Bankruptcy Lawyer Bryan W. Stone answers the question: “What is a small business bankruptcy ?”
A shareholder of the identity verification startup company Jumio Inc. has sued Eduardo Saverin and other former top executives for grossly mismanaging the firm and driving it into bankruptcy.
Saverin, most well-known for co-founding Facebook with Mark Zuckerburg, was one of Jumio’s earliest investors and primary lenders. Founded in 2010, the company offers tools to help other businesses verify and process identification documents such as driver’s licenses and credit cards. Jumio markets itself as being a time-saving tool that also helps its customers reduce fraud.
Now, at least one shareholder seems to feel as though Jumio’s executives—the ones named in the lawsuit anyway—are as fraudulent as the scams from which they said they were protecting their clients.
Jumio has had a tumultuous last couple of years. In 2015 its CEO resigned after an internal investigation into potential financial irregularities. Jumio’s board filed for Chapter 11 bankruptcy this March. As part of the bankruptcy proceedings, Saverin was prepared to buy the company’s assets for $3.2 million in cash.
However, the potential sale to Saverin created uproar amongst Jumio’s shareholders, many of whom felt that he had misrepresented and mishandled the company’s finances while serving as director. This May Jumio ended up selling to private-equity firm Centana instead—to the whopping tune of $850,000.
That’s over $2 million less than Saverin said he was prepared to pay. So why would the shareholders have preferred the company sell for millions less than what Saverin would have paid?
For one, Saverin’s purchase offer was reportedly a ruse—a move to test the market and attract interest from other potential buyers in order to attain the highest offer possible.
The recently filed shareholder lawsuit, brought by Bloso Investments Ltd, also helps answer the question. The complaint accuses Saverin and the other named executives of running Jumio without proper accounting and financial controls for years, to the point that they allegedly drove the firm into bankruptcy.
The complaint alleges that while Jumio’s executives had their interests protected by the company’s bankruptcy, Bloso lost its entire investment of almost $5 million when Jumio went belly-up.
In a corporate bankruptcy such as this one, the company’s publicly traded stock is temporarily frozen. Often, shareholders are left with the stock’s rock-bottom liquidation value plus any premium based on the probability that the company will restructure and start operating successfully in the future. If the business drastically restructures itself in bankruptcy and emerges an improved organization, its stock values can rise above what they were initially, but this is relatively rare.
If shareholders have a means to prove financial mismanagement after the company hurts their interests, the shareholders can, like Bloso has, sue the directors who owed a fiduciary duty to the company. A fiduciary duty requires reasonable care of the assets within your care, and holds you to the highest standard of honesty and loyalty. In this context, the duty of loyalty means an executive must act in the company’s best interests and not for his or her own personal benefit.
Bloso accuses Saverin and the other executives of breaching these duties. Specifically, it alleges that they misrepresented Jumio’s financial state when it solicited investments from Bloso, and used those investments to their own benefit instead of Jumio’s. In one specific example, the lawsuit accuses Jumio of including the full amount of credit card purchases in its purported revenue, instead of the two (2) percent fee it actually charged on these transactions.
On this blog we recently talked about how bad faith business dealings can bar you from being able to even file for bankruptcy, as happened with TutoringZone co-founder Matthew Hintze. Although we’ll have to wait and see how successful Bloso is in its lawsuit, this case is another prime example of how bad-faith business dealings can wreak havoc on your legal life.
If you are contemplating bankruptcy in the Charlotte area, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with legally sound advice for your particular situation.
About the Author
Kyle Frost joined Arnold & Smith, PLLC in 2013 where he focuses his practice on all aspects of civil litigation and bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.
Born and raised in upstate New York, Mr. Frost attended the University at Albany on a Presidential Scholarship, graduating magna cum laude with a double major in Political Science and Sociology. He went on to attended Wake Forest University School of Law in Winston Salem, North Carolina.
Following college, Mr. Frost spent over a year teaching English in South Korea. He worked in a private school in Seoul developing curriculum, English programs, and educating both children and adults that were interested in learning a new language.
In his spare time, Mr. Frost enjoys homebrewing, fishing, and travelling.
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