A board member’s reporting of suspected corporate financial malfeasance to the SEC is protected from litigious retaliation by Illinois’ Citizenship Participation Act, but reporting it to shareholders is not.
Ditto Holdings, Inc. is a private shareholder-owned corporation whose sole subsidiary is Ditto Trade Inc., an online retail stock trading company. In 2013, Trade CEO and Ditto Holdings board member Paul S. allegedly discovered evidence of suspicious financial activity by Ditto’s chairman and CEO, Joseph F., including possible securities law violations. Records indicated Joseph had been diverting the company’s capital to himself personally and had spent $1.5 million for the benefit of himself and his family. Paul S. wrote to Ditto’s board revealing his concerns. After receiving a hostile response from the general counsel and another director, Paul S. reported his allegations to the Securities and Exchange Commission.
Shortly thereafter, Paul was notified the board had fired him as CEO of Trade for failing to obtain his brokerage license. After allegedly learning Joseph was attempting to have him removed from the board, Paul sent an e-mail to more than 200 Ditto shareholders, claiming to be the victim of retaliation for doing his duty as a board member. Paul was then informed he had been removed from the board by consent of the shareholders, and removed as executive vice president for his “destructive and reckless” actions.
The company sued Paul for breach of fiduciary duty, seeking $40 million in damages. Ditto alleged Paul and Joseph F. clashed over the management of the company, and that Paul knew he was about to be fired. Ditto also claimed Paul breached both his confidentiality agreement by sending the shareholder e-mail and his employment agreement by failing to obtain the necessary license.
Paul sought to dismiss the suit as a Strategic Lawsuit Against Public Participation (SLAPP) under the Citizen Participation Act. A SLAPP is a meritless lawsuit used to retaliate against a party for exercising First Amendment rights such as free speech, and is intended to “chill a defendant’s speech or protest activity and discourage opposition through delay, expense, and distraction.” Paul claimed he acted to protect the corporation, its employees, and shareholders from Joseph’s apparently suspicious transactions, and that the suit was intended to retaliate against him. Ditto argued the crux of its complaint was his email to its shareholders, not his complaint to the SEC.
The circuit court denied Paul’s motion to dismiss on the grounds he had failed to show Ditto’s claims were meritless. On appeal, the First District Appellate Court found Paul was exercising his constitutional right to petition the government when he reported the alleged fraud to the SEC. His email to the shareholders, however, was not “in furtherance of the constitutional rights to petition, speech, association, and participation in the government,” but related solely to “his own private concern.” Thus, the only “protected act” was the SEC email. Moreover, Paul’s alleged delay in obtaining the required license could not be dismissed as part of a SLAPP because it also is not a protected act.
The court noted that Ditto’s suit was filed suspiciously soon after the SEC email, and the company’s $40 million request for damages appeared baseless and “grossly disproportionate to the acts alleged,” but concluded “[Paul] has not yet … disproved that Ditto suffered any damages.”
The court also concluded that Paul could not demonstrate the lawsuit was retaliatory and meritless or “based solely on, related to, or in response to” his protected act in emailing the SEC because Ditto’s claims were largely based on the email to the shareholders, a statutorily unprotected act. Consequently, the court rejected Paul’s SLAPP suit claims.
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