The D&O Diary

The D&O Diary


Notes from the London Underground

Posted in Travel Posts

065aThe D&O Diary was in London this week for meetings and a couple of industry events. Though my schedule on this visit was full, I did have a little time between meetings for a bit of touristing. I have been to London many times before, but I always try to make a little time to walk through the city’s many historic sites, like, for example, St. James’s Park (pictured left, looking toward the Old Admiralty Buildings).


I also always try to go somewhere I haven’t been before. This time, I managed to make time to visit Hampstead Heath, which covers 790 acres in the northern part of the city. I took the Northern Line Underground train to Kentish Town, and walked to Parliament Hill in the southern end of the park, which at an elevation of about 350 ft. is one of the highest points in the city. Even though it was a little hazy the day I visited, looking south from the hilltop back toward the city center, I could clearly make out Canary Wharfthe Gherkinthe Shard and St Paul’s Cathedral. Because of the haze and the sunlight to the south, the view was hard to photograph, but I have tried to depict the view in the first picture below. There is no consensus on how Parliament Hill (shown in the second picture below) got its name, but the likely explanation is that the Houses of Parliament could be seen from the hilltop (although on the day I was there I was unable to make out the actual Parliament building, which is about 6 miles away). I actually prefer the story that the hill got its name because Guy Fawkes and the other Gunpowder Plot conspirators retreated to the hill to watch the Parliament building blow up. (Their plot failed.) I will say that the Heath was an extraordinarily pleasant place to stroll on a sunny but chilly March morning. The third picture below is a view back across the Heath to Kentish Town. The final picture is a view back towards the Heath itself.










078aOne other place I made some time to visit was St. John’s Wood, a  high-end residential area in the city’s northwest. The churchyard adjacent to the St. John’s Church that gave the area its name was also an agreeable place to visit on a sunny morning (as depicted in the picture to the left). The High Street in St. John’s Wood has a well-kept, prosperous feel to it (as depicted in the picture below). However, I wanted to visit the area for other reasons. The first was to see Lord’s Cricket Ground, which is located across the street from the church. The second, more important reason was the line in the Rolling Stones’ song, “Playing with Fire” (which was the B-side on the 45 rpm version of the Rolling Stones’ 1965 hit “The Last Time”). The lyrics to the song go like this: “Your mother she’s an heiress, owns a block in St. John’s Wood/And your father’d be there with her, if he only could/But don’t play with me, ’cause you’re playing with fire.” Given the suggestion in the song’s lyrics, I was not surprised to find that there actually are quite a few very high-end houses in the area, particularly on Avenue Road. Wikipedia reports that “in 2013, the price of housing in St John’s Wood reached exceptional levels. Avenue Road had more than 10 large mansions/villas for sale. The most expensive had an asking price of £65 million, with the cheapest at £15 million. The remainder were around £25 million.” St. John’s Wood is also the home of the Abbey Road recording studio the Beatles made famous in their 1969 album. It was difficult to get a picture zebra-striped crossing without a group of people in the cross-walk trying the recreate the album cover.








013aBetween my meetings and my touring around, I managed to spend a fair amount of time during this visit on the Tube. There is nothing like the vacant time on a subway ride to allow your mind to wander and to contemplate things like, say, the interesting and odd assortment of place names in and around London. In the Underground with nothing else to distract, things occur to you, like, for instance, there probably once was a white chapel in what is now Whitechapel, and there were once black friars in what is now Blackfriars. But was there a ham in West Ham? Or, for that matter, East Ham? And what are we to suppose about the origins of such place names as Spitalfields, Cockfosters, Tooting Bec, Chigwell, Fairlop and Barking? And even without these mysteries to ponder, there are the other curious names – such as Shepherd’s Bush, Elephant and Castle, Mudchute, and Upminster?  Then there are the odd re-occurrences of similar sounding names. Not only is there an Underground station named Cannon Street, but also there is a Canning Town stop and a Canons Park stop, and there is both an Edgware stop and an Edgeware Road stop (the two stations are on different lines and nowhere near each other), and both a Kennington stop and a Kensington stop (not to mention West Kensington, South Kensington, and Kensington High Street). There’s an Ealing Broadway, a Fulham Broadway and Tooting Broadway. Also Bethnel Green, Stepney Green, Golders Green, Parsons Green, Turnham Green — and Green Park.


005aFor an American traveling on the tube, there are also the unfolding revelations about many of the place name pronunciations. For most uninitiated U.S. visitors, the most surprising station name pronunciation is that of Leiscester Square – not just the first word, which most Americans are surprised to discover is pronounced not “lye-chester” but “lester” – but also the second word, which is pronounced with two syllables as “skway-uh.” Even a station name as seemingly straightforward as Earl’s Court turns out to involve sonic surprises – it is pronounced “ulls coat.” (The  Earl’s Court station is pictured left.) Even a familiar name like Arsenal can surprise – it is not “Ar-son-ul” as an American might expect but rather it is “Ah-snull.”


And beyond the place names, there are the street names – Crutched Friars, Mincing Lane, Seething Lane, Savage Garden. The street names sound vaguely like detective novel titles or rock band group names.


By the way, if you have ever wondered who that lady is that does the in-train station announcements on the London Underground, her name is Emma Clarke, a professional voice-over performer. Her website, with links to sample of her various announcements – including her silky smooth reminder to “Please mind the gap between the train and the platform” – can be found here.


My primary purposes for visiting London this time were to attend the C5 D&O Liability conference and to attend a reception co-sponsored with Beazley and the Mayer Brown law firm. On Thursday morning at the C5 conference, I participated on a panel discussion U.S. D&O liability developments along with my good friends Chris Warrior of Hiscox and Phil Norton of Arthur J. Gallagher (first picture below). At the Beazley event, I participated in a panel discussion with Tracy Holm and Adrian Jenner of Beazley, and David Chadwick of Mayer Brown (second picture below). Both events were a great success and I enjoyed them both immensely. I was particularly pleased to learn in my discussions with the attendees at both events how many of them follow The D&O Diary.






I took the final picture below of the audience at the Beazley event. Adrian Jenner of Beazley had just asked me whether the pictures I have posted in my various travel posts were taken with a smart phone camera or with a digital camera. In response to the question, I pulled out my digital camera (which I was at the moment wearing in a holster on my belt) and snapped a picture of the audience. Immediately after I took the picture, we adjourned the panel discussion in favor of cocktails.




Guest Post: Is Employee Awareness and Training the Holy Grail of Cybersecurity?

Posted in Cyber Liability

weilIn the current environment, most organizations are aware of the potential threats to their firms from a breach of their data systems and networks. Among the ways companies can protect themselves from these types of threats is through improved employee awareness and training. In the following guest post, Paul Ferrillo and Randi Singer of the Weil, Gotshal & Manges law firm discuss the steps companies can take to avoid common lapses in employee judgment or awareness that can expose a company to a cyber-incident


I would like to thank Paul and Randi for their willingness to publish their guest post on my site. I welcome guest post submissions from responsible authors on topics of interest to readers of this site. Please contact me directly if you would like to submit a guest post. Here is Paul and Randi’s guest post.


They may be based in North Korea, Russia, China, or the United States. They may call themselves “Deep Panda,” “Axiom,” Group 72,” the “Shell_Crew,” the “Guardians of Peace,” or the “Syrian Electronic Army.” But no matter how exotic or mundane the origins of a particular cyber-criminal organization, all that it needs to initiate a major cyberattack is to entice one of your employees to click on a malicious link in an email, inadvertently disseminate malware throughout the network servers, and potentially cause tremendous damage and loss of business.[i]

Indeed, “spear phishing” is a tactic used by cyber-criminals that involves sending phony, but seemingly legitimate, emails to specific individuals, company divisions, or even business executives, among other typically unwitting targets. Unlike spam, these emails usually appear to be from someone the recipient knows and in many cases can appear completely legitimate, or at least unassuming. If the recipient opens any attachments or clicks any links, havoc can ensue. Such spear phishing emails are suspected to have caused many of the recent major cyber attacks. Despite fancy-sounding defensive cybersecurity devices at companies and financial institutions, “spear phishing with malware attachments” is often the easiest route into a sophisticated network.[ii] One report recently noted that, “Compared to the ‘spam-phishing’ emails of days past, which most people have learned to identify and avoid over the years, spear-phishing emails are astronomically more effective. Whereas the current open rate for spam emails is a meager 3%, the open rate for spear-phishing emails is a staggering 70% (not to mention 50% of those who open these emails also click the links they contain). A study published by Cisco found 1,000 spear-phishing emails generate ten times more data revenue for hackers than sending 1,000,000 spam-phishing emails.”[iii] According to another recent study, 90 percent of all hacks in the first half of 2014 were preventable, and more than 25 percent were caused by employees.[iv]

For these reasons, it is absolutely crucial that a company provide training to its employees to detect and avoid spear phishing attacks, and more broadly, avoid common lapses in judgment or awareness that can expose a company to a cyber-incident. For example, companies can easily offer training that improves password protection, helps avoid workplace theft, and better protects employee-owned devices without password protection such as smartphones, laptops, and tablets. Though no one particular training regimen can provide guaranteed protection from a cyber-attack, statistics support their inclusion as a critical part of a company’s overall security posture.

Anti-Spear Phishing Training

Weeks after the announcement of the Anthem attack, which, like that on Sony Pictures, was likely caused by a sophisticated spear phishing operation, cybersecurity guru Brian Krebs noted that others were attempting to prey upon the misfortune of over 80 million patients by sending their own spoofed emails to affected customers.[v] Other “cold-calling” scams apparently were perpetrated at about the same time as the fake emails were sent:



Now, if you were a terrified Anthem patient whose personal health information was potentially stolen, this sort of an email communication would not be unexpected, and would be very appealing; it would be natural to click the link. In reality, clicking on the fraudulent “free credit protection link” would only have touched off a whole new world of pain.

Here is another example illustrating the growing sophistication of spear phishing attacks. What if you were an existing customer of HSBC and received this email? Would you click on the link, or ignore it and potentially let your account be suspended by “the bank”?[vi]




But the potential price for opening a link that does not appear to be obviously suspicious can be breathtakingly high. In an era where there is so much personal information about everyone on the Internet, it would not be hard for even a high-school student to create an authentic-looking email that could catch us when we least suspect a cyber-attack (especially the Anthem “customer email”). Even higher-level employees are vulnerable to spear phishing (often called “whaling” when high-level executives are targeted), and the corresponding damage can be exponentially worse.[vii]

How do you guard against a socially engineered spear phishing attack? You train and you train, and then you train some more. Many corporate IT departments already periodically send out fake emails to their employees hoping for a “bite.” Many more companies regularly train their employees monthly on anti-spear phishing using automated computer programs that send emails to employees from exact website addresses to see who will unwittingly click on the links.[viii] Records can be kept of successes (and failures). Some companies might award prizes to employees who religiously resist getting tricked, gaining loyalty while simultaneously lowering risk. Lowering the risks of an employee clicking on a malware-infected spear phishing email can be substantial.[ix]

Password Protection and Awareness

There has also been a tremendous amount of publicity over the inadequacy of employee passwords. A January 2013 report by Deloitte suggests that an astonishing 90 percent of user passwords are vulnerable to hacking.[x] There are a few rules of the road:

  1. Companies should force employees to change their passwords regularly (preferably every 30 days), without exception;
  2. Employee passwords cannot be common defaults such as “password” or “12345”;[xi]
  3. Employees should not store passwords on sticky notes placed on their computers or in a physical or digital file or folder called “password”;
  4. Employee passwords should be strong; rather than the first name of the employee’s child, dog or cat, it should contain unique patterns of letters, numbers and other signs, like “I li6e cho$hlat@”;
  5. Employees should be required to install passwords on any device used to access company email or any company resources, including home laptops, so that they remain secure as well;
  6. Companies should make sure that employees follow responsible “social media” practices with regard to company-specific information;
  7. Companies should provide privacy screens to employees to prevent “shoulder surfing” (reading over an employee’s shoulder); and
  8. Employees should receive frequent training on spear phishing, so no employee inadvertently gives up his password to an unauthorized third party.

Other Simple (Non-Hardware) Ideas to Protect Company Data

Finally, for any company, it is important for the IT department to reinforce the following best practices for the handling of company data:

  1. Follow least-access principles and control against over-privileging. An employee should only be given access to the specific resources required to do his or her job. Not every employee needs the keys to the kingdom.
  2. Make sure software patches and critical updates are made in a prompt and timely fashion so that no critical patch is left uninstalled for lack of time or budget.
  3. Every company should install within each employee a sense of “ownership” in the collective good of the company, one that requires him or her to be cyber-conscious and sensitive to the potential areas of susceptibility that we have described above.

Cybersecurity is the ultimate team sport, and every person in the company, from a director down to an entry-level employee, needs to be invested in its cybersecurity:

The infamous Sony hack, the systematic attacks of Heartbleed and Shellshock targeting core internet services and technologies, and the new wave of mass mobile threats have placed the topic of security center stage. Organizations are dramatically increasing their IT budgets to ward off attack but will continue to be vulnerable if they over-invest in technology while failing to engage their workforce as part of their overarching security solution. If we change this paradigm and make our workforce an accountable part of the security solution, we will dramatically improve the defensibility of our organizations.”[xii]

We cannot claim that any of these ideas are cure-alls for the hacking problem in the United States (in fact, none are complete solutions). We can only subscribe to the theory that failing to implement basic cybersecurity “blocking and tackling” practices is the functional equivalent of forgetting to lock the back door.

[i] See “Learning from the Mistakes of Others: Sony, NSA, G2O, & DoD Hacks,” available here; also see, e.g. “Data Breach at Health Insurer Anthem Could Impact Millions,” available here.

[ii] See “‘Spear Phishing’ Attacks Infiltrate Banks’ Networks,” available here.

[iii] See above at footnote 1.

[iv] See “Over 90 percent of data breaches in first half of 2014 were preventable,” available here; also see “The Weakest Link Is Your Strongest Security Asset,” available here (noting, “According to PwC, employees and corporate partners are responsible for 60% of data breaches. Verizon’s research suggests the number is even higher, at almost 80%.”).

[v] See “Phishers Pounce on Anthem,” available here.

[vi] See here.

[vii] See “Hacking the Street, FIN4 Likely Playing the Market,” available here.

[viii] See e.g. the anti-spear phishing training offered by a company called Phishme, available here.

[ix] See “KnowBe4 Security Awareness Training Blog: Train Employees And Cut Cyber Risks Up To 70 Percent,” available here.

[x] See “90 percent of passwords vulnerable to hacking,” available here.

[xi] See here.

[xii] See “The Weakest Link Is Your Strongest Security Asset,” available here.

Facts, Opinions, Omissions, and Context: The U.S. Supreme Court Issues Omnicare Opinion

Posted in Securities Litigation

kaganIn a March 24, 2015 opinion in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund (here), the U.S. Supreme Court set aside the Sixth Circuit’s ruling that allegations of “objective falsity” were sufficient to make a statement of opinion in securities offering documents actionable. The Supreme Court remanded the case to the lower court to consider whether the plaintiffs had sufficiently alleged that facts had been omitted from the opinion so as to make the statement of opinion misleading, in light of the entire context. The Court’s decision is briefly summarized in the accompanying guest post from the Skadden law firm.


The Omnicare case involves the standard for liability under Section 11 for statements of opinion in a company’s offering documents. The Supreme Court took up the case to determine whether or not it is sufficient to survive a dismissal motion for a plaintiff in a Section 11 case to allege that a statement of opinion was objectively false, or whether the plaintiff must also allege that the statement was subjectively false – that is, that the defendant did not believe the opinion at the time the statement was made. The Supreme Court’s granted the writ of certiorari in the Omnicare case because of a a split in the circuits between those (such as the Second and Ninth Circuits) holding that in a Section 11 case allegations of knowledge of falsity are required; and those (such as the Sixth Circuit, in the Omnicare case) holding that allegations of knowledge of falsity are not required.


In the Omnicare case, the plaintiff shareholders alleged that two statements in its registration statement filed in connection with its $765 million securities offering in December 2005 had been misleading – first, the statement by the company that “we believe” that the company’s contractual arrangements with various third parties are “in compliance with applicable federal and state law,” and second, the statement by the company that “we believe” that its contracts with pharmaceutical manufacturers “are legally and economically valid arrangements that bring value to the healthcare system.” The plaintiffs alleged, in reliance on separate enforcement actions the federal government filed against Omnicare alleging that the company had paid kickbacks, that these two statements were false and misleading.


The defendants moved to dismiss the complaint and the district court granted the motion to dismiss. However, the Sixth Circuit reversed the district court, holding that the shareholders complaint alleged that the two statements were “objectively false,” and further, that the defendants did not need to allege that anyone at Omnicare disbelieved the statements.


In its March 24, 2015 opinion, the Court vacated the Sixth Circuit’s opinion and remanded the case to the Sixth Circuit for further proceedings. The Court’s opinion was written by Justice Elena Kagan and in which all nine justices joined in the court’s judgment – although Justices Scalia and Thomas wrote concurring opinions voicing their separate concerns with aspects of the majority opinion.


Justice Kagan’s opinion divided the consideration of the case into two parts, based on two parts of Section 11, because she said, the two parts raise different issues. The first part of her analysis related to the portion of Section 11 making companies and corporate officials liable for “untrue statement[s] of . . . material fact” and the second part makes the same defendants liable if they “omitted to state a material fact . . . necessary to make the statements [in its registration filing] not misleading.”


Omnicare had tried to argue that a defendant can never be liable for a mere opinion. Justice Kagan rejected this argument, saying that “as even Omnicare acknowledges, every such statement explicitly affirms one fact: that the speaker actually holds the stated belief.”If the speaker did not hold the belief, then he or she can be held liable.


Moreover, she added, if the statement of opinion includes a “supporting fact” — such as the statement about patented technology in this statement of opinion: “I believe our TVs have the highest resolution available because we use a patented technology to which our competitors do not have access” – the speaker can not only be held liable under the false statement portion of the Section 11 if the “speaker did not hold the belief she professed” but also “if the supporting fact she supplied were untrue.”


The plaintiffs in this case, she noted, cannot avail itself of either of these two types of false statement liability, because the statements on which the plaintiffs rely are “pure statements of opinion.” Basically, Justice Kagan said, the statements on which plaintiffs rely amounted to the company’s saying “we believe we are obeying the law.” Plaintiffs argue that these statements turned out to be untrue because the company was paying kickbacks. But the mere fact that statements turned out to be untrue cannot serve as the basis of liability because “a sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless whether an investor can ultimately prove the belief wrong.” Contrary to the plaintiffs’ argument and the Sixth Circuit’s opinion, Section 11’s false statement provision is not “an invitation to Monday morning quarterback an issuer’s opinions.”


Justice Kagan then went on to analyze the plaintiffs’ claims under Section 11’s omissions provision. The question, she said is, “when, if ever, the omission of a fact can make a statement of opinion like Omnicare’s, even if literally accurate, misleading to an ordinary investor.” In reaching the conclusion that a statement of opinion might under some circumstances support an omission claim, she said that “a reasonable investor may, depending on the circumstances, understand an opinion statement to convey facts about how the speaker has formed the opinion.” If, she said, “the real facts are otherwise, but not provided, the opinion statement will mislead its audience.” For example, a company might say “we believe our conduct is lawful” without having consulted a lawyer, which she said, would be “misleadingly incomplete.” Thus, she said, “if a registration statement omits material facts about the issuer’s inquiry into or knowledge concerning a statement of opinion, and if those facts conflict with what a reasonable investor would take from the statement itself, then §11’s omissions clause creates liability.”


Having said that an omission of material facts might give rise to Section 11 liability for an opinion, Justice Kagan then walked this observation back. She said that an opinion “is not necessarily misleading when an issuer knows, but fails to disclose, some fact cutting the other way,” adding that “a reasonable investor does not expect that every fact known to an issuer supports its opinion statement.” She said that “whether an omission makes an expression of opinion misleading always depends on context” because “the reasonable investor understands a statement of opinion in its full context, and §11 creates liability only for the omission of material facts that cannot be squared with such a fair reading.”If it were otherwise, she said, a company could “nullify” the statutory requirement simply by starting a sentence with “we believe” or “we think.”


Having said that the omissions clause in Section 11 can support liability for an opinion based on what a reasonable investor might understand, she added that to establish this type of claim, a claimant must allege the “failure to include a material fact has rendered a published statement misleading.” To be specific, she said,


The investor must identify particular (and material) facts going to the basis for the issuer’s opinion—facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have—whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.


Because the Sixth Circuit had not considered the Omnicare case in light of this analysis, the Supreme Court remanded the case to the lower courts for further consideration with the “right standard in mind.” On remand, and with respect to any facts the plaintiff allege were omitted, the courts below “must determine whether the omitted fact would have been material to a reasonable investor.” If the plaintiffs clear those hurdles, then the courts have to consider whether Omnicare’s legal compliance opinions were misleading “because the excluded fact shows that Omnicare lacked the basis for making those statements that a reasonable investor would expect.”She added that “the analysis of whether Omnicare’s opinion is misleading must address the statement’s context” – that is, the other statements throughout the rest of the registration statement.


Justice Scalia filed a concurring opinion, joining the Court’s judgment but differing from the majority opinion on the circumstances in which omitted facts could support Section 11 liability for an opinion. Justice Thomas also joined the Court’s judgment but said that the majority should not have reached the omission question because it was not properly before the Court.



The Supreme Court’s ruling represents, in its rejection of the Sixth Circuit’s “objective falsity” standard, a victory for the defendants. However, the Court’s conclusion that omitted facts could make a statement of opinion misleading and support Section 11 liability is more to the liking of those on the plaintiffs’ side of the aisle, even if the Court did set a rather high bar for stating a claim under the statute’s omissions prong. Even the false statement-part of the Court’s analysis arguably gives the plaintiffs something they can use, in the Court’s analysis of “supporting facts” in an opinion that might be misleading. At a minimum, the plaintiffs in this case have managed to live for another day, even though the Sixth Circuit’s ruling was set aside.



The Court seemed clear that there are basic differences between facts and opinions. However, an opinion might, we are told, might include “supporting facts.” And while Omnicare’s statement did not include supporting facts – the statements on which the plaintiffs rely, we are told, are “pure statements of opinion” – there could be “omitted facts” whose omission makes the statement of opinion misleading. Moreover, whether or not these omitted facts are sufficient to make the statement actionable depends on “context.” The difference between facts and opinions may be clear, but the two interact in complex ways.


Opinions often are involved in the allegations in Section 11 claims because financial statements contain many different types of opinions. Court have held that financial statement items such as reserves, goodwill and so on constitute opinions, and, at least until the Sixth Circuit decision in the Omnicare case, have been pretty comfortable saying that opinions are not actionable under Section 11 unless the speaker didn’t believe the opinion. Now, courts will have to consider whether the opinion included misleading “supporting facts,” and whether or not there were “omitted facts” sufficient to make the opinion misleading, taken in context of the entire Registration Statement. Maybe the lower courts will apply these standards without difficulty. I suspect some courts will labor, particularly on questions surrounding allegedly omitted facts and whether or not the alleged omissions were sufficient to make even a “pure statement of opinion” misleading, in light of the entire context.


These issues may be particularly important just now because of the increase in IPO activity in the securities marketplace in 2013, 2014 and continuing this year. As I have pointed out previously on this blog, more IPOs mean more IPO-related litigation. As plaintiffs in the IPO cases prepare their complaints, they will now be sure with respect to any statements of opinion to allege that the opinion omitted facts and were therefore both misleading and actionable. The Omnicare standards of liability for statements of opinion in registration statements are likely to get a workout in the district courts where the IPO-related lawsuits are filed.


Alison Frankel’s March 24, 2015 post on her On the Case blog (here) discusses how what she calls the Court’s “middle of the road approach” in the Omnicare case is consistent with several recent decisions from the U.S. Supreme Court. A March 24, 2015 memo from the Proskauer law firm discussing the Court’s decision can be found here.

Guest Post: Omnicare Decision Clarifies Pleading Standard for Section 11 Claims Based on Statements of Opinion in Registration Statements

Posted in Securities Litigation

skadden_logo_noLLP_bigAs I discuss in the accompanying post, on March 24, 2015, the U.S. Supreme Court issues its opinion in the Omnicare case. In the following guest post, the Skadden law firm summarizes the case and its holding. A version of the guest post previously was published as a Skadden client alert. I would like to thank the attorneys at Skadden for submitting this guest post and allowing me to publish it on this site. I welcome guest post submissions from responsible authors on topics of interest to readers of this blog. Please contact me directly if you would like to submit a guest post. Here is the Skadden guest post.



In an opinion issued yesterday, the U.S. Supreme Court held in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund that an issuer may be held liable under Section 11 of the Securities Act of 1933 for statements of opinion made in a registration statement if the issuer failed to hold the belief professed or failed to disclose material facts about the basis for the opinion that rendered the statement misleading. The Court granted certiorari to consider how Section 11 pertains to statements of opinion, and today’s opinion addresses the question as applied to misstatements and omissions. Justice Elena Kagan delivered the opinion of the Court, in which Chief Justice John Roberts and Justices Anthony Kennedy, Ruth Bader Ginsburg, Stephen Breyer, Samuel Alito and Sonia Sotomayor joined. Justices Antonin Scalia and Clarence Thomas each filed opinions concurring in the judgment.


The Court vacated and remanded the Sixth Circuit’s 2013 decision holding that a Section 11 plaintiff need only allege that an opinion in a registration statement was “objectively false,” notwithstanding the company’s understanding when the statement was made. In particular, the Court held that a statement of opinion in a registration statement may not support Section 11 liability merely because it is “ultimately found incorrect.” With regard to the prong of Section 11 that addresses alleged misstatements of fact (and always careful to note that materiality was being assumed), the Court held that “liability under §11’s false-statement provision would follow … not only if the speaker did not hold the belief she professed but also if the supporting fact she supplied were untrue.” Slip op. at 9. The plaintiffs below, however, limited their objection to two pure statements of opinion and, in expressly disclaiming and excluding any allegation sounding in fraud or deception, did not contest that the company’s opinion was honestly held. Importantly, the Court held that with respect to potential misstatement liability under Section 11, “a sincere statement of pure opinion is not an ‘untrue statement of material fact,’ regardless whether an investor can ultimately prove the belief wrong.” Id.


The Court thereafter considered “when, if ever, the omission of a fact can make a statement of opinion like Omnicare’s, even if literally accurate, misleading to an ordinary investor.” Slip op. at 10. As to this omissions prong of Section 11, the Court further held that an issuer may be liable under Section 11 for omitting material facts about the inquiry into or knowledge concerning a statement of opinion if those facts “conflict” with what a reasonable investor would “understand an opinion statement to convey” with respect to “how the speaker has formed the opinion” or “the speaker’s basis for holding that view.” Id. at 11-12. The Court clarified that an issuer need not disclose every fact “cutting the other way” against an opinion because “[r]easonable investors understand that opinions sometimes rest on a weighing of competing facts.” Id. at 13. Underscoring the importance of context, the Court held that issuers may be liable only where the omitted facts “conflict with what a reasonable investor would take from the [opinion] statement itself.” Id. at 12.


The Court reiterated that “an investor cannot state a claim by alleging only that an opinion was wrong; the complaint must as well call into question the issuer’s basis for offering the opinion.” Slip op. at 17. Specifically, the Court held that a Section 11 plaintiff must identify particular and material “facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have … whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context,” which the Court described as “no small task.” Id. at 18. The Court remanded the case to the trial court for further proceedings and analysis consistent with the standard articulated by the Court.


By Jay B. Kasner, Matthew J. Matule, Edward B. Micheletti, Peter B. Morrison, Amy S. Park, Noelle M. Reed, Charles F. Smith and Jennifer L. Spaziano, Skadden, Arps, Slate, Meagher & Flom LLP

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


Cornerstone Research: Average and Aggregate Securities Suit Settlements Plunged in 2014

Posted in Securities Litigation

cornerstone reserach pdfThe aggregate amount of all securities class action settlements during 2014 declined to the lowest level in years and there also was a “dramatic” decrease in the average securities suit settlement amount during the year, according to a March 24, 2014 report from Cornerstone Research. The report, which is entitled “Securities Class Action Settlements: 2014 Review and Analysis,” can be found here. Cornerstone Research’s March 24, 2015 press release about the report can be found here.


According to the report, the number of securities suit settlements during 2014 (63) was just about the same as the number in 2013 (66). However the total amount of all securities class action lawsuit settlements during the year was $1.068 billion, compared to $4.847 billion in 2014, a decline of 78 percent. The 2014 total is the lowest level in sixteen years and was also 84 percent below the annual average for the prior nine years. (All figures in the report are adjusted for inflation. The settlement year for purposes of the report corresponds to the year in which the hearing to approve the settlement was held, rather than the year in which the settlement announced.)


In addition, the average settlement amount also decreased in 2014. The average settlement amount during 2014 was only $17.0 million, compared to $73.5 million in 2013, well below the annual average for the period of 1996-2013 of $57.2 million. The average settlement amount in 2014 was 64 percent below the annual average during the post-PSLRA period. The 2014 average settlement amount was the lowest level since 2000. The median settlement in 2014 of $6.0 million is only slightly below the 2013 median of $6.6 million, but more significantly below the 1996-2013 median settlement amount of $8.3 million.


The reason for the decline in the aggregate and average amounts during 2014 is that there were fewer large settlements. The largest settlement in 2014 was $265 million, compared to $2.5 billion in 2013. In 2014, all but one of the 63 cases (98 percent) settled for less than $100 million, and 11 percent settled for $2 million or less. In addition to the decrease in the number of very large settlements, there was also an increase in the proportion of settlements of $10 million or less. About 62 percent of all 2014 settlements were for $10 million or less, compared to 53 percent during the period 2005-2013.


The decline on the number of large settlements arguably is no surprise as the dollars potentially at stake in the cases that settled in 2014 were lower than was the case in recent years. Using what the report calls “estimated damages” as a way to measure amount plaintiff shareholders might seek to recover, the report notes that the “estimated damages” in the 2014 settlements were 60 percent lower than for 2013, and were the lowest in 12 years, which “contributed to the substantially lower average settlement amounts.” The report notes that the volatility of the stock market in recent years has been declining when compared to earlier years, which may have contributed to the smaller average “estimated damages” for cases settled in 2014. Moreover, as a result of the reduction during 2014 of the filing of cases with large market capitalization losses “may mean that the lower level of large settlements will persist in the future.


The report notes that settlements and “estimated damages” are typically smaller for cases involving only Section 11 and/or Section 12(a)(2) claims. There were only three cases that settled in 2014 that involved only ’33 Act claims, and there were another 7 cases that involved both ’33 Act and ’34 Act claims. The increase in IPO activity since 2013 and continuing this year “suggests that settlements of cases involving these claims are likely to be more prevalent in future years.”


The report notes a number of other factors that affect the settlement size. Cases involving accounting allegations are generally associated with higher settlement amounts and higher settlements as a percentage of “estimated damages.” Historically, cases with third-party codefendants (accountants or underwriters) have settled for substantially higher amounts as a percentage of “estimated damages.” However in 2014, cases with and without third-party defendants settled for similar percentages of “estimated damages.”


Companion derivative actions continue to be associated with higher class action settlements. In 2014, the median settlement for cases with an accompanying derivative action was 31 percent higher that for case without an accompanying derivative amount; in 2013, the difference was 78 percent, and in 2012, it was 387 percent. Cases that involved a corresponding SEC settlement are also associated with significantly higher settlement amounts, and also with larger settlements as a percentage of “estimated damages.” In 2014, the median settlement for cases with an SEC action was $8.4 million, compared to $5.5 million without.


The involvement of an institutional investor plaintiff is also correlated with higher settlement amounts, perhaps because the institutional investors only choose to become involved in cases with more serious allegations. (For example, in 2014, institutional investors were involved as lead plaintiff in seven out of the ten settlements that involved a corresponding SEC action.) The median settlement for cases with a public pension as lead plaintiff in 2014 was $13 million, compared to $5 million for cases without a public pension as a lead plaintiff. Interestingly, the percentage of settlements involving public pensions as lead plaintiff declined in both 2013 and 2014. In 2013, only 44% of settlements involved public pensions as a lead plaintiff, down from 47% in 2012, and in 2014, only 37% of settlements involved a public pension as a lead plaintiff.


For the cases that settled in 2014, the median and average time to settlement was three years; however, cases involving larger estimated damages and cases involving larger firms tend to take longer to settle. 


Yet Another U.S. Securities Suit Arising From a Latin American Corruption Investigation

Posted in Securities Litigation

chileIn yet another U.S. securities class action lawsuit involving a non-U.S. company and a corruption investigation in the company’s home country, on March 19, 2015 a shareholder of Chemical & Mining Company of Chile, Inc. (Sociedad Quimica y Minera de Chile, S.A, or SQM), the world’s largest producer of iodine and lithium and a major potash producer, filed a lawsuit in the Southern District of New York against the company and certain of its directors and officers. A copy of the plaintiff’s complaint can be found here. The plaintiff’s lawyers March 19, 2015 press release about the lawsuit can be found here.


The case relates to the ongoing corruption and tax evasion scandal involving the Chilean financial services firm, Banco Penta. The prosecutors’ probe of the firm began with an investigation into whether the firm was using fake receipts to dodge taxes, but, as discussed in a March 4, 2015 Reuters article (here), the investigation has expanded into an inquiry whether or not receipts were also used to make illegal campaign contributions to the right-wing Independent Democratic Union (UDI) party. According to Reuters, the UDI party has links to the 1973-1990 dictatorship of Augusto Pinochet.


On February 26, 2015, SQM published the first of a series of press releases detailing the company’s increasing entanglement in the ongoing Banco Penta investigation that, as the securities class action complaint alleges, “ultimately culminated in the termination of the Chief Executive Officer and resignation of three SQM board members.” In the February 26 press release (here), the company announced that at the request of its Chairman of the Board, an “extraordinary” board meeting had been held to discuss the corruption and tax evasion investigation. The press release also announced that the Board had established a special committee to perform an investigation.


It is worth noting that SQM’s Board Chair is Julio Ponce Lerou, one of the wealthiest individuals in Chile and the former son-in-law of Augusto Pinochet. In September 2014, Chile’s securities regulator fined Ponce $70 million, a record sanction in Chile, in connection with an investigation of illegal securities trading, including trading in the shares of SQM.


On March 11, 2015, SQM disclosed in a press release (here) that its board of directors would be meeting the next day to evaluate a request from the Public Prosecutor for information relating to the Prosecutor’s “investigation into improper political campaign contributions.”


On March 12, 2015, SQM issued a press release (here) stating that its board of directors had met that same day in extraordinary session and had resolved to form an independent investigation with respect to the prosecutor’s request for information; to schedule another board meeting on March 16, 2015 to analyze the independent investigation report and “to make a decision regarding the voluntary delivery of the requested information”; to ratify the board’s “willingness to cooperate” with the prosecutor and to confirm that all of the requested information “is ready to be delivered when appropriate.”


In a March 16, 2015 press release (here), the company stated that it had turned over all of the information that the prosecutor had requested to the Chilean Internal Revenue Service, which the company stated was the proper authority to receive the information.


In a separate March 16, 2015 press release (here), the company announced that board, meeting that same day in extraordinary session, had “agreed to terminate” Patricio Contesse González, the company’s CEO. The press release also stated that the board had appointed Patricio de Solminihac Tampier as the new CEO effective immediately. The securities class action complaint alleges that in the weeks leading up to Contesse’s dismissal, he had “attempted to block the Company’s decision to turn over the documents.”


Finally, in a March 18, 2015 press release (here) the company announced the resignation of the three SQM board member designees of the Potash Corporation of Saskatchewan, Wayne R. Brownlee, José Maria Eyzaguirre and Alejandro Montero.


In its own separate March 18, 2015 press release (here), Potash Corp., which owns a 32 percent stake in SQM, stated that the Chilean prosecutor had made “serious allegations of wrongdoing” against SQM and its management, and that Potash’s board designees’ requests for full and voluntary cooperation “have been rejected by a majority of the Board.” The press release goes on to state that “it has become clear that given our minority and dissident position on the board, we are unable to ensure either that an appropriate investigation is conducted or that SQM collaborate effectively with the Public Prosecutor.” Accordingly, the three Potash Corp. designees had resigned. Wayne Brownlee, one of the three that resigned from the SQM board, is the Chief Financial Officer of Potash Corp.


Perhaps in response to the Potash Corp. press release, SQM issued a second March 18, 2015 press release (here), in which the company stated that it had “promptly initiated internal investigations” and created a special committee to complete an independent report; that it had contracted independent consultants in Chile and the U.S.; and that it “continue to provide information to the regulatory authorities as necessary.” The press release also stated that the company had terminated Contesse and voluntarily provided the Chilean Internal Revenue Service with the information the prosecutor had requested.


A March 18, 2015 Bloomberg article entitled “Potash Board Exodus Sinks SQM as Chile Company Fights Probe” (here) stated that on the news of the three individual’s resignation from the SQM board, the company’s share price on the Santiago stock exchange, which had already fallen on the prior new of the investigation, fell as much as 29%, the most in two decades. The price of the company’s American Depositary Receipts, which trade on the NYSE, fell 17%.


In their March 19, 2015 press release, plaintiff lawyers announced that they had filed a securities class action lawsuit against SQM, Contesse (the former CEO), Solminihac (the new CEO) and Ricardo Ramos, the company’s Chief Financial Officer. The complaint alleges that the defendants made false and misleading statements or omissions by failing to disclose that “money from SQM was channeled illicitly to electoral campaigns for [UDI], Chile’s largest conservative party” and that the company “lacked internal controls over financial reporting” and that as a result the company’s financial statement were false and misleading.


The Complaint asserts claims based on Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The Complaint is filed on behalf of investors who purchased SQM’s American Depositary Shares on the New York Stock Exchange between March 4, 2015 and March 17, 2015.


The SQM lawsuit follows closely after the securities class action lawsuit filed in December 2014 against Petrobras and certain of its directors and officers in the wake of the massive scandal in Brazil surrounding the company (The Petrobras lawsuit is discussed here.) Both of these U.S. securities lawsuits involve Latin American companies whose shares trade on their home countries’ stock exchange and that also have American Depositary Shares trading on a U.S. exchange. In both cases, the lawsuits arising out of bribery or corruption investigation in their home countries and being pursued by prosecutors or regulatory authorities in their home countries.


Both of these lawsuits, in turn, follow after the securities class action lawsuit filed in April 2013 against Wal-Mart de Mexico SAB De CV (“Walmex”) and certain of its directors and officers, in the face of corruption allegations involving its operations in Mexico. The securities complaint quoted extensively from news reports that the company had falsified its financial records in order to conceal its widespread bribery activities. Walmex’s American Depositary Receipts trade on the New York Stock Exchange. (A separate action previously had been filed against Walmart Stores, Walmex’s U.S. parent, as discussed here).


The phenomenon of civil litigation following in the wake of a corruption investigation is nothing new, at least in the U.S. What is different about these various lawsuits, including the new lawsuit against SQM, is that they involve non-U.S. companies sued in a U.S. securities class action lawsuit in connection with bribery or corruption activities and investigations in their home countries, by their home countries’ regulators or prosecutors.


As I noted in a prior post, in recent months there has been a series of securities lawsuits filed in the U.S. against non-U.S. companies in connection with regulatory investigations in the companies’ home countries. For example, as discussed here, in January 2014, NuSkin Enterprises was hit with a securities class action lawsuit following news of an investigation in China of the company’s allegedly fraudulent sales practices there. In June 2014, China Mobile Games and Entertainment was hit was a U.S. securities class action lawsuit following news of a bribery investigation in China involving company officials.


As regulators in Latin America and around the world become increasingly more active, it not only become increasingly more likely that companies elsewhere could become involved in regulatory or even criminal investigations, but also, at least where the companies have securities trading on U.S. exchanges, increasingly more likely to become involved in a U.S. securities class action lawsuit.


Which of course immediately begs the question – what about investors in companies whose shares do not trade on U.S. exchanges? By the same token, what about the investors who purchased their SQM shares on the Santiago exchange? As a result of the U.S. Supreme Court’s decision in Morrison v. National Australia Bank, the investors who purchased their shares on exchanges outside the U.S. cannot assert claims under the U.S. securities laws. Will those investors seek to try to assert claims in their home country’s courts, under their home country’s laws? Will they seek to expand or reform their home country’s laws so that they can assert their claims there?


As I noted in a recent post, there have been moves toward the adoption of a form of collective litigation in a number of Latin American countries, including Chile. Will investors who bought their SQM shares on the Santiago exchange but who are closed out of the U.S. class action seek to pursue a claim or claims in Chile’s courts, under Chilean law? I hope that my readers in Chile and elsewhere in Latin America will let me know what they think about the possibility of a civil action in Chile on behalf of shareholders who purchase their SQM shares on the Santiago exchange.


(In another recent post, here, I discuss how the existence of the U.S. securities class action lawsuit involving non-U.S. companies can create something of a “double whammy” for investors who purchased their shares in the company on the company’s home country exchange, as the settlement of the U.S. lawsuits effects a form of “wealth transfer” to the investors who purchased their securities on the U.S. exchange.)


In any event, it is worth noting that non-U.S. companies with securities trading on U.S. exchanges continue to attract the attention of plaintiffs’ lawyers. As I discussed in my most recent annual review of U.S. securities class action lawsuit filings (here), non-U.S. companies continued to get his with securities litigation in numbers disproportionate to their representation on the U.S. exchanges. For example, in2014, about 19 percent of securities lawsuit filings involving non-U.S. companies, while non-U.S. companies represent only about 16 percent of a U.S.-listed companies. These same trends have continued in 2015, where eight of the 39 securities lawsuits filed so far this year (about 20 percent) have involved non-U.S. companies, while the non-U.S. companies continue to represent only about 16% of all U.S.-listed companies.


More About Fee-Shifting Bylaws: Over the last few days, I have linked on this blog to several recent articles on the topic of fee-shifting bylaws, most of them written by authors with an academic or a defense perspective. Readers interesting in a plaintiffs’ lawyers’ perspective on the topic will want to review the March 16, 2015 article from Mark Lebovitch and Jeroen Van Kwawegen of the Bernstein Litowitz law firm entitled “Of Babies and Bathwater: Deterring Frivolous Stockholder Suits Without Closing the Courthouse Doors to Legitimate Claims” (here). In their interesting paper, the authors suggest that “the ‘nuclear option’ of allowing boards of public companies to employ fee-shifting bylaws against stockholders whose interests they are supposed to represent is poor policy and departs from well-established legal principles.”


The authors also propose their own alternative as a way to try to reduce abusive shareholder litigation. They propose the adoption of “a two part test that would eliminate the weakest two-thirds of all stockholder litigation.” Under this two-part test, before approving a “disclosure only settlement,” the court would “affirmatively determine that: (1) the disclosures providing the purported consideration to stockholders are, in fact, material, and (2) subject to judicial discretion to approve a broader release for good cause shown, the release is limited to the benefit of the disclosures obtained, so as to ensure that meritorious claims that were not properly vetted by counsel are not inadvertently or thoughtlessly released.”


Finally, readers interested in the ongoing debate regarding the legislation proposed in Delaware to address fee-shifting bylaws will want to review Alison Frankel’s March 20, 2015 post on her On the Case blog entitled “Why Proposed Legislation in Delaware Won’t End Loser-Pays Fight” (here), in which she discusses Columbia Law Professor’s John Coffee’s recent CLS Blue Sky blog post about the proposed legislation, to which I linked earlier this week. She also mentions the Bernstein Litowitz’s authors’ paper as well.


Break in the Action: I will be traveling during the week of March 23, 2015, and there will be an interruption in this blog’s usual publication schedule while I am on the road. Normal publication will resume upon my return to the office the following week.


Among other things while I am traveling, I will be attending the C5 D&O Liability Insurance Forum in London. On Thursday morning, March 26, 2015, I will be participating in a panel entitled “The Latest U.S. Judicial Decisions, Litigation, and Exposures and Emerging D&O Liability Risks” with my good friends Chris Warrior of Hiscox and Phil Norton of A.J. Gallagher. I will also be moderating a panel at the C5 conference on Wednesday, March 25, 2015, on the topic “Lifting the Lid on Regulatory Investigations and Lessons Learned” with Robert Sikellis, the Chief Compliance Counsel at Siemens, and Richard Sims of Simmons & Simmons.


On Wednesday evening, March 25, 2015, I will be participating once again in the annual London event and reception that my firm co-sponsors with Beazley and (this year) the Mayer Brown law firm. This event usually draws most of the London D&O insurance marketplace and we hope it will be successful again this year.


If you see me this week at the C5 conference or at the Beazley event, I hope that you will be sure to say hello, particularly if we have not previously met. I look forward to seeing everyone in London. 


Class Actions in Canada: A Critical Commentary

Posted in International D & O

can flag 2A number of countries have procedural mechanisms allowing groups of aggrieved parties to pursue their legal claims in the form of a collective action. While no other country has a class action mechanism quite like that of the United States, another country that also has well-developed class action mechanisms is Canada. However, unlike the United States, in Canada there is no federal class action process; instead, class action claims must be brought in one of the provincial or territorial courts and invoke the relevant jurisdiction’s litigation processes.


One of the Canadian jurisdictions where class action litigation is active is Ontario. Since the province adopted Class Proceeding Act over twenty years ago, numerous class actions have been filed in the province. The Law Commission of Ontario is now undertaking a comprehensive review of the Class Proceedings Act, as discussed on the Commission’s website (here). As part of the Law Commission of Ontario’s review of experiences with the Class Proceedings Act, the Commission has asked for interested parties to submit comments .


In response to the Commission’s request for comments, the U.S. Chamber of Commerce Institute for Legal Reform and the Canadian Chamber of Commerce have prepared a paper that will be presented at an event in Toronto on March 23, 2015. The paper, entitled “Painting an Unsettling Landscape: Canadian Class Actions 2011-2014,” can be found here. The Institute for Legal Reform’s March 23, 2015 press release about the paper can be found here.


The paper takes a comprehensive look at class action litigation in Canada – not just in Ontario, but in all of the provincial and territorial courts as well. The paper describes a number of recent developments in the provincial courts, which the paper’s authors suggest “certainly will invite the filling of more class actions in Canada.”


The paper opens by noting that while there had been some reason to believe several years ago that Canada might be “stepping away from its long-standing liberal approach to class actions,” more recent developments suggest that this trend has “evaporated.” Canadian courts have, according to the paper, “their tradition of consistently lax class certification standards,” adding that “it is once again a relatively sure bet that a class proposed to a Canadian court will be certified.” This “increasingly favorable atmosphere” has been “readily apparent” in a number of substantive areas, including, for example, the antitrust and securities arenas.


In terms of how the cases fare once they go forward, the paper notes that class action trials are “occurring with increasing frequency.” Indeed, class trials are “much more likely to occur in Canada than in the U.S.” The paper notes that defendants have gained some notable trial successes. With respect to the cases that settle, the paper notes that “Canadian tribunals are more rigorously assessing whether class members are appropriate benefiting from settlements.” Some courts are “growing increasingly skeptical of class counsel fee applications.”


The paper evinces a particular concern with third-party litigation funding, which, the paper says, is “gaining greater currency in Canada, particularly in the class action context.” The paper expresses the concern that the increased use of third-party litigation funding “threatens to undermine the effectiveness of ‘loser pays’ policies adopted by some jurisdictions to discourage non-meritorious litigation.” The paper does express support for recent developments in Ontario where the courts have insisted that third-party funding arrangements be publicly disclosed and judicially approved. The paper argues that increased transparency and judicial scrutiny will help reduce “the prospects that funders will seek to satisfy their own financial goals in derogation of class member interests.”


Of interest to readers of this blog, the paper has a number of interesting comments about securities class action litigation in Canada. Among other thing, the paper comments, with reference to the recent Ontario court decision in the Canadian Solar case (about which refer here) , among others, that “recent decisions of Ontario courts have made it clear that the Ontario Securities Act may be applied extraterritorially.” However, the paper also notes that in Ontario Court of Appeal’s decision in the BP case, the court ruled that a putative class action involving securities that were purchased over a foreign exchange should have been stayed on forum non conveniens grounds.


The paper also notes that “recent decisions have confirmed that leave to pursue class claims under the Ontario Security Act is evaluated with minimal scrutiny.”


The Institute for Legal Reform’s press release about the Canadian class action paper contains a statement from the Institute’s President, Lisa Rickard. Among other things, Rickard says that “recent confirmation by Canadian courts of low class action certification standards, and the convergence of other factors … are setting the stage for increased abuse of this type of litigation across Canada.” Rickard adds that “the growth of third party litigation funding is also fueling class action lawsuit abuse in Canada because it is a sophisticated scheme for gambling on litigation that rewards those who invest in the lawsuits, or the gamblers, at the expense of the class members themselves.”


The paper concludes with a call for “meaningful legal reform” throughout the Canadian provinces. The paper calls on the litigation defense community to advocate for “more meaningful class certification requirements” and for measures to create “disincentives to the filing of non-meritorious actions.” The paper also calls for lawmakers to formalize third party funding safeguards, and at a minimum establish requirements for the disclosure of and requiring judicial approval for funding arrangements. The paper concludes with a call for the defense community to remain active in the Law Commission of Ontario review process to “ensure that the effort is not dominated by plaintiffs’ counsel perspectives.”

Why Are Investors Seeking Litigation Funding Opportunities? Because Litigation Funding is Profitable

Posted in Litigation Financing

gavelapril2013In a March 9, 2015 article entitled “Hedge Fund Manager’s Next Frontier: Lawsuits” (here), the Wall Street Journal described how the “next act” for EJF Capital LLC, a hedge fund run by Friedman, Billings, Ramsay Group’s former co-founder Emmanuel Friedman, will be to deploy a new litigation finance arm that has already, according to the Journal, “raised hundreds of millions of dollars” to “lend to law firms pursuing class-action injury lawsuits.”


The hedge fund’s foray into litigation financing is pretty far afield from the firm’s prior investments. According to the Journal, the fund’s last big investment successes involved purchasing troubled mortgage securities during the financial crisis and buying the federal government’s investments in smaller banks.


Why would a hedge fund focused on financial securities get involved in something like litigation financing? For a very simple reason – litigation financing is profitable.


How profitable? Well, because a number of litigation funding firms are publicly traded, we don’t have to guess. For example, on March 18, 2015, Burford Capital Limited, the largest player in the growing U.S. litigation funding business and a publicly traded firm whose shares trade on the London Stock Exchange AIM Market, released its results for 2014, showing that the company’s revenue during the year rose by 35 percent to $82 million, with a 43 percent rise in operating profit, to $61 million. The company, which has assets of over $500 million under management, reports that since its inception it has produced” a 60% return on invested capital.” My prior post about Burford Capital can be found here.


Similarly, Bentham IMF, the U.S. arm of IMF Bentham Limited, whose shares trade on the Australian Stock Exchange, reported in December 2014 (here) that it had funded ten deals during the year, with client recoveries of nearly $100 million resulting from jury verdicts and settlements. The firm itself had gross returns of more than $31 million for the year, with a net profit of $17 million.


These kinds of results attract attention. The increasing involvement of financial firms in litigation-funding also attracts criticism. In a March 26, 2014 guest post on this blog entitled “The Real and Ugly Facts of Litigation Funding” (here), Lisa Rickard, the President of the U.S. Chamber of Commerce’s Institute for Legal Reform, said “Litigation funding is a sophisticated scheme for gambling on litigation.” She said further that the growth of litigation funding will lead to “more lawsuits, more litigation uncertainty, higher settlement payoffs to satisfy cash-hungry funders, and in some instances, even corruption” (the latter comment referring to the Chevron case in Ecuador, noted below)


There is no doubt that the litigation funding industry has been involved in controversy. In a March 18, 2015 Bloomberg article entitled “Hedge Fund Betting on Lawsuits is Spreading” (here), Paul M. Barrett, discussing the rise of the litigation-funding in the U.S., notes that while Burford Capital has “helped move litigation funding into the corporate-litigation mainstream,” its funding ventures include its “most notorious – and least successful investment” relating to a class action oil pollution lawsuit against Chevron in Ecuador.


Barrett, the author of the Bloomberg article, and who is also the author of the 2014 book Law of the Jungle: The $19 Billion Legal Battle Over Oil in the Rain Forest and the Lawyer Who’d Stop at Nothing to Win (here), notes in the article that Burford invested $4 million in the Ecuador case in 2010. The plaintiffs, a group of Ecuadorians, won a $19 billion judgment in Ecuador against Chevron, but the oil company then “turned the tables” and persuaded a U.S. judge that the Ecuadorian suit involved coercion, bribery and fabricated evidence. By then, Burford had sold off its interest in the lawsuit and accused the plaintiffs’ attorney of deceit. As Barrett puts it in his article, the Ecuadorian episode “constituted a black eye for Burford” that continues to provide “ammunition for critics of litigation finance.”


Despite the criticism and controversy, litigation funding continues to attract new entrants and investors, as the recent entry of EJF Capital discussed above shows. Litigation funding is well-established in several other countries. As I have noted in prior posts on this blog, most recently here, litigation funding is an important part of the class action litigation landscape in Australia. As discussed here, litigation financing continues to play an important role in class action litigation in Canada. Litigation financing may play an increasingly important role in the U.K.; as I discussed in a recent post (here), the U.K. litigation involving Tesco is being supported by a litigation funding firm.


There are important differences between the legal system in the U.S. and the legal systems in the other countries where litigation funding is now well-established. Canada, Australia and the U.K. all have a “loser pays” litigation model, where an unsuccessful claimant must pay their adversary’s legal fees. In the U.S. by contrast, we follow the American rule, under which each party bears its own cost. In addition, most states in the U.S. allow contingency fees, by contrast to many other countries where contingency fees are not permitted. Because of loser pays model and the prohibition of contingency fees, there may be reasons why litigation funding is better established in other countries.


Just the same, litigation funding recently has been quickly developing in the U.S., perhaps because there is so much litigation and because litigation in the U.S. can be so expensive – which raises the question of what the rise of litigation funding may mean for civil litigation in the U.S.


The more positive spin may be that the availability of litigation funding will level the playing field for smaller litigants attempting to take on larger adversaries. At the same time, however, litigation funding raises a host of questions. First and foremost are the concerns about the possible conflicts between the litigation investors and the actual litigants. The funders’ investment objectives may diverge from the actual litigant’s litigation objectives – differences that could lead to diverging views about litigation tactics and even case resolution approaches and objectives.


Similarly, there is the question whether litigation funding is appropriate in the class action context. While the litigation funding unquestionably may help facilitate a recovery for the class, the amount to be paid to the litigation funder, in the form of commission or other payment, will reduce the amount of the recovery for the class. (To provide some perspective on this issue, in its report of its 2014 results, Bentham IMF reported that with respect to the recoveries in which it was involved, clients and outside counsel took 69%, with Bentham drawing the remaining 31%.) The absent class members cannot all be consulted in advance about such arrangements, which may or may not look fair after the fact.


A more fundamental question has to do with the possible effect of growing amounts of litigation funding on the litigation system. Will the availability of litigation funding fuel an increase in litigation? Will it encourage adversaries — who might otherwise be able to reach a business resolution of their dispute – to litigate rather than negotiate? And then there are the concerns about a field in which there apparently are huge sums to be made but few barriers to entry — will the outsize profits that are now being reported attract less scrupulous competitors who attempt to extract outsized returns at the expense of litigants? Will competition for the best cases encourage the players that are unable to attract the best cases to finance less meritorious cases?


There are, in short, a host of unanswered questions about the growing presence of litigation funding on the U.S. litigation scene. There is no doubt that the current players’ returns will attract additional participants. Litigation funding seems likely to become an increasingly important part of commercial litigation in the U.S. I fully expect that we will be continue too hear a lot more about this topic. But the point is – litigation funding is here, now. We had better recognize that, get used to it, and try to understand what it means.


SEC Chair Weighs in on Fee-Shifting Bylaws: In a March 19, 2015 speech at the Tulane University Law School (here), SEC Charman Mary Jo White offered a number of observations on a variety of topics, including fee-shifting bylaws. While she made it clear that the SEC is monitoring developments on the topic closely, the agency has not decided to take a position and she declined to comment on the merits of any particular position on the issue, she did say that “I am concerned about any provision in the bylaws of a company that could inappropriately stifle shareholders’ ability to seek redress under the federal securities laws. All shareholders can benefit from these types of actions.” She added that “If the Commission comes to believe that these provisions improperly hinder shareholders’ exercise of their rights, it may need to weigh in more directly in this discussion.”


More About Fee-Shifting Bylaws: In yesterday’s post, I linked to a couple of academic articles discussing litigation reform bylaws, and in particular, fee-shifting bylaws. I wanted to add another link on the topic. In an interesting March 19, 2015 paper entitled “The Intersection of Fee-Shifting Bylaws and Securities Fraud Litigation” (here) Arizona Law School Professor William Sjostrom, examines the possible effect of fee-shifting bylaws would have on securities litigation and then takes a look at whether a bylaw shifting fees for securities litigation would be valid under federal securities laws – Professor Sjostrom concludes that they would not. Professor Sjostrom further concludes that Congress should not validate fee-shifting bylaws. The article includes in an appendix a detailed list of the 43 companies that have adopted fee-shifting by laws since the Delaware Supreme Court issued its May 2014 decision upholding the validity under Delaware law of a fee shifting by law.


The Latest from China: I suspect that many of this blog’s readers, like me, also follow the China Law Blog, which is written by Dan Harris of the Harris & Moure law firm. Harris’s posts are reliably readable and interesting. On March 15, 2015, Dan had a particularly interesting post that I wanted to be sure to note here. The post, entitled “China’s Golden Age for Foreign Companies is Over” (here) details the increasing difficulties foreign companies are having operating in China and notes that many companies are shifting operations to Vietnam. As Harris details in his post, “There is no disputing that China’s golden age for foreign companies doing business in China is over. China today is just not nearly as favorable or easy for foreign companies as it was ten years ago.” While doing business in Vietnam is not without its own set of challenges and may not be the right choice for some companies, a number of companies are relocating operations or their entire business there. Harris’s post is interesting and I recommend reading the full post on his site.


Break in the Action: I will be on the road the week of March 23, 2015, and so there will be a brief hiatus in this blog’s normal publication schedule. Regular publication will resume the following week.

Thinking About the Data Breach Securities Class Action Lawsuits Yet to Come

Posted in Securities Litigation

cyber2There has been extensive litigation filed in the wake of the many high-profile data breaches over the last several years, but by and large the lawsuits have been filed on behalf of consumers or employees. Along the way, there have also been lawsuits filed against the directors and officers of the companies that experienced the data breaches – for example, shareholders derivative lawsuits were filed against directors and officers at Target (about which refer here) and Wyndham Worldwide (about which refer here).


But there have not been D&O lawsuits filed involving many of the other recent high-profile data breaches. Indeed, as I noted in a recent post, there are a number of specific reasons why there may be no D&O litigation relating to the Sony Pictures Entertainment breach. In addition, and so far at least, there has been no D&O litigation relating to the Anthem data breach, the Home Depot data breach, and of the many other high profile data breaches that have occurred over the last few months.


So in assessing the data breach-related claims to date, we have a relatively few derivative lawsuits, a couple of which were mentioned above, but so far not much in the way of securities class action litigation. To be sure, in 2009, there was a securities class action lawsuit filed against Heartland Payments Systems and certain of its directors and officers related to the company’s massive data breach. (The court granted the defendants’ motion to dismiss in that case). None of the more recent high-profile data breaches have resulted in securities class action lawsuits.


However, despite the fact the wave of high-profile data breaches has not yet led to a uptick in securities class action litigation, in a March 17, 2015 post on his D&O Discourse blog (here), Doug Greene of the Lane Powell law firm says that he “remain(s) convinced that a wave is coming, perhaps a tidal wave.” Moreover, Greene predicts that the wave will not only include shareholders derivative lawsuits of the type that were filed against Target and Wyndham Worldwide, but also securities class action lawsuits and SEC enforcement matters.


In making this prediction, Greene first focuses on the usual reason given when the question is asked about why there hasn’t been more data breach-related securities class action litigation so far. The reason, it is often suggested, is that least to this point most of the high profile data breaches have not resulted in a significant drop in the affected company’s share price. Greene reviews the reasons usually given for this absence of price decline, which is that in a world in which all companies potentially are susceptible to a cyber attack, the occurrence of a data breach is basically random and doesn’t say much about the company’s business or it future financial performance.


Greene suggests that this dynamic is about to change. In effect, he is predicting that in the future news of a data breach may well affect the share prices of at least some of the companies involved. First, he predicts that in a world where companies are now working hard to improve their cyber security, the company’s cyber security standards may become a basis of competition. Some companies may seek to secure business or even investment based on the extent of their own cyber security. If cybersecurity become a competitive issue and in particular if companies start touting the extent of their cyber protection, the companies’ statements will be “susceptible to challenge as false or misleading if they suffer a breach.” If the company’s share price reflects a widespread perception that the company has a competitive advantage based on its cybersecurity, it share price might well decline, perhaps significantly, if the company’s experiences a problem.


Green adds that the SEC is focused on cybersecurity disclosure and “inevitably will start to more aggressively police disclosures.” In addition, he predicts that whistleblowers from IT departments will start to surface, and auditors will begin to prompt disclosures as they increase their focus on the financial impact of cybersecurity breaches.


I have no way of knowing whether or not there will be significant numbers of securities class action lawsuits in the future. Indeed, in answering his own question of whether or not data breach securities class action lawsuits will become a prominent type of securities class action lawsuit, Greene himself says “I doubt it.”


There are reasons to be modest about these types of predictions; there have been past predictions and speculations about possible data breach-related securities lawsuits, but so far, there has been little action in that department. But I do think there are reasons to be concerned that there may be significant securities class action litigation related to data breaches in the future.


In addition to all of the reasons Greene cites, I think there is at least one additional reason to be concerned about possible future data breach-related securities class action litigation. That is, the plaintiffs’ bar has an incentive to try to find a way to capitalize on the adverse publicity surrounding a company that has experienced a data breach. Some plaintiffs’ lawyers are now focused on the consumer and employee privacy breach-related claims. But the plaintiffs’ lawyers will also consider possible D&O claims as well, when the right circumstances arise.


Along those lines, at the PLUS D&O Symposium in New York in February, one of the leading plaintiffs’ securities attorney, when asked to make a prediction about future litigation trends, expressly said that he expects there to be significant data breach related litigation – and he added that he hope to be the one bringing the claims. In other words, when the right circumstances present themselves, the plaintiffs’ lawyers will not hesitate to file the claims. Up until now, they have simply been considering what their opportunity might be. I would expect them to act when they think they have found their opportunity.


I also agree with Greene that the SEC will play a significant role here. The SEC has made it clear that cyber security disclosure is a priority. It has been over three years since the SEC released its Disclosure Guidance on cyber security, but many companies still have not yet adapted their disclosure practices (as discussed here). Several of the individual SEC commissioners have made it clear in individual speeches that cyber security issues generally remain an agency priority (refer for example here). What active future steps the agency might take remains to be seen, but it does seem at possible that the agency might use an enforcement action as a more aggressive way to send a message on these issues. If agency uses its enforcement authority in that way, the plaintiffs’ lawyers will not be far behind.


In the immortal words of that astute sage, Yogi Berra, it’s tough to make predictions, especially about the future. Though the future remains uncertain, I do agree with Greene that when it comes to the possibility of future data breach-related securities class action litigation, “the risk is high enough that all companies need to pay more attention to their cybersecurity disclosures.” I also agree with him that insurers, brokers and risk managers need to be mindful of the potential securities class action risk in this area.


Questions About Delaware’s Proposed Fee-Shifting Bylaw Legislation: As discussed in a recent post (here, second item), the Delaware Corporation Law Council has recently proposed draft legislation that among other things would prohibit Delaware companies from adopting a fee-shifting bylaw . In a March 16, 2015 post on the CLS Blue Sky Blog (here), Columbia Law School Professor John Coffee takes a detailed look at the draft question. Among other things, he examines the provision of the proposed legislation that restrict bylaws that shift fees in connection with “an intracorporate claim.” Coffee questions whether this provision as worded would prohibit a bylaw shifting fees for a federal securities claim, as opposed to “Delaware-style” litigation.


Coffee then examines the issues that might arise if the Delaware statutory provision as adopted only prohibits the adoption of a bylaw shifting fees for Delaware-type litigation, and a company adopts a bylaw requiring fee shifting in connection with a federal securities suit. Coffee examines the various preemption and other issues that might arise under the PSLRA and otherwise if a company were to try to adopt such a fee-shifting bylaw.


The article is technical and interesting and suggests that even if the Delaware legislature adopts the proposed legislation, fee-shifting bylaw questions could continue to follow.


More About Litigation Reform Bylaws: Along with the fee-shifting bylaws, another litigation reform bylaw that has been under recent discussion has been the possibility of a bylaw requiring the arbitration of shareholder disputes, perhaps with a class action waiver. I have discussed the possibility of these types of bylaws in prior posts on this blog, most recently here.


In a March 18, 2015 post on the CLS Blue Sky Blog (here), Visiting Duke Law School Professor Ann Lipton examines the legal theory that has supported the assertion of the validity of these types of bylaw provisions. Basically, the courts that have upheld the validity of these arbitration bylaw provisions have subscribed to the view that the Federal Arbitration Act requires the enforcement of contractual bylaw provisions, and that a bylaw is essentially a contractual provision. In her article, Professor Lipton takes issue with both aspects of this analysis and argues that the Federal Arbitration Act is “incompatible” with corporate governance issues. 


Life Sciences Companies and Securities Litigation: 2014 Update

Posted in Securities Litigation

lifesciencesLife sciences companies are “an increasingly popular target” of securities class action lawsuits, according to the annual securities litigation survey from the David A. Kotler of the Dechert law firm. According to the March 16, 2015 report, entitled “Dechert Survery of Securities Fraud Class Actions Brought Against U.S. Life Sciences Companies,” the number of 2014 securities suit filings against life sciences companies represents a “remarkable increase” compared to 2013. The Dechert law firm report can be found here. My analysis of the 2014 securities class action litigation filings, including the filings against life sciences companies, can be found here.


According to the Dechert report, in 2014, there were 39 different securities class action complaints filed against 38 different life sciences companies, representing approximately 23% of the 170 securities class action lawsuits filed during the year.


The number of suits and the percentage the suits represent of all securities filings represent a “sharp increase” compared to equivalent levels in recent years. For example, in 2013, only 11% of the 167 securities fraud lawsuit filings involved life sciences companies. The 2014 figures were also well ahead of 2012 (18%), 2011 (9%) and 2010 (16%).


The filings in 2014 followed trends that developed in recent years in which the securities litigation activity appears to be concentrated on companies with “relatively smaller market capitalizations.” In 2014, 57% of all life sciences companies hit with securities class action lawsuits had market capitalizations of under $500 million. Indeed, about 40% of the life sciences companies (15 out of 38) had market caps under $250 million.


At the same time, many of the 2014 lawsuits also involved larger companies as well. Life sciences companies with market capitalizations of at least $2 billion were named as defendants in about 21% of the 2014 lawsuits against companies in those industries.


The 2014 filings followed recent trends in other respects. The report notes that trend that began in 2011 of a return to “more industry-specific allegations” continued in “full force” in 2014. The kinds of allegations the report characterizes as industry specific are allegations such as “alleged misrepresentations or omissions regarding marketing practices, prospects/timing of FDA approval, product efficacy, product safety, manufacturing and other healthcare-related allegations.” Approximately 56% of the 2014 securities suits against life sciences companies involved these types of industry specific allegations, while claims of inaccurate financial reports/accounting improprieties were asserted in 44% of the 2014 life sciences securities suits. Some of the 2014 suits involved both types of allegations.


The report concludes with an analysis of how the 106 securities suits filed against life sciences companies between 2011 and 2014 have fared in the courts. The report notes that the defendants in these cases have “continued to enjoy relative success in obtaining dismissals.” However, the report also notes that “it is equally worth noting that securities fraud lawsuits still carry a substantial risk of exposure, and even when settled can result in very large payments.” To illustrate the later point, the report cites Pfizer’s January 2015 agreement to pay $400 million to settle the securities class action litigation pending against the company.


Belated St. Patrick’s Day Greetings: My travel schedule prevented me from posting on St. Patrick’s Day itself the following great St. Patrick’s Day mug shot sent in by Jim Sandnes of the Skarzynski Black law firm. I am pleased to see that the firm used a D&O Diary mug to hold some seasonally appropriate shamrocks at its main reception desk. Thanks to Jim for sending the mug shot along. Readers interested in reviewing other mug shots that I have posted should take a look here.


st pats Mugshot