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Perhaps no corporate scandal of recent years has created such wide-ranging troubles as the stock option backdating mess. Companies have spent untold millions on legal fees for independent investigations, government negotiations, and shareholder and derivative suits. And even if the companies clean house, the disgraced executives can and do insist that their former employers keep paying their high-priced lawyers, thanks to indemnification contracts that are a standard perk in executive suites. In the case of Brocade Communications Systems Inc., which cut ties with its convicted former chief executive officer, Gregory Reyes, legal fees could eventually reach $100 million. Its securities filings show that as of July 28, it had paid about $65 million in legal fees. That figure is sure to balloon because it doesn’t include Reyes’ seven-week criminal trial, which began in June. The former CEO was defended by a flotilla of lawyers from Skadden Arps Slate Meagher & Flom and Munger Tolles & Olson. On Aug. 7, a federal jury in San Francisco convicted Reyes on all 10 counts sought by prosecutors. Reyes’ conviction likely hasn’t ended Brocade’s obligations. His lawyers are working on his appeal, as well as defending him in a civil case filed by the Securities and Exchange Commission. Brocade’s bylaws allow full indemnification to the extent permitted by Delaware law. And the courts of Delaware, where Brocade is incorporated, have been generous to officers and directors. After a final finding of guilt, a company can attempt to recover the fees, but that’s a tough row to hoe. Insurance is usually not available, recovering from former executives is rarely easy, and it doesn’t appear that companies have ever gone after the law firms that received the fees. Reyes’ lead lawyer, Richard Marmaro at Skadden Arps, wouldn’t say who is paying his client’s fees. A Brocade spokesperson likewise declined to say. Other companies are saddled with eight-figure-fee backdating headaches. Mercury Interactive Corp. spent an astounding $72 million on legal fees, as of June 30, 2006. (It has since been bought by Hewlett-Packard Co.) As of June 30 this year, KLA-Tencor Corp. has spent $36.8 million, Monster Worldwide Inc. has spent $32 million, and CNET Networks Inc. has spent $21 million, according to securities filings. And these figures don’t include any fines the companies have paid the SEC. One former general counsel accused of backdating, Lisa Berry of Juniper Networks Inc., made a special effort to make sure that she would be indemnified. Six months before Berry left Juniper in January 2004, she took the unusual step of setting up an indemnification trust for herself, according to securities filings. That type of trust is generally found only at companies facing bankruptcy or a change in control, said Gillian McPhee, a partner at Gibson Dunn & Crutcher. (Juniper declined to comment.) Berry may need it; she was sued by the SEC in August. Companies with huge backdating legal fees aren’t getting much relief from insurers, either. “In most stock option cases, insurance companies are not reimbursing [legal expenses] in the ordinary course,” said a lawyer whose firm represents a backdating defendant. Insurers are citing policy exclusions, such as when individuals engage in bad acts for personal profit. Some of these coverage disputes are in mediation or arbitration, this lawyer said. This article originally appeared in The American Lawyer , a publication of ALM. �

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