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.

 

A fundamental tenet of corporate law is that a business corporation is organized and carried on for the benefit of its stockholders.  In recent times, an increasing number of for-profit organizations have formed in order to pursue social and environmental goals. There is a growing investor movement toward the financial support of organizations that have social benefit purposes at the center of their existence. However, it may be difficult for directors and officers of these organizations to pursue these social purposes without running afoul of traditional fiduciary duties requiring corporate managers to maximize shareholder value.

 

In order to address these concerns, a group of lawyers and academics have proposed a new form of enterprise, the benefit corporation. The idea behind this organizational form is to create an enterprise that can utilize the tools of business financing and management to address social and environmental issues. In order to deal with the legal issues involved with organizing a business enterprise for broader goals, the proponents of this idea have crafted Model Benefit Corporation Legislation.

 

Since 2010, the model legislation has been adopted in whole or in part in seven states, including California, New Jersey and Virginia, and is under consideration in a number of others. New York’s version  became law  on February 10, 2012. Although the model legislation’s provisions address a number of issues, the “heart” of the model benefit corporation legislation is its provisions addressing concerns related to potential director and officer liability.

 

In this post, I examine the circumstances that have led to the proposal for the development of the benefit corporation concept; the specifics of the organizational form described in the Model Benefit Corporation Legislation; and the aspects of director and officer liability addressed in the legislation. I conclude with my thoughts about the proposed organizational form, including the implications from both a liability and insurance standpoint.

 

My analysis of these issues relies heavily on the November 16, 2011 paper entitled “The Need and Rationale for the Benefit Corporation” (here).  A number of contributors participated in the creation of this document, but the paper’s principal authors are William H. Clark, Jr. of the Drinker Biddle law firm, and Larry Vranka of Canonchet Group LLC. I also refer below to the Model Benefit Corporation Legislation, which can be found here. Information about benefit corporations generally can be found at the Benefit Corporation Information Center. The January 7, 2012 article in The Economist magazine the first piqued my interest in benefit corporations can be found here.

 

Background

Two recent trends have come together to create the need for a new form of business enterprise. On the one hand, there is a growing class of investors joining the socially responsible investing movement. These investors hope to create a direct social impact through targeted equity and debt investments. (A November 2010 J.P. Morgan study on impact investing can be found here.) On the other hand, for-profit social entrepreneurs, who are interested in pursuing mission-driven businesses, are increasingly common.

 

An earlier initial response to these developments was the 2007 formation of the B Lab, a non-profit organization whose purpose was to devise and implement a certification system for companies interested in distinguishing themselves in order to try to attract the socially focused investors. B Lab promulgated a number of certification standards for these companies. The difficulty is that these standards were to be adopted within the existing legal framework.

 

A critical component of the existing legal framework is the basic principal that business corporations exist to maximize shareholder value. This principal constrains the ability of businesses, at least within the existing framework, to consider the interests of constituencies other than shareholders. To be sure, a number of states, in response to takeover battles in the 80’s, did implement so-called “constituency” statues that enable boards and senior company officials to take in account community interests when considering a takeover bid.  Unfortunately, among the states that have not adopted constituency statues is Delaware, the place of incorporation for many companies. In addition, even in the states that have adopted constituency statutes, there is a dearth of case law interpreting the statutes, and so there is very little guidance on what other interests a board may consider and to what extent. In addition, constituency statutes are often merely permissive, not mandatory.

 

Owing to the absence of clear legal standards in these areas, directors may be hesitant to consider social goals or the interests of other constituencies for fear of breaching their fiduciary duties to shareholders. The legal uncertainties and need for greater clarity have led to the proposal of a new form of business enterprise to address the needs of for-profit mission-driven businesses.

 

The Benefit Corporation

In order to address the legal concerns, reformers have proposed the benefit corporation. The three distinct aspects of the benefit corporation are that it has 1) a corporate purpose to create a material positive impact on society and the environment; 2) expanded fiduciary duties of directors that require consideration of nonfinancial interests; and 3) an obligation to report on its overall social and environmental performance as assessed against third-party standards.

 

These attributes are embodied in the Model Benefit Corporation Legislation, which has provided the basis for the benefit corporation statues that have been enacted in the seven states. (The seven states are Maryland, Hawaii, Vermont, Virginia, California, New Jersey and New York. Four other states are currently considering similar legislation.) 

 

               

Under the model legislation, the benefit corporation is required to have a purpose of “general public benefit” and allowed to identify one or more “specific public benefit” purposes. The model legislation lists seven non-exhaustive possibilities for specific public benefit goals, which include: providing products or services to low income individuals; providing economic opportunities for individuals or communities; preserving the environment; improving human health; promoting the arts or sciences; increasing the flow of capital to public benefit enterprises; or the accomplishment of any other particular benefit to society or the environment.

 

The model legislation further provides that in considering the best interests of the corporation, the directors of the corporation “shall consider the effects of any action or inaction” on the shareholders; the employees of the corporation; the customers; community or societal factors; the local and global environment; the short-term and long-term interests of the benefit corporation; and the ability of the benefit corporation to accomplish its general and specific benefit purposes.

 

In addition to providing this broad array of factors directors must consider, the model legislation provides certain protections for the benefit corporation directors (and officers). First, the model legislation provides that consideration of the interests of all stakeholders shall not constitute a violation of the general fiduciary duty standards for directors. Second, the model legislation expressly exonerate the directors and officers from monetary damages for any action taken in compliance with the preexisting standards for director duties; and for the failure of the benefit corporation to pursue or create its stated general or specific public benefit. These provisions are intended to eliminate directors’ concerns that they could face damages liability for the enterprise’s failure to fulfill its purposes or for considering the interest of constituencies other than shareholders.

 

The model legislation does provide for a form of injunctive relief action, to require the benefit corporation to live up to its commitments. Under these provisions, shareholders have the right to bring a legal action in the form of a “benefit enforcement proceeding” on the grounds that a director or officer has failed to pursue the stated general or specific purpose or failed to consider the interest of the various stakeholders identified in the statute. However, only shareholders or directors can bring a benefits enforcement proceeding; beneficiaries of the corporation’s public purpose have no right of action. The exclusion of any right of action by third parties protects the benefit corporation from unknown, expanded liability that might create disincentives to becoming a benefit corporation

 

Discussion

The purpose of the benefit corporation is to provide an appropriate enterprise vehicle for for-profit mission-driven businesses. Among the objectives in structuring the benefit corporation form is the need to address critical issues regarding the duties and potential liabilities of directors and officers. The key objectives of the model legislation are to ensure that directors and officers of the benefit corporation do not incur liability for considering the interests of constituencies other than shareholders and to ensure that the directors and officers do not incur monetary liability for allegedly failing to fulfill the organization’s general or specific benefit purposes.

 

It is important to note that although the model legislation provides that the directors and officers cannot be held liable for damages under the benefit corporation provisions, the benefit corporation provisions do not exempt the directors and officers from liability for violating general standards of fiduciary care. The exemption from monetary damages in the model legislation provide only that directors is “not personally liable for monetary damages for (1) any action taken as a director if the directors performed the duties of office in compliance [existing statutory provisions specifying the duties of directors generally]; or (2) failure of the benefit corporation to pursue or create general public benefit or specific public benefit.” Parallel provisions provide similar protections for officers. 

 

The point is that the exemption from monetary damages under the benefit corporation provisions does not exempt the directors and offices from claims for damages for violation of their general fiduciary duties. By the same token, however, the model legislation specifies that the directors and officers of the benefit corporation cannot be held liable for considering the interests of constituencies other than shareholders.

 

The model legislation does provide for a “benefits enforcement action,” for shareholders to pursue injunctive relief if the organization is not pursuing its benefits objectives or providing required reporting. Even though this action does not allow for damages, it does create a context within which defense costs could be incurred.

 

In other words, not withstanding the liability protections in the model legislation, directors and officers of a benefit corporation continue to face the possible liability exposures and defense expense exposures.

 

As a for-profit venture organized to pursue a public good, a benefit corporation does not really fit within the usual D&O insurance framework, which divides the world between non-profit and commercial enterprises. In addition, the benefit corporation regime has unique aspects that could have insurance implications, such as the possibility of a benefit enforcement action.

 

In just over two years, seven states have enacted legislative provisions allowing for benefit corporations. Implementing legislation is under consideration in several more states. It seems likely that adoption of benefit corporation legislation will become more generalized in the months and years ahead. It also seems likely that as the benefit corporation form become more widespread that insurers will be called upon to address the insurance needs of this new type of enterprise. The unique features of these organizations raises the possibility that new insurance solutions, targeted to the unique needs of these kinds of companies, will be required.

 

In any event, benefit corporations represent an interesting innovation on the corporate enterprise landscape. If, as seems likely, more states adopt benefit corporation enabling legislation, the issues involved in addressing these companies’ insurance requirements will become an increasingly common concern.

 

During 2011, plaintiffs filed a wave of securities class action lawsuits against U.S.-listed Chinese companies. There were 39 of these lawsuits filed in 2011 (out of 218 total securities class action lawsuit filings in 2011), as discussed here.  Often the complaints in these lawsuits consisted of little more than a repetition of the allegations that had been raised against the company in an Internet analyst report.

 

While the Internet reports often raised sensational allegations against the companies, the claimants still faced the problems associated with trying to substantiate these allegations – a challenging task under any circumstances, but even more so given political, legal and cultural differences involved, as well as language and other barriers. It should come as no surprise then that a few of these cases might just peter out.

 

Although there is no way to know for sure from the bare record, that certainly seems to be the case in the securities class action lawsuit that had been filed in 2011 against Yongye International.

 

As discussed at greater length here, plaintiffs first filed a securities class action lawsuit against Yongye and certain of its directors and officer in the Southern District of New York in May 2011. The complaint relied on a May 11, 2011 Seeking Alpha article entitled “Yongye International’s Reported Production: SEC Filings Raise Red Flags” (here). The article stated in part “that the company and its joint-venture partner could not have produced, and therefore sold, the reported plant product tonnages given the company’s stated manufacturing capacity and shipments.” Ultimately several class actions were filed, which were later consolidated and lead counsel was appointed. Lead counsel filed an amended complaint in December 2011. The amended complaint again was reliant on the allegations in the Seeking Alpha article.

 

On March 8, 2012, the company announced (here) that the lead plaintiff’s action had been voluntarily dismissed, with prejudice as to the lead plaintiff. A copy of the court’s March 6, 2012 order of voluntary dismissal can be found here.  It is impossible to tell from the bare record what led up to the voluntary dismissal. However, from the court docket, it can at least be discerned that following a February 1, 2012 hearing in the case, Judge Richard J. Sullivan ordered that the plaintiffs file a further amended complaint by March 5, 2012. It appears that rather than submitting the amended complaint on March 5, the plaintiffs filed a motion to voluntarily dismiss the complaint, with prejudice as to the lead plaintiffs.

 

It was  noted when these cases were flooding in that not perhaps all of these cases would prove to be meritorious and indeed some of them have been dismissed (refer for example here). On the other hand, other cases have survived the initial dismissal motions (refer for example here). The critical point is that even in those cases in which the plaintiffs’ claims survive the initial pleading threshold, their claims stiff face substantial challenges, not the least of which are problems involved with effecting service of process and in conducting discovery in China, as well as deriving from the geographic distances and language issues involved. (Refer here).

 

The tactical retreat in the Yongye case, even before the initial rounds of pleading were complete and before the threshold motions had even been filed, suggests at a minimum that the barriers involved in pursuing these cases in some instances may be prohibitive. And, without in any way suggesting that it was in fact the case with the Yongye lawsuit, some of the cases may have been filed in reliance on Internet reports and analysis that could prove difficult to substantiate.

 

Many of these cases are still only in their earliest stages. It remains to be seen have they will fare. There is the possibility that in many instances the cases against the U.S.-listed Chinese companies will not in the end amount to very much.

 

The Great Lionel Messi: Even those of you that do not follow International soccer have probably seen stories recently suggesting that FC Barcelona’s talented Argentine striker Lionel Messi may be the greatest soccer player ever. Even Time Magazine recently had an article asking the question. If you are wondering what all the fuss is about – which you might well do if you have only seen pictures of Messi, he looks, as one commentator suggested, like the valet parking attendant to whom you would hesitate to give your car keys – you will want to see this video of Messi’s amazing five-goal performance in Wednesday’s UEFA Champions League qualifier game between Barcelona and Bayer Leverkusen. A couple of the goals are the result of terrific passing but the rest of the goals are pure Messi.

 

As one commentator noted on the Eurosport blog (here):

 

To describe Lionel Messi as a good player, a great player, is a statement so facile as to render it pointless. Such is the utter brilliance of the Barcelona forward, we are not just running out of superlatives, as the old cliché has it, we are running out of ways to say we are running out of superlatives. He is a man for which conventional language is no longer sufficient.

 

But before we roll the videotape, let us pause for a few words in appreciation for APOEL Nicosia, the team from Cyprus that is the gatecrasher in the European club championship. If defending champion Barcelona is the team to beat, APOEL is the underdog team to watch and root for. APOEL knocked out the French powerhouse Lyon on Wednesday, in what one commentator said “ might have been the biggest sports moment in Cyprus’s history.”

 

Now, for Mr. Messi:

 

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Though the current bank failure wave has been rolling for several years now and though there have been over 425 bank closures during that period, the much anticipated FDIC failed bank litigation has been slower to gain momentum – that is, perhaps, at least until now. Through the end of 2011, the FDIC had filed 18 lawsuits against former directors and officers of failed banks. But now with the latest FDIC lawsuits, described below, the FDIC has already filed seven so far in 2012, three of which just in the last nine business days. There is a definite sense that the pace of litigation activity is picking up.

 

The latest FDIC failed bank lawsuit was filed in the Northern District of Illinois and relates to the failed Broadway Bank of Chicago, Illinois. Broadway Bank failed on April 23, 2010. The FDIC’s compliant, which can be found here, alleges that at the time of failure that bank had assets of 1.06 billion and that the bank’s failure cost the insurance fund $391.4 million. According to news reports, the failed bank is the former family bank of a former Illinois state treasurer.

The FDIC’s lawsuit, filed in its capacity as the failed bank’s receiver, seeks to recover over $104 million in losses the bank allegedly suffered on commercial real estate loans. The complaint names nine individuals as defendants, seven director defendants and two officer defendants. The complaint asserts claims against the nine defendants for gross negligence; breach of the fiduciary duty of care; and negligence.

The complaint alleges that the defendants “recklessly implemented a strategy of rapidly growing Broadway’s assets by approving high-risk loans without regard for appropriate underwriting and credit administration practices, the Bank’s written loan policies, federal regulations and warnings from the Bank’s regulators.” With regard to the regulators’ warnings, the complaint alleges that the Director Defendants approved “two of the worst Loss Loans” on June 24, 2008 after a meeting earlier the same day with the Bank’s regulators in which the regulators “specifically warned the Director Defendants about the risks that these types of loans posed to the Bank.” That same day regulators had discussed with the Director Defendants the need to “enter a Memorandum of Understanding” that would “impose restrictions on the Bank to stop this type of high risk lending.”

One of the director defendants, James McMahon, who served on the bank’s board from 2003 to December 22, 2008 issues a press release about the FDIC’s complaint, in which McMahon notes that the bank had been founded “by an immigrant who left Greece in 1962 to find a better life in America,” and had become a “vital force in the financial life of the community.” The bank had been “unable to withstand the greatest market decline since the Great Depression and, along with over 400 other community banks” had been “forced to close their doors.” With respect to the lawsuit, McMahon states “with the advantage of 20-20 hindsight, the FDIC now blames Broadway’s former officers and directors for not anticipating the same unprecedented market forces that also surprised central bankers, national banks, economists, major Wall Street firms and the regulators themselves.” McMahon concludes by noting that the allegations in the complaint are “utterly without merit and I expect to be fully vindicated by the Court.”

With this lawsuit, the FDIC has now filed 25 lawsuits against the former directors and officers as part of the current wave of bank failures. The Broadway bank lawsuit is the fifth that the FDIC has filed so far in Illinois, the most of any state except Georgia, where the FDIC has filed six suits. There clearly are more cases in the pipeline, as the FDIC has stated on its website that, as of February 14, 2012, the agency 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 the 25 lawsuits filed so far represent only about half of the lawsuits that had been authorized as of the middle of February, and the 205 individuals named in those 25 lawsuits represent less than half of the individuals against whom lawsuits have been authorized. The number of authorizations undoubtedly will continue to climb in the months ahead, as will the number of lawsuits.

With this latest suit, the FDIC has now filed three new lawsuits in just the last nine business days. These three cases include the February 24, 2012 lawsuit filed in the Northern District of Georgia involving two former officers of the failed Community Bank and Trust of Cornelia, Georgia (about which refer here, scroll down) as well as the March 2, 2012 lawsuit filed in the Northern District of Georgia against 12 former directors and officer of the failed Freedom Bank of Commerce, Georgia (about which refer here, scroll down). There is a definite sense that the pace of the FDIC’s litigation activity has picked up. Though this latest lawsuit was filed well in advance of the three-year statute of limitations, the two prior suits were much closer to the cut-off, and with the three-year deadline date looming for the failed bank class of 2009 – the largest year for failed banks – it seems likely there will be increasing numbers of suits ahead.

Very special thanks to John M. George, Jr. of the Katten & Temple law firm for sending me a copy of the Broadway bank complaint and for sending me James McMahon’s press release. The Katten & Temple law firm represents Mr. McMahon.

Corruption Investigation Follow-On Civil Suits Reach Canada: The occurrence of follow-on civil actions being filed in the wake of corruption and bribery investigations is a phenomenon I have noted frequently on this blog. It now appears this type of follow on civil suit has now reached Canada.

As discussed here, the share price of SNC-Lavalin Group recently declined sharply after the company announced an internal investigation of the accounting for certain payments in connection with a company project in Libya . As reflected in their March 1, 2012 press release (here), plaintiffs’ lawyers have now initiated a securities class action lawsuit in Quebec Superior Court against the Company and certain of its directors and officers.

The plaintiffs’ complaint alleges that the company violated its continuing disclosure obligation by misrepresenting the company’s internal controls and accounting. Among other things the complaint alleges that an anonymous letter the company’s senior management alleged that for years shell companies had been used to funnel money from SNC-Lavalin to members of the Libya’s Gadhafi family. UPDATE: On January 12, 2016, the plaintiffs filed their fourth amended consolidated complaint, which can be found here.

The phenomenon of follow on civil litigation has been a factor in the U.S. for years. As anticorruption efforts spread elsewhere, the likelihood is not only that more companies will face scrutiny from government officials, but they may also face civil litigation as well. At a minimum this case shows how Canada’s litigation environment is continuing to evolve, and its litigation landscape is becoming both more extensive and more complex.

Special thanks for a loyal reader for alerting me to this case.

On March 7, 2012, Towers Watson released the report of its 2011 Directors and Officers Liability Survey. This report, which summarizes the results of the firm’s annual survey, reflects the survey respondents’ D&O insurance arrangements and purchasing patterns. The annual Towers Watson report is much-anticipated for its insights into the practices of corporate insurance buyers, and this year’s report does not disappoint. The 2011 report can be found here.

 

The Survey Pool

As with the results of any survey, it is very important in connection with this survey report to understand the characteristics of the survey participants. In particular, it is very important to understand that the pool of respondents to the 2011 survey is heavily weighted toward very large companies. Excluding nonprofits and charities, the average annual revenues of the survey participants was $4.254 billion. The average asset size (excluding nonprofits and charities) was over $5 billion. The average market capitalization of the public company participants was $5.3 billion. Only 19 of the public company participants had market caps under $1 billion. Even the private company respondents were very large; about half of the private company respondents had assets over $1 billion.

 

The respondents were also concentrated in certain industries. Over half of the respondents were concentrated in just four industries: financial service/insurance; manufacturing; energy and utilities; and financial services excluding insurance. The pool of respondents including only small percentages of respondents from other industries, including communications; natural resources; transportation; and healthcare/pharmaceuticals.

 

The Survey Results

Over half of the survey respondents reported that the premium charged for their primary D&O insurance policy had declined at the last renewal. However, this result diverged between the public company and private company respondents. Among public companies, 62% reported a decline in the premium for their primary D&O insurance policy, but only 35% of private company respondents reported a decline. In addition, a slightly higher percentage of private company respondents saw a premium increase (18%) compared to public companies (14%). The report states that these data can be interpreted to suggest “a potential hardening in the private/nonprofit segment with insurers looking to drive rates.”

 

The survey’s information regarding limits purchasing patterns is very highly reflective of the respondent pool’s composition of very large companies. Thus, excluding charities and nonprofits, the average total limits purchased among all survey respondents is $98 million. Even among private company respondents, the average total limits purchased was $36.3 million. The average total limit for public company respondents was $126.8 million. However, among public companies with market caps under $250 million, the average total limits purchased was $25.7 million and the median was $15 million. Among private companies with assets under $250 million, the average limits purchased was $8.3 million and the median was $5.5 million. A quarter of public companies reported that they had increased their limits at the most recent renewal, compared to 14% of private and nonprofit organizations.  

 

Over three quarters (77%) of respondents reported that, in addition to primary D&O insurance, they purchased excess insurance from at least one additional insurer. 57% of all respondents purchased excess Side A or Side/DIC insurance. However, 78% of public company respondents reported that they purchased Side A or Side A/DIC insurance. Consistent with the heavy representation in the respondent pool of very large companies, the average Side A and Side A/DIC limits purchased among public company respondents was $54.6 million, and the median was $30 million. These average and median figures were much lower for smaller public companies; for example, for public companies with market caps under $250 million, the average was $13 million and the median was $10 million.

 

Though the majority of respondents said that the most important consideration in purchasing D&O insurance was the scope of coverage for the directors, only a very small percentage of respondents reported that the purchased independent director liability insurance. For example, only 7% of public company respondents reported that they purchased IDL insurance.

 

Excluding charities and nonprofits, 56% of respondents, and 68% of public company respondents, reported that they have international operations. Of the public companies with international operations, 39% reported that they purchased local D&O insurance policies in foreign jurisdictions, while 17% of private companies reported that they have international units that purchase local policies. These figures undoubtedly reflect the predominance in the respondent pool of larger organizations, as the survey itself showed that the larger the company, the more likely it was to purchase local policies. The report itself notes with respect to the local policy purchasing patterns that the “results continue to demonstrate the strides organizations have made in understanding the complexities and exposures when conduction business outside the United States.”

 

66% of the survey respondents reported having had a D&O claim in the past then years. The larger companies were more susceptible to claim activity, with the largest companies reporting the highest levels of claim activity. About two-thirds of respondents who had claims reported that they were satisfied with their insurers’ handling of the claim, but nearly 20% of the respondents reported that they were dissatisfied with how the insurers handled the claims. (This 20% figure is consistent with same level of dissatisfaction reported in the 2010 survey.)

 

Discussion

The Towers Watson survey report is a very valuable resource for the D&O insurance industry and for D&O insurance buyers. The survey report provides valuable insight into limits purchasing patterns, program structure and program design. All of us in the industry should be grateful that Towers Watson has undertaken the survey and made its report publicly available.

 

Anyone using or relying on the survey data, however, should take into account the fact that the pool of survey respondents was weighted toward very large companies, even among the private company respondents. Because a number of the survey results directly reflect that presence of a significant number of larger companies among the respondents, some results may be less relevant for smaller companies. In addition, as noted above, the survey pool was heavily weighted towards companies in certain industries. This should be taken into account in connection with companies from industries that were not as well represented in the respondent pool.

 

The survey’s results with respect to Side A purchasing patterns and with respect to the inclusion of local policies among companies with international operations are interesting. These results show the extent to which these program structures are becoming pervasive, at least among larger public companies. 

 

The survey’s results regarding the survey respondents’ claim experience represents something of a mixed review for the industry. On the one hand, about two thirds of respondents were generally satisfied with the way their insurers handled their claims. On the other hand, fully one out of five of respondents was dissatisfied, and this level of reported dissatisfaction was consistent in both the 2010 and the 2011 survey reports. This level of reported dissatisfaction suggests that there may be significant opportunities for the D&O insurance industry to deliver claims services in more customer focused way.

 

One final note about the survey. Everyone in the industry benefits from this survey and the survey report is a resource that is available to everyone. I hope that the industry will keep this in mind in future years and in particular make sure that the survey itself is distributed as broadly as possible so that the survey results are as fully representative as possible. Everyone can do their part to make the survey results even more meaningful in the future.

 

Very special thank to the survey report’s principal author, Larry Racioppo of Towers Watson, for providing me with a copy of the report.

 

The Latest FDIC Failed Bank Lawsuit: On March 2, 2012, the FDIC filed its latest failed bank lawsuit, against certain former directors and officers of the failed Freedom Bank of Georgia, of Commerce Georgia. The FDIC’s complaint, which was filed in the Northern District of Georgia, can be found here. In its lawsuit, the FDIC seeks to recover over $11 million dollars it alleges was caused by the twelve individual defendants’ negligence and gross negligence.

 

With this lawsuit, the FDIC has now filed 24 lawsuits in connection with the current wave of bank failures, including six so far in 2012. Of the 24 lawsuits overall, six have involved failed Georgia banks. Like many of these cases, this latest suit was filed just short of the expiration of the three-year statute of limitations. (The March 2 filing date came shorty before the third anniversary of the bank’s March 6, 2009 closure.) Because so many banks failed during 2009, it may be expected as the current year progresses we will be seeing an increasing number of lawsuits involving the class of 2009.

 

Scott Trubey’s March 6, 2012 Atlanta Journal Constitution article about the Freedom Bank case can be found here.