Judge ponders why insurance companies don’t seek reimbursement from convicted clients

SANTA ANA - A federal prosecutor's cross examination of a businessman accused of insider trading sparked a debate involving an issue the judge said has perplexed him for 40 years: insurance companies demanding reimbursement from convicted clients.

As a longtime leader in the ophthalmology industry, the defendant, James Mazzo, has an insurance policy that's paying what Assistant U.S. Attorney Stephen A. Cazares estimated last week to be "millions and millions" in fees to one of the world's largest law firms, Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates.

Mazzo may have to reimburse his insurance company if he's convicted, and Cazares wanted to question Mazzo about that because the prosecutor believes it could show the jury that the defendant has extra motivation to continue fighting his charges rather than plead guilty.

U.S. District Judge Andrew J. Guilford called it a "highly complicated" area that evokes questions about how often insurance companies enforce reimbursement requirements for convicted clients.

"If you were to make that argument, don't we spend four days analyzing insurance polices on when they might go against a well-known CEO, and what effect that might have on their ability to provide future policies?" Guilford said.

He referenced his background in civil litigation -- he spent 30 years at Sheppard, Mullin, Richter & Hampton LLP -- and said he's long wondered why reimbursement is rarely enforced. Many insurance companies reserve the right to require reimbursement for a fraud conviction, but when a civil fraud verdict is reached, they don't take action, the judge said.

"To this day, after 40 years, I still wonder why the insurance companies don't do that more often," he said during last week's trial proceedings. The trial resumes this week.

Michael J. Bidart of Shernoff Bidart Echeverria LLP said the conversation appeared to be in good hands: "These are very skillful lawyers and a judge that's highly experienced in dealing with these kinds of issues."

"It's not uncommon for insurance companies to reserve their rights to seek reimbursement for payment toward non-covered claims," Bidart said. "But it is always factually dependent on the circumstances of the particular case and the type of insurance coverage. So it's very difficult to generalize."

In court, Skadden partner Clifford M. Sloan argued that questions about Mazzo's legal fees would be "extremely prejudicial and unfair."

Cazares and Assistant U.S. attorney Jennifer L. Waier argued that Skadden partner Richard Marmaro's cross examination of retired Major League Baseball player Doug DeCinces, who is cooperating with prosecutors after a jury convicted him last May, opened the door for the questions.

Cazares mentioned that Marmaro implied DeCinces stopped fighting his conviction not because he's guilty but because he wanted to stop paying legal fees.

But while DeCinces described his fees as "three times" $1 million, he didn't give an exact figure. The Skadden team also withdrew a request to admit a document that included the figure. In a brief, Sloan wrote that the document was withdrawn during "a colloquy with the court" that occurred while Marmaro questioned DeCinces.

"No door has been opened," Sloan wrote in a brief.

In argument Thursday, Sloan drew a distinction between a witness and a defendant and noted that Marmaro questioned DeCinces about his legal fees to establish his bias as a witness. His brief cited United States v. Abel, 469 U.S. 45, 52 (1984) and Davis v. Alaska, 415 US. 308, 316-17 (1974).

He cited in argument United States v. Dickens, 775 F.2d 1056, 1058 (9th Cir. 1983), which he said established that because a defendant was being cross examined rather than a witness, bias on his or her behalf was self-evident.

Guilford said, "If the fees are $10 million or $50 million, it adds more weight to the argument that the government wishes to make."

"With all due respect, your honor, I think the basic principle does not depend on the amount of money at issue," Sloan replied.

Guilford prohibited Cazares from mentioning Mazzo's insurance policy to the jury, so Cazares never questioned him about his legal fees. But money remained a major theme of his cross examination.

The insider trading charges against Mazzo stem from the acquisition of his company, Advanced Medical Optics, by Abbott Laboratories in 2009.

Mazzo is accused telling DeCinces about the deal ahead of time. After his conviction last year, DeCinces told prosecutors he bought Advanced stock at Mazzo's behest and told his friends to do so also, selling it for profit after the deal went through. Mazzo maintains that DeCinces is lying about his guilt to try to get out of a lengthy prison sentence.

Mazzo's defense theory argues the deal with Abbott was tenuous at the times DeCinces testified Mazzo urged him to buy stock because a deal was near. Mazzo testified he was not pleased with Abbott's offer. United States v. DeCinces et al., 12-CR00269, (C.D. Cal., filed Nov. 28, 2012).

Cazares displayed for the jury Mazzo's employment agreement with the new owners, which called for him to receive payments totaling $7.5 million over 18 months if he worked for Abbott. He also displayed an email Mazzo sent his friends, including defense witness Jon Wampler, the day the acquisition was announced.

The subject line was "made you some money today" and the message called the Abbott deal a "great great move." Wampler replied thanking him for the "great return" on his investment and said "now I'll just have to buy some Abbott."

Cazares pointed out that for Wampler to receive a great return, he would have had to purchase Advanced stock at well below the Abbott deal price of $22 per share. Advanced's stock was valued around $20 and up to $40 for most of its time on the market, but dropped to about $5 in the months before the sale.

For Mazzo to know the Abbott deal was profitable, he had to have known precisely when Wampler bought stock and for how much, Cazares said.

"I just assumed that they did well," Mazzo said.