BamBrogan v Hyperloop 14 July 2016
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BamBrogan v Hyperloop 14 July 2016
Brogan BamBrogan is pissed after Hyperloop One chief counsel Afshin Pishevar put a
noose on his chair. By his own admission, he resigned after a series of actions he alleges
top management made to disadvantage employees and investors.
Not a boring stockholder suit
BamBrogan’s complaint would have been another boring legal brief about Series A & B
stock and stockholder dilution were it not for allegations of Russian investors capable of
violence, a girlfriend making $40,000 a month, and nooses left on chairs. For most of us,
this will be a voyeuristic look into a dysfunctional startup. This story promises to be the
OJ story of the tech world. But what are the interests of the players?
The management of Hyperloop One is most directly affected. They will have to defend
the suit. A loss would unseat them and perhaps land them in jail. Employees of the
company will spend hours at the water cooler discussing the case, accomplishing little
while this story plays out. In the best scenario, they could end with more control and a
shot at the pot of gold at the end of the tube. The State of California has an interest in
enforcing its employment laws. The investors have an interest to see that their invested
funds were managed to maximize the likelihood of a profitable outcome. Finally, this
fight could be the end of the Hyperloop dream
Investors
Investors in Hyperloop One have every reason to expect that management has
expended whatever portion of the $100 million they have contributed to the
venture in a way that maximizes the likelihood of Hyperloop’s success and the
economic benefit they derive.
The suit makes serious allegations in several areas. It describes cash outlays for
services at above market rates for results of questionable value. Whether these
costs were material or of value is a matter for the jury to decide. The allegations of
self-dealing are easier to prove. That the company chose to give its investment
banking business for a fee to a company controlled by a board-member’s brother,
when another firm offered to do it free in expectation of future business is perhaps
bad judgement. An examination of Fideras.com, the investment banker’s website,
shows a connection to another firm, Zanbato Inc, founded by Joe Lonsdale.
The Fideras website, now only a splash page with a secure login, is, technically a
subdomain of Zanbato. You can verify this by going to the Fideras login dialog and
clicking Privacy Policy.
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The suit points out that Hyperloop One engaged the services of The Pramana Collective
for public relations. Later, Pishevar started seeing Meredith Kendall of the Pramana
Collective socially. BamBrogan asserts that more or less simultaneously, the monthly
rate paid to Pramana was increased from $15,000 per month to $40,000. Further,
BamBrogan asserts, the commercial relation with Pramana was terminated after his
engagement to Kendall faltered. Kendall left Pramana in May 2015, according to her
LinkedIn page. Don’t bother looking for Pramana’s website; there is none.
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Pishevar and Kendall at the Build Gala 7 March 2015
In another allegation, BamBrogan asserts that management of the company interrupted
engineers’ work to conduct tours of the facility. This is a matter of style, opinion, and
priorities. If it is true that one guest was a “Los Angeles nightclub doorman” unrelated
to fund raising, that would be over the top. The suit also asserts that company facilities
were used for parties, interrupting engineering work.
Investors
Investors in a deal like Hyperloop go in with their eyes wide open. They expect
most ventures to fall apart. They also expect to negotiate terms and voting
privileges that typically favor the founders and earlier investors. In all cases,
however, they expect their money to be used for the purpose of building a
profitable company. They have a legal right to expect that management protects
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their interest with the same or greater degree of care as their own. It’s called
fiduciary duty.
Investors are tolerant of small shenanigans; it’s a price of doing business. As long
as the investment is showing promise, they tolerate management’s quirks.
When things start falling apart, investors start taking a deeper interest and may
install a new management to salvage the investment. In most cases, when the
handwriting is on the wall; investors seek to close the company with the least
additional loss.
Hyperloop is not a typical faltering venture. The underlying technical concepts are
proven. The Scarborough RT commuter rail in Toronto has used magnetic
levitation and linear motors since 1985. The company has a competitor,
Hyperloop Transportation Technologies (HTT), giving credence to the concept.
SpaceX is constructing a Hyperloop test track in preparation for a competition of
thirty academic teams building prototype capsules. Hyperloop One is
demonstrably ahead of HTT. It is unlikely that investors would pull the plug now,
having committed $100 million and being in first place in the technology race.
Investors may, however, be displeased with management’s performance. The
Russian contingent lead by Summa Group has already established its position in
reaction to the lawsuit. It has cast its lot with management, calling the lawsuit an
“internal matter.” Where other investors including GE Ventures and SNCF (the
French national railway) take sides remains to be seen.
The investors will watch carefully the court’s reaction to BamBrogan’s claim of
breach of fiduciary responsibility (the seventh cause of action). They are likely
situated similarly to the employees with stock options – money or time invested,
but little voting power.
Employees
The employees of Hyperloop One fall into four categories: the four plaintiffs
BamBrogan, Sauer, Pendergast, and Mulholland, seven additional who signed the letter
to management, as many as fifty who cooperated with management, and the rest who
are probably hoping to keep a job.
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The majority of employees at Hyperloop One didn’t see the goings on with the public
relations agency or the investment bank, both of which are in the Bay Area. They were
unlikely to know much about the various classes of stock, which they would probably
own only for a few hours when they exercised their stock options at some sunny day in
the future. They are today concerned about their jobs which are in jeopardy.
The lawsuit alleged that as many as fifty employees aided management by “engaging in
unlawful conduct … that caused harm to Plaintiffs.” These folks are in a most tenuous
position. They may be called upon to defend themselves in court. Whether the
company pays their legal bill is unknown. If BamBrogan is eventually restored to
power, they may not be well favored.
The seven who signed the letter to management but did not sue seem to have made
their peace with the company. Josh Giegel was promoted to chief technical officer,
given a seat on the board of directors, and in a curious twist, named as a co-founder of
the company.
The four plaintiffs can’t be much worse off. In the worst case, that they lose, they will
be out attorney’s fees. The first round of press analysis has branded the lawsuit crazy,
insane, and delusional. BamBrogan will be hard pressed to find a job with Lonsdale’s
description of him as “unstable,” and “gone haywire” following him.
If they prevail, the four would be reinstated at Hyperloop One. How that would work
if the current board and management stay in place is hard to say. To win the case, the
four will have to prove breach, in which case they will probably be working for a new
team. Then there’s the matter of money. The insurance company writing the directors’
insurance is likely to be unhappy. If fraud is proven, however, the D&O policy will
likely exclude it. How much the four would ask for in general, special, and
consequential damages will be part of the public saga.
State of California
The State of California has a lot invested in the outcome of this case. California is
home to many startups. The state will want to see that investors and employees
see justice in this very visible case, else other states might be a better home for
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startups. Whether the fiduciary duty claim is more appropriately handled in
Delaware Chancery Court, I cannot say.
1102.5. (a) An employer, or any person acting on behalf of
the employer, shall not make, adopt, or enforce any rule,
regulation, or policy preventing an employee from disclosing
information to a government or law enforcement agency, to a
person with authority over the employee, or to another
employee who has authority to investigate, discover, or
correct the violation or noncompliance, or from providing
information to, or testifying before, any public body
conducting an investigation, hearing, or inquiry, if the
employee has reasonable cause to believe that the
information discloses a violation of state or federal
statute, or a violation of or noncompliance with a local,
state, or federal rule or regulation, regardless of whether
disclosing the information is part of the employee's job
duties.
(b) An employer, or any person acting on behalf of the
employer, shall not retaliate against an employee for
disclosing information, or because the employer believes
that the employee disclosed or may disclose information, to
a government or law enforcement agency, to a person with
authority over the employee or another employee who has the
authority to investigate, discover, or correct the violation
or noncompliance, or for providing information to, or
testifying
before,
any
public
body
conducting
an
investigation, hearing, or inquiry, if the employee has
reasonable cause to believe that the information discloses
a violation of state or federal statute, or a violation of
or noncompliance with a local, state, or federal rule or
regulation, regardless of whether disclosing the information
is part of the employee's job duties.
In order for the retaliation and wrongful termination causes (first and second) to stick,
the plaintiffs will need to prove the breach of fiduciary duty claim (seventh cause).
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That’s going to be a high hurdle, and one that Orin Snyder will fight. He’s a feisty one.
He will seek to drown Cotchett, Pitre & McCarthy, LLP in depositions and discredit its
witnesses on the stand. BamBrogan claims that CEO Rob Lloyd already threatened to
“bleed the employees dry with frivolous lawsuits.” Whether BamBrogan, Sauer, Pendergast, and
Mulholland have the cash between then to pay the legal bills or whether Cotchett, Berger, and
Buescher have the energy to pursue the case to conclusion on a contingency basis remains to be
seen.
Hyperloop One Management
A loss in this case would be a severe blow to Shervin Pishevar. It would open him up to
action from the company’s investors. That could separate him from Hyperloop One.
He most certainly has other resources to fall back on. His ability to sponsor other
startups would be crippled. The same goes for Joe Lonsdale.
It is unclear what outcome is likely for Rob Lloyd. He had to be named in the suit; he is
after all CEO of Hyperloop. It seems however that he and BamBrogan had at least a
working relation during Lloyd’s early tenure (from June 2015). BamBrogan described
Lloyd conceding Afshin Pishevar as “untouchable”, which indicates a certain level of
trust between the two. Lloyd gave up a shot at CEO of Cisco. Whether he could land
on his feet at another company is a matter for speculation.
Hyperloop One and its top three executives will have to fight this one. They took the
first step, hiring New York lawyer Erin Snyder. That portends a nasty fight.
The Biggest Loser
Perhaps the biggest loser in this fight will be the public, whose imagination has been
captured by the dream of a new mode of transport that could move people from
downtown LA to San Francisco in thirty-six minutes.
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