Corporate Governance

Hampshire Group, Limited v. Kuttner: A Tee Hee Analysis (Criticizing the Whistleblowers)

By J Robert Brown Jr.

Where did the allegations of misbehavior come from?

A series of new employees started with the company between 2004 and 2006.  One was the new compliance officer, a former employee with Deloitte.  Another was the general counsel and CFO.  Yet despite what has to be seen as a courageous gesture, it forced the board and, ultimately, the court to have to address uncomfortable issues. 

This did not make the court happy, which can be seen from the unnecessary statements about the whistleblowing employees and their actions.  As the introduction to the opinion sets out: 

• [The company's] board appears to have been inspired to replace [the CEO] because three of the company's newer employees wrote the board a stinging screed alleging a score of instances of wrongdoing (the 'Internal Review Memorandum'). Although most of these allegations were found to be unsubstantiated after an expensive investigation by outside advisors, some of the allegations were found by the advisors to be meritorious and the board's hand was forced.

In other words, the "stinging creed" (system of religious belief) consisted of mostly unsubstantiated allegations that resulted in an "expensive investigation." 

Moreover, the opinion suggested that the whistleblowers themselves had engaged in questionable behavior.  One "caused [the company] to pay for a hotel room for her in San Francisco on a night when she was staying with a family member."  Another "was reimbursed over $1,700 for meals and lodging at the Ritz-Carlton during a personal vacation in Puerto Rico.  [He] admitted that he sought these improperly and was later rewarded by being made CEO."  

The relevancy of the criticism is hard to see.  The officers identified what they viewed as troublesome behavior and notified the board.  The board conducted an investigation and also found troublesome behavior.  The court agreed that at least a couple of instances involved a breach of fiduciary obligations by the officers.  That the whistleblowers may have had an entirely clean slate does not at all affect these acts or judgment.  The message in this decision is that anyone within a corporation who acts as a whistleblower runs the risk of having their reputation questioned as a result.  

The opinion in Hampshire Group Limited v. Kuttner is posted on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on August 13, 2010 (boomark / email).