March 8, 2008 in Business

Lawsuits surround Next IT

By The Spokesman-Review
 

A Spokane company that develops software to protect company financial information has become embroiled in a courtroom fracas between two men accusing each other of misusing their positions for personal gain.

Last fall NextSentry Corp., a subsidiary of a Spokane firm owned by Fred Brown, sued the company’s former CEO, James Hereford, accusing Hereford of misrepresenting company financial data and harming the company’s market value and level of investment.

Last month Hereford sued Brown’s main company, Next IT, asserting that Brown trumped up accusations of wrongdoing against him in order to squeeze him out of his minority shares in Next IT.

Brown also filed a personal civil suit against Hereford, alleging that Hereford misused a line of credit the pair had arranged to build a $3 million spec home in the Black Rock Development at Lake Coeur d’Alene. The two men planned to split the profits after the house was sold.

In that recent suit, filed in Spokane County Superior Court, Brown said Hereford took $600,000 from the line of credit and used it to buy stock in Next IT. Brown said their contract did not allow Hereford to use the money that way.

Hereford’s attorney, Douglas Siddoway, said Brown knew of Hereford’s plan to use the money and didn’t oppose it. Siddoway said Hereford told him the $600,000 was spent to buy stock in Next IT in 2003 or early 2004 in part to help Brown launch that company.

Brown called Hereford’s explanation inaccurate. “Just think about that statement and make your own interpretation,” Brown said.

Hereford declined to comment on the legal actions, Siddoway said.

The three lawsuits together reveal a bitter contest between Brown, one of Spokane’s more successful entrepreneurs, and the man he hired and then fired from a key job in one of his companies.

“What this really is about is an effort by Fred to force Jim to relinquish his stock in Next IT,” Siddoway said.

Brown launched Next IT in early 2004; its main product is software that provides quick summaries of information for customers. It recently sold the use of that technology, for example, to Alaska Airlines, which uses it as a virtual service agent called Jenn.

Brown and Next IT spun off NextSentry in early 2006, with Hereford becoming CEO in March that year. Hereford was paid roughly $180,000 per year, and fired in the summer of 2007.

NextSentry develops tools to protect banks and other companies from having sensitive information removed from computers or altered by workers or others.

Among accusations in NextSentry’s lawsuit against Hereford were that he misrepresented sales of NextSentry products to two customers, who turned out not to have ordered the software. Those were contracts of $300,000 and $115,000 that didn’t happen, though Hereford said they had.

In reply to those charges, Siddoway filed a court document saying those “sales” were in fact “pipeline” forecasts rather than concluded deals.

Hereford’s suit accuses five unnamed board members and Next IT of an attempt to squeeze him and a second minority shareholder, David Koto, out of the company.

Siddoway said that even though Brown wasn’t named in the suit, Hereford believes Brown is behind the effort against him and Koto.

“We see the (Next IT board’s) goals as trying to get back Jim’s Next IT stock. We concede Fred has the right to fire Jim. But he has no right to get his stock back,” said Siddoway.

Siddoway said Hereford’s shares came from his own investment of $500,000 in Next IT, another investment in NextSentry, and from stock options offered by the Next IT board.

Both are private companies that don’t release their financials; as a result it is difficult to estimate the value of their shares.

Both the NextSentry suit against Hereford and his suit against Next IT seek recovery of damages at trial.

Siddoway said the court dispute makes little sense to him.

“Why a company like Next IT, in the development stage and with some major success and poised to do quite well, why it would divert so much time and attention to this kind of sidebar distraction is hard to understand.”

Brown, for his part, conceded the suits have been “very unhealthy and very uncomfortable.”

He added, “When everything does come out, things will be healthy again.”


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