At the PLUS D&O Symposium in New York this past March, I participated on a panel entitled, “Financial Institutions Underwriting: Is it Safe to Come Out Yet?” The implication of the panel topic was that perhaps with the passage of the credit crisis, financial institutions might not be as big of a D&O underwriting risk as they had been perceived to be during the crisis. At the same time, the presentation of the title in the form of a question suggested that perhaps there might still be further risks ahead.


Subsequent events have proven that it was right to continue to ask the question. As I wrote in a post earlier this week, the LIBOR scandal, among other things, shows that the financial institutions arena remains a risky neighborhood. In the earlier post, I questioned whether the follow-on civil litigation arising in the wake of the LIBOR scandal would include securities class action litigation. We now know the answer to that question as well.


On July 10, 2012, a Barclays shareholder filed a securities class action lawsuit in the Southern District of New York, against Barclays PLC and two related Barclays entities, as well as the company’s former CEO, Robert Diamond; and its former Chairman Marcus Agius. The complaint, which can be found here, is filed on behalf of class of persons who purchased Barclays ADRs between July 10, 2007 and June 27, 2012.


According to the plaintiffs’ lawyers’ press release, the complaint alleges that the defendants participating in an illegal scheme to manipulate the LIBOR rates, and that the defendants “made material misstatements to the Company’s shareholders about the Company’s purported compliance with their principles and operational risk management processes and repeatedly told shareholders that Barclays was a model corporate citizen even though at all relevant times it was flouting the law..” Alison Frankel has a detailed July 12, 2012 post on the On the Case blog (here) detailing this new securities class action lawsuit.


Although (as discussed here) there has already been extensive antitrust litigation filed in connection with the LIBOR scandal, this latest securities suit against Barclays is the first securities class action lawsuit filed in the scandal’s wake. Obviously, Barclays is the only financial institution that has reached a settlement with the regulatory authorities. At the same time, however, Barclays wasn’t the only participant in the scheme. Many other companies have been implicated in the scandal. As the regulatory process unfolds and as other financial institutions reach regulatory settlements, it seems very likely that there will be further securities class action lawsuits to come.


While early litigation developments in this latest financial sector scandal are only beginning to unfold, the litigation fallout from earlier scandals is slowly playing itself out. There were key developments in two significant cases filed in connection with prior scandals in the financial arena.


First, in July 11, 2012 order (here), Southern District of New York William H. Pauley III denied in part the defendants’ motion to dismiss the securities class action lawsuit that had been filed against the Bank of American, certain of its directors and officers, its offering underwriters and its auditors, in a case filed in the wake of the mortgage foreclosure processing scandal.


As detailed here, the plaintiffs alleged that the bank had misrepresented its reliance (and the reliance of Countrywide Mortgage, a company Bank of American purchased at the outset of the financial crisis) on the Mortgage Electronic Registration System (MERS), a computerized system for tracking mortgages that tried to eliminate the need for mortgage originators to physically record mortgages. As the mortgage meltdown unfolded it became clear that it would be difficult if not impossible for the bank to foreclose on mortgages in MERS.


The plaintiffs also alleged because of the bank’s reliance on MERS, the bank had breached the warranties it had given in connection with mortgage securitizations that it had good title to the mortgages, and also had breached its mortgage underwriting standards, as a result of which, the plaintiffs allege, the bank is liable for repurchase claims by mortgage securitizers for billions of dollars worth of mortgages. The plaintiffs also allege that in connection with a December 2009 securities offering, the defendants misrepresented the problems associated with the bank’s reliance on MERS as well as the bank’s vulnerability to repurchase claims.


Judge Pauley granted the defendants’ motions to dismiss the plaintiffs’ Section 11 claims relating to the December 2009 offering, on statute of limitations grounds. Judge Pauley also granted the motions of the individual director and officer defendants, as well as of BofA’s offering underwriters and auditors, as to all of the remaining allegations. However, the dismissal of the claims (other than the Section 11 claims relating to the December 2009 offering) against the individual defendants was without prejudice. And most importantly from the plaintiffs’ perspective, Judge Pauley denied the motion to dismiss of the bank itself other than with respect to the Section 11 claim.


I have added this ruling to my running tally of subprime and credit crisis-related dismissal motions rulings, which can be accessed here. Jan Wolfe’s July 11, 2012 Am Law Litigation Daily article discussing Judge Pauley’s ruling can be found here.


Second, in an earlier case arising from the subprime meltdown and credit crisis, on July 9, 2012, the parties to the subprime mortgage securities suit involving BancorpSouth filed a stipulation of settlement indicating that they had agreed to settle the case for $29.25 million. The settlement is subject to court approval. According to the parties’ stipulation (a copy of which can be found here), the settlement is to be entirely funded by D&O insurance; the stipulation provides that as part of the settlement, the defendants will “cause their directors’ and officers’ insurers” to pay the $29.25 million into escrow.


As detailed here, the plaintiffs had first filed their suit against BancorpSouth and certain of its directors and offices in the Middle District of Tennessee in May 2010.  The plaintiffs alleged that as the credit crisis had unfolded, the bank had been slow to recognize losses in its lending portfolio, instead claiming that it its portfolio was of a higher quality than those of other lending institutions. Ultimately the bank was forced to recognize extensive losses. The plaintiffs alleged that the bank had failed to properly account for its construction and commercial real estate loans, failing to reflect impairment in the loans and had not adequately reserved for loan losses  On January 24, 2012, the court entered an order accepting the magistrate’s recommendation that the defendants’ motions to dismiss should be denied.


I have added the BancorpSouth settlement to my list of subprime case resolutions, which can be accessed here.


Dodd-Frank Whistleblower Developments: We are still awaiting the payment of the first whistleblower bound under the Dodd-Frank Act’s whistleblower provisions. But that is not to say that there have not been any developments. To the contrary there have been several recent rulings in various legal proceedings involving the Dodd-Frank Act whistleblower provisions.


As Jan Wolfe notes in a July 10, 2012 article in the Am Law Litigation Daily (here), several courts have recently shed significant light on the Dodd Frank whistleblower provisions. Among other things, one court has ruled that the provisions give retroactive protection to the whistleblowers at subsidiaries of public companies, not just to whistleblowers at the  publicly traded parent company. However, an earlier court ruled that, because the Dodd-Frank Act is silent about the extraterritoriality of the whistleblower provisions, the provisions do not apply extraterritorially.