Antitrust regulation and securities enforcement each involve entirely separate areas of the law. However, an increasingly frequent follow-on effect of a regulatory investigation for allegedly anticompetitive conduct is an ensuing class action lawsuit under the securities laws. A lawsuit recently filed in the Southern District of New York, which also has some unique characteristics all of its own, is the latest example of this kind of follow-on securities litigation. These cases may present important D&O insurance considerations, as well.


According to their April 9, 2009 press release (here), plaintiffs’ counsel have filed a securities class action lawsuit against Mechel OAO and certain of its directors and officers. Mechel is a Russian mining and metals company whose American Depositary Receipts trade on the NYSE. The securities complaint (which can be found here) follows in the wake of declines in the company’s share price after allegations of "anticompetitive and monopolistic practices."


The sequence of events surrounding the allegations involves a remarkably compressed time frame. According to the complaint, on July 24, 2008, then-Russian Prime Minister Vladimir Putin "called for antitrust authorities to investigate Mechel’s raw material pricing policies," amid allegations that Mechel charged Russian customers twice what it charged non-Russian customers. On July 28, 2008, Putin also stated that Mechel had used offshore traders to minimize tax payments, which he characterized as "tax evasion."


According to the complaint, on August 14, 2008, barely three weeks after Putin’s initial statement, Mechel was found guilty of breaking competition laws; discriminating against Russian consumers; and maintaining a monopoly in the coal market. Mechel was ordered to take several remedial steps, including cutting prices and signing long term deals with local clients. The company was also ordered to pay a $32 million fine.


The securities complaint filed on April 8 alleged that the defendants failed to disclose:


(i) that the Company had engaged in anticompetitive conduct by employing a discriminatory pricing policy for raw material sales between domestic and foreign steel firms; (ii) that the Company had engaged in monopolistic conduct by fixing and maintaining coking coal prices at artificially high levels and unreasonably refusing contracts; (iii) that as the Company’s anticompetitive and monopolistic practices were discovered, the Company would incur a significant level of fines, and would be forced to enter into long term coking coal supply contracts below market prices; (iv) that a portion of the Company’s revenue was derived from anticompetitive and monopolistic conduct, and when such behavior was discovered, the Company’s revenue would significantly decline in future periods; (v) that the Company had used a sophisticated sales and distribution scheme involving wholly owned offshore trading companies to evade paying taxes on a portion of its revenue; (vi) that the Company lacked adequate internal and financial controls; (vii) that the Company’s financial statements were not prepared in accordance with United States Generally Accepted Accounting Principles ("U.S. GAAP"); and (viii) that, as a result of the foregoing, the Company’s financial statements were materially false and misleading at all relevant times.


The Mechel complaint has a number of distinctive and noteworthy features, but in addition it shares one characteristic in common with several other recently filed securities lawsuits – that is, the alleged securities law violations are based on an alleged disclosure failures relating to supposed anticompetitive behavior.


For example, in August 2008, investors filed a securities class action lawsuit in the Eastern District of Michigan against Reddy Ice Holdings and certain of its director and officers. Background regarding the case can be found here. The complaint alleges that the company engaged in a price-fixing conspiracy that permitted the company to report revenues that were "derived from illegal activities in violation of the U.S. antitrust laws."


Similarly, in December 2008, investors filed a securities class action lawsuit in the District of Delaware against container shipping company Horizon Lines and certain of its directors and officers. Background regarding the case can be found here. The securities lawsuit followed in the wake of guilty pleas entered by three Horizon employees to fixing shipping fees in the Puerto Rico shipping Lane. The securities complaint alleges, among other things, that as a result of the price fixing, Horizon’s revenues had been inflated and its earnings reports and revenue guidance had been misleading.


These lawsuits alleging violations of the securities laws based on allegations of anticompetitive conduct should be distinguished from cases in which plaintiffs seek to allege antitrust violations as a way to circumvent the procedural requirements of the PSLRA. The U.S. Supreme Court rejected this kind of "end run" in the IPO Laddering Antitrust Case (Credit Suisse v. Billing), which is discussed at greater length here. The Supreme Court said in that case that it could not allow the antitrust case to proceed, as "to permit an antitrust lawsuit risks circumventing [the statutory requirements of the PSLRA] by permitting plaintiffs to dress what is essentially a securities complaint in antitrust clothing."


By contrast, the Mechel case and the other cases above are seeking to accomplish the reverse; that is, they are seeking to dress allegations of anticompetitive behavior (and the economic consequences of the regulatory enforcement action) in the clothing of a securities class action lawsuit. The plaintiffs will of course have to satisfy the PSLRA’s pleading requirements in order to be allowed to proceed. But the point that should not be overlooked is that there has been a string of cases in recent months where plaintiffs have filed follow-on securities lawsuits in the wake of allegations of anticompetitive behavior.


Given the predominance of the subprime and credit-crisis securities litigation since early 2007, it is easy for less conspicuous trends like this to be overlooked. The likelihood is that there could be more of this kind of litigation ahead as a result of the current economic turmoil, because of the danger that desperate companies might do desperate things, like calling a competitor to try to work things out.


The possibility of securities litigation based on allegations of anticompetitive behavior does raise an important D&O insurance consideration. Although it is relatively uncommon in public company D&O insurance policies, some private company D&O insurance policies contain an antitrust exclusion. For example, one private company D&O insurance carrier’s form excludes coverage for loss "based upon, arising from, or in any way related to any actual or alleged violation of any law, rule or regulation relating to anti-trust, restraint of trade, unfair business practice or interference with another’s business, contractual or economic relationships or interests."


These kinds of exclusions are objectionable on a number of different grounds, but the cases described above demonstrate one very specific reason to avoid policies containing this language. Were this language to make its way into a public company D&O policy, the insurer might, especially given the breadth of the preamble language ("based upon, arising from, or in any way relating to"), attempt to rely on this provision to try to preclude coverage for the kind of claim described above. The typical public company D&O policy does not contain this exclusion, but its mere existence even just in some private company forms is reason enough to be on guard.


While the Mechel case shares some attributes with the two other cases discussed above, it is in most ways a strikingly unique case. Among other things, the complaint’s references to Vladimir Putin’s statements represent an element of a kind not found in many complaints – with one other significant exception, as described below.


Mechel itself is not the first Russian company to become involved in a U.S. securities lawsuit. For example, investors in Yukos Oil tried to bring a U.S. securities lawsuit against the company (refer here), but with little success. The Yukos investors also separately attempted to sue the Russian Federation, several Russian oil companies, and a number of Russian officials (including the current Russian Prime Minister Dmitry Medvedev). Putin himself was not named as a defendant in the case but the complaint did quote certain statements attributed to him. As described here, this separate case ultimately was dismissed on jurisdictional grounds.


Mechel is merely the latest of many foreign domiciled companies to become involved in securities litigation in the U.S. Just in 2009 alone, as many as 14 of the roughly 65 securities class action lawsuits filed so far this year (about 21%) have been filed against companies domiciled outside the U.S. Similarly in 2008, 34 of the 226 securities class action lawsuits (about 15%) were filed against foreign companies. Clearly the non-U.S. companies are sued at a greater rate than are domestic companies. Some of the foreign companies may simply make attractive targets, but the number of suits may also suggest that the foreign companies are not always ready for the scrutiny that comes with a U.S. listing.


An April 9, 2009 Bloomberg article by Thom Wiedlich about the Mechel case can be found here.


Optional Federal Insurance Regulation?: A recurring topic in recent years has been the possibility of the introduction of federal insurance regulation. Although this idea has a long history, it could received greater attention in the current environment.


The idea was recently revived in proposed legislation introduced on April 2, 2009. The National Insurance Protection Act (H.R. 1880) would allow insurers and insurance producers to elect federal regulation. An April 8, 2009 memorandum from the Locke, Lord, Bissell & Brooke firm entitled "Once More into the Fray: National Insurance Consumer Protection Act Revives Optional Federal Charter Discussion" (here) describes and analyses the bill in detail.


Among other things, the memo notes that the recent financial turmoil has "increased momentum for change to regulation of the financial services industry and the insurance industry is no exception." However, the memo also notes that it is unclear how the proposed legislation would fit within the Treasury Department’s overall plan for regulatory reform, and until the Treasury details its plan, the proposed legislation "may not gain much legislative traction."


Special thanks to Peter Schwarz of the Securities Mosaic for providing a copy of the memo.