By Elise Hansen, Law360 – August 20, 2020 – The CEO of celebrity texting app Community tricked the company’s founders out of their shares for cheap and cut out the Ashton Kutcher-backed company’s original investor, according to a lawsuit filed Thursday in California federal court.
Charles Buffin and Max Levine said that they were wrongly convinced to sell most of their shares for about $22,000 apiece just before Community.com Inc. raised money in a celebrity-backed funding round valuing the company at $180 million. Buffin and Levine called CEO Matthew Peltier’s alleged behavior “egregious,” fraudulent and a violation of securities laws.
“Through this lawsuit, plaintiffs seek what they are owed,” the complaint said, adding that the amount is likely at least $30 million.
Buffin and Levine founded Community in about 2013 as a way for social media influencers to communicate more directly with fans, according to the suit. Today, Community is raising funds at a roughly $450 million valuation and boasts a client list that includes such celebrities as Jennifer Lopez, John Legend, Kerry Washington and Paul McCartney, the complaint said.
But the company’s early days were less star-studded, according to the filing.
Community’s first investor was Max Levine’s father, Steven Levine, who invested $50,000 in the fledgling venture, according to the complaint. His investment was later determined to be a 2.5% equity stake, the filing said. Steven Levine also joined the suit as a plaintiff.
Max Levine and Buffin left Community in mid-2017 as the app struggled to gain users or generate significant revenue, but both of them held on to 750,000 shares, according to the filing.
In mid-2018, Peltier indicated that Community was in trouble financially and soon began to push to repurchase the co-founders’ shares, the complaint said.
“In mid-2018, Peltier began to consistently communicate to Buffin and Max Levine that the company was on the brink of failure and that the value of their shares was ‘whatever,'” the complaint said. “Peltier continued to put pressure on Buffin and Max Levine to sell and reinforced the idea that the company was drowning and that their shares had no value.”
In October of that year, Peltier told the co-founders that either Community would go bankrupt, leaving them with no return on their investment, or they could sell back their shares for about $20,000 to keep the company afloat and avoid a total loss, the complaint said.
Peltier hinted that two new founders would come on board and attempt to right the ship, but refused to disclose who they were, according to Buffin and the Levines.
Buffin and Max Levine said they each sold back 600,000 of their shares for $22,002 apiece in late November 2018.
But according to the complaint, Community was at that time negotiating a $35 million funding round at a $180 million valuation led by Sound Ventures, a venture capital firm founded by actor Ashton Kutcher and talent agent Guy Oseary.
“All of this information was inconsistent with the dire picture that Peltier painted for Buffin and Max Levine,” the plaintiffs said. “Had Peltier told Buffin and Max Levine this information, they would not have agreed to sell back any of their shares.”
Peltier also began to deny that Steven Levine was a shareholder, the filing said.
Buffin and the Levines said Peltier had breached his fiduciary duties by denying key information to shareholders, and accused Peltier and Community of fraudulent misrepresentation. In total, they brought 19 causes of action, including financial elder abuse, federal and state securities law violations and fraud.
They are seeking damages for their alleged losses as well as punitive damages, attorney fees and costs, among other relief.
The case is Charles Buffin et al. v. Community.com Inc. et al., case number 2:20-cv-07552, in the U.S. District Court for the Central District of California.