The National Law Journal has a story today about a tactic by prosecutors that threatens a new source of attack on rights to indemnification and advancement. The story appears below in full.
Execs: Misbehaving May Cost You
Dee McAree
The National Law Journal
10-12-2005

A move by prosecutors to attack the legal fee agreements of corporate executives in a high-profile white-collar crime case has raised concerns among corporate and defense counsel.
The maneuver took place during the trial of David Wittig and Douglas Lake, who were accused of looting Westar Energy Inc. of $37 million.
After a first trial ended in a hung jury in December 2004, a second Kansas City, Kan., jury last month convicted Wittig on all 39 counts and Lake on 30 counts, including fraud and conspiracy. U.S. v. Wittig/Lake, No. 03-40142-01/02 (D. Kan.).
But the convictions have rendered moot an important appellate question about the advancement of legal fees to accused corporate executives that was pending during the trial before the 10th U.S. Circuit Court of Appeals.
‘ESSENTIALLY UNPRECEDENTED’
Prosecutors had attacked the indemnification and legal fee agreements that were extended to Wittig and Lake under Westar’s bylaws, obtaining a broad restraining order on their assets, including their right to the advancement of legal fees.
“Throughout this case, the U.S. Attorney’s Office has viewed Westar as the victim of a crime,” said Jim Cross, a spokesman for the U.S. Attorney for the District of Kansas, Eric Melgren. “We do not believe that a victim should be required to pay the legal fees of a defendant.”
Defense lawyers and amici say this is the first instance where such arrangements have come under attack during a trial. Most companies have similar advancement agreements, modeled on Delaware law, that provide legal fees to executives sued in connection with their office, noted Robert G. Morvillo, a defense attorney and partner at New York’s Morvillo, Abramowitz, Grand, Iason & Silberberg.
“As far as we know, seeing an injunction on paying fees on an ongoing basis is essentially unprecedented,” said Alok Ahuja of Lathrop & Gage in Kansas City, Mo., author of an amicus brief filed by the Association of Corporate Counsel. “There is no reported decision that has upheld this, but given that the government tried it here, we fully expect they will try it again,” added Ahuja.
The ACC, while not involved directly with either Wittig or Lake, intervened because of the important public policy issues at stake, said ACC’s general counsel, Susan Hacket.
“We were horrified when we learned that the government had found a way to say that a good way to roll the defendant is to prevent them from even raising a defense,” Hacket said.
It is not uncommon for individual officers to be named in company lawsuits, and most of them would be hard-pressed if they had to be personally liable for litigation costs every time the company was sued, she added.
Moreover, the advancement of legal fees is an important check on prosecutorial restraint, argued Ahuja.
“In a post-Enron, post-Sarbanes-Oxley world, there is ever increasing pressure on prosecutors,” he said. Companies may face lighter charges or sentences for cooperating in government investigations against their own officers, and the defendants’ personal assets may be frozen, making it difficult to pay legal fees, he noted.
Defense lawyer Morvillo agrees that there is increased pressure on companies, and that Westar prosecutors took a “novel approach.”
“Many in the defense bar are concerned about the government poking its nose in an area it doesn’t belong,” Morvillo said.
The advancement of legal fees was hotly contested throughout the trial.
Prosecutors had argued that the defendants’ right to legal fees was connected to their alleged misconduct, and thus forfeitable, said Wittig’s attorney, Jeffrey Morris of Berkowitz Oliver Williams Shaw & Eisenbrandt in Prairie Village, Kan. Defense lawyers countered that advancement was an independent right written into the company bylaws.
During the two trials, the district court went back and forth on the issue, finally placing the legal fees in escrow with instructions that the jury should decide the issue. Ultimately, the jury found, after delivering its verdict, that the advancement right of the defendants was not tied to misconduct and not a forfeitable asset, rendering moot the pending appeals.
The lack of a 10th Circuit ruling means that the advancement right is open for attack in future trials, lawyers say.
“What it means if the 10th Circuit doesn’t address it is that it continues as a simmering issue,” Ahuja said.