What Is 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.

Key Takeaways

  • Malfeasance refers to a willful and intentional action that causes some injury or harm to a party.
  • Corporate malfeasance involves the management of a company deliberately hiding the financial reality of the company, which can lead to an accounting scandal that hurts shareholders.
  • Financial frauds or ponzi schemes are another example of malfeasance that can fleece unwitting investors.
  • Malfeasance is subject to lawsuit, although these cases tend to be difficult to prove in court.

Understanding Malfeasance

Corporate malfeasance describes major and minor crimes committed by officers or key employees 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.

A party that incurs damages by malfeasance is entitled to settlement through a civil lawsuit, but proving malfeasance in a court of law is often difficult and can be both time consuming and expensive.

Malfeasance should not be confused with misfeasance, which is is the act of engaging in an action or duty but failing to perform the duty correctly. Misfeasance refers to an action that is unintentional. However, malfeasance is the willful and intentional act of doing harm. It is also different from nonfeasance, or the absence of action to help prevent harm or damage for ocurring.

Examples of Corporate 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.