Bankrupt Startup That Blew $2 Billion From SoftBank Sues Ex-CEO, Board Directors Over ‘Self-Dealing’

The conflicts, governance lapses, boardroom disputes, ballooning financial losses, and accounting fraud allegations eventually torpedoed the company—and the nearly $2 billion SoftBank invested in it over several years, including about $1 billion after the PwC report that raised red flags. The startup lost an additional $1 billion invested by Greenoaks, Khosla Ventures and more than a dozen other firms. Katerra, which SoftBank valued at nearly $6 billion at its peak in 2019 with more than 8,000 employees, declared bankruptcy last year.

Filed in Delaware federal court by Katerra and a group of construction and real estate firms to which Katerra owes money, the lawsuit uses other internal emails, board meeting notes and financial statements to allege, for instance, that the board failed to hold audit committee meetings for years while at the same time approving transactions and acquisitions that directly benefited Katerra executives, including then-CEO Michael Marks.

The civil complaint, which hasn’t been previously reported, highlights the legal risks executives and board members face by failing to follow some basic governance practices. The Information first reported on Katerra’s accounting manipulation and board-level problems last March, but the suit provides new details about the board’s alleged failures.

It’s unusual for principals of bankrupt companies to face lawsuits alleging unjust enrichment, but “it’s perfectly natural to expect the creditors and bankruptcy estate to go after the executives and board members if it looks like they illegally funneled money out of the company,” Michael Ohlrogge, an assistant professor of law at New York University, said.

“If they’re egregiously bad facts, it’s not that hard to win,” he said, but “it could be harder to find the money” if it was spent.

Linden Zakula, a spokesperson for Marks, said the lawsuit contained numerous inaccuracies and rebutted specific claims made against Marks. “We are confident in our case against these meritless claims—demonstrating that Michael always acted in the best interest of the company and left the company in July 2020 with a clear plan for success,” Zakula said.

A lawyer for Solomon, the former CFO who was also named as a defendant, didn’t respond to requests for comment. Representatives of Soros, Greenoaks and Foxconn didn’t have a comment and a SoftBank spokesperson declined to comment.

The embarrassing details of Katerra’s failure also mark another black eye for SoftBank and its roughly $100 billion Vision Fund. With Saudi Arabia as its biggest source of money, the Vision Fund invested in other troubled or disastrous firms including office-leasing firm WeWork, lender Greensill Capital, glass manufacturer View, car-sharing startup Getaround, robotic pizza-making developer Zume and dog-walking app Wag, to name a few.

A common theme of many of those mistakes was a lack of due diligence before the investment, former Softbank partners have said. As of the end of 2021, however, the fund’s performance had more than made up for those failures, thanks in part to stakes it took in mature firms including Arm Holdings. But while the Vision Fund had a gain on paper of $40 billion at the time, that figure has undoubtedly fallen since then because SoftBank’s lucrative sale of Arm to Nvidia fell apart and the shares of some investments that now trade publicly fell by a third or more amid a broader stock market pullback.

Private Jets, Insider Deals

The Katerra lawsuit largely focuses on Marks, who co-founded the company in 2015 after previously leading electronics manufacturer Flextronics (now Flex) and investment firm Riverwood Capital. He also briefly led Tesla as CEO in 2007.

The alleged conflicts of interest started shortly after Katerra’s founding. The startup won an early contract by offering to build apartments for The Wolff Company, a real estate developer, for far less money than other construction firms, the suit said. Wolff was the property of investment firm Paxion Capital, owned by Katerra co-founders Michael Marks, Jim Davidson and Fritz Wolff. Deloitte, the company’s auditor at the time, raised a red flag about the arrangement but was ignored, according to the lawsuit.

Then in 2017, the board, which had five members at the time, gave Marks the green light to acquire companies for up to $5 million without its approval, and also “rubber-stamped” larger acquisitions, according to the complaint. The lawsuit alleges that Marks repeatedly and grossly overpaid for the assets Katerra acquired, and some of the deals benefited him or other executives directly.

For instance, Katerra bought a labor staffing company, Construct Corps, in which Marks was a major investor, for $4.9 million, according to the lawsuit. Brad Knight, another former Katerra executive named in the lawsuit, held a 10% stake in Construct Corps. The lawsuit implied Marks’ deal making was rife with incompetence: Between 2017 and 2019, Katerra bought eight companies for more than $300 million in cash and stock. But the liabilities for those companies collectively exceeded their hard assets by the time the deals were consummated, according to the suit.

Several months before Marks’ departure, the board approved an annual salary of $1 million for him as well as a $687,500 bonus payment

Zakula, the spokesperson for Marks, said the former CEO intentionally took a loss on Katerra’s acquisition of Construct Corp. The spokesperson added that Marks lost money on Paxion’s investment in the Wolff Company and left Paxion in 2020.

The lawsuit also alleges that executives used company money for personal expenses, including private jet travel and a private box at Golden State Warriors games. The company also paid for a $12,500-a-month lease on a house for one of its senior executives. And the employment contract for Solomon, the former CFO, stated that she could use the company’s private jet “to fly herself, her parents and her dog,” according to the complaint.

‘No Flowcharts’

Marks failed to rein in costs as the company offered real estate developers bargain-basement prices, its construction projects ran into repeated delays, and employees struggled to get materials to job sites on time, according to a January 2019 internal document referenced in the suit. Overall, Katerra lost $546 million while generating $771 million in revenue in 2018, the same year that Marks sold Katerra shares valued at more than $30 million, The Information previously reported, though it’s unclear whether SoftBank or another investor bought them. Executives told investors Katerra would slash those losses by about 40% the next year.

By October 2019, however, Marks was telling his lieutenants he was unsatisfied with the company’s latest financial forecasts. “Does all this mean we expect to do much worse than what we told the board a week ago?” he said in an email, according to the lawsuit. “We again miss every number all of the time.…So, the reporting isn’t good, and the results are worse.…This just sucks. Has to get better,” he said.

But the company’s operating loss ballooned to $769 million that year after generating $1.6 billion in revenue, financial statements in the lawsuit show. As it hemorrhaged money trying to build apartments in U.S. suburbs, the company spun up large divisions in Saudi Arabia and India. At the urging of SoftBank CEO Masayoshi Son, Katerra executives spent months exploring how to build a new city in Indonesia, The Information previously reported.

The size of the losses appeared to take board directors off guard. One of them, Jim Davidson, a co-founder of private equity firm Silver Lake Partners who also co-founded Katerra with Marks, told fellow directors in March 2020 that Marks wasn’t presenting them with clear financial statements. He asked Marks and another executive to send the “actual financial statements for 2019 quarters and year end. Don’t care if audited.…No PowerPoint summary. No flowcharts.”

$1 Million Salary

A couple weeks later, Marks emailed Jeff Housenbold, a SoftBank Vision Fund partner who joined Katerra’s board in 2018, suggesting he and other directors push Davidson off the board. Marks said he thought Davidson was trying to oust him as CEO.

The board eventually voted to remove Marks as CEO that spring and he left in July. According to the lawsuit, Housenbold later said in an interview that Marks should have been removed as CEO more than a year earlier but directors were reluctant to remove him because “of his experience and reputation, his control over certain Board seats, and his status as founder and second largest shareholder.”

Nevertheless, several months before Marks’ departure, the board approved an annual salary of $1 million for him as well as a $687,500 bonus payment, the lawsuit said. Zakula said Marks took no salary for the first four years on the job. (Neither SoftBank nor Housenbold were named as defendants.)

After Marks’ departure, the company ramped up an investigation of multiple instances of accounting problems, including in its renovations division, which The Information previously reported. Another problem was related to construction projects Katerra performed in the Western U.S. In order to hit forecasted revenue and profit goals in the first half of 2020, the division delayed recognition of project losses, according to the lawsuit.

The misstatements in the first quarter of 2020 “took Katerra West’s operating margin from a $8.68 million loss to a $1.17 million profit, [which] could be viewed as material by a reasonable investor,” Katerra reported to the Securities and Exchange Commission, according to the lawsuit. Katerra executives later determined the results weren’t material and wouldn’t require a restatement.