WPP, the advertising conglomerate, is suing Grouf and Spot Runner's other board members, charging them with a massive scheme to enrich themselves to the tune of $54 million while the online-advertising startup bled $80 million in losses. WPP is seeking $13 million in damages. (The lawsuit is embedded below.)

So many people believed Spot Runner's story — a startup ostensibly dedicated to simplifying the process of buying television ads, a challenge Grouf experienced firsthand while working on John Kerry's failed presidential campaign in 2004. Media giants from WPP to Grupo Televisa to CBS invested more than $100 million in the company — some of which WPP charges went into Grouf's pockets instead of into the company's coffers. Bob Pittman, a Spot Runner board member, is also accused of selling his shares, as are Battery Partners and Index Ventures. Spot Runner claims WPP just wants to get back its investment in a declining ad market.

Everyone loves an upstart. In 2006, as it raised its first round of venture capital, Spot Runner cast itself early on as the David against Google's Goliath as the search engine was starting to dabble in brokering television commercials.

Grouf told a gullible Kara Swisher last summer that the company was "scrappy," bragging about the low rent it paid on its headquarters on Wilshire Boulevard in Los Angeles. But the company lurched from business plan to business plan — first hiring dozens of video producers to churn out cookie-cutter TV ads, then buying a search-advertising startup, then switching from selling TV ads to small businesses to wooing national advertisers. Executives came and went, and the company laid off hundreds in waves starting last fall.

John Gentry, the company's president, blamed the economy, telling Fortune Small Business that "everyone's hard hit." But the WPP lawsuit has revealed the economy excuse as an obvious lie. Spot Runner took in $5 million in revenues in 2007 and lost $35 million. 2008 was hardly an improvement: The company took in $9 million and lost $45 million. (Spokeswoman Rosabel Tao would not comment specifically on those figures, saying that WPP's filing had "inaccuracies.") At those figures, Spot Runner didn't have anything resembling a real business, let alone one that would wax or wane with the swings of the economy.

WPP alleges that Spot Runner's executives and board members, including some of its early venture-capital backers, sold shares to new investors, pocketing the proceeds rather than putting the money in the company's treasury.

Spot Runner is now betting the company on something called Project Malibu, a digital system for buying television ads. Wait a second: Wasn't that the initial idea, to use technology to make buying TV ads easier? The fantasy of perfectly liquid markets has long entranced entrepreneurs, who can't understand why all business processes aren't as efficient as the equations they studied in college. But it's hard to imagine a business less efficient than one which loses $5 for every $1 it makes.

The picture painted by WPP charges are of a market that functioned very efficiently for Grouf and his pals. Too bad it didn't have anything to do with advertising.

"I feel really bullish about the business," Grouf tells us. But he was not bullish enough to reveal any numbers — like how much of the $51 million in venture capital Spot Runner raised earlier this year still remains in its bank account, and to what extent he reduced the company's monthly cash burn through these layoffs.

He was more forthcoming about Joanne Bradford, the Microsoft executive he hired, briefly, as an executive vice president. She left Spot Runner after less than six months to join Yahoo, which had long been courting her.

"Tell me about it," Grouf groused when we brought up Bradford's rapid departure. "After the Yahoo-Microsoft dance was over, they needed to move quickly on their ad sales group, and they made her an offer she couldn't refuse. The shame is we reorganized the business the way she wanted it to run, and she left midstream."

Today was Black Tuesday at Spot Runner. Due to a strategic shift, they fired 100 employees at our LA offices that did not have the "skill set" they required. Spot Runner is no longer going to serve as a provider of television advertising to local businesses. I'm sure they will have no trouble competing with major holding companies for national TV advertising accounts, or selling keyword based search engine marketing to local businesses who can save 50% by going directly to Google. I'm curious to see Grouf's exit strategy for this quagmire.

Here's Grouf talking about the local-advertising strategy, now apparently being abandoned:

Agency Spy earlier aired rumors of financial trouble at Spot Runner, saying the company had recently rescinded job offers it had made. The blog also noted that Bradford hadn't been around the office much — absences a Spot Runner flack put up to business travel and Bradford's relocation from the Bay Area to L.A.