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Investor accuses Everything but the House of 'misrepresenting' its financial condition

Lawsuit: Online auction house lost $3M a month as it grew
Posted at 9:12 AM, Jan 07, 2019

CINCINNATI — An investor in one of Cincinnati’s most celebrated startups is suing Everything but the House, alleging its former leaders withheld important financial details prior to closing a $900,000 stock sale in 2017.

Light EBTH LLC claims it was “fraudulently induced” to purchase EBTH shares when three former executives overestimated the company’s revenue performance and underestimated its financial losses – each by millions of dollars.

Court records indicate Light EBTH is a Delaware corporation whose manager is Mark Sullivan, a former Citigroup executive from Connecticut who graduated from Miami University and serves on its fundraising foundation.

In addition to the company, the defendants named in the case are Miami grad Andy Nielsen, who was replaced as CEO last May, and his brother Jonathan Nielsen, who was chief revenue officer for EBTH when the stock was sold. Former Chief Operating Officer Michael Reynolds was also named as a defendant.

The complaint alleges EBTH managers projected an $18.6 million loss on 2016 revenue of $75.9 million when Light EBTH was considering its purchase of 369,130 shares in late 2016. A day after the sale closed on Jan. 9, 2017, the lawsuit alleges EBTH revealed its 2016 losses would reach $29.25 million on revenue of $61.8 million.

“Defendants fraudulently lured the plaintiff to invest in the company,” said the lawsuit filed Jan. 3 in U.S. District Court in Cincinnati. “They did so by knowingly misrepresenting the true financial information of the company.”

The company issued a statement on the lawsuit:

“EBTH does not typically comment on litigation, however, it is important to note the company was not a party to the January 2017 transaction that took place among the other parties in the 'Light EBTH' lawsuit. The 'Light EBTH' transaction was a private-party to private-party sale of common stock, in which the company received no benefits or proceeds. EBTH believes that the claims against it are without merit and intends to vigorously defend against this lawsuit.”

Andy Nielsen did not return calls seeking comment. An attorney for Light EBTH declined to comment.

A stock purchase agreement attached to the complaint shows Light EBTH was the second-largest investor to purchase shares from EBTH founders and owners in the 2017 sale that raised $7.2 million. Light EBTH bought 13 percent of the roughly 3 million shares sold for $2.44 each.

The Western and Southern Life Insurance Company bought 61 percent of the shares for $4.4 million. Other buyers included New Coast Ventures, Hyde Park Venture Partners and Vine Street Ventures, an investment fund started by founders of the Brandery startup accelerator. Individual investors Tim Stautberg, J. David Rosenberg and Mark Inglis also purchased shares, according to the stock sale agreement.

The lawsuit says Light EBTH sought reimbursement from Jonathan Nielsen and Michael Reynolds, who each sold a portion of their shares to Light EBTH in the 2017 transaction. But that attempt failed. Now, Light EBTH is seeking a judgment in excess of $75,000 from Nielsen and Reynolds along with punitive damages.

The lawsuit sheds new light on financial woes that preceded Andy Nielsen’s ouster as CEO and the company’s dramatic downsizing in early 2018. EBTH grew to roughly 1,000 employees as it embarked on a national expansion aimed at opening offices in 27 cities. But early last year, it closed 19 of those markets and cut more than 400 jobs including about 300 in Cincinnati.

RELATED: Growing pains at Everything but the House

The company never revealed details about its profitability as it developed – focusing instead on how much investor capital it raised and gross revenue from the sale of all items on its online auction site.

In July 2017, the lawsuit claims, the company told Light EBTH it was making “strong progress” toward “a banner year.” But at the end of 2017 EBTH announced it would take on additional venture capital debt, potentially diluting the value of all shares.

A few months after that, Andy Nielsen was replaced as CEO by Scott Griffith, who previously led the car-sharing company Zipcar prior to its initial public offering in 20011. Griffith told WCPO last May that Nielsen’s parting was amicable but the company needed to focus on profitable growth.

“We’re intentionally slowing growth down so that we focus on delivering a great customer experience and focus on metrics that drive margin,” Griffith said. “I still believe this is a large-scale company in the making.”