InfoSpace founder made insider trades, judge rules
By David Heath and Sharon Pian Chan
Seattle Times staff reporters
InfoSpace founder Naveen Jain made illegal insider
stock trades while he was chief executive officer of the
Internet company, a federal judge here ruled in a
shareholder lawsuit.
Jain may have to pay $207 million plus interest to
InfoSpace, the amount the plaintiff is seeking. That
would make it the largest insider-trading award of its
kind.
U.S. District Judge Marsha Pechman will determine the
exact amount. In an earlier court filing, Jain's lawyers
said he might have to pay $237 million if he lost the
case.
"I don't know much about it," said Jain, 43, who was
fired as CEO by the InfoSpace board in December. "It
makes no sense to me whatsoever."
InfoSpace did not comment on Pechman's Wednesday
decision.
During the dot-com craze, InfoSpace, an Internet and
wireless services company, was among the greatest
successes on the stock market. At its peak,
InfoSpace was worth more than Boeing. Jain owned
more than $8 billion in InfoSpace stock alone.
Jain made more than $400 million from selling
InfoSpace stock. Three of the sales totaled $207
million, which he now may have to pay back to the
company.
Pechman ruled that Jain had made several illegal stock transfers within six months, including improperly
taking control of shares he had given to his children's trusts.
The Securities and Exchange Act of 1934 makes it illegal for a corporate insider to sell shares within six
months of buying them. This strict law is intended to prevent officers and others with insider information
from exploiting that knowledge for quick profits.
As penalty for illegal trades, the insider must pay the company the largest profit the insider could have
made, regardless of whether any profit was realized.
In this case, Jain argued that he did not profit from the illegal trades. However, the maneuvers gave him
greater voting control of the company and at one point could have saved him up to $1 billion in federal
taxes, said David Simmonds, attorney for the shareholder.
The plaintiff, Thomas Dreiling, a Seattle lawyer, won't recover any money from the lawsuit. The award goes
to InfoSpace.
The complicated case stems mainly from two separate events.
The first occurred just before the Bellevue company went public in December 1998. InfoSpace discovered
possible lawsuits facing the company because of deals Jain had made. In several cases, Jain promised
stock options to employees but never delivered.
To protect InfoSpace shareholders, Jain was required to put 1 million of his own InfoSpace shares into an
escrow account. The shares were needed to pay for claims from potential lawsuits.
Instead of using personal shares, Jain used shares owned by a trust for his children.
This action was an illegal trade, Pechman ruled, because Jain took control of shares he did not own, in
essence buying them for free.
In a strange twist in the lawsuit, Jain argued that the escrow account was never established, even though
he signed and filed numerous reports with the Securities and Exchange Commission stating that the
account, with its 1 million shares, did exist.
He claimed that his company was supposed to establish the account, but did not. Furthermore, he testified
that he did not read SEC documents before signing them.
The second event took place in May 1999. Jain and his wife, Anuradha, made another transfer, giving 2
million InfoSpace shares, worth $2 billion at one point, to special tax-free trusts for their children.
When shares of the company split 2-for-1, however, the new stock certificates for some reason were sent
to Jain's office.
Instead of returning the shares to the trusts, Jain and his wife signed documents to have the new shares
put into their personal account. He claimed in the lawsuit that he didn't understand what he was signing.
When the improper transfer was discovered the following year, Jain and his wife returned the shares to the
trusts.
After Jain was ousted as CEO in December, he started Intelius, a Bellevue technology firm across the
street from his old company.
InfoSpace is now suing Jain and another former InfoSpace engineer for violating agreements that they
would not compete against the company. Last month Jain resigned from the InfoSpace board.
Another defendant in the shareholder lawsuit is Stiles Kellett Jr., an Atlanta investor who recently agreed
to pay back $5.5 million to InfoSpace for illegal trades.
According to court documents, Kellett had been fed confidential insider information by an InfoSpace
director, John Cunningham, who was president of Kellett's investment company. Pechman ruled that
because of their relationship, Kellett was an insider making illegal trades.
Steve Sirianni, one of the shareholder's lawyers, said corporate insiders should have known better.
"There's really no excuse for violating the law that's set up to be a deterrent," he said. |
