dolAccording to a June 23, 2014 Wall Street Journal article entitled “U.S. Increases Scrutiny of Employee-Stock Ownership Plans” (here), the federal government is “stepping up scrutiny of how U.S. companies are valued for employee-stock ownership plans.” This increased scrutiny includes increased litigation activity, often alleging that ESOP share valuations are flawed. The targets of this litigation include not only the appraisers who valued the shares but also the plan trustees that have fiduciary duties to “put the interests of workers first.”

 

As of fiscal 2011, the latest year for which information is available, about 6,800 U.S. companies had employee stock ownership plans, involving more than 13.4 million workers. The plans have amassed total assets of $940 billion. For many of the workers participating in these plans, the ESOP is the principal or sole retirement benefit.

 

According to the Journal article, the government contends that “some owners are selling stakes in their companies to employee-stock-ownership plans at inflated prices.” The U.S. Department of Labor is the plaintiff in 15 current ESOP-related lawsuits, virtually all of which involve alleged “shoddy estimates” of company shares. The agency has filed a total of 28 ESOP-related lawsuits since October 2009, double the number of lawsuits filed during the previous six years. Since the start of fiscal 2010, the Department of Labor has recovered over $241 million through lawsuits and through investigations that were resolved without a lawsuit being filed, nearly all of which involve valuations.

 

According to the lawsuits described in the article, the target in many of these lawsuits is the appraiser that provided the valuation although the article notes that “the agency also is getting tougher on trustees who work on behalf of employee-stock ownership plans – and have a fiduciary duty to put the interests of workers first or face financial liability if things go wrong.”

 

Problems often emerge when company management are involved in the appraisal process. According to the article, 95% of companies with ESOPs are closely held, forcing appraisers to rely heavily on company management for information.

 

The Journal article primarily is focused on lawsuits brought by the U.S. Department of Labor, but as several of the examples cited in the article make clear, company employees often file their own separate lawsuits when earlier share price valuations prove to have been inflated. While these employee lawsuits often also target the appraisers, the targets of the employee lawsuits often involve the plan trustees.

 

The Journal article makes it clear that in many cases there may be good reason for the government’s scrutiny of ESOPs. Valuation issues clearly are a recurring problem. Many insurance industry professionals know that for purposes of management liability insurance ESOPs are sometimes viewed as a riskier class of business than are other private companies.

 

However, the article does make it clear that there are certain factors than can help avert faulty appraisals, such as through the requirement that the ESOP obtain a share price evaluation when a stock plan is started and a requirement that workers are told once a year how much their shares are worth. The presence of factors showing that the appraiser performing the appraisal was independent and that the appraisal was not influenced by management (such as through management provided revenue estimates) also may help avoid problem valuations. The presence of these and other factors supporting the share valuation the company uses could help reassure insurance underwriters about companies with ESOPs.  

sup ct 5On June 23, 2014, the U.S. Supreme Court released its long-awaited decision in Halliburton Co. v. Erica P. John Fund, in which the Court had taken up the question whether or not to set aside the presumption of reliance based on the fraud on the market theory that the Court first recognized in its 1988 decision in Basic, Inc. v. Levinson.  The case was closely watched because its outcome had the potential to transform securities class action litigation in the United States.

 

In the end, the Court, in an opinion written by Chief Justice John Roberts and joined by five other justices, declined to overturn Basic, but held that a securities class action defendant should have the opportunity at the class certification stage to try to rebut the presumption by showing that the alleged misrepresentation did not impact the defendant company’s share price. The Supreme Court’s opinion can be found here. Justice Thomas, joined by Justices Scalia and Alito, wrote an opinion concurring in the judgment in which he contended that the Court should have overturned Basic.

 

While the Court’s decision will not alter the securities litigation landscape as much as might have been the case if it had overturned Basic, the Court’s holding that defendants may at the class certification stage seek to rebut the presumption of reliance based on the absence of price impact could have a significant effect on securities litigation. In many cases, plaintiffs may be unable to obtain class certification where in the past they might have been able to have a class certified. In any event, the class certification phase likely will become more costly as the parties dispute the issues surrounding the impact of the alleged misrepresentation on the share price.

 

Background

Since the U.S. Supreme Court’s 1988 decision in Basic, Inc. v. Levinson, securities plaintiffs seeking class certification have been able to dispense with the need to show that each of the individual class members relied on the alleged misrepresentation, based on the presumption that in an efficient marketplace, a company’s share price reflects all publicly available information about a company, including the alleged misrepresentation, and that the plaintiff class members relied on the market price.

 

In the U.S. Supreme Court’s 2013 decision in Amgen (about which refer here), at least four justices (Alito, Scalia, Thomas and Kennedy) appeared to question the continuing validity of the presumption. In his concurring opinion, Justice Alito asserted that the presumption “may rest on a faulty economic premise,” and specifically stated that “reconsideration” of the Basic presumption “may be appropriate.”

 

Recognizing the opportunity to have the Court reconsider the fraud on the market theory, the defendants in the long-running Halliburton securities class action litigation sought to have the Court consider whether the Court should “overturn or significantly modify” the Basic presumption of “class wide reliance derived from the fraud on the market theory.”

 

The Halliburton case has been pending since 2002. In their complaint, the plaintiffs allege that the company and certain of its directors and officers understated the company’s exposure to asbestos liability and overestimated the benefits of the company’s merger with Dresser Industries. The plaintiffs also allege that the defendants overstated the company’s ability to realize the full revenue benefit of certain cost-plus contracts.

 

For several years, the parties in the case have been engaged in full-scale combat on the issue of whether or not a class should be certified in the case. Indeed, the class certification issue in the case has already been before the U.S. Supreme Court; in 2011, the Court unanimously rejected  the company’s argument (and the Fifth Circuit’s holding) that in order for a plaintiff to obtain class certification, the plaintiff must first establish loss causation.

 

Following the Supreme Court’s earlier ruling, the case was remanded back to the lower courts. In June 2013 the Fifth Circuit affirmed the certification of a shareholder class in the case.  In its opinion, the Fifth Circuit expressly affirmed the district court’s holding that Halliburton could not present evidence at the class certification stage that the alleged misrepresentation did not impact the company’s share price and therefore that there was no basis for the presumption of reliance. Halliburton filed a petition for writ of certiorari, which the U.S. Supreme Court granted.  

 

The Court’s June 23, 2014 Opinion 

In an opinion for the Court written by Chief Justice Roberts, the Court vacated the Fifth Circuit’s judgment and remanded the case for further proceedings.

 

At the outset, the Court declined to overturn Basic, noting that “before overturning a long-settled precedent … we require a special justification,” and concluding that “Halliburton had failed to make that showing.” In reaching this conclusion, the Court rejected Halliburton’s argument based on statutory analysis that plaintiffs should always have to prove individual reliance. The Court also rejected Halliburton’s argument that Basic should be overturned based on changes in economic theory surrounding the “efficient market” hypothesis on which the fraud on the market theory is based.

 

The Court also declined to overturn Basic in reliance on principles of stare decisis, holding that these principles have “special force in respect to statutory interpretation.” While noting Halliburton’s argument that the Basic presumption produces a number of “serious and harmful consequences,” such as allowing plaintiffs to “extort large settlements from defendants for meritless claims,” the Court said that “these concerns are more appropriately addressed to Congress, which has in fact responded to some extent to many of the issues Halliburton raised,” for example, through the PSLRA.

 

The Court also rejected Halliburton’s argument that in order to obtain class certification the plaintiffs should have to prove that the alleged misrepresentation actually affected the defendant company’s share price. The Court said requiring the plaintiffs to make this showing “would radically alter the required showing for the reliance element” in a 10b-5 case. The Court said that “for the same reasons we declined to completely jettison the Basic presumption, we decline to effectively jettison half of it by revising the prerequisites for invoking it.”

 

But while the Court declined to require plaintiffs to directly prove price impact in order to invoke the Basic presumption, the Court did agree that defendants “should at least be allowed to defeat the presumption at the class certification stage through evidence that the misrepresentation did not in fact affect the stock price.”

 

The Court noted that the defendants already may introduce price impact evidence at the merits stage and that in many cases plaintiffs already introduce price impact evidence (such as event studies) at the class certification stage to show that the market price of the defendant’s stock responds to information about the company, to establish that the market for the company’s shares is efficient. The court reasoned that if plaintiffs were allowed to present price impact evidence to satisfy the efficient market requirement (which requirement the Court described as “an indirect proxy for price impact”), it makes no sense to preclude the introduction of evidence for the direct purpose of showing that the alleged misrepresentation did not impact the price:

 

Price impact is thus an essential precondition for any Rule 10b-5 class action. While Basic allows plaintiffs to establish that precondition indirectly, it does not require courts to ignore a defendant’s direct, more salient evidence showing that the alleged misrepresentation did not actually affect the stock market’s price and, consequently that the Basic presumption does not apply.

 

The Court concluded by saying with respect to the Basic presumption of reliance that “defendants must be afforded an opportunity before class certification to defeat the presumption through evidence that an alleged misrepresentation did not actually affect the market price of the stock.”

 

In a separate opinion in which he concurred in the Court’s judgment, Justice Thomas, joined by Justices Scalia and Alito, argued that Basic should be overruled noting that “Logic, economic realities, and our subsequent jurisprudence have undermined the foundations of the Basic presumption.”

 

Discussion 

Because the Court did not, as Justice Thomas urged in his separate opinion (a dissenting opinion in all but name), overturn Basic, the Court’s second Halliburton opinion will not have the dramatic impact on class action securities litigation that it might have. Nevertheless, the Court’s ruling will have a significant impact on class certification in misrepresentation cases under Rule 10b-5. It will introduce a significant level of inquiry and dispute at the class certification stage, and it will result in some cases in the denial of class certification motions in cases in which class certification might have been granted in the past.

 

At a practical level, there will be a lot of issues for the lower courts to sort out. There undoubtedly will be significant disputes regarding the type of evidence that is permitted to address the issue of price impact. There will be disputes about the quantum of evidence the defendants must provide in order to rebut the presumption. There undoubtedly will be issues surrounding the type and scope of discovery permitted as the parties wage a battle of experts on the price impact issue. The lower courts could be wrestling with these issues for years.

 

Because the price impact dispute will require the parties to present expert analyses on the question of whether or not the alleged misrepresentation affected the share price, the dispute could prove costly, particularly as the parties and the courts sort out the issues noted in the preceding paragraph. These processes could significantly increase defense expenses at an earlier stage of the proceedings. Justice Ginsburg, in a concurring opinion in which Justices Breyer and Sotomayor joined, noted that because the Court recognized that “it is incumbent upon the defendant to show the absence of price impact,” the Court’s holding “should impose no heavy toll on securities fraud plaintiffs with tenable claims.” Her opinion makes no comment with respect to the additional costs defendants undoubtedly will incur at the class certification stage in an effort to try to rebut the presumption.

 

Another consequence of the Court’s opinion is that it may affect the way that plaintiffs plead their cases. The Basic presumption only applies to misrepresentation cases under Rule 10b-5. It does not apply to cases in which the allegedly misleading statement is an omission. In omissions cases, the plaintiffs rely on a different presumption, the Affiliated Ute presumption, which arguably is unaffected by the Court’s holding in this case. In addition, the Basic presumption does not apply to cases in which the plaintiffs allege violations of Sections 11 and 12 of the ’33 Act. In order to try to avoid the procedural hurdles that the Court’s opinion in Halliburton introduces, plaintiffs may seek to cast their cases as omissions cases or may prefer to pursue ’33 Act claims rather than claims under the ’34 Act and Rule 10b-5. 

 

From an insurance perspective, the Court’s holding in this case will not have the disruptive impact that it might have had if the Court had overturned Basic. The Court’s ruling that defendants may seek to rebut the presumption of reliance by showing the absence of price impact may result in classes being certified in fewer cases, which would be beneficial for defendants and their insurers. However, the dispute of price impact issues could increase overall defense expenses, perhaps significantly, which could have its own impact on D&O insurers. Whether the ruling will result in fewer cases being filed remains to be seen.

 

In the end, the insurance marketplace will have to wait and see how these issues play out, and in the interim it seems unlikely there will be any immediate changes in the way D&O insurance is underwritten and priced. There will, however, be some discussion in the marketplace about the extent of coverage available for the kind of price impact event studies that the Halliburton court discussed. At least one carrier has already introduced, in anticipation of the Halliburton ruling, an endorsement providing that no retention is applicable to the cost of an event study. There may be other marketplace developments along these lines as the marketplace responds to the Court’s ruling.

 

Very special thanks to the several readers who sent me copies of the Halliburton decision.  

 

delaware2As I noted in a recent post (here), in response to a recent Delaware Supreme Court decision upholding the facial validity of fee-shifting bylaws, proposed legislation was  introduced in the Delaware General Assembly to limit the Supreme Court’s ruling and to restrict the ability of Delaware corporations to utilize their bylaws to shift the costs of litigation to unsuccessful shareholder litigants.

 

However, as discussed in detail in a June 20, 2014 memo from the Skadden Arps law firm entitled “Fee Shifting: Bylaws: The Current State of Play” (here), the legislative proposal has now been withdrawn, in order for representatives of the Delaware bar to study the use of fee-shifting bylaws, in anticipation that the Delaware legislature will take up the issue again in 2015. Broc Romanek’s discussion on his TheCorporateCounsel.net blog of the recent action withdrawing the proposed legislation can be found here.

 

Background

As I discussed in a recent post (here), in a May 8, 2014 decision in ATP Tour, Inc. v. Deutscher Tennis Bund, the Delaware Supreme Court upheld the facial validity of a nonstock corporation’s bylaw provision shifting attorneys’ fees and costs to unsuccessful plaintiffs in intra-corporate litigation. Because the court’s holding seemed to be equally applicable to stock corporations as well as to nonstock corporations, the decision appeared to open the way for all Delaware corporations to adopt fee-shifting bylaws. The possibility that companies might be able to shift litigation costs to unsuccessful shareholder claimants potentially could have transformed shareholder litigation.

 

On May 22, 2014, the Delaware Corporate Law Council proposed an amendment to the DCGL that according to the amendment’s synopsis is “intended to limit the applicability of [the Delaware Supreme Court decision in ATP Tours, Inc. v. Deutscher Tennis Bund] to non-stock corporations, and to make clear that such liability may not be imposed on holders of stock in stock corporations.”

 

As discussed in the recent Skadden law firm memo, the legislative proposal, like the Delaware Supreme Court’s decision in the ATP Tour case, “became the subject of much attention and debate from the media and legal commentators and prompted a significant amount of lobbying effort.” Legal reformers argued that the ATP Tour decision “gives corporations a means to protect their stockholders against the high costs of litigation by deterring the filing of abusive, duplicative suits.”

 

The Latest Legislative Development

On June 18, 2014, the legislative proposal was withdrawn and the Delaware Senate introduced a resolution addressing the issue of fee-shifting bylaws.  The resolution notes that Delaware law is “balanced and flexible” and “protects legitimate interests of all stakeholders.” The resolution further notes that “maintaining balance, fairness and predictability requires attention to ensure that statues, court rules, and judicial doctrine … do not encourage meritless litigation and impose unnecessary costs.” At the same time, the resolution notes, various groups have “expressed concern about the potential unintended consequence of permitting stock corporations to adopt such bylaws and the chilling impact it could have on meritorious litigation.”

 

The resolution goes on to state that Delaware’s governor and legislature “strongly support a level playing field that provides the ability for stockholders and investors to seek relief” and that the proliferation of fee-shifting bylaws “will upset the careful balance that the State has strived to maintain.”

 

In recognition of the “complexity and importance” of these issues, the Senate resolution calls upon a number of groups to continue their “ongoing examination” of the State’s laws “with an eye toward maintaining balance, efficiency, fairness and predictability.” The examination is expressly requested to include whether the adoption of legislation relating to fee-shifting bylaws would be appropriate for the General Assembly to consider in 2015.

 

The groups urged to conduct this examination include the Delaware State Bar Association, its Corporation Law Section, and the Council of that Section.

 

Discussion 

For the time being, it is unclear whether or not fee-shifting bylaws will be permitted in Delaware. The Skadden law firm’s memo urges caution for companies considering the adoption of fee-shifting bylaws. As the memo notes, “there is a significant risk that adoption of fee-shifting bylaws could generate a meaningful adverse reaction from, among others, governance advocates, proxy advisory firms, and some stockholders.”

 

Even though the Delaware legislature will not be acting until 2015 at the earliest, there are good reasons for companies to proceed cautiously in considering the adoption of a fee-shifting bylaw. The law firm memo outlines a number of specific items for companies to consider in that regard, including, for example, the company’s stockholder profile and its relationship with its shareholder base.

 

While the memo urges caution on fee-shifting bylaws, the law firm continues to believe that companies should consider the adoption of forum selection bylaws. As I discussed in a recent post (here), even though questions continue to surround the possibility that companies might be able to try to control abusive shareholder litigation through the use of fee-shifting bylaws, the adoption of forum selection bylaws has become increasingly common as a possible way to try to “reduce the cost and risk of multi-jurisdictional stockholder litigation.”

 

More About Forum Selection Bylaws: A lawsuit filed on June 19, 2014 in the Delaware Chancery Court raises interesting questions about the extent of the ability of corporations and their boards to adopt forum-selection bylaws. According to a June 20, 2014 Law 360 article entitled “First Citizens Sued Over ‘Only in NC’ Forum Choice Bylaw” (here, subscription required), the City of Providence, Rhode Island, a shareholder of First Citizens BankShares, has filed a lawsuit challenging the validity of a bylaw recently adopted by First Citizens that designates North Carolina as the exclusive forum for a wide variety of shareholder suits, even though the company is organized under the laws of Delaware.

 

According to the article, the dispute arises out of the planned merger of First Citizens and South Carolina-based First Citizens South. The bylaw designating North Carolina as the exclusive forum for shareholder litigation was adopted the day before the merger was announced. In its lawsuit, the City of Providence seeks a judicial declaration that the bylaw is invalid under Delaware General Corporation Law provisions giving the Delaware Chancery Court exclusive jurisdiction for many shareholder claims against Delaware corporations. The City of Providence alleges that First Citizens’ board breached their fiduciary duties by adopting the bylaw and seeks to have the court declare the bylaw invalid and unenforceable.

 

As discussed here, in June 2013, the Delaware Chancery Court upheld the validity of a bylaw adopted by Chevron’s board that designated Delaware as the exclusive forum for adjudication of various shareholder disputes. This latest lawsuit against First Citizens raises the interesting question of whether or not boards of Delaware corporations appropriately may adopt bylaws designating a forum other than Delaware as the exclusive forum for shareholder disputes. The City of Providence alleges in its lawsuit challenging First Citzens’ recently adopted bylaw that the company’s bylaw improperly deprives the company’s shareholders of their rights to avail themselves of Delaware’s courts.

 

It will be interesting to see how broadly the Delaware courts will extend the rights of boards to adopt forum selection bylaws and in particular to see whether or not the Delaware court will conclude that the board’s authority in that regard includes the right to designate a forum other than Delaware as the exclusive forum for shareholder disputes.

Due to personal circumstances, I will not be adding new posts for the next few days.To hold things over until I return, I thought I would post a link to the Q&A I did with Tom Fox on his FCPA Compliance and Ethics Blog last week. The Q&A covers a lot of ground, from my childhood, through college and lawschool, and then straight to how I started my blog and how the “mug shot” series came about. The Q&A can be found here. Special thanks to Tom for inviting me to participate in the Q&A on his blog.

 

 

spainIn an interesting June 11, 2014 Financial Times article entitled “Spain’s Renewal Must Include Governance Improvements” (here), financial journalist and commentator Tony Barber identifies corporate governance issues that he believes Spanish companies have been slow to address. According to Barber, while there may be historical explanations for many of the long-standing corporate governance practices in Spain, Spanish companies’ increasingly international shareholder base will require the companies to meet higher governance standards.

 

Barber acknowledges that corporate governance practices at Spanish companies have improved since the CNMV, the national financial market regulator, published a non-binding code of good governance in 2006. But progress has been slow and “some of the biggest, most internationally active Spanish companies can certainly do better.” According to Barber, the current government has plans to update the 2006 code. It has also sent a bill to parliament that will increase shareholders’ control over executive pay, strengthen the voice of minority shareholders and address potential conflicts of interest.

 

Barber identifies four additional governance issues that, in his view, many Spanish companies need to address. First, he says that “too many combine the roles of chairman and chief executive in one person.” Second, the boards are often “too old and universally old.” Third, many boards are too large. And finally, “some boards contain too few credible independent directors.” Among other things, these practices allow the concentration of power in one person’s hands.

 

The current board practices of many large Spanish companies “have deep roots in Spanish business culture.” This culture is a lingering vestige of practices during the Franco era, when Spain “remained in most respects a self-enclosed world, dominated by a handful of mighty financiers and industrialists.”

 

These old habits die hard, even though in a wide variety of industries Spanish companies “stride the globe” and even though foreign investors hold roughly 40 percent of the equity of the companies in Madrid’s blue-chip Ibex-35 index. Even companies like Banco Santander that have started to make changes still have boards that are almost exclusively Spanish. Even after adding former U.S. banking regulator Sheila Bair to its board in January, the bank’s 16-person board consists of 14 Spaniards, a Chilean and Bair. Three board members belong to one all-powerful family.

 

Barber contends that “national as well as gender-diversity is something that Spanish companies need to get to grips with.” Even when Spanish companies select foreign directors, they tend to turn first to Spanish-speaking countries. Barber comments that “it stretches credulity to suggest that such appointments reflect a meticulously conducted search for the best candidate. “

 

To underscore the importance of these issues for Spanish companies, Barber cites as an example the recent decision of Pemex, the Mexican national oil company, to sell most of its 9.2 percent investment in Repsol, the Spanish energy group. Among other things, Pemex cited Repsol’s governance practices as a reason for the sale. While not meaning to suggest that Pemex’s views on governance represent some sort of a standard, Barber said that “there is no doubt that international investors would welcome higher standards at some of Spain’s best known companies.”

 

Barber closes his article with a reference to the recent abdication of King Juan Carlos, noting that “modern Spain is embarking on a project of national renewal that calls for brave decisions in difficult times.”  Improving corporate governance “will form part of the contribution of Spanish business to this task.”

 

The practices and the resistance to reform in Spain may be best understood by reference to the country’s particular history, but many of the concerns are not unique. Other countries have their own versions of many of these issues. Just the same, it is interesting to consider this country-level perspective on corporate governance practices

aguilarIn a June 10, 2014 speech entitled “Boards of Directors, Corporate Governance and Cyber-Risks: Sharpening the Focus” delivered at the New York Stock Exchange, SEC Commissioner Luis A. Aguilar highlighted the critical importance of the involvement of boards of directors in cybersecurity oversight. In his speech, Aguilar 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.” A copy of Aguilar’s speech can be found here.

 

Aguilar opened his speech by highlighting the extent of the risks associated with cybersecurity. He emphasized the “widespread and severe impact that cyber-attacks could have on the integrity of the capital markets, infrastructure and on public companies and investors.” In light of these risks, Aguilar said that “effective board oversight of management’s efforts to address these issues is critical to preventing and effectively responding to successful cyber-attacks and, ultimately, to protecting the company and their consumers, as well as protecting investors and the integrity of the capital markets.”

 

Aguilar noted that risk management oversight is an increasingly important board role, adding that “there can be little doubt that cybersecurity also must be considered as part of the board’s overall risk oversight. “ Aguilar specifically referenced the recent effort by proxy advisory firm ISS to oust many directors of Target Corporation for allegedly lax cybersecurity oversight, which, he said, “should put directors on notice to proactively address the risks associated with cyber-attacks.” (It should be noted, however, that at the June 11, 2014 Target Corp. annual meeting all board members were re-elected.)

 

Aguilar emphasized that the threats of a cyber-attack include not only the risk of business disruption and reputational harm but also for directors “the threat of litigation and potential liability for failing to implement adequate steps to protect the company from cyber-threats.” He noted that –“perhaps unsurprisingly” – Target and Wyndham have each recently been hit with shareholder lawsuits relating to those companies’ data breaches, commenting that “boards that choose to ignore, or minimize, the importance of cybersecurity responsibility do so at their own peril.”

 

In discussing what boards can and should be doing on cybersecurity issues, Aguilar said that the place for boards to begin in assessing their company’s cybersecurity readiness is the National Institute of Standards and Technology’s February 2014 report entitled the “Framework for Improving Critical Infrastructure Cybersecurity” (here), which he said is “likely to become a baseline for best practices by companies, including in assessing legal or regulatory exposure to these issues or for insurance purposes.”

 

In order to translate the concepts in the NIST’s Framework into action, boards need to take steps to address the knowledge gap that often exists at the board level on cybersecurity issues. Aguilar recommends that boards create a separate enterprise risk committee at the board level in order to ensure that there is sufficient focus at the board level on the adequacy of resources and overall support provided to company executives responsible for risk management. Boards should also develop “a clear understanding of who at the company has primary responsibility for cybersecurity risk oversight and for ensuring the adequacy of the company’s cyber-risk management practices.”

 

The key, according to Aguilar, is to ensure that the company is appropriately prepared to respond in the event of a cyber-attack. Boards, he said, “should put time and resources into making sure that management has developed a well-constructed and deliberate plan” for responding to a data breach or other cyber incident.  The plan should include, among other things, a framework for determining  “whether and how the cyber-attack will need to be disclose internally and externally.” He added a suggestion that in undertaking this disclosure the company should go beyond the impact on the company and consider the impact on others, including consumers or other groups.

 

Aguilar closed his speech by emphasizing that “given the heightened awareness of these rapidly evolving risks, directors should take seriously their obligation to make sure that companies are appropriately addressing [cybersecurity] risks.”

 

Aguilar’s speech represents yet another confirmation that cybersecurity is a board level issue. He also emphasized that board failure to address these issues represents a liability exposure for directors. While he referred only to the efforts of shareholders to hold board members accountable through litigation, the fact is that – as his speech itself underscores – cybersecurity is an increasingly important issue to the SEC. It is not too much to say that a message implicit in his speech is that the Commission itself may hold boards accountable for their responsibilities as well. At a minimum, Aguilar’s speech underscores that cybersecurity is an issue on which the Commission is focused and about which the Commission is concerned.  

njHas notice of claim been provided “as soon as practicable” if it is sent to the insurer during the policy period but six months after service on the insured of the underlying complaint? Apparently not, at least according to a June 6, 2014 opinion of a New Jersey intermediate appellate court, applying New Jersey law. In addition, the New Jersey appellate court further held that an insurer on a claims made policy does not have to plead or prove that it was prejudiced by the late notice. The appellate court affirmed the trial court’s entry of summary judgment in favor of the insurer.  A copy of the appellate court’s opinion can be found here.

 

I have to admit that I have some issues with this decision, for reasons discussed below.

 

Background

The plaintiffs in the coverage action are assignees of the insured. The plaintiffs operate a church and child care center. The plaintiffs decided to relocate their operations and they entered a contract to buy a piece of land for the purpose. The plaintiffs also entered a separate arrangement to obtain financing for the land purchase from the insured, which is a mortgage financing company. The insured ultimately failed to provide the financing for the land transaction and the transaction fell through. The plaintiffs sued the insured to recover the various costs the plaintiffs had incurred in trying to complete the land transaction and the mortgage financing. Ultimately the insured settled with the plaintiffs for a small cash payment and for the assignment to the plaintiffs of its rights under its D&O insurance policy.

 

The insured’s insurance policy ran for the period from January 1, 2006 to January 1, 2007. The insured was served with the plaintiffs’ complaint in the underlying action on February 21, 2006. However, the insured did not provide notice of the complaint to its insurer until August 28, 2006. The insurer denied coverage on a number of grounds including the ground that the insured had not provided notice of claim to the insurer “as soon as practicable” as required under the policy.

 

The notice provisions of the policy state that:

 

(a) The Company or the Insureds shall, as a condition precedent to the obligations of the Insured under this policy, give written notice to the Insurer of any Claim made against an Insured as soon as practicable and either:

(1) anytime during the Policy Period or during the Discovery Period (if applicable); or

(2)  within [thirty] days after the end of the Policy Period or the Discovery Period (if applicable), as long as such Claim is reported no later than [thirty] days after the date such Claim was first made against an Insured.

 

After the assignment to the plaintiffs of the insured’s right under the policy, the plaintiffs filed an action against the insurer seeking a judicial declaration that the policy covered the underlying claim. The parties filed cross-motions for summary judgment. On February 3, 2013, the trial court granted the insurer’s motion for summary judgment, based in its finding that the insured did not provide the insurer with notice of the underlying claim as soon as practicable and therefore that coverage was barred. The plaintiffs appealed.

 

The June 6 Opinion 

On June 6, 2014, in an unpublished per curiam opinion, the Superior Court of New Jersey, Appellate Division, affirmed the trial court’s ruling.

 

The appellate court observed that the insured had provided the insurer with notice of claim “over six months after plaintiffs served them with the complaint.” The court added that “No explanation for this lengthy delay was provided.”  The appellate court cited with approval its own prior decision in a 1963 case in which the earlier court had held that a delay of five and one-half months in providing notice was not “as soon as practicable” under the terms of a similar policy.

 

The appellate court also noted that the notice provision required notice to be provided to the insurer both within the policy period and as soon as practicable. Because “the insured did not meet both of the notice requirements that were unambiguously expressed in the policy, we conclude that coverage was properly denied to the insureds and by extension, to plaintiffs as their assignees.”

 

In reliance on the New Jersey Supreme Court’s 1985 holding in Zuckerman v. National Union Fire Insurance Co., the appellate court also rejected the plaintiffs’ argument that the insurer had to show that it was prejudiced by the late notice in order to assert the late notice as a defense to coverage. In Zuckerman, the New Jersey Supreme Court had held that with respect to claims made policies (like the one involved here) an insurer need not show that it was prejudiced by an insured’s failure to provide notice as soon as practicable in order to deny coverage. The New Jersey Supreme Court had said in Zuckerman that to require an insurer to make such a showing would constitute an “unbargained-for expansion of coverage, gratis, resulting in the insurance company’s exposure to a risk substantially broader than that expressly insured against in the policy.” The appellate court said that as an intermediate appellate court, “we are bound to follow and enforce the decisions of the Supreme Court.”

 

Discussion

As anyone involved in the insurance business knows, late notice happens. Delayed notice is provided to insurers all the time. The delays in providing notice happen for all sorts of reasons or for no reason at all. Usually, the delay arises because the person within the organization who knows about the lawsuit is not the same person within the organization who knows about the organization’s insurance.  (This problem about the location of insurance knowledge within an organization is the reason why it is a good idea to seek to have the notice provision amended by endorsement to provide that the clock does not start to run on notice issues until certain specified persons find out about a claim.)

 

In the context of an industry in which belated notice is a regular occurrence, a delay of six months is nothing.  For that reason, I simply don’t understand the comment by the court with respect to the timing of the notice here that “no explanation for this lengthy delay was provided.”  In my humble opinion based on over thirty years in the D&O insurance business, it is not even remotely accurate for the appellate court to suggest that a six-month delay in providing notice is “lengthy.” I would describe it as “normal” or “par for the course” or “basically, the kind of thing that happens when any process requires the involvement of people.”

 

Not only was the delay in providing notice here not “lengthy,” but the insurer was provided notice during the policy period. This is not a case where the notice finally came sailing in months after the insurer was off of the risk. The insurer was still on this risk when it received notice.

 

And not only that, the insurer here did not even claim that it was prejudiced in any way by the six month delay in providing notice. What is the point of harshly enforcing a mere procedural requirement in a punitive way given that the condition was fulfilled during the contract period and nothing about the fulfillment of the condition was detrimental to the insurer?

 

And here’s the final issue – the appellate court did not even ask what the word “practicable” means and whether or not in this case the insured did provide notice as soon as was practicable for this insured. One definition of the word “practicable” in an online dictionary is that the word means “capable of being done” or “capable of putting into effect.”  Seems to me that the insured here provided notice as soon as it was capable of providing notice.

 

The term “as soon as practicable” is meant to be both a liberalizing term and to provide flexibility, by contrast to the use in some policies of terms requiring provision of notice within a specified time period (say, 60 or 90 days). The more flexible standard is meant to be less rigid than the precise time requirement – and frankly it is meant to be a looser standard. Basically, the term means that the insured should provide notice of claim as soon as it can.  There is nothing in standard industry practices to suggest that the provision of notice during the policy period and six months from service of the claim is not “as soon as practicable” – unless the six month delay prejudiced the insurer in some way, which is a factor that is not present here.

 

I will say that I don’t know where courts get off with this idea that when a policyholder seeks coverage for a claim that it is trying to get “unbargained-for expansion of coverage.” In this case in particular, the suggestion that the insured’s assignee was looking for unbargained-for coverage is a completely unwarranted statement. To the contrary, the courts’ harsh and unwarranted construction of the notice provisions represents a completely unjustified diminution of coverage.

 

It is hard to question the position that the insurer took in this case with respect to late notice, given that two courts have concluded that under New Jersey law the notice here was not “as soon as practicable.”  Just the same, I have to say that the fact that an insurer would take the position that the insurer took on the notice issue here is a relevant topic in a discussion with a client about the insurer’s claims handing practices.  

sdnysealOn May 8, 2014, Southern District of New York Judge Deborah Batts, applying New York law, held that a there was not a sufficient “factual nexus” between a securities suit filed after the expiration of a failed bank’s D&O insurance policy and an FDIC claim that had been first made during the policy period and therefore — because the subsequent claim did not relate back to the prior claim — it is not covered under the policy. The decision raises interesting questions about degree of overlap required to make different claims interrelated.

 

A copy of the opinion can be found here. This decision is discussed in a June 5, 2014 post on the Sedgwick Insurance Law Blog (here). A May 19, 2014 post on the Wiley Rein law firm’s Executive Summary blog can be found here.

 

Background

State banking authorities closed the Park Avenue Bank on March 12, 2010. Three days after the bank close, Charles Antonucci, the bank’s President and CEO,  was arrested and charged with attempting to defraud the Troubled Asset Relief Program and for self-dealing with bank funds, which included several “round trip transactions” that he claimed were personal investments in the bank.

 

On September 1, 2010, the FDIC sent certain former directors of the bank a demand letter in which the FDIC asserted claims against the individuals for alleged breaches of fiduciary duty, negligence and gross negligence. The demand letter asserted that the individuals’ acts and omissions caused the bank a loss of approximately $50.7 million. The FDIC’s claim, as Judge Batts later summarized it, “primarily focused on [the individuals’] deficient policies, internal controls, and practices, which ultimately led to PAB’s failure,” such as having inadequate collection procedures and failing to properly supervise employee compensation. However, as Judge Batts also noted, the FDIC demand letter also alleged that the individuals “failed to act on allegations of improper conduct made against [Antonucci], ultimately causing significant financial harm to the bank.”

 

The individuals notified the bank’s D&O insurer of the FDIC claim. The D&O policy in force at the time had a policy period from September 9, 2008 to September 9, 2009, but the period had been extended to November 8, 2010. The D&O insurer accepted the FDIC demand letter as a claim under the policy.

 

On February 12, 2012, well after the expiration of the D&O policy, Bruce Kingsley filed a lawsuit against the bank’s former directors under Arizona securities laws. The Kingsley complaint alleges that Antonucci had made material misrepresentations and omissions in order to induce the Kingsley plaintiffs to make investments in two customers of the bank. The investments were actually used to fund Antonucci’s round-trip transactions. The Kingsley plaintiffs contended that the bank’s former directors should be liable for their “lax oversight” of Antonucci and for the bank’s lack of “sound corporate governance.” The Kinglsey complaint alleged that the directors “did not act in good faith with respect to their control or lack of control of Antonucci” and “did not take reasonable steps to maintain and enforce a reasonable and proper system of appropriate supervision and internal controls.”

 

The directors submitted the Kingsley lawsuit to the bank’s D&O insurer asserting that the FDIC demand letter and the Kingsley lawsuit involved interrelated wrongful acts. The D&O insurer denied coverage for the Kingsley lawsuit contending that the lawsuit had been filed after the policy had expired and that the two claims did not involve interrelated wrongful acts.

 

The directors filed an action in the Southern District of New York seeking a judicial declaration that the two claims involved interrelated wrongful acts and that the D&O insurer had breached the policy when it denied coverage for the Kingsley lawsuit. The D&O insurer filed a motion to for judgment on the pleadings.

 

In the policy, Interrelated Wrongful Acts are defined as “Wrongful Acts which have as a common nexus any fact, circumstance, situation, event, transaction or series of related facts, circumstances, situations events or transactions.”  Under the policy all claims based on Interrelated Wrongful Acts “shall be considered a single Claim” that is “deemed to be first made on the date the earliest of such Claim was first made.”

 

The May 8 Ruling 

In her May 8, 2014 memorandum and order, Judge Batts granted the D&O insurer’s motion for judgment on the pleadings, ruling that the two claims do not present Interrelated Wrongful Acts “because they do not share a sufficient factual nexus.” Because the two claims are not related, the D&O insurer did not breach the policy by declining coverage for the Kingsley Claim.

 

In reaching this conclusion, Judge Batts considered several cases under New York law in which courts had interpreted interrelated wrongful acts provisions and in which the courts had held that for two claims to be related they must “share a sufficient factual nexus.” She observed, based on her review of the cases that “where courts have found a sufficient factual nexus, the two claims had specific overlapping facts.”

 

Here, Judge Batts said, “the factual overlap between the two Claims is tenuous at best; Plaintiffs allegedly failed to act properly with respect to Antonucci, whether it be their control and oversight of him, as alleged in the Kinglsey Complaint, or their failure to investigate allegations of his misconduct, as alleged by the FDIC.”

 

Judge Batts said with respect to these allegations about Antonucci, “if painted in broad strokes, the two Claims may arise out of the same deficient corporate structure or Plaintiff’s lack of oversight.” However, she said, the directors “merely plead in a conclusory manner that the two Claims share common facts and circumstances, yet, as previously explained, the FDIC Claim merely references Antonucci’s general misconduct whereas the Kingsley Claim makes specific allegations of his fraud on the Kingsley plaintiffs.” The directors “bald allegation” that the two Claims arise out of a common set of circumstances “are insufficient to demonstrate a common factual nexus.”

 

Without more, Judge Batts said, “there simply is not a sufficient factual nexus between the FDIC Claim and the Kingsley Claim.” To interpret the two as interrelated “would be to grant the insured more coverage than he bargained for and paid for.”

 

Discussion

In considering Judge Batts’s decision, I will begin where she ends, with her saying that if these two claims were considered to be interrelated, the insureds would be getting more coverage than they bargained and paid for. I find this a curious statement, since the bank had bargained and paid for a policy providing that coverage extended not only to claims made during the policy period but also to claims made subsequent to the policy period if the subsequent claims were related to a claim made during the policy period. The problem is not that the bank did not bargain and pay for the kind of coverage the directors are seeking here; the problem is, as I have frequently noted on this blog, that relatedness issues are notoriously elusive.

 

The difficulty here, as in all coverage cases involving relatedness issues, is determining what degree or quantum of relatedness is sufficient to make alleged wrongful acts interrelated. It is not as if the FDIC Claim and the Kingsley claim were entirely unrelated – there is at least one important area of overlap:  both involve allegations that the board had breached its duties to supervise and control Antonucci. Judge Batts in fact acknowledged the overlap is evident when the picture here  is “painted in broad strokes.”

 

Indeed, I think a reasonable person might easily conclude that the two claims, involving as they do allegations of lack of proper oversight of Antonucci, have “as a common nexus” a “circumstance” or “situation.” In that regard, I note that the policy’s definition of Interrelated Wrongful Acts is written very broadly; it provides that Wrongful Acts are Interrelated if they have as a common nexus “any fact, circumstance, situation, event or transaction.”

 

The word “any” is very comprehensive – if there is any fact circumstance or situation having a common nexus, then the Wrongful Acts are interrelated. Judge Batts faulted the directors’ argument because the overlap on which the directors relied was “painted in broad strokes” – that is, it only appeared at a high level of generalization. However nothing about the policy says that this level of generalization is insufficient. To the contrary, and to reiterate, the policy itself refers to any fact, circumstance, situation, event or transaction

 

The comprehensiveness of this definition communicates that it was intended to be interpreted and applied very broadly. In fact, insurers often are arguing that it should be interpreted very broadly, as for example when arguing that a subsequent claim is related to a prior claim made during a prior policy period in which the insurer did not provide coverage (refer for example here), or when the insurer is arguing that multiple claims made over multiple policy periods triggers only a single policy of insurance, not multiple policies (here).

 

Even recognizing all of the points Judge Batts made in her ruling, I still think it could reasonably be argued that the definition is amply expansive to include both of the claims involved here. And – to turn Judge Batts’s valedictory declamation on its head – since the policyholder expressly bargained and paid for a policy that provided coverage for subsequent claims that are interrelated with claims that are made during the policy period, the insurer here ought to provide coverage for the Kingsley claim, particularly given the breadth of the scope of the definition of Interrelated Wrongful Acts.  

 

As I have said previously about cases interpreting and applying interrelated wrongful act provisions, the cases taken collectively illustrate nothing so much as how elusive these issues can be. This case is a good example of this principle. The problem of course is that this is not some theoretical exercise. The individuals seeking coverage here now have no insurance to rely on to defend themselves against the allegations in the Kingsley complaint.

 

All of that said, I understand the Insurer’s position here as well. The Kingsley complaint was a securities fraud lawsuit relating to the bank CEO’s involvement in a third party (or self-interested) transaction. The FDIC demand letter related to the alleged mismanagement of the bank. I can see why the insurer felt that the two claims were unrelated. That is the problem with interrelatedness disputes. There are no clear answers and the outcomes wind up being a matter of perspective. 

 

supct2014Since their 2002 enactment, the whistleblower protections in Section 806 of the Sarbanes-Oxley Act have been presumed to apply only to employees of publicly traded companies. After all, the provisions are entitled “Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud.” However, in its March 4, 2014 holding in Lawson v. FMR, LLC (here), the U.S. Supreme Court held that Section 806 protects whistleblowing activity by employees of a private contractor of a public company.

 

The decision has rightfully raised concern, if for no other reason than that the reach of the decision remains unclear. At the same time, the decision does not reach as far as some commentators have suggested. In this post, I take a look at what the court held, what is unclear, and some important distinctions that should be kept in mind when thinking or talking about this case and its implications.

 

Background 

This lawsuit involves the Fidelity family of mutual funds. The Fidelity funds themselves have no employees. Instead they contract with investment advisors that handle their day to day operations. The plaintiffs in these cases were employees of Fidelity Brokerage Services LLC, a subsidiary of FMR Corp. and a private company. The plaintiffs allege that they had been retaliated against by their employer in violation of Section 806 for reporting alleged improprieties involving certain of the Fidelity mutual funds. Their employer moved to dismiss their complaint arguing among other things that Section 806 applied only to publicly traded companies. Following proceedings in the courts below, the case made its way to the U.S. Supreme Court.

 

Section 806 provides in pertinent part that “No [public] company …or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any manner discriminate against an employee in the terms and conditions of employment because of [whistleblowing or other protected activities].”

 

In a 6-3 majority opinion written by Justice Ruth Bader Ginsberg, the Court held that based on the statutory text – and in particular Section 806’s reference to “contractor” and “subcontractor” – as well the “mischief” to which Congress was responding in the wake of the Enron and WorldCom scandals, Section 806’s whistleblower protections extend to employees of contractors and subcontractors.

 

In a dissenting opinion, Justice Sotomayor criticized the “stunning reach” of the majority’s opinion, noting that “by interpreting a statute that already protects an expansive class of conduct also to cover a large class of employees, today’s opinion threatens to subject private companies to a costly new form of employment litigation.”  The dissent charged that the court’s holding could authorize a “babysitter to bring a federal case against his employer – a parent who happens to work at the local Walmart (a public company) – if the parent stops employing the babysitter after he expresses concern that the parent’s teenage son may have participated in an Internet purchase fraud.”

 

Discussion 

There is good reason that this decision has raised the alarm in certain quarters. Justice Sotomayor’s comment in her dissent that “today’s opinion threatens to subject private companies to a costly new form of employment litigation” provides ample justification for concern. Private company employers rightfully are concerned to learn that the SOX whistleblower provisions can apply to public companies’ private contractors.

 

As justified as these concerns are, I fear that the concern may be overstated in certain quarters—or rather, that concerns are being raised that even the most alarming parts of the Court’s decision do not justify. For starters, I have heard otherwise responsible commentators summarize the decision as saying that it holds that the SOX whistleblower provisions apply to private companies. This is a correct but incomplete statement. I think the implications of this decision are better understood if we clarify what actually happened here.

 

First of all, though the employees who claimed retaliation were indeed employees of a private company, the company on which they blew the whistle was a publicly traded company. This is not a situation in which private company employees blew the whistle on their own private company employer. The Supreme Court did not say that the Sarbanes Oxley whistleblower provisions apply when a private company employee blows the whistle on a private company. The involvement of the public company, and the fact that the whistle was blown on a public company, are critical considerations here. The majority’s reasoning placed heavy emphasis on the purposes of Sarbanes-Oxley in preventing fraud at public companies. In other words, without this public company involvement, there would appear to be no basis for the SOX whistleblower provisions to apply to a private company.

 

Another critical aspect of this situation is that, while the whistleblowers were employees of a private company, the public company involved had no employees of its own. All of the operations were conducted for the public company by the employees of a private company affiliate. The majority opinion was very concerned that these kinds of arrangements are common in the mutual fund industry and that if the Sarbanes Oxley whistleblower protections were not extended to these employees that mutual fund industry employees would be left without protection from retaliation.  While the lower courts are going to have to interpret the Lawson decision, and while the plaintiffs obviously will want to try to push the limits of the Lawson court’s holding, the circumstances involved in this case were very specific kinds of circumstances. The dissent’s babysitter example rightfully raises concerns, but the context of this decision matters.

 

Unfortunately for all concerned, many questions will now have to be tested in the lower courts. The extent to which private company employers can be dragged into these kinds of cases will have to be developed. Of particular concern is the Court’s holding that private company employers can be subject to the whistleblowing provisions if the private company is a “contractor” or “subcontractor,” which certainly raises questions about what type of a relationship with a public company is sufficient to bring a private employer within the anti-retaliation provision of the Sarbanes-Oxley Act. This may be of particular concern where the private company employer enters long-term arrangements to provide legal, accounting, or financial services to a public company.

 

As the Covington & Burling law firm put it in its June 6, 2014 Law 360 article entitled “Private Employers and Whistleblowing Post-Lawson” (here, subscription required), ”every private company should ask whether it has a business relationship that could qualify it as a contractor or subcontractor of a public company.” This determination “will be straightforward in some cases but murky in others, given the lack of any defining criteria.” Until the courts provide clearer guidance, “prudent companies should act on the assumption that they will be subject to Section 806.”

 

I concur in the view that private companies should proceed on the assumption that they could be subject to Section 806. However, I want to reiterate that even under Lawson, the SOX whistleblowing provisions are not going to apply unless the whistle is blown on a public company. There is nothing about Lawson that says that Section 806 applies if the whistle is blown on a private company.

 

I think the most accurate way to say it is that Lawson extended SOX whistleblower protection to employees of contractors of public companies, whether the contractors are public or private – rather than just saying that the decision extended Sox whistleblower protection to private companies.

 

While I think this distinction is important, I don’t want to suggest that I think Lawson does not represent a significant expansion of the reach of Sarbanes-Oxley whistleblower protections. It does represent a significant expansion. My point is just that it as significant as the extension is, it is not as significant as some commentators have been describing it.

 

The Covington law firm memo has some helpful suggestions about steps employers can take to try to protect themselves in light of these developments.  

 

senegal1A May 31, 2014 article in the Economist magazine entitled “Migration from Africa: No Wonder They Still Try” (here) describes how migrants from further south in Africa are desperately trying to make their way through Libya and across the Mediterranean to Europe. Some migrants pay close to $2,000 for passage on rickety boats to European landing points. As the Economist reports,  “Many do not survive.”  Armed conflict, swelling populations and other factors have driven many to make the attempt to flee, despite the dangers involved. 

 

Many of these migrants come from countries such as Central African Republic, Mali,  northern Nigeria, Somalia and Southern Sudan, which are troubled by civil unrest. Not all of the African countries are as disrupted as these, but even in the more stable countries conditions are difficult for many. As result of an unexpected relationship, I have developed a perspective on the conditions in one of Africa’s more stable countries.

 

Senegal is a francophone country on Africa’s west coast, about the geographic size of South Dakota and with a population about the size of Pennsylvania. The country’s capital, Dakar, is located on the Atlantic Coast, at the country’s westernmost point. Dakar has a population of about 1 million people. In the capital city’s outskirts, there is a high school with a 50 year-old English teacher: an educated, articulate man with a sharp eye and a hard-earned sense of cynicism. Through his words I have been given a glimpse of the very different world in which he lives.

 

I was first introduced to Mamoun Bey (not his real name) four years ago through my eldest daughter, who works for a nonprofit healthcare book publisher. Mr. Bey is effectively his school’s health care officer, and for years he has relied on a medical handbook the nonprofit publishes to provide medical care to the school’s students and their families. He wrote to the nonprofit to ask for a new copy of the book because the one he had was falling apart. Upon request from my daughter, I provided the funding for the organization to supply Mr. Bey several new books. Somehow, Mr. Bey found out about my involvement and he wrote me a long, interesting letter. We have been regular correspondents ever since. Each one of Mr. Bey’s letters provides a window into a world that is even further from my own than geographic distance alone would suggest.

 

In his first letter, written after receiving the new medical guides, Mr. Bey explained to me the health care issues facing his school community.  He began with an explanation of “the African way of life.” In the densely populated cities “we share so many things together.” In Senegal in particular there is “an exaggerated tradition of shaking hands with everyone, even with unknown persons (strangers)” which “unfortunately accounts for the high rate of transmission of diseases.” In Africa, the population is threatened with many infectious diseases and with “endemic fatal diseases, like malaria, typhoid and cholera.” The transmission of rabies from dog bites is also a problem as “hordes of dogs roam about with no owner to claim them.”

 

Poor environmental conditions “explain the endemic character of many infectious diseases.” During the rainy season, “pools of water and mud stagnate in most African cities.” In the absence of access to clean drinking water, people drink contaminated well water. A better storm water runoff and sewage system would alleviate many of these conditions, but those improvements would be possible only “if we had responsible and honest statesmen across the continent.”

 

The curse of corrupt politicians is something of a running theme for Mr. Bey. The poor storm water drainage and poor transport systems are “due to the unscrupulous politicians who choose to enrich themselves to the detriment of their respective countries.” The “paradox” is that so many African counties are “rich in natural resources.” However, it is “mostly foreign companies, hitherto mostly Europeans, today Chinese, that exploit them with the complicity of the politicians in power.”  As a result, “little goes to the development of our countries.”

 

The storm water runoff problems present a particularly harsh example of the corrosive effects of corruption.  During the rainy season, many of Dakar’s residential areas flood. Those with money “hire trucks full of sand or soil that they dump in front of their houses thus deflecting the flood water to their neighbors opposite!” The prior national government had started a program to try to relocate people who had built houses in swampy areas during drought years but “much of the funds were embezzled” and less than a thousand of the planned twenty thousand residential units were actually built.

 

While there are many difficulties in living in Dakar, Mr. Bey does have a surprising level of access to the outside world and to technology. He has Internet access at his school and he has an email account, but we both prefer to communicate by regular mail rather than over the Internet. He also has a television and a cell phone.  He follows U.S. and European politics by listening to the BBC. During the 2012 U.S. Presidential elections, he commented to me that he had heard that Ohio was a critical swing state. When he was describing a particular feature of his country to me, he suggested I could learn more about it by looking it up on Google.

 

Mr. Bey, who is University educated, strongly believes in the value of education. His older children are enrolled at the University but he is disappointed that his youngest son “couldn’t cope with studies.” His son now spends his time tending animals and more recently “he has been spending a lot of time in his friend’s home operating computer games.” Mr. Bey says, “I am not happy about this.”

 

Mr. Bey’s letters have told me a great deal about day to day life and important events in Dakar. His second letter to me included a detailed account of the political crisis the country faced when the then-President tried to run for a third term in office, in defiance of a constitutional provision limiting the President to two terms. The crisis led to street protest and ultimately to an internationally monitored election in which the former President was voted out of office. Senegal, for all of its struggles, has functioning democratic institutions, in contrast to so many other African counties.

 

Mr. Bey also told me about a religious festival of the local Mourid community. The festival, held each December and called the Magal de Touba, is a “big gathering of disciples, sympathizers and curious visitors” to commemorate the return of their leader, Cheikh Amadou Bamba, from exile in Gabon where he had fled from the French colonial administration. Many “exploits” are attributed to this leader and he has attracted a following of “fanatics.” The disciples “travel from all parts of the country in huge convoys,” while others come from abroad. For Mr. Bey, who is always concerned about health and safety issues, the burdens this human influx puts on the local transportation create very dangerous conditions. He notes that “there are often severe accidents with heavy casualties,” and this year more than 30 people died during the festival. Many of the accidents are the result of simple mechanical failure, but “most cases are due to human recklessness and greediness.” In order to complete as many trips as possible, the drivers don’t rest sufficiently and their fatigue causes them to lose control of their vehicles, as happened in connection with one particularly horrible head on collision that resulted in 18 deaths.

 

Through our correspondence we are both learning about each other’s cultures; I think I have been able to show Mr. Bey a little bit about our culture in the U.S. For instance, I told him about the annual gathering in my neighborhood to watch the Super Bowl, which he found interesting. He said, “Here, people believe that you there live highly individualized lives like in Europe with little or no contacts with neighbors. At least your Super Bowl account gives a different image. Here, people are very gregarious to the point that they almost step on your feet. There is too much wagging and less productivity, save for craftsmen and farmers.”  Mr. Bey was also surprised to learn that my mother-in-law lives in our home. He said that he had heard that in Europe and America, older folks are “put in institutions” where they live alone.

 

Health-related topics are a recurring theme in Mr. Bey’s letters and often a jumping off point for comparisons between African and American cultures. In discussing the rising incidence of cancer in Africa, Mr. Bey first noted that until recently “cancer was little known in Africa.” Things have changed. He lost the mother of his oldest son to breast cancer. He also described in moving detail the recent death of a neighbor and close friend from cancer. Mr. Bey said “when I went to see my friend in his last days, I could only lay my right hand on his forearm and recite some prayer verses that I know.” As for why there has been a change, “some say it’s due to our countries’ copying the American and European way of life: eating less and less natural food, living in a more and more polluted environment, inhaling cigarette and engine smoke, paint and chemicals.”

 

Not all of Mr. Bey’s observations relate to health and safety concerns.  For example, Mr. Bey provided an interesting description of the Barack Obama’s June 2013 visit to Senegal, as well as an interesting perspective on U.S. relations with Africa:

 

Your President, Barack Obama, spent three days here with his wife, two daughters, mother-in-law, and a very huge delegation made up mainly of businessmen officials and security personnel. Some main roads of Dakar were closed to the public and taken over by the U.S. security forces to avert any attempt by violent gangs in Libya and Mali to infiltrate the joyful welcoming. The most moving moment of his visit was to Gorée Island, a small island close to Dakar from where thousands of slaves were said to have been exported in inhuman conditions to America during the slave trade. Visitors are shown the famous door of no return. … People are very happy and proud to welcome such guests. They do help financially the country. George Bush junior is the most outstanding in giving aid to African countries: He created the Millennium Challenge account award which undertook a lot of road and bridge construction and financed agriculture in a selected number of African countries to encourage them to more democracy. …The enlightened citizens will forever remember his legacy in Africa as John F. Kennedy’s Peace Corps initiative is still remembered today.  

 

Mr. Bey’s life is difficult and full of challenges, many of which are so different than the kinds of things that I have to deal with on a day to day basis. But we also share many concerns. He worries about his children and their futures. He wants to see his country run well and he aspires to a time when the government can properly address the challenges his country faces.

 

I feel very grateful to have gotten to know Mr. Bey through his letters. It is not just that the many challenges that Mr. Bey faces helps me to appreciate the many benefits that I enjoy, often without sufficient awareness. It is that through the words of this articulate, observant man I have come to appreciate the common humanity we all share with people living in a very different culture and under very different conditions.  His comments about and gratitude for the efforts of several American presidents to help his country made me feel proud, and helped me to appreciate that our prosperous country can help others to try to prosper and succeed.

 

I feel very fortunate to be able to call Mr. Bey my friend.