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.

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Background

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

 

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

 

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

 

The Appellate Court’s decision

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

 

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

 

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

 

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

 

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

 

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

 

Discussion

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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