Shareholders Sue Williams
Jeanette S. Wolfe and Charles V. Wheeler have filed a stockholder's derivative suit in district court in Tulsa, Oklahoma. It names Matthew W. Bross, senior VP and chief technology officer for Williams, and John C. Bumgarner Jr., president of strategic investments for Williams, along with several other company officers at the service provider, as defendants.
The case alleges that Bross and Bumgarner “breached fiduciary duties to stockholders of WCG and Williams” when they accepted pre-IPO shares in ONI Systems Inc. (Nasdaq: ONIS), a vendor that is now supplying Williams with DWDM (dense wavelength-division multiplexing) equipment. The lockup period for ONI shares is due to expire in November.
Wheeler and Wolfe are not asking for damages to be paid directly to them, but are instead asking that the profits realized from the ONI investments be turned over to Williams Communications Group to benefit all the shareholders.
According to the complaint, Bross received 332,000 shares of stock in November of last year at $3.30 per share (see Williams' CTO Profits From His Position ). A little while later ONI sold 63,316 shares to Bumgarner for $6.32. In December Williams purchased 1.58 million shares of stock for $6.32 each. Then in March of 2000, Williams agreed to buy $30 million worth of equipment from ONI by June 1, 2000.
“As directors of the company they should be looking out for the best interest of the shareholders,” says Robert L. Wheeler, one of the attorneys for the plaintiffs, who also happens to be Charles Wheeler’s brother. “ONI had no other customers; they wouldn’t have been able to go public without Williams. Bross’s investment wouldn’t have gone anywhere if Williams hadn’t given them a $30 million contract.”
ONI’s stock price climbed the charts when it debuted this summer at $25 a share and shot up to $115 on its first day of trading. And it has remained high since then -- closing at $71 a share today.
This isn’t the only suit that Bross is facing for taking pre-IPO stock. The same plaintiffs have also filed suit against him and Wayne Price, former VP of network architecture at Williams, for their dealings with Sycamore Networks Inc. (Nasdaq: SCMR). As in the ONI situation, Bross and Price had accepted pre-IPO shares in the company, which went public last fall.
Prior to the controversy spawned by the ONI deal, Williams allowed employees to take customer stock following approval of their superiors.
Last spring, Williams set a new policy that prohibited individual employees from taking stock or options from customers.
Bob McCoy, senior VP of law for Williams, told Light Reading in an interview earlier this year that the equity policy had been reviewed and changed at the "highest level" of the company because of management situations that had arisen from equity compensation.
"We had a policy change in April," said McCoy. "From that point we would no longer allow employees to be recipients of directed shares or friends and family [stock]. We put a restriction in play. Also, people on technical advisory boards were no longer allowed to accept compensation. Prior to that, they were compensated for their board work. We didn't take anybody's grants away."
McCoy also noted that employees with substantial holdings in customer equity, including Bross, were allowed to keep whatever they had acquired before the policy change.
And it is this key decision which led to the plaintiffs also naming the rest of Williams top executives as defendants. The plaintiff’s allege that allowing Bross, Bumgarner, and Price to keep their shares conflicted with shareholders’ interest.
“They made a wrong decision in allowing them to keep those shares,” says Wheeler. “It is against the trust and loyalty of their shareholders for directors to allow these guys to make decisions about this equipment when they were investing in the company at the same time.”
Williams would not comment directly, citing the fact that the matter is still in litigation. But it will file its response to the suit with the court at the end of October.
“It’s probably not the best legal claim that could be made," says one lawyer following the case, who didn't want to be named. "But it's certainly viable.” -- Marguerite Reardon, senior editor, and R. Scott Raynovich, executive editor, Light Reading, http://www.lightreading.com