A recurring question – one that I am getting now on just about a daily basis – arises from concerns about the Trump administration’s possible impact on the world of directors’ and officers’ liability. Implicit in the question is the assumption that the new administration’s policies and actions will indeed affect D&O claims. While I agree with this assumption – that the new administration’s actions will have an impact–at this point it is still far too early to tell what that impact might be. For now, I think all we can do is watch some key indicators. In this blog post, I review what I think are the key indicators, and what the indicators may tell us about what lies ahead for D&O claims.
The Larger Economy and Business Environment
As a preliminary matter, it is important to note at the outset that the Trump administration’s actions on certain key policy issues could and likely will have an enormous impact on the economy and the business environment. The administration’s actions on issues such as trade and tax policy and on business deregulation potentially could provide a significant boost for many businesses (although perhaps not all businesses, or at least not all businesses equally). By the same token, the Federal Reserve’s actions to increase interest rates could also mean significant changes in the business environment as well. Even if these changes are generally positive for the economy as a whole, these changes could mean uncertainty and turbulence for some interest-rate sensitive businesses.
To the extent individual businesses suffer setbacks because of these changes, these companies could suffer reverses and losses – which are the kinds of things that historically have resulted in D&O claims against at least some companies. What all of this will mean for D&O claims in general and for individual companies of course remains to be seen. But before getting into more specific issues, it is important to keep these more general considerations about the economy and the business environment in mind as well.
Now, on to more specific issues that at this point seem as if they could impact the D&O claims environment. As I see it, there are three specific things to watch. These three things are: (1) the judiciary; (2) the Department of Justice; and (3) the Securities and Exchange Commission.
The Federal Judiciary
First, the judiciary. I know most readers of this blog are well aware that President Trump has nominated Judge Neal Gorsuch to fill the current vacancy on the U.S. Supreme Court. Judge Gorsuch is a respected federal circuit court judge with impressive credentials and at least at this point I think most people assume his nomination will be confirmed. Though Judge Gorsuch has been on the federal bench for ten years, there is a relatively limited record from which to try to determine what his views might be on business-related issues; the Tenth Circuit, the federal circuit court on which Judge Gorsuch currently sits, does not see as many business cases as, say, the Second Circuit or the Ninth Circuit.
Nevertheless, a recent guest post on this blog reflected the analysis of attorneys from the Paul Weiss law firm in which they concluded based on Judge Gorsuch’s writings from before he was on the bench as well as his opinions in a number of cases that he is likely to be generally skeptical of securities lawsuits and with respect to agency deference. Thus it seems probable that as a U.S. Supreme Court Justice, Gorsuch likely will be a reliable vote for the conservative block in business cases.
While Judge Gorsuch’s nomination for the Supreme Court is the headline issue that is attracting all of the attention, there is a larger issue with respect to the Trump administration’s potential impact on the federal judiciary.
The larger issue has to do with the fact that in addition to the vacancy on the U.S. Supreme Court, there are a total of 122 vacancies on the other federal courts. Nearly 14% of all authorized federal judicial positions are vacant. The Supreme Court vacancy is important, and the question of who will fill that vacancy is of course also important. But the fact is that in any given year, the U.S. Supreme Court will only hear a small number of business cases. The day to day processing of business cases takes place in the lower federal courts, particularly the federal district courts. There are 96 vacancies among the federal district courts. President Trump’s nomination to these district court judgships could have an enormous impact at the ground level on business litigation in the U.S.
The Trump administration’s progress on filling vacancies in the executive branch arguably has been slow, and one can only assume that it could be some time before the administration moves on to filling the federal district court vacancies. But with the benefit of a Republican Senate, it seems likely that when President Trump gets around to the district courts, he will be able to fill the lower courts with his candidates. Given the number of vacancies, and given the likely support he will enjoy from a Republican-dominated Senate, President Trump has the opportunity to reshape the face of the federal judiciary. The likely effect of these changes seems probable to be of benefit to business litigants.
The Department of Justice
Attorney General Jeff Sessions is responsible for running the U.S. Department of Justice, which in turn is responsible for criminal enforcement under the federal laws. Sessions is a former prosecutor and U.S. Attorney with a well-established reputation as defender of “law and order.” While he is well known for his focus on drug enforcement issues, he has also made it clear that he is prepared to be active on white collar crime issues. In his confirmation hearings as well as in numerous prior public statements, Sessions has made it clear that he places a high priority on fighting corporate misbehavior.
One wild card that has been thrown into the mix is the administration’s firing over the weekend of Southern District of New York Preet Bharara. The Southern District of New York is the home of the country’s financial services industry and prosecutorial activity there arguably is more important for the overall level of white collar criminal enforcement than any other district in the U.S. Bharara was tough cop who was pursuing an active enforcement approach. Because of the many enforcement actions and prosecutions currently in process, the level of enforcement will not change overnight. But the identity of Bharara’s replacement and their approach could have an important impact on overall levels of white collar crime enforcement. Francine McKenna has an interesting March 13, 2017 MarketWatch article (here) about what Bharara’s departure may mean for Wall Street enforcement.
One particularly important question about the new administration is the extent to which the DoJ under Sessions will continue to enforce the so-called Yates Memo, which embodied the prior administration’s policy of seeking to hold individual executives accountable for corporate misconduct. While I suspect that the new administration will no longer refer to this policy as the Yates Memo, at the same time I think expectations are that the new administration will continue the policy. Indeed, there are at least some who think that the new administration will be even more aggressive in seeking to hold individuals accountable for corporate misconduct.
As far as the Justice Department’s enforcement priorities, it is hard to know for sure which direction the agency will go. Based on the President’s comments and the tone of his other appointments, you would have to assume that, say, environmental criminal enforcement will not be a top priority. Other areas are harder to predict.
For example, during the election campaign, Trump made comments critical of the Foreign Corrupt Practices Act; among other things, he said of the FCPA “It’s a horrible law and it should be changed.” On the other hand, during his confirmation hearings, Sessions specifically mentioned the FCPA as a law that he vowed to enforce. Similarly, with respect to antitrust enforcement, candidate Trump expressed skepticism of certain high profile mergers that were announced; at the same time, however, the expectation is that President Trump’s appointments to the DoJ and the FTC likely will translate into a change in direction in antitrust enforcement toward a less interventionist approach.
All of these questions do highlight specific issues to watch, including what the new administration says and does about the Yates Memo (or, rather, about the policies in the Yates Memo); as well as who the President nominates to the key deputy attorney general positions at the DoJ.
The Securities and Exchange Commission
President Trump’s nominee for the Chairmanship of the SEC, Jay Clayton, is a Wall Street lawyer who has made a career representing large financial firms and other corporate clients in financial transactions and regulatory matters. His client list includes most of the largest banks on Wall Street; his wife works for Goldman Sachs. His practice generally did not include representing clients in connection with enforcement matters. His background contrasts significantly from that of his processor, Mary Jo White, who was a career prosecutor who brought to her job a lifetime reputation as (and the fundamental instincts of) a “tough cop.” All else equal, it seems likelier that priority of the agency under Clayton would be more toward regulatory and finance issues, rather than toward enforcement issues. One potentially significant factor that could affect this is the identity of the person named to head the agency’s enforcement division. The person named to fill that role could affect the enforcement division’s priorities and focus.
Given the President’s nomination of Clayton to be the SEC’s Chair, it might be tempting to conclude that in the Trump administration the SEC will take a less aggressive enforcement approach than under the prior administration. On the other hand, it could be important to remember the many statements Trump made as a candidate about how corrupt Wall Street is and how many problems are caused by bankers. If there were, say, to be a big financial scandal involving one of the Wall Street banks, it is easy to imagine President Trump going off on Twitter rampage against the bank and its management. In that circumstance, the President’s remarks could pressure the agency to take a more aggressive approach.
Over the last few months, I have been asked frequently whether a reduction in SEC enforcement activity might increase (or decrease) the number of private securities lawsuits. It is hard to know what the trends in enforcement activity will be and what the agency’s priorities will be under its new leadership, and so it is hard to make any predictions about the direction of claims. That said, it is important to note that a significant number of securities class action lawsuits each year follow on in the wake of announcement of SEC (or DoJ) enforcement actions. If it were to be the case that the SEC were to take a less aggressive enforcement approach under the new administration, one possible outcome is that there might be incrementally fewer securities class action lawsuits, because of the reduction in the number of follow-on claims.
Another question I am often asked is about the Dodd-Frank whistleblower program. Both as a candidate and as President, Donald Trump has frequently stated his intent to repeal the Dodd-Frank Act. While he frequently used the word “repeal,” a rollback is likelier, in which a number of features of the Act are cut back, while other features remain. For now, the assumption seems to be that the whistleblower program will remain in place, but with some changes. For example, some have suggested that the law should be modified to restrict the ability of individuals who participated in the wrongdoing from benefiting from the whistleblower bounty program. But while there may be some tweaks to the program, the likelihood at least for now seems to be that the whistleblower program will remain in place.
As I think should be clear by now, in my view it is far too early to tell what the effects of the Trump administration will be on D&O claims. The one thing I know for sure is that the effects of the administration will not be neutral. There are a number of key factors that will be worth watching over the next few months in order to be able to get a better sense of what the ultimate trends and direction will be. It is important to emphasize that the changes that lie ahead, whatever they may be, likely will not be apparent for some time. This is a picture that is going to develop slowly and over the course of the next few months. The one thing I know for sure is that the process won’t be dull and there will be lots of high profile developments that will drive the process.
Background on Trump’s FCPA Views: Donald Trump’s hostile views about the FCPA may reflect something other than purely academic concerns. Anyone interested in knowing more about how the President came by his views about the FCPA will want to read Adam Davidson’s article in the most recent issue of The New Yorker entitled “Donald Trump’s Worst Deal” (here), about a very sketchy-looking deal with which the Trump Organization was involved in Baku, Azerbaijan. At a minimum, it looks as if the Trump Organization got mixed up with some very “bad dudes,” through an apparent total lack of “extreme vetting.” Sad!
The New Yorker hardly qualifies as a totally objective source when it comes to Trump; indeed, just last week, the magazine had a long and alarmist article about alleged Russian involvement in the November 2016 U.S. Presidential election. The article attempts to draw power from what is implied or suggested rather than what is actually said.
Just the same, the more recent article about the Baku deal raises some serious concerns and does make you wonder where and when Trump’s business dealings (in the past, in the present) might cause him problems in his current role.