A co-founder of Softbank Interactive Marketing has filed suit against the company's new management, alleging that in taking over the company nearly three months ago the new officers defrauded him of a promised US$200,000 payment.
In the Los Angeles Superior Court suit, Softbank Interactive cofounder Robert Colvin said Pattinson Hayton, the Australian financier who led the bid by Rhode Island-based Zulu-Tek to acquire the Internet advertising firm, refused to hand over the $200,000 in order to force Colvin to abandon the terms of his employment contract and resign.
Colvin's complaint, filed 19 February, alleges that after four weeks of haggling with Hayton and associates over the payment, Hayton told him bluntly: "I always negotiate to gain leverage" and "No one said we had to be fair."
In addition to the $200,000, Colvin is seeking unspecified punitive damages. In the five weeks since the suit was filed, a Los Angeles Superior Court judge granted Colvin a "petition for attachment" that freezes $200,000 in assets held by Zulu-Tek and Softbank Interactive, pending a trial in the case.
Hayton did not return calls seeking comment on Colvin�s allegations. The attorney representing Softbank Interactive Marketing and Zulu-Tek, Laurie Butler, says that her clients will be "vigorously opposing this lawsuit," and that she would be filing an answer to the Colvin suit later this week. "Our client has advised us that he believes that there are substantial offsets that are due to our client by virtue of material misrepresentations made by the plaintiff," Butler said. "We will be filing papers which substantiate that this week."
The suit names several other former Softbank Interactive officials - including longtime Colvin colleagues Edward West and Lawrence Howorth and departed Zulu-Tek CEO Ronald Meatchem - as defendants. But Colvin says that West and Howorth aren't the main focus of his suit. "As a requirement of the law, I've effectively had to go after all the officers and directors," he says. "Once the courts have decided that Ted and Lawrence aren't culpable, they're out of there."
Zulu-Tek, a little-known firm that gained wide attention after its 31 December 1997 purchase of Softbank Interactive, has been the subject of enthusiastic investor speculation that has only been heightened by the IPO success of another established player in the Net advertising space, DoubleClick.
But the aftermath of Zulu-Tek's takeover of Softbank - including the resignation of key executives, the desertion of its entire European staff, and the shuttering of its Chicago office - has raised questions about its prospects and the strategic aims of its new owners.
Zulu-Tek has announced an alliance with Texas-based Enhanced Services, a company whose revenues derive mainly from a computer repair business but which has aspirations of making a play in the multimedia sphere through a CD-ROM development subsidiary. Enhanced, listed on Nasdaq's small-cap exchange, said in a filing with the Securities and Exchange Commission that it is carrying out a stock swap with Zulu-Tek. The two firms will ally their business strategies and try to raise $50 million in private placement capital to pursue joint projects.
Colvin's suit raises the profile of Hayton, a dealmaker with a long history of scrapes with securities regulators and business partners, in the Zulu-Tek picture. Butler, the attorney, describes Hayton as an adviser to a group of investors who hold the majority of Zulu-Tek's stock. But Colvin�s suit asserts that Hayton controls Zulu-Tek as its majority shareholder and acts as a "de facto Chief Financial Officer, Chairman of the Board and President" of Softbank Interactive.
It was in this capacity that Hayton allegedly withheld the money owed Colvin and forced him out of his job.
After Zulu-Tek bought a majority interest in Softbank Interactive on 31 December, it addressed letter agreements to Colvin and two other Softbank Interactive executives, co-founder Andy Batkin and CFO Howorth, promising to pay them within five business days of the sale closing for Yahoo stock options the company held in trust for them.
The options had been earned by the former Softbank Interactive executives back in 1995 as part of a contract they won to sell advertising for Yahoo's then-fledgling directory service. When Zulu-Tek bought Softbank Interactive, Batkin placed a "hold" on the Smith Barney account containing the options, according to the suit, to be sure they wouldn�t be sold without the executives receiving their share. As a condition for payment by Zulu-Tek, Batkin was required to release the hold.
In early January, according to the suit, Colvin was informed that Hayton was arranging to wire $200,000 to Colvin's personal bank account. As proof, Colvin was given a document, on Softbank Interactive letterhead, that would seem to authorize the Bank of America in Palm Desert, California, to wire $200,000 to his account. Included as "Exhibit C" in Colvin's suit, the document is signed by "Pat Hayton," but offers no title beneath his signature.
"... When a week went by and the money was still not wired into his account," according to the suit, "Mr. Colvin became suspicious." Through his bank, he contacted Bank of America and eventually sent them a copy of the wire transfer order he had received. That's when Colvin learned that Hayton's instructions to the bank had not included an account number from which the funds were to be transferred.
On 21 January, Colvin called Hayton and asked why the money hadn't been transferred. According to the suit, Hayton responded that "he would authorize payment to Mr. Colvin only if Mr. Colvin first agreed to discuss an 'exit strategy' whereby Mr. Colvin released [Softbank Interactive] from the employment contract between [Softbank Interactive] and Mr. Colvin." Colvin's June 1996 contract with Softbank, agreeing to pay him $120,000 a year with a bonus of at least 25 percent, stated that he would be employed through July 1999.
Five days later in a face-to-face meeting, Colvin again asked Hayton how he could refuse to hand over the $200,000 given the signed agreement from Meatchem, the wire transfer signed by Hayton. That�s when, according to the suit, "Mr. Hayton laughed and said, 'I always negotiate to gain leverage' and 'no one said we had to be fair.'"
Within a week, Colvin received another letter from Meatchem, the CEO, saying "We believe it would be in our mutual best interests if you vacate your office today, and take your personal effects." The next day, Colvin's voice mail service was suspended, his email account was deactivated, and the locks were changed at his office.
Subsequent correspondence with Meatchem in which Colvin asserted he did not agree to resign and demanded his payment, was met by a letter from Meatchem in which he agreed that Colvin was owed $200,000, but said that only Hayton had the authority to transfer the money. Meatchem contended that despite serving as the parent company's chairman and CEO, he had no signing power over Softbank Interactive's bank accounts.
On 16 February, Colvin contacted an attorney representing Softbank Interactive and was told that the company was experiencing a cash shortage. "If that is true," the suit states, "it can only be because Defendants caused the Yahoo options to be liquidated in violation of their duty to hold those options in trust ..."
Colvin then filed suit against Hayton, Meatchem, Softbank Interactive, Zulu-Tek, and the others on 19 February, requesting a jury trial. Now he is preparing for battle and, at the same time, evaluating his employment options. "I'll make a decision soon," he said. "I intend to stay in the field of interactive marketing. As soon as all this legal stuff gets done, I'm out the door and back in the mix."
