Bitter court fight lifts veil on venture-capital world, ends in sanctions

Making bundles of money during the turn-of-the-century tech boom was easy. Distributing it, though, could be a lot harder.

It was the prospect of big profits from investing in technology startups that brought Kirk Lanterman, chief executive of Seattle-based Holland America cruise line, together with Dan Regis and later Bill Tenneson. Disputes over how to share those profits have kept the men in court for more than three years.

The lawsuits provide a rare look into the secretive venture-capital business at a time of extreme prosperity.

"You wouldn't conceive of why these people ever sued each other," said Regis' attorney, Robert Adolph of Adolph & Gamache in Seattle. "They made hundreds of millions of dollars — wealth beyond my conception and your conception."

Earlier this month, a King County Superior Court judge chastised Lanterman and his attorneys, saying they pursued claims against Regis and Tenneson that were baseless or intended solely to harass them.

The judge, Suzanne Barnett, ordered the Dorsey & Whitney law firm to pay $200,000 apiece to Regis and Tenneson, and Lanterman must pay $50,000 to each. Local attorneys say the penalty against Dorsey & Whitney is the largest against a Washington law firm, topping a $325,000 sanction in 1994 against now-defunct Bogle & Gates.

Lanterman hired Regis in 1996 to run Kirlan Venture Capital, a Seattle-based fund that invested in some of the region's best-known high-tech startups, including aQuantive, formerly known as Avenue A, and Internap Network Services.

Regis ran Kirlan's first fund and started a second fund in 1997. Besides his salary, he received bonus payments based on the performance of the fund's investments.

However, Regis and Lanterman could not agree on how Regis was to receive the millions of dollars in bonuses he had earned. Regis wanted the payments to be made so that they could be taxed as capital gains. Lanterman wanted them to be distributed as ordinary income, which would have been taxed at a higher rate.

Regis sued Lanterman in March 2000. He had resigned from Kirlan in June 1999 but agreed to stay on as a consultant to help his successor, Tenneson.

The sums involved were huge. In March 2000, Kirlan's two funds held 4.7 million shares of Internap, worth more than $400 million; Regis claimed that his share amounted to $22 million.

But while the two sides argued, the stock market dived. Internap shares fell from $80 on March 20 to $40.06 on April 3. Regis' bonus fell along with it. He claimed to have lost more than $9.2 million.

Two months after Regis sued, Lanterman filed a countersuit against Regis and Tenneson, whom he had fired that May. Among more than a dozen claims against the two men, Lanterman accused them of stealing proprietary information from Kirlan and using it to form a new venture-capital firm, Digital Partners, rather than a third Kirlan fund, as Tenneson was brought on board to do.

Regis and Tenneson are general partners at Digital Partners, a $36 million fund.

Barnett found that the two men started Digital Partners only after Lanterman and Tenneson couldn't agree on the terms of a third fund and Lanterman had disassociated himself from it.

"By December 23, 1999, Lanterman had written clearly and emphatically that neither he nor (Kirlan) wanted any part in the fund Tenneson was proposing," Barnett wrote in her Oct. 16 opinion. "He did not want to advise, he did not want to invest, and he did not want Tenneson to solicit participation by any Kirlan fund investors."

In late 2001, Barnett dismissed all of Lanterman's claims against Regis and Tenneson. Regis was awarded damages and lawyers' fees totaling more than $18.5 million and Tenneson received about $180,000.

Barnett's decision was upheld on appeal this summer.

The saga didn't end there. In a relatively uncommon move, Regis and Tenneson asked the judge to sanction Lanterman and Dorsey & Whitney for clogging up the court system with groundless claims.

Washington court rules require attorneys to thoroughly question and investigate the validity of suits. Barnett found that eight of Lanterman's 18 claims either had no basis in fact or none in law, or were brought solely to harass Regis and Tenneson.

"Attorneys are not gladiators engaged for purposes of single warrior combat," Barnett wrote. "Attorneys who believe they are in 'the business' to do their clients' bidding are in the wrong business. ... Lanterman probably had very firm and fixed ideas about the result he wanted to achieve and the pain he wanted to inflict in the process."

Lanterman's attorneys at Dorsey & Whitney referred inquiries to Peter Ehrlichman, head of the firm's trial group in Seattle. Ehrlichman said the ruling was wrong and would likely be appealed.

"It is one thing to lose a case and to have the court find against you, but it should not lead ... to a conclusion that lawyers should be sanctioned," Ehrlichman said.

Regis said he felt vindicated by Barnett's action.

"I would never have chosen to have this kind of an event in my life," Regis said. "Our adversary insisted on using the legal system as a weapon. God love her, (the judge) said you can't do that here. There are limits."

Tricia Duryee: 206-464-3283 or tduryee@seattletimes.com