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Trust Your Instincts – They are Probably Right

In my last posting, I discussed how the current recession could be used by an unscrupulous majority shareholder to hide his embezzlement.  Unfortunately for several clients I have met with in the past couple of months, these words proved prescient.

One shareholder in particular thought she saw herself in that posting and started questioning what was happening with the company.  Of course, she was told that all dividends had stopped because the company was losing money as a result of “the economy.”  However, something in the back of her mind told her that things were just not right.  Although she figured that the company would probably lose at least some money as a result of the economic downturn, she did not think her dividend checks should stop altogether.  After all, she left her employment with the company years ago on the premise that she would retain her shares, along with her right to receive proportionate distributions.

When she came to me with her suspicions, she was fearful at first because she thought seeing a lawyer meant she was on the road to expensive and protracted litigation with no real proof the majority shareholders had done anything wrong.  But, as is so often the case, the majority suffered from hubris – outrageous arrogance and a belief that they could do and get away with anything .  While the client believed her business partners would never be dumb enough to do something where they could easily be caught, experience has taught me that hubris among such people is very common, and often leads to their downfall.

Sure enough, the majority would not produce the check ledger, any cancelled checks, or any bank records.  But when we finally obtained them through another route, the documents showed that my client, the minority shareholder, was the only shareholder whose distributions were cancelled, a clear violation of New Jersey law.

If you believe that your business partner is using the economy as a mask for something improper he or she is doing, trust your instincts and “follow the money.”  You will either be proven correct, and protect your rights in the process; or you will be proven wrong and gain piece of mind.  But you win either way.