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

The changing mix of corporate and securities litigation is a recent phenomenon on which I have frequently commented on this blog. While identifying the fact of the change is relatively straightforward, explaining it is more challenging. According to a January 11, 2012 article in The Review of Securities & Commodities Regulation entitled “Shareholder Litigation After the Fall of an Iron Curtain” (here), written by Boris Feldman of the Wilson Sonsini law firm, the changing pattern in corporate and securities litigation filings is a result of changes in the plaintiffs’ securities litigation bar – particularly, the elimination of a dominant plaintiffs’ firm. These changes, according to Feldman, have resulted in the five recent securities litigation trends he identifies in his article.

For many years, according to the article, the Milberg Weiss law firm was the “dominant securities plaintiffs’ law firm.” Even after it split into two separate law firms on the East and West Coasts, it was, according to Feldman, “the 800-pound gorilla of the shareholder litigation jungle.” In addition to dominating the litigation, the firm “exercised some discipline” on the rest of the plaintiffs’ securities bar, demonstrating “substantial influence over smaller firms and parvenus.”

Now, “for reasons of retirement and incarceration,” the familiar patterns of the past have been disrupted. Feldman analogizes this disruption in the standard order of the securities litigation world to the disruptions that followed in the political world in the wake of the fall of the Iron Curtain.

Without a dominant firm, smaller firms are now “free agents,” and new entrants have appeared. These smaller and newer players are “less predictable (and often less rational).” According to Feldman, these changes in the plaintiffs’ bar explain five trends in shareholder litigation he identifies in his article.

First, Feldman notes the recent rise in multi-jurisdiction litigation, where a single company can face multiple suits in different jurisdictions arising out of the identical factual circumstances. Feldman notes that although this might have happened from time to time in the past, when it did, the plaintiffs firms worked things out among themselves. But this is far less common now. Instead, firms that have “decided they have a better shot at participating in the litigation” have consciously chosen to file outside the company’s home jurisdiction, particularly in connection with shareholder derivative litigation. This multiplication of litigation has forced corporate defendants to have to defend themselves in multiple courts, resulting in added expense and uncertainty.

The second trend Feldman notes is the proliferation of demand letters. In the past, plaintiffs would bypass this statutory prerequisite to the filing of derivative litigation, out of a concern that the demand represented a concession that demand was not futile. More recently, however, demand letters have become “fashionable,” as secondary players, eager “to get in on the action,” will submit a demand even if derivative litigation has already been filed. Feldman notes that this may “actually be advantageous to defendants,” as courts will often stay derivative litigation while the defendant company considers the demand.

Third, Feldman notes the rise of derivative litigation paralleling shareholder class action lawsuits. In the past, the type of stock drop that would trigger a 10b-5 class action would not also spawn a derivative suit, at least in the absence of a major accounting problem and restatement. Now, parallel derivative suits are “de rigeuer.” The plaintiffs bar now “just cannot resist cribbing the class complaints,” even though the company’s setback does not suggest any breach by the company’s board. This change is attributable to a simple explanation: “different suits for different folks.”

The fourth trend Feldman notes is the automatic filing of litigation when a merger is announced. When “giants roamed the earth,” there was merger objection litigation, but not every single time a merger was announced. Now the litigation is pervasive and it follows a standard pattern of an initial suit alleging a breach of fiduciary duty after the deal is announced, followed by an amended complaint alleging disclosure violations after the proxy has been filed. The other change Feldman notes about this litigation is that in the past, the litigation went away once the deal closed, as the defendants defeated the preliminary injunction seeking to block the deal. Now the merger suits are increasingly surviving the closing, based on amended allegations that “range from weak to laughable.” Though few of these suits result in a payout, the plaintiffs’ lawyers “persist,” seeking “a place in the sun.’

Finally, Feldman notes the rise in actions under Section 220 of the Delaware Code seeking to inspect the corporate defendant’s books and records. Feldman says there has been more of this litigation in the past year than in all prior recorded history. In part this rise is due to encouragement from members of the Delaware judiciary. But this rise is also attributable to a cottage industry of plaintiffs’ firms eager to “get in on the action.” Defendant companies find these suits impossible to avoid; whatever they produce, the plaintiffs ask for more until they have “created an impasse and gotten a ticket to sue.” Feldman suggests that this “epidemic” of Section 220 litigation is “unlikely to be solved without intervention by the Delaware legislature.”

Feldman closes by suggesting that in the current, rapidly changing world, the “more fragmented world of plaintiffs’ securities lawyers will continue to amaze and surprise us with their innovation and resilience.”

Very special thanks to Boris Feldman for sending me a link to his article.

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

As a result of legal changes taking place in many countries around the world, as well as U.S. Supreme Court case law developments, questions involving the possibility of securities litigation outside the U.S. has become an increasingly high profile issue. In a guest post, Robert F. Carangelo, Paul A. Ferrillo and Catherine Y. Nowak of Weil, Gotshal & Manges LLP take a detailed look at the issues surrounding the emergency of securities litigation activity and exposures out side the U.S.

Many thanks to Robert, Paul and Catherine for their willingness to publish their article here. I welcome guest posts from responsible commentators on topics relevant to this blog. Any readers who are interested in publishing a guest post on this site are encouraged to contact me directly. Robert, Paul and Catherine’s guest post follows:

Key developments in both the litigation and regulatory context are compelling multinational corporations to reassess their global securities litigation and regulatory compliance strategies. In the litigation context, recent U.S. Supreme Court activity has limited the ability of overseas plaintiffs to bring securities class action claims within the United States. As such, plaintiffs have shifted litigation to more flexible jurisdictions in Europe and overseas, thereby forcing global firms listed on multiple exchanges to increasingly defend against securities class action claims and regulatory investigations in numerous jurisdictions. At the same time, governments around the world have responded to the recent financial crisis by bolstering their regulatory capability. Governments have not only adopted more robust legislative regimes with respect to securities regulation, but they have also invested heavily in stronger enforcement protocols.

Clearly the rules of the game have changed within the global securities litigation landscape over the past few years. In turn, multinational companies are revaluating their response and responsibilities to adapt to these new challenges. For instance, how do these new realities affect litigation and settlement strategy for securities class actions? [1] What is the impact of a shareholder derivative action being commenced against a multinational firm simultaneously in the United States and abroad? How can global firms comply effectively with heightened U.S. and foreign regulatory investigations? Which of these trends could affect a company's compliance obligations in a post-Dodd-Frank world? Finally, how does all of this influence a company's purchase of directors and officers liability insurance? 

A new securities litigation strategy, or “Playbook”, is therefore key for global firms that must now compete under these new realities and regulations. Strategic suggestions are discussed below along with practical advice to help navigate global securities litigation and regulatory enforcement.

A.  Litigation Context: An Increase in Overseas Securities Litigation

Traditionally, the United States was deemed by overseas plaintiffs as the premier forum in which to mount a securities class action claim against a publicly-traded company. Federal courts were comfortable applying U.S. securities fraud laws to disputes arising outside of the United States and overseas plaintiffs enjoyed the efficiency and sophistication of the U.S. litigation system. However, last year, in an abrupt reversal, the United States Supreme Court dramatically limited the extraterritorial application of U.S. securities laws in Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010). This reversal now not only bars plaintiffs from establishing jurisdiction in the United States over a multinational company traded on non-U.S. exchanges, it also limits U.S. jurisdiction in cases involving non-exchange-based securities transactions.

While Morrison will likely curb the filing of certain securities litigation actions in the U.S., the net effect of this case seems to be that such litigation will simply shift to other, more flexible, jurisdictions. For example, in 2010, the United States District Court for the Southern District of New York dismissed a securities fraud suit against Fortis, a Belgium-based financial services company.[2] Within one year of the SDNY decision, a Dutch law firm filed suit on behalf of foreign investors against Fortis in the Utrecht Civil Court. [3]  The Dutch Suit chch includes as plaintiffs some of the largest pension funds in Europe, mirrors the same allegations that were previously dismissed in the United States.[4]

Below is a list of likely jurisdictions where modified versions of U.S.-type securities litigation are likely to materialize. We also identify emerging jurisdictions that are expected to bolster their securities litigation and regulatory framework in the coming years.

Canada

Canadian securities class actions are sharply on the rise. Not only is there a record 28 active Canadian securities class actions currently being considered by Canadian courts, but these class actions are estimated to represent approximately $15.9 billion in claims.[5] This rise can be partly attributed to the perception that Canada has very similar securities class action legislation as the U.S. and therefore plaintiffs routinely launch parallel claims in Canadian jurisdictions. Some of these similarities include comparable certification requirements and the existence of both primary and secondary liability under the laws of most Canadian provinces. 

Two recent developments, however, stand out in their ability to increase significantly the number of securities suits brought forward in Canada. First, some Canadian jurisdictions have recently statutorily revoked the “reliance” element of a securities fraud cause of action.[6] By completely removing the reliance requirement in Ontario securities legislation, plaintiffs will no longer have to prove reliance at all, nor rely on a presumption, such as “fraud-on-the-market”, to properly mount a statutory-based claim. It seems likely then that plaintiffs may look to Ontario to advance claims that would otherwise be blocked in the United States due to deficiencies in proving reliance.The other major development is the endorsement of litigation funding in Ontario. In Dugal v. Manulife Financial Corporation, (2011 ONSC 1785, ¶ 3 (2011)),  the Ontario Superior Court approved a third party funding arrangement between the plaintiffs and Claims Funding International (“CFI”), an Irish corporation.[7] In arriving at his decision Justice Strathy commented on how the “loser pays” system, which is currently the typical method of assigning the costs of the litigation in Ontario, disincentivizes a class representative from coming forward: “the grim reality is that no person in their right mind would accept the role of representative plaintiff if he or she were at risk of losing everything they own ... no rational person would risk an adverse costs award of several million dollars to recover several thousand dollars or even several tens of thousand of dollars.”[8] It is therefore not surprising that analysts have observed that Justice Strathy’s comments “could prove persuasive to judges in other Canadian jurisdictions and could also encourage potential plaintiffs and litigation funders to enter into similar agreements”[9] throughout the country.

There are, however, some limitations on the breadth and scope of Canadian securities fraud claims. In Ontario, damages are limited to the greater of 5 percent of the market capitalization of the company, or $1 million.[10] Damages pertaining to directors and officers are also generally limited to the greater of 50 percent of compensation or $25,000.

United Kingdom

In the U.K., class actions have not reached the scale of the U.S., but are routinely applied under current legislation. Class actions, or “group actions,” may be brought under Part 19.11 of the English Civil Procedure Rules, which provides that a Group Litigation Order (“GLO”) can be made to provide for the management of cases alleging common issues of law and fact.[11] Securities fraud related claims, more specifically, can be made either under common law principles (e.g., fraud, deceit, or negligent misrepresentation), or under Section 90 of the Financial Services Markets Act of 2000 (for liability relating to statements made in a prospectus.)[12] Under these provisions, claims can be pursued in a representative action where one representative claimant or defendant acts on behalf of a class of individuals. Shareholders are also permitted to bring derivative suits for director negligence, breach of duty or breach of trust under the U.K. Companies Act 2006.[13] The increased use of litigation funding in the U.K. may also make securities class action claims more viable.[14]

Netherlands

The Netherlands is also no stranger to securities fraud claims.  In contrast to the U.S., the issue of jurisdiction has not been seriously challenged in Dutch courts. Therefore, courts in the Netherlands are much more flexible in asserting jurisdiction, such as Fortis, which we discuss above. Courts in the Netherlands have also adopted a class settlement procedure, known as WCAM, “to create legally binding multi-national settlements of class action suits alleging securities fraud.”[15] One such example is the landmark $352 million Royal Dutch Shell settlement, which arose from allegations by European investors that Shell overstated its oil and gas reserves.[16] As such, the Netherlands might be the new “place to be” for investors seeking large recoveries for their securities fraud claims.

Germany

Though not yet as class action friendly as other highly-industrialized countries, substantive securities fraud claims are filed in Germany. For instance, after a similarly-styled securities lawsuit was dismissed in the U.S. following Morrison, a Canadian bank brought suit in Stuttgart District Court alleging that Porsche manipulated the shares of Volkswagen common stock in 2008 when it was trying to take over Volkswagen.[17]

Important differences do, however, exist within the German approach to securities litigation. For instance, Germany passed the Capital Investors’ Model Proceeding Law in 2005. This legislation serves as the primary legal authority for securities fraud class actions.[18] Rather than providing a mechanism to certify a “class-type” claim, the German legislation instead provides for the designation or selection of a “model case.” This “model case,” allows common elements of claims to be litigated first, and its common rulings bind all petitioners.[19] Another difference is Germany’s use of an “opt-in” system. In contrast to the “opt-out” approach in U.S. securities cases, only those claimants who actively choose to opt into the model case before a final judgment or settlement are bound by the decision.

Other Emerging Jurisdictions

While some jurisdictions may not have as robust of a securities litigation framework as the countries mentioned above, recent developments across different regions reinforce the need for global firms to monitor potential litigation venues around the world. Australia, for instance, has a well-established history of litigation funding and has adopted legislation that is highly similar to U.S.-style securities laws. Mexico, also recently amended its laws to allow consumers and investors to bring class actions.[20] High-profile restructurings in the Middle East (e.g. Dubai) have spurred shareholders in that region to seek better legislative protections and possible compensation. Finally, securities experts have also speculated that China, in an effort to attract even more investment capital into the country, is likely to introduce more stringent corporate governance and securities standards in the near term.[21]

B.    Regulatory Context: Stronger Overseas Securities Regulatory Frameworks

Just as U.S. style securities fraud litigations are heating up in foreign jurisdictions, foreign governments are also enacting new laws and institutions designed to regulate securities and address corruption in the aftermath of Dodd-Frank.

Stronger Regulators in Canada and the United Kingdom

Canada and the United Kingdom are both undertaking substantial reform in order to implement stronger regulatory and enforcement agencies. One of the biggest adjustments in Canada is the recent initiative to consolidate the thirteen provincial securities commissions that currently exist into a single regulator at the federal level.[22] The proposed consolidation will bolster regulatory and criminal enforcement across the country and allow for a more consistent approach to securities regulation.[23] In February 2011, the U.K. HM Treasury published a consultation paper providing more detail regarding recent financial regulatory reforms in the U.K. These reforms would be overseen by three new regulatory authorities: the Financial Policy Committee (which would regulate the U.K. financial system as a whole); the Prudential Regulation Committee (which would regulate financial institutions that carried significant risks on their balance sheets); and the Financial Conduct Authority (which would be the successor to the U.K. Financial Services Authority (FSA), the U.K.’s equivalent of the U.S. Securities and Exchange Commission). Under this scheme, the Financial Conduct Authority will have “as it core purpose, protecting and enhancing the confidence of all consumers of financial services . . . .”[24] The introduction of these new institutions by 2012 highlights the commitment of each government to building a stronger enforcement regime for publicly-traded companies.

New Anti-Bribery Legislation in Europe

Many countries in Europe have also adopted new anti-bribery legislation that may affect international issuers. The U.K. Bribery Act, which went into effect earlier this year, creates new liabilities for companies that fail to prevent the use of bribery within their organizations.[25] Similarly over the past year, Russia and China both enacted anti-bribery legislation, and Spain updated its anti-bribery statutes thereby criminalizing corporate bribery in that country.[26]

An Additional Layer of Regulatory Oversight

Finally, public-traded companies listed on multiple exchanges will now have to navigate another layer of regulatory oversight in Europe, due to the recent introduction of a new European Union regulatory framework for securities and banking.[27] The new European Securities and Markets Authority will provide overall guidance to the European financial markets and will be responsible for ensuring that a single set of harmonized regulations are applied by national regulators.[28]

The result of this torrent of regulatory reforms is clear: global firms must be able to navigate not only multiple jurisdictions, but multilateral regulatory initiatives as well. This requires an intimate and thorough understanding of the new rules of the game to develop successful, sustainable securities strategies.

C.   Overseas Regulatory Enforcement Activity 

As international securities regulation increases, so does international regulatory enforcement activity. In the U.S., Dodd-Frank reforms allow the S.E.C. and U.S. Department of Justice to assert jurisdiction under the more lenient “cause” and/or “effect” tests, thereby significantly increasing the reach of these regulators. In July 2010, French regulators pursued a large French hedge fund for insider trading,[29] and in January 2011 filed insider trading charges against France’s largest publisher.[30] In 2010, regulators in Hong Kong prosecuted insider trading charges against a large hedge fund.[31] In 2011, the FSA levied a substantial fine against a large multinational company in the U.K. for failing to have proper anti-bribery controls in place.[32] Outside of the bribery context, the FSA also ordered another large fine against the former Chairman of a large U.K. supermarket chain for failing to properly disclose voting rights in such company.[33] In Canada, regulators have also been active. Most recently, the Ontario Securities Commission has been aggressively investigating allegations of securities fraud and insider trading against executives of Sino-Forest Corp.[34] 

Cooperation among international securities regulators has also become commonplace.[35] For instance, regulators in France, Costa Rica, and the United States recently collaborated, and later collected significant penalties from a global communications company relating to anti-bribery charges.[36] International issuers would be prudent to update their regulatory protocols with the understanding that future cooperation with multiple regulators may require a much more rigorous response.

D.   What Does All this Mean for the Multinational, Publicly Traded Company?

The possibility of trans-national securities litigation and enforcement activity is very real, especially as the plaintiffs bar adapts to the new landscape and foreign jurisdictions. Below are a few suggestions aimed at establishing the new “Playbook” regarding global securities litigation and regulation:

Designate a Global Quarterback -- Internally and Externally

The potential for U.S.-type securities litigation and enforcement activity abroad requires a reassessment of both internal and external resources. Internally, foreign companies trading on multiple foreign exchanges need to devote legal resources toward understanding the securities laws and regulations in potentially problematic jurisdictions, jurisdictions where new regulations have been implemented, or in jurisdictions where there is likely to be significant groups of potentially-affected shareholders. This type of understanding is crucial in instances where companies are contemplating or have already completed securities offerings on foreign exchanges.

For similar reasons, the company should also identify outside legal resources in these jurisdictions that have experience dealing with class actions, and are well-versed with cross-border issues relating to both litigation and regulatory investigations. It is also important to manage the expectations of the parties and regulators to ensure that one jurisdiction investigating alleged misconduct does not outpace the other regulators, thereby unfairly advantaging both existing and potential plaintiffs. For instance, there are currently two class actions proceeding simultaneously in New York and Ontario relating to securities fraud allegations pertaining to IMAX Corporation, the makers of a propriety motion picture film format. The Ontario Superior Court has endorsed plaintiffs’ ability to conduct some discovery, even though the litigation is still at an early stage.[37] Some commentators suggest that this discovery decision “may enable plaintiffs’ classes composed of both U.S. and Canadian investors to perform an end-run around the U.S. Private Securities Litigation Reform Act (“PSLRA”) by filing suit in Canada.”[38]

Counsel must also be acutely aware of complex data privacy laws in the European Union, which make electronic discovery considerably more difficult than in the U.S. Ideally, the best outside resource to coordinate all of these concerns is one international law firm that can efficiently plan and manage both litigations and investigations in multiple jurisdictions at the same time.

Review Compliance Activities

It has become especially apparent that Dodd-Frank did not just change the landscape of securities regulation and enforcement in the U.S. As noted above, the U.K. and the European Union are working mightily to coordinate regulatory measures already in place in the U.S. Similarly, many countries are either instituting for the first time, or revising already-established laws relating to insider trading and anti-bribery. As a result, it is important for companies to have the adequate internal compliance resources to monitor, train employees, and respond to a fast-changing international regulatory landscape.

Review D&O Insurance

Finally, with the increase in trans-national securities-related litigation and regulatory investigations, it is critically important to verify that the company’s directors and officers liability insurance policy (“D&O policy”) will adequately respond to these new challenges abroad. D&O policies are very tailored instruments and are often dependent on the specific jurisdiction where the litigation or investigation is commenced. Therefore a company must also investigate whether the current D&O policy in place will actually apply not only to potential litigation or investigation in a foreign jurisdiction, but also with regards to any settlement resulting therefrom.[39]  Also, it is important to confirm if the D&O policy in question for the particular claim provides coverage for investigations and shareholder derivative actions (as corporate indemnification obligations may vary from country to country). This is an important and complicated area; it is imperative that large companies carefully determine whether it is worth the expense to engage both experienced insurance counsel and a D&O broker experienced on the international playing field to review its D&O coverage from a trans-national claims and investigations perspective.  This is not an area to be penny wise and pound foolish, as the stakes have undoubtedly risen given the new paradigm of global securities litigation, regulation, and enforcement activity.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

During 2011, elevated levels of M&A related litigation and the surge of litigation involving U.S.-listed Chinese companies offset declining numbers of credit crisis-related lawsuits, leading to overall levels of securities class action lawsuit filings consistent with recent years, according to a annual securities litigation study of NERA Economic Consulting. NERA’s December 14, 2011 report, entitled “Recent Trends in Securities Class Action Litigation: 2011 Year-End Review,” can be found here.

Based on the 213 filings between January and November 2011, NERA projects 2011 year-end filings of 232, which would be slightly below the 241 securities class action lawsuits filed in 2010 but above the 218 filed in 2009, and consistent with the 1997-2004 average of annual filings of 231.

Though the 2011 filing levels are consistent with recent years, the mix of cases has “changed substantially.” Credit crisis-related case, which predominated among filings in recent years, declined, while at the same time, M&A-related cases accounted for nearly 29% of all filings and filings against U.S.-listed Chinese companies have accounted for 18%.

Filings in the Second and Ninth Circuits accounted for more than half of all 2011 filings. However, the M&A objection suits are much more evenly distributed, with eight to ten merger objection cases filed in each of the Third, Fourth, Fifth and Ninth Circuits.

By contrast to recent years in which filings against companies in the financial sector predominated, 2011 filings have not been concentrated against companies in any one sector. (Filings against companies in the financial sector accounted for about 16% of all filings, which is in line with pre-credit crisis averages). More filings were against companies in the electronic technology and technology services sector that any other sector, representing about 21% of filings. Health technology accounted for 15% of filings.

More than a third of 2001 filings were against foreign-domiciled companies, more than double the levels of such filings in recent years. This increase of filings against foreign-domiciled companies was largely driven by filings against companies either domiciled or having their principal executive offices in China, which accounted for 39 of the 2011 filings. The pace of filings against Chinese companies slowed as the year progressed, with 27 filings in the year’s first half and 12 during the period July through November. However, the 12 filings during the period July to November are still above the 2010 total of ten cases involving Chinese companies.

Securities class action lawsuit settlements during 2011 averaged $31 million, compared to $108 million in 2010. However, if settlements in excess of $1 billion and the IPO laddering settlements are excluded, the 2010 average falls to $40 million, while the 2011 average stays at $31 million.

The 2011 median settlement was $8.7 million compared to 2010’s all time-median settlement of $11 million. Though the median settlement fell in 2011 compared to 2010, the median still represents the third highest annual median.

The NERA study is quite detailed and contains a wealth of other information and it merits being read at length and in full.

Discussion

In “counting” securities class action lawsuit filings, NERA counts multiple lawsuits against the same defendant in the same circuit as a single filing. However, if there are filings against the same defendant in different circuits, NERA counts those filings in separate circuits as separate filings, which may result in NERA’s annual filing count being higher than filing accounts that are published elsewhere.

In addition, NERA’s 2011 filings count is the result of a year end-projection based on actual filings from January through November. The fact that NERA’s 2011 filing number is the result of a projection may also result in differences between NERA’s year end number and those shown in other year end reports.

NERA “counts” only securities class action lawsuits filed in federal court. That means it does not include securities class action lawsuits filed in state court (as is permitted under The Securities Act of 1933). Similarly, while the NERA report contains extensive analysis of M&A related lawsuit filings, that analysis is limited to M&A cases filed in federal court. Many M&A related cases are in fact filed in state court. NERA’s analysis of M&A related litigation does not relate to those state court lawsuits.

Finally, in reporting on annual filing levels, NERA’s analysis reflects a consideration only of absolute numbers of filings. NERA’s does not include an analysis of those filings compared to the total number of publicly traded companies. As I have commented elsewhere, the total number of companies whose shares are publicly traded in the U.S. has declines substantially in recent years. The fact that absolute numbers of filings have stayed more or les consistent while the numbers of public companies has declined could be argued to suggest that overall levels of securities class action lawsuit filing have been increasing.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Securities class action lawsuit filings continued to accumulate during the third quarter of 2011, and the filing levels remain on pace for an above average year of securities class action litigation. As was the case in earlier quarters this year, the third quarter filing level was significantly buoyed by merger-related litigation and by lawsuits involving U.S.-listed Chinese companies, although to a lesser extent than prior quarters. There are some other interesting trends emerging as well.

By my count, there were 49 new securities class action lawsuits filed in the third quarter of 2011, bringing the year to date total through September 30 to 154. (Please see below for some note about “counting “and the reasons my count may differ from other published tallies.) The third quarter filing levels held steady with the number in the second quarter of 2011, when 49 lawsuits were also filed. The 154 filings year to date implies an annual filing total of about 205, which would be above the 1997-2009 average of 195.

The two most significant factors in the securities lawsuit filings during the first nine months of the year are merger-related lawsuits and lawsuits involving U.S.-listed Chinese companies. Of the 154 federal securities lawsuits filed through September 30, 47 (30.51%) were merger-related. Non-U.S. companies were named as defendants in 43 of the securities lawsuits (27.9%) filed during the first three quarters, of which 32 involved U.S. listed Chinese companies (20.79%).

Though the merger-related filings and lawsuits against U.S.-listed Chinese companies both continued to accumulate in the third quarter, both trends were diminished in the third quarter compared to the year’s first half. During the third quarter, 11 of the 49 lawsuit filings (22.54%) were merger-related, and 6 of the 49 filings (12.24%) involved U.S.-listed Chinese companies, both figures down compared to the year to date as a whole.  

The 154 YTD lawsuit filings involve a surprising diversity of companies. The companies named as defendants in the securities lawsuit filings during the year’s first nine months represented 91 different Standard Industrial Classification codes (SIC). Unlike recent years, in which filings against financially-related companies predominated, the SIC code categories with the largest number of filings during the first three quarters of 2011 reflect industries that historically have been the focus of securities litigation.

Thus, the SIC code categories with the largest number of securities lawsuit filings so far this year are SIC code categoies 3674 (Semiconductor and Related Devices) and 7372 (Prepackaged Software). The next largest SIC code category includes one industrial group that has also been a frequent target in the past, SIC Code category 2834 (Pharmaceutical Preparations), in which six companies have been sued year to date. Another category that has also had six new filings so far this year is a group that in the past has not seen the same level of litigation activity, SIC Code category 1311 (Crude Petroleum and Natural Gas).

The federal securities class action lawsuits during 2011’s first nine months have been filed in 45 different federal district courts, but just two courts have accounted for more than half of the filings. During the first three quarters of the year, there were 33 new securities class action lawsuit filing in the Southern District of New York, and 29 in the Central District of California. Both of these figures were significantly increased by filings involving U.S.-listed Chinese companies. In the Southern District of New York, 21 of the 33 filings through September 30 involved non-U.S. companies, of which 13 were U.S.-listed Chinese companies. In the Central District of California, 13 of the 29 lawsuits filed during the first nine months of the year involved U.S.-listed Chinese companies.

In the overall category of corporate and securities litigation, including litigation filed in state courts, the merger-related litigation has been and remains the predominant story. By my count, during the first three quarters, there was merger objection litigation filed involving at least 129 transactions, and accounting for at least 185 different lawsuits (counting lawsuits filed in both federal and state court). These figures only take account of the lawsuits of which I am aware and are almost certainly understated. In other words, if you are attempting to track corporate and securities litigation and you are only monitoring federal securities class action litigation, you are missing a great deal of the action. In fact, you could be missing the majority of the action.

As I noted at the outset, my lawsuit count may differ from other published accounts for a number of reasons. First, I include in my count class action lawsuits asserting violation of the federal securities laws but that are filed in state court. There were at least two of these during the third quarter of 2011. In addition, I may not always decide to include the same merger-objection lawsuits in my tally as do other sources that track securities lawsuit filings. I include the merger-related lawsuit if it is in federal court and if it alleges a violation of the federal securities laws.

The decision to include the above described categories of cases and other factors will likely cause my count to be slightly higher than other published tallies. I think the tallies will remain directionally consistent but the differences might be enough to lead to differences of opinion about, for example, whether or not the number of annual filings is increasing or declining, or how the annual filing levels compare with annual averages.

The Towers Watson 2011 D&O Insurance Survey Form Released: Towers Watson has released the 2011 survey form for its annual survey of D&O insurance buying patterns. Everyone in the industry benefits from Towers Watson’s annual survey, the summary report for which Tower Watson makes freely available. Because everyone benefits from it, we all have a stake in making sure that there are sufficient responses to ensure that the survey results are meaningful. I hope everyone will take the time to ensure that as many D&O insurance buyers as possible will complete the survey. The survey can be found here.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Securities class action lawsuit filings were "down sharply" according to the annual study of securities class action litigation released jointly today by the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research. The full report can be found here and the January 5, 2010 press release accompanying the report can be found here.

According to the study, which found that there were a total of 169 securities class action lawsuit filings through December 21, 2009, the 2009 filings were both 24% below the 223 filings in 2008 and 14% below the annual average of 197 filings during the years 1997 through 2008.

The Stanford study reports a lower lawsuit count than previously published studies of the 2009 securities lawsuit filings, including the prior report of NERA Economic Consulting (refer here) as well as my own prior analysis (refer here). I discuss these differences below.

The relative decline in the number of lawsuit filings in 2009 compared to prior years, according to the Stanford report, is attributable in part to the decline in subprime and credit crisis related filings. Among other things, the report notes that there were only 17 subprime and credit crisis related lawsuits in the second half of 2009.

The press release accompanying the report also quotes Dr. John Gould of Cornerstone Research as saying that the observed decline is consistent with the decline in stock market volatility during 2009, noting that after increasing during the preceding two years, volatility declined both in the first and second halves of 2009.

The study also details the large number of filings that were characterized by "a substantial lag between the end of the class period and the filing" date, a phenomenon about which I written extensively in the past (most recently here). The report notes that the percentage of filings with a lag of more than a year has increased steadily from 5% in 2005 to a historical high of 18% in 2009.

According to the study, historically, class action lawsuit with longer filing lags "have been dismissed at a higher rate than class actions with shorter filings lags," at a rate of 55% for the one-year lag filings versus 42% for filings with a lag between one year and six months, and 36% with a lag of less than six months.

The study also notes that the lag filings are largely the work of the Coughlin Stoia law firm, which was "involved in 63% of the filings with lags longer than six months and 58% of filings with lags longer than a year." This activity levels compares to the firms involvement in 39% of all filings and 29 percent of filings with lags shorter than six months.

The press release quotes Stanford Law Professor Joseph Grundfest as saying, with respect to the lag filings, that the belated filings suggest that "plaintiffs are trying to fill the litigation pipeline by bringing older lawsuits that weren’t attractive enough to file while the firms were busy pursuing financial sector claims," adding that "these lawsuits are more likely to be dismissed and can therefore be characterized as lower quality claims" and that the filings may "reflect factors idiosyncratic to one large plaintiff firm’s strategy, and have little to do with larger market forces."

In addition to tracking the overall number of filings, the report also notes the number of lawsuits filed against unique issuers, which declined even more sharply than the overall number of filings. Thus, while the report found that overall filings declined by 24% between 2008 and 2009, the total number of unique issuers involved in securities lawsuits decreased by 32 percent. The difference in the attributable to the number of multiple filings against the same target, as well as the relatively large number of filings against private companies and other non-exchange traded entities.

The report further notes that of all exchange traded companies, 1.8 percent were defendants in federal securities class action lawsuits filed in 2009 compared to 2.6% in 2008 and compared to a 2.4% annual average for the 12 years ending December 2008.

The number of lawsuits against foreign issuers also declined in 2009, according to the study. After peaking at 16.4% of all filings in 2007, the percentage of filings against foreign issuers declined to 12.4% in 2009. The study attributes the relative decline to the falling off of the credit crisis lawsuits, because so many of the suits against foreign companies were related to the subprime and credit crisis.

Finally, the decline in 2009 credit crisis filings was also associated with a decline in market capitalization losses in 2009. The disclosure dollar loss attributable to 2009 class actions was $83 billion, a 62 percent decrease from 2008.

Some Thoughts about the Numbers: As noted above, the Stanford study’s 2009 lawsuit count varies from previously published figures, including my own. NERA reported 235 filings in 2009, and I reported 189 (I discuss the difference between my count and NERA’s in my prior post, here), compared to the 169 reported by Stanford.

I know that part of the explanation lies in the fact that the Stanford report cutoff at December 21, 2009, which meant that the Stanford study missed at least three more lawsuits filed before year end.

The Stanford study also counts multiple filings related to the same allegation against the same companies only once. This provides a partial explanation for the differences between the Stanford study and the NERA study, which separately counts separate actions in separate circuits unless and until the lawsuits are later consolidated.

Another difference between the studies may be the fact that the NERA study reported a projected year end number, as the result of an extrapolation from filings through mid-December. Though the Stanford study ended prior to year end, it did not incorporate any extrapolation for cases filed after the cutoff date and before year end.

All of these factors clearly are relevant but even collectively they don’t seem sufficient to explain the entire difference. Of course, another factor may simply be differences in information, but given that the plaintiffs’ lawyers put out press releases when they file lawsuits, the information differences likely account for only a small part of the differences in lawsuit counts.

All of this underscores a point that I made at length in connection with my own study of the 2009 filings, which is that readers would benefit enormously from knowing more about what protocols the various study publishers use when the are deciding what "counts."

The Stanford analysis is certainly easier to decode in this respect that other reports since the Stanford Clearinghouse publishes its list of lawsuits on its website — for free, which is a tremendous public service for which all of us should be grateful. But merely knowing which cases were put on the list does not tell us why those cases were included, nor does it tell us what other cases might have been omitted and why. (Indeed, the reason I continue to do my own count and analysis every year, even though Stanford publishes its own list for free on the web, is the uncertainty about what the list does and does not include.)

The Stanford report also gets high marks for stating right on its cover what it is included in its "research sample," which is very helpful and very commendable. But even taking this very explicit information into account, it still seems like there must be more going on that would explain the differences between the various reports.

Here are some illustrations of questions that would be helpful to know: Are securities lawsuits filed in state courts included? Are merger objection suits included? Are proxy solicitation misrepresentation cases included? How about lawsuits filed separately on behalf of equity shareholders and bondholders – one lawsuit or two? How about lawsuits that only allege state securities law violations? What kinds of cases are omitted from the count? What other sorting criteria are used?

The more of this type of information that readers are provided, the more helpful the published reports would be for readers. The approach that would be most helpful to readers would be for the reports to identify the way that their counting protocols differ from those used by other studies, in order to help readers understand the differences.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

One of the more interesting securities class action lawsuit filing patterns that has developed as 2009 has progressed is the number of securities suits that have been filed long after the end of the purported class period cut-off date, as I have previously noted here. A November 21, 2009 National Law Journal article entitled "Securities Fraud Suits Resurface" (here, registration required) examines these patterns and reports that as plaintiffs’ lawyers turn away from credit crisis-related cases and turn back to "traditional securities suits," the plaintiffs are "slapping public companies with securities class actions months or years after the fraud came to light."

According to the article, eight of the 23 securities class actions filed against public companies in October and November 2009 "define the class as investors who bought or acquired the company’s stock during some time between 2006 and the first half of 2009." My prior posts (here and here) demonstrate that this pattern of filings with the class period cut-off date well in the past emerged well before October.

The article attributes a statement to Sam Rudman of the Coughlin Stoia law firm to the effect that "he’s working through a backlog of potential targets." The explanation for the backlog is that "lawsuits related to subprime mortgages and financial instruments consumed much of Coughlin Stoia’s energy in recent months," but the new subprime and credit crisis-related filings are "waning." The article quotes Rudman as saying about the subprime and credit crisis cases that "we’re busy litigating cases, but not a lot of new ones are being started," so now the firm is looking at cases "we kind of backburnered for two years."

As a result, the firm is "putting many prior stock drops under the microscope before the statute of limitations runs out." Rudman is quoted as saying about the number of cases the firm is looking at, "my list is long."

As I noted in my prior posts about the backlog, the plaintiffs’ efforts to work off the backlog poses a challenge for D&O underwriters, because it means that companies with long distant stock price drops could still find themselves involved with securities litigation long after the event. As a result, it is hard for underwriters to be sure when a company is "out of the woods."

Another consideration as the backlog cases come in is that the new cases are more broadly distributed across the economy than was true for the filings during at least the last couple of years. Since mid-2007, the new lawsuits have largely been concentrated in the financial sector. But in the second half of 2009, there have been fewer cases against financial companies and the cases that have been filed have hit a much broader variety of industries, as I recently noted in detail here. This filing shift may require a recalibration of risk distribution and, consequently, risk selection.

Lawyers tell me that these older cases pose a problem for the companies too. The target companies may have new management that is unfamiliar with the events that gave rise to the prior stock price drop. The company may also be involved in M&A activities, and the overhang of a past stock price drop can, for example, present an uncertainty to an acquirer.

One challenge plaintiffs may face with these lawsuits is that in some cases they brush right up against the applicable statute of limitations for securities fraud suits, as was the case with the new lawsuit filed on October 28, 2009 against Pitney Bowes, where the suit was filed one day short of the two-year statute of limitations (as I discuss further here, scroll down).

Some of these recent cases have even been filed seemingly after the statute of limitations period has passed, as Adam Savett noted on his Securities Litigation Watch blog (here), with respect to the complaint against Avanir Pharmaceuticals, which was filed three years after the proposed class period cut-off date.

There’s delayed, and then there’s stale. In at least a few instances, these cases are being offered up after the sell-by date.

Arkansas Securities Plaintiff Attorney Sentenced: Readers may recall the courtroom drama earlier this year when Arkansas-based securities class action attorney Gene Cauley took the Fifth in response to questions from Southern District of New York Judge Jed Rakoff about $9.3 million missing from the funds escrowed in connection with the settlement of the Bisys Group securities class action lawsuit. Shortly thereafter, Cauley agreed to plead guilty to wire fraud and criminal contempt for misappropriating the escrowed funds.

Today, Cauley was sentenced to 86 months in prison, and ordered to pay $8.8 million in restitution, in addition to the $500,000 he previously paid, as reported here on the WSJ.com Law Blog.

An earlier WSJ.com Law Blog post reported (here) that Cauley was in fact a protégé of Bill Lerach. Today’s article on Bloomberg (here) about Cauley’s criminal sentencing notes that Cauley joins a growing list of plaintiffs’ securities class action attorneys who have "been jailed for felonies," including Bill Lerach himself and his former law partners, Mel Weiss, Steven Schulman and David Bershad, and including even Marc Dreier.

These gentlemen of course made their living for many years accusing corporate officials of fraud. Ahem. Yes, well…isn’t ironic, don’t you think?

Welcome: The D&O Diary would like to welcome the latest new addition to the blogosphere, the CyberInquirer blog. The blog is maintained by Rick Bortnick and Pam Pengelley of the Cozen O’Conner firm and is devoted to "news and views on recent developments in Cyber Law and Insurance." The blog looks promising and looks like a great new source of new and information about insurance and law issues relating to Cyberspace. I look forward to following future posts and wish the site’s authors great success. They appear to be off to a great start.

Speaker’s Corner: Next week, I will be co-Chairing the American Conference Institute’s 15^th Annual Advanced Forum on D&O Liability in New York. The faculty for this event includes an all-star cast of insurance industry professionals and leading attorneys. The conference will be held on November 30 and December 1, 2009 at The Carlton Hotel in New York. The event website can be found here and the agenda, including a complete list of speakers and topics, can be found here.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

One interesting thing about the most recently filed securities class action lawsuits is what they have in common – that is, that while the companies sued are drawn from a surprising diversity of industries, none of them are in the financial services sector. The absence of new securities suits against financially related companies is quite a contrast to the lawsuits that were being filed a year ago, and for that matter that were being filed in the first few months of 2009. There is an increasingly strong suggestion that after more than two and a half years, the subprime and credit crisis-related litigation wave may have finally just about played itself out.

The latest securities lawsuit is representative. That is, on November 17, 2009, plaintiffs’ lawyers announced (here) that they had filed a lawsuit in the District of Rhode Island against CVS Caremark and certain of its directors and offices. The complaint, which can be found here, alleges that the defendants failed to disclose operating problems the company was having in its pharmacy benefits management (PBM) business, which the company acquired in 2007. On November 5, 2009, the company disclosed (here) the PBM problems and also disclosed that the company was the subject of an FTC investigation into the company’s drug benefits practices.

Whatever else might be said about the new CVS lawsuit, the suit clearly was not filed against a financial services company and the allegations appear unrelated to the financial crisis.

The several new securities cases filed over the last two weeks share both these traits. That is, the defendant companies are outside the financial sector and the allegations generally do not appear to specifically relate to the global financial crisis.

A case in point is the lawsuit filed last week against The Boeing Corporation and certain of its directors and officers. The plaintiffs’ lawyers’ November 13, 2009 press release (here) describes the securities suit that was filed in the Northern District of Illinois. According to the press release, the complaint (which can be found here) alleges that the company misrepresented the production timeline and anticipated delivery dates of the company’s Dreamliner 787 commercial aircraft.

Similarly, on November 6, 2009, plaintiffs’ lawyer initiated a securities class action lawsuit against jewelry retailer Zale Corp. (about which refer here) alleging that the company had improperly recorded certain prepaid advertising expenses and intercompany accounts receivable.

Other examples include the November 10, 2009 action against Hemispherix Biopharma, (refer here) alleging misrepresentations in connection with the new drug application of one of the company’s clincal stage products; the action filed on November 6, 2009 against STEC, Inc.(refer here), the memory drive manufacturer, which is alleged to have overstated demand for one of its products; and the November 6, 2009 action filed against specialty women’s clothing retailer Limited Brands (refer here), which is alleged to have made misrepresentations regarding the company’s direct-to-consumer ecommerce initiative.

Again, none of these cases involve financial companies and none are directly related to the financial crisis.

To be sure, all along as the subprime and credit crisis litigation wave unfolded over the last two and a half (actually nearly three) years, there have been cases that didn’t involve financial companies and that were unrelated to the credit crisis. However, this recent collection of cases, particularly the absence of any financial related suits, seems to represent a categorically different filing pattern.

At the same time, there are still some cases being filed that unquestionably reflect back to the credit crisis. Indeed, late last week I noted (here) that a credit crisis-related lawsuit had been filed against VeraSun Energy. Even though the company itself is not financially related, the claims in the complaint relate to the company’s alleged problems arising from the company’s wrong way bets on certain financial derivative hedging contracts.

There undoubtedly are other cases yet to come like that filed against VeraSun, where the allegations reflect back on the events of the financial crisis – particularly, as was the case with the VeraSun filing, if the plaintiffs’ lawyers’ continue to file suits where the proposed class period cutoff date is well in the past, and accordingly the lawsuits involved long past events. As I noted in my post about VeraSun, those kinds of cases could continue to arrive for some time to come.

But while there could and likely will be further additional cases relating to or arising from the financial crisis, it seems increasingly likely that the mix of cases will be much more diverse that has been the case for almost three years now. This may entail some adjustment for D&O insurance underwriters, who have been very defensive against financial company risks, but much more agreeable to accepting other kinds of risks. The pattern over the last few weeks suggest that securities litigation risk may once again be dispersed across a wide variety of sectors and industries, and a more generalized underwriting approach to risk selection may be required going forward.

So What About Bernard Madoff’s Insurance?: If you are like me, you have probably wondered since the very beginning of the Madoff scandal what kind of insurance his firm carried. It turns out that, other than a bond, his firm didn’t carry professional liability insurance.

As reflected in Susan Sclafane’s November 17, 2009 National Underwriter article (here), Madoff apparently had for years refused to buy D&O insurance, and instead carried only a $25 million financial institutions bond because he was required to do so by participants in his legitimate clearing trade business. (The bond carrier, which reportedly was on the risk for 15 years, apparently has filed a rescission action.)

Not that the D&O insurance would have gone very far, even if there had been D&O insurance in place, in view of the massive scale of the losses. For that matter, given Madoff’s guilty plea, coverage for claims against Madoff or his firm would have been excluded under most D&O policies anyway.

Perhaps it was Madoff’s awareness that of the unlikelihood of coverage that convinced him not to squander his ill-gotten gains on insurance designed to protect his victims.

Special thanks to a loyal reader for providing the link to the National Undewriter article.

Today’s Grammar Question: Observant readers may have noticed that in discussing the recent securities filings I used the plural form of the verb "to be" in connection with my use of the noun, "none" – as in, "none of them are," rather than "none of them is."

While I have no particularly strong feelings on the question of the proper verb form to be used with the noun "none," a little bit of Internet research convinced me there are quite a number of people who feel quite strongly on the subject.

I also am persuaded that the plural verb form is generally proper (as discussed here), and that even for those who feel that either usage is proper, the plural form is in any event most appropriate when the word "none" is used in the sense in which I used it – that is, to mean "not any, " in reference to plural entities (about which refer here).

If there are any readers out there who have a strong reaction to my resolution of this grammatical issue, I suggest that the best response is either a long walk or a short drink. (Or if you prefer, a short walk and a long drink. Better yet, skip the walk.)

Further Apologies: I apologize to everyone for continuing service problems with this site, particularly with respect to the delivery of email notifications. LexBlog, my blog hosting service, is continuing to suffer ill effects from a sustained spambot attack a few days ago. Along with everyone else, I sure hope things return to normal soon, if for no other reason than for the sake of my sanity.  

• Email This
• Print
• Comments
• Trackbacks
• Share Link

By now, it is well-established that the recent heightened securities lawsuit filing activity has been largely concentrated in the financial sector. However, litigation involving companies in other sectors has by no means gone away. In addition, recent filings suggest that while the plaintiffs’ lawyers have been concentrating on the financial sector, a backlog of actions against other companies may have been piling up, and that the plaintiffs’ lawyers are now getting around to working off the backlog by initiating long-deferred cases against companies outside the financial sector.

The most recent example of this apparently postponed activity against nonfinancial companies involved the online auction company, Bidz.com. As reflected in their May 7, 2009 press release (here), plaintiffs’ counsel has initiated a securities class action in the Central District of California against the company and one if its officers. Though the case was just launched this past week, the purported class period runs from August 13, 2007 to November 26, 2007. That is, the proposed class period ends more than a year and half before the case was filed.

The Bidz.com action joins several other recently filed securities class action lawsuits filed against nonfinancial companies where the end of the proposed class period is well before the date on which the cases were first filed.

For example, the securities class action first filed in the Southern District of New York on April 28, 2009 against fashion apparel company Liz Claiborne and certain of its directors and officers (about which refer here) has a proposed class period of February 28, 2007 through April 30, 2007. The proposed class period end is nearly two full years prior to the date on which the action was finally commenced.

In addition, in the securities action first filed on April 14, 2009 in the Southern District of New York against Coach, Inc., the fashion accessory and leather goods company, the class period proposed runs from January 23, 2007 to October 22, 2007 (refer here for background about the case).

These cases join other securities suits filed earlier this year against nonfinancial companies in which the filing date came considerably after the proposed class period end. The Sprint Nextel action (here), first filed on March 10, 2009, has a proposed class period of October 26, 2006 through February 27, 2008. The Rackable Systems case (here), first filed on January 16, 2009, has a proposed class period of October 30, 2006 through April 4, 2007.

At one level, there may be nothing remarkable about the timing of these actions’ filings, given the applicable statute of limitation (refer here), which allows actions to be brought up to two years after the discovery of the alleged fraud. These lawsuits are in that sense by no means "stale."

But as a practical matter, it is noteworthy that these lawsuits are only now arising, in some cases as much as nearly two years after the supposed revelation of the underlying events. Particularly when these cases are viewed collectively, there is a definite suggestion that these cases may have been deferred while plaintiffs’ lawyers were preoccupied with other things.

All of which raises the possibility that while the plaintiffs’ lawyers were caught up in the litigation frenzy concentrated in the financial sectors following the subprime meltdown and the credit crisis, they were also building up a backlog of deferred cases against other companies, to which they are now finally getting around.

Of course, this flurry of apparently belated activity against nonfinancial companies could be purely coincidental. Time will tell. The challenge in the interim for D&O underwriters is that the perennial problem of assessing the continuing litigation risk for a company that had some adverse news some time ago may be even trickier now. It is always difficult to know for sure when a company that has had a problem is "out of the woods," and with the possibility that plaintiffs’ lawyers may now be working off a backlog, this assessment may be dicier than ever.

The suggestion that plaintiffs’ lawyers may be working off a backlog of cases against nonfinancial companies raises the possibility that the focus of securities litigation activity in coming months may shift to companies outside the financial sector. And as I recently noted (here), the mounting number of corporate bankruptcies may also drive litigation activity outside the financial sectors. Of course, it remains to be seen whether or not these apparent trends will continue to emerge. But the prospect for increased securities litigation involving nonfinancial companies is certainly one of the critical issues to watch as the year progresses.

Climate Change and D&O Issues: Regular readers know that I have in the past written extensively (more recently here) about the possibility of a growing D&O exposure arising from climate change-related disclosure issues. My good friend Carol Zacharias, General Counsel of ACE Professional Risks, has written an article published in the Spring 2009 issue of The John Liner Review entitled "Climate Change is Heating Up D&O Liability" (here) that provides a comprehensive overview of the topic, including a review of related litigation that has already arisen.

Along with her many interesting observations, Zacharias concludes that "the question is no longer whether there will be actions arising out of how a company and its leadership assess, quantify, and disclose climate change risks, but rather how extensive the litigation will be and when it will be lodged against directors and officers."

Hat tip to Mason Power at MAPO Online (here) for the link to the article.

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

On March 11, 2009, Cornerstone Research released its report of 2008 securities lawsuit settlements entitled "Securities Class Action Settlements: 2008 Review and Analysis" (here). Cornerstone previously released its review of 2008 securities class action filings, which can be found here. Among other things, the newly released Cornerstone Report concludes that "the value of cases settled in 2008 was lower than the historically unprecedented high totals reported from 2005 through 2007." Cornerstone's March 11, 2007 press release regarding the report can be found here.

Although the Cornerstone Report is more or less consistent with prior analyses of the 2008 settlements (for example, the previously released study by NERA Economic Consulting, which can be found here), it also differs in some specific details. The differences are in part explainable due to the methodology used to assign settlements to a particular year. In the Cornerstone Report, the designated settlement year corresponds to the year in which the hearing to approve the settlement was held, rather than the year in which the settlement was first announced.

The Report finds that the median value of 2008 settlements was $8 million, which is lower than 2007’s all-time high median of $9 million but is higher than the median of $7.4 million for all cases settled during the period 1996 through 2007. Median settlements as a percentage of estimated damages were generally higher for cases settled in 2008 compared to settlements during the period 2002-2008. Just over half of the 2008 settlements were for less than $10 million, although the number of "very small settlements" is declining, while the number of settlements in the $20-$25 million range is increasing.

The average settlement in 2008 "fell dramatically" from $62.7 million in 2007 to $31.2 million, which is partly due to the fact that there were no settlements approved in 2008 that exceeded $1 billion (by contrast to 2007, during which the massive Tyco settlement was announced). If the top four all-time settlements are excluded from the analysis, 2008’s average settlement of $31.2 million is "in line with" the average settlement during the period 1996 through 2007 of $34.6 million. (All settlement amounts are adjusted for inflation and are expressed in 2008 dollars.)

The Report found that the average time from filing to settlement has increased steadily. Whereas historically cases settled approximately three years after filing, during 2007 and 2008, the average time from filing to settlement increased to three and a half years.

The Report also identified a number of factors that appeared significant with respect to settlement values:

1. GAAP Violations: The Report found that GAAP violations, which were alleged in 70% of 2008 settled cases, "continued to be resolved with a larger settlement amount and a higher percentage of estimated damages relative to cases not involving accounting allegations."

2. Restatements: Allegations involving restatements were involved in 35% of 2008 settlements. However, cases with restatements "are no longer associated with a statistically significant increase in settlement amounts," consistent with PCAOB research concluding that restatement announcements "are viewed by the market as less significant events." However, cases in which an accountant was named as defendants continued to settle for the "highest percentage of estimated damages among cases with accounting allegations."

3. ’33 Act Claims: Controlling for the presence of underwriter defendants, the presence of Section 11 or Section 12(a)(2) claims is "not associated with a statistically significant increase in settlement amounts." The Report does note that suits with ’33 Act allegations reached "historically high levels" in 2007 and 2008, and that as these cases settle over the next few years, the importance of ’33 Act claims in determining settlement amounts "may increase."

4. Institutional Investor Plaintiffs: When institutional investors are lead plaintiffs, settlements are "significantly higher." However these higher settlements are "associated with public pension plans, as opposed to union funds or other types of institutional investors."

5. Accompanying Derivative Claims: The number of settlements of securities class actions that were accompanied by derivative actions decreased in 2008 compared to prior years. But with respect to the securities suits that were accompanied by derivative actions, the settlement amounts were "significantly higher." In general, cases with accompanying derivative actions tend to be larger (in terms of estimated damages) and also typically involve accounting allegations and public pension plaintiffs, and include accompanying SEC actions. Controlling for these other factors, the Report concludes that cases involving derivative actions "are associated with statistically significant higher settlement amounts."

6. SEC Actions: Cases with associated SEC actions are involve "significantly higher settlements" as well as higher settlements as a percentage of estimated damages.

7. Non-Cash Components: 9% of 2008 settlements involved non-cash components. Settlements involving non-cash components are statistically higher in value, even controlling for estimated damages and the nature of the allegations.

The Report concludes with several remarks about the recent wave of subprime and credit crisis related securities litigation. First the report notes that the three settlements of these cases so far include the $475 million Merrill Lynch class action settlement. The Report notes that the Merrill case reached settlement in 18 months, which is relatively quick compared to other cases. Otherwise, however, the Report notes that, with only three of these cases settled so far, "it is still too early to anticipated what impact, if any" settlements of the credit crisis cases will have on overall settlement trends.

(My running table of subprime and credit crisis related securities lawsuit settlements and dismissals can be accessed here. My commentary on the Merrill Lynch settlement can be found here.)

The Report concludes with an observation regarding the damages represented in the 2008 securities lawsuit filings. That is, the "disclosure dollar losses" (a defined term in the Report representing one measure of investor losses) associated with the 2008 filings "reached historic highs in 2008." Because disclosure dollar loss is a "significant predictor of settlement size," the size of settlements "may increase in the future."

The Report reflects a number of different findings of significant interest to D&O insurers. In particular, the Reports finding regarding the increase in settlements in the $20 to $25 million could have significant implications for excess insurers that are active in this space. Moreover, the Report’s detailed analysis of factors affecting settlement values could be important considerations in setting case reserves.

However, D&O insurers will also want to take a couple of additional considerations into account in assessing the implications of this report. First, the Cornerstone report reflects only settlement amounts. D&O insurers’ losses in connection with any given claim also include defense expense, which is not reflected in the Cornerstone study. Indeed, D&O insurers can incur significant amounts of defense expense even if a case is dismissed and there is no settlement.

In addition, the Cornerstone study reflects only class action settlements. It does not take into account any amounts that defendants or their insurers were obligated to pay as part of settlements to plaintiffs that opted out of the settlement class. As I have noted previously, opt outs are an increasingly important factor in the resolution of securities lawsuits. As a result, class action settlement data along may insufficiently express the overall dollar exposure of securities class action defendants and their insurers.

The Cornerstone contains extensive additional analysis and warrants reading at length and in full. Once again, the Report’s authors, Laura Symons and Ellen Ryan, have done an outstanding job analyzing the latest settlements and explaining their findings.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

On February 23, 2009, Advisen released its Report of 2008 securities litigation entitled "Securities Litigation in 2008: Implications for the D&O Market in 2009 and Beyond" (here, $ required). The Advisen Report’s numerical securities litigation analysis is directionally consistent with prior reports of the 2008 lawsuits, although the Report also contributes its own unique observations to the dialog. The Report also provides a number of specific comments about the lawsuits themselves as well as about likely future trends, including in particular reflections on the implications for D&O insurers.

Advisen’s February 26, 2009 press release describing the Report can be found here.

Largely as a result of the way it counted the lawsuits, the Advisen report concludes that securities class action lawsuits as such did not substantially increase in 2008 compared to 2007, although both years’ activity did increase compared to 2006. Pertinent to these conclusions, the Advisen Report provides a lengthy explanation of its "counting" methodology, which is helpful in understanding how Advisen’s numbers differ from those reflected in prior reports. The Advisen Report correctly notes that the phrase "securities class actions" is "increasingly inadequate for categorizing and explaining securities suits."

The Advisen Report is consistent with previous released studies in its conclusion that during 2008 securities litigation was concentrated in the financial sector. The Report notes that "fully half of securities lawsuits filed in 2008 named financial firms and their directors and officers as defendants." Specifically, the Report finds that banking, finance and insurance companies accounted for half of the securities lawsuits in 2008.

The Report stresses that the nature of many of the suits filed in 2008 differs from what may have been standard form in prior years. Many of the suits were not filed against public companies for their financial disclosures, but rather were filed against companies that structured or sold securities, and were being sued for representations about the securities themselves. The auction rate securities lawsuits are one illustration of this new category.

In addition, Advisen reports that during 2008, many of the suits were filed not as securities class action lawsuits as such, but rather in the form of lawsuits for breach of fiduciary duty, breach of contract, or common law torts. Many of these lawsuits were filed in state court.

The Report notes that as the economy continues to deteriorate, "at some point in 2009, the idea of ‘subprime and credit crisis’ as a category of suits will fade away as the credit crisis simply becomes ‘the economy’." Among other things, the Report speculates that the spreading economic woe could cause the growing litigation wave to spread outside the financial sector.

The deteriorating economic conditions could also lead to increased bankruptcies, a development the Advisen Report notes "almost certainly will be accompanied by an increase in securities lawsuits." The Report notes that since 1995, roughly 35 percent of large public companies (defined as having more than $250 million in assets, measured in 2008 dollars) that filed for bankruptcy were also named in securities class action lawsuits. However, in 2007 and 2008, the percentage increased to 77 percent.

The Report also notes a number of factors contributing toward escalating costs of defense, including the complexity of the cases being filed, the novelty of many of the legal theories, and the coincidence of multiple, simultaneous proceedings.

The Report reviews the implications of these developments and trends for D&O carriers. The Report also contains interesting comments from several D&O mavens, including John McCarrick, Rick Bortnick and Joe Monteleone. The Report is interesting, well-written and well-documented, and well worth reading in its entirety.

My own overview of the 2008 securities lawsuit filings can be found here.

Remember Options Backdating?: The cases from the last wave of corporate scandals still remain, although fewer and fewer or them all the time. On February 27, 2009, the parties to the Sunrise Senior Living securities lawsuit, one of the remaining options backdating related securities class actions, agreed to settle the case for $13.5 million. A copy of the stipulation of settlement can be found here.

I have added the Sunrise settlement to my running table of the options backdating related lawsuit settlements, dismissal and dismissal motion denials. The table can be accessed here.

Special thanks to Adam Savett of the Securities Litigation Watch for providing me with a copy of the Sunrise settlement stipulation.

Now I Have Seen Everything: According to a March 2, 2009 story on Bloomberg (here), former AIG Chairman and CEO Maurice "Hank" Greenberg has sued AIG alleging that "material misrepresentations and omissions" caused him to acquire AIG shares in his deferred compensation profit participation plan at an inflated value, and later to lose nearly his entire investment after AIG's losses became known.

A March 2, 2009 Reuters story about the lawsuit (here) says that Greenberg acquired the shares on January 30, 2008, when AIG shares traded at $54.37. The company’s shares closed today at 42 cents. Greenberg seeks the difference between what he paid for the shares and what he said the shares were worth, as well as reimbursement of more than $70 million of taxes.

The defendants in the lawsuit include, in addition to the company, Greenberg’s successor as CEO, Martin Sullivan, as well Joseph Cassano, who headed AIG’s Financial Product (AIGFP) division. Both men worked for Greenberg prior to Greenberg’s departure.

I wonder if his lawsuit would be barred from coverage under AIG’s D&O insurance program (assuming for the sake of argument that it is not otherwise exhausted by prior claims)? As a former officer and director of the company, he still qualifies as an "insured" and so his lawsuit potentially at least could trigger the "insured vs. insured" exclusion typically found in most D&O policies. On the other hand, he left the company in March 2005, and so his claim might come within a coverage carve back in the exclusion, depending on how the applicable provision is worded.

If one were to assume that insurance would not be available, then defense expenses (both for the company and for the individuals, who would be indemnified by the company) would come from AIG itself, which owes the U.S. government approximately a gazillion dollars. The same would go for any uninsured settlements or judgments. I leave to others to comment on whether or not taxpayers ought to have to incur the costs associated with this lawsuit.

Perhaps pertinent to the question whether or not taxpayers should have to bear the cost of Greenberg's lawsuit, in comments published today (here), the current AIG CEO, Edward Liddy, said that Greenberg is partially responsible for AIG’s current woes. Among other things, Liddy said "The formation of the AIGFP unit, which has literally brought us to our knees, that happened on his watch. The compensation systems that have gone astray, happened on his watch. I don’t think it’s as clean and simple as sometimes Hank would like to portray."

And Finally: This week’s Time Magazine has several interesting article about the current economic crisis, including an article highly critical of former SEC Chairman Christopher Cox, entitled "The Inside Story on the Breakdown at the SEC" (here).

In addition, this week’s issue also has a fascinating story entitled "One Bad Bond" (here), which explains how losses have compounded exponentially in connection with a CDO-cubed created in March 2007 and called Jupiter High-Grade CDO V. This poster-child of financial engineering excess was originally rated AAA, but now nearly 59% of the instrument’s investments are worthless. Among Jupiter’s investments is an interest in the Mantoloking CDO, a toxic investment vehicle about which I blogged a year ago, here.

The article is worth tracking down in its original print version, because the print version is more detailed and is accompanied by graphics that are not available online but that do a particular good job in showing how the complexity of these instruments compounded the losses as the underlying mortgages have faltered.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The numbers are unambiguous – there were more securities lawsuits filed in the second half of 2008 than there were in the first half. Nevertheless commentators and observers continue to repeat the mistaken conclusion that there were fewer lawsuits filed in the second half, and even to try to discern some significance from a decline that never, in fact, occurred.

Here are the facts. As reflected on the Stanford Law School Clearinghouse Securities Class Action Clearinghouse website, which helpfully indexes the securities class action filings by quarter (here), there were 112 securities lawsuits filed in the first half of 2008 and 114 in the second half.

Not only were there more lawsuits filed in the second half of the year, but there were more lawsuits filed in the fourth quarter (65) than any other quarter during the year. Indeed, there were more lawsuits filed in December (30) than any other month during the year.

Clearly, the fact that securities lawsuit filings in fact accelerated at the end of 2008 potentially has far different implications for the future than the mistaken impression that lawsuit filings were declining.

The source of the impression that there were fewer lawsuits in the second half of 2008 is the year-end securities lawsuit filing Report jointly published by the Stanford Law School Clearinghouse and Cornerstone Research. The Report, which can be found here, considered only lawsuit filings through December 15, 2008. As I noted at the time the Report was first published (here), by omitting the last two weeks’ lawsuit filings, the Report not only excluded at least 12 lawsuit filings from its analysis, but it also reached a conclusion, inconsistent with the actual aggregate year-end data, that lawsuit filings had declined in the year’s second half. When lawsuit filing data through December 31 are considered, it is clear that the number of filings did not decline in the year’s second half.

What difference does it make whether or not lawsuit filings declined in the second half? Well, a discussion of the reasons for a lawsuit filing decline is a far different conversation that a debate over the reasons why lawsuit filings accelerated in the year’s final quarter and month. The repetition of the impression that lawsuit filings were declining when in fact they were accelerating not only perpetuates a misunderstanding of what actually happened, but it also allows the possibility that decisions could be made or conclusions reached based on a faulty premise.

Unfortunately the conclusion that securities lawsuit filings declined in the second half of 2008 continues to be repeated. As reflected in a February 9, 2009 Business Insurance article (here), industry observers continue to distract themselves and perhaps others as well debating the reasons for a lawsuit filing decline that never happened, when in fact the actual discussion ought to be the reason why lawsuit filings actually accelerated at the end of the year.

The danger from this mistaken conclusion is apparent in the remarks of one leading industry observer at a recent conference. As quoted in the Business Insurance article, the observer noted, in apparent reliance on the Cornerstone report, that “in this last quarter, there were actually fewer cases filed. It got better, not worse at the end of the year.” The world certainly looks a lot different if you think things recently “got better”; unfortunately, they didn’t get better, they got worse.

The D&O insurance industry has a hard enough time behaving rationally and making sense of what has actually happened. It would be extremely unfortunate if the industry were to become even further confused by a conclusion that unsupported by full-year data.

I entreat readers to do everything they can to make sure that the misimpression about securities lawsuit filing activity levels is not perpetuated. The industry faces too many other challenges to have to deal with the added burden of laboring under misimpressions.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

On January 6, 2008, Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse released their report on the 2008 securities class action lawsuit filings entitled "2008: A Year in Review." The Report can be found here and the accompanying press release can be found here.

According to the Cornerstone Report, through December 15, 2008, there were 210 securities class action lawsuits filed in 2008, which represents an 18% increase over 2007 and an 80% increase over 2006. The Report also found that the 2008 filing levels represented a 9% increase over the average annual filing level of 192 for the 11 years ending in December 2007.

As discussed below, the Report’s analysis of the 2008 filing levels is consistent with my own previously released analysis, which can be found here.

Cornerstone’s release of its annual securities litigation report is a much-anticipated event, and this year’s Report does not disappoint. It contains a veritable treasure trove of detailed observations, including a multitude of complex comments about the magnitude of financial losses involved in securities cases over time. The Report also has a host of other detailed comments about the specifics of the 2008 filings.

The Report merits a thorough and comprehensive reading. I briefly summarize the Report’s findings below and follow with my own comments.

The Cornerstone Report’s Findings

The Report observes that the period of heightened filing activity began in the second half of 2007. The 317 filings during the last 18 months represent a 71 percent increase over the 185 filings during the preceding 18-month period.

The Report finds that the 2008 filing activity was "dominated by a wave of litigation against firms in the financial sector" and that "litigation against firms closest to the on-going subprime/liquidity."

The 2008 Report introduces a truly nifty innovation called the Securities Litigation Heat Map, which graphically shows how concentrated the 2008 securities filing activity was in the financial sector. Among other things, the Map shows that nearly a third of all large financial firms were named defendants in a securities class action in 2008.

The Heat Map also shows how over the years different sectors have been variously targeted in securities lawsuits.

The Heat Maps confirm what practitioners in this area have long known, which is the litigation activity is strongly driven by sectors slides and contagion effects, as a result of which over time industry alone has proven to be a very poor predictor of likely future securities litigation activity. Simply put, the plaintiffs lawyers simply move on to then next hot trend.

The Report also includes the annual analysis of what it calls Disclosure Dollar Losses (that is, market capitalization losses at the end of each class period). The Report finds that these losses for 2008 class actions totaled $227 billion, which is 48 percent more than 2007 and 75 percent more than the annual average for the 11 years ending in 2007, and also represents the highest level since 2000.

In its review of the status of database cases, the Report finds that of resolved cases, 41 percent were dismissed and 59 were settled. The majority of cases were resolved after the first ruling on the motion to dismiss but before the rulings on summary judgments. For class actions filed between 1996 and 2002 and resolved by the end of 2008, the median time to resolution was 33 months, the median time to settlement was 37 months, and the median time to dismissal was 25 months. The Report also concludes that class action with higher shareholder losses take longer to resolve.

The Report also notes that the percentage of cases involving Section 11 claims increased to its highest level in 2008. The Report also noted that with respect to alleged violations of GAAP, there has been a shift from allegations related to income line statements to allegations related to balance sheet components. The Report also notes that seven of the 192 companies named in class actions in 2008 subsequently filed for bankruptcy, compared to two out of 172 in 2007 (although five of the 2007 companies filed for bankruptcy in 2008).

The Number of 2008 Filings

The Report’s tally of 210 new securities filings through December 15, 2008 is essentially consistent with my own report’s conclusion (refer here) that there were 224 new securities lawsuits through December 31, 2008, as there were 13 new securities lawsuits filed after December 15 and before December 31. The 13 additional lawsuits I included in my tally but that were omitted from the Cornerstone Report account for virtually all of the difference between the two analyses.

The arrival of 13 new securities lawsuits in the last two weeks of the year is unusual, as December is usually a slower month for new filings. The late December influx was largely but not exclusively due to the flood of Madoff- related litigation.

Cornerstone’s Report’s cutoff at December 15 is significant in other respects as well. For example, the Report states that lawsuit filings dipped in the second half of the year, and even relies on the supposed second half decline as one of the grounds on which it suggests that financial sector securities lawsuit filings may diminish in 2009. The Report also devotes a great deal of effort to trying to reconcile this supposed second half decline with observations regarding stock market volatility.

However, when all of the lawsuits filed through year end are included, it turns out that filings actually increased in the second half of the year. Not only that, but as I pointed out in my report on the 2008 filings, the securities lawsuit filing levels in the fourth quarter 2008 and in December 2008 represent, respectively, the highest quarterly and monthly totals in over five years.

Projected 2009 Filing Trends

The Report contains no predictions regarding likely overall 2009 filing levels, but the accompanying press release quotes Stanford Law Professor Joseph Grundfest to the effect that securities litigation against the financial sector may decline in 2009 because "virtually all the major financial services firms have already been sued," as a result of which "the pool of major financial services defendants might be getting fished out." In support of this conclusion, the Report among other things cites the fact that of the 15 largest financial services companies by market capitalization at the beginning of 2007, 12 of them have already been sued.

Professor Grundfest does not actually predict that overall securities lawsuit filings will decline in 2009; however, in the press release, he is quoted as saying that, because all of the major financial institutions have already been sued, "the supply of new defendants might be drying up." He also suggests that "litigation activity against the financial sector may decline next year," and in the Report adds that "it is unclear as to whether the wave of litigation will extend significantly beyond the larges financial firms in the near future."

My own view is that 2009 could well be a very active year for securities litigation. This view is based in part on the surge of litigation in the latter part of 2008, which shows every sign of continuing. The fact that there were thirty new securities class action lawsuits in December 2008, including ten new credit crisis-related lawsuits, strongly suggests that plaintiffs’ lawyers are finding no shortage of targets.

In addition, the credit crisis litigation wave long ago ceased to be just about the large financial institutions, if indeed it ever was just about that. As time has gone by, the wave has continued to spread and evolve. One attribute of this evolution is that as 2008 progressed, the credit crisis litigation has extended far beyond the financial services sector, as I noted most recently here.

In other words, the plaintiffs’ lawyers may or may not find new targets in the financial sector. (Although I strongly suspect that as a result of the Madoff scandal the plaintiffs’ lawyers will find innumerable new financial sector targets, but that is a separate issue.) The likeliest scenario, borne out by filing patterns that are already emerging, is that the plaintiffs will simply move on to other sectors, as they have numerous times in the past.

I note parenthetically that the probable movement of the litigation to a new sector is graphically foreshadowed by the Cornerstone Report’s Securities Litigation Heat Maps, which vividly show how quickly plaintiffs’ lawyers have moved from sector to sector in the past.

All of which I believe suggests that the heightened filing levels show every likelihood of continuing into 2009. Indeed, given the strong likelihood of additional Madoff victim litigation, as well as the likely continued spread of the credit crisis litigation wave outside the financial sector, the likeliest possibility is that 2009 will be a very active year for securities litigation.

The WSJ.com Law Blog has a January 5, 2009 post (here) discussing the 2008 securities lawsuit filings and quoting both from the Cornerstone Report and from my analysis of the 2008 filings.

• Email This
• Print
• Comments
• Trackbacks (2)
• Share Link

Over the holidays, I added two blog posts that readers may find particularly interesting. To make sure that readers returning to their desks after the holidays do not overlook them, I have highlighted the two posts below, with links.

The List: Madoff Investor and Feeder Fund Litigation (December 26, 2008): This post is the access point to a table of Madoff Investor and Feeder Fund litigation. I have updated the litigation table numerous times since the initial publication, as several readers have helpfully provided relevant additional links and documents.

I will continue to update the table as new Madoff litigation arises. Readers are strongly encouraged to let me know of any new or additional information necessary to keep the table accurate and up to date.

A Closer Look at the 2008 Securities Lawsuits (January 2, 2009): As part of an annual feature on this blog, I reviewed last year’s securities lawsuit filings. As detailed in greater length in the post, the 224 new securities filings in 2008 represents the highest annual filing total since 2004.

The post also discusses the possible impact of the 2008 securities filing activity on the D&O insurance marketplace.

2008 Year in Review: On January 6, 2008, at 2:00 p.m. EST, I will be participating in a free webcast sponsored by the Securities Docket (here) entitled “2008 Year in Review: Securities Litigation and SEC Enforcement.”

The webcast will be moderated by Bruce Carton of the Securities Docket, and will feature several of my fellow bloggers, including Francine McKenna of the re: The Auditors blog (here); Tom Gorman of the SEC Actions blog (here); and Walter Olson of the Point of Law blog (here). Additional information about the webcast can be found here.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

As other commentators previously have noted (refer here), the pace of securities lawsuit filings increased significantly in 2008 compared to recent years. According to my tally, there were 224 new securities lawsuits filed in 2008. The 2008 total represents a 30% increase over the 172 securities lawsuits filed in 2007, and an 88% increase over the 119 securities lawsuits filed in 2006.

The 2008 filing total also represents the highest annual filing total since 2004. All signs seem to indicate that the heightened filing levels will continue into 2009.

My 2008 securities lawsuit filing tally reflects a lower number than the figures NERA Economic Consulting recently published (refer here), and in that regard I urge readers to refer to my comments below about the particular complications associated with "counting" securities lawsuits in 2008.

Overall Observations

The most significant factor in this year’s heightened securities litigation filing activity was the number of subprime and credit crisis-related securities lawsuit filings. Of the 224 new securities cases filed in 2008, 101 were subprime or credit crisis-related. As reflected on my running tally of subprime and credit crisis-related securities lawsuits, which can be accessed here, there have been 141 total of these cases filed overall during 2007 and 2008 combined.

One factor that increased the number of subprime-related lawsuit filings in 2008 was the influx of auction rate securities lawsuit filings (about which refer here). There were 21 of these auction rate securities lawsuits filed in 2008, largely in the first half of the year.

Another factor that increased the 2008 filings was the influx of Madoff-related litigation during December 2008. My running tally of the Madoff lawsuits can be found here. Investors have initiated Madoff-related securities class action lawsuits against at least seven distinct investment groups, and every sign is that this litigation will continue to flood in during the early weeks and months of 2009.

2008 Filings by SIC Code

The predominance of the subprime and credit crisis-related litigation during 2008 is borne out in the profile of the companies that were sued in securities lawsuits during the year. Though the companies targeted represent over 90 different Standard Industrial Classifications (SIC) Codes, fully 99 of the lawsuits hit companies with SIC Codes in the 6000 series (Finance, Insurance and Real Estate), including 19 in SIC Code 6021 (National Commercial Banks) and 20 in SIC Code 6211 (Security Brokers and Dealers).

There were a number of securities lawsuit defendants entities in 2008 that have no SIC Code designated. These defendants include mutual funds, private investment firms and other entities. By my count, there were as many as 23 new lawsuits filed in 2008 against entities that lack an SIC designation. In most cases, these entities are involved in investment or financial services-related businesses, which even further underscores the fact that much of the securities litigation activity in 2008 was concentrated in the financial sector.

But while securities suits against companies in the financial sector were a predominant factor in the 2008 securities lawsuits filings, there were other SIC Code categories that also saw significant litigation activity, including SIC Code 3674 (Semiconductors) which also saw ten filings; SIC Code 2834 (Pharmaceutical Preparations) which saw nine lawsuit filings; and SIC Code 3845 (Electromedical and Electrotherapeutic Apparatus) which had five.

In addition, while the credit crisis lawsuits hit the financial sector hard, the credit crisis litigation wave spread outside the financial sector as the year progressed and the financial turmoil spread. As I noted here, and as a result of the dramatic events in the financial markets during September and October 2008, a number of companies outside the financial sector were hit with credit crisis-related lawsuits, particularly those with exposure to Lehman Brothers, Fannie Mae and Freddie Mac, or those that made wrong-way bets on currencies or commodities.

State and Court Distribution of Filings and Defendants

The concentration of cases in the financial sector also affected the geographic distribution of the 2008 case filings. Though securities lawsuits were filed in 48 different federal district courts (as well as several state courts), 97 of the 224 securities filings in 2008 were filed in the Southern District of New York. The federal district with the second highest number of new lawsuit filings was the Northern District of California, where 12 new securities lawsuits were filed. Other districts with a significant number of filings include the District of Massachusetts (10), and the Central District of California (9).

Another factor contributing to the significant number of filings in the Southern District of New York was the number of lawsuits filed there against foreign-domiciled companies. Overall, there were 34 foreign companies sued in securities lawsuits in 2008, all but five of which were initiated in the Southern District of New York. The 34 foreign companies sued represented 17 different countries, with the largest number from Canada (8), China (5) and Switzerland (4).

The domestic U.S. companies hit with securities lawsuits were based in 31 different states, and the District of Columbia. The state with the largest number of new securities lawsuits was New York (42), followed by California (23), Massachusetts (13) and Ohio (10).

The Pace of Filings and Likely Future Trends

The pace of new lawsuit filings increased during the year, with 105 during the first half and 119 in the second half. The fact that the fourth quarter, with 67 new filings, was the most active quarter during the year, together with the fact that there were a significant number of filings (30) in December (typically a quiet month for securities lawsuit filings), suggests that the heightened level of securities filings will continue into 2009. Indeed, the filings in the fourth quarter of 2008 and during December 2008 represent, respectively, the highest quarterly and monthly totals in more than five years.

My conclusion that the increased securities litigation activity levels will continue in 2009 is reinforced by the likelihood that the credit crisis litigation wave will continue to spread outside the financial sector in 2009.

Some Comments about "Counting": One reason for the wide disparity in the various published versions of the 2008 securities lawsuit filings is that the seemingly simple task of counting lawsuits was particularly complicated during 2008.

One complication is that some companies were sued multiple different times by different sets of claimants, on different legal theories, or with respect to different sets of circumstances. For example, one historically unusual phenomenon that recurred during 2008 was the initiation of new securities lawsuits initiated by preferred shareholders or subordinate securities holders (about which refer here). The multiplication of lawsuits involving different claimants or different legal theories but related defendants raised a continuing series of questions whether or not a new action does or does not represent a separate lawsuit that should be separately counted.

This question whether or not a separate complaint represents a new lawsuit was particularly complicated with respect to the Madoff-related litigation that flooded in during the final weeks of December. As reflected in my running tally of these lawsuits, which can be accessed here, there have already been multiple lawsuits against related Madoff-feeder funds. Reasonable minds might well differ as to whether or not a particular complaint represents an entirely new lawsuit or simply a related or duplicate complaint.

Another attribute of this multiplicity of lawsuit filings is that the number of new lawsuits filed may be significantly different than the number of companies sued, as some companies were sued multiple times in multiple different lawsuits. As a result, there may be a certain amount of double counting associated with some of the lawsuit tallies or some of the analysis of lawsuit filings.

Yet another factor complicating the counting is that during 2008 plaintiffs initiated a number of securities class action lawsuits in state court (about which I previously commented here). In many instances these lawsuits are difficult simply to find. The inclusion of these cases, and the uncertainty around their numbers, could significantly affect the overall lawsuit tally.

As has been increasingly the case in recent years, it has become progressively more difficult simply to maintain definitional clarity about what exactly is being counted. To clarify what I have been tracking, I try to count class action lawsuits that allege violations of the federal securities laws. That said, I have excluded certain lawsuits that other reasonable minds might include. For example, I generally exclude merger objection lawsuits. In addition, I generally exclude lawsuits in which the securities allegation is simply that the defendants failed to register securities. On the other hand, I include lawsuits even if the defendant entity is not a publicly traded entity (for example, if the defendant is a private equity fund or a hedge fund.)

Because of these definitional issues, it is almost inevitable that various tallies of the 2008 securities lawsuits will differ.

UPDATE: The WSJ.com Law Blog has a January 5, 2009 post (here) regarding the 2008 securiteis class action filings. The Law Blog entry links to this post and includes comments from a number of commentators and practitioners in the field.

Impact on D&O Pricing?: The uptick in securities lawsuit filings in 2008 might well be expected to have an upward impact on D&O pricing, and indeed it may yet have that effect. But particular features of the 2008 filings might moderate that expected effect.

First, the concentration of the filings in the financial sector means that the impact from the heightened filing levels is not widespread throughout the D&O industry. D&O carriers are not yet experiencing the impact of the filing levels across their entire portfolio, and carriers that do not have significant financial industry exposure may not yet be experiencing elevated claims activity, although that likely will change as the credit crisis litigation wave spreads outside the financial sector.

Second, even with respect to the heightened activity levels, the impact is muted somewhat by the multiple different lawsuit filings against the same companies. The D&O impact from the third, fourth or fifth new lawsuit against the same company may not increase the aggregate losses to which insurance applies. Because the number of companies sued is less than the number of new lawsuits initiated, the aggregate claims frequency level is less than the overall filing levels might indicate.

Third, many of the defendant entities are not publicly traded companies. As I noted above, many of the defendant entities in new 2008 lawsuits were mutual funds, investment partnerships, hedge funds, or other investment vehicles. The incidence of litigation against these types of entities would have only an indirect impact at most on the market for public company D&O insurance.

Fourth, a significant amount of the securities litigation activity in 2008 involved claims likelier to create errors and omissions (E&O) insurance losses, rather than D&O losses. For example, the Madoff-related litigation and the auction rate securities litigation may or may not produce D&O insurance losses, but may well produce significant E&O losses. The spread of losses to other insurance lines could dilute the overall impact from the 2008 litigation on the D&O carriers.

Fifth, most of these cases are still in their earliest stages, and it will be some time yet before the losses begin to accrue. Until loss payments begin to mount, D&O pricing is unlikely to make dramatic changes (at least as a result of securities filing activity levels).

All of that said, the increase in litigation activity in 2008, together with the disruption involving market leader AIG and other leading carriers, as well as the prospect for continued significant litigation activity in 2009, are likely to create uncertain conditions in the D&O marketplace and could lead to increased carrier caution as 2009 progresses. Indeed, Advisen, a leading industry observer, is predicting that a hard market for insurance will develop toward the end of 2009 (about which refer here).

2008: The Year in Review: Readers interested in learning more about the 2008 securities litigation trends will want to the January 6, 2009 webcast sponsored by Securities Docket.

I will be participating in this free webcast, which will begin at 2 pm EST, along with a number of my esteemed fellow bloggers, including the Securities Docket’s own Bruce Carton; Walter Olson of the Point of Law blog; Tom Gorman of the SEC Actions blog; Francine McKenna of the Re: The Auditors blog; and Lyle Roberts of the 10b-5 Daily blog. Further information about the podcast can be found here.

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