Malfeasance: What it Means, How it Works, Examples

What Is Malfeasance?

Malfeasance is an act of sabotage in which one party to a contract commits intentional damage. Damaged parties can seek settlement through a civil lawsuit. Proving malfeasance in court is difficult as the true definition is rarely agreed upon.

Key Takeaways

• Malfeasance refers to intentional actions that cause injury or harm.
• Corporate malfeasance involves deliberate financial hiding, leading to accounting scandals.
• Financial frauds or Ponzi schemes are other examples of malfeasance that can harm investors.
• Malfeasance is subject to lawsuit, but proving it in court is often difficult.

Understanding Malfeasance

Corporate malfeasance describes crimes committed by company officers or key employees. These crimes involve intentional acts that harm the corporation or failure to perform duties and adhere to related laws. As corporate malfeasance increases, countries pass more laws and take more preventative measures, minimizing global crime.

Damages incurred due to malfeasance can be settled through civil lawsuits, but proving malfeasance in court is often time-consuming and expensive.

Malfeasance should not be confused with misfeasance, which is the improper performance of a duty. Misfeasance refers to unintentional actions, while malfeasance is the intentional act of harm. It is also different from nonfeasance, which refers to the absence of action to prevent harm.

Examples of Corporate Malfeasance

Enron

In October 2001, Enron Corporation disclosed a quarterly loss of $618 million. Enron was hiding significant financial losses using creative accounting advised by its auditor, Arthur Andersen. The firm was found guilty of shredding incriminating documents regarding Enron. Issuing deceptive financials and conspiring to obstruct justice by hiding or destroying documents are serious crimes.

Amidst Enron’s financial challenges, executives promoted company stock to employees and investors as having a strong outlook. As stock prices increased, executives sold their shares. President Jeffrey Skilling profited over $62 million from his Enron stock, knowing the impending financial catastrophe. Lying about a company’s financial condition with intent to profit is securities fraud.

Tyco

In 2002, Tyco’s CEO and CFO were charged with embezzling corporate funds to support their lavish lifestyles. They used company funds to purchase luxury homes, take extravagant vacations, and buy expensive jewelry, defrauding shareholders of millions.

Madoff

In 2008, Bernie Madoff defrauded investors out of billions through a Ponzi scheme. His firm operated for decades, attracting money from international investors. Madoff’s case is one of the greatest instances of financial malfeasance in the United States.

Paulson

In April 2010, the U.S. Securities and Exchange Commission (SEC) charged Goldman Sachs Group with securities fraud for not disclosing that hedge fund investor John Paulson chose the bonds backing a collateralized debt obligation (CDO) Goldman sold to its clients. Paulson selected the CDO, believing the bonds would default, and aggressively shorted them by purchasing credit default swaps for himself. The creation and sale of synthetic CDOs worsened the financial crisis, multiplying investors’ losses. Paulson made $1 billion while investors lost $1 billion with the CDO.

In April 2010, the U.S. Securities and Exchange Commission (SEC) charged Goldman Sachs Group with securities fraud for not disclosing that hedge fund investor John Paulson chose the bonds backing a collateralized debt obligation (CDO) Goldman sold to its clients. Paulson selected the CDO, believing the bonds would default, and aggressively shorted them by purchasing credit default swaps for himself. The creation and sale of synthetic CDOs worsened the financial crisis, multiplying investors’ losses. Paulson made $1 billion while investors lost $1 billion with the CDO.