Much happened in recent days while The D&O Diary was away on extended travel. Some of the developments were significant. What follows is a brief summary of the more significant events over the last few days.

 

Subprime-Related Citigroup Bondholders Action Settles for $730 Million: In what is the second-largest settlement of a subprime and credit crisis-related securities class action lawsuit, the parties to the Citigroup bondholders’ action have agreed to settle the case for $730 million. The settlement is subject to court approval. A copy of the plaintiffs’ lawyers’ March 18, 2013 memorandum regarding the settlement can be found here. The plaintiffs’ lawyers’ March 18, 2013 press release regarding the settlement can be found here.

 

The settlement relates to a series of suits consolidated in the Southern District of New York and alleging that in connection with approximately 48 bond offerings between May 2006 and August 2008, Citigroup had misrepresented its exposure to subprime mortgages and related bonds as well as to subprime-related collateralized debt obligations. The consolidated litigation is described in greater detail here. As discussed here, on July 12, 2010, Southern District of New York Judge Sidney Stein substantially denied the defendants’ motion to dismiss the bondholders’ action.

 

The defendants in the consolidated litigation included not only Citigroup itself but also 28 current or former Citigroup directors and officers and nearly eighty investment banks that served as offering underwriters in the bond offerings. According to the parties’ March 18, 2013 stipulation of settlement (here), the settlement appears to resolve all of the claims against all of the defendants. However, the only payment mentioned in the stipulation of settlement is Citigroup’s agreement to pay the full $730 million settlement amount into escrow within the specified time following court approval. Of course, there may have been other arrangements between and among the other defendants with regard to the settlement amount.

 

As massive as this $730 million settlement is, there is a note of defensiveness about the settlement in the plaintiffs’ lawyers’ memorandum. The memo take great pains to emphasize that while the case was pending, the Second Circuit entered its opinion in Fait v. Regions Financial Corp. (about which refer here), in which the appellate court held that securities suit defendants cannot be held liable for statements of “opinion” unless the claimants can plead and prove that the defendants did not actually hold the stated opinions. The plaintiffs’ lawyers  underscore the fact that the defendants would likely argue in motions before the court that many of the valuation and reserve misstatements on which the Citigroup bondholder claimants rely are mere statements of opinion that are not actionable in the absence of allegations that the defendants did not actually believe the opinions. In their discussion of this issue as well as in other features of their memorandum, the plaintiffs’ lawyers — by highlighting the vulnerabilities of their case — appear to be anticipating criticism that the settlement is not even larger than it is. (As an aside, it will be interesting to see if in connection with this settlement, as there have been with several of the large subprime and credit crisis securities suits, a number of significant opt-outs from the settlement class.)

 

Just the same, among settlements of subprime and credit crisis-related securities class action lawsuits, this latest settlement is exceeded only by the massive $2.43 billion BofA/Merrill Lynch merger settlement, which is discussed in greater detail here. According to the plaintiffs’ lawyers’ memorandum regarding the latest settlement, the $730 million bondholders’ settlement, if approved by the court, would also represent the second largest recovery in a securities class action lawsuits brought on behalf of purchasers of debt securities, as well as one of the three largest recoveries in a case that does not involve a financial restatement. The settlement also ranks among the fifteen largest recoveries in any securities class action lawsuit.

 

The $730 million Citigroup bondholders’ action settlement also significantly exceeds the $590 million settlement in the separate subprime-related Citigroup shareholders’ action, about which refer here. I have updated my running tally of the subprime and credit crisis case resolutions to reflect this latest settlement. The tally can be accessed here. Here is an updated list of the ten largest subprime and credit crisis-related securities class action lawsuit settlements.

 

Case

Amount

Links

BofA/Merrill Lynch Merger

$2.43 billion

Here

Citigroup Bondholders’ Action

$730 million

This Post

Wells Fargo/Wachovia Bondholders Action

$627 million

Here

Countrywide

$624 million

Here

Citigroup Shareholders’ Action

$590 million

Here

Lehman Brothers (including offering underwriters’ settlement)

$507 million

Here

Merrill Lynch

$475 million

Here

Merrill Lynch Mortgage-Backed Securities

$315 million

Here

Bear Stearns

$275 million

Here

Charles Schwab

$235 million

Here

 

FDIC Failed Bank Litigation Update: As the FDIC has been doing on a monthly basis as the current banking crisis has evolved, the FDIC has updated the page on its website describing the failed bank litigation that the agency has been filing. In the latest update, as of March 19, 2013, the agency states that is has now authorized litigation against the former directors and officers of 106 failed banks (up from 102 as of February 15, 2013).

 

The agency has also now filed a total of 53 failed bank lawsuits against former directors and officers of 52 failed banks (up from 51 lawsuits involving 50 failed institutions as of February 15, 2013). The number of approved lawsuits (which is inclusive of the lawsuits that have been filed) suggests that there may be as many of 53 additional as yet unfiled lawsuits waiting to be filed – however, at least some of these lawsuits may be resolved though pre-lawsuit negotiation.

 

With respect to the two lawsuits filed since the FDIC last updated its website, one, involving the failed Carson River Community Bank, was previously mentioned in a post earlier this month (here, refer to the fifth item in the post). The other new lawsuit involves the failed InBank of Oak Forest, Illinois, which failed on September 4, 2009. A copy of the FDIC’s complaint can be found here. The fact that the FDIC filed the complaint so far past the third anniversary of the bank’s closure suggests that the FDIC”s claims as receiver of the failed bank may have been the subject of a tolling agreement.

 

In addition to the FDIC’s website page regarding failed bank litigation, the FDIC has also significantly updated the page the agency recently added to its site in which the agency has indicated that it will provide information regarding its settlement of failed bank claims. As discussed in a recent post (here), the FDIC has been the target of media scrutiny for its failure to disclose claim settlements. In response to this media attention, the FDIC has added the settlements page to its website; at the time I reviewed the agency’s new website page a few days ago, the agency had posted only a few settlement agreements and indicated that it hoped that by March 31, 2013 the page would more completely reflect all settlements.

 

The agency has now substantially updated the settlements page and added links to numerous additional settlement agreements, including links to several settlement agreements that had not previously been publicly available. Just to cite a couple of examples of the previously undisclosed settlement agreements, readers may recall that December 2012 analysis of the FDIC’s failed bank litigation, Cornerstone Research included a review of failed bank lawsuit settlements (refer here, see page 11). In its list of failed bank lawsuit settlements, Cornerstone Research identified two cases – involving Heritage Community Bank and Corn Belt Bank and Trust Company – for which the settlement amounts had not been reported.

 

In the latest update to the new settlement agreements page on its website, the FDIC has now provided copies of the settlement agreements in these two cases for which the settlement details previously had not been reported.

 

As now reflected on the FDIC’s website, the August 2012 settlement agreement in the Heritage Community Bank failed bank lawsuit, which can be found here, shows that the case settled for $3.15 million, all of which apparently was to be funded by D&O Insurance.

 

The April 2012 settlement agreement in the Corn Belt Bank and Trust Company case, which can be found here, shows that the case settled for a total payment of $700,000, $266,000 of which is to be paid by the individual defendants and the remainder of which is to be paid by the failed bank’s D&O insurer (the insurer is a party to the settlement agreement).

 

The availability of this previously unavailable settlement information is very interesting. Given the volume of new information that the agency has added to the site – the agency has added information relating to settlements in connection with 29 different failed banks in 13 different states — I have not yet had a chance to work through it all. It is however clear that the agency’s new proactive willingness to provide settlement information will prove to be a rich source of information as the agency resolves the cases and claims that it has asserted as part of the current bank failure wave.

 

Freddie Mac Files Libor Scandal Suit Against Rate Setting Banks, British Bankers Association: In the wake of the three regulatory settlements that have arisen so far in the wake of the Libor-scandal, the government-sponsored mortgage finance company has now gotten into the act and filed its own lawsuit seeking recovery of billions of dollars of damages it alleges it sustained as a result of the manipulation of the benchmark rates. A copy of Freddie Mac’s complaint, which the agency filed on March 18, 2013 in the Eastern District of Virginia, can be found here.

 

There are a number of interesting things about this lawsuit. First of all, the only plaintiff in the case is Freddie Mac. The complaint is not asserted on behalf of its larger sibling agency, Fannie Mae, even though the body responsible for oversight of the two mortgage-finance entities had recommended that both agencies pursue claims based on an estimated more than $3 billion in Libor related damages. Undoubtedly Fannie Mae will be filing its own action shortly.

 

A second interesting thing about the lawsuit has to do with the defendants. Freddie Mac has not only  named the Libor rate-setting banks themselves, but it has also named as a defendant the British Bankers Association itself, which acted as a clearinghouse for the rate-setting banks’ borrowing information, which served as the bases for the Libor benchmarks. As Wayne State University Law School Professor Peter Henning points out in his March 20, 2013 post on the Dealbook blog (here), Freddie Mac has alleged that the organization was aware of the manipulation and did nothing too stop it. As Henning notes, “the fact that one is aware of misconduct by others, and even that their services are being used, is usually not enough to show participation in a conspiracy.” Henning adds that there may also be an issue whether or not a U.S. court even has jurisdiction over the BBA.

 

Third, in addition to an antitrust claim, Freddie Mac has raised some additional allegations against certain of the bank defendants. Unlike many of the claimants in the various Libor scandal lawsuits, Freddie Mac had direct contractual relations with several of the rate-setting banks. Freddie Mac directly purchased swaps from several of the bank. The complaint alleges that when the banks pushed down Libor, the agency received lower payments from the swaps. Freddie Mac asserts separate breach of contract actions against eight of the banks (including Bof A, Citigroup, Deutsche Bank and UBS), alleging that the manipulation violated the terms of the agency’s agreements with the banks.

 

Fourth, there is the court in which Freddie Mac filed the suit. The Eastern District of Virginia is notorious as the so-called “Rocket Docket.” As noted in the March 18, 2013 memorandum from the Hunton & Williams law firm (here, registration required), the Eastern District of Virginia moves with “lightening speed,” adding that “the average time from filing a civil case to trial is approximately 11 months, with 2012 constituting the fastest trial docket in the country for the fifth straight year.” Continuances are virtually unheard of. In other words, even though Freddie Mac’s case has only just been filed, it could accelerate past the other Libor cases that have been pending elsewhere for some time – that is, if Freddie Mac can keep the case in the E.D.Va.

 

The defendants undoubtedly will try to have the case transferred to the Southern District of New York and added to the consolidated litigation pending before Judge Naomi Buchwald. Freddie Mac will undoubtedly argue that its distinct breach of contract claims, as well as its unique status as a government-sponsored entity, militate against transfer and consolidation.

 

In a field of interesting Libor-related claims, this new case will be particularly interesting to watch. It will also be interesting to see if Fannie Mae jumps into the fray as well (seems likely to me).

 

Supreme Court Declines Cert in Goldman Sachs Subprime Suit: As I have noted in numerous blog posts, the Supreme Court has shown a significant propensity in recent years to take up securities cases, a propensity that has it turn led to a series of significant High Court decisions that have had a profound impact on securities litigation. However, the Court can have also a significant impact when it chooses not to act as well as when it chooses to get involved. A recent decision to deny a petition for a writ of certiorari arguably falls into the category of cases where the Court’s failure to act has great significance.

 

As I noted in a blog post at the time (here), in September 2012, the Second Circuit handed plaintiffs in subprime and credit crisis-related securities suits a significant victory on the issue of standing in a case involving Goldman Sachs.

 

The background on the decision has to do with the fact that many of the toxic mortgage-backed securities that were a key part of the subprime mortgage meltdown were sold in multiple separate offerings based on a single shelf registration statement but separate prospectuses. Each separate offering included multiple securities at varying tranches of seniority and subordination. In the litigation following the subprime meltdown, defendants in suits bought by mortgage-backed securities investors initially had considerable success in arguing that the claimants have standing only to assert claims only with respect to the specific offerings and tranches in which the claimants themselves had invested, and lacked standing to assert class claims on behalf of investors who purchased securities in other offerings and tranches.

 

In a September 6, 2012 opinion (here), the Second Circuit ruled  — in a case involving mortgage-backed securities issued by a unit of Goldman Sachs — that the investor plaintiff had standing to assert claims relating not only to the specific offerings in which the plaintiff invested but also the claims of investors in other related offerings, to the extent that the securities in the other offerings were backed by mortgages originated by the same lenders that originated the mortgages backing the plaintiff’s securities. The Second Circuit also rejected the argument that the plaintiff lacked standing to assert claims on behalf of investors in the different tranches.

 

The Second Circuit’s recognition of the plaintiffs’ standing to assert claims even related to securities that the plaintiffs’ themselves had not purchased eliminated a significant tool in the defendants’ arsenal to try to narrow the claims involved in any given case. The elimination of this tool presented the prospect that securities defendants could face significantly broader claims than they might have faced had they been able to narrow the case.

 

In other words, Goldman was not the only securities litigation defendant that was interested in seeing if the Supreme Court might take up its case and review the Second Circuit’s holding; many defendants were interested in seeing if the Supreme Court might overturn the Second Circuit’s ruling. In its papers filed with the Supreme Court, Goldman had argued that letting the Second Circuit decision stand "will effectively increase by tens of billions of dollars the potential liability that financial institutions face in this and similar class actions."

 

However, as reflected in the Supreme Court’s docket sheet for the Goldman case, on March 18, 2013, the Court denied Goldman’s petition for a writ of certiorari. The Court’s refusal to take up the case not only means that the Second Circuit’s opinion stands in that Circuit; it also could be argued to suggest that the Court supported the Second Circuit’s analysis, an implication that plaintiffs might try to use to suggest that the Second Circuit’s analysis should be applied even where these other circuits (for example the First and Ninth Circuits) arguably have case law recognizing the narrower standing requirements that defendants would prefer. At a minimum, the broader standing analysis that the Second Circuit recognized in the Goldman decision now unquestionably applies in the Second Circuit itself, where so many of these cases are pending.

 

The Goldman bondholders claim will now go forward. The parties to the case undoubtedly will find the $730 million settlement in the Citigroup bondholders’ case of great interest.

 

The number of securities class action lawsuits filed against life sciences companies rose in both absolute and relative terms in 2012, according to a March 20, 2013 memorandum by David Kotler of theDechert law form entitled “Survey of Securities Fraud Class Actions Brought Against U.S. Life Sciences Companies.”   According to the report, a copy of which can be found here, life sciences companies “remain an increasingly popular target of securities fraud class action lawsuits.”

 

According to the report, 27 pharmaceutical, biotechnology and medical companies were hit with securities suits in 2012, representing about 18% of all securities suits filed during the year.  By comparison, in 2011, 17 of those companies had securities suits filed against them, representing just 9% (It should be kept in mind when comparing the two years that securities class action lawsuit filings overall declined significantly between 2011 and 2012, as discussed in greater detail here.) The 18% of all securities suits that life sciences companies’ filings represented in 2012 is “well above the percentage of securities fraud complaints filed in recent years.”

 

During 2012, the fillings against life sciences companies continued to be concentrated on smaller companies. During 2012, 50% of all life sciences securities suit filings involved companies with market caps of less than $250 million, as compared to 58% in 2011 and 31% in 2010.

 

Abut 43% of the 2012 life sciences securities complaints involved alleged misrepresentations or omissions regarding product efficacy. However, “complaints claiming financial improprieties and insider trading were still prevalent in 2012.”

 

Though life sciences companies continue to be the target of securities class action litigation, many of these cases are also dismissed. The report notes that “in 2012, life sciences companies continued to enjoy relative success in obtaining dismissals of the securities fraud lawsuits filed in recent years.” For example, the report shows that of the 23 securities lawsuits filed against life sciences companies in 2008, three remain pending, eleven were settled, and nine have been dismissed, or about 45% of all resolved cases.

 

However, as the report also notes, “it is equally worth noting that securities fraud lawsuits still carry a substantial risk of exposure, and even when settled can result in very large payments.” The report notes that the 2008 securities suit filed against Medtronic settled during 2012 for $85 million.

 

The report also discusses the U.S. Supreme Court’s February 2013 decision in the Amgen case (background about which can be found here). The report states that “the Supreme Court’s decision in Amgen is expected to have a profound impact on the critical class certification stage in securities fraud class action lawsuits filed against life sciences companies, especially in the Second, Fifth and First Circuits, where the previously required higher threshold for plaintiffs to overcome the class certification barrier now will be lessened.”

 

The report concludes with a number of practical suggestions for life sciences companies to take to minimize the risk of, and impact from, securities fraud class actions.

 

Very special thanks to David Kotler for providing me with a copy of the report.

 

The Norman keep of the Cardiff Castle certainly looks forbidding enough in the accompanying picture, but the photo alone cannot convey the sheer brutality of the gale force winds, freezing temperatures and driving snow squalls that accompanied The D&O Diary’s recent visit to Wales. According to the somewhat dramatic local press coverage, the winds blowing across Britain last week traveled there all the way from Siberia and did in fact cover coastal areas in a blanket of snow.  More of the same is due this week. You don’t go to Britain in March for the weather.

 

Indeed, when I told one of my neighbors back home – who previously lived in England for many years – that I intended to visit Cardiff, her reaction was “Why on earth would you do that?” My answer, which she found entirely insufficient, was that I have always wanted to hear the Welsh language spoken aloud. As it turned out though, actually hearing the language spoken proved more elusive than I had hoped. None of the regulars at the Cardiff pubs we visited could demonstrate much Welsh language proficiency. I later learned that Welch is actually spoken by fewer than 20% of the residents of Wales. In the end, I had to be content with a local language replay telecast of a Welsh Premier League soccer game between Bangor City and Airbus UK Broughton, which certainly involved enough double consonants and daunting diphthongs to satisfy any reasonable requirements. (Bangor City won, two-nil.)  

 

Though Cardiff has suffered for decades as a declining industrial town, recent concentrated investments in the city center and along the waterfront have made it an interesting place to visit. (Or at least it would be at a time when it was not so blitheringly cold.) Cardiff is just a two-hour train ride from Paddington Station in London, and it does present the opportunity to visit what is in effect and in practice a foreign country, with its own culture, language, capital and flag. The River Taff  makes its way through parklands in the city center and the Castle battlements afford an agreeable view of the mountains beyond. 

 

An afternoon meal at Pettigrew’s Tea Rooms adjacent to the Castle grounds – consisting of a teahouse version of Ploughman’s Lunch and a nice pot of tea – was a pleasure. And a pint of locally brewed Brains beer at The Goat Major pub on High Street helped chase away the ill effects of the bitter wind. Just the same, the barkeep at The Old Arcade pub just down the street, after we had answered her question about what we were doing in Cardiff, observed that “There’s nothing on in Cardiff, I’m going to Los Angeles for my vacation.”

 

The ancient university town of Oxford is only a little over an hour from Cardiff by rail. Oxford has a compact city center with a rich history and is full of beautiful antique buildings. The central city streets are lined with gothic façades, and seemingly modest doorways open to breathtakingly beautiful courtyards and quadrangles. Oxford University has no central campus. Instead there are 38 colleges scattered through town. Several of the college campuses include huge meadows and manicured gardens. The grounds of Magdalene College (pronounced, for some reason, “maud-lin”) encompass an extensive tree-lined stretch of the River Cherwell. Each of the colleges includes living quarters for the scholars, classroom and teaching space, a chapel and a dining facility.

 

The oldest of the college buildings date from the 12th Century, although the city’s educational tradition supposedly extends even further back than that. Many of the college buildings in the central town area date from the Tudor and Stuart eras with extensive renovations in the late Victorian era. Though the historical buildings give the town a museum feel, the fact is that all of the ancient buildings are still in use for their original educational purposes. Our visit fell between academic terms, but we also saw many students studying, working and bicycling through the city’s narrow streets.

 

Every street and building has a story – that modest doorway is where Bill Clinton stayed while at Oxford as a Rhodes Scholar, this room is where Queen Henrietta Maria stayed during the English Civil War, this window opens to the room where J.R.R. Tolkien lived. Many of the colleges have famous graduates– for example, Oscar Wilde, King George VII and U.S. Supreme Court Justice Stephen Breyer attended Magdalene College. Christ Church College counts thirteen British Prime Ministers among its alums. Fictional characters are associated with many of the colleges. Lord Peter Wimsey of the Dorothy Sayers detective novels attended Balliol College. Charles Ryder, the narrator of Brideshead Revisited, attended Hertford College, and his friend Sebastian Flyte attended Christ Church College. Hilary Mantel’s recent Booker Prize winning historical novel Wolf Hall opens with Cardinal Wolsey scheming to confiscate abbey lands and treasuries in order to establish what ultimately became Christ Church College. Many of the Hogwarts scenes in the Harry Potter movies were filmed at Christ Church.

 

The highlight of our Oxford visit was the Evensong service at the cathedral at Christ Church College. We entered the cathedral as the setting sun illuminated the central quadrangle, including the central fountain with its statue of Mercury (where, according to tradition, entering students at the college are said to be “dipped in mercury”). As darkness gathered, the beautiful music from the choral service filed the church’s massive vaulted sanctuary.

 

Filled with inspiration, we retreated after the service to The Bear pub, which claims to have been serving pints to town and gown since the twelfth century. We wound up sitting with a family from Chile, in wonder at the frigid temperatures during what is their summer season. There are a number of worthy pubs in town — Tolkien first read portions of the Lord of the Rings to his friends, including C.S. Lewis, at the Lamb and Flag pub, adjacent to St. John’s College. The Port Mahon Pub, which is across the river from the central town, has a wood-burning fire-place and an excellent menu of grilled foods.

 

From Oxford, we returned to London, barely an hour away by train. Although our London itinerary included shows and concerts, the centerpiece of our visit was a tour of legal London. Our first stop at The Old Bailey criminal courts served up a murder case worthy of Horace Rumpole. Ten men sat in the dock, accused of the December 2011 murder of Danny O’Shea. On the morning we attended, the defense attorneys were arguing, based on previously introduced evidence, over what charges could be presented to the jury. It appears that on the night of the incident, the defendants (or at least some of them) had gathered with the intent of retrieving a cell phone that had been stolen the prior week from one of the defendants. Poor Danny O’Shea had not been involved with the phone theft and appears to have been killed by mistake. O’Shea died of a knife wound, but it is unclear who wielded the knife. The defendants were all charged with conspiracy to commit murder or in the alternative to commit grievous bodily harm. The defense arguments focused largely on the question whether the conspiracy to commit murder charge could be presented to the jury. The charge requires proof of awareness of the presence of a lethal weapon at the crime scene, which each defendant’s counsel argued had not been presented with respect to their client.

 

We found the defense arguments absolutely brilliant. We were, however, surprised and appalled by the scope and extent of the cell phone location evidence, which had been assembled to minutely track the defendants’ movements the night of O’Shea’s death. The cell phone data co-located the defendants’ cell phones in the vicinity of the crime scene with minute to minute precision. CCTV video also provided corroborating evidence. Rumpole meets Big Brother.

 

In the afternoon, we visited the Royal Courts of Justice and watched arguments in a civil proceeding brought by an immigration detainee against the Home Secretary alleging that his detention had been based in part on the government’s confusion of him with another person and that government inattention had led to his confinement for unjustifiably long periods.  Once again, the quality of the lawyering was impressive. It was also striking how in both of the proceedings, highly articulate attorneys were skillfully representing disadvantaged individuals. It would be very hard for anyone to come away from a view of the British legal system in action without being impressed. Though the wigs give the unmistakable impression that the barristers have chosen to adorn themselves with the pelt of a dead animal, the elevated level of discourse and the rituals of courtesy are striking.

 

Our tour of legal London also included a visit Lincoln’s Inn in Holborn, one of the four Inns of Court  in London to which Barristers belong. All of the Inns offer interesting architecture in beautiful settings and interesting histories and traditions. The Inns are reminiscent of the colleges at Oxford University, with the difference that the Inns are dedicated exclusively to the barristers’ study and practice of law. Generally, access to the Inns is restricted, but we were able to take advantage of an open house  — in which aspiring barristers could seek a pupillage (apprenticeship) position with barristers’ chambers (law offices) — to wander through the grounds and explore many of the buildings. Lincoln’s Inn is associated with Thomas More, who studied and taught there, and with John Donne.  Margaret Thatcher is a member as well. The interior of the Reading Room at the Law Library at the University of Michigan (where I attended law school) bears a striking resemblance to the Great Hall at Lincoln’s Inn.

 

Adjacent to Lincoln’s Inn is Lincoln’s Inn Fields, the largest public square in London. On the north side of the square is one of London’s hidden jewels, the Sir John Soane Museum. The museum preserves Soane’s architecturally interesting home and its incredible collection. Soane was a successful architect best known for his design of the old Bank of England building. He filled his home with a diverse assortment of sculpture, paintings, and architectural ornaments and built into the structure a series of skylights and other features designed to highlight his collection. His paintings (including several Canalettos and the original of Hogarth’s A Rake’s Progress) are cleverly displayed in an ingenious series of hinged wall cabinets. The museum is a memorial to a certain admirable kind of British eccentricity.

 

We followed up our tour of London courts with a visit to the Victoria and Albert Museum, hoping to take advantage of the museum’s extended hours that evening. While we had merely intended to view some of the Museum’s exhibits, it turned out that the evening hours featured music and wine in the Museum’s central foyer. We also were fortunate enough to see a performance by the Pink Singers choir, which included a program of music ranging from madrigals to show tunes. After the choir concert, we capped the evening off with a detour to Harrods’s, where we sat at the Oyster Bar in the beautiful Food Court and enjoyed a light supper of smoked salmon and champagne. In other words, it was an evening just like any typical evening back home in Cleveland.

 

Our London sojourn happened to coincide with the championship game of the Six Nations rugby tournament, which was played back in Cardiff, where we had visited earlier in the week. We watched the game with a loud and raucous crowd at The Prince of Wales pub on Drury Lane, which seemed like a good place to watch a sporting contest between teams from Wales and England. Wales dominated the game but it still remained close until about the 60th minute, when Wales quickly scored a succession of points to put the game out of reach. (Wales ultimately won 30-3). The swearing that ensued achieved almost biblical proportions. However, within minutes of the final whistle, good spirits were restored after everyone had refilled their glasses and then one of the disappointed fans managed to find a piano pushed against the wall and he led the crowd in a series of profane drinking songs.

 

Much the same spirit attended the rather water-logged St. Patrick’s Day celebration in Trafalgar Square the next day. The vile weather might quickly have subdued the overflow crowd, but fueled with Guinness and other refreshments, the crowd managed to achieve a festive mood (albeit with a rather ragged edge). The chilly rain ultimately drove us away, and our wanderings led us to a small, snug church not far from Westminster Cathedral, where we warmed our spirits and ourselves listening to an afternoon organ recital. We were only a few hundred yards away from the rain-soaked crowd in Trafalgar, but the soaring notes of Bach and Elgar lifted us almost impossibly far away.

 

A final highlight of the trip was an excursion to Greenwich, to see the observatory and to tour the recently restored Cutty Sark clipper ship, now suspended three meters off the found in a glass-walled dry dock, allowing visitors to walk beneath its metal-clad bottom. The National Maritime Museum, which is also located in Greenwich, is excellent and is a required destination for anyone curious about England’s great commercial seafaring history.

 

The top of the hill at Greenwich offers the unique opportunity to straddle the Prime Meridian. It also affords a great view across the Thames to the rather astonishing development at Canary Wharf, as well as upriver to the skyline of The City. From that vantage point, London’s vast size, rich history and complex diversity are unmistakable. Notwithstanding the wretched weather, London is and always will be an absolutely fantastic place. Cheers, London.

 

 

Though the number of securities class action lawsuit settlement approvals reached a 14-year low in 2012, aggregate and average settlement amounts increased compared to 2011, according to the annual securities suit settlement report of Cornerstone Research. The report, which is entitled “Securities Class Action Settlements: 2012 Review and Analysis,” can be found here. Cornerstone Research’s March 20, 2013 press release regarding the report can be found here. A one-page infographic of the report’s findings can be found here.

 

According to the report, courts approved 53 securities class action lawsuit settlements in 2012, compared to 65 in 2011 (itself a very low year) and compared to a 2002-2011 average of 98 settlement approvals per year. The report suggests that the low number of settlement approvals in 2012 may be due to the relatively low number of securities class actions filed in 2009 and 2010.

 

Though the number of settlement approvals was down in 2012, the aggregate amount of settlement approvals was up substantially compared to 2011. The total amount of all settlements exceeded $2.9 billion dollars in 2012, compared to about $1.4 billion in 2011. Mega-settlements (those involving settlement amounts of over $100 million) accounted for more than 75% of the 2012 settlement amounts.

 

The average reported settlement amount dramatically increased from 2011 levels—in excess of 150 percent (from the inflation-adjusted amount of $21.6 million in 2011 to $54.7 million in 2012). The median settlement amount increased more than 70 percent in 2012, from $5.9 million last year to $10.2 million.

 

Possibly as a result of a barrage of recent press criticism for its nonpublic settlements, the FDIC has launched a page on its website to publish details regarding the settlements it has reached in failed bank claims. The page, which can be found here, acknowledges that it is not yet complete. Even in its incomplete state it does reflect information about at least three settlements that as far as I am aware had not previously been publicly available.

 

First, the background about the questions surrounding the FDIC’s nonpublic settlements. In a March 11, 2013 Los Angeles Times article entitled “In a Major Policy Shift, Scores of FDIC Settlements Go Unannounced” (here) critical of the agency, E. Scott Rickard noted that the FDIC has “opted to settle cases while helping banks avoid bad press, rather than trumpeting punitive actions as a deterrent to others.” The article notes the agency’s willingness to agree, in connection with claims settlements, that the details of the settlements would not be disclosed except in response to a specific inquiry. As a result, claims defendants were able to avoid having settlement details made public.

 

Indeed, there have been settlements in FDIC failed bank lawsuits that are not publicly available. In report on FDIC litigation as of December 31, 2012, Cornerstone Research noted in connection with failed bank lawsuits that have settled so far, the details of at least two of the six settled cases had not been made publicly available.  In addition, I have been advised by many participants in the failed bank claim process that there have been other settlements in which the parties resolved failed bank claims without the FDIC actually filing suit. Details regarding these pre-suit settlements have also not been publicly disclosed.

 

Perhaps as a reaction to the adverse publicity following the Los Angeles Times article, the FDIC has now added to its website a page on which it has listed at least some settlements with the apparent intention of having the page complete by the end of this month. The page (here) lists only three settlement agreements, all from the state of Florida. As far as I am aware, the details regarding these three settlements previously were not publicly available. At least one of the settlements directly involves the thee settling defendants D&O insurer. None of the three settlements listed relate to the two cases for which Cornerstone Research had been unable to obtain settlement information.

 

The first of the three settlement agreements posted on the site involves a July 2012 settlement between the FDIC as receiver for the failed BankUnited of Coral Gables, Florida and Michael Orlando. BankUnited failed in May 2009. In May 2012, the FDIC in its capacity as BankUnited’s Receiver filed an action against Orlando and others in the Northern District of California alleging fraud and other misconduct in connection with certain loan transactions. According to the settlement agreement posted on the FDIC’s website, Orlando agreed to settle the FDIC’s claim for payments totaling $1 million. The settlement agreement does not specify whether or not Orlando served as a director or officer of the bank, but certain details of the settlement suggest that he was not. The settlement agreement does not mention D&O insurance.

 

The second settlement agreement that the FDIC has posted on its website involves the failed First Priority Bank of Bradenton, Florida. First Priority, which closed in April 2008, was one of the first bank’s to fail as part of the current bank failure wave. The settlement agreement, which is dated in April 2012, states that the FDIC as First Priority’s receiver asserted claims against certain former directors and officers of First Priority in connection with certain of the bank’s loans. It does not appear that the agency actually filed a lawsuit against the individuals; rather, it appears that the settlement was negotiated without a suit being filed. In a detail that will be of interest to readers of this blog, it appears that First Priority’s D&O insurer is a party to the settlement agreement and that the insurer, despite apparently disputing whether there was coverage under its policy for the FDIC’s claim, agreed to fund the settlement in the amount of $1,750,000. The insurer apparently received a policy release for its payment, subject to certain specified reservations.

 

The third settlement agreement list on the FDIC’s website involves the failed Ocala National Bank of Ocala, Florida, which failed in January 2009. The agreement is between the FDIC in its capacity as the bank’s receiver and an entity identified only as The Willoughby Corporation. The FDIC apparently filed a lawsuit against Willoughby, which Willoughby apparently agreed to settle for its payment of $40,000. The settlement agreement does not identify the nature of the FDIC’s claims against Willoughby.

 

It isn’t clear from the FDIC’s website why all three of the matters referenced on t he website page involve failed Florida banks, nor is it clear why these three particular matters are the ones included on the site – frankly, the three seem like a rather odd assortment, and the absence of information relating to the settlements of the litigated cases seems odd. An optimistic assessment of the information would be that this page is still under construction and the obviously missing information to be added in order to complete the page.

 

Indeed, the page itself says that the “initial posting of past settlements will occur on a rolling basis as they are processed with the goal to have recent settlement agreements posted by March 31, 2013.” The page also says that “will publish the terms and conditions of all settlements as they become available and the material will be updated on a monthly basis.” It will be interesting to monitor the page as the agency updates it in the coming days, in particular to see whether the agency posts the previously unavailable information about the litigates case settlements, and to see the extent to which the agency includes information regarding pre-litigation settlements.

 

The agency’s apparently new found interest in settlement transparency could pose some challenges. The agency could face certain constraints in disclosing past settlements to the extent the parties to the settlements had reached understandings that the settlement would remain confidential. Future settlement negotiations could be complicated to the extent that parties to the negotiations want to try to make confidentiality a condition of any possible settlement. Negotiations could also be complicated as information becomes more readily available that might serve as settlement benchmarks or at least reference points. On the other hand, greater transparency will allow a more accurate assessment of what the FDIC’s claims have accomplished and could even afford some insight into the impact of the settlements on D&O insurers. Some observers may also contend that greater settlement transparency will provide deterrent effects as well.

 

Special thanks to a loyal reader for providing a link to the settlement page on the FDIC’s website.

 

NERA Releases 2012 Wage and Hour Settlements Report: On March 12, 2013, NERA Economic Consulting released its 2012 report on settlements of wage and hour cases. The report, which is entitled “Trends in Wage and Hour Settlements: 2012 Update,” can be found here.

 

The report contains a number of interesting observations about wage and hour settlements. Among other things, the report notes that on average, companies paid $4.8 million to resolve wage and hour cases in 2012, up slightly from the $4.6 million observed in 2011, but lower than the overall average of $7.5 million for the 2007 to 2012 period. The median settlement value for 2012 of $1.7 million was also slightly higher than the $1.6 million median in 2011. (Although it is not expressly stated in the report, it appears that the settlement analysis is solely with respect to class action wage and hour litigation, not individual actions.)

 

By now, many readers may have seen the 2012 Towers Watson D&O insurance survey, entitled “Directors and Officers Liability: 2012 Survey of Insurance Purchasing Trends,” which can be here. (I am only belatedly posting a link to the survey now owing to my travel schedule last week, when Towers Watson released the survey report).

 

As always, the survey report contains a number of interesting insights, including in particular the report’s conclusion that “the insurance marketplace for directors and officers liability is clearly firming, as evidenced by increased pricing experienced in many sectors.”

 

The report contains a number of other interesting insights about the current D&O insurance marketplace for both public and private/nonprofit entities, but readers will also want to note the precautionary comment in the report’s introduction, which state that “it is important that care is taken”  in drawing conclusions from the report owing to the fact that  "the majority of respondents were large organizations with total assets/revenues in excess of US$1 billion” and that “firms with assets/revenues under US$1 billion were not as well represented.”

I know that much of this blog’s readership is located outside the United States and that many readers have substantial business dealings overseas. One of the countries that I know many are focused on is India. For that reason I am pleased to be able publish the following guest from Michael Lea and Abhimanyu Malkan of JLT Specialty Limited (pictured, left)..Mike is Partner and Head of Management Liability in JLT’s Financial Risks Division and is based in London. Abi is a Research Analyst in JLT’s Financial Risks Division and is based in Mumbai.

 

I would like to thank Mike and Abi for their willingness to publish their article on this site. I welcome guest posts from responsible commentators on topic of relevance to this blog. Readers interested in publishing a guest post are encouraged to contact me directly. Here is Mike and Abi’s  article:

 

 

 

The Indian government has decided to replace almost six decades of company law governing the companies in India, i.e. Companies Act, 1956 (CA1956) by new law, the Companies Act 2012 (CA 2012). The proposed Indian Companies Bill (CA 2012) has been passed by the lower house of Indian Parliament, however, approval by the upper house is still pending.

 

In this post, we examine the directors & officers (D&O) insurance market in India which is of particular relevance to many companies who deal with India, particularly the US. The current regulations in the proposed bill along with D&O related issues have created a conducive environment to selling D&O insurance in India.

 

Background

 

Most company executives generally understand that D&O insurance is useful given the changing landscape of regulations in India coupled with the recent spate of global claim experiences which has brought risk factors associated with directors and officers into significant prominence. The expansion of global footprints of Indian companies coupled with a complex regulatory environment, increased shareholder activism and litigation has made the job of directors and senior executives onerous and exposed to its own set of risks. Increasing awareness and extensive coverage of erroneous decisions taken by senior executives (for example Satyam scam and sexual harassment cases in the year 2000) have also brought D&O liability insurance issues into the Indian board room. Further, the economic downturn along with a rise in sub-prime related law suits has brought an increased awareness of D&O insurance. Recently India, Inc. saw as many as 340 independent directors resigning from their positions fearing that their reputation might be at stake if the company fails to live up to investor expectations. The Satyam case brought to fore issues related to protection for independent directors and other innocent executives. I believe that Satyam was dubbed as the "Indian Enron" when it was revealed in January 2009 from the company’s founder and Chairman that more than $ 1 billion of revenues the company had reported were fictitious.

 

Earlier, many firms resisted the need for D&O insurance because of a less litigious environment and hence the assumption that they would never have a D&O claim. We believe that this perspective overlooked the fact that there are claims such as racial discrimination, sexual harassment and unfair dismissal which have resulted in regulators actions under various statutes, such as the Companies Act 1956, Securities and Exchange Board of India 1992, Foreign Exchange Management 1999 etc. Further, the reports on Corporate Governance such as the Kumarmangalam Birla report 1999; the Narayana Murthy Report 2003 and Clause 49 of the listing agreement with stock exchanges state explicitly the board’s responsibilities. These statutes set the standards for directorial behavior and at the same time increase the potential for actions against directors who fall short of these standards. In our view, actions can come from various D&O claims plaintiffs that include customers, vendors, employees, competitors, suppliers and a host of other stakeholders. In this globalized world, anyone anywhere can be a prospective claimant and when a company has a claim, costs can mount quickly. In such cases, suits with little merit can be also expensive to defend and resolve. There could be significant defense costs and damages in such actions which can vary from thousands to millions of rupees. The length of time taken to settle these cases can also extend from several months to several years.

 

Why sell D&O insurance in India?

 

The general awareness of D&O related liability risks amongst the Indian corporate sector and the financial services industry has given an opportunity to the Indian insurance industry to provide insurance solutions to cater to the need of their clients. This is evident in the number of the companies that offer D&O insurance. The leading companies in India that offer D&O insurance include Tata AIG, HDFC Ergo, Bajaj Allianz, ICICI Lombard, New India Assurance and Raheja QBE.

 

In our view, the Indian economy is expected to be in high single digit growth in the current decade. Indian companies are listing on foreign stock exchanges, acquiring or merging with non-Indian companies. The listing requirements, the litigious environment in overseas jurisdictions and the prohibitive legal costs all make D&O insurance a ‘must-get’ policy. Further, we believe that the risk of claims and litigation for the directors and officers of a company would continue to see a significant increase, both over the short and long-term as more Indian companies become globalized. There are companies in India that have taken maximum D&O cover ranging from $1 million to $100 million. Recently in a landmark development in the Indian insurance industry, Tata Steel purchased consolidated global cover (including its European operations) worth $160 million for its directors and officers. So most Indian multinational companies are buying or consolidating their D&O covers in India because of premium efficiencies, choice of the best-in class policy wordings, limits, deductibles and also because of close proximity with the insurance companies and intermediaries.

 

Currently most multinational companies already have D&O cover for their subsidiaries currently operating in India. This is imperative for them due to operational, working and cultural differences in each country’s environment. However, despite the increased awareness of D&O, the cover purchased by publicly listed companies in India is very limited with only 10% of listed companies having D&O policies of any sort. So there are advantages for insurance brokers and insurance companies to demonstrate the features of D&O cover (what should and shouldn’t be covered) to the management of publicly listed companies in India. The attitude amongst Indian entrepreneurs for purchasing an insurance cover was considered a cost rather than an investment with companies believing that they are unlikely to need the insurance because they believed that they would never have a lawsuit and moreover because of the less litigious environment. But we believe that with the Satyam scam, the sexual harassment in Infosys and other D&O related issues, the importance of having a D&O insurance cover would increase and as a consequence of this increased interest, the quality of D&O covers available in the market will improve.

 

Historically, Private companies in India resisted the need for D&O insurance as they felt the number of shareholders was minimal. However recently, more Indian privately-held companies with their share of employment disputes and minority shareholder issues are increasingly showing more interest in buying D&O cover. The fact is, the right time to buy insurance is when you think you don’t need it. Indeed the costs for private company D&O insurance is relatively low compared to publicly listed companies and for the relatively low cost, private company D&O insurance buyers can obtain coverage that is quite broad. Since private company D&O insurance policies provide broader coverage at a relatively low cost, we believe that D&O cover should be part of every private company’s risk management portfolio – not just private companies with a broad ownership base.

 

Regulation is also one of the strongest drivers for purchasing insurance in India. The fact that the Securities and Exchange Board of India (SEBI) intends to make D&O mandatory for publicly listed companies, is fueling demand for D&O insurance products. The purchase of management liability policies such as D&O liability is driven more by regulatory compliance and corporate governance rather than a risk management approach.

 

Lastly, we believe that the motivation for buying D&O cover does not rest solely upon factors such as financial misstatements, sexual harassment, etc. The possibility for litigation can also arise due to other genuine reasons. For example, although directors and officers have a duty of care to make decisions that are in the best interest of the organization and its stakeholders, there is always a risk of getting it wrong and being sued as a consequence. The possibility of litigation against individuals can result in an unwillingness on the part of boards to take risky decisions or actions as they can stand to lose a lot in the event of a legal challenge. As the management of Indian companies gain a broader understanding of the benefits D&O insurance, the demand for cover will most definitely increase.

 

Combined or Separate Limits?

 

The most popular cover across India within D&O liability is the Excess Side A Cover, which is the directors & officers own personal dedicated limit of liability, where they are not indemnified by the company. For example, D&O policies are often written to include coverage for lawsuits brought directly against the organization which has resulted in sharing policy limits among the organization and its directors, officers or members. In certain situations, the bankruptcy courts have seized the D&O policy as an asset of the bankruptcy estate, leaving the directors, officers or members without coverage. These policies are written with very few exclusions and will provide coverage on a primary basis where coverage is broader than the underlying primary D&O policy. Further, insurance buyers should ensure that small premium differences do not deter them when making important insurance decisions which could leave them vulnerable without sufficient protection should the hour of the need arise.

 

What to look for in the Proposed New Indian Companies Bill?

 

For the first time, duties of the directors have been defined in this bill. The bill states that the director of a company shall:

 

  • Act in accordance with its constitution document.
  • Act in good faith in order to promote the objects of the company for the benefit of its members as a whole and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.
  • Work with due and reasonable care, skill and diligence; exercising independent judgment
  • Not be involved in a position or activity that may be in a direct or indirect conflict of interest with company or possibility of conflict
  • Not take or attempt any undue advantage either personally or for relatives, partners or associates. If any director is found guilty for achieving undue gain, the director will be liable to reimburse an amount equal to the gain to the company
  • Cannot hand over his office and any such assignment shall be void

 

Besides this, the new proposed Bill CA2012 bill has widened the definition of the "officer who is in default" to include key managerial personnel that includes

 

  • Chief Executive Officer or the Managing Director or the Manager
  • The Company Secretary
  • The Whole-Time Director
  • The Chief Financial Officer; and
  • And such other officer which may be prescribed

 

The proposed Bill CA2012 has no provision corresponding to Section 201 of the CA1956 Act (indemnification of directors) stating that there is no restriction on the companies to indemnify its directors. The only reference to the provisions of indemnity to directors is given in Section 197 of the CA2012 stating that the premium paid on the insurance policy shall be treated as part of the remuneration of the officers only if such officer is found guilty. The critical distinction between Indian Companies Act 1956 and the proposed bill CA2012 is that insurance companies can now indemnify directors even before the judgment of the court. The advantage of this policy arrangement is that now directors or officers would not have to worry about defense costs. 

 

The proposed Bill CA2012 also introduces the concept of class action suits to provide that a requisite number of members or depositors may file an application before the Tribunal on behalf of the members and creditors if they are of the opinion that the management or control of company affairs are being conducted in a manner that is against the interests of its members or creditors.

 

Future Outlook for D&O Insurance in India

 

The landscape in India with respect to D&O insurance has changed rapidly in the last five years. We  believe that because of recent developments in D&O related issues, we have transitioned from concept selling to general awareness about the D&O product. Directors would want to shield themselves from the risk of huge liabilities in the event of fraudulent activity stemming from poor corporate governance policies. The surge in demand has been fuelled not just by recent high profile scandals but also due to higher judicial and regulatory scrutiny by the regulatory authorities. For example, there have been talks about the Securities and Exchange Board of India (Indian capital markets regulator) making it mandatory for all listed companies to buy D&O insurance. Further, the proposal to hike Foreign Direct Investment in Insurance to 49% is likely to be taken up in parliament for the budget session. If passed and ratified, capital would not be a limitation for expansion.

 

As more and more Indian companies become multinationals, and more foreign entities invest in them, companies employ people of various nationalities. So with this, the Indian D&O market is poised for a rapid growth. Companies, who want to deal with India, should note that currently, entry of Insurance Companies into India is permitted only through joint ventures, with FDI limits (Foreign Direct Investment).

 

In the latest of a series of decisions dealing with the enforceability of arbitration agreements, the U.S. Supreme Court in its 2011 decision in the AT&T Mobility LLC v Concepcion case held that the Federal Arbitration Act preempts state laws that refuse to enforce class action waivers in consumer arbitration agreements as unconscionable or against public policy.

 

The Concepcion decision has had a sweeping impact, as was seen most recently in a February 21, 2013 FINRA Hearing Panel decision in a enforcement action involving Charles Schwab & Company. The FINRA enforcement department had brought an action against Schwab challenging the company’s new customer agreement in which the customer was required to agree to arbitrate any disputes and waive any ability to assert a claim by means of a judicial class action. The Hearing Panel concluded that the agreement violated FINRA’s rules. However, it also concluded, in reliance on Concepcion, that the Rules are unenforceable because they conflict with the Federal Arbitration Act. (The Hearing Panel did find the agreement did violate the Rules by attempting to limit the powers of FINRA arbitrators to consolidate individual claims in arbitration.) FINRA has appealed the Hearing Panel ruling, but the Ruling does show the Concepcion decision’s significant impact.

 

And now, the question of the enforceability of arbitration agreements is back before the U.S. Supreme Court again. On February 27, 2013, the Court heard oral argument in yet another case examining the enforceability of arbitration agreements. The case is styled as American Express v. Italian Colors Restaurant. Background regarding the case can be found here. The case involves a purported class action antitrust action filed by a group of vendors against American Express in which the vendors allege that AmEx’s credit card policy constitutes an illegal tying arrangement because it forces the vendors to accept debit and credit cards at the same fee level.  American Express sought to invoke the arbitration clause in its contractual agreement with the vendors.

 

The case has been procedurally complicated and the specific decision on appeal to the Supreme Court represented the third separate opinion by the Second Circuit in the case. In what as known as the American Express III decision (here), the Second Circuit refused to enforce the class action waiver in the AmEx contractual agreement on the ground that it would effectively preclude the plaintiffs from prosecuting their federal antitrust claims because individual arbitrations would make the expert witness expense cost prohibitive.

 

 As a Ballard Spahr law firm points out in a memo about the case, the Third, Ninth and Eleventh Circuits disagree with the Second Circuit on whether or not the “vindication of statutory rights” theory is still viable in light of Concepcion. Those courts have found that Concepcion requires the enforcement of a class action waiver notwithstanding arguments that the plaintiffs would be unable to vindicate their statutory rights without a class action because their claims were worth less than the cost of litigating them.

 

The vendor plaintiffs’ were represented before the Supreme Court by former Solicitor General Paul Clement, who argued that it would not make economic sense for the vendors to pursue their claims individually because the costs of economic experts would be far in excess of their individual damages, and thus they would be effectively precluded from asserting their claims. As described in Daniel Fischer’s account of the oral argument in a February 27, 2013 Forbes article, the vendors’ contentions “did not seem to make much headway with the Justices.” Even liberal Justice Stephen Breyer expressed skepticism and lack of sympathy for the vendors.

 

The outcome of the pending Italian Colors case remains to be seen. But if as seems likely the Supreme Court continues to follow its now established pattern of supporting the enforceability of arbitration clauses, it seems likely that the vendors’ efforts to avoid AmEx’s arbitration clause, including the class action waiver, will fail. Of course, until the Supreme Court issues its decision in the Italian Colors case there is no way of knowing this for sure.

 

If American Express prevails in the Italian Colors case and the Supreme Court holds that the class action wavier in the AmEx customer agreement is enforceable, it raises the question of what may be next in the Supreme Court’s recognition of arbitration agreement and class action waiver enforceability. In particular it raises the question (that Daniel Fischer noted in his Forbes article) that the next step may be the question of enforceability of arbitration requirements in corporate articles of incorporation or by-laws.

 

The question of whether or not a company can impose an arbitration requirement through its articles of incorporation or its by-laws drew a great deal of attention when The Carlyle Group, which was preparing to go public at the time, specified in its partnership agreement that all limited partners would be required to submit any claims to binding arbitration. (I discussed Carlyle’s initiative in a prior blog post, here.) Ultimately, the SEC used its control of the registration process to prevent Carlyle from including this provision. But as illustrated in an April 22, 2012 article by Carl Schneider of the Ballard Spahr law firm on the Harvard Law School Forum on Corporate Governance and Financial Regulation (here), the idea continues to have its advocates and it seems likely that sooner or later there will be a case or circumstance testing the permissibility of arbitration provision in articles of incorporation or corporate by-laws.

 

For now, the questions of whether or not an arbitration clause in a corporate governance document would be enforceable will have to await another day. If the Supreme Court follows the trend of its own cases and upholds AmEx’s class action waiver in the Italian Colors case, we can certainly expect to see arbitration clauses with class action waivers proliferating in commercial documents. Unless and until Congress intervenes, arbitration provisions including class action waivers would likely become an increasingly common provision of transaction documents. Whether AmEx will prevail and whether that would lead to a test case involving articles of incorporation ad corporate by-laws remain to be seen. Until things change, it seems likely that we will all have to become increasingly more accustomed to dispute resolution through arbitration.

 

As I detailed in recent blog posts (here and here), these days virtually every public company M&A transaction is likely to involve M&A-related litigation. For that reason, M&A litigation represents a significant liability exposure for directors and officers of the companies involved in the M&A transaction and they have a keen interest in taking steps to try to reduce that exposure.

 

These concerns are the topic of a new paper from Chubb entitled “Director Liability Loss Prevention in Mergers and Acquisitions” (here). The paper was written by D&O maven Dan Bailey of the Bailey and Cavalieri law firm. (Readers know that The D&O Diary is a big fan of Dan’s; we recently published a guest post by Dan on Cyber Liability issues.) The paper “reviews the basic legal duties of directors in this context and summarizes many loss control procedures for directors when addressing a proposed M&A transaction.”

 

The paper notes at the outset that directors “are routinely rewarded” for their hard work on a proposed M&A transaction “by being sued.” The shareholder plaintiffs “typically allege the directors acted improperly in investigating, negotiating, approving, rejecting or disclosing the acquisition transaction, regardless of how thoroughly and prudently the directors acted.”  Though the lawsuits cannot be prevented, “directors can increase the defensibility of those lawsuits and improve the quality of their decision-making process with respect to a proposed acquisition by anticipating and implementing various loss prevention practices.”

 

The paper outlines the basic legal principles that define the standard of conduct for directors of the target company. The paper then goes on to outline the steps directors can take to try to manage their liability exposure. Among other things, the paper states that “directors should create a record demonstrating that they carefully and thoroughly considered relevant information regarding the proposed transact.” Directors should also “obtain advice from experienced, qualified and independent experts in each of the relevant substantive areas.” In addition, “only independent and disinterested outside directors should act on behalf of the company with respect to the proposed transaction.” In addition, “directors should seek to obtain the best value available for the company,” in the specific ways that the paper enumerates. Finally, the company must manage the timing and content of its disclosures of the transaction in order to try to minimize disclosure-related risks.

 

There are also a number of transaction-related pre-litigation strategies the company can implement to improve the companies ability to defend the inevitable litigation. These include, among other things, amending the by-laws to designate a specific jurisdiction as the exclusive venue for shareholder suits involving governance issues; retaining qualified defense counsel in advance of the transaction; develop an external communication protocol to reduce disclosure –related risks; and the provision of detailed directors training in anticipating of the takeover process, including the “likely sequence of events, recommended governance practices and various best practices related to the proposed transaction.”

 

Finally, the paper reviews the indemnification and insurance issues relevant in the M&A context.  Among other things the paper discusses the need for the target company to have in place prior to the closing “a prepaid, noncancelable, extended run-off policy that cannot be amended or affected in any way by the acquiring company or subsequent management.”

 

Another M&A related insurance topic that the paper does not discuss is the possible need for representations and warranties insurance protection. Readers may be interested to note that the Professional Liability Underwriting Society (PLUS is hosting a webinar on Tuesday March 19, 2013 at 11:00 am EDT on the topic of Representations and Warranties insurance coverage. Information about this free webinar can be found here.

 

D&O Year in Review: Once again, my good friends at Troutman Sanders have published their annual roundup of D&O insurance coverage decisions. The publication, which is entitled “D&O Professional Liability: A Year in Review,” which provides a comprehensive overview of coverage decisions from the world of D&O in the last year, can be found here.

 

Board Minutes: I recently was asked to attend a meeting of the board of directors of a large financial institution client. While I was in the meeting, one director asked my views about board meeting minutes: should the board minutes be very detailed? Or should they be bare-boned? Which was better from a risk management standpoint? From the way the director asked the question, I knew that that was a topic on which he himself had strong views, and his manner also suggested that this topic was an issue of some debate at the board level. I looked across the table to the company’s general counsel, to see how I should handle the question. Her face said “Don’t throw me under the bus.” So all I said was that the question of board minutes is an important topic that should be discussed with your in-house counsel and if needed your outside counsel.

 

The question about the appropriate level of detail in board minutes is a recurring question. There is, in fact, no single right answer. The correct answer will vary, depending on the age and size of the company, as well as the advice of the company’s counsel. There are a number of important considerations to keep in mind, which are reviewed in a March 6, 2013 JD Supra Law News article written by Stephen Honig of the Duane Morris firm and entitled “Director Liability: Corporate Minutes as Trojan Horse” (here). The article reviews the liability issues that may arise from the board minutes and also reviews how the ground rules change as companies mature and grow larger. The article reviews the legal touchstones and lays out the basic ground rules. The article concludes by saying that directors “should remember that they are protected if they utilize robust process in the board room and are well-served if they document that process.”

 

Is a Pending Appellate Decision Interpreting Morrison Off the Docket?: For some time, we have been awaiting a ruling from the Second Circuit in the hedge fund claimants’ appeal of a district court dismissal of their action against Porsche and certain of its directors and officers. The hedge funds, which had shorted Volkswagen stock in the belief that its share price would fall, claimed that Porsche misled investors by denying through much of 2008 that it intended to acquire VW. Porsche later disclosed that it had been positioning itself to acquire the company.

 

As discussed here, in a December 30, 2010 ruling, Southern District of New York Harold Baer granted the defendants’ motions to dismiss. In granting the motion, Baer relied on the U.S. Supreme Court’s decision in National Australia Bank v. Morrison. Judge Baer found that because the securities underlying the swap instruments the hedge funds had acquired were traded on the German stock exchange, acquiring the swaps was the “functional equivalent of trading the underlying shares on a German exchange."

 

The hedge funds filed an appeal of Judge Baer’s dismissal. As discussed here, while the appeal was pending, the Second Circuit issued a ruling in the Absolute Activist Value Master Fund case interpreting Morrison’s application to non-exchange traded securities. The court held that in order to pursue a securities claim in connection with a transaction in non-exchange securities, the claimant has to allege either “irrevocable liability was incurred or title transferred within the United States.” I noted at the time that the Absolute Activist Value Master Fund case The Second Circuit’s holding in the Absolute Activist Value Master Fund case, in which the Second Circuit said among other things that the identify of the securities involved in the transaction is not determinative, would seem to suggest that the district court’s holding in the Porsche case may not withstand scrutiny on appeal.

 

Ever since the Second Circuit issued its ruling in the Absolute Activist Value Master Fund case, observers have been awaiting the Second Circuit’s ruling in the Porsche case. However, on March 6, 2013, Bloomberg reported (here) that the hedge funds have filed a motion to withdraw their appeal in the Porsche case. The Second Circuit must grant the motion to withdraw, but assuming it is granted, it appears that the appeal would be withdrawn, meaning that the lower court dismissal of the case would stand. The Bloomberg article notes that four cases against Porsche and certain of its directors and officers remain pending in Germany. It appears that the hedge funds may have decided to focus their efforts on the Germany cases.

 

In any event, if the Second Circuit grants the motion to withdraw, the long-anticipated resolution of the hedge funds’ appeal of the dismissal will not be forthcoming. That would mean at a minimum that the Absolute Activist Value Master Fund ruling will continue to represent the standard for securities cases involving non-U.S. entity defendants whose shares do not trade on U.S. exchanges.

 

I can’t help having a “that’s too bad” reaction. I have been looking forward to seeing what the Second Circuit was going to do with the appeal in the Porsche case.

 

One Director Defendant in Latest FDIC Failed Bank Suit: As the FDIC has been ramping up its litigation against the directors and officers of failed banks, one of the things that has been hard to figure is how the agency decides who it is going to sue. Sometimes it files cases only against former bank officers, sometimes it includes director defendants. And now in the latest case to be filed, the FDIC has filed a suit against only a single director defendant. However, in this case, there is some information available to explain why the one director was the only defendant.

 

On February 22, 2013, the FDIC, acting in its capacity as the receiver of the failed Carson River Community Bank, filed an action in the District of Nevada against James M. Jacobs, a former director of the bank. A copy of the FDIC”s complaint can be found here. Regulators closed the bank on February 26, 2010, which means that the agency filed its compliant just before the third-year anniversary of the bank’s closure. The sole defendant is described in the complaint as the co-founder and as a stockholder of the bank, as well as a director in the bank. Importantly for purposes of the suit, the complaint also states that Jacobs also had ownership interests in certain Oklahoma banks that participated in some of the loans that the FDIC referenced in the complaint.

 

As detailed in a March 1, 2013 memo by W. Bard Brockman of the Bryan Cave law firm (here), according to the FDIC’s complaint, the three subject loans were participated out to two Oklahoma banks owned by Mr. Jacobs’ family and for which Mr. Jacobs served as a director. The other directors on the Senior Loan Committee knew about Mr. Jacobs’ interest in the participating banks, but they did not know that Mr. Jacobs allegedly had secretly arranged for the Oklahoma participating banks to have preferential rights to repayment upon default. The Oklahoma banks were ultimately paid in full and Carson River Community Bank sustained most of the loss on the loans. This conduct, the FDIC alleges, constituted a breach of Mr. Jacobs’ fiduciary duty to Carson River Community Bank.

 

Brockman speculates that there may be an additional reason why the other loan committee members were not named as defendants because “Nevada has a very forgiving standard of liability for corporate directors. Under the Nevada corporate code, a director is not liable unless it is proven that: (a) the director’s act or failure to act constituted a breach of his fiduciary duties; and (b) the breach of those duties involved intentional misconduct, fraud or a knowing violation of law.” Brockman suggests that the FDIC must not have had sufficient facts to support an allegation that the other directors had committed “intentional misconduct, fraud, or a knowing violation of the law.” Brockman concludes by noting that this case is “a true factual outlier and it does not signal a trend that the FDIC will target single director defendants.”

 

A Break in the Action: For the next few days, I will be traveling overseas on business. The D&O Diary’s publication schedule (such as it is) will be disrupted for the next few days. I hope to resume the normal publication schedule during the week of March 18, 2013.

 

And Finally: A recurring topic of interest to everyone here is the question of why The Netherlands is sometimes referred to as Holland. This topic is amusingly explained in the accompanying video (with more information on the topic than you might have thought possible). Enjoy. (Sorry about the short commercial at the beginning.)

 

Although I was aware that among the Dodd-Frank Act’s hundreds of pages are provisions relating to so-called “conflict minerals,” until recently I had not had to pay much attention to these provisions. But now, for whatever reason, the conflict minerals disclosure requirements suddenly have hit the center of my radar screen. I have had to do a lot of backing and filling on the topic. Because I think we are all going to have to become familiar the conflict mineral disclosure requirements, I have summarized what I have learned below

 

First, some background. Section 1502 of the Dodd Frank Act required the SEC to promulgated rules requiring companies to annually disclosure their of conflict minerals originating in the Democratic Republic of Congo (DRC) or an adjoining country. On August 22, 2012, the SEC adopted the conflict mineral disclosure rules. The SEC’s August 22, 2012 press release can be found here and the rule itself can be found here.

 

The specific minerals at issue are tantalum, tin, tungsten and gold. The countries covered by the disclosure rules are, in addition to the DRC, Angola, Burundi, Central African Republic, the Republic of Congo, Rwanda, South Sudan, Tanzania, Uganda and Zambia (the “Covered Countries”)

 

The rule applies not just to companies with SEC reporting obligations (including both domestic and foreign issues) but. It also applies to any company that uses the specified minerals if the minerals are “necessary to the functionality or production” of a product manufactured by or “contracted to be manufactured” by the company.

 

Companies are required to comply with the new disclosure rules for the calendar year beginning January 1, 2013, with the first disclosures due May 31, 2014 and subsequent disclosures due annually each year after that. However, a legal challenge to the rules has been raised. On October 19, 2012, the U.S. Chamber of Commerce and the National Association of Manufacturers filed a petition for review with the Court of Appeals for the District of Columbia requesting that the SEC’s rule be set aside in whole or in part.

 

While the legal challenge remains pending, many companies are readying themselves to comply with the rule. Basically, the rule requires disclosure by a public company if it manufactures (or has others manufacture) a product that includes a conflict mineral. If a company determines that its product has a conflict mineral, the company must conduct a good faith inquiry to determine if the mineral is derived from mining in one of the Covered Countries. If the company determines that the minerals came from one of the Covered Countries, it must then file a Conflict Minerals Report on Form SD.

 

Among other things, companies filing a Report must conduct due diligence efforts (using an internationally recognized framework, such as the OECD Due Diligence Guidance) to determine whether the operations in the Covered Country helped finance armed conflict. If the minerals are conflict free, the company must certify that conclusion with an independent audit. If the minerals are not conflict free, the company must disclose the information relating to its use of the conflict minerals. For companies unable to determine whether or not the minerals are conflict-free, the company can declare itself “conflict indeterminable” during a two-year grace period (four years for smaller reporting companies).

 

Notwithstanding the legal challenge, and though the first reporting deadline is still more than a year away, many companies are now scrambling to try to adapt to these reporting requirements. As Barbara Jones of the Greenberg Traurig firm wrote in a March 5, 2013 Law 360 article entitled “Sharpen Your Pencils for Conflict Minerals Disclosures” (here, registration required), reporting companies are “forming high-level internal compliance teams with representatives from legal, finance, internal audit and purchasing involved to assess the extent, if any, that the company’s product contain conflict minerals.” The efforts, she notes have extended to “supply chain participants” who are not “deeply involved in determining and certifying the original source of supplies of tantalum, tine, tungsten and gold (3TGs) and their numerous derivatives, sold to their customers.”

 

There is a lot of risk here for the companies involved. First and foremost, companies face a serious potential PR risk. Companies found to be out of position on conflict minerals will undoubtedly face a publicity firestorm from humanitarian groups and activist investors. Although it remains to be seen, adverse publicity could prove to be a problem not just for companies that must declare their use of conflict minerals but even for those that are unable to declare themselves conflict mineral free.

 

As with any disclosure requirement, there is also a significant litigation risk as well. Companies compelled to reveal their use of conflict minerals could well be the target of shareholder suits. A particularly difficult problem would involved companies that had declared themselves to be conflict free that are later shown have been using conflict minerals after all. The negative publicity and likely share price decline would undoubtedly be followed by a securities class action lawsuit. Activist shareholders could also launch derivative suits against companies based on allegations such as the failure to implement adequate procedures to ensure that the company’s products were conflict mineral free.

 

Of course, whether any of these kinds of suits actually emerge remains to be seen. But though these potential dangers remain off in the future, and though the first reporting deadline is more than a year ahead, the present challenge for reporting companies is to be prepared now for these coming tests. I also anticipate that in coming months, questions surrounding companies’ preparations for the conflict minerals disclosure requirements increasingly will become a part of the D&O insurance underwriting process.

 

As a final note, I should stress that in my description above I simplified the conflicts minerals disclosure requirements. Readers who want a deeper understanding may want to visit the Conflict Minerals Resource Center on the website of the Schulte Roth law firm. The site has a number of helpful links and articles.