The Perils Of Being Suddenly Rich. And Then You Find You're Suddenly Poor.

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http://www.nytimes.com/2007/04/21/technology/21hayden.html

THE PERILS OF BEING SUDDENLY RICH

By KATIE HAFNER
Published: April 21, 2007

In many ways, David Hayden is the ideal entrepreneur. While still in elementary school in a suburb east of San Francisco he published a newspaper, and before graduating from college he had his own construction business. He has seen his Internet start-ups — first Magellan, then Critical Path — soar and he has seen them crash.

And as with many entrepreneurs, Mr. Hayden never claimed expertise in the arcana of margin calls, puts, hedges and collars that are the engine of the investment banking world.

While he went about the business of building companies, Mr. Hayden trusted the people who inhabit that world of high finance to take care of him. He paid advisers and lawyers to scour such deals, and put his faith in the investment bankers that would make him rich. And they did.

But his wild ride unraveled, and now he is assigning blame to those same bankers, who in turn have gone after him for all he’s worth — and more.

For more than four years, Mr. Hayden, 52, has been locked in a protracted legal fight with Robertson Stephens, the investment banking firm that is now a unit of Bank of America, as it has pursued a $24 million personal debt. Bank of America points to an arbitrator’s ruling, which affirms that the bankers acted “within the standard of care.”

Venture capital is flowing once again in Silicon Valley with the dot-com collapse safely behind it. Even Mr. Hayden is still in the game, with a company called Jeteye. Yet his legal battle stands as a cautionary tale of what can happen when someone pays too little attention to what is happening to his money and lives life a little too large.

“I can’t tell you how common this story is,” said Martin Resnick, a partner at Resnick Investment Advisors in Westport, Conn. “When stocks went from $100 to $1, massive fortunes were lost.”

Even before his recent difficulties, when it came to the vagaries of start-up financing, Mr. Hayden was no beginner. In 1994, after 15 years as a general contractor, he had grown interested in the potential of the Internet, and he created one of the earliest Internet start-ups — a search company called Magellan whose competitors included Excite, Lycos and Infoseek.

Mr. Hayden was a co-founder of Magellan with his wife at the time, Isabel Maxwell, the daughter of Robert Maxwell, the publisher.

Robertson Stephens, then one of Silicon Valley’s premier investment banking firms, stepped in to underwrite Magellan’s initial public offering. For the first time in his life, Mr. Hayden was facing the possibility of great wealth.

But at the last minute, Robertson Stephens backed out. “They just said, ‘It’s not the right time,’ ” Mr. Hayden recalled in a recent interview. Instead, Robertson Stephens took Excite public.

For Magellan, the timing couldn’t have been worse. In 1996, the window for Internet I.P.O.’s began to close on companies like Magellan, and the company was eventually sold to Excite. That year, too, his marriage to Ms. Maxwell broke up.

For Mr. Hayden, a friendly, open man who sports a shock of thick wavy hair, the second time was supposed to be the charm. And for a while, it was.

After the experience with Magellan, Mr. Hayden thought about returning to the building business, but “only for five seconds.”

Then, in 1997, using his own savings, he helped found Critical Path, which handled e-mail for corporations and large Internet service providers.

Before long, Robertson Stephens was back in the picture, and ready to take Critical Path public. Further, the company offered to manage Mr. Hayden’s personal wealth. Bankers promised Mr. Hayden white-glove treatment. “If a problem ever comes up, I will fall on the sword for you,” wrote one Robertson Stephens executive in an e-mail message to Mr. Hayden, according to hearing documents.

“The bottom line was ‘we’re going to take great care of you this time,’ ” Mr. Hayden recalled. He agreed in writing that should a dispute arise, they would use private arbitration.

In February 1999, just before the public stock offering, Mr. Hayden borrowed $2 million from Robertson Stephens, pledging all his Critical Path stock as collateral, as well as any future stock he might receive.

When Critical Path went public on March 29, 1999, its initial offering price of $24 rose rapidly and Mr. Hayden’s shares grew in value to more than $100 million. At times over the next year, they were worth well over $200 million.

When Critical Path went public on March 29, 1999, its initial offering price of $24 rose rapidly and Mr. Hayden’s shares grew in value to more than $100 million. At times over the next year, they were worth well over $200 million.

In 2000, over the course of the year, Mr. Hayden sold $45 million worth of stock, and continued to borrow against the remainder of his stock held by Robertson Stephens. Eventually, the loan was increased, first to $5 million, then $20 million. At one point, he borrowed as much as $30 million against the shares. Although his wealth existed mostly on ledger sheets, Mr. Hayden believed himself to have become supremely rich and lived life accordingly.

Mr. Hayden and his second wife, Storey, bought a 7,000-square-foot mansion in one of San Francisco’s wealthiest neighborhoods for $8 million. The Haydens spent a year gutting, renovating and decorating the house with a refined yet understated eye, putting Venetian plaster on the walls and blond oak on the floors. The Haydens also bought property in Sun Valley, Idaho, for $4 million.

Mr. Hayden put a down payment on a Gulfstream jet. He invested in several start-ups and started his own venture capital firm. He drove a Ferrari. Together with the television producer Norman Lear, he bought an original copy of the Declaration of Independence. He was invited to the White House.

Some of Mr. Hayden’s co-workers were taken aback by his excesses. “I was embarrassed for him,” said Wayne Correia, one of the original co-founders of Critical Path who left the company at the end of 1999. “It was the worst case of nouveau riche you can possibly imagine.”

Mr. Hayden is the first to concede that it was a period when it was easy to lose one’s bearings. “Dining with presidents is a heady thing. It can turn even the most grounded head,” he said recently while seated in the well-appointed living room of the San Francisco house.

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For many dot-com multimillionaires at the time, a lavish lifestyle became its own seduction.

“Part of the bizarre but interesting psychology of the tech boom was the sense of hubris people developed, thinking they were impregnable to losses and defeats,” said Joan DiFuria, a psychotherapist who is co-founder, with Stephen Goldbart, of the Money, Meaning and Choices Institute in Kentfield, Calif., north of San Francisco. “They had a fantasy that things could only go up.” During the boom period, Ms. DiFuria and Mr. Goldbart coined the phrase “sudden wealth syndrome.”

Then the world started to slip. By early 2001, Critical Path was in financial trouble and the stock was trading near $2. As security against his outstanding loan, the Haydens put up the San Francisco house, as well as the Sun Valley property.

In November 2001, Robertson Stephens, which by then was owned by Fleet Bank, began seeking repayment of the personal loan. Mr. Hayden said he would have sold the San Francisco house, but Robertson Stephens placed a lien on it, making it difficult to do so.

Mr. Hayden said that it was not until September 2000, when he requested a briefing on hedging, a common practice, that Robertson Stephens discussed it with him.

In April 2002, Mr. Hayden hired a lawyer and filed a lawsuit, asserting that Robertson Stephens mismanaged his money and shirked its fiduciary duty by not informing him properly of ways he could have protected himself.

But when the case went to arbitration, in September 2003, after a weeklong hearing, Richard Chernick, a private arbitrator, ruled against Mr. Hayden. “Hayden’s claims are not established,” wrote Mr. Chernick, and he awarded Robertson Stephens $23,828,209.60 plus interest. Personal wealth experts say that although Mr. Hayden’s situation is an extreme one, it was not at all unusual for people whose wealth existed mostly on paper to live as if it were otherwise.

Mr. Resnick pointed out that if Mr. Hayden had hedged his position, or diversified his portfolio into other stocks, he could have been protected. “Had he acted prudently, he’d still be rich,” Mr. Resnick said. Yet Mr. Resnick also faulted Mr. Hayden for not having educated himself more thoroughly.

“At what point does the person with the money have some responsibility to know something about what he’s doing?” Mr. Resnick asked. “If you’re smart enough to have made the money, you should be smart enough to figure out something to do with it.”

In the arbitration hearing, Robertson Stephens claimed that it had indeed presented hedging opportunities to Mr. Hayden, but he declined them. The firm said it also encouraged Mr. Hayden to diversify his holdings.

In a written statement about Mr. Hayden’s case, Bank of America said, “In a 21-page opinion, Mr. Chernick dismissed all of Mr. Hayden’s claims as meritless. That opinion speaks for itself.”

Mr. Hayden challenged the arbitration ruling in California Superior Court on grounds that Mr. Chernick had inadequately disclosed the extent of his ties to Bank of America. Mr. Hayden lost, but took his challenge to the California Court of Appeals in San Francisco. This month, Mr. Hayden’s appeal on the disclosure obligation claim was heard by a three-judge panel. A decision is expected within 90 days.

If the panel affirms the lower court’s ruling, Mr. Hayden will be liable for the arbitrator’s award. With the addition of interest and legal fees, Mr. Hayden said he would be some $38 million in debt, and he might have to file for personal bankruptcy. “If we lose, we’re done. I’ll just say, ‘that’s the end of it.’ ”

Robertson Stephens currently holds title to the San Francisco house, which is now worth more than $14 million, as well as the Sun Valley property, which is worth around $8 million. Yet Mr. Hayden has a redemption-rights period, giving him some time to pay off the debt and buy the properties back. (In 2003, Mr. Hayden’s second marriage ended.)

But if the panel reverses that lower court decision, the matter will be returned for arbitration and Mr. Hayden will pursue his claim again.

Mr. Hayden is also an optimist. In May 2004, he started Jeteye, with some $4 million in venture funding. But Jeteye, which allows users to share collections of Web pages, has not succeeded as Mr. Hayden had hoped, and he is seeking additional funding.

To pay bills, Mr. Hayden is gradually selling off furniture and paintings. Yet he appears to harbor surprisingly little bitterness. “It’s better that way in the end,” he said. “Otherwise you focus on stuff that doesn’t matter.”

And he is staying philosophical about his situation. “It’s just stuff, and it’s important to not let stuff get in the way of what’s important,” he said. “People, happiness, health, children, and putting money in the right places.”