In an exceptionally rare clawback case, The Hertz Corp. has sued its former general counsel, Jeffrey Zimmerman, and two other top executives in New Jersey federal court 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 related to misstating company income.
Hertz does not accuse 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 suit, along with then-chief financial officer Elyse Douglas.
The suit states, “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 suit says. Zimmerman’s attorney, Vincent Connelly of the Chicago office of Mayer Brown, declined to comment. Zimmerman, who served as general counsel from December 2007 until he resigned in December 2014, couldn’t be reached for comment.
While the U.S. Securities and Exchange Commission has brought a few clawback cases against executives, one brought 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, who owns Herbert Beigel & Associates in Tucson, Arizona, says the complaint speaks for itself.
Hertz, previously based in Park Ridge, moved its headquarters to Estero, Florida, after the 2012 acquisition of the Dollar Thrifty Automotive Group.
The facts of the case stretch back to 2011 and into 2013, a three-year period 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.
Frissora allegedly demanded “paradigm-busting accounting.”
As an example of Zimmerman’s knowledge, the suit says “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 states, “Defendants’ wrongful ‘tone at the top’ was a form of misconduct and gross negligence because it exacerbated various risk factors,” and led to inadequate internal controls and “a plethora of accounting errors.”
Eventually Hertz, which is headquartered in Estero, Florida, was forced to restate three years worth of income. All three defendants resigned under pressure and received multimillion-dollar severance packages.
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 for the District of New Jersey, alleging they were in breach of the company’s clawback policy.
Hertz also accused them of breaching their severance agreements by misstating that they had not engaged in “willful gross neglect” or “willful gross misconduct.”
The suit says Frissora and Zimmerman also “represented in those agreements that they had not facilitated … and ha[ve] no knowledge 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 that the defendants are not entitled to have their own attorneys’ 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 attorneys’ fees. That action is expected to be heard first, in May.