LifeLock Says Startup Execs Pulled a Fast One

WILMINGTON, Del. (CN) — Identity-theft protection company LifeLock sued the former CEO and CFO of a startup company it bought, claiming they hid valuable intellectual property to use it in another startup.

LifeLock sued Wenceslao Casares and Cynthia McAdam on Monday in Delaware Chancery Court. Casares was CEO and McAdam CFO and general counsel for Lemon in 2013 when they negotiated the $43 million sale of the company to LifeLock, according to the 62-page lawsuit.

LifeLock claims it did not receive all the assets of Lemon because Casares and McAdam had already launched another startup company, Xapo, with a key component of Lemon's intellectual property.

LifeLock says it bought Lemon mainly for its intellectual property, including the "Lemon Wallet" mobile app that allows consumers "to securely store private credit card and other account information on their smart phones."

But a "payment functionality" component of the Lemon Wallet, which allows users to pay merchants using credit cards, debit cards and bitcoin, was kept secret, LifeLock says. "This payment functionality — including the ability to make payments from an online wallet using bitcoin — was considered to be especially valuable to defendants, and so they wanted to keep it for themselves," according to the complaint.

Lemon is not a defendant; only Casares and McAdam are.

"Defendants schemed to hide this technology from LifeLock during the negotiation and due diligence process so that LifeLock would not realize that the IP belonged to Lemon," the complaint states.

LifeLock says accomplished this through misrepresentations and omissions, including saying that equipping the Lemon Wallet with bitcoin capability was abandoned at the request of Lemon's board.

Casares and McAdam also negotiated their continued employment with Lemon after the acquisition, along with other key employees responsible for the startup's success. And, the complaint states, "once the transaction was consummated, and while still employees of Lemon (now a wholly owned LifeLock subsidiary), defendants continued to develop Lemon Wallet's payment and bitcoin functionality using Lemon computers, services, and employees, and on Lemon's premises."

In fact, LifeLock claims, McAdam said she needed to work from home while working for Lemon, but was actually working from Xapo's Palo Alto offices on Xapo business.

"Defendants' post-Merger employment was little more than a ruse because while employed by Lemon, in Lemon offices, on Lemon computers and on Lemon-owned cloud server accounts, during Lemon-paid business hours, and using Lemon IP, defendants simply plotted their exit to Xapo while devoting the majority of their time to developing Xapo products," LifeLock says in the complaint.

Casares announced the launch of Xapo and the Xapo Wallet app with bitcoin functionality just days after resigning from Lemon. Xapo has private equity investments of more than $40 million and The Wall Street Journal estimates the company is worth $100 million, according to the complaint.

Forensic examination of Lemon computers showed that by "October 2013, defendants had already developed a version of a bitcoin wallet that was hosted by Lemon, but disabled the functionality from the Lemon Wallet and transferred access to that functionality from Lemon's domain to xapo.com," Lifelock says.

That's when Casares and McAdam co-founded Xapo, LifeLock says. "By January 2014, defendants had a market-ready 'Xapo Wallet' app with bitcoin functionality, and it was not magically created overnight."

LifeLock says there are only two possible explanations: "(i) the IP [intellectual property] remains with Lemon despite its current, unauthorized use by defendants and Xapo; or (ii) the IP was surreptitiously stolen by defendants, with no compensation paid to Lemon."

Whichever it is, LifeLock says, the defendants owe it tens of millions of dollars, for fraud, fraudulent inducement, breach of representations and warranties in the merger agreement, breach of contract, breach of fiduciary duties, unjust enrichment, and legal malpractice (against McAdam).

LifeLock also seeks an accounting, restitution, an injunction, legal fees and costs of suit.

It is represented by Stuart Grant with Grant & Eisenhofer.

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