Siemens Damage Claim is unprecedented

Implications: Siemens announced that the Supervisory Board has approved recommendations of its law firm to claim damages from executive board members in charge between 2003 and 2006. It will be the first time in German history that a chief executive of a company listed on the German blue-chip stock index DAX has been sued for damages by his former employer.

Analysis:  Siemens announced on 29 July 2008 that the Supervisory Board has approved recommendations of its law firm to claim damages from almost all executive board members in charge between 2003 and 2006. Claims will be made against the former Siemens CEOs Heinrich von Pierer and Klaus Kleinfeld as well as against former top managers Johannes Feldmayer, Thomas Ganswindt, Edward Krubasik, Rudi Lamprecht, Heinz-Joachim Neubürger, Jürgen Radomski, Uriel Sharef, Günter Wilhelm and Klaus Wucherer. Siemens told Financial Times Germany that the managers had "breached their organizational and supervisory responsibilities" by failing to stop illegal practices and wide-ranging bribery in the company. It will be the first time in German history that a chief executive of a company listed on the German blue-chip stock index DAX has been sued for damages by his former employer. Both Heinrich von Pierer and Klaus Kleinfeld have consistently denied any wrongdoing. Michael Hendricks, an expert in directors & officers (D&O) insurance stated in the 29 July 2008 issue of the German Business Daily Handelsblatt that the justifications for the damage claims are “crystal clear“ and the chances of success are “very good”. Since D&O insurance policies do not pay in the case of intentional acts, the private assets of the managers are seriously at risk should they be found liable. Siemens, on the other hand, would be glad if it could recover the amount of around EUR 200 Million (approx. USD 290 million) calculated by Mr. Hendricks as the potential available damages. Experts estimate that a settlement of the issue could take 4-5 years as reported by the Handelsblatt in its 29 July 2008 issue. In addition to the civil damage claims, prosecutors in Munich, where the Siemens headquarters is situated, are still conducting investigations against more than 300 suspects in the scandal in which Simens allegedly bribed clients and customers around the world in order to win infrastructure contracts, using slush funds and sham companies to make the illegal payments. On Monday 28 July 2008, sentence was handed down in the first criminal proceeding of the Siemens probe with the Munich District Court giving Reinhard Siekaczek, a former middle-ranking manager, a two-year suspended sentence and imposing a remarkable fine of EUR 108,000 (approx. USD 157,000). The sentence is widely expected to have a signal effect for other criminal cases which could follow. While Daniela Bergdolt of a German lobby organization for the protection of shareholder rights (Deutsche Schutzvereinigung für Wertpapierbesitz) called the decision “absolutely correct”, Peter von Blomberg, head of Transparency International Germany, called the decision “very mild” citing the fact that the accused cooperated with the court and supported the entire investigation process. The current criminal proceedings as well as the damage claims against Siemens managers are unprecedented and the Siemens case has increased attention to corporate compliance and risk management issues at German companies of all sizes and in all branches.