As previously reported here, the former CEO of Brocade Communications Inc., Greg Reyes, was sentenced to 21 months in prison and ordered to pay a $15 million fine in the first criminal trial to arise out of the stock options backdating scandal. Reyes has appealed the verdict.
As recently reported in the financial press, Brocade has paid more than $46 million to the Skadden, Arps, Slate, Meagher & Flom lawyers defending Reyes in connection with various civil and criminal actions arising out of alleged stock option backdating at Brocade. However, according to several news reports, in December 2007, Brocade stopped advancing Reyes's legal fees, resulting in $7 million in unpaid legal fees. Reyes sued to force Brocade to continue advancing his legal fees.
Although Reyes was convicted of a crime, it is possible that Reyes's indemnification agreement requires that Brocade continue to advance his legal fees through any appeals, subject to a right to recoup those fees if the conviction is upheld. As previously reported here, the Delaware Chancery Court was recently asked to rule on whether a corporation's duty to advance its executives' legal bills includes expenses incurred in appealing criminal convictions. Sun-Times Media Group, Inc. v. Black et al., No. 3518-VCP. On July 30, 2008, Delaware Chancery Court Judge Leo Strine concluded that the company's bylaws require payment of fees for corporate officials while their cases are still on appeal.
In the lawsuit Reyes brought against Brocade to force Brocade to continue to advance his legal fees, Reyes claims that his criminal conviction doesn't absolve Brocade from advancing legal fees because his indemnification agreement with Brocade 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."