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Board Members, Executives and Family Members Can Still Benefit

Since then, MCI has taken steps to mitigate potential conflicts of interest. Last year, MCI reported paying $770,000 for legal services from the District law and lobbying firm Patton Boggs LLP. Laurence Harris, an MCI director since the company emerged from bankruptcy in April, was a Patton Boggs partner. "We believe that the fees paid to Mr. Harris's firm are normal and customary in amount and scope for the work performed and are similar to that paid by other clients," a company report said.

Harris, a former MCI executive, lobbied for the company through Patton Boggs before joining the board, MCI spokesmen said. To avoid potential conflicts of interest, Harris has ceased to be an equity partner at Patton Boggs, meaning that the fees MCI pays the firm do not influence his compensation there, MCI general counsel Anastasia D. Kelly said.

TeleCommunications Systems chief executive Maurice B. Tose is developing an office park where his company has agreed to lease space. (James M. Thresher -- The Washington Post)

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Though the term "related party transaction" has come to sound "like it's a dirty word," Kelly said, "to have a complete prohibition in my view . . . is a little bit like throwing out the bath water with the baby."

Cynthia Richson, corporate governance officer at the Ohio Public Employees Retirement System, a big institutional investor, however, has a harsher view of related party transactions. "In an ideal world, they would be banned," she said.

But the post-Enron reforms by Congress and the stock exhanges didn't bar all related party transactions. Instead the new rules assign more responsibility to independent directors, those considered free of potential conflicts of interest. Membership on committees that oversee auditing, for example, was restricted to directors considered independent of the company, and boards were required to have a majority of independent directors. In addition, the Nasdaq Stock Market required related party transactions to be approved by independent directors.

The distinction between independent directors and others, however, is sometimes not intuitive.

MicroStrategy, a software company that inflated earnings during the dotcom bubble, this February entered an agreement that allows Vestmark Inc. to use MicroStrategy software in Vestmark products, according to its SEC filings. Vestmark's chief executive and controlling stockholder, David Blundin, is a former MicroStrategy employee and a member of MicroStrategy's board. MicroStrategy, which declined to comment for this story, has reported that it considers Blundin an independent director.

Friedman, Billings, Ramsey Group Inc., an investment bank, last year paid $772,000 to the Dechert LLP law firm. Dechert partner Wallace L. Timmeny, who FBR classifies as independent by New York Stock Exchange standards, serves on the FBR board's nominating and governance committee and chairs the committee that oversees compliance with laws and regulations.

"The implication . . . is that the minute you accept a fee for something, you've sold your soul, and I don't buy that," said Timmeny, who has been a lawyer to Friedman Billings Ramsey since 1989 and a director since 1997.

"You want people who can add value, not who are some paper figures who are so remote they don't bring value," said William J. Ginivin, FBR's chief legal officer.

Fannie Mae, a government-sponsored housing finance company, reported that last year it paid $375,000 to the Duberstein Group, a lobbying and consulting firm led by Fannie Mae director and former White House chief of staff Kenneth M. Duberstein. In 2001, Fannie hired a son of board member H. Patrick Swygert, president of Howard University.

Fannie Mae said in a statement its hiring of Swygert's son after Swygert joined the board "does not impact Mr. Swygert's independence," but Fannie Mae does not consider Duberstein, the lobbying firm executive, to be independent.

Transactions with Executives

TeleCommunication Systems reported a related-party transaction involving a company controlled by Tose, its chairman and chief executive. Tose owned a controlling interest, as of the company's last annual proxy report, in Annapolis Partners LLC, a real estate development firm that won an Anne Arundel County competition to develop a 46.5-acre former Navy waterfront site.

One of the assets Tose's development firm brought to the project was a potential prime tenant: TeleCommunication Systems. Under a contract the county signed with the development firm, Annapolis Partners had to execute a lease with Telecommunication Systems or another lead tenant before it could take ownership of the property. The transfer of the property took place in 2002.

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