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

A recent negotiated resolution of an FDIC failed bank lawsuit suggests disputes over D&O insurance coverage may represent the real frontline in the failed bank litigation wars. The compromise was reached in the lawsuit the FDIC only recently filed in the District of Arizona involving the failed First National Bank of Nevada. As discussed below, the FDIC and the bank officer defendants have reached a settlement agreement that includes a stipulated judgment, assignment of insurance rights, release of claims against the individual defendants, and a covenant not to execute the judgment against the individual defendants.

First National Bank of Nevada failed on July 25, 2008 (as discussed here). First National Bank of Arizona was one of FNB Nevada’s sister banks until the two banks merged less than 30 days prior to FNB Nevada’s failure. As discussed here (scroll down), on August 23, 2011, the FDIC filed an action in the District of Arizona against Gary Dorris, who was CEO and Vice Chairman of the banks’ holding company as well as of both FNB Nevada and FNB Arizona, and Phillip Lamb, who was EVP of the banks’ holding company as well as of both FNB Nevada and FNB Arizona. The FDIC’s complaint alleged mismanagement and gross negligence at FNB Arizona that allegedly left FNB Arizona holding millions of dollars of bad loans.

On September 2, 2011, just days after the FDIC filed its complaint against the two individuals, the FDIC and the two defendants filed a joint motion for entry of judgment. A copy of the joint motion for entry of judgment can be found here. Though they had filed an answer denying liability, the defendants nevertheless consented to the entry of judgments “for purposes of compromising disputed claims.” Pursuant to the parties’ settlement agreement, the two individuals each consented to the entry against each of them of separate judgments in the amount of $20 million (plus post-judgment interest).

As part of the parties’ settlement agreement, upon the entry of the judgment the defendants will assign to the FDIC all of their rights and claims against the D&O insurer. The FDIC for its part agreed not to take any action to enforce the judgment against the individuals, except with respect to the individuals’ rights under the D&O policy. The joint motion alleged that the bank’s D&O insurer has “denied coverage, refused to defend, to advance defense costs, to indemnify, or to consider settlement of the claims brought against the defendants.”

Assuming for the sake of discussion that the court enters the consent judgment in the form the parties have requested, the FDIC’s obvious next move is to file a lawsuit against the bank’s D&O insurer, seeking to recover the amount of the judgments from the D&O insurer. The joint motion does identify the D&O insurer, but it does not specify the face amount of the D&O insurance policy, nor does it specify the basis on which the D&O insurer has denied coverage.

The fact that the consent judgment was submitted within days after the initial complaint was filed does seem to suggest that the lawsuit filing was itself part of a coordinated plan anticipating the consent judgments, as a way to shift the FDIC’s focus from the individuals themselves to the D&O insurer, the recovery of whose policy proceeds appears to have been the FDIC’s objective all along.

The problem with this approach is that it has not been established that the individuals in fact breached any duties or that they should be or could be held liable on the merits. Of course, the individuals would contend that when the D&O insurer failed to provide them with a defense, they were left on their own to take whatever steps they could to protect themselves from liability and to avert the accumulation of further defense expense. The FDIC, as the individuals’ successor in interest under the policy, now undoubtedly will argue that having disclaimed coverage and having declined to participate in the individuals’ defense, the carrier should not be heard to object to the basis on which the individuals compromised the lawsuit.

But merely because the FDIC will succeed to the individuals’ rights under the policy does not establish that there is coverage under the policy or that the D&O insurer has any liability for the amounts of the consent judgment. If it comes to that, the D&O insurer will undoubtedly attack the judgment on many bases. The D&O insurer will also likely maintain its assertion that there is no coverage under the policy for the claims against the individuals as well as for the judgment.

Given that this bank closed in mid-2008, which was very early in the current wave of bank failures, it is relatively unlikely that the operative policy had a regulatory exclusion (as those had only just started making their return to the D&O insurance marketplace at or about that time). The likelier possibility is that the coverage denial is based on some policy process issue, such as timely notice, claims made date, or the like.

As I previously noted, it could be argued that the D&O insurer, having denied coverage, should not be heard to object to the fact that the individuals have taken steps to protect themselves. However, the problem with these type of consent judgment/covenant not to execute type deals is that this approach can run the risk of slipping into a collusive arrangement, with the insured individual willingly agreeing to a settlement amount that has no relation to the his or her true liability exposure. In my prior life as an insurance company coverage attorney, I saw more than one deal that could only be described as abusive, and I have one particular deal   in mind that qualified as grotesque bad faith (it was so awful no court would touch it and it died a very ignominious death).

Whatever the merits or demerits of these types of deals, we undoubtedly will see many more of them before the current round of failed bank litigation finally plays itself out. FNB Nevada failed in the earliest days of this wave of failed banks, and the FDIC is just now getting around to pursuing claims and insurance coverage related to its closure. Many hundreds of banks have failed in the interim and over the coming months and years, the FDIC will be pursuing claims and insurance coverage in connection with many of those subsequent bank failures. In many of these cases, as apparently was the case here, the FDIC’s ultimate objective will be the recovery of D&O insurance proceeds.

As a result, there may well be many more occasions where, as here, individuals, in order to extricate from an FDIC lawsuit, similarly agree to a consent judgment and an assignment their rights to their D&O insurance policy in exchange for a covenant not to execute the judgment against them and their assets.

The larger message here is that as the FDIC ramps up its claims and lawsuits against the former directors and officers of failed banks, one of the consequences will be a rash of coverage lawsuits involving the failed institutions’ D&O insurance policies. All I can say is that it seems like old times to me. I expect that all across the country there are coverage attorneys getting their files from 20 years ago out of storage. 

As I said at the outset, D&O insurance coverage suits may represent the real frontlines of the failed bank litigation wars. (It is no coincidence that the lawsuit filed at the same time as the suit against the FNB Arizona defendants, the one filed against former directors and officers of Silverton bank, described here, apparently also is really a dispute about D&O insurance coverage; indeed in that case, the FDIC took the extraordinary step of naming the D&O insurers as defendants in the liability lawsuit.)

 In any event, it is clear that coverage lawsuits involving failed bank D&O policies will be one of predominant features of the D&O insurance scene for the next several years to come.

News coverage regarding the bank executives’ settlement with the FDIC can be found here. Special thanks to a loyal reader for sending me a copy of the parties’ joint motion for entry of judgment.

Court Rejects Failed Bank Directors and Officers Bid to Dismiss Claims Against Them: Meanwhile, in a case in the Northern District of Illinois involving the former directors and officers of the failed Heritage Community bank, the court has rejected the individual defendants’ motions to have the claims for negligence and breach of fiduciary duty against them dismissed, except to the extend the negligence claims are duplicative of the fiduciary duty claims.

As discussed here, in November 2010, the FDIC filed a lawsuit against certain former directors and officers of Heritage. The defendants moved to dismiss the FDIC’s negligence and breach of fiduciary duty allegations, arguing that the alleged misconduct that on which the negligence and breach of fiduciary duty claims are based are protected by the business judgment rule; that the FDIC had failed to sufficiently state claims for gross negligence, negligence or breach of fiduciary duty; and that the negligence and breach of fiduciary duty claims were duplicative.

In a September 1, 2011 order (here), Northern District of Illinois Judge Rebecca Pallmeyer denied the defendants’ motions, except that she granted the motions to the extent the negligence claims were duplicative of the fiduciary duty claims. In rejecting the defendants’ attempt to rely on the business judgment rule, she found that because these arguments represented affirmative defenses and held that the “appropriate mechanism for consideration” of the affirmative defenses is “a motion for judgment on the pleadings or for summary judgment.”

Judge Pallmeyer also found that the FDIC’s allegations “are sufficient to meet the liberal notice pleading requirements and to set for the duty, breach, causation and damage elements of claims for gross negligence, negligence and breach of fiduciary duty.”

For those involved in defending former directors and officers in FDIC litigation (and these individuals’ D&O insurers), Judge Pallmeyer’s ruling may be concerning. One of their principal defenses for individuals caught up in FDIC failed bank litigation will be that under FIRREA, they can only be held liable for gross negligence (refer here for an excellent discussion of these issues). This argument is most compelling with respect to outside directors, as  a judge in the Central District of California recently recognized in dismissing NCUA claims that had been brought against outside directors of the failed WesCorp credit union (as discussed at greater length here). Although Judge Pallmeyer did dismiss the negligence claims to the extent they were duplicative of the fiduciary duty claims, she did not reach the question whether or not under FIRREA the individuals can be held liable only for gross negligence.

Special thanks to a loyal reader for forwarding the Heritage bank ruling to me.

Annual Law Firm Survey of D&O Insurance Coverage Issues: On September 7, 2011, my good friends at the Troutman Sanders law firm issued their annual survey of coverage decisions involving D&O and professional liability insurance policies, which can be found here. The survey is very comprehensive and has the added virtue of being indexed by topic, which makes the survey a particularly useful resource for those involved with D&O insurance claims to keep at hand.

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The parties to two of the consolidated subprime-related securities lawsuits pending against Oppenheimer Funds have settled the case for a total of $100 million. This settlement has a number of interesting features, as discussed further below, including in particular aspects of the allocation of the total settlement amount between the two consolidated fund actions. The settlement also leaves the consolidated action filed against yet other Oppenheimer Funds pending.

In Spring and Summer 2009, a total of 32 class action lawsuits were filed against a number of the Oppenheimer Funds. These actions were brought by investors who had purchased shares of the Funds that were traceable to offering documents that allegedly contained misrepresentations and omissions. As a general matter, the investors alleged that the Funds had been marketed as representing investments that did not involve undue risk, but that beginning in 2006, the Funds had invested heavily in “risky” investments such as mortgage-backed securities, credit-default swaps and total-return swaps. When the financial crisis hit, these Funds later lost a substantial part of their net asset value.

As ultimately organized, the Oppenheimer Funds lawsuits were organized into three consolidated cases involving, respectively, the Oppenheimer Champion Income Fund; the Oppenheimer Core Bond Fund; and the consolidated “Rochester” cases (involving seven other Oppenheimer Funds).Background regarding the Core Bond Fund action can be found here. Background regarding the Oppenheimer Champion Income Fund can be found here. These two cases were consolidated  for discovery purposes. The Rochester cases proceeded independently. Background regarding the Rochester cases can be found here.

 The $100 million settlement involves only the Oppenheimer Champion Income Fund action and the Oppenheimer Core Bond Fund action. The consolidated Rochester Funds case is not part of this settlement, which apparently remains pending in the District of Colorado.

The $100 million settlement is described in various settlement documents filed with the District of Colorado on or about May 19, 2011. The stipulation of settlement in the Oppenheimer Champion Bond Fund case can be found here. The stipulation of settlement in the Oppenheimer Core Bond Fund case can be found here. The motions to court for preliminary approval of the settlements can be found here and here, respectively.

The parties’ settlement-related filings portray an interesting settlement process resulting in a settlement with a number of interesting features.

 First of all, the parties were able to reach this settlement while the motions to dismiss were fully briefed and pending, but before there had been any ruling on the motions.

Second, the settlement was the result of a protracted settlement mediation process that consumed a number of months. As a result of this process, the parties agreed to the $100 million settlement amount – but the parties were not done yet. They had to further agree on how the $100 million would be split, or allocated, between the Oppenheimer Champion Bond fund case, on the one hand, and the Oppenheimer Core Bond Fund case , on the other hand.

The parties entered a separate process for determining the allocation of the $100 million between the two cases. The parties entered a separate mediation process to determine the process, and for purposes of this separate process, the plaintiffs’ Lead Counsel brought in separate, independent counsel to represent each of the two respective Funds. Each side then presented mediation briefs to the mediator. On February 25, 2011, the mediator determined that the appropriate allocation between the two funds would be 47.5 percent for the Core Bond Fund Class and 52.5 percent for the Champion Income Class.

As a result of this allocation, the parties stipulated that the $100 million settlement amount is to be allocated between the two cases as follows: $52.5 million to the Champion Income Fund and $47.5 million to the Core Bond Fund class. Each of the two settlements is expressly condition on the approval of the settlement in the other case.

The settlement papers say relatively little with respect to the role that insurance may have played in the settlement. The settlement stipulations do specify that the parties to the settlement “understand and agree that any obligation of the Trustee Defendants [I.e., the individuals named as defendants in the suits who had served of trustees of the respective funds] hereunder will be satisfied by insurers or other Defendants and that no portion of the Settlement Amount is to be paid personally by the Trustee Defendants.”

There are a number of noteworthy aspects of this settlement. The first is that it was reached before the motions to dismiss had been ruling. Obviously there is no prohibition on settling cases before the dismissal motions rulings, as cases do settle prior to dismissal motion rulings from time to time. But it is relatively unusual, and the size of this settlement before the dismissal motion rulings is also noteworthy.

It is also noteworthy that these cases have been settled for a significant amount while the other Oppenheimer Fund cases involving the Rochester funds remain pending and unresolved. Those other cases remain on a different track, apparently, but the settlement does put those unresolved cases in an interesting light.

The subprime-related lawsuits against the Oppenheimer funds were only one among several sets of cases filed against mutual fund families or funds raising subprime related allegations. Another of these mutual fund cases, the Schwab Yield Plus case, settled previously for a total of $235 million (about which refer here). Many more of these mutual fund related cases also remain pending. This Oppenheimer Fund settlement put those other mutual fund cases in an interesting light, as well.

In any event, I have added the Oppenheimer Fund settlement to my running tally of subprime-related case resolutions, which can be accessed here. According to my data, the $100 million Oppenheimer Funds settlement represents the sixth largest subprime-related securities lawsuit settlement so far. (If the Rochester funds cases were to ultimately settle, the amount of any settlement of those cases would obviously increase Oppenheimer’s aggregate settlement amount.)

As I have noted before, many of the subprime-related cases remain pending and eventually they will be resolved. It is worth noting that as the various Oppenheimer cases went forward, they were consolidated in various ways, and it appears that other cases are being resolved on a consolidated basis as well. This consolidation processcould reduce the overall number of case resolutions while potentially increasing the total resolution amounts in connection with any one consolidated case.  

Nate Raymond’s May 22, 2011 Am Law Litigation Daily article about this settlement can be found here. The plaintiffs’ attorneys’ press release regarding the settlements can be found here. Special thanks to the readers who sent me information about this settlement.

SEC Investigations and D&O Insurance: There are three articles in this week’s National Underwriter that may be of interest to readers of this blog. The articles and their respective links are as follows: “A Newly Assertive SEC, Backed By Whistleblowers, Means Rise in Investigations – And Risks” (here); “As Investigation –Cost Coverage Evolve, Prices on Existing D&O Solutions Drop” (here); “Investigation Edge: Brokers Welcome New ‘Entity’ Product From Chartis” (here).

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In a settlement that has a number of interesting features, Satyam Computer Services, an Indian technology outsourcing company, has agreed to pay $125 million to settle the consolidated securities class action litigation pending against the company in Southern District of New York.

The only settling defendant is the company itself, which is now known as Mahindra Satyam. The settlement does not resolve claims against the individual defendants, including certain of the company’s former directors and officers, or against PricewaterhouseCoopers-related entities.

The settlement is subject to court approval, as well as other regulatory and governmental approval. A copy of February 16, 2011 settlement stipulation can be found here.

Background

Satyam was quickly dubbed the "Indian Enron" when it was revealed in January 2009 – in a stunning letter of confession from the company’s founder and Chairman -- that more than $1 billion of revenue that the company had reported over several years was fictitious. Investors immediately filed multiple securities class action lawsuits in the Southern District of New York.

The plaintiffs’ consolidated amended complaint alleges that in addition to fabricating revenues senior company officials siphoned off vast sums from the company to entities owned or controlled by the Chairman and members of his family. The defendants include ten former directors and officers of the company; certain entities affiliated with the company’s chairman and individuals associated with those companies; and certain PwC-related entities.The defendants filed motions to dismiss.

The Satyam Settlement

In the settlement stipulation, Satyam has agreed to pay $125 million into a settlement fund. The company, which is apparently funding the settlement entirely out of its own resources, is the only settling defendant. The claims against all of the other defendants remain pending.

In addition to the $125 million, Satyam also agreed to pay the settlement class 25% of any recovery the company may obtain against the PwC entities, in the event the company in its sole discretion decides to pursue a claim against the PwC entities.

There amount of plaintiffs’ attorneys’ fees specified or agreed to in the stipulation, however the settlement papers reflect that plaintiffs’ counsel intends to seek a fee award of 17% of the settlement fund, as well as out of pocket expenses not to exceed $2.5 million.

Lead counsel also intends to seek court approval to establish out of the settlement fund a $1 million litigation fund "to help pay for future litigation costs incurred during the continued litigation of the Action against the Non-Settling Defendants."

Discussion

There are a number of interesting things about this settlement, the first being its size. Even though it is only a partial settlement, the $125 million settlement amount would be tied for 69^th on the list of the all-time largest securities class action settlements.

Another very interesting feature of the settlement is that it resolves only the claims against the company – leaving all of the company’s former directors and offices in the lawsuit. These individuals include not only the company’s former Chairman and founder and his family members who were at the center of the scandal, but also the various outside individuals who were serving on the company’s board while the alleged fraud was going on. The suggestion seems to be that the current company management is prepared to leave all of the former board members hanging out there on their own.

The fact that the company apparently is also funding this settlement out of its own resources is also interesting. Shortly after the scandal broke, there were press reports that the company carried $75 million of D&O insurance. Of course, these press reports may have been mistaken. Or perhaps the insurance was unavailable to the company, either because the insurance did not include entity coverage or because the carriers are asserting coverage defenses. The possible availability of insurance raises the question whether the coverage is available for the individuals’ defense or any future settlements (assuming it has not already been depleted or exhausted by prior defense fees).

Another interesting component of the settlement is the composition of the settlement class to which the parties stipulated as part of the settlement. The class includes not only investors who bought the company’s American Depositary Shares on the NYSE, but also U.S. residents who bought ordinary company shares on Indian stock exchanges.

The interesting question is whether, in light of the U.S. Supreme Court’s holding in Morrison v. National Australia Bank, the U.S.-based investors who purchased their shares on the Indian exchange actually have claims they can assert under U.S. securities laws. (Indeed, the settlement stipulation expressly notes that the defendants had supplemented their pending motions to dismiss, seeking in reliance on Morrison to dismiss the claim of the U.S. residents who purchased their shares on the Indian exchanges.)

Several U.S. district courts (refer for example here and here) have already ruled that Morrison precludes Section 10(b) claims of so-called "f-squared claimants" – that is, U.S. residents who bought share of non-U.S. companies outside of the U.S. Nevertheless, the proposed settlement class includes these f-squared claimants. In other words, the proposed settlement class includes claimants who may or may not have the ability to assert claims under Section 10(b) in light of Morrison. Indeed, as the remaining defendants might even succeed in having those claimants’ claims dismissed as the case goes forward.

However, in recognition of the hurdles that these investors face, the settlement agreement provides that the U.S. investors who bought their shares on the Indian exchange will not receive the same proportion of compensation as the ADS investors.

As Alison Frankel notes in her February 17, 2011 Am Law Litigation Daily article about the settlement (here), common share holders will take a 90 percent discount on their potential recovery, by comparison to the ADS investors. The agreement states that this discount is "in recognition of additional legal hurdles facing U.S. residents who purchased Satyam ordinary shares on markets outside the United States in seeking to recover under federal securities laws." The estimated average recovery would be $1.36 per ADS and 6 cents per ordinary share.

But though the proposed class definition arguably includes a class of claimants broader than Morrison might prescribe, the proposed class does not include non-U.S. residents who purchased their Satyam shares on the Indian exchanges. These investors’ claims apparently are not resolved or even addressed by this settlement.

Another interesting feature of this settlement is the extent to which it seemingly encourages further litigation against the Non-Settling parties. The settlement not only includes the company’s agreement to pay the settlement class 25% of any recovery the company may obtain from the PwC entities, but it also includes a $1 million war chest for the claimants to use in order to continue their claims against the other defendants. This settlement might be good news for Satyam and for the settlement class, but it seems like bad news for the remaining defendants and for the PwC entities.

In other words, the company may be settling, but this case is far from over.

Bankruptcy and D&O Insurance: On March 2, 2011 at from 1:00 pm EST to 2:30 EST, the Torts and Insurance Practice Section of the American Bar Association will be sponsoring a teleconference on the topic of "D&O Insurance in the Context of Bankruptcy." The teleconference will feature a number of distinguished speakers, including my good friend Perry Granof. Information about the teleconference can be found here.

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Even after two years, the Madoff scandal continues to fascinate. Following close on the heels of last week’s news of Mark Madoff’s tragic suicide is the absolutely arresting news of Jeffry Picower’s estate’s $7.2 billion settlement with the U.S. government – to be specific, the precise amount of the settlement is $7,206,157,717, according to the Southern District of New York U.S. Attorney’s December 17, 2010 press release.

According to the press release, the settlement amount represents “all the profits Picower withdrew over the years.” Picower apparently first invested with Madoff in the late 70’s, and withdrew billions over time. After Madoff’s scheme was exposed “it became clear” that Picower had “profited at the expense of more recent [Madoff] investors.”

One aspect of the settlement, and apparently a critical condition on which Picower’s widow had insisted, is the provision that “neither Picower nor any of the related entities participating in the settlement had any involvement in, or knowledge of, Madoff’s fraud.”

This settlement will not leave Picower’s widow destitute. Most of this money had been intended for a philanthropic foundation, not for Picower’s heirs. According to the Washington Post (here), Picower’s widow will retain $200 million and his daughter will retain $25 million, the funds for all of which reportedly derived from sources other than Madoff-related profits.

Those readers who are curious to know exactly how a $7.2 billion civil forfeiture works will want to take a look at the U.S. Attorney’s December 17, 2010 forfeiture complaint. The complaint, which can be found here, is styled as an action by the United States against the “Defendant in rem” – specifically, “$7,206,157,717 on Deposit at J.P. Morgan Chase Bank, N.A..”

Among other interesting tidbits, the complaint reveals that, in order to generate those $7.2 billion in profits, the total amount that Picower had invested with Madoff’s investment advisory services was $617,456,578 – which by my calculation means that Picower’s investment with Madoff had supposedly generated lifetime returns of over 1,100%)

The estate’s December 17, 2010 stipulation of settlement with the government, which can be found here, represents in effect the estate’s agreement to forfeit the Defendant in rem to the government, to be effected, the stipulation recites, by the Clerk of Court’s issuance of “a warrant for the arrest of the Defendant in rem.”

Southern District of New York Judge Thomas Greisa approved the forfeiture case settlement. The settlement remains subject to the bankruptcy court’s approval.

This dual judicial approval is required because the settlement actually represents two different funds to be paid in settlement of two different matters. One fund, in the amount of $5 billion, is to be paid in settlement of the adversary proceeding the SIPC Trustee Irving Picard had filed against Picower in the bankruptcy court. The remaining $2.2 billion is actually in settlement of the civil forfeiture proceeding itself. Picard is to administer both funds for the benefit of the Madoff victims according to the detailed procedural specifications in the settlement stipulation.

The New York Times speculates that as a result of this and other recoveries, those who lost the amount of their principal investment by investing with Madoff may recover as much as 50 percent of their losses.

Special thanks to a loyal reader for providing the Picower settlement documents.

The Next Act of this Icelandic Saga Will Not be Staged in New York: Many readers may recall my May 2010 post about the events surrounding the failure of Iceland’s Glitnir Bank and the subsequent lawsuit filed in New York state court against the bank’s controlling shareholder and his wife, certain former bank directors and officers, and the Bank’s auditor.

At the time, I noted that “the obvious question about this case is what the heck is it doing in state court in New York?”

Apparently, the New York state court judge in charge of the case had exactly the same question. As reflected in Julie Triedman’s December 17, 2010 Am Law Litigation Daily article (here), on December 15, 2010, Judge Charles Ramos has thrown out the lawsuit on forum non conveniens grounds.

According to the article, among other issues with which Ramos was concerned was the practical problem associated with language translation. Judge Ramos seemed to accept the argument of counsel for one of the defendants, who had asked the Judge to “imagine the burden of trying to translate that all? We can’t even pronounce the names, much less translate this all.” (In that regard, I note that in typing my prior post about this case, I was unable to accurately reproduce the individual defendants’ names, as the requisite typographic symbols are simply unavailable.)

Judge Ramos also seemed annoyed by the very idea that this case could be added to his judicial burdens. The article reports that Judge Ramos said “you know something, we don’t need extra work. How many cases does the average judge in Iceland have in their inventory?...I’ve got 350.”

Demonstrating the true New Yorker’s perception of geography, Ramos added that “what I see unfolding is a case that is going to show me that the conspiracy was hatched in Iceland or Denmark or some place, but not necessarily New York.”

Ramos conditioned his dismissal on the defendants’ acceptance of jurisdiction in Icelandic courts. He advised the plaintiffs’ counsel to “get yourself a plane ticket.”

And Speaking of Failed Banks: Meanwhile, while everyone was distracted with other things, the FDIC quietly closed six more banks this past Friday night, bringing the 2010 YTD total to 157. There could be more bank failures yet to come this year, but given that next Friday is Christmas Eve and the following Friday is New Year’s Eve, the FDIC might be done closing banks, for this year at least.

Though the monthly totals fluctuated throughout the year from a monthly low of seven failed banks in February 2010 to a monthly high of 23 in April 2010, it definitely seems as if the bank closure pace slowed as the year progressed. There have been only 71 bank failures in the second half of 2010, compared with 86 in the first half. Moreover, after the FDIC closed 22 banks in July 2010, the agency closed only 49 banks over the following give months (an average of just under 10 banks a month).

The six bank closures this past Friday included three more bank in Georgia. There have been 51 bank failures total in Georgia since January 1, 2008, the highest total for any state during that period.

But the state with the highest number of bank closures in 2010 is Florida, which with one more bank closure this past Friday now has had 29 bank failures this year. (Georgia is second in 2010 bank failures with 21.) Florida also has the second highest number of bank failures since 2010, with 45.

Since January 1, 2010, there have now been a total of 322 bank failures. With 860 banks ranked as “problem institutions” in the agency’s most recent Quarterly Banking Profile, it seems likely that bank failure will likely continue as we head into 2010.

A Spectral Italian Vintner, Perhaps?: Novelist Jay McInerney’s wine column in this Saturday’s Wall Street Journal (here) contained this sentence: “When the elder brother died, he returned to Italy to run the family business.” In fairness, the surrounding context makes some sense out of this otherwise incomprehesible sentence. Nevertheless, The D&O Diary feels compelled to throw a flag on this sentence for unnecessary roughness in the use of the English language.

And Finally: If you have not yet had someone send you a link to the marvelous December 16, 2010  “Let it Dough!” illustrations on Christoph Niemann’s Abstract City blog on the New York Times website, give yourself a treat and take a few minutes to check them out here. (The “Hot Toddies” illustration alone justifies the time to visit the site.)

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There is a reason that when class action settlements are announced, they are described as preliminary and subject to final approval – sometimes the settlements fall apart before the case is finally put to rest. That appears be what has happened with the Schwab YieldPlus subprime-related securities class action lawsuit.

As discussed here, in April 2010, the parties to the Schwab YieldPlus securities suit announced a preliminary settlement of the plaintiffs’ securities claims. At the time, the settlement did not include plaintiffs’ separate state law claims. In May 2010, Schwab announced the separate settlement of the state law claims. The total value of the agreed settlements was about $235 million.

However, in a November 8, 2010 press release (here), Charles Schwab Corporation announced that it had notified the plaintiffs in the case that it was invoking the termination provisions of the settlement agreement and withdrawing from the case.

As reflected in the November 8, 2010 notice of withdrawal that Schwab filed with the court, a copy of which can be found here, after the parties initially reached their settlements, the plaintiffs contended that the remained free to pursue certain state law claims on behalf of non-California residents. The specific claims at issue are asserted under the California Business & Professions Code Section 17200.

Schwab had contended that the form of judgment agreed upon as part of the settlement had been designed to release all claims. However, in an October 14, 2010 order (here), Northern District of California William Alsup, referring to the Section 17200 claims as "the governance claim," said that "at no time was the governance claim certified for class treatment for anyone residing out of California" and he cited language in the settlement notice that the Section 17200 claims were "not released in the settlement." He concluded that, as a result, the non-California residents’ claims "were never extinguished by the settlement," and "federal securities class members residing outside of California are free to sue under Section 17200."

In its motion to withdraw, Schwab commented that it had "agreed to a generous settlement," but only in exchange for "an end to all litigation," adding that "now that Plaintiffs have reneged on the primary consideration Schwab was to receive…Schwab has no choice but to withdraw from the joint motions for final approval."

It is hard to tell from the outside exactly what happened here – that is, whether there was some problem or misunderstanding about the way the release was put together, whether the plaintiffs somehow sandbagged the defendants, or if there was just some massive misunderstanding with respect to whether or not all of the Section 17200 claims had been settled.

The conclusion that there is no way to tell from the outside what is going on is reinforced by Judge Alsup’s October 14 order. My initial instinct was to be sympathetic with Schwab’s complaint that it had thought it was buying complete repose for its millions, but that clearly is not the conclusion that Judge Alsup reached. All in all, this is a little bit of a head-scratcher.

The one thing is clear is that as a result of Judge Alsup’s order, Schwab concluded that it had no choice except to blow up the settlement. Perhaps that will mean the case will now go forward, but of course there is always the possibility that the motion to withdraw was a form of negotiation carried out by other means.

I recently noted that it seemed as if not many of the subprime related cases were settling, even though scores of the subprime cases have survived dismissal motions. Well, now there is one fewer subprime cases. Perhaps the Schwab settlement debacle explains why so few other cases have settled – these cases are complex and the settlement efforts are tricky.

I have modified my list of subprime and credit crisis related case resolutions, which can be accessed here, to reflect Schwab’s motion to withdraw from the settlement.

Pretty Soon You’re Talking About Real Money: It just in August that the lawyers in the Lehman Brother proceedings had approached the bankruptcy court to request the release an additional $35 million from the company’s D&O insurance policies. (My post about the prior request can be found here.) The total amount of insurance that the court has now authorized, including the $35 million, is $70 million.

Now the lawyers are back. Only this time the lawyers want more. A lot more.

On October 27, 2010, the lawyers for the debtors request a fresh $90 million, which Wayne State Law Professor Peter Henning, writing on the New York Times Dealbook blog (here), interprets to mean that "the government could be closer to ending its civil and criminal investigations and moving ahead with some type of enforcement." A copy of the latest motion can be found here.

As Henning explains, Lehman had one $250 million D&O insurance tower for the period May 2007 to May 2008, and a second $250 million insurance tower for the period May 2008 to May 2009. The prior payments were made under the first of these two towers. The prior $35 million was exhausted in part by the settlement of a securities arbitration against Lehman’s former CEO, Richard Fuld. The remainder has gone to defense fees.

In their latest motion for relief from the automatic bankruptcy stay, in order to permit the payment of the $90 million, the debtors are requesting the authorization of payments from the fifth, sixth and seventh excess D&O insurers in the 2007-08 tower in the total amount of $55 million, and payments of $35 million from the primary and first level excess insurers in the D&O 2008-09 tower. According to the motion, the primary and first level excess insurers in the 2008-09 towers have "recognized coverage" for certain legal proceedings.

Assuming this request will be granted, a total of $135 million out of the $250 million total in the 2007-08 tower will have been released, and now the erosion of the second tower has begun as well. The motion does not explain why the requested amount has ramped up so rapidly from the prior request, but the implications are, as Professor Henning notes, serious. At the time of the prior request I suggested that the lawyers just might succeed in depleting the entire $250 million of the 2007-08 tower. At this rate they may get there even sooner than I previously supposed. And now they are working on the second tower as well. The fees clearly are accumulating more rapidly than the $5 million a month previously supposed.

My prior post has an detailed review of the implications of these massive costs.

Special thanks to Professor Henning for providing me with a link to his blog post.

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In a post last week, I discussed a recent article by three academics in which they considered whether companies involved in securities lawsuits  financially underperform after the cases are settled. The prior post provoked an unusual level of reader commentary. Among the comments posted was one from former plaintiffs’ securities class action attorney William Lerach.

Because I know readers enjoy a spirited discussion as much as I do, and because I believe this blog can and should encompass a wide variety of viewpoints, I communicated with Mr. Lerach to see if he would allow me to republish his comment in the form of a guest post on this site. Mr. Lerach agreed and so his comment is reproduced below. In order to appreciate the context for Mr. Lerach’s remarks, I strongly recommend reading the prior post on which he is commenting. Here are his comments:

After reading Kevin's description of this study concerning the post settlement performance of companies sued for securities fraud and his own evaluation of the paper I don't know whether to characterize them both as silly or stupid. They're probably a combination of both. Almost everything about the study and the associated commentary ignores the basic realities of the circumstances that surround the vast majority of securities fraud litigations. Most companies end up being sued for securities fraud––and then end up (with the help of directors’ and officers’ liability insurance) paying a settlement––because they have lied to the marketplace about the quality of the corporation's business or its products or finances. Frequently the revelation of the truth results and not only a sharp drop in the stock price but adverse financial revelations, a drop in revenues and cash flow, violation of bank or lending covenants and management shakeups. So are we surprised that companies with these characteristics suffer "greater risks of financial distress" after they later settle a lawsuit. Of course they face such risks because they were lying about the nature of their business earlier--to cover up flaws in products, performance or the business model itself. Often such companies face a" liar's discount" in the marketplace as a consequence of their prior bad conduct. It's not the lawsuit or the settlement of the lawsuit that injures the company-or impairs it ongoing performance of financial condition-it is the misconduct, the lying and the financial falsification of the executives that got the company sued in the first place that undermines the future performance and financial health of the company. We should not be surprised that companies that have committed securities fraud––whether it's stuffing the channel, lying about their products, or falsifying their financials, "perform worse than their peers". What is it about such companies and their managements that would cause us to believe that they would perform better than their peers? Kevin's conclusion that this flawed study suggests that suits are better directed at the individuals who perpetrated the misconduct i.e. the officers of the company-- and that this would somehow spare the corporate entity the financial distress of the settlement -ignores the reality of the indemnification obligation of the company which in virtually every case causes the company to fund the bulk of any settlement on behalf of the officers directors and then only to the extent it has not been paid for by directors and officers liability insurance, a contributor which would have no material adverse impact on the corporate entity. Underlying the study and Kevin's commentary on it is the notion somehow that suits brought on by half of shareholders merely transfer money from one group of shareholders to another and therefore really don't benefit anyone-- but harm the company. Not only does this ignore the reality that the bulk of the settlement monies in these cases comes from directors and officers insurance but it completely misses the point that the vast majority of settlement proceeds go to former shareholders of the company––those investors who purchased the shares of the company at an inflated price during the fraud period but who in most instances, out of anger , frustration, or even for tax considerations later sell the shares at a loss and have no further interest in the corporate entity. These are former shareholders not current shareholders with the equivalent of a tort claim against the company. I normally am not moved to comment on the academic work done concerning securities lawsuits but the simplistic nature of this study is so obvious that I could not resist pointing out these shortcomings. It may well be that there are many defects with securities fraud class action lawsuits but any financial underperformance of companies that follows their settling such lawsuits against them and their officers and directors is not one of them.

I would like to thank Mr. Lerach for taking the time to communicate his reaction to my prior post and for allowing me to reproduce his thoughts here. As I have already had my say on this topic, and because my business partners prefer that I attend to my day job from time to time, I will not respond here to Mr. Lerach’s comments. However, I expect some readers may have their own reactions to Mr. Lerach’s remarks, and I encourage everyone to consider adding their thoughts to this post using the blog’s comment feature. I have always hoped this site would serve as a platform for the exchange of ideas, and I encourage all readers to use post their thoughts for the benefit of other readers.

In a prior post (here), I reviewed the recent biography of Mr. Lerach, Circle of Greed. My interview with the book’s authors can be found here.

That's Reassuring:  I am still trying to work out whether I am silly or stupid. Or perhaps both. In the meantime, I take some consolation from the fact that Lexis Nexis has selected The D&O Diary as one of the Top 50 Insurance blogs, as reflected in the icon embedded in the right hand margin.

In addition, George Mason Law Professor J.W. Verret, writing in the Truth on the Market blog on Monday, included The D&O Diary as one of twelve blogs he lists as his "favorite corporate law blogs." UCLA Law Professor Stephen Bainbridge, commenting on Verret's list on  the ProfessorBainbridge.com blog, also included The D&O Diary on his (somewhat longer) list of corporate law blogs he reads regularly.  My thanks to both venerable Professors (and fellow bloggers). I should add that my blog list is very much like theirs and that my list also includes both of their blogs.

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The New Century Financial securities class action lawsuit – which was the first of the subprime-related securities class action lawsuits when it was filed in February 2007 – has been settled for $124,827,088, subject to court approval. The plaintiffs’ July 30, 2010 unopposed motion for settlement approval can be found here.

The settlement actually consists of three separate settlement stipulations and three corresponding settlement funds. Of the total settlement amount, $65,077, 088 will be paid on behalf of the thirteen former New Century directors and officers; $44,650,000 will be paid on behalf of KPMG, New Century’s auditor; and $15 million will be paid on behalf of the offering underwriter defendants.

The $65 million to be paid in the class action settlement on behalf of the individual directors and officers is actually part of a larger settlement on the individuals’ behalf. As reflected in the separate director and officer settlement stipulation filed in connection the motion for settlement approval, a total of $91,102,331.51 will be paid in cash by eleven directors’ and officers’ liability insurers (which are listed on page 11 of the stipulation) in order to settle in whole or in part not only the claims against them in the securities class action lawsuits but also the claims pending against some or all of the individuals in proceedings before the SEC, in separate litigation brought against them by other plaintiffs, as well as bankruptcy trustee claims.

As reflected at greater length here, plaintiff investors first filed their action against the defendants in February 2007. New Century filed for bankruptcy in April 2007. In March 2008, the New Century bankruptcy examiner filed a report (refer here) finding, among other things, that the company had "engaged in a number of significant improper and imprudent practices related to its loan originations" that "created a ticking time bomb that detonated in 2007." On December 3, 2008, Central District of California Judge Dean Pregerson denied the defendants’ motions to dismiss (refer here).

The New Century Financial case was one of the higher profile subprime-related securities class action lawsuits and one of the most prominent in which the motion to dismiss was denied. However, as reflected in my running tally of subprime related case resolutions and settlements (which can be accessed here), it is only the fourth largest subprime securities suit settlement so far, behind the Countrywide settlement ($624 million), the Merrill Lynch settlement ($475 million) and the Merrill Lynch bondholders settlement ($150 million).

Unlike those larger settlements, however, in the New Century Financial case there was no viable entity remaining to fund a larger settlement. The size of the insurers’ contribution and the number of insurers involved in the D&O settlement stipulation suggests that the remaining D&O insurance was exhausted to fund the D&O portion of the settlement. These figures also suggest that there were certain constraints on the possible size of the settlement. KPMG’s very sizeable contribution of $44.75 million toward the settlement represents a significantly greater contribution that it paid in the much larger Countrywide settlement ($24 million).

I suspect that this was an enormously difficult settlement to pull off. Given the number of parties, the number of proceedings, the number of insurers, and the amount of money at stake, trying to settle this case undoubtedly was challenging, particularly since continuing defense expenses eroded the amount of insurance remaining as the settlement negotiations went forward. I tip my hat to the lawyers involved in bringing this settlement together.

The SEC’s separate July 30, 2010 announcement of its settlement of its enforcement action pending against three former New Century directors and officers can be found here. The stipulation of settlement in the class action lawsuit specifies that the portion of the $91 million in insurance funds is to be paid in part on behalf of the three individuals in the SEC proceeding; however, the stipulation specifies that these amounts "shall not be applied towards penalties owed pursuant to" the SEC settlement.

Another Subprime Securities Suit Settlement: In addition to the New Century Financial case, the subprime-related securities class action lawsuit involving The PMI Group also recently settled. The company announced in its August 3, 2010 filing on Form 1-Q (here) that on July 13, 2010 the parties agreed to a proposed settlement of $31.25 million, subject to court approval. The settlement is to be funded entirely by The PMI Group's insurers. Background regarding the case can be found here. Like the New Century Financial case, the PMI Group subprime-related securities class action lawsuit had also survived a motion to dismiss, as discussed here.

A Different Sort of Insurance Cover: Being an astronaut is a dangerous occupation, and those that climb into space launch vehicles understandably would want life insurance in case the worst were to happen. However, life insurers have proven reluctant to insure astronauts.

As reflected in this fascinating post on the UK Insurance blog (here), the interesting way the crews for the Apollo 11 through 16 dealt with this issue was for each crew member to sign specially issued, stamped and marked envelopes, with the idea that were the worst to happen, the value of the "insurance covers" would "sky-rocket" allowing the astronauts’ families to secure financial benefits without formal insurance.

Fortunately, none of the missions that used this makeshift form of insurance suffered any fatalities (though Apollo 1 did meet an unfortunate fate and later Space Shuttle Challenger and Columbia missions did suffer terrible disasters). The Apollo missions "insurance covers" were never used and now trade among collectors.

Special thanks to loyal reader Chris Areheart for sending along this interesting item.

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As opening speaker on June 21, 2010 at the Stanford Law School Directors’ college, Southern District of New York Judge Jed Rakoff shared his views about Bank of America’s settlement of the SEC enforcement action, including some thoughts about why he approved the revised $150 million settlement of the case after he rejected the prior $33 proposed settlement. He also commented on what he hopes the significance of the sequence of events may be.

In August 2009, the SEC filed an enforcement action against Bank of America related to the events surrounding the company’s acquisition of Merrill Lynch. At the outset, the case related solely to omissions pertaining to the payment of bonuses at Merrill Lynch prior to the merger, although as later amended the action extended to omissions in the proxy materials relating to Merrill’s deteriorating financial condition after the merger was announced but prior to the shareholder vote.

In a harshly worded September 14, 2009 opinion (here), Judge Rakoff had rejected the parties initial $33 proposed settlement, finding that it did not meet the requisite standard for judicial approval, as it was "neither fair, nor reasonable, nor adequate." He challenged the very premise of the deal, which he said "proposes that shareholders who were the victims of the Bank’s alleged misconduct must now pay the penalty for the misconduct."

On February 4, 2010, the SEC announced a revised settlement of its amended enforcement action. Though the revised settlement substantially increased the cash value of the settlement, many observers at the time questioned whether the revised settlement addressed Rakoff’s numerous concerns with the initial pact. Yet Rakoff approved it, although "reluctantly."

In his speech at the Stanford Directors College, Judge Rakoff provided some explanation of the reasons he approved the revised deal. Among other things, he noted that the revised settlement included "specific prophylactic measures" regarding disclosures that had not been included in the initial proposal.

In addition, though the settlement funds would still ultimately come from Bank of America’s then-current shareholders, the funds under the revised settlement would go to Bank of America’s pre-merger shareholders, rather than to the SEC, as had been the arrangement under the initial settlement. Because about half of the post-merger shareholders had prior to the merger been Merrill Lynch shareholders, but only the pre-merger Bank of America shareholders would receive the settlement funds, the practical effect of the settlement was a "renegotiation" of the price of the merger deal.

Rakoff also mentioned that the day before the settlement was proposed, New York Attorney General Andrew Cuomo ("Hereinafter to be referred to as ‘The Candidate,’" Rakoff added) filed a state court action against Bank of America and two of its officers charging them with fraud (about which refer here). He said that "under the circumstances, he had no alternative but to examine" the material the AG had relied upon, as a result of which he concluded that the SEC’s "view of the facts was not unreasonable."

Rakoff added that he "really would have preferred that the case go to trial, as that would have provided an opportunity for a jury to determine what the facts were," but his role was not to determine his own preferences but rather to determine whether the proposed settlement was "fair, reasonable and adequate."

In commenting on what the significance of these events may be, Judge Rakoff noted that in the past SEC consent judgments have largely been free from "scrutiny" because of the generally "high regard" the judiciary has for the SEC and the "deference" the SEC is given as a result.

Judge Rakoff said he "harbors the hope" that the questions he raised about the Bank of America settlement may "encourage some of my colleagues in being more proactive in assessing other SEC consent judgments" as well as consent judgments in other cases. These kinds of efforts may or may not contribute to greater "efficiency" but they "will lead to greater justice."

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In the largest subprime-related securities suit settlement to date, Countrywide Financial has reached an agreement to pay $600 million to settle the securities class action pending against the company and certain of its directors and officers, according to an April 23, 2010 article by Gabe Friedman in The Daily Journal (here, subscription required). The settlement reportedly is still confidential and is also subject to the approval of several pension boards.

The settlement agreement would include the release several top Countrywide executives, including former CEO Angelo Mozillo.

The settlement is also subject to court approval; however, the agreement reportedly was the product of mediation before U.S. District Judge Howard Matz, and accordingly it seems unlikely that it would be set aside by the court, assuming it ultimately is approved by all parties.

The consolidated securities class action lawsuit against Countrywide is pending before Central District of California Judge Mariana R. Pfaelzer. In a massive December 1, 2008 opinion, about which refer here, Judge Pfaelzer had denied the defendants’ motion to dismiss. The Countrywide case remains one of the most prominent subprime-related securities cases in which the motions to dismiss were denied.

The settlement reportedly only relates to the securities class action lawsuit; the separate California-based shareholders’ derivative lawsuit, which also survived a motion to dismiss (refer here), apparently remains pending. The separate Countrywide ERISA class action lawsuit previously settled for $55 million (refer here).

In addition to these actions brought by private litigants, the SEC has also separately filed an enforcement action against former CEO Angelo Mozillo, as well as the company’s former CFO and COO, as discussed here. In addition, a recent report in the Wall Street Journal suggested that a Central District of California grand jury is also looking into the possibility of criminal misconduct at Countrywide.

By any measure, this is a very large settlement – should it in fact be finalized. According to the RiskMetrics’ Top 100 Settlements report (here), the $600 million Countrywide settlement would be tied for 13^th largest securities settlement of all times.

The $600 million Countrywide settlement is also by far the largest subprime-related securities class action lawsuit settlement, by far eclipsing the $475 million that Merrill Lynch agreed to pay to settle its subprime related securities class action lawsuit (about which refer here).

Despite the sheer size of the Countrywide settlement and its relative high ranking on the settlement tables, there may be some who may question the settlement at this dollar figure. Shareholders lost billions of dollars when Countrywide’s stock price plunged before the company’s acquisition by Bank of America. In addition, Angelo Mozillo sold hundreds of millions of dollars in his personal holdings in the company’s stock before the share price began its plunge.

As the post mortem on the subprime meltdown has developed, Countrywide has become the preferred example of many of the excesses that preceded the subprime meltdown. Accordingly, there may well be some who question whether $600 million, as big of a number as it is, is "enough."

The problem with arguments about what is "enough" is that it immediately begs the question of "compared to what?" Those who contend that it is not "enough" may well point to the magnitude of the investor losses (although clearly not all of the drop in Countrywide’s market capitalization is attributable to the alleged fraud). They may also point out that even just with respect to options backdating, there was at least one securities lawsuit settlement greater than $600 million (the UnitedHealth Group case, which settled for a total $925.5 million, taking all settlements into account).

On the other hand, there have only been a dozen cases in the entire history of securities litigation that have settled for more than $600 million and many of those involved companies that were brought down due to criminally fraudulent misconduct (e.g., Enron, WorldCom, Cendant). Other cases just involved criminal misconduct (e.g., Tyco). But WorldCom was acquired, it didn’t go bust and so far there have been no criminal allegations.

There may be those who feel so strongly that that the investors’ recovery should have been larger that they may object to the settlement; indeed, there could be those who feel they could do better on their own and who choose therefore to opt-out of the class settlement. As I have detailed elsewhere, even in many of the prior settlements that were larger even than the Countywide settlement, there were significant numbers of individual opt outs and in many cases, the aggregate amount of the opt-outs’ recovery represented a very significant percentage of the class settlement amount.

But whatever else may be said, $600 million is a lot of money. The Countrywide settlement comes close on the heels of the $200 million Schwab YieldPlus settlement. The quick succession of these two settlements suggests that the evolution of the subprime litigation wave may have reached a critical point. We may now begin to see other settlements emerge, particular in those cases that have survived dismissal motions.

The Countrywide and Schwab settlements, taken together with the $475 Merrill Lynch settlement, represent over $1.2 billion. These few data points suggest that the aggregate costs of resolving all of the subprime and credit crisis related litigation could be staggering.

But as impressive as these three settlements are, both individually and collectively, they all share one trait that may make them irrelevant in many cases. That is, in each of these three cases, there was a solvent and relatively strong entity available to fund a significant settlement. (Indeed, by the time the cases settled, the relevant entity with respect to both the Merrill Lynch and Countrywide settlements happened to be Bank of America.)

In many other pending cases, the relevant entity has long since folded (e.g., New Century Financial), and other than quickly dwindling insurance proceeds, there may be relatively few sources out of which to fund settlements. These eye-poppingly large settlements may represent nothing so much as what may be possible where there are deep pockets available, but they may not represent relevant reference points for many other cases.

In any event, my running tally of the subprime and credit crisis related lawsuit resolutions can be accessed here. However, readers should be aware that I will not be entering the data on the Countywide settlement until I have complete data and a link to a primary source that is not behind a firewall.

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In one of the most substantial settlements to date to arise out of the subprime-related securities litigation wave, the parties to the consolidated Schwab YieldPlus securities class action lawsuit have reached an agreement to settle the case for $200 million, according to an April 20, 2010 press release from The Charles Schwab Corporation. The parties’ settlement arises in the wake of several recent summary judgment rulings in the case and in advance of a looming May 10, 2010 trial date.

The proposed settlement is subject to definitive agreement and court approval. The settlement also does not include certain state law claims the plaintiffs had asserted, as well as other regulatory claims.

The plaintiffs had filed several class action complaints in 2008 that were later consolidated. As reflected in the plaintiffs’ second amended complaint, the plaintiffs alleged that Schwab and related entities, as well as certain Schwab directors and officers, violated federal and state securities laws and other state laws in representations made about Schwab’s YieldPlus Fund, a short-term fixed income mutual fund.

Essentially, the plaintiffs alleged that the defendants misled investors when they described the Fund as a safe alternative to cash which had "minimal" risk of a fluctuating share price. The plaintiffs allege that the Fund was not "stable" or "safe" because it was comprised of assets that were riskier than represented. Specifically, the plaintiffs alleged that the assets held by the Fund were of longer duration than represented. The plaintiffs also alleged that the asset allocation disclosures and the description of the Fund’s concentration in illiquid securities were inconsistent with the Fund’s significant and increasing concentration in mortgage-backed securities.

The plaintiffs allege that by extending the average duration of the portfolio and by investing in between 46% to 50% of portfolio assets in mortgage-backed securities, the defendants caused the Fund and its shareholders to incur billions of dollars in losses. The complaint alleges that the Fund’s shareholders lost up to 36% of their "supposedly safe cash investment."

Northern District of California Judge William Alsup had recently issued a series of orders substantially denying the defendants’ motions for summary judgment. In a March 30, 2010 order (here), Judge Alsup denied the defendants’ motion for summary judgment and granting plaintiffs’ motion for summary judgment as to plaintiffs’ claims under the Investment Company Act of 1940. In an April 8, 2010 order (here), Judge Alsup substantially denied defendants’ motions for summary judgment on ’33 Act disclosure issues and loss causation issues. In a separate April 8, 2010 order (here), Judge Alsup substantially denied the individual defendants’ motion for summary judgment as to the plaintiffs’ Section 12 claims and certain state law claims. Trial in the case had been set to begin on May 10, 2010.

In its April 20 press release, the company stated that it increased its contingency reserve relating to the case an additional $172 million pre-tax (beyond the $11 million the company had previously accrued in the wake of the March 30 summary judgment ruling) an amount which is "net of expected insurance coverage."

The proposed settlement of the Schwab YieldPlus Fund securities suit is the second largest settlement yet to arise out of the subprime-related securities litigation wave, exceeded only by the massive January 2009 settlement in the Merrill Lynch subprime-related securities lawsuit (about which refer here). In addition, according to reliable sources, this settlement is the fourth largest securities settlement in the Ninth Circuit and the second largest for a noninstitutional lead plaintiff.

The size of the settlement undoubtedly is a reflection of the looming trial date and recent adverse summary judgment rulings, as well as the size of the losses claimed by the plaintiff class. While many of these factors are case specific, this settlement could nevertheless potentially cast a significant shadow across the huge number of remaining subprime-related securities lawsuits. The fact that the case involved a mutual fund may also present its own differentiating characteristics, but plaintiffs may nevertheless seek to rely on fact and amount of this settlement in other cases.

There has been a certain amount of publicity recently about how the plaintiffs may be faring poorly in the subprime related securities litigation, at least at the motion to dismiss stage. At a minimum, the sheer magnitude of this settlement suggests the enormous stakes that may be involved in the subprime-related securities lawsuits – at least those that survive initial pleading hurdles.

I have in any event added the Schwab settlement to my running tally of subprime and credit crisis-related lawsuit case resolutions (including dismissal motion rulings), which can be accessed here.

An April 20, 2010 Business Week article discussing the settlement can be found here. A Net Worth Plus blog post about the settlement can be found here.

Special thanks to  Reed Kathrein  of the Hagens Berman firm, which is lead plaintiffs' counsel in the YieldPlus lawsuit, for providing me with copies of the summary judgment motion rulings.

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On March 24, 2010, Cornerstone Research released its annual study of securities class action lawsuit settlements. The most recent study, which is entitled "Securities Class Action Settlements: 2009 Review and Analysis" and is written by Ellen M. Ryan and Laura E. Simmons, can be found here. Cornerstone’s March 24, 2010 press release concerning the study can be found here.

The study reflects a number of interesting observations about median and average securities class action lawsuit settlements that were approved during 2009. The study also includes a useful analysis of the factors that affect settlement size, and concludes with some commentary about likely future settlement trends.

First, the median 2009 settlement of $8.0 million is unchanged from 2008, although slightly up from the $7.4 median of all settlements during the years 1996 through 2008.

Second, the 2009 average settlement amount of $37.2 million is up from the 2009 average of $28.4 million. The 2009 average of $37.2 million is well below the $55.4 million average of all settlements during the period 1996 through 2009. However, if the largest four settlements during the period 1996 through 2008 are removed from the analysis, the average 2009 settlement of $37.2 million is slightly higher than the adjusted $34.4 million average for the 1996 to 2008 period.

(This analysis of average settlements excludes the settlements associated with the IPO Laddering cases, which given the number of cases resolved in that settlement has the effect of distorting the average settlement values.)

Third, the distribution of 2009 settlements also is comparable to prior years. Almost 60% of all settlements during the period 1996 through 2009 are below $10 million, and more than 80 percent settled for less than $25 million. Settlements in excess of $100 million remain relatively infrequent, occurring in approximately 7 percent of all cases.

Fourth, according to the study, the largest single most important factor is the amount of so-called plaintiffs’ style damages (that is, "damages" calculated using the methodology most often urged by securities class action plaintiffs). However, settlements as a percentage of plaintiffs’ style damages generally decrease as damages increase, and this observation is particularly valid for very large cases.

Fifth, the Cornerstone also assesses settlement values relative to what it calls Disclosure Dollar Loss, which compares the defendants company’s stock prices on the days before and the days after the corrective disclosure. The study reports that settlements as a percentage of the disclosure dollar loss generally decline as the loss increases.

The study also identified a number of other factors that affect overall settlement size:

1. GAAP Violations: Approximately 65% of 2009 settlements involved cases included alleged violations of GAAP. These cases "continued to be resolved for larger settlements that for cases not involving accounting allegations.

2. Auditor Defendants: Cases in which auditors are defendants settle for a relatively higher percentage of estimated plaintiffs’ style damages even when compared to the broader set of all cases in which improper accounting allegations were made. Since the cases filed in 2009 involve an increased number of auditor defendants even while the overall number of filings declined compared to the prior year, the presence of auditor defendants could become an increasingly significant factor in future settlements.

3. Financial Restatements: Approximately 45 percent of 2009 settlements involved financial restatements, which contrasts with reports of declining numbers of financial restatements. However, given the general lag between filing and settlement, the 2009 settlements generally involve cases filed during the 2004 to 2006 period, which was when the most significant numbers of restatements occurred.

4. ’33 Act Allegations: After controlling for the presence of underwriter defendants and controlling for other factors, the inclusion of ’33 Act claims does not result in a statistically significant increase in settlement amounts.

5. Institutional Investors Plaintiffs: Cases involving institutional investors as lead plaintiffs are associated with significantly higher settlements. The higher settlements are associated with cases involving public pension plans as lead plaintiffs as opposed to union funds or other institutional investors. These larger settlements may be due to the fact that the sophisticated investors get involved in the stronger cases and the larger cases. However, even when controlling for case size and other factors the presence of a public pension plan as lead plaintiff is still associated with a statistically significant increase in settlement size.

6. Companion Derivative Suits: Securities class action lawsuits associated with companion derivative cases are associated with statistically significant higher settlement amounts.

7. SEC Enforcement Actions: Cases that involve SEC actions are associated with significantly higher settlements, as well as higher settlements as a percentage of estimated "plaintiffs’ style" damages.

The study concludes with the observation that the economic environment during 2009 "did not have a distinguishable effect either on the number of settled cases or on the total value of securities case settlements approved during the year.’

The study also notes that as a general matter the securities class action lawsuits associated with credit crisis largely have not yet settled. Looking ahead, the study’s authors "anticipate that as these cases are resolved, settlements are likely to increase both in number and in value."

Discussion

As has been the case in prior years, Cornerstone’s analysis of the 2009 settlements is interesting and full of useful information. There are a number of important considerations to keep in mind in assessing the information in the study.

The first is that the Cornerstone analysis is limited exclusively to aggregate amounts paid in settlement of securities class action lawsuits. It does not reflect, or even provide any indication of, settlement amounts that were or were not paid for out of D&O insurance.

Second, the settlement values do not reflect costs incurred in connection with the defending the securities class action lawsuits, or any related proceedings (for example, derivative suits or SEC enforcement proceedings). In considering the Cornerstone data for purposes of assessing D&O limits adequacy, appropriate adjustment would have to made for associated defense expense. Given the incredible escalation of defense expenses in recent years, the adjustment required to accommodate likely defense expense is substantial.

Third, the data set upon which the Cornerstone analysis is based is limited exclusively to class action settlements. In recent years, however, there has been the increased incidence of claimants opting out of the class settlement and reaching their own separate settlements. This phenomenon potentially increases the aggregate dollar costs required to resolve all related securities litigation, which is an additional factor that needs to be taken into account in connection with the overall question of D&O limits adequacy.

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On December 15, 2009, NERA Economic Consulting released its annual study of securities class action litigation trends. The study, entitled "Recent Trends in Securities Class Action Litigation: 2009 Year-End Update," and written by my friends Stephanie Plancich and Svetlana Starykh, can be found here. The study concludes that, notwithstanding the decline in credit crisis related filings in the second half of 2009, the projected year-end filing levels will be within historical norms. Average and median securities class action settlements are also consistent with recent trends.

According to the study, credit crisis related filings, which predominated class action filings during 2007 and 2008, "gradually declined" as 2009 progressed. Despite this decline, the total number of securities suit filings has not dropped off, "as other types of cases replaced credit crisis filings."

Based on NERA’s own counting methodology (which, as is explained in footnote 2 of the report, counts separate filings in separate circuits as separate lawsuits until the cases are consolidated), NERA counted 215 securities class action lawsuit filings through November 30, 2009, which projects to 235 filings by year end. Though the projected total of 235 would be below the 2008 level of 253 filings, it is well within the 1997-2004 average of 231 annual filings.

Although the 2009 filing levels look as if they will fall within historical levels, the 2009 filings were swollen by at least a several phenomena that may be short lived. Thus, for example, 36 of the 2009 filings involve Ponzi schemes. Though there may continue to be Ponzi scheme revelations as we head into 2010, it does seem likely that there may be fewer of those stories ahead.

Similarly, the 2009 filings were also increased by 13 new cases related to leveraged ETFs. (My prior post about ETF-related lawsuits can be found here). Though there may be further ETF cases yet to come, this group of cases seems likely to decline, as virtually all of these filings relate to a single family of funds and all relate to a single set of disclosures about the funds’ performance over time.

A third filing pattern that may not continue going forward is the number of cases in which the filing date falls well after the proposed class action cutoff date. (My most recent post about these apparently belated securities suit filings can be found here.) The NERA study shows that during the second half of 2009, the average time between the end of the class period and the date of the first filing lengthened to 279 days (versus a period of 161 days for suits filed during the preceding three years). The NERA study speculates that this may be a reflection of the fact that plaintiffs firms have been "focused on the large credit crisis cases over the last two years," but that they are "now able to focus on bringing other, non-credit-crisis cases with older class periods."

The NERA study reports that cases in 2009 continued to be clustered in the financial sector, with 53% of all filings naming a defendant in the finance sector. Another sector that has continued to see substantial activity is the health technology and services sector.

As far as case resolutions, the NERA study reports that for cases that were filed in 2000, 36% have been dismissed and 61% have settled, but that "even almost a decade after filing, there are still approximately 3% of cases that have yet to reach a final resolution," which underscores the fact that in some instances these cases can take as much as a decade or more to resolve.

Of course, the majority of cases filed in recent years remain pending. For these most recent cases, a higher proportion of resolutions have been dismissals rather than settlements, which the NERA study notes "is unsurprising, as motions to dismiss are usually fled relatively early in the litigation process, often before settlement discussions commence." Ultimately however, the NERA study comments, "we expect that a higher proportion of these recent filings will result in settlements."

With respect to the credit crisis cases, the NERA study notes that over 80% of the cases remain pending, with only 15% of the cases dismissed compared to only 4% (nine cases that have settled.) My running tally of subprime case resolutions can be accessed here. The NERA report comments that this pattern is consistent with observed patterns in which early on more cases are dismissed but that ultimately over time a large proportion of cases settle than are dismissed.

As far as settlements, the NERA study reports that the average securities class action settlement in 2009, if the IPO laddering settlement is removed from the equation, was $42 million, which is substantially above the 2003-2009 average of $29 million, but which is consistent with the overall trend, which is that "there has been a general increase in the average settlement values since 1996."

But though the average settlements continue to increase, median settlements have held relatively steady. In 2009, the median settlement was $9 million, similar to the medians in 2007 ($9.4 million) and 2008 ($8.0 million).

Over the past several years, the ratio of settlement to investor losses has held steady at around 2.5%. The NERA study speculates that because this ratio has held reasonably steady and because investor losses historically have been correlated with settlement values, the fact that investor losses in cases filed during 2007 and 2008 were significantly higher than prior years may be "a signal of potentially higher settlements in the future," as the 2007 and 2008 cases move toward settlement.

As always, the 2009 version of the NERA study provides interesting and thorough analyses. It is worth noting that, because the NERA study "counts" separate filings in separate circuits as separate filings as separate cases, the NERA filing will differ from (and almost certainly be higher than) the figures that other commentators may report in their year end reports.

One thing about the average and median settlement figures that I think all observers should keep in mind is that these figures do not include defense expense, which can be considerable and in many cases can represent a significant percentage of the settlement amounts. In addition, these class settlement figures do not reflect the value of any separate opt-out settlements, nor do they reflect the amounts of other litigation settlements, such as might be incurred in connection with parallel derivative or ERISA class action lawsuits.

My point is that as impressive as the settlement figures reflected in the NERA report are, they represent only a portion of the litigation exposure that the affected companies may have faced, and therefore represent only a partial and incomplete measure, for example, of what insurance limits may be sufficient to protect companies and their directors and officers from their claim exposures.

NERA’s December 15, 2009 press release regarding the 2009 study can be found here.

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In many prior posts (refer here), I have suggested that FCPA-related losses could represent a growing D&O exposure. In a recent demonstration of just how significant these kinds of exposures can be, Siemens disclosed  earlier this week that it has reached a 100 million euro settlement with its D&O insurers in connection with the claims arising from the company’s bribery scandal. The filing, which incorporates the insurance settlement documentation, raises a number of interesting issues.

In its December 8, 2009 filing of Form 6-K (here), Siemens reports that on December 2, 2009, the company reached a settlement agreement with its D&O liability insurers, while simultaneously announcing that it had also reached settlements with a number of its former directors and officers against whom it has asserted damages claims arising out of the bribery scandal. The settlements include the agreement of the company's former CEO Heinrich von Pierer to pay 5 million euros, and of his successor, Klaus Kleinfeld, to pay 2 million euros. Other former board members agreed to pay amounts ranging from 1 million euros to 3 million euros.

The filing explains that Siemens had a total of 250 million euros of D&O insurance coverage, arranged in five layers of 50 million euros each. Each layer had a lead insurer as well as participating coinsurers. The settlement agreement, which can be found in Annex 10 to the filing, identifies the lead insurers and the participating coinsurers for each layer.

The insurance settlement requires a payment to Siemens of up to 100 million euros, consisting of two parts: a payment of 90 million euros (against which prior defense payments of 5.5 million euros are to be credited) and as well as the payment of an additional fund of 10 million euros. The 10 million euro fund is to be maintained for the defense of future claims as well as for the satisfaction of "justified claims." that are asserted against former Board Members based on the bribery allegations or that have no connection with bribery allegation but for which coverage would have otherwise have been available under the D&O insurance program.

All of the layers in the Siemens D&O insurance program participated in the settlement, with each successive layer contributing a proportionately smaller percentage of the layer's 50 million euro limit.. (The percentage participations applicable to each layer are specified in the settlement agreement.) The 10 million euro fund is to be managed by the lead insurer on the primary layer on behalf of all the insurers.

The settlement agreement recites that the insurance settlement was the result of "intensive discussion" and that the Insurers had previously indicated that coverage might be denied on the grounds of, among other things, "pre-contractual knowledge and/or fraudulent/intentional violations of duties, and/or certain rights by unilateral declaration [that] can be exercised, which would lead to retroactive rescission of the D&O insurance." The parties reached the settlement in order to avoid the need to litigate these issues as well as to avoid the need for Siemens to pursue an action against … former Board Members who settled with Siemens in order to establish their liability as a precondition for the obligation to provide coverage."

Siemens’ SEC filing also reflects the settlement agreements reached separately with various former company officials. The filing recites that in connection with the individual settlements the individuals have agreed "not to draw on the D&O insurance coverage" in connection with their agreed payments to the company.

The agreement is subject to shareholder approval, which will be determined at the company’s January 26, 2010 shareholder meeting. (The shareholders will also vote on the individual settlements as well). The agreement clarifies that upon the effectiveness of the settlement, the insurance policies will be "retroactively terminated."

If it is "determined by a non-appealable court decision that individual Former Board Members intentionally or knowingly … violated their duties," then the Insurers shall be entitled to ask for reimbursement of defense costs paid to the respective former Board Member. The lead primary insurer is designated to administer this portion of the agreement.

There are a host of interesting things about this settlement.

The first is the marginal note accompanying the settlement stating that Michael Diekmann, a member of Siemens’ Supervisory Board, is the chairman of the Management Board of the parent holding company of the lead insurer on Siemens’ primary D&O insurance policy. The filing states that "Mr. Diekmann did not participate in the consultations and decisions pertaining to the Coverage Settlement." Call me cynical, but even if he didn’t participate in the consultations, this connection didn’t exactly impede the settlement either, if you take my meaning. To me this fact seems like it might help explain how there was any settlement at all, rather than the mother of all European D&O coverage lawsuits.

The second interesting thing is the way the D&O insurance policies are responding. The insurers are making a claims payment directly to the company, for claims that have been asserted by the company against its former officers. Unless the company’s European-issued insurance policies lack the kind of Insured vs. Insured exclusion that is standard in D&O policies issued in the U.S., there is something very peculiar about this payment. Even if the company itself is not an insured under the policy, it would seem like there would be an exclusion to protect against the possibility of collusive claims. Of course, there might have been such as exclusion in Siemens program and it was simply compromised as part of the settlement. (Readers who can help rationalize this apparent Insured vs. Insured problem are cordially invited to clarify, using this blog’s comment function.)

UPDATE: A knowledgeable European reader who prefers anonymity sent me a note with the following observation:"Regarding the payment towards the company we usually don´t carry IvI-exclusions over here in Germany. Most of the claims are made by the companies against individual directors and officers, word is that it´s around 80% or more of the times. We are basically still in the fledging stages of D&O litigation over here, D&O coverage was allowed in 1986, distribution really didn´t took off until the end of the 90s. The mentality over here regarding the pursue of claims against your directors and officers is totally different than in the US. Until the middle of the 90s, courts hadn´t even ruled on supervisory boards being forced to pursue claims against directors and officers."

The other thing about the insurers’ 90 million euro payment (less defense expenses previously paid) is the question of what exactly it represents. Simultaneously with the insurance settlement, Siemens settled its claims against most of the former company officials. So those claims have been resolved by individual payments for which the individuals are prohibited from seeking insurance. There are remaining claims against other individuals, but that is what the 10 million euro fund is for. So what exactly is the 90 million euro (less prior defense expense) payment for? Of course, the company has incurred literally billions of costs, expenses, fines and penalties in connection with the bribery scandal, but I don’t think the insurers are paying for the company's own scandal related expenses. 

The settlement agreement recites that, among other things, the insurance settlement relieved the company of the need to file and pursue actual lawsuits against former board members. I guess the internal logic of the settlement agreement is that the company could have pursued the lawsuits, and if they did, each would have to be litigated and separately settled, and the insurer would have to pay (assuming the claims were covered). The insurance settlement in effect says that we are just going to cut out all the intervening steps and compromise everything for a single payment.

The third feature is the way the settlement incorporates a settlement fund for future losses. It is on the one hand an escrow fund, but on the other hand it is more like insurance, or perhaps the residue of insurance with certain insurance-like attributes (e.g., it only applies to "justified" claims) The insurers are in effect providing a limited amount of insurance, but in a bargained down amount, with many fewer conditions.

Fourth, to the extent the insurance policies provided any type of insurance coverage for securities claims, the compromise and termination apparently precludes the availability of insurance in connection with the securities class action lawsuit filed in the Eastern District of New York last week, in which the plaintiffs alleged violations of U.S. securities laws solely against Siemens. (The $10 million fund would not be available in connection with this claim, because the claim was filed solely against the company, but the fund was set up only for claims asserted against former board members.)

Finally, I wonder what this settlement and the company’s settlements with the individual former company officials do to the derivative lawsuit that was filed in New York earlier in connection with the bribery scandal (refer here, see page 18). It is entirely possible that that case fell by the wayside earlier on, or that it was preempted by the claims the company itself asserted against the individuals. But it is an interesting question what impact these developments would have on the New York derivative lawsuit if it were still an active case. (Readers who may have any insight into the status of the derivative lawsuit are encouraged to provide updated information via the comment feature of this blog.)

Whatever else may be said about the settlement, it clearly represents a massive hit to the European D&O insurers. Hits on this scale may have become almost commonplace in the U.S., but this type of loss is still represents an extraordinary D&O insurance development in Europe. I wonder if this settlement is a game changer for the European D&O insurance community. UPDATE: Readers have advised me that massive D&O settlements on this scale are unfortunately becoming all too common in Europe as well; one example cited is the recent 57.5 million euro settlment involving EM.TV.

Finally, it is worth noting that the massive amount of the insurance settlement underscores the extent of the exposure that bribery-related claims represent. Though the Siemens case is extraordinary on many levels, the kind of insurance losses on claims related to bribery-related allegations are becoming increasingly common. As the Siemens insurance settlement demonstrates, the exposures are clearly not limited just to the United States.

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As D&O maven Dan Bailey noted in a recent memo (here), ERISA class action litigation represents a significant and growing liability exposure for benefit plan fiduciaries. With the recent addition of the $70.5 million settlement in the Tyco ERISA class action lawsuit (about which refer here) and the $55 million settlement in the Countrywide ERISA class action lawsuit (refer here) to the long and growing list of significant ERISA class action settlements, it is clear that the these ERISA class action lawsuit represent an increasingly important area of potential liability exposure.

In light of the increasing prevalence of these significant ERISA class action lawsuits, it seems to me that the time has arrived for a more systematic tracking of significant settlements.

Accordingly, I have prepared a list of the largest ERISA class action settlements of which I am aware. The list, in the form of a Word document, can be found here.

This list is comprehensive, but it likely is incomplete. I suspect strongly that there may be other similarly significant ERISA class action settlements of which I am unaware that should be included in order for the list to be complete. I would be very grateful if any readers who are aware of any specific settlements that I omitted from the list but that should have included would please let know so that I can incorporate them into the list and make the information available to all readers.

In any event, as new ERISA class action settlements arise in the future, I will add them to the list, and I will indicate on the top of the Word document the most recent date on which the list was updated. I encourage readers to let me know about any significant ERISA class action settlements of which they become aware.

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On July 30, 2009, Eastern District of New York Judge Thomas C. Platt entered an order (here) preliminarily approving the settlement of the securities class action lawsuit that had been filed certain directors and officers of American Home Mortgage Investment Corporation. The total value of the settlement is $37.25 million, which alone makes the settlement significant. However, the settlement is also significant because it appears to be the first subprime-related securities lawsuit settlement to which the target company’s auditors and offering underwriters contributed toward settlement.

As reflected in greater detail here, plaintiffs first initiated the lawsuits in July 2007. Because American Home itself had filed a voluntary petition for bankruptcy under Chapter 11, the company itself was not named as a defendant. In addition to the individual directors and officers, the defendants named in the case included the company’s outside auditor, Deloitte & Touche LLP, as well the investment banks that had acted as offering underwriters in connection with the company’s August 9, 2005 and April 30, 2007 public offering of its securities. Deloitte issued reports as to the company’s financial statements that were incorporated into the offering documents.

American Home had been a real estate investment trust that engaged in the investment in and origination of residential mortgage loans. The complaint (which can be found here) essentially alleged that the company was experiencing an increasing level of loan delinquencies. The complaint alleged that this was due to the company’s shift from higher quality loans to higher risk subprime loans, though the company allegedly continued to represent that it was not a subprime lender. As a result of the decline in loan quality, the company allegedly was experiencing increasing difficulties selling its loans, which compelled the company to reduce prices, reducing profits and margins. The company allegedly was also failing to write-down the value of certain loans and mortgage-backed assets in its portfolio. As a result of these developments, the plaintiffs alleged, the company was overstating its financial results.

The plaintiff filed a motion for preliminary approval of the settlement (here) on July 7, 2009. According to the document, the settlement was reached while the motions to dismiss were still pending and as the result of formal mediation as well as settlement discussions. As reflected in the document and its attachments, the $37.25 settlement is actually a reflection of three separate settlement stipulations: a settlement of $24 million with ten individual defendants; a settlement of $4.75 million with Deloitte; and a settlement of $8.5 million with the seven underwriter defendants. (The details of the settlement are summarized here, see paragraph 8.)

According to the individual defendants’ stipulation of settlement, the company’s D&O insurers (who are named in the stipulation) "agreed to pay the Settlement Amount on behalf of the Settling Defendants."

While the settlement is noteworthy in and of itself, it is significant because the settlement includes significant monetary contributions from the offering underwriters and the company’s outside auditors. So far as I am aware, this is the first subprime-related securities class action lawsuit settlement in which either offering underwriter or audit firm defendants have made a monetary contribution toward settlement. These defendants’ settlement contributions are all the more noteworthy given that the motions to dismiss in the case had not even been heard in the case.

Many of the subprime and credit crisis related securities suits name offering underwriters or audit firms as defendants. Whether or to what extent these parties will find themselves contributing toward settlement in these other cases remains to be seen. But if they are required to participate in settlements in significant amounts as was the case in the American Home suit, the overall costs of litigation for these firms could quickly mount to some truly impressive aggregate figures.

The D&O insurers’ contribution toward the individuals’ settlement is also a reminder that these cases could wind up being collectively very expensive for the D&O insurance industry. There are still only a handful of settlements but the ones have been entered so far include some sizeable settlements, and if the settlements so far are representative, there could be some huge claims payments ahead.

Even the few settlements that have been entered so far would seem to be starting to have their impact on the insurers – for example, the recent $32 million settlement in the RAIT Financial subprime-related securities case (refer here) and the recent $22 million settlement in the American Home Lenders subprime-related securities case (here) were also entirely funded by the D&O insurers. If these settlements are any indication, the industry’s overall claim loss exposure from the subprime and credit crisis-related litigation wave could be enormous.

I have in any event added the American Home settlement to my list of subprime and credit crisis-related lawsuit resolutions, which can be accessed here.

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On November 10, 2008, NERA Economic Consulting released a report entitled "SEC Settlements: A New Era Post-Sox" (here) that details trends in the number of SEC settlements and of SEC settlement values in the six years since the enactment of the Sarbanes-Oxley Act.

The Report has a number of interesting findings, including the observation that prior to SOX’s enactment, the largest SEC enforcement action penalty was the April 2002 penalty of $10 million imposed against Xerox. However, the Report notes, after SOX, "the SEC has imposed penalties of $10 million against 115 parties, include 14 that were penalized at least $100 million." The Report includes a "top ten" settlements list, which is headed by AIG’s 2006 settlement of $800 million.

The Report also contains an analysis of the five most frequent allegations. Topping the list is microcap fraud (such as broker room operations or pump-and-dump schemes), followed by misstatement/omissions (including options backdating), and misappropriation of investor funds. The majority of cases against publicly traded companies involve allegations of misrepresentations or omissions.

The Report note that the SEC is on pace to reach 739 settlements in 2008, which would represent an increase in the number of settlements for the second straight year. The increase is driven largely by an increase in the number of individual settlements. The number of company settlements, by contrast, is declining. The number of company settlements is on pace to reach 171, which would represent the lowest number of company settlements since SOX was enacted.

The median 2008 company settlement through the end of the third quarter is $1.0 million, which is up from the 2007 median of $700,000, but well below the annual medians during the years 2004-2006, when the medians ranged from $1.1 to $1.5 million. The median individual settlement throughout the post-SOX era has been approximately $100,000.

Median settlements for public company misstatement cases have declined from a 2006 high of $50 million to a 2008 median (through the end of the third quarter) of $12.0 million. The report speculates that this decline may be due to the 2007 institution of a requirement for Commission approval prior to beginning negotiations in public company cases. (It is also probably worth noting that three of the top ten settlements took place in 2006, whereas none of the top ten has yet taken place in 2008.) The majority of public company misstatement cases settle for less than 1% of market capitalization.

The Report did note that of 197 companies the study identified as having settled SEC enforcement proceedings related to company misrepresentations or omissions, 181 had announced the existence of an investigation. The average time from the investigation announcement to the settlement for these 181 companies was 2.3 years.

The report also found that forty-three percent of company payments have been in the form of disgorgement, with 57% representing penalties. With respect to individual settlements, disgorgement represents 88% of payment amounts.

Relation Between SEC Settlements and Securities Class Action Lawsuits?:  The Report anticipated a question that formed in my mind as I read its analysis, which is the relation, if any, between SEC settlements and private securities class action litigation. The Report notes "it might be tempting to draw a comparison" between the number of class action filings, which increased in 2007, and the increase in the number of SEC settlements in 2007 compared to 2006. The Report notes that this comparison would be "misleading" in two respects:

First, the filing of a securities class action represents the first stage of class action legal proceedings, whereas SEC settlements are part of the last stage of the legal process. Because the SEC does not announce its investigations publicly, it is generally not possible to track the beginning of investigations. Instead this paper tracks settlements, which are often the first public information about an SEC matter. Second, most SEC settlements do not parallel shareholder class actions. In 2007, only 22% of SEC settlements were with public companies or their employees and related to misstatements, and were therefore closely comparable to shareholder class actions.

SEC Settlements and D&O Insurance, Briefly Noted: It is probably worth emphasizing that very little if any of the amounts involved in these settlements would have been insured under a typical D&O insurance policy. Most policies exclude from their definition of insured "Loss" such items as "fines and penalties" and disgorgements of amounts are typically excluded or do not otherwise represent insurable loss. However, in many instances, defense fees incurred in connection with the enforcement proceedings would be covered, depending on the applicable policy’s definition of the term "Claim."

New NERA Website: In addition to its Report, NERA also announced on November 10 the launch of its new website entitled "Securities Litigation Trends" (here) where NERA will be centralizing its own securities litigation analysis and also collecting other useful links (including related blogs).

Special thanks to Ben Seggerson at NERA for providing links to the NERA study and to the new web page.

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One of the most closely followed recent case developments in the D&O insurance arena is the ruling in the CNL Hotels & Resorts case that a Section 11 settlement did not represent covered loss under a D&O insurance policy. As I noted in a recent post (here), on August 18, 2008, the CNL Hotels & Resorts holding was affirmed by the Eleventh Circuit. These developments have occasioned a great deal of discussion and commentary in the D&O insurance community.

Among the more noteworthy commentary on this topic is the analysis of the well-known and widely respected D&O insurance coverage attorney, Joe Monteleone of the Tressler, Soderstrom, Maloney & Preiss law firm. Joe’s commentary appeared in his firm’s August 2008 Specialty Lines Advisory (here, at page 2). As always, I found Joe’s analysis interesting, but I also found that I disagreed with him on a portion of his analysis.

Because I thought an exchange of views on these topics would be useful and perhaps even entertaining, I approached Joe to determine his willingness to engage in a colloquy on this topic to be reproduced on this site. Joe agreed, and our exchange follows below. First, I have quoted a portion of Joe’s article, which is followed by my comments on his article. Joe’s rebuttal appears after my comments.

Joe's Article (Extract):

In his commentary, Joe wrote the following with respect to the CNL Hotels & Resorts case (and cases with similar holdings): 

When you cover the entity for its Section 11 loss, you are in effect saying that your IPO was overpriced by perhaps tens of millions of dollars. While not saying that it is OK, what you are saying is we will let the insurer step in and pay that loss and the corporation can keep its ill-gotten gain. How is that any different than a company simply refusing to pay for goods it has ordered and then letting its insurer pay when it is sued for a breach of its contract to pay? Insurance may cover negligent and even reckless misconduct, but it should not cover crooked behavior.

  Kevin's Comments:

In his article, Joe makes a number of valid and interesting points, particularly with respect to the history of these issues. However, underlying Joe’s legal analysis is a series of value judgments. It seems to me that these value judgments misapprehend several critical considerations. I have set out these critical considerations below. In doing so, I also recognize that courts may have disfavored several of my arguments; readers will judge for themselves whether it is legitimate for me to reference these judicially disfavored points here

The first important consideration is that while companies that are the target of Section 11 claims may be alleged to have made all sorts of misrepresentations or omissions, these allegations are virtually never put to the test of proof. The mere fact that plaintiffs allege that offering documents contained supposed misrepresentations does not mean that the offering proceeds were in fact "ill-gotten." These kinds of claims, like all claims, are compromised because of the burdens and expense of litigation and because few are willing to accept the risk of an adverse verdict.

Nor does the fact that substantial sums are paid to compromise these claims, in and of itself, mean that the defendants company’s IPO was overpriced, much less that the company engaged in "crooked behavior." These settlements take place after the company has experienced a significant stock price drop. Compromising claims in the context of significant market capitalization losses can prove costly, but entry into even a costly settlement is far different than a determination of culpability or wrongdoing.

But I have even deeper concerns beyond just the fact that a settlement does not in and of itself betoken that a company’s IPO was "overpriced" or that the company is improperly keeping "ill-gotten gains." The fact is that the use of heavily freighted words such as "ill-gotten" and "crooked" are fundamentally misplaced in connection with alleged corporate liability in a Section 11 claim.

Under well-established legal principles, corporations are said to be "strictly liable" under Section 11 for material misrepresentations and omissions in offering documents. There is no element of fraud or scienter required in a Section 11 claim, and indeed plaintiffs pleading claims under Section 11 now routinely state (as a means of averting onerous pleading requirements) that they are not alleging or averring fraud in relation to these claims. The point is that in general not even the plaintiffs asserting the claims against these companies allege that the companies engaged in "crooked behavior."

In his article, Joe concedes that insurance properly can be paid for behavior that is merely negligent or even for behavior that is reckless. How then is it appropriate to withhold insurance benefits from companies who can be found liable without any fault at all?
 

I know that the district court in the CNL Hotels & Resorts case said that the absence of fraud allegations in Section 11 claims represents "distinction without a difference." But the absence of allegations of knowing or reckless misconduct does matter, deeply. The use of acutely pejorative words – that are completely unwarranted given the strict liability standard for corporate liability under Section 11 -- has the effect of demonizing the company and putting it the position of moral error. The danger is that it is easier to withhold insurance benefits from a "bad" company. The use of these morally freighted words not only inappropriately shapes the tone of the dialog but potentially enables an unjustified result.

Moreover, even if a Section 11 claimant should allege fraud or dishonesty, the typical D&O policy’s fraud exclusion ensures that insurers do not have to pay benefits for "crooked behavior." But here’s the thing about the fraud exclusion – at least as worded in most current policies, it is only triggered after an adjudication of fraud. The fraud exclusion is no barrier to the payment of insurance benefits to fund settlements of claims alleging fraud.

Indeed, insurance companies regularly fund Section 10(b) claim settlements, notwithstanding allegations of fraudulent misconduct. Surely Joe is not suggesting that insurers cannot properly fund Section 10(b) settlements? And if Section 10(b) settlements properly can be funded because there has been no adjudication of fraud, why can insurers withhold payment of insurance benefits from Section 11 benefits in the absence of an adjudication of fraud, merely because of unproven allegations of "ill-gotten gains" or even "crooked behavior"?

An August 25, 2008 New York Law Journal article by Joshua Sohn of the DLA Piper law firm entitled "Liable Until Proven Innocent" (here) decries the leniency of Section 11 and Section 12(a)(2) pleading requirements. Among other things, Sohn quotes the Supreme Court’s recent Twombley opinion to assert that lenient Section 11 and 12(a)(2) pleading standards will continue to "push cost-conscious defendants to settle even anemic cases."

The lenient pleading standards make IPO companies that experience sharp stock price drops likely targets for Section 11 claims. The leniency of the Section 11 liability standards also means that the lawsuits are likely to survive preliminary motions, leaving defendant companies few options other than settling. Because of this heightened susceptibility to dangerous litigation, companies about to conduct an IPO are particularly sensitive to the need for D&O insurance.

An IPO company is generally regarded as an attractive insurance prospect, and many insurers compete actively to write the insurance for IPO companies. The confounding thing is that insurers that actively competed for the business and voluntarily undertook to insure an IPO company would later contend that the most likely and most dangerous claim the company would face is uninsurable. Whether or not this coverage position makes the insurance agreement illusory, it certainly raises serious concerns about the utility of the insurance agreement.

It will be argued that public policy prohibits insurance for corporate Section 11 liability because the relief sought is restitutionary in nature. As a general matter, the determination of private contractual matters based on public policy grounds raises certain fundamental question about the sources and uses of law. One particular concern is that the supposed requirements of public policy lack a definite point of reference and could become simply a matter of perspective. The notion than insurance for Section 11 claims is against public policy is neither inherent nor absolute, and indeed is an issue on which pertinent parties take a point of view different than followed in recent case law.

The SEC’s perspective is particularly relevant to this public policy question. On the one hand, the SEC takes the position (here) that corporate indemnification for ’33 Act liabilities is "against public policy" and unenforceable. On the other hand, the SEC emphatically does not specify that insurance for ’33 Act liabilities is against public policy. To the contrary, the SEC expressly designates (here) as among the expenses that properly may be charged to the costs of a securities offering the premium charged for insurance "which insures or indemnifies directors or officers against any liability they may incur in connection with the registration, offering or sale of such securities."

The SEC’s public policy analysis distinguishes between the indemnification of Section 11 liability and the provision of insurance for Section 11 liabilities. The SEC’s statements suggest that in its view public policy does not prohibit the enforcement of policies insuring against Section 11 liability, by contrast to its indemnification.

If nothing else, the SEC’s views ought to suggest that what public policy dictates as far the insurability of Section 11 claims is neither self-evident nor universally held. All of which should raise serious concerns about using judicially declared principles of supposed public policy to determine private contractual rights.

It was a nearly universal reaction among both D&O underwriters and brokers that this line of case law produced a result that, while perhaps perfectly logical to an insurance lawyer, ran absolutely contrary to marketplace understanding and commercial expectations. It is worth considering that both underwriters (the ones who sell insurance) and brokers (the ones who procure insurance on behalf of insurance buyers) universally agree that D&O policies should cover these kinds of settlements.

In response to these concerns, the entire D&O insurance industry has taken steps, as quickly and as vigorously as any insurance-related industry has ever done anything, to try to insert policy language calculated to prevent lawyers from making arguments that while perhaps logical to the lawyers defy the expectations and understandings of the commercial marketplace. The marketplace understands that the compromise of disputed Section 11 claims in no way means that a company has engaged in "crooked behavior" and in fact represents the very contingency for which policyholders buy insurance.

Joe's Counterpoints:

Kevin’s repeated admonishments for my use of the term "crooked behavior" call to mind Judge Posner’s words in the Level 3 decision, a case that perhaps more than any other establishes the public policy rationale relied upon by the CNL Resorts courts.

Taking a cue from Judge Posner, I should have refrained from use of the pejorative term "crooked", and I regret any possible inadvertently implied mischaracterization of the motive of the corporate issuer in CNL Resorts or other cases.

Nonetheless, I will now "politely" set forth a number of rebuttal points.

First, I believe the fact that the underlying CNL Resorts litigation, like many other similar litigations, concluded with a settlement and, hence, no evidentiary proof of ill-gotten gain, misses the point of these insurance coverage cases. Regardless of the culpability of the conduct, there could be no liability of the issuer unless the offering was in fact overpriced. To have an insurer pay the amount of the overpricing, rather than have the issuer disgorge it uninsured, results in an unentitled windfall to the issuer.

That being said, I share Kevin’s observation of the irony that in these cases of what is in essence strict liability there can be no insurance recovery, but yet insurers routinely pay to cover liabilities resulting from reckless conduct in other securities cases. Ironic, yes, but it is supportive of the point that culpability of conduct is not the issue.

Also, I would agree that in most of these cases that are disposed via settlement, the insurer cannot apply one or both of its "conduct exclusions", which with increasing frequency in today’s insurance market are written with requirements of a final adjudication in the underlying proceeding. That may hold true for both the dishonesty exclusion and that for personal profit. The latter would arguably apply to preclude coverage for these settlements, but for an adjudication requirement, and in addition to the uninsurability reasoning of the courts in applying the law and public policy.

By no means do these decisions render the insurance agreement illusory, because none of them have applied the uninsurability argument to the individual directors and officers defendants. Thus, in most cases, an allocation should result, but certainly not a complete absence of coverage for all defendants. Although the court in the SR International decision enunciated a public policy argument of having the insurers stand behind the way they market their policies, that was in the context of a dispute over coverage for an underwriter defendant. There is little argument that an underwriter does not receive the proceeds of the offering, and thus its settlement payment cannot be fairly characterized as a disgorgement of ill-gotten gain. Nevertheless, the public policy arguments in that decision give a degree of validity and support to those D&O insurers who have voluntarily attempted to underwrite around the issue by endorsement, notwithstanding what may be the law now in some jurisdictions.

I do not want to belabor the seeming contrast between the SEC’s views on indemnification vs. insurance, but I believe the SEC may well not be inclined to enforce an indemnification prohibition in a settlement context where arguably no Section 11 "liability" has been established.

Finally, I must raise a bit of skepticism at Kevin’s conclusion that insurance underwriters and brokers are in universal accord as to providing "full" coverage for a Section 11 settlement, and that the debate remains only an arcane one among the wonks in the insurance coverage bar. I cannot speak for any particular insurer on this, but it appears at least some were vigorously contesting this issue before the Eleventh Circuit until its decision last month in CNL Resorts. Yes, the endorsements and new policy language purporting to clarify and grant the coverage are frequently seen in today’s market (and, in full disclosure, I have even crafted some of the endorsements and policy language at the request of clients), but I remain reluctant to concede the approach is universal.

Afterword: Consistent with the rules of engagement that I established for this colloquy, Joe gets the last word, so I will offer no surrebuttal. I would like to thank Joe for his willingness to engage on this topic and to offer his views. I would also like to invite readers to chime in on the debate using the blog’s comment feature. (Please note that you can add a comment without providing identifying information, so it possible to add comments anonymously.)

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I have previously noted (most recently here) the increasing significance of opt-out actions as a part of securities lawsuit resolution. Columbia Law School Professor John Coffee, in a March 27, 2008 paper entitled “Accountability and Competition in Securities Class Actions: Why ‘Exit’ Works Better Than ‘Voice’” (here) examines the opt-out phenomenon and concludes that while the increased recoveries in opt-out actions compared to class recoveries will encourage competition among plaintiffs’ counsel, shareholder litigation could become even costlier to resolve.

Coffee also concludes, contrary to what others have “prematurely predicted,” that shareholder class action lawsuits “will not die or whither away, but that the current system of shareholder class action lawsuits may be abandoned in favor of a “two-tier system,” in which “the largest investors will opt-out and sue in state court individual actions, with the class action becoming the residual vehicle for smaller investors.” These possibilities have enormous implications for the future of securities litigation, which Coffee’s paper explores.

Coffee opens his paper comparing the changes wrought by the opt-out phenomenon with prior legislative efforts to reform class action litigation. Specifically, Coffee notes that unlike legislative efforts to give the class greater control, such as the lead plaintiff provision of the PSLRA, the increasingly utilized opt-out option may offer true oversight, actual competition, and even lead to better results for the plaintiff class.

In analyzing these developments, Coffee adopts terminology from the writings of economist Albert O. Hirschman. Hirschman describes two ways in which organizational behavior may be modified: (i) participants can be given greater “voice”; or (ii) participants can be given increased ability to “exit” the system. Coffee contrasts the legislative reforms, such as the lead plaintiff provision, designed to give class members greater “voice,” with the alternative of “exit” offered by the opt-out option. Coffee concludes that “ ‘exit’ works better than ‘voice,’” at least within realm of securities class actions.”

A critical component of Coffee’s analysis is that “when institutional investors exit the class and sue individually, they appear to do dramatically better – by an order of magnitude!” Coffee views this as an “optimistic development” because the opt-out outperformance can “kickstart active competition” among plaintiffs’ attorneys, by contrast to the PSLRA reforms which have had the perverse effect of reducing competition.

As Coffee notes, these developments have significant implications for the future of class litigation, as large institutional investors increasingly may conclude that their interests are better served by proceeding separately. Coffee specifically notes that the current wave of subprime-related cases are “particularly likely to produce a high rate of opt-outs,” because of the predominance of institutional investors among purchasers of the kinds of asset-backed securities that are at the heart of many of these lawsuits.

Coffee speculates that defendants (and indeed all class litigants) may seek to employ adaptive practices to offset these developments. Among other possibilities Coffee reviews are such practices as advancing the time of the opt-out decisions before the settlement is reached; structuring the settlement in a way to give class members “priority” over individual recoveries, such as given them a security interest in company assets to the extent of the settlement amount; including a “most favored nation” provision in class settlements so that class members are entitled to increase their recovery if opt-outs reach a higher settlement; or even reducing the settlement amount in respect of each opt-out.

In the final analysis, each of these potential adaptations has shortcomings. Over the long run, Coffee anticipates, “increased opting out will place class counsel under increased competitive pressure to improve the class settlement.” For that reason, Coffee concludes that “greater competition is coming.”

I very much agree with Professor Coffee that the emergence of significant opt-out settlements represents a watershed development in securities class action litigation, with the potential to have an enormous impact. However, I think it does still remain to be seen how widespread the opt-out phenomenon will prove to be.

The increased recovery percentages (so far) in the high profile opt out actions do provide obvious incentives for institutional investors to become more focused on their opt-out opportunities. But so far the significant opt-out activity has been limited to “mega” cases where the aggregate recoveries, for both the class and the opt-out litigants have run into the hundreds of millions and even the billions of dollars. It is entirely possible that rather than becoming a universal phenomenon affecting all, most, or even many securities class actions, significant opt-out activity will be limited only to a small handful of cases where the dollars involved reach this rarified range. Without more, it seems premature to project that shareholder litigation is about to enter a two-tier system where institutional litigants have abandoned class resolutions altogether.

That said, even if the phenomenon proves to be limited only to a small subset of securities cases, the opportunities and incentives involved could still affect the overall outcome of many securities cases. Just the threat of material opt-outs could affect the class action settlement dynamic. As Professor Coffee notes, some adaptive behavior is likely, as litigants seek to suppress or minimize the prospects for opt-outs. The likeliest adaptive behavior is that class settlements overall could be driven upward, as all class settlement participants seek to remove the incentive to opt out by improving the class settlement itself.

We are already in an era of increasing average claim severity. The emergence of the opt-out phenomenon can only amplify these trends. In any event, the developments related to opt-outs also present important implications for D&O insurers’ severity assumptions and for insurance purchasers’ assumptions about limits adequacy. The direct and indirect impacts from the emergence of significant opt out activity could make historical assumptions in this regard obsolete.

Very special thanks to Professor Coffee for his permission to cite and quote his paper, which, he emphasizes, is preliminary only.

Hat tip also to Werner Kranenburg of the With Vigour and Zeal blog (here) for the link to Professor Coffee’s paper.

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On March 31, 2008, Cornerstone Research released its review and analysis of 2007 securities class action settlements. Cornerstone’s press release can be found here and the full report can be found here. The Cornerstone Report differs in certain particulars from the previously released NERA Economic Consulting report (about which refer here), but the two reports are directionally consistent.

Cornerstone’s press release emphasizes that the aggregate dollar value of all settlements was down 60% compared to 2006, but the full report emphasizes that, when the four largest settlements are removed from the analysis, the aggregate value of all settlements in 2007 exceeded all prior years except the unprecedented year of 2006.

The full report also highlights that the median securities class action settlement reached an all-time high of $9.0 million in 2007, compared to a median of $6.9 million for the years 1996 through 2006. The increase in the median settlement in 2007 is “partly due to the fact that the percentage of cases settling for $10-20 million increased substantially from prior years.” On the other hand, the number of settlements in excess of $100 million declined from 14 in 2006 to only nine in 2007.

According to the Cornerstone report, the average securities class action settlement fell from $105 million in 2006 (excluding the Enron settlement) to $62.7 million in 2007. But the 2007 average still exceeded the average of $54.7 million for the years 1996 through 2006.

The Cornerstone report examines the factors affecting settlement amounts and concludes that the presence of institutional investors lead plaintiffs and the existence of parallel shareholders’ derivative lawsuits both tend to have an upward effect on settlement values.

The press release quotes Stanford Law Professor Joseph Grundfest as saying that “it seems clear that the aggregate dollar value of settlements over the next two or three years is likely to decline significantly because the inventory of large cases in the pipeline just isn’t there. The interesting open question is whether the subprime crisis will cause an uptick in securities fraud settlement activity that might, given the settlement cycles in the litigation industry, only become apparent three to five years from now.”

The differences between the analysis in the Cornerstone and NERA Economic Consulting reports appears to be due at least in part to the different methods the two studies used to categorize settlements by settlement year, with one report categorizing the settlements by the year in which the settlement was announced and the other report categorizing the settlement by the year in which it was approved.

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