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Investors Want Idealab Liquidated

Internet: Lawsuit against the Pasadena company's founder claims Bill Gross mismanaged the incubator. The plaintiffs want the $500 million that remains.


A group of blue-chip investors who poured nearly $1 billion into the once-highflying Internet pioneer Idealab Inc. filed a lawsuit Friday demanding that founder Bill Gross liquidate the company and return the $500 million that's left.

The suit alleges that Gross, Idealab's chief executive, and his fiancee, company President Marcia Goodstein, badly mismanaged the company and have kept the enterprise alive simply to preserve their sumptuous lifestyle.

"In just two years, the defendants burned through more than $500 million," the lawsuit says. "Idealab's 'incubator' business, for all practical purposes, is nonexistent, and in fact, other 'incubators' are winding down, dissolving and refunding investor money."

Gross responded to the suit, saying it is "completely and totally baseless."

"It's just embarrassing that these people are so immature and crybaby that they want to take an investment that they made and carry it out this way," he said after reading the allegations. "There's a market downturn, but Idealab as a company is doing great."

The filing of the lawsuit late Friday in Los Angeles Superior Court marks a grim milestone in the rise and fall of one of the most luminous stars of the so-called new economy.

With Pasadena-based Idealab, Gross invented the concept of an Internet "incubator" that turned inspirations into corporations in as little as three months. His strategy was widely copied as entrepreneurs and investors looked to cash in on the dot-com craze.

But the tech meltdown of the last two years has left 6-year-old Idealab a shadow of its former self.

Its most famous fledgling, online toy retailer EToys Inc., was once worth more than Toys R Us but shut down last year after burning through millions of dollars. Dozens of lesser-known firms also have been shuttered.

Idealab's Web site lists 26 active companies, only one of which has been a big hit. Overture Services Inc., a pay-for-placement Internet search engine, has a market capitalization of $2.2 billion.

The investors suing Idealab--including Dell USA, T. Rowe Price Science & Technology fund and Moore Global Investments Ltd.--say there is little for the incubator to do and it could easily operate on a $1-million annual budget. Instead, Idealab maintains offices in Pasadena, Silicon Valley, Boston and London and recently doubled the salaries of Gross and Goodstein.

The lawsuit has opened a can of worms, alleging a series of unseemly practices that occurred behind closed doors at the privately held company.

It accuses Gross and his associates of using Idealab's resources to fund stock repurchases at inflated prices and collateralize personal loans, instead of looking out for the company's investors. The plaintiffs said Idealab executives refused to hold shareholder meetings or provide access to the company's financial records, in violation of California law.

The plaintiffs claim Gross has refused to liquidate Idealab because he is $40 million in debt and has a $50-million loan "he cannot possibly repay" without "accessing the assets of Idealab." The suit also says six other executives and directors have borrowed a total of nearly $4.5 million from the company.

Gross said he borrowed $40 million from Bank of America so he could plow it back into the company, not spend it on personal items.

"I invested in Idealab on the same terms as they did," Gross said. "That money is in Idealab alongside theirs."

The plaintiffs, including mutual funds and individuals, were the last major investors in Idealab. They put up $1 billion for a 10% share of the incubator, giving it a total valuation of $10 billion. The investment came in March 2000, just weeks before the dot-com bubble burst. Some of Idealab's best-known start-ups began folding soon after.

Idealab and the plaintiffs have spent months trying to negotiate a deal that would allow the investors to recoup at least part of their massive cash influx. But the investors said Gross offered only 10 cents on the dollar. If Idealab were forced to divest its cash and liquidate assets, the investors could get 50 cents on the dollar, according to the suit.

The investors will probably seek an injunction to prevent Gross and other executives from frittering away Idealab's remaining assets, said their attorney, Skip Miller, a partner with the Los Angeles firm Christensen, Miller.

They are seeking at least $500million in damages in addition to recovering the $500million remaining from their original investment.

Idealab President Goodstein said the suit came as a surprise.

She said the company had little contact with its investors and there were no signs they were considering legal action.

"We're scratching our heads," she said.

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