While advertising network DoubleClick is enjoying a lofty price on Nasdaq's national market, its one-time rival Softbank Interactive Marketing has been confined to the small stakes traded on the over-the-counter bulletin board.
Why? The story told by a lawsuit filed Friday in New York Supreme Court by four former officers of Softbank Interactive would argue that parental negligence and mismanagement are to blame for the company's failure to be among today�s hot Net stocks.
The suit alleges that Softbank Interactive was mistreated by its majority shareholder, Softbank Holdings, from the get-go, and should not have been sold to Zulu-Tek Inc., which bought Softbank Interactive in December. The suit seeks US$200 million in damages.
The plaintiffs allege that Softbank Interactive's former parent, Softbank Holdings, its sister company Ziff-Davis, and three directors engaged in "fraudulent, self-interested, conflict-ridden, and irresponsible actions" that ultimately stripped the value right out of the online advertising firm. Three of the plaintiffs were founders of Softbank Interactive Marketing (SIM), recently rechristened ZuluMedia.
Additionally, the suit alleges that the sale of Softbank Interactive to Zulu-Tek, a little known Net advertising firm based in Newport, Rhode Island, put Softbank Interactive "into the hands of a company that proceeded to mismanage the business and misappropriate its assets, all to plaintiffs' and SIM's severe financial detriment."
However, Softbank Interactive was only named as a "nominal defendant" in the complaint, which means that it and its new owners are not a primary target of the action. Laurie Butler, an attorney with Tourtelot & Butler who represents Softbank Interactive, or ZuluMedia, and Zulu-Tek, said she had not seen a copy of the suit. But she said that her clients "don't feel that they've done anything wrong in buying Softbank Interactive and are just interested in running a business."
Calls to Softbank Holdings were not returned. Nor were calls to Ziff-Davis, which is in a quiet period prior to an initial public offering.
The plaintiffs are Net advertising pioneers Andy Batkin, chairman of Softbank Interactive until it was purchased by Zulu-Tek; Bob Colvin, a Softbank Interactive founder and executive who says he was forced to resign from the company in January; Lawrence Howorth, formerly Softbank Interactive�s CFO; and Ted West, the company�s former vice president for development. All are shareholders in Softbank Interactive, now known as ZuluMedia.
The case was brought both individually by the plaintiffs and derivatively in their role as shareholders who together own about 29 percent of Softbank Interactive. Derivative cases -- in which minority shareholders act on behalf of the company itself -- generally have to jump quite a few legal hurdles and are often difficult to bring to judgment.
The defendants are Softbank Holdings Inc.; Masayoshi Son, the president, chairman, and majority shareholder of the Japanese conglomerate Softbank Corp., which owns Softbank Holdings; and Eric Hippeau and Jeffrey Ballowe, two of Softbank Interactive�s directors. The charges include fraud, breach of fiduciary duty, and breach of contract.
And though the suit is witheringly critical of Softbank Holdings' decision to sell the company to Pattinson Hayton, an Australian financier with a history of legal troubles, Hayton himself is not named as a defendant in the case.
The birth of Softbank Interactive
The tale began in 1995 when Batkin and Colvin became the first outside sales representatives for a Web site when they signed Yahoo back in 1995. West was Netscape's first outside sales representative.
Apparently recognizing the talent of these upstarts in the budding online ad business, Softbank Holdings in June 1996 purchased their respective firms -- Interactive Marketing Inc. and Network 1.0 -- for a total of $5.75 million in cash and a collective 29 percent stake in the newly formed company, known as Softbank Interactive Marketing. Softbank Holdings was allotted 70 percent of the shares.
In the meantime, DoubleClick also got its start and quickly signed up its own big name clients, like AltaVista. It wasn't long before it became the market leader in Net advertising. Its stock debuted at $17 in February, the 3.5 million-share offering raising $59 million. DoubleClick shares are now trading at around $44.
Meanwhile, the former Softbank Interactive executives are alleging fraud, saying that Softbank Holdings, Ziff-Davis and the named executives falsely promised that Softbank Interactive would be an independently run company with significant financial backing from Softbank Holdings, including $100 million in working capital.
Instead, the plaintiffs maintain, Softbank Interactive was not adequately funded and was pressured to serve the needs of ZDNet, the Ziff-Davis hub site for tech news. (Ziff is wholly owned by Softbank Holdings, pending its imminent IPO.)
"... Virtually from the moment of its inception, the defendants converted SIM into a company dedicated primarily to serving the needs and value of their own businesses, in blatant disregard of SIM's obligations to its other clients and its own corporate best interests," the suit says.
Meanwhile, Softbank Holdings "refused to provide the level of funding that was necessary for the effective operation of SIM," and instead decided to sell the firm, the lawsuit alleges.
The sale to Zulu-Tek
The suit�s description of Softbank Holdings' sale of its majority interest in Softbank Interactive isn't kind to any of the parties involved:
Softbank Holdings apparently set a deadline of selling Softbank Interactive by 31 December 1997 and offered Softbank Interactive CEO Caroline Vanderlip a bonus of $250,000 for meeting that deadline. That reward, according to the plaintiffs, all but assured "that the person primarily responsible for running the day-to-day operations of SIM would act consistently with the interests of the defendant Softbank [Holdings] ... rather than in the best interests of [Softbank Interactive]."
A buyer was found and on 31 December, Softbank Holdings sold 66 percent of Softbank Interactive to Mediabank, a company controlled by Pattinson Hayton. Mediabank was then a wholly owned subsidiary of Netmaster Group, which changed its name in January 1998 to Zulu-Tek. That company's stock currently trades for about 60 cents.
While officials of Zulu-Tek have consistently downplayed Hayton's role in the company's operations, the lawsuit describes Hayton as "the individual primarily responsible for negotiating" the purchase of Softbank Interactive.
Public records show that Hayton has been sanctioned by securities regulators and repeatedly charged with financial impropriety by a number of former business partners. The lawsuit points out that Hayton had at least seven unpaid court judgments against him totaling more than $2 million at the time of the sale. The defendants, the suit alleges, went with "a buyer of highly questionable financial responsibility and integrity ... in blatant disregard for their obligations to ... SIM shareholders."
The plaintiffs say Softbank Holdings also broke a promise to give Softbank Interactive's shareholders 30 days notice before selling the company.
Shortly after assuming control of Softbank Interactive, Hayton opened two new bank accounts in the company's name, according to the suit. "... Hayton dictated that all SIM receipts be deposited into one of these two accounts, and refused to grant access to the records of this account to [Lawrence Howorth]," Softbank Interactive's chief financial officer at the time.
"... Over the course of the following two months," alleges the suit, "a substantial amount of funds was withdrawn from this account and paid to Hayton, companies in which he has or is believed to have an interest, and to other persons or entities who were not creditors of SIM." When Howorth demanded to see the records of these accounts, the suit says Hayton stripped him of his CFO title and responsibilities.
Meanwhile, employees began resigning "as a result of the company's failure to pay and delay in paying compensation due and owing to them." The company�s entire European staff abandoned ship and its Chicago office has closed its doors; essentially the entire executive team has resigned since the year began. Clients allegedly "ceased doing business with SIM due to SIM's failure to remit funds due and owing to them; potential customers refused to do business with SIM because of concerns about the company's financial viability; and additional funding from [Zulu-Tek] was not provided to SIM, despite the need, and repeated requests, for such funding."
And, according to the suit, "the activities of Hayton as it relates to the conduct of SIM and its affiliates has come under the scrutiny of federal law enforcement officials."
The plaintiff's attorney, Alan Vinegrad of Wachtel & Masyr in New York, had no comment on the suit. Softbank Interactive's former chairman Batkin said: "The complaint speaks for itself as to what our grievances are with the defendants. It's pretty specific."
