The D&O Diary

The D&O Diary

A PERIODIC JOURNAL CONTAINING ITEMS OF INTEREST FROM THE WORLD OF DIRECTORS & OFFICERS LIABILITY, WITH OCCASIONAL COMMENTARY

Calculating Damages in Securities Class Action Lawsuits

Posted in Securities Litigation

cornerstone reserach pdfBecause securities class action lawsuits under Section 10 of the Securities Exchange Act of 1934 and Rule 10b-5 so rarely go to trial (a topic I addressed in a recent post, here), questions about how damages are calculated are not often addressed directly. Section 28(a) of the ’34 Act specifies that no plaintiff shall “recover … a total amount in excess of [that person’s] actual damages.” However, the statute does not define “actual damages” and courts have adopted a variety of approaches to the question.

 

A November 19, 2014 paper published by Cornerstone Research and the Goodwin Proctor law firm entitled “Limiting Rule 10b-5 Damages Claims” (here) takes a look at the way that courts have addressed this issue. As discussed in the paper, the beginning point for analysis of the damages issues is the amount of “inflation” – that is, the difference between the defendant company’s actual stock price and what the price would have been absent the alleged fraud. The authors note that the administrative processes following a settlement, or more rarely, a verdict, involve several adjustments. These adjustments can reduce individual class members’ claims as well as plaintiffs’ estimates of classwide damages. However, the authors found, there are inconsistencies in the ways that courts apply these adjustments.

 

The authors suggest that the aggregate effect of these adjustments “can be quite large and may often be underestimated or overlooked by defendants.”  The authors contend that these adjustments can be inform defense strategies in settlement negotiations and could be influential on prospective settlement opt-outs on their decision whether or not to participate in class settlements.

 

In order to analyze these issues, the authors reviewed the plans of allocation reflected in publicly available settlement claims forms and notices for sixty-five Rule 10b-5 class action settlements occurring during 2012 and 2013. They also review the verdicts in the Vivendi and Household Financial cases, both of which cases resulted in jury trial verdicts. The authors also drew upon their own experience in the post-judgment proceedings in the Apollo Group securities litigation.

 

Based on this analysis, the authors identified three approaches to adjusting damages:

 

1. Offsetting recognized losses with gains from price inflation caused by the alleged fraud. (Inflation Gains Offset)

2.  Adjusting recognized losses with nominal gains. (Nominal Gains Offset)

3. Limited per-share recognized losses to nominal losses. (Nominal Loss Cap)

 

The starting point of the authors’ analysis is the recognition that an investor suffers a loss if he or she purchases a share at an inflated price and then later sells the share after a corrective disclosure eliminates the share price inflation. Say, for example, the investor purchases a share at a price of $27 with a $7 price inflation, and then after the corrective disclosure sells the share for $20, realizing a $7 dollar loss.

 

The authors suggest that this calculation should be adjusted to take other possible factors into account.

 

First, the investor’s losses on the sale of the share should be offset by any gains the investor realized as a result of the share inflation. Say, for example, the same investor purchased a share prior to the class period at $20 and then sold it during the class period at the price of $27 (reflecting the increased price due to the inflation.). The authors argue that the investor’s $7 loss on the post disclosure sale should be offset by the investor’s $7 gain during the class period, resulting in a conclusion that the investor suffered $0 in losses.

 

The authors contend that it is “economically rational” to subtract the gains from inflation from losses from inflation in calculating the harm to an investor. The authors found that the courts in the Household Finance case recognized the need to offset losses from gains from inflation. However, they also noted that “this seemingly well-recognized legal principle does not, however, explicitly appear in any of the sixty-five settlements the authors reviewed.” This offset can be calculated only when an individual investors’ purchase and sale information are available, as would usually be the case in opt-out litigation or sometimes for lead plaintiffs.

 

The gains from inflation cannot always be calculated accurately when performing plaintiff-style aggregate damages calculation. What can be calculated using publicly available information is the maximum adjustment to a plaintiff-style aggregate damages calculation. The “bank “of these available offsets is “often substantial and perhaps underestimated in the settlement negotiations.” The “economic logic and legal basis for this adjustment is strong and provides an argument for defendants negotiating smaller settlements.”

 

Second, the authors contend that recognized losses should be offset with nominal gains. In this example, the investor that experienced the $7 post disclosure loss also purchased a share during the class period at $27 dollars a share, reflecting the $7 price inflation, and sold the share during the class period at $28 per share, also reflecting the $7 per share price inflation. The authors contend the investors $1 gain on the class period transaction should be offset against the $7 loss, resulting in a net loss of $6. The authors note that a nominal gain offset was not mentioned in either the Household Finance or Vivendi verdicts, perhaps, the authors note, because “a nominal gains offset is likely to be smaller than a gain from inflation offset.”

 

The authors note that the while the nominal gains offset can be calculated when an investor’s trading data are available (for example with opt-outs or named plaintiffs), the adjustment cannot be determined reliably for the class using plaintiff-style aggregate damages models. The authors contend, however, that nominal gains from shares purchased during the class period are able to be offset against losses from inflation. While the nominal gains will not exceed losses from inflation, calculating the maximum reduction in damages due to nominal gains can “still be helpful for settlement discussion purposes.”

 

Third, the authors also contend that per-share recognized losses should be limited to nominal losses. This calculation takes in to account the PLSRA’s 90 day look-back period, which limits a plaintiff’s damages to the difference between the purchase price and the mean trading price of the security during the 90 days following a corrective disclosure. In this example, if the investor purchased a share with a $7 price inflation during the class period at $27 and sold the share after the corrective disclosure at $25, the damages are only $2, not $7. The 90-day rule creates what the authors call a “nominal loss cap.”

 

The nominal loss cap can be applied with respect to investors, such as opt-out claimants and named plaintiffs, where trading data are available. The authors also contend that “an estimate of the effect of nominal loss caps can and should also be applied to plaintiff-style damages estimates.”

 

The authors contend that all three of these adjustments can and should be applied in settlement negotiations to estimate recognized losses. The authors contend that the incorporation of these types of adjustments into class settlement could influence prospective opt-outs decision whether or not to remain in the settlement class.

 

In my view, the authors’ analysis should be of interest not only to defendants engaged in settlement negotiations, but also to the D&O Insurers whose financial interests could be affected by the negotiations. In the press release accompanying the report’s release, Dan Tyukody of the Goodwin Proctor law firm is quoted as saying “Besides lawyers and judges, these findings should definitely be of considerable interest to the insurance industry” – a statement that is clearly correct. I think that D&O insurers’ claims managers will want to review this report closely, to understand the authors’ analysis and to consider how this analysis could be incorporated into securities lawsuit settlement negotiations. The authors’ analysis clearly seems to suggest settlement negotiations approaches that could be used to argue for lower settlements reflecting the kinds of damages adjustments the report details.

 

Special thanks to Katie Galley of Cornerstone Research for sending me a copy of this report.

Securities Trial Jury Holds Former Longtop CFO Responsible for One Percent of Damages

Posted in Securities Litigation

longtopAs noted in a post yesterday, last Friday a federal jury held Derek Palaschuk, the former CFO of Longtop Financial, liable for the company’s financial misrepresentations. On Monday, the jury deliberated further on the percentage of investors’ damages for which Palaschuk is responsible. According to Nate Raymond’s Nov ember 24, 2014 Reuters article (here) the jury held the CFO responsible for only one percent of the investors’ damages. The jury assigned 49 percent of the responsibility to Longtop itself and 50 percent to the company’s former CEO, Wai Chau Lin. Max Stendahl’s November 24, 2014 Law 360 article about the jury’s division of responsibility for investors’ damages can be found here.

 

The jury did not determine the dollar value of Palaschuk’s one percent responsibility. The plaintiffs’ lawyer in the case is quoted in the press coverage as saying that the value of the jury’s 1% responsibility finding against Palaschuk has a value of somewhere between $5 million and $8.82, although the way the plaintiffs’ lawyers came up with this figure is by applying the percentage against the amount of the default judgment that Southern District of New York Judge Shira Scheindlin previously entered against the company and the CEO (as discussed here).

 

It should be noted that the damages amount in the default judgment was based solely on an uncontested proffer by plaintiffs’ counsel in connection with the plaintiffs’ motion for default judgment against defendants that failed to appear and defend. The Reuters article quotes Palaschuk’s counsel as saying that the plaintiffs’ counsel’s estimate of the dollar figure that the one percent responsibility allocation represents as “pie-in-the-sky.” The exact dollar value of one percent damages calculation is subject to further proceedings.

 

However, the Reuters article does also note that on Monday the jury did find that Longtop’s american depositary shares were inflated due to the securities law violations from Feb. 10, 2010 to May 17, 2011, by $11.89 to $19.51 per share. The Reuters article also reports that Palaschuk’s lawyers plan to ask a judge to set the verdict aside.

 

D&O Diary Named to American Bar Association Journal’s List of Top 100 Law Blogs: I am pleased to report that once again The D&O Diary has been voted onto the American Bar Association Journal’s list of the top 100 law blogs, as detailed here. I am very honored to be included on this list once again as the list includes many of the blogs that I regularly  follow. It is quite privilege to be included in the same list as all of the other fine blogs.

 

Now that the 2014 top law blawg list has been decided, what comes next is the voting for the best in category. The D&O Diary is contending for the title of best in the Niche blog category (for some reason the ABA Journal’s editors seem to think that D&O liability and insurance is niche topic). I would be grateful for any readers who would be willing to take the time to vote for my blog as the best of the Niche category. Thanks to everyone who already voted for my blog to be included in the ABA Top 100 Blawg list for 2014. Congrats to all of the 2014 nominees.

 

Rare Securities Suit Trial Produces Jury Verdict Against Former Longtop Financial CFO

Posted in Securities Litigation

longtopOn November 21, 2014, after a securities class action trial that lasted less than three days and after less than a day of deliberation, an eight-person jury entered a verdict holding former Longtop Financial Technologies CFO Derek Palaschuk liable for the company’s alleged misrepresentations about its financial condition. According to Nate Raymond’s November 21, 2014 Reuters article about the verdict (here), the jury will return on Monday, November 24, 2014 to determine the damages to be awarded to investors. Max Stendahl’s November 21, 2014 Law 360 article about the verdict can be found here (subscription required).

 

As detailed below, trials in securities class action lawsuits are extremely rare – there has not been a trial in a securities class action lawsuit to reach a verdict since 2011. As also discussed below, there were a number of other unusual features about this case, including both the brevity of the trial and the dearth of witness testimony and other evidence.

 

Background

During the period 2010 to 2012, plaintiffs’ lawyers rushed to file a wave of securities suits against U.S.-listed Chinese companies, including against the Xiamen, China-based Longtop Financial (as detailed here). Unlike many of U.S.-listed Chinese companies caught up in the wave of securities litigation, Longtop Financial did not obtain its U.S. listing through a reverse merger, but instead it became a public company through a conventional IPO in 2007. Its shares traded on the NYSE. At one point, its market capitalization exceeded $1 billion.

 

Questions began to dog the company after Citron Research published an April 26, 2011 online report critical of the company. Among other things, the report questioned the company’s “unconventional staffing model,” alleged prior undisclosed “misdeeds” involving management, and referenced “non-transparent” stock transactions involving the company’s chairman, among other things. Other critical research coverage followed.

 

Longtop’s problems took another turn for the worse in May 2011 when, in advance of the high profile IPO of Chinese social networking company, Renren Network, Longtop’s CFO, who sat on Renren’s board as chair of the audit committee, resigned from the Renren Network board to prevent the questions at Longtop from affecting Renren’s IPO.

 

Then on May 23, 2011, in a filing with the SEC on Form 6-K, the company announced that both its CFO and its outside auditor, Deloitte Touche Tomatsu (DTT) had resigned. In its accompanying press release (here), the company said that DTT stated in its May 22, 2011 letter of resignation that it was resigning as a result of, among other things,

 

(1) the recently identified falsity of the Company’s financial records in relation to cash at bank and loan balances (and possibly in sales revenue); (2) the deliberate interference by certain members of Longtop management in DTT’s audit process; and (3) the unlawful detention of DTT’s audit files.

 

DTT further stated that it was “no longer able to rely on management’s representation’s in relation to prior period financial reports, and that continued reliance should no longer be place on DTT’s audit reports on the previous financial statements.” 

 

A copy of Palaschuk’s terse May 19, 2011 resignation letter can be found here.

 

Securities class action lawsuits followed. The actions were consolidated before Judge Shira Scheindlin in the Southern District of New York. The defendants in the lawsuits included the company, certain of its directors and officers and Deloitte Touche Tohmatsu. The plaintiffs alleged that the company had falsified its financial results by exaggerating revenues, underreporting bank loan balances, and transferring employee expenses to an off-balance sheet entity.  

 

In April 2013, Judge Scheindlin dismissed the claims against the audit firm. As discussed in detail here, on November 14, 2013, Judge Scheindlin entered a default judgment order including a damages award of $882.3 million against the company and its former CEO, Wai Chau Lin.

 

Following the dismissal of the auditor and the entry of default judgment against the company and the CEO, the sole remaining defendant left in the case was Palaschuk, the former CFO, whom the plaintiffs were able to serve in Canada in 2012 and who filed a motion to dismiss the plaintiffs’ claims against him. In a June 29, 2012 opinion (here), Judge Scheindlin, though acknowledging that the online research reports may well have been biased owing to the online analysts’ financial interests as short sellers of Longtop’s stock, denied Palaschuk’s motion. Among other things, she found that the plaintiffs had sufficiently alleged that in various company press release and financial filings, Palaschuk had made misleading statements about the company’s financial condition and the basis for its growth.

 

According to Nate Raymond’s Reuters article, in a July hearing, Palaschuk told the Court that he saw no reason “to have my insurance company pay for something where I wasn’t reckless.”

 

The Trial  

Trial in the plaintiffs’ case against Palaschuk commenced on Wednesday, November 19, 2014. The entire trial took less than three days, as investors were unable to call witnesses in China. Palaschuk himself was the only fact witness.

 

Palaschuk reportedly testified that in a May 2011 telephone conversation Lin, the company’s former CEO, had confessed to fraud, but that prior to that phone call, he (Palaschuk) didn’t know about the supposed false accounting. He claimed in his trial testimony that he acted in good faith and took steps to investigate the factual allegations as they arose.

 

According to the Law 360 article, the plaintiffs counsel argued in her closing argument that Palaschuk had repeatedly ignored warning signs of a “culture of fraud” at Longtop. The red flags included fake contracts and reports by outside analysts claiming the company’s revenues were too good to be true. The article quotes counsel as having argued that “when confronted with these warning signs – with these warning signs that begged for investigation – defendant Palaschuk failed to adequately respond. The lack of action the defendants took to find the truth is truly mind-boggling.”

 

The case went to the jury on Friday, November 21, 2014, and later that same day the jury entered a liability verdict in favor the plaintiffs and against Palaschuk. Damages in the case will be determined in separate proceedings that will begin on Monday, November 24, 2014.

 

Discussion 

As I noted at the outset, trial in securities class action lawsuits are extremely rare. According to information compiled by Adam Savett, Director, Class Action Services, Kurtzman Carson Consultants (KCC), LLC, including the trial against Palaschuk, there have been only 24 securities class action lawsuits that have gone to verdict since Congress enacted the Private Securities Litigation Reform Act (PSLRA) in December 2005. There have only been 13 trials during that period involving post-PSLRA conduct.

 

To put this into perspective, according to NERA (here), between January 1, 1996 and December 31, 2013, a total of 4,226 securities class action lawsuits were filed, meaning that only about one half of one percent of all cases filed during that period went to trial.

 

Taking post-trial proceedings into account (including post-verdict appeals), 12 of the 24 cases that have resulted in a verdict have gone for the plaintiffs and 12 have gone in the defendants’ favor.

 

Those familiar with securities class action litigation know that the cases that are not dismissed or otherwise resolved on procedural grounds almost always settle. It appears that this case did not settle because Palaschuk believed he did nothing wrong. You can certainly see that Palaschuk’s might conclude that he was being targeted on a sort of last-man-standing basis. It is hard to tell how much the difficulty of accessing witness testimony and other evidence hamstrung his efforts to defend himself. But his strategy to fight rather than settle seems to have backfired.

 

Of course, the trial verdict is only one procedural phase; Palaschuk can still attempt in post-trial motions and on appeal to have the verdict overturned. For now at least his decision to fight clearly didn’t play out as he had hoped. Depending on what happens in the damages phase, his decision to fight could wind up looking even worse.

 

Among the many reasons that these kinds of cases almost always settle is that the defendants recognize that they can’t run this risk of a jury verdict that might trigger the fraud exclusion typically found in D&O insurance policies (and that are usually only triggered “after adjudication” of fraud –meaning that a jury verdict is the potential trigger). Ironically, Palaschuk’s reason for refusing to settle (at least according to the July statement cited above) is that he didn’t think his insurer should have to pay anything even though he hadn’t acted recklessly. Depending on exactly what the jury actually decided here, Palaschuk’s decision to push this case to trial could wind up depriving him of any insurance, if the jury ruled that he had acted fraudulently (rather than merely recklessly). The jury verdict form has not yet been posted to the Court’s electronic docket so there is no way to determine exactly what was decided.

 

The insurance question is not only important to Palaschuk, it is important to the plaintiffs. It is extremely unlikely that the plaintiffs will collect a single penny of the cartoonishly inflated default judgment. If the jury verdict precludes coverage for Palaschuk under Longtop’s D&O policy, the plaintiffs will be left trying to enforce collect in Canada on his personal assets on the judgment entered against him. A judgment collection effort against a foreign domiciled individual seems likely to be an unpromising and possibly unrewarding project.

 

Just the same, it will be interesting to see what happens in the damages phase of this case. Post-trial proceedings seem likely. In any event, there is little about this case or about the mixed record of class action securities lawsuit trial verdicts that would encourage other defendants to try to push the cases against them to trial.

 

What’s Next? Crowdsourced Litigation Financing, Apparently: In prior posts on this site (most recently here), I have noted the rise of litigation financing. Given this trend, and in the age of the Internet, it was perhaps inevitable that a litigation funding website facilitating crowdsourced litigation funding would arise. In any event, whether inevitable or not, a site for crowdsourced financing is now here.

 

According to its November 19, 2014 press release (here), a new venture called LexShares has launched “an online marketplace for investing in litigation.” The company’s website can be found here. According to the press release, the company’s online platform “connects accredited investors with plaintiffs in commercial lawsuits in order to make an equity investment in a specific case.” If the plaintiff wins, the investor will received a portion of the proceeds commensurate with the investor’s investment. If the plaintiff loses, the investors lose their investment.

 

According the press release, all legal claims investment opportunities to be posted on the LexShares website are “reviewed by its legal and securities professionals” and are to be offered to investors through a registered broker-dealer. Plaintiffs seeking to have their cases funded through the website must apply to have their cases posted on the site. Once the cases are posted, investors (who must have established their credentials as accredited investors) can review the case and decide if they want to invest. Investors who choose to invest can track the case on the site. The press release states that LexShares has already funded a case with a claim value of more than $40 million and currently has multiple other legal claim investment opportunities available for investment.

 

The press release quotes University of Minnesota Richard Painter as saying that “Litigation funding is maturing. The next logical step is using a technology platform like LexShares to broaden access to this asset class and equalize access to the legal system.”

 

A November 20, 2014 Bloomberg article about LexSource can be found here. A November 19, 2014 TechCrunch article about the site can be found here.  

 

SEC: Number of Whistleblower Reports Continues to Increase

Posted in Whistleblowers

sec sealThe number of whistleblower reports to the SEC increased again in the latest fiscal year, according to the annual report of the SEC whistleblower office. The report, which the SEC is required by the Dodd-Frank Act to provide to Congress annually, is entitled the “2014 Annual Report to Congress on the Dodd-Frank Whistleblower Program” and can be found here.

 

According to the report, there were 3,620 whistleblower reports to the SEC during the 2014 fiscal year (which ended on September 30, 2014).  That represents an increase of 382 (11.8%) over the 3,238 that were filed in the 2013 fiscal year. The number of reports has increased each fiscal year since the program’s inception. Overall, there have been a total of 10,193 whistleblower reports since the program commenced toward the end of the 2011 fiscal year.

 

The agency still has made relatively few of the whistleblower bounty awards authorized under the Dodd-Frank Act, although the number of awards is slowly increasing. The agency has now made a total of 14 whistleblower awards, nine of which were made during the 2014 fiscal year; as the report notes, the agency made more awards in the 2014 fiscal year than in all the other years of the program combined. Most significantly, the 2014 awards included a single award of $30 million, which, as discussed in greater detail here, is the largest bounty award the agency has made. Significantly, the $30 million award was also the fourth award under the program to a foreign-domiciled individual, meaning that 28.5% of the small number of awards have gone to non-U.S. whistleblowers.

 

The report also notes that in addition to new awards during the year, the amount of awards previously made increased during the year as size of the recoveries from the wrongdoers increased, either in the agency’s own proceedings or in other parallel proceedings.

 

In addition to making awards, during the year the agency also denied awards to other whistleblowers. The agency reports that it has denied a total of 19 claims for whistleblower awards, with 12 of those denials taking place during the 2014 fiscal year. Among other reasons for award denials is that the information provided by the whistleblower was not “original”; the filing for the award was not timely made; or that information provided by the whistleblower did not lead to a successful enforcement action.

 

The agency also noted in the report that it has taken steps to curb abuses of the program. Apparently one individual has submitted 143 different applications in responses to Notices of Covered Actions as well as numerous other forms trying to establish his right to a whistleblower award. (A “NoCa” is an item posted on the agency’s website identified Commission actions that resulted in monetary sanctions of over $1 mm, allowing anyone who believes they are entitled to a whistleblower award to submit an application.)  The individual’s filings apparently contained numerous deficiencies. While the individual was given an opportunity to remedy the deficiencies, he failed to do so. The Commission entered an order providing that the individual was ineligible for an award on any of the items he purported to identify to the agency or in any future covered or related action.

 

The most common categories of complaints reported by the whistleblowers to the SEC during the 2014 fiscal year were Corporate Disclosures and Financials (16.9%), Offering Fraud (16%), and Manipulation (15.5%).

 

During the 2014 fiscal year, individuals from all 50 states submitted whistleblower reports, as well as from Puerto Rico and the District of Columbia. The states with the highest numbers of reports were California (556, or about 15% of all reports); Florida (264); Texas (208); and New York (206).

 

During the 2014 fiscal year, the agency also received whistleblower reports from a total of 60 foreign countries, and since the program’s inception, the agency has received reports from a total of 83 different countries. The countries with the largest numbers of reports during fiscal 2014 were the United Kingdom (70); India (69); Canada (59); and China (32).

 

It is interesting to note that while the SEC whistleblower program has attracted numerous reports from overseas whistleblower, and while over a quarter of the bounty awards so far have been made to overseas whistleblowers, the Second Circuit recently held that the Dodd-Frank Act’s anti-retaliation provisions do not protect overseas whistleblowers (as discussed here). It remains to be seen whether the involvement of overseas whistleblowers will remain as active given this absence of anti-retaliation protection.

 

The report also contains some interesting information about the characteristics of the individuals that received bounty awards during 2014. Among other things the agency notes that in two instances the individuals receiving the awards only brought their information to the SEC after attempting to report the violation internally within their own companies and only after their company failed to take corrective action. The report quotes the head of the agency’s Whistleblower Office as saying that the awards to these two individuals “drive home another important message – that companies not only need to have internal reporting mechanisms in place, but they must act upon credible allegations of potential wrongdoing when voiced by their employees.”

 

Though the SEC has now made a number of bounty awards, including the record $30 million award, the agency’s powder is dry. The report notes that the Investor Protection Fund (which was provided by Congress in the Dodd-Frank Act and out of which whistleblower reports are made) at the end of the 2014 fiscal year had a balance of $437.8 million. Clearly the agency will be making many more awards in the future, which in turn should encourage other whistleblowers to come forward.

 

An ABA TIPS Webinar about Interrelatedness Issues: Readers of this blog know that one of the most vexing D&O insurance coverage issues involves questions of whether or not multiple claims are or are not interrelated. An upcoming webinar presented by the American Bar Association Tort Trial & Insurance Practice Section’s Professionals’ Officers’ and Directors’ Liability Committee will address this perennial issue.

 

On December 3, 2014, from 1:00 pm to 2:30 pm EST, my good friend Perry Granof of the Granof International Group will be moderating a webinar panel to discuss this topic. The panel will include Serge Adams of the Schuyler, Roche & Crisham law firm, Ommid Farashahi of the Bates Carry law firm, Neil Posner of the Much Shelist law firm, and Carol Zacharias of ACE. Information about the webinar including registration directions can be found here.

Notes from the Advisen European D&O Insights Conference in London

Posted in Blogging, Travel Posts

051aThe D&O Diary was in London this week to attend and participate in the Advisen European Insights Conference, which took place on Wednesday at the Willis Building, located conveniently across Lime Street from the Lloyd’s Building. The picture to the left was taken on Lime Street, with the Lloyd’s Building on the left, the Willis Building on the right, and in between and down the street,  the Gherkin (30 St. Mary Axe).  The Advisen event was interesting and well-attended, and drew attendees not only from the London market, but from the European continent as well.

 

Among other things, I had the opportunity to participate in a panel entitled “It’s Getting Personal: The Growing Focus on Individual Accountability,” that was chaired by my good friend Francis Kean of Willis. Here is a post-session photo of the panel. From left to right, Francis Kean, Willis; Noona Barlow, AIG; Victoria Watson, QBE; and me. 

 

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I also moderated a panel entitled “Privacy and Network Security Issues for Directors and Officers.” The panel (of which, unfortunately I did not get a picture) included Neil Arklie of Swiss Re; Cris Baez of QBE; Julia Graham of DLA Piper; and Geoff While of Barbican.

 

The conference also afforded a great opportunity to see old friends and industry colleagues. In the first picture below, I am standing with my former colleague and good friend Giovanni Fanizza of Gen Re (Madrid) and Cris Baez (QBE, Paris), and in the second picture, I am standing with Tim Walsh of Advisen; Enrico Nanni of AON; and Chris Warrior of Hiscox.

 

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The two following pictures were taken from the twenty-second floor of the Willis Building. The first picture was taken looking west, with the dome of St. Paul’s Cathedral in the center. The second picture was taken looking east. with Tower Bridge visible in the center, crossing the river.

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It was a pleasure to be in London this week. As Samuel Johnson famously said, “When a man is tired of London, he is tired of life, for there is in London all that life can afford.”

 

More pictures of London:

 

Trafalgar Square:

 

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Buckingham Palace:

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Piccadilly Circus:

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Green Park:

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St. James’s Park:

 

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Cheers! (Picture of my favorite London ale, Fuller’s London Pride, taken at my favorite London pub, The Prince of Teck, on Earl’s Court Road).

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Paris Notes

Posted in Travel Posts

021aThe D&O Diary is on assignment in Europe this week, with the first stop this past weekend in Paris for a field inspection of our junior-year study-abroad student’s scholarly and living arrangements. Our short weekend visit in the middle of rainy November, involving a variety of personal obligations and commitments, afforded only brief opportunities to observe and experience the city itself. But though it was dark and rainy, and though time was short, it was still Paris.

 

Despite grey skies, cool temperatures and occasional soaking rains, Paris059a still proved to be a marvelous place in which to promenade on Saturday afternoon. The conditions in November even afford some advantages over those prevailing in warmer months. The walkways along the river are less crowded, the museums are less jam-packed and seating is generally available at the sidewalk cafes.

 

048aEven after many visits to the city, an afternoon of rambling can still supply unexpected discoveries. On this visit, while walking from the Marais back toward the city center, we found behind the venerable church of St-Paul-St-Louis a hidden area of artisans’ workshops and small, comfortable cafes, known as the Village St-Paul. The Village sits between the Church apse and the river. The Village’s maze of pedestrian walkways and quiet courtyards –featuring shops with furniture, bricolage,  decorative fabrics and glass, toys, photographs and books, wine and other food — provides an oasis of calm just steps away from the noisy traffic of rue Saint-Antoine.

 

006aA brief stroll around Paris inevitably also involves numerous encounters with public artwork, particularly sculpture. The statuary is there to uplift, inspire, and instruct – as well as to display the wealth and sophistication of the state or of the patron that financed the emplacement. While much of the public art in Paris is beautiful, some is a bit more puzzling. We found ourselves contemplating a particularly elaborate fountain sculpture ensemble in the Jardin Marco Polo, south of the Jardin du Luxembourg in the greenway leading toward the Boulevard du Montparnasse. At the southern end of the greenway is an allegorical statuary arrangement, featuring four nymphs holding a globe, seven horses emerging from the waters of the inner basin, an arrangement of dolphin waterspouts within the inner fountain, and a circle of turtles arrayed in the outer fountain basin. The turtles are for some reason spouting water from their mouths. This elaborate and inexplicable arrangement sits in a relatively untrafficked area. Even given all the usual purposes of public art, this sculptural ensemble posed the simple question –why?

 

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A little research revealed that in the fountain (known as the Fontaine de l’Observatoire, owing to the proximity of the nearby Observatoire de Paris) the four female figures were intended to represent the four points of the compass, as a means of portraying the four parts of the world (that is, Europe, Africa, Asia and America). The other figures were merely decorative, rather than allegorical. So there is no deeper meaning behind the spouting turtles. As shown at the end of the post, Paris is full of public statuary, much of it interesting and even beautiful.

 

033aWhile we enjoyed some brief periods of sunshine, damp conditions generally prevailed otherwise. But regardless of the weather, there are always opportunities in Paris to enjoy the city’s wonderful food. We had a particularly pleasant meal Saturday evening at La Bastide Odeon  on rue Corneille, adjacent to the Odéon-Théâtre de l’Europe. We enjoyed a wonderful meal of a type that is all too difficult to find in the United States.  Our dinner included a bowl of chestnut soup, a tureen of bouillabaisse, a plate of rocket and walnuts, and an assortment of cheeses. Dinner at this quiet restaurant was relaxing and agreeable, and, given the quality of the food and the service, surprisingly affordable.

 

We also had an opportunity to experience one of Paris’s most venerable institutions in operation. On Sunday morning we attending the worship service at the church of  Saint-Germain- des-Prés. The church, 063awhich is the burial site for many of the  Merovingian kings, is this year celebrating the 1,000 year anniversary of its bell tower. Shortly before the service began, the church bells in the tower rang gloriously, with their peals echoing within the central nave, followed by a dramatic burst of organ music. A surprisingly large crowd attended the service – the seating area was completely full. Even though the church service was entirely in French, we nevertheless found it both interesting and inspiring. 

 

After the church service, we retreated to a brasserie on nearby rue de Buci, for a leisurely Sunday afternoon dejeuner during which we contemplated the eternal verities while watching the innumerable passersby. It is something of a mystery that in a city with a northern climate and cool temperatures for much of the year outdoor dining has become an almost inextricable part of the city’s identity.  Yet even on a cool November afternoon, enjoying a meal at a sidewalk café is, at least for an occasional visitor like me, one of those essential experiences without which a visit to the city would seem incomplete.

 

This time – as always seems to be the case – our Paris sojourn was far too brief. A weekend visit to Paris is like a taste of a delicious concoction, a brief experience that leaves you wishing you could enjoy the entire meal. As I rolled northward on the Eurostar train toward London, where I will be attending the Advisen European D&O Insights Conference this week, I felt more than a little envy for the study-abroad student who is even now looking forward to several more months in Paris.

 

More Pictures of Paris:

 

The Apse of the Church of St-Paul-St-Louis

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More Public statuary

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A Beautiful City in the Late Fall

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Personal Liability for Corporate Officials Under U.S. Import Laws

Posted in Director and Officer Liability

blumarbleImport laws and custom duties are not areas of the law into which I frequently (or lightly) venture, but I delve into these topics here and now because developments in these areas have served up yet another example where individual corporate officers have been held liable personally for matters that previously had been regarded exclusively as the source of corporate liability.

 

In September 16, 2014 en banc opinion (here), the United States Court of Appeals for the Federal Circuit held that a corporate official can be personally liable for unpaid duties and for (potentially massive) civil penalties in connection with  undervaluing merchandise imported by his company.

 

This decision is discussed in a September 18, 2014 memo from the Katten Muchin law firm entitled “Introducing Corporate Liability into Corporate Negligence: An Analysis of the Trek Leather Decision” (here) and in a November 2014  memo from the Kirkland & Ellis law firm entitled “Individual Found Liable for Violations of U.S. Import Laws” (here).

 

Background

Harish Shadadpuri is the President and sole shareholder of Trek Leather, Inc. Among other things, Trek imports men’s suits. The U.S Bureau of Customs and Border Protection (CBP) alleges that Trek was the importer of record of a 2004 shipment of men’s suits. The CPB alleges that by means of “false acts, statements and/or omissions” the company and its President “understated the dutiable value” of the shipment of suits, resulting in the underpayment of duties of $133, 605, in violation of the customs civil penalty statute, 19 U.S.C. Section 1592.

 

Section 1592 provides in pertinent part that “no person by fraud, gross negligence, or negligence” may “enter, introduce or attempt to enter or introduce any merchandise into the United States” by means of misrepresentations or omission.

 

The Court of International Trade had granted the government’s motion for summary judgment of liability as to both defendants. On appeal, the Federal Circuit had initially held that only importers of record and certain other indentified entities had the responsibility for making entry and that penalties under Section 1592 could only be imposed against those with that responsibility.

 

As the Katten Muchien memo summarized, in its initial decision the Federal Circuit had specified that “for the government to assess a penalty against an individual for violations stemming from entries filed by that individual’s import-of-record company, one of three activities had to arise: the government had to (1) ‘pierce the corporate veil’ to establish that the individual was in fact the importer-of-record; (2) establish that the individual him or herself was liable for fraud; or (3) establish that the individual was an aider and abettor of the company’s fraud.”

 

The individual sought en banc review of the Federal Circuit’s initial decision

 

The September 16, 2014 Decision

In a unanimous en banc decision written for the Federal Circuit by Judge Richard G. Taranto, the Court, setting aside the initial decision, held that the individual defendant could be held liable under the civil penalties statute for actions the Court found constituted the “introduction” of goods within the meaning of the statute.  The Federal Circuit held that the term “introduce” in Section 1592 is broad enough to include acts that extend beyond the formal filing of an entry for the importation of goods.

 

Specifically, the appellate court held that the term “introduce” was broad enough to “cover actions that bring good to the threshold of the process of entry by moving goods into CBP custody in the United States and providing critical documents (such as invoices dictating value) for use in the filing of papers for an anticipated release into the U.S. commerce.”

 

In finding the individual defendant liable, the appellate court was explicit that it was not piercing the corporate veil nor was it holding the individual liable simply because of his status as an officer of the company. Rather, the court stated that it was holding him liable for conduct it found to have violated Section 1592.

 

The appellate court affirmed the judgment against the individual for unpaid duties of $45,245 and penalties of $534,420, plus interest.

 

Discussion 

As I said at the outset, import law and customs duties are not within my usual bailiwick. However I am always concerned with issues affecting the potential liabilities of corporate directors and officers. What struck me in reading this opinion, and particularly, in reading the law firm memos, is that the upshot of the Federal Court’s en banc decision is that individual officers may now be held liable under the import laws for conduct that previously had been regarded exclusively as a potential source of corporate liability.

 

As the Kirkland memo puts it, under this decision, “any corporate officer, compliance officer, or customs broker helping prepare or send invoices to be used for CBP entry has potential liability for ‘introducing’ merchandise in violation of law.”

 

The Katten memo adds that by opening up the possibility of personal liability for “introducing” goods – while at the same time leaving the term “introduce” itself open to interpretation — the appellate court may be “opening exposure to personal liability for all sorts of individuals who are simply trying to do their job.” The law firm memo adds that personnel may find that “their ordinary routines are filled with activities that may be construed as ‘introducing’ merchandise into the United States,” for which “they could find themselves facing personal liability.”

 

This case obviously has important risk management implications. Companies and their personnel have significant incentives to ensure that procedures used are compliant with import law requirements.

 

Because of my lack of familiarity with this area of the law, I hesitate to attempt too may generalizations or conclusions. I note simply that, first, this development presents yet another area of personal liability for corporate officials ; and, second, that this development raises the possibility of individuals  being held responsible for liabilities that had previously been viewed as exclusively corporate. I note in that regard that the judgment against the individual here included not only a statutory penalty and interest, but also included the unpaid duties themselves, which to me clearly seems like a corporate rather than an individual responsibility.

 

From an insurance standpoint, it seems likely that the typical D&O Insurance policy would cover the defense fees and costs of an individual subject to an enforcement action of this type, However, most carriers would likely contend that the unpaid import duties as well as any civil penalties do not represent covered loss under their policies.

 

Speakers’ Corner: This week I will be in London to participate as a panelist and as a moderator at the Advisen European D&O Insights Conference (here), which will take place Wednesday at the Willis Building. If you will be at the conference, I hope you will make a point of saying hello, particularly if we have not previously met.

 

Break in the Action: There will be a brief interruption in the publication schedule for this site while I am on travel. The normal publication schedule will resume when I return to my office next week.

Guest Post: U.S. Long Arm Jurisdiction Creates New Terrorism Headaches for Banks (Among Others!)

Posted in International D & O

IFrancis Kean hi resn prior posts (most recently here), I have noted the growing problems involved with the increasing willingness of U.S. regulators to exert their regulatory and enforcement authority outside of the U.S. In the following guest post, Francis Kean of Willis examines a recent decision by the United States Court of Appeals for the Second Circuit in which the appellate court upheld the exercise of U.S. court jurisdiction under the U.S. Financial Anti-Terrorism Act against a financial institution domiciled outside the U.S. and involving alleged conduct taking place entirely outside of the U.S.

 

Francis Kean is executive director of Willis FINEX in London and the D&O expert for the WillisWire blog. This post was originally published November 7, 2014 on WillisWire (here).

 

I would like to thank Francis for his willingness to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to readers of this blog. Please contact me directly if you think you might be interested in submitting a guest post. Here is Francis’s guest post.

 

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I am indebted to John Blancett, partner of law firm SDMA for drawing my attention to a startling decision of the US Court of Appeal for the Second Circuit: Tzvi Weiss et al. v. National Westminster Bank Plc (judgment delivered 22nd September 2014). The case is striking and disturbing not just as fresh evidence that US long-arm jurisdiction is alive and well but also because it shows just how low the threshold test is for establishing liability against a financial institution which in the eyes of the US Courts might be said to have “… provided material support to a terrorist organization.”

 

The US Anti-Terrorism Act

The claim was originally brought against Natwest in the US District Court, for the Eastern District of New York under the US Financial Anti-Terrorism Act (ATA) on behalf of some two hundred US nationals (or their estates, survivors or heirs) who were victims of terrorist attacks launched in Israel by Hamas.

 

The ATA was introduced in the US expressly to provide a new civil cause of action in federal law for international terrorism. Not only does it provide extra-territorial jurisdiction over terrorist acts abroad against US nationals but it also confers jurisdiction on US courts for the conduct of financial institutions (or other organizations or individuals) anywhere in the world.

 

The Facts

The facts are simply stated. Between 1987 and 2007 Natwest provided banking services, first to the Palestine and Lebanon relief fund and then to its successor, the Palestine Relief and Development Fund (“Interpal”). In 2003 the United States Treasury Department Office of Foreign Assets Control (OFAC) designated Interpal a Specially Designated Global Terrorist (SDGT) on the basis that it “… has been a principal charity utilised to hide the flow of money to Hamas…”.

 

Following OFAC’s designation of Interpal as an SDGT, Natwest sought guidance from the Financial Sanctions Unit of the Bank of England and was told “… there are presently no plans to list [Interpal] under the Terrorism order in the UK” and “there is no need to take any further action…”. This stance was confirmed by both the UK Charity Commission and Special Branch. The Financial Sanctions Unit also told Natwest not to make any payments to or for the benefit of Hamas and that any suspicion of any such payments should be reported to the Charities Commission, the Bank of England and Special Branch.

 

Natwest subjected Interpal’s accounts to regular review and concluded in 2005 that some of the organisations receiving funds from Interpal were indeed suspected of having connections with Hamas. Natwest closed the last of Interpal’s accounts in March 2007. At no time was there any evidence that Natwest was aware of any Interpal payments either to Hamas or to any other organisations that were designated as terrorist organisations by the Bank of England or OFAC at the time of the payment.

 

The Court’s Decision

Natwest applied for summary judgment dismissing the victims’ claim on the basis that they could not show that it acted with the requisite knowledge to impose liability under ATA . The District Court dismissed the claim on this basis.

 

Perhaps unsurprisingly, based on the summary of Natwest’s actions above, the District Court concluded that there was insufficient evidence of any “..deliberate indifference as to whether Interpal funded terrorist activities….” After all, Natwest had expressly sought the views of the Bank of England and had also taken due account of the views of both the UK Special Branch and UK Charity Commission.

The surprise comes with the Court of Appeal’s decision overruling the District Court and finding in favour of the plaintiffs. This is how they summed up:

 

…we conclude that [the Anti-Terrorism Act’s] requirement is less exacting and requires only a showing that Natwest had knowledge that, or exhibited deliberate indifference to whether Interpal provided material support to a terrorist organisation, irrespective of whether Interpal’s support aided terrorist activities of the terrorist organisation. (Emphasis added)

 

What the Case Means

It seems (to me at least) that the difference between the two approaches could not be more significant. The focus of Natwest (and it may be said of the relevant UK authorities) was on the question as to whether Interpal could be suspected of “terror financing”.

 

By contrast, the US Court of Appeals has in effect said that Natwest’s focus should, for the purposes of the US Act at least, have been on the much broader question as to whether Interpal was “in any way financing a terrorist organisation”. In other words, if, for example, there was evidence that Interpal financed Hamas’ non-political and/or non-violent activities, that would be sufficient for the civil action for damages against Natwest to proceed. The fact that the UK authorities (and therefore perhaps understandably Natwest itself) may not have looked at this question in the same way was not an adequate defence to such civil liability under ATA.

 

Watch out!

The implications of this decision for companies anywhere in the world which do not follow precisely the same line as the US when it comes to the US ATA are sobering indeed.

 

Without wishing to finish on too apocalyptic a note, it is worth pointing out that the ATA does not just apply to financial institutions but to any and all organisations and individuals anywhere!

 

Update

11 November, 2014

Perhaps inevitably in the “Land of Litigation”, it wasn’t going to take long for others to catch on to the idea of trying to hold banks accountable for terrorist acts.

I spotted this piece in The New York Times of 10th November announcing new claims against HSBC, Barclays, Standard Chartered, the Royal Bank of Scotland and Credit Suisse following on from the NatWest case about which I blogged and another case involving Arab Bank. Although I haven’t seen the complaints themselves (and although they seem to focus on  Hezbollah, the Shiite militant group, as well as Iran’s Islamic Revolutionary Guard Corps-Qods Force rather than Hamas), they will undoubtedly  rely on the same US Anti-Terrorism Act.

It seems from the article that the claimants in this case will have an additional hurdle (or opportunity to extend the reach of the Act, depending on your point of view). This is because the Wall Street banks did not in these cases themselves make the transfers as opposed to allegedly facilitating them. Definitely one to watch!

 

- See more at: http://blog.willis.com/2014/11/us-long-arm-jurisdiction-creates-new-terrorism-headaches-for-banks-among-others/#sthash.FwXZGxLX.dpuf

D&O Insurance: Subsequent Lawsuit to Enforce Judgment Held Interrelated with Prior Adversary Action

Posted in D & O Insurance

marlyandThe question of whether or not a subsequent claim is interrelated with a prior claim — and therefore deemed first made at the time the earlier claim was filed – is a recurring D&O insurance coverage issue.  If the later claim is to be deemed first made at the time of the prior lawsuit, then the later claim is not covered under the claims made D&O insurance policy in force at the time the later claim arose.

 

In a November 7, 2014 opinion (here), District of Maryland Judge George Jerrod Hazel examined these recurring issues and determined that a 2010 action to enforce a judgment was interrelated with the 2006 adversary proceeding in which the judgment had been entered and therefore that the later action was not covered under the D&O policy in force at the time it was filed.  

 

Background

In 2002, Haymount Limited Partnership (HLP) retained International Benefits Group (IBG) to help HLP obtain financing for a real estate development project. HLP ultimately obtained financing but refused to pay IBG the finder’s fee IBG contended it was due. IBG claimed that HLP’s refusal to pay the finder’s fee forced IBG into bankruptcy. In 2006, IBG’s bankruptcy trustee filed an adversary proceeding in the District of New Jersey (the 2006 Adversary Proceeding) against HLP; its two general partners (Westminster and Haymount); Edward J. Miller, Jr., president of Haymount and Chairman of W.C. and A.N. Miller; and John A. Clark, vice president of Wesminter and president of the John A. Clark Company.

 

The trustee’s complaint in the 2006 Adversary Proceeding alleged conspiracy to deny IBG its finder’s fee; breach of contract; unjust enrichment; and tortious interference. On January 8, 2010, a judgment of $4.4 million was entered in the 2006 Adversary Proceeding against HLP and the others in favor of the Trustee.

 

On October 29, 2010, the Trustee filed a second action (the 2010 Action) in the District of New Jersey against several of the same defendants as had been named in the 2006 Adversary Proceeding, including HLP, Edward Miller and John Clark. The first paragraph of the 2010 Action stated that the suit was an “ancillary and adversary proceeding to recover and collect” the $4.4 million judgment entered the 2006 Adversary Proceeding. The complaint in the 2010 Action describes a number of actions the defendants allegedly took to transfer HLP’s assets in order to make them unavailable to satisfy the $4.4 million judgment. The complaint in the 2010 Action asserted claims against the defendants for fraudulent transfer, fraudulent conveyance, common law and statutory conspiracy, creditor fraud, and aiding and abetting.

 

In November 2010, W.C. and A.N. Miller Development Co. submitted notice of the 2010 Action to its D&O insurer, seeking to have the insurer pay its defense costs incurred in defending the 2010 Action. The carrier denied coverage for the claim, based on its assertion that the 2010 Action and the 2006 Adversary Proceeding involved interrelated wrongful acts and therefore that the 2010 Action is deemed under the policy to have been first made at the time the 2006 Action was filed. The insurance carrier argued that because the 2010 Action was deemed made in 2006, it was not first made during the coverage period of its claims made policy and therefore was not covered under the policy

 

Miller filed an action as against its D&O insurance carrier alleging that the insurer had breached its duties under the policy and seeking to recover the costs it incurred in defending the 2010 Action. The insurance carrier filed a motion for judgment on the pleadings and Miller filed a motion for summary judgment.

 

The D&O insurance policy provided that all “Interrelated Wrongful Acts” were considered one “Claim” for purposes of coverage. The Policy stated that “more than one Claim involving … Interrelated Wrongful Acts shall be considered one Claim which shall be deemed first made on … the date on which the earliest such Claim was first made.” The Policy defined “Interrelated Wrongful Acts” as “any Wrongful Acts which are logically or causally connected by reason of any common fact, circumstance, situation, transaction or event.”

 

The November 7 Opinion  

In his November 7 opinion, Judge Hazel granted the carrier’s motion for judgment on the pleadings and denied Miller’s motion for summary judgment, holding that the 2006 Adversary Proceeding and the 2010 Action involve Interrelated Wrongful Acts therefore that under the policy the two are deemed one Claim first made at the time the first action was filed. Because the subsequent lawsuit was deemed first made four years prior to the inception of the D&O insurance policy the 2010 Action  is not covered under the policy.

 

In reaching this conclusion, Judge Hazel rejected two arguments on which Miller sought to rely. First, he rejected Miller’s argument that because coverage under the D&O insurer’s policy for the 2006 Adversary Proceeding would have been precluded under the policy’s contract exclusion, it could be treated with the 2010 Action as a single Claim. Judge Hazel said the policy does not require a Claim to be covered in order for it to be treated the basis of an Interrelated Wrongful Act and therefore to be the basis of a single Claim. Judge Hazel also rejected Miller’s argument that the 2006 proceeding in bankruptcy was not a Claim within the meaning of the policy, finding that the 2006 Adversary Proceeding met the policy’s definition of the term Claim.

 

Judge Hazel went on to reject Miller’s argument that at most the two actions involve a “common motive” (that is, the defendants’ purported desire to avoid paying the finder’s fee), rather than a “common scheme.” Judge Hazel concluded that the two actions did arise out of a “common scheme” that “was directed at a specific entity (IBG), that involved a single contract (the fee agreement), that arose out of the same real-estate transaction (the Haymount Project) and that sought a single outcome (precluding IBG’s monetary recovery for its involvement in the Haymount Project).” Thus, Judge Hazel concluded, the two actins “shared a common nexus – namely, an alleged scheme involving the same claimant, the same fee commission, the same contract, and the same real estate transaction.”

 

Judge Hazel also found that the two actions were “logically or causally” connected, as It was “entirely logical” that the bankruptcy Trustee would file an action to recover damages associated with the alleged actions taken to avoid payment of the judgment entered in the 2006 Adversary Proceeding, noting that if the defendants in the 2006 Adversary Proceeding had satisfied the judgment, the 2010 Action would not have been filed.

 

Miller had tried to argue that there were important differences between the two actions, contending that the two lawsuits arose during different time periods, included different legal claims and involved a number of different parties. Judge Hazel said that these differences — “as well as any other differences” — were “irrelevant” to the question of whether the two actions involved Interrelated Wrongful Acts. Judge Hazel said that “the relevant focus is not on any number of differences” between the two actions, but instead “the relevant focus is on the similarities between the two.” Indeed, he added “so long as a single fact, circumstance, situation, transaction, or event logically or causally connects” the two actions, they would be deemed Interrelated Wrongful Acts.

 

Discussion

Because the 2010 Action expressly related to efforts by the bankruptcy Trustee to enforce or to collect upon the judgment the Trustee had obtained in the 2006 Adversary Proceeding, it was always going to be difficult for Miller to establish that the two actions were not “logically or causally connected by reason of any common fact, circumstance, situation, transaction or event.” Indeed, because the complaint in the 2010 Action stated on its face that it was “an ancillary and adversary proceeding to recover and collect” on the judgment entered in the 2006 Adversary Proceeding, there would seem to be little basis on which to contend that the two actions were not “logically or causally connected” by a common fact, circumstance or situation.

 

But while the outcome here may not necessarily be surprising, there are some noteworthy aspects of Judge Hazel’s ruling. First, his observation that any differences between the two actions are irrelevant is striking. While the differences between the 2006 Adversary Proceeding and the 2010 Action may well not have been determinative here, that is a long way from saying that consideration of the differences between two actions would never be relevant.

 

Second, Judge Hazel’s reading of the Policy’s definition of the term Interrelated Wrongful Acts is quite broad; his emphasis that two actions would involve Interrelated Wrongful Acts “so long as even a single fact, circumstance, situation, transaction, or event logically or causally connects” the two underscores how broadly the policy’s definition of Interrelated Wrongful Acts could sweep. The breadth of this reading suggests that points of overlap between two actions could be very peripheral or even remote and still be sufficient to connect the two as interrelated. The breadth of this expansive reading seemingly raises the possibility that coverage for entire categories of litigation could be precluded simply because there may have been an earlier lawsuit filed.

 

My concern in this regard is based in part on Judge Hazel’s suggestion that any differences between two actions are irrelevant, and that all that matters are the similarities between the two. While I understand that a party seeking to establish that differences between two actions matter has the burden of showing the significance of the differences (particularly with respect to the question of whether the two actions share a common factual nexus), it seems to me to be too much to suggest the differences between two action are never relevant.

 

I find it interesting that Judge Hazel gave the definition of Interrelated Wrongful Act here such an expansive reading even though the definition lacked the wording sometimes found in similar definitions in other D&O insurance policies; that is, while the definition in this case provided that alleged wrongful acts are interrelated if they are connected “by reason of” a common fact or circumstance, other policies’ definitions provide further that the alleged wrongful acts are interrelated if they are “based upon, arising out of or in any way relating to” a common fact or circumstance. Judge Hazel gave the policy wording here an expansive meaning notwithstanding the absence of this broader definitional wording.

 

As I noted at the outset of this discussion, the interrelatedness analysis in this case arguably was fairly straightforward. The reason I have nevertheless dwelt on these issues at length is because all too often interrelatedness issues can be vexatious and even confounding, as I noted at length in a prior post. My concern is that the sweep of Judge Hazel’s generalizations about the interrelatedness issues – particularly his statement that any differences between two actions are irrelevant to the interrelatedness analysis –could be read in a way that could cause problems in other cases where the lines of analysis may not be as straightforward as they arguably were here.

Notes from the PLUS International Conference in Las Vegas

Posted in Blogging

caesersThis past week the annual PLUS International Conference took place at the sprawling Caesar’s Palace complex in Las Vegas. Given the mass of confusing pathways and corridors and vast distances between the various event venues at the hotel, it wouldn’t surprise me at all to hear that a few conference attendees are still wandering around inside the Caesar’s Palace grounds, dazed into a trance by the blaring music and the slot machines’ flashing lights. Just the same, it was unquestionably a very successful event.

 

The high point of the event for me was the presentation of the PLUS1 award to my good friend Aruno Rajaratnam, of the Ince & Co. law firm in Singapore, whom I interviewed in a Q&A I posted on this site last week. In the first picture below I am standing outside the conference ballroom with Aruno. The next picture shows Aruno delivering her acceptance speech. In the third picture, Aruno stands with incoming PLUS President Jim Skarzynski and immediate Past PLUS President Dave Williams. The final picture was taken at the dinner in celebration of Aruno’s award; shown from left to right in the picture are Dave Williams of Chubb; Aruno; Ann Longmore of Marsh; Shasi Gangadharan of Chubb (Singapore); Joe Montelone of the Rivkin Radler law firm; and me.

 

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The PLUS International Conference is always a good opportunity to reunite with old friends. In the picture below, I am standing with my former colleague and good friend, Diane Parker of AWAC, together with Robert Chadwick of the Campbell Chadwick law firm in Dallas.

 

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This final picture was taken at the opening night reception. From left to right, Corbette Doyle of Vanderbilt University; me; Pete Herron of Travelers; and Jeff Lattman of Beecher Carlson.

 

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