As the various corporate scandals have unfolded, one of the concerns has been whether changing laws and attitudes may mean that outside directors face increased exposure to shareholder claims and enforcement actions. (See my prior article on the topic here.) One of the elements of this concern has been the statements of various regulatory officials that they intend to pursue outside directors for their failure to prevent corporate officials’ misdeeds. Among the oft-cited recent examples of regulatory intent to pursue outside directors is the December 2005 service of a “Wells Notice” on three outside directors of the Hollinger. But whatever regulators overall intent may be regarding outside directors generally, the SEC has recently advised the three Hollinger directors that it will not pursue enforcement action against them.

The SEC has been pursuing an enforcement action (here) against Hollinger’s former chairman and CEO Conrad Black and its former COO F. David Radler. In addition the Department of Justice has filed criminal charges against Black, Radler and other individuals. (Here) Radler has pled guilty to the criminal charges, but the civil and criminal charges against Black remain pending. Essentially, it is alleged that Black and Radler defrauded Hollinger’s shareholders by diverting the company’s assets and opportunities (in simple terms, they are alleged to have looted the company). Hollinger’s Board ousted Black in November 2003.

According to news reports (here), in December 2005, the SEC served Wells Notices on three members of Hollinger’s board. The three individuals included Jim Thompson, the former Governor of Illinois; Richard Burt, who served as U.S. Ambassador to Germany under Ronald Reagan; and Marie-Josee Kravis, an economist and wife of financier Henry Kravis. The three made up the board’s audit committee at a time when Black allegedly was fleecing the company.

But while the service of the Wells Notice on the Hollinger directors seemed to suggest a regulatory intent to pursue outside directors, it now appears that the SEC does not intend to go after the Hollinger directors after all. In an October 20, 2006 Chicago Tribune article entitled “SEC Drops Probe of Thompson” (here), the individuals stated that the SEC had recently advised them that it would not pursue legal action against them.

In a separate development, Richard Perle, another former Hollinger director who had also received a Wells Notice, also announced that he had been advised by the SEC that it would not pursue an action against him (here). The SEC’s decision not to pursue Perle may be even more significant, because Perle had served on Hollinger’s board’s Executive Committee with Black and Radler. According to news reports, Hollinger’s own internal investigation had concluded that Perle had “repeatedly breached his fiduciary duties” by failihg to evaluate consent forms that authorized transactions.

The SEC’s decision not to pursue further enforcement actions against the Hollinger outside directors is consistent with expectations based on historical practices. According to a 2006 legal study by University of Texas Professor Bernard Black, Cambridge University Professor Brian Cheffins, and Stanford Law School Professor Michael Klausner, entitled “Outside Director Liability” (here), the liability risk of outside directors is “very low.” The article details the infrequency with which outside directors are the target of enforcement proceedings and liability actions. The remote possibility that Outside Directors might be called upon to contribute to settlements out of their own funds, “would be avoided with appropriate [D&O] policy limits and current state of the art protections.”

Nevertheless, it remains to be seen whether the current options backdating scandal will result in enforcement actions or liability exposure against outside directors. For example, three directors of Mercury Interactive have themselves been served with Wells Notices in connection with the company’s options backdating investigation. (Here). (Mercury itself has proposed the pay a $35 million civil penalty, here.) In addition, according to news reports (here), in the recent shareholders’ derivative action filed against Novell, plaintiffs’ lawyers have indicated their particular aim to pursue board members in connection with the allegedly backdated options the board received.

Options Backdating and D & O Insurance: One of the recurring questions as the options backdating scandal has unfolded has been what the scandal may mean for D & O insurers – and their policyholders. On October 20, 2006, the San Francisco Chronicle ran an article entitled “Who Pays Mounting Legal Bills? Insurers May Cover Directors, Execs – For Now” (here). The article discusses likely D & O coverage issues and concerns from the options backdating scandal. Full disclosure: I was interviewed in connection with the article.

Conrad Black on FDR: Apparently Black has had a lifelong interest in Franklin Delano Roosevelt, and among the things for which Black is alleged to have used the funds he misappropriated from Hollinger is an auction purchase of a collection of FDR’s papers. With the assistance of his wife, conservative columnist, Barbara Amiel, Black wrote a bestselling 1,280-page biography of FDR entitled Franklin Delano Roosevelt: Champion of Freedom. The book received generally positive reviews (here). On October 29, 2003, shortly before he was ousted from Hollinger, the Wall Street Journal published an op-ed column written by Black, entitled “Capitalism’s Savior” (here), in which Black extols FDR’s virtues and asserts that FDR is “rightly judged the greatest American president since Lincoln.” A January 12, 2004 New York Magazine article examining the curious intersection between Black’s literary pretensions and his legal woes may be found here.