What are we to make of the recent spate of claw-back headlines?

Barclays Bank intends to claw back shares from its former Chief Executive Officer Robert Diamond for the LIBOR rate-fixing scandal

J.P. Morgan Chase has revealed it intends to claw back compensation from its Chief Investment Officer Ina Drew, the trader Bruno Iksil, and others for the $5 billion “whale trading” fiasco.

The defunct “Big Law” firm of Dewey & LeBoeuf LLP, now in bankruptcy, has tendered to over 700 of its former partners a claw-back settlement demand or they will face certain tortuous litigation.

These claw backs aim to retrieve compensation already received by these respective executives and law partners.

As I indicated in a previous blog post, a claw back provision, under certain conditions, permits a company to demand repayment of compensation previously paid to executives.  Those conditions usually involve compensation paid to executives based on performance measures or factual circumstances that turn out to be inaccurate, false, or fraudulent.  It can be based on statute or by contract.

The claw back in the Dewey situation involves the  legal principle of “insider preference” which disallows a transfer of property by a bankruptcy debtor  (like Dewey) to an insider (like one of its  partners) to the disadvantage of another unsecured creditor.

In  Dewey’s case, the  firm’s bankruptcy estate is offering the deal to gain cash to pay down its debt in exchange for the ex-partners’ release from liability.  The alternative is having personal liability for the law firm’s debt and being pursued by its unsecured creditors.

By statute and contract our free market economies attempt to regulate or bind executives to uphold and adhere to legal and moral conduct.

Can we legislate ethics or contract for morality?  The Ten Commandments is a combination of law and covenant to do the right thing.  We also have claw-back laws on the books like the Sarbanes –Oxley Act of 2002 and the U.S. Bankruptcy Code, and in the case of not-for-profits, state not-for-profit corporation laws and common law.

A person’s reputation takes years to build and only a minute to be destroyed by some real or perceived illegal or immoral act.  Executives must be vigilant about their ethics and business choices.

The public, whether they are the residents of Main Street America, the self-described 99 per centers, or good corporate governance types, really is fed up with reckless, risky corporate financial behavior and outsized compensation packages that bear little relation to performance by the executives receiving them.  Greed is not good.  For executives, ethical behavior is always the right thing to do personally, organizationally, and globally.

Claw-back mechanisms are necessary to do justice and to reassure the public that fairness, honesty and proportionality will be promoted and protected.  We are still in uncertain, unstable economic times and there is much economic hardship.  Such conditions make ripe the seeds of class warfare that always underlie the surface of a capitalist economy.  I love capitalism and there is no better system; however, it cannot be unbridled and must be tempered with appropriate controls like statutory and contractual claw-back provisions.

As for the headlines, I say bravo for the increased use of legitimate claw-back mechanisms.


In an earlier blog post, we have discussed the Securities Exchange Commission’s (SEC) power to claw back compensation paid to executives by their companies under certain circumstances. The statutory basis of the claw back power against perceived wayward  executives is Section 304 of the Sarbanes-Oxley Act of 2002 (SOX).   We noted in that post that SOX made CEOs and CFOs of companies that are subject to any securities laws financial reporting requirements, liable for repayment of compensation or profits received based on financial misstatements that necessitated an accounting restatement.

Expanding Use of Claw Back

On August 30, 2011, the SEC announced its settlement with the former CFO of Beazer Homes USA, an Atlanta-based  homebuilding company.  Although the SEC did not personally charge the CFO with misconduct, the SEC is forcing him to reimburse his former company over $1.4 million in compensation that he received arising from fraudulent financial statements.  SEC Atlanta  Regional Director Rhea Kemble Dignam commented “O’Leary received substantial incentive compensation and stock sale profits while [the Beazer company] was misleading investors and fraudulently overstating its income.”

Abscence of Charge Not Enough

The CFO was vulnerable to the claw back even though it was the company’s chief accounting officer that was actually charged with
perpetrating the fraudulent overstatement of the company’s income.  The SEC stated in its press release:

“Section 304 requires reimbursement by some senior corporate executives of certain compensation and stock sale profits received while their companies were in material non-compliance with financial reporting requirements due to misconduct … [including] an individual who has not been personally charged with underlying misconduct or alleged to have otherwise violated the federal securities laws.”

Trust But Verify

What is the lesson to be learned from this case?  CEOs and CFOs must be ever vigilant in ensuring that the financial statements of their companies are not misleading or fraudulently prepared by employees.  They must treat their accounting employees, as President Ronald Reagan treated the Russians in  his nuclear missiles treaty: “Trust but verify.”  Even when they may not be personally charged  with wrongdoing, the SEC may hold still hold them personally responsible and   require them to disgorge their compensation.  Who said life was fair?


The Chicago Tribune became its own story to report. The 12 December 2010 Sunday edition of the Chicago Tribune newspaper dramatically reported that the Official Committee of Unsecured Creditors in the Tribune Company’s Chapter 11 bankruptcy case in Delaware now seeks to claw back from approximately 200 employees.   The claw back amounts to around $180 million in compensation paid to the emloyees.

As the term suggests, “claw back” means getting money returned that was previously paid out.  It can be based on statute or by contract.

The creditors seek to tag former Tribune Co. Chairman and CEO Dennis FitzSimons for $28.7 million.  Former Chicago Tribune and Los Angeles Times Publisher David Hiller has $15.4 million at risk.  Other former top and lower echelon Tribune Co. executives face similar risk of loss of fortune.

The Committee of Unsecured Creditors is pressing its case utilizing the bankruptcy legal principle of “insider preference” which disallows a transfer of property by a bankruptcy debtor to an insider more than 90 days prior but within one year after the filing of the petition for bankruptcy.  Executives, managers, and employees are “insiders.”  The idea is not to allow a debtor (in this case the Tribune Co.) to arbitrarily and unfairly give priority in payment to one creditor like an officer,  director, relative, general partner, managing agent, and so forth to the disadvantage of another unsecured creditor like a  trade creditor.   The U.S. Bankruptcy Code aims to ensure equitable treatment for all creditors.

The compensation payments in question resulted from the December 2007 leverage buyout that converted the Tribune Co.  into a private company.  The closing of that deal necessitated cash payments for accumulated restricted stock, deferred compensation, success bonuses, transition pay, phantom equity, and severance benefits.

This is not a pretty picture.  Many junior executives and lower ranking managers have been caught in this litigation net.  They were not involved in the deal making for the ill-fated leveraged buyout.  Their compensation was legitimately earned over the years, but the timing of their payouts was unfortunate.  Much of the money may have been spent.

How does an executive protect himself in this situation?  If he has any inkling that his company may go bankrupt, he should set aside the money  and consult a bankruptcy attorney as to how long his risk is for a claw back from creditors under the bankruptcy code then  in current effect.  The bankruptcy code does change from time to time, and so consultation with a bankruptcy attorney is a smart thing to do.



The financially troubled Tribune Company had asked a federal bankruptcy court in Delaware to permit the company to give bonuses to a group of high level executives for 2010.  The court approved the bonuses yesterday. The requested bonus amounts to $43 million, if the company reaches an operating cash flow target of at least $685 million.  Since last summer the U.S. Trustee in the bankruptcy proceeding has objected to the Tribune’s filing. Creditors and unions feel that the company doesn’t “get it,” that is, the company is finding money for its executives while union members and lenders take financial hits.  Naturally, the company makes the argument that it needs to incentivize its employees and that its bonus proposals are reasonable.

According to news accounts, the company has agreed to claw back bonus payments made to certain executives who breached their fiduciary duties or otherwise perpetrated wrongs in effecting the 2007 leveraged buyout of the company.  The claw back in this instance is a good thing.

However, what’s wrong with most of this picture?  The optics are terrible.  With the economy moving sideways and the unemployment rate remaining stubbornly high, now is not the time to highly compensate executives of a failed company seeking to reorganize.  In the present economic climate and executive labor market, I do not buy the argument that the company needs generous bonuses to keep its present talent.  Frankly, the present talent should be grateful to be employed.  To borrow a phrase from the first Bill Clinton presidential election, “It’s the economy, stupid!”  Look no further than last week’s midterm elections to see and hear the angst of Eddie Everyman, who voted against the Democrats for their perceived failure to address job creation among other economic worries.

Under ordinary economic circumstances, I am certainly not one to question a company’s judgment or right to provide appropriate compensation to attract and retain talent.  In fact, all things being equal, I advocate it, as I am an unrepentant capitalist.  I certainly do not favor our federal government dictating how much private companies can compensate their executive when those private companies  are not being bailed out by taxpayer dollars  –  let the executive labor market and the board of directors make that determination.

I do, however, think it is absurd from a public relations point of view and an equitable point of view (a bankruptcy court is a court of equity) that  the Tribune Company, while pursuing the benefits of a reorganization under bankruptcy, also seeks to give financial preference to its executives to the detriment of its creditors and unions.

My two cents worth:  In these extraordinary times, the Tribune executives should tighten their belts and make sacrifices like most everyone else.


I published a 17 May 2010 post on the concept of the “claw back” in executive employment contracts and compensation. POWER WORD PLAY (A Word, Term or Concept an Executive Ought to Know): CLAW BACK.  For those readers who have not yet read this earlier post, a claw-back provision  allows a company, or sometimes a government,  to take back compensation previously given an executive because of some misinformation or wrongful conduct that would have precluded the compensation if the company or government, as  the case may be, had known about the misinformation or wrongful conduct.  We discussed the extraordinary $468 million dollar claw back that the U.S. Security and Exchange Commission invoked in 2007 against the CEO of United Health Group Inc.

Recently I was reading my friend Darryl DePriest’s fascinating multi-part series on the public relations management of one the biggest attempted claw backs of executive compensation.  In his blog piece, Litigation Communication in Spitzer v. Grasso, DePriest does a case study on the controversy surrounding the former head of the New York Stock Exchange.

In August of 2003, the NYSE board approved a total of $187.5 million in compensation to Chairman and CEO Richard A. Grasso. As bits and pieces of the compensation became public, Grasso and the NYSE became embroiled in a firestorm eventually leading to Grasso’s forced resignation. The New York Attorney General at the time, the ever enterprising Eliot Spitzer, filed a law suit seeking the return of payment of $100 million out of $139 million in compensation paid by the NYSE.  Grasso fought back both in the court and in the media.  He prevailed!  He was saving both his money and his reputation at the same time.  Both are important.  At different points in a person’s life, money may be more important to the person than reputation, and vice versa.

It goes to show you that each case must be evaluated on its own merits.  Rolling over and being passive in a claw-back scenario may not be justified. For other executives, when you do wrong, the honorable thing to do is to take your lumps and show remorse.  In any event, the take-home point that we all have is that an executive should consider at the outset 1) whether he deserved to be clawed back, and, if not, 2) whether he should hire public relations counsel to complement his retention of legal counsel.  As Grasso proved, the retention of vigorous public relations and legal counsel is money well spent.

Also, the idea that a contract should be honored and upheld no matter how excessive the compensation may appear to third parties is fundamental to the rule of law and the protection of property – without which we cannot have an effectively  functioning market economy or democracy.  If third parties find fault with a compensation package, they need look no further than the compensation committee of the board of directors.  Now whether a board’s compensation committee has properly vindicated its duties, responsibilities and obligations is a different matter to consider.

POWER WORD PLAY (A Word, Term or Concept an Executive Ought to Know): CLAW BACK

Did you know that the Chairman and CEO of United Health Group, Inc. had to give back $468 million in cash bonuses, sold stock, and remaining stock options?   Because of the purported misconduct of options backdating, his compensation was “clawed back” from him by the powerful paw of the U.S. Securities and Exchange Commission in a 2007 settlement agreement. This occurred even before the current ongoing controversy over perceived excessive executive compensation in our recent times of near economic global implosion.

What the Company Giveth, It Taketh  Away

The tool of using “claw back” provisions in executive compensation plans and employment agreements is increasing.  As the term suggests, a claw back provision, under certain conditions, permits a company to demand repayment of compensation previously paid to executives.  Those conditions usually involve compensation paid to executives based on performance measures or factual circumstances that turn out to be inaccurate, false, or fraudulent. An example is where earnings are misstated and those earnings were used as a justification, validation or trigger for a performance bonus or other compensation.


The statutory genesis of the claw back against the hapless United Health Group CEO is Section 304 of the Sarbanes-Oxley Act of 2002.  This law, among many other things, made CEOs and CFOs of companies that must comply with any financial reporting requirement under the securities laws, liable for repayment of compensation or profits received based on misstatements necessitating an accounting restatement.


Corporate reform activists as well as such 800-pound gorillas like TARP Pay Czar Kenneth Feinberg, the US Treasury Department’s specialmaster,  clamor for the utilization of claw back provisions as a means of protecting shareholders and taxpayers  from reckless, dishonest, or avaricious  executives whose actions could destroy a company or wreck an economy – think Enron and AIG.  (TARP is an acronym for Troubled Asset Relief Program, our US government financial bailout for companies that were deemed too big to fail.)  Of course, a reckless, dishonest or avaricious executive is all in the eyes of the beholder – it may or may not be true.  Fortunately, for the executives of companies who have received TARP funds, Feinberg has been hesitant to invoke his claw back powers.

Both boards of directors and CEOs must get used to the idea of claw back provisions as their application and implementation may be becoming the norm a lot quicker than they anticipate.

Squeaky Clean

Parting word: An executive’s ethical behavior and utmost integrity are the best ways to claw proof the executive’s compensation.

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