Among the features of the recently enacted JOBS Act that has attracted the most attention are the legislation’s provisions for “crowdfunding.” Under these provisions, a company is permitted to raise up to $1 million during any 12-month period through an SEC-registered crowdfunding portal. While these provisions have attracted a great deal of discussion and even controversy, a more basic question is – who will actually be taking advantage of this new fundraising procedure?

 

A common assumption about the new crowdfunding procedure is that it will be most beneficial to start-up companies. But at least according to a May 9, 2012 CFO.com article (here), due to the procedural burdens and costs associated with the JOBS Act’s crowdfunding provisions, crowdfunding is unlikely to be an attractive alternative for start-up companies.

 

According to the article, the crowdfunding provisions in the JOBS Act may be “too complex and onerous” and “not very cost-effective“  for an early-stage company. Among other things, entrepreneurs launching a new venture “may lack the financial acumen and robust business plans they’ll need to comply with the JOBS Act” and they also “may not have the cash to hire the accountants and lawyers they will need to navigate the law.” 

 

Instead, the companies likeliest to be using crowdfunding will be “more mature firms” that “have the experience of searching for sources of capital” and that are “able to show, based on financial information, performance metrics and forecasts, that they are heading in the right direction.”  Among other things, the crowdfunding process will require a certain amount of rigor, if for no other reason than the company using the process will have to provide financial statements.

 

The financial statement requirements will impose a cost-benefit analysis on companies considering a crowdfunding financing, due to the Act’s sliding scale requirements. Companies raising up to $100,000 need provide only a financial statement signed by the company’s directors. But companies raising between $100,000 and $500,000 must provide financials reviewed by a CPA. And for companies raising between $500,000 and $1 million, audited financials must be provided. Companies will have to decide whether their financing requirements justify the expense of having their financials reviewed or audited. In addition, the Internet platforms through the crowdfunding offerings will be conducted will also be charging fees, which will add to the cost.

 

As I have previously noted (refer here), the JOBS Act’s crowdfunding features also expressly include liability provisions. The potential liability exposures mean that issuers trying to raise money through a crowdfunding offering “will probably need to get a lawyer involved,” which, as a commentator quote in the article notes, is “not ever cheap.”

 

There is also the possibility that the SEC will add even greater burdens and expense when it releases its crowdfunding rules in January 2013. Among other things, the SEC could add additional burdens in the way that it regulates the funding portals. The SEC has also no secret of its concerns about the possibility of scam artists using crowdfunding to try to con investors, as a result of which, as a commentator quote in the article notes, the SEC might “layer on more regulation.” For example, the SEC might require disclosure after the crowdfunding offering, which “could make crowdfunding potentially cost prohibitive.”

 

The Venue That Suits You Best: Where is the best place in the world to file a lawsuit? Well that depends on the kind of lawsuit you want to file. Want to sue for libel? Then you want to file in the U.K. Thinking of suing for patent infringement? Then you should file in Germany. All of this is according to the “best and worst places to sue” atlas published on May 10, 2012 in BusinessWeek, and which can be found here.

 

More Thoughts on Asia: As I discussed in a blog post summing up my observations of my recent Asia trip, there is an incredible amount going on now in Asia. The present and future business opportunities in Asia are enormous – so much so that I really regretted during my trip that my children were not there to see what I was seeing.

 

It is in this context that I note an article that appeared on May 11, 2012 Wall Street Journal. The article, entitled “P&G Unit Bids Goodbye to Cincinnati, Hello to Asia” (here), describes how Proctor & Gamble is moving its cosmetics and personal-care unit from Cincinnati to Singapore. The company is making the move based on its “decision to base the business in the fast-growing Asia beauty market,” as part of a larger plan to move employees and manufacturing facilities closer to its key customer bases. The article goes on to note that the Asia-Pacific region already accounts for half of the world’s market for skin care, and is also by far the fastest growing region.

 

The article includes a sidebar identifying a number of similar moves developed-world companies have made recently. For example, GE has moved its X-ray unit from Wisconsin to Beijing; Halliburton has set up a separate headquarters in Dubai; DSM Engineering Plastics has moved its headquarters from the Netherlands to Singapore: and Rolls-Royce has moved its global marine headquarters to Singapore from London. (As I understand it, AON’s recent decision to move its headquarters from Chicago to London is in part explainable as part of this same phenomenon, because so much of its business and growth is outside the U.S.)

 

Maybe I am giving too much significance to these developments I am overly focused on Asia so soon after my return home from Asia.  Even allowing for that possibility, these companies’ moves still seem significant. These companies are re-orienting themselves because the world is re-orienting.   It seems pretty clear to me that the path to future business success is going to run through Asia. Those of us doing business in the U.S. and in Europe now need to prepare for the fact that our clients, or at least those who are likeliest to succeed, are going to be positioning themselves to participate in Asian opportunities. Provides of services will need to be prepared to adjust as the companies reposition.

 

China in Ten Words: Another observation from my Asia trip is how vast, complex and enigmatic China is. Since returning home, I have read several books about China and its history, trying to get a better sense of the country and the changes it has been through in recent years. The country is so large and the changes it has been through have been so momentous that it seems nearly impossible to briefly summarize it all. For that reason, the slim, readable book China in Ten Words by Yu Hua, a Chinese author who lives in Beijing, is so interesting and impressive.

 

Yu’s book is divided into ten short chapters, each of which has a single word as a theme. The ten chapters are: people; leaders; reading; writing; Lu Xun (a pre-revolutionary Chinese author); revolution; disparity; grassroots; copycat; and bamboozle. Yu took this thematic approach because, as he says, if he tried to capture everything about China, the result would be a book so long that no one could ever read it. By limiting himself to just ten words, he gives us “ten pairs of eyes” to scan the contemporary Chinese scene.

 

Yu’s method has a very specific purpose, which he explains in his introduction:

 

“The arrow hits the target, leaving the string,” Dante wrote, and by inverting cause and effect he impresses on us how quickly change can happen. In China’s breathtaking changes during the past thirty years we likewise find a pattern of development where the relationship between cause and effect is turned in its head. Practically every day we find ourselves surrounded by consequences, but seldom do we trace those outcomes back to their roots. The result is that conflicts and problems –which have sprouted everywhere like weeds during these past decades – are concealed amid the complacency generated by our rapid economic advances. My task here is to reverse normal procedure; to start from the effects that seem so glorious and search for their causes, whatever discomfort that may entail.

 

In tracing the current outcomes back to their roots, Yu tells the story of contemporary China from the perspective of his own personal experiences. What quickly becomes apparent is not only how much Yu has seen and experienced in his life, but how much everyone in China older than, say, forty or so, has seen and experienced. The dramatic and appalling details of the scenes he witnessed during the Great Leap Forward and the Cultural Revolution, which took place during his childhood and adolescence, provide an almost incredible backdrop to China’s current prosperity and economic growth.  As Yu says, “in this quest to follow things back to their source, we cannot help but stumble on one misfortune after another.”

 

The unexpected and interesting message that emerges from Yu’s account is the directness of the connection between the events during the Great Leap Forward and the Cultural Revolution and contemporary circumstances. Yu finds parallels between the excesses of those earlier eras and many of the excesses of modern China. In his chapter titled “Revolution,” he shows how the propaganda deceptions of the Great Leap Forward era and the revolutionary violence of the Cultural Revolution era continue to shape behavior and events.

 

The consequences for China emerge Yu’s book progresses; his final four chapters – disparity, grassroots, copycat and bamboozle – portray a country beset with “moral bankruptcy and confusion of right and wrong.” For example, in discussing the “copycat” phenomenon – whereby, as a result of an engrained revolutionary era ethos, counterfeiting and infringement are accepted as part of the “anarchist spirit” – Yu characterizes the trend as “a sign of something awry in China’s social tissue.”

 

In the same vein, in the book’s final chapter, Yu explains how the word “bamboozle” has come to gain such broad acceptance in modern China, as its particular usage “throws a cloak of respectability over deception and manufactured rumor.” Yu describes a society where the people routinely bamboozle the government and the government routinely bamboozles the people  Yu recounts several different tales illustrating this process in action, and then comments that “there is really no end to these stories of fraud and chicanery, for ‘bamboozle’ has already insinuated itself into every aspect of our lives.”

 

Yu concludes that “the rapid rise in popularity of the word ‘bamboozle,’ like that of ‘copycat,’ demonstrates to me a breakdown of social morality and a confusion in the value system in China today,” which he says is “an aftereffect of our uneven development these past thirty years.” Yu ends his book with a personal anecdote showing how the attempt to bamboozle can backfire. (Yu recounts how as a child he faked a stomachache to get out of doing chores and wound up getting his appendix removed.) Yu doesn’t expressly connect the link between his personal experiences and China, but the implicit message seems to be that China could wind up as the victim of its own bamboozlement.

 

Yu writes simply and clearly, and his many anecdotes humorously illustrate his themes. Using ten words, Yu manages to provide an interesting and though-provoking picture of contemporary China. In the portrait he paints, China is a troubled giant still struggling to recover from the painful events of the country’s early history.

 

One of the critical issues in putting together a D&O insurance program is the question of how to structure the insurance. Among the more complex issues is how to divide the program between “traditional” D&O insurance coverage and Excess Side A DIC insurance (which in effect provides catastrophic protection for individual directors and officers in certain defined circumstances). A more basic issue is the question of how to “layer” the program between primary and excess insurers, and how large each of these layers should be in the overall program.

 

The question of how to layer a D&O insurance program is certainly not new, but it remains a vital question and even a source of continuing scrutiny and debate. The latest example of how topical these issues are appeared in a May 8, 2012 post in Alison Frankel’s On the Case blog (here). Within  the context of a post in which Frankel discusses the overall importance of D&O insurance in securities suit settlements, Frankel quotes Steve Toll of the Cohen, Milstein, Sellers & Toll law firm. Toll has some harsh words to say for the way in which companies structure their D&O insurance.

 

Among other things, Toll objects to the fact that over the last decade insurers have splintered their D&O insurance into multiple layers, which in the event of a claim means that plaintiffs’ lawyers are often negotiating with multiple insurance company representatives. In Toll’s eyes, the problem with this arrangement is that “at every step, every carrier puts up a roadblock,” which he says “dramatically affects the resolution of these cases. In almost every one, it’s the same fight.”

 

Toll is one of the country’s leading plaintiff’s securities attorneys. I understand that his comments are based on extensive experience and that his frustration about the settlements is real. However, with all due respect for Toll, I think it is fair to note that it is hardly a concern of the parties to the insurance contract(s) that the plaintiffs or the plaintiffs’ attorneys don’t like the way the insurance is structured. D&O insurance is not there to make claimants or their attorneys happy nor is it intended to be a reserve pool on which claimants or their attorneys get to draw; it is there to protect the company’s directors and officers.

 

It could be argued that it is to the long term benefit of both companies and their insurers that there is a certain amount of friction for plaintiffs and their attorneys to be able to get at the insurance. It ensures that loss costs are contained, which in turn should help to keep insurance costs down.

 

Indeed, at least one leading defense attorney has recommended that D&O insurance should be arranged in tiers, for that very reason. In his venerable article entitled “The Veil of Tiers: Shareholder Lawsuits and Strategic Insurance Layers” (here), first published way back in 1997, Boris Feldman of the Wilson Sonsini law firm argued that “the ‘strategic tiering’ of directors’ and officers’ (D&O) insurance is a useful consideration in designing an effective risk management program.” Feldman argued in favor of arranging D&O insurance program in multiple layers, asserting that “Each separate layer of insurance constitutes a firebreak. It is extremely difficult, in ordinary cases, for plaintiffs to jump from layer to layer in funding a settlement – especially early in the litigation.” That is, what the plaintiffs’ lawyer is complaining about is the very thing that the defense attorney is recommending.

 

Alas, there is a lot more to the question of how to structure D&O insurance that just splitting the program up in to a bunch of layers to the everlasting frustration of plaintiffs’ lawyers. Even Feldman acknowledges in his article that “there is no magic formula as to the right amount or structure of a D&O portfolio.” He also says that if there are too many layers “you may expend substantial energy trying to keep your insurance house in order during a lawsuit” and “should you find yourself in a situation where you really need all of that insurance to settle a troublesome claim, it will be harder to get carriers to participate as you go higher up the chain.” In other words, the issue of too many insurers and too many insurers’ representatives in the settlement room can be a problem for policyholders and for defense counsel as well as for plaintiffs’ lawyers.

 

More recently, an entirely different perspective on the layering of D&O insurance has emerged. In his April 2012 paper “How Collective Settlements Camouflage the Costs of Shareholder Lawsuits” (which can be found here, and which I previously reviewed here – and the author’s comments on my review can be found here), Fordham Law School Professor Richard Squire raises an entirely different set of objections to the layering of D&O Insurance.

 

Professor Squire contends that insurers in the primary layers and lower level excess layers are often compelled to contribute toward settlement when the settlement demand (or more accurately, the settlement opportunity) exceeds their layer. This compulsion, Squire notes, is often effectively given legal force through a rarely identified but nonetheless very real “duty to contribute.” The compulsion results in a “cramdown” effect, where the upper layer excess insurers and the policyholder pressure the primary insurer and lower level excess insurers to settle.  These forces lead to a number of ills, including “plaintiff overcompensation at insurer expense”; overpriced liability insurance; and lawsuits of doubtful merit.

 

That is, Squire contends that as a result of the pressures that the insurance layering brings about, plaintiffs (and, presumably their lawyers) are “overcompensated.” I suspect that somehow Steve Toll might dissent from this perspective, or from any contention that his clients or he are overcompensated. Toll’s comments certainly don’t evince any awareness of a cramdown effect.

 

In my view, there is no single perspective that explains the way that the layering of D&O insurance will affect the settlement dynamic in every case. In cases involving particularly egregious facts, the layering is going to be irrelevant. (For example, the entire Lehman Brothers D&O insurance tower was always going to be toast, regardless of how it was layered). And in weaker cases, layering could have the firewall effect that Feldman described in his article, which given the weakness of the case involved is a good thing. In most other cases, the impact will be complicated and will vary according to the circumstances, including in particular how quickly defense expenses are accumulating and how likely it is that future defense expenses will burn through several of the lower layers.

 

What is important to understand is why D&O insurance is layered in the first place. The reason that D&O insurance programs are layered is that no D&O insurer could sustain the concentration of risk that would be involved with exposing outsized amounts of capital to any single large corporate exposure. As a result, the insurance needs of most buyers of D&O insurance (particularly among public companies) exceed the insuring capacity of any one carrier – and usually, the insurance capacity of several carriers is required in order to put together a program large enough to meet the insurance needs of most buyers.

 

In general, most buyers would probably prefer fewer, larger layers in the program. However, it is not always feasible to obtain larger layers, and as a result in most cases the participation of multiple carriers will be required in order to complete most buyers’ programs.

 

There might be ways to avoid the layered insurance structure. One possibility would be to arrange the D&O insurance in a quota share program. In a quota share program, the various carrier participants’ interests are arranged vertically, rather than horizontally. Under this arrangement, each carrier would share ratably in each dollar of loss costs, so the carriers’ interests in trying to save loss costs would be aligned in a way that would eliminate many of the conflicts the various commentators have noted.

 

The shortcoming of the quota share approach is that it would be very difficult for all of the participating insurers to cede control to a single decision maker. In the absence of a single point of control, the claims process could be reduced to chaos. The other thing about quota share D&O insurance is that people have been talking about it for years, yet it has never gone anywhere. As a practical matter, at least as things currently stand, quota share insurance is not an available alternative to the current customary layering of D&O insurance.

 

If D&O insurance layering is an inevitable aspect of most D&O insurance programs, at least as things currently stand, the question then is how can the problems the various commentators have identified be reduced? I have no comprehensive solutions, but I do have a few suggestions of ways some of the problems might be reduced:

 

1. Keep the Excess Carriers in the Loop: Problems often arise when the excess carriers are advised only at the eleventh hour that there is a settlement demand that pierces their layer or that the defense expenses are about to exhaust the underlying layers. If the excess carriers are provided complete information as the claims develop, they are less likely to resist requests for quick action based on lack of information.

2. Keep Track of Difficult Players: I have long felt that as an industry we don’t do nearly enough to hold carriers accountable over time for recalcitrant behavior. I think that over the long haul, everyone would benefit if there were more of a league table of claims responsiveness. If carriers knew that their claims reputations truly depended on their responsiveness, there would be greater disincentives against foot-dragging and other undesirable behavior.

3. Horses for Courses: This point is really a corollary of the prior point. That is, when the D&O insurance program is being structured at the outset, a great deal of care should be taken to give precedence to the carriers that have consistently demonstrated themselves to be responsive players.

4. The Broker Has a Role to Play: One way to try to keep the claims process on track and settlement efforts moving forward is to enlist the assistance of the broker that placed the coverage, at least to the extent that the broker has claims resources sufficiently knowledgeable and experienced to be able to participate meaningfully in the claims process and to be able to act as a claims advocate for the policyholder. The broker can also serve as a reminder to the various carriers involved of points 2 and 3 above.

 

There are probably a lot more points that might be made here, and I strongly urge readers who have thoughts along those lines to weigh in here by adding their thoughts using the comment feature on this blog.

 

The final point I want to make is that all of this underscores the fact that the process of putting together an appropriate D&O insurance program is an art not a science, and it requires not only a great deal of technical knowledge, but it also requires a broad perspective on the claims process and on the various carriers’ track records in that process. All of which is another way of saying that perhaps the most important step in putting together an appropriate D&O insurance program is making sure that a knowledgeable and experienced broker has been enlisted to guide the process.

 

This Could Get Interesting: Readers of this blog are well aware of the rash of securities litigation involving U.S.-listed Chinese companies that arose in the last couple of years. Securities regulators have also gotten interested in some of the revelations involving Chinese companies. A significant challenge that faces both private litigants and the U.S. regulators is the difficulty of investigating and conducting discovery involving companies that have their principal places of operation in China.

 

Along those lines, the SEC has now taken an aggressive move in its efforts to try to investigate alleged accounting issues involving Longtop Financial. The SEC had attempted to subpoena Longtop’s auditor, Shanghai-based Deloitte Touche Tomahtsu, in an attempt to obtain the audit firm’ audit work papers in connection with the firm’s audit of Longtop. The audit firm has resisted producing the work papers, asserting that production of the work papers would violate Chinese law.

 

On May 9, 2012, the SEC instituted an administrative proceeding against the audit firm. A copy of the SEC’s order instituting the administrative proceedings can be found here. The SEC’s May 9, 2012 press release about the action can be found here. The firm is charged with violating the Sarbanes-Oxley Act, which requires foreign public accounting firms to provide audit work papers concerning U.S. issuers to the SEC upon request. This is the first time the SEC has brought an enforcement action against a foreign audit firm for failing to comply with a request. The administrative proceeding will be assigned to an Administrative Law Judge at the agency. The judge would determine the appropriate remedial sanctions if the judge finds in favor of the SEC staff.

 

As reflected in Ross Todd’s May 9, 2012 Am Law Litigation Daily article about the SEC’s action (here), the SEC’s latest action follows extensive procedural efforts by the agency to try to obtain the work papers. Todd also reports that efforts between regulators in the U.S. and China may have resulted in the development of some type of compromise that may break the impasse.

 

Whether or not these issues can be worked out remains to be seen. But in the meantime, the SEC’s so far unproductive efforts serves to underscore the difficulties involved with trying to pursue actions involving companies with their principal places of business in China.

The rating agencies must defend against  claims for negligent misrepresentation in connection with the ratings the firms assigned to a pair of structured investments vehicles, Southern District of New York Judge Shira Scheindlin has ruled in a pair of May 4, 2012 decisions. Judge Scheindlin did grant the defendants’ motions to dismiss claims for negligence, breach of fiduciary duty and aiding and abetting, which substantially narrowed the plaintiffs’ claims.  But she denied the rating agencies’ motions to dismiss with respect to the negligent misrepresentation claims, finding that, based on the plaintiffs’ allegations, the ratings qualified as actionable misstatements under New York law.

 

Judge Scheindlin issued the opinions in two cases involving structured investment vehicles, one called Rhinebridge and one called Cheyne Financial. Judge Scheindlin’s opinion in the Rhinebridge case can be found here and the opinion in the Cheyne Financial case can be found here.

 

The background on the Cheyne financial case can be found here. The Rhinebridge case arose out of the Rhinebridge structured investment vehicle’s (SIV) June 27, 2007 offering of certain investment securities to certain Qualified Institutional Buyer and Qualified Purchasers. In connection with the offering, the rating agencies gave the Rhinebridge securities the highest ratings. The plaintiffs also allege that the rating agencies helped structure the investment vehicle. The offering proceeds were invested in a variety of residential mortgage related investments. The SIV was forced into receivership on October 22, 2007, becoming, the plaintiffs alleged, “perhaps the shortest-lived ‘Triple A’ investment fund in the history of corporate finance.”  In addition to the rating agencies, the plaintiff investors had also sued IKB Deutsche Industriebank AG , the bank that sponsored the SIV, and Morgan Stanley, which had acted as offering underwriter.

 

Judge Scheindlin had originally dismissed the plaintiffs’ common law claims, holding under New York law that the common law claims were preempted by the Martin Act. However, in December 2011, as discussed here, the New York Court of Appeals rejected Martin Act preemption for common law claims, and Judge Scheindlin allowed the plaintiffs leave to amend their pleadings to assert common law claims. After the plaintiffs amended their pleadings the defendants renewed their motions to dismiss.   

 

In her May 4 ruling in the Rhinebridge case, Judge Scheindlin granted the defendants’ motions to dismiss the plaintiffs’ claims for negligence, breach of fiduciary duty and aiding and abetting. However, she denied the motion to dismiss the plaintiffs’ claims against the rating agencies for negligent misrepresentation.

 

In denying the motions to dismiss the negligent misrepresentation claims, Judge Scheindlin said that:

 

the Rating Agencies (1 intended that their ratings would be used to evaluate the SIV; (2) intended that the plaintiffs –members of a select group of qualified investors – would rely in the ratings to evaluate the SIV; and (3) prepared their ratings with the end and aim of inducing investors such as the plaintiffs to invest in the SIV.

 

Judge Scheindlin’s ruling was specifically dependent on her determination, based on the plaintiff’s allegations, that “there was a privity-like ‘special relationship’ between the plaintiffs and the Rating Agencies.”  Judge Scheindlin also allowed the negligent misrepresentation claims to go forward as to IKB Deutsche Industriebank and Morgan Stanley.

 

Judge Scheindlin’s ruling in the Cheyne Financial case paralleled her rulings in the Rhinebridge case, and her order in the Cheyne Financial case expressly referenced her rulings in the Rhinebridge case.

 

Discussion

Among the causes many cite for the subprime meltdown is the willingness of the rating agencies to assign investment grade rating to securities backed by subprime mortgages. For that reason, in many of the lawsuits filed as part of the subprime litigation wave, plaintiffs have named rating agencies as defendants, seeking to hold them responsible for their investment losses. However, as discussed here, whether the rating agencies could actually be held liable is unclear, because in the past courts have found the rating agencies’ rating opinions to be protected by the First Amendment. The rating agencies have also raised a number of other defenses regarding their rating opinions.

 

A series of rulings in several cases have questioned the rating agencies’ defenses. As discussed here, in a September 2009 ruling in the Cheyne Financial case, Judge Scheindlin held that, at least where the rating agencies’ ratings were released only to a select group of investors, the rating agencies could not rely on their First Amendment defense. In May 2010, a California state court judge followed Judge Scheindlin in rejecting the rating agencies first amendment defense, as discussed here. In November 2011, in a case involving Thornburgh Mortgage mortgage pass through certificates, District of New Mexico Judge James Browning also rejected the rating agencies first amendment defenses, also relying on Judge Scheindlin’s opinion in the Cheyne Financial case, as discussed here.

 

Judge Scheindlin’s May 4 rulings arguably represent the latest decisions holding that the rating agencies could at least potentially be held liable for their ratings opinions. However, Judge Scheindlin’s latest rulings, like the prior rulings holding that the rating agencies could not rely on First Amendment defenses, were largely reliant on the fact at that the securities in question had only been distributed to a select group of investors. Indeed, in the Rhinebridge case, Judge Scheindlin found that the plaintiffs had adequately alleged that there was a privity-like relationship between the plaintiff investors and the rating agencies.

 

The various rulings In these cases, including also Judge Scheindlin’s most recent rulings in the Rhinebridge and Cheyne Financial cases, represent significant developments in connection with investors’ efforts to try to hold the rating agencies liable. However because these rulings are all dependent on the fact that the securities at issue were distributed only to a select group of investors, these rulings may not be helpful in cases involving securities that were more broadly distributed. But though these rulings have limitations, they also represent a growing body of case law on which investors can try to rely in asserting their claims against the rating agencies.

 

David Bario’s May 7, 2012 Am Law Litigation Daily article discussing Judge Scheindlin’s rulings can be found here.  Special thanks to Dan Newman of SCN Strategies for sending along copies of the opinions.

 

FCPA-Related Securities Class Action Suit Filed Against Wal-Mart: In yesterday’s post, I noted that CalSTRS had filed a shareholder derivative action against Wal-Mart, as nominal defendant, and certain of its directors and officers, in connection with the revelations concerning the company’s Mexican bribery allegations. Now, in addition to the shareholder derivative lawsuits, investors have also launched a securities class action lawsuit in connection with the bribery allegations.

 

According to their May 7, 2012 press release (here), the plaintiffs’ lawyers have filed a securities class action lawsuit against the company and certain of its directors and officers in the Middle District of Tennessee. The complaint, which can be found here, features a quote from and even a picture of company founder Sam Walton (allegedly taken from the company’s annual report). According to the press release, the complaint alleges that the defendants “ concealed from the investing public during the Class Period” that “the Company had violated the Foreign Corrupt Practices Act in connection with the bribery payments” and  that  "Walmart management did not address ethical concerns in a ‘timely and effective manner’ as represented by defendants.”

 

As I said previously about the CalSTRS derivative suit, these lawsuit filings reinforce the view that follow-on civil litigation is an almost invariable accompaniment of FCPA-related investigations, and show that FCPA-related exposures are a matter of serious shareholder concern. Taken collectively, the risk of an FCPA investigation as well of the related follow-on civil litigation risk are increasingly important liability exposures for companies and their directors and officers.

 

The number of bank failures has been winding down for a while now, but at same time the FDIC’s failed bank litigation has been ramping up. Through April 20, 2012, the FDIC has filed a total of 29 lawsuits against former directors and officers of failed banks, involving 28 different institutions. In a May 4, 2012 BankDirector.com post (here), Cornerstone Research takes a detailed look at the failed bank litigation so far. Cornerstone Research’s related May 2012 paper entitled “Characteristics of FDIC Lawsuits Against Directors and Officers of Failed Financial Institutions” can be found here.

 

According to the paper, during 2012 the FDIC has been “intensifying its litigation activity associated with failed financial institutions.” So far, the FDIC has filed 11 lawsuits in 2012, compared with 16 during all of 2011. The 2012 filing activity is on pace for a total of 35 lawsuits this year.

 

Currently, about 6 percent of financial institutions that have failed since 2007 have been the subject of FDIC lawsuits. (That compares to about 24 percent of all institutions that failed during the S&L crisis.). According to the Cornerstone Research paper, the lawsuits filed during the current bank failure wave have targeted the larger institutions and those with a higher estimated cost of failure.

 

The median size of the 28 institutions targeted so far was approximately four times as large as the median size of all failed institutions and six times as large as the median size of currently active institutions. The 28 targeted institutions had median total assets of $973 million, compared with median total assets of approximately $241 for all failed institutions. The 28 institutions had a median estimated cost to the FDIC of $222 million at the time of seizure, compared to the median cost of failure of $59 million for all failed financial institutions. The median cost of failure for financial institutions that have been targeted in 2012 lawsuits was $355 million, compared with $158 million for institutions sued from 2007 through 2011.

 

The states with the largest numbers of bank failures during the period 2007 through April 2012 were Georgia, Florida, Illinois and California. With the exception of Florida, the percentage of FDIC lawsuits targeting failed institutions is slightly higher than the percentage of failed institutions in those states. Despite the large number of failed institutions in the state, there has only been one failed bank lawsuit filed in Florida so far.

 

The 29 lawsuits filed so far have targeted a total of 239 former directors and officers. Outside directors were named as defendants in 20 of the 29 lawsuits. The remaining lawsuits targeted only inside directors and officers. Three cases have also included insurance companies as named defendants, and one case included a law firm defendant. Three cases have included directors or officers’ spouses as named defendants.

 

Losses on Commercial Real Estate and Acquisitions, Development and Construction loans were the most common bases for alleged damages. 17 of the complaints identified CRE loans as the basis for claimed damages and 15 of the complaints identified ADC loans.

 

The most recent lawsuits have been filed just prior to the expiration of the three-year statutes of limitations. During 2012, the median time between an institution’s failure and the filing of an FDIC lawsuit was 2.97 years, compared with 2.26 years for the lawsuits filed during the period 2007 through 2011. Among the 11 lawsuits filed so far in 2012, five involved lawsuits that failed in 2010, five involve lawsuits that failed in 2008, and one involved a bank that failed in 2008.

 

The FDIC has indicated on its website that through April 25, 2012, the agency has authorized lawsuits involving 493 individuals at 58 institutions. As these figures are inclusive of the lawsuits already filed, the authorization figures imply a pipeline of as many as 30 additional lawsuits — which were they to be filed would represent another 7 percent of all failed banks. That is, the filed and authorized lawsuits together could involve as much as 13 percent of all failed institutions. These figures of course represent only the lawsuits authorized to date; the FDIC has been increasing the number of authorizations monthly over the course of the past several months.

 

The FDIC’s latest authorization figures on its website did not specify an aggregate damages figure that the authorized lawsuits represent, but the figure the agency used (for a lesser number of lawsuits) in January 2012 was $7.7 billion, which compares to the aggregate damages claimed so far of $2.4 billion – which suggests that the authorized lawsuits may include some very significant additional claimed damages.

 

The Cornerstone Research report notes that a number of the large and costly bank failures during 2008 (and 2009) have not yet been the subject of an FDIC lawsuit. The report notes that the directors and officers of these institutions may be involved in negotiations with the FDIC. Whether these additional large bank failures will become the subject of future FDIC lawsuits “will depend on the outcome of such negotiations, statute of limitations restrictions, and tolling agreements that may be agreed upon during such negotiations.”

 

Only three of the FDIC’s failed bank lawsuits have settled so far, as discussed on page 13 of the Cornerstone Research report. These settlements include the WaMu settlement (about which refer here) and the First National Bank of Nevada settlement (about which refer here).

 

On a final note, the Cornerstone Research report projects that given the current pace of bank failures this year, we are on track for about 69 bank failures in 2012, compared to 92 in 2011 and 157 in 2010. With the addition of another failed bank this past Friday evening, there have been a total of 23 bank failures so far this year.

 

CalSTRS Takes on Wal-Mart Over FCPA Issues: As I have previously noted on this blog, a frequent accompaniment of an investigation of a Foreign Corrupt Practices Act investigation is a follow-on civil lawsuit, in which investors alleged either that the company’s management failed to properly supervise the company’s operations or that the company issued misleading statements about its internal controls or financial condition.

 

Given the relative frequency of this type of litigation, it was hardly surprising that Wal-Mart’s recent announcements of FCPA-related concerns involving its Mexican operations attracted litigation. Just the same, as Alison Frankel points out in a May 4, 2012 article on her On the Case blog (here), the filing of a lawsuit against Wal-Mart, as nominal defendant, and 27 of its current and former directors and officers, by the California State Teachers Retirement System (CalSTRS) represents a significant and noteworthy development.

 

In its May 3, 2012 complaint, which can be found here, CalSTRS alleges, among other things, that “prolonged failure to address detailed and credible allegations of criminal activity undertaken with the tacit or express consent of current and former senior corporate officials, and the complicity of the Company’s highest level executives in shutting down any investigation into those allegations, is causing and will continue to cause the Company substantial harm.”

 

As Frankel comments, when an “800-pound gorilla” like CalSTRS gets involved in this type of follow-on civil litigation, things have definitely become “serious.” The CalSTRS lawsuit will also set up a potential conflict between the actions previously filed in Arkansas in connection the Wal-Mart’s FCPA revelations and the CalSTRS action, which was filed in Delaware.

 

From my perspective, the CalSTRS lawsuit not only reinforces the view that follow-on civil litigation is an almost invariable accompaniment of FCPA-related investigations, but the involvement of CalSTRS itself highlights that FCPA-related exposures are a matter of serious shareholder concern. Taken collectively, the risk of an FCPA investigation as well of the related follow-on civil litigation are increasingly important liability exposures for companies and their directors and officers. 

 

Judge Wants to Know About Lehman Executives Wealth Before Approving D&O Settlement: Last August when it was first announced that the parties to the shareholder suit arising out of the collapse of Lehman Brothers had agreed to settle the case for $90 million – the amount of the remaining limits of the company’s D&O insurance program – I knew there could be trouble, especially since the settlement did not contemplate any contribution from the individual defendants themselves.

 

I was not the only one that anticipated possible problems. The plaintiffs lawyers themselves foresaw there could be trouble, as well. Aware of a possible “hue and cry” about the Lehman executives “getting off the hook without paying any money,” the plaintiffs tried to head off controversy by hiring John S. Martin, Jr., a retired federal judge, in order to determine whether the executives had a combined net worth of $100 million. Judge Martin prepared a report in which he concluded that “I am satisfied that the Liquid Worth of the Officer Defendants taken together, is substantially less than $100 million.”

 

The parties submitted their proposed settlement – including Judge Martin’s report — to Southern District of New York Judge Lewis Kaplan. In a May 3, 2012 opinion that opens with a quotation from noted legal scholar Kenny Rogers, Judge Kaplan concluded that the information in Martin’s report was not sufficient to permit him to determine whether or not he should approve the settlement. Judge Kaplan’s opinion evinces full awareness of the fact that if the parties had failed to reach their agreement to settle the case for the remaining D&O insurance program limits, the amount of insurance remaining would rapidly have diminished, leaving the shareholders with perhaps an even smaller recovery.

 

Judge Kaplan’s concern has to do with the nature of the inquiry Judge Martin was asked to address. Specifically, Judge Kaplan was concerned with the fact that Judge Martin looked only at whether or not the defendants’ liquid net worth is less than $100 million. Judge Martin’s answer, Judge Kaplan said, “is not informative as is necessary and appropriate for this Court to consider” all of the requisite factors for class action settlement approval. In the end, Judge Kaplan called for the in camera production of all the information that had been submitted to Judge Martin, so that Judge Kaplan could consider all information (presumably including information about assets the defendants may have held that is not “liquid”) in order to determine how the settlement compared to possible available alternatives by assessing the extent to which the defendants could withstand a judgment in excess of the remaining amount of insurance.

 

Everything about this situation is highly unusual, starting with the fact that the case involved is perhaps the highest profile civil lawsuit arising out of the financial crisis and that the collapse of Lehman Brothers may have been the most critical development during the crisis. The fact that the case settled as it did may not have been all that unusual, as parties often reach compromises based on dwindling amounts of insurance. However, the plaintiffs, anticipating trouble, took extraordinary steps to try to substantiate the settlement, by hiring Judge Martin to assess the individual defendants’ net worth. By the same token, Judge Kaplan’s further consideration of the individual defendants’ collective net worth arguably is even more unprecedented.

 

The defendants have until May 10, 2012 to submit the information they had provided to Judge Martin to Judge Kaplan for in camera review.

 

Susan Beck’s May 4, 2012 Am Law Litigation Daily article about Judge Kaplan’s decision can be found here.

 

On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (commonly referred to as the JOBS Act). This legislation, which enjoyed strong bipartisan support in Congress, is intended to ease the IPO process for emerging growth companies and to facilitate capital-raising by reducing regulatory burdens and disclosure obligations. Among other things, the Act also introduces changes that could impact the potential liability exposures of directors and officers of both public and private companies. These changes could have important D&O insurance implications.

 

In the latest issue of InSights, I take a detailed look at the provisions of the JOBS Act and consider the Act’s possible impact on D&O liability and insurance. The InSights article can be found here.

On March 30, 2012, in a decision that may highlight the extent to which Canadian courts are increasingly willing to enforce securities laws in ways that may have extraterritorial effects, the Ontario Court of Appeals held that the liability regime under the Ontario Securities Act applies to Canadian Solar, a company whose shares trade only on NASDAQ and that do not trade on any Canadian exchange, and that has its principal place of business in China. A copy of the Court of Appeal decision can be found here.

 

Background

An Ontario resident initiated a putative class action lawsuit against Canadian Solar under the Ontario Securities laws, alleging that the company overstated its financial results. Section 138.3 of the Ontario Securities Act creates a cause of action in the event of a misrepresentation by a “responsible issuer.” The statute defines “responsible issuer” as a reporting issuer or “any issuer with a real and substantial connection to Ontario, any securities of which are publicly traded.”

 

Canadian Solar is not a “reporting issuer.” Its shares are listed only on NASDAQ. Its shares do not trade on any Canadian exchange. Canadian Solar’s principal place of business is in China. However, it is registered as a Canadian federal corporation with its registered office and executive offices in Ontario.

 

A motions judge held that Canadian Solar is “responsible issuer” within the meaning of the statute. Among other things, the motions judge held that Canadian Solar’s shares did not have to be publicly traded in Canada for it to come within the definition of “responsible issuer.” Canadian Solar appealed this aspect of the motions judge’s ruling, arguing that only a company whose shares were publicly traded in Canada came within the definition of a “responsible issuer.”

 

The Ruling of the Court of Appeals

In a March 30, 2012 opinion, written by Justice Alexandra Hoy for a three-judge panel, the Ontario Court of Appeal s held that “the general principles with respect to extraterritorial regulation do not require that the definition of ‘responsible issuer’ be interpreted as confined to issuers any of whose securities are publicly traded in Canada.” Justice Hoy added that “there is a sufficient connection between Ontario and Canadian Solar to support the application of Ontario’s regulatory regime to Canadian Solar.”

 

Among other things, in connection with the sufficiency of the connection to Ontario, the court also noted that the plaintiff , “an Ontario resident who placed his order in Ontario for shares of a corporation based in Ontario, would reasonably expect that his claim for misrepresentations in documents released or presented in Ontario would be determined by an Ontario court.”

 

Discussion

The Ontario Court of Appeals decision in the Canadian Solar case is interesting and potentially significant because of its holding that the secondary market misrepresentation damages class action under the Ontario securities laws could be asserted against a company even though the company’s securities were not publicly traded in Canada. Because all of the Canadian provinces have enacted legislation simalar to Ontario’s (similar at least in this respect), the decision could have implications across all of the Canadian provinces. There obviously are factors that made this situation somewhat distinct, if not perhaps unique; Canadian Solar is a Canadian registered corporation with both its registered office and its executive offices in Ontario. In addition, the plaintiff, an Ontario resident, purchased his Canadian Solar shares in Ontario.

 

Nevertheless, as noted in an April 4, 2012 memo from the Osler, Hoskin & Harcourt law firm (here), the Court’s decision “makes it clear that non-reporting issuers whose shares do not trade anywhere in Canada may nevertheless find themselves subject to Ontario’s liability regime for misrepresentations made in the secondary market, provided however that the issuer has a ‘real and substantial connection’ to Ontario.”

 

At a minimum, as discussed in a May 2012 memo from the Blake, Cassels & Graydon law firm (here), the Canadian Solar opinion provides “possible guidance that may be instructive to determining when a real and substantial connection exists for purposes of the statute.” In particular, the memo also notes, it appears that “there is no one factor that will insulate companies from Canadian securities law.”

 

The Blake law firm’s memo goes on to suggest that “it is feasible that the current state of the law may result in Ontario and other Canadian jurisdictions becoming the forum of choice for shareholders attempting to seek remedies even where the connection to Canada is tenuous.” What remain to be determined in future cases, as the Osler, Hoskin law firm’s memo notes, “is the extent of the connections that other foreign issuers will be required to have with the province before they will be considered ‘responsible issuers’ for purposes of” the statute.

 

In the wake of the U.S. Supreme Court’s decision in Morrison v. National Australia Bank, one of the questions that has been asked is whether another jurisdiction will emerge as an alternative forum in which aggrieved investors precluded from U.S courts can pursue their remedies. The Canadian Solar case provides an interesting point of view on the consideration of these issues, given that because the company’s shares trade on NASDAQ, an action against the company and its directors and officers under the U.S. securities laws is not precluded under Morrison. (Indeed, a separate action against the company has been filed in the United States, about which refer here.)

 

Nevertheless, the case does provide interesting additional insight into the possible availability of Canada as an alternative forum. This possibility was already the subject of a great deal of focus since Canadian courts have certified a global plaintiff class in the Imax case (about which refer here), and in the Arctic Glacier case (about which refer here). 

 

The possibility that the Canadian courts might emerge as an alternative forum of choice seems to be advanced by the Court’s holding that it is not preclusive of an action under the relevant laws that the defendant company’s share were not traded on a Canadian exchange. Of course there were many other factors involved in this case that supported the application of the Ontario laws here that are not going to be present in many other cases. Nevertheless, the case does reflect a willingness by Canadian courts to apply its laws to cases with significant foreign aspects as well.

 

Much has been written recently (including on this blog) about the growing prevalence of M&A related litigation. These lawsuits, typically launched by the target company shareholders, are filed shortly after a merger announcement and usually object to some aspect of the proposed merger or of the merger-related disclosure. But the merger objection lawsuit is not the only kind of lawsuit that mergers can produce – there is also the kind of lawsuit that can arise post-merger when, it is alleged, the merger was not successful.

 

In a recent example of this second kind of merger lawsuit, on May 2, 2012, plaintiffs filed a shareholder class action lawsuit in the Northern District of Illinois against Allscripts Healthcare Solutions and two of its officers. Allscripts is, according to the complaint, the “corporate result” of the merger of Allscripts-Misys Healthcare Solutions and Eclipsys Corporation, which was announced on June 9, 2010.

 

The complaint references the company’s April 26, 2012 filing on Form 8-K (here), in which the company “shocked the market” by reporting earnings sharply lower than guidance, as well as the termination of the Chairman of the company’s board of directors; the resignations of three other directors; and the resignation of the company’s CFO. According to the 8-K, the termination and resignations followed board discussions regarding the leadership of the company. The complaint alleges that in reaction to the news the company’s share price dropped sharply.

 

According to plaintiff’s counsel’s May 2, 2012 press release (here), the complaint alleges that during the class period:

 

Allscripts concealed that: (a) the process of developing a unified product offering after the Merger had suffered debilitating setbacks, including major undisclosed schisms among the most senior levels of the Company, which ultimately resulted in the loss of key personnel and harmful upheaval in Company leadership; (b) a material portion of Allscripts’ revenue and net income was predicated on the successful integration of these systems, and substantial business relationships had been destroyed by the Company’s inability to make material progress in this area; and (c) as a result of the foregoing, Allscripts lacked a reasonable basis for its claims of progress in post-Merger integration, sound operations, profitable results, and continued growth.

 

This latest lawsuit exemplifies the second type of merger-related lawsuit, typically filed post-merger and typically alleging that the merger did not live up to expectations. Perhaps the highest profile example of this type of lawsuit is the litigation filed in July 2002 in the wake of the failed AOL Time Warner merger. That litigation ultimately resulted in a settlement of $2.5 billion (not to mention extensive additional opt-out settlements), which is the seventh largest securities class action lawsuit settlement of all time.  

 

Another high-profile case of this same type is the lawsuit that was filed in 2000 following the December 1998 merger transaction that led to the formation of Daimler Chrysler. That case ultimately settled for $300 million.

 

Nor are high-profile mergers the only types of transactions that can produce this type of merger-related litigation. For example, in September 2011, shareholders filed a securities class action in the Northern District of California against Equinix and certain of its directors and officers, in which the plaintiffs disclosed that the company was having difficult with the integration of Switch & Data Facilities Company, which Equinix had acquired in April 2010. (To be sure, in March 2012, the court granted the defendants’ motion to dismiss, albeit with leave to amend.)  

 

My point here is that the merger objection cases are not the only type of litigation that mergers and acquisitions activity can generate. As these examples show, there is also the possibility that to the extent the merger does not live up to expectations (or rather – allegedly does not live up to expectations) there could be post-merger litigation as well. These post-merger suits may either allege (as was the case in the Daimler Chrysler litigation) that the merger related documents contained misrepresentations, or that the company made misrepresentations regarding its post-merger operations or merger-related integration (as was the case in the Equinix case and in the recently filed Allscropts case). At some level it is hardly surprising that litigation might arise post-merger from time to time, given that – depending on who you ask – “mergers have a failure rate of anywhere between 50 and 85 percent.”

 

Indeed the possibility of a lawsuit alleging that the merger did not live up to expectations is itself not the only type of post-merger litigation that can arise. Another variant that can sometimes arise is the post-merger lawsuit alleging that the surviving company failed to properly account for the transaction or to properly present the financials of the combined companies. An example of this latter type is the July 2011 lawsuit filed against JBI, Inc. and certain of its directors and officers, in which the plaintiff alleged that the company did not properly account for certain media credits it had acquired in connection with an acquisition transaction.

 

All of which serves to underscore a point which has long been known to D&O underwriters – that is, the mergers and acquisitions transactions provide context out of which litigation sometimes (perhaps frequently) arises. The recent rise in merger objection litigation has certainly amplified this point. But as the examples in this blog post demonstrate, there are other types of lawsuits beyond the merger objection cases that can arise in connection with or following a merger transaction.

 

Are We There Yet?: One of the huge by-products of the July 2010 enactment of The Dodd-Frank Act is the huge rulemaking burden that the Act imposed on a variety of federal agencies. As I have noted in a prior post (here), the agencies have been laboring under the rulemaking burdens, and in many cases have fallen far beyond their rulemaking deadlines the Act required.

 

Although there obviously is no joy in the exercise, the Davis Polk law firm has been diligently tracking the agencies’ rulemaking progress. In its May 2012 Dodd-Frank Progress Report (here) the law firm details the current status of the agencies’ rulemaking efforts.

 

Among other things, the study shows that as of May 1, 2012, a total of 221 Dodd-Frank rulemaking requirement deadlines have passed. Of those 221, 148 (67%) have been missed and 73 (33%) have been met with finalized rules. Regulators have not yet released proposals for 21 of the 148 missed deadlines.

 

Of the total of 398 rulemakings that Dodd-Frank required, 108 (27.1%) have been met with finalized rules and 146 rules have been proposed that would meet the requirement  (36.7% more). Rules have not been proposed to meet 144 (36.2%) rulemaking requirements.

 

The Dodd-Frank Act’s rulemaking juggernaut grinds onward. Your government at work. At the direction of Congress.

 

A great deal of the analysis of securities class action lawsuit settlements revolves around measures of aggregate, average and median settlement amounts. These data, while useful, are relatively unhelpful in trying to anticipate the outcome of any particular case, particularly at the outset. To try to develop a way to predict likely case outcome at the outset of a securities class action lawsuit, four academics conducted a detailed statistical analysis of securities class action settlements in order to identify factors that affect outcomes.

 

In their April 30, 2012 paper entitled “Predicting Securities Fraud Settlements and Amounts: A Hierarchical Bayesian Model of Federal Securities Class Action Lawsuits” (here), Northwestern University Business Professor Blakeley McShane, Juridigm Principal and Vice President Oliver Watson, U. Penn Law Professor Tom Baker and Fordham University Law Professor Sean Griffith set out to create a “predictive model to forecast case outcomes based exclusively on information available at the time the lawsuit is filed.”

 

Their model, described in their paper, “estimates (i) the probability of the settlement versus dismissal of a securities class action lawsuit and (ii) the amount for which the class action will settle conditional on the settlement.”

 

A great deal of the authors’ paper is devoted to a description of the methodology used to derive the data on which their analysis is based. Another significant part of the paper is devoted to a description of their analytic methodology, which, as their title suggests, employs high level statistical approaches and techniques. A detailed description of the authors’ data derivation and statistical methodologies is beyond the scope of this blog (which is another way of saying that I know my limits).

 

For purposes of understanding the authors’ conclusions, it is useful to note that the authors derived a data set of nearly 1200 securities class action lawsuits and associated case resolutions. Among other critical steps taken to derive their data set, the authors focused exclusively on cases filed post-PSLRA that were filed five years or more before the starting date of their analysis. (The five year cut-off was used to ensure the likelihood that the cases in the data set had been finally resolved). Essentially, the authors looked at cases filed between 1996 and 2005 that otherwise survived the authors’ filters and sorting criteria.

 

The authors also derived several of their own measures using variety of data sources. For example, in order to determine the “notoriety” or “newsworthiness” of a particular company or case, the authors considered the number of Google News Archive hits associated with the company in the year prior to the lawsuit filing.

 

Using these and other data points and applying selected statistical methods to develop their model, the authors identified a number of variables predictive of whether a case is settled or dismissed, and variables predictive of the settlement amount if a case is settled.

 

The variables the authors identified that indicate that a case will most likely settle include “a number of classes or types of securities associated with the case, a higher return on the S&P 500 during the class period, whether or not GAAP violations were alleged and having an individual plaintiff listed.” Factors that indicate that a case is less likely to settle (that is, more likely to be dismissed) include “longer filing times, higher market capitalization, a higher company return during the class period, having an institutional plaintiff listed, and greater public notoriety (as measured by the number of Google hits in the year prior to filing).”

 

The variables the authors found that positively impact the settlement amount include “the total number of securities, the length of the class period, market capitalization, the company return during the class period, whether or not earnings were restated, whether or not the case was a Securities Act Section 11 case, whether or not insider trading was alleged, the existence of an institutional plaintiff, and the number of Google hits.” Factors associated with lower settlement amounts include “longer filing times and not having an institutional investor listed (i.e., having only an individual plaintiff listed or having no plaintiff listed).”

 

The authors also found that though GAAP cases are more likely to settle, the GAAP cases that do settle do not have higher settlement amounts. The authors speculate that this is likely due to the fact that an allegation of a GAAP violation significantly bolsters the merits of the case, which increases the chances the case will survive a dismissal motion. The authors suggest that this makes it more appealing for plaintiffs to take on a GAAP violation case even if the potential damage award is relatively low.

 

At the same time, Rule 10b-5 cases are less likely to settle (that is, more likely to be dismissed) but those that do settle have higher settlement amounts. The authors attribute this to the greater damages available to Rule 10b-5 plaintiffs. The authors suggest that plaintiffs rationally might be willing to pursue cases with a lower survivability probability when the cases are likelier to have larger settlements, assuming the cases survive dismissal. Cases without institutional plaintiffs are more likely to survive motions to dismiss, which the authors interpret to suggest both that institutional investors select the high potential value cases and that plaintiffs’ lawyers exercise more care regarding the merits of cases with only an individual plaintiff.

 

The authors also noted a number of differences among the various circuits and industries. For example, the authors note that the eleventh circuit appears to have modestly lower settlement amounts whereas the ninth and tenth circuits have modestly higher settlement amounts. Similarly, utilities have somewhat higher settlement amounts.

 

Discussion

I have necessarily summarized here the authors’ much more detailed analysis. The only way to fully understand and appreciate the authors’ predictive analysis, as well as the ways in which the authors’ conclude that the various factors are predictive, is to read their paper in full, which I recommend.

 

I do note that the ability to predict case outcomes at the outset is important for a number of process participants, including in particular the affected D&O insurers. Among other things, D&O insurers must have reliable means to assess and predict case outcomes at the outset in order to try and set case reserves appropriately. In addition, D&O insurers whose coverage attaches only in the excess layers will want to be able to assess cases at the outset in order to try to determine the likelihood that losses associated with any particular claim will penetrate their attachment point. For the involved D&O insurers, the authors’ predictive model could provide a useful tool.

 

The authors’ model could prove a useful tool for the defendant companies themselves as well as for their defense counsel. It is critically important for companies and their counsel in setting their litigation strategy to have an accurate understanding of the seriousness of the claim.  The authors’ model may provide a useful way for companies and their counsel to make a realistic assessment of the seriousness of the case in order to try to set defense strategy appropriately.

 

If I were to make one suggestion to the authors in order to make their analysis more accessible, it would be to expand their summary description of the relevant factors so that the factors are not only identified but also so that the nature of their relevance is more apparent. For example, it is of course important for the authors to state in the summary of their conclusions that, for example, “the length of the class period” is a relevant factor positively impacting settlement. It would be even more helpful for the non-mathematician reader for the authors to explain in the conclusion section how the variation of the length of the class period affects the settlement (that is, is it a shorter or a longer class period that positively affects the settlement?). A more detailed explanation in the paper’s discussion section of the authors’ specific conclusions with respect to each of the identified factors would make the authors’ otherwise somewhat intimidating paper more approachable to a wider variety of readers and would make the authors’ conclusions both clearer and more useful for those trying to understand the implications of the authors’ analysis.

 

I would like to thank Professor Tom Baker for providing me with a copy of this interesting paper.

 

UPDATE: Following my publication of this post, and in particular in response to my comments about the paper, one of the paper’s authors, Blakeley McShane, contacted me with a supplement to the article, to provide further explanation of the paper and its conclusions. Because I think the supplement significantly aids an understanding of the paper, I have reproduced the supplement in full below. My thanks to McShane for taking the time to prepare a detailed supplement and for his willingness to allow me to publish it here. Here is the supplement: 

 

Thank you for your interest in our paper “Predicting Securities Fraud Settlements and Amounts: A Hierarchical Bayesian Model of Federal Securities Class Action Lawsuits” which is forthcoming in the Journal of Empirical Legal Studies. We really enjoyed reading your write-up of our results and wanted to follow up on your last paragraph where you requested a more friendly description of the effect of each variable. We will attempt to be as clear as possible and focus on our “best guess” of the effect of each variable (i.e., the dots in Figures 8a and 9a respectively). Of course our estimates are subject to uncertainty (indicated by the thick and thin lines of Figures 8a and 9a) but we will ignore that for the purpose of this discussion.

 

First, let’s begin by discussing the data. Our principal data source comes from the Riskmetrics Group’s Securities Class Action Services Division which tracks securities fraud class action lawsuits on a commercial basis. Nonetheless, as you mentioned, a substantial amount of processing as well as augmentation with data from other sources was required. This is detailed in Section II of our paper so we will just give a brief description of each of the variables that are “statistically significant” in either of the two stages of our model (i.e., the settlement versus dismissal stage and settlement amount conditional on settlement stage).

• Total Securities: The number of different securities (e.g. stocks, bonds, etc.) associated with the case.
• Filing Time: The length of time from the end of the class period until the filing date.
• Class Length: The length of the class period.
• Market Capitalization: The market capitalization of the plaintiff firm.
• Company Return: Roughly speaking, the percentage return on the plaintiff firm’s stock during the class period (see Section II.C for full details on how we constructed this variable).
• S&P 500 Return: The percentage return on the S&P 500 during the class period.
• GAAP: Whether or not GAAP violations were alleged in the case.
• Restated: Whether or not the allegation mentions that the company’s financial statements were restated.
• 10b5: Whether or not the case was a Rule 10b-5 case.
• Section 11: Whether or not the case was a Securities Act Section 11 case.
• Plaintiff: The plaintiff variable has three values. If one or more institutions are listed as the plaintiff, we set out Plaintiff variable equal to “Institutional”. If no institutions are listed but one or more individuals are, we set it equal to “Individual”. Finally, if nothing is listed in the database, we set it equal to “Unknown”. Of course, this does not mean there is no plaintiff in the case; rather, it means Riskmetrics has not obtained the information for this variable. This is potentially informative for whether or not a case settles and for how much it settles for if it does settle, but probably says more about Riskmetrics’ priorities in gathering data than anything else. In particular, given the nature of Riskmetrics’ business, they are most highly incented to collect complete data for cases which settle and especially those which settle for large amounts. Consequently, we would, for example, a priori expect Empty plaintiff cases (i) to be less likely to settle and (ii) to settle for less when they do settle.
• Insider Trading: Whether or not insider trading was alleged in the case.
• Google Hits: A measure of the newsworthiness or notoriety of the case. In particular, the number of Google News Archive associated with the company name in the year prior to the filing date (see Section II.E for full details on how we constructed this variable).

 

With the variables defined, let’s begin with the factors that predict settlement amount conditional on a case settling. We identified eleven “statistically significant” predictors of the settlement amount:
• Total Securities: A 1% increase in total securities is associated with a 0.25% increase in the settlement amount.
• Filing Time: A 1% increase in the filing time is associated with a 0.1% decrease in the settlement amount.
• Class Length: A 1% increase in the length of the class period is associated with a 0.1% increase in the settlement amount.
• Market Capitalization: A 1% increase in market capitalization of the plaintiff firm is associated with a 0.4% increase in the settlement amount.
• Company Return: A 1% increase in plaintiff firm’s return over the class period is associated with a 0.2% increase in the settlement amount.
• Restated: Restated financial statements are associated with a 20% increase in the settlement amount.
• Section 11: Securities Act Section 11 cases are associated with a 45% increase in the settlement amount.
• Individual Plaintiff: Individual plaintiff cases are associated with a 35% decrease in the settlement amount relative to cases with an institutional plaintiff.
• Unknown Plaintiff: Unknown plaintiff cases are associated with a 40% decrease in the settlement amount relative to cases with an institutional plaintiff.
• Insider Trading: Insider trading cases are associated with a 30% increase in the settlement amount.
• Google Hits: A 1% increase in the number of Google News hits is associated with a 0.05% increase in the settlement amount.

Many of these variables make intuitive sense. For instance, the total number of securities, market capitalization, and number of Google hits are associated with the size of the firm and hence how much damage can be done and how large a settlement can be extracted. Similarly, the longer the class length, the greater the number of securities traded during the period and, hence, the larger the damages. The higher damages for Section 11 cases (all other things being equal) may reflect the fact that plaintiffs do not need to prove scienter to succeed. The filing time result has a plausible basis as there is often a rush to file the “best” cases. Interestingly, some “merits” variables such as Restated and Insider Trading, which in theory should only affect whether or not a case settles or is dismissed, also impact the settlement amounts thus suggesting that decisions over whether or not there were damages versus how great those damages were may not be entirely independent. The Company Return finding is somewhat surprising, since a lower return during the class return would indicate larger damages from the alleged fraud. Our hypothesis is that that this finding is picking up on the capacity of the defendant to pay. Other things being equal, a company that recently made money is going to be better able to pay a settlement. Finally, the result for the identity of plaintiff is consistent with Riskmetrics’ business model as outlined above.

 

The interpretation of the significant coefficients for the model which predicts whether a case settles or is dismissed is somewhat more complicated than that for the settlement amount model. This is because each case is associated with a “latent score” giving the probability of dismissal: cases with high scores are very likely to settle and cases with low scores are very likely to be dismissed. The tricky part is that the relationship between the latent score and the probability is non-linear. Instead, it follows an S-shaped curve called a logistic curve:

With a logistic curve, the increase in the probability of settlement associated with a small change in the latent score depends on the original latent score: at the extremes, the change in probability is quite small whereas in the middle it is quite large. For example, an increase of 0.1 from -4.0 to -3.9 hardly changes the probability as can be seen in the above figure (the probability only goes from 1.8% to 1.9%). Similarly, an increase of 0.1 from 4.0 to 4.1 hardly changes the probability as can be seen in the above figure (the probability only goes from 98.2% to 98.4%). On the other hand, in the middle of the curve, small changes can have a substantial impact. For example, an increase of 0.1 from 0.0 to 0.1 changes the probability substantially from 50% to 52.5%. In the descriptions which follow, the increase in probability will be for the middle of the curve where the “action” is.

 

We identified ten “statistically significant” predictors of the probability of settlement:
• Total Securities: A 1% increase in total securities is associated with a 0.4% increase in the probability of settlement.
• Filing Time: A 1% increase in the filing time is associated with a 0.02% decrease in the probability of settlement.
• Market Capitalization: A 1% increase in market capitalization of the plaintiff firm is associated with a 0.02% decrease in the probability of settlement.
• Company Return: A 1% increase in plaintiff firm’s return over the class period is associated with a 0.15% decrease in the probability of settlement.
• S&P 500 Return: A 1% increase in plaintiff firm’s return over the class period is associated with a 0.3% increase in the probability of settlement.
• GAAP: Allegations of GAAP violations are associated with a 13% increase in the probability of settlement.
• 10b5: Rule 10b-5 cases are associated with a 25% decrease in the probability of settlement.
• Individual Plaintiff: Individual plaintiff cases are associated with an 8% increase in the probability of settlement relative to cases with an institutional plaintiff.
• Unknown Plaintiff: Unknown plaintiff cases are associated with a 60% decrease in the probability of settlement relative to cases with an institutional plaintiff.
• Google Hits: A 1% increase in the number of Google News hits is associated with a 0.02% decrease in the probability of settlement.

Again, many of these results have an intuitive basis. The result for filing has the same intuition as for settlement amounts: many of the “best” cases are filed early. While we had no a priori expectation for the market capitalization result, perhaps bigger firms are better able to defend themselves; regardless, the effect is weak. Nonetheless, this as well as the result for Google Hits may be a result of the “plaintiff selection effect” whereby plaintiffs select cases which are more likely to be dismissed but will settle for a large amount conditional on surviving the motion to dismiss. This is consistent with the results presented above. Not surprisingly, as the company’s return during the class period goes down (potential evidence of fraud), the likelihood of settlement goes up; this is exacerbated when the market as a whole (as measured by the S&P 500) goes up during the same period. GAAP violations are a classic merits variable and therefore associated with increased likelihood of settlement. A combination of Riskmetrics’ incentive in gathering data as well as the plaintiff selection effect are likely at play in explaining the plaintiff results (i.e., Riskmetrics’ is more likely to gather plaintiff information for cases which settle and, further, institutional plaintiffs are more likely to become involved in cases with larger damages potential). Riskmetrics’ incentives are also likely to explain the number of securities result, as Riskmetrics will be more likely to gather all of the securities information for cases that actually do settle. Finally, the lower probability of settlement of 10b5 cases likely reflects the greater difficulty of proving the knowledge required (scienter) as compared to, for example, Section11 cases.

 

We hope this is more interpretable and clarifies matters some. Thank you again for your interest in and coverage of our work

 

On April 25, 2012, Cornerstone Research released a report written by Stanford Business School Professor Robert Daines and Cornerstone Research Principal Olga Koumrian entitled “Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions – March 2012 Update” (here). This memorandum is the latest in a series of recent papers documenting the growth in merger related litigation in the United States. The research described in this paper is consistent with the prior reports but it also contains some new additional insights.

 

The report opens with a number of observations about the incidence of litigation in connection with mergers valued at $500 or greater during the period 2007 to 2001. The report shows that while in 2007 only about 53% of such deals attracted litigation, by 2011 almost all deals (96%) of those deals attracted litigation.

 

In addition, with respect to the deals of that size that attracted litigation during that period, the number of lawsuit per deal also increased between 2007 and 2011. Thus, while in 2007, the average number of lawsuits per litigated deal was 2.8, in 2011, the average number of lawsuits per litigated deal was 6.2 million. The report also shows that these trends were not limited just to the largest deals; during 2010 and 2011, for deals valued between $100 million and $500 million, 85% of the deals attracted litigation, and the average number of lawsuits per litigated deal was 4.1.

 

The absolute count of lawsuits involving deals with values of $500 million or greater also nearly doubled during that period, with 289 lawsuits filed in 2007 and 502 lawsuits filed in 2011.

 

The authors also note that as of March 2012, 67 lawsuits have already been reported for thirteen out of seventeen deals announced during January and February 2012. 

 

Certain deals attracted far more than the average number of lawsuits. A table in the report shows that fifteen deals with a valuation of $100 million or greater during the period 2007-2011 attracted fifteen or more lawsuits. Interestingly, of these fifteen, twelve of these deals were announced in 2010 or 2012. The report notes that size alone does not explain which deals attracted these large numbers of suits, and that in fact several relatively small acquisitions attracted fifteen or more lawsuits.

 

The report also shows that deals in certain industries seem to attract the most numbers of lawsuits. Thus, deals in the energy industry attracted an average of 8.6 lawsuits per deal, and deals in the consumer goods industries attracted an average of 6.0 lawsuits per deal.

 

There is a common perception that there is a “race to file” these lawsuits after deals are announced. However, the report shows that while filings arrive quickly after deal announcements, the time to filing has not accelerated in any material way since 2007. Indeed, the proportion of lawsuits filed in the first week after the deal announcement declined from 55 percent in 2007 to 39 percent in 2011. In all years studied, “a significant percentage of lawsuits were filed more than four weeks after a deal’s announcement.”

 

One phenomenon that has been the subject of discussion with respect to this type of litigation is whether or not there has been a “flight from Delaware” as claimants seek to pursue claims in the courts of other states. This study shows that with respect to merger litigation involving Delaware corporations, the share of M&A lawsuits filed in Delaware was higher in 2011 (45%) than in 2007 (34%) and that the percentage has increased steadily since 2008. However, according to the report, the “most striking trend in venue choice” is that challenges to the same deal in both Delaware and some other venue (as opposed to just Delaware alone or to some other venue alone) are now more common than in 2007. Most lawsuits brought in non-Delaware courts were filed in California, Texas and New York, “likely reflecting where many deal targets are headquartered.”

 

The report shows that M&A shareholder lawsuits “typically settle and often settle quickly.” Of the 2010 and 2011 lawsuits where the authors were able to track the resolution, 28 percent were voluntarily dismissed, four percent were dismissed by the court, and 67 percent settled. This represents a “significant change in outcomes observed a decade ago.” A prior study cited in the report shows that in 1999 and 200, 59 percent of cases were dismissed and only 28 percent settled. Of the 202 unique settlements involving 2010 and 2011 deals, 194 were reached before the merger closed. The median time between lawsuit filing and settlement was forty-four days.

 

Settlement terms have also changed over time. Whereas during 1999 and 2000, the majority of settlements (52%) involved cash awards and only 10% involved additional disclosures only, only 5% of 2010 and 2011 lawsuits related to M&A deals involved cash payments, and a large majority (83%) involved additional disclosure only settlements.

 

The average fee awards in connection with the M&A suits in 2010 and 2011 in connection with deals valued at $500 million or greater was $1.2 million. However, this average was pulled upward by some larger awards. Only 23% of plaintiff fee awards were $1 million or higher, while 44 percent were at or under $500,000 or under. Of the largest plaintiffs few awards, several were associated with settlements that did not involve any payment to shareholders. Average fees per deal fluctuated between 2007 and 2011, and while the average fees as a percentage of deal value in 2010 and 2011 remained higher that in 2007, the average fees as a percentage of deal value declined in 2010 and 2011 compared to 2009.

 

Discussion

The analysis in the Cornerstone Research report corroborates many of the observations noted in prior analyses of these same topics. That is, M&A related litigation is becoming increasingly more prevalent, and each deal is attracting an increasing number of lawsuits. At a minimum, the Cornerstone Report helps explain why M&A related litigation has become increasingly more expensive to defend. The impact of M&A litigation settlements and of plaintiffs’ fee awards on the cost of this litigation is less clear, but overall the implication is that the growing frequency of this type of litigation remains a very significant corporate and securities litigation trend, with important implications for D&O insurers.

 

One very important consideration to be kept in mind when comparing the various reports regarding M&A litigation is that each of the reports has used its own deal size definition to define the merger transactions that are the basis of each report’s analysis. The definitions used in the various reports are not necessarily consistent. At a minimum, the differences in the definitions used can make comparisons between the reports challenging. In any event, it is important in considering the analysis in any one of the reports to keep clearly in mind what definitions the report has used in determining what merger transactions to include the study.

 

The FDIC’s Latest Failed Bank Lawsuit: On April 20, 2012, the FDIC filed its latest failed bank lawsuits against ten former directors and officers of the failed First Bank of Beverly Hills. In its complaint (here), which the FDIC filed in its capacity as receiver for the failed bank, the FDIC seeks to recover losses of at least $100.6 million the bank allegedly suffered on nine poorly underwritten acquisition, development and construction loans and commercial real estate loans from March 2006 through July 2007.

 

The bank failed on April 24, 2009, or just short of three years prior to the date the FDIC filed its lawsuit. The complaint asserts claims against the ten defendants for negligence, gross negligence and breach of fiduciary duties. The complaint alleges that the defendants approved or allowed the loans in question in willful disregard of the bank’s own loan policies and with “willful blindness” to the risks and imprudence of the loan decisions. The complaint alleges that at the same time the defendants were approving these risky strategies, they were “weakening the Bank’s capital position by approving large quarterly dividend payments to the Bank’s parent company,” of which several defendants were shareholders. The complaint alleges that the individual defendants “lined their own pockets” with these dividends.

 

The FDIC’s lawsuit against the former directors and officers of the First Bank of Beverly Hills is the 29th the FDIC has filed as part of the current wave of failed bank litigation, and the fifth so far involving a failed California bank. In its latest website update, the FDIC announced that as of April 25, 2012, the agency has authorized lawsuits in connection with 58 failed institutions against 493 individuals for D&O liability, inclusive of the 29 filed D&O lawsuits naming 239 former directors and officers. Given the large number of failed banks like the First Bank of Beverly Hills approaching the third anniversary of their closure, it seems likely that we will be seeing a flurry of new FDIC failed bank lawsuits in the months ahead.

 

In the meanwhile, the FDIC continues to take control of additional failed banks. This past Friday evening, the FDIC closed five additional banks, the most the FDIC has closed in a single day this year. These additional closures bring the 2012 year to date number of bank closures to 22. This flurry of bank closures is a little bit surprising as up to this point, the pace of closures had begun to suggest that the FDIC was winding down its new bank closures. The five closures on Friday night suggest that there may still be a number of bank failures yet to come.

 

For Almost As Long As Our Country Has Existed, Man Has Dreamed of Traveling to Cleveland: NASA announces its plan to put a man on a bus to Cleveland. Get the details here.

 

The final stop on The D&O Diary’s Asian Tour was the island city-state of Singapore. Located only about 60 miles north of the equator, Singapore is a sun-drenched commercial center that has managed despite its slight size to become one of the world’s wealthiest countries.

 

Prior to boarding my flight to Singapore, I purchased a bottle of water, drank about half of it, and stuck the unfinished bottle in a side pocket of my backpack. As I boarded the flight, I stuck the backpack in the overhead compartment. I guess the lid popped off of the water bottle, and all of the remaining water spilled out. Now, if you are about to spend four hours sitting next to a total stranger, it is a very poor idea to start things off by dumping about eight ounces of cold water on them. I was vigorously cursed out in a language I was unable to identify, and all of my apologies were disdained — even though during the course of the flight it became apparent that my damp seat mate spoke English fluently.  Fortunately, no permanent harm was done, and this episode, though embarrassing, did not otherwise affect my Singapore visit.

 

The whole country of Singapore covers an area only slightly larger than Chicago, but with double the population. It is also one of the world’s wealthiest countries, with the highest percentage of U.S. dollar millionaires of any country in the world (15.5% of all households). It is a global trade, financial and manufacturing center. As a result, and despite its equatorial location, it has a tidy, orderly, prosperous feel.If you were suddenly dropped there,  and if it were not for the cars driving on the right-hand side, you would probably guess you were in a particularly well-off suburb of Miami. I suspect that most Americans would find Singapore a particularly comfortable place to visit.

 

As far as I can tell, the basic institutional unit in Singapore is the shopping mall. There not only seems to be an endless supply of upscale malls, but they all seem to be busy as well. Singapore’s two casinos have only been open for less than four years, but, flush with Chinese gamblers, Singapore is already a larger gambling market than Las Vegas. The Marina Sands Singapore Casino, which sort of like a massive, three-hulled cruise ship tipped on its end, with a gigantic skateboard stretching across the towers, dominates the downtown Marina district. 

 

My stay in Singapore was relatively brief, much shorter than my visits to my other Asian destinations, but I was there long enough to get a strong sense of the essential commercial energy of the place. Location is one of the country’s natural advantages; its proximity to India and China and to the emerging economies of South East Asia makes it the natural hub for regional commerce. As a result, the city is extraordinarily cosmopolitan. At the PLUS event that was the reason for my visit, there were attendees not only from Singapore itself, but a wide variety of other countries, including India, Malaysia, Thailand, Mauritius, and United Arab Emirates, among many others.

 

One of the literal high points on my brief visit was a ride on the Singapore Flyer, which, depending on who you ask, may be the highest ferris wheel in the world. It does in any event provide some astonishings views of the city, of the Singapore harbor, and of Indonesia to the South and Malaysia to the North.

 

In addition to the climate, economy and atmosphere, another reason to visit Singapore is its food. I can’t recall the last time I enjoyed so many interesting meals in such a short amount of time. Among many other local specialties I enjoyed is rendang, a spicy meat dish with a lot of kick, mee siam, a spicy seafood noodle dish, and tandoori murgh (yogurt marinated chicken). A particular high point for me was the opportunity to sample a rich diversity of local dishes while sitting on the verandah of the Singapore Cricket Club, a local landmark, as the guest of my good friend, Aruno Rajaratnam, whose hospitality helped make my Singapore visit so enjoyable.

 

One particularly interesting area to explore and to eat is Holland Village, a small enclave of shops, restaurants and bars in the western end of the urban center. There is a lively, street-café feel to the area, but the main attraction is the several indoor food courts where you can quickly sample a wide-variety of regional foods. On a warm, sunny afternoon, it was a very pleasant to sit in a shady café drinking Tiger Beer and watching the incredibly diverse local populace stroll by.

 

The PLUS event in Singapore was extraordinarily successful. The event was held at The American Club and it drew a standing-room only crowd. As I noted above, many of the attendees had traveled a long way just to attend. It is clear that there is a great deal of interest among the insurance professionals in South East Asia in the networking and educational opportunities that PLUS affords. It was a privilege for me to be able to address and to meet so many Asian insurance industry professionals. I congratulate the PLUS leadership for taking the initiative in launching the Asian events, and I congratulate the local committee that organized the events, particularly Aruno Rajaratnam and Shasi Gangadharan. I can only hope that the two events this past week in Hong Kong and Singapore are just the first of many PLUS Events in Asia. I also hope that PLUS will continue to offer our Asian industry colleagues the opportunity to become a part of our professional community. On a personal note, it was personally gratifying to learn how many of my industry colleagues in South East Asia are loyal readers of The D&O Diary.

 

What I Learned in Asia: The world is incredibly large, rich and diverse. But as large as the world is, it is still possible for me to start the day in Singapore and have dinner at my home in Ohio. Modern technology and transport have shrunk the world. Nor is this merely a geographic phenomenon. I found in my business meetings during my travels that my Asian counterparts are dealing with many of the same challenges and issues as I am every day.

 

However, one important difference is the pace of economic activity in Asia, which is far beyond anything I have ever experienced. In many ways, business growth in the developed economies all too often is about taking existing business away from competitors. In Asia, there is true, organic economic growth. The future opportunities in the growing economies of South East Asia and in the newly developing countries, like, for example, Cambodia and even Myanmar, are enormous.

 

One particular regret I have about my Asian trip is that I was not able to take any of  my kids with me to see what I saw. I think it is going to be incredibly important for our future work force to understand what is happening in Asia and in the larger global economy. Today and increasingly in the future, our young people will be competing not only with their counterparts down the street but also with their counterparts on the opposite side of the world. We all need to recognize that the global counterparts are extraordinarily motivated and are also positioning themselves to compete in an economy that they fully understand is global.

 

Our Asian counterparts are training their work force to be adaptable and to be able to function in a variety of languages and cultures. To be sure, one advantage we have in the United States is that the rest of the world is racing to learn our language. But at the same time, I fear that we have been too slow to recognize that is not going to be enough simply to expect the rest of the world to speak English. Our future work force will have to be culturally adaptable. Our chronic cultural parochialism could put our work force at a substantial disadvantage in the global economic competition.

 

However, if the increasingly global economy presents a challenge, it also represents an opportunity. That is, there may be an opportunity to participate in the developing economies’ growth – which could be a positive spin on the possibility that future growth and many of the future jobs will in Asia, rather than at home. It will under any circumstances be critically important for our future work force here to be able to function globally.

 

An additional note is that Asia is far from a block or economic unit. To the contrary, cultural differences, natural geographic and resource advantages, as well as differences in political and legal systems, will have an enormous impact on how different Asian countries will fare going forward. To cite but one example of this, it will be critically important to see which countries strike the appropriate balance between the ability of economic participants to extract profits and the ability of those participants to shift “external” costs onto their society. For example, in China, the willingness to allow businesses to prosper while society chokes on the fumes ultimately could undercut the country’s long run success.

 

One of the side effects of the wealth creation that has followed economic development in Asia is the emergence of a rising middle class. With the growth of the middle class has come a convergence around a common set of life styles, living patterns and even values. At its most superficial, this convergence includes the emergence of global brands with nearly universal appeal. But it also includes rising expectations about housing, education, and health care, as well as about the free flow of information and ideas.

 

As a result of this convergence, it is not just technology and transport that have shrunk the world. Rather, it is an increasingly shared set of experiences, expectations and aspirations that characterize ever greater parts of the world. The growing global economy may include both challenges and opportunities; but at its most basic level, it may mean that we live in a more integrated world. Although a global economy seems to mean global competition, there will also be possibilities for global collaboration within a more integrated world.

 

I find the possibilities for global collaboration the most interesting of all. Indeed, if there is a common thread through all of the business meetings on my trip, it is the common assumption that collaboration presents the greatest promise, both in and with Asia. Throughout my Asian travels, I was struck with how enthusiastic everyone I  met was about finding ways to collaborate. I left Asia with three hopes; one, that I might return again soon;two, that the apparently extensive prospects for collaboration in Asia might quickly bear fruit; and three, that I am able to stay in close touch with my many new Asian friends.  

 

More Singapore Pictures:

The Marina Sands Casino, Singapore:

 

Looking out to the Singapore Strait (from the Singapore Flyer):

 

 

 

 

 

 

 

 

 

 

 

A Country of Shopping Malls: