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Ex-CEO Reyes Sues Brocade Over Unpaid Legal Fees in Backdating Mess
The Recorder
September 17, 2008
Brocade Communications Inc. has paid more than $46 million to the Skadden, Arps, Slate, Meagher & Flom lawyers defending former CEO Gregory Reyes in the stock option backdating scandal.
But according to a new lawsuit filed by Reyes, the company has turned off the spigot.
In a complaint filed last month in Delaware Court of Chancery, Reyes claims that Brocade stopped paying his lawyers at Skadden Arps in December 2007. He says his former company owes his attorneys $7 million in unpaid fees.
Reyes was convicted on 10 criminal counts in August 2007 for his role in the backdating scandal at Brocade. He has appealed the verdict.
Although insurers will generally try to stop paying legal fees after a conviction, white-collar and insurance lawyers say a given indemnification agreement may obligate the company to pay legal fees through appeals -- though they may demand their money back from a defendant whose convictions are upheld.
In the lawsuit against Brocade, Skadden lawyers claim that the criminal conviction doesn't let Brocade off the hook and quotes a portion of the agreement, which states that a conviction "shall not create the presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law."
Richard Marmaro, the Skadden lawyer representing Reyes, said he couldn't comment on the case. Brocade also declined to comment.
The lawsuit claims that as the case against Reyes progressed, the company became increasingly unwilling to pay: In the fall of 2006, Brocade said it would no longer pay Reyes' legal fees "without receiving detailed narratives of work performed."
Then, the company stopped paying for things it had paid for before like "long-distance telephone charges, word processing expenses and photocopying charges."
Finally, in December, Brocade stopped paying altogether.
The lawsuit comes on the heels of newspaper baron Conrad Black's win in the Delaware Court of Chancery that forced the Sun-Times Media Group Inc. to foot his legal bills while he is appealing a fraud conviction. That, said Ohio insurance lawyer Kevin LaCroix, bodes well for Reyes.
"Given that decision, it's seemingly a prudent and practical thing for [Reyes] to do," said LaCroix, an expert on directors and officers insurance and liability.
Part of the current dispute appears to be over how much Brocade's insurers are willing to pay. The lawsuit claims that litigation billing guidelines created by AIG, the company's insurer, weren't consistent with the indemnification agreement between Reyes and Brocade.
Even as Reyes tries to get the company to pay his legal fees, Brocade is trying to make Reyes pay it back for all the legal fees it's advanced to him. The company's been pursuing a suit against Reyes and nine other former Brocade executives and board members to recover damages caused by the backdating case.
