SOFTBANK LAWSUIT IS LATEST PROBLEM FOR AD NETWORK: FOUNDING EXECS SEEK $200 MILLION FROM FORMER PARENT AND ZIFF-DAVIS

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A $200 million lawsuit filed by the founding executives of Softbank Interactive Marketing against its former parent Softbank Holdings and Softbank subsidiary Ziff-Davis is the latest problem for the interactive advertising company since its sale to Zulu-tek in December.

Some clients of the former SIM network, which has been renamed ZuluMedia, are worried about the lawsuit and surrounding publicity.

"All of the news from the press about the company concerns us, and we hope to have those concerns addressed," said Mark Evans, advertising general manager of Netscape Communications Corp., a ZuluMedia client that was scheduled to meet with new leadership at Zulu-tek late last week.

UPHEAVAL SINCE TAKEOVER

"I'm surprised they have any clients at this point, given the disarray and chaos they've been in," said Peter Storck, group director of online advertising at Jupiter Communications, pointing to other legal action and management upheaval since the Zulu-tek takeover (AA, March 23, P. 1) One advertising manager familiar with the ZuluMedia sales operations said that of the previous 20-plus sales force, only a handful of sales reps remain.

A Zulu-tek spokesman declined to comment, noting the company is not a defendant in the suit.

The $200 million suit was filed April 17 in New York Supreme Court, New York, by Andrew Batkin, former chairman of SIM; Lawrence Howorth, former exec VP-chief financial officer; Edward West, former exec VP-business development; and Robert Colvin, former senior VP-client acquisition. All are still minority shareholders in SIM, but left the company following its takeover by Zulu-tek.

The former SIM executives seek to recover damages for lost compensation and business opportunities resulting from "fraudulent, conflict-ridden and irresponsible actions" of the defendants, according to the lawsuit.

Also named in the suit as defendants are Eric Hippeau, chairman-CEO of Ziff-Davis; Jeffrey Ballowe, former president of marketing and development of Ziff-Davis' Interactive Media divisions; and Masayoshi Son, president and majority shareholder of Softbank Corp., parent of Softbank Holdings.

Malcolm Morris, senior-VP and general counsel for Ziff-Davis, said, "All of the defendants believe the suit is without merit, especially with respect to Ziff-Davis, which never held an ownership interest in Softbank Interactive."

The plaintiffs claim mismanagement by Softbank and Ziff-Davis executives kept them, their clients and stockholders from realizing the full potential of the Internet ad network.

"We felt we were stripped of the opportunity to build the company we started and reap the financial benefits," said Mr. Batkin.

The former SIM executives said in the lawsuit they all agreed to participate in the formation of SIM following promises made by the defendants that the company would be a "multidimensional interactive services company that would provide its services to a wide variety of Web site providers."

`CONSTRICTED NETWORK'S ABILITY'

However, the plaintiffs argue in the suit, "Virtually from the moment SIM was formed, the defendants . . . embarked upon a calculated and deliberate scheme to control the operations and management of SIM in a manner consistent with their own best interests, rather than in the best interests of SIM and its other shareholders."

The former SIM executives said in the claim that Softbank Holdings and Ziff-Davis used the ad network primarily to represent Ziff's ZDNet Web site and that of Yahoo!, in which Softbank owned a 38% interest. This "constricted" the network's ability to serve its other clients, the plaintiffs said.

COMPETITIVE BUSINESS MODEL

However, said Mr. Evans at Netscape, "The entire business model of a third-party rep firm is competitive up and down the line." He said he's been satisfied with the sales business he's been receiving from ZuluMedia, which represents Netscape on a non-exclusive basis.

Since its takeover of Softbank, bad publicity has surrounded the company. One of Zulu-tek's financial advisers, Pattinson Hayton, has been fined for failing to file Securities & Exchange Commission documents and had a $3.7 million judgment on a fraud claim by a Colorado software marketer.

The plaintiffs, who failed in an attempt to buy back control of SIM, said "Softbank sold [SIM's] stock to a company [Zulu-tek] whose inappropriateness as a purchaser was obvious for all to see."

Even before the takeover, the ad network was having trouble fulfilling its promises to at least some clients.

"We bought this great concept, but the things they promised never materialized," said an ad sales manager for a former SIM client.

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