WPP Group has filed a lawsuit in federal court accusing Spot Runner of operating a "pump and dump scheme."
The suit, filed in U.S. District Court in California, alleges that Spot Runner, its directors, attorneys and venture capital backers Battery Ventures and Index Ventures improperly arranged for a secondary stock offering. WPP is seeking $13.2 million in damages.
Spot Runner denied any wrongdoing.
"This lawsuit is about WPP, a minority shareholder, wanting to sell their Spot Runner stock retroactively," the company said in an e-mailed 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."
The suit sours an investment WPP made in the Internet-based TV platform in August 2006. WPP joined with Interpublic Group and CBS in a $40 million funding round for the Los Angeles startup, putting about $10 million into the firm.
The suit calls into question the role of advertising holding companies as strategic investors. WPP has been the most aggressive in making investments in privately held technology companies, investing in a raft of startups like mobile search company Jumptap, social media monitor Visible Technologies and rich media ad network Videoegg.
As a strategic investor, WPP's role with such companies is twofold: gain an understanding and foothold in new technologies and, secondarily, deliver financial returns. In its suit, WPP claims Spot Runner's founders took advantage of the company.
"Rather than working to make Spot Runner a successful and profitable venture, they perpetuated a 'pump and dump' scheme in which they aggressively promoted the company to new investors (often by promoting that WPP was an investor in and supporter of the company) and then sold new investors large quantities of their own secondary shares at ever-increasing valuations," the suit alleges.
WPP claims Spot Runner co-founders Nick Grouf and David Waxman and its early investors sold more than $54 million of shares in the company between the time of WPP's investment and March 2008.
These sales, according to WPP, were not discussed at meetings of the board of directors. WPP does not have a director at Spot Runner but has an observer at meetings. WPP claims it was notified of the March 2008 sale, although it did not know of the previous stock sales raising up to $40 million, and the holding company sold $900,000 of stock.
Spot Runner, which has closed funding rounds in excess of $100 million, has struggled with the deteriorating economy, going through a couple rounds of layoffs. The company is pinning its hopes on Project Malibu, a media planning and buying platform it is rolling out to bring Web-style dynamics to the old-school ad world of TV buying.