 11. BREACH OF AGREEMENT
22 ) 12. FINANCIAL ELDER ABUSE
) 13. REMOVAL OF DIRECTORS
23 )
24 BY FAX
25 JURY TRIAL DEMANDED
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26 CMP
Complaint
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Plaintiffs allege on information and belief based upon, inter alia, the investigation
made by themselves and through their attorneys, except as to those allegations which
pertain to the plaintiffs themselves, which are alleged upon knowledge, as follows:
SUMMARY AND NATURE OF THE ACTION
1. This is a stockholders’ direct action, and a derivative action against the
defendants seeking to remedy defendants' violations of California law, including having
intentionally made material misstatements and omissions in solicitations of, and reports to,
prospective and existing shareholders, breaches of fiduciary duties, and violations of
California Corporations Code §§ 309, 310, 1507, 1601 and 1602, and the common law.
2. The causes of action alleged in this Complaint inherently have both direct
and derivative characteristics. It is a direct action in that plaintiffs were injured when they
were solicited to purchase shares in, loan money to, guarantee loans to, and/or assign
personal property interests to nominal defendant Rhausler, Inc., by means of materially
false or misleading written and verbal representations of defendants Terry J. Johnston and
Robert John Glynn, Jr. This also is a derivative action in that Rhausler, Inc., a California
corporation, was injured by the self—serving and intentional misapplication, misdirection
and/or diversion of Rhausler assets to defendant Terry J. Johnston and entities in which he
had substantial interest, including defendants 3COR Medical, Inc. and TeDan Surgical
Innovations, LLC.
3. Rhausler, Inc., was also injured by the charging to, and payment by,
Rhausler of administrative and other expenses that should rightfully have been the
obligations of the persons, or entities who benefitted from them, including the 3COR
Medical and TeDan Surgical corporate defendants. Rhausler was further injured by
defendant Terry J. J ohnston’s use of Rhausler assets to pay for personal expenses of
himself, his immediate and extended family members, his foreign mistress, associates in
other enterprises, and their mistresses. For complete relief in the derivative action,
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COMPLAINT
equitable relief in the form of an accounting from Rhausler directors Terry J. Johnston and
Robert John Glynn, Jr., will be required. In addition, there is a derivative action that arises
from those directors’ breach of their fiduciary duties to Rhausler shareholders in tacitly
approving the payment to Terry J. Johnston a salary ($12,500/month) and other benefits
commensurate with full-time work, dedication and undivided loyalty by a senior executive
of a going concern, when, in fact, he was devoting substantial time to promoting the
interests of TeDan Surgical, 3COR Medical, Tecomet, a Massachusetts—based medical
device company with whom Johnston entered into an agreement to market spinal implants
for a monthly retainer of $3,000, plus commissions, and Industry of the Redwoods, LLC, a
10 Nevada company that Terry J. Johnston and Robert John Glynn, Jr., created so that
11 J ohnston’s new wife (Baocui Zhang) could earn commissions by selling Rhausler products
12 to third—parties, and the products of third-parties to Rhaulser, in order to buttress her
13 application for Resident Alien status. The Rhausler products provided to satisfy Industry of
14 the Redwoods’ customers were grossly discounted in cost so as to effectively increase
15 commission income, while the products sold to Rhausler via Industry of the Redwoods
16 were at prices inflated to further increase commissions.
17 JURISDICTION AND VENUE
18 4. This Court has jurisdiction over all causes of action asserted herein pursuant
19 to the California Constitution, Article VI, § 10, because this case is a cause not given by
20 statute to other trial courts. The direct action is brought pursuant to § 382 and § 410.10 of
21 the California Code of Civil Procedure, and the derivative action is brought pursuant to §
22 800 of the California Corporations Code to remedy defendants' violations of law.
23 5. The Court has jurisdiction over each defendant named herein because each
24 defendant is either a corporation organized and existing under the laws of the State of
25 California, or, as with the individual defendants, has sufficient minimum contacts with
26 California to render the exercise of jurisdiction by the California courts permissible under
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COIVIPLAINT
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traditional notions of fair play and substantial justice. All of the defendants conduct
business and/or maintain offices in California, and the headquarters of Rhausler and 3COR
and their principal place of business are located in Redwood City, California, and they are
incorporated in California.
6. Venue is proper in this Court because Rhausler and one or more of the
individual defendants, at all times relevant herein, either resides in or maintains executive
offices in San Mateo County, and a substantial portion of the transactions and wrongs
complained of herein, including the defendants' primary participation in the wrongful acts
detailed herein in violation of their fiduciary and other duties owed to Rhausler and its
10 shareholders, and to the plaintiffs, occurred in San Mateo County, and defendants have
11 received substantial compensation in San Mateo County by doing business here and
12 engaging in numerous activities which have an effect in this County.
13 THE PARTIES
14 7. Plaintiff FRED H. GEISLER, M.D., PhD. (“GEISLER”), was, at all times
15 material herein, a resident of Cook County, State of Illinois, until May, 2014, when he
16 became a resident of Emmet County, State of Michigan, and a board-certified
17 neurosurgeon of international renown. GEISLER has been a director, non—corporate officer
18 and holder of 600,000. shares, which constitutes roughly 36% of the outstanding stock of
19 nominal defendant Rhausler, Inc, since 2008. He was born on March 2, 1947, and attained
20 the age of 65 years on March 2, 2012.
21 8. Plaintiff NORMAN C. FLEMING (“FLEMING’), was, at all times material
22 herein, a resident of Maricopa County, State of Arizona, where he lives in retirement
23 following a 35-year career as a senior executive in medical device design, manufacturing
24 and sales organizations. FLEMING has been a holder of 40,000 shares of Rhausler stock
25 since 2008. He was born on November 23, 1947, and attained the age of 65 years on
26 November 23, 2012. GEISLER and FLEMING are collectively referred to as “Plaintiffs.”
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9. Defendant TERRY J. JOHNSTON (“JOHNSTON”) was, at all times
material herein, a resident of Redwood City, San Mateo County, State of California and
relocated to Nevada in or about 2014, and simultaneously held the positions of Chairman
of the Board, President and Chief Executive Officer of nominal defendant Rhausler, Inc;
President, Chief Executive Officer and sole shareholder of 3COR Medical, Inc, although
JOHNSTON represented that 3COR was actually a wholly-owned subsidiary of nominal
defendant Rhausler, a managing member holding a 33.33% interest in TeDan Surgical
Innovations, LLC, President and Chief Executive Officer of Industry of the Redwoods,
LLC, and President, Chief Executive and the m sole shareholder of Cabo Spine, Inc.,
10 although it is nominally owned by his employee, Rowena Mier.
11 10. Defendant ROBERT JOHN GLYNN, JR. (“GLYNN”), was, at all times
12 material herein, a resident of Pleasanton, Alameda County, State of California, a member
13 of the State Bar of California, and held the positions of Director, and Secretary and
14 General Counsel of nominal defendant Rhausler, Inc. GLYNN has been a member of the
15 California Bar since January 7, 1959.
16 11. Defendant KATIE SIMS, CPA (“SIMS”), was, at all times material herein, a
17 resident of Santa Clara County, State of California, and a partner in the accounting firm
18 Magnolia Group, LLP, with offices at Los Altos, California. SIMS was the accountant for
19 nominal defendant Rhausler, defendant 3COR, and defendant JOHNSTON and his other
20 ventures. In that capacity, SIMS prepared the tax'returns of the corporations, including the
21 preparation and transmittal of Forms 112OS K—l to the shareholders of Rhausler, Inc,
22 which had applied for, and been accepted as, a Subchapter S corporation under the Internal
23 Revenue Service Code on June 2, 2008.
24 12. Defendant 3COR IVLEDICAL, INC. (“3COR”), was, at all times material
25' herein, a corporation organized under the laws of the State of California, duly registered
26 with the California Secretary of State, entity number C2464264, with principal offices at
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837 Industrial Road, Unit B, San Carlos, County of San Mateo, State of California. The
Statement of Information filed with the Secretary of State on August 26, 2008 reflects that
JOHNSTON holds all 3 corporate offices and is the sole director. It further shows that the
business of 3COR is “medical sales.” The Secretary of State’s website reflects that the
agent for service of process is “Terry Johnston, 917 Durlston Road, Redwood City, CA
94062.”
13. Defendant TEDAN SURGICAL INNOVATIONS, LLC (“TEDAN”), was,
at all times relevant herein, a limited liability company organized under the laws of the
State of Texas on November 14, 2005, Filing Number 800570065. The Texas Secretary of
10 State records reflect that the 3 managing members are Daniel Fishman of Houston, Texas;
11 Daniel Bass of El Granada, California, and JOHNSTON. The records further show that the
12 agent for service of process is “Danny Fishman, 12615 W. Airport Blvd, Ste. 200,
13 Sugarland, TX 77478.” By agreement dated June 1, 2006, Mr. Fishman holds 33.34%
14 interest in TEDAN, and Messrs. Bass and JOHNSTON each hold a 33.33% interest.
15 TEDAN has an office and personnel working in San Carlos, California, located in San
16 Mateo County.
17 14. Nominal Defendant RHAUSLER, INC. (“RHAUSLER”), was, at all times
18 material herein, a corporation organized under the laws of the State of California, duly
19 registered with the California Secretary of State, entity number C3074956, with principal
2o offices at 837 Industrial Road, Unit B, San Carlos, County of San Mateo, State of
21 California. The Statement of Information filed with the Secretary of State on February 16,
22 2016 reflects that JOHNSTON is the Chief Executive Officer and the Chief Financial
23 Officer; that GLYNN is the Secretary, and that JOHNSTON, GEISLER and GLYNN are
24 the Directors. It further shows that the agent for service of process is “Terry Johnston, 837
25 Industrial Road, Unit B, San Carlos, CA 94070.” As noted in paragraph 11, ante,
26 RHAUSLER has opted for treatment as a Subchapter S Corporation under the Internal
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Revenue Code.
15. Plaintiffs are ignorant of the true names and capacities of defendants sued
herein under California Code of Civil Procedure §474 as Does 1 through 25, and therefore
suethese defendants by such fictitious names. Plaintiffs will amend this Complaint to
allege defendants’ true names and capacities when ascertained. Plaintiffs are informed and
believe, and thereon allege, that each of the fictitiously named defendants is responsible in
some manner for the occurrences herein alleged, and that plaintiffs’ damages as herein
alleged were proximately caused by their conduct.
l6. Plaintiffs are informed and believe and based thereon allege, at all times
1o mentioned herein, that defendants, and each of them, were the principals, agents,
11 employees, servants, alter egos, joint venturers, aiders—and—abettors and/or co—conspirators
12 of the remaining defendants, and were acting in the course and scope of such agency,
13 employment, joint venture, and/or conspiracy; that defendants, and each of them, were
14 doing the things herein alleged, were the actual and/or ostensible agents of the remaining
15 defendants and were acting within the course and scope of said agency; and that each and
16 every defendant, as aforementioned, when acting as a principal, was negligent in selecting,
17 hiring, supervising and continuing the employment of each and every defendant as an
18 agent, employee or joint venturer, and/or that said defendants approved, supported,
19 participated in, authorized, and/or ratified the acts and/or omissions of said employees,
20 agents, servants, conspirators, and/or joint venturers.
21 17. Plaintiffs are informed and believe that there exists currently and all times
22 herein mentioned relevant to the subject lawsuit a unity of interest and ownership between
23 Defendant JOHNSTON and Defendant corporation 3COR, such that any individuality and
24 separateness between JOHNSTON and 3COR has ceased, and that Defendant JOHNSTON
25 is the alter ego of defendant corporation 3COR.
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PRESUIT DEMAND ALLEGATIONS
18. Plaintiffs incorporate by reference all preceding and subsequent paragraphs
as if set forth fully herein.
19. Plaintiffs bring the derivative action in the right and for the benefit of
RHAUSLER to redress injuries suffered and to be suffered by RHAUSLER as result of
breaches of fiduciary duties, fraud and deceit, conversion, false reports and material
misstatements, violations of California Corporations Code §§ 309, 310, 1507, 1601 and
1602, commission of waste and misfeasance by the individual defendants, and other
violations of law alleged in this Complaint. Plaintiffs will adequately and fairly represent
1o the interests of RHAUSLER and its stockholders in enforcing and prosecuting its rights.
11 20. Plaintiffs were and are currently stockholders of RHAUSLER and owners of
12 RHAUSLER’S common stock at all times relevant to the individual defendants' wrongful
13 course of conduct as alleged herein. Plaintiffs acquired stock prior to the events giving rise
14 to this derivative action. Plaintiffs delivered a true and correct copy of this Complaint to
15 RHAUSLER before it was filed with this Court, pursuant to California Corporations Code
16 § 800(b)(2).
17 21. As a result of the facts set forth throughout this Complaint, and additionally
18 pursuant to California Corporations Code § 800(b)(2), Plaintiffs have not made demands
19 on RHAUSLER’S board of directors to institute this particular action against the
20 individual and other corporate defendants. Demand on two of the three individual
21 defendants who are members of RHAUSELER’S board of directors — JOHNSTON and
22 GLYNN — to institute this action against themselves is not necessary because such a
23 demand would be a futile and useless act. They would be forced to sue themselves, and
24 persons/business entities with whom they have extensive business and personal
25 entanglements, which they will not do, hereby excusing demand.
26 22. However, Plaintiffs, and each of them, have demanded that the board take
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the remedial actions sought herein in that:
a. GEISLER, one of the 3 members of the RHAUSLER board of directors, in
addition to being the holder of roughly 36% of RHAUSLER’S stock, insisted that GLYNN
be replaced as a director and RHAUSLER’S general counsel in a May 9, 2016 email to
JOHNSTON on account of errors made by GLYNN in drafting a 2015 agreement with
Aesculap, one of the world’s largest surgical instrument companies, to market large
quantities of RHAUSLER’S Plage Titanium Cervical Implant. Instead of wording the
agreement to require that Aesculap actually purchase the negotiated minimum number of
RHAUSLER’S product over a period of six years, GLYNN drafted the provision as a set
10 of “goals,” thereby permitting Aesculap to have control of the marketing of the implant
11 without actually selling, or paying for, any minimum number of units. In that May 9, 2016
12 email, GEISLER also told JOHNSTON that GLYNN had allowed JOHNSTON to enter
13 into 2012 side agreements whereby JOHNSTON would sell RHAUSLER’S Trabeculite
14 Titanium Cervical Spinal Implant to customers and personally pocket commissions on
15 those sales, rather than passing all revenue to RHAUSLER, and to act as an independent
16 contractor on a $3,000 per month retainer for Tecomet, as set forth in paragraph 3, page 3,
17 ante. GEISLER’S email to JOHNSTON concluded, “Your current support of GLYNN,
18 despite multiple issues including the contract fiasco with Aesculap, is baffling to me... [a]
19 new corporate lawyer could easily solve these current organizational problems...I can find
20 a new corporate lawyer today with the intent of straightening the corporate books out.”
21 GEISLER’S email further demanded that the revenues that 3COR earned from the sale of
22 RHAUSLER’S products be passed directly to RHAUSLER without JOHNSTON diverting
23 any of it to his own uses. On May 27, 2016, an uncharacteristically subdued JOHNSTON
24 advised GLYNN by email that, “. .. [GEISLER] is insisting to look for a new company
25 lawyer. I will let you know when this takes place. Sorry that this is happening, it has been
26 a great pleasure to work with you over these years.”
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b. GEISLER made further demands on JOHNSTON to end the practice of
using RHAUSLER as JOHNSTON’S personal piggy-bank and to ensure that 3COR and
TEDAN paid their fair shares of administrative expenses being born solely by
RHAUSLER. GEISLER insisted that JOHNSON sign a “Rhausler, Inc. Partners Working
Agreement,” executed by both men and witnessed by Rowena Mier, JOHNSTON’S long—
time employee and aider—and—abettor in J OHNSTON’S plundering of RHAUSLER, on
April 25, 2016. A true copy of that “Working Agreement” is appended hereto as Exhibit
“A.” GEISLER also sent March, 2017 emails to SHVIS, asking her to delay filing
RHAUSLER’S corporate tax return, and to amend the returns filed in earlier years, to
account for irregularities in RHAUSLER’S bookkeeping that were caused by
JOHNSTON’S efforts to feather his own nest at the expense of RHAUSLER and its
shareholders. JOHNSTON paid lip service to GEISLER’S demands for a period of roughly
one month, but to date GLYNN still sits on the board and is corporate counsel;
JOHNSTON still runs sales through 3COR and devotes substantial efforts to selling
TEDAN’S and Industry of the Redwoods products/services, but RHAUSLER continues to
bear the majority of the administrative expense for RHAUSLER, 3COR, TEDAN’S San
Carlos, CA office and Industry of the Redwoods.
23. Similarly, FLEMING has repeatedly requested information from
JOHNSTON and RHAUSLER about the company’s financial status, its products,
prospects and activities. He has also felt compelled to annually urge RHAUSLER to
transmit the K-1 forms to shareholders in a timely manner, i.e., they are due when the
Form 1120S is filed on March 15 of each year. FLEMING has also been contacted by
other shareholders who share his frustration, including a physician who responded to
FLEMING’S March 30, 2017 query: “You'll forgive me for asking, but investors
haven't received any updates in years. Is anyone else concerned about your investment? If,
so please respond.” The response was, “Thanks. So funny; normal business practice they
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COMPLAINT
clearly do not follow. Fortunately, I have given up on that investment long ago.”
FLEMING received his last “update” from JOHNSTON/RHAUSLER by email on
December 5, 2011: “FYI Good news for Rhausler, Aesculap will start the field trials and
then a full launch. We will keep you updated. TI.”
24. FLEMING understands that RHAUSLER’S Bylaws provide, in part, at
Article VII, Section 6., entitled “Financial Statements,” that, “... these documents shall be
exhibited at all reasonable times, or copies provided, to any shareholder on demand.”
FLEMING further understands that California Corporations Code § 1601 gives
shareholders an absolute right to inspect and copy the financial records of the affected
company upon demand. Nevertheless, FLEMING’S repeated demands have been ignored
by JOHNSTON/RHAUSLER.
25. GEISLER and FLEMING have directly, persistently and undeniably made
manful efforts “to secure from the board such action as plaintiffIs] desire[]” (Cal. Corp.
Code § 800(b)(2)), but to no avail. Further efforts would be futile. Two-thirds of the entire
board is neither interested nor independent, since they are named as individual defendants
herein and because they are liable for the violations of fiduciary duty, statutory and
common-law violations, commission of waste, and other claims alleged herein.
26. No demand on the board is required for Plaintiffs’ direct action.
FACTS AND ALLEGATIONS
27. Plaintiffs incorporate by reference all preceding and subsequent paragraphs
as if set forth fully herein.
28. GEISLER is an internationally renowned expert in spinal care and a pioneer
of new, innovative procedures. He is one of this nation’s leading authorities on spinal cord
injuries and degenerative diseases of the spine. He both developed and adopted multiple
new spinal treatments and technologies at their onset. GEISLER was the first physician in
the United States to adopt anterior cervical plating, as well as total lumbar disc
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replacement that is published in the Neurosurgery literature and that he taught to other
surgeons. He is also an active researcher, lecturer, and author. His recent focus has been
on relieving post-operative pain, sacral iliac joint treatments, new spinal stabilization and
fusion techniques, and minimally invasive spinal surgery. As noted, ante, he is a board—
certified neurosurgeon licensed to practice in the State of Illinois, where he founded and
headed the Illinois Neuro—Spine Center at Rush Copley Medical Center at Aurora, IL.
GEISLER pioneered integration of titanium wire in spinal applications, and holds patents
on several spine devices, including cervical plates, VBR cervical implants, Plage cervical
spine implants, a spinal drill guide, microbeam radiation surgical therapy and allograft
bone grafts.
29. In the late 1980’s, or early 1990’s, GEISLER was introduced to
JOHNSTON, who was then working in research and development at Aesculap, one of the
world’s largest surgical instrument and implant companies. GEISLER and JOHNSTON
collaborated on Aesculap’s introduction of the first anterior cervical stabilization plating
system, named CASPAR.
GEISLER’S Agreement with JOHNSTON Re RHAUSLER
30. In 2008, GEISLER was approached by JOHNSTON with the idea of forming
a partnership to purchase the inventory and intellectual property (patents) of Olsen
Medical, a privately-held Kentucky company. In order to finance the acquisition,
GEISLER and JOHNSTON obtained a $1,040,000 Small Business Administration
(“SBA”) loan, secured by a lien on JOHNSTON’S Redwood City, California residence
and GEISLER’S personal assets. Additionally, and to satisfy Olsen’s demand for a steady,
monthly schedule of payments prior to the SBA funding, JOHNSTON proposed that a new
entity, RHAUSLER, be formed to make those payments and to further develop and market
the Olsen technology, design, development and market new spine surgery devices, and
acquire both exclusive and non—exclusive distribution rights to devices and technology
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owned by others.
31. JOHNSTON proposed, and GEISLER agreed, that:
a. As founders JOHNSTON would be granted 900,000 shares of RHAUSLER
stock, and GEISLER would be granted 600,000 shares,
b. GEISLER would pay to RHAUSLER the sum of $160,000 as a capital
contribution to be used as seed money;
c. GEISLER would assign certain of his patents to RHAUSLER, for which he
would be paid a royalty on sales;
(1. JOHNSTON would fold his separately-owned 3COR into RHAUSLER to
facilitate sales to hospitals at which GEISLER and other physicians /shareholders practiced
in order to avoid direct conflicts of interest; and
e. JOHNSTON would operate RHAUSLER from offices in California, while
GEISLER would serve as the company’s chief medical officer and promote the use of
RHAUSLER products by using them in his very busy spine surgery practice.
32. JOHNSTON and GEISLER further agreed that JOHNSTON would oversee
the sale of RHAUSLER stock via a private placement of 1,500,000 shares exempt from
17 securities registration to a limited number of individuals at $2.50 per share.
18 33. JOHNSTON represented to GEISLER that J OHNSTON’S extensive
19 background in owning, operating and promoting medical device design, manufacturing and
20 marketing companies uniquely suited him to being the Chief Executive Officer and Chief
21 Financial Officer of RHAUSLER; that JOHNSTON had a cadre of well-qualified
22 individuals to assist in forming and operating the company, while GEISLER’S
23 participation would be nominal, as befitting an absentee owner. The first person that
24 JOHNSTON proposed to employ was GLYNN, who JOHNSTON represented to be an
25 attorney experienced in the process of incorporating a company and thereafter serving as
26 general counsel.
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34. JOHNSTON further proposed, and GEISLER further agreed, that:
a. RHAUSLER would be incorporated in California;
b. JOHNSTON, GEISLER and GLYNN would constitute the Board of
Directors; and
c. JOHNSTON would be reimbursed for RHAUSLER-related expenses.
35. JOHNSTON and GEISLER further agreed that JOHNSTON would receive
some compensation in the form of salary for his work and contributions to RHAUSLER
\DOO\]O\
(not any other business entity).
36. The RHAUSLER Board authorized payment of $1,181 per month for
10 J OHNSTON’S rental of his automobile, as memorialized in the Minutes of a Special
11 Board of Directors meeting on October 5, 2008.
12 Incorporation of RHAUSLER and Issuance of Shares to GLYNN and FLEMING
13 37. On January 28, 2008, JOHNSTON and GLYNN caused RHAUSLER to be
14 incorporated under the laws of California by the filing of Articles of Incorporation,
15 corporate number C3074956.
16 38. Pursuant to the GEISLER-JOHNSTON agreement, GEISLER paid in his
17 $160,000, and began the process of transferring to RHAUSLER his ownership interest in
18 certain of his patents in 2008, and then in 2010 Spinal Integration, LLC, and its patents,
19 which RHAUSLER authorized GEISLER to acquire for RHAUSLER which included
20 GEISLER’S loan of $345,000 to RHAUSLER for his portion of Spinal Integration, LLC
21 ownership not purchased. This loan amount was booked in QuickBooks, but has never
22 been paid.
23 39. JOHNSTON advised GEISLER that Rowena Mier was being hired to
24 manage RHAUSLER’S business office, to generate invoices, keep the books, pay the bills,
25 and interface with shareholders, vendors and customers. However, Ms. Mier did not start
26 work until June, 2008 and, as a consequence, she claims there is no record of the receipt,
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28
deposit, or disposition of the monies received by RHAUSLER prior to that date, including
the roughly $350,000 received from the sale of RHAUSLER stock.
40. JOHNSTON caused a professional—looking business plan and private
placement memorandum to be created for prospective RHAUSLER shareholders and,
between February 2 and September 11, 2008, RHAUSLER received $760,000 from
individual investors who purchased RHAUSLER stock at $2.50 per share. The
OO\]O\
“Confidential Private Placement Memorandum,” dated March 26, 2008, represented that it
owned several patented devices that had, in fact, been transferred to RHAUSLER by
GEISLER, who had either patented his own designs or acquired them (Spinal Integration),
10 or had been purchased by JOHNSTON and GEISLER (Olsen). The Memorandum further
11 represented that RHAUSLER owned development stage, design stage and “Class III PNA
12 Design and Development Devices.”
13 41. JOHNSTON also arranged for 144,000 shares of RHAUSLER to be
14 purchased by various vendors as “sweat equity,” whereby the vendor would be
15 compensated for goods and services, up to a pre—negotiated amount, in return for
16 RHAUSLER shares valued at $2.50 each. Included in those “sweat equity” shareholders
17 was GLYNN, who acknowledged the arrangement by a writing he drafted and executed on
18 May 8, 2008, to wit: “Pursuant to the foregoing Resolution of the Board of Directors of
19 Rhausler, Inc. on 5/7/08 the undersigned Robert J. Glynn, Attorney at Law, General
20 Counsel and Secretary of the Board does hereby agree and accept the terms of the
21 Resolution as set forth therein concerning the form of payment by Rhausler Inc stock for
22 his professional services rendered on behalf of the Company on and after May 7, 2008.”
23 42. In early 2008, FLEMING, who had met and worked with JOHNSTON
24 during the period 1977 — 1981, encountered JOHNSTON at an airport. FLEMING, who
25 had spent 21 years at Johnson & Johnson as Vice President, Corporate National Accounts,
26 before moving to Boston Scientific in the same capacity for the following 15 years, when
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they were both employed at Johnson & Johnson, learned of RHAUSLER and its prospects
from JOHNSTON. Following his review of the Private Placement Memorandum, which
confirmed J OHNSTON’S representations about the Plage Cervical Implant System, as
well as the Quick Plate Cervical Plating System, and the VBR Cervical Spacer being
“development stage devices” that were owned by RHAUSLER, FLEMING purchased
40,000 shares of RHAUSLER for $100,000 in April, 2008. JOHNSTON’S representations
about RHAUSLER’S intellectual property and the prospects of “development stage”
products that RHAUSLER owned or purportedly was coming out with, were a material
inducement to FLEMING’S decision to purchase 40,000 shares of RHAUSLER stock for
$100,000. However, as noted in paragraphs 23, 24 and 25, ante, his demands for
information about his investment have fallen on deaf ears.
Contractual, Tort, and Other Allegations Against JOHNSTON and GLYNN
43. Although GEISLER had been promised royalties on the sales of
RHAUSLER products employing the patented matter he had assigned to RHAUSLER
under his agreement with JOHNSTON/RHAUSLER, GEISLER was repeatedly told by
JOHNSTON that the company could not afford to pay those royalties at present; that they
would be reflected (“booked”) on the company’s books and income statements, but that
they would not actually be paid. Similarly, GEISLER was advised that the interest and
principal that RHAUSLEIVJOHNSTON had promised would be paid on the loans
GEISLER had made to RHAUSLER in part for the purchase of Spinal Integration, LLC,
and its patents ($345,000), would also be booked, but not actually paid. As of December
31, 2016, GEISLER is owed royalties of $1,083,435.07 and, on his loans to RHAUSLER,
principal in the amount of $345,000, plus interest.
44. By May, 2013, the balance on the SBA loan to purchase Olsen Medical had
fallen to $624,000, and RHAUSLER’S board agreed that RHAUSLER should directly be
responsible for that debt. At JOHNSTON’S suggestion, and on advice of GLYNN, who
1 6
COMPLAJNT
recorded and published the Minutes of the Special Meeting of the Board of Directors, it
was agreed that JOHNSTON would refinance his Redwood City residence, pay off the
SBA loan, thereby loaning $624,000 to RHAUSLER, which would execute a promissory
note in that principal amount, amortized over 9 years at 7% interest, payable in monthly
installments of $7,803.92 to JOHNSTON and his spouse at that time, Kari Johnston. The
RHAUSLER board so resolved, Resolution 2013-1, on May 15, 2013. However, the
promissory note prepared by JOHNSON for GEISLER’S signature, on behalf of
RHAUSLER, and executed by GEISLER on June 15, 2013, reflected that the loan amount
was $635,868.06, the interest rate was 5.5%, and the monthly payments were $8,202.27.
GEISLER had not recalled the exact details of the month-old board resolution, but had
relied on J OHNSTON’S honesty in preparing the promissory note.
45. Following the Aesculap debacle described in paragraph 22, ante, which
resulted in RHAUSLER having to pay to Aesculap $170,000 rather than Aesculap paying
to RHAUSLER the $894,414 that JOHNSTON and GLYNN claimed was due for the first
two years only under the multi—year, $5,500,000 distribution agreement, JOHNSTON told
GEISLER that there was no money for further refining/developing the Plage system, or the
17 Trabeculite technology that RHAUSLER planned to distribute under an exclusive
18 licensing agreement with Tecomet.
19 46. Although GEISLER was a Director and Chief Medical Officer of
2o RHAUSLER, his attendance at Board meetings was virtually always telephonic, and his
21 requests that he be given not just the income statements and balance sheets generated by
22 the company’s accountants, but also the “Quick Book” entries that would detail the
23 revenues and expenses, were brushed aside by JOHNSTON and Rowena Mier.
24 Nevertheless, GEISLER was surprised and alarmed by the bleak financial picture
25 JOHNSTON was painting, particularly since he had personally guaranteed RHAUSLER’S
26 $450,000 revolving line of credit through United American Bank.
27 17
C01V.[PLAINT
28
Discovery of Defendants’ Wrongdoing
47. In December, 2014, JOHNSTON and Rowena Mier were deposed in
JOHNSTON’S divorce proceedings with ex-wife Kari Johnston. Later, GEISLER was
provided copies of the transcripts of those depositions and was asked for his comments
about the testimony of JOHNSTON and Ms. Mier. He has also recently reviewed
voluminous electronic files of RHAUSLER’S financial statements, QuickBook entries,
and communications between RHAUSELER officers, directors and employees, most of
which had omitted GEISLER as a recipient.
Discovery of Wrongdoing by JOHNSTON
48. As a result of GEISLER’S review of that recently obtained material, which
required months to sift through and make sense of, he has discovered the following:
a. Contrary to their agreement, and without GEISLER’S knowledge, consent or
authorization as a Board member, JOHNSTON caused RHAUSLER to pay him a monthly
salary that amounted to $1,010,833 from 2008 until December, 2016 for work that
JOHNSTON performed for RHAUSLER as well as work he performed for 3COR,
TEDAN, and other non-RHAUSLER entities,
b. Contrary to their agreement, and without GEISLER’S knowledge, consent or
authorization as a Board member, JOHNSTON used the RHAUSLER American Express
credit cards to pay for the personal living and travel expenses of himself, his immediate
and extended family, and his Chinese girlfriend (now wife), who he began a romantic
relationship with in 2008. JOHNSTON also caused RHAUSLER to issue him company
checks for reimbursement of expenses that were not business related, and he caused
RHAUSLER to pay his then-wife (Kari Johnston) a $1,000 per month salary when she
24 performed no services for the company. He also caused RHAUSLER to pay for health
25 insurance for JOHNSTON, JOHNSTON’S family, Ms. Mier and Ms. Mier’s children.
26 RHAUSLER paid Anthem Blue Cross $510,000 in health care premiums without
27 1 8
CONTPLAINT
28
GEISLER’S knowledge and consent. RHAUSLER also paid $14,000 to the Pacific
Athletic Club, and $5,000 to the Western Athletic Club for J OHNSTON’S membership;
c. Contrary to his representations---which he caused to be memorialized in
2013 “Evaluation Report” of RHAUSLER---that 3COR was a wholly—owned subsidiary of
RHAUSLER, JOHNSTON treated it as his solely—owned property. He used 3COR to
receive payments from Tecomet and other companies for J OHNSTON’S services as a
distributor/sales representative for their products at the same time he was purportedly
engaged in running RHAUSLER and selling its products;
(1. Contrary to his representations, JOHNSTON was using 3COR to bill
hospitals and other entities for RHAUSLER products which he instructed RHAUSLER to
sell to 3COR at discounts of 50%, but which 3COR charged usual and customary rates to
the customer. Once 3COR received payment from the customer, 3COR would pay over to
RHAUSLER the amount RHAUSLER had charged 3COR, less a commission fee;
e. Over time, the money diverted to 3COR, either because of the difference in
the amount charged customers and the amount paid to RHAUSLER, or because, in some
cases, RHAUSLER was not paid at all for its products and/ or the services of its Chief
Executive Officer, would accumulate to a point where JOHNSTON would cause it to be
loaned by himself or 3COR to RHAUSLER, and then paid back to 3COR, or himself;
f. JOHNSTON was also causing Rowena Mier and defendants GLYNN and
SIMS to perform tasks for 3COR, TEDAN, Industry of the Redwoods, Baocui Zhang
(J OHNSTON’S new wife) and JOHNSTON personally for which RHAUSLER paid the
employee, or attorney;
g. JOHNSTON was also causing RHAUSLER to pay travel and related
24 expenses for sales trips to market RHAUSLER products, but which in reality were for the
25 purpose of selling TEDAN products, Tecomet products, or for non—business visits to Ms.
26 Zhang. Some of these and other expenses charged to RHAUSLER were also charged to
27 19
COlVIPLAlNT
28
3COR, thereby providing JOHNSTON with double-billing benefits and additional tax
deductions;
h. JOHNSTON was using the money siphoned off from RHAUSLER by 3COR
to nominally employ and pay salary to the Mexican girlfriend of one of his TEDAN
partners in 2010. RHAUSLER paid that same TEDAN partner of J OHNSTON’S
$154,000, separate and apart from the $67,000 that was paid to that TEDAN partner’s
company. Presumably, the TEDAN partner would later pay cash directly to JOHNSTON,
or otherwise reimburse him or 3COR for the “consultant” fees RHAUSLER paid to his
girlfriend;
10 i. In addition to dividing his loyalty between RHAUSLER, TEDAN, 3COR,
11 and Industry of the Redwoods, JOHNSTON entered into an agreement on or about
12 October 21, 2016 to allow the Orthopaedic Implant Company of Reno, Nevada, to base its
13 “OIC Cervical PEEK Space” on the Rhausler Plage Anterior Cervical Fusion System
14 without any remuneration to RHAUSLER. Presumably, JOHNSTON has a side deal with
15 them as well.
16 Discovery of Wrongdoing by GLYNN and SIMS
17 49. As a result of GEISLER’S review of the material identified in Paragraphs 47
‘
18 and 48, which required months to sift through and make sense of, he also discovered the
19 following:
2o a. Although GLYNN and SIMS should have known that, “Tax practitioners and
21 subchapter S shareholders need to be aware that Revenue Ruling 74-44 states that the IRS
22 will re—characterize small business corporation dividends paid to shareholders as salary
23 when such dividends are paid to the shareholders in lieu of reasonable compensation for
24 services,” as the IRS advised RHAUSLER by letter dated June 2, 2008, neither of them so
25 advised RHAUSLER nor its “sweat equity” shareholders, and neither of them advised
26 RHAUSLER that only individuals, not corporations, could hold shares in an “S”
27 20
COMPLAINT
28
corporation. As a consequence, RHAUSLER became embroiled in a divorce action
between a “sweat equity” participant and his spouse, and was forced to pay substantial
attorney fees in addition to a $71,000 settlement;
b. Contrary to his duty of loyalty to his corporate client (and his parallel duty as
a corporate director), GLYNN performed services for 3COR, Industry of the Redwoods,
Ms. Zhang and JOHNSTON personally, but was paid by RHAUSLER. In addition to the
“sweat equity” GLYNN and his associate have earned, GLYNN has been paid over
$104,000 by RHAUSLER to perform legal services for the company, including the 2015
drafting of the ill-fated Aesculap agreement discussed in paragraph 22, ante;
c. The RHAUSLER state and federal tax returns, and the K-l’s sent to
shareholders, are inaccurate as a consequence of the irregularities cited above, but SIIVIS
declines, by her responses to GEISLER’S March, 2017 email requests, to take action to
amend the returns and K-l’s, thereby exposing RHAU
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JEFFREY F. RYAN (SBN 129079) FILEDNW SAN MATEO (301 LAW OFFICES OF JEFFREY F. RYAN 1 JUN g 3 2017 The Fitzpatrick Building 2000 Broadway Street Redwood City, CA 94063 Phone: (650) 924—8343 jeff@jeffreyryanlaw.com Attorney for Plaintiffs FRED H. GEISLER & NORMAN C. FLEMING OO\] IN THE SUPERIOR COURT OF THE STATE OF CALIFORNIA \O FOR THE COUNTY OF SAN MATEO 10 CIVIL DIVISION-SOUTHERN BRANCH 11 FREDH GEISLER, MD ,..PhD an 1nd1v1dual CAME 1 ll 0 2 8 8 5 and NORMAN C FLEMING, an individual, 12 directly, and derivatively on behalf of VERIFIED COMPLAINT FOR: RHAUSLER, INC, a California Corporation, 13 1. INTENTIONAL MISREPRESENTATION Plaintiffs, 14 2. FRAUD AND DECEIT v. 3. BREACH OF FIDUCUIARY 15 DUTY TERRY J JOHNSTON, an individual, KATIE 4. CONVERSION 16 SIMS, CPA, an individual, ROBERT JOHN S. CONVERSION GLYNN, JR, an individual, 3COR IVIEDICAL, 6. CONSPIRACY TO COMMIT 17 INC, a California Corporation, TEDAN BREACH OF FIDUCIARY SURGICAL INNOVATIONS, LLC, a Texas DUTY 18 Limited Liability Company, and DOES 1 to 7. AIDING AND ABETTING 25, TWO TORTS 19 Defendants, 8. IMPOSITION OF CONSTRUCTIVE TRUST 20 and RHAUSLER, INC., a California 9. FALSE REPORTS Corporation, 10. ACCOUNTING 21 Nominal Defendant. ) 11. BREACH OF AGREEMENT 22 ) 12. FINANCIAL ELDER ABUSE ) 13. REMOVAL OF DIRECTORS 23 ) 24 BY FAX 25 JURY TRIAL DEMANDED " 17—13111—1121388 ' \ 26 CMP Complaint 576989 ' 27 28 €011.11]... 111111111111111111111“11 1 . Plaintiffs allege on information and belief based upon, inter alia, the investigation made by themselves and through their attorneys, except as to those allegations which pertain to the plaintiffs themselves, which are alleged upon knowledge, as follows: SUMMARY AND NATURE OF THE ACTION 1. This is a stockholders’ direct action, and a derivative action against the defendants seeking to remedy defendants' violations of California law, including having intentionally made material misstatements and omissions in solicitations of, and reports to, prospective and existing shareholders, breaches of fiduciary duties, and violations of California Corporations Code §§ 309, 310, 1507, 1601 and 1602, and the common law. 2. The causes of action alleged in this Complaint inherently have both direct and derivative characteristics. It is a direct action in that plaintiffs were injured when they were solicited to purchase shares in, loan money to, guarantee loans to, and/or assign personal property interests to nominal defendant Rhausler, Inc., by means of materially false or misleading written and verbal representations of defendants Terry J. Johnston and Robert John Glynn, Jr. This also is a derivative action in that Rhausler, Inc., a California corporation, was injured by the self—serving and intentional misapplication, misdirection and/or diversion of Rhausler assets to defendant Terry J. Johnston and entities in which he had substantial interest, including defendants 3COR Medical, Inc. and TeDan Surgical Innovations, LLC. 3. Rhausler, Inc., was also injured by the charging to, and payment by, Rhausler of administrative and other expenses that should rightfully have been the obligations of the persons, or entities who benefitted from them, including the 3COR Medical and TeDan Surgical corporate defendants. Rhausler was further injured by defendant Terry J. J ohnston’s use of Rhausler assets to pay for personal expenses of himself, his immediate and extended family members, his foreign mistress, associates in other enterprises, and their mistresses. For complete relief in the derivative action, 2 COMPLAINT equitable relief in the form of an accounting from Rhausler directors Terry J. Johnston and Robert John Glynn, Jr., will be required. In addition, there is a derivative action that arises from those directors’ breach of their fiduciary duties to Rhausler shareholders in tacitly approving the payment to Terry J. Johnston a salary ($12,500/month) and other benefits commensurate with full-time work, dedication and undivided loyalty by a senior executive of a going concern, when, in fact, he was devoting substantial time to promoting the interests of TeDan Surgical, 3COR Medical, Tecomet, a Massachusetts—based medical device company with whom Johnston entered into an agreement to market spinal implants for a monthly retainer of $3,000, plus commissions, and Industry of the Redwoods, LLC, a 10 Nevada company that Terry J. Johnston and Robert John Glynn, Jr., created so that 11 J ohnston’s new wife (Baocui Zhang) could earn commissions by selling Rhausler products 12 to third—parties, and the products of third-parties to Rhaulser, in order to buttress her 13 application for Resident Alien status. The Rhausler products provided to satisfy Industry of 14 the Redwoods’ customers were grossly discounted in cost so as to effectively increase 15 commission income, while the products sold to Rhausler via Industry of the Redwoods 16 were at prices inflated to further increase commissions. 17 JURISDICTION AND VENUE 18 4. This Court has jurisdiction over all causes of action asserted herein pursuant 19 to the California Constitution, Article VI, § 10, because this case is a cause not given by 20 statute to other trial courts. The direct action is brought pursuant to § 382 and § 410.10 of 21 the California Code of Civil Procedure, and the derivative action is brought pursuant to § 22 800 of the California Corporations Code to remedy defendants' violations of law. 23 5. The Court has jurisdiction over each defendant named herein because each 24 defendant is either a corporation organized and existing under the laws of the State of 25 California, or, as with the individual defendants, has sufficient minimum contacts with 26 California to render the exercise of jurisdiction by the California courts permissible under 27 3 COIVIPLAINT 28 traditional notions of fair play and substantial justice. All of the defendants conduct business and/or maintain offices in California, and the headquarters of Rhausler and 3COR and their principal place of business are located in Redwood City, California, and they are incorporated in California. 6. Venue is proper in this Court because Rhausler and one or more of the individual defendants, at all times relevant herein, either resides in or maintains executive offices in San Mateo County, and a substantial portion of the transactions and wrongs complained of herein, including the defendants' primary participation in the wrongful acts detailed herein in violation of their fiduciary and other duties owed to Rhausler and its 10 shareholders, and to the plaintiffs, occurred in San Mateo County, and defendants have 11 received substantial compensation in San Mateo County by doing business here and 12 engaging in numerous activities which have an effect in this County. 13 THE PARTIES 14 7. Plaintiff FRED H. GEISLER, M.D., PhD. (“GEISLER”), was, at all times 15 material herein, a resident of Cook County, State of Illinois, until May, 2014, when he 16 became a resident of Emmet County, State of Michigan, and a board-certified 17 neurosurgeon of international renown. GEISLER has been a director, non—corporate officer 18 and holder of 600,000. shares, which constitutes roughly 36% of the outstanding stock of 19 nominal defendant Rhausler, Inc, since 2008. He was born on March 2, 1947, and attained 20 the age of 65 years on March 2, 2012. 21 8. Plaintiff NORMAN C. FLEMING (“FLEMING’), was, at all times material 22 herein, a resident of Maricopa County, State of Arizona, where he lives in retirement 23 following a 35-year career as a senior executive in medical device design, manufacturing 24 and sales organizations. FLEMING has been a holder of 40,000 shares of Rhausler stock 25 since 2008. He was born on November 23, 1947, and attained the age of 65 years on 26 November 23, 2012. GEISLER and FLEMING are collectively referred to as “Plaintiffs.” 27 4 COMPLAINT 28 9. Defendant TERRY J. JOHNSTON (“JOHNSTON”) was, at all times material herein, a resident of Redwood City, San Mateo County, State of California and relocated to Nevada in or about 2014, and simultaneously held the positions of Chairman of the Board, President and Chief Executive Officer of nominal defendant Rhausler, Inc; President, Chief Executive Officer and sole shareholder of 3COR Medical, Inc, although JOHNSTON represented that 3COR was actually a wholly-owned subsidiary of nominal defendant Rhausler, a managing member holding a 33.33% interest in TeDan Surgical Innovations, LLC, President and Chief Executive Officer of Industry of the Redwoods, LLC, and President, Chief Executive and the m sole shareholder of Cabo Spine, Inc., 10 although it is nominally owned by his employee, Rowena Mier. 11 10. Defendant ROBERT JOHN GLYNN, JR. (“GLYNN”), was, at all times 12 material herein, a resident of Pleasanton, Alameda County, State of California, a member 13 of the State Bar of California, and held the positions of Director, and Secretary and 14 General Counsel of nominal defendant Rhausler, Inc. GLYNN has been a member of the 15 California Bar since January 7, 1959. 16 11. Defendant KATIE SIMS, CPA (“SIMS”), was, at all times material herein, a 17 resident of Santa Clara County, State of California, and a partner in the accounting firm 18 Magnolia Group, LLP, with offices at Los Altos, California. SIMS was the accountant for 19 nominal defendant Rhausler, defendant 3COR, and defendant JOHNSTON and his other 20 ventures. In that capacity, SIMS prepared the tax'returns of the corporations, including the 21 preparation and transmittal of Forms 112OS K—l to the shareholders of Rhausler, Inc, 22 which had applied for, and been accepted as, a Subchapter S corporation under the Internal 23 Revenue Service Code on June 2, 2008. 24 12. Defendant 3COR IVLEDICAL, INC. (“3COR”), was, at all times material 25' herein, a corporation organized under the laws of the State of California, duly registered 26 with the California Secretary of State, entity number C2464264, with principal offices at 27 5 COMPLAINT 28 837 Industrial Road, Unit B, San Carlos, County of San Mateo, State of California. The Statement of Information filed with the Secretary of State on August 26, 2008 reflects that JOHNSTON holds all 3 corporate offices and is the sole director. It further shows that the business of 3COR is “medical sales.” The Secretary of State’s website reflects that the agent for service of process is “Terry Johnston, 917 Durlston Road, Redwood City, CA 94062.” 13. Defendant TEDAN SURGICAL INNOVATIONS, LLC (“TEDAN”), was, at all times relevant herein, a limited liability company organized under the laws of the State of Texas on November 14, 2005, Filing Number 800570065. The Texas Secretary of 10 State records reflect that the 3 managing members are Daniel Fishman of Houston, Texas; 11 Daniel Bass of El Granada, California, and JOHNSTON. The records further show that the 12 agent for service of process is “Danny Fishman, 12615 W. Airport Blvd, Ste. 200, 13 Sugarland, TX 77478.” By agreement dated June 1, 2006, Mr. Fishman holds 33.34% 14 interest in TEDAN, and Messrs. Bass and JOHNSTON each hold a 33.33% interest. 15 TEDAN has an office and personnel working in San Carlos, California, located in San 16 Mateo County. 17 14. Nominal Defendant RHAUSLER, INC. (“RHAUSLER”), was, at all times 18 material herein, a corporation organized under the laws of the State of California, duly 19 registered with the California Secretary of State, entity number C3074956, with principal 2o offices at 837 Industrial Road, Unit B, San Carlos, County of San Mateo, State of 21 California. The Statement of Information filed with the Secretary of State on February 16, 22 2016 reflects that JOHNSTON is the Chief Executive Officer and the Chief Financial 23 Officer; that GLYNN is the Secretary, and that JOHNSTON, GEISLER and GLYNN are 24 the Directors. It further shows that the agent for service of process is “Terry Johnston, 837 25 Industrial Road, Unit B, San Carlos, CA 94070.” As noted in paragraph 11, ante, 26 RHAUSLER has opted for treatment as a Subchapter S Corporation under the Internal 27 6 COIVIPLAINT 28 Revenue Code. 15. Plaintiffs are ignorant of the true names and capacities of defendants sued herein under California Code of Civil Procedure §474 as Does 1 through 25, and therefore suethese defendants by such fictitious names. Plaintiffs will amend this Complaint to allege defendants’ true names and capacities when ascertained. Plaintiffs are informed and believe, and thereon allege, that each of the fictitiously named defendants is responsible in some manner for the occurrences herein alleged, and that plaintiffs’ damages as herein alleged were proximately caused by their conduct. l6. Plaintiffs are informed and believe and based thereon allege, at all times 1o mentioned herein, that defendants, and each of them, were the principals, agents, 11 employees, servants, alter egos, joint venturers, aiders—and—abettors and/or co—conspirators 12 of the remaining defendants, and were acting in the course and scope of such agency, 13 employment, joint venture, and/or conspiracy; that defendants, and each of them, were 14 doing the things herein alleged, were the actual and/or ostensible agents of the remaining 15 defendants and were acting within the course and scope of said agency; and that each and 16 every defendant, as aforementioned, when acting as a principal, was negligent in selecting, 17 hiring, supervising and continuing the employment of each and every defendant as an 18 agent, employee or joint venturer, and/or that said defendants approved, supported, 19 participated in, authorized, and/or ratified the acts and/or omissions of said employees, 20 agents, servants, conspirators, and/or joint venturers. 21 17. Plaintiffs are informed and believe that there exists currently and all times 22 herein mentioned relevant to the subject lawsuit a unity of interest and ownership between 23 Defendant JOHNSTON and Defendant corporation 3COR, such that any individuality and 24 separateness between JOHNSTON and 3COR has ceased, and that Defendant JOHNSTON 25 is the alter ego of defendant corporation 3COR. 26 27 7 COL/[PLAINT 28 PRESUIT DEMAND ALLEGATIONS 18. Plaintiffs incorporate by reference all preceding and subsequent paragraphs as if set forth fully herein. 19. Plaintiffs bring the derivative action in the right and for the benefit of RHAUSLER to redress injuries suffered and to be suffered by RHAUSLER as result of breaches of fiduciary duties, fraud and deceit, conversion, false reports and material misstatements, violations of California Corporations Code §§ 309, 310, 1507, 1601 and 1602, commission of waste and misfeasance by the individual defendants, and other violations of law alleged in this Complaint. Plaintiffs will adequately and fairly represent 1o the interests of RHAUSLER and its stockholders in enforcing and prosecuting its rights. 11 20. Plaintiffs were and are currently stockholders of RHAUSLER and owners of 12 RHAUSLER’S common stock at all times relevant to the individual defendants' wrongful 13 course of conduct as alleged herein. Plaintiffs acquired stock prior to the events giving rise 14 to this derivative action. Plaintiffs delivered a true and correct copy of this Complaint to 15 RHAUSLER before it was filed with this Court, pursuant to California Corporations Code 16 § 800(b)(2). 17 21. As a result of the facts set forth throughout this Complaint, and additionally 18 pursuant to California Corporations Code § 800(b)(2), Plaintiffs have not made demands 19 on RHAUSLER’S board of directors to institute this particular action against the 20 individual and other corporate defendants. Demand on two of the three individual 21 defendants who are members of RHAUSELER’S board of directors — JOHNSTON and 22 GLYNN — to institute this action against themselves is not necessary because such a 23 demand would be a futile and useless act. They would be forced to sue themselves, and 24 persons/business entities with whom they have extensive business and personal 25 entanglements, which they will not do, hereby excusing demand. 26 22. However, Plaintiffs, and each of them, have demanded that the board take 27 8 COMPLAINT 28 the remedial actions sought herein in that: a. GEISLER, one of the 3 members of the RHAUSLER board of directors, in addition to being the holder of roughly 36% of RHAUSLER’S stock, insisted that GLYNN be replaced as a director and RHAUSLER’S general counsel in a May 9, 2016 email to JOHNSTON on account of errors made by GLYNN in drafting a 2015 agreement with Aesculap, one of the world’s largest surgical instrument companies, to market large quantities of RHAUSLER’S Plage Titanium Cervical Implant. Instead of wording the agreement to require that Aesculap actually purchase the negotiated minimum number of RHAUSLER’S product over a period of six years, GLYNN drafted the provision as a set 10 of “goals,” thereby permitting Aesculap to have control of the marketing of the implant 11 without actually selling, or paying for, any minimum number of units. In that May 9, 2016 12 email, GEISLER also told JOHNSTON that GLYNN had allowed JOHNSTON to enter 13 into 2012 side agreements whereby JOHNSTON would sell RHAUSLER’S Trabeculite 14 Titanium Cervical Spinal Implant to customers and personally pocket commissions on 15 those sales, rather than passing all revenue to RHAUSLER, and to act as an independent 16 contractor on a $3,000 per month retainer for Tecomet, as set forth in paragraph 3, page 3, 17 ante. GEISLER’S email to JOHNSTON concluded, “Your current support of GLYNN, 18 despite multiple issues including the contract fiasco with Aesculap, is baffling to me... [a] 19 new corporate lawyer could easily solve these current organizational problems...I can find 20 a new corporate lawyer today with the intent of straightening the corporate books out.” 21 GEISLER’S email further demanded that the revenues that 3COR earned from the sale of 22 RHAUSLER’S products be passed directly to RHAUSLER without JOHNSTON diverting 23 any of it to his own uses. On May 27, 2016, an uncharacteristically subdued JOHNSTON 24 advised GLYNN by email that, “. .. [GEISLER] is insisting to look for a new company 25 lawyer. I will let you know when this takes place. Sorry that this is happening, it has been 26 a great pleasure to work with you over these years.” 27 9 COMPLAINT 28 b. GEISLER made further demands on JOHNSTON to end the practice of using RHAUSLER as JOHNSTON’S personal piggy-bank and to ensure that 3COR and TEDAN paid their fair shares of administrative expenses being born solely by RHAUSLER. GEISLER insisted that JOHNSON sign a “Rhausler, Inc. Partners Working Agreement,” executed by both men and witnessed by Rowena Mier, JOHNSTON’S long— time employee and aider—and—abettor in J OHNSTON’S plundering of RHAUSLER, on April 25, 2016. A true copy of that “Working Agreement” is appended hereto as Exhibit “A.” GEISLER also sent March, 2017 emails to SHVIS, asking her to delay filing RHAUSLER’S corporate tax return, and to amend the returns filed in earlier years, to account for irregularities in RHAUSLER’S bookkeeping that were caused by JOHNSTON’S efforts to feather his own nest at the expense of RHAUSLER and its shareholders. JOHNSTON paid lip service to GEISLER’S demands for a period of roughly one month, but to date GLYNN still sits on the board and is corporate counsel; JOHNSTON still runs sales through 3COR and devotes substantial efforts to selling TEDAN’S and Industry of the Redwoods products/services, but RHAUSLER continues to bear the majority of the administrative expense for RHAUSLER, 3COR, TEDAN’S San Carlos, CA office and Industry of the Redwoods. 23. Similarly, FLEMING has repeatedly requested information from JOHNSTON and RHAUSLER about the company’s financial status, its products, prospects and activities. He has also felt compelled to annually urge RHAUSLER to transmit the K-1 forms to shareholders in a timely manner, i.e., they are due when the Form 1120S is filed on March 15 of each year. FLEMING has also been contacted by other shareholders who share his frustration, including a physician who responded to FLEMING’S March 30, 2017 query: “You'll forgive me for asking, but investors haven't received any updates in years. Is anyone else concerned about your investment? If, so please respond.” The response was, “Thanks. So funny; normal business practice they 10 COMPLAINT clearly do not follow. Fortunately, I have given up on that investment long ago.” FLEMING received his last “update” from JOHNSTON/RHAUSLER by email on December 5, 2011: “FYI Good news for Rhausler, Aesculap will start the field trials and then a full launch. We will keep you updated. TI.” 24. FLEMING understands that RHAUSLER’S Bylaws provide, in part, at Article VII, Section 6., entitled “Financial Statements,” that, “... these documents shall be exhibited at all reasonable times, or copies provided, to any shareholder on demand.” FLEMING further understands that California Corporations Code § 1601 gives shareholders an absolute right to inspect and copy the financial records of the affected company upon demand. Nevertheless, FLEMING’S repeated demands have been ignored by JOHNSTON/RHAUSLER. 25. GEISLER and FLEMING have directly, persistently and undeniably made manful efforts “to secure from the board such action as plaintiffIs] desire[]” (Cal. Corp. Code § 800(b)(2)), but to no avail. Further efforts would be futile. Two-thirds of the entire board is neither interested nor independent, since they are named as individual defendants herein and because they are liable for the violations of fiduciary duty, statutory and common-law violations, commission of waste, and other claims alleged herein. 26. No demand on the board is required for Plaintiffs’ direct action. FACTS AND ALLEGATIONS 27. Plaintiffs incorporate by reference all preceding and subsequent paragraphs as if set forth fully herein. 28. GEISLER is an internationally renowned expert in spinal care and a pioneer of new, innovative procedures. He is one of this nation’s leading authorities on spinal cord injuries and degenerative diseases of the spine. He both developed and adopted multiple new spinal treatments and technologies at their onset. GEISLER was the first physician in the United States to adopt anterior cervical plating, as well as total lumbar disc 1 1 COMPLAINT replacement that is published in the Neurosurgery literature and that he taught to other surgeons. He is also an active researcher, lecturer, and author. His recent focus has been on relieving post-operative pain, sacral iliac joint treatments, new spinal stabilization and fusion techniques, and minimally invasive spinal surgery. As noted, ante, he is a board— certified neurosurgeon licensed to practice in the State of Illinois, where he founded and headed the Illinois Neuro—Spine Center at Rush Copley Medical Center at Aurora, IL. GEISLER pioneered integration of titanium wire in spinal applications, and holds patents on several spine devices, including cervical plates, VBR cervical implants, Plage cervical spine implants, a spinal drill guide, microbeam radiation surgical therapy and allograft bone grafts. 29. In the late 1980’s, or early 1990’s, GEISLER was introduced to JOHNSTON, who was then working in research and development at Aesculap, one of the world’s largest surgical instrument and implant companies. GEISLER and JOHNSTON collaborated on Aesculap’s introduction of the first anterior cervical stabilization plating system, named CASPAR. GEISLER’S Agreement with JOHNSTON Re RHAUSLER 30. In 2008, GEISLER was approached by JOHNSTON with the idea of forming a partnership to purchase the inventory and intellectual property (patents) of Olsen Medical, a privately-held Kentucky company. In order to finance the acquisition, GEISLER and JOHNSTON obtained a $1,040,000 Small Business Administration (“SBA”) loan, secured by a lien on JOHNSTON’S Redwood City, California residence and GEISLER’S personal assets. Additionally, and to satisfy Olsen’s demand for a steady, monthly schedule of payments prior to the SBA funding, JOHNSTON proposed that a new entity, RHAUSLER, be formed to make those payments and to further develop and market the Olsen technology, design, development and market new spine surgery devices, and acquire both exclusive and non—exclusive distribution rights to devices and technology 12 COMPLAINT owned by others. 31. JOHNSTON proposed, and GEISLER agreed, that: a. As founders JOHNSTON would be granted 900,000 shares of RHAUSLER stock, and GEISLER would be granted 600,000 shares, b. GEISLER would pay to RHAUSLER the sum of $160,000 as a capital contribution to be used as seed money; c. GEISLER would assign certain of his patents to RHAUSLER, for which he would be paid a royalty on sales; (1. JOHNSTON would fold his separately-owned 3COR into RHAUSLER to facilitate sales to hospitals at which GEISLER and other physicians /shareholders practiced in order to avoid direct conflicts of interest; and e. JOHNSTON would operate RHAUSLER from offices in California, while GEISLER would serve as the company’s chief medical officer and promote the use of RHAUSLER products by using them in his very busy spine surgery practice. 32. JOHNSTON and GEISLER further agreed that JOHNSTON would oversee the sale of RHAUSLER stock via a private placement of 1,500,000 shares exempt from 17 securities registration to a limited number of individuals at $2.50 per share. 18 33. JOHNSTON represented to GEISLER that J OHNSTON’S extensive 19 background in owning, operating and promoting medical device design, manufacturing and 20 marketing companies uniquely suited him to being the Chief Executive Officer and Chief 21 Financial Officer of RHAUSLER; that JOHNSTON had a cadre of well-qualified 22 individuals to assist in forming and operating the company, while GEISLER’S 23 participation would be nominal, as befitting an absentee owner. The first person that 24 JOHNSTON proposed to employ was GLYNN, who JOHNSTON represented to be an 25 attorney experienced in the process of incorporating a company and thereafter serving as 26 general counsel. 27 1 3 COMPLAINT 28 34. JOHNSTON further proposed, and GEISLER further agreed, that: a. RHAUSLER would be incorporated in California; b. JOHNSTON, GEISLER and GLYNN would constitute the Board of Directors; and c. JOHNSTON would be reimbursed for RHAUSLER-related expenses. 35. JOHNSTON and GEISLER further agreed that JOHNSTON would receive some compensation in the form of salary for his work and contributions to RHAUSLER \DOO\]O\ (not any other business entity). 36. The RHAUSLER Board authorized payment of $1,181 per month for 10 J OHNSTON’S rental of his automobile, as memorialized in the Minutes of a Special 11 Board of Directors meeting on October 5, 2008. 12 Incorporation of RHAUSLER and Issuance of Shares to GLYNN and FLEMING 13 37. On January 28, 2008, JOHNSTON and GLYNN caused RHAUSLER to be 14 incorporated under the laws of California by the filing of Articles of Incorporation, 15 corporate number C3074956. 16 38. Pursuant to the GEISLER-JOHNSTON agreement, GEISLER paid in his 17 $160,000, and began the process of transferring to RHAUSLER his ownership interest in 18 certain of his patents in 2008, and then in 2010 Spinal Integration, LLC, and its patents, 19 which RHAUSLER authorized GEISLER to acquire for RHAUSLER which included 20 GEISLER’S loan of $345,000 to RHAUSLER for his portion of Spinal Integration, LLC 21 ownership not purchased. This loan amount was booked in QuickBooks, but has never 22 been paid. 23 39. JOHNSTON advised GEISLER that Rowena Mier was being hired to 24 manage RHAUSLER’S business office, to generate invoices, keep the books, pay the bills, 25 and interface with shareholders, vendors and customers. However, Ms. Mier did not start 26 work until June, 2008 and, as a consequence, she claims there is no record of the receipt, 27 l4 . COMPLAINT 28 deposit, or disposition of the monies received by RHAUSLER prior to that date, including the roughly $350,000 received from the sale of RHAUSLER stock. 40. JOHNSTON caused a professional—looking business plan and private placement memorandum to be created for prospective RHAUSLER shareholders and, between February 2 and September 11, 2008, RHAUSLER received $760,000 from individual investors who purchased RHAUSLER stock at $2.50 per share. The OO\]O\ “Confidential Private Placement Memorandum,” dated March 26, 2008, represented that it owned several patented devices that had, in fact, been transferred to RHAUSLER by GEISLER, who had either patented his own designs or acquired them (Spinal Integration), 10 or had been purchased by JOHNSTON and GEISLER (Olsen). The Memorandum further 11 represented that RHAUSLER owned development stage, design stage and “Class III PNA 12 Design and Development Devices.” 13 41. JOHNSTON also arranged for 144,000 shares of RHAUSLER to be 14 purchased by various vendors as “sweat equity,” whereby the vendor would be 15 compensated for goods and services, up to a pre—negotiated amount, in return for 16 RHAUSLER shares valued at $2.50 each. Included in those “sweat equity” shareholders 17 was GLYNN, who acknowledged the arrangement by a writing he drafted and executed on 18 May 8, 2008, to wit: “Pursuant to the foregoing Resolution of the Board of Directors of 19 Rhausler, Inc. on 5/7/08 the undersigned Robert J. Glynn, Attorney at Law, General 20 Counsel and Secretary of the Board does hereby agree and accept the terms of the 21 Resolution as set forth therein concerning the form of payment by Rhausler Inc stock for 22 his professional services rendered on behalf of the Company on and after May 7, 2008.” 23 42. In early 2008, FLEMING, who had met and worked with JOHNSTON 24 during the period 1977 — 1981, encountered JOHNSTON at an airport. FLEMING, who 25 had spent 21 years at Johnson & Johnson as Vice President, Corporate National Accounts, 26 before moving to Boston Scientific in the same capacity for the following 15 years, when 27 1 5 COIVIPLAINT 28 they were both employed at Johnson & Johnson, learned of RHAUSLER and its prospects from JOHNSTON. Following his review of the Private Placement Memorandum, which confirmed J OHNSTON’S representations about the Plage Cervical Implant System, as well as the Quick Plate Cervical Plating System, and the VBR Cervical Spacer being “development stage devices” that were owned by RHAUSLER, FLEMING purchased 40,000 shares of RHAUSLER for $100,000 in April, 2008. JOHNSTON’S representations about RHAUSLER’S intellectual property and the prospects of “development stage” products that RHAUSLER owned or purportedly was coming out with, were a material inducement to FLEMING’S decision to purchase 40,000 shares of RHAUSLER stock for $100,000. However, as noted in paragraphs 23, 24 and 25, ante, his demands for information about his investment have fallen on deaf ears. Contractual, Tort, and Other Allegations Against JOHNSTON and GLYNN 43. Although GEISLER had been promised royalties on the sales of RHAUSLER products employing the patented matter he had assigned to RHAUSLER under his agreement with JOHNSTON/RHAUSLER, GEISLER was repeatedly told by JOHNSTON that the company could not afford to pay those royalties at present; that they would be reflected (“booked”) on the company’s books and income statements, but that they would not actually be paid. Similarly, GEISLER was advised that the interest and principal that RHAUSLEIVJOHNSTON had promised would be paid on the loans GEISLER had made to RHAUSLER in part for the purchase of Spinal Integration, LLC, and its patents ($345,000), would also be booked, but not actually paid. As of December 31, 2016, GEISLER is owed royalties of $1,083,435.07 and, on his loans to RHAUSLER, principal in the amount of $345,000, plus interest. 44. By May, 2013, the balance on the SBA loan to purchase Olsen Medical had fallen to $624,000, and RHAUSLER’S board agreed that RHAUSLER should directly be responsible for that debt. At JOHNSTON’S suggestion, and on advice of GLYNN, who 1 6 COMPLAJNT recorded and published the Minutes of the Special Meeting of the Board of Directors, it was agreed that JOHNSTON would refinance his Redwood City residence, pay off the SBA loan, thereby loaning $624,000 to RHAUSLER, which would execute a promissory note in that principal amount, amortized over 9 years at 7% interest, payable in monthly installments of $7,803.92 to JOHNSTON and his spouse at that time, Kari Johnston. The RHAUSLER board so resolved, Resolution 2013-1, on May 15, 2013. However, the promissory note prepared by JOHNSON for GEISLER’S signature, on behalf of RHAUSLER, and executed by GEISLER on June 15, 2013, reflected that the loan amount was $635,868.06, the interest rate was 5.5%, and the monthly payments were $8,202.27. GEISLER had not recalled the exact details of the month-old board resolution, but had relied on J OHNSTON’S honesty in preparing the promissory note. 45. Following the Aesculap debacle described in paragraph 22, ante, which resulted in RHAUSLER having to pay to Aesculap $170,000 rather than Aesculap paying to RHAUSLER the $894,414 that JOHNSTON and GLYNN claimed was due for the first two years only under the multi—year, $5,500,000 distribution agreement, JOHNSTON told GEISLER that there was no money for further refining/developing the Plage system, or the 17 Trabeculite technology that RHAUSLER planned to distribute under an exclusive 18 licensing agreement with Tecomet. 19 46. Although GEISLER was a Director and Chief Medical Officer of 2o RHAUSLER, his attendance at Board meetings was virtually always telephonic, and his 21 requests that he be given not just the income statements and balance sheets generated by 22 the company’s accountants, but also the “Quick Book” entries that would detail the 23 revenues and expenses, were brushed aside by JOHNSTON and Rowena Mier. 24 Nevertheless, GEISLER was surprised and alarmed by the bleak financial picture 25 JOHNSTON was painting, particularly since he had personally guaranteed RHAUSLER’S 26 $450,000 revolving line of credit through United American Bank. 27 17 C01V.[PLAINT 28 Discovery of Defendants’ Wrongdoing 47. In December, 2014, JOHNSTON and Rowena Mier were deposed in JOHNSTON’S divorce proceedings with ex-wife Kari Johnston. Later, GEISLER was provided copies of the transcripts of those depositions and was asked for his comments about the testimony of JOHNSTON and Ms. Mier. He has also recently reviewed voluminous electronic files of RHAUSLER’S financial statements, QuickBook entries, and communications between RHAUSELER officers, directors and employees, most of which had omitted GEISLER as a recipient. Discovery of Wrongdoing by JOHNSTON 48. As a result of GEISLER’S review of that recently obtained material, which required months to sift through and make sense of, he has discovered the following: a. Contrary to their agreement, and without GEISLER’S knowledge, consent or authorization as a Board member, JOHNSTON caused RHAUSLER to pay him a monthly salary that amounted to $1,010,833 from 2008 until December, 2016 for work that JOHNSTON performed for RHAUSLER as well as work he performed for 3COR, TEDAN, and other non-RHAUSLER entities, b. Contrary to their agreement, and without GEISLER’S knowledge, consent or authorization as a Board member, JOHNSTON used the RHAUSLER American Express credit cards to pay for the personal living and travel expenses of himself, his immediate and extended family, and his Chinese girlfriend (now wife), who he began a romantic relationship with in 2008. JOHNSTON also caused RHAUSLER to issue him company checks for reimbursement of expenses that were not business related, and he caused RHAUSLER to pay his then-wife (Kari Johnston) a $1,000 per month salary when she 24 performed no services for the company. He also caused RHAUSLER to pay for health 25 insurance for JOHNSTON, JOHNSTON’S family, Ms. Mier and Ms. Mier’s children. 26 RHAUSLER paid Anthem Blue Cross $510,000 in health care premiums without 27 1 8 CONTPLAINT 28 GEISLER’S knowledge and consent. RHAUSLER also paid $14,000 to the Pacific Athletic Club, and $5,000 to the Western Athletic Club for J OHNSTON’S membership; c. Contrary to his representations---which he caused to be memorialized in 2013 “Evaluation Report” of RHAUSLER---that 3COR was a wholly—owned subsidiary of RHAUSLER, JOHNSTON treated it as his solely—owned property. He used 3COR to receive payments from Tecomet and other companies for J OHNSTON’S services as a distributor/sales representative for their products at the same time he was purportedly engaged in running RHAUSLER and selling its products; (1. Contrary to his representations, JOHNSTON was using 3COR to bill hospitals and other entities for RHAUSLER products which he instructed RHAUSLER to sell to 3COR at discounts of 50%, but which 3COR charged usual and customary rates to the customer. Once 3COR received payment from the customer, 3COR would pay over to RHAUSLER the amount RHAUSLER had charged 3COR, less a commission fee; e. Over time, the money diverted to 3COR, either because of the difference in the amount charged customers and the amount paid to RHAUSLER, or because, in some cases, RHAUSLER was not paid at all for its products and/ or the services of its Chief Executive Officer, would accumulate to a point where JOHNSTON would cause it to be loaned by himself or 3COR to RHAUSLER, and then paid back to 3COR, or himself; f. JOHNSTON was also causing Rowena Mier and defendants GLYNN and SIMS to perform tasks for 3COR, TEDAN, Industry of the Redwoods, Baocui Zhang (J OHNSTON’S new wife) and JOHNSTON personally for which RHAUSLER paid the employee, or attorney; g. JOHNSTON was also causing RHAUSLER to pay travel and related 24 expenses for sales trips to market RHAUSLER products, but which in reality were for the 25 purpose of selling TEDAN products, Tecomet products, or for non—business visits to Ms. 26 Zhang. Some of these and other expenses charged to RHAUSLER were also charged to 27 19 COlVIPLAlNT 28 3COR, thereby providing JOHNSTON with double-billing benefits and additional tax deductions; h. JOHNSTON was using the money siphoned off from RHAUSLER by 3COR to nominally employ and pay salary to the Mexican girlfriend of one of his TEDAN partners in 2010. RHAUSLER paid that same TEDAN partner of J OHNSTON’S $154,000, separate and apart from the $67,000 that was paid to that TEDAN partner’s company. Presumably, the TEDAN partner would later pay cash directly to JOHNSTON, or otherwise reimburse him or 3COR for the “consultant” fees RHAUSLER paid to his girlfriend; 10 i. In addition to dividing his loyalty between RHAUSLER, TEDAN, 3COR, 11 and Industry of the Redwoods, JOHNSTON entered into an agreement on or about 12 October 21, 2016 to allow the Orthopaedic Implant Company of Reno, Nevada, to base its 13 “OIC Cervical PEEK Space” on the Rhausler Plage Anterior Cervical Fusion System 14 without any remuneration to RHAUSLER. Presumably, JOHNSTON has a side deal with 15 them as well. 16 Discovery of Wrongdoing by GLYNN and SIMS 17 49. As a result of GEISLER’S review of the material identified in Paragraphs 47 ‘ 18 and 48, which required months to sift through and make sense of, he also discovered the 19 following: 2o a. Although GLYNN and SIMS should have known that, “Tax practitioners and 21 subchapter S shareholders need to be aware that Revenue Ruling 74-44 states that the IRS 22 will re—characterize small business corporation dividends paid to shareholders as salary 23 when such dividends are paid to the shareholders in lieu of reasonable compensation for 24 services,” as the IRS advised RHAUSLER by letter dated June 2, 2008, neither of them so 25 advised RHAUSLER nor its “sweat equity” shareholders, and neither of them advised 26 RHAUSLER that only individuals, not corporations, could hold shares in an “S” 27 20 COMPLAINT 28 corporation. As a consequence, RHAUSLER became embroiled in a divorce action between a “sweat equity” participant and his spouse, and was forced to pay substantial attorney fees in addition to a $71,000 settlement; b. Contrary to his duty of loyalty to his corporate client (and his parallel duty as a corporate director), GLYNN performed services for 3COR, Industry of the Redwoods, Ms. Zhang and JOHNSTON personally, but was paid by RHAUSLER. In addition to the “sweat equity” GLYNN and his associate have earned, GLYNN has been paid over $104,000 by RHAUSLER to perform legal services for the company, including the 2015 drafting of the ill-fated Aesculap agreement discussed in paragraph 22, ante; c. The RHAUSLER state and federal tax returns, and the K-l’s sent to shareholders, are inaccurate as a consequence of the irregularities cited above, but SIIVIS declines, by her responses to GEISLER’S March, 2017 email requests, to take action to amend the returns and K-l’s, thereby exposing RHAU