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Just weeks after Dorsey & Whitney partner Zachary Carter joined the board of Marsh & McLennan as an independent director, New York State Attorney General Eliot Spitzer announced that the insurance broker was under investigation for alleged bid-rigging. The timing could indicate that the March appointment of Carter � a former U.S. attorney and white-collar defense lawyer � helped facilitate a deal last month with Spitzer that resulted in the ouster of some suspected Marsh wrongdoers and paved the way for a settlement without criminal charges against the company. At the same time, the appointment, at least at first, most likely provided Carter with the prestige and connections afforded to board members of huge publicly traded companies like Marsh & McLennan Cos. So what’s the problem? Plenty, assert some experts. Attorneys who take a seat as independent directors on the boards of public corporations � especially those in legal trouble � are making a risky move by exposing themselves to potential liability. In addition, some observers caution that publicly traded companies, which may believe they are ensuring compliance by having an attorney as a board member, could be shortchanging themselves. Push for outsiders In Carter’s case, he joined Marsh’s board and its auditing committee in May, following a push by institutional investors of Marsh’s subsidiary, Putnam Investments, to include outside directors on Marsh’s board. Those investors, which included state pension plans participating in Putnam mutual funds, called for independent directors following the company’s implication in the mutual fund probe last year. The investigations, conducted by both the Securities and Exchange Commission (SEC) and Spitzer’s office, found that some funds were allowed to trade after hours to gain advantage. But now, Marsh, the largest insurance broker in the world, finds itself embroiled in another battle with Spitzer, this time over an alleged bid-rigging scheme related to so-called market service agreements between several insurance brokers and insurance companies. Marsh reportedly has reached a tentative settlement of the allegations for $500 million, which followed the resignations of some key executives, including Jeffrey Greenberg, former chairman and chief executive officer. After the Putnam Investments investigation, New York State Comptroller Alan Hevesi, with the endorsement of pension fund officials, went to Marsh executives and urged them to bring Carter in as an outside director. Carter, who receives $40,000 annually plus stock for serving on Marsh’s board, said last week that directors with white-collar law experience can enhance a board by adding additional perspective. “It’s useful for the board to have someone who sees a company’s operations from the vantage of the regulatory community,” he said. That enhanced perspective may have proved beneficial in negotiating with Spitzer this time. Although individual Marsh executives could face criminal charges, such charges against the company itself � which would almost certainly spell its demise � are not anticipated. Appointed to the Eastern District of New York under the Clinton administration, Carter, 54, also served as a U.S. magistrate judge from 1991 to 1993. He later worked as a defense attorney in the Enron case, representing its former president and head of trading. As U.S. attorney, he prosecuted New York City police officers for the precinct bathroom assault of the Haitian immigrant, Abner Louima. He currently serves as co-chairman of Dorsey & Whitney’s white-collar crime and civil fraud practice group. Carter’s background also includes a previous connection with Spitzer. The attorney general himself selected Carter two years ago to serve on the board of Hale House, a charitable children’s home in New York, after its former executive director was indicted for misappropriating more than $700,000 in funds. Despite the Hale House appointment, Carter said Spitzer was not involved in the appointment to his new post on the Marsh board. Spitzer’s office declined to comment. Although Carter became a director just five months before Spitzer’s investigation was announced, some could view Carter as part of Marsh’s alleged bid-rigging problems. “You’re sitting there with a bull’s eye on your head,” said Michael Missal, a partner in Kirkpatrick & Lockhart’s securities enforcement and white-collar defense practice group who previously served as senior counsel in the SEC’s enforcement division. (Missal’s firm is not involved in Spitzer’s action against Marsh, but it does represent public companies that are pursuing claims against Marsh.) Attorneys sitting on boards of troubled public companies run the risk of being ensnared in a class action or shareholder derivative lawsuit, Missal said, despite whatever well-intentioned reason they had for joining in the first place. Yet some attorneys may be willing to take that risk because of the prestige of serving on a big public company’s board. “It looks great on your resume, it can be fun at times and it gives you great access to other decision-makers,” he said. But perks may not be worth it. Some observers have questioned whether Marsh’s board, comprised of six insiders and 10 outside directors, exerted enough control over the company as its problems unfolded. More significant are the lawsuits already filed against Marsh, in which investors claim that mismanagement led to corruption, which, in turn, led to falling share prices. Clients of Marsh products also are lining up to allege that the company � its leaders included � cheated them out of fair insurance prices. No one is safe Class action attorney William Lerach, with Lerach Coughlin Stoia Geller Rudman & Robbins of San Diego, said that because the allegations of bid-rigging, by his estimation, involve up to 50% of the reported income of Marsh, a company with $11 billion in revenues, no director, at this point, is in the clear. His firm already has filed several securities class actions against Marsh and other insurance brokers. Lawsuits also are pending against the insurers themselves. “It’s not unreasonable to charge each of the directors with knowledge of such a huge portion of the net income,” Lerach said. But whether each Marsh director will be named in one of Lerach’s lawsuits is uncertain. Among his firm’s clients is the California State Teachers Retirement System, which is one of the institutional investors that supported Carter’s appointment to the Marsh board in the first place. Even so, Lerach said that it is conceivable that all of Marsh’s directors could be sued eventually, though he cautioned that Marsh’s alleged wrongdoing is “still unfolding.” To accuse someone of fraud, which, if proven, generally is not covered by directors’ and officers’ insurance, one needs a “darn good basis for doing so,” he said. But it is not only the directors who need to worry about lawsuits. For firms whose attorneys serve on public boards, it is possible that they could be implicated if the director is sued. Under many partnership agreements, what the attorney-director earns flows to the rest of the firm’s partners. It is unlikely that fact alone could make the firm potentially liable, said Andrew Rossman, a partner with Akin Gump Strauss Hauer & Feld’s securities litigation group. But if a firm is heavily involved in also representing the firm and receives substantial fees from that work, it may show a firm’s “culpable participation,” he explained. Rossman said that of the firms that allow their attorneys to serve on public companies’ boards � and many big ones do � about half also perform work for the company. The other half prohibit it. In addition to the connections an attorney makes in taking a seat on a board, appointing an attorney, especially one with white-collar prosecutorial experience, as an independent director � particularly if the company in trouble � can send a signal to clients and investors that the company is making a turn for the better. In addition, such a move may appease prosecutors weighing whether to proceed with criminal charges against a company, a process that can gut a public company. WorldCom’s strategy That strategy seemed to work for WorldCom. Part of its recovery after an accounting fraud scandal included adding former U.S. Deputy Attorney General Eric Holder, now a partner at Washington’s Covington & Burling, to its board, along with several other new directors. Holder, who oversaw the drafting of guidelines for criminally prosecuting public companies while he was deputy attorney general, urged against criminally indicting WorldCom for securities fraud. It apparently worked. Though former executives of WorldCom were indicted, the company itself has not been. Holder did not return phone calls seeking comment. But winning over the federal and state prosecutors may not equate to a director’s immunity from private lawsuits. Franklin A. Gevurtz, author of West’s Hornbook on Corporations, said that attorneys who come on board after a company already has experienced problems, as did Carter after Marsh’s Putnam Investments probe, are particularly vulnerable should more difficulties arise later. “It’s the ‘once bitten’ idea,” he said. “You’re in more trouble if you’re brought in aware of problems. ‘Gee I didn’t realize something was afoot’ really doesn’t work later.”

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