December 9, 2016

When key executives turn the company into a personal piggy bank

Posted in Employment Law by Gene Killian |

The Eagles once sang, “Oh, and it’s a hollow feelin’/When you get down to dealin’ friends…”  They were singing about heartache, but in the business world, there are few things worse than a breach of trust by someone you put in a key position.  When that happens, long-time relationships can end bitterly, and once the lawyers get involved, corporate funds start flying out the door. But I guess, as my late father-in-law often told me, “Business is the process of accumulating whip marks.”  (He was an executive for the old DeLorean Motor Company, so he would have known.)

Example: Without going into too much detail, we have a case in the office right now where an organization hired a President who viewed the place as his personal piggy bank, walking off with almost a million dollars before he got caught.  And over the years, we’ve had to deal with many similar incidents.  That’s why I found the recent Florida case of Brown Jordan Int’l, Inc. v. Carmicle so interesting.  It’s a great study in how things can easily go sideways when you’re not paying attention, especially when times are good.

Basically, BJI, a furniture manufacturer, hired Carmicle as its Director of New Business Development. His wife, Rashna, later joined BJI as Director of Marketing.  (Yes, that’s a red flag for nepotism.)  Carmicle did well in the organization, becoming Vice-President of Sales, and later, President of a BJI subsidiary (BJS).  But problems eventually developed, such as:

  1. Carmicle keeping his wife on the payroll after she had left the organization, at an eventual rate of $78,000 per year. 
  1. Hundreds of thousands of dollars spent on sporting events, such as University of Louisville football and basketball tickets, without proper documentation. 
  1. Carmicle accessing the computers of other key BJI executives and downloading private e-mails, including e-mails containing sensitive company financial information, without authorization. 
  1. After getting caught, Carmicle destroying or “losing” data on iPhones and iPads, and remotely locking his company computer.

Now, I obviously wasn’t there, so I can only go on what the Court’s decision says (and assume it’s true). But here are a few glaring mistakes that I believe were made in this case (and other similar cases in which I’ve been involved):

  1. Letting a serious problem with an employee fester by giving “second chances.” Look, nobody (except a sociopath) likes to fire people. So we avoid it, because it’s unpleasant.  But I was struck by the fact that the organization’s CEO had a discussion with Carmicle, that the CEO described as “pretty direct.” According to the Court: “Moriarty [the CEO] claims to have made it clear during this conversation that Carmicle’s actions warranted termination for cause of his employment, but that Moriarty decided to give Carmicle a second chance because he believed Carmicle learned from his mistake. While there is no written evidence of this communication, [the company’s General Counsel] testified that Moriarty generally prefers to communicate verbally, whether in person or over the phone, and does not put much in writing.”  (Emphasis mine.) I don’t want to sound unduly harsh, but once an employee has stolen from the organization, or has substantially underperformed, there can be no “second chances.” Granting “second chances” puts the organization at risk, because there’s a high likelihood of recidivism. Also, as for not putting things in writing, keep in mind that, in litigation, the side with the most notes about critical conversations usually wins.  By waiting too long, the company allowed Carmicle (who saw the handwriting on the wall) to send a letter to management when his firing was imminent, claiming that he was a whistleblower because he had discovered certain financial improprieties in the books and records of the organization. (Apparently, there was one set of internal books, but another set of financials that were prepared for a potential buyer.) That, of course, allowed Carmicle to claim wrongful termination when he was eventually fired.  
  1. Failure to set and follow proper internal standards. The decision in this case refers to the internal procedures and controls that were ignored.  For example, the organization was supposed to set up a procedure for annual approval and documentation of entertainment expenditures, but no one ever followed up. The Court noted: “Moriarty never received a written request for approval of ticket expenditures after December 2011, and no procedure for annual approval and documentation of such expenditures was ever established.”  Trust me, plaintiffs’ lawyers love nothing more than (A) no standards at all, or even better, (B) the failure to follow written standards or promises. 
  1. Lack of accountability. This is closely related to the preceding point on internal standards.  Lack of accountability (especially at the highest levels) breeds the opportunity for fraud.   Remember the movie “Casino,” where Robert DeNiro’s character talks about the “Eye in the Sky”?  (You can watch a clip here.) You don’t have to be quite that paranoid, but there has to be a system of proper supervision.   Along these lines, when my wife worked on Wall Street years ago, she was required to take a two-week vacation every year, no matter what. That seems very generous and altruistic, but the reason was so that all of her files could be reviewed and audited, including the electronic files she generated. Something to think about. 
  1. Lack of IT security. Carmicle was able to access the companywide private email system because, in connection with a changeover to Office 365, he received a generic password that allowed him to get into everyone’s private accounts. In addition, when things started going sideways, and even after he was terminated, he maintained the ability to access hardware from off-site, and lock it or wipe it. Before any key employee is terminated (actually, before any employee is terminated), the first step should be to consult with your IT department or IT professionals to ensure that the system is secure, and that the departing employee no longer has access, immediately upon termination.

So, what happened at the end of all this drama in the Carmicle case?  The Court held that Carmicle’s termination was proper, and that the company owed him nothing under his Employment Agreement (which, he had alleged, entitled him to profits and severance pay). The Court also held that Carmicle violated federal law, including the Computer Fraud and Abuse Act and the Stored Communications Act, by accessing other employees’ email accounts, and that he had wilfully destroyed material evidence.  And because things rarely get truly resolved in the Court system, the case is now on appeal.  Cha-ching for the lawyers.  Aggravation for management.  And it probably could all have been avoided if the company had terminated a problem employee at the first sign of trouble.

You can read the full decision here.