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

In a May 27, 2011 post on the FCPA Compliance and Ethics Blog (here), Tom Fox has some interesting observations about the ongoing FCPA gun sting trial. (Readers will recall that this prosecution involves numerous individuals from the armaments industry who were caught up in a government sting operation that included extensive wiretaps and an FBI agent posing as a representative of an African government.)

Among other things, Fox comments that this prosecution is a “game changer” because of the government’s use of “organized crime fighting techniques in very mundane white collar crime.”

Fox’s point is a serious one, particularly in view of the government’s use of wiretaps in several other recent high-profile prosecutions. The insider trading conviction of Raj Rajaratnam depended critically on extensive government wiretaps. The prosecution of the former big law associate who had passed along inside information gained from the law firms where he worked also relied on use of wiretaps.

The government’s use of these aggressive crime-fighting techniques underscores how seriously the government is taking its responsibility to enforce these laws. The government’s willingness to use these techniques also has important implications for anyone concerned about the potential exposures for companies and their executives. The most obvious lesson is that the government is vigilant and will actively pursue criminal activity. For that reason, corporate compliance efforts are critically important.

Another, perhaps more chilling implication is that presuming confidentiality for even the most private conversations and communications could be dangerous. There is probably a larger essay for another day here. Suffice it to say that the line between necessary vigilance and intrusive surveillance is a fine one, and the government’s involvement in monitoring its citizen’s activities is fraught with difficulties. Some might say it is only those involved in criminal activities that have any thing to fear.  I note that we only hear about the wiretaps that result in criminal prosecutions. One can only wonder about the extent of governmental intrusion into purely lawful communications.

Independent Director Liability Insurance: Do independent directors need a separate liability insurance policy? The IDL insurance product has been around for years, though relatively few companies buy it. The problem is that sometimes when things go wrong, things go catastrophically wrong. Though IDL continues to attract relatively few buyers, there are occasions when it could be critically important. A May 26, 2011 article from Corporate Secretary magazine (reprinted here) takes a closer look at the IDL product. (Full disclosure, I was interviewed for the article).

Take Two: Perhaps there are no panaceas, but there may be one thing Americans could do to solve many of their problems -- everything “from stuck zippers to the national debt” -- according to a recent report you might have missed.

The American Scene: A series of recent trips has reminded me that there are a multitude of beautiful places in this big country. Among other delightful places I have visited are several that are well worth the journey, including Davidson, North Carolina; Lake Tahoe, California; Denver, Colorado; and Lexington, Virginia.

My most recent sojourn, a Memorial Day weekend  trip to South Carolina for a wedding, introduced me to Greenville, which is yet another delightful surprise. The cluster of restored buildings and pedestrian bridges surrounding the waterfalls on the Reedy River and the blocks of shops and restaurants along the tree-lined Main Street make the town a pleasant and enjoyable place to explore. Greenville is only one of several U.S. cities that recently have made big investments in reorienting themselves toward their riverine setting, including Dubuque, Iowa and Jacksonville, Florida.

Travel has its stresses and headaches, but it also occasionally affords agreeable discoveries that reward the exertion. Truly, you could explore this country endlessly and never exhaust its aesthetic possibilities.    

Greenville, South Carolina  May 28, 2011

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As reflected in the most recent dismissal motion rulings in the Countrywide subprime securities lawsuit, the proper use of a Rule 10b5-1 trading plan can provide a substantial defense to allegations of securities law violations. In her April 6, 2009 opinion (here), Central District of California Mariana Pfaelzer dismissed the insider trading allegations against certain individual defendants whose trading plans were in order. However, she refused to dismiss the insider trading allegations against Countrywide CEO Angelo Mozillo, whose plan was ‘unusually modified," demonstrating that merely having a plan is by itself not enough, if the plan is not structured properly or has been altered.

This difference in outcome underscores the need for certainty about what plan features and practices will afford the desired protection under the Rule. In a March 25, 2009 update (here), the SEC’s Division of Corporate Finance updated its Exchange Rules Compliance and Disclosure Interpretations (C&DI) to provide additional guidance on Rule 10b5-1.

As reflected in an April 17, 2009 DLA Piper memo (here) discussing the SEC’s recent updated guidance, the update "comes at a time of heightened and well-publicized scrutiny by the Enforcement Division of the SEC regarding trading activity in and around Rule 10b5-1 plans." According to the law firm memo, the updated C&DI includes "some important new guidance."

As discussed in the memo, the updated guidance clarifies that "the cancellation of one of more plan transactions" affects the availability of the affirmative defense under the Rule, because the cancellations represent an alteration of or deviation from the plan. Similarly, the facts and circumstances surrounding the creation of a new plan after the cancellation of a prior plan needs to be evaluated to determine the "good faith" intent of the person creating the plan.

The updated guidance also clarifies that the affirmative defense is not available if a person establishes a plan while in the possession of material nonpublic information, even if the plan is structured so that the transactions will not begin until after the information is made public.

The SEC’s issuance of updated guidance is instructive and helpful, because Rule 10b5-1 plans can be a very important tool for individuals to use to try to limit their liability when they trade in the personal shares in company stock. As discussed at greater length here, the Eighth Circuit’s October 16, 2008 opinion in the Centene Corporation securities litigation underscored the fact that these plans are still a good idea, notwithstanding some of the concerns that recently have been raised. In that case, the court held that there could be no inference of scienter from insider sales made pursuant to Rule 10b5-1 plans.

Melissa Klein Aguilar has an April 21, 2009 article in Compliance Week (here) discussing the SEC’s updated guidance. Hat tip to Bruce Carton at the Securities Docketfor the tweet that alerted me to Aguilar’s article.

New ERISA Litigation Study: A frequently recurring question is whether I know where to find good statistical information about ERISA litigation. Unfortunately, the publicly available resources in this area are limited.

However, as reflected on the Susan Mangiero’s Pension Risk Matters blog (here), on April 15, 2009, Pension Governance Incorporated and its partner Michael-Shaked Group debuted a new study of over 2,400 ERISA cases that were filed between January 1, 2005 and August 31, 2008. A copy of the study can be found here.

The study reports a number of interesting findings, including in particular the fact that "ERISA lawsuits are increasing in number and complexity in terms of combinations of allegations." The study also breaks down the ERISA cases in the study database by type of allegation; by Circuit; by disposition; and by distribution of outcomes. The study also analyzes top litigated ERISA Code sections.

This new study is a great resource, which I hope the authors will continue to update and publish. I also hope that in future updates, the authors might consider publishing aggregate settlement data, along the lines that NERA and Cornerstone publish with respect to securities class action cases.

And Finally: At least according to a story that is making the rounds on the Internet (here), Demitrius Soupolos of Stuttgart, Germany, and his former beauty queen wife, Traute, were unable to have children because, as he was advised by his doctor, Soupolos is sterile. So Soupolos paid $2,500 to his neighbor, Frank Maus, already the father of two children, to impregnate Traute.

About three times a week over the course of six months -- a total of 72 different times -- Maus "attempted to impregnate" Traute. When Traute did not become pregnant, Maus had his own medical exam.

Turns out that Maus, too, is sterile, which "shocked everyone but his wife, who was forced to confess that Maus was not the real father of their two children." Soupolos has now sued Maus to get his money back. Maus’s defense? He did not guarantee conception, only that he would give it "an honest effort." The news articles do not report on how things stand now between Maus and his wife.

All of which makes me wonder, shouldn’t somebody look into whether there is something in the water supply that is causing the men in the neighborhood to become sterile? And do you suppose Soupolos will ask Maus’s wife for the name of the father of her children?

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