2009 was an eventful year, with significant developments across a wide variety of economic, financial, judicial and legislative fronts. With the arrival of the New Year, it seems appropriate to take a look back at the past year’s most significant D&O developments.
So, in the finest tradition of year-end punditry, here is The D&O Diary’s list of The Top Ten D&O Stories of 2009.
1. Credit Crisis Litigation Wave Wanes: The subprime and credit crisis-related litigation wave that began in February 2007 continued to surge as 2009 began, but as the year progressed, the long-running wave finally seemed to lose momentum. During the wave’s nearly three-year duration, there were by my count 205 subprime and credit crisis-related securities class action lawsuits filed, 62 of which were filed in 2009, primarily during the first half of the year.
NERA’s annual securities litigation survey noted that during 2008, over 40% of all filings had involved credit crisis cases, but that this proportion decreased to "around 30%" in 2009, and "by the second half of the year, credit crisis filings began to slow down." Nevertheless, the NERA report also noted that "total levels of filings have remained relatively high," as "standard cases appear to have made up much of the decrease in filings related to a slowdown in credit crisis litigation" during the second half of 2009.
2. Plaintiffs’ Lawyers Turn to "Backburnered" Cases: One of the main drivers in the return to the filing of "standard cases" in the second half of 2009 was belated filing of cases to which the plaintiffs’ lawyers returned after the credit crisis cases died down. Many of the cases during the second half of 2009 were filed long after the purported class period cut off date, a phenomenon I noted most recently here. According to public statements of one leading plaintiffs’ attorney, the plaintiffs’ lawyers are going back to cases that they have "backburnered for two years."
By my count, 22 of the 94 securities class action lawsuits in the second half of the year were filed more than a year after the proposed class period cut-off date. Indeed, NERA noted with respect to the cases that were filed in the second half of 2009 that the average time to filing from the end of the class period to the filing date had grown to 279 days, compared to historical averages of 161 days, and only 69% of the cases in the second half of the year were filed within one year of the end of the class period, compared to historical averages of 84%.
The plaintiffs’ lawyers efforts to work off the backlog that developed while they were concentrating on the credit crisis cases poses a challenge for D&O underwriters, because it means that companies with long distant stock price drops could still find themselves getting dragged into securities litigation long after the event. As a result, it is hard for underwriters to be sure when a company is "out of the woods."
Moreover, the arrival of the belated filings still seems to be going strong, as a number of the new securities suits filed in December 2009 presenting these same backlog characteristics. It seems probable that this trend will continue, at least for the short run, as we head into 2010.
3. The Stockpile of Subprime and Credit Crisis Cases Slowly Makes Its Way through the System: The number of subprime and credit crisis-related filings may finally have slowed, but due to this nearly three-year onslaught of new cases, there is a stockpile of accumulated lawsuits that still are just beginning to be resolved.
As NERA noted in its annual securities litigation survey, over 80% of the subprime and credit crisis cases remain pending. About 15% of the cases have been dismissed, and only about 4% have been settled. This proportion of settlements to dismissals is consistent with historical experience, in which cases are more likely to be dismissed than to settle in the first few years after filing.
As reflected in my own running tally of subprime and credit crisis-related lawsuit dismissal motion rulings (here), there have been 28 dismissal motion rulings granted (eleven with prejudice) — although in three cases in which dismissal motions were initially granted, the subsequently filed amended complaint survived renewed dismissal motions. The three cases in which the renewed motions were denied include the Washington Mutual and PMI Group cases (about which refer here and here). One dismissal (in the NovaStar Financial case) has already withstood appeal.
On the other hand, dismissal motions have been denied in whole or in part in 14 subprime and credit crisis-related cases, including several high profile cases, such as the cases involving New Century (here), Countrywide (here) and Accredited Home Lenders (here).
Though only a small number of subprime and credit crisis cases have settled, the settlements to date are impressive. The settlements include not only the outsized Merrill Lynch settlements (about which refer here), but also include significant settlements in other cases as well, including the Beazer Homes and Accredited Home Lenders cases.
With only a small percentage of these cases yet resolved, it is clear that the resolution of the subprime and credit-crisis related cases will remain an important part of the litigation landscape for years to come.
4. Bank Failures Mount: In a troublesome development with many worrisome implications, 140 lending institutions failed in 2009, by far the largest number of annual bank closures since the end of the S&L crisis. (By way of comparison, in 2008, there were 25 bank closures.) The number of bank failures increased as the year progressed, as 95 of the 140 bank failures (or roughly 68%) took place in the second half of 2009.
Though the bank closures were spread across 32 states, more than half of 2009 failed banks were concentrated in just four states: Georgia (25), Illinois (21), California (17) and Florida (14).
Despite the mounting numbers of bank failures, there has not yet been significant amounts of D&O litigation involving former directors and officers of the failed institutions. The are significant signs, however, that significant amounts of failed bank litigation ahead. Not only have investors and even employees of some failed banks filed lawsuits (about which refer here), but the FDIC has also shown a commitment to preserving its prerogative to assert claims against the directors and officers of failed banks. The FDIC has also begun to file notices of claims, in an attempt to preserve insurance against which to recover for claims against the directors and officers.
The FDIC’s latest quarterly banking report shows that it reckons there were 552 "problem" institutions as of September 30, 2009, up from just 416 at the end of 2Q09. With the numbers of both failed and troubled banks growing, and with the signs already pointing toward increased litigation involving these institutions, it seems likely that failed bank litigation will be a significant part of D&O litigation activity in 2010.
5. Business Bankruptcies Swell: According to the latest quarterly report of the Administrative Office of the U.S. Courts (about which refer here), business bankruptcy filings were up 52 percent in the 12 months ended September 30, 2009. The number of business-related bankruptcy filings has increased in the 12-month period preceding the quarter end of each quarter since the end of the third quarter 2006. The highest monthly total was in April 2009, when there were 5,621 business-related bankruptcies, compared to 4,853 in September 2009.
The possibility of a bankruptcy filing remains a significant threat for financially troubled businesses. As a general rule, D&O claims follow the filing of a bankruptcy petition.
Bankruptcy-related claims present a host of complications, not least of which is the intricate way that D&O insurance policies respond in the bankruptcy context. One recent development illustrating the difficulties that can arise in the bankruptcy context was the July 2009 decision in the Visitalk case (about which refer here), in which the Ninth Circuit upheld the carriers’ denial of coverage for a lawsuit brought be a company as debtor in possession against former directors and officers of the company, as a result of the policies insured vs. insured exclusion.
The likelihood of further business bankruptcies, with the prospect of related D&O claims, suggests that these kinds of coverage complications will appear frequently during 2010.
6. Rising Derivative Lawsuit Settlements: Threaten Increased Excess Side A Losses: The $118 million settlement in August 2009 of the Broadcom options backdating-related derivative lawsuit is the latest in a series of massive derivative lawsuit settlements. But perhaps even more significantly from the D&O insurance industry’s perspective, the Broadcom settlement appears to be the first instance where Excess Side A insurers were called upon outside of the insolvency context to contribute significantly toward settlement.
As detailed in greater length here, Broadcom’s Excess Side A insurers contributed $40 million toward the $118 million settlement. If nothing else, the settlement certainly underscores the value to companies (and their directors and officers) of the Excess Side A product, even outside the insolvency context.
The Broadcom settlement also represents a significant development for D&O insurers, who up until now have enjoyed the opportunity to offer Excess Side A insurance in a relatively low cost environment, particularly outside of the insolvency context. The Broadcom settlement highlights the potential for Excess Side A insurers to sustain significant losses on this product. The increasing incidence mega settlements, along with the growing numbers of business insolvencies, underscore the growing possibility for these kinds of losses.
7. Ponzi Schemes Emerge, Lawsuits Follow: The dramatic December 2008 revelation of Bernard Madoff’s massive Ponzi scheme proved to be only the first in a series of Ponzi scheme disclosures. According to a December 29, 2009 AP story (here), more than 150 Ponzi schemes collapsed in 2009, compared to "only" 40 in 2008. Among others, the schemes revealed in 2009 included the alleged Stanford Financial Group fraud and the alleged fraud of disbarred Florida attorney Scott Rothstein.
The one inevitable product of these disclosures has been the subsequent emergence of related litigation. The Madoff scandal along is its own litigation phenomenon. Indeed, the list of just the Madoff-related lawsuits – most of which were filed during 2009 – runs to over 25 pages. The Stanford Financial scandal also generated its own mass of litigation, beginning shortly after the fraud was revealed in February 2009. Many of the other Ponzi schemes have also generated their own burst of related litigation activity.
All of this litigation has produced a flood of claims activity for insurers. To be sure, many of these claims are more likely to trigger losses under E&O or even Fiduciary liability policies, rather than D&O policies. However, D&O insurance is implicated in a number of these suits, and the sheer claims volume as well as the accumulating costs of defense undoubtedly will adversely affect the results of D&O (and E&O) insurers for some time to come.
8. Supreme Court Grants Cert in Two Securities Cases: There was a time not too long ago when the U.S. Supreme Court only rarely took up securities lawsuit appeals. But in recent years, securities cases have become increasingly common on the Supreme Court’s docket. Just within the last couple of terms, the Court has handed down the Tellabs and Stoneridge cases (about which refer here and here).
Even with these recent developments, it remains noteworthy when the Supreme Court agrees to hear securities related cases, and for that reason it is significant that during 2009 the Supreme Court agreed to hear the appeals of two different securities suits. These two cases potentially could have a material impact on securities litigation procedure and jurisdiction.
First, in May 2009, the Supreme Court granted Merck’s petition for a writ of certiorari in the securities class action relating to the company’s disclosures about Vioxx. The Supreme Court will in this case address the question of what is required to establish "inquiry notice" sufficient to trigger the running of the two-year statute of limitations for private securities suits under the ’34 Act. Background on the Merck case can be found here.
Second, in November 2009, the Supreme Court granted cert in the National Australia Bank case. As a result of taking the case, the Supreme Court is likely to confront generally the question of extraterritorial application of the U.S. securities laws and will address specifically the question of when U.S. court properly can exercise jurisdiction over the claims of so-called "f-cubed" claimants (that is, foreign investors who bought their shares in foreign-domiciled companies on foreign exchanges). Background on the NAB case can be found here.
Both of these cases are likely to be decided during 2010. The Supreme Court heard argument in the Merck case in late November and it will likely hear argument in the NAB case during 2010. These cases potentially could have a significant impact on many securities lawsuits. The Merck case could affect frequently recurring statute of limitations issues and the NAB case could affect jurisdictional issues, and perhaps other concerns, in cases involving foreign companies (though pending Congressional initiatives could wind up superseding the Court on the jurisdiction question, about which see below).
While the outcome of these cases remains to be seen, the very fact of the Supreme Court’s involvement makes these cases significant. The anticipated rulings likely will represent among the more significant developments in 2010.
9. Congress Tackles Financial Reform: As a result of the political and financial events of the past two years, Congress is now poised to address a host of issues affecting both the financial markets and the securities laws, and some of the Congressional initiatives commenced in 2009 likely will have a significant impact on securities litigation.
The House of Representatives has already approved "The Wall Street Reform and Consumer Protection Act of 2009" H.R. 4173 (here), a sprawling 1279-page Bill that would institute a number of reforms that could have dramatic impact on the financial services industry.
As I detailed in a prior post (here), the Act also incorporates a number of provisions that could significantly affect securities litigation. Among other things, the Act provides a statutory standard for extraterritorial jurisdiction of the securities laws in certain circumstances. The Act also clarifies the pleading standard applicable to private securities lawsuits against the credit rating agencies. The Act would also significantly increase the SEC’s funding.
The House Bill must now be reconciled with several financial reform proposals pending in the Senate. Among other competing Senate initiatives are two bills introduced by Senator Arlen Specter.
The first of these, "The Liability for Aiding and Abetting Securities Violations Act of 2009," S. 1551 (here), would legislatively overturn Stoneridge and allow private securities suits for aiding and abetting claims. (Refer here for a discussion of this Bill.)
The second of the bills, "The Notice Pleading Restoration Act of 2009," S. 1504 (here, would legislatively overturn the Iqbal case and set aside the "facial plausibility" pleading requirement. (Refer here for a discussion of this Bill.)
While the legislative proposals are likely to go through many changes before financial reform legislation finally is enacted, these initiatives suggest that whatever finally becomes law will likely include provisions that could significantly impact securities litigation in the years ahead. It seems probably that Congress will enact financial reform legislation in some form during 2010, and so these Congressional initiatives could prove to be among next year’s top stories as well.
10. Significant D&O Exposures Emerge Outside the United States: For many years, the increasing threat of significant D&O exposures outside the United States has been a recurring theme amongst D&O insurance professionals. But in 2009, there were several significant developments demonstrating that D&O exposures outside the U.S. are no longer merely theoretical possibilities.
Perhaps the most significant developments in that regard are the two December 2009 rulings by Ontario Superior Court Justice Katherine van Rensberg allowing the securities lawsuit pending against IMAX and certain of its directors and officers to go forward, and certifying a global class of investors on whose behalf the case will now proceed. Legislation permitting this type of lawsuit in Ontario had been enacted several years before, but the IMAX case represented the first instance in which a lawsuit filed under the relatively new statutory provisions was allowed to proceed, as discussed at greater length here.
Though the IMAX case is still only in its earliest stages, a separate development in the liability case filed in Germany against certain directors and officers of Siemens underscores the fact that lawsuits outside the U.S. are potentially capable of producing massive D&O insurance losses.
As discussed at greater length here, in December 2009, Siemens reached a 100 million euro settlement with its D&O insurers in connection with claims arising from the company’s bribery scandal.
These developments are interesting and significant in and of themselves. But they are perhaps even more significant to the extent they underscore the fact that D&O exposures outside the U.S. are both growing and substantial. Clearly, the U.S. no longer has serious liability exposures for directors and officers.
Conclusion
One of the most noteworthy aspects of the 2009’s top D&O stories is that extent to which many of them indicate the trends we can expect to emerge or to continue in the year ahead. Certainly, the number of banks that failed during 2009 suggests the probability during 2010 of extensive litigation against the directors and officers of failed banks. The anticipated decisions of the Supreme Court and the probable Congressional action on financial reform legislation are also likely to be among the significant developments in 2010.
For that matter, the continued resolution of credit crisis-related litigation and the Ponzi scheme lawsuits are also likely to be a significant part of the litigation activity in 2010 (and for years to come).
What lies ahead in the coming year remains to be seen. But based solely on the events during the year we just concluded, 2010 promises to be both interesting and action packed. All I can say is that it is a great time to be a blogger.
More Year End Lists: As we head into 2010, a number of my fellow bloggers have also produced retrospective posts about the year we just concluded.
Francis Pileggi of the Delaware Corporate and Commercial Litigation Blog has published a list of the "Top 5 Corporate and Commercial Cases from Delaware for 2009" (here).
In an interesting complement to Pileggi’s post, University of Denver Law Professor Jay Brown has begun a series on his Race to the Bottom blog of "Delaware’s Top Five Worst Shareholder Decisions for 2009" (here). This list apparently will be published in a series of posts, the first of which may be found here, and the rest to be published in the days ahead.
The FCPA Blog has published its annual "FCPA Enforcement Index" (here), which among other things, tallies up the SEC and DOJ enforcement actions under the FCPA, as well as FCPA-related civil litigation.
The Drug and Device Law Blog has a list of the "Top Ten Prescription Medicine/Medical Device Decisions of 2009" (here).
Legally related but more on the entertainment end of the continuum, Above the Law published its list of its "Top Ten Most Popular Stories of 2009" here.
Randy Maniloff and Sarah Damiani’s "Ninth Annual Review of the Year’s Ten Most Significant Insurance Coverage Decisions" (including the "Second Annual Insurance Coverage for Dummies) can be found here.
And finally, with a look ahead, my friend Evan Rosenberg of Chubb has written "A D&O Liability Wish List for 2010" which appeared in the January 2010 issue of Directors & Boards magazine, here.
Early January Observation: It is a truth universally acknowledged that early January is a rotten time to use a health club. I have belonged to many different clubs in many different cities, and the invariable pattern regardless of the facility or the location is that after New Year’s the clubs fill up with earnest, first-time users. This year has proven no exception.
Usually, by the 15th of the month or so, all of the hubbub dies down and the only ones in the club are the regulars. My advice to anyone who has made a New Year’s resolution this year to start going to the gym is – don’t get discouraged, working out will be much more enjoyable after the middle of the month or so. Hang in there.