Public Enforcement of Directors’ Duties in Australia

ausAustralia has long been in the vanguard when it comes to enforcement of duties of corporate directors. Australia was the first English-speaking jurisdiction to introduce statutory directors’ duties in 1896, and the first English-speaking jurisdiction to introduce criminal sanctions to enforce statutory directors’ duties in 1958. However, following the recent global financial crisis, questions were raised in Australia (as they were elsewhere) about the effectiveness of Australia’s enforcement regime for directors’ duties. These questions in turn raised the question about what was in fact being done by to enforce directors’ duties under Australian law. In a March 2016 paper entitled “An Empirical Analysis of Public Enforcement of Directors’ Duties in Australia: Preliminary Findings” (here), five academics have taken a comprehensive look at the public enforcement of directors’ duties under Australian law. Their paper reaches a number of interesting conclusions, as discussed below. A summary of their paper and its findings appeared in a June 9, 2016 post on the Harvard Law School Forum on Corporate Governance and Financial Regulation (here).


The duties of corporate directors under Australian law are codified in the provisions of the Corporations Act 2001, the statutory predecessor of which was the Corporations Act of 1989. The statute specifies the directors’ duties as encompassing the following: the duty of care and diligence; the duty to act in good faith and in the best interests of the corporation; the duty not to improperly use their position to gain an advantage for themselves or to cause detriment to the corporation; the duty not to improperly use information; the duty to disclose material personal interests; the duty not to vote on matters in which the director has a personal interest; duty not to give a financial benefit to a related party without member approval; and a duty to prevent insolvent trading by the company. All of these duties are subject to both civil and criminal sanctions, except the duty to exercise care and diligence.


The statutes allow for both private and public enforcement of directors duties; the private enforcement is pursued through civil litigation. The public enforcement of the duties is pursued through civil enforcement actions by the Australian Securities and Investments Commission (ASIC) and criminal enforcement actions by the Commonwealth Director of Public Prosecutions (CDPP). ASIC is empowered to pursue pecuniary penalties up to A$200,000 per contravention; management disqualification orders, and compensation orders for loss incurred by the company. The CDPP can pursue a wide range of sanctions including prison sentences of up to five years per offense, fines of up to A$360,000 per offense, pecuniary penalties, compensation orders, good behavior bonds and community service orders.


In order to assess and analyze the public enforcement of directors’ duties, the authors assembled a database of all sanctions imposed in civil and criminal proceedings brought by ASIC and the CDPP for contravention of the statutory provisions specifying the directors’ duties. The authors identified 27 civil and 72 criminal court matters from January 1, 2005 thought December 31, 2014. (The database excluded enforcement actions pursuant to other procedural means, including, for example, administrative proceedings and negotiated outcomes.) From their review of this database, the authors made a number of interesting findings.


Interestingly, the authors found that criminal enforcement of directors’ duties was significantly more prevalent than civil enforcement. Criminal enforcement by the CDPP was responsible for about 81% of all matters in which liability was established and about 61% of all defendants found liable.


The authors also made some interesting findings about penalties for corporate wrongdoing. Following the financial crisis, many commentators suggested the maximum civil pecuniary penalty of A$200,000 is too low. The authors concluded first that the imposition of other types of sanctions was much more frequent than the imposition of the pecuniary penalty, and that penalties imposed were typically much lower than the maximum. Custodial sentences and civil management disqualification orders were much more frequently imposed than pecuniary penalties. Prison sentences and disqualification orders together accounted for about 67% of sanctions imposed, while only about 18% were civil pecuniary penalties and only about 2% were fines.


With respect to the pecuniary penalties imposed, the authors found that median civil pecuniary penalty imposed on defendants who had engaged in a single contravention was only about A$25,000, and the median penalty imposed on all defendants (including those that had engaged in multiple contraventions) was A$50,000.


The average civil management disqualification order was about 5.2 years and the average maximum prison sentence was about 2.25 years. However about 46% of the prison sentences involved immediate release suspended sentences, in the form of immediate release subject to good behavior.


The ASIC and the CDPP enjoy a high rate of litigation success. The CDPP and ASIC established liability in about 88% and 89% of matters, respectively. The CDPP and ASIC established liability in relation to about 84% and 92% of defendants respectively.


In the text of their study, the authors make an interesting observation about the relative impact of civil and criminal enforcement. The authors note that it is “important not to equate prevalence of enforcement with the overall societal impact on enforcement, as the impact of enforcement is not just a matter of the particular matters won and particular defendants punished, but also the broader media exposure and public knowledge of the proceedings.” Given that some civil matters involve high-profile defendants, “it may be the case that some civil matters attract greater media coverage and public attention than criminal matters, which are predominantly litigated in the inferior courts.” The authors note that the distinction between civil and criminal jurisdictions is “not as meaningful as it first appears.” For example, the authors note, “criminal sanctions can be lenient, such as a 12 month good behavior bond,” while civil sanctions “can be severe, such as a 25 year management disqualification order.”


The authors’ analysis of the Australian directors’ duties enforcement regime is interesting, but it would be even more interesting to see an analysis comparing the Australian regime to that of the U.S. and U.K. For starters, directors’ duties in the U.S. equivalent to the ones enumerated in the Australian statutes are mostly regulated at the state rather than federal level. (Obviously directors’ duties under the federal securities laws are regulated at the federal level). The enforcement and sanctions regimes in the various U.S. states vary widely, and the U.S. system enforcement system relies heavily on the private enforcement mechanisms through private civil litigation.


Along with the comparative legal analysis, another assessment that would be interesting would be the relative effectiveness of the system – that is, which are better at deterring director misconduct and what is more effective – higher fines or greater sanction of disqualification?  A final analysis that would also be helpful for directors in Australia is discussion of the steps they can take to reduce the likelihood of becoming involved in an enforcement action.

Supreme Court Asked to Clarify Private Company’s Federal Securities Law Stock Purchase Disclosure Duties

sup ct 5In the D&O insurance world, private company liabilities, exposures, and insurance are viewed as categorically distinct from public company liabilities, exposures, and insurance. There are completely separate and distinct insurance policy forms for each of the two categories of companies. In this traditional view, one of the key distinctions between two kinds of companies is the potential liability of public companies and their directors and officers under the federal securities laws. However, it has recently become apparent to me that this perceived difference between the two categories of companies may be less distinct than I had perceived. For example, as I noted in a recent post, the SEC has recently made it clear it is watching private companies, and is particularly concerned with so-called “unicorns” (private start-up firms with valuations greater than $1 billion).


This issue of the potential private company liabilities under the federal securities laws came up again for me recently when I read about a petition for a writ of certiorari that a securities claim plaintiff has filed in the U.S. Supreme Court. As discussed in a June 8, 2016 post on Jim Hamilton’s World of Securities Litigation (here), the petition asks the Court to address the question whether a privately held corporation trading in its own stock has an Exchange Act duty to disclose all material information or abstain from trading. As discussed below, the petition and the underlying claim raise important questions about the potential liabilities of private companies under the federal securities laws. The May 31, 2016 cert petition in the case of Fried v. Stiefel Laboratories, Inc. can be found here. Continue Reading

D&O Insurance: Thinking About the Insured vs. Insured Exclusion

arizonaThough the Insured vs. Insured exclusion is a standard D&O policy provision, it seems to generate a disproportionate number of D&O insurance-related coverage disputes. The exclusion precludes coverage for claims brought by one Insured Person against another Insured Person. Among the host of recurring issues are the questions surrounding the exclusion’s preclusive reach when the claimants suing an Insured include both individuals who are Insured Persons and other individuals who are not Insured Persons.


These questions arose in a coverage dispute involving a series of lawsuits brought against the board of U-Haul International Inc. parent Amerco. One of the lawsuits had been brought by a former Amerco board member (who was also related by family to the company founder) but the rest of the lawsuits had been initiated  by other shareholders who were not Insured Persons under Amerco’s D&O insurance policy. The various actions were consolidated by court order. The company’s D&O insurer denied coverage for the board’s defense expenses based on the Insured vs. Insured exclusion. In a June 6, 2016 opinion (here), the Ninth Circuit affirmed the district court’s holding that the exclusion precluded coverage for all of the claims. Continue Reading

Onslaught of Securities Suits Against Brazilian Companies Continues

brazilAs a result of scandals, investigations, and even an environmental catastrophe, there has been a wave of securities lawsuit filings in the U.S. against Brazilian-domiciled companies whose securities are listed in the U.S. This filing trend began in late 2014 with the first lawsuit filing against Petrobras and certain of its directors and officers, which was in turn followed by lawsuits against other companies caught up in the corruption scandal. In recent weeks lawsuits related to a separate regulatory investigation in Brazil have emerged, bringing the total number of securities lawsuits pending in the U.S. against Brazilian companies to six. These developments, along with events in Brazil itself, have roiled the D&O insurance marketplace in Brazil, particularly for Brazilian companies with securities listed in the U.S. Continue Reading

Federal Agencies Joining the Data Security Enforcement Action Bandwagon

cfpbUntil now, the primary federal agency regulating data security has been the Federal Trade Commission. Indeed, in August 2015, the Third Circuit in the Wyndham Worldwide case affirmed the FTC’s regulatory enforcement authority against companies failing to take appropriate action to protect consumer financial information. However, other federal regulatory agencies are now increasing asserting their authority with respect to data security issues, including in particular, the Consumer Financial Protection Bureau (CFPB), which recently brought its first data security enforcement action. These developments underscore the fact that companies face a growing regulatory exposure relating to cybersecurity issues. The specific recent developments also highlight the expectations regulators are asserting with respect to board responsibility for cybersecurity issues and establish that companies can face data security enforcement action even if the companies have not themselves experienced a data breach. Continue Reading

Does Rule 10b5-1 Need Revision to Prevent Improper Insider Trades?

sec sealThe SEC promulgated Rule 10b5-1 nearly 16 years ago to allow executives (whose wealth often is entirely locked up in company shares) to trade in their company’s stock without incurring possible liability under the securities laws. The Rule provides an affirmative defense against allegations of improper trading. In many cases defendants have  relied on the existence of a Rule 10b5-1 trading plan in order to have the securities claims against them dismissed (for example,  here and here). However, the Rule has also been subject to criticism, and some have questioned whether corporate executives are abusing their plans in order to shield questionable trading.


A recent academic study corroborates the view that the plans “are being abused to hide more informed insider trading.” The study, by Gothenburg University Professor Taylan Mavruk and  University of Michigan Business School Professor H. Nejat Seyhun and entitled “Do SEC’s 10b5-1 Safe Harbor Rules Need to Be Rewritten?” (here) concludes that “safe harbor plans are being abused to hide profitable trades made while in possession of material non-public information.” The authors suggest a number of revisions to the Rule in order to “prevent further abuse.” The authors summarized their findings in a short June 2, 2016 post on the CLS Blue Sky Blog (here). Continue Reading

Guest Post: Second Circuit Strikes Down Imposition of $1.27 Billion FIRREA Penalty

paul weiss largeOn May 23, 2016, in an interesting development in one of the more high profile lawsuits to arise out of the financial crisis, the Second Circuit reversed the $1.27 billion civil penalty that Southern District of New York Judge Jed Rakoff  imposed on Countrywide and several related defendants in a case involving the company’s sale of mortgages to government sponsored entities. A copy of the Second Circuit’s opinion can be found here.


In the following guest post, attorneys from the Paul Weiss law firm take a look at the Second Circuit’s decision and discusses its implications, particularly with respect to the government’s use of the the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) to prosecute financial institutions’ alleged to have committed financial misconduct. Continue Reading

Guest Post: The State Court Section 11 Problem: Three Solutions


Priya Cherian Huskins

One of the more interesting current issues in the securities litigation arena is the question of whether or not the concurrent jurisdiction provisions in the ’33 Act continue to afford state court jurisdiction for Section 11 securities class action lawsuits, or whether the Securities Litigation Uniform Standards Act of 1998 (SLUSA) superseded these provisions. As I noted in a recent post, a corporate defendant recently filed a petition for writ of certiorari with the U.S. Supreme Court to try to get the Court to take up this question. In the following guest post, Priya Cherian Huskins, of Woodruff-Sawyer & Co. examines three different “solutions” that have been proposed to address the ongoing question regarding concurrent state court jurisdiction for Section 11 class action lawsuits. One of the three proposed solutions in the cert petition recently filed with the U.S. Supreme Court, while the other two suggested solutions involve different alternative approaches, including one suggested by Stanford Law Professor Joseph Grundfest. Continue Reading

The Interesting Story Behind a Recent $310 Million Class Action Settlement

alaAny time a civil lawsuit settles for a combined total of $310 million, it is noteworthy, if for no other reason than the sheer size of the deal. But a $310 class action settlement recently preliminarily approved in Jefferson County (Alabama) Circuit Court is noteworthy not just for its size, but also for the nature of the allegations involved.


In the recently settled case, the plaintiffs alleged that in connection with the 1999 settlement of the MedPartners Securities Litigation, the defendant company and its primary D&O insurer had misrepresented the amount of insurance available in connection with the litigation, and more particularly, failed to disclose that the company had obtained a post-litigation “unlimited” excess insurance policy (known as an “LMU”) from the primary D&O insurer. After the details of the LMU came to light in subsequent unrelated litigation, a plaintiff from the prior securities lawsuit class filed a new lawsuit alleging misrepresentation in connection with the securities lawsuit settlement. The details of the plaintiffs’ allegations in the misrepresentation lawsuit — most of which the defendants dispute — make for some interesting reading.


The plaintiffs’ class motion for preliminary approval of the settlement of the misrepresentation lawsuit, to which the parties’ stipulation of settlement is attached, can be found here. The Alabama Court’s June 1, 2016 order preliminarily approving the settlement can be found here. The settlement is subject to the Court’s final approval. Continue Reading

After the Hulk Hogan Lawsuit Funding Flap, Is it Time for a Look at Litigation Financing Regulation?

floridaIn recent years, one of the most important developments in litigation in the U.S. has been the rise of the litigation funding industry. Indeed, the industry’s rise has more recently been fueled by increasing investor interest, even as the industry itself has diversified into lawsuit portfolio investing (as opposed to individual-case investing). The industry’s rise and increasing importance already had attracted scrutiny and criticism, but nothing compared to the deluge of attention that has followed revelations that Hulk Hogan’s privacy litigation against Internet scandal site Gawker was funded by Silicon Valley mogul Peter Thiel. The news about Thiel’s financial involvement has produced a cascade of commentary about litigation funding, which in turn has arguably put the litigation industry on the defensive. The news has also fueled a debate about whether there should be more transparency about litigation funding, and even whether there should be other litigation funding industry regulation, as discussed below. Continue Reading