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

As reflected in their agreement filed on August 26, 2010, the parties to the New York and Delaware derivative actions involving former AIG CEO Maurice Greenberg, as well as certain other former AIG directors and officers, have agreed to settle the case for a payment to AIG by its D&O insurers of $90 million. The agreement also provides that the insurers will pay $60 million to Greenberg and Howard Smith, AIG’s former Chief Financial Officer, for their legal fees.

 

The settlement is subject to the approval of Delaware Chancery Court Vice Chancellor Leo Strine. Jef Feeley and Hugh Son’s August 27, 2010 Bloomberg article about the settlement can be found here.

 

This derivative lawsuit settlement follows AIG’s $725 settlement of a related securities class action lawsuit, and also follows the $115 million settlement in 2008 of a separate shareholders derivative lawsuit involving directors and officers of AIG.

 

Background

In 2004, the first of many separate shareholders derivative lawsuits (later consolidated) were filed in New York and in Delaware, against AIG as nominal defendant, and against numerous former AIG directors and officers, including Greenberg and Smith. The investors alleged that AIG insiders to misstated AIG’s financial performance in order to deceive investors about AIG’s financial condition.

 

The centerpiece of the lawsuit was an allegedly fraudulent $500 million reinsurance transaction in which various AIG insiders staged an elaborate artificial transaction with Gen Re Corporation. The complaint also alleged AIG insiders allegedly used secret offshore subsidiaries to mask AIG losses, misstated accounts with no basis for their adjustments, failed to correct well-documented accounting problems in an AIG subsidiary, and hid AIG’s involvement in controversial insurance policies that involved betting on when elderly people would die. The complaint also related to alleged bid-rigging allegations and alleged sale of illegal financial products.

 

In a lengthy February 2009 opinion, Delaware Vice Chancellor Leo Strine denied the motions to dismiss of Greenberg, Smith and certain other senior former AIG officials, although he granted the motion as to certain other individuals. Strine observed, among other things, "The Complaint fairly supports the assertion that AIG’s Inner Circle led a — and I use this term with knowledge of its strength — criminal organization. The diversity, pervasiveness, and materiality of the alleged financial wrongdoing at AIG is extraordinary."

 

Following further procedural wrangling and developments, the parties participated in a series of mediations involving retired Judge Layn Phillips, which resulted among other things in this settlement agreement.

 

The Settlement

The August 26 agreement seems to resolve all of the litigation involving all of the parties. However, the agreement is also not self-sufficient, as it is "conditioned upon execution of and compliance with a written settlement agreement under which the D&O carriers" pay the agreed upon amounts. I have not been able to obtain a copy of the separate insurance agreement and indeed the wording of the August 26 agreement suggests that at least at the time the August 26 agreement was drafted, the implied insurance agreement had not yet been drafted or fully executed.

 

The August 26 agreement does recite that the applicable insurance consists of AIG’s 2004-2005 D&O insurance tower, which has aggregate limits of liability of $200 million. The agreement does not identify the insurers in the tower or their respective limits of liability. The agreement also recites that the parties to the August 26 agreement have claims pending against the insurance tower in excess of its $200 million limit.

 

The agreement also states that the insurers "dispute that the D&O Insurance Tower is available to pay the claims made under the policies," but that the parties "desire to resolve their disputes regarding the appropriate allocation of their respective rights to the D&O Insurance Tower."

 

The agreement also incorporates certain understandings as the plaintiffs’ attorneys’ fees. Among other things, the agreement provides that the Delaware plaintiffs’ attorneys shall seek and the other parties shall not oppose attorneys’ fees of no more than 22.5% of the Settlement Amount (i.e. no more than $20.25 million) and no more than $1 million in expenses. The New York plaintiffs’ attorneys will seek a fee of no more than $2.5 million. If the two sets of attorneys were to realize the full amount of these fee awards and expenses, the net recovery to AIG from the settlement would be $66.25 million.

 

Discussion

There are a number of interesting things about this settlement. First, the cash payments specified in the agreement are to be funded exclusively with the proceeds of the D&O Insurance Tower.

 

Indeed, the Bloomberg article linked above quotes Greenberg’s attorney as saying that all of litigation by or on behalf of AIG again Greenberg "was settled with Mr. Greenberg paying nothing and other parties paying money to Mr. Greenberg." (This statement is probably worthy of an entire blog post some day all on its own.). Victor Li’s August 27, 2010 Am Law Litigation Daily article (here) about the settlement quotes the Delaware litigation lead plaintiffs’ attorney as saying that as a result of the settlement, $90 million is going to AIG that otherwise would have gone to Greenberg and other defendants based on a 2009 settlement between AIG, Greenberg and Smith, under which AIG agreed to reimburse up to $150 million of their legal fees.

 

While others can debate who gave or got what in this settlement, the bottom line is that the money for this settlement is coming entirely from insurance.

 

Without details about the separate insurance settlement referenced in the August 26 agreement, it is hard to know for sure, but it seems as if the $150 million of insurance funds exhausts the remaining funds under the D&O Insurance Tower, either by actual payment of loss or by compromise. (There obviously is some linkage between the $150 million total of payments in the August 26 agreement and the November 2009 agreement between AIG and Greenberg, but the precise connection isn’t apparent from the face of the documents I have seen so far.)

 

In addition to the fact that the August 26 agreement recites that the parties claims on the D&O Insurance Tower exceed the Tower’s $200 million aggregate limits of liability, another reason I assume that the Tower is actually or effectively exhausted is the interpleader action the primary insurer in this Tower filed against Greenberg and AIG, in order to avoid or resolve an arbitration dispute about priority rights to the proceeds of the $15 million primary policy. By interpleading the $15 million limits of liability, the primary insurer was effectively disclaiming any rights to those funds, indicating that those amounts at least consumed by claims costs. The next layers up above the primary insurance undoubtedly were also substantially eroded if not consumed by claims costs as well.

 

My final observation about the $90 settlement on behalf of Greenberg with AIG is that this represents yet another jumbo settlement of a shareholders’ derivative suit. There was a time when a derivative lawsuit settlement involving substantial cash payments was very unusual, but in recent years substantial payment of cash in connection with the settlement of derivative lawsuits has become increasingly common.

 

In addition to the $115 million settlement of the prior AIG derivative suit, other large recent derivative lawsuit settlements include the $118 million Broadcom options backdating related derivative settlement, the $122 million Oracle settlement and the $225 million Comverse Technology options backdating related derivative lawsuit settlement. It is particularly noteworthy that all of these payments are outside the insolvency context.

 

One consequence of this outbreak of jumbo settlements in derivative lawsuits is that the possibility that Excess Side A insurance might be called upon to pay loss – even outside of the insolvency context -- seems to be increasing. Certainly these massive settlements provide increasing evidence for the value to insureds of these kinds of insurance structures, whether or not the recent AIG settlement did or did not actually involve contributions from Excess Side A insurers. The increasing numbers of derivative settlements involving large cash payments certainly underscores that the Excess Side A insurers are exposed to potential losses -- even outside of the insolvency context -- an exposure that actually seems to be increasing over time.

 

Special thanks to Jef Feeley for providing a copy of the August 26 agreement.

 

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

One side-effect from the oil slick spreading across the Gulf of Mexico following the blowout of the Deepwater Horizon oil rig, and a direct result of the massive economic and environmental damage it has caused, is the efflorescence of lawsuits from persons whose property or livelihood have been threatened or damaged by the spill. Given the magnitude of the damage and the extent of the ensuing litigation, it was perhaps only a matter of time before the expanding litigation wave came to include D&O claims too.

 

On May 7, 2010, a BP shareholder filed a shareholders’ derivative lawsuit (complaint here) against BP PLC, as nominal defendant, and 15 individual directors and officers, including Tony Hayward, BP’s CEO. The defendants also include Transocean Ltd. and related entities, the Deepwater Horizon’s rig owner; Cameron International Corp., which manufactured the blowout prevention devices that allegedly failed; and Halliburton Energy Services, which was installing cement casing on the well-head at the time of the explosion. The complaint also purports to name as defendants the third-party defendants’ insurers.

 

The complaint seeks recovery against the BP defendants for breach of fiduciary duty and corporate waste. The complaint alleges that despite numerous other prior safety and environmental concerns at BP the defendants "elected to cut costs, including safety and manufacturing expenditures in pursuit of profitable results, even lobbying regulatory authorities to "remove or decrease the extent of safety and maintenance regulation."

 

The complaint also asserts claims against the third-party defendants for contribution and constructive trust alleging that their misconduct was a "substantial factor in the disaster" and therefore they "should be held responsible for the effects of the disaster."

 

Among the damages to BP that the plaintiff alleges are the costs of $6 million per day that BP is spending to try to stop the leak and remediate its effects; BP’s required cleanup costs under federal and state statutory mandates; its exposure to lawsuits; as well as damage to BP’s reputation and good will, which as already resulted in a drop in BP’s share price.

 

There are a number of very interesting things about this lawsuit, particularly with respect to the claims against BP’s directors and officers.

 

The is that, in arguing that the BP board cannot objectively evaluate whether to bring the claims alleged in the complaint, the complaint explicitly references BP’s prior disasters, including the infamous 2005 Texas City, Texas refinery explosion and fire and the 2006 Prudhoe Bay oil spill. In particular this most recent complaint references the Prudhoe Bay shareholders’ derivative lawsuit filed against BP’s directors and officers, in which the defendants had (according to the latest complaint) agreed to "certain corporate governance changes at BP designed in part to prevent a recurrence of safety and maintenance problems at the company." (General background regarding the Prudhoe Bay lawsuit and its outcome can be found here.)

 

The Deepwater Horizon lawsuit complaint alleges that notwithstanding the commitment in the Prudhoe Bay litigation settlement agreement BP has "merely gone through the motions" to make the agreed upon changes, as a result of which the company has "not experienced one iota of improvement in its workplace and environmental safety." Elsewhere the complaint alleges that notwithstanding the severity of the safety concerns that led to this prior settlement that company has been "making purely cosmetic changes at the corporate level while ignoring the substance of the safety violations and the threat to" the environment as well as to "the Company’s own survival as a going concern."

 

Second, as another argument why demand on the current board should be excused, the complaint also cites the massive wave of litigation that has already been filed against BP in the wake of the Deepwater Horizon disaster. The complaint argues that the BP defendants "cannot reasonably be expected to defend BP itself against allegations of misconduct in [the other lawsuits] while simultaneously pursuing these claims" in the derivative suit "for the very same or very substantially related misconduct." Given the vast number of claims, the complaint contends, "it is not possible for the Director Defendants in this case…to impartially consider whether to bring these claims."

 

Third, the complaint, though filed in Louisiana, expressly references the standards identified in the British Companies Act of 2006, particularly the Act’s requirement in Section 172 that corporate boards ensure that their companies conduct operations with due regard for "the impact of the company’s operations on the community and the environment." This express reference to U.K. law is interesting given that the case is filed in Louisiana and highlights what may be one fundamental problem the plaintiff may face, as discussed further below.

 

Fourth the plaintiffs’ bid to join the third-party defendants’ insurers seemingly represents an attempt to take advantage of the fact that Louisiana is one of the few jurisdictions permitting tort claimants to bring so-called "direct actions" against their tortfeasor’s liability insurers.

 

Though the plaintiff’s complaint invokes the full-throated rhetoric of righteous outrage, it nevertheless faces certain hurdles that could shut the case down before it gets started.

 

The first of course is that the plaintiffs have not made the requisite demand on BP’s board to bring these claims directly on the company’s behalf. As noted above, the plaintiff has argued that due to prior litigation against BP and current Deepwater Horizon-related litigation now emerging, demand should be excused.

 

Setting aside the question whether or not demand is excused, there are other potential threshold hurdles. One that is amply illustrated in the complaint’s reference to the U.K. law noted above which is that BP is a U.K. corporation organized under the U.K.’s laws. BP will undoubtedly attempt to argue that the "internal affairs doctrine" dictates that the U.S. court should decline jurisdiction, so that these claims involving a U.K. corporation and U.K. law may be heard in U.K. courts.

 

The "internal affairs doctrine" was argued successfully by another U.K. corporation, BAE Systems, which successfully had derivative litigation in the U.S. arising from the company’s bribery scandal dismissed in reliance on the "internal affairs doctrine." Indeed, BP itself unsuccessfully raised similar arguments in the Prudhoe Bay derivative litigation.

 

The plaintiffs’ complaint attempts to anticipate these arguments. The complaint is full of explicit references to the myriad vital contacts between BP and the U.S. Among other things the complaint emphasizes that 39% of BP’s shareholders are located in the U.S. and that its energy production and capital expenditures are larger in the U.S. than in any other country. The plaintiff is clearly cueing up an argument that the circumstances uniquely affect the U.S. and its interests and therefore the case comes within an exception to the doctrine.

 

Where the BP derivative litigation may ultimately head remains to be seen. At a minimum, BPs directors and officers face the prospect of enormous expense defending against this litigation, and significant potential liability.

 

It should not be overlooked that this lawsuit represents yet another example of a company domiciled outside the United States facing a D&O claim in the U.S. courts. The susceptibility of non-U.S. companies to U.S.-based D&O litigation is a topic of recurring interest, among other reasons because of the securities law issues regarding the extraterritorial jurisdiction of the U.S. securities laws, of the kind raised in the National Australia Bank case now pending before the U.S. Supreme Court.

 

These questions of non-U.S. companies’ exposure to U.S. claims are also a topic of recurring interest to D&O insurers. The most obvious concern to insurers is the extent to which non-U.S. companies face threats of D&O litigation in the U.S. and therefore should be paying D&O premiums commensurate with the existence of the U.S.-based litigation exposure.

 

My final observation about the new BP lawsuit is that while I was reading the complaint I had the premonition that the BP derivative complaint may represent the precursor of the as-yet-unfiled but undoubtedly soon-to-arrive first D&O lawsuit based on global climate change related allegations.

 

The BP complaint’s allegations about the extent of the environmental and economic damage from the Deepwater Horizon oil spill, as well as the reputational harm to the company, and about management’s failure to anticipate and prevent the alleged harm, both to the spill victims and to the company, may prefigure the way the first global climate change lawsuit will be written (up to and including the tone of unrestrained moral outrage). The only thing missing is some event – or perhaps some alleged disclosure violation – and the existing environmental disaster derivative lawsuit template will be adapted for new global climate change derivative litigation.

 

Whether or not the litigation template is adapted to global climate change, the threat of environmentally-related D&O litigation undoubtedly will persist. Indeed, heightened concern and anxiety in the wake of the Deepwater Horizon disaster will only make this type of litigation more likely in the future.

 

A good overview of the litigation environment surrounding the oil spill and the general implications for the insurance industry can be found in a May 7, 2010 memo from Laura Foggen and Benjamin Theisman of the Wiley Rein law firm entitled "The Gulf Oil Spill: Considerations for Insurers" (here).

 

A May 10, 2010 Bloomberg article about the new BP derivative lawsuit can be found here.

 

Let Us Remember Justice Stevens – and The Bee, Don’t Forget the Bee: Everyone here at The D&O Diary is very interested in President Obama’s nomination of Solicitor General Elena Kagan to the U.S. Supreme Court. Press coverage in coming months undoubtedly will be filled with stories concerning her nomination and the confirmation process. Though attention is appropriately focused on the nominee, we think it is also appropriate to pause and consider the Justice she hopes to replace, John Paul Stevens.

We can think of no better place to being that in Ian Frazier’s piece, "Remember Justice Stevens" in this week’s issue of the New Yorker (here). Be forewarned, you may start to suspect that the article is going off the tracks right about the point where the author states: "A few minutes passed before Justice Stevens became aware of the bee under his shirt, just at the base of his neck."

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Various blogs and news articles expressed surprise and astonishment at the $2.876 billion judgment entered against Richard Scrushy in the HealthSouth state court derivative lawsuit, but a review of the June 18, 2009 memorandum opinion (here) that accompanied the final judgment shows that Jefferson County (Alabama) Circuit Court Judge Alwin E. Horn III actually ruled that the total amount of the damages to be the even more eye-popping amount of $3.115 billion. It was only the application of $239 million credit for judgments entered against other defendants that brought the number down to the $2.876 billion figure ultimately entered against Scrushy and other individual defendants.

 

It may well be wondered how on earth the court could have come up with these astronomical figures, whether before or after the application of the judgment credit. Part of the answer is the fraud itself, with Judge Horn described as “remarkable and perhaps unique in its duration, size and scope.”

 

 

Judge Horn’s opinion details what he describes as HealthSouth’s fraudulently reported net income during the period 1996 through 2002. The annual figures stated in the opinion, when added up, suggest that HealthSouth’s fraudulently reported net income exceeded its actual net income by over $3.138 billion.

 

 

However, Judge Horn’s damage calculation was not directly related to the massive scale of the fraud. Rather, it was calculated based on a variety of separate categories of damages including: excess bonuses paid to Scrushy ($10.4 million); amounts Scrushy gained on inside trades ($147.4 million); amounts the company spent on remediation, reconstruction and restatement of its financial records ($457.6 million); amounts the company spent during the period 2004 to 2006 on excess debt, consent fees, bond and credit payments as a result of the fraud ($1.147 billion);salaries and bonuses paid to fraud participants ($26.5 million); excess payments and loans to Scrushy-related enterprises ($260 million) and HealthSouth’s overpayment of taxes ($169.6 million).

 

 

These amounts, as staggering as they are, add up “only” to $2.2 billion. The total damages Judge Horn calculated reached $3.115 billion by the application of nearly one billion dollars in prejudgment interest. In determining the amount of interest, Judge Horn calculated the applicable interest rate in varying amounts over time, applying Delaware law and using the standard of five percentage points above the Federal Discount Rate, resulting in interest rates applied in some cases of as much as 10%.

 

 

Judge Horn’s opinion does not state whether post-judgment interest will also accrue, but presumably there are provisions for this interest under applicable law.

 

 

Whether or not further proceedings or appeals ultimately will substantiate all of these damage amounts and interest assessments, Judge Horn’s analysis represents a fascinating catalog of the harm caused to the company as a result of the fraud, as well as the ways that Scrushy himself profited. It should probably be noted that the possibility of an appeal may be complicated by the rather interesting question of how Scrushy could post an acceptable and adequate appeal bond.

 

 

Judge Horn’s opinion makes for interesting reading in other respects as well, particularly the ways that Judge Horn went about reaching factual conclusions despite having to deal with competing and conflicting testimony from witnesses he described as “six testifying felons.”

 

 

Among other things, Judge Horn relied on Scrushy’s own testimony in a prior case (the MedPartners case), in which Scrushy testified about what financial information a CEO must receive. Judge Horn described Scrushy’s testimony as an “unwitting confession,” because it showed that “for a fraud of even a billion dollars to occur over a period of years, the CEO had to know of the fraud.”

 

Assuming for the sake of argument that the massive judgment against Scrushy withstands further review, if any, the question will then become what if anything can be recovered on the company’s behalf. Though at one time he was a wealthy man, years of litigation and the panoply of claims against him undoubtedly have greatly reduced his former wealth. He may have a multibillion dollar judgment against him, but that does not make him a multibillion dollar man. Nor does it seem likely that the company’s recovery will ever remotely approach the amount of the judgment.

 

A June 19, 2009 Law.com article by Ben Hallman providing the backstory on the state court derivative lawsuit can be found here.

 

 

From Those Incredibly Large Amounts to Some Incredibly Small Numbers: After working with figures in the billions, it is hard focus on a dispute involving only very small fractions of a dollar, but that is what is involved in the securities class action lawsuit filed on June 18, 2009 in the Eastern District of Arkansas against Shearson Financial Network and certain of its directors and officers.

 

 

As reflected in the their June 19, 2009 press release (here), the plaintiff’s purported class action complaint (which can be found here) alleges that the defendants

 

caused a press release to be issued on May 7, 2009, that stated the Company had emerged from bankruptcy. In the press release, the Company used the ticker symbol, SHSNQ to identify itself, which was the ticker symbol belonging to the Company’s old stock which would ultimately be cancelled. However, at the time the Company issued the press release the stock listed under the ticker symbol SHSNQ was still trading and had not been cancelled. As a result of defendants’ false and misleading statements, Shearson’s securities traded at artificially inflated prices during the Class Period, reaching a high of $.039 on May 8, 2009.

On May 11, 2009, the Company issued a press release stating among other things that the stock trading under the ticker symbol SHSNQ would be cancelled and that Shearson’s new stock would trade under a different ticker symbol.

 

The complaint alleges that following the issuance of the May 11 press release the share price fell to $.0097 on trading volume of over 27.6 million shares. (That is, the share price decline three cents per share). Later, all shares traded under the symbol SHSNQ were canceled, meaning holders of those shares “were left with nothing but losses.”

 

The plaintiff, who bought his shares at $.039 per share on May 8, 2009, purports to represent a class of purchasers who bought the SHSNQ shares during the five-day period between May 7, 2009 and May 12, 2009.

 

I know that there have been class periods shorter than five days. But I suspect there have been very few classes brought on behalf of share price declines as small as three cents a share. I was unable to determine how many of the SHSNQ shares actually traded on the open market, but even assuming a three cent per share loss on all of the 27.6 million SHSNQ shares that traded on May 11, the market cap decline was $810,000. Obviously, not everyone selling bought their shares at the peak and some sold before the entire three cent share decline accumulated, so the actual losses on those trades is almost certainly quite a bit below that amount.

 

 

The relatively small amount in dispute is of course no reason to forebear from filing the lawsuit; however, the absence of any allegations of scienter of any kind, in combination with the small amount in dispute, would have been enough to discourage most self-interested plaintiffs’ attorneys from enlisting in this case.

 

More Bank Closures: After the close of business on June 19, 2009, the FDIC announced the closure of three more banks, bringing the year to date total number of bank closures to 40. The FDIC’s complete list of failed banks, including the latest three to be added, can be found here. The three banks all had assets under $1 billion dollars, continuing the trend of closures in the community banking sectors.

 

One of the three banks was located in Georgia, bringing the total number of Georgia banks to fail during 2009 to seven, and the total since January 1, 2008 to 12.

 

My recent overview of the growing number of bank closures and the implications for the D&O insurance marketplace can be accessed here.

 

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

In what is, according to news reports (here), the largest settlement to date in a shareholders’ derivative lawsuit in Delaware Chancery Court, four former AIG executives and former AIG managing general agent C.V. Starr today reached a $115 million settlement in the 2002 AIG derivative lawsuit.

 

The lawsuit was filed by the Teachers’ Retirement System of Louisiana in 2002 against AIG, as nominal defendant; certain former AIG directors and officers (many of whom were later dropped from the case); and Starr.

 

According to news reports (here), the plaintiff alleged that half of the $2 billion AIG paid C.V. Starr between 2000 and 2005 "represented sham commissions for work that, in some cases, was done by AIG employees." The lawsuit also questioned "why some executives were allowed to serve simultaneously as officers of C.V. Starr, a closely held insurance agency, while profiting from business between the two companies." The complaint also alleged that Starr gave the individual defendants bonuses on fees from AIG. In effect the complaint alleged that the commissions were a mechanism for the defendants to "line their pockets."

 

The case was scheduled to go to trial on September 15, 2008. The four settling individual defendants include former AIG Chairman and CEO Maurice Greenberg; former AIG CFO Howard Smith; former Vice Chairman of Investments Edward Matthews; and former director and Vice Chairman of Insurance Thomas Tizzio.

 

The vast bulk of the settlement -- $85.5 million – is to be paid by AIG’s D&O insurance carriers. A list of the carriers on AIG’s D&O program can be found here.

 

The more interesting question is where the remaining $29.5 million will come from. Some of the news reports give the impression that the individuals are funding the settlement. However, it appears that the individuals themselves are funding only a small portion of the remaining $29.5 million.

 

Greenberg’s counsel’s statements to the press (for example, here) are quite emphatic that Greenberg himself will not be contributing anything the settlement. One news report (here) does suggest that Tizzio "is expected to pay between $1 million and $5 million," Smith and Matthews "would pay very small amounts, if anything."

 

It appears that the bulk of the $29.5 million will be paid by C.V. Starr. According to Greenberg’s counsel, Starr "expects to contribute between $20 million and $30 million."

 

The details about who will be paying what seem surprisingly imprecise. In particular, the wide potential variance in Tizzio’s contributions seem odd to me, as even a wealthy individual generally would require a more precise determination of how many millions of his dollars are going to be required. Which makes me wonder whether perhaps Tizzio has an individual source of insurance that may be contributing on his behalf.

 

There are a variety of other odd features to this settlement, at least as it is described in the news reports, the most striking of which is that Tizzio apparently will be making a material settlement contribution but apparently Greenberg will not. To be sure, C.V. Starr, of which Greenberg is still Chairman and CEO, will be making a more than $20 million contribution, raising the question whether the amount of Starr’s contribution and the fact that Greenberg himself is not contributing to the settlement are linked.

 

And even with respect to C.V. Starr’s contribution, certain questions arise. For example, given the fact that some or all of the individual defendants apparently were also officers of C.V. Starr, is Starr’s D&O carrier funding some or all of Starr’s contribution to the settlement?

 

It should also be noted with respect to Starr’s payment to AIG that Starr is in fact AIG’s largest shareholder. As of July 15, 2008, Starr owned 10.5% of AIG’s outstanding shares, which represents Starr’s largest asset. Maybe that is just context, but it is an interesting context nonetheless.

 

I also have questions concerning the $85.5 million contribution from AIG’s D&O carriers. Beyond sheer curiosity about how much of AIG’s D&O insurance tower was depleted by defense expense, I also wonder whether the insurer’s settlement contribution to this derivative settlement drew upon the insurance program’s Side A coverage, which provides protection for nonindemnifiable loss. You would not expect the $85.5 million payment to AIG to be indemnifiable in the absence of insurance, so all else equal the amount would seem to represent a Side A loss. The same would also seem to be true with respect to the individuals’ own separate contribution to the settlement.

 

My question about which D&O policy coverage funded the settlement may require some context. Given the size of this derivative settlement, as well as other recent large derivative settlements (including, for example, the $50 million Hollinger derivative settlement), there seems to be a growing threat of very large derivative settlements, which is a relatively new development.

 

Many companies, particularly large financial services companies, often have D&O insurance programs built exclusively or predominantly of Side A-only protection. These kinds of programs have become increasingly common in recent years, but in general losses have really not yet caught up to this coverage to a significant degree.

 

The options backdating derivative cases presented the possibility of significant potential losses for these types of coverages, but it is my understanding that the Side A-only losses from these cases really have not yet significantly materialized. There has been speculation that the subprime litigation wave might also produce significant Side A losses, but those cases are only in their earliest stages yet, so the losses have yet to fully develop.

 

The possibility of derivative settlements of the magnitude of the recent AIG settlement may represent the most significant threat to these Side A programs and coverages, at least outside of the bankruptcy context. Which is why I am curious to know which policy coverage funded the AIG D&O insurers’ portion of the AIG settlement.

 

Finally, I am curious about how likely coverage issues were dealt with in connection with this settlement. I expect that the insurers would have raised the personal profit exclusion typically found in most D&O policies as at least a potential defense to coverage. I am guessing that the existence of this issue complicated the settlement process (or at least the insurers’ contribution to the settlement). The absence of a judicial determination that the individuals had improperly profited undoubtedly ameliorated this potential impediment. The individuals' desire to avoid any determination that might preclude coverage may have helped precipitate settlement on the eve of trial.

 

As always, I am interested if any readers can shed any light on the details. I am particularly interested details involved with the individuals’ contributions; around the extent of insurance funding for C.V. Starr’s contribution; and concerning AIG’s insurers’ contributions. Anonymity will be scrupulously protected.

 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Regular readers know that I have been tracking subprime-related class-action lawsuits (here). In a recent post, I noted my interest in trying to develop a similar list of subprime-related derivative lawsuits. In response to my request, a number of readers supplied helpful information, and as a result I have been able to develop a list of subprime-related derivative lawsuits, which can be accessed here.

The list is accurate but it may not be complete. Readers aware of any other subprime-related derivative lawsuits are encouraged to let me know, so that I can address any omissions. I will update the list as new lawsuits come in or as new information becomes available.

The table of cases I have compiled lists the companies that have been named as nominal defendants in shareholders’ derivative lawsuits. Some of the companies listed actually have been sued in multiple derivative suits, and some companies have been sued in multiple jurisdictions. However, where the allegations relate to substantially similar allegations, each company has only been listed once, regardless of the number of actual derivative lawsuits pending. Where I have been able to supply relevant links (in most cases to the actual complaint), the link pertains to the first filed suit.

As the list reflects, a total of 20 companies have been sued as nominal defendants in subprime-related derivative lawsuits. The derivative suits against seven of these companies were first filed in 2008, the rest in 2007. Most (but not all) of the companies named in the derivative suits have also been named in subprime-related securities class action lawsuits. Most of the companies sued in the derivative lawsuits are in the lending and banking industries, but the list also includes insurance companies, home builders, and REITs, among other.

Special thanks to Adam Savett of the Securities Litigation Watch (here) for providing information and links to several of the lawsuits, and thanks to all readers who provided information and suggestions in response to my inquiry.

Another Auction Rate Securities Lawsuit: On April 8. 2008, plaintiffs’ lawyers filed another purported securities class action lawsuit on behalf of auction rate securities investors against the companies that allegedly sold them the securities, in this case Raymond James Financial. A copy of the plaintiffs’ lawyers’ April 8 press release can be found here, and a copy of the complaint can be found here.

This brings the total number of auction rate securities lawsuits to eleven. My prior post discussing the auction rate securities lawsuits can be found here. I have been tracking the auction rate securities lawsuits as part of my running tally of subprime-related class action lawsuits, about which more below.

Adjusting the Subprime-Related Class Action Litigation Tally: Also as a result of my efforts to build the list of subprime-related derivative lawsuits, I received additional information regarding three previously filed securities class action lawsuits. In the past, I had determined that these three lawsuits were not appropriately categorized as subprime-related. However, upon further inquiry and based on conversations with some readers, I have now added these three additional lawsuits to my running tally of subprime-related securities class action lawsuits. The three added lawsuits related to Municipal Mortgage & Equity (about which refer here), WSB Financial Corp. (refer here), and CBRE Realty Finance (refer here).

With the addition of these three lawsuits, and with the addition of the Raymond James auction rate securities lawsuit referenced above, my running tally of subprime-related lawsuits now stands at 68. One unfortunate consequence of my decision to add these three cases is that now my running tally may no longer agree with others’ tallies, such as the Stanford Law School Securities Class Action website (here). There is an inherent categorization problem in trying to track the subprime lawsuits. Reasonable minds will disagree about whether a case is or is not appropriately categorized as subprime related. There are almost always going to be some disagreements at the margins.

Many thanks to the readers who supplied the information and commentary about the three class action lawsuits.

Subprime ERISA Lawsuit Update: As most readers know, I have also been tracking subprime-related ERISA lawsuits (here). As a result of my research and inquiries regarding subprime derivative lawsuits, I identified three additional subprime-related ERISA lawsuits of which I previously had been unaware. These three additional ERISA lawsuits pertain to Huntington Bankshares (refer here), National City Corp. (refer here), and Impac Mortgage (refer here).

With the addition of these three suits to my list, the number of subprime-related ERISA lawsuits now stands at 14, five of which have been filed in 2008, and the remainder of which were filed in 2007.

Two Options Backdating Case Developments: Two courts recently issued rulings on motions to dismiss in options backdating-related lawsuits.

First, on March 31, 2008, in the Juniper Networks option backdating-related securities litigation (about which refer here), Judge James Ware of the United States District Court for the Northern District of California largely denied the defendants’ motion to dismiss, except that he granted the motion (with leave to amend) as to one individual defendants, and he granted the motion to dismiss all alleged misrepresentations that took place prior to July 14, 2001, as time barrred. A copy of the March 31 order in the Juniper Networks case can be found here.

Second, and also on March 31, 2008, in the Microtune options-backdating related derivative litigation, Judge Richard Schiff of the United States District Court for the Eastern District of Texas granted the defendants’ motion to dismiss, albeit with leave to amend as to certain individuals on certain claims. A copy of the Microtune opinion can be found here. Judge Schell first concluded the Congress had not created a private right of action under Section 304 of the Sarbanes-Oxley Act, and dismissed that claim. Judge Schell also granted the dismissal with prejudice of claims of allegedly misleading proxy statements as to the individual defendants who were not on the board at the time of the proxy. The proxy allegations were dismissed without prejudice as to the remaining individual defendants. Similarly, the plaintiffs’ claims based on Section 10(b) were also all dismissed, but with prejudice as to some defendants and without prejudice as to others. The court declined to exercise jurisdiction over the plaintiffs’ state law claims.

I have added these two decisions to my table of options backdating related case dispositions, which can be accessed here. Readers are encouraged to let me know about case dispositions of which they become aware so that I can add them to the list.

Special thanks to Nick Even of the Haynes and Boone firm for the link to the Microtune decision.

New Century Updated: In an earlier post (here), I noted that the court had granted (with leave to amend) the defendants’ motion to dismiss in the first-filed subprime related securities class action lawsuit, involving New Century Financial Corporation. On March 24, 2008, the plaintiffs filed their amended complaint (here), which names as defendants not only certain former directors and officers of the company, but also the company’s former auditor, KPMG, and the company’s offering underwriters.

Readers will recall that in connection with the New Century bankruptcy proceeding, the bankruptcy examiner recently released a detailed report (about which refer here) in which, among other things, the examiner reviewed the question of the auditors’ and the company's directors and officers' potential responsibility for certain accounting practices and statements at the company. In light of the bank examiner’s report, the plaintiffs sought (and the defendants’ agreed not to oppose) leave to file a second amended complaint, which the court granted. The plaintiffs’ must file their second amended complaint by April 30, 2008. The court also set a briefing schedule for the anticipated motion to dismiss, to be argued September 8, 2008. A copy of the court’s order granting leave and setting the scheduling can be found here.

A German Securities Trial?: The Securities Litigation Watch has an interesting post (here) about the apparent mass securities lawsuits trial that has commenced in Germany involving Deutsche Telecom. An April 7, 2008 Business Week article discussing the trial can be found here.

• Email This
• Print
• Comments (2)
• Trackbacks
• Share Link

In the world of directors' and officers' liability, securities class action lawsuits dominate the dialogue. Securities lawsuits generate headlines and produce eye-popping settlements. There are even websites (refer here and here) devoted exclusively to providing the latest information about securities lawsuits. The same cannot be said for derivative lawsuits, but it has not always been that way. At least until 30 years ago or so, shareholders derivative lawsuits were the main vehicle for defining the duties of corporate directors and officers and establishing the standards of corporate governance.

A November 2007 law review article by Wisconsin Law School Dean Kenneth B. Davis, Jr., entitled "The Forgotten Derivative Suit" (here), takes a detailed look at the diminished role of derivative lawsuits and examines the ways in which derivative lawsuits nevertheless still matter.

The author begins with the view that until the mid-70s, courts, acting through derivative lawsuits, provided the principal means of corporate oversight. Over the last three decades, this role has shifted, principally to independent Board directors but to others as well. In analyzing derivative litigation's changing role, the author refers to historical analysis and prior research as well as to his own survey of 294 opinions involving derivative suits brought in federal and Delaware courts and involving Delaware corporations and issued between 2000 and the first quarter of 2007.

In Dean Davis's view, the two most important causes for the declining significance of derivative lawsuits is the judicial development of the demand requirement (and corresponding deference to independent directors) and the development of exculpatory statutes relieving directors of financial responsibility for many actions. These factors, the author finds, "have combined to marginalize the derivative suit for cases not involving self-dealing or other palpable breaches of the duty of loyalty."

In addition, a number of developments "began to supplement and supplant the derivative suit with respect to both of its recognized roles - compensation and deterrence." As for compensation, "securities and other class actions now perform many of the functions previously associated with the derivative suit." In addition, regulatory mechanisms (especially the SEC's enforcement program) and the threat of criminal prosecution 'have evolved to challenge the derivative suit's reputation as the chief regulator of corporate management." Moreover, as a result of a more vigorous business press and the publicity surrounding recent corporate scandals, "the stigma of corporate misconduct" also provides significant deterrence even in the absence of formal action. All of these mechanisms fulfill functions the derivative lawsuit would have provided in the past.

The author takes a particular look at the recent wave of options backdating derivative lawsuits (about which refer here), which he notes are "consistent with the critique that derivative suits simply piggyback on what the government (or perhaps the media) has already uncovered and investigated." In this circumstance, the derivative lawsuit can contribute to deterrence only if the government lacks resources and if the plaintiff is willing to follow through. He notes that "too often, however, the economic pressures facing the plaintiffs' attorney, coupled with the defendants' access to indemnification and insurance, leads to a quick and non-pecuniary settlement that supports the award of attorneys' fees but imposes little if any monetary cost on the individual defendant." (The latter point was underscored in the Wall Street Journal's November 19, 2007 article, here, discussing the outcomes of many of the options backdating cases.)

Notwithstanding these limitations on the continued meaningfulness of derivative lawsuits, there are still circumstances, the author concludes, when derivative lawsuits are likeliest to be valuable. The first involves "misconduct at smaller companies, whose shares are less actively traded" or not publicly traded at all, and where the misconduct "will be more likely to escape the awareness and the interest of governmental agencies and the media." The second involves "cases seeking the return of a substantial benefit" which "pose a greater threat of personal loss to individual defendants." In cases "challenging transactions between the corporation and those who control it" (which would tend to involve both smaller companies and personal benefit, both of the previously identified factors), "the derivative suit continues to make its most important contributions, both as a source of compensation and deterrence for the corporation's minority shareholders and as a public good."

The author, who clearly has devoted much time to studying and thinking about derivative lawsuits, bemoans their diminished role. He notes that:

There is no field manual, code of conduct, formal training or licensing body to spell out what directors ought to do in a specific situation....[Courts'] opinions are ... the raw material for a dialogue across the business and legal professions as to what should be expected of directors....One effect of the stricter demand requirements has been to reduce the volume of case law available to perform this culture shaping role.

As someone who has spent most of my professional career involved with directors' and officers' liability issues, I have always felt that derivative lawsuits are underappreciated, understudied, and poorly understood. Part of the reason for this is that there is relatively little centralized information about derivative lawsuits, especially by comparison to securities class action lawsuits. Dean Davis's article goes a long way toward helping to explain the role and significance of derivative lawsuits, and provides useful supporting data. The article helps to fill a significant void in the world of directors' and officers' liability.

Special thanks to Dean Davis for providing me with a link to this excellent article.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

On November 8, 2006, a sweeping bill affecting U.K. companies went into affect when the Companies Bill, which at 696 pages is Britain's longest piece of legislation, received royal approval. (The House of Lords site reflecting all information pertaining to the Bill may be found here.) The Bill contains a statutory statement of directors' general duties and extended authority for shareholders to sue directors for negligence, default, breach of duty or breach of trust - a broader range of conduct than under prior law.

The Bill's statutory statement of directors' general duties sets out seven duties:

• The duty to act within the company's powers;
• The duty to promote the success of the company;
• The duty to exercise independent judgment;
• The duty to exercise reasonable care, skill and diligence;
• The duty to avoid conflicts of interest;
• The duty not to accept benefits from third parties; and
• The duty to declare any interest in any proposed transaction or arrangement with the company.

The new general statutory duty to "promote the success of the company" is the most controversial clause in the Bill, and includes many considerations of which directors must now take into account - not only the long term business consequences of any decision, but also "the impact of the company's operations on the community and the environment." This new statutory duty requires directors to consider wider social responsibility factors when making decisions. The various statutory requirements may create obligations that conflict. But the decision of what constitutes the company's best interests will not be set aside if made in good faith and the directors have exercised reasonable care, diligence and skill.

The Bill extends existing shareholder rights to bring derivative claims. The new statutory procedure enables a shareholder to bring a claim with respect to any actual or alleged negligence, default, breach of duty (including the new statutorily codified duties) or breach of trust. A shareholder seeking to bring a claim must petition the court for the right to proceed, based upon a showing of good faith and taking into account whether the company decided not to pursue the claim. If leave to continue is granted, the company must reimburse the shareholder for brining the action; if not, the shareholder bears his or her own costs.

According to a detailed review (here) of the Bill by the Norton Rose law firm, the absence of the risk of costs if leave to pursue the derivative claim is granted "may make shareholders more likely to bring an action under the new procedure." The new right to bring an action for breach of any duty, including the new statutory duties, "provides another tool for use by activist shareholders to push for change at underperforming companies." But how useful this tool will be depends on "the court's willingness to exercise its discretion to intervene in what, in many cases, will be simply commercial decision making by the company, its directors and majority shareholders." In light of these considerations, the Norton Rose firm's memo suggests that "boards should review the wording of their D & O policies to ensure that defending derivative claims is covered."

A summary of other aspects of the Bill may be found at the CorporateCounsel.net, here.

A Private Conspiracy?: According to a November 15, 2006 Bloomberg.com article entitled "KKR, Carlyle, 11 Other Accused of Rigging Buyouts" (here), the law of Wolf, Haldenstein, Adler, Freeman & Herz has brought a purported class action accusing 13 private equity firms of rigging the market to take companies private. The complaint purportedly alleges that investors did not receive full value for their shares because of a conspiracy that violated antitrust laws. The purported class potentially represents tens of thousands of shareholders in dozens of deals in which public companies were taken private. Among the specific transactions named are deals involving Univision, HCA and Harrah's Entertainment. The list of defendants reads like a who's who in the world of private equity, including KKR, Carlyle, Thomas H. Lee Partners, Blackstone Group, Bain Capital, Apollo Management, Texas Pacific Group, and others.

Prior press reports had disclosed that the antitrust division of the U.S. Deparment of Justice in Manhattan is examing potential antitrust violations by private equity firms engaged in "club deals" to acquire public companies. An October 11, 2006 Wall Street Journal article entitled "Probe Brings 'Club Deals' to the Fore" can be found here (subscription required.)

Best Commercial Ever?: You decide. Roll the tape, here.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

In recent days, there has been extensive media attention (here and here) focused on the fact that plaintiffs' lawyers seeking to exploit the options backdating scandal are filing shareholders' derivative suits in preference to securities fraud class action lawsuits. Indeed, The D & O Diary's running tally of options backdating lawsuits (here) shows that only 16 companies have been named in securities fraud lawsuits, but over 70 companies have been named as nominal defendants in shareholders' derivative lawsuits. But while the observation that plaintiffs' lawyers are preferring shareholders' derivative lawsuits appears to be valid, this observation does not explain why plaintiffs' lawyers are so eager to file derivative lawsuits. Traditionally, derivative lawsuits have not been nearly as lucrative for plaintiffs' lawyers as securities fraud suits. So why are plaintiffs' lawyers preferring derivative lawsuits in connection with the options backdating scandal?

It may be supposed that recent trends in other recent derivative lawsuits' recoveries makes these suits more attractive to plaintiffs' lawyers now than perhaps they were in the past. The derivative lawsuit filed against the Hollinger board resulted in a $50 million settlement (here) - funded entirely by D & O insurance - and the Oracle derivative settlement resulted in Larry Ellison's payment of $100 million to charity, as well as his payment of the company's $22 million attorneys' fees. In addition, the existence of a derivative lawsuit was a "substantial factor" in the payment of $200 million in settlement of various litigation against AOL Time Warner. But there need to be numerous caveats around the purported value of the AOL Time Warner derivative settlement (see the prior D & O Diary post concerning the AOL Time Warner settlement here) and the Oracle settlement with its payment to charity rather than to the company requires a very big asterisk (and is probably a worthy topic of a separate post). The Hollinger settlement may be more apposite, but it may also represent an extreme case.

Whether or not these other settlements represent a trend that might be increaing plaintiffs' lawyers interest in filing shareholder derivative suits, the derivative lawsuits brought in connection with options timing allegations appear subject to numerous defenses or other practical limitations. To name but a few of the defenses and limitations:

Standing: For many of the companies involved in the backdating scandal, the period during which the alleged misdating took place covers a large swath of time, in some cases going back to the early or mid 90's. In order to have sufficient standing to pursue the derivative suit, a shareholder plaintiff will have to show continuous share ownership, at the time of the alleged wrongdoing as well as the at the time of the lawsuit. Some putative plaintiffs may satisfy this requirement, but not many, and most of the plaintiffs in whose name the options lawsuits have been brought lack the requisite standing (and for an additional comment about standing, see the note below about the Mercury Interactive shareholders' derivative lawsuit);

Statute of Limitations: The statute of limitations under Delaware law for shareholder derivative suits is three years. Shareholders' claims for alleged options timing misconduct more than three years' prior to the spring or summer 2006 (when most of the lawsuits were filed) may well be time barred. Plaintiffs' lawyers undoubtedly will seek to circumvent this bar by alleging concealment or some other excuse to stay of the limitations bar, but the whole point of a limitations statute is to avoid trying events from the distant past. The limitations period may well prove a substantial bar to many of the plaintiffs' claims.

Demand Requirement: In the race to the courthouse that followed the media frenzy surrounding the options backdating scandal, many of the plaintiffs' lawyers disregarded the derivative lawsuit filing prerequisite that the plaintiffs first demand that the board pursue the lawsuit on the corporations' behalf or present allegations to show why demand would be futile. The demand requirement is substantial and cannot be circumvented by mere conclusory allegations of futility; the plaintiff must plead with particularity why a majority of the board lack sufficient disinterest to consider the demand. This should be a particular burden in the many cases where the directors did not themselves benefit from the options timing. Moreover, where (as in most cases) the plaintiffs filed their suits without first pursuing a books and records request to obtain requisite factual information as a basis for their claim, a
dismissal based a failure to meet the demand requirement will be with prejudice;

Exculpatory Clause: Most corporations have adopted an exculpatory clause in their corporate charter, as permitted under Delaware law, precluding liability against the directors for breach of fiduciary duty except upon a showing of bad faith or disloyalty. Liability for mere breaches of the duty of care is waived under these exculpatory provisions. In most cases, the boards of directors of companies caught up in the backdating scandal were simply unaware of the backdating, and therefore allegations of wrongdoing amount to no more than alleged breached of the duty of care, the liability for which is precluded under the exculpatory clause.

To be sure, there are some companies with respect to which more substantial or active wrongdoing is alleged, and with to respect to which the derivative claim may be more substantial and perhaps potentially more lucrative for the plaintiffs' lawyers. But these claims amount to no more than a very small handful; almost all of the derivative complaints that have been filed are subject to the above defenses and other substantial defenses and limitations. It remains to be seen whether the flood of derivative lawsuits raising options timing allegations produces substantial value for the corporations on whose behalf the lawsuits have been filed, or for the plaintiffs' lawyers who filed the lawsuits. But the number and strength of the potential defenses makes the D & O Diary wonder: why are the plaintiffs lawyers filing all these derivative suits?

The D & O Diary is interested in readers' comments about the potential merits of the shareholders' derivative options backdating lawsuits.

Unique Standing Defenses in the Mercury Interactive Derivative Lawsuit: Among the companies involved in the options backdating scandal is Mercury Interactive, which also was named as the nominal defendant in a shareholders' derivative lawsuit brought by the Lerach Couglin firm. On July 25, 2006, while the derivative lawsuit was pending, Mercury Interative announced its acquisition by Hewlett-Packard. According to a September 11, 2006 story on Law.com entitled "H-P Deal May Kill Mercury Suit" (here), one of the individual defendants (who is represented by the Wilson Sonsini firm) has filed a motion to dismiss based on the argument under Delaware law that as a result of the H-P acquisition, the plaintiffs lack standing to assert the claim against the individual defendants. The only way the case can continue is if H-P decides to take it up on its own. The story has a definite "clash of the titans" feel to it, because the Lerach firm's response to the motion to dismiss is to contend that because of the Wilson Sonsini's firm's alleged involvement in the H-P board's brouhaha about its own Board investigation, Wilson Sonsini is or ought to be precluded from being involved in the Mercury Interactive lawsuit. Lerach's arguments based on the Wilson Sonsini firm's role with H-P probably indicates nothing so much as that the motion to dismiss is almost certainly meritorious, as mergers of this type generally divest plaintiffs of standing under Delaware law.

Thanks to Adam Savett of the Lies, Damn Lies blog (here) for the link to the Law.com article. (The comments about the case are strictly my own.)

Options Backdating Litigation Tally Update: The D & O Diary has updated its options backdating litigation tally (here) to add the new securities fraud class action lawsuit that has been brought against Aspen Technology (here). The addition of the Aspen Technology lawsuit brings the number of securities fraud lawsuits based on options timing allegations to 16. In addition, the number of companies sued in shareholders' derivative lawsuits is now stands at 71, with the addition to the lawsuit against Home Depot (here), THQ (here), and Witness Systems (here).

Request for Information: As previously noted on The D & O Diary (here), Lynn Turner, the former Chief Accountant at the SEC and now a managing director at Glass Lewis, testified on Capitol Hill on September 6, 2006. As part of his written testimony (here), Turner attached an appendix that listed the companies involved in the options backdating investigations. A column on the appendix purported to identify the companies that have been named in options backdating shareholder suits (but not differentiating between securities fraud suits and shareholders' derivative suits). There were some companies that were not identified in Turner's exhibit as having shareholder suits that have in fact been sued (e.g., Mattel), and there were others identified as having been sued that The D & O Diary simply cannot independently corroborate as having been sued. The companies that Turner lists as having been sued for which The D & O Diary can find no corroboration are: Amkor, Blue Coat, Boston Communications, Dot Hill, Molex, and Newpark Resoureces. Most if not all of these six companies have shown up on various plaintiffs' law firms' press releases as being "under investigation" but as far as I have been able to determine they have not actually been sued. The D & O Diary would greatly appreciate it if its readers could provide any further corroboration about the existence of lawsuits against these companies -- or any others that do not appear on The D & O Diary's list of options backdating lawsuits.

Special thanks to Michael Miraglia for a link to the Turner testimonial exhibit and to Bill Ballowe for his help in locating options backdating lawsuits.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

On May 12, 2006, the United States District Court for the Southern District of New York preliminarily approved the settlement of the consolidated derivative litigation filed on behalf of AOL Time Warner against 25 of the company's present and former directors and officers as well as other third party defendants. The various derivative lawsuits alledged that the defendants had breached their fiduciary duties in connection with the AOL/Time Warner merger. The settlement requires the company to undertake a wide variety of corporate governance reforms. A cursory reading of the settlement documents might also lead one to conclude that the settlement also involved a payment of $200 mm by the company's directors and officers insurance carriers in settlement of the derivative litigation, which would make this settlement by far the largest derivative settlement of which The D & O Diary is aware. However, a closer reading of the settlement documents reveals a more nuanced picture about the monetary portion of the settlement.

The Stipulation of Settlement filed with the Court states that on September 5, 2005, the derivative litigation plaintiffs made a policy limits demand under the Company's D & O Policy, and on September 7, 2005, "the Company was able to reach a settlement with its directors and officers insurance carriers pursuant to which the carriers will pay approximately $200 million in addional fund in connection with the securities and derivative claims listed in Exhibit D." Although the propinquity of the plaintiffs' demand and the insurers' settlment could be interpreted to suggest that the former caused the latter, that interpretation may be an illustration of the logical fallacy post hoc ergo propter hoc ("after this, therefore because of this"). By its own terms, the Stipulation states that the $200 mm payment under the insurance company settlement was in connection with both the derivative and the securities cases, not the derivative cases alone. Moreover, the referenced Exhibit D identifies 38 separate items of litigation in connection with which the insurance settlement had been made, including the SEC investigation, the DOJ investigation, the consolidated securities litigation, the ERISA litigation, and a very long list of many other items, including but definitely not limited to the derivative litigation.

Accordingly, it does not appear accurate to conclude that the $200 mm was paid just to settle the derivative litigation, or at least to settle the derivative litigation alone. Indeed, the parties never make that statement in any of the supporting documents. The documents state only that the "Derivative Actions were a substantial factor in the Company's ability to obtain an approximately $200 million insurance recovery." The settlement documents apparently are quite careful not to say how substantial of a factor the derivative actions were, or how substantial other factors (such as the $2.65 billion consolidated class action settlement) might have been.

The final settlement hearing in the consolidated derivative litigation is scheduled for June 28, 2006.

• Email This
• Print
• Comments
• Trackbacks
• Share Link