Corporate controller claims Playboy asked for accounting entry that violated Sarbanes-Oxley Act; when she refused they retaliated against her and later wrongfully terminated her employment.
- Case Name: Catherine A. Zulfer v. Playboy Enterprises Inc., and Does 1 through 10, inclusive
- Court and Case Number: USDC Central / 2:12-cv-08263-BRO-SH
- Date of Verdict or Judgment: Wednesday, March 05, 2014
- Date Action was Filed: Monday, September 24, 2012
- Type of Case: Employment, Wrongful Termination
- Judge or Arbitrator(s): Hon. Beverly Reid O'Connell
Plaintiffs: Catherine Zulfer, 56, controller.
Defendants: Playboy Enterprises Inc.
- Type of Result: Jury Verdict
- Gross Verdict or Award: $6,000,000 plus findings under Civil Code 3294(b). The jury found that Playboy had retaliated in violation of the Sarbanes Oxley Act. The matter was resolved after the verdict.
- Trial or Arbitration Time: 6 days.
- Jury Deliberation Time: Less than 2 hours.
- Jury Polls: Unanimous 8-0 on all questions.
Attorney for the Plaintiff:
The deRubertis Law Firm, APC by David M. deRubertis and Helen Kim, Studio City.
Law Offices of Mindy Lees by Mindy Lees, Studio City.
The Aarons Law Firm APC by Martin Aarons, Sherman Oaks.
Attorney for the Defendant:
Sheppard, Mullin, Richter & Hampton LLP by Jennifer Redmond and Morgan Forsey, San Francisco.
Sheppard, Mullin, Richter & Hampton LLP by John Stigi, III, Kathryn Visosky and Nora Stiles, Los Angeles.
Theodora Oringher PC by Todd Theodora, Costa Mesa.
Plaintiff's Technical Expert(s):
Gerald Thorpe, Sarbanes-Oxley Compliance and GAAP, Reston, VA.
Susan Bleecker, economics, Pasadena.
Defendant's Technical Expert(s):
Eric Sussman, Sarbanes-Oxley Compliance, Los Angeles.
Chen Song, Ph.D., economics, Irvine.
Facts and Background
Facts and Background:
Plaintiff worked for Playboy Enterprises Inc. as an executive in the company's Corporate Accounting Department for approximately thirty years. In 2009, Playboy was suffering financial losses. The Board of Directors brought in new management including a new CEO (Scott Flanders), CFO (Christoph Pachler) and Senior Vice President of Human Resources (Kendice Briggs).
From 2010 to 2013, Playboy’s workforce was reduced from over 500 to just over 150 employees. In 2010, as part of the reductions, Playboy laid-off its existing Corporate Controller, leaving two divisional controllers: Plaintiff Zulfer (Controller for the Entertainment Division) and John McDonald (Controller for the Publishing and Licensing Divisions). In August 2010, Flanders and Pachler promoted Ms. Zulfer to Senior Vice President and Corporate Controller position. She thus assumed corporate and public accounting duties while still continuing to perform her Entertainment Division Controller duties.
On January 14, 2011, CFO Pachler asked Ms. Zulfer to accrue on the company’s general ledger $1.1 million in executive bonuses. Ms. Zulfer declined to do so, stating she needed Board approval to make the accruals. Pachler again asked that she accrue the bonuses stating that Board approval was needed for their payment but not for their accrual. Later that day, Ms. Zulfer and Pachler met.
It was alleged by plaintiff that Pachler improperly pressured her to make the accrual in violation of the company’s internal accounting controls (which Sarbanes-Oxley requires) and accruing the bonuses at that time would violate generally accepted accounting principles (GAAP) under which a bonus must be accrued if the payment of the bonus is probable and the amount of it is estimable.
In defense, Pachler claimed this was a minor and routine debate about an accounting issue and internal controls encourage such debates; that having such a debate does not violate internal controls.
After her meeting with Pachler on January 14, 2011, Ms. Zulfer called Playboy’s Chief Compliance Officer and General Counsel Howard Shapiro. Ms. Zulfer and Mr. Shapiro disputed what was said on this call.
Plaintiff alleged that she told Shapiro that Pachler had just demanded she make the accrual; that she told Pachler making the accrual would violate GAAP and the company’s internal controls; that Pachler continued to tell her to make the accrual; and that Pachler “went off on her” when she refused.
According to defendant's general counsel, Shapiro, Ms. Zulfer was looking for “cover” in a disagreement with her boss; what she reported was simply a routine accounting debate; nothing she said raised any Sarbanes-Oxley (SOX) or internal control concern or constituted a whistleblower complaint; and he referred Ms. Zulfer to the company’s external auditors (Ernst & Young), internal auditors (Grant Thorton) or the former CFO and current Chair of the Board and its Audit Committee to answer her accounting questions.
It was undisputed that Shapiro took no action in response to his discussion with Ms. Zulfer (e.g., did not report it to the Audit Committee, did not initiate an investigation, etc.).
After his discussion about the accruals with Ms. Zulfer on January 14, 2011, Pachler informed Flanders that external auditors at Ernst & Young may ask whether the Board has approved the bonuses when it audits Playboy’s financials after Playboy closed its 2011 books. Flanders then contacted the Chair of the Board and requested that the Board vote on the bonuses, which the Board did, approving payment of $1.1 million in bonuses on January 23, 2011, following which Ms. Zulfer accrued them.
On February 11, 2011, Ms. Zulfer attended a meeting of the Board’s Audit Committee, which oversees financial reporting and disclosures. At the meeting, an Ernst & Young partner asked if management was aware of any allegations of fraud or any whistleblowing and Shapiro replied “no.” Ms. Zulfer did not speak up or disagree with Shapiro’s answer. In addition, Ms. Zulfer never made a written complaint about Pachler’s request to accrue the bonuses before she was told she would be terminated.
For the rest of 2011, Playboy continued to restructure its operations. In March 2011, it went from a publicly traded back to a privately held company. In August 2011, Playboy sold its Entertainment Division to a company called Manwin. As part of the Manwin sale of the Entertainment Division, all of Playboy’s Entertainment Division 200+ employees were laid-off (and many went to work for Manwin).
In late-August 2011 (soon after the Entertainment Division was sold to Manwin), Pachler claimed he decided to eliminate Ms. Zulfer’s position, bring Publishing and Licensing Controller John McDonald from Chicago to California and have Mr. McDonald continue to handle Publishing and Licensing controller duties as well as the small remaining amount of corporate controller duties.
Pachler testified that McDonald was the most qualified person for the remaining controller duties. The Publishing and Licensing Divisions remained and McDonald had done their accounting for 20-plus years. The Entertainment Division (plaintiff Zulfer’s) had been sold to Manwin, and the remaining corporate accounting duties were simple things McDonald had previously done in other positions for Playboy.
Under Playboy’s severance policy, Ms. Zulfer received approximately $272,000 in severance benefits which Playboy paid to her. Ms. Zulfer continued to work for Playboy through December 31, 2011.
Following her termination, Ms. Zulfer has worked in production accounting for two different movies for short-term assignments. However, she has not held another corporate controller or senior financial executive position. Ms. Zulfer did not receive psychological treatment for her emotional distress.
Plaintiff contended that Pachler’s repeated requests that she accrue the bonuses without Board approval violated the company’s internal controls and, if she accrued them, she would have violated GAAP because the payment of the bonuses was not probable and estimable. Plaintiff alleged that her disclosures to Pachler and Shapiro therefore qualified as protected activity under SOX.
Plaintiff also contended that soon after her protected activity, Pachler engaged in a series of retaliatory actions, including her exclusion from meetings, accusing her of misconduct, etc. Plaintiff also claimed that Pachler began to devise a plan to terminate her in retaliation for her protected activity by using the “go private” and Manwin transactions as a pretextual excuse to cover-up the retaliation.
Playboy asserted that Zulfer’s conduct was not legally protected activity under SOX and, in any event, the termination decision was based on purely legitimate business reasons and had nothing to do with the alleged protected activity.
Playboy alleged that no internal control at Playboy required Board approval for accrual of the bonuses; rather, the controls only required Board approval of the payment. Playboy also asserted the payment of the bonuses was not merely probable and estimable, they were actually virtually certain to occur because, inter alia: (1) the Board was very satisfied with the new management’s performance; (2) before January 14, 2011, the Board had approved the “go private” agreement which committed the company to paying the bonuses; and (3) the Board had approved a bonus plan for CEO Flanders that set forth financial goals which had been met in fiscal 2011.
Based on the above, Playboy contended Ms. Zulfer’s belief that accruing the bonuses was improper was incorrect and unreasonable (and, thus, did not constitute legally protected activity). Playboy supported these contentions by testimony from the Chair of the Board, its senior management, the outside auditors from Ernst & Young and a GAAP expert.
Playboy also denied that the termination decision was motivated at all by the bonus accrual issue. Rather, it contended it eliminated Ms. Zulfer’s position because the “go private” and Manwin transactions eliminated the majority of her job duties and John McDonald was the best and most qualified person to handle the remaining controller duties because the majority of the remaining controller duties related to the Publishing & Licensing Divisions.
Playboy also maintained that it treated Ms. Zulfer fairly including paying her nearly $300,000 in severance benefits; that plaintiff failed to reasonably mitigate her damages by seeking comparable employment; rather, that Ms. Zulfer voluntarily absented herself from the relevant job market by choosing to do inferior production accounting work rather than actively seeking another corporate accounting position.
- Special Damages Claimed - Future Lost Earnings: Back and front pay ranging from $1,000,000 at the lower end scenarios to $2,750,000 at the highest end scenario.
Demands and Offers
- Defendant Final Offer before Trial: Under $100,000.