CEO Problems Raise D&O, EPLI Issues

The vice president of human resources of a privately heldcorporation in California called the EPL hotline forrecommendations regarding personnel issues and the companysexecutive suite.

The company had recently implemented an employee hotline. Acaller left an anonymous “complaint” implicating the chiefexecutive officer in a series of incidents raising key exposureissues.

The caller claimed the CEO had falsified his expense records tocover up a marital affair with a subordinate. The subordinatesubsequently claimed sexual harassment and had threatened to “gopublic” with allegations that the CEO engaged in financialimproprieties in an effort to artificially inflate the numbersunderlying the companys financial performance.

The “tip” also alleged that the CEO had made threats to hisformer lover with statements that “hed make her life and her job aliving hell if she went public.” Because of the seriousness ofthese issues, the vice president of Human Resources asked forrecommendations on what to do as a result of the anonymouscall.

EPL Hotline Recommendations:

The “tip” raises numerous issues and poses problems in terms ofworkplace and corporate laws. In order to protect the company, thevice president of Human Resources should consider variouspro-active steps in these circumstances.

First, the company has a decision to make with respect to thetipsters report of a potential sexual harassment problem.

While no “victim” has come forward to complain, the company isnow on notice that its most senior executive is alleged to haveengaged in conduct inconsistent with the companys personnel policyagainst workplace harassment.

If it ignores the tip and does not investigate and a second suchincident should occur, it is “on notice” of a potential problem andthe company will be opening itself up to more extensive punitivedamages exposure for failing to take steps to remedy the problem.This is assuming an investigation would substantiate the fact thatthere is a problem.

Logistically, an investigation into the conduct of the CEO wouldraise a host of problems if the HR Department would undertake theinvestigation on its own. It is probably best in thesecircumstances to engage the services of an independent consultantor outside counsel to conduct the investigation.

The anonymous call also raises issues with respect to potentialmisconduct on the CEOs part. Cheating on expenses, threatening awhistleblower and “cooking the books” raise serious and substantialissues of ethics, performance, and civil and criminal lawissues.

Separate and apart from the duty to investigate a potentialworkplace harassment problem, the company has a duty to investigatethese issues because of the nature of the complaint and the highranking position of the person alleged to have engaged in themisconduct.

If substantiated in an investigation, the CEOs allegedmisconduct could easily give rise to a decision to terminate hisemployment. This will raise a host of issues for the company.

The company stands much to lose in the eyes of its constituents,ranging from employees to its customers. In turn, the terminationwill impact the companys potential liability under workplace andcorporate laws.

California also affords a number of potential remedies whichwould raise the exposure for litigation. This would range from thenew “sue your boss” statute (allowing direct actions against theCEO for alleged improprieties) to an unfair business practice(under the Civil Code provision 17200) for those allegedly injuredby the conduct of the CEO.

The companys employment practices liability and directors &officers insurance policies may, in turn, be implicated by theseexposures.

Last, but not least, there may be potential liability under theSarbanes-Oxley Act. Private companies are not entirely immune toits provisions. If the subordinates “going public” included areport to law enforcement officials, acts of retaliation orotherwise interfering with the subordinates employment orlivelihood could constitute a violation of Section 1107 of the law.The CEO could be liable for both civil and criminal penalties. Inthese circumstances, it would behoove the company to engage specialcounsel for advice on these problems.

Lisa Bee is director of EPL risk management for LexingtonInsurance Company in Boston. Gerald L. Maatman is a partner withSeyfarth Shaw in Chicago.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, November 26, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.