In a December 6, 2012 opinion (here), a New York state court judge applying New York law has denied a D&O insurer’s motion seeking a summary judgment determination that its policy’s “professional services” exclusion precluded coverage for attorneys’ fees that the Andy Warhol Foundation incurred in defending claims brought by art owners disgruntled by the Foundation’s determination that Warhol had not painted the owners’ paintings.

 

Background

The Foundation is charged with protecting the legacy of the painter, Andy Warhol. The primary purpose of an affiliated entity, The Andy Warhol Art Authentication Board, is to review pieces of artwork submitted t it to determine whether or not they were created by Warhol.. (The related entities are collectively referred to in this post as the Foundation.).

 

 In 2007, an art owner filed a class action lawsuit against the Foundation and related entities on behalf of all persons who had sought authentication from the Foundation that art they owned had been painted by Warhol. A separate art owner later filed an individual action against the Foundation. The claimants, who included persons whose artwork had been determined not to have been created by Warhol, asserted claims of fraud, violations of the Lanham Act and violation of the Sherman Act. After extensive litigation, the claimants ultimately withdrew their claims.  

 

The Foundation sought coverage for its defense fees from the insurer that had issued the organization a $10 million D&O policy and a $2 million E&O policy. The insurer initially denied coverage under both policies, but ultimately wound up paying the full limit of $2 million under the E&O policy. The Foundation sought to recover the remaining balance of its defense costs ($4.6 million plus interest) under the D&O policy. The insurer refused to pay and the Foundation filed suit.

 

The insurer filed a motion for summary judgment in the coverage action, arguing, among other things, that coverage for the remaining defense fees was precluded under the D&O policy’s “professional services” exclusion, which provides that:

 

In consideration of the premium paid, it is hereby agreed that the Company shall not be liable to make any payment for “loss” or “defense cost” in connection with any “claim” made against the “Insured” based upon, arising out of, directly or indirectly resulting from or in consequence of, or in any way involving:

1. The furnishing or the failure to furnish professional services by an attorney, architect, engineer,, accountant, real estate agent, financial consultant, securities dealer, veterinarian or insurance agent or broker.

2. The furnishing or failure to furnish professional services by an [sic] physician, dentist, psychologist, anesthesiologist, nurse, nurse anesthetist, nurse practitioner, nurse midwife, x-ray therapist, radiologist, chiropodist, chiropractor, optometrist, or other medical or mental health professional.

3. A “professional incident” as defined herein. “Professional incident” means any actual or alleged negligent:

a) act;

b) error; or

c} omission

in the actual rendering of services to others including, counseling services, in your capacity as [sic] social services organization. Professional services include the furnishing of food, beverages, medications or appliances in connection therewith.

 

The insurer argued that the Foundation’s authentication services constitute “professional services,” precluding coverage for the defense fees. The insurer also argued that the Foundation fits within the category of a “social services” organization under Section 3 of the exclusion.

 

The Court’s Order

In his December 6, 2012 Decision and Order, Justice Peter Sherwood of the New York (New York County) Supreme Court, applying New York law, denied the D&O insurer’s motion for summary judgment. With respect to the professional services exclusion, Justice Sherwood found that the insurer could not carry its “heavy burden” of proving that the exclusion applies, noting that “the Exclusion lists specific occupations that involve specialized training and skill. Authentication services are not listed.” Justice Sherwood further noted that examples supplied in the exclusion “do not relate in any way to art authentication services.” Because the exclusion is “at best ambiguous,”  it must be construed in the policyholder’s favor,  Justice Sherwood denied the insurer’s motion for summary judgment.

 

Discussion

Although Justice Sherwood denied the insurer’s motion for summary judgment, he did not enter summary judgment in Foundation’s favor. Indeed, the docket cover sheet attached to the decision and order indicates that the ruling is a “non-final disposition.” It is unclear whether or not there are other bases on which the insurer is contesting coverage that were not addressed in its summary judgment motion or what other issues may remain for trial.

 

That said, Judge Sherwood’s ruling represents a serious set back for the insurer in this case. There is a peculiar irony in the court’s determination that the professional services exclusion did not preclude coverage yet at the same time the carrier (ultimately) acknowledged coverage for the claim under itsE&O policy. The general expectation between these kinds of policy’s is that a professional liability claim would be covered by one or the other of the two policy’s but not both; indeed, the general purposeof the professional services exclusion is to ensure that the D&O insurer does not pick up coverage for claims that properly belong under an E&O policy.

 

The problem for the insurer is not that the authentication services didn’t involve the delivery of a kind of professional service. Indeed, I think most people would agree that the art authentication services are professional services, as commonly understood. However that does not mean that the authentication services represent professional services within the meaning of the D&O policy’s exclusion. To make that determination, the actual language used in the policy must control. And that’s clearly where the insurer got in trouble here.

 

The exclusionary language used would seem to have little to do with circumstances of the Foundation’s operations. There is no general catch-all language, either — or at least no language obviously intended to provide a catch-all provision. There is no doubt that had the insurer used language better matched to the Foundation’s activities and circumstances that the exclusion might have operated to preclude coverage. Any underwriting manager responsible for policy issuance quality control will want to take a close look at what happened here and draw some obvious lessons about the steps necessary to ensure that the policy as issued reflects the terms and conditions required to meet the risks accepted.

 

Lisa Scuchman’s December 10, 2012 Am Law Litigation Daily article about Judge Sherwood’s summary judgment ruling can be found here.

 

More About that $168.8 Million Verdict in the IndyMac Case: Readers interested in the massive $168.8 million jury verdict entered last Friday on behalf of the FDIC in its capacity as receiver of the failed IndyMac bank against thee banks former directors and officers will want to take a look at Alison Frankel’s December 11, 2012 post on her On the Case blog (here). As I noted in my discussion about the verdict, the FDIC’s strategy in the case is to try to recover under a second $80 million tower of D&O insurance. The agency’s strategy was dealt a major setback earlier this year, in the form of a ruling in a separate proceeding that all of the IndyMac lawsuits relate back to a prior claim and therefore trigger only a single, virtually depleted $80 million tower. That coverage determination is now on appeal. Frankel’s post does an a good job summarizing the FDIC’s strategy as well as its procedural maneuvering with respect to the second $80 million tower. The FDIC apparently hopes not only to be able to argue that the second $80 million tower is triggered, but that the D&O carriers are liable for  amounts awarded in excess of the $80 million as well.

 

Readers may also be interested in taking a look at the Alston & Bird law firm’s memo about the verdict as well. The firm’s December 11, 2012 memo argues that the verdict is of limited relevance outside of California or in any jurisdiction in which a corporate officer cannot be held liable for mere negligence. The law firm, which represents former directors and officers in a host of the FDIC’s failed bank cases, contends that in many of the cases that the FDIC has filed, “the FDIC will be required to demonstrate that the former bank officers and directors committed gross negligence, which is far more difficult to prove than simple negligence or breach of fiduciary duty.”

 

New securities class action lawsuit filing levels were comparable to historical norms during 2012, but the number of settlements and of dismissals were both down for the year, according to the analysis and projections of NERA Economic Consulting in their December 11, 2012 publication “Flash Update: 2012 Trends in Securities Class Actions” (here).

 

According to the report, there were 195 new securities class action lawsuits filed this year through November 30, 2012. NERA projects that there will be around 213 total lawsuit filings by year end. The projected number is slightly below the 2007-2011 average of 221. (It should be noted that NERA counts multiple actions in multiple jurisdictions against the same defendants as different filings, unless and until consolidated, so NERA’s initial lawsuit filing counts will be higher than those published by some other sources. NERA also notes in the report’s footnotes that it “counts” a case if it involves securities, even where the complaint alleges violations of the common law or breach of fiduciary duty. This criterion may also result in counts differing from other published sources, some of which “count” cases only if they allege violations of the federal securities laws.)

 

The report notes that the 2012 filing levels are more or less consistent with recent years, even though the credit crisis-related lawsuit filings have faded away. The report notes that in 2005-2006, just prior to the credit crisis, annual filing levels had been as low only about 160. The report notes that the number of filings has not declined to these prior lower levels, as “the plaintiffs’ bar has found new causes of action, with merger objection cases picking up much of the slack.”

 

Though filings levels have remained more or less level, the number of cases resolved during 2012 through dismissal or settlement has plummeted. (It is important to understand that the report measures the time of settlement as the date on which it is approved, so some high profile settlements that were announced in 2012 – such as the massive $2.43 billion settlement of the BofA/Merrill Lynch merger case – are not reflected in NERA’s analysis. The NERA report count of dismissals includes dismissals that are not yet final, such as dismissals without prejudice.)

 

According to the report, the 92 settlements that are projected to be approved in 2012 is the lowest number since 1996 and 25% lower than 2011. The 60 dismissals projected for the year represent the lowest level since 1998 and the 2012 total is 50% lower than 2011. The total of 152 cases that have been resolved (settled or dismissed) is also the lowest level since 1996. The report notes that part of the reason for these declines may simply be that there were fewer cases pending and therefore available to be resolved as 2012 began, the lowest level of pending cases since 2000. The report also speculates that the slowdown in the number of settlements and dismissals may also be due to “other changes in the legal environment.”

 

While the number of settlements may have declined, average and median settlements are up. The average securities class action settlement in 2012 was $36 million, compared to a 2005-2011 average of $42.1 million. But if the calculation excludes settlements over $1 billion, the IPO laddering cases and the merger objection cases, the 2012 average is $36 million, up from a revised average for the 2005-2011 period of $32 million. The median settlement in 2012 was $11.1 million, which is the largest ever annual median since 1996, and only the second year since 1996 that the median has exceeded $10 million.

 

FDIC D&O Lawsuits and D&O Insurance Coverage: Former directors and officers of failed banks who are sued by the FDIC may look to the bank’s D&O insurance to defend and protect themselves. However, the bank’s D&O insurer may assert defenses to coverage that could limit the availability of the insurance, according to a December 10, 2012 memorandum entitled “Not So Fast: Directors and officers Sued by the FDIC over Bank Failures Should Not Assume D&O Insurance Will Cover the Claims” (here) by Britt K. Latham and M. Jason Hale of the Bass Berry and Sims law firm.

 

As reflected in the memorandum, among other issues, the carriers are raising the “Insured vs. Insured” exclusion found in most policies as a defense to coverage for claims brought by the FDIC in its capacity as the failed bank’s receiver. The authors review the existing case law and observe that “this issue is expected to be hotly contested in the wake of continuing D&O lawsuits by the FDIC related to bank failures.”

 

My own overview of the impact of the Insured vs. Insured exclusion on the FDIC’s failed bank litigation can be found here. As I discussed in a recent post (here), in October 2012, a federal court in Puerto Rico held that the Insured vs. Insured exclusion does not preclude coverage for an FDIC’s claims as receiver of a failed bank against the bank’s former directors and officers.

 

On December 7, 2012, in a comprehensive victory for the FDIC in its capacity as receiver of the failed IndyMac bank, a jury in the Central District of California entered a verdict of $168.8 million in the FDIC’s lawsuit against three former officers of the bank. As reflected in the verdict form (a copy of which can be found here), the jury found that the defendants had been negligent and had breached their fiduciary duties with respect to each of the 23 loans at issue in this phase of the FDIC’s case against the three individuals

 

At the time its July 11, 2008 closure, IndyMac had assets of about $32 billion, making its failure the fifth largest bank failure in U.S. history. But though there have been a few larger bank failures, none have been costlier to the FDIC’s deposit fund. IndyMac’s collapse has cost the fund nearly $13 billion.

 

In June 2010, the FDIC filed against a lawsuit several former officers of the bank’s homebuilder division, in what was the first D&O lawsuit the agency filed during the current bank failure wave, as discussed here. The FDIC’s lawsuit sought to recover damages from the individual defendants for “negligence and breach of fiduciary duties” and alleged “significant departures from safe and sound banking practices.” As discussed here, in July 2011, the FDIC filed a separate lawsuit against IndyMac’s former CEO, Michael Perry.

 

As discussed here, trial in the FDIC’s case against the former homebuilder division officers began on November 6, 2012. The three individual defendants in the case that went to trial are: Scott Van Dellen, the former President and CEO of IndyMac’s Homebuilders Division (HBD), who was alleged to have approved all of the loans that are the subject of the FDIC’s suit; Richard Koon, who was HBD’s Chief Lending Officer until mid-2006 and who was alleged to have approved a number of the loans at issue; Kenneth Shellem, who served as HBD’s Chief Compliance Officer until late 2006, and who is also alleged to have approved many of the loans. (The FDIC’s original complaint had named a fourth individual, William Rothman, as a defendant as well. According to pleadings filed in the case, Rothman settled with the FDIC in exchange for Rothman’s assignment to the FDIC of Rothman’s rights against IndyMac’s D&O insurers.)

 

According to news reports, the jury reached its verdict after 16 days of trial. During the trial, the defendants attempted to argue that they and the bank were victims of an unanticipated downturn in the housing market. The FDIC in turn argued that the bank officials disregarded danger signals about the housing market and continued to approve loans in order to meet production goals and obtain bonus compensation.

 

The jury verdict form reflects separate verdicts as to each of the 23 loans that were at issue in this phase of the trial of the case. With respect to each of the loans, the jury separately found that the specific defendants who were named as to each of the loans had been negligent and had breached their fiduciary duties. The jury assigned separate damages as to each of the loans as well. The separate damage awards total $168.8 million. However, each of the three defendants was held liable for differing amounts. All three of the defendants were named only with respect to 14 of the 23 loans. With respect to five of the 23 loans, only Van Dellen and Shellem were named, and as to four of the loans, Van Dellen alone was named. Thus the jury found Van Dellen liable as to all 23 of the loans, but found Shellem liable only as to 18 of the loams and found Koon liable only as to 14 of the loans.

 

The just completed trial apparently represents only the first trial phase of this matter. There apparently will be a separate trial phase that will address the FDIC’s allegations as to scores of other loans as well as allegations with respect to the bank’s loan portfolio as a whole. The FDIC apparently is seeking total damages of more than $350 million. In addition, the FDIC’s separate case against Perry, the bank’s former CEO, will continue to go forward as well.

 

Given the magnitude of the jury’s verdict, there undoubtedly will be post-trial motions and, after the conclusion of all remaining trial phases, appeals as well. One issue that likely will be subject of an appeal will be Central District of California Judge Dale Fischer’s October 2012 determination under California law that the three defendants, as former officers (but not former directors), could not rely on the business judgment rule and therefore could be held liable for mere negligence. (The potential appeal value of this issue for the defendants may be diminished somewhat due to the fact that the jury specifically found that the defendants had not only been negligent, but had also violated their fiduciary duty, suggesting that the defendants would still have been found liable even if they couldn’t be held liable for negligence).

 

While the jury verdict unquestionably represents a victory for the FDIC, the FDIC may face considerable challenges attempting to collect on the verdict. There may be little or no remaining D&O insurance out of which the FDIC might try to recover. As discussed at length here, in July 2012, Central District of California Judge Gary Klausner held in a related D&O insurance coverage case that all of the various lawsuits related to Indy Mac’s collapse (including the case that in which the jury verdict was just entered) were interrelated to the first-filed lawsuit, and thus triggered only the D&O insurance that was in force when the first suit was filed. Because all of the later-filed lawsuits related back to the first lawsuit, the later lawsuits – including the lawsuit in which the jury verdict was entered — did not trigger a second $80 million insurance program that was in force when the later suits were filed. (The FDIC has filed an appeal of Judge Klausner’s ruling.)

 

In other words, unless Judge Klausner’s insurance coverage ruling is reversed on appeal, the only insurance available out of which the FDIC might be able to try to realize the amount of the jury verdict is whatever is left under the first tower of insurance. However, as I noted in a prior post, in pleadings that they filed in July 2012, the defendants represented to the court that defense fees incurred in all of the various IndyMac-related lawsuits, as well as settlements that had been reached in some of the suits, had exhausted or would soon exhaust the first tower of insurance.

 

Pleadings that the three individuals filed in the case state that “the FDIC specifically structured this lawsuit in order to reach the Tower 2 Policy.” Judge Klausner’s ruling in the insurance coverage case obviously upset the FDIC’s strategy in this case. The outcome of the appeal in the insurance coverage case may well determine whether or not the massive verdict the FDIC just won results in any significant monetary benefits for the agency.

 

This case was not only the first case the FDIC filed against the former directors and officers of a failed bank as part of the current bank failure wave, but it is also the first case to go to trial. Since the FDIC filed this suit back in July 2010, the agency has filed forty more cases against the directors and officers of failed banks. There undoubtedly will be more lawsuits yet to come. Many of the individual defendants named in these cases vigorously dispute the FDIC’s allegations. However, the jury verdict in the IndyMac case may communicate a sobering message about what it might mean to force a case all the way to trial. Given this verdict, it may now be even more unlikely that one of these cases would go to trial.

 

Scott Recard’s December 8, 2012 Los Angeles Times article about the jury verdict can be found here.

 

Special thanks to Thomas Long of the Nossaman law firm for sending me the jury verdict form. The Nossaman firm represented the FDIC at the IndyMac trial.

 

D&O Insurer, FDIC Settle Claims Against Former BankUnited Officials: The FDIC’s efforts to try to recover under failed banks’ D&O insurance do not always involve a lawsuit. Sometimes the FDIC asserts its claims in a demand letter that it presents to the former directors and officers of a failed bank, with a copy of the letter also send to the failed bank’s D&O insurers. Sometimes these kinds of letter demands result in a settlement without a lawsuit ever being filed. That apparently is what has happened in connection with the FDIC’s claims against former directors and officers of BankUnited, a Coral Gables, Florida bank that failed in May 2009, at least according to a December 6, 2012 article in the South Florida Business Journal.

 

As reflected here, on November 5, 2009, the FDIC, in its capacity as BankUnited’s receiver, sent a letter to fifteen former directors and officers of the bank, in which the FDIC presented its "demand for civil damages arising out of losses suffered as a result of wrongful acts and omissions committed by the named Directors and Officers." The letter, a copy of which can be found here, explains that the demand for civil damages is "based on the breach of duty, failure to supervise, negligence, and/or gross negligence of the named Directors and Officers." Though the letter is nominally addressed to the fifteen individuals, copies of the letters also were sent directly to the bank’s primary and first level excess D&O insurers.

 

In addition to the FDIC’s claims against former directors and officers of the failed bank, shareholders of the failed bank’s holding company (which is now bankrupt) filed a lawsuit against certain former bank directors and officers. The bankruptcy trustee asserted claims against the individuals as well.

 

According to the newspaper article, these various parties have reached a settlement agreement, subject to bankruptcy court approval, to divide the bank’s $10 million primary D&O insurance policy four ways: $3.5 million to the class action plaintiff; $2.5 million to the FDIC; $1.65 to the bankruptcy trustee; and the balance going to pay legal defense fees and other costs. The settlement agreement also allows the FDIC to attempt to pursue a recovery from the carrier that issued the bank’s $10 million first level excess D&O insurance carrier, which has refused to pay under its policy.

 

This settlement is interesting because it reflects the tensions that can arise when multiple claims have been asserted against the former directors and officers of a failed bank. When there are multiple claims and only limited insurance, the various claimants are put in competition with each other, as they each race to try to capture as much of the insurance as they can while at the same time accumulating defense fees erodes what little insurance there may be. The division here of the $10 million primary D&O policy reflects an effort between and among the various claimants to try to work out a split of the insurance  so that each of the various sets of claimants at least gets a part of the policy proceeds. The challenge for other claimants trying to work out similar deals in other cases is to try and get a deal done before defense fees exhaust the insurance fund.

 

Special thanks to a loyal reader for sending me a link to the article about the BankUnited settlement.

 

Civic Duty: I will be on jury duty this week. We’ll see if anybody has the guts to allow me to remain in the jury box. If I am called, it may be a few days before I am able to resume normal blogging activities.  

 

In the following guest post, Kara Altenbaumer-Price (pictured) takes a look at two recent case decisions in which courts have declined attorneys’ fee awards in connection with non-cash class settlements. Kara is the Management & Professional Liability Counsel for insurance broker USI. 

 

Many thanks to Kara for her willingness to publish her article here. I welcome guest posts from responsible commentators on topics relevant to this blog. Any readers who are interested in publishing a guest post on this site are encouraged to contact me directly. 

 

Two recent cases striking down attorney fees awards raise questions about lawyer-driven class actions and the viability of suits aimed at garnering attorney fees rather than cash for the class plaintiffs. If the holding in either case gains traction, it could have a significant positive impact on D&O insurance, particularly in the area of merger-objection suits and efforts by carriers to stem the losses from these types of cases.    

 

In the first case, the Dallas Court of Appeals dealt a blow to plaintiffs’ lawyers pursuing so-called “bump up” cases in Texas state courts in September when it rejected a settlement that included cash to the lawyers, but none to the class of investors. Rocker v. Centex Corp. appears to have been a typical “bump-up” case in which shareholders of a company about to merge or be acquired file suit seeking to raise—or “bump up”—the purchase price of the company they hold shares in. 

 

The legacy of this case was thrown into uncertainty on November 30, 2012 when the Texas Supreme Court granted the review of the case without consideration of the merits and set aside the judgment pursuant to an agreement by the parties. Nonetheless, the case warrants discussion because the reversal did not call into question the merits of the lower appellate court decision.

 

The underlying case in Rocker v. Centex was not unusual, as it is not uncommon for the settlement of merger objection cases to include additional disclosures to the shareholders about the proposed deal, but no increase in share price and thus no cash to the shareholder class. Such settlements, however, usually involve hefty attorneys’ fees awards to the plaintiffs’ counsel. What was remarkable about Rocker v. Centex is that the Texas appellate court, however, refused to approve such a settlement, ruling that tort reform legislation passed several years ago in Texas prohibits such awards.

 

The court looked to a Texas Rules of Civil Procedure called the “coupon rule” that provides that “if any portion of the benefits recovered for the class are in the form of coupons or other noncash common benefits, the attorney fee awarded in the action must be in cash and noncash amounts in the same proportion as the recovery for the class.”   In Rocker v. Centex, the entire settlement to the class was a noncash benefit in the form of additional, material disclosures related to the deal. As a result, the court ruled that the plaintiffs’ attorneys could be awarded no cash—even if it meant that they had worked for free. The Centex case eliminates the incentive for plaintiffs’ counsel to bring cases—at least in Texas state courts—where the end goal is attorneys’ fees. If there really is a belief that the share price is too small, and the case causes a rise in the share price, then attorneys fees would still be justified and payable under the Centex ruling.

 

The second case actually arises in the context of privacy litigation, rather than securities class actions, but it tackled the same issue of class settlements than contain no cash to the class. A California federal district court rejected a settlement in a privacy class action against Facebook because the settlement included changes to Facebook, $10 million to organizations involved in internet privacy, and $10 million in attorneys fees, but no cash to the plaintiffs themselves. The court in Fraley v. Facebook  questioned the large size of the fee award. The court also rejected arguments by plaintiffs’ counsel estimating the value of the privacy changes to Facebook to the plaintiffs and questioned whether injunctive awards to plaintiffs can be assigned a value at all for assessing attorneys’ fees. Like the Rocker v. Centexcase, this case  potentially has huge implications for class actions pursued for the purpose of creating plaintiffs’ fee awards.

 

Both of these cases highlight the primary issue that defendants (and insurers) have with merger litigation (even though the Facebook case arose in another context, the principle is the same)—the notion that the cases exist not to ensure that the best deal is achieved for shareholders, but to make a quick and sizeable buck for plaintiffs attorneys. As Advisen wrote in its second quarter 2012 report that “it has been suggested, including by some judges presiding over these cases, that new filings are driven more by plaintiff’s attorneys seeking new sources of fee revenues than by the economics of mergers and acquisitions.” Companies, eager to close the deal, usually offer up a hasty settlement that includes large fee awards, to make the litigation go away. 

 

With 91 percent of merger deals above $100 million resulting in litigation according to Cornerstone, insurance carriers have taken note of this issue, which has turned D&O insurance from a low frequency, high severity product to a high-frequency product in the carrier’s view. Many have blamed the increase in M&A suits for the recent rise in D&O insurance rates. One solution to combat this issue is the introduction of separate M&A deductibles for public company D&O and exclusionary language for M&A cases that is creeping into 2012 and 2013 D&O insurance renewals.   Considering that coverage changes tend to lag behind the litigation trends, it will be interesting to watch this trend develop as carriers continue to try to manage losses associated with M&A cases.

 

Many have blamed the increase in M&A suits for the recent rise in D&O insurance rates. One solution to combat this issue is the introduction of separate M&A deductibles for public company D&O and exclusionary language for M&A cases that is creeping into 2012 and 2013 D&O insurance renewals.   Considering that coverage changes tend to lag behind the litigation trends, it will be interesting to watch this trend develop as carriers continue to try to manage losses associated with M&A cases.

 

Insured depositary institutions continued to improve during the third quarter of 2012, while at the same time the number and percentage of “problems institutions” declined, according to the FDIC’s latest quarterly banking profile. The quarterly report for the quarter ending September 30, 2012, which the agency released on December 4, 2012, can be found here. The FDIC’s December 4, 2012 press release about the report can be found here.

 

According to the report, reduced expenses from loan losses and rising noninterest income helped the insured institutions’ earnings reach $37.6 billion in the third quarter, the highest quarterly earnings posted since the third quarter of 2006. The FDIC’s press release quotes FDIC Chairman Martin Gruenberg as saying that “this was another quarter of gradual bur steady recovery for FDIC-insured institutions.”

 

The FDIC also reported a decline in the number of “problem institutions” during the quarter, from 732 at the end of the second quarter of 2012 to 694 at the end of the third quarter. (A “problem institution” is an insured depositary institution that is ranked either a “4” or a “5” on the agency’s 1-to-5 scale of risk and supervisory concern. The agency does not release the names of the banks on its “problem” list.) The quarterly decline represented the sixth consecutive quarter that the number of “problem” banks has fallen, and it is the first time in three years that there have been fewer than 700 banks on the list.

 

The number of reporting institutions declined during the quarter, from 7245 at the end of the second quarter 2012 to 7181 at the end of the third quarter. The 694 problem institutions at the end of the third quarter 2012represented 9.66% of all reporting institutions, whereas the 714 problem banks at the end of the second quarter 2012 represented 10.10% of all reporting institutions. By way of comparison, at the end of the third quarter of 2011, there were 844 problem institutions, representing 11.35% of the 7436 institutions reporting as of September 30, 2011. At year end 2010, there were 884 problem institutions, representing 11.39% of all reporting institutions at the time.

 

The assets of the “problem banks” as of the end of the third quarter 2012 stood at $262.2 billion, down from $282.2 billion as of the end of the second quarter 2012. The problem institutions as of the end of the third quarter of 2011 represented assets of $339 billion. At the end of 2009, the 702 problem institutions at that time represented assets of $402 million.

 

Twelve institutions failed during the third quarter of 2012, the smallest number of failures in a quarter since the fourth quarter of 2008, when there were also 12. There were a total of 43 bank failures in 2012 through September 30, 2012. There have been seven more bank failures since that date, brining the 2012 YTD total as of December 4, 2012 to 50. Through December 4, 2011, there had been 90 YTD bank failures. At this point it appears that there will be fewer bank failures this year than during any year since 2008, when there were 25. Since January 1, 2008, there have been a total of 457 bank failures. The high water mark for bank failures was in 2012, when there were 157 – the highest annual number of bank failures since 18 years prior.

 

Still Another Failed Bank Lawsuit in Georgia: While the bank failure wave finally seems to be winding down, the follow-on litigation is still just ramping up. With the third year anniversaries of bank failures that occurred during the period with the most bank closures approaching, the FDIC clearly seems to be ramping up its failed bank litigation. On December 3, 2012, the FDIC filed yet another lawsuit against the former directors and officers of a failed Georgia bank. The FDIC’s complaint, filed in the Northern District of Georgia in its capacity as receiver for the failed First Security National Bank (FNSB) of Norcross, Georgia, can be found here.

 

FNSB failed on December 4, 2009, so the FDIC really went down to the three year statute of limitations wire on its FNSB filing. The FDIC’s complaint names seven former directors and officers as defendants. The FDIC asserts claims for both negligence and gross negligence, citing the defendants’ “numerous, repeated, and obvious breaches and violations of the Bank’s loan policy and procedures, underwriting requirements, banking regulations and sound bank practices” as “exemplified” by 17 loans made between December 20, 2995 and February 19, 2008, for which the agency seeks damages of no “less than $7.596 million.”

 

This latest complaint is the 41st that the FDIC has filed against the former directors and officers of a failed bank as part of the current bank failure wave. It is also the 13th the agency has filed involving a failed Georgia bank, meaning that over 31% of all failed bank D&O lawsuits have targeted failed Georgia banks. While Georgia has had more bank failures during the current bank failure wave than any other state, its approximately 80 bank failures represents only about 17.5 percent of all bank failures, meaning that the FDIC is pursuing a disproportionally high number of lawsuits in connection with failed Georgia banks, as I noted in greater detail in a recent post (here).  

 

Special thanks to a loyal reader for providing me with a copy of the FSNB complaint.

 

In what is by far the largest settlement in the current wave of securities litigation involving Chinese companies, Ernst &Young, which served as the outside auditor for Sino-Forest, has agreed to pay C$117 million to settle the securities suit that  Sino-Forest investors filed  in Ontario against the accounting firm. (At current exchange rates, the Canadian dollar and the U.S. dollar are valued roughly equally.) According to the plaintiffs’ lawyers’ December 3, 2012 press release (here), E&Y’s settlement of the Sino-Forest suit “is the largest settlement by an auditor in Canadian history, by a large margin, and is one of the largest-ever auditor settlements worldwide.”

 

As discussed here, the plaintiffs’ lawyers first filed their suit in Ontario Superior Court of Justice on behalf of Sino-Forest shareholders in June 2011, following press reports and online reports that the company had substantially overstated the size and value of its forestry holdings in China’s Yunnan province. The allegations first emerged in a June 2, 2011 report by online-research firm Muddy Waters, which accused Sino-Forest of outright fraud. Floyd Norris’s June 9, 2011 New York Times article about E&Y’s involvement in the Sino-Forest scandal can be found here. Earlier this year, Sino-Forest filed for bankruptcy protection.

 

As detailed in the claimants’ amended statement of claim, the lawsuit named as defendants Sino-Forest, its senior officers and directors, its auditors, its underwriters and a consulting company. The plaintiffs previously settled with the consulting company in an agreement that did not involve any monetary payments (refer here). An overview of the Ontario litigation, including links to key documents, can be found here.  The plaintiffs’ lawyers’ December 3 press release emphasizes that the plaintiffs’ claims against the remaining defendants (including in particular the individual directors and officers and the offering underwriters, as well as another auditor) remain pending.

 

Perhaps coincidentally (or perhaps not), on December 3, 2012, the Ontario Securities Commission filed charges against Ernst & Young that the firm had failed to conduct their audits of Sino-Forest “in accordance with relevant industry standards.” The OSC’s Statement of Allegations against E&Y can be found here. A December 3, 2012 Financial Post article discussing both the OSC allegations and the separate civil suit settlement can be found here.

 

And in yet another apparent coincidence, on December 3, 2012, the SEC initiated administrative proceedings against the China affiliates of each of the Big Four accounting firms (including E&Y’s Chinese affiliate) and another large U.S. accounting firm for refusing to produce audit work papers and other documents related to China-based companies under investigation by the SEC for potential accounting fraud against U.S. investors. The SEC’s December 3 press release about the administrative action can be found here.

 

E&Y’s settlement of the Sino-Forest suit is noteworthy in several respects, and not just because it is the largest auditor settlement in Canadian history. It is also noteworthy because it is the largest settlement so far of any kind in connection with the wave of securities suits that were filed in the U.S. and in Canada against Chinese companies in recent years. As I noted in a prior post (here), in general the securities suits involving U.S.-listed Chinese companies that have reached the settlement stage have only resulted in modest settlements, well below the range of median settlements for U.S. securities class action lawsuits generally. However, those modest settlements have involved only the corporate entity defendant  and its directors and officers, and the settlements typically involved only the remaining amounts of D&O insurance.

 

From the earliest stages of the wave of securities suits involving Chinese companies, I had been told that owing to the logistical challenges and other shortcomings in the lawsuits against the Chinese companies, the true targets were really not the companies themselves, but rather their outside advisors. Up to this point, I have been skeptical that the plaintiffs might succeed in getting traction in their claims against the outside advisors. Clearly, the massive E&Y settlement in the Sino-Forest case demonstrates that the claims against these companies outside advisors  canhave significant value, at least in some cases. In any event, these cases have suddenly become much more interesting to watch.

 

Dismissal Granted in U.S.-Listed Chinese Company Securities Suit: The securities suits involving Chinese companies are only valuable to the plaintiffs if they are able to get to the case to the settlement stage. Many of these cases have been dismissed at the preliminary motions stage, and on December 3, 2012, the defendants’ motions to dismiss were grated in the securities suit pending in the Western District of Washington against L&L Energy, a U.S. company owning Chinese mining operations, and certain of its directors and officers. The motion was granted with leave to amend.  A copy of the December 3 opinion can be found here.  

 

As detailed here, the plaintiffs had raised a number of allegations against L&L, asserting among other things that the company had misrepresented its revenues in its filings with the SEC. In making these allegations the plaintiffs relied on discrepancies between the financial figures the company reported in its SEC filings and the figures the company’s subsidiaries reported in China with the State Administration for Industry and Commerce (SAIC).

 

In rejecting the plaintiffs’ allegations based on this discrepancy, Western District of Washington Robert Lasnik noted that the two kinds of financial  reports involved a number of different reporting requirements and protocols. Based on these differences in the reporting requirements, Judge Lasnik concluded that while “one might draw the inference that the amounts reported to the SAIC and the SEC are inconsistent … because the inputs and consolidation methods varied in material respects, the inference is not particularly strong.” He concluded that “the bare allegations supporting the plaintiffs’ assertions that the SEC numbers, rather than the SAIC numbers, are fabrications fail to raise the necessary strong inference of falsity.”

 

This decision is just the latest to consider securities fraud allegation based on allegations that the financial figures a Chinese company reported to the SEC were different than those reported to the SAIC. As I noted here, in August 2012, the court denied the motion to dismiss in the securities suit involving Duoyuan Global Water, a case that also involved the same kinds of alleged reporting discrepancies. However, as noted here, in November 2011, the court in the China Century Dragon Media case, like Judge Lasnik in this case, granted the defendants motion to dismiss in another lawsuit involving alleged reporting discrepancies.

 

Clearly, the track record is mixed; the one thing that is for sure is that the mere fact of the reporting discrepancies alone may not be sufficient for plaintiffs’ to survive the initial pleadings stage.

 

Special thanks to a Doug Greene of the Lane Powell law firm for forwarding a copy of the L&L Energy opinion. Lane Powell represents the defendants in the L&L Energy case.

 

Rescue Stairs for Stranded Bears: Feel like smiling? Good. Watch this video. 

Though the FDIC has filed failed bank lawsuits in a number of states during the current bank failure wave, the agency has filed a disproportionally large number of suits against former directors and officers of failed Georgia banks. On November 30, 2012, the FDIC filed yet another D&O lawsuit involving a failed Georgia bank, the twelfth the agency has filed involving a failed Georgia bank, out of 40 total lawsuits overall that it has filed.

 

On November 30, 2012, the FDIC as receiver of The Buckhead Community Bank filed a complaint in the Northern District of Georgia nine former directors and officers of the failed bank. Six of the individual defendants served only as directors, two served as both directors and officers, and one seved only as an officer. The FDIC’s complaint can be found here.

 

The individual defendants include the bank’s former Chairman, R. Charles Loudermilk, Sr. In addition to serving as the bank’s Chairman, Loudermilk was, according to the complaint, also the largest shareholder of the bank’s holding company. Loudermilk is the 85-year old founder of the rent-to-own company, Aaron’s Inc. Loudermilk was also the founder of Buckhead Community Bank as well.

 

The bank, which was located in the Buckhead neighborhood of Atlanta, failed on December 4, 2009. The FDIC’s complaint asserts claims against the defendants for negligence and for gross negligence and alleges that the defendants engaged in “numerous, repeated, and obvious breaches and violations of the Bank’s Loan Policy, underwriting requirements and banking regulations, and prudent and sound banking practices” as “exemplified” by thirteen loans and loan participations the defendants approved that cause the bank damages “in excess of $21.8 million.”

 

An interesting feature of the lawsuit is that the FDIC has included allegations of ordinary negligence. This is interesting because of the recent decision in the Northern District of Georgia in the Integrity Bank case, applying Georgia law and holding that because of their protection under the business judgment rule, directors cannot be held liable of ordinary negligence. In light of that earlier decision, it would seem that the defendants in the new lawsuit have a basis on which to seek to have the negligence claims against them dismissed.

 

The FDIC, in anticipation of this argument, has alleged (at paragraph 84 of the complaint), that the individual defendants are not entitled to rely on the business judgment rule because “none of the Defendants’ actions or inactions, which are the basis of the this negligence claim, was taken in good faith, nor were Defendants reasonably well-informed in taking such actions or inactions.”

 

 It should also be noted that the FDIC is pursuing an interlocutory appeal of the court’s order in the Integrity Bank On November 19, 2012, the Eleventh Circuit granted the FDIC’s request for leave to pursue an  interlocutory appeal, so there will likely be much more to be heard on this issue in the months ahead.

 

The FDIC’s lawsuit against the former directors and officers of The Buckhead Community Bank is the 40th failed bank lawsuit the agency has filed as part of the current bank wave. Of these 40 lawsuit, 12 (including this latest suit) have been filed against former directors and officers of failed Georgia banks, or about 30 percent of all of the failed bank D&O suits that agency has filed so far. Georgia has had more bank failures than any other state, but with about 80 failed banks out of the more than 440 failed banks total, Georgia’s bank failures represented only about 18 percent of all failed banks. For whatever reason, Georgia’s failed banks are disproportionately represented among the bank failures that have led to FDIC failed bank litigation.

 

One final note about this case is that it was filed just days before the third anniversary of the bank’s failure. Because so many banks failure in the fourth quarter of 2009 and the first two quarters of 2010, it seems likely there will be many more suits just ahead. The FDIC has made it clear that further lawsuits are coming. On its website (here), the agency states that as of November 15, 2012, it has authorized suits in connection with 84 failed institutions against 700 individuals for D&O liability. This includes 40 filed D&O lawsuits naming 317 former directors and officers (these figures take this latest lawsuit into account). In other words, the agency has authorized as many as 44 additional lawsuits. For many months now, each time that the agency updates its website, the number of authorized lawsuits increases, so even more lawsuits likely lie ahead.

 

As discussed in an earlier guest post on this site (here), entrepreneurial plaintiffs’ lawyers seem to have hit upon a new way to extract a fee from the fights over executive compensation. This new wave of executive comp suits, in which the plaintiff’s seek to enjoin upcoming shareholder votes on compensation or employee share plans on the grounds of inadequate or insufficient disclosure, have resulted in some success – at least for the plaintiffs’ lawyers involved. These new kinds of executive compensation–related lawsuits possibly may be “gaining steam,” according to a recent law firm study.

 

A November 19, 2010 memo from the Pillsbury law firm entitled “Plaintiffs’ Firms Gaining Steam in New Wave Say-on-Pay Lawsuits” (here) reviews the history of say-on-pay litigation that has followed in the wake of the Dodd Frank Act’s requirements for an advisory shareholder vote on executive compensation. The memo shows that of the at least 43 companies that experienced negative say-on-pay votes in 2011, at least 15 were hit with shareholder suits alleging, among other things, that the companies’ directors and officers had violated their fiduciary duties in connection with executive compensation. However, as is well documented in the law firm memo, these suits have not fared well in the courts; ten of the eleven of the 2011 suits that have reached the motion to dismiss stage have resulted in dismissals.

 

Faced with this poor track record on last year’s say-on-pay suits, plaintiffs’ lawyers have filed fewer of these kinds of suits this year against companies that experience negative votes. However, as the law firm memo explains, one plaintiffs’ firm has now “orchestrated a new strategy to hold companies liable: suits to enjoin the shareholder vote because the proxy statement failed to provide adequate disclosure concerning executive compensation proposals.” According to the memo, there have been at least 18 of these types of suits, with nine of them having been filed just in the month preceding the memo’s publication.

 

As detailed in Nate Raymond’s November 30, 2012 Reuters story entitled “Lawyers gain from ‘say-on-pay’ suits targeting U.S. firms” (here), these new style lawsuits (of which the article says some 20 have been filed) have met with some success. According to the article, at least six of these suits “have resulted in settlements in which the companies have agreed to give the shareholders more information on the pay of the executives.” These settlements have also “resulted in fees of up to $625,000 to the lawyers who brought the cases.” The article also notes, however, that while the settlements have provided additional disclosures and legal fees for the firm that has filed almost all of these suits, “they have netted no cash for shareholders.”

 

These new suits share certain characteristics with the M&A-related lawsuits that are another current litigation trend. (Refer here for background regarding the M&A-related litigation trends.)  That is, they are filed at a time when the defendant company is under time pressure that motivates the company to settle quickly rather than deal with the lawsuit. Just as in the merger context, where the company wants to move the transaction forward and doesn’t want the lawsuit holding things up, companies facing these new style say-on-pay lawsuits, facing an imminent shareholder vote, are pressured to reach a quick settlement rather than risking a delay in the shareholder vote.

 

It is hard to disagree with the sentiment of one defense counsel, quoted in the Reuters article, that these lawsuits are nothing more than a “shakedown for a quick buck.” At least some companies are trying to resist these suits. For example, in a November 13, 2012 ruling, Alameda County (California)Superior Court Judge Wynne Carvill rejected the plaintiff’s injunction request, holding that there is “no risk of any interim, much less irreparable harm” if the say-on-pay vote went forward. A copy of the November 13 order can be found here.

 

A battleground issue that may be increasingly important, at least for the companies trying to fight these suits, will be venue. The plaintiffs’ firm that is leading the charge on these cases has chosen to file them in state courts outside of Delaware. The defendants usually seek to remove the cases to federal court, but, as discussed in Alison Frankel’s November 30, 2012 post on her On the Case blog (here), the plaintiffs have had some success in having the cases remanded to state court. As the statements of the defense attorneys quoted in Frankel’s blog post show, however, the defense attorneys have not conceded this issue, which they clearly view as a vital battleground in trying to fight these cases.

 

But while some companies and their attorneys may be fighting these cases, the plaintiffs’ firms pushing these suits seem likely to continue to file them as long as they can make money doing so. As the author of the Pillsbury memo notes, in a quote in the Reuters article, “Where the plaintiffs securities bar sees that they will get a return on their investment, they’re going to keep filing them.”

 

In my view, both the kinds of say-on-pay lawsuits filed last year and the new style version of the suits that are hot right now are symptoms of a larger phenomenon, which is the attempt by the plaintiffs’ securities bar to diversify their product line. The root cause is that there are fewer traditional securities class action lawsuits these days and the ones that are filed are tougher to prosecute as a result of a string of U.S. Supreme Court decisions over the last several years, as well as the cumulative effect of Congressional reforms. Faced with fewer profit making opportunities in their traditional product line, the plaintiffs’ securities firms have been trying to diversity.

 

A number of current litigation trends are the result of the plaintiffs’ securities bar’s diversification efforts – not just the various kinds of say-on-pay lawsuits, but also the M&A-related litigation that has ramped up so much recently, as well as the class action opt-out litigation trends I noted in a recent post (here). (Indeed, you could argue that these diversification efforts first started with the options backdating cases, most of which were filed as derivative suits, rather than as securities class action lawsuits). The pressure on the plaintiffs’ firms to diversify will likely continue to lead to more lawyer-driven litigation of these kinds, including not only the varieties of lawsuits I have noted here but also perhaps other kinds of suits that will emerge in the months ahead.

 

To be sure, it could be argued that these evolving litigation trends are simply a reflection of the fact that we have an entrepreneurial and opportunistic plaintiffs’ bar in this country. An alternative point of view is that in a global economy our domestic companies are put at an enormous competitive disadvantage as a result of the unproductive costs our over-active litigation system imposes on them. Anybody making a list of unproductive costs accruing due to lawyer-driven litigation would have to put the expenses associated with these new wave say-on-pay suits right at the top of the list.

 

Second H-P Securities Suit Sweeps in a Broader Roster of Defendants: In a post last week, I noted that plaintiffs’ lawyers had quickly jumped on the Autonomy acquisition accounting scandal at H-P and had filed a securities class action lawsuit. As I noted in my post, the first suit filed, at least, named only H-P and certain of its current and former officers as defendants. In particular, I noted that the first complaint did not name as defendant Autonomy or any of its former officers or directors, nor did it name any of H-P’s outside advisors.  However, I also noted that further lawsuit seemed likely, and noted the possibility that additional suits might include additional defendants.

 

Now further lawsuits have in fact been filed and the latest suits have expanded the roster of defendants. As reflected in plaintiffs’ lawyers November 30, 2012 press release (here), the latest suit to be filed names as defendants not only H-P and certain of its officers, but also H-P directors, Autonomy and Deloitte LLC, H-P’s auditors. The complaint can be found here. The individual defendants named in the complaint include not only H-P’s former and current CEOs and its current CFO, as well as two other H-P’s chief accounting officers, but also Michael Lynch, the former CEO of Autonomy, and Sushovan Hussain, Autonomy’s former CFO. (Speical thanks to a loyal reader for providing a copy of the complaint.)

 

The H-P/Autonomy debacle continues to attract critical press scrutiny, including a November 30, 2012 New York Times article entitled “H-P’s Autonomy Blunder May be One for the Record Books” (here) in which James B. Stewart writes that H-P’s acquisition of Autonomy arguable ranks as one of the worst deals ever, ranking right up there with the disastrous Time Warner acquisition of AOL. Among other things, Stewart writes:

 

It’s true that H.P. directors and management can’t be blamed for a fraud that eluded teams of bankers and accountants, if that’s what it turns out to be. But the huge write-down and the disappointing results at Autonomy, combined with other missteps, have contributed to the widespread perception that H.P., once one of the country’s most admired companies, has lost its way.

 

Second Circuit Affirms Dismissal of Securities Suit Filed Against U.S.-Listed Chinese Company: Over the last several years, plaintiffs have filed dozens of securities suits against U.S.-Listed Chinese companies, alleging accounting misrepresentations as well as undisclosed transactions benefiting insiders. (This litigation phenomenon is detailed and discussed at greater length here.)  Though some of these cases have survived dismissal motions, others have not survived the initial pleading hurdles. On November 29, 2012, the Second Circuit, in a summary order (here), affirmed the dismissal of one of these suits.

 

On October 26, 2010, Mecox Lane Limited issued over 11 million American Depositary Receipts in an IPO. As discussed here, on December 3, 2010, following company disclosures, investors filed an action against Mecox, certain of its directors and officers, and its offering underwriter, alleging that the Company’s gross margins had been adversely impacted by increased costs and expenses which made it impossible for Mecox Lane to achieve the results defendants projected at the time of the IPO. On March 5, 2012, Southern District of New York Judge Robert Sweet granted the defendants’ motion to dismiss. The plaintiff appealed.

 

In the November 29 summary order affirming the dismissal, a three judge panel of the Second Circuit noted that:

 

Even taking all of the Complaint’s allegations as true and drawing all reasonable inferences in favor of the Plaintiffs, the statements that they point to as untrue or misleading are neither. The Complaint does not mention undisclosed information, but points to nothing to show that disclosures were required.

More About the U.S.-Listed Chinese Companies: The Mecox Lane case is the second of the recent securities suits involving U.S.-listed Chinese companies to reach the Second Circuit. As discussed here, in August 2012, the Second Circuit revived a securities suit that had been filed against China North Petroleum Holding that had been dismissed by the District Court.

 

In addition to the revived securities suit, China North Petroleum has other problems as well. As described in its November 30, 2012 litigation release (here), the SEC has filed a civil enforcement action in the Southern District of New York against the company, its CEO and former Chairman, and its founder and former director, as well as other officers and the family members of one of the officers.

 

The SEC alleges, in connection with the company’s two 2009 stock offerings, that the CEO and the founder, as well as the other officers, “diverted offering proceeds to the personal accounts of corporate insiders and their immediate family members, and also engaged in fraudulent conduct in connection with at least 176 undisclosed transactions between the company and its insiders or their immediate family members, otherwise known as related-party transactions.” The SEC alleges that the transactions totaled approximately $59 million during 2009.

 

More About Law Firm Management Liability Insurance: As I noted in a prior post (here, second item), unsecured creditors of the bankrupt Dewey LeBoeuf law firm have sought the bankruptcy court’s leave to file an action against three of the law firm’s former managing partners, accusing them of law firm management misconduct and seeking to recover under the law firm’s management liability insurance policy.

 

As discussed in a November 29, 2012 Am Law Daily article (here), the bankruptcy court has granted the creditors leave to pursue the claims. However, as the article also discusses, the claimants could face barriers attempting to recover under the insurance policy. As the article notes, “the lead insurer connected to the policy … has said such suits may not be covered because Dewey, as the policyholder, is essentially suing itself.” The article does not explain the basis on which the carrier is contending that the claims of the creditors represent the claims of Dewey itself. However, given the stakes involved, it seems likely that these issues will be sorted out as the creditors press their claims.

 

Special thanks to a loyal reader for sending me a link to the Am Law Daily article.

 

Deconstructing “Skyfall”: (Spoiler Alert, these comments will give away key plot element of the movie, so don’t read this if you haven’t seen the movie).

 

1. Can I just say that Bond’s idea of luring Raoul Silva northward to Bond’s childhood home was a really crappy plan? Not only did it directly result in M’s death, but M16 never did recover the stolen list of undercover agents. The entire sequence conclusively proved that Bond is no longer qualified for service, as the M16 tests earlier in the movie showed. M chose to disregard what the tests clearly established, which ultimately cost her her life.

 

2. Shortly after we were informed that Bond’s childhood home had been sold, the structure was first strafed with automatic gunfire from a helicopter gunship and then blown up. At the real estate closing, it is going to be a disappointing walk-through for the property’s buyers, that’s for sure.

 

3. In case you were wondering, the poem M said she had learned from her late husband and that she recited (in part) to the Parliamentary committee (just before armed gunmen burst into the Committee room) is “Ulysses” by Alfred, Lord Tennyson. Here is the portion she quoted:

 

Though much is taken, much abides; and though

We are not now that strength which in the old days

Moved earth and heaven; that which we are, we are,

One equal-temper of heroic hearts,

Made weak by time and fate, but strong in will

To strive, to seek, to find, and not to yield.

 

4. So we know for sure that Judi Dench will not be in the next Bond movie. But how about Daniel Craig? Most of Skyfall seemed to be a variation on the theme that Bond is getting old and might just be over the hill. And in the scenes where Bond was unshaven, Craig sure was looking pretty scraggly. I am not making any predictions, but don’t be surprised if Craig isn’t there next time Bond is back.   

 

Every fall, I assemble a list of the current hot topics in the world of Directors and Officers (D&O) Liability Insurance. While the past 12 months have not seen as many headline-grabbing D&O related events as in some past years, the issues that are currently unfolding have had a significant impact on the marketplace. In the latest issue of InSights (here), I take a look at what to watch now in the world of D&O. Readers of this blog will be particularly interested in the first entry of the article, discussing the question of whether the marketplace for D&O insurance is firming.

 

A prior version of the latest InSights article appeared in expanded form on this site, here.

In her authorized 2009 biography of American business icon Warren Buffett, The Snowball,  Alice Schroeder admirably captured how Buffett’s long and successful business career resulted in the accumulation of not only vast wealth, but also of an impressively large and loyal network of close friends. Among Buffett’s buddies is Fortune Magazine’s editor-at- large, Carol Loomis. Loomis not only befriended Buffett and his wife, along the way becoming a Berkshire shareholder and an occasional Buffett bridge partner, but also for the last 35 years she has served as the pro bono editor of Buffett’s widely-read and admired annual letter to Berkshire shareholders.

 

Owing to her unique access to Buffett, Loomis has written a number of perceptive and even revelatory Fortune articles about Buffett. She also provided editorial direction to Fortune colleagues on numerous other articles about Buffett that appeared in the magazine. Many of these articles from the Fortune archives have been collected in a new book, entitled Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2012. The title is a reference to Buffett’s frequent statement that he enjoys his work so much that he “tap dances to work ” As befits a book with such an upbeat title, the book is a rousing celebration of Buffett’s life and business success. (A disclosure statement seems appropriate at this point: I own BRK.B shares, although not merely as many as I wish I did.)

 

If Schroeder’s book represented a personal biography of Buffett, Loomis’s book is more of a business biography. The Fortune articles about Buffett are arranged essentially in chronological order, as a result of which the book charts the long arc of Buffett’s business life. Buffett himself recently said that “when you look at Berkshire, you are looking across corporate America.” Reading this book is in many ways a guided tour not only through Buffett’s career and business success, but also through the ebbs and flows of the American business scene over the last four decades.

 

There is much to commend and admire about this book. Among other things, the book includes several excellent examples of masterful magazine writing. Loomis’s own April 1988 article entitled “The Inside Story of Warren Buffett” (a version of which can be found here) may be the single best short description available of Buffett and his business philosophy. (Indeed, if you read Loomis’s article, you arguably could dispense with the need the now growing collection of book-length Buffett biographies.)

 

Loomis’s October 1997 article entitled “The Wisdom of Salomon?” (a version of which can be found here), about Buffett’s fraught 1991 involvement in the near-collapse of the Salomon Brothers investment banking firm, is a gripping account of perhaps the greatest crisis in Buffett’s long career.

 

There are also a number of minor gems in this book, including a charming 1978 article about how a still–relatively unknown Buffett helped produce an enormous investment profit for the endowment of tiny Grinnell College (on whose Board of Trustees Buffett served at the time) through a clever and well-timed acquisition of a Dayton, Ohio television station. (The book also reveals that the Grinnell trustees included, during the time that Buffett served on the board, one of the founders of Intel and some guy named Steve Jobs. I have no idea how Grinnell managed to recruit so many corporate titans to its board. I do know that the current value of the college’s endowment is approximately $1.5 billion — or more than $800,000 for each of the school’s 1,700 students.)

 

The book also reprints a 1995 book review written by Bill Gates about yet another Buffett biography. Gates’s book review contains an amusing retelling of the occasion in 1991 when Gates and Buffett first met, as well as a touching account of the friendship of the two men. (In an introduction to the Gates piece, Loomis reports that Gates had not wanted to come to the event at which he met Buffett, but was only persuaded to attend after he learned that Washington Post CEO Katherine Graham was going to be there as well. Loomis also reports that while Buffett arrived at the event in the back seat of Post Managing Editor Meg Greenfield’s “ancient and cramped” Subaru, “Bill and his girlfriend (soon to be wife) Melinda French, arrived more grandly, in a helicopter.”)

 

Another very interesting feature of this book is how its chronological structure highlights  the way earlier events can foreshadow later developments (even though not apparent at the time). For example, Loomis’s riveting account of the Salomon fiasco provides an almost painful premonition of the Lehman collapse 17 years later. And you can’t read the excerpt in the book of Buffett’s 2002 letter to Berkshire shareholders characterizing derivatives as “weapons of financial mass destruction” without thinking about what happened at AIG just six years later. Indeed, if one were to write a work of fiction with so much heavy-handed foreshadowing, most readers would immediately reject it as hopelessly contrived.

 

While this book is both enlightening and enjoyable to read, it has its shortcomings. Among other things, even though there were slight mentions of Buffett in the magazine at earlier times (including one April 1966 item that managed to misspell Buffett’s last name), Fortune didn’t write about Buffett as Buffett until the late 70s, and didn’t get around to writing a feature article about him until the early 80s. By that time, Buffett was already in his 50s and by any measure already a phenomenally successful investor and businessman. Simply put,  other than Loomis’s one article mentioned above, this book lacks a detailed examination of how Buffett got started and how he developed the iron-clad business principles that have guided him ever since.

 

There is another shortcoming with this book’s approach, one that is perhaps an inevitable result of the fact that the book is an anthology of magazine articles written over many decades. Its coverage of Buffett, as thorough as it was, has been episodic and intermittent. Loomis makes up for this somewhat with a running commentary interspersed throughout the book, but inevitably there are gaps. Some of the gaps are huge.

 

For example, there is nothing in the book about Berkshire’s investment in BNSF, by far the largest investment of Buffett’s entire investing career, one that was so large it cost the company its triple-A rating. There is nothing in the book about what I think is one of the most interesting phases of Buffett’s investing career, that is, his opportunistic investment of $15.6 billion in the 25 days of panic that followed the Lehman bankruptcy. There is nothing in the book about the series of unprecedented moves Buffett has made in recent years, including, for example, Berkshire’s $10 billion investment in IBM (following years of repeated statements that Buffett would never invest in technology because he doesn’t understand it) or Berkshire’s 2010 move to buyback its own shares.

 

And in an omission that is common among all of the various Buffett biographies, there is little in the book about the criminal prosecution of the top officers of what was at the time the largest Berkshire subsidiary, General Re, owing to a complex, appearances-only transaction between Gen Re and AIG, of which Buffett may well have been aware at the time and with which Buffett may even have been involved. We don’t know much about whether or not Buffett was involved or not, as to this date no one, especially not Buffett, has provided a comprehensive written account of the events from Buffett’s perspective. (More disclosure: During the relevant period, I worked at a subsidiary of Gen Re.)

 

In addition, one of the great strengths of the magazine’s coverage of Buffett – that is, Loomis’s privileged access to Buffett — may also be another of the book’s shortcomings. By her own admission, Loomis is not objective about Buffett. Her biases are well-disclosed – she describes herself as Buffett’s “close friend.” Over the years, Loomis controlled much of the magazine’s content about Buffett, either by writing it herself or by managing the editorial process of others’ articles. The result is that some of the magazine’s Buffett coverage, especially when read in quick succession as this book’s format requires, starts to feel like hagiography.

 

In short, while I think this new book is great and I have no trouble recommending it, in my view, the quintessential Buffett business biography still has yet to be written. I will say that for anyone interested in getting a handle on Buffett’s investing philosophy and business approach, as well as on the early days of his business career, the best bet may be Roger Lowenstein’s 1995 bio entitled Buffett: The Making of an American Capitalist. Indeed, the Bill Gates book review I mentioned above was written about Lowenstein’s book, of which Gates said “until Warren writes his own book, this is the one to read.”

 

I have managed to get this far in my review of Loomis’s book about Buffett without mentioning what is by far its best part – that is, the numerous pieces written by Buffett himself that are interspersed throughout the book. One of the most interesting items is an article Buffett wrote for the magazine in May 1977 entitled “How Inflation Swindles the Equity Investor” (a version of which appears here).  I had not previously read this article, but it may be the single best piece I have ever read encapsulating Buffett’s conception of equity investing. It also reflects a detailed and edifying analysis of the dangers economic inflation poses, a theme to which Buffett has returned time and again over the years (including his provocative essay in his 2011 letter to Berkshire shareholders about investing in gold).

 

The fact that the best parts of this book are the ones that Buffett himself wrote suggests that the optimal approach to trying to understand Buffett may be to just cut to the chase and read Buffett’s own personal anthology, in the form of his annual letters to Berkshire shareholders. Thirty-five years’ worth of the letters is freely available on Berkshire’s website, here. My own analysis of the most recent years’ letters, along with my other writings about Buffett, can be found here.

 

Some readers may well find it a daunting task to try to work through hundreds of pages of the shareholder letters. Here’s a secret: there is a shortcut. George Washington Law School Professor Lawrence Cunningham has compiled an indexed, thematically arranged anthology of Buffett’s writings in a splendid book entitled The Essays of Warren Buffett: Lessons for Corporate America, the most recent edition of which can be found here. As I noted in my review of an earlier edition of Cunningham’s book, here, “Cunningham has done a masterful job distilling Buffett’s writings and organizing them according to topic. This arrangement not only facilitates a quick reference to Buffett’s comments on any given topic, but it also provides insight into how Buffett’s views on the topic may have evolved over time.”

 

For readers who may be interested, my review of Alice Schroeder’s Buffett biography can be found here.

 

The Wit and Wisdom of the Sage of Omaha: One of the great pleasures of reading (or just reading about) Buffet’s various essays is his gift for the homey aphorism, often told with great humor. Loomis’s book captures a few of the good ones, including Buffett’s own summary of his experiences running (and saving) Salomon: “I felt like the drama critic who wrote, ‘I would have enjoyed the play except that I had an unfortunate seat. It faced the stage.’”

 

Loomis also recounts some career advice Buffett gave to an audience of University of Washington business school students: “I’d advise you when you go out to work , work for an organization of people you admire, because it will turn you on. I always worry about people who say, ‘I’m going to do this for ten years. I really don’t like it very well. And then I’ll do this…’ That’s a little like saving up sex for your old age. Not a very good idea.”

 

Some of my favorite Buffet anecdotes appear in his letters to Berkshire shareholders. In his 1986 letter, he wrote about the tailor who went to see the Pope, whose friends asked him what the Pope is like. Buffett writes that “our hero wasted no words: ‘He’s a forty-four medium.’” Another favorite is the story about the man who asked his vet what to do for his horse that limped sometimes but seemed fine at other times. Buffett states that “the vet’s reply was pointed: ‘No problem – when he’s walking fine, sell him.’”

 

My own personal favorite, from the 1985 letter, is one that I have quoted previously on this blog, but I like it so much, I am reproducing it again here:

 

An oil prospector, moving to his heavenly reward, was met by St. Peter with bad news. “You’re qualified for residence”, said St. Peter, “but, as you can see, the compound reserved for oil men is packed. There’s no way to squeeze you in.” After thinking a moment, the prospector asked if he might say just four words to the present occupants. That seemed harmless to St. Peter, so the prospector cupped his hands and yelled, “Oil discovered in hell.” Immediately the gate to the compound opened and all of the oil men marched out to head for the nether regions. Impressed, St. Peter invited the prospector to move in and make himself comfortable. The prospector paused. “No,” he said, “I think I’ll go along with the rest of the boys. There might be some truth to that rumor after all.”