Wednesday, December 19, 2007

Outside Lawyer Charged in Refco Fraud -- Who Pays the Legal Fees?

The lead outside lawyer for the now-defunct commodities brokerage Refco Inc. was indicted on charges of aiding the company's CEO in hiding debts by engaging in "round-trip" transactions at the end of quarters.  The eleven-count indictment (available below) includes conspiracy, false filing, wire fraud, bank fraud, and securities fraud counts in connection with the spectacular collapse of Refco, which went into bankruptcy only two months after its initial public offering.  The prosecution is part of a growing trend in which corporate lawyers are finding themselves as targets of investigations and defendants in criminal and civil enforcement actions -- the SEC filed charges against the lawyer, too.

The prosecution raises an interesting question for me about the payment of attorney fees for the indicted lawyer.  The defense will probably cost at least $10 million if the criminal case goes to trial, and could reach $20 million is there is a conviction and an appeal.  Defense counsel is from Cooley Godward's New York office, so the rates will not be cheap.  The lawyer is a partner at Mayer Brown and was head of its derivatives group, so he certainly has been well-paid, but the financial drain in this type of case is enormous.  For executives at public companies, there is usually an indemnification clause in the corporate by-laws or an employment agreement to cover the attorney's fees that also includes in most cases an advancement requirement.  For example, corporate defendants like Conrad Black and Joseph Nacchio had a substantial portion of the attorney's fees in their prosecutions covered by their former corporate employers.

I doubt an outside lawyer would be covered by a corporate indemnification clause for work on behalf of the business.  It may be that the retainer agreement would require the company to cover any costs related to the representation, although in this case Refco is in bankruptcy and unlikely to pay anything toward the defense, especially when the alleged fraud is what triggered its collapse.  Mayer Brown is an LLP, and its partnership agreement may have an indemnification clause similar to what one would see in a corporation.  I'm not familiar enough with such things -- being up in an ivory tower -- so I can't say whether that is a realistic possibility.  Advancement of fees is perhaps of greater importance because a defendant would prefer not to have to wait until the end of the case to get the funds to pay the lawyers, who cannot work on a contingency basis in a criminal case.

A recent filing by former Milberg Weiss partner Stephen Schulman seeks payment of his attorney's fees in a criminal prosecution against the firm and a number of its former partners that is illustrative of a claim for fees by outside counsel.  Schulman filed his claim to compel arbitration (available below) because the firm cut off payment of the fees after he agreed to plead guilty and a grand jury indicted former name partner Melvyn Weiss.  The legal fees until Schulman's guilty plea were $4.5 million, which have been paid, and he has incurred another $1.2 million since then that the firm has refused to pay.  The Milberg Weiss partnership agreement states, "Any amounts for which a Partner becomes liable in connection with the rendition of services to a client  . . . whether or not insured or insurable against (and whether or not insurance has been or is obtained) shall be an expense of the Partnership."  Schulman's claim is not based solely on this provision, but it does provide an example of a partnership provision that may provide some protection for outside lawyers who are charged with a crime or in a civil enforcement action related to their work for a client.

With the increased focus on attorneys by federal prosecutors and the SEC, it may be a good time for lawyers to check the indemnification provisions in their firm's organizing documents to see just how much protection they have. (ph)

Download us_v_collins_refco_indictment_dec_18_2007.pdf

Download schulman_v_milberg_weiss_attorneys_fees_motion_nov_27_2007.pdf

Attorney Fees, Fraud, Prosecutions | Permalink

TrackBack URL for this entry:

Listed below are links to weblogs that reference Outside Lawyer Charged in Refco Fraud -- Who Pays the Legal Fees?:


Post a comment