Berkshire Hathaway Chairman Warren Buffett is often referred to as the “Sage of Omaha” and is respected for his business insight. But in many ways his reputation for sagacity is simply a by-product of a very basic, company-related project. What Buffett set out to do was to cultivate a certain type of shareholder for Berkshire – one that that understands and appreciates his long-run approach to investing. In the 1988 shareholders’ letter, Buffett makes this explicit when he says that “all of our policies and our communications are designed to attract the business-oriented long-term owner and to filter out possible buyers whose focus is short-term and market-oriented.”

 

Buffett’s annual letters to Berkshire shareholders serve first and foremost to explain what he is doing, so that the shareholders understand what they are in for. The letters assume that the shareholders are long-term owners, and so much of the letters’ content presumes familiarity with prior letters. In other words, each additional letter is a part of a continuing conversation (or, perhaps, monologue) and each letter can be best appreciated within that larger context.

 

All of Buffett’s shareholder letters for the years 1977 through 2012 are available on the Berkshire website, and anyone interested in developing a better understanding of Buffett’s approach and investing philosophy — and in seeing how Buffett has addressed his key themes over time — can freely access the letters.

 

However, most readers would find the prospect of reading 36 years’ worth of shareholder letters to be a forbidding prospect. For starters, the letters are arranged chronologically, not thematically, so even a very determined reader might find it challenging to work through the archive and emerge with a systematic understanding of how Buffett has developed his key themes over time. It can also be daunting to try to find among the various letters the place where Buffett has, for example, mentioned mutual fund directors, or described derivatives as “weapons of financial mass destruction.”

 

Fortunately for anyone interested in better understand Buffett’s philosophy or in trying to find what he has said on a particular topic, there is a brilliant alternative to simply working through all of the letters. George Washington University Law Professor Lawrence Cunningham has collected and edited Buffett’s letters and other writings into a highly readable and topically indexed volume entitled “The Essays of Warren Buffett: Lessons in Corporate America,” the third edition of which was released earlier this year. Cunningham has done a masterful job distilling Buffett’s writings and organizing them by topic

 

The latest edition is updated to include excerpts from Buffett’s most recent letters. The book not only facilitates quick location of Buffett’s statements on specific topics, but it also affords an opportunity to see how Buffett has developed his themes over time, which unquestionably provides great insight into Buffett’s investment views.

 

Because Buffett wants to the Berkshire shareholders to understand the company’s business, one of the principal focuses of Buffett’s annual letters is the topic of how to understand and use financial information. What makes Buffett’s letters so interesting and rewarding to read is how clearly he can explain even relatively complex financial concepts. Buffett also frequently writes with humor – for example, in explaining the need to allow a particular project to unfold , he notes that “No matter how great the talent or effort, some things just take time; you can’t produce a baby in one month by getting nine women pregnant.”

 

Sometimes in the course of his annual letters, it seems as if Buffett has a penchant for going off on tangents. However, reading Buffett’s essays arranged thematically reveals the way that some of these seemingly tangential asides fit into larger themes. For example, Buffett’s fulminations about stock options fit within the larger context of executive compensation, which in turn is a topic that relates the more basic concern of what makes a firm a well-managed company. Understanding what Buffett thinks makes a company well-managed in turn helps explain Berkshire’s investments – which is the ultimate purpose of his letters.

 

The letters obviously have far greater value than simply helping Berkshire investors to understand the company. Indeed, Buffett’s dissertations on investing are full of remarkably good and practical advice. (Indeed, even though I am a long-standing Buffett devotee, and, I should add, a Berkshire shareholder as well, I found it worthwhile to re-read the excerpts about investing collected in this book.) For example, Buffett notes that there are three primary causes for investors to experience poor investment results: high costs, portfolio decisions made based on tips and fads rather than basic principles; and a start-and stop approach to the market marked by untimely exits and entries. Buffett concludes by noting that “Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.”

 

While Cunningham’s book provides a thorough overview of Buffett’s writings, there are omissions. As I also noted in my review of the prior edition of this book, I think the volume would be even more complete were it to include selections from Buffett’s writing over the years about insurance. The insurance business has been the segment on which Buffett has concentrated the most, and his reasons for his focus on this industry convey a lot about his approach to investing and his understanding of how business cycles work. In particular, Buffett’s many comments about “float” and the insurance “cycle” convey a lot about what his overall approach to investing and business.

 

Another gripe I have is, as I also noted in connection with the prior edition, though this volume omits Buffett’s writings generally about insurance, somehow the book manages to include every single instance where Buffett has said that his company does not carry D&O insurance. I have always thought that these statements are dangerous for mere ordinary mortals. It is fine for Buffett and his billionaire board members to disdain D&O insurance (particularly given that the corporate indemnity that Berkshire provides is more financially sound than any insurance commitment would be), but persons of more ordinary means can ill afford to run the risk of uninsured board service.

 

But these quibbles are minor. The book itself is quite an accomplishment; it is that rare business book that is both worthwhile and enjoyable to read.

 

Special thanks to Professor Cunningham for calling my attention to the book.

 

A year ago, President Obama signed the Jumpstart Our Business Startups (JOBS) Act, a legislative product of rare bipartisan collaboration that was intended to improve employment and make it easier for smaller firms to raise private equity. (For an overview of the Act’s provisions, refer here.) Twelve months later, many of the rules needed to implement the JOBS Act remain uncompleted and the legislation’s promise remains largely unfulfilled.

 

As detailed in a March 29, 2013 Washington Post article entitled “JOBS Act Falls Short of Grand Promises” (here), “nearly a year after its enactment, major portions of the act are in limbo, and other parts have failed to measure up to the grandiose job-creation promises.”

 

The JOBS Act was specifically intended to aid “Emerging Growth Companies” (ECGs), which the Act defined as companies with annual revenues under $1 billion. Among other things, the Act was intended to make it easier for these companies to go public. It would be hard to make the case that the JOBS Act has delivered a boost to initial public offerings. As detailed in a March 27, 2013 Wall Street Journal article entitled “JOBS Act Sputters on IPOs” (here), in the twelve months since the Act’s passage IPOs of ECGs “are on track to fall 21% to 63 from 80 in the prior year.” The Journal article does note that a number of market and economic factors “helped chill the climate for IPOs over the past year” and “the IPO market is showing signs of improving health.”

 

Another concern about the IPOs that are taking advantage of the Act’s provisions is that some may not be exactly represent the kind of companies Congress had in mind. For example, one of the companies that completed its offering while taking advantage of the JOBS Act’s so-called “IPO on-ramp” provisions, was Manchester United, a 135 year old sports club based in Manchester, England, that, though obviously unlikely to create any U.S. jobs, nevertheless qualified as an “Emerging Growth Company.” As Jason Zweig noted in his August 3, 2012 Wall Street Journal article entitled “When Laws Twist Markets” (here), among the other companies taking advantage of the JOBS Act provisions are “blank check companies,” noting that “In an irony only Congress could foster, many of the blind pools rushing to list under the JOBS Act have no employees and say in their prospectuses that they might never hire anybody at all.”

 

Even for ECGs that completed IPOs after the JOBS Act was enacted, the impact of the IPO on-ramp provisions has been mixed. A January 2013 memo from the Skadden firm entitled “The JOBS Act: What We Learned in the First Nine Months” (here) analyzed the 53 ECGs that completed IPOs between April 5, 2012 ad December 15, 2012. The memo relates that certain of the Act’s provisions, such as the provision allowing draft registration statements to be submitted confidentially and the provision allowing ECGs to provide scaled-down executive compensation disclosure, have met with “strong acceptance.” Other provisions such as the option for ECGs to provide an abbreviated period of financial statement disclosure, have met with only “weak acceptance.” Yet other provisions, such as those allowing “test the waters” communications in advance of the offering, have met with “mixed acceptance.” As pointed out in the March 2013 issue of CUG.COMments (here), while “certain aspects” of the JOBS Act “have been seized upon by ECGs,” the ECGs’ “utilization of the available benefits” has been “inconsistent.”

 

While the IPO on-ramp provisions have had a mixed effect, the “most significant bits” of the Act, according to a March 30, 2013 Economist article entitled “America’s JOBS Act: Still Not Working” (here) are “bottled up at the SEC.” Most importantly, the SEC still has not issued rules to implement the Act’s provisions relating to Crowdfunding. The SEC also has not issued rules to allow companies to raise as much as $50 million in the public markets without undertaking reporting obligations, nor has it issued rules lifting restrictions on advertising private securities offerings.

 

Among the reasons for the delays on the crowdfunding rules has been an internal debate within the SEC about the best approach to take. According to the Economist, Mary Shapiro, the outgoing SEC chairman was concerned that the JOBS Act would “eliminate important protections for investors” and she was particularly critical of the crowdfunding provisions. It remains to be seen what the approach will be of the incoming chair, Mary Jo White; at a minimum, it may be many months before the final rules are put into effect.

 

My earlier post on concerns about problems with crowdfunding can be found here. A more basic question concerns who will actually be able to take advantage of crowdfunding, given the Act’s statutory constraints, an issue I discussed here.

 

According to the Post article linked above, the Act’s mixed record has occasioned some concerns and even regrets on Capitol Hill. There is now a perception in Washington that the Act, described in the article as “a grab bag of ideas cobbled together for greater impact,” was “hastily introduced” and enacted due to election year pressures with “record speed.” The result, according to unnamed critics, is “laws fraught with risks to investors.” At a minimum, the Act “underscores how difficult it can be for Washington to spur job creation even when there’s strong bipartisan consensus on a plan.”

 

The picture is not entirely negative. According to the Journal, biotechnology companies, which have been “a bright spot for IPOs during the past year,” appear to be “using the new rules more than other companies.” Many biotech firms are unprofitable when they go public and they find that “the ability to save time and money by taking advantage of the relaxed standards was beneficial.”

 

Among many others concerned with the Act and its possible implications, D&O insurers continue to weigh the Act’s effects. For now, most insurers continue to await developments, particularly the introduction of the crowdfunding rules. The insurers remain concerned about possible crowdfunding abuses and about the liability measures in the crowdfunding provisions. Some insurers have already started adding crowdfunding exclusions to their private company D&O insurance policies. At a minimum, the delays attending the Act’s implementation have introduced an element of uncertainty, which likely has increased the insurers’ general wariness. The general perception seems to be that the Act could still have a significant impact on the scope of policyholders’ potential liability, but exactly what that might mean remains to be seen. Even after a year, the Act’s impact remains unclear, for insurers as for other observers and commentators.

 

About the Ruling in the Consolidated Libor-Scandal Antitrust Litigation: Readers interested in Judge Buchwald’s opinion in the consolidated Libor-scandal antitrust litigation (about which refe here), and who are wondering what remains after the recent rulings and what the implications may be for the other Libor-related lawsuits will want to review Alison Frankel’s April 1, 2013 post on her On the Case bliog (here). Frankel has a detailed analysis of what portions of the consolidated cases remain after the ruling, as well as what it all might mean for the other cases before Judge Buchwald as well as the cases that have not yet been consolidated in her court.

 

Yet Another Modest Securities Suit Settlement Involving U.S. Listed Chinese Company: During 2010 and 2011, plaintiffs’ lawyers rushed to file lawsuits against U.S.-listed Chinese companies that caught up in various accounting scandals. However, as I have previously noted, even the cases that have survived the preliminary motions have produced only very modest settlements.

 

In the latest example of one of these cases settling modestly, on April 1, 2013, the plaintiffs’ lawyers in the securities suit involving Deer Consumer Products announced that the case had been settled for $2.125 million. As noted in the parties’ stipulation of settlement (here), the settling defendants include the company and two individuals, although the released defendants appear to include all of the Deer company-related defendants. The settlement does not appear to involve the payment of any insurance funds; the stipulation recites that the settlement amount “shall be paid exclusive by the Settling Defendants.”

 

As I recently noted (here, second item), the exceptions to this pattern of the securities suits against U.S.-listed companies settling modestly are the cases in which there are significant settlement contributions from the companies’ outside professionals. For example, as discussed in the recent post, the recent $20 million settlement in the case involving Sinotech Energy Limited included an $18 million settlement contribution from the company’s offering underwriters. And of course there is the eye-popping $117 million settlement payment by Ernst & Young in the Ontario securities class action lawsuits involving Sino Forest.

 

The plaintiffs’ lawyers in the Deer Consumer Products, perhaps recognizing the impact of the claims against the Chinese companies’ outside advisors, on March 9, 2013 filed a separate action in the Central District of California against the company’s outside auditors, Goldman Kurland Mohindin,  in what appears to be something of a second phase of litigation.

 

Rule 10b5-1 Trading Plans: “Avoiding the Heat”: The SEC promulgated Rule 10b5-1 in order to allow company insiders to safely trade in their company securities without incurring liability under the securities laws. As it has turned out, trading under Rule 10b5-1 plans has been a source of significant scrutiny, as I recently noted here. Nevertheless Rule 10b5-1 trading plans can still provide significant liability protection, if they are set up, implemented and maintained appropriately.

 

A March 11, 2013 memo from the Covington & Burling law firm entitled “Rule 10b5-1 Trading Plans: Avoiding the Heat” (here) lays out the practical steps that companies and their executives can take to try to take advantage of the Rule and to avoid the issues that have caused problems with trading plans in the past. The memo’s authors note that “remains a beneficial and frequently utilized provision to permit corporate insiders to sell the securities of their companies while minimizing the risk of engaging in insider trading.” However, they add that “public companies and insiders seeking to rely on Rule 10b5-1 should renew their focus on ensuring that their trading plans comply with the requirements of the rule.”

 

On March 29, 2013, in a ruling that she acknowledged some might find to be “unexpected” in light of the substantial regulatory fines and penalties that some of the defendants have paid, Southern District of New York Naomi Reice Buchwald granted the defendants’ motions to dismiss the antitrust and RICO claims in the consolidated Libor-based antitrust litigation. Judge Buchwald also dismissed the plaintiffs’ state law claims and some of the plaintiffs’ commodities manipulation claims. However, she denied the defendants’ motions to dismiss at least a portion of the plaintiffs’ commodities manipulation claims. A copy of Judge Buchwald’s massive 161-page opinion can be found here.

 

As detailed here, the consolidated litigation arises out of allegations that the banks involved with setting the Libor benchmark interest rate conspired to manipulate the benchmark. The plaintiffs – several municipalities, commodities traders and investors, bondholders and the Schwab financial firm, among many others – variously allege that suppression of the Libor benchmark reduced the amount of interest income they earned on various financial instruments. The various cases were consolidated before Judge Buchwald. The defendants moved to dismiss.

 

In her March 29 Opinion, Judge Buchwald granted the defendants’ motions to dismiss as to all of plaintiffs’ claims, except for a portion of the plaintiffs’ commodities manipulations claims. All of the dismissals were with prejudice, except for her dismissal of plaintiffs’ state law claims, over which she declined to exercise supplemental jurisdiction and therefore she dismissed the state law claims without prejudice.

 

First, she dismissed the plaintiffs’ antitrust claims because the plaintiffs failed to allege an antitrust injury and therefore lacked standing to assert antitrust claims. In order to bring an antitrust claim, a plaintiff “must demonstrate not only that it suffered injury and that the injury resulted from defendants’ conduct, but also that the injury resulted from the anticompetitive nature of the defendants’ conduct.” Judge Buchwald found that “the alleged collusion occurred in an arena in which defendants never did and never were intended to compete.” Though the defendants allegedly “agreed to lie about the interest rates they were paying,” this presents allegations “of misrepresentation, and possibly fraud, not of failure to compete.”

 

She added that “the process by which banks submit LIBOR quotes to the BBA is not itself competitive, and plaintiffs have not alleged that defendants’ conduct had an anticompetitive effect in any market in which defendants compete.”

 

Second, Judge Buchwald denied the defendants’ motions to dismiss the commodities manipulation claims that had been raised by the so-called “Exchange-Based Plaintiffs,” who claimed that the defendants had manipulated Eurodollar futures contracts in violation of the Commodities Exchange Act. She found that the plaintiffs had adequately pled the manipulation claims – although she noted that she has “doubts about whether plaintiffs will ultimately be able to demonstrate that they sold or settled their Eurodollar contracts at a loss as a result of defendants’ conduct.” However, she found that, because press coverage in early 2008 had loudly raise concerns about problems with Libor, the plaintiffs were on inquiry notice about possible claims in May 2008. She concluded that the plaintiffs’ claims based on contracts entered before May 29, 2008 are time-barred. She raised a concern that claims based on contracts entered between May 29, 2008 and April 15, 2009 (two years before the plaintiffs filed their complaint) may also be time-barred but she declined to dismiss those claims at this point.

 

Third, in reliance on the PSLRA amendments to RICO, Judge Buchwald granted the defendants’ motion to dismiss the plaintiffs’ RICO claim. The PSLRA bars plaintiffs from bringing a RICO claim based on predicate acts that could have been subject to a securities fraud action. Judge Buchwald concluded that the alleged wrongful acts underlying the RICO claims could have been the subject of a claim for securities fraud. She also found that the RICO claims were barred in any event as they impermissibly seek extraterritorial application of U.S. law; RICO applies only domestically, “meaning that the alleged ‘enterprise’ must be a domestic enterprise,” whereas here the “enterprise alleged by plaintiffs is based in England.”

 

Finally, Judge Buchwald dismissed all of the plaintiffs’ state law claims. She dismissed the plaintiffs’ state law antitrust claims with prejudice on the same grounds on which she had granted the motions to dismiss the plaintiffs’ claims based on federal antitrust law. She declined to exercise supplemental jurisdiction over the plaintiffs’ remaining state law claims, which she dismissed without prejudice.

 

In concluding her massive opinion, Judge Buchwald noted that “it might be unexpected that we are dismissing a substantial portion of plaintiffs’ claims,” given the massive regulatory settlements that several of the defendants have entered. These results, she said, are “not as incongruous as they appear,” noting that under the statutes invoked here, “there are many requirements that private plaintiffs must satisfy, but which government agencies need not.” The focuses of public and private enforcement differ, and “the broad public interest behind the statutes invoked here, such as integrity of the markets and competition, are being addressed by ongoing government enforcement.”

 

She added that the “private actions which seek damages and attorney’s fees must be examined closely to ensure that the plaintiffs who are suing are the ones properly entitled to recover and that the suit is, I fact serving the public purposes of the laws being invoked.” Although she is “fully cognizant” that several defendants have entered massive settlements, “we find that only some of the claims that plaintiffs have asserted may properly proceed.”

 

Discussion

As a result of Judge Buchwald’s rulings, only a small portion of some of the claimants’ claims will go forward. Only the claimants who asserted commodities manipulation in connection with exchange-based transaction have continuing claims, and then only a portion of those claims.  All of the many other plaintiffs’ claims have been entirely dismissed. These plaintiffs can of course try to pursue their state law claims – which were dismissed without prejudice — in state court; they can also appeal Judge Buchwald’s ruling. The might do both, appeal the rulings on their federal claims while separately pursuing their state law claims.

 

As Judge Buchwald noted at the outset of her opinion, Libor-related claims have continued to be filed even after the litigation was consolidated before her. She stayed these many more recently filed cases while she addressed the pending motions to dismiss in the earliest filed cases. The various legal rulings in her March 29 order presumptively will apply to all of these other cases that are also now before her.

 

Her rulings presumptively will affect other cases that had been filed elsewhere and not yet consolidated in her court. For example, her rulings undoubtedly will affect the Libor-related action that Freddie Mac filed on March 13, 2013 in the Eastern District of Virginia (about which refer here, second item). Though her decision, as a district court ruling, has no precedential impact, it does have persuasive effect, and given the incredibly painstaking nature of her rulings, they undoubtedly will have an impact on these other cases even if they are not consolidated in Judge Buchwald’s court. Of course, if these other cases are consolidated before Judge Buchwald, the litigants can look to her March 29 opinion to determine how their cases will fare in her court.

 

There are, however, at least some cases that will not be affected (at least not directly) by Judge Buchwald’s opinion. Not all of the Libor-related cases were asserted antitrust or other federal statutory claims. There have been Libor-related claims filed solely based upon state law theories of recovery — for example, based on allegations of fraud (refer for example here). These claims may be subject to jurisdictional limitations and the state law claims may also be subject to their own sets of defenses. But these claims at least are not directly affected by Judge Buchwald’s rulings. The claims may also even be boosted by portions of her ruling, as for example, where she observed that the allegations that the defendants agreed to lie about the interest rates they are paying may support a allegations of “misrepresentation, and possibly of fraud, but not of a failure to compete.”

 

But though the state law claims may remain, Judge Buchwald’s ruling on the antitrust claims have to provide substantial relief to the banks involved. One of the big concerns facing the banks has been the possibility that their entry into regulatory settlements could handicap them in the private antitrust litigation, which includes the possibility of treble damages. If the looming possibility of adverse effects in separate civil litigation is removed, it may be easier for the banks that have not yet resolved the regulatory actions to conclude the regulators’ actions. Of course, Judge Buchwald’s rulings must also survive any appeal if they are to be of reliable comfort to the banks involved.

 

UPDATE: In an excellent April 1, 2012 post on her On the Case blog (here), Alison Frankel has a very detailed analysis of what remains of these cases, what the implications are for the other cases before Judge Buchwald, and what the implications are for cases not yet  before her.

 

As a result of changes in the regulatory environment, the securities litigation landscape is changing around the world. In an earlier post (here), Robert F. Carangelo, Paul Ferrillo and Catherine Y. Nowak of the Weil Gotshal & Manges law firm surveyed the regulatory changes and the implications for securities litigation throughout the world. Since the time of that earlier post, the changes have continued. In a guest post below, Weil Gotshal attorneys Carangelo, Ferrillo and  Hannah Field-Lowes take an updated look at the rapidly changing global regulatory environment and the securities litigation implications.

 

The authors would like to thank Amanda L. Burns for her substantial contributions to this article. Mr. Carangelo and Mr. Ferrillo are also co-authors of The 10b-5 Guide, an authoritative primer on securities fraud case law for both business professionals and legal practitioners.

 

Many thanks to Robert, Paul and Hannah for their willingness to publish their article here. I welcome guest posts from responsible commentators on topics relevant to this blog. Any readers who are interested in publishing a guest post on this site are encouraged to contact me directly. Robert, Paul and Hannah’s guest post follows:

 

            About a year ago, we published “A New Playbook for Global Securities Litigation and Regulation,” in which we detailed dramatic changes in the global securities regulatory and litigation arena driven by various factors, including not only the financial crisis of 2007-2008, but also changes in tolerance in the United States to litigation brought by foreign investors against public companies listed on non-U.S. exchanges.

 

            One year later, the regulatory environment continues to revamp with new rules being issued constantly in the United States to conform to the legislative mandates set forth in the Dodd Frank Act. The United Kingdom and European Union also seek to reinforce previous global initiatives to reform and strengthen the Pan-European financial markets.

 

            What is more ever-present, however, is the marked increase in global enforcement activities by regulators in the United Kingdom, Canada, and the European Union, which are attempts to give teeth to the global financial reforms each jurisdiction felt necessary to potentially prevent a “repeat” of the financial crisis. This article seeks to address the increase in global securities enforcement activity and concludes that continued cooperation and coordination in enforcement activities will be required to seamlessly address the desire to strengthen global regulatory initiatives aimed at harmonizing and centralizing international securities regulation to create safer, more fundamentally sound financial markets for investors.

 

Global Enforcement Efforts outside the United States

            The United Kingdom

            Perhaps the most dramatic change in any country’s regulatory and enforcement scheme over the past twelve months is the United Kingdom’s decision to replace the Financial Services Authority (“FSA”) as the single financial services regulator with two successor bodies: the Prudential Regulation Authority (“PRA”) and the Financial Conduct Authority (“FCA”). This “split” becomes effective on April 1, 2013 and comes from the Financial Services Bill of 2012, which received royal assent on December 19, 2012.

 

            While the PRA will focus on the day-to-day supervision of large banking institutions, insurers and certain investment firms with significant risk on their balances sheets, the FCA will focus exclusively on consumer protection, market integrity and conduct issues: regulating how and what services are provided to consumers, and ensuring such services are delivered to consumers so they can rely on the integrity of the markets. The remit of the two bodies will, however, overlap and many large financial institutions will be dual regulated. In an October 2012 speech, Managing Director of the Conduct Business Unit of the FSA (soon to be FCA) Martin Wheatley noted, “Good wholesale conduct relies on effective policing of market abuse. People carrying out transactions in U.K. markets need to have confidence that they are operating on a level-playing field with everyone else. Our approach to market conduct will reinforce the strong track record the FSA has built, where 20 criminal convictions for insider trading have been secured since 2009.”

 

            The FSA had an extraordinarily active year in 2012, particularly with regard to alleged LIBOR manipulation. That activity continues in early 2013 with the February 6, 2013 announcement of a total of $612 million of fines against RBS, including a £87.5 million fine from the FSA related to the bank’s role in the LIBOR scandal.  According to one recent report, “the 10 largest FSA fines of all time now include five 2012 cases.” After RBS, the second and third largest FSA fines, which were assessed against UBS AG and Barclays Bank plc (at £160 million, and £59.5 million, respectively) in 2012, also related to the LIBOR scandal.[i] Going forward, it remains to be seen whether the new FCA will continue to pursue the more “high profile” cases against large banking institutions, or will aim its focus at the rest of the market firms and individuals, where fines and penalties assessed have dropped.[ii]

 

            Initial indications of the FSA’s approach in 2013 are mixed. The FSA’s commitment to a strong individual deterrence program is reflected by the fact that six individuals are currently facing prosecution for alleged insider dealing and three more were recently arrested on suspicion of such offences.   On the other hand, there remains a robust focus on the activities of major financial institutions, as reflected by the FSA’s confirmation that a wide-scale review of sales of interest rate hedging products to small businesses will be undertaken.

 

            European Union Enforcement Activities and Initiatives

            Enforcement activity in the European Union has taken a different track than in the United Kingdom, primarily because there is no “one” securities enforcement regulatory authority with the power to prosecute financial crimes on a cross-European border basis. As Professor Eric C. Chaffee observed, the International Organization of Securities Commission, formed in 1983, “is unable to achieve the harmonization and centralization necessary to regulate the emerging global capital markets. The organization mainly serves a monitoring function, rather than a centralized force for regulation and enforcement.” That enforcement authority is generally limited to the particular countries that have signed on as members of IOSCO through Multi-lateral Memorandums of Understanding. However, many of these members do not have the wherewithal or ability to create an enforcement mechanism within their geographical boundaries. Nevertheless, IOSCO members (like the United States) regulate 95 percent of the world’s securities markets.

 

            Following the financial crisis, the European Securities and Markets Authority (“ESMA”) was established in 2010 to continue the work carried out by a previous European regulatory body. The ESMA was given some new powers and authorities to strengthen coordination among European supervisors and to enable ESMA to take action to ensure the consistent application of rules and facilitate coordinated decision-making. Those responsibilities are organized by ESMA through European Enforcers Coordination Sessions (“EECS”), a forum containing thirty-seven European enforcers from twenty-nine countries, which coordinates enforcement activities that are, in sum, delegated to enforcement authorities within the member states. The EECS monitors and reviews financial statements published by issuers on regulated European securities markets in accordance with International Financial Reporting Standards (“IFRS”) and considers whether those financial statements comply with IFRS and other reporting requirements, including any relevant national law of the home country of the issuer.[iii] The IFRS are developed by the International Accounting Standards Board (“IASB”), with interpretative guidance provided by the IFRS Interpretations Committee.

 

            Since 2011, ESMA, by and through the EECS, has been actively publicizing areas the EECS will focus on when reviewing the financial statements of European-listed entities. In 2011, not unexpectedly, the EECS was focused on publicly traded companies in the financial institution sector and how those companies portrayed their exposure to sovereign debt. The EECS issued two public statements in July and November 2011 that stressed both the need for transparency in reporting exposures consistent with the relevant IFRS and on a country-by-country basis. In 2011, the EECS commenced eighteen enforcement actions that required the issuance of revised financial statements, around 150 actions that required public corrective notes or other public announcements, and approximately 420 actions that required corrections in future financial statements.{iv] 

 

            In November 2012, ESMA issued further guidance as to areas that will be concentrated on by the EECS. In addition to continued focus on disclosures related to sovereign debt exposures and the impairment of financial instruments tied to or related to the sovereign debt crisis, ESMA will also focus on the impairment of non-financial assets, the measurement of discount rates used to measure post-employment benefit obligations, and on disclosures related to contingent assets and contingent liabilities.

 

            Significantly, however, there is “a general impetus in the EU . . . to move to a much more robust and ambitious market abuse regulatory framework.” The general desire to institute an effective regulatory mechanism is embodied by the proposed Market Abuse Regulation (“MAR”) and updated Market Abuse Directive (“MAD II”), and both regulations are likely to become effective by the end of the year.

 

            Importantly, the proposals seek to address a concern that there are, at present, safe havens within the European Union for those who trade on inside information or engage in market abuse. Most notably, Austria, Bulgaria, Slovakia, the Czech Republic, Estonia, Finland and Slovenia do not criminalize insider trading and/or market abuse. While the impact of the reform is likely to be minimal in jurisdictions such as the United Kingdom, which already have robust regulatory frameworks, jurisdictions with less stringent legislation for deterring financial crime are likely to see significant improvements in the tools available to them to tackle insider trading and market abuse.

 

            The enhanced regulatory framework has also been responsive to recent benchmark manipulation with respect to LIBOR and EURIBOR. The proposed reforms have, accordingly, been updated to impose civil sanctions for actual or attempted manipulation of benchmarks amounting to market manipulation. Benchmark manipulation will also constitute a criminal offense under the proposals’ expanded scope, which will impose sanctions on both those who carry out the manipulation or aid and abet those who do, as well as individuals engaging in its incitement.

 

            Canadian Enforcement Activities

            In our last “Playbook” article, we mentioned that Canada was considering consolidating its thirteen provincial securities regulators into one single regulatory enforcement agency at the federal level. Though that initiative was later rejected by the Supreme Court of Canada, securities enforcement activity remains strong, though it is down in relative terms from past years. According to the 2011 report of the Canadian Securities Administrators (which comprises the ten Canadian provinces and the three territories), 126 proceedings were commenced 2011, down from 178 in 2010. $52 million in fines were assessed during 2011—$41 million of which were in connection with illegal distributions.[v]

 

            The drop in securities enforcement activity appears to coincide with the decrease in securities class actions filed in Canada. According to NERA, in 2012 only nine new securities class actions were filed in Canada, down from fifteen in 2011. NERA notes that the decrease in securities class actions corresponds with a drop in both Chinese reverse merger class actions and credit crisis class actions, which were large drivers of class actions filings since 2008.[vi]

 

Enforcement Efforts – The United States Looking Outwards

            So where does the United States factor into this global enforcement picture? From an “outward” reach perspective, the SEC undoubtedly continues to monitor SEC- regulated firms with headquarters overseas. Foreign firms registered with the SEC must generally comply with U.S. securities laws and rules, including requirements that the registrant maintain certain books and records, and submit to examinations conducted by SEC staff. The SEC also has supervisory memorandums of understanding with various overseas counterparts (like the U.K. FSA and the Ontario Securities Commission) that allow the SEC and its foreign counterparts equal access to information that will permit supervisory oversight over large global financial institutions, broker-dealers and investment advisers.{vii]

 

            Further, Section 929P(b) of the Dodd-Frank Act extends the jurisdictional reach of the anti-fraud provisions of U.S. securities laws to securities transactions occurring outside the United States that involve only foreign investors, as well as conduct occurring outside the United States that has a foreseeable effect within the United States. It is important to note that this section of the Dodd Frank Act is limited to actions brought by the SEC (and not private civil actions).

 

            The United States also has a “seat at the table” on the boards of many of the organizations mentioned above, including IOSCO, the Financial Stability Board and the IFRS Foundation Monitoring Board, the overseer of the IASB. The SEC also participates in the Council of Securities Regulators of the Americas (an organization composed of securities regulators in the Western Hemisphere), and the Organization for Economic Cooperation and Development. As noted above, however, the United States does not current subscribe to the use of IFRS. Instead, it continues to follow generally accepted accounting principles established by FASB. Though this topic has been explored for years, the United States does not seem to be close to adopting the IFRS.[viii]

 

Conclusion – So Where Does This All Lead?

            Precipitated by the global credit crisis, and in large part by the international reach of Dodd-Frank, never before have the global financial markets been subject to such increased regulation as they face today. In large part, the benefits of such regulation have been mixed. Here in the United States, regulation of large financial institutions has dramatically increased, and will continue to do so as more and more of the mandates set forth by Dodd-Frank (like the Volcker Rule) become law (or the subject of continued rule-making by the SEC).

 

            In the United Kingdom, given the strong activity of the FSA in 2012, we think the FCA should be off to a running start, though the question remains where the emphasis of its enforcement activities will lie. Will it be weighted towards “headline” events such as continued enforcement of the U.K. Bribery Act and continued LIBOR investigations and prosecutions? Or will the FCA focus its efforts more on day-to-day “blocking and tackling” regulatory issues in its dealing with large global financial institutions, hedge funds and private equity funds? 

 

            As for the European Union, the challenge remains in translating the necessity to oversee and regulate large global firms with the sheer fact that such regulatory authority needs to be ultimately delegated to each individual member state of the European Union, each of which might have their own views as to how to regulate firms within their borders (or not to regulate due to budgetary constraints that might not allow them to proceed). The forthcoming implementation of the MAR and MAD II may, however, go some way to instituting much needed uniformity in addressing financial misconduct across the European Union.

 

            Despite the enormous progress that many jurisdictions have made to give teeth toward necessary regulatory changes, enormous challenges remain. As noted by Professor Chafee in his article, given its enormous head start in the regulatory process, despite the United States failure to adopt IFLRS, it is probably the SEC that is in the best position to push towards harmonization and centralization of international securities laws in an effort to prevent a potential repeat of the 2008 financial crisis.[ix]

 

[i] NERA Economic Consulting, FSA Calendar Update 2012, 3 (2013), available at http://www.nera.com/nera-files/PUB_FSA_Trends_A4_0113.pdf. These fines were part of cross-border investigations in cooperation with U.S. authorities, which also levied fines. Id. 

[ii] Id. at 4 (“Setting aside these largest fines, the size of more typical fines, measured by the median, has dropped to the 2010/11 level of £600,000.”); id. at 5 (“This year has witnessed a sharp decline in the number an aggregate amount of fines against individuals.”).  

[iii] See European Securities and Markets Authority, Activity Report on IFRS Enforcement in the European Economic Area in 2011 15 (2012), available at http://www.esma.europa.eu/system/files/2012-412.pdf.

[iv] See id. at 15.

[v] Canadian Sec. Adm’rs, 2011 Enforcement Report 9  (2012), available at http://er-ral.csa-acvm.ca/wp-content/uploads/2012/02/CSA_2011_English.pdf.

[vi] NERA Economic Consulting, Trends in Canadian Securities Class Actions: 2012 Update 1 (2013), available at http://www.nera.com/nera-files/PUB_Recent_Trends_Canada_0213.pdf.

[vii] See, e.g., Memorandum of Understanding, Concerning Consultation, Cooperation and the Exchange of Information Related to Market Oversight and the Supervision of Financial Services Firms, U.S. SEC-U.K. FSA, Mar. 4, 2006, available at http://www.sec.gov/about/offices/oia/oia_multilateral/ukfsa_mou.pdf. The US is also signatory to an IOSCO Multi-lateral Memorandum of Understanding which allows regulators in more than 70 jurisdictions to share information needed to support their investigations. See Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information, International Organization of Securities Commissions (2012), available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD386.pdf. For a list of current IOSCO MOU Signatories, see http://www.iosco.org/library/index.cfm?section=mou_siglist. 

[viii] Eric C. Cahhee, The Internationalization of Securities Reform: The United States Government’s Role in Regulating the Global Capital Markets, 5 J. Bus. & Tech. L. 187, 202 (2010), available at http://heinonline.org/HOL/Page?handle=hein.journals/jobtela5&div=18&g_sent=1&collection=journals.

[ix] Id. at 205-06.

 

As the most dramatic evens from the financial crisis recede into the past, there is an urge to consign the downturn to the pages of history, But the banking crisis in Cyprus earlier this week, along with persistent unemployment in this country and elsewhere, show that, as much as we would all like to turn the page, the credit crisis still is not yet in the past. And just like the economic effects, the litigation that accumulated as a result of the crisis continues to grind through the courts as well.

 

The most recent example of the continuation of the credit crisis litigation involves a case pending in the Southern District of New York against Deutsche Bank and four of its directors and officers. The case was filed on behalf of investors who purchased Deutsche Bank common stock between January 3, 2007 and January 16, 2009. (Based on Morrison, the district court dismissed from the case any shareholders who purchased their shares outside the United States.) 

 

In a March 27, 2013 order (here), Southern District of New York Judge Katherine Forrest largely denied the defendants’ motions to dismiss the plaintiffs’ complaint. There are a number of interesting things about Judge Forrest’s ruling, in particular the significance she attached to the massive (and profitable) short bet a Deutsche Bank trader made against residential mortgage backed securities (RMBS) and collateralized debt obligations (CDOs) at the same time Deutsche Bank was profiting from packaging and selling these very kinds of securities to outside investors.

 

Background

As discussed here, the plaintiffs first filed their lawsuit in 2011, seeking damages under the federal securities laws based both on an alleged scheme to defraud and on alleged misrepresentations or omissions. The plaintiffs alleged that the bank had structured and sold RMBS that it knew to be poor quality; misrepresented its risk management practices; failed to write down impaired securities; and disregarded findings that the residential mortgage loans did not comply with underwriting standards.

 

The defendants moved to dismiss, arguing that the “scheme” theory was after the fact construct rather than a before the fact plan; that the alleged misstatements were merely subjective opinions that are not actionable and that in any event were not made with scienter, and that the specific defendants were not the makers of actionable misstatements.

 

In drafting their complaint, the plaintiffs were able to draw extensively on the April 2011 report about the financial crisis of the U.S. Senate Subcommittee on Investigations as well as complaints that the U.S. Department of Justice and the Federal Housing Finance Agency filed against Deutsche Bank. Among other things to which plaintiffs were able to cite and to which Judge Forrest referred in her opinion were internal emails referring to the RMBS that the bank was marketing as “crap” and referring to the CDOs that the bank was structuring as a “balance sheet dump” (As is now all too familiar with allegations of damaging internal emails, there are many similar statements in this same vein.)

 

In her opinion, Judge Forrest also cites at length allegations based on internal communications relating to a massive bet a Deutsche Bank trader, Greg Lippmann, had made against the very kind of RMBS that the bank was packaging and selling. His short position ultimately grew to be as large as $4 to $5 billion. The position was so large that it drew the attention of the top company management, who reviewed his position and allowed him to continue to pursue his strategy. Judge Forrest’s opinion quotes numerous internal emails in which Lippmann disparaged Deutsche Bank’s own RMBS deals. Lippmann’s short bet ultimately returned profits of $1.5 billion, allegedly “the largest profit Deutsche Bank ever obtained from a single short position.”

 

In denying Deutsche Bank’s motion to dismiss, Judge Forrest found the “defendants had specific knowledge of the poor quality of the mortgages” and that the defendants “demonstrated this knowledge by authorizing Lippmann to take and expand a multi-billion dollar short position. Despite their awareness of these problems, the defendants “nonetheless repeatedly assured investors that their credit and lending practices were conservative and being adhered to.”

 

Judge Forrest specifically rejected the defendants’ argument that the alleged misrepresentations and omissions on which the plaintiffs sought to rely were mere non-actionable statements of opinion. She noted that the plaintiffs allege that “at the very time the market was beginning to experience the early effects of the sub-prime implosion, Deutsche Bank made statements that it had acted conservatively with respect to risk and had adhered to conservative lending standards.” Noting that the plaintiffs also alleged that at the same time defendants made these statements, “the same individuals who had made the statements had been provided information indicating the opposite,” allegations that present facts “supportive of both objective and subjective falsity.”

 

In concluding that the scienter allegations were sufficient as to three of the four individuals defendants (the fourth was dismissed for lack of any allegations tying the individual to any specific statements), Judge Forrest noted that the defendants had made statements about the mortgage-backed securities operations “while at the same time knowing that these assets were far riskier than an investor might reasonably suppose.” She specifically reference allegations that Lippmann had made presentations to the Executive Committee, of which the three defendants were members, supporting his view that a multi-billion dollar bet against RMBSs and CDOs was appropriate. These allegations, she found, “support a strong inference of scienter.”

 

Discussion

A few days ago, when it was announced that Citigroup had settled the subprime-related bondholders’ action for $730 million, there was a sense that the subprime litigation stage might finally be winding up, with only a little bit of moping up left to go. At almost the same time, however, the U.S. Supreme Court denied a writ of certiorari in the Goldman Sachs bondholders’ action, ensuring that the Goldman case would go forward with a broad class definition as a result of the Second Circuit’s opinion in that case (about which refer here, fourth item).

 

And now Judge Forrest has denied the motion to dismiss in this case involving Deutsche Bank. The ongoing cases against Goldman Sachs and now this one against Deutsche Bank are reminders that the subprime-related litigation wave may still have a lot further to run yet.

 

The significance that Judge Forrest attached to Deutsche Bank’s internal emails is nothing new. By now we have now grown accustomed to the damaging use that can be made of incautions or ill-advised internal emails. What is perhaps more interesting is the significance that she attached to Lippmann’s short position and his internal communications about it (that is, his defense to company management of his investment position). It is true that Lippmann’s short position ultimately grew to several billion dollars. At the same time, though, Deutsche Bank’s mortgage group held a $102 long position, and another affiliate held a separate long position of almost $9 billion.

 

The defendants had tried to argue that the much larger long position showed the company’s true beliefs about the market for mortgage-backed securities. Judge Forrest said about the divergent bets that “it simply means that they are gamblers unwilling to place their entire bet on red, versus black.” The plaintiffs’ complaint, she found, “plausibly suggests that they assured investors that their bets were in one direction – and omitted that they had taken bets in both directions.” That is, everything they said was consistent with and supported their long position, without divulging the (admittedly much smaller) short position.  The key seems to be that the plaintiffs alleged both that the defendants were aware of Lippmann’s short position and his reasons for taking it; they were not only aware of the concerns on which the short bet was based but they allowed him to expose billions of dollars on the bet, while providing reassuring words to investors.

 

Seventh Circuit Affirms Boeing Securities Suit Dismissal: The outcome of the dismissal motions in the Deutsche Bank case shows how advantageous it can be for plaintiffs lawyers when they have extensive public resources (like a 646-page Senate report) on which to rely in crafting their allegations. The Seventh Circuit’s March 26, 2013 affirmance of the district court’s dismissal of the securities suit that had been filed against Boeing and based on production delays involving its Dreamliner aircraft shows the challenges plaintiffs’ lawyers can face when they don’t have those kinds of resources to rely upon. The Seventh Circuit’s opinion can be found here.

 

As detailed in the appellate court’s opinion, written by Judge Richard Posner for a three-judge panel, the plaintiffs alleged that the defendants had misled investors by failing to disclose that the company would not make its target date for the “First Flight” of the airliner, despite knowing of production issues that would require the flight to be delayed. The plaintiffs’ initial complaint was dismissed because it lacked sufficient allegations to support the allegation that the defendants knew that the production issues would require the first flight to be delayed.

 

In order to try to address these problems in their amended complaint, the plaintiffs sought to rely on a single confidential witness, an engineer later identified as Bishunjee Singh. The complaint relied on Singh’s statements to support amended allegations that company management knew that the airliner had failed certain tests and that the failure might result in a delay of the first flight.

 

There was only one problem – “No one had bothered to show the complaint to Singh” and “investigations by Boeing soon revealed that the complaint’s allegations concerning him could not be substantiated.” In his deposition, Singh “denied virtually everything that the investigator had reported.” The appellate court noted that the district court thought that the plaintiffs’ lawyers “failure to attempt to verify their allegations in the investigator’s notes amounted to a fraud on the court.”

 

The appellate court not only affirmed the dismissal of the plaintiffs’ complaint but remanded the case to the district court for further proceedings with respect to question of sanctions. As if that were not bad enough, the appellate court made a point of noting that the same plaintiffs’ firm had been criticized for making misleading allegations concerning confidential sources in order to stave off dismissal in other cases. The appellate court noted that “recidivism is relevant in assessing sanctions.’

 

Alison Frankel has a particularly interesting commentary on the Seventh Circuit’s opinion in the Boeing case in a March 26, 2013 post on her On the Case blog (here).

 

Readers will be interested to note that the lead plaintiffs’ firm in both the Deutsche Bank case discussed above and in the Boeing case is the same firm. Any number of conclusions might be drawn from the outcomes in the two cases, starting with the fact that one case was dismissed and may result in the award of sanctions, whereas the other case is going forward. Among the many differences between the cases, however, is that in the one case, the plaintiffs were able to rely on a detailed report for a U.S. Senate Committee in drafting their complaint. In the other case, well, the sources were not so good.

 

Readers mulling this over and reaching conclusions about ultimate considerations of justice may want to pause a moment and consider, from the perspective of Boeing investors, the ultimate history of the Dreamliner aircraft. As detailed in an article entitled “Requiem for a Dreamliner?” in the February 4, 2013 issue of the New Yorker (here), the latest problems with the Dreamliner’s batteries, which have grounded the entire fleet of Dreamliners, “is just the latest in a long series of Dreamliner problems, which delayed the plane’s debut for more than three years and cost Boeing billions of dollars in cost overruns. The Dreamliner was supposed to become famous for its revolutionary design. Instead, it’s become an object lesson in how not to build an aircraft.”

 

Given the airliner’s checkered development history, the plaintiffs’ lawyers may feel that the problem was not that they didn’t have a valid claim, but that they just couldn’t come up with the right sources. And if you were of a certain frame of mind and only focused on the portion of the Seventh Circuit’s opinion about the sanctions issue (which has certainly drawn all of the media attention), you might (or might not) take the plaintiffs’ point.

 

However, Judge Posner also had some very interesting things to say about scienter, that might suggest how difficult it would be for plaintiffs’ to state a securities claims based on developmental stage production delays. Judge Posner’s comments about scienter go on for several pages and are worth reading in full; it would be hard to do them full justice here. Among other things, Judge Posner noted how implausible it is that the company had any motivation to mislead either investors or prospective customers by postponing for a few days (until after the Paris Air Show) the announcement that the first flight would be delayed. Posner noted that:

 

A more plausible inference than that of fraud is that the defendants, unsure whether they could fix the problem by the end of June, were reluctant to tell the world “we have a problem and maybe it will cause us to delay the First Flight and maybe not, but we’re working on the problems and we hope we can fix it in time to prevent significant delay, but we can’t be sure, so stay tuned.”

 

Citing Kant on the difference between “a duty of truthfulness and a duty of candor,” Posner added that “there is no duty of total corporate transparency – no rule that every hitch or glitch, every pratfall, in a company’s operations must be disclosed in “real time,” forming a running commentary, a baring of corporate innards, day and night.” (Call it a hunch, but I suspect that Posner’s words are in for a long run in future dismissal motions).

 

At this point, the Dreamliner has accumulated a lifetime supply of hitches, glitches and pratfalls. However, Posner is saying that without more, even a snootful of glitches doesn’t amount to securities fraud. As for what might constitute “more,” well, it seems like the factual details from a voluminous report of a Senate subcommittee appears to be enough. An unreliable witness definitely is not enough — except perhaps for sanctions

 

Special thanks to a loyal reader for supplying me with a copy of the Boeing decision.

 

Mutual fund directors have been attacked before. For example, in his 2002 letter to shareholders of Berkshire Hathaway, Berkshire chairman Warren Buffett took a detour in an essay about corporate governance to express concerns about mutual fund directors. He noted that mutual fund directors effectively have only two “important duties”; to pick the fund manager and to negotiate the manager’s fee. The record of mutual fund managers pursuing either goal has been “absolutely pathetic.” The manager selection process for far too many funds has become a “zombie-like process that makes a mockery of stewardship.”

 

Within months of Buffett’s stinging criticisms, many participants in the mutual fund industry were ensnared in the so-called “market timing” scandal, in which it was alleged, among other things, that mutual funds were permitting trading in their fund shares after market close. In the wake of the market timing scandal, the mutual fund industry faced not only a great deal of scrutiny but also a wave of enforcement actions.

 

At least according to a March 25, 2013 Wall Street Journal article entitled “Fund Directors Are Feeling the Heat” (here), mutual fund directors are attracting attention once again. The Journal article was focused on the administrative proceedings that the SEC has filed against eight former members of the board of directors overseeing several Morgan Keegan mutual funds. The agency filed the administrative action, a copy of which can be found here, in December 2012. In its December 10, 2012 press release accompanying the filing, the agency said that the directors had “abdicated” their asset –pricing responsibilities.

 

The administrative proceeding relates to five Morgan Keegan mutual funds whose portfolios contained below-investment grade debt securities, some of which were backed with subprime mortgages. In its press release about the proceeding, the agency claims that the funds “fraudulently overstated the valuation of their securities as the housing market was on the brink of financial crisis in 2007.” The agency has previously charged the funds’ managers with fraud, and the Morgan Keegan itself agreed to pay $200 million to settle related charges.

 

The agency alleges that the directors delegated their fair valuation responsibility to a valuation committee without providing meaningful substantive guidance and made “no meaningful effort to learn how fair values were being determined.”

 

The Journal article reports that the parties to the administrative proceeding are in settlement negotiations, but in the meantime the proceeding is going forward. The Journal article notes that the directors met 30 times in 2007, including 14 times in three months, and received daily updates on the value of the five mutual funds they oversaw.

 

Regardless of how the administrative proceeding against the former Morgan Keegan mutual fund directors ultimately plays out, the proceeding is, according to the Journal article,  “making waves” across the mutual fund industry. According to a December 14, 2012 memorandum from the Debevoise & Plimpton law firm, the administrative proceeding against the Morgan Keegan directors represents “a stark warning to fund directors and all fund personnel charged with management or oversight duties that they need to take their responsibilities for overseeing fund management seriously, even with respect to the complex and technical area of asset valuation.” The action signals “the SEC’s willingness to charge senior officials for failing to ensure the fair valuation of hard-to-value securities.”

 

The SEC’s decision to pursue an administrative action against the fund directorsseems clearly calculated to send a message. The fact that the agency filed the administrative proceeding against the directors after it had concluded an enforcement action against the fund management company itself does seem, as the Debevoise law firm said in its memo, that the administrative proceeding was intended to serve as a “stark warning.”

 

The SEC’s action against the Morgan Keegan directors unquestionably is noteworthy, but it is far from the first instance where allegations have been raised against mutual fund directors in the wake of the financial crisis. There were in fact a number of private securities class action lawsuits filed against mutual funds after the subprime meltdown, and a number of these suits included the funds’ outside directors as named defendants.

 

For example, March 2008, investors in the Charles Schwab YieldPlus Funds initiated a securities suit alleging violations of the federal securities laws and seeking damages; the defendants in that action included the funds’ trustees. The federal litigation ultimately settled for $200 million (with an additional $35 million to settle separate but related state litigation). The consolidated subprime-related securities class action litigation involving several Oppenheimer mutual funds, and which also included the funds’ trustees as named defendants, ultimately settled for a total of $100 million, as discussed here.

 

Indeed, as discussed here, the Morgan Keegan funds themselves were also involved in separate securities class action litigation that included as named defendants the same individual outside directors as were named in the SEC administrative proceeding. The separate Morgan Keegan fund securities class action litigation ultimately was settled for $62 million (refer here). 

 

The SEC’s administrative action against the Morgan Keegan funds’ outside directors not only has important implications in general about mutual funds outside directors’ accountability. It also has important implications about the scope of their potential liability exposure. Together with the possibility of private securities litigation, the possibility of an aggressive SEC pursuing administrative actions or even enforcement proceedings against the outside directors of mutual funds underscores the fact that serving as a mutual fund director entails significant liability exposures.

 

The extent of the liability exposures in turn highlights the importance for the outside directors to confirm that the mutual funds maintain D&O liability insurance sufficient to ensure that the directors can defend themselves against all claims that might arise against them. As the circumstances surrounding the Morgan Keegan funds demonstrate, when adverse developments lead to claims, numerous claims involving numerous parties can be involved. This fact underscores the need to ensure that the mutual funds maintain insurance limits of liability that are sufficient to respond in the complex claims situations. Finally, the need to ensure that the sufficient funds remain to protect the outside directors when multiple claims arise underscores the need to makes sure that the insurance program is structured to provide that a portion of the D&O insurance is dedicated solely to the outside directors’ protection.

 

Securities Suit Against U.S.-Listed Chinese Company Settles: In 2010 and 2011, plaintiffs’ lawyers rushed to file securities suits in U.S. courts against Chinese companies with shares listed on the U.S. securities exchanges. However, the suits have not proven to be as remunerative as the plaintiffs’ lawyers might have hoped. As I noted in an earlier post, many of the cases that have settled have involved only very modest settlements.

 

A recent settlement in one of these suits might provide modest grounds for encouragement for the plaintiffs’ lawyers. On March 25, 2013, the parties to the securities class action lawsuit pending in the Southern District of New York against Sinotech Energy Limited filed a stipulation of settlement indicating that they had agreed to settle the case for a total of $20 million. (The settlement does not include the company’s auditor, Ernst & Young Hua Ming LLP). The settlement is subject to court approval. The parties’ settlement stipulation can be found here.

 

Though this settlement is more substantial than the prior settlements, it should be noted that Sinotech Energy’s contribution to the settlement is only $2 million. The remaining $18 million is coming from several offering underwriter defendants who were also named as defendants in the litigation. This outcome is in fact consistent with what many plaintiffs’ lawyers have told me about these cases, which is that while they hope to recover from the company defendants, their real hope for recovery is based on the attempt to try to recover from the outside professionals who helped the companies to go public. (I am guessing that the reason that Ernst & Young Hua Ming was not a party to this settlement may have something to do with the $117 million that Ernst & Young agreed to pay in the Ontario securities suit relating to Sino Forest; the plaintiffs may be hoping they can use that prior settlement as a “price of poker” indicator.)

 

Whether or not the plaintiffs can succeed in recovering from the outside advisors, they likely will have to set their expectations of recoveries from the Chinese companies themselves at modest levels. It isn’t just that the Chinese companies have not contributed significantly to the settlements so far; it is that apparently in many instances, the Chinese companies are not even paying their own defense lawyers. As reflected in a March 14, 2013 Reuters article entitled “Defense Attorneys in China Securities Cases Look for an Exit” (here), defense counsel in several of these cases involving U.S.-listed Chinese companies are seeking to withdraw from the cases because their Chinese clients are not paying them. It doesn’t bode well for any eventual recovery for the plaintiffs if the defendant company isn’t bothering to pay its own lawyers.

 

Special thanks to a loyal reader for sending me a copy of the Reuters article.

 

The M&A Litigation Problem: As anyone following recent litigation trends knows, litigation relating to M&A transaction has become a serious problem. If it is any consolation, the courts are working on it, at least in Delaware, according to Vice Chancellor Donald Parsons of the Delaware Chancery Court. In a forthcoming article entitled “Docket Dividends: Growth in Shareholder Litigation Leads to Refinements in Chancery Procedure” (here, Hat Tip to the Delaware Corporate and Commercial Litigation Blog), Parsons contends that the Delaware Chancery Court is developing tools to address the concerns associate with the M&A litigation.

 

According to Parsons, Delaware’s courts are best positioned to respond to this litigation, although, owing to the phenomenon of multi-jurisdictions litigation, it is can’t resolve all of the concerns. Those who are interested in Parsons’ views may want to review Alison Frankel’s tidy summary of the article in a March 26, 2013 post on her On the Case blog (here).

 

You Think Your Job is Tough?: Next time you are feeling that your job is too demanding or stressful, spend a little time considering this guy’s job.

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.