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Qwest 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
Denver Post
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 March 19.

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, experts say.

"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 are incorporated.

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 have to.

Qwest can attempt to recover

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 for him.

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 avuong@denverpost.com.

http://www.denverpost.com/business/ci_5099187