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Webvan Files for Bankruptcy, Hit with Shareholder Suit

Webvan Files for Bankruptcy, Hit with Shareholder Suit

The shareholder suit alleges that Webvan violated U.S. securities law because its IPO contained 'materially false and misleading information.'

By Lori Enos
07/16/01 10:39 AM PT

Defunct online grocer Webvan (Nasdaq: WBVN) and three of its affiliates -- Webvan Operations, Webvan Bay Area, and HomeGrocer.com -- formally filed for Chapter 11 bankruptcy protection Friday.

Close on the heels of the bankruptcy filing, a class action suit was filed against a group of Webvan officers and directors and the company's initial public offering (IPO) underwriters.

Foster City, California-based Webvan shuttered its operations July 9th and said it would be laying off its workforce of 2,000. The company said Friday that it plans "an orderly sale" of its business and assets.

Chief executive officer Robert Swan said last week that while the company "made significant progress" in cutting operating losses and reducing its burn rate, order volume in the quarter just ended "declined considerably," accelerating the need for new capital.

"We took this action rather than continuing to operate with high losses and decreasing cash," Swan said.

Parachute Dangling

Webvan's bankruptcy filing reportedly listed assets with a book value of $1.2 billion and debts of $106 million. However, goodwill and other intangibles make up $734 million of the assets.

George Shaheen, Webvan's former chief executive, is the company's largest unsecured creditor with a claim of US$5 million for a supplemental retirement package, according to reports. Webvan had agreed to pay Shaheen $375,000 a year for the rest of his life as part of the retirement package.

Webvan's bankruptcy filing said that of the 800 million shares authorized, 481.7 million shares were outstanding, according to reports. The filing lists the following as owning at least five percent of the voting stock: company founder Louis Borders, 10.3 percent, Softbank America, 9.7 percent, Sequoia Capital, 8.4 percent, Benchmark Capital, 7.6 percent, and Amazon.com, 5.2 percent.

Notably, Borders dumped 45 million shares of Webvan stock on June 22nd for 6 cents per share, or a total of $2.7 million.

IPO Questioned

Meanwhile, a lawsuit filed by Bernstein Liebhard & Lifshitz, LLP against "certain officers and directors of Webvan" and the underwriting firms involved in Webvan's IPO alleges that the defendants violated U.S. securities law by filing a registration statement and prospectus that contained "materially false and misleading information and failed to disclose material information."

The suit maintains that the prospectus was misleading because it failed to disclose that the underwriters had an agreement with certain investors to provide them with "significant amounts of restricted Webvan shares in the IPO in exchange for exorbitant and undisclosed commissions."

The suit also alleges that the underwriters had agreements with certain customers to allocate shares in the IPO to those customers in exchange for the customers' agreement to purchase Webvan shares in the after-market at pre-determined prices.

Wall Street Targets

The underwriting firms named in the suit are Goldman Sachs; Donaldson Lufkin & Jenrette, Merrill Lynch; Pierce, Fenner & Smith; Bear Stearns; Deutsche Bank Securities; and Thomas Weisel Partners.

When contacted by the E-Commerce Times, Bernstein Liebhard & Lifshitz spokesperson Linda Flood said she had no comment on the case and would not identify the Webvan officers and directors named in the suit.

The suit seeks the recovery of damages for all investors who purchased Webvan stock between November 4, 1999 and December 6, 2000.


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