rhode islandWell-advised professional services firms will carry both errors and omissions insurance and management liability insurance. A recurring problem under management liability insurance policies for all types of professional services firms relates to the very broad professional services exclusions often found in these polices. These exclusions preclude coverage for claims relating to the professional services firm’s delivery of professional services. Insurers sometimes attempt to apply a very broad preclusive effect to these exclusions, even with respect to claims for which the professional services firm rightfully expects coverage under its management liability policy.

 

In a recent case, a federal district court applying Rhode Island law ruled that the Legal Services Exclusion in a law firm’s D&O insurance policy did not preclude coverage for false advertising claims asserted against the law firm and two of its attorneys, and therefore that the insurer had a duty to defend the  underlying lawsuit. The case provides a good example of the kinds of problems that can emerge when carriers broadly apply the professional liability exclusion in a professional services firm’s management liability insurance policy. A copy of the district court’s February 3, 2014 opinion can be found here.

 

Hat tip to the Jones Lemon Graham law firm’s D&O Digest blog for the link to the district court’s decision. The blog’s April 7, 2014 discussion of the case can be found here.

 

Background  

Levine & Associates, a small law firm, advertises on the Internet and on television using the tag line “Call a Heavy Hitter® Today!”  Two clients of the law firm filed an action in Rhode Island Superior Court against the law firm and two of its attorneys. The third count of the claimants’ complaint alleges a class action for “Deceptive Trade Practices.” Specifically, the plaintiffs allege that the defendants “deceptively advertised in all media in Rhode Island” and that the defendants “gave the false impression to Plaintiffs and …to future clients that they have special expertise in personal injury cases and disability cases.”

 

The law firm submitted the lawsuit as a claim under its D&O Insurance policy. The D&O insurer denied coverage for the claim, citing the D&O policy’s Legal Services Exclusion, which precludes coverage for “Loss for any Claim based upon or arising out of any Wrongful Act related to the rendering of, or failure to render, professional services.” The law firm filed an action against the D&O insurer seeking a judicial declaration that the law firm defendants are entitled to defense and indemnification for the underlying lawsuit. The parties cross-moved for summary judgment.

 

The Court’s Opinion 

In a February 3, 2014 opinion, Rhode Island District Court Judge John J. McConnell, Jr. granted the law firm’s motion for summary judgment and ruled that the D&O insurer had a duty to defend the defendants in the underlying claim.

 

The D&O insurer had sought to rely on the Legal Services Exclusion’s broad “arising out of” preamble, arguing that courts have interpreted exclusions with this language very broadly. The insurer argued further that the allegations of false and deceptive advertising are “inextricably intertwined with the rendering of professional services” and that the allegedly deceptive advertising would not constitute a Wrongful Act within the meaning of the policy unless the law firm was hired by a claimant and then failed to deliver services as advertised. For its part, the law firm argued that the alleged deception related to advertising not to the delivery of legal services.

 

Judge McConnell looked at the dictionary definition of the term “render,” which means “to do; perform; to render a service” and “to do (a service) for another.” Based on this, he said that “the plain and ordinary language of the Legal Services Exclusion therefore eliminates from coverage only conduct that relates to Levine & Associates providing legal services.” He noted that the claimants’ claim “is about advertising not about the provision of legal services.” He added that “applying the Legal Practices Exclusion to this alleged deceptive advertising would ignore the meaning of the word ‘rendering’.”

 

Judge McConnell concluded by saying that “if the Court were to adopt the expansive reading” of the exclusion urged by the D&O insurer, “then any conduct by Levine & Associates would be excluded from coverage since Levine & Associates’ business is ‘related to the rendering of …professional services’.” He added that “if this were the case, the D&O Policy would be meaningless and provide no coverage. The Court will not construe the contract to create such an absurd result.”

 

Judge McConnell added in a footnote the following observation: “What seems clear from the plain language of the exclusion is that it was meant to exclude claims commonly referred to as malpractice claims, as opposed to claims arising from the business side of running a legal business. The policy in question here was a Directors and Officers policy, not a legal malpractice policy.”

 

Discussion 

When the law firm in this case advertised itself, it was engaging in ordinary business activity of the type any business organization might undertake. It was not “doing what lawyers do,” it was “doing what any business might do.” The law firm rightfully expected that its D&O Insurer should provide coverage for the advertising-related claim to the same extent as it would provide coverage for a similar claim against any small business. 

 

This case provides a perfect example of why I have long argued that the professional services exclusion within a D&O Insurance policy ought to have the narrower “for” wording rather that the broader “arising out of” wording – the danger is that with the broader wording the insurer could seek have the exclusion’s preclusive effect apply far beyond the relatively narrow delivery of professional services and apply it to anything a professional services firm does.

 

 

Unfortunately, as I have previously noted on this blog (refer here), the question of whether or not claims related to the activity of a professional services firm are precluded from coverage under the firm’s management liability insurance policy is a recurring issue.  The use of the “for” wording in the exclusion’s preamble would provide some assurance that the exclusion is not applied overly broadly, and that the exclusion would apply only (as it should only apply) to “malpractice” claims and not to the business side of a professional firm’s business. Regrettably, many carriers decline to give the narrower “for” wording, and so problems continue to arise when carriers seek to apply the exclusion broadly.

 

Judge McConnell was right when he said that if a D&O insurance policy’s professional services exclusion is applied broadly to apply to the business side of the professional firm’s business, it threatens to render the policy meaningless and to lead to an “absurd result.” If a carrier will not (as it should) agree to change the professional services exclusion preamble to the “for” word, then it is incumbent on the carrier to ensure that it does not rely on the breadth of the broader “arising out of” preamble wording to try to make the exclusion apply to the business side of a professional firm’s business.  

 

As the Jones Lemon Graham law firm’s blog post notes, the Court’s opinion discusses only the third count in the underlying complaint, it does not discuss the other counts. Nor, as the blog post notes, “is the firm’s commercial general liability advertising injury coverage addressed.” I would note that the opinion also does not discusses whether or not the law firm’s D&O policy has a so-called “antitrust” exclusion, which as sometimes worded will preclude coverage for allegations of unfair or deceptive trade practices.

 

I suspect some readers may have some strong responses to my comments in the blog post. Readers are strongly encouraged to add their comment to this post using the blog’s comment feature.

 

new jerseyIt is a dangerous world out there. Among many other things, companies and other organizations are increasingly vulnerable to data security attacks from would-be hackers. Indeed, an April 8, 2014 New York Times article entitled “Hackers Lurking in Vents and Soda Machines” (here) notes that “companies scrambling to seal up their systems from hackers and government snoops are having to look in the unlikeliest places for vulnerabilities.”

 

According to the article, in recent incidents hackers have gained access to sensitive data through all kinds of internal systems, including “heating, ventilations and air-conditioning ; billing; expense and human-resource management systems; graphics and data analytics functions; health insurance providers; and even vending machines.”

 

As if it were not enough that companies and other organizations have to contend with the possibilities that the hackers are coming at them from just about every conceivable direction, the companies must also face the possibility that if they are subject to a successful hack, they may have to face an enforcement action from governmental regulators over the breach and its consequences.

 

In an April 7, 2014 decision (here), in a test case of the agency’s authority, District of New Jersey Judge Esther Salas confirmed the authority of the Federal Trade Commission to pursue an enforcement action against Wyndham Worldwide Corp. and related entities alleging that the company and its affiliates had failed to make reasonable efforts to protect consumers’ private information.

 

Background 

The FTC alleges that between April 2008 and January 2010, intruders gained unauthorized access to Wyndham’s computer network on three occasions, on each occasion accessing sensitive personal information stored in Wyndham’s hotel property management system. The agency also alleges that after discovering the first two breaches, Wyndham “failed to take appropriate steps in a reasonable time frame to prevent the further compromise” of its network. The FTC alleges that the data breaches resulted in the compromise of more that 619,000 consumer payment card account numbers, many of which were subsequently exported to a domain registered in Russia, allegedly causing fraudulent charges and more than $10.6 million in fraud loss.

 

As discussed here, the FTC filed a complaint against Wyndham and its related entities alleging that the defendants’ alleged failure to maintain reasonable and appropriate data security for consumers’ sensitive personal information violated the prohibition in Section 5(a) of the Federal Trade Commission Act of “acts or practices in or affecting commerce” that are “unfair” or “deceptive.” The FTC’s lawsuit seeks to compel the company to improve its security measures and to remedy any harm its customers have suffered.

 

The defendants moved to dismiss, arguing that the FTC does not have the authority to bring an unfairness claim involving data security; that fair notice principles require the agency to promulgate regulations before brining this type of an unfairness claim; and that the FTC’s allegations are pleaded insufficiently to support either an unfairness or deception claim.

 

The April 7 Ruling  

In a detailed, 42-page opinion, Judge Salas denied the defendants’ motion to dismiss and rejected the hotel chain’s arguments that the FTC does not have the authority to regulate data-security practices or that the agency has to issue regulations before bringing a data breach enforcement action. She also held that the FTIC’s allegations were sufficient to state a claim for purposes of the motion to dismiss.

 

Before considering the question of whether the FTC had authority to bring the action, Judge Salas noted that “we live in a digital age that is rapidly evolving – and one in which maintaining privacy is, perhaps, an ongoing struggle.” This environment “raises a variety of thorny legal issues that Congress and the courts will continue to grapple with for the foreseeable future.”

 

In contending that the FTC did not have the authority to regulate data security and therefore to bring the enforcement action, Wyndham argued that various measures Congress has enacted give certain federal agencies the authority to establish minimum data-security standards in various sectors of the economy, in effect carving out a data-security exception to the FTC’s unfairness authority by its specific statutory specifications.. Judge Salas found that the data-security legislation “seems to complement – not preclude – the FTC’s authority” and that in any event the legislation actions “do not call for a data-security exception to the FTC’s unfairness authority.”

 

As for Wyndham’s argument that fair notice requires the FTC to issue rules and regulations before it can file an unfairness claim, Judge Salas noted that “Circuit Courts of Appeal have affirmed FTC unfairness actions in a variety of contexts without preexisting rules or regulations specifically address the conduct-at-issue.” Moreover, she said she could not accept “the untenable consequence of accepting” Wyndham’s argument, that the FTOC would have to cease bringing all unfairness actions without first prescribing particularized prohibitions – “a result that is in direct contradiction with the flexibility inherent in Section 5 of the FTC Act.”

 

Finally, with respect to Wyndham’s argument that the FTC’s complaint did not satisfy minimum pleading requirements because, among other things, it did not specify how the consumers had suffered the requisite “substantial injury.” Judge Salas concluded that the FTC’s complaint sufficiently pleads both an unfairness claim and deception claim under Section 5 of the FTC Act.

 

Judge Salas emphasized, with respect to her rulings, that “the Court does not render a decision on liability today,” and she further emphasized that her decision “does not give the FTC a blank check to sustain a lawsuit against every business that has been hacked.” Instead, she said, she her decision only “denies a motion to dismiss given the allegations in this complaint – which must be taken as true at this stage – in view of binding and persuasive precedent.”

 

Discussion 

Though Judge Salas took pains to emphasize that ruling was narrow and addressed only to the specific matter and issues before her, her decision does nevertheless have “broad ramifications for the liability of companies whose security systems are breached,” according to an April 7, 2014 Wall Street Journal article about the ruling in the Wyndham case (here).

 

According to the Journal, the FTC has brought dozens of data-security cases, but “the overwhelming majority of them have produced out-of-court settlements, meaning judges were never asked to weigh in on the agency’s powers.” The article quotes the FTC’s chair, Edith Ramirez, as saying that the ruling confirms the agency’s ability to “hold companies accountable for safeguarding consumer data.” It also quote her as saying “Companies should take reasonable steps to secure sensitive consumer information,” adding that “when they do not, it is not only appropriate but critical that the FTC take action on behalf of consumers.”

 

By now, most company officials are aware that a significant data breach can be disruptive and expensive for their companies and can be a public relations disaster. In addition to these problems, a significant data breach can also have litigation consequences as well. As I noted in a recent post, following Target’s recent high profile data breach, the company’s directors and officers were hit with a shareholders derivative suit. And as the FTC’s Wyndham case shows, companies experiencing significant data breaches at least potentially could face a civil enforcement action from the FTC, and perhaps other regulators as well. Not only does this case affirm the FTC’s authority to bring these types of actions, but the statement of the FTC chair make it clear that the agency intends to pursue more of these kinds of actions on behalf of consumers.

 

For publicly traded companies, these kinds of regulatory actions may present insurance challenges. The only defendants in this action were the corporate parent company and certain of its operating subsidiaries. In a public company D&O policy, the corporate entity is provided coverage only for securities claims. Because the FTC’s enforcement action did not allege violation of the securities laws, an FTC action of this kind would not trigger the entity coverage found in most D&O policies.

 

While private company D&O insurance policies provide broader entity coverage, private company policies also often contain so-called “antitrust” exclusions that broadly preclude coverage for claims involving allegations of unfair or deceptive trade practices. The exclusions in some carrier’s policies expressly preclude coverage for claims under the Federal Trade Commission Act. Some carriers will remove these exclusion upon request, but others will not, while yet others will only provide so-called antitrust coverage on a sublimited basis, or on a defense cost only basis.

 

Many carriers now offer separate cyber risk insurance policies that include third-party liability protection. The third-party liability protection available under these cyber risk policies usually include insurance protection for actions brought by regulators following a data breach, including even coverage for regulatory fines and penalties where insurable.  However, the third-party regulatory protection available under many cyber risk policies is often subject to a sublimit.

 

The threat of a significant cyber breach presents a significant risk for companies and Increasingly these risks include the possibility of litigation following a data breach — including the risk of litigation brought by shareholders or by regulators. These data breach litigation risks in turn may present potentially complex insurance coverage issues, which underscores the need for companies to consult with knowledgeable insurance advisors in connection with these developing litigation exposures.

 

 

wikiglobeAs a result of heightened regulatory scrutiny and changing enforcement priorities around the world, “cartel enforcement is a hot topic in boardroom,” according to a March 29, 2014 Economist magazine article entitled “Just One More Fix” (here). According to the article, antitrust enforcement authorities are getting “better at detecting cartels and bolder in punishing them.” This developing global regulatory trend has important implications for companies, their boards, and for their D&O insurers.

 

According to the article, “fines and penalties” for conduct violating antitrust laws “have shot up in recent years greatly raising the costs of collusion.” In recent years, enforcement authorities have busted international conspiracies “in fields as diverse as seat belts, seafood, air freight, computer monitors, lifts and even candle wax.” 

 

Although in this as in many other regulatory arenas U.S. regulators have lead the way, the article mentions significant current or recent enforcement actions in countries as diverse as Brazil, Japan, German, Ireland, India, and Britain, as well as actions by the European Commission. In these and many other jurisdictions, “policing and penalties have grown harsher.” For example, in the U.S. the maximum corporate fine has increased tenfold, while the European Commission can fine companies up to 10% of turnover..

 

Perhaps most significantly, the various countries’ competition authorities are sharing information and acting in tandem. As a result, “in the biggest cases, offenders can be hit with suits in a dozen countries.” More difficultly for the defendant companies, “jurisdictions often co-ordinate their actions but they do not have to take account of each other’s fines, and do not always agree.”

 

In addition to the actions of regulatory authorities, “price-fixers have to worry about the growth of civil litigation, which almost always follows action by competition authorities.” According to the article, “private suits in America generated awards and settlements of $33 billion – four times the level of official fines – between 1990 and 2008.” Although class action lawsuits are most frequently filed in American courts, the article notes that “class actions are less common but [are] on the rise in Europe, with Britain, German and the Netherlands leading the way.”

 

One reason for the increased regulatory attention to cartel busting is that price-fixing companies have huge incentives to self-report. Over 50 countries have now adopted regulatory programs providing that a company that self-reports will receive substantial leniency credits in connection with sentencing and fines, while at the same time, a company that hangs back and is not forthcoming may face more punitive fines and penalties.

 

Perhaps the most interesting point in the article I that notwithstanding all of this regulatory and enforcement activity, cartels continue to form, basically because, as an academic study cited in the article put it, “crime pays.” The study showed that cartels typically can raise prices 20%, which at the same time the chances of getting caught remain relatively low.

 

In other words, we have a set of business behaviors for which there are strong economic incentives, meaning that companies will continue to be drawn toward this type of conduct notwithstanding the increasing regulatory focus. As a result, there would seem to be a strong likelihood that we will continue to see significant regulatory attention to this area.

 

Accordingly, while there may be economic incentives that continue to draw companies toward anticompetitive behavior, this area represents a significant liability exposure for companies and their boards. The exposure consists not only of potential civil liability to regulators or even to consumers or other civil claimants; in many jurisdictions, the tools available to competition enforcement authorities include the ability to bring criminal actions as well. As the article notes, “America leads in putting price-fixers behind bars,” adding that the average jail term has rise, from eight months in the 1990s to more than two years now. Criminal penalties can be imposed in Ireland and Britain as well.

 

For all of these reasons, it is hardly surprising that cartel enforcement is, as the article says, a hot topic for corporate boards. It may also be of increasing concern to their D&O insurers as well, although antitrust and competition claims may represent something of an awkward fit for many D&O insurance policies.

 

In many antitrust enforcement actions and in many civil antitrust lawsuits, the main target or one of the main targets is going to be the company itself. However, public company D&O policies typically provide insurance coverage for securities claims only. Because an antitrust enforcement action or follow on civil action typically will not include an alleged violation of the securities laws, the typical public company D&O insurance policy will not provide coverage for the antitrust enforcement actions or even the follow on civil actions (except as noted below).

 

The coverage for the corporate entity afforded in private company D&O insurance policies is broader; it typically is not limited to securities claims only. However, many private company policies include an antitrust exclusion in their base policy forms. (As discussed here, the preclusive effect of the typical private company D&O insurance policy antitrust exclusion is usually much broader than just antitrust claims but also includes many other kinds of unfair and deceptive trade practices claims as well.). Some – but not all – carriers will agree to remove this exclusion upon request, while others will provide defense cost only protection for antitrust claims, or otherwise restrict the coverage available for antitrust claims through sublimits or coinsurance provisions. In other words, even under private company D&O insurance policies, the extent of coverage available for antitrust claims against the corporate entity often may be limited at best, and in other cases nonexistent.

 

It is a different story with respect to antitrust claims against individuals. Subject only to the preclusive effect of any antitrust exclusions and any other potentially applicable exclusions, the typical D&O insurance policy would provide coverage for individual defendants in antitrust enforcement actions or follow on civil actions.

 

As noted above, the article states that consumer civil actions often follow in the wake of the regulatory enforcement action. In addition, there is another type of civil action that may also follow after the regulatory action. Shareholder suits may also follow after the regulatory action.

 

For example, as discussed here, in April 2013, shareholders initiated a securities class action lawsuit in the U.S. against Sweden-base auto parts firm Autoliv and certain of its directors and officers, relating to the company’s announcements in early 2011 that the DoJ and the European Commission were investigating units of the company for anti-competitive practices and antitrust violations. The investigation resulted in the company’s June 2012 agreement to plead guilty to price-fixing for certain auto parts.

 

Similarly, as discussed here, Russia-based Mechel OAO and certain of its directors and officers were hit with a securities class action lawsuit in the U.S. after Russian authorities found guilty of breaking competition laws; discriminating against Russian consumers; and maintaining a monopoly in the coal market.

 

Other examples of cases where securities class action lawsuit followed in the wake of antitrust enforcement activity include the  securities suit filed against Reddy Ice Holding and certain of its directors and officers (about which refer here), as well as the securities suit filed against Horizon Lines and certain of its directors and officers (refer here). More recently, the Libor-scandal related securities suit filed in the U.S. against Barclays and certain of its former executives followed after the company had reached a regulatory settlement with regulators in the U.S and the U.S. of an enforcement action that included alleged violations of the antitrust laws.

 

While the typical antitrust enforcement action would not trigger the entity coverage under a public company D&O policy because it does not involve an alleged violation of the securities laws, these securities lawsuits following on in the wake of antitrust enforcement actions which do involve alleged violations of the securities laws typically would trigger the entity coverage in the public company D&O policy.

 

In other words, because of the type and scale of litigation activity that can follow in the wake of antitrust enforcement activity, the current regulatory enthusiasm for cartel busting not only represents an important liability exposure for companies and their boards, this trend may also represent a significant exposure for their D&O insurers as well, even if only in the form of the follow on securities litigation.

 

More generally, these antitrust enforcement trends and related civil litigation represent just one specific example of a larger phenomenon that I have noted frequently in recent months, which is increasing levels of regulatory enforcement action in general as well as of the rise in related civil litigation following in the wake of the enforcement actions ( about which refer here).

prIn an interesting March 31, 2014 opinion (here), the Unites States Court of Appeals for the First Circuit, applying Puerto Rico law, affirmed a district court’s ruling that the D&O insurer for the failed Westernbank of Mayaguez, Puerto Rico must advance the bank’s former directors’ and officers’ expenses incurred in defending the FDIC’s suit against them in its capacity as the failed bank’s receiver. Though the case ultimately involves an interpretation of Puerto Rican statutory principles dictating when an insurer must advance defense expenses, it also includes an interesting angle on the recurring issue of whether or not an action against a failed bank’s directors and officer by the FDIC in its capacity as receiver for the bank is precluded from coverage under the “Insured vs. Insured” exclusion found in most D&O insurance policies.

 

Background

 

Regulators closed Westernbank on April 30, 2010, which according to the FDIC cost the insurance fund $4.25 billion. In October 2011, certain of the former Westernbank directors and officers sued the bank’s primary D&O insurer in state court in Puerto Rico, seeking a judicial declaration that the insurer must defend that against claims the FDIC had asserted against them  (about which refer here). The FDIC as receiver for Westernbank moved to intervene in the state court action, and on December 30, 2011, removed the state court action to the District of Puerto Rico. On January 20, 2012, the FDIC filed its amended complaint in intervention, in which it named as defendants certain additional directors and officers, and, in reliance on Puerto Rico’s direct action statute, the various D&O insurers in the bank’s D&O insurance program. A copy of the FDIC’s amended complaint can be found here.

 

In its complaint, the FDIC, as Westernbank’s receiver, seeks recovery of over $176 million in damages from the former bank’s directors and officers as well as their conjugal partners, based on twenty-one alleged grossly negligent commercial real estate, construction and asset-based loans approved and administered from January 28, 2004 through November 19, 2009. In its complaint in intervention in the directors and officers coverage action against the bank’s D&O insurers, the FDIC seeks a judicial declaration that its claims against the directors and officers are covered under the policies. All of the defendants moved to dismiss the respective claims against them.

 

As discussed here, on October 12, 2012, Judge Gustavo Gelpi, denied all of the motions to dismiss. A copy of the court’s October 23, 2012 decision can be found here. Among other things, Judge Gelpi ruled that the insured vs. insured exclusion did not preclude coverage for the FDIC’s liability action against the former directors and officers, in part because at least in this case the FDIC not only sought to enforce the rights of the failed bank to which it succeeded as the failed bank’s receiver, but also because the FDIC also sought to enforce the rights of “depositors, account holders, and a depleted insurance fund.”

 

In addition, and of the greatest significance for purposes of the appeal,  Judge Gelpi ruled that the D&O insurer must advance the individuals defendants defense expenses, noting that Puerto Rican statutory law requires liability insurers to advance defense expenses “if there is even a remote possibility that a claim ultimately will be covered.” He also noted that his advancement ruling “is without prejudice” to the insurer’s “eventually being entitled to repayment.”

 

The insurer sought to appeal the advancement ruling to the First Circuit.

 

The March 31 Opinion

 

In a March 31, 2014 opinion written by Judge Ojetta Rogeriee Thompson, a unanimous three-judge panel of the First Circuit affirmed the lower court’s ruling that the D&O insurer must advance the individual directors’ and officers’ defense expenses.  The appellate court emphasized that the Puerto Rican statute requiring advancement if there is even a “remote possibility” of coverage, and that any doubts about an insurer’s advancement obligation “must be resolved in the insured’s favor.”

 

The insurer had sought to argue that there was not even a remote possibility of coverage, because the FDIC’s action against the individuals depended on the rights to which it succeeded as receiver for the failed bank. Because the FDIC as receiver stepped into the shoes of the failed bank, the insurer argued,  its action is just as precluded under the insured vs. insured exclusion as the action would have been had it been brought by the bank itself. In arguing that there was at least a remote possibility of coverage, the individuals and the FDIC cited to various cases that have held that the insured vs. insured exclusion does not preclude coverage for a D&O lawsuit brought in its capacity as receiver for a failed bank.

 

The appellate court noted specifically that, while the insurer argued that the FDIC was proceeding only its capacity as receiver, the FDIC for its part alleged more than that it had succeeded to the rights of the failed bank. It also alleges under FIRREA that it has succeeded to the rights of Westernbank’s depositors and account holders, and also that it was suing to recover “money the insurance fund had shelled out” after the bank failed. The Court said that “we think that these allegations make it likely possible – even if only remotely so – that the FDIC is suing on these non-insureds’ behalf. “

 

Noting that the parties’ arguments make this “a classic battle of dueling caselaw” with “no controlling authority” and with an obligation to resolve any doubts in the insured’s favor, the D&O insurer’s “suggestion that there is zero likelihood of a remote possibility of coverage falls flat.” The court ruled that the district court’s advancement ruling should stand, while emphasizing that “having lost the likelihood-of-success skirmish,” the D&O insurer “may still ‘win’ the coverage war at a succeeding trial on the merits.”

 

Discussion

 

It bears emphasizing that the First Circuit’s ruling does not represent an appellate affirmation of the district court’s coverage ruling on the insured vs. insured exclusion, but rather represents only an appellate ruling on the question of whether or not the lower court correctly applied the Puerto Rican statute requiring liability insurer’s to advance defense costs when coverage is disputed.

 

Nevertheless, the appellate court’s determination of the advancement issue does provide some interesting perspective on the ultimate merits of the disputed coverage issue. First, the appellate court did note (in footnote 2) that the D&O insurance policy at issue, by contrast to other policies that the same insurer has issued, does not contain a so-called “regulatory exclusion” expressly excluding coverage for claims brought by regulatory authorities.

 

Second, the appellate court considered it relevant and significant that in asserting its claims, the FDIC expressly sought to assert rights beyond those to which it succeeded as receiver of the failed bank, asserting in addition its rights under FIRREA to assert the claims of depositors and account holders, as well as on behalf of the deposit insurance fund.  These are the claims with respect to which the district court had concluded that the FDIC was also proceeding in a non-insured capacity and therefore that its claims were not precluded from coverage by the insured vs. insured exclusion.

 

Because the appellate court’s ruling involved the merits only of the advancement issue and did not involve an appellate consideration of the merits of the coverage dispute under the insured vs. insured exclusion, it will have no preclusive effect even in the First Circuit of the continuing dispute as to whether or not the FDIC’s assertion of claims in its capacity as receiver of a failed bank against the bank’s former directors and officers are precluded under the insured vs. insured exclusion.

 

Accordingly, this ongoing coverage dispute, which has also arisen in numerous other coverage actions associate with failed bank D&O lawsuits, will continue. The carriers, for their part, will try to rely on the rulings, such as the Northern District of Georgia Judge Richard W. Story’s August 2013 opinion (discussed here) that the insured vs. insured exclusion does preclude coverage for an FDIC lawsuit against a failed bank’s directors and officers, while the directors and officers will try to rely on rulings such as Northern District of Georgia Judge Robert Vining’s January 2013 ruling, discussed here, that the insured vs. insured exclusion doesn’t preclude coverage.  

 

I do note the following with respect to the question of the relevance to the coverage determination of the question as to whether or not the FDIC is proceeding against the directors and officers in a capacity other than as the receiver for the failed bank. The insurers will likely contend that even if the FDIC is acting on behalf of other constituencies in bringing the suit, it is first and foremost bringing the suit in its capacity as receiver for the failed bank, as that is the basis upon which it has any right to bring the claims in the first place. The insurers will further argue that the sole basis on which the FDIC has any right to assert the claims is because, by operation of the receivership, it is acting “in the right of” the failed bank, and therefore the preclusive language of the exclusion applies, notwithstanding the fact that the FDIC may have other purposes and motivations in bringing the action. The policy’s exclusion does not require, in order for the exclusion to apply, that the action be brought “solely” or “only” “in the right of” the Organization. The insurers will argue that because the action was brought “in the right of” the Organization, the exclusion applies notwithstanding the fact that in bringing the claim the FDIC was also action on behalf of other constituencies.

 

One final aspect of the First Circuit’s opinion here is worthy of comment. In her opinion for the court, Judge Thompson adopted a rather light-hearted tone, using phrases such as saying that the directors and officers “find themselves in the cross-hairs” or in its intervention the FDIC was “jumping in with gusto” or that “without missing a beat” the directors and officers sought coverage under the D&O policy. There is much more of the same in the opinion. Some may find this approach to judicial writing amusing; I do not. I am not sure what Judge Thompson sought to achieve by this approach, but personally I find this jaunty tone to be grating. I don’t think she intended to communicate that the parties’ dispute was unimportant, but I know for sure I were a party to this dispute I would have found her “isn’t this all so very amusing” tone to be extremely annoying.

 

Very special thanks to Evan Shapiro of the Boundas Skarzynski Walsh & Black law firm for sending me a copy of the First Circuit’s opinion.

 

Joe Monteleone’s take on the First Circuit’s opinion in an April 3, 2014 post on his D&O E&O Monitor blog can be found here.  

 

law libraryAs I have previously noted on this blog, a recurring insurance coverage issue is whether or not the costs incurred in responding to a regulatory or enforcement subpoena represent covered defense under a D&O insurance policy. In an interesting March 27, 2014 memo entitled “D&O Coverage for Subpoena Response Costs: An Emerging Consensus?” (here), Benjamin D. Tiersky of the Orrick law firm takes a closer look at the recent case law and concludes that “there is a general trend emerging to recognize broad coverage for subpoena response costs under D&O policies.”

 

The costs of responding to an administrative, regulatory or grand jury subpoena can be very substantial, particularly in this era when so many documents are electronic or stored electronically. Given the magnitude of subpoena response costs, it is hardly surprising that those responding to the subpoenas seek to find insurance to pay for their incurred costs.

 

The principle point of dispute when questions arise as to whether or not a D&O insurance policy covers subpoena response costs are covered is the question of whether or not a subpoena is a “Claim” within the meaning of the policy. In contending that there is an “emerging consensus” that subpoena response costs are covered, Tievsky cites several recent cases in which courts have found that these a subpoena comes with the D&O insurance policy’s definition of “claim” because it represents a “demand for non-monetary relief.”

 

The author  refers in particular to the 2013 New York appellate court decision in a case involving Syracuse University and its costs incurred in responding to various subpoenas involved with investigations surrounding allegations against a former assistant basketball coach. The appellate court affirmed the trial court’s ruling that the insurer was liable for the university’s costs of responding to the subpoenas. The author also cites other cases where courts have found that a D&O insurance policy provides coverage for subpoena response costs, including at least case where a federal district court cited the Syracuse University case in finding coverage for the costs of responding to a NASA subpoena.

 

The author does note that while there may be a trend in the case law on the question of whether or not a subpoena is a claim within the meaning of the D&O insurance policy, questions may remain depending on the issue of who the subpoena’s target is and whether or not the subpoena is directed to an insured person or is directed to that person in an insured capacity.

 

The author also notes that issues may arise about which costs are covered. The author notes that insurers may take the position that they are only obligated to cover legal costs incurred in responding to the subpoena, but may dispute whether they must also cover indirect costs such as internal investigations relating to the subject matter of a subpoena, or costs relating to informal information requests relating to the subject matter of a subpoena.

 

In noting that “policyholders must be wary that with specific reference to D&O coverage of subpoena response costs” because “two leading cases come out opposite ways” on the question whether the policy must also cover indirect costs such as internal investigations relating to the subject matter of the subpoena or the costs of informal investigative responses. In support of this statement, the authors cites to the 2011 decision in the MBIA case (about which refer here), in which the Second Circuit held that costs incurred in voluntarily complying with investigative requests, as well as special litigation committee costs, are covered under a D&O insurance policy. The author contrasts the MBIA decision with the 2012 decision in the Office Depot case (about which refer here), in which the Eleventh Circuit held that the insured’s costs of responding to an informal inquiry were not covered under its D&O insurance policy.

 

Finally, the author notes that questions also remain as to whether “ancillary costs” that may arise when a company is subpoenaed – such as the costs associated with hiring a crisis management firm – are covered under the D&O insurance policy.

 

Discussion

 

The author’s analysis is interesting and certainly there are grounds on which it may be argued that a consensus is emerging on the question of whether or not a subpoena is a claim for purposes of determining D&O insurance coverage. However, I think there are several important points that should be kept in mind when considering these issues.

 

First, the wordings of the policy definition of the term “Claim” vary substantially between policies and the precise wording used can be crucial. Often seemingly minor differences can be coverage-determinative.

 

Second, in addition to the wording of the policy, the nature of the subpoena involved may also be important. A court may well have a different perception of, say, a grand jury subpoena, compared to an administrative subpoena, for example.

 

Third, the typical D&O policy provides coverage for loss arising from a “Claim” based on an “actual or alleged Wrongful Act.” Whether or not a subpoena represents a “Claim,” there may still be a question whether an actual or alleged Wrongful Act is involved.

 

Fourth, the author is correct that the MBIA and Office Depot cases may represent contrasting reference points on the question of whether or not various investigative response expenses are or are not covered. However, the cases were not directly related to the specific question of whether or not subpoena response costs as such are or are not covered. In addition, as discussed here, while the MBIA case undoubtedly is helpful to policyholders, its usefulness may be limited by the case-specific and somewhat unusual fact that all of the disputed costs at issue in the case were incurred after the SEC had issued a formal order of investigation. Accordingly, the case may be less helpful in those circumstances when a formal order of investigation has not yet been issued.

 

Special thanks to the several readers who sent me a copy of the author’s memo.

 

NERA_horizontal_2945_4cIn the following guest post, Christopher Laursen, Senior Vice President and Chair, Financial Institutions and Bank Practice at NERA Economic Consulting, takes a look at the current enforcement trends involving the Bank Secrecy Act and the Anti-Money Laundering regulations. I welcome guest submissions from responsible persons on topics of interest to readers of this blog. If you are interested in submitting a guest post, please contact me. Here is Chris’s guest post:

*******

 

 Following HSBC Holdings plc’s December 2012 admission to facilitating the laundering of $881 million in drug cartel monies and violating federal sanctions, members of Congress have pressed regulators to hold individuals accountable for systematic violations of Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulations. Recent enforcement trends and public statements suggest that regulators, who were already shifting towards a stricter enforcement trend by levying large corporate monetary penalties, have responded with increased scrutiny for directors and officers failing to address alleged BSA/AML compliance shortfalls. In March 2014 statements before the Association of Certified Anti-Money Laundering Specialists (ACAMS), regulators indicated that they intend to hold individuals accountable for violations as part of this broader shift toward stricter enforcement.

 

Members of Congress have repeatedly raised the issue of individual accountability for AML compliance violations. In October 2013, House Democrats introduced a bill making bank executives, officers, and directors personally liable for BSA/AML violations. The “Holding Individuals Accountable and Deterring Money Laundering Act” would also grant FinCEN, the federal regulator directly responsible for enforcing BSA/AML compliance, expanded power to litigate independently of other regulators. The bill was referred to the Subcommittee on Crime, Terrorism, Homeland Security, and Investigations on January 9, 2014.

 

Undersecretary of the Treasury for Terrorism and Financial Intelligence David S. Cohen stated before the Senate Committee on Banking that under his direction, FinCEN is looking at ways to bring monetary penalties and industry participation injunctions against individuals for BSA violations. Comptroller of the Currency Thomas J. Curry has echoed FinCEN’s focus on responsibility, and repeatedly stated that the OCC was looking into holding individuals accountable for violations. He reiterated this goal in a focused speech before ACAMS in March 2014, suggesting that a stricter enforcement paradigm targeting individual accountability might emerge in the near future. In each of these statements, bank D&O were mentioned as a class facing increased scrutiny from an individual liability perspective.

 

The general trend toward stricter enforcement is evident from recent enforcement actions against financial institutions. Federal regulators levied nearly $5 billion in monetary penalties against financial institutions in connection with alleged violations of BSA/AML regulations since 2007. According to analysis by NERA Economic Consulting in the white paper “Recent Trends in BSA/AML Enforcement and Litigation,” two-thirds of all formal enforcement actions since 2012 have included monetary penalties, compared to only one-third from 2007 through 2011. Moreover, more than four-fifths of the approximately $5 billion in monetary penalties imposed since 2007 have been levied since 2012. This regulatory emphasis has persisted despite reportedly enhanced BSA/AML compliance efforts by financial institutions’ compliance personnel, directors, and officers, including a 38% increase in filings of Suspicious Activity Reports (SARs) since 2006.

  Figure 3

 

Regulators’ enforcement practices have shifted paradigms from the financial crisis and its aftermath through the present. From 2007 through late 2009, a period in which many financial institutions struggled to maintain liquidity and capital ratios, regulators typically issued cease and desist orders with no pecuniary levies. No BSA/AML monetary penalty exceeded 1% of a financial institution’s total equity capital in that period.  This stance may have been, in part, an effort to avoid placing further strains on institutions weathering the financial crisis. From late 2009 onward, however, regulators shifted to a more aggressive enforcement paradigm and pursued enforcement actions against financial institutions for both larger dollar amounts and larger proportions of total equity capital. The increasing trend in the penalties assessed as a share of total equity capital—conditional upon an enforcement action—has been striking.

 

Figure 4

 

 

As part of this aggressive enforcement paradigm, FinCEN added a stand-alone Enforcement Division in June 2013 in a major internal reorganization, and FinCEN also started placing emphasis on corporate and individual responsibility with respect to BSA/AML compliance. While historically, financial institutions that were the subject of enforcement actions were typically able to consent to monetary penalties without admitting or denying the alleged wrongdoing, FinCEN Director Jennifer Shasky Calvery has made clear in multiple speeches since 2013 that this practice is deliberately changing. This emerging trend in admitting responsibility in response to enforcement actions both increases the liability risk for D&O and widens avenues for private litigation against financial institutions and their D&O.  

 

Bank D&O are ultimately responsible for ensuring that a bank maintains an effective BSA/AML compliance program, which must be approved by the board of directors and noted in the board minutes. The compliance program must provide for four minimum requirements: 1) a system of internal controls to ensure ongoing compliance; 2) independent testing of BSA/AML compliance; 3) designation of an individual or individuals responsible for managing BSA compliance; and 4) compliance training for appropriate personnel. In addition, notification of SARs filed must be regularly presented to the board of directors and documented in the board minutes.

 

A number of enforcement actions have assessed personal monetary penalties against bank D&O over the past few years. In February 2009, the directors of Sykesville Federal Savings Association were collectively fined $10,500 in non-reimbursable civil money penalties for multiple violations of a consent order to cease and desist. In January 2013, the OCC levied civil money penalties against five D&O of Security Bank for up to $20,000 per person in connection with violations including failure to ensure an effective BSA compliance and SAR reporting system. In September 2013, the Justice Department charged the CEO of Public Savings Bank with criminal failure to file a SAR and maintain adequate AML controls in connection with an $86,400 wire transfer of suspected drug money.

 

Though bank directors and officers are often covered by D&O liability insurance, for the past several years the Federal Deposit Insurance Corporation (FDIC) has taken an increasingly strong position that a financial institution’s insurance policies may not indemnify D&O for civil money penalties. In 2011, the FDIC cited several financial institutions for D&O liability insurance policies that covered civil money penalties, and in October 2013 the FDIC published a Financial Institution Letter explicitly prohibiting insured depository institutions or their holding companies from purchasing insurance policies that would indemnify institution-affiliated parties against civil money penalties.

 

The shift toward individual accountability for BSA/AML violations has sparked some concerns that qualified personnel might avoid compliance or D&O positions at banks due to the risk of personal liability, especially due to the prohibition on institution-provided D&O civil money penalty insurance coverage. Comptroller Curry attempted to assuage such concerns in his March 2014 address before ACAMS, stating that increased D&O accountability “doesn’t mean that a senior executive in New York, for example, should be held responsible if an account officer in South America decides to turn a blind eye to suspicious transactions.” Curry also clarified that his focus would be on major, systemic violations, by assuring ACAMS that the regulatory focus on individual accountability “doesn’t mean penalizing honest mistakes or errors in judgment or even minor failures in compliance.”

 

While many experts and financial journalists have expressed concern that qualified individuals will nonetheless shy away from BSA/AML compliance positions as a result of a focus on individual accountability, some see this very public expression of regulatory intent as a means of forcing bank executives and boards of directors to prioritize compliance, in order to provide more support to compliance officers. Since compliance does not create revenue, regulators and bank compliance personnel have both expressed the sentiment that tough talk and even enforcement “catastrophes” by regulators are sometimes required to shift management’s attention to compliance matters. Seen through this lens, regulators’ recent comments suggest that they do not believe bank D&O are currently allocating sufficient attention or resources to BSA/AML compliance, and may feel the need to make a few examples.

 

Many financial institutions have responded to stronger BSA/AML enforcement with enhanced compliance programs, a substantial increase in SAR filings, and so-called de-risking of customer portfolios. De-risking, a potentially costly compliance response, involves the purposeful closing of financial relationships with groups of customers or lines of business considered high risk under BSA/AML standards. Before de-risking a group of customers or a line of business, banks must compare the benefits of potential revenue from existing business arrangements against potential compliance risk costs.

 

Regulators have generally encouraged increased SAR filings as the best relatively inexpensive way to reduce compliance risks for financial institutions. Institutions have responded to this impetus: the number of SARs filed with FinCEN has grown nearly thirty-fold since 1996, when the SAR was introduced, and nearly five-fold since 2002, the first year the Patriot Act’s Title III expansion of BSA/AML requirements was in effect, according to FinCEN’s SAR Activity Review – By the Numbers. However, some regulators and law enforcement personnel have criticized what they term “defensive” SAR filings, which allegedly report a large number of transactions with low levels of detail included in each report. Regulators have initiated multiple enforcement actions against financial institutions for allegedly insufficient or incomplete SAR filings, likely to incentivize banks to report additional context in each SAR filing.

 

Partial compliance with relevant regulations is not enough to avoid regulatory action. The JPMorgan Chase & Co. (JPMC) settlement from January 2014 in particular reveals the broad scope and long look-back of recent enforcement actions. JPMC admitted and accepted responsibility for violations of the BSA during the period between 1996 and 2008, including failure to file SARs in connection with its relationship with Bernard Madoff and his Ponzi scheme and failure to maintain an effective AML program. However, in the deferred prosecution agreement, supervisory agencies acknowledged that JPMC filed a timely British SAR on Madoff, but seemingly sought to emphasize that meeting foreign reporting obligations did not satisfy US BSA/AML regulatory requirements.

 

The increasing magnitude of regulatory and private challenges to BSA/AML compliance has come with increased costs to financial institutions. According to the 2014 Global Anti-Money Laundering Survey, average AML compliance costs for financial institutions have grown at a rate of at least 40% every three years since 2002, and by 53% over the most recent three year period. It is expected that the costs of compliance, regulatory enforcement actions, and private lawsuits will continue their increasing trend. As legislators and regulators have specifically stated their desire to hold D&O accountable for AML violations, and as regulators bar institution-provided liability insurance from indemnifying D&O, it may also be expected that their personal liability risks will increase accordingly.

 

 

Author: Christopher Laursen

Senior Vice President

Chair, Financial Institutions and Banking Practice

NERA Economic Consulting

tel: +1 202 466 9203

christopher.laursen@nera.com

 

Mr. Laursen is a Senior Vice President and Chair of NERA’s Financial Institutions and Banking Practice. He is a leading expert in financial products, markets, risk management, and financial regulation. He has served as an expert witness in numerous litigation matters and has provided consulting and advisory services for both public and private sector clients. Prior to joining NERA in 2009, Mr. Laursen served as a banking company policy-maker, supervisor, and examiner for 17 years with the Federal Reserve Board, Regional Federal Reserve Banks, and the Office of the Comptroller of the Currency. He has extensive expertise in anti-money laundering compliance, fraud reviews, credit underwriting, and trading activities, and has served as an expert witness and consultant in matters dealing with BSA/AML.

150aThe D&O Diary’s European mission continued last week with a stop for meetings in Stockholm, Sweden’s beautiful capital city and the largest city in Scandinavia. I know from experience that the weather in Europe in March can either be great or it can be awful. Just the same, I couldn’t have predicted the weather in Stockholm last week. The word that comes to mind is – magical. For three straight sunny days, the temperatures were in the 60s, with crystal clear blue skies and only the gentlest of breezes.

 

Let’s put this weather into perspective. At 59 degrees north latitude, Stockholm is really far north.  By way of comparison, Moose Jaw, Saskatchewan is only at 50 degrees north latitude. While I was actually getting a little sunburned in Stockholm, it snowed – twice – back home in Cleveland (located at 41 degrees north latitude). The funny thing is, I had several different conversations with locals who were upset because the winter in Stockholm was so awful – no snow! It hardly even got cold this winter! And Spring, in March? What’s up with that? (Stockholm is also further east than you might think. Stockholm is at 18 degrees east longitude; Berlin, by comparison, is at 13 degrees east longitude. Stockholm is both the furthest north and – excepting only Asia – it is the furthest east I have ever traveled.)

 

Stockholm has the essential charm, character and history you would068a expect of a venerable European capital city. But there is also something about its location on the Baltic Sea that in my mind makes Stockholm distinct, almost exotic. 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 (as reflected in the picture at the top of this post).  And as a by-product of Sweden’s now centuries-old pacifist history, its architectural legacy is unusually well preserved. 

 

074aStockholm has a population of about 1.3 million, roughly the size of San Diego –but comparisons to the American city (or really to any city) are difficult because of the way Stockholm is arranged. Its physical area is one-third water and one third-parks. As a result, the city’s texture is surprisingly varied. Gamla Stan, the city’s extraordinarily intact old town, is laced with narrow, cobble-stone alleyways and full of shops and restaurants. The Baltic Sea connects to Lake Mälaren through a series of locks where Gamla Stan links to Södermalm, the city’s densely populated southern island. During my visit, I made my way to Tantolunden, one of the city’s many huge parks, on Sodemalm’s southern side. A collection of small holiday houses sits along a south-facing hillside in the park, each with its own garden (pictured below). The warm sunshine had drawn out each garden’s early spring flowers in a colorful profusion of crocuses, snowdrops and daffodils.   

 181a

 

 

 

 

 

 

 

 

 

As enjoyable as it is to walk around the city, the necessity for using public transportation quickly became apparent. I am a big fan of using public transportation when I travel, but I have to admit that had to work up my nerve to use the Stockholm subway (Tunnelbana). The city transit map looked like a colorful bowl of spaghetti. And then there are the station names – well, they are all in Swedish. None of the station names are pronounced the way they look. One of the stations with a relatively simple name near my hotel was “Hötorget,” which is pronounced “Heur-tor-jeh(t)” (sort of). But I managed to overcome my trepidation. It turns out the system is relatively easy to use and quite efficient. The subway system has also been called the world’s largest underground art gallery; many of the stations are dazzlingly colorful.

 

On Saturday, I was confident enough in my mastery of the transit system026a to take the Tunnelbana to Drottningholm Palace, the Swedish royal palace and residence of the current monarch, King Carl XVI Gustaf of Sweden. Regrettably, I did not see the King while there, nor any other member of the royal family. The palace is beautifully situated on the water and within immense parklands, but during my visit the trees and formal gardens were still in their winter dormancy. Further away from the actual palace itself, the park walkways were quite deserted. The woods and gardens had a quiet, austere beauty. I can only imagine how spectacular the grounds are in the summer months.

 

077aaThere is another palace in the city center, known simply as the Royal Palace (Kungliga Slottet), within Gamla Stan, across from the Parliament Building. This palace apparently is no longer used as a residence; I was told that this one is where the King works. Which made me wonder, what kind of “work” does a king do? I picture King Carl answering his email, putting together a spreadsheet listing his various palaces, and sending text messages to the other European royalty (say, to Prince Charles: “Sup dog? When u gonna b king???”)

 

There are a lot of great reasons to visit Stockholm, but one of the best is the food. I had several great meals there. For example, I had a terrific Asian fusion meal one night in an unusual food court near my hotel, called K25. (The name is a reference to the food court’s street address, Kungsgatan 25.) The basic idea of the place seems to be casual dining as theater. There are eleven food vendors in the center of the hall, and along the back wall is stadium style seating, affording an agreeable view of the food court scene. This perspective allowed me to observe that I was easily double the age of just about everyone in the place.

 

001aI did also enjoy some traditional Swedish food, as well. On my first night in Stockholm, I traveled by ferry with several industry colleagues to Restaurant J, a beautifully situated waterfront restaurant, where I enjoyed a plate of reindeer carpaccio, served with cloudberries and beets. And on Friday night, I had a traditional Swedish meal at Gunnels Krog, a small restaurant in Gamla Stan. For my main course, I had – wait for it – Swedish meatballs (pictured), made from moose meat and served with ligonberries, pickles, and cauliflower, with a bowl of potatoes on the side. I am not sure what kind of wine Hugh Johnson would recommend with moose meat, but I had a nice Côtes du Rhône. I also enjoyed the opportunity to chat with the restaurant’s charming proprietress, Gunnels Angberg, who is one of those special people who manages to show that she absolutely loves what she does and that she wants to share it with everyone. It was a truly memorable meal.

 

I want to thank Sverker Edstrom and Carl Bach of Navigators for inviting me to Stockholm to participate in their very successful broker event. Stockholm is a terrific place and I am grateful to have had the opportunity to visit.

 

I know I got lucky with the weather. I took advantage of it. I think I walked a couple of dozen miles in Stockholm and I took hundreds of pictures. I have set out a small sample of them below.

 

196a

 

 

 

 

 

 

 

 

 

 

 

 

173a

 

 

 

 

 

 

 

159a

 

 

 

 

 

 

 

 

 

 

 

 

055a

 

 

 

 

 

 

 

027a

 

 

 

 

 

 

 

I know that it is very immature of me, and perhaps even ignorant, but I found some of the Swedish words and phrases to be funny.

112a

 

 

 

 

 

 

 

116a

 

 

 

 

 

 

 

117a

 

 

 

 

 

 

 

153a

cornerOwing to a number of larger settlements, the average securities class action settlement amount in 2013 rose, while at the same time the media settlement amount declined, according to a study of the securities suit settlements from Cornerstone Research. The study also reports that the number of settlements and the aggregate dollar value of all settlements also rose during the year. The report, which is entitled “Securities Class Action Settlements: 2013 Review and Analysis,” can be found here. Cornerstone Research’s March 27, 2014 press release about the study can be found here.

 

According to the report, there were 67 securities class action settlements that received court approval during 2013 (up from 57 in 2012). The aggregate dollar value of the 2013 settlements was $4.773 billion, which represented a 46 percent increase over 2012 and which also was the highest annual total dollar value over the last six years.

 

The average settlement amount during the year was $71.3 million, compared to the average securities class action settlement during the period of $55.5 million between 1996 and 2012. (All settlement dollars are adjusted to account for economic inflation.). The increase in the aggregate and average settlement amounts during 2012 was largely a reflection of the number of “mega settlements” (i.e., settlements over $100 million). There were six mega settlements during 2013, which was the second highest proportion of those large settlements in the last ten years. The number of large settlements during the year was in part due to the resolution of several credit crisis-related lawsuits. These six mega settlements accounted for 84 percent of the total dollar value of the 2013 settlements.

 

While aggregate and average settlement values increased during 2013, the median settlement amount declined. The median settlement value in 2013 was $6.5 million, compared to a median settlement amount during the period 1996-2012 of $8.3 million. The decrease in the median during 2013 was a result of the high number of smaller settlements – approximately 60 percent of the cases that settled in 2013 were resolved for $10 million or less. About a third of these smaller settlements related to cases involving Chinese reverse merger companies (all but one of the Chinese reverse merger cases that settled in 2013 were resolved for less than $10 million).

 

The report includes a graphical illustration (Figure 4 in the report) showing a cumulative ten-year settlement distribution. According to the illustration, 55.5% of all cases were settled for $10 million or below, 78.8% of cases were settled for $25 million or below, and 87.4% of cases were settled for $50 million or below.

 

A separate illustration (Figure 7) shows median settlements as a percentage of “estimated damages” during the preceding ten years. The illustration shows that median settlements as a percentage of these estimated damages have fluctuation over time but have remained in the roughly 2-3% range during that period. During 2013, the figure was 2.1%, which was level with 2011 but up slightly from 2012 (when the figure was 1.8%). An accompanying figure shows that these percentages decrease as the size of the settlement increases. For settlements under $50 million, the percentage in 2013 was 15.1%, while for settlements over $250 million, the percentages were 2.0% or lower.

 

Over the last ten years, the median settlement value of cases that allege only ’33 Act claims ($3.4 million) is lower than for cases that allege only ’34 Act claims ($8.8 million) or that allege both ’33 Act and ’34 Act claims ($6.8 million). This difference is a reflection of the fact that the “estimated damages” for ’33 Act claims tends to be lower than the two other categories of cases.

 

The study also shows that cases involving alleged GAAP violations, restatements or reported accounting irregularities all tend to be associated with higher settlement amounts and tend to settle for a larger percentage of “estimated damages” than cases without those allegations. Similarly, cases involving third-party codefendants, such as an auditor or underwriter, often are larger and more complex cases and have a higher settlements as a percentage of “estimated damages.”

 

Over 55 percent of settlements since 2006 have had an institutional investor as lead plaintiff. Possibly because the cases in which the institutional investors tend to get involved are the larger or more serious cases, the settlements in cases involving institutional investor lead plaintiffs are larger than for other cases. The median settlement in 2013 for cases with a public pension as a lead plaintiff was $23 million, compared with $3 million for cases without a public pension lead plaintiffs.

 

Settlement amounts for class actions accompanied by derivative actions are significantly higher. In 2013, 40 percent of settled cases involved an accompanying derivative action, compared to 32 percent of settled cases during the period 1996-2012.  

 

Cases involving a corresponding SEC action are associated with significantly higher settlement amounts and have higher settlements as a percentage of “estimated damages.” The median settlement amount for cases with an accompanying SEC action for the period 1996-2013 was more than two times the median settlement for cases without an accompanying SEC action. Settlements of $50 million or lower are far less likely to involve corresponding SEC actions or public pensions as lead plaintiffs.

 

The report does note that the Halliburton case now pending before the U.S. Supreme Court “has the potential to dramatically affect the entire landscape surrounding securities class actions, “ including the considerations relating to settlements discussed in the report, including, in particular “the settlement amounts involved.”

U.S. ChamberAs I have previously noted on this blog, one of the more noteworthy recent litigation developments has been the rise in litigation financing in the U.S. The presence and effect of litigation financing remains controversial, at least in certain quarters. In the following guest post, Lisa Rickard, the President of U.S. Chamber Institute for Legal Reform, presents her perspective on third-party litigation funding and the dangers that in her view it represents for our legal system and processes.

 

I welcome guest post submissions from responsible commentators on topics of interest to readers of this blog. The views expressed in guest posts are those of the post’s author(s). Readers who are interested in submitting a guest post should contact me directly. Here is Lisa’s guest post:

***********************

             Third-party litigation funding, the practice by which outsiders fund large-scale litigation, has received substantial attention in recent months as litigation financers have sought to legitimize their business as a valid part of the U.S. legal system.  But the notion that litigation financing is a mechanism for promoting justice is, at best, naïve, and at worst, disingenuous.  In reality, litigation financing is a sophisticated scheme for gambling on litigation, and its impact on American companies is unambiguous:  more lawsuits, more litigation uncertainty, higher settlement payoffs to satisfy cash-hungry funders, and in some instances, even corruption. 

 

            The ugly side of litigation financing was recently revealed in a ruling by federal Judge Lewis Kaplan in Chevron Corporation v. Donziger, Chevron’s federal civil-racketeering suit against Steven Donziger, lead plaintiffs’ lawyer in the infamous Lago Agrio lawsuit against Chevron.  Lago Agrio was a mass-tort environmental-contamination lawsuit brought by Donziger, purportedly on behalf of Ecuadorians who had been harmed by Texaco’s former oil exploration and production operations in Lago Agrio, Ecuador.  Donziger and his co-counsel prosecuted the suit in part with the help of a $4 million investment by the Burford Capital financing firm, which made its investment in exchange for a percentage of any award to the plaintiffs.

 

            In February 2011, the Ecuadorian trial court awarded the plaintiffs an $18 billion judgment (later reduced to $9 billion) against Chevron.  Shortly afterward, Chevron sued Donziger for civil racketeering for procuring the judgment fraudulently.  In his March 4 opinion, Judge Kaplan found that the “decision in the Lago Agrio Case was obtained by corrupt means.”  Judge Kaplan also lamented the plaintiffs’ lawyers’ “romancing of Burford,” which the court found led plaintiffs’ counsel to adopt a litigation strategy designed to maximize plaintiffs’ ability to collect on any judgment – rather than focus on securing a judgment ethically and honestly – by multiplying proceedings against Chevron in several jurisdictions to harass it and increase its defense costs.

 

            Fortunately, many American companies have grown highly skeptical of third-party litigation financing.  In fact, a recent survey by Buford Capital found that only 2% of in-house counsel are using litigation funding.  Presumably, that is because they recognize that funding more litigation in what is already the world’s most litigious country is not in the interests of the business community or the American economy.

 

            Nonetheless, I frequently hear from proponents of third-party litigation finance that litigation funding companies are in high demand by major law firms who are seeking partners to invest in litigation.  While that may be a profitable model for plaintiffs’ firms, law firms with corporate clients that partner with litigation funders to finance plaintiff litigation do so at the peril of undermining the interests of their clients.  This is so because litigation funding arrangements not only increase litigation and litigation costs, but they erode long-term relationships between law firms and institutional clients by requiring the law firms to advance positions that will put their long-standing corporate clients at risk. 

 

Even more troubling is the fact that much of the litigation finance industry is unregulated and even unseen.  The U.S. Chamber Institute for Legal Reform will propose an amendment to the Federal Rules of Civil Procedure that would mandate the disclosure of third-party litigation funding arrangements at the outset of civil litigation.  If adopted, the amendment would shine much-needed light on the practice of litigation funding and mitigate some of the abuses that result from this practice. 

 

            The growth of third-party funding in litigation has made it increasingly difficult to uncover whether the funding company in a given case is calling some or all of the litigation-related shots for the plaintiff.   This uncertainty creates acute problems when it comes to settlement negotiations.  A party that must pay a third-party funder out of the proceeds of any recovery may be inclined to reject what might otherwise be a fair settlement offer in the hopes of securing a larger sum of money.  Disclosure of litigation funding arrangements would curtail this problem, revealing the funder’s presence as a player in the settlement process, garnering more informed litigation decisions by parties on both sides, as well as the judge, who plays an important role in facilitating settlement.  Disclosure of litigation funding would also ensure that judges and jurors do not participate in litigation in which they have a financial interest.

 

            Disclosure is an important first step, but other steps must be taken to minimize the impact of litigation funding on our system of justice.  For example, funders should be prohibited from exercising any control over litigation in order to protect the attorney-client relationship and minimize ethical risks; and funders should be on the hook for the other side’s legal expenses if a lawsuit they promoted and financed fails.  These common-sense regulations would not solve all the problems posed by litigation financing, but would help minimize them.

 

No matter how much its proponents try to dress up litigation funding, the reality is not pretty:  litigation funders meddle in litigation, turning a profit for themselves at the expense of the parties to litigation, attorney-client relationships and the integrity of the U.S. judicial system.  That is not a business model the Chamber can support.  The Chamber is, and always will be, a champion of free enterprise.  But third-party funding in litigation is antithetical to all notions of free enterprise; it is an exercise in coercion using the civil justice system.  Funders pursue windfall profits by forcing businesses into a very expensive litigation process (including costly discovery) and pressing for substantial settlements.  In order for American businesses to thrive, we need a reliable, predictable judicial system with judgments all of us trust as impartial and administration focused on deciding the rights of parties.

             

The author is President of the U.S. Chamber Institute for Legal Reform.

118aThe D&O Diary is on assignment in Europe this week, with the first stop in the Danish capital city of Copenhagen, for meetings there. Copenhagen has a population of about 1.2 million spread across its many neighborhoods and boroughs but perhaps owing to the height restriction on its buildings, the city feels much smaller, even cozy. In 2013, Monocle magazine selected Copenhagen as the world’s “most livable city,” and after just a short visit, it is easy to see why. With its many parks, canals and quiet charm, Copenhagen is a very comfortable city.  

 

Copenhagen is also unmistakably a Northern city, and in late March, the weather arrives in two forms: chilly sunshine and chilly rain. Fortunately for me, though I got soaked to the skin my first afternoon there, sunshine otherwise prevailed. In addition to a good coat and a scarf, a pair of thick-soled boots is also required for tromping around on the city’s cobblestone streets and sidewalks.

 

Despite the cool temperatures, Copenhagen is a city filled with bicycles053a and bicyclists. For example, during my visit I saw a new upscale mall that has just been completed. The mall has a massive parking lot – for bicycles. The highlight of my visit to Copenhagen was a bicycle tour of the city’s harbor and canal district with the head of the local Chubb office, my good friend Bjorn Petersen, and his wife. As part of the tour, we took our bicycles on a ferry boat to the islands across the harbor from the central city. One of the literally high points of the tour was a visit to the historic Vor Frelskers Kirke. The church’s corkscrew spire has an external spiral staircase, and the view from the top of the churchtower is extraordinary (if also vertiginous)

 

002aDenmark has been and remains a monarchy and the vestiges of the country’s royal heritage are a distinctive feature of the country’s capital city.  A key part of the mandatory tourist itinerary in Copenhagen is a visit to the several palaces around the city. The royal palace of Amalienbourg (pictured here, with two of its four wings flanking the Marble Church), which was next to the hotel where I stayed, is remarkably accessible. Cars drive freely through the palace’s central square. A Danish flag flying from the rooftop signaled that the current monarch, Queen Margrethe II, was in residence at the palace while I was in town. The Queen, who I am told is much beloved by the Danish people (I heard her referred to as “Mom”), claims direct lineal descent from the Viking King, Harald Bluetooth.

 

009aThe city’s most famous tourist attraction may be the statue of the Little Mermaid, based on the character from the Hans Christian Anderson fairy tale. The statue sits on a rock in the harbor and attracts tour buses of visitors, but I am guessing just about everyone has the same reaction I did, which was — “That’s it?” Perhaps the statue came to be such a prominent landmark because, like the city she inhabits, she is quiet, modest and attractive. 

 

At least the people of Copenhagen have a sense of humor about their iconic statue. Not far from the tourist bus-surrounded site of the famous statue, in a canal away from the central harbor, is a less well-known sculpture, the “Genetically Modified Little Mermaid,” a fantastic figure that suggests that the Danish don’t take their famous statue too seriously.

 

033a

 

 

 

 

 

 

 

The city’s chilly climate calls for hearty food, which explains the quintessential Danish meal of smørrebrød, which is basically an open-face sandwich made heavy rye bread (rugbrød) covered in butter (or, more traditionally, lard) and accompanied by an assortment of toppings, such as herring, eggs, tomato, onions, cheese, and liver paste. I found I particularly enjoyed the herring, which is served a variety of ways, including marinated, curried or pickled. The traditional way to enjoy herring smørrebrød is with a glass of schnapps, accompanied by a glass of beer.

 

062aA  smørrebrød lunch with friends was an appropriate opportunity to contemplate the distinctive Danish cultural concept of hygge (pronounced “hue-gge,” sort of). The word is usually translated as “cozy,” and in a comfortable candle-lit restaurant filled with flowering plants and happy Danes chowing down on heavy rye bread, it is easy to feel as if you have the sense of the concept, particularly after a glass or two of schnapps. But it was explained to me that hygge is not just a descriptive term, it is a process, and you are part of it.

 

I had an experience in Copenhagen that I think helped me get closer to the true meaning of hygge. One evening while I was there, I went to hear jazz at a club I had found on the Internet. I arrived before the music started, and I was seated at a table with a young couple, who were in their young 20s. It quickly became clear that (1) this was a first date; (2) it was not going well; and (3) the last thing in the world either one of them wanted was some old guy stuck at their table with them. It was apparent that emergency measures were required.

 

I got up and found the waitress and told her to bring a bottle of champagne and three glasses, and to fill the glasses before anyone had a chance to ask what was going on. In answer to the looks of surprise and confusion that appeared on my tablemates’ faces, I told them that it was traditional in America to serve champagne when you were meeting new friends. After a clink of glasses, I was soon able to learn that my new friends’ names were Jan and Carla. Jan is a student and Carla works in IT for a bank. It turns out that not only was this a first date, it was a blind date. Jan’s sister works with Carla at the bank, and the sister had set up the date. As I anticipated, after the first glass of champage, Jan and Carla were relaxed and laughing, and by the time the second set started, they were sitting, as song goes, dangerously close to one another. The evening which had threatened to become a total disaster for them had been transformed into a big success. I haven’t had a chance to check with any of my Danish friends, but I think this sequence represents a good example of hygge. I also hope that Jan and Carla will name their firstborn after me, and I expect that they will be telling their grandchildren about the crazy American who bought them a bottle of champagne on their first date.

 

I had hoped that my visit to Copenhagen might include a side trip to Malmö, which is a short-train ride just across the bridge in Sweden, but business back home required my attention and so I will have to save the trip to Malmö for my next visit. And I do have to come back. Everyone here told me that I need to see the city in the summer. It was a great place to visit in the early spring so it has to be fantastic in the warmer months.

 

More Views of Copenhagen

Sankt Jorkens Canal

092a

 

 

 

 

 

 

 

 

 

The Strøget Shopping District

110a

 

 

 

 

 

 

 

113a

 

 

 

 

 

 

 

Who’s this guy? Obviously, a Great Dane.

096a

 

 

 

 

 

 

 

 

 

More Danish Royal Palaces

074a

 

 

 

 

 

 

 

104a

 

 

 

 

 

 

 

Copenhagen, a place to discover the meaning of hygge.

121a