In prior posts (most recently here), I noted that the two-year lull in securities filings that began in mid-2005 has ended. The trend of heightened securities lawsuit filing levels that has prevailed since mid-2007 continued in November 2007. In fact, the 25 new securities lawsuits filed in November (see list here) represents the highest monthly total of new securities lawsuits since January 2005, and the total of 81 new securities lawsuits filed during the four-month period from August 1, 2007 through November 30, 2007 represents the highest four month total since the period from July to October 2004.
The total of 81 new securities lawsuits for the August to November 2007 period implies an annualized 12-month filing rate of 243 class actions, which, were it a year-end total, would represent the highest annual filing rate since 2002, the year of many of the major corporate scandals.
It might well be presumed that the heightened securities litigation activity is being driven by the subprime meltdown, and the subprime problems are indeed an important contributing factor – but only one factor among many. For example, during November, by my assessment, only four of the 25 new securities lawsuits were subprime-related (Washington Mutual, Citigroup, Freddie Mac, and ACA Capital).
Other sectors, far removed from the subprime problems, also saw substantial new securities lawsuit activity during November. For example, three of the 25 companies sued for the first time in November (Vodaphone Group, Virgin Mobile, and Leap Wireless) are in the 4812 SIC Code (Radiotelephone Communications). In addition, three companies (Sanofi-Aventis, Wyeth and Flamel Technologies ) in the 2834 SIC Code (Pharmaceutical Preparations) were also sued for the first time in November. Other groups that saw significant activity in November, and that similarly have no relation to the subprime problems, include the 3663 SIC Code (Broadcasting and Communications Equipment) and the 1311 SIC Code (Crude Petroleum and Natural Gas), each of which had two new lawsuits in November. In other words, while subprime-related litigation activity is an important part of the increased filing levels, it is not the sole explanation.
Five of the 24 companies sued for the first time in November had completed IPOs within the preceding twelve months. In two instances, the IPOs were quite recent. Pzena Asset Management, which was first sued on November 21, 2007, completed its IPO on October 24, 2007. Giant Interactive Group, which was sued for the first time on November 26, 2007, had just completed its IPO on November 1, 2007.
Six of the 25 companies sued in November are domiciled outside the United States, including two each from France (Flamel Technologies and Sanofi-Aventis) and China (Giant Interactive Group and Focus Media Holding). Another of the companies sued in November is based in Hong Kong (China Expert Technologies). Companies based in China seemingly have been a target during 2007; by my count, seven Chinese companies have been sued so far this year, with another two from Hong Kong and one from Taiwan.
December historically has been a slow month for securities class action filings, so the total 2007 number of filings is unlikely end upcategorically different that the 160 filings year to date, probably somewhere around 170. A yearly total in that range, while well above the 2006 total of 118 (according to the Stanford Law School Securities Class Action Clearinghouse, here) is below the totals for the years preceding 2006. However, the important story about the 2007 filings will not be (or at least should not be) the year end totals; the story should be that during the period August to November 2007, securities class action filings returned to historical levels after a two year lull. Or as Adam Savett has noted on his Securities Litigation Watch blog (here), commenting with the benefit of superior data, filing levels are now above historical levels. But while the precise details may vary depending on the data set used, the broad outlines do not. Securities filings are back up.
What are the D & O Carriers Making of All of This?: Given that circumstances have clearly changed, you would expect there to have been some response or reaction from the D & O carriers. Without a doubt, the D & O insurance environment for financial institutions has changed, where renewals have become more challenging, pricing (for financial institutions) has moved higher than even a short time ago, and underwriting has become much more rigorous. My impression from talking to various participants in the underwriting community is that there currently is a great deal of anxiety about the subprime meltdown, among other reasons because nobody is really sure how bad it is going to get or how broadly the damage will spread. My impression is that D & O underwriting managers are currently spending a lot of time talking to their senior management trying to provide an assessment of their portfolio’s exposure to subprime risk.
These current attitudes were implicitly expressed in the November 28, 2007 press release (here) of Bermuda-based Catlin Group Limited; in addition to reporting a $75 million charge related to subprime-related securities in its investment portfolio, the company went out of its way to reassure investors that the company “does not believe that its insurance and reinsurance portfolio is materially exposed to potential claims arising from subprime-related issues.” The statement also noted that Catlin had “in the past largely withdrawn from business classes, such as financial institutions E & O and Fortune 500 D & O liability, that appear most likely to be affected” by subprime-related issues.
This latter statement obviously assumes that the subprime-related D & O risks are concentrated in the Fortune 500, an assumption that may or may not be warranted given the uncertainty about how broadly the subprime risks will spread (about which see my prior post here). But the deeper significance of this statement is that the company felt compelled to make this disclosure at all; it clearly bespeaks an awareness at the senior management level that subprime risks are a serious concern for investors. These kinds of concerns clearly are not limited to Catlin, and indeed are likely to surround other carriers who may (or whose investors are concerned that they may be) exposed to significant subprime risks.
But as the discussion above shows, the changing circumstances in the D & O liability arena are not limited just to subprime. The carriers are rightly focused on subprime as a very significant exposure that could produce some very negative returns. But if the industry concentrates on subprime-related concerns alone without taking these other emerging issues into account, there could be some serious problems down the road.
We Also Expect that Every Editor Will Do His Duty, Too: Admiral Nelson’s familiar flag signal at the Battle of Trafalgar apparently was the result of some indispensable last-minute word edits from the crew aboard Nelson’s flagship, the HMS Victory. According to Arthur Herman’s account in his readable book To Rule the Waves: How the British Navy Shaped the Modern World (here), this is how the famous flag signal (“England expects that every man will do his duty“) came about, as the British fleet approached the combined Spanish and French fleets off Cape Trafalgar:
“I will now amuse the fleet with a signal,” Nelson suddenly announced. “Do you not think there is one yet wanting?” In the astonished silence, he suggested, “Nelson confides that every man will do his duty.” Someone proposed substituting “England” for “Nelson,” and Lieutenant Pasco asked to change “confides” to “expects,” because “confides” would have to be spelled out, flag by flag….So the final version rose up on Victory’s yards and masts.
I recalled this demonstration of practical but effective editorial action when I read the following sentence in Zachary Karabell’s November 30, 2007 op-ed column entitled “Saviors of the Citi” in the Wall Street Journal (here): “This changed landscape puts the sovereign wealth funds in a plumb position.” Most editors would (or at least should) quickly discern that Karabell’s word choice was just plumb wrong. That is, it is “completely or absolutely” wrong, as the word “plumb” is used and understood.
What the gentleman obviously meant to say is that sovereign wealth funds enjoy certain advantages – a situation that was obviously intended to be described as a “plum position,” not a “plumb position.” Owing to its mixed metaphors, even were the phrase corrected, no one would mistake it as a model of prose expression. At least the erroneous word choice would have been averted.
We here at The D & O Diary, forced to combine the creative and editorial functions in a single human resource possessed of but limited time and abilities, understand all too well the challenges involved in maintaining editorial standards. But we also fully appreciate that readers expect that every editor will do his duty.