The Wall Street Journal has an article (subscrip. req.) about the costs to companies (and their shareholders and insurers) of defending executives from fraud charges. The article discusses a Delaware court ruling last October holding that Rite-Aid must continue to advance the defense fees of its former CFO, despite the fact that he has plead guilty to criminal fraud charges, because there has not yet been a “final disposition” (i.e., sentencing) in the case.
Quote of note: “A company’s average cost of defending against shareholder suits last year was $2.2 million, according to Tillinghast-Towers Perrin. ‘These costs are likely to climb much higher, due to a lot of claims for more than a billion dollars each that haven’t been settled,’ says James Swanke, an executive at the actuarial consulting firm. Though companies can recoup some defense costs through directors-and-liability insurance, it is rare to collect legal fees already advanced to former officers who have been convicted or pleaded guilty.”
Quote of note II: “Seeking to stop payouts to wrongdoers, insurers now want new insurance policies to be written differently than in the past. Instead of making fee payments pending a ‘final disposition’ in a court case, insurers are suggesting that corporate policies call for payments pending a ‘final determination’ of a fraud allegation. The upshot: A third-party arbitrator would decide whether an accused individual has committed fraud, rather than waiting for courts to rule.”