Startup Litigation Digest #5
UC Center for Business Law San Francisco | Fall 2024
About this Edition
Welcome to our fifth edition of the Startup Litigation Digest. You can read our first, second, third and fourth editions in this new format.
As the startup ecosystem evolves, we remain committed to tracking notable startup cases to spotlight for founders, investors, board members, and legal professionals. Our aim is to provide a valuable resource for navigating the complex litigation landscape of today's tech-driven economy.
Your insights can also help shape this digest. If you have feedback on this edition or know of litigation matters you'd like us to highlight in future releases, please reach out directly or email us at epsteinevan@uclawsf.edu or cablea@uclawsf.edu
We gratefully acknowledge the contributions of Claudia Philipp, Class of 2026, for her assistance in this edition of the Startup Litigation Digest.
Sincerely,
UC Center for Business Law San Francisco
Summary of Cases
SKAEL & Baba Nadimpalli. On September 24, 2024, Baba Nadimpalli, co-founder and former CEO of SKAEL Inc., a SF-based private company valued at approximately $230 million, was charged by the SEC and DOJ for allegedly lying to investors about the business-automation startup’s revenue figures.
Medley Health. On September 12, 2024, the SEC charged now-defunct digital pharmacy startup Medly Health’s co-founder and former CEO, Marg Patel, former CFO, Robert Horowitz, and former Head of Rx Operations, Chintankumar Bhatt, with defrauding investors in connection with capital raising efforts that netted the company over $170 million.
Equinox Innovative Systems Inc. Litigation. On August 6, 2024, Randy Morser, CEO of Equinox Innovative Systems Inc., was sued by former board members for allegedly undermining the company’s sale to TCOM LP. The lawsuit claims he delayed negotiations, allowing TCOM to reduce its offer from $10 to $1 per share, while benefiting personally.
U.S. v. Ruthia He and David Brody. On June 13, 2024, two executives of a California-based digital health startup were arrested and charged by the DOJ in connection with an alleged $100 million scheme to illegally distribute Adderall and other stimulants over the internet.
Updates on Cases from Prior Issues
FTX Litigation Update (Issue #1):
On Sept 24, 2024, Caroline Ellison, the former CEO of Alameda Research, was sentenced to 2 years in prison for her role in the FTX cryptocurrency exchange's collapse. During her sentencing, she expressed remorse and took responsibility for her actions, which included misleading investors and misusing customer funds. U.S. District Judge Lewis A. Kaplan said Ellison’s cooperation was “very, very substantial” and “remarkable.” He added that in a case of such gravity, cooperation could not serve as a “get-out-of-jail-free” card. She was ordered to report to prison Nov. 7.
On Oct 30, 2024, Nishad Singh was sentenced to three years of supervised release at a hearing in Federal District Court in Manhattan. Judge Lewis A. Kaplan said that Mr. Singh provided crucial assistance to the government and that he had played a “much more limited” role in the scheme than his colleagues had.
The State of Prosecutions of FTX Executives:
Sam Bankman-Fried (SBF): 25 years in prison
Ryan Salame: 7.5 years in prison
Caroline Ellison: 2 years in prison
Nishad Singh: No prison time (3 years of supervised release)
Gary Wang: Sentencing on November 20, 2024
Bolt & Ryan Breslow (Issue #1): This is quite a case involving founder Ryan Breslow trying to return to the CEO job at his startup Bolt once valued at $11 billion in 2021 (having raised more than $1 billion from investors) and repriced down 97% in a share buyback. A new deal would value the company at $14 billion from two investment firms based in the UK and United Arab Emirates. According to Dan Primack [Axios]: “ [the deal] would give Breslow millions of dollars and indemnification from lawsuits, [including] $200 million from a UAE-based SPV [that still refuses to share the names of its partners]. It also would include a purported $250 million in influencer marketing credits from The London Fund, which has an existing relationship with another Breslow startup called Love. Bolt also would make an investment into The London Fund, with Breslow joining its board. The bottom line: Bolt’s investors have spent the past week trying to do due diligence with information that not only was incomplete, but downright false.”
United States v. Sean Grusd (Issue #3): Sean Grusd was sentenced to seven years in federal prison for orchestrating a fraudulent investment scheme that defrauded investors of $23 million. Grusd formed three investment funds, promising to invest in successful financial technology companies. Between 2021 and 2022, Grusd convinced more than a dozen victims to invest in his funds. Instead of investing the funds, he transferred the money to his personal accounts, using it to finance a lavish lifestyle—purchasing luxury cars, condos in Chicago and Montreal, and extravagant travel and entertainment. Many of the victims had invested their life savings. Grusd, 32, of Los Angeles, pleaded guilty to wire fraud and was sentenced by U.S. District Judge Sara L. Ellis. In addition to the prison term, he was ordered to pay over $21 million in restitution to his victims. The case was prosecuted by the U.S. Attorney’s Office for the Northern District of Illinois, with the FBI leading the investigation.
Alafi et al v. Cohen et al (Issue #2): In 2022, Stanley Cohen, a prominent genetics professor at Stanford was found guilty of negligent misrepresentation and ordered to pay $29 million in damages to investors in Nuredis – a biotech company that he co-founded with Professor Tzu-Hao Cheng in 2016 and that wound up in 2018. The trial took place in 2022 and was presided by The Hon. Beth McGowen, Judge of the Superior Court of CA, County of Santa Clara. On Oct 25, 2024, the 6th District Court of Appeal of the State of CA reversed and remanded the case for the trial court to provide a detailed statement of decision to clarify the legal and factual grounds of the judgment.
1. SKAEL & Baba Nadimpalli
On September 24, 2024, the SEC charged Baba Nadimpalli, the former CEO of tech startup SKAEL with $30 million fraud.
According to the SEC’s complaint, filed in the U.S. District Court for the Northern District of California, from January 2021 through February 2022, Nadimpalli raised more than $30 million from investors by falsely claiming that SKAEL had millions of dollars in annually recurring revenue, which was more than 10 times the true amount. The complaint also alleges that Nadimpalli falsely suggested to investors that SKAEL’s customers included a number of well-known companies, and, further, that Nadimpalli forged bank statements to show nonexistent payments from customers. Nadimpalli also allegedly spent hundreds of thousands of dollars of SKAEL’s money on his own personal expenses, including payments on his house and car.
On that same date, the DOJ charged Baba Nadimpalli, with securities and wire fraud for defrauding investors and misleading them about the company’s revenue, annual recurring revenue (ARR), and other financial and sales information.
According to an indictment filed Jan. 17, 2024 and unsealed Sept. 23, 2024, Nadimpalli, 41, a citizen of Australia who resided in San Francisco, Calif., founded SKAEL in 2016 and served as its CEO from 2016 until July 2022. SKAEL was a San Francisco-based, software-as-a-service (“Saas”) company that claimed to provide its corporate clients with AI and automation software to assist customers with mundane, time-intensive tasks.
Nadimpalli is charged with three counts of securities fraud and seven counts of wire fraud.
The case is being handled by the Corporate and Securities Fraud Section of the U.S. Attorney’s Office for the Northern District of California.
2. Medley Health
On September 12, 2024, the SEC charged three former executives of pharmacy startup Medly Health Inc. with defrauding investors.
According to the SEC’s Complaint, from at least February 2021 through August 2022, Patel and Horowitz provided financial information to existing and prospective investors that fraudulently overstated Medly’s revenue due in part to millions of dollars’ worth of fake prescriptions entered into the company’s systems by Bhatt. The SEC’s complaint alleges, among other things, that Patel and Horowitz knew of, but failed to correct, significant accounting irregularities and were aware of several reports and complaints by employees that the revenue reported in Medly’s financial statements to investors was inaccurate.
The SEC’s complaint, filed in the U.S. District Court for the Eastern District of New York, charges Patel, Horowitz, and Bhatt with violating the antifraud provisions of the securities laws and charges Bhatt with aiding and abetting Patel’s and Horowitz’s primary securities law violations. The complaint seeks permanent injunctions, civil money penalties, disgorgement, prejudgment interest, and officer-and-director bars against all three defendants.
3. Equinox Innovative Systems Litigation
On August 6, 2024, Randy Morser, founder and CEO of Equinox Innovative Systems Inc., a technology company headquartered in Columbia, Maryland that developed drone surveillance solutions, was sued by former board members for allegedly sabotaging the company’s sale to TCOM LP in a scheme to renegotiate the transaction on self-serving terms.
According to the court filing in Delaware’s Chancery Court, from 2021 to 2022, Morser engaged in actions that undermined TCOM’s original offer. He reportedly delayed negotiations until the drone maker faced difficulties, rendering certain stock options worthless. This tactic was designed to prevent key investors from exercising their options and influencing the deal. The revised agreement favored Morser’s employment post-sale and repayment of debts he personally guaranteed, while reducing TCOM’s bid from $10 to $1 per share.
Per the complaint, Morser allegedly told other members of the Board that because of his divorce, his ex-wife would receive a significant portion of the value of his Equinox stock, as a result, he did not personally care much about obtaining the highest price for Equinox stock. Morser also told other members of the Board that TCOM’s employees were well compensated and that one of the most important pieces of any deal with TCOM would be continued employment with TCOM. This alleged behavior led to a crisis that allowed him to maintain 60% control to finalize the deal without dissenting board members.
The lawsuit also targets TCOM and four other former Equinox directors, suggesting complicity in Morser's actions.
This case highlights potential conflicts of interest in tech startups, impacting future investment behaviors and merger negotiations in the industry.
4. U.S. v. Ruthia He and David Brody
On June 13, 2024, Ruthia He, founder and CEO of the California-based digital health company Done Global Inc, and David Brody, its Clinical President, were arrested in Los Angeles and San Rafael, respectively. They face allegations of participating in a scheme to illegally distribute Adderall over the internet, conspiring to commit healthcare fraud by submitting false and fraudulent reimbursement claims for Adderall and other stimulants, and obstructing justice.
The indictment alleges that the defendants provided easy access to Adderall and other stimulants by exploiting telemedicine and spending millions on deceptive advertisements on social media. They allegedly generated over $100 million in revenue by arranging for the prescription of over 40 million pills.
These charges are the Justice Department’s first criminal drug distribution prosecutions related to telemedicine prescribing through a digital health company.
The case is assigned to the U.S. District Court for the Northern District of California, United States Courthouse, 450 Golden Gate Avenue, San Francisco, CA 94102 before Judge Charles R. Breyer.
About the UC Center for Business Law San Francisco
The UC Center for Business Law San Francisco was founded in 2018 with the mission of bringing together leading scholars, business leaders, practitioners, regulators and students to engage in the study, teaching and practice of business law at UC Law SF (formerly UC Hastings).
Other CBL Programs
VC-Backed Board Academy (VCBA): A one-day executive education program exclusively tailored for directors of venture-backed private companies. Immerse yourself in a curriculum crafted by leading academics and industry experts, designed to sharpen your strategic insights and amplify your board’s impact. The last version took place at Nasdaq’s MarketSite in NYC on Oct 29, 2024. The next edition will return to San Francisco in Spring 2025.
CBL Scholars Program, a merit award created to develop a new generation of future leaders in business law.
CBL Roundtable on Financial Policy & Regulation, an invite-only program that seeks to assemble diverse perspectives from academics, regulators, operators, practitioners, and investors to expressly identify friction points and, more importantly, pragmatic solutions for everyone involved in the ecosystem.
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