In a provocative statement suggesting the unlikelihood of "damage awards" against subprime lenders’ directors and officers, XL Capital Ltd. CEO Michael McGavick yesterday told a Goldman Sachs Group conference that "being collectively stupid is not a basis for a lawsuit," according to a December 9, 2009 Bloomberg article (here).
As reflected in the article, McGavick indicated that investors have little chance of extracting damages awards from executives and board members at firms that lost money, as the article put it, "betting on subprime mortgages." McGavick is quoted as saying that its "very hard to pick out the management team that did something wrong to the level that the law requires."
McGavick’s comments have already kicked up controversy, as reflected in Ross Todd’s December 9, 2009 article on Am Law Litigation Daily, entitled "Are Directors and Officers Safe from Securities Fraud Suits Because They Were ‘Collectively Stupid?’" (here).
However, it is difficult to tell from the Bloomberg article how comprehensive McGavick’s comments were intended to be. Was he talking only about companies that invested in subprime mortgages or was he talking about a larger group of companies, including subprime lenders and other companies that were brought down or seriously damaged by the subprime meltdown?
Subject to that uncertainty about the scope of McGavick’s comments, I have several thoughts and comments in reaction to his remarks.
As an initial matter I note that while it may be true that "collective stupidity" hardly represents a legal theory on which liability might be based, it also is not a very promising defense. Even setting aside the colorful use of the word "stupidity," it is not a great defense to argue that everybody managed to get it wrong, as proved to be the case in the connection with options backdating, for example.
And to the extent that McGavick’s statement was intended to be broadly based and was meant to suggest generally that plaintiffs are unlikely to even file lawsuits based on the subprime meltdown, the facts suggest otherwise. Plaintiffs have already filed over 200 subprime and credit crisis securities class action lawsuits (as reflected in the attachment to this prior blog post), as well as over 25 derivative lawsuits and over 15 ERISA class actions. Clearly, the plaintiffs’ lawyers perceive what McGavick characterized as "collective stupidity" to be a litigation opportunity.
If McGavick’s statement was intended to suggest that plaintiffs will not succeed in the cases arising out of the subprime meltdown, I have to say that from my perspective it is far too early to make any sweeping statements about who will come out ahead generally from the subprime and credit crisis lawsuits.
Specifically, even though there have been over 200 subprime and credit crisis related securities class action lawsuits, only a small portion of those cases have made it through the dismissal stage as reflected in my running tally of the rulings on subprime lawsuit dismissal motions, which can be accessed here.
Although the defendants have prevailed in many of the motions so far, there have also been a number of motions on which plaintiffs have prevailed – for example in the New Century and Countrywide cases (as reflected here and here, respectively). Indeed, there have been cases, like the Washington Mutual case (refer here), where the initial motion was granted, but the cases survived the renewed motion after the complaint was amended.
And even though there have only been a handful of settlements in the subprime and credit crisis cases so far, the settlements so far collectively represent nearly a billion dollars. Even if the out-sized Merrill Lynch settlements are disregarded, the other settlements still represent some very significant numbers. (The settlement data can be accessed here). Even modest extrapolation against the entire population of lawsuits suggests that even if plaintiffs don’t extract "damages awards," they are likely to notch some significant settlements before everything is said and done.
With so many of the subprime and credit crisis cases yet to be resolved, I think the most that can be said with respect to the D&O insurance industry’s likely aggregate exposure to the subprime and credit crisis lawsuits is that it is too early to tell. I will say that if you take into account the aggregate expenses that the D&O industry will sustain in defending insureds, it is clear that by any measure that the subprime and credit crisis litigation wave will in the final analysis represent a significant event for the D&O insurance industry, no matter what happens.
My prior interim update on the subprime and credit crisis-related litigation wave can be found here.