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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The Act’s Provisions

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

 

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

 

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

 

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

 

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

 

Discussion:

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

 

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

 

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

 

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

 

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

 

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

 

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

  

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

St. Stephen’s Green, Dublin:

 

Trinity College, Dublin

 

Ireland’s Eye, Off of Howth

 

 

 

 

 

 

 

 

 

The Cliffs at Howth, from breakwater

 

Looking South to the Wicklow Mountains

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The Adam Room

 

Some of Lloyd’s City Neighbors

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

A Barge Picks Camden Lock:

 

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

 

 

 

 

 

 

 

 

 

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

 

St. Bride’s Warm and Comfortable Sanctuary:

 

 

An Eye on the Thames: 

 

 

 

 

 

 

 

 

 

A Perspetive on London From the Regent’s Canal

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Discussion

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Discussion

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

 

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

 

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

 

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

 

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

 

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

 

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

 

FDIC Files First Failed Bank Lawsuit in Florida: Even though Florida has had the second highest number of bank failures of any of the states during the current bank failure wave (trailing only Georgia), the FDIC had not filed any failed bank lawsuit in Florida—until now. On March 13, 2012, the FDIC filed an action in the Middle District of Florida in the agency’s capacity as receiver of the failed Florida Community Bank of Immokalee, Florida, against the failed bank’s former CEO and six of the failed bank’s former directors. A copy of the FDIC’s complaint can be found here.

 

The bank failed on January 29, 2010. In its complaint, the FDIC alleges that the bank’s collapse was caused by “grossly negligent loan underwriting and loan administration, resulting in excessive and dangerous concentrations” of commercial real estate loans and of acquisition and development loans. The FDIC seeks to recover on losses of in excess of $62 million dollars in connection with six specific loans. The FDIC asserts state law claims of negligence against the former directors and against the former CEO, as well as claims of gross negligence under FIRREA against all of the individual defendants.

 

The FDIC’s lawsuit in the Florida Community Bank case is the 26th that the FDIC has filed in connection with the current bank failure wave. It is also the eighth that the FDIC has filed so far in 2012. Though the FDIC has now filed 26 lawsuits, according to the FDIC’s website and as of February 14, 2012, the FDIC has authorized suits in connection with 49 failed institutions against 427 individuals for D&O liability with damage claims of at least $7.8 billion. Thus, there are at least 23 additional lawsuits approved and in the pipeline. And it seems like that when the FDIC next updates the authorized lawsuit figures on its website, there will be yet other lawsuits authorized. As I have previously discussed, it seems likely that we will see many of these forthcoming lawsuits during 2012.

 

CIT Group Subprime-Related Suit Settles for $75 Million: In the latest of the subprime and credit crisis-related securities class action lawsuits to settle, on March 13, 2012, the parties to the CIT Group subprime suit filed with the court a stipulation of settlement reflecting that the case had been settled for $75 million. A copy of the parties’ settlement stipulation can be found here.

 

As reflected here, the plaintiffs first filed suit against CIT Group and certain of its directors and officers in July 2008. The plaintiffs alleged that CIT’s public financial statements failed to account for tens of millions of dollars in loans to Silver State Helicopter, which loans were highly unlikely to be repaid and should have been written off. The plaintiffs also alleged that the company had misrepresented the performance of its subprime home lending and student loan portfolios.

 

In November 2009, CIT Group itself filed for bankruptcy and the company was dismissed out of the lawsuit. As discussed here (scroll down), on June 10, 2010, Southern District of New York Judge Barbara Jones denied the remaining defendants’ motion to dismiss. Following the dismissal motion ruling, the parties entered mediation that ultimately resulted in the settlement. The settlement is subject to court approval. (CIT Group rather conspicuously emerged from bankruptcy after only six weeks.)

 

The CIT Group settlement is noteworthy if for no other reason than that it came about in 2012. Even though there are many subprime and credit crisis-related securities cases pending, including many that have already passed the motion to dismiss stage, the pace of settlement of these cases seems to have slowed to a crawl (indeed, in its recently released annual study of securities class action lawsuit settlements, refer here, Cornerstone Research specifically noted the slow settlement pace of the credit crisis suits as one reason why both the number and aggregate monetary value of securities suit settlements was down significantly in 2011).

 

Readers of this blog may be interested to know whether or to what extent D&O insurance contributed toward the CIT Group settlement. The settlement stipulation is nonspecific, but it does suggest that insurance is playing a role in the settlement of this case. For example, in describing the settlement amount, the stipulation provides that within a specified time of the court’s preliminary approval of the settlement, the defendants or CIT shall pay or “cause their insurers” to pay into escrow the $75 million settlement amount. In his March 14, 2012 Am Law Litigation Daily article about the settlement (here), Victor Li reports that “all 13 current and former CIT executives named as defendants were indemnified by CIT and covered by D&O insurance.”

 

I have in any event added the CIT Group settlement to my running tally of subprime and credit crisis-related lawsuit settlements, which can be accessed here.

 

SEC Files Enforcement Action against Three Former Thornburg Mortgage Executives: In the latest civil subprime and credit crisis-related enforcement action, the SEC on March 13, 2012 filed a civil enforcement action in the District of New Mexico against three former executives of Thornburg Mortgage, including the company’s former CEO, Larry Goldstone. Prior to its 2008 collapse, Thornburg was the second largest mortgage originator in the United States. The SEC’s complaint can be found here. The SEC’s March 13, 2012 press release about the case can be found here.

 

The SEC alleges that the three defendants schemed to fraudulently overstate the company’s income by more than $400 million and falsely record a profit rather than an actual loss for the fourth quarter in its 2007 annual report. The complaint alleges that in the days before the company filed its 2007 10-K, the company was facing a severe liquidity crisis due to the company’s receipt of numerous margin calls totaling more than $300 million. The complaint alleges that the defendants withheld information about the margin calls from investors and even from the company’s own auditors. However, two hours after the 10-K filing, the company received additional margin calls that it was unable to meet. The company was forced to disclose these developments and soon thereafter the company disclosed that it would be filing an amended annual report. By the time the company filed its amended 10-K, its share price had collapsed. The company never recovered and ultimately filed for bankruptcy.

 

The March 13, 2012 statement of two of the individual defendants regarding the SEC’s enforcement action can be found here.

 

Neither the SEC’s press release nor complaint explains why the complaint is only being filed now, more than four years after many of the events described in the complaint. The SEC has faced some criticism for allegedly failing to act aggressively enough in the wake of the global financial crisis. Perhaps in recognition of these criticisms, the SEC itself emphasizes in its press release that with the Thornburg Mortgage enforcement action SEC has now filed financial crisis related enforcement actions against 98 individuals and entities.

 

The press release also links to a page on the SEC’s website, entitled “SEC Enforcement Actions: Addressing Misconduct That Led to or Arose from the Financial Crisis.” The website page makes for interesting reading, but it is hard to shake the impression that it is a relatively short list of items, in light of the magnitude of the financial crisis and in light of the over 230 subprime and credit crisis related securities class action lawsuits that investors have filed. Given the long lag between the events involved and the filing of the Thornburg Mortgage enforcement action, it may be that there are more cases that are still in the pipeline, perhaps many, relating to the financial crisis.

 

Thornburg Mortgage and certain of its directors and officers were also the subject of a separate investor lawsuit, although as discussed in detail here, the first of the investor lawsuits was filed in August 2007, well before the events described in the SEC’s enforcement action. As discussed here, in January 2010, District of New Mexico James Browning granted the defendants’ motions to dismiss large parts of the investors’ lawsuit, although parts of the case survived, and perhaps critically, the investors’ claims against Goldstone, the former CEO, largely survived. In February 2012, the parties to the investor suit advised the court that the plaintifs had reached a settlement with 13 individual defendants, including Goldstone. The parties hope to file their settlement documents with the court in April.

 

As Alison Frankel lnotes in her March 14, 2012 Am Law Litigation Daily article about the settlement (here), once again the SEC "once again lags the private bar." .(Hat top to Frankel for the link to the letter in which the parties to the securities suit advised the court of the settlement.)

 

A March 13, 2012 Huffington Post article discussing the SEC’s Thornburg Mortgage enforcement action can be found here.

 

Securities Suit Against U.S.-Listed Chinese Company Survives Dismissal Motion: In a recent post (here), I raised the question of how far the plaintiffs are really going to be able to go in the wave of securities class action lawsuits that have been filed against U.S.-listed Chinese companies. While it still remains to be seen how far these cases ultimately will go, at least one of these cases filed in 2011 has survived the initial dismissal motion.

 

As discussed here, in April 2011, the plaintiffs first filed their action in the Central District of California against ZST Digital Networks and certain of its directors and officers. The plaintiffs alleged the in 2008, the company reported to the SEC revenues of over $50 million and over $100 million in 2009, but reported to the Chinese governmental agency the State Administration of Industry and Commerce (SAIC) revenues of only a very small fraction of those amounts. The company’s 2010 10-K acknowledged the discrepancy between the figures and stated that the company’s reports to the SAIC were not in compliance with applicable regulations.

 

The defendants moved to dismiss the action on the grounds that the complaint failed to meet threshold pleading requirements. Among other things, the defendants argued that there was no particularized allegation that it was the SEC filings and not the SAIC filings that were untrue.

 

In a February 14, 2012 order (here) Judge Gary Allen Feess granted in part and denied in part the defendants’ motion to dismiss. In responding to the defendants’ argument that the plaintiffs have insufficiently pled which of the company’s filings were untrue, Judge Feess noted that the two filed reports “differ by a factor of over two thousand,” and the $6 million profit reported in the SEC filing contrasts particularly sharply with the loss reported in China. The Court said the defendants’ preferred explanation “merely dances around the issue” without explaining how the company came to report such widely different figures.

 

The court’s rejection of the defendants’ argument that the plaintiffs’ had insufficiently alleged which of the two filings was untrue stands in contrast to the November 2011 conclusion that a different Central District of California Judge reached in the China Century Dragon Media case (about which refer here). In that prior ruling, the court found that the plaintiffs had not sufficiently alleged, in connection with an alleged discrepancy in regulatory filings, that the SEC filings were untrue. The court in that prior case had allowed the plaintiffs leave to replead, however.

 

Judge Feess did dismiss certain other aspects of the plaintiffs’ case without prejudice. But his ruling that the discrepancy between the SEC filings and the SAIC filings was sufficient to overcome the initial pleading hurdles could be relevant in a number of the other pending cases involving U.S.-listed Chinese companies. Whether or not the plaintiffs ultimately succeed with many of these cases remains to be seen. But getting over the initial pleading threshold is an important first step.

 

A March 13, 2012 case study of the opinion in the ZST Digital Networks case written by Stephen Brodsky of the Bernstein LItowitz firm can be found here (registration required).

 

Four Say-on-Pay Lawsuits Are Dismissed in Quick Succession: In a recent post (here), I reported on comments from some observers that investors unhappy with companies’ responses to negative say-on-pay votes will likely continue to pursue say-on-pay related litigation in 2012. But any investor (or their counsel) considering filing a say-on-pay related lawsuit will want to take a look at David Bario’s March 12, 2012 Am Law Litigation Daily article (here) reporting that in quick succession, motions to dismiss recently have been granted in four of the pending say-on–pay lawsuits. (The original article listed only three, but an update at the bottom of the article adds the fourth case to the list.)

 

According to the article, dismissal motions have been granted just in the last two weeks in the say-on-pay lawsuits that were filed against the boards of Intersil Corporation; Umpqua Holding Corporation; Jacobs Engineering; and BioMed Realty Trust. As far as I know, only one of the say-on-pay lawsuits has survived the initial dismissal motion; as noted here, the say-on-pay suit involving Cincinnati Bell did survive the dismissal motion. However, there have been other cases that have been dismissed. Given that there were only ten total suits filed out of the approximately 41 companies that sustained negative say-on-pay votes, the track record for these case does not look great, and could not be encouraging for any prospective plaintiff that might consider filing a similar action in connection with any company that sustains a negative say-on-pay vote during the 2012 proxy season.

 

Speakers’ Corner: On Tuesday March 27, 2012, I will be participating as a panelist at the C5 Forum on D&O Liability Insurance in London. I will be speaking about the latest U.S. legal developments affecting the D&O exposure of non-U.S. companies. Information about the conference, including registration information, can be found here. If you are attending the conference in London, I hope you will take the time to introduce yourself, particularly if we have not previously met.

 

A Video for St. Patrick’s Day: You will definitely want to round up your mates to watch this St. Patrick’s Day video featuring Gareth Longrass and his faithful dog Roy. Roy is a legend is Gloucestershire. Cheers, everyone.

 

A decline in the number and size of settlements in 2011 led to a drop in aggregate and average securities class action settlement figures during the year, according to the annual study of securities suit settlements from Cornerstone Research. According to the study, entitled “Securities Class Action Settlements: 2011 Review and Analysis” (here), the number and total value of all securities suit settlements reached a ten-year low during 2011. Median and average settlements were also well below historical levels. Cornerstone Research’s March 14, 2011 press release regarding the study can be found here.

 

According to the study, there were 65 court-approved securities class action lawsuits settlement during 2011, representing a total of $1.4 billion in settlement funds. (The study uses the year in which a settlement receives court approval as the year of the settlement, rather than the year in which the settlement was first announced.) The number of 2011 settlements is 25 percent below the prior year’s number and 35 percent below the average of the preceding 10 years. The aggregate settlement amount represents a 58 percent decline from 2010’s total of $3.2 billion.

 

The median settlement amount declined nearly 50 percent in 2011, from $11.3 in 2010 to $5.8 million in 2011. The 2011 median represents the lowest annual median settlement figure during the post-Reform Act era. The average settlement also declined from $36.3 million in 2010 to $21 million in 2011. The 2011 average is well below the 1996-2010 average of $55.2 million. The 2011 average of $21 million is even below the 1996-2010 average if the three largest settlements during that period are removed from the equation (the adjusted 1996-2010 average is $39.9 million). The 2011 average is the lowest average settlement in the last decade.

 

The relatively low 2011 average is largely attributable to the absence of very large settlements during the year. In addition, the average for settlements of $100 million or greater declined more than 27 percent from 2010 to 2011.

 

The report reviews several possible explanations for the decline in the number of settlements and in aggregate settlement funds during 2011. First, the report attributes the decline “largely to the drop in traditional securities class actions that began in 2006.” This decline in filings was partially offset by credit crisis cases, but the credit crisis cases tend to take longer to settle than traditional cases.

 

Another factor in the ten-year low in average and median settlements is that the 2011 settlements involved cases with lower “estimated damages” than prior years. The “estimated damages” for 2011 settlements declined 40 percent compared to 2010.

 

The 2011 settlements also lacked the involvement of factors that often are associated with larger settlements. There was a substantial decline during 2011 of settlements involving accounting-related allegations, overlapping SEC actions and companion derivative actions. There was also a reduction in the number of settlements involving third-party defendants (such as auditors). As these factors “tend to be associated with higher settlement amounts,” the drop in the number of cases with these characteristics “may explain the lower 2011 settlement values.”

 

The factors that contributed to the lower settlement figures during 2011 may only be temporary. Indeed, the report notes that in light of the $725 million AIG settlement that was approved in February 2012, “it appears likely that the total dollar amount of settlements will return to more typical levels in 2012.”

 

The report contains a number of interesting observations, including one that will be of particular interest to readers of this blog. The report states that nearly 80% of settlements with identifiable D&O insurance contributions “were funded 100 percent by such policies,” compared with about 60% in 2010. The report suggests that this increase in the proportion of the settlement amounts covered by D&O insurance “may be a function of the lower overall settlement amounts in 2011 and an increase in the level of D&O coverage carried by firms.”

 

The report also contains some interesting analysis about the cumulative distribution of all post-Reform Act settlements. According to the report, more than half of the post-Reform Act settled cases have settled for less than $10 million, about 80 percent have settled for less than $25 million, and only 7 percent have settled for $100 million or higher.

 

Discussion

One factor that may have a considerable impact on the analysis is the report’s use of the year of settlement approval as the settlement year, rather than the year of announcement. While this factor is at one level simply a timing issue, it does have an impact. Just to pick one settlement by way of illustration, the $725 million AIG settlement noted above may not have been approved by the court until 2012, but it was first announced in 2010 (refer here). By the same token, there are a number of credit crisis related settlements that were announced in 2011 (for example, the $417 million Lehman Brothers underwriters’ settlement), but that will not receive final court approval until 2012 or later.

 

To be sure, it makes sense to only include settlements that have actually been approved and as they are approved.  My point is just that the use of this methodology distributes the settlements in a way that could affect the overall settlement figures, include overall aggregates, medians and averages. A different methodology might produce different conclusions about settlement trends. This is not just an idle observation; practitioners, for instance, pay keen attention to settlement announcements, and their perceptions of settlement trends are based on the most recent settlement announcements, not the most recent settlement approvals.

 

That said, the time of settlement approval does have important practical significance, because it dictates when investors receive their money. It also dictates when the plaintiffs’ lawyers get paid as well. Given the relative decline in the number of aggregate value of settlements in 2011, it seems that 2011 was an off year for the plaintiffs’ bar.

 

The report’s observation about the percentage increase in D&O insurance contribution toward settlement is also very interesting. This observation might suggest that even if the aggregate, averages and medians may be dropping, the equivalent figures for the insurers themselves might actually be increasing.

 

There are a couple of important considerations to keep in mind with respect to Cornerstone Research’s analysis. The first is that the report considers only class settlements. The figures in the report do not include any amounts related to settlements with other claimants that opt out of the class action settlement, which can be a significant factor in connection with at least some settlements. The settlement amounts in the report also do not include amounts incurred in defending against these lawsuits. The defense costs often are enormous, and typically are borne in whole or in part by the D&O insurers, which adds the overall costs this litigation imposes on the D&O insurers.

 

Finally, the settlements analyzed in the Cornerstone Research report related solely to securities class action lawsuits. Settlements in association with other types of corporate and securities litigation are not included. In most past years, the absence of consideration of other types of litigation would not have been worth noting, as the securities class action suits represented by far the most significant corporate and securities litigation threat. However, as I have noted on this blog (refer here), litigation relating to mergers and acquisitions activity is becoming an increasingly serious problem – and it is a problem that involves both increased frequency and severity, as large settlements in the M&A cases, previously unknown, have become increasingly common. In other words, the consideration of the trends noted in the Cornerstone Research report represent only a part of the serious corporate and securities litigation exposure that companies face.