Covad Co-Founder Files Corporate Governance Suit

September 15, 2003 ( - Pointing to a wide-ranging series of self-dealing transactions using corporate assets, a co-founder and former general counsel of Covad Communications Group Inc. has filed a derivative and class action lawsuit against the company.

In the lawsuit, Dhruv Khanna alleges the DSL and Web-hosting company’s board of directors used millions of dollars in corporate funds and Covad shares, to enrich individual directors in transactions that “were highly detrimental to Covad.”   This was done so that other ailing companies, which certain Covad directors and officers had a financial stake in, could be propped up with assets from the Covad transactions, according to Wilmington, Delaware-based securities law firm of Grant & Eisenhofer, a representative of Khanna.  

Additionally, Khanna – who left the company last year but remains one of its largest shareholders – says the transactions were deliberately omitted in several of Covad’s public filings, including proxy statements, to avoid accountability.   The majority of the transactions alleged in the suit occurred when Covad’s auditors could not complete their annual audit because of a lack of internal controls when the company’s stock was about to be de-listed from NASDAQ, according to the complaint.  

“It is with great sadness that I bring this suit against the Covad Board and Covad, one of the pioneers in high-speed Internet access services,” said Khanna, who co-founded the company in 1996.   “However, the evidence outlined in the lawsuit points to egregious misuse of corporate funds and assets to enrich a small group of board members, who continue to control Covad today, as described in our complaint.   This lawsuit is the only realistic course of action to remedy those abuses.”

The complaint also names as defendants :

  • venture capital firm Crosspoint Venture Partners, LP
  • Covad’s CEO Charles Hoffman
  • Covad’s chairman Charles McKinn .

With the action, Khanna is seeking relief in two class action counts on behalf of shareholders entitled to vote at the 2002 and 2003 shareholder meetings.   Also, Khanna seeks compensatory and consequential damages for Covad and aims to void the elections of Covad’s directors, held in July of 2002 and August of 2003.