massA recurring D&O insurance coverage issue involves the question of whether or not a subpoena constitutes a claim, as I have noted on prior posts (for example, here). When this issue comes up, the dispute is usually over whether or not there is coverage under the policy for the costs of responding to the subpoena and ensuing costs. But there are other implications if a subpoena is a claim, as was demonstrated in a January 6, 2015 decision (here) by District of Massachusetts Judge Rya Zobel.

 

Judge Zobel ruled that there was no coverage under Biochemics, Inc’s D&O insurance policy for defense costs incurred in an SEC investigation and enforcement action against the company and its CEO where the company had been served with an investigative subpoena before the policy commenced. Judge Zobel held that the claim was first made when the subpoena was served before the policy incepted and therefore was not covered under the policy..

 

Background

On May 5, 2011, the SEC entered a formal order of investigation against BioChemics and its officers On May 9, and September 12, 2011, the SEC served Biochemics with document subpoenas. The subpoenas referenced the formal order of investigation. In January 12, 2012 the SEC served deposition subpoenas on the company’s CEO and two other individuals. In March 2012, the SEC served subpoenas for additional documents on the company and its CEO. The 2012 subpoenas referenced the May 2011 formal order. In December 2012, the SEC filed an SEC enforcement action against Biomedics, its CEO, and two stock promoters who had worked with BioChemics.

 

This coverage dispute involves the D&O insurance policy that Biochemics had in place during the period November 13, 2011 and November 13, 2012. Biochemics had D&O insurance in place before November 2011, but the insurance had been issued by a different insurance carrier. Biochemics notified the new D&O insurer of the January and March 2012 subpoenas. The insurer denied coverage, contending that the entire SEC investigation was a single “claim” that has commenced when the SEC issued its first document subpoena in May 2011, before the insurer’s policy went into effect.

 

Biochemics and its CEO initiated a lawsuit against the insurer seeking coverage under the D&O insurance for the defense costs incurred in the investigation and enforcement action. The parties cross-moved for summary judgment.

 

The claims made D&O insurance policy at issue provided that “Coverage under this Policy shall apply only with respect to Claims deemed to have been first made during the Policy Period and reported to the insurer in accordance with the terms herein.”

 

The policy defined “Claim” to mean, among other things, any “civil, arbitration, administrative or regulatory proceeding against any Insured commenced by … the filing of a notice of charge, investigative order or like document.”

 

The policy also specifies that all Claims “arising from the same Wrongful Act and all Interrelated Wrongful Acts shall be deemed to be first made on the earlier date that (1) and of the Claims is first made against an Insured under this Policy or any prior policy.”

 

The January 6 Decision 

In her January 6, 2015 order, Judge Zobel granted the insurer’s motion for summary judgment and denied the plaintiffs’ motion. In reaching this conclusion, Judge Zobel stated that:

 

The triggering events are all part of a single SEC Investigation under the Formal Order. Each subpoena was issued under, and referred to, the original Formal Order, and investigated the same officers and company for the same pattern of security violations through public misstatements. Under the clear language of the policy and on the record before the court, the subpoenas all constituted a single “Claim” under the policy.

 

Because, Judge Zobel said,  the investigation and enforcement action — that is, “the Claim at issue”  –was “’first made’ before the policy period”  it is, “therefore, not covered under the policy.”

 

Discussion

It is interesting to me that this decision reaching the conclusion that the claim was first made when the first subpoenas were served in May 2011 omits the usual debate about whether or not a subpoena is a claim. That probably is because the company was looking for coverage for the defense fees incurred in connection with the January and March 2012 subpoenas, and so couldn’t really take the position that a subpoena is not a claim. Just the same, it is noteworthy that Judge Zobel seemed to accept that a subpoena is a claim, without the usual dispute over whether a subpoena is a “proceeding” or whether a subpoena can trigger coverage without an allegation of a Wrongful Act.

 

The more practical question here is why Biochemics sought coverage for the SEC investigation and enforcement action from the carrier that issued the November 2011-November 2012 policy, and not from the carrier whose policy was in force prior to November 2011. There is no way to tell from Judge Zobel’s opinion alone, but I am guessing that Biochemics did not give notice to the prior carrier of the May and September 2011 subpoenas, and only sought insurance coverage from any carrier once the January and March 2012 subpoenas were served. At some point, it must have occurred to Biochemics that it should have sought coverage from the prior carrier but perhaps by then it was too late. UPDATE: An alert reader points out that Footnote 1 to Judge Zobel’s opinion may shed some additional light on this issue. Footnote 1 says “Claims are also pending in this action against plaintiffs’ insurance brokerage firm and an individual broker; thay are not at issue at the current juncture.”

 

In any event, the important point here is that if a subpoena is a claim, then it is a claim for al purposes under the policy, including for purposes of determining the claims made date. The usual scenario is that an insured is seeking to establish that a subpoena is a claim in order to be able to establish coverage. Here, the fact that a subpoena is a claim and service of a subpoena establishes the claims made date wound up precluding coverage for this policyholder.

 

 hollywoodAs I noted in my recent rundown of the top D&O stories of 2014, one of the most important developments during the year just finished was the emergence of cyber security as a D&O liability concern. During 2014, plaintiff shareholders launched cyber breach-related derivative lawsuits against the boards of Target and Wyndham (about which refer here and here, respectively).But arguably the highest profile cyber breach during the year was the hack attack on Sony Pictures Entertainment apparently related to the company’s release of the controversial movie “The Interview.” Though at least six class action lawsuits have been filed on behalf of present and former Sony employees, so far there have been no shareholder lawsuits filed.

 

According to a detailed and interesting analysis published  in an unlikely source, a lawsuit against Sony would be an “an uphill battle” – which of course does not mean that no one will give it a shot, but does mean that any shareholder that wants to try will face a “very difficult exercise.”

 

Here at The D&O Diary, we don’t ordinarily devote much time to reading articles published in the Hollywood Reporter, but then we found Jonathan Handel’s December 23, 2014 article in that publication entitled “Sony Hack: Will Shareholders Sue?” (here) to be particularly interesting. In summary, Handel concludes that it would be very difficult for a plaintiff to pursue a shareholder lawsuit against Sony Pictures Entertainment or its senior officials. The reasons why it would be so difficult fall into two general categories – the difficulties any claimant would faces pursuing derivative suits, and difficulties a shareholder claimant would face that are particular to Sony.

 

First, a little bit of background. Sony Pictures Entertainment (SPE) is a wholly owned subsidiary of Sony Corp. SPE is a Delaware corporation with its principal place of business in California. Sony Corp. is a Japanese corporation whose shares trade in Tokyo and that also has American Depositary Receipts trading in the U.S.

 

Though Sony has ADRs trading on a U.S. exchange, it is unlikely that prospective claimants would seek to file a securities class action lawsuit against the company relating to the hack attack, because, Handel notes, the parent company’s share price “hasn’t moved decisively” as a result of the news surrounding the attack — which means that if shareholder claimants were to try to bring a lawsuit, they would likely have to proceed by way of a shareholder derivative lawsuit.

 

Handel speculates that a prospective derivative lawsuit claimant might want to try to allege what Handel describes as a series of “egregious misjudgments, such as allegedly lax cybersecurity and what plaintiff’s attorneys would no doubt call a reckless – or at least grossly negligent – decision to proceed with The Interview despite North Korean threats earlier this year. A third decision – to pull the movie, at least from major chains – could also come under fire.”

 

A shareholder attempting to bring a derivative lawsuit would of course face all of the hurdles that any derivative plaintiff would face. The prospective plaintiff would first have to make a demand on the company’s board demanding that the board itself launch the lawsuit, or plead in his or her complaint that demand would have been futile. If demand is made and refused, the plaintiff would have to plead that the demand was wrongfully refused.

 

The Sony defendants would also have all of the defenses that other defendants have in these types of cases. First, the defendants can rely on any exculpatory provisions the company may have in its bylaws or other charter documents. Second, the defendants would be able to rely on the business judgment rule to argue that the shareholders and the courts should not absent extraordinary circumstances second guess the board’s business decisions.

 

As if all of these hurdles and defenses were not enough to deter prospective claimants, there are additional considerations owing to the specific circumstances involved here. Because any prospective claimants would own shares (or ADRs) of Sony Corp., the parent company, and not of SPE, the subsidiary, the lawsuit would be filed not against the board of SPE, but would have to be filed against the parent company’s board, in the form of a “double derivative lawsuit.’

 

As Handel explains in his article, a double derivative lawsuit is “a procedural vehicle to remedy the claimed wrongdoing where the parent company board’s decision not to enforce the subsidiary’s claim is unprotected by the business judgment rule.” In other words, any claimant would have to argue not only that SPE board’s conduct falls outside the protection of the business judgment rule, but also that the parent company’s board’s decision not to sue SPE also falls outside the protections of the rule.

 

There are still further complications. Because the investors who bought their Sony securities on U.S. exchanges hold ADRs and not shares, their rights and remedies are further defined by the Deposit Agreement that regulates the administration of the ADRs. Many ADR deposit agreements have choice of law clauses specifying the law that would apply in the event of a dispute between an ADR holder and the company or its executives. Although the deposit agreement provisions vary, the likelihood is that Sony’s deposit agreement specifies that Japanese law governs ADR holder disputes.

 

If Japanese law applies to claims brought by ADR holders, any claimant would face some potentially insurmountable hurdles. First, at least according to sources Handel cites in his article, current Japanese law does not allow double derivative actions. Second, while the Japanese legislature recently adopted revisions to the Companies Act, which governs Japanese corporations, those revisions are not effective until April 1, 2015 and are not retroactive. The new provisions are in any event restrictive, requiring among other things that the claimant hold at least a 1% interest in the company involved.

 

Despite all of these concerns, it is still possible that a claimant might try to file a lawsuit. But for all of the reasons cited above and discussed further in Handel’s article, any claimant would face a very difficult challenge. As one of the commentators cited in the article put it in characterizing the maze of difficulties a claimant would face, this situation is “like a law school exam.”

 

The circumstances surrounding cyber security breaches may yet prove to be a source of significant corporate and securities litigation. But the complicated circumstances surrounding the Sony hack attack underscore that pursuing these kinds of claims is never straightforward. And as I noted in connection with the dismissal of the lawsuit filed last year against Wyndham Worldwide, it remains to be seen whether or not erstwhile plaintiffs will figure out a way to overcome all of the procedural hurdles involved and manage to turn these kinds of lawsuit into a successful exercise.

 

I will say that I never though I would have occasion to link to the Hollywood Reporter here for the publication’s legal analysis, but I have to admit that Handel’s article was interesting and is worth reading in full.

 

 

 

ten1The year just ended was an eventful one in the world of directors’ and officers’ liability. Many of the year’s key events represented significant changes in the D&O liability environment. Many of the changes during 2014 have important implications for 2015 – and possibly for years to come. The list of the Top Ten D&O Stories of 2014 is set out below with an eye toward these future possibilities.

 

1. Fee-Shifting Bylaws Emerge as a Possible Litigation Reform Tool: For years, defense advocates have sought to try to curb abusive ligation through reform legislation and other means, yet costly and burdensome corporate and securities litigation has continued to vex companies and their executives. However, an interesting new initiative has recently emerged – the attempt to achieve litigation reform through amendments to corporate bylaws.

 

The possibility of litigation reform through bylaw revision received a substantial boost in May 2014, when the Delaware Supreme Court in the ATP Tours, Inc. v. Deutscher Tennis Bund case upheld the facial validity of a bylaw provision shifting attorneys’ fees and costs to unsuccessful plaintiffs in intra-corporate litigation. This development quickly caught the eye of litigation reform advocates, as the adoption of fee-shifting bylaws seemed to offer a way for companies to reduce the costs of and possibly curb burdensome litigation. At the same time, however, shareholder advocates became concerned that these types of bylaws could deter even meritorious litigation.

 

The controversy that quickly followed over fee-shifting bylaws seemed headed for a swift resolution when the Delaware General Assembly quickly moved to enact on a measure that would have limited the Supreme Court’s ruling to non-stock corporations (meaning that it wouldn’t apply to Delaware stock corporations). However, as discussed here, the legislature tabled the measure and now it will not be acted upon until early 2015.

 

While the proposed legislation remains pending, institutional investors are mounting a concerted effort in support of legislative action in Delaware “to curtail the spread of so-called ‘fee-shifting’ bylaws,” while business groups are conducting a campaign opposing the legislation.

 

Despite the current uncertainty in Delaware surrounding the issue, a number of companies have gone ahead and adopted some version of a fee-shifting bylaw. Alibaba, one of 2014’s highest profile IPOs, was among several companies that completed offerings during the year and that had adopted fee-shifting bylaws. These developments have triggered calls for the SEC to take action with regard to fee-shifting bylaws.

 

At the same time, while the debate in Delaware over fee-shifting bylaws has continued, there have been developments in other states suggesting that regardless of what the Delaware legislature ultimately does, the debate over fee-shifting bylaws will go on. Among other things, the Oklahoma legislature has adopted a provision mandating the shifting of fees in derivative suits. The Oklahoma provision specifically applies to derivative suits “instituted by a shareholder” where there is a “final judgment.” In those circumstances, the court “shall require the non-prevailing party or parties to pay the prevailing party or parties the reasonable expenses, including attorney fees . . . incurred as a result of such action.”

 

The larger question is whether or not these developments portend a significant revision of what is known as the American Rule, under which it has been the practice in the U.S. that each litigation party bears its own costs. As companies increasingly seek to introduce their own form of litigation reform through revision of their bylaws, and as courts and legislatures evolve their response to these kinds of bylaw provisions, there is a possibility these developments could work a major change to the traditional American Rule on attorneys’ fees — which in turn could have a significant impact on the corporate litigation environment.

 

The developments in the Delaware legislature with regard to fee-shifting bylaws will be one of the important issues to watch in 2015, as will the action or inaction on the topic by the SEC. It will also be interesting to see whether there are any related developments in other states on this topic as well.

 

2. Cyber Security Emerges as  D&O Liability Concern: In a year that began with unfolding news of  the massive Target data breach and ended with the malicious cyber intrusion at Sony Corporation, cyber security emerged as one of 2014’s overall top stories. It also became clear during 2014 that — along with the reputational risks and operational integrity issues—cyber security also increasingly represents a potential liability exposure for corporate directors and officers, as highlighted by two sets of lawsuits filed this year

 

First, as discussed here, in January 2014, shareholders filed two derivative lawsuits in the United States District Court for the District of Minnesota against certain officers and directors of Target Corp. The two complaints alleged that the defendants were aware of how important the security of private customer information is to customers and to the company, as well the risks to the company that that a data breach could present. The complaints allege that the company “failed to take reasonable steps to maintain its customers’ personal and financial information,” and specifically with respect to the possibility of a data breach that the defendants failed “to implement any internal controls at Target designed to detect and prevent such a data breach.”

 

Second, as discussed here, a shareholder for Wyndham Worldwide Corporation initiated a derivative lawsuit against certain directors and officers of the company, as well as against the company itself as nominal defendant, related to the three data breaches the company and its operating units sustained during the period April 2008 to January 2010. As noted here, the company is already the target of a Federal Trade Commission enforcement action in connection with the breaches. The plaintiff alleges that “in violation of their express promise to do so, and contrary to reasonable expectations,” the company and its subsidiaries “failed to take reasonable steps to maintain their customers’ personal and financial information in a secure manner.”

 

While plaintiffs’ lawyers were quick to file these D&O lawsuits, it isn’t clear that this type of litigation will prove to be successful. Indeed, as discussed here, in an October 20, 2014 opinion, District of New Jersey Judge Stanley Chesler, applying Delaware law, granted the defendants’ motion to dismiss the complaint in the Wyndham Worldwide case. Judge Chesler found that the Wyndham board’s refusal to pursue the plaintiff’s litigation demand was a good-faith exercise of business judgment, made after a reasonable investigation.

 

It remains to be seen whether the plaintiffs’ lawyers will succeed in exploiting the continuing wave of data breaches as a source of D&O liability. However, it is clear that company boards and senior management will continue to face scrutiny for cyber security issues. As discussed here, SEC Commissioner Luis Aguilar underscored these concerns in a June 2014 speech in which he stressed that “ensuring the adequacy of a company’s cybersecurity measures needs to be a part of a board of director’s risk oversight responsibilities.” He added the warning that “boards that choose to ignore or minimize the importance of cybersecurity oversight responsibility do so at their own peril.”

 

3. U.S. Supreme Court Sidesteps Potentially Transformative Securities Litigation Issues, But One More Potentially Significant Case Remains on its Docket: For several months in early 2014, all eyes were on the U.S. Supreme Court as we awaited the outcome of the Halliburton case, which potentially could have been a game changer in the world of securities class action litigation. The case raised the possibility that the Court might reconsider or even dump the “fraud on the market” theory, on which the ability of investors to pursue securities claims as a class action significantly depends. In the end, because the Supreme Court left the fraud on the market theory unchanged, the Halliburton case did not have the disruptive effect that it might have. As Doug Greene put it on his D&O Discourse blog (here), Halliburton “may well have the lowest impact-to-fanfare ratio of any Supreme Court securities decision, ever.”

 

After the Supreme Court released its Halliburton decision, attention shifted to two other securities cases on the Court’s docket, particularly to the IndyMac case. As discussed here, in Public Employees’ Retirement System of Mississippi, v. IndyMac MBS, the Supreme Court was to consider whether the filing of a class action lawsuit tolls the statute of repose under the Securities Act or whether the statute of repose operates as an absolute bar that cannot be tolled. Even though the case raised technical issues involving seemingly arcane legal doctrines, it had potentially significant practical implications. If the filing of a class action lawsuit does not toll the statute of repose, current practices regarding class action opt-outs could be significantly affected.

 

The IndyMac case was scheduled to be argued on Monday, October 6, 2014. However, in an unexpected turn of events, on September 29, 2014, the U.S. Supreme Court entered an order dismissing the writ of certiorari as improvidently granted, based on settlement-related developments in the underlying case, as discussed further here.

 

But while the Halliburton case did not transform the world of securities class action litigation, and though the Court dropped the IndyMac case without addressing the critical statute of repose issues, there is still one more securities case remaining on the Supreme Court’s docket, one that could still prove to be significant.

 

As discussed here, in March 2014, the U.S. Supreme Court agreed to take up the Indiana State District Council of Laborers v. Omnicare case, to determine whether or not it is sufficient to survive a dismissal motion for a plaintiff in a Section 11 case to allege that a statement of opinion was objectively false, or whether the plaintiff must also allege that the statement was subjectively false – that is, that the defendant did not believe the opinion at the time the statement was made.

 

The Supreme Court’s consideration of the Omnicare case will resolve a split in the circuits between those (such as the Second and Ninth Circuits) holding that in a Section 11 case allegations of knowledge of falsity are required; and those (such as the Sixth Circuit, in the Omnicare case) holding that allegations of knowledge of falsity are not required. The case is potentially important because the absence of allegations of knowledge of falsity is a frequent basis for dismissals of Section 11 suits in the Second and Ninth Circuits, where the vast preponderance of securities suits are filed. As it is, the current split would allow cases to go forward in the Sixth Circuit that would not survive in the Second and Ninth Circuits. The D&O Discourse blog commented that “Omnicare likely will have the greatest practical impact of any Supreme Court securities decision since the Court’s 2007 decision in Tellabs.”

 

The Court heard argument in the Omnicare case in November 2014 and is expected to issue its decision in the case before the end of the current term in June 2015.

 

4. Largest Ever Shareholder Derivative Suit Settlement Reached, Continuing Recent Emergence of Jumbo Derivative Suit Settlements: Until recently, derivative lawsuit settlements rarely involved a significant cash component. The settlements instead usually consisted of an agreement for the company concerned to adopt corporate governance reforms and the payment of the plaintiffs’ attorneys’ fees. One of the more noteworthy recent developments in the world of corporate and securities litigation has been the emergence of derivative lawsuit settlements involving a significant cash component.

 

This phenomenon was evident in 2013 in the $139 million News Corp. settlement, which was at the time the largest ever cash settlement of a shareholder derivative settlement. This trend continued again in 2014 in two other derivative settlements — one involving Activision Blizzard, Inc. and the other involving Freeport-McMoRan, Inc. — involving massive cash payments, much of it reportedly to be paid by D&O insurers. The Activision settlement may represent the largest cash settlement payment ever in a shareholder derivative lawsuit.

 

As discussed here, on November 19, 2014, Activision, which is the maker of the popular videogames “Call of Duty” and “Worlds of Warcraft,” announced the $275 million settlement of the shareholder derivative lawsuit that had been filed in Delaware Chancery Court. The lawsuit had been filed in connection with the transaction announced in July 2013 whereby Activision and an entity controlled by Activision‘s two senior officers acquired over 50% of Activision‘s outstanding shares from Vivendi S.A., its controlling stockholder, for approximately $8 billion in cash.

 

In its press release, Activision said that the $275 million settlement amount was to be paid to Activision itself by “multiple insurance companies, along with various defendants.”  According to the November 19, 2014 Reuters article by Tom Hals (here), the Activision settlement is “the largest of a shareholder derivative lawsuit,” exceeding 2013’s $139 million News Corp. settlement.(My list of the largest derivative settlements can be found here.)

 

Shortly after the Activision settlement was announced, news of another massive derivative lawsuit settlement emerged. According to Liz Hoffman’s December 1, 2014 Wall Street Journal article (here), Freeport-McMoRan is nearing a settlement of more than $130 million to resolve a 2013 shareholder derivative lawsuit filed in connection with the company’s purchase of two oil-and-gas companies, as discussed here. The settlement would resolve allegations by Freeport’s shareholders that the company overpaid when it bought McMoRan Exploration and Plains Exploration & Production companies for a combined $9 billion. The shareholders had alleged that the Freeport board had conflicts of interest while negotiating the company’s purchase of the companies.

 

The Journal article reports that under the proposed settlement agreement, much of the more than $130 million to be paid in the settlement would be paid to the Freeport shareholders in the form of a special dividend. The total amount of the dividend is likely to exceed $100 million. According to the Journal article, “most of the cost of the settlement would be paid for using a special type of insurance policy that covers directors and executives, according to some of the people. Freeport would pay the rest.”

 

According to a December 1, 2014 WSJ MoneyBeat blog post about the settlement (here), this type of settlement providing for a dividend payment to shareholders is the “first example” of this type of settlement payout.

 

These recent settlements underscore the fact that shareholder derivative litigation has become a significant severity risk for companies and their directors and officers – and for their D&O insurers. The News Corp. settlement was funded entirely by D&O insurers and the Activision and Freeport McMoRan settlements are to be funded at least in part by D&O insurance.

 

The rise of jumbo shareholder derivative lawsuit settlements has a number of implications. Among other things, it is a topic that will have to be considered as D&O insurance buyers consider how much insurance they will need to ensure that their interests are adequately protected.

 

5. IPOs Surge, IPO-Related Litigation Emerges: 2014 was a very strong year for IPOs globally, but in the U.S., where there were more IPOs this year than any year since 2000, this was an “exceptional” year, according to a report from accounting and consulting firm EY (here). According to the report, there were 288 IPOs completed in the U.S. during 2014 (through December 4, 2014, and inclusive of deals then expected to close by year’s end), which represents an increase of 27% over 2013 (when there were 225 IPOs). The U.S. IPOs raised around $95 billion, which, according to the report represents “new high.” By way of contrast, the 2013 U.S. IPOs raised about $62 billion.

 

The surge in IPO activity in the U.S. is, according to recent academic research, due at least in part to the so-called “IPO on-ramp procedures” in the Jumpstart Our Business Start-Ups (JOBS) Act, enacted in 2012. The JOBS Act’s IPO on-ramp procedures are designed to ease the process of going public for “emerging growth companies” (EGCs), which the Act defines as companies with annual revenues less than $1 billion. Under these provisions, EGCs may submit their draft registration statements to the SEC confidentially and only need to disclose their intention to list their shares 21 days before they start investor roadshows. The EGCs can also release just two years of audited financial statements, rather than the standard three, and need only disclose the compensation of the top three executives rather than the standard five.

 

In their paper entitled “The JOBS Act and IPO Value: Evidence that Disclosure Costs Affect the IPO Decision” (here), Michael Dambra of SUNY Buffalo, and Laura Casares Field and Michael Gustafson of Penn State report their findings that, controlling for market conditions, the JOBS Act provisions have boosted listings by 21 companies annually, a 25 percent increase compared to the average number of IPOs from 2001 to 2011, while at the same time IPOs in other developed countries have remained below their pre-2012 numbers.

 

Foreign issuers appear particularly keen to take advantage of the JOBS Act provisions. Non-U.S. companies completed 67 IPOs on U.S. exchanges during 2014, which represents more foreign IPOs than any other market and accounts for 52% of all cross-border deals globally. The non-U.S. companies raised $40.8 billion, which represents 81% of all capital raised in cross-border transactions. The cross-border IPO activity in the U.S. during the year were at the highest levels since 2007. The cross-border deals originated in a number of countries, including China (16 IPOs); Europe (26 IPOs, of which 8 were from the UK); and Israel (8 IPOs).

 

There aren’t many down sides to this story, but if there is one concern worth noting it is that an increase in IPO activity will almost certainly translate into an increase in IPO-related securities litigation, as discussed here. Indeed, of the 170 new securities class action lawsuits filed during 2014, 17 of them (10%) involved IPO companies. Twelve of these IPO-related securities suits were filed in the year’s second half, suggesting that the IPO-related securities litigation picked up as the year progressed. Given the lag time between the date of an IPO and the date of a securities suit filing, and given the increase in IPO activity in 2013 and 2014, we should expect to see IPO-related securities litigation continue to increase in 2015.

 

6. Many Banks Prosper But Problem Institutions Remain and Failed Bank Lawsuits Continue to Accumulate: According to reports from the FDIC, banking institutions in this country continue to improve and are performing better than during the same period a year ago. However, even six years after the height of the financial crisis a significant number of problem institutions remain.

 

According to the FDIC’s latest Quarterly Banking Profile, the agency still rates 329 banks as “problem institutions.” (A “problem institution” is a bank that the FDIC ranks as a 4 or a 5 on its 1-to-5 scale of financial stability. The agency does not release the names of the banks its regards as problem institutions.)  To be sure, the number of problem institutions has declined. The third quarter of 2014 was the 14th consecutive quarter in which the number of problem institutions declined. The number of problem banks is now 63 percent below the post-crisis high of 888 at the end of the first quarter of 2011. The number of problem banks at the end of the third quarter of 2014 represented the lowest number of problem institutions since the end of the third quarter of 2009, when there were 305.

 

The number of banks overall is also declining, as banks fail or merge out of existence and as few new banks emerge. As recently as the end of 2007, there were 8,534 institutions reporting to the FDIC. At the end of the third quarter 2014, the number of reporting institutions was down to 6,589, representing a decline of over 1,945 (a drop of over 22%). While the banking sectors as a whole is improving, the number of problem institutions isn’t necessarily decreasing because the problem banks are getting better; in many cases, the problem banks simply no longer exist due to closures or mergers.

 

The percentage of problem banks remains surprisingly high given that we are now six full years past the peak of the financial crisis. As of the end of the third quarter, fully 5% of all banks continue to be ranked as “problem institutions” — and banks are continuing to fail. A total of 18 banks failed during 2014 (albeit only six during the year’s second half). This does represent fewer failures in 2014 compared to 2013 (when there were 24).

 

As of the latest report on the agency’s website, the FDIC has filed a total of 104 failed bank lawsuits during the current bank failure wave, with 20 suits filed in 2014 alone. The agency’s website notes that it has authorized lawsuits in connection with 148 failed banks, suggesting that there are more lawsuits yet to be filed beyond the 104 filed to date. As the bank closures continue to come in, the period during which the FDIC will be filing new failed bank lawsuits extends further into the future.

 

According to the FDIC, of the 104 lawsuits it has filed, 33 have fully settled and one resulted in a favorable jury verdict. These numbers imply a significant number of pending and as yet unresolved lawsuits that will continue to work their way through the system. There are a number of important implications from this continuing litigation.

 

First, it seems likely that we will continue to see significant judicial decision-making on issues relating to the liabilities of directors and officers. The failed bank litigation has already led to a number of significant D&O decisions. For example, in July 2014, in connection with a failed bank case pending in Georgia, the Georgia Supreme Court issued a landmark decision discussing the protections available under Georgia law to corporate directors and officers under the Business Judgment Rule, as discussed here. As the pending cases continue to work their way through the system we may see further judicial decisions affecting the liability exposures of directors and officers.

 

Second, in connection with insurance coverage litigation that has arisen in conjunction with the FDIC failed bank litigation, we will see further judicial decisions interpreting key D&O insurance policy provisions. For example, as discussed most recently here, there have been a number of interesting decisions addressing the question of whether or not the insured vs. insured exclusion found in most D&O insurance policies precludes coverage for claims brought by the FDIC in its capacity as receiver of a failed bank. So far, the cases have reached differing conclusion on this question, although several recent decisions have held that the exclusion does not preclude coverage. In any event, it seems likely there will be further judicial decisions interpreting D&O insurance policy language as the failed bank insurance coverage litigation unfolds.

 

Third, the pending litigation will continue to weigh on the D&O insurance carriers that are active in providing insurance to commercial banks. The ongoing litigation continues to produce adverse development in these carriers’ prior underwriting year results and to undermine their current calendar year results, a combination that is particularly painful in the current low interest rate environment (when there is less investment income with which to try and offset adverse claims experience).

 

7. SEC Awards Largest Ever Whistleblower Bounty Under the Dodd-Frank Whistleblower Program: According to the latest annual SEC whistleblower program report (about which refer here), there were 3,620 whistleblower reports to the SEC during the 2014 fiscal year (which ended on September 30, 2014).  That represents an increase of 382 (11.8%) over the 3,238 that were filed in the 2013 fiscal year. Overall, there have been a total of 10,193 whistleblower reports since the program commenced at the end of the 2011 fiscal year.

 

The agency still has made relatively few of the whistleblower bounty awards authorized under the Dodd-Frank Act, although the number of awards is slowly increasing. The agency has now made a total of 14 whistleblower awards, nine of which were made during the 2014 fiscal year.  The agency made more awards in the 2014 fiscal year than in all the other years of the program combined.

 

Most significantly, as discussed here, and in what is by far the largest whistleblower bounty award yet under the Dodd-Frank’s whistleblower provisions, on September 22, 2014 the SEC announced an award of between $30 and $35 million to a whistleblower who provided original information that led to a successful SEC enforcement action.

 

One particularly interesting feature of this award is that the whistleblower is a foreign resident. According to the SEC’s press release this is the fourth whistleblower award to a resident of a foreign country, which the agency says “demonstrates the program’s international reach. “ The head of the SEC’s whistleblower office is quoted in an agency press release as saying that the award “shows the international breadth of our program as we effectively utilize valuable tips from anyone, anywhere to bring wrongdoers to justice.’” The whistleblower office head is also quoted as saying that “whistleblowers from all over the world should feel similarly incentivized to come forward with credible information about potential violations of the U.S. securities laws.”

 

A significant number of the whistleblower reports submitted to the SEC come from outside the U.S. During the 2014 fiscal year, the agency received whistleblower reports from a total of 60 foreign countries, and since the program’s inception, the agency has received reports from a total of 83 different countries. The countries with the largest numbers of reports during fiscal 2014 were the United Kingdom (70); India (69); Canada (59); and China (32).

 

While the SEC whistleblower program has attracted numerous reports from overseas whistleblower, the Second Circuit recently held that the Dodd-Frank Act’s anti-retaliation provisions do not protect overseas whistleblowers (as discussed here). It remains to be seen whether the involvement of overseas whistleblowers will remain as active given this absence of anti-retaliation protection.

 

8.  Big Corporate Scandals Make a Comeback: We will probably never again see a spate of massive corporate scandals of the type we saw more than a decade ago, when vivid stories of corporate misconduct involving companies such as Enron and WorldCom dominated the headlines.  There have been a number of other high profile corporate scandals since that time, such as the Satyam accounting scandal and scandal arising out of H-P’s acquisition of Autonomy. But while the emergence of financial scandals may be nothing new, a striking number of corporate scandals came to light during 2014.

 

Among the higher profile scandals is that involving Petroleo Brasileiro, S.A. (“Petrobras”). The massive corruption and money laundering investigation of Petrobras and its employees and executives by Brazilian officials has been widely reported in the global financial press. For example, as reported a November 14, 2014 Wall Street Journal article entitled “Petrobras Scandal Widens, Earnings Delayed” (here), Brazilian federal police had arrested 18 Petrobras employees who allegedly “were part of a bribery and money-laundering scheme that has siphoned hundreds of millions of dollars from the state-owned oil firm into the pockets of employees, contractors and politicians.” The Journal also reported that the investigation, which has been dubbed “Operation Car Wash,” threatens “to upend the second term of recently re-elected President Dilma Rousseff.” The scandal reportedly has also drawn the attention of U.S. investigators as well.

 

The Petrobras scandal emerged shortly after another high-profile scandal involving another prominent non-U.S. company came to light. When Tesco PLC announced on September 22, 2014 that its previously forecast first-half profit had been overstated by £250 ($408.8 million), the news of the accounting irregularities was “serious,” as Tesco plc’s CEO of less than a month’s standing at the time put it.  As bad as the initial announcement was, the news soon grew worse. On October 1, 2014, the company announced that the U.K.’s financial watchdog, the Financial Conduct Authority (FCA), has “commenced a full investigation” of the accounting irregularities at the company. The situation grew bleaker still on October 23, 2014, when the company announced that the amount of the overstatement was actually £263 million pounds ($422 million), rather than the previously announced £250, and that the company’s Board Chair, Richard Broadbent, would be stepping down. An October 23, 2014 Bloomberg article describing the company’s interim results and the Chair’s resignation can be found here.

 

Both the Petrobras and Tesco scandals resulted in the filing of securities class action lawsuit in the U.S. (as noted here and here), as did the October 2014 disclosure of accounting issues at real estate investment trust American Realty Capital Properties.

 

As discussed in detail here with respect to the securities lawsuit filings against the company, on October 29, 2014, American Realty issued a press release (here) in which it disclosed the existence of an accounting error and subsequent cover-up relating to its financial statements for the two quarters of 2014. The press release stated that the “error was identified but intentionally not corrected,” and that other adjusted funds from operations and financial statement errors “were intentionally made,” resulting in an overstatement of adjusted funds from operations and understatement of net loss for first three and six months of the year.

 

According to a December 19, 2014 Wall Street Journal article (here), American Realty’s former Chief Accounting office, whom the company sacked following its disclosure of the accounting issues, has alleged in a defamation lawsuit she filed against the company’s CEO that the CEO “ordered subordinates to manipulate financial results at his firm.”

 

General Motors also experienced a massive scandal over the faulty ignition switches installed in its vehicles, and while that was a scandal of a different sort, it did also result in a securities class action lawsuit, as noted here.

 

These scandals underscore the treacherousness of the landscape in which D&O insurers must operate. It doesn’t take many of these kinds of problems to make D&O underwriters skittish. And though most companies will never become involved in anything like the disaster of the kinds described above, these scandals do create an environment in which even much more modest problems are considered.

 

9. Environmental Issues Re-Emerge as a D&O Liability Concern: During the financial crisis, many issues and concerns that previously loomed large moved further down the agenda. Even though the recovery from the crisis is still uneven, some of the issues that fell by the wayside are moving back up the list of priorities. Environmental liability issues are among these concerns. Among other things, this has meant an uptick in D&O litigation arising from environmental issues.

 

In recent months, there have been a number of lawsuits filed based on alleged misrepresentations of the defendant company’s environmental compliance. As the derivative lawsuit filled in May 2014 against the board of Duke Energy highlights, environmental issues apparently are becoming an area of increasing focus for plaintiffs’ lawyers.

 

In addition, it does seem as if the plaintiffs are getting some traction in securities suits based on environmental compliance disclosures. For example, on August 7, 2014, the securities suit filed against Exide Technologies and certain of its directors and officers based on the defendants’ allegedly misleading statements about the company’s compliance with environmental regulations became the latest environmental disclosure securities suits to overcome the initial pleading hurdles. A copy of Central District of California Judge Stephen V. Wilson’s August 7, 2014 order denying the defendants’ motion to dismiss can be found here.

 

The survival of the environmental disclosure securities suit against Exide comes closely after the Second Circuit’s recent ruling in the JinkoSolar securities suit, discussed here, in which the appellate court reversed the lower court dismissal of the suit and concluded that the plaintiffs’ allegations concerning the alleged deficiencies of the defendant company’s environmental compliance disclosures were sufficient.

 

These cases underscore the fact that reporting companies’ environmental compliance disclosures are facing increasing scrutiny, making the quality of the environmental disclosures increasingly important.

 

In addition to these issues involving traditional environmental liability concerns, there may be reason to be concerned that D&O liability issues could arise from alarms over global climate change. As discussed here, in a series of letters sent to board members of various major energy companies and to a number of participants in the directors and officers liability insurance industry, three environmental groups contend that climate change denial by energy industry representatives presents a risk of personal liability to the individual energy company board members. The letters also contend that “the threat of future civil or criminal litigation could have major implications for D&O liability insurance coverage.” The letters were sent in late May by three environmental organizations – Greenpeace International, the World Wildlife Fund International and the Center for International Environmental Law – to board members at 32 energy companies and to 44 participants in the D&O insurance industry.

 

While one might question the environmental groups’ tactics and methods, it probably is a worthwhile exercise for the D&O industry to think about whether or not climate change related claims might be coming and to think about how the industry should be preparing to respond. The list of items to be considered includes questions about how these possibilities should affect pricing, underwriting and risk selection. The issues also should include terms and conditions – such as, for example, whether the provisions of the typical pollution and environmental liability exclusion found in many policies needs to be revised.

 

10. U.S. Lawsuit Filings in the Wake of Overseas Regulatory Investigations Grew During the Year: The lawsuits investors filed in U.S. courts related to the Petrobras scandal are interesting on many levels. Among other things, the Petrobras lawsuits are representative of the growing phenomenon of U.S. securities litigation following the disclosure of a bribery or corruption investigation. Another securities suit filed about the same time, involving Cobalt International Energy also followed after the announcement of a bribery investigation, as did the lawsuit filed in December 2014 against Sanofi,  the lawsuit filed in August 2014 against Key Energy Services, and the lawsuit filed in March 2014 against Hyperdynamics Corporation. 

 

While as a general matter there is nothing new about the filing of these kinds of follow-on securities lawsuits, there is one aspect of the Petrobras lawsuit filings that is particularly interesting and that may represent an emerging securities litigation filing trend. That is, the Petrobras lawsuits involve U.S. securities suit filings against a non-U.S. company based on disclosure surrounding a regulatory investigation outside the U.S.

 

In the past, the U.S. has been the most active country, particularly with respect to bribery investigations. However, several countries have recently become more active in enforcing their own anti-bribery laws, including, among others, China, Canada, and Brazil. These investigations have not only led to increase in anti-corruption enforcement actions, but also in many cases have led to follow-on civil litigation as well.

 

There were a number of these kinds of follow-on civil actions filed in the U.S during 2014. For example, in addition to the Petrobras lawsuit, and as discussed in greater detail here, in January 2014, Nu Skin Enterprises was hit with a securities class action lawsuit following news of an alleged investigation in China of the company’s allegedly fraudulent sales practices there. Similarly, in June 2014, China Mobile Games and Entertainment Group was hit with a securities class action lawsuit following the news of an anti-bribery investigation in China involving company officials, as discussed here.

 

These cases all involve investigations in the respective companies’ home countries. However, as  discussed in detail here, for many companies, their most significant regulatory risk may be outside of their home country, and as the $489 million fine that GlaxoSmithKline paid to Chinese regulators in September 2014 demonstrates, the foreign country regulatory exposures increasingly are very substantial. Further complicating matters is that regulatory investigations increasingly involve cross-border collaboration and cooperation of multiple countries’ regulatory and enforcement authorities. The Libor interest rate manipulation and the foreign currency manipulation investigations both involved significant cross-border collaboration, as has the many trade sanctions violations investigations.

 

As overseas regulatory activity continues to increase, the incidence of follow-on civil lawsuit filings is likely to continue to grow as well. An interesting related question is whether the increase in regulatory activity will lead to increased civil lawsuit filings in courts outside of the United States. The inaccessibility of U.S. courts to investors who purchased their shares of non-U.S. companies on non-U.S. exchanges (as a result of the U.S. Supreme Court’s Morrison decisions) may cause these investors to seek to pursue remedies in their own countries, or to seek legal reform to reduce procedural barriers to pursuing these kinds of claims.

 

These developments raise important issues about the liability exposures of the potentially affected companies as well as for their directors and officers. The liability exposures include not only the potential regulatory and enforcement risk but also the possibility of follow-on civil actions, brought by shareholders or others. The “others” that might bring claims include supervisory board members in those jurisdictions with the dual-board structure.

 

These issues in turn have important D&O insurance implications. The issues also present a particularly difficult challenge for D&O insurance underwriters involved in underwriting companies outside the U.S. as they must attempt to understand and anticipate these kinds of actions from regulators and how they may affect the companies under consideration.

 

Conclusion

There is always a lot going on in the world of D&O liability and insurance, and 2014 was no exception in that regard. But what is interesting is how so many of 2014’s key developments foreshadow coming events in 2015 and beyond. For example, the Delaware legislature’s ongoing consideration of fee-shifting bylaw legislation and the U.S. Supreme Court’s review of the Omnicare case, among many other pending issues, will only be resolved as 2015 unfolds.

 

For that reason, we will have to wait to see the implications of many 2014’s key events. The one thing that seems certain is that 2015 will be an eventful year.

 

2014 – A Year in Blogging: I am sure that 2014 was an eventful year for many readers. It certainly was an action-packed year for The D&O Diary. One particular aspect of the year just ended highlights just how remarkable the year was for me. 

 

During 2014, my perambulations took me all the way from the shores of the Baltic Sea to the seacoasts of the Arabian Sea. 

 

In late March, I traveled to Stockholm, a beautiful city of fourteen islands on the coast of Sweden, at the mouth of Lake Mälaren, by the Stockholm archipelago and the Baltic sea. As I noted in my blog post about the visit, ‘Stockholm is wreathed in water. With the brilliant blue skies and the waterfront buildings reflecting off the water’s surface, there were times during my visit when the city itself seemed to be floating on the water.” 

 

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In August, I was half a world away, in Mumbai, which surely is, as I noted in my blog post about my visit, one of the world’s most distinctive cities. Mumbai sits on the Arabian Sea on India’s west coast. The pictures below were taken, respectively, from the upscale Malabar Hill residential area, looking south along the seacoast, and facing the Arabian Sea at Juhu Beach. Mumbai is both the most fascinating and the most complex city I have ever visited.

 

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My August trip to Asia included a stop in Singapore, a prosperous, equatorial city located on the Singapore Strait, which connects the Strait of Malacca to the west and the South China Sea to the east. The city’s modern central business district is oriented toward Marina Bay, which connects the Strait to the Singapore River. As I noted in my blog post about my visit, while strolling along the recently redeveloped riverfront, it is easy forget that you are deep in the heart of Southeast Asia.

 

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My travels to Scandinavia in March also included a brief stop in Copenhagen, Denmark’s capital city. Copenhagen faces the Øresund to the east, the strait of water that separates Denmark from Sweden, and which connects the North Sea with the Baltic Sea. Copenhagen has been described as the “world’s most livable city,” and after a short visit there (decribed in my blog post, here), it is easy to see why the city has that reputations. With its many parks, canals and quiet charm, Copenhagen is a very comfortable city.

 

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I was again near the North Sea in late September, when I visited Edinburgh. As shown below, during the clear weather that prevailed while I was there, the view from the top of Arthur’s Seat afforded a view out the Firth of Forth to the North Sea beyond. While in Edinburgh, I was fortunate enough to hike the footpath that winds along the Water of Leith, a stream that runs from the Pentland Hills to the port city of Leith, on the Firth. Edinburgh proved to be a little bit of surprise, as I noted in my blog post about my visit. Insted of the dark and gloomy domain perched on craggy peaks that I pictured, the city was (at least while I was there) bright, open, and while hilly, an uncommonly pleasant place in which to stroll around.

 

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In November, I snuck in a short visit to Paris before heading to London for meetings there. As I noted in my blog post about the visit, here’s the thing you need to know about November in Paris. It can be cloudy, dark, and rainy — but it is still Paris.

 

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Throughout my travels, I had the pleasure of meeting industry colleagues from around the world who follow my blog. It is great fun for me to meet so many people in so many places that read The D&O Diary. I feel tremendously enriched by meeting so many industry colleagues and making so many new friends. I look forward to making many more friends in the upcoming year. Here’s wishing a very happy and prosperous New Year to everyone who follows this blog, on whatever seashore you may call home.   

  

filings piileThe number of securities class action lawsuit filings rose slightly in 2014 compared to 2013, although the number of filings during the year was below longer term annual average number of filings. Companies in the life sciences sector were particularly hard hit, as were companies in the computer services and in the financial services and oil and gas extraction industries.

 

Absolute Number of Lawsuit Filings: There were 170 new securities class action lawsuits filed during 2014, compared to 167 in 2013 and 152 in 2012. While the number of filings increased in 2014 for the second straight year, the 2014 filings were below the 1997-2012 annual average of 191. (Please see the notes at the end of this post regarding data sources and counting methodology.)

 

Relative Number of Lawsuit Filings: While the absolute number of filings in 2014 was below the long-term annual average filing number, the number of filings in 2014 relative to the number of publicly traded companies tells a different story. The fact is that there are many fewer publicly traded companies than there were a few years ago.

 

 According to NERA (here), in 1997, there were 8,884 U.S. listed companies. By the end of 2012, there were only 4,916 U.S.-listed companies, representing a decline of over 44%. Even though the number of listed companies increased during the year as a result of IPO activity, there were still only about 5,100 U.S, listed companies at the end of 2014. That means that with 170 lawsuits filed in 2014, the percentage of U.S. listed companies subject to securities lawsuit during the year was approximately 3.3.%, which is above the 1997-2012 average annual filing rate of 2.85%.

 

This distinction between the absolute and relative filing figures is important. It would be all too easy to look only at the absolute number of filings during 2014 and conclude based on the fact that the 2014 number of filings was below long term annual averages that securities lawsuit filings are down. In fact, however, relative to the number of public companies, the filing rate in 2014 was actually up. Or to state the same thing in a more meaningful way, during 2014 it was likelier that a publicly traded company would get hit with a securities lawsuit than it was during the period 1997-2012.

 

Courts in Which the Lawsuits were Filed: The 2014 securities class action lawsuits were filed in numerous different courts. There was at least one securities lawsuit filed in 39 different U.S. district courts. However, many of the filings during 2014 were concentrated in just a few courts.

 

There were, for example, 50 new securities lawsuits filed in the Southern District of New York, representing 29.4% of all 2014 filings.

 

There were a total of 29 new securities suits filed in the U.S. District Courts in California (including 13 in the Central District of California and 19 in the Northern District of California), represented about 17% of all 2014 filings.

 

Taken together, the filings in the district courts in New York (including both the Southern District of New York and the Eastern District of New York) and the district courts in California accounted for a total of 82 securities lawsuit filings, or more than 48% of all 2014 lawsuit filings.

 

Interestingly, there were also 15 new lawsuit filed in the District of New Jersey, representing about 9% of all 2014 filings.

 

Together, the filings in the district courts in New York, California and New Jersey represented 57% of all 2014 securities lawsuit filings.

 

Industries of Companies Sued: The 2014 securities lawsuit filings were spread across a large number of different industries.  The companies hit with securities suits in 2014 were spread across 89 different Standard Industrial Classification (SIC) codes. There were however certain industries where the filings were concentrated.

 

Companies in the life sciences sector were particularly hard hit. There were a total of 36 securities class action lawsuit filed against companies in the 283 SIC code group (Drugs), representing about 21 percent of all 2014 filings. Among those 36 companies was a subset of 23 companies in the 2834 SIC code category (Pharmaceutical Preparations), representing 13.5% of all 2014 filings in that one SIC code category alone. In addition, there were also seven companies hit in the 3800 SIC Code series (Measuring and Analyzing Instruments), including five in the 384 SIC code group (Surgical, Medical and Dental Instruments and Supplies). There were also two companies hit in the 8731 SIC Code category (Commercial, Physical and Biological Research).

 

Taking all of these lawsuits collectively, there were a total of 45 companies sued in these various life sciences-related SIC categories, meaning that life sciences companies accounted for a total of more than a quarter of all securities lawsuits in 2014 (about 26.4%).

 

Companies in the computer services and semiconductor industries were also hard hit. During 2014, 13 companies in the 737 SIC code group (Computer Programming and Computer Services) were hit with securities suits, as were five companies in the 3674 SIC Code category (Semiconductors). Together these two high tech categories accounted for about 10.5% of all 2014 filings.

 

Together lawsuits against life sciences and high tech companies accounted for well over a third of all 2014 securities lawsuit filings (about 37%).

 

The downturn in oil and gas sector also led to an increase in the number of lawsuit filings against companies in the oil and gas businesses. During 2014, companies in the 1300 SIC code group (Oil and Gas Extraction) were hit with eleven securities class action lawsuits, representing about 6.4% of all 2014 filings.

 

As has been the case in recent years, there were a significant number of lawsuits filed in 2014 against companies in the financial services sector. During 2014, 22 companies in the 6000 SIC Code series (Finance, Insurance, and Real Estate) were hit with securities suits, representing about 13% of all 2014 filings. While these lawsuits represent a significant portion of 2014 suits, the filings against financial companies were down in 2014 compared to recent years. For example, according to Cornerstone Research (here), filings in which financial companies were the primary defendant represented 15% of all 2013 filings. During 2008 and 2009, during the peak of the financial crisis, filings in which financial companies were the primary defendant represented 37% and 34% of all filing in those years, respectively.

 

Lawsuits Against Foreign Companies: According to NERA (here), about 16% of all companies listed on U.S. exchanges are domiciled outside the U.S. During 2014, 32 non-U.S. companies were hit with securities class action lawsuits. These suits involving foreign companies represented about 19% of all 2014 lawsuit filings, meaning that during 2014, foreign-domiciled companies were disproportionately targeted. The percentage of lawsuits filed against foreign companies was up in 2014 compared to 2013, when suits against foreign companies represented about 15% of all suit filings.

 

The 2014 filings against foreign companies included lawsuits filed against companies registered in or with principal places of business in 15 different countries – although this count is complicated by the “Flash Boys” high frequency trading securities lawsuit, in which massive list of defendants includes company defendants from a number of foreign companies. I have made no attempt to account here for the foreign defendants in the high frequency trading lawsuit.

 

The foreign country with the highest number of companies sued in 2014 was China, which had ten companies sued during the year. Indeed, five companies sued in 2014 had the word “China” in the company name. No other country had more than two companies named as defendants in lawsuits during 2014.

 

Merger Lawsuits: In past years, a significant number of securities lawsuit filings have arisen out of merger transactions. The number of merger objection securities lawsuit filed in federal court in 2014 was down compared to recent years. 18 of the 2014 securities suits related to merger activity, representing about 10.5% of all 2014 securities suits.

 

Lawsuits Involving IPO Companies: The numbers of initial public offerings completed in 2013 and 2014 were up significantly compared to recent years. As discussed here, the 288 IPOs completed during 2014 represents the highest annual number of IPOs since the dot com boom year of 2000.

 

Along with the increased numbers of IPOs has come increased numbers of IPO-related securities suits, as discussed in greater detail here. During 2014, there were 17 securities lawsuit filed against IPO companies, representing 10% of all filings during the year. Of the 17 companies sued, two had completed their IPOs in 2012, eight had completed their offerings in 2013 and seven had completed their offerings in 2014.

 

Given the increase in the number of IPOs during 2013 and 2014 and in light of the usual lag time between the IPO date and the date of lawsuit filings, it seems probable that there will continue to be significant numbers of filings in the months ahead involving IPO companies.

 

A Final Note About Data Sources and Methodology: The data used in the analysis above were compiled from a variety of sources, including media outlets (such as Bloomberg and Yahoo Finance), online legal news services (including Law 360 and Advisen), and other online data services (including the Stanford Law School Securities Class Action Clearinghouse). In addition, during the course of the year, I took advantage of opportunities to audit my lawsuit dataset by comparing it to those being compiled by other litigation monitoring services.

 

In counting the securities class action lawsuits, I count each company sued for the same basic set of allegations only once, which is different from the methodology used by other prominent litigation monitoring sources. At least some of these services count each lawsuit separately (at least if the complaint is filed in a separate judicial district), unless and until the separate lawsuits are consolidated. The different methodologies used will not only result in different litigation counts, but it could also result in differing analytical conclusions. It is very important to understand the methodologies used by the different prominent litigation monitoring services and to understand how the methodologies used will affect analyses of the data.  

 

cyberThe hack attack on Sony Pictures Entertainment was massive, and it had a devastating effect on the company. As detailed in the December 30, 2014 Wall Street Journal article entitled “Behind the Scenes at Sony as Hacking Crisis Unfolded,” (here), the hackers who attacked Sony’s systems didn’t just pilfer the company’s data — they erased the data, rendering the company’s entire computer system and landline phones unusable. The malicious hackers also “created maximum chaos” by leaking five Sony movies onto the Internet, along with thousands of internal documents (including a host of embarrassing emails) and the Social Security numbers and other personal information of over 47,000 people, including current and former employees.

 

While at one level the Sony attack rightly may be described as unprecedented, it was not even the worst corporate attack in 2014. Bloomberg’s Report on the worst 2014 data breaches (here) reported that Sony had 47,000 records stolen, but 83 million records were stolen from J.P. Morgan, affecting 76 million households and seven million small businesses. The Home Depot hack resulted in the theft of 100 million records, including 56 million credit cards and 53 million email addresses. The data breach at eBay, in which hackers stole email addresses, physical addresses and login credentials, may have affected up to 145 million active users.

 

However, as unprecedented as the Sony hack attack was, and as massive as the other breaches during 2014 were, none of these represent the “change” to which I was referring in the title of this blog post.

 

Instead, I as referring to the news about a couple of other cyber incidents that might have been overlooked in all of the hoopla over what a Sony executive may have said about Angela Jolie in an internal email. These two cyber incidents that came to light in December are “downright scary,” in the words of a December 22, 2014 Computerworld article about the incidents and entitled “Cyberwarfare: Digital Weapons Causing Physical Damage” (here), as both incidents resulted in “physical damages in the real world.”  

 

The first of these two incidents, as reported on in a December 10, 2014 Bloomberg article (here), involved a 2008 cyber attack on a Turkish pipeline. The hackers, believed to be Russian, exploited a vulnerability in the pipeline’s surveillance camera software to infiltrate the pipeline’s internal network. The hackers shut down alarms, cut off communications and super=pressurized the crude oil in the line, resulting in a fiery explosion. The blast managed to put the pipeline out of commission without triggering a single alarm and, resulted in massive losses for the private companies and governments with interests in the pipeline. Among other things, this incident is significant from an historical perspective, as it preceded the 2010 Stuxnet cyber incident in which Iran’s nuclear centrifuges were damaged.

 

The second of the two incidents was disclosed in a December 2014 report by Germany’s Federal Office for Information Security. According to the report (here, in German), a German steel factory suffered massive damage when hackers managed to access the factory’s production networks, allowing the hackers to tamper with the controls of a blast furnace. After the system was compromised, individual system components began to fail. As a result of the failures, one of the plant’s blast furnaces could not be shut down, resulting in “massive damage” to the plant. A December 19, 2014 PC World article about the incident can be found here.

 

As disturbing as the malicious hack attack at Sony was, these physical damage incidents represent an entirely different category of cyber security threat. There are a host of implications from these threats, among which are the problems this type of cyber breach physical damage presents from an insurance perspective. Property insurers are moving quickly to make it clear that they do not intend to provide insurance for property damage arising from this type of peril. For their part, the cyber insurance carriers are not interested in expanding their coverage to pick up this type of exposure either; right now, they are so spooked from the losses associated with the Target and Home Depot breaches that they have little appetite for picking up coverage for an exposure of unknown but potentially devastating scope.

 

If nothing else, these cyber breach property damage incidents underscore the fact that it is a dangerous world out there. The scope of the threat posed by the possibility of these types of incidents recurring is uncertain, but it certainly doesn’t help that the possible damage that another incident like this might involve may not be insurable in the current insurance marketplace.

 

One more note about the Sony cyber incident. Sony’s experience following the cyber attack highlights the importance of one aspect of the coverage that privacy and network security policies do offer — that is, the coverage for business interruption following a cyber breach. The Journal article to which I linked above details the way that Sony’s business processes and operations were completely disrupted by the breach. Among other things, the article (published a month after the attack commenced) states that Sony’s network is “expected to be fully operating again with eight weeks.” Business interruption may be one of the most significant effects of a disruptive cyber attack – in Sony’s case, that may even have been among the objectives of the hackers’ malicious attack on the company.

 

Mind Blowing Fact of the Day: I thought it was pretty interesting to read in a January 3, 2015 article in The Economist entitled “Robber Barons and Silicon Sultans: Self-Made Wealth in America” (here) that “Each iPhone contains the same amount of computing power as was housed in MIT in 1960.”

 

But what really blew me away was the following statement in another article in the same issue of the magazine entitled ‘There’s an App for That: The Future of Work” (here): “According to Benedict Evans of Andreessen Horowitz, the new iPhones sold over the weekend of their release in September 2014 contained 25 times more computing power that the whole earth had at its disposal in 1995.”  

 

All that computing power so phone owners can take selfies, play Candy Crush Saga, and post pictures of their cats on Facebook.

 

In thinking about the cyber security stories discussed above and about this information about growing availability of computing power, there is much to contemplate concerning the lack of data security over digital domains as our world become increasingly digital.  

 

brazilAfter investors recently launched a securities class action lawsuit against Petrobras and certain of its directors and officers on behalf of those who purchased the company’s ADSs on U.S. exchanges, I speculated on whether or not investors who purchased their Petrobras shares in Brazil and are therefore precluded from participating in the U.S. lawsuit might try to file their own separate action in Brazil, subject to whatever procedural limitations might apply there.

 

This speculation in turn triggered an email exchange with Brazilian readers who alerted me about the press coverage in Brazil following the filing of the U.S. lawsuit. Among other things, the Braziian press coverage has raised the question whether the ADS investors have avenues to seek redress under U.S. law that are simply not available to those who purchased their Petrobras shares on the Brazilian exchange.

 

According to a December 14, 2014 post on the CLS Blue Sky blog (here), this discrepancy in the remedies available to investors for the same essential alleged wrongdoing and harm depending on where they bought their shares has arisen in Brazil before.

 

The blog post, by Érica Gorga, a Professor at Fundação Getulio Vargas São Paulo Law School and a research scholar at Yale Law School, takes a look at two prior situations in which Brazilian companies with securities listed on U.S. securities exchanges were sued in U.S. securities class action lawsuits, while Brazilian investors were left out with respect to their personal investment losses. (The blog post presents a summary of the author’s longer scholarly paper, which can be found here.)

 

According to Gorga’s analysis, not only did the U.S. investors in those two prior cases recover compensation for their losses while the Brazilian investors did not, but the company’s settlement payments to the U.S. investors left Brazilian investors even worse off in a sort of double-whammy Gorga calls a “double circularity.”

 

The two prior situations that the author examined involved Sadia S.A. and Aracruz Celulose S.A. Both of these companies and certain of their directors and officers were sued in securities class action lawsuits in the U.S. on behalf of investors who purchased the companies’ American Depositary Receipts on U.S. exchanges. The Sadia U.S. lawsuit, which is described here, settled for $27 million. The Aracruz U.S. lawsuit, which is described here, settled for $37 million.

 

Shareholders of these two companies who purchased their shares on Brazilian exchanges also tried to initiate litigation in Brazil, relying on the same alleged wrongdoing alleged in the U.S. lawsuits. However, the author notes, “because of the lack of private class actions” in Brazil, the Brazilian investors “had to rely on derivative suits, which provided only a small recovery to one of the companies, rather than to harmed investors.”

 

The author says that the Sadia and Aracruz cases “provide concrete examples of the financial value distribution that characterizes the current system of transnational securities litigation.” The current state of affairs where investors who purchase their shares on U.S. exchanges can attempt to seek redress of their investment losses for alleged financial misrepresentations while investors who purchased their shares elsewhere cannot underscores the “costs borne by foreign investors” when non-U.S. companies cross-list in the U.S. As she puts it, the non-U.S. investors “who usually don’t enjoy the same antifraud protections overseas – due to the lack of appropriate law or enforcement mechanisms – are compelled to accept wealth transfers to U.S. investors.” These phenomena, the author suggests, are “aggravated” by the U.S. Supreme Court’s decision in Morrison v. National Australia Bank,

 

In commenting on this “wealth transfer,” the author suggests that the investors who purchased their shares in cross-listed companies on non-U.S. exchanges are hit with a sort of double whammy. This phenomenon is due in part to the so-called “circularity problem” in securities litigation, which refers to the fact that innocent shareholders who did not participate in the securities fraud bear the cost of compensating investors who lost value.

 

When a cross-listed company is involved, there is an extra layer of costs imposed on foreign shareholders, beyond those associated with the circularity problem. In what the author calls a “double circularity” problem, the shareholders who purchased their shares of the company on a non-U.S. exchange “bear twice the costs of failures in a company’s corporate governance practices: first, when their shares lost value due to the wrongdoing per se; second, when they bear the costs of indemnification paid exclusively to U.S. security holders.”

 

While the author’s analysis of these issues is focused particularly on the two Brazilian examples, these “foreign-bearer” costs are “likely to be generalized to foreign investors in all jurisdictions.” And while some jurisdictions have developed forms of aggregate litigation to provide avenues for redress for harmed investors, “there remain serious doubts whether these actions will provide an effective institutional framework that fully supports collective litigation and financial recovery.”

 

The general direction of the author’s analysis would seem to be a prelude to a call for other jurisdictions to provide investors who purchase shares on the jurisdiction’s exchanges with remedies equivalent to those available in the U.S. Indeed, she does note that there has been speculation in the wake of Morrison that the restriction on the availability of remedies in U.S courts for non-U.S. investors might lead to the expansion of investor remedies elsewhere. However, she also notes there are a host of structural restrictions – the absence of contingency fees, the loser pays model — that cut against the adoption of these kinds of reforms in many jurisdictions. Indeed, she notes, if there were a jurisdiction where the need for development of new remedies would seem to be apparent, it would be Brazil in the wake of the Sadia and Aracruz cases — but nothing along those lines has developed there, at least so far.

 

After reviewing a number of academic reform proposals, the author comes out in favor of a “system of adjudication of transnational securities litigation providing equal treatment for securities holders subject to the same wrongdoing regardless of the national of the purchasers or the location of the purchase/sale,” which could be achieved “through issuer or investor choice of applicable legal regime.”

 

Discussion

Before the U.S. Supreme Court’s Morrison decision, it was a frequent topic of discussion whether so called f-cubed lawsuits – involving claims by foreign investors who bought their shares in foreign companies on foreign exchanges – were appropriately being heard in the U.S. However, when the U.S. Supreme Court made it clear in the Morrison case that the U.S securities laws do not apply to f-cubed cases, the practical impact arguably may have been – at least from the perspective of this academic’s article – to substitute one problem for another.

 

The author’s paper describes what she calls the transnational securities litigation problem, in which different investors have different remedies (or some investors have no remedies) for similar wrongdoing based solely on where the investors bought their shares. Her paper emphasizes not just that the different investors have different remedies, but that the availability of remedies to one group of investors arguably comes at the expense of the other investors. This is an interesting and valuable insight.

 

While I appreciate the value of the authors’ observations, I nonetheless believe certain additional considerations need to be taken in to account

 

 

First, the presence of D&O insurance may ameliorate the concern the author describes. As the author acknowledges in her longer academic paper, most of the cost of one the U.S. securities suit against the two Brazilian companies (Aracruz) was paid for by the company’s D&O Insurers, and thus was not borne by non-U.S. investors. (The author notes that the costs of the D&O insurance was borne by all investors, but inured to the benefit only of the investors who purchased shares on U.S. exchanges)

 

Because in many cases U.S. class action securities litigation settlements are funded in whole or in part by D&O insurance, the magnitude of the adverse financial impact on non-U.S. investors from the settlement of U.S. securities litigation often arguably will be significantly less than the author suggests. The frequent role of D&O insurance in these kinds of settlements is a factor that adds a layer of complexity to the analysis of these issues and arguably reduces the magnitude of the “double circularity” issue the author describes.

 

Second, the “transnational securities litigation problem” the author describes arguably is at least in part a side-effect of advantages that the U.S. securities markets have in the global financial marketplace. To be sure, the availability of securities litigation remedies to investors who purchase securities on the U.S. exchanges means that companies with securities listed on the U.S. exchanges face a heightened risk of litigation. This litigation risk is well known and often decried, both within and outside the U.S. Yet despite these well- recognized litigation risks, non-U.S. companies continue to list their shares on U.S. exchanges. Indeed, as I noted in a recent post on 2014 IPOs, 23% of all IPOs on U.S. exchanges during 2014 involved non-U.S. companies, and these non-U.S. company IPOs represented 52% of all cross-border IPO deals globally during the year.

 

There are of course a host of reasons why non-U.S. companies seek to list their shares on U.S. exchanges. I would argue that among other reasons companies seek U.S listings is that because of the requirements for transparency and accountability, a U.S. listing  communicates a willingness to be subject to a certain level of scrutiny. One of the elements of the increased scrutiny prevailing in U.S. securities markets is the ability of investors who purchase their shares to collectively seek damages for financial misrepresentations. The increased level of accountability supports transparency, which in turn supports overall market confidence.

 

 

 

The absence of remedies to investors who purchase shares elsewhere is of course a detriment to those investors, but the availability of remedies is a clear advantage to investors who purchase shares on the U.S. exchanges. The availability of these remedies in turn helps support the U.S. markets’ reputation for transparency that makes the U.S. exchanges an attractive place for companies to list their shares. From that perspective, then, the circumstances of which the author complains are part of the features that make the U.S. exchanges attractive to issuers and to investors.

 

Third, I have long thought that the absence of equivalent investor remedies in other countries sooner or later would motivate investors to agitate for reform in their home countries. Change has been slow in coming. But despite the lack of progress to date on these issues, the prospect for the development of mechanisms for redress within individual countries seems likelier to occur than the development of complex mechanisms of the kind the author supports that would require cross-border collaboration of securities regulators.

 

Finally, there is the possibility that certain existing mechanisms could also provide investors with avenues for redress. It is beyond the scope of this blog post, but there have been developments in the Netherlands that suggest means by which global investors could seek to recover investment losses.  In addition, there have been class action developments in other countries (including in particular Canada and Australia) that could also allow for global class actions where jurisdictional requirements in those countries are otherwise met. In other words, there may be other forces at work that could help ameliorate the transnational securities litigation problem that the author describes.

 

A final note. It may be that the two prior cases to which the author refers may not have been sufficient to provoke a chance in the remedies available to Brazilian investors. I wonder whether the scope and scale of the new Petrobras scandal might be enough to bring about change. Brazil only recently adopted strong antibribery laws yet authorities have moved quickly to move against corruption. Could the same kind of thing develop with respect to allegations of securities fraud?  

 

riA recurring D&O insurance question is whether or not a policy’s contract exclusion precludes coverage for claims that the insured induced the claimant into entering a contract through negligent or intentional misrepresentations. In a interesting December 22, 2014 opinion (here), District of Rhode Island Judge John J. McConnell, Jr., applying Rhode Island law, held that even a contract exclusion with the broad “based upon” or “arising out of” preamble language did not preclude coverage for a portion of a jury verdict holding that the insured’s intentional misrepresentations had induced the claimant to enter into the disputed contract. As discussed below, Judge McConnell’s opinion provides a useful and interesting perspective on this recurring question about the scope of the contract exclusion’s preclusive effect.

 

In 2004, TranSched Systems undertook negotiations to acquire certain software assets from Versys Transit Sollutions. During the course of these discussions, Versys was represented by Versys’ Vice President Sheryl Miller and its Vice President of Product Development and Chief Technology Officer, Lorin Miller. In February 2005, the two companies entered an Asset Purchase Agreement (APA) and related documents transferring ownership of the software assets from Versys to TranSched.

 

The software assets were not delivered as provided in the APA. TranSched initiated litigation in Delaware alleging that prior to the parties’ entry into the APA the two Versys representatives had made material misrepresentations about the software assets and also that Versys had breached the APA. After Versys received the complaint, it submitted the lawsuit as a claim under its D&O insurance policy.

 

The Delaware lawsuit went to trial and the jury found against Versys on three grounds: (1) intentional misrepresentation; (2) breach of contract regarding misrepresentations and warranties under the APA; and breach of the covenant of good faith and fair dealing. The jury awarded damages of $500,000. The trial judge awarded TranSched costs and prejudgment interest of over $170,000.

 

TranSched was unable to collect the judgment from Versys, which is no longer in business. TranSched attempted to collect the judgment from Versys’s D&O insurance carrier. The insurer denied coverage for the judgment and the TranSched filed an action in the District of Rhode Island seeking to establish that the insurer’s policy provided coverage for the amount of the judgment.

 

The insurer contended that coverage for the judgment was precluded from coverage by two policy exclusions, the Limited Contract Exclusion and the Fraud Exclusion.

 

The Limited Contract Exclusion provides that there is no coverage under the policy for any Claim “based upon, arising from, or in consequence of any actual or alleged liability of an Insured Organization under any written or oral contract or agreement, provided that this Exclusion …shall not apply to the extent that an Insured Organization would have been liable in the absence of the contract agreement.”

 

The Fraud Exclusion precludes coverage for Claims “based upon, arising from, or in consequence of any deliberately fraudulent act or omission or any willful violation of any statute or regulation by such Insured, if a final and non-appealable judgment or adjudication adverse to such Insured establishes such a deliberately fraudulent act or omission or willful violation.” The Severability of Exclusions clause provides further that with respect to the Fraud Exclusion, “only facts pertaining to and knowledge possessed by any past, present or future Chief Financial Officer, President, Chief Executive Officer or Chairperson of any Insured Organization shall be imputed to any Insured Organization to determine if coverage is available.”

 

The December 22 Opinion

 

In his December 22, 2014 memorandum opinion, District of Rhode Island Judge McConnell, applying Rhode Island law, held that while the breach of contract exclusion precluded coverage for the breach of contract and breach of the implied covenant of good faith portions of the jury’s verdict, neither of the two exclusions on which the insurer sought to rely precluded coverage for the intentional misrepresentation portion of the jury’s verdict.

 

In concluding that the Limited Contract Conclusion did not preclude coverage for the intentional misrepresentation portion of the jury’s verdict, Judge McConnell cited several prior decisions in which courts had concluded that intentional misrepresentations are not precluded from coverage under a contract exclusion “where the misrepresentations were made before the transaction and the transaction was generated by and was a consequence of a misrepresentation.” (Emphasis in original, citations omitted). Judge McConnell said he found “the reasoning in these cases to be persuasive and applicable to the facts of this coverage dispute.”

 

Judge McConnell went on to say that the contract exclusion is “limited to actual liability arising under the contract.” He added that the “evidence at trial sufficiently supports TranSched’s assertion that the intentional misrepresentation claim did not arise out of the contract, but concerned only pre-transaction conduct,” noting further that “the APA was not a cause of the intentional misrepresentation claim, it was the result of it, and any tortious conduct is not covered under the exclusion because it preceded the APA and was independent of the contract itself.”

 

With respect to the Fraud Exclusion, Judge McConnell rejected the insurer’s attempt to circumvent the Severability Exclusion by arguing that it was not attempting to impute any conduct to Versys but rather was focusing on the conduct of Versys itself. Judge McConnell said that to support this interpretation, he would have to “ignore the Severability of Exclusions clause” and would have to find that “any misleading statement representation or omission by any employee … would trigger the fraud exclusion.” He added that “the fraud exclusion, without the severability clause, could work an inequitable result when one considers how many employees a company has and the fact that the exclusion as written makes the company responsible for all of its employees’ misconduct without providing any coverage.”

 

Based on his review of the evidentiary material presented Judge McConnell said that “it is clear that the case mainly focused on the vice presidents’ roles in driving the transaction,” and that because “their conduct does not bind Versys on the terms of the exclusion, the fraud exclusion does not apply in this case.”

 

As a result of the Judge McConnell’s conclusion that the jury verdict was awarded on both covered and uncovered claims, he determined that there would have to be an allocation. He ordered the parties to submit the allocation to mediation using either the services of the Magistrate Judge assigned to the case or of a mediator of their own choosing.

 

Discussion

This case represents the relatively unusual circumstance that the insurance coverage questions are being considered after the entry of a jury verdict in the underlying claim. It is much more frequently the case that these kinds of issues are being disputed after the underlying case has been settled. Though the jury verdict does make this case distinct from many other situations in which these kinds of questions arise, Judge McConnell’s ruling may nevertheless be useful and even instructive in other cases in which the extent of the preclusive effect of the policy’s contract exclusion is in dispute.

 

In that regard, it is important to note that though there were breach of contract allegations, and though all of the allegations in the underlying lawsuit related to the transaction in connection with which the relevant contract had been entered, Judge McConnell did not simply conclude that the broad preamble of the exclusion meant that the exclusion’s preclusive effect applied to all of the transaction-related allegations.

 

As I have noted in prior posts (for example, here), I have been concerned by a number of recent court decisions in which courts have interpreted D&O insurance policy contract exclusions with a broad preamble to sweep so broadly as to preclude coverage not only for breach of contract claims but also for misrepresentation claims relating to the same transaction in which the contract arose.

 

Here, even though the contract in question followed the alleged misrepresentations, and even though the contract in question arose from and was induced by the alleged misrepresentations, Judge McConnell concluded that the contract exclusion did not preclude coverage for the misrepresentation claims. As he put it, the misrepresentations “did not arise out of the contract, but concerned only pre-transaction conduct,” adding that the APA contract “was not a cause of the intentional misrepresentation claim, it was the result of it, and any tortious conduct is not covered under the exclusion because it preceded the APA and was not independent of the terms of the contract itself.”

 

Judge McConnell’s conclusion in this regard (and the conclusions of the courts on whose opinions he relied) stands in contrast to the cases in which courts have interpreted contract exclusions with a broad preamble so broadly as to preclude coverage even for claims alleging that the contract resulted from pre-contract inducements.

 

While circumstances will vary and while there may be factual issues that affect the analysis in specific situations, there is an element of convincing logic to Judge McConnell’s analysis that the contract exclusion – even an exclusion with a broad “based upon” or “arising out of” preamble – does not apply to preclude coverage for claims involving conduct that preceded the entry of the contract. This logic applies even if the allegation is that the pre-contract conduct was an inducement for the parties to enter the contract. As Judge McConnell said, liability for these types of inducement claims does not arise out of the contract, it is the other way around; the contract arose out of the inducements.

 

As I have noted in prior posts, the prior cases in which courts have applied contract exclusions to preclude coverage even for negligent or fraudulent inducement claims arguably are applying the contract exclusions so broadly as to preclude coverage for the very types of claims for which the policy’s coverage was intended.

 

I have long thought that the cure for this overly broad application of the contract exclusion would be to amend the exclusion’s preamble to provide that the exclusion’s preclusive affect applies only to claims “for” breach of contract.

 

However, Judge McConnell’s opinion makes clear that even if a contract exclusion uses the broader “based upon or arising out of” language, the policy exclusion does not apply to all claims asserted merely because there is a transaction involved. His conclusion that the exclusion does not apply to pre-transaction conduct provides an important distinction on which policyholders can seek to rely in contending that even a contract exclusion with a broad preamble does not preclude coverage merely because a transaction is involved.

 

On a final note, it is worth observing that Judge McConnell concluded that the policy’s fraud exclusion did not preclude coverage even though this case involved the rather unusual situation in which there had actually been a final adjudication of an intentional misrepresentation. His ruling in that regards was reliance on the severability clause that limited the persons whose conduct could be imputed to the company. Judge McConnell’s ruling on the fraud exclusion not only underscores the critical importance of the inclusion of these types of severability provisions, but the analysis in his opinion highlights the unfairness that would be involved if the policy did not include a severability provision of this type. His analysis also highlights how important it is to limit the number of persons whose knowledge or conduct will be imputed to the entity for purposes of determining the applicability of the conduct exclusions.

prokauerIn numerous posts (most recently here), I have noted the ongoing controversy in Delaware on this issue whether or not companies organized under the laws of that state should be able to adopt so-called fee-shifting bylaws. In the following guest post, Tanya Dmitronow, Rachel Wolkinson, and Stacey Eilbaum, all of whom are litigation lawyers at Proskauer Rose LLP and authors of the Firm’s Corporate Defense and Disputes blog, discuss the debate in Delaware regarding the use of bylaws to impose limits on shareholder litigation in light of the Delaware Supreme Court decision in ATP Tour, Inc. v. Deutscher Tennis Bund. Brad Ruskin, a Proskauer partner, represented ATP Tour, Inc. in that case. A version of this post previously appeared on Proskauer’s Corporate Defense and Disputes blog. 

I woud like to thank the attorneys from Proskauer for their willingness to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of itnerest to readers of this blog. Please contact me directly if you are interested in publishing a guest post. Here is the Proskauer attorneys’ guest post.

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The ability of corporations to impose liability on shareholders through bylaws and charter provisions has been the subject of much debate recently. On May 8, 2014, the Supreme Court of Delaware held in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554, 555 (Del. 2014), that “a fee-shifting provision in a non-stock corporation’s bylaws can be valid and enforceable under Delaware law.” This decision (in favor of ATP, represented by Proskauer’s own Brad Ruskin) prompted a proposed amendment to the Delaware General Corporation Law (DGCL) that would eliminate the ability of Delaware stock corporations to impose liability on shareholders through bylaw and charter provisions, including fee-shifting liability, and a debate about the use of bylaws to define the bounds of shareholder litigation. Act to Amend Title 8 of the Delaware Code Relating to the General Corporation Law, S.B. 236, 147th Gen. Assemb. (Del. 2014). Senator Bryan Townsend, D-Newark, was able to delay the debate on the proposed legislation until the Delaware legislature reconvenes in January 2015.

While the Supreme Court’s decision in ATP was the catalyst for the legislative development, ATP was not the first time that a court in Delaware had validated bylaws defining the bounds of shareholder litigation. Last year, the Delaware Court of Chancery upheld the validity of board-adopted forum selection bylaws in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013). In that case, cited by the Delaware Supreme Court in ATP, the Delaware Court of Chancery held that a board of directors has the statutory authority to unilaterally adopt forum selection bylaws if the corporation’s certificate of incorporation permits the board to amend its bylaws. The Court of Chancery noted that board-adopted forum selection bylaws were statutorily valid because they were process-oriented, in that they concerned when a shareholder may sue a corporation. The Chancery Court contrasted forum selection bylaws with substance-oriented bylaws, which would involve whether a shareholder is barred from suing or the type of remedy a shareholder may recover, and could not be unilaterally adopted by a board of directors. The Chancery Court held that process-oriented bylaws were matters concerning the rights of shareholders that bylaws properly may address under 8 Del. C. Section 109(b). Id. at 952.

Moreover, the Chancery Court in Boilermakers found that the forum selection bylaws were contractually valid and enforceable, rejecting plaintiffs’ argument that the board-adopted bylaws could not be a contractual forum selection clause because the stockholders had not approved such provisions. Title 8 Del. C. Section 109(a) permits a corporation, through its certificate of incorporation, to grant its directors the unilateral power to adopt and amend the bylaws, and the boards in Boilermakers had the power to amend their corporations’ bylaws under their certificates of incorporation. Therefore, the Court of Chancery reasoned, when investors purchased stock in these corporations, they agreed to be bound by any board-adopted bylaws as “part of a binding broader contract among the directors, officers, and stockholders formed within the statutory framework of the DGCL.” Id. at 939. In addition, the Chancery Court noted that because of this “flexible contract” between the shareholders and the corporations, shareholders who object to forum selection bylaws have the option to amend or repeal the bylaws and the opportunity to elect directors on an annual basis. For more on the ATP and Boilermakers decisions, see Ralph Ferrara and Rachel Wolkinson, “When the Camel’s Nose Gets Under the Tent: Fee-Shifting and Forum Selection in Delaware,” Corporate Governance Advisor.

Interestingly, between the date of the Boilermakers decision and late September 2013, approximately 70 companies, including 21st Century Fox, DuPont, JCPenney, Electronic Arts, and Air Product & Chemicals adopted exclusive forum-selection provisions. See Glass Lewis on Exclusive Forum Provisions, Sept. 25, 2013.

A recent decision by the Court of Chancery provides further support for the validity of board-adopted forum section bylaws. In City of Providence v. First Citizens BancShares, Inc., 99 A.3d 229, 234 (Del. Ch. 2014), issued on September 8, 2014, the Court of Chancery again upheld the validity of a forum selection bylaw, addressing for the first time the question of “whether the board of a Delaware corporation may adopt a bylaw that designates an exclusive forum other than Delaware for intra-corporate disputes.” The forum selection bylaw at issue in City of Providence was “virtually identical” to the bylaw adopted in Boilermakers with the exception that, unlike the bylaws in Boilermakers, which designated Delaware as the exclusive forum, the bylaw designated “as the forum the United States District Court for the Eastern District of North Carolina, or, if that court lacks jurisdiction, any North Carolina state court with jurisdiction, instead of the state or federal courts of Delaware.” Id. at 230. Relying on Boilermakers, the Chancery Court dismissed the plaintiffs’ facial validity challenge, citing Sections 109(a) and (b) of the DGCL and explaining that First Citizen’s charter granted the board the power to amend the bylaws, therefore putting stockholders on notice that the board “may act unilaterally to adopt bylaws addressing” topics subject to regulation by bylaw under section 109(b). Id. at 234.

As to the question of whether the board of a Delaware corporation may adopt a bylaw designating an exclusive forum other than Delaware for intra-corporate disputes, the Chancery Court held that the analysis of Delaware law outlined in Boilermakers compelled the same conclusion in this matter. Although Delaware may be the most reasonable forum for disputes regarding the internal affairs of corporations, the Chancery Court explained that “nothing in the text or reasoning of [Boilermakers] can be said to prohibit directors of a Delaware corporation from designating an exclusive forum other than Delaware in its bylaws.” Id. 

The Chancery Court declined to address City of Providence’s argument that the forum selection bylaw improperly stripped the court of the “‘exclusive jurisdiction’ vested upon it by the General Assembly” as a “hypothetical as-applied challenge,” noting that “Vice Chancellor Laster recently . . . concluded that a grant by the General Assembly of ‘exclusive’ jurisdiction to this Court for claims arising under a particular statute does not preclude a party from asserting a claim arising under that statute in a different jurisdiction” and that “any attempt by the General Assembly to bestow . . . a ‘substantive right’ to bring a claim only in this Court would conflict with the Supremacy Clause of the United States Constitution and federal diversity jurisdiction.” Id. at 236.

City of Providence should provide some confidence in the numerous forum selection bylaws boards have adopted post-Boilermakers. Meanwhile, debate over the proposed DGCL amendment when the legislature reconvenes next month will no doubt add to the evolving discussion over the use of bylaws to define the bounds of shareholder litigation.

We will keep you apprised of developments on this issue in the upcoming year. 

minnOn December 16, 2014, in an interesting ruling that undoubtedly will stir up a great deal of debate, District of Minnesota Judge Paul Magnuson, applying Delaware law, granted U.S. Bancorp’s motion for summary judgment, holding that the bank’s professional liability insurers must pay $30 million of the $55 million the bank agreed to pay in settlement of overdraft fee overcharge class action lawsuits, plus related defense fees. A copy of Judge Maguson’s memorandum opinion can be found here.

 

Judge Magnuson rejected the insurers’ argument that coverage for the settlement was precluded as a matter of public policy because the underlying claims for repayment of the overcharges were restitutionary in nature. Judge Magnuson ruled that the “after adjudication” requirement of the policy’s ill-gotten gains exclusion implies coverage for the settlement of disputed claims for restitutionary amounts, where there has been no adjudication that the amounts involved were wrongfully taken.

 

Insurers contend (and indeed assume) that professional liability policies and management liability policies do not cover restitution. Indeed, Judge Magnuson was willing to assume for purposes of his opinion that restitutionary amounts are not covered. The question Judge Magnuson addressed was whether the policies at issue provided coverage for the settlement of claims for restitutionary amounts, where there had been no determination that the amount to be paid constituted a restitution. In a ruling that undoubtedly will prove controversial in claims departments everywhere, Judge Magnuson held that under policies with an adjudication requirement, coverage is available for settlements of restitutionary claims in the absence of an adjudication.

 

Background

In 2009, U.S. Bank was sued in a series of class action lawsuits in which the claimants alleged that the bank had improperly charged overdraft fees to its customers and that it had misrepresented its overdraft fee policy. The claimants asserted a variety of common law and statutory claims and sought the return of the excess overdraft fees.

 

U.S. Bank submitted the overdraft fee class action lawsuits as claims under its professional liability insurance policies.  U.S. Bank maintained a program of professional liability insurance with total limits of $35 million, consisting of a primary policy of $20 million and an excess policy of $15 million. The primary policy was subject to a $25 million deductible. The insurers denied coverage on the ground that the amounts claimed in the overdraft fee overcharge class actions were restitutionary in nature and that restitution is uninsurable as a matter of law.

 

U.S. Bank reached an agreement to settle the underlying lawsuit for a total payment of $55 million. The insurers provided consents to the settlement subject to a reservation of their rights under the policies to later contest coverage. In connection with the settlement, U.S. Bank did not admit liability, nor did the settlement characterize the settlement payment as restitution.

 

U.S. Bank filed an action against its insurers in the District of Minnesota alleging breach of contract and seeking a judicial declaration that the settlement and defense costs are covered. The insurers filed a motion for judgment on the pleadings.

 

The primary policy’s definition of the term “Loss” contained a provision (which the Court called the Uninsurable Provision) that “Loss” does not included “matters which are uninsurable under the law pursuant to which the Policy is construed.” The definition of “Loss” also specified (in a provision that the Court called the Extension-of-Credit Provision) that “Loss” does not include “principal, interest or other monies either paid, accrued or due as a result of any loan, lease or extension of credit” by the bank.

 

In addition, in an exclusion the Court called the Ill-Gotten Gains Provision, the primary policy precluded from coverage claims “brought about or contributed to in fact by any … profit or remuneration gained by [U.S. Bank] or to which [U.S. Bank] is not legally entitled … as determined by a final adjudication in the underlying claim.”

 

As discussed here, on July 3, 2014, Judge Magnuson denied the insurers’ motion for judgment on the pleadings. Judge Magnuson rejected the insurers’ arguments that the settlement was precluded from coverage as a matter of law. Judge Magnuson, reading the Uninsurable Provision in light of the Ill-Gotten Gains Provision, reasoned that “the policies exclude from coverage restitution resulting from a final adjudication and by implication include within coverage restitution stemming from a settlement.” He said that “to interpret the Uninsurable Provision to always preclude coverage for restitution would nullify the Ill-Gotten Gains Provision, which plainly says that only a final adjudication precludes coverage for restitution. The provision must have effect.”

 

Judge Maguson rejected the insurers’ motions for reconsideration and motion to have questions of law certified to the Delaware Supreme Court. U.S. Bank then moved for summary judgment on the question of coverage for the amount of the settlement in excess of the deductible as well as for the related defense costs.

 

The December 16 Summary Judgment Ruling

In his December 16, 2014 opinion, Judge Magnuson granted U.S. Bank’s motion for summary judgment, holding that the policy language at issue was “unambiguous” and that there were no disputed issues of material fact. He held that the bank is entitled to recover from the insurers of $30 million of the settlement in excess of the applicable deductible amount as well as related attorneys’ fees.

 

Although the insurers could not identify case law holding restitution to be uninsurable as a matter of Delaware law, Judge Maguson nevertheless was willing to assume without deciding for purposes of his ruling that restitution is uninsurable as a matter of law in Delaware. However, the “crux of the dispute,” he said, is not really whether or not restitution is uninsurable bur rather “whether the settlement constitutes restitution.”  Judge Magnuson ruled that it does not.

 

Based on the presence of the adjudication requirement in the Ill-Gotten Gains Exclusion, Judge Magnuson said that “the policies unambiguously require that a final adjudication in the underlying action determine that a payment is restitution before the payment is barred from coverage as restitution.” He reasoned that “the settlement is not a payment that a final adjudication in the underlying action determined is restitution” because there has been “no final adjudication in [the underlying litigation] determining that the gains were ill-gotten and ordering the return of those gains.”

 

He added that the court “will not automatically presume – as the Insurers do – that the settlement constitutes restitution because it resolved claims alleging ill-gotten gains and seeking disgorgement of those gains,” noting that “if a settlement resolves claims alleging unlawful activity but excludes an admission of liability for the activity, it does not establish that the underlying allegations are true or false.”

 

He noted further that “under a policy with an after adjudication requirement, mere allegations are insufficient. If allegations of unlawful activity are never determined to be true, a payment to dispose of those allegations is not restitution because restitution can only occur if that which is being returned was wrongfully taken.”

 

Judge Magnuson rejected the insurers’ attempt to rely on the “no loss” line of cases, such as the Seventh Circuit’s opinion in the Level 3 case, which hold that a policyholder that returns amounts to which it was never entitled suffered no loss. Judge Magnuson rejected the relevance of these cases based on his determination that those cases are distinguishable because they did not involve Ill-Gotten Gain Exclusions with an after adjudication requirement. Judge Magnuson even rejected the relevance of cases applying the “no loss” principles where the applicable policies’ exclusions had “after adjudication” provisions because the courts in those cases had “failed to otherwise analyze the impact of the final-adjudication requirement.”

 

Judge Magnuson also rejected the insurers’ argument that to allow coverage for the settlement of restitutionary claims would “incentivize banks to settle rather than to litigate these types of lawsuits to obtain coverage for restitution.” He said that if the insurers were concerned that the settlement constituted restitution, they “could have refused consent or conditioned consent on an admission of liability for wrongdoing or a stipulation that that the payment was restitution.”

 

Finally, Judge Magnuson rejected the insurers’ argument that the Extension-of-Credit Provision precluded coverage for the settlement amounts because the underlying claim was based on the bank’s improper overdraft fee practices and not on an extension of credit.

 

Discussion

In light of Judge Magnuson’s July ruling on the insurers’ motion for judgment on the pleadings, his ruling on the bank’s summary judgment motion arguably comes as no surprise. In many ways, his summary judgment opinion is simply a recapitulation of his earlier opinion on the insurers’ prior motion. However, while the outcome of the summary judgment motion arguably was preordained by his prior ruling, that does not mean the outcome of this case is not a surprise, at least for those in the claims departments of professional liability insurers and management liability insurers.

 

It has been a basic operating assumption for some time within these insurance claims departments that their companies’ policies do not cover restitutionary amounts. Within this assumption was the further assumption that this coverage prohibition extended not only to judgments requiring restitution (or disgorgement), but also to settlements of claims for restitution (or disgorgement).

 

The insurers in this case undoubtedly will seek to appeal Judge Magnuson’s ruling in this case, so there could be more of this story to be told before the outcome is certain. But even though this case may have further to go, Judge Maguson’s rulings so far have important implications that the insurers will have to consider.

 

The fact is that most professional liability and management liability claims settle without an adjudication. Up until now, insurers may have been secure in their belief that their policies do not cover even settlements of claims for restitutionary amounts. Judge Maguson’s rulings in this case clearly suggests that even if we can all agree that these kinds of policies do not cover restitutionary amounts, the policies – or at least those with after adjudication clause in their ill-gotten gains exclusions – may well cover settlements of claims for restitutionary amounts where there has been no adjudication of wrongdoing.

 

The significance of the after adjudication requirement in the ill-gotten gains exclusion is magnified by the fact that these days the equivalent exclusions in most professional liability policies and management liability policies have adjudication requirements. Insurers who up to this point may have felt secure in their belief that their policies did not cover settlement of claims seeking restitution will now have to consider whether their policy language will need to be changed. However, in light of Judge Magnuson’s analysis, it would not be sufficient for the insurers simply to modify their policy’s definition of loss to provide that “Loss” shall not include restitutionary amounts or disgorgement. Even if the insurers were to make this change to the policy definition, the presence of the after adjudication requirement would still arguably require the insureres’ payment under their policies of the settlement of claims for restitution in the absence of an adjudication of wrongdoing.

 

Nor is it an easy option for the insurers simply to remove the adjudication requirement from the ill-gotten gains provision, at least in the current marketplace environment. The fixture of the adjudication requirement in the conduct exclusions in these kinds of policies is the result of a hard-won, multiyear battle between policyholder representatives, on the one hand, and insurers’ representatives, on the other hand. Having won this battle over the course of many years, to the point that the adjudication requirement is now a basic provision in most insurers’ base policies, policyholders and their representatives are not going to simply sit back and take it if the insurers’ were to now try to remove the adjudication requirements. The restriction of coverage that the removal of the adjudication requirement might represent would be an unacceptable development and in a highly competitive marketplace any insurer trying to make this change would quickly find its premium revenue going elsewhere.

 

Focusing solely at the issues involved in this case, it seems to me that there is a relatively straightforward way for insurers determined not to provide coverage for amounts paid in settlement of claims for fee overcharges to avoid coverage for those amounts. That is, the insurers could specify that the policy does not provide coverage for any loss based on or arising out of claims that the insured improperly charged or over charged fees or other amounts. (Although in this marketplace even this tailored type of exclusion might prove competitively impractical.)

 

Even if the insurers could manage some kind of fee-dispute exclusion, that would not address the larger concern that the carriers don’t want to find themselves on the hook for amounts policyholders agree to pay in settlement of restitutionary claims. Insurers quite simply will not want to have their policies called upon to fund the resolution of claims that their insureds’ wrongfully obtained or withheld amounts from third-parties. But unless and until the carriers can figure out a way around the logical conundrum that the presence of the adjudication requirement in the ill-gotten gains exclusion creates, they may well find themselves called upon to contribute toward settlement of restitutionary claims.

 

It will in any event be interesting to see what happens on appeal in this case. One place the insurers may want to start as they think about the arguments to raise on appeal is Judge Maguson’s rejection of the insurers’ argument that the ruling in this case will incentivize defendants to settle rather than litigate restitionary lawsuits in order to secure insurance coverage for the restitution. In the Level 3 case, the Seventh Circuit had said that “it can’t be right” that coverage for restitution could pivot on whether the case was resolved by settlement or adjudication because the insured, “seeing the handwriting on the wall,” could simply agree “to pay the plaintiffs in the fraud suit all they were asking for” and “retain the profit it had made from the fraud.”

 

Judge Magnuson said that insurers could avoid this problem by refusing consent to the settlement or conditioning consent on an admission of liability for wrongdoing or a stipulation that the payment was restitution. With all due respect, these suggestions are impractical. Insurers that throw roadblocks into settlement discussion or that try to condition settlement consent on such unlikely things as admissions of wrongdoing or stipulations of restitution would very quickly find themselves embroiled in bad faith litigation and facing arguments that they should be held liable for the entire amounts of settlements in excess of the policy limits for their refusal to consent to settle. No insurance claims department could consider conducting itself the way Judge Magnuson suggests. On appeal, the insurers can seek to cite the concerns the Seventh Circuit noted while also seeking to undercut the sufficiency of the basis on which Judge Magnuson rejected these concerns. (Of course, this argument really does not avoid the analytical problem relating to the policy’s adjudication requirement.)

 

I suspect that this case will stir up some strong responses for many of this blog’s readers. I urge readers who have opinions to add their thoughts to this post using the blog’s comment feature.

 

Many thanks to a loyal reader for calling my attention to this ruling and for providing me with a copy of Judge Magnuson’s opinion.

 

oneworldOver the past several days there have been a number of items that will be of interest to readers of this blog, which I note briefly here.

 

First, an article in the December 20, 2014 Wall Street Journal entitled “Sony Made It Easy, But Any of Us Could Get Hacked” (here), contends that if you are aware of the current state of information-technology security, “you’re aware that this could happen to any company (though it is still amazing that Sony made it so easy).” Experts aware of hackers’ methods, the author contends, know that “against a sufficiently skilled, funded and motivated attacker, all networks are vulnerable.” The experts know that when this type of expert hacker is involved, the hacker “always gets in.” However, against the kind of lower-skilled hacker that hit Target and Home Depot, “good security may protect you completely.” To avoid winding up like Sony, the first thing to do is “for organizations to take this stuff seriously.” The second thing to do is for those of us who entrust companies with our information (that is, all of us), we have to be smart, understand the risks and “know that your data are vulnerable.”

 

Second, in a December 19, 2014 New York Times article entitled “Delving Into the Morass of Insider Trading” (here), James B. Stewart takes a look at the state of the law in light of the Second Circuit’s recent blockbuster ruling overturning the insider trading convictions of two Wall Street traders (about which refer here).  Stewart contends that we have reached the point where “we need an insider trading statute.” The root of the confusion over what trading is prohibited is that “insider trading is a crime entirely defined by common law.” As a result, it has been open to interpretation as prosecutors and enforcement officials come and go, which has led to “tortured attempts to fit new insider trading cases into earlier precedents.” The article quotes UCLA Law Professor Stephen Bainbridge as saying that the best way to organize some limiting principles would be for Congress to adopt an insider trading statute. A statute would also be simpler to enforce and prosecute. The article quotes one commentator as suggesting that the uproar following the recent Second Circuit decision may “finally spur Congress to act.”

 

Third,  an article in the December 13, 2014 issue of The Economist entitled “Accounting Scandals: The Dozy Watchdogs” (here) reviews the long list of accounting scandals starting with Enron and WorldCom, going through the later scandals at Olympus,  Autonomy, and Satyam, and running up to the recent Tesco scandal,  in which the scandals emerged after auditors had given each of the companies a clean bill of heath. The article suggests that “such frequent scandals call into question whether this is the best the Big Four can do – and if so, whether their efforts are worth the $50 billion a year they collect in audit fees.” In recent years, the “expectations gap” between what investors expect and the standards auditors set for themselves has led to a pattern in which “investors disregard auditors and make little effort to learn about their work, value securities as if audited financial statements were the gospel truth, and then erupt in righteous fury when the inevitable downward revisions cost them their shirts.” The stakes are high, the article note, and “only substantial reforms of the auditors’ perverse business model can end the cycle of disappointment.” The article urges a number of remedies, including an expansion of the audit report to include, for example, a more detailed summary of the auditors’ activities and areas of focus and greater competition. A more challenging remedy might include taking the selection of auditors away from the client companies.

 

One final note about the Economist article. Readers of this blog would be hard pressed to distinguish what the article calls the “most elegant solution”  to the accounting scandal conundrum — which involves a proposal for companies to adopt  “financial statements insurance” — from the entity liability coverage now available under most public companies D&O Insurance policies.

 

And Finally: In the Playlist column in the Saturday Wall Street Journal (here), actor Cary Elwes describes his lifetime love for the 1965 song by The Who entitled “I Can’t Explain.” He explains that over time she “had a deeper feeling for the song because I finally understood the lyrics and connected with their point: ‘I’m gettin’ funny dreams again and again / I know what it means, but / Can’t explain / I think it’s love / Try to say it to you / When I feel blue.’ The song is one of the most brilliant expressions of not being able to express yourself.”

 

This video includes an impossibly youthful version of The Who performing the song on the old Shindig! television show. Roger Daltrey is up front and singing, but the late lamented drummer Keith Moon is the one to watch in this video.  

 
http://youtu.be/rT6X8mns3VU