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Shareholder Lawsuits Allege that Chesapeake Energy Corp. Directors Concealed $1 Billion in Loans Giving the CEO an Interest in Company’s Natural Gas Wells

May 8th, 2012 · No Comments

According to shareholder lawsuits recently filed in the U.S. District Court for the Western District of Oklahoma, Chesapeake Energy Corporation’s directors allegedly violated federal securities laws and their fiduciary duties by concealing over $1 billion in loans that gave the company’s CEO an interest in every natural gas well drilled over a 10 year period.

The lawsuits follow a mid-April news report published by Reuters that purportedly shows how Chesapeake’s chairman and CEO, Aubrey McClendon, obtained a 2.5% state in thousands of wells that the natural gas company has drilled since 2005.  On April 26, 2012, Reuters reported that the U.S. Securities and Exchange Commission (SEC) had been carrying out an investigation of a decision of Chesapeake’s board to permit McClendon to use a “company finance source” to obtain up to $1 billion in loans secured by the CEO’s stake in the natural gas wells.

Following this report, Chesapeake released a statement admitting that while it had general knowledge of the loan-and-investment program, the company’s directors “did not review, approve or have knowledge of the specific transactions engaged in by [the CEO] or the terms of those transactions.”

The lawsuit was brought by two Chesapeake shareholders and seeks to hold Chesapeake’s board of directors – including former Oklahoma Governor Frank Keating – individually liable for the cost of the alleged violations of fiduciary duty.

One of the shareholder complaints contains allegations that Chesapeake’s directors violated both federal proxy laws and their duty of disclosure by failing to inform shareholders of the possible conflict of interest and cost arising from the company assisting the CEO to purchase an interest in the natural gas wells.

The lawsuit seeks an order from the court to force Chesapeake’s director’s to make a complete disclosure of facts pertaining to the loans and investment scheme and also to put in place independent oversight of the program.

Shares of the Chesapeake stock have rapidly declined since the Reuters news story broke, resulting in a nearly half-billion dollar loss in the company’s market value.  The lawsuits also request that the court order the company’s directors to compensate shareholders for the shares’ decline in value.

Tags: Executive Compensation Attorney

Ninth Circuit Issues En Banc Decision Adopting Narrow Interpretation of Computer Fraud and Abuse Act (CFAA)

April 19th, 2012 · No Comments

Last week the U.S. Court of Appeals for the Ninth Circuit issued an en banc decision in the case of United States v. Nosal, No. 10-10038 (9th Cir. Apr. 10, 2012), relating to the issue of whether former employees can be held criminally liable under the Computer Fraud and Abuse Act (CFAA) for accessing their employer’s computer in violation of the employer’s computer use policy in order to obtain client information for a new job. The court held, in a 9-2 decision, that the CFAA does not allow criminal prosecutions of an employee who violates his or her employer’s computer usage policy. However, such employees can still be subject to criminal liability under other theft statutes.

At issue in the lawsuit was the conduct of David Nosal, a former employee of executive search firm, Korn/Ferry International, who convinced some of his former co-workers who were still working for Korn/Ferry to assist him in starting a competing business. Nosal’s former co-workers used their login information to download company information including the names and contact information of clients from a database on Korn/Ferry’s computer and then sent that information to Nosal. While the employees were authorized to access the company’s database, the company maintained a policy forbidding the disclosure of confidential information.

After the transfer of client data, the government indicted Nosal on various criminal charges including trade secret theft, mail fraud, and violations of the CFAA. The CFAA forbids the “exceed[ing] authorized access” for a fraudulent purpose and defines this as “access[ing] a computer with authorization and to use such access to obtain or alter information in the computer that the accesser is not entitled so to obtain or altered.”

The court interpreted the CFAA narrowly, holding that because Nosal’s associates had permission to access the company’s database and obtain the information contained therein, the Government’s charges failed to meet the element of “without authorization, or exceeds authorized” access.

Writing for the majority, Chief Judge Kozinski indicated that perhaps the most important factor for the majority in interpreting the CFAA narrowly was its concern that the Government’s “construction of the statute would expand its scope far beyond computer hacking to criminalize any unauthorized use of information obtained from a computer” and would “make criminals of large groups of people who would have little reason to suspect they are committing a federal crime.”

The court’s en banc decision will limit prosecutors who have made more aggressive use of the CFAA in recent years, as well as companies who have used the CFAA as a basis for claims against current and former employees.

The Government may seek review of the Ninth Circuit’s en banc ruling by the U.S. Supreme Court, as the Ninth Circuit’s recent decision conflicts with decisions of the First, Fifth, Eighth, and Eleventh Circuits.

Tags: Executive Compensation Attorney

Former Executives Sued for Breach of Duty Ask Delaware Chancery Court to Force Company to Finance Their Defense

April 6th, 2012 · No Comments

Three former executive officers of Catch the Wind Inc. (CTW Inc.), a wind turbine technology company, have asked the Chancery Court of Delaware to require the company to pay their legal bills in a breach of duty lawsuit that the company brought against them.

The executives founded Optical Air Data Systems to develop and research laser technology and later spun off CTW Inc. in 2008 as a separate company that would focus on commercial applications of the technology the parent company had developed.  Following the spin-off, CTW Inc. became a subsidiary of CTW Ltd., a Delaware chartered holding company that reincorporated in the Cayman Islands in 2011 following an investment by venture capital investment company, Bayview Public Ventures.

The three executives named in the suit had served as directors of CTW Inc. until September 2011 when the holding company voted to terminate them after a disagreement about the purchase of a company jet. CTW Ltd. The company brought then suit against the former executives, claiming that they misled the company about the cost of the plane to the tune of $18 million.

The former corporate officers have asked the court to force CTW Ltd. to pay near $60,000 in existing legal fees and future attorney costs as Delaware law requires that corporations chartered in the state to pay all defense costs that corporate directors and officers incur during their service. The former executives claim that despite CTW Ltd. now being a Cayman Islands company, Delaware indemnification law continues to apply to the former executives’ employment contracts.

Under Delaware law, corporations agree to cover the cost of their officers’ and directors’ legal bills, provided that the officers and directors are not found responsible for disloyal actions. Additionally, in Delaware corporations must advance the cost of officers’ legal defense as they accumulate during litigation rather than when litigation has concluded.

Tags: Executive Compensation Attorney

Chinese Company Ordered to Disclose Location of Executives Named in U.S. Securities Fraud Suit

March 23rd, 2012 · No Comments

Judge Philip Gutierrez of the U.S. District Court for the Central District of California recently ordered China Intelligent Lighting & Electronics to disclose any information it has pertaining to the whereabouts of its directors and officers so that shareholders can bring action against the executives in a securities fraud suit.  The company’s directors and officers are named in a lawsuit involving false information provided during an initial public offering (IPO).

The disclosure order is significant, because typically under the Private Securities Litigation Reform Act (PSLRA), plaintiffs are barred from proceeding in discovery until the lawsuit has survived a motion to dismiss.  Judge Gutierrez indicated that he made an exception because the plaintiffs seeking to bring action against China Intelligent Lighting had made repeated attempts to locate four of the company’s officers and had not yet succeeded in serving them process.

“Not granting [the limited discovery]” would, according to the judge, “delay this litigation and may ultimately allow some defendants to escape liability.”  Additionally, according to the judge, China Intelligent Lighting is unlikely to be burdened by the request and that this limited discovery “will not contravene the purposes of the PSLRA discovery stay.”

China Intelligent Lighting is allegedly among one of the hundreds of so-called ‘reverse merger’ companies that now trade on U.S. stock exchanges after having created shell corporations chartered in the U.S. but whose assets, executives, and headquarters are located in China.

The U.S. Securities and Exchange Commission (SEC) has recently targeted many of these reverse merger companies for allegedly illegally manipulating assets, providing false or incomplete information on mandatory disclosures, failing to adhere to proper corporate governance, and improper accounting practices.   Lawsuits against such companies often face problems in gaining access to officers and information that may be located abroad.


Tags: Executive Compensation Attorney

Securities and Exchange Commission Brings Fraud Lawsuit against China-Based Executives of Puda Coal

March 23rd, 2012 · No Comments

The U.S. Securities Exchange Commission (SEC) has charged two executives of a China-based company, Puda Coal Inc., with fraud, claiming that the executives sold U.S. investors shares in a shell company instead of the actual coal business in which investors sought to purchase stock.

The suit alleges that Puda Coal’s chairman, Ming Zhao, and former CEO, Liping Zhu, attempted to “steal and sell” Puda Coal’s subsidiary company, Shanxi Puda Coal  Group.  Specifically, the SEC claims that Zhao transferred Puda Coal’s controlling interest in Shanxi Puda to himself and then turned Puda into an empty shell company prior and sold shares to the publish.

The SEC also alleges that Puda Coal’s chairman and former CEO also failed to report their company’s transfer of the controlling interest in Shanxi Puda to the SEC while continuing to raise investments from U.S.-based investors.

According to an internal probe, Puda Coal previously announced that Mr. Zhao had transferred the company’s stake in Shanxi Puda without seeking formal approval from the company’s board or shareholders and that Mr. Zhu had been aware of the transaction.

The lawsuit, filed in the U.S. District Court for the Southern District of New York on February 22, 2012, seeks court orders for Zhao and Zhu to return any funds they gained from the allegedly fraudulent transactions as well as pay civil fines.

This case follows the SEC’s continuing efforts to investigate irregularities of China-based companies that list on U.S. stock exchanged.  Puda Coal had previously been listed on the NYSE Amex but was delisted in 2011.


Tags: Executive Compensation Attorney

Monster.com Parent Company Sues Former Vice President for Soliciting Workers in Violation of Agreement

December 28th, 2011 · No Comments

Monster Worldwide, Inc., the parent company of the internet-based job search service Monster.com, filed a breach of contract suit against its former executive vice president, Darko Dejanovic, in the U.S. District Court for the Southern District of New York on December 16, 2011. The suit alleges that Dejanovic violated nonsoliciation agreements he had entered into with Monster by hiring two of Monster’s top technology executives within a year of leaving the company.


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Dejanovic began working for Monster as its senior vice president and global chief information officer in 2007 and was promoted to executive vice president in 2008. According to the complaint, Dejanovic signed nonsolicitation agreements when he joined the company and another when he was promoted in exchange for $1.2 million in stock options.

In August 2011 Dejanovic left his position at Monster for a new job with The Active Network, Inc.  After his move, Dejanovic obtained Monster’s permission to solicit one Monster employee but, according to the complaint, then solicited two other employees who left monster in October 2011 without disclosing their future plans. These two employees are currently alleged to work for The Active Network.

The lawsuit seeks an injunction permanently barring Dejanovic from making further solicitations of Monster employees until August 2012, an order forcing Dejanovic to return his stock options, and attorney fees.

Tags: Breach of Contract · Executive Compensation · Noncompete Litigation

Lawyer Monthly Names The Employment Law Group® its 2011 Labor & Employment Law Firm of the Year

December 1st, 2011 · No Comments

Tags: The Employment Law Group

TELG Principal’s Article on Security Clearance Guidelines Featured in Westlaw Journal

November 10th, 2011 · No Comments

The Employment Law Group® law firm principal attorney R. Scott Oswald’s two-part article titled “Introduction to the Federal Security Clearance Process,” recently appeared in the Westlaw Journal, Government Contracts.

In Part 1 of the article, Oswald provides a comprehensive summary of the history and development of security clearance law. He explains how recent law has developed by referring to important Executive Orders under Presidents Eisenhower and Clinton, as well as landmark Supreme Court Cases such as Egan v. Department of the Navy.  In addition, Oswald explains the basis on which security clearance candidates are evaluated.  He explains that:

The adjudicative process for a security clearance is ‘an examination of a sufficient period of a  person’s life to make an affirmative determination that the person is an acceptable security risk.’ Agencies inquire into a candidate’s perceived loyalty, reliability, and trustworthiness by reviewing the candidate’s history, relationships, and overall character.

Oswald lists the primary factors considered by evaluators during a security clearance investigation:

  • Foreign Influence
  • Foreign preference
  • Sexual behavior
  • Personal conduct
  • Financial considerations
  • Alcohol consumption
  • Psychological conditions
  • Criminal conduct
  • Handling protected information
  • Outside activities
  • Use of information technology systems

In Part 2 of the article, Oswald describes the process of appealing a security clearance denial or revocation across various government agencies, such as the Department of Defense and NASA. He also offers practical tips for successfully appealing an adverse security clearance determination by an agency. He encourages the candidate to examine the agency’s stated reasons for denying or revoking the security clearance and collect evidence to support an argument against the agency’s decision. Oswald strongly recommends seeking the advice of an experienced employment attorney:

An attorney with experience examining and cross-examining witnesses can be invaluable during a hearing.  An experienced attorney may also have handled security clearance cases with your particular agency and will be able to frame your case consistent with your agency’s expectations.

Tags: Executive Compensation Attorney

Corporate Counselor Publishes Article by R. Scott Oswald Describing Common Mistakes Employers Make that Lead to Litigation

November 10th, 2011 · No Comments

Corporate Counselor published an article written by R. Scott Oswald, Managing Principal at The Employment Law Group ® law firm, titled “Common Mistakes That Encourage Employees to Seek Legal Advice.” The article describes the nine “most common, yet avoidable, mistakes that can leave a company’s current and former employees disillusioned and cause them to seek out outside legal advice.”

Here are the common but avoidable mistakes:

  1. Failing To Provide COBRA Notices: The Consolidated Omnibus Budge Reconciliation Act of 1985 (COBRA) requires covered employers to permit qualified employees to purchase health care coverage at group rates temporarily. Covered employers must provide notice to qualified beneficiaries of their right to purchase COBRA coverage within 30 days of the occurrence of a qualifying event. . . .  When employers fail to provide their employees with a COBRA notice in a timely fashion, employees become concerned and seek legal assistance in obtaining the continuation of their benefits.
  2. Failing To Compensate Employee Wage Due: An employer’s failure to pay the employee’s outstanding wages and/or vacation time, to the extent required, in a prompt manner often prompts an employee to seek legal assistance in obtaining the compensation owed to them.
  3. Ignoring Employee Complaints: If an employer establishes a protocol for handling its employee complaints and follows its protocol, an employer is more likely to avoid a finding of discrimination and to avoid the imposition of punitive damages. Frequently, employees simply wish to have their complaints acknowledged.
  4. Disregarding Employee Discipline Protocols: Employees feel wronged when employers do not follow their own written protocols relating to discipline of employees. Employers could even revitalize problem employees by issuing detailed PIPs that clearly lay out their expectations for their employees’ conduct and the specific actions that employees may take to meet those expectations.
  5. Delaying Response To Accommodation Request: Once an employer learns that an employee requires an accommodation to continue performing his or her job, the employer must engage in “an interactive process with the employee to identify and implement appropriate reasonable accommodations.”
  6. Terminating An Employee On FMLA Leave: An employer’s termination of an employee who is currently using FMLA leave can be direct evidence of FMLA retaliation…. If an employer finds that it must terminate an employee who is out on FMLA leave, it should ensure that it has an independently confirmable legitimate business reason for terminating that employee. Further, the employer should be able to demonstrate that its legitimate business reason does not in any way relate to the employee’s use of FMLA leave, or the circumstances surrounding that employee’s use of FMLA leave.
  7. Providing Inadequate Notice of Terminations: If an employee learns of his termination through a third party or though the employer’s work schedule (i.e., the employee is not scheduled to work), an employee is more likely to seek legal advice regarding his employment rights. When an employer decides to terminate an employee, it should provide a terminated employee with a written notice of termination as soon as is practicable.
  8. Escorting Employee Off Employer’s Premises: Employees are also likely to contact an employment attorney after suffering the indignity of being escorted from their employers’ premises by security or management. . . . The employer should avoid making a spectacle of the employee’s termination.
  9. Giving Negative References: Employers can push their former employees to seek legal advice if they provide negative references to potential employers. . . . Negative references may unfairly portray the employee in a negative light and later subject the employer to claims of defamation. Instead, the employer should confirm nothing more than the employee’s position, employment status and/or title, dates of employment, and salary.

The list, although not comprehensive, provides employers with suggestions that could prevent some of the lawsuits brought by current and former employees.

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Tags: Executive Compensation · The Employment Law Group

Virginia Court Refuses to Enforce Overbroad Non-Compete Provision, Overruling Precedent Regarding an Identical Provision

November 8th, 2011 · No Comments

On November 4, 2011, the Circuit Court of Fairfax County, in Home Paramount Pest Control Co. v. Shaffer, explicitly overruled its 1989 decision in Paramount Termite Control Co. v. Rector, holding unenforceable the same non-compete language it had previously enforced.  The court noted that stare decisis is not “an inexorable command,” and “was never meant to prevent a careful evolution of the law.”

The court examined the following non-compete provision in the employment agreement between plaintiff Home Paramount and  its former employee Justin Shaffer:

The Employee will not engage directly or indirectly or concern himself/herself in any manner whatsoever in the carrying on or conducting the business of exterminating, pest control, termite control and/or fumigation services as an owner, agent, servant, representative, or employee, and/or as a member of a partnership and/or as an officer, director or stockholder of any corporation, or in any manner whatsoever . . .

(Emphasis added).

In Virginia and many other jurisdictions, the enforceability of a non-compete provision is a question of law in which the court closely examines the provision to determine if it is narrowly drawn to protect the employer’s legitimate business interest, is not unduly burdensome on the employee’s ability to earn a living, and is not against public policy.  The court considers as a whole the extent of the provision’s restrictions on employment activities; the geographic scope of the restrictions; and the duration of the restrictions.

The court held in Home Paramount that the provision was overly broad because it sought to prohibit Shaffer from working for a competitor in any capacity.  This made the entire non-compete unenforceable.  The court found:

. . . [V]alid provisions prohibit “an employee from engaging in activities that actually or potentially compete with the employee’s former employer.”  Omniplex World Services,270 Va. at 249, 618 S.E.2d at 342 (emphasis added).  But a former employee may find new employment with his former employer’s competitor in which he engages exclusively in activities that do not compete with the former employer. . . .  When a former employer seeks to prohibit its former employees from working for its competitors in any capacity, it must prove a legitimate business interest for doing so.

. . . On its face, [the non-compete provision] prohibits Shaffer from working for Connor’s or any other business in the pest control industry in any capacity.  It bars him from engaging even indirectly, or concerning himself in any manner whatsoever, in the pest control business, even as a passive stockholder of a publicly traded international conglomerate with a pest control subsidiary.  The circuit court therefore did not err in requiring Home Paramount to prove it had a legitimate business interest in such a sweeping prohibition.

(Emphasis added).

Since the court found the non-compete provision overbroad and therefore unenforceable, it did not examine any evidence of the former employee’s purported unfair competition following his tenure at Home Paramount.

Tags: Noncompete Litigation · Noncompetition Litigation