The civil trial involving the former and current management of venture capital investment company San Vicente Group (SVG) went into its third week after the current management escalated the fight over legal fees by filing for bankruptcy.
Current management of the troubled investment company contends that former managers were shady investors who acted as little more than small-time stock promoters and whose pay packages are a picture of corporate malfeasance. Counsel for the former management say that the defendants’ pay and agreements fall in line with standard accepted practice and are being unfairly singled out among the many management teams that lost money in the tech bubble.
With SVG fighting for bankruptcy, the fight over legal fees has now become central to the trial, and has made the already slim prospects for a settlement even more unlikely.
Peter Fuhrman, CEO of San Vicente Group, said the corporation filed for bankruptcy on Jan. 27 in order to halt payments of legal fees to the defendants it was required to make under its bylaws. Fuhrman maintains that the eight defendants were purposely inflating their legal bills in a tactical effort to stymie the trial. “This seems to be a transparent and cynical attempt to bankrupt us before we could even get this to trial,” Fuhrman says. “From day one, the legal spending was at such a high level that it was inevitable that we would end up with our entire cash resources depleted. It looks like a classic example of scorched-earth litigation policy.”
“They chose to bring a sweeping case against a lot of people and now they cry because they underestimated the costs and Delaware law,” says Michael Diamond, an attorney with Milbank Tweed Hadley & McCoy and who is representing four defendants. He says that SVG’s declaring bankruptcy to stop legal fee payments is a tactic of its own, and that the company has fought a losing battle over the payments, coming close to being found in contempt by a Delaware court.
In 2000, GlobalNet Financial.com (NASDAQ: GLBN, since acquired by NewMedia Spark PLC) raised $46.7 million for what would become the SVG, a venture firm it had founded and, at the time, controlled. Completing a hostile takeover in November 2001, 104 shareholders ousted SVG’s former management and installed a new board, charged with stabilizing the portfolio and liquidating its assets. The shareholders, which were mainly hedge funds, were able to complete the takeover because the company had not been established as a limited partnership, but as a Delaware corporation, a structure, which allows 51% of the shareholders to initiate a corporate change.
Following the takeover, the new board accused the old board of looting the company and sued the old board for breach of fiduciary duty. The old board has also allegedly retained control of SVG’s portfolio through a separate entity and the current board has sued for control of that entity as well.
By April 2002, the new board had returned $18 million of the $22.5 million remaining in liquid investments. “We believe that without this change in control, they would have been totally wiped out,” says Fuhrman, who adds that San Vicente now has only $2.4 million in cash and “a deeply distressed portfolio.”
“This was a high tech investment co founded at the end of 1999. The offering memorandum says that this is very risky,” says Diamond. “We all know what happened to the market. The thing that is different with this company is that they raised $42 million bucks in the beginning of 2000 and only invested $13 million. They were being cautious given the state of the market.”
Separately, the shareholders retained the same plaintiff law firm to pursue a class action suit against the former board, alleging misrepresentations and omissions on the offering memorandum including the type of companies in which SVG would invest and its officers’ compensation plan. The related fraud charges carry penalties that can legally reach triple the amount of the alleged damages.
Both sides agree on one thing: that the case will probably not go to the jury until early ore mid-March. “It was anticipated that would be done about now,” says Diamond, “but lawyers are notorious for underestimating the time it takes to get things done.”
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