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Business Observer Friday, Nov. 19, 2004 17 years ago

Risky Venture

Tampa investor Frank Musolino has won federal civil judgments totaling about $24 million over a failed investment in a high-tech company.

Risky Venture

Tampa investor Frank Musolino has won federal civil judgments totaling about $24 million over a failed investment in a high-tech company.

By David R. Corder

Associate Editor

At the height of the dot-com craze, Tampa investor Frank Musolino took a gamble on a promising but small Phoenix-based software-development company. This was not an unusual investment strategy for the former Temple Terrace councilman, who had made a fortune from tile imported from his native Italy and real estate investments in the Tampa Bay area. He was one of the original venture investors in Inktomi Corp., a producer of Internet search engine technology that merged a couple of years ago with Yahoo! Inc.

The idea behind the company Eugene Buzzeo founded in 1993 seemed promising. He claimed his Web-based software system could simplify complicated system-programming tasks for colleges and universities. The former Dun & Bradstreet technology executive quickly amassed a customer base that included contracts with Maricopa (Ariz.) Community Colleges, Californiais Community College MIS Consortium and the University of Hawaii.

On that promise, Musolino invested $10 million in the fall of 1999 in Buzzeo Inc. Opportunities appeared so great that Buzzeo, Musolino and his close ally, Tampa attorney Geoffrey Hodges, met in early spring 2000 to talk about the possibility of taking the Phoenix company public, according to court records. Over the next few months, Musolino, individually or through trusts he directed, invested another $16.1 million.

Then reality set in: The national market receded; high-tech companies all over the nation went bust.

Musolino and Hodges learned that some of Buzzeois customers had threatened the company with claims for breach of contract. More revelations emerged. The company, which folded in 2001, never fulfilled a $4.7 million software-development contract the Hawaii university awarded the company in 1997, records show. Musolino sued to recoup his money.

This year Musolino prevailed in the U.S. District Court, Tampa, in his bid to recover his investment in Buzzeo Inc. Last month, U.S. District Judge Richard A. Lazzara awarded Hodges, as trustee of two trusts Musolino directed, a $2 million judgment against Eugene Buzzeo and his wife, Janet.

Five months earlier, Lazzara awarded Musolino and Hodges, as a trustee, a $22.7 million judgment against several other directors and affiliates of Buzzeo Inc. Itis uncertain exactly how much of the judgment the two expect to collect. Neither Musolino nor Hodges responded to a GCBR request for comment.

In the companyis defense, Buzzeo said he didnit fraudulently induce Musolino to invest in the software company. He claims Musolino and Hodges knew Buzzeo Inc. desperately needed capital to fulfill its contractual obligations. He also claims Musolino and Hodges performed a thorough inspection of the companyis financial records prior to the investment.

iThe company had no other immediately available alternatives for raising the required cash,i Buzzeo argued in an answer to allegations Hodges made as trustee of the two trusts that Musolino directed.

Buzzeo also filed a $3 million counterclaim against Musolino and Hodges on charges of fraud in the inducement and tortuous interference with contract and/or with prospective economic advantage. But court records show the counterclaim languished.

Buzzeo argued that Musolino knew the company needed cash so badly in the spring 2000 that he put additional conditions on the second round of cash invested in the software-development company.

In exchange for that investment, court records state, Musolino wanted 1 million shares of stock that Buzzeo owned personally in the company. But Musolino wanted those shares at a price of $2.50 each o $1.50 less than the price he paid for the shares acquired in the original $10 million investment. On top of that, Musolino wanted Buzzeo to sign a three-year employment agreement and noncompete contract.

iBecause the company was in dire need of investment funding, and because he understood that the employment agreement was a substantial component of the consideration he would receive for the sale of his personal stock at such a discounted price, Gene Buzzeo agreed to the terms of the transaction demanded by Musolino,i court records state.

By the time he completed his investment in the company, Musolino had become Buzzeois largest stockholder, court records state. Not long after, Musolino and Hodges joined the companyis board of directors and consequently fired Buzzeo as president and CEO.

But Musolino and Hodges told the court a different story. The two claim Simcha Roth, a New York-based Buzzeo Inc. director, discovered a troubling fact in the summer 1999.

iRoth learned that Buzzeois application server, rules server and workflow engine were inoperable,i court records state. iNot only did the software not work, several components of it were non-existent, having never been developed.i

Musolino and Hodges argued Buzzeois programming code was just a faAade, a loop of computer code that did not work.

iBuzzeois application-server technology was built on outdated client-server technology, not distributed computing technology,i court records state. iThis means Buzzeo could not deliver any distributed enterprise computing technology to any customer within a reasonable time, because Buzzeo did not have the application-server technology that was essential to such a product.i

On learning this, Roth relayed his concerns to Yitz Grossman, another Buzzeo director, court records state. The two then purportedly conspired with Eugene Buzzeo to secure third-party securities from investors such as Musolino.

In the June judgment, Lazzara ordered Roth and New York-based Consulting Administrative & Professional Services Inc. (CAPS), which acted as Buzzeo chief financial officer, to pay the $22.7 million in damages, prejudgment interest, attorneysi fees and costs.

As part of the stipulated judgment, Lazzara also dismissed claims in that lawsuit against Buzzeo Inc. and other parties listed in Musolinois complaint.

Following Buzzeois closure in 2001, Musolino and Hodges reorganized the corporation as Tampa-based Zeosoft Corp. and then as Zeosoft Technology Group Inc. Itis uncertain whether they still own an interest in Zeosoft Technology, which operates out of the Phoenix area but now offers customers on-demand mobile servers capable of running enterprise software applications over networks of handheld devices.

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