Exclusive: Bebo founders, shareholders sue owner for ‘destroying’ site

Bebo, which has hit one rocky patch after another the past few years, now has new troubles. The social network’s founders and some other shareholders are suing its current owner, alleging fraud.

Original co-founders Michael and Xochi Birch’s MXB Holdings, Ron Conway’s SV Angel investment vehicle, TV executive Michael Jackson and entrepreneur Richard Hecker have filed suit against Criterion Capital Partners (CCP), which took Bebo off AOL’s hands in June 2010, and its CEO Adam Levin.

The quartet, which invested in Criterion’s Bebo six months after it was dumped by AOL, is seeking $5 million in damages. Their filing in San Francisco alleges:

  • Criterion has “exploited” Bebo and has been “fraudulent” by “using its operating capital to pay the salaries of Criterion’s staff”, including $14,000 per month to Levin.
  • Criterion has “withheld” Bebo financial operation details from shareholders.
  • Bebo has “operated for 20 months and has failed to hold a single board meeting or shareholder meeting”, including one to discuss “a decision to pass on opportunities to sell the company and realise shareholder value”.
  • Bebo’s reputation is being hurt by racking up defaults for failing to respond to lawsuits. Bebo defaulted on its San Francisco lease and moved to Criterion’s Los Angeles HQ without board or shareholder approval.

Criterion has not yet filed a response through the court, but CEO Adam Levin told paidContent: “We believe this to be a baseless claim and amounts to a fishing expedition.” A pre-trial hearing is scheduled to take place in San Francisco on August 8.

The dispute is the latest twist in the tale of the teen-focused social network, which the Birches founded in 2005 and which AOL bought from the couple and other original investors in 2008 for a stratospheric $850 million.

AOL off-loaded Bebo to Criterion in June 2010. Six months later, Criterion recapitalised the site by tapping the Birches and the others for new investment. Michael Birch returned as strategic advisor. The plaintiffs are amongst r minority shareholders.

New suitors for Bebo, including a media company, knocked on Criterion’s door within weeks, GigaOM reported at the time. But no sale happened.

In addition to damages, the plaintiffs now want a receiver to be appointed to run the social network – a move which could let them benefit from a subsequent re-sale. That would mean a fourth owner for Bebo in seven years.

The business relationships have gone spectacularly sour. In their filing, the four plaintiffs complain Criterion’s Levin “has not dedicated sufficient time and energy to the operation” and “would almost never show up at Bebo’s office”.

And they say “gross mismanagement” was to blame for Bebo going offline for two days this January – an outage which caused even Michael Birch, at the time, to suppose the site had disappeared for good.

Criterion has not arrested Bebo’s traffic decline, but has previously claimed to have made Bebo profitable by cutting costs and bringing in engineering talent to refresh the technology under Xbox co-creator Kevin Bachus as chief product officer.

Criterion director Tristan Lazareff is also named as a defendant. Criterion buys and tries to turn around troubled companies. More company background:

  • After acquiring Bebo, it salvaged video technology from a UK broadcasters’ joint venture to build TV show aggregator SeeSaw. But the service collapsed last year after money Criterion said it had been promised by an investor failed to materialise.
  • On the same day Criterion acquired SeeSaw, its CEO Levin and an associate, Hollywood veteran Dan Adler, also bought the troubled Beitar Jerusalem football club. But that deal was aborted after a dispute with the club’s conservative owner.
  • Last year, Criterion acquired 10 Fatburger fast food restaurants in California, to go with a franchise of Papa John’s pizzeria it also owned.