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Modell owned 80 percent of the Cleveland Stadium Corporation (Stadium) and 53 percent of the Cleveland Browns Football Company

(Browns). Gries owned 43 percent of Browns. The Browns board consisted of Modell, the outside lawyer for both corporations, three individuals employed by both corporations, and Gries. Modell proposed that the Browns buy the Stadium for $6 million. Gries objected, saying that the Stadium appraised for only $2 million. The Browns board approved the purchase nonetheless (all directors other than Gries voting in favor). Gries commenced a shareholders derivative suit seeking to rescind the purchase. Who should win? See Gries Sports Enterprises v. Cleveland Browns Football Company, 496 N.E.2d 959 (Ohio S. Ct. 1986).

The Board of Directors is accountable to the community for maintaining the organizations vision, for guiding its program activities, for being fiscally responsible and for carrying out its mission with integrity. Because of these factors, under the common law, courts are disposed to give directors wide latitude in the management of a corporations affairs, as long as they reasonably exercise an honest, unbiased judgment.

Moreover, in general, boards guidelines for how the Board members can best work together, e.g., when they want to meet, how members should be on Committees, how they recruit and orient new members, how they manage for consistent meeting attendance, how the Board will work with the chief executive officer, how they will avoid conflict-of-interest, etc.

Therefore, we can conclude that unless Gries have any solid evidence to prove otherwise, the boards decision to purchase the Stadium for $6 Million is valid from legal and corporate point of view.

Another way to look at is if board members who have an actual or potential conflict of interest, they should not participate in discussions or vote on matters affecting transactions between the organization and the other group. Even by this method, the purchase is clear and fair.

A Fortune 500 CFO admits to having deliberately treated $4 billion in operating expenses as assets, thereby allowing the corporation to show profits instead of losses. The auditor never detected this. The corporations stock drops 95 percent and bond covenants related to billions in debt are breached. At its peak price last year, the CFO sold stock (acquired through options) for $15 million, generating a $10 million gain. a. Why might the corporation have to file for bankruptcy protection? b. What provision(s) of the securities law will probably be the basis for a class-action lawsuit by the stockholders? c. Why will the 1995 Act probably not stop a class-action lawsuit from proceeding to the discovery phase? d. Why will the CFO be subject to criminal (as well as civil) securities sanctions? e. Will the SEC likely ever allow the CFO to be an officer or director of a publicly traded corporation in the future? f. Will the SEC allow the CFO to keep the $10 million gain on the stock? g. What kind of civil penalties could the SEC impose on the CFO?

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