This past week I was at the annual Professional Liability Underwriting Society (PLUS) D&O Symposium at the Marriott Marquis Hotel in Times Square, New York. The weather on the Tuesday arrival day was unusually clement for early February in New York, and even though rain moved in on Wednesday evening, the good vibe on arrival day seemed to carry through the conference. Continue Reading PLUS D&O Symposium in New York
It is extremely rare for securities class action lawsuits to go all the way through to a jury verdict. Since 1996, there have been more than 5,200 securities class action lawsuits filed, but, as detailed further below, fewer than 25 cases during that time have gone to trial. However, on February 4, 2019, a jury in the Central District of California entered a verdict in the securities class action lawsuit pending against Puma Biotechnology and certain of its directors and officers. While the jury found that the plaintiffs had not proven that three of the four allegedly misleading statements at issue were “false and misleading,” the jury found against the defendants and for the plaintiff as to a fourth statement. The jury specified damages of $4.50 a share with respect to the one misleading statement, which, according to the plaintiff’s counsel’s press release, amounts to a damages award of “up to $100 million,” although the actual damages amount remains to be calculated based on trading during the class period. Continue Reading Rare Securities Class Action Lawsuit Trial Results in Partial Verdict for Plaintiffs
Cybersecurity threats are on the rise. Companies that find themselves hit with data breaches face a number of challenges, including in particular the challenge of responding to strict breach disclosure and notification requirements. In the following guest post, Paul A. Ferrillo, a shareholder in the Greenberg Traurig law firm’s Cybersecurity, Privacy, and Crisis Management Practice, takes a look at the steps the companies can take before they are breached to be better positioned to respond to the notification requirements in the event of a breach. I would like to thank Paul for allowing me to publish his article as a guest post. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Paul’s article. Continue Reading Guest Post: Beat the Clock: 5 Important Steps to Deal with Today’s Complicated Cyber Breach Disclosure World
As cybersecurity has become an increasingly important consideration for all corporate operations, one of the most pernicious problems has been the rise of so-called “ransomware” attacks – that is, systems breaches in which hackers take control of corporate networks and demand ransom payments as a condition of unlocking the systems. 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, takes a look at the ransomware phenomenon, how companies are responding, and why. A version of this article previously was published on Securities Docket. I would like to thank John for allowing me to publish his article as a guest post. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is John’s article. Continue Reading Guest Post: Ransomeware’s Dirty Little Secret: Most Corporate Victims Pay
The number of federal court securities class action lawsuit filings remained “near record levels” during 2018, according to the latest report published by Cornerstone Research in conjunction with the Stanford Law School Securities Class Action Clearinghouse. State court securities lawsuit filings, detailed in the report, drove securities class action litigation filing activity to even higher levels during 2018, arguably to the highest levels ever. According to the report, the likelihood of a U.S.-listed company getting hit with a securities suit was higher in 2018 than it has ever been. Driven by the sheer volume of litigation and the number of lawsuits against larger companies, the 2018 securities suit filings represented an aggregate market capitalization loss of over $1 trillion. The Cornerstone Research report, entitled “Securities Class Action Filings: 2018 Year in Review,” can be found here. Cornerstone Research’s January 30, 2019 press release can be found here. My own review of the 2018 securities class action lawsuit filings can be found here. Continue Reading Cornerstone Research: Combined Federal and State Securities Suit Filings at Highest-Ever Levels in 2018
During 2017 and 2018, plaintiffs’ lawyers filed a number of securities class action lawsuits against companies that had experienced data breaches. Among the highest profile of these cases was the securities lawsuit filed in 2017 against the credit rating firm, Equifax, which in September 2017 announced that hackers had breached its consumer database and accessed millions of records containing personally identifiable information. On January 28, 2019, in a ruling that will be closely analyzed in connection with the several other recently filed data breach-related securities lawsuits, Northern District of Georgia Judge Thomas W. Thrash, Jr. entered an order granting in part and denying in part the defendants’ motion to dismiss. A copy of the January 28 order can be found here. Continue Reading Equifax Data Breach-Related Securities Suit Dismissal Motion Denied in Part, Granted in Part
The pace of federal court securities class action filings during 2018 was “the highest since the aftermath of the 2000 dot-com crash,” according to a recent report from NERA Economic Consulting. Not only were the filings during the year at significantly elevated levels, but the filings “accelerated over the second half of the year, with the fourth quarter being one of the busiest on record.” As noteworthy as the filing trends are, the elevated filing pace “masked fundamental changes in the filing characteristics,” including the shift toward significantly higher amounts of investor losses. Average and median settlement levels also jumped significantly during the year, compared to the year prior. The January 29, 2019 report, entitled “Recent Trends in Securities Class Action Litigation: 2018 Full-Year Review” can be found here. NERA Economic Consulting’s January 29, 2019 press release about the report can be found here. My analysis of the 2018 federal court securities class action lawsuit filings can be found here. Continue Reading NERA Economic Consulting: Securities Suit Filings at Highest Level in Years
A big factor in the heightened levels of securities litigation filings in 2018 and one of the most important recent litigation trends has been the rise of event-driven securities litigation. These are securities lawsuits based not – as was the case in the past – on accounting misstatements or financial misrepresentations, but on setbacks in a company’s operations that affect a company’s share price. In recent months, securities suits have been filed following wildfires, plane crashes and data breaches. Given this trend and in light of the significance of the event, it arguably should be no surprise that plaintiff lawyers have now filed a U.S. securities class action lawsuit after the most recent Brazilian dam collapse, the January 25, 2019 disaster at Brumadinho, in Minas Gerais, Brazil. Continue Reading Latest Brazilian Dam Disaster Leads to Event-Driven Securities Suit
The use of Deferred Prosecution Agreements (DPAs) has been an established practice in the U.S. for years, but the use of DPAs was just introduced into the U.K. in 2014, and there have as yet only been a very small number of cases involving DPAs in the U.K. In the following guest post, Mark Sutton and Karen Boto take a look at the developments surrounding the use of a DPA in connection with the DPA recently agreed to between the U.K. grocery store firm Tesco and the U.K. Financial Conduct Authority (FCA). I would like to thank Mark and Karen for allowing me to publish their article. I welcome guest post submissions from responsible authors on topics of interest for this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Mark and Karen’s article.
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Since the introduction of Deferred Prosecution Agreements (DPAs) into the UK in February 2014 there have been four reported cases to date.
DPAs are appealing to both corporates and the Serious Fraud Office (SFO). They allow corporations to escape criminal prosecution by paying a fine and improving compliance. This avoids lengthy, expensive and often complicated trials, spares the corporation concerned and can assist with the SFO’s publicly reported resourcing issues.
The Tesco DPA
In March 2017 we saw one of the largest fines being imposed in the UK under the DPA system. This was imposed against Tesco Plc who agreed to pay a fine of approximately £129m in order to suspend the prosecution of allegations relating to false accounting by its subsidiary, Tesco Stores Ltd.
At the same time the Financial Conduct Authority (FCA) announced that Tesco had also agreed to a redress scheme to compensate its investors (to the tune of £85m).
Three former Tesco executives were then accused of wrongdoing over the alleged £250m accounting scandal and were criminally prosecuted.
As a result of the criminal proceedings, the exact terms of the DPA, including the agreed Statement of Facts, was not made public so as not to prejudice those prosecutions.
The acquittals
The last of the three former executives was cleared of wrongdoing by a criminal court on 23 January 2019; the other two being cleared of charges in December 2018. In both cases the executives were acquitted based on the prosecution’s “weak” evidence and it being established that there were no cases to answer.
The Statement of Facts
Following the collapse of the criminal trial, on the very same day that the final executive was acquitted, the terms of DPA agreed between Tesco and the SFO was published for the first time.
Unlike the other three DPAs signed in the UK to date, the Tesco DPA is the first to publicly name individuals (which is not a requirement).
The Statement of Facts clearly ascribes wrongdoing to the former executives. It says that the three former executives were “aware of and dishonestly perpetuated the misstatement [of figures]” leading up to market disclosures in August and September 2014, “thereby falsifying or concurring in the falsification of accounts or records made for an accounting purpose”. It also stated that one of the individuals “signed off false numbers in Tesco’s accounting system” and that they all failed to alert others to the issue and “instead concealed the true position“.
Who has really benefitted from the Tesco DPA?
It is difficult in the current circumstances to see who the real winner is, if anyone is.
Although the former executives applied to Lord Justice Leveson, (the judge who approved the DPA in April 2017), to redact their details in the light of the acquittals, this was not successful.
Under the legislation he held he had no jurisdiction to do this but noted that the DPA “related only to the potential criminal liability of Tesco Stores Ltd and did not address whether liability of any sort attached to Tesco Plc or any employee, agent.”
However, this analysis does not assist the former executives who, having been cleared via the criminal court process, have now been labelled as dishonest persons in a private document, which has been released to the public. This is clearly a prejudicial and distressing outcome for those concerned.
Also, with some pretty scratching comments being levelled at the SFO over its apparent lack of evidence, its credibility maybe impacted.
The inconsistent court rulings also raise serious questions for Tesco as to whether it concluded its own investigations, and the DPA, too quickly (paying a hefty fine) in circumstances where no individual has been convicted.
Conclusion
There is no doubt that this decision raises important concerns about the DPA process. Is it adequate for a DPA to be agreed by a Court before a thorough examination of all the evidence has taken place? Is it right that there are no powers to prevent a subsequent publication? It will be interesting to see if DPAs now undergo urgent reform.
From an insurance perspective, it demonstrates the importance of the severability language commonly found in D&O policies in the London market. This example highlights the dangers that would exist if statements and admissions of wrongdoing, which have perhaps been made for commercial and reputational reasons, could be imputed to the directors and officers for the purposes of analysing the coverage position. In the absence of this language, such statements might allow insurers to deny liability for a claim by relying on the conduct exclusion (to the extent it triggers upon a written admission) and/or the prior consent requirement (to make an admission) which would be unjust if those admissions and statements subsequently turned out to be incorrect.
Everyone involved in any way in D&O insurance transactions has seen an insurance buyer choose to buy a policy that while less expensive provides narrower coverage. Sometimes the price difference might be slight, sometimes the difference could be significant. But the fact is, the most expensive policy is the one that doesn’t provide coverage when it should, and in the event of a claim, narrower coverage can translate into a claims denial. Anyone who wants to see what this might look like in action will want to consider the recent ruling out of the Middle District of Florida, in which the court held that the securities exclusion in a private company D&O insurance policy precluded coverage for an underlying claim against the policyholder and certain of its directors and officer. The January 2, 2019 decision in the case can be found here. A January 25, 2019 post on the Wiley Rein law firm’s Executive Summary Blog about the decision can be found here. Continue Reading D&O Insurance: Policy Wording Matters