Among the questions that followed in the wake of the U.S. Supreme Court’s Morrison v. National Australia Bank decision has been whether and to what extent plaintiffs’ lawyers will resort to courts outside the U.S. to pursue securities claims on behalf of investors who purchased the defendant company’s shares outside the U.S. The action recently filed in the Netherlands on behalf of non-U.S. investors in Fortis presents shows that plaintiffs’ lawyers will be pursuing these claims.
A recent announcement involving prior Dutch settlements underscores that efforts to obtain recoveries outside the U.S. on behalf of non-U.S. investors have actually been underway for some time. The settlements show how parallel (or at least sequential) proceedings can resolve the claims of both U.S. and non-U.S. investors, respectively. These procedures, which have been used before in the same way, may afford a means by which all investors – including even non-U.S. investors – potentially may obtain recoveries, notwithstanding the constraints of Morrison.
On March 3, 2011, the Stichting Converium Securities Compensation Foundation issued a Hearing Announcement in connection with the settlements totaling $58.4 million on behalf of investors who purchased shares of Converium Holding AG between January 7, and September 2, 2004 and who did not purchase their shares on a U.S. exchange and who were not residents of the U.S. at the time they purchased their shares. The hearing, to be held on October 3, 2011 in the Amsterdam Court of Appeals, will determine whether or not the settlements will be held binding.
The Non-U.S. investor proceedings in the Netherlands follow the settlement of related proceedings the U.S. As discussed at length here, Converium investors first filed a securities class action in the Southern District of New York in October 2004. The plaintiffs alleged Converium and certain of its officers and directors, as well its corporate parent, Zurich Financial Services, had made misleading statements about Converium’s financial condition, including the adequacy of its loss reserves for its North American business during the class period. (Converium had spun out of Zurich in a 2001 IPO.)
In 2007, while the U.S. case was pending, SCOR Holding (Switzerland) acquired the voting rights of Converium pursuant to a tender offer.
In rulings dated March 6 and March 19, 2008 (refer here and here, respectively) Judge Denise Cote, applying pre-Morrison standards for determining the reach of the U.S. Securities laws, certified a class consisting of all persons who purchased Converium American Depositary Shares on the NYSE, and all U.S residents who purchased their Converium Shares on a non-U.S. exchange. Excluded from the class were investors who had purchased their shares on any non-U.S. exchange who were not U.S. residents at the time of their purchased.
The U.S. action ultimately settled for a total of $84.6 million, consisting of $75 million from SCOR and $9.6 million from Zurich. The Southern District of New York approved this settlement and entered final judgment on December 22, 2008.
As detailed here, in July 2010, two groups acting on behalf of the non-U.S. Converium investors entered settlement agreements with Scor and Zurich. The total amount of the two settlements is $58.4 million, of which $40 million is to come from SCOR and $18.4 million is to come from Zurich. The SCOR settlement agreement can be found here and the Zurich settlement agreement can be found here. The two groups acting on the investors’ behalf were Stichting Converium Securities Compensation Foundation, Dutch foundation formed for the purpose of seeking recoveries on behalf of the Non-U.S. Converium investors. Dutch investors in particular were represented by Vereniging VEB NCVB.
Pursuant to the Dutch Collective Settlement of Mass Damages Claims Act (known as WCAM), enacted in 2005, the parties then petitioned the Amsterdam Court of Appeals for approval of the settlement. An English translation of the parties’ petition, as amended, can be found here. The Act basically allows parties to seek court approval for collective settlement of mass actions entered for the benefit of class members who do not opt out.
On November 12, 2010, the Amsterdam Court of Appeals entered a provisional judgment acknowledging its right to recognize the settlements and scheduling a hearing for interested parties to appear and present their arguments with respect to the petition. Interestingly, the November 12 order specifically references the U.S. Supreme Court’s Morrison decision and the impact the decision has on the ability of Non-U.S. investors to pursue securities claims in U.S. courts. The hearing to determine whether the settlement agreements will be binding will take place on October 3, 2011.
These settlements represent the latest occasion when the new Dutch procedures have been used to reach settlements on behalf of non-U.S. investors in connection with securities claims that were also the subject of U.S. securities class action lawsuit claims and settlements.
The first and highest profile of these prior settlements was the $381 million settlement on behalf of non-U.S. Royal Dutch Shell investors. As discussed here, in May 2009, the Amsterdam Court of Appeals approved the settlement and authorized payment to Non-U.S. investors. The Dutch settlement followed an earlier settlement of a parallel U.S. securities class action lawsuit settlement on behalf of U.S. investors and arising out of the same factual allegations.
The Royal Dutch and the Converium settlements illustrate possible means by which, even in the wake of Morrison, non-U.S. investors can obtain recoveries for their investment losses. As plaintiffs’ attorneys cast about for alternatives for non-U.S. investors to pursue in the wake of Morrison, the use of settlements under the Dutch procedures may provide a possible remedy.
However, as Luke Green noted in a recent detailed post on the Risk Metrics Group Insights blog (here), there are a number of limitations on the usefulness of this Dutch procedure for investors seeking recoveries. First, only court authorized representatives can pursue claims on behalf of investors, and representatives cannot seek damages. Rather, the Dutch courts can only certify the class and approve out of court settlements. Green also notes that absent a chance in EU regulations, the class representative may have difficulty enforcing the settlement outside the Netherlands. A detailed discussion of the potential conflict between the Dutch Act and the laws of other jurisdictions can be found here.
In the circumstances where there is no prior U.S.-based settlement or U.S. action to provide both leverage and a path to settlement, the non-U.S. investors will have to try another approach – as was the case for the Fortis investors who recently filed an action in the Netherlands in which they seek to assert claims on behalf of investors who affirmatively joined the action. Of course, it remains to be seen how successful that approach will be.
In the meantime, it seems probable that investors will continue in the wake of Morrison to explore jurisdictional alternatives, in the Netherlands and elsewhere. As I recently noted (here), Canada could represent yet another alternative, at least to the extent the recent Ontario court certification of a global class in the Imax securities class action proves to represent the potential reach and applicability of the Ontario securities laws. Developments in yet other jurisdictions could present additional possibilities.
In any event, it is probably worth noting that post-Morrison, the class certified in the U.S. action would not have included the U.S. residents who purchased their Converium shares outside the U.S. Following Morrison, several district courts have ruled (e.g., refer here) that the claims of these so-called "f-squared" investors are outside the ambit of the U.S. securities laws. These investors would essentially be in the same boat with the non-U.S. investors who purchased their shares outside the U.S.
Is the SEC Targeting Outside Directors?: A March 3, 2011 memo from the Haynes and Boone law firm entitled "SEC Enforcement: Spolighting Outside Directors" (here) takes a look at a recent SEC enforcement action that specifically targeted outside directors for their allegedly failure to fulfill their responsibilities as Board member at a company that engaged in fraudulent misconduct.
The memo suggests that although the specific case involved "egregious" misconduct, the SEC’s actions signal "a new willingness to prosecute those directors who disregard or neglect their duties." The memo suggests a number of lessons from the case, including in particular that outside directors must respond to "red flags."
Another Sarbanes-Oxley Clawback Action: In a separate March 3, 2011 action (here), the SEC also entered a negotiated settlement with the former CEO of Beazer Homes, in which the CEO agreed to reimburse the company $6.4 million in cash and also various company securities the CEO had received as part of his incentive bonus compensation during 2006. The SEC alleged that the company had filed fraudulent financial statements during the period for which the CEO had been awarded the bonus compensation.
The SEC had asserted its right to compel the return (or to "clawback") the bonus compensation under Section 304 of the Sarbanes Oxley Act. Under Section 304, it is not necessary for the individual target to have participated or even to have been aware of the conduct resulting in the company’s misstatement. The Beazer Homes CEO neither admitted nor denied the SEC allegations.
This is not the first time the SEC has used Section 304 to clawback compensation. As noted here, the SEC has previously sought to clawback compensation from the CEO of CSK Auto. The SEC also previously entered a clawback settlement with the CEO of Diebold (refer here).
As I noted in a prior post (here), these kinds of clawback actions present a host of complex D&O coverage issues. In any event, we are likelier to see more clawback actions in the future, in light of the expanded clawback requirements in the Dodd-Frank Act.
Academy Awards Retrospective: In the academy awards ceremony last week, The King’s Speech carried away a host of trophies. And perhaps appropriately so. It is an entertaining movie with excellent acting. And as I noted in an earlier post when I saw it, the movie made excellent use of music.
But I agree with Joe Queenan’s February 20, 2011 column in the Wall Street Journal. For all of its finery and as good as it is, The King’s Speech is a formulaic movie. As at least one Internet reviewer before me has observed, it is The Karate Kid with a British accent and better costumes. Take nothing away from Colin Firth, who was excellent, but were it not for our general enchantment with British royalty, this movie would not likely have swept the statuettes.
For my money, True Grit was the best movie of the year. If you saw the movie, you will recall the dreamlike sequence after Rooster Cogburn rescues Mattie and races through the night on horseback to try to get her medical attention. An absolute stunning visual sequence that was all the more remarkable because you didn’t notice it until you thought about it later.
Not only that, but Haille Steinfeld deserved the Oscar for best supporting actress. Anyone who can portray a 14 year old hung upside down in a cave filled with a decaying corpse and poisonous snakes and manage to convey simultaneously both terror and a sense of self-control has to win the award. And if you really want to appreciate how fantastic Haille Steinfeld was as the most recent version of Mattie, you should see how Kim Darby in the same role in the older version absolutely killed the movie. (I ask you, how could anyone play Mattie as a whiny simp?)
I am sure that like me many viewers enjoyed the unusual characters, odd but amusing dialog and unexpected plot of True Grit. The recent version of the movie more faithfully reproduced the feel of the novel on which the movie was based. Charles Portis wrote book. I know this because Portis wrote another book which I would argue is one of the funniest books out there.
Ten years after he wrote True Grit, Portis published The Dog of the South, which is the story Ray Midge’s headlong plunge from Little Rock into Mexico and then Belize. Midge is chasing his friend, Dupree, who ran off with Midge’s wife and took his car. And Midge wants his car back. It would be hard to quickly summarize Midge’s meandering quest and the oddball assortment of characters he encounters. The book is full of curious observations and busted bicycle wheel conversations that somehow make sense and are always funny (albeit often incorrect politically). Here’s a short excerpt to give a flavor of the book:
In South Texas I saw three interesting things. The first was a tiny girl, maybe ten years old, driving a 1965 Cadillac. She wasn’t going very fast, because I passed her, but still she was cruising right along, with her head tilted back and her mouth open and her little hands gripping the wheel
Then I saw an old man walking up the median strip pulling a wooden cross behind him. It was mounted on something like a golf cart with two-spoked wheels. I slowed down to read the hand-lettered sign on his chest. "Jacksonville Fla or Bust."
I had never been to Jacksonville but I knew it was the home of the Gator Bowl and I had heard it was a boom town, taking in an entire county or some such thing. It seemed like an odd destination for a religious pilgrim. Penance maybe for some terrible sin, or some bargain he had worked out with God, or maybe just a crazed hiker. I waved and called out to him, wishing him luck, but he was intent on his marching and had no time for idle greetings. His step was brisk and I was convinced he wouldn’t bust.
The third interesting thing was a convoy of stake-bed trucks all piled high with loose watermelons and cantaloupes. I was amazed. I couldn’t believe that the bottom ones weren’t being crushed under all that weight, exploding and spraying hazardous melon juice onto the highway. One of nature’s tricks with curved surfaces. Topology! I had never made it that far in my mathematics and engineering studies, and I knew now that I never would, just as I knew that I would never be a navy pilot or a Treasury agent. I made a B in Statics but I was failing in Dynamics when I withdrew from the field. The course I liked best was one called Strength of Materials. Everybody else hated it because of all the tables we had to memorize but I loved it. I had once tried to explain to Dupree how things fell apart from being pulled and compressed and twisted and bent and sheared but he wouldn’t listen. Whenever that kind of thing came up, he would always say – boast, the way those people do – that he had no head for figures and couldn’t do things with his hands, slyly suggesting the presence of finer qualities.