Hide Outside Comp, Forfeit Your Salary?

Last week the Second Circuit federal court of appeals in New York really dropped the hammer on an investment banker. The banker was a nominal partner in a small investment banking firm.

The banker had received stock, options, and cash compensation from certain of his firm’s client companies that he was personally involved with. That was a problem: Under his employment agreement with his firm, all of that compensation was to have gone to the firm. Moreover, it seems the banker never mentioned to his firm what he was getting from these companies.

The banker left his firm to join one of the client companies as chairman and CEO. It was an amicable parting — at first. But as he and the firm tried to sort out what the firm owed him, the firm tumbled to some of the outside comp that he had been receiving. That didn’t go over very well.

Both sides filed lawsuits. When the dust settled, the appellate court held that, under New York law, the banker had been a “faithless servant” for receiving, and failing to disclose, his compensation from the client companies. Because the disloyalty had been so extensive, the court said, the banker had to forfeit all compensation paid to him by the firm — including his salary — from the time of his first act of disloyalty.

You can read the court’s opinion at the Second Circuit’s Web site — look up case no. 02-7928, Phansalkar v. Andersen Weinroth.