Malfeasance

Key Takeaways

• Malfeasance is an intentional act causing harm, often leading to legal action, though difficult to prove in court.
• Corporate malfeasance includes acts like concealing financial status, harming investors or shareholders.
• Examples of malfeasance include financial frauds and Ponzi schemes, which deceive investors for profit.
• Distinguish malfeasance from misfeasance, which involves unintentional improper conduct, not willful harm.
• Understanding corporate malfeasance is crucial for maintaining transparency and integrity in financial markets.

What Is Malfeasance?

Malfeasance refers to a deliberate and intentional act of wrongdoing that causes harm or damage to another party. It differs from misfeasance and nonfeasance as it involves a willful intent to cause harm. If you're wondering what constitutes malfeasance, why it's significant, or what legal implications it holds, this guide covers these aspects in detail. Malfeasance is often associated with corporate scandals, financial frauds, and cases such as Enron, Tyco, and Bernie Madoff, highlighting its impact on industries and economies worldwide.

Malfeasance in Corporate and Legal Context

In corporate settings, malfeasance often refers to intentional acts or omissions by company leadership that materially harm stakeholders. These actions may include knowingly issuing misleading disclosures, concealing risks, or misusing corporate resources.

Malfeasance differs from related legal concepts:

Misfeasance involves performing a lawful act improperly or carelessly.

Nonfeasance refers to a failure to act when a duty exists.

Malfeasance, by contrast, involves affirmative, intentional wrongdoing.

Since corporate malfeasance can have wide effects, many places have increased rules, required more transparency, and made enforcement tougher.

Noteworthy Cases of Corporate Malfeasance

The following cases are frequently cited in academic, legal, and regulatory discussions to illustrate how malfeasance can manifest at scale:

Enron

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 Andersen firm. The firm was found guilty of shredding incriminating documents pertaining to its advisory and auditing of Enron.1 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.1 Then-president Jeffrey Skilling made a total profit of over $62 million from 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 the intent to profit from a sale of stock is securities fraud.2

Tyco

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.3

Madoff

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.4 Madoff’s case is still considered one of the greatest cases of financial malfeasance in the United States.

Paulson

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.5

Legal Consequences of Malfeasance

Malfeasance involves intentional misconduct, and its consequences extend beyond private disputes and often attract regulatory and criminal scrutiny. When proven, malfeasance may lead to:

Civil lawsuits seeking damages

Criminal prosecution for fraud or related offenses

Regulatory penalties, fines, or professional sanctions

Because these cases hinge on intent, they often involve extensive document review, witness testimony, and regulatory inquiry.