A wealthy client, Allen, invested $10,000 in a software development business owned by a college acquaintance, Mark. Allen received two percent of the stock in the company, put away the certificates, and didn’t think about it again for several years until one day he was served with the lawsuit. The suit alleged that the company had breached a contract to develop a particular program for a customer. The failure to deliver the program on time had cost the customer millions of dollars; it was now suing for $25 million. Allen was named as a defendant, together with the company which was primarily a service business with no substantial assets. It was clear that the real target in the case was Allen and not the company. Allen had $3 million of stocks and bonds in several brokerage accounts and this was the prize the plaintiff was after.
The case was disturbing. From a legal standpoint, Allen, as a minority shareholder-not even an officer or director-had no liability for any obligations of the company. Even if the damages were caused as alleged, Allen had no input or responsibility for the operations of the business.
The case had been filed solely because the other side had run an asset search on all of the shareholders-looking for a “shakedown” target-and they hit the jackpot when they found Allen’s accounts. The attorney for the other side later admitted to us that if they hadn’t found Allen’s money, they wouldn’t have filed the case. They had nobody else to go after. But now they had a perfect setup. Although Allen had no real liability, what happens in court is often different than what we think should happen.
As a named defendant in the case and the only one with money, Allen faced a difficult choice-fight or settle. If he fought, there was a risk that he could lose the lawsuit with damages of several million dollars plus attorney fees. That would probably wipe him out financially. If he won the case, it would still cost $100,000-$150,000 in legal fees and expenses and would absorb much of his time and emotions for at least the next few years. The lawyer for the other side knew how to play the game.
After several months of painful negotiations, Allen settled the case for $450,000. It was difficult for him to pay the money-mostly from an emotional standpoint-because he had done nothing wrong. But he was trapped and outmaneuvered, and he had no choice. By holding his money in an unprotected form, easily discovered and reachable, he was a vulnerable target. The proper strategy, and the one Allen now uses, is to limit access to personal financial information and shield assets from potential claims. That will minimize the threat from these types of cases.