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Clawbacks: Prospective Contract Measures in an Era of Excessive Executive Compensation and Ponzi Schemes

49 Pages Posted: 24 Aug 2009 Last revised: 14 Mar 2013

Miriam A. Cherry

Saint Louis University - School of Law

Jarrod Wong

University of the Pacific - McGeorge School of Law

Date Written: August 23, 2009

Abstract

In the spring of 2009, public outcry erupted over the multi-million dollar bonuses paid to AIG executives even as the company was receiving TARP funds. Various measures were proposed in response, including a 90% retroactive tax on the bonuses, which the media described as a "clawback." Separately, the term "clawback" was also used to refer to remedies potentially available to investors defrauded in the multi-billion dollar Ponzi scheme run by Bernard Madoff. While the media and legal commentators have used the term "clawback" reflexively, the concept has yet to be fully analyzed. In this article, we propose a doctrine of clawbacks that accounts for these seemingly variant usages. In the process, we distinguish between retroactive and prospective clawback provisions, and explore the implications of such provisions for contract law in general. Ultimately, we advocate writing prospective clawback terms into contracts directly, or implying them through default rules where possible, including via potential amendments to the law of securities regulation. We believe that such prospective clawbacks will result in more accountability for executive compensation, reduce inequities among investors in certain frauds, and overall have a salutary effect upon corporate governance.

Keywords: clawbacks, TARP, executive compensation, corporate governance, Ponzi Scheme, Bernard Madoff, contracts

Suggested Citation

Cherry, Miriam A. and Wong, Jarrod, Clawbacks: Prospective Contract Measures in an Era of Excessive Executive Compensation and Ponzi Schemes (August 23, 2009). Minnesota Law Review, Vol. 94, 2009; Pacific McGeorge School of Law Research Paper No. 10-01. Available at SSRN: https://ssrn.com/abstract=1460104 or http://dx.doi.org/10.2139/ssrn.1460104

Miriam Cherry

Saint Louis University - School of Law ( email )

100 N. Tucker Blvd.
St. Louis, MO 63101
United States
314-977-04537 (Phone)

Jarrod Wong (Contact Author)

University of the Pacific - McGeorge School of Law ( email )

3200 Fifth Avenue
Sacramento, CA 95817
United States
1(916)7397231 (Phone)
1(916)7397272 (Fax)

HOME PAGE: http://www.mcgeorge.edu/x2152.xml

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