Risk Management

Prosecutors Challenge Legal Defense Fees

One observer maintains that in the eyes of the government, "a good way to roll the defendant is to prevent them from even raising a defense."
Craig SchneiderOctober 12, 2005

An unprecedented legal maneuver by federal prosecutors may threaten the legal fees that corporate executives rely on from their employers, according to The National Law Journal.

The maneuver surfaced during the retrial of two former executives of Westar Energy Inc., chairman and chief executive officer David Wittig and chief strategic officer Douglas Lake, who were accused of stealing $37 million from the Topeka-based utility. Prosecutors perceived Westar as the “victim of a crime,” Jim Cross, a spokesman for the U.S. Attorney for the District of Kansas, explained to The National Law Journal. “We do not believe that a victim should be required to pay the legal fees of a defendant.”

Westar’s bylaws, like those of many public companies, require it to advance to executives any reasonable legal fees and expenses arising from their employment, reported The Kansas City Star. Prosecutors argued that this right was forfeitable because it was linked to their alleged misconduct, Wittig attorney Jeffrey Morris of Berkowitz Oliver Williams Shaw & Eisenbrandt told the Law Journal.

In attacking Westar’s indemnification and legal-fee agreements, prosecutors reportedly obtained a broad restraining order on Wittig’s and Lake’s assets, including the defendants’ rights to the advancement of legal fees. There was no ruling to uphold the injunction going forward, but “given that the government tried it here, we fully expect they will try it again,” Alok Ahuja, a lawyer with Lathrop & Gage, told the legal paper.

Susan Hacket, general counsel for the Association of Corporate Counsel (which filed an amicus brief authored by Ahuja), put it even more strongly. “We were horrified,” she told the Law Journal, that the government had discovered that “a good way to roll the defendant is to prevent them from even raising a defense.”

The trial judge ultimately placed the legal fees in escrow, reported the legal paper, and let the jury decide the issue. Last month Wittig and Lake were convicted on multiple counts, including fraud and conspiracy, but the jury reportedly found that their right to advancement of legal fees was not tied to their conduct, and thus not subject to forfeiture.

Wittig and Lake are scheduled to be sentenced in January, according to the Star.

Most executives named in lawsuits against their employer would be “hard-pressed” if they had to pay for litigation costs out-of-pocket every time the company was sued, argued Hacket. That’s particularly true if the defendant’s personal assets are frozen. On Tuesday, the Supreme Court let stand a lower-court ruling against two former executives of Gemstar-TV Guide International. That ruling effectively bolstered the ability of the Securities and Exchange Commission to freeze payments to corporate executives under Sarbanes-Oxley.

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