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Legal memos trace acrimony between Demoulas factions

Arthur T. Demoulas was fired from Market Basket in June, but the allegations underpinning that fateful decision arose nearly four years ago in legal memos that accused him of real estate transactions that enriched his side of the family at the expense of the business and other relatives.

The memos, written by a lawyer for his cousin and longtime nemesis, Arthur S. Demoulas, claimed Arthur T. and his brothers-in-law were “plundering” millions of dollars through deals they arranged in several communities in Massachusetts and New Hampshire.

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Arthur T. vehemently denied the allegations. He argued that Arthur S. trumped up the charges in an effort to take control of their company, Demoulas Super Markets Inc., and pay himself more of its profits at the expense of customers and employees.

Now, as Arthur T. tries to buy his cousin out of the business, a Globe review of the memos, which were sent to the company’s board of directors in late 2010, provides insight into the discord within the embattled grocery chain and the motivations of the men fighting to control it.

On Friday, the parties continued to negotiate Arthur T.’s proposal to buy the shares of Arthur S. and other relatives. The company has also said it is evaluating other offers.

The 2010 memos suggest that Arthur S., along with his lawyer, long before his cousin was fired, suspected that Arthur T. was using his position to benefit himself at the expense of Market Basket.

At the time, Arthur T. was serving as president of the company and also controlled a majority of the seats on the board of directors, making Arthur S. a contrarian voice within the multibillion dollar company.

A Grocery store’s discord

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“Arthur T. has conducted himself exactly as the board should have anticipated, as a faithless fiduciary,” Arthur S.’s lawyers wrote in one of two legal memos to the board in 2010. “He has pursued his own, and members of his family’s, interests to the detriment of (the company) and its other shareholders.”

But a retired judge hired by the Market Basket board actually found no wrongdoing by Arthur T. in several of the instances raised by Arthur S.

The legal memos, obtained by the Globe, were written by a lawyer for Arthur S. Demoulas to the Market Basket board to voice grievances about the way the company was being run. Also included are memos by an attorney for Arthur T. Demoulas in response to the allegations.

Arthur S.’s memos outlined accusations of a self-dealing scheme by Arthur T. and his brothers-in-law, Michael Kettenbach and Joseph Pasquale, to arrange deals to develop Market Basket stores that would pay them millions in excessive fees and inflated sales prices. They claimed that Arthur T.’s actions constituted grounds for his dismissal as president of the company.

In one instance cited in the legal memos, lawyers for Arthur S. alleged that Arthur T. had recommended in 2010 that the company pay $20.9 million to acquire a Bourne property from an entity in which Arthur T. was a major investor. After the company bought the site, a prominent Boston real estate executive consulted by Arthur S., Robert Griffin of Cushman & Wakefield, appraised the property at $9 million.

Arthur S.’s lawyers alleged the higher price allowed the entity funded by Arthur T. to collect an excessive profit. But they said the extent of that profit wasn’t disclosed to the company.

Lawyers for Arthur T. called the allegations baseless. They noted that Cushman & Wakefield later appraised the Bourne property again as part of a separate effort to evaluate the company’s real estate and found it to be worth $25.5 million.

“That appraisal certainly supports the purchase price paid by [Demoulas Super Markets] in 2010 for the property, and demonstrates that the transaction was fair to DSM,” Arthur T.’s lawyers wrote in January 2011.

The fighting of recent years revived the kind of allegations that were at the heart of the epic legal battle the Demoulas family waged in the 1990s.

In that lawsuit, Arthur S. accused Arthur T. and his father, Telemachus, of defrauding him and other family members out of their shares in the company. A judge ruled in Arthur S.’s favor, awarding millions of dollars in damages but ultimately dividing the ownership of the company between warring factions of the family.

The outcome fueled decades of additional legal disputes. Arthur S. often accused Arthur T., who became president in 2008, of trying to spend company money on services performed by entities controlled by his side of the family.

A frequent target of those accusations: Retail Development and Management Inc., a real estate firm owned by Arthur T.’s brothers-in-law, Kettenbach and Pasquale. Arthur S.’s lawyer wrote in an October 2010 memo that Market Basket was paying “grossly excessive fees” to the company.

The memo stated, for example, that Retail Development and Management, which oversees its real estate and helps develop new stores, was paid 7.5 percent of the total development costs of its projects. That rate, the memo argued, “was far in excess of prevailing market rates in the industry” of 2 to 3 percent.

Neither Kettenbach nor Pasquale could be reached for comment Friday.

Arthur T. has defended the arrangement with his brothers-in-law, arguing that the relationship ultimately saved Market Basket money by allowing it to acquire store sites without alerting its competitors and triggering a bidding war.

After Arthur S. made claims about the conduct, the company’s board of directors, then controlled by Arthur T., hired a retired judge in 2011 to review the allegations.

The judge found that the fees paid to Retail Development and Management — the real estate firm owned by Arthur T.’s brothers-in-law — were not excessive given the scope of its work.

The judge, Mel L. Greenberg, also found no evidence of wrongdoing by Arthur T. after reviewing his roles in real estate projects in Waltham, Brockton and Bourne, according to a copy of his findings obtained by the Globe. All those locations had been flagged by Arthur S. in the legal memos as examples of violations of fiduciary duties or self-dealing.

However, Greenberg concluded Arthur T. and the company’s board neglected their fiduciary duties in dealings involving a store in Somerset, N.H., according to the copy of his findings. He said they failed to determine if the business would have been better served by exercising an option to purchase the store instead of paying rent to an entity in which Arthur T. and his family owned a 55 percent interest.

In that case, Arthur S. argued that exercising the option would have saved Market Basket money. He said Arthur T. had failed to do so because of his personal interest in the other entity.

If the judge’s 2012 report was meant to put the matter to rest, it failed.

In the ensuing years, Arthur S. and Arthur T. continued to battle over real estate matters and other issues, including investments made by the company’s profit-sharing plan. Their fights have always ended in the same stalemate after acrimonious board meetings failed to resolve the underlying issues.

The tide finally turned in the cousins’ long-running battle last summer. A family member who had previously voted her shares on Arthur T.’s behalf in board elections switched sides to Arthur S. side, giving him control of the company.

Arthur S. and new board members then instituted a series of changes. The company halted several real estate projects, including store projects in Waltham and Plymouth. It also voted to distribute $300 million in cash to shareholders.

In June, Arthur S. fired his cousin and several of Market Basket’s top managers, leading to rallies and employee walkouts that have left the company unable to stock its store shelves.

Arthur T. has since offered to buy the 50.5 percent of shares in the company owned by Arthur S. and his relatives. The negotiations, expected to continue Saturday, largely turn on valuations of real estate and sources of revenue that the cousins have been fighting over for more than 20 years.

Casey Ross can be reached at cross@globe.com.
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