Ontario judge rules against Xtreme Labs co-founders, Chamath Palihapitiya in Tinder-focused lawsuit

Sundeep Madra and Amar Varma

Former Extreme Venture Partners (EVP) founding partners Sundeep Madra and Amar Varma, as well as Social Capital CEO Chamath Palihapitiya, have been ordered to pay $15.69 million USD to plaintiffs in an Ontario Superior Court ruling that found the three had conspired to acquire mobile software development shop Xtreme Labs at a discounted price, in addition to breached contractual obligations with EVP.

The ruling marks the latest development in a longstanding legal battle between the notable Toronto VCs, Palihapitiya, and EVP’s current partners and additional co-founders Ray Sharma, Ken Teslia, and Imran Bashir. The lawsuit began in 2014 when Sharma, Bashir, and Teslia filed a claim of over $200 million in damages against Madra and Varma, alleging that the pair had conspired with Palihapitiya, also a former Facebook VP, to hide an interest in dating app Tinder as part of a sale of shares in dev studio Xtreme Labs.

“This is not a case of tough business tactics and clever negotiating strategy. Nor is it a case of sellers’ remorse. This is a case of a purchaser conspiring with fiduciaries of a company to acquire a business and doing so based on breaches of fiduciary and contractual duties.”

The complex case dates back to August 2012, when Madra and Varma sold a controlling stake of Xtreme Labs (founded the same year as EVP) to Palihapitiya, buying out the three plaintiffs, who were also co-founders in the software development shop. At that time, Xtreme owned 13 percent equity interest of Hatch Labs, which had developed and launched Tinder that same month.

According to the recent judgment, Sharma, Bashir, and Teslia (the plaintiffs) alleged that the two partners “misrepresented the financial status of Xtreme Labs and concealed material information from them,” including the equity interest they maintained in Hatch Labs and the existence of Tinder. They argued that this misrepresentation led the trio to sell their shares in Xtreme at a discounted price.

This week, the Ontario Superior Court of Justice ruled in favour of Sharma, Bashir, and Teslia, with Justice Barbara Conway stating that Madra and Varma breached their “fiduciary obligations” and conspired with Palihapitiya to acquire developer studio Xtreme Labs at a discounted price, hiding an interest in Tinder as part of the sale to appropriate for themselves.

“This is not a case of tough business tactics and clever negotiating strategy,” the judgment reads. “Nor is it a case of sellers’ remorse. This is a case of a purchaser conspiring with fiduciaries of a company to acquire a business and doing so based on breaches of fiduciary and contractual duties.”

After having purchased Xtreme for $18 million USD, Palihapitiya negotiated, just over a year after the original purchase, the sale of the lab to Pivotal for $60 million USD. The ruling noted that at that time he, as well as Madra and Varma “carved certain assets out of Xtreme Labs” and transferred them to their own holding company. That included the 13 percent equity in Hatch, which they later sold for $30 million USD in March 2014.

The ruling also found that the Madra and Varma had breached their fiduciary duties as managing directors of Fund I, failing to fulfill their obligations under the shareholders agreement for a general partner when they established Extreme Venture Partners Annex Fund I LP (Annex Fund) in December 2011. The Annex Fund invested in six of EVP Fund I’s most successful portfolio companies and operated for two years until it closed down in December 2013.

As part of the ruling, Madra and Varma are being ordered to pay punitive damages in the amount of $250,000 in respect to the Annex Fund. The pair, along with Palihapitiya and fellow defendants (Madra and Varma’s holding companies, Palihapitiya’s personal investment company El Investco, and Annex Fund) are also ordered to pay damages of $3.36 million USD to Fund I, Sharma, and Bashir, as well as disgorgement of profits in the amount of $12.33 million USD to Fund I.

“Mr. Varma and Mr. Madra are disappointed by the decision and intend to appeal,” a lawyer representing the two defendants told BetaKit. A lawyer representing the plaintiffs, on the other hand, stated that they were “very happy with the Court’s decision.”

“Our clients have successfully demonstrated that Chamath, Amar, and Sunny worked together to acquire the shares of Xtreme Labs at an undervalued price and concealed an asset of the company from the selling shareholders. In taking on this litigation our clients stood up for their investors who placed their trust in them, and have been fully vindicated,” the statement read.

BetaKit had previously reported on the collateral damage of the ongoing legal dispute as recently as last year, when Madra and Varma alleged that EVP’s current general partners were forcing the sale of a portfolio company to fund the lawsuit between the two groups. In an email to LPs of EVP’s Fund I obtained by BetaKit at the time, Madra and Varma ask that the current general partners be removed due to a “personal vendetta” that would undermine the fund’s best interests.

They alleged that Sharma, Bashir, and Teslia were harassing and forcing portfolio company Uken Games, to sell one of its game assets, Bingo Pop, as part of a move to eliminate EVP Fund I’s ownership stake. The two also filed a counterclaim, looking for more than $10 million in punitive damages, arguing that the plaintiff should not be allowed to finance legal proceedings from cash via EVP Fund I.

Sharma, who is also the CEO of EVP, called the email an “attempt to distract from the merits of our action against them.” He told BetaKit that the plaintiffs had repeatedly been harassed over the previous year with “anonymous messages seeking to intimidate us into abandoning our action.”

Little more than a week after BetaKit obtained the email, Los Angeles-based mobile entertainment company, Jam City (founded by MySpace co-founder Chris DeWolfe), acquired Bingo Pop from Uken for an undisclosed amount.

With files from Douglas Soltys.

Meagan Simpson

Meagan Simpson

Meagan is the Associate Editor for BetaKit. A tech writer that is super proud to showcase the Canadian tech scene. Background in almost every type of journalism from sports to politics. Podcast and Harry Potter nerd, photographer and crazy cat lady.