CEO Problems Raise D&O, EPLI Issues

The vice president of human resources of a privately held corporation in California called the EPL hotline for recommendations regarding personnel issues and the companys executive suite.

The company had recently implemented an employee hotline. A caller left an anonymous “complaint” implicating the chief executive officer in a series of incidents raising key exposure issues.

The caller claimed the CEO had falsified his expense records to cover up a marital affair with a subordinate. The subordinate subsequently claimed sexual harassment and had threatened to “go public” with allegations that the CEO engaged in financial improprieties in an effort to artificially inflate the numbers underlying the companys financial performance.

The “tip” also alleged that the CEO had made threats to his former lover with statements that “hed make her life and her job a living hell if she went public.” Because of the seriousness of these issues, the vice president of Human Resources asked for recommendations on what to do as a result of the anonymous call.

EPL Hotline Recommendations:

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

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

While no “victim” has come forward to complain, the company is now on notice that its most senior executive is alleged to have engaged in conduct inconsistent with the companys personnel policy against workplace harassment.

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

Logistically, an investigation into the conduct of the CEO would raise a host of problems if the HR Department would undertake the investigation on its own. It is probably best in these circumstances to engage the services of an independent consultant or outside counsel to conduct the investigation.

The anonymous call also raises issues with respect to potential misconduct on the CEOs part. Cheating on expenses, threatening a whistleblower and “cooking the books” raise serious and substantial issues of ethics, performance, and civil and criminal law issues.

Separate and apart from the duty to investigate a potential workplace harassment problem, the company has a duty to investigate these issues because of the nature of the complaint and the high ranking position of the person alleged to have engaged in the misconduct.

If substantiated in an investigation, the CEOs alleged misconduct could easily give rise to a decision to terminate his employment. 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 termination will impact the companys potential liability under workplace and corporate laws.

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

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

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

Lisa Bee is director of EPL risk management for Lexington Insurance Company in Boston. Gerald L. Maatman is a partner with Seyfarth 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 serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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CEO Problems Raise D&O, EPLI Issues

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