Company exec loans still around

NEW YORK – Corporate loans to executives may seem like relics, remnants of the go-go years when executives such as WorldCom Corp.’s Bernie Ebbers and Tyco International Ltd.’s Dennis Kozlowski treated corporate coffers as personal piggy banks.

But the loans haven’t gone away. In fact, a handful of companies with shaky finances forgave millions of dollars in loans to their executives in recent years.

Corporate reform law Sarbanes-Oxley made new loans by a company to its executives illegal. But loans made before the law went into effect July 30, 2002, were allowed to stand. The existing loan agreements cannot be modified in a “material” way, even if the modification benefits the company.

Does forgiving a loan entirely count as a material modification? That “is and has been an open and debatable issue, one of the things lawyers scratch their heads about,” said Bryn Vaaler, a partner in the corporate group of the Minneapolis office of the law firm Dorsey & Whitney LLP.

There’s no case law to settle the matter, so companies continue to forgive loans to their executives.

What does the SEC say about forgiving loans? So far, not much.

The SEC has pursued only one executive loan enforcement action since Sarbanes-Oxley passed, which resulted in a fine.