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Frustrated Idealab investors filed an amended complaint against the once high-flying West Coast incubator late Thursday, charging founder Bill Gross and other company officials with self-dealing, violations of federal securities laws and division of corporate assets. About 20 new investors, all preferred shareholders in Pasadena, Calif.-based Idealab, joined the lawsuit. The investors include T. Rowe Price Science & Technology Fund, Dell Computer Corp., and new plaintiffs Essex Private Placement Fund II, Guy Starkman and Cindy Margolis. They allege Gross and his fianc�e, Idealab president Marcia Goodstein, are continuing to operate the company for personal benefit and to preserve an extravagant lifestyle. Idealab dismissed the charges as bogus. “These claims are even more absurd and unconscionable now than they were six weeks ago, because the plaintiffs and their attorney know full well that the allegations are contradicted directly by the information we’ve given them,” said Teresa Bridwell, Idealab’s vice president of corporate communications. “They have made a conscious decision to ignore the facts and continue their publicity stunt. We will not be distracted by these tactics from continuing to create real and lasting value for all of our shareholders.” A handful of shareholders initially filed suit in Los Angeles Superior Court in January, hoping to force a shutdown of Idealab and recoup some of their money. The Series D investors, who helped pump nearly $1 billion into the Internet incubator and became preferred shareholders with a 10 percent stake, want Gross to liquidate the company and return the $500 million remaining, plus $500 million in damages. They allege Gross wasted their money by investing in doomed companies, including shuttered online store, eToys Inc. The initial complaint also states that by continuing operations of Idealab, Gross can avoid personal bankruptcy and gain valuable time to “access corporate assets to reduce and pay off this personal debt.” These Series D investors say Idealab racked up losses of more than $600 million between fiscal 2000 and fiscal 2002, and that the combined salaries of Gross and Goodstein more than tripled, from $440,000 to $1.4 million per year. In addition, Gross and Goodstein use a corporate jet and receive hefty life insurance premiums paid by Idealab, the investors stated. “Defendants have wasted hundreds of millions of dollars on failed ventures and follies,” the amended complaint reads. “At the same time, defendants have awarded themselves millions of dollars of benefits in the forms of raises, loans, stock, stock options and sweetheart investment opportunities usurped from Idealab as well as other corporate benefits. The preferred shareholders, including plaintiffs, however, have received no return, no dividends, no distributions.” Plaintiffs also say the incubator violated federal securities laws by keeping financial information secret from the U.S. Securities and Exchange Commission. The suit alleges Idealab hid facts from the SEC in order to maintain an exemption from the Investment Company Act of 1940. “Those charges are absolutely baseless,” Bridwell said late Thursday. “As it relates to the 1940 act, we are today and have been compliant with that. We do have an exemption to that [law], but we actually meet the test with and without the exemption. We went through the process with the SEC, which is a very rigorous process.” The complaint also says Idealab gave both Gross and Goodstein a $250,000 bonus, and increased other executives’ salaries during a time when the incubator faced myriad troubles. The plaintiffs also contend that Idealab funded Gross’ divorce by replacing 150 million shares and/or options that Gross surrendered to his ex-wife in their divorce settlement. Bridwell contends Idealab has been more than forthright with the company’s financials. Idealab mails financial statements to preferred shareholders every quarter and the company held meetings open to all preferred shareholders last spring in Los Angeles and New York, she said, noting some of the plaintiffs attended these meetings. “We did offer information to [investors] and they refused,” she said. “It’s the general theme. They are misconstruing facts.” But plaintiff attorney Skip Miller, of Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro in Los Angeles, said Bridwell’s statements are untrue. “We hadn’t seen any financial statements in a long time, and the financial statements are unaudited,” he said. “Some of the documents had white-outs. But after [we] filed suit, they did provide financial data.” Investors also criticize Idealab’s success — or failure — rate. Many of the incubator’s startups have closed doors. Idealab’s Web site lists more than two dozen companies, but most of these have failed, according to Miller. The plaintiffs invested in Idealab shortly before the incubator planned to go public — but that IPO was nixed when the market plunged. At that point Idealab’s stated valuation was $10 billion, the complaint says. But Bridwell noted several of Idealab’s startups have gone public or were bought. Ticketmaster Online, for example, merged with Idealab’s Citysearch in 1998 before launching an IPO, and Centra. Idealab’s flagship company, Overture Services, has over a $2 billion market capitalization. Bridwell also said Gross is not using Idealab’s capital to pay off his personal debt, and that Idealab has been open with investors about the company’s operations. Idealab, which claims to have $220 million in cash and $140 million in marketable securities and some private assets — rather than the $500 million that litigants claim — says it has plenty of fuel to continue operations. Bridwell said Idealab has plans to launch about nine companies in Pasadena and Boston, though no timetable has been determined when these startups will debut. Idealab launched one new company, Evolution Robotics Inc., a software technology and services firm based in Pasadena, two weeks ago. Bridwell said Idealab’s new startups, many of which Gross conceived, include energy, wireless and broadband applications businesses in California and Boston. Idealab plans to launch them under a $12 million investment budget this year. “I suppose hope springs eternal,” quipped plaintiff’s attorney Miller. “But if [Idealab's] prior track record in the different era is any indication, the chances of that happening are slim and close to none. I think their track record to date is one for 50.” Copyright (c)2002 TDD, LLC. All rights reserved.

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