Lot 21 Shareholders Seek Carat Payout

The common shareholders of Lot21 are accusing Carat Interactive, which bought the once-high-flying interactive shop two years ago, of depriving them of up to $8.7 million in earn-out payments, according to legal documents.

A three-person arbitration panel is scheduled to hear arguments May 3 in Los Angeles.

Aegis Group’s Carat Interactive bought San Francisco-based Lot21, known for its creative prowess and work in emerging technologies for clients such as eBay and Palm, in January 2002. Preferred shareholders received $1.8 million in cash, and common shareholders were promised $8.7 million over three years if certain revenue goals were achieved.

So far, the 27 common shareholders have received $500,000 in earn-out checks sent two months ago, according to Irwin Schwartz of Petri Bauer Schwartz, Lot21’s Boston law firm.

In a motion the firm filed last month in U.S. District Court in the Central District of California, Lot 21 claims Carat Interactive stymied the shop’s efforts to meet its financial targets by “forcing” Lot21 to resign one of its largest clients, terminating one of its senior executives and not crediting it with income from unbilled media. “In our view, the game that Carat and Aegis are playing is that they want Lot21 for free,” said Schwartz.

After the sale, Carat Interactive told Lot21 it would have to resign its Peoplesoft account because of a conflict with Carat’s Siebel client, according to court filings. By the end of 2002, the documents allege, Carat Interactive had stripped Lot21 president and COO Eric Wheeler of his post-merger task of adding business from existing and prospective clients.

Lot21 also claims Carat Interactive did not provide Wheeler, the designated shareholder representative, with sufficient paperwork to determine whether the shop had triggered the earn-out program. Wheeler, who joined OgilvyInteractive North America as executive director last December, declined comment.

In its counterclaim, Carat Interactive alleges in court documents that Lot 21 “knowingly and intentionally” misrepresented its 2001 revenue—at the time of the deal, Lot21 claimed $40 million in billings—and that the adjusted book value of Lot21’s assets was $881,000 less than the target.

In a March 12 letter to the arbitration panel, Carat Interactive’s lawyer made a motion to exclude disputes arising from the earn-out payment calculations. Harry Olivar Jr. of Quinn Emanuel Urquhart Oliver & Hedges, a Los Angeles-based law firm, argued that under Carat Interactive’s stock-purchase agreement with Lot21, such matters should be handled by an “accounting referee.”

Olivar declined comment, citing the litigation, as did Carat Interactive president Sarah Fay.

The arbitration, which was initially requested by Wheeler on behalf of Lot21’s shareholders in January 2003, may be postponed as both parties await a decision from the L.A. Supreme Court on Lot 21’s March 19 petition to compel London-based Aegis to participate in the hearing. “We believe these accusations are without merit,” said an Aegis rep.