MOD Systems sued by investor
UPDATE: Arnold claims company, CEO involved in 'massive fraud'
By Jennifer Netherby -- Video Business, 2/20/2009
FEB. 20 | Digital music and movie kiosk company MOD Systems and its top executives are being sued by angel investor Robert Arnold for “massive fraud,” embezzlement and breach of fiduciary duty in a lawsuit filed Wednesday in superior court in Seattle.
Arnold, MOD’s initial investor, owns a 7.8% stake in the company and is suing on behalf of MOD while also naming the company, CEO Mark Phillips and chairman Anthony Bay and Kenneth Gordon in the suit, which partly centers on MOD’s $35 million investment from Toshiba and NCR Corp. last year.
Arnold claims as part of the deal that MOD gave the two companies and Deluxe Entertainment Services Group a controlling interest in MOD and gave Toshiba the right to use its intellectual property for its own interests so it could compete against MOD.
Phillips and Bay were given special considerations as part of the deal that Arnold, MOD’s only other major shareholder, was not given, according to the suit. Arnold claims the company didn’t disclose the terms of the deal to him.
Among the juicier charges in the lawsuit is the claim that CEO Mark Phillips has been embezzling money from MOD, using company funds to pay for his car, rent and travel, while also setting up a consulting agreement on MOD’s behalf with Meteor Consulting, whose account in the Netherlands is controlled by Phillips. Arnold says MOD is unaware that Phillips is paying the monthly $15,000 to $25,000 payments to himself.
The company told TechFlash blog, which first reported Arnold’s plans to file a suit, that the company is investigating the claims but called the charges against MOD unfounded.
MOD chief financial officer Richard Barber said in a statement on behalf of the company that Arnold's allegations are being taken seriously by MOD and Phillips and an independent committee of MOD's board of directors has been set up to investigate the claims.
"The company believes that the claims Mr. Arnold is asserting against MOD Systems itself are unfounded and without merit," Barber said in the statement. "The company has recently added experienced senior management to take it from a startup business venture to the next level. MOD Systems has developed an exciting product offering that generated significant interest and was met with enthusiastic support at the recent Consumer Electronics Show in Las Vegas."
MOD is already embroiled in a lawsuit with former Warner Home Video president Warren Lieberfarb, who claims the company owes him more than $1 million for consulting work.
