Good morning. My name is Knoll Lowney with the law firm of Smith & Lowney. Along with my co-counsel, we are representing Ms. Schwartzman in this case against Mike McGavick and the Safeco Board of Directors.
Today I will be describing the lawsuit we filed this morning in the Federal Court here in Seattle. The complaint and much of the critical documentary evidence is posted on our informational website www.mcgavicklawsuit.com. We have also posted these prepared statements.
This lawsuit filed today is called Schwartzman v. McGavick. It includes a shareholder derivative suit, which means it is a lawsuit brought on behalf of Safeco Corporation. In this situation, where Safeco’s Board of Directors was complicit in the fraudulent transaction, it is necessary for an owner of the company to bring the lawsuit to recover corporate assets. It is the shareholders, like Ms. Schwartzman, who are the owners of Safeco.
Before describing the allegations in our complaint, I am going to ask Ms Schwartzman to make a statement about why she has brought the suit. This will be your only opportunity to hear from Ms. Schwartzman as she will not be answering questions and will not be available for further interviews.
I will now turn the mike over to my client, Emma Schwartzman.
[Ms. Schwartzman makes statement]
As Ms. Schwartzmann explained, our lawsuit will prove that Mike McGavick looted Safeco on his way out the door. Rather than being a “golden parachute,” our lawsuit alleges that the $28 million McGavick took from Safeco this year was a “stolen parachute.”
The actions of Mr. McGavick and the Board of Directors are prime examples of corporate waste and corruption that tarnish the reputation of a highly regarded local company, as I will now describe.
When McGavick became Safeco’s CEO in 2001, he drove a hard bargain. In addition to an annual compensation package worth as much as eight million dollars, McGavick also bargained for a “golden parachute” provision. This meant that if McGavick were fired, he would receive a multi-million dollar termination payment.
But Mike McGavick did not get fired from Safeco; he voluntarily resigned. And his employment contract clearly stated that if he resigned he would forfeit his right to a big payout. He would forfeit all compensation, including bonuses and stock options, and would get only his last paycheck. These employment contracts are quoted in the complaint, included in your packets, and posted on our website.
Instead of resigning from Safeco with his final paycheck, as his contract clearly provided, McGavick walked away with $28 million.
This lawsuit will prove that this $28 million payment was improper and fraudulent on numerous counts, and McGavick acted dishonestly and unethically in bargaining for and receiving this payment.
For example, the $28 million payment included a $2.3 million bonus and millions of dollars of stock options and restricted stock rights. But McGavick’s employment contract provided that by resigning he forfeited all of these.
There is no question that McGavick knew that his voluntary resignation would cause him to give up these bonuses and stock rights. Such forfeiture provisions are common. McGavick was acutely aware of this fact, since when he resigned from his previous employment at CNA Corporation, he forfeited his bonus for his final year of work, stock options and cash.
So, how was it that Mr. McGavick found himself walking away with over $28 million including stock options and a bonus? Fraud – in the form of a document called an Executive Transition Services Agreement that McGavick and Safeco executed in early December 2005.
We will show that this transition agreement was merely a fraudulent transaction to carry out an illegal giveaway of Safeco assets.
For example, the agreement required McGavick to provide “transition services” during January and February of 2006. And purportedly in exchange for these two months of part time work, the transition agreement improperly and unethically returned to him all of the stock options and bonuses he forfeited by resigning.
In addition, the transition agreement allowed McGavick to retain the label of an “employee” for two months after he stepped down as CEO. By calling McGavick an “employee” for these two months, Safeco became obligated to make another multi-million stock award to McGavick.
The millions of dollars Safeco paid to McGavick under the transition payment were so out of proportion to any services McGavick provided to Safeco that the payment constituted corporate fraud.
This is especially so because during these two months, McGavick was not an employee of Safeco. He was a full-time candidate for the U.S. Senate. This is clearly shown by McGavick’s non-stop campaign and fundraising schedule during these months and his own comments on February 2nd, when he expressed relief at finally being able to campaign full time.
The complaint alleges other examples of improper payments to McGavick. For example, certain of McGavick’s stock rights were not to vest until 2008, according to the terms of his employment contract. Yet McGavick made almost a million dollars from these stock rights when he resigned.
It is no defense that Safeco’s Board of Directors approved these improper payments. Indeed, for every modern corporate scandal, there is a Board of Directors looking the other way. But this money did not belong to the members of Safeco’s Board of Directors to give away. The Board had a duty to protect this $28 million for the company and its shareholders, and it breached this duty by approving these improper payments.
The lawsuit also alleges that McGavick and the Board actively concealed the value and the extraordinary nature of this $28 million payment. For example, the 2006 proxy statement sent to shareholders was carefully drafted to conceal the full value of McGavick’s payments, thereby violating Federal Securities Laws. Shareholders probably would never have learned of the $28 million figure if McGavick had not been required to disclose it in his Senate race.
Our lawsuit seeks to unwind this fraudulent transaction and to recover these improper payments for Safeco and its shareholders. We seek to make McGavick give back his $28 million “stolen parachute.”
Before concluding, I want to comment on the political undertones of this case. Inevitably, some people will try to dismiss this lawsuit as a political attack on McGavick. But this lawsuit is about corporate corruption not partisan politics. Indeed, two of the defendants in the lawsuit are prominent members of the Democratic Party, including a former democratic governor. The Democratic and Republican parties are both learning about this lawsuit today for the first time.
We are concerned, however, that McGavick has threatened to use part of this $28 million dollar payment to fund his Senate Race. It is the plaintiff’s position that these improper payments must be returned to Safeco shareholders, and we will consider all options to prevent this money from being spent on politics or anything else. Thus, this case could not wait until after November’s election.
Ultimately, we know that those reporting upon this case will look beyond partisan reaction and scrutinize the facts of the case. To enable this, we have set up a website www.mcgavicklawsuit.com, that includes information about the case, including the complaint filed today, these prepared statements, key evidence, and questions and answers about the lawsuit.