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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