By now you will have heard that the U.S. Department of Justice has filed a securities class action lawsuit against S&P and its corporate parent, McGraw-Hill, about the rating agency’s  ratings of collateralized debt obligations as the subprime meltdown unfolded. A copy of the DoJ’s complaint, filed on February 4, 2013 in the Central District of California, can be found here.

 

The complaint has attracted widespread media attention, as well it should, since it represents that government’s first action against a rating agency in connection with the subprime meltdown and the credit crisis But there are a number of interesting features to this action, beyond just the fact that the DoJ has filed a lawsuit against a rating agency.

 

First, there’s the fact that the lawsuit was filed in the Central District of California, rather than in New York, where S&P is located. To the extent that the complaint supplies an answer for the choice of venue question, it appears that the DoJ chose the C.D. Cal. because that is where the failed Western Federal Corporate Credit Union was located. As is alleged in the complaint, the failed credit union was apparently an investor in a number of the specific CDOs mentioned in the complaint. Many of these investments resulted in a total loss to the credit union. More broadly, the DoJ alleges that the S&P engaged in a scheme to “defraud investors.” The specific investors mentioned by name in the complaint area all federally insured depositary institutions.

 

The second interesting thing about the complaint is that thought it was filed by the Department of Justice, it has been filed as a civil action, presumably because the DoJ feels stands a better chance of success with the lower standard of proof applicable in a civil case. But though the case was filed as a civil action, the claims asserted are a little unexpected (at least to me). The DoJ asserts substantive claims for wire fraud, mail fraud, and two counts of financial institution fraud under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”).

 

In its February 4, 2013 press release about the then-anticipated law suit, S&P characterizes  the DoJ’s use of FIRREA as a “questionable legal strategy” intended as an attempt to “end run” the “well-established legal precedent “ on which the defendants hope to rely. Presumably, the reference to the established precedent refers to case law finding that that rating agency’s opinions represent opinion protected under the first amendment.

 

I suspect a different explanation for the DoJ’s reliance on FIRREA. The fact is, many of the events described in the complaint took place many years ago, in some instances six years ago or more. The DoJ is rightly worried about possible statute of limitations concerns. That’s where FIRREA comes in. FIRREA has a ten-year statute of limitations for a violation of, or a conspiracy to violate, the mail or wire fraud statutes, if the offense affects a financial institution (about which refer here). The defendants undoubtedly will try to raise a host of defenses, but the DoJ doesn’t want statute of limitations issues to cut the action short.

 

Third, the complaint names as defendants only S&P and its corporate parent. None of the other rating agencies are named – a point that gripes S&P. In its February 5, 2013 press release, issued after the complaint was filed, S&P notes that “every CDO cited by the DoJ also independently received the same rating from another rating agency.” It may simply be that S&P is up first and the other rating agencies’ turn is coming. However, another possibility may be that the DoJ had more to work with against S&P, particularly from the apparent treasure trove of emails that are liberally quoted in the complaint.

 

The complaint paints a very detailed picture of the dynamic inside S&P as it became increasingly apparent in early 2007 that residential mortgages originated in 2006 were failing quickly, particularly with respect to subprime and Alt-A mortgages. It is clear that S&P felt under a great deal of pressure not to move any more quickly than its competitors for fear of losing business. The warning signs appeared to accumulate as 2007 unfolded while at the same time the issuers who sought out S&P’s ratings were scrambling to complete offering s, to get mortgage backed securities out of their warehouse. The emails and other internal communications (at least as portrayed in DoJ’s complaint) seem to show a sequence of events where alarm bells were sounding louder yet deals continued to get pushed through.

 

As things deteriorated, a gallows humor seems to have set in, provoking a number of emails in which S&P staffers apparently acknowledged the growing problems. As quoted in detail in this February 5, 2013 Business Insider column (here), the emails show an apparent perception on the part of at least some S&P staff that the firm was compromising its rating standards under pressure from issuers. The emails include the now-infamous email in which one staffer quipped that a transaction could be “structure by cows” and the firm would still rate it. Another email exchange between an analyst and an investment banker outside the firm about how the MBS world is “crashing” and the firm is running around to “save face.”

 

Another analyst sent an email with a spoof version of Talking Heads’ classic hit, “Burning Down the House,” including lyrics that “huge delinquencies” in the 2006 vintage were “bringing down the house.” The complaint alleges that shortly after this first email, the same analyst sent an email with a video of the analyst singing the first verse of the spoof for an audience of laughing S&P staffers. (More about the surprise appearance from the Talking Heads in the DoJ’s complaint here.)

 

Whatever may be the reasons why the DoJ decided to proceed under FIRREA and to sue only S&P, the agency will still have to contend with the argument that the rating agency’s ratings are inactionable opinion or are protected by the First Amendment – arguments that the Sixth Circuit appeared to validate in its December 2012 opinion dismissing actions that the Ohio Attorney General filed against the rating agencies on behalf of Ohio state employee pension funds.

 

Time will tell how the DoJ attempts to address these arguments, but it appears from the agency’s complaint that the agency will be attempting to argue that S&P is not entitled to rely on these defenses because the ratings did not represent the rating agency’s opinions. The complaint alleges that the rating agency “falsely represented” that the ratings “reflected S&P’s true opinion” regarding the credit risks the complex securities represented to investors.  The DoJ may be poised to argue that the alleged misrepresentations on which its claims are based are not the opinions themselves but rather the rating firm’s statements about its process and the integrity of its process.

 

One final question is why is the government acting now, years after the crash and years after the events described in the complaint? Several media reports suggested that the DoJ acted only after attempts to work out a negotiated settlement failed. One of the S&P’s lawyers tried to suggest on CNBC that the government investigation intensified after the rating firm downgraded the U.S.’s debt. What ever the reason that the complaint is only being filed now, if nothing else the complaint does show that we are continuing to live with the fallout from the credit crisis and the issues from the crisis are going to be litigated for some time to come.

 

Alison Frankel has a good summary of the complaint and its allegations in her February 5, 2013 post on her On the Case blog (here).

 

Special thanks to the several readers who sent me a copy of the DoJ’s complaint.

 

And Finally: With a hat tip to the Business Insider article linked above, here is the original video version of “Burning Down the House”

 

In last week’s Advisen webinar on 2012 D&O claims trends, one of the audience questions related to the growth and relevance of litigation funding in the U.S.  In responding to the question I noted, among other things, the rise of litigation funding outside the U.S., particularly in Australia and Canada – a point I underscored in a blog post late last week noting the growing importance of litigation funding in Canadian class action litigation.

 

Consistent with this litigation funding theme, on February 1, 2013 the Am Law Litigation Daily ran an interesting interview of Christopher Bogart, the CEO of Burford Group LLC, one of several firms in the vanguard of the growth of litigation funding in the U.S. Burford Group is the investment advisor for Burford Capital, which according to its website is “the world’s largest provider of investment capital and risk solutions for litigation.” (The formal relationship of the various Burford entities is described here.) Burford’s shares are listed on the London AIM exchange. Bogart helped co-found Burford in 2009, after serving as an attorney for the Cravath, Swaine & Moore law firm and as general counsel of Time Warner.

 

The Am Law Litigation Daily article asks the rhetorical question whether the “litigation funding moment” may have arrived, based on Burford’s reported results for 2012. Among other things, the article notes that Burford took in $47 million in recoveries from 12 investments (which may consist of either a single case or a portfolio of cases for a single client). The article also notes that overall Burford has provided $373 million in financing for over 46 investments. According to a January 24, 2013 Financial News article (here), Burford reported a return on investment for the completed cases of 61%, with further recoveries pending. The Financial News article suggests that this may be the period where litigation funding “comes of age.”

 

In another sign of the firm’s apparent progress, in a January 21, 2013 press release (here), Burford announced the addition to its U.S. operations of several new hires, including the addition of Georgetown University Law Professor Jonathan Molot as Chief Investment Officer.

 

Burford is only one of several litigation funding firms now operating in the U.S. and elsewhere. Juridica Investments is another investment fund that is publicly traded in the U.K. and that has U.S. operations engaged in U.S. litigation funding.  IMF Australia Ltd, another litigation funder that is listed in Australia, is the corporate parent of Bentham Capital LLC, which is also in the business of funding U.S. litigation.

 

The success of companies like Burford has attracted additional competition. For example, in January 2012, Parabellum Capital spin-out from Credit Suisse for purposes on litigation funding investments in the U.S. And, as discussed in a prior post (here) in April 2012, former Simpson Thacher partner Michael Chepiga and former Bernstein Litowitz Partner Sean Coffey announced the formation of Black Robe Capital Partners, as yet another firm formed for purposed of litigation funding investment.

 

In short, there are now a number of firms active in litigation funding in the U.S. Most of these firms have only just been formed within the last few years, but signs are that these firms could take on an increasingly important role in the U.S. litigation scene. Indeed, in Canada and Australia, where the litigation funding track record is longer, litigation funding has become a significant part of the litigation landscape, particularly with respect to class action litigation. For example, in its 2010 study of securities class action litigation in Australia (refer here), NERA Economic Consulting identified the emergence of litigation funding as the most significant development behind the increase in securities class action litigation that country. Similarly, in its recent study of Canadian class action lawsuit developments (discussed here), the Osler Hoskin & Harcourt firm documented how litigation funding arrangements increasingly are accepted by the courts, a development that the firm worries could spark further class litigation there.

 

These developments outside the U.S raise the question of what the growth (and success) of litigation funding may mean for litigation in the U.S. The more positive spin may be that the availability of litigation funding levels the playing field for smaller litigants taking on much larger adversaries. At the same time, however, litigation funding raises a host of questions. First and foremost are the concerns about the possible conflicts between the litigation investors and the actual litigants. The funders’ investment objectives may diverge from the actual litigant’s litigation objectives – differences that could lead to diverging views about litigation tactics and even case resolution approaches and objectives.

 

 Similarly, there is the question whether litigation funding is appropriate in the class action context. While the litigation funding unquestionably may help facilitate a recovery for the class, the amount to be paid to the litigation funder, in the form of commission or other payment, will reduce the amount of the recovery for the class. The absent class members cannot all be consulted in advance about such arrangements, which may or may not look fair after the fact.

 

A more fundamental question has to do with the possible effect of growing amounts of litigation funding on the litigation system. Will the availability of litigation funding encourage an increase in litigation? Will it encourage adversaries — who might otherwise be able to reach a business resolution of their dispute – to litigate rather than negotiate? And then there are the concerns about a field in which there apparently are huge sums to be made but no apparent barriers to entry — will the outsize profits that are now being reported attract less scrupulous competitors who attempt to extract outsized returns at the expense of litigants?

 

There are, in short, a host of unanswered questions about the growing presence of litigation funding on the U.S. litigation scene. There is no doubt in light of the outsized returns that the early entrants to the field are reporting that there will be increasing activity in the litigation funding arena and that litigation funding could become an increasingly important part of commercial litigation in the U.S. I fully expect that we will be hearing a lot more on this topic in the months ahead. But the point is –litigation funding is here, now. We had better recognize that, get used to it, and try to understand what it means.

 

One final note. The last time I ran a blog post about litigation funding, I immediately got a host of phone calls from would-be litigants looking for funding. Friends, I am just a blogger. I am not involved in litigation funding nor am I in the business of referring others to litigation funders. If you are a prospective litigant looking for litigation funding, please do not call or email me. I have linked above to the websites for the firms that are involved in litigation funding. Please contact them, not me. Thank you.

 

In the Current Environment, D&O Insurance Remains Critically Important: As numerous observers have noted (refer, for example, here), litigation related to mergers and acquisitions activity declined in 2012 relative to 2011, at least in part due to the decline in the number of M&A deals. The question remains what this development means for litigation activity in 2013. A January 25, 2011 CFO.com article entitled “If Mergers Pick Up, Can Lawsuits Be Far Behind?” (here), notes a number of factors suggesting that M&A activity could improve in 2013, which could lead to a resurgence of M&A claims – a development that could make the D&O insurance for the companies involved increasingly important.

 

The CFO.com article states the M&A related lawsuits “have been in decline because of waning M&A activity.” However, other observers have been reluctant to ascribe the decline in M&A litigation just to the reduced M&A activity alone. For example, and as discussed here, in its recent study of 2012 D&O claims, Advisen noted the number of new merger objection suits declined 24 percent in 2012 compared to the all-time high levels in 2011. The report attributed the decline in merger objection suit filings in part to the decreased M&A activity. However, the report also noted, the ten percent decline in M&A activity “does not fully explain the large decrease in suits.”

 

Whatever may be the reasons for the relative decline in M&A-related litigation in 2012, circumstances suggest that companies may be poised for a rebound of M&A activity in 2013. The CFO.com article notes that corporate cash levels, currently over $1.1 trillion for the S&P 500, may support strong M&A activity this year. Should M&A activity levels rebound in 2013, the likelihood is that the companies involved in the deals will also become involved in litigation related to the transaction.

 

The likelihood of litigation in turn underscores the importance of the D&O insurance available for the companies involved. The CFO.com article emphasizes that because of the likelihood of claims it is more important than ever for all companies – both publicly traded and privately held – to take steps and make inquiries “to make sure they’re adequately covered.” As one commentator quoted in the article notes, company officials should examine their coverage regularly, because “what’s available in the market changes, the forms change and the exclusions change.”

 

Readers who review the CFO.com article will note that the article cites results from the most recent Towers Watson D&O Liability Insurance Survey report. Readers interesting in reviewing the survey report itself should refer here.

 

The Week Ahead at the PLUS D&O Symposium: This week I will be attending the PLUS D&O Symposium at the Marriott Marquis hotel in New York. On Tuesday, February 6, 2013, I will be moderating a panel at the Symposium entitled “Financial Institutions Underwriting: Is it Safe to Come Out Now? Part 2” which is a follow-up to a panel on the same topic that I moderated at last year’s Symposium. Joining me on the panel will be Laurie Banez, Senior Vice President, Chief Underwriting Officer, Argo Pro; Jack Flug, Managing Director, Marsh; Paul Ferrillo, Litigation Counsel , Weil Gotshal & Manges LLP; and Sandy Crystal, Executive Vice President, Crystal & Company. I hope everyone will plan on attending our panel, which should be great.

 

I will be around the Symposium venue throughout the conference, and I look forward to seeing everyone there. I hope that if you see me at the Symposium that you will take a moment to say hello, particularly if we have never met before. I look forward to seeing everyone there.

 

2012 was “another brisk year of class action activity” in Canada, according to a recent memorandum from the Osler Hoskin & Harcourt law firm entitled “Class Actions in Canada 2012” (here). There were a number of significant class action developments in Canada in 2012, including the “landmark” $117 million E&Y settlement in the Sino-Forest case (about which refer here). The developments during the past year “suggest that 2013 may be a tipping point for the maturing class action jurisprudence in Canada.”

 

The law firm memo covers class action developments across a broad range of areas of the law, including securities law, competition law, product liability law and employment law, among others. Among other things, the memo also discusses the increasing role of third party funding in class action litigation in Canada. The memo reviews several recent Canadian court decisions where third party funding arrangements have been allowed, and notes that more recently cases have set out a “road map” for approval of future third-party funding arrangements.

 

The memo notes that these developments involving third party funding arrangements “will undoubtedly encourage plaintiffs to seek approval of similar agreements in other class actions.” The memo’s authors add a note of concern about these kinds of funding arrangements. They note that under the “loser pays” model that applies to class action litigation in most of the Canadian provinces, “the risk of an adverse cost award has traditionally served an important function in discouraging plaintiffs from pursuing questionable cases.” The authors note that “if these risks are outsourced to third parties, there is a concern that plaintiffs may be relieved of some of the adverse consequences of poor case selection, resulting in more strategic class action litigation.”

 

With respect to securities class action litigation, the memo notes that there was “significant activity” in Canada in 2012. The key developments included the March 2012 ruling in the Canadian Solar case (about which refer here), in which the Ontario Court of Appeal held that the liability regime under the Ontario Securities Act applies to a company whose shares trade only on NASDAQ and that do not trade on any Canadian exchange, and that has its principal place of business in China. (The company has its head office and business operations in Ontario and some of the allegedly misleading documents originated in Ontario).

 

The memo also notes that, notwithstanding the low threshold plaintiffs must meet in order to obtain leave to proceed under the Ontario Securities Act in a secondary market securities class action formulated in the Imax case (about which refer here), class plaintiff nonetheless face “ a meaningful evidentiary burden.” In particular, the denial of leave in the Western Coal Corporation case — in whichJustice George Strathy found "no reasonable possibility" that a trial judge would accept the plaintiffs’ expert evidence — provides a  "welcome reminder" that "courts will exercise an important gatekeeping function at teh leave stage and the certification stage, and this gatekeeping function may include a rigorous assessment of the expert evidence and a threshold evaluation of the merits." (For more aboute the Western Coal decision and its possible implications, refer here.)

 

In connection with employment class actions, the memo notes that there was a trio of cases in 2012 released by the Ontario Court of Appeal concerning certification in three overtime class action cases. Among other things, these rulings resulted in one certification in a misclassification case and two certifications in an “off-the-clock” case. Because parties to at least two of these cases have sought leave to appeal to the Supreme Court, “we may see further judicial guidance on the certification of employment class actions in 2013.”

 

The memo concludes by noting that in light of the numerous significant class action developments in 2013, “there are signals that 2013 may be a watershed year for class action practice in Canada.” The memo notes that according to one of the leading Canadian class action judges, Canada’s “class action bar and jurisprudence” has now “reached maturity” – a development that has significant implications for both the class action bar and for businesses in Canada.

 

More on the New Wave of Say-on-Pay Litigation: In an earlier post, I noted the “new wave” of say-on-pay litigation, in which the plaintiffs’ firms have filed class action lawsuits seeking to enjoin an upcoming a shareholder vote, challenging the adequacy of proxy disclosures on executive compensation and equity plans. A January 31, 2013 memorandum from the Latham & Watkins law firm entitled “Defending the Latest Wave of Proxy Litigation: Say-on-Pay and Equity Plan Shareholder Class Action Injunction Litigation” (here) takes a look at the early results from these cases and notes that the results “provide guidance for companies that want to plan ahead to position themselves for a strong defense and minimize business disruption if a suit is filed.” The memo provides an outline for reviewing and drafting proxy disclosure in anticipation of these kinds of suits as well as the steps to take to prepare for the defense in the event a case is filed.

 

More About Rule 10b5-1: As a result of a series of recent Wall Street Journal articles, Rule 10b5-1 trading plans are under scrutiny once again, as I discussed here. The suspicion of the trading plans is ironic, since the Rule allowing the plans was designed to allow company insiders to trade their shares without incurring liability. When set up properly and used correctly, Rule 10b5-1 plans can be an effective securities litigation loss management tool. But that begs the question – how are they set up properly and used correctly?

 

A January 19, 2013 memo from the Davis Polk law firm entitled “Rule 10b5-1 Plans: What you Need to Know” (here),  takes a look at the recent issues surrounding Rule 10b5-1 plans and lays out a set of practical guidelines to be used in establishing the plans in order to avoid the kinds of problems that have recently arisen. The guidelines also provide a useful basis to use to try to figure out if a particular plan is likely to cause problems. The guidelines answer a number of the recurring questions surrounding the plans.

 

The past year included dramatic and important developments involving elections, tragedies and natural disasters. While there was nothing in the world of Directors and Officers Liability to match this drama, it was nevertheless an eventful year, with many significant developments. In the latest issue of InSIghts, which can be found here, I take a look at Top Ten D&O Stories of 2012.

As numerous observers (including this blog) have noted, securities class action lawsuit filings were down in 2012 compared to the previous year and historical averages. It turns out that the downturn was not limited just to securities class action litigation. New lawsuit filings for corporate and securities litigation generally declined in 2012, according to a January 29, 2013 report from Advisen entitled “D&O Claims Trends: 2012 Wrap Up” (here). The new report details an annual decline across all of the categories of corporate and securities litigation that it tracks, while at the same time noting that litigation filings in the aggregate in 2012 were still elevated compared to prior years.

 

According to the survey, the total number of corporate and securities lawsuits declined 21 percent from 2,043 suits in 2011 to 1,616 in 2012. But though the numbers declined year over year, the 2012 filings still exceeded all other years except 2011. The elevated levels between 2012 and the years preceding 2011 was largely due to what the Advisen report calls “securities fraud” suits (which it should be emphasized is a category that does not include securities class action lawsuits and largely consists of regulatory and enforcement actions) and shareholders derivative suits.

 

The report emphasizes that the apparent decline in overall corporate and securities litigation levels between 2011 and 2012 may be a reflection of the fact that 2011 was an “unusually active year” for litigation. But, the report adds, to the extent that the 2012 figures do represent a longer term trend, it may be that the plaintiffs’ firms’ resources “are being allocated outside the realm of D&O related litigation.”

 

The decline in the number of securities class action lawsuits, which has been mush noted, “likely reflects a change in the emphasis by plaintiffs’ firms due in part to a string of Supreme Court decisions favoring defendants,” as well as a “shift in focus towards other types of suits that can be resolved quickly in more favorable state jurisdictions at a far lower cost to the law firm.”

 

Along those lines, the report notes that as recently as 2007, securities class action lawsuits represented 22 percent of all corporate and securities lawsuit filings, but only about 11 percent in both 2011 and 2012. The declining significance of securities class action lawsuit as a percentage of all corporate and securities lawsuit filings is a reflection of the changing mix of corporate and securities litigation.

 

The largest drop in corporate and securities litigation activity between 20011 and 2012 occurred with respect to breach of fiduciary duty suits, which fell 31 percent year-over-year. A large factor in this drop was the decline in 2012 of new merger objection lawsuit filings, after those types of suits had increased sharply between 2006 and 2011. According to the report, the number of new merger objection suits declined 24 percent in 2012 compared to the all-time high levels in 2011. This decline in merger objection suit filings may be in part a function of the decreasing M&A activity. However, the ten percent decline in M&A activity “does not fully explain the large decrease in suits.”

 

Though suits against financial firms continued to predominate among all corporate and securities lawsuits, the percentages of suits involving financial firms was also down in 2012. Suits against financial firms involved 28 percent of all new filings in 2012 compared to 31 percent in 2011, largely “an outcome of the continuing wind down of subprime and credit crisis activity.”

 

The report notes that during 2012, though the number of settlements was down, the average securities class action lawsuit settlement (including proposed and tentative settlements) was $51.8 million, compared to $34.9 million in 2011.

 

The report includes an interesting report on Foreign Corrupt Practices Act enforcement activity and related follow-on litigation, as we as related D&O insurance issues. The report notes that though FCPA enforcement activity was down in 2012, most commentators expect that the decline will prove to be temporary. The report also notes that between 20% and 30% of FCPA enforcement actions trigger shareholder derivative suits.

 

Advisen Report Webinar: On Tuesday January 29, 2013 at 11 am EST, I will be participating in a webinar sponsored by Adivsen in which the report’s findings will be discussed.  The webinar will provide a quarterly review of securities and other litigation impacting D&O coverage and will identify and analyze the trends of greatest significance to Risk Managers and Management Liability professionals. The participants in this free webinar will include AIG’s Tom McCormack, John McCarrick of the White and Williams law firm, and Advisen’s David Bradford and Jim Blinn. Further information about the seminar, including registration instructions, can be found here.

 

Time for a Music Video Interlude: All the Single Babies. If you like it, then you’d better put a diaper on it.

 

Most states have adopted statutes providing individuals who serve as directors on nonprofit boards with limited immunity from liability. Among other issues that frequently arise is the scope of the protection provided under this statutory immunity. A recent decision from the Connecticut Appellate Court in a case involving a liability claim against the volunteer President of the nonprofit interpreted the statutory immunity expansively to encompass a broad range of activities. The decision provides interesting insight into the extent of immunity available to nonprofit board members. The Connecticut Appellate Court’s decision, released on January 1, 2013, can be found here.

 

Background

The Friends of Hammonasset is nonprofit volunteer organization organized under Section 501(c)(3) of the Internal Revenue Code. The organization works with the Hammonasset Beach State Park (a Connecticut State Park). Deanna Becker serves as the volunteer President of Friends. Becker is not compensated for her services.

 

In January 2010, the park held its annual “Owl Prowl” event. The Friends organization was invited to participate in the event and handled all of the publicity for it. One the evening of the event, one of the attendees slipped and fell on roadway and broke his wrist.

 

The injured individual filed a personal injury lawsuit against Friends and against Becker. The trial court entered summary judgment for both defendants, holding that the plaintiff had not alleged sufficient facts to support a claim for premises liability against Friends and also that Becker has immunity from plaintiff’s claims brought against her in her capacity as President of Friends. The plaintiff appealed.

 

The Appellate Court’s decision

On appeal the plaintiff argued that the trial court erred in entering summary judgment in Becker’s favor because his claims against Becker did not relate to duties or activities within the scope of the statutory immunity.

 

The statutory immunity provisions, which are contained in Connecticut General Statutes Section 52-557m, provide that the officer or director of tax-exempt organization who is “not compensated” for their services “shall be immune from civil liability for damage or injury … resulting from any act, error or omission made in the exercise of such person’s policy or decision-making responsibilities if such person was acting in good faith and within the scope of such person’s official function and duties, unless such damage or injury was caused by the reckless, willful or wanton misconduct of such person.”

 

In his appeal, the plaintiff argued that this section does not apply because he did not allege that Becker was negligent in her “policy or decision-making responsibilities.” Rather, he alleged that she was negligent in her supervising, training and oversight activities as the President of Friends, in that she allegedly failed to suet up a walk through of the path to determine if safety hazards existed; failed to assign a member of Friends to do a walk through; and failed to notify or assign a volunteer to notify the state to plow or sand the area.

 

The Appellate Court determined that these alleged activities of Becker were within her “policy or decision-making responsibilities,” noting that:

 

When the phrase “decision-making responsibility” is examined in conjunction with the dictionary definitions of supervise, oversee and train, the allegations in the complaint describe conduct falling squarely within Becker’s decision-making responsibilities. The allegations imply that Becker had the authority to make decisions that included ordering a walk through of the park before the event, directing that a Friends volunteer perform the walk through, and informing the state of dangerous conditions that the volunteer might find. Accordingly, the plaintiff cannot prevail on his claim that decision-making responsibilities do not encompass supervising, training and overseeing.

 

The Appellate Court also rejected the plaintiff’s contention that the state statutory immunity provision was preempted by the federal Volunteer Protection Act. The Act contains a provision preempting any state law to the extent that it is inconsistent with the Act, but exempting from preemption any state statue that provides “additional protection” to volunteers. The Appellate Court interpreted the Connecticut statutory provisions to provide “greater protections” than the Act, and accordingly the Appellate Court concluded that the Act did not preempt the Connecticut statutory provisions.

 

Discussion

In a January 21, 2013 Hartford Business Journal article discussing this decision (here), Dylan Kletter, an attorney with the Brown Rudnick law firm, notes that the Appellate Court’s decision confirms that the statutory immunity provisions “provide broad protection” for volunteer nonprofit board members and officers, adding that

 

Although the scope of an officer or directors’ “policy or decision-making responsibilities” will vary based on the unique facts of each tax-exempt organization’s mission and activities, the court’s decision gives comfort to such volunteer officers and directors and reinforces the concept that unless such an individual acts with “reckless, willful or wanton misconduct” in the exercise of their duties, they may similarly qualify for total immunity from legal liability and damages.

 

Most other states statutory immunity provisions are similar to those of Connecticut, so the “comfort” that volunteer directors and officers can take from this decision is not limited just to those in Connecticut. The decision provides reassurance that courts will broadly interpret the scope of responsibilities for which the immunity protection is available. (It should be noted that some statues require that the nonprofit organization’s by-laws must expressly grant the immunity in order for an individual to be entitled to the immunity.)

 

But though this decision is reassuring for volunteer directors and officers, it nevertheless must be kept in mind that the immunity available under these statutory provisions is limited – and limited in a number of ways.

 

First, the protection is only available to nonprofit directors and officers who are not compensated. So if for example a nonprofit organization were to bring on their board a specialist of some kind who provides the organization with some indispensable exercise and if that individual were compensated for their board service, that individual likely would not qualify for the statutory immunity. 

 

Second, the scope of the statutory protection is limited. It not only is restricted to “policy and decision-making responsibilities” but only to those within “the scope of such person’s official function and duties.” At a minimum, these limitations present potentially fruitful grounds for dispute over the questions whether the individual’s alleged misconduct was with the scope of protected activities, as this case shows.

 

Third, the statutory provisions restrict not only the breadth of activities that are protected but also the kind of activities that are protected. Thus the immunity is not available when the individual officer or director was not “acting in good faith” or was engaging in “reckless, willful or wanton misconduct.” Plaintiff’s lawyers interested in averting the statutory immunity defense will likely keep these limitations in mind when drafting the complaint and will shape their allegations accordingly.

 

Finally, although it is kind of obvious, it is worth noting that even at its greatest extent, the statutory immunity provisions protects only individuals. It does not protect the nonprofit organization itself.

 

The volunteer directors and officers of nonprofit organizations can be reassured that they have immunity from liability for claims of negligence against them in connection with their actions undertaken within the scope of their duties. But because there are numerous limitations to the protection availably under the immunity statutes, it remains important for these organizations and their representatives to ensure that the organizations have and maintain a comprehensive program of liability insurance, including in particular broad, state-of-the- market D&O insurance. Because of the extent of the scope of protection afforded under these insurance programs is so important for nonprofit organization directors and officers, they will want to ensure that a knowledgeable and experienced insurance professional designed and placed their program.

 

The FDIC Ramps Up the Lawsuits: Earlier last week, I noted that the FDIC had filed the first of failed bank D&O lawsuit in 2013. I speculated at the time that there would be many more cases to come this year. As if to prove my point, late last week, the FDIC filed two more failed bank lawsuits, including the latest the agency has filed involving a failed Georgia bank. Both of the new lawsuits were filed on January 25, 2013. Both of the banks involved failed on January 29, 2010, so that agency filed its lawsuits just before the third anniversary of the banks’ failures and just ahead of the end of the statute of limitations period.

 

First, the agency filed an action in the Western District of Washington in its capacity as receiver for the failed American Marine Bank of Bainbridge Island, Washington against four officer defendants (one of whom was also a director) and six director defendants. The FDIC’s complaint (a copy of which can be found here) alleges claims for breach of fiduciary duty, gross negligence and negligence. Among other things, the FDIC alleges that the defendants “took unreasonable risks with the Bank’s loan portfolio; allowed irresponsible and unattainable rapid asset growth concentrated in high-risk and speculative” construction and commercial real estate loans; and “disregarded regulator advice and criticisms regarding lending activities. The complaint alleges that the defendants’ actions caused damages to the bank of “no less than $18 million.”

 

Second, in the latest lawsuit the agency has filed involving a failed Georgia bank, the FDIC filed an action in the Northern District of Georgia against eleven former directors and officers of the failed First National Bank of Georgia, of Carrollton, Georgia. In its complaint, which the FDIC filed in its capacity as receiver for the failed bank, the FDIC asserts claims for negligence, gross negligence and for breach of fiduciary duties. The complaint, which can be found here, alleges that the defendants failed to properly oversee the bank’s lending function, improperly approved millions of dollars in loans, allowed excessive concentration in certain lending areas and knowingly permitted poor loan underwriting. The FDIC alleges that these actions cause damages to the bank in excess of $29.97 million.

 

These latest lawsuit are the 46th and 47th that the agency has filed as part of the current failed bank wave and the second and third so far in 2013. For whatever reason, the FDIC’s suits have been disproportionately concentrated in Georgia. This latest suit is the 15th in Georgia so far, meaning that just under third of all of the FDIC’s lawsuits have involved failed Georgia banks. Though more banks have failed in Georgia than any other state as part of the current bank failure wave, Georgia’s bank failures represent far less than a third of all bank failures. There may be some timing issues here as many Georgia banks were among the first to fail but it still remarkable how many suits the agency has filed in the state.

 

Scott Trubey’s January 25, 2013 Atlanta Journal Constitution article about the latest Georgia lawsuit can be found here. Special thanks to a loyal reader for sending me a link to the article and alerting me to the new lawsuit. Special thanks to yet another reader for sending me a copy of the Western District of Washington complaint.

 

Advisen Claims Trend Seminar: On Tuesday January 29, 2013 at 11 am EST, I will be participating in a Quarterly D&O Claims Update Webinar hosted by Advisen. The webinar will provide a quarterly review of securities and other litigation impacting D&O coverage and will identify and analyze the trends of greatest significance to Risk Managers and Management Liability professionals. The participants in this free webinar will include AIG’s Tom McCormack, and Advisen’s David Bradford and Jim Blinn. Further information about the seminar, including registration instructions, can be found here.

 

A Spectacle Too Many Are Missing: One of the world’s great sporting events is taking place, yet very few are paying any attention. The 2013 African Cup of Nations soccer tournament is being played now (actually, between January 19, 2013 and February 10, 2013) in South Africa. Though the tournament features many of the world’s best soccer players as well as a host of upstarts, the tournament undeservedly is receiving little attention, particularly in the United States.

 

Among the many incredibly talented players participating are the tournament are reigning African Footballer of the Year, Yaya Touré of the Côte d’Ivoire (who plays his club football for Manchester City in the English Premiere Leagu); Emmanuel Adebayor, the Togolese football player and striker for Tottenham Hotspur in the English Premier league; Michael Essien, the Ghanian player who is currently playing for Real Madrid in La Liga, the Spanish football league, on a season loan from Chelsea in the English league; and Gervinho, who plays for Côte d’Ivoire and for Arsenal in the English Premier League. There are many others great players as well.

 

Even more exciting than these marquee players are the upstarts, like the team from Niger that has qualified for the tournament for only the second time, or the team from tiny Cape Verde Islands, which has never previously qualified for the tournament, yet, after a stunning 2-1 victory on Sunday against Angola, is sitting in second place in its tournament bracket and has already qualified for the tournament’s next round.

 

The tournament has featured some brilliant games, including in particular the game in which Burkina Faso, which had hung on throughout the game, scored in the fourth minute on stoppage time on the absolute final play of the game to pull off a tie against a much more talented Nigerian team, or the game in which an inexperienced Niger side played with sheer determination to scrap out a nil-nil draw against the much more experienced team from the Democratic Republic of Congo.

 

A soccer aficionado friend of mine regards the world’s seeming inattention to these games with a shrug, noting that it may be that international soccer competitions, like Opera or Single-Malt Scotches, are an acquired taste that can be appreciated only by the cognoscenti. I disagree. This tournament features the highest level of athleticism and games that flow with an incredible beauty. I think many sports fans would be drawn into these games on first glimpse of they only saw the games.

 

The games are actually a lot easier to see this year than during prior tournaments, because ESPN 3 is showing at least some of the games live – but because of the time difference, they are being broadcast during the morning in the U.S., which is not a time when most people are watching sports. For those who are interested in the games or who think they might be interested, but aren’t interested in sitting down to watch soccer at 10 am in the morning, the best way to watch these games is through the Watch ESPN app. On the ESPN 3 Channel on the App, under the Replay tab, all of the games are listed by date. (You can also find all of the games by clicking on the Sports tab along the top of the user interface and clicking on “Soccer” in the drop down menu).

 

To get a sense of the sheer athleticism this tournament involves, as well as the incredible enthusiasm of the teams’ supporters, watch this video of the 22 year-old Tunisian forward, Yousef Msakni, scoring the game winning goal in stoppage time in a first-round game against Algeria:

 

https://youtube.com/watch?v=NtHgKRT_ME4

A shareholder of the holding company for a failed Virginia bank, the Bank of the Commonwealth, has filed a securities class action lawsuit in the Eastern District of Virginia against the holding company and certain of the company’s directors and officers. The lawsuit, filed on January 22, 2013, follows after the July 2012 indictment of four of the bank’s officers, and the SEC’s January 9, 2013 filing of a civil enforcement action against three of the bank’s former officers. A copy of the shareholder’s securities class action complaint can be found here.

 

The Bank of the Commonwealth of Norfolk, Virginia failed on September 23, 2011. As discussed in a prior post (here, second item), on July 11, 2012, a grand jury returned an indictment (here) against the bank’s former Chairman and CEO, Edward Woodard, Jr.,  for conspiracy to commit bank fraud, bank fraud, false entry in a bank record, multiple counts of unlawful participation in a loan, multiple counts of false statement to a financial institution, and multiple counts of misapplication of bank funds. Three other former officers of the bank and two of its customers are charged with a variety of related charges. The FBI’s July 12, 2012 press release regarding the indictment can be found here.

 

As described in its January 9, 2013 press release (here), the SEC filed a civil enforcement action against Woodard, Cynthia Sabol, the bank’s CFO, and Stephen Fields, the bank’s former executive vice president. The SEC’s complaint, which can be found here, asserts claims for securities fraud against the three defendants for alleged “misrepresentations to investors by the bank’s parent company.” The SEC charged the three “for understating millions of dollars of losses and masking the true health of the bank’s loan portfolio at the height of the financial crisis.” The SEC alleges that Woodard “knew the true state” of the bank’s “rapidly deteriorating loan portfolio,” yet he “worked to hide the problems and engineer the misleading public statements.” Sabol also allegedly knew of the efforts to mask the problems yet signed the disclosures and certified the bank’s financial statements. Fields allegedly oversaw the bank’s construction loans and helped mask the problems.

 

Following just days after the SEC filed its enforcement action, a holding company investor filed a securities class action complaint in the Eastern District of Virginia on January 22, 2013. The complaint names as defendants the holding company itself, six of its former officers and seven directors. The complaint alleges that the defendants “concealed” the holding company’s and the bank’s “true financial condition in a number of ways,” including “fraudulently underreporting the Company’s allowance for loan and lease losses (‘ALLL’) and provision for loan and lease losses … in an effort to overstate the quality and nature of the Bank’s loan portfolio.”

 

The complaint further alleges that “the truth of the Company’s true financial condition emerged through partial disclosures,” and while the company announced increases in ALLL and the provision for loan and lease losses during the class period “it fraudulently attempted to do so with a ‘soft landing’ by failed to increase ALLL and the Provision to the full extent required, and at the same time issuing false reassurances to investors.”

 

The complaint alleges that the holding company, Woodard, Sabol, and Woodard’s successor as CEO, Chris Beisel, violated Section 10(b) of the Exchange Act. In a separate count, the complaint alleges that the remaining individual defendants are liable to the plaintiff class as Control Persons under Section 20 of the Exchange Act.

 

Among the individual defendants named in the complaint is Thomas W. Moss, Jr, a former director of the bank and presently the Norfolk City Treasure and a former speaker of the Virginia House of Delegates. A January 24, 2013 Virginian-Pilot article about the new lawsuit quotes Moss as saying that “the board is clean on this” and saying with respect to the plaintiff that “he doesn’t know what he’s talking about,” adding that “the feds haven’t found a thing wrong with the board.”

 

The named plaintiff in the complaint, Robert Bogatitus, accompanied his complaint with a certification stating among other things that he had purchased a total of 2000 shares in the bank holding company four separate transactions between May and September 2011. Interestingly, all four of the purchase transactions took place after the company filed its 2010 10-K on April 15, 2011. In the 10-K, the company revealed that “[a] federal grand jury is investigating the Bank and certain of its former and current officers regarding lending and reporting practices of the Bank and the manner in which certain loans and loan renewals were considered and approved.” In addition, the plaintiff purchased half of his 2,000 shares of holding company stock on September 26, 2011 – three days after the September 23, 2011 closure of the bank. The patterns of the plaintiff’s purchases seem to undercut the suggestion that he made his purchases in reliance on representations about the bank’s loan quality and financial condition.

 

In the wake of current wave of bank failures, much of the focus (including on this blog) has been concentrated on the lawsuits that the FDIC has been filing against former directors and officers of the failed banks. But as the circumstances involving this failed bank show, the post-failure legal proceedings can and sometimes do include a host of other kinds of actions, both civil and criminal. Indeed, at least as of today, the FDIC itself has not filed an action in its capacity as receiver for the failed bank against this bank’s former directors and officers.

 

The proliferation of legal proceedings here underscores the range of exposures that bank directors and officers can face following a bank’s failure, beyond just the risk of an FDIC D&O action. These proceedings also show the diversity of demands that can be put on a failed bank’s D&O insurance program. It is of course impossible to discern from the outside whether and to what extent this bank carried D&O insurance at the time it failed, and whether or not any insurance remained in place when these various actions have commenced. But to the extent the bank had D&O insurance in place that remained in effect as these various actions have arisen, the attorneys’ fees and costs from the various actions are likely to quickly erode the remaining limits of liability.

 

If nothing else, the various proceedings also underscore the range of exposures that face bank directors and officers. For those advising banks with respect to their D&O insurance – particularly with respect to publicly traded banks – the sequence of events here represents something of a cautionary example. The proceedings that have followed this bank’s failure provide a substantial example of the kinds of risks that the program should be designed to address.

 

Special thanks to a loyal reader for sending me a link to the Virginian-Pilot article linked to above.

 

The Beginning of Another Epic Journey for a Familiar Company? : As reflected in detail here, on June 18, 2002, plaintiff shareholders filed a securities class action lawsuit against Tellabs and certain of its directors and officers. The case would eventually makes its way all the way up to the U.S. Supreme Court, where in 2007 the Court would enter a landmark opinion decision defining the standards to be applied at the dismissal motion stage in a securities class action. The decision is widely viewed as a setback for securities class action plaintiff. After the Supreme Court decision, the case returned to the lower court for extensive further proceedings (including an important interlude in the Seventh Circuit). Finally in April 2011, nearly nine years after the case began, the parties settled the case for $7.375 million.

 

Whether or not the ultimate outcome was worth it after that tortuous journey, another set of plaintiffs are back at it again. As reflected in the plaintiffs’ lawyers’ January 23, 2013 press release (here), plaintiff investors filed a new securities class action lawsuit in the Northern District of Illinois against Tellabs and certain of its directors and officers. According to the press release, the Complaint alleges that:

 

the defendants failed to disclose, among others: (1) that in the fourth quarter of 2010, the Company was changing its distribution arrangement with a customer; (2) that this change to the distribution arrangement masked that Tellabs’ business was declining substantially faster than the Company had represented to the public; (3) that the Company’s North American business was slowing at a greater rate than the Company had represented to the public; and (4) that, as a result of the above, the defendants’ positive statements about the Company’s business, operations and prospects lacked a reasonable basis.

 

It is always hard to know at the outset of a securities suit where it is going to lead, but I suspect that these plaintiffs do not expect another nine year marathon and certainly are hoping that they will not have to make another foray to the Supreme Court. In any event, when the company files its inevitable motion to dismiss, it will be able to rely heavily on the principles established in a Supreme Court decision with the company’s own name on it.

 

In a January 22, 2013 opinion (here), Southern District of New York Judge J. Paul Oetken has dismissed one of the many securities class action lawsuits that were filed against U.S.-listed Chinese companies in 2011. Though the primary interest in the case may be that it involves U.S. securities suit against a Chinese company, Jinkosolar Holdings, the case is also interesting with respect to the alleged misrepresentations on which the suit is based, which relate to the environmental problems in one of the company’s manufacturing facilities.

 

Jinkosolar is a manufacturer of solar technology products with operations based in China. In May 2010, the company conducted an Initial Public Offering of American Depositary Shares on the New York Stock Exchange. In November 2010, the company completed a secondary offering.

 

In April and May 2011, the company had a series of communications with the Chinese environmental authorities regarding hazardous waste disposal issues at its Zhenjian plant. The company did not disclose these communications to its shareholders. However, as the Court later put it, a “kerfuffle” at the company’s plant “forced Jinkosolar’s hand.” In August and September 2011, Residents living near the plant became concerned about a large scale fish-kill near the plant. In mid-September, the media began reporting on locals’ demonstrations outside the company’s plants. In two press releases in late September, the company announced that it had suspended operations at the plant and also revealed the earlier communications with the environmental authorities. As the news came out, the price of the company’s ADSs declined 41%

 

In October 2011, holders of the company’s ADSs filed a securities class action lawsuit in the Southern District of New York against the company, eight directors and officers of the company; and the company’s offering underwriters. The plaintiffs’ complain asserted claims under both the ’33 Act and the ’33 Act. In support of their allegations, the plaintiffs relied on three statements in the company’s offering prospectus in which the company explained its environmental compliance efforts and the consequences to the company if it were found to be in violation of the applicable environmental requirements. The defendants moved to dismiss.

 

In his January 21, 2013 order, Judge Oetken granted the defendants’ motions to dismiss. Judge Oetken found with respect to two of the three statements from the prospectus on which the plaintiffs sought to rely that he could “easily dispense” with the allegations. He noted with respect to these two statements that:

 

These paragraphs do, of course, explain to shareholders that Jinkosolar is obliged to follow certain regulations. But if anything, they weigh the pluses and minuses of following such regulations with a disquieting frankness. The first paragraph, for instance, explicitly balances the costs of “compliance” with safety regulations with the “adverse publicity and potentially significant monetary damages” stemming from “non-compliance.” Similarly, the second paragraph notes that Jinkosolar is “subject” to Chinese regulations, but – particularly when read alongside the first paragraph – does nothing to indicate any sort of commitment on the part of Jinkosolar to follow those regulations.

 

The third Prospectus statement on which the plaintiffs sought to rely presented, Judge Oetken found, “a more complicated matter.” The statement indicates, among other things, that the “we generate and discharge chemical waste, waste water, gaseous waste, and other industrial waste,” reiterates the company’s monitoring efforts and adds that “we are required to comply with all PRC national and local environmental protection laws and regulation.”

 

With respect to these statements, the plaintiffs argued that these statements “falsely imply that Jinkosolar had an effective pollution treatment system and a good pollution record, suggesting that the company had put the environmental issues “in play” and creating an obligation to keep shareholders updated.

 

Judge Oetken said that was “a close call” whether the statements on which the plaintiff’s sought to rely are materially misleading. In particular one sentence “does give the court pause”: the sentence stated that “We also maintain environmental teams at each of our manufacturing facilities to monitor waste treatment and ensure that our waste emissions comply with PRC environmental standards.” Judge Oetkin said that one way the sentence could be read is to signify that the company is able to “ensure that our waste emissions comply with PR environmental standards. “ But read another way, the statement is merely saying that the environmental teams are “maintained” with the purpose or function to “monitor and to ensure” compliance.

 

The Court found that the second of these two alternative readings is “the more sensible one.” The Court went on to say that it “cannot say that a reasonable investor would, or even could, read this one ambiguous sentence as a pronouncement that Jinkosolar is ‘ensuring’ environmental standards were met.” This, the court said, is “all the more true given how cautious Jinkosolar was in it Prospectus.” The company “carefully laid out the plusses and minuses” of abiding by the Chinese regulations and “underscored to investors that fines due to pollution are a real possibility.” These warnings, “taken together with the overall weakness of the instances f material misstatements and omissions proffered by Plaintiffs, indicate that no reasonable investor coul d have believed that the Prospectuses ensured a positive environmental record.”

 

In granting the defendants’ motions to dismiss, Judge Oetken did not expressly indicated whether or not the dismissal was with prejudice. However, in his final line of his opinion, he did direct to Clerk to “close this case.”

 

Discussion

For many readers, the primary interest of this case will be that it involves a U.S.-listed Chinese company. However, unlike many of the U.S.-listed Chinese companies that have been hit with securities class action lawsuits in recent years, this company did not obtain its listing by way of a reverse merger transaction. This company completed a full-blown IPO, which may have made a difference in the outcome of this case.

 

It was only as a result of the company’s IPO that the company completed a full and detailed Prospectus. (The company also completed a full Prospectus in connection with its secondary offering.) The Prospectus contained extensive and detailed precautionary statements. It was the detail and extent of these statements that seemed to have made a difference to Judge Oetken. Thus, in his opinion, Judge Oetkin refers to what he calls the “disquieting frankness” of the company’s disclosures regarding its environmental compliance risks.” He also noted “how cautious” the company was in its environmental compliance risk factors in its Prospectuses.

 

Because of the depth of the disclosures in its offering documents, Jinkosolar was able to make arguments and raise defenses in reliance on the detailed Prospectus disclosures. Because so many of the U.S.-listed Chinese companies did not complete a full-blown IPO, but rather obtained their U.S. listings through reverse merger transactions, they likely did not create offering documents with similarly precautionary disclosure. For that reason, the outcome of this dismissal motion ruling may not be all that helpful to many of the other U.S.-listed Chinese companies involved in U.S. securities suits. Indeed, most of those other companies are unlikely to be able to raise the kinds of arguments that Jinkosolar raised here, and certainly seem unlikely to be able to cite disclosure statements that a court might describe as reflecting “disquieting frankness.”

 

For me, the most interesting thing about this case is not that it involves a Chinese company defendant, but rather that it involves alleged misrepresentations with respect to environmental liabilities and exposures. As I have previously noted on this blog (refer, for example, here), these kinds of cases, involving alleged misrepresentation of environmental issues do arise periodically. The possibility of this kind of claim is often a key concern at the time of D&O insurance policy placement, as the question often arises whether the standard policy’s pollution exclusion will preclude coverage for a securities claim based on environmentally-related disclosures.

 

As this case demonstrates, it is critically important for the standard pollution exclusion to be revised to carve back coverage for securities claims and derivative claims based on environmental disclosures. (It is worth noting that many of the modern Excess Side A DIC insurance policies often have no environmental or pollution exclusion. In addition, some carrier’s primary D&O insurance forms omit the standard pollution exclusion and simply provide that the policy’s definition of “Loss” does not include costs of environmental remediation. Unless the insured company’s primary D&O insurance policy omits the environmental exclusion in this way, it will be indispensable for the standard environmental liability exclusion be revised in order to preserve coverage for securities claims and derivative claims based on alleged misrepresentations or misconduct relating to environmental issues. These considerations are likely to become increasingly important as environmental disclosure issues become of greater regulatory concern (about which refer here).

 

The one final thing I will say about this case and the fact that it does involve a U.S.-listed Chinese company is that it is yet another case involving a Chinese company in which the plaintiffs have struggled. Although some of the U.S. securities suits have managed to survive motions to dismiss, others (like this one) have not. Even the cases that have survived motions to dismiss have proved challenging for plaintiffs as they have faced numerous procedural hurdles (refer for example here). In addition, in other cases involving U.S.-listed Chinese companies that have reached the settlement stage, the settlement amounts have proved to be modest. (On the other hand, as noted here, E&Y did recently agree to settle a Canadian securities case relating to Sino-Forest, and a Hong Kong arbitration panel did just make a more than $70 million award based on its determination that China MediaExpress Holdings is a “fraudulent enterprise.” Notably, and arguably ironically, neither of these big recoveries involved one the many U.S. court securities suits filed against Chinese companies.)

 

Special thanks to a loyal reader for sending me a copy of Judge Oetken’s opinion in this case.  

 

Upcoming Event: Readers of this blog may be interested to know about a seminar that will be held at the St. John’s School of Risk Management in New York on February 5, 2013 entitled "A Day at Lloyd’s: An Introduction to the Lloyd’s Market Structure and the Use of ADR to Manage Disputes Involving Lloyd’s."  The event will be moderated by my good friend Perry Granof and includes a number of distinguished speakers, among them another good friend, Nilam Sharma of the Ince & Co. law firm. The event, which will take place on the day prior to the beginning of the PLUS D&O Symposium, runs from 12:30 to 5:00 pm. Further information about the event can be found here. You can register for the event here.

 

Securities class action lawsuit filings were down “sharply” in 2012 compared to the prior year and to historical average, according to Cornerstone Research’s annual report. The study, published in conjunction with the Stanford Law School Securities Class Action Clearinghouse and entitled “Securities Class Action Filings: 2012 Year in Review,” can be found here.  A short, single-page graphic summary of the report’s conclusions can be found here. The two organization’s January 23, 2013 press release discussing the report can be found here. My own analysis of the 2012 securities suit filings can be found here.

 

According to the report, there were 152 securities class action lawsuits filed in 2012, which is below both the number of filings in 2011 (when there were 188) and the 1997-2011 annual average number of filings (193). The 152 filings in 2012 represents a 19 percent decrease from 2011 and a 21 decrease from the 1997-2011 annual average.

 

A significant factor in the reduced number of filings in 2012 was the decline in filing activity during the year’s second half, particularly during the fourth quarter. There were only 64 filings in the second half, compared with 88 in the first half. The filing level in the second half of 2012 was “lower than all semiannual periods other than the historic low observed in the second half of 2006.” The 25 filings in the year’s fourth quarter was “the lowest number of filings in any quarter in the last 16 years.” The report notes that these observations are consistent with “a declining trend since the first half of 2010.”

 

The report states that the decrease in 2012 filings was “largely due” to declines in federal mergers and acquisitions objection litigation and in the number of lawsuits involving Chinese companies (particularly Chinese companies that obtained a U.S. listing through a reverse merger transaction). According to the report, on a year-over-year basis, M&A filings decreased 70 percent (as plaintiffs appeared to prefer state court forums for this type of litigation) and filings related to Chinese reverse merger companies decreased by 68 percent. The report also noted that for the first time since 2007 there were no new securities class action lawsuit filings related to the credit crisis.

 

The number of filings against foreign issuers dropped from 61 in 2011 to 32 in 2012 (a 48 percent drop). Though filings against foreign issuers represented only 24 percent of all 2012 filings, compared to 32 percent in 2011, the 2012 percentage “reflects a level that is greater than al prior years other than 2011.” The continued elevated level of filings against foreign issuers in 2012 is largely due to filngs related to Chinese firms. There were a total of 18 filings against Chinese companies in 2012 (including Hong Kong companies) compared to 40 in 2011.

 

Larger companies were less likely to be the target of a securities suit in 2012 compared to recent years. 3.4% of S&P 500 companies were named in securities suits in 2012, compared to an annual average of 6.1% for S&P 500 companies during the period 2000 to 2011. The 2012 level is comparable to the 13-year low observed in 2011 (3.2%).

 

The most targeted industrial sector in 2012 was Consumer Non-Cyclical, representing 32% of all filings. Health care and life sciences companies comprised 67 percent of all Consumer Non-Cyclical filings (33 filings), compared to 62 percent (28 filings) in 2011. Filings against companies in the financial sector continued a declining trend with 15 filings in 2012, compared with 43 in 2010 and 25 in 2011.

 

As I noted in my own analysis of the 2012 securities suit filings, it is too early to tell whether the late-year decline in filings represents a trend or just a temporary dip in the general ebb and flow of securities suit filings. The report noted that the previous low semiannual filing level was in the second half of 2006, which was quickly followed by the onslaught of the subprime meltdown and credit crisis-related litigation wave.

 

One obvious factor in the overall 2012 decline was the absence of any episodic even driving filing levels. Indeed, Dr. John Gould, one of the report’s authors, is quoted in the press release as having said that “the absence of a filings trend…influenced the total number of new cases,” by comparison to recent years when filing levels have been dominated by “observable filings types,” such as, more recently, the M&A related litigation and litigation involving U.S.-listed Chinese companies.

 

While it is hard to know whether the trend will continue, the press release identifies at least one development that could result in a possible increase in future securities lawsuit filings. The press release quotes Stanford Law School Professor Joseph Grundfest, who notes that the upsurge in SEC whistleblower reports raises the questions whether the SEC will translate these reports into enforcement actions, and, if so, whether “private-party plaintiffs will be successful in prosecuting ‘piggyback’ claims that copy the Commission’s complaints.”

 

One factor that could also explain the declining number of 2012 filings is the plaintiffs’ securities bar’s continuing shift to diversity their inventory. Going back to the options backdating cases in 2006, the plaintiffs lawyers have been pursuing types of litigation other than securities class action litigation (in part due to unfavorable U.S. Supreme Court decisions). While the Cornerstone Report notes the absence of any new credit crisis-related securities class action lawsuit filings in 2012, there were a host of credit crisis-related lawsuits filing as individual actions in 2012. It is hard to tell, but it seems likely that this diversifying trend will continue.

 

Finally, it is worth noting that, as one reader observed in a comment to my blog post analyzing the 2012 securities suit filings, Superstorm Sandy could have had an impact on fourth quarter filings, since the storm basically closed New York’s downtown business district for several weeks during the fourth quarter.

 

Jan Wolfe’s January 22, 2013 Am Law Litigation Daily article about the Cornerstone Research report can be found here.

 

 

Picking up where it left off at the end of the year, the FDIC has filed its first failed bank D&O lawsuit of 2013. The lawsuit, which the agency filed on January 17, 2013 in the District of New Mexico, names as defendants ten former directors and officers of the failed Charter Bank, New Mexico. The complaint, which the FDIC filed in its capacity as receiver for the failed bank, alleges claims for negligence, gross negligence and breach of fiduciary duty, can be found here.

 

Charter Bank failed on January 22, 2010, so the FDIC filed the complaint just before the third anniversary of the bank’s closure (and just before a long holiday weekend as well.) The complaint alleges that prior to its failure the bank committed 72% of the bank’s core capital to a “highly speculative and risky” subprime lending operation in Denver, Colorado in late 2006, when the defendants “knew or should have known” there was no secondary market for subprime mortgage loans. The operation made loans that “no reasonable institution” would have made at the time, and relaxed underwriting standards to do so. Unable to sell the mortgages into the secondary market, the bank had to take the loans onto its own balance sheet, which cause the bank to suffer financial losses.

 

The lawsuit, the first that the FDIC has filed in 2013, is also the first that the agency has filed in New Mexico as part of the current failed bank litigation wave. This latest lawsuit is the 45th that the agency has filed as during the current banking crisis, 26 of which were filed in 2012. (These figures, both overall and for 2012, include the lawsuit filed just before the holidays in the Central District of California in connection with the failed Alliance Bank of Culver City, California. The FDIC’s complaint, filed on December 21, 2012, in its capacity as receiver for the failed bank against X former directors and officer of the bank can be found here.)

 

There undoubtedly are more lawsuits to come. On January 22, 2013, the FDIC updated the page on its website on which the agency indicates the current number of lawsuits that the agency has authorized. According to the latest update, as of January 15, 2013, the FDIC has authorized suits in connection with 95 failed institutions against 788 individuals for D&O liability. This includes 45 filed D&O lawsuits naming 355 former directors and officers. The 45 lawsuits filed involve 44 failed institutions, so the implication is that there are lawsuits involving some 51 failed institutions yet to come – based on the number of lawsuits that have been authorized so far. Since the FDIC has increased the number of authorized lawsuits each month for several months in a row now, the likelihood seems to be that there are at least 51 more lawsuits – and possibly many more – to come in the months ahead.