I spend the better part of most days – both in my day job and in writing this blog – thinking about the liabilities of directors and officers. Most of the time I am focused on their civil liabilities. However, even though it is not something I think about all the time, the fact is that the potential liabilities of corporate executives also include criminal liabilities as well. I thought about this recently in reviewing a July 3, 2018 Bloomberg article entitled “From Executive Suit to Jail: One German CEO’s Tales of Prison” (here). The article tells the story of Thomas Middlehoff, a German executive who was convicted criminally and who served time in prison.
Prior to his conviction, Middlehoff served as an executive of several companies, and he also served on the Board of Directors of the New York Times Company. In May 2005, he became CEO of KarstadtQuelle. In 2007, KarstadtQuelle changed its name to Arcandor. Middlehoff was removed as Arcandor’s CEO in March 2009, owing to the decline in Arcandor’s share price during the time he served as the company’s CEO.
Three months after his removal, a German prosecutor announced an investigation of alleged fraud on Middlehoff’s part. He was eventually convicted of misappropriating half a million euros of corporate funds for personal expenses. He was sentenced to a three-year prison term. He appealed his conviction. He was imprisoned in 2014, while his appeal was pending. He ultimately served five months in jail. After his appeal was dismissed, he was served the rest of his sentence working outside prison at a charity.
The Bloomberg article emphasizes the many perks and luxuries MIddlehoff enjoyed while he served as a corporate executive and draws a contrast to his life behind prison walls. He told the reporter that “when the door shut for the first time, it was a feeling as if the air had been drawn from my lung. My head was spinning.” He says that he wept the first time his wife visited him. The article notes that “Meetings with lawyers meant body searches before and after each encounter, family visits were restricted to twice a month – and only for three people, a tough situation for Middlehoff, who has five children.”
He kept himself together while in prison with a disciplines daily routine. He rose each day at 5 am and read the bible, followed by a work-out regimen that included 100 push-ups.
The article highlights Middlehoff’s experience in light of the recent imprisonment of Audi CEO Rupert Stadler. Stadler was arrested and jailed in June, based on concerns that he was tampering with evidence or suppressing evidence related to the Volkswagen diesel emissions probe. Stadler’s arrest apparently came as a shock to the company. The Bloomberg article quotes a statement from VW CEO Herbert Diess as saying that if the charges against Stadler are true that Stadler would be barred from returning to the company.
Middlehoff told the Bloomberg reporter “The real scandal is that none of his colleagues are speaking up for Stadler, and that’s why I wanted to do it. I wish him a lot of strength, and the confidence that he will survive this without damage to his soul.”
Middlehoff’s message of solidarity with and support for Stadler is interesting. There is a sense in Middlehoff’s message that only someone who has been through the shocking loss of status and freedom that goes with being imprisoned can know what another person in that position is experiencing. Perhaps at some level this is true. But the lessons from Middlehoff’s experience are not limited just to other executives who have been imprisoned. It is also a cautionary tale for any corporate executive who engages in criminal misconduct, whether for personal gain or out of a belief that they will never get caught, or for other reasons.
Over my long career working with directors and officers of public and private companies, I have known some individuals who later were convicted and imprisoned. For example, I met Jake and C.H. Butcher, the Tennessee bankers who were convicted in 1985 of banking fraud after their Knoxville-based banking empire failed in the early 80’s. (As I said, I have been doing D&O for a long time.) I once took the deposition of a former corporate executive while he was in a federal penitentiary. So it is not news to me that corporate executives can be criminally charged and wind up in jail. Just ask the so-called “Pharma Bro” Martin Skhreli, who is currently imprisoned in a federal penitentiary serving a seven-year sentence for securities fraud.
Just the same, it probably is worth it every now and then to go back and remember that the potential liabilities for corporate executives include the possibility of criminal liability. It may not be information that an executive needs to hear every day. But there could be value in making executives figuratively hear the sound of a jail cell door slamming shut from time to time.
One question I get pretty regularly about executives’ potential criminal liability has to do with how the D&O insurance policy responds with respect to criminal matters. Most policies define the term claim to include a criminal prosecution after indictment. So the indictment triggers coverage and means that the executive’s defense fees can be paid under the policy. The policy is of course subject to a conduct exclusion precluding coverage if the precluded conduct is established by a final adjudication. There are disputes about whether or not a conviction alone is sufficient to trigger the exclusion, at least while an appeal is pending. If the exclusion is triggered, the insurer may attempt to recoup the amounts it paid for the individual’s defense (although usually by that time, the individual does not have any assets from which to recover). Obviously, criminal fines and penalties are not covered.
These insurance issuers are important in the way that money matters so often are, but I suspect that for Middlehoff, the importance of these money issues pale by comparison to the other concerns had has had to deal with as a result of his criminal conviction and imprisonment. I am sure it is an experience that has changed his life – and worth contemplating.