Hertz Seeks $70 Million in Clawbacks from Former Executives

Hertz Global Holdings Inc. is demanding that ex-CEO Mark Frissora and other former senior managers return at least $70 million of incentive compensation for their roles in an accounting scandal five years ago.

The car-rental chain accused the former executives of pressuring employees to use fraudulent accounting techniques to inflate income and earnings, according to a March 25 lawsuit. The alleged misconduct spurred a federal investigation and prompted Hertz to restate several years of financial results, costing the firm more than $200 million.

The restatement “was triggered by the gross negligence and misconduct of Hertz’s senior executive officers” who set the wrong tone at the top, the company alleged. Hertz filed the lawsuit after Frissora, ex-CFO Elyse Douglas, and J. Jeffrey Zimmerman, who was general counsel, refused to return incentive compensation tied to the erroneous results.

Hertz’s effort to recoup the awards—a rare move by companies even in cases of dubious behavior by senior management—follows a protracted stock slump as falling used-vehicle prices and the rise of ride-sharing companies squeeze car-rental profits. The accounting scandal also stoked skepticism about Frissora among some investors of Caesars Entertainment Corp., which he has led since 2015. He’s set to leave the casino operator this month.

Clawbacks Are a Powerful Tool

Clawbacks, though rarely used, are a powerful tool for companies seeking to punish executives for wrongdoing. The measure, made possible by the 2002 Sarbanes-Oxley Act, has been used by firms including Wells Fargo & Co. and JPMorgan Chase & Co. to recoup hundreds of millions from ex-employees accused of malfeasance.

Hertz’s policy allows it to claw back compensation from any employee whose gross negligence, fraud, or willful misconduct contributed to a financial restatement, according to a regulatory filing.

“I strongly disagree with the allegations,” Frissora said in an emailed statement provided by his attorney, Jeffrey Brown of Dechert LLP. “I am proud of my record of integrity and transparency in business, and I am confident that these claims will be shown to be untrue.”

Separately, Hertz also demanded that Scott Sider, a former president of the rental-car unit in the Americas, repay incentive compensation he previously received. On March 28, Sider sued the company in state court in Delaware after it refused to pay his legal bills related to the clawback. A day later, Frissora, Douglas, and Zimmerman filed similar suits in Delaware Chancery Court.

Bryan Ralson, an attorney for Douglas, declined to comment. Kevin Coen, a lawyer for Sider and Zimmerman, didn’t reply to a phone message seeking comment.

Both Sider and another former manager—ex-controller Jatindar Kapur—were mentioned in Hertz’s complaint as having played a role in the accounting scandal but weren’t listed as defendants. Kapur didn’t respond to a request for comment.

Shares of Hertz tumbled in mid-2014 after the company disclosed it would have to restate results for the past three years and cut its sales forecast. Frissora stepped down that August amid pressure from investors including billionaire activist Carl Icahn. Zimmerman departed months later, while Douglas left at the end of the preceding year. The stock has plunged about 85 percent since then.

Hertz’s public filings materially misstated pretax income because of accounting errors made in multiple units, the Securities and Exchange Commission (SEC) said in December.

“Improper methodologies were used to determine allowances and write-offs’’ for some receivables, according to the SEC. The company agreed to pay $16 million to settle the claims without admitting or denying wrongdoing.

An internal investigation by Hertz’s board concluded that Frissora created a pressure-cooker work environment in which he leaned on subordinates to make “inappropriate accounting decisions’’ so the firm could hit its financial targets, according to the lawsuit. If it looked like Hertz might miss a financial milestone, Frissora would “berate subordinates who did not come up with’’ non-traditional accounting approaches “to fill the gaps between Hertz’s actual and expected performance.’’

Douglas and Zimmerman were sued for failing to report their boss’s pressure tactics, Hertz said in the complaint. The company is also demanding that they return severance pay.

Frissora’s moves to circumvent normal accounting rules continued after Hertz’s $2.3 billion acquisition of rival rental chain Dollar Thrifty Automotive Group in 2012, according to the suit. The combination of both companies’ headquarters into a single Florida complex prompted staff defections, which “further strained Hertz’s internal controls.’’

“Defendants significantly compromised the company’s long-term security by pushing a counterproductive aggressive agenda, doing so despite knowing full well that Hertz was in a difficult and taxing period of corporate upheaval,’’ the company said in the complaint.

The case is The Hertz Corporation v. Frissora, 19-cv-08927, U.S. District Court for the District of New Jersey (Newark).

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