New York Tells Private Company: Fire Your CEO
From yesterday's Wall Street Journal [$], word that the New York Department of Financial Services has strong-armed Ocwen Financial Corp., a leading mortgage servicer, into a legal settlement that not only extracts $150 million from the company and puts it under the thumb of a state-appointed monitor but even requires its executive chairman to resign:
The range of penalties assessed in the case is unusual and may set a new precedent of state regulatory involvement in financial companies’ affairs. Federal and state regulators have slapped banks with tens of billions of dollars in fines before, but Ocwen stands as a rare case of a firm having a top executive forced out to settle charges of mismanagement and misconduct and being obliged to consult with authorities when it appoints board members....
“You’re basically taking away from shareholders the ability to run their company,” said Ira Lee Sorkin, a former senior official at the Securities and Exchange Commission and now a lawyer who defends people and companies in regulatory actions. He isn’t involved in the Ocwen case. “You’re telling the company in effect that the regulator is now running the company.”
It might be one thing if the departing chairman, William Erbey, who built up the company over decades and owns part of it, had himself been convicted of some disqualifying offense, but the article makes no mention of his facing personal charges at all, let alone being found guilty.
The modern pioneer in seeking the personal ouster of executives as part of regulatory enforcement actions was then-New York attorney general, and later disgraced governor, Eliot Spitzer. Six years ago I wrote about two of the most celebrated of Spitzer's wins:
As prosecutor, part of Spitzer’s distinctively relentless style was to demand the decapitation of large organizations by the firing of their CEOs, even in the face of arguments that such steps presumptively punished the execs without a trial and might badly disrupt the enterprises they led. The arch example is Spitzer’s vendetta against Hank Greenberg of American International Group (AIG), without peer the most highly regarded executive in the insurance sector over the past half century. AIG, long known as three steps ahead of its industry and a huge asset to American business presence and prestige abroad, has now entered a tailspin without Greenberg, destroying billions and billions in value for shareholders and others, even as the charges against its former chieftain have mostly wilted on the vine. On a smaller but still significant scale, Spitzer forced Marsh, the biggest insurance broker, to oust its CEO, which it replaced with an old crony of Spitzer’s; that didn’t work out either, and further fortunes were lost.
Unlike AIG and Marsh, Ocwen Financial isn't even a New York company, being headquartered in Atlanta. Its stock has lost many billions in value since last October, and fell yesterday by another 17%. The settlement requires Mr. Erbey to depart by the middle of next month.
Had the dispute proceeded to trial, it's unlikely a judge would have ordered Mr. Erbey's ouster. But large businesses today facing charges from financial regulators seldom dare insist on their right to a day in court -- the risks of going to trial are just too high, as law professor Brandon Garrett and commenter James Copland explained at a recent Cato panel discussion on Garrett's book Too Big to Jail: How Prosecutors Compromise with Corporations. Until that calculus changes, they will be at the mercy of whatever arbitrary if not vengeful terms regulators may insist on.
