In an exceptionally rare clawback case, The Hertz Corp. is suing its former general counsel and two other top executives to recover over $70 million the company says it paid them in incentive pay and a “golden parachute” severance package, plus over $200 million in legal fees and other costs due to misstated financial reports.
Hertz, which is headquartered in Estero, was forced to restate three years worth of income. All three defendants resigned under pressure and received multimillion-dollar severance packages.
Hertz does not accuse ex-GC Jeffrey Zimmerman of doing anything illegal, but the complaint alleges he “failed to stop, effectively counterbalance, or otherwise offset or report to Hertz’s board of directors” about actions of former CEO Mark Frissora, which led to serious accounting misconduct. Frissora is a co-defendant in the lawsuit along with then-chief financial officer Elyse Douglas.
Frissora demanded “paradigm-busting accounting,” the suit said. “As General Counsel and chief compliance officer, Zimmerman was responsible for ensuring the accuracy and completeness of disclosures to stockholders and the public,”
Zimmerman’s failure to stop or report Frissora was a breach of his duty owed to Hertz, the complaint said. Zimmerman’s attorney, Vincent Connelly of the Chicago office of Mayer Brown, declined comment. Zimmerman, who served as general counsel for seven years ending in December 2014, couldn’t be reached for comment by deadline.
While the Securities and Exchange Commission has brought a few clawback cases against executives, one filed by a corporation is very rare. In fact, Hertz attorney Herbert Beigel said he knows of no other case quite like it. Beyond that, Beigel of Herbert Beigel & Associates in Tucson, Arizona, said the complaint speaks for itself.
The lawsuit was filed in federal court in New Jersey by Gordon & Rees attorney Douglas E. Motzenbecker of Florham Park, New Jersey. Robert Viducich of the Law Office of Robert R. Viducich in New York also represents Hertz.
The facts of the case stretch back to 2011-2013 when then CEO-Frissora allegedly “displayed a management style and temperament that created a pressurized operating environment at the company … [which] led to inappropriate accounting decisions and the failure to disclose information critical to an effective review of Hertz’s finances,” the suit states.
As an example of Zimmerman’s knowledge, the suit said, “During the January 2013 close, Frissora urged Zimmerman to conduct a granular review of the legal reserves to help the company ‘bridge the gap’ for year-end results. Then, in September 2013, Frissora again urged Zimmerman to review legal reserves.”
The suit said the defendants’ “wrongful ‘tone at the top’ was a form of misconduct and gross negligence,” led to inadequate internal controls and “a plethora of accounting errors.”
According to the suit, Zimmerman’s golden parachute included, among other things, a series of lump-sum payments, the retention of certain incentive-based equity awards, eligibility for 92.9 percent of his 2014 bonus and the continued use of certain perquisites, such as insurance coverage.
Last December the company agreed to pay $16 million to settle a case brought by SEC for materially misstating its income by some $235 million.
In February, after an internal investigation and settlement with the SEC, Hertz sent letters to the defendants demanding they return their incentive and severance payments, totaling $70 million. When they did not do so, Hertz brought suit March 25 in U.S. District Court in New Jersey, alleging they were in breach of the company’s clawback policy.
Hertz also accused them of breaching their severance agreements by saying they had not engaged in “willful gross neglect” or “willful gross misconduct.”
The suit said Frissora and Zimmerman also “represented in those agreements that they had not facilitated” or knew of “any financial or accounting improprieties or irregularities within Hertz.”
Hertz cites as damages the $70 million in incentive and severance pay, and over $200 million in investigative, legal and remediation costs, including the SEC penalty. The legal costs include defending the company against several lawsuits brought after the income restatement.
Hertz also seeks a declaratory judgment saying the defendants are not entitled to have their attorney fees paid by the company for this litigation.
Meanwhile, the defendants have filed their own action in Delaware Chancery Court, asking that the court order Hertz to pay their attorney fees. That action is expected to be heard first in May.