RoweCom in LJ Academic News Wire

[Ann Okerson <aokerson@pantheon.yale.edu>]

Date: Tue, 04 Feb 2003 08:28:35 -0800
From: chlj@espcomp.com
To: AOKERSON@pantheon.yale.edu
Subject: Library Journal Academic News Wire: February 04, 2003

Library Journal Academic Newswire (TM)
February 4, 2003

[SNIP]

FRAUD? ROWECOM CREDITORS SUE DIVINE CLAIMING FRAUDULENT INDUCEMENT

A day after the subscription agent RoweCom filed for bankruptcy protection
last week (see LJ Academic Newswire 1/28/03) as part of the process of its
sale to EBSCO, its creditors did what many expected--they filed suit
against parent company, divine, inc. The case now furthers charges that
officials at struggling divine may have committed fraud by inducing
RoweCom to collect funds from libraries for services it knew it could not
provide. The suit alleges that divine officials siphoned a substantial
$73.7 million from the subsidiary, which collected the funds from
thousands of libraries, even though divine allegedly had determined last
spring that it could no longer support RoweCom. In response, divine
officials said that the allegations are "without merit," adding that the
company hoped to "achieve a global solution... in the next several days."
The suit was filed on behalf of RoweCom "debtors,"  not the ad hoc
creditors committee that has helped facilitate the sale to EBSCO.

Particularly serious is the suit's allegation that divine encouraged
RoweCom to offer programs designed to save libraries money--programs that
in reality may have been little more than a scheme to raise cash. Under
the heading "divine Loots RoweCom," the suit claims that divine told
RoweCom to offer discounts to customers who paid early and also offer a
"cash first" program in which customers had to pay for orders before they
were actually placed with publishers. Of the nearly $74 million requested
in the suit, $65 million had been collected for subscriptions.  That $65
million now stands as an estimate of the unpaid subscriptions, although
some observers had speculated the bill could climb higher, over $100
million. According to the bankruptcy filing, the largest creditors are the
National Institutes of Health, with $2.4 million at stake, Virginia Tech,
with $1.6 million, and 3M Co., with $1.3 million. While divine officials
expressed confidence they could win any potential litigation, the company
clearly cannot afford a verdict against it. According to THE DAILY DEAL, a
staggering 16 acquisitions since March 2001 and a slumping business have
left divine with only $62.3 million in cash, less even than the sum named
in the suit. Its stock is trading at roughly 86 cents per share on the
strength of a 1-for-25 reverse split last May.

[SNIP]

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