VOIP Fledgling in Founders Flap

This week’s launch of StreamCast Networks Inc.'s Morpheus Voicebox put i2Telecom International Inc. (OTC: ITUI) on the map as a provider of voice-over-IP hardware and service to U.S. consumers (see Morpheus Morphs Into VOIP Provider). But before taking on P2P VOIP competitors, i2Telecom was already fighting the founders of a company it acquired.

The founders of SuperCaller Community Inc. are seeking to rescind the sale of SuperCaller to i2Telecom and collect damages of at least $40 million, according to the lawsuit they filed last December in U.S. District Court in San Francisco. Their suit alleges that i2Telecom’s directors and officers carried out an elaborate scheme to trick the founders of SuperCaller into relinquishing control of their company and intellectual property. I2Telecom says the suit is without merit and has moved to dismiss the case.

SuperCaller was founded as Limcom Inc. in February 2001 by Lew Lim and Darius Mostowfi. The Mountain View, Calif., startup developed a box that enables standard telephones to make voice-over-IP calls over broadband Internet connections.

In their complaint, the SuperCaller's founders say that in May 2002 a newly formed company with few assets, called Excel Capital Partners Inc., contacted them about investing in SuperCaller. The following month, Excel changed its name to i2Telecom and entered agreements to buy 20 percent of SuperCaller’s shares for $1.3 million and jointly develop and license SuperCaller’s technology.

I2Telecom’s CEO, Paul Arena, joined SuperCaller’s board, as part of its investment. But SuperCaller’s founders claim in their complaint that the appointment was never valid because i2Telecom delivered only half of the $1.3 million it promised to invest. They further claim that Arena and i2Telecom pressured them to increase spending on product development to drain SuperCaller’s cash and make the company dependent on i2Telecom for additional funding.

In August 2002, Arena alleged that $200,000 was unaccounted for in SuperCaller’s books, according to the founders’ complaint. The complaint further claims that Arena and i2Telecom board members used the allegedly missing $200,000 to threaten SuperCaller’s founders with criminal prosecution, deportation (neither man is a U.S. citizen), and physical violence unless Mostowfi voted Lim off the board, Lim resigned as CEO, and Mostowfi assigned rights to his inventions to SuperCaller.

Interestingly, Lim did resign in September 2002, as did Mostowfi about a month later. In January 2003, i2Telecom announced it had acquired SuperCaller. Lim and Mostowfi claim their shares of the company they founded were rendered worthless in the transaction. Fourteen months later, i2Telecom went public through a reverse merger with a shell company called Digital Data Networks Inc., which was listed on the over-the-counter bulletin board and was nearly insolvent at the time of the merger.

Arena, who is still CEO of i2Telecom, had no comment on the lawsuit except to say, “The company considers the claims in this case to be without merit and will defend vigorously against them.”

The plaintiffs claim in their complaint that since June 2002, SuperCaller’s valuation has risen from $6.5 million to $40 million (i2Telecom’s market capitalization was $17 million at the close of trading on Thursday). Because of SuperCaller's change in value, defense attorneys might argue that the founders have sellers' remorse.

Naren Chaganti, attorney for the plaintiffs, dismisses such a notion. “The so-called increase in value is actually unrealized value that existed from the beginning,” he says. “It’s not the result of somebody’s doing.”

Even if SuperCaller’s value had decreased since it was sold to i2Telecom, the founders still would have tried to get the company back, because they would have been entitled to the value of the company at the time it was sold, Chaganti says.

I2Telecom’s current financial status is unclear, since the company has not yet reported results for the period after its merger with Digital Data Networks. Financial statements filed in the lawsuit show that for the year ended January 31, 2003, i2Telecom had a net loss from operations of $1.58 million and a cash balance of $1.6 million (the company had not yet begun generating revenue). In March, before the merger with Digital Data Networks, the company raised $2 million in a private placement.

Directors and officers of i2Telecom own about 52 percent of the company’s shares, giving them majority voting control.

— Justin Hibbard, Senior Editor, Light Reading

Sabung Ayam 3/13/2020 | 7:06:48 PM
Sabung Ayam Online Saya sangat terbantu oleh artikel pembahasan ini, di mana saya bsa melihat kelanjutannya?

technonerd 12/5/2012 | 1:57:30 AM
re: VOIP Fledgling in Founders Flap ... sounds like they excel in cheating. Which makes them solid citizens in Northern California.
whyiswhy 12/5/2012 | 1:57:29 AM
re: VOIP Fledgling in Founders Flap I think you overstate the case against all citizens in No CA. I would limit your area of aspersions to the vicinity of Sand Hill Road and adjacent neighborhoods (Menlo Park, Palo Alto, Redwood City, Portola Valley, Atherton).


But I completely agree with the cheating comment. Actually, this is just one of many (four or five) similar situations I am aware of.

Typical situation is the initial investors get cold feet, a new investors comes along and by various means gets full control of the company.

The favorite tactic is the senior bridge loan, with ultimate trounsing of the founders and n-1 round investors. Bridge loan for $M million, and only a fraction is actually put into the companies coffers.

Good luck to Lim and the founders.

The take over artists probably have their signatures. As in my post the other day: Perfectly Legal. But perfectly immoral.

A good and just judge can give them relief, but they have to get a very smart one to understand beyond the basic issue: they signed the deal. VC tactics are too much for them. I mean, Lim got sniggered, and he is probably a very sharp guy.

If these guys had been previous investors, Lim might have a chance to get something. Then they unfairly leveraged, and probably broke some laws. Of course, they will argue risk, but they probably want to avoid the topic of how much they contributed to the overall risk.

The key is when the so-called offense occurred and what it was: I presume it was an accounting oversight that probably happened before the cheaters invested. Then they "discovered" it after they were on board. They turned it into an embezzlement charge to dump the founders. Prove yourself are innocent and all that. Pretty typical.

It's a rough business world. Watch your backside.

technonerd 12/5/2012 | 1:57:26 AM
re: VOIP Fledgling in Founders Flap I've invested in a couple of startups in the first round, and have gone through the "trouncing" you mention. The companies themselves have done well, but the first-round investors were sheared like your proverbial sheep. Oh well, live and learn.

The unfortunate thing is that, over time, this sort of thing winds up being a Gresham's Law in that potential investors like myself learn the hard way never to put money into new companies. It's not an activity for honest people, that's for sure.
whyiswhy 12/5/2012 | 1:57:26 AM
re: VOIP Fledgling in Founders Flap Yep, you nailed it. But don't limit it to start-ups and privates.

Next big legal-criminal (oughta' be a law) activity: JDSU. Too much cash on hand, too tempting for the executives to keep their hands off.

A deal to split it with an "acquirer" or an "acquisition" is being arranged as I write this.

Execs will reward themselves under the "change of ownership" clause, and probably the "executive bonus" plan by "awarding" themselves the bulk of the cash.

Shareholders (and employees) screwed, as what will be left will be a much emptier (no cash) shell.

The stock market is definitely a case of Greshams law once you wake up and become a cynic.

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