MarchFirst management in $50m lawsuit

4 March 2002 MarchFirst’s former CEO and senior management have been accused of wasting millions of dollars trying to build a “façade of success” as the Internet services company ran out of money, according to a bankruptcy court filing.

CEO Robert Bernard and other senior managers have been accused on 11 counts of breach of fiduciary duty. They now face a lawsuit brought by the bankruptcy trustee, who is seeking up to $50 million (€57.8m) in damages for stockholders from insurance policies that covered MarchFirst’s senior management.

MarchFirst filed for Chapter 11 bankruptcy protection in April 2001, before being put into Chapter 7 liquidation just weeks later.

Bankruptcy trustee Andrew Maxwell lists a catalogue of “abuses [that] continued and accelerated while MarchFirst was in the vicinity of insolvency”. He added that management and the board of directors “recklessly, intentionally and knowingly breached their duties to the company and its creditors.”

MarchFirst went bust not just as a result of the collapse of the dot-com sector, but because the company’s management wasted “untold millions of dollars by building an infrastructure for growth that did not exist at MarchFirst,” concludes Maxwell.

The consultancy’s top brass have also been accused of artificially inflating the company’s growth by setting up an elaborate charade of ’round-tripping’.

This involved investing in numerous start-ups, which subsequently handed the funds back to MarchFirst in return for consulting services performed by the Internet services company. Booking revenue improperly was a widespread practice, according to Maxwell. Several lawsuits alleging similar charges have been combined into a single case.

Chicago, Illinois-based MarchFirst was founded in 1995 as Web site developer USWeb. The company initially engaged in an acquisition spree to scoop up around 50 other small “Web shops” in the US in a bid to become a national US Web developer, before acquiring UK-based Xplora in April 1998.

MarchFirst was created as a result of USWeb’s two biggest mergers: with advertising agency CKS in September 1998 in a $324 million (€375m) stock deal; and with systems integrator Whittman-Hart in December 1999 in a deal worth $7.9 billion (€9.1bn), also in stock.

The old Whittman-Hart systems integration business – which was profitable – was off-loaded to Andrew ‘Flip’ Filipowski’s Divine for just $12.5 million (€14.5m) in cash and $57.5 million (€66.6m) in notes payable over five years, weeks before MarchFirst filed for Chapter 11.

Indicative of the hubris that surround the company, it had started building – but never finished – a “grandiose” headquarters boasting 650 parking spaces and 380,000 square feet of space. The management also made use of a corporate jet, among other extravagant expenses, according to the bankruptcy filing.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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