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.

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