paley vs radar networks, ross second amended complaint

SECOND AMENDED COMPLAINT

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Gibson, Dunn & Crutcher LLP

GIBSON, DUNN & CRUTCHER LLP G. CHARLES NIERLICH, SBN 196611 [email protected] LINDSEY BLENKHORN, SBN 227484 [email protected] 555 Mission Street, Suite 3000 San Francisco, California 94105-2933 Telephone: 415.393.8200 Facsimile: 415.393.8306

Attorneys for Plaintiffs KATE PALEY AND WORD DIAMONDS, LLC

SUPERIOR COURT OF THE STATE OF CALIFORNIA

IN THE COUNTY OF SAN MATEO

KATE PALEY and WORD DIAMONDS, LLC, a Delaware Limited Liability Company,

Plaintiffs,

v.

RADAR NETWORKS, INC., a Delaware Corporation; NOVA SPIVACK; STEVE HALL; ROSS LEVINSOHN; EVRI, INC., a Washington Corporation; and DOES 1-100, inclusive,

Defendants.

CASE NO. CIV-494701

SECOND AMENDED COMPLAINT FOR:

(1) FRAUD (2) FRAUDULENT CONVEYANCE -

UNIFORM FRAUDULENT TRANSFER ACT

(3) FRAUDULENT CONVEYANCE - UNIFORM FRAUDULENT TRANSFER ACT

(4) BREACH OF CONTRACT (5) BREACH OF CONTRACT (6) BREACH OF COVENANT OF GOOD

FAITH AND FAIR DEALING (7) BREACH OF FIDUCIARY DUTY (8) DECLARATORY JUDGMENT (9) ACCOUNTING (10) CONVERSION (11) CONVERSION (12) CALIFORNIA UNFAIR

COMPETITION LAW (13) CONSTRUCTIVE TRUST

DEMAND FOR JURY TRIAL

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Plaintiffs Kate Paley and Word Diamonds, LLC allege and state as follows:

INTRODUCTION

1. This action arises from the concerted efforts of Radar Networks, Inc. (“Radar”), and

its executives, directors and agents, to take advantage of one of its angel investors. Radar and its

chief executive, Nova Spivack, misled Kate Paley about Radar’s financial condition and prospects in

order to induce her to invest millions of dollars. When the money ran out, Mr. Spivack again

returned to Ms. Paley with more false promises of positive returns, and a new story about how he

wanted to integrate her company, Word Diamonds, LLC (“Word Diamonds”), into Radar’s principal

product, Twine.com. Based on Mr. Spivack’s misrepresentations, Ms. Paley invested millions more

and lost millions more.

2. In fact, there was no prospect of significant returns, and Radar lacked either the will or

the ability to deliver on its promises concerning Word Diamonds. Instead, the overarching scheme,

recently consummated, was to use Ms. Paley’s money to keep Radar afloat long enough for it to

fraudulently convey its assets to a friendly company, leaving Ms. Paley with nothing.

3. Defendant Radar is a start-up company specializing in the development of semantic

web applications.

4. Ms. Paley is private individual who has spent much of her professional life pursuing

various opportunities related to her strong Christian faith. Among other things, Ms. Paley has

devoted millions of dollars, and thousands of hours of her time, to developing her own company,

Word Diamonds.

5. Word Diamonds is a one-of-a-kind, patent pending, website that allows users to

explore and map connections between various words and phrases in the Bible in a visually engaging

manner.

6. In 2007 and 2008, Ms. Paley invested a total of $5 million in debt in Radar – $2

million pursuant to a May 2007 Note and Warrant Purchase Agreement (the “2007 Purchase

Agreement”) and $3 million pursuant to an October 30, 2008 Note and Warrant Purchase Agreement

(the “2008 Purchase Agreement”).

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7. In order to induce her to make these investments, Radar and its executives and agents

deceived Ms. Paley by making misrepresentations to her concerning Radar’s financial condition and

prospects. In addition, they preyed on her desire to expose Word Diamonds to a larger audience by

promising to integrate Word Diamonds into Radar’s flagship product, Twine.com.

8. Radar also breached the 2008 Purchase Agreement by using the proceeds of Ms.

Paley’s investment for a variety of improper purposes, most of which were designed to keep Radar

afloat long enough for its assets to be fraudulently conveyed to a friendly company, Evri Inc.

(“Evri”), with strong ties to Radar’s management and board of directors.

9. In addition, rather than develop Word Diamonds, as it had promised to do, Radar

effectively destroyed much of the value that Ms. Paley had created.

10. Specifically, pursuant to a December 20, 2008 Cross-Licensing and Services

Agreement (the “Services Agreement”) between Word Diamonds and Radar, Radar was supposed to

improve the cross-functionality of the Word Diamonds website, and integrate the Word Diamonds

website with Twine.com.

11. Radar was unable or unwilling to execute on many of the tasks that it had agreed to

perform, however, including making the visual interface of the Word Diamonds website more

visceral. And when Ms. Paley directed Radar to discontinue those efforts and move on to more

productive work, Radar ignored her directive, and instead allowed an outside company, Stimulant, to

completely dismantle the Word Diamonds site, which, in effect, tripled the complexity and workload,

destroying its ability to function for the purpose for which it was built and designed.

12. In addition, for a period of nearly a year, Radar refused to allow Ms. Paley to access

the site or correct any of the problems that Radar itself had created.

13. Unsurprisingly, Ms. Paley’s investment in Radar has proved disastrous. As a result of

Defendants’ fraud, and Radar’s breaches of the Purchase Agreements, Ms. Paley’s entire investment

has been lost. After three years, millions of dollars, and thousands of hours, she has been left with

nothing to show for her efforts except a broken site with no functionality.

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THE PARTIES

14. Plaintiff Kate Paley resides in Warren, Connecticut. She is the creator and sole owner

of Word Diamonds. During the relevant time period, Ms. Paley was a minority shareholder in Radar.

15. Plaintiff Word Diamonds is a Delaware limited liability company with its principal

place of business in Warren, Connecticut. Word Diamonds is an interactive website designed to

allow users to “unpack” the Bible by exploring the many facets and origins of the words and

expressions used in the Bible. Among other things, Word Diamonds should allow users to

graphically draw connections among word passages in the Bible, and to share those connections with

other users.

16. Defendant Radar is a Delaware corporation with its principal place of business in San

Francisco, California. The primary business of Radar is developing semantic web applications for

the general public. Radar introduced its first commercial product, Twine, in 2008. Twine is an

online, social web service for information storage, authoring and discovery.

17. On information and belief, during the relevant time period, Defendants Nova Spivack,

Steve Hall, and Ross Levinsohn (“Director Defendants”) served on Radar’s Board of Directors.

18. Defendant Nova Spivack is a resident of California. He is the founder of Radar, and

was its Chief Executive Officer prior to its recent acquisition by Evri.

19. Defendant Steve Hall is a resident of California. He is a Managing Director of Vulcan

Capital and heads all of Vulcan Capital’s early stage venture capital investments. On information

and belief, during the relevant time period, Vulcan Capital invested millions of dollars in Radar and

was Radar’s largest single shareholder. Mr. Hall also serves as a director of Defendant Evri, Inc.

(“Evri”). During the relevant time period, Vulcan Capital invested $8 million in Evri, was Evri’s sole

source of venture capital funding, and was Evri’s single largest shareholder. On information and

belief, Mr. Hall had primary responsibility for overseeing Vulcan Capital’s investment in both Radar

and Evri.

20. Defendant Ross Levinsohn is a resident of California. He is also a partner with Fuse

Capital, formerly Velocity Interactive Group. Velocity was the lead investor in Radar’s $13 million

Series B round of venture capital financing in February 2008.

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21. Defendant Evri is a Washington corporation based in Seattle, Washington. Evri’s

principal product is a search and discovery engine that filters the real-time web for news and

conversations and distills them into intelligent information streams. Evri is funded by Vulcan

Capital, the same investment vehicle that provided significant funding to Radar. On March 11, 2010,

Evri announced that it had acquired substantially all of Radar’s assets.

22. The true names and capacities, whether individual, corporate, associate, governmental,

or otherwise, of defendants Does 1 through 100 are unknown to Plaintiffs at this time. Plaintiffs

therefore sue said defendants by such fictitious names. When the true names and capacities of said

defendants have been ascertained, Plaintiffs will amend this complaint accordingly. Plaintiffs are

informed and believe, and thereon allege, that each defendant designated herein as a Doe is

responsible, willfully, negligently, or in some other actionable manner, for the events and happenings

hereinafter referred to, violated California or other laws, and caused plaintiffs and each of them harm

and damages, as hereinafter alleged.

FACTUAL BACKGROUND

Radar Fraudulently Induces Ms. Paley to Enter into the May 2007 Note and Warrant Purchase

Agreement

23. Ms. Paley’s dealings with Radar began in 2007.

24. In early April 2007, Ms. Paley entered into discussions with Radar’s founder, Nova

Spivack, about a possible multi-million dollar investment in Radar.

25. Prior to investing, Ms. Paley emphasized to Mr. Spivack that she was extremely

concerned about the potential risk of investing in Radar, going so far as to tell Mr. Spivack in an

April 18, 2007 email, “Nova, I really can’t lose this money, it would be really bad if I did.”

26. In an attempt to induce her to invest, Mr. Spivack responded by emphasizing the

“tremendous upside potential” of the semantic web and falsely assured Ms. Paley that Radar had

“huge upside” and the “potential for great reward.”

27. Mr. Spivack further assured Ms. Paley that “we have done quite a bit of work over the

last year to reduce risk compared to our earlier days – for example, we’ve assembled great investors,

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one of the best teams in the industry for this opportunity, and we’ve built unique technology and a

potential ‘killer app.’”

28. Playing on Ms. Paley’s deep spirituality, Mr. Spivack also held himself out to Ms.

Paley as a deeply religious person who wanted Ms. Paley to invest in Radar because of their

“spiritual connection.” Mr. Spivack even went so far as to tell Ms. Paley that he regarded her interest

in Radar as a “sign from God.”

29. In reliance on Mr. Spivack’s knowing false and misleading representations to her, Ms.

Paley agreed in May 2007 to invest $2 million pursuant to the May 2007 Purchase Agreement with

Radar. In the first quarter of 2008, Radar purported to convert Ms. Paley’s initial debt investment

into equity, leaving her as a minority shareholder of Radar.

Radar’s Fraud Continues – Ms. Paley Enters into the October 30, 2008 Note and Warrant

Purchase Agreement in Reliance on Radar’s Misrepresentations

30. In mid-2008, Mr. Spivack again approached Ms. Paley about making a further

investment in Radar. In order to induce her to invest more money, Mr. Spivack knowingly

misrepresented to Ms. Paley that Radar was interested in integrating Ms. Paley’s Word Diamonds’

website into Radar’s flagship product, Twine.com. Specifically, on October 21, 2008, Mr. Spivack

told Ms. Paley in various emails:

We need additional capital to buy some time until Sept 2009. when we expect to be bought or raise a much larger round. We need about $3M - $4M to extend our runway to that time. I think the amazing thing is that the visualization project and [Word Diamonds] are exactly that. So ideally you invest in another Note and we do this and everybody wins, and in the end you actually make your money back times a multiple when we get bought! Much better than just spending your money on a firm to build [Word Diamonds]. What do you think?

[W]e are excited about building the Word Diamonds technology and integrating it into Twine. . . . I also see a lot of potential for [Word Diamonds] to be part of Twine.

I love the fact that this gives you a way to “monetize” your investment in Word Diamonds via Twine. The money you spend to make [Word Diamonds] would have been spent anyway, but via Twine there is a chance to multiply it when we get bought in the future. It really is great. . . . . [Y]ou get [Word Diamonds] built, AND Twine gets a budget to make the visualization features AND we have a budget in place to ride out the economic downturn if necessary. It’s a thing of beauty.

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31. Mr. Spivack also falsely assured Ms. Paley that he was “deep in discussions with other

big companies . . . about investing in Twine” and that he was “confident that a lot more money” was

forthcoming.

32. In fact, on information and belief, Radar’s prospects for the future were not nearly as

bright as Mr. Spivack suggested because, among other things, there were no other credible investors

on the horizon. In addition, on information and belief, Radar never had any intention of devoting the

resources necessary to integrate Word Diamonds into Twine.com.

33. In reliance on Radar’s misrepresentations, Ms. Paley invested another $3 million on

October 30, 2008 pursuant to the 2008 Purchase Agreement.

Radar Breaches the 2008 Purchase Agreement

34. In addition to the promises Radar made to Ms. Paley before she invested, the express

terms of the 2008 Purchase Agreement required Radar to use the proceeds of Ms. Paley’s $3 million

investment solely “for the continued development of Twine.com and to create and manipulate

semantic data and content.” A related schedule specifically allocated Ms. Paley’s $3 million

investment to discrete tasks, as follows:

Development of a Next Generation Visual Interface. Integration of the Visual Interface into Twine.com

$1 million

Migration of Word Diamonds into Twine and initial configuration, setup, etc.

$200,000

Ongoing technical support, systems administration, and editorial maintenance

$370,000

Infrastructure expansion

$300,000

Ongoing administrative and management support

$300,000

Development of combined features

$830,000

Total

$3 million

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35. In fact, in breach of the 2008 Purchase Agreement, Radar used the proceeds of Ms.

Paley’s investment for a variety of improper purposes, including solicitation of traffic from Google in

the hopes that obtaining such traffic would allow the Company to secure additional financing.

36. Ms. Paley has demanded on several occasions that Radar provide information

sufficient to indicate how it disposed of the proceeds of her investment, but Radar has refused to

provide such information.

Radar Improperly Converts Ms. Paley’s Debt to Equity

37. Radar also improperly, and in breach of the 2008 Purchase Agreement, purported to

convert Ms. Paley’s $3 million debt investment into equity. Under Section 1.5 of the 2008 Purchase

Agreement, and Section 2.1 of Convertible Promissory Note (the “Note”) attached as Exhibit B to the

2008 Purchase Agreement, Ms. Paley’s debt converted automatically into equity only in the event

that Radar consummated a new $4 million equity financing.

38. Section 1.2 of the Note further stated that Ms. Paley’s $3 million Note was due and

payable in the event of “(a) demand by Lender after September 30, 2009, . . . (c) a Change of Control,

or (d) demand by Lender following the occurrence of an Event of Default.”

39. As a practical matter, then, Ms. Paley had an unfettered right to immediately call her

$3 million debt investment in the event that Radar (1) failed to consummate an equity financing by

September 30, 2009; (2) was sold to another company; or (3) defaulted under the 2008 Purchase

Agreement.

40. On September 21, 2009 (just nine days before the September 30, 2009 deadline),

Radar notified Ms. Paley that her debt had been converted to equity pursuant to an equity investment

that purportedly occurred on September 15, 2009.

41. This was a ruse. On information and belief, Radar had not consummated the $4

million equity financing necessary to convert Ms. Paley’s debt into equity, but rather had secured

only $800,000 from two funds – Vulcan Capital, where Radar board member Steve Hall serves a

Managing Director, and Fuse Capital, where Radar board member Ross Levinsohn is a partner and

member of a seven-person Investment Team. Ms. Paley remained a minority shareholder in Radar

after this improper conversion.

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42. On information and belief, Radar purported to consummate an equity financing

sufficient to convert Ms. Paley’s debt to equity because it knew that, absent such conversion, Ms.

Paley had the right to demand repayment because of Radar’s breaches of the 2008 Purchase

Agreement and in addition had an unfettered right to demand repayment on September 30, 2009.

43. Because Radar did not meet the requirements under the 2008 Purchase Agreement for

converting Ms. Paley’s $3 million Note to equity, pursuant to Section 1.2(a) of the 2008 Purchase

Agreement, Ms. Paley is entitled to demand repayment of the Note for any reason whatsoever.

44. In addition, Evri’s acquisition of substantially all of Radar’s assets on March 11, 2010

constituted a Change of Control pursuant to Section 1.2(c) of the 2008 Purchase Agreement.

45. Finally, the breaches described above constitute Events of Default under Section 1.3

of the 2008 Purchase Agreement.

46. For these reasons, Ms. Paley is entitled to immediate repayment of the $3 million Note

pursuant to the terms of the 2008 Purchase Agreement and the Note.

The Scheme Continues – Radar’s Breaches of the December 20, 2008 Cross-License & Services

Agreement

47. On December 20, 2008, Word Diamonds entered into a Cross-License & Services

Agreement (“Services Agreement”) with Radar.

48. Ms. Paley invested millions of dollars in developing the Word Diamonds website prior

to entering into the Services Agreement with Radar. At the time the parties signed the Services

Agreement, the Word Diamonds website was virtually bug free and offered visitors an attractive, user

friendly, interface.

49. Pursuant to Section 7.l of the Services Agreement, Radar agreed to engage “qualified

personnel” to perform various services relating to the Word Diamonds website in a “timely and

professional manner.”

50. In addition, the parties agreed to a schedule whereby Radar committed to migrate

Word Diamonds onto a Radar server, and complete any related debugging by the end of April 2009.

In addition, Radar agreed to complete and implement design updates to Word Diamonds by the end

of June 2009.

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51. On information and belief, Radar never had any intention of performing its obligations

under the Services Agreement, and expressed interest in the Word Diamonds website solely in order

to induce Ms. Paley to invest money in Radar.

52. Radar outsourced the development of Word Diamonds to less than qualified

companies named Stimulant and Lab Zero, even though it had promised that only Radar engineers

would be working on the site, and that the only outsourcing would be to agreed-upon top tier

development companies.

53. Within a few months of signing, it became apparent that Radar had no intention of

living up to its obligations under the Services Agreement and that the outsourcing companies were

not qualified to perform Radar’s obligations under the Services Agreement. In particular, it soon

became apparent that Stimulant was not qualified to work on any “visceral effects,” and had no

experience doing so.

54. Meanwhile, Mr. Spivack continued to assure Ms. Paley that Radar was prospering and

described Twine.com as “growing beautifully since we did the October public launch.”

55. In mid-2009, Ms. Paley discovered that Radar and Stimulant effectively had

dismantled the Word Diamonds website, and removed or destroyed virtually all of the useful cross-

functionality of the site, in the process destroying much of the value that Ms. Paley had created.

Radar and Stimulant dismantled Ms. Paley’s patented structure for the Word Diamonds website

against Ms. Paley’s express instructions, and without ever informing her.

56. Between May and August 2009, Ms. Paley communicated with Radar personnel on a

nearly daily basis concerning the problems that Radar was having integrating Word Diamonds with

Twine.com, and improving the cross-functionality of Word Diamonds. On numerous occasions, she

informed Radar that Stimulant was not competent to work on visceral effects, and should focus on the

visualization or design of other functions, rather than on programming.

57. Nevertheless, Radar and Stimulant continued to experiment with visceral effects, and

ultimately destroyed virtually all of the website’s useful cross-functionality, while tripling the

complexity and workload of an enormous application.

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58. Unable or unwilling to fix the many problems Ms. Paley indentified, Mr. Spivack

eventually acknowledged in an August 21, 2009 email that “there were some unexpected delays . . . .

We are sorry for those delays and we can and should take responsibility for those we caused.”

Radar Pressures Ms. Paley to Waive and/or Not Exercise Her Rights under the Purchase

Agreements and the Services Agreement

59. By August 2009, Ms. Paley was so frustrated that she reached out to Radar board

member, Steve Hall, to discuss Radar’s egregious breaches of the Services Agreement.

60. During August and September 2009, Mr. Hall participated in two conference calls and

several email exchanges with Ms. Paley and others at Radar, in an attempt to resolve the parties’

disputes.

61. It soon became apparent that Defendants were less concerned with Radar’s breaches

of the Services Agreement, and more concerned with trying to coerce Ms. Paley into waiving her

rights under the Purchase Agreements and Services Agreement and investing still more money in

Radar.

62. On numerous occasions, Radar’s management and attorneys threatened legal action

against Ms. Paley, and told her that her efforts to protect her rights under the Purchase Agreements

and the Services Agreement were preventing the Company from raising additional capital. In one

October 4, 2009 email, for example, Mr. Spivack made his threats explicit:

Please focus on providing us with written assurances on Monday that you do not intend to sue us. If not, we have to proceed as if a formal lawsuit has been made – unfortunately your attorney did make such a threat to our attorney and unless it is retracted, we have to take it seriously. If the threat is not retracted, I have to inform my board and it will put our new investment round at risk, possibly resulting in the company shutting down.

63. In fact, Radar’s struggles to obtain financing had virtually nothing to do with Ms.

Paley’s efforts to preserve her rights under the Purchase Agreements and the Services Agreement.

One potential investor candidly acknowledged to Ms. Paley that litigation was “the least of [his]

concerns” and that he had chosen not to invest because “Nova [had] consistently failed to be

intellectually honest about his own failings and the Company’s.”

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64. Finally, on November 7, 2009, Mr. Spivack admitted the dire nature of the company’s

financial condition, including the fact that he had hidden such condition from Ms. Paley: “But look,

if there truly is an objective mistake or shortcoming – I will want to see it fixed. The challenge is that

Radar is dead in the water, totally out of money, and so am I. I have nothing. . . . Radar is days from

going under unless we get funded. I’ve been in such a struggle – completely unrelated to WD – the

industry collapsed from under us. Our funding collapsed. We’ve had terrible struggles to keep our

investors from bailing out. It’s been so difficult. You just cannot imagine. I have tried to shield you

from all of that.”

65. At the end of the day, Ms. Paley was left with a non-functioning website that will need

to be completely rebuilt before any functionality can be restored.

66. Even more egregiously, for virtually all of 2009, Radar refused to provide Ms. Paley

back-end access to the Word Diamonds website thereby delaying her ability to try to correct the

damage that Radar and Stimulant inflicted. Radar’s refusal to provide Ms. Paley with access to her

own website was part of a concerted effort to hide the truth from Ms. Paley and to take advantage of

her. On information and belief, among other things, Defendants hoped that, by holding the Word

Diamonds website hostage, they could coerce Ms. Paley into waiving her litigation claims and

investing more money into Radar.

Radar Fraudulently Conveys Its Assets to Evri

67. Defendants consummated their scheme by fraudulently conveying substantially all of

Radar’s assets to a friendly acquirer named Evri on March 10, 2010.

68. Specifically, Radar conveyed substantially all of its assets to Evri in exchange for (i)

Evri’s assumptions of certain liabilities of Radar; (ii) payments by Evri to certain creditors of

Radar—but not Ms. Paley; and (iii) Evri’s issuance of stock to certain of Radar’s creditors. Radar

received no cash consideration from Evri.

69. As a Managing Director of Vulcan Capital (which was the largest single shareholder

of both Evri and Radar), and as the person responsible for overseeing Vulcan Capital’s investment in

Radar and Evri, Mr. Hall had a direct financial interest in the transaction between Radar and Evri.

Indeed, on information and belief, the amount of compensation that Mr. Hall receives as a result of

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his participation in Vulcan Capital depends on the success of certain of Vulcan Capital’s investments,

including the investments in Radar and Evri. Thus, Defendant Hall stood to receive a personal

financial benefit from Radar’s fraudulent conveyance of all of its assets to Evri. [Anything else we

can add here?]

70. Radar’s board approved the transaction with Evri on March 9, 2010, based on the

recommendation of an “Acquisition Committee.” Radar’s board formed the Acquisition Committee

on February 24, 2010 – just thirteen days before Radar’s board approved the transaction. The

Acquisition Committee consisted of only one person, Radar board member Ross Levinsohn.

71. On information and belief, Radar is insolvent as a result of its transaction with Evri.

72. According to Mr. Spivack, however, Radar received “numerous” offers for Radar

from “leading Internet and media companies,” including offers from companies that were “larger and

more established” than Evri.

73. On information and belief, Defendants concocted and participated in a conspiracy to

sell Radar to Evri in order to enrich themselves and to evade, hinder, delay and defraud Ms. Paley.

74. Indeed, at the time Radar’s board purported to approve the transaction, Defendant

Spivack already had agreed to a enter into a consulting agreement with Evri, and was engaged in

discussions about expanding his relationship with Evri.

75. At the time of Radar’s conveyance, Defendant Hall also had a financial stake in Radar

and Evri, as a result of his Vulcan’s Capital’s significant investments in both companies, and his

responsibility for overseeing those investments. Upon information and belief, Mr. Hall led and

currently oversees Vulcan Capital’s investment in Evri. Mr. Hall also was a member of Evri’s board

at the time of the transaction, and remains on Evri’s board.

Radar Refuses to Return Word Diamonds’ Property

76. Over the course of its relationship with Radar, Word Diamonds provided Radar with a

variety of information, including but not limited to: (1) information regarding the patent-pending

design of the web site; (2) copies of all site backups performed on Word Diamonds, since the site was

in the Company’s control; and (3) materials such as compact discs, books, and documents including,

without limitation, all punch lists and working documents from both Radar and Stimulant as well as

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files, visuals, and related materials. Ms. Paley has repeatedly requested that Radar return this

information, to no avail.

Radar Leaves No Value in the Word Diamonds Site

77. After three years of pouring money into Radar and what Ms. Paley believed was the

development of the Word Diamonds site, Ms. Paley finds herself with neither a remaining investment

nor a functioning site.

78. Since the sale of Radar to Evri, Ms. Paley has been forced to seek out other web

development and design firms to repair what Radar had effectively destroyed. These firms have

confirmed to Ms. Paley that all of the functionality in the site has been destroyed. Ms. Paley is now

in the process of rebuilding the Word Diamonds site in its entirety at her own expense.

FIRST CAUSE OF ACTION

FRAUD

(By Paley Against Radar and Spivack)

79. Plaintiff incorporates by reference as if set forth in full herein, the allegations of

paragraphs 1 through 78 of this Complaint.

80. In an intentional, malicious and fraudulent scheme to cheat and defraud Ms. Paley,

Defendants knowingly made misrepresentations and omissions of material fact to Ms. Paley as

described herein.

81. Defendants made these misrepresentations and omissions in an attempt to induce Ms.

Paley to invest money in Radar.

82. Ms. Paley, to her substantial detriment, reasonably relied on these misrepresentations

and omissions, and believing them to be true, invested $5 million in Radar.

83. Because Defendants fraudulently intended to induce Ms. Paley to detrimentally rely

on their intentional misrepresentations and omissions, and because Ms. Paley in fact relied to her

detriment on their intentional misrepresentations and omissions, and because Defendants concealed

their true intentions from Ms. Paley, Ms. Paley is entitled to damages in an amount to be determined

at trial, or in the alternative, rescission of her investment in Radar, plus applicable interest.

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84. In addition, because Defendants’ conduct was willful, wanton, malicious, and

oppressive, and undertaken with the intent to defraud, Ms. Paley seeks exemplary and punitive

damages.

SECOND CAUSE OF ACTION

FRAUDULENT CONVEYANCE – UNIFORM FRAUDULENT TRANSFER ACT

CIVIL CODE § 3439.04

(By Paley Against All Defendants)



86. Ms. Paley was a creditor and minority shareholder of Radar prior to Radar’s

conveyance of virtually all of its assets to Evri.

87. Radar conveyed its valuable assets to Evri with the actual intent to hinder, delay or

defraud its creditors, including Ms. Paley.

88. Accordingly, Radar’s sale of its assets to Evri is fraudulent as to the present creditors

of Radar, including Ms. Paley.

89. Defendants conspired to fraudulently transfer Radar’s valuable assets to Evri with the

actual intent to hinder, delay, or defraud Ms. Paley.

90. As directors of the debtor, and as persons with significant indirect financial interests in

Radar, Defendants Hall and Levinsohn were legally capable of engaging in a fraudulent conveyance.

91. Pursuant to the Uniform Fraudulent Transfer Act, Civil Code Section 3439.07, Ms.

Paley seeks an order: (i) setting aside the above reference conveyance to the extent necessary to

satisfy Ms. Paley’s claim and/or granting an attachment against the assets conveyed. Ms. Paley

further seeks an injunction preventing further disposition of the conveyed assets by Radar or Evri.

92. Ms. Paley also seeks damages in an amount to be proven at trial. In addition, because

Defendants’ conduct was willful, wanton, malicious, and oppressive, and undertaken with the intent

to defraud, Ms. Paley seeks exemplary and punitive damages against Radar, Evri and Defendant

Spivack.

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THIRD CAUSE OF ACTION

FRAUDULENT CONVEYANCE – UNIFORM FRAUDULENT TRANSFER ACT

CIVIL CODE § 3439.05

(By Paley Against All Defendants)



94. Ms. Paley was a creditor and minority shareholder of Radar prior to Radar’s

conveyance of virtually all of its assets to Evri.

95. Radar did not receive reasonably equivalent value for the assets it sold to Evri.

96. Radar became insolvent as a result of conveying its assets to Evri.

97. Accordingly, Radar’s sale of its assets to Evri is fraudulent as to the present creditors

of Radar, including Ms. Paley.

98. Defendants conspired to fraudulently transfer Radar’s valuable assets to Evri with the

actual intent to hinder, delay, or defraud Ms. Paley.

99. As directors of the debtor, and as persons with significant indirect financial interests in

Radar, Defendants Hall and Levinsohn were legally capable of engaging in a fraudulent conveyance.

100. Pursuant to the Uniform Fraudulent Transfer Act, Civil Code Section 3439.07, Ms.

Paley seeks an order: (i) setting aside the above-referenced conveyance be to the extent necessary to

satisfy Ms. Paley’s claim and/or granting an attachment against the assets conveyed. Ms. Paley

further seeks an injunction preventing further disposition of the conveyed assets by Radar or Evri.

101. Ms. Paley also seeks damages in an amount to be proven at trial. In addition, because

Defendants’ conduct was willful, wanton, malicious, and oppressive, and undertaken with the intent

to defraud, Ms. Paley seeks exemplary and punitive damages against Radar, Evri, and Defendant

Spivack.

FOURTH CAUSE OF ACTION

BREACH OF CONTRACT

(By Paley Against Radar)

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103. Ms. Paley and Radar are parties to a 2008 Purchase Agreement pursuant to which Ms.

Paley invested $3 million in debt in Radar.

104. Ms. Paley has performed all of her obligations under the 2008 Purchase Agreement.

105. Under Section 6.1 of the 2008 Purchase Agreement, Radar was supposed to use the

proceeds of Ms. Paley’s investment solely “for the continued development of Twine.com and to

create and manipulate semantic data and content.”

106. On information and belief, Radar used the proceeds of Ms. Paley’s $3 million

investment for a variety of improper purposes.

107. Radar’s misuse of the proceeds of Ms. Paley’s $3 million investment was a breach of

the express terms of the 2008 Purchase Agreement.

108. As a direct and proximate result of Radar’s breach of its obligations under the 2008

Purchase Agreement, Ms. Paley has suffered substantial harm in an amount to be determined at trial.

FIFTH CAUSE OF ACTION

BREACH OF CONTRACT

(By Word Diamonds Against Radar)


paragraphs 1 through 104 of this Complaint. Radar also is in breach of the Services Agreement

between Word Diamonds and Radar.

110. Word Diamonds and Radar are parties to a Services Agreement.

111. Word Diamonds has performed all of its obligations under the Services Agreement.

112. Pursuant to Section 7.l of the Services Agreement, Radar agreed to engage “qualified

personnel” to perform various services relating to the Word Diamonds website in a “timely and

professional manner.”

113. Radar breached its obligations under the Services Agreement by outsourcing its

obligations under the Services Agreements to companies, including Stimulant and Lab Zero, that

lacked the capability and sophistication necessary to perform the required work.

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114. Over the course of 2009, Radar and Stimulant systematically dismantled the Word

Diamonds website, and removed or destroyed virtually all of the useful cross-functionality of the site,

tripling the workload and complexity, and in the process destroying much of the value that Ms. Paley

had created.

115. As a direct and proximate result of Radar’s breach of its obligations under the Services

Agreement, Word Diamonds has suffered substantial harm in an amount to be determined at trial.

SIXTH CAUSE OF ACTION

BREACH OF COVENANT OF GOOD FAITH AND FAIR DEALING

(By Word Diamonds Against Radar)



117. Word Diamonds expected that Radar would use its best efforts to take actions in

support of the Services Agreement, and to provide services of the highest quality.

118. Instead, Radar took actions that effectively destroyed much of the value of the Word

Diamonds website.

119. In so doing, Radar acted in bad faith.

120. As a direct and proximate result of Radar’s breach of the covenant of good faith and

fair dealing, Word Diamonds has suffered substantial harm in an amount to be determined at trial.

SEVENTH CAUSE OF ACTION

BREACH OF FIDUCIARY DUTY

(By Paley Against Spivack and Hall)



122. The Director Defendants owe fiduciary duties to Ms. Paley because of her status as a

minority shareholder of Radar, including the duty to act with due care and the utmost good faith and

loyalty.

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123. On information and belief, the Director Defendants’ knowingly structured the

conveyance of substantially all of Radar’s assets to Evri in order to specifically devalue Ms. Paley’s

investments in Radar and create disproportionate benefits for Radar’s other stockholders and

creditors, thereby breaching the fiduciary duties they owed to Ms. Paley.

124. As a direct and proximate result of Defendants’ breaches of their fiduciary duties, Ms.

Paley has suffered substantial harm in an amount to be determined at trial.

125. In addition, on information and belief, Defendant Spivack’s actions were conducted

with malice, oppression, and/or fraud so as to warrant an award of exemplary and punitive damages

in favor of Ms. Paley.

EIGHTH CAUSE OF ACTION

DECLARATORY JUDGMENT

(By Paley Against Radar)



127. There are actual bona fide and substantial issues in dispute between the parties

concerning (1) whether Ms. Paley’s $3 million debt investment was properly converted to equity

under the terms of the 2008 Purchase Agreement and Note; and (2) whether Ms. Paley is entitled to

demand repayment of her $3 million debt investment under the terms of the 2008 Purchase

Agreement and Note.

128. A declaratory judgment of the rights and responsibilities of the parties under the 2008

Purchase Agreement and Note is appropriate and necessary to settle these disputes.

NINTH CAUSE OF ACTION

ACCOUNTING

(By Paley Against Radar and Evri)

129. Plaintiffs incorporate by reference as if set forth in full herein, the allegations of


130. Defendants squandered and misused the proceeds of Ms. Paley’s investment in Radar

pursuant to the 2007 and 2008 Purchase Agreements.

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131. Defendants possess complete and unfettered control over the books and records of

Radar concerning the disposition of the proceeds from Ms. Paley’s investment.

132. Ms. Paley demands access to Radar’s books and records, as well as a complete

accounting of the disposition of the proceeds of Ms. Paley’s $5 million investment in Radar.

TENTH CAUSE OF ACTION

CONVERSION

(By Word Diamonds Against Radar, Spivack and Evri)



134. At all relevant times, Word Diamonds was entitled to the possession of the valuable

information and property it provided to Radar.

135. Defendants have deprived Word Diamonds of a property interest and converted the

same for their own use.

136. On numerous occasions, Word Diamonds has demanded the immediate return of its

information and property, but Defendants have refused to return it.

137. Defendants’ actions constitute unlawful conversion.

138. As a direct and proximate result of Defendants’ refusal to return Word Diamonds’

property, Word Diamonds has suffered substantial harm in an amount to be determined at trial. In

addition, because Defendants’ conduct was willful, wanton, malicious, and oppressive, and

undertaken with the intent to defraud, Word Diamonds seeks exemplary and punitive damages.

ELEVENTH CAUSE OF ACTION

CONVERSION

(By Paley Against Radar, Spivack and Evri)



140. Radar was not authorized to use the proceeds of Ms. Paley’s debt investments

pursuant to the 2007 and 2008 Purchase Agreements for purposes other than “the continued

development of Twine.com and to create and manipulate semantic data and content.”

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141. In addition, Radar was not permitted under the terms of the 2008 Purchase Agreement

and Note to convert Ms. Paley’s $3 million debt investment into equity.

142. Because of Defendants’ conduct, Ms. Paley was entitled to possession of the money

she invested in Radar.

143. Defendants have converted Ms. Paley’s investment for their own use.

144. On numerous occasions, Ms. Paley has demanded the return of her investment, but

Defendants have refused to return it.

145. These actions, and the other actions set forth in this Complaint, deprived Ms. Paley of

her valuable interests as a debt holder in Radar.

146. Defendants’ actions constitute unlawful conversion.

147. As a direct and proximate result of Defendants’ actions, Ms. Paley has suffered

substantial harm in an amount to be determined at trial.

148. In addition, because Defendants’ conduct was willful, wanton, malicious, and

oppressive, and undertaken with the intent to defraud, Ms. Paley seeks exemplary and punitive

damages.

TWELFTH CAUSE OF ACTION

CALIFORNIA UNFAIR COMPETITION LAW

(By Paley Against Radar, Spivack and Evri))



150. The activities of Defendants relating to the 2007 and 2008 Purchase Agreements and

the Services Agreement constitute unlawful, unfair, and/or fraudulent business practices, and thus

unfair competition pursuant to Business & Professions Code § 17200, et seq.

151. Plaintiff suffered injury in fact and have lost money or property as a result of such

unfair competition.

152. The harm associated with Defendants’ conduct far outweigh any benefits.

153. Because of Defendants’ violations of California’s Unfair Competition Law, Ms. Paley

is entitled to restitution and other such relief as provided by law.

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THIRTEENTH CAUSE OF ACTION

CONSTRUCTIVE TRUST

(By Paley Against Radar, Spivack and Evri)



155. As a proximate result of Defendants’ fraudulent misrepresentations and otherwise

wrongful conduct as alleged herein, Ms. Paley has suffered significant harm.

156. In particular, by virtue of the actions described above, Defendants are in possession of

$5 million that, in equity, they ought not to hold.

157. By reason of the fraudulent and otherwise wrongful manner in which the Defendants

obtained their alleged right, claim or interest in Ms. Paley’s $5 million investment, Defendants have

no legal or equitable right, claim or interest therein, but, instead, are involuntary trustees holding Ms.

Paley’s investment in constructive trust for her, with the duty to convey Ms. Paley’s investment to

her.

158. As a result, Ms. Paley requests that all property, including bank accounts of Radar and

Evri, in the amount of $5 million be declared in a constructive trust for Ms. Paley.

159. Ms. Paley also seeks equitable relief, including the return of such property, with

interest.

PRAYER

WHEREFORE, Plaintiffs prays for the following relief against Defendants:

1. Damages suffered by Ms. Paley as a result of Radar’s breaches of the 2008 Purchase

Agreement, in an amount to be determined at trial;

2. Rescission of Ms. Paley’s $5 million investment in Radar, plus applicable interest;

3. An order: (i) setting aside the above-referenced conveyance be to the extent necessary

to satisfy Ms. Paley’s claim and/or granting an attachment against the assets conveyed. Ms. Paley

further seeks an injunction against preventing further disposition of the conveyed assets by Radar or

Evri.

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4. Damages suffered by Word Diamonds as a result of Radar’s breach of the Services

Agreement, in an amount to be determined at trial;

5. A declaration that Ms. Paley’s $3 million debt investment in Radar was not properly

converted to equity under the terms of the 2008 Purchase Agreement and Note;

6. A declaration that Ms. Paley’s $3 million debt investment is due and owing under the

terms of the 2008 Purchase Agreement and Note.

7. An order directing Radar to return all information provided to it by Word Diamonds

over the course of their relationship;

8. General and special damages, in an amount according to proof;

9. Restitution;

10. Imposition of a constructive trust in the amount of $5 million;

11. Punitive damages against Defendants Radar, Evri and Spivack;

13. Prejudgment and postjudgment interest;

14. Equitable relief; and

15. Such other relief as the Court deems just and proper.

JURY DEMAND

Plaintiffs demand a trial by jury for all issues triable by a jury.

DATED: November 17, 2010 GIBSON, DUNN & CRUTCHER LLP

G. CHARLES NIERLICH LINDSEY BLENKHORN

By: G. Charles Nierlich

Attorneys for Plaintiffs KATE PALEY AND WORD DIAMONDS, LLC

Paley Second Amended Complaint_RW EDITS (2).DOC

paley vs radar networks, ross second amended complaint

Documents

manipulate

falsely assured

radars flagship

suffered substantial

radar afloat

radars board

word diamonds

relevant time