April 11, 2017

Federal Lawsuit Alleges Yahoo and Other Defendants Failed to Safeguard Trust Fund for Jailed Dissidents, While Burnishing Its Corporate Reputations and Using Trust Money for Personal Enrichment

WASHINGTON, D.C. – A federal lawsuit filed today accuses Yahoo! (NASDAQ: YHOO) of mismanaging and failing to safeguard millions of dollars in humanitarian aid that it pledged, as part of a 2007 court settlement, to Chinese dissidents imprisoned by the Chinese Communist Party for exercising their freedom of expression. Of the $17.3 million that funded the Yahoo Human Rights Trust, more than $13 million, including a $2.55 million Washington D.C. townhouse, has been illegally diverted for expenditures that have nothing to do with providing humanitarian assistance, according to today’s filing. While Yahoo frequently highlighted the Trust as evidence of the company’s commitment to human rights, often to fend off shareholder proposals calling for stronger action in defense of freedom of expression, the lawsuit alleges that Yahoo and former Yahoo executives Michael Callahan and Ronald Bell, failed to live up to those responsibilities.
The Yahoo Human Rights Trust was established after the Internet company provided Chinese authorities with the identities of Yahoo users in China who, using Yahoo email accounts in the early 2000s, disseminated material that the Chinese government found objectionable. As a result, several Chinese citizens, including the husband of one of the plaintiffs in today’s filing, were imprisoned for years at a time. Facing intense public scrutiny, Yahoo’s then-CEO Jerry Yang and then-Executive Vice President Michael Callahan agreed to create the Trust, which they pledged would provide financial assistance to future Chinese dissidents imprisoned by the Chinese government for exercising their freedom of expression. However, today’s lawsuit alleges that the Trust has largely been used for anything but that purpose.

“In standing idly by while it knew the Yahoo Human Rights Trust was being squandered, Yahoo abandoned its responsibilities to Trust beneficiaries, who have risked their lives by speaking out for political reform in China,” said Times Wang, a Cohen Milstein Sellers & Toll attorney representing the plaintiffs. “We hope this lawsuit creates an opportunity for Yahoo to replenish the fund and make good on its commitment to support basic freedoms as a responsible corporate citizen.”

“Yahoo promised to support us in our fight for the most fundamental of rights – the freedom to speak our minds, access information, and work toward a better future for our children,” said He Depu, a plaintiff who spent eight years in prison, through a translator. “For the sake of future activists and the broader rights movement in China, we call on Yahoo to do the right thing and stand with those on the frontlines of this fight for civil liberty.”

Following the 2007 settlement, Yahoo designated Harry Wu, a former political activist and director of D.C.-based Laogai Research Foundation (“LRF”), as the day-to-day administrator of the Trust. However, Yahoo and its executives maintained oversight of the Trust, and had a fiduciary duty to ensure that its funds were disbursed properly. Yahoo executives served as trustees, were directors of a non-profit organization created to administer the Trust, and were charged with reviewing and approving funding requests.  

Wu, however, allegedly misused the Trust’s assets for personal gain, depleting the funding desperately needed by imprisoned dissidents and their families. According to the complaint, filed today in United States District Court for the District of Columbia, this began almost immediately: in 2007, Wu doubled his annual compensation, giving himself a $60,000 dollar raise, while offering his wife a $40,000 salary bump for what appeared to be a ‘no-show’ job. All told, after the establishment of the Yahoo Trust, Wu paid himself and his wife more than a million dollars. Additionally, in 2008, just months after the fund’s creation, Wu and LRF purchased a $1.45 million property in Washington, D.C, followed by another $2.55 million real estate purchase in 2015. These properties were used to house Wu’s personal pet project, a museum about Chinese prison labor camps, but did nothing in terms of providing financial assistance to imprisoned dissidents. In both cases, the lawsuit alleges that Wu illegally used Trust assets for these real estate purchases. 

The lawsuit also alleges that Wu used Trust assets to defend himself personally in a series of lawsuits, in cases involving sexual harassment, the misuse of federal grants, and even in a lawsuit brought by some of the plaintiffs in the original 2007 lawsuit to recover a portion of the settlement owed to them personally.

In contrast to these extravagant personal expenses, only $700,000 – or 4% of the original $17.3 million allocated to the Human Rights Trust Fund – has been used to provide aid to imprisoned dissidents. In 2015, only 1.5% of the LRF expenditures was spent on humanitarian aid, equating to roughly 0.1% of the Yahoo trust’s total assets. However, as detailed in the filing, even these figures may have been inflated.

Records show that Yahoo executives knowingly turned a blind eye to the misuse of the funds, neglecting their fiduciary responsibility to the Trust’s beneficiaries. These executives regularly received reports from the LRF on how the Trust’s assets were being spent, and were also aware that Wu had been previously sued for withholding money awarded in the 2007 settlement. Individuals inside Wu’s organization began voicing their concerns. For example, an employee at the LRF repeatedly voiced concerns in writing to, among others, Yahoo executives about Wu’s behavior and the financial transparency of the organization. In one instance, the employee warned executives that Wu was “offend[ing] the basic agreement with Yahoo!,” even noting that no qualified staff at the LRF had been assigned to work on issues related to assistance for victims of political oppression. Despite these multiple warnings, Yahoo executives tasked with overseeing the Trust did nothing to investigate or mitigate the issue. 

Though evidence of Wu’s inappropriate and unlawful behavior continued to mount, Yahoo continued to tout the Trust as a way to combat negative perceptions of its track record as a corporate citizen. The company repeatedly used the existence of the Trust to rebuff calls from the public and investors to strengthen its commitment to human rights. In 2008, a group of public pension funds who were shareholders submitted a proposal urging Yahoo to institute policies that would protect free access to the Internet. The company opposed the proposal, calling it “unnecessary” in light of policies such as the establishment of the Trust, which the company described as a “Human Rights Fund,” and which it claimed was meant “to provide humanitarian relief and legal support for dissidents imprisoned for expressing their views online.” In 2011, a Chinese shareholder issued a similar proposal. Once again, the company opposed the proposal, as “unnecessary,” citing as evidence “a number of core initiatives, including . . . [c]reating the Yahoo! Human Rights Fund.”

The plaintiffs seek full replenishment of the money originally pledged to the Yahoo Human Rights Trust and a modification to make Chinese dissidents imprisoned for exercising their freedom of expression the sole beneficiaries of it, as well as the return of all monies unlawfully taken by Wu and the LRF and a full accounting of all Yahoo Trust assets and expenditures since its creation.

Complaint - April 11, 2017

About Cohen Milstein
Founded in 1969, Cohen Milstein Sellers & Toll PLLC is recognized as one of the premier law firms in the country handling major, complex plaintiff-side litigation. With more than 90 attorneys, Cohen Milstein has offices in Washington, D.C., Chicago, Ill., New York, N.Y., Palm Beach Gardens, Fla., Philadelphia, Pa., and Raleigh, N.C.  For additional information, visit www.cohenmilstein.com or call 202.408.4600.