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

A recent appellate court opinion interpreting a D&O liability insurance policy securities exclusion carries some important reminders both about policy wording precision and about exclusionary language, and also raises some critical questions about the scope of coverage for securities claims generally.

In an October 27, 2008 opinion (here), the Eighth Circuit, applying Minnesota law, held in the In re SRC Holding Corp. case that there is no coverage under a D&O liability insurance policy containing a securities claims exclusion for claims made against a financial services company and certain of its directors and officer for alleged wrongful acts in connection with the company’s underwriting and sale of certain municipal bonds.

Following a description below of the case’s background and the appellate court’s holding, I discuss the implications of the Eighth Circuit’s decision.

Background

Between 1996 and 1999, Miller & Schroeder (M&S), a securities underwriter and broker, underwrote and sold $140 million of municipal bonds. The bonds later defaulted and the bond investors initiated lawsuits and arbitration proceedings against M&S and certain of its directors and officers, alleging breaches of federal securities laws and other violations. M&S ultimately went into bankruptcy.

M&S’s D&O insurance carrier denied coverage for the claims. The bankruptcy trustee initiated a lawsuit against the D&O insurer alleging breach of contract and seeking a judicial declaration of coverage. The individual M&S directors and officers intervened in the trustee’s action.

The bankruptcy court held that the policy exclusion on which the insurer relied to deny coverage did not preclude coverage for all of the claims and that the carrier must defend the individuals against all claims. The district court affirmed the bankruptcy court’s ruling and the carrier appealed.

The Eighth Circuit’s Decision

On appeal, the carrier argued that the district court erred in finding that the policy required the carrier to provide the directors and officers with defense cost coverage and indemnification for the bond investors’ claims.

The carrier relied on Endorsement No. 3 to the policy, which provides that:

In consideration of the premium charged, this Policy does not apply to any Claim based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any actual or alleged violation of:

(1) the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, any other federal law, rule or regulation with respect to the regulation of securities, any rules or regulations of the United States Securities and Exchange Commission, or any amendment of such laws, rules or regulations; or

(2) any state securities or "Blue Sky" laws or rules or regulations or any amendment of such laws, rules or regulations; or

(3) any provision of the common law imposing liability in connection with the offer, sale or purchase of securities.

The district court held that this exclusion precluded coverage only for M&S’s sale of its own securities, but not otherwise. In reaching this conclusion, the district court relied in part on the testimony of the insurance broker who sold the policy, who testified, according to the appeals court, that "this standard-form securities exclusion is typically intended to exclude coverage for liability resulting from the insured’s sale of its own stock."

As the appeals court paraphrased the district court’s logic, because the provision had a "typical effect," the meaning of the provision "must accord with that typical effect." The district court said that this was the only interpretation that "makes sense."

The appeals court held, however, that the district court erred in relying the broker’s testimony. Because the district court held (correctly in the appellate court’s view) that the provision is unambiguous, it was erroneous as a matter of Minnesota law for the court to rely on extrinsic evidence in interpreting the provision.

The Eighth Circuit said that "the effect of [the securities exclusion] as it may be generally applied in practice is not the legal authority that governs our coverage inquiry here; it is the mutually agreed-upon policy’s plain language that binds [the parties] in the first instance." The appeals court noted that

Sophisticated business entities who rely on experts to advise them are best suited to determine what makes the most economic sense and the language they have mutually negotiated and agree to is the best evidence of what those parties intended.

The appeals court held that the endorsement is "not limited to claims arising out of M&S’s sale of its own securities," as such a limitation "is nowhere to be found in its language."

The appeals court also rejected the suggestion that this interpretation was inconsistent with other provisions in the policy.

The insureds argued further that in any event coverage for claims against them for alleged violations of NASD rules were not precluded, and therefore that the carrier was obliged to fund the defense, even as to non-NASD proceedings.

The appeals court rejected this argument as well, in reliance on the Endorsement No. 3’s broad preamble ("based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving…"), as well as the policy’s provisions broadly treating interrelated matters as a single claim.

Because the alleged NASD violations "arise out of, flow from and have their origins in the same set of operative facts" as the claims alleging violations of the securities laws, for which coverage is broadly excluded under the policy, they fall "well within the ‘arising out of’ exclusionary language of Endorsement No. 3."

The Wiley Rein law firm, which represented the carrier before the appellate court, has a detailed memorandum here summarizing the Eighth Circuit’s decision is greater detail.

Discussion

The Eighth Circuit’s ruling is noteworthy in and of itself, as a federal appellate court decision vigorously holding that insurance policies negotiated between sophisticated parties must be interpreted strictly according to their terms.

The opinion also represents a cautionary tale for practitioners in this area, and it is well worth considering more fully in that light.

None of my remarks are meant in any way as a criticism of the broker involved. Clearly, the broker’s view of how this policy should operate had a substantial basis, as both the bankruptcy court and the district court adopted the broker’s interpretation.

However, the Eighth Circuit’s opinion is a harsh reminder that, notwithstanding what the common understanding may be about the meaning or operation of policy provisions, ultimately courts will look at a policy‘s actual language. As the Eighth Circuit’s opinion demonstrates, a court’s policy interpretation may or may not coincide with common understandings or expectations. For practitioners in this area, the appellate court’s ruling underscores that what matters is wording not intent.

In addition, the court’s reliance on the breadth of Endorsement No.3’s exclusionary preamble is a reminder of the inclusive nature of this type of omnibus language. The Eighth Circuit found that the use of this broad preamble substantially extended the reach of the provision’s exclusionary effect, which represents its own reminder to practitioners of the critical importance of the way in which policy provisions are framed, particularly policy exclusions.

A critical part of the coverage dispute here relates to the fact that the securities violations alleged arose not in connection transactions involving the insured company’s own securities. This aspect of the dispute raises a more general question about how, in the absence of a securities claim exclusion, D&O insurance policies should respond to claims of securities law violations asserted by persons other than the insured company’s own shareholders.

There have been some high profile 2008 examples of securities lawsuits filed by persons other than the defendant company’s own shareholders. The numerous auction rate securities claims represent one example. Another example is the securities class action lawsuits filed against, among others, Hexion Specialty Chemical and certain of its directors and officers by shareholders of Huntsman Corporation. The Huntsman shareholders alleged that the Hexion defendants "deceived the investing public regarding Hexion’s efforts and intentions with respect to the merger with Huntsman." (Refer here for further background about the Hexion claim).

These recent examples, as well as the M&S case discussed above, underscore the possibility of securities allegations by persons other than a company’s own shareholders. These kinds of claims can arise not only in connection with financial companies, like M&S and the companies involved in the auction rate securities cases, but can also involve non-financial companies, like Hexion.

Questions of policy coverage for these types of securities lawsuits potentially could be significant not only in connection with the type of exclusionary language in the M&S case, but also in connection with the definition of "securities claim" found in the typical D&O insurance policy.

There are standard formulations for the definition of the term "securities claim." One formulation is oriented toward claims arising under the securities laws and the other is oriented toward claims involving the issuer’s securities or the issuer’s securities holders.

Definitions of the term "securities claim" oriented toward the securities laws themselves will extend more broadly without respect to who has asserted a claim and are more likely to encompass securities lawsuits filed by persons other than a company’s own shareholders.

Definitions of the term "securities claim" tied to claims involving the company’s own securities, rather than more broadly to claims involving the securities laws generally, could be interpreted more narrowly with respect to securities lawsuits brought by persons other than the company’s own shareholders.

All of which begs the question: how should the policies respond to securities lawsuits against insured persons filed by claimants other than the company’s own shareholders? In my view, because these claims allege wrongful acts by persons insured under the policies, they represent precisely the kind of litigation for which the policy should provide coverage. Of course, whether any particular policy will respond to this kind of claim depends on the actual policy language.

Financial Collapse: The Board Game: According to a November 28, 2008 Financial Times article entitled "Icelanders Collapse in Laughter" (here), some Icelanders, tapping into their typically "darkly ironic sense of humor" have developed a board game "that takes a grimly comical swipe at the financial crisis that has devastated the economy."

Players roll dice and move around the game board while drawing cards that, for example, allow them to buy a private jet or obtain a foreign loan, or perhaps go bust. Icelanders have been suggesting additional content for the cards via the Internet. Among other cards suggested is one reading "Go to demonstrate at parliament, stop to buy some eggs to throw, only to realize that prices have gone up so much you can’t afford them."

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FDIC Report: More Bank Failures Coming?: The FDIC’s Quarterly Banking Profile for the third quarter 2008 (here), released on November 25, 2008, paints a dismal picture of the banking industry.

Among other things, the Report notes that during the third quarter the number of insured institutions on the FDIC’s "Problem List" increased from 117 to 171, and the net assets of "problem" institutions rose from $78.3 billion to $115.6 billion. This represents the first time since the middle of 1994 that assets of "problem" institutions have exceeded $100 billion.

These grim statistics suggest further bank failures ahead. A November 25, 2008 CFO.com article discussing the FDIC’s report (here) quotes FDIC chairperson Sheila Bair as saying "we expect more banks to fail."

In its November 25 press release (here), the FDIC also notes that "community banks – those with total assets of under $1 billion – are beginning to exhibit stresses similar to those facing the industry as a whole." However, the press release also comments that "capital levels and reliance on retail deposits remain higher at those banks than the industry average."

My recent post detailing the latest bank failures and possible implications can be found here. My earlier post addressing the possibility of a new wave of "dead bank" litigation can be found here.

Big FCPA Penalties Ahead: According to statements reported in a November 25, 2008 Law.com article (here), the SEC’s deputy enforcement division director expects the imposition in the next two to six months of Foreign Corrupt Practices Act (FCPA) penalties that will "dwarf the disgorgement and penalty amounts that have been obtained in prior cases."

The biggest FCPA penalty to date is the $44.1 million settlement Baker Hughes paid last year to settle charges of bribery and other improper conduct in six countries (about which refer here).

One probe attracting particularly attention is the investigation involving Siemens, which in 2006 disclosed that it had uncovered more than $1 billion in bribes paid in over a dozen countries in order to win contracts. The potential magnitude of this fines and penalties Siemens could be facing may be inferred from Siemens’ recent 1 billion euro provision for the expected settlement with U.S. and German authorities of bribery allegations (about which refer here).

A "twist" noted with respect to the forthcoming cases is that a "significant" number involve violations that were not self-reported by the companies. In the recent past, many of the FCPA enforcement cases have arisen when companies themselves discovered and reported violations. However, many of the newer cases "were generated by other leads," such as the SEC’s own investigatory work or whisteblowers.

As I have noted in prior posts (most recently here), one of the risks increasingly associated with FCPA enforcement actions is the threat of follow-on civil litigation. For example, Siemens itself is the subject of a purported shareholders’ derivative suit in the U.S. related to its ongoing bribery investigations. As the scale of FCPA enforcement activity grows, the threat of FCPA-related civil litigation will also increase.

Litigation Funding Developments: In a November 2008 report on Transatlantic Trends in Business and Litigation (here), the Lloyd’s insurance market, among other things, examines the growing prevalence of third-party litigation funding, whereby investors financially support a claimant in return for a share of the damages. (My recent post discussing the role of litigation funding in the Australian class action against Centro Properties can be found here.)

The Lloyd’s report concludes that businesses on both sides of the Atlantic "should expect third party litigation funding to rise," and that "current economic conditions may actually accelerate the growth."

Meanwhile, a start-up venture is planning to try to launch an IPO in what may be one of the more creative attempts to try to fund litigation. According to a November 18, 2008 Pensions & Investments article (here), VR Holdings, Inc. is planning the offering to try to "provide liquidity" for the suit’s 2,500 claimants, 2,000 of whom are older than 65 and concerned that they may not live to see the suit settled. (For reasons specified below, these concerns may be well founded.)

According to the company’s President, the IPO will "give the claimants a vehicle to hopefully generate some funds for themselves." The offering is a "way to sell stakes in the eventual payout," in that the shares will be "like an option that sells for around $1 but has a potential upside of $12 or $14." (I guess this fellow believes the company is not yet in the quiet period.)

The suit, which has been filed against several investment firms, alleges that the defendants conspired to "take over, liquidate, and bankrupt" (I presume not necessarily in that order) a concert T-shirt maker.

In addition to possible legal objections to this litigation funding arrangement, the prospective IPO may face a more immediate practical obstacle. That is, the case, which was pending in the Northern District of Illinois, has already been dismissed with prejudice. It is unclear from the article whether a timely notice of appeal was filed. (No, I am not making any of this up.)

The prospective IPO sponsors may want to reconcile themselves to the possibility that investors may not exactly fall all over themselves to get a piece of this action.

And Finally: The Securities Docket blog has an interesting interview (here) with trailblazing blogger Mike O’Sullivan of the Munger, Tolles & Olson law firm, whose trendsetting Corp Law Blog showed the way for many blogs that followed, including The D&O Diary. After running his blog for some time, O’Sullivan ultimately stopped adding new posts in 2004.

In discussing the reasons why he discontinued the blog, O’Sullivan notes that he was facing "existential doubts" of the kind that will be familiar to any blogger, including yours truly: "Why am I doing this? What do I really have to say? Why are you reading this?"

In commenting on the current crop of corporate and securities blogs, O’Sullivan mentions that one blog he "slavishly" follows is Broc Romanek’s (and now Dave Lynn’s) Corporate Counsel blog (here), which I mention here because it is a blog that I read every day as well.

Hats off to Bruce Carton for the interview and for his new Securities Docket site (here) which has quickly also become a daily (or even several times daily) must-read.

Blogging Off: The D&O Diary likely not be adding any new posts for the next few days. We will resume our "normal" publication schedule after December 1.

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The closure of three more banks this past Friday night underscores the difficult environment now facing many banks and also suggests that the pace of bank failures is accelerating. These developments may also have important implications for the D&O insurance placement market banks may have to confront in the months ahead.

On November 21, 2008, the FDIC announced (here) that state bank regulators had closed The Community Bank of Loganville, Georgia and that the FDIC has been named as a receiver.

The FDIC also announced on November 21, 2008 (here) that as part of an FDIC-brokered deal, U.S. Bank had acquired the banking operations of Downey Savings and Loan Association of Newport Beach, California and PFF Bank and Trust of Pomona, California.

With the addition of these three banks, the total number of 2008 bank closures now stands at 22. The FDIC’s complete list of all bank failures since October 2000 can be found here. The 2008 year-to-date total represents the highest annual total since 1993 and is already double the highest annual number of bank failures for any year reflected on the FDIC table. (There were 11 bank failures in 2002).

Moreover, the pace of bank failures has accelerated as the year has progressed. 18 of the 22 bank failures in 2008 have taken place since July 1, 2008, and nine have occurred just since October 1, 2008. The November 2008 month-to-date total of five bank failures is already the highest number of failures for any month reflected on the FDIC table.

In addition, as noted in a November 22, 2008 Washington Post article (here), the most recent bank failures expanded "what is by far the most expensive crop of bank failures in modern American history." Downey, which had $12.6 billion in assets is the third largest bank failure this year (after Washington Mutual and IndyMac). The FDIC projects that it will spend $2.3 billion as a result of the three most recent closures. The FDIC also projects that it will spend almost $15 billion total on the year-to-date 2008 closures. The Post article notes that this 2008 annual amount is "more than twice the total of any previous year."

The states with the highest number of 2008 closures so far are California (4), Georgia (3), Nevada (3), and Florida (2), which may be expected due to the well-chronicled trouble in the housing markets in those regions. But banks in states outside these more notoriously troubled areas are also failing, including, for example, banks in Missouri, Minnesota, Kansas and Illinois. In other words, while the banks in the states with the most significant housing trouble are faring poorly, banks in other states may also face challenges.

At this point, the reasonable presumption is that there will be further bank failures to come. It seems unlikely that there will be hundreds of failures as occurred during the S&L crisis, but the number of failures yet to come could be substantial. The slowing economy and the likelihood of continued deterioration in the residential and commercial real estate sectors suggest that the pace of bank failures could continue well into 2009 and even beyond.

One of the possible consequences from a wave of bank failures could be surge of related claims. I have previously noted (here) the possibility that we could be headed toward a new era of "dead bank" litigation. It is hardly surprising then that D&O underwriters’ concerns regarding banks and other traditional lending institutions are increasing, even with respect to those, such as community banks, that have seemingly avoided many of the problems of the current financial crisis.

Very recently, it has become apparent that the D&O underwriting industry has taken a much more defensive approach to banking institutions, again even including in some instances institutions such as community banks. To be sure, financial institutions in general have faced greater underwriting scrutiny for some months now as the credit crisis has unfolded. Recently, the level of scrutiny has increased and the scope of the scrutiny has widened. The carriers that are active in this space are taking a much harder line, and have shown an unaccustomed willingness to walk away even from long-standing relationships.

These carriers’ apparently altered underwriting stance has changed the insurance environment for many banking institutions. Some smaller banks that have for years enjoyed significant competition among D&O underwriters may now find that they face a changed situation. Banks that are facing operational or financial challenges may now find insurance placement difficult.

The changed insurance underwriting environment for banks and other financial institutions is part of the evidence some commentators have cited to support their view that a harder D&O insurance market may be approaching (refer, for example, here). Whether the overall D&O insurance market will harden remains to be seen. But it seems likely that the D&O insurance market for financial institutions, at least, could become challenging as we head into 2009.

Court Rejects Starr Foundation Lawsuit Against Former AIG CEO, CFO: According to a Bloomberg article (here), on November 17, 2008, New York Supreme Court Justice Charles Ramos dismissed a lawsuit that the Starr Foundation had filed against former AIG Chairman and CEO Martin Sullivan and former AIG CFO Steven Bensinger, calling the case a "waste of time."

Starr’s May 2008 lawsuit contended that the defendants had "fraudulently reassured" Starr in August 2007 that AIG’s "risk of loss from its credit-default swap portfolio was remote." Starr alleged that it would have sold its entire portfolio of AIG stock if it had known the extent of the company’s subprime exposure.

Starr’s President, Florence Davis, testified that the foundation had been "reassured" by the defendants’ August 2007 remarks. However, in an affidavit, Davis acknowledged that the foundation sold more than 12 million AIG shares, worth almost $1 billion, between August and October 2007, and only stopped because the company’s share price fell below $65 a share.

Judge Ramos questioned Davis at the November 17 hearing, seeking to clarify this seeming inconsistency in Davis’s comments. Judge Ramos apparently found Davis’s answers less than satisfying. The Bloomberg article reports that Judge Ramos told Davis "You are being more than difficult. You are being contemptuous, and you are very, very close to contempt of court and I’m talking criminal contempt. Now answer my question."

According to the Bloomberg article, following this barrage, Davis asked for a break to get an asthma inhaler.

Under questioning from the defendants’ counsel, Davis also testified that the foundation did not sell its remaining shares in February 2008, even after AIG had disclosed its subprime woes, because the price was "too low." Defense counsel argued that this showed that the foundation based its decisions to sell or to hold on its own criteria, and not based on the defendants’ disclosures.

Just an aside, but do you suppose that the Starr Foundation’s Chairman, Hank Greenberg, who was also Sullivan’s predecessor as AIG’s Chairman and CEO, had anything to do with the foundation’s pursuit of this litigation against the defendants? Nah….

And Finally: Speaking of AIG, the Delaware Corporate and Commercial Litigation Blog (here) has posted links to video clips of portions of the recent Delaware Chancery Court hearing regarding the AIG derivative litigation about the government’s bailout of the company. The footage is a reminder that the expression "courtroom drama" does not apply to everything that happens in a courtroom.

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Though multi-billion dollar auction rate securities settlements were announced to great fanfare some months ago, litigation involving auction rate securities continues to mount (as I previously noted, here). Two recently filed proceedings highlight the fact that notwithstanding the settlements, many investors’ grievances are yet to be addressed.

As a result, while regulatory authorities continue to press for additional settlements, other investors may feel that the settlements do not remedy their particular claimed harm, and may seek to pursue individual litigation, in effect opting out of the regulatory settlements already reached.

I note that I raised the possibitliies for these further disputes when the settlements first emerged, here.

The Hutchinson Auction Rate Securities Lawsuit

First, on November 14, 20008, Hutchinson Technology filed a securities lawsuit in Minnesota federal court against UBS and related entities, accusing the defendants of fraud in connection with their purchase on Hutchinson’s behalf of approximately $70 million in illiquid auction rate securities under a discretionary cash management agreement.

Hutchinson’s complaint, which can be found here, alleges that UBS sought to protect its own balance sheet by seeking “secretly to shift the risk from its swelling inventory of ARS onto clients like Hutchinson by pitching ARS as safe, liquid, ‘cash equivalent’ investments while knowing that, in fact, the purported liquidity of the ARS had become an illusion.”

The complaint quotes extensively from UBS e-mails and other internal documents allegedly showing that the defendants had conflicts of interest with their own clients to whom they sold the securities, as well as a growing awareness of the dangers associated with a failing ARS marketplace. The complaint alleges that the defendants violated federal and state securities laws as well as other state statutory and common law duties.

What makes the Hutchinson complaint of particular interest is that it expressly acknowledges UBS’s August 2008 auction rate securities settlement, which the complaint also implicitly acknowledges applies by its terms to Hutchinson. However, the complaint alleges that the settlement “does not resolve the dispute between Hutchinson and UBS” in that the settlement’s terms “do not return Hutchinson to the position it would otherwise be in but for UBS’s fraud.”

Though the settlement contains UBS’s commitment to redeem the securities as par, “the purchases will take place over several years, and corporations with positions of more than $10 million (like Hutchinson) will not be able to start selling their position to UBS until June 30, 2010.” And thought the settlement required UBS to provide “liquidity loans,” any borrowing client would “remain obligated to repay the loan on demand even if the value of the ARS declines.”

Hutchinson’s complaint cites several alleged deficiencies with these arrangements. First, “it is uncertain whether UBS will have the means to satisfy its obligations or indeed survive as a firm.” (Ouch.) Second, Hutchinson “has needs for liquidity well in advance of that date,” including, for example, the need to redeem $150 million in convertible notes due in March 2010. Third, the value of Hutchinson’s ARS has “dropped considerably,” causing the company to mark down the securities on its balance sheet, with further writedowns potentially ahead, which in turn could have the effect of “potentially negatively impacting the price of its stock.”

Hutchinson is basically attempting to opt out of UBS’s regulatory settlement regarding the auction rate securities. Though the settlement promises eventually to make Hutchison whole, it is the word “eventually” that is giving Hutchinson concern. Hutchinson’s litigation objective may be discerned from its offer in its complaint to tender its auction rate securities investments “at par value plus all interest accrued.” Hutchinson wants its own deal, without having to wait, in effect contending that the delay itself constitutes an additional form of harm.

Hutchison may or may not succeed. Many of the harms it claims have not yet occurred, but merely threaten. But to the extent other investors perceive, like Hutchinson, that their interests are better served or will be advanced by separately litigating their claims rather than participating in the settlements, the utility of the regulatory settlements could be substantially undermined.

Because of this risk, UBS may have to vigorously contest Hutchison’s claim (and other claims like it) or face the prospect of a multitude in individual disputes and pressure to enter a multitude of individual deals that could bleed the company on a timetable accelerated from the more leisurely scheme contemplated in the regulatory settlements.

This potentially could become a process for the administration of a thousand cuts – and it potentially affects not just UBS, but Citicorp, Wachovia, Merrill Lynch and the other large institutions (or their successors in interest) that tried to effect a comprehensive solution to the auction rate securities debacle.

The Massachusetts Regulatory Action Against Oppenheimer

While the financial firms that have reached regulatory settlements could face continued litigation notwithstanding the settlements, other firms that have not yet reached settlements could face continued regulatory pressure to do so.

For example, on November 18, 2008, the Massachusetts Securities Division filed a complaint (here) to initiate an adjudicatory proceeding against Oppenheimer for alleged violations of state securities laws in connection with the company’s sales of auction rate securities to the firm’s clients in the state.

The complaint alleges that Oppenheimer “significantly misrepresented not only the nature of the ARS, but also the overall stability and health of the market when marketing the product to clients.” The complaint further alleges that “Oppenheimer executives and ARS Department personnel sold their own ARS as they learned that the market was in danger of imploding.”

The complaint, which was filed with the Office of the Secretary of the Commonwealth, seeks an order among other things, “requiring Oppenheimer to offer rescission of sales of ARS at par” and “requiring Oppenheimer to make full restitution to investors who already sold these instruments at less than par.” Basically, the complaint seeks to compel Oppenheimer to provide substantially the same relief as other firms previously have agreed as part of their regulatory settlements.

The one thing that is clear from these two new proceedings is that, despite the high profile settlements earlier this year, litigation surrounding the auction rate securities continues to mount. First, there are firms like Oppenheimer that have not yet reached regulatory settlements that will face pressure to do so. But second, there are continuing disputes, like those raised by Hutchinson, that continue even with respect to the firms that have already reached regulatory settlements.

If nothing else, it seems likely that the auction rate securities litigation will churn on for some time to come, with no end yet in sight.

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There no longer seems to be a question whether European countries will adopt some form of collective action procedures. The questions now are what form the collective action mechanisms will take and to what extent will the processes will adapt or reject features of the U.S. class action model.

A November 6, 2008 article by NYU law professors Samuel Issacharoff and Geoffrey Miller entitled "Will Aggregate Litigation Come to Europe?" (here) takes a look at these questions and examines whether current European reforms are, in light of the extent of the aversion to the U.S. model, "likely to be effective in realizing their stated aims."

The authors begin their analysis by noting that while class actions were long "decried as the perversity of rapacious Americans," class actions are now "the focus of significant reforms in many European countries and even at the level of the European Union." Indeed, a "consensus" has emerged that "aggregate litigation will soon be the norm" in Europe. But by the same token, there is also a consensus that the European model of aggregate litigation "will not replicate American class action litigation with its domination of entrepreneurial plaintiffs’ attorneys."

The European movement toward aggregate litigation models has advanced because of the "need to create ex post accountability mechanisms" and the create mechanisms for the "efficient resolution of numerous intertwined claims." Aggregate litigation also mobilizes "efforts to foster prevention through the prospect of civil litigation."

The authors note that the criticisms of the U.S. model in many ways correspond with concerns raised inside the U.S. But the authors also ask whether or not the categorical aversion to the U.S. model may leave European reform efforts without the means to achieve desired results.

In order to assess whether the European rejection of the U.S. model sweeps too broadly, the authors examine the recurring criticisms of U.S. class action litigation. Among other things, the authors suggest that by framing the debate this way, the discussion will reflect both the weaknesses and the strengths of the U.S. approach and allow the reform process to benefit from the beneficial aspects of the U.S. approach.

The four criticisms of U.S. class action litigation on which the authors focus are:

(1) the danger that mass settlements may overgeneralize, by treating differently situated claimants as if they were similar, particularly where "an unsolicited and effectively unsupervised" agent resolves the case on behalf of absent class members;

(2) the most significant recovery is "often by successful class counsel, not by any class member;

(3) the uneasy relation between entrepreneurialism and avarice (as evidenced most recently by the criminal pleas of leading plaintiff securities attorneys); and

(4) the manipulation of the judicial forum for litigation gain (particularly through serial exploitation of "judicial hellholes").

The authors observe that what unifies these four controversies is "the role of private entrepreneurial lawyers" – which, the authors note, is "precisely what troubles Europeans about American class action practice." Nevertheless, motivated lawyer action is the "engine that fuels American aggregate practice." The authors ask whether the comprehensive rejection of the U.S. model "throws the baby out with the bath water" and whether "the controversies that arise in a system build on self-interest can be mitigated without disabling the entire undertaking."

In order to examine these questions, the authors look at the common features of European collective action reform efforts. While the legal reforms represent a broad spectrum of initiatives, there are three common features: (1) the tendency to allow only organizations to represent consumers in class actions; (2) the interaction between rules on litigation funding and class action procedures; and (3) the preference for "opt-in" rather than "opt-out" systems.

The authors find that there are potentially significant limitations to each of these unifying features. The authors also note that the evolving European efforts attempt to realize the benefits of collective action, but are "limited in their conception of how these processes will be realized."

The threshold issue that current European reform efforts must address is who will "organize, fund and lead the collective efforts." Both the strength and weakness of the American collective approach has been the "willingness to entrust a great deal of social regulation to private initiative and common law forms of adjudication." The authors express their concern that the European "cultural revulsion" to "accepting the reality of legal enforcement as entrepreneurial activity may leave the reforms without the necessary agents of implementation."

Discussion

The excesses of the U.S. class action system are a familiar hobby horse for social critics, both in the U.S. and abroad. Nevertheless aggrieved parties continue to pursue relief and redress through class litigation -- and not just consumers whose interests critics contend are hijacked by self-interested lawyers, but also well-financed institutional investors that are fully informed about their interests and fully able to act independently.

While Europeans disdain the excesses of the U.S. model, there have been periodic outbursts over the past several years where the need for collective action mechanisms has been so obvious that the local legal systems had to respond. Among the various corporate scandals that came to light earlier this decade were several instances where large group of aggrieved European investors were adversely affected and collectively sought redress. The current credit crisis underscores these issues. The further European development of collective action mechanisms does, as the authors note, seem to be inevitable.

On the other hand, the limitations of the U.S. model have been painfully apparent lately. The criminal sentencing of the leading plaintiff securities attorneys certainly highlights the corrupting potential of class litigation where the agent controls or even selects the principal.

There is also recent evidence that aggrieved parties involved in U.S-based litigation increasingly may perceive their interests to be best served outside of class litigation. Significant securities class action opt-out actions, in which would-be class members proceed independently to maximize their recovery and even to reduce counsel fees (about which refer here), suggest deep concerns about the utility of class litigation.

The authors may be correct that class litigation is most effective if it is driven by motivated entrepreneurs who can drive the process and maximize class results. Nevertheless, the lessons of the recent past in the U.S. highlight clearly how important it is for strict controls over class counsel.

The recent lessons also suggest the need for some modesty in advocating the U.S. class counsel model to Europeans. Indeed, rather than expecting the success of the European reforms to depend on European’s willingness to adopt aspects of the U.S model (such as the involvement of entrepreneurial counsel), perhaps it will be the case that the improvement of the current flawed U.S. model will depend on the adoption in the U.S. of existing or yet-to-emerge European innovations that develop as part of current European reform efforts.

Hat tip to the Point of Law blog (here) for the link to the article.

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In a recent post (here), I raised concerns about the possibility of U.S.-domiciled companies becoming subject to securities litigation under the Ontario Securities Act. Now, a recent decision by an Ontario Superior Court judge interpreting the Act’s provisions suggests the possibility of litigants using a parallel Ontario proceeding to circumvent the PSLRA’s discovery stay.

The decision arose in connection with the prospective securities action that claimants seek to pursue in Ontario court against IMAX and certain of its directors and officers. Under the provisions of Bill 198, enacted in 2005 and codified in Section XXIII.1 of the Ontario Securities Act (which can be found here), a preliminary procedure is required to determine whether a liability action under the Act can proceed.

Section 138.8 (1) of the statute, a liability action cannot be commenced "without leave of court granted upon motion with notice to each defendant." The court is to grant leave only "where it is satisfied" that the action "is being brought in good faith" and there is a "possibility" the plaintiff will prevail at trial.

The procedure specified for this determination is that the plaintiff and each defendant are to serve affidavits "setting forth the material facts upon which each intends to rely." The affiant may be "examined" on the affidavit "in accordance with the rules of the court."

The issue addressed in the recent decision in the IMAX case is the breadth of the examination that is to take place in connection with this authorization proceeding. In addressing this question, Madame Justice Katherine van Rensberg issued a ruling that potentially could compel defendants to answer questions under oath about a broad range of issues, even issues the claimants have not initially raised. A November 18, 2008 Globe and Mail article regarding the decision can be found here.

Justice van Rensberg wrote that the Act itself "provides no guidance as to the interpretation of the threshold test and what type, quality and quantity of evidence the court is to consider." IMAX had urged her to restrict examination to publicly available information. However, she found that shareholders seeking leave to proceed under the Act have "special powers" generally not available otherwise and she held that anyone being examined must answer questions that have a "semblance of relevance" even if it "might also reveal some other potential issues or wrongdoing not currently contemplated by the statutory claim."

The "semblance of relevance" test Judge Van Rensberg used is the threshold used in connection with discovery, the procedures with respect to which ordinarily apply once a case is underway. In effect, the Judge’s ruling permits discovery in the precertification stage, before the case has even been authorized to proceed. As comments quoted in the article note, defense advocates had militated in favor of inclusion of the precertification procedure in the Act as a way to bar frivolous claims, but now it appears that procedure can be used to compel defendants "to disclose evidence relevant to the merits."

This development, if it stands, not only seems to authorize plaintiffs to use the procedure to conduct a fishing expedition, it also could be used as a way to aid a parallel proceeding filed in U.S. courts, by allowing shareholders to examine company officials, even as to matters not raised either case.

As Adam Savett points out on his Securities Litigation Watch blog (here), this procedure, pursued in parallel with a U.S. filed lawsuit, could permit claimants to use the Ontario procedure to circumvent the PSLRA’s stay of discovery. Savett points out that IMAX itself is not only subject to the Ontario action but also to a separate action under the U.S. securities laws in the Southern District of New York, in which a motion to dismiss is pending. Savett observes that the Ontario court’s IMAX ruling "raises the specter of cases being filed cooperatively in Canadian and U.S. courts, with discovery in the Canadian action possibly being allowed to be used in the U.S. action."

This possible PSLRA discovery stay end-around takes on even greater potential significance in combination with the possibility of U.S.-domiciled companies and their directors and officers getting hauled into securities litigation in the Ontario courts. As I noted in my prior post (here), discussing the Ontario securities lawsuit recently filed against AIG, the prospect for U.S. companies of securities litigation outside the U.S. is unattractive. But perhaps even more unwelcome is the possibility of litigants using a parallel Ontario case against a U.S. company as a way to try to get material to be used to support a separate U.S. proceeding against the company.

If the recent IMAX ruling stands, U.S. securities litigators might have to become a great deal more familiar with Ontario’s securities laws and procedures.

Special thanks to Mark Renzel for providing me a link to the Globe and Mail article.

More about the AIG Lawsuit: A couple of interesting items about the AIG lawsuit appeared after I wrote my recent post about the case.

First, in a Guest Column on the Securities Docket (here), Dimitri Lascaris of the Siskinds law firm provides interesting additional detail about the "substantive and procedural advantages" offered to aggrieved claimants under the Ontario Act, as well as the potential damages available. The Siskinds firm is lead counsel in the Ontario proceedings filed against both AIG and against IMAX.

Lascaris also wrote in his column that "for a long time, America has largely dictated the standards by which issuers are obliged to conduct themselves in a globalized capital market. Like much else that is coming to an end in today’s capital markets, that era may be over. "

Second, Law.com has a November 19, 2008 article (here) about the case against AIG filed in Ontario. Among other things the article quotes Lascaris as saying that the AIG action is the first use of the use of the liability provisions of the Ontario Securities Act against a non-Canadian company.

And Finally: I would like to thank all of the many Canadian readers who commented to me about the AIG case. Numerous readers provided me with helpful additional information about the Ontario Act and about securities litigation in Canada. In that respect, several readers added helpful and interesting comments to the blog post about the AIG case, and I commend those comments to everyone's attention.

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A November 13, 2008 Wall Street Journal article entitled "Inflated Credentials Surface in the Executive Suite" (here) reported on multiple instances where corporate officials lacked claimed academic or work credentials. The article is based on a survey conducted by Barry Minkow, a convicted felon who did jail time for his role in the ZZZZ Best stock scam, who now heads the Fraud Discovery Institute.

The article cites seven examples where corporate officials allegedly falsified credentials. The article notes that this "may be enough to raise investor concerns about executive credibility as well as company procedures for vetting by management and board members." The article also cites industry sources that as many as 20% of job seekers "are found to have inflated their education credentials."

The day after this article appeared, the Journal also reported (here) that J. Terrence Lanni, the departing Chairman and CEO of MGM Mirage, is now "in a dispute with his alma mater over his academic credentials." Contrary to the company’s published statements about Lanni’s education, USC business school has no record of Lanni having received an MBA there. The question about Lanni’s education only came to light after the Journal raised questions based on Minkow’s research.

The November 13 Journal article quotes a Wharton School business ethics professor as saying "I’m very concerned that if people believe you can lie and get away with it, then down the line people will start cheating on their expense report, they’ll start misrepresenting their billable hours, they’ll start misusing their corporate funds."

Credential Inflation and Securities Litigation: Given this sense that résumé falsification (or at least its toleration) could engender a culture of deception, it is hardly surprising that allegations of credential misrepresentation have from time to time made their way into securities class action lawsuits.

For example, in the October 2006 securities class action lawsuits filed against Xethanol and certain of its directors and officers (about which refer here), the plaintiffs allege that the company’s chairman and CEO had "fabricated his résumé" among other things, by allegedly falsely claiming to have worked at Unilever, Northrup Grumman, and Reed Elsevier.

Similarly, in the January 2003 case filed against MCG Capital (about which refer here), the plaintiffs alleged that the company’s November 2001 IPO offering documents misrepresented the "credentials, credibility and integrity" of the company’s Chairman and CEO. Specifically, the complaint alleged that the offering documents misrepresented that the individual had earned a B.A in Economics from Syracuse, when in fact he had not. (It should be noted that the case was later dismissed and the Fourth Circuit affirmed the dismissal.)

Securities lawsuits also frequently allege that companies have misled investors by failing to disclose key details of corporate officials’ backgrounds. For example, in the November 2006 lawsuit filed against Pegasus Wireless and certain of its directors and officers (about which refer here), the complaint alleges that the company’s failed to disclosure the CEO and President’s prior involvement with bankrupt companies, as well as with other companies whose histories the complaint suggests "suspected stock and market manipulation." The company’s CFO is also alleged to have a "history of involvement with failed and suspect ventures," as well as past ties to individuals with "felonious" records.

This last example arguably goes well beyond mere credential inflation, but it does underscore how integrally misrepresentations or omissions about key officials’ histories potentially can affect investor perceptions. That in part explains why disclosure of credential inflation or résumé falsification can produce a significant marketplace reaction. As Minkow is quoted as saying in the Journal article, "you have to ask yourself, as any good investigator would say, what else could there be?"

Identity Misrepresentation: A Short History: The problems of credential inflation and résumé falsification are not limited to the corporate world. There have been numerous recent examples in government, academia and elsewhere. Many readers will recall, among the more notable recent examples, the tale of George O’Leary, who was fired five days after being hired as Notre Dame’s football coach, after it was discovered that he had falsely claimed to have a master’s degree in education and to have played college football for three years. The Wall Street Journal has compiled an extensive list of other recent examples, here.

There is a temptation to classify these deceptive practices as just another byproduct of our iniquitous era of botox and breast implants, where packaging is valued above substance and identity represents not things as they are but as people can be made to believe them to be.

Identity misrepresentation is not, however, unique to our time. These kinds of impostures go back as far as biblical times, where, for example, Jacob’s mother disguised him as his twin brother Esau so that Jacob would received their father’s blessing, intended for Esau.

Similarly, history is full of royal pretenders and alleged monarchs. During the reign of England’s Henry VII, there were actually two pretenders. The first, Lambert Simnel, a commoner who was crowned by Yorkist supporters as the supposed "King Edward VI," and Perkin Warbeck, who pretended to the First Duke of York and the younger son of Edward IV. And of course, there was Anna Anderson, who was claimed to be the Grand Duchess Anastasia, youngest daughter of Tsar Nicholas II.

Literature is full of examples as well. These include the numerous instances of gender disguise in many of Shakespeare’s play, such occurs in Twelfth Night and As You Like It. More recent examples of gender disguise occur in Tootsie and Yentl.

One of the more entertaining examples of identity misrepresentation occurs in one of The D&O Diary’s favorite books, The Count of Monte Cristo, by Alexandre Dumas, in which Edmond Dantès dupes others into believing him to be a Count so that he can revenge himself on his enemies and tormentors.

Identity, Ambition and the Need for Affirmation: The most extensive literary examination of the interplay between the portrayal and the reality of identity may be F. Scott Fitzgerald’s The Great Gatsby. At one level, the book is about nothing more than Nick Carraway’s effort to understand who Gatsby really is.

The sycophants and partygoers that surround Gatsby at the book’s outset aren’t quite certain, but suspect that he may be a bootlegger and may even have killed a man. Gatsby tells Nick an elaborate tale of having been educated at Oxford and then having inherited the family fortune. But that Gatsby’s persona is a façade is so obvious that one of the uninvited partygoers at Gatsby’s house is astonished to learn that the volumes lining the shelves in Gatsby’s library are actually real books.

Gatsby’s self-portrayal is an elaborate invention, a manufactured identity that, as Nick puts it, sprang from Gatsby’s "Platonic conception of himself." Gatsby’s self-contrivance is all part of his involved effort to prove himself worthy of Daisy Buchanan. The origins of Gatsby’s obsession with Daisy are perhaps best understood in his explanation that Daisy’s voice is so fascinating because it is "full of money."

Driven by his obsession for Daisy, Gatsby (born James Gatz) attempts to recreate himself within an intricate structure of credential inflation. The Oxford education proves to have been only a five-month stint following the war. His wealth, supposedly inherited, was actually acquired by means that Gatsby himself is unwilling to discuss.

Gatsby’s determined striving helps explain the credential inflation to which contemporary corporate individuals seem particularly prey. Ambition and desire, combined with a desperate need for affirmation or acceptance, drives these individuals to represent themselves as improved versions of themselves, or perhaps even as somebody different altogether.

In any event, it is clear that when inflated credentials are involved, it may be indispensible to make certain that the books are real.

The Ultimate Inflated Credential: Divinity: Among the most outrageous identity misrepresentations in literature is that of Danny Dravot who, in Rudyard Kipling’s The Man Who Would Be King, is all too willing to be taken by the people of Kafiristan as a god, based on their delusion that he is the son of Alexander the Great. It all ends very badly for Danny and his sidekick, Peachey Carnahan, when the Kafiris discover that Danny is "Not god, not devil, but man!"

The story was made into a memorable 1975 movie (now somewhat disturbing for its colonialist presumptions) starring Michael Caine and Sean Connery. In this video excerpt, Danny and Peachy reckon the benefits of Danny being taken for a god, as well as the secrecy their deception requires:

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Questions surrounding the susceptibility of foreign domiciled companies to U.S. securities laws and to the jurisdiction of U.S. court are frequently recurring issues, as I noted most recently here. However, a new case filed in Ontario under Ontario’s securities laws presents an interesting variation on these questions.

The Ontario Action Against AIG

According to its November 13, 2008 press release (here), the Siskinds law firm has filed a class action application and accompanying statement of claim in the Ontario Superior Court of Justice under the Ontario Securities Act against American International Group, American International Group Financial Products, and ten current or former AIG directors and officers. According to the press release, the claim is brought on behalf of Canadian investors who bought AIG securities between November 10, 2006 and September 16, 2008.

A copy of the application and statement of claim can be found here. According to the press release, the statement of claim alleges as follows:

The AIG class action arises out of AIGFP's credit default swaps and the crippling decline in AIG's stock price when the true effect of those credit default swaps became known to the investing public. The AIG disclosures out of which the class action arises are currently the subject of investigation by law enforcement authorities, and are alleged in the class action to have caused massive losses to Canadian investors.

The Ontario Securities Act

The action is brought under the investor protection provisions in Part XXIII.1 of the Ontario Securities Act. (Refer here for the provision of the Act.) The statutory provision specifies the liability standards in connection with "secondary market disclosure."

Section 138.3 of the statute provides a cause of action for damages on behalf of persons who trade in a company’s security -- "without regard to whether the person or company relied on the misrepresentation" -- where "a responsible issuer or a person or company with actual, implied or apparent authority to act on behalf of a responsible issuer releases a document that contains a misrepresentation."

The persons against whom the action may be brought are specified to include, among others, the issuer, "responsible" directors and officers, as well as persons who "knowingly influenced" the issuer or responsible persons.

Jurisdictional Issues

The plaintiff’s statement of claim takes great pains to emphasize that the action has "a real and substantial connection with Ontario." Indeed, in paragraph 155, the statement of claim alleges that the financial disclosures that are the basis of the action were "disseminated in Ontario"; that "a substantial proportion of the Class Members reside in Ontario"; that AIG "carries on business in Ontario"; that AIG considers its Canadian revenue as "domestic" for accounting purposes"; that "key AIG personnel charged with oversight of the above conduct were domiciled in Ontario and undertook part of that effort from Ontario."

The pains taken in the statement of claim to specify the claim’s connection to Ontario suggests an anticipation of a question whether the case properly belongs in Ontario courts. AIG is, after all, domiciled outside of Canada, and its shares do not trade on Canadian securities exchanges (or at least the plaintiff does not so allege). The alleged misstatements were prepared and issued outside of Canada.

On the other hand, the statement of claim does allege misconduct, harm and damages within Ontario. Without presuming the outcome, allegations of this type are of the kind that at least some U.S. courts have found a sufficient basis for the exercise of jurisdiction and the application of U.S. securities laws on companies domiciled outside the U.S.

Discussion

Setting aside these subject matter jurisdiction issues, and disregarding potential personal jurisdiction issues, there are some larger questions about this case. AIG faces extensive litigation in the U.S. on similar or related issues. Should any particular jurisdiction’s court have priority? Should courts defer to another jurisdiction’s courts?

These kinds of questions have come up before, for example, in connection with the Royal Dutch Shell cases, where there were also parallel proceedings in different countries (refer here). The way that these proceedings should coordinate is very much an evolving issue. But the noteworthy difference between that prior example and this instance is that here the target company is a U.S.-based company. It will be interesting to see whether that distinction makes a difference and how the respective cases unfold.

I also have these vague, unformed questions whether or not it makes a difference that AIG is now effectively owned by U.S. taxpayers. The taxpayers’ highest priority right now is getting repaid for the astonishing obligations to the U.S. treasury that AIG has recently undertaken. I haven’t worked it all out yet, but there does seem to be something inconsistent with the U.S. taxpayers’ interest in having the company’s limited resources siphoned off to defend and possibly to pay damages in a foreign jurisdiction. Canadian investors probably don’t care much about that, I suppose.

Of course, it might be argued that U.S. courts have been doing similar things to other countries’ companies (including Canadian companies) for some time now. Indeed, the plaintiff’s lawyers’ press release quotes one of the plaintiff’s attorneys as saying:

for many years, Canadian corporations have had to confront the long arm of America's justice system. But with the enactment of Part XXIII.1 of the Ontario Securities Act, Canadian investors can finally pursue remedies in our own Courts against American corporations that fail to respect Canada's securities laws. Canadian investors are entitled to have Canadian Courts hear their claims.

The one thing that is clear is that a class action under the Ontario securities laws is a serious matter. As I noted in a prior post (here), a prior class under the Ontario securities laws against FMF Capital recently settled for over CAN$28 million. This settlement apparently represents the largest securities class action settlement in Canada, and while the amount may seem small compared to some of the massive U.S. settlements, the amount did represent a very significant percentage of the investors’ claimed investment loss.

At a minimum, the FMF Capital settlement suggests that a claim under the Ontario securities laws represents a serious potential liability exposure. Along those lines, it should be noted that the press release states that the plaintiff class seeks damages of $550 million. (The press release does not state whether or not those are U.S. or Canadian dollars.)

UPDATE: Dimitri Lascaris of the Siskinds law firm has written a guest column on the Securities Docket blog (here), in which he explains the basis of jurisdiction in Ontario for the AIG lawsuit, as well as the operation and effects of the Ontario securities laws.

Two Final Observations

First, this new lawsuit represents yet another demonstration that the threat of securities litigation outside the United States continues to grow.

Second, this new lawsuit presents an interesting and potential dangerous expansion of this growing threat, which is the possibility that U.S. domiciled companies could find themselves the target of securities litigation in other jurisdiction’s courts under other jurisdiction’s laws.

To the extent it proves to be successful, the Ontario plaintiff’s new lawsuit against AIG could represent a very unwelcome and potentially complicated expansion of the liability exposures of U.S companies and their directors and officers.

Special thanks to Adam Savett of the Securities Litigation Watch blog (here) for providing a copy of the Ontario court application and statement of claim.

Now This: In this time of financial turmoil, it pays to be resourceful. And so, The D&O Diary is giving serious consideration to converting itself into a bank holding company, in order to be able to join other leading American business enterprises and participate in the bailout process.

While there might be those who would contend that we are not "too big to fail," we certainly are feeling the effects of the economic downturn, and recent 401(k) statements suggest that radical measures may be required. Capital infusions would be particularly welcome here.

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On November 13, 2008, I participated on a panel at a seminar sponsored by the Pennsylvania Bar Institute in Philadelphia, Pa. The topic of the panel was "Blogging for Lawyers." Appearing with me on the panel was Francis Pileggi, the author of the Delaware Corporate and Commercial Litigation Blog (here). In connection with the panel, I delivered a paper, which is reproduced in a slightly modified form below. Francis has also posted his paper on his blog, which can be accessed here.

I would like to thank Francis for inviting me to participate in this panel, which was a fascinating experience. Clearly, many lawyers (and perhaps others, too) are interested in knowing more about blogging. Here is my paper:

The First Amendment to the U.S. Constitution enshrines freedom "of the press" as one of our nation’s most hallowed rights. Historically, at least, only the few fortunate enough to own a printing press could actually benefit from this constitutional protection.

Until now.

As a result of technological innovation, it is now possible for everyone in effect to have their own printing press in the form of a blog and to publish their views to the entire world via the Internet. This new medium is both powerful and flexible, and represents and extraordinary new means for personal expression, for the exchange of ideas, and for the advancement of economic interests.

The Benefits of Blogging

Perhaps many of the benefits of blogging may seem self-evident, but my own experience has included many unforeseen and unanticipated benefits that have contributed significantly to the overall value of the enterprise.

1. A Larger Stage: As a professional based in suburban Cleveland, I could be susceptible to isolation, obscurity and even irrelevance. The blog not only facilitates a connection with my immediate professional community, but also with a larger national and even international audience, far beyond the relatively narrow scope of my day to day professional activities.

One of the more interesting and gratifying developments from the blog has been the links my blog has enabled me to form with academics, regulators, journalists, and attorneys from an incredibly diverse variety of contexts and jurisdictions. The resulting dialog has not only been intellectually enriching, it has also helped to raise my professional profile far more than any other professional development activity I have ever undertaken.

2. Recognition: Simply by virtue of having a blog on a topic, others assume you are an expert. Whether or not this is actually the case, I have been quoted, as a supposed expert, in national and international publications, including The Wall Street Journal, The New York Times, Bloomberg, The Los Angeles Times, The San Francisco Chronicle, among many others.

I have been invited to speak at or even moderate a wide variety of conferences and other events. I have been asked to lecture at law schools. I have been invited by law firms to speak to their clients. I have been asked by investment banks to share my thoughts about industry trends with their clients. I have been retained by consulting firms, accounting firms and actuarial firms. I have been asked to contribute written work to numerous publications. Virtually all of these opportunities have come my way as a result of the blog.

3. A Voice in the Dialog: In my field as in many others, there is an ongoing dialog about issues and developments. The blog ensures not only that my voice is heard in this ongoing dialog, but it also allows me the means to try to set the agenda. While I would not be so immodest as to claim that the blog has allowed me to be influential, it has at least assured that my voice is heard. Whatever else might be said about my contributions, as a result of the blog, I am not irrelevant, despite being based in Beachwood, Ohio (which, by the way, is a pretty nice place).

4. An Audience is a Great Thing: A blog is a medium of expression. It is also a medium of communication, and many audience members will communicate with a blog’s author. This has proven to be one of the most important parts of my blogging experience, as audience members constantly provide me with ideas, suggestions and questions that have immeasurably enriched my blog. Indeed, I have gotten many of my best ideas from readers and I truly love it when readers communicate with me about my blog.

If there is any downside, it is that it takes time to respond to reader inquiries and comments. I also wish that readers would feel freer to post their comments directly on my blog. It is fine for readers to tell me that they disagree with me, but it would be so much better if they would tell everyone. All of that said, a strong and active readership is one of the important parts and one of the most important benefits of a successful blog.

5. Trend Watching Begets Trend Knowledge: There is an unexpected side-benefit from making a practice of observing, thinking about and commenting on trends and developments. That is, these practices ensure that I am aware of and have thought about all of the latest trends and developments. This has a direct payback for my professional practice, which is that I am fully prepared to speak knowledgeably about most topics that are likely to arise in the typical business setting. This is a substantial asset in many professional and business meetings.

6. The Blogosphere: Another significant benefit from blogging consists of the links I have developed with fellow bloggers. The blogosphere is a congenial and mutually supportive place. Bloggers show each other courtesy and respect. Fellow bloggers helped support and publicize my blog in its early days, and have continued to supply me with information and commentary all along the way. The blogosphere’s conviviality adds a measure of satisfaction and enjoyment to the blogging experience.

The Burdens of Blogging

As a practical matter, just about anything anyone would need to have a successful blog is available for free on the Internet. But even if blogging might be free, that does not mean that it is without its costs. A blog is a harsh mistress, and the demands required ought to be fully considered by anyone contemplating blogging.

1. Time: I am frequently asked how much time I spend on my blog. I usually try to laugh off the question with a joke. The reality is not very funny. I actually spend a lot more time on the blog that I think anyone could possibly imagine. It helps to be a closet insomniac. I spend many, many hours on my blog, hours stolen from time in which I would otherwise be relaxing, enjoying my family, or sleeping. The blog takes an insane amount of time.

2.Blogging is a Lot Harder Than it Looks: I think every blogger starts their blog in a burst of optimism, with a backlog of things they are yearning to express. The early enthusiasm and reservoir of ideas carry the blog for a time. But the real challenge is sustaining the blog after the initial enthusiasm fades and the backlog of ideas is depleted. During the time I have been blogging, there have been many promising new blogs that have dazzlingly burst out, generated truly interesting and impressive content, and then quietly blinked out of existence. Sustaining a blog for the long haul is difficult.

Finding things to write about and finding the time to write them is hard work that requires serious commitment. I have found myself blogging in airports, hotels, coffee shops, beach houses, trains, basements, attics, and spare bedrooms. I have worked on my blog in London, Cologne, Montreal, Quebec City, San Diego, Dallas, Dubuque, Omaha, Tampa, and just about everyplace in between; I have posted blogs from laptops, libraries, Internet Cafes, and hotel business centers, and just about any other location where the Internet can be accessed. I have blogged on my birthday, Christmas Day, my anniversary, on vacation, during the Super Bowl, during rainstorms, during snowstorms, and even on beautiful sunny days.

I think writing a blog is a possibility that everyone ought to consider, but at the same time it should also recognized that not everyone will want to do everything that is required to sustain a blog over time.

3. The Benefits Are Indirect: There may be bloggers whose blogs produce direct economic benefits commensurate with the time and effort required. But for most bloggers, the most identifiable economic benefits are indirect. To be sure, I have developed revenue-producing client contacts directly as a result of the blog. But these developments are the exception, not the rule.

There is of course substantial reputation-enhancing power in having blog. I think the heightened professional profile my blog has helped me to raise will in the long run translate into significant revenue generating opportunities. But others might conclude that there are shorter, more sure-fire paths to business development.

4. Conflicts: A constant blogging concern is remaining sufficiently mindful of the possibility that the views I express on my blog potentially could conflict with the interests of my current or future clients. I try as hard as I can to be circumspect. But I can imagine that this concern about potential conflicts might well discourage some professionals who might otherwise be inclined to blog.

Three Things Potential Bloggers Should Know

1. Technology: It is easy to set up a blog. About two minutes on Blogger.com is enough to get started. But to get a blog set up the way you want and to deal with all of the problems that inevitably arise, a willingness to futz around with technology is indispensible. Fee-based services such as LexBlog reduce – but do not eliminate – the need to directly confront the technological beast. I would not recommend blogging to anyone who is uncomfortable troubleshooting technological issues.

2. The Downside of Owning a Printing Press: I made the analogy above comparing a blog to a printing press. The analogy is far more apt than might appear at first blush. As a blogger, you are in fact in the publishing business. For example, you have subscribers, who will expect you to address delivery problems, subscription questions and complaints, as well as delivery interruption and cancellation issues. Addressing subscriber concerns and questions is an ongoing challenge.

In addition, a blogger has editorial responsibilities. I am frequently called upon to address such issues as faulty or missing hyperlinks, misspellings, and erroneous references. These kinds of concerns can not only be time-consuming, they can also be disheartening. Without editors or fact-checkers, a blogger almost inevitably encounters these kinds of concerns, especially given the time pressure inherent in the blogging medium. Remedying these kinds of concerns is an indispensible but underappreciated part of the blogging process.

3. Plagiarism Happens: I recently participated in a business competition where our team presented directly after one of our competitors. One of the questions the prospect asked in our meeting directly quoted information the competitor had provided to the prospect in the preceding meeting. The information consisted of original research I personally conducted and about which I had written on my blog. I was astonished and appalled not only that a competitor would brazenly plagiarize my original work, but even more astonished that the competitor would even think about attempting to use the information to compete against me.

Call me naïve. I work very hard on my blog to make sure that I credit my sources. Given my own personal practices and standards, the idea that someone would simply plagiarize my work never occurred to me. For the first time, I have experienced serious reservations about the wisdom of sharing my original work with the whole world. I still have misgivings which I have not entirely reconciled. All I can say is that would-be bloggers should be more aware of this issue than I have been.

Conclusion

Some of my remarks here might discourage some potential bloggers. I do not intend to be discouraging, merely realistic. That said, all of the burdens, challenges and concerns notwithstanding, I have found blogging to be enormously satisfying on both a personal and professional level. In the end, while there might be a host of good professional reasons for me to have a blog, I have found the enterprise worthwhile simply because I have found it satisfying. If I didn’t enjoy doing it so much, I wouldn’t do it.

A blog is a wonderful platform for self-expression. The opportunity to express my views knowing they will be read by a wide variety of persons around the world is stimulating and gratifying. I am constantly reminded of the power of the Internet. The idea that I can have my own little corner of the Web that thousands of people voluntarily and repeatedly choose to visit is just so inexpressibly cool. It never ceases to amaze me.

Afterword

Based on the questions at today's seminar, I realize that there many additional topics about blogging that I should attempt to address, beyond the issues I discussed above.  Topics that came up today included: 

How do you get started blogging? 

How is the blogging medium different from mainstream media, and why does it matter? 

How should a busy professional sort, access and use law blogs? 

Time and space do not allow me to address these issues here. But these are all worthy topics, which I hope to try to address in forthcoming posts in the next few weeks.

In the interim, I very much welcome readers questions and comments about blogging. I am very interested in sharing my thoughts and knowing more about readers' thoughts on this topic.

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On November 11, 2008, Citigroup (here) and Fannie Mae and Freddie Mac (here) announced plans to modify existing home loans in an attempt to help borrowers avoid further foreclosures.

These mortgage relief efforts unquestionably are constructive, even praiseworthy. But as noted on the Real Time Economics blog (here), these efforts represent only a “drop in the bucket.” Among other concerns is that these relief initiatives can only reach “whole loans,” those that have not been broken up and sold into complex debt instruments. Apparently only 20% of troubled loans are whole loans.

As a result, for example, the Citigroup program addresses only mortgages the company itself still holds. With respect to the mortgages that Citigroup services but does not own, Citigroup says that it “will work diligently with investors to secure their approval to expand the program.”

The complications that could arise from investors’ interests in the loans that have been sold is becoming apparent in the wake of  the Bank of America’s earlier relief efforts on the mortgage loans it acquired in the Countrywide acquisition. If the upshot from those efforts is any indication, changes to the underlying mortgages made without investors’ assent could well lead to controversy and even litigation.

Background

On October 6, 2008, Bank of America announced (here) a “proactive home retention program that will systematically modify troubled mortgages.” The program, which included up to $8.4 billion in interest rate and principal reductions for nearly 400,000 customers of Countrywide Financial Corporation, was hailed at the time as a “good framework” for similar arrangements with other mortgage companies.

The program was part of a deal Bank of America reached with the attorneys general of several states to settle claims brought regarding risky loans that Countrywide had originated. The press coverage at the time (refer here) noted that the deal would impact investors that own securities composed of mortgages originated by Countrywide, and that investors’ approval of the deal was required.

Investor’ Concerns

According to a November 10, 2008 Charlotte Observer article (here), it appears that investors may be balking at the Countrywide mortgage deal, and some may be considering suing.

The article cites a white paper (here) prepared by the New York law firm of Grais & Ellsworth, which paper asserts with respect to the deal that “even though Countrywide’s own conduct (or misconduct)” necessitated the deal,

Countrywide plans to pay not a cent of its own (or, rather, of its parent Bank of America) toward the $8.4 billion. Instead, it plans to impose the cost of its settlement on the trusts into which the to-be-modified loans were securitized, and thereby onto holders of certificates in those trusts. In our view, Countrywide’s plan will violate the agreements that govern those trusts.

The Charlotte Observer article quotes Bruce Boisture of Grais & Ellsworth as saying that as the deal reduces mortgage interest rates and principal balances, less cash will be paid into the mortgage trusts, as a result of which the trusts will note have enough cash to pay the trusts’ obligations. Boisture estimates that “385 trusts, representing hundreds of investors and outstanding debt originally worth $465 billion, could be eligible for a lawsuit.”

The white paper asserts that Countrywide had a “hopeless conflict of interest” between its obligations as the mortgage servicer under the securitization documents and as the originating lender that had allegedly engaged in predatory lending. Countrywide’s agreement as the mortgage servicer to modify the mortgages might extinguish the Countrywide’s liability as the loan originator, but, the white paper asserts, the agreements violate Countrywide’s obligations as the loan servicer under the securitization documents.

The white paper concludes by arguing that:

Countrywide and B of A must be assuming that the $8.4 billion will be spread over enough certificateholders that none will think it worth the trouble to protest. By working together for their mutual protection, certificateholders can disabuse Countrywide and B of A of this unfortunate assumption.

According to its website (here), the law firm is hosting a November 18, 2008 webcast “to brief investors” on Countrywide’s plan. The website states that the firm and several investors “are now organizing a coalition to contest Countrywide’s plan through demands on the trustees, and, if necessary, litigation.”

Discussion

The questions being raised on behalf of the investors in the securities backed by the Countrywide mortgages underscores how difficult it could be to try to provide relief to borrowers whose mortgages were broken up and sold. As the white paper contends, mortgage restructuring potentially could violate the rights of investors owning securities backed by the mortgages.

The dispersion of the Countrywide mortgages amongst as many as 385 trusts and many more investors demonstrates how daunting it could be to secure investors’ consent to the mortgage adjustments. While one might argue that investors would be better of if there are fewer foreclosures, obtaining the assent of investors, who may or may not agree, could prove challenging.

It may be worth noting that mortgage restructuring may not only arguably harm the interests of the investors directly involved, but it could also undermine the appetite of potential future investors for similar investments. If future investors cannot be confident that their interests will not be altered, efforts to reinvigorate the securitization process (and by extension, the home lending process) could be impeded.

The investors’ objections to the Bank of America mortgage workout deal and the prospect of litigation on the investors’ behalf highlights how challenging it may be to come up with solutions that address the predicament of all of the mortgage borrowers.

In each of bailouts and workouts that have flowed across the front pages of the nations’ newspapers in recent days, there have been constituencies that have been aided but there are also constituencies that have been harmed. Equity interests have been diluted or wiped out, debt interests have been subordinated or extinguished, and other interested parties have similarly been disadvantaged..

Some of these disadvantaged parties have sued. For example, AIG shareholders have initiated an action in the Delaware courts seeking to assert their rights to vote on the (original) AIG bailout. There undoubtedly will be others of these disadvantaged constituencies that will bring their grievances to the courts. Including, perhaps, the investors that purchased securities backed by the Countrywide mortgages.

More ERISA Lawsuits: It may be argued that the aggrieved constituencies include, at least in some instances, the employees of the bailed out companies. That appears to be the position of the plaintiffs’ attorneys who, according to their  November 10, 2008 press release (here), have filed a class action against Fannie Mae under ERISA on behalf of Fannie Mae employees who participated in the Fannie Mae ESOP between April 17, 2007 and the present and whose accounts included Fannie Mae common stock.

There may well be employees of other companies that have been affected by the recent financial market turmoil that similarly file actions under ERISA. For example, the Milberg firm issued a November 10, 2008 press release (here) that it is “investigating illegal conduct” by the Hartford Financial Group and certain fiduciaries of the Hartford Investment and Savings Plan. The purported investigation involves supposed violations of ERISA.

The new Fannie Mae ERISA action is merely the latest in a series of actions that have been filed under ERISA as part of the subprime meltdown and the current financial crisis. Since the beginning of the subprime meltdown I have been tallying these ERISA lawsuits here. With the addition of the Fannie Mae lawsuit, the current tally now stands at 19.

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On November 10, 2008, NERA Economic Consulting released a report entitled "SEC Settlements: A New Era Post-Sox" (here) that details trends in the number of SEC settlements and of SEC settlement values in the six years since the enactment of the Sarbanes-Oxley Act.

The Report has a number of interesting findings, including the observation that prior to SOX’s enactment, the largest SEC enforcement action penalty was the April 2002 penalty of $10 million imposed against Xerox. However, the Report notes, after SOX, "the SEC has imposed penalties of $10 million against 115 parties, include 14 that were penalized at least $100 million." The Report includes a "top ten" settlements list, which is headed by AIG’s 2006 settlement of $800 million.

The Report also contains an analysis of the five most frequent allegations. Topping the list is microcap fraud (such as broker room operations or pump-and-dump schemes), followed by misstatement/omissions (including options backdating), and misappropriation of investor funds. The majority of cases against publicly traded companies involve allegations of misrepresentations or omissions.

The Report note that the SEC is on pace to reach 739 settlements in 2008, which would represent an increase in the number of settlements for the second straight year. The increase is driven largely by an increase in the number of individual settlements. The number of company settlements, by contrast, is declining. The number of company settlements is on pace to reach 171, which would represent the lowest number of company settlements since SOX was enacted.

The median 2008 company settlement through the end of the third quarter is $1.0 million, which is up from the 2007 median of $700,000, but well below the annual medians during the years 2004-2006, when the medians ranged from $1.1 to $1.5 million. The median individual settlement throughout the post-SOX era has been approximately $100,000.

Median settlements for public company misstatement cases have declined from a 2006 high of $50 million to a 2008 median (through the end of the third quarter) of $12.0 million. The report speculates that this decline may be due to the 2007 institution of a requirement for Commission approval prior to beginning negotiations in public company cases. (It is also probably worth noting that three of the top ten settlements took place in 2006, whereas none of the top ten has yet taken place in 2008.) The majority of public company misstatement cases settle for less than 1% of market capitalization.

The Report did note that of 197 companies the study identified as having settled SEC enforcement proceedings related to company misrepresentations or omissions, 181 had announced the existence of an investigation. The average time from the investigation announcement to the settlement for these 181 companies was 2.3 years.

The report also found that forty-three percent of company payments have been in the form of disgorgement, with 57% representing penalties. With respect to individual settlements, disgorgement represents 88% of payment amounts.

Relation Between SEC Settlements and Securities Class Action Lawsuits?:  The Report anticipated a question that formed in my mind as I read its analysis, which is the relation, if any, between SEC settlements and private securities class action litigation. The Report notes "it might be tempting to draw a comparison" between the number of class action filings, which increased in 2007, and the increase in the number of SEC settlements in 2007 compared to 2006. The Report notes that this comparison would be "misleading" in two respects:

First, the filing of a securities class action represents the first stage of class action legal proceedings, whereas SEC settlements are part of the last stage of the legal process. Because the SEC does not announce its investigations publicly, it is generally not possible to track the beginning of investigations. Instead this paper tracks settlements, which are often the first public information about an SEC matter. Second, most SEC settlements do not parallel shareholder class actions. In 2007, only 22% of SEC settlements were with public companies or their employees and related to misstatements, and were therefore closely comparable to shareholder class actions.

SEC Settlements and D&O Insurance, Briefly Noted: It is probably worth emphasizing that very little if any of the amounts involved in these settlements would have been insured under a typical D&O insurance policy. Most policies exclude from their definition of insured "Loss" such items as "fines and penalties" and disgorgements of amounts are typically excluded or do not otherwise represent insurable loss. However, in many instances, defense fees incurred in connection with the enforcement proceedings would be covered, depending on the applicable policy’s definition of the term "Claim."

New NERA Website: In addition to its Report, NERA also announced on November 10 the launch of its new website entitled "Securities Litigation Trends" (here) where NERA will be centralizing its own securities litigation analysis and also collecting other useful links (including related blogs).

Special thanks to Ben Seggerson at NERA for providing links to the NERA study and to the new web page.

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This past week, in conjunction with the PLUS International Conference in San Francisco, the insurance information firm Advisen issued an updated forecast of insurance losses likely to arise from the credit crisis. As reflected in its November 5, 2008 press release (here), Advisen is now estimating aggregate D&O and E&O losses of $9.6 billion, up from the firm’s February 2008 $3.6 billion forecast. The firm also issued separate reports detailing its analysis of D&O losses (refer to report here) and E&O losses (report here).

Advisen has not only increased its estimate since February, it has widened the scope of what it is estimating. Thus, for example, the earlier estimate referred only to projected losses from securities class action lawsuits. The most recent estimate includes anticipated losses from derivative lawsuits, governmental investigations and other matters. The more recent forecast includes other items not incorporated into the prior estimate, such as an estimate for defense fees incurred on dismissed claims. For these and other reasons, some caution is advised in comparing the two estimates, as the overall increase in part reflects differences in the estimation process.

In addition, Advisen’s aggregate $9.6 billion forecast falls within a broader range of estimated combined D&O and E&O losses of from $6.8 billion to $12.1 billion. The sheer breadth of this range (reflecting a potential swing of as much as $5.3 billion) underscores the continuing difficulty of attempting to quantify the insurance industry’s potential credit crisis-related losses.

There are several considerations that make any current attempt to quantify the insurance industry’s credit crisis related exposure particularly challenging.

1. What are We Measuring?: Both the credit crisis and the associated litigation have expanded and evolved since the started to emerge in early 2007. Moreover, as a result of the dramatic events that shook the global financial markets in September and October 2008, what began as a subprime meltdown has now become a more generalized downturn affecting the broader economy. As I have emphasized in recent posts (refer here and here), the broader economic turmoil has produced its own associated litigation, and further litigation seems highly likely.

Because of these recent developments, it has become increasingly difficult to define with precision what is and what is not "credit crisis-related." The lines defining the category have blurred to the point that it may be difficult to say with any certainty what is being measured. The absence of definitional clarity makes both descriptions and predictions particularly precarious. The very attempt to quantify credit crisis related losses implies a categorical precision that may no longer exist.

2. Measurement Distortions: Most attempts to describe the credit crisis exposure reference the total number of securities lawsuits. While this total is important, the reality is that the number of lawsuits is greater than the number of companies sued. Several companies have been sued multiple times on behalf of different sets of putative claimants, as the Advisen report duly notes. To the extent the successive lawsuits hit the same insurance program, they are less likely to increase the insurance industry’s overall losses.

Moreover, as I discussed here, early returns suggest that the courts have proved skeptical that investor losses in the context of a marketwide meltdown are the result of fraud. It is far too early to generalize from these early returns, but to the extent the courts remain skeptical, the overall potential impact of this litigation could be diminished.

In addition, the insurance losses on any particular claim will vary widely depending not only based upon the issues affecting the underlying liability exposure, but also affecting the extent of insurance coverage triggered. Issues such as retentions, program structure, limits availability, as well as overall terms and conditions, could significantly affect the extent to which the payment of insurance proceeds is triggered in any particular claim.

As the Advisen report notes, these issues are particularly relevant for claims against companies in the financial sector, as many of these companies carry very large self-insured retentions or have limited their insurance coverage protection solely to Side-A only protection. These coverage-related issues could substantially determine the extent of insured losses in many claims, which in turn could substantially affect the insurance industry’s aggregate exposure.

3. The Uncertainty of Events to Come: Any estimate of the insurance industry’s overall credit crisis-related exposure necessarily encompasses not only projections about the lawsuits that have already been filed, but also incorporates assumptions about the number and seriousness of lawsuits yet to be filed. In addition, the estimate also includes certain assumptions about how much longer the new lawsuits will continue to emerge.

Advisen suggests that the losses will spread into 2009, reflecting an apparent presumption that the accumulation of lawsuits will run only through 2009. My crystal ball is no better than any one else’s, but my own view is that lawsuits associated with the current economic crisis will continue to emerge for some time to come, and more specifically will continue well beyond the end of 2009. But the critical issues here is that any attempt to estimate the insurance losses entails certain assumptions about the lawsuits yet to come, and the magnitude of the losses estimated will vary materially depending on the assumptions used.

The foregoing analysis suggests a number of competing considerations, some of which might imply larger overall insurance losses, some of which cut the other way, and some of which that will have an uncertain impact. For that reason, I think it is particularly difficult to try to estimate the insurance industry’s overall exposure from the credit crisis related litigation. As a result, I have no opinion one way or the other about the accuracy of Advisen’s estimate.

That said, I agree with Advisen that the insurance industry’s overall losses are going to be very large, and that whatever the loss projection might have been in February 2008, developments since that time suggest that the number almost certainly has increased. Moreover, as a result of the events in the financial marketplace during September and October 2008, there are increased prospects for further significant losses to continue to accumulate across a wide variety of companies and across a wide variety of industries. There is every possibility that Advisen will find it necessary to increase its estimate in the future.

I think the most recent developments in the financial markets may be particularly significant for the insurance industry’s ultimate losses. These events included some enormously significant events, including, for example, the largest bank failure in U.S. history, the bankruptcy of one of the largest investment banks, and the government’s bailout of the largest insurance company. At the same time, commodity prices and currency exchange rates changed direction abruptly and significantly. These and other developments will continue to reverberate through the global economy for months and perhaps years.

One of the direct consequences from these developments is that there will be significant additional litigation, and this additional litigation will emerge for some time – as I noted above, the litigation could well continue to emerge beyond the end of 2009. Because of the turmoil in the global financial market, this litigation is widely dispersed across the entire economy. That is, unlike the litigation exposure that prevailed in the early stages of the subprime meltdown and credit crisis, which was concentrated in the financial and real estate sectors, the litigation exposure now ranges across most industries and many companies.

Is the D&O Insurance Industry Headed for a Hard Market?: The insurance industry in general has not yet reacted fully to these developments. To be sure, and as fully noted in the Advisen report, companies in the financial sector are now seeing D&O insurance price increases and a more challenging underwriting environment. The Advisen report also suggests, correctly in my view, that there are a variety of factors that potentially could lead to a hardening market ahead, including in particular the losses associated with Hurricane Ike and other catastrophic events, as well as the marketplace disruptions involving AIG and the investment losses that have accumulated at other leading carriers.

All of that said, other than with respect to companies in the financial sector, there is little present evidence of a market turn. For most companies, conditions remain competitive, and both pricing and available terms and conditions remain attractive.

A harder market may well lie ahead, as Advisen suggests. The question is how far ahead. I doubt companies generally will experience a hard D&O insurance market until insurers are reporting substantial calendar year losses across their D&O portfolio.

The Advisen report suggests that the credit crisis-related losses will be spread "across 2007, 2008 and 2009." However a close reading of the Advisen reports reveals that Advisen is referencing "accident years" not "calendar years." Losses associated with claims in a particular accident year may not be fully developed until years later. An insurer recognizes a loss only when the claim is paid or a reserve against the ultimate amount is finally established. The calendar year in which the loss is finally recognized may be years after the accident year in which the claim first arose. The lag time to the ultimate loss in the professional liability insurance lines can be as long as three years or more. The lag time creates a risk (all too often realized) of loss underreporting.

Another danger of the lag time is the possibility that carriers may misunderstand their own loss experience, which could produce a mismatch between the risks assumed and the pricing charged. Exacerbating this concern is the insurers’ delayed recognition that the litigation threat from the evolving credit crisis has spread to the larger economy. Simply put, current pricing may not reflect the existing litigation exposure.

The interaction of these factors suggests the possibility that the arrival of the harder market could be delayed but could be even more disruptive when it arrives. The carriers that are the slowest to recognize the changed circumstances will be the ones that experience the most disruptive impact.

Of course, to the extent that AIG’s travails and other carrier’s investment portfolio woes produce a shortage of insurance capacity, the hard market’s arrival could be accelerated. But my own view is that predictions of a hard market for D&O insurance could be premature until the insurers begin to recognize serious calendar year losses in the professional liability lines.

More Bank Closures: In what has become a regular Friday night ritual, after the close of business on Friday November 7, 2008, the FDIC announced the closure of two more banks.

First, the FDIC announced (here) that state regulators had seized and the FDIC had been appointed the receiver of Franklin Bank of Houston Texas. Second, the FDIC also announced (here) that it had been appointed receiver of Security Pacific Bank of Los Angeles, California, after the bank was closed by state banking authorities.

These two bank closures represent respectively the eighteenth and nineteenth bank closures so far during 2008. The FDIC’s complete list of bank closures during the period October 1, 2000 through the present can be found here. Of the 19 bank closures year to date, thirteen have occurred since July 1, 2008. Moreover, after the close of business for the past four Fridays in a row, the FDIC has announced at least one bank closure.

The year to date number of bank closures already represents that highest annual total since 1993, at the tail end of the last era of failed banks. More to the point, the pace of bank closures, which has increased in the second half of 2008, has accelerated over the past four weeks.

For anyone who remembers the last era of failed banks, these bank closures represent a particularly ominous sign. They also represent one more reason why I believe that the turmoil from the credit crisis, and associated litigation, will continue for some time to come.

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One of the more distressing side effects of the recent dramatic events in the global financial markets has been the sudden and unexpected reversal of fortune on any number of financial transactions and positions, particularly with respect to commodities and currencies. These developments have proven to be particularly troublesome for market participants that sought to protect themselves from commodities or currency exposure through financial hedges, only to find themselves suddenly stuck in wrong way bets as commodities prices or currency exchange rates moved quickly in unexpected directions.

At least in connection with several companies, the consequences from these adverse hedge transaction developments have included the arrival of securities class action lawsuits.

The most recent of these lawsuits have both involved foreign domiciled companies. Sadia, S.A. is a Brazilian meat products and processing company whose shares trade on the Brazilian exchange and whose ADRs trade on the NYSE. According to their November 5, 2008 press release (here), plaintiffs’ lawyers have initiated a securities class action lawsuit against Sadia and certain of its directors and officers in the Southern District of New York, on behalf of persons who bought both shares and ADRs of Sadia between April 30, 2008 and September 26, 2008. A copy of the complaint can be found here.

According to the press release, the complaint alleges that during the class period:

Sadia entered into undisclosed currency derivative contracts to purportedly hedge against the Company's U.S. dollar exposure. The Company characterized the amounts of these contracts as "nominal." However, these contracts violated Company policy in that they were far larger than necessary to hedge normal business operations and resulted in a loss of $365 million. As a result of Defendants' admission of violating Company policy regarding currency hedging, the American Depository Receipts of Sadia S.A. closed at $9.50 per share, down from the previous day's close of $15.27, a decline of 38%.

The second of these recent lawsuits involved Britannia Bulk Holdings, a U.K.-based drybulk shipping and maritime logistics services company that conducted a $116.2 million IPO on June 17, 2008. According to their November 6, 2008 press release (here), plaintiffs’ lawyers have initiated a securities class action in the Southern District of New York against the company and certain of its directors and officers, as well as against its offering underwriters. A copy of the complaint can be found here.

According to the press release,

on October 28, 2008, Britannia Bulk issued a press release announcing that the Company expected a significant net loss for the third quarter of 2008 compared to the net income achieved during the second quarter of 2008. The loss was due to problems with hedges the Company had entered into earlier in the year. In addition, the Company announced it would not pay a dividend on its common shares for the quarter ended September 30, 2008, or for the foreseeable future.

Following this disclosure, the Company’s stock collapsed to $0.16 per share. The following day, the Company disclosed that it had been notified by its lenders that they were accelerating all of its subsidiary’s obligations under a $170 million lending facility. This would ultimately result in the subsidiary being placed into administration under U.K. insolvency laws.

According to the complaint, the Registration Statement failed to disclose the problems in the Company’s activities in the forward freight agreements ("FFAs") market. Specifically, the Registration Statement concealed that the Company failed to institute and enforce controls that would prevent Company personnel from buying FFAs not purchased to hedge identifiable ship or cargo positions. FFAs were represented to only be used as a hedge for work Britannia Bulk’s ships engaged in. However, in fact, FFAs were used outside of these guidelines, exposing the Company to significant risks. Moreover, the Company had not entered into appropriate fixed price contracts given the dramatic fluctuation in crude oil and bunker fuels.

Add to these two the securities lawsuit recently filed against Pilgrim’s Pride (about which I previously wrote here), which also included allegations of an ill-timed hedge designed to control price increases for its feed materials, that hurt the company when feed prices unexpectedly plunged.

While the companies and specific transactions involved are very diverse, the common thread among these cases is that in each case the company was harmed as a result of a wrong-way bet on commodities or currencies. In each case, the sudden and dramatic events in the financial markets during September and October 2008 produced a magnified impact on financial condition of these companies. To be sure, in the Sadia and Brittania Bulk cases, the circumstances appear to have been exacerbated by allegedly unauthorized trading, but nevertheless in all three cases the financial harm resulted from hedging or hedge related activities that suddenly and unexpectedly went very wrong.

These companies are far from the only companies that attempted to protect themselves from rising commodities prices or currency exposures through hedge transactions, and that are also likely far from the only companies that found themselves in wrong-way bets when the commodities and currency markets moved unexpectedly and materially in unexpected directions in recent weeks.

Indeed, a November 6, 2008 Wall Street Journal article (here) described the steep losses some investors (including several large companies) have incurred in connection with their investment in a relatively new derivative investment called an "accumulator, which obligates the investor to buy a fixed quantity of a security, commodity or currency at a fixed price and at regular intervals. This approach works when prices are rising, but can be devastating when prices fall. The article specifically mentions VeraSun, which recently filed for bankruptcy, and which experienced huge losses on accumulator contracts for the price of corn. The article also mentions Citic Pacific, which recently experience losses of as much as $2 billion on an accumulator contract linked to the Australian dollar.

Another common thread among these companies is that most of them are not involved in the financial services industries. Each of these company’s circumstances represents an example of the ways that the turmoil in the global financial markets during September and October 2008 has altered the prior wave of subprime and credit crisis-related litigation, which before that time had been largely been confined to the financial services and real estate industries, to spread into the larger economic and financial marketplace.

The fallout from the disruptive events of the past few weeks has already included significant litigation activity outside the financial sector. While it still remains to be seen how extensive the litigation activity beyond the financial sector ultimately will prove to be, at this point it seems increasingly likely that a diverse range of companies could become involved.

In making this observation, I am not limiting my prognostication just to companies that have engaged in hedging transactions, but rather I am contemplating the entire universe of companies that have experienced a significant reversal of fortune due to the this fall’s disruptive events. So, in addition to companies that have experienced unexpected reversals on wrong-way bets on commodities or currencies, there are companies that were adversely affected by Lehman Brothers’ failure (refer here) or by the sudden seizing up of the credit markets that followed (refer here). In the days to come, there will be an increasing number of companies reporting problems due to these and other concerns. While not every company reporting these problems will sustain a securities class action lawsuit, a significant number will, and many of them, like the companies mentioned above, will be outside of the financial sector.

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With the sentencing of the last two defendants in the criminal investigation of the Milberg law firm and several of its former partners, it may be time to ask what the impact has been on the plaintiffs’ securities bar and what the future may be for securities litigation. There are also interesting questions about what the impact may be on securities litigation as a result of  Barack Obama’s election to the White House and the augmentation of the Democrats’ control of Congress.

These questions were the focus of a November 5, 2008 panel at the PLUS International Conference in San Francisco. The panel, which was moderated by Edwards Angell Palmer & Dodge partner John McCarrick, included Boris Feldman of the Wilson Sonsini firm; Professor Joseph Grundfest of Stanford Law School; Keith Fleischman of the Grant & Eisenhofer firm; and Judge Vaughn Walker of the Northern District of California.

The session was preceded with a fascinating video created for the event entitled "The Rise and Fall of William Lerach," which detailed the career and criminal prosecution of former plaintiffs’ securities bar titan Bill Lerach. The video also included an interview of Lerach that had been taped before Lerach began his incarceration.

The video included a detailed history of the circumstances underlying the criminal investigation of the Milberg firm, including the fascinating story of how a lovers’ quarrel in Cleveland and the discovery of stolen paintings in a public storage warehouse led to Lerach’s indictment and eventually to the entry of guilty pleas by Lerach and others. (I detailed these events behind the criminal indictments, including pictures of the stolen paintings and how they related to the overall story, here).

The video contained some extraordinary footage, including a vintage video clip of Lerach in a 2003 speech about supposedly corrupt corporate officials, quoting the Bible (refer to text here) as saying, "What profit a man if he gain the whole world but lose his own soul?" – adding parenthetically on his own, "or his freedom." The video also quoted Lerach as saying several times in an apparent attempt to defend the kickback payments that led to his conviction that "it was an industry practice" and that his firm did it "because we had to" in order to "meet competition. "

Following the video, the panelists turned to the question of the current state of the plaintiff securities bar and what may lie ahead.

The discussion focused initially on the question whether the leading plaintiffs’ lawyers’ demise has opened the door for other plaintiffs’ firms. Boris Feldman observed that the level of talent in the plaintiffs’ has proven to be both deep and broad. He added, however, that in his view that the more significant development is that the power of the securities class action cases seems to have shifted from an individual lawyer, like a Lerach or a Mel Weiss, to institutional investors. Keith Fleishman agreed that institutional investors are in greater control of these cases.

Judge Walker expressed a contrary view, commenting that from his perspective the cases "largely have not changed." He said that the involvement of a sophisticated institutional investor that "rides herd" occurs "in relatively few cases." In the vast majority of cases, he said, "things have not changed." He said that in his view, plaintiffs’ lawyers are "still very much in the drivers’ seat."

He went on to note that the problems with the system are not confined to the conduct to which Lerach plead guilty, noting that Lerach had plenty of what Walker called "accessories." Among the "accessories" Walker identified are the judges who have not "ridden herd" to scrutinize settlements, fee awards and claim administration. He also identified the defense bar as among the "accessories," who present settlements without having obtained the facts but instead "locking arms" with the plaintiffs’ counsel at settlement hearings, as a result of which there is no "adversary presentation" of the kind on which courts depend.

Judge Walker expressed concern that there is little monitoring or participation in the strategic process, and "frankly not enough discipline" in the system "to weed out the cases" that should not be pursued.

Keith Fleischman disagreed with Judge Walker and said that in his experience, courts were very much engaged in the supervision of cases and their settlements, and required a process in which the developments were "highly scrutinized."

Professor Grundfest offered the view that perhaps both Judge Walker’s and Fleischman’s viewpoints were correct because the cases are "bifurcated" between the larger cases in which institutional investors are actively involved and the smaller cases where smaller plaintiffs’ firms and investors with smaller interests are involved. Grundfest observed that the vast majority of cases either are dismissed or settle for under $10 million, and the institutional investors are not involved in these smaller cases.

Boris Feldman observed that some of these smaller plaintiffs may include small Taft-Hartley funds whose involvement may represent a "version 2.0" of the activities that led to the problems of which Lerach was convicted. He raised the question about the small union locals that are repeatedly involved in securities cases in which they actively seek lead plaintiff status, which, Feldman suggests, raises questions about what is really in it for the local funds and whether there are favors of one kind or another that that motivates these small funds.

An interesting related question that came up in the panel discussion is whether or not the institutional investors’ involvement in securities litigation could lead to an increase in the number of securities cases that go to trial. Fleischman first raised this, suggesting that expectations on both sides of these cases have changed, which could lead to more cases going to trial.

Feldman came back to this topic later, suggesting that the dynamic has changed in cases in which politicians are involved, such as where the lead plaintiff is a large public pension fund. Feldman observed that the specialized lawyers who have handled these cases generally know what a case is worth, and generally know about where a case will settle. Politicians may have other motivations, and may well believe that a trial victory would be more valuable to them than a settlement.

Professor Grundfest also suggested that plaintiffs’ firms, managing a portfolio of cases almost in the same way a hedge fund manages its investments, may find it expedient to take cases to trial as one way to try to maximize returns across their entire portfolio. Grundfest agreed that we are probably going to see more trials.

The panel discussed a number of other topics, including the way in which plaintiffs’ plead damages in the class action complaint. Judge Walker observed that insufficient attention is paid to whether the theory of damages alleged makes sense. He noted that not enough attention is paid to demonstrating the way that the defendant company’s stock price moved with respect to the alleged misrepresentations.

The panelists also discussed the way in which e-discovery has changed these cases. Feldman observed that e-discovery has been a "goldmine" for the plaintiffs’ lawyers, and because of the expense involved, the "big loser" has been the insurance companies. Grundfest noted that he tells his students that "e-mail" stands for "evidence mail" because it "captures and creates smoking guns." Judge Walker noted that these documents can sometimes assume an importance all out of proportion to the case as well.

What the Election Means for the Plaintiffs’ Bar: The panel concluded with the panelists making predictions about what Tuesday’s election may signify for securities litigation. Grundfest opened the discussion by stating that as a result of the Democrats’ sweeping electoral victory, the headline is that "Christmas comes early" for the plaintiffs’ bar, and the only question is "what’s in the boxes and what’s under the tree." Grundfest suggested that the plaintiffs’ bar may succeed in having Congress legislatively reverse Stoneridge and Central Bank.

Grundfest also suggested that Congress might move toward revising the pleading standard in securities cases, moving from the currently more restrictive standard to one where the case could survive a motion to dismiss if there were the "mild aroma" of fraud. Grundfest also suggested that as the likely changes could "dramatically increase the exposure" for the insurers, because the potential securities litigation exposure is "likely to go up in the future."

Feldman agreed that, after a period in which conditions may have been relatively advantageous for defendants, we could have entered "a bad period from a claims perspective for insurance companies." Feldman suggested that Obama’s judicial appointees are likely to be more receptive to class actions, and to favor the "interests of the little man." He agreed that the plaintiffs’ priorities are likely to get through Congress and also that Central Bank is likely to be legislatively reversed. He also said that the current credit crisis will feed into this processes, as excesses unearthed as part of the credit crisis will become the "poster children" to justify the legislative changes.

Judge Walker concluded the discussion with an observation of the irony that we now find ourselves in a period of the greatest upheaval of our generation yet two of the most talented plaintiffs’ lawyers are "out of action."

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At first glance, poultry producer and processor Pilgrim’s Pride and shopping center REIT General Growth Properties would seem to have little in common. But while they may be in different business sectors they share a remarkable number of common woes.

Both are laboring under crushing debt obligations associated with recent acquisitions, and both face potentially insurmountable problems servicing or restructuring their debt. The problems facing both companies are further exacerbated by the economic downturn. In each case, the founding families may lose control of the companies, or perhaps even their entire investment. Both companies have also seen their share prices plummet.

And now, both companies have been hit with securities class action lawsuits.

While these two new lawsuits at one level are the result of these two companies’ particular challenges, the underlying debt issues and complications arising from the current credit crisis could affect legions of other companies, and possible spark even further securities litigation.

Pilgrim’s Pride: As detailed in a front-page October 17, 2008 Wall Street Journal article entitled "Debt Woes, Feed Costs Come Home to Roost at Pilgrim’s" (here), Pilgrim’s Pride is struggling under the burden of debt associated with its 2007 acquisition of rival Gold Kist, making Pilgrim’s Pride the "world’s largest chicken company."

As noted in a subsequent Journal article (here), in addition to an "increasingly untenable debt load," the company has been "hammered by rising prices for feed, bad bets in the grain market, [and] falling prices for chicken." The October 17 Journal article details an ill-timed hedge the company had entered, fixing its grain feed costs when prices had peaked, locking the company into a costly contract just before prices began to decline.

Pilgrim Pride’s financial challenges have been "exacerbated" by the economic downturn, as a result of which fewer consumers are dining out, reducing demand for chicken.

Due to these circumstances, Pilgrim Pride’s share price has declined 97 percent this year. On October 30, 2008, press reports (here) speculated that the company, which faces pending interest payments it may not be able to fulfill, is a "likely" candidate for bankruptcy.

In addition, and also on October 30, 2008, plaintiffs’ lawyers issued a press release (here), announcing that they have filed a securities lawsuit in the Eastern District of Texas against Pilgrim’s Pride and certain of its directors and officers. A copy of the complaint can be found here.

According to the press release, the complaint alleges that the defendants "misrepresented the Company’s financial condition and concealed the impact of the Company’s capital problems on its business and prospects." The Complaint specifically references the company’s September 24, 2008 press release (here), in which it announced that it had "notified its lenders that it expected to report a significant loss" in its fiscal period ending September 27, "due to high feed-ingredient costs, continued weak pricing and demand for breast meat, and the significant impact of hedged grain positions during the quarter."

According to the press release, the complaint alleges that the defendants failed to disclose that:

(a) the Company’s hedges to protect it from adverse changes in costs were not working and in fact were harming the Company’s results more than helping; (b) the Company’s inability to continue to use illegal workers would adversely affect its margins; (c) the Company’s financial results were continuing to deteriorate rather than improve, such that the Company’s capital structure was threatened; (d) the Company was in a much worse position than its competitors due to its inability to raise prices for customers sufficient to offset cost increases, whereas its competitors were able to raise prices to offset higher costs affecting the industry; and (e) the Company had not made sufficient changes to its business model to succeed in the more difficult industry conditions.

General Growth Properties: As detailed in Wall Street Journal articles dated October 20, 2008 (here), and October 28, 2008 (here), the "aggressive mortgage financed acquisition strategy" of General Growth Properties, the second-largest U.S. mall owner, "has left the company with little ability to pay debt coming due amid the credit crisis."

As detailed in an October 27, 2008 Bloomberg article (here), General Growth’s shares have declined over 95 percent this year "on concern that the company won’t be able to refinance about $1.2 billion of debt this year." The debt stems in part form the company’s 2004 $11.3 billion acquisition of Rouse companies.

Compounding the company’s difficulties are the departures of three of the company’s senior executives (refer here), on reports that the executives had obtained loans from a trust associated with the company’s founding family, in order to pay of margin debt the executives had incurred to acquire stock in the company.

The company had earlier sought to raise capital through the sale of preferred stock, but these efforts "fizzled", as reported in the October 28 Journal article. The company is now seeking to sell three massive Las Vegas luxury malls, to try to address the company’s "most pressing problem," which is $900 million in mortgage acquisition costs coming due on November 28. The October 28 Journal article reports that "without an extension or new funding, General Growth doesn’t have cash on hand to pay the debt."

General Growth is burdened not only with the heavy load of debt that financed its acquisition strategy and difficulty in obtaining credit or additional capital, but it is also challenged by falling real estate values and increasing vacancy rates, driven by the declining economy.

On October 31, 2008, plaintiffs’ counsel issued a press release (here) announcing that they had initiated a securities class action lawsuit in the Northern District of Illinois against General Growth and certain of its directors and officers. A copy of the complaint can be found here.

According to the press release, the Complaint alleges that the defendants "made false and misleading statements about General Growth’s access to financing," in particular that the company "had the ability to refinance billions of dollars of debt that was coming due in the fall of 2008 and the spring of 2009, on acceptable terms." The complaint further alleges that the company failed to disclose that "the Company’s President/Chief Operating Officer had received loans from the Chief Executive Officer’s family trust in violation of the Company’s own Code of Business Conduct and Ethics."

Discussion: Pilgrim’s Pride and General Growth are far from the only companies burdened with debt incurred as a result of acquisitions fueled by the easy credit during an earlier era. Nor are they the only companies laden with debt they may not be able to refinance or repay while also facing the adverse effects of the general economic downturn.

Just this past week, the U.S.’s second largest ethanol producer, VeraSun, filed for bankruptcy; VeriSun also fell victim of wrong way hedges on corn supplies (refer here). Well-known retailers Mervyn’s, Linens ‘N Things, and Shoe Pavilion are already in liquidation (refer here). The financial difficulties have also spread to some unexpected places, as described, for example in the October 29, 2008 Wall Street Journal article entitled " Cash-Poor Biotech Firms Cut Research, Seek Aid" (here).

One particular area of concern involves the numerous companies acquired as part of debt-financed leverage buyout. As detailed in a November 2, 2008 New York Times article entitled "Debt Linked to Buyout Tighten the Economic Vise" (here),  "many of the loans used to finance the deal are coming due at the worst possible time." The article quotes a Harvard Business School professor as saying that "The big question is how apocalyptic it will be." 

In the weeks and months ahead, there will be other companies – perhaps many other companies – faced with precisely the same dismal circumstances as these two companies. In the current economic downturn, all companies will suffer, and weaker companies will struggle. Highly leveraged companies may not survive.

As other companies toil with these challenges amid the difficult financial conditions, many of them may also become the target of securities litigation. Indeed, as I noted in recent posts (here and here), the "bad economic vibe" could result in further securities litigation.

While the arrival of additional securities lawsuits seems likely, it remains to be seen how many of these cases succeed. As I noted in a recent post discussing the subprime-related securities litigation (here), courts increasingly appear skeptical of allegations that a company’s collapse in the current challenging economic circumstances, even if the result of aggressive or even sloppy business practices, is the result of fraud.

An additional question these cases present is whether they are sufficiently credit-crisis related to be included in my running tally of subprime and credit crisis-related securities litigation (which can be accessed here). While I could certainly come up with arguments for including these cases, in the end I don’t think they belong on the list. These cases are more the result of generalized business conditions rather than the specific phenomenon I have been trying to capture in my lawsuit tracking. But regardless of how they are categorized, these cases certainly do suggest we are and will remain in a period of heightened litigation activity.

One final note about these cases is that they involved companies outside of the residential real estate and financial services industries. Whether or not these cases are credit crisis related for purposes of categorization and tracking, they are definitely indicative of the way in which deteriorating financial and economic conditions -- that originated in the subprime arena but quickly spread more broadly -- threaten to extend the current litigation wave beyond the financial sector to the general marketplace.

The subprime and credit crisis litigation wave may well have been contained to a relatively narrow segment of industries, but as economic conditions continue to deteriorate, the litigation thread will become more generalized and widespread.

Another Failed Bank: After the close of business on Friday October 31, 2008, state banking regulators closed Freedom Bank of Bradenton, Florida, and the FDIC was named as a received. An FDIC press release describing the closure can be found here. According to the FDIC’s Failed Bank List (here), the closure of Freedom Bank is the 17^th U.S. bank seized by regulators so far in 2008.

As reflected in a November 1, 2008 Bloomberg article (here) reporting about Freedom Bank, the number of bank closures in 2008 year-to-date represents the highest number of bank failures since 1993, which was of course at the tail and of the last significant era of failed banks.

The Bloomberg article also reports that Freedom Bank had lost $258 million in the last two quarters from rising losses on real estate loans. Freedom is the second bank failure in Bradenton this year; in August, regulators closed First Priority Bank of Bradenton (about which refer here).

Contagion: The November 1, 2008 New York Times article entitled "From Midwest to M.T.A., Pain from Global Gamble" (here) describes how market place participants as diverse as Wisconsin school systems and New York’s Metropolitan Transit Authority were ensnared in the financial difficulties of formerly high-flying Irish bank Depfa, which in October 2007 merged into German bank Hypo Real Estate. The consequences for Hypo have proved to be dire, as the company recently required a massive bailout from the German government.

The consequences for the Wisconsin schools have also been calamitous, as detailed in the article. The article does not mention that the Wisconsin schools have already launched a lawsuit against the broker/dealer and investment bank responsible for the schools’ CDO investment. My prior post discussing the Wisconsin schools’ lawsuit can be found here.

PLUS Week: This upcoming week, I will be in San Francisco attending the PLUS International Conference. As a result, The D&O Diary will likely not maintain its usual publication schedule. If you see me at the conference, I hope you will take a moment to introduce yourself, particularly if we have not previously met. See you in San Francisco.

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