United Directors Sued Over Ousted CEO's Severance Package

Updated on
  • Pension fund says board should clawback Jeff Smisek’s payments
  • Smisek stepped down over ‘Chairman’s Flight’ scandal

United Continental Holdings Inc. airplanes sit outside the company's hangar at Newark Liberty International Airport (EWR) in Newark, New Jersey, U.S., on Wednesday, April 12, 2017.

Photographer: Timothy Fadek/Bloomberg via Getty Images

United Continental Holdings Inc. directors were sued by a pension fund for granting a $37 million severance package to the carrier’s former chief executive officer, who was ousted in a bribery scandal.

The airline’s board erred in signing off on “lavish golden parachutes” for ex-CEO Jeff Smisek and other officials forced out after investigators found a public official strong-armed United into scheduling twice-weekly flights to an airport near a Port Authority of New York and New Jersey official’s vacation home, the Florida-based fund said in a lawsuit.

Directors also harmed investors by refusing to demand that Smisek return severance payments, the City of Tamarac Firefighters Pension Trust Fund said in the Delaware Chancery Court complaint.

The board “put the interests of Smisek and the other officers ahead of the company’s best interests,” the fund’s lawyers said in the suit, which was unsealed Wednesday.

“We will defend ourselves against this claim, which we believe has no merit,” Erin Benson, a spokeswoman for United, said in an emailed statement.

David Samson, once the chairman of the Port Authority of New York and New Jersey, pleaded guilty to bribery charges last year after federal investigators found he pressured United executives to set up the “Chairman’s Flight” from Newark to Columbia, South Carolina.

Unprofitable Route

Sampson was spared prison by a federal judge, who fined the former New Jersey attorney general $100,000 and sentenced him to a year of confinement at his home in Aiken, South Carolina, plus four years’ probation.

Smisek stepped down as the probe into why United restored direct flights between Newark and the capital of South Carolina heated up in 2015. United was seeking funding from the Port Authority to upgrade train access to the Newark airport, the airline’s East Coast hub, when Sampson sought a resumption of the flights.

United agreed to pay a $2.4 million fine to settle U.S. Securities and Exchange Commission claims that it violated securities laws by resurrecting the money-losing flights. The carrier also paid a $2.25 million fine to resolve a U.S. Justice Department probe into the deal.

The pension fund faults United directors for not firing Smisek when the bribery scheme came to light. Instead, the board wrongfully allowed Smisek and other executives involved in the scandal to resign and get severance payments, the fund said in the suit.

The board compounded its error by refusing to “clawback” the severance payments on the basis that it would discourage potential managers from considering positions with the airline in the future, the fund’s lawyers noted.

“To not clawback compensation in the face of egregious and illegal behavior sends the message that” executives can “violate the law with impunity,” the fund said in the suit. “This rationale is contrary to all the public policy concerns underlying the purpose of clawbacks, and serves no reasonable business purpose.’’

The case is City of Tamarac Firefighters Pension Trust Fund v. Carolyn Corvi, No. 2017-0341, Delaware Chancery Court (Wilmington).

— With assistance by Michael Sasso, and Mary Schlangenstein

(Adds details from lawsuit. A previous version of the this article was corrected for the destination of the “Chairman’s Flight” flight.)
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