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Former Covad GC's Derivative Suit Settles for $7 Million
Accused of harassment, GC shot back that he was the victim of racism, and filed a $125M suit on stockholders' behalf
The Recorder
February 29, 2008
Covad Communications and its ex-general counsel have finally laid to rest a sordid, six-year saga of allegations of self-dealing directors, sexual harassment and retaliatory firing.
Covad directors agreed to pay the company $7 million to settle a long-running derivative suit originally filed by former GC and co-founder Dhruv Khanna, the San Jose, Calif., telecom company detailed in its annual report, released Tuesday.
Khanna filed a shareholder's derivative suit after he was fired in 2003, accusing the company's directors of wasting money and enriching themselves at the expense of shareholders. Among other things, the suit accused Covad directors of bailing out a venture capitalist who sat on the board by buying a failing company he had backed.
The plaintiffs sought to recover at least $125 million in damages on behalf of the company, according to news reports. Last fall, the defendants -- who included directors and a venture capital firm -- agreed to pay Covad $5 million to settle. The final tab was $7 million, with $1.89 million of that going to plaintiffs' counsel Grant & Eisenhofer and another East Coast firm.
Khanna was placed on administrative leave in 2002 amid charges of sexual harassment, according to court documents. He claimed that he was targeted because he was a whistleblower and because of his nationality. Khanna was born in India.
But even though the former GC stands to get some secondhand benefit from the settlement as a major Covad shareholder, he won't receive a payout personally. That was never the point, a reserved Khanna told The Recorder on Wednesday.
"There was a settlement paid by the directors and former directors of the company," Khanna said. "I do feel at least partly vindicated, and that's good enough for me."
Steven Schatz, a longtime Wilson Sonsini Goodrich & Rosati partner who represented defendant Crosspoint Venture Partners, said settling the case was the prudent thing to do for his client.
"I thought it was a rational decision to put the case behind everybody," Schatz said. "My client believed that the suit was baseless, but it recognized that the reality of litigation is that there are costs associated with litigation."
Covad's attorney, Latham & Watkins partner Paul Dawes, declined to comment on the suit. A Covad press release echoed Schatz, saying the company had settled to keep costs down and because of the inherent uncertainty of litigation.
Schatz said it was an unusual case because it was filed by a former executive, unlike most derivative suits, which are brought by shareholders far from company management.
"This was very aberrational from my experience because of who the plaintiff was," said Schatz, a veteran of the securities bar. "Normally it's just an investor; here it was the former general counsel."
But, then again, nothing in the bitter fight between Covad and its former top lawyer could be called mundane.
FOUNDING AND FALLING OUT
Khanna, now 48, left Intel Corp. in 1996 with Charles McKinn and Chuck Haas to found Covad. The company tapped into the brand-new broadband market, catching the telecom wave at the right time.
But in 2001, the market crashed and Covad filed for bankruptcy. Although the company soon emerged from insolvency, its high-flying stock had plummeted from a high of $60 a share to less than a dollar.
Inside Covad, relations between Khanna and the company also went downhill. After an investigation into alleged sexual impropriety led to his suspension in 2002, Khanna turned around and pointed the finger at the board for allegedly breaching its fiduciary duty. Neither Khanna nor a Covad spokesman would discuss the circumstances that led to Khanna's firing beyond the account in the company's annual report.
Covad formed a special committee and hired lawyers from Goodwin Procter to investigate. The committee concluded that Khanna's allegations didn't hold water, including the claim that he was suspended for blowing the whistle and targeted because of his race and national origin. After that, Khanna was canned.
The former GC's suit in Delaware Chancery Court came late in 2003. It accused the board, including co-founder McKinn, of a host of improprieties. Khanna alleged that the board allowed McKinn and Rich Shapero, a Covad director and VC at Crosspoint, to create and invest in a competing company in 1999. He also accused the board of buying BlueStar Communications Group in 2000 to rescue Crosspoint's investment in the floundering company. Covad, with lawyers from Latham & Watkins; the directors, with lawyers from Heller Ehrman; and Crosspoint, with lawyers from Wilson Sonsini, fought back vigorously. Their 2005 motion to dismiss put a damper on the suit. Although some allegations survived, Khanna was disqualified as a plaintiff, leaving two other shareholders to carry the torch.
Delaware Vice Chancellor John Noble reasoned in his 2006 opinion that Khanna was far too involved in the transactions in question to be a plaintiff. Noble also wrote that Khanna's employment dispute made it unclear whether the suit was really for the benefit of the shareholders.
"At that point, the litigation became a resolvable business lawsuit and not a personal grudge match," said Heller Ehrman's Norman Blears.
Today, Khanna said he's enjoying a combination of "recreation, philanthropy and business." He owns Kirigin Cellars, a Gilroy, Calif., winery.
Khanna started his legal career at Pettit & Martin and worked as a telecom lawyer at Morrison & Foerster before moving in-house at Intel. Now, the only legal work he does is for himself, he said.
As for his Covad stock, it's turning into cash. Platinum Equity agreed to buy the company for $304 million or about $1 a share in October. Khanna was one of the largest individual stockholders, with millions of shares in his former company.
And as for the drawn-out dispute, it's all in the past now, he said.
"I've certainly moved on with my life," he said.
