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

The Deepwater Horizon platform explosion and oil spill took place in the Gulf of Mexico, about 250 miles southeast of Houston. The environmental damage took place in the Gulf and along the Gulf shore in the Southeastern United States. When BP’s shareholders tried to sue the board of directors of BP -- a corporation organized under the laws of England -- in a derivative suit filed in federal court in the U.S. alleging breaches of fiduciary duty, they clearly hoped their suit would do better in a court closer to the site of the disaster and ensuing spill. But the district court dismissed the suit on forum non conveniens grounds. In a January 16, 2013 opinion (here), a three-judge panel of the Fifth Circuit affirmed the dismissal.

As discussed here, plaintiffs filed the first of several derivative lawsuits in connection with the Deepwater Horizon oil spill in May 2010. Though many of the lawsuits were first filed in the Eastern District of Louisiana, the cases were ultimately consolidated through the multidistrict litigation process in the Southern District of Texas. However, while the lawsuits were filed in U.S. courts, they asserted claims under the U.K. Companies Act 2006 (about which refer here). The defendants moved to dismiss the consolidated derivative litigation in the grounds of forum non conveniens.

In a September 15, 2011 ruling, Judge Keith Ellison of the Southern District of Texas determined that, notwithstanding the fact that the Deepwater Horizon disaster took place in the U.S. and caused extensive environmental damage here, “the English High Court is a far more appropriate forum for this litigation,” and accordingly he granted the defendants’ motion to dismiss the cases.  Judge Ellison’s decision can be found here. My prior post discussing Judge Ellison’s opinion can be found here.

In its January 16 per curiam opinion, the Fifth Circuit panel affirmed the district court’s decision, concluding that the lower court had not abused its discretion in granting the dismissal on forum non conveniens grounds.

Among other things, the Fifth Circuit reviewed the multipart analysis a district court must use in order to determine whether or not to dismiss a case on forum non conveniens grounds. Among the most important of considerations is whether or not there is an alternative forum where the matter can be heard. In order to satisfy the availability requirement, the district court had conditioned its dismissal on the Defendants filing a stipulation that they would submit to the jurisdiction of the English courts, which the Defendants had done. The Fifth Circuit concluded that the stipulation satisfies the availability requirements.

Another important consideration a district court must consider in connection with a motion to dismiss on forum non conveniens grounds is the existence of a local interest in the dispute. The Fifth Circuit concluded that the district court had not abused its discretion in determining that, because this dispute was not intended to redress the impact of the Deepwater Horizon disaster in the United States but rather was intended to compensate the British company BP for its financial and reputational harm, England had the greater local interest in the matter.

The Fifth Circuit also concluded that the district court had “reasonably” determined that public interest factors weighed heavily in favor of England as a more convenient forum, given that the English statute on which the plaintiffs sought to rely had only recently been enacted leaving the U.S. courts with little jurisprudence to use to try to apply the statute properly.

The plaintiffs chose to file their suit in the U.S. rather than in the U.K. undoubtedly had something to do with a perception that a court in closer proximity to the damages caused by the spill might prove to be a more receptive forum. The selection of a U.S. court over an English one also reflects the more general advantages a plaintiff enjoys here by comparison to English courts – for example, the absence in the U.S. of a “loser pays” model, among other things.

These kinds of advantages often encourage plaintiffs with claims involving non-U.S. companies to try to pursue their claims in U.S. courts. But the outcome of the dismissal motion in the BP derivative suit represents just one more example of the many ways prospective litigants are finding it increasingly more difficult to pursue corporate and securities claims against non-U.S. companies in U.S. courts. Courts interpreting the U.S. Supreme Court’s Morrison decision have significantly narrowed the circumstances in which securities claims involving foreign companies can go forward in U.S. courts. The Fifth Circuit’s affirmance of the dismissal of the BP derivative suit underscores the difficulties prospective claimants may fact in pursuing derivative suits involving non-U.S. companies here as well.

Among the many other lawsuits filed in connection with the Deepwater Horizon disaster, there also was, in addition to this shareholders’ derivative suit, a securities class action lawsuit. Though the separate securities class action lawsuit will be going forward at least in part, the preliminary motions in the securities suit also demonstrate some of the challenges plaintiffs now face in trying to pursue claims in the U.S. against non-U.S. companies. As discussed here, in a February 2012 ruling, Judge Ellison denied in part the motions of defendants to dismiss the securities class action lawsuit that BP shareholders had filed in connection with the Deepwater Horizon disaster.

Though Judge Ellison denied the motions to dismiss with respect to the claims asserted by securities class action plaintiffs who had purchased BP ADRs on the U.S. securities exchanges, he granted the motion to dismiss all of the claims – including claims asserted under New York state law and English common law – of U.S.-domiciled investors who purchased their BP shares on the London Stock Exchange. Judge Ellison specifically concluded that because the federal securities laws do not apply to the securities transactions on LSE, he also lacked supplemental jurisdiction to consider the English common law claims. By shaving off the claims of the shareholders who purchased their shares, Judge Ellison dramatically narrowed the scope and range of potential damages in the securities class action lawsuit.

Jan Wolfe’s detailed January 18, 2013 Am Law Litigation Daily article about the Fifth Circuit’s ruling in the BP derivative suit can be found here.

• Print
• Comments
• Trackbacks
• Share Link

In the wake of the disastrous April 2010 Deepwater Horizon oil spill, BP was hit with a wave of litigation from plaintiffs asserting claims of personal injury, wrongful death and property damage. The claimants also included BP shareholders raising allegations that they had been misled regarding BP safety efforts and processes. In a 129-page February 13, 2012 opinion (here), Southern District of Texas Judge Keith Ellison, while granting the defendants’ motion to dismiss certain of plaintiffs’ allegations, denied defendants’ motion to dismiss many of the allegations of BP investors who had purchased BP American Depositary Shares (ADS) on the New York Stock Exchange.

However Judge Ellison granted the defendants’ motion to dismiss all of the claims – including claims asserted under New York state law and English common law – of U.S.-domiciled investors who purchased their BP shares on the London Stock Exchange.

Finally, in a separate 82-page order also dated February 13, 2012 (here), Judge Ellison granted without prejudice defendants’ motion to dismiss the claims on a separate group of Plaintiffs (the “Ludlow plaintiffs”).

Background

The Deepwater Horizon oil spill lasted for eighty seven days and cost BP somewhere between $20 billion and $40 billion. Over the course of the disaster, over four million barrels of oil spilled in the Gulf at a rate of about 60,000 per day. From the date of the initial explosion to the final date of the class period in the securities class action lawsuit, BP’s market capitalization fell over $91 billion.

As detailed here, investors filed the first of their securities class action lawsuits against BP, related entities and certain of its directors and officers in May 2010. The various suits were transferred to the Southern District of Texas. The cases were ultimately consolidated, and the New York Controller and the Ohio Attorney General were appointed as lead plaintiffs. Judge Ellison also appointed a separate subclass consisting of the Ludlow plaintiffs. The New York and Ohio plaintiffs alleged that BP had made a series of fraudulent misstatements about its safety efforts and procedures beginning in 2007. The Ludlow plaintiffs’ allegations related to specific statements about the company’s Gulf operations in the thirteen months prior to the Deepwater Horizon explosion.

The New York and Ohio plaintiffs named as defendants BP, certain BP-related entities and ten former directors and officers. The Ludlow plaintiffs alleged claims against certain BP entities and nine individual defendants. The defendants moved to dismiss.

The Court’s February 13, 2012 Rulings

In his February 13 opinions, Judge Ellison agreed with the defendants that certain of the New York and Ohio plaintiffs’ allegations were legally insufficient, and that the plaintiffs’ allegations as to certain of the individual defendants were also insufficient. However, he also held, at least with respect to the claims of ADS investors, that other allegations were sufficient and that adequate claims had been asserted against the BP entities, former BP CEO Tony Hayward, and against Douglas Suttles, BP’s Chief Operating Officer for Exploration and Production from January 2009 to January 2011.

Judge Ellison held that the ADS investors had adequately pled misrepresentations regarding BP’s progress in the year’s preceding the Deepwater Horizon disaster in implementing the recommendations of an independent committee BP had organized and that had been chaired by former U.S. Senator Howard Baker (the so-called Baker Report); regarding its ability to respond to a spill in the Gulf of Mexico; regarding its reported retaliation against employees who raised safety concerns; and regarding post-spill estimates of the spill amounts. Judge Ellison also found that he could not conclude at this stage that the alleged misrepresentations were immaterial.

With respect to the plaintiffs’ allegations concerning the company’s implementation of the Baker Report recommendations, Judge Ellison said that “the Deepwater Horizon explosion, subsequent investigation, and other facts Plaintiffs allege pointing to similarities between the Deepwater Horizon accident and BP’s history of safety failures support Plaintiffs’ contention that BP seriously overstated the ‘progress’ it had made in implementing the Baker Panel’s recommendations.”

Judge Ellison also found that the plaintiffs had “sufficiently pleaded facts to demonstrate that BP misrepresented the size of the spill it was prepared to respond to in the Gulf and misrepresented the Company’s general spill response capabilities.”

In addition, he found that “the alleged facts sufficiently, even forcefully, establish that BP was knowingly retaliating against workers who reported safety concerns, even while issuing statements explicitly denying any retaliation.”

Judge Ellison granted the motions of eight of the ten individual defendants, ruling either that the plaintiffs had not adequately tied the individuals to the allegedly misleading statements or had not adequately alleged scienter. However, he concluded that the scienter allegations were sufficient as to the BP entity defendants, Hayward and Suttles. With respect to Hayward, Judge Eillson noted that “Hayward defined his position as CEO to include a special and targeted focus on process safety. Taking him at his own word, the Court finds that Plaintiffs have sufficiently pleaded scienter with respect to Hayward.”

With respect to the BP entities and Suttles, Judge Ellison focused in particular on the disclosures following the accident regarding the size of the spill and BP’s recovery capabilities. He observed that “the difference between what BP was actually able to recover and what it claimed it could recover is so great that the projected numbers … appeared to have been invented out of thin air.” Though BP claimed it could recover nearly 500,000 barrels of oil a day, forty-nine days after the explosion, BP was recovering only 15,000 barrels a day.

However, based on the U.S. Supreme Court’s holding in Morrison v. National Australia Bank, Judge Ellison granted the defendants’ motion to dismiss the Section 10(b) claims of U.S. investors who had purchased ordinary BP shares on the London Stock Exchange. He also held that these investors New York common law class action claims were precluded under SLUSA. Finally, he held that the Court lacked original jurisdiction over these investors claims under English law, holding that because the Court lacked jurisdiction over the Section 10(b) claims, the court lacked supplemental jurisdiction over the Englsh law claims.

In granting the defendants’ motion to dismiss the Ludlow plaintiffs’ claims without prejudice, Judge Ellison found that certain of the defendants’ statements in the months preceding the Deepwater Horizon disaster were materially misleading. However, with respect to those statements, Judge Ellison found that the plaintiffs had not adequately pled scienter. Judge Ellison observed that “the court is acutely aware that federal legislation and authoritative precedents have created for plaintiffs in all securities actions formidable challenges to successful pleading. Today’s decision is a reflection of that. By no means, however, does the Court mean to signal that no pleadings that Plaintiffs could proffer would be successful. An amended complaint may well be able to adduce additional information responsive to this Court’s concerns.” He granted the Ludlow plaintiffs’ twenty days in which to file an amended complaint.

Discussion

Though Judge Ellison’s rulings eliminate many of the New York and Ohio plaintiffs’ allegations and several of the individual defendants, substantial parts of their claims survived the dismissal motion and will go forward. Moreover, the possibility remains that the Ludlow plaintiffs may be able to amend their pleadings sufficiently to survive a renewed motion to dismiss.

The dismissal of the ordinary shareholders’ claims is a more substantial blow. As Nate Raymond notes in his February 13, 2012 article on Am Law Litigation Daily about Judge Ellison’s rulings (here), the ADS investors may represent a smaller part of BP investors.

Nevertheless, the claims that will for sure going forward are substantial. In his recitation of these allegations, Judge Ellison betrayed a sense of outrage, undoubtedly a reflection of the magnitude of this disaster. Neither the survival of these allegations nor the Court’s unmistakable sense of outrage bodes well for BP. The possibility of a trial in the Southern District of Texas is a prospect that BP could not rationally contemplate. However, the nature and magnitude of the allegations and the sheer size of the market cap loss could make any attempt to settle this case extremely difficult, notwithstanding the reduced size of the investor class. For all of these reasons, it will be very interesting to watch this case as it goes forward.

Judge Ellison’s holdings regarding the U.S. investors who purchased their shares on the London exchange add an interesting additional element to his opinion. His ruling that Morrison precludes the claims of these investors (sometimes referred to as F-squared investors, because the involve U.S. investors who purchased shares in a foreign company on a foreign exchange), is consistent with rulings of other courts who have been faced with f-squared investor claims in the wake of Morrison. However, his conclusion that the New York common law claims were precluded under SLUSA and that he lacked jurisdiction over the English law claims are interesting and could be important in other cases where plaintiffs’ seek to circumvent Morrison. (It is worth noting in that regard that the court presiding over the Toyota shareholders’ securities class action has rejected the efforts of plaintiffs in that case to rely on Japanese law.)

Alison Frankel has a detailed analysis of the Court’s consideration of the Morrison issues in her February 13, 2012 post on Thomson Reuters News & Insight, here.

The fact is, however, that these F-Squared investors have just as much reason to feel aggrieved by the defendants’ alleged misrepresentations as the ADS investors. The F-squared investors just don’t get access to a U.S .court, which leaves them with the dilemma of whether they can pursue their claims elsewhere. Hurdles to trying to pursue these kinds of claims in England (lack of class action procedures, loser pays rules) might encourage these displaced investors to consider claims elsewhere – perhaps Canada or the Netherlands? It will be interesting to see whether these investors try their luck elsewhere.

Judge Ellison’s concluding remarks in which he granted the Ludlow plaintiffs leave to attempt to replead their allegation sounded remarkably sympathetic. He not only acknowledged how hard it is for plaintiffs to try to overcome the threshold pleading obstacles, but he sounded like he was sorry about it, as if he felt that  perhaps that plaintiffs ought not to be faced with such onerous initial pleading hurdles. Those sentiments are of course cold comfort to the Ludlow plaintiffs if they are unable to overcome the pleading hurdles with their amended pleadings. (For those who are curious, Ellison, who was a Rhodes scholar and who clerked for Justice Harry Blackmun, was appointed to the bench by President Clinton.)

One final note. I was struck in reading Judge Ellison’s opinion how influenced he was by BP’s communications after the disaster. These opinions provide a very stark reminder that the way that a reporting company manages bad news can substantially affect the company’s securities litigation exposure. These opinions and Judge Ellison’s retelling of the tale provide some pretty stark lessons for other companies trying to deal with bad news. A negative lesson from these circumstances is that there are things a company can do to avoid further damaging the company even after disaster has struck – and there are things a company can do to make things worse, too

. 

A February 13, 2012 Bloomberg article regarding Judge Ellison’s rulings can be found here. In an earlier post (here) I discuss Judge Ellison's September 2011 ruling dismissing the BP Deepwater Horizon derivative suit in favor of an English forum.

• Print
• Comments
• Trackbacks
• Share Link

A wave of litigation followed in the wake of the April 2010 Deepwater Horizon oil spill. Among this litigation were several shareholder derivative suits filed against certain directors and officers of BP and of its U.S. subsidiary. At the time these cases first arose, I asked whether or not these suits involving (and ultimately for the benefit of) an English corporation and even asserting claims under English law would be permitted to go forward in U.S. courts.  

A September 15, 2011 ruling from Judge Keith Ellison of the Southern District of Texas determined that, notwithstanding the fact that the Deepwater Horizon disaster took place in the U.S. and caused extensive environmental damage here, “the English High Court is a far more appropriate forum for this litigation,” and accordingly he granted the defendants’ motion to dismiss the cases.  Judge Ellison’s September 15 decision can be found here.

As discussed here, plaintiffs filed the first of several derivative lawsuits in connection with the Deepwater Horizon oil spill in May 2010. Though many of the lawsuits were first filed in the Eastern District of Louisiana, the cases were ultimately consolidated through the multidistrict litigation process in the Southern District of Texas. However, while the lawsuits were filed in U.S. courts, they asserted claims under the English Companies Act of 2006 (about which refer here). The defendants moved to dismiss the consolidated derivative litigation in the grounds of forum non conveniens.

In his September 15 ruling, Judge Ellison granted the defendants’ motion to dismiss. He summarized his ruling by saying that “this case is a shareholder derivative action brought under a recently enacted U.K. statute on behalf of an English Company against numerous English defendants and other foreign nationals.” The Court, he said, is “persuaded that the Complaint should be dismissed under the doctrine of foreign non conveniens, as the English High Court is the more appropriate forum for this case.”

Judge Ellison found that considerations of public interest “most strongly favor England as the appropriate forum in which to proceed with this case.” He noted that the focus would not be the events in the Gulf that led up to the oil spill, but rather the actions of the company’s board, which took place in England. He commented that “this lawsuit is not intended to redress the devastating impact of the Deepwater Horizon disaster in the Unites States. Instead the lawsuit is intended to compensate BP for the financial and reputational harm the company suffered as a result of its high level management’s alleged disregard for the safety of its operations.”

Judge Ellison noted that “the primary concern of this derivative litigation is the internal affairs of an English corporation, and the suit seeks to recover damages for the benefit of BP only.” He concluded that England “has a far greater interest in the resolution of this dispute.”

Judge Ellison was particularly concerned that were the case to remain in a U.S. court, the court would have to interpret and apply the recently enacted Companies Act. If the case were to go forward in a U.S. court, “the Court would be faced with the formidable exercise of interpreting and applying a still nascent and evolving body of law.”

Judge Ellison did condition his dismissal on the defendants proferring adequate proof that they are amenable to service of process in England or submitting a stipulation that the will submit to the jurisdiction of the appropriate English court.

Although the claimants clearly would have preferred to pursue their mismanagement claims against the BP officials in the U.S., where the disastrous oil spill occurred, Judge Ellison found that the allegations in this case involve alleged actions or inactions that took place in England. The fact is that though the shareholders chose to file their action here in preference to England, with full awareness that English courts presented an alternative forum. The decision to file here rather than there undoubtedly had something to with a perception that a court in closer proximity to the damages cause by the spill might prove to be a more receptive forum. The selection of a U.S. court over an English one also reflects the more general advantages a plaintiff enjoys here by comparison to English courts – for example, the absence in the U.S. of a “loser pays” model, among other things.

These kinds of advantages often encourage plaintiffs with claims involving non-U.S. companies to try to pursue their claims in U.S. courts. But the outcome of the dismissal motion in the BP derivative suit represents just one more example of the many ways prospective litigants are finding it increasingly more difficult to pursue corporate and securities claims against non-U.S. companies in U.S. courts. Courts interpreting the U.S. Supreme Court’s Morrison decision have significantly narrowed the circumstances in which securities claims involving foreign companies can go forward in U.S. courts. Judge Ellison’s decision in the BP case underscores the difficulties prospective claimants may fact in pursuing derivative suits involving non-U.S. companies here as well.

Alison Frankel’s September 16, 2011 Thomson Reuters News & Insight article about Judge Ellison’s decision can be found here. Victor Li’s September 16, 2011 Am Law Litigation Article about the decision can be found here.

For Whom the Statute Tolls: Under Section 13 of the ’33 Act, liability actions alleging a violation of the statue must be brought within one year of “discovery of the untrue statute or omission.” Section 13 provides further that in no event shall the action be brought more than three years after the security was first offered to the public. The one year provision represents a statute of limitation and the three year provision represents a so-called “statute of repose.”

Questions of statutes of limitation and repose might seem obscure, but they can often be critical in determining whether or not a case will go forward. A September 15, 2011 decision by Southern District of New York Judge Laura Taylor Swain in the Morgan Stanley Mortgage Pass-Through Certificates Litigation (here) presents interesting and potentially significant rulings on both the statute of limitations and statute of repose issues.

The case involves claims asserted by investors who purchased certain mortgage-backed securities issued by various Morgan Stanley related entities. The plaintiffs allege that the offering documents related to these securities misrepresented and omitted material facts regarding the underwriting standards applied by the loan originators. As detailed in Alison Frankel’s September 16, 2011 article in Thompson Reuters News & Insight (here), this lawsuit has a convoluted procedural history, in part due to the plaintiffs’ efforts to assemble a group of prospective class representatives whose claims were not time-barred. This latest dismissal motion round involved amended allegations and additional named plaintiffs. The defendants again moved to dismiss based on the statute of limitations and the statute of repose.

Judge Swain’s 40- page opinion reflects a number of interesting rulings, particularly with respect to the timeliness questions. First, she rejected the defendants’ arguments, based on information that was publicly available more than a year before the initial complaint was filed, that the claims of the Public Employees’ Retirement System of Mississippi (MissPERS) were untimely. Judge Swain said that though there was ample publicity on issues pertaining to circumstances relevant to the securities, none of the various items of publicity “addresses, even at a speculative level, the disregard of underwriting practices, neglect of appraisal standards, or consequent LTV ration misrepresentations alleged in the [amended complaint]”

Nevertheless, though she found that the early warnings were not sufficient to trigger inquiry notice, she also found that the plaintiffs had not alleged with sufficient specificity the time and circumstances of their discovery of the conduct alleged in their claims. Accordingly she allowed the plaintiffs leave to replead to establish the circumstances of their discovery in order to establish compliance with the one year statute of limitations.

Perhaps even more interesting is Judge Swain’s ruling on the question of the three-year statute of repose, and in particular her application of what is known as the American Pipe tolling doctrine. Under this doctrine, which derives from a 1974 U.S. Supreme Court opinion, the initiation of an earlier class action suit tolls the running of the statute of limitations for other purported class members who may later seek to intervene and represent the class. The application of the American Pipe tolling doctrine to the running of the statute of limitations is well established. A long standing question has been whether American Pipe tolling also applies to the statute of repose. Judge Swain held that American Pipe tolling does apply to the statue of repose, and denied defendants’ argument that the claims of certain new plaintiffs were barred by the statue of repose in the ’33 Act.

In holding that American Pipe tolling applies even to the three-year statute of repose, Judge Swain declined to follow two recent decisions by other Southern District of New York judges. She reasoned that the tolling doctrine is equitable in nature and “permits a court – after weighing the equities in the discrete case before it – to authorize plaintiffs to bring actions outside the limitations period.”

Judge Swain’s ruling about the statute of repose represents a potentially big deal. If followed by other courts, it could potentially be very significant in cases where an initial plaintiff’s purported class action is dismissed for the plaintiff’s lack of standing. Other prospective claimants who might want to come forward at that point might find their claims blocked by the statute of repose, if the initial filing did not toll the statute’s running.

This possibility is not merely theoretical, particularly with respect to the many mortgage-backed securities class action claims that have been asserted in the wake of the financial crisis. In many of these cases, the claimants have had some of their initial claims dismissed because the named plaintiff did not actually buy securities in all of the offerings in which the securities were sold. Judge Swain’s ruling, if followed, would remove one potentially significant impediment that might other wise exist for other prospective claimants who did buy securities in the other offerings and who might want to come forward and assert class claims on behalf of other investors who bought those securities.

The question is whether other courts will follow Judge Swain on these issues, or will follow the other two Southern District of New York decisions that recently went the other way and held that American Pipe tolling does not apply to the statute of repose.  In her September 16, 2011 Am Law Litigation Daily article about Judge Swain’s ruling in the Morgan Stanley case (here), Susan Beck identifies and links to the two other recent Southern District of New York rulings that Judge Swain declined to follow. She also speculates that the Second Circuit will likely weigh in on these issues, given that the two prior cases (which resulted in dismissals) are on appeal to the Second Circuit and have been consolidated for one hearing before that court.

Special thanks to a loyal reader for sending me a copy of Judge Swain’s decision in the Morgan Stanley case.

When Words Fail: Here in the blogosphere, the deadline is always right now. Because of the need for speed and the fact that I work alone (often late at night or very early in the morning), mistakes sometimes make their way into my blog posts. Because I don't the benefit of an editor's surveillance, I am always grateful when readers point out the errors to me, so that I at least have the opportunity to make a correction.

Massive media organizations publishing on a regular weekly basis with the benefit of a large editorial staff have fewer excuses for errors. For that reason, I am always appalled at the slips that make their way into print in some traditional print publications.

This week’s candidate for the boo-boo that someone really should have caught appears in the current issue of Time Magazine (cover date September 26, 2011). In an article entitled “After Three Years and Trillions of Dollars, Our Banks Still Don’t Work” (here, subscription required), Stephen Gandel writes, with reference to comments by analyst Meredith Whitney about the banking sector, “Eventually, Whitney says, growing litigation issues and a continued drop in housing market were bound to burst the levy.” I am pretty sure Whitney meant that eventually the “levee” was bound to burst, as a "levy" might be on a ballot or be imposed but I have never heard of one bursting. In addition, I feel pretty confident that if this were pointed out to Gandel, a “damn” would burst out as well.

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

On May 20, 2010, the U.S. Senate passed the Restoring American Financial Stability Act of 2010 (S. 3217) by a vote of 59 to 39. The Senate websites latest version of the Bill can be found here, and the Senate Banking, Housing and Urban Affairs Committee’s link to the most current version can be found here. Though these may be the most current versions available they do not necessariliy represent the final text of the bill, which was substantially amended and is not yet publicly available.

The Senate Bill must now be reconciled with the financial reform legislation the House passed last December (about which refer here). The reconciliation committee will be selected this upcoming week, and the plan is to have the reconciled version available for President Obama’s signature before July 4.

The massive Senate bill weighs in a 1566 pages. It is in many important ways substantially similar to the House bill, although there are also critical differences. Among the differences is the Senate bill’s controversial provision, sponsored by Sen. Blanche Lincoln, requiring financial firms to separate derivatives trading from banking operations and even spin them off under certain circumstances.

Among other measures that were not included in the Senate bill is the amendment proposed by Senator Arlen Specter that would have legislatively overturned Stoneridge and created a private right of action for aiding and abetting securities fraud. Theoretically, the measure could be included during the reconciliation process, but that seems highly unlikely at this point. Susan Beck’s May 21, 2010 Am Law Litigation Daily article reporting on the amendment’s defeat can be found here.

Another provision not included in the Senate bill is the measure incorporated in the House version (Section 7216) to provide extraterritorial jurisdiction for securities cases involving conduct within the U.S. constituting significant steps in furtherance of the securities violation, even if the transaction occurs outside the U.S. and involves only foreign investors. This provision, if incorporated in the reconciled version of the legislation, would legislatively address the "f-cubed" securities suit raised in many cases, included the National Australia Bank case now before the U.S. Supreme Court.

On the other hand, the Senate bill, like the House version, does incorporate a number of statutory corporate governance reforms. Among other things, the Senate version provides for non-binding shareholder votes on executive compensation (Section 951). The Senate bill also includes a measure requiring clawbacks from "any current or former officer" of incentive compensation awarded in the three year period prior to a financial restatement (Section 954). The Senate bill also adds additional disclosure requirements regarding compensation and regarding employee and director hedging (Sections 952 and 955)

In addition the Senate bill also specifies rules governing director elections (Section 971), among other things mandating that in uncontested elections, directors receiving a majority of votes are deemed elected. The measure further provides that directors receiving less than a majority in an uncontested election shall resign, with the board to consider whether or not to accept the resignation.

The Senate bill also requires companies to disclose the reasons why they have or have not chosen to have the same person serve both as board chair and CEO (Section 973)

The Senate bill also adopts a number of measures under the heading of "Investor Protection and Improvements to the Regulation of Securities." Among other things, the Senate bill, like the House version, includes measures providing protection and rewards for whistleblowers who report securities law violations to the SEC (Sections 922-24). The Senate bill also creates an Investor Advisory Committee that would consult with the SEC on matters pertaining to protecting investor interests (Section 911). The Senate bill also creates an Office of Investor Advocate within the SEC (Section 914).

Of particular interest to readers of this blog, the Senate bill, like the House bill, has a number of provisions relating specifically to insurance. The Senate Bill creates an Office of National Insurance (Section 502), which is in form substantially similar to the Federal Insurance Office in the House version. Like the agency created in the House version the agency created in the Senate bill would be housed within the Treasury Department. Neither the House nor the Senate version envisions that that the new federal agency would replace state insurance regulation. Instead, the new agency would monitor the industry in order to identify systemic risks; oversee TRIA; and coordinate international insurance regulatory efforts, among other things.

The Senate bill also contains a number of other insurance-related provisions, including a section addressing reporting, payment and allocation of premium taxes (Section 521); and another section relation to the regulation of non-admitted insurance (Section 522). Yet another measure specifies streamlined non-admitted insurance procedures for certain commercial insurance buyers (Section 525)

There are many other measures of more general interest in the massive Senate bill, including "improvements" to the regulation of rating agencies (Section 931 et seq.); increased disclosure requirements in connection with municipal securities (Section 975 et seq.); the creation of a Bureau of Consumer Financial Protection (Section 1001 et seq.); provision for the regulation of hedge fund advisors and others (Section 401 et seq.); and the institution of regulation for swap markets (Section 721 et seq.).

Though the ultimate shape of the legislation that will be presented to President Obama remains to be seen, the likely scope of many measures is already relatively clear, as both versions of the legislation include numerous substantially similar provisions. Whether or not the provisions ultimately enacted into law will suffice to prevent future financial crisis is a separate question but there can be little doubt that the financial system is about to face some enormous changes.

It is probably worth emphasizing here, as it may be overlooked elsewhere given the other high-profile issues the legislation involves, that the reform legislation, when enacted, will entail significant federal government involvement in areas previously viewed as the province of state regulation. Specifically, both insurance and corporate governance have until recently been regarded as matters with respect to which state interests should control.

Though significant levels of regulatory responsibility will remain at the state level both for insurance and corporate governance, this reform legislation significantly increases the federal government involvement. It doesn’t seem too suspicious to conjecture that these measures represent significant milestones in what is likely to be continued growth of federal responsibility in these areas.

The bill’s provisions relating to insurance could be of practical significance for insurance professionals. I did not review the provisions at length in this post, but if they survive in some form in the final bill, I will undertake a detailed review at that time.

Rating Agencies in the Crosshairs: The financial reform bill’s provisions relating to the rating agencies represent only one of a variety of developments that is raising the heat for those firms. David Segal’s May 23, 2010 New York Times article entitled "Suddenly, the Rating Agencies Don’t Look Untouchable" (here) takes a look at the assaults the rating agencies are facing on a variety of directions, including on the litigation front.

The article makes the point that though the rating agencies are prevailing in most of the credit crisis related cases in which they have been involved, there have also been a small handful of cases that have survived initial motions to dismiss. The article makes the point that as the litigation evolves, the plaintiffs’ lawyers are learning from every decision, including the dismissals, and are refining their arguments in subsequent cases.

The author of The D&O Diary is quoted briefly toward the end of the article.

More Deepwater Horizon Securities Litigation: As I have previously noted, the Deepwater Horizon disaster has already produced significant corporate and securities litigation, including the BP shareholders derivative suit (about which refer here) and the Transocean securities class action lawsuit (refer here). Now this litigation also includes a securities class action lawsuit filed against BP and certain of its directors and officers.

On May 21, 2010, plaintiffs’ lawyers filed a securities class action lawsuit in the Western District of Louisiana against BP and nine of its directors and officers. A copy of the complaint can be found here. The case is brought on behalf of purchasers of BP’s American Depositary Receipts "based on Defendants' repeatedassurances of BP's safe operations, reflected in the ADR price, have seen the value of their shares plummet 20% overnight - representing about $30 billion in market capitalization - as the truth about BP's operations has emerged."

The complaint alleges that "by touting the growth potential of its Gulf of Mexico operations… and highlighting the safety of the operations, BP convinced investors, including Plaintiffs, that BP would be able to generate tremendous growth with minimal risk." However, the plaintiffs allege, "The truth was that BP was cutting comers and reducing its spending on safety measures in an effort to maximize profits in the Gulf of Mexico."

Interestingly, the plaintiffs’ Louisiana counsel is the law firm of Domengeuax, Wright, Roy & Edwards, a Lafayette, Louisiana firm that has already been very active in pursuing Deepwater Horizon claims on behalf of commercial fisherman, shrimpers, oystermen, and charter boat operators, as well as on behalf of families of persons suffering injuries or death in the initial platform explosion, as reflected here.

Special thanks to Adam Savett of the Securities Litigation Watch blog for providing a copy of the BP complaint.

O.K., Who Invited the Actuary?: In his rambling biography of Pablo Picasso, Norman Mailer describes an opium-laced party at Le Bateau-Lavoir, Picasso’s Montmartre rooming house, where the guests included such luminaries as Guillaume Apollinaire and numerous avant- garde sculptors, painters and poets. Mailer also reports that the guests included "Maurice Princet, the actuarial mathematician for insurance companies, who would give them his own popular introduction to Einstein’s work before long."

Say what?

I mean no disrespect to my many insurance actuary friends, but even were I to have access to Picasso’s opium, I don’t think I could imagine how an actuary wound up in this particular scene. I mean, can you picture Princet trying to bring down the house with the old story about the guy "who couldn’t disprove the null hypothesis"?

In fairness, I should acknowledge that Princet was to play in important role in the later development of "cubism," and indeed has been described by one of the principal actors in the drama as the "godfather" of cubism, for having introduced Picasso to certain mathematical concepts. I don’t think I would be alone, however, in finding it startling that the cast of characters in this particular production includes an insurance actuary.　

• Print
• Comments
• Trackbacks
• Share Link