EX-DISCOVER STAR SUES OVER PAY CLAWBACK BEFORE $35 BILLION DEAL

(Bloomberg) -- A former top executive at Discover Financial Services has accused the credit card company of wrongly clawing back millions of dollars in compensation and using her as a “scapegoat” to assuage regulators ahead of its $35 billion merger with Capital One Financial Corp.

In a lawsuit filed Wednesday in federal court in Chicago, Diane Offereins alleges that Discover acted months after she retired from a 25-year career at the digital bank. Offereins, 66, joined Discover as chief information officer before expanding a payments network that became the envy of lenders on Wall Street and a major draw for Capital One. When the company publicly announced her retirement in March 2023, the chief executive officer at the time paid tribute to her legacy, and a Partner of the Year award was created in her honor.

But months into her retirement — and one day before her shares, now valued at about $8 million, were due to vest — Discover canceled the outstanding equity awards, which made up 60% of her compensation. They told her she was partly to blame for a long-running saga involving the misclassification of credit cards that was made public after she retired.

Now Offereins is alleging breach of contract, as well as gender and age discrimination, and seeking to recover her equity awards plus unspecified monetary damages. Her claims spotlight the misclassification headache Discover has been eager to resolve as it prepares to be acquired by Capital One in one of the biggest deals announced this year. Roger Hochschild stepped down as CEO last year amid the overcharging issue.

‘Convenient Scapegoat’

Offereins claims she was treated worse than male executives bearing greater responsibility for the misclassification. Her lawyer Sean Hecker said in a statement that Discover used her as “a convenient scapegoat amid a blockbuster merger deal.”

Discover had no immediate comment on the suit. Capital One didn’t respond to an email and a phone call requesting comment.

Companies often use compensation clawbacks as a way of showing regulators someone has been held responsible for corporate missteps. Offereins, who was the most senior woman on the executive committee when she retired last year, claims she was also the perfect target, having recently left Discover and being the only senior executive with sufficient unvested equity that could be canceled.

The lawsuit comes as the credit card platform awaits sign-off from the US Justice Department and banking regulators for its merger, which would create the largest credit card issuer in the US by loan volume. If approved, the deal would also put Discover in direct competition with market heavyweights Visa Inc. and Mastercard Inc., though the union has prompted concerns that it could stifle competition and drive up consumer costs.

It’s unclear how much weight, if any, banking regulators scrutinizing the merger are giving to the card misclassification issue. But Discover’s handling of the problem is still the subject of a Securities and Exchange Commission investigation, and the company has put aside $1.2 billion to cover liabilities connected to the overcharging. In July the company reached an agreement to settle a related class action lawsuit.

Rare Asset

When Discover publicly revealed in July 2023 that it had misclassified some credit card accounts into its highest pricing tier as far back as 2007, the shares took a beating.

Capital One saw an opportunity to acquire a rare asset — a global payments network facilitating tens of millions of credit card transactions a day. Inheriting the company’s compliance issues would be part of the deal, but Capital One executives have said they’re prepared to take on the risk to add such a network to their stable.

In her lawsuit, Offereins says she was responsible for expanding that now-prized network and managed $300 billion in annual payments volume as president of payment services.

As far back as 2010, Offereins alleges, she was involved in discussions to rebalance the card classification portfolio, with proposals “routinely presented to the most senior leaders of the company.” But the problem was given a lower priority by the card business because it didn’t have a material impact on Discover’s revenue, according to her lawsuit.

Unpleasant Surprise

During an interview in July 2023 as part of an internal investigation into the misclassification, Offereins says, she articulated her efforts to fix the issue but said another side of the business was ultimately responsible for reclassifying cards. Discover never reached out with the outcome of its probe or suggested she bore greater responsibility for the card misclassification issue than others, according to the suit.

It wasn’t until she checked her account at the end of the year, already several months into retirement, that she learned her unvested equity had been suspended.

In a subsequent letter, Discover said it concluded that Offereins had willfully or recklessly violated risk policies and wouldn’t receive her stock awards.

The case is Diane Offereins v. Discover Financial Services, 24-cv-08032, US District Court, Northern District of Illinois (Chicago).