Agent Wins $1M in Suit Against VCs

A Silicon Valley jury has awarded a little over $1 million to a placement agent in his suit against Jerusalem Venture Partners (JVP), Shalon Ventures, Worldview Technology Partners and several others.

The agent, Spencer Cleveland of San Francisco, filed the breach of contract suit back in November 2000. It went to a jury trial in California’s Alameda County Superior Court on Jan. 5. The jury delivered its verdict on Feb. 20.

It isn’t clear if the judge will make a final ruling. Cleveland declined to comment. The attorney for the defendants did not return calls for comment.

Cleveland’s suit alleged that failed optics company InLight Communications Inc. hired him to raise capital, but the company later pursued two rounds of venture financing without him. The jury found that JVP, Shalon, Worldview and others caused InLight to breach an “engagement contract” with Cleveland, and it awarded the placement agent damages of $1,015,812.70, according to the verdict form filed with the court.

The award is a fraction of the $128 million that Cleveland originally sought, but the fact that the jury found in his favor could give venture capitalists pause.

Asked whether the verdict in the case could spawn more suits or have a chilling effect, Grant Collingsworth, a partner at Atlanta law firm Morris, Manning & Martin, said: “This strikes me as a fairly isolated case – most likely a jury just looking to stick someone with the bill after the company folded its tent. However, one successful lawsuit does tend to lead to others. If a trend of these lawsuits develops, it will increase the risk of a failed investment for the VC, but I doubt it will have a great chilling effect on VCs making investments.”

Collingsworth adds: “What this case really demonstrates is the benefit of having an orderly wind-down when a portfolio company fails. The more loose ends you leave out there, the greater the chance the investor could get left holding the bag.”

As bad as it is for the defendants, it could have been a heck of a lot worse. Cleveland’s suit originally asked for about $128 million, including punitive damages and damages for emotional distress. It also listed six causes of action.

Later, the court reduced the total amount that Cleveland could seek to $54.55 million, and it reduced his total number of claims from six to three, said Kara Andersen in a previous interview and who represented all the defendants in the case. Cleveland’s claims for emotional distress and punitive damages were also tossed out before the jury reached a verdict, Andersen said. She could not immediately be reached for comment late Thursday.

Cleveland’s suit alleged that InLight hired Cleveland to raise a minimum of $2 million in funding, of which he was to receive a fee of 7% of the amount raised. Cleveland identified E-Tek Dynamics as a company “interested in InLight as part of a group investing $15 million in a first round and investing $50 million in a second round,” the suit claimed. Had the deal gone through, Cleveland stood to make $4.55 million, or 7%, of the $65 million total.

The lawsuit also claimed that rather than pursue the deal with E-Tek, InLight executives broke their non-disclosure agreement with Cleveland and shared information (about E-Tek’s interest and a business plan drawn up by Cleveland) with Teddy Shalon, consultant, investor in startups and onetime chairman of InLight, according to Thomson Venture Economics, publisher of PE Week.

Shalon then shared the “confidential and proprietary information” with other prospective investors, who ultimately invested $2.48 million in InLight’s first round and $11.5 million in its second, the suit alleged.

JVP and an undisclosed venture investor made a first-round investment in InLight in June 2000, according to Thomson VE.

JVP and Worldview did a second round in the company in September 2000 at a post-money valuation of $26 million, according to Thomson VE.

InLight, formerly known as MEMS Inc., filed for bankruptcy in 2001.

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