With such friends
05.12.2000 | 15:57
Jonathan Nassie
themarker.com
How much would you pay for the Brooklyn Bridge? If you’re reading TheMarker.com, probably not a penny. You’d figure you were being taken. But there are probably a lot of goofs out there who’d pony up with a happy smile and pad off to pen a postcard to Maw.
The lawsuit pressed by Alrov against Net2Wireless and its chairman, David Rubner, one of the better-known figures in the Israeli hi-tech industry, paints a picture something like that: Rubner standing on the ramp to a bridge selling a pack of lies to passing investors in order to get their money.
There were apparently a lot of goofs out there prepared to pony up. But Alrov’s Alfred Akirov was the first to yell, I’ve been had.
Akirov’s lawsuit is deadly serious. It mentions major sums of money and raises claims of fraud and false presentations. His claims wait examination by the courts. We don’t know what the defendant will say yet. But even before we hear the other side of the affair, even before the courts have their say, the lawsuit does accomplish something. It describes the atmosphere at the time in the Israeli hi-tech arena. Although those careless days are probably gone forever, it should be said.
If Akirov's description of the chain of events is accurate, Rubner has some explaining to do. Another problem is that Akirov, who leaped into a major investment without looking first, probably wasn’t the only careless and happy-go-lucky businessman in Israel during the hi-tech heyday of late 1999. Back in 1993, a rumor circulating a Tel Aviv café was enough to set oil stocks spiraling skywards. In early 2000, apparently, a whisper to the unwise was enough to prise loose a check for $5 million.
Psst! A pirated Dr Dre? A fish? A hi-tech company?
“Rubner took the trouble to inform Akirov that if he did indeed manage in the short time left to wedge the Alrov group into the investment, he’d be doing him a big favor, because it was a one-time opportunity,” Akirov states in his lawsuit.
Take a stroll around the open-air vegetable, fruit and pirate-CD markets of any Israeli city. “It costs me more than that, you’re getting a special price just for you,” you’ll hear. In the veggie market, okay, but in hi-tech? When the prices are in the millions? In a conversation between two of Israel’s leading businessmen?
Apparently, just so. Rubner apparently really was one of Alfred Akirov’s good friends. He apparently did devote the days following their chat to persuading the other investors to let Alrov in too. And lo, after a few days he called Akirov back, saying that his efforts had not been in vain. He’d managed to persuade the “group of investors” to let Alrov invest too, under certain conditions.
The conditions involved the magnitude of the investment: $3 million to $5 million, a decision by Alrov on the spot, and signatures within days. The punch-line: the tight schedule did not permit additional background checks on Net2Wireless, or amendment to the investment documents or terms.
In other words, Rubner was telling Akirov that he (Rubner) had made a terrific effort to allow him (Akirov) to invest it ($5 million) in a startup (Net2Wireless) without giving him (Akirov) a chance (even a wee one) to check the company (Net2Wireless) or to amend the investment agreement (to make it more reasonable, for example).
Put otherwise, Akirov examined his new investment about as carefully as you’d examine a candy bar at the grocery before forking over your dollar.
The mystery “lead investor”
Any venture capital fund manager would carry out an intense due diligence process for much smaller sums of money. He’d meet with the startup’s management, have its technology checked by external experts, and comb its market for potential competitors, which he would then evaluate. And that’s for starters. He might also demand to meet with reps of key potential clients to hear their requirements of the product. Then he’d butt heads with the company, wrestle over the company valuation for the purposes of the investment, and finally, finally, if they manage to come to terms, he and his lawyer will sit down and compile a contract stipulating everything from stock options to protection from dilution and the right to invest in further rounds.
But Akirov comes from the real estate industry, not venture capital. He didn’t even go visit the company or meet with its managers. Three days after receiving Rubner’s nod, he sent over a commitment to invest $5 million. Akirov did append his lawyer’s comments to the terms of investment to his letter of commitment, but addressed his missive to the “lead investor”, as Rubner had forbidden him to make any changes in the agreement. Changes, he said, were the province of the “lead investor”. Which, according to Rubner’s presentation, was supposed to be Goldman Sachs and funds run by George Soros.
Akirov’s decision relied on Goldman Sachs leading the investment and carrying out due diligence on the company. Indeed, Goldman Sachs is as classy a lead investor as one could hope for. But the thing is, as Akirov notes in his lawsuit – neither Goldman Sachs nor Soros were actually mentioned in the list of investors in the agreement. Weird, he thought to himself, but his suspicions weren’t aroused yet, not at that stage. He relied on Rubner’s presentation that they were indeed the lead investors in Net2Wireless, even if not mentioned by name in the investment agreement.
Fact and fiction
Fact: Neither Goldman Sachs nor Soros ever put so much as $1 into Net2Wireless. Rubner had taken their names in vain when dropping them to lull Akirov into investing in the startup without looking at it first.
Akirov explains that he discovered the same presentation had been made to all the investors: all were told that the due diligence process was being carried out by a “lead investor”. That was a fiction.
Fact: At the end of the day there was no classy investor leading the pack and investigating the startup, there was no leader at all. Everybody else trusted that somebody else had done it.
Fact: Akirov agreed to invest $5 million in a startup for less than 1% of its equity, a transaction valuing it at more than half a billion dollars. More than the value of Scitex Corporation (Nasdaq:SCIX), for instance. He did it without checking the company in any way or talking with the other investors. Rubner could as well have sold him a piece of a company that makes rubber rats.
Would Akirov have leaped so readily into a deal to buy a piece of building that he was told was worth half a billion dollars? Wouldn’t he have driven over to make sure it really existed?
Akirov may have a serious case against Rubner, or maybe he doesn’t, but Rubner’s reputation has sure taken a beating from the Net2Wireless affair. But that isn’t the end of matters, probably. Alrov stock is traded on the Tel Aviv Stock Exchange. Akirov’s name is likely to appear on another lawsuit: that of Alrov’s shareholders, leveling accusations against him.
Net2Wireless comments
In response to Akirov’s claims, Net2Wireless comments that it has read the lawsuit and Mr Akirov’s claims, and that they are utterly baseless. The company states that Mr Akirov knew that his claims were incorrect, and that he is trying to impose illegitimate pressure on the company to void his investment after learning that at this stage, it is not worthwhile. The company said it has handed the matter over to its lawyers |
