The D & O Diary : Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

In a September 21, 2007 opinion (here), issued following an earlier bench trial, United States District Judge Charles A. Pannell, applying Georgia law, rejected AFC Enterprises' D & O carrier's attempt to rescind AFC's D & O policy and ordered the carrier to pay over $24 million in compensatory damages and prejudgment interest. AFC's September 26, 2007 news release announcing the decision can be found here.

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On September 27, 2007, Amkor Technology announced (here) that the United States District Court for the District of Arizona had granted the defendants' motion to dismiss the securities class action lawsuit pending against the company and several of its directors and officers. As noted in a prior post (here), the initial complaint that the plaintiffs had filed in January 2005 did not contain options backdating allegations. After the company's revelation during 2006 of options backdating concerns, the plaintiffs amended their complaint to add the backdating allegations. The plaintiffs' second amended complaint can be found here.

In a September 25, 2007, U.S. District Judge Paul Rosenblatt granted the defendants' motion to dismiss the second amended complaint. A copy of the September 25 dismissal ruling can be found here. Judge Rosenblatt granted the motion with respect to the options backdating allegations on two grounds: first, that the plaintiffs had failed to adequately plead loss causation as required under the Dura Pharmaceuticals case; and second, that the plaintiffs had failed to adequately plead scienter.

In attempting to establish loss causation, the plaintiffs attempted to rely on the stock price drop following the Company's July 26, 2006 press release (here) in which the company both announced its second quarter 2006 operating results and also announced that it had voluntarily formed a Special Committee to examine options practices. Judge Rosenblatt, reviewing all of the allegations, considered that the price drop following the July 26 announcement was due to the company's second quarter results and weak third quarter forecast, rather than to the two sentence announcement of the Special Committee. In reaching this decision, Judge Rosenblatt considered the fact that at the time of the company's August 16, 2006 announcement (here) that it would be restating its prior financials and its October 6, 2006 announcement (here) of the Special Committee's findings, the company's stock price went up. Judge Rosenblatt said "the Plaintiffs have failed to link their losses to the alleged misrepresentations by showing the Amkor price dropped upon revelation of the true state of the facts. As noted by the Defendants, once a corrective disclosure was issued the stock price actually increased."

Judge Rosenblatt's finding that the plaintiffs had failed to adequately plead scienter is based on his conclusion that "other than general assertions about the Individual Defendants' roles and responsibilities and motivations, the Plaintiffs do not plead specific facts to support their allegations of scienter." Although Judge Rosenblatt mentions the Supreme Court's recent Tellabs opinion (about which refer here), the Tellabs decision is basically irrelevant to the scienter ruling.

The Amkor dismissal is interesting in and of itself , as the first dismissal of an options backdating related securities class action lawsuit of which I am aware. (Readers are encouraged to correct me on this point if I missed a prior options backdating securities lawsuit dismissal.)

UPDATE: Alert reader Avi Wagner points out that on July 30, 2007, Judge Fogel dismissed the Mercury Interactive options backdating securities lawsuit without prejudice. Judge Fogel's order may be found here. (I am embarrassed to admit that I actually had an item about this dismissal in an earlier post, here -- I should learn to rely on the blog rather than trusting my memory.)

In addition, alert reader John Orr points out that on September 14, 2007, the Court granted the defendants' motion to dismiss in the Verisign options backdating lawsuit, a case that combined both 10b-5 and derivative allegations. The Verisign dismissal order can be found here. The court granted the motion to dismiss the Section 10b-5 action based on the Tellabs case and the failure to allege sufficient facts to support a scienter finding and also failure to plead sufficient facts to establish loss causation. Similarly to the Amkor derivative case (as discussed below), the court granted to motion to dismiss the derivative allegations based on the platiniffs' failure to allege sufficient facts to establish demand futility and to establish that the plaintiffs had standing.

Another aspect of the dismissal is that it corroborates a view that was widely held at the time the options backdating scandal was unfolding a year ago as an explanation why there were relatively few options backdating securities lawsuits but a relatively large number of shareholder derivative lawsuits - that is, the view at the time is that the backdating revelations were not accompanied by stock price declines of the type necessary to support a securities claim. The plaintiffs in the Amkor lawsuit may have been unable to resist the temptation to try to upgrade their existing securities lawsuit by adding allegations relating to options backdating. But the absence of the ability to show causally related damages ultimately doomed their options backdating allegations. (It should also be noted that Judge Rosenblatt also dismissed the plaintiffs original unrelated allegations as well.)

None of this is to say that the plaintiffs' counsel who elected to file derivative lawsuits necessarily can be expected to fare better. Indeed, on August 28, 2007, Judge Rosenblatt also dismissed the separate options backdating related derivative complaint that had been filed against Amkor as nominal defendant as well as against several of its directors and officers. (Refer here for a copy of Judge Rosenblatt's dismissal opinion in the Amkor derivative lawsuit.) Judge Rosenblatt granted the dismissal motion on the ground that the plaintiff had failed to plead facts sufficient to establish demand futility. He also found that the plaintiff had failed to plead facts sufficient to show that he had the requisite share ownership for the requisite time period necessary to establish that he had standing to bring the claim.

The timing of the Amkor dismissal is interesting because is follows so closely after the recently announced $16 millions settlement in the Rambus options backdating securities lawsuit (about which refer here). While the Rambus settlement might have been (and may still prove to be) a precursor to further settlements, the Amkor dismissal may embolden some options backdating securities lawsuit defendants to continue to resist in the hopes of securing a dismissal, rather than attempting to reach an early compromise.

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In an earlier post (here), I discussed a recent case in which investors sued a subprime mortgage lender's auditor, as one example of the ways in which aggreived parties may seek to impose gatekeeper blame on professionals for the subprime lending mess. A recent lawsuit filed against the prominent New York law firm of Cadwalader, Wickersham & Taft, though it arises in the context of commercial mortgages, may suggest a way that law firms may also get drawn into litigation arising from the subprime lending mess.

According to a September 26, 2007 Law.com article entitled "$70 Million Suit Against Cadwalader Reflects Risks of Practice in Mortgage-Backed Securities" (here), in October 2006, Nomura Asset Capital Corp. filed a state court lawsuit in Manhattan "over documents the law firm drafted for a 1997 securitization transaction in which Nomura pooled 156 commercial mortgages worth around $1.8 billion."

The securitization documents warranted that the pool "qualified" for special tax treatment, and also warranted that that this qualification meant that the mortgages were backed by properties worth at least 80% of the mortgage amounts. After some of the mortgages in the pool defaulted, LaSalle Bank, which held the pool in trust, sued Nomura, alleging that the mortgage loans were not "qualified" because one large property in the pool was worth substantially less than 80% of the loan value.

Ultimately, the Second Circuit held (here) that the inclusion of the 80% warranty, in addition to the warranty that the pool was "qualified," imposed additional duties on Nomura. Nomura later settled with LaSalle for $67.5 million, and subsequently filed the legal malpractice action against Cadwalader for the inclusion of the 80% warranty in the securitization documents. According to the Law.com article, Cadwalader's motion to dismiss remains pending.

Though Nomura's lawsuit against Cadwalader grows out of the commercial mortgage context and relates to transactions from ten years ago, it is, as the article states, "unfolding against a backdrop of a credit crisis centering on such securities and the default of mortgages behind them." The article notes that "the situation is worrisome to those law firms that have large securitization practices."

As losses on subprime mortgage-backed securities mount, aggrieved parties will cast about for deep pockets to target, and if the Nomura case is any indication, aggrieved parties may well attempt to seize on purported defects in the securitization documents to attempt to target the law firms that drafted the documents. To the extent law firms' clients and former clients are compelled to pay investor losses on securities they sold to investors, the clients and former clients may attempt to shift those losses to the lawyers that drafted the securitization documents.

To be sure, the Nomura case against Cadwalader involves the unusual circumstance that the presence of a single phrase in the documentation is allegedly linked to Nomura's obligation to have to pay the prior settlement to LaSalle. Other potential litigants will face greater difficulties showing how the the lawyer's conduct supposedly caused their losses. But clearly the gatekeepers on whom aggrieved parties will attempt to pin the blame for subprime-lending losses will include lawyers, as well as other professionals.

Hat tip to alert reader Kelly Reyher for the link to the Law.com article.

SEC to Convene Securities Lawsuit Roundtable: According to a September 24, 2007 Wall Street Journal article entitled "SEC to Study Revamp to Shareholder Suits" (here), the SEC will be convening a roundtable in the first quarter of 2008 to explore possible revisions to the U.S. system of private securities litigation.

The SEC's decision to convene the roundtable is in response to an August 2, 2007 letter to the SEC from six prominent law professors, who suggested that the SEC "take a leadership role in studying [private securities litigation] and making or recommending policy changes if and where appropriate."

The professors initiative, and the SEC decision to convene a roundtable, follows the suggestions of the Paulson Committee (refer here) and the Bloomberg/Schumer report (refer here) that the litigiousness in the U.S. is harming the competitiveness of U.S. capital markets.

In addition to their letter, the professors also provided a list of fifteen suggested discussion topics (here). Readers of this blog will be interested to note that among the topics that the professors suggested to be discussed is the following:

What is the role of insurance in [private securities class action] settlements? What portion of the settlements (and the costs associated with the litigation) is funded by insurance carriers? What is the impact on investors of the insurers' role, including the impact of any insurance rate increases?

The list of questions also includes an extended bibliography of academic papers on related topics, which may also be of interest to readers of this blog.

The D & O Diary sincerely hopes that if the SEC is going to examine this question about the role of insurance that the SEC will consult persons who are actually involved in the D & O insurance industry. All too often, commentators prefer to theorize based on economic models (or even worse, nothing more than their own assumptions) about how D & O insurance functions, without actually talking to anybody who is directly involved with the operation of D & O insurance within the U.S. litigation system. I know a few people in the D & O industry who would have quite a lot to say about the professors' proposed D & O insurance question.

Hat tip to the 10b5-Daily (here) for the links to the professors' letter and list of questions.

Did the Expert Say Why the Airport Police Don't Plan on Doing Things Correctly?: The front page of the September 26, 2007 Cleveland Plain Dealer carried the following headline: "Airport Police Plan a Mistake, Expert Says."

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One of the most oft-noted observations (refer, for example, here) concerning directors' and officers' liability exposure is that since mid-2005 the number of securities class action filings has fallen well-below historical averages. When NERA Economic Consulting recently released its 2007 mid-year report on securities class actions (refer here for my prior post about the NERA report), the report noted that while lower class action filing levels persist, the filing rate during the first-half of 2007 did represent an increase over immediately prior six-month period. The NERA study was focused on filing during the period ending on June 30, 2007, but it is clear the filing levels since June 30 have continued the upward trend that NERA noted, particularly since August 1, 2007.

By my count, during the eight weeks between August 1 and September 21, 2007, 37 companies were sued for the first time in securities class action lawsuits. If this filing rate is extrapolated over a 52-week period, the resulting annualized rate would be 296 lawsuits, well above historical norms.

Perhaps the most active week during the recent 8-week period was the immediate past week of September 17 through September 21, when eight companies were sued for the first time in securities class action lawsuits:

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As the subprime lending mess has unfolded, one of the more interesting challenges has been trying to figure out where the subprime risk is. This query is not simply a matter of figuring out which financial institutions engaged in subprime lending (although this surely is part of the equation). The more complicated part of the inquiry is figuring out where all that subprime debt wound up, either as mortgages or after being sliced, diced, and repackaged into mortgage-backed financial instruments sold to investors.

This question is no small inquiry. As noted in a prior post (here), according to the Office of the Comptroller of the Currency, there is over $1.08 trillion in subprime mortgage debt being held outside the lending industry. What that much debt dispersed into the economy, it seems probably that the debt instruments have wound up in some pretty unexpected places. As Gretchen Morgenstern notes in her September 23, 2007 New York Times column entitled "Guess Who's Feeling the Mortgage Pain" (here), "nine months after the meltdown in the home loan market, investors are still waiting for banks, brokerage firms and other companies to come clean on losses incurred" on mortgage-backed securities.

One obvious place to look for this debt is at other financial institutions, as shown, for example, in the case of Scottish Re Group, whose recent disclosure (here) of its exposure to mortgage investment risk rocked its stock price. Morgenstern's September 23rd Times column also discusses potential issues at E*Trade Financial Corporation and the valuation of mortgage-backed assets on its balance sheet. But financial institutions are not the only companies carrying mortgage backed securities on their balance sheets. Nonfinancial companies apparently are also carrying a significant amount of these investments, too.

A September 19, 2007 Wall Street Journal article entitled "Why Firms Like Smucker May Feel Pinch of Debt Crunch" (here) took a look at several nonfincial companies that are carrying mortgage-backed securities on their balance sheets. The companies mentioned in the article include J.M. Smucker (the jelly maker), Garmin (the navigation device manufacturer), Microsoft, Netflix, and Sun Microsystems. These companies invested in the mortgage-backed instruments because they "had been viewed as relatively safe investments that produced slightly better returns than cash and governmental bonds - and could be sold quickly if needed."

The problem for these companies in the current financial environment is how these assets should be carried on their balance sheets, and specifically whether, in light of the complicated valuation questions surrounding these assets, "the cash stated on the balance sheet is a true representation of the cash available to the company." The Journal article states:

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In what may be the beginning of the final act in the Milberg Weiss criminal investigation, on September 20, 2007, a federal grand jury indicted Mel Weiss of participating in a scheme that paid millions of dollars in kickbacks to paid plaintiffs in over 235 class action and shareholders derivative lawsuits. The payments, allegedly made over a 25-year period, garnered the Milberg Weiss firm over $250 million. The Second Superseding Indictment naming Weiss and adding additional allegations against the Milberg Weiss firm and against Seymour Lazar, one of the paid plaintiffs, can be found here. The U.S. Attorneys' Office's press release announcing the indictment can be found here.


In addition, on September 20, 2007, former Milberg Weiss partner Steven Schulman agreed to plead guilty to a federal racketeering charge and to acknowledge that he and others conspired to conceal the secret payments from courts and absent class members. Schulman's plea agreement can be found here, and the U.S. Attorneys' office's September 20 press release announcing the plea agreement can be found here.



A September 21, 2007 Wall Street Journal article describing the new indictment and Schulman's guilty plea can be found here. A September 21, 2007 New York Times article can be found here.

The new indictment describes a scheme in which Weiss, Bill Lerach (refer here), David Bershad (refer here), Schulman, and unnamed Milberg Weiss partners E, F and G formed a conspiracy to provide individuals illegal kickbacks, and to cause the individuals to provide false and misleading statements in court documents and in depositions. The three named paid plaintiffs are alleged to have received at least $11.3 million in illegal payments, and others are alleged to have received hundreds of thousands of dollars in payments.

The new indictment alleges that in order to conceal the payments, some of the payments were made through intermediary law firms, and one of the criminal defendants named in the indictment is Paul Selzer, an attorney who is alleged to have received and transmitted the payments for Lazar.

Many of the allegations in the new indictment appeared in the indictments previously filed or were revealed at the time of Bershad's plea agreement. The new indictment does add the allegation that the kickback payments were omitted from or mischaracterized within the Milberg Weiss law firm's accounting books and records, and that as a result the law firm "provided false and misleading information to Milberg Weiss's outside accountants and tax preparers concerning such payments." The indictment also alleges that the law firm prepared false tax documents to disguise the nature of the payments to the intermediary law firms. (There is certainly some significant irony in the fact that the law firm, which garnered hundreds of millions of dollars in fees by alleging that corporations misrepresented their financial condition, is itself alleged to have misrepresented itself financially and to have falsified its own books and records.)

The new indictment also contains some interesting new tidbits. For example, the indictment alleges that after Bershad warned Weiss that paying one of the named plaintiffs in Florida would violate Florida law, "Weiss and Partner F replied, among other things, that because they would be paying [the individual] in cash, there would be no paper trail and therefore there was little risk they would ever be caught." The indictment also alleges that in the mid-80s, Weiss carried thousands of dollars in cash to Florida to pay the Florida paid plaintiffs.

The new indictment also contains detailed allegations regarding the disposition of the Milberg Weiss firm's $40 million fee from the Oxford Health case (about which refer here). Schulman's plea agreement suggests where this information may have come from, and is described further below.

The Milberg Weiss firm and Weiss himself are also alleged to have obstructed justice by withholding and or misrepresenting the discovery of a 1990 fax from one of the paid plaintiffs (Stephen Cooperman, about whom refer here) to Bershad. The indictment alleges that the document was withheld from production called for by a Grand Jury subpoena, and that later Weiss made a false statement by stating that he had found the document in a safe in his office at the law firm and that he had forgotten about the document at the time of the document production. The new indictment alleges that Weiss "had not discovered the 11/15/1990 telefax in his safe, but instead had taken the document from David J. Bershad, who had found it in his desk drawer when searching for documents responsive to the Grand Jury Subpoena." (It appears that many of the details in the new indictment may have come from Bershad, who is cooperating with the government as part of his plea agreement.)


According to the U.S. Attorney's Office press release, Weiss will appear in court on October 12, and will be arraigned on October 25. The press release also states that Weiss faces a maximum prison sentence of 40 years in federal prison. The indictment also seeks the Milberg Weiss firm's forfeiture of the entire $251 million it is alleged to have made in the cases in which the paid plaintiffs allegedly participated.


Although somewhat overshadowed by the new indictment, Schulman's plea agreement also has some interesting new information. As part of his agreement, Schulman agreed to pay a $250,000 fine and a criminal forfeiture of $1.85 million ($1 million within seven days of his guilty plea and $850,000 seven days before his sentencing). The plea agreement also contemplates a sentence of from 27 months to 32 months, but the sentencing calculation is not binding on the court. Schulman retains the right to appeal the amount of any forfeiture or fine and also the conditions of his supervised relese. Schulman has agreed to cooperate with the government.


Exhibit A to Schulman's plea agreement reflects the factual allegations against him. The exhibit alleges that Schulman entered in to an agreement with Weiss, Bershad and unnamed Milberg Weiss partner E to make and conceal secret payments to Vogel. The specific allegations relate to payments made in connection with the settlement of the Oxford Health class action. Schulman and Vogel and alleged to have agreed that in light of the size of the Milberg Weiss law firm's $40 million fee in the case, Vogel's share should be reduced from his usual 12 percent.


Schulman allegedly told Weiss that Vogel was willing to accept a smaller percentage, but Weiss is alleged to have said that "in light of the pending criminal investigation" he did not want to negotiate over the telephone. Weiss allegedly instructed Schulman to set up a meeting, and Weiss later allegedly told Schulman that he had worked out an agreement. Schulman is alleged to have sent a Milberg Weiss law firm check to an intermediary attorney, in order to effect payment to Vogel, with a letter stating that the check was to the law firm in payment of services rendered in the Oxford Health case.


Schulman is also alleged to have made or to have caused to be made false and misleading statements in several cases, in which Vogel stated that he was not accepting payments for serving as a plaintiff.


According to the U.S. Attorney's Office press release, Schulman is scheduled to appear in court on October 19 and is scheduled to be arraigned on October 22.


The prison term specified in Schulman's plea agreement (27 to 32 months) seems to stand in odd contrast to the significantly shorter 12 to 24 months specified in Lerach's plea agreement. (This may provide one more fact supporting the view, favored in certain quarters, that Lerach got off easy.) However, Schulman's relatively greater recommended sentence may be due to the application of negative Sentencing Guideline factors specified in his plea agreement as "substantial interference with the administration of justice"; "obstruction extensive in scope"; and "abuse of a position of trust."


With all of the (currently) indicted Milberg partners having pled guilty, Weiss stands alone to face the allegations. The government's case apparently will be aided by Bershad's and Schulman's cooperation. (Lerach did not agree to cooperate with the government in his plea agreement.) Meanwhile, the Milberg Weiss law firm also faces even more serious allegations than it did before. The firm released a statement today (here) that "we will continue to fight for our clients and class members and to achieve the record recoveries for which our firm has long been known." The statement adds that none of the firm's active partners is alleged to have been involved in any wrongdoing." (Of course, the partners who are alleged to have committed wrongdoing on the firm's behalf have all left the firm, and several of them have already pled guilty. But, hey, they aren't at the firm any more, are they?)

So cue the "Ride of the Valkyries" and raise the curtain for what may prove to be the final act, the one in which the fat lady could possibly sing.

Hat tip to the Legal Pad blog (here) for the links to the new indictment, press releases and Schulman plea agreement.

More Subprime Lawsuits: The D & O Diary is maintaining a running tally (here) of subprime-related securities class action lawsuits. Today, I added two new lawsuits to the list, a new lawsuit filed against NetBank (press release here) and a new lawsuit against Opteum (press release here). The addition of these two new lawsuits brings the total of subprime related lawsuits to 16, in addition to four subprime-related lawsuits that have been filed against construction companies.

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According to news reports (here), on September 18, 2007, Bill Lerach has agreed to plead guilty to a federal conspiracy charge. The plea agreement can be found here, the criminal information can be found here, and the governement's press release can be found here. Hat tip to the WSJ.com Law Blog (here) for the links to the plea documents.

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In prior posts (refer here) and other publications (here), I have written about the growing potential exposure to directors and officers of publicly traded companies arising from global climate change concerns. My views have been met with some interest, but also with significant skepticism. But while there are admittedly as yet no D & O claims from climate change issues, several recent developments confirm my view that climate change-related issues represent a growing are of D & O exposure.

In its 2006 Form 10-K, Dominion made no disclosure of projected CO2 emissions from the proposed plant or its current plants. Further, Dominion did not attempt to evaluate or quantify the possible effects of future greenhouse gas regulations, or discuss their impact on the company. Dominion also did not present any strategies to reduce CO2 emissions, as new regulations would likely require. These omissions make it difficult for investors to make informed decisions.

Under federal and state laws and regulations, Dominion's disclosures to investors must be complete and not misleading. Selective disclosure of favorable information or omission of unfavorable information concerning climate change is misleading. Dominion cannot excuse its failure to provide disclosure and analysis by claiming there is insufficient information concerning known climate change trends and uncertainties. (Emphasis added.)

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In an earlier post (here), I noted Cornerstone Research's release of its mid-year 2007 of securities class action lawsuits filings and settlements. On September 13, 2007, NERA Economic Consulting released its own mid-year 2007 study, entitled "Recent Trends in Shareholder Class Action Litigation: Filings Stay Low and Average Settlements Stay High - But Are These Trends Reversing?" (here). The NERA study differs in some of its numeric specifics from the Cornerstone study, but the two studies are directionally consistent. The NERA study also has some interesting additional observations, particularly with respect to possible future directions of current trends.

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Regular readers know that I have been maintaining a list (here) of subprime lending-related securities class action lawsuits. A cluster of new subprime lending lawsuits arrived this week, and these new lawsuits suggest additional directions in which the suprime lending litigation wave may be heading.

First, a lawsuit filed in behalf of employees of Countrywide Financial Corporation alleges that actions by the company and its executives caused 401(k) plan participants to lose millions of dollars. News articles describing the Countrywide employees' 401(k) plan lawsuit can be found here and here. Under the company match component of the plan, many employees received a 50 percent match of up to six percent of their plan contribution, which during 2005 and 2006 was paid in the form of company stock. The Complaint alleges that the defendants had a duty to warn employees' of the company's precarious financial condition and that the defendants intentionally concealed information from plan participants. (Many of the putative class members potentially are also part of the Company's recently announced plan to eliminate 12,000 jobs.)

Second, the Coughlin, Stoia, Geller, Rudman & Robbins firm recently filed a securities class action lawsuit against Tarragon Corporation. Even though Tarragon is not itself a subprime lender (the company develops, renovates, and builds condominiums), the allegations in the complaint derive from the turbulence in the residential real estate sector and in the credit markets that has followed the subprime meltdown. A copy of the Complaint can be found here and the press release describing the complaint can be found here.

The Complaint alleges that Tarragon had failed to consolidate an unprofitable variable interest entity into its consolidated financial statements; had failed to take timely impairment charges and other write downs; and "due to a deterioration in the real estate credit markets ... was experiencing liquidity issues due to its inability to obtain loan modifications and additional financing and there was serious doubt about Tarragon's ability to continue as a going concern." The Complaint also alleges that "given the increased volatility in the homebuilding industry and the real estate credit markets, the Company had no reasonable basis to make projections about its 2007 results."

Third, on September 12, 2007, the Sheet Metal Workers' National Pension Fund filed a shareholders' derivative lawsuit against Beazer Homes as nominal defendant, and several of the company's current and former directors and officers. (Refer here for a copy of the Complaint.) The Complaint alleges that the defendants breached their duties by failing to implement internal controls to prevent the operation of the company's mortgage origination and brokerage subsidiary in an illegal manner; caused the company to issue false financial statements, and failed to prevent improper insider trading and the improper grant of bonuses to senior management.

None of these new lawsuits are straightforward securities class action lawsuits filed against subprime mortgage lenders of the kind that I have been tracking. But they are all consequentially related to the subprime mortgage mess. The Countryside 401(k) lawsuit is the most obvious example, since it involves a subprime lender, and the plaintiffs' are merely pursuing alternative legal approaches after other plaintiffs' lawyers have already occupied the securities class action space with relation to Countrywide. I have added the Countywide suit to my list of subprime lender 401(k) lawsuits, here.

The Beazer Homes derivative lawsuit is a related example. Beazer has also already been sued in a subprime lending-related securities class action lawsuit (refer here), but just as happened with the options backdating scandal, plaintiffs' lawyers who are preempted from filing a securities lawsuit are suing the same companies under shareholders' derivative theories. And as also happened in the options backdating cases, the derivative cases may be attracting attorneys from outside the traditional plaintiffs' securities bar. The lead counsel in the Beazer Homes derivative case is the Motley Rice law firm, which is better known for its involvement in asbestos and tobacco litigation.

The Tarragon lawsuit is interesting because, while it is not directly related to subprime lending per se, it is directly related to the turbulence that has hit the larger residential real estate sector, and is largely due to more generalized disruptions in the credit marketplace. The worrisome implication is that the contagion effect of the subprime mess is not only having an adverse impact on larger segments of the economy, but those adverse effects could produce additional shareholder litigation outside the subprime arena itself. And on an even more general level, the heightened level of plaintiffs' lawyer activity manifest in these three cases may perhaps bespeaks a broader litigation threat to a broader spectrum of companies.

More About Alternatives to Auditor Liability Caps: In a prior post (here), I reviewed a recent article in which Professor Lawrence Cunningham proposed a capital markets-based alternative to auditor liability caps. My post provoked a very detailed and thoughtful response from Professor Cunningham, which I have incorporated as an update in my prior post (please refer to the italicized text, here).

As an aside, this type of exchange of ideas is exactly what I had hoped would happen when I started this blog. Although idea exchanges have arisen from time to time, I wish it would happen even more frequently. And along those lines, I would like to emphasize that readers are cordially invited to post comments to any of my blog posts (using the "comment" link at the foot of the post). Readers who feel compelled to prepare a lengthier or more formal response to one of my post should just let me know, and it if makes sense, I will try to incorporate responsible commentary, just as I have incorporated Professor Cunningham's response to my comments about his article.

Tarragon: Most readers likely will associate the name "Tarragon" with the familiar herb, sometimes known as "dragon's wort." Perhaps I associate more freely than others, but to me the company's name brings to mind Professor Hercules Tarragon (pictured to the left), one of the members of the ill-fated Sanders-Hardiman expedition in Hergè's classic Tintin comic book, The Seven Crystal Balls. Professor Tarragon was one of several men who suffer the curse of Rascar Capac for transporting Capac's mummified remains from Peru to Europe.

Another classic Tintin character is the garrulous and irrepressible insurance agent, Jolyon Wagg (pictured to the right), whose caricature of a backslapping, glad-handing insurance salesman is the humorous essence of the negative stereotype those of us in the insurance industry must live with on a daily basis.

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As the various blue-ribbon panels studying the competitiveness of the U.S. financial markets have proposed various regulatory reforms, one recurring theme has been the proposal for auditor liability caps (refer here), a topic that is also under study by the European Commission (refer here). A 2007 paper by Professor Lawrence Cunningham of the George Washington University Law School entitled "Securitizing Audit Failure Risk: An Alternative to Caps on Damages" (here) proposes an alternative to auditor liability caps for the risk of catastrophic audit failure, by having the audit firms issue bonds to the capital markets to provide coverage for the risks.

Cunningham notes that at the center of the arguments in support of auditor liability caps are concerns about the limited availability of insurance for auditors; while these arguments are most persuasive during hard insurance markets when insurance is relatively unavailable, the arguments may be less persuasive during soft insurance markets when insurance is relatively more available. Cunningham notes that "proposals to cap liability that are supported by arguments about lack of insurance may be unable to respond to the dynamics of these markets." The likelihood of a legislative liability cap solution that is appropriately sensitive to these changing insurance marketplace dynamics is unlikely.

But in any event, the periodic fluctuations of the insurance market clearly present limitations on the value of insurance-based risk transfer mechanism; Cunningham's article reviews those limitations at length. As an alternative to the insurance-based model, Cunningham proposes "insurance-based securitization" that would "distribute risk of audit failure through the capital markets." Cunningham's proposal is modeled in the existing use of catastrophe bonds (or cat bonds as they are more commonly known) to transfer risk for extreme property loss or damage events. These bonds pool investor funds, which are invested in low-risk investment vehicles and pay out interest income, with the principal available to pay loss in the event of the occurrence of certain defined events. Cunningham proposes that just as these bonds are available to protect against the risk of natural events such as earthquakes and hurricanes, similar types of bonds could also be used to protect against the risk of catastrophic audit failure.

Cunningham advances a number of arguments in support of his proposal. Among other things, he argues that managing these risks through the capital markets "should reduce the volatility that auditors have faced for decades and that is an important basis for the insurance based arguments in favor of establishing ex ante damage caps on auditor liability for auditor failures." Cunningham also argues that, through risk-sensitive interest rate requirements, capital markets will introduce "capital market monitoring of auditing firm performance." Finally, Cunningham notes that a private bond offering "is relatively simple for auditing firms to complete compared to the political challenge necessary...to establish caps on damages."

Cunningham's innovative proposal is both novel and interesting. The general success of the existing cat bond market does suggest the innovative potential of this proposal. I do have several concerns about the proposal though, which are as follows.

In general, the cat bond market has extended only to first-party property damage risk, not to third-party liability risk. I am guessing there are several reasons for this. The first is that the triggering event for a property cat bond is easily identifiable, and the losses are short-tail - that is, the event occurs and the losses are ascertained within a relatively short time thereafter. In contrast, a third-party liability claim can have a very protracted life with an uncertain outcome. The extent and duration of this uncertainty may be ill-suited to the requirements of the capital markets and of investors; the claims uncertainty could undermine reliable bond valuations during the long duration of the claim.

In addition, the losses that trigger cat bond payments are beyond anyone's control; the mere existence of the bonds do not and cannot attract claims. By contrast, the actions of third parties can cause events that would trigger liability bond losses, and indeed the very existence of the bonds arguably could attract claims (consistent with the old insurance adage that limits attract losses).

Along the same lines, the existing cat bond market is supported by a very sophisticated cat modeling industry that produces robust, scientific frequency predictions concerning the likelihood of one of the triggering natural events. As someone who as spent a lifetime pondering liability claim frequency and severity, I know that projecting either liability frequency or severity are very difficult and uncertain enterprises. It would be a very difficult task indeed to compose the kind of disclosure that would be required to provide investors with the kind of projections these bonds would require in order to support a robust marketplace. This difficulty could require interest rate payments on the bonds that could make the bonds uneconomical for the marketplace. (This same principle is at work in insurance pricing, where the loss ratio insurers use as a pricing input is usually more demanding than for property lines, leading to higher pricing requirments to account for the uncertainty.)

In addition, the big four accounting firms operate as private entities. Their history and their clients' expectations could both militate against their voluntarily undertaking the kind of disclosure investors would require. Investors clearly would expect detailed information about the distribution of the firms' clientele, and logically could expect disclosures about firm representation of certain specific companies. The level of disclosure the accounting firms would be required to provide investors, even if limited to the context of a private offering and to select investors, could prove to be a difficult if not insurmountable barrier for the accounting firms themselves.

Finally, the whole value of a capital market based solution is to avoid the cyclicality and volatility of the insurance marketplace, but the capital markets for these kinds of bonds could be subject to the own cyclicality. Indeed, during a time of significant losses, there may be little or no market interest in bonds of this kind, just as when insurer losses mount insurance can be scarce or unavailable. For that reason, I am uncertain whether the availability of this type of capital market alternative, even if the other barriers could overcome, would in the end remedy the concerns for which an alternative to the traditional insurance marketplace was sought.

These concerns notwithstanding, Professor Cunningham's paper is interesting and makes a valuable contribution to the dialog surrounding proposed auditor liability caps. Special thanks to Professor Cunningham for providing me with a link to his article.

UPDATE: Professor Cunningham Reponds: Here are Professor's Cunningham's responses to my comments about his article:

Thanks, Kevin, for your thoughtful comments on my paper exploring adapting cat bonds to auditor liability.

Some more background on my motivations before addressing your concerns:

1. Statistical research (here and here) suggests a non-trivial medium-term risk that large liability cases could destroy one of the remaining four big auditing firms and thus threaten our system of private auditing of public enterprises.

2. Reducing this risk by putting legal caps on auditor damages is a hard political sell--Members of Congress find it difficult explaining to American investors why these firms should enjoy such a privilege and any choice of cap levels could seem arbitrary.

3. Proponents of caps currently have incentives, when in doubt, to interpret information in ways that overstate the stakes (as when asserting that the prevalence of self-insurance is due to unavailability of external insurance, a claim I evaluate in the paper).

4. Elsewhere, I endorse Josh Ronen's novel idea of financial statement insurance to address some such problems, but recognize that it is also a hard political sell absent a crisis rationalizing the radical change it entails.

5. Here, I consider cat bonds because they: (a) could add resources to meet claims that threaten to destroy audit firms or the industry; (b) avoid political obstacles facing both caps and financial statement insurance; and (c) highlight informational problems in the policy debate on caps.

On the substance of your excellent points about cat bonds, particularly how they are used in first-party property damage contexts but not yet for third-party liability contexts:

1. True, property cat bonds address shorter tail losses than third-party claims usually do, raising concerns addressed by contract and pricing. Cat bonds have a set contractual maturity, such as one year or two, and state contractual triggering events that determine whether principal is repaid or lost at maturity (such as judgments or settlements exceeding stated catastrophic amounts during the bond term). So bondholders don't wait until claims are resolved before the payout determination is made. True, a bond's maturity date influences strategic decisions in pending litigation (whether to settle or not and for how much). Contract terms limit this capacity (through tailored rules governing litigation management and general principles like good faith). These contractual features are priced into the bond.

2. Also true, property cat bonds address risks that are purely fortuitous while auditors have some control over exposure, creating the serious problem of moral hazard. But moral hazard exists under existing external insurance and even self-insurance to an extent. Worse, the fact that only four large firms exist can create moral hazard if partners and employees act as if their firms are too big to fail (about which refer to my prior paper, here). So reducing moral hazard seems vital. Financial statement insurance may be better than cat bonds for that purpose but cat bonds contribute bondholders offering market monitoring to diminish the problem not exacerbate it. Also, cat bonds do not attract suits against auditors because they fund only catastrophic loss layers, with negotiated triggers set at upwards of $500 million.

3. True, again, cat bonds for natural disasters are supported by scientific risk modeling tools enabling valid predictions that may not be adaptable to auditing risks. Lacking requisite information could dissuade investors from buying bonds, at least at interest rates less than costs of auditor self-insurance or external insurance. But (a) the statistical research referred to earlier provides a foundation for such exercises and (b) at least some reasonably reliable facsimile of such models seems necessary to justify political decisions to establish caps on auditor liability by legal fiat.

4. Your fourth point seems the most compelling explanation for why auditors have not issued cat bonds and presents the most significant impediment: for understandable reasons, firms don't want to disclose information that investors would require about their client base, financial resources or claims history. Again, however, similar data should be required to justify a political decision to cap liability or set optimal cap levels.

On this and the preceding point, it is possible to see informational problems as a sort of market failure supporting regulatory intervention. Yet the information is within firms' control and they can decide whether to use it in the political arena, in markets, or not at all. Notably, using this data in the political arena to support caps creates incentives to overstate risk whereas using it in the marketplace to sell cat bonds creates incentives to understate risk.

Admittedly, cat bonds may or may not work for auditing. But if they work or might work, this may weaken arguments for caps (and could add protection against audit industry destruction); if they are shown to be unworkable, this may strengthen the case for caps. So either way, I appreciate your giving the idea a public forum for debate (and for your comments that will improve my paper). It would be wonderful if risk modeling firms and investment banks would consider the idea, perhaps even pitch it to auditing firms, for a non-academic test.


More About the AIM Challenge: Behind the reform proposals of the blue-ribbon panels mentioned above are concerns about U.S. financial market's loss of IPO market share to overseas' securities markets, particularly London's Alternative Investment Market (AIM) (about which I most recently commented here). But changing marketplace conditions have put the AIM in an altogether different light, as illustrated in the September 10, 2007 Bloomberg.com article entitled "London's AIM Exchange Loses Members on Costs as Nasdaq Prospers" (here).

According to the article, companies that have listed on AIM are starting to grow disenchanted. 116 companies exited AIM in the first half of 2007, 35 more than a year earlier, and delisting more than doubled to 40 during the same period, compared to 15 last year. (Delistings on Nasdaq meanwhile fell from 41 to 30.) Among other reasons for these departures are high costs and a perceived lack of issuer company benefit - the AIM market is "showing signs of saturation."

As one commentator cited in the article noted, while "there's a good market for small caps," the supply of investment has not been able to keep up with the supply of equity. Another commentator cited in the article notes that the increase in companies leaving AIM "is probably a reflection of the market having attracted too many poor quality businesses," as there has been a "deluge of companies that should never have been brought to market."

As I have noted before (refer here), the would-be reformers case for regulatory reform has always seemed to be "weak," but as the global marketplace evolves there appear to be increasing reasons to question whether the premise on which the reformers' proposals are based even exist. (For further commentary on this same topic, refer here)

Subprime Litigation Wave: The D & O Diary has commented frequently (most recently here) on the wave of litigation growing out of the subprime lending mess. The Washington Post has a September 11, 2007 article entitled "Mortgage Mess Unleashes Chain of Lawsuits" (here) which sounds many of the same themes.

Among other tidbits in the article is the comment that the SEC has formed a working group to examine "accounting and disclosure issues, as well as stock sales earlier this year by executives at companies that have since been ensnared by the subprime mess." An official at the SEC enforcement division is quoted as saying "we will look at those responsible for any potential fraud, by company management, auditors, lawyers, credit-rating agencies or others."

You Can't Make This Stuff Up - But Plaintiffs' Lawyers Can!: This article appeared in Crain's Chicago Business on September 10, 2007 (here) -- please note that in referring to this article I mean no disrespect to Mrs. Akkad, and I do not in any way mean to make light of her terrible loss. Mrs. Akkad has our deepest sympathies. My inclusion of this article relates particularly to her lawyer's comments in the final two paragraphs about her case:

The widow of a Hollywood producer who died in a Jordan terrorist bombing is suing hotel chain Global Hyatt Corp.

A guest at the Hyatt in Amman, Jordan, Moustapha Akkad was killed Nov. 9, 2005, in an attack by a suicide bomber, according to a statement from law firms representing his widow, Sooha Akkad.

The complaint alleges that Chicago-based Hyatt was negligent in failing to responsibly protect its registered guests from foreseeable criminal attacks,
failing to provide metal detectors, and failing to keep unauthorized individuals from accessing the inside of the hotel, according to the statement.

A spokeswoman for Hyatt declined to comment.

Hyatt should've had heightened security on the date Mr. Akkad was killed in part due to the date itself, according to the statement. In the Middle East and in many countries, date precedes month when writing out full dates, according to the statement.

"Thus, November 9 becomes 9/11," said Thomas Demetrio, a lawyer with Chicago-based law firm Corboy & Demetrio.

Special thanks to a loyal reader for proving a link to this article.

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Rambus Settles Securities Lawsuit: In a September 7, 2007 press release (here), Rambus announced that it had settled the July 2006 options backdating-related securities class action lawsuit that had been filed against the company and certain of its directors and officers. Rambus has agreed to pay $18 million in exchange for a dismissal with prejudice of all claims against all defendants. The press release also stated that the settlement is subject to court approval and that the company "has been and will continue to be in discussions with its insurers concerning their contribution of a portion of the settlement amount."

In terms of market meltdowns and the degree of pain inflicted on the financial system, the subprime mortgage crisis has the potential to rival just about anything in recent financial history from the savings-and-loan crisis of the late 1980s to the post-Enron turndown at the beginning of this decade.

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There is an understandable tendency to focus on emerging risks and latest trends, because new issues often are the most interesting and because no one wants to get blindsided by something coming over the horizon. But sometimes the old standard issues are the most important ones. Amidst all the hubbub about subprime lending, options backdating, and other headline-grabbing stories, an old fashioned problem like insider trading still remains vitally important.

As detailed in an August 28, 2007 Reuters article (here), the SEC has brought 35 insider trading cases this fiscal year, which began in October 2006. And Christopher Steskal of the Fenwick & West firm in his September 4, 2007 article entitled "Insider Trading is Back" (here), notes that during the first half of 2007, the SEC has sued over 20 professionals for insider trading.

Tom Gorman at the SEC Actions blog has put together a good summary (here) of the various kinds of insider trading enforcement actions that the SEC has brought this year. Gorman notes (in support of which he provides supporting citations) that the SEC has gone after major Wall Street players, and has targeted their use of "big boy letters" (about which refer here); that the SEC has gone after trading in advance of takeover or earnings announcements; and the SEC has also cracked down on spousal trading and "pillow talk" cases, as well as cases involving trading by family and friends. Gorman notes that these actions are "examples of the increasing number of cases being brought," and also "clearly demonstrate the increasing focus of the SEC and the DOJ on insider trading."

Steskal, the Fenwick & West attorney cited above, also notes along the same lines that "most of the SEC enforcement actions this year" against Wall Street professionals and corporate executives "involve insider trading in advance of mergers and acquisitions," adding that the recent level of M&A activity "has provided fertile ground for SEC enforcement actions." Steskal also notes that the SEC has identified Rule 10b5-1 trading plans as an are for special scrutiny, a topic I discussed in an earlier post (here).

But the dangers involved with insider trading are not limited just to the risk of an SEC enforcement action. As has long been the case, trading by insiders in their personal shares of company stock at sensitive times and in sensitive amounts magnifies the litigation and liability exposures for companies and their directors and officers. The simple fact is that trading by insiders, even if innocent, colors the facts and invites heightened judicial scrutiny. For all the recent judicial and media attention (refer here) given to the heightened pleading standard under the PSLRA, the fact is that a case with insider trades that the plaintiffs are able to portray as suspicious is likely to survive a motion to dismiss.

I have long advocated (refer here) companies' adoption of a written insider trading policy as a way to try to control the risks that potentially can arise from trading by insiders. The minimum components for an effective insider trading policy include: trading windows and blackouts; appointment of a compliance officer, who has responsibility for preclearance of trades; and the adoption of a prohibition against specified types of trading by insiders, with stiff sanctions to be applied in the event of violations. Finally, the development of well-designed Rule 10b5-1 trading plans can be a powerful tool to reduce securities litigation exposure.

Steskal's memo, linked above, has a good bullet point summary of the basic requirements for an effective insider trading policy. My own dated but still surprisingly relevant discussion of the issues surrounding a written insider trading policy can be found here.

Insider trading is an old, perhaps even time-worn topic, but once again it appears to be the case that classics never go out of fashion. Those of us in the D & O insurance business can become so focused on insurance-based risk mitigation solutions, but the reality is that, above and beyond risk-shifting strategies like insurance, there are perhaps even more important practical steps that companies can take to manage their securities litigation risk. And those of us who have been around awhile remember that there was a time and a place when securities litigation loss prevention was an important part of the dialog in the D & O marketplace. Perhaps it is time for a revival, sort of like classic rock for D & O wallahs.

My earlier, somewhat more pessimistic post on the possibilties for D & O insurers to play a role as a corporate governance monitor may be found here.

Options Backdating Update: Regular readers know that I have been maintaining (here) a running tally of the options backdating lawsuits. For several months now, the pace of adding new cases to the list has slowed, but today I added two new lawsuits to the lists.

First, as a result of yesterday's news (here) that Pediatrix has been named as a nominal defendants in a shareholders' derivative suit, I have added the company to the list, bringing the total of options backdating related derivative lawsuits to 164.

Second, plaintiffs' lawyers have filed a purported securities class action lawsuits against UTStarcom (a shareholders derivative lawsuit was previously pending against the company), according to their September 5, 2007 press release (here). The addition of the UTStarcom lawsuit brings the total number of options backdating related securities class action lawsuits to 33.

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As I noted in prior posts (most recently here), the long-running options backdating blame game eventually morphed into an exercise that included suing the gatekeepers. Even though the subprime mortgage lending litigation machine has only recently gotten cranked up, it has already turned into yet another round of gatekeeper scapegoating. According to a September 3, 2007 International Herald Tribune article entitled "Citigroup Unit and Deloitte are Sued over Subprime Lender's Share Issue" (here), a lawsuit filed on August 27, 2007 relating to American Home Mortgage's April 2007 secondary offering (about which refer here) seeks to extend the blame to the company's auditors and offering underwriters. A copy of the complaint can be found here. (Hat tip to Adam Savett at the Securities Litigation Watch for the link to the complaint.)

The lawsuit is brought on behalf of shareholders who purchased shares in American Home's secondary offering of 4 million shares, which was completed on April 30, 2007, less than four months before American Home's August 6, 2007 bankruptcy filing. The shares sold in the offering at $23.75/share. American Home's shares closed today at 27 cents a share. The defendants include ten present or former directors and officers of American Home, as well as Deloitte & Touche, which allegedly prepared and certified certain reports and statements used in the offering materials, and Citigroup Global Markets, which allegedly was the sole underwriter for the offering.

According to an August 31, 2007 press release describing the lawsuit (here), the complaint alleges that the offering materials failed to disclose that at the time of the offering, American Home was experiencing an increasing number of loan delinquencies, and that it had failed to establish adequate reserves against future loan losses and failed to write down the value of delinquent loans. The complaint also alleges that at the time of the offering American Home was increasingly unable to sell its loans, even at sharp discounts, increasing its mortgage lending related exposure. The complaint alleges that the defendants withheld this information from the investing public and that as a result the defendants violated Sections 11, 12 and 15 of the Securities Act of 1933.

As I previously noted (here), Jonathan Weil at Bloomberg.com wrote on August 15, 2007 (here) about what he called the "poor schlimazels at Deloitte & Touche LLP who blessed the books at American Home...mere months before it went belly up." Weil noted the unenviable position that the auditors were in, given that a "going concern" audit opinion would have represented a default under American Home's credit facility. A going concern opinion would almost certainly have been a self-fulfilling prophecy, but as Weil noted, "a self-fulfilling prophecy would have spared investors from the Company's April 30 offering of 4 million shares." Weil's article also cites other instances where auditors issued clean opinions shortly before a subprime lender's failure.

While there is no apparent reason to think its actions are in any way related to these prior events involving American Home Mortgage, Deloitte appears to have taken a different approach in connection with NovaStar Financial's more recent financing attempts. A September 4, 2007 CFO.com article entitled "Deloitte Forecloses on NovaStar Stock Offerings" (here) states that Deloitte "torpedoed" NovaStar's efforts to sell $150 million in preferred stock. According to NovaStar's own September 4 news release (here), the company was unable to meet the offering requirements of filing a registration statement by August 30, essentially because. as the press release states,

Deloitte & Touche LLP, NovaStar's independent auditors ("Deloitte"), advised NovaStar in the last week of August 2007 that it was not willing to issue a consent or otherwise be associated with the rights offering unless the Company reissued its 2006 financial statements to include footnote disclosures regarding these matters. In addition, Deloitte further advised NovaStar that its reissued report on such financial statements would include an explanatory paragraph about the uncertainty of NovaStar's ability to continue as a "going concern". NovaStar determined that work necessary for the reissuance of its 2006 financial statements and the reissuance of
Deloitte's audit report would not be completed by August 30, 2007, and [the offering managers] indicated that they were not willing to waive or extend this requirement.

As I have noted before (refer here), the subprime lending litigation wave is likely to sweep in a broad variety of defendants, as would-be plaintiffs seek an ever-broader variety of defendants to try and stick with plaintiffs' losses. The circle of blame has already encompassed not only the subprime lenders and their directors and officers (here), but also credit rating agencies (here), real estate brokers and home builders (here), mortgage brokers and real estate appraisers (here), as well as auditors and offering underwriters, as noted above. The wave is likely to continue to spread outward.

One final note: according to news reports (here) the U.S. Trustee in Wilmington, Delaware reportedly has moved to preclude the law firm of Cadwalader, Wickersham & Taft from acting as American Home's special counsel in connection with the company's bankruptcy because the firm acted as the company's counsel in connection with the April 2007 stock offering.

It's Official: For those of you who were unsure whether the news of Bill Lerach's retirement would prove to have been greatly exaggerated, you may want to check out the revamped website (here) of the newly renamed law firm of Coughlin Stoia Geller Rudman and Robbins LLP. Lerach's name has been removed from the roster of attorneys at the firm. The firm with the new name is apparently eager to prove it will move just as quickly as it did under its old guise; the firm announced today (here) that it had launched a securities class action against Jones Soda Company and several of its directors and officers.

And for those of you interesting in such things (there must be some of you out there), the Houston Chronicle has an article (here) that praises Lerach's work on behalf of Enron's shareholder, and honors his "unblemished" legacy. That's what the article says.

Predicting the First Climate Change-Related Securities Lawsuit?: In earlier posts (refer here), as well as separate publications (here), I have written about the possibility of D & O claims arising out of climate change issues, particularly climate change related disclosures. Admittedly, the discussion of these issues has been somewhat abstract, as there have yet been no D & O claims related to climate change issues. I still believe that it is prudent to consider these exposures, because I believe it is only a matter of time before these claims begin to emerge.

Of course, the mere assertion that it is only a matter of time begs the question - when will these claims emerge? While I would hesitate to make any specific prediction myself, Adam Savett at the Securities Litigation Watch (here) has, in light of the "proliferation of corporate sustainability reports," boldly put the over/under at "June 30, 2008 for the first securities class action lawsuit to include allegations from a corporate sustainability report." We won't have long to wait to see whether Adam is correct, as his target date is only ten months away. We'll be watching closely...

Blogger Move: We here at The D & O Diary are big fans of the Drug and Device Law Blog (here), and so we noted with interest that Mark Herrmann, one of the blog's co-authors (the other author is Jim Beck), has relocated (refer here) from Cleveland to Chicago. Mark not only was at Michigan Law School with me, but he was - prior to his move - part of the well-known blogging elite here in Cleveland. While the shores of Lake Erie will miss Mark (and his wife Brenda, who happened to be my dentist), we wish him every success on the shores of Lake Michigan. All I can say is - Mark, how could you leave in a year when it looks like the Indians might finally make the playoffs?

Speakers' Corner: On September 12, 2007, I will be moderating a panel at a Professional Liability Underwriting Society (PLUS) Midwest Chapter Event, to be held at the Cincinnati Hyatt at 3 pm. The panel, entitled "Current Issues in Directors and Officers Liability Insurance" includes noted D & O commentator Dan Bailey, policyholder attorney Tom Reiter, leading broker Jim Lash, and Mark Lamendola of Travelers. Details about the event can be found here. The panel will be followed by at cocktail reception at 5 pm. I hope readers in the Great Lakes and Ohio Valley regions will plan to attend.

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