Dov Seidman accused of cheating shareholders
The author of a bestselling book on moral leadership has been accused of cheating investors out of millions of dollars when he sold his business ethics consultancy to a private equity firm.
Dov Seidman founded LRN when he was barely 30, “with a
powerful vision that the world would be a better place if more people did the
right thing”.
Today, it provides ethical advice and compliance training to
dozens of blue-chip businesses, which have included pharmaceuticals company
Pfizer, media conglomerate Viacom, and Altria, the maker of Marlboro
cigarettes. The New York Times Company has been a client, and the paper’s star
columnist Thomas Friedman has called Mr Seidman his “teacher and friend”.
Mr Seidman sold the company to Leeds Equity Partners in
2018, cashing out 80 per cent of his shares in exchange for about $128m,
according to litigation filings.
It is this deal that is now under attack by former
shareholders, who say they were coerced into selling their stakes at a far
lower valuation a year earlier. The resulting lawsuit — parts of which have
recently been unsealed by a Delaware court — threatens to tarnish the image of
a corporate social responsibility pioneer who has done exceptionally well by
promoting the idea of doing good.
LRN describes itself as “a flat, self-governing
environment”. According to a newspaper article Mr Seidman wrote in 2012,
employees can write their own reviews, spend company money without approval,
and take unlimited holiday. “If business is no longer war,” he wrote in How,
his 2007 book that includes a glowing foreword by Bill Clinton, “then you need
to practise skills that take the war out of business.”
All the same, Mr Seidman has fought hard to protect his
intellectual property in court. When a television advert for US yoghurt brand
Chobani asserted that “a cup of yoghurt won’t change the world, but how we make
it might”, Mr Seidman sued, contending that the campaign “threatened to tarnish
and devalue the how philosophy”.
Emails allegedly showed that Mr Seidman’s own talent agents
at William Morris Endeavor had used his ideas when they helped plan the Chobani
campaign. The lawsuits were settled. Chobani no longer uses the slogan “How
Matters”.
Mr Seidman has also proved a shrewd dealmaker. In 2016, he
agreed a strategic partnership with PwC that gave LRN an entry with some of the
firm’s clients. The collaboration, which at its height accounted for 8 per cent
of LRN’s revenue, fell apart in less than two years, according to a settlement
agreement filed with a Delaware court. But Mr Seidman saw a way to turn that
misfortune to his advantage, too.
At the time, a number of LRN shareholders were looking for a
way to liquidate their holdings. PwC paid $25m to settle disputes arising from
the failed partnership, according to the settlement agreement, and LRN used the
surplus cash to grant the shareholders their wish, offering to buy them out at
$1.35 a share in 2017.
Among those who accepted was one of Mr Seidman’s longtime
friends, Howard Marks, co-founder of the Activision video game studio behind
such titles as Call of Duty.
Mr Marks, who is not related to the Howard Marks who
co-founded private equity firm Oaktree Capital, received about $4m in the
transaction. All told, about half of LRN's shareholders participated, and
nearly a quarter of the company’s shares were cancelled, according to court
filings. This gave Mr Seidman a bigger stake and a larger share of the proceeds
when Leeds bought the company the following year for about $255m, or $7 for
each remaining share.
In April this year, Mr Marks received a call from Mr
Seidman, according to a complaint filed on his behalf in Delaware Court of
Chancery. A disgruntled former LRN shareholder had filed a lawsuit, and
according to Mr Marks, Mr Seidman contacted him to ask whether, “as a personal
favor, he would agree to exclude himself from the lawsuit”. Mr Seidman denies
this, and says he was not the one to initiate the call.
Instead, Mr Marks decided to join the litigation. The
plaintiffs allege that Mr Seidman concealed LRN’s true financial condition and
coerced shareholders into accepting the $1.35-a-share offer. It was, they
claim, a scheme to acquire control of the company at an unfair price before
completing a sales process that Mr Seidman had already secretly begun.
Mr Seidman’s lawyers have dismissed the lawsuit as “seller’s
remorse”, stating that no one was forced to sell their shares and that “the
[LRN] board never claimed that the tender offer price was fair”.
The allegations have yet to be tested in
court, including the plaintiffs’ assertion that Mr Seidman was
discussing a potential sale at the time of the 2017 tender offer.
To Mr Seidman’s supporters, the increase in LRN’s value is
not a sign of wrongdoing, but a consequence of the growing clamour for
corporate ethics initiatives.
Either way, what will matter in court is not so much the
price of Mr Seidman’s shares, but how he achieved it — a vindication, of sorts,
for the philosophy that has been his life’s work.
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