The case of the imaginary investor
05.12.2000 | 12:30
Leor Mohr
Deceit. Fraud. False presentations. Failure to conduct negotiations in good faith.
Nor is that the end of the list of accusations that Israeli real estate mogul Alfred Akirov’s company Alrov levels at the Israeli startup Net2Wireless and its chairman, David Rubner of ECI Telecom (Nasdaq:ECIL) fame.
In its suit filed with the Tel Aviv District Court, Alrov demands NIS 21.7 million, restoration of its $5 million investment plus interest and linkage differences. It claims the investment was made based on deceitful presentations by Rubner.
The favor
It all began back in March, when Nasdaq was in its prime and investors pounced on anything smacking of technology. Alrov was no exception. After meeting between Rubner and Alfred Akirov, Alrov elected to invest in the startup Net2Wireless, which developed technology to transmit multimedia files over cellular networks.
The lawsuit claims that Rubner presented Net2Wireless as a promising technology company without rivals in the middle of a $30 million financing round. The plaintiffs claim Rubner said that due to the nature of the investment, the company did not intend to raise capital from Israeli investors. They claim Rubner said a group of investors was in the process of conducting due diligence on Net2Wireless, and that the strategic investors leading the financing round were Goldman Sachs and the investment funds led by billionaire George Soros.
Rubner, the plaintiffs claim, said the timetable for investment was very tight, that the financing round would be completed within days, and that it was doubtful whether there was room for Alrov to come on board. But Rubner said he’d see if he could wedge Alrov in, contingent on Alrov reaching a decision on the spot, the plaintiffs claim. They also say Rubner told Akirov that if he could work it out, he – Rubner – would be doing him – Akirov – a big favor, because it was a one-time opportunity.
Six days after the initial conversation between the two businessmen, Rubner informed Akirov that he had persuaded the group of investors to allow Alrov in. Three days later Alrov committed to investing $5 million in Net2Wireless. Alrov did not conduct any due diligence tests, relying totally on Rubner’s good name and the due diligence conducted by Goldman Sachs and the Soros funds, as Rubner had said.
The investment brought the Alrov group something under 1% of Net2Wireless’s equity, extrapolating to a company value for the young startup of more than half a billion dollars – and it hadn’t posted one red cent in sales yet. Alrov bought it at $37 per share. When signing the investment agreement, Alrov was told of the reverse merger under which Net2Wireless would be taken up by Sensar Corporation (Nasdaq:SCII).
Is that the scent of rat?
Back in March Sensar stock was traded at about $90 per share. The merger deal would have valued Net2Wireless at about $2.5 billion. Akirov was content with his investment. The problems began when Sensar stock started to lose ground from $90...
…to its current level of about $2.
The problems continued. Nextel Corporation (Nasdaq:NXTL) backed out of an agreement to invest $32 million in Net2Wireless. Two weeks ago Sensar revealed that Nasdaq was raising objections to the proposed merger with Net2Wireless because of past irregularities in which two substantial shareholders in Sensar, David Bodner and Murray Haberfeld, had been involved. Yesterday Nasdaq nixed the merger altogether and advised Sensar that if it went ahead, it would be delisted.
Anyway, Alfred Akirov smelled a rat and finally set out to sniff around.
He was probably pretty surprised at what he found. The plaintiffs claim that in fact, there had been no lead investor or strategic investor in that financing round. Alrov claims that all the investors he contacted were purely financial in nature.
And that’s just for starters. Alrov also claims that none of the investors with whom it checked had carried out a serious due diligence process, or led the investors in negotiations with the company. Most of the investors had been told, Alrov claims, that the job was being carried out by other investors, but the plaintiff did not discover any investor that had actually fulfilled the leadership role Rubner described.
The imaginary investor
Which leads to one of Akirov’s most dramatic accusations: that neither Goldman Sachs nor any Soros funds led the investment in Net2Wireless. They weren’t even on the list of investors, he claims. These two firms, which Rubner had used as a lever to prise investment out of Alrov in record time with no background checks, had no function whatsoever in the group of investors. Moreover, not only did the group of investors include no seasoned technology investors – it did in fact include several Israeli bodies, contrary to Rubner’s statement.
As if that weren’t bad enough, the plaintiffs also have complaints about the valuation of Net2Wireless for the purpose of the investment. Alrov claims that the day before its investment was finalized, Net2Wireless distributed millions of options to various parties, at an exercise price of $1.86 per share. One of the main beneficiaries was none other than David Rubner, who received 1.07 million options. The next day Alrov invested in Net2Wireless according to a share price of $37, remember. Certainly a handsome addition to value for one day.
“Rubner pressed the plaintiff to invest quickly without checks in reliance on ‘strategic investors’ that never existed, and did not trouble to disclose to the plaintiff that he did not in practice believe in the company valuation at which the plaintiff invested, and therefore received options at a ludicrous exercise price that could generate huge profit for him even if the share price plunges, as it did,” the lawsuit states.
Later in the document they add that not only did Rubner and Net2Wireless make false presentations, they also concealed substantial facts that, if known in time, would have stopped the plaintiff from making the investment. These facts include the involvement of David Bodner and Murray Haberfeld in the company, the exercise price of the options, and the excessive employment terms of the company's CEO, Nehemia Davidson.
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