October 30, 2007
On Leaving Corporate Executives "Naked, Homeless and Without Wheels"
Posted by Lisa Fairfax

Donald Langevoort has an article entitled 'On Leaving Corporate Executives Naked, Homeless and Without Wheels": Corporate Fraud, Equitable Remedies, and the Debate Over Entity Versus Individual Liability'.  The quote is from former SEC Chairman Richard Breedan who once threatened that his agency would pursue corporate executives so as to leave them “naked, homeless and without wheels.”  If the title does not grab you, the article itself is a very interesting and important read on the extent to which our current regime enables us to effectively go after individual executives involved in corporate malfeasance, particularly in order to recoup monetary rewards received in the context of such malfeasance.

                To be sure, Breedan’s words were uttered in the context of insider trading scandals.  Yet many in law enforcement expressed a similar sentiment on the heels of the more recent corporate scandals, suggesting that corporate executives should and would be held accountable for their misdeeds.  And that they would be stripped of their ill-gotten gains.  Yet as Langevoort points out, too often law enforcement efforts appear to miss the mark as it relates to individuals.  Certainly several high-profile criminal prosecutions reveal that since 2002, there has been some increased focus on corporate executive liability.   However, even when executives go to jail, some of them retain their incentive compensation.  Moreover, criminal enforcement efforts increasingly have included a focus on entity liability.  A similar phenomenon occurs on the civil side.  Thus, Langevoort notes that reports reveal that settlements in fraud on the market lawsuits tend to be paid by companies or D&O insurers, while fines extracted from SEC enforcement actions tend to be paid by companies—and not executives.  In fact, while some people feared that the personal settlements crafted pursuant to WorldCom and Enron would prompt a trend towards greater personal liability in civil settlements, they instead appear to stand as the exception to a system that generally relies on corporate payouts.

                Of course the recent focus on entity liability, particularly in the criminal context, not only has sparked debate, but also has generated some degree of consensus that the justifications for such corporate payouts are not clear.  Langevoort’s article uses the debate regarding entity versus individual liability as a springboard to examine the available tools for going after executives complicit in corporate fraud.  As he notes, entity liability emerged as a solution for the difficulties with holding individual executives liable.   Thus, while individual liability may be preferable to entity liability, it is appropriate to ask, if we pull back on entity liability, will individual liability will take its place?  In particular, Langevoort focuses on the equitable remedies of rescission and restitution as applied to corporate executives.  Langevoort concludes that while there are some remedies available in this area at both the state and federal level, they are underutilized because of legal and practical impediments.

                Langevoort’s article pinpoints an important issue that merits further attention.  In fact, many appear frustrated by the fact that current law enforcement efforts appear to leave executives’ monetary rewards intact.  Certainly one oft-cited complaint regarding the ousting of underperforming CEOs is that, despite their underperformance, they manage to leave with very lucrative severance packages.  So while we may not be interested in leaving executives “naked, homeless and without wheels,” there is an interest in ensuring that they do not reap the monetary benefits of corporate misconduct.  And it appears that our current regime does not effectively respond to that interest.

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