3 novembre, 2006 18:34

New York AG Presses Companies to Stop Paying Indicted Employees' Legal Bills

David Hechler

Corporate Counsel

11-02-2006

Federal prosecutors aren't the only ones putting the squeeze on corporate defendants, it turns out. Like the U.S. Department of Justice, New York state Attorney General Eliot Spitzer has also pressured companies to stop paying the legal fees of employees who face criminal charges. Spitzer appears to be the only state AG who has raised fee payment as an issue.

A handful of defense attorneys with clients indicted by Spitzer knew that he had demanded fee cutoffs. But the AG's tactics came as a surprise to several white-collar crime experts and leaders of the bar, including officials at the Association of Corporate Counsel, the National Association of Criminal Defense Lawyers and the American Bar Association.

Most of Spitzer's targets are financial institutions swept up in his probe of mutual funds. According to a Corporate Counsel review of 17 agreements that Spitzer's office struck with companies accused of market timing, nine settlements included "no indemnification" clauses. These provisions prohibit a business from paying the legal fees of indicted employees unless its bylaws require it. In one instance, Bank of America Corp. agreed to a no-indemnification clause even though its bylaws require it to pay fees. Moreover, the bank had already begun advancing expenses in at least one case.

Spitzer's office declined to comment on the no-indemnification clauses. (Spitzer is running for governor of New York.)

The fee issue first garnered public attention in the Justice Department's prosecution of 16 former employees of KPMG for allegedly promoting and selling illegal tax shelters. In June the federal district court judge hearing the case ruled that Justice lawyers had unconstitutionally pressured KPMG to stop paying the legal bills of its ex-employees. Judge Lewis Kaplan wrote in his decision that the right of employees to have their companies pay their legal expenses "is as much a part of the bargain between employer and employee as salary or wages."

Though the fee cutoff question had come up in court before, Kaplan appears to be the first judge to issue a written ruling since the Justice Department issued its corporate prosecution guidelines in 2003. Known as the Thompson Memorandum, the guidelines instruct federal prosecutors to consider whether a company is paying its employees' legal bills when deciding whether to indict the business.

Spitzer has also taken an aggressive approach on fee payment, most often in mutual fund cases. Starting in 2003, the AG began investigating firms that engaged in market timing of their funds -- rapid trading that benefited favored clients to the detriment of long-term shareholders. It was a natural issue for Spitzer, since New York is the capital of the financial services industry. Believing that federal securities enforcement was lax, the AG resolved to go after perceived offenders himself. He was helped by a New York state securities law, the Martin Act, which allows prosecutors to win convictions without having to prove criminal intent.

To date, nine companies implicated in the market-timing probe have signed agreements with the AG that contain no-indemnification clauses. In virtually identical language in a section headed "Cooperation," the businesses are prohibited from paying expenses of "current or former directors, officers, employees, or agents," except where required by law or written agreement.

In addition to Bank of America, the companies that have agreed to this provision are Bank One Corp.; Federated Investors Inc.; Pilgrim Baxter & Associates Ltd.; RS Investment Management Inc.; Strong Capital Management Co.; Alliance Capital Management Corp.; AIM Advisors Inc. and Invesco Funds Group, which are affiliated; and Waddell & Reed Financial Inc., which signed the most recent agreement, in July.

One corporate defense attorney who challenged Spitzer on fee payments is C. Evan Stewart of New York's Zuckerman Spaeder. Stewart represents former Bank of America financial adviser Theodore Sihpol III, who was indicted by Spitzer's office in 2004. Though Bank of America's bylaws required it to pay its employees' legal fees, Stewart says he had to sue the company to force the issue.

According to Sihpol's complaint, filed in Delaware Chancery Court in 2003, his attorney was told by a Bank of America lawyer that it had decided to "cooperate fully" with Spitzer's office, and any "request for advancement of [legal] expenses by Mr. Sihpol would be vetted with the attorney general." After the bank's lawyers submitted a written request to Spitzer's office, they later told Sihpol that expenses would not be advanced. But shortly before the suit was scheduled to go to trial, Bank of America agreed to pay.

In Stewart's view, the denial of fees is "fundamentally a denial of due process." He explains, "You're taking away the ability of people to defend themselves." A lawyer for Bank of America did not respond to a request for comment. In July 2005 a Manhattan jury acquitted Sihpol on 29 of 33 charges, deadlocking on the others. Three months later, the AG dropped those charges too.

Spitzer has aggressively pushed the fee issue in at least one other case. Last year his office sued Soundview Health Center to require that its indicted executives post a bond before it could could pay their attorneys' fees. Spitzer wanted to ensure that employees at the New York-based nonprofit health care provider who had been charged with misusing state funds would personally repay their legal expenses if they were eventually convicted.

Soundview's lawyer, Susan Necheles of New York's Hafetz & Necheles, says she had never heard of a prosecutor demanding a bond in such circumstances. "The attorney general was trying to squeeze people into cooperating with the investigation," Necheles says. "They were trying to cut off fees so people couldn't defend themselves." The state court judge denied Spitzer's demand. The employees eventually pleaded guilty to lesser offenses and still work at Soundview, Necheles says.

Defense lawyer Stewart hopes prosecutors at both the state and federal level will have a change of heart about fee payments after the KPMG ruling, but he isn't sanguine about it. "The optimist in me says I hope so, but I remain skeptical," he says. "I think the government will use every power it has at its disposal to do what it thinks is necessary."