WPP sues TV ad company Spot Runner for “pump-and-dump scheme”

Update:  Added the WPP complaint below.

Update II: Added letter from Spot Runner to employees, sent out Friday, below.

Spot Runner, the start-up Web company that lets advertisers places ads on TV, has been sued by one of its investors, WPP Group for securities fraud and breach of contract, AdAge reports.

WPP, one of the world’s largest advertising agencies, said Spot Runner’s executives aggressively promoted WPP’s investment in it to gain new investors and then sold large quantities of their shares at growing valuations. It says Spot Runner did not disclose some stock sales, as required under an agreement.

The suit names Spot Runner CEO Nick Grouf and co-founder David Waxman as well as investors including Pilot Group’s Bob Pittman, Index Ventures’ Danny Rimer and Battery Ventures’ Roger Lee. Peter Huie, Spot Runner’s general counsel is also named. WPP says the group sold their own secondary shares in the “pump and dump” scheme, and is seeking about $13 million in damages.

Complicating the relationship is that WPP apparently sought to sell its stock in the company too. “This lawsuit is about WPP, a minority shareholder, wanting to sell their Spot Runner stock retroactively,” Spot Runner wrote in an email statement. “This situation is unfortunate; we had hoped that we would have had a long relationship with WPP. We believe the claims are without merit and we will vigorously defend against them, including taking all necessary legal action to protect Spot Runner’s reputation.”

It’s not clear to what extent other factors are involved here, including possible tension between the two players as a result of Spot Runner’s business model. The company can be seen as a competitive force to WPP because it lets advertisers go straight to Spot Runner’s online site in order to create and place ads on TV. It thus replaces some services provided by WPP. On the other hand, the company has struggled in the marketplace of late, so it’s hard to argue that it’s a real threat to WPP right now.

WPP helped lead a $40 million investment into the Los Angeles company three years ago. WPP holds less than three percent of Spot Runner, according to a company source.

Spot Runner has gone through three rounds of layoffs lately, laying off more than 200. It has raised a total of $111 million from WPP, UK media group Daily Mail, Grupo Televisa,, hedge fund Legg Mason Capital Management, French luxury group Groupe Arnault/LVMH, Allen & Company, Battery Ventures, Capital Research and Management, CBS, Index Ventures, The Interpublic Group and Tudor Investment Corporation.

Updated: I’ve embedded the complaint below for easy reading.

While it is increasingly common for start-up company founders and investors to sell their shares on the “secondary” market, in order to cash in a bit on the value they’ve created at the company, there seems to have been an extraordinary amount of such sales going on at Spot Runner, and WPP lists a bunch of times where it says it was misled and not informed by the company while the insiders were making the sales. A source close to Spot Runner tells me that that some of the facts contained in the complaint are incorrect, saying that WPP had signed documents indicating that they knew of some of the sales. We’ll be doing more digging on this.

Most eye-opening, however, is WPP’s claim that Spot Runner co-founders, Battery and Index received $54 million for their share sales in 2007 and 2008. If true, that’s quite substantial, considering that the company have been better placed trying to sell shares for itself, to raise cash, not to benefit its insiders. WPP notes that, at one point, it was informed of a share sale, but that it was told the sale would be of new shares, not of existing shares. Moreover, the sales came during a time when the company lost a whopping $35 million in 2007 and $45 million in 2008. The interesting reading picks up around page 16.

Update II: Here’s a letter the company sent to its employees late Friday:

Team,

As you may have heard, WPP, a minority shareholder (less than 3%) in
Spot Runner since 2006, filed a lawsuit against the company and its
board members primarily related to the sale of Spot Runner stock and
Spot Runner’s communications with WPP.  This situation is unfortunate,
as we appreciate and value the relationships we have with all of our
investors and we had hoped for a long and supportive relationship with
WPP.  We believe these claims are without merit and we will vigorously
defend against them, including taking all necessary legal action to
protect Spot Runner’s reputation.

We feel strongly that WPP’s complaint contains many baseless accusations
and we want to give you a broader perspective on the matter.  This
lawsuit is unrelated to our products and services – it is centered on
legal agreements entered into with WPP, a sophisticated investor,
regarding the way that shareholder stock sales were handled.  WPP
alleges that Spot Runner’s board members failed to disclose to WPP the
stock sales by shareholders, allegedly in violation of the board’s
obligations to stockholders, among other things.

We are confident that Spot Runner complied with all of its obligations
under the various shareholder agreements. When these sales occurred,
there was overwhelming demand for Spot Runner stock and the company did
not want to dilute existing shareholders by issuing new shares.
Therefore, the founders (in 2006) and the board members and other
preferred shareholders (in 2007 and early 2008) agreed to make room for
important, new investors and respond to their desire to invest in Spot
Runner by selling their own shares. In 2007 and 2008, WPP and other
preferred shareholders were given notice that the sales were occurring
and they had the opportunity to participate in the sales. In fact, WPP
signed various documents acknowledging this opportunity.

Spot Runner and all of its employees conduct business with the utmost
integrity. Our team, technologies, and products and services are core
assets of which we can all be proud.  It is because of your hard work
that we have come this far.  To that end, we continue to drive hard
toward successfully launching Project Malibu and realizing its full
potential.  You also should know that our board members remain majority
shareholders in Spot Runner – a concrete sign of their commitment to and
confidence in the business.

Our outside counsel will work with the board and management team to
develop a formal reply, which ultimately will be filed with the court.
These legal proceedings should not affect our day-to-day operations.

We are grateful that we can count on you to remain focused on serving
our clients and partners to the best of your abilities.

Thank you again for all that you do for Spot Runner.