'There is an expectation that the executive act strictly in the corporation's interest': lawyer
A former executive of an international group of companies must pay more than US$500,000 to his former employer for breach of his fiduciary duties and fraudulent actions, the Alberta Court of King’s Bench has ruled.
The decision demonstrates the seriousness of the fiduciary duties of a high-ranking employee, according to Joseph Oppenheim, a lawyer at Carbert Waite in Calgary.
“An executive of a corporation, as a matter of law, has fiduciary obligations attached to their role,” he says. “The reason behind the law is a recognition that someone in that position has access to the corporation's assets and the power to exercise discretion over how those assets are used, and that leaves the corporation vulnerable.”
“When you have that vulnerability, there is an expectation that the executive act strictly in the corporation's interest with respect to how assets are treated, used, spent, etc., and that leads to this particular stringent duty,” he adds.
Expenditures approval required from board
In 2001, the worker became president and CEO of Foremost Universal Limited Partnership, an Alberta corporation involved in the design, manufacture, sale, and service of tanks, vessels, and compression equipment for the energy and environmental industries.
In 2003, he was made president of the Foremost Income Fund (FIF), a mutual fund that oversaw the operations of Universal and other businesses in the Foremost Group, including Alberta-based Foremost Industries Limited Partnership (FILP), which manufactured heavy all-terrain vehicles and drilling equipment.
In October 2011, the worker entered into a written employment agreement that required him to comply with the Foremost Group’s policies, practices, and procedures and to avoid and disclose “any and all potential conflicts of interest.” His responsibilities were for all businesses within the Foremost Group and he reported to the board of directors of FIF.
The worker was regularly reminded that he was required to consult with and obtain approval from the FIF board on matters outside of his authority, such as expenditures above his spend authorization limit, contracts with “red flag” terms, any matter that was out of the ordinary, and employee compensation.
In early 2012, the worker authorized the expenditure for three separate repair stages at a Universal storage facility. He didn’t notify the board of directors as each stage was submitted separately. However, the combined amount was beyond his spending authority.
When the board learned of the authorization, the worker admitted that the processes he used were "embarrassing” and said that he was committed to meeting their expectations.
Failed to follow approval process
In May 2012, the worker discussed a rebranding project with the senior management committee. By the fall, the FIF board learned that the project was at the point of conclusion without them having an opportunity to review it. They allowed it to finish since most of the work had already been done, but they reminded the worker of the need for their involvement.
In early 2013, FILP’s general manager informed the worker that a mulcher manufacturer was not going to live up to its contractual obligations to the Foremost Group’s Russian companies. The worker approved a loan of $400,000 (all figures USD) to the manufacturer but he didn’t involve the legal department or the board.
On Jan. 7, 2013, the board discussed its concerns with the worker. The worker agreed and he insisted that he was committed to following Foremost Group principles.
In February, the worker sought approval for a $50,000 bonus for an employee. The board felt it was too high, so the worker reduced it to $40,000. However, a short time later, the worker paid an additional $20,000 from a commission pool. The board felt that the worker had structured the bonus to avoid having to get approval.
In late 2013, the worker reviewed an $11.5-million contract template with a Russian pipeline company for six vehicles, despite the fact that the contract had several “red flags.” He didn’t inform the FIF board because he didn’t think a final contract had been signed.
Dishonesty about contract signing
When a board trustee emailed the worker about his concerns over the deal, the worker said that he had instructed the manager of the Russian operation to accept it, although that wasn’t true. He acknowledged that his actions were “offside.”
In March 2014, the FIF board determined that the worker had breached his employment obligations and fiduciary duties. The worker acknowledged his failures and said that he wanted to do better, but on March 19 the board decided it would not renew his employment agreement when it expired on Dec. 31.
The worker revealed that he had not authorized the signing of the pipeline company contract, which led the board to determine that their trust in him was irrevocably damaged. The worker’s employment was terminated on March 26 for his failure to follow Foremost policies, misrepresentation of business information to the board, failure to follow corrective instructions, lack of candour in dealing with the board, and “general non-performance of your employment obligations.”
One week later, the Russian operation manager requested approval to pay a 10 per cent agency fee for the Russian pipeline contract – agency fees were common in Russia to facilitate contracts. The board approved the payment and the manager resigned immediately.
Foremost Group investigated the agency fee payments and found two payments of $78,000 and $35,000 to the worker’s numbered company incorporated in Alberta that he used to invoice consulting services as part of his compensation.
Fraudulent payments
Foremost Group also found that from 2011 to 2013, the manager of the Russian operation received three bonus payments from the commission pool approved by the worker and followed each with a financial gift to the worker’s numbered company. The three gifts totalled more than $166,000 and the worker acknowledged that these payments were wrong.
The worker sued for wrongful dismissal. FIF filed a counterclaim alleging that the worker breached his fiduciary duty and his duties of loyalty, honesty and good faith. It sought damages for the money that the worker had inappropriately been paid.
The court noted that the worker admitted to the impropriety of receiving significant financial gifts from a subordinate and that it was a conflict of interest since the gifts came from Foremost Group’s funds. In addition, the worker concealed them from the board and provided false information about the Russian pipeline transaction.
The court found that the worker, in his role as president and CEO, had fiduciary duties and was required to avoid conflicts of interest. The evidence was clear that he breached these duties, said the court.
The employment agreement clearly set out the expectations and the FIF board regularly reinforced them, but despite the worker acknowledging that he needed to improve, he didn’t, the court said.
Just cause to dismiss worker
The court determined that Foremost Group had just cause to dismiss the worker. As for the employer’s counterclaim, it found that the worker’s position with “significant power to manage and control the Foremost Group’s operations” left the companies vulnerable to his misconduct, the court said.
Where an employee is found to have stolen from their employer, committed fraud, or intentionally breached their fiduciary obligations, just cause is certain if the employer can prove it, says Oppenheim, adding that alleging fraud or similar serious misconduct in a counterclaim has to be done carefully.
“If an employer [alleges fraud], sues the employee, and is found not to have proved the misconduct or, worse, is found to have misled the court, it can backfire and the employer can be held liable for bad-faith conduct, let alone wrongful dismissal,” he says. “An employer has to have their ducks in a row and do a careful investigation to determine that they actually have the evidence to substantiate serious allegations.”
The court dismissed the worker’s wrongful dismissal action and found that the worker was personally liable for the payments he received from the manager, as well as the “fraudulently charged” agent fees that led to payments to his numbered company. The worker was also personally liable for $200,000 in damages that Foremost Group suffered from breaches of his fiduciary duty and employment agreement stemming from delays in the implementation of other financial practices.
The court also granted Foremost Group’s claim for $50,000 in punitive damages due to the worker’s bad faith and dishonesty while holding a fiduciary role. The worker was ordered to pay Foremost Group a total of $529,224.09 plus costs.
“As a lawyer, I'm always impressed when any party - whether it be an organization or an individual - is able to successfully prove fraud in a civil case, because it’s not an easy thing to do,” says Oppenheim. “It takes a lot of forensic-type work to uncover the evidence you need to get there.”
Oppenheim adds that although punitive damages are fairly rare, it’s worth it for an employer to claim them in an action against an employee if it’s confident it can prove misconduct serious enough to warrant them, such as fraud.
