What began as a bitter legal dispute between Kainos Capital and one of its co-founders exploded into a bitter full-fledged feud Tuesday after the Dallas private equity firm filed a countersuit in Delaware.
Sarah Bradley, a partner at Kainos, sued her two co-founders and the firm’s chief financial officer in January, alleging they tricked her into signing documents that reduced her 25 percent interest in the firm’s investment management and eliminated her rights as a Kainos manager. In her explosive petition, she also claimed Kainos had a “frat house” culture in which she was pressured to drink heavily at company retreats and was groped by a drunken Kainos executive.
But in Tuesday’s countersuit, Kainos executives alleged that her eye-popping lawsuit was itself designed to give her leverage as part of a larger, secret litigation strategy to inflict maximum damage on the firm.
“By virtue of the concealment and strategic timing of Bradley’s baseless lawsuit, Kainos has suffered substantial economic and reputational injury – just as Bradley calculated,” says the 130-page countersuit filed in Delaware Chancery Court.
Kainos vehemently denies Bradley’s basic claim, alleging she confirmed in writing many times that she understood and agreed to the change in her ownership interest in multiple emails she sent to investors throughout 2016, including due diligence information that disclosed her newly-reduced 12 percent interest in the management company.
What’s more, Kainos says, Bradley obtained copies of old Kainos agreements under the pretense that her tax and estate planning advisors needed them, transferred proprietary and confidential contact information for current and potential Kainos investors and industry executives to her personal email and then deleted 25,000 emails from Kainos’ servers in an attempt to destroy evidence.
In addition to those actions, the countersuit says Bradley breached both her contract and her fiduciary duty to the firm by including highly confidential information as exhibits in her explosive lawsuit.
Kainos hired Delaware law firm Morris, Nichols, Arsht & Tunnell and New York firm Wachtell, Lipton, Rosen & Katz to represent it in the litigation. Bradley’s lawyers are William Reid IV, Craig Boneau, Jordan Vimont and Scott Saldana of Reid Collins & Tsai in Austin as well as Delaware lawyer Jessica Zeldin.
Reid, Bradley’s lead attorney, did not immediately return a call from The Texas Lawbook seeking comment.
According to the Kainos filing, Bradley’s lawsuit was timed to be filed just after the distribution of a private placement memorandum for the company’s third fund (Fund III), completely derailing the investment effort.
The PPM, a confidential document which formally launches the fundraising process, would obligate Kainos to update the offering to potential investors with the allegations contained in Bradley’s lawsuit. Just two days after Kainos began distributing its PPM to potential investors, the countersuit says, Bradley threatened Kainos with litigation “to extract a favorable settlement.” When Kainos refused to settle, Bradley filed her lawsuit – and attached the PPM as an exhibit, exposing the confidential elements of the offer to public scrutiny.
“The firm could either quickly agree to Bradley’s settlement demand, or it would need to disclose the dispute to investors and, in so doing, imperil the Fund III capital raise by stopping its forward momentum just after Kainos had fired the starting gun,” the countersuit says. “Kainos was publicly committed and thus more vulnerable to bad news and any suggestion that its offering materials were not complete and accurate.”
Had Bradley raised her concerns with the firm earlier, Kainos would have delayed the formal launch of its Fund III capital raise and would not have allowed Bradley to lead the fundraising efforts “and hold herself out to potential investors as the face of Kainos,” the countersuit says.
“Instead, just as Bradley intended, the timing of Bradley’s litigation threat placed Kainos in a lose-lose situation,” the suit says, since Kainos could not engage potential investors “without disclosing that Bradley had threatened them with a lawsuit.”
“And so the firm began to contact its existing and prospective investors to inform them of the news,” the complaint says.
A Tale of Two Lawsuits
The Original
Bradley helped form Kainos in 2012 with Andrew Rosen and Robert Sperry. Since its inception, Kainos has managed portfolio companies in the food and consumer products industries, including big household names such as SlimFast, Ghirardelli and Kettle Cuisine.
Rosen, who recruited Bradley, brought her on board primarily as a fundraiser and investor relations manager. Since her responsibilities included investor relations, as well as due diligence and business development, she held seats on the firm’s investment committee and the boards of several portfolio companies.
Under their original agreement, they would all be owners of the investment manager, Kainos Manager LLC, the entity from which all three would receive a salary, distributions of profits and a right to carried interest, Bradley’s lawsuit says. They agreed that Bradley’s stake would be 25 percent, Sperry’s would be 33 percent and Rosen’s would be 42 percent.
Per Kainos Manager’s operating agreement, each co-founder received membership interests that carried the same rights – none of which included the ability to force out another member, Bradley’s lawsuit says.
Although the partners successfully secured $475 million for their first fund, according to Bradley’s lawsuit, the dynamic began to change as Rosen “began a power grab inside Kainos, excluding Bradley from the decision-making process while taking complete control over Kainos’ accounting, management and compensation.”
In December 2015, as Kainos was getting ready to launch its second fund, Rosen emailed Bradley saying he intended to reduce her interest in Kainos Manager to 12 percent, attempting “to strong-arm Bradley into voluntarily agreeing to the reduction with no compensation,” the complaint says.
After she refused, the lawsuit says, Rosen conspired with Sperry and Kainos CFO David Knickel to convert Kainos Manager from a Delaware LLC to a Delaware limited partnership, which would allow them to reduce Bradley’s ownership rights’ to zero.
They also formed a plan to induce her into signing off on the conversion, which they did by telling her it was only for tax purposes. To orchestrate the conversion, the lawsuit says, the defendants secretly created a new entity with the same name that they filed with the Delaware Secretary of State. Thus, it posed as an LLC but in reality, it was the general partner of an LP to which Bradley held no interest.
They attached the conversion document in an April 2016 email on the eve of closing Kainos’ second fund, which ended up raising $895 million. Bradley alleges that when she called Knickel to further understand the conversion, he reiterated that it was only for tax purposes and that it would have no impact on her ownership interests. He urged her to sign the document immediately, or it would endanger the closing of Fund II.
She said she signed the document under those pretenses, believing she would maintain her 25 percent ownership interest.
“The reality was quite different,” Bradley’s lawsuit says. “The end product of the purported conversion was Kainos Capital LP, a limited partnership with Knickel as the initial limited partner and the newly formed Kainos GP, in which Bradley would later learn that she had now ownership interest, serving as the general partner… she owned nothing,” Bradley’s complaint says.
She said the documents were so misleading that it took her until December 2018 to piece together the real story: that Rosen, Sperry and Knickel had devised a scheme to force Bradley out.
All the while, the lawsuit says, Rosen and Sperry consistently threatened Bradley with termination and taking her carried interest if she were to step out of line with their performance expectations. This would expose her family of six to significant harm, as Bradley is the primary breadwinner.
The Counter
But Kainos’ countersuit paints the facts differently – a plot in which Bradley became increasingly unhappy at Kainos, but kept that to herself and devised a litigation strategy instead of talking to her partners.
The private equity firm says Bradley’s involvement declined over the years. Though Bradley came on board to perform investor relations and source new deals, “she showed virtually no interest in business development,” the lawsuit said.
And although she served on the board for three of Kainos’ Fund I portfolio companies, she showed little interest in them as well, the firm’s lawsuit says. She seldom met with portfolio company management teams to learn about their businesses, which resulted in the companies’ senior operative executives expressing “their frustration to Rosen and Sperry about her lack of preparation and engagement in her board duties.”
By the time the firm was ready to launch their third fund, the lawsuit says, Bradley no longer sat on any of the portfolio company boards and played no meaningful role in deal sourcing.
In her lawsuit, Bradley says she asked Knickel for a copy of Kainos’ Fund II agreements, which detailed the agreements regarding the management company and carried interest of the partners. When Knickel “lied and told her it did not exist,” Bradley obtained the documents from Kainos’ lawyers at Weil, Gotshal & Manges.
But Kainos’ countersuit claims Bradley obtained the documents from Weil on the pretext that she needed them for tax and estate planning. Kainos later learned that Bradley had been communicating with the Tendy Law Office in New York, which specializes in plaintiff-side commercial litigation.
When she received the documents, the countersuit says, she “immediately forwarded them to personal or family e-mail accounts to ensure that Kainos did not learn the identity of the ultimate recipient.”
Over the next few months, Kainos discovered, Bradley also had numerous meetings with lawyers at Reid Collins & Tsai, who filed the litigation for her.
Kainos allocated a significant portion of its 130-page lawsuit to respond to Bradley’s complaint paragraph by paragraph – admitting some undisputed facts, but overall generally denying all of the nuanced allegations within each paragraph.
“All allegations expressly admitted herein are denied,” Kainos prefaced for the court before its paragraph-by-paragraph breakdown. “All headings and subheadings in the complaint do not constitute well-pleaded allegations of fact and therefore require no response. To the extent that a response is deemed required, defendants deny any and all allegations contained in the headings and subheadings in the complaint.”