D&O lawsuit results from social engineering losses

In 2016, the CEO of FACC, a Chinese owned, Austrian-based aerospace manufacturer, was duped in a social engineering scheme that ultimately cost the company approximately €52.8M. The chief executive officer, Waltar Stephan, received an email purporting to be from another senior employee at FACC.

Stephan believed that the email was legitimate, and then acted on its instruction – ultimately leading FACC financial controllers to wire approximately €52.8M to fraudsters over numerous transfers. Upon realizing the fraud, the company was able to block €10.9M of the transfers at various financial institutions, ultimately leaving the company with a €41.9M loss from the deception. Furthermore, FACC was also left with an operating loss of €23.4M in its 2015/16 financial year, which contrasts sharply with the forecasted €18.6M operating profit in the absence of the fraud. Shortly thereafter, the company fired both Stephan and its CFO. At the time of the dismissal, the company stated that “The supervisory board came to the conclusion that Mr. Walter Stephan has severely violated his duties, in particular in relation to the ‘fake president incident’.”

Most recently, in December 2018, FACC filed a lawsuit against Stephan and its ex-CFO, seeking damages of €10M. The company is alleging that the defendants failed to set up adequate internal controls and to meet their obligations of collegial cooperation and supervision. A directors’ and officers’ (D&O) liability insurance policy can provide financial protection for board members and executives when faced with a supervisory lawsuit. The policy will also respond should a public company be named in a securities lawsuit. Indemnification for settlement and judgment amounts, as well as legal defence costs, can be provided by D&O liability insurance in the event of a covered claim.