Covad co-founder sues company

Dhruv Khanna, who was fired earlier this year, files a lawsuit against the company and a number of its board members, alleging mishandling of its finances.

Matt Hines Staff Writer, CNET News.com
Matt Hines
covers business software, with a particular focus on enterprise applications.
Matt Hines
2 min read
Covad Communications co-founder Dhruv Khanna filed a lawsuit against the company and a number of its current and former board members, alleging mishandling of its finances.

In the lawsuit filed in the Chancery Court of Wilmington, Del., Khanna claims that some directors and executives of the DSL (digital subscriber line) access provider, including Covad CEO Charles Hoffman, breached their fiduciary duties by "engaging in or approving actions that constituted waste and self-dealing."

The company put Khanna on paid leave in 2002 and fired him in January 2003. He said in the lawsuit that the company fired him as a form of retaliation for his being a "purported whistleblower" regarding the fiduciary misconduct. Khanna remains one of the company's largest stockholders with more than 5 million shares.

Covad appointed a special investigative committee to probe the allegations made by Khanna last year, while he was still employed by the company. According to the company, the committee used an independent law firm to assist in its investigation and concluded that Khanna's allegations were "without merit." Covad said in a statement that it plans to vigorously oppose the Delaware lawsuit.

Among other allegations, the lawsuit claims that Covad's board members used their influence to facilitate the company's 2000 buyout of DSL provider BlueStar. Khanna maintains that Covad board members with investments in BlueStar forced approval of the $200 million acquisition. Under Covad, the BlueStar business unit was eventually shuttered. The suit also claims that fellow co-founder Charles McMinn, Covad's current chairman, used his position to encourage risky investments in several other companies he had interests in.

Khanna helped establish Covad in 1996 along with McMinn and Chuck Haas. The three former Intel executives sought to tap into the emerging market for high-speed Internet access. However, the company fell prey to market conditions, reported large losses, and eventually filed for Chapter 11 bankruptcy in August 2001.

Covad emerged from Chapter 11 in December 2001 and has since seen an upturn in its business prospects and stock value. The company's shares have risen considerably after the announcement of deals with companies such as AT&T and MCI to market its DSL services.

Vik Grover, an analyst for New York-based investment bank Needham, said Covad is "in a great spot" and that the lawsuit will likely do little to halt its current momentum.

"Right now, Covad seems like the greatest idea in space, as it's getting a free ride from the long-distance companies from networks to marketing," Grover said. "This is a company that is out of bankruptcy, has little or no debt, and a lot of potential to add new customers."