Car rental company Hertz is suing former executives to recoup losses related to its 2015 restatement to correct aggressive accounting.
In a complaint filed in U.S. District Court in New Jersey, Hertz says it wants to take back $70 million in incentive compensation paid to Mark Frissora, the company’s former CEO, Elyse Douglas, former CFO, and John Jeffrey Zimmerman, former executive vice president and general counsel. The company also is seeking more than $200 million in damages, accusing the three of inappropriately inflating income in a way that ultimately forced the company to restate its financial statements for fiscal years 2011 through 2013.
Hertz says the clawback policies contained in its compensation agreements entitle the company to recover compensation that was paid based on financial results that had to be restated as a result of mismanagement. The company asserts further damages resulting from “a lengthy and costly investigation by the Securities and Exchange Commission, additional significant fees paid to Hertz’s accountants, defense of class action and derivative suits by shareholders, and substantial damage to Hertz’s business.”
Representatives for Frissora, Douglas, and Zimmerman could not immediately be reached for comment.
When Hertz filed its 2015 restatement, the company identified accounting improprieties in reserve accounts, fleet adjustments, fixed asset adjustments, accounting classifications, and other adjustments that caused net income to be overstated by $231 million from 2011 to 2013. In addition to the fallout damage associated with the restatement, the company also faced a $16 million penalty from the SEC over its accounting issues.
According to Hertz, Frissora’s management style led to an “inconsistent and inappropriate” tone at the top of the organization, where a “pressurized operating environment” led to an inappropriate emphasis on meeting internal budgets, business plans, and estimates. That led to inappropriate accounting decisions and failures to disclose critical information, the company’s complaint says.
While Hertz attributes the overall tone to Frissora, it faults Douglas and Zimmerman for not tempering it. Described as Frissora’s right-hand subordinates, Douglas and Zimmerman failed to “stop, effectively counterbalance, or otherwise offset or report” Frissora’s forceful tone, “in breach of their duties owed to Hertz,” the company says.
The company says the defendants “collectively employed or otherwise acquiesced” in aggressive accounting to meet growth targets, all while Hertz did not have personnel with the requisite knowledge or experience of the company’s reporting obligations to properly apply generally accepted accounting principles (GAAP). Their actions, says Hertz, compromised the company’s long-term security by pushing an aggressive agenda, despite knowing the company was in a state of upheaval with inadequate internal controls.