Tuesday, March 28, 2006

Cutting Off Attorney's Fees to Former Corporate Executives

The Wall Street Journal has an interesting article (here) on instances in which corporations have terminated payment of the attorney's fees of executives who are being prosecuted for conduct at the company.  One reason for stopping the payments identified in the article is pressure from the Department of Justice on companies that have entered into plea or deferred prosecution agreements to demonstrate their continuing cooperation.  The focus on payment of attorney's fees for individuals is traceable to the Thompson Memo (here) on prosecuting corporations, which identifies such payments as one example of a corporation's lack of cooperation.  The Memo states, "[W]hile cases will differ depending on the circumstances, a corporation's promise of support to culpable employees and agents, either through the advancing of attorneys fees, through retaining the employees without sanction for their misconduct, or through providing information to the employees about the government's investigation pursuant to a joint defense agreement, may be considered by the prosecutor in weighing the extent and value of a corporation's cooperation."  One case the article examines involves former executives of Enterasys Networks Inc. charged with accounting fraud.  They asserted to the court that prosecutors pressured the company to cut-off the payment of their attorney's fees in 2005.  The district court postponed the trial to look into the matter, although it made no finding of prosecutorial misconduct. 

Co-blogger Ellen Podgor is quoted in the article as noting that many corporations cannot continue in business with a criminal conviction, so they will do almost anything to demonstrate their cooperation to prosecutors.  The problem for the company is that its contractual obligations and the requirements of state law, particularly for companies incorporated in Delaware, may mandate payment of the attorney's fees to current and former executives during both an investigation and subsequent criminal or civil action.  Prosecutorial requests to discontinue payments to defense attorneys can put the company in the difficult position of denying assistance to a person who has not been found guilty of a crime and acting in a way that could be a breach of a legal obligation, yet also risk being branded as uncooperative.  This is a situation that is  unlikely to get better so long as the Thompson Memo's view of the payment of attorney's fees reigns. (ph)

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