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Nishan Founder: VCs Screwed Me

One of the founders of Nishan Systems -- acquired by McData Corp. (Nasdaq: MCDTA) for $83 million in cash this summer -- has filed a lawsuit charging that two of Nishan's venture capital backers, certain Nishan executives, and McData cheated him and other holders of the startup's common stock out of their fair share of the proceeds from the deal.

Aamer Latif, who was president and CEO of Nishan from its founding in 1998 until 2002, says in his lawsuit that ComVentures, Lightspeed Venture Partners, and others conspired to make the terms of the McData acquisition more favorable to Nishan's preferred shareholders -- in other words, themselves -- rather than its common shareholders. [Disclosure: Lightspeed Venture Partners is an investor in Light Reading Inc., publisher of Byte and Switch.] Latif, who was a member of Nishan's board of directors, held 7.3 million shares of Nishan common stock.

"Nishan and certain of its officers and directors... individually, and in combination, defiled the corporate trust by, among other things, first illegally purchasing votes to ensure the consent of certain shareholders to, then misallocating the proceeds of, a merger agreement that disproportionately favors the defendant shareholders," says Latif's complaint.

Latif filed his original lawsuit in Santa Clara County Superior Court on Sept. 11, 2003, less than a month after McData announced plans to buy Nishan. McData said it would pay $83 million in cash and assume $2 million in debt, a price tag notably under the $100 million-plus investors had pumped into Nishan (see McData Sweeps Up Nishan, Sanera). Latif, represented by San Francisco law firm Sagy Law Associates, filed an amended complaint on Oct. 10. The news of his suit was first reported this Sunday by the The Mercury News of San Jose, Calif.

The lawsuit names as individual defendants Roland Van der Meer, partner with ComVentures; Gill Cogan, general partner with Lightspeed; Robert Russo, CEO of Nishan; and John McGraw, who was appointed interim CEO of Nishan after Latif departed in May 2002.

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