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Firms Struggle to Recover Failed Execs' Pay

Larry Lasser: $78 million.

Mark Whiston: $14 million.

Walking away from the biggest scandal in the history of the mutual fund industry with boatloads of cash: Priceless.

Several ex-CEOs and former high-level executives in the fund industry have presided over the disgraceful behavior at their respective shops that led to Fundgate, yet still received compensation packages worth millions of dollars. Many were aware of what was going on, although their level of knowledge and participation in such schemes has been a subject of dispute and denial in some cases. Others were just asleep at the wheel.

Either way, it hardly seems fair to reward them handsomely, but most firms are reluctant to fight for this money because of the potential further damage a messy legal battle could create.

Nearly all executive compensation is guaranteed through an employment contract and can only be void if an executive is fired for cause, which means the employee violated the terms of the agreement. "Unless someone is terminated for cause, which stops the payment of severance, firms are pretty much obligated," said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.

"Cause is tough to demonstrate," Elson said. "It is a reasonably high standard. Having to prove it and slug it out in court, where the executive may appeal, may make the whole process more difficult. Firms may think it's just better to put this whole thing behind them."

Terminating for cause can be sticky for firms, especially those involved in high-stakes settlement talks with regulators. If an executive is terminated for cause, the firm, in essence, is admitting that one of its own was at fault. Firms go to great lengths to avoid admitting guilt, even after coughing up hundreds of millions of dollars in fines, because such a confession could further widen the firm's legal exposure. Anyone familiar with the majority of the settlements mutual fund firms have entered into with regulators in the last year would know that an admission of guilt is noticeably absent. This is commonplace in settlements with federal regulators, and is the case with all of the settlements with the SEC.

Putnam agreed to two separate $55 million settlements, totaling $110 million combined. However, in a rare break from the norm, it did admit guilt in its settlement with state regulators in Massachusetts. However, the firm settled in such a way that experts feel it did not expose itself to any additional liability.

"Lasser really had them by the short hairs," said Eli Bortman, a professor of business law at Babson College in Wellesley, Mass. Putnam Investments showed Lasser, its former CEO, the door late last year after revelations of improper trading by several Putnam executives came to light. Behind closed doors, the firm claimed Lasser was dismissed for cause, and a battle over the executive's compensation ensued for several months. The case went to arbitration, but in the end, Lasser walked away with $78 million from Putnam's publicly held parent Marsh & McLennan. It was less than the $89 million some estimated Marsh owed him, but still a large sum. Marsh claimed Lasser received no severance and was only paid what he was owed, but Lasser's lawyers disputed that claim, noting he was released from his non-compete clause and was indemnified by the company from any potential litigation. Through a spokesman, Lasser said he is happy with the settlement, but declined further comment for this story.

The case with Whiston, Janus' former CEO, is very different. Unlike Lasser, it is unclear whether or not Whiston knew of the illegal activity at his shop. Whiston stepped down shortly before the Denver-based shop agreed to a $226 million settlement with regulators, but while many have speculated that Whiston knew about the deals, there is nothing conclusive in the public record that proves that.

"Mark Whiston has been a vigorous opponent of market timing for many years, and never structured or approved any exceptions to Janus' anti-timing policy," a spokesman for Whiston said. "Any speculation to the contrary is simply untrue. Under his leadership and encouragement, Janus turned away or shut down thousands of market-timing accounts in recent years." A Janus spokeswoman, while confirming Whiston is still on the payroll as a consultant until year's end, declined comment for this story.

In 2002, Whiston commissioned a report to find out about timing arrangements at the shop, and although the study was completed long before revelations about timing at Janus became public, there is no evidence Whiston received or reviewed the results of the study.

Further fueling the speculation was the wording the SEC chose to use in its settlement document. "Certain members of JCM's senior management and certain portfolio managers knew about, or were reckless in not knowing about, the approved market-timing relationships," the agency concluded. However, Whiston was not specifically named.