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A California state court ruled on Thursday that a lawsuit filed by certain investors against Internet incubator Idealab can go forward. The investors expect to go to trial sometime next year, with depositions beginning in January. The ruling gave disgruntled Series D investors the green light to further review Idealab’s books and potentially oust the company’s directors, including chairman and founder Bill Gross. The plaintiffs, who are seeking $725 million, also said Thursday that the U.S. Securities and Exchange Commission had launched an inquiry in June into whether the company violated its exemption from the Investment Company Act of 1940. According to the investors, if Idealab’s exemption is rescinded, the incubator would have to pay back its Series D backers and thus face going out of business. The preferred shareholders petitioned the SEC in August to reject Idealab’s exemption from the Investment Company Act legislation that regulates the activities of investment companies. The investors, which include individuals as well as investment firms Kline Hawkes & Co., T. Rowe Price Science and Technology Fund, Remington Investment Strategies L.P., among others, said Thursday they have hired accounting firm Deloitte & Touche to investigate more than 200,000 Idealab documents recently ordered by the court to be disclosed. One document relates to Idealab’s role in helping Gross obtain a personal $70 million line of credit from Bank of America, they said. Idealab is best known for launching successes like search engine company Overture Services Inc. and online metro guide company Citysearch, which eventually merged with Ticketmaster Online. Idealab also launched a few high-profile flops, among them defunct eToys Inc. and beauty site Eve.com. Preferred shareholders initially filed suit against Idealab in Los Angeles Superior Court in January. In late July, they filed an amended complaint, adding allegations, including breach of fiduciary duty, fraud and deceit by concealment. Several defendants are named in the suit, including Gross and his wife, president and COO Marcia Goodstein, Chief Financial Officer Bradley Ramberg and Director Benjamin Rosen, founder and former chairman of Compaq Computer Corp., and a co-investor in some Idealab portfolio companies. Investors allege Rosen was engaged in “front-running” on stock investments. But the investors’ main complaint is that Gross and Goodstein are using Idealab to preserve what they say is an extravagant lifestyle. More than 90 percent of all fourth-round investors have joined the lawsuit, including newcomers New Dimensions, Vertical Ideas and J.B. Investment Partners. The suit contends that its directors “have abdicated their independence and objectivity in blind obedience to Gross and Goodstein in exchange for personal benefits form Idealab at the expense and to the detriment of the plaintiffs.” “We think they should be held to the highest standards of corporate governance, just as any other corporation,” said Jay Ferguson, a partner at Los Angeles-based Kline Hawkes & Co., which is leading the suit. Idealab spokesman Steve Chadima said his company had not yet received a copy of the judge’s ruling, but said Idealab always expected to go to trial over the inspection of corporate records. The company and Gross deny any wrongdoing. Chadima also said the SEC has not launched an inquiry into whether the incubator should be exempt from the investment act. “We have been in continual discussion with the SEC. We talk to them all the time, regularly update them on all our activities,” he said. “They’ve never suggested for a moment that we did anything improper or illegal or the like.” According to the investors, the California judge ruled that the inspection of Idealab’s books and the issue of whether to remove Idealab’s directors will proceed to trial. The judge also asked for more information on other key issues, including the possibility of dissolution or liquidation and deceit and fraud. Investors also alleged breach of fiduciary duty, which will go forward to trial as a derivative action on behalf of the corporation. Earlier this year, the investors had sought to repurchase each of their shares for about 37 cents for every dollar invested, but Idealab refused to sell at that price, saying it couldn’t afford it. Copyright �2002 TDD, LLC. All rights reserved.

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