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Livingston, McAuliffe Face Suits by Investors

Terry McAuliffe, the chairman of the Democratic National Committee, and former House Appropriations Chairman Bob Livingston (R-La.) are being sued for securities fraud in Texas for their role in a technology startup that allegedly bilked $16 million from political figures, Washington lobbyists and other investors in the waning years of the high-tech boom.

According to a civil lawsuit filed this year in a district court in Dallas, a group of investors in Media Fusion, a now-defunct company, are trying to recoup their money from McAuliffe, Livingston and five other company officials on the grounds that they failed to properly oversee the firm as it ran aground in 1999 and 2000.

Another prominent Washington lobbyist is also a target of the lawsuit: retired Naval Rear Adm. James Carey, a former aide in the Reagan administration.

The lawsuit charges that McAuliffe, Livingston, Carey and four other board members “failed to perform any oversight” of the company and its founders, causing the investors to put their money into a “fraudulent business venture.”

McAuliffe is challenging the lawsuit on the grounds that he was “never officially elected” to the company’s board. Robert Bieck Jr., McAuliffe’s lawyer, said McAuliffe “had no involvement with the plaintiff, its investment or the events giving rise to the lawsuit.”

Livingston and Carey also are challenging the lawsuit, though they declined to be interviewed for this story.

The case stems from their roles in 1999 and 2000 in Media Fusion, a venture that seemed to be a promising high-tech company.

The founders of the Dallas-based company claimed they had developed a technology that could send broadband Internet service over electricity lines — a breakthrough that promised to revolutionize Internet service and make its investors rich.

But the invention, the plaintiffs charge, was a sham.

“They never even did any research,” said Ed Philbin, a retired Air Force major general who once testified on behalf of Media Fusion on Capitol Hill. Philbin is not a party to the suit on either side.

Though the technology was never adequately tested, Media Fusion founders William Stewart and Edwin Blair applied for and received a U.S. patent, rounded up millions of dollars from investors, hired two dozen influential lobbyists in Washington, and went after $50 million in funding from the Defense Department and various other federal agencies, according to court documents and interviews with former officials of the company.

A ‘Dereliction of Duties’

Now, many of the investors want their money back.

In the lawsuit, one set of investors is seeking a total of at least $80,000 from McAuliffe, Livingston, Carey and four other board members for failing to “exercise reasonable care in performing due diligence into the representations made by Stewart and others regarding the value of his alleged invention.”

“Had they sought even a limited independent examination of Stewart’s claimed invention, they would have discovered its fraudulent nature as well as Stewart’s inability to explain his invention to knowledgeable physicists,” the investors allege in their lawsuit.

As an example of what they called the board’s “dereliction of duties,” the lawyers for the investors point to comments Livingston made to Wired magazine shortly after he left the company in 2001: “I was on the board. I did not have anything to do with day-to-day operations. And when, a few months ago, I saw things that I didn’t like, I got off.”

For investors in Media Fusion, the discovery was “inexcusably too little, too late,” the lawsuit charges.

Attempts to reach Stewart and Blair were unsuccessful. Court filings show that they are fighting the lawsuit.

Several other lawsuits against Media Fusion and its board are in the works around the country, including a $1 million civil case in South Carolina that targets Carey, but not McAuliffe or Livingston.

If either of the civil cases in Texas and South Carolina is successful, other investors are expected to pursue similar judgments against the company and its board.

Media Fusion Comes to Washington

According to court papers and interviews with people formerly involved in Media Fusion, Carey became the first of the political figures to sign up with the company, joining the board of directors a few months after its 1998 founding. He was tasked with recruiting other prominent Washington figures to serve on the company’s board of directors in order to open doors on Capitol Hill and entice other investors.

Carey soon persuaded McAuliffe and Livingston to enroll by offering them $50,000 a year and a chance to get in on the ground floor of what he promised would be “the next Microsoft,” according to Bruce Bowman, the attorney who filed the Texas lawsuit.

“Their association with Media Fusion was used to attract investors,” the Texas investors charge in their suit. “All three had significant influence in Washington, D.C., and their addition to Media Fusion’s management committee added legitimacy to the company and its purported technology.”

The strategy paid off: Within a year, the company had raised $16 million from 350 investors, many of whom came from inside the Beltway.

The new ties to Washington figures gave the company a whiff of political celebrity. According to the lawsuit, Media Fusion boasted that McAuliffe persuaded former President Bill Clinton to tee off with Media Fusion golf balls when he hit the links.

Clinton also invited Media Fusion founder Stewart to a St. Patrick’s Day party in March 2000 at the White House.

Meanwhile, former Rep. Dick Armey (R-Texas), then the Majority Leader, stopped by the opening of the company’s Dallas headquarters. And Rep. Billy Tauzin (R-La.), whose district bordered on Livingston’s old seat, invited Media Fusion officials to brief him in his Capitol Hill office.

As Media Fusion worked to raise its profile and attract funding in early 1999, the company assembled a team of Washington lobbyists to go after $50 million in funding from the Pentagon and other federal agencies, according to internal company memos obtained by Roll Call from a one-time investor who is not a party to the lawsuit.

To lead the lobbying effort, Media Fusion picked the Livingston Group, the appropriations lobbying shop that Livingston founded just days earlier when he resigned from Congress after serving as the chairman of the powerful House Appropriations Committee.

In an unusual dual role for a lobbyist, Livingston would serve his new client on the board of directors and be its top Washington lobbyist.

“If anyone knows how the federal funding process works and how we can achieve success in this arena, it is Bob Livingston,” Carey announced in an e-mail to Media Fusion’s Washington lobbying team on March 19, 1999.

Livingston retired from Congress on Feb. 28, 1999, and started the Livingston Group March 1. Lobbying rules prohibit former Members of Congress from speaking to former colleagues about clients for one year.

“But those restrictions do no apply to others in his firm, and it is they who will be working with us in that regard,” Carey said in the e-mail.

According to a list of Media Fusion’s lobbyists obtained by Roll Call, three other Livingston Group lobbyists handling the account also had intimate knowledge of the federal appropriations process and close ties to the Appropriations panel: J. Allen Martin, Livingston’s long-time chief of staff; Paul Cambon, his top Appropriations aide; and Richard Legendre, who ran Livingston’s Louisiana office.

In his e-mail, Carey dubbed the Livingston team the “Media Fusion Nuke Weapon.”

But the Livingston Group never registered to lobby for Media Fusion. Instead, Livingston and about half of the lobbying firms working for Media Fusion were paid by another entity, International Technology Resources, a firm that sources say was run by Carey from an office park in Alexandria, Va.

“We were told not to register for Media Fusion,” said one lobbyist who once worked for Media Fusion. “Carey wanted us to register under ITR.”

According to an internal Media Fusion list of its Washington lobbyists, other firms on the account failed to register for either entity, including Barbour Griffith & Rogers, the firm founded by Haley Barbour, a former head of the Republican National Committee and now the governor of Mississippi.

In all, more than a dozen lobbying firms and 28 lobbyists signed up with Media Fusion and International Technology Resources, according to the list of lobbyists.

“If someone seems to be legit, you go with them,” said Virtual Murrell, one lobbyist on the Media Fusion team.

In 1999, the two entities reported paying their lobbyists $460,000 — about twice as much as Southwest Airlines typically pays its squadron of Washington lobbyists, according to federal lobbying forms.

Media Fusion also hired former Secretary of State Henry Kissinger to handle foreign negotiations.

Investing in Lobbyists

The company employed other unusual lobbying practices.

In the summer of 1999, just days after the company secured $10 million in funding from a House spending bill, Media Fusion offered each of its Washington lobbyists the opportunity to buy stock in the company.

In a July 10, 1999, e-mail, Carey offered each of his lobbyists the option to purchase 2,000-share blocks of stock in Media Fusion for what seemed to be a bargain price: $5 a share.

“With one million customers, using the Wall Street stock valuation formula, that would make Media Fusion worth $4 billion, and thus the stock should be $80 per share at his point,” Carey said in his pitch to the lobbyists.

Many of the members of Media Fusion’s Washington team snatched up the stock, including retired Maj. Gen. Philbin.

During the company’s two-year existence, a total of 350 people invested $16 million in the company in and outside of Washington, according to the company.

Meanwhile, Media Fusion executives continued to send out a series of rosy e-mails and letters to Media Fusion shareholders about the company’s future.

Media Fusion was awarded patent #5982276. It said it was on the verge of inking a $145 million deal with an undisclosed major electric utility. It said it had successfully completed laboratory tests on the technology in Guatemala that confirmed its potential. It was featured in the European edition of The Wall Street Journal. And, in the fall of 1999, it said it had sold an exclusive license to Power Korea 21 to use its technology in South Korea for a staggering $1.5 billion.

In a Dec. 12 letter, Blair, one of the company’s founders, told investors that a company called Zoned In had agreed to purchase 1 million shares of Media Fusion for $65 million.

“Among other things, this means that the Media Fusion units you purchased are now valued at $65 each,” Blair said.

In four months, the lobbyists had seen their Media Fusion stock rise 1,300 percent.

Trouble in Dallas

But unbeknownst to its investors in Washington, things were falling apart in Dallas.

In fact, the technology had never been tested. Money from the promised deals was not rolling in. And an internal audit had uncovered “extravagant and inappropriate spending” by one of the founders, Stewart.

“As far as I am concerned, they lied to me,” said Mickey Walter, a retired lieutenant general who was listed on Media Fusion’s government relations team. Walter, who invested $10,000 in the company, said he “lost every penny of it.”

Said another Washington lobbyist who invested in Media Fusion: “The company sounded great. The problem was that there was no ‘there’ there.”

According to an internal audit, Stewart went on a $1.8 million spending spree, buying everything from $350,000 in jewelry and to $50,000 worth of sound equipment.

The audit also found that Stewart, who was paid $1 million a year, traveled by private jet and limousine.

He even used company funds to launch his own record label, Big G Records.

“It soon became apparent to a lot of us that Like Stewart wasn’t playing it straight,” said James Gilberson, a Media Fusion lobbyist. “A lot of the money that was squandered was for his high living. He really wasn’t working on the technology but he was doing things like taking private jets to the Grammy’s.”

In retrospect, some of Media Fusion’s lobbyists now say they missed clues that the firm and its founders had been overplaying their hand.

One of those was Van Hipp Jr., a former chairman of the South Carolina Republican Party and a lobbyist with American Defense International, one of Washington’s top defense lobbying firms.

In April 1999, Hipp and his firm signed up to lobby for Media Fusion. Taken by the potential of the technology to solve the so-called “last mile problem,” Hipp volunteered to help Media Fusion founder Stewart get nominated for a Nobel Prize.

Using contacts in the scientific community overseas, Hipp secured a sought-after meeting for Stewart with the committee of scientists who nominate scientists for the prestigious prize.

Stewart never showed.

Co-founder Blair blamed the snub on a “flu bug that has a tendency to turn into pneumonia,” according to a letter he sent to shareholders in February 2000.

Investors later discovered that Stewart had been sued before for his roles in other startup companies.

Within months, Media Fusion stopped paying its lobbyists. And they were stuck holding company stock that was worthless.

In the summer of 2000, McAuliffe resigned from the board. He was soon followed out the door by Livingston and Carey.

Lawyers for the Media Fusion investors in Texas charge that Livingston, McAuliffe, Carey and other board members had failed in their duties to protect shareholders by verifying the optimistic financial forecasts offered by Stewart and Blair.

“Directors have a responsibility for their shareholders,” said Bowman, an attorney representing the investors. “We are alleging that they did not exercise their duties as directors of the company.”

In a statement to Roll Call, McAuliffe’s attorney countered that he had no legal responsibility for Media Fusion investors because he was never formally voted onto its board of directors.

In addition, McAuliffe and Livingston assert that the Texas court does not have jurisdiction over them since they live in Washington.

A Texas appeals court rejected that defense a few months ago and the issue now stands before the Texas Supreme Court.

If McAuliffe and Livingston remain a part of the lawsuit, the case is expected to begin early next year.

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