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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Background

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

 

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

 

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

 

The Appellate Court’s decision

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

 

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

 

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

 

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

 

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

 

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

 

Discussion

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Discussion

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

In a January 18, 2013 order (here), the U.S. Supreme Court granted a writ of certiorari to hear the appeals of three separate petitioners in cases arising out of the Ponzi scheme of R. Allen Stanford. The petitioners are two former law firms for the Stanford International Bank and an insurance brokerage that allegedly was involved in the sale of certificates of deposits for the bank. The petitioners are asking the Supreme Court to decide whether or not the plaintiffs are precluded under the Securities Litigation Uniform Standards Act (“SLUSA”) from asserting state-law class action claims against the three firms. By taking up the case, the Supreme Court will decide important issues about SLUSA’s scope that have divided the lower courts.

 

Congress enacted SLUSA in 1998 in order to prevent erstwhile securities law claimants from circumventing the restrictions of the Private Securities Litigation Reform Act (PSLRA) by filing their claims in state court under state law. As the Supreme Court said in 2006 in the Dabit case, “To stem the shift from Federal to State courts and to prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of the [PSLRA], Congress enacted SLUSA.”

 

SLUSA precludes most state-law class actions involving a “misrepresentation” made “in connection with the purchase or sale of a covered security.” The lower courts have wrestled with the question of what it required in order to satisfy the “in connection with” requirement and trigger SLUSA preclusion.

 

In these cases, the investor plaintiffs contend they were misled to believe that the CDs in which they invested were backed by quality securities traded on major exchanges (though it later appeared that the CDs in fact had little or nothing behind them). The defendants moved to dismiss the state law class actions that had been filed against them, arguing that, though CDs themselves were not “covered securities” within the meaning of SLUSA, the state court class action claims were nevertheless precluded under SLUSA because the plaintiffs claimed they were induced to purchase the securities by misrepresentation that the CDs were backed by SLUSA-covered securities.

 

The district court before which the cases were consolidated granted the defendants’ motions to dismiss and the plaintiffs appealed. In a March 19, 2012 opinion (here), a three-judge panel of the Fifth Circuit reversed the district court, specifically holding that the alleged purchases of covered securities that back the CDs were “only tangentially related to the fraudulent scheme” and therefore that SLUSA does not preclude the plaintiffs from using state class actions to pursue their claims.

 

In reaching its decision, the Fifth Circuit panel exhaustively reviewed the prior case law in which other Circuit courts had considered the question of what connection between an alleged fraud involving uncovered and a downstream transaction in covered securities is required for SLUSA preclusion to apply. The Fifth Circuit’s review of the case law shows that there are divergent and potentially inconsistent views among the various Circuit courts on this question.

 

The two defendant law firms and the defendant insurance brokerage firm filed petitions for writ of certiorari to the U.S. Supreme Court. The cert petitions of the Proskauer Rose and Chadbourne & Parke law firms can be found here and here, respectively. The cert petition of the insurance brokerage, Willis of Colorado, Inc., and its related entities and firms, can be found here. (Hat tip to the SCOTUS Blog for the links to the cert petitions.)

 

In its petition, the Chadbourn & Parke law firm argued that split in authority among the various circuit courts has resulted in inconsistent interpretations and applications of SLUSA preclusion. The firm argued that the Fifth Circuit had adopted an interpretation of the “in connection with” standard that resulted in a determination that SLUSA preclusion did not apply, allowing the case against the firm to go forward, while at the same time rejected a conflicting standard prevailing in the Second, Sixth and Eleventh Circuits that would have resulted in the application of SLUSA preclusion here. The petitioners argued that the Circuit split not only threatened inconsistent outcomes among the Circuits, but it frustrated the very purposes for which Congress enacted SLUSA – that is to establish “national standards” for class actions “involving nationally traded securities.”

 

The Supreme Court’s consideration of these three consolidated cases promises to be interesting and potentially significant. If nothing else, the consolidated cases involve a high-stakes dispute relating to a high-profile fraud. This consideration alone ensures that the Supreme Court’s consideration of these three consolidated cases will receive significant attention.

 

On a more basic level, the Supreme Court’s consideration of these issues should resolve the split among the Circuits in their interpretation of the “in connection with” requirement in the SLUSA preclusion provision. Resolving this split should reduce the possibility of different outcomes in different cases based on nothing more than the judicial Circuit in which the different cases were filed.

 

More importantly, the Supreme Court’s consideration of these issues will help define the scope of SLUSA preclusion in more complex cases where the alleged fraudulent scheme involves a multi-layered transaction. These kinds of questions have been unfortunately common in recent times: for example, the same kinds of questions arose in connection with the Madoff feeder fund suits. (The Courts in the Madoff feeder fund cases concluded that SLUSA preclusion applied.)

 

In a very important sense, the Supreme Court is just the latest battle in the continuing struggle that first emerged after the enactment of the PSLRA. The struggle involves the efforts of the plaintiffs’ securities bar to try to find ways to circumvent the strict standards that Congress imposed in the PSLRA. The plaintiffs’ lawyers first tried to avoid the PSLRA by pursuing their claims in state law suits to which the PSLRA. To avoid that, Congress enacted SLUSA. In these consolidated cases, the Supreme Court will determine the extent to which plaintiffs pursuing claims against remote actors are or are not subject to the constraints of the PSLRA as well as the subsequent Supreme Court case law interpreting the PSLRA

 

In their cert petition, Chadbourne Park argues that the plaintiffs’ filed their claims as state law class action precisely for the reason of circumventing Supreme Court case decisions that restricted federal securities law claims against third party advisors, which is precisely the outcome SLUSA was intended to prevent. In making these arguments, the law firm emphasizes that the aiding and abetting claims the plaintiffs are attempting to assert under state law are not allowed under federal law. The Supreme Court’s determination of these consolidated cases will significantly determine the extent to which plaintiffs can pursue state law securities-related claims against third party advisors. The determination matters because of the possibility it presents that the plaintiffs could pursue these state law claims in circumstances in which federal statutory and case law would not permit such claims.

 

The Supreme Court’s cert grant in these three consolidated cases is just the latest in a series of securities-related disputes that the Court has been willing to take up. The Court already has the Amgen case on its docket this term; the Amgen case has already been argued and the Court’s decision in expected before the end of the current term in June.

 

It used to be that years would pass between Supreme Court cases considering securities law issues. In the past five or six years, though, the Court has seemed to want to take up several securities cases each term. While the Court’s willingness to take up more securities cases certainly provides great blog fodder, it has made the securities litigation environment more volatile and it has occasionally introduced significant and unanticipated changes (as happened for example with the Supreme Court’s paradigm-shifting opinion in Morrison v. National Australia Bank). In final analysis, that is the real reason it is interesting when the Supreme Court agrees to take up a securities case – you never know for sure what might happen when the Supreme Court makes its determination.

 

The Deepwater Horizon platform explosion and oil spill took place in the Gulf of Mexico, about 250 miles southeast of Houston. The environmental damage took place in the Gulf and along the Gulf shore in the Southeastern United States. When BP’s shareholders tried to sue the board of directors of BP — a corporation organized under the laws of England — in a derivative suit filed in federal court in the U.S. alleging breaches of fiduciary duty, they clearly hoped their suit would do better in a court closer to the site of the disaster and ensuing spill. But the district court dismissed the suit on forum non conveniens grounds. In a January 16, 2013 opinion (here), a three-judge panel of the Fifth Circuit affirmed the dismissal.

 

As discussed here, plaintiffs filed the first of several derivative lawsuits in connection with the Deepwater Horizon oil spill in May 2010. Though many of the lawsuits were first filed in the Eastern District of Louisiana, the cases were ultimately consolidated through the multidistrict litigation process in the Southern District of Texas. However, while the lawsuits were filed in U.S. courts, they asserted claims under the U.K. Companies Act 2006 (about which refer here). The defendants moved to dismiss the consolidated derivative litigation in the grounds of forum non conveniens.

 

In a September 15, 2011 ruling, Judge Keith Ellison of the Southern District of Texas determined that, notwithstanding the fact that the Deepwater Horizon disaster took place in the U.S. and caused extensive environmental damage here, “the English High Court is a far more appropriate forum for this litigation,” and accordingly he granted the defendants’ motion to dismiss the cases.  Judge Ellison’s decision can be found here. My prior post discussing Judge Ellison’s opinion can be found here.

 

In its January 16 per curiam opinion, the Fifth Circuit panel affirmed the district court’s decision, concluding that the lower court had not abused its discretion in granting the dismissal on forum non conveniens grounds.

 

Among other things, the Fifth Circuit reviewed the multipart analysis a district court must use in order to determine whether or not to dismiss a case on forum non conveniens grounds. Among the most important of considerations is whether or not there is an alternative forum where the matter can be heard. In order to satisfy the availability requirement, the district court had conditioned its dismissal on the Defendants filing a stipulation that they would submit to the jurisdiction of the English courts, which the Defendants had done. The Fifth Circuit concluded that the stipulation satisfies the availability requirements.

 

Another important consideration a district court must consider in connection with a motion to dismiss on forum non conveniens grounds is the existence of a local interest in the dispute. The Fifth Circuit concluded that the district court had not abused its discretion in determining that, because this dispute was not intended to redress the impact of the Deepwater Horizon disaster in the United States but rather was intended to compensate the British company BP for its financial and reputational harm, England had the greater local interest in the matter.

 

The Fifth Circuit also concluded that the district court had “reasonably” determined that public interest factors weighed heavily in favor of England as a more convenient forum, given that the English statute on which the plaintiffs sought to rely had only recently been enacted leaving the U.S. courts with little jurisprudence to use to try to apply the statute properly.

 

The plaintiffs chose to file their suit in the U.S. rather than in the U.K. undoubtedly had something to do with a perception that a court in closer proximity to the damages caused by the spill might prove to be a more receptive forum. The selection of a U.S. court over an English one also reflects the more general advantages a plaintiff enjoys here by comparison to English courts – for example, the absence in the U.S. of a “loser pays” model, among other things.

 

These kinds of advantages often encourage plaintiffs with claims involving non-U.S. companies to try to pursue their claims in U.S. courts. But the outcome of the dismissal motion in the BP derivative suit represents just one more example of the many ways prospective litigants are finding it increasingly more difficult to pursue corporate and securities claims against non-U.S. companies in U.S. courts. Courts interpreting the U.S. Supreme Court’s Morrison decision have significantly narrowed the circumstances in which securities claims involving foreign companies can go forward in U.S. courts. The Fifth Circuit’s affirmance of the dismissal of the BP derivative suit underscores the difficulties prospective claimants may fact in pursuing derivative suits involving non-U.S. companies here as well.

 

Among the many other lawsuits filed in connection with the Deepwater Horizon disaster, there also was, in addition to this shareholders’ derivative suit, a securities class action lawsuit. Though the separate securities class action lawsuit will be going forward at least in part, the preliminary motions in the securities suit also demonstrate some of the challenges plaintiffs now face in trying to pursue claims in the U.S. against non-U.S. companies. As discussed here, in a February 2012 ruling, Judge Ellison denied in part the motions of defendants to dismiss the securities class action lawsuit that BP shareholders had filed in connection with the Deepwater Horizon disaster.

 

Though Judge Ellison denied the motions to dismiss with respect to the claims asserted by securities class action plaintiffs who had purchased BP ADRs on the U.S. securities exchanges, he granted the motion to dismiss all of the claims – including claims asserted under New York state law and English common law – of U.S.-domiciled investors who purchased their BP shares on the London Stock Exchange. Judge Ellison specifically concluded that because the federal securities laws do not apply to the securities transactions on LSE, he also lacked supplemental jurisdiction to consider the English common law claims. By shaving off the claims of the shareholders who purchased their shares, Judge Ellison dramatically narrowed the scope and range of potential damages in the securities class action lawsuit.

 

Jan Wolfe’s detailed January 18, 2013 Am Law Litigation Daily article about the Fifth Circuit’s ruling in the BP derivative suit can be found here.

 

If to err is human, then writing a blog is a most human endeavor. Tight deadlines and late-night drafting sessions ensure that mistakes infiltrate even carefully composed posts. It is a painful exercise for me to review old posts and see the errors that managed to make it onto my site.

 

In my best efforts to try to avoid mistakes, I try to read my draft posts very carefully (or as carefully as I am able at the late hours at which I am usually composing my posts). Over time, I have developed reading habits that I now carry over to all of my reading. Through this process, I have noticed a number of recurring writing errors that I have outlined below.

 

I have acknowledged the many  errors in my own writing here to assure readers that my comments below about writing are not just the pedantic rant of some self-appointed grammar scold. I offer my observations here with all due humility and in recognition that we all make mistakes, I offer these observations in the hope that others might find them helpful. In this post, I concentrate on word choice errors. Perhaps in a later post I will come back to grammatical errors.

 

Word Choice

Sometimes when I am reading along I will see a word so completely misplaced that I wonder what in the world the author was thinking – or whether the author was thinking. Just yesterday morning I read this sentence on a blog that I follow: “Chief Justice Roberts and Justice Alito dominated the questioning of the water district’s counsel, Paul Wolfson, and appeared exacerbatedby Mr. Wolfson’s argument that the property owner must accept a conditional permit to be able to challenge the condition as violative of Nollan and Dolan.” Don’t you hate it when Supreme Court Justices get “exacerbated” in public? I suspect (although I am not entirely certain) the author meant to say that the two Justices were “agitated.”

 

The preceding example illustrates the kind of word usage errors to which all of us are prone. Here are some recurring word choice mistakes I have noted where the context makes it clear that the author intended to use another word. I am sure some of these errors are Auto Correct blunders, while others are the product of simple inattention. Some of the boo-boos are doozies.

 

Tenant/Tenet: A “tenant” is a person who has a lease. A “tenet” is guiding principle or doctrine. So when I want to refer to a matter of belief, I might use the phrase “a fundamental tenet.” If I were instead to use the phrase “fundamental tenant,” I would be referring to someone who pays a lot of rent.

 

Marquee/Marquis: The sign that projects out from the façade of a movie theater is a “marquee.” A “marquis” is a nobleman ranking below a duke but above an earl or count. So a featured product or attribute is a “marquee product” or a “marquee attribute.” I guess a “marquis product” would be something made by the British aristocracy. 

 

Clique/Click: A “clique” is a small, exclusive group. A “click” is a small, sharp sound. If you are a member of a “clique,” you are smug and self-satisfied. If you are a member of a “click” you are in the sound-making business. (I can’t believe that anyone could make this mistake, but I recently saw it in an angry letter-to-the-editor).

 

Tack/Tact: One of the meanings of the word “tack” comes from sailing, and means to change the boat’s direction relative to the wind by shifting the boat’s sails. The sailing term has come to be used metaphorically. For example, when someone changes their approach to a situation, we might say they are “taking a different tack.” The word “tact” refers to a sense of propriety. I recently read a legal essay in which the author said that “the defendant’s counsel decided to try a different tact.” Maybe the lawyer started holding his tea cup with his little pinky raised?

 

Rein/Reign: A “rein” is a leather strap attached to a bridle and used to lead a horse. A “reign” refers to the period during which a sovereign occupies the throne. These words get mixed up when somebody is trying to say that he or she wants to control something the way they might control a horse (as in “I am going to have to rein him in”) but instead they use the word “reign” and thereby inappropriately invoke the monarchy.

 

Tortious/Tortuous/Torturous: I would say that about half the time anyone uses any one of these three words, they actually meant to use one of the other two. The word “tortious” is a legal term, which essentially means of or pertaining to a tort or wrong. “Tortuous” means full of twists or turns, as in “a tortuous path.” The word “torturous” means causing torture or suffering. The most common confusion of these words occurs when a non-lawyer intends to use the word “tortious.” I have a very simple suggestion on how to avoid confusing these three words. That is, if you didn’t already know the difference between these three words before you read this blog post, then you should just avoid using any of these three words altogether.    

 

Reticent/Reluctant: There appears to be a common misconception that the word “reticent’ is simply a highfaluting form of “reluctant.” Though the two words are somewhat similar, they are not equivalent. The word “reticent” means to be disposed to be silent. The word “reluctant” means unwilling or disinclined. It does not make sense to say that someone is “reticent to get involved.” Here’s my advice: If you feel the urge to use the word “reticent,” just say “shy.” Why use three syllables when one will do just fine?

 

Waive/Wave (Waiver/Waver): A “waiver” is an intentional relinquishment of a known right. A “waver” is somebody saying goodbye to a loved one at the airport. When you “waive” your rights, you are agreeing not to assert them. When you “wave” your rights, you are trying to dry them off in the breeze. 

 

Council/Counsel: These words get conflated when someone is trying to refer elliptically to a lawyer or to legal advice. The word “counsel” can be used as a noun or as a verb; that is, it can be used to describe an advisor or to describe advice. A “council” is an assembly of persons gathered for deliberations. Near my house when I was a child, there was a Catholic church called “Our Lady of Good Counsel.” By contrast, the moniker “Our Lady of Good Council” refers to a popular assemblywoman. Anyway, if you are referring to a lawyer or to legal advice, the word to use is “counsel.” To avoid confusion, just say “lawyer” or “advice” and be done with it.

 

Advice/Advise: The confusion of these two words somehow feels like a blood relative to the confusion of council and counsel. When a lawyer counsels you, she is advising you. When a lawyer gives you her counsel, she is giving you her advice. Here’s how to keep them straight: “advise” is a verb and “advice” is a noun.

 

Site/Cite: A “site” is a location. A “cite” is a reference or quotation. This blog is a web site. When I refer to a legal case on this site, it is a cite to that case. I try to keep this distinction in my sights.

 

Used to/Use to: The confusion of these two short phrases use to bother me, but then I got used to it.

 

When Words are Lacking: It is one thing to confuse words, but it is an entirely different problem when there are no words. An anecdote will illustrate the problem.

 

Like many newlyweds, when I was newly married I was unsure how to address my new mother-in-law and father-in-law. I wanted to use their first names, but that seemed a little bit forward at that point. I decided I would just ask them how they wanted me to address to them, in the hope that they would then authorize me to use their first names. In making this calculation, I did not make sufficient allowances for the peculiarities of the specific people I was dealing with. (I know better now.) My mother- in- law, a scholar of Chinese art, said that the Chinese have words for everything, and they even have words for a son- in- law to use to address his mother- in- law and father-in- law. She suggested that I use these Chinese words to address them. If I recall correctly, the words were something like “kung-kung” and “tai-tai.” She wasn’t kidding. (I didn’t learn the Chinese words, but I did learn something important about my new in-laws.)

 

The point of this story is that there are a lot of things for which there are no words in English, such as forms of address for a son-in-law to use when addressing his father-in-law or a mother-in-law. As illustrated in this January 8, 2013 article from The Atlantic, there are also many emotional states and circumstances for which other languages have names but for which there are no English equivalents. My personal favorite from this list is “Backpfeifengesicht (German): A face badly in need of a fist.”

 

Once you get started, apparently there are a lot of things for which are no words in English and there are a lot of lists of words in foreign language for which there are no English equivalents. I have linked here and here to a couple of the better lists. Here is a good example from one of the lists: “Zeg (Georgian): It means ‘the day after tomorrow.’ Seriously, why don’t we have a word for that in English?”

 

And Now, A Complete Waste of Time: On the website for Abbey Road Studios, the studios have a page with a live webcam feed of the street crossing that the Beatles made famous with their Abbey Road album cover. The camera is set up at a reverse angle from the album cover shot, but if you watch the webcam feed for a few minutes during the daytime you will see various people in the crosswalk trying to take pictures of their group striking the album cover road crossing pose. I watched for about ten minutes yesterday morning and saw several different groups of people trying to capture the album shot. Click here if you want to watch the webcam feed — but only if you are prepared to waste the next quarter of an hour. (Another day I will write the essay about our amazing modern technology and the ridiculous ways we use it.).

 

In what is as far as I know the first determination of liability in connection with the recent wave of litigation filed against U.S. listed Chinese companies, a Hong Kong-based arbitration panel has entered an award in favor of an investment unit of C.V. Starr of over $77 million against China MediaExpress Holdings and related persons and entities, based on the panel’s determination that the company was a “fraudulent enterprise.” The panel’s December 19, 2012 award, which can be found here, makes for fascinating reading. (Hat tip to Jan Wolfe, who reported the award and related U.S.-court filings in a January 16, 2013 Am Law Litigation Daily article, here.)

 

In October 2010, China MediaExpress obtained a U.S. listing through a reverse merger with a U.S. listed publicly traded shell corporation. Prior to the reverse merger, the predecessor entity was owned by Zeng Cheng (“Cheng”) and Ou Wen Lin and Lin’s brother. China MediaExpress allegedly was in the business of providing advertising on inter-city busses. The company’s financial statements showed growing profits and large cash reserves. Starr invested a total of $53.4 million in China MediaExpress in two private transactions in January 2010 and October 2010. 

 

In early 2011, online analysts published reports questioning China MediaExpress’s financial statements. Shortly thereafter, China MediaExpress’s auditor and CFO resigned, as well as members of its board of directors. (Refer here for background.) Trading in China MediaExpress’s shares was halted. Pursuant to provisions in its stock purchase agreements with China MediaExpress, Starr initiated two Hong Kong arbitration proceedings against China MediaExpress, as well as Cheng, the Lin brothers and related entities. Separately, Starr initiated a securities fraud class action against China MediaExpress, its principals and related entities, and the company’s auditor in the District Court of Delaware. (In addition, certain other shareholders separately filed a securities class action lawsuit against China Media Express in the Southern District of New York, about which refer here.)

 

The arbitration panel, which was chaired by former Delaware Supreme Court Justice Andrew Moore II, heard evidence in the two consolidated arbitrations in May 2012. On December 19, 2012, the panel delivered its Award.  A copy of the arbitration award was filed in the District of Delaware lawsuit on January 13, 2013 (refer here).

 

The 49-page award makes for some fascinating reading. Among other things, the panel concluded that the company was “a fraudulent enterprise that caused Starr to lose the total value of its investment.” Cheng, the panel concluded, has “no credibility whatsoever”. Ou Wen gave the impression on the witness stand that “he would say whatever he thought would advance his case.” 

 

Among many things that troubled the panel was what had happened to the supposedly thriving business that had been represented to Starr. The company attempted to argue that the business had been destroyed by short sellers, a contention the panel described as “ridiculous,” observing that:

 

To put it bluntly, this claim of Cheng and CME that short sellers destroyed his business is nonsense. It is a fabrication evidently designed to hide the fact that CME never had the business it represented to the world that it had or that, if it did, it has been ravished by dishonest conduct on the part of those who conducted the business. Coupled with the conduct when challenged with the matters raised by [the company’s auditors] and other matters, Cheng’s claim that the short sellers destroyed his business indicates that Starr was correct with it contended that CME was a fraudulent enterprise.

 

The one specific transaction Cheng offered to explain what happened to all of the cash that the company had reported on its balance sheet was “a land transaction at Shoushan Waterfall.” However, the “evidence concerning this transaction was so implausible and contradictory that it is impossible to accept his claim that any money invested in that transaction was for the benefit of CME and its shareholders even if money of CME was used to finance this transaction.” Overall, the evidence Cheng offered regarding this transaction (which had not been approved by the Board or reported to shareholders and involved a company in which Cheng had an ownership interest) established that Cheng was “in breach of his fiduciary duty.” The evidence concerning the transaction “simply reinforces the conclusion that Cheng was both an unreliable witness and a dishonest businessman.”

 

As Jonathan Weil said in his January 11, 2013 Bloomberg column about the latest accounting scandal involving a Chinese company, “Chinese stocks may not make for trustworthy investments, but they sure can be entertaining to watch from a distance.”

 

The arbitration panel’s award represents a devastating judgment against China MediaExpress and its key officials. It remains to be seen how Starr will be able to use this judgment in its separate U.S. securities fraud suit and whether it will be able to collect on the Hong Kong panel’s award. It will also be interesting to see what the claimants in the separate securities class action lawsuit will be able to make of the arbitration award. On the one hand, the panel’s brutally worded conclusions about the company and its principals are damning. On the other hand, the issue preclusive effect of these determinations in separate proceedings involving separate parties and separate evidentiary standards is the kind of thing good lawyers could argue about for a long time.

 

In any event, whatever the ultimate effect of the arbitration’s panel’s determinations may prove to be, the fact is that, according a statement by Starr’s lawyer quoted in the Am Law Litigation Daily article linked above, the panel’s ruling represents the “first time any of these issues concerning Chinese reverse mergers have been adjudicated.” The implication for other companies involved in these cases – many of which involve allegations even more sensational than were raised here – is ominous.