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In the rubble of the recent financial scandals, few see opportunity. If there is one, though, Boies, Schiller & Flexner is not going to let it pass. The New York firm headed by litigator extraordinaire David Boies is finding a niche for itself in the aftermath of the brutal financial revelations that have helped slow the economy. It is signing up the infamous companies and suing, on their behalf, the executives that helped sail them into the rocks. The tactic is rare — an unusual airing of dirty laundry that comes across as equal parts public confessional, clever financial move and sweet vengeance. “I think it is new,” said Morrison & Foerster partner David Bayless, former head of the Securities and Exchange Commission’s San Francisco divisional office. “Normally there’s a united front because everybody says no fraud was committed. But now, if you have a situation where everybody says there was a fraud, it makes sense.” So far, Boies Schiller is representing Tyco International Ltd. and Adelphia Communications Corp. in suits against their former executives, some of whom have been indicted by authorities. It has also been retained by a third company, Qwest Communications International Inc., though no similar suit has yet been filed. Tyco laid out its case in a very public way. Its own SEC filing alleged that former executives pilfered the company to the tune of more than $100 million, and included salacious details about their spending habits — former CEO L. Dennis Kozlowski used allegedly ill-gotten funds to buy a $6,000 shower curtain, among other accoutrements. The executives have denied the allegations. “Mr. Kozlowski has previously been quoted as saying it’s unfair and unfounded,” said Kozlowski’s lawyer, New York solo Stephen Kaufman, about the lawsuit. Where companies used to quietly show disgraced executives the door, the rules have now changed — the companies are now making a very public spectacle of their leaderships’ excesses. “Here what they did was so wrong and so clearly wrong, plus the magnitude was so large, that this is not a case where you just close that door and hope he doesn’t knock again,” said Boies Schiller partner Philip Korologos, who is suing former Adelphia executives. The devastation to the scandal-ridden companies was so complete that any recovery — if recovery is even possible — won’t restore the companies to their former glory. Still, said Boies Schiller partner David Shapiro, “I think it’s important for a company like Tyco that is changing its corporate governance … to not simply get rid of the problem people, but take steps to recover the money.” As Tyco’s SEC filing explained, it’s not just about the money: “The amount of money improperly diverted by Tyco’s former executives … is very small in comparison with Tyco’s total revenues and profits, but it is very large by any other relevant comparison; and the extent of the former executives’ misconduct has harmed Tyco’s reputation and credibility with investors, lenders, and others.” Shapiro is one of Boies’ newest hires, working out of the firm’s Harrison Street offices in Oakland, Calif., but spending most of his time on the East Coast. The former interim U.S. attorney from the Northern District is, for all intents and purposes, prosecuting the Tyco case. He has three targets: Kozlowski, former General Counsel Mark Belnick and former director Frank Walsh. A fourth, former Chief Financial Officer Mark Swartz, is in arbitration with the company. Collectively, the four are accused of pilfering more than $100 million by using the company as a personal piggy bank. According to the complaint, they routinely borrowed money from the company for illegitimate purposes, only to forgive the loans at a later date. Pursuing executives for defrauding the company without the protection of bankruptcy court gets tricky. Airing management’s misdeeds could fuel shareholder litigation against the company. As Bayless said, under some circumstances it could leave a company in a compromising position: “The only question is how big of a check are you going to write — or is the insurance company going to write.” But Korologos and Shapiro see that risk as overblown. “Plaintiffs’ lawyers manage to find something to sue on no matter what is said,” Shapiro said. Adelphia is on a different scale from Tyco. There the former executives are accused of diverting $3 billion over the years. And since the company alleged a Racketeer Influenced and Corrupt Organizations charge, it will be able to ask for triple damages if the allegation sticks. On Monday, a federal judge agreed to freeze the assets of the Rigas family, founders of Adelphia. Because Adelphia filed for bankruptcy earlier this year, it has less to lose by pursuing former management. “Once you’re in bankruptcy, all bets are off because you may as well sue anyone and everyone,” Bayless said. If Adelphia can keep the court and the creditors happy, the company may as well try to recover as much money as possible from the parties that arguably contributed to its downfall. Adelphia also recently sued its former auditor, Deloitte & Touche, and Korologos suggested more suits might be on the way. “In bankruptcy, you basically can tell the world things are very bad and go up from there,” Korologos said, suggesting that it’s the only way the rebuilding of the company can begin. Not that Korologos and Shapiro aren’t mindful of other litigation. Criminal authorities and the SEC have filed actions against Tyco and Adelphia executives. Those suits will likely affect the speed with which Boies, Schiller & Flexner attorneys can bring their cases, since certain depositions will likely be stayed. Korologos also keeps the U.S. Trustee and Adelphia’s creditors apprised of the suit. It probably doesn’t hurt that Korologos worked with Rigas prosecutor Timothy Coleman when both were at Cravath, Swaine & Moore. And what Coleman does in prosecuting the Rigas family will benefit Adelphia, Korologos said. “We will be able to use pleas and criminal convictions against them.” PREVIOUS SCANDALS The law firm is not the first to go after executives. San Francisco solo Michael Eagan has been doing it for more than a decade. Eagan first did it in the infamous Technical Equities case in the late 1980s, one of the largest investment broker scandals in history. After Technical Equities filed for bankruptcy, Eagan, on behalf of the company’s creditors, sued the company’s former executives, along with its auditor, its securities broker and its bank. He won millions in settlements from the latter three. Then he won a $122 million jury verdict against the executives. “When we did this 10 or 11 years ago, everybody thought we were crazy,” Eagan said. Eagan tries to put it in simple terms. “If the executives at Tyco walked into a safe and walked off with $1 billion, there’s no question you sue the executives,” Eagan said. There are barriers to any meaningful recovery, however. Going after individuals engaged in fraudulent activity means insurance companies can invoke fraud exceptions written into most director and officer liability policies. Any recovery will often come out of the former executives’ personal assets. In the cases of Kozlowski or the Rigas family, whose personal wealth was a topic for the gossip pages long before the scandals hit, it may not be much of a problem. In the Technical Equities case, however, it was. Eagan was never able to fully recover the $122 million jury verdict he won.

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