The lawyer behind a lawsuit brought against LSV Asset Management hopes a victory in court will benefit not only the plaintiffs but employees of other firms facing similar situations.
A challenge from the asset manager to have the case dismissed was denied on June 17 in what the plaintiffs’ firm argues is a significant milestone in the proceedings. The case will now move into the discovery phase pending a trial in front of a jury.
The lawsuit was filed in Cook County, Illinois in July 2024 by four former employees, all partners or executives of the firm, who alleged fraud, the breaking of fiduciary duty, and the implied covenant of good faith. The plaintiffs cite “damages arising from a forced sale of their acquired equity shares of LSV at a below-market price, based on a series of fraudulent representations.”
Despite claims of a significant victory in court for law firm Procel Levine and the plaintiffs, the judge's action simply means that he believes the allegations to have sufficient merit to proceed. This is a standard procedural step.
In response to the latest court decision and a request for comment, LSV told Institutional Investor that it has every intention of continuing to push back against the claims, arguing that they are inaccurate.
“Plaintiffs’ previous fraud claim in the case was recently dismissed by the court. The new fraud claim, which largely rehashes the allegations of the previously dismissed claim, is also filled with inaccuracies, omits relevant information and is without merit,” the firm said. “LSV intends to seek dismissal of plaintiffs’ latest attempt to allege fraud and will continue to vigorously defend itself in court.”
An Alledged Wrongdoing
According to the complaint, “Plaintiffs’ claims are predicated on the fact that defendants engaged in a fraudulent scheme to strip them of the purchased LSV Shares. In doing so, the managers and LSV took actions that: (1) violated their own representations concerning the shares; (2) were inconsistent with their own emails; (3) violated the operative written agreements; (4) violated their fiduciary duties; and (5) were inconsistent with both common sense and industry norms.”
The executives alleged wrongdoing following the forced sale of large equity positions in the firm that they had purchased over the time they were employed, a combined period of over 90 years. The plaintiffs collectively purchased equity for over $25 million (investing over $2 million in cash and financing $22 million), entitling them to “millions of dollars of annual distributions,” which the "Plaintiffs reasonably believed they would continue to receive distributions from LSV after leaving the company"
When each decided to leave independently of each other in 2023, they argue that the company: “Purported to claw back the purchased LSV Shares without plaintiffs’ consent. Defendants caused a sale of the purchased LSV Shares back to LSV and/or employees of LSV.”
This gave them “pennies on the dollar and left them no choice but to sue the company and the defendants,” said Brian Procel, partner at Procel Levine, their appointed legal representative. The court documents argue that the value was around one quarter of what the fair sale price would have been.
The specific amounts in question are yet to be confirmed and will be argued at the trial, but the plaintiffs are suing for $100 million, which includes the value of the distributions withheld by LSV until the date of judgment, and the market value of the LSV shares that the executives argue were sold without authorization.
The four argue that LSV sold the purchased shares at a price that reflected a 3-times multiple on LSV’s annual earnings. (The plaintiffs acquired their LSV shares years earlier, in many cases at prices based on a 6-times multiple of the manager’s annual earnings. LSV sold the shares on June 28, 2024 at a transaction price that was based on a valuation of $10.6 million for a 1 percent share. This equates to a valuation of just $1.06 billion for the entire company, which currently manages roughly $100 billion in assets.
In contrast, the plaintiffs calculated that SEI, a publicly traded company, owns 38.6 percent of LSV. SEI is worth $8.68 billion, and LSV contributes about 21 percent of SEI's after-tax earnings. Thus, SEI’s 38.6 percent ownership interest in LSV is estimated to be worth $1.82 billion, equating to an overall LSV company value of $4.72 billion.
Based on this, the claim argues that the true value of the purchased LSV shares is at least four times the amount argued by LSV.
“This case represents an issue that is all too prevalent in the corporate world, and it's just based on sheer greed,” Procel told II. “We have a situation where individuals who own millions if not potentially hundreds of millions of dollars in their own right are not satisfied with that and want to go after the shares of their hard-working employees.”
Procel hopes this will mark a shift in how vested equity is managed at firms and that a positive result will mean others facing the same problem would be able to follow suit.
“Fortunately, the plaintiffs have the resources and the ability to stand up for themselves. There's a lot of people out there who are being taken advantage of in a similar way, who aren't able to fight. This case calls attention to the real struggle between the people with the power and the money and those who don’t.”
The claim was made against LSV Asset Management, its founder, CEO and CIO Josef Lakonishiok, CLO Josh O’Donnell, COO Kevin Phelan and partner and portfolio manager Menno Vermeulen.
LSV tried to have the case thrown out of court. But, a Circuit Court of Cook County, Illinois, judge rejected LSV’s arguments that the suit was meritless, time-barred or contractually justified, upholding that there is a potential breach of fiduciary duty and the implied covenant of good faith. In the June hearing, however, the judge dismissed the allegations of fraud, but withheld the remaining aspects of the case. The plaintiffs can come back with amendments to the suggestions of fraud.
The four former LSV employees are Han Qu, Bhaskaran Swaminathan, Peter Young and Simon Zhang. At the time of departure, the four held 0.89, 0.54, 0.73 and 0.24 percent of LSV's equity, respectively.
Each alleges that during the course of their employment they were strongly encouraged to purchase equity in the firm as a showing of commitment and alignment to the firm and its values. These acquisitions were made via bank loans, and the employees were told that the shares would remain in their possession if they were to leave the firm. Instead, the plaintiffs argue that when they left the shares were repurchased by LSV at unfavorable valuations and that each was denied any involvement about when the sale would be made.
LSV also subsequently held back $25 million from the four executives, which the firm said was a “reasonable litigation reserve.” The plaintiffs reject this.
With many asset managers privately owned and equity a crucial component in attracting and retaining talent, this case is likely to be closely observed by the industry and could potentially set a precedent for how firms structure and enforce equity agreements going forward.
LSV Asset Management was formed in 1994 and focuses on value equity investing. Beyond the statement, the firm declined to comment on the ongoing case but remains confident that it has sufficient evidence to mount a response against the plaintiffs. A date has not yet been set for the trial, but it does appear that both sides are bracing themselves for a lengthy process.
