Company fights claim that its major backers improperly seized control of the firm.
Albridge Solutions, the central technology company
serving independent broker-dealers and their reps with a
mission-critical portfolio accounting solution, is being sued by its
founder, Louis C. Gerber. Albridge, formerly known as StatementOne, has
been embroiled in the bitter legal battle for four years, with Gerber
alleging that the company's venture-capitalist backers stole the
company from him, with the assistance of Gregory Pacholski, Albridge's
chief executive officer.
The legal wrangling has become so contentious that,
at one point, the Mercer County Prosecutor's Office, in New Jersey,
conducted a criminal investigation and convened a grand jury to
consider forgery charges against Albridge Chief Executive Office
Gregory Pacholski. The charges were ultimately dismissed and Pacholski,
along with his administrative assistant, were cleared of any criminal
wrongdoing, but the episode reveals the acrimony infusing this
high-stakes struggle for control of the company.
About Albridge
Using patent-pending, state-of-the art technology,
Albridge collects, cleanses and normalizes transaction and
position-level securities data that it receives from settlement and
clearing firms, data custodians and product companies. This data in
turn is used to power Albridge's Web-based portfolio accounting and
performance reporting solution, whish is used by 100 B/Ds representing
nearly $1 trillion in assets, 70,000 financial advisors and more than
10 million investors with 35 million accounts.
Albridge is ranked No. 32 in Inc. Magazine's
November 2005 list of the fastest-growing private companies in America,
based on its revenue growth for the three years that ended December 31,
2004. According to an Albridge press release when it was named to the
Inc. list, in that three-year period Albridge showed an astounding
1,787% growth in sales revenue. Reporting sales revenue in 2004 at
$15.8 million to Inc., Albridge has 122 employees. "It's a testament to
the value we bring to the market," says Jake Rohn, a senior executive
at Albridge.
Albridge has little competition in the independent
B/D and rep arena. Independent reps can sell so many different
products-stocks, funds and annuities-from so many different financial
services companies, and custody them in so many different places, that
before Albridge no firm succeeded in the daunting task of collecting
all the client account data into one statement.
While not perfect, Albridge's solution has been the
only reliable Web-based portfolio accounting and reporting system that
has been deployed for any length of time by independent B/Ds, and it is
the only choice available to large independent B/Ds because its
scalable data warehouse is able to handle large volumes. As such, it
seems likely that Albridge at some point will want to go public, which
would likely enrich the venture capitalists and executive team. That's
undoubtedly why Gerber has fought furiously to undo events that
occurred nearly six years ago and that led to his relinquishing
management and control of the company he founded.
Legal History
Gerber's lawsuit against Albridge, which according
to court papers has involved 23 days of depositions and more than
100,000 pages of documents, including thousands of e-mails, so far has
been completely unsuccessful. The courts have ruled against him in
every major turn of the case.
The lawsuit began June 17, 2002, when Gerber filed a
complaint alleging that the board of Albridge failed to fulfill its
fiduciary duties to shareholders and the company by approving two
investments in the company, in September 2001 and August 2002, in which
the board was "self-interested," and that the board deliberately
undervalued the company to dilute Gerber and other shareholders.
Both sides in the case in mid-2004 asked the judge
for a summary judgment-a ruling that cuts short the need for a full
trial because all factual issues in a case are settled or so one-sided
that they need not be tried. The summary judgment motions were heard on
October 20, 2004, and January 27, 2005. On August 17, 2005, the judge
granted Albridge's motion for a partial summary judgment-a major blow
to Gerber-on all of Gerber's shareholder rights claims, leaving for
trial only Gerber's claims relating to his employment agreement. On
September 3, 2005, Gerber asked for reconsideration of the case in a
motion that was argued on December 7, 2005, but on January 3, 2006, the
court ruled against him and denied his motion.
On February 7, 2006, Gerber filed a motion seeking
to appeal the lower court's decision, which was denied on April 17. A
day later Gerber's attorney, Gil Messina, filed a motion saying that
the appeals court should reconsider the matter because one of the
judges who ruled against Gerber, Judge Joseph Yannotti, was subpoenaed
by Messina in an unrelated case.
In that case, according to court papers, Messina was
seeking to depose Yannotti, a former assistant state attorney general,
about alleged misconduct by lawyers who worked for Yannotti in the
attorney general's office. Messina's motion says Yannotti may be biased
against Gerber because Messina was investigating him as part of a
lawsuit, and that Yannotti should have recused himself from ruling on
Gerber's case. Messina's motion for the recusal of Yannotti and
reconsideration of the case by the appellate court was granted.
Even if the appeals court rules against Gerber
again, the case could still drag on for many months because Gerber
could still appeal if he loses on his employment claim, which has not
been ruled on by the trial court.
Gerber's Tale
Even if you believe that Gerber's lawsuit has little
merit, as judges have ruled so far, Gerber's personal story seems
tragic. I first met Lou Gerber in 1996 at a conference for independent
advisors. He was an exhibitor at the conference, standing behind a
table hawking software-Fundscape Mutual Fund Pack. While most exhibitor
display booths sported flashy graphics and marketing materials,
Gerber's booth space was bare, with no display, and he did not even
have literature about his product on the table. It was kind of sad
looking, and Gerber was a little disheveled. I remember asking what he
was selling and he began explaining it to me. Gerber's software allowed
individual investors in mutual funds to create a consolidated
statement. Gerber made an impression on me because what he was doing
was complicated. He seemed like a mad scientist type.
I heard nothing of Gerber after that until around
1999. That was when I realized that he was the CEO behind a new company
making inroads with independent B/Ds by offering a system for creating
consolidated account statements. Gerber had leveraged what he learned
in creating Fundscape and transformed the product from one serving
retail investors to make it serve B/Ds. He called the new venture
StatementOne.
In December 2000, I wrote a column about Gerber. In
what seems so poignant in light of Gerber's recent legal battle, that
column focused on the fact that Gerber "came close to financial ruin"
in 1999 when he was building the first-generation software that would
become StatementOne. The lead in that column: "Lou Gerber says he was
six weeks away from being forced to sell his home and move in with his
in-laws." Gerber had taken a second mortgage on his home in 1998 to
finance the ongoing operation of the company. He had spent his
retirement fund and his kids' college education money and given the
last seven years of his life to creating Fundscape, working in his
basement with a lone programmer. "I spent everything I had-about
$700,000-to create what would become the first version of
StatementOne," Gerber told me in a recent telephone interview.
When I wrote the December 2000 column about him,
Gerber had just turned things around by selling to venture capitalists
in June 2000 a stake in StatementOne for $17 million. He seemed
optimistic and full of details about how StatementOne was about to
transform the independent advisor business by allowing reps to view
consolidated statements of their client holdings and provide their
clients with consolidated statements, something that reps were never
before able to do. Little did Gerber know that within months his world
would come crashing down.
Gerber's History
After graduating from the University of Florida in
1977 with a degree in finance, Gerber started his career at Merrill
Lynch as a broker. He became the highest-earning rookie broker in
Merrill's Orlando branch. He became the first retail broker to sell
corporate products, one of which was portfolio performance analysis. By
June 1986 Gerber was selling only performance analysis, and when
Merrill sold the division of the company offering the product he
decided to leave and start his own performance analysis software
business, The Monitor Group, according to court papers filed by Gerber.
The Monitor Group, which consulted to pension funds managing in
aggregate $30 billion, was bought by Provident Bank in December 1989.
Gerber ran the business for the bank, and started the bank's
proprietary mutual fund family. By May 1993, however, the bank sold the
business back to Gerber because, according to Gerber, "The monitoring
business would not sufficiently impact its bottom line."
After reacquiring the business, Gerber continued
providing performance analysis for public pension funds, and used the
money from that business to finance Fundscape. In September 1998
Financial Services Corp., now an AIG-owned independent B/D, became the
first company to use Fundscape. Gerber sought the help of Donn Goodman,
who he had hired as an outside sales consultant for Monitor Advisory,
in building Fundscape. Goodman introduced Gerber to Jim Vitalie of
Century Business Systems (CBIZ). The two agreed to line up financing
for Fundscape in return for a 15% equity position in the company. CBIZ
invested $1.2 million in Fundscape in June 1999, much-needed "angel"
financing.
In October 1999, according to Gerber's complaint,
Fundscape sought help from Ernst & Young in developing a Web-based
application of Fundscape, and Pacholski was the E&Y engagement
partner who worked on the project. That same month, Fundscape received
a request for proposals from ING, the insurance giant that had just
bought a number of independent B/Ds and that now wanted a system for
creating consolidated statements for its reps. In January 2000,
Fundscape would win the ING contract by, according to Gerber, beating
out Advent Software, TechFi and other dominant players.
Venture Capital
In June 2000, the venture capital investors-Axiom
Venture Partners, Boston Ventures, Charterhouse Group, Rohit M. Desai
Associates, Fireman's Fund Insurance Company and Aetna Retirement
Holdings-bought a stake in Albridge and infused much-needed cash into
the company. In July 2000, Gerber hired Pacholski away from CapGemini
Ernst & Young, where he'd been working as consultant on the
Fundscape project. Around that same time, according to Gerber's
complaint, it became clear that the CGEY Web application would not
work. Pacholski led a push to get the program developed by Christmas
2000, telling employees they'd receive $150,000 bonus if they met the
deadline. They did, and by March 9, 2001, ING was using StatementOne's
Web-based platform.
Booz-Allen & Hamilton, a consultant, was hired
in March 2001 to provide a long-term growth outlook for StatementOne's
product, and it conservatively projected revenues of $216 million for
2006 and said sales could exceed $430 million.
It was around then, Gerber alleges, that members of
the board of directors "began to take actions which were calculated to
undermine Gerber's authority and position as CEO of StatementOne and
enhance their control and interests to the detriment of StatementOne
and common shareholders, including Gerber."
Albridge's Perspective
From Albridge's perspective, events in this period
were very different from the way Gerber describes them. According to
Albridge's appeals court brief, Gerber raised the $17 million from
these investors in June 2000 after showing them revenue projections of
$68.5 million for 2001 and $140 million for 2002, with earnings before
interest, taxes, depreciation and amortization of $44 million for 2001
and $111 million for 2002.
Within months, however, it became apparent that the
financial forecasts shown to the investors were glaringly
overoptimistic. By October 2000 the company was projecting just $10
million in revenue for 2001 and a net loss of $6 million.
Both sides agree that that the company would run out
of cash in April 2001. According to papers filed by Albridge, between
June 2000 and March 2001 the company spent $13 million of the funds
raised in June 2000. While Gerber had painted a rosy picture for me
when I interviewed him in November 2000, his company was in a financial
tailspin.
The Rift
Gerber says that, in the spring of 2001, he started
to downsize the company to conserve cash. With the product developed,
he wanted to market it and bring in contracts in the spring and summer
of 2001. The company would run out of money in August without new
investment. On April 10, 2001, according to Gerber's brief, Gerber
decided that if StatementOne did not land a deal by May that was being
negotiated with Jefferson Pilot, a big insurer with a large sales
force, StatementOne would lay off all but seven of its staff of 35 once
the company's cash reserve dipped below $350,000.
The following day, Gerber was suddenly stricken with
atrial fibrillation, a condition in which the heart beats chaotically.
His doctor, according to court papers, told him not to even think about
work. It was not until September 4, 2001, that he was able to return to
work. It was during these critical months, Gerber alleges, that the
StatementOne board turned against him.
According to Gerber's motion for an appeal, Gerber's
plan to downsize the company was never implemented and cash was drained
out of the company in a conspiracy to take the company away from him on
the cheap. "The intended effect of these actions was to devalue the
company, bring it to the brink of collapse and then demand Gerber and
other common shareholders accede to the onerous and unconscionable
terms of the investors," according to Gerber's appellate court brief.
Forgery Allegations
During the period in which Gerber was disabled with
a heart condition, a Merrill Lynch cash account was tapped. According
to Gerber, Albridge CEO Pacholski instructed his assistant, Michelle
Goudsmith, to sign Gerber's name to move money from the account. As a
result, Goudsmith and Pacholski were indicted for forgery in early 2003
after Gerber filed a criminal complaint against them. The charges stood
against them for several months. The money was used to fund company
activities, and the prosecutor eventually dismissed the criminal
charges.
"The refusal to downsize the company and the
unauthorized withdrawal of capital funds from the Merrill Lynch account
were done with the purpose to devalue the common stock of the company
and deplete StatementOne's capital in order to place the company in a
precarious financial position," Gerber's lawsuit charges. The actions
of Pacholski and the venture capital investors, according to Gerber's
suit, "would ultimately require Gerber to yield to the June 2000
investors when, in September 2001, they imposed unconscionable and
coercive demands on Gerber and other common shareholders in order to
extract unfair advantages for themselves."
Gerber's Downfall
The venture capital investors over the summer of
2001 negotiated a deal to bring in cash that severely diluted the
holdings of Gerber and other common shareholders. Meanwhile,
StatementOne's cash balance plunged to $310,000 on August 31. Then, in
the midst of the final negotiations to bring in the $3 million
investment, the World Trade Center tragedy shocked the financial system
and added uncertainty. By September 20, 2001, the firm's cash balance
had sunk to $51,000.
When the final terms of the new investment were
given to Gerber on September 25, his employment contract was cut from
three years to one, his pay slashed by $50,000 a year, he was removed
from the employee option pool and his option exercise price was reset
from $.04 cents to $0.51 cents a share. Because the venture capitalists
were given extraordinary preference in that financing, Gerber claims he
and other common shareholders who started the company would get nothing
if the company were sold within a year of the financing. The only
reason StatementOne was not sold and the investors did not cash out
within months of that financing, according to Gerber, was because he
filed the lawsuit. Gerber's lawsuit also says he did not know that
Pacholski had entered into a deal giving him 3% of the company after
closing the September financing round.
Gerber says he was coerced into signing the deal,
which included a shareholder consent saying that the deal was fair and
a general release freeing StatementOne of any liability it might have
to him. Gerber alleges that Barry Bronfin of Axiom, one of the venture
capital investors, told him that if he did not sign the deal, he would
have to come up with the company's payroll of $280,000 a month or shut
down the company.
Says Gerber: "People said, 'OK, the software is
built and now we don't need Lou, so let's get rid of him and take over
the company ourselves."
Albridge's View
The courts so far have sided with Albridge.
"What this boils down to is a founder who had to
make a decision: If there were no financial backing, he could retain a
large piece but more than likely own a large piece of nothing," says
Albridge's Rohn. "Or, to raise capital at a very difficult time in the
market-at the height of the dot-com crash, right after 9/11. Terms were
open and he consented to them with his eyes wide open."
Some of the most convincing points made by Albridge in its appeals brief:
In May 2001, Pacholski and other members of the
management team agreed to take a salary deferral in return for stock
options to help the company survive.
Gerber in June 2001 agreed to resign as CEO as a condition of any investment.
Gerber on August 15 thought the business would run
out of money before any new investment deal could be reached and wrote
an e-mail to Pacholski while he was vacationing in Europe, saying they
should "wind up" the business and let the "troops know they won't have
a next paycheck."
After being presented in late August with the terms
of the September investment to stave off dissolution, Gerber e-mailed
Pacholski, saying, "This is OK w/me ... let's get going on it."
Concerned the firm would fold before the investment
was finalized, Gerber in e-mails advocated closing the deal without
securing shareholder consents.
After company lawyers rejected the idea of not getting shareholders to
sign consents-saying they understand their equity position would be
drastically diluted-Gerber signed a solicitation letter urging his
fellow common stockholders to support the deal, e-mailing a company
lawyer on September 21 to say, "I will do anything I can to make sure
the deal closes."
After September 11, one of the investors backed
out of the deal and skittish venture capitalists imposed tougher terms
on the company to compensate for what they saw as substantially
increased risks.
After Gerber signed the financing deal, he
attempted to rescind it. Gerber says that after he learned, on
September 26, that his named had been forged to make withdrawals from
the Merrill cash accounts, he changed his mind about moving ahead with
the financing deal and rescinded the deal on October 2-taking advantage
of a federal law that lets you back out of contracts within eight days
of signing them. Gerber says that should have restored his equity
position and put him back in control of the company as CEO. Instead,
the board concluded that Gerber's actions harmed the company and fired
him. Gerber, in turn, says the board members were self-interested and
violated their fiduciary obligation to the company because they stood
to gain personally.
Gerber's lawsuit goes on to argue that a subsequent
financing in August 2002 also was improper and further diluted him and
other common shareholders. Gerber, in an interview, says his stock
position went from 25% before the September 2001 financing to about 6%
in October 2001, and then to 1% in August 2002.
"As an entrepreneur, my ability was to see further
into the future than anyone else could at the time," says Gerber.
"Almost by definition, that means I was not as good at dealing with
what is going on today. I'm not Jack Welch. But I built a great team.
In fact, the team that runs the company today was hired by me."
Albridge's Future
Albridge's growth rate, while still amazing, has
slowed as it has matured, and its revenue base has stabilized. While
Rohn refused to say what it is, he admitted when I asked that it is
less than 100% but more than 20% to 30%. "We more than doubled sales in
the last two years," says Rohn. Growing the business further won't be
as easy as it has been because competitors, such as Investigo, have
been focusing on making a scalable data warehouse and will become a
more viable alternative for large independent B/Ds. However, Albridge
has so much momentum, market penetration and experience that it is
likely to continue to be successful.
Earlier this year Albridge released its new
insurance platform. "We have over a dozen carriers live now, and expect
over the next 18 months to cover the vast majority of carriers," says
Rohn. Albridge has long had the ability to bring in subaccount
information on annuities, but this improvement allows Albridge to
show advisors and their clients key policy information, including
beneficiaries, riders, premiums and policy dates.
Albridge is also focusing on expanding its use of
Web services to enable integration with other applications-including
financial planning, analytics and other software. Albridge currently is
integrated-meaning you don't import or export data but have live
integration-with more than a dozen applications made by other vendors.
This leverages Albridge's role as the central data warehouse of
independent B/Ds, "and we're like Switzerland," says Rohn. Meanwhile,
Albridge continues to improve its ability to allow a B/D or other
vendor to move all of its rep data into an application. To meet
compliance requirements, for instance, B/Ds need to take all of their
reps' trades and analyze them for break points, suitability and other
issues, and Albridge can make money by making that task more efficient
for B/Ds.
With almost all of its revenue derived from the
independent B/D market, according to Rohn, Albridge is edging into new
markets in search of future growth. While it has attempted to move into
the RIA space, my guess is that it is unlikely this will be where
future growth would come from. However, Rohn says Albridge earlier this
year sold to a bank brokerage for the first time, and to its first
trust company. It recently announced its first deal with a regional
B/D. This would seem to be where the most future growth could come.
Meanwhile, investor use of online statements is
still in a nascent stage. When online performance reporting first
became available several years ago, many thought it would become widely
used overnight. It has not. That may finally be changing. Rohn says
that in the last two years, the number of retail client users of
Albridge soared from 40,000 to 700,000. That still represents a
fraction less than 7% of all the clients with access to Albridge,
however.
Albridge has accomplished the amazing in recent
years and serves the industry well. It's tragic that its founder
believes he has not gotten his fair share. But it looks like the courts
believe that what happened to him was all done within the law.