A partner at Dallas private equity firm Kainos Capital is suing its other founders for allegedly stripping her interest in the company as millions in fees poured into an office run by a “frat house” culture.
The lawsuit filed in Delaware court Friday afternoon by Kainos Partner Sarah Bradley brings accusations of a “power grab” within a new firm that was riding a boom in the private equity industry. The allegations also come amid intensifying scrutiny over how women are treated in the workplace, especially in a business long dominated by men.
Bradley also alleges that she was groped by a Kainos executive at a company retreat, according to her lawsuit.
Kainos has denied the claims made in the suit and questioned Bradley’s litigation tactics. A spokesman for Kainos said in a statement that Bradley’s lawsuit “lacks merit and its allegations are false.”
Bradley was recruited by Kainos Founder Andrew Rosen to raise its first fund, despite warnings it would be “career suicide” due to the past “pay-to-play” scandal of Hicks Muse, the firm Kainos was being spun out of, according to her lawsuit.
With the help of Bradley’s connections, the first fund closed in 2013 at about $475 million, including commitments from a Canadian pension fund. According to the lawsuit, Bradley agreed to a 25 percent interest in Kainos’ business but was allegedly told her share would be cut to 12 percent as they prepared in 2015 to raise a second fund.
After refusing, Bradley was allegedly told by Rosen if she didn’t help raise the second fund, she would be fired and her interest in Kainos would be stripped entirely. Bradley’s attorney stated in the lawsuit that the alleged attempts to “strongarm” her were an example of the kind of atmosphere at Kainos.
Bradley was pressured to drink numerous shots at a holiday party and was told, as the only female executive, she had to participate if she wanted to be “part of the team,” according to an instance detailed in her lawsuit.
Bradley allegedly confronted Rosen about the pressure put on employees to work after excessive drinking at a company retreat where an employee allegedly passed out next to a pool. She was told, according to the lawsuit, that she could “love it, learn it, or leave it.” At a later retreat, another female employee allegedly drank so much she needed medical attention, according to the lawsuit.
Rosen allegedly “expressed anger” at Bradley at a later meeting for not fully participating in the firm’s partying, was taken off new deals and was told to apologize to the Kainos team in Dallas, the lawsuit says.
“Rosen created a frat-house-styled ethos of forced overconsumption of alcohol and general debauchery coupled with shaming and coercion if anyone tried to push back,” according to Bradley’s lawsuit.
The other founders had no authority to reduce Bradley’s share at the time, but, according to the lawsuit, came up with a plan to cut it to zero.
A FIGHT OVER MILLIONS IN FEES
In April 2016, Bradley claims that Rosen and Kainos’ other founders Robert Sperry and David Knickel created a new structure for the firm and persuaded her to agree to it on the eve of the second fund closing, according to emails highlighted in the suit.
Knickel allegedly claimed the conversion was for tax purposes only. Bradley was allegedly told the new structure would not impact her ownership rights and that without her signature the second fund could not close, according to the lawsuit.
She was also allegedly told there was no draft of the agreement at the time even though it was allegedly filed that day.
The conversion allegedly reduced Bradley’s interest to a revocable 12 percent interest in profit sharing and gave the other founders the power to remove her from the investment committee at their discretion, Bradley claims.
Kainos’ second fund closed in October 2016 at about $895 million. The firm’s fees would roughly triple as the founders allegedly whittled down Bradley’s share, according to the suit.
Bradley allegedly received a fraction of the $2.4 million for her work in 2017 she claims she was owed if her 25 percent stake had been honored – not counting bonuses her lawyer says were given to others in the office.
Bradley claims she could not tell whether she was being fairly compensated because Rosen was allegedly controlling the firm’s accounting.
The problems came to a head late last year, as the firm prepared to raise a third fund targeting $1.5 billion. If she didn’t help raise the money, Bradley was allegedly warned again that her share would go to zero, according to the lawsuit.
Bradley helped with the fundraising but also sought documents of the business’ conversion from 2016 and found she effectively had no ownership rights.
The suit claims Bradley never agreed to the new powers granted to Rosen in documents found after the 2016 conversion and is challenging their lawfulness.
She has sued seeking to restore her original 25 percent interest in the firm and to recover her share in the fees.
“Rather than the partnership they had all agreed to, through a legal shell game and lies, the defendants transformed Kainos Capital into a dictatorship,” Bradley’s attorney William Reid said in an emailed statement.
KAINOS DENIES ALLEGATIONS
“This is a financial dispute over something that happened nearly three years ago, and Ms. Bradley has been well aware that her ownership was reduced,” a spokesman for Kainos said in its statement. “Kainos has provided tremendous opportunities to its employees and partners, including Ms. Bradley, and, more importantly, has maintained an unrelenting focus on delivering results to its investors while upholding the highest standards of integrity in business. The Kainos team will not be influenced by improper litigation tactics and we intend to defend ourselves vigorously in this matter.”
The firm has made a splash in Dallas’ private equity scene by focusing on major brands, particularly in the food business. It acquired struggling diet drink maker SlimFast in 2014, turned the company around, and sold it for $350 million in October.
But the fate of its third fund, which was poised to double the size of the firm, could be jeopardized by Bradley’s lawsuit.
Many investors committed capital to Kainos under the impression that it was jointly owned by Bradley and her fellow founders and that decisions as well as fees were shared, according to her attorney.
It’s unclear if any investors have decided to pull out.