Warburg Pincus sued for $911m

LONDON - Warburg Pincus, the New York buyout and venture capital firm created in 1966, is being sued for US$650 million ($911 million) by former investors and founders of QoS Networks for allegedly forcing the Irish telco into bankruptcy.

The Dublin company raised US$49.3 million in 2000, with US$30 million from Warburg Pincus, court documents show. Warburg Pincus, the controlling shareholder, had the power to decide whether QoS would raise new capital in 2001. The company alleges Warburg Pincus prevented any fundraising.

"It's very unusual for a case like this to get to a court of law," said John Daghlian, a London partner at US law firm O'Melveny & Myers. "People must be really upset to take it this far."

QoS co-founder Michael Keane said that he had not had the "opportunity" to settle out of court.

Warburg Pincus, facing three US lawsuits claiming the company breached its fiduciary duty, may decide to have the cases tried this year. The company, which is seeking US$7.8 billion for the world's third-biggest buyout fund, denies QoS's allegations.

Warburg Pincus is countersuing, saying it was misled about QoS's condition. QoS made less than US$500,000 of sales before running out of money in 2001, Keane said.

"Warburg Pincus voted for the certainty of nothing instead of the possibility of something when they prevented a capital restructuring that would have allowed new funds to come into the company in 2001," he said.

Warburg Pincus said in its countersuit that Keane "intentionally misrepresented" QoS's condition. In January 2001, Keane promised QoS would have positive cash flow in the third quarter of 2001 and said QoS would have US$99.4 million of net income in 2002, according to Warburg Pincus' lawsuit.

The Nasdaq Composite Index fell 50 per cent from April 2000, when Warburg Pincus first invested in QoS, to September 2001, when QoS's US unit sought bankruptcy protection.

US venture capital spending plummeted 73 per cent in the third quarter of 2001, as startup companies went out of business, according to Venture Economics, a New York research firm.

Judge Herman Cahn at the Supreme Court of the State of New York has dismissed one count in the founders' and shareholders' suits, which alleged fraud.

George Soros' former buyout unit, and Global Crossing, a fibre-optic network operator that filed for bankruptcy in January 2002, each invested US$5 million in QoS.

They are not suing Warburg Pincus.

- BLOOMBERG