The year just finished included dramatic and important developments involving elections, tragedies and natural disasters. While there was nothing in the world of directors’ and officers’ liability to match this drama, it was nevertheless an eventful year in the world of D&O, with many significant developments. By way of review of the year’s events, here is The D&O Diary’s list of the Top Ten D&O stories of 2012.
1. Barclays and UBS Enter Massive Libor Scandal-Related Regulatory Settlements: The Libor scandal first began to unfold more than four years ago, but with the dramatic announcements in late June 2012 of the imposition of fines and penalties of over $450 million against Barclays PLC, the scandal shifted into a higher gear. But as significant as were the Barclays settlements, the recent announcement by UBS that it had entered its own set of regulatory settlements totaling over $1.5 billion represented an even more substantial development.
In both sets of settlements, the banks involved admitted that their representatives had attempted to manipulate the Libor benchmark interest rates. UBS also admitted that its representatives had attempted to collude with third parties – including both interbank dealers and other Libor panel banks – to try to affect the benchmarks, at first to try to extract profits from its derivatives trading activities and later to try to affect public perception of the bank’s financial health during the peak of the credit crisis. The U.S. Commodities Futures Trading Commission expressly concluded that UBS had “succeeded” in manipulating Libor Yen benchmark rates. UBS’s Japanese unit pled guilty to one count of wire fraud.
Among the many implications from these developments is their possible impact on existing and future Libor scandal-related litigation. The revelations in the UBS regulatory settlements of collusive activity obviously will bolster the existing antitrust litigation that has been consolidated in Manhattan federal court. The sensational aspect of many of the factual revelations in connection with the UBS settlement may encourage other litigants to pursue claims, just as the revelations in the Barclays settlement encouraged other claimants to file suit. Among other suits that filed the Barclays settlement was the filing of a securities class action lawsuit in federal court in Manhattan. There is the possibility that UBS shareholders could also attempt to file a shareholder suit.
Another consideration in the wake of the UBS developments is the possibility of claims against the interbank dealers that allegedly participated in the Libor benchmark rate manipulation efforts. Up to this point, the universe of potential litigation targets seemed to be limited to the small handful of large banks on the Libor rate setting panels. With the suggestion that these third party interbank dealers participated in the allegedly manipulative conduct, for the first time there is a suggestion of the scope of litigation expanding beyond just the panel banks themselves.
It seems likely that there will be further regulatory settlements involving the panel banks in the months ahead. Among other features of the Barclays and UBS regulatory settlements that undoubtedly will capture the attention of the other banks is that, as massive as were the settlements that Barclays and UBS entered, both UBS and Barclays were the beneficiaries of credits for their cooperation with regulators. The unmistakable suggestion for the other banks is that they should step up their cooperative efforts with regulators as soon as possible or face the possibility of even more severe consequences. It does seem probable that by the time this scandal plays itself out, there will be many more regulatory settlements, some of which might make the Barclays and UBS settlements look modest.
As the other banks attempt to position themselves to reach regulatory settlements, there undoubtedly will be even further factual revelations, which in turn will further hearten prospective litigants and likely lead to either further or expanded litigation. However, there are a number of factors that should be kept in mind on the question of what the Libor-scandal litigation might mean for the D&O insurance industry.
First, many of the undoubtedly huge costs that are looming likely will not represent insured amounts. The regulatory fines and penalties will not be insured. The company investigative costs also are likely not covered. In addition, most of the antitrust litigation filed to date has named only corporate defendants. Under the typical D&O insurance policy, the companies themselves are only insured for securities claims. So the antitrust litigation, for example, would likely not be covered under the typical D&O insurance policy.
In addition, many of these large banks do not carry traditional D&O insurance or may only have restricted insurance. In some instances, the banks’ insurance may include a substantial coinsurance percentage or a massive self-insured retention. Other banks may only carry so-called Side A only insurance, which covers individual directors and officers only and is only available when the corporate entity is unable to indemnify the individuals due to insolvency or legal prohibition. Given that none of the potentially involved banks have failed, it seems unlikely that this Side A only coverage would be triggered.
2. As Bank Failures Wane, the FDIC Ramps Up the Failed Bank Litigation: The number of bank failures dropped significantly in 2012 compared with prior years. Only 51 financial institutions failed during 2012, the lowest annual number of bank closures since 2008, when there were 25 bank failures. By way of comparison, there were 92 bank failures in 2011 and 157 in 2010. Overall, there have been 468 bank failures since January 1, 2007. Of the 51 bank failures during 2012, only 20 came in the year’s second half, and only 12 came after August 1, 2012.
Though the bank failure pace clearly is declining, the pace of the FDIC’s filing of failed bank litigation is ramping up. With the addition of the December 17, 2012 filing of its lawsuit against the former CEO and six former directors of the failed Peoples First Community Bank of Panama City, Florida, the FDIC filed 25 failed bank D&O lawsuits during 2012 and a total of 43 altogether during the current wave of bank failures.
The signs are that the FDIC’s active pace of litigation filing activity will continue as we head into 2013. As Cornerstone Research noted in its recent report analyzing the FDIC’s failed bank litigation (refer here), the FDIC tends to file its failed bank lawsuits as the third year anniversary of the bank closure approaches, owing to the applicable three-year statute of limitations. The peak period of bank closures came in early 2010, suggesting that we will continue to see further failed bank litigation in 2013.
The Cornerstone Research report’s analysis shows that the FDIC has initiated D&O lawsuits in connection with nine percent of the banks that have failed since 2007. During the S&L crisis, the FDIC (and other federal banking regulators) filed D&O lawsuits in connection with 24% of all failed institutions. If the FDIC were to file D&O lawsuit in connection with 24% of all failed institutions this time around, that would imply that the FDIC would ultimately file about 112 lawsuits (based on the number of banks that have failed so far since 2007). The final number of FDIC lawsuits might well get into that range, as the FDIC’s most recent update on the number of authorized lawsuits indicates that the agency has authorized suits in connection with 89 institutions (or about 19% of the banks that have failed so far). The FDIC increased the number of authorized lawsuits each month during 2012, so the authorized number of suits could quickly reach as high as the implied 112 number of suits.
For whatever reason, the FDIC’s lawsuits against former directors and officers of failed banks have been disproportionately concentrated in Georgia. Of the 43 failed bank D&O lawsuits the FDIC has filed, 14 have involved Georgia banks, or just under one-third of all lawsuits. Nine out of the 25 D&O suits the FDIC filed in 2012, or about 36%, involved Georgia banks. At one level this is no surprise, as during the current bank failure wave there have been more bank failures in Georgia than in any other state. But the approximately 80 failed banks in Georgia represent only about 18 percent of the total number of bank failures, so the level of failed bank litigation in Georgia is disproportionately high. Of course there may be timing issues contributing to this and the disproportionately high level of lawsuits involving Georgia may even out as the FDIC continues to file new suits in 2013.
3. FDIC Wins $168.8 Million Jury Verdict Against Former IndyMac Officers: Even as the FDIC has continued to ramp up the number of lawsuits against former directors and officers of failed banks, the earliest suits the agency filed have been moving toward resolution. On December 7, 2012, in connection with the first D&O suit the agency filed as part of the current bank failure wave and in what may prove to be one of the most dramatic resolutions of any failed bank suit, a jury in the Central District of California entered a $168.8 million verdict in the FDIC’s lawsuit against three former officers of the failed IndyMac bank.
The jury found that the defendants had been negligent and had breached their fiduciary duties with respect to each of the 23 loans at issue in this phase of the FDIC’s case against the three individuals. The just completed trial apparently represents only the first trial phase of this matter. There apparently will be a separate trial phase that will address the FDIC’s allegations as to scores of other loans as well as allegations with respect to the bank’s loan portfolio as a whole. The FDIC apparently is seeking total damages of more than $350 million.
While the jury verdict unquestionably represents a victory for the FDIC, the FDIC may face considerable challenges attempting to collect on it. As discussed at length here, in July 2012, Central District of California Judge Gary Klausner held in a related D&O insurance coverage case that all of the various lawsuits pertaining to Indy Mac’s collapse (including the case in which the jury verdict was just entered) were interrelated to the first-filed lawsuit, and thus triggered only the D&O insurance that was in force when the first suit was filed. Because all of the later-filed lawsuits related back to the first lawsuit, the later lawsuits – including the lawsuit in which the jury verdict was entered — did not trigger a second $80 million insurance program that was in force when the later suits were filed. (Judge Klausner’s ruling is on appeal.)
Reports are that defense expenses and other settlements have substantially depleted the first D& O insurance tower. In other words, unless Judge Klausner’s coverage ruling is reversed, there may be little or no remaining D&O insurance out of which the FDIC might try to recover on the jury verdict. However, as discussed on Alison Frankel’s On the Case blog (here), the FDIC hopes to be able to enforce against the D&O insurers the entire amounts of the judgments it obtains against the former IndyMac officers, even those amounts in excess of the policies’ limits of liability.
Regardless of whether or not the FDIC will ever be able to collect, the entry of the jury verdict in the IndyMac case represents a significant development. Indeed, in its recent report about FDIC failed bank D&O litigation, Cornerstone Research cited the FDIC’s success at the IndyMac trial as one reason we can expect to see the agency bring more failed bank D&O lawsuits in the months ahead. The jury verdict may also give pause to other failed bank directors and officers who were otherwise determined to fight FDIC claims. However, some commentators have questioned the relevance of the verdict to other FDIC suits outside of California.
In a related development a week after the jury entered the massive verdict against the three former IndyMac officers, Michael Perry, IndyMac’s former CEO, reached an agreement to settle the separate lawsuit that the FDIC had brought against him. In his settlement, Perry agreed to pay $1 million, plus an additional $11 million to be funded entirely by insurance. The settlement agreement provides that Perry has no liability for the insurance portion of the settlement and also provides for an assignment to the FDIC of all his rights against IndyMac’s D&O insurers.
4. Congress Enacts the Jumpstart Our Business Startups (JOBS) Act: On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (commonly referred to as the JOBS Act). This legislation, which enjoyed strong bipartisan support in Congress, is intended to ease the IPO process for Emerging Growth Companies (EGCs) and facilitate capital-raising by reducing regulatory burdens and disclosure obligations. The Act also introduces changes that could impact the potential liability exposures of directors and officers of both public and private companies. These changes could have important D&O insurance implications.
As discussed at greater length here, the JOBS Act contains a number of IPO “on ramp” procedures designed to ease the process and burdens of the “going public” process for EGCs. For example, EGCs can elect to submit their IPO registration statement for SEC review on a confidential, nonpublic basis, although the registration statement must be publicly filed at least 21 days before the IPO roadshow.
Among the other features of Act that has attracted the most attention are its provisions allowing “crowdfunding.” Under these provisions, a company is permitted to raise up to $1 million during any 12-month period through an SEC-registered crowdfunding portal. The crowdfunding provisions have yet to go into effect. The SEC’s implementing regulations are due to be released in January 2013.
It remains to be seen how the JOBS Act’s changes will ultimately play out. Many of the Act’s provisions (such as, for example, the crowdfunding provisions) are subject to significant additional rulemaking. Even before the JOBS Act was enacted, the SEC was already straining under rulemaking obligations imposed by the Dodd-Frank Act. As the SEC is far behind on many rulemakings required by the Dodd-Frank Act, the sheer weight of the agency’s obligations, as well as post-election changes in the agency’s leadership, could mean delays for the rulemakings required under the JOBS Act.
Though the reduced compliance and disclosure requirements for EGCs reduces costs and affords these companies certain advantages, that does not necessarily mean that D&O insurance underwriters will regard ECGs as having less risk. To the contrary, the reduced compliance and disclosure requirements may well raise underwriters’ concerns that EGCs represent a riskier class of business.
In addition, some of the Act’s provisions could increase potential liabilities under certain circumstances. For example, Section 302(c) of the Act expressly imposes liability on issuers and their directors and officers for material misrepresentations and omissions made to investors in connection with a crowdfunding offering. The crowdfunding provisions may blur the clarity between private and public companies. The crowdfunding provisions expressly contemplate that a private company would be able to engage in crowdfunding financing activities without otherwise assuming public company reporting obligations. Yet, at the same time, that same private company will be required to make certain disclosure filings with the SEC in connection with the crowdfunding offering; and could also potentially incur liability under Section 302(c) of the JOBS Act.
Many private company D&O insurance policies contain securities offering exclusions. The wordings of this exclusion vary widely among different policies, and some wordings could be sufficiently broad to preclude coverage for crowdfunding activities. In addition, some private company D&O insurers have already introduced exclusions expressly precluding coverage for claims arising from crowdfunding. As was the case with the Sarbanes-Oxley Act and the Dodd-Frank Act, the D&O insurance industry may face a long period where it must assess the impact of changes introduced by this broad, new legislation. It may be some time before all of the Act’s implications and ramifications can be identified and understood.
5. Credit Crisis Suit Continue to Produce Massive Settlements: The subprime and credit crisis related litigation wave that began all the way back in 2007 continues to grind though the court system, and during 2012 several of the remaining cases resulted in massive securities class action lawsuit settlements The first of these was the $275 million Bear Stearns settlement, which was announced in June 2012. That was followed within a few weeks by the $590 million Citigroup settlement, announced in late August 2012.
Then in late September 2012, the parties to the pending BofA/Merrill Lynch settlement announced a $2.43 billion settlement, the largest settlement so far of any of the subprime and credit crisis related lawsuits. The BofA/ Merrill settlement is not only the eighth largest securities class action lawsuit settlement ever (refer here for the Stanford Law School Class Action Clearinghouse’s list of the top ten largest securities suit settlements), but according a September 28, 2012 press release from the Ohio Attorney General (whose office represented several Ohio pension funds that were among the lead plaintiffs in the case), it is the fourth largest settlement funded by a single defendant for violations of the federal securities laws, and it is largest securities class settlement ever resolving a Section 14(a) case (alleging misrepresentations in connection with the a proxy solicitation). According to the Ohio AG, the settlement is also the largest securities class action settlement where there were no criminal charges against company executives.
With the entry of these large settlements and of several additional smaller settlements during the year, the various settlements in the many securities class action lawsuits filed as part of the subprime and credit crisis related litigation wave now total $8.092 billion. The average credit crisis securities suit settlement is $139.5 million; however, if the three largest settlements are removed from the equation, the average drops to $80.87 million. Not all of these settlement amounts were funded by D&O insurance but D&O insurance did find a significant part of many of these settlements, including many of the smaller settlements. Moreover, many of the subprime and credit crisis securities class action lawsuits continue to grind through the system, and defense costs continue to accumulate and the prospect for even further settlement costs loom
Even as the credit crisis itself continues to recede into the past, litigation continues to accumulate — although the litigation is evolving. That is, many of the most recently filed lawsuits, alleging either misrepresentations in offering documents relating to mortgage-backed securities or put-back rights asserted by issuers that purchased mortgages from lending institutions, are being asserted as individual actions. These latest suits seem to ensure that credit crisis related litigation will continue for years to come.
6. Securities Class Action Opt-Outs Return With a Vengeance: One of the more interesting story lines in the securities class action litigation arena in recent years has been the emergence of substantial class action opt-out litigation, whereby various claimants representing significant shareholder ownership interests select out of the class suit and separately pursue their own claims – and settlements. The class action opt-out litigation emerged as a significant phenomenon in the litigation arising out of the era of corporate scandals a decade ago. After attracting a great deal of attention and concern at the time, the phenomenon seemingly faded into the background — that is, until several large public pension funds and mutual fund families opted out of the $624 million Countrywide subprime-related securities lawsuit settlement, about which I previously commented here.
Now, more than a year after the high-profile Countrywide opt-out suit, significant class action opt-outs appear to be becoming a regular part of the larger securities class action litigation. Even the $590 million settlement in the Citigroup subprime-related securities class action lawsuit, as massive as it is, has been accompanied by a significant number of class action opt-outs.
As discussed in Nate Raymond’s December 13, 2012 On the Case blog post (here), several significant institutional investors have elected to opt out of Citigroup settlement and are pursuing their own separate actions. The article, which notes that “opt-outs have become a regular feature fixture in any big securities class action,” reports that a total of 134 investors have chosen to opt out of the Citigroup settlement, including some institutional investors that had filed separate individual actions as long as two years ago.
Similarly, a significant number of institutional investors opted out of the Pfizer securities class action litigation pertaining to the company’s disclosures about the safety of its Celebrex and Bextra pain medication. In their November 15, 2012 complaint (here), seven public pension funds (including CalPERS and CalSTRS) and dozens of mutual funds from four separate mutual fund families have filed a separate lawsuit against the company and five of its individual directors and officers.
Why are the opt-out claimants selecting out of the class actions? The answer is that the institutional investor opt-out claimants think the can do better for themselves by proceeding separately. In a November 15, 2012 Am Law Litigation Daily article (here), counsel for the Pfizer securities litigation opt-out claimants is quoted as saying, among other things, that in other opt-out claims that his firm has filed in connection with other pending securities class action lawsuits, the firm has resolved the opt-outs claims for “multiples” of what they would have recovered as class claimants. In addition, based on counsel’s remarks in the news article, there has been a level of significant opt-out activity in recent years that has been going on beyond the radar screen — indeed, the plaintiffs’ firm filing the Pfizer opt-out complaint reportedly has been involved in 14 additional opt-out suits just in the first nine months of 2012.
The comments in the Am Law Litigation Daily article suggest that institutional investors’ interest in opt-out litigation is growing, largely due to the growing perception that their recoveries will be increased by proceeding outside of the class. The opt-out claimants also avoid the cumbersome process and delays involved in the class settlement process. Mutual funds, which traditionally have not been involved in opt out litigation, have become more interested and involved in opting out. The article quotes Columbia Law Professor John Coffee as saying that “the trend is toward opting out.”
For many years, class action lawsuits have been a favored whipping boy for conservative commentators. But for all of the ills that class actions can sometimes involve, the prospect of a litigation process in which mass group claims are fragmented and can only be resolved in a piecemeal fashion hardly represents an improvement. Given the apparently increasing institutional investor interest in pursuing claims separate from the larger investor class, we could very quickly be getting to the point where resolution of class litigation is only one part of a multistep process.
7. Securities Suit Filings, Settlements and Dismissals Decline During 2012: Largely as a result of a slowdown in new filings during the fourth quarter, 2012 securities class action lawsuit filings were below the levels of recent years and well below historical averages. There were 156 new securities class action lawsuit filings during 2012, down from 188 in 2011 and well below the 1996-2011 annual average of 193.
The drop in 2012 filings is largely due to the decline in filings during the year’s fourth quarter. There were 45, 45 and 41 filings during the first, second and third quarters, respectively. However, in the fourth quarter there were only 25 new securities class action lawsuit filings. The 66 new filings during the second half of 2012 represented the lowest filing level for any half-yearly period since the first half of 2007. (I detailed in a recent post the differences in counting methodology that may explain how my tally differs from other published securities class action lawsuit counts.)
In addition, not only did the number of new lawsuit filings decline in 2012 (at least according to my tally), the number of cases resolved during 2012 through dismissal or settlement also plummeted, according to a recent study from NERA Economic Consulting. (The NERA report considers the time of settlement as the date on which settlement is approved, so some high profile settlements that were announced in 2012 are not reflected in NERA’s analysis. The NERA report count of dismissals includes dismissals that are not yet final, such as dismissals without prejudice.)
According to the NERA report, the 92 settlements projected to be approved in 2012 is the lowest number of annual approved settlements since 1996 and 25% lower than 2011. The 60 dismissals NERA projected for 2012 represent the lowest dismissal level since 1998. The 2012 dismissal total is 50% lower than 2011. The total of 152 cases that resolved (settled or dismissed) during 2012 is also the lowest level since 1996. The NERA report notes that part of the reason for the decline in case resolutions may simply be that there were fewer cases pending and therefore available to be resolved as 2012 began, when there were the lowest level of pending securities cases since 2000. The report also speculates that the slowdown in the number of settlements and dismissals may also be due to “other changes in the legal environment.”
While the number of settlements may have declined, adjusted average and median settlements are up. The average securities class action settlement in 2012 was $36 million, compared to a 2005-2011 average of $42.1 million. But if the calculation excludes settlements over $1 billion, the IPO laddering cases and the merger objection cases, the 2012 average of $36 million compares to an adjusted average for the 2005-2011 period of $32 million. The median settlement in 2012 was $11.1 million, which is the largest ever annual median since 1996, making 2012 only the second year since 1996 that the median has exceeded $10 million.
8. The Mix of Corporate and Securities Litigation Continues to Change: For many years, the default topic when the question of corporate and securities litigation came up was securities class action litigation. However, in more recent years, a broader range of lawsuits has been relevant to the discussion. This diversification phenomenon got started in the middle part of the last decade with the wave of options backdating lawsuits, many of which were filed as shareholders’ derivative suits rather than as securities class action lawsuits. Another more recent manifestation of this development has been the onslaught of merger objection litigation, as a result of which nearly every merger transaction these days now involves litigation.
It seems clear that as the opportunities for plaintiffs’ attorneys to participate in traditional securities class action litigation have diminished, the plaintiffs’ attorneys are casting about, seeking ways to diversity their product line. The opt-out litigation noted above seems to be one manifestation of this effort, along with the merger objection litigation.
During the past year, yet another development of the plaintiffs’ lawyers’ efforts to diversity was the development of a new form of litigation involving executive compensation. This new wave of executive comp suits, in which the plaintiff’s seek to enjoin upcoming shareholder votes on compensation or employee share plans on the grounds of inadequate or insufficient disclosure, have resulted in some success – at least for the plaintiffs’ lawyers involved. These new kinds of executive compensation–related lawsuits possibly may be “gaining steam,” according to a recent law firm study.
A November 19, 2010 memo from the Pillsbury law firm entitled “Plaintiffs’ Firms Gaining Steam in New Wave Say-on-Pay Lawsuits” (here) reviews the history of say-on-pay litigation that has followed in the wake of the Dodd Frank Act’s requirements for an advisory shareholder vote on executive compensation. The memo shows that of the at least 43 companies that experienced negative say-on-pay votes in 2011, at least 15 were hit with shareholder suits alleging, among other things, that the companies’ directors and officers had violated their fiduciary duties in connection with executive compensation. However, as is well-documented in the law firm memo, these suits have not fared well in the courts; ten of the eleven of the 2011 suits that have reached the motion to dismiss stage have resulted in dismissals.
Faced with this poor track record on the 2011 say-on-pay suits, plaintiffs’ lawyers filed fewer of these kinds of suits in 2012 against companies that experienced negative votes. However, as the law firm memo explains, one plaintiffs’ firm has now “orchestrated a new strategy to hold companies liable: suits to enjoin the shareholder vote because the proxy statement failed to provide adequate disclosure concerning executive compensation proposals.” According to the memo, there have been at least 18 of these new types of suits, with nine of them having been filed just in the month preceding the memo’s publication.
As detailed in Nate Raymond’s November 30, 2012 Reuters story entitled “Lawyers gain from ‘say-on-pay’ suits targeting U.S. firms” (here), these new style have met with some success. According to the article, at least six of these suits “have resulted in settlements in which the companies have agreed to give the shareholders more information on the pay of the executives.” These settlements have also “resulted in fees of up to $625,000 to the lawyers who brought the cases.” The article also notes, however, that while the settlements have provided additional disclosures and legal fees for the firm that has filed almost all of these suits, “they have netted no cash for shareholders.”
These new suits share certain characteristics with the M&A-related lawsuits. That is, they are filed at a time when the defendant company is under time pressure that motivates the company to settle quickly rather than deal with the lawsuit. Just as in the merger context, where the company wants to move the transaction forward and doesn’t want the lawsuit holding things up, companies facing these new style say-on-pay lawsuits, facing an imminent shareholder vote, are pressured to reach a quick settlement rather than risking a delay in the shareholder vote.
Both the kinds of say-on-pay lawsuits filed in 2011 and the new style version of the suits that are hot now are symptoms of a larger phenomenon, which is the attempt by some parts of the plaintiffs’ securities bar to diversify their product line. The pressure on the plaintiffs’ firms to diversify will likely continue to lead to more lawyer-driven litigation of these kinds, including not only the varieties of lawsuits noted here but also perhaps other kinds of suits that will emerge in the months ahead.
9. Whistleblower Reports Surge, Threatening Further Enforcement Action and Bounty Payments Ahead: When the whistleblower bounty provisions in the Dodd-Frank Act were enacted, there were concerns that the provisions – allowing whistleblowers an award between 10% and 30% of the money collected when information provided by the whistleblower leads to an SEC enforcement action in which more than $1 million in sanctions is ordered – would encourage a flood of reports from would-be whistleblowers who hoped to cash in on the potentially rich rewards.
As it has turned out, the whistleblower bounty program has been slow to get started. The SEC finally awarded its first whistleblower bounty in 2012. As reflected in the SEC’s August 21, 2012 press release (here), the agency’s first whistleblower award for the relatively modest amount of $50,000. However, small amount of this single award should not be interpreted to suggest that the whistleblower program will not amount to much. To the contrary, the signs are that the whistleblower program seems likely to turn out to be very significant.
In November 2012, the SEC’s Office of the Whistleblower produced its annual report for the 2012 fiscal year on the Dodd-Frank whistleblower program. The report shows that during the 2012 fiscal year, the agency received 3,001 whistleblower tips. The agency received tips from all 50 states as well as from 49 countries outside the United States. The report details the events that must occur and the process that must be followed in order for a bounty award to be made. The prolonged process seems to ensure that some a significant amount of time is required between the time when a whistleblower submits a tip and a bounty award is made.
The agency’s report makes it clear that though there has only been one bounty award so far, many more lie ahead. Among other things, the report notes that during the past year there were 143 enforcement actions resulting in the imposition of sanctions in excess of the $1 million threshold for the award of sanction, and that Office of Whistleblower is continuing to review the award applications the Office received during the 2012 fiscal year. In other words, the likelihood is that there will be further awards in the year ahead – and the report notes that the value of the Fund out of which any future awards are to be made now exceeds $453 million.
It seems probable that as more awards are announced, interest in the whistleblower program will increase as well. Opportunistic plaintiffs’ lawyers casting about for alternatives to traditional securities litigation are already attempting to position themselves to take advantage of these anticipated developments. Many plaintiffs’ firms are advertising on the Internet and elsewhere seeking to assist whistleblowers to submit their tips to the agency and also to try to get the inside track on any civil litigation opportunities that might follow in the event that the SEC were to pursue an enforcement action based on the whistleblower’s tip. Among the more interesting examples of these efforts on plaintiffs’ lawyers’ part during recent months were the December 2012 publicity efforts of the plaintiffs’ firm representing whistleblower alleging that Deutsche Bank hid billions of dollars of losses on its derivatives portfolio during the peak of the credit crisis.
It seems that if 2012 was the year in which the Dodd-Frank whistleblower program finally got off the ground, 2013 will likely be the year when the program picks up serious momentum. It seems likely that in the year ahead that we will not only see increased enforcement activity as a result of whistleblowers’ tips, but that we will see increased numbers of whistleblowers’ bounty awards, as well as the possibility of increased private civil litigation following in the wake of the enforcement actions.
10. Rule 10b5-1 Trading Plans Under Scrutiny Once Again: When the SEC brought civil enforcement charges against former Countrywide Financial CEO Angelo Mozilo in June 2009, a critical part of the agency’s allegations was that Mozilo had manipulated his Rule 10b5-1 trading plans to permit him to reap vast profits in trading his shares in company stock while he was aware of increasingly serious problem in the company’s mortgage portfolio.
Among other things, the SEC alleged that pursuant to these plans and during the period November 2006 through August 2007, and shortly after he had circulated internal emails sharply critical of the company’s mortgage loan underwriting and the “toxic” mortgages in the company’s portfolio, Mozilo exercised over 51 million stock options and sold the underlying shares for total proceeds of over $139 million.
In October 2010, Mozilo agreed to settle the SEC’s enforcement action for a payment of $67.5 million dollars, including a $22.5 million penalty and a disgorgement of $45 million. The financial penalty was at the time (and I believe still is) the largest ever paid by a public company’s senior executive in an SEC settlement.
As if all of this were not enough to cast a cloud over Rule 10b5-1 trading plans, the trading plans are once again back in the news, and once again the news about the plans is negative. A front page November 28, 2012 Wall Street Journal article entitled “Executives’ Good Luck in Trading Own Stock” (here), reports on the newspaper’s analysis of thousands of trades by corporate executives in their company’s stock. Among other things, the newspaper reports on numerous instances where executives, trading in company shares pursuant to Rule 10b5-1 plans, managed to extract trading profits just before bad news sent share prices down or to capture gains with purchases executed just before unexpected good news.
It appears that the SEC reads the Journal. The agency has launched investigations in connection with trading activities at several of the companies mentioned in the Journal article. While not all of the trades under scrutiny involved Rule 10b5-1 trading plans, possible plan misuse seems to be at least one aspect of the investigation. Insider trading involving supposed tips about various companies has been a significant investigative focus for some time now (for example, as pertains to the various insider trading allegations involving Raj Rajaratnam and others), but these most recent allegations involve alleged improper trading by company insiders in their personal holdings of their company stock. The allegations and ensuing investigations seem likely to produce significant enforcement activity in the months ahead, as well as possible follow on private civil litigation.
There is no doubt that these various allegations involving insider trading plans have put the plans in a negative light. However, as discussed here, a well-designed and well-executed plan can still provide substantial liability protection by allowing insiders to trade in their holdings of company stock without incurring securities liability exposure. Notwithstanding these recent developments, a well-designed Rule 10b5-1 plan remains important securities litigation loss prevention
Blogging Year in Review: During 2012, the staff here at The D&O Diary tried to keep track of important developments in the world of directors and officers liability. While we strive to maintain our focus on topics within our central area of concern, from time to time we also try to diversify our mix of offerings. During the past year, we managed to work in other fare, such as interviews, book reviews and guest posts reflecting the perspectives of other industry commentators.
Though we enjoy diversifying the mix of offerings with these other kinds of articles, we must admit that we derive the greatest pleasure when we venture far off topic in our occasional travel blog posts. 2012 provided a rich variety of opportunities for travel blogging, including trips to London (with a special visit to the Lloyd’s Building), Dublin, Beijing, Hong Kong, Singapore, Munich and Berlin.
As much fun as it was to write the travel blogs, our favorite post of the year (and maybe of all time), was the July 2012 post about Summer and Time. If you have not yet read it, you can find the post here. Even if you don’t read the entire post, please take a look at the pictures and read the comments from other readers. Even if you have read it before, you may find it rewarding to read the post again, now that that the chilly winds of winter are blowing.
I have a lot of fun writing this blog. But I could never do it without the support and encouragement from readers. I would like to express my thanks here to the many readers who during the past year sent me case decisions, suggestions and document links. I get my best stuff from readers, and the willingness of readers to support my efforts helps to make this site a better resource for everyone. My thanks to everyone who has helped along the way, and to everyone that reads and supports this site. And finally, I would also like to thank my colleagues at RT Pro Exec and RT Specialty for their support and encouragement I could never keep this going without their backing.
I am looking forward to another year of blogging in 2013. I welcome readers’ thoughts and comments and in particular I welcome suggestions for how this site might be improved.