The long arm of the Martha Stewart scandal spread to Silicon Valley this week as shareholders sued venture capitalist John Doerr, who until recently served on the board of Martha Stewart Living Omnimedia.
The suit alleges that Doerr, Stewart and other company insiders dumped 5.3 million Omnimedia shares worth $79 million based on private information about the scandal brewing over Stewart’s sales of ImClone System shares.
Doerr, a general partner at Menlo Park’s Kleiner Perkins Caufield & Byers and arguably the country’s best-known venture capitalist, sold his firm’s 2 million shares for $29 million in March and resigned from the board, according to the suit filed Wednesday in U.S. District Court in the Southern District of New York.
Stewart’s sale of ImClone stock became public in June.
Doerr achieved a national profile in 1996 when, ironically, he successfully led the charge against California Proposition 211, which would have given shareholders more power to wage class-action lawsuits.
He was a key booster of the Internet and of presidential aspirant Al Gore during the dot-com boom, and he helped launch the political advocacy group TechNet.
The shareholder suit highlights a controversy in the venture capital world about whether VCs, who make a living investing in pre-public start-up companies, should risk remaining on boards after the companies have gone public.
Doerr’s white-glove firm was also named as a defendant, along with six top Omnimedia executives who sold shares earlier this year.
“This is a baseless lawsuit, and we will be filing a motion with the court to dismiss the case,” said David Furbush, the attorney representing Doerr and Kleiner Perkins, in a telephone interview Thursday.
“Nowhere does the complaint provide any facts to show that the directors of Martha Stewart Living Omnimedia knew of the ImClone trades before they were publicly disclosed,” said Furbush, a partner in the East Palo Alto office of Brobeck, Phleger & Harrison. “I think it’s a shot in the dark.”
Stewart is under investigation by federal authorities for selling 4,000 ImClone shares on Dec. 27, one day before the Food and Drug Administration rejected ImClone’s application for a cancer drug, Erbitux.
The shareholder suit alleges that Stewart, Doerr and other company insiders knew about that controversy and dumped their stakes before Omnimedia stock took a hit.
Lawyers with Milberg Weiss Bershad Hynes & Lerach LLP, which filed the class action, were not available to comment.
Stewart could not be reached for comment late Thursday.
Doerr became a director of the once high-flying publishing company in July 1999, at the height of the dot-com frenzy. At the time, he was considered an e- commerce guru for his high-profile investments in companies like Amazon.com and was expected to facilitate deals for the Martha Stewart Web site.
At the same time, Kleiner Perkins made a $25 million investment in Stewart’s company, which went public a few months later.
In its stock registration statement for the IPO, Omnimedia said, “We believe that the investment in our company by Kleiner Perkins, and the participation of John Doerr on our Board of Directors, will provide significant strategic benefits to us as we expand our Internet/Direct Commerce business. There can be no assurance, however, that we will succeed in this, or any other, aspect of our strategy.”
Kleiner Perkins was one of the company’s largest shareholders before selling its entire stake in a private sale in July at $14.50 per share. The buyer was an investment firm called ValueAct Capital Partners that also bought shares privately from Stewart, according to the lawsuit.
Historically, VCs have left their company boards when the companies have gone public. But during the technology boom, when VCs like Doerr were seen as superstars, retaining board seats after an IPO became more common.
Public directorships both expose VCs to costly shareholder litigation and potentially put them at odds with their fund’s investors on the question of when to sell shares.
Board members may be loath to sell shares when their value is going down because it could hurt the company. But VCs are supposed to maximize value for the investors in their funds, which could mean bailing out of a sinking stock.
An additional consideration is that VCs, as partners in their firms, may be at personal risk in shareholder lawsuits.
Omnimedia shares closed at $8.59 Thursday, down from a high this year of $20.93 reached in March.
The lawsuit requests damages but does not specify an amount.
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