Punishment Without Cause: Disgorgement And Forfeiture Of Salary And Pensions

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It has become popular among prosecutors and regulators in recent years to claim that officials who engaged in wrongdoing on the job should be forced to surrender every dollar earned on that job. The U.S. Attorney for the Southern District of New York has issued a policy statement that his office will use federal forfeiture laws to seek to strip the pensions of state officials convicted on federal corruption charges. Such policy mirrors the position often taken by SEC enforcement lawyers in seeking to disgorge all of the salary and bonuses earned by corporate officials found to have engaged in misdeeds. The problem with these claims, both as a matter of law and as a matter of fairness, is that they most often fail the basic test of causation.

As to pension forfeiture, last September the Southern District of New York U.S. Attorney announced a policy to use the forfeiture laws to seek to correct a so-called “error of state law” permitting convicted state officials to maintain their pensions. Gary Stein’s excellent recently published scholarly article explains in detail how the question of under what circumstances government-funded pensions may be subject to forfeiture requires a balancing competing policy concerns, and that such balancing has been undertaken by the legislature. In the case of New York state officials, the issue is governed by the New York State Constitution and a 2011 statute; in the case of federal officials, it is addressed by specific federal statutes. Such applicable federal and state law is inconsistent with the Southern District of New York’s announced policy to claw back any pension interest that a public official “accrued while engaging in criminal conduct.” Indeed, in the case of New York state officials, where pension forfeiture is permitted, the applicable statute is far more nuanced and limited than the federal prosecutor’s policy, requiring the consideration of a host of potential mitigating factors and allowing for the exercise of judicial discretion. Stein persuasively argues that the U.S. Attorney’s new position is an overreach into the legislative realm.

In general under federal forfeiture law, only “proceeds” obtained because of the offense are forfeitable. Thus, under applicable law, property that a person would have obtained even if the offense had never occurred cannot be regarded as forfeitable proceeds. Public officials, like other employees, receive pension benefits because of their employment. Aside from the unusual case in which an official is shown to have bribed his or her way into office in the first place, pension benefits are not the “proceeds” of corruption while in office. As Stein points out, any argument that the public would have thrown out the official had it known of the corruption is logically flawed because the test for but-for causation is what would have happened if the entirety of the wrongdoing did not exist — not what would have happened if the wrongdoing existed but its concealment did not.

While many may resent that public officials are granted generous pensions in the first place, using the forfeiture laws to strip pensions from those who have been convicted is not the way to address that broader issue. One does not need to imagine every corrupt official to be as otherwise dedicated and sympathetic as the Mayor of Camden, New Jersey portrayed in American Hustle to understand why it might be unjust to strip pension benefits accumulated through long years of dedicated service for what may have been an isolated act of corruption, even without considering the impact of a lost pension on the Mayor’s innocent family members.

“American Hustle” (Photo credit: JoeInSouthernCA)

A similar controversy is reflected in SEC enforcement actions, which commonly seek disgorgement of all of the salary and other compensation earned by corporate officials while fraud is afoot at their companies. The Second Circuit’s recent decision in SEC v. Razmilovic confirms the basic principle that the SEC’s remedy of disgorgement under the federal securities laws reaches only so much of a defendant’s gains as are shown to be causally related to the fraud. The Second Circuit thus affirmed the decision of the district court rejecting the SEC’s attempt to disgorge all of Razmilovic’s salary earned as CEO while his company, Symbol Technologies, was engaged in an accounting fraud that inflated its reported revenue and earnings. The court found that Symbol’s continued viability confirmed that Razmilovic performed valuable services for the company during the relevant period despite his involvement in the fraud. Because a large portion of his base salary was unrelated to the company’s reported performance, that portion was not subject to disgorgement. The district court distinguished cases involving defendants who had prolonged the lives of their employers by means of fraud, and thus received compensation during that time that they would not have received had their employers gone out of business.

In short, while it may play well in the press for an enforcement official to seek to recover every dime in compensation a public or corporate official received or accrued while wrongdoing was afoot, applicable law generally requires proof that such sums would not have been obtained absent the wrongdoing. Defendants found guilty in criminal or SEC enforcement proceedings typically will suffer other very severe consequences. Before also requiring them to surrender past salary or vested pension benefits, it is only just to ask whether such sums were obtained as a result of years of legitimate, valuable labor rather than as a result of proven instances of wrongdoing.

 

Topics:  Disgorgement, Forfeiture, Pensions

Published In: Criminal Law Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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