New corporate and securities lawsuits filings in the second quarter of 2013 were “down dramatically” compared to 2013’s first quarter, according to the quarterly D&O Claims Trends report of insurance industry information firm Advisen, which was released today and which can be found here. At the current filing level, the total of all corporate and securities lawsuit filings for 2013 “will have the lowest level of filings since 2006.”

 

Readers reviewing the Advisen report will want to be very careful to note that the report uses its own unique terminology. In particular, the report uses the term “securities suits” to refer to all categories of corporate and securities litigation. Among the subsets within this larger category of “securities suits” is what the report calls “securities fraud” suits, which as used in the report refers to actions brought by regulatory and enforcement authorities, as well as private securities suits that are not brought as class actions. The category of “securities fraud” suits does not include securities class action lawsuits, which have their own separate category of “securities class action” suits, which part of the larger category of “securities suits.” Readers will want to be very attentive to the report’s usage of these terms.

 

According to the Advisen report, there was a 41 percent decline in new corporate and securities lawsuit filings in the second quarter of 2013 compared to 2013’s first quarter. This quarter to quarter decline – from 352 new corporate and securities lawsuits in the first quarter to 234 new corporate and securities lawsuits in the second quarter – represents the “largest quarterly decline since before the financial meltdowns of 2007/08.” The year over year quarterly drop was even sharper, as the number of new corporate and securities lawsuits declined 55 percent comparing the second quarter 2013 filings to the filings in the second quarter of 2013. The 234 new corporate and securities lawsuits during 2Q13 is the lowest number of quarterly filings since before 2009.

 

Several categories of corporate and securities lawsuits contributed to this decline, with corporate and securities lawsuits that the report characterizes as breach of fiduciary duty lawsuits, derivative shareholder lawsuits and securities fraud lawsuits all declining in the quarter. What the report calls securities fraud lawsuits (which again, as noted above, includes regulatory and enforcement actions but does not include securities class action lawsuits) fell by 59 percent from the first quarter of 2013 to the second quarter of 2013.

 

The report notes that this decline in the number of what the report calls “securities fraud” lawsuits dates back to the first quarter of 2012 and “is due in part to a chance of emphasis in SEC enforcement.” Although this downward trend “had been apparent,” It has “never been as drastic as it was this past quarter.”

 

Merger objection lawsuits have contributed significantly to the growth in corporate and securities lawsuit filings in recent years. Though the numbers of these suits increased dramatically in the years through 2011, the numbers of these lawsuits began to decline in 2012, compared to 2011, and “are on pace to do so again in 2013.” The report does not examine the question whether the decline in the absolute number of merger objection lawsuits in 2012 and YTD in 2013 reflects a decline in merger activity.

 

The report notes that securities class action lawsuits as a percentage of all corporate and securities lawsuit filings have been on a downward trend since 2007 (from 22 percent of all corporate and securities lawsuits in 2007 to 10 percent in 2012). However, with the decline in the filing of other types of corporate and securities lawsuits in the second quarter of 2013, second quarter securities class action lawsuits represented 13 percent of all corporate and securities lawsuits.

 

Absolute numbers of securities class action lawsuit filings have also been declining for the past two years. The report states that there were 74 securities class action lawsuit filings during the first half of 2013, putting the annualized filings on a pace for another decline in 2013 from the 184 filings that Advisen reported in 2012. The report does note an uptick in the number of securities class action lawsuits alleging accounting allegations. (My own analysis of first half 2013 securities class action lawsuit filings can be found here.)

 

Companies in the financial services sector remained as the leading target of corporate and securities lawsuits in the second quarter of 2013. A quarter of all corporate and securities lawsuit filings in the second quarter involved companies in the financial sector. The report notes that “the downward trend in new financial services filing” which has developed as the credit crisis has receded into the past “continued in the second quarter.”

 

The quarterly Advisen report also includes a separate section on the cyber liability exposures of corporate directors and officers. The report states that directors and officers “are faced with an ominous new threat landscape comprised of an evolving set of exposures.” Readers interested in this topic will want to review the guest post on this blog of D&O maven Dan Bailey, in which Dan discusses directors’ cyber liability exposures. A recent post in which I discussed the question whether or not cyber breaches could become the next wave of securities litigation can be found here. Finally, a more recent post in which I discussed the questions corporate directors will want to be asking about cyber risk and cyber liability insurance can be found here.

 

Speakers’ Corner: On Tuesday, July 16, 2013, I will be participating in Advisen’s Quarterly D&O Claims Trends Webinar, in which, among other things, the latest Advisen report will be discussed. In this free hour-long webinar, which will take place at 11:00 am EDT, I will be participating on a panel with Kieran Hughes of AIG, Carl Metzger of the Goodwin Proctor law firm and Jim Blinn of Advisen. The panel will discuss claims trends and developments during the first quarter of 2013. Registration information for the webinar can be found here.

 

On July 15, 2013, the FDIC provided the latest update on the web page on which the agency is tracking the litigation it has filed and that has been authorized against the directors and offices of failed banks. According to the latest update, the FDIC has now filed a total of 69 lawsuits against failed bank directors and officers, including a total of 25 so far during 2013. By way of contrast, the FDIC filed 26 lawsuits against failed bank directors and officers during all of 2012.

 

Though the agency has now filed 69 lawsuits, it has not filed any since mid-June — roughly a month-long period where there have been no new failed bank lawsuit filings. During the current bank failure litigation wave, there have been other periods where the pace of new filings dropped off (refer for example here). Given the ebb and flow of filing activity, it would unwarranted to try to read anything into the fact that there have been any filings in about a month – particularly given that there was an intervening federal holiday during that period.

 

The latest update also reflects an increase in the number of lawsuits against failed bank directors and officers that the agency has authorized. As of the prior update (dated June 7, 2013) the agency had authorized lawsuits involving 114 failed banks and involving 921 former directors and officers. Now with the latest update, the agency has now authorized lawsuits in connection with 120 failed banks, and involving 962 individuals. In other words, since the last update the agency, the agency has authorized lawsuits in connection with only six additional banks, but the lawsuits authorized in connection with those six banks apparently involve 41 individuals.

 

The number of authorized lawsuits is inclusive of the 69 lawsuits the agency has filed so far, involving 530 former directors and officers. In other words, in addition to the 530 individuals who have been named as defendants in failed bank lawsuits, the FDIC has authorized lawsuits involving another 432 former directors in connection with the 51 authorized but as yet unfiled lawsuits.

 

Just as there have been no lawsuits in about one month, there have been no new bank failures  during that period either. Actually, it has been more than a month since the last bank failure on June 7, 2013. There have been a total of 484 bank failures since January 1, 2007. With the recently increased number of authorized lawsuits, the agency has now authorized lawsuits in about 24 percent of bank closures during the current bank failure wave. This implied rate of litigation activity is roughly equivalent to the litigation rate during the S&L crisis, when banking regulators filed lawsuit against the former directors and officers of failed bank in connection with about 24% of failed institutions.

 

To be sure,  the agency has at this point only authorized lawsuits in connection with about 24% of banks that failed during the current bank failure wave; what percentage of those authorizations result in actual lawsuits remains to be seen. On the other hand the number of lawsuits authorized also seems likely to increase in the months ahead.

 

The 69 lawsuits that have been filed so far have been filed in 19 different states and Puerto Rico. The state with the largest number of lawsuits against former directors and officers of failed banks is Georgia, which now has had 16 lawsuits filed against former directors and officers of banks that were located in the state prior to their closure. This is hardly surprising since Georgia has experienced the highest number of bank failures. But with about 23% of all failed bank lawsuits involving failed Georgia banks, but with the state representing only about 17% of bank failures, the lawsuits are falling disproportionately against Georgia’s banks. Of course, that could simply be a matter of timing; many of the closed Georgia banks were among the first banks to fail, so it arguably is unsurprising that the earliest lawsuits would be concentrated against failed Georgia banks.

 

After Georgia, the states with the largest numbers of failed bank lawsuits are California (9); Illinois (9); Florida (7); Washington (5); and Nevada (4). This roster of states corresponds roughly with the list of states that have experienced the highest numbers of bank failures.

 

Largely as a result of the pre-dismissal motion discovery bar and the heighted pleading standard Congress and the courts have imposed, the plaintiffs in these cases increasingly have come to rely on the statements of confidential witnesses in attempting to plead securities fraud cases, a development that has become the target of extensive criticism.

 

In an unusual July 9, 2013 post-settlement order in the Lockheed Martin securities class action lawsuit, Southern District of New York Jed Rakoff examines the role of confidential witness-based allegations, both in the Lockheed case itself and in securities cases in general. As is clear from Judge Rakoff’s memorandum, the plaintiffs’ reliance on confidential witness testimony to try to meet heightened pleading standards presents a problem for both plaintiffs and for defendants, as well as for the courts. A copy of Judge Rakoff’s July 9 opinion can be found here.

 

Background

As discussed here, in July 2011, shareholder plaintiffs filed a securities class action lawsuit against Lockheed Martin and certain of its directors and officers. Among other things, the plaintiffs alleged that the defendants had misrepresented the company’s prospects and financial results. In support of their allegations, the plaintiffs’ complaint relied in part on the supposed testimony of certain confidential witnesses, who were current or former company employees and who provided testimony substantiating that the individual defendants were aware of certain facts or had knowledge of certain issues. The defendants moved to dismiss the plaintiffs’ complaint.

 

In a February 14, 2012 ruling explained in a July 13, 2012 order, Judge Rakoff denied the defendants’ motion to dismiss – as he later noted, the dismissal denial was “partly in reliance on the statements attributable to the [confidential witnesses].” After the dismissal motion was denied, the parties commenced discovery. Defense counsel used discovery processes to obtain the names of the confidential witnesses and then took their depositions.

 

The defendants then filed a motion for partial summary judgment, arguing that in their depositions, the confidential witnesses had recanted their testimony or denied having made the statements attributed to them. The plaintiffs countered that the witnesses had changed their stories because of financial or other pressure Lockheed had brought to bear on them but that their investigator’s notes largely confirmed what had been attributed to the witnesses in the complaint.

 

As Judge Rakoff later explained in his recent memorandum, because “the parties competing assertions raise serious questions” that “implicated the integrity of the adversary process itself, he ordered five of the confidential witnesses to appear in court, along with the plaintiffs’ investigator. The transcript of the October 2012 hearing, which can be found here, makes for some interesting reading

 

On December 14, 2012, Judge Rakoff issued an order denying the defendants’ motion for summary judgment, with an opinion to follow. That same day, the parties informed the court that they had settled the case. Judge Rakoff preliminarily approved the settlement in March 2013. Even though the case has settled and it was, as Rakoff noted in his recent memorandum opinion, “no longer necessary to issue a full opinion” explaining his reasons for denying the defendants’ motion for summary judgment, Judge Rakoff nevertheless issued his July 9 memorandum because, he noted, “a few comments may be helpful in light of certain issues presented by [the summary judgment] motion that are likely to recur in future cases.”

 

The July 9 Memorandum

Judge Rakoff opened his July 9 memorandum by noting that “the recent attempts by Congress and the Supreme Court to curtail what they perceive as vexatious, even extortionate class action filings have spawned innovative but problematic reactions—as this case illustrates.” He added that the procedural hurdles that Congress and the courts had created, while designed to give the courts a “gatekeeper” function to weed out “dubious class action lawsuits at the outset,” have produced “an unintended consequence” – that is, that plaintiffs’ counsel “undertake surreptitious pre-pleading investigations designed to obtain ‘dirt’ from dissatisfied employees.” The amended complaint in this case, “as in many others,” relied on information attributed to confidential witnesses.

 

After reviewing the cases’ procedural history and the reasons why he convened the unusual October 2012 hearing at which he heard the live testimony of the previously confidential witnesses and the plaintiffs’ investigator, he summarized his conclusions about the testimony. Judge Rakoff stated that the testimony

 

bore witness to the competing pressures this process has placed on the confidential witnesses and the impact such pressures had had on their ability to tell the truth. In a nutshell, it appeared to the Court that some, though not all of the [confidential witnesses] had been lured by the investigator into stating as ‘facts’ what often were mere surmises, but then, when their indiscretions were revealed, felt pressured into denying outright statements they had actually made.

 

With respect to three of the witnesses who had backpedaled rather too far from what they had told the plaintiffs’ investigator, Rakoff said that “while the court was not unsympathetic to the difficult position in which these witnesses found themselves, their disrespect for their obligation to tell the truth hardly redounded to their credit.” Rakoff contrasted these witnesses from two others who “provided welcome evidence that some witnesses can still place the value of truth above their self-interest.”

 

Judge Rakoff found with respect to the plaintiffs’ investigator that “his report of his findings to plaintiff’s counsel was accurate in all material respects.” The only statement attributed to a confidential witness that was not accurately stated in the amended complaint was not the result of mis-reporting by the investigator “but of mis-drafting by counsel.” The amended complaint, in a misstament Judge Rakoff described as “improper,” characterized a witness’s surmise as actual knowledge, “an error made more egregious by the fact that the Court had relied, in part, on the statement” in denying the motion to dismiss. However he noted that had had relied on other evidence as well, and the plaintiff’s counsel had subsequently amended the complaint to correct the error.

 

Strictly speaking, there was no reason for Judge Rakoff to have issued his July 9 memorandum. With the case settled, no issues remained before him except as pertains to procedures surrounding the pending settlement. In his concluding paragraph, Judge Rakoff explained why he nevertheless released the Memorandum:

 

The sole purpose of this memorandum … is to focus attention on the way in which the PSLRA and decisions like Tellabs have led plaintiffs’ counsel to rely heavily on private inquiries of confidential witnesses, and the problems this approach tends to generate for both plaintiffs and defendants. It seems highly unlikely that Congress or the Supreme Court, in demanding a fair amount of evidentiary detail in securities class action complaints, intended to turn plaintiffs’ counsel into corporate ‘private eyes’ who would entice naïve or disgruntled employees into gossip sessions that might help support a federal lawsuit. Nor did they likely intend to place such employees in the unenviable position of having to account to their employers for such indiscretions, whether or not their statements were accurate. Bat as it is, the combined effect of the PSLRA and cases like Tellabs are likely to make such problems endemic

 

Discussion

Judge Rakoff is far from the first observer to note the problems involved with plaintiffs’ reliance on confidential witnesses and the abuses that can sometimes result. Indeed he is far from the first member of the judiciary to raise a red flag about the problems associated with confidential witness testimony in securities cases.

 

For example, in a February 5, 2013 order in the SunTrust Banks securities suit, in which Northern District of Georgia Judge William S. Duffey, Jr.,   in a post-dismissal proceeding in which he denied the defendants’ motion for sanctions, noted that the plaintiffs’ conduct with respect to a confidential witness was “not in keeping with the conduct expected of attorneys practicing before the Court.” While counsel’s actions “did not constitute an actionable violation,” the Court “remains troubled by the conduct of Plaintiffs’ counsel.”

 

By the same token, in a March 26, 2013 decision of the Seventh Circuit in an opinion by Judge Richard Posner in the Boeing securities class action lawsuit, the appellate court remanded a case to the district court to address the plaintiffs’ counsel’s compliance with Fed. R. Civ. Proc. 11, noting that the plaintiff’s counsel’s failure to inquire about apparent concerns with a confidential witness’s testimony “puts one in mind of ostrich tactics – of failing to inquire for fear that the inquiry might reveal stronger evidence of their scienter regarding the authenticity of the confidential source that the flimsy evidence of scienter they were able to marshal against Boeing.” The Court noted that the law firm involved had been criticized in other cases for “misleading allegations concerning confidential witnesses” and added that “recidivism is relevant in assessing sanctions.”

 

What makes Judge Rakoff’s observations about the ills associated with the plaintiffs’ reliance on confidential witnesses noteworthy (other than the fact that he went way out of his way to issue an entirely non-required statement) is that he emphasized that the problem is an issue for both plaintiffs and for defendants and, more importantly, he focused on the cause of the problem. Rakoff sees the problem as the unintended result of the pleading constraints that Congress and the Supreme Court have put on plaintiff shareholders in securities class action lawsuits. In his view, the problem appears almost unavoidable, or at least highly likely to recur, making these kinds of problems “endemic.”

 

Judge Rakoff stated that he was issuing his memorandum, despite the absence any case-specific reason to do so, because he wanted to “focus attention” on the problem. He does not specify whose attention he wants to focus. Certainly, he got my attention, as well as that of other bloggers. But although I am sure Judge Rakoff is quite attentive to opinion in the blogosphere, I recognize that his primary motivation was trying to attract the attention of Congress and appellate courts, to show them how the unintended consequences of their actions were producing a serious problem of all concerned.

 

Though Judge Rakoff can try to focus attention on the problem, that effort alone does not address the obvious next question, which is – what can be done about it?

 

In an April 4, 2013 post on his D&O Discourse blog (here), securities litigator Doug Greene of the Lane Powell lays out his proposal of what to do about the confidential witness problem. Among other things, Greene suggests requiring plaintiffs’ lawyers to include sworn declaration from confidential witnesses and to provide employment related information to substantiate that their employment provided them the actual opportunity to observe the events about which they were testifying. Greene also proposes allowing defense counsel limited discovery of confidential witnesses prior to the motion to dismiss, to avoid situations where dismissal motions are granted based on the testimony of witnesses that later recant. (I should emphasize that I am summarizing Greene’s proposals ; his analysis and discussion of these issues is extensive and warrants a full reading, rather than my mere summary description here).

 

Certainly, one of the issues causing the confidential witness problem is that they are, well, confidential. The pattern recurs often that after the dismissal motion is denied, and the witnesses’ identities are known and their testimony is questioned, the witnesses recant. In that respect, Greene’s suggestion that plaintiffs must provide greater corroborating and identifying information appears to have a substantial basis.

 

On the other hand, as Judge Rakoff noted, once the identities of confidential witnesses are known, they are then “pressured into denying outright the statements they had actually made.” As one leading plaintiffs’ lawyer has said to me, confidential witnesses always recant, because of the financial and other pressure their employer can bring to bear on them, regardless of how precise, specific and detailed their prior testimony had been. The introduction of procedural steps that would accelerate the process of forcing witnesses to recant their testimony – even where, as Judge Rakoff noted, they had actually made the statements they were now denying – will not necessarily and in every case represent a guarantee of greater integrity in the process.

 

The one thing that is clear is that we have a problem. Judge Rakoff is right to try to draw attention to this problem. Whether or not the problem is, as Judge Rakoff state, “endemic,” it clearly is a recurring problem. While greater scrutiny of plaintiffs’ use of confidential witness testimony is one step to try to address this problem, that alone will not be sufficient. As Judge Rakoff’s memorandum highlights, the focus should be on the cause of the problem, which he regards as the unintended result of the specific steps taking by Congress and the courts to rein in abusive securities litigation.

 

I have no brilliant proposals to address this problem, but I think Judge Rakoff is on the right track. It is more important to look at causes, rather than effects. The focus should be on the causes. More importantly, there must be a focus. This is a problem that is not going away.

 

More About the Supreme Court: When the founding fathers in their ageless wisdom set up our tripartite system of government, they virtually guaranteed that there would be tension between the three branches. A recent essay in the Lexington column in the Economist magazine taking a look at the just-completed Supreme Court term comments on how this tension – particularly the tension between the Court and Congress – characterizes much of the Court’s late term activities.

 

In the essay, entitled “Above the Fray, but Part of It,” the column’s author notes that

 

A single instinct binds together several big and seemingly incompatible rulings handed down by the Supreme Court at the end of its term. That instinct touches on traditional arguments about the competing rights of the federal government versus the 50 states, but is larger than a discussion of states’ rights. Put simply, the court showed a deep suspicion of attempts to use the law to place a particular group or institution on a pedestal, granting it special privileges to shield it from attack or competition. To give the instinct a single label, the court rejected paternalism as a way of organizing American society.

 

After noting that the court had rejected one kind of paternalism in the Voting Rights Act and affirmative action cases, “in striking down the Defense of Marriage Act, the majority was – in effect — taking issue with a paternalism of the right.” The Supreme Court’s suspicion of paternalism “belongs to a long national tradition, to be sure: America was born of revolution and built around self-government.”

 

Just the same, the court’s end-of-term rulings “defy easy partisan labeling.” Both from the right and the left there is a distinct sense of “what is at stake, politically.” As the column’s author notes, “This is a Supreme Court which does not hide its disdain for Congress.” It is a “supremely confident court.” As a result, “this has been a term of unusual confrontation and drama. Expect more to follow.”

 

Back in 2009, one of the prominent securities litigation filing trends was the prevalence of “belated” securities class action lawsuit – that is, cases filed at the very end of the limitations period rather than in immediate aftermath of a stock price decline

 

And then in 2011, perhaps the most significant securities lawsuit filings trend at the time was the massive upsurge in the filings of securities class action lawsuits against U.S.-listed Chinese companies.

 

More recently, both of these trends appeared to have subsided. But a securities class action lawsuit filed this past week appears to bring both of these past trends together again in a single new case. It should be noted that, in an interesting variation of the past trends, the most recent case involves a company based not in the People’s Republic of China, but rather in Taiwan, Republic of China.

 

As reflected in their July 10, 2013 press release (here), plaintiffs’ lawyers filed a securities class action lawsuit in the Southern District of New York against SemiLEDs Corp. and certain of its directors and officers. According to the plaintiffs’ complaint, though the company was headquartered in Boise, Idaho, at the time of its December 8, 2010 IPO, the company has its principal operational, administrative and manufacturing facilities in Taiwan. SemiLEDs is a holding company for wholly-and majority-owned subsidiaries and joint ventures that manufacture and sell light emitting diode (“LED”) chips and components used in general lighting applications.

 

According to the press release, the Complaint alleges that the defendants failed to disclose that:

 

 (i) that the Company was experiencing known, but undisclosed, pricing pressures for its products which were reasonably likely to have a material adverse effect on SemiLEDs’ future revenues and operating income; (ii) that known events or uncertainties, including the reduction in demand for the Company’s products, the likely (and ultimate) loss of a large customer, and the decline in the value of the Company’s inventory, were reasonably likely to cause SemiLED’s financial information not to be indicative of future operating results; (iii) that the Company’s disclosure controls were materially deficient and its representations concerning them were materially false and misleading; (iv) that the certifications issued by defendants associated with the Company’s disclosure controls were materially false and misleading; and (v) that, based on the foregoing, defendants lacked a reasonable basis for their positive statements about the Company, and its then current business and future financial prospects.

 

The complaint further alleges that on July 10, 2011, SemiLEDs issued a press release announcing its financial results for the quarter ended May 31, 2011. For the quarter, the Company reported a revenue decline of 43% from the previous year’s third quarter, and a net loss of $5.1 million. The Company’s results for the quarter were adversely impacted by a $1.1 million inventory charge during the quarter, an amount equal to more than 7% of the value of the Company’s total inventory at February 28, 2011. SemiLEDs’ stock price fell nearly 11% on July 12, 2011

 

The announcement and stock price decline took place two years ago, but the plaintiffs did not file their complaint until July 10, 2013. In their complaint, the plaintiffs purport to represent a class of the company’s shareholders who purchased their shares between December 9, 2010 and July 12, 2011 – that is, who purchased their shares between the day after the company’s registration statement was declared effective and the first trading day after the company’s July 10, 2011 earnings announcement.

 

Though the complaint references the company’s December 2010 IPO, the complaint does not assert claims under the Securities Act of 1933. Rather, the two substantive claims in the complaint are both asserted under the Securities Exchange Act of 1934. The apparent explanation for the omission of ’33 Act claims is the statute’s one-year limitations period. By asserting their action exclusively under the ’34 Act, the plaintiffs clearly hope to rely on that statutes two-year limitations period.

 

But while the way that the plaintiffs have plead their case can be understood by reference to the various limitations periods, that still does not explain why the plaintiffs did not get around to filing their suit until the very end of the limitations period.

 

Back a few years ago when there was a rash of belated securities suit filings — where the complaint was not filed until the very end of the limitations period — one of the explanations proposed was that the leading plaintiffs’ firms were buried under the vast numbers of credit crisis related lawsuits they were filing at the time. There may be something like that going on here as well, but the fact is that credit crisis litigation wave peaked some time ago. At least in absolute numbers, securities class action lawsuit filings overall are down compared to historical norms (about which refer here).. It isn’t apparent why this case would have been filed so belatedly.

 

By the same token, the surge of lawsuits filed against U.S.-listed Chinese companies also peaked some time ago. Of course this case involves a Taiwanese company rather than a Mainland company. But still the train left the station on the Chinese company securities suit filing trend some time ago.

 

In the end, of course, every case is filed for its own reasons and not merely because it represents an example of then-current filing trends. Each case also has its own dynamic and internal logic. All of which argues against trying to make too much out of a single case. Just the same, you just can’t help noticing the resemblance between the characteristics of this case and recent years’ filing trends. What was old is new again.

 

A recurring issue in the litigation the FDIC has filed against the directors and officers of failed banks is the question of whether or not officers – as opposed to directors – can rely on the business judgment rule as a defense under applicable state law. A July 8, 2013 decision by Judge Dean Pregerson applying California law concluded (as have other courts in failed bank cases) that the California’s statutorily codified Business Judgment Rule protects only directors, not offices. But, as Judge Pregerson found, there are also ircumstances when directors cannot rely on the Business Judgment rule as the basis for a motion to dismiss, either. A copy of Judge Pregerson’s July 8, 2013 opinion can be found here.

 

Background

The First Bank of Beverly Hills failed on April 24, 2009. On April 20, 2012, the FDIC in its capacity as receiver for the failed bank filed a lawsuit against ten former directors and officers of bank. In its complaint (here), the FDIC seeks to recover losses of at least $100.6 million the bank allegedly suffered on nine poorly underwritten acquisition, development and construction loans and commercial real estate loans from March 2006 through July 2007.

 

The FDIC asserts claims against the ten defendants for negligence, gross negligence and breach of fiduciary duties. The complaint alleges that the defendants approved or allowed the loans in question in willful disregard of the bank’s own loan policies and with “willful blindness” to the risks and imprudence of the loan decisions. The complaint alleges that at the same time the defendants were approving these risky strategies, they were “weakening the Bank’s capital position by approving large quarterly dividend payments to the Bank’s parent company,” of which several defendants were shareholders. The complaint alleges that the individual defendants “lined their own pockets” with these dividends.

 

The defendants moved to dismiss arguing, among other things that they are protected by California’s business judgment rule from the claims of breach of fiduciary duty.

 

The July 8 Order

In his July 8 order, Judge Pregerson denied the defendants’ motions to dismiss. He considered the motions of the director defendants and of the officer defendants separately.

 

First, with respect to the director defendants, Judge Pregerson concluded that “the FDIC had pleaded facts sufficient to overcome the business judgment rule.” He concluded that the FDIC “has stated a claim for the directors receiving improper personal benefits, which, if true may deprive them of the protection of the business judgment rule.” He also noted that the FDIC “has stated a claim for the directors’ abdication of corporate responsibility,” adding that “the FDIC alleges that the directors approved loans so facially deficient that the made reliance [on information provided by others] unwarranted.”

 

Judge Pregerson also concluded that the director defendants were not entitled to dismissal of the breach of fiduciary duty claims based m the exculpatory clause in the bank’s articles of incorporation. The inclusion of an exculpatory clause in corporate charters is permitted under California law, but the exculpation available under these provisions is limited by exceptions. Judge Pregerson found that the FDIC’s allegations here come within the exceptions. Among other things, Judge Pregerson found, quoting the language of the statutory limitations on exculpatory clauses, that  the complaint alleges that the director defendants “received an improper personal benefit” and also that the FDIC had “pleaded facts amount to ‘reckless disregard’” and that “state a claim for an ‘unexcused pattern of inattention that amounts to an abdication of duty.

 

With respect to the officer defendants, Judge Pregerson, following several other courts applying California law, concluded that corporate officers, as opposed to directors, are not entitled to rely on the business judgment rule.

 

Discussion

It is worth noting that Judge Pregerson did not definitively rule that the director defendants cannot rely on the protection of the business judgment rule, only that – based on the FDIC’s allegations, which must be take as true for purposes of the dismissal motion – the business judgment rule cannot serve as a basis for dismissing the FDIC’s claims in against the director defendants at the dismissal motion stage.

 

Many of the directors and officers named as defendants in the FDIC’s failed bank lawsuits have raised the business judgment rule as a defense and sought to rely on the rule as the basis of a motion to dismiss. Judge Pregerson’s rulings here, based on the FDIC”s allegations, that the director defendants cannot rely on the rule as the basis for dismissal of the agency’s claims, is a reminder that the business judgment rule is not a defense to certain kinds of allegations. Specifically Judge Pregerson’s ruling show that director defendants may not be able to rely on the rule as a defense against allegations of self-interested conduct or of abdication of duties.

 

Judge Pregerson’s decision that the California Business Judgment Rule does not protect officers is consistent with prior federal court rulings applying California law in FDIC failed bank cases where officers of the failed banks have sought to invoke the rule. Refer, for example, here.

 

In several jurisdictions, individual defendants have successfully argued that their conduct is protected by the business judgment rule and accordingly, that they cannot be held liable for ordinary negligence. The most significant holding is the August 14, 2012 decision in the Northern District of Georgia in the Haven Trust case, in which Judge Steve C. Jones dismissed the claims against both the director and officer defendants, because of his determination that under Georgia law the directors’ and officers’ conduct is protected by the business judgment rule. The Haven Trust case is discussed here. Earlier in August, a judge in the Middle District of Florida, ruled in the FDIC’s failed bank lawsuit relating to the failed Florida Community Bank of Immokalee, Florida, that under Florida law directors cannot be held liable for ordinary negligence, as discussed here. The ruling in that case did not reach the question of whether or not officers can be held liable for ordinary negligence under Florida law.

 

 

In a recent post about the latest U.S. Supreme Court decision supporting arbitration, I speculated that the next step might be arbitration clauses in corporate bylaws, requiring shareholders to arbitrate shareholder claims. In response to my post, several readers alerted me that these issues had already been raised in a case involving CommonWealth REIT, though I had not been able to track the case down. Fortunately a recent law firm memo details the case and discusses its implications. Though it only involves a trial court decision in Maryland state court, the CommonWealth REIT decision could have important implications for those interested in pursuing the notion of arbitration clauses in corporate by-laws.

 

In a July 8. 2013 Law 360 article entitled “A Template for Tamping Down Corporate Activism” (here, subscription required), Andrew Stern, Alex J. Kaplan and Jon W. Muenz of the Sidley Austin law firm discuss the May 8, 2013 Maryland Circuit Court decision in the case involving CommonWealth REIT. According to the authors, the case is the first to squarely address the issue whether a company can enforce a by-law clause requiring shareholders to arbitrate their claims. As discussed in the memo, the Maryland court ruled that the company could enforce the clause.

 

Commonweath REIT is a publicly traded real estate investment trust organized under the laws of Maryland. Two investment funds acquired nearly 10% of Commonwealth shares and then launched a lawsuit against the company and its trustees seeking declaratory and injunctive relief to prevent alleged “value-destroying” and “self-interested” conduct by the defendants.

 

The company immediately initiated arbitration proceedings, in reliance on a provision in the company’s bylaws requiring that “any disputes, claims or controversies brought by or on behalf of any shareholder … be resolved through binding and final arbitration.” The plaintiff funds sought to stay the arbitration, arguing that they had never “assented” to the arbitration clause (which they said had been “unilaterally foisted upon them”) and that no consideration had been exchanged and therefore no binding arbitration agreement had been formed.

 

The Maryland court rejected the funds’ objections and held the bylaw arbitration clause to be enforceable. In finding that the funds had assented to the clause, the court noted that each share certificate of CommonWealth stock bore a legend stating that “the holder of this certificate…agrees to be bound by all of the provisions of the …Bylaws.” Based on this legend, the court concluded that the funds had “constructive knowledge” of the arbitration provision and that it was “enough to constitute mutual assent of the parties to the arbitration provision.” The court also noted that the funds were “sophisticated parties” who had “actual knowledge” of the arbitration clause as they had “investigated” the company’s bylaws prior to purchasing Commonwealth stock.

 

The court also found that there had been sufficient consideration for the arbitration clause to be binding. The court found that the arbitration clause could be enforced by either party which the court found to constitute adequate consideration.

 

The article notes that the funds had filed a notice of appeal of the lower court’s ruling, but that the funds then dismissed their appeal to pursue arbitration.

 

The article’s authors comment that though it remains to be seen how other courts will address the question of the enforceability of arbitration clauses in corporate bylaws, the Maryland decision “should be seen as, at the very least, a significant incremental victory for boards and trustees who view arbitration as an effective means to manage the typically highly public nature of corporate activism.” At a minimum, the authors note, the decision could be seen – at least for Maryland companies — as “a green light for boards … to include broad arbitration clauses in their bylaws without seeking shareholder approval.”

 

Among other issues that other courts may interpret differently than the Maryland court is the question of whether or not shareholders can, like the plaintiffs in the Maryland case, be said to have “constructive knowledge” of the bylaw provisions or to have “assented” to the provisions. The article’s authors noted that the Maryland court did not discuss Delaware court decisions on which the funds sought to rely in arguing that Delaware’s courts have rejected the principle that “stockholders somehow assent to provisions contained in company bylaws simply by virtue of being stockholders.”

 

I find this entire topic very interesting. After I published my prior post about arbitration clauses in corporate by laws, I had several discussions with various lawyers about whether or not courts would ever enforce such a clause against shareholders, particularly where the clause was adopted without shareholder consent. Several plaintiffs’ lawyers scoffed at the notion that courts would ever enforce such a clause. Nevertheless, here is one case where the court enforced the clause.

 

To be sure, this is only the decision of a trial level state court. It has no precedential value and may or may not be followed by other courts. Other courts may be less willing to conclude as the court did here that the plaintiffs have “constructive knowledge” of the bylaw clauses or have assented to the provisions. Other courts may be less willing to conclude that there was adequate consideration to support enforcement of the clauses. Nevertheless, at least this one court did enforce the arbitration clause. As the law firm memo’s authors state, this decision does represent an “incremental victory” for those who advocate for the inclusion of these types of provisions in corporate bylaws as a way to forestall costly and burdensome shareholder litigation.

 

With the U.S. Supreme Court’s willingness to enforce arbitration agreements in commercial and consumer contracts, and with case law developments like the one in Maryland, more companies may be encouraged to attempt to use their bylaws as a way to control shareholder litigation. I suspect we will see more – both from companies and from the courts – on the arbitration clauses in corporate bylaws.

 

Alison Frankel has an interesting column on this topic on her On the Case blog (here).

 

Time to Nominate Blogs for the American Bar Association Blawg 100: Each year, the American Bar Association publishes its list of the top 100 legal blogs. The ABA calls its list the Blawg 100. The ABA is calling for nominations for this year’s list. The group would like to know about blogs that you read regularly and that you think other lawyers should know about. They ask that you send a separate nomination for each blog that you would like the group to consider. The group may include some of the best comments from the nominations in their Blawg 100 coverage. Nomination must be submitted no later than 7 p.m. on Friday, August 9, 2013. Nominations can be submitted here.

 

Quarterly D&O Claims Trends Webinar: On Tuesday, July 16, 2013 at 11 am EDT, I will be participating in a webinar sponsored by Advisen to discuss Quarterly D&O Claims Trends. This hour-long webinar is free. The other particpants in the call will include Kieran Hughes of AIG and Carl Metzger of the Goodwin Proctor law firm. For further information about the seminar and to register, refer here.

 

An important accessory to the indemnification rights of directors and officers is their right to have their defense expenses advanced while the claims against them are pending, before their ultimate right to indemnification has been determined.  A frequently recurring issue is the question of when the company may withhold advancement. This issue often arises when new management has asserted claims against former managers they blame for problems at the company.

 

A recent decision by the Ontario Court of Appeal, applying Ontario and Canadian federal law, affirmed the holding of the lower court that Look Communications, the company involved, did not have to advance the costs certain former directors and officers incurred in defending claims the company had filed against them. Though the decision will be of greatest interest to directors and officers of companies in Canada, it nevertheless provides an interesting perspective on the rights of advancement here in the U.S. as well. A copy of the Ontario Court of Appeal’s July 4, 2013 opinion can be found here.

 

Background

Look Communications is a technology company organized under the Canadian Business Corporations Act (CBCA). Its business fortunes faltered and its board ultimately approved a sale of its assets through a court-supervised process. Following the sale, the board authorized the payment of bonuses to certain officers and directors and also allowed corporate officials to receive compensation for the cancellation of certain stock option and other equity rights. Altogether the company paid over $20 million in bonus compensation and in compensation for the options and equity rights, representing about 32% of the asset sale proceeds.

 

After the award of the bonuses and other compensation was disclosed, shareholders filed significant objections. The board authorized the payment of $1.5 million in retainers to law firms acting on behalf of the directors and officers, who then resigned once the retainers had been paid.

 

In July 2011, after an investigation by Look’s new management, Look commenced an action against the former directors and officers alleging that the individuals had breached their fiduciary duties and seeking repayment of the bonuses and equity cancellation payments. The individual defendants, in reliance on the company’s by-laws as well as a written indemnification agreement, demanded that the company advance their expenses incurred in defending against the company’s lawsuit. The company refused and the individuals filed separate actions seeking judicial declarations of their advancement and indemnification rights.

 

Under Section 124 of the CBCA, a company may indemnify its directors and officers for legal proceedings in which the individuals become involved as a result of their association with the company, as long as the individual seeking indemnification “acted in good faith and with a view of the best interests of the corporation.” Look’s by-laws made these permissive indemnification rights mandatory. A separate indemnification agreement required Look to advance legal costs in any proceeding, including one brought by Luck itself, subject only to an obligation to repay if a court determined that the individual was not entitled to indemnification.

 

The former directors and officers argued in reliance on the by-laws and indemnification agreement that they were entitled to automatic advancement of their defense fees; that they were also entitled to a presumption that they had acted in good faith; and that their ultimate entitlement to indemnification could only be determined after a full evidentiary trial.

 

Look relied on Section 124(4) which provides that a corporation is permitted to advance defense fees only “with the approval of the court.” Look argued that this provision required the court to preliminarily assess the parties’ conduct to determine whether the persons seeking advancement had acted in good faith. Look further argued that the individuals had not acted in good faith and were not entitled to advancement and submitted affidavits and other materials in support of this position.

 

As discussed here, in a September 28, 2012 decision, Justice Lawrence A. Pattillo of the Ontario Superior Court of Justice held that the individual directors and officers were not entitled to advancement. Among other things, Justice Pattillo held that under Section 124(4) court approval was required for advancement and that approval can be granted only if the officer or director claiming advancement “acted honestly and in good faith with a view to the best interests of the corporations.”

 

Justice Pattillo concluded that the company had made out a strong prima facie case that the former directors and officers had acted in bad faith by awarding themselves over 30% of the assets sales value, and authorizing the payment of the legal retainer on their own behalf before resigning. 

 

The individuals appealed. On appeal, the individuals urged the appeals court to avoid imposing a merits-based threshold on advancement, arguing that were the court to impose such a threshold directors and officers would be required to litigate the merits of the underlying case in the separate action to determine whether or not they were entitled to advancement.

 

The July 4 Opinion

In a July 4, 2013 opinion written by Justice Robert J. Sharpe for a unanimous three-judge panel, the Ontario Court of Appeal dismissed the individuals’ appeal and affirmed the lower court’s ruling, holding that the statute “imposes a judicial filter on advance funding and the strong prima facie test for determining whether advancement should be denied is apt.” The Court added that the “test comports with the statutory requirement for court approval but also is sufficiently stringent to ensure that advance funding is ordinarily available to those claiming it unless there is strong evidence of bad faith.”

 

The individuals had attempted to argue, in reliance on Delaware law, that their defense expenses ought to be advanced without scrutiny of their conduct, subject only to an undertaking to repay if it is later determined based on the outcome of the underlying proceeding that they are not entitled to indemnification. Justice Sharpe wrote:

 

In my view, apart from demonstrating that it is motivated by a very different underlying policy than adopted by Parliament in Section 124(4), Delaware law does not assist us in resolving the issue on this appeal. Unlike the CBCA, the Delaware General Corporation Law does not require court approval of the advancement of legal expenses. (Citations omitted). By enacting Section 124 (4), Parliament has determined that whatever corporate by-laws or agreements promise, by statute, advancement of legal costs requires court approval and court approval should be withheld if the officer or director has not acted in good faith and in the best interests of the corporation. That represents a fundamentally different policy choice that that prevailing in Delaware, a policy choice that this court must respect.

 

Justice Sharpe went on to conclude that the individuals’ indemnification agreements did not alter the statutory requirement for judicial supervision. Justice Sharpe agreed that if the agreements’ wording alone controlled, advance funding could only be denied on the basis of a final and conclusive judicial determination. However, the court concluded, the “issue must be decided on the basis of the overriding language of Section 124(4)” which provides that the right of advancement is “subject to court approval before trial.”

 

The Court of Appeal concluded based on the evidentiary record presented to the court below that the lower court had not erred in concluding that the company had made out a strong prima facie case of bad faith, and properly concluded that the individuals were not entitled to advancement of their costs in defending the claims the company had filed against them.

 

Discussion

In the Ontario appellate court’s view, the indemnification provisions in the Canada Business Corporations Act represent “a fundamentally different policy choice than that prevailing in Delaware.” Section 124(4) “imposes a pre-trial good conduct filter,” while under the Delaware statutes “advance costs are awarded without any scrutiny of the conduct.”

 

Section 124(4) does indeed provide for indemnification under the related statutory provisions “with the approval of the court.” In that respect, the appellate court’s conclusions are unremarkable – they are simply a reflection of the statutory language specifying a requirement for judicial supervision for the implementation of statutory indemnification rights. However, the Ontario Court not only held that the “judicial filter” requirement applied to the individuals’ statutory indemnification rights, but it also held that the requirement for judicial supervision applied to the interpretation of the individuals’ contractual indemnification rights.

 

It is not at all uncommon for new management to pursue claims against a company’s former management. New managers often blame the former managers for problems besetting the company. One very good reason that well-advised managers will seek to put contractual indemnification agreements in place is so that if the managers are the target of claims after they have left the company, they can claim their rights of indemnification notwithstanding the arrival of new management. The contractual indemnification provides them an extra measure of protection and some level of assurance that their rights will be protected if claims later arise.

 

The Ontario court’s interpretation of the statutory provision to require judicial supervision not only of statutory indemnification rights but also of contractual indemnification rights at a minimum adds an additional procedural layer for individuals seeking to rely on their indemnity rights to defend themselves. This result is not necessarily compelled by the statutory language, and even the appellate court agreed that if indemnification issue were determined solely on the basis of the language of the agreement, “advance funding could only be denied on the basis of a final and conclusive judicial determination.” However, the Ontario appellate court nevertheless found that the statute’s “overriding language” imposed requirement of preliminary judicial supervision even on the individuals’ contractual rights.

 

In addition to the additional procedural burdens these requirements put on the individuals seeking indemnification, there is the additional concern of the impact of a “finding of a strong prima facie case of bad faith” on any D&O insurance that may be available to these individuals. There are at least two potential impacts, one having to do with the applicable retention and the other having to do with the possible operation of policy exclusions.

 

The judicial determination that the individuals are not entitled to advance funding means as a practical indemnification is not available to them. The individuals would then seem to have an argument that the Side A retention is applicable to their claim for policy benefits. In most instances, the Side A retention is zero, meaning that — if coverage is otherwise available under the policy — the individuals would have a basis on which to argue that they are entitled to first dollar coverage under the policy.

 

Which of course begs the question of whether coverage is otherwise available under the policy. One issue an insurer undoubtedly would explore in these circumstances is whether or not the judicial determination would trigger the preclusive effect of the conduct exclusions. The individuals would argue that even a judicial finding of “a strong prima facie case of bad faith” is not enough to trigger the conduct exclusion, which typically will provide that it applies only after a “final adjudication” The court’s prima facie determination is an interim, interlocutory determination; it is by no means a final adjudication. Moreover, the finding of bad faith arguably represents something other then a determination of criminal, fraudulent or even dishonest conduct. The individuals would appear to have a substantial basis on which to argue that this type of judicial determination would not implicate the typical conduct exclusion wording.

 

It is worth observing as a final note that though this case represents the rare case where individual directors and officers were denied their rights to advancement of their defense expenses, the outcome is a direct reflection of the specific statutory language involved and of the unusual circumstances presented. But even though the result if the outcome of very jurisdiction-specific and case-specific factors, it nevertheless provides an interesting example from which to consider the rights of individual directors and officers to have their costs of defending claims advanced on their behalf. 

 

Special thanks to loyal reader James Camp for providing me with a copy of the Canadian appellate court’s opinion.

 

In my former days on the carrier side, our D&O insurance group advocated for our policyholders a program of securities litigation loss prevention, on the theory that there are steps companies can take to make themselves less likely to be a securities suit target or better able to defend themselves if they are hit with a suit. The concept of securities litigation loss prevention remains a worthy idea although not always as frequently discussed as perhaps it should be. 

 

Because of my past interest in this topic, I was particularly pleased to see the recent memo from the Latham & Watkins law firm entitled “Giving Good Guidance: What Every Public Company Should Know” (here). The memo provides a good overview of the issues public companies should consider in developing their approach to earnings guidance, and it also sets out practical steps companies can take to try to reduce the possibility of guidance-related liability.

 

The memo begins with a review of the legal context, noting with respect to earnings guidance that “the legal landscape should be carefully understood before management takes the plunge.” The memo provides a cautionary note with the observation that it is possible “to make critical mistakes that can have significant economic consequences under the federal securities laws and in the financial markets.” At the same time, however, “it is possible to give guidance in a deliberate and careful way without incurring undue liability.”

 

After reviewing the basic liability landscape, as well as critical considerations arising from the statutory safe harbor provisions and regulatory provisions such as Regulation FD, the memo reviews two basic questions – that is, how far to go and what to say in giving guidance – and provides critical guidelines. In particular, the memo emphasizes the importance of having a carefully considered company-specific plan for giving guidance that takes advantage of opportunities to accompany disclosure with meaningful cautionary statements.

 

In a particularly useful section, the memo lays out ten rules for “giving good guidance,” all of which are built around having a controlled process involving designated spokespersons delivering carefully considered message accompanied by meaningful cautionary statements. The memo concludes with an appendix of frequently asked questions.

 

I am pleased to be able to link to the law firm’s memo here and to recommend it for company management interested in taking steps to try to reduce the securities litigation exposures arising from providing earnings guidance. It is a favored indoor pastime these days to bemoan the fact that we have a hyperactive litigation system that can impose enormous costs on operating companies. But the fact is that there are steps companies can take to reduce their risk of becoming involved in a securities suit. While there may be much to lament about our litigious system, there are steps companies can take to try to do something about it, and that is a much more positive and practical way for companies to deal with the litigation threat.

 

In an earlier post (here), I discussed the question of the role of D&O insurers in the securities litigation loss prevention process. To see a recent post discussing M&A-related litigation loss prevention, refer here.

 

The SEC’s New Policy to Require Liability Admissions in Certain Cases: Following on Judge Jed Rakoff’s concerns in the Citigroup SEC enforcement action in connection with the proposed settlement that the company had neither admitted nor denied wrongdoing, the SEC, under new leadership, has reconsidered its longstanding policy and now will no longer allow defendants to settle cases without also admitting liability.

 

Though the new policy has yet to be applied in a specific case, commentators have already raised a number of concerns with the SEC’s proposed new approach. In a July 2, 2013 New York Times Deal Book column (here), Wharton School professor David Zaring raises the concern that the new approach could prove very costly for the SEC, as defendant companies will be very reluctant to make admissions that could be used against them in related civil litigation. These disincentives will make it that much harder for the SEC to resolve cases and in the end require the agency to take more cases to trial, a prospect that could drain the agency’s already strained resources.

 

In addition to the concern that admissions could be used against them in related civil litigation, the companies face yet another problem with the possibility of admissions. That is, the admissions could potentially serve as a basis for a company’s D&O insurer to deny coverage based on the policy’s misconduct exclusion. The possibility that an admission might cost the company its D&O insurance protection would provide yet another deterrent for companies from entering into admissions as part of an SEC enforcement action settlement.

 

Can the Countrywide Derivative Suit Survive the BofA Acquisition?: When does a derivative lawsuit survive a merger? That was the question before the Delaware Supreme Court earlier this week in connection with the derivative suit filed against the management of Countrywide Mortgage prior to the company’s acquisition by Bank of America. The case came to Delaware’s highest court by way of a certified question from the Ninth Circuit, which had asked whether under Delaware law the shareholder plaintiffs could maintain the suit notwithstanding the merger in light of the “fraud exception” to Delaware principles about post-merger shareholder standing.

 

In a July 3, 2013 post on her Reuters blog (here), Alison Frankel has an interesting summary of the issues as well as of the parties’ arguments. As Frankel explains, under Delaware law, derivative suit plaintiffs lose their standing to pursue claims on behalf of the company when they lose their ownership interest as a result of a merger. The one exception is when the merger was a itself a fraud intended only to protect the board, which the BofA acquisition was not. The question was whether the Delaware Supreme Court might recognize other circumstances, such as those involved here, where the derivative suit might survive the merger, given Countrywide’s alleged misconduct. The plaintiffs’ arguments in that regard relied heavily on various statements the Delaware Supreme Court had made in prior cases about Countrywide’s conduct.

 

Frankel’s column summarizes the parties’ arguments on these issues and the question of whether or not the court would have to recognize a new exception to the general rules in order to recognize the right of the plaintiffs to pursue their claims. This will be very interesting case to watch — it will be interesting to see what the Delaware Supreme Court does.

 

Travel has a definite allure. The opportunity to break from the routine and to experience something new offers the perfect antidote to the tedium of everyday life.

 

But travel also entails its own set of concerns and constraints. Flight delays, lost baggage and foul weather can quickly turn an alluring adventure into a travel nightmare. And the challenge of navigating an unfamiliar city and dealing with an unknown language and strange customs, cuisines and currencies can sometimes be overwhelming.

 

That is why the one of the most critical travel decisions is the selection of the right hotel. A good hotel can provide a place to retreat when plans go awry or when weariness sets in. The very best hotels are themselves a part of the travel experience, a place to which you would gladly return simply for its own sake.

 

In a prior post (here), I set out a few of my hotel recommendations. In this post, I add a few more based on more recent travel. I offer these suggestions for whatever use they may be for readers visiting the mentioned destinations. I also hope that by offering my recommendations, readers will be encouraged to add their own recommendations, using the comment feature in the right column.

 

I should note at the outset the criteria on which my hotel assessments are based. Although I believe that selection of the right hotel is one of the indispensable elements of successful travel, I am not a big believer in spending a lot of money on hotels. First of all, I am really cheap. Second of all, I find that the extra cost associated with expensive hotels rarely adds significantly to the value – and sometimes costly hotels are singularly uncomfortable places.

 

For me, the best hotels are quiet, clean and inexpensive, and provide a good base from which to explore the surroundings.

 

Based on these standards, the best hotel in which I have recently stayed is the Mandala Hotel in Berlin. The hotel is located on Potsdamer Strasse, adjacent to Potsdamer Platz, at the junction of former East Berlin and West Berlin. It is a new hotel and its rooms are sleek, modern and spacious. Each room has a kitchenette. The hotel has a modern fitness center and wi-fi is included in the cost of the room. It is walking distance from the Brandenberg Gate and the Tiergarten, and a block away from a major transport hub in the Platz. Across the street is the Sony Center, a multi-building structure with shops, theaters and restaurants. A single occupancy room is only about €170. (My travel post about Berlin can be found here.)

 

Another hotel that I enthusiastically recommend is the Gibson Hotel in Dublin (pictured at the top of this post). It is also a new hotel, with very modern rooms, a fully equipped fitness center and free wi-fi. The staff is friendly, cheerful and helpful. Every bit of tourist advice we received from the staff at the front desk was solid gold. The hotel is located at the terminus of the new Luas tram line and is a ten-minute walk along the Liffey River to the city center. The hotel was built at the tail end of the days of the Celtic Tiger, on the assumption that it would be surrounded by ranks of then-planned office towers. Most of the planned buildings were never built and so the hotel is forced to attract clientele based on price. Though this is a modern, upscale hotel, a single-occupancy room can run as low as €99. (My travel post about Dublin can be found here.)

 

By contrast to these two newer hotels, another hotel I am happy to give my highest recommendation to is an older, more traditional hotel in a very old and traditional city. The Old Bank Hotel is located on High Street in Oxford, directly across from All Souls College and in the heart of the ancient college town. It is a boutique hotel, with comfortable furnishings and original artwork. The cost of the hotel not only includes a sumptuous breakfast but also the opportunity to take a tour of the surrounding colleges with an expert tour guide. The rooms have an old fashioned elegance. This hotel is a little pricier than the others but well worth the cost. (The travel post in which I describe our visit to Oxford and other sites can be found here.)

 

Another more traditional hotel that I very much enjoyed is the Innside Madrid Genova, located on the Plaza Alonzo Martinez in Madrid. The hotel is located in a neoclassical 19th Century building that has been recently been retrofitted with modern hotel rooms. Breakfast, which includes one of the best cups of coffee I have ever enjoyed, is served in a bright, airy atrium. The hotel has a modern fitness center. It is located on one of the central metro lines. The Museo del Prado and the Buen Retiro Park are about a ten minute walk away, and the Malasaña district, with its lively street life, is nearby. A single occupancy hotel room is about €160 a night. (My travel post about Madrid can be found here.)

 

Finding a pleasant hotel in Europe is one thing, but it can be even more critical when traveling in Asia given the distances and the increased level of travel challenge involved. One hotel I am particularly happy to recommend is the Conrad Hotel in Hong Kong. This hotel is unquestionably more expensive than my usual preferred hotels, but its location and accommodations would be very hard to beat. The hotel is located in the Pacific Place business district, adjacent to a very high end shopping mall full of shoppers from the Mainland intent on filling their suitcases with luxury goods. The hotel is walking distance from the Zoological Gardens, and nearby to the tram line that runs to the top of Victoria Peak. The varied breakfast buffet runs from traditional English breakfast to a full array of Asian choices. The hotel has a complete fitness center, which can be particularly important for helping to overcome jet lag. This hotel is not cheap, but it is worth it. (The travel post about my visit to Hong Kong can be found here.)

 

Another Asian hotel that I can recommend at least to first time visitors is the Westin in Beijing. Beijing can be a daunting and even overwhelming place, and for a first visit, I think many Americans would prefer to have a hotel that includes familiar comforts and reliable features. The Westin Hotel Financial Street in the Xi Cheng district may not be charming or even particularly distinctive, but it is very comfortable with well-appointed Western-style hotel rooms. The hotel has a complete fitness center and free wi-fi (although you can’t access Facebook, Twitter or Google). Though the hotel is pleasant but otherwise unremarkable, it does offer one amenity that more than makes up for everything else, and that is the absolutely astonishing breakfast buffet. The range of choices and quantity and quality of the food make the breakfast a truly wonderful experience. The hotel is located in a canyon of new, modern office buildings, so it is not the most ideal base for exploring, but the cabs are cheap and so it is easy to range around the city. Tiananmen Square is only a short cab ride away. Seasoned visitors may prefer a different hotel or a different location, but for a first time visitor to Beijing, the Westin does just fine. (The travel post about my Beijing visit can be found here.)

 

In my previous post about hotels, I described my then all-time favorite hotel, the Base2Stay in London. The hotel remains among my favorites, but after a recent series of extensive renovations, the hotel has changed its name. It is now known as the Nadler Kensington. I continue to favor this small hotel. The rooms and common areas are decorated in a simple Scandinavian style, which though perhaps austere to the point of severity, are practical and efficient. The location may not be fashionable, but it is functional – it is located a block from the Earl’s Court tube stop, on the Piccadilly Line (which also serves Heathrow), in an area with pubs, shops and cafes, and on a quiet street full of school kids and Mums pushing prams. The people who work at the hotel are friendly and helpful. A single occupancy room runs around £105 a night.

 

Though I remain a big fan of the hotel now known as the Nadler, I have also recently tried out a couple of other hotels in London that I am also happy to recommend. These two alternative hotels may present a more attractive choice for some visitors because of their locations. For visitors intended to sample the London theater scene, the Fielding Hotel near Covent Garden is a good choice. This small hotel is located on a short, quiet pedestrian street adjacent to the Royal Opera in the heart of the West End theater district. The rooms are small but charming, quiet and comfortable, and it would be pretty hard to beat the hotel’s location. It is surrounded by restaurants, pubs, and theaters and many of the city’s attractions are within easy walking distance. The hotel does not have a lift so this is not a good choice for someone with mobility issues but it is otherwise a little jewel of a hotel. A double occupancy room runs about £180 a night. 

 

Another London hotel I can recommend in a quieter part of town is the Mornington Hotel, which is located in a quiet residential neighborhood just north of Hyde Park, near the Lancaster Gate tube station. The hotel is a short block from the Park and walking distance from the Paddington train station. The rooms are Spartan but clean and efficient. The proximity of Hyde Park and Kensington Garden make this hotel a great stop for visitors who want to enjoy London’s outdoor attractions. At the same time, owing to the proximity of the tube station, many of the city’s other attractions remain accessible. A single occupancy room runs about £130 a night. (My most recent travel post about visiting London can be found here.)

 

I have a few other European hotel recommendations as well. In Munich, I enjoyed a stay at the Pullman, a quiet, comfortable hotel in a mostly residential area at the Nordfriedhof station, just three stops from the city center on the main north-south U-bahn line. The Lufthansa bus from the airport stops directly opposite the hotel. The breakfast buffet is superb. In Barcelona, I stayed at the Hotel Alexandra, which is in an upscale shopping district, just a block away from the Rambla de Catalunya, the city’s famous boulevard with its pedestrian zone it its wide central median. The hotel is a good jumping off point for exploring the city. (My travel posts about Munich and Barcelona can be found here and here, respectively.)

 

When I am trying to locate a suitable hotel in an unfamiliar city, I rely on three resources: friends’ recommendations (for example, the Innside Genova in Madrid was the recommendation of a friend who lives nearby); Trip Advisor (which was how I found the Mandala in Berlin, the Old Bank in Oxford and the Gibson in Dublin); and Frommer’s (through which I found both the Fielding and the Mornington Hotels in London). Trip Advisor can be very good, and I find it reliable. However, there are some cities where it just has too many hotels – it is not very useful in London and New York, for example. Frommer’s is very safe and I find it a reliable source when traveling with my family. However, sometimes the Frommer’s preferred hotels can be, well, a little dull.

 

When I am looking for a hotel, I always prefer a friend’s recommendation, when it is available, and that is why I have taken the time to write this post. I wanted to make sure to pass along all of my best hotel recommendations, for whatever help they may be to others. By the same token, I hope that readers share their recommendations as well. I hope readers will take the time to post a note with their favored hotel recommendations, using the comment feature in the right hand column. As always, I welcome readers’ comments about my notes and observations as well.

 

Afterword: There is yet another reason why I wrote this post. This past holiday weekend, I was able to get away with my family to Pentwater, Michigan, our lakeside rural retreat (which I wrote about in a prior post,  here). While away in Michigan, I enjoyed a number of extended, hours-long bike rides. As I pedaled away the miles, this blog post more or less wrote itself. It was in effect a mental exercise to accompany the physical exertion of the bike ride. I always return from vigorous exercise bursting with new ideas. I hope at least some of the other newly hatched ideas eventually find their way onto this site. For that matter, I hope I have a chance for further long bike rides and even more ideas.

 

In the meantime, I really do hope that readers will supplement this blog post with their own hotel recommendations. I look forward to hearing about everyone’s favorite hotel experiences.

 

An important recurring issue is the questions whether the prior filing of a securities class action lawsuit tolls the applicable statute of repose under the federal securities laws. In an important June 27, 2013, the Second Circuit issued an important decision on this question, holding that the tolling doctrine does not apply to three-year statue of repose under the Securities Act of 1933. A copy of the Second Circuit’s opinion can be found here.

 

In the following guest post, Susanna M. Buergel, Charles E. Davidow, Brad S. Karp, Daniel J. Kramer, and Richard A. Rosen of the Paul Weiss law firm take a look at the Second Circuit’s opinion and discuss its implications. Jane B. O’Brien also contributed to the law firm’s memo. I welcome guest post submissions from responsible commentators on topics of interest to readers of this blog. If you would like to have a guest post considered for publication on this site, please send it directly to me. Here is the Paul Weiss firm’s guest post:

 

On June 27, 2013,  in Police & Fire Retirement System of the City of Detroit v. IndyMac MBS, Inc., — F.3d —-, No. 11-2998-cv, 2013 WL 3214588 (2d Cir. June 27, 2013) (“IndyMac”), the Second Circuit issued an important decision, holding that the tolling doctrine established in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974) (“American Pipe”), does not apply to the three-year statute of repose in Section 13 of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77m, et seq. This decision is likely to have significant consequences for securities class action litigants.

 

The Court’s Holding

In IndyMac, the lead plaintiffs asserted claims under Sections 11, 12(a) and 15 of the Securities Act arising out of IndyMac’s issuance of securities in 106 different offerings.  The district court dismissed for lack of standing all claims arising from the offering of securities not purchased by the lead plaintiffs. In re IndyMac Mortgage-Backed Sec. Litig., 718 F. Supp. 2d 495 (S.D.N.Y. 2010). Five members of the putative class that did purchase those securities moved to intervene in the action to pursue the claims that had been dismissed. The district court denied the motions to intervene on the ground that the Section 13 repose period had lapsed and could not be tolled by American Pipe or extended by Federal Rule of Civil Proceedure 15(c). See In re IndyMac Mortgage-Backed Sec. Litig., 793 F. Supp. 2d 637 (S.D.N.Y. 2011). An appeal to the Second Circuit by certain of the proposed intervenors followed.

 

Section 13 of the Securities Act contains two limitations periods: (i) a one-year statute of limitations from the date of discovery of the violation; and (ii) a three-year statute of repose from the date the security was bona fide offered to the public.[1]   Although it is well established under American Pipe that the one-year statute of limitations is suspended while the class action is pending, prior to the Second Circuit’s decision in IndyMac, there was a split of authority within the Circuit on the question of whether the statute of repose is similarly suspended. 

 

The Second Circuit held that Section 13’s statute of repose is not tolled by the filing of a class action complaint. In reaching this conclusion, the Second Circuit found that, to the extent American Pipe tolling is an equitable doctrine, as the appellees argued, then its application to Section 13’s repose period is barred by Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991), in which the Supreme Court held that equitable tolling principles do not apply to that period. Slip op. at 15. If, on the other hand, it is a “legal” tolling rule based on the class action provisions of Federal Rule of Civil Procedure 23, as the appellants argued, its application to a statute of repose is barred by the Rules Enabling Act, 28 U.S.C. § 2072(b), which prohibits a Federal Rule of Civil Procedure from operating to “abridge, enlarge or modify any substantive right.” Slip op. at 15–16. 

 

The Second Circuit was not persuaded by the appellants’ argument that such a rule would burden the courts and disrupt class action litigation and noted that even if such a problem arose, it would be for Congress, not the courts, to address. Id. at 17.

 

The Implications of IndyMac

By giving effect to Section 13’s statute of repose, the IndyMac decision allows issuers and underwriters of securities to know, by a date certain, when all potential claims arising out of a particular securities issuance have been extinguished. In addition, the Second Circuit’s decision is likely to have significant consequences for class action practice beyond the Securities Act context. 

 

First, the Second Circuit’s analysis appears to be equally applicable to other statutes of repose. IndyMac lends strong support to the argument that no statutes of repose may be tolled under American Pipe, including the five-year statute of repose governing claims brought under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq. In addition, the Second Circuit’s holding raises questions as to the enforceability of private agreements to toll statutes of repose like Section 13. 

 

Second, although IndyMac happens to have involved plaintiffs that intervened in the class action, its statutory analysis is almost certainly equally applicable to the claims of class members who elect to opt out of a class to pursue individual litigation. Thus, IndyMac will likely require class members to make a more prompt decision as to whether to opt out. 

 

Third, nothing in IndyMac suggests that it will not be applied to litigations that are currently pending. As a result, the decision is likely to be invoked in pending opt-out actions.

 

Fourth, IndyMac is likely to halt the tendency of sophisticated and large institutional investors to wait to file individual actions until the class action has proceeded well into, and indeed sometimes after, merits discovery. If institutional investors are now forced to file their actions earlier, this might obviate the problem of having to negotiate a class settlement only to find that large numbers of class members have decided to opt out. Such a development would be particularly welcome because standard “blow” or termination provisions have historically not protected defendants against significant downside risks. The ruling may also permit earlier discussions that could lead to the global resolution of all related matters arising out of the same core set of facts. 

 

Finally, IndyMac may result in other changes to class action practice, including pressure to brief class certification motions earlier in the life of the litigation. 

*          *          *

This memorandum is not intended to provide legal advice, and no legal or business decision should be based on its content. Questions concerning issues addressed in this memorandum should be directed to:

Susanna M. Buergel                   Charles E. Davidow                   Brad S. Karp

212-373-3553                             202-223-7380                            212-373-3316

sbuergel@paulweiss.com          cdavidow@paulweiss.com        bkarp@paulweiss.com

 

Daniel J. Kramer                        Richard A. Rosen

212-373-3020                            212-373-3305

dkramer@paulweiss.com          rrosen@paulweiss.com

                                                

 

Jane B. O’Brien contributed to this client alert.

[1]“No action shall be maintained to enforce any liability created under section 77k or 77l(a)(2) of this title unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence, or, if the action is to enforce a liability created under section 77l(a)(1) of this title, unless brought within one year after the violation upon which it is based. In no event shall any such action be brought to enforce a liability created under section 77k or 77l(a)(1) of this title more than three years after the security was bona fide offered to the public, or under section 77l(a)(2) of this title more than three years after the sale.” 15 U.S.C. § 77m.