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

Because of the dramatic events in the financial and credit markets, 2008 will undoubtedly go down in history as a dark and difficult year. 2008 was a challenging year for bloggers, too. So much happened of such significance that trying to find the time to comment and the words to express it all were almost overwhelming blogging challenges.

But dramatic headline events do not always make the best blog posts, because high profile events are exhaustively reported in the mainstream media. The blog posts that stand out in retrospect are those that analyze a specific detail of larger events reported elsewhere; that draw connections between otherwise disparate events; or that highlight developments that otherwise would be lost in the noise.

I have set out below my own list of The D&O Diary’s Top Ten Blog Posts of 2008. I have used a simple standard in determining which posts to include; I listed posts that stand up best to re-reading now. The Top Ten posts are presented chronologically.

1. "CDO Squared" Securities Lawsuit Hits MBIA (January 13, 2008): MBIA is only one of several bond insurers to get caught up in the subprime litigation wave. But the lawsuit against MBIA arose at a time when all of us were still just becoming acquainted with some of the complex financial instruments that have caused so much trouble.

This post attempted to explore the then-unfamiliar CDO-squared instruments, incorporating into the exercise both a detailed study of Warren Buffett’s condemnation of derivative securities as "financial weapons of mass destruction," as well as a reflection of the possible lessons for the current crisis from the near-collapse of Long Term Capital Management ten years earlier.

Little did I suspect at the time how relevant my observations about derivative securities or the lessons of LTCM would become later in 2008. (As an aside, I must note how instructive I found it to reread now all of January 2008’s posts. What an astonishing year 2008 was.)

2. Auction Rate Securities: The Next Subprime Litigation Wave? (February 13, 2008): This post commented on "a developing breakdown in an obscure corner of the credit market involving debt instruments called ‘auction rate securities.’" The post accurately foresaw the coming wave of auction rate securities litigation, which according to my tally involved at least 21 companies in new securities lawsuits during 2008. (My subprime and credit crisis-related litigation tally, which includes auction rate securities litigation, can be found here.)

Litigation involving auction rate securities remained one of the top securities litigation stories throughout 2008 (as reflected here, for example), and the lawsuits were a significant factor in the upsurge in new securities filings in 2008. My complete overview of the 2008 securities filings can be found here.

3. A Single "Toxic" CDO, A Multitude of Subprime Lawsuits (March 9, 2008): So many of 2008’s dramatic events were so large and their effects were so sweeping that they defy easy comprehension. An alternative way to try to understand what happened is to look at a single investment vehicle – in this case, a collateralized debt obligation (CDO) called "Mantoloking" – and examine the difficulties and litigation that has followed in its wake.

The extent and magnitude of the problems from just this one investment structure (among other things, it played a role in Bear Stearns’ demise) helps put some context around the problems now besetting the global financial marketplace.

4. D&O Insurance: Defense Expense and Limits Adequacy (June 2, 2008): Every now and then a set of circumstances come along that helps illustrate one of the perennial problems in D&O insurance. In this instance, the case involved was the criminal prosecution arising from the collapse of Collins & Aikman. The particular problem involved was the possibility that defense costs alone threatened to exhaust the company’s entire $50 million insurance program before the criminal case even went to trial.

As discussed in the post, the increasing possibility that defense costs could deplete or exhaust available insurance undermines traditional notions of limits adequacy and underscores the importance of issues involving program structure as part of the insurance acquisition process.

5. Section 11 Lawsuits: Coming Soon to a State Court Near You (July 21, 2008): One of the more interesting (yet little noted) features of the subprime and credit crisis-related litigation wave has been the frequency with which plaintiffs’ lawyers in reliance on the ’33 Act’s concurrent jurisdiction have chosen to file Section 11 lawsuits in state court rather than federal court.

As I speculated elsewhere (refer here), these state court lawsuits arguably represent an involved form of forum shopping. They also may represent an attempted end run around the PSLRA’s procedural requirements. But whatever the motivation may be, the plaintiffs’ bar has shown a heightened interest in proceeding in state court and have even has some success in opposing removal to federal court.

In the general hubbub of the current financial turmoil, this litigation development has not attracted nearly as much attention as it deserves. The anomalous phenomenon of federal class action litigation going forward – in significant volume – in state court represents a trend that deserves greater attention. As I have noted in this blog post, some "recalibration" may be required.

6. A Closer Look at the Fed’s $85 Billion AIG Bailout (September 17, 2008): Both the significance and consequences of the AIG bailout are still emerging, as reflected in Carol Loomis’s December 24, 2008 Fortune article (here). But in rereading a blog post written in the immediate aftermath of the first announcement of the AIG bailout, it appears that many of the continuing questions were immediately apparent.

7. WaMu: A Thrift Falls in the Forest: (September 28, 2008): It is one measure of the massive scale of this fall’s events that the largest bank failure in U.S. history is almost a footnote to the year’s events. Even though WaMu’s failure may be overshadowed by other events, that does not mean that the event lacks significance. Indeed, many of the consequences of WaMu’s collapse still have yet to emerge.

Moreover, WaMu was only one of 25 bank failures in the U.S. during 2008. Though overshadowed by other more dramatic events, these bank failures portend further difficulties in 2009.

8. More Damn Things to Worry About (September 30, 2008): So many things happened so quickly in September 2008 that we were all left wondering: what else could go wrong? This post embodies sheer frustration we felt at the time and the depth of the concern about what may lie ahead. Many of the specific fears expressed have indeed come to pass. Though written quickly and at a very late hour, the post withstands scrutiny now.

9. Reading the New Buffett Bio (October 8, 2008): In the midst of this Fall’s financial crisis, it was a reassuring pleasure to read about Warren Buffett’s life. I enjoyed Alice Schroeder’s new biography of Buffett, and I enjoyed writing about her book. Writing a book review is something of a departure for this blog, but it stands out perhaps for that very reason. Given everything that was happening at the time, it was a relief just to read a book.

10. The Evolving Credit Crisis Litigation Wave (December 3, 2008): As we head into 2009, it is critically important to understand that as 2008 progressed, not only did the credit crisis itself evolve into something much more extensive and dangerous, but so too did the related litigation wave. In an earlier post (here), I speculated that the litigation wave might have reached an "inflection point." Further lawsuit filings confirmed that the litigation wave has spread beyond the financial sector.

Because this litigation wave is likely to continue to spread in the weeks and months ahead, this development represents an important and noteworthy trend for the New Year.

And Finally: In addition to my favorite blog posts, I also had a favorite video of the year, the viral video Where the Hell is Matt? I not only smile every time I watch this video, I like it a little bit more with each viewing. YouTube reports that the video has been viewed over 16 million times. Matt’s website (here) reports that the video was shot in 42 countries and took 14 months to videotape and edit.

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FDIC Report: More Bank Failures Coming?: The FDIC’s Quarterly Banking Profile for the third quarter 2008 (here), released on November 25, 2008, paints a dismal picture of the banking industry.

Among other things, the Report notes that during the third quarter the number of insured institutions on the FDIC’s "Problem List" increased from 117 to 171, and the net assets of "problem" institutions rose from $78.3 billion to $115.6 billion. This represents the first time since the middle of 1994 that assets of "problem" institutions have exceeded $100 billion.

These grim statistics suggest further bank failures ahead. A November 25, 2008 CFO.com article discussing the FDIC’s report (here) quotes FDIC chairperson Sheila Bair as saying "we expect more banks to fail."

In its November 25 press release (here), the FDIC also notes that "community banks – those with total assets of under $1 billion – are beginning to exhibit stresses similar to those facing the industry as a whole." However, the press release also comments that "capital levels and reliance on retail deposits remain higher at those banks than the industry average."

My recent post detailing the latest bank failures and possible implications can be found here. My earlier post addressing the possibility of a new wave of "dead bank" litigation can be found here.

Big FCPA Penalties Ahead: According to statements reported in a November 25, 2008 Law.com article (here), the SEC’s deputy enforcement division director expects the imposition in the next two to six months of Foreign Corrupt Practices Act (FCPA) penalties that will "dwarf the disgorgement and penalty amounts that have been obtained in prior cases."

The biggest FCPA penalty to date is the $44.1 million settlement Baker Hughes paid last year to settle charges of bribery and other improper conduct in six countries (about which refer here).

One probe attracting particularly attention is the investigation involving Siemens, which in 2006 disclosed that it had uncovered more than $1 billion in bribes paid in over a dozen countries in order to win contracts. The potential magnitude of this fines and penalties Siemens could be facing may be inferred from Siemens’ recent 1 billion euro provision for the expected settlement with U.S. and German authorities of bribery allegations (about which refer here).

A "twist" noted with respect to the forthcoming cases is that a "significant" number involve violations that were not self-reported by the companies. In the recent past, many of the FCPA enforcement cases have arisen when companies themselves discovered and reported violations. However, many of the newer cases "were generated by other leads," such as the SEC’s own investigatory work or whisteblowers.

As I have noted in prior posts (most recently here), one of the risks increasingly associated with FCPA enforcement actions is the threat of follow-on civil litigation. For example, Siemens itself is the subject of a purported shareholders’ derivative suit in the U.S. related to its ongoing bribery investigations. As the scale of FCPA enforcement activity grows, the threat of FCPA-related civil litigation will also increase.

Litigation Funding Developments: In a November 2008 report on Transatlantic Trends in Business and Litigation (here), the Lloyd’s insurance market, among other things, examines the growing prevalence of third-party litigation funding, whereby investors financially support a claimant in return for a share of the damages. (My recent post discussing the role of litigation funding in the Australian class action against Centro Properties can be found here.)

The Lloyd’s report concludes that businesses on both sides of the Atlantic "should expect third party litigation funding to rise," and that "current economic conditions may actually accelerate the growth."

Meanwhile, a start-up venture is planning to try to launch an IPO in what may be one of the more creative attempts to try to fund litigation. According to a November 18, 2008 Pensions & Investments article (here), VR Holdings, Inc. is planning the offering to try to "provide liquidity" for the suit’s 2,500 claimants, 2,000 of whom are older than 65 and concerned that they may not live to see the suit settled. (For reasons specified below, these concerns may be well founded.)

According to the company’s President, the IPO will "give the claimants a vehicle to hopefully generate some funds for themselves." The offering is a "way to sell stakes in the eventual payout," in that the shares will be "like an option that sells for around $1 but has a potential upside of $12 or $14." (I guess this fellow believes the company is not yet in the quiet period.)

The suit, which has been filed against several investment firms, alleges that the defendants conspired to "take over, liquidate, and bankrupt" (I presume not necessarily in that order) a concert T-shirt maker.

In addition to possible legal objections to this litigation funding arrangement, the prospective IPO may face a more immediate practical obstacle. That is, the case, which was pending in the Northern District of Illinois, has already been dismissed with prejudice. It is unclear from the article whether a timely notice of appeal was filed. (No, I am not making any of this up.)

The prospective IPO sponsors may want to reconcile themselves to the possibility that investors may not exactly fall all over themselves to get a piece of this action.

And Finally: The Securities Docket blog has an interesting interview (here) with trailblazing blogger Mike O’Sullivan of the Munger, Tolles & Olson law firm, whose trendsetting Corp Law Blog showed the way for many blogs that followed, including The D&O Diary. After running his blog for some time, O’Sullivan ultimately stopped adding new posts in 2004.

In discussing the reasons why he discontinued the blog, O’Sullivan notes that he was facing "existential doubts" of the kind that will be familiar to any blogger, including yours truly: "Why am I doing this? What do I really have to say? Why are you reading this?"

In commenting on the current crop of corporate and securities blogs, O’Sullivan mentions that one blog he "slavishly" follows is Broc Romanek’s (and now Dave Lynn’s) Corporate Counsel blog (here), which I mention here because it is a blog that I read every day as well.

Hats off to Bruce Carton for the interview and for his new Securities Docket site (here) which has quickly also become a daily (or even several times daily) must-read.

Blogging Off: The D&O Diary likely not be adding any new posts for the next few days. We will resume our "normal" publication schedule after December 1.

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On November 13, 2008, I participated on a panel at a seminar sponsored by the Pennsylvania Bar Institute in Philadelphia, Pa. The topic of the panel was "Blogging for Lawyers." Appearing with me on the panel was Francis Pileggi, the author of the Delaware Corporate and Commercial Litigation Blog (here). In connection with the panel, I delivered a paper, which is reproduced in a slightly modified form below. Francis has also posted his paper on his blog, which can be accessed here.

I would like to thank Francis for inviting me to participate in this panel, which was a fascinating experience. Clearly, many lawyers (and perhaps others, too) are interested in knowing more about blogging. Here is my paper:

The First Amendment to the U.S. Constitution enshrines freedom "of the press" as one of our nation’s most hallowed rights. Historically, at least, only the few fortunate enough to own a printing press could actually benefit from this constitutional protection.

Until now.

As a result of technological innovation, it is now possible for everyone in effect to have their own printing press in the form of a blog and to publish their views to the entire world via the Internet. This new medium is both powerful and flexible, and represents and extraordinary new means for personal expression, for the exchange of ideas, and for the advancement of economic interests.

The Benefits of Blogging

Perhaps many of the benefits of blogging may seem self-evident, but my own experience has included many unforeseen and unanticipated benefits that have contributed significantly to the overall value of the enterprise.

1. A Larger Stage: As a professional based in suburban Cleveland, I could be susceptible to isolation, obscurity and even irrelevance. The blog not only facilitates a connection with my immediate professional community, but also with a larger national and even international audience, far beyond the relatively narrow scope of my day to day professional activities.

One of the more interesting and gratifying developments from the blog has been the links my blog has enabled me to form with academics, regulators, journalists, and attorneys from an incredibly diverse variety of contexts and jurisdictions. The resulting dialog has not only been intellectually enriching, it has also helped to raise my professional profile far more than any other professional development activity I have ever undertaken.

2. Recognition: Simply by virtue of having a blog on a topic, others assume you are an expert. Whether or not this is actually the case, I have been quoted, as a supposed expert, in national and international publications, including The Wall Street Journal, The New York Times, Bloomberg, The Los Angeles Times, The San Francisco Chronicle, among many others.

I have been invited to speak at or even moderate a wide variety of conferences and other events. I have been asked to lecture at law schools. I have been invited by law firms to speak to their clients. I have been asked by investment banks to share my thoughts about industry trends with their clients. I have been retained by consulting firms, accounting firms and actuarial firms. I have been asked to contribute written work to numerous publications. Virtually all of these opportunities have come my way as a result of the blog.

3. A Voice in the Dialog: In my field as in many others, there is an ongoing dialog about issues and developments. The blog ensures not only that my voice is heard in this ongoing dialog, but it also allows me the means to try to set the agenda. While I would not be so immodest as to claim that the blog has allowed me to be influential, it has at least assured that my voice is heard. Whatever else might be said about my contributions, as a result of the blog, I am not irrelevant, despite being based in Beachwood, Ohio (which, by the way, is a pretty nice place).

4. An Audience is a Great Thing: A blog is a medium of expression. It is also a medium of communication, and many audience members will communicate with a blog’s author. This has proven to be one of the most important parts of my blogging experience, as audience members constantly provide me with ideas, suggestions and questions that have immeasurably enriched my blog. Indeed, I have gotten many of my best ideas from readers and I truly love it when readers communicate with me about my blog.

If there is any downside, it is that it takes time to respond to reader inquiries and comments. I also wish that readers would feel freer to post their comments directly on my blog. It is fine for readers to tell me that they disagree with me, but it would be so much better if they would tell everyone. All of that said, a strong and active readership is one of the important parts and one of the most important benefits of a successful blog.

5. Trend Watching Begets Trend Knowledge: There is an unexpected side-benefit from making a practice of observing, thinking about and commenting on trends and developments. That is, these practices ensure that I am aware of and have thought about all of the latest trends and developments. This has a direct payback for my professional practice, which is that I am fully prepared to speak knowledgeably about most topics that are likely to arise in the typical business setting. This is a substantial asset in many professional and business meetings.

6. The Blogosphere: Another significant benefit from blogging consists of the links I have developed with fellow bloggers. The blogosphere is a congenial and mutually supportive place. Bloggers show each other courtesy and respect. Fellow bloggers helped support and publicize my blog in its early days, and have continued to supply me with information and commentary all along the way. The blogosphere’s conviviality adds a measure of satisfaction and enjoyment to the blogging experience.

The Burdens of Blogging

As a practical matter, just about anything anyone would need to have a successful blog is available for free on the Internet. But even if blogging might be free, that does not mean that it is without its costs. A blog is a harsh mistress, and the demands required ought to be fully considered by anyone contemplating blogging.

1. Time: I am frequently asked how much time I spend on my blog. I usually try to laugh off the question with a joke. The reality is not very funny. I actually spend a lot more time on the blog that I think anyone could possibly imagine. It helps to be a closet insomniac. I spend many, many hours on my blog, hours stolen from time in which I would otherwise be relaxing, enjoying my family, or sleeping. The blog takes an insane amount of time.

2.Blogging is a Lot Harder Than it Looks: I think every blogger starts their blog in a burst of optimism, with a backlog of things they are yearning to express. The early enthusiasm and reservoir of ideas carry the blog for a time. But the real challenge is sustaining the blog after the initial enthusiasm fades and the backlog of ideas is depleted. During the time I have been blogging, there have been many promising new blogs that have dazzlingly burst out, generated truly interesting and impressive content, and then quietly blinked out of existence. Sustaining a blog for the long haul is difficult.

Finding things to write about and finding the time to write them is hard work that requires serious commitment. I have found myself blogging in airports, hotels, coffee shops, beach houses, trains, basements, attics, and spare bedrooms. I have worked on my blog in London, Cologne, Montreal, Quebec City, San Diego, Dallas, Dubuque, Omaha, Tampa, and just about everyplace in between; I have posted blogs from laptops, libraries, Internet Cafes, and hotel business centers, and just about any other location where the Internet can be accessed. I have blogged on my birthday, Christmas Day, my anniversary, on vacation, during the Super Bowl, during rainstorms, during snowstorms, and even on beautiful sunny days.

I think writing a blog is a possibility that everyone ought to consider, but at the same time it should also recognized that not everyone will want to do everything that is required to sustain a blog over time.

3. The Benefits Are Indirect: There may be bloggers whose blogs produce direct economic benefits commensurate with the time and effort required. But for most bloggers, the most identifiable economic benefits are indirect. To be sure, I have developed revenue-producing client contacts directly as a result of the blog. But these developments are the exception, not the rule.

There is of course substantial reputation-enhancing power in having blog. I think the heightened professional profile my blog has helped me to raise will in the long run translate into significant revenue generating opportunities. But others might conclude that there are shorter, more sure-fire paths to business development.

4. Conflicts: A constant blogging concern is remaining sufficiently mindful of the possibility that the views I express on my blog potentially could conflict with the interests of my current or future clients. I try as hard as I can to be circumspect. But I can imagine that this concern about potential conflicts might well discourage some professionals who might otherwise be inclined to blog.

Three Things Potential Bloggers Should Know

1. Technology: It is easy to set up a blog. About two minutes on Blogger.com is enough to get started. But to get a blog set up the way you want and to deal with all of the problems that inevitably arise, a willingness to futz around with technology is indispensible. Fee-based services such as LexBlog reduce – but do not eliminate – the need to directly confront the technological beast. I would not recommend blogging to anyone who is uncomfortable troubleshooting technological issues.

2. The Downside of Owning a Printing Press: I made the analogy above comparing a blog to a printing press. The analogy is far more apt than might appear at first blush. As a blogger, you are in fact in the publishing business. For example, you have subscribers, who will expect you to address delivery problems, subscription questions and complaints, as well as delivery interruption and cancellation issues. Addressing subscriber concerns and questions is an ongoing challenge.

In addition, a blogger has editorial responsibilities. I am frequently called upon to address such issues as faulty or missing hyperlinks, misspellings, and erroneous references. These kinds of concerns can not only be time-consuming, they can also be disheartening. Without editors or fact-checkers, a blogger almost inevitably encounters these kinds of concerns, especially given the time pressure inherent in the blogging medium. Remedying these kinds of concerns is an indispensible but underappreciated part of the blogging process.

3. Plagiarism Happens: I recently participated in a business competition where our team presented directly after one of our competitors. One of the questions the prospect asked in our meeting directly quoted information the competitor had provided to the prospect in the preceding meeting. The information consisted of original research I personally conducted and about which I had written on my blog. I was astonished and appalled not only that a competitor would brazenly plagiarize my original work, but even more astonished that the competitor would even think about attempting to use the information to compete against me.

Call me naïve. I work very hard on my blog to make sure that I credit my sources. Given my own personal practices and standards, the idea that someone would simply plagiarize my work never occurred to me. For the first time, I have experienced serious reservations about the wisdom of sharing my original work with the whole world. I still have misgivings which I have not entirely reconciled. All I can say is that would-be bloggers should be more aware of this issue than I have been.

Conclusion

Some of my remarks here might discourage some potential bloggers. I do not intend to be discouraging, merely realistic. That said, all of the burdens, challenges and concerns notwithstanding, I have found blogging to be enormously satisfying on both a personal and professional level. In the end, while there might be a host of good professional reasons for me to have a blog, I have found the enterprise worthwhile simply because I have found it satisfying. If I didn’t enjoy doing it so much, I wouldn’t do it.

A blog is a wonderful platform for self-expression. The opportunity to express my views knowing they will be read by a wide variety of persons around the world is stimulating and gratifying. I am constantly reminded of the power of the Internet. The idea that I can have my own little corner of the Web that thousands of people voluntarily and repeatedly choose to visit is just so inexpressibly cool. It never ceases to amaze me.

Afterword

Based on the questions at today's seminar, I realize that there many additional topics about blogging that I should attempt to address, beyond the issues I discussed above.  Topics that came up today included: 

How do you get started blogging? 

How is the blogging medium different from mainstream media, and why does it matter? 

How should a busy professional sort, access and use law blogs? 

Time and space do not allow me to address these issues here. But these are all worthy topics, which I hope to try to address in forthcoming posts in the next few weeks.

In the interim, I very much welcome readers questions and comments about blogging. I am very interested in sharing my thoughts and knowing more about readers' thoughts on this topic.

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