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Judge Rejects Claim to Shut Down Idealab

June 28, 2003|E. Scott Reckard | Times Staff Writer

A state judge Friday gutted a fraud lawsuit filed by investors who had hoped to dissolve Idealab Inc., a Pasadena firm set up to spawn Internet companies.

The investors, who had poured more than $700 million into Idealab during the Internet craze, accused founder Bill Gross of mismanagement and plundering corporate assets to finance a lavish lifestyle. They had sought to shut down the company so they could lay claim to its liquid assets, estimated earlier this year at $350 million.

Los Angeles County Superior Court Judge Charles W. McCoy tossed out that cause of action, ruling that the plaintiffs lack the one-third ownership of the company's common stock that is required to pursue such a claim. McCoy also threw out claims of breach of contract and deceit by concealment -- and said the plaintiffs could no longer try to reinstate any of those claims in their often-amended lawsuit.

The judge ruled that the plaintiffs, which include former Microsoft Corp. executives and a T. Rowe Price Associates Inc. mutual fund, may continue to try to oust Gross and Howard Morgan, another Idealab director, for alleged malfeasance in office.

The plaintiffs' attorney, Skip Miller, said in a statement that he was grateful the malfeasance claim can proceed but disappointed that the attempt at forcing the liquidation of Idealab had failed.

Miller said the judge's decision rested on "a technical interpretation" of whether his clients have a sufficient ownership stake in Idealab. Whatever their number of common shares, "the plaintiffs put up almost all the money invested" and thus should be able to sue under state law, Miller said.

He didn't comment directly on whether an appeal was in the works but said, "We are evaluating our options and intend to proceed full-bore."

Through a spokeswoman, Gross said he was "excited that the most important parts of the lawsuit were thrown out."

Idealab general counsel Douglas McPherson said he was confident that the plaintiffs would be stymied in any attempt to eject Gross and Morgan over allegations of self-dealing and other misdeeds.

The plaintiffs control less than 9% of Idealab's common stock and a majority of shareholders has reelected the company's board twice since the suit was filed 18 months ago, McPherson pointed out.

As originally filed, the suit contended that Idealab's incubator business, "for all practical purposes, is nonexistent." It noted that other technology incubators "are winding down, dissolving and refunding investor money."

Idealab is far from dormant, McPherson said, contending that five of its operating companies have become profitable since the suit was filed, including search engine Overture Services Inc.

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