Malfeasance

DEFINITION of 'Malfeasance'

Malfeasance is an act of outright sabotage in which one party to a contract commits an act that causes intentional damage. A party that incurs damages by malfeasance is entitled to settlement through a civil lawsuit. Proving malfeasance in a court of law is often difficult, as the true definition is rarely agreed upon.

BREAKING DOWN 'Malfeasance'

Corporate malfeasance describes major and minor crimes committed by officers of a company. Such crimes may involve committing intentional acts that harm the corporation or failure to perform duties and adhere to related laws. Corporate malfeasance can result in serious problems within an industry or a country’s economy. As the incidence of corporate malfeasance increases, countries pass more laws and take more preventative measures, minimizing the amount of crime taking place globally.

Examples of Malfeasance

In October 2001, Enron Corporation disclosed a quarterly loss of $618 million. Enron was hiding significant financial losses by utilizing creative accounting under the advice of its auditor, the Arthur Anderson firm. The firm was found guilty of shredding incriminating documents pertaining to its advisory and auditing of Enron. Issuing deceptive financials and conspiring to obstruct justice by hiding or destroying documents are serious crimes.

Seeing the financial challenges Enron was having, executives promoted company stock to employees and public investors as having a strong financial outlook. As stock reached high prices, executives sold their shares. Then-president Jeffry Skilling sold $47 million of his Enron stock with complete knowledge of the impending financial catastrophe to avoid losing millions of dollars when the stock price plummeted. Lying about a company’s financial condition with intent to profit from a sale of stock is securities fraud.

In 2002, Tyco’s chief executive officer (CEO) and chief financial officer (CFO) were charged with funding their lavish lifestyles through corporate embezzlement. The executives used company funds when purchasing luxury homes, lavish vacations and expensive jewelry, defrauding shareholders out of millions of dollars.

In 2008, Bernie Madoff defrauded investors out of billions of dollars through the investment company he set up as a Ponzi scheme. His firm operated for decades and pulled in money from sophisticated international investors. Madoff’s case is considered the greatest case of corporate malfeasance in the United States.

In April 2010, the U.S. Securities and Exchange Commission (SEC) charged Goldman Sachs Group with securities fraud for failing to disclose that hedge fund investor John Paulson chose the bonds backing a collateralized debt obligation (CDO) Goldman sold to its clients. Paulson chose the CDO because he believed the bonds would default and wanted to aggressively short them by purchasing credit default swaps for himself. The creation and sale of synthetic CDOs made the financial crisis worse than it might have been, multiplying investors’ losses by providing more securities against which to bet. Paulson was paid $1 billion for his swaps while investors lost $1 billion with the CDO.

RELATED TERMS
  1. Enron

    A U.S. energy-trading and utilities company that housed one of ...
  2. Enroned

    A slang term for having been negatively affected by senior management's ...
  3. Collateralized Debt Obligation ...

    An investment-grade security backed by a pool of bonds, loans ...
  4. Nigerian Barge Deal

    A 1999 agreement between Enron and Merrill Lynch in which Enron ...
  5. Securities Fraud

    A type of serious white-collar crime in which a person or company, ...
  6. Synthetic CDO

    A form of collateralized debt obligation (CDO) that invests in ...
Related Articles
  1. Investing

    The Enron Collapse: A Look Back

    This was one of the most complex bankruptcies in U.S. history. Ten years later, we look back at what happened and how it permanently impacted the financial markets.
  2. Investing

    Enron: The Fall Of A Wall Street Darling

    Enron is a classic example of greed gone wrong and how investors were led astray.
  3. Investing

    Why Enron Collapsed

    Enron’s collapse is a classic example of greed gone wrong.
  4. Investing

    3 Notorious American White Collar Criminals

    Learn about the crimes and punishments of some of the most infamous convicted white-collar crooks.
  5. Investing

    The Biggest Stock Scams Of All Time

    Where there is money, there are swindlers. Protect yourself by learning how investors have been betrayed in the past.
  6. Investing

    Financial Statement Manipulation An Ever-Present Problem For Investors

    The SEC has taken steps to eliminate this type of corporate fraud, but it remains a real risk for investors.
  7. Trading

    Detecting Financial Statement Fraud

    Find out how to tell if a company is manipulating its financial data, so you don't invest in the next Enron.
  8. Financial Advisor

    John Paulson's Success Story: Net Worth, Education & Top Quotes

    Learn about the early life and distinguished career of John Paulson, the hedge fund manager who made billions betting on the subprime mortgage crisis.
  9. Retirement

    Business Owners: Avoid Enron-esque Retirement Plans

    If your business administers a retirement plan, you should recognize what's at stake.
  10. Markets

    Europe Can't Use RICO to Sue Reynolds American

    Many people are familiar with how the government has taken the Racketeer Influenced and Corrupt Organizations Act (RICO), originally created as a tool to go after organized crime, and adapted ...
RELATED FAQS
  1. What are some high profile cases of companies who failed to be socially responsible?

    Learn about corporate social responsibility. Explore how Enron's lack of corporate responsibility ultimately destroyed the ... Read Answer >>
  2. When is a bond's coupon rate and yield to maturity the same?

    Read about some of the major business risks assumed by Enron and Arthur Andersen, its accounting partner, before its infamous ... Read Answer >>
  3. What are some famous scandals that demonstrate the agency problem?

    Learn more about the agency problem and find a few famous examples. Find out what contributes to these problems and how investors ... Read Answer >>
  4. How did Enron use off-balance-sheet items to hide huge debts and toxic assets?

    Find out how Enron misused special purpose vehicles to hide mountains of debt prior to its infamous scandal and collapse ... Read Answer >>
  5. Are all mortgage backed securities (MBS) also collateralized debt obligations (CDO)?

    Learn more about mortgage-backed securities, collateralized debt obligations and synthetic investments. Find out how these ... Read Answer >>
  6. Where did market to market (MTM) accounting come from?

    Find out how mark to market accounting originated and how it has been forced to evolve to eliminate subjectivity from financial ... Read Answer >>
Trading Center