Litigation funding has long been a significant part of commercial litigation landscape outside the U.S. For example, in Australia, observers have attributed the growth in securities litigation to the availability of litigation funding. Litigation funding arrangements have also recently been approved in connection with securities class action litigation in Canada. Litigation funding has been available in the United States for some time, as well, at least to a limited extent. But recent developments suggest that we can expect increased involvement of increasingly sophisticated litigation funding investors in the U.S., with increasing involvement in commercial litigation.

 

The latest sign of the sophisticated parties increasing interest in U.S. litigation funding is the April 9, 2012 announcement of litigation finance company BlackRobe Capital Partners LLC that retired Simpson Thacher partner Michael Chepiga has joined BlackRobe as managing partner. BlackRobe was launched last year by Sean Coffey, formerly a partner at the plaintiffs’ securities class action firm, Bernstein LItowitz, along with Timothy Scrantom, who co-founded Juridica Investments, Ltd. (about which more below). In 2010, Coffey also ran unsuccessfully to become the democratic candidate in the New York Attorney General election. Many readers will remember Coffey from his days at Bernstein Litowitz when he acted as lead counsel for investors in the WorldCom securities litigation. An April 9, 2012 Am Law Daily article detailing Chepiga’s move to BlackRobe can be found here.

 

According the firm’s press release, BlackRobe aims to invest in lawsuits in exchange for a share of the recovery. The firm “targets investments between $2 million and $8 million in complex commercial litigation cases, including intellectual property, antitrust and breach of contract disputes, that have a potential for damages in excess of $50 million.”

 

The BlackRobe firm is only one of several litigation funding firms now concentrating on the commercial litigation in the U.S. Juridica Investments Ltd. and Burford Capital Ltd, both investment funds that are publicly traded in the U.K., have U.S. operations engaged in litigation funding in the U.S. IMF Australia Ltd, another litigation funder that is listed in Australia, is the corporate parent of Bentham Capital LLC, which is also in the business of funding U.S. litigation.

 

Most of these firms, as well as several others, have only gotten involved in U.S. litigation funding within the last year. Obviously, this diverse group of firms acting independently seems to have decided that there is an investment opportunity in U.S. litigation funding. There is no doubt that litigation in the United States is a very expensive proposition. Looked at in its most favorable light, litigation funding may provide a financial means to allow meritorious cases to go forward. As a October 3, 2011 Wall Street Journal article about litigation funding noted, litigation funding can provide a way for smaller companies to level the playing field against bigger opponents.

 

Just the same, the litigation funding phenomenon has its critics. The most common concern is that the spreading availability of litigation funding will encourage non-meritorious or even frivolous litigation, by removing litigants’ financial constraints. The litigation funders themselves argue in response that they are in this to make money, and that rather than encouraging frivolous litigation, the funders’ financial incentives will act as a screening mechanism through which only cases likely to provide an appropriate return on investment  (i.e., meritorious) will be funded. The involvement of highly sophisticated attorneys like Coffey and Chepiga would seem to support this point, as their presence suggests an elevated level of scrutiny.

 

Though the financial incentives and level of sophistication arguably might militate against frivolous lawsuits getting funding, there is still the risk that the presence of investors looking for lawsuits in which to invest might nevertheless increase litigation levels. Indeed, in its 2010 study of securities class action litigation (refer here), NERA Economic Consulting identified the emergence of litigation funding as the most significant development behind the increase in securities class action litigation in Australia. Setting to one side the question of whether or not the cases involved would be meritorious, it is worth asking the question whether or not it would be a good thing if increased litigation funding availability were to lead to a similar increase in litigation in the United States.

 

There are a number of other questions that also quickly come to mind. For example, will the involvement of sophisticated investors lead to potential or even actual conflicts of interest between the funders and the litigants then are funding? It is not difficult to imagine situations in which the funders’ desire to realize their investment return might conflict with the litigant’s goals and objectives. Indeed, the possibility of this type of conflict was one of the specific concerns that an Ontario court raised while considering a litigation funding arrangement in Manulife Financial Corporation securities class action lawsuit pending in the court (about which refer here). Though the court ultimately approved the arrangement in that case, the possibility of conflicts remains a concern.

 

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

 

A related question has to do with overall fairness. As things currently stand, there do not seem to be barriers to entry in the litigation funding field. While the involvement of highly respected attorneys such as Coffey and Chepiga provide some reassurance about the integrity of the process and the legitimacy of the arrangements, there are increasingly large numbers of firms getting involved in this space and there are no guarantees that all of the participants will be equally respectable. Ought there to be standards protecting the prospective litigants?

 

As noted in a recent post about class action litigation in Australia, there are now calls there to require litigation funding firms to be registered and to require that the litigation funding firms have appropriate procedures in place to manage potential conflicts of interest. Australia has a longer experience with litigation funding; it might not be a bad idea to heed the calls in that country to regulate the litigation funding industry and look at whether it might be a good idea to have some regulatory controls in this country as well.

 

In any event, for better or worse, the number of litigation funding firms in this country is increasing and as a result it seems likely that the litigation funding is likely to become an increasingly important factor in sophisticated commercial litigation. Because many of these firms have only just started their U.S. operations, it is too early to tell what the ultimate impact will be. Notwithstanding the involvement of highly respected attorneys such as Coffey and Chepiga, I find it hard to view these developments without serious concerns. In any event, I suspect that we will be hearing a lot more on this topic in the months ahead.

 

A May 2010 American Lawyer article detailing the development of third-party litigation funding in the U.S. can be found here.

 

In an interesting variant on the kinds of claims that the former directors and officers of a failed financial institution can face, on April 6, 2012, the SEC charged two former officers of the publicly traded holding company for the failed Franklin Bank of Houston with securities fraud. In its April 6, 2012 complaint (here), the SEC alleges that the two former officers engaged in a fraudulent scheme designed to conceal the bank’s deteriorating loan portfolio and inflate its earnings at the outset of the financial crisis. The SEC’s litigation release about the case can be found here.

 

According to the SEC’s complaint, in the second and third quarters of 2007, the bank began to experience increased delinquencies in its mortgage loan portfolio. During this same period, the bank was considering “strategic alternatives” include the possible sale of the bank. Investment advisers told the bank’s CEO Anthony Nocella and its CEO Russell McCann that the bank needed to “polish the apple” by showing positive earnings “momentum” and “stable asset quality.”

 

The SEC alleges that in order to conceal the bank’s rising loan delinquencies and improve its earnings for the third quarter of 2007, Nocella and McCann instituted three loan modification schemes by which the bank was able classify non-performing loans as performing. These alleged modification schemes, with names like “Fresh Start” and “Great News,” allegedly enabled the bank to conceal from shareholders over $11 million in delinquent and nonperforming residential loans and $13.5 in nonperforming construction loans. The SEC alleges that the bank overstated its 2007 net income and earnings by 31% and 77% respectively.

 

On May 2, 2008, in a filing on Form 8-K, the bank acknowledged that the accounting for the loan modifications should be revised and that investors should no longer rely on the bank’s filing on Form 10-Q from the third quarter of 2007. On November 7, 2008, the bank was closed by Texas state banking regulators and the FDIC was appointed as receiver. The bank’s holding company also filed for bankruptcy in 2008.

 

In its April 6 complaint against Nocella and McCann, the SEC seeks financial penalties, officer-and-director bars, and permanent injunctive relief against the two individuals to enjoin them from future violations of the federal securities laws. In reliance on Section 304 of the Sarbanes Oxley Act, the complaint also seeks to “clawback” bonus compensation that Nocella and McCann received. (See the note below about another recent action in which the SEC has sought to use Section 304 to clawback bonus compensation from executives of a company that had restated its financial statements.)

 

In its litigation release, the SEC expressly acknowledges “the assistance of the Federal Deposit Insurance Corporation in this matter,” which suggests that at a minimum that two agencies were cooperating in this matter and also suggests the possibility that the FDIC may even have referred the matter to the SEC. The FDIC’s involvement is also a reminder that  as part of its post-failure post-mortem processes, the FDIC is not only attempting to determine whether or not it has a valuable civil suit on its own as receiver, but is also looking to see whether or not wrongdoing has occurred that warrants referral to other authorities. The FDIC has not on its own pursued any claims in connection with Franklin Bank’s closure. It is also interesting to note that the SEC is only now pursuing this enforcement action, though the events complained of took place well over four years ago, and the though the bank itself failed over four years ago.

 

The SEC’s filing of its action against the two former Franklin Bank officials is not the first time the SEC has pursued an enforcement action against former directors and officers of a failed bank. As noted previously (here, scroll down), in an October 11, 2011 complaint (here), the SEC filed a civil enforcement action against four former officers of UCBH Holdings, Inc., the holding company for United Commercial Bank, which failed in November 2009. According to the SEC’s October 11, 2011 litigation release, the complaint alleges that the defendants “concealed losses on loans and other assets from the bank’s auditors, causing the bank’s holding company UCBH Holdings, Inc. (UCBH) to understate its 2008 operating losses by at least $65 million.” The complaint alleges that the further loan losses ultimately caused the bank to fail. The SEC action seeks permanent injunctive relief, an officer bar, and civil money penalties.

 

Though the FDIC has not itself filed a civil action against the former directors and officers of Franklin Bank, in June 2008, as reflected here, the bank’s holding company’s investors did file their own securities class action lawsuit against the failed bank’s former directors and officers, its auditor and its investment banks. In a March 21, 2011 order (here), Southern District of Texas Judge Keith Ellison granted the defendants’ motions to dismiss. The investors have appealed to dismissal. The appeal remains pending.

 

The SEC action against the two former Franklin Bank officials, along with the investor lawsuit, serve as a reminder that the former directors and officers of a failed bank face significant additional litigation threats beyond just the possibility of a civil action by the FDIC in its role as receiver of the failed bank. Where, as here, the failed institution or its holding company were publicly traded, the potential liability exposures include the possibility of an SEC enforcement action or a securities class action lawsuit. Even though the penalties and clawback amounts the SEC is seeking in the enforcement action would not be covered under a D&O policy, the costs associated with defending this type of enforcement action would likely be covered (assuming that D&O insurance coverage is in fact available). These costs, along with the costs of defending the type of shareholder suit filed here, erode the limits of liability of any applicable insurance, while at the same time competing claimants may be in a race to try and claim a portion of the dwindling policy limits. All of which is a reminder of the strains that post-failure litigation can put on the D&O insurance resources of a failed bank.

 

The FDIC’s Latest Failed Bank Lawsuit: The FDIC may not yet have filed a civil action against the former directors and officers of Franklin Bank, but it has been active in pursuing claims against the former officials of other failed institutions. In the FDIC’s latest failed bank lawsuit, on April 4, 2012, the FDIC filed a lawsuit in the Eastern District of North Carolina against seven former directors and officers of the failed Cape Fear Bank of Wilmington, North Carolina. In the its complaint (here), the FDIC as receiver for the failed bank seek to recover $11.2 million in losses the bank allegedly suffered on 23 loans the defendants approved between September 27, 2006 and February 27, 2009. The FDIC asserts claims against the seven defendants for negligence, gross negligence and breach of fiduciary duty.

 

It is interesting to note that the FDIC’s April 4 action against the former Cape Fear Bank officials was brought just short of the third anniversary of the bank’s April 10, 2009 closure. The highest number of bank closures during the current wave of bank failures took place during 2009 and the pace of closures increased as the year progressed. The implication is that 2012 moves forward, the third anniversary of many of the class of 2009 bank closures will be approaching. The likelihood is that pace of FDIC failed bank lawsuit filings will increase for the rest of this year, as the FDIC tries to get out ahead of the rolling statute of limitations dates for the 2009 bank failures.

 

The latest suit is the 28th that the agency has filed as part of the current wave of bank failures and the tenth so far in 2012. This suit is also the third that the FDIC has filed so far in North Carolina.

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While the number of FDIC failed bank lawsuits seems likely to be cranking higher this year, the pace of the bank failures themselves clearly is slowing. Through the end of the first quarter, the FDIC has taken control of only 16 financial institutions so far this year, putting the agency on pace for a total of 64 this year, which would be the lowest number of annual failures since 2008. Given that even the pace so far this year seems to be slowing, the 2012 annual total may well come in below the projected total of 64 closures.

 

Scott Trubey has an interesting April 8, 2012 article in the Atlanta Journal-Constitution (here) about the failed bank litigation so far and yet to come, with a particular emphasis on the litigation involving failed Georgia banks. Among the many former bank officials that the FDIC has targeted is the former NFL quarterback, Jim McMahon, who was among seven former directors and officers named as defendants in the FDIC’s lawsuit relating to the failed Broadway bank, as discussed in an April 9, 2012 Chicago Sun-Times article (here)

 

FDIC Settles Malpractice Claim Against Failed Bank’s Lawyers: According to an April 4, 2012 filing in the Western District of Oklahoma (here), the parties to the FDIC’s lawsuit against the former lawyers for the failed First State of Altus Bank of Altus, Oklahoma, have settled the case. An April 7, 2012 article from The Oklahoman newspaper describing the settlement can be found here.

 

The First State Bank of Altus failed on July 31, 2009. On October 26, 2011, the FDIC, as receiver for the failed bank, filed an action in the Western District of Oklahoma against the bank’s outside law firm, Andrews Davis, and two of its attorneys, Joe Rockett and Matthew Griffith. In its complaint (here), the FDIC as receiver for the failed bank asserted claims for professional negligence and malpractice.

 

The complaint alleges that the bank failed because of losses it suffered in connection with projects of what the complaint described as the Anderson-Daugherty Enterprise, which the complaint describes as the business efforts of the bank’s former CEO, Paul Daugherty, and Fred Don Anderson, who was CEO of a company called Altus Ventures, a substantial borrower of the bank. The FDIC alleges that the law firm assisted Anderson in planning and implementing the so-called Anderson-Daugherty Enterprise, while at the same time representing both Daugherty personally and the bank itself. The complaint alleges that as a result of these relationships, the law firm and the two individuals had substantial conflicts of interest. The law firm also was allegedly involved in counseling the bank in connection with certain loans to certain enterprises in which Daugherty and Anderson or their related entities had financial interests. The complaint alleges that the bank ultimately suffered losses of over $10 million on related loans.

 

Neither the April 4 court filing nor the newspaper article about the filing reflects any of the details of the settlement of the case. It is worth noting that though the FDIC filed the lawsuit against the failed bank’s former lawyers, it has not to date filed an action against any of the failed bank’s former directors and officers.

 

The suit against the lawyers for First State Bank is not the first instance where the FDIC has pursued claims against a failed bank’s former law firm. As discussed here, in October 2011, when the FDIC filed suit against the former directors and officers of the failed Mutual Bank of Harvey, Ill., the defendants included the bank’s former outside general counsel, as well as the former outside general counsel’s law firm. Indeed, on its website, the FDIC reports that as of March 20, 2012, the agency states, without providing any further breakdown, that it “has authorized 29 other lawsuits for fidelity bond, insurance, attorney malpractice, appraiser malpractice, and RMBS claims.”

 

SEC Files Another Strict Liability Clawback Action: The clawback action the SEC filed against the two former officers of Franklin Bank was not the only action under Section 304 of the Sarbanes Oxley Act that the SEC filed last week. In addition, on April 2, 2012, the SEC also filed a Section 304 clawback action in the Western District of Texas against the former CEO and CFO of ArthroCare. But unlike the case involving the action involving the former Franklin Bank executives, the action against the former ArthroCare executives does not allege that the two individual defendants were involved in or even aware of the alleged wrongdoing. The SEC is pursuing its action against the two ArthroCare executives on a strict liability basis.

 

In its complaint (here), the SEC alleges that during the tenure of the two ArthroCare executives, two sales ArthroCare executives engaged in a channel stuffing scheme in order to inflate the company’s revenue and earnings. The SEC has pursued a separate enforcement action against the two sales executives. ArthroCare was later required to restate its financial statements for 2006 and 2007. The former CEO and CFO both resigned from the company following the company’s own internal investigation of its revenue reporting practices.

 

In its compensation clawback complaint against the former CFO and former CEO, the SEC expressly states that it “does not contend” that the former CFO and CFO “participated in the wrongful conduct.” However, the SEC contends, Section 304 requires the former CEO and CFO to reimburse the company for their bonus compensation and stock sale profits garnered during the periods corresponding to the financial statements that were later restated.

 

The action involving the former CEO and CFO of ArthroCare is not the first occasion on which the SEC has used Section 304 to pursue a compensation clawback even though the targeted executives were not alleged to have been involved in the wrongdoing that caused their companies to have to restate the companies’ financial executives. The SEC previous pursued a clawback action against the CSK Auto; as discussed here, in that case the federal district affirmed the SEC’s authority to seek a clawback without a showing of complicity in the wrongdoing. The district court judge stated that “"the text and structure of Section 304 require only the misconduct of the issuer, but do not necessarily require the specific misconduct of the issuer’s CEO or CFO."

 

As discussed here, in a similar case, the SEC pursued a Section 304 clawback action against the former CFO of Beazer Homes, though the individual was not alleged to have been involved in any wrongdoing.

 

My thoughts on the deeply troubling implications of the increasing trend toward imposing liability even without culpability can be found here. As I have previously noted (here), these provisions allowing for the return of compensation without fault or culpability also raise a host of potentially troublesome insurance coverage issues. The D&O insurance marketplace has responded to these concerns, as many carriers are now willing in at least some cases to add a provision to their policy stating that the policy will cover defense expenses incurred in connection with a SOX 304 action.

 

An April 2, 2012 post on the SEC Actions blog about the SEC’s clawback action against the former ArthroCare executives can be found here.

 

On an annualized basis, the pace of securities class action lawsuit filings fir the first quarter of 2012 ran above historical averages, although the pace of filings declined compared to  the prior month in the quarter’s second and third months. Merger-related cases, which were such a significant part of 2011 filings, remained an important factor in filings in the first quarter of this year, but other pronounced 2011 filing trends diminished in the year’s first three months.

 

Overall, there were 57 new securities class action lawsuit filings in the first quarter of 2012, which represents an annual filing rate of about 228 lawsuits. This filing rate is above the 2011 filing levels, when there were 188 securities class action lawsuit filings, and the 1996-2010 annual average filing rate of 194. However, the pace of filings  was not level  throughout the first quarter. The number of lawsuit filings declined from the prior month in the second and third months of the quarter. Thus, while there were 24 new securities class action lawsuit filings in January, there were 19 in February and only 14 in March.

 

One pronounced 2011 filing trend was the number of lawsuits filed against U.S.-listed Chinese companies. Last year, 41 of the 188 filings (or about 22%) involved these Chinese companies. There were fewer of these lawsuit filings in the second half of 2011 than there were in the first half of the year, and this downward trend continued in the fist quarter of 2012, when there were only two filings involving U.S.-listed Chinese companies.

 

Overall in 2011, 68 of the 188 filings (or about 38%) involved non-U.S. companies. The number of filings against non-U.S, companies declined significantly during the first three months of 2012, when there were only six filings against foreign companies, or about 10.5% of all first quarter filings. This rate is much closer to the historical proportion of all filings involving non-U.S. companies; during the period 1996 to 2010, only about 8.5% of all filings involved companies domiciled outside the U.S.  Of the six first quarter filings involving non-U.S. companies, four involved companies from Canada, and two involved Chinese companies. Of the four Canadian companies, three were in SIC Cod 1040 (Gold and Silver Mining)

 

One 2011 filing trend that continued in the first quarter of the year was the significant percentages of all filings that were merger related. In 2011, 43 of 188 filings were merger related (22.87%). In the first quarter of 2012, 13 of 57 filings (22.81%) were merger related. The percentage of cases relat4ed to mergers was virtually unchanged in the first three months of 2012 compared to the full year of 2011. The significant numbers of merger-related cases is an important reason why the filing rate in the year’s first quarter is above longer term norms.

 

The filings during the year’s first quarter involved companies drawn from a wide variety of industries. The 57 first quarter lawsuits involved companies in 39 different Standard Industrialization Code (SIC) code categories. Companies in Life Sciences-related grouping had the greatest number of first quarter filings. There was a total of six filings in  Industry Group 283 (Drugs), and there was a total of four filings in Industry Group  384 (Surgical, Medical and Dental Instruments), The ten total filings from these two groupings represent about 17.5% of all first quarter 2012 filings. The 17.5% percentage of all filings during the first quarter involving Life Sciences companies is above the historical annual percentage of all filings involving Life Sciences companies; as discussed at greater length here, during both 2008 and 2009, about 10% of all filings involved Life Sciences companies.

 

Industry Group 737 (Computer Programming, Data Processing and Other Computer-Related Services) also had a total of four filings. No other industry group had more than three filings.

 

With one exception, the first quarter 2012 filings were widely distributed among the U.S. district courts.` During the first quarter, the 57 securities class action lawsuits were filed in 29 different district courts. The one court where there was a concentration of filings was the federal court in Manhattan. During the first quarter there were 18 filings (or just less than a third of all filings) in the Southern District of New York.

 

It is important to note that the filing figures for the first quarter of 2012 do not include two categories of cases that have been an important part of all corporate and securities litigation activity during recent periods. Thus, the 57 first quarter securities class action lawsuit filings does not include merger objection lawsuits that were filed in state courts. The first quarter figures also do not take into account securities cases that were filed during the quarter that were not filed on a class action basis. There have been a host of individual actions relating to mortgage-backed securities and alleging violations of the securities laws; because these actions were not filed on behalf of a class, they are not reflected in the tally of securities class action lawsuits. But when these other types of cases are taken into consideration, it is very clear that the level of all corporate and securities litigation is at elevated levels.

 

On March 27, 2012, the U.S. House of Representatives passed the Jumpstart Our Business Startups Act (of the JOBS Act as it is more popularly known). President Obama is expected to sign the Act shortly. The Act is intended to facilitate capital-raising by reducing regulatory burdens. The Act also introduces changes designed to ease the IPO process for certain smaller companies. Among many other things, the Act introduces changes that could impact the potential liability exposures of directors and officers of both public and private companies. A copy of the Act can be found here.

 

The Act’s Provisions

Emerging Growth Companies and the IPO Process: Many of the changes in the JOBS Act are geared toward “emerging growth companies” (EGCs), which are defined broadly in the Act as companies with annual gross revenues under $1 billion in the most recent fiscal year. EGCs are relieved of certain disclosure requirements in their IPO filings. EGCs are also allowed to file their IPO registration statement for SEC review on a confidential basis. The Act allows EGCs to “test the waters” for a prospective IPO  by allowing the companies to meet with qualified institutional investors or institutional accredited investors notwithstanding the pending offering. In addition, the Act allows EGCs to discern the level of prospective investor interest in the offering by allowing analysts to publish research relating to an EGC notwithstanding the pending IPO.

 

Reduced Disclosure Requirements for Emerging Growth Companies: The Act also provides for reduced disclosure and reporting burdens for EGCs for a period of as long as five years after an IPO, as long as the company continues to meet the definitional requirements. In these provisions, the Act unwinds many of the requirements Congress only recently added through the Sarbanes-Oxley Act and in the Dodd-Frank Act.

 

For example, an EGC will not be subject to the requirements fo an auditor attestation report on internal controls as otherwise required under Section 404(b) of the Sarbanes Oxley Act. Similarly, an EGC would be exempt from the requirements under the Dodd-Frank Act to hold shareholder advisory votes on executive compensation and on golden parachutes. EGCs also are exempt from recently enacted requirements regarding executive compensation disclosures. For example, they exempt from the requirement to calculate pay versus performance ratios and the ratio of compensation of the CEO to the median compensation of all employees. The EGCs also are not required to comply with new or revised financial accountings standards until private companies are also required to comply with the revised standard.

 

Private Capital Fundraising, Revised Registration Thresholds: The Act also introduces a number of reforms relating to private capital-raising. For example, the JOBS Act also eliminates the prohibition on “general solicitation and general advertising” applicable to Rule 144A offerings, provided the securities are sold only to persons reasonably believed to be qualified institutional investors. The JOBS Act also raises the threshold number of investors that would trigger the Exchange Act registration requirements. Instead of the current threshold of 500 investors, the AC specifies that companies will only be required to register their securities only after they have over $10 million in assets and equity securities held either by 2,000 persons or by 500 persons who are not accredited investors.

 

Crowdfunding: The Act also introduces measure designed to allow companies to use “crowdfunding” to raise small amounts of capital through online platforms. The provisions create a new exemption from registration for private companies selling no more than $1 million of securities within any 12-month period and so long as the amount sold to any one investor does not exceed specified per investor annual income and net worth limitations. The crowdfunding provisions specify that  the online portals participating in these types of offerings to register with the SEC. The Act also requires the issuing companies to provide certain specified information to the SEC, investors and to the portal. The Act expressly incorporates provisions imposing liability on crowdsourcing issuers for misrepresentations and omissions in the offerings, on terms similar to the existing provisions of Section 12 of the ’33 Act.

 

Discussion:

As if often the case when legislation introduces significant innovations, it will remain to be seen how all of these changes will ultimately play out. (I am assuming here that President Obama will sign the bill in due course.) This uncertainty is increased where, as here, many of the Act’s provisions (such as, for example, the crowdfunding provisions) are subject to significant additional rulemaking.

 

The provisions modifying the IPO process for EGSs unquestionably could encourage some smaller companies to “test the waters” and perhaps even to go public sooner. The reduced compliance and disclosure requirements for EGCs unquestionably could reduce the post-IPO costs for the qualifying companies.

 

The Act’s exemptions for the EGCs from many of the compliance and disclosure requirements that Congress only recently imposed on all public companies at least potentially could reduce the liability exposures for Emerging Growth Companies and for their directors and officers. For example, a company that does not have to conduct a say-on-pay vote is not going to get hit with a say on pay lawsuit. Similarly, the elimination of requirements for executive compensation disclosures eliminates the possibility that those companies could be subject to allegations that the compensation disclosures were misleading.

 

By the same token, the Act arguable introduces provisions that could increase the potential liabilities of some companies. For example, Section 302(c) of the Act expressly imposes liability on issuers and their directors and officers for material misrepresentations and omissions made to investors in connection with a crowdfunding offering. The crowdsourcing provisions are subject to rulemaking, but the rules must be provided within 270-days of the Act’s enactment. Among other things, the rulemaking will clarify the crowdsfunding issuer’s disclosure requirements.

 

It is worth noting that these crowdfunding provisions may blur the clarity of the division between private and public companies. The crowdfunding provisions seem to expressly contemplate that a private company would be able to engage in crowdfunding financing activities without assuming public company reporting obligations. Yet at the same time, that same private company will be required to make certain disclosure filings with the SEC in connection with the offering and could potentially incur liability under Section 302(c) of the JOBS Act.

 

These and many other changes introduced in the Act could require the D&O insurance industry to make changes in its underwriting and perhaps in policy forms to accommodate these changes. As was the case with the Sarbanes-Oxley Act and the Dodd-Frank Act, the D&O insurance industry may face a long period where it must try to assess the impact of changes introduced by this broad, new legislation. Though many of the Act’s provisions seem likely to reduce the potential scope of liability for many companies (particularly the EGCs), the Act could also introduce other changes that might result in increased potential  liability for other companies (particularly those resorting to crowdfunding financing).

 

As a final point, it is worth noting that President Obama has still not even signed the Act but questions about the Act are already being raised. For example, an April 2, 2012 Wall Street Journal article, noting the post-IPO accounting disclosures of discount coupon company Groupon, raised the concern that if the JOBS Act had been in place, Groupon would have been able to confidentially submit its IPO documents to the SEC, allowing its pre-IPO accounting concerns to remain below the radar. Undoubtedly, further questions will be asked as the JOBS Act goes into force and its provisions are implemented.

  

Several law firms have issued helpful memos on the Jobs Act. A March 29, 2012 memo from the Paul Weiss law firm can be found here. A March 2012 memo from the Jones Day law firm can be found here. Very special thanks to the several readers who sent me links or asked questions about the JOBS Act.

 

Supreme Court Issues Unanimous Opinion in Section 19(B) Statute of Limitations: Perhaps because the issues involved are technical, there was little notice paid to to the U.S. Supreme Court’s March 26, 2012 issuance of its unanimous opinion in the Credit Suisse Securities (USA) LLC v. Simmonds case. The Court’s opinion, which was written by Justice Antonin Scalia, can be found here.

 

As discussed here, the Supreme Court had taken up the case to address the question whether the two-year statute of limitation period applicable to claims for short-swing profits under Section 16(b) of the Securities Exchange Act are subject to tolling, and if so, what is required to resume the running of the statute.

 

The Court held that the failure of a person subject to Section 16 to file the specified disclosure statement does not indefinitely toll the two-year statute of limitations. The Court said that even if the statute were subject to equitable tolling for fraudulent concealment, the tolling ceases when the facts are or should have been discovered by the plaintiff, regardless of when the disclosure statement was filed. The Court said that the traditional principles of equitable tolling should apply and remanded the case to the district court to determine how those principles should be applied in this case. The Court split 4-4 on the question of whether the two-year statute functions as a statute of repose that is not subject to tolling.

 

The Supreme Court’s ruling on this technical issue regarding the application of the statute of limitations for short-swing profit claims does not have a widespread impact. However, the Court’s decision eliminates the possibility that the statute could be tolled indefinitely, as arguably might have been the impact of the Ninth Circuit’s opinion in the case.

 

A March 30, 2012 memo from the Bingham McCutchen firm about the decision can be found here. A March 30, 2012 memo from the Davis Polk law firm about the decision can be found here.

 

Point/Counterpoint on the "Dip" in Securities Class Action Settlements: In a prior post (here), I discussed the recent Cornerstone Research report detailing the "dip" in securities class action settlements in 2011. In an April 2, 2012 post on the New York Times Dealbook blog (here), two attorneys, Daniel Tyiukody of the Goodwin Proctor firm and Gerald Silk of the Bernstein Litowitz firm, provide their contrasting points of virew on the reported "dip." The bottom line is that the kinds of cases that have been filed in recent years have been taking longer to settle — and there are a lot of cases, particularly related to the credit crisis, in the pipeline. Silk also notes that there have been fewer restatements in recent years, and also that there have been more individual (non-class) securities that have been filed.

 

 

On first encounter, three impressions immediately emerge regarding the throngs of pedestrians walking along O’Connell Street, the main thoroughfare in Dublin’s central district: first, everyone is incredibly young; second, they are a surprisingly diverse crowd; and third, there are a hell of a lot of babies in strollers everywhere you look.

 

The D&O Diary was on assignment in the British Isles last week, and the final stop on the itinerary was Dublin, a great city with a rich history and beautiful buildings, that is brimming with  youthful energy and  full of contrasts. (The picture above depicts the River Liffey, looking west, and also reflects the glorious weather we enjoyed during our visit.)

 

It turns out that the initial impressions about the crowds on O’Connell Street have a basis in demographic fact; while we were in Dublin, the Irish government released the preliminary results of the 2011 census, which showed, among other things, that the country has been experiencing an “extraordinarily high birth rate” and the natural increase in population is the “highest on record of any previous census.” The census also found that “ethnic diversity is now an established fact of Irish life,” and that the number of non-Irish nationals increased by a third since the 2006 census.

 

The city’s youthful, lively population projects a sense of dynamism that, at least at first impression, seems to be reflected in the fabric of the city itself. The city’s gleaming airport is brand new. A sleek new tram line runs parallel to the River Liffey. New ultramodern office buildings line the tram tracks, bearing logos of global companies like PwC, J.P. Morgan, Statoil, and BNP Paribas. Unfortunately, all of the dazzling infrastructure and of the ultramodern construction projects are the glittering remnants of the time, now five years gone and receding further into the past every day, when the Celtic Tiger roared.

 

As the tram line continues east toward the city’s docklands, it quickly becomes apparent how it all went so terribly wrong. The snazzy buildings with the corporate logos quickly give way to empty “see through” buildings, and then to the hulking concrete superstructures of buildings that were incomplete when the music stopped. Along the final tram stops, huge areas optimistically cleared for even more building projects remain empty, inhabited only by the ghosts of the banks and other firms that failed when the real estate bubble burst.

 

As befits a city with both an irrepressible youthful dynamism and a legacy of seemingly insurmountable budget woes, Dublin presents a host of contradictions. On Saturday, crowds of youths  — many with babies in strollers —  thronged the city’s main shopping districts along Grafton and Henry Streets, both of which lined with global brands like H&M, Swatch, Starbucks, Disney and Apple. At the same time, thousands of protest marchers demonstrated outside the governing party’s annual convention, rallying against the new 100 euro household tax (which more than half of the obligated tax payers had failed to pay by the March 30 deadline).

 

In the wake of the financial crisis, Dublin and Ireland face a host of challenges. But during several days of record-breaking warmth in the final week of March, the city positively hummed with life. The walkways along the Liffey were lined with grateful city dwellers, their pale faces turned toward the sun like so many red-headed sunflowers. The lush, flower covered St. Stephen’s Green, which is a veritable urban oasis, was also crowded with families (including innumerable babies in ubiquitous strollers) sunning themselves and enjoying the prematurely blooming flowers and blossoming trees.

 

Nestled in the city’s center is the venerable Trinity College, founded in 1592  by Queen Elizabeth to civilize and improve her Irish subjects. I can’t say for sure what the campus might be like under ordinary conditions, but on a sunny Spring day with temperatures in the 70s, its lawns are covered with students enjoying the warmth in a way you might expect, say, on a college campus in South Carolina.

 

Near Trinity College is another area that is perhaps of even greater interest to many tourists, the pub and restaurant district know as Temple Bar. On a warm spring evening, the area’s cobble-stone streets were full of Guinness-fuelled crowds of tourists and youthful revelers. The party atmosphere was lots of fun, but by the second or third visit to the area, I began to feel like it was an entertainment zone for thirsty visitors looking for the tourist version of the Irish pub experience. When my son and I found ourselves seated next to six middle-aged Japanese women taking pictures of themselves holding (untouched) glasses of Guinness, the whole place started to feel like an Irish-themed amusement park designed to separate foreign visitors from their euros.

 

In search of something a little less tourist-intensive, and hoping to catch the Pro12 rugby league game between Munster and Leinster, I typed “best places to watch sports in Dublin” into Google, and came up with the Bruxelles pub, on Harry Street, off of Grafton. The bar was packed with rugby fans, most seemingly loyal to Leinster. The bartender poured a proper pint, and the crowd was transfixed on the flat screen televisions around the room.

 

Leinster ultimately won the game, but the important thing is that we learned the appropriate forms of address during a televised rugby game. The true rugby fan from time to time waves a hand toward the television and exclaims “Ahhh!”, in a guttural growl from deep in the throat. Periodically, it is also appropriate to shout “Come on lads!” as well as “that’s a fookin’high tackle, for sure!” Large quantities of Guinness also are apparently required. No one was taking pictures of themselves drinking beer.

 

Perhaps the high point of our Dublin visit was the walking tour of the 1916 Easter Rising. Because the events took place relatively recently; because the structures involved in the Rising are not only still standing but mostly still in use; and because the consequences of the Rising have continued to reverberate over the years, the tour’s impact is extraordinary. The Rising has been and remains the source of much controversy, as it was quickly suppressed and resulted in the swift execution of its leaders, and also resulted in the destruction of much of the city’s central business district. O’Connell Street (then called Sackville Street) itself was left in ruins. In the immediate aftermath, the leaders of the Rising were widely reviled for in effect bringing the War in Europe  to Dublin. Ireland has never adopted the anniversary of the Rising as its Fourth of July or Bastille Day.

 

But after it was suppressed and the leaders executed, the Rising came to represent the embodiment of heroic nationalism as the country struggled toward independence. Views about the meaning of the Rising have continued to shift in the years since. With the centennial of the Rising now approaching, the question of the meaning of the events is the subject of renewed focus. The Rising tour, along with a separate tour of Kilmainham Gaol, where political prisoners were held and where the leaders of the Rising were executed, was a particularly interesting and memorable part of the visit to Dublin.

 

The Rising tour meets at the International Bar on Wicklow Street, not far from Trinity College. It turns out that a tour of a different type was also taking place there. That same morning, groups of Trinity students were conducting a unique form of pub crawl. The students were arranged in groups of six and dressed in costumes (as, say, the cast from Scoobie Doo or from the Flintstones). Their apparent plan was to run through a series of six pubs. At each pub, each participant had to chug a beer, and then run to the next pub. The International was only the second pub on the circuit. I can only imagine what the participants looked like by the time they reached the fifth or sixth pub. Now, I know some readers may be thinking that this activity is simply the ancient Gaelic sport of “hurling,” but that is actually an entirely different but equally inexplicable pastime (involving giant wooden spoons with three foot long handles, where the contestants run around, and, well, I am not sure about the rest, but it is a lot of fun to watch with a pint of Guinness).

 

One of the most amusing parts of this costumed, beer-swilling foot-race was the reaction of the pub regulars, who were seated at tables along the wall opposite the bar, pints of Guinness at their elbows, and faces unchanging as huffing and puffing teams of, say, Teenage Mutant Ninja Turtles, came charging into the pub, called for a round of beers, and then went running out. Just another day in Dublin, the regulars’ unchanging faces seemed to say.

 

Although there is much to be said for a pub and a proper pint, on a warm spring day Dublin’s outlying areas offer an even more alluring attraction. Thirty minutes north of the city on the DASH commuter rail line is the seaside village of Howth . The train line terminates at the edge of the town’s snug harbor. The main road runs along the sea-front past the breakwater, and then winds up into the hills overlooking the town and the harbor. At the road’s end, a foot path winds into the cliffs and up to the summit, where there are breathtaking views of the Irish Sea and of Ireland’s Eye, a rugged offshore island. The hillsides were covered with yellow gorse blossoms. Looking south from the summit, you can see beyond Dublin to the Wicklow Mountains.

 

Ireland is a beautiful country with a rich history, as well as an enviable trove of assets. It may face some formidable challenges. But with its youth and its energy, its future holds great promise. In the meantime, its capital remains a lively and entertaining destination, a comfortably diverse place to visit and enjoy.

 

St. Stephen’s Green, Dublin:

 

Trinity College, Dublin

 

Ireland’s Eye, Off of Howth

 

 

 

 

 

 

 

 

 

The Cliffs at Howth, from breakwater

 

Looking South to the Wicklow Mountains

The Lloyd’s Building, at 1 Lime Street in London, is the vital, dynamic heart of the London insurance market, as well as the historic center of the global insurance industry. The D&O Diary is on assignment in the U.K. this week, and one of the high points of the business itinerary was a tour of the Lloyd’s building in London, supplemented by a short but gratifying introduction to a host of London insurance market professionals.

 

The Lloyd’s Building’s exterior, still striking after 25 years, often attracts the most attention (and, even now, some controversy), but it is the building’s interior that is actually the most interesting. The building’s first three floors are a web of activity, with underwriters in the boxes considering risk submissions brought to them by the brokers.

 

The boxes are a remnant of the marketplace’s earliest origins at Lloyd’s Coffee House, where in those days marine risks were underwritten at the shop’s stalls and booths. The boxes today include sleek computer screens, and they often display the names of large multinational insurance organizations. Just the same, according to time-honored practices, the brokers still queue up at the boxes to present their client’s risks and much of the business is still transacted face-to-face. Even if these processes are vestigial, they represent both a civilized tradition and a time-tested way to transact insurance business.

 

On my prior visit to the Lloyd’s building years ago, there was a sense the building was a little under utilized. Much of the third floor then was vacant. But now the building seems to be full and the sense of energy and activity is palpable.

 

Notwithstanding the building’s ultramodern décor and the omnipresence of electronic technology, the building as an insurance market retains important artifacts reflecting its long history and embodying many of its traditions. The Lutine Bell, rescued from a sunken vessel, stands in the center of the building’s first floor; the bell still sounds from time to time, but only on the occasion of a major loss. The Adam Room on the building’s eleventh floor, a re-creation of the prior building’s meeting room, represents a sharp design contrast to the rest of the building. Though it is now used for ceremonial purposes, its traditional décor provides a symbolic link to the market’s long and venerable history.

 

The London insurance market is now much bigger than just Lloyd’s itself, and around The City there are other insurers in the so-called company market who do not participate directly in the Lloyd’s marketplace. But even these other participants are located in close proximity to the Lloyd’s building. As a result of the physically compact nature of the London insurance marketplace, and also due to the marketplace’s tradition of doing business face-to-face, there is very much of a feeling of community in the marketplace. Many of the participants know each other, to a much greater degree that their counterparts might elsewhere in the global insurance industry.

 

I enjoyed a particularly rewarding encounter with the London insurance community at a reception that my firm, OakBridge, co-sponsored with Beazley Group and the Ince & Co. law firm. It was through my friendships with individuals at these two other firms that the reception came about, but the reception itself was really not for or about the sponsoring firms as such. The whole point of the reception was simply to bring together as many participants in the London management liability insurance arena as were willing to come out on a Tuesday evening. In the event, over 75 underwriters, brokers, reinsurers and lawyers attended. I saw many old friends and made many new friends.

 

I thoroughly enjoyed the opportunity to become better acquainted with my professional colleagues in London. I came away with a strong sense of the professional collegiality that is so characteristic of the place. In the U.S., the D&O insurance industry is also collegial, but because it lacks the geographic concentration of the London market, the sense of community in the U.S. is not the same.

 

As a result of the Internet and other features of modern business, all too often in the U.S. (and elsewhere) our business interactions are impersonal and detached. In my own work situation, I am literally in an office by myself, with no colleagues nearby and with my links to the business world running through Internet routers and telephone lines. Sometimes it seems that what we may have gained in process efficiency from our modern approach to business, we may have lost in so many other ways. Although our transactions are usually friendly, it is infrequent that we know or know much about those with whom we are conducting business. As I circulated among the guests at the reception the other evening, I was reminded that in a business community built on relationships, business takes place not merely among market participants, but also between friends.   And there is a lot to be said for that.

 

I would like to thank my good friend Tom Coates of R.K. Harrison for taking me and my son around the Lloyd’s building. I would also like to thank all of my friends at Beazley Group and at Ince & Co. for co-sponsoring the reception. And to all my friends in London, old and new, all I can say is that I hope someday I have a chance to repay your hospitality. And to do business, as well. Cheers.

 

The Adam Room

 

Some of Lloyd’s City Neighbors

The D&O Diary is on assignment in the British Isles this week, with the first stop on the itinerary in London. The London sojourn represented a return engagement to a familiar and favorite place, both for myself and for my 18 year-old son, who accompanied me.

 

Because we have seen most of the major tourist landmarks on prior visits, for this trip we planned only to visit new places and try to try stay off the beaten path. The glorious weather that greeted us on arrival almost immediately set our plans aside, however. With sun streaming down and temperatures in the 70s, we were drawn to St. James Park, in part because at the time of my son’s prior visit, the park’s lake was drained for maintenance. From there, it was on to Green Park and then Hyde Park.

 

London is universally known as an impressive, diverse, vibrant place, but it is not always thought of as a beautiful city. On a sunny spring day with the spring flowers in bloom and flowering trees in blossom, the city is stunning. In defiance of all expectation about London weather, we enjoyed several remarkable days of warm sunshine. We later learned that the weather set records in many places in Britain.

 

If London can sometimes be beautiful, it is always cosmopolitan. One of the things I enjoy most about the city it its rich diversity. While riding the elevator in the Covent Gardens tube station, my son and I counted nine different languages among the thirty or so people in the elevator. But if it is sometimes beautiful and always cosmopolitan, it is first and foremost a city. It is a crowded, bustling city full of all types, some of them not entirely attractive.

 

Take, for example, the red-faced man decked out in full Chelsea football team regalia, whom we saw outside of the Tube station near our hotel. Even though it was only 11:00 am and more than an hour before the scheduled start of the football game, he was completely pissed, and when we saw him, two Bobbies (both fully a foot taller than he) had him backed into a corner, with their hands on his chest. He was shouting at them, “Yeah? Well what the f—k are you going to do about it, then? What the f—k are you going to do about it? Eh?” Sadly, I believe that Chelsea was required to play its game that day without this enthusiastic fellow in his usual seat.

 

Immersion in an urban environment like London can involve many of these kinds of experiences. We were walking down Charing Cross Road, and a woman behind us shouted (and I mean shouted), “Where the hell are we going?” A man, presumably her husband, replied, “Trafalgar Square.” She answered, “Why the f—k are we going there? There’s nothing in Trafalgar Square.” The man replied, “These lads have never seen the four f—king lions in Trafalgar Square, and these lads need to see the four f—king lions in Trafalgar Square.”

 

There are indeed four lions in Trafalgar Square, at the base of the Nelson Monument, but at least on the occasions when I have been there, the lions have not been engaged in any particularly noteworthy activities. There is also a large digital clock near the steps to the National Gallery that is displaying a countdown to the summer Olympics. Even though the games begin in July, the clock was the only active reference to the Olympics we noticed.

 

In addition to the Olympics, this year is Queen Elizabeth’s diamond jubilee, celebrating her 60 years on the throne. We did see quite a few banners and posters commemorating this event. We also saw on television the speech she delivered to Parliament earlier in the week. The queen will be 86 in April but she did a fine job with her speech, reminding her audience that during her reign there have been twelve different prime ministers (a line that for some reason drew a nervous laugh). The Beatles were right, “Her Majesty is a pretty nice girl,” but it is not true that “she doesn’t have a lot to say.”

 

Upon waking to a sunny and warm morning, we declared Saturday to be Market Day. We first went to the Portobello Market in Notting Hill. The market is really more of a street festival, with food and street musicians and, on a warm spring morning, crowds of people. The market winds along gentrified streets lined with blossoming trees and vendors selling seemingly endless supplies of such indispensable items as buttons, boxing gloves, pocket watches, antique sewing machines, gas masks, and vintage computers. In addition to treasures such as these, there was also some other stuff that was kind of junky.

 

After a time, we retreated to a pub for refreshment and sustenance. Our waiter, who was named Nikita, is from Moscow and is in London studying business at the London Metropolitan University. His English was perfect (he said that his mother teaches English). Fortified after a chicken and mushroom pie, and braced with the benefit of a pint of Fuller’s London Pride, and feeling beneficence and equanimity toward our fellow man, we made our way to our next stop on our Saturday market tour.

 

Camden Market in Camden Town is a very different affair than the Portobello Market. If the Portobello Market is a festival, then the Camden Market is a carnival, or perhaps a bazaar (or maybe even a bizarre, if the word can properly be used in this way). At the Camden Market, you can buy all of the tee shirts, tattoos and body piercings you would ever need. Personally, my own needs in the tattoo and body piercing departments are fulfilled at the current count of zero as to both. But there are many people whose requirements along these lines are seemingly unlimited. There are certainly possibilities of both types available in Camden Town that I had not previously encountered.

 

After a short distance, the market street intersects the Regent’s Canal, at Camden Lock. It is very much of a working canal, and while we were watching, a long narrow barge negotiated the lock. On a warm spring afternoon, the banks of the canal were lined with youths sunning themselves and displaying their multifarious tattoos and body piercings at what they believed to be their best advantage. They were talking, eating, playing guitars, drinking beer, and also engaging in sundry other activities that that I do believe are still illegal, even in London. The footpath along the canal affords an unusual perspective on parts of the city that are not usually on tourist itineraries. I would have been happy to explore the canal footpath for miles, but after a time we were both footsore and even a little sunburned. (And what an amazing thing that is, to be sunburned in London in March.)

 

In addition to city’s outdoor markets, we also took in a little bit of London’s theater scene. At the recommendation of a family friend, we had purchased tickets for the musical “Matilda,” which is based on the book by Roald Dahl. As we entered the theater, I had deep misgivings when I saw that almost all of the other theatergoers were young mums with little girls in tow. We were, however, pleasantly surprised by what proved to be a delightfully entertaining show. As befits a play about a clever girl, the play was very cleverly staged, with some very intricate and interesting choreography that was all the more impressive because it involved so many little kids. The production aimed to be a crowd-pleaser and I would have to say it was quite successful. All the mums and little girls walked out of the theater singing songs from the show. My son and I were both smiling as we left, too. (I understand the show will be making its way to Broadway in 2013. I predict a decades-long run there.)

 

On Saturday night, we also went out, but for a very different kind of performance. I had purchased tickets online for a concert at the Church of St. Martin in the Fields, just of Trafalgar Square (near those four, uh, famous lions). It was a candlelight concert, with the London Musical Arts Orchestra performing a program of pieces by Mozart. During the interval, the conductor provided an interesting introduction to Mozart’s Symphony No. 39, which was to be performed in the concert’s second half. During the lecture, several of the musicians walked through the audience, performing pieces from the Symphony to illustrate a point, which had an almost magical effect of connecting the audience with the performers. Because of the coziness of the venue and the relatively small size of the ensemble, the performance felt very direct, almost intimate.

 

Sunday was a full British day, in a variety of ways. First, we attended the worship service at St. Bride’s Church on Fleet Street. The church occupies the oldest church site in London, and supposedly there has been a church there since the 600s. The church is named for St. Bride of Kildare, and because of its location just off Fleet Street, where newspapers formerly were located before they became extinct, the church is known as the “journalists’ church” (if that is not an inherent conflict in terms).  The current structure was designed by Sir Christopher Wren after the Great Fire. The stunning “wedding cake” spire alone is worth a visit. The church was heavily damaged in World War II but it has been beautifully restored. With the sun streaming in the southern windows, the barrel-vaulted sanctuary was warm and comfortable. The church choir was surprisingly good and with the church’s remarkable acoustics, the overall experience was quite uplifting.

 

Feeling thus inspired and conscious that we needed to do something about it straight away, we made our way down Fleet Street to The Strand, where we went into The George pub, opposite the Royal Courts of Justice, and we both ate a Full English Breakfast and watched Celtic play Rangers in a Scottish Premier League game. The game, which featured five goals and four red cards, was highly entertaining. (Rangers won, 3-2). Fortified with a pint of Sambrooks’s Ale, we returned to the street with feelings of beneficence and equanimity toward our fellow man.

 

Our next stop entailed a trip to the Royal grocery emporium, Fortnum & Mason, on Piccadilly. Our shopping list included a most particular kind of Ceylon tea which, where were to have neglected to purchase it, we might as well have abandoned the idea of returning home. The store consists of five full floors, with a green grocery in the basements and clothing on the top two floors and luxury items on the foors in between. When I was in London last year, during a massive street protest about government budget cuts, a small group of hooligans smashed the store’s windows and vandalized its façade. There was a long explanation in the newspaper for this seemingly random event, something about the store’s ownership and its payment of taxes. The protesters themselves, whose march I had seen the entire day, were quite serious and their march was generally peaceful. Unfortunately, the actions of a few idiots who somehow thought trashing a grocery story represented a meaningful political act had the effect of trivializing the protest. I am guessing that when it was over, everyone went home and had a cup of tea. Which is certainly what I associate with the store.

 

In the evening, we went to Porters English Restaurant on Henrietta Street, just off of Covent Garden. We had been there on a prior visit and returned to enjoy the lamb, apricot and mint pie. Over dinner, we tried to figure out how the Chelsea fan we had seen had wound up in such a tangle with the police. I pointed out that Bobbies wear those odd hats, that look like they have a rigid, black plastic condom stuck on top of their heads. That reminded my son of the line from “A League of Their Own,” when Tom Hanks says to the umpire, “Has anyone ever told you that you look like a pen-s with a hat on?” Upon reflection, it s very likely that the Chelsea fan had said something very much like that to the Bobbies.

 

Our London visit continues with more business-oriented activities on the agenda, and then we move on to other destinations. With time permitting and events warranting, I will provide further updates. (For those who worry about such things, my son drank no alcoholic beverages at any pubs we visited.)

 

A Barge Picks Camden Lock:

 

All The Tatoos and Body Piercings You Could Ever Want or Need:

 

 

 

 

 

 

 

 

 

Everything you could ever want or neet — and more, at the Portobello Market:

 

St. Bride’s Warm and Comfortable Sanctuary:

 

 

An Eye on the Thames: 

 

 

 

 

 

 

 

 

 

A Perspetive on London From the Regent’s Canal

Though down from the previous year on both an absolute and a relative basis, securities class action lawsuit filings against life sciences companies remained a significant component of all securities class action lawsuit filings during 2011, according to a March 20, 2012 memorandum entitled “Survey of Securities Fraud Class Actions Brought Against Life Sciences Companies” by David Kotler of the Dechert law firm (here).

 

According to the report, there were 17 securities class action lawsuits filed against life sciences companies during 2011, representing approximately 9% of all 2011 securities class action suits. The number of 2011 life sciences suits represents a decline both in absolute and relative terms from the prior year, when there were 29 securities suits involving life sciences companies, representing 16% of all securities class action lawsuits. However, the 2011 figures are consistent with albeit slightly below prior years (for example, during both 2008 and 2009, suits against life sciences companies represented 10% of all securities lawsuits).

 

It should be noted that these filings statistics do not reflect lawsuits filed against life sciences companies involving merger objection allegations. If the M&A suits were included, the statistics would reflect an even greater frequency of corporate and securities lawsuits involving life sciences companies.

 

The lawsuits filed against life science companies in 2010 had been weighted toward the larger companies. However, the lawsuits filed in 2011 were more focused on smaller companies. During 2011, 58% of all life sciences companies hit with securities suits had market capitalizations under $250 million, compared with only 31% in 2010. By contrast, during 2010, 29% of the securities lawsuits involving life sciences firm related to companies with market caps over $10 billion, whereas during 2011, there were no suits filed involving those larger life sciences companies.

 

Allegations relating to financial proprieties and financial misrepresentations remain an important part of suits involving life sciences companies, but to a lesser extent than in the previous year. During 2010, over half of all complaints against life sciences companies involved these financially-related allegations, but during 2011, only 35% of the suits involved these types of allegations. The report notes with respect to the 2011 suits that “half of the claims alleging financial improprieties were brought against China-based companies.”

 

By contrast, the report notes, “industry specific allegations were comparatively on the rise in 2011.” Eleven of the 17 lawsuits of the complaints filed against life sciences companies involved allegations of misrepresentations involving product safety or efficacy. Allegations of allegedly fraudulent life sciences product marketing were raised in seven of the suits. Allegations involving misrepresentations in connection with prospects for FDA approval were involved in four cases, and allegations relating to manufacturing were involved in three cases. (Some complaints involved more than one of these categories of allegations).

 

Though life sciences companies are a frequent target of securities suits, these cases are also often dismissed. During 2011, according to the report, “courts continued to gran with relative frequency life sciences companies’ motions to dismiss due to plaintiffs’ inability to sufficiently plead scienter.” On the other hand, “it is also worth noting that, even in cases that are settled, securities fraud class action lawsuits can result in very large payments.”

 

One development during 2011 potentially of significance with respect to securities litigation involving life sciences companies was that in March 2011, the U.S. Supreme Court issued its opinion in Matrixx Initiatives v. Siracusano (about which refer here). In its opinion, the Court rejected the argument of Matrixx Initiatives that adverse product reports must be "statistically significant" in order for a manufacturer to have an obligation to disclose the reports to investors.

 

As the law firm memo notes, of particular importance to life sciences companies is the question whether, as a result of the Matrixx Initiatives case, “a publicly traded life sciences company can be held liable for securities fraud for failing to disclose adverse reports” regarding its products. Life sciences companies are faced with the task of “where to draw the disclosure line in the absence of a bright line standard.”

 

Fortunately, the report notes, thus far, the Matrixx Initiatives decision “has not resulted in any noticeable increase in securities fraud lawsuits brought against life sciences companies,” and the case’s holding has “not yet shown any significant impact on existing case law beyond rejection of the bright line rule based on lack of statistical significance.”

 

The author concludes with a number of practical suggestions for life sciences companies to take to minimize the risk of, and impact from, securities fraud class actions.

 

Directors and Officers’ Liabilities in Failed Bank Lawsuits: In a recent post (here), I examined the February 27, 2012 decision in the FDIC lawsuit involving the failed Integrity Bank of Alpharetta, Georgia, in which Northern District of Georgia Judge Steve Jones determined that allegations of mere ordinary negligence against the bank’s former directors and officers were barred by the business judgment rule under Georgia law.

 

A March 2012 memorandum from the Jones Day law firm entitled “FDIC Failed Bank Director and Officer Claims – Recent Court Decisions Better Define the Landscape” (here) takes a look at the Integrity Bank decision as well as recent developments in the FDIC’s failed bank lawsuit in the Northern District of Illinois involving Heritage Community Bank (for background involving the Heritage Community Bank case, refer here).

 

Among other things, the memo’s authors conclude that the decision in these cases “have helped inform the strategy of former directors and officers facing potential FDIC claims or actual litigation.” Even more importantly, according to the authors, “the Integrity decision appropriately set the bar higher for FDIC claims based on ordinary negligence, at least in jurisdictions with law similar to Georgia.” Obviously the decision is particularly important in Georgia itself, which has had more bank failures than any other state during the current bank failure wave.

 

Wage & Hour Litigation: Big and Getting Bigger: According to the title of a March 19, 2012 Corporate Counsel article, wage and hour litigation is “Big – and Getting Bigger” (here). Among other things, the article notes that “there has been more than a 325 percent increase in wage and hour lawsuits filed over the last ten years.” In the reporting year ended March 31, 2011, there were over 7,000 wage and hour claims filed in federal courts, which is “higher than the total filings of all other types of employment cases combined.”

 

Among other reasons cited in the article for this upsurge in wage and hour litigation is that these cases, according to one commentator quoted in the article “are very lucrative for plaintiffs lawyers,” as well as easier and less expensive for plaintiffs’ lawyers than discrimination class actions. Another reason for the increase in cases is that “employers continue to struggle with the law,” which in many ways is maladapted to today’s work place (where, for example, workers often find they must check blackberries, even outside of normal work hours). Employers struggling with how to apply the law are “confounded by the scarcity of case law” – although, as the article notes, the U.S. Supreme Court is scheduled to hear argument in a wage and hour case on April 16, 2012, in the Christopher v. SmithKline Beacham Corp. case. (Background on the Christopher case can be found here.)

 

A Break in the Action: Over the next several days, I will likely not be posting as frequently due to extended travel oblligations. The D&O Diary will resume its normal publication schedule in April.

 

The process of restructuring financially distressed companies is complicated and fraught with challenges. Among the many potentially complicating challenges that can arise is the possibility of claims against the company’s management. Because of the risks involved with these kinds of claims, it is critically important that steps are taken to insure that directors and officers are protected appropriately throughout and after the reorganization process.

 

The “best practices” for ensuring that directors and officers are protected before, during and after a reorganization are reviewed in an interesting March 14, 2012 memorandum from Shaunna Jones and Jeffrey Clancy of the Willkie Farr law firm entitled “Reorganization and D&O: Not Always Business as Usual” (here).

 

The memo contains key observations and practical advice regarding D&O insurance for companies involved in a financial reorganization. I review the memo’s key points below. However, it is important to note at the outset that the specific requirements of any particular company will be a reflection of the company’s financial circumstances; the specific reorganization process in which the company engages and how that process unfolds; and the particulars of the D&O insurance program that the company has in place at the time of its reorganization.

 

Because of these variables, there is no one single set of insurance-related steps that will apply to every financial reorganization. In order to determine the appropriate D&O insurance-related steps that any particular financially distressed company should take, the company should consult closely with its financial, legal and insurance advisors. That said, however, there are certain considerations that should be taken into account when these circumstances arise.

 

First, a company should determine whether the reorganization process has triggered the “change in control” provisions of the company’s existing D&O insurance program, and if the process has or will trigger those provisions, when the chance in control took place or will take place. This question is relevant, because the existing D&O insurance program will not provide coverage for any acts, errors or omissions that occur after the change in control.

 

The typical D&O insurance policy will provide that a change in control occurs when another person or entity acquires 50 percent or more of the voting control or power to select a majority of the board of directors of the insured company. Many policies also provide that that a change in control is triggered upon the appointment of a receiver, liquidator or trustee (although other policies do not have these trustee provisions, or the provisions are deleted by endorsement).

 

Whether and when the provisions are triggered will depend on the specific reorganization process in which the company has engaged. A Section 11 bankruptcy filing may not trigger a change in control, particularly where (as is often the case) no trustee has been appointed. The change in control in a Chapter 11 bankruptcy may not take place until the reorganization plan is implemented, on the plan’s “effective date.” The routine appointment of a trustee in a Chapter 7 bankruptcy, by contrast, potentially could trigger the change in control, depending on the applicable policy wording.

 

Regardless of the form of the reorganization and the timing of the change in control, if there is to be a “going forward” business following the reorganization, steps must be taken to protect the officers and directors of the new entity, and to ensure that the “going forward” protection dovetails with the insurance protection that is in place for the directors and officers of the former entity or operation. To make sure that all of these things are in place when and as they should be, without gaps in coverage, several steps should be taken at the before and during the reorganization process.

 

 The two critical insurance-related structures that need to be addressed are the implementation of an appropriate “run-off” for the directors and officers of the former entity and that “going forward” coverage is available for the directors and officers of the new entity (if there is to be one following the reorganization). The run-off coverage extends the period within which claims arising in connection with pre-reorganization conduct may be noticed. The “going forward” coverage is necessary to address claims involving post-reorganization conduct.

 

One question that often arises is why directors and offices need run-off coverage if the plan of reorganization involves a release of claims that could be asserted by creditors. The fact is that post-organization claims can and often do arise and they can be costly to defend, even if the directors and officers have a defense based on the release. There is also always the risk that the particular claim that arises may not be precluded by the release.

 

A practical complication that often arises is that the financial distress and/or the commencement of the restructuring process “may complicate a company’s ability to expend funds on D&O insurance.” Also, a potentially complicating factor that often arises is that the existing program may expire before the date of the change in control, which could require the company to go through a renewal transaction before the run off coverage is put in place.

 

Many companies facing a renewal date during the reorganization process will extend their existing program rather than acquiring a renewal program. This approach may be less time-consuming and may actually be more attractive to the insurer(s), who may not want to expose “fresh limits” to a financially distressed company. There may be drawbacks to an extension, particularly if the current program’s limits are “impaired” by an existing claim. The key is to ensure that the insurance protection remains in place throughout the reorganization process.

 

It may be that the payment of the premiums for the extension or renewal will require bankruptcy court approval. In some situations, it may be possible to include within a restructuring support agreement or plan support agreement a provision allowing for both the purchase of both necessary extensions or renewals of the D&O insurance and for the purchase of run-off coverage. Similarly, if the company is purchasing debtor-in-possession financing, the company should take steps to ensure that the costs associated with extensions and run-off purchases are including within the financing.

 

Provisions may be made for the post-reorganization entity to indemnify the directors and officers of the former entity. This indemnification may be structured in a variety of ways. The authors suggest that the “best practice” is to confirm the indemnity arrangements with the insurers, including adding the new entity as an insured under the run-off policy to ensure coverage for the new entity’s indemnification. The authors suggest that it should be confirmed that notwithstanding the indemnification that no retention would apply under the run-off policy and that the insured vs. insured endorsement should be modified to insure coverage for claims by the new entity against the directors and officers of the former entity. The authors acknowledge that while all of these options may be available, they should be considered and pursued.

 

Discussion

The authors’ memo is interesting and contains much sound advice. Notwithstanding the authors’ practical approach, the memo does underscore how complicated the insurance issues can be for companies going through financial reorganizations. The complications underscore how important it is for companies planning a financial reorganization to coordinate with the insurance advisors – as well as how important it is to have knowledgeable, experienced financial advice before and during a financial reorganization.

 

One particular issue the authors do not address is the way in which the “run-off” and “going forward” programs should be organized in order to allow for the possibility of a claim that “straddles” the past-acts/future acts dates of the two programs. It is important in protecting against this possibility that the “other insurance” provisions of the policies are coordinated.

 

Although the memo contains many useful observations, perhaps the most important is the authors’ emphasis on the need for these issues to be monitored and addressed before, during and after the reorganization process. Advance planning can reduce the likelihood that problems will arise, for example, in connection with payment for extensions and run-off purchases. Reassessment may be required throughout the reorganization process, particularly if the process unfolds differently than was expected at the outset (if for example, the plan changes from a reorganization to a liquidation).

 

I know that there is a lot more than can be said on these topics and that there are additional issues involved beyond those discussed above. I encourage readers to add their thoughts and comments on this topic, using this blog’s comment feature.

 

The Latest FDIC Failed Bank Lawsuit: On March 16, 2012, the FDIC filed its latest failed bank lawsuit. In its complaint (here), filed in the Northern District of Georgia in its capacity as receiver of the failed Omni Bank of Atlanta, the agency has sued ten of the bank’s former officers, seeking to recover over $24.5 million the bank allegedly sustained on over two hundred loans on loans involving low income residential properties and $12.6 million in wasteful expenditures on low income other real estate owned properties. The complaint, which can be found here, asserts claims against the defendants for negligence and for gross negligence.

 

As Scott Trubey reported in his March 16, 2012 Atlanta Journal Constitution article about the suit (here), since its failure, the bank has been the center of several criminal investigations involving both banker and borrower misconduct. Jeffrey Levine, a former bank executive vice president who was also named as a defendant in the FDIC’s lawsuit, is among those who have been hit with criminal charges.

 

The FDIC’s latest lawsuit is the seventh that the agency has filed so far involving a failed Georgia bank, the most of any state. (Georgia has also had more bank failures than any other state). The latest suit is the 27th that the agency has filed as part of the current wave of bank failures and the ninth so far in 2012. It is interesting to note that the agency filed this suit just short of the third anniversary of the bank’s March 27, 2009 closure. As the current year progresses, the agency will be facing similar anniversaries of bank closures, which coincides with the FDIC’s three year statute of limitations for bringing suit. Since the bank closure rate hit its high water mark in 2009, we are likely to see increasing numbers of suits this year. It already seems that the pace of lawsuit filing has picked up, as I noted in a recent post. 

 

Counsel Selected for Second Circuit Appeal of Issues Surrounding the Settlement of the SEC’s Enforcement Action Against Citigroup: As I noted in a recent post, the Second Circuit has stayed the SEC’s enforcement action against Citigroup, so that the appellate court can consider whether or not Southern District of New York Judge Jed Rakoff erred in rejecting the parties settlement of the case. One of the anomalous features of the case is that in connection with the motions to stay and for interlocutory appeal, since both the SEC and Citigroup had moved for the stay and for the appeal, the adversarial position had not been represented. In its ruling staying the case and granted the motion for appeal, the Second Circuit directed the Clerk of the district court to appoint counsel so that the adverse position (that is, that Judge Rakoff had not erred in rejecting the settlement) would be represented before the merits panel.

 

The counsel to represent the adverse position has now been selected – it will be John “Rusty” Wing, of the Lankler, Siffert and Wohl law firm. As Susan Beck notes in her March 16, 2012 Am Law Litigation Daily article about the appointment (here), there are a variety of unusual aspects of this appointment. The first is that it has been well over a decade since Wing argued before the Second Circuit. The second is that Wing apparently was selected by Rakoff himsef, almost as if Wing were to be representing  Rakoff in person, rather than merely arguing in support of his ruling rejecting the settlement. Wing is in fact a former colleague of Rakoff’s when the two served in the U.S. Attorney’s office together. The selection of Wing, and more particularly the process by which he was selected, raise a number of interesting questions about who he is representing and what his role will be. For example, should Wing be consulting with Rakoff in preparing his appellate brief?

 

The selection of Wing represents just one more unexpected and unusual twist in a case that has already had more than its fair share of unexpected twists and turns. In any event, Wing will face an uphill battle given the finding of the three-judge Second Circuit that granted the stay that the SEC and Citigroup have demonstrated a “substantial likelihood” of success on the merits.

 

Alison Frankel has an interesting March 16, 2012 post about Wing’s selection on Thomson Reuters News & Insight (here).

 

In a sharply worded March 15, 2012  per curiam opinion (here), a three-judge panel of the Second Circuit granted the motions of Citigroup and the SEC to stay district court proceedings in the SEC’s enforcement action against the company, so that the appellate court could consider the merits of the question of whether or not Judge Rakoff had properly rejected the parties’ $285 million settlement agreement.

 

While the Second Circuit did not rule that Judge Rakoff’s rejection of the settlement was improper, in concluding that that there was a substantial likelihood the parties would prevail on the merits on that question, the three-judge panel expressly rejected the reasoning on which Judge Rakoff had declined to approve the settlement.

 

In its enforcement action, the SEC alleged that Citgroup had made misrepresentations in its marketing of collateralized debt obligations. At the same time the SEC filed its complaint, the parties filed a consent judgment for court approval. Among other things, Citigroup agreed to pay $285 million into a fund to be distributed to CDO investors.

 

In a November 28, 2011 order (about which refer here), Judge Rakoff rejected the proposed settlement, holding that it was not fair, adequate, reasonable, or in the public interest because Citigroup had not admitted or denied the SEC’s allegations. Among other things, Judge Rakoff contended that without the admission of liability he was not in a position to assess the settlement. He also characterized the $285 million settlement as “pocket change” for Citigroup. Judge Rakoff put the action on track for trial on the merits. The parties jointly filed motions with the Second Circuit seeking to stay the District Court proceedings and for an interlocutory appeal of Judge Rakoff’s rejection of the settlement.

 

The three judge panel granted the motions to stay and for interlocutory appeal, finding that the parties had carried their burden of showing a substantial likelihood of success on the merits on appeal. In concluding that the parties had carried their burden, the three judge panel considered and rejected each of the three bases on which Judge Rakoff had based his decision to reject the settlement.

 

First, the three-judge panel rejected Judge Rakoff’s conclusion that the settlement without an admission of liability represented bad policy and failed to serve the public interest because defrauded investors could not use the settlement  against Citigroup in separate shareholder lawsuits. The three-judge panel said that this reasoning “prejudges the fact that Citigroup had in fact misled investors, and assumes that the SEC would succeed at trial in proving Citigroup’s liability.”

 

The three-judge panel was even more concerned that in rejecting the settlement on this basis, Judge Rakoff failed to give deference to the SEC on what the three-judge panel called a “wholly discretionary matter of policy.” It is not, the three-judge panel said, “the proper function of federal courts to dictate policy to executive agencies.” Nevertheless, the three-judge panel concluded, “the district court imposed what it considered to be the best policy to enforce the securities laws.”

 

The three-judge panel added that it questioned “the district court’s apparent view that the public interest is disserved by an agency settlement that does not require the defendant’s admission of liability. Requiring such an admission would in most cases undermine any chance of compromise.”

 

Second, the three-judge panel considered and rejected Judge Rakoff’s reasoning that he must decline to accept the settlement because it is unfair to Citigroup. The three-judge panel questioned “whether it is a proper part of a court’s legitimate concern to protect a private, sophisticated, counseled litigant from a settlement to which it freely consents.” The panel added that “we doubt that a court’s discretion extend to refusing to allow such a litigant to reach a voluntary settlement in which it gives up things of value without admitting liability.”

 

Third, the three-judge panel rejected Judge Rakoff’s reasoning that without an admission he lacked a basis on which to assess the fairness of the settlement. The panel said that this reasoning disregarded the substantial record the SEC had amassed over its investigation. The panel added that “the court was free to assess the available evidence and to ask the parties for guidance as to how the evidence supported the proposed consent judgment.”

 

The panel went on to reject Judge Rakoff’s suggestion that without an admission of liability that the settlement was somehow inherently unfair. The pane said that this is “tantamount” to a ruling that without an admission of liability “a court will not approve a settlement that represents a compromise,” adding that:

 

It is commonplace for settlements to include no binding admission of liability. A settlement is by definition a compromise. We know of no precedent that supports the proposition that a settlement will not be found to be fair, adequate, reasonable, or in the public interest unless liability has been conceded or proved ….We doubt whether it lies within a court’s proper discretion to reject a settlement on the basis that liability has not been conclusively determined.

 

Having concluded that the parties had established a substantial likelihood of success on the merits, the three-judge panel went on to consider the likelihood of harm to the parties of the stay is not granted. In reaching a conclusion of the likelihood of harm, the panel noted that the “the district court’s rejection of the settlement cannot be cured by the parties returning to the bargaining table to make relatively minor adjustments to the terms of the settlement to address the court’s concerns,” a circumstance that “substantially reduces the possibilities of the parties reaching settlement.”

 

Finally, in concluding that the public interest would be served by granting the stay, the three-judge panel noted the SEC asserts that both the settlement and the stay would serve the public interest, about which the panel said “we are bound in such matters to give deference to an executive agency’s assessment of the public interest.” This does not mean, the panel said, that a court “must necessarily rubber stamp” an agency’s positions, but it does mean that “a court should not reject the agency’s assessment without substantial reason.” The panel added that “we have no reason to doubt the SEC’s representation that the settlement it reached is in the public interest.”

 

The three judge panel did note the rather anomalous circumstance that because Citigroup and SEC had both filed motions to stay and for interlocutory appeal, the adversarial position had not been presented. In order to ensure that the adversarial position would be represented on appeal, the three-judge panel directed the Court’s clerk to appoint counsel for the consideration of the merits.

 

Discussion

The three-judge panel was careful to note that it did not rule on the question of whether or not Judge Rakoff had improperly rejected the settlement. It noted that its reasoning was not preclusive on the merits panel. It is in fact possible, at least as a theoretical matter, that on further proceedings and with skilled counsel engaged to argue the “adversarial position,” that a different panel might reach a different conclusion about Judge Rakoff’s rejection of the settlement.

 

The strong likelihood is that the merits panel will reach the same conclusion as the three-judge panel. The conclusion in the panel’s opinion that Judge Rakoff had failed to allow appropriate deference to the SEC (by contrast to the panel’s own exceptional deference to the agency) seems likely to be taken up by the merits panel. In addition, that there is “no precedent” for the conclusion that a court should reject a settlement because it lacked an admission of liability also seems to suggest the likeliest path that the merits panel would take.

 

Finally, and more importantly, there is a pervasive sense throughout the three judge panel’s opinion that if parties can’t settle without requiring an admission of liability, then parties are unlikely to try to compromise. This practical and common sense observation suggests that the three judge panel saw nothing wrong at any level with a settlement in which there has been no admission of liability. This reasoning may prove to be the most important to the merits panel.

 

Judge Rakoff’s opinion was emotional, reflected a high moral tone, and bespoke a theoretical consideration of the issues. The three-judge panel’s opinion more practical than theoretical, and reflected a more restrained and deferential conception of the appropriate role of the court in these circumstances. The difference behind these two approaches may be explained by the fact that Judge Rakoff may, as the three-judge panel observed, have “prejudged” the fact that Citigroup had misled investors.

 

The ultimate outcome of this appeal remains to be seen. However, if the three-judge panel’s view of this case prevails, the demise of the “neither admit nor deny” settlement will be avoided. Some commentators might decry this outcome, but many of the outrage voiced by many of these observers will be based on atheir own presumption that Citigroup had acted improperly. While compromises of disputed claims may be less emotionally satisfying than a determination of fault, the practical reality is that the system might well grind to a halt if parties cannot compromise. Perhaps the most valuable observation of the three-judge panel is that if parties are not free to reach settlements without an admission of liability, then parties will be unlikely to compromise, an outcome that would impose enormous costs on litigants and burdens on courts.

 

Allison Frankel has a good analysis of the three-judge panel’s opinion on Thimson Reuters News & Insight (here)

 

Many thanks to the several loyal readers who sent me copies of the three-judge panel’s opinion.