The varied travels of the time-honored D&O Diary mug have continued, with appearances here, there and everywhere.

 

Readers will recall that in a recent post, I offered to send out to anyone who requested one a D&O Diary coffee mug – for free – but only if the mug recipient agreed to send me back a picture of the mug and a description of the circumstances in which the picture was taken. In previous posts (here, here, here, here, here, here,  here, and here), I published prior rounds of readers’ pictures. The pictures have continued to arrive and I have posted the latest round below.

 

One reaction I often have when reviewing readers’ mug shots is a recurring wish that I had been present for the reader’s photo shoot. That was certainly my reaction when I viewed the first of today’s featured pictures. The first photo comes to us from loyal reader Mary Irvin of Columbia, South Carolina who sent in this warm picture of her D&O Diary mug in the October sunshine amidst the grapevines at the Opus One winery in Napa Valley, California.

 

 

 

 

 

 

 

 

 

 

 

We received quite a number of pictures this time around taken at sporting venues. The first of these sporting pictures comes to us from Mike Parry of Marsh in London, who took a number of mug shots at St. Andrews in Scotland. The picture below is a classic shot of the Swilcan Bridge, with the famous 18th hole of the Old Course in the background.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Our good friend Bill Hopkins of AIG Cat Excess Liability also sent in some golf course pictures, including the one below taken at Stowe, Vermont.

 

 

 

 

 

 

 

 

 

 

 

 

Laura Burke of Lockton also chose a sporting venue for her mug shot. Laura reports that she took this picture from the RT Specialty suite at Soldier Field in Chicago. The picture was jointly submitted by the Lockton Financial Services Team in Chicago with special thanks to Jon Reiner of RT Specialty for taking them to the Bears game.

 

 

 

 

 

 

 

 

 

 

 

 

Apparently inspired by The D&O Diary’s recent travelogue about Lisbon, Richie Leisner of the Trenam Kemker law firm in Tampa sent in this picture of his D&O Diary mug displayed with a number of Lisbon souvenirs. (My Lisbon blog post includes a picture of the actual streetcar to which the souvenir streetcar in the picture below corresponds.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

It wouldn’t be a D&O Diary mug shot gallery without a picture from Asia. This installment’s Asia picture comes to us from Enoch Zhou of AIG in Shanghai. Enoch sent in the great picture taken in the  ancient town in Shanghai called Nanxiang. Enoch pointed out something which I had not noticed before, which is that The D&O Diary mugs were made in China. Enoch noted that the mugs had traveled all the way to the U.S. and then back to China.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 I have to say, it is so much fun seeing the different places that people have taken their D&O Diary mugs and the great pictures that they have sent back. I never cease to be amazed when people lug their mugs all around the map just to be able to send back a blogworthy mug shot. My thanks to everyone who has sent in a picture.

 

If there are readers out there who want a mug and have not yet ordered one, I still have some mugs left. If you would like one, just drop me a note and I will be happy to send one along to you. Just remember that if you order a mug, you have to send back a picture. Also, please be patient if you order a mug, it may take a few days for me to get your mug in the mail.

 

Numerous questions surround the SEC’s new policy requiring enforcement action defendants in “egregious” cases to admit to wrongdoing in order to settle with the agency, rather than simply agreeing to neither admit nor deny the agency’s allegations. As I discussed in a prior post (here), among the questions is the issue of what the impact from these kinds of admissions may be for the availability of D&O insurance for the defendants making the admissions.

 

In an October 17, 2013 article entitled “Recent Changes in SEC Enforcement Policy Require Renewed Attention to Directors’ and Officers’ Insurance Terms” (here), Eric Barber and Charles (Chip) Mulaney of the Perkins Coie law firm take a closer look at the insurance issues arising from the SEC’s new settlement approach.

 

As the authors note, an immediate concern is whether the admissions are sufficient to trigger the conduct exclusions found in D&O insurance policies. These exclusions preclude coverage for claims involving fraudulent or criminal misconduct or the gaining of profit or advantage that is illegal. The authors note that in the event that if an SEC enforcement action defendant were to reach a settlement with the agency that includes admissions of wrongdoing, the defendant’s D&O insurer may argue that the admissions “are sufficient to trigger the conduct exclusion and thus bar coverage in a civil lawsuit arising out of the same set of facts.”

 

The most direct way to avoid this type of coverage issue may be through the way the settlement itself if structured. As the authors note, in the recent JP Morgan “London Whale” settlement (about which refer here), the company kept its admissions vague on the issue of “who did what wrong” and avoided any mention of intent. The authors also note that in the recent Harbinger/Falcone settlement (about which refer here), the defendants preserved leeway in the agreement to deny the allegations in other proceedings arising out of the same conduct. These kinds of settlement features could allow a company room to contend that its admissions to the SEC do not trigger the conduct exclusions.

 

In addition, the conduct exclusions in most D&O insurance policies are only triggered “after adjudication” that the precluded conduct has actually taken place; the authors note that if, like the JP Morgan London Whale settlement, the settlement is in the context of an administrative proceeding that does not require or involve court approval, “the insured may be able to argue that, absent court approval, the conduct exclusion has not been implicated.”

 

The authors also note the importance of so-called severability provisions in the D&O insurance policy. These provisions are found in relation to both the policy exclusions and in relation to the policy application.

 

With respect to the policy provisions relating to severability of the exclusions, these provisions ensure that the misconduct of one insured person will not be imputed to any other insured for purposes of determining the applicability of a policy exclusion. This could be particularly important in the context of a multi-defendant proceeding where one defendant (say, the corporate defendant) is motivated to pursue settlement and perhaps willing to make admissions to put the matter to rest, while other defendants could be less willing to settle based on an admission. The severability of the exclusions provision ensures that one party’s wrongdoing admissions will not be imputed to another for purposes of determining the applicability of an exclusion.

 

The severability of the application provision ensures that any one individual’s knowledge of facts pertaining to an application misrepresentation will not be imputed to any other person. Application severability could be critical if the D&O insurer were to contend in reliance on admissions in an SEC settlement that the D&O insurance application contained misrepresentations. The severability provision could ensure that another party’s admissions would not serve as a basis for the insurer to try to rescind the policy as to other parties.

 

The authors also note that if SEC enforcement action defendants were to provide admissions in an SEC settlement that an insurer contends are sufficient to preclude coverage, the D&O insurer might also seek recoupment of defense fees that the insurer has already paid. The authors note that insurers “have met with mixed success on this issue,” but that the insurers might well seek recoupment in a larger case where millions of dollars have been spent. The authors suggest that insureds “should pay careful attention” to whether the policy explicitly grants the insurer the right of recoupment of previously paid defense costs and whether the insurer has explicitly reserved its right to seek recoupment when it starts making defense cost payment at the outset of the claim.

 

In my view, the possibility that the insurer might seek recoupment of defense costs that have already been paid is a particular concern. There are enough recent cases where insurers have obtained to right to recoupment defense fees, for example, following a criminal conviction (refer, for example, here) to raise the concern that the insurers might seek recoupment in the event of admissions of wrongdoing in an SEC settlement. (For an overview of the issues surrounding the insurer’s right of recoupment, refer here).

 

It is relatively rare for a D&O insurer to seek recoupment. Often by the time the legal proceedings have reached the point where the insurer has a basis on which to try to seek recoupment, the individual from who it would seek recoupment has few remaining assets from which the insurer might recover. In addition, many insurers understand that it is a poor public relations move to be seen suing your own customer trying to recover amounts you previously paid under a contract of insurance.

 

Though recoupment is rare, it comes up often enough to be a concern. The law in this area is not entirely uniform. In some jurisdictions, the courts have held that, if at the outset of a claim the carrier has reserved the right to seek recoupment in the event of a determination of noncoverage, the carrier has the right to seek to recoup defense costs incurred in connection with claims that are not covered under the policy. Court that follow this approach reason that allowing the insurer to recoup the defense costs where a timely reservation of rights was issued promotes the policy of ensuring that defenses are afforded even in questionable cases. Other courts following this line have reasoned that it would be inequitable for the insured to retain the benefits of the defense without repayment where there was no coverage under the policy.

 

On the other hand, other courts have held that the policy itself must specificly address the carrier’s right to seek recoupment and that the mere fact that the carrier has reserved its rights to seek recoupment is not sufficient to create a right that is not otherwise found the policy.

 

In light of these various concerns, it seems likely that there will be a renewed focus among D&O insurance practitioners on the potentially implicated policy provisions. I am just speculating here for now, but given these developments, I can imagine the debate with the industry involving the following.

 

First, I suspect that there will be a renewed focus on the wordings of the conduct exclusions. Among other things, policyholder advocates will try to restrict the fraud exclusion trigger to “deliberate fraudulent or criminal misconduct,” with an emphasis on including the word “deliberate” and eliminating any reference in the exclusion to “dishonesty.” I would also expect policyholder advocates to try to tinker with the “after adjudication” requirement; for example, there might be an effort to include language requiring that the “adjudication” to take place in a judicial proceeding (as opposed to an administrative proceeding).

 

Similarly, there is likely to be a renewed focus on the question of whether or not there are express policy provisions relating to the insurer’s right to recoupment. Although one approach might be simply to try to have the insurer remove policy provisions of this type, the removal of the provision alone (even if the insurers were to agree to it) might not be sufficient to address policyholder concerns about the possibility of the insurer seeing recoupment in the event of wrongdoing admissions in an SEC proceeding.

 

Another approach policyholder advocates might take would be to try to include express policy language to the effect that the insurer will not seek recoupment in the event of admissions in an SEC enforcement action; I would expect that even if the insurers were willing to consider the possibility of including this type of language, there would still be a significant debate over what type of carve outs would be added. That is, the insurer would likely still want to preserve the right to seek recoupment in the event of certain kinds of admissions.

 

The SEC’s new policy is still new and we are all still in the position of seeing how the new policy will be implemented. The agency’s actual practices will have a significant impact on how the D&O insurance industry ultimately responds. But in the meantime, there will likely be a significant debate among D&O insurance practitioners over what the right response will be from an insurance standpoint to the SEC’s new policy. 

 

The Cyber Risk “Governance Gap”: Numerous observers (including this blog) have noted the growing liability exposures facing boards of directors arising from cyber breach risks. Still other commentators have suggested the measures boards should be taking in light of these risks. Yet, at least according to a recent paper summarizing several recent research studies, at all too many companies, there is a “cyber risk governance gap” – that is, a “gap” between “the legal exposure presented by cyber risks and the ability of corporate boards to address these risks effectively.”

 

In a recent Bloomberg Law article entitled “Cyber Risk and the Board of Directors – Closing the Gap” (here), Michael Gold of the Jeffer Mangels Butler & Mitchell law firm explores what he describes as the “cyber risk governance gap.” He cites research from Carnegie Mellon focused on the energy and utilities industries as showing that 71 percent of surveyed boards rarely or never review privacy and security budgets; 51 percent of boards rarely or never review security program assessments; and 54 percent rarely review top level policies. He also notes that industrial companies showed only “modestly better” in a study conducted by the U.S. Department of Homeland Security on companies that experience cyber breach events in 2012.

 

Gold suggests that boards of many companies may be “timid about engaging cyber risk” because these risks have “no real parallel in the experience of most corporate directors.” He notes that many directors, particularly those at mature companies, “are older and are not as comfortable with digital technologies.” Compounding this issue is the fact that the complexity of the technology and the act the frequent use of jargon raise barriers even more.

 

Gold also notes that, perhaps ironically, for many board members the problem may not be too little information, but too much; he notes that the “sheer volume of information” which leaves board members with “cyber security fatigue,” which all too often leads to the default mode characterized by the blanket excuse that “we have a good IT staff.”

 

Of arguably greater concern is that, according to a study Gold cites from the National Association of Corporate Directors, is that many board members are “simply unaware of the operational risks at their company” because they “do not know enough to ask the necessary questions of the right people to obtain the information they need.”

 

Based on these concerns, Gold suggests some steps companies and their boards can take to address the “governance gap.” First he suggests mandatory cyber education for board members, with an emphasis on developing cyber expertise at the board level, including through the consideration of candidates with appropriate expertise. He also suggests creating a board level reporting system that gives directors “timely and usable information to permit a reliable high-level evaluation of the company’s cyber risk profile, defensive strategies and infrastructure.”

 

I found Gold’s article interesting, both in and of itself, and as yet another example of a growing volume of commentary underscoring the fact that many companies seem to be slow off the mark in addressing cyber risks. This message is consistent with the related concern noted in a recent post on this site that despite SEC guidance directing reporting companies to incorporate greater cyber risk disclosure in their periodic filings, many companies have not yet modified their disclosure to address cyber disclosure.

 

Readers interested in a more detailed perspective on the actions boards of directors should be taking and the questions directors should be asking about cyber risks will want to take a look at the prior guest post on this site by D&O insurance industry veteran Dan Bailey discussing director’s “new focus” on cyber risk issues. In any event, as discussed in a separate post (here), one particular question companies should be asking company management is the extent to which the company has secured dedicated insurance to protect the company in the event of a cyber breach or privacy event.

 

Plaintiffs Withdraw Appeal of Forum Selection Bylaw Case: Defense advocates were heartened in June when Delaware Chancery Court Chancellor Leo E. Strine, Jr. entered an order upholding forum selection bylaws adopted by Chevron and Federal Express as statutorily and contractually valid. It was hoped at the time that the ruling validating the forum bylaw provisions might help to reduce the curse of multi-jurisdiction litigation by requiring shareholder claims to be litigated in Delaware. However, a concern at the time was as a lower court ruling only, Chancellor Strine’s decision could be overturned on appeal by the Delaware Supreme Court. The plaintiffs did in fact file an appeal and court watchers had been eagerly anticipating the appellate court’s consideration of the case.

 

As it turns out, the court watchers can relax – – the plaintiffs have decided to drop their appeal. As discussed in an October 16, 2013 post by Widener University Law Professor Lawrence Hamermesh’s on the school’s Institute of Delaware Corporate & Business Law blog (here), the plaintiffs in the Chevron and Fed Ex cases voluntarily dismissed their appeal of Chancellor Strine’s ruling.

 

Professor Hamermesh comments that he thinks this is a “tactically intelligent move” on the plaintiffs’ part. It was widely believed that the appellate court would affirm Chancellor Strine’s opinion. By dropping their appeal, the plaintiffs arguably preserved “at least a residual crack of daylight … to argue, in cases brought outside of Delaware, that exclusive forum bylaw provisions are generally unenforceable.” The professor did note his “disappointment” that the Delaware Supreme Court will now not get the chance to consider the case; he had been hoping for a strong opinion endorsing the enforceability of the provisions.

 

Speakers’ Corner: On Monday October 21 and Tuesday October 22, 2013, I will be co-chairing the American Conference Institute’s 17th Forum on D&O Liability in New York. The two-day conference includes an outstanding cast of speakers. It should be a great session. Information about the conference can be found here.

 

If you will be attending the conference, I hope you will make a point of saying hello to me while we are there, particularly if we have never met previously.

 

Owing to my attendance at the conference, there may be an interruption in The D&O Diary’s publication schedule. Normal publication should resume later in the week.

 

O.K., here’s something – on October 17, 2013, Northern District of Illinois Judge Ronald Guzman entered a post-verdict judgment in the long-running Household International securities class action lawsuit. The judgment award consisted of principal damages of $1,476,490,844.21 and prejudgment interest of $986,408,772, for a total judgment amount of $2,462,899,616.21, along with post-judgment interest and taxable costs. According to the lead plaintiffs’ law firm, the judgment represents “the largest judgment ever in a securities fraud trial.” Household International is now a unit of HSBC Holdings PLC. A copy of the judgment can be found here.

 

Got your attention? Good. Here’s the background.

 

As detailed here, the plaintiffs first filed their lawsuit back in 2002 on behalf of all persons who acquired Household International securities between October 23, 1997 and October 11, 2002. The plaintiffs contended that during the class period, the defendants concealed that Household "was engaged in a massive predatory lending scheme."

 

According to the complaint, Household "engaged in widespread abuse of its customers through a variety of illegal sales practices and improper lending techniques." Household also reported "false statistics" that were intended to "give the appearance that the credit quality of Household’s borrowers was more favorable that it actually was." The plaintiffs allege that the "defendants’ scheme" allowed them "to artificially inflate the Company’s financial and operational results."

 

In the third quarter of 2002, the company took a $600 million charge and restated its financial statements for the preceding eight years, and in October 2002, the company announced that it had entered into a $484 regulatory settlement regarding its lending practices. On November 14, 2002, the company announced that it was to be acquired by HSBC Holdings. (HSBC’s Chairman later admitted that "with the benefit of hindsight, this is an acquisition that we wish we had not undertaken." The entry f the judgment probably doesn’t improve things in that regard.)

 

The defendants in the lawsuit included Household International and its mortgage finance subsidiary, Household Financial Corporation, and Household’s former CEO and CFO, as well as certain other former officers and directors. The company’s offering underwriters were also initially named as defendants, but they were later dismissed from the case (refer here). The plaintiffs also reached a prior settlement with the company’s former auditor, Arthur Anderson.

 

As detailed here, trial in the case commenced on March 30, 2009. Judge Guzman bifurcated the case into two parts, with a damages phase to follow the initial liability phase.

 

As detailed here, on May 7, 2009, the jury returned a mixed verdict in which the jury found for the plaintiff on a number of – but not all – counts. The verdict form the jury entered (which can be found here) is quite complex and very detailed. The jurors were asked to make specific findings with respect to 40 allegedly false and misleading statements. The jury found in favor of the defendants with respect to 23 of the statements. However, the jury found in favor of the plaintiffs with respect to 17 of the statements.

 

The October 17 judgment order, arriving as it did some four and a half years after the verdict, followed several post-trial defense motions to invalidate the verdict as well as defense objections to thousands of class members’ claims. The Court also considered and ruled on issues concerning the reliance of absent class members on defendants’ statements. The entry of judgment follows an October 4, 2013 order from the district judge denying all of the defendants’ post-trial motions.

 

The judgment was entered against Household International; its former Chairman and CEO William Aldinger; its former CFO and COO David Schoenholz; and its former Vice-Chair of Consumer Lending Gary Gilmer. The company, Aldinger and Schoenholz were hold jointly and severally liable for the judgment and Gilmer was liable for 10% of the judgment.  

 

It is worth noting that the judgment includes post-judgment interest. That means that interest will continue to accrue during the pendency of any appeal that the defendants may file. (Even at low interest rates, interest costs can ramp up pretty quickly on $2.4 billion).

 

In addition, according to a statement from the plaintiffs’ firm law firm, the firm is “continuing to litigate defendants’ objections to over 25,000 additional claims with losses in excess of $650 million.” According to the firm, if the defendants’ objections to certain of these claims are denied, the firm will seek entry of judgment in favor of these claimants as well.

 

As readers of this blog well know, very few securities class action lawsuits actually go all the way to trial. Of the slightly more than two dozen cases that have gone to trial since the enactment of the PSLRA, about half have resulted in defense verdicts. Of the trials that have resulted in plaintiffs’ verdicts, none have resulted in damages awards anywhere remotely approaching the size of this judgment. (The post-PSLRA verdicts are detailed in a handy presentation prepared by our friend, Adam Savett.) The only verdict any where near this one (and still not all that near) was the $280 million plaintiffs’ verdict in the Apollo Group case; after the defendants appealed the verdict all the way to the U.S. Supreme Court, the parties settled the case for $145 million.

 

This case may have a long history but it may also be a long way from over. As staggering as the judgment is, it also now give the defendants the opportunity to file an appeal. There is of course the issue of filings an appeal bond on a $2.46 billion judgment. And there is the fact that post-judgment interest will accrue during the pendency of any appeal.

 

As noted above, of the very few securities class action lawsuits have gone all the way to trial, quite a number have resulted in defense verdicts. Just the same, after the Apollo Group verdict and now this verdict, I am going to predict that even fewer defendants will be interested in pushing their securities cases to trial.

A petition for a writ of certiorari filed last month in the U.S. Supreme Court in connection with the long-running Halliburton securities class action lawsuit – which has been up to the Supreme Court once already – takes aim at one of the critical components in the securities plaintiffs’ tool kit: the “fraud on the market” presumption.

 

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 prove 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.  

 

The “fraud on the market” presumption has many critics. And in connection with the U.S. Supreme Court’s 2013 decision in the Amgen case (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.”

 

In recognition that the time may be ripe to take on the continuing validity of the presumption, and to take advantage of the apparent opening to do so now that at least four justices seemed to indicate interest in taking up the question, Halliburton has now filed with the U.S. Supreme court a petition for a writ of certiorari which expressly seeks 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.”

 

Halliburton filed its petition in connection with a securities class action lawsuit that has been pending against the company and certain of its directors and officers since 2002. In their complaint, the plaintiffs allege that the company and certain of its directors and offices unstated the company’s exposure to asbestos liability and overestimated the benefits of the company’s merger with Dresser Industries. The plaintiffs also alleged that the defendants overstated the company’s ability to realize the full revenue benefit of certain cost-plus contracts.  

 

For several years now, 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 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 ruling, the case was remanded back to the lower courts and in in June the Fifth Circuit certified a class in the case.  

 

Now the company is back seeking to have the Supreme Court take up the case again and consider again what issues may appropriately be considered at the class certification stage. In its petition, the company argues that the Basic presumption is based on outdated economic theory and that the special considerations given putative class plaintiffs in securities suits are out of keeping with the Court’s more recent class action case law, particularly the Wal-Mart case and the Comcast case. Among other things, the company argues that the stock market just isn’t as efficient as the Basic decision assumed.

 

Halliburton’s petition has garnered some noteworthy support. On October 10, 2013, the U.S. Chamber of Commerce of the United States and the National Association of Manufacturers filed an amicus brief in support of the company’s petition. Among other things, these business groups argue that the Court should take up the case “to address the scourge of securities class action lawsuits that siphon productive capital out of the manufacturing economy while enriching a narrow group of trial lawyers.” These business groups argue that the fraud on the market theory has “greatly facilitated securities class actions” and contributed to their exponential growth since the 80’s.

 

In addition, a group of leading academics and former SEC Commissioners has also come out in support of Halliburton’s petition. According to an October 15, 2013 New York Times column by Ohio State University Professor Steven Davidoff entitled “A Push to End Securities Fraud Lawsuits Gains Momentum” (here), the academics and former regulators have also submitted an amicus brief in support of the company’s petition, arguing that in practice the Basic presumption has essentially eliminated the reliance requirement intended by statute. They rely on academic research by Stanford Law Professor Joseph Grundfest that in the Exchange Act Congress meant to refer to actual reliance.  

 

The fact that in the Amgen decision at least four justices evinced concern about the fraud on the market theory and potential interest in reconsidering the Basic presumption might seem to suggest that Halliburton’s petition might have a good chance of attracting the four votes necessary for the Court to take up the case.

 

Just the same, even if there are four justices who want to have the Court reconsider Basic, that does not necessarily mean that the Halliburton case is the case that those justices, or any others, necessarily want to take up for that purpose

 

First, in their Brief in Opposition to Halilburton’s petition, filed on Friday, the plaintiffs argue that the case is not a “proper vehicle” for the Court to re-consider the Basic presumption because Halliburton has not preserved the issue sufficiently in order now to be able to present it to the Supreme Court. The plaintiffs argue that early in the case, the company conceded that its shares traded in an efficient market, and that, until recently, the company did not argue that the Basic presumption did not apply or should be overturned or set aside. The plaintiffs argue that this procedural history creates insurmountable barriers to the Court considering the issues that Halliburton now wants to raise. In any event, the Supreme Court may not want to take up and reconsider one of its well-established precedents where the issue was not procedurally preserved or fully ventilated in the lower courts.

 

Second, there is the fact that the Court has already fully analyzed the appropriate class certification considerations in this very case, in connection with its 2011 decision. The Court may well question whether it is worth the Court’s time to yet again take up issues surrounding a procedural ruling in a case that it has already considered.

 

In that regard, the plaintiff argues that the company’s petition represents “little more than a thin repackaging of arguments previously presented to and rejected by the Court two years ago.” The second question that the company has presented in its petition [“whether the defendants may rebut the presumption and prevent class certification by presenting evidence that the alleged misrepresentations did not distort the market price of the stock“] does start to sound an awful lot like the issues that were previously argued in the case. While there may be interest at the court at taking up a case that will allow the Court to reconsider the Basic presumption, the Supreme Court may not want to take up a case that might wind up with the Court rehashing a host of arguments it already heard just two years ago.

 

The plaintiffs also argue in the Opposition Brief that the court should not disturb a well-established precedent given that Congress has revised the federal securities laws numerous times since the Basic case was decided. They specifically argue that Congress refused to undue Basic when it revised the securities laws in 1995, and therefore that the Court should defer to Congress and leave things as they are – just as Congress did.

 

If the Court were to take up the case, the potential stakes are enormous. Professor Davidoff said in his column that the case could “put a stake through the heart of securities fraud cases.” Alison Frankel, in an October 14, 2013 post on her On the Case blog (here) commented that this is “a hugely consequential cert petition.” If the Court were to do away with the fraud on the market theory, “it will fundamentally remake securities litigation.”

 

While the potential stakes are enormous, the outcome is not pre-ordained, even if the cert petition is granted. There may be the requisite four votes for the Court to take up the case, but that does not necessarily mean that there would be five votes to overturn a long-standing Supreme Court precedent. In that regard, it is worth noting that in the Amgen case, Chief Justice John Roberts joined a majority opinion written by Justice Ginsberg where she specifically noted that Congress had amended the securities laws in 1995 without altering the Basic presumption.

 

For now, the most immediate question is whether the Court will take up the case. All else aside, it is a fact that for several years the Court has been keen to take up securities cases, for whatever reason. If the Court follows its recent pattern and takes up this case again as well, the case could be one of the most interesting and important securities cases before the Supreme Court in a generation.

 

New corporate and securities litigation filings declined in the third quarter of 2013 compared to the prior quarter and the filings so far this year are on pace for the lowest annual number of filings since before the credit crisis, according to a new report from the insurance information firm, Advisen. The new report, entitled “D&O Claims Trends: Q3 2012”(here), notes that while filings overall are down, the number of filings in some categories – particularly securities class action lawsuit filings – were actually up in the third quarter compared to the preceding quarter.

 

Advisen’s latest quarterly report introduces certain improvements, the most significant of which is that it subdivides prior reporting categories so that, for example, data relating to regulatory and enforcement actions (now presented in a category called “capital regulatory actions”) are separated from data relating to private civil securities actions not filed as class actions (now presented in a category called “securities individual actions”). This change should improve the clarity of the information presented in future reports.

 

As detailed in the report, during the third quarter of 2013, there were 268 corporate and securities lawsuit filings, down from 278 in the second quarter of 2013 (representing a quarter to quarter decline of 4%). Filings during the third quarter 2013 were down 21% from the same quarter a year ago. The 2013 filings represent the lowest quarterly total since the end of 2008.

 

Several different kinds of lawsuit filings declined during the third quarter, including merger objection lawsuits (which the current report has separated out from breach of fiduciary duty lawsuits). According to the report, the absolute numbers of merger objection lawsuit filings have been declining since 2011, and the 2013 merger objection filings are down from 2012. The report notes, without accompanying quantification, that the downward trend in the number of merger objection suits “is likely a result of a decline in overall M&A activity.”

 

While some categories of lawsuit filings were down during the third quarter, securities class action lawsuit filings were up, both as a percentage of all filings and in terms of the absolute number of suits filed. According to the Advisen report, there were 58 securities class action lawsuit filings during the third quarter 2013, compared with 42 in the second quarter. The securities class action lawsuits represented 22 percent of all corporate and securities lawsuit filings, an increase of 7 percent from the second quarter, when the securities class action lawsuits represented 15 of all corporate and securities lawsuit filings. The third quarter securities class action lawsuit filings represent the largest quarterly total since the first quarter of 2012.

 

The report also notes that the trend of securities class action lawsuit filings as a percentage of all corporate and securities lawsuit filings has been downward for a six year period. However, with many types of lawsuit filings continuing to decline, the increase in the number of securities class action lawsuit filings so far this year means that the class action suits as a percentage of all corporate and securities filings in on pace to increase for the year. The report notes that part of the increase in the number of securities class action lawsuit filings is attributable to an increase in the number of accounting fraud cases.

 

Financial firms continued to experience the highest percentage of new corporate and securities lawsuit filing, with new lawsuits in this sector representing nearly one fourth of all third quarter filings. However, while the number of filings against companies in the financial sector remains high, the percentage of all filings against financial companies is down from 2009, which suits against financial companies represented 40 percent of all filings. The report notes that new filings against companies in the financial sector are now “approaching pre-crisis levels.”

 

The Advisen report is very careful to note that information about corporate and securities lawsuit filings outside the U.S. can be more difficult to capture. However, the available data suggest increasing litigation activity involving non-U.S. companies. Overall, identified litigation activity involving non-U.S. companies represented 12 percent of all corporate and securities lawsuit filings during the third quarter, which, while slightly down from the second quarter of 2013, is four percent higher than the third quarter of 2012.

 

The latest quarterly Advisen report also introduces a new feature called Loss Insight Foundation, which consists of a ten-year quarter-by-quarter overview of corporate and securities lawsuit filings segmented by industry and year-end market capitalization, as a percentage of all companies in each segment. By expressing the number of lawsuits in a segment as a percentage of all companies in a segment, the analysis produces litigation rates, permitting a comparison between segments. Among other things, the analysis shows that the rate of lawsuits against companies with market caps over $200 billion is significantly greater than the rate of lawsuits against other companies, with the rate of suits against these mega companies peaking during the credit crisis. The data also confirm that companies with smaller market capitalizations are less likely to have securities class action lawsuit filings.

 

Quarterly Advisen Webinar: On October 17, 2013, at 11:00 am EDT, I will be participating in an Advisen webinar to discuss the third quarter litigation trends and related litigation developments. The hour-long webinar, which is free, will also include AIG’s Rich Dziedziula, Joseph O’Neill of the Peabody & Arnold law firm, and Adivsen’s Jim Blinn. Further information about the webinar, including registration information, can be found here.

 

In its landmark decision Morrison v National Australia Bank, the U.S. Supreme Court said that the U.S. securities laws do not apply to share transactions that do not take place on U.S. securities exchanges. But do these principles operate the same way in other jurisdiction — would courts in other jurisdictions decline to apply the jurisdiction’s securities laws to share transactions that took place outside the jurisdiction? That was the question recently before an Ontario court in a secondary market securities misrepresentation lawsuit brought on behalf of purported class of BP shareholders who purchased their shares both inside and outside of Canada.

 

In an October 9, 2013 ruling, Ontario Superior Court Justice Barbara Conway rejected BP’s motion to stay the action with regard to the Canadian- based BP shareholders who had purchased their shares on non-Canadian exchanges. She also rejected BP’s bid to have the action stayed on the grounds of forum non conveniens as to the BP securities holders who purchased their securities on exchanges outside of Canada. Justice Conway’s ruling, which did not address whether the plaintiffs would be given leave to proceed on their claims or whether a class would be certified, can be found here.

 

Background

Following the Deepwater Horizon oil spill, the plaintiff filed a class action in Ontario Superior Court against BP, alleging that the company had made various representations in its operations and safety program. The plaintiffs purport to represent a class of Canadian residents who purchased BP securities between May 9, 2007 and May 28, 2010. BP’s ADSs traded on the TSX until August 2008, until it voluntarily delisted them. The ADSs are now listed only on the NYSE. BPs common shares are listed on the London and Frankfurt stock exchanges. The plaintiff himself purchased his BP ADSs on the NYSE. The purported class excludes Canadian residents who purchased BP ADSs on the NYSE and who do not opt-out of the U.S. securities class action lawsuit. 

 

In advance of the court’s consideration of whether or not the plaintiff would be given leave under the Ontario Securities Laws to proceed or whether or not a class would be certified, BP moved the court seeking an order to stay the proceedings as to the BP shareholders who purchased their shares outside of Canada on the grounds of lack of jurisdiction, or alternatively seeking to stay proceedings as to those shareholders on the grounds of forum non conveniens.

 

The October 9 Decision

In considering the BP’s jurisdictional argument, Justice Conway said that the question under applicable law is whether or not the there is a “real and substantial connection” between Ontario and the claim. BP conceded that the court had jurisdiction over the claims of BP shareholders who purchased their shares on the TSX. In reliance on the U.S. Supreme Court’s Morrison holding, BP urged the court to adopt an “exchange-based” approach to determine the question of whether or not a tort had been committed in the province sufficient to support jurisdiction as to the claims of the BP shareholders who purchased their shares outside Canada.

 

After reviewing the relevant Ontario Securities Laws, Justice Conway concluded that “there is nothing in the wording of the Act that restricts the cause of action to investors who purchased their shares on an Ontario exchange.” If she were to adopt BP’s reasoning, she would be “imposing a limitation in the Act where none exists.”

 

Justice Conway went on to note that the relevant statutory provisions allowed shareholders to bring secondary market misrepresentation claims without having to prove reliance. She reasoned that “if a responsible issuer makes a misrepresentation and the Act deems the Ontario investor to have relied on the misrepresentation when he purchased shares of that issuer, the statutory tort must be considered to have been committed in Ontario.” She went on the say that she “cannot agree” that the location of the statutory tort “is to be determined, in each case, by the location of the exchange on which the action share purchase occurred.”

 

Justice Conway also rejected BP’s attempt to have the case stayed as to the non-TSX purchasers on the grounds of forum non conveniens. BP had argued that the TSX trading volume was negligible and should not serve as a basis to bring the claims of Canadian BP shareholders who purchased their shares in the U.S. and the U.K. into the Ontario courts. BP argued that U.S. and U.K. were more appropriate forums in which to litigate those claims.

 

In rejecting these arguments, Justice Conway said that in her view, “BP is seeking to restrict and fragment the proposed class at this early stage of the proceedings,” and the outcome BP sought would “result in this potential claim …being litigated in three different jurisdictions. That is not convenient, cost-effective or efficient.” She noted that no class has yet been certified in the U.S. action, and that even if certified, a NYSE purchaser who opted-out would not be able to participate in the Ontario action if stayed. Meanwhile, U.K. purchasers would be required to bring individual actions and seek to have their actions consolidated. “I cannot,” she said, “see how that would be a clearly more appropriate forum for their claims.”

 

She concluded by stating that “BP has failed to meet its burden of establishing that the U.S. and U.K. courts are clearly more appropriate forums in which to adjudicate the claims of the non-TSX purchasers.”

 

Discussion

The U.S. Supreme Court’s decision in Morrison itself is a reflection of the specific wording of the relevant U.S. securities laws. On that basis, it is hardly surprising that a court in another jurisdiction analyzing that jurisdiction’s securities laws might reach a different conclusion on the question of whether or not the jurisdiction’s securities laws apply to securities transactions on exchanges outside the jurisdiction. Nevertheless, it is interesting, at least to this American observer, that Justice Conway declined to adopt the principles described in the Morrison opinion.

 

It seems to have been critical that the purported class consists only Canadian purchasers of BP securities. Indeed, this was the key element to Justice Conway’s conclusion that the “statutory tort’ took place in Ontario. Following the logic of her analysis, it would seem to be much more difficult for a non-Canadian who purchased shares outside of Canada to prove that the “statutory tort” took place in Canada.

 

To put this analysis in terms that had been developed amongst U.S. practitioners, Justice Conway seems to be saying, at least implicitly, that Ontario’s securities laws apply to so-called “F-Squared” claimants – that is, claimants residing in the jurisdiction but who bought their shares in a foreign company on a foreign exchange.

 

By the same token, and based on Justice Conway’s analysis, Ontario’s laws would not seem to apply to a  so-called “F-Cubed” claimant – that is, a foreign resident who purchased their shares of a foreign company on a foreign exchange. Her jurisdictional analysis, in which she concluded that the statutory injury must be considered to have been committed in Ontario if the issuer made the misrepresentation to an Ontario investor, would seem to preclude jurisdiction for a non-Ontario claimant. That is, the negative inference seems to be that the statutory injury would not take place in the province if the claimant were not an Ontario investor.

 

Justice Conway’s analysis of the forum non conveniens issue is interesting. She did not seem to put much weight on the question of where the misrepresentations were made; where the witness and documents were located; or to the fact that the same factual issues are likely to be worked through in the U.S courts. And by contrast to the U.S. courts that have  denied forum non conveniens motions in corporate and securities cases relating to the Deepwater Horizon circumstances because the devastating oil spill took place only a short distance from the courthouse doors, Justice Conway appeared to attach no particular weight in her analysis to the location of the oil spill itself.

 

I find all of this fascinating, but I also recognize my limitations as a non-Canadian observer of Canadian litigation developments. I hope that our friends north of the border will weigh in with their views, particularly if they take exception to anything I have said here. It does seem that the corporate and securities litigation following on in the wake of the Deepwater Horizon oil spill seems destined to require courts to address a host of issues about cross-jurisdictional enforcement of laws and liabilities.

 

Special thanks to Andrew Morganti for sending me a copy of Justice Conway’s decision. Morganti is co-counsel for the plaintiff in the Ontario action discussed above.

 

An October 15, 2013 memo from the Blake’s law firm about the decision can be found here.

 

Since the U.S. Supreme Court issued its opinion in Morrison v. National Australia Bank, would-be claimants who purchased shares of a non-U.S. company outside the U.S. have struggled to find a way to pursue their claims in U.S. courts. Among other things, these claimants have tried to avoid Morrison’s federal securities claim-preclusive effect by filing common law claims against the non-U.S. company in U.S. courts. These efforts have largely proven unsuccessful, as courts have dismissed these claims on forum non conveniens grounds, on the theory that the non-U.S. company’s home court represent a more appropriate forum for the claims.

 

However, as a result of a recent ruling in one of the many lawsuits arising out of the BP Deepwater Horizon oil spill, at least some of the claims of investor claimants who purchased their BP shares on a non-U.S. exchange will be going forward in a U.S. court. Even though the court ruled that English law governed the claimants’ common law and statutory claims, the court found that it could not conclude that an English court is a more appropriate forum for the claims. A copy of Southern District of Texas Judge Keith Ellison’s September 30, 2013 97-page ruling granting in part and denying in part defendants’ motions to dismiss can be found here.

 

Judge Ellison’s conclusions reflect considerations that may be unique to the circumstances surrounding the Deepwater Horizon oil spill. Nevertheless, the case does represent a significant instance where claimants whose U.S. securities laws claims would be precluded by Morrison have found a way to be able to pursue claims on an alternative theory in U.S. courts.

 

Background       

Following the April 20, 2010 Deepwater Horizon oil spill, BP shareholders filed a number of lawsuits against the company and its officials seeking to recover for their financial losses. Among these lawsuits was a securities class action lawsuit filed under U.S. securities laws. Many of the allegations in the securities class action lawsuit survived the motion to dismiss; however, as discussed here, in February 2012, Southern District of Texas Keith Ellison, in reliance on the U.S. Supreme Court’s decisions in Morrison, granted the defendants’ motion to dismiss the claims of putative class members who had purchased BP common shares on the London Stock Exchange (LSE). Many of the claims of putative class members who purchased BP ADSs on the New York Stock Exchange survived the dismissal motion.

 

Judge Ellison’s September 30, 2013 decision related to a separate, individual action that had been brought by three U.S. public pension funds, the Alameda County Employees’ Retirement Association; the Employees’ Retirement System of the City of Providence; and State-Boston Retirement System. The plaintiffs’ separate action was filed against BP and several of its related entities as well as against seven current or former BP executives. The plaintiffs alleged that prior to the spill that the defendants had made material misrepresentations relating to BP’s safety efforts and preparedness, and after the spill with respect to the amount of oil that was leaking from the damaged well.

 

Only Alameda and State-Boston had purchased BP ADSs on the NYSE, and those two plaintiffs asserted claims against the defendants under the federal securities laws.  Alameda and State-Boston also bought BP common shares on the LSE. Providence had only purchased common shares on the LSE.

 

In addition to Alameda’s and State-Boston’s claims under the federal securities laws, the plaintiffs also asserted common law fraud, common law aiding and abetting fraud claims, and negligent misrepresentation claims against the defendants. Each of the three plaintiffs also asserted state statutory claims, under various Texas, California and Massachusetts statutory provisions.

 

The defendants moved to dismiss arguing among other things that Alameda’s and State-Boston’s federal securities law claims allegations were insufficient to state a claim; that English law applies to the plaintiffs’ common law and state statutory claims; that English law did not permit many of the plaintiffs’ common law and state statutory claims; and that even with respect to the plaintiffs’ claims that are recognized by English law, that the plaintiffs’ allegations were insufficient to state a viable claim. The defendants also argued in the alternative that if the Court were to conclude that the plaintiffs stated viable claims under English law, that the court should dismiss the claims under the doctrine of forum non conveniens.

 

The September 30, 2013 Opinion

In his September 30, 2013 opinion, Judge Ellison granted in part and denied in part the defendants’ motion to dismiss. Among other thing, Judge Ellison granted in part and denied in part the defendants’ motion to dismiss Alameda’s and State-Boston’s claims under the federal securities laws. In this post, I do not examine Judge Ellison’s rulings concerning the federal securities laws claims.

 

In considering the defendants’ motion to dismiss the plaintiffs’ common law and state statutory claims, Judge Ellison first had to address the question of which jurisdiction’s laws governed the claims and the dismissal motion. Applying Texas choice of law principles and using the standards enunciated in the Restatement (Second) of Conflict’s of laws, Judge Ellison determined that the laws of England have the “most substantial relationship” to the plaintiffs’ claims.

 

Judge Ellison then undertook to “map” plaintiffs’ claims to English law. He first determined that English law does not recognize claims for aiding and abetting common-law fraud, statutory fraud or statutory unfair and deceptive trade practices, and he therefore granted the defendants’ motion to dismiss these claims.

 

The defendants acknowledged that three English law claims “map” onto the plaintiffs’ theories of liability under state law. The first of these, relating to the plaintiffs’ state statutory claims, map to statutory securities fraud under the Financial Services and Markets Act of 2000 (“FSMA”). The plaintiffs’ claims for common law fraud map to the English action for “deceit.” The plaintiffs’ claims for common law negligent misrepresentation map to the English action for “negligent misstatement.” However, the defendants argued that while the plaintiffs’ state statutory claims and common law claims correspond to claims under English law, the plaintiffs’ allegations were nevertheless insufficient to state a claim.

 

In a painstakingly detailed analysis, Judge Ellison concluded that the plaintiffs’ allegations were at least in part sufficient to state a claim under the corresponding English law legal theories.

 

The defendants argued that the court should nevertheless dismiss the plaintiffs’ claims under the doctrine of forum non conveniens. The defendants argued that England is an available and adequate alternative forum for these claims and that private and public interest factors favored dismissal in preference to the English forum. The defendants argued that most of the alleged misstatements originated in England, that the non-party witnesses are predominantly in England, that English courts would be more familiar with English law, and that it would be difficult for a U.S. court to construe and apply the FSMA, which has not been widely interpreted by English courts.

 

Judge Ellison concluded that “the Court does not find that Defendants have surmounted the high bar for disturbing Plaintiffs; choice of forum.” He fount that “the private and public interest factors, viewed in toto, do not indicate that this Court is an inconvenient forum for Plaintiffs’ English law claims.” He noted that “it would be inefficient to send these claims to England, when nearly the same issues will be adjudicated here in the Class Action and in the individual action asserting Exchange Act claims.” In that regard, he noted in particular that Alameda and State-Boston’s U.S. securities laws claims would remain and be litigated in his court.

 

He also found that the one public interest factor that favored dismissal – the need to apply foreign law to some of the plaintiffs’ claims – “cannot be determinative.” He noted that “the Court is certainly capable of applying English law, which shares so many strong similarities with U.S. law due to a common heritage.”

 

Finally, he noted that the other public interest factors “weigh in favor” of keeping the plaintiffs’ claims in the U.S. court, observing that “the nature of the controversy is unquestionably local.” The oil spill that prompted the claims “occurred only 50 miles off the cost of Louisiana” and “the majority of the misrepresentations alleged by Plaintiffs touch the adequacy of, and the attention paid to, the safety of BP’s U.S. operations.” Because neither the private interest factors nor the public interest factors weigh strongly in favor of dismissal, Judge Ellison declined to “upend Plaintiffs’ choice of forum.”

 

Discussion

Over the course of Judge Ellison’s lengthy and detailed opinion, he dismissed a significant number of the plaintiffs’ claims. He also determined that English law governs that plaintiffs’ common law and state statutory claims, and that there is no English counterpart for many of the common law claims the plaintiffs sought to assert, resulting in dismissal of a number of claims. Nevertheless, he found that the plaintiffs’ allegations were sufficient for those claims for which there are English counterparts. Most importantly, he found that the remaining viable claims could remain pending in a U.S. court and did not have to be dismissed in favor of an English court.

 

Thus, while significant parts of the plaintiffs claims were dismissed, the plaintiffs still succeeded in keeping at least some of their claims alive and pending in a U.S. court. This is significant in and of itself, of course, but it is also noteworthy because it represents a substantial instance where a set of claimants whose U.S. securities laws claims would be precluded under Morrison because they purchased their shares in a non-U.S. company on a foreign exchange nevertheless were able to subject the non-U.S. company to a claim in U.S. courts. In other words, Judge Ellison’s ruling represents the rare instance when prospective claimants have managed to side-step the implications of Morrison in order to subject a non-U.S. company to claims in a U.S. court.

 

Since the U.S. Supreme Court’s Morrison decision, other claimants have tried to circumvent Morrison and subject a non-U.S. company to claims in a U.S. court by asserting claims of common law fraud. By and large, those efforts have not been successful.

 

For example, as discussed here, in December 2012, New York’s appellate court rejected the efforts by short-seller claimants to assert common law claims in New York state court against Porsche and certain of its directors and officers. The claimants’ federal securities law claims had already been dismissed on the basis of Morrison, because the claimants had purchased their securities outside of the U.S. The New York appellate court found that the claimants’ common law claims, which the claimants had filed in state court after their federal securities laws claims had been dismissed, should be dismissed on the ground of forum non conveniens.

 

The plaintiffs’ success here in avoiding a dismissal on the ground of forum non conveniens is all the more noteworthy because in the separate BP Deepwater Horison shareholders’ derivate lawsuit, Judge Ellison had granted the defendants’ motion to dismiss on forum non conveniens grounds. As discussed here, in September 2011, Judge Ellison found that the balance of factors weighed in favor of the dismissal of the suit in preference for an English forum, as the derivative suit would involve considerations of the proper conduct under English law of the affairs of the board of an English company. Judge Ellison found that considerations of the internal affairs doctrine militated in favor of dismissal. As discussed here, in January 2013, the Fifth Circuit affirmed the dismissal of the BP Deepwater Horizon shareholders’ derivative lawsuit.

 

But while this case may represent an important instance in which prospective claimants have been able to side-step Morrison and assert claims in U.S. court against a non-U.S. company, there are several reasons why this case may or may not present a playbook for other claimants who are otherwise precluded from U.S. courts by Morrison to try to establish common law or state statutory claims against a non-U.S. company.

 

First, there are several distinct factors that clearly weighed heavily in Judge Ellison’s analysis that are unlikely to be present in other cases. Among other things, Judge Ellison considered the pendency of many other claims in the court relevant, noting that considerations of judicial efficiency weighed in favor of keeping the case in the same court where so many of the same factual issues would be determined. He also was clearly influenced by the fact that the Deepwater Horizon oil spill had taken place nearby and so many of the statements at issue related to events or operations in the U.S.

 

Another thing that could be important about Judge Ellison’s opinion is that it is lower court ruling. Although the defendants will not be able to get appellate consideration of Judge Ellison’s ruling unless they are willing to ride this lawsuit all the way through its procedural conclusion in the district court (barring the possibility of an interlocutory appeal), the possibility that an appellate court might take a different view has to be kept in mind. In that regard, it is worth noting that in the Porsche case mentioned above, the state trial court judge had declined to dismiss the case on forum non conveniens grounds; it was only on appeal that the court determined that the case should be dismissed.

 

But while there are considerations that clearly make Judge Ellison’s determination something less than a pattern of general applicability, it nonetheless represents a noteworthy instance where claimants whose federal securities law claims were barred under Morrison were still able to assert claims in a U.S. court against a non-U.S. company. It presents an occasion in which claimants may have succeeded in side-stepping Morrison in order to assert claims in a U.S. court against a non-U.S. company and is important for that reason.

 

Special thanks to a loyal reader for sending me a copy of Judge Ellison’s decision.

 

UPDATE: Alison Frankel has an excellent October 15, 2013 post about this decision on her On The Case blog, here.

In an unusual step, the FDIC, the federal regulator responsible for insuring and supervising depositary institutions, has weighed in on financial institutions’ purchase of D&O insurance. The FDIC’s October 10, 2013 Financial Institutions Letter, which includes an “Advisory Statement on Director and Officer Liability Insurance Policies, Exclusions and Indemnification for Civil Money Penalties” (here), advises bank directors and officers to be wary of the addition of policy exclusions to their D&O insurance policies and also reminds bank officials that the bank’s purchase of insurance indemnifying against civil money penalties is prohibited.

 

The agency’s brief two-page letter opens with the observation that the FDIC has “noted an increase in exclusionary terms or provisions contained in depositary institutions’ D&O insurance policies.” The agency notes that the addition of these exclusionary provisions “may affect the recruitment and retention of well-qualifies individuals,” and that when the exclusions apply, “directors and officers may not have insurance coverage and may be personally liable for damages arising out of civil suits.”

The FDIC is concerned that bank officials “may not be fully aware of the addition or significance of such exclusionary language.” Accordingly, the agency urges officials to apply “well-informed” consideration to the potential impact of policy exclusions. The agency urges “each board member and executive officer to fully understand the answers to the following questions” especially when considering renewals and amendments to existing policies:

  • What protections do I want from my institution’s D&O policy?
  • What exclusions exist in my institution’s D&O policy?
  • Are any of the exclusions new, and if so, how do they change my coverage?
  • What is my potential personal exposure arising from each policy exclusion?

The letter also states that banks’ boards of directors should “also keep in mind” that FDIC regulations “prohibit an insured depositary institution or [holding company] from purchasing insurance that would be used to pay or reimburse an institution-affiliated party (IAP) for the cost of any civil money penalty (CMP) assessed against such person in an administrative proceeding or civil action commenced by any federal banking agency.”

The letter goes on to note that the agency’s regulations prohibiting insurance indemnifying against civil money penalties “do not include an exception for cases in which the IAP reimburses the depositary institution for the designated cost of the CMP coverage.”

Discussion

On the one hand, the FDIC’s warnings about the need for bank officials to be well-informed about their D&O insurance and to be wary about the addition of policy exclusions are simply good advice. Indeed, the warnings represent worthy counsel for officials at any corporate entity, not just at banking institutions. All corporate officials should be attentive to their D&O insurance, and the questions that the FDIC suggests are good questions for the directors and officers of any institution.

However, the FDIC is not just offering disinterested guidance here. The FDIC doesn’t say it, but it has a very specific concern in mind. The FDIC is worried about the inclusion in banks’ D&O insurance policies of a so-called “regulatory exclusion” precluding coverage for claims brought by regulatory agencies such as the FDIC. Although these exclusions are still somewhat unusual, when a policy has one of these exclusions, the FDIC is unlikely to be able to recover under the policy for any claims the agency files against a bank’s directors and officers. (For background about the regulatory exclusion, refer here.)

The likeliest time for a D&O insurer to try to add a regulatory exclusion is when a financially troubled bank seeks to renew its insurance. The insurer, concerned that the bank might fail, wants to protect itself against possible liability for any post-closure claims that the FDIC might bring in its capacity as receiver of the failed bank.

The FDIC is (as discussed further below) in the midst of filing and pursing a host of lawsuits against the former directors and officers of many of the banks that failed between 2007 and the present. In these lawsuits and in other suits that the agency might want to pursue, the FDIC may be stymied in trying to secure a recovery if the failed bank’s D&O insurance policy has a regulatory exclusion. The FDIC has issued its advisory statement because it wants to try to enlist banking officials’ assistance in trying to ward off the inclusion of these kinds of exclusions on D&O insurance policies.

The problem for both bank officials and for the FDIC is that if a bank is sufficiently troubled, no amount of attentiveness will be sufficient to ward off the addition of exclusionary provisions. Banks that are in troubled condition are likely to find that they have few D&O insurance options and that the only coverage they can obtain is an insurance program that includes a regulatory exclusion or other coverage limiting provisions.

Nevertheless, while in some circumstances (especially with regard to troubled banks)  there may be little that bank officials can do about the addition of coverage narrowing policy provisions, there is certainly nothing wrong with urging bank officials to be attentive to the changes in their coverage on renewal. The FDIC’s suggestion that bank officials stay informed about changes in their D&O insurance is, as noted above, good advice.

Because the FDIC’s letter went to all banking exclusions and by its terms is meant to apply with respect to all institutions, insurance professionals that work with reporting institutions should expect that their banking clients will be presenting them with these questions and should be prepared to answer their client’s questions.

For their part, banking officials should consider whether their advisors are adequately answering their questions. Although it is true in most corporate contexts, it is particularly true in the context of banking institutions that the firms and their directors and officers should be sure that their insurance advisor is knowledgeable and experienced. In looking for answers to the FDIC’s suggested questions, bank officials will want to assess whether their advisors’ answers show that their advisor is sufficiently knowledgeable and experienced to counsel them with regard to these important insurance issues.

The agency’s separate statements about insurance for civil money penalties are interesting and represent something of a public clarification of a long-standing issue. By way of background, under FIRREA and related regulations, civil money penalties may be assessed for the violation of any law, regulation, as well as for a violation of any condition imposed in writing by the appropriate Federal banking agency in connection with any written agreement between a depository institution and the agency.

As discussed in a prior guest blog post on this site (refer here), the FDIC had informally been taking the position that bank’s D&O insurance policies should not provide for the indemnification of civil money penalties. However, this type of coverage has long been available in the insurance marketplace and many D&O insurance policies currently in place expressly provide for the insurance of these penalties. One of the ways that banks and their insurers have sought to address possible agency concerns about the insurance is by having the individuals protected by the civil money penalty provisions reimburse the bank for the cost of the civil money insurance protection. As noted in the guest blog post, “This was based on the assumption that if the bank could prove that the directors and officers paid for the coverage personally, that the FDIC wouldn’t object to the coverage.”

These insurance industry practices continued because certain assumptions were being made about the agency’s approach to these issues. With the FDIC’s issuance of the Advisory Statement, the agency’s views are now clear – banks are “prohibited” from purchasing insurance that would pay or reimburse for civil money penalties, and there is no exception from the regulations that allows the insured individuals to reimburse the bank for the civil money penalties protection.

The agency’s issuance of the Advisory Statement and the clarification of the agency’s position with respect to insurance for civil money penalties does raise the practical question about what banks and their insurers should do with respect to the many insurance policies that are currently in force providing insurance for civil money penalties. One immediate question that comes to mind is whether or not the policies should now be specially endorsed to remove the endorsements providing for civil money penalty coverage. Alternatively, some may feel that it is sufficient simply to allow the current policies to run through their natural expiration and at renewal a new policy can be put in place without the civil money penalties provisions.

It seems likely that banking officials will also now want to know if there is anything else that they can do to protect themselves from their exposure to possible civil money penalties against them. Among the topics that are likely to be discussed in the months ahead  is the question whether the FDIC’s Advisory Statement prohibiting banks from purchasing insurance the includes indemnification against civil money penalties does not prohibit individuals from buying insurance on their own to protect themselves from civil money penalty exposures.

The discussion of these latter possibilities would have to include consideration of  (1) whether the operative regulations and the Advisory Statement preclude purchase of insurance protection against civil money penalties by individuals as well as by depositary institutions;  and (2) whether the agency’s clarification that there is no exemption in the regulation allowing individuals to reimburse banks for the purchase of insurance for civil money penalties protection in and of itself precludes the individuals’ purchase of this type of insurance, or at a minimum effectively communicates what the agency’s view would be on the issue.

Finally, there is the practical question of whether insurers would even be interested in trying to offer separate policies for individuals providing insurance for civil money penalties, given the likely low premiums involved and the prospects — for both the insured persons and for the insurers — of running afoul of the FDIC. In the past, the insurers have shown little interest in offering this type of product.

FDIC Updates Failed Bank Lawsuit Information: On October 11, 2013, the FDIC updated the page on its website on which the agency tracks the lawsuits it has filed in its capacity as receiver for failed banks against the banks’ former directors and officers. As of the latest update, the agency has now filed a total of 81 lawsuits against the former directors and officers of failed banks, including a total of 37 so far this year. (By way of comparison, the agency filed only 25 during all of 2012.)

The updated page also notes that as of October 8, 2013, the agency has authorized suits in connection with 127 failed institutions against 1,029 individuals for D&O liability. These figures are inclusive of the 81 filed D&O lawsuits naming 616 former directors and officers. In other words, based solely on the number of authorized suits, there may be a backlog of as many as 46 lawsuits yet to be filed.

While the number of lawsuits and authorized lawsuits continue to increase, the number of bank failures seems to have slowed. As also reflected on the agency’s website, there have been no bank failures in the last month.

Third Quarter Claims Trends Update: On October 17, 2013, I will be participating in Advisen’s Third Quarter Claims Update, along with AIG’s Rich Dziedziula, Joseph O’Neil of the Peabody & Arnold law firm, and Advisen’s Jim Blinn. The free one-hour webinar, which will begin at 11:00 am EDT, will discuss recent corporate and securities lawsuit filing trends as well as key developments to watch. Further information about the webinar including sign up information can be found here.

The D&O Diary’s European itinerary continued this week in Zürich, Switzerland, where I travelled for meetings and to attend the inaugural continental European educational event of the Professional Liability Underwriting Society (PLUS). Zürich is a picturesque city in a beautiful setting, but the grey skies and cool temperatures while I was there came as something of a shock after the sunny warmth of Portugal. Between the weather and the meetings, I did not see as much of the city as I would have liked, but I did have a good albeit brief introduction.

 

Zürich is Switzerland’s largest city, with about 350,000 residents and a metropolitan population of about 1.83 million. The city is frequently identified as the wealthiest city in Europe – the city’s affluence is in fact readily apparent and has certain practical consequences for the casual visitor.

 

The PLUS event was held in a modern business hotel in a high rise district outside the central city. However, I spent my first two days in the city in the Altstadt (Old Town), the historic city center, which is an extended area of narrow, cobblestone streets and well-preserved older buildings along both banks of the Limmat River, which flows into the city from the northern end of Lake Zürich.

 

The river’s right (or east) bank has many hotels and restaurants. The dominant thoroughfare on the left (or west) bank is Bahnhofstrasse, which runs northward parallel to the river from the lakeshore to the main train station and also traverses the rarified world of high finance and luxury retail. Sleek black sedans glide up to the discrete front doors of the numerous private banks along the street; the world’s wealthy warm their hands over their money inside the banks, and then, before heading back to Asia, Africa or the Middle East, they drop some pocket change at the adjacent swish shops, such as Cartier and Tiffany.

 

One consequence of the wealth and of the fact that the city is the center of the Swiss financial services industry is that Zurich is expensive. The fare for my brief cab ride from the airport to my hotel was 60 Swiss francs with tip (a little bit more than $60 dollars). I don’t think I have ever had to pay the equivalent of $9.50 for a beer before, except perhaps at a live sporting event. It quickly became apparent that the 300 Swiss Francs I had brought with me were going prove woefully inadequate.

 

Just about every time I travel overseas, somewhere along the way I have a “Dude, I’m from Cleveland” moment. On this latest trip, the moment occurred when I went into a retail bank branch to exchange Euros for some more Swiss francs, so that I would have enough walking around money. After having established that the teller spoke English “a lee-tell beet,” I explained the transaction I had in mind. The teller asked me, “Do you have an account with this bank?” to which the only response I could think of was “Dude, I am from Cleveland. Do I look like I have a Swiss bank account?” For failing to have established a Swiss bank account, I paid a five franc fee for the currency exchange transaction.

 

I arrived in Zürich with ambitious plans to take a boat ride on the lake and to take a train up into the mountains. Unfortunately, the weather steadily deteriorated throughout my stay. The grey skies first turned foggy, then rainy, and by the time I left town the air temperatures were only in the upper 30s. The boat ride and mountain visit were out. 

 

Instead, I explored the city’s old town and walked for miles along the riverside and lakeside quays. Zurich is beautiful and the old town has been well-preserved. But the city itself lacks any dramatic local landmarks (other than the lake and the mountains of course, which blanketed in fog don’t make much of a statement); there are no castles, ancient ruins or cathedrals, and, other than their distinctive clock towers, the city’s various historic churches are relatively modest affairs. After several hours of striding around and window shopping at the exclusive shops, I began to think that Zurich might a little bit of a dull place.

 

At loose ends as evening approached, I innocently wandered into an old-fashioned beer hall located on the east riverbank quay, and discovered something of a parallel universe that exists alongside Zurich’s orderly upscale propriety. The establishment is called Bierhalle Wolf, which consists of a large wood-paneled dining room filled with long tables and benches. In the late afternoon and early evening, a trio of paunchy, middle-aged men dressed in lederhosen and playing a tuba, a guitar and an accordion played songs ranging from traditional Oompa music to Abba. A crowd of unusually uninhibited people sang along or danced in the aisles, clapping their hands or waiving their napkins over their heads.

 

During their breaks, the band members wandered around the hall chatting with people in the crowd, including me. In their next set after the break, the band leader paused to say (in English) that their next song was dedicated to their new friend Kevin, from Cleveland. For some reason, they played ‘Achy Breaky Heart,” which brought the crowd into the aisles, dancing and whistling appreciatively. What a place. The schnitzel was pretty good too, or at least appropriately matched to the venue and the beer. I left persuaded that Zurich is not a dull place after all.

 

The PLUS event itself was a quite success. It was a pleasure to meet many industry colleagues from around Europe. The sessions were excellent. I congratulate the local committee that organized the event, and I also congratulate PLUS leadership for its initiative in extending the organization’s education opportunities to continental Europe. I will say it was very nice to learn that there are so many D&O Diary readers in Europe. I hope that our European colleagues can look forward to many more events like this one in the years to come. Special thanks to the event committee for inviting me to be a part of this inaugural event.

 

 

 

More Pictures of Zurich: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The D&O Diary is on assignment in Europe this week, with the first stop along the way in the beautiful, historic and sun-drenched city of Lisbon, or as the natives say, Lisboa.

Lisbon is the westernmost capital city in Europe, with a population of about 550,000 in the city proper, and a total of around 3 million in the sprawling urban area. History is layered deep in Lisbon. Rising above the city in the Alfama district is the Castelo de São Jorge (pictured left), originally a Visigoth fortification, later held by the Moors until they were thrown out of Portugal in 1147. The castle ramparts provide a scenic overview of the central city and of the Tagus River (pictured below), or the Rio Tejo as the locals call it. Down below to the South of the castelo is the Baixa District, beautifully built in a rigid grid system after the Great Lisbon Earthquake of 1755. Beyond that are the narrow streets of the Bairro Alto climbing to the top of another of Lisbon’s steep hills.

Although with a little vigorous walking you can cover the city center on foot, a more pleasant way to see the sights is to board one of the venerable street cars (electricos). The no. 28 street car (pictured below) provides a particularly fascinating ride as it takes you past many of the city’s most historic sights. There is, of course,  a certain intimidation factor in taking public transportation in a foreign country – first there is the confusion about what the fare is and how to pay it, and then there is the nagging anxiety that perhaps you are on the wrong train or going in the wrong direction. The first time I boarded the no. 28 street car, after having fumbled through the process of paying my fare, I decided just to ride the journey out, to see the entire route. The line terminated, appropriately enough at a cemetery. It is where the journey ends for all of us.

Many of the words in Portuguese are similar to Spanish, but overall the two languages sound very different. The letter “s” is pronounced with an –zh sound or a  –sh sound, and many of the vowels are rounded and spoken far back in the throat. I think if you closed your eyes and just listened to the language, you might think you were hearing a Russian speaking Italian. I memorized a few phrases, the most useful of which was não falo Português (I don’t speak Portuguese)  — which ,for some reason, always drew a laugh, perhaps for the irony of using language to say I don’t speak it. I also came equipped with my one indispensable travel phrase, which in Portugal is said as uma cerveja, por favor. After returning from my not entirely planned visit to the cemetery, I found a sidewalk café on a overlook in the Bairro Alto (the last picture at the bottom of the post, just before the video) where I successfully deployed my one indispensable phrase. I finished the café transaction with the delightfully ornate word in Portuguese for “thank you” – obrigado, which is pronounced with a powerful Iberian trilling of the letter “r.”

Feeling a little bolder about public transportation the next day, I took a tram out to Belém, where the Tagus meets the ocean. Many of Portugal’s famous voyages of discovery set sail from there. The huge Mosterio des Jerònimos was built by Manuel I to give thanks for Vasco de Gama’s safe return from India. The Torre de Belém, built in the early 16th century, sits along the river and affords views out to the great ocean beyond. It is quite something to consider that for a brief time five centuries ago, tiny Portugal (about the geographic size of South Carolina) bestrode the globe as the preeminent maritime power. The moment was short-lived, as the difficulty and cost of defending its mercantile advantages proved too great to maintain, particularly as the country dealt with problems and distractions closer to home. The legacy of the colonial era lives on in Lisbon, in the faces of residents from places like Brazil, Mozambique and Macau.

If Lisbon is figuratively layered in history, it is literally paved in small cobblestones, called calçadas. Many of the walkways are decorated in ornate patters of alternating black and white stones. Hiking around on cobblestone walkways can wear out your feet pretty quickly, but I really came to admire and appreciate the sheer artistry of the elaborate stone patterns. In his book of essays about Lisbon entitled “The Moon, Come Down to Earth,” American writer Philip Graham, who was also fascinated with the cobblestones, describes the experience of taking up a loose calçada in his hand: “I twist and turn it in my hand and feel the attentive craft, how each of the stone’s six sides has been carefully chipped to a rough approximation of a smooth surface. That must be why I feel such affection for these stones – they’re as individual as people. But it’s an affection laced with sadness, because so much of their originality –their five other sides – is normally buried out of sight. And that’s a lot like people, too.”

This innate sadness is something of a theme. One of my main motivations for choosing to go to Portugal was a desire to hear the famous traditional music, called fado. Lisbon is to fado as New Orleans is to jazz. The word “fado” means fate, and the music is infused with mournful sadness. The lyrics convey a spirit of longing and regret, embodied in the Portuguese word saudade. Fado has undergone something of a revival recently, spurred by the popularity of stars such as Mariza (through whose songs I first encountered fado).

I spent a fair amount of time trudging around the narrow streets of the Bairro Alto looking for just the right fado club. I wound up choosing one because it seemed the least touristy, but my instincts proved faulty. Soon after I ordered my dinner,  a tour bus full of Japanese tourists filled the place. Fortunately, the music did not disappoint. The fadista, who was heartbreakingly beautiful as well as talented, was accompanied by a mandolin and a guitar. Although I couldn’t understand the words, her singing conveyed the sorrowful message of the lyrics. (Oddly, many of the songs seemed to be about Lisbon. The chorus of one song was simply “Leezh-bo-ah, Oh!, Leezh-boh-ah.”) It was a great show, even though the Japanese tourists insisted on standing up and taking flash pictures – repeatedly – throughout  the performance.

On my way out of the club, I said to the singer “Amo sua música” (I love your music) to which she responded by saying (in Engish) “In that case, you’ll want to buy one of my CDs.” I laughed and said to her “Quanto é?” (How much is it?), to which she responded (in English) “A bargain at fifteen euros.” I handed her the money, she handed me a CD, and I said to her (in English) “Thank you. Goodbye,” to which she responded by saying “Obrigada. Adeus, meu amigo.”

After I left the fado club, I meant to go back to the hotel. It was late and I was tired. However, on my way  to the hotel, I was drawn by the irresistible sound of Brazilian music. I wound up going into a samba club and standing at the crowded bar. I have always thought of samba music as a cliché, but this was something different. I would say that the place was rocking, but that is not quite right –the place was swaying. It is impossible to listen to samba music and stay still. Everyone’s head was bobbing along to the beat. One impossibly tall young woman (whom I later learned was the bass player’s girlfriend) was walking around the club and drawing random people into dancing. She found it particularly amusing when she tried to dance with me. I am sure part of the amusement was that I was easily thirty years older than everyone else in the place, and I was certainly the only one wearing a blazer and a button-down shirt. Her laugh seemed to say “Look, I got Pops here to dance! What’s this guy doing in this club, anyway?” I survived the samba dance lesson, but I did stay out a lot later than I had intended.

The next morning (a little later than I had hoped), I took a train from the Rossio Station is Lisbon to Sintra, in the mountains about 45 minutes away. Sintra – prounced SEEN-tra, with more of that lovely trilling of the “r” — is the site of several former royal palaces and castles. It sounded pretty interesting from the guidebooks, but what the guidebooks didn’t manage to convey is that it would be crime to visit Portugal and to miss Sintra. The Palacio Nacional de Sintra (pictured to the left) is stunning; even on the warm afternoon that I visited, the beautifully tiled rooms were cool and comfortable. But the best part of visiting Sintra is the Castelo dos Mouros, located about 1,500 ft. above the town on a small mountain. The Castelo, which can only be reached (as far as I can tell) by a very vigorous hike up a steep, rocky incline, was built in the 8th or 9th century by the Moors, later captured by Norse invaders, and ultimately taken by the Portuguese. I arrived at the mountain top drenched in sweat, but the exertion was well worth the effort. The views from the vertiginous battlements were absolutely astonishing. I stayed up there for a couple of hours, exploring the castle walls and admiring the incomparable views.

As I headed back to Lisbon on the train, I was certain that I had done something truly special that day. I also started to understand why the traditional Portuguese music is so mournful. The country is beautiful and has a proud and rich history. Yet its greatest moments were centuries ago. Little of its literature is translated into other languages. Its wonderful and distinctive wine and music are little appreciated outside of the country. The country spent the better part of the 20th century suffering under a repressive dictatorship. Its beautiful capital city is often overlooked in favor of more glamorous places like Paris or Rome. When I told the cab driver back home who took me to the airport that I was going to Portugal, he said “Portugal? Where is that exactly?” (Admit it, when you first saw that this post was about Lisbon, you said to yourself, “Lisbon? Why did he go to Lisbon?”)

Friends, I am here to tell you, Lisbon is a great place. It is a shame that the city is often overlooked. If you have ever sampled a glass of Portuguese vinho tinto and observed to yourself with surprise and delight, “Hey this stuff is really good!” then you know what it would be like to visit Lisbon.

More Pictures of Lisbon:

The Alfama, the city’s oldest district

The Baixa District

Praca Do Comercio

Castelo dos Mouros, in Sintra

Bela Lisboa

Wonder what fado sounds like? Here is a bonus video — this is Mariza peforming a fado concert at the Torre de Belem: