Moreover, ComVentures and Lightspeed plotted to enhance their stake in the company when Nishan was in critical need of funding, according to Latif.
In March 2003, Nishan was "under a pressing need to raise additional cash," yet the two VC firms "created an environment that prevented the Company from seeking funding from outside investors," Latif alleges in his complaint.
Instead, in what appears to be an especially greedy move, Latif's lawsuit details $5.5 million in bridge loans proposed by Lightspeed and ComVentures in June and August 2003 that guaranteed a return to the investors of three times the amount of their investment (plus interest) in the event of a merger or sale of the company. Latif's complaint notes that the VCs proposed $2.5 million of the bridge loan on August 1 -- after McData's initial acquisition offer had already been received.
"The opportunity to participate in the bridge loan was restricted to Lightspeed and ComVentures and a handful of shareholders (including a common shareholder) they hand-picked, although other qualified shareholders had expressed unsurprising interest in sharing in its bounty," says Latif's complaint, under the heading of "The Unconscionable Bridge Loan."
According to the lawsuit, McData is paying a total of approximately $90 million for Nishan -- with only $4 million going to the common shareholders. Meanwhile, about $59 million of that total goes to the preferred shareholders (which include the company's VCs); $16 million to bridge loan investors including Lightspeed, ComVentures, and other preferred shareholders; $2.5 million to Credit Suisse First Boston Corp., which acted as financial adviser to Nishan in the deal (and is named as a defendant in Latif's lawsuit); $1.1 million to McGraw; and $10 million in retention and severance payments to Russo and other employees.
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