Uber Faces New Investor Suit Alleging Fraud -- WSJ

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 27, 2017).

A small shareholder of Uber Technologies Inc. on Tuesday sued the ride-hailing company and its former chief executive for allegedly covering up "illicit business tactics," the latest legal challenge following months of scandals at the highflying startup.

The lawsuit from the Irving Firemen's Relief & Retirement Fund in Texas claims Uber and former CEO Travis Kalanick knowingly misled investors while raising capital by failing to reveal the company had potentially broken laws, revelations that allegedly cost investors billions of dollars in losses on investments. The complaint, filed in the U.S. District Court for the Northern District of California, seeks class-action status on behalf of Uber's myriad investors, and asks for unspecified damages.

The small retirement fund invested about $2 million in Uber in February 2016 through a Morgan Stanley fund at a $62.5 billion valuation.

"The company's vaunted corporate culture was revealed in truth to consist of a toxic hotbed of misogyny, sexual discrimination, and disregard for the law that threatened the company's reputation, business and prospects," according to the complaint. Uber, which is privately held but was valued at $68 billion in its most recent fundraising round in June 2016, has lost at least $18 billion in market capitalization, the fund alleges, citing media reports.

Representatives for Mr. Kalanick, Uber and Morgan Stanley declined to comment. Representatives for the firemen's fund declined to comment beyond the complaint.

The lawsuit adds to mounting legal issues faced by Uber as its new CEO Dara Khosrowshahi takes over for Mr. Kalanick, who resigned under pressure from investors in June. Uber faces three possible federal probes, including a preliminary investigation by the Justice Department into alleged violations of the Foreign Corrupt Practices Act. Uber has said it is cooperating with the investigations.

Tuesday's shareholder allegations echo a lawsuit filed last month by one of Uber's directors and largest investors, Benchmark Capital, which is seeking the ouster of Mr. Kalanick as a director through the return to the board of three seats he controls. Though the case has been moved to private arbitration, it has overhung Uber's board and divided its investors.

Like Benchmark, the firemen's fund specifically pointed to news reports detailing Uber's use of software to evade regulators, known as Greyball, a program called Hell used to gather intelligence about rival Lyft Inc.'s operations, a lawsuit from Google parent Alphabet Inc. over allegedly stolen trade secrets, and charges of widespread workplace discrimination.

Class-action shareholder suits targeting private companies are relatively uncommon, said Kevin LaCroix, an attorney who advises companies on directors and officers insurance. Unlike with publicly traded companies, small investors in privately held startups typically receive limited financial information and other disclosures.

"It's been these 'unicorn' companies that have attracted these suits," he said. "The potential range of damages could be very high for a company of this magnitude and valuation."

Robbins Geller Rudman & Dowd LLP, which is representing the firemen's fund in the suit, is also involved in a continuing proposed class-action shareholder suit against privately held biotech firm Theranos Inc., which was valued by investors at $9 billion in 2014. Theranos has disputed the allegations of securities fraud.

The firemen's fund invested in Uber through a somewhat unusual arrangement with Morgan Stanley, which offered clients an opportunity to invest in a fund known as New Riders LP, while promising limited financial disclosure. Investors in the New Riders fund hoped to profit from an eventual Uber IPO, which Mr. Khosrowshahi has said won't come for at least 18 months.

Write to Greg Bensinger at greg.bensinger@wsj.com

(END) Dow Jones Newswires

September 27, 2017 02:47 ET (06:47 GMT)