A recurring D&O insurance coverage issue is the question of whether or not the D&O insurance policy provides coverage for a plaintiffs’ fee award. The question often arises in the context of a settlement of a shareholders’ derivative suit that includes an agreement to pay the plaintiffs’ attorneys fees as part of the settlement. In many instances, the settling company’s D&O insurer will contest coverage for the plaintiffs’ attorneys’ fees.

 

In a May 28, 2013 Law 360 memorandum by Anthony Tatum and Shelby S. Guilbert, Jr. of the King & Spalding law firm entitled “Securing D&O for Attorneys’ Fees in Securities Cases” (here, subscription required), the authors present their views on this recurring coverage issue. The authors contend that “the plain language of most D&O policies, as well as the reported cases where this issue has been litigated, demonstrate that plaintiffs’ attorney’s fees should be covered.”

 

Carriers rely on several arguments when they contend that the plaintiffs’ fees are not covered under the policy. The principal argument on which they rely is that the plaintiffs’ attorneys’ fees portion of a derivative settlement represents a cost the company incurred in order to secure the benefits obtained for the company in the derivative lawsuit. The insurers argue that because the fees represent the cost of procuring a benefit for the company, they do not represent “damages” or otherwise represent covered “Loss” under the policy. Carriers will also sometimes argue further that under the “American rule,” each party to civil litigation bears its own costs, and so the agreement to pay the plaintiffs’ attorneys’ fees is a voluntary payment rather than a “Loss” to the company.

 

In their article, the authors argue that the typical D&O insurance policy has a very broad definition of Loss, typically including “damages, settlements, judgments and defense costs.” This broad definition typically contains no restriction or limitation removing plaintiffs’ attorneys’ fees from the definition of “Loss.” The authors assert that “when D&O insurers include broad definitions … but fail to specifically bar recovery of plaintiffs’ attorney’s fees, D&O policyholders have a compelling plain language argument that plaintiffs’ attorneys’ fees are covered loss.”

 

The authors argue further that, in addition to the policy language, “case law also generally supports the view that plaintiffs’ fees are covered loss.” The authors review at length the 2011 opinion of the First Department of New York’s Appellate Division in XL Specialty Insurance Co. v. Loral Space & Communications (here), in which the intermediate appellate court held that an insured’s payment of attorneys’ fees to plaintiffs’ counsel in a derivative lawsuit was covered loss, even though the lawsuit arguably benefitted the insured company. The authors also review two other decisions from other jurisdictions that the authors contend are “consistent” with the Loral case.

 

The authors conclude, with respect to the cases  they reviewed, that

 

The takeaway from all of these cases is that consistent with the plain language of most D&O policies, courts generally view plaintiffs’ attorneys’ fees as just another type of damages. Plaintiffs’ attorneys’ fees fall squarely within the scope of most D&O policies’ definitions of key terms like “loss,” “damages and “claim,” and unless a D&O policy specifically excludes coverage for plaintiffs’ attorneys’ fees, such fees should be covered.

 

Policyholders are unanimous in their agreement with the authors’ views of this issue. In my experience, policyholders are shocked to learn that the carriers would even try to contend that the plaintiffs’ attorneys’ fee portion of a derivative settlement would not be covered. Nevertheless, while I am generally on the policyholder side of these issues these days, I do think it is important to note that the questions surrounding these issues have not been quite as definitively resolved as the authors suggest in their memo.

 

Among other things, it is very important to note that while a majority of three judges in the Loral case did conclude that the plaintiffs’ attorneys’ fees were covered, the ruling was accompanied by a spirited dissent by two other judges who argued strenuously that the fees should not be covered under the policy. As I discussed in a prior post regarding the decision (here), the dissent said that in order for the derivative fee award to be covered, it would have to represent "an actual loss, not an expense or the cost of doing business." The dissent reasoned that in this case, Loral "did not sustain a loss but rather benefitted from the judgment."

 

A fee award a derivative suit, the dissent observed, represents "the equitable entitlement of the successful derivative plaintiff to recover the expenses of his/her attorneys’ fees from all the shareholders of the corporation on whose behalf the suit was brought." The dissent observed that "if not spreading the cost of attorneys’ fees sounds in unjust enrichment, the obvious corollary is that shifting the cost to shareholders as a group cannot be characterized as a loss."

 

At a minimum, the vigorous dissent in the Loral case shows that judicial views on this issue are hardly uniform, and in view of the close vote in the case at the intermediate appellate level, the state of the law on these issues arguably is not settled. The narrowness of split between the majority and the dissent on this issue suggests that this dispute is far from resolved. The underlying issue is likely to continue to be debated in other cases.

 

I have long wondered whether all would be better off if this issue were addressed in the policy, along the lines of the way the industry developed a policy solution to the contentious issue that Section 11 settlements were not covered under the Policy. The way the industry addressed that issue is that it became standard to include in public company D&O policies language stating that the insurer would not take the position that a settlement of a ’33 Act case was not covered under the Policy. Perhaps the industry will adopt a similar approach on this derivative lawsuit fee award issue.

 

In the meantime, while we await a solution to this issue in the policy, policyholders will continue to argue that amounts agreed to in payment of plaintiffs’ attorneys’ fees in derivative settlements represent covered loss under the policy.

 

I would be very interested in hearing from others on this issue, particularly readers on the insurer side of the aisle who may have a different perspective on this recurring issue.

 

In two decisions last week – one in the Sixth Circuit and one in the First Circuit – federal appellate courts set aside lower court dismissals of securities class action lawsuits. Although the two cases are different and the two appellate opinions address different legal issues, the two decisions both seem to suggest a similar message to the lower courts to be a little less hasty in dismissing cases.

 

The Sixth Circuit opinion is particularly interesting, because the Court not only articulated a very precise (and plaintiff-friendly) standard for pleading strict liability in a Section 11 claim, but also expressly declined to follow the Second and Ninth Circuits on the Section 11 pleading requirements, setting up a split in the circuits that could attract the attention of the U.S. Supreme Court.

 

The Sixth Circuit Opinion

On May 23, 2013, a unanimous three-judge panel of the Sixth Circuit entered an opinion affirming in part and reversing in part the lower court’s dismissal of a securities class action lawsuit against Omnicare and certain of its directors and officers. As discussed here, the case has an extended  procedural history, and the recent appeal represents the case’s second trip to the Sixth Circuit.

 

The specific issue before the appellate court in the most recent appeal involved the question of what plaintiffs are required to plead in order to establish a claim under Section 11. The plaintiffs claimed that in connection with a December 2005 securities offering, the company’s offering documents had falsely stated that the company was in compliance with legal requirements, when the company was in fact engaged in a variety of illegal activities including kickback arrangements with pharmaceutical companies and the submission of false claims to Medicare and Medicaid.

 

In February 2012, the district court granted the defendants’ motion to dismiss, finding that the plaintiffs were required but failed to plead that the defendants knew that the statements about the company’s legal compliance were false. The plaintiffs appealed the dismissal to the Sixth Circuit. On appeal, the plaintiffs argued that Section 11 provides for strict liability and it was therefore inappropriate for the district court to require them to plead knowledge in connection with their Section 11 claim.

 

The defendants, in reliance on the Second Circuit’s 2011 decision in Fait v. Regions Financial Corporation, as well as Ninth Circuit case authority, argued that in order to plead a Section 11 claim, the plaintiffs not only had to plead not only that the allegedly misleading statement was objectively false, but also that the defendants “disbelieved” the statement – that is, that the plaintiffs had to plead both objective and subjective falsity.

 

The Sixth Circuit rejected the defendants’ arguments, noting that, by contrast to Section 10(b) and Rule 10b-5, which require a plaintiff to plead scienter, Section 11 is “a strict liability claim,” adding that “once a false statement has been made, a defendant’s knowledge is not relevant to a strict liability claim.” Under Section 11, the Sixth Circuit said, “if the defendant discloses information that includes a material misstatement, this is sufficient and a complaint may survive a motion to dismiss without pleading knowledge of falsity.”

 

The Sixth Circuit expressly declined to follow the Second and Ninth Circuits, based on its observation that those courts had misinterpreted the U.S. Supreme Court’s 1991 decision in Virginia Bankshares, Inc. v. Sandberg. By contrast to the Second Circuit’s interpretation of the Virginia Bankshares case, the Sixth Circuit said the Virginia Bankshares case “was not faced with and did not address whether a plaintiff must additionally plead knowledge of falsity in order to state a claim.” Moreover, the Virginia Bankshares case involved a Section 14(a) claim, rather than a Section 11 claim. The Sixth Circuit observed that “it would be unwise for this Court to add an element to Section 11 claims based on little more than a tea-leaf reading in a Section 14(a) case.” Accordingly, the Sixth Circuit refused to extend Virginia Bankshares to impose a knowledge of falsity requirement in a Section 11 claim.

 

The Sixth Circuit concluded that the plaintiffs’ allegations of Omnicare’s alleged misrepresentations regarding its legal compliance were sufficient to state a claim under Section 11, reversed the district court’s dismissal on the ground, and remanded the case to the lower court. However, the Sixth Circuit did affirm the district court’s dismissal of the plaintiffs’ GAAP-based misstatements and omissions.

 

The First Circuit’s Opinion

On May 24, 2013, a unanimous three-judge panel of the First Circuit (including former U.S. Supreme Court Justice David Souter, sitting by designation), in an opinion written by Judge Jeffrey Howard, entered an order vacating the dismissal of the securities class action lawsuit pending against CVS Caremark.

 

CVS Caremark was formed through a March 2007 merger between CVS Corp. and Caremark Rx Inc. The plaintiffs alleged that the success of the merger depended on the success of integrating the two companies’ operations. The plaintiffs allege that following the merger, the defendants made a number of statements about the success of the integration efforts and the level of service provided to important pharmaceutical services customers. In particular the plaintiffs cited a number of statements following the merger about the successful integration of the two companies’ computer systems and operations.

 

The plaintiffs allege that these statements concealed problems the company was having with computer integration. The plaintiffs allege that integration problems resulted in the company’s loss of major clients whose business was worth $3 billion in annual revenues to the company. The plaintiffs allege that the truth about the company’s problems was revealed in a November 5, 2009 conference call with analysts. In the call, the company’s CEO, Thomas Ryan announced, among other things, that the company had suffered “some big client losses” and that “service issues” had led to the loss of at least one of the large clients. Ryan also announced that due to the loss of business, the company would not make its previously announced projected growth in earnings per share. Ryan also announced the unexpected retirement of the head of the “chief architect” of the merged companies’ integrated business model.

 

In their securities class action complaint, the plaintiffs alleged that Ryan’s statements revealed that the company’s failure to integrate the predecessor companies’ operations had resulted in the loss of billions of dollars of customer contracts. In support of this allegation, the plaintiffs cited several analyst reports, which among other things, stated that the company had “stunned” the marketplace with the information about the loss of customer business and “the breakdown” of the Caremark business model. Following the November 5 conference call and quarterly earnings announcement, the company’s share price declined 20 percent.

 

The district court granted the defendants’ motion to dismiss, holding that the plaintiffs’ complaint did not plausibly allege that Ryan’s statements in the November 5 call caused the drop in the company’s share price, with one exception – Ryan’s statements that the company would not make the projected growth in earnings per share. However, because this projection was a protected “forward looking statement,”’ it could not form the basis of a claim against the defendants. The plaintiffs appealed the district court’s ruling, except that they did not appeal the district court’s conclusion regarding the forward looking statement.

 

On appeal, the plaintiffs argued that Ryan’s statements in the November 5 call represented a concession that the post-merger integration had been less successful than the company had claimed and the resulting service quality issues and loss of client business were due to these integration difficulties. The defendants argued that the November 5 conference call did not represent a “corrective disclosure” because Ryan never said that there were integration problems; that the market was previously aware of the customer losses; and that the plaintiffs cannot bootstrap their theory that Ryan’s statements in the November 5 call caused the share price decline by relying on statements from analysts’ reports.

 

In its May 24 opinion, the First Circuit vacated the district court’s dismissal and remanded the case for further proceedings. In concluding that the plaintiffs had plausibly alleged that the November 5 call had revealed the company’s problems with service and systems integration, the First Circuit cited a number of factors: first, during the call, Ryan had for the first time revealed that “service issues” had led to the loss of contracts; second, the market reacted with “alarm” to the news of the magnitude of the company’s lost business and the problems that led to the loss; and third that the unexpected retirement of the “architect” of the integration “alerted the market to problems” with the integrated business.

 

The Court concluded that the plaintiffs’ allegations “indicated that the drop in CVS Caremark’s share price was causally related to its misstatements regarding the integration of CVS and Caremark, and these allegations are sufficiently plausible to foreclose dismissal.”

 

However, the defendants also argued that the plaintiffs had not sufficiently pled an actionable misstatement or omission and also had not sufficiently pled scienter. Accordingly, rather than reversing the district court’s opinion, the appellate court merely vacated the district court’s dismissal, for the court “to consider alternative grounds for dismissal if it chooses.”

 

Discussion

In each of these two cases, the appellate courts set aside the district court’s dismissal of the respective plaintiffs’ securities class action lawsuits. Although the two appeals involved different facts and presented different legal issues, there arguably is a common message to the district courts in the two appellate opinions. In that regard, it is worth noting the concurring opinion of Northern District of Ohio Judge James Gwin in the Omnicare case (Gwin sat by designation on the Sixth Circuit panel that heard the Omnicare appeal).

 

Judge Gwin wrote separately to underscore district courts’ discretion under Fed. R. Civ. Proc. 54(b) to revive previously dismissed claims while the case remains pending if newly discovered evidence so warrants. In making this point, Judge Gwin cited Fed. R. Civ. Proc. 1, which states that district courts are charged with enforcing rules “to secure the just, speedy, and inexpensive determination” of an action. Judge Gwin concluded his concurring opinion by noting, with reference to Fed. R. Civ. Proc. 1, that “there’s a reason that ‘just’ precedes ‘speedy’”.

 

To paraphrase Judge Gwin, the message to the district courts seems to be – slow down there, not quite so speedy with the dismissals. That is, for all of the statutory and case law hurdles that the plaintiffs must overcome in order to try to state a securities claim, a quick dismissal still is not always going to be the appropriate outcome. As formidable as the obstacles are, the obstacles are not insurmountable.

 

The Sixth Circuit’s holding in the Omnicare case is particularly interesting, and seemingly holds open the prospect that it will be substantially easier for Section 11 claimants in the Sixth Circuit to state a claim that it will be for Section 11 claimants in the Second and Ninth Circuits. In a May 24, 2013 column on her On the Case blog,  here, Alison Frankel quotes the defense counsel in the Omnicare case as saying that the Sixth Circuit’s ruling could “open the floodgates” for litigation in the Circuit.  The split in the Circuits, and the stark fact that claims that could go forward in the Sixth Circuit will not go forward in the Second and Ninth, seems likely to attract the interest of the U.S. Supreme Court – particularly since the apparent split appears to be the result of directly conflicting interpretations of the U.S. Supreme Court’s decision in the Virginia Bankshares case.

 

Although the two appellate cases were quite different from each other in a number of respects, it is interesting to note that both cases involved companies in the pharmaceutical business. That is, they both parts of the larger life sciences sector that has so consistently attracted securities class action litigation over the years (refer for example here). In the past, it has been reassuring that though companies in the life sciences sector disproportionately attract litigation, the cases filed in the sector seemed to also involve a relatively high dismissal rate. The outcome of these two appeals, at least, suggests that at least these some of the dismissals (that is, these two cases, for instance) may not have been warranted.

 

It is important to note that though these respective plaintiffs have succeeded in having the district court dismissals set aside, the plaintiffs are a long way from home. In particular, the parties in the CVS Caremark case will have to go back to the district court and wrangle over threshold questions such as whether or not the plaintiffs have adequately alleged misrepresentation and scienter. The plaintiffs in the Omnicare case, having weathered their second appeal in the case, will have to go back and continue to prosecute their claims in the case, which have now been pending for years. There is nothing that says that the plaintiffs in either case will every have anything to show for their efforts.

 

Even though the plaintiffs prevailed in these appeals, these cases serve as a reminder of how challenging it is for securities class action plaintiffs and their lawyers to take on one of these kinds of lawsuits. The claims not only face formidable legal and procedural obstacles but also require the claimants and their counsel to be willing to carry the case for years. Whether or not the Sixth Circuit’s opinion in the Omnicare case will “open the floodgates,” any prospective claimant seeking to rely on the decision will still have to be come prepared with copious reserves of endurance and perseverence.

 

Special thanks to a loyal reader for sending me a copy of the Sixth Circuit opinion.

 

As discussed in an article in the Sarasota Herald Tribune (here), on May 22, 2013, a Middle District of Florida jury returned a verdict against Sarasota law firm Icard Merrill, and one of its partners, Robert Messick, in a legal malpractice action arising out of the collapse of the failed First Priority Bank of Bradenton, Florida.

 

The FDIC had claimed that Messick had represented multiple parties in a single loan transaction that had cause a significant loss to the bank. The FDIC, in its role as receiver for the failed bank, had sought damages of over $4 million, but the jury reduced the damage award to $1.2 million. The trial court is now considering post-trial motions. The May 23, 2013 press release from the law firm that had represented the FDIC in the case can be found here.

 

According to the FDIC’s professional liability lawsuits page on its website (here), legal malpractice cases are among the 51 actions that the agency has authorized above and beyond the actions the agency has authorized to be filed against the former directors and officers of failed banks. As discussed here, in at least one failed bank lawsuit the agency has filed, the agency’s complaint named as defendants certain former directors and officers of the bank and also named as defendants the bank’s former outside General Counsel and former outside law firm. In addition to negligence, gross negligence and breach of fiduciary duty claims against the former directors and officers, the FDIC’s complaint alleged legal malpractice claims against the former General Counsel and his law firm.

 

While it is clear that the FDIC intends to pursue attorney malpractice claims as part of its litigation approach in the current bank failure wave, the FDIC’s pursuit of legal malpractice claims does not seem to as significant component of the agency’s litigation strategy as it was during the S&L crisis. Information on the FDIC’s website shows that during the S&L crisis, the agency and the RTC filed a total of 205 attorney malpractice suits in connection witih  10 percent of all failed institutions. From those cases and some prelitigation settlements, the agencies recovered more than $500 million, averaging about $2.5 million for each suit filed. The primary source of recovery in most of the cases was attorney malpractice insurance policies.

 

The agency clearly aims to include attorney malpractice claims and recoveries this time around. It just seems that the attorney malpractice claims will not loom as large as part of the agency’s failed bank recoveries as they did during the S&L crisis. The agency does not appear to be filing nearly as many legal malpractice claims this time around, either in absolute numbers or as a percentage of bank failures.

 

In part this decline in the number of failed bank legal malpractice actions may be due to one important change in the relationship between bank’s outside counsel and the bank’s board. Prior to the S&L crisis, it was quite common for a bank’s outside counsel to sit on the bank’s board. The potential conflict in responsibilities led to many of the claims that the FDIC and the RTC filed during the last bank failure wave. Since then, it became much less common for outside counsel to serve on bank’s boards. So a factor that led to many of the claims during the S&L crisis simply is not present for nearly as many of the bank failures during the current bank failure wave.

 

The Coming Hurricane Season: Once again, the NOAA has released its predictions for the upcoming hurricane season. According to NOAA’s May 23, 2013 release, the agency is predicting an “active” Atlantic hurricane season with as many as 3 to 6 major hurricanes. In a conversation with an industry colleague about the agency’s predictions, I expressed my skepticism about the reliability of the agency’s and even suggested that the entire prediction effort had very low value.

 

My friend took my criticisms as a challenge, and managed to locate and send to me a link to a very interesting September 2011 blog post from a Houston Chronicle blog called SciGuy. The post can be found here. Although the blog post analysis shows that NOAA’s hurricane prediction track record is better than a random guess, it has only been slightly better than a random guess. On the other hand, hurricane seasons are much more variable than anyone but a meteorologist might predict, so in that respect it is quite something that the agency has managed to perform as well as it has.

 

While I will concede that this detailed analysis proves that the agency’s predictions have predictive value, the agency’s track record is only slightly better than a random guess. The math may validate the agency’s efforts but given how slight the predictive value is, I reserve my right to continue to contend that the entire prediction effort has very low value.

 

According to the latest update on the FDIC’s website, the pace of the agency’s filing of failed bank lawsuits picked up considerably in the last month. According to the agency’s website (here), which the agency updated on May 22, 2013 the agency has now filed a total of 63 lawsuits against the directors of failed banks, an increase of nine new lawsuits since the agency’s last update in April. With the latest lawsuits, the agency has now filed a total 19 new lawsuits so far this year, compared to 26 during all of 2012.

 

The agency’s quickened pace of lawsuit filings since its last website presents quite a contrast to the period preceding the agency’s last website update. As I noted at the time of the April update, the agency had filed only one new lawsuit since its prior update and had filed only four new lawsuit overall since February 1, 2013. I had noted in posts since the FDIC’s last website update that the agency had been filing a number of lawsuits. However, the agency’s website update contains a number of new lawsuits I had not previously noted.

 

First, on April 26, 2013, the FDIC filed an action in the District of Puerto Rico in its capacity as receiver for the failed Eurobank of San Juan, Puerto Rico, against nine of the bank’s former directors. A copy of the FDIC’s complaint can be found here. Regulators closed the bank on April 30, 2013, so the FDIC filed the action just before the third anniversary of the bank’s failure. The action seeks to recover over $55 million in losses the bank incurred on twelve commercial real estate loans approved between March 6, 2006 and December 22, 2008. The complaint alleges that the nine director defendants “failed to properly oversee Eurobank’s lending practices and approved 12 high-risk loans with glaring underwriting deficiencies that violated prudent lending standards as well as the Bank’s own credit risk management policy.”

 

Interestingly, it its lawsuit against the former Eurobank directors, the FDIC also named as defendants the spouses of several of the directors: the conjugal partnerships of several of the directors; and the bank’s D&O insurers, with respect to which the agency seeks a judicial declaration that the carriers’ policies cover the losses the agency seeks to recover. These additional defendants are named as defendants pursuant to Puerto Rican law. The insurers are named as defendants in reliance of Puerto Rico’s direct action statute. (The FDIC’s prior failed bank lawsuits in Puerto Rico also named spousal and insurer co-defendants, in reliance on the provisions of Puerto Rican law, as discussed here.)

 

Second, the FDIC filed an action on April 29, 2013 in the Eastern District of Missouri in its capacity as receiver of the failed Champion Bank of Creve Coeur, Missouri, against ten former directors and officers of the bank for negligence, gross negligence and breach of fiduciary duty, for approving “sever high-risk out-of-territory commercial real estate loan participations and two business lines of credit resulting in damages of at least $15.56 million.” A copy of the FDIC’s complaint can be found here. The bank failed on April 30, 2010, so the FDIC filed its suit just before the third anniversary of the bank’s failure.

 

Third, on May 13, 2013, the FDIC filed an action in the Southern District of Indiana in its capacity as receiver of the failed Irwin Bank and Trust Company and Irwin Union Bank against four former officers of the banks. Regulators closed the banks on September 18, 2009, which suggests that the parties may have previously entered into a tolling agreement. As reflected in the FDIC’s complaint (here), the FDIC asserts claims against the defendants for negligence, gross negligence and for breach of fiduciary duty, for approving nineteen “poorly underwritten” loans between May 27, 2005 and April 12, 2009. The agency seeks recovery of damages of “no less than $42 million.”

 

Finally, on May 20, 2013, the FDIC filed an action in the Northern District of Iowa against eight former directors and officers of the failed Vantus bank of Sioux City, Iowa, which failed September 4, 2009. Again, the fact that the complaint has been filed so far beyond the third anniversary of the bank’s closure suggests that the parties may have entered a tolling agreement. The FDIC’s complaint (here), asserts claims against the directors and officers for negligence, gross negligence and for breach of fiduciary duty. The FDIC bases its claims against the defendants for allegedly causing the bank to use $65 million (120% of the bank’s core capital) to purchase “high risk collateralized debt obligations back by trust preferred securities without due diligence and in disregard and ignorance of regulatory guidance about the risks and limits on purchases of such securities.”

 

All signs are that the number of failed bank lawsuits will continue to accumulate in the months ahead. Indeed, as has been the case for some months now, once again the FDIC has adjusted its website as part of its monthly update to reflect the increased numbers of authorized lawsuits. In the latest update, the FDIC has indicated that as of May 21, 2013, the agency has authorized suits in connection with 114 failed institutions against 921 individuals for D&O liability. These figures are inclusive of the 63 filed D&O lawsuits naming 488 former directors and officers, so the implication is that there is a backlog of as many as 51 approved but yet unfiled lawsuits in the pipeline.

 

At least by reference to bank closure dates, the assumption would seem to be that we should be near the high water mark for failed bank lawsuits, owing to the fact that the peak numbers of bank failures occurred in the last two quarters of 2009 and the first two quarters of 2010. The suggestion would seem to be that the number of failed bank lawsuit might start to begin to taper off as 2013 progresses. However, the presence on the latest filed lawsuits of several banks that were well past their third anniversaries suggests that there could be factors that prolong the filing curve into the future.

 

With lawsuits authorized in connection with 114 failed institutions, the agency has now authorized lawsuits in connection with just about 24% of all failed banks. In other words, the percentage of failed institutions for which lawsuits have been authorized is approaching the 24% of failed institutions that were involved in failed bank litigation during the S&L crisis.

 

Though the bank failure rate has clearly slowed during 2013, some banks nevertheless are continuing to fail. As reflected on the FDIC failed bank list (here), three banks have been closed so far in May 2013, bringing the 2013 YTD number of failed banks to 13.

 

The early returns in the Libor-scandal related litigation have not been favorable for the claimants. As noted here, on March 29, 2013, Southern District of New York Judge Naomi Reice Buchwald substantially granted the motion to dismiss in the consolidated Libor-scandal antitrust litigation, and as discussed here, on May 13, 2013, Southern District of New York Judge Shira Scheindlin granted the motion to dismiss in the Libor-related securities class action lawsuit filed against Barclays.

 

Notwithstanding these setbacks for claimants seeking to recover damages from the Libor benchmark rate-setting banks, on May 20, 2013, certain claimants filed yet another Libor scandal-related lawsuit against the banks. The latest lawsuit, which was filed in the New York (New York County) Supreme Court, is filed as an individual action, not a class action, and may represent a new approach calculated to overcome some of the hurdles that the prior claimants have faced.

 

Alison Frankel has an interesting May 21, 2013 post about this latest Libor-scandal related lawsuit in her On the Case blog , here.

 

The latest complaint, a copy of which can be found here, was filed on behalf of two investment firms and two investment failed funds that they represent. In late 2007 and early 2008, the funds had entered into a type of complex financial transaction called a corporate bond basis package. One of the critical components of the transaction was an interest rate swap that, among other things, was designed to provide a floating-rate interest payment to the funds. The plaintiffs investment strategy assumed that as the banking crisis worsened, the Libor rate would increase, as (it was assumed) the crisis would force the rate-setting banks themselves to pay higher interest rates. The investment was designed to provide increased interest payments as the Libor benchmark increased.

 

Instead of making money as the Libor benchmark increased, the funds lost money, and actually had to make increased levels of collateral commitment, as the benchmark stayed basically level. Ultimately the funds were forced to unwind the transactions on very unfavorable terms, including, among other things, locking in artificially suppressed levels of Libor for the remaining periods of the swap transactions. Ultimately, the funds failed as a result of these problems. It was only later, when the details of the manipulation of the Libor benchmark rates emerged, that the plaintiffs understood that the investment performed so poorly because the Libor benchmark had been suppressed, as the participating banks sought to mask their true financial condition. Many of the Libor rate-setting banks that are accused of manipulating the benchmark rates were parties in the financial transactions that are the basis of the lawsuit.

 

Against the six banks with whom the plaintiffs had a direct financial relationship with the now-defunct funds , the plaintiffs have filed claims for breach of contract; breach of the implied covenant of good faith and fair dealing; and unjust enrichment. Against all of the rate-setting banks, the plaintiffs have filed claims for common law fraud; aiding and abetting fraud; tortious interference with contract; tortious interference with prospective business advantage; and civil conspiracy. The plaintiffs claim damages of $250 million.

 

By asserting common law claims, the claimants in this action avoid the statutory defenses that have led to setbacks for the claimants in the Libor-scandal antitrust and securities lawsuits. And while the assertion of these claimants of common law fraud claims will require the claimants to establish reliance, the nature of the relationship that these claimants had with the banks as a result of the transactions increases the likelihood that they will be able to establish reliance.

 

There have been prior Libor scandal-related cases asserting common law fraud claims (refer for example here). Nevertheless, this latest lawsuit may represent something of a new front in the Libor-scandal litigation wars, and may suggest a way for prospective Libor-scandal related to circumvent some of the obstacles that prior claimants have faced. That is, the claimants may avoid the problems prior claimants have confronted by proceeding individually rather than in the form of a class action, and by asserting common law claims rather than federal statutory claims.

 

The question is whether other prospective claimants individually have sufficient damages to warrant proceeding individually, and in addition whether the prospective claimants had sufficient direct contact with the Libor benchmark rate-setting banks in order  to be able to try to substantiate the common law claims  — for example, to allow the claimants to satisfy “reliance” requirements. According to comments from the counsel for these claimants that Frankel quoted in her blog post, there “are lots and lots of investors who dealt directly with the banks “ and that have sufficient damages to warrant individual claims.

 

It may be, as these claimants’ counsel is quoted as saying in Frankel’s blog post, that “this is where the future of Libor litigation exists, if it exists.” While the Libor claimants may have hit some early setbacks in the prior cases, there may be future cases that avoid the hurdles that the prior claimants faced and that prove to be more productive for the claimants.

 

It is far to early if this alternative approach to Libor litigation will bear fruit, but there is at least the suggestion that Libor litigation still has much further to go. Despite the early setbacks, it may be a while yet before we can assess overall how claimants are faring in this litigation. 

 

In Defense of “No Admit” Settlements: For some time now, settlements of SEC enforcement actions in which the defendants neither admit nor deny wrongdoing have been under attack. These kinds of settlements were first and most publicly attacked by Southern District of New York Judge Jed Rakoff, who, in a November 2011 order, questioned the SEC’s no admit settlement with Citigroup. (That ruling is currently on appeal to the Second Circuit.) More recently, on May 14, 2013, Senator Elizabeth Warren sent the heads of several federal agencies, including the SEC, a letter questioning the practice of entering into settlements without an admission of guilt.

 

There clearly will continue to be debate on this issue. I have long thought that if the SEC is prohibited from entering into “no admit” settlements, among the possible consequences would be that fewer cases would settle, more cases would go to trial, and the SEC’s resources would be stretched, meaning even less enforcement in the end.

 

In a May 21, 2013 op-ed piece in the Wall Street Journal entitled “Why the SEC needs ‘No-Admit’ Settlements” (here), former SEC Enforcement head and current King & Spaulding partner Russell G. Ryan adds some additional concerns that might arise if the SEC were barred from entering into “no admit” settlements.

 

First, Ryan notes that an obvious alternative for the SEC, rather than pursuing civil enforcement actions in which it would be barred from entering into “no admit” settlements, the SEC would logically seek to pursue more cases through its administrative process, which requires no oversight by the courts. The administrative proceedings are viewed as less severe that federal court enforcement proceedings. In addition, because of the absence of judicial scrutiny, cases in the administrative process “invite the potential for reduced transparency and accountability when compared with settlements that require the imprimatur of an independent federal judge.”

 

Second, Ryan argues that if the agency were barred from entering “no admit” settlements, the outcome would be “weaker settlements overall.” Ryan points out that settlements are the result of protracted negotiations characterized by give and take by both parties. Ryan notes that:

 

Among many terms negotiated in an SEC settlement, the no-admit clause is one of the most important to the defense. A policy change requiring an admission of wrongdoing would, in essence, take this settlement term off the table. It would therefore force the SEC to compromise elsewhere in the bargain to maintain the fragile equilibrium that would have prevailed without the admission.

 

It is “naïve” to think that the SEC would be able to bargain for the exact same settlements as they are now if the SEC is not able to offer the possibility of a “no admit” provision in the bargain. Ryan contends that “the inevitable end result” if an admission of wrongdoing is required would be “lighter overall sanctions in a less accountable venue.”

 

As I have previously noted (refer for example here), one of the most vexing issues in the D&O claims arena is the questions of whether or not two claims are or are not interrelated. If the two are interrelated, they are deemed a single claim for purposes of determining the claims made date. The outcome of this analysis often can mean the difference between the availability of coverage and non-coverage for one or both of the claims.

 

In a recent D&O insurance coverage dispute in the Western District of Washington, Judge Richard A. Jones wrestled with the relatedness question in the context of a qui tam claim that followed after an earlier anti-retaliation claim. Having determined that the subsequent qui tam claim “related back” to the prior anti-retaliation claim, and that the subsequent claim was deemed made at the time of the earlier claim, Judge Jones then had to determine whether the two claims were also a single claim for purposes of the application of a policy exclusion.

 

As discussed in his March 11, 2013 opinion (here), Judge Jones determined that the “single claim” deeming term operates only with respect to the policy’s claims made provisions, but did not operate with respect to the application of the policy’s exclusions. Judge Jones’s opinion is the subject of a May 15, 2013 memorandum from Matt Jacobs and Jan Larson of the Jenner & Block law firm (here).

 

Background

In April 2009, Richard Klein, the former CFO of Omeros Corporation, notified the company that he believed he had been terminated from the company in retaliation for internally reporting what he contended was the provision of falsified time records to the National Institute of Health (NIH) in connection with an NIH grant. In September 2009, Klein filed a lawsuit against Omeros alleging that he had been fired in violation of the anti-retaliation provisions of the False Claims Act.

 

Omeros submitted the anti-retaliation claim to its management liability insurer, which provided both EPL and D&O insurance to Omeros. Pursuant to a reservation of rights, the insurer defended Omeros against the Klein suit under the EPL coverage section. The insurer ultimately exhausted the $1 million limit of liability applicable to the EPL coverage in defense of the Klein claim.

 

In November 2010, Klein sought leave to amend his complaint to include a qui tam action on behalf of the United States, asserting that Omeros had violated the False Claims Act. Omeros submitted this amended claim to its management liability insurer. The insurer agreed to defend the amended claim, again under a reservation of rights, under the D&O liability portion of its coverage. The insurer then filed an action seeking a judicial declaration that it there is no coverage under its policy for the qui tam action. Omeros filed a counterclaim contending that the insurer had breached its duties under the policy, acted in bad faith, and violated the Washington Insurance Fair Conduct Act.

 

The insurer moved for partial summary judgment, arguing that because Klein did not file his qui tam claim until November 2010, and because the applicable policy expired in October 2009, the qui tam action was not a claim made during the policy period, and therefore was not covered under the policy. Omeros argued, in reliance on the policy’s Related Acts provisions and definitions, that the subsequent qui tam action related back to the prior anti-retaliation claim, that the subsequent claim is deemed made at the time of the earlier claim, and as a result of the operation of these provisions is deemed a claim made during the policy period.

 

The relevant provisions of the Policy provide that

 

All Claims based upon or arising out of the same Wrongful Act or any Related Wrongful Acts or one or more series of any similar, repeated or continuous Wrongful Acts or Related Wrongful Acts, shall be considered a single Claim. Each Claim shall be deemed to be first made at the earliest of the following times:

1. when the earliest Claim arising out of such Wrongful Act or Related Wrongful Act is first made; or

2. when notice pursuant to section VII.B above [relating to notice of facts “which may be reasonably expected to give rise to a Claim”] of a fact, circumstance, or situation giving rise to such a Claim is given.

 

The D&O Coverage section of the Policy defines “Related Wrongful Acts” as “Wrongful Acts” that re “logically or causally connected by reason of common fact, circumstance, situation, transaction, casualty, event or decision.”

 

The March 11 Opinion

In his March 11, 2013 Opinion, Judge Jones held that “the qui tam claim and the anti-retaliation claim Mr. Klein raise in his initial complaint are based on related wrongful acts.” Judge Jones noted that Klein had alleged in his initial complaint and in his qui tam claim that Omeros had made false reports to the NIH, and accordingly the two claims were logically connected. The insurer had argued that there were differences between the qui tam claim and the anti-retaliation claim; for example, the former seeks recoveries for wrongs done to the United States, while the later seeks a recovery solely from wrongs done to Klein. Judge Jones said that “the policy’s test for a related wrongful act is not whether there are differences, but whether or not there is any ‘common fact, circumstance, situation event or decision’ that logically connects the acts.”

 

Judge Jones added that Omeros’s alleged false reporting “is a common event that logically connects the anti-retaliation and qui tam claims.” The facts underlying both claims “are common facts.” Because the facts are related within the meaning of the policy, the policy requires the insurer “to treat separate claims based on those wrongful acts as if they had been made on the date of the earlier claim.”

 

The insurer, Judge Jones noted, also had a “backup argument.” The insurer argued that if the policy required the two claims to be treated as a “single claim,” and because that “single claim” would have to include Klein’s original anti-retaliation claim, the following exclusion in the D&O portion of the policy was therefore triggered with respect to the qui tam claim: “The Insurer shall not be liable to make any payment for Loss in connection with a Claim made against any Insured …based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any past, present or future actual or potential employment relationship.”

 

Judge Jones concluded that although the policy deems interrelated claims a single claim for purposed of determining when a claim was made, “they are not a single claim for purposed of applying policy exclusions that are unrelated to the claim-made nature of the policy.” He added that “it is reasonable to construe exclusions that have nothing to do with the claims-made nature of the policy to apply individually to separate claims, even if the separate claims are considered a single claim for purposed of determining when they were made.”

 

Discussion

As I have frequently noted on this site, interrelatedness issues are among the most vexing that can arise under the D&O insurance policy. However, the insurer’s argument here that the anti-retaliation and qui tam claim were unrelated and therefore separate claims was always going to be an uphill battle. It is not just the Klein asserted the qui tam claim in an amended complaint in the same lawsuit in which he had asserted the anti-retaliation claim. It is also the fact that both claims depended on a core nucleus of underlying factually allegations based on his contention that the company had falsely reporting specific information to the NIH in connection with an NIH grant.

 

What is more interesting about this decision is Judge Jones’s exploration of the question of what it means that separate claims are “deemed a single claim.” The insurer argued that if the separate claims are a single claim for purposes of the determining the claims made date, then they must be a single claim for purposes of determining the application of policy exclusions. The problem with this argument is that the “deemer” clause deems separate claims to be a single claim for purposes of making the claims made date determination, not for all purposes under the policy.

 

The easiest way to see the problem with the insurer’s argument is to consider a situation in which Klein had filed both the anti-retaliation claim and the qui tam claim in his initial complaint during the policy period. In that circumstance, Omeros would reasonably expect that the insurer would provide coverage for both of the simultaneously made claims, with coverage for the anti-retaliation claim under the EPL coverage section and coverage for the qui tam claim under the D&O coverage section. The mere fact that the were separately made but deemed a single claim for purposes of the determining the claims made date should not change the availability of coverage under the policy.

 

It is always an interesting question whether or not two matters will be found to be sufficiently related to be deemed a single claim. In this case, the Court was asked to determine the extent of the implications if two separate claims were deemed a single claim for purposes of determining the claims made date. As Judge Jones determined, even if the separate claims are deemed a single claim for purposes of the claims made date determinations, the single-claim clause does not govern when applying policy exclusions unrelated to the claims-made nature of the policy.

 

In a May 16, 2013 decision (here), Eastern District of Missouri Magistrate Judge Terry Adelman, applying Missouri law, determined that the failure of an insured under a management liability insurance policy to provide timely notice of claim precluded coverage under the policy, even in the absence of a showing of prejudice to the insurer.

 

Background       

On December 28, 2007, Secure Energy’s Board of Directors received a demand from Michael McMurtrey regarding commissions he allegedly was owed. On May 16, 2008, McMurtrey filed a lawsuit against Kenny Securities and against John Kenny, a director and founder of Secure Energy. On April 13, 2009, McMurtrey added Secure Energy as a defendant to the lawsuit. McMurtrey sought to recover $1.8 million in commissions and $2 million in punitive damages. McMurtrey alleged breach of contract, unjust enrichment, fraud, negligent misrepresentation, and conspiracy against Secure Energy. McMurtrey voluntarily dismissed his suit on June 25, 2009 but refilled it against the same defendants on July 8, 2009.

 

Secure Energy’s management liability insurance policy provided that the insured must provide notice of claim to the insurer as soon as practicable after becoming aware of the claim but no later than 60 days after the expiration of the policy. However, Secure Energy did not notify the insurer of the claim until May 4, 2011. According to the Magistrate Judge’s opinion, the reason for Secure Energy’s delay in providing notice was it was unsure whether it had a claim. However, the Magistrate Judge also noted that in 2009, the company’s insurance broker had advised the company that while there may be little or no coverage under the policy for the claim, the only way to determine coverage is to submit a claim.

 

The insurer rejected coverage for Secure Energy’s claim on the grounds of late notice. Secure Energy then filed an action seeking a judicial declaration that there was coverage for the claim under the policy. The insurer filed a motion for summary judgment arguing that coverage was precluded because Secure Energy had failed to provide timely notice. Secure Energy argued that coverage was not precluded because the insurer had suffered no prejudice from the untimely notice.

 

The May 16, 2013 Decision

In a short May 16 opinion, Magistrate Judge Adelman granted the insurer’s motion for summary judgment. Secure Energy had tried to argue that under Missouri law, an insurer cannot deny coverage for a claim based on late notice unless the insurer can demonstrate that the insured’s failure to comply with the notice provisions prejudiced the insurer. The insurer argued that under Missouri case law, in order to deny coverage on the basis of late notice, an insurer under a “claims made” policy need not demonstrate prejudice.

 

After reviewing the case law, Magistrate Judge Adelman observed that “the Missouri Supreme Court distinctly held that an insurer is not required to show prejudice in a ‘claims made’ policy. Several Missouri state and federal courts have followed this reasoning.” Magistrate Judge Adelman concluded that the insurer “is not required to demonstrate that it was prejudiced by Secure Energy’s failure to provide notice under the claims made policies. Secure Energy’s failure to give the requisite notice precludes it from coverage.”

 

Discussion         

Delayed notice is a recurring problem for policyholders seeking to obtain insurance coverage for claims. The reasons that the notice is delayed are innumerable. All too often, it will emerge that the reason the notice was delayed is that the policyholder did not think there was coverage or, as apparently was the case here, the policyholder did not think there was yet a claim. In other cases, the insured simply concluded that the claim was no big deal – only to find out later that it is a bigger problem than first appeared. Because I have seen these patterns so many times over the years, I have developed a simple rule – always give notice. No good comes from withholding notice. If you are asking the question whether or not you should give notice, then you should give notice.

 

But if policyholders sometimes hurt themselves by withholding notice, it can sometimes appear that some carriers in some instances seek to use the notice requirements as a coverage dodge. (Please note that in making this observation here, I am in no way commenting on the carrier’s behavior in the Secure Energy case.). For that reason, I am concerned when late notice can serve as a basis to deny coverage even in the absence of prejudice to the insurer. In fairness, the notice here was years late. The tardiness of the notice here is hard to excuse, particularly when two years prior to actually providing notice, the company had been advised by its broker to go ahead and give notice. But even here, the carrier does not appear to have prejudiced by the delay – or, at a minimum, did not claim to have been prejudiced by the delay.

 

The best way for companies to avoid problems with the notice requirement is to have processes to ensure that notice to the insurer is quickly provided after a claim has arisen. However, long experience has taught me that in the real world, the insurer is not always notified right away. The simple fact is that company management, particularly at some smaller companies, is focused on operational issues and is not always sophisticated about insurance issues. Courts evolved the “notice prejudice” rule in recognition of this practical reality.

 

I know that there are a number of jurisdictions where the courts have held that the “notice prejudice” rule is not applicable in the claims made context. I would argue that the “notice prejudice” rule has a place, even in the world of “claims made” policies. As I discussed in a prior post (here), some courts have applied the notice prejudice rule even in the claims made context (although, it should be noted, in that prior post, I noted some concerns with the court’s application of the rule in that specific case).

 

My concern is that without the application of the “notice prejudice” rule, the notice requirements can become a trap for the unsophisticated or uninformed insured and result in an inadvertent loss of the insured’s rights under the policy. I recognize that insurers want to be able to be involved in claims and don’t want to get caught up in murky questions about what may constitute “prejudice,” and therefore prefer a bright-line notice test. I would argue that the “notice prejudice” provides an appropriate balancing of interests. Obviously, the later a policyholder’s notice of claim is, the harder it would be for a policyholder to obtain coverage under the policy.  

 

I know my friends on the carrier side may have differing views, and in particular may well contend that the notice provisions serve important purposes that should not lightly be set aside. I invite readers to add their views using this blog’s comment feature in the right hand column.

 

BlackRobe Litigation Funding Firm Shuts Down: In recent posts (most recently here), I have noted with alarm the apparently proliferation of firms in the U.S. formed to provide litigation financing. The firms are in the business of providing funding for litigation as a form of investment. Among the many developments in this area that captured my attention was the 2011 formation of BlackRobe Capital Partners. The firm’s principals included Sean Coffey, a former partner at the Bernstein Litowitz plaintiffs’ securities firm, joined a year later by retired Simpson Thacher partner Michael Chepiga. As I noted at the time, the involvement of highly respected attorneys like Coffey and Chepiga added an entirely new dimension to the emerging litigation funding phenomenon.

 

Now comes the news that BlackRobe is closing down. As reported in a May 14, 2013 Wall Street Journal article (here), the firm’s founders are “walking away from the litigation-finance firm, citing internal disagreements and a failure to attract enough outside capital from investors.” Though the firm has made over $30 million in investments, “the firm wasn’t able to raise a large discretionary pool of capital.”

 

It is hard to know how much significance to attach to BlackRobe’s demise. On the one hand, a significant factor contributing to the firm’s closure were philosophical differences among the firm’s founders. On the other hand, the firm was also having trouble raising capital, which could suggest an overall lack of investor support for the litigation funding project. However, representatives of several more established litigation funding firm are quoted in the Journal article to the effect that their firms have had no difficulty raising money. So it is possible that BlackRobe’s quick end reflects nothing more than the difficulty that startups face in an evolving industry.

 

Susan Beck’s May 16, 2012 Am Law Litigation Daily article about the BlackRobe firm’s demise (here), includes comments from several of the firm’s principals that seem to corroborate the conclusion that firm’s end was in large measure the result of company-specific factors, including in particular differences among the firm’s principals about how to run the firm.

 

Although the demise of the BlackRobe firm unquestionably is noteworthy, it may or may not say anything about the emergence of the litigation funding phenomenon. Certainly the firm’s difficulties raising capital suggest that it may be a difficult field for startups. Overall, it seems that litigation funding will continue to be a factor, notwithstanding BlackRobe’s demise.

 

Libor Claimants Face High Hurdles: As readers of this blog know, the civil claimants attempted to recover damages against the Libor benchmark rate-setting banks have found the going difficult. For example, most recently the claimants in the Libor scandal-related securities suit filed against Barclays had their action dismissed (about which refer here). A May 16, 2012 Law 360 by Michael Gass, Stuart Glass and Kevin Quigley of the Choate Hall law firm entitled “Libor Litigation Must Overcome Significant Obstacles” (here, subscription required) reviews the various adverse litigation developments the Libor scandal claimants have had to face and concludes that the claimants’ “obstacles to recovery are inherent and, perhaps, insurmountable.”

 

Special thanks to a loyal reader for sending along a link to the Choate Hall memo.

 

The D&O Diary’s European sojourn concluded with a brief stop earlier this week for business meetings in Madrid. I had never been to Madrid before. Like many Americans, I have a deep attachment to Paris, a city I have visited many times and for which I have an abiding affection. However, after my visit to Madrid this week, I now recognize that a visit to Madrid was long overdue — and that my bias toward Paris may have been due to a simple lack of critical comparative data.

 

Madrid is a big city. Its population is almost 3.5 million, a little less than that of Los Angeles. Driving in from the airport, the city’s size and sprawl are apparent. But Madrid’s Centro de la Ciudad is quite compact. It is possible to walk the diameter of the city center, from the Palacio Real to the Museo del Prado, in an afternoon. But though it is physically possible to traverse the central city in a short time, to actually do so would be a mistake. There is so much to see within the city that a more leisurely pace is by far the better approach, and indeed Madrid’s own rhythm pretty much requires it anyway.

 

The city’s heart (and literally the country’s central point) is the sun-drenched, crescent-shaped Plaza Puerto del Sol (pictured above at the top of the post). Radiating northward from the plaza are busy upscale pedestrian shopping streets. Far more interesting are the streets to the west of the plaza, full of stores selling clocks, musical instruments, antique religious paraphernalia, coins, tapestries, hats, gloves, and assorted other remnants of time and history.

 

Just to the southwest of the Puerta del Sol is the Plaza Mayor, a sprawling, colonnaded quadrangle with an area of nearly 200,000 square feet enclosed by three-story residential structures mixing Habsburg, Bourbon and Georgian architecture. Today, the Plaza is ringed with shops, sidewalk cafes and restaurants, and thronged with sightseers snapping selfies with their cell phones. Enterprising young hustlers work the crowd, trying to sell French and Italian school kids little plastic wind up pieces of crap and bird whistles that make a sound like a duck with a hernia.

 

I had a particularly pleasant evening sitting at a sidewalk café in the Plaza Mayor, watching the peaceful procession of tourists while the sun set and the day turned to dusk. The Plaza has not always been so serene. At the Museo del Prado, I saw a painting from the time of the Spanish Inquisition depicting an auto de fe in the Plaza Mayor. The painting appeared to have been created in celebration of the event, which involved the trial of dozens of heretics. Among the attendees depicted in the painting was the then-monarch, King Charles II (who proved to be the last of the Spanish Habsburg monarchs). As I watched the darkness gather in the Plaza, I wondered whether the ancestors of the swifts and swallows that flitted about the twilight sky also flew about the heretics’ pyres as well.

 

The sun sets unexpectedly late in Madrid — after 9 pm local time while I was there. Turns out that Madrid has put itself in the “wrong” time zone. Madrid is actually a little bit further west than London, but rather than sharing Greenwich Mean Time with the U.K., Madrid has put itself on Central European Time, the same time as the rest of Western Europe. Madrileños adaptation to solar time explains in part – but only in part— their late-shift lifestyle. The hours around midnight are prime time in the city’s many atmospheric neighborhoods. But it is not just the evenings that are late. The entire day is oriented later.

 

 

For one of my business meetings while there, I met a couple of industry colleagues for lunch. We met at my hotel at 1:30 pm, and we strolled around Malasaña, one of the many neighborhoods in the city center with atmospheric, narrow alleyways lined with tabernas, wine bars, and restaurants. From there, we made our way through a maze of city streets to the Mercado de San Miguel, a 19th century iron-canopied marketplace near the Plaza Mayor. After a renovation completed in 2009, the market is now full of small, upscale eateries, as well as shops selling upmarket meats, cheeses and wine. We paused there to share a plate of oysters from Galicia, which we ate standing up and which we washed down with a glass of white wine. From there, we made our way westward toward the Palacio Real, to a traditional Spanish restaurant near the Plaza de las Vistillas (which affords an agreeable view of the green expanse of the enormous Casa de Campo and the Sierra de Guadarrama mountains beyond).

 

We finally sat down at our table for lunch at about 3:15 pm. The restaurant was packed. After many plates of sardines, clams, small squares of dried ham and toasted bread with tomato sauce, plus potatoes with eggs, fish cooked in garlic with onions and mushrooms, cheese, and much else besides, we finished our lunch around 5:30, about the same time as the rest of the lunchtime crowd. No wonder they eat dinner so late in Madrid.

 

In at least one respect, the city’s late-hour orientation worked to my advantage. One day, after I had finished my meetings for the day, I was able to sneak in a visit to the Museo del Prado, because it stays open until 8 pm. The Prado unquestionably is one of the world’s great art museums. Its collection holds over 7,000 paintings, including many masterpieces of Western Art, but from my perspective, the most interesting art works in the museum are the "pinturas negras" (black paintings) of Francisco Goya. The fourteen paintings, which were given their collective name due to the artist’s heavy use of dark pigment, were painted as murals in the artist’s rural retreat and apparently were never meant for exhibition. The paintings are intense and haunting, and present quite a contrast to the many galleries of well-fed Habsburgs and Bourbons upstairs. 

 

In a happy stroke of luck, my visit to Madrid coincided with the feast day of San Isidro. Because San Isidro is the patron saint of Madrid, his feast day is a city holiday. On the feast day, a number of people in traditional attire made a pilgrimage to the various sites around the city associated with the saint, including a well at which the saint is reported to have miraculously saved the life of his son through the intercession of angels. One of the day’s traditions includes drinking water from the well, a ritual (in which I joined) that is supposed to produce particularly salubrious effects, both physically and spiritually.

 

Most of the city’s residents seemed to be honoring the saint’s feast day by strolling through Madrid’s parks and ancient neighborhoods, with their narrow streets and tiny plazas. And why not? Madrid has to be one of the best cities in the world in which to just walk around. I got lost numerous times while I was there, which at first I found quite frustrating, as I have a certain pride in my sense of direction. But after a while, I realized that it didn’t matter, that I should just follow the streets where they led and enjoy the scene as I passed through.

 

Given the throngs of happy strollers on San Isidro’s feast day, the idea that Spain is the midst of an economic crisis seems wildly implausible. Nick Paumgarten explained this seeming paradox in a February 23, 2013 New Yorker article entitled “The Hangover” (here):

 

It is often hard to perceive an economic crisis. Debt doesn’t look like much. It has no shape and smell. But over time, it leaves a mark. In Spain, it manifested itself, first, as empty buildings, stillborn projects and idled machines. The country is now a museum of doomed developments – a white-elephant safari… In twenty years, Spain acquired an urbane opulence that turns out to have been built on debt that cannot be repaid…. Once the crisis came, foreign money dried up. No one, in either the private or public sector, wanted to finance Spain’s liabilities, and interest rates shot up. Spain is now stuck with an unaffordable currency and seemingly unpayable debt.

 

What may lie ahead for Madrid and for the country remains to be seen. The city and the country have been through very dark times before. Whatever may come, it seems likely the city will endure, as it has through centuries of change.

 

I opened this post about Madrid by mentioning Paris. My invocation of the romantic French city was deliberate. I know that for many Americans, Paris represents the urban ideal, as is captured in the old saying to the effect that when good Americans die, they go to Paris (a quotation variously attributed to Oliver Wendall Holmes and Oscar Wilde). With all due respect to our conditioned reverence for all things Parisian, I have to say that Madrid has every bit of Paris’s charm – perhaps even more. As one of my American friends in Madrid put it, Madrid is Paris without the Parisians. I wouldn’t quite put it that way, as I happen to have had only good experiences with Parisians. I would say that Madrid is Paris without the requirement for rigid adherence to certain aesthetic forms.

 

Whether or not the comparisons between the two cities are apt, or even necessary, the simple fact is that Madrid is a colorful city with a rich and complicated historical heritage, and a vibrant street life of which I think I could never grow tired.

 

I propose a revision to the old saying; how about this – when good Americans die, they wind up in Madrid on a warm spring evening, seated at an outdoor table at a tapas bar, with a bottle of Rioja and hours to go before the dawn.

 

 

 

 

 

 

 

 

 

More pictures of Madrid:

Fiesta de San Isidro:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Palacio Real

 

Paseo del Prado: 

 

 

 

 

 

 

 

 

 

 

 

Gran Via

 

 

 

 

 

 

 

 

 

 

 

The Streets of Madrid

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In a May 13, 2013 order (here), Southern District of New York Judge Shira Scheindlin granted defendants’ motion to dismiss the Libor-scandal related securities suit that had been filed against Barclays and two of its former executives following the company’s entry into a massive Libor-related settlement last summer. The suit’s dismissal is just the latest setback for claimants hoping to recover damages in connection with the Libor scandal.

 

As discussed in greater detail here, on July 10, 2012, Barclays shareholders filed a securities class action lawsuit in the Southern District of New York, against Barclays PLC and two related Barclays entities, as well as the company’s former CEO, Robert Diamond; and its former Chairman Marcus Agius. The complaint, which can be found here, was filed on behalf of class of persons who purchased Barclays ADRs between July 10, 2007 and June 27, 2012.

 

The complaint alleges that the defendants participating in an illegal scheme to manipulate the LIBOR rates, and that the defendants “made material misstatements to the Company’s shareholders about the Company’s purported compliance with their principles and operational risk management processes and repeatedly told shareholders that Barclays was a model corporate citizen even though at all relevant times it was flouting the law.” The defendants moved to dismiss.

 

In her May 13 order, Judge Scheindlin granted the defendants motion to dismiss, holding that Barclays’ representations about its business practices and its disclosures about its contingent liabilities were not actionable misstatements or omissions, and with respect to the remaining statements on which the plaintiffs, that even if they are actionable, that the statements were too attenuated from the company’s 2012 corrective disclosure to establish loss causation.

 

Judge Scheindlin found that many of the statements on which the plaintiffs sought to rely concerning the company’s business practices, particularly general statements about the company’s high standards, constituted mere “puffery.” She added that even as to the statements concerning the company’s Libor practices that arguably are not mere puffery, “plaintiffs’ allegations fail to connect the statements” to the company’s Libor practices. She added that “finding such statements actionable on these facts would render every financial institution liable to every investor for every act that broke the law or harmed reputation.”

 

Judge Scheindlin granted the motion to dismiss with prejudice, expressly denying plaintiffs leave to amend.

 

The Barclays securities suit was the first securities suit to be filed as part of the Libor scandal, and remains the only traditional securities suit filed in connection with the scandal. The only other lawsuit filed in connection with the Libor scandal in which securities law violations have been raised is the state court complaint that Schwab recently filed against the Libor rate setting banks. As discussed here, among the many other claims that Schwab asserted in the complaint, Schwab also asserted a claim against the banks under the ’33 Act, in reliance on the statutes concurrent jurisdiction provision. The Barclays suit is the only case in which the plaintiffs have filed a federal court action relating to Libor and primarily alleging a securities law violation.

 

There obviously is much further to go as the Libor-related litigation unfolds, and it is far too early to start making generalizations. Nevertheless, it does seem that at least so far, the claimants are not faring particularly well in the Libor-related litigation. Judge Scheindlin’s dismissal motion grant in the Barclays case follows Judge Buchwald’s March 2013 ruling in the consolidated Libor-related antitrust litigation largely granting the defendants’ motion to dismiss. To be sure, Judge Buchwald recently granted the plaintiffs in the consolidated case leave to seek to file and amended complaint (while at the same time throwing buckets of cold water on any hopes that she might actually allow the plaintiffs to file an amended complaint).

 

At a minimum, it looks as if the Libor-related litigation might involve a long slog for the claimants, possibly involving extensive appellate litigation. The claimants may yet have a day to celebrate in the Libor litigation, but so far things have not been going particularly well.

 

David Bario’s May 13, 2013 Am Law Litigation Daily article about Judge Scheindlin’s ruling the Barclays suit can be found here.

 

Class Actions: Coming Soon to a Palais du Justice Near You?: According to news reports, the government of French President François Hollande is trying to advance legislation that would allow consumers in France to pursue claims in a form of a class action. On May 2, 2013, the government submitted proposed legislation to the Council of Ministers that would permit consumer class actions. As described in a May 9, 2013 article in Commercial Risk Europe (here), the bill “will enable the public to get compensation for damages caused by mass-market products and anti-competitive practices, reducing the disadvantage that a consumer is prone to suffer when taking action alone against a big corporation.”

 

As discussed in a May 9, 2013 Economist article about the legislation (here), the collective action that the Act proposes is somewhat different than the U.S. class action process.

 

The proposed legislation faces significant opposition from business groups. And even if it were enacted, it would be limited to consumer-type representation; it would not represent the advent of securities class action litigation in France. However, if enacted, it would represent the latest development in the expansion of collective action processes outside the United States. Whether or not the development would lead to the future enactment of some type of securities-related collective action, it nevertheless represents an example of how non-U.S. litigation threats continue to expand and grow.

 

As the Economist article linked above discusses, many other countries have recently enacted provisions allowing for collective action, and other countries are considering it. Recent U.S. judicial decisions (including the Morrison decision) may have advanced this process as U.S. courts have begun to restrict access to non-U.S. claimants. The Economist article suggests that a competition of sorts may already be underway as countries vie to become the preferred venue.

 

Keeping Track of International D&O: With all the changes afoot, it is hard to keep track of where things stand among various countries with respect to the potential liabilities of directors and officers. A recently published directory does provide significant help in that regard. In its recent publication, “A Global Guide to Directors’ and Officers’ Issues Around the World in 2013” (here), Zurich Insurance provides an overview of D&O issues in 43 different countries. The massive 868-page publication continues extensive useful information with respect to each of the countries covered. It is a valuable resource for anyone who much advised companies regarding the potential liability exposures of directors and officers in a range of companies.

 

Very special thanks to a loyal reader for providing links to the article about the new French legislation and to the Zurich Insurance publication.

The D&O Diary is on assignment in Europe this week. The first stop was in Barcelona, where I was a speaker at an annual industry event hosted by my good friends at HCC Global. The education session was a success. As for Barcelona itself … what can you say about a city that has a beautiful beach, a rich historic and cultural heritage, complex and fascinating architecture, and world-class nightlife?

 

Barcelona is larger, busier and more beautiful than I had anticipated. The city sits on the Mediterranean Sea, with Tibidabo, a 1,600 ft. mountain to the northwest, and with Montjuic, a rocky prominence that was the site of the 1929 World Fair and the 1992 Barcelona Olympics, to the south. With a population of 1.6 million, Barcelona is about the size of Philadelphia (although all comparisons between the two cities stop there). While we think of Barcelona as Spanish, the locals consider their city to be Catalan. I don’t think I saw a single Spanish flag in Barcelona itself, but Catalan flags and banners fly everywhere.

 

Barcelona’s architecture is varied and much of it is beautiful. At many street corners, tourists stop to photograph façades and building ornaments. Many of Barcelona’s architectural gems are mixed into otherwise ordinary neighborhoods. For example, Antoni Gaudí’s famous Casa Milà was right around the corner from my hotel, on a busy upscale shopping street. The building for which Gaudí is best known, the stunning and still controversial and still unfinished Sagrada Família cathedral, bursts upward out of a quiet residential neighborhood like some sort of surreal volcano. The narrow alleyways of the Bari Gòtic, the medieval district inside Barcelona’s Ciutat Vella, its old city, are full of well-preserved medieval buildings as well as portions of the Roman Wall and the beautiful Plaça del Rei.

 

Running through the city center from the seafront northwestward into the upscale L’Eixample neighborhood is La Rambla (which at Plaçe de Catalunya becomes Rambla de Catalunya), a tree-lined avenue with a pedestrian walkway in its wide median.  Along the several kilometers-long promenade are sidewalk cafes, small shops and kiosks, street musicians, and squadrons of tourists looking for the right place to sit down and have a glass of sangria.

 

I don’t speak Spanish (much less Catalan), but I have mastered a few Spanish words, including one indispensable phrase: Una cerveza por favor. I was sitting at a sidewalk café along La Rambla, after having successfully deployed my indispensable Spanish phrase, when a German couple sat down next to me. When the waiter came up, it was clear that the waiter didn’t speak German and the Germans didn’t speak Spanish. With instantaneous tacit agreement, both the waiter and the Germans switched to English. This was one of many incidents during my visit to Barcelona that caused me to contemplate languages and communications and the way the forces of the global economy are shaping both. Among other things, I was able to communicate – in English – with all of the other conference participants, regardless of where they are from. Most of the people I met in Barcelona spoke multiple languages, while I spoke only one – fortunately for me, I grew up speaking the one that everyone else could speak.

 

On my way over to Barcelona, I read a history of the Spanish Civil War. In analyzing the war’s causes, the book noted that in the early ’30s, high levels of unemployment had led to social unrest. The book reported that the unemployment rate in Spain in 1933 was 12%. The current rate of unemployment in Spain is approaching 25%. The country now has safety nets that it did not in the ’30s, and Barcelona itself continues to project prosperity. But during my visit, there were unmistakable signs that the current poor economic conditions are taking a significant toll.

 

For example, on my first day in the city, when I entered the Bari Gòtic, I walked right into a massive demonstration, involving a huge crowd of people chanting, blowing whistles, and beating drums. They had gathered opposite the Palau de la Generalitat (which houses the offices of the President of Catalonia). They were protesting against educational spending cuts. Many of the protesters also carried signs (in Catalan) about Catalonian independence. The protest was peaceful and even had a festive air. But surrounding the protesters was a heavily armed cordon of riot police.  It doesn’t take much imagination to picture how the peaceful protest could quickly turn into something much more ominous. But for most of my visit, the troubles stayed well in the background.

 

My visit to Barcelona coincided with the annual Formula 1 Grand Prix of Spain. I had never been to a Formula 1 race before, or for that matter, a motorsports event of any kind. Here is what you need to know about a Formula 1 race: the noise from twenty-two F1 race cars as the race starts is the loudest sound that has occurred in the entire universe since the Big Bang itself. The cars accelerate from a standing start (pictured below, left) to over 120 miles an hour in five seconds. The race, which is a combination of noise, speed, raw power, skill and danger, is 66 laps of total sensory overload.

 

After the race is underway and the cars begin taking pit stops, the cars are scattered across the course, and it becomes, at least for an uninformed observer like me, impossible to tell what is going on. When the race ended (an event I had no idea was coming), I turned to the person next to me and asked him who had won. I gathered later that my question was the F1 racing equivalent of asking  — after LeBron James has hit a buzzer-beater slam dunk to win an NBA playoff game — who that guy was who scored the last basket. The winning driver, it turns out, was the local favorite, Fernando Alonzo, a Spanish driver for the Ferrari team. I believe that every single person there, other than me, knew which car was Alonzo’s and that he had crossed the finish line first at the checkered flag, ten seconds ahead of his closest competitor. Alonzo received a huge trophy and sprayed champagne on the crowd around the viewing stand. My ears were ringing for hours afterwards.

 

It has been many years since I have stayed out on the town past two in the morning. Because dinner time in Barcelona isn’t until 10:00 p.m. or later, on two consecutive evenings, I did not return to my room until the early morning hours. However, it turned out that I was something of an early bird, by Barcelona standards. When I was in a cab on my way back to the hotel at the ungodly hour of 2 am, the city streets were still active and alive with revelers apparently planning on greeting the dawn. I know that I found the F1 race an absolutely overwhelming experience. I can only imagine how it felt to those who had come back from the nightclub at 5 or 6 am. The cars’ noise must have seemed the voice of an angry and vengeful god.

 

The central part of Barcelona is dense and bustling. But the city also has a great deal of green space, some spectacular parks and, of course, an absolutely stunning beach. Among the city’s parks is Parc Guell, which may be one of the most interesting and beautiful urban parks I have ever seen. The park sits on a ridge above the city and is full of fantastic buildings designed by Gaudí. Pathways lead up the hillside from the park’s eccentric, whimsical entrance, offering spectacular views of the city and the sea at every turn. On a sunny afternoon, a host of leisurely strollers made their way up the hill or sat at overlooks listening to the innumerable buskers. The view from the hilltop, pictured at the top of this post, is breathtakingly beautiful. As I stood there looking at the city spread below and the azure sea beyond, I was irrevocably confirmed in my certainty that Barcelona is a truly awesome place.

 

I would like to thank my friends at HCC Global for inviting me to be a part of their great event and for the opportunity to visit their beautiful city. It was a great pleasure to be able to meet so many industry colleagues from all over the world, and to find out that not only could I converse with all of them in my own language, but also that all of them read The D&O Diary. I must say that Barcelona is the perfect venue for …well, for just about anything as far as I can tell. 

 

Farewell to you, beautiful Barcelona. Sorry that I had to leave, but I needed to get some sleep.

 

More pictures: 

As I said, Barcelona is a truly awesome place: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A view of the old city and the Placa del Rei:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

La Sagrada Familia bursts up out of the surrounding quiet residential neighborhood like some sort of surreal volcano.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Barcelona — great nightlife and a world class venue for anything