Saturday, November 18, 2006

Clawing Back Attorney's Fees

Defense costs in white collar crime prosecutions, and the inevitable wave of parallel proceedings, can run into the millions.  Recent cases involving a high level of defense legal fees includes the prosecution of Jeffrey Skilling, which came in at over $70 million, the $17 million Richard Scrushy was awarded from HealthSouth, and the various KPMG defendants who will spend at least $5 million each, and quite possibly much more as the government buries the eighteen defendants in documents.  While directors and officers usually have a right to be indemnified for their attorney's fees, and even a right to have the company pay the fees in advance of a final judgment in the matter, the back end of the deal is often overlooked.  The requirement to pay attorney's fees can be conditioned on requiring the recipient to provide an agreement to repay any amounts advanced if it turns out the officer or director is guilty of a crime, which would show the person did not act in good faith.  Such is the case involving former Computer Associates CEO Sanjay Kumar, sentenced to twelve years for securities fraud and obstruction of justice related to a scheme to inflate the company's revenue.  CA Inc., at it is now known, filed suit against Kumar to recover $14.9 million in attorney's fees advanced to him during the government's three year investigation.  According to a Reuters story (here), the company obtained an order from a New York state court attaching Kumar's property as security for the attorney's fee claims, including his "$9 million home, two Ferrari sports cars, Volvo and Land Rover sport utility vehicles, and a 57-foot Italian Azimut yacht." 

CA's by-laws are typical of most public corporations in providing for a right to repayment of attorney's fees if the covered employee is found (or pleads) guilty to a crime.  The relevant provision (here) states:

Expenses (including attorneys’ fees) actually and reasonably incurred by any such person in defending any such threatened, pending or completed action, suit or proceeding shall be paid on behalf of such person by the Corporation in advance of the final disposition of such action, suit, or proceeding and within 30 days of receipt by the Secretary of the Corporation of (1) an application from such person setting forth the basis for such indemnification, and (2) an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article. A plea of guilty to a felony charge arising out of misconduct committed by such person in his or her capacity (a) as a director or officer of the Corporation, (b) as a director or officer of, or in a similar capacity with respect to, any subsidiary or joint venture of the Corporation or other entity or enterprise referred to in the preceding paragraph of this Article, or (c) as a fiduciary, trustee or administrator or in a similar capacity with respect to any employee benefit plan or other plan or program sponsored by the Corporation or any subsidiary of the Corporation shall, for purposes of the mandatory advancement of expenses provided in the preceding sentence, constitute a final disposition of such action or proceeding. The financial ability of any person to make a repayment contemplated by this provision shall not be a prerequisite to the making of an advance.

The guilty plea triggers Kumar's undertaking to repay the attorney's fees that he gave to secure the advancement of funds, so the company's claim is pursuant to the terms of the by-law provision.  As a Delaware corporation, CA is permitted under the Delaware General Corporation Law to condition an advancement on such an undertaking, so it will be difficult for Kumar to stop the court from ordering repayment or seizing property to satisfy the claim.  (ph)

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