Paley Vs Radar Networks, Ross Second Amended Complaint

1 GIBSON, DUNN & CRUTCHER LLP
G. CHARLES NIERLICH, SBN 196611

2 GNierlich@gibsondunn.com
LINDSEY BLENKHORN, SBN 227484
3 LBlenkhorn@gibsondunn.com
555 Mission Street, Suite 3000
4 San Francisco, California 94105-2933
Telephone: 415.393.8200
5 Facsimile: 415.393.8306
6 Attorneys for Plaintiffs

KATE PALEY AND WORD DIAMONDS, LLC
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8
SUPERIOR COURT OF THE STATE OF CALIFORNIA
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IN THE COUNTY OF SAN MATEO
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KATE PALEY and WORD DIAMONDS, LLC, CASE NO. CIV-494701
12 a Delaware Limited Liability Company,
SECOND AMENDED COMPLAINT FOR:
13 Plaintiffs,
(1) FRAUD
14 v. (2) FRAUDULENT CONVEYANCE -
UNIFORM FRAUDULENT
15 RADAR NETWORKS, INC., a Delaware TRANSFER ACT
Corporation; NOVA SPIVACK; STEVE HALL; (3) FRAUDULENT CONVEYANCE -
16 ROSS LEVINSOHN; EVRI, INC., a Washington UNIFORM FRAUDULENT
Corporation; and DOES 1-100, inclusive, TRANSFER ACT
17 (4) BREACH OF CONTRACT
Defendants. (5) BREACH OF CONTRACT
18 (6) BREACH OF COVENANT OF GOOD
FAITH AND FAIR DEALING
19 (7) BREACH OF FIDUCIARY DUTY
(8) DECLARATORY JUDGMENT
20 (9) ACCOUNTING
(10) CONVERSION
21 (11) CONVERSION
(12) CALIFORNIA UNFAIR
22 COMPETITION LAW
(13) CONSTRUCTIVE TRUST
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DEMAND FOR JURY TRIAL
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SECOND AMENDED COMPLAINT

1 Plaintiffs Kate Paley and Word Diamonds, LLC allege and state as follows:
2 INTRODUCTION
3 1. This action arises from the concerted efforts of Radar Networks, Inc. (“Radar”), and
4 its executives, directors and agents, to take advantage of one of its angel investors. Radar and its
5 chief executive, Nova Spivack, misled Kate Paley about Radar’s financial condition and prospects in
6 order to induce her to invest millions of dollars. When the money ran out, Mr. Spivack again
7 returned to Ms. Paley with more false promises of positive returns, and a new story about how he
8 wanted to integrate her company, Word Diamonds, LLC (“Word Diamonds”), into Radar’s principal
9 product, Twine.com. Based on Mr. Spivack’s misrepresentations, Ms. Paley invested millions more
10 and lost millions more.
11 2. In fact, there was no prospect of significant returns, and Radar lacked either the will or
12 the ability to deliver on its promises concerning Word Diamonds. Instead, the overarching scheme,
13 recently consummated, was to use Ms. Paley’s money to keep Radar afloat long enough for it to
14 fraudulently convey its assets to a friendly company, leaving Ms. Paley with nothing.
15 3. Defendant Radar is a start-up company specializing in the development of semantic
16 web applications.
17 4. Ms. Paley is private individual who has spent much of her professional life pursuing
18 various opportunities related to her strong Christian faith. Among other things, Ms. Paley has
19 devoted millions of dollars, and thousands of hours of her time, to developing her own company,
20 Word Diamonds.
21 5. Word Diamonds is a one-of-a-kind, patent pending, website that allows users to
22 explore and map connections between various words and phrases in the Bible in a visually engaging
23 manner.
24 6. In 2007 and 2008, Ms. Paley invested a total of $5 million in debt in Radar – $2
25 million pursuant to a May 2007 Note and Warrant Purchase Agreement (the “2007 Purchase
26 Agreement”) and $3 million pursuant to an October 30, 2008 Note and Warrant Purchase Agreement
27 (the “2008 Purchase Agreement”).
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1 7. In order to induce her to make these investments, Radar and its executives and agents
2 deceived Ms. Paley by making misrepresentations to her concerning Radar’s financial condition and
3 prospects. In addition, they preyed on her desire to expose Word Diamonds to a larger audience by
4 promising to integrate Word Diamonds into Radar’s flagship product, Twine.com.
5 8. Radar also breached the 2008 Purchase Agreement by using the proceeds of Ms.
6 Paley’s investment for a variety of improper purposes, most of which were designed to keep Radar
7 afloat long enough for its assets to be fraudulently conveyed to a friendly company, Evri Inc.
8 (“Evri”), with strong ties to Radar’s management and board of directors.
9 9. In addition, rather than develop Word Diamonds, as it had promised to do, Radar
10 effectively destroyed much of the value that Ms. Paley had created.
11 10. Specifically, pursuant to a December 20, 2008 Cross-Licensing and Services
12 Agreement (the “Services Agreement”) between Word Diamonds and Radar, Radar was supposed to
13 improve the cross-functionality of the Word Diamonds website, and integrate the Word Diamonds
14 website with Twine.com.
15 11. Radar was unable or unwilling to execute on many of the tasks that it had agreed to
16 perform, however, including making the visual interface of the Word Diamonds website more
17 visceral. And when Ms. Paley directed Radar to discontinue those efforts and move on to more
18 productive work, Radar ignored her directive, and instead allowed an outside company, Stimulant, to
19 completely dismantle the Word Diamonds site, which, in effect, tripled the complexity and workload,
20 destroying its ability to function for the purpose for which it was built and designed.
21 12. In addition, for a period of nearly a year, Radar refused to allow Ms. Paley to access
22 the site or correct any of the problems that Radar itself had created.
23 13. Unsurprisingly, Ms. Paley’s investment in Radar has proved disastrous. As a result of
24 Defendants’ fraud, and Radar’s breaches of the Purchase Agreements, Ms. Paley’s entire investment
25 has been lost. After three years, millions of dollars, and thousands of hours, she has been left with
26 nothing to show for her efforts except a broken site with no functionality.
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1 THE PARTIES
2 14. Plaintiff Kate Paley resides in Warren, Connecticut. She is the creator and sole owner
3 of Word Diamonds. During the relevant time period, Ms. Paley was a minority shareholder in Radar.
4 15. Plaintiff Word Diamonds is a Delaware limited liability company with its principal
5 place of business in Warren, Connecticut. Word Diamonds is an interactive website designed to
6 allow users to “unpack” the Bible by exploring the many facets and origins of the words and
7 expressions used in the Bible. Among other things, Word Diamonds should allow users to
8 graphically draw connections among word passages in the Bible, and to share those connections with
9 other users.
10 16. Defendant Radar is a Delaware corporation with its principal place of business in San
11 Francisco, California. The primary business of Radar is developing semantic web applications for
12 the general public. Radar introduced its first commercial product, Twine, in 2008. Twine is an
13 online, social web service for information storage, authoring and discovery.
14 17. On information and belief, during the relevant time period, Defendants Nova Spivack,
15 Steve Hall, and Ross Levinsohn (“Director Defendants”) served on Radar’s Board of Directors.
16 18. Defendant Nova Spivack is a resident of California. He is the founder of Radar, and
17 was its Chief Executive Officer prior to its recent acquisition by Evri.
18 19. Defendant Steve Hall is a resident of California. He is a Managing Director of Vulcan
19 Capital and heads all of Vulcan Capital’s early stage venture capital investments. On information
20 and belief, during the relevant time period, Vulcan Capital invested millions of dollars in Radar and
21 was Radar’s largest single shareholder. Mr. Hall also serves as a director of Defendant Evri, Inc.
22 (“Evri”). During the relevant time period, Vulcan Capital invested $8 million in Evri, was Evri’s sole
23 source of venture capital funding, and was Evri’s single largest shareholder. On information and
24 belief, Mr. Hall had primary responsibility for overseeing Vulcan Capital’s investment in both Radar
25 and Evri.
26 20. Defendant Ross Levinsohn is a resident of California. He is also a partner with Fuse
27 Capital, formerly Velocity Interactive Group. Velocity was the lead investor in Radar’s $13 million
28 Series B round of venture capital financing in February 2008.
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1 21. Defendant Evri is a Washington corporation based in Seattle, Washington. Evri’s
2 principal product is a search and discovery engine that filters the real-time web for news and
3 conversations and distills them into intelligent information streams. Evri is funded by Vulcan
4 Capital, the same investment vehicle that provided significant funding to Radar. On March 11, 2010,
5 Evri announced that it had acquired substantially all of Radar’s assets.
6 22. The true names and capacities, whether individual, corporate, associate, governmental,
7 or otherwise, of defendants Does 1 through 100 are unknown to Plaintiffs at this time. Plaintiffs
8 therefore sue said defendants by such fictitious names. When the true names and capacities of said
9 defendants have been ascertained, Plaintiffs will amend this complaint accordingly. Plaintiffs are
10 informed and believe, and thereon allege, that each defendant designated herein as a Doe is
11 responsible, willfully, negligently, or in some other actionable manner, for the events and happenings
12 hereinafter referred to, violated California or other laws, and caused plaintiffs and each of them harm
13 and damages, as hereinafter alleged.
14 FACTUAL BACKGROUND
15 Radar Fraudulently Induces Ms. Paley to Enter into the May 2007 Note and Warrant Purchase
16 Agreement
17 23. Ms. Paley’s dealings with Radar began in 2007.
18 24. In early April 2007, Ms. Paley entered into discussions with Radar’s founder, Nova
19 Spivack, about a possible multi-million dollar investment in Radar.
20 25. Prior to investing, Ms. Paley emphasized to Mr. Spivack that she was extremely
21 concerned about the potential risk of investing in Radar, going so far as to tell Mr. Spivack in an
22 April 18, 2007 email, “Nova, I really can’t lose this money, it would be really bad if I did.”
23 26. In an attempt to induce her to invest, Mr. Spivack responded by emphasizing the
24 “tremendous upside potential” of the semantic web and falsely assured Ms. Paley that Radar had
25 “huge upside” and the “potential for great reward.”
26 27. Mr. Spivack further assured Ms. Paley that “we have done quite a bit of work over the
27 last year to reduce risk compared to our earlier days – for example, we’ve assembled great investors,
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1 one of the best teams in the industry for this opportunity, and we’ve built unique technology and a
2 potential ‘killer app.’”
3 28. Playing on Ms. Paley’s deep spirituality, Mr. Spivack also held himself out to Ms.
4 Paley as a deeply religious person who wanted Ms. Paley to invest in Radar because of their
5 “spiritual connection.” Mr. Spivack even went so far as to tell Ms. Paley that he regarded her interest
6 in Radar as a “sign from God.”
7 29. In reliance on Mr. Spivack’s knowing false and misleading representations to her, Ms.
8 Paley agreed in May 2007 to invest $2 million pursuant to the May 2007 Purchase Agreement with
9 Radar. In the first quarter of 2008, Radar purported to convert Ms. Paley’s initial debt investment
10 into equity, leaving her as a minority shareholder of Radar.
11 Radar’s Fraud Continues – Ms. Paley Enters into the October 30, 2008 Note and Warrant
12 Purchase Agreement in Reliance on Radar’s Misrepresentations
13 30. In mid-2008, Mr. Spivack again approached Ms. Paley about making a further
14 investment in Radar. In order to induce her to invest more money, Mr. Spivack knowingly
15 misrepresented to Ms. Paley that Radar was interested in integrating Ms. Paley’s Word Diamonds’
16 website into Radar’s flagship product, Twine.com. Specifically, on October 21, 2008, Mr. Spivack
17 told Ms. Paley in various emails:
18 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
19 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
20 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
21 [Word Diamonds]. What do you think?
22 [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.
23
I love the fact that this gives you a way to “monetize” your investment in Word
24 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
25 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
26 ride out the economic downturn if necessary. It’s a thing of beauty.
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1 31. Mr. Spivack also falsely assured Ms. Paley that he was “deep in discussions with other
2 big companies . . . about investing in Twine” and that he was “confident that a lot more money” was
3 forthcoming.
4 32. In fact, on information and belief, Radar’s prospects for the future were not nearly as
5 bright as Mr. Spivack suggested because, among other things, there were no other credible investors
6 on the horizon. In addition, on information and belief, Radar never had any intention of devoting the
7 resources necessary to integrate Word Diamonds into Twine.com.
8 33. In reliance on Radar’s misrepresentations, Ms. Paley invested another $3 million on
9 October 30, 2008 pursuant to the 2008 Purchase Agreement.
10 Radar Breaches the 2008 Purchase Agreement
11 34. In addition to the promises Radar made to Ms. Paley before she invested, the express
12 terms of the 2008 Purchase Agreement required Radar to use the proceeds of Ms. Paley’s $3 million
13 investment solely “for the continued development of Twine.com and to create and manipulate
14 semantic data and content.” A related schedule specifically allocated Ms. Paley’s $3 million
15 investment to discrete tasks, as follows:
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Development of a Next Generation Visual Interface. Integration of the $1 million
17 Visual Interface into Twine.com
18
Migration of Word Diamonds into Twine and initial configuration, setup, $200,000
19 etc.
20
Ongoing technical support, systems administration, and editorial $370,000
21 maintenance
22
Infrastructure expansion $300,000
23
24 Ongoing administrative and management support $300,000

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Development of combined features $830,000
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27 Total $3 million
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1 35. In fact, in breach of the 2008 Purchase Agreement, Radar used the proceeds of Ms.
2 Paley’s investment for a variety of improper purposes, including solicitation of traffic from Google in
3 the hopes that obtaining such traffic would allow the Company to secure additional financing.
4 36. Ms. Paley has demanded on several occasions that Radar provide information
5 sufficient to indicate how it disposed of the proceeds of her investment, but Radar has refused to
6 provide such information.
7 Radar Improperly Converts Ms. Paley’s Debt to Equity
8 37. Radar also improperly, and in breach of the 2008 Purchase Agreement, purported to
9 convert Ms. Paley’s $3 million debt investment into equity. Under Section 1.5 of the 2008 Purchase
10 Agreement, and Section 2.1 of Convertible Promissory Note (the “Note”) attached as Exhibit B to the
11 2008 Purchase Agreement, Ms. Paley’s debt converted automatically into equity only in the event
12 that Radar consummated a new $4 million equity financing.
13 38. Section 1.2 of the Note further stated that Ms. Paley’s $3 million Note was due and
14 payable in the event of “(a) demand by Lender after September 30, 2009, . . . (c) a Change of Control,
15 or (d) demand by Lender following the occurrence of an Event of Default.”
16 39. As a practical matter, then, Ms. Paley had an unfettered right to immediately call her
17 $3 million debt investment in the event that Radar (1) failed to consummate an equity financing by
18 September 30, 2009; (2) was sold to another company; or (3) defaulted under the 2008 Purchase
19 Agreement.
20 40. On September 21, 2009 (just nine days before the September 30, 2009 deadline),
21 Radar notified Ms. Paley that her debt had been converted to equity pursuant to an equity investment
22 that purportedly occurred on September 15, 2009.
23 41. This was a ruse. On information and belief, Radar had not consummated the $4
24 million equity financing necessary to convert Ms. Paley’s debt into equity, but rather had secured
25 only $800,000 from two funds – Vulcan Capital, where Radar board member Steve Hall serves a
26 Managing Director, and Fuse Capital, where Radar board member Ross Levinsohn is a partner and
27 member of a seven-person Investment Team. Ms. Paley remained a minority shareholder in Radar
28 after this improper conversion.
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1 42. On information and belief, Radar purported to consummate an equity financing
2 sufficient to convert Ms. Paley’s debt to equity because it knew that, absent such conversion, Ms.
3 Paley had the right to demand repayment because of Radar’s breaches of the 2008 Purchase
4 Agreement and in addition had an unfettered right to demand repayment on September 30, 2009.
5 43. Because Radar did not meet the requirements under the 2008 Purchase Agreement for
6 converting Ms. Paley’s $3 million Note to equity, pursuant to Section 1.2(a) of the 2008 Purchase
7 Agreement, Ms. Paley is entitled to demand repayment of the Note for any reason whatsoever.
8 44. In addition, Evri’s acquisition of substantially all of Radar’s assets on March 11, 2010
9 constituted a Change of Control pursuant to Section 1.2(c) of the 2008 Purchase Agreement.
10 45. Finally, the breaches described above constitute Events of Default under Section 1.3
11 of the 2008 Purchase Agreement.
12 46. For these reasons, Ms. Paley is entitled to immediate repayment of the $3 million Note
13 pursuant to the terms of the 2008 Purchase Agreement and the Note.
14 The Scheme Continues – Radar’s Breaches of the December 20, 2008 Cross-License & Services
15 Agreement
16 47. On December 20, 2008, Word Diamonds entered into a Cross-License & Services
17 Agreement (“Services Agreement”) with Radar.
18 48. Ms. Paley invested millions of dollars in developing the Word Diamonds website prior
19 to entering into the Services Agreement with Radar. At the time the parties signed the Services
20 Agreement, the Word Diamonds website was virtually bug free and offered visitors an attractive, user
21 friendly, interface.
22 49. Pursuant to Section 7.l of the Services Agreement, Radar agreed to engage “qualified
23 personnel” to perform various services relating to the Word Diamonds website in a “timely and
24 professional manner.”
25 50. In addition, the parties agreed to a schedule whereby Radar committed to migrate
26 Word Diamonds onto a Radar server, and complete any related debugging by the end of April 2009.
27 In addition, Radar agreed to complete and implement design updates to Word Diamonds by the end
28 of June 2009.
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1 51. On information and belief, Radar never had any intention of performing its obligations
2 under the Services Agreement, and expressed interest in the Word Diamonds website solely in order
3 to induce Ms. Paley to invest money in Radar.
4 52. Radar outsourced the development of Word Diamonds to less than qualified
5 companies named Stimulant and Lab Zero, even though it had promised that only Radar engineers
6 would be working on the site, and that the only outsourcing would be to agreed-upon top tier
7 development companies.
8 53. Within a few months of signing, it became apparent that Radar had no intention of
9 living up to its obligations under the Services Agreement and that the outsourcing companies were
10 not qualified to perform Radar’s obligations under the Services Agreement. In particular, it soon
11 became apparent that Stimulant was not qualified to work on any “visceral effects,” and had no
12 experience doing so.
13 54. Meanwhile, Mr. Spivack continued to assure Ms. Paley that Radar was prospering and
14 described Twine.com as “growing beautifully since we did the October public launch.”
15 55. In mid-2009, Ms. Paley discovered that Radar and Stimulant effectively had
16 dismantled the Word Diamonds website, and removed or destroyed virtually all of the useful cross-
17 functionality of the site, in the process destroying much of the value that Ms. Paley had created.
18 Radar and Stimulant dismantled Ms. Paley’s patented structure for the Word Diamonds website
19 against Ms. Paley’s express instructions, and without ever informing her.
20 56. Between May and August 2009, Ms. Paley communicated with Radar personnel on a
21 nearly daily basis concerning the problems that Radar was having integrating Word Diamonds with
22 Twine.com, and improving the cross-functionality of Word Diamonds. On numerous occasions, she
23 informed Radar that Stimulant was not competent to work on visceral effects, and should focus on the
24 visualization or design of other functions, rather than on programming.
25 57. Nevertheless, Radar and Stimulant continued to experiment with visceral effects, and
26 ultimately destroyed virtually all of the website’s useful cross-functionality, while tripling the
27 complexity and workload of an enormous application.
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1 58. Unable or unwilling to fix the many problems Ms. Paley indentified, Mr. Spivack
2 eventually acknowledged in an August 21, 2009 email that “there were some unexpected delays . . . .
3 We are sorry for those delays and we can and should take responsibility for those we caused.”
4 Radar Pressures Ms. Paley to Waive and/or Not Exercise Her Rights under the Purchase
5 Agreements and the Services Agreement
6 59. By August 2009, Ms. Paley was so frustrated that she reached out to Radar board
7 member, Steve Hall, to discuss Radar’s egregious breaches of the Services Agreement.
8 60. During August and September 2009, Mr. Hall participated in two conference calls and
9 several email exchanges with Ms. Paley and others at Radar, in an attempt to resolve the parties’
10 disputes.
11 61. It soon became apparent that Defendants were less concerned with Radar’s breaches
12 of the Services Agreement, and more concerned with trying to coerce Ms. Paley into waiving her
13 rights under the Purchase Agreements and Services Agreement and investing still more money in
14 Radar.
15 62. On numerous occasions, Radar’s management and attorneys threatened legal action
16 against Ms. Paley, and told her that her efforts to protect her rights under the Purchase Agreements
17 and the Services Agreement were preventing the Company from raising additional capital. In one
18 October 4, 2009 email, for example, Mr. Spivack made his threats explicit:
19 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 –
20 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
21 my board and it will put our new investment round at risk, possibly resulting in the
company shutting down.
22
63. In fact, Radar’s struggles to obtain financing had virtually nothing to do with Ms.
23
Paley’s efforts to preserve her rights under the Purchase Agreements and the Services Agreement.
24
One potential investor candidly acknowledged to Ms. Paley that litigation was “the least of [his]
25
concerns” and that he had chosen not to invest because “Nova [had] consistently failed to be
26
intellectually honest about his own failings and the Company’s.”
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1 64. Finally, on November 7, 2009, Mr. Spivack admitted the dire nature of the company’s
2 financial condition, including the fact that he had hidden such condition from Ms. Paley: “But look,
3 if there truly is an objective mistake or shortcoming – I will want to see it fixed. The challenge is that
4 Radar is dead in the water, totally out of money, and so am I. I have nothing. . . . Radar is days from
5 going under unless we get funded. I’ve been in such a struggle – completely unrelated to WD – the
6 industry collapsed from under us. Our funding collapsed. We’ve had terrible struggles to keep our
7 investors from bailing out. It’s been so difficult. You just cannot imagine. I have tried to shield you
8 from all of that.”
9 65. At the end of the day, Ms. Paley was left with a non-functioning website that will need
10 to be completely rebuilt before any functionality can be restored.
11 66. Even more egregiously, for virtually all of 2009, Radar refused to provide Ms. Paley
12 back-end access to the Word Diamonds website thereby delaying her ability to try to correct the
13 damage that Radar and Stimulant inflicted. Radar’s refusal to provide Ms. Paley with access to her
14 own website was part of a concerted effort to hide the truth from Ms. Paley and to take advantage of
15 her. On information and belief, among other things, Defendants hoped that, by holding the Word
16 Diamonds website hostage, they could coerce Ms. Paley into waiving her litigation claims and
17 investing more money into Radar.
18 Radar Fraudulently Conveys Its Assets to Evri
19 67. Defendants consummated their scheme by fraudulently conveying substantially all of
20 Radar’s assets to a friendly acquirer named Evri on March 10, 2010.
21 68. Specifically, Radar conveyed substantially all of its assets to Evri in exchange for (i)
22 Evri’s assumptions of certain liabilities of Radar; (ii) payments by Evri to certain creditors of
23 Radar—but not Ms. Paley; and (iii) Evri’s issuance of stock to certain of Radar’s creditors. Radar
24 received no cash consideration from Evri.
25 69. As a Managing Director of Vulcan Capital (which was the largest single shareholder
26 of both Evri and Radar), and as the person responsible for overseeing Vulcan Capital’s investment in
27 Radar and Evri, Mr. Hall had a direct financial interest in the transaction between Radar and Evri.
28 Indeed, on information and belief, the amount of compensation that Mr. Hall receives as a result of
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1 his participation in Vulcan Capital depends on the success of certain of Vulcan Capital’s investments,
2 including the investments in Radar and Evri. Thus, Defendant Hall stood to receive a personal
3 financial benefit from Radar’s fraudulent conveyance of all of its assets to Evri. [Anything else we
4 can add here?]
5 70. Radar’s board approved the transaction with Evri on March 9, 2010, based on the
6 recommendation of an “Acquisition Committee.” Radar’s board formed the Acquisition Committee
7 on February 24, 2010 – just thirteen days before Radar’s board approved the transaction. The
8 Acquisition Committee consisted of only one person, Radar board member Ross Levinsohn.
9 71. On information and belief, Radar is insolvent as a result of its transaction with Evri.
10 72. According to Mr. Spivack, however, Radar received “numerous” offers for Radar
11 from “leading Internet and media companies,” including offers from companies that were “larger and
12 more established” than Evri.
13 73. On information and belief, Defendants concocted and participated in a conspiracy to
14 sell Radar to Evri in order to enrich themselves and to evade, hinder, delay and defraud Ms. Paley.
15 74. Indeed, at the time Radar’s board purported to approve the transaction, Defendant
16 Spivack already had agreed to a enter into a consulting agreement with Evri, and was engaged in
17 discussions about expanding his relationship with Evri.
18 75. At the time of Radar’s conveyance, Defendant Hall also had a financial stake in Radar
19 and Evri, as a result of his Vulcan’s Capital’s significant investments in both companies, and his
20 responsibility for overseeing those investments. Upon information and belief, Mr. Hall led and
21 currently oversees Vulcan Capital’s investment in Evri. Mr. Hall also was a member of Evri’s board
22 at the time of the transaction, and remains on Evri’s board.
23 Radar Refuses to Return Word Diamonds’ Property
24 76. Over the course of its relationship with Radar, Word Diamonds provided Radar with a
25 variety of information, including but not limited to: (1) information regarding the patent-pending
26 design of the web site; (2) copies of all site backups performed on Word Diamonds, since the site was
27 in the Company’s control; and (3) materials such as compact discs, books, and documents including,
28 without limitation, all punch lists and working documents from both Radar and Stimulant as well as
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1 files, visuals, and related materials. Ms. Paley has repeatedly requested that Radar return this
2 information, to no avail.
3 Radar Leaves No Value in the Word Diamonds Site
4 77. After three years of pouring money into Radar and what Ms. Paley believed was the
5 development of the Word Diamonds site, Ms. Paley finds herself with neither a remaining investment
6 nor a functioning site.
7 78. Since the sale of Radar to Evri, Ms. Paley has been forced to seek out other web
8 development and design firms to repair what Radar had effectively destroyed. These firms have
9 confirmed to Ms. Paley that all of the functionality in the site has been destroyed. Ms. Paley is now
10 in the process of rebuilding the Word Diamonds site in its entirety at her own expense.
11 FIRST CAUSE OF ACTION
12 FRAUD
13 (By Paley Against Radar and Spivack)
14 79. Plaintiff incorporates by reference as if set forth in full herein, the allegations of
15 paragraphs 1 through 78 of this Complaint.
16 80. In an intentional, malicious and fraudulent scheme to cheat and defraud Ms. Paley,
17 Defendants knowingly made misrepresentations and omissions of material fact to Ms. Paley as
18 described herein.
19 81. Defendants made these misrepresentations and omissions in an attempt to induce Ms.
20 Paley to invest money in Radar.
21 82. Ms. Paley, to her substantial detriment, reasonably relied on these misrepresentations
22 and omissions, and believing them to be true, invested $5 million in Radar.
23 83. Because Defendants fraudulently intended to induce Ms. Paley to detrimentally rely
24 on their intentional misrepresentations and omissions, and because Ms. Paley in fact relied to her
25 detriment on their intentional misrepresentations and omissions, and because Defendants concealed
26 their true intentions from Ms. Paley, Ms. Paley is entitled to damages in an amount to be determined
27 at trial, or in the alternative, rescission of her investment in Radar, plus applicable interest.
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1 84. In addition, because Defendants’ conduct was willful, wanton, malicious, and
2 oppressive, and undertaken with the intent to defraud, Ms. Paley seeks exemplary and punitive
3 damages.
4 SECOND CAUSE OF ACTION
5 FRAUDULENT CONVEYANCE – UNIFORM FRAUDULENT TRANSFER ACT
6 CIVIL CODE § 3439.04
7 (By Paley Against All Defendants)
10 86. Ms. Paley was a creditor and minority shareholder of Radar prior to Radar’s
11 conveyance of virtually all of its assets to Evri.
12 87. Radar conveyed its valuable assets to Evri with the actual intent to hinder, delay or
13 defraud its creditors, including Ms. Paley.
14 88. Accordingly, Radar’s sale of its assets to Evri is fraudulent as to the present creditors
15 of Radar, including Ms. Paley.
16 89. Defendants conspired to fraudulently transfer Radar’s valuable assets to Evri with the
17 actual intent to hinder, delay, or defraud Ms. Paley.
18 90. As directors of the debtor, and as persons with significant indirect financial interests in
19 Radar, Defendants Hall and Levinsohn were legally capable of engaging in a fraudulent conveyance.
20 91. Pursuant to the Uniform Fraudulent Transfer Act, Civil Code Section 3439.07, Ms.
21 Paley seeks an order: (i) setting aside the above reference conveyance to the extent necessary to
22 satisfy Ms. Paley’s claim and/or granting an attachment against the assets conveyed. Ms. Paley
23 further seeks an injunction preventing further disposition of the conveyed assets by Radar or Evri.
24 92. Ms. Paley also seeks damages in an amount to be proven at trial. In addition, because
25 Defendants’ conduct was willful, wanton, malicious, and oppressive, and undertaken with the intent
26 to defraud, Ms. Paley seeks exemplary and punitive damages against Radar, Evri and Defendant
27 Spivack.
28
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1 THIRD CAUSE OF ACTION
2 FRAUDULENT CONVEYANCE – UNIFORM FRAUDULENT TRANSFER ACT
3 CIVIL CODE § 3439.05
4 (By Paley Against All Defendants)
7 94. Ms. Paley was a creditor and minority shareholder of Radar prior to Radar’s
8 conveyance of virtually all of its assets to Evri.
9 95. Radar did not receive reasonably equivalent value for the assets it sold to Evri.
10 96. Radar became insolvent as a result of conveying its assets to Evri.
11 97. Accordingly, Radar’s sale of its assets to Evri is fraudulent as to the present creditors
12 of Radar, including Ms. Paley.
13 98. Defendants conspired to fraudulently transfer Radar’s valuable assets to Evri with the
14 actual intent to hinder, delay, or defraud Ms. Paley.
15 99. As directors of the debtor, and as persons with significant indirect financial interests in
16 Radar, Defendants Hall and Levinsohn were legally capable of engaging in a fraudulent conveyance.
17 100. Pursuant to the Uniform Fraudulent Transfer Act, Civil Code Section 3439.07, Ms.
18 Paley seeks an order: (i) setting aside the above-referenced conveyance be to the extent necessary to
19 satisfy Ms. Paley’s claim and/or granting an attachment against the assets conveyed. Ms. Paley
20 further seeks an injunction preventing further disposition of the conveyed assets by Radar or Evri.
21 101. Ms. Paley also seeks damages in an amount to be proven at trial. In addition, because
22 Defendants’ conduct was willful, wanton, malicious, and oppressive, and undertaken with the intent
23 to defraud, Ms. Paley seeks exemplary and punitive damages against Radar, Evri, and Defendant
24 Spivack.
25 FOURTH CAUSE OF ACTION
26 BREACH OF CONTRACT
27 (By Paley Against Radar)
28
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3 103. Ms. Paley and Radar are parties to a 2008 Purchase Agreement pursuant to which Ms.
4 Paley invested $3 million in debt in Radar.
5 104. Ms. Paley has performed all of her obligations under the 2008 Purchase Agreement.
6 105. Under Section 6.1 of the 2008 Purchase Agreement, Radar was supposed to use the
7 proceeds of Ms. Paley’s investment solely “for the continued development of Twine.com and to
8 create and manipulate semantic data and content.”
9 106. On information and belief, Radar used the proceeds of Ms. Paley’s $3 million
10 investment for a variety of improper purposes.
11 107. Radar’s misuse of the proceeds of Ms. Paley’s $3 million investment was a breach of
12 the express terms of the 2008 Purchase Agreement.
13 108. As a direct and proximate result of Radar’s breach of its obligations under the 2008
14 Purchase Agreement, Ms. Paley has suffered substantial harm in an amount to be determined at trial.
15 FIFTH CAUSE OF ACTION
16 BREACH OF CONTRACT
17 (By Word Diamonds Against Radar)
19 paragraphs 1 through 104 of this Complaint. Radar also is in breach of the Services Agreement
20 between Word Diamonds and Radar.
21 110. Word Diamonds and Radar are parties to a Services Agreement.
22 111. Word Diamonds has performed all of its obligations under the Services Agreement.
23 112. Pursuant to Section 7.l of the Services Agreement, Radar agreed to engage “qualified
24 personnel” to perform various services relating to the Word Diamonds website in a “timely and
25 professional manner.”
26 113. Radar breached its obligations under the Services Agreement by outsourcing its
27 obligations under the Services Agreements to companies, including Stimulant and Lab Zero, that
28 lacked the capability and sophistication necessary to perform the required work.
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1 114. Over the course of 2009, Radar and Stimulant systematically dismantled the Word
2 Diamonds website, and removed or destroyed virtually all of the useful cross-functionality of the site,
3 tripling the workload and complexity, and in the process destroying much of the value that Ms. Paley
4 had created.
5 115. As a direct and proximate result of Radar’s breach of its obligations under the Services
6 Agreement, Word Diamonds has suffered substantial harm in an amount to be determined at trial.
7 SIXTH CAUSE OF ACTION
8 BREACH OF COVENANT OF GOOD FAITH AND FAIR DEALING
9 (By Word Diamonds Against Radar)
12 117. Word Diamonds expected that Radar would use its best efforts to take actions in
13 support of the Services Agreement, and to provide services of the highest quality.
14 118. Instead, Radar took actions that effectively destroyed much of the value of the Word
15 Diamonds website.
16 119. In so doing, Radar acted in bad faith.
17 120. As a direct and proximate result of Radar’s breach of the covenant of good faith and
18 fair dealing, Word Diamonds has suffered substantial harm in an amount to be determined at trial.
19
SEVENTH CAUSE OF ACTION
20
BREACH OF FIDUCIARY DUTY
21
(By Paley Against Spivack and Hall)
22
121. Plaintiff incorporates by reference as if set forth in full herein, the allegations of
23
paragraphs 1 through 116 of this Complaint.
24
122. The Director Defendants owe fiduciary duties to Ms. Paley because of her status as a
25
minority shareholder of Radar, including the duty to act with due care and the utmost good faith and
26
loyalty.
27
28
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1 123. On information and belief, the Director Defendants’ knowingly structured the
2 conveyance of substantially all of Radar’s assets to Evri in order to specifically devalue Ms. Paley’s
3 investments in Radar and create disproportionate benefits for Radar’s other stockholders and
4 creditors, thereby breaching the fiduciary duties they owed to Ms. Paley.
5 124. As a direct and proximate result of Defendants’ breaches of their fiduciary duties, Ms.
6 Paley has suffered substantial harm in an amount to be determined at trial.
7 125. In addition, on information and belief, Defendant Spivack’s actions were conducted
8 with malice, oppression, and/or fraud so as to warrant an award of exemplary and punitive damages
9 in favor of Ms. Paley.
10 EIGHTH CAUSE OF ACTION
11 DECLARATORY JUDGMENT
12 (By Paley Against Radar)
15 127. There are actual bona fide and substantial issues in dispute between the parties
16 concerning (1) whether Ms. Paley’s $3 million debt investment was properly converted to equity
17 under the terms of the 2008 Purchase Agreement and Note; and (2) whether Ms. Paley is entitled to
18 demand repayment of her $3 million debt investment under the terms of the 2008 Purchase
19 Agreement and Note.
20 128. A declaratory judgment of the rights and responsibilities of the parties under the 2008
21 Purchase Agreement and Note is appropriate and necessary to settle these disputes.
22 NINTH CAUSE OF ACTION
23 ACCOUNTING
24 (By Paley Against Radar and Evri)
25 129. Plaintiffs incorporate by reference as if set forth in full herein, the allegations of
27 130. Defendants squandered and misused the proceeds of Ms. Paley’s investment in Radar
28 pursuant to the 2007 and 2008 Purchase Agreements.
Gibson, Dunn &

Crutcher LLP 19
1 131. Defendants possess complete and unfettered control over the books and records of
2 Radar concerning the disposition of the proceeds from Ms. Paley’s investment.
3 132. Ms. Paley demands access to Radar’s books and records, as well as a complete
4 accounting of the disposition of the proceeds of Ms. Paley’s $5 million investment in Radar.
5 TENTH CAUSE OF ACTION
6 CONVERSION
7 (By Word Diamonds Against Radar, Spivack and Evri)
10 134. At all relevant times, Word Diamonds was entitled to the possession of the valuable
11 information and property it provided to Radar.
12 135. Defendants have deprived Word Diamonds of a property interest and converted the
13 same for their own use.
14 136. On numerous occasions, Word Diamonds has demanded the immediate return of its
15 information and property, but Defendants have refused to return it.
16 137. Defendants’ actions constitute unlawful conversion.
17 138. As a direct and proximate result of Defendants’ refusal to return Word Diamonds’
18 property, Word Diamonds has suffered substantial harm in an amount to be determined at trial. In
19 addition, because Defendants’ conduct was willful, wanton, malicious, and oppressive, and
20 undertaken with the intent to defraud, Word Diamonds seeks exemplary and punitive damages.
21 ELEVENTH CAUSE OF ACTION
22 CONVERSION
23 (By Paley Against Radar, Spivack and Evri)
26 140. Radar was not authorized to use the proceeds of Ms. Paley’s debt investments
27 pursuant to the 2007 and 2008 Purchase Agreements for purposes other than “the continued
28 development of Twine.com and to create and manipulate semantic data and content.”
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1 141. In addition, Radar was not permitted under the terms of the 2008 Purchase Agreement
2 and Note to convert Ms. Paley’s $3 million debt investment into equity.
3 142. Because of Defendants’ conduct, Ms. Paley was entitled to possession of the money
4 she invested in Radar.
5 143. Defendants have converted Ms. Paley’s investment for their own use.
6 144. On numerous occasions, Ms. Paley has demanded the return of her investment, but
7 Defendants have refused to return it.
8 145. These actions, and the other actions set forth in this Complaint, deprived Ms. Paley of
9 her valuable interests as a debt holder in Radar.
10 146. Defendants’ actions constitute unlawful conversion.
11 147. As a direct and proximate result of Defendants’ actions, Ms. Paley has suffered
12 substantial harm in an amount to be determined at trial.
13 148. In addition, because Defendants’ conduct was willful, wanton, malicious, and
14 oppressive, and undertaken with the intent to defraud, Ms. Paley seeks exemplary and punitive
15 damages.
16 TWELFTH CAUSE OF ACTION
17 CALIFORNIA UNFAIR COMPETITION LAW
18 (By Paley Against Radar, Spivack and Evri))
21 150. The activities of Defendants relating to the 2007 and 2008 Purchase Agreements and
22 the Services Agreement constitute unlawful, unfair, and/or fraudulent business practices, and thus
23 unfair competition pursuant to Business & Professions Code § 17200, et seq.
24 151. Plaintiff suffered injury in fact and have lost money or property as a result of such
25 unfair competition.
26 152. The harm associated with Defendants’ conduct far outweigh any benefits.
27 153. Because of Defendants’ violations of California’s Unfair Competition Law, Ms. Paley
28 is entitled to restitution and other such relief as provided by law.
Gibson, Dunn &

Crutcher LLP 21
1 THIRTEENTH CAUSE OF ACTION
2 CONSTRUCTIVE TRUST
3 (By Paley Against Radar, Spivack and Evri)
6 155. As a proximate result of Defendants’ fraudulent misrepresentations and otherwise
7 wrongful conduct as alleged herein, Ms. Paley has suffered significant harm.
8 156. In particular, by virtue of the actions described above, Defendants are in possession of
9 $5 million that, in equity, they ought not to hold.
10 157. By reason of the fraudulent and otherwise wrongful manner in which the Defendants
11 obtained their alleged right, claim or interest in Ms. Paley’s $5 million investment, Defendants have
12 no legal or equitable right, claim or interest therein, but, instead, are involuntary trustees holding Ms.
13 Paley’s investment in constructive trust for her, with the duty to convey Ms. Paley’s investment to
14 her.
15 158. As a result, Ms. Paley requests that all property, including bank accounts of Radar and
16 Evri, in the amount of $5 million be declared in a constructive trust for Ms. Paley.
17 159. Ms. Paley also seeks equitable relief, including the return of such property, with
18 interest.
19 PRAYER
20 WHEREFORE, Plaintiffs prays for the following relief against Defendants:
21 1. Damages suffered by Ms. Paley as a result of Radar’s breaches of the 2008 Purchase
22 Agreement, in an amount to be determined at trial;
23 2. Rescission of Ms. Paley’s $5 million investment in Radar, plus applicable interest;
24 3. An order: (i) setting aside the above-referenced conveyance be to the extent necessary
25 to satisfy Ms. Paley’s claim and/or granting an attachment against the assets conveyed. Ms. Paley
26 further seeks an injunction against preventing further disposition of the conveyed assets by Radar or
27 Evri.
28
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1 4. Damages suffered by Word Diamonds as a result of Radar’s breach of the Services
2 Agreement, in an amount to be determined at trial;
3 5. A declaration that Ms. Paley’s $3 million debt investment in Radar was not properly
4 converted to equity under the terms of the 2008 Purchase Agreement and Note;
5 6. A declaration that Ms. Paley’s $3 million debt investment is due and owing under the
6 terms of the 2008 Purchase Agreement and Note.
7 7. An order directing Radar to return all information provided to it by Word Diamonds
8 over the course of their relationship;
9 8. General and special damages, in an amount according to proof;
10 9. Restitution;
11 10. Imposition of a constructive trust in the amount of $5 million;
12 11. Punitive damages against Defendants Radar, Evri and Spivack;
13 13. Prejudgment and postjudgment interest;
14 14. Equitable relief; and
15 15. Such other relief as the Court deems just and proper.
16 JURY DEMAND
17 Plaintiffs demand a trial by jury for all issues triable by a jury.
18
19 DATED: November 17, 2010 GIBSON, DUNN & CRUTCHER LLP

G. CHARLES NIERLICH
20 LINDSEY BLENKHORN
21
22 By:
G. Charles Nierlich
23
Attorneys for Plaintiffs
24 KATE PALEY AND WORD DIAMONDS, LLC
25 Paley Second Amended Complaint_RW EDITS (2).DOC
26
27
28
Gibson, Dunn &

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Paley Vs Radar Networks, Ross Second Amended Complaint

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Paley Vs Radar Networks, Ross Second Amended Complaint

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1 GIBSON, DUNN & CRUTCHER LLP

G. CHARLES NIERLICH, SBN 196611

6 Attorneys for Plaintiffs

Gibson, Dunn &

SECOND AMENDED COMPLAINT

10 and lost millions more.

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

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

27 (the “2008 Purchase Agreement”).

Gibson, Dunn &

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

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

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

14 website with Twine.com.

Gibson, Dunn &

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

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

28 Series B round of venture capital financing in February 2008.

Gibson, Dunn &

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

13 and damages, as hereinafter alleged.

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

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

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

Gibson, Dunn &

2 potential ‘killer app.’”

6 in Radar as a “sign from God.”

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

12 Purchase Agreement in Reliance on Radar’s Misrepresentations

17 told Ms. Paley in various emails:

Gibson, Dunn &

7 resources necessary to integrate Word Diamonds into Twine.com.

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

9 October 30, 2008 pursuant to the 2008 Purchase Agreement.

10 Radar Breaches the 2008 Purchase Agreement

15 investment to discrete tasks, as follows:

24 Ongoing administrative and management support $300,000

Gibson, Dunn &

6 provide such information.

7 Radar Improperly Converts Ms. Paley’s Debt to Equity

12 that Radar consummated a new $4 million equity financing.

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

22 that purportedly occurred on September 15, 2009.

28 after this improper conversion.

Gibson, Dunn &

11 of the 2008 Purchase Agreement.

17 Agreement (“Services Agreement”) with Radar.

Gibson, Dunn &

3 to induce Ms. Paley to invest money in Radar.

12 experience doing so.

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

27 complexity and workload of an enormous application.

Gibson, Dunn &

5 Agreements and the Services Agreement

Gibson, Dunn &

8 from all of that.”

10 to be completely rebuilt before any functionality can be restored.

17 investing more money into Radar.

18 Radar Fraudulently Conveys Its Assets to Evri

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

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

24 received no cash consideration from Evri.