(Reuters) - Yahoo Inc has been hit with a lawsuit saying it failed to safeguard more than $17 million it pledged to help jailed Chinese dissidents in a 2007 settlement.
The lawsuit, filed on Tuesday in federal court in Washington by a group of Chinese dissidents, accuses Yahoo of "willfully turning a blind eye" while Harry Wu, a high-profile political activist charged with administering the funds, used them for personal gain.
The company had a legal duty to make sure the funds were used properly, but instead used the settlement as "window-dressing" to "stem the immense criticism over Yahoo's complicity in egregious human rights violations," the lawsuit says.
Only $700,000 of the $17.3 million settlement fund has actually been used to help jailed dissidents, according to the lawsuit.
Yahoo spokesman Mike Sefanov declined to comment, saying the company does not discuss ongoing litigation.
Yahoo originally established the fund to settle a lawsuit brought by the company's users in China, who were jailed for expressing their political views after Yahoo turned over information about them to the Chinese government.
The company appointed Wu as administrator of the fund and its own general counsel as trustee, according to the lawsuit.
The Shanghai-born Wu, a U.S. citizen who died last April, was director the Laogai Research Foundation, a Washington-based human rights organization. His estate is also named as a defendant in the lawsuit.
It was not immediately clear if a lawyer had been hired to represent the estate in the matter and an operator said there was no listed telephone number for the foundation. A number associated with Wu's last address was not in service.
The dissidents claim that Wu immediately began using the funds for personal gain, giving himself and his wife substantial raises. He and his foundation bought two Washington properties for $1.45 million and $2.55 million that were used to house a museum on Chinese prison camps, the lawsuit says.
The dissidents also contend that Wu used settlement funds to defend himself against lawsuits accusing him of sexual harassment and misusing federal grant money.
Yahoo ignored "numerous red flags," including direct warnings from an employee of the foundation and concerns from a shareholder, the dissidents said.
The lawsuit demands that the full amount of the settlement fund be replenished, and that the settlement be modified to ensure that dissidents are the sole beneficiaries.
Yahoo is expected to be acquired by Verizon Communications Inc later this year.
Reporting by Brendan Pierson in New York; Editing by Tom Brown