Hampshire Group, Ltd. v. Kuttner

Hampshire Group, Ltd. (Hampshire) (plaintiff) sold sweaters. Ludwig Kuttner (defendant) founded Hampshire and was its chairman and chief executive officer from its 1977 inception until Hampshire’s board asked him to resign in late 2006 after Hampshire’s audit committee issued preliminary findings regarding potential financial improprieties. Charles Clayton (defendant) joined Hampshire in 1978, serving in various senior financial roles, including two stints as chief financial officer (CFO). Hampshire terminated Clayton in 2006 based on the audit committee’s preliminary findings. Roger Clark (defendant) joined Hampshire in 1998, serving as, among other things, Hampshire’s principal accounting officer until Hampshire laid him off in late 2006. In May 2006, several newly hired Hampshire executives circulated a memo (internal review memo) expressing their concerns about certain financial practices. In response, Hampshire’s audit committee retained outside counsel and other outside advisers to investigate. That investigation concluded that most of the concerns raised in the internal review memo were not well-founded and that the problems validated by the investigation did not cause Hampshire’s financial statements to be materially misleading. However, the investigators noted that Hampshire had engaged in a sweater-donation practice by which it helped employees take personal income tax deductions to which the employees were not entitled (and which caused the employees potentially to understate their taxable income). The investigators also found that these actions caused Hampshire to violate federal tax law regarding executive compensation. Clayton took improper personal tax donations in at least 2005 and 2006; Clark took a $4,000 improper deduction in 2003. Numerous other Hampshire executives took improper deductions, including Kuttner and Heath Golden, Hampshire’s former outside counsel and general counsel and its present CFO (and an author of the internal review memo). The sweater-donation scheme persisted into 2006 despite the fact that, in 2004, the audit committee instructed Clayton to stop the scheme. Clayton had agreed to do so but did not. Ultimately, Hampshire restated its financial statements for several years, although it was unclear whether the restatements were necessary. Hampshire sued Kuttner, Clayton, and Clark, alleging that each breached his fiduciary duty of loyalty to Hampshire. Hampshire settled with Kuttner but proceeded to trial against Clayton and Clark.