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© 2015 Zuckerman Spaeder LLP

The Inbox – The SEC’s Claws May Come Out

We recently discussed the SEC’s proposed rules pursuant to the 2010 Dodd-Frank Act regarding the clawback of executive compensation under various circumstances related to accounting restatements. Now it seems Hertz’s former CEO, Mark Frissora, may become one of the first test cases should these rules survive the comment period. According to Footnoted, upon Frissora’s resignation last September, he received over $10 million plus other benefits. But the company recently filed a 10-K for 2014 that not only included restated results for 2012 and 2013, but also made a disclosure that could suggest a possible future effort to claw back Frissora’s severance package. The disclosure blamed Frissora for creating an environment that “in some instances may have led to inappropriate accounting decisions and the failure to disclose information critical to an effective review of transactions and accounting entries.” Perhaps another interesting twist is whether any potential clawback will have an effect on Frissora in his new role as CEO of Caesar’s Entertainment, a position he assumed two weeks ahead of Hertz’s delayed filings.

California is known for its skeptical treatment of employers’ efforts to enforce non-competes, but it may not be as friendly toward all employees as originally suspected, according to The National Law Review. In 2014, California resident Stacey Sabol-Krutz left her position with Quad Electronics, a Michigan-based employer, to take a position with a rival company, which was also based in Michigan. Sabol-Krutz had started working for Quad in Michigan, and signed her employment contract there, but moved to California in 2011. Her employment contract specifically named her new employer as a company that Sabol-Krutz wouldn’t join for 12 months after leaving Quad. After Quad found out about Sabol-Krutz’s new job, it sued her for breach of contract. She, in turn, filed suit in California, attempting to invalidate the agreement under California law. The California court, noting the absence of a choice of law provision in the agreement, found that Michigan law applied, using a “governmental interest” test. Although courts may refuse to apply a choice of law provision when construing restrictive covenants (as we illuminated here), Sabol-Krutz’s move to California to work for an out-of-state employer did not win her the protection of California law. Read More ›

Was American Apparel’s Lawsuit Against Former CEO Dov Charney Brought “By Reason of the Fact” That He Was Its CEO, Such That It Must Advance His Legal Fees?

The legal saga of American Apparel and its founder and former CEO, Dov Charney, has more twists and turns than the latest season of Game of Thrones.  We’ve previously blogged about the sundry clashes between the two, including Charney’s ongoing arbitration for severance, the sexual harassment allegations against Charney, and a lender’s threat of default on a major loan after Charney was fired.

Now, Charney and American Apparel are battling in two separate cases in Delaware Chancery Court.  In the first, American Apparel has sued Charney for violating a standstill agreement by becoming involved in shareholder suits and commenting to the press.  The second case is a follow-on to the first: Charney has sued to force the company to advance his fees for the standstill lawsuit.  In this Game of Thrones, you win or you pay for your defense out of your own pocket. Read More ›

Corporate Executive Alert: Tough Clawback Rules Relating to Financial Restatements Are Coming

On July 1, the SEC issued long-awaited proposed rules pursuant to the 2010 Dodd-Frank Act. As we've discussed in prior posts here and hereSection 954 of Dodd-Frank required the SEC to direct national security exchanges not to list any company that does not adopt a policy requiring recovery of incentive-based pay received by executive officers in excess of what would have been received under an accounting restatement. Although the new rules are only proposals and they could change after public comment, it's not too early for executives to begin to plan for the financial issues they will face in the event their company issues a financial restatement, as 746 companies did in 2014.

Clawbacks of executive compensation after a financial restatement are not new, of course. After the 2002 Sarbanes-Oxley Act authorized the SEC to claw back one year’s worth of incentive compensation from a CEO or CFO whenever there has been a financial restatement resulting from "misconduct," companies began voluntarily adopting clawback policies applicable to financial restatements.  And after the Emergency Economic Stabilization Act of 2008 required clawback policies for companies receiving financial assistance under TARP that applied to "any bonus, retention award, or incentive compensation... based on statements of earnings, revenues, gains or other criteria that are later found to be materially inaccurate,"  additional companies adopted or expanded their clawback regimes. Today, most Fortune 100 companies have a clawback policy applicable to restatements (although they differ widely as to the triggering events, the types of compensation subject to clawback, whether the executive must have caused or contributed to the false or incorrect financial reporting, and the board's discretion to forgo a clawback, among other variables). But many large companies and most mid-cap and small companies have not adopted clawback policies, and virtually no company has implemented a clawback policy as severe as the Dodd-Frank legislation’s mandate. Most have been waiting for the SEC's proposed rules. Read More ›

The Inbox - The Ways of the “Wolf”

Benjamin Wey immigrated to Oklahoma from China as a teenager with scant dollars in his pocket.  He parlayed ambition and ties to Chinese businesses into a lucrative investment firm engaged in the controversial practice of reverse mergers. According to the Washington Post, this so-called “Wolf of Wall Street” hired a beautiful Swedish model, Hanna Bouveng, to serve as his assistant, and used her Swedish contacts to further his business interests while heaping monetary rewards on her to seemingly win her affections.  According to Bouveng, Wey pressured her into a sexual relationship, and when she refused his advances, he allegedly terminated her employment, waged war on her reputation through social media, stalked her, and threatened her with further ruin. Ms. Bouveng fought back in Manhattan federal court where she sued Wey for sexual harassment, retaliation and defamation. The jury returned an $18 million verdict in favor of Ms. Bouveng. While Ms. Bouveng likely feels vindicated, Wey is claiming victory on his twitter account.   Read More ›

Non-Solicitation Clauses: They’re Up to You, New York

National employers sometimes include choice-of-law provisions in their employment agreements, selecting one particular state’s law even for employees who don’t work in that state.  For example, a company based in Massachusetts might ask its California employees to sign agreements selecting Massachusetts law.  Applying one state’s law to all of the employer’s relationships can make outcomes more predictable, especially when the employer knows that law well.

But not always, as the New York Court of Appeals held earlier this month in Brown & Brown, Inc. v. Johnson.  In Brown & Brown, the Court of Appeals refused to apply an employment agreement’s selection of Florida law, holding that New York law should determine whether a customer non-solicitation provision in that same agreement was enforceable.  Read More ›

Part 2 – How to Motivate Executives to Perform at Their Highest Level Through a Bankruptcy

In our last post, we discussed differences between “pay to stay” arrangements, which face stricter scrutiny in bankruptcy cases, and “Produce Value for Pay” plans, which provide incentives for executives based on strong corporate performance.  As promised, we now examine two cases that illustrate acceptable ways for companies to motivate their executives to perform through a Chapter 11 bankruptcy.

The first is the case of Chassix Holdings, Inc., which manufactures parts for approximately two-thirds of automobiles made in North America.  After a sequence of unfortunate financial and operational setbacks during 2014, Chassix found itself a petitioner under Chapter 11 of the bankruptcy code last month.  Included among the operational setbacks was the fact that approximately 1,100 employees voluntarily left Chassix during 2014.  Since it was critical to have a work force with the proper experience, skill, and know-how to manufacture the auto parts, Chassix found itself exploring ways to enhance its compensation options prior to the petition date in order to retain more of its employees.  Unfortunately, it didn’t finish these plans prior to the petition date.

Chassix took a couple of important steps in designing its KERP and seeking authority from the bankruptcy court to implement it.  First, and foremost, it limited its KERP to a pool of employees who were not company “insiders.”  Therefore, the bankruptcy court applied the more liberal standard of business judgment when it evaluated the plan, even though Chassix had not established and regularly implemented the plan before its bankruptcy petition.  Under this standard, and considering the pre-petition employee turnover and the support of the various creditor constituencies, the bankruptcy court approved the KERP.  Read More ›

How to Motivate Executives to Perform at Their Highest Level Through A Bankruptcy

At the outset, the answer to the question posed in this article seems simple: employers should just pay their employees as much as is reasonably possible.  However, when a corporation finds itself in Chapter 11 reorganization, the Bankruptcy Code restricts the use of some traditional motivational methods.  Simultaneously, competitors might make tempting job offers to quality employees, inducing them to leave the business.  This combination of factors can distract employees from the main task of getting the debtor through the reorganization process. 

To provide sufficient compensation and persuade employees to remain with the business, a debtor can attempt to adopt a key employee retention plan (KERP for short), also known as a “pay to stay” arrangement.  This is in contrast to a “Produce Value for Pay” plan that provides incentives for strong corporate performance. Read More ›

Sixth Circuit Upholds Financial Planner’s Sarbanes-Oxley Win

Section 1514A of the Sarbanes-Oxley Act shields a whistleblower from retaliation if he reports “conduct [that he] reasonably believes” violates certain laws, including Securities and Exchange Commission regulations.  Last month, the Sixth Circuit held that the question of a whistleblower’s “reasonable belief” is a “simple factual question requiring no subset of findings that the employee had a justifiable belief as to each of the legally-defined elements of the suspected fraud.”  Rhinehimer v. U.S. Bancorp Investments, Inc., No. 13-6641 (6th Cir. May 28, 2015).  Based on this principle, the court affirmed a $250,000 verdict in favor of the plaintiff, Michael Rhinehimer.

According to the Court’s opinion, Rhinehimer was a financial planner for U.S. Bancorp who helped his elderly customer, Norbert Purcell, set up a trust and a brokerage account.  In November 2009, Rhinehimer went on disability leave, and asked a colleague not to conduct any transactions with Purcell.  The colleague didn’t follow the instructions, and instead put Purcell into investments that Rhinehimer believed were unsuitable.  (Unsuitability fraud under the securities laws occurs when a broker knows or reasonably believes certain securities to be unsuitable to a client’s needs, but recommends them anyway.)    Rhinehimer complained about the trades, but his superiors warned him that he should “stay out of the matter” and stop criticizing the colleague.  After Rhinehimer hired a lawyer, he was placed on a performance improvement plan and fired after he failed to meet it. Read More ›

The Inbox – Orwell’s Big Brother Has An App For That

Big Brother is watching you, or at least tracking your movements through your smartphone. According to the Washington Post, employers have steadily increased their use of GPS-enabled technology to track the movements and location of “field employees” like salespeople and delivery drivers. In fact, a 2012 study by the Aberdeen Group cited an increase of over 30% in the tracking of employees over the previous 5 years. Legitimate reasons exist to track field employees, such as making sure that drivers take the best routes and sales calls are conducted efficiently. But it’s more tricky to justify the tracking of employees who are off the clock.  For example, Myrna Arias, a former sales executive with Intermex, was allegedly fired for disabling a tracking app called Xora StreetSmart when she was off duty. Now Ms. Arias has sued the company, alleging wrongful termination and invasion of privacy. Jay Stanley, a senior policy analyst at the ACLU, cautions employers against collecting off-the-clock data, because it opens the door to discriminatory practices. Mr. Stanley wondered, "What happens if an employer doesn't like the choices a worker makes in their personal lives and retaliates professionally?" 

We discussed emerging trends in the c-suite recently, and found that companies are increasingly tying executive compensation to performance. For those that do not, we can imagine a corporate shareholder version of peasants storming the castle with pitchforks in hand, thanks to say-on-pay voting. In the case of JP Morgan CEO Jamie Dimon’s 2014 compensation, the shareholders’ rebellion led to a relatively low approval rate for Dimon’s and other executives’ compensation. According to USA Today, 61.4% of shareholders approved the payouts, which starkly contrasts with an average 90% approval rating for companies that seek shareholder input on salary and bonus plans. Advisory firm ISS encouraged shareholders to rebuke the plan when they learned of Dimon’s $7.4 million cash bonus. ISS advised that “[t]he reintroduction of a large discretionary cash bonus in the CEO’s pay mix, without a compelling rationale, has substantially weakened the performance-basis of his pay.” If corporate leadership can provide a strong rationale for a big bonus, it’s more likely that the shareholders will drop their pitchforks and fall in line.  Read More ›

The Insurance Benefits From Early Discovery Of Employee-Caused Losses

Earlier this month, we posted about the U.S. District Court for the Northern District of Ohio’s decision that a credit union’s insurance policy was not invalid from the start because of its employee’s misrepresentations on the application.  The decision, National Credit Union Administration Board, as Liquidating Agent of St. Paul Croatian Federal Credit Union v. CUMIS Insurance Society, Inc., also illustrates other arguments that insurers may make in denying coverage for claims under D&O policies or reserving their rights to litigate later.  In this post, we explore how the court determined whether St. Paul “discovered” the loss more than two years before it filed suit against its insured, in which case its lawsuit would have been barred by a suit limitations period.

To briefly recap the facts of the case, St. Paul Croatian Federal Credit Union (“St. Paul”) and its insurer, CUMIS, agreed that a St. Paul bank manager, Mr. Raguz, had engaged in fraud by creating fake loans and accepting bribes.  St. Paul eventually collapsed and was taken over by regulators. The liquidator appointed to administer St. Paul’s assets made a claim for its losses against CUMIS under a bond policy it had issued in favor of St. Paul.  CUMIS responded not only by claiming that the bond policy was invalid from its inception because Mr. Raguz made material misrepresentations in obtaining and renewing it, but also because the policy stated that “legal proceedings” to recover loss from CUMIS had to be “brought within two years of Discovery of Loss.”  Under the policy, “Discovery occur[ed] when [St. Paul] first become aware of facts which would cause a reasonable person to assume that a loss of a type covered under this Bond has been or will be incurred, regardless of when the act or acts causing or contributing to such loss occurred.”

To support its contention that St. Paul was aware of the loss long before it brought suit, CUMIS argued that the St. Paul board of directors were aware of two “critical facts” about the fraud, which would have led a reasonable person to assume a loss.  First, CUMIS claimed that the delinquency rate of zero for the loan portfolio was unreasonable given its size, and that the directors should have known this fact more than two years before the lawsuit.  In addition, CUMIS claimed that the directors should have known of the fraud more than two years in advance because the loan portfolio included $131.2 million of loans that were purportedly secured by deposits, even though in fact there were only $122.5 million of deposits securing the loans.     Read More ›