Legal Hazard: Corporate Crime, Advancement of Executives' Defense Costs, and the Federal Courts

Abstract

The corporate scandals that engulfed Enron and WorldCom have renewed scrutiny of practices such as corporate subsidy of executives' attorney's fees, insurance, and indemnification in criminal cases. Fee subsidies and related practices, while necessary in some contexts, reflect agency costs that separate the interests of managers and shareholders. Fee subsidies also promote moral hazard, by holding executives harmless for conduct that can injure the corporation. Prosecutors and regulators have recently begun to examine such practices as obstacles to cooperation and cleaning house by corporations that wish to avoid indictment. In response, segments of the organized bar have deplored the government's more skeptical turn. In addition, a federal court in a case involving the major accounting firm, KPMG, has struck down elements of the government's guidance to prosecutors. Drawing on earlier wisdom from New Dealers such as William O. Douglas, the article argues that the KPMG decision is a dangerous reach, and that both governments and corporate boards have legitimate interests in seeking to cap the subsidy of executives' legal fees in criminal cases.