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Non-Tech : The Enron Scandal - Unmoderated -- Ignore unavailable to you. Want to Upgrade?

To: Glenn Petersen who wrote (3006)	5/9/2004 10:08:20 AM
From: Glenn Petersen	Read Replies (1) \| Respond to of 3602

Shareholders, insurers often pay executives' legal fees Payments add to cost of business boston.com By Carrie Johnson and Ben White, Washington Post May 9, 2004 When corporate executives wind up in court, who pays the legal bills? Sometimes, it is the executives themselves. But in many cases, shareholders wind up covering the tab. And just as often, insurance companies pay -- and then pass along their costs by raising premiums across the board, making it costlier for scandal-free firms to do business. The question of who pays the bills is playing out in nearly every high-profile corporate fraud case. Frank Quattrone, the former investment banker at Credit Suisse First Boston who was convicted last Monday of obstructing justice, has had his multimillion-dollar legal bills paid by his company through two trials. Quattrone's lawyer signaled he would appeal the verdict. A CSFB spokeswoman declined to comment on whether the firm would continue to pay his bills. In another case in a New York courtroom, three members of the Rigas family are defending themselves against charges they siphoned off millions of dollars from the nation's fifth-largest cable television firm to pay for a golf course, luxury cars, and church dues. And shareholders of bankrupt Adelphia Communications Corp. are partly on the hook for the defense. Lawyers for Adelphia founder John Rigas and his sons Timothy and Michael already have received $24 million from the company and an additional $1 million from Adelphia's insurers to cover legal expenses. The practice of advancing legal fees to executives in trouble is common in the corporate world, according to legal specialists and insurance industry executives, because of state laws and company policies designed to protect the innocent and help attract the most qualified job and board candidates. But some vocal critics of the practice are calling on businesses to set limits on how executives can be reimbursed for legal bills when they come under the scrutiny of regulators and prosecutors. ''Don't they have any responsibility to the company?" asked Harvey Pitt, former chairman of the Securities and Exchange Commission, who now runs the consulting firm Kalorama Partners LLC. ''Why should the company reward them if they have caused the company irreparable harm?" The issue is brewing in part because of the sheer number of ongoing federal probes in the post-Enron era and the often enormous costs of paying for legal defense. For instance, in the case of former Cendant Corp. chairman Walter Forbes, whose fraud trial began April 19, the bills recently have topped $1 million per month, according to court filings. A spokesman for Cendant, the New York conglomerate, said the company is ''obligated" to pay for legal expenses for its executives, though it may have legal grounds to seek the return of the money if Forbes is convicted of the fraud, conspiracy, and insider trading charges against him. But actually getting money back can be difficult, according to analysts and defense lawyers, because executives who admit wrongdoing often have spent the majority of their own funds on government fines. A defense lawyer for Forbes did not return calls. In some of the biggest corporate fraud cases, top executives are paying their own way -- at least for now. Former Enron Corp. chief executive Jeffrey Skilling already has shelled out $23 million to his legal team at O'Melveny & Myers LLP, according to court papers. And HealthSouth Corp. founder Richard Scrushy has paid his lawyers more than $21 million out of his own pocket, prosecutors said. Charles Russell, a spokesman for Scrushy, said he would try to recover some of the money through insurance policies. Martha Stewart paid for her own criminal defense, but her media firm, Martha Stewart Living Omnimedia Inc., has been covering her costs in shareholder lawsuits connected to her role as an officer of the company. The company expects to seek reimbursement for those costs from its insurers. Other executives have battled mightily to preserve their rights to collect money they believe they are owed, often with the backing of the courts. In the Adelphia case, US District Judge Michael Baylson ruled in March that Associated Electric & Gas Insurance Services Ltd. (Aegis) had to pay as much as $300,000 each to several directors and officers -- including John Rigas and his sons -- who are defending themselves against civil litigation in the wake of the company's collapse. Aegis declined to comment. The rise in insurance claims has resulted in soaring premiums for policies that cover legal claims against officers and directors. According to a recent study by consulting firm Towers Perrin-Tillinghast, director and officer liability insurance premiums rose 33 percent in 2003. That increase came even as insurance carriers reduced the total amounts they pay on claims and increased deductibles, according to the study. Robert Cox, an executive vice president at Chubb, said the rate of increase in premiums actually has slowed somewhat in recent months but probably will not fall because the number of civil securities fraud lawsuits -- and the size of judgments -- remains high by historical standards. Cox said the average civil settlement has tripled, to $24 million from $8 million, since 1996. And he said investors are filing about 200 civil claims per year, twice as many as the average in the late 1990s. ''You could argue that the numbers are no longer going up dramatically," Cox said. ''But they are remaining steady."