In recent days, settlements relating to two high-profile securities class action lawsuits were announced. Because there are some interest things about these two settlements, I take a closer look at each of them below.


Is the Qwest Securites Class Action Lawsuit Finally Settled?  In Qwest Communications  August 6, 2008 filing on Form 10-Q (here), the company announced that it would pay an additional $40 million, and that its former CEO, Joseph Nacchio, and its former CFO, Robert Woodruff, would “contribute a total of $5 million insurance proceeds,” to try to settle the long-standing consolidated Qwest securities litigation. These payments, together with amounts to which Qwest previously agreed, bring the total value of the class settlement to $445 million.


The court had previously approved the $400 million settlement, to which Nacchio and Woodruff were not parties, over Nacchio and Woodruff’s objections. Among other things, the two individuals contended that the prior settlement was structured to strip them of their indemnification rights. As I discussed here, on a January 16, 2008 opinion, the Tenth Circuit held that the two individuals had standing to challenge the settlement because provisions interfered with the two individuals’ potential rights and existing legal claims for indemnification. The Tenth Circuit remanded the case for the district court to provide further analysis of the individuals’ settlement objections.


According to the company’s 10-Q, the revised settlement resolves the class claims against the two individuals (in addition to all other defendants, the claims against who were resolved in the initial settlement), in exchange for which the two individuals withdrew their objections to the settlement and resolved their indemnification dispute with the company.


In a statement that is noteworthy in the larger context, the 10-Q reports that the company has “the right to terminate the settlement if class members representing more than a specified amount of alleged securities losses elect to opt-out.” The 10-Q provides no information as to what might constitute the “specified amount.”


This “blow up” provision, by which the deal is off if a specified percentage opts out, is not atypical, but it is interesting in the context of the Qwest settlement. As I noted in a prior post (here), the now superseded Qwest settlement had the distinction of being the first settlement (of which I am aware) in which the value of the individual opt-out settlements exceeded the value of the class settlement. (At that time, the aggregate value of the opt-out settlements totaled $411 million, compared to the $400 million class settlement).

The revised Qwest settlement value exceeds the aggregate value of the prior publicly disclosed value of the opt-out settlements. But given the magnitude of the prior opt-outs, there certainly is an interesting question of what greater quantity of opt-outs might be required to blow up the revised settlement? And are the prior opt-outs included in that equation? Along those lines, it should also be noted that in its October 30, 2007 filing on Form 10-Q (here), the company announced that the aggregate amount claimed by various persons then opting out from the class settlement is "in excess of $1.9 billion" (which presumably included the $411 million in opt out settlements entered to that point). And if that amount of opting out is not enough to blow up the settlement, then just how much is?


Whether or not this settlement finally resolves this class action, the entire sequence of events may be significant in another respect as well. The events have the potential at least to mark the end of an approach to securities class action case resolution that became fashionable during the era of corporate scandals – that is, to try to ensure that as part of the case settlement that the certain individual defendants were forced to pay out of their own assets to resolve claims asserted against them. The extreme cases reflecting this approach were Enron and WorldCom, where individuals were made to pay settlement amounts without recourse to insurance or indemnity.


The Qwest securities class action, and in particular the difficulties that the company encountered in trying to settle the case without resolving claims against Nacchio and Woodruff, could constrain future attempts to implement this approach. Of course, it may also be argued that the Tenth Circuit did not specifically disallow the prior settled that excluded the two individuals; it merely required the district court to provide further explanation of why it approved the settlement that arguably deprived the individuals of their indemnification rights.


One puzzling note about the amended settlement is the statement in the company’s 10-Q’s that Nacchio and Woodruff were contributing $5 million “insurance proceeds.” The document does not specify the source of the insurance, nor how there could be further insurance available after prior settlements, defense expense and other litigation expense.


Another odd note about this insurance component of the settlement is the suggestion that the two individuals were "contributing" the insurance funds, as if the $5 million was drawn from funds that these two individuals alone controlled, or at least that they were in a position to direct. Given that this case first arose way back in 2001, it is relatively unlikely (albeit not impossible) that these individuals carried individual director liabiltiy (IDL) insurance or that the company carried separate Side A insurance (although if the company did carry separate Side A coverage, the company’s refusal to indemnify would trigger the protection). The other possibiltiy is that earlier on the parties and the company’s insurers reached some accomodation that dedicated certain insurance funds solely for these two individuals, an arrangement that would be unusual particulary in the context of a claim that would seem likely to exhaust all available insurance.


In any event, in the end, despite all the efforts to the contrary, the claims against Naccho and Woodruff were settled without these two individuals having to make a contribution out of their own assets. The Qwest securities class action, and in particular the difficulties that the company encountered in trying to settle the case without including the claims against Nacchio and Woodruff, could constrain future attempts to implement this approach. (Of course, it may also be argued that the Tenth Circuit did not specifically disallow the prior settled that excluded the two individuals; it merely required the district court to provide further explanation of why it approved the settlement that arguably deprived the individuals of their indemnification rights.)


An August 7, 2008 Rocky Mountain News article describing the revised settlement can be found here.


About the GM Securities Litigation Settlement: As noted on the 10b5-Daily blog (here), in the company’s August 7, 2008 filing on Form 10-Q (here), General Motors announced that on July 21, 2008, it had settled the securities class action lawsuit pending against the company and certain of its directors and officers. For background regarding the lawsuit, refer here. The company agreed to pay $277 million and its auditor, Deloitte & Touche, agreed to pay $26 million, bringing the total value of the settlement to $303 million.


The 10-Q also announced that on August 6, 2008, the parties had also reached an agreement to settle the related shareholders’ derivative lawsuit. The settlement agreement “requires our management to recommend to the Board of Directors and its committees that we implement and maintain certain corporate governance changes for four years.” The company also agreed not to oppose the derivative plaintiffs’ petition for attorneys’ fees and costs “not to exceed $7.465 million.”


The 10-Q states further that the company believes “that a portion of our settlement costs are covered by insurance.” The document states that the company anticipates “recording income of approximately $200 million in the third quarter with insurance-related indemnification proceeds for previously recorded indemnification costs” including “the cost incurred to settle the General Motors Securities Litigation suit.”


An August 8, 2008 Business Insurance article (here) reports that a GM spokeswoman clarified that only $100 million of the $200 million of insurance relates to the securities lawsuit settlement; “half” of the $200 million, the article reports that the spokeswoman said, “is for settlements of litigation the company is not disclosing.”


Notwithstanding the odd note about $100 million of insurance for the settlement of undisclosed litigation, the overall suggestion is that $177 million of GM’s contribution to the securities lawsuit settlement is uninsured – or perhaps $7.645 million more than that if the attorneys’ fees in the derivative lawsuit are to be paid by insurance.


An interesting aspect of this case is the identity of the lead plaintiffs. Despite the defendant company’s iconic status as an American company, the lead plaintiffs were two overseas institutional investors, Deka Investment GmbH, an investment fund manager based in Germany, and Luxembourg-based fund manager Deka International S.A, both affiliates of DekaBank. The presence of foreign plaintiffs in U.S. class actions has become increasingly common, a trend that is likely to continue as U.S.-based plaintiffs firms expand their presence overseas. The Securities Litigation Watch has frequently discussed this trend, as noted here.


One additional interesting aspect of this settlement is that it the parties were able to resolve the case at such an early stage. According to an August 11, 2008 article on (here), the federal judge to whom the case was assigned sent the case to mediation while the defendants’ motions to dismiss were still pending.


According to RiskMetrics data quoted in the Business Insurance article, the GM settlement ranks as the twenty-fifth largest securities fraud settlement ever. And again, citing RiskMetrics data, the August 9, 2008 Wall Street Journal reported (here) that the GM settlement is the third largest securities lawsuit settlement of 2008, after the $895 million UnitedHealth Group settlement and the $750 Xerox settlement.


Special thanks to a loyal reader for the link to the Business Insurance article.


D&O Funds Gone, Case Grinds On: In a prior post (here), I noted that in the criminal case arising out of the collapse of Collins & Aikman, one of the defendants had sought an early  trial date because of the approaching depletion of the D&O insurance policy limits, potentially leaving him without resources to fund his defense.


In an August 8, 2008 post on his Race to the Bottom blog (here), Professor Jay Brown reports that even though no date has yet been set for the criminal trial in the case, the D&O insurance policy limits are now entirely exhausted. Counsel for one of the defendants reportedly stated at a July 24, 2008 status conference in the case that “the fourth and final layer carrier has informed us that – basically not to assume that there’s going to be any money after invoices submitted on July 31st.”


The possibility that $50 million in insurance limits might be exhausted before a trial date is even set is a nightmare scenario for any director or officer.


As I noted in my prior post, escalating defense expense is an increasingly important consideration in the D&O limits selection equation. The potential for defense expense alone to deplete all available insurance in a catastrophic claim like the one involving Collins & Aikman may seem like an extreme case, but D&O insurance ought to be able to respond and provide protection even in a catastrophic claim. However, increased limits along may not be the answer; rather, insurance structures, designed to ensure dedicated protection to specified individuals, may be the most important protection against the devastating potential of catastrophic D&O claims.