Saturday, October 13, 2007

Lawyers Don't Come Cheap These Days

All the recent investigations and subsequent prosecutions of senior executives, especially CEOs, is creating a boomlet for white collar criminal defense lawyers and some significant costs for companies on the hook for the attorney's fees.  A Bloomberg article (here) notes that Brocade Communications Systems Inc. has paid over $38 million in legal fees related the investigation of options backdating along with the defense costs of former CEO Gregory Reyes and other executives charged in criminal and SEC civil enforcement actions.  That does not include the $7 million Brocade paid as a civil penalty to settle the SEC case against the company.  In the most recent quarter ending in July, the company spent over $18 million on legal fees while making a profit of $10.7 million.  In all likelihood that amount does not include the bulk of the costs for Reyes' criminal trial that ended with a conviction in August, for which his lawyers from Skadden Arps probably didn't submit bills until after the quarter ended.

An American Lawyer article (here) discusses other high-price legal defenses for corporate executives and the costs for intensive internal investigations -- conducted by lawyers, of course -- related to options backdating:

  • Mercury Interactive spent $72 million before it was acquired by Hewlett-Packard, which no longer breaks out its results separately;
  • KLA-Tencor spend $38.6 million;
  • Monster, Inc. spent $32 million;
  • CNET Networks spent $21 million.

A case that generated significant legal fees outside the backdating realm was the defense of former Enron CEO Jeffrey Skilling, which came in at around $75 million before the most recent work on his criminal appeal -- and don't think his 200+ appellate brief to be argued by former Solicitor General Walter Dellinger will come cheap.  A recent district court case involving a former executive of Westar involved claimed attorney's fees of over $15 million, including nearly $3 million spent on the successful appeal of a conviction that will lead to a third criminal trial.

For anyone contemplating serving as an officer or director of a public company, a good indemnification clause is an absolute must.  Corporations paying out these fees are never very happy when the conduct of executives ends up being so costly, but it seems to be the price to be paid for hiring and retaining CEOs, directors, and other officers.  (ph)

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