Dealmakers sue ex-employer Comdisco
Glimpse of venture unit's meltdown
June 09, 2003
By Julie Johnsson
chicagobusiness.com
A bitter legal battle between Comdisco Holding Co. and three former managing directors of the company's venture capital arm provides a glimpse into the frenzied deal-making that triggered the Rosemont leasing giant's bankruptcy and demise.
The three executives, Manuel Henriquez, Glen Howard and Geoffrey Tickner, are suing Rosemont-based Comdisco for $163 million in incentives they say are owed for deals they made for Comdisco Ventures and two related investment entities as the dot.com bubble burst.
In a stinging rebuttal filed last month, Comdisco accused the three of breach of fiduciary duty, fraud and negligence and asked the Bankruptcy Court here to dismiss their claim.
Run from tony offices in Silicon Valley, Comdisco Ventures was the cornerstone of a misguided attempt by former CEO Nicholas Pontikes to transform the staid equipment leasing and disaster-recovery company into a splashy new-economy player.
Mr. Pontikes relied heavily on high-risk investing to bolster earnings, a strategy that worked for a time. As the technology market collapsed in 2000, the venture unit doubled its deal volume to 700 transactions worth a staggering $1.5 billion, a pace of $125 million per month.
Venture execs catch blame
Comdisco's court filing portrays the venture unit, which Comdisco once planned to take public, as a rogue operation churning out ill-conceived deals even as the corporate parent encountered the liquidity crisis that led it to seek Chapter 11 bankruptcy protection in July 2001.
Once ranked among the Fortune 500, the company — formerly Comdisco Inc. — emerged from bankruptcy last fall as Comdisco Holding Co., whose sole purpose is to wind down operations and settle outstanding claims.
While Comdisco executives declined to speak about the litigation, the company's May 15 Bankruptcy Court filing blames the venture executives for contributing to Comdisco's collapse by investing without conducting proper due diligence, allegedly causing the company to write off more than $595 million in losses.
"That's absolutely not true," counters Douglas Lipke, an attorney representing Messrs. Henriquez and Howard. " Our guys made Comdisco hundreds of millions of dollars from their efforts. They left on their own before those losses were created. It is not fair at all."
Indeed, Mr. Henriquez left the company in April 2000, but subsequently acted as a consultant; the other executives left a year later, according to court documents. Neither Mr. Tickner nor his attorney, Charles Schulman, could be reached for comment.
Mr. Lipke, who heads the insolvency, bankruptcy and corporate reorganization group at Chicago law firm Vedder Price Kaufman & Kammholz P.C., plans to file a motion to dismiss Comdisco's counterclaim this week. If he succeeds, the men would collect in full from a $378-million reserve created by Comdisco to cover disputed claims.
The court's determination will likely hinge on how culpable Messrs. Henriquez, Howard and Tickner were as managing directors who ran the company's investment funds, but reported to James Labe, president of Comdisco Ventures, and, ultimately, Comdisco's senior management team. Mr. Labe, who had sought to collect $60.5 million in a similar claim, settled last fall for $2.9 million, according to court documents.
Mr. Labe resigned in April 2001, after then-CEO Norman Blake visited the California offices with an eye toward selling the venture capital business in the hope of saving Comdisco from bankruptcy. Mr. Blake, who had joined the company just two weeks earlier, immediately abandoned those plans.
"It was a very high-risk portfolio, and not well-managed," he told Crain's later.
Mr. Labe could not be reached for comment, and his attorney did not return a call seeking comment.
To bolster the case that the venture executives acted properly, Mr. Lipke cites initial public offering documents that Comdisco filed in 2000 with the Securities and Exchange Commission (SEC) that tout the venture group's due diligence procedures and corporate oversight of its activities.
"The company is put in the odd position of having to suggest that its statements (to the SEC) were false," notes Stephen Presser, professor of law and business at Northwestern University. Comdisco can rationalize that by arguing, " We relied on the representation made by these people in good faith. We didn't do wrong; these guys did wrong."
Indeed, Comdisco alleges that in their haste to close deals, the three executives neglected to track the financial performance of the investments in their portfolio and did little or no due diligence before funding prospects. Rather, they invested blindly in deals where "A-list" venture capital funds were involved, the filing alleges.
For example, they invested $12.5 million in Chicago's EthnicGrocer.com Inc. in early 2000 to gain favor with big-name venture capitalist Kleiner Perkins Caufield & Byers, the lead investor in the food e-tailer. The executives' research for the investment: review of "only a single page of financial projections, which pertained only to the then-current fiscal year," Comdisco alleges.
What's more, Comdisco Ventures' investment was significantly larger than the funding provided by the lead investor, the filing states. Yet, the fund managers "did almost nothing to monitor their investments (such as obtaining updated financial statements) between July 2000 . . . and April 2001, when EthnicGrocer reported that its prospects going forward were not good."
Comdisco lost more than $7.3 million on that investment, according to the filing. EthnicGrocer executives, who later reorganized the company as TransEthnic Inc., now based in Elk Grove Village, declined comment.
Risks, responsibilities in dispute
Controls at Comdisco Ventures were so sloppy, the filings allege, that when Goldman Sachs & Co. evaluated its investment portfolio in late 2000, the New York-based investment bank found it had no active credit-scoring system or fundamental systems to track how its portfolio was allocated — basic tools employed by venture capitalists to estimate the risk in their holdings.
In fact, Comdisco claims the venture capital executives ignored management's demands to stop making investments as the cash crunch worsened in late 2000 and early 2001. The company contends that Comdisco management ordered the company's outside counsel not to draft any legal documents for the venture unit, in order to bring the deal-making to a halt.
Mr. Lipke maintains that none of the activity identified in Comdisco's filing was covert — that Mr. Labe and the company's managing directors reviewed the transactions in regular Monday morning meetings, and Comdisco's senior management was fully briefed on the investments.
"Whatever was being done was always reviewed by parties at levels above our clients," he says.
And if his motion to have Comdisco's counterclaim dismissed fails next week and the matter proceeds to trial, he promises to make clear how complicit Comdisco executives were in the venture unit's rise and fall.
"We're prepared to go forward and take some very serious discovery."
Senior Reporter Sandra Jones contributed to this report.
©2003 by Crain Communications Inc. |
