How to Owe Facebook $3 Million Dollars


Yesterday’s blog outlined a few ways that you could accidentally become tangled up with your business to the point where you became personally liable. Being the owner of a US business isn’t always enough to keep you safe from lawsuits. There are some things you can do that will blow apart that protection.

The “Guiding Spirit” Argument

This is a legal argument that could apply equally to a General Partner and an LLC Manager or Member). It says that personal liability can be found if a corporate officer has direct, extensive control over a corporation’s wrongful activities, or an aspect of a corporation that is doing something wrong. This officer is said to be the “guiding spirit” behind the actions, especially if it was something they participated in personally.

It’s a little scary on the face of it, especially if you’re a single owner company. But remember, the conduct of the company has to be something which gives rise to a legal action. Here are some examples:

  • A chemical company who makes workers handle dangerous chemicals without proper protection, and doesn’t warn the workers of the danger
  • A business owner who uses his company to facilitate a ponzi scheme
  • A business owner who creates a business structure to commit fraud or perform other criminal activities

Simply being part of a company that is doing bad things isn’t always enough to get you caught up. It depends on what you know, and what you did (or didn’t do) with respect to the activities in question.

A great example of this is the directors of Enron and Worldcom. Remember them? They were big companies in the early to mid 2000s, who both were committing accounting fraud. When discovered, both companies fell apart, leaving shareholders with nothing, and employees with no pension, no severance and no way to get any justice. In both cases, the scope of the accounting fraud that these two companies were doing was so large the courts found that all of the directors were negligent. The directors were supposed to be the shareholder representatives, watching over the corporations’ officers (who are the ones doing day to day business) to make sure things were being done properly. But the courts found that all of the directors failed so spectacularly, they should not be able to hide behind the traditional liability protections. In each case the directors agreed to settlements of 10s of millions in order to stay out of jail.

So What About Facebook?

In the recent Facebook case, the company on the losing end was called Power Ventures. It had created a platform allowing users to combine all of their social media accounts together. But where Power Ventures got into trouble was when they started sending out emails to users promoting a competition, under Facebook’s name. This violated something called the CAN-SPAM Act, which is what we use in the US to regulate how you can be marketed to. Under CAN-SPAM, you always have to be able to trace an email back to the true sender. To make it worse, Power Ventures required users to give up private Facebook information to enter the contest, which was then used by Power Ventures for their own purposes.

At trial, the court found that not only was the company at fault, but its founder, Steve Vachani, was so integral and fundamental to this activity that he was the “guiding spirit.” He developed the technology, he designed and implemented the promotional contest, and he designed the competition. And so, because of this, Mr. Vachani was found liable along with the company. Along with power Ventures, he is personally on the hook to pay the damage award to Facebook, which is $3 million.

So the lesson here is, BE CAREFUL. If you aren’t sure about the legalities of something, talk with an attorney.

At Smart Business Incorporation, we specialize in helping US investors and business owners develop structures to run their businesses, protect their assets and keep as much of their earnings as possible. If you want to know how to best structure your next business, visit our website or drop us an email at info@smartbusinessincorporation.com. We’ll be glad to help.

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