Pomerantz LLP

United Airlines Rewards Executives Who Bribed Public Official -- Really?

Attorney: Gustavo F. Bruckner
Pomerantz Monitor July/August 2017

What should happen when the top executives of a corporation are implicated in an illegal scheme that brings disrepute to the company and results in millions of dollars in fines and legal costs? You might expect them to be terminated with haste and efforts made to seek from them the costs incurred by the corporation due to their wrongdoing. But in the case of United Airlines, you would be wrong.

In 2015, Jeffery A. Smisek, then United Continental’s CEO, was the subject of a government investigation regarding a bribery scheme with then-New York/New Jersey Port Authority chairman David Samson. Samson had complained to Smisek that there was no direct route from the Newark, New Jersey airport to the vicinity of his South Carolina vacation home and asked whether United could revive the company’s previously discontinued, money-losing direct flight from Newark to Columbia, South Carolina.

At first, Smisek balked. Samson then twice threatened to block Port Authority consideration of one or more of the company’s planned projects. As a result, Smisek agreed to accommodate Samson with the requested direct flight to South Carolina. Operating twice a week, the Newark-to-Columbia route—which Samson reportedly liked to refer to as “the chairman’s flight”—was, on average, only half full, and remained unprofitable for United Continental during the 19 months of its revived existence. The route ultimately lost approximately $945,000 for the company.

Samson entered into a plea agreement with the U.S. Department of Justice wherein he pleaded guilty to bribery or misusing his official authority to pressure United Continental to reinstitute the flight. Samson was ultimately sentenced to one year of home confinement, four years of probation, and a fine of $100,000.

As a result of the bribery scheme with Samson, United Continental was forced to pay a $2.25 million penalty to the United States Treasury and another $2.4 million to the SEC, as well as to expend untold amounts in undertaking an internal investigation in conjunction with federal authorities.

Rather than firing Smisek for cause, the United Continental Board of Directors instead elected to sign a separation agreement awarding Smisek a severance package worth an estimated $37 million dollars. Other implicated executives were also allowed to resign and were given severance packages. Notably, all of the severance packages were granted well before the company concluded a non-prosecution deal with federal authorities and before the company was made to pay fines regarding the bribery scheme. One executive did have his bonus cut, but was then promoted from Senior Vice President of Network Planning, to Executive Vice President and Chief Operations Officer.

Our client, a United shareholder concerned by the lack of integrity at the top, initiated a request for a books and records inspection pursuant to Delaware statute to determine whether it was appropriate to seek clawback of any ill-gotten compensation. Documents received in response to this request indicated that the United Continental Board of Directors never truly considered instituting a clawback of compensation paid to Smisek and the other executives involved in the bribery scheme, despite their egregious and illegal behavior. Rather than penalizing Smisek by, for example, terminating his previously awarded unexpired stock options and clawing back prior compensation, the company rewarded him with a very handsome separation package—despite ongoing investigations by agencies of the federal government.

Our client then made a demand for legal action upon the United Continental Board of Directors, specifically asking the Board to “institute legal action for damages against all responsible officers and directors.” The Board rejected the demand. Their reasoning was astonishing: that “to allow unfettered ‘discretion to recoup compensation whenever the Board determines misconduct, willful or otherwise, has occurred,’ where such discretion is out of step with industry norms, would make it difficult for United to recruit and retain top talent, particularly at the senior management level.”

Rather than punishing the executives who authorized bribing public officials, the company gallingly asserted it would be bad for business to do so, and instead rewarded them with big bucks and benefits. Stockholders expect that, at a minimum, corporate officers act in accordance with the law. To not clawback compensation in the face of egregious and illegal behavior sends the message that officers can violate the law with impunity.

Pomerantz initiated a lawsuit for our client, brought derivatively on behalf of the company, against the United Board for refusing to clawback compensation paid to the senior executives involved in the bribery scheme despite being empowered to do so by the company’s policies, and against Smisek for restitution and disgorgement of ill-gotten profits. The Delaware Court of Chancery will determine if the payments were properly made or if the officers should have jumped the airline without the golden parachutes. Fasten your seatbelts, this will get bumpy.