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November 30, 2003

Nishan Systems founder sues VCs, others over McDATA acquisition


Nishan Systems founder and board member Aamer Latif has filed a suit against the company's Venture Capital (VC) investors and others in the California Superior Court, Santa Clara County. ComVentures (and its General partner Roland Van der Meer); Lightspeed Venture Partners (and its general partner Gill Cogan); Robert Russo (CEO of Nishan); John McGraw (Chairman of Nishan's board); McDATA Corporation; and investment banking firm Credit Suisse First Boston; have been named among the defendants in the suit.

The suit alleges that the defendants engaged in fraudulent vote-buying to garner common shareholder votes needed to approve McDATA's acquisition of privately held Nishan Systems. Among other claims, the suit alleges that the venture capital firms stacked the Nishan board so as to promote their own financial interests at the expense of Latif and other common shareholders.

The lawsuit stems from the recent $90 million acquisition of the San Jose, CA-based Nishan, a supplier of storage over IP technology, by McDATA. The deal, announced on August 25, 2003, closed on September 19, 2003. Along with punitive damages for fraud, vote-buying, and other infractions, the suit seeks a redistribution of the merger proceeds.

According to the suit, certain common shareholders were promised cash payouts of up to $1.1 million in return for their affirmative merger vote. The venture capital firms, the complaint alleges, walked away with $11 million of the merger package for a two-month bridge loan (at about 800% interest) they had offered Nishan after the merger with McDATA was agreed upon in principal.

"This is a clear case of shareholder vote-buying," said Rony Sagy, attorney at the law firm, Sagy Law Associates, representing Latif. "To win their votes legally, the defendants could have offered more money from the merger proceeds to the Nishan common shareholders, the founders and employees who worked hard for little pay, in anticipation of making the company successful and reaping the benefit of that work in the future. Instead, the defendants blatantly ignored their obligations to the remaining shareholders and pocketed a much larger portion for themselves."

Click Here to track the developments in the case via the Sagy Law Associates web site. This web page provides links to the press release on the suit issued by the law firm and Latif; news articles covering it (including in the San Jose Mercury News and Byte and Switch), etc.

Tim Oren defends the VCs
Reacting to the San Jose Mercury News report on the case, Tim Oren, Managing Director of VC firm, Pacifica Fund, says in his web log: "While I'm quite sure (it) has happened in the venture world, ... (the Nishan case) is not a very persuasive case of venture investors cheating some poor founder out of his rightful money." Oren highlights the fact that the VCs either lost money or barely broke even on the total amount they invested in Nishan.