That option weighs heavy over every decision to go to trial. And it’s a complex trade-off, thanks to directors’-and-officers’ (D&O) insurance. “If you are facing damages that go way beyond the coverage limits, and you can settle it for a modest amount with some contribution from the carrier,” settling is almost a no-brainer, says Wolff. If a company goes to trial and wins, though, it can save the cost of a settlement, likely in the billions for JDS Uniphase. Legal fees are no doubt higher, but D&O insurance covers those in almost all cases. That makes a successful trial “free” in a certain sense, not counting sizable time and effort on the part of companies and executives.
Losing, of course, makes things considerably worse. A company faces both the cost of damages, which may or may not be more than a settlement would have run, and the risk of losing its insurance coverage. “If you have a final finding of intentional wrongdoing, that would remove the coverage,” leaving the firm on the hook for both damages and legal costs, says Michael Tu, an attorney at Orrick who successfully represented defendants in a 2005 case against Thane International. It’s not yet clear what will happen with Apollo, but the firm disclosed in late January that it had racked up $25 million in costs related to the trial, including legal fees, and that its insurers still had the right to withdraw coverage.
Costly, in More Ways Than One
Given their druthers, some D&O providers would like to see more companies take a hard line against shareholders. “Many securities and derivatives cases are nonsense, or at least very weak, and when they result in significant payments to resolve them, the effect is to chum the water,” says John Lenzen, worldwide head of litigation for ACE Group of Cos. “It’s a shame.”
Considering the exposure involved and the fact that insurance often covers settlements, it’s still unlikely that such cases will become de rigueur, though. For one, the recent trials give just as much impetus to big shareholder plaintiffs as to companies to stand their ground. The fact that companies more often win does change the calculus, “but it still doesn’t mean there will be lots going to trial,” says Varian.
As for life after a trial, it does go on. Kenda Gonzales, for example, is working for a private real estate company, according to her court testimony. Anthony Muller says he is “loving” his retirement in Pebble Beach, California. Others have made lemonade out of lemons. Former Clarent CFO Simon Wong (who never went to trial, because the charges against him personally were dismissed) is now consulting with other companies on Section 404 of Sarbanes-Oxley, according to his attorney, Orrick’s William Alderman.
But would any CFO who has been through such a trial recommend it to others? Unlikely, say attorneys. Win or lose, each trial required months of preparation, weeks of sitting in the courtroom listening to past events being rehashed in excruciating detail, and days of enduring hostile questioning on the stand. Then there’s the long, drawn-out appeals process, which can last years after the verdict is rendered. “This case, even as a victory, took a toll on the defendants,” says Eth. “People often forget that.”