Managers in positions of authority can either do great good for a company or inflict great harm. Because we learn more from the second than the first, I wanted to tell you about a recent case from the U.S. 5th Circuit Court of Appeals, the federal appeals court covering Texas.
$11,897, 689.39
That is the amount of monetary harm a jury found was caused by John Kawcak, a former Operations Supervisor, to his employer Antero Resources Corporation, a large, publicly traded oil and gas producer. Seems that Kawack had a close friend, Tommy Robertson, who owned two companies performing “drillout” operations. Essentially, these companies unplug obstructions in an oil or gas well so drilling won’t be impeded.
And guess who awarded contracts to perform this work for Antero? Kawcak.
Hatching A Payout Scheme
According to Antero, Kawcak and Robertson hatched a scheme for Kawcak to give all of the drillout work to Robertson. Antero claimed Robertson’s companies would take longer than necessary to unplug the well by dropping tools down it or bringing the wrong equipment to the worksite.
And, well, time is money, especially when a drillout operation costs $30,000 per day.
In other words, Antero believed these companies were milking the gig. It figured this out and sued Robertson and his companies. The pretrial exchange of evidence (known as discovery) revealed Kawcak’s role, and Antero sued him as well for, among other claims, breach of fiduciary duty (a duty owed by managers to their employers when they are placed in position of great authority). Robertson settled, but Kawcak took his chances with a jury.
At trial, the jury learned Kawcak received cash payments of $729,000 from Robertson’s companies, plus a jet (although Kawcak asserted he bought the jet himself). I know what you’re wondering: How much did Kawcak receive in compensation from Antero?
Get this: $2,666,828 (salary and bonuses), plus restricted stock valued at $9,439,497 when the stock vested.
Appealing the Awarding Damagers
Kawcak appealed the awarding of damages. He lost.
First, Texas law doesn’t require exact precision in the amount sought by the injured party. Rather, a principled basis for an estimate is legally sufficient.
Second, the loss recoverable in Texas is for out-of-pocket damages (the difference between what was charged and the value that was received). By billing Antero more than the services it rendered, Kawcak caused Antero to incur out-of-pocket expenses.
Third, the appeals court ordered the trial court to further explore whether Robertson’s settlement should operate as a credit to lessen the damages awarded against Kawcak. Antero Resources Corp . v. Kawcak (5th Cir., October 31, 2023).
The Bottom Line for Employers
Why did I want to tell you about this case? Because all companies, large or small, need to focus on internal controls to prevent employee self-enrichment or any type of position abuse.
- Talk to your CPA or forensic accountant or lawyer about your current internal controls. How can they be improved? What does this case teach you about improving them? Some thoughts:
- “I can resist everything except temptation.” That’s Oscar Wilde. Your job is to make sure you remove temptation for your employees.
- Make employees in key positions take vacations. If an employee is engaged in wrongful conduct, the best way to keep the conduct under wraps is never to let other employees sit at your desk.
- Never centralize the awarding of contracts to one person.
- Segregate accounts payable from accounts receivable.
- If all your needs in an area are limited to one vendor, ask why.
You get the idea. Always a good idea to review and revisit policies and procedures.
Michael P. Maslanka is a professor at the UNT-Dallas College of Law. You can reach him at michael.maslanka@untdallas.edu.