The D&O Diary

The D&O Diary


Supreme Court Will Not Consider the Securities Act Statute of Repose Issue in the Indy Mac Case After All

Posted in Securities Litigation

supctAs I had noted on this blog (here), one of the important securities law cases on the U.S. Supreme Court’s docket for the upcoming term involved the failed IndyMac bank. The Court had granted cert in the case to decide whether the three-year limitations period in Section 13 of the ’33 Act may be tolled by the filing of a putative securities class action (under a legal theory known as the American Pipe tolling doctrine), or rather is a statute of repose that cannot be tolled. Though seemingly technical, the case presented potentially significant issues.


The case was scheduled to be argued next Monday, October 6. However, on September 29, 2014, in an unexpected development, the U.S. Supreme Court entered an order dismissing the writ of certiorari as improvidently granted, based on settlement-related developments in the underlying case.


As discussed in greater detail here, the underlying securities lawsuit involves allegations that the failed IndyMac Bank misled investors in connection with its issuance of securities in over 100 different offerings. The District dismissed for lack of standing all claims in which the plaintiffs had not themselves purchased securities. Five investors who did purchase the securities sought to intervene. The district court denied the motion to intervene, on the grounds that the three year statute of repose had lapsed and was not extended by the American Pipe tolling doctrine and could not be extended under Fed. R. Civ. Proc. 15 (c). The proposed intervenors appealed.


In a June 27, 2013 opinion (here), the Second Circuit, in an opinion by Judge Jose A. Cabranes for a three-judge panel, held that the filing of a class action lawsuit does not toll Section 13’s statute of repose. The appellate court held that neither the equitable tolling principles under American Pipe nor the legal tolling principles could operate to extend the period of the statute of repose.


The proposed intervenors filed a petition with the U.S. Supreme Court seeking a writ of certiorari. The intervenors argued that the Second Circuit’s opinion conflicted with a prior holding of the Tenth Circuit that American Pipe tolling does apply to Section 13’s statute of repose. The intervenors also argued that the Second Circuit’s holding unsettled long-standing class action practices with regard to the principles of tolling. The Court granted the petition and the case was fully briefed and ready to be argued.


All was set for the Supreme Court to address these important legal issues under the federal securities laws. However, on September 22, 2014, the plaintiffs in the underlying case notified the district court that they had reached a settlement with the underwriter defendants in the underlying case. As discussed in a September 23, 2014 post in her On the Case blog (here), Alison Frankel reported that the amount of the settlement was $340 million dollars. The settlement is of course subject to court of approval.


The U.S. Supreme Court got wind of this development and the justices likely were asking themselves that if the case has settled is there anything left of the case for the Court to consider? So on September 23, 2014, the Supreme Court entered an order in the case directing the parties to submit letter briefs addressing the issue ““What should be the effect, if any, of the proposed settlement agreement now pending before the district court on the matter pending before this Court?”


In response, lawyers for all of the parties in the case  of suggested that the case could go forward in the Court because there remained claims against one of the underwriting firms sued in the case — Goldman Sachs & Co.  Goldman Sachs had been dismissed as a defendant in the class action and didn’t participate in the proposed settlement.


However, as discussed in a September 29, 2014 post on the SCOTUS blog (here), the Court seems to have concluded that as a result of the settlement there was not enough of the case left of the case for the Court to hear – although the Supreme Court’s terse order dismissing the writ of certiorari in the case contains precious little explanation for the Court’s action.


The most immediate consequence of the Court’s order is that the Supreme Court appeal in the case will not go forward, meaning that the Second Circuit’s order in the case will remain standing – which in turn means that the split in the circuits that was the basis on which the Court had granted cert in the first place will continue. Because such a vast preponderance of securities cases are filed in the Second Circuit, the Second Circuit’s ruling that the filing of a class action does not toll the ’33 Act’s statute of repose will remain operative with respect to a very large number of securities cases that are filed.


In the merits briefs filed with the Supreme Court and in certain of the amicus briefs that were filed in support of the plaintiffs, the plaintiffs and the amici had argued that if the Second Circuit’s decision were allowed to stand, class members in many securities class actions would have to make wasteful “protective filings” in order to maintain their right to proceed independently and avoid being time-barred if class certification was subsequently denied.  These filings would drain judicial resources and impose costs on putative class members without any countervailing benefit. (This position is discussed in greater detail here.) Whether or not this will happen remains to be seen, but there is  no doubt that the fact that the Second Circuit’s decision in the case will be allowed to stand could have a significant impact on class action practice in ’33 Act case in the Second Circuit.


Though the U.S. Supreme Court has dismissed the IndyMac case from its docket, that does not mean that there won’t be any securities law action in the Court’s upcoming term. The Court still has another securities case on its docket. On November 3, 2014, the Court will hear argument in the Omnicare case.


As discussed here, in March 2014 the Supreme Court granted cert in the Omnicare case to take up the question whether or not to survive a dismissal motion it is sufficient 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 consideration of the Omnicare case will resolve 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 it is not required.


So the Supreme Court will be hearing and deciding an important securities law case in the upcoming term. It just won’t be getting to the ’33 Act statute of repose issue, at least not this term. Those of us who find the American Pipe tolling doctrine fascinating will have to find some other way to amuse ourselves.


And Finally: Two camels in a car. For all of you who have been wondering what would happen if you tried to put two camels in a car.  


The Travel Issue: Edinburgh Edition

Posted in Travel Posts

149aThe D&O Diary is on assignment in the United Kingdom this week, with the first stop in the venerable city of Edinburgh, for meetings and an event. Due to flight delays, cancellations and missed connections, my visit to Scotland’s capital city was cut short by a day, which compressed both my meetings and my opportunity to see the sights. Even with a shortened stay, I still managed to take in quite a bit of the city.


Edinburgh turned out to be quite a bit of surprise. Perhaps I was fortunate with the time of year of my visit and the pleasant weather that prevailed while I was there. Rather than the dark and gloomy domain perched on craggy peaks that I pictured, the city was (at least while I was there) bright, open and, while hilly, an uncommonly pleasant place in which to walk around.


With a population of about 470,000 (about the same size as145a Sacramento), Edinburgh is perched on the south side of the Firth of Forth, which opens out to the North Sea. The city’s name is pronounced with a distinctive Scottish flourish – it is “Edin-burra” not “Edin-burg.” The view within the city is dominated by the looming presence of the Edinburgh Castle (pictured at the top of the post), which stands at the top of the city’s Old Town. An architecturally interesting and beautiful cobblestone street, called the Royal Mile (pictured left), connects the Castle to the royal Palace of Holyroodhouse (pictured below). On a warm, sunny fall afternoon, the Royal Mile was thronged with tourists looking to buy kilts, tartans and whisky to take home with them.



067aEdinburgh is a topographically complicated city owing to the several craggy outcroppings, the remnants of ancient volcanic activity, within and adjacent to the city. Looming beyond Holyroodhouse is the craggy peak known as Arthur’s Seat, the highest point among the rocky outcroppings of the Salisbury Crags. On a clear day, the view from Arthur’s peak seemed almost limitless. To the east, the Firth of Forth stretched out to the North Sea. About twenty miles away, the soft, rolling beauty of the Pentland Hills framed the view to the southwest. To the north, Edinburgh castle soared about the city below.







Just days before my visit, Scotland had held a referendum on whether or057a not it should be an independent country. I saw the remnants of the independence campaign around the city. Though Edinburgh had voted “No” in much greater numbers that most of the rest of the country, most of the campaign remnants that I was were in support of the “Yes” vote. On Saturday evening, I was in a pub to which I had been drawn by the live acoustic music. Late in the evening, the musician played a song called “Caledonia.” Every single person in the place sang along to the lyrics that go like this: “Let me tell you that I love you/And I think about you all the time/Caledonia you’re calling me, now I’m going home/But if I should become a stranger/Know that it would make me more than sad/Caledonia’s been everything I’ve ever had.” And then when the song ended, in unison, everyone in the college age crowd in the pub stood and shouted “Yes! Yes! Yes! Yes!” It was so cool it gave me goosebumps and it also made me think that for many in Scotland the independence issue is not over and may never go away.




Whenever I spoke to anyone there, after hearing my American accent, whoever I was speaking to would say that I must be there for the Ryder Cup golf tournament (which was played over the weekend at Gleneagles, about an hour outside Edinburgh). The next topic for discussion was where I was from in the United States, and when I said Ohio, the standard response was “Aye, you’re the first person I ever met from Ohio.” I wanted to reply that, in fact, Ohio is 50% larger geographically than Scotland and has more than twice as many people. Of course, I also thought to myself that Scotland’s history, heritage and culture are many times greater and more distinctive than that of Ohio or just about any other U.S. state you might care to mention. So I kept the comparisons  between Scotland and Ohio to myself.


103aWhile I was in Edinburgh, I took full advantage of the clement weather for some ambitious walking.  A friend back home upon learning that I was going to be visiting Edinburgh had told me that I had to make time to explore the footpath that winds along the Water of Leith, a stream that runs from the Pentland Hills to the port city of Leith. Though I didn’t walk the entire length of the walkway, I did walk from a point near my hotel all the way to Leith, Edinburgh’s historic port city, about five miles away. The pathway goes through a number of picturesque villages, including Stockbridge, Canonmills, and Dean Village. The stroll along the walkway’s heavily wooded, sunlight dappled pathway was quite a contrast to the crowded sidewalks near my hotel in the city’s shopping district.






The city is actually full of green space. Just a bit south of the Royal Mile is the University of Edinburgh, which itself is adjacent to a large open parkland called the Meadow. I roamed around the area after my meeting089a on Friday afternoon, and as I walked back toward town on the Meadow Path, a footpath that connects the campus to the historic city, I came upon two grandmotherly women who were holding up a map and obviously trying to figure out where they were. From the accents, I could tell they were American, so I offered to help.


It turns out that the two women, whom I later learned are sisters and are named Edna and Alice, had gone AWOL from their tour group, and had intended to walk on their own from their hotel to the Royal Mile. They been given surprisingly useless directions – they were told to “turn left at the Starbuck’s,” which, given the fact that there is a Starbuck’s on just about every street corner, virtually guaranteed that they would get lost. They weren’t far away from their destination, but the Royal Mile was about a half a mile away – and straight uphill.  From their reaction, it was clear that they didn’t think that after all of their wanderings they had enough left in the tank to make it up the hill. I suggested that they should go in the pub just across the way and call for a cab to take them back to their hotel. It was pretty clear they weren’t sure at all about the idea of going in a pub (they didn’t look like the types who, say, made a habit of going on pub crawls), so I said I would accompany them. The Doctors pub (apparently named for its proximity to the medical school) was quiet on a Saturday afternoon, with a few men in a corner watching the Ryder Cup on television.


I told the ladies that we might as well get comfortable while they waited for the cab and I suggested that they should make the most of their pub experience and have a pint of ale. They laughed at the idea, but the spirit of adventure got ahold of them, and they agreed to try a pint. To their surprise, they liked the ales the bartender recommended them, and after a time of convivial conversation, they decided it was their turn to buy me a round. I wouldn’t have thought that spending an afternoon drinking beer with a couple of American grandmothers would be the best way to spend the day, but I have to say I enjoyed meeting them. After the second round, I had to remind them that they had intended to call a cab to go back to their hotel. As they were leaving, they said that the visit to the pub had been the most fun they had on their entire trip and they couldn’t wait to tell the others in the tour group about their adventure. As is often the case while traveling, the unplanned events and encounters often are the best part.


My time in Edinburgh was all too brief, and I soon had to leave to head on to London. But I am glad I had the chance to catch a little glimpse of the Scottish city. I enjoyed the entire experience. As much as I enjoyed climbing up to the top of Arthur’s Seat and hiking along the Water of Leith pathway, the afternoon in the pub with Edna and Alice might have been the best part of the visit for me as well.


More Pictures of Edinburgh:



New Town













Here’s a video of the song “Caledonia”


Oklahoma Legislature Adopts Derivative Litigation Fee-Shifting Provision

Posted in Corporate Governance

oklachomaOne of the most interesting recent developments has been the onset of innovative litigation reform efforts in the form of bylaw revisions. Among the most intriguing of these efforts involves fee shifting bylaws, whereby an unsuccessful claimant in intracorporate litigation must pay the other party’s costs. As discussed here, earlier this year, the Delaware Supreme Court upheld the validity of a fee shifting bylaw, a judicial decision that immediately triggered a legislative initiative to limit the effect of the decision to non-stock companies. As discussed here, the Delaware legislative initiative has now been tabled until early next year.


But while the Delaware legislative initiative is on hold, at least one legislature has gone forward to provide for the awarding of fees against unsuccessful derivative lawsuit claimants. As discussed by University of Denver Law Professor J. Robert Brown in a September 24, 2014 post on the Race to the Bottom blog (here), the Oklahoma legislature has adopted a bill providing that in a shareholder initiated derivative action against a domestic or foreign corporation, the court “shall require the nonprevailing party or parties to pay the prevailing party or parties the reasonable expenses including attorneys’ fees, taxable as costs, incurred as a result of such action.” A copy of the Oklahoma legislation can be found here.


Professor Brown notes that the Oklahoma arrangements are, in a sense, narrower than what the Delaware Supreme Court approved, as the Oklahoma legislation only applies to derivative suits, and it is more balanced, as it provides for the awarding of attorneys fees for successful derivative plaintiffs.


Nevertheless the “loser pays’ model that the Oklahoma legislation adopts is extraordinary —  It represents a significant departure from what is general known as the American Rule, under which each party typically bears its own cost. And unlike the fee-shifting bylaws being debated in Delaware –which would in any event require each company to decide whether it was going to adopt the bylaw (and might therefore be subject to shareholder scrutiny) — the Oklahoma legislation applies to any derivative action in the state, even if the company involved is not an Oklahoma corporation.


As Professor Brown points out in his blog post, derivative actions are often dismissed on procedural grounds (for example, based upon the failure to make a demand on the board, without a judicial determination that demand would be futile), meaning that derivative lawsuit plaintiffs often do not prevail. Under this statute, a shareholder plaintiff that does not prevail “will be forced to pay the other side’s fees, something that can result in dollar amount s that stretch into six and seven figures.”


The risk of this possibility, according to Professor Brown “provides a significant disincentive to file a suit against the board for breach of fiduciary duties” – which, it seems to me, was the Oklahoma legislature’s intent. I don’t have a good sense of how many derivative lawsuits are actually filed in Oklahoma’s courts, but whatever the number is, now with this legislation in place, there are certainly going to be fewer derivative lawsuits filed in the Sooner State than there were in the past.


I know there are some who might say that is a good thing. For his part, Professor Brown says the effect of these fee shifting provisions is “to insulate challenges to boards for breach of the duty of loyalty, for bad faith, or for wasting corporate assets. In other words, it has the potential to render boards unaccountable for their actions as directors.”


Professor Brown says that Oklahoma is the “first state to intervene in the debate” about fee shifting in derivative litigation. His use of the word “first” is telling – he did not say “only.” For starters, we know that Delaware is going to get into the mix on these issues sometime in 2015. In addition, as things stand, there is a Delaware Supreme Court decision holding that fee shifting bylaws are valid. If the Delaware legislature fails to act, or winds up taking a different action than originally proposed, fee shifting bylaws might well become a regular bylaw provision for Delaware corporations. And while we will have to wait to see what Delaware’s legislature  will do, perhaps other states will, like Oklahoma, adopt  a “loser pays” rule, or permit companies incorporated in their jurisdiction to adopt fee shifting by laws.


I don’t expect that every state’s legislature would be willing to adopt a bill like the one Oklahoma’s legislature passed, but there are some other states that might. If this kind of legislation becomes widespread, the environment for litigating derivative lawsuits in this country could be substantially altered. In any event, there will be many more developments ahead as this particular story unfolds.


Break in the Action: Due to Travel Requirements, the D&O Diary will not be published for the next few days. Regular publication will resume once I am back in the office toward the end of next week.


SEC Announces Largest Yet Whistleblower Bounty Award of Over $30 Million

Posted in Securities Litigation

seclogoIn what is by far the largest whistleblower bounty award yet under the Dodd-Frank’s whistleblower provisions, the SEC on September 22, 2014 announced an award of between $30 and $35 million to a whistleblower who provided original information that led to a successful SEC enforcement action. In the SEC’s Order providing for the award (here), the name of the company against whom the report was made and the name of the award recipient are redacted. In addition to the sheer size of the award, there are a number of other interesting features about the award.


The SEC’s September 22, 2014 press release about the award can be found here. A September 22, 2014 press release from the law firm that represented the whistleblower can be found here.  


Section 922 of the Dodd-Frank Act created certain new whistleblower incentives and protections. The section directs the SEC to pay awards to whistleblowers that provide the Commission with original information about a securities law violation that lead to the successful SEC enforcement action resulting in monetary sanctions over $1 million.  The size of the award may range from 10 % to 30% of the amount recovered in the enforcement action. The section also prohibits retaliation against whistleblowers. By law, the SEC protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity.


The SEC announced its rules implementing the Dodd-Frank whistleblower provisions in May 2011, but until now there still have been relatively few awards. According to the SEC press release, there have been a total of only 14 awards so far (including nine so far in fiscal 2014, which ends next week.) Until this latest award announced on Monday, the largest previous award under the program had been the agency’s October 2013 award of $14 million (about which refer here).


The latest award is more than twice as large as the prior record award. The percentage awarded is redacted from the SEC’s Order, but the dollar figure is specified in the Order, which states that “given the monetary sanctions thus far collected, [the percentage awarded] should yield a total award of between $30 million and $35 million.” The amount awarded implies that the amount of the enforcement order was between $300 and $900 million dollars. However, there are clues in the SEC’s Order suggesting that the enforcement award was at the lower end of the range.


The Order states that in determining the amount of the award, the agency took into account the significance of the information provided and the law enforcement interests at issue. However, the whistleblower objected to the percentage of the award, arguing that it was lower than the percentage of other awards the agency has made. The Order acknowledges that a downward adjustment was made based on the whistleblower’s delay in making the report.


The Order refers to the whistleblowers “delay in reporting the violations, which under the circumstances we find unreasonable. The duration of the delay has been redacted, but the Order does say that during  the period of the whistleblower’s delay in coming forward, “investors continued to suffer significant monetary injury that otherwise might have been avoided.” This discussion and the fact of the downward adjustment to the award percentage suggests that the percentage award was at the lower end of the range, which in turn suggests that the amount of the recovery from the target company was at the lower end of the conjectured range (that is, closer to $300 million).


One particularly interesting feature of this award is that the whistleblower is a foreign resident. According to the SEC’s press release this is the fourth whistleblower award to a resident of a foreign country, which the agency says “demonstrates the program’s international reach. “ The head of the SEC’s whistleblower office is quoted in the press release as saying that the award “shows the international breadth of our program as we effectively utilize valuable tips from anyone, anywhere to bring wrongdoers to justice.’” The whistleblower office head is also quoted as saying that “whistleblowers from all over the world should feel similarly incentivized to come forward with credible information about potential violations of the U.S. securities laws.” Neither the Order nor the press release says whether or not the company against which the report was made is a foreign domiciled company.


The fact that foreign residents have received whistleblower awards is in at least one respect not surprising. The SEC’s latest annual whistleblower report stated that nearly 12% of all whistleblower reports during fiscal 2013 were from non-U.S. residents. The size of this award seems likely to encourage others to come forward, both inside and outside the U.S. However, despite the size of this recent award, one factor that may discourage prospective non-U.S. whistleblowers is the recent holding of the Second Circuit (discussed here) in which the appellate court determined that the Dodd-Frank Act’s provisions protecting whistleblowers from retaliation do not apply to non-U.S. residents.


There is some irony in the number of whistleblower awards so far to foreign residents. That is, at least some other countries that have actively considered whether or not to have an active bounty system to provide monetary awards to whistleblowers have decided against it. As discussed here, the UK regulatory authorities recently rejected the idea.


There are several implications from this latest large award. The first is that this award, taken together with the $14 million award last October, shows that the agency is prepared to make some very large awards indeed. Which in turn seems likely to have the effect of encouraging others to come forward.  Along the same lines, it now seems that while it has taken a while to get going, the likely will be more awards announced more frequently, which again could have the effect of encouraging prospective whistleblowers.


The second is that the whistleblower program is leading directly to significant enforcement activity. In the press release accompanying this award, an agency spokesperson is quoted as saying that in the absence of the whistleblower report the underlying fraud would have been very hard to detect. The inference is that the program is promoting additional enforcement activity.


What remains to be seen is the extent to which the whistleblower program and the increased enforcement activity will lead to increased follow-on civil litigation. There have been recent cases (refer for example here) where securities class action litigation has followed in the wake of whistleblower reports, but so far to my knowledge there have been no cases where a follow on civil lawsuit  has followed after and because a whistleblower report to the SEC. Indeed, the SEC’s elaborate efforts to protect the identity of the whistleblower and the identity of the targeted company present impediments to this kind of litigation developing.


Nevertheless I think it is likely that the increased enforcement activity will lead to increased follow-on civil litigation, even if just as a result of the enforcement activity if not the whistleblower report itself. Before all is said and done the whistleblower provisions, could have a significant impact on the level of enforcement activity and on amount of civil litigation.


One final observation. The fact that this whistleblower was represented by a law firm  – which  published its own press release about this award – says something in and of itself. The law firm involvement clearly suggests a perception that there the whistleblower program represents a business opportunity. The involvement of counsel also suggests a way that follow-on litigation might still go forward notwithstanding the SEC’s efforts to protect the identity of whistleblowers.

D&O Insurance: Prior and Pending Litigation Exclusion Bars Coverage for Lawsuit Filed Years Before But Served During the Current Policy Period

Posted in D & O Insurance

paUnder which claims made D&O insurance policy is there coverage for a claim that was filed under seal years ago but not served on the policyholder until the policy period of the current policy? If you find the answer “no policy” as unsatisfying as I do, read on. In a September 15, 2014 opinion (here), a three-judge panel of the Superior Court of Pennsylvania affirmed the trial court’s grant of summary judgment holding that Amerisource Bergen’s D&O insurance policy’s prior and pending litigation exclusion precluded coverage for a False Claims Act lawsuit that was filed under seal in 2006 but not served on the company until 2010. In the discussion section below I try to sort out what happened here.



On June 5, 2006, Kassie Westmorland filed a False Claims Act lawsuit against Amerisource Bergen and Amgen. The action alleged that the defendants had submitted false Medicare claims relating to a particular drug. Pursuant to the standard procedure for this type of action, the lawsuit was filed under seal, in order to permit the U.S. government to determine whether or not it would take up the suit. Amerisource did not learn of the existence of the matter until March 2008, when Amgen informed Amerisource that Amgen was under investigation. In February 2009, the Department of Justice informed Amerisource and Amgen that it was reviewing the allegations. In February 2009, the federal court permitted a redacted copy of the complaint on the court’s electronic docket. In January 2010, Amerisource received service of process of the lawsuit.


In July 2009 – that is, after the redacted complaint was available on the court docket but before Amerisouce had been served with the complaint – Amerisouce provided its primary D&O insurer with formal notice of a potential claim. The insurer had been the primary insurer on Amerisource’s D&O insurance program for the policy years 2007-08, 2008-09, and 2009-10. For the policy year 2006-07, the insurer had been in an excess position in Amerisource’s D&O insurance program and a different insurer had been in the primary position.


The insurer denied coverage to Amerisource under the 2009-10 primary policy and refused to pay Amerisource’s expenses incurred in defending the False Claims Act action. Amerisouce filed an action in Pennsylvania state court against its primary D&O insurer alleging breach of contract and bad faith. On July 16, 2013, the trial court granted the insurer’s motion for summary judgment, on the ground that both Exclusion L (“prior and pending litigation”) and Exclusion Y (“false, deceptive or unfair business practices”) precluded coverage. Amerisource appealed.


The 2009-10 policy defines the term “Claim,” in relevant part as a “civil proceeding against [Amerisource] seeking monetary damages … commenced by the service of a complaint or similar pleading” or a “written demand against [Amerisouce] for monetary damages.”


Exclusion L to the policy, the “Prior or Pending Litigation” exclusion, excludes any Claim


alleging, based on, arising our of, attributable to any prior or pending litigation, claims, demands, arbitration, administrative or regulatory proceeding or investigation filed or commenced on or before the earlier of the effective date of this policy or the effective date of any policy issued by [the Insurer] of which this policy is a continuous renewal or a replacement, or alleging or derived from the same or substantially the same fact, circumstance or situation underlying or alleged therein.


September 15 Opinion

In a September 15, 2014 Opinion written by Judge Patricia Jenkins for a three-judge panel,  the Superior Court of Pennsylvania affirmed the trial court’s ruling, holding that coverage was precluded under exclusion L.


The court began is analysis by citing with approval from an earlier federal district court opinion in which that court, explaining the purpose and operation of claims made insurance policies which provide coverage only for claims first made during the policy period, said that “claims made policies generally include a number of endorsements and exclusions intended to limit [the] front end risk by cutting off liability for claims ready, but not yet made, at the start of the policy period.” The appellate court noted that Exclusion L, the prior and pending litigation exclusion, in Amerisource’s D&O insurance policy is “one such exclusion intended to limit [the Insurer’s] front and risk for claims ready, but not yet made, at the start of the policy period.”


The appellate court rejected Amerisouce’s argument that the exclusion had not been triggered because, even though the lawsuit had been filed in 2006, the company was not served with the complaint until January 2010. The court said that, in order to be triggered, the exclusion requires only that the prior litigation has been “filed” or “commenced.” The court said that “we think it is clear that litigation is ‘filed’ or ‘commenced’ against an entity when it names that entity as a defendant, is filed with a court, and is docketed and given a case number. Nothing in the ordinary meaning of those terms requires service of original process or unsealing of the complaint in order for an action to be ‘filed’ or ‘commenced.’”


The appellate court also drew a comparison between the policy’s definition of “Claim,” which expressly references the requirement for the service of a complaint, and Exclusion L, which does not. The court said that “the explicit requirement in [the definition of “Claim”] demonstrates that the parties knew how to include a service requirement when they so desired.” The court added that “the absence of a service requirement from exclusion L demonstrates that the parties did not intend for ‘filing’ or ‘commencement’ of litigation in exclusion L to depend upon service of process.” 


The appellate court also rejected Amerisouce’s argument that the exclusion does not apply because the 2009-10 primary policy was part of a series of insurance policies that extend back to May 1, 2006, thus predating the June 2006 lawsuit. The court disagreed with Amerisouce’s contention that the claimant had filed or commenced her lawsuit on or after “the earlier of the effective date of the [2009-10 policy] or of any policy issued by [the Insurer] of which the [2009-10 policy] is a continuous renewal or a replacement.” The court said that the 2009-10 policy was a continuous renewal policy of the first of the primary policies it had issued in the 2007-08 policy period. The 2009-10 policy, the court said, was neither a continuous renewal policy nor a replacement of the carrier’s 2006-07 excess policy, as the 2009-10 policy did not “replace” the 2006-07 policy. The court noted that the language in the exclusion was written in the disjunctive, so it did not apply to a series of policies that included a combination of renewals and replacements.


Finally, because the appellate court found that exclusion L applies to preclude coverage, it did not need to review whether or not exclusion Y (“false, deceptive or unfair business practices”) applies.



In thinking about the outcome of this case, it is probably worth keeping in mind that there might not have been coverage here even if Amerisource had been able to clear the prior and pending litigation exclusion hurdle. The appellate court did not reach the question of whether or not the deceptive trade practices exclusion applied, but the trial court had concluded that the exclusion also precluded coverage for this claim. So in the end there simply may not have been coverage for this claim under the D&O insurance policy in place when the claim was finally made.


Just the same, there is something particularly unsatisfying about the outcome of this case. Within the meaning of the claims made insurance policy itself, the “Claim” – in the form of the False Claims Act lawsuit – was not “made” against Amerisouce until it was served on the company in January 2010. Amerisouce had apprised the insurer of the potential claim shortly after the company itself had learned of the lawsuit. It couldn’t have provided notice before that, because it simply didn’t know of the details of the lawsuit’s existence. It is very hard not to regard this as a situation where the insurer avoided coverage because the policyholder got ambushed by a concealed lawsuit.


I suppose one way to look at this is that the prior and pending litigation exclusion operates to parcel out the risk that there might be a lawsuit out there that was already underway before the policy commenced but that nobody yet knows about. It could be argued that, as demonstrated in this case, the exclusion is set up so the risk that there might be a lawsuit out there falls on the policyholder and not the insurer.


In trying to pinpoint what is wrong with what happened here, it occurs to me that there is sort of a threshold theoretical problem with the application of the prior or pending litigation exclusion to the false claims act lawsuit. The prior and pending litigation exclusion is meant to address separate litigation, not the lawsuit for which coverage is sought. This just isn’t the sort of situation to which the prior and pending litigation exclusion was meant to apply.


I can think of several possible solutions. The first is that the prior and pending litigation exclusion could be amended to provide that the exclusion does not apply to False Claims Act complaints that were filed but not served prior to the effective date of the policy. The potential shortcoming of this solution is that there may be other types of lawsuits, beyond just False Claims Act claims, where the sequence of events that occurred here might also unfold.


So maybe the best way to avoid this problem would be to line up the language between the prior and pending litigation exclusion and the definition of claim, so that both require service of process. Of course carriers might not be willing to go so far, the standard prior and pending litigation exclusion is deliberately written broadly, so that carriers can restrict what the court here called the “front end” risk.


One thing occurs to me in thinking about the “front end risk” analysis that is the theoretical justification for the inclusion of a prior and pending litigation exclusion on a policy like this one. That is, a carrier arguably has a legitimate concern about “front end” risk when claim made coverage first incepts. But in subsequent policy years, the legitimacy of that concern diminishes –which is obviously the reason for the inclusion in the exclusion of the language about the earlier date of prior policy of which this policy is the continuous renewal.


While the “continuous renewal” language helps, what might make more sense is to say that at some point the prior and pending litigation exclusion should come off the policy altogether. Where a policyholder has had a continuous program of claims made insurance coverage in place over a period of time, the “front end risk” ceases to provide the theoretical justification for the inclusion of the prior and pending litigation exclusion, and it could be argued that the prior and pending litigation exclusion should no longer be a part of the policy.


I recognize that views about this situation may differ, and I welcome readers’ comments about this claim, particularly those on the carrier side who may take a different view of the policy exclusion and how it was applied here.


Very special thanks to Arthur Washington of the Mendes & Mount law firm for sending me a copy of this decision. (Mendes & Mount was not involved in the case.) I hasten to add that the views expressed in this blog post are exclusively my own.


UPDATE: A reliable source advises that this claim involved an E&O policy, not a D&O policy.


Insurance Panel Discussion in New York on October 15: H.S. Grace & Company, Inc. is sponsoring  a complimentary Insurance Update Breakfast event at the Princeton Club in New York City on October 15, 2014. My good friend Joe Monteleone of the Rivkin Radler law firm will be moderating a panel focused on Shareholder Derivative Litigation followed by a session discussing Representations and Warranties insurance. The event sponsor expects to receive 1.5 CLE credits in New York, which are also recognized in New Jersey. For more information about this event, please refer here.

JOBS Act Provisions Fuel IPO Surge, Raise Concerns

Posted in IPOs

tockertapeAll eyes may be on the record-setting IPO of Chinese Internet firm, Alibaba, but the real IPO story for 2014 may be the significant number of IPOs this year involving smaller companies. The number of companies completing IPOs this year  is on pace for the highest annual level since 2007, a surge in initial public offerings that, according to recent academic research, is due at least in part to the so-called IPO on-ramp procedures in the Jumpstart Our Business Start-Ups (JOBS) Act, which Congress enacted in 2012. Just the same, while most of the eligible companies appear to be taking advantage of the JOBS Act provisions, at least some commentators have raised concerns about the provisions’ long-term effects.


The JOBS Act’s IPO on-ramp procedures are designed to ease the process of going public for “emerging growth companies”(EGCs),  which the Act defines as companies with annual revenues less than $1 billion. Under these provisions, EGCs may submit their draft registration statements to the SEC confidentially and only need to disclose their intention to list their shares 21 days before they start investor roadshows. The EGCs can also release just two years of audited financial statements, rather than the standard three, and need only disclose the compensation of the top three executives rather than the standard five.


Many companies are taking advantage of these JOBS Act provisions. According to a study by Ernst & Young cited in a recent Wall Street Journal article (here), almost 80% of EGCs filing for IPOs have used the confidential filing provisions, 90% took advantage of the reduced compensation disclosures and 45% are using the provision that allows them to file only two years of audited financials.


An August 26, 2014 paper from three academics suggests that the IPO on –ramp procedures  are spurring companies to undertake and complete initial public offerings. In their paper entitled “The JOBS Act and IPO Value: Evidence that Disclosure Costs Affect the IPO Decision” (here), Michael Dambra of SUNY Buffalo, and Laura Casares Field and Michael Gustafson of Penn State report their findings that, controlling for market conditions,  the JOBS Act provisions have boosted listings by 21 companies annually, a 25 percent increase compared to the average number of IPOs from 2001 to 2011, while at the same time IPOs in other developed countries have remained below their pre-2012 numbers.


The JOBS Act provisions have been a particular boon for companies in certain industries, particularly biotech and pharmaceutical companies, as well as technology, media and telecommunications. According to data compiled by Bloomberg (here), there were twice as many biotech IPOs in 2013 than in any year since 2004.


Another sector whose offerings have been boosted is foreign-domiciled companies. According to an August 29, 2014 post on the MoFo Jumpstarter blog entitled “The Rise of Foreign Issuer IPOs” (here), foreign issuers have proven to be particularly keen to take advantage of the JOBS Act provisions.


The blog post reports that of the 222 IPOs completed in 2013, 37 involved foreign issuers (including30 EGCs, or 13.5% of all 2013 IPOs), compared to 21 foreign issuers (including 12 EGCs, or 9.3% of all 2012 IPOs) among the 128 companies that completed IPOs in 2012.In 2014, as of the date of the blog post, there have already been 44 foreign issuer IPOs in the U.S., raising $10.3 billion. The foreign companies completing U.S. listing during 2014 includes companies from sixteen different countries, with the largest number (15) from the Cayman Islands and China (12). In addition to the companies that have already completed IPOs in 2014, there are in addition nine foreign issuers in registration.


According to a recent Wall Street Journal article (here), the early results for EGC IPO companies have been impressive. Nearly 20% of the EGCs that went public in 2013 started trading above their expected price range, compared with about 10% for big company IPOs. In addition, in their first three months of post-IPO trading, shares in companies with less than $1 billion in revenues gained 38% versus a 15% average gain from 2000 until the JOBS Act took effect, which also beat last year’s average three-month post-IPO  gain of about 35% for bigger companies.


But while much of the news appears to be good, some apprehensions have started to emerge.  As discussed in a September 15, 2014 Wall Street Journal article entitled “Relaxed Rules for Small-Company IPOs Raise Concerns” (here), some commentators have started to worry about a “JOBS Act effect” in which the EGCs lead off with a share price increase but “start to fizzle” within a year. The article notes that while the smaller company IPOs often begin with a rising stock price, the pattern of gains often then reverts to historical trends, in which larger-company IPOs turn in a better long-term performance. Thus, among 2013 IPOs, larger-company IPOs have posted average gains of 40%, while returns from smaller companies is about 38%, the same pattern as before the JOBS Act.


Among the issues that seems to be weighing on the smaller company stock are concerns relating to the reduced information the EGCs supply with the registration statements. The Journal article quotes one commentator as saying that “less information and less transparency are ultimately negative.” The article cites specific concerns about the smaller companies’ executive compensation disclosures. Another risk for investors is that ‘economic growth and low interest rates have fueled the stock market, potentially masking the true effects of the JOBS Act.” It could be, according to Lynn Turner, the SEC’s former Chief Accountant, years before it is clear if the JOBS Act’s exemptions were worth it.


I don’t know whether or not there actually is a “JOBS Act effect” or whether EGCs will  in fact “start to fizzle.” There is no doubt that all companies, including EGC IPO companies, are enjoying the current benign market conditions, and there is no doubt that if, say, the Fed starts to raise interest rates, the market conditions could change for EGC IPOs along with everybody else.


But whether or not there is a JOBS Act effect, the one thing I know is that as the numbers of IPOs increases, the number of IPO-related lawsuits has also increased, as I documented in a recent post (here). When any IPO company has a stumble or hits an obstacle, the company’s share price tends to decline sharply. When that happens, a securities class action lawsuit often follows. It will be interesting to watch as the numbers of EGC IPO companies accumulates whether any lawsuits reference disclosure issues relating to the JOBS Act provisions. Another factor that will be interesting to watch is the extent to which the foreign issuer IPOs are drawn into IPO-related litigation.


In any event, given the typical post-offering lag between the IPO launch date and the usual timing of post-IPO litigation, it seems likely that as the numbers of IPOs have continued to grow during 2014, we will continue to see IPO-related litigation continue to accumulate at least into 2015.

Guest Post: Activist Shareholder: The New Kid on the German D&O-Block

Posted in International D & O

BurkhardAlthough I try to include on this blog topics involving issues from outside the United States, because of my background and experience, U.S-related topics tend to predominate. That is why I am always grateful to have the opportunity to publish a guest post from a non-U.S. reader. I have published below an article discussing D&O insurance issues in Germany from Dr. Burkhard Fassbach who is a partner in  the Dusseldorf-based D&O advisory firm, Hendricks & Co. Burkhard is licensed to practice law in Germany and is standing legal counsel to the German operation of the London-based Howden Broking Group. 

I would like to thank Burkhard for his willingness to publish his guest post on my site. I welcome guest post submissions from responsible authors on topics of interest to readers of this blog. If you would like to publish a guest post, please contact me directly. Here is Burkhard’s guest post: 



In the wake of the financial crisis, leading corporate governance experts in the U.S. have urged the separation of the personal union of chairman and CEO, i.e. the CEO-duality. The advocates make reference to the perks that the German two-tier board system entails. Through proxy fights taking place in shareholders’ meetings, institutional investors and activist shareholders in the U.S. increasingly succeed in their endeavor to split the functions of chairman and CEO. The shareholders’ meeting in Germany is in charge of the decision whether to grant D&O insurance protection to the supervisory board members or not. Conflicts of interest almost invariably gain center stage in this context. The common goal of both debates is the split.


I. The German Stock Corporation Act’s authority regime regarding the granting of D&O insurance coverage 

Quoting to German literature and treatises on stock corporation law, Professor Christian Armbrüster of Berlin University has pointed to its authority rules according to which the decision whether to grant D&O insurance protection to the executive board members rests on the supervisory board. The granting of D&O insurance protection to the members of the supervisory board lies within the competence of the shareholders’ meeting. The executive board effectuates the conclusion of the insurance contract. See Armbrüster, VersR 2014, 1 seq.


It has been in the journal ‘The Supervisory Board’ (2nd issue, 2013) that the author has red-flagged the necessity of separate D&O protection for supervisory board members with a distinct insurance carrier in the German two-tier board system. In adherence to the above-mentioned authority rules, foreign institutional investors will also have a say in the decision. Hence, in Germany the shareholders are in the driver’s seat for this question.


In an article dating from May 10, 2013, published in the German daily newspaper F.A.Z. headed  “majority of DAX (German Share Index) companies in foreign ownership”, Gerald Braunberger, making reference to a pertinent academic study, demonstrated that the majorities of shares of the 30 companies listed in the DAX are owned by foreign investors. On average, foreign portfolios comprise 55 percent of these shares. For the most part, the foreign purchasers are wholesale investors such as pension and investment funds, banks, and insurers. The author points to the foreign shareholders’ exerting influence on German companies, such as in the case of the chairman of the supervisory board of Lufthansa. Just as palpable was the influence of foreign investors on the fate of Deutsche Bank, the author claims. It was foreign investors who appreciably contributed to the decision to refrain from Josef Ackermann’s inaugural to the office of the chairman of the supervisory board of Deutsche Bank after his removal from the office of chairman of its executive board. See Gerald Braunberger, Majority of DAX Companies in Foreign Ownership, F.A.Z., May 10, 2013, at


II. Activist shareholder 

The term ‘activist shareholder’ is defined as a shareholder who uses her stock ownership in order to exert pressure on management in public. The activists’ goals encompass both financial and ideational interests. In the former alternative, they seek to enhance the shareholder value by means of changing corporate policy and financial machinery, implementation of measures of cost cutting, etc.; in the latter alternative, they pursue goals such as disinvesting in certain countries or implementing a corporate policy that is more ecofriendly. Such activism manifests in various facets: proxy fights, public campaigns, resolutions of shareholders’ meetings, negotiation and litigation with management. See at This article will discuss recent endeavors to implement quasi-dualistic board structures in the U.S. The impetus in the U.S. to separate the functions of CEO and chairman is rather unillumined in the German law society.


III. Severance of the CEO-duality in the U.S. 

A scenario that was subject to comprehensive news coverage emerged in May 2013 at the shareholders’ meeting of JPMorgan Chase & Co. in Tampa, Florida, where shareholders proposed the independence of the chairman drawing on the following rationale: ‘Is a company a sandbox for the CEO, or is the CEO an employee? If he’s an employee, he needs a boss, and that boss is the board. The chairman runs the board. How can the CEO be his own boss?’ See supporting statement of shareholder proposal 6 in the bank’s definitive proxy statement in 2013, here. James L. Dimon, CEO and chairman of JPMorgan, opposed the shareholders’ demand for independence.


The occurrences were kicked off on the backdrop of a trader of the bank causing a gigantic loss. As a result, the leadership function of the CEO was cast doubt upon. The shareholders were eager to improve corporate governance structures of the bank by having an independent chairman acting as a counterweight to the chief executive. Voting culminated and became a referendum on James L. Dimon himself. It has been through intense lobbying that he was able to prevail. Eventually, 32.2 percent of the shares supported a separation of the two leadership positions in the bank. See Jessica Silver-Greenberg  and Susanne Craig ‘Strong Lobbying Helps Dimon Thwart a Shareholder Challenge’, New York Times, May 21, 2013.


In just about every shareholder meeting of listed corporations in the U.S., shareholder activists speak out in favor of splitting the chairman from the CEO. Leading American economic journalists support this clear tendency. In the March 30, 2009 issue of the Wall Street Journal, Johann S. Lubin, under the headline ‘Chairman-CEO Split Gains Allies – Corporate Leaders Push for Firms to Improve Oversight by Separating Roles’, drew attention to an academic study conducted by the Millstein Center for Corporate Governance and Performance at Yale University School of Management. The study (Policy Briefing No. 4: Chairing the Board – The Case for Independent Leadership in Corporate North America) is available on the internet. See at Endeavors to this effect are also continuously covered in the blog of the Harvard Law School Program on Corporate Governance. See at Experts have proclaimed the independence of the chairman and issued an appeal to the NYSE and NASDAQ to make the independence of the chairman a mandatory listing standard.


In the March 12, 2013 issue of Fortune Magazine, Elizabeth G. Olson put the postulation in a nutshell:


‘Governance groups say that the corporate coziness – the CEO acts as his own boss because he reports to himself in his chairman role – allows unchecked risk taking that may produce spectacular short-term results but winds up harming the company.’ See Elizabeth G. Olson, ‘Why the CEO-chair split matters’, Fortune Magazine, March 12, 2013.


Meanwhile, activists in the U.S. have been producing overwhelming success. According to a paper written by Charles Tribbett printed in the journal ‘THE CORPORATE BOARD’, 44 percent of the S&P 500 corporations had implemented a split of the jobs of chairman and CEO in 2012. As regards the segment of NASDAQ 100, 62 percent of the corporations had a split in 2012. See Charles Tribbett, ‘Splitting the CEO and Chairman Roles – Yes or No?’, THE CORPORATE BOARD, November / December 2012.


IV. The German D&O two-tier trigger policy gaining interest in the U.S. 

The necessity of separate D&O insurance protection for the members of the supervisory board is predicated on conflicts of interest. In essence, the rationale is conterminous with the one that U.S. American shareholder activists rely upon in furtherance of the separation of CEO and chairman. So do they invoke conflicts of interest in order to substantiate their position. Except for in a limited number of monistic European Public Companies, management is institutionally separated from monitoring in the German board system. And yet, which strikes the observer as odd, members of both organs, i.e. the executive and the supervisory board, are collectively insured in Germany under the same policy with the very same insurer. This is the result of an unreflecting reception of U.S. American coverage concepts in Germany. D&O experts in the U.S. convey their interest in the latest discussion surrounding the two-tier trigger policy in Germany. See guest post in D&O Diary at The upshot of the essential reasoning underlying such a concept of a two-tier trigger D&O insurance structure is this:


Pursuant to the German Stock Corporation Act § 111(1), the supervisory board shall supervise the management of the company. As the monitoring of management rests with the supervisory board, any mistake (breach of duty) made by management can theoretically be converted into a mistake by the supervisory board. See Bachmann, NJW-Beil. 2014, 43 (44); see also BGHZ 117, 127 seq., BGH, ZIP 2007, 224 seq. Practice in damage case is permeated by the defendant members’ of the executive board serving third-party notices on the members of the supervisory board that acted on the basis of the ARAG-doctrine. In such a scenario, the insurer must refrain from simultaneously representing the opposing interests of the defendant executive board members and the notified supervisory board members. The insurer is ensnared in an inherent conflict of interest. See Schäfer/Rückert, German language interview on the Director’s Channel, at If the insurer exerts his sole authority to conduct litigation, then, in accordance with the legal precedents set forth by the Federal Supreme Court, it shall protect the interests of the insured person in the same way a lawyer retained by that person would. See BGHZ 119, 276 (281); BGH r+s 2011, 499 (599). That is to say the insurer must not defend claims both on behalf of the executive and the supervisory faction.


V. Conclusion  

According to the German authority regime in the Stock Corporation Act, the decision whether to afford separate D&O insurance protection to the supervisory board members (two-tier trigger policy) is one to be made by the shareholders’ meeting in Germany. Thus, foreign investors in Germany – in particular from the U.S. – also have a say in this vital decision. Through their endeavors to sever the CEO-duality, activist shareholders in the U.S. are familiar with the rationale prompting the separate D&O insurance protection of supervisory board members in Germany. Conflicts of interest almost invariably become virulent in this context. The common goal of both debates, i.e. in the U.S. and Germany, is the split.



Who is an “Officer”? A Critical Inquiry for Indemnification and Insurance

Posted in Corporate Governance

gsMany companies provide advancement, indemnification and insurance benefits and protection for their officers and directors. However, it is not always clear who is an “officer” for purposes of claiming the benefits and protection. The long-running and high-profile saga of Sergey Aleynikov, the former Goldman Sachs computer programmer and company Vice President accused of stealing proprietary electronic computer code used in the company’s high frequency trading platform, presents a vivid example of the problems that can arise when the meaning of the term officer is unclear.


In a September 3, 2014 opinion (here), the Third Circuit found that the term “officer” in Goldman’s bylaws to be ambiguous and therefore vacated the district court’s ruling that Aleynikov was entitled to advancement from Goldman of his criminal defense expenses. As discussed below, the Third Circuit’s opinion underscores the problems involved when indemnification provisions do not clearly specify who is an officer entitled to the provisions’ benefits. The opinion also presents a number of lessons for those involved in drafting indemnification provisions.



Goldman, Sachs & Co is a broker-dealer limited liability partnership organized under New York law. It is a non-corporate subsidiary of GS Group, a Delaware Corporation. Aleynikov was employed by GSCo from May 2007 through June 2009 as part of a team of computer programmers responsible for developing source code for GSCo’s high frequency trading system. During his GSCo employment, Aleynikov carried the title of “vice president.” He did not supervise other employees and he exercised no management or leadership responsibilities.


In April 2009, Aleynikov accepted a job with a start up company in Chicago. Before leaving GSCo, Aleynikov allegedly copied onto his home computer thousands of lines of confidential source code. Aleynikov was later arrested and charged federally with theft of trade secrets in violation of the Electronic Espionage Act. Aleynikov was convicted of the federal charges and sentenced to 97 months in prison. However, the Second Circuit reversed the conviction on the grounds that Aleynikov’s conduct did not fall within the scope of the charged federal offenses. Shortly thereafter, Aleynikov was indicted by a state court grand jury on charges of unlawful use of secret scientific material and unlawful duplication of computer related material. The state court charges remain pending.


Michael Lewis, the author of Moneyball and Liar’s Poker,  has a very interesting and detailed account of Aleynikov’s odyssey through the criminal justice system in a September 2013 Vanity Fair article entitled “Did Goldman Sachs Overstep Criminally Charging its Ex-Programmer?” (here). Lewis’s article is worth reading even if you aren’t interested in the other legal issues surrounding Aleynikov’s criminal prosecution.


Aleynikov filed a civil action in the District of New Jersey seeking indemnification for the defense expenses he incurred in the federal criminal action and seeking advancement of his defense expenses in the state criminal action. In seeking indemnification and advancement, Aleynikov sought to rely on Goldman Sachs Group’s bylaws, under a provision applicable to non-corporate subsidiaries like GSCo. The provision specifies that “the term ‘officer’ shall include in addition to any officer of such entity, any person serving in a similar capacity or as the manager of such entity.”


Goldman opposed Aleynikov’s entitlement to either indemnification or advancement, arguing that despite his “vice president’ title, Aleynikov was not an officer of his company, and that in any event, whatever indemnification rights Aleynikov may have for his successful defense of the federal criminal action, his rights are subject to set-off based on the company’s counterclaims against him for breach of contract, misappropriation of trade secrets and conversion. The parties cross-moved for summary judgment.


As discussed here, in an October 2013 opinion, District of New Jersey Judge Kevin McNulty granted summary judgment in Aleynikov’s favor on his claim for advancement but denied his motion for summary judgment on his motion for indemnification. Judge McNulty also denied Goldman’s cross-motion for summary judgment on the indemnification issue. Goldman appealed to the Third Circuit.


The September 3 Opinion

In a September 3, 2014 majority opinion written by Judge Raymond C. Fischer (with Judge Julio Fuentes dissenting), the Third Circuit concluded that the term officer as used in Goldman’s bylaws was ambiguous and accordingly vacated the District Court’s grant of summary judgment on the advancement issue. The appellate court affirmed the district court’s denial of Goldman’s motion for summary judgment on the indemnification issue.


In concluding that the word officer as used in the bylaw was ambiguous, the court said that the bylaws’ definition of the term was “circuitous, repetitive, and mot importantly, fairly or reasonably susceptible to more than one meaning.” Because the court determined that the term was ambiguous, it determined that it could look beyond the bylaws themselves to determine the intended meaning of the term.


The court concluded that two kinds of extrinsic evidence are relevant to the inquiry – “course of dealing” evidence and “trade usage” evidence. With respect to the course of dealing evidence, the court said that Goldman’s procedure for appointing and removing officers, which the district court had discounted because they were not always followed and were not in any event made public, may be of relevance for a jury to decide.


The appellate court also referred to evidence Goldman had introduced on its track record of providing indemnification for other individuals at GSCo. The record showed that over a six year period, Goldman has paid the attorneys’ fees of fifty-one of fifty three who had sought indemnification. More specifically, Goldman had paid the attorneys’ fees of fifteen of seventeen “vice presidents” who has sought indemnification. The district court had discounted this evidence, but the court said it provided some evidence from which a jury could interpret Goldman’s contention that indemnification decisions were discretionary.


Finally the court considered the trade usage evidence Goldman had offered, which was that there has been significant “title inflation” in the financial services industry and that the title “vice president” is not particularly meaningful. The district court had also discounted this evidence, in effect saying that it was Goldman’s problem that it might have been profligate in its bestowal of titles.


The appellate court said that the extrinsic evidence that Goldman offered raised genuine issues of material fact on the question of whether or not Aleynikov was entitled to advancement under the relevant bylaws. In concluding that it was appropriate for the extrinsic evidence to be taken into account, the appellate court also rejected the argument, that the district court had accepted, that in any event as the creator of the bylaw, the bylaw should be interpreted against Goldman under the principles of contra preferentem. The appellate court said that interpreting the bylaws in Aleynikov’s favor against Goldman is “putting the cart before the horse” because, the court found, there was a prior question of whether or not Aleynikov was a beneficiary of the bylaws.


In his dissent, Judge Fuentes said that while he agreed that the term officer as used in the bylaws was ambiguous, he believed that under Delaware law an ambiguous term in a corporate instrument should be construed against the drafter rather than inviting use of extrinsic evidence to decipher the term’s meaning. He would have interpreted the ambiguity of the definition against Goldman, particularly given Delaware’s strong public policy in favor of advancement. On that basis, Fuentes said, he would find that as a Vice President, Aleynikov is an officer and therefore entitled to have his legal fees advanced.



This high profile case has drawn a great deal of attention and scrutiny, in part because of the notoriety of the allegations against Aleynikov, in part because of the snicker-inducing aspect of some of the details of the dispute — such as, for example, Goldman’s argument that, in effect, it doesn’t mean all that much in the financial services industry for someone to have the title of Vice President.


While this case has garnered much attention, the basic question involved is one that arises all too often when lower level personnel are seeking advancement and indemnification. Bylaw provisions are often unclear on the question of who is an officer. At a minimum, this case illustrates the problems that can arise when bylaw provisions do not define precisely who is an officer for purposes of entitlement to advancement or indemnification.


It could be argued that companies have an incentive to keep these questions ambiguous, in order to try to preserve an element of discretion. Certainly, in this case, Goldman wants to be able to argue that it should no indemnification or advancement obligations for someone it contends stole valuable intellectual property. However, there is one very practical reason why anyone involved in drafting corporate bylaws would want to ensure that there are no ambiguities and that the provisions are mandatory and are set up to operate automatically. That is, at the time the provisions are written, no one has any way of knowing whether or not they themselves might be the ones seeking to rely on the provisions.


The dissent referred to the strong Delaware public policy in favor of advancement, which was a very important consideration in the district court’s resolution of the summary judgment motions as well. The appellate court’s majority opinion did not address this public policy issue as such. However, this case demonstrates the reason why the public policy in favor of advancement can be so important. Aleynikov is facing ongoing criminal charges and has no choice but to try to defend himself as best he can. With the denial of summary judgment on the advancement issue, he must now try to convince a jury he is entitled to advancement – but in the meantime the state law criminal case is going forward. A jury verdict on the advancement issue may come too late for him to be able to defend himself. Aleynikov’s circumstances may suggest why the strong public policy in favor of advancement is important.


Again those drafting indemnification provisions have an interest in seeing that the measures are enforced with a bias in favor of advancement and indemnification, as at the time the provisions are drafted, no one has any way of knowing who will want to or have to try to take advantage of the provisions. Would-be indemnitees will not want to find their claim of entitlement to these benefits depend on whether or not a court recognizes and enforces a public policy in favor of advancement, so what those drafting bylaw provisions will want to do is to incorporate into the bylaws provisions that affirmatively specify that there will be a presumption in favor of advancement and providing a mechanism for interim payments if there is a dispute over the entitlement to advancement.


Another issue that those responsible for drafting indemnification provisions may want to keep in mind is that when the companies involved have, like Goldman Sachs here, complex corporate structures, it may make sense for the separate operating units to have separate indemnification provisions. As pointed out in the Kirkpatrick & Townsend law firm’s September 9, 2014 memo about the Third Circuit’s decision (here), if the Goldman subsidiary involved in this case had had its own separate indemnification provisions, then “the ambiguity in this case about who is entitled to the benefit might have been avoided.” Similarly, and as the law firm memo also points out, if there were clear procedures for appointing officers and the procedures were widely disseminated and followed, it would be easier to determine who was intended to be part of that group.


These kinds of questions are not limited just to the indemnification and advancement context. Many of these issues may also arise in the context of D&O insurance as well. The question of whether not a particular individual is or is not an insured person under the policy is a frequently recurring issue, particularly where lower level employees are involved. This question may be less of an issue in a private company D&O Insurance policy, where the policies broad standard definition of insured persons often includes employees.


Under a public company D&O policy, employees may also be insured persons for purposes of Securities Claims. But where the claim involved is not a Securities Claim, difficult questions can arise. Under a public company D&O insurance policy outside of the Securities Claim context, employees typically are not included in the definition of insured persons. Rather, the policy will typically define an insured person as a “duly elected or appointed director or officer” or similar words. The problem in situations like Aleynikov’s is that it unclear whether or not, as a Vice President, he would come within this definition. The question that may well arise is whether or not he was duly elected or appointed and therefore would come within this definition. One way some companies will choose to address this policy is to request that the policy be specially endorsed to specify that persons holding specific titles or offices are insured persons within the meaning of the policy.


Of course, board member and senior executives may not want their company’s D&O insurance to be eroded by claims raised against lower level employees. This concern would be particularly magnified in a situation like this one where the claim against the lower level employee is that he misappropriated intellectual property belonging to the company. All of which underscores that there are certain fundamental tensions and even conflicts of interest involved in (and perhaps inherent in) both indemnification and insurance arrangements. Some of those with potential interests in indemnification and insurance would like to see those benefits made broadly available. Others – and often the company itself—have interests in seeing the benefits being made available only narrowly.


These more theoretical questions – that is, how broadly should the benefits be made available – often are not considered at the outset. Often the arrangements are made with an unconscious (or unexamined) bias, such as for example that it is always better to have indemnification and insurance broadly available. It is perhaps a inquiry for another day, but these questions often are not fully examined.


Failed NC Bank Execs Granted Summary Judgment on All FDIC Claims

Posted in Failed Banks

ncOn September 11, 2014, in a sharply worded order that will give heart to the FDIC’s many other failed bank litigation targets, Eastern District of North Carolina Judge Terrence Boyle, applying North Carolina law, granted the summary judgment motion of the former directors and officers of the failed Cooperative Bank of Wilmington, N.C., in the lawsuit the FDIC had filed against them in its capacity as the failed bank’s receiver. Judge Boyle rejected all of the FDIC’s claims against the former bank officials. The defendants in other failed bank lawsuits undoubtedly will seek to rely on Judge Boyle’s ruling that the loan underwriting actions on which the FDIC sought to base its liability claims are protected by the business judgment rule. A copy of Judge Boyle’s order can be found here.


A September 15, 2014 memo about Judge Boyle’s opinion from Mary Gill and Laura Tapson of the Alston & Bird law firm entitled “Bank Directors and Offices Win Summary Judgment on All FDIC Claims” can be found here. (Alston & Bird was not involved in the case.)



After the Cooperative Bank of Wilmington, N.C. failed in June 2009, the FDIC as the failed bank’s receiver initiated a lawsuit against certain former directors and offices of the bank, asserting claims for negligence, gross negligence, and breaches of fiduciary duty in connection with the defendants’ approval of 86 loans between January 2007 and April 2008. The FDIC alleged that in making the loans, the defendants had deviated from prudent lending practices established by the bank’s own loan policy, published regulatory guidelines and generally accepted banking practices. In its lawsuit, the FDIC sought to recover approximately $40 million in losses the bank sustained in connection with the subject loans.


Earlier on in the case, Judge Boyle had denied the defendants’ motion to dismiss the FDIC’s lawsuit. Following discovery, the defendants filed a motion for summary judgment on all claims against them. .


The September 11 Order 

In his September 11 Order, Judge Boyle granted the defendants’ motion for summary judgment, dismissing all of the FDIC’s claims against the former directors and officers.


With respect to the FDIC’s claims for ordinary negligence and for breach of fiduciary duty, Judge Boyle ruled that “the business judgment rule applies and shields the defendants from liability.”


Judge Boyle said that under North Carolina law the business judgment rule “serves to prevent courts from unreasonably reviewing or interfering with decisions made by duly elected and authorized representatives of a corporation, “ adding that “absent proof of bad faith, conflict of interest, or disloyalty, business decisions of officers and directors will not be second-guessed if they are the product of a rational process and the officers and directors have availed themselves of all material and reasonably available information.” (Citations omitted) There can be no liability even if a subsequent finder of fact considers a decision “stupid, egregious, or irrational” so long as the court determines that “the process employed was either rational or employed in a good faith effort to advance the corporate interest.”


Judge Boyle first concluded that “the FDIC failed to reveal any evidence that suggests that defendants engaged in self-dealing or fraud or that any defendant was engaged in any unconscionable conduct that might constitute bad faith.” While the wisdom of the lending decisions may “raise interesting questions in hindsight,” the business judgment rule precludes the court from “delving into the whether or not the decisions were ‘good’.”


Given that Judge Boyle found no indication that the decisions were the result of bad faith, conflict of interest or disloyalty, the only question left was whether the decisions were the result of a rational process and in furtherance of a rational business purpose.


In concluding that the loan decisions that are at the heart of the FDIC’s case were the result of a rational process, Judge Boyle relied in particular on the FDIC’s own Reports of Examination during the period when the loans were made,  in which the bank’s management had been graded as “satisfactory” and not requiring “material changes.” The CAMELS ratings in the ROE of “2” for management, asset quality and sensitivity to market risks “show that the process the defendants used to make the challenged items were expressly reviewed, addressed and graded by the FDIC regulators in the 2006 ROE, adding that for the FDIC “to now argue that the process behind the loans is irrational is absurd.” (Judge Boyle noted in a footnote that CAMELS ratings are given on a scale of 1 to 5, with 1 being the highest. Banks scoring a 1 or a 2 “are considered well-managed and presenting no material supervisory concerns.”)


Based on these examination ratings and the comments of the bank’s independent auditors in 2006, 2007 and 2008, Judge Boyle found “as a matter of law, that defendants’ processes and practices for the challenged loans were rational.”


Judge Boyle also concluded that the challenged loans could be attributed to a rational business purpose, noting that while there were “clearly risks” associated with the bank’s goal of growing to be a $1 billion institution and to stay competitive with other banks that were making inroads into its territory, “the mere existence of risks cannot be said in hindsight to constitute irrationality.” He added that “where as here, defendants do not display a conscious indifference to risks and where there is no evidence to suggest that they did not have an honest belief their decisions were made in the company’s best interests, then the business judgment rule applies even if those judgments ultimately turned out to be poor.”


Judge Boyle also granted the defendants’ motion for summary judgment on the FDIC’s gross negligence claims, based on his finding that “the FDIC has presented no evidence that any of the defendants approved the challenged loans and made policy decisions knowing that these actions would harm Cooperative and breach their duties to the bank.” He added that “the FDIC cannot show that any of the defendants engaged in wanton conduct or consciously disregarded Cooperative’s well- being.”


In closing, Judge Boyle went out of his way to express his disdain for the FDIC’s contention that not only was the global financial crisis foreseeable, but it was actually foreseen by the individual defendants, a contention on which he felt compelled to comment because of the “absurdity of the FDIC’s position.” Judge Boyle reviewed numerous public comments made by various government officials before and after the financial crisis, including then-U.S. Secretary of the Treasury Hank Paulson and Federal Reserve Chairman Ben Bernanke, to the effect that regulators could not have seen the financial crisis approaching, and then commented that


The FDIC claims that the defendants were not only more prescient than the nation’s most trusted bank regulators and economists, but that they disregarded their own foresight of the coming crisis in favor of making the risky loans. Such an assertion is wholly implausible. The surrounding facts … belie the FDIC’s position here. It appears that the only factor between defendants being sued for millions of dollars and receiving millions of dollars in assistance from the government is that Cooperative was not considered “too big to fail.”


Judge Boyle concluded saying that for big banks to be forgiven for their role in the financial crisis because of their size while the directors and officers of small banks are pursued for monetary compensation “is unfortunate if not outright unjust.”



In assessing Judge Boyle’s ruling here, it needs to be kept in mind that the kinds of claims the FDIC asserted against the former directors and officers of Cooperative Bank are pretty typical of the kinds of claims the agency has asserted against the former directors and officers of many other failed banks in the FDIC’s various failed bank’s lawsuits. For Judge Boyle to characterize the FDIC’s various positions as “absurd” and “implausible” is extraordinary. Judge Boyle not only dismissed the FDIC’s claims but seemed to reject the very premises on which the claims were based. It is fair to say – and I suspect that individual defendants in other failed bank cases will try to say – that if the FDIC’s position in this case is “absurd,” then its position in many other cases where it has asserted the same basic claims is also absurd.


There is another feature of Judge Boyle’s decision that is noteworthy, and that is his willingness to refer to the FDIC’s own Reports of Examination, made prior to the bank’s failure, as evidence that the bank’s lending practices involved rational processes. In its many failed bank lawsuits, the FDIC takes great pains to try to distinguish between its role and activities as a regulator and its role and activity as receiver. The debate on this distinction often takes place in the context of a debate over whether defendants can assert affirmative defenses against the FDIC. Judge Boyle determinations in the course of reviewing the defendants’ summary judgment motion simply disregards the distinction on which the FDIC so frequently seeks to rely; if the question is whether or not the bank’s lending practices were rational, then the FDIC’s pre-failure assessment of the bank’s lending practices are relevant.


The Alston & Bird memo to which I linked above states that Judge Boyle’s decision is “the first summary judgment ruling to address the business judgment rule in the wave of FDIC litigation following the financial crisis.” Other defendants will undoubtedly seek to rely on Judge Boyle’s rulings in the Cooperative Bank case as they seek to obtain summary judgment in their own cases. The ruling will obviously be of greatest use in other cases to which North Carolina law apply. As it turns out, that is a relatively small number of the pending cases. My information review of the FDIC’s online listing of its failed bank lawsuits suggests that there may be as few as only two other failed bank lawsuits pending in North Carolina federal courts.


Whether Judge Boyle’s ruling will prove to be useful or influential in cases to which the law of jurisdictions other than North Carolina law apply remains to be seen. The Alston & Bird memo suggests that even outside North Carolina, Judge Boyle’s application of the business judgment rule to grant summary judgment here “should provide strong support for granting summary judgment in favor of the D&Os in other cases as well.” While it can be argued that North Carolina’s version of the business judgment rule is not dissimilar to that applicable in other jurisdictions, the difference in applicable law might be enough for other courts to use as a basis to distinguish Judge Boyle’s analysis.


Where Judge Boyle’s decision might be most useful in other cases is the use he made of the FDIC’s Reports of Examination and CAMELS ratings. Many of the banks that failed collapsed quickly. Many of the institutions that failed appeared to be healthy only a short time before the closed, particularly at the outset of the financial crisis. The defendants in many of the other failed bank cases will be able to show that their management and lending practices were regarded as satisfactory by regulators just prior to the onset of the crisis. At least in the many pending cases where there are no allegations of self-dealing or conflict of interest, the defendants in other cases like the defendants here may be able to rely on the regulators’ own pre-failure positive assessment of their banks’ lending practices to refute the FDIC’s hindsight attempt to characterize those same practices as negligent.


Special thanks to Mary Gill of Alston & Bird for sending me a copy of Judge Boyle’s decision as well as providing me with a copy of her law firm’s memo.


A Note about Banks and Cyber Disclosure: According to its review of 10-Ks and 10-Qs of 575 publicly traded banks, LogixData concluded that 303 of the banks’ (52%) SEC reports had “absolutely no mention of anything related to cyber security.” (Hat Tip: The blog, here).


Living on Earth: This is what life is like sometimes. You are in Room 342, and this is the only available information to help you find your way:  




D&O Insurance: Though Specific Litigation Exclusion Does Not Apply, Subsequent Suits Related to Prior Claim Not Covered

Posted in D & O Insurance

nomura1As the litigation wave arrived following the global financial crisis, many financial institutions were hit with multiple suits that arrived piecemeal and over time. For D&O insurance coverage purposes, these lawsuits were filed across multiple policy periods. A recurring question as the subprime litigation has worked its way through the system is whether the various lawsuits trigger only a single policy or multiple policies (refer, for example, here).


The question arose again in the D&O insurance coverage litigation related to the various RMBS-related securities lawsuits that were filed against Nomura Holding America, Inc. and certain of its operating subsidiaries. In a September 11, 2014 opinion (here), Southern District of New York Judge Katherine Polk Failla ruled that — because she found that the five subsequent lawsuits filed against the Nomura entities were related to a prior securities lawsuit previously pending against the firms — the five subsequent claims related back to and were deemed made at the time of first  lawsuit. Based on this determination, she ruled that there was no coverage for the subsequent suits under the D&O insurance policies in place at the time the subsequent suits were filed.


Though Judge Failla’s ruling in the Nomura coverage dispute, like outcomes in many of the cases involving interrelatedness issues, reflects circumstances specific to the situation involved, her ruling nonetheless has important lessons for parties that find themselves involved in a relatedness clash. In addition, her separate ruling that the applicable policies’ specific litigation exclusion does not preclude coverage for the subsequent claims has important lessons for anyone attempting to draft a similar exclusion.



Prior to the financial crisis, Nomura, through its operating subsidiaries, organized and issued residential mortgage-backed securities (RMBS) backed by mortgages originated by third-party lending institutions. In 2008, various Nomura subsidiaries and certain of the subsidiaries officers and directors were named as defendants in a securities class action lawsuit styled as Plumbers’ Union Local No. 12 Pension Fund v. Nomura Asset Acceptance Corp. (the “Plumbers’ Union” lawsuit). The Plumbers’ Union lawsuit alleged that the defendants had made various misrepresentation or omissions in the offering documents provided in connection with certain RMBS offerings. Nomura submitted the Plumbers’ Union lawsuit as a claim to the insurer providing Nomura’s D&O insurance at the time.


During the period July 1, 2010 to July 1, 2013, Nomura purchased three successive one-year D&O insurance policies from a different carrier than the one whose policy was in force at the time the Plumbers’ Union lawsuit was first filed. Between 2011 and 2012, five additional securities class action lawsuits were filed against Nomura and various of its subsidiaries, containing allegations that the named defendants had breached the securities laws in connection with the entities’ RMBS operations and issuance. Nomura provided notice of these five subsequent lawsuits to the D&O insurer whose policies were in place at the time the subsequent lawsuits were filed.


The D&O insurer to whom the five subsequent suits were submitted denied coverage for the claims. The insurer asserted two grounds for its denial. First, the insurer asserted that coverage was precluded by a manuscript endorsement that had been added to the policies the carrier issued to Nomura; the endorsement (referred to in the coverage lawsuit as the “Plumbers’ Union Exclusion”) provided that no coverage would be available under the policies for any claim that was


based upon, arising from, or in consequence of any fact, circumstance, situation, transaction event or matter described or cited below or the same or any substantially similar fact, circumstance, situation, transaction, event or matter:


Amended Complaint for Violation of Section 11, 12 (a)(2) and 15 of the Securities Act 1933 (USA), PLUMBERS’ UNION LOCAL NO. 12 PENSION FUND, individually and on behalf of all Others Similarly Situated vs. NOMURA ASSET ACCEPTANCE CORPORATION et al, United States District Court for the District of Massachusetts, No. 06-10446-RGS.


The D&O insurer also denied coverage in reliance Section 13(g) of its policies, which provides that “All Related Claims shall be treated as a single Claim first made on the date the earliest of such Related Claims was first made … regardless of whether such date is before or during the Policy Period.”


The term “Related Claims” is defined as “all Claims for Wrongful Acts based upon, arising from, or in consequence of the same or related facts, circumstances, situations, transactions, or events or the same or related series of facts, circumstances, situations, transactions or events.”


In response to the insurer’s coverage denial, Nomura filed a separate lawsuit seeking a declaratory judgment that the D&O insurer had wrongfully denied coverage for the five subsequent actions and that the carrier had breached its duty to provide coverage. The parties filed cross-motions for summary judgment.


The September 11 Opinion 

In her September 11 Opinion, Judge Failla denied the insurer’s summary judgment motion with respect to the Plumbers’ Union exclusion, holding that the insurer had failed to meet its burden of showing that the exclusion precludes coverage, but granted the insurer’s summary judgment motion with respect to section 13(g), based on Nomura’s “failure to show that the Policies provide coverage for the Underlying Actions.”


In support of its reliance on the Plumbers’ Union Exclusion, the insurer had argued that the subsequent lawsuits involved “the same or any substantially similar fact circumstance, situation, transaction, event or matter” as the “event or matter described or cited below” – that is, the Plumbers’ Union lawsuit. Nomura argued in opposition that the exclusion precluded coverage only for events or matters the same as or similar to the event or matter cited (that is, the Plumbers’ Union amended complaint itself) and not to factual matters contained in the Amended Compliant or legal arguments raised in that case. In making this argument, Nomura referenced the policies’ Prior and Pending Litigation exclusion, which, by contrast to the Plumbers’ Union Exclusion, precluded coverage not only for claims pending on the prior and pending litigation date, but also “circumstances or situations underlying or alleged therein.”


Judge Failla agreed that the Plumbers’ Union Exclusion referenced only the “matter” cited but not to “the factual allegations contained in the Plumbers’ Union Amended Complaint,” yet she also observed at the same time that “it is difficult to imagine how an action, but not necessarily its underlying factual allegations, could be the ‘same’ or ‘similar’ to the Plumbers Union Amended Complaint without also being ‘based upon, or arising from’ the Plumbers’ Union Amended Complaint.” In the end, because she found that the carrier’s interpretation depended on “adding words and phrases that are simply not there,” she concluded that the carrier had not carried its burden of showing that the Plumbers’ Union Exclusion precluded coverage.


With respect to the insurer’s reliance on Section 13(g), Judge Failla said that the subsequent complaints and the Plumbers’ Union lawsuit would be “substantially similar” within the meaning of the provision if they arose out of a common “factual nexus.” In order to determine whether a sufficient factual nexus exists, the Court, she said, must undertake a “side-by-side review” of the factual allegations to determine their relationship. Based on this analysis, she concluded that “the relevant complaints contain overlapping (and frequently identical) factual allegations, arising from strikingly similar circumstances, alleging similar claims for relief.” She separately identified six categories of alleged misrepresentations that the plaintiffs in each of the actions relied upon. She summarized her conclusions this way:


Plumbers’ Union and the Underlying Actions are each brought by similarly-situated investors against the same group of defendants who participated in the same types of securities offerings pursuant to nearly identical offering documents involving the sale of interests in pools of mortgage loans that were made, poled and securitized in strikingly similar ways. What is more, the factual allegations in the complaints are more than overlapping, they are nearly identical. On this basis, the Underlying Actions clearly allege facts which are the “same” or “similar to” those alleged in Plumbers’ Union.



I have referred numerous time on this blog (for example here) to the difficulty and vexatiousness of interrelatedness disputes. The difficulty arises from the fact that it is always possible to find similarities between two actions and it is always possible to find differences. The outcomes of interrelatedness cases tend to be all over the map and it is very difficult to draw any generalizations about the cases, except that they tend to be very situationally and factually specific. This case is no exception. But while there arguably may be no general principles to be drawn from Judge Failla’s rulings in this case, there are certain lessons that may be discerned for parties caught up in an interrelatedness dispute.


With respect to the lessons to be learned, I note at the outset that Judge Failla was even handed – she dished in equal measures on both parties and their counsel for making or failing to make various arguments. I happen to know the lawyers representing the parties here, either personally or by reputation, and I know them to be excellent, skilled practitioners. The various chastisements Judge Failla dispensed in the course of her opinion (for example, “the Court will not do Nomura’s work for it”) say more about her judicial temperament than about the quality of the advocacy involved.  


Before getting to the lessons to be learned for parties engaged in relatedness disputes, there is one preliminary lesson to be learned for those responsible for drafting manuscript endorsements. I have no doubt that the intent of the Plumbers’ Union exclusion was to preclude coverage for any subsequent lawsuits involving the same or similar factual allegations as the Plumbers’ Union lawsuit. But as Nomura was able to argue here, that is not what the exclusion actually said. The exclusion referred only to the Plumbers’ Union Amended Complaint, but it did not refer to “the factual allegations or the claims alleged therein.” It is not that the exclusion was not very carefully written; indeed, the Plumbers’ Union lawsuit itself is described in the exclusion in excruciatingly specific detail. But in the end the exclusion itself did not actually say what was intended. So the lesson for draftsman of manuscript endorsements is, first, to take care that the exclusion says that was intended – here, that what was meant to be excluded was any lawsuit containing the same or similar allegations as the Plumbers’ Union lawsuit – but also that if the exclusion is a specific litigation exclusion, that the exclusion precludes not just the referenced lawsuit itself, but also the facts alleged and claims asserted.


Now, for the lessons to be learned by those involved in interrelatedness disputes. First, for those parties seeking to establish that a prior and subsequent lawsuit are interrelated, the argument will be advanced to the extent that the similarities are demonstrated in a detailed, side-by-side comparison of the relevant allegations. Judge Failla chided the insurer for failing to provide this type of comparison, noting that “it was not until the Court requested supplemental briefing that Defendant submitted an in-depth, allegation-by-allegation review of the operative complaints in support of its argument.” In the absence of this specific documentation, the insurer was left to argue based “solely upon similar categories of misrepresentations,” which, Judge Failla noted, “could be applied so expansively that entire business lines could be precluded from coverage based on a single lawsuit.” The lesson, then, is that the party seeking to establish relatedness should provide a detailed, side-by-side comparison of the allegations in the complaints the party contends are related.  


Second, it is not enough for a party seeking to argue that different claims are unrelated to identify differences between the claims. Here, Nomura noted numerous differences between the various complaints – they involved different claimants, different defendants, different offerings, different underlying mortgages, and different underlying mortgage originators. Judge Failla was unpersuaded by existence of these differences, noting that “Nomura did nothing to demonstrate that these identified differences mattered, i.e., that they were anything other than differences in name only.” The lesson for the party seeking to show that separate lawsuits are unrelated is that it is not enough to show that there are differences; the party must also show why the differences matter, particularly with respect to the question of whether or the lawsuits involved a common factual nexus.


It is interesting to note that in rejecting Nomura’s arguments, Judge Failla rejected a specific argument Nomura had tried to make based on the language used in the policies’ definition of relatedness. Nomura had tried to argue that the policies had a narrower definition of relatedness than that involved in many of the other relatedness cases. Nomura made this argument because the definition of relatedness in the policies at issue, by contrast to the language found in the policies involved in the other cases, did not contain the words “or in any way involving” (i.e., the other policies in the other cases provided that the two matters are related if they are “arising from, based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving, the following, etc.”) Judge Failla expressly acknowledged that the policies at issue did not include the “or in any way involving” language, but that did not affect here analysis of the factual nexus issues.


While the absence of this language did not affect Judge Failla’s analysis in this case, it is interesting that Nomura tried to make the argument. There is nothing to provide assurance that the absence of this language might not make a difference in another case (indeed, Judge Failla noted that other courts have found the presence of this language to be significant). The lesson here seems to be that, at the time of placement, policyholder advocates would seek to have this language removed while insurer representatives would seek to have it included. In the event of a coverage dispute, policyholder advocates will argue with respect to a relatedness definition lacking this language that the definition is narrower and not as inclusive; while carrier advocates will argue that whether or not the language is present, the only operative question is whether not there is a common factual nexus between the two matters.


A Creature That Prospers Regardless of Circumstance: Here at The D&O Diary, we have been watching the build-up to next week’s referendum on Scottish independence with a mixture of fascination and trepidation. We understand the romantic appeal of an independent Scottish state yet fear what unanticipated circumstances it might bring as well. For all the reasons mustered for and against independence, the argument in support of independence that strikes us as the strangest is the one put forth in September 12, 2014 Bloomberg article entitled “Scottish Lawyers Say Referendum May Transform Legal Industry” (here).


It seems that some of the local lawyers support dumping a union that has lasted more three centuries because independence will mean more legal business. (I am not making this up.) According to the article, Scottish lawyers see a Yes vote in the September 18 referendum as “an opportunity to take their rule of law to the world, transforming a distinctly local market into an international one.” Another commentator is quoted as saying that “the impact of independence on the legal industry in Scotland and the rest of the U.K. will result in a very busy time for lawyers. “ (Others cautioned, however, that a Yes vote could lead to a prolonged period of stagnation – and that would be bad for business.)


What of questions of defense, trade, taxation and currency; what of generations of mutual struggle through wars, crises and change; what of ties based on a union that has lasted longer than that of the United States? What could be more thrilling than the possibility of billable hours?


“I Found a Picture of You”: While trying to follow the ins and out of the Scottish independence debate, I have taken up listening to the BBC World Service News using the BBC app on my iPad. I have wound up hearing a lot more than news about the referendum. Just the other day, I heard a very interesting interview of Chrissie Hynde, the rock vocalist and lead singer in The Pretenders. I confess that I have always had a fascination with Hynde, in part because I have never been able to figure out how someone from Akron, Ohio managed to transform herself into a British rock star. It was a good interview, but they didn’t play any of her music, so after it was over, I went to YouTube to see what I could find.


I have always like Hynde’s voice, so confident and so cool. She and her music may now be vestiges from an earlier time, but I think she is still worth listening to. So, to get your Monday morning started right, here’s a bit of music from Chrissie Hynde and The Pretenders – and what could be more appropriate for a Monday morning that “Back on the Chain Gang”?: