The D&O Diary

The D&O Diary


More About D&O Insurance Coverage for Subpoena Response Costs

Posted in D & O Insurance

law libraryAs I have previously noted on this blog, a recurring insurance coverage issue is whether or not the costs incurred in responding to a regulatory or enforcement subpoena represent covered defense under a D&O insurance policy. In an interesting March 27, 2014 memo entitled “D&O Coverage for Subpoena Response Costs: An Emerging Consensus?” (here), Benjamin D. Tiersky of the Orrick law firm takes a closer look at the recent case law and concludes that “there is a general trend emerging to recognize broad coverage for subpoena response costs under D&O policies.”


The costs of responding to an administrative, regulatory or grand jury subpoena can be very substantial, particularly in this era when so many documents are electronic or stored electronically. Given the magnitude of subpoena response costs, it is hardly surprising that those responding to the subpoenas seek to find insurance to pay for their incurred costs.


The principle point of dispute when questions arise as to whether or not a D&O insurance policy covers subpoena response costs are covered is the question of whether or not a subpoena is a “Claim” within the meaning of the policy. In contending that there is an “emerging consensus” that subpoena response costs are covered, Tievsky cites several recent cases in which courts have found that these a subpoena comes with the D&O insurance policy’s definition of “claim” because it represents a “demand for non-monetary relief.”


The author  refers in particular to the 2013 New York appellate court decision in a case involving Syracuse University and its costs incurred in responding to various subpoenas involved with investigations surrounding allegations against a former assistant basketball coach. The appellate court affirmed the trial court’s ruling that the insurer was liable for the university’s costs of responding to the subpoenas. The author also cites other cases where courts have found that a D&O insurance policy provides coverage for subpoena response costs, including at least case where a federal district court cited the Syracuse University case in finding coverage for the costs of responding to a NASA subpoena.


The author does note that while there may be a trend in the case law on the question of whether or not a subpoena is a claim within the meaning of the D&O insurance policy, questions may remain depending on the issue of who the subpoena’s target is and whether or not the subpoena is directed to an insured person or is directed to that person in an insured capacity.


The author also notes that issues may arise about which costs are covered. The author notes that insurers may take the position that they are only obligated to cover legal costs incurred in responding to the subpoena, but may dispute whether they must also cover indirect costs such as internal investigations relating to the subject matter of a subpoena, or costs relating to informal information requests relating to the subject matter of a subpoena.


In noting that “policyholders must be wary that with specific reference to D&O coverage of subpoena response costs” because “two leading cases come out opposite ways” on the question whether the policy must also cover indirect costs such as internal investigations relating to the subject matter of the subpoena or the costs of informal investigative responses. In support of this statement, the authors cites to the 2011 decision in the MBIA case (about which refer here), in which the Second Circuit held that costs incurred in voluntarily complying with investigative requests, as well as special litigation committee costs, are covered under a D&O insurance policy. The author contrasts the MBIA decision with the 2012 decision in the Office Depot case (about which refer here), in which the Eleventh Circuit held that the insured’s costs of responding to an informal inquiry were not covered under its D&O insurance policy.


Finally, the author notes that questions also remain as to whether “ancillary costs” that may arise when a company is subpoenaed – such as the costs associated with hiring a crisis management firm – are covered under the D&O insurance policy.




The author’s analysis is interesting and certainly there are grounds on which it may be argued that a consensus is emerging on the question of whether or not a subpoena is a claim for purposes of determining D&O insurance coverage. However, I think there are several important points that should be kept in mind when considering these issues.


First, the wordings of the policy definition of the term “Claim” vary substantially between policies and the precise wording used can be crucial. Often seemingly minor differences can be coverage-determinative.


Second, in addition to the wording of the policy, the nature of the subpoena involved may also be important. A court may well have a different perception of, say, a grand jury subpoena, compared to an administrative subpoena, for example.


Third, the typical D&O policy provides coverage for loss arising from a “Claim” based on an “actual or alleged Wrongful Act.” Whether or not a subpoena represents a “Claim,” there may still be a question whether an actual or alleged Wrongful Act is involved.


Fourth, the author is correct that the MBIA and Office Depot cases may represent contrasting reference points on the question of whether or not various investigative response expenses are or are not covered. However, the cases were not directly related to the specific question of whether or not subpoena response costs as such are or are not covered. In addition, as discussed here, while the MBIA case undoubtedly is helpful to policyholders, its usefulness may be limited by the case-specific and somewhat unusual fact that all of the disputed costs at issue in the case were incurred after the SEC had issued a formal order of investigation. Accordingly, the case may be less helpful in those circumstances when a formal order of investigation has not yet been issued.


Special thanks to the several readers who sent me a copy of the author’s memo.


Guest Post: BSA/AML Enforcement Trends and D&O Liability

Posted in Director and Officer Liability

NERA_horizontal_2945_4cIn the following guest post, Christopher Laursen, Senior Vice President and Chair, Financial Institutions and Bank Practice at NERA Economic Consulting, takes a look at the current enforcement trends involving the Bank Secrecy Act and the Anti-Money Laundering regulations. I welcome guest submissions from responsible persons on topics of interest to readers of this blog. If you are interested in submitting a guest post, please contact me. Here is Chris’s guest post:



 Following HSBC Holdings plc’s December 2012 admission to facilitating the laundering of $881 million in drug cartel monies and violating federal sanctions, members of Congress have pressed regulators to hold individuals accountable for systematic violations of Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations. Recent enforcement trends and public statements suggest that regulators, who were already shifting towards a stricter enforcement trend by levying large corporate monetary penalties, have responded with increased scrutiny for directors and officers failing to address alleged BSA/AML compliance shortfalls. In March 2014 statements before the Association of Certified Anti-Money Laundering Specialists (ACAMS), regulators indicated that they intend to hold individuals accountable for violations as part of this broader shift toward stricter enforcement.


Members of Congress have repeatedly raised the issue of individual accountability for AML compliance violations. In October 2013, House Democrats introduced a bill making bank executives, officers, and directors personally liable for BSA/AML violations. The “Holding Individuals Accountable and Deterring Money Laundering Act” would also grant FinCEN, the federal regulator directly responsible for enforcing BSA/AML compliance, expanded power to litigate independently of other regulators. The bill was referred to the Subcommittee on Crime, Terrorism, Homeland Security, and Investigations on January 9, 2014.


Undersecretary of the Treasury for Terrorism and Financial Intelligence David S. Cohen stated before the Senate Committee on Banking that under his direction, FinCEN is looking at ways to bring monetary penalties and industry participation injunctions against individuals for BSA violations. Comptroller of the Currency Thomas J. Curry has echoed FinCEN’s focus on responsibility, and repeatedly stated that the OCC was looking into holding individuals accountable for violations. He reiterated this goal in a focused speech before ACAMS in March 2014, suggesting that a stricter enforcement paradigm targeting individual accountability might emerge in the near future. In each of these statements, bank D&O were mentioned as a class facing increased scrutiny from an individual liability perspective.


The general trend toward stricter enforcement is evident from recent enforcement actions against financial institutions. Federal regulators levied nearly $5 billion in monetary penalties against financial institutions in connection with alleged violations of BSA/AML regulations since 2007. According to analysis by NERA Economic Consulting in the white paper “Recent Trends in BSA/AML Enforcement and Litigation,” two-thirds of all formal enforcement actions since 2012 have included monetary penalties, compared to only one-third from 2007 through 2011. Moreover, more than four-fifths of the approximately $5 billion in monetary penalties imposed since 2007 have been levied since 2012. This regulatory emphasis has persisted despite reportedly enhanced BSA/AML compliance efforts by financial institutions’ compliance personnel, directors, and officers, including a 38% increase in filings of Suspicious Activity Reports (SARs) since 2006.

  Figure 3


Regulators’ enforcement practices have shifted paradigms from the financial crisis and its aftermath through the present. From 2007 through late 2009, a period in which many financial institutions struggled to maintain liquidity and capital ratios, regulators typically issued cease and desist orders with no pecuniary levies. No BSA/AML monetary penalty exceeded 1% of a financial institution’s total equity capital in that period.  This stance may have been, in part, an effort to avoid placing further strains on institutions weathering the financial crisis. From late 2009 onward, however, regulators shifted to a more aggressive enforcement paradigm and pursued enforcement actions against financial institutions for both larger dollar amounts and larger proportions of total equity capital. The increasing trend in the penalties assessed as a share of total equity capital—conditional upon an enforcement action—has been striking.


Figure 4



As part of this aggressive enforcement paradigm, FinCEN added a stand-alone Enforcement Division in June 2013 in a major internal reorganization, and FinCEN also started placing emphasis on corporate and individual responsibility with respect to BSA/AML compliance. While historically, financial institutions that were the subject of enforcement actions were typically able to consent to monetary penalties without admitting or denying the alleged wrongdoing, FinCEN Director Jennifer Shasky Calvery has made clear in multiple speeches since 2013 that this practice is deliberately changing. This emerging trend in admitting responsibility in response to enforcement actions both increases the liability risk for D&O and widens avenues for private litigation against financial institutions and their D&O.  


Bank D&O are ultimately responsible for ensuring that a bank maintains an effective BSA/AML compliance program, which must be approved by the board of directors and noted in the board minutes. The compliance program must provide for four minimum requirements: 1) a system of internal controls to ensure ongoing compliance; 2) independent testing of BSA/AML compliance; 3) designation of an individual or individuals responsible for managing BSA compliance; and 4) compliance training for appropriate personnel. In addition, notification of SARs filed must be regularly presented to the board of directors and documented in the board minutes.


A number of enforcement actions have assessed personal monetary penalties against bank D&O over the past few years. In February 2009, the directors of Sykesville Federal Savings Association were collectively fined $10,500 in non-reimbursable civil money penalties for multiple violations of a consent order to cease and desist. In January 2013, the OCC levied civil money penalties against five D&O of Security Bank for up to $20,000 per person in connection with violations including failure to ensure an effective BSA compliance and SAR reporting system. In September 2013, the Justice Department charged the CEO of Public Savings Bank with criminal failure to file a SAR and maintain adequate AML controls in connection with an $86,400 wire transfer of suspected drug money.


Though bank directors and officers are often covered by D&O liability insurance, for the past several years the Federal Deposit Insurance Corporation (FDIC) has taken an increasingly strong position that a financial institution’s insurance policies may not indemnify D&O for civil money penalties. In 2011, the FDIC cited several financial institutions for D&O liability insurance policies that covered civil money penalties, and in October 2013 the FDIC published a Financial Institution Letter explicitly prohibiting insured depository institutions or their holding companies from purchasing insurance policies that would indemnify institution-affiliated parties against civil money penalties.


The shift toward individual accountability for BSA/AML violations has sparked some concerns that qualified personnel might avoid compliance or D&O positions at banks due to the risk of personal liability, especially due to the prohibition on institution-provided D&O civil money penalty insurance coverage. Comptroller Curry attempted to assuage such concerns in his March 2014 address before ACAMS, stating that increased D&O accountability “doesn’t mean that a senior executive in New York, for example, should be held responsible if an account officer in South America decides to turn a blind eye to suspicious transactions.” Curry also clarified that his focus would be on major, systemic violations, by assuring ACAMS that the regulatory focus on individual accountability “doesn’t mean penalizing honest mistakes or errors in judgment or even minor failures in compliance.”


While many experts and financial journalists have expressed concern that qualified individuals will nonetheless shy away from BSA/AML compliance positions as a result of a focus on individual accountability, some see this very public expression of regulatory intent as a means of forcing bank executives and boards of directors to prioritize compliance, in order to provide more support to compliance officers. Since compliance does not create revenue, regulators and bank compliance personnel have both expressed the sentiment that tough talk and even enforcement “catastrophes” by regulators are sometimes required to shift management’s attention to compliance matters. Seen through this lens, regulators’ recent comments suggest that they do not believe bank D&O are currently allocating sufficient attention or resources to BSA/AML compliance, and may feel the need to make a few examples.


Many financial institutions have responded to stronger BSA/AML enforcement with enhanced compliance programs, a substantial increase in SAR filings, and so-called de-risking of customer portfolios. De-risking, a potentially costly compliance response, involves the purposeful closing of financial relationships with groups of customers or lines of business considered high risk under BSA/AML standards. Before de-risking a group of customers or a line of business, banks must compare the benefits of potential revenue from existing business arrangements against potential compliance risk costs.


Regulators have generally encouraged increased SAR filings as the best relatively inexpensive way to reduce compliance risks for financial institutions. Institutions have responded to this impetus: the number of SARs filed with FinCEN has grown nearly thirty-fold since 1996, when the SAR was introduced, and nearly five-fold since 2002, the first year the Patriot Act’s Title III expansion of BSA/AML requirements was in effect, according to FinCEN’s SAR Activity Review – By the Numbers. However, some regulators and law enforcement personnel have criticized what they term “defensive” SAR filings, which allegedly report a large number of transactions with low levels of detail included in each report. Regulators have initiated multiple enforcement actions against financial institutions for allegedly insufficient or incomplete SAR filings, likely to incentivize banks to report additional context in each SAR filing.


Partial compliance with relevant regulations is not enough to avoid regulatory action. The JPMorgan Chase & Co. (JPMC) settlement from January 2014 in particular reveals the broad scope and long look-back of recent enforcement actions. JPMC admitted and accepted responsibility for violations of the BSA during the period between 1996 and 2008, including failure to file SARs in connection with its relationship with Bernard Madoff and his Ponzi scheme and failure to maintain an effective AML program. However, in the deferred prosecution agreement, supervisory agencies acknowledged that JPMC filed a timely British SAR on Madoff, but seemingly sought to emphasize that meeting foreign reporting obligations did not satisfy US BSA/AML regulatory requirements.


The increasing magnitude of regulatory and private challenges to BSA/AML compliance has come with increased costs to financial institutions. According to the 2014 Global Anti-Money Laundering Survey, average AML compliance costs for financial institutions have grown at a rate of at least 40% every three years since 2002, and by 53% over the most recent three year period. It is expected that the costs of compliance, regulatory enforcement actions, and private lawsuits will continue their increasing trend. As legislators and regulators have specifically stated their desire to hold D&O accountable for AML violations, and as regulators bar institution-provided liability insurance from indemnifying D&O, it may also be expected that their personal liability risks will increase accordingly.



Author: Christopher Laursen

Senior Vice President

Chair, Financial Institutions and Banking Practice

NERA Economic Consulting

tel: +1 202 466 9203


Mr. Laursen is a Senior Vice President and Chair of NERA’s Financial Institutions and Banking Practice. He is a leading expert in financial products, markets, risk management, and financial regulation. He has served as an expert witness in numerous litigation matters and has provided consulting and advisory services for both public and private sector clients. Prior to joining NERA in 2009, Mr. Laursen served as a banking company policy-maker, supervisor, and examiner for 17 years with the Federal Reserve Board, Regional Federal Reserve Banks, and the Office of the Comptroller of the Currency. He has extensive expertise in anti-money laundering compliance, fraud reviews, credit underwriting, and trading activities, and has served as an expert witness and consultant in matters dealing with BSA/AML.

The Travel Issue: Stockholm Edition

Posted in Travel Posts

150aThe D&O Diary’s European mission continued last week with a stop for meetings in Stockholm, Sweden’s beautiful capital city and the largest city in Scandinavia. I know from experience that the weather in Europe in March can either be great or it can be awful. Just the same, I couldn’t have predicted the weather in Stockholm last week. The word that comes to mind is – magical. For three straight sunny days, the temperatures were in the 60s, with crystal clear blue skies and only the gentlest of breezes.


Let’s put this weather into perspective. At 59 degrees north latitude, Stockholm is really far north.  By way of comparison, Moose Jaw, Saskatchewan is only at 50 degrees north latitude. While I was actually getting a little sunburned in Stockholm, it snowed – twice – back home in Cleveland (located at 41 degrees north latitude). The funny thing is, I had several different conversations with locals who were upset because the winter in Stockholm was so awful – no snow! It hardly even got cold this winter! And Spring, in March? What’s up with that? (Stockholm is also further east than you might think. Stockholm is at 18 degrees east longitude; Berlin, by comparison, is at 13 degrees east longitude. Stockholm is both the furthest north and – excepting only Asia – it is the furthest east I have ever traveled.)


Stockholm has the essential charm, character and history you would068a expect of a venerable European capital city. But there is also something about its location on the Baltic Sea that in my mind makes Stockholm distinct, almost exotic. Stockholm is wreathed in water. With the brilliant blue skies and the waterfront buildings reflecting off the water’s surface, there were times during my visit when the city itself seemed to be floating on the water (as reflected in the picture at the top of this post).  And as a by-product of Sweden’s now centuries-old pacifist history, its architectural legacy is unusually well preserved. 


074aStockholm has a population of about 1.3 million, roughly the size of San Diego –but comparisons to the American city (or really to any city) are difficult because of the way Stockholm is arranged. Its physical area is one-third water and one third-parks. As a result, the city’s texture is surprisingly varied. Gamla Stan, the city’s extraordinarily intact old town, is laced with narrow, cobble-stone alleyways and full of shops and restaurants. The Baltic Sea connects to Lake Mälaren through a series of locks where Gamla Stan links to Södermalm, the city’s densely populated southern island. During my visit, I made my way to Tantolunden, one of the city’s many huge parks, on Sodemalm’s southern side. A collection of small holiday houses sits along a south-facing hillside in the park, each with its own garden (pictured below). The warm sunshine had drawn out each garden’s early spring flowers in a colorful profusion of crocuses, snowdrops and daffodils.   








As enjoyable as it is to walk around the city, the necessity for using public transportation quickly became apparent. I am a big fan of using public transportation when I travel, but I have to admit that had to work up my nerve to use the Stockholm subway (Tunnelbana). The city transit map looked like a colorful bowl of spaghetti. And then there are the station names – well, they are all in Swedish. None of the station names are pronounced the way they look. One of the stations with a relatively simple name near my hotel was “Hötorget,” which is pronounced “Heur-tor-jeh(t)” (sort of). But I managed to overcome my trepidation. It turns out the system is relatively easy to use and quite efficient. The subway system has also been called the world’s largest underground art gallery; many of the stations are dazzlingly colorful.


On Saturday, I was confident enough in my mastery of the transit system026a to take the Tunnelbana to Drottningholm Palace, the Swedish royal palace and residence of the current monarch, King Carl XVI Gustaf of Sweden. Regrettably, I did not see the King while there, nor any other member of the royal family. The palace is beautifully situated on the water and within immense parklands, but during my visit the trees and formal gardens were still in their winter dormancy. Further away from the actual palace itself, the park walkways were quite deserted. The woods and gardens had a quiet, austere beauty. I can only imagine how spectacular the grounds are in the summer months.


077aaThere is another palace in the city center, known simply as the Royal Palace (Kungliga Slottet), within Gamla Stan, across from the Parliament Building. This palace apparently is no longer used as a residence; I was told that this one is where the King works. Which made me wonder, what kind of “work” does a king do? I picture King Carl answering his email, putting together a spreadsheet listing his various palaces, and sending text messages to the other European royalty (say, to Prince Charles: “Sup dog? When u gonna b king???”)


There are a lot of great reasons to visit Stockholm, but one of the best is the food. I had several great meals there. For example, I had a terrific Asian fusion meal one night in an unusual food court near my hotel, called K25. (The name is a reference to the food court’s street address, Kungsgatan 25.) The basic idea of the place seems to be casual dining as theater. There are eleven food vendors in the center of the hall, and along the back wall is stadium style seating, affording an agreeable view of the food court scene. This perspective allowed me to observe that I was easily double the age of just about everyone in the place.


001aI did also enjoy some traditional Swedish food, as well. On my first night in Stockholm, I traveled by ferry with several industry colleagues to Restaurant J, a beautifully situated waterfront restaurant, where I enjoyed a plate of reindeer carpaccio, served with cloudberries and beets. And on Friday night, I had a traditional Swedish meal at Gunnels Krog, a small restaurant in Gamla Stan. For my main course, I had – wait for it – Swedish meatballs (pictured), made from moose meat and served with ligonberries, pickles, and cauliflower, with a bowl of potatoes on the side. I am not sure what kind of wine Hugh Johnson would recommend with moose meat, but I had a nice Côtes du Rhône. I also enjoyed the opportunity to chat with the restaurant’s charming proprietress, Gunnels Angberg, who is one of those special people who manages to show that she absolutely loves what she does and that she wants to share it with everyone. It was a truly memorable meal.


I want to thank Sverker Edstrom and Carl Bach of Navigators for inviting me to Stockholm to participate in their very successful broker event. Stockholm is a terrific place and I am grateful to have had the opportunity to visit.


I know I got lucky with the weather. I took advantage of it. I think I walked a couple of dozen miles in Stockholm and I took hundreds of pictures. I have set out a small sample of them below.












































I know that it is very immature of me, and perhaps even ignorant, but I found some of the Swedish words and phrases to be funny.


























Cornerstone Research Releases 2013 Securities Class Action Settlements Analysis

Posted in Securities Litigation

cornerOwing to a number of larger settlements, the average securities class action settlement amount in 2013 rose, while at the same time the media settlement amount declined, according to a study of the securities suit settlements from Cornerstone Research. The study also reports that the number of settlements and the aggregate dollar value of all settlements also rose during the year. The report, which is entitled “Securities Class Action Settlements: 2013 Review and Analysis,” can be found here. Cornerstone Research’s March 27, 2014 press release about the study can be found here.


According to the report, there were 67 securities class action settlements that received court approval during 2013 (up from 57 in 2012). The aggregate dollar value of the 2013 settlements was $4.773 billion, which represented a 46 percent increase over 2012 and which also was the highest annual total dollar value over the last six years.


The average settlement amount during the year was $71.3 million, compared to the average securities class action settlement during the period of $55.5 million between 1996 and 2012. (All settlement dollars are adjusted to account for economic inflation.). The increase in the aggregate and average settlement amounts during 2012 was largely a reflection of the number of “mega settlements” (i.e., settlements over $100 million). There were six mega settlements during 2013, which was the second highest proportion of those large settlements in the last ten years. The number of large settlements during the year was in part due to the resolution of several credit crisis-related lawsuits. These six mega settlements accounted for 84 percent of the total dollar value of the 2013 settlements.


While aggregate and average settlement values increased during 2013, the median settlement amount declined. The median settlement value in 2013 was $6.5 million, compared to a median settlement amount during the period 1996-2012 of $8.3 million. The decrease in the median during 2013 was a result of the high number of smaller settlements – approximately 60 percent of the cases that settled in 2013 were resolved for $10 million or less. About a third of these smaller settlements related to cases involving Chinese reverse merger companies (all but one of the Chinese reverse merger cases that settled in 2013 were resolved for less than $10 million).


The report includes a graphical illustration (Figure 4 in the report) showing a cumulative ten-year settlement distribution. According to the illustration, 55.5% of all cases were settled for $10 million or below, 78.8% of cases were settled for $25 million or below, and 87.4% of cases were settled for $50 million or below.


A separate illustration (Figure 7) shows median settlements as a percentage of “estimated damages” during the preceding ten years. The illustration shows that median settlements as a percentage of these estimated damages have fluctuation over time but have remained in the roughly 2-3% range during that period. During 2013, the figure was 2.1%, which was level with 2011 but up slightly from 2012 (when the figure was 1.8%). An accompanying figure shows that these percentages decrease as the size of the settlement increases. For settlements under $50 million, the percentage in 2013 was 15.1%, while for settlements over $250 million, the percentages were 2.0% or lower.


Over the last ten years, the median settlement value of cases that allege only ’33 Act claims ($3.4 million) is lower than for cases that allege only ’34 Act claims ($8.8 million) or that allege both ’33 Act and ’34 Act claims ($6.8 million). This difference is a reflection of the fact that the “estimated damages” for ’33 Act claims tends to be lower than the two other categories of cases.


The study also shows that cases involving alleged GAAP violations, restatements or reported accounting irregularities all tend to be associated with higher settlement amounts and tend to settle for a larger percentage of “estimated damages” than cases without those allegations. Similarly, cases involving third-party codefendants, such as an auditor or underwriter, often are larger and more complex cases and have a higher settlements as a percentage of “estimated damages.”


Over 55 percent of settlements since 2006 have had an institutional investor as lead plaintiff. Possibly because the cases in which the institutional investors tend to get involved are the larger or more serious cases, the settlements in cases involving institutional investor lead plaintiffs are larger than for other cases. The median settlement in 2013 for cases with a public pension as a lead plaintiff was $23 million, compared with $3 million for cases without a public pension lead plaintiffs.


Settlement amounts for class actions accompanied by derivative actions are significantly higher. In 2013, 40 percent of settled cases involved an accompanying derivative action, compared to 32 percent of settled cases during the period 1996-2012.  


Cases involving a corresponding SEC action are associated with significantly higher settlement amounts and have higher settlements as a percentage of “estimated damages.” The median settlement amount for cases with an accompanying SEC action for the period 1996-2013 was more than two times the median settlement for cases without an accompanying SEC action. Settlements of $50 million or lower are far less likely to involve corresponding SEC actions or public pensions as lead plaintiffs.


The report does note that the Halliburton case now pending before the U.S. Supreme Court “has the potential to dramatically affect the entire landscape surrounding securities class actions, “ including the considerations relating to settlements discussed in the report, including, in particular “the settlement amounts involved.”

Guest Post: The Real and Ugly Facts of Litigation Funding

Posted in Litigation Financing

U.S. ChamberAs I have previously noted on this blog, one of the more noteworthy recent litigation developments has been the rise in litigation financing in the U.S. The presence and effect of litigation financing remains controversial, at least in certain quarters. In the following guest post, Lisa Rickard, the President of U.S. Chamber Institute for Legal Reform, presents her perspective on third-party litigation funding and the dangers that in her view it represents for our legal system and processes.


I welcome guest post submissions from responsible commentators on topics of interest to readers of this blog. The views expressed in guest posts are those of the post’s author(s). Readers who are interested in submitting a guest post should contact me directly. Here is Lisa’s guest post:


             Third-party litigation funding, the practice by which outsiders fund large-scale litigation, has received substantial attention in recent months as litigation financers have sought to legitimize their business as a valid part of the U.S. legal system.  But the notion that litigation financing is a mechanism for promoting justice is, at best, naïve, and at worst, disingenuous.  In reality, litigation financing is a sophisticated scheme for gambling on litigation, and its impact on American companies is unambiguous:  more lawsuits, more litigation uncertainty, higher settlement payoffs to satisfy cash-hungry funders, and in some instances, even corruption. 


            The ugly side of litigation financing was recently revealed in a ruling by federal Judge Lewis Kaplan in Chevron Corporation v. Donziger, Chevron’s federal civil-racketeering suit against Steven Donziger, lead plaintiffs’ lawyer in the infamous Lago Agrio lawsuit against Chevron.  Lago Agrio was a mass-tort environmental-contamination lawsuit brought by Donziger, purportedly on behalf of Ecuadorians who had been harmed by Texaco’s former oil exploration and production operations in Lago Agrio, Ecuador.  Donziger and his co-counsel prosecuted the suit in part with the help of a $4 million investment by the Burford Capital financing firm, which made its investment in exchange for a percentage of any award to the plaintiffs.


            In February 2011, the Ecuadorian trial court awarded the plaintiffs an $18 billion judgment (later reduced to $9 billion) against Chevron.  Shortly afterward, Chevron sued Donziger for civil racketeering for procuring the judgment fraudulently.  In his March 4 opinion, Judge Kaplan found that the “decision in the Lago Agrio Case was obtained by corrupt means.”  Judge Kaplan also lamented the plaintiffs’ lawyers’ “romancing of Burford,” which the court found led plaintiffs’ counsel to adopt a litigation strategy designed to maximize plaintiffs’ ability to collect on any judgment – rather than focus on securing a judgment ethically and honestly – by multiplying proceedings against Chevron in several jurisdictions to harass it and increase its defense costs.


            Fortunately, many American companies have grown highly skeptical of third-party litigation financing.  In fact, a recent survey by Buford Capital found that only 2% of in-house counsel are using litigation funding.  Presumably, that is because they recognize that funding more litigation in what is already the world’s most litigious country is not in the interests of the business community or the American economy.


            Nonetheless, I frequently hear from proponents of third-party litigation finance that litigation funding companies are in high demand by major law firms who are seeking partners to invest in litigation.  While that may be a profitable model for plaintiffs’ firms, law firms with corporate clients that partner with litigation funders to finance plaintiff litigation do so at the peril of undermining the interests of their clients.  This is so because litigation funding arrangements not only increase litigation and litigation costs, but they erode long-term relationships between law firms and institutional clients by requiring the law firms to advance positions that will put their long-standing corporate clients at risk. 


Even more troubling is the fact that much of the litigation finance industry is unregulated and even unseen.  The U.S. Chamber Institute for Legal Reform will propose an amendment to the Federal Rules of Civil Procedure that would mandate the disclosure of third-party litigation funding arrangements at the outset of civil litigation.  If adopted, the amendment would shine much-needed light on the practice of litigation funding and mitigate some of the abuses that result from this practice. 


            The growth of third-party funding in litigation has made it increasingly difficult to uncover whether the funding company in a given case is calling some or all of the litigation-related shots for the plaintiff.   This uncertainty creates acute problems when it comes to settlement negotiations.  A party that must pay a third-party funder out of the proceeds of any recovery may be inclined to reject what might otherwise be a fair settlement offer in the hopes of securing a larger sum of money.  Disclosure of litigation funding arrangements would curtail this problem, revealing the funder’s presence as a player in the settlement process, garnering more informed litigation decisions by parties on both sides, as well as the judge, who plays an important role in facilitating settlement.  Disclosure of litigation funding would also ensure that judges and jurors do not participate in litigation in which they have a financial interest.


            Disclosure is an important first step, but other steps must be taken to minimize the impact of litigation funding on our system of justice.  For example, funders should be prohibited from exercising any control over litigation in order to protect the attorney-client relationship and minimize ethical risks; and funders should be on the hook for the other side’s legal expenses if a lawsuit they promoted and financed fails.  These common-sense regulations would not solve all the problems posed by litigation financing, but would help minimize them.


No matter how much its proponents try to dress up litigation funding, the reality is not pretty:  litigation funders meddle in litigation, turning a profit for themselves at the expense of the parties to litigation, attorney-client relationships and the integrity of the U.S. judicial system.  That is not a business model the Chamber can support.  The Chamber is, and always will be, a champion of free enterprise.  But third-party funding in litigation is antithetical to all notions of free enterprise; it is an exercise in coercion using the civil justice system.  Funders pursue windfall profits by forcing businesses into a very expensive litigation process (including costly discovery) and pressing for substantial settlements.  In order for American businesses to thrive, we need a reliable, predictable judicial system with judgments all of us trust as impartial and administration focused on deciding the rights of parties.


The author is President of the U.S. Chamber Institute for Legal Reform.

The Travel Issue: Copenhagen Edition

Posted in Travel Posts

118aThe D&O Diary is on assignment in Europe this week, with the first stop in the Danish capital city of Copenhagen, for meetings there. Copenhagen has a population of about 1.2 million spread across its many neighborhoods and boroughs but perhaps owing to the height restriction on its buildings, the city feels much smaller, even cozy. In 2013, Monocle magazine selected Copenhagen as the world’s “most livable city,” and after just a short visit, it is easy to see why. With its many parks, canals and quiet charm, Copenhagen is a very comfortable city.  


Copenhagen is also unmistakably a Northern city, and in late March, the weather arrives in two forms: chilly sunshine and chilly rain. Fortunately for me, though I got soaked to the skin my first afternoon there, sunshine otherwise prevailed. In addition to a good coat and a scarf, a pair of thick-soled boots is also required for tromping around on the city’s cobblestone streets and sidewalks.


Despite the cool temperatures, Copenhagen is a city filled with bicycles053a and bicyclists. For example, during my visit I saw a new upscale mall that has just been completed. The mall has a massive parking lot – for bicycles. The highlight of my visit to Copenhagen was a bicycle tour of the city’s harbor and canal district with the head of the local Chubb office, my good friend Bjorn Petersen, and his wife. As part of the tour, we took our bicycles on a ferry boat to the islands across the harbor from the central city. One of the literally high points of the tour was a visit to the historic Vor Frelskers Kirke. The church’s corkscrew spire has an external spiral staircase, and the view from the top of the churchtower is extraordinary (if also vertiginous)


002aDenmark has been and remains a monarchy and the vestiges of the country’s royal heritage are a distinctive feature of the country’s capital city.  A key part of the mandatory tourist itinerary in Copenhagen is a visit to the several palaces around the city. The royal palace of Amalienbourg (pictured here, with two of its four wings flanking the Marble Church), which was next to the hotel where I stayed, is remarkably accessible. Cars drive freely through the palace’s central square. A Danish flag flying from the rooftop signaled that the current monarch, Queen Margrethe II, was in residence at the palace while I was in town. The Queen, who I am told is much beloved by the Danish people (I heard her referred to as “Mom”), claims direct lineal descent from the Viking King, Harald Bluetooth.


009aThe city’s most famous tourist attraction may be the statue of the Little Mermaid, based on the character from the Hans Christian Anderson fairy tale. The statue sits on a rock in the harbor and attracts tour buses of visitors, but I am guessing just about everyone has the same reaction I did, which was — “That’s it?” Perhaps the statue came to be such a prominent landmark because, like the city she inhabits, she is quiet, modest and attractive. 


At least the people of Copenhagen have a sense of humor about their iconic statue. Not far from the tourist bus-surrounded site of the famous statue, in a canal away from the central harbor, is a less well-known sculpture, the “Genetically Modified Little Mermaid,” a fantastic figure that suggests that the Danish don’t take their famous statue too seriously.










The city’s chilly climate calls for hearty food, which explains the quintessential Danish meal of smørrebrød, which is basically an open-face sandwich made heavy rye bread (rugbrød) covered in butter (or, more traditionally, lard) and accompanied by an assortment of toppings, such as herring, eggs, tomato, onions, cheese, and liver paste. I found I particularly enjoyed the herring, which is served a variety of ways, including marinated, curried or pickled. The traditional way to enjoy herring smørrebrød is with a glass of schnapps, accompanied by a glass of beer.


062aA  smørrebrød lunch with friends was an appropriate opportunity to contemplate the distinctive Danish cultural concept of hygge (pronounced “hue-gge,” sort of). The word is usually translated as “cozy,” and in a comfortable candle-lit restaurant filled with flowering plants and happy Danes chowing down on heavy rye bread, it is easy to feel as if you have the sense of the concept, particularly after a glass or two of schnapps. But it was explained to me that hygge is not just a descriptive term, it is a process, and you are part of it.


I had an experience in Copenhagen that I think helped me get closer to the true meaning of hygge. One evening while I was there, I went to hear jazz at a club I had found on the Internet. I arrived before the music started, and I was seated at a table with a young couple, who were in their young 20s. It quickly became clear that (1) this was a first date; (2) it was not going well; and (3) the last thing in the world either one of them wanted was some old guy stuck at their table with them. It was apparent that emergency measures were required.


I got up and found the waitress and told her to bring a bottle of champagne and three glasses, and to fill the glasses before anyone had a chance to ask what was going on. In answer to the looks of surprise and confusion that appeared on my tablemates’ faces, I told them that it was traditional in America to serve champagne when you were meeting new friends. After a clink of glasses, I was soon able to learn that my new friends’ names were Jan and Carla. Jan is a student and Carla works in IT for a bank. It turns out that not only was this a first date, it was a blind date. Jan’s sister works with Carla at the bank, and the sister had set up the date. As I anticipated, after the first glass of champage, Jan and Carla were relaxed and laughing, and by the time the second set started, they were sitting, as song goes, dangerously close to one another. The evening which had threatened to become a total disaster for them had been transformed into a big success. I haven’t had a chance to check with any of my Danish friends, but I think this sequence represents a good example of hygge. I also hope that Jan and Carla will name their firstborn after me, and I expect that they will be telling their grandchildren about the crazy American who bought them a bottle of champagne on their first date.


I had hoped that my visit to Copenhagen might include a side trip to Malmö, which is a short-train ride just across the bridge in Sweden, but business back home required my attention and so I will have to save the trip to Malmö for my next visit. And I do have to come back. Everyone here told me that I need to see the city in the summer. It was a great place to visit in the early spring so it has to be fantastic in the warmer months.


More Views of Copenhagen

Sankt Jorkens Canal









The Strøget Shopping District

















Who’s this guy? Obviously, a Great Dane.











More Danish Royal Palaces

















Copenhagen, a place to discover the meaning of hygge.








Looking at the Costs and Benefits of SOX

Posted in SOX (Generally)

magglassThe Sarbanes Oxley Act was enacted nearly twelve years ago in the midst of profusion of corporate scandals. Despite the passage of time, the Act has remained controversial. In order to evaluate the Act’s impact, Harvard Law Professor John C. Coates and Harvard Business School Professor Suraj Srinivasan undertook to review over 120 studies of the Act, focusing on research in accounting law and finance. They compiled their findings in a January 12, 2014 paper entitled “SOX After Ten Years: A Multidisciplinary Review” (here), which finds that though the Act has not had many of the dire consequences that its critics predicted, it is also analytically difficult to make the case that the Act overall has been beneficial.


In certain circles, the enactment of SOX is still highly controversial – it is, as noted in a March 10, 2014 Forbes article about the authors’ paper (here), still viewed by many as “a politically motivated over-correction” that threatens to “lead to a loss of risk-taking and competitiveness.” The authors themselves noted a “puzzle” about the public debate regarding SOX – that is that while the Act “continues to be fiercely and relentlessly attacked in the U.S., particularly in political election battles and during legislative debates,” survey evidence suggests that “informed observers, including corporate officers and investors, do not believe that the Act – as implemented…has been a significant problem and may well have produced net benefits, and the law has been copied at least in part by other countries.”


While the debate has continued, one thing is clear: Despite the criticisms, the Act and its institutions have survived almost unchanged. The PCAOB remains a durable and significant part of the regulatory landscape. The relation between audit firms and issuers continues to be defined by SOX. Internal control mechanisms, as modified by subsequent legislation that eliminates the provisions application to smaller companies, remain in force.


At the time of its implementation, the Act’s most vehement critics predicted it would lead to the federalization of corporate law, and argued that the law was excessively “mandatory,” in contrast to the traditional disclosure-oriented approach of the U.S. securities laws. The authors reviewed the results of research to date and concluded that “SOX had little impact on the federal/state balance of legal authority over corporations, has functioned to force disclosure, which in turn has combined with market forces to induce significant changes in control systems, and has been partly but not completely coped by other countries.”


The Act’s critics also have contended that the Act would “increase the marginal cost of being a U.S.-registered public company more than the benefits of the status,” which in turn, it was predicted, would lead to more companies going private or going dark, fewer companies going public, and loss of listings to exchanges outside of the U.S. However, the authors found that the research to date showed that “while smaller, less liquid and more fraud-prone firms did indeed exit U.S. stock markets after SOX,” the evidence that SOX reduced the number of IPOs is “weak at best, and is offset by evidence that IPO pricing improved.” The firms that have gone private or gone dark typically are very small, with market capitalizations generally under $30 million, and in fact going private trends in the U.K. “were similar to those in the U.S. after SOX.”


Though there are fewer non-U.S. companies with cross listings in the U.S., the firms that “defect to London” are “smaller, less profitable, less likely to have a Big-4/5 auditor, and are more likely to be based in a developed country” (the later point indicating that the benefits of a U.S. listing may be smaller for firms from developed countries than for companies in developing countries). The fact that there are fewer cross-listings obscures the fact that “the firms that choose to list in the U.S. post-SOX are larger, more profitable companies from less developed countries.” In market cap terms, “these larger cross-listing firms more that make up for the loss in listings in small firms, resulting in a net gain in market capitalization from foreign listings into the U.S. post-SOX.”


The authors also found that the results of various surveys about SOX stand in interesting contrast to the frequent criticisms of the Act. The authors found after a review of various surveys of corporate officials and investors that “contrary to the vehement criticisms of SOX,” the views of SOX among those most affected by its provisions “has been far more nuanced, even receptive,” producing among other things a higher level of confidence in companies’ financial reporting.


The authors suggest that the continuing criticisms of the Act may be due to the fact that “the Act has had clear, non-trivial and quantifiable direct costs,” while the “tasks of estimating either the benefits or the indirect costs of the Act are at least an order of magnitude more difficult than the task of estimating the direct costs,” and indeed the tasks of estimating the benefits and indirect costs “are possibly beyond the present capacity of researchers to achieve with much precision.”


Readers of this blog may be particularly interested in the authors’ analysis of the SOX-related costs of litigation. Many of the Act’s critics had predicted that SOX would lead to an “explosion of litigation,” with particularly dire predictions about the liabilities of independent directors. The authors found that while securities litigation incidence did rise immediately after SOX, it dropped to pre-SOX levels soon thereafter, and that while litigation risk for independent directors spiked in 2002, it reverted to pre-SOX levels after that. The authors noted the same pattern with D&O insurance premiums, where the premiums spike in the period 2002 to 2004, but declined in the years that followed. The authors noted that the pattern was “more consistent with large costs arising from the fundamental corporate misconduct that gave rise to SOX, followed by a reduction in that misconduct.”


Of particular note with respect to SOX’s litigation impact is the authors’ review of the impact of SOX on state court litigation. The Act’s critics has suggested that SOX might lead to changes in state law as a result of shareholders suing under state law but using SOX’s requirements as a basis for doing so. A comprehensive review of all Delaware court decisions between 2002 and 2012 showed only fifteen references in any way to SOX, and of these not one imposed liability on directors for failing to adhere to standards or live up to obligations created by SOX.


In the end, the authors conclude that “the state of research is such that – even after ten years – no conclusions can be drawn about the net costs and benefits of the Act, its effects on net shareholder wealth, or other research relevant to its assessment.” For policy makers, the challenges are how to better design future regulatory interventions so as to “permit more reliable inferences about their effects” in order to “improve the quality of information about whether they have led to net benefits” and to “reduce the risk that pure politics, untethered by fact or reason, will continue to generate unnecessarily costly oscillation in systemically important laws.”


Break in the Action: Over the next several days I will be traveling on business and there will a brief interruption in The D&O Diary’s publication schedule while I am away. Normal publication operations will resume upon my return.   

Citing Concerns with Plaintiff’s Law Firm’s Roles, District Court Denies Class Cert in IPO Securities Suit

Posted in Securities Litigation

texas naoIn an opinion reflecting her concerns about the role of the lead plaintiff’s law firm as well as concerns about the predominance of common issues among the proposed class members’ claims, a federal district court judge has denied the plaintiff’s motion for class certification in a lawsuit filed under the Securities Act of 1933. The opinion, which is strongly influenced by the U.S. Supreme Court’s recent class action case law, also reflects the interesting (and perhaps timely and topical) use of an event study in connection with a class certification motion. Northern District of Texas Judge Jane Boyle’s March 19, 2014 opinion in the Kosmos Energy Ltd. Securities Litigation can be found here.



As discussed in detail here, investors first sued the company, certain of its directors and officers, and its offering underwriters, based upon alleged misrepresentations in the offering documents in connection with the company’s May 10, 2011 IPO. The investors allege that the offering documents contained misrepresentations about the performance and expected production of an offshore oilfield in Ghana called the “Jubilee Field.” The investors allege that the failure to disclose the now-public production problems cost investors “hundreds of millions of dollars.”


After filing an amended complaint, the lead plaintiff (the Nursing Home and Related Industries Pension Plan) filed a motion for class certification; to appoint the lead plaintiff as Class Representative; and to appoint its counsel as Class Counsel. In support of their motion for class certification, the plaintiff submitted a declaration from its Board Chair. The defendants opposed the motion for class certification, arguing that the plaintiff had not established the adequacy of the proposed class representative or the predominance of common issues among the putative class members.


In opposing the motion, the defendants cited the Board Chair’s deposition testimony to show that the Board Chair was unfamiliar with basic facts about the case and therefore not an adequate class representative. The defendants also relied on an Event Study prepared by Glenn Hubbard, the prominent economist and current head of the Columbia Graduate School of Business (and former head of the Council of Economic Advisors) to contend based on a variety of public disclosures from the company about the problems at the Jubilee Field that the many potential class members likely had varying levels of knowledge or awareness about the problems, and accordingly because of these issues about individual knowledge the plaintiff could not show a predominance of common issues among the potential class members.


Judge Boyle opened her analysis of the plaintiff’s motion with a detailed review of what she called the “evolution” of recent class action case law , both at the U.S. Supreme Court (particularly in the Walmart and Comcast cases) and in the Fifth Circuit.  Judge Boyle said that the case law reflects a shift from a “presumptively favorable approach toward class certification to a more skeptical view coupled with a more exacting review process” that requires plaintiffs to “produce actual evidence that they are entitled to class status.”  She emphasized that the more exacting review process applies to securities class action lawsuits as well. The PLSRA in particular, she noted, focused on the importance of the determination of the adequacy of the class representatives.


In describing what is required, Judge Boyle said “plaintiffs seeking class certification must produce actual, credible evidence that the proposed class representatives are informed, able individuals who are themselves – not the lawyers—actually directing the litigation.” In addition, certification may be denied where the representative lacks a basic understanding of “what the suit is about.”


After reviewing the parties’ submissions, Judge Boyle found that, with reference to the Board Chair’s deposition testimony in which the Board Chair evinced little knowledge of the case, “a strong inference may be drawn” that the plaintiff and the plaintiff’s law firm “maintain the type of close affiliation that calls into question whether the firm or its counsel is the one actually pursuing the case.”


Judge Boyle was particularly concerned with the portfolio monitoring services the plaintiff’s law firm provides to the plaintiff pension fund. Judge Boyce said that the fact that the firm performs these services; recommended and then filed the lawsuit; and now seeks to be lead counsel “strongly suggests that this is a lawyer and not a client-driven suit.”


Judge Boyle said that in light of the Board Chair’s unfamiliarity with the case and the underlying facts and even with the substance of her own declaration, the plaintiff “simply failed to meet her burden to bring forth facts that establish” that the plaintiff pension fund is an adequate representative.


Judge Boyle also found that the plaintiff failed to establish that common questions predominate over individual questions, as required in order to the class certification requirements to be met. In reaching this conclusion, the referenced the defendants’ “unrebutted” evidence of investor knowledge of problems at Jubilee Field, which Judge Boyle found to show that the plaintiff had not established that common questions would predominate.


The Event Study on which the defendants’ relied showed that “the disclosure of information about production issues at the Jubilee Field following Kosmos’ IPO did not cause any decline in Kosmos’ stock price.” The study also identified fourteen occasions on which class members might have acquired varying levels of knowledge about the Jubilee Field production problems, which Judge Boyle found to be “more than adequate to show that individual inquires might be necessary” and therefore that the requirement that common issues predominate had not been met.



There are a number of very interesting aspects of Judge Boyle’s opinion. The first is her emphasis on how much the Supreme Court case law has changed the class certification analysis and the extent to which (she concluded) the evolving case law requires the plaintiff to come forward with evidence to support their class certification position. She seemed quite impatient with what she deemed plaintiff’s conclusory assertions and reliance on legal arguments. She expected the plaintiff to provide factual support to show that the class certification requirements had been met, and was quite critical of the plaintiff and its lawyers for not providing the requisite factual support.


Second, her commentary about the plaintiff’s law firm’s portfolio monitoring services and the plaintiff’s law firm’s role in the case are also interesting. Many of the leading securities plaintiffs’ firms provide these kinds of services for institutional investors, in the obvious hope that they will identify possible cases for the investors to bring, and in the related hope that the law firm might file the lawsuit on their portfolio monitoring client’s behalf.  The plaintiffs firms have in the past faced sharp criticism for their alleged conflicts of interest in providing the services and bringing the cases. Indeed, in a harsh 2009 commentary, Southern District of New York Judge Jed Rakoff (whose ultimate written opinion in the case Judge Boyle cited) questioned the conflict involved in plaintiffs’ firms playing these various roles. (Refer here for a review of Rakoff’s commentary).


But though other judges have questioned these services, what makes Judge Boyle’s commentary here interesting is that the plaintiff’s law firm’s various roles were a substantial factor in her conclusion that the plaintiff had not satisfied the adequacy requirement, because the case appeared to be lawyer-driven rather than client-driven, and involved a client that was uninformed about the most basic aspects of the case and even about the content of her own declaration.


The defendants’ use of an event study is particularly interesting, and not just Judge Boyle cited it in her conclusion that the plaintiffs had not shown that common issues predominate.


Readers will recall that in the recent oral arguments in the Halliburton case now before the U.S. Supreme Court, the justices and the parties had debated the merits of possibly requiring event studies to show the “price impact” of alleged misrepresentations in order for plaintiffs to be able to rely on the “fraud on the market” theory to establish class-wide reliance.


The present case provides an example of what such an event study might look like and how it might be used – indeed, although it was not directly pertinent to the outcome of the class certification motion, the defendants’ event study purported to show that the supposedly withheld information about the production problems at the Jubilee Field did not affect the company’s share price. (Presumably if the Supreme Court winds up requiring plaintiffs to show “price impact,” plaintiffs in future cases will submit their own event studies, unlike the plaintiff here.)


Some readers may be quick to note that courts in the Fifth Circuit (where Judge Boyle’s court is located) are notoriously tough for securities class action plaintiffs and perhaps that Judge Boyle’s opinion can be best understood in that light. However, courts in other jurisdictions may well ask many of the same questions that she asked. Her perspective on the impact of the recent U.S. Supreme Court class action case law is particularly interesting as is her expressions of concern about the plaintiff’s firms various roles 


In case you were wondering, Glenn Hubbard led the Council of Economic Advisors during George W. Bush’s first presidential term. Judge Boyle was appointed to the bench by George W. Bush.


Special thanks to a loyal reader for providing me with a copy of Judge Boyle’s opinion


Another Mug Shot Assortment

Posted in Blogging

It has been a while since I have had a chance to publish a collection of reader’s mug shots, but enough pictures have accumulated in the interim that it is now  time to post another round.


Readers will recall that in a recent post, I offered to send out a D&O Diary coffee mug to anyone who requested one – for free – but only if the recipient agreed to send me back a picture of the mug and a description of the circumstances in which the picture was taken. In previous posts (here, here, here, here, here, here, here, here , here, here, here, here, here and here), I published prior rounds of readers’ pictures. I have posted the latest round of readers’ pictures below.


Our first mug shot in the round comes to us from David S. Garner Jr. at Wells Fargo in Atlanta, who sent us this portrait of his desktop including what I have to presume is a picture of a Georgia Bulldog. It is good to see that the D&O Diary mug is being put to use as a coffee cup as well.










Our next picture was sent in by Tim Bennett of U.S. Risk Financial Services. Here’s his explanation of the picture: “While passing through Chicago Midway Airport, I caught Jake and Woody in the middle of a hot set. I leant them my D&O Diary Mug for a bit of refreshment. But when I got it back, it smelled more like bourbon than coffee!” Well, in the immortal words of the Blues Brothers, “what do you want for nothing, a rubber biscuit?” 












Andrew L. Margulis of the Ropers, Majeski, Kohn & Bentley law firm in New York sent in this picture depicting a scene that will be all to familiar to anyone who lives on the East Coast of the U.S. This winter has been the worst. Andrew notes that “I believe my mug wishes it was sent to someone who lived in a warmer climate.”












Speaking of snow, Abigail Williams of Marsh in Philadelphia attributed her delay in getting me a mug shot in part to “the immense amount of snow on the east coast,” among other things. She was finally able to send in the dashboard shot of the mug with a background of the Philadelphia skyline. In the immortal words of Elton John, “Philadelphia freedom took me knee high to a man” (whatever that means).










Our last shot in the round is a little bit unusual. The picture was sent in by Jason Sacha of the Ricketts Harris law firm in Toronto. Unfortunately, Jason’s request for a D&O Diary mug came in to me only after I had already shipped out the last of the mugs. Though I couldn’t send Jason a mug, I invited him to send in a picture of one of his law firm’s mugs instead, and he submitted this shot looking out of the window of his Toronto office.












Because I have shipped out the last of the mugs, I am afraid I can’t fulfill any further requests. However, if other readers like Jason would like to send in pictures taken with their own firm’s mugs, I would be happy to publish the pictures. Of course, if there are D&O Diary mug recipients out there who still have not sent in mug shots, I would be happy to post  those pictures as well.


Very special thanks to everyone that has sent in a mug shot. It has been so much fun seeing the picture and receiving the messages.  


More About Stories We’re Following

Posted in D & O Insurance

calendarIndyMac Coverage Suit Settled, But Oral Argument Will Stay on the Calendar?: As I noted in a recent post (here, second item), the parties in the IndyMac D&O insurance coverage action – that is, the dispute to determine whether or not only a single $80 million tower of insurance applies to the various D&O claims surrounding the bank’s collapse or whether two $80 million towers have been triggered – had notified the Ninth Circuit that they reached an agreement to settle all of the disputes subject to completion of documentation and subject to bankruptcy court approval. At the time of their initial notice to the court, the parties did not ask that the oral argument scheduled for April 7, 2014 be taken off of the calendar, because not all parties agreed to have the oral argument taken off calendar while the settlement documentation remained uncompleted.


However, in a March 7, 2014 Joint Notice of Settlement to the Ninth Circuit (here), the parties advised the appellate court that the settlement documentation had been completed and that all of the parties were now requesting that the oral argument be taken off calendar. The parties also advised the appellate court that on March 5, a motion for approval of the settlement had been filed with the bankruptcy court.


Apparently, the parties’ Joint Notice of Settlement to the court that they had settled the case was not good enough for the Ninth Circuit.  In a March 14, 2014 order (here), the Ninth Circuit denied the parties’ joint request to have the scheduled oral argument removed from the calendar.


The appellate court noted that in their Joint Notice, the parties had advised that “after the bankruptcy court rules and grants ‘certain related relief,’ its decision ‘will allow other settlements to be consummated.’” The Ninth Circuit said “When those matters are actually settled, or when the parties can give some further explanation of the status of those matters and the contingencies involved, the parties may so inform this court and renew their motions to remove the cases from the oral argument calendar>”


The one thing that isn’t clear from the documents submitted to the court is whether or not the bankruptcy court will act, and the related settlements can be put into place, before the scheduled April 7 date for oral argument. You would hope that the Ninth Circuit would not make the parties actually show up and argue the issues in a dispute that has been resolved. Perhaps if the various approvals and contingencies cannot be sorted out before April 7, the Ninth Circuit would at least agree to continue to the argument to a later date to allow the bankruptcy court processes play out. However, there is nothing in the Ninth Circuit’s somewhat cranky order to suggest that it would entertain such a request.


In any event, for now, the scheduled oral argument — in a case that has been settled – remains on the calendar. I wonder what you would do know if you were one of the lawyers that was planning on presenting in the April 7 oral argument session. Do you go ahead and prepare? Of course, one thing you would to is to press the bankruptcy court for all of the approvals and try to complete all of the remaining contingencies, so you can go back to the Ninth Circuit as soon as possible to answer the appellate court’s questions and requests. However, what do you do if the bankruptcy court doesn’t act quickly enough? Or the Ninth Circuit still has a problem with removing the argument from the calendar?


I know from the list of counsel on the Joint Notice that there are a lot of lawyers out there that know the answers to these questions. I would be grateful of one of the lawyers involved would drop me a note and let me know what it is going on and what is likely to happen. To the extent I can, I will update this post with any additional information.  


German Court Dismisses Investor Action Filed Against Porsche: According to a March 18, 2014 New York Times article (here), a judge in Stuttgart has dismissed the damages lawsuit that 23 hedge fund investors had filed against Porsche in connection with the car company’s unsuccessful attempt to acquire Volkswagen. A March 17, 2014 Reuters article about the dismissal ruling can be found here.


The dismissal in the German lawsuit is the latest setback in a series of defeats for hedge fund investors in their efforts to press their claims against Porsche. As discussed here, certain  hedge funds first filed an action in the Southern District of New York alleging that during 2008, Porsche and certain of its executives made a series of misrepresentations in which Porsche claimed that it did not intend to acquire control of Volkswagen, while at the same time it allegedly was secretly accumulating VW shares with the purpose of obtaining control. In October 2008, after Porsche disclosed its intent to obtain control of VW, VW’s share price rose significantly and the short sellers suffered significant trading losses. The short-sellers’ federal court complaint asserted claims under the U.S. securities laws and also for common law fraud.


As discussed here, on December 30, 2012, Southern District of New York Judge Harold Baer dismissed the securities claims based on Morrison, on the grounds that the subject transactions — securities-based swap agreements — represented a foreign transaction and are therefore not within the purview of the U.S. securities laws. Judge Baer declined to exercise supplemental jurisdiction over the common law claims. The hedge funds appealed the district court ruling to the Second Circuit. However, as discussed here, in March 2013, twelve of the hedge funds withdrew their appeal, although press reports suggest that the appeal of the 20 remaining hedge funds remained unaffected. As far as I know the remaining hedge funds’ appeal remains pending (although if any reader out there has different information, I would be grateful for the clarification).


In March 2011, several of the same short sellers launched a separate action in New York Supreme Court against Porsche alleging claims for fraud and unjust enrichment. Porsche moved to dismiss the state court complaint on the grounds of forum non conveniens and for failure to state a claim. Porsche also moved in the alternative to stay the state court action pending the outcome of the Second Circuit appeal in the federal court action. As discussed here, on August 6, 2012, New York (New York County) Supreme Court Judge Charles E. Ramos rejected Porsche’s motion to dismiss the case on forum non conveniens ground. A copy of Judge Ramos’s decision can be found here. Porsche filed an appeal.


As discussed here, in a December 27, 2012 opinion (here, starting at page 138), a five-Justice panel of the New York Supreme Court appellate division unanimously reversed Judge Ramos’s decision and entered a judgment of dismissal in Porsche’s favor. In dismissing on the grounds that New York was not an appropriate forum, the appellate court noted that the only alleged connections between the action and New York “are the phone calls between plaintiffs in New York and a representative of the defendant in Germany” and “emails sent to plaintiffs in New York but generally disseminated to parties elsewhere.”


While these investors struggled to try to get a U.S. court to take up their case, other investors took their claims to the German courts. As discussed here, these hedge fund investors initiated an action against Porsche in Stuttgart based on the same allegations. According to the recent media reports, however, a judge in Stuttgart has ruled that Porsche managers did not commit misconduct when they denied plans to try to take over Volkswagen. According to the Times article, the judge ruled that Porsche was not obligated in early 2008 to disclose its intention to acquire VW shares. The Times article quotes the judge as saying that “It was hardly possible to react to public speculation about a takeover of VW except with a denial.”


The hedge funds’ action in Germany represented an interesting initiative for aggrieved investors whose claims were foreclosed from U.S. court by Morrison to try to pursue their claims in the corporate defendant’s home country rather than in the U.S. The German lawsuit represented the possibility that the elimination of the U.S. forum for these kinds of investor disputes would force investors to pursue their claims in the courts of the country of domicile, which in turn might lead to the development of the law and of remedies to address these kinds of claims. The Stuttgart court’s dismissal of the hedge funds’ action represents something of a set back for the possibility of the development of these kinds of jurisdictional alternatives in the wake of Morrison.


On the other hand, the dismissal of the Stuttgart action may not be the end of the story. Presumably, the claimants in Stuttgart action have appeal options of some kind. In addition, the Times article also notes that legal proceedings relating to the takeover attempt remain pending in Braunschweig,  Germany, as well as in Hannover and Frankfurt. As far as I know, the Second Circuit appeal remains pending as well. So there may be much more of this story to be told before the outcome is known for sure. But the dismissal of the Stuttgart action seems to represent something of a setback for the idea that investors precluded from U.S. courts by Morrison might be able to pursue their claims in the home courts of the corporate defendants.


Speakers’ Corner: On April 1 and 2, 2014, I will be participating in the C5 Forum on D&O Liability Insurance in London. On April 1, I will be participating in a panel entitled “Assessing the Impact of Regulatory Investigations and Claims on D&O Insurers” with Helga Munger of Munich Re and Clive O’Connell of Goldberg Segalla. On April 2, I will be moderating a panel entitled “Securities Class, Collective and Representative Actions – Critical Developments and Comparisons within the USA and Europe” with panelists Chris Warrior of Hiscox, Isabelle Hilaire of Chubb, and Leslie Kurshan of Marsh. Information about the conference can be found here.


If you are attending the conference, I hope that you will make a point of saying hello, particularly if we have not met before.