Graal was called Zelda Online... because it was actually Zelda 3 with multiplayer support. Stefan took the graphics of Zelda 3, recoded the game from scratch and added online capabilities. Fan games are not really a rare thing, and Zelda is one of those games that tend to get a lot of fan games. Back then it was free, Stefan didn't get money for Zelda Online so was he in the wrong? Nah. Whether or not he got a C&D order from Nintendo is unknown. Some say he did, he says he never did. He may have just wanted to make his project more serious, and a fan game can only get so far before you DO have legal issues. Eventually he revamped and made his own graphics and changed the name to Graal. Most of the overworld tiles ended up looking fairly unique and different, some tiles suffered from looking like cheap upscales(castle tiles mainly).

Whether or not he actually got threatened by Nintendo we'll never know. Even if he did, it was not some personal type of thing. Nintendo generates a C&D e-mail and sends it out, threatening to take legal action. It's all pretty much daily paperwork to Nintendo, and typically it never escalates beyond that e-mail.