In what may be the largest settlement ever in securities class action litigation involving a pharmaceutical company, Merck has agreed to a combined settlement of $688 million to settle two related securities class action cases. The company’s February 14, 2013 press release announcing the settlements can be found here.

 

The lawsuits relate to alleged representations concerning the anti-cholesterol drug Vytorin. The drug was marketed through a joint venture between Merck and Schering-Plough. The shareholder claimants allege that the companies and certain of their directors and officers withheld information relating to poor clinical trial results while continuing to promote the drug’s benefits.

 

 

According to the company’s press release, the company will pay $215 million to resolve the claims against the Merck defendants and $473 million to resolve the claims against the Schering-Plough defendants. The company also announced that it would take a pre-tax and after-tax charge of $493 million, which the company indicated "reflects anticipated insurance recoveries." (Although it is not entirely clear, the company statement about the charge suggests that the company "anticipate" insurance recoveries of $195 million, possibly under the insurance programs of the two companies).The settlements are subject to court approval.

 

 

According to Victor Li’s February 14, 2013 Am Law Litigation Daily article (here), the cases settled three weeks before they were set to go to trial. The article also quotes the lead plaintiffs’ lawyers as saying that the settlement is the largest ever involving a securities class action lawsuit against a pharmaceutical company; is among the top ten settlements in a securities class action that didn’t involve a restatement; and is among the 25 largest securities settlements of any kind.

 

 

Facebook IPO Derivative Suits Dismissed: In a February 13, 2013 opinion (here), Southern District of New York Robert Sweet granted without prejudice the defendants’ motion to dismiss the Facebook IPO shareholders’ derivative suits that had been multidistricted before him. The ruling not only represents a win for the defendants in the derivative suits, but it could also prove helpful in the parallel securities class action litigation. In addition, parts of the opinion may also be helpful in other state court IPO cases and may even prove helpful for defendants attempting to address the multi-jurisdiction litigation problem in the M&A litigation context.

 

As Alison Frankel discusses in a February 14, 2012 post on her On the Case blog (here), Judge Sweet’s ruling contains strong language dismissing plaintiffs’ claims based on Facebook’s alleged failure to disclose internal projections, noting that "courts throughout the country" have "uniformly agreed" that the internal calculations are not material. He added that "an opposite ruling would have changed at least two decades of IPO practice."

 

Judge Sweet also (as Frankel puts it) "implicitly endorsed" the use of forum selection clauses in certificates of incorporation, though he denied Facebook’s motion to dismiss on forum selection grounds. According to the defense lawyers Frankel quotes in her post, the judge’s analysis of the issue, though clearly dicta, represents a "significant" development in a relatively undeveloped area of the law.

 

Judge Sweet also held that shareholders who purchased their shares in the IPO do not have standing to complain about pre-IPO conduct. Derivative plaintiffs must be able to show that they owned their shares at the time of the conduct they are complaining about. Because they did not own their shares at the time of the pre-IPO conduct that is the basis of their claims, they lack standing to assert claims based on that conduct.

 

Finally, Judge Sweet held that federal judges have discretion to consider threshold issues such as standing and forum selection clauses even before they determine whether they have jurisdiction over the derivative suits. It is this latter holding that Frankel suggests may be most helpful to defendants litigating multi-jurisdiction M&A litigation, because the defendants could remove the state court cases to federal court and before the case can be remanded the federal court might be able to rule on the threshold issues.
 

Securities class action filings in Canada were down in 2012 compared to 2011’s record number of filings and compared to recent annual averages, according to a February 13, 2013 report from NERA Economic Consulting. The report, which is entitled “Trends in Canadian Securities Class Actions: 2012 Update,” can be found here. NERA’s press release summarizing the report’s findings can be found here.

 

According to the report, there were nine securities class actions filed in Canada in 2012, down from the “all time high” of 15 new cases filed in 2011, and below the annual average of 12 new cases filed per year since 2008. Eight of the nine 2012 cases were filed under the secondary market civil liability provisions of the provincial securities actions (so-called “Bill 198” cases).

 

The downturn in the number of new securities class action lawsuit filings in Canadian securities class action may be due in part to the abatement of a couple of filing trends that drove filings prior to 2012. In recent years, filing levels had been increased due to credit crisis related filings and due to the surge in cases against Chinese domiciled companies. There were no new case filings in Canada in 2012 related to either of these trends.

 

Eight of the nine cases involved companies with shares traded on the Toronto stock exchange. The ninth case involves Facebook, which does not have shares listed on a Canadian exchange. (As discussed here, there is recent Canadian authority allowing cases against companies whose shares traded exclusively on foreign exchanges to go forward in Canadian courts.)  Six of the nine new Canadian securities class action cases had parallel U.S. filings

 

In addition to these new filings in Canadian courts, there were six U.S. class action filings in 2012 involving Canadian-domiciled companies. Two of these six also involved parallel Canadian securities class actions, but four of the six involved companies for which there is no parallel Canadian class action.

 

Two-thirds of the 2012 securities class action filings in Canada were brought against companies in the mining or oil and gas sectors.

 

The most significant securities class action settlement in Canada is E&Y’s $117 million settlement in the Sino-Forest case, which, the report notes, if approved would represent “the largest settlement of a Bill 198 case to date.” There have only been two prior audit firm defendant settlements of Bill 198 cases, both of which involved the auditors’ agreement to pay $500,000 to settle the claims.

 

The report notes with respect to the twelve Bill 198 cases that have settled to date (excluding partial settlements, which would remove the E&Y/Sino Forest settlement from the calculation) that the average settlement amount is $10.5 million and the median settlement is $9.3 million. The average settlement as a percentage of compensatory damages claimed is 12.6% and the median is 8.9%. The average settlement of the four Bill 198 cases that had parallel U.S. claims is $16.9 million and the median is $17.2 million. The average of the settlements in the eight domestic-only cases is $7.4 million and the median is $5.4 million.

 

With new filings, settlements and dismissals during 2012, there are now a total of 51 active Canadian securities class actions, four more than at the end of 2011 and nearly double the number of active cases four years ago. All but nine of the cases still active as of the end of 2012 were filed after 2007. The combined impact of the growing number of open claims and case law developments suggest that “we may see more settlements during 2013 than we saw in 2012.”

 

For discussion of a recent law firm memo asking whether class action lawsuits in Canada had “reached maturity,” refer here.

 

Litigation related to M&A activity continued at an “extremely high rate” in 2012, according to the latest research update from Ohio State law professor Steven Davidoff and Notre Dame business professor Matthew Cain. According to the professors’ analysis, presented in their February 1, 2013 paper entitled “Takeover Litigation in 2012” (here), 91.7% of all merger transactions that met the professors’ criteria attracted at least one lawsuit, compared to 91.4% in 2011.

 

The professors’ paper is the latest update on their research originally presented in their January 2012 article entitled “A Great Game: The Dynamics of State Competition and Litigation” (here), which I reviewed here. Following the original article’s publication, the professors updated their research with additional litigation data regarding M&A transactions that took place in 2011. Their latest paper updates their research with regard to 2012 transactions.

 

The professors have limited their analysis to merger transactions over $100 million involving publicly traded target companies with an offering price of at least $5 per share. The 2012 update includes only transactions there were completed as of January 2013. The professors intend to update their 2012 data in six months to incorporate information relating to the in process transactions.

 

It is probably worth noting that there were fewer deals that met the professors’ sorting criteria in 2012. There were only 84 deals with the defined characteristics in 2012, compared to 128 in 2011 (representing a year over year drop of 34%). But the percentage of deals attracting at least one lawsuit remained virtually unchanged, with 91.7% of deals attracting at least one suit, compared to 91.4%. The professors believe based on anecdotal evidence, that when they update their 2012 “the ultimate litigation rate will match or exceed the 91.7% figure.” Though the litigation rate is virtually unchanged from 2011, the 2012 rate is “almost 2.5% that of 2005,” when the litigation rate was only 39.3%.

 

The number of complaints brought per transaction remained at about 5.0 lawsuits per transaction, the same rate as in 2011 but more than double the mean number of lawsuits in 2005, when the figure was 2.2/ Multi-jurisdiction litigation “remained similar in 2012 with 50.6% of transactions with litigation experiencing litigation in multiple states,” compared to 53% in 2011.

 

87.5% of all 2012 cases that had settled involved “disclosure only” settlements, compared to 79.5% in 2011. The average attorneys’ fees were down substantially in 2012, but that may be driven by a few larger settlements in 2011. The median attorneys’ fee award was about the same both years — $580,000 in 2011, $595,000 in 2012.

 

Delaware attracted a slightly reduced share of M&A litigation in 2012. The state attracted 46.7% of all litigation that could have been filed in there in 2012, compared with 52.8% in 2011. Delaware “also appears to be dismissing fewer cases, thus allowing more cases to be settled” – 76.9% of Delaware cases settled in 2012, compared with 61.5% in 2008. The authors note, referencing their original paper, that “when Delaware loses cases to other jurisdictions it historically has dismissed fewer cases and allowed more to settle, consistent with conduct designed to reattract litigation.”

 

Discussion

Because of the authors’ sorting criteria, their analysis and conclusion are most relevant to the larger transactions. However, based on my own observations, the authors’ conclusions are consistent even with respect to the smaller deals that do not meet their sorting criteria. The explosion of M&A-related litigation in recent years has not been limited just to the larger companies and transactions.

 

The surge in M&A related litigation in recent years has been one of the principal justifications the D&O insurance carriers have given as an explanation for their efforts to try to increase the insurance rates, particularly with respect to the rates for primary D&O insurance. In addition, the upsurge in M&A-related litigation has also affected the terms and conditions that the carriers are willing to offer. In particular, some carriers have been insisting on adding a separate, larger retention for M&A-related claims. The professors’ updated M&A-related litigation date seems to suggest that the carriers will try to continue to push rate and to try to include separate M&A-related claim retentions.

 

As I detailed in a prior post (here), the defense expenses and settlement amounts associated with M&A-related litigation represent a serious problem, for the companies involved and for their insurers. The prevalence of the multi-jurisdiction litigation is a particularly vexing problem, as the proliferating lawsuits are expensive to defend and difficult to resolve.  Unfortunately, based on the professor’s updated research, all signs are that these phenomena will remain a significant part of the corporate and securities litigation landscape for the foreseeable future.

 

Special thanks to Professor Davidoff for providing me with a copy of his latest paper.

 

Chinese Reverse Merger Cases: Is There a “China Discount”?: During 2010 and 2011, and to a lesser extent during 2012, the plaintiffs’ securities lawyers rushed to file securities class action lawsuits against Chinese companies that had obtained a U.S. listing through a reverse merger. But while these cases flooded the courts, they have not proven to be a huge bonanza for the plaintiffs’ lawyers or their clients. As I noted in a prior post, the settlement so far have been rather modest.

 

Michael Goldhaber’s February 12, 2012 Am Law Litigation Daily article entitle “Whither Chinese Reverse Merger Litigation?” (here) suggests that there may be a “China discount” in the Chinese reverse merger cases. The article quotes a defense attorney with the Sherman & Sterling law firm as saying that there is now a “critical mass of settlements between $2 million and $3 million” and that these lower settlements “may exert a gravitational pull on other settlements down the road.” The article notes that “the remarkable uniformity of the settlements suggests that $5 million D&O insurance policies are standard for this niche,” adding that a policy of that amount allows enough for defense fees and a settlement compromise with in the policy limit.

 

The two arguable exceptions to these generalizations both involve proceedings outside the U.S. The first is the $77.5 million Hong Kong arbitration award that C.V. Starr obtained against the founding shareholders of China MediaExpress Holdings (about which refer here) and E&Y’s $118 million December 2012 settlement of a Canadian class action arising out of its audit of Sino-Forest Corporation (refer here). Though these two exceptions each have their own distinct characteristics, these developments may hearten the claimants in the other cases and give them the incentive to continue to try to press on. The evidence so far, however, suggests the greater likelihood of the more modest settlements that have tended to become the norm.

 

A particularly interesting feature of the Am Law Litigation Daily article is a link to Sherman & Sterling document provided a comprehensive status summary of more than 75 disputes in U.S. forums relating to allegations of securities violations by Chinese parties, including more than 50 reverse merger companies. The summary document can be found here.

 

In order to try to defend themselves from claims asserted against them by the FDIC as receiver for a failed bank, the failed bank’s directors and officers often raise affirmative defenses, either based on pre-receivership conduct (as for example, in connection with pre-failure examinations) or post-receivership conduct (as for example in connection with the agency’s management of the liquidation process). Whether or not these defenses can be asserted against the FDIC was litigated extensively in the failed bank litigation arising in the S&L crisis era. These questions were raised again in one of the FDIC’s current bank cases. In a February 12, 2013 order (here), Northern District of Illinois Judge Virginia Kendall granted the FDIC’s motion to strike the directors and officers affirmative defenses.

 

On July 31, 2009, regulators closed the Mutual Bank of Harvey, Illinois and the FDIC was appointed as receiver.  As discussed here, on October 25, 2011, the FDIC initiated a lawsuit in the Northern District of Illinois. The complaint was noteworthy at the time because the bank not only named as defendants eight former directors and two former officers of the bank but also included the complaint also names as defendants the bank’s outside General Counsel, who was also a director of the bank, and well as the General Counsel’s law firm.

The defendants asserted a number of affirmative defenses, including the defenses of failure to mitigate, comparative fault, superseding/intervening cause, lack of proximate cause and waiver and estoppel. The FDIC moved to strike the affirmative defenses.

In her February 12 order, Judge Kendall first addressed the defendants’ defenses that were based on the FDIC’s alleged conduct during the regulatory and investigatory of the FDIC’s examination of the bank (that is, its pre-receivership conduct).  Judge Kendall granted the FDIC’s motion to strike these defenses because the conduct of the FDIC during the pre-receivership regulation of the bank falls into the “discretionary conduct” exception to the Federal Tort Claims Act. Discretionary agency conduct cannot be the basis of a claim against the U.S. or one of its agencies. Judge Kendall said the same reasoning “applies with equal force to affirmative defenses pleaded against a government agency because of that agency’s discretionary acts.”

The defendants also asserted affirmative defenses of failure to mitigate, superseding/intervening cause, comparative fault, which related to the agency’s post-receivership conduct. These defenses relied primarily upon the agency’s alleged post-receivership failure to collect on the bank’s accounts and improperly disposed of the bank’s assets, among other things. After an extensive review of the case law developed during the S&L crisis, Judge Kendall concluded that all of the conduct on which the defendants sought to rely was within the agency’s discretionary functions. Judge Kendall granted the FDIC’s motion to strike these defenses “because they improperly challenge the discretionary power of the FDIC to maintain and dispose of the Bank’s assets post-receivership.”

The defendants also raise affirmative defenses related to causation, such as lack of proximate cause and intervening/superseding causes, based on the general market conditions during the financial downturn. Judge Kendall noted that proximate cause is an element of the FDIC’s case in chief and is not properly pleaded as an affirmative defense. However, she noted, “striking the affirmative defenses related to lack of proximate cause and/or presence of intervening cause by no means bars the defense from asserting that the FDIC has not carried its burden with respect to the element of causation.”

Finally, Judge Kendall also struck the defendants attempt to reserve the right to assert affirmative defenses at a later date. Judge Kendall found that this attempted reservation is an “improper reservation under the Federal Rules.”

Discussion

The FDIC generally argues that when it takes over as receiver, it “stands in the shoes” of the failed bank. That does not seem entirely to be the case, however, at least with respect to some of the affirmative defenses these defendants sought to assert here. Certainly, if the bank were still viable and asserted the claims against the directors and officers of the kind that the FDIC is asserting, the individual defendants would have the right to assert affirmative defenses (or at least to argue that they had that right under applicable state law). However, the agency argued that it is not susceptible to these defenses because of its discretionary agency functions. Clearly, if the agency has the right to make that argument, its receivership status involves something other than just standing in the shoes of the failed bank.

During the current bank failure wave, other failed banks’ directors and officers  have also sought to assert affirmative defenses against the FDIC, and in at least some instances, they have done so with somewhat greater success that the defendants here. For example, as discussed here, in a February 2012 ruling, Northern District of Georgia Judge Steve C. Jones granted in part and denied in part the FDIC’s motion to strike the affirmative defenses of the former directors and officers of the failed Integrity Bank.

Judge Jones granted the FDIC’s motion to strike the directors and officers affirmative defenses based on the agency’s pre-receivership conduct. However, Judge Jones denied the FDIC’s motion to strike the affirmative defenses based on a failure to mitigate, estoppel and reliance “to the extent those defenses are based upon post-receivership conduct by Plaintiff in its capacity as receiver.” 

Judge Jones’s rulings in the Integrity Bank case are now before the Eleventh Circuit on interlocutory appeal, although the principal issue before the appellate court is whether r not under Georgia law the FDIC can assert claims of ordinary negligence against the failed bank’s directors and officers. Interestingly, Judge Kendall’s opinion does not refer to Judge Jones’ s rulings in the Integrity Bank case (perhaps because Judge Jones’s rulings relied to a certain extent on Georgia law).

Whether or not the former directors and officers of a failed bank can assert affirmative defenses against the FDIC represents a significant issue, and one on which the courts appear to be differing conclusions. It remains to be seen whether one or the other line of analysis will control these issues. It should be noted that in both of the two district court opinions, the district court judges did agree that even if the defendants could not argue causation issues as an affirmative defense that the defendants could argue that the FDIC had not carried its burden to establish causation in its case in chief.

Many thanks to a loyal reader for sending me a copy of Judge Kendall’s opinion.

After entity coverage began to be added to the D&O insurance policy a couple of decades ago, a recurring problem in the bankruptcy context was whether or not the D&O policy proceeds were property of the estate under Bankruptcy Code Section 541(a) and subject to the automatic stay under Bankruptcy Code Section 362. The question arose because the directors and officers of the bankrupt company wanted access to the insurance proceeds to fund defense expense or settlements, but the bankruptcy trustee wanted the proceeds preserved so they are available to satisfy the trustee’s own claims, and so the trustee sought to subject payment of the proceeds to the bankruptcy stay.

 

As most practitioners who regularly deal with these issues know, the practical solution to these issues that seems to have been worked out is for the insured directors and officers to approach the bankruptcy court in order to try to obtain an order lifting the stay to allow the carrier to advance their costs of defense, usually subject to certain terms and conditions. These orders are often referred to as “comfort orders,” since they allow the carrier to advance the defense costs without running afoul of the bankruptcy court.

 

Though these procedures may be well known to those who have to deal with them frequently, they may be less familiar to others in the industry who are not as frequently involved in claims presenting these issues. Recent developments in a high-profile case provide a window into these procedures. Although these case developments are not unprecedented, they still provide a useful and perhaps even interesting insight into the way these processes work, particularly for those who may be less familiar with the processes.

 

As was well-publicized at the time, in November 2012, the Rhode Island economic development agency sued former major league baseball star Curt Schilling and several executives at Schilling’s defunct video gaming company, 38 Studios, in a civil action in Rhode Island Superior Court, alleging that Schilling and the other executives, as well as certain officials from the economic development agency, committed fraud in connection with the state’s approval of a $75 million loan guarantee supposedly provided to induce the company to relocate to Rhode Island from Massachusetts.

 

At the time the lawsuit was filed, Schilling’s company and certain related entities were in Chapter 7 bankruptcy proceedings in the District of Delaware bankruptcy court. The trustee in the bankruptcy proceeding contended that the proceeds of the company’s D&O policy were subject to the automatic stay in bankruptcy. Schilling and three other executives from his company filed a motion in the bankruptcy court seeking to have the automatic stay lifted in order to permit the advancement under the D&O policy of their costs incurred in connection with the defense of the Rhode Island lawsuit. The bankruptcy trustee filed limited objections.

 

On February 7, 2013, Bankruptcy Court Judge Mary Walruth granted the executives’ motion and entered an order (a copy of which can be found here) authorizing the D&O insurer to advance the executives defense costs, subject to certain conditions. First, the carrier was directed to provide the trustee and the trustee’s counsel no more than 45 days after the close of each calendar quarter a report stating the total amount disbursed under the policy; the amount disbursed during the quarter; the amount of fee and costs requests pending for which the carrier had not yet made disbursement; and the total amount of coverage remaining under the policy. The order specified that the trustee retained the right to try to seek to have the stay reinstated. The order also specifically stated that the order did not modify the parties’ various rights and obligations under the policy.

 

With the benefit of the order, Schilling and the other officials will now be able to rely on the D&O policy proceeds to fund their defense against the claims in the Rhode Island lawsuit. While there may be nothing remarkable about this now, for many years this relatively straightforward process was highly controversial and extensively litigated, as a result of disputes over the extent to which the policy and the policy proceeds were assets of the estate of the bankrupt company. Fortunately, the processes followed here are now better established. This case provides a good illustration of the way these things now work for those that may not be entirely familiar with these practices.

 

It is nothing new for seemingly outrageous emails to trigger attention-grabbing claims of wrongdoing. But revelations this past week arguably represent some type of high-water mark, as a cluster of serious allegations were accompanied by a trove of embarrassing excerpts from emails and instant messages. While the latest disclosures provide yet another reminder of the dangers associated with ill-considered use of modern electronic communications technology, they also raise questions about the use that regulators and claimants are attempting to make of the communications.

 

The regulators’ press releases announcing RBS’s settlement this past week of charges of alleged Libor manipulation drew heavily on excerpts from the bank’s internal electronic communications. The CFTC considered the communications so damning that it included several pages of excerpts in its February 6, 2013 press release announcing RBS’s agreement to the agency $325 million penalty. Among other things, the press release quotes RBS yen traders, aware of other rate-setting banks’ manipulative conduct, as saying that “the jpy libor is a cartel now,” to which another trader commented that “its just amazing how libor fixing can make you that much money.” A later communication quotes a yen trader as saying that there is “pure manipulation going on.” 

 

The CFTC’s press release quotes other internal communications that appear to show RBS Libor rate submitters and derivatives traders agreeing on where to set that days rate submissions, with the traders offering (seemingly modest) inducements such as “sushi rolls from yesterday” and “there might be a steak in it for ya” and “we’ll send lunch around for the whole desk.” The messages also seem to show the traders interacting with interbroker dealers, asking them to “speak to” the rate submitters at other banks, so that “as a team” the rates come in at the desired level.

 

A February 6, 2013 Financial Times article detailing many of the RBS emails and entitled “Record of Trader Talk to Haunt RBS,” can be found here.

 

Similarly, and as I noted in my prior post about the DoJ’s recent civil complaint against S&P, the government’s allegations against the rating agency depend heavily on excerpts drawn from internal emails and other electronic communications. The embarrassingly colorful emails seem to suggest that the rating agency consciously issued unjustifiably high ratings for CDOs to please its customers and to avoid losing market share to rival rating agencies. The email excerpts include the now infamous line on one April 5, 2007 instant message from a securities analyst that “we rate every deal … it could be structured by cows and we would rate it.” The complaint also quotes — at length and in full — one S&P analyst’s 2007 March parody of the Talking Head’s song “Burning Down the House,” entitled “Bringing down the House” and suggesting that subprime mortgage delinquencies were threatening to wreak havoc.

 

The complaint quotes more serious (and seemingly more damning) messages, including the July 5, 2007 message from a recently hired S&P analyst to an outside investment-banker:

 

The fact is, there was a lot of internal pressure in S&P to downgrade lost of deals earlier on before this thing started blowing up. But the leadership was concerned about p*ssing off too many clients and jumping the gun ahead of Fitch and Moody’s.

 

The emails quoted in the complaint also reflect an apparent internal debate about S&P’s rating methodology and whether proposed tightening could prove competitively disadvantageous. The DoJ complaint quotes one internal May 2004 e-mail as saying:

 

We just lost a huge Mizhuo RMBS deal to Moody’s due to a huge difference in the required credit support level. What we found from the arranger was that our support level was at least 10% higher than Moody’s … this is so significant it could have an impact on future deals. There’s no way we can get back on this one but we need to address this now in preparation for future deals

.

There were also revelations this past week in the civil litigation that Belgian bank Dexia filed in 2012 against JP Morgan and its affiliates. As detailed in a February 6, 2013 New York Times article entitled “E-Mails Imply JP Morgan Knew Some Mortgage Deals Were Bad” (here), Dexia is relying on a “trove of internal emails and employee interviews” to allege that when JP Morgan uncovered flaws in thousands of home loans, rather than disclosing the problems, the bank simply adjusted the critical reviews,  perpetuating the appearance that the securities into which the mortgages had been bundled were more secure than they might otherwise appear.

 

Among other things, the Times article quotes a September 2006 internal JP Morgan mortgage loan analysis that determined that “nearly half of the sample pool” was “defective,” meaning that the loans did not meet underwriting standards. The article says that JP Morgan dismissed or altered these and other critical assessments, for example, to show that a smaller number of loans were “defective.” The article cites one specific example in which a 2006 review of mortgages found that over 1,100 mortgages were more than 30 days delinquent, but that the offering document sent to investors showed only 25 loans as delinquent.

 

In its February 8, 2013 front-page article about Tom Hayes, a derivatives trader known as ‘Rain Man” and who worked, serially, for RBS, UBS and Citigroup, and who is one of the few individuals to be individually prosecuted in connection with the Libor scandal, the Wall Street Journal not only quoted Hayes’s email communications but also reported that Hayes would “change his status on his Facebook page to reflect his daily desires for Libor to move up or down.”

 

One interesting feature of a number of these communications is that in many instances the individuals involved evinced awareness that they needed to be careful with what they said. For example, the author of the “Burning Down the House” parody, in an email that followed quickly after the first note in which he sent the parody lyrics, told the parody recipient “For obvious professional reasons, please do not forward this song. If you are interested, I can sing it in your cube.” The CFTC’s press release quotes a transcript from a telephone conversation (recorded because it took place on a trading desk), in which a trader and a rate submitter agreed on a rate level to be submitted to the British Banker’s Association (BBA); in the transcript that submitter advises the trader (after refusing to agree to the rate on Bloomberg Chat), that “We’re just not, we’re not allowed those conversations on [instant messages]” because, the rate submitter tells the trader “of the BBA thing” (that is, reports of investigation involving Libor rate setting at the BBA).

 

There is no doubt that these excerpts from the emails and other electronic communications make a horrible impression and could even cause the various companies involved serious problems. But as damning as some of these emails seem to be, there is also a danger that the impression these messages create is a false one. In an interesting February 7, 2013 essay on Yahoo Finance (here), Henry Blodget (who certainly knows a thing or two about embarrassing emails):

 

the trouble with email is that sometimes people who aren’t, in fact, breaking rules often vent or joke or react to information in emails–and, in so doing, create a "paper" trail that, later, out of context, makes it look like they have broken rules (or at least done something sleazy). And when these emails come out, they are often seized upon as proof of wrongdoing, before they have actually been evaluated in context. And that gets a lot of companies and employees in hot water, even when the employees didn’t, in fact, break any rules.

 

Of course, as Blodget notes, the emails do sometimes in fact evidence wrongdoing. The problem is that when seemingly damning email excerpts are blasted into the media, it is very difficult to appreciate the larger context within which the excerpts fit.

 

By way of illustration, the handful of emails that the DoJ quotes in its S&P complaint was taken from over twenty million pages of e-mails the rating agency produced to the government. As John Cassidy notes in his interesting and balanced analysis of the DoJ’s complaint in a February 5, 2013 New Yorker article, should the S&P case go to trial, the rating agency will have the opportunity to “place the offending communications in context, and to counterbalance them with more exculpatory materials.” Though the emails unquestionably do not read well, “bad publicity doesn’t necessarily equate to a defeat in court.”

 

I have personal experience with the way that emails can be pulled at random from a mountain of paper and made to look as if they are much more serious and meaningful than they ever were intended to be. For many years, I was the head of a D&O underwriting facility. From time to time, we were involved in coverage litigation, and invariably the claimants’ lawyers seemed to think it was really clever to depose the head of the operation. So being deposed became a regular feature of my job. In many of these depositions, the claimants’ attorneys would pull out emails written in jest or written in haste, and question me about them under oath. There is nothing like having the lens of video camera pointed at your face to take all of the humor out of a gag email.

 

By now, I think we are all aware of the dangers that email and other forms of electronic communications represent. The messages are written in haste and seem ephemeral. Yet because of the permanence of the electronic storage, they stand as an archival record of thoughts and messages that live on long after the moment has passed.

 

As I said at the outset of this blog post, it is nothing new for regulators and claimants to have a field day with ill-considered electronic communications, and I think all of us have heard many times about the need for caution when using email and other forms of electronic communication. However, human nature being what it is, and given the nature of electronic communications (which encourages haste as well as imprecise and sometimes even ill-considered expression), it is perhaps inevitable that in a vast archive of electronic messages there will be a handful of unfortunate items.

 

But though these kinds of unintended blunders can seem inevitable, it is still worth trying to learn from what the regulators and claimants have done with the electronic communications in these cases. These cases underscore the fact that for all of their convenience and ease of use, electronic communications can be very dangerous. In the press of day-to-day business, this danger can be hard to remember. But a useful exercise to try to adopt is to pause and ask yourself, before hitting “send,” how the message would look if it were to fall into the hands of a hostile and aggressive adversary who was looking for ways to try to make you or your company look bad. Were this simple test to be more widely implemented, we would certainly see a marked reduction in, for example, running email jokes about the French maid’s outfit.  

 

My final thought is this – we all know that many electronic messages are written in haste and sometimes with insufficient care. With full awareness of this attribute of electronic communications, we should hesitate to jump to too many conclusions about the seemingly damaging inferences that could be drawn from email or instant message excerpts. But we should also learn from the inferences that regulators and claimants are trying to draw and try to take that into account in our own communications.

 

UPDATE: As if to reinforce my point in this post, today’s WSJ has an article entitled "Two Firms, One Trail in Probes on Ratings" (here), that explains why the government is pursuing claims against S&P but not rival rating agency firm Moody’s — it is because Moody’s "took careful steps to avoid creating a trove of potentially embarrasing employee messages like those that came back to haunt S&P."  The article explains that Moody’s analyts "in recent years had limited access to instant-message programs and were directed by executives to discuss sensitive matters face to face." These strictures apparently were put in place following the investigations and scandals initated by then-NY AG Eliot Spitzer.

 

More About Rule 10b5-1 Plans: As I noted in a recent post, several articles in the Wall Street Journal have raised concerns about the way that some corporate officials are using their Rule 10b5-1 trading plans. The Journal article implied that some officials were using their plans improperly, to try to shield their trades in shares of the company from scrutiny.

 

In a February 6, 2013 post on the Harvard Law School Forum on Corporate Governance and Financial Regulation entitled “The Best Laid Plans of 10b5-1” (here), Boris Feldman, a partner at the Wilson Sonsini law firm, takes a look at the current controversy surrounding the use of Rule 10b5-1 plans. Among other things, Feldman notes that “Rule 10b5-1 plans are a blessing and a curse: a blessing, because they enable executives to diversify their company holdings in a stable, law-abiding manner; a curse, because they tempt cheaters into hiding their malfeasance in a cloak of invisibility.”

 

After considering the questions now being raised about the plans, Feldman suggests “some ‘good housekeeping’ features of plan design and implementation that enhance the odds of surviving such scrutiny.” Feldman’s article provides a number of practical suggestions to try to ensure that trading plans are used for the purposes for which they were intended and provide the protection for which the Rule was designed.

 

More SEC Enforcement Activity Against Private Equity Firms?: According to recent statements from the head of the SEC Asset Management Unit, the agency may be preparing to bring increased numbers of enforcement actions against private equity firms. According to a February 7, 2013 memo from the Weil Gotshal law firm (here), the SEC official, speaking at a recent conference, described the problems in the private equity industry as due to “too many managers chasing too little capital.” The factors the official identified as contributing to a risk of fraud in the industry include “difficulties in valuing illiquid assets and certain incentive structures that are prevalent in the private equity sector.” While noting the more active enforcement role that the agency intends to take, the official also identified the critical steps that management at private equity firms can take to make sure that the firms interests are and remain aligned with those of investors.

 

Upcoming ABA Seminar on Failed Bank Litigation: On February 21, 2013, the American Bar Association Tort Trial & Insurance Practice Section’s Professionals’ Offices and Directors’ Liability Committee will be sponsoring a teleconference on the topic of “Failed Bank Litigation.” The teleconference, which is scheduled to run from 1:00 pm to 2:30 pm, will be moderated by my good friend Joe Monteleone of the Tressler law firm, and will include a panel of distinguished experts.

 

The panel will discuss the investigations and litigation that may ensue against failed banks and their directors and officers, and will also address “various types of liability insurance policies and bonds that could be implicated, and how competing claimants and insureds must deal with finite insurance limits.” Further information about the teleconference can be found here.

 

Today’s Music Video Interlude: Turn the sound down and sit back and enjoy this amazing video of a young boy laying down some astonishing blues vocals. As the guitar shop owner says, “That is smokin’ good.”

 

On February 5, 2013, in a detailed opinion exploring the nuances of a D&O policy’s extended reporting period provisions, Western District of North Carolina Judge Henry Herlong Jr.  determined that the directors of the failed Bank of Ashville of Asheville, North Carolina timely provided their D&O insurer notice of the FDIC’s lawsuit against them as the failed bank’s receiver. Practitioners in the D&O arena will want to read this opinion, a copy of which can be found here, for its examination of the interactions between the policy’s “basic” 60-day extended reporting period and its 12-month “supplemental” extended reporting period.

 

Background

The Bank of Asheville failed on January 21, 2011. As discussed here, on December 29, 2011, the FDIC as the failed bank’s receiver filed a lawsuit in the Western District of North Carolina against seven former directors of the bank. On December 29, 2011, the directors provided the bank’s holding company’s D&O insurer with notice of the FDIC’s lawsuit.

 

The D&O policy provided coverage for the period November 3, 2007 through November 3, 2010. However, the policy contains a 60-day “basic” extended reporting period, allowing for the notice of claims 60 days beyond the policy’s expiration. The policy also provided for a 12-month “supplemental” extended reporting period that, by endorsement and upon payment of an extra premium charge, allows an additional 12 month reporting period. The “supplemental” extended reporting provision in the policy provided that “the supplemental Period starts when the Basic Extended Reporting Period …ends.” 

 

Through a process that the court’s opinion reviewed in detail, the bank purchased the 12-month supplemental extended reporting period prior to the expiration of the policy period. The endorsement the D&O insurer issued specified that the supplemental extended reporting period is “11-01-2010 – 11-01-2011.”

 

After the directors submitted notice of the FDIC lawsuit to the insurer, the insurer took the position that the notice was untimely. The directors filed an action seeking a declaratory judgment that the insurer is required to pay defense costs and any settlements or judgments in the FDIC’s lawsuit. The directors also alleged a claim for reformation of the policy. The parties filed cross-motions for summary judgment.

 

The February 5 Opinion

In his February 5 opinion, Judge Herlong granted the directors’ motion for summary judgment, holding that the directors had timely provided notice of the FDIC lawsuit to the insurer prior to the expiration of the extended reporting period.

 

The dispute that the court considered came down to the question whether the 12-month supplemental extended reporting period ran from the end of the policy period of the policy or from the end of the policy’s 60-day basic extended reporting period.

 

After a detailed review of the communications between the various parties involved in the acquisition of the supplemental extended reporting period, the court concluded that

 

Although the Policy provided a 60-day basic Extended Reporting Period automatically, [the D&O insurer] charged the Bank the maximum permitted under the Policy, a 200 percent premium, for the 12-months of Supplemental Extended Reporting Period coverage. However [the D&O insurer] erroneously used the dates November 3, 2010 to November 3, 2011. Thus under [the D&O insurer’s] argument, the Bank paid for 12 months and received only 10 months of additional extended reporting coverage. Based on the foregoing, the court finds that the starting and ending dates of the Endorsement conflict with the terms of the Policy and is ambiguous because it is subject to different interpretations regarding the 60-day Basic Extended Reporting Period and the 12-month Supplemental Extended Reporting Period.

 

The D&O insurer argued that all of the documents and communications, including in particular the endorsement showing a supplemental extended reporting period from November 3, 2010 to November 3, 2011, “support a finding that the intent of the parties was to eliminate the 60-day Basic Extended Reporting Period.”

 

Judge Herlong said that this “is an amazing argument, “ asking the question “Why would the Bank forfeit the 60-day Basic Extended Reporting Period when the Policy specifically provides that if the Bank purchases an extended reporting period of 12 months, the 12-month period begins when the 60-day Basic Extended Reporting Period ‘ends’?”

 

Judge Herlong concluded that “the evidence is clear that the Plaintiffs did not know or intend to forfeit the 60-day Basic Extended Reporting Period. To the contrary, the only inference that can be drawn from the evidence is that the Plaintiffs paid for 14-months of extended reporting coverage, which includes the 60-day Basic Extended Reporting Period and the 12-month Supplemental Extended Reporting Period.” Judge Herlong granted the directors request to reform the schedule of the endorsement to allow for notice during the period January 3, 2011 to January 3, 2012, as a result of which the directors’ notice to the insurer of the FDIC’s lawsuit was timely.

 

Discussion

Although this decision is fact intensive and is a reflection of the specific policy language involved, it nevertheless represents a cautionary tale that is worth heeding. D&O policies are complex contracts with a variety of parts that interact in myriad subtle ways. My review of the sequence of events here as well as a familiarity with the way that the transaction of the kind involved here are processed suggests to me that the parties really were not fully conscious of the possible complications arising from the interaction between the basic extended reporting period and the supplemental extended reporting period.

 

Once the dispute arose, the parties tried to argue over what had been intended, when in reality there had really been no intent, as the persons involved in the transaction may not have been conscious of the potential issue in the first place; the carrier provided a quote with and issued the supplemental extended reporting period endorsement with dates that did not take the 60-day basic extended reporting period into account. The bank and its representatives accepted the quote and placed the order for the supplemental extended reporting period without objecting that the specific period that the carrier proposed to provide did not take the 60-day basic extended reporting period into account. Accordingly, faced with a fundamentally ambiguous situation (but taking into account the policy’s provision that the supplemental extended reporting period starts when the basic extended reporting period ends), the court construed the situation in the directors’ favor.

 

I think anyone who has been involved in these kinds of situations can see how this happened. The policy allowed for a 12 month reporting period extension, the bank said it wanted a 12 month extension, and the carrier issued an endorsement that extended the reporting period 12 months. Because I can see how what happened here could happen, I am reluctant to try to draw conclusions too broadly, other than to say that this case does provide a lesson for us all on the need when modifying a policy to consider all of the ways that the proposed modification will affect the policy.  On a much simpler level, the case does provide an important illustration of the ways that the policy’s various extended reporting provisions interact. I want to make clear that in stating these conclusions here, I do not mean to suggest that I am finding fault with anyone’s actions. As I said, I can see how this situation came about.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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