Employee sues InfoSpace under racketeering law
Seattle Times business reporter
In a case that may be the first of its kind, an employee is suing Internet company InfoSpace under federal racketeering law for allegedly cheating him out of thousands of stock options potentially worth millions of dollars.
The suit alleges the Bellevue-based content provider and its chairman, Naveen Jain, repeatedly defrauded employees by promising them stock options that were never delivered. In some cases, the suit says, employees were fired before the options were due to be granted.
InfoSpace flatly denied the lawsuit's allegations.
The pattern of fraud violates the Federal Racketeer Influence and Corrupt Organizations Act, the employee, John E. Richards, stated in the suit filed Monday in U.S. District Court in Seattle.
Richards contends he was promised he would be granted more options than any other past or future employee as an incentive to join InfoSpace and build an online Yellow Pages directory in January 1998. Richards, InfoSpace's vice president of merchant services/Yellow Pages, was granted options to buy 125,000 shares of the company at that time, but later learned other employees had been granted options for many more shares.
"It wasn't until recently that he began to hear of these other cases," said Richards' attorney, Steve Berman, of Hagens Berman in Seattle.
The suit, in alleging a pattern of deception via phone and mail that would qualify for RICO status, recounts six other court cases in which employees were denied options allegedly promised by Jain. They alleged fraud, breach of contract or discrimination, but not violations of racketeering law. Three of those cases were settled and three are pending in federal court, Richards' suit said.
In one case cited in the complaint, employee Kent Plunkett alleged he was promised options to buy 2 million shares at 1 cent apiece. The suit says Jain later changed the price to 10 cents and then fired Plunkett before granting the options. That case was settled in March for $10.5 million, according to the suit.
InfoSpace's Jain declined to comment, but a spokesman, Mark Peterson, said the company would vigorously defend itself. "We believe these allegations are totally without merit," he said.
Richards' suit seeks unspecified triple damages, court costs and an adjustment to ensure he continues to receive more options than any other InfoSpace employee. It also alleges breach of contract and fraudulent misrepresentation and names Richards' wife, Susan, as a co-plaintiff.
"He still believes in the company, and, frankly, hopes to stay at the company, but believes the defendant, Jain, made promises that weren't kept," Berman said.
The suit doesn't specify an amount that Richards was denied, nor does it state at what price Richards' existing options were granted. Options give employees the right to buy shares at a certain price, usually below their market worth.
Assuming, for example, that Richards was denied options to buy an additional 750,000 shares at $1 each, he might have missed a potential gain of $5 million based on yesterday's closing price of $7.86 a share. InfoSpace went public in December 1998 and peaked at $130.53 in March, so depending on the timing, those options could have been worth substantially more.
"We don't know his loss," Berman said. "We don't know how many people during this period have gotten more shares."
Berman said the InfoSpace case could be the first use of RICO to target employee earnings at an Internet company.
RICO is often associated with organized crime but in fact is used against a wide range of frauds.
In a case decided in March, for example, a federal appellate-court panel in San Francisco ruled that America Online did not violate racketeering laws by using "flat-fee" advertisements to bring in more customers than it could possibly provide with Internet access.
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