In the cozy confines of bankruptcy court, Webvan was supposed to be insulated from nasty things like shareholder lawsuits.
At least, that was the general perception in mid-July when the online grocery delivery service announced it had burned through most of its cash and filed for bankruptcy protection.
Under U.S. law, the filing is supposed to shield Webvan from lawsuits. The way the system works, litigation against a company gets put off while its case winds its way through bankruptcy court.
Given that tidy set of protections, investors may have been surprised a few days ago to find Webvan featured front and center in a brand new shareholder lawsuit from a class-action law firm.
The suit, filed by the law firm Wolf Haldenstein Adler Freeman & Herz, charges that Webvan's executives and underwriters conspired to pump up share prices during the e-grocer's much-hyped initial stock offering in 1999. It asks that investors be paid back some of what they lost.
In most aspects, the suit is virtually identical to dozens of other lawsuits filed by class-action firms this year against tech firms charged with deceiving investors into paying exorbitant sums for now-worthless stock.
In Webvan's case, however, there's one major difference: Webvan itself isn't getting sued. Instead, lawyers opted to go after everyone else who might have played a big role in the financial disaster, including founder Louis Borders, ex-CEO George Shaheen, and nine investment banks that signed on to handle Webvan's stock market debut.
"People lost money because of the things that they did, and they should pay," said Fred Taylor Isquith, a securities lawyer at Wolf Haldenstein. Although he wishes he could sue Webvan too, suing the people in charge of the company and its stock offering is the next best thing.
Webvan isn't the only bankrupt company whose officers and underwriters are now implicated in a messy class-action lawsuit.
Former executives, directors and bankers for eToys -- which declared itself bankrupt in March following a disastrous holiday season -- are named as defendants in two class-action lawsuits filed in July by Wolf Haldenstein and Milberg Weiss.
Ex-honchos and bankers of Value America -- which was one of the first big-name Net retailers to go bankrupt, in August 2000 -- are also the subjects of a belated barrage of litigation by the same two firms.
That's not to mention the scores of companies that first got sued when they were still solvent but have since filed for bankruptcy. That list includes Internet service provider PSINet, DSL provider Rhythms NetConnections and network builder Winstar Communications.
David Lisi, a securities lawyer at Fenwick & West, said it's not common historically for class-action lawyers to pursue shareholder suits against officers of bankrupt companies. However, these are unusual times, and that may be fueling the lawsuit boom.
After all, the roller-coaster-like rise and fall of Net and telecom stocks in the past two years was a spectacle unmatched in the annals of American investment history. Huge sums were made. Huge sums were lost. For class-action lawyers, it's no surprise that huge sums are also being litigated over.
"On some level, the plaintiffs are making a statement and saying 'We're going to pursue these cases,'" Lisi said.
They're not letting a little thing like a bankruptcy filing get in the way.
Most of the cases brought against the bankrupt firms are pretty much the same as the ones that have been filtering in for months against the tech firms and investment banks that participated in the red-hot IPO market of 1999 and 2000.
Over the last five months, class-action law firms have filed suits against all of Wall Street's most prominent investment banks, along with the companies that profited most abundantly during the days of the Internet stock bubble.
The suits -- filed against defendants ranging from Merrill Lynch to MP3.com -- charge that banks played a major role in fostering the inflated valuations of new stock offerings in 1999 and 2000.
By illegally manipulating offerings in technology and Internet companies, the suits allege, investment banks made sure that shares of newly public companies would soar in early trading. Many individual investors who bought IPO shares at peak prices were left holding the bag when the stocks crashed in the months that followed.
Whether the new suits targeting directors and officers are likely to succeed is anybody's guess. Part of the lure for class-action lawyers, however, is that many companies carry what is known as directors and officers insurance. These policies provide coverage when a company's executives or board members get sued.
Lisi believes that leaving bankrupt or near-bankrupt corporations out of the suits also makes it easier for plaintiffs' lawyers to concentrate on getting money from the deep-pocketed Wall Street investment banks that helped pump up their stocks.
With so many of the companies that were original targets of lawsuits now broke or nearly broke, it should be no surprise that law firms are looking for new victims, said Michael St. James, a bankruptcy lawyer in San Francisco. Since they can't target a bankrupt firm, it makes sense to target the banker.
"In bankruptcy, it's routine to look around and say, 'Well, is there some other way to make money?'" St. James said.
