The number of SEC enforcement actions against public companies and their subsidiaries declined in the first half of FY 2018 compared to the comparable year prior period, continuing a sharp downward trend that began in the second half of FY 2017 and falling to the lowest level in years, according to a new report from Cornerstone Research, written in collaboration with the NYU Pollack Center for Law & Business. Monetary settlements during the first half of fiscal 2018 also fell to their lowest level in years. The report, entitled “SEC Enforcement Activity: Public Companies and Subsidiaries, Midyear FY 2018 Update” (here), reports on SEC enforcement activity involving public companies and their subsidiaries for the first half of fiscal 2018, which ended March 31, 2018. Cornerstone Report’s May 15, 2018 press release about the report can be found here.
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IPO-Related Securities Litigation and the Idea of Shareholder Claim Mandatory Arbitration
As I have noted in prior posts, a number of commentators have proposed that companies filing with the SEC to complete IPOs ought to be able to include in their bylaws a mandatory arbitration provision requiring shareholder claimants to submit claims – including even claims under the federal securities laws – to arbitration. This idea, which has been percolating for years, received a significant boost in a statement last summer from outgoing SEC Commissioner Michael Piwowar, in which he suggested that the SEC would favorably view submissions by IPO companies that included bylaw provisions requiring mandatory arbitration of securities claims. As detailed in an April 23, 2018 paper from Elisa Mendoza of ISS Securities Class Action Services entitled “The Uncertain Role of IPOs in Future Class Actions” (here), this idea has its critics. But what might this kind of mandatory arbitration proposal, if put into action, actually mean for securities class action litigation going forward? Mendoza’s paper helpfully takes a statistical look at this question in light of historical securities litigation involving IPO companies.
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U.S. Senators Introduce Bill to Require Litigation Funding Disclosure
Along with the recent rise in third-party litigation financing has come a widely-held perception that there is something vaguely shady about it. For example, a May 12, 2018 New York Times article, in what is nearly a compulsory formulation, described litigation funding as “unregulated and opaque.” This common perception about litigation funding is one reason why I have long felt that eventually that some form of litigation financing disclosure is going to be required – indeed, one state has already instituted rules requiring the disclosure. The possibility for more universal disclosure requirements moved one step closer last week, when three U.S. Senators introduced legislation that would make litigation financing disclosure mandatory in certain kinds of federal court lawsuits. The draft bill has predictably drawn praise and scorn from commentators with opposing viewpoints, but the key thing at this point is that the debate about litigation financing disclosure has moved from the fringes and has now taken center stage.
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Guest Post: The First Federal Court Hearing on SEC Jurisdiction over ICOs
As cryptocurrencies and ICOs have proliferated, one very key question has been whether not the coins or tokens are securities within the meaning of the federal securities laws. Earlier this week, the first federal court hearing at which this question was discussed took place in the federal district court in Brooklyn. In the following guest post, John Reed Stark, President of John Reed Stark Consulting and former Chief of the SEC’s Office of Internet Enforcement, provides his detailed report of the court hearing as well as his perspective on the topics under discussion. A version of this article originally appeared on Cybersecurity Docket. I would like to thank John for his willingness to allow me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is John’s guest post.
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Wendy’s Settles Data Breach-Related Derivative Lawsuit
More recent data breach-related D&O lawsuits have been filed in the form of securities class actions, one of which, the Yahoo securities class action lawsuit, recently resulted in a sizable settlement. Before that though, during the period 2014 to 2016, there was a series of data breach related suits filed in the form of shareholder derivative actions. By and large, these cases did not fare particularly well, largely resulting in dismissals. The last of these data breach-related derivative lawsuits that remained pending is the one filed against fast-food company Wendy’s. Now the Wendy’s case has also settled, albeit for a combination of cybersecurity and governance therapeutics and agreement to pay the plaintiffs’ attorneys fees. The resolution of this last remaining shareholder derivative suit again raises a question that has been much discussed, of the extent to which data breach-related issues will lead to more D&O litigation.
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Federal Judge Orders Litigation Funding Disclosure to the Court, Rather than to Opposing Parties
One of the many issues under discussion when the question of litigation financing regulation comes up is whether parties’ use of litigation financing must be disclosed. One federal district court has implemented provisions requiring the disclosure of litigation financing, and the state of Wisconsin recently adopted measures requiring litigation financing disclosure. The federal Advisory Committee on the Rules of Civil Procedure is separately studying measures that would require disclosure. In the meantime, other courts continue to struggle with the disclosure issue. The federal district court judge in Ohio presiding over the multidistrict opioid litigation has fashioned his own litigation financing disclosure approach; Northern District of Ohio Judge Dan Aaron Polster has ordered the litigants in the opioid litigation to provide litigation funding disclosure to the court itself, rather than to the parties. Interestingly, this approach has drawn praise from a leading third-party litigation funder, as discussed below. Judge Polster’s May 7, 2018 order can be found here.
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D&O Insurance Coverage for Competitor Hire Claims
A frequently recurring claim that many companies face is a lawsuit brought by a competitor after the company hires the competitor’s former employee. Depending on how the competitor’s lawsuit is framed, these kinds of claims can be an awkward fit with the defendant company’s D&O insurance policy. A recent insurance coverage dispute in Delaware state court illustrates the kinds of coverage issues that can sometimes arise in connection with these claims. As discussed below, there are ways that D&O insurance policies can be revised to try to address at least some of the coverage issues. Delaware Superior Court Judge Eric Davis’s May 2, 2018 in the insurance coverage litigation can be found here.
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Wells Fargo Settles Phony Account Securities Suit for $480 Million
Wells Fargo has agreed to pay $480 million to settle the securities class action lawsuit arising from the company’s fake customer account scandal. The lawsuit followed in the wake of allegations that the bank had opened millions of accounts on behalf of customers frequently without the customers’ knowledge or consent, and in some instances based on fictitious customer information. As discussed below, the massive securities suit settlement, which is subject to court approval, is among the largest ever. The company’s May 4, 2018 press release about the settlement can be found here. The settlement was also disclosed in the company’s May 4, 2018 filing on Form 10-Q, here. A May 4, 2018 press release about the settlement by Union Investment, the lead plaintiff in the action, can be found here.
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Guest Post: Another Court Applies New York’s “Sufficient Factual Nexus” Test to Related Claims
As I have frequently noted on this blog (for example, here), problems involving relatedness between claims present recurring coverage issues under D&O insurance policies. In the following guest post, Maurice Pesso and Greg M. Steinberg of the White and Williams LLP law firm take a look at a recent decision out of the Northern District of Illinois applying New York law to a D&O insurance dispute involving related claims issues. I would like to thank Maurice and Greg for their willingness to allow me to publish their article on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Maurice and Greg’s guest post.
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Ninth Circuit: No Crime Policy Coverage for Social Engineering Fraud Losses
Along with all of the other risks arising from companies’ increasing dependence on electronics communications and data storage technology has come not only the risks of a data breach caused by a hacker, but also the risk of a company’s transfer of funds by one of its employees who has been duped into believing the transfer was legitimate and authorized. These kinds of losses, which have been called “payment instruction fraud” or “social engineering fraud,” raise of a host of potential issues under traditional insurance policies, owing to the voluntary nature of the funds transfer made by a person authorized to access the company’s computer system. A recent decision by the Ninth Circuit illustrates the kinds of coverage problems that can arise from these circumstances. The Ninth Circuit’s unpublished April 17, 2018 opinion in Aqua Star (USA) Corp. v. Travelers Casualty & Surety Company of America can be found here. The Wiley Rein’s law firm’s April 19, 2018 post about the Ninth Circuit decision can be found here.
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