Even though I was not even away a full week for the recent PLUS D&O Symposium, there was a flood of noteworthy developments while I was gone. Here is a roundup of last week’s news and notes.
Subprime-Related Derivative Lawsuit Largely Dismissed: In a detailed and painstaking February 24, 2009 opinion (here), Chancellor William Chandler dismissed the bulk of the consolidated subprime-related derivative suit pending against Citigroup, as nominal defendant, and certain of the company’s directors and officers, in Delaware Chancery Court. A very thorough review of the opinion can be found on the Delaware Corporate and Commercial Litigation Blog, here.
Chancellor Chandler dismissed all but one of plaintiffs’ claims for failure to adequately plead demand futility. He did, however, allow plaintiffs’ claims of waste concerning the compensation and benefits package for Citigroup’s CEO to continue.
The most interesting part of Chancellor Chandler’s opinion relates to the plaintiffs’ allegations that the defendants failed to monitor the company’s business risk with respect to Citigroup’s exposure to the subprime mortgage market. Chandler characterized this claim as an assertion that "the director defendants should be personally liable to the Company because they failed to fully recognize the risk posed by subprime securities."
Chandler noted that Delaware case and statutory law places "an extremely high burden on a plaintiff to state a claim for personal director liability for failure to see the extent of a company’s business risk." Chandler concluded that in light of this burden, plaintiffs’ conclusory allegations (and thus their failure to plead particularized facts) were insufficient to excuse demand.
Among other things, Chandler noted that the "oversight duties under Delaware law are not designed to subject directors, even expert directors, to personal liability for failure to predict the future and to properly evaluate business risk."
Chandler did take pains to distinguish the recent Chancery Court decision in which the "failure to monitor" claim against the directors and officers of AIG survived a motion to dismiss. (The February 10, 2009 opinion in the AIG case can be found here.) In that case, unlike the Citigroup action, the defendants "allegedly failed to exercise reasonable oversight over pervasive fraudulent and criminal conduct." The Citigroup case, by contrast, involved only alleged failure to recognize the extent of the company’s business risk.
Both because of the high-profile nature of the Citigroup case as well as Chancellor Chandler’s detailed review of the applicable provisions of Delaware law, his opinion could prove to be particularly influential in other pending subprime and credit crisis-related derivative suits. The basis on which he distinguished the AIG case could also prove to be an important distinguishing characteristic in the determination of which derivative suits will survive and which may be dismissed.
I have in any event added the Citigroup opinion to my table of subprime and credit crisis-related lawsuit settlements, dismissal and dismissal denials. The table can be accessed here. A list of the subprime and credit crisis-related derivative suits themselves can be found here.
One final observation about the Delaware Corporate and Commercial Litigation Blog, which I referenced above. If you have any inclination or desire to follow the important legal trends affecting the potential legal liabilities and responsibilities of corporate directors and officers, you will find the Delaware litigation blog absolutely indispensible. I would rank the blog among the few truly must-read resources in this area on the Internet. The blog’s post on the Citigroup case is just one example why.
More Stanford Financial Developments and Litigation: In addition to the initiation of criminal charges against former Stanford Financial Group investment officer Laura Pendergast-Holt for obstructing the SEC’s investigation (about which refer here), last week’s developments regarding the Stanford scandal included the SEC’s filing late Friday night of an amended enforcement complaint in the matter.
According to the SEC’s amended complaint (which can be found here), R. Allen Stanford and his firm’s CFO, James M. Davis, operated a massive Ponzi scheme and misappropriated at least $1.6 billion of investor money in bogus personal loans to Stanford. An unspecified additional amount was also put into speculative investments, which by the end of 2008 made up the bulk of the Stanford Financial Group’s investments, though the company marketed its portfolio as a "well-diversified portfolio of highly marketable securities."
The amended complaint also alleged that Stanford and Davis fabricated portfolio’s investment performance, deciding each month on the return to be reported and "reverse engineering" the financial statements to reflect investment income that was never earned.
A February 28, 2009 New York Times article describing the criminal charges and the amended SEC complaint can be found here.
In addition to these criminal and regulatory developments, the Stanford Group was also hit with an additional civil lawsuit, this time involving a case filed in a Canadian Court. According to a February 27, 2009 article in the Financial Post (here), on February 25, 2009, Calgary-based furniture manufacturer has initiated a class action lawsuit in the Alberta Court of Queen’s Bench against Allen Stanford, Stanford International Bank, Stanford Group Company, Stanford Capital Management LLC, James M. Davis and Laura Pendergast-Holt.
The company alleges that it invested $1 million in certificates of deposit issued by the bank. The complaint, which seeks class action status, seeks damages for misrepresentation, unjust enrichment, conversion, fraudulent conveyance and breach of trust. The complaint also asserts fraud in connection with other Stanford investments.
I have added the new Canadian lawsuit to my running tally of the Stanford related litigation, which can be accessed here.
More Madoff Litigation, Too: During the past week, additional litigation related to the Madoff scandal also continued to flow in. I have added multiple new cases to my running tally of the Madoff-related litigation, which can be accessed here. Special thanks to the several readers who have alerted me to new Madoff cases, particularly to loyal reader Jon Jacobson.
One of the more interesting new cases is the one filed on February 24, 2009 in the District of New Jersey. Though this case raises allegations similar to those asserted in prior cases, the complaint asserts claims neither against Madoff and firm nor against the Madoff feeder funds. Rather, the sole defendant in the case is Peter Madoff, Bernard Madoff’s brother.
According to the complaint in the case (which can be found here), Peter Madoff and his brother "have worked side by side" for "nearly 40 years," and their offices "were only a few feet from each other." The complaint alleges, among other things, that Peter Madoff was responsible for "regularly verifying and accurately reporting the financial condition" of the Madoff firm, as well as establishing and monitoring internal controls and detecting and reporting any legal violations. The complaint asserts claims under Sections 10(b) and 20 of the ’34 Act, for breach of fiduciary duty, aiding and abetting, negligence, and negligent misrepresentation.
Hat tip to the Courthouse News Service for the Peter Madoff complaint.
Auction Rate Securities Litigation Continues to Amass: As I have previously noted (here), the various massive auction rate securities settlements do not seem to have stemmed the tide of auction rate securities litigation, and cases involving institutional and entity investors, who are not part of the regulatory settlements, continue to file new lawsuits.
The latest example of this phenomenon is the complaint filed on February 25, 2009 in the Eastern District of Missouri by KV Pharmaceutical Company against Citigroup Global Markets. A copy of the complaint can be found here.
The complaint alleges that between May 2005 and February 2008, Citigroup counseled KV into investing $72 million in auction rate securities that are now illiquid. Among other things, the complaint alleges that the securities can now be sold, if at all, at substantial discounts to par value. The complaint alleges that "holding $72 million of illiquid ARS exacerbates KV’s current cash crisis, which is requiring KV to seek borrowed capital and engage in overall cost-cutting by, among other things, eliminating approximately 700 jobs."
Clearly the auction rate securities market’s continued failure to function is causing enormous stress for the persons and entities unfortunate enough to have been stuck holding these instruments when the music stopped last February.
Hat tip to the Courthouse News Service for the KV Pharmaceutical complaint.
More Failed Banks: Add two more banks to the growing list of 2009 bank failures. On Friday, February 27, 2009, the FDIC took control of the Heritage Community, Glenwood, Illinois (about which refer here), and of the Security Savings Bank of Henderson, Nevada (refer here). Prior to its closure, the Heritage Community Bank had assets of $232.9 million, and Security Savings Bank had assets of $238.3 million.
The closure of these two banks brings the total number of banks closed during February 2009 to ten, and the 2009 year to date total to 16 (compared to 25 during all of 2008). The FDIC’s complete list of failed banks can be found here.
As I recently noted (here), a significant number of the 2009 bank failures, including the two most recent examples, involve smaller community banks. These troubling developments raise serious concerns both for the banking community and for the larger economy. The rash of bank closures also raises the likelihood that there will be increased litigation involving the failed banks and their former directors and officers.
Did the Milberg Kickback Scheme Hurt Class Members?: Those readers who were fortunate enough to have attended the PLUS D&O Symposium among other things heard interesting comments from St. John’s University law professor Michael Perino about the fascinating video, "The Rise and Fall of Bill Lerach" (to see the video trailer for which, refer here). Perino mentioned in his discussion the research he had completed about the impact on shareholder class members from the kickback payments the Milberg firm made to the paid plaintiffs.
In light of Professor Perino’s remarks, I thought readers might appreciate having a link to the Professor’s research paper, which can be found here. As reflected in the paper’s abstract, Perino concluded that not only were the firm’s fee requests and awards overall higher in the cases identified in the indictment, but that these findings are consistent with the hypothesis that class members were harmed.
An interesting commentary on the paper can be found on Professor Ribstein’s Ideoblog, here.
Insurance Persons of the Year: The LexisNexis Insurance Law Center is receiving nominations for the "Insurance Law Persons of the Year." The Center will be making four awards: the Policyholder Attorney of the Year; the Insurer Attorney of the Year; the Insurance Regulator of the Year; and the Insurance Jurist of the Year. In each case, the award will go to the person in each area that had the most impact in insurance law during 2008.
The deadline for nominations is March 6, 2009. Nominations can be sent to Karen Yotis the following address: firstname.lastname@example.org.
My New All-Time Favorite Headline: The table I have assembled regarding the Stanford Financial Group litigation, which I mentioned above, has proven to be a popular addition to this blog. I am grateful that a number of other blogs and sites have linked to the post in which the table can be accessed.
But as nice as it is for other blogs to recognize my post, nothing can top the article posted on February 24, 2009 on the American Lawyer website (here), entitled "D&O Diary Launches Stanford Financial Litigation Tally; Kevin LaCroix is Our Hero." That one even impressed my wife (I think), which is really saying something.
My thanks to AmLaw reporter Alison Frankel for this nice but undeserved accolade.
And Finally: Just a reminder to all my readers that I continue to report additional items between blog posts on Twitter. Among other things, I am increasingly active in retweeting interesting items from other Twitterers. Readers interested in monitoring my "tweets" are encouraged to click on the Twitter button in the right-hand column above to follow my Twitter posts.
In addition, I remain interested in connecting with readers on LinkedIn. I have recently become much more active in various LinkedIn groups and I would like to draw other readers into the dialog. I encourage readers interested in connecting with me on LinkedIn to click on the button in the right hand column above and join my network.