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Possible Qwest recovery of legal costs
By Will Shanley, Staff Writer
Denver Post
Monday, April 23, 2007

Qwest Communications has firm legal footing to recover at least some of the millions of dollars the company has advanced Joe Nacchio for his legal bills, experts said.

But it is not a given that Qwest will ever pursue such a court battle, and even if it does, it's unclear whether Nacchio will have any money left to reimburse the Denver-based telecommunications giant, the experts said.

"It's still in limbo," said John Toothman, founder of The Devil's Advocate, a legal-fees consulting firm in Great Falls, Va.  "Qwest may feel like they are throwing good money after bad."

Toothman said Qwest's ability to recover the money it advanced Nacchio received a boost last week after the former CEO was convicted on 19 counts of illegal insider trading.  Nacchio was found not guilty on 23 counts of insider trading in connection with stock sales made in early 2001.  Nacchio is expected to appeal.  He faces a maximum penalty of 10 years in prison and a $1 million fine for each of the counts on which he was convicted.

"Once he is found guilty of even one (criminal) act, the company's presumption that it must stand by its officer vanishes," said Toothman.

Qwest must wait until Nacchio has exhausted all possible legal appeals before it can try to recover the money, Toothman said.

Bob Toevs, a Qwest spokesman, wouldn't say when or if the company would seek reimbursement.  Toevs declined to say how much money Qwest advanced to Nacchio for his legal fees.

"We will consider the impact of the jury's verdict on this obligation, but in the meantime, we will continue to carefully review all expenses submitted to us by the former CEO and his legal team," Toevs said.

Qwest's 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.

Companies can typically 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.

Qwest has said it has director and officer coverage.  Nacchio's severance agreement indicates that the company has separate coverage for him.

Corporate executives, especially for public companies, are increasingly asking for expanded legal protection in the wake of tighter regulations such as the Sarbanes-Oxley Act of 2002, said Lawrence Hamermesh, a corporate and business law professor at Widener University School of Law in Wilmington, Del.

"As legal risks have become more visible, executives are demanding more protection up front," said Hamermesh.

Hamermesh said it is rare for companies to seek reimbursement.  He pointed to additional legal expenses and the possibility of bad publicity as reasons why.

HealthSouth, a health-care service provider based in Birmingham, Ala., was able to roughly cut in half the amount of legal fees it had to pay to former chief executive Richard Scrushy, who last year was convicted on bribery charges.  Scrushy was awarded just $17 million of the $31.7 million he had sought from his former employer.

"There is a cost of going to the mat on something like this -- even if there is a potential pot of gold at the end," said Hamermesh.  "But I'm sure he (Nacchio) has a lot of people breathing down his neck."

The government is seek at least $52 million in forfeiture from Nacchio.  The U.S. Securities and Exchange is seeking more than $200 million.

Staff writer Will Shanley can be reached at 303-954-1260 or wshanley@denverpost.com.

http://www.denverpost.com/business/ci_5728223