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Qwest chokes on Nacchio tab
By Al Lewis, Staff Columnist
Denver Post
Sunday, May 27, 2007

Qwest is balking at Joe Nacchio's legal tab after the former CEO was convicted on 19 counts of insider trading last month.

Nacchio filed a lawsuit Thursday in Delaware Chancery Court, demanding that Qwest keep the money flowing for his pricey legal defense.

These bills could total $75 million.

Nacchio is appealing his criminal convictions and faces civil accounting-fraud charges from Securities and Exchange Commission and several other lawsuits.

Qwest officials declined comment, except to say they would challenge the suit.

Perhaps Nacchio and his lawyers can now get in line with everyone else who feels short-changed at Qwest, including retirees, employees and shareholders.

Not that he doesn't have a claim.

Nacchio's employment contract, as quoted in the lawsuit, indemnifies him "against all liabilities and reasonable expenses ... in any threatened, pending, or completed action, suit or proceeding, whether civil, criminal or administrative, or investigative."

The lawsuit argues that Qwest did not fire Nacchio "for cause," so this provision remains in effect.

Qwest hasn't disclosed what it has paid of Nacchio's tab, or how much of this liability is covered by insurance policies.  But one thing seems clear:  Nacchio cheated his shareholders and his shareholders have since had to pay for his lawyers.

This is a typical contract for an executive at a Delaware-based corporation, said Lawrence Hamermesh, a law professor at the Widener University School of Law in Wilmington, Del.

What CEO would take the job if the potential legal liabilities weren't covered?

Delaware courts have seen this sort of lawsuit before.  Most often, executives prevail over balking companies.

"These are pretty strong obligations," Hamermesh said.  "The record for companies debating them isn't so hot."

Indemnification clauses get muddled when there are criminal convictions, though.  Delaware law prohibits companies from indemnifying guilty executives.

Qwest appears to be reviewing its obligations since Nacchio was convicted on 19 counts.  But Nacchio was also acquitted on 23 counts, which may leave Qwest on the hook to pay the legal tab for the fees associated with those.

Additionally, Qwest is likely bound to pay for Nacchio's appeal, Hamermesh said.  And if Nacchio wins on appeal, Qwest may have to pay for everything.

"I don't think it's clear that Qwest has refused to pay," said Jay Brown, a University of Denver law professor.  "Nacchio's attorneys haven't got resolution of their most recent bill, but no one has said they are not paying it yet."

Brown sees the suit as a pre-emptive strike with Nacchio's lawyers putting all future billing disputes in the court of their choosing.

Nacchio's lawyers have been submitting bills since early 2006, which were generally paid within 45 to 60 days, according to the suit.  Then came the bill for April, following Nacchio's conviction.

A Qwest lawyer told a Nacchio lawyer that discussing April's bill was "beyond (her) pay grade," the lawsuit said.

Nacchio's lead counsel, Herbert Stern, then called Qwest general counsel Richard Baer, who declined to answer whether Qwest would pay the bill.  He no longer returns Stern's calls, the suit said.

Stern also read comments from Qwest CEO Dick Notebaert in Thursday's Denver Post. Notebaert said the company is analyzing what it has to pay.  "It's extremely complex," Notebaert said.

Notebaert was responding to questions at Qwest's annual shareholders' meeting on Wednesday.  Shareholders who lost fortunes as Qwest stock tumbled are not in the mood to pay Nacchio's legal bills.

Notebaert is under some pressure to appease them.  Holding back on the April bill is one way to do that.

Companies "like to hold their head high and say, 'We did everything we could to avoid this,"' Hamermesh said.

But a deal is a deal in Delaware's Chancery Court.

In the end, Qwest may have to live up to its side of the bargain with Nacchio, even if in many ways, Nacchio did not live up to his.

Al Lewis' column appears Sundays, Tuesdays and Fridays. Respond to Lewis at denverpostbloghouse.com/lewis, 303-954-1967 or alewis@denverpost.com.

http://www.denverpost.com/business/ci_5992291