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

Securities class action lawsuit filings in Canada hit record levels in 2011 according to a new report from NERA Economic Consulting. The January 31, 2012 report, entitled “Trends in Canadian Securities Class Actions: 2011 Update” (here) concludes that the persistent growth in Canadian securities class action lawsuit filings “is not a transient phenomenon.”

According to the report, in 2011, there were 15 new securities class action lawsuit filing in 2011, more than in any previous year. The 2011 filings bring the total number of pending and unresolved Canadian securities class action lawsuit filings to 45.

The growth in securities lawsuit filings in Canada is largely a result of the growth in new filings under Bill 198, the Ontario legislation that amended the Ontario securities laws with regard to issuer’s continuous disclosure obligations. The report notes that there have been a total 35 Bill 198 cases since the Act became effective at the end of 2005, including nine in 2011. The Bill 198 cases account for more than two-thirds of all of the suits filed between 2008 and 2011. The other claims filed in 2011 include, among other things, one prospectus claim; one related to a takeover bid; two related to investment fund management; and two related to Ponzi schemes.

Just as was the case with 2011 securities lawsuit filing in the U.S, a significant driver in the 2011 Canadian filings was the rise in filings against Chinese companies whose shares trade on North American exchanges. Among the highest profile case in Canada was the lawsuit involving Sino-Forest, whose shares trade on the Toronto stock exchange. (As noted here, U.S. investors recently have attempted to bring a class action in U.S. federal court against Sino Forest alleging violations of NY state law.) At least three of the other new 2011 filings involve Chinese companies.

Interestingly, the report notes that one Chinese company involved in a 2010 Canadian securities lawsuit filing did not have shares listed on a Canadian exchange, but did have shares listed on Nasdaq. So far, the case, involving Canadian Solar, has been permitted to proceed.

Canadian companies with listings on U.S. exchanges also face a securities class action litigation risk. The report notes that in 2011, five Canadian domiciled companies were named as defendants in six securities class action lawsuits in the U.S. At least one of these companies was also named in a securities class action lawsuit in Ontario. Since 1987, Canadian-domiciled companies have been named in 74 securities lawsuits in the U.S. Of these, 21 had parallel actions in the U.S., although most of these parallel actions were filed after the enactment of Bill 198.

Historically, class action lawsuit filings in Canada have been concentrated in the financial sector, as well as the energy and minerals sectors. In 2011, five of the Canadian filings involved companies in the minerals sector and four involved companies in the finance sector.

Only two cases settled in 2011, involving total payments of $58.6 million. Of the ten settlements so far of Bill 198 cases, the average settlement amount is $10 million and the median settlement is $6.2 million. The report notes that given the small number of settlements to date, “it is unclear whether these are indicative of the size of settlements that should be expected in the future.”

The report concludes that the upward filing trend is likely to continue in 2012 and beyond. The report’s authors cite a number of factors in support of their conclusion that “we are likely to continue to see an increasing number of new cases filed,” including the growth in the Canadian securities class action bar; the track record that has been established with the certification of global classes (in the IMAX and Arctic Glacier cases) and with plaintiffs being given leave to proceed in Bill 198 cases; the success of counsel in achieving large settlements (and obtaining large fees); and the barriers in the U.S. under the Morrison decision to investors who purchased shares outside the U.S. proceeding in U.S. courts.

Discussion

Although the number of securities class action lawsuit filings in Canadian courts remains well below the number of filings in the U.S., both the growth in the filings and the indicated trends suggest that Canadian securities class action litigation could be increasingly important.

The report’s comment about the growth in the size of the Canadian plaintiffs’ securities bar may be the most telling point. Clearly, the plaintiffs’ attorneys sense that there is an opportunity. As non-U.S. investors search for alternative ways to pursue claims in the wake of the U.S. Supreme Court’s decision in Morrison, Canada may be emerging as one of the most attractive alternatives. The Canadian courts’ willingness to certify global classes in the IMAX and Arctic Glacier cases suggests the opportunity for investors to pursue their claims in Canadian courts.

Among the many very interesting comments in the NERA study of Canadian securities litigation was the comment about the action that is pending in Canada against Canadian Solar, Inc. The case has been allowed to proceed so far, even though the company’s shares did not trade on a Canadian securities exchange but did trade on Nasdaq. Although there undoubtedly is more to the story, it is interesting to note that the investors chose to file their action in Canada. The company has also been sued in a separate action in the U.S. (refer here), but the circumstances do suggest the possibility of an emerging jurisdictional competition.

The sense of a jurisdictional competition is reinforced with the filing of the state law class action filed by Sino-Forest in the U.S. The same circumstances were also the subject of a separate action in Canadian court.

The emergence and growth of significant securities class action litigation outside the U.S. is one of the most interesting developments in recent years, and the U.S. Supreme Court’s holding in the Morrison case has added increased importance to the issue. It could be increasingly important to watch developments in Canada and elsewhere.

Special thanks to NERA for providing me with a copy of their report.

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During the twelve months ending June 30, 2011, at least 32 Chinese companies were hit with U.S. securities suits. In addition, the U.S. Securities and Exchange Commission has initiated a number of enforcement actions and other proceedings against U.S.-listed Chinese companies, issued a formal bulletin warning investors about the risks of investing in Chinese companies that have gone public through reverse merger transactions, and launched a task force to investigate U.S.-listed Chinese companies that have sold stock to investors in the U.S.

These developments have significant D&O insurance implications for the directors and officers of these firms. In a July 14, 2011 Client Advisory from the Pillsbury Winthrop law firm, Pillsbury partner Peter M. Gillon and I review the current litigation exposure facing U.S.-listed Chinese companies and examine the questions that officials at these firms should be asking about their D&O insurance.

The Client Advisory can be found here.

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In today’s global economy, business increasingly is conducted cross-jurisdictionally. Company officials and their advisors increasingly must grapple with liability issues arising under the laws of multiple jurisdictions. These liability issues in turn can present complex indemnification and insurance questions. Simply identifying the operative legal considerations can present a significant challenge.

A newly updated legal resource may afford valuable information for those struggling with these issues. Information about the new volume, entitled Directors’ Liability and Indemnification: A Global Guide, Second Edition, can be accessed here. This new edition was edited by UK Insurance maven, Ed Smerdon of the Sedgwick Detert law firm.

The book’s separate chapters describe the essential legal principles in 38 different countries. This latest edition includes new chapters on China, the Czech Republic, Kazakhstan, South Korea and the United Arab Emirates, among others. Each chapter has been written by a leading law firm in the relevant jurisdiction. For example, the chapter on the United States was written by Dan Bailey and Darius Kandawalla of the Bailey Cavalieri law firm.

Each chapter provides a country-specific overview of the legal principles governing directors’ duties and obligations. The text also contains a description of the claims environment in each country, including the relevant considerations regarding criminal and regulatory liability. The information also includes the principles governing the availability of indemnification and insurance in each country, as well.

The information for each country is presented succinctly and provides more of an introduction to the critical legal considerations than it does a comprehensive dissertation. This volume will be most useful to those looking for a quick impression of the legal environment. For those looking for a deeper understanding, this volume at least provides some starting points.

It seems likely that legal challenges arising from the cross-jurisdictional conduct of business will only increase in the months and years ahead. This volume will likely prove a valuable resource for insurance advisors and others called upon to counsel companies in connection with the associated liability exposures and related insurance considerations. We can only hope that this book’s editors and authors will continue to update and expand this volume in the years ahead.

Many thanks to Ed Smerdon for providing me with an opportunity to review an advance copy of the book.

D&O Insurance Implications of Dodd-Frank: The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 introduced sweeping reforms to every aspect of the country’s financial system. In addition, many of the Act’s provisions – including in particular its new whistleblower bounty sections -- seem likely to lead to increased SEC enforcement activity. The enforcement activity could in turn lead to follow on civil litigation.

The Act’s potential enforcement and litigation implications also carry important D&O insurance implications. These considerations and implications are reviewed in detail in a February 2011 article entitled "Dodd-Frank, SEC Enforcement Activity, Whistleblowers and D&O Insurance" (here) by my friend Priya Cherian Huskins and her colleague Carolyn Polikoff of the Woodruff Sawyer firm. Among other things, the authors discuss particular problems that may arise in connection with the Dodd-Frank’s executive compensation clawback provisions, as well as D&O insurance concerns arising from the new whistleblower provisions. The article concludes with a list of eight D&O insurance recommendations.

My thanks to Priya for reaching out to me to include a link to the article on this site.

Failed Bank Litigation Resources: Most readers who are following the events surrounding the current failed bank litigation wave likely are already familiar with the FDIC’s Failed Bank List, which is updated every Friday evening to reflect the latest banks of which the FDIC has taken control.

Another page on the FDIC website of which readers may want to be aware is the FDIC’s Professional Liability Lawsuits page. I have previously linked to this page in prior blog posts, but the FDIC has been updating the page and it now has a number of additional useful features.

First, for some time now, the FDIC has been updating the page to reflect the latest number of former directors and officers of failed banks against whom civil actions have been authorized. The page has recently been updated to show that the FDIC has now authorized civil actions against 130 directors and officers. More importantly, it is clear that the FDIC will be regularly updating this page with new information as additional actions are authorized.

In addition, in the new feature that readers may find most useful, the FDIC has now provided specific details regarding each of the four civil actions it has filed so far against former directors and officers of failed banks. From the way the information is presented (at the bottom of the page), it appears that the FDIC intends to update this information as additional actions are filed. Accordingly, this page could prove to be a valuable resource over time as the number of FDIC actions grows.

I intend to continue to track -- and link to --the FDIC litigation on my own as it is filed, as reflected here. At least for now, the FDIC itself also seems to be committed to tracking and providing this information as well. Many readers may find the FDIC’s page to be a highly credible and (we can hope) timely resource on these issues. I will continue to provide links to the lawsuits.

And speaking of failed banks, the FDIC did take control of four additional banks this past Friday night, as is reflected on the agency’s Failed Bank List. These four new closures bring the 2011 year to date number of failed banks to 18.

The 18 bank failures have been spread across 12 different states, though the largest number of closures this year has been in Georgia (4), which has led the way with the largest number of bank failures since the current wave began. The 18 failures so far in 2011 bring the total number of failed banks since January 1, 2008 to 340.

It is interesting to note that the pace of bank closure so far this year is running slightly ahead of the pace in 2010, when the FDIC closed more banks than it had in a single year since 1992. The FDIC did not close its 18^th bank in 2010 until February 19.

Living in America: On Friday, the determination of peaceful demonstrators in Egypt resulted in the historic overthrow of their oppressive government, but the lead story in Saturday’s Cleveland Plain Dealer was that the Cleveland Cavaliers’ ended their 26-game losing streak on Friday night. The Cavs’ first victory since December also apparently merited a headline in larger type as well.

As a letter to the editor in Sunday's edition put it, "Your newspaper failed to explain why all those Egyptians were so excited about the Cavs game."  

Web Animation Video Phenomenon Even Reaches the Insurance Industry: I know that many of you were as interested as I was in the February 11, 2011 Wall Street Journal article about the increasing numbers of customized computer-generated animated videos, which anyone can make on web sites such as Xtranormal.

One sure sign of how widespread this new phenomenon has become is the animated Xtranormal video now circulating that takes a light-hearted look at the perennial conversation about business between brokers and underwriters. For those of you who have not already seen it, here is the "I Need New Business" video. (The views, attitudes and opinions expressed in the video do not necessarily reflect those of The D&O Diary or its author.)

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One of the questions posed in the wake of the U.S. Supreme Court’s landmark decision in Morrison v. National Australia Bank is whether the Court’s holding might encourage securities claimants foreclosed by Morrison from U.S. court to attempt to pursue their claims in their home countries or in other jurisdictions.

The January 10, 2011 action of two U.S. law firms in filing a claim in the Netherlands against Belgian financial services giant Fortis on behalf of a specially formed foundation suggests the process of looking outside the U.S. may have begun.

Background

As detailed here, in October 2008, Fortis shareholders filed a securities class action lawsuit against Fortis, certain of its directors and officers, and its offering underwriters in the Southern District of New York, seeking damages based on alleged violations of the U.S. securities laws.

Fortis is a Belgium-based financial company that in late 2008 received a massive bailout from the governments of Belgium, the Netherlands and Luxembourg. Fortis’ shares trade on several European exchanges and its ADRs trade over-the-counter in the U.S.　

In their amended complaint, the plaintiffs alleged that the defendants misrepresented the value of its collateralized debt obligations; the extent to which its assets were held as subprime-related mortgage backed securities; and the extent to which its ill-fated decision to acquire ABN-AMRO had compromised the company’s solvency.

In a February 2010 decision (discussed here), then-District Judge Denny Chin entered an order, applying the then-applicable jurisdictional standards under the Second Circuit’s opinion in the Morrison case, granting with prejudice the defendants’ motion to dismiss.

The Investors’ Dutch Claim

In a January 10, 2011 press release (here), two U.S. securities law firms announced that they had filed an action in Utrecht Civil Court on behalf of a specially formed foundation, Stichting Investor Claims Against Fortis. An English translation of the lawsuit can be found here (Hat Tip to the Am Law Litigation Daily for the copy of the complaint.) Netherlands law allows foundations to bring collective actions on behalf of investors who affirmatively join the action.

The lawsuit is filed against Ageas NV/BV, as Fortis is now known, certain of its directors and officers, and its offering underwriters.

As described in the press release, the Dutch lawsuit’s allegations largely mirror the allegations in the previously dismissed lawsuit U.S law. Owing to the peculiarities of the relevant Dutch laws however, the recently filed lawsuit does not directly seek damages; rather, according to the press release, it seeks a judicial declaration that Fortis defrauded investors in the 2007 rights issue the company conducted to acquire ABM Amro. If the Foundation succeeds in establishing liability, the case will proceed to a claims phase in which investors can attempt to recover compensatory damages.

The press release states that more than 140 institutional investors – "including many of the largest pension funds in Europe" – and over 2,000 individual claimants have joined the foundation. The press release also asserts that shareholders’ collective losses are in the tens of billions of euros.

The press release states that the foundation represents investors in Europe, the Middle East, Australia – and, interestingly enough, the U.S. The press release also states that the Foundation’s director previously worked with one of the two U.S. law firms in negotiating the $450 million class action settlement in the Netherlands in 2007 in the Royal Dutch Shell lawsuit. (Background regarding the Royal Dutch Shell settlement, including further background regarding the Dutch collective action statute can be found here.)

Discussion

Now that investors who purchased shares on foreign exchanges can no longer seek damages in U.S. courts under the U.S. securities laws, these same investors may find the remedies available in other countries more attractive. There is no doubt that this recently filed Fortis action is a first step in that direction – perhaps the first of many.

Indeed, the press release quote one of the U.S. plaintiffs’ securities attorneys as saying that the new action in the Netherlands "offers an innovative avenue to address securities fraud claims outside the U.S. following the restrictions imposed on international investors by the Supreme Court’s decision in Morrison v NAB. We believe this action could be a model for future investor claims outside the United States."

David Bario’s January 10, 2011 Am Law Litigation Daily article about the new lawsuit (here) quotes the same U.S. attorney as saying that "our clients are increasingly looking for forums where they’re going to be able to receive compensation for their non-U.S. losses," adding that ‘we’re looking at other cases that in are in various stages of analysis."

In other words, the new Fortis action may be the first, but it almost certainly will not be the last. I also wonder whether enterprising attorneys will seek to pursue this same initiative in other countries – for example, in Ontario, where at least one court was willing to certify a global class, in the Imax securities class action, under the province’s newly revised securities laws.

Finally, I wonder whether this effort to find a substitute for claims in U.S. courts under U.S. laws will force some institutional investors in other countries to press for reforms in their home countries to provide better means for attempting to recoup losses based on alleged fraud.

It has already become apparent that the Morrison decision has very important implications for securities litigation in the U.S. The filing of the Fortis case underscores the fact that the Morrison decision also has important implications for securities litigation outside the U.S.

Without meaning to sound too cynical, I have to say that from one perspective, what has happened is that as a result of Morrison, the U.S. has lost its former advantage on a highly specialized kind of service product that is now being "offshored" to other jurisdictions. U.S.-based plaintiffs’ lawyers are trying to position themselves to take advantage of this development, but I wonder how long they will be able to insinuate themselves into legal proceedings in other countries’ courts involving other countries’ processes, companies and investors.

More About Halliburton: As I noted in yesterday’s blog post, the U.S. Supreme Court has granted the petition for a writ of certiorari in the Halliburton securities class action lawsuit. Nate Raymond has a good summary of the issues in the case in his January 10, 2011 Am Law Litigation Daily article, here.

A Cautionary Note About Merger Lawsuits and Forum Selection Bylaws: If you have not yet seen it, you will definitely want to take a look at the January 10, 2011 Wall Street Journal article about merger-related litigation (here). The article, which was definitely making the rounds on the email circuit today, numerically demonstrates that litigation is becoming an almost invariable accompaniment to corporate mergers and acquisitions.

There is one point mentioned in the article that I think requires explanation, or at least some further information. The article closes with a comment from one lawyer that some companies are putting provisions in their bylaws designating Delaware as the forum in which fiduciary litigation must be heard.

A bylaw forum selection clause may be a good idea, but it might not be enforceable. The article neglects to mention that just last week Northern District of California Judge Richard Seeborg held that the forum selection clause in Oracle’s bylaws is unenforceable. Please refer to my January 6, 2011 post (here, scroll down) for a link to the Oracle decision and for a discussion of the case.

Momma, Don’t Let Your Babies Grow Up to Be Law Students: If you or anyone you care about is thinking about going to law school, you will definitely want to read the article that appeared in Sunday’s New York Times entitled "Is Law School a Losing Game?" (here). A very depressing, stark portrait of an academic racket that is definitely out of whack.

Points of Reference: As explained on Wikepedia (here), the Netherlands are often referred to as Holland, although North and South Holland are actually only two of its twelve provinces. Holland itself was one of the seven provinces that in 1581 formed the Republic of the Seven United Netherlands. Refer also to this longer explication of the terminology surrounding the Netherlands and its language -- among other things, the t in the Netherlands is not capitialized.

In the early 19th Century, what is now the Netherlands  was part of  The United Kingdom of the Netherlands, until what is now Belgium split off to form a separate country in 1830. And now, at least according to a January 10, 2011 New Yorker article (here), Belgium itself is in danger of further subdividing, as its Dutch-speaking Northern Flemish territories strain to draw away from the Southern francophone Wallonia.

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As a result of series of legal developments, securities class action lawsuits in Australia have become have become increasingly common in recent years, and signs are that these trends will continue, according to a comprehensive study of Australian securities class action litigation issued on May 7, 2010 by NERA Economic Consulting.

The report can be found here, and NERA’s May 7 press release can be found here. (Hat Tip to Adam Savett of the Securities Litigation Watch blog, who has a post about the NERA study here).

Although the Australian laws permitting securities class action litigation have been in place since 1992, there were only two cases filed prior to 2000. There were a total of five cases filed during the years 2000 to 2003, and the filings began to increase steadily during 2004 and thereafter. There were a record number of cases filed in 2009, when six securities class action lawsuits were filed. There were a total of 22 securities class action lawsuits filed during the period 2004 to 2009.

A number of factors have contributed to the growing numbers of lawsuits. The first is that, according to the NERA study, "following the high-profile collapse of a number of companies in the early 2000s … shareholders have demonstrated that they are increasingly willing to use class actions as a tool to protect themselves from harmful conduct, and to punish offenders."

In addition, there have been several key case law developments that have removed some impediments, including decisions clarifying that shareholders can seek damages when their loss is distinct from any loss suffered by the company, and other decisions clarifying the rights of shareholders suing for damages against companies that are under administration.

However, perhaps the most significant development behind the increase in securities class action litigation in Australia is the "emergence of commercial litigation funding." Because of the prohibition against contingency fees, as well as the risks of costs awards against unsuccessful litigants, there were substantial financial barriers against pursuing this type of litigation.

Seventeen out of the 24 Australian securities class action lawsuits that have been filed since 2004 have been financed by a commercial litigation funder. The Australian commercial litigation funding business is dominated by IMF (Australia) Ltd., the first publicly listed litigation funder in Australia. IMF has financed 14 securities class action lawsuits and has proposed financing in an additional three suits that have not yet been filed. Though IMF dominates, according to the NERA study, a number of new firms have recently entered the market.

(Readers who, like me, are fascinated by this concept of litigation funding may want to have a look at IMF’s website, linked above.)

The two primary causes of action in Australian securities class action lawsuits are "contraventions of the continuous disclosure rules" and alleged violations of the laws prohibiting misleading and deceptive conduct. A number of suits also allege breaches of fiduciary trust. The two most common allegations, asserted in 52% of cases, are inaccurate earnings guidance and improper accounting.

Despite the dominance of the materials industry in the Australian economy, suits against mining or other companies represent only 14% of all cases filed. Actions brought against issuers in the diversified financial, insurance and real estate industries account for slightly more than half of all filings.

Because so many of the securities lawsuits have been filed in recent years, only a small number of all suits have been resolved. Of the 12 that were resolved as of December 2009, eight were settled, although all five of the resolved cases that were filed after 2003 were settled. The NERA report suggests that the litigation funding arrangements may have contributed to this trend toward negotiated resolutions, as the litigation funders are likely to "promote the selection and subsequent filing of actions that are stronger and for which a greater proportion of potential class members have signed a funding agreement."

Though Australian securities class action lawsuit filings have increased in recent years, they are many fewer securities lawsuit filed there than in the United States even allowing for the differences in size of the two countries’ economies. The NERA report comments that the class action filing levels in the Australia are "broadly similar to the level seen in Canada, once adjusted for the respective size of each economy."

The report concludes with the observation about Australian securities class action lawsuits that "with a number of recent common law developments having resolved many areas of uncertainty, it is likely that the rate of growth of filings evident since 2004 wil continue into the future."

NERA is of course well known for its periodic studies of U.S. securities class action lawsuits. Their new study of Australian class action lawsuits is the third in a series of studies concerning securities class action lawsuit litigation outside the U.S., following on its studies concerning securities litigation in Canada (refer here) and Japan (refer here).

More About the Schwab YieldPlus Securities Class Action Lawsuit Settlement: In an earlier post (here), I reviewed the $200 million settlement in the Schwab YieldPlus subprime related securities class action lawsuit. As noted at the time, the settlement did not resolved the related state law claims that the plaintiffs had filed.

On May 5, 2010, the Charles Schwab Company announced (here) that it had resolved the remaining state law claims as well, in exchange for an agreement to pay an additional $35 million, brining the total value of the Schwab YieldPlus settlement to $235 million. I have adjusted my table of subprime-related securities lawsuit case resolutions accordingly.

Farewell Ernie Harwell: Everyone here at The D&O Diary was saddened by the news earlier this week of the death of Hall of Fame baseball announcer for the Detroit Tigers, Ernie Harwell. One of my fondest memories from my three years at University of Michigan Law School is of listening to radio broadcasts of Tiger games, and of Harwell’s friendly, welcoming voice bringing the games alive. Harwell is perhaps better known for his signature home run calls ("That one is long gone!), but I will always remember the way he began games by saying "Its another great day for Tiger baseball." It was always a great day for Tiger baseball when Harwell was in the booth.

Ernie, we will miss you.

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Pop quiz: the law of which jurisdiction should govern a coverage dispute arising under D&O insurance policies issued by U.S-domiciled insurers to an NYSE company incorporated in Delaware with its headquarters in Oregon? If you find the answer "British Columbia" as surprising as I do, read on. The court decision discussed below could have important implications for the typical U.S. D&O policy, with its extension of "worldwide coverage," particularly as both commerce and litigation become increasingly global.

Background

Now-bankrupt forest products company Pope and Talbot, Inc. was incorporated in Delaware and had its corporate headquarters in Portland, Oregon. Until its bankruptcy, its shares traded on the NYSE. Pope and Talbot conducted business through several operating subsidiaries, the largest of which was P&T Ltd., a Canadian federally chartered company with its principal operations in British Columbia. The bulk of Pope and Talbot’s operations ran through P&T Ltd. and the bulk of Pope and Talbot’s employees were employed by P&T Ltd.

P&T Ltd. is now in receivership. PricewaterhouseCoopers is the receiver for P&T Ltd. PWC, in its role as receiver, has instituted an action in British Columbia seeking a judicial declaration of coverage under the parent company’s D&O insurance policies for claims against P&T Ltd.’s directors and officers brought by former P&T Ltd employees under the Canadian Business Corporations Act for unpaid wages.

Pope and Talbot’s D&O insurance program was structured in several layers, involving three U.S. domiciled insurers. The negotiation and placement of the policies took place in the United States.

In a prior ruling, British Columbia Supreme Court Justice Paul Walker determined that the British Columbia court had jurisdiction over PWC’s declaratory judgment action. The insurers then sought a declaration that Oregon law would govern the dispute.

The November 12 Opinion

In his November 12, 2009 decision (here), Justice Walker determined that British Columbia law is the proper law to be applied to the interpretation of the policy.

He began with the determination that the parties intended different laws to apply to different parts of the policy (a choice of law principle known as dépeçage). In reaching this conclusion, Justice Walker referenced several different parts of the policies at issue, including in particular the primary policy’s definition of "Loss," which contained a provision specifying that the policy’s coverage for punitive and exemplary damages would be determined under the law most favorable to the insured. Justice Walker also referenced the policy’s Oregon state amendatory endorsements, which specified that Oregon law would govern any disputes regarding alleged misrepresentations in the insurance application.

Justice Walker determined that given these clause-specific choice of law provisions, and given the absence from the policies of any general choice of law provisions, the "proper law" governing the disputes arising under other policy provisions "is left to be determined by the court hearing the dispute to find based on the application of its own laws, taking into account the directing language in the policies."

Reviewing these circumstances in this light, and discounting the policies’ various connection to jurisdictions in the United States, and applying British Columbia choice of law principles, Justice Walker concluded that "the policies have the closest and most substantial connection with BC," and therefore BC law governs the coverage dispute presented by the receiver.

In substantiating this decision, Justice Walker stated that given the importance of the Canadian subsidiary, "most of the claims could be expected to arise from Canadian operations," and he stressed that the P&T Ltd. employees’ wage claims are "unique to Canadian operations" and have "no equivalent in Oregon," as a result of which Justice Walker concluded that "the proper law of the policies to determine the carriers’ coverage obligations for these claims is BC law."

He added that the parties "would reasonably have expected BC law to apply to determine the insurers’ coverage obligations."

Discussion

Suffice it to say that I have concerns with Judge Walker’s analysis. He managed to blow right past the fact that all of the acts involved with the formation of the insurance contracts took place in the U.S. and that insurance contracts were formed between a U.S.-domiciled company and U.S.-domiciled insurers, and that the key risks insured against and for which the policy was purchased were U.S.-based.

Justice Walker simply jumps to the conclusion that given the size of the P&T Ltd’s operations, the insurance contracts were primarily designed to protect against Canadian exposures. However, the company that purchased the policy was the parent company, a U.S.-domiciled company whose shares traded on a U.S. securities exchange. Is there any possible doubt that the most important reason the company bought the policy – and the reason the policies cost so much in U.S. currency – is because the company and its directors and officers wanted protection against corporate litigation in U.S. courts under U.S. law?

Of course the policies do provide "worldwide coverage" and, yes, of course substantive local law governs the local claims wherever the claims might arise. But Justice Walker seems to have telescoped the primacy of local law regarding the underlying dispute into a determination that local law should govern questions of policy interpretation, which analytically are two completely different issues.

All of that said, there are a couple of points in Justice Walker’s analysis that do give me pause. In particular, the considerations on which he relied in concluding that principles of dépeçage control the choice of law issue are by no means far-fetched. His consideration of the "law of the most favorable venue" wording in the provisions relating to coverage for punitive and exemplary damages is interesting and raises issues I had not previously considered. He may have a point that this language could be interpreted to suggest that the parties intended the laws of different jurisdictions to apply to different parts of the policy.

Where his analysis goes off track, in my view, is having found that different jurisdictions’ laws may apply to different policy provisions, he concluded both that BC choice of law principles should determine which law should apply, and he applied these BC choice of law principles in a blunderbuss way to conclude that BC law governed interpretation of the policy (see, e.g., his assertion that the likeliest claims to arise under the policies were Canadian claims.)

But the most significant aspect of Justice Walker’s decision is the unmistakable message that if a policy provides "worldwide coverage," the policy not only applies to claims wherever they may arise, but courts in those far flung jurisdictions may push ahead and apply their own local laws to questions of coverage relating to the local claim.

In the increasingly global economy, many businesses have significant operating subsidiaries in many countries. And as the rest of the world become increasingly litigious, too, the possibility of claims arising in these multifarious jurisdictions is increasingly likely. But while the U.S. D&O insurance industry has long noted the increasing possibility of claims arising outside of the U.S., I suspect it may come as a big surprise to many U.S. D&O insurers that local will law will not only govern the local claim itself, but the local court could also determine that local law governs questions of policy coverage for the local claim.

I have no idea what the insurance coverage laws are in vast smorgasbord of countries outside the U.S. Who knows what a court in, say, Vietnam or Slovakia or Gabon might conclude about a U.S-issued D&O insurance policy’s coverage for a local claim? I doubt that many domestic U.S. D&O insurers do either, and I suspect they have little interest in finding out.

On that score, it should be noted that Justice Walker repeatedly recognized the right of the parties to choose the law that would govern the interpretation of the policies, and it was only the absence of any such a provision that allowed him to conclude that BC law should govern.

All of which suggests to me that we may have reached the point where, at least from the carriers’ perspective, it may be time to for U.S.-based D&O insurers to consider the inclusion of a general choice of law clause in their policy. The inclusion of a choice of law clause would have the advantage of predictability and certainty, and it would spare the parties from a post-claim surprise discovery that, for example, the parties reasonably expected that BC law would govern the interpretation of these policies. (I am sure it was news to these carriers to learn that they had "expected" the interpretation of these polices to be governed by the law of British Columbia.)

Given the increasingly global nature both of commerce and of litigation, the inclusion of a choice of law clause arguably could be the reasonable next step in the evolution of the U.S. D&O insurance policy. Many international contracts in many contexts (including the insurance and reinsurance context) as a matter of course specify which jurisdiction’s law should govern the interpretation of the contract. Indeed, the typical D&O policy, with its "worldwide coverage" provision, really is itself an international contract, and to that extent it may be anomalous that U.S. D&O policies often do not have choice of law provisions.

Of course, were general choice of law clauses to be included in D&O insurance policies, the clauses would have to be carefully coordinated with other policy provisions, including in particular the most favorable venue wording relating to coverage for punitive and exemplary damages.

I recognize that both my analysis of Justice Walker’s opinion and my suggestions about the inclusion of choice of law language in U.S. D&O insurance policies could be controversial. I can well imagine D&O professionals who advocate for policyholders arguing that the local law ought to govern policy coverage issues. I can also imagine some insurance professionals objecting that whatever benefit a choice of law clause might produce in the international context, it might produce some unexpected and even unwanted results in the domestic context.

I am very interested in readers’ views, particularly those who may have a perspective different than mine regarding Justice Walker’s opinion and also with respect to my suggestions about choice of law provisions.

Very special thanks to loyal D&O Diary reader Raymond Sieh, whom I just met for the first time at last week’s PLUS International Conference, for providing me with a copy of the opinion.

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Beginning with the corporate scandals earlier in this decade and continuing with the more recent financial meltdown and Ponzi scheme revelations, these has been a widespread push toward corporate governance reform. In some European countries, these developments have been accompanied by the implementation of mechanisms to provide some form of relief to the victims of corporate misconduct.

These legal trends have in turn had a significant impact on the European D&O insurance marketplace, as discussed at length in the November 2009 Advisen report entitled "European D&O Insurance Market to Benefit from Governance and Legal Reforms" (here, $ required).

As discussed in the report, Europe has had its own share of accounting scandals, as a result of which "governments across Europe have passed laws requiring new disclosures, enhanced shareholder protections, and greater transparency." There have also been actual or proposed changes to litigation procedures, many of which represent moves toward the development of various forms of collective action. Though the progression of these changes varies by country, the "clear trend" is toward a "more collective-friendly civil legal system"

As a result of these developments (both the scandals and the legal reform), "the number of shareholder suits filed in European courts is substantially up."

In discussing this European litigation, the report uses its own terminology, and in particular, the report (apparently – the report does not expressly define the term as used in connection with the European litigation) uses the expression "securities suits" to describe both actions initiated by private litigants as well as regulatory enforcement actions.

With this specific use of the phrase "securities suits," the report states that since 2005, "32 large securities suits were filed in European courts against European companies." (The report does not specify what is meant by "large.") Of these 32 "large securities suits," 18 were filed in the first half of 2009 alone. In addition, of the 32, 29 were collective action suits. For cases settled since 2005, the average settlement per case was a "staggering" 117 euros ($155 million).

In addition, European companies have become increasingly susceptible to "securities suits," as the report uses that term, in U.S. courts as well. Claims against European companies doing business in the U.S., particularly those whose shares trade on U.S. securities exchanges, have "mushroomed" in recent years. The number of "securities suits" against European companies increased from 10 in 2005 to 37 in 2008, and to 23 in the first half of 2009.

Many of these "securities suits" against European companies in U.S. courts hare securities class action lawsuits – of the 113 "securities suits" filed against European companies in U.S. courts since 2005 (through mid-2009), 54 are securities class action lawsuits. The remainder of "securities suits" apparently includes enforcement actions, individual lawsuits and derivative actions.

The average settlement of "securities suits" against European companies in U.S. courts during the period 2005 through mid-2009 is 55 million euros ($78 million).

These litigation developments have amplified the risks to corporate directors and officers, and according to the report have affected the perceived need for D&O insurance as well. Most large European companies carry some amount of D&O insurance, although the "perceived level of D&O insurance coverage need varies among countries." Many small to mid-sized European public companies do not purchase D&O insurance at all. This relatively low penetration, together with the changing legal environment that could encourage more companies to purchase D&O insurance, represents a "once-in-a-lifetime growth potential" for D&O insurers.

The report estimates that the European D&O insurance market represents 2008 written premium of 1.37 euros ($2.0 billion), up from about 1.01 billion euros ($1.25 billion) in 2004. By contrast, the Advisen report estimates, the 2008 U.S. D&O insurance marketplace was worth about $6.8 billion.

The European market has grown in recent years at a compound between 2004 and 2008 of about 7.9 percent, but due to improved product take-up rather than to rate increases. The report projects that the European D&O insurance market is likely to continue to grow, though the growth is likely to vary from country to country, commensurate with the countries’ changing levels of legal reform.

The report contains a detailed overview of the specific legal developments in the U.K., German, Netherlands, Italy and France, and also includes summaries of legal developments in Austria, Denmark, Finland, Norway, Spain, Sweden and Switzerland.

The report is interesting and timely, and provides a thorough overview of European legal developments and the way they will impact the European D&O insurance marketplace.

My prior post on the development of collective action procedures in Europe and the contrast of these procedures with the U.S. class action system can be found here. My previous discussion of current D&O insurance issues in Germany can be found here. The state of securities litigation exposures for directors and officers of Japanese and Canadian companies, respectively, can be found here and here.

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In an October 29, 2009 order (here, Hat Tip: Am Law Litigation Daily), Ontario Court of Justice judge Paul Perell ruled that the direct involvement of the U.S.-based law firm Milberg LLP was permissible in the securities class action lawsuit filed against Timminco Limited and pending before the court.

Timminco had been sued in two separate proposed class actions under Part XXIII.1 of the Ontario Securities Act. The first filed action (about which refer here) was brought by Toronto-based Kim Orr Barristers P.C. The second was brought later (refer here) by the London (Ont.)-based Siskinds law firm. Each of the respective law firms filed cross-motions to stay the other action. (The motions were presented as "carriage motions," the purpose of which is "to stay all other present and future class proceedings relating to the subject matter.")

The Kim Orr law firm argued that because of its association with Milberg, which it described in its motion papers as "a pre-eminent American class action firm," it is "in the best position to prosecute the action." In a response that the Ontario court characterized as "unkindly," the Siskinds law firm drew attention to the "serious stain on the reputation of Milberg LLP," and also raised concerns about the American law firm’s involvement in an Ontario class action.

Calling it a "very difficult decision and a very close call," the Ontario court ruled in favor of the Kim Orr firm and stayed the Siskinds action.

The court did observe that the Siskinds firm is "one of the pre-eminent class action firms in Canada." The Kim Orr firm, founded in January 2008 was formed by attorneys from other firms that the court described as "pre-eminent."

The Ontario court did note the criminal misconduct in which certain Milberg partners had been involved, but also noted that all of the criminally charged attorneys had left the firm. He further noted that the two Milberg attorneys proposed to be involved in the Timminco case were "untainted" by the wrongdoing.

The two Milberg attorneys are Michael C. Spencer (currently involved in the trial of the Vivendi securities class action lawsuit in New York) and Arthur Miller (who among other things is an NYU law professor and previously a law professor at Harvard Law School). In support of its motion to lead the Timminco case, a Kim Orr partner submitted an affidavit stating that Milberg’s "experience and resources will greatly enhance our ability to prosecute the case."

In reaching its decision to allow the Kim Orr firm action to proceed, the court said it found the involvement of the Milberg firm to be a "neutral factor." The court observed that Milberg "does not bear the mark of Cain," and the two Milberg attorneys "have fine reputations and excellent credentials."

The court also noted that while "one can posit examples where the involvement of an American law firm would be grounds for disqualifying an Ontario firm," this is not one of those cases. The court found that Milberg’s proposed role of providing "investigative services, document management services, and strategic advice" not to be disqualifying.

After a detailed review of the two law firms’ respective class action claims, the court decided to favor the application of the Kim Orr firm and granted its motion to stay the Siskinds action.

An October 30, 2009 Am Law Litigation Daily article about the ruling can be found here.

Over the past several years, many of the leading U.S. plaintiffs’ securities class action law firms have launched various initiatives to expand their practice internationally. (Refer, for example, here.) As the Timminco case appears to demonstrate, one consequence seems to be the export to other countries of U.S.-based securities class action experience and expertise.

These developments not only seem to be producing an expanded universe of opportunities for the U.S. law firms, but also, given that what the U.S. firms are contributing is their "experience," seem to threaten the possible overseas extension of many attributes of U.S.-style securities class action litigation.

The decision in the Timminco case discussed above underscores that there are limitations for U.S. attorneys’ involvement. Indeed, the Am Law Litigation Daily article linked above describes a prior case in which the purely financial involvement of the U.S.-based Motley Rice law firm in a prior Ontario class action lawsuit was disallowed. But the fact that Milberg firm will be participating in the Timminco case does suggest that U.S. plaintiffs’ securities class action attorneys may and sometimes will play a role in the prosecution of securities actions outside the U.S., a development that undoubtedly will be unwelcome for the potential litigation targets in other countries.

These developments will also be unwelcome to the potential targets’ D&O insurers as well. Along those lines, it is worth noting that in the October 29 opinion in the Timminco case, Judge Perell expressly noted that "the Timminco directors carry insurance policies that may be available to partially compensate class members if the litigation is resolved in their favor."

Timminco’s D&O insurance limits would potentially exposed whether or not the Milberg firm was involved in the case. But the prospect of U.S.-based securities class action plaintiffs’ attorneys aiding securities class action litigation outside the U.S. does seem to present some unwelcome additional possibilities, both in this case as well as other cases yet to come, in Ontario or elsewhere.

To be sure, the local attorneys appear highly motivated to develop their own securities class action practices, and it could be, as Judge Perell observed in the Timminco case, that the U.S. plaintiffs’ attorneys presence or involvement really is just a "neutral factor." From my perspective, though, the U.S. securities plaintiffs’ attorneys’ involvement could represent an additional force advancing the development of securities class action litigation outside the U.S.

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As a result of legislative reforms and a changing enforcement environment, the number of disclosure related securities cases in Japan has increased in recent years and is likely to continue to grow in the years ahead, according to a July 15, 2009 report from NERA Economic Consulting. The report, which was written by Makoto Ikeya and Satoru Kishitani, is entitled "Trends in Securities Litigation in Japan: 1998-2008" and be found here.

The report examines 249 criminal and civil actions alleging violation of the Japanese securities from 1998 through 2008. Because very few Japanese cases settle, the report analyzes cases that have resulted in a judgment following trial.

The 249 cases studied encompass a wide variety of kinds of matters. The vast majority of the 249 cases (79%) represent broker-dealer cases (reflecting, for example, suitability allegations as well as a variety of other issues). The list also contains other kinds of cases included "market manipulation" and "insider trading" cases. But a large and growing number of the cases involve allegations of "misstatement" – indeed, by 2008, the misstatement cases represented half of all of the cases.

The growth in the number of misstatement cases in recent years is attributable to changes in the liability provisions in the Japanese securities laws. One set of revisions lessened the plaintiff’s burden for proving damages. In addition, for fiscal years beginning April 1, 2008, misstatements in internal control reports are subject to civil liability. The introduction of new accounting standards, more rigorous audits and disclosure of quarterly reports has added disclosure responsibilities, "increasing the risk that companies may make misstatements and face suits." Finally, Japan’s Securities and Exchange Surveillance Commission has been strengthened and expanded.

The report’s data show that cases related to misstatements have increased significantly since 2005, although the numbers in part reflect that certain high profile scandals have attracted multiple suits in the absence of any provision in Japan for class action litigation. For example, there have been eleven cases filed against Seibu Railway and four against Livedoor.

The report also notes that cases alleging that auditors alleged failed to detect misstatements have been on the rise since 2006, with ten such cases from 2006 through 2008, compared to only two from 1998 through 2005.

The report also notes that the type and number of plaintiffs involved is changing. Institutional investors have been more involved in recent years; for example, pension funds and trust banks are the main plaintiffs in the cases against Livedoor and Seibu Railway. Plaintiffs attorneys have also started forming large groups of plaintiffs to file for damages; the Livedoor case involved 3.310 individual investors and similarly large plaintiff groups have formed in other cases.

The increased number of misstatement cases has also affected the damages trends. The 9.5 billion yen award in the Live Door case raised the average award in 2008 to 450 million yen. However, of the 25 civil cases alleging misstatements between 1996 and 2008, a high number resulted in no damages award, although eight of those sixteen involved audit firm defendants and four involved Seibu Railway litigation.

Excluding litigation against the audit firms, 44% of the civil misstatement cases resulted in damage awards that were more than half of the amount sought and the average judgment was 1.5 billion yen.

The report concludes by noting that given the changes in disclosure requirements and the current litigation environment, securities litigation in Japan is expected to gradually increase going forward. However, in light of the "fundamental differences" between the U.S. and Japan (for example, "the absence of class actions, fewer attorneys, and other social factors") it is "unlikely that the number of securities litigation cases in Japan will be comparable to the U.S."

An interesting January 2009 legal memorandum by the Anderson Mori & Tomotsune law firm on the topic of civil liability under Japanese law for false statements in securities filings can be found here.

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There is no question that the Amsterdam Court of Appeals’ May 29, 2009 action authorizing Royal Dutch Shell to begin funding the April 2007 securities settlement represents a landmark development. Under the ruling (a copy of which can be found here, in Dutch), Shell will begin paying a total of $381 million to a foundation that represents over 150 institutional investors in 17 European countries, Canada and Australia, in settlement of their securities fraud claims arising from allegations that Shell had overstated its oil and gas reserves.

A June 1, 2009 Law.com article describing the court’s action can be found here. The foundation’s May 29, 2009 press release describing the court’s action can be found here.

But while the court’s approval of the settlement unquestionably is a significant development, it remains unclear what this development implied about the likelihood of further collective settlements of the same kind, and in the short term it seems unlikely to overcome non-U.S. investors’ interest in pursuing relief in U.S courts, at least when that option is available.

Background

Royal Dutch Shell and certain of its directors and officers were first sued in a U.S.-based securities lawsuit in the District of New Jersey on January 29, 2004, following the company’s January 9, 2004 announcement that it was writing down its "proved" oil and gas reserves by 20%. Background regarding the U.S. securities suit can be found here. The class on whose behalf the U.S. action was initially brought purported to include European investors who had purchased their shares on exchanges outside the U.S.

In July 2005, Netherlands enacted the Dutch Act on Collective Settlements of Mass Damages, which, subject to considerations discussed below, allows for collective settlement of the claims of the members of a class who do not opt out.

Shell and its biggest investors are located in the Netherlands. As discussed at length in a January 7, 2008 American Lawyer article (here), the Dutch Act gave Shell and its European investors a way to settle "on their home turf." On April 11, 2007, Shell agreed to pay $352.6 million, plus administrative expenses, to Shell investors who purchased their shares and resided outside the U.S. (As explained in the foundation’s May 29 press release linked above, the amount of the settlement was later increased to align the Non-U.S. shareholders’ settlement with the settlement Shell had reached in the U.S action with U.S. investors.) A detailed description of the settlement can be found here.

The settlement was contingent on its approval by the Amsterdam Court of Appeals, which the court granted in its May 29 declaration. The Dutch Court’s approval is likely enforceable throughout Europe based on the European regulation on jurisdiction and recognition of judgments.

Discussion

The Dutch court’s refusal to approve the settlement would have represented a significant setback for the prospect of future similar settlements, as would the court’s refusal, for example, to approve the participation in the settlement of non-Dutch investors.

But while the court’s approval avoided these setbacks and while the settlement itself clearly provides an example of a way in which European investors were able to resolve their grievances against a European company in a European court, that does not mean that the Amsterdam Court of Appeals is now about to be inundated with these kinds of settlements. Indeed, given the clear advantages to proceeding in U.S. courts under the U.S. securities laws, aggrieved non-U.S. investors are likely to continue to attempt to pursue their claims in U.S. courts, as long as and to the extent that U.S. relief and remedies are available to them.

First, while the Dutch Act allows for collective settlements of the type involved in the Shell claim, it does not allow for collective damages claims. Indeed, as stated in the American Lawyer article linked above, the "innovative solution" involved in the Shell settlement was that Shell and the European investors used the Dutch Act to settle the European investors’ U.S.-based damages claims. While this allowed the European investors to "settle litigation on their home turf," it depended on the existence of the U.S. lawsuit on the front end, in order for there to be a Dutch settlement on the back end.

The Shell settlement basically represented an innovation, but the ability for other litigants to use the Shell settlement itself as a model will largely depend on the existence of a similar combination of circumstances. It is far likelier that the next set of European investors to try to use the Dutch Act will need to establish their own "test case" rather than simply modeling off of the Shell settlement. In other words, change in the form of a European collective action remedy for aggrieved investors has been and appears likely to continue to be episodic and incremental, rather than categorical.

In the meantime, the U.S. courts continue to offer potential claimants, even those located outside the U.S., with a host of potential advantages. The U.S lacks a loser pays rule; it allows contingency fees; it uses a jury system for civil cases; and it has a well recognized and understood class action mechanism. It also has a highly motivated, entrepreneurial plaintiffs bar. Its courts recognize the fraud on the market theory, which spares claimants from having to prove that the relied on alleged misrepresentations.

Of course, many potential claimants would prefer a remedy in their home country if one were available. However, the reason for which non-U.S. investors would seek to resort to non-U.S. courts is less likely to be due to the availability of possible alternatives like the Dutch Act and more likely to be due to jurisdictional constraints on their access to U.S. courts. Non-U.S. investors in Non-U.S. companies who bought their shares outside the U.S. – so-called "foreign cubed" or "f-cubed" claimants – who have jurisdictional access to the U.S courts are likely to continue to take advantage of it, at least as long as and to the extent that the access remains available. A detailed comment on ClassActionBlawg.com about the interaction between U.S. jurisdiction for f-cubed claims and the possibility of further Shell-type settlements can be found here.

As discussed in a recent post (here), last October, the Second Circuit declined to rule that U.S. courts could never exercise jurisdiction over the claims of f-cubed claimants. In the National Bank of Australia case, the Second Circuit held that subject matter jurisdiction exists if "activities in this country were more than merely preparatory to a fraud and culpable acts or omissions occurring here directly caused the losses abroad." However the court declined to find jurisdiction in that specific case.

The petition of the plaintiffs in the National Australia Bank case for a writ of certiorari case to the U.S. Supreme Court is pending. The 10b-5 Daily blog (here) reported earlier this week that the Supreme Court has asked the Solicitor General to present her views on the petition. A June 1, 2009 Bloomberg article discussing the Supreme Court’s request for the SG’s views in the NAB case can be found here.

There is of course no way of knowing now, but it is at least possible that the f-cubed jurisdiction issue will soon wind up in front of the U.S. Supreme Court. In the meantime, the Second Circuit’s decision continues to allow for the possibility of subject matter jurisdiction in f-cubed cases, at least under certain circumstances.

All of that said, the movement toward the development of collective remedies in jurisdictions outside the U.S. is now well-established and the Dutch Court’s approval of the Shell settlement undeniably represents another step in support of that movement. We are likely to continue to hear in the weeks and months ahead about the growing threat of collective investor actions outside the U.S. What remains to be seen is where the next "test case" will come from and how it will be framed.

My prior post comparing and contrasting in detail European and U.S. collective action procedures and approaches can be found here.

Very special thanks to Werner R. Kranenburg (who can be found on Twitter, here) for a copy of the Dutch Court’s ruling.

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Questions surrounding the susceptibility of foreign domiciled companies to U.S. securities laws and to the jurisdiction of U.S. court are frequently recurring issues, as I noted most recently here. However, a new case filed in Ontario under Ontario’s securities laws presents an interesting variation on these questions.

The Ontario Action Against AIG

According to its November 13, 2008 press release (here), the Siskinds law firm has filed a class action application and accompanying statement of claim in the Ontario Superior Court of Justice under the Ontario Securities Act against American International Group, American International Group Financial Products, and ten current or former AIG directors and officers. According to the press release, the claim is brought on behalf of Canadian investors who bought AIG securities between November 10, 2006 and September 16, 2008.

A copy of the application and statement of claim can be found here. According to the press release, the statement of claim alleges as follows:

The AIG class action arises out of AIGFP's credit default swaps and the crippling decline in AIG's stock price when the true effect of those credit default swaps became known to the investing public. The AIG disclosures out of which the class action arises are currently the subject of investigation by law enforcement authorities, and are alleged in the class action to have caused massive losses to Canadian investors.

The Ontario Securities Act

The action is brought under the investor protection provisions in Part XXIII.1 of the Ontario Securities Act. (Refer here for the provision of the Act.) The statutory provision specifies the liability standards in connection with "secondary market disclosure."

Section 138.3 of the statute provides a cause of action for damages on behalf of persons who trade in a company’s security -- "without regard to whether the person or company relied on the misrepresentation" -- where "a responsible issuer or a person or company with actual, implied or apparent authority to act on behalf of a responsible issuer releases a document that contains a misrepresentation."

The persons against whom the action may be brought are specified to include, among others, the issuer, "responsible" directors and officers, as well as persons who "knowingly influenced" the issuer or responsible persons.

Jurisdictional Issues

The plaintiff’s statement of claim takes great pains to emphasize that the action has "a real and substantial connection with Ontario." Indeed, in paragraph 155, the statement of claim alleges that the financial disclosures that are the basis of the action were "disseminated in Ontario"; that "a substantial proportion of the Class Members reside in Ontario"; that AIG "carries on business in Ontario"; that AIG considers its Canadian revenue as "domestic" for accounting purposes"; that "key AIG personnel charged with oversight of the above conduct were domiciled in Ontario and undertook part of that effort from Ontario."

The pains taken in the statement of claim to specify the claim’s connection to Ontario suggests an anticipation of a question whether the case properly belongs in Ontario courts. AIG is, after all, domiciled outside of Canada, and its shares do not trade on Canadian securities exchanges (or at least the plaintiff does not so allege). The alleged misstatements were prepared and issued outside of Canada.

On the other hand, the statement of claim does allege misconduct, harm and damages within Ontario. Without presuming the outcome, allegations of this type are of the kind that at least some U.S. courts have found a sufficient basis for the exercise of jurisdiction and the application of U.S. securities laws on companies domiciled outside the U.S.

Discussion

Setting aside these subject matter jurisdiction issues, and disregarding potential personal jurisdiction issues, there are some larger questions about this case. AIG faces extensive litigation in the U.S. on similar or related issues. Should any particular jurisdiction’s court have priority? Should courts defer to another jurisdiction’s courts?

These kinds of questions have come up before, for example, in connection with the Royal Dutch Shell cases, where there were also parallel proceedings in different countries (refer here). The way that these proceedings should coordinate is very much an evolving issue. But the noteworthy difference between that prior example and this instance is that here the target company is a U.S.-based company. It will be interesting to see whether that distinction makes a difference and how the respective cases unfold.

I also have these vague, unformed questions whether or not it makes a difference that AIG is now effectively owned by U.S. taxpayers. The taxpayers’ highest priority right now is getting repaid for the astonishing obligations to the U.S. treasury that AIG has recently undertaken. I haven’t worked it all out yet, but there does seem to be something inconsistent with the U.S. taxpayers’ interest in having the company’s limited resources siphoned off to defend and possibly to pay damages in a foreign jurisdiction. Canadian investors probably don’t care much about that, I suppose.

Of course, it might be argued that U.S. courts have been doing similar things to other countries’ companies (including Canadian companies) for some time now. Indeed, the plaintiff’s lawyers’ press release quotes one of the plaintiff’s attorneys as saying:

for many years, Canadian corporations have had to confront the long arm of America's justice system. But with the enactment of Part XXIII.1 of the Ontario Securities Act, Canadian investors can finally pursue remedies in our own Courts against American corporations that fail to respect Canada's securities laws. Canadian investors are entitled to have Canadian Courts hear their claims.

The one thing that is clear is that a class action under the Ontario securities laws is a serious matter. As I noted in a prior post (here), a prior class under the Ontario securities laws against FMF Capital recently settled for over CAN$28 million. This settlement apparently represents the largest securities class action settlement in Canada, and while the amount may seem small compared to some of the massive U.S. settlements, the amount did represent a very significant percentage of the investors’ claimed investment loss.

At a minimum, the FMF Capital settlement suggests that a claim under the Ontario securities laws represents a serious potential liability exposure. Along those lines, it should be noted that the press release states that the plaintiff class seeks damages of $550 million. (The press release does not state whether or not those are U.S. or Canadian dollars.)

UPDATE: Dimitri Lascaris of the Siskinds law firm has written a guest column on the Securities Docket blog (here), in which he explains the basis of jurisdiction in Ontario for the AIG lawsuit, as well as the operation and effects of the Ontario securities laws.

Two Final Observations

First, this new lawsuit represents yet another demonstration that the threat of securities litigation outside the United States continues to grow.

Second, this new lawsuit presents an interesting and potential dangerous expansion of this growing threat, which is the possibility that U.S. domiciled companies could find themselves the target of securities litigation in other jurisdiction’s courts under other jurisdiction’s laws.

To the extent it proves to be successful, the Ontario plaintiff’s new lawsuit against AIG could represent a very unwelcome and potentially complicated expansion of the liability exposures of U.S companies and their directors and officers.

Special thanks to Adam Savett of the Securities Litigation Watch blog (here) for providing a copy of the Ontario court application and statement of claim.

Now This: In this time of financial turmoil, it pays to be resourceful. And so, The D&O Diary is giving serious consideration to converting itself into a bank holding company, in order to be able to join other leading American business enterprises and participate in the bailout process.

While there might be those who would contend that we are not "too big to fail," we certainly are feeling the effects of the economic downturn, and recent 401(k) statements suggest that radical measures may be required. Capital infusions would be particularly welcome here.

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