published Dec 13, 2017, 4:35:09 PM, by Jef Feeley and Anders Melin

(Bloomberg) —
Some Liberty Tax Inc. investors have lost patience with founder John Hewitt.

A pension fund is asking a judge to order Hewitt to relinquish his controlling stake in the national tax-preparation service after an internal review found that while running the company, he had sex in his office and hired relatives of female employees with whom he’d had romantic relationships.

Liberty’s directors voted in September to remove Hewitt as chief executive officer. The pension fund says that doesn’t go far enough, claiming Hewitt is breaching his legal duties to shareholders.

Hewitt’s refusal to sell his stake has caused so much turmoil at the Virginia Beach-based firm that Liberty delayed an earnings release set for Dec. 6 and watched its auditor, KPMG, resign over Hewitt’s continued involvement with the company, the asbestos workers’ pension fund said in the suit.

Liberty’s “value has been harmed by the reputational harm Hewitt has wrought on the company,’’ according to the Dec. 11 complaint, which says the internal review also found that he gave a sweetheart deal on a tax-return franchise to a girlfriend.

The Liberty case is just the latest in a string of firings of prominent men as sexual harassment accusations shake public figures in fields as diverse as the media, the U.S. Congress and restaurant chains. Even company founders such as Uber’s Travis Kalanick and the Weinstein Co.’s Harvey Weinstein have lost their jobs following harassment allegations.

Poses Risk

Company boards are increasingly being drawn into the fray. “This is opening up a whole new area of liability for corporations,’’ said Davia Temin, president and CEO of Temin & Co., a New York-based crisis management company. “They have to seriously look at the risks this behavior poses to the company.’’

Liberty declined to comment on the lawsuit, but said the company “remains fully committed and focused on the upcoming tax season.” John Paris, Hewitt’s lawyer, didn’t immediately return a call for comment.

Liberty Tax has tumbled 15 percent since Sept. 5, the day before the company fired Hewitt as CEO without disclosing the reasons. The stock rose less than 1 percent to $11.15 on Wednesday in New York.

Hewitt owns 200,000 Class B shares, which entitles him to elect a majority of the board’s directors. He also holds about 14 percent of the publicly traded Class A shares, regulatory filings show. Director Steven Ibbotson controls the biggest chunk of Class A stock — about 22 percent — mostly through 3 million shares held in Datatax Business Services Ltd., which he owns together with family members. He’s served on the board since 1999.

“This is the problem with dual class stock — when your economic and voting interests are disparate, you run into these issues,” Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, said of Hewitt’s reluctance to sell his stake.

First Chain

Hewitt launched Liberty in 1997 after losing a battle for control of Jackson-Hewitt, the first tax preparation chain he founded in 1982. The company was sold to HFS Inc. for $480 million in cash. Liberty, which uses people dressed in Statue of Liberty costumes to drum up business, racked up more than $170 million in revenue in 2016. H&R Block, the biggest U.S. tax preparer, had $3.04 billion of revenue in its most recent fiscal year.

A July call to Liberty ethics hotline touched off an internal investigation of Hewitt’s activities, according to the suit. Directors hired the New York-based law firm of Skadden Arps Slate Meagher & Flom to probe the CEO’s behavior.

The law firm found Hewitt had romantic relationships with at least 10 female employees that created a hostile work environment at the company, according to the complaint.

Hewitt caused Liberty officials to favor his romantic partners, according to the suit. In one case, he granted a girlfriend the right to buy a tax-prep franchise without a down payment. When she later decided to cash out of the business, he commanded executives to pay her seven times the franchise’s value plus $220,000 in cash and stock, according to the suit.

The pension fund also claims Hewitt has moved to oust directors who opposed him. Last month, Hewitt removed two directors and replaced them with his own picks. A third director voluntarily stepped down. A fourth board member, John Garel, announced Nov. 13 that he wouldn’t seek reelection because of the upheaval tied to Hewitt’s actions.

Hewitt has damaged the company through his “improper behavior, the resignation of Liberty’s auditor, and the signals Hewitt has sent to the market through his aggressive re-assertion of control that he will not operate the company for the good of its equity owners, but instead for his own personal enrichment and gratification,’’ the pension fund alleged.

The case is Asbestos Workers Philadelphia Pension Fund v. Hewitt, 2017-0883, Delaware Chancery Court (Wilmington).

–With assistance from Laura Colby.To contact the reporters on this story: Jef Feeley in Wilmington, Delaware at jfeeley@bloomberg.net ;Anders Melin in New York at amelin3@bloomberg.net To contact the editors responsible for this story: David Glovin at dglovin@bloomberg.net Peter Blumberg, Janet Paskin

COPYRIGHT © 2017 Bloomberg L.P