may face fight for money
If its ex-CEO is convicted, the firm can seek reimbursement
for paying to defend him.
By Andy Vuong, Staff Writer
Sunday, January 28, 2007
CA Inc. is trying to recover the $14.9 million that the
software company spent to defend former chief executive
Sanjay Kumar against accounting-fraud charges.
A lawsuit by the Islandia, N.Y.-based company, formerly
known as Computer Associates, has targeted Kumar's cars,
home, yacht and bank accounts after he pleaded guilty to
masterminding a multibillion-dollar fraud.
A similar court battle could be in line for Denver-based
Qwest if former chief executive Joe Nacchio is convicted of
criminal insider trading.
Qwest is footing Nacchio's legal bill, which could cost up
to $75 million for both civil and criminal cases, according
to experts. Nacchio has pleaded not guilty to 42 counts of
illegal insider trading. His criminal trial is set to begin
Bob Toevs, a Qwest spokesman, wouldn't say whether the
company would seek reimbursement if Nacchio is convicted,
but he said it has the right to.
Qwest and CA are just two of a large number of companies
that pay legal fees for their current and former executives,
"It's very, very common for almost any corporation, and
certainly for large publicly traded companies, to have
provisions and agreements that will actually require the
corporation to advance defense costs up front," said
Lawrence Hamermesh, a corporate and business law professor
at Widener University School of Law in Wilmington, Del.
Hamermesh said companies are not required to do so under
state law in Delaware, which is where Qwest and many firms
Instead, experts say, most companies offer indemnification
from legal proceedings and pay attorney fees in advance in
order to attract officers and directors to their company.
"If I'm wrongfully charged, why should I have to fork out
$25 million to $50 million or $60 million to defend myself?"
said John Marquess, president of Legal Cost Control, a
legal-fees consulting firm in New Jersey.
Current and former officers and directors at Qwest don't
Qwest can attempt to
Qwest says its bylaws require it to advance legal fees for
officers and directors who may be involved in a civil or
criminal proceeding because of their work with the company.
The company also says that if a conviction is handed down,
it can attempt to recover its money.
The Justice Department charges allege that Nacchio sold $101
million in Qwest stock in early 2001 while he knew the
company's finances were faltering.
Nacchio's attorneys have argued that Nacchio had a rosy
outlook for Qwest in early 2001 because he knew the company
was in line to receive large government contracts.
Separately, the Securities and Exchange Commission has sued
Nacchio and several other former Qwest executives, charging
that they fraudulently boosted revenues by $3 billion from
1999 to 2002. Qwest later restated much of that revenue.
Nacchio has also been named in several shareholder lawsuits.
Toevs wouldn't disclose how much the company's insurance may
be covering in legal expenses for Nacchio.
Amount of coverage varies
Insurance broker Bruce R. Swicker said companies can carry
two types of so-called directors and officers insurance to
help defend the company and its key officials against
lawsuits -- one to cover the company and the other to cover
the individual officer or director. The coverage is also
used to pay settlements.
Toevs said Qwest has D&O coverage. Nacchio's severance
agreement indicates that the company has separate coverage
A provision in the agreement says that "the company shall
continue to make the indemnification/insurance payments" as
defined in his initial employment contract.
Nacchio joined Qwest in early 1997 and left in mid-2002.
How much Qwest ends up paying for legal fees depends on the
insurance coverage limits they purchased, Swicker said. The
insurance coverage is rescinded, however, if an officer or
director is found guilty of a crime that harms the company.
Enron reportedly only carried limits of up to $365 million
for the entire corporation.
Qwest paid $250 million in 2004 to settle an SEC suit
alleging accounting fraud. It later paid $400 million to
settle a shareholder class-action suit.
D&O insurance may have covered portions of those
settlements, but Qwest won't say.
Swicker said the wave of corporate scandals in the late
1990s and early 2000 forced some insurance companies to stop
offering D&O coverage.
"When all this first broke, there was a definite hardening
of the market, as carriers either withdrew or they lowered
the limits they were willing to offer," Swicker said.
He said new corporate governance laws such as Sarbanes-Oxley
have helped the market recover.
Staff writer Andy Vuong
can be reached at 303-954-1209 or