Employment Law Attorneys

Executive Indemnification from Lawsuits2 min read

On June 5, 2003, Xerox and the U.S. Securities & Exchange Commission (SEC) reached a $22 million settlement resolving claims made by the SEC in a civil suit filed in federal court in New York. The SEC suit accused several key former executives of Xerox “of taking part in a scheme that misled investors about the financial results of Xerox from 1997 to 2000.” NY Times 6/6/03. The executives include Paul A. Allaire, former chairman and CEO, Barry D. Romeril, former CFO and several others.The SEC stated that Mr. Allaire and Mr. Romeril would be personally responsible for $1 million each in fines. It remains unclear whether each executive will be required to forfeit profits and compensation received during the fraud period. The remaining balance of the SEC’s claims, will be covered by an officers and directors insurance policy maintained for Xerox executives.
The settlement is an example of how D&O insurance policies protect executives that allegedly participate in corporate fraud with the intention of escaping individual liability. All companies provide such insurance coverage for executives through their bylaws and executive agreements. Most if not all executives demand such insurance protection against individual liability at the start of employment. Although corporate fraud is being discovered and rectified everyday, the D&O indemnification insurance practice will continue unless remedied by state legislatures. This is unlikely to occur due to political reasons.
In the months and years ahead, key executives should be mindful that shareholders and enforcement agencies, like the SEC, will vigorously monitor and prosecute executive corporate fraud. The best practice for the executive to follow, is to promote the best interests of the shareholders and avoid personal financial gain. At the earliest internal signs of corporate fraud, the executive should communicate such issues to the “independent” members of the Board. If no immediate resolution is reached, the executive should resign his or her employment. This will preserve the credibility of the executive and prevent tarnishing his or her career record when the matter is publicly disclosed. However, an involuntary resignation is no easy task, in the face of internal corporate pressure to prevent public disclosure of the departure and the underlying corporate fraud. Most notably, the executive runs the risk of being sued by the company for breach of contract and unfairly blamed for the causing the corporate fraud event. In light of this “catch 22”, the executive must adhere to individual ethics and immediately distance him or herself from the company.
Mark P. Carey
Carey & Associates, P.C.
71 Old Post Road, Suite One
Southport, CT 06890
203) 255-4150 tel.
203) 255-0380 fax.