Are you liable for the improper acts of your CEO if you did not know about them (and did not profit from them)?
Saturday’s NY Times reported on a case involving Marshall Cogan and his company, Trace Holdings. One of the officers a backruptcy trustee went after was the firm’s GC, Philip Smith. As the Times reports:
Mr. Smith was Trace’s general counsel from 1988 to 1999. He also served as corporate secretary until 1996. Beginning in 1995, he began primarily working as general counsel for Foamex, said his lawyer, Robert A. Meister of Piper Rudnick Gray Cary.
“They weren’t inspectors general; they weren’t F.B.I. people,” Mr. Meister said. “They were businessmen running a business. They knew what they were doing in their business, but they didn’t know what Mr. Cogan was doing on his own.”
He added, “It would be grossly unfair to hold an innocent director liable for more than $20 million when he didn’t receive a penny.”
At a non-jury trial, the lower court found Mr. Smith and other officers liable for some of Mr. Cogan’s actions. Mr. Smith appealed the decision, and the lower court’s denial of a jury trial. The Second Circuit vacated the judgment and remanded for a new trial by jury; the opinion is here.
Inquiring GCs will want to watch this case on re-trial.