When Can a CEO Be Held Personally Liable?
While the “corporate veil” shields CEOs and other corporate officers in most circumstances, there are exceptions. From corporate non-compliance to personal acts of negligence, CEOs can face personal liability in a number of different circumstances. In federal enforcement matters, CEOs can also face the risk of criminal prosecution if accused of intentionally facilitating or participating in fraudulent or other illegal conduct.
This article, co-authored by former Justice Department prosecutors and FBI agents, discusses the primary circumstances in which CEOs can face personal civil or criminal liability. It also discusses some recent cases in which CEOs were held personally liable in government enforcement actions, and provides some insights into what CEOs can do to mitigate their personal liability exposure.
5 Circumstances in Which Corporate CEOs Can Face Civil or Criminal Liability
Corporate CEOs can face civil lawsuits and criminal prosecution under a broad range of circumstances. Broadly speaking, these circumstances fall into five categories:
1. Personal Criminal Acts
CEOs can face criminal prosecution for their own illegal acts. If a corporate CEO commits a crime, that CEO generally cannot avoid personal culpability by claiming to have acted on behalf of, or at the behest of, his or her company.
For example, let’s say a CEO offers a bribe to a foreign public official—a federal offense under the Foreign Corrupt Practices Act (FCPA). Even if the CEO claims to have made the bribe on behalf of his or her company, the CEO can still face federal prosecution for his or her criminal act. The same is true in cases in which CEOs facilitate unlawful transactions between private parties and use their positions of corporate authority to support or participate in other unlawful activities.
2. Intentional or Grossly Negligent Non-Compliance
In addition to criminal culpability for unlawful acts, CEOs can also face civil liability for intentional or grossly negligent non-compliance. While compliance obligations generally exist at the corporate level, CEOs are responsible for guiding their companies’ compliance efforts. If a CEO intentionally steers a company away from compliance, or if a CEO is grossly negligent in maintaining non-compliant operations, then the CEO and the company could both potentially face liability in federal enforcement proceedings.
3. “Piercing” Circumstances
CEOs can also face civil liability when there is justification for piercing the corporate veil. Private litigants can seek to pierce the corporate veil in circumstances involving:
- Commingling of personal and corporate assets and debts
- Acts that exceed the CEO’s corporate authority
- Insufficient corporate assets to cover the company’s liability
Commingling is most common with smaller companies, although this can also come into play when CEOs of larger companies use corporate accounts to cover personal expenses, or when they use corporate debt for personal benefit. The issue of insufficient corporate assets often comes up in connection with bankruptcy proceedings, although a bankruptcy filing is not necessary to potentially give rise to individual exposure.
4. Direct Third-Party Lawsuits Against the CEO
In addition to piercing actions, CEOs can also face personal liability when sued directly by private litigants. These lawsuits can run the gamut from fraud claims asserted by vendors to harassment claims asserted by current and former employees. Unlike piercing actions, in these lawsuits plaintiffs are not seeking to hold CEOs liable for corporate acts (or purportedly corporate acts), but instead for acts undertaken by CEOs in their individual capacities.
5. Corporate and Shareholder Derivative Litigation
Finally, CEOs can face personal liability in corporate and shareholder derivative litigation. These types of cases typically involve claims of fraud committed against the company or mismanagement of the company’s assets or operations. In corporate and shareholder derivative litigation, CEOs can face substantial liability exposure; and, as we discuss below, plaintiffs will often attempt to structure their claims so that CEOs’ D&O insurance policies do not apply.
Recent Examples of CEOs Facing Personal Liability in Federal Enforcement Matters
While most CEOs do not expect to face personal liability, the Justice Department routinely pursues charges against CEOs and other corporate executives (civil lawsuits against CEOs are common as well). Here are four recent examples of Justice Department cases involving charges against CEOs in their individual capacities:
- Tech CEO Indicted for Tax Evasion, Investor Fraud, and Other Crimes – A federal grand jury returned a 39-count indictment against the CEO of a software company. The indictment included charges for tax evasion, wire fraud, money laundering, and other offenses arising out of the CEO’s use of Swiss and Bermudian bank accounts to conceal approximately $2 billion of income. The Justice Department also alleged that the CEO perpetrated a scheme to defraud investors in the company’s debt securities by backdating records, among other fraudulent acts.
- CEO of Medical Device Company Charged with COVID-19 Securities Fraud Scheme – The CEO of a medical device company was indicted for his involvement in an alleged scheme to defraud investors by making false and misleading statements about a new COVID-19 test, which subsequently led to millions of dollars in losses for investors. According to the Justice Department, the CEO fraudulently claimed the company’s test was about to be approved by the Food and Drug Administration (FDA), when in fact no such approval was pending.
- Non-Profit CEO Charged with Aggravated Identity Theft and Various Fraud-Related Offenses – The CEO of a non-profit was charged with wire fraud, bank fraud, aggravated identity theft and other crimes stemming from the CEO’s alleged misuse of federal funds and theft from multiple victims.
- Mobile Decide Company CEO Charged with Assisting International Drug Traffickers – A grand jury returned an indictment against the CEO of Sky Global on charges that he knowingly and intentionally participated in a criminal scheme to assist international drug traffickers in avoiding detection through the company’s encrypted communication devices.
What Can CEOs Do to Mitigate Their Personal Liability Exposure?
Government enforcement actions targeting CEOs can have various triggers. Audits, tips, review of public filings, and whistleblower complaints from disgruntled former employees or shareholders all frequently lead to civil and criminal allegations. Private civil litigation can involve a broad range of allegations as well; and, with this in mind, CEOs need to consistently make informed decisions with both their personal risk and their company’s risk in mind.
While CEOs should engage legal counsel for their companies, in many cases they will also need to engage their own personal legal counsel. This is certainly true in circumstances in which the CEO’s and the company’s interests are at odds (i.e. in the event of a potential lawsuit alleging corporate mismanagement), but CEOs can benefit from engaging personal legal counsel in other circumstances as well. From regulatory compliance to establishing offshore accounts, and from potential conflicts of interest to transactions that have the potential to lead to federal scrutiny if not carefully structured and documented, CEOs – just like their companies – need to know how to comply with the law and manage their risk effectively.
What About D&O Coverage and Other Types of Liability Insurance?
Purchasing directors and officers (D&O) liability insurance is one way that CEOs can mitigate their risk of personal liability in civil litigation. But, D&O coverage is typically subject to two key conditions: (i) that the CEO executed his or her corporate duties in good faith; and, (ii) that the CEO’s alleged misconduct did not exceed the threshold of ordinary negligence.
Given these limitations on D&O coverage, plaintiffs will often pursue claims based on gross negligence or civil conspiracy. While these claims may – and should – ultimately fail if they are unsubstantiated, facing litigation alone can have its own financial and reputational costs. As a result, D&O insurance alone is not enough, and CEOs must know how and when to make decisions with their own potential liability exposure in mind.
We Help CEOs Mitigate Their Personal Liability Risk and Defend Against Civil and Criminal Allegations
Despite all of the risks discussed above, it is possible for CEOs to manage their risk effectively. At Oberheiden P.C., our attorneys and consultants rely on centuries of combined experience on both sides of federal investigations, law enforcement proceedings, and civil litigation to help CEOs make informed and strategic decisions. Whether you have recently been appointed and you want to make sure you have adequate protections in place, or you are facing a pending investigation or potential lawsuit, we can help you protect yourself while also meeting your statutory and contractual duties to your company.
Do you have questions about your personal liability exposure as a CEO? Do you want to make sure you are making the right decisions with your personal best interests and your company’s best interests in mind? Are you a CEO who is currently being targeted in a federal investigation or civil lawsuit? Are you curious how much personal liability does a CEO have? If so, we can help, and we encourage you to contact us for more information.
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