LOS ANGELES (CN) – Founders, board members and investors of start-up media company Spot Runner skimmed $54 million from the floundering company by selling their own shares at inflated prices to new investors, according to a derivative complaint in Superior Court.
Spot Runner, a privately held start-up media company, was founded by defendants Nick Grouf and David Waxman, who are also board members. Defendants Danny Rimer, Roger Lee and Robert Pittman are also on the board of directors and Lee and Rimer are general partners to private equity funds Battery Ventures and Index Ventures. Defendants Battery and Index own a combine 60 percent of Spot Runner stock, according to the complaint.
Though Spot Runner was entirely reliant on private investment capital for survival, between 2006 and 2008, the defendants “engaged in a scheme to divert to their own pockets a total of $54 million in badly needed private investment capital,” the complaint states.
At the time, “the company was losing thirty to forty million dollars per year and quickly depleting the capital that had been raised,” according to plaintiff WPP Luxembourg Gamma Three Sarl, a Luxembourg-based public relations company.
The defendants “conducted these transactions in secret, deliberately circumventing contractual arrangements designed to provide WPP and other shareholders with notice of such transactions, while also failing to disclose the company’s massive losses,” WPP alleges on behalf of itself and Spot Runner.
The defendants aggressively promoted the company to new investors and sold them huge quantities of their own shares at ever-increasing prices, the complaint states.
WPP claims the defendants used the name of its parent company, WPP Plc, which it calls “the largest media buyer in the world,” to gain credibility and new investors.
WPP says it would have pulled out immediately had it known that Spot Runner’s founders were reducing their personal stake in the company by selling off their shares. WPP says it invested on the condition that the founders and other investors involved in managing the company disclose all of their personal stock sales.
Spot Runner public relations representative Rosabel Tao responded, “It would only be fair to point out that WPP’s arguments in the state complaint are basically a subset of the federal complaint. WPP tried twice to sue Spot Runner in federal court and their complaint was dismissed by the court both times. This time, they are trying to bring an action in state court.”
WPP seeks $11.7 million in damages for breach of contract, aiding and abetting and breach of fiduciary duty.
Its lead counsel is Ben Whitwell with Venable LLP.