In its latest failed bank lawsuit, the FDIC, in its capacity as receiver of the failed County Bank of Merced, California, has filed a complaint against five former officer of the bank. The FDIC’s complaint was filed in the United States District Court for the Eastern District of California on January 27, 2012, just short of three years from the date of the bank’s closure. A copy of the FDIC’s complaint can be found here.

 

County Bank failed on February 6, 2009 and the FDIC was appointed as its receiver. The FDIC’s lawsuit has been filed against five former officers of the bank, each of whom served on the bank’s Executive Loan Committee. The complaint alleges claims against them for negligence and breach of fiduciary duty, in connection with 12 loans the bank made between December 2005 and June 2008, which the FDIC says caused the bank losses in excess of $42 million.

 

The FDIC alleges that the five defendants caused or allowed the bank to make “Imprudent real estate loans, typically for the construction and development of residences.” The complaint alleges that the bank’s real estate lending represented “significant departures from safe and sound practices.” The complaint further alleges that the bank’s management “disregarded the Bank’s credit policies and approved loans to borrowers who were not credit worthy and/or for projects that provided insufficient collateral and guarantees for repayment.”  The complaint further alleges that the bank’s management “unwisely continued risky commercial real estate lending in a deteriorating market even after becoming aware of the market decline.”

 

The FDIC filed its complaint only days before the third anniversary of the bank’s closure – that is, just before the expiration of the statute of limitations period within which the FDIC could bring its claims. Up until this point during the current bank failure wave, the FDIC has been proceeding very deliberately, in most cases filing lawsuits only after two years or more has elapsed since the date of bank closure.

 

The FDIC’s filing of this action just before the end of the limitations period is reminder that notwithstanding the FDIC’s deliberate pace in filing these lawsuits, the FDIC does face certain absolute time deadlines. Moreover, this particular bank’s closure occurred at a time when the number of bank closures began to escalate rapidly. The FDIC took control of increasing numbers of banks as 2009 progressed and on in to early 2010, which means that the limitations period within which the FDIC will have to file lawsuits will be about to run out for a host of failed banks in the coming months.

 

There were a total of 140 bank failures in 2009, ten in February 2009 alone, after only 25 bank failures in all of 2008. The numbers of bank closures escalated even further after February 2009. Indeed, there 95 bank failures in the last six months of 2009. In other words, as we move through 2012, the FDIC will be approaching the statute of limitations deadline for increasing numbers of banks.

 

In light of the approaching limitations deadline the 2009 bank failures, it seems likely that over the next few months we will see a surge in case filings, many, like the complaint here, filed at the very end of the applicable limitations period.

 

In any event, the FDIC’s action in the County Bank case represents the twenty-first failed bank action the agency has filed so far as part of the current bank failure wave, and already the third so far in 2012. The FDIC’s first two actions this year, both of which were filed in Puerto Rico, are described here.

 

Year End Securities Litigation Review Webinar: On February 1, 2012 at 11:00 am EST, I will be participating in a year-end securities litigation review webinar sponsored by Advisen . The webinar will be moderated by Advisen’s Jim Blinn and will also include my good friend David Williams of Chubb. The webinar is free. To register and for additional information, refer here.

 

One feature of the recent changing mix of corporate and securities litigation has been the rise in the filing of follow-on derivative lawsuits in the wake of securities class action lawsuit filings. As Wilson Sonsini partner Boris Feldman recently noted, “like a moth drawn to a candle,” the derivative bar watches class action filings and “just cannot resist cribbing the class action complaints, even though the company’s setback does not suggest any breach of fiduciary duty.”

 

The rise in the number of follow-on derivative lawsuits seems to be attributable to the efforts of smaller or newer plaintiffs’ firms to try to get a piece of the action. The problem with these kinds of cases is that they just compound the defendant company’s litigation expense and threaten distraction from or even prejudice to the company’s defense in the class action suit – all as a result of a derivative action supposedly brought on the company’s behalf.

 

One way to try to reduce at least some of the potential evils associate with these follow-on suits would seem to be to stay the derivative suit until the securities suit has concluded. In many cases, the derivative plaintiffs agree to a stay. The question whether the court itself should order a stay of one of these follow-on suits was addressed in a January 27, 2012 Delaware Chancery Court opinion (here) in a derivative action involving SunPower Corporation.

 

The litigation arose after SunPower announced that it would have to restate its prior financials due to the underreporting of expenses at its Philippine manufacturing operations. Following these announcements, the company and several of its directors and officers were named as defendants in securities class action lawsuits (later consolidated) in the Northern District of California. The consolidated class action case was initially dismissed without prejudice, but the class action plaintiffs’ amended pleading survived the defendants’ renewed motion to dismiss. The court’s December 19, 2011 denial of the defendants’ renewed motion to dismiss can be found here.

 

Following the filing of the securities class action lawsuits, additional plaintiffs filed five derivative lawsuits in California state court, seeking indemnification from the individual defendants for any expenses the company incurs in the class actions. Those five California derivative actions were stayed by agreement.

 

However, yet another plaintiff filed a separate derivative action in Delaware Chancery Court, after having first exercised his rights to inspect the company’s books and records. The Delaware plaintiff contended that his access to confidential company documents has shown that the company had incurred million of dollars of costs, even before the class action lawsuits were filed, due to the accounting issues with the company’s Philippine operations.

 

The defendants moved to stay the Delaware plaintiffs’ action, arguing that proceeding with the derivative suit would prejudice the company’s defense in the securities suit. The defendants also argued that because the relief the Delaware derivative plaintiff seeks is largely contingent on the outcome of the securities suit, it would be premature for the derivative suit to proceed. The derivative plaintiff argued that because his filings were under seal, the defendants overstated the prejudice, He also argued that the because of the $8 million in expenses the defendants had already incurred in connection with the restatement, there were noncontingent damages ripe for adjudication.

 

In granting the defendants’ motion for a stay, Vice Chancellor Donald F. Parsons, Jr. concentrated on the overlap between the factual allegations in the class action lawsuit and in the derivative lawsuit. Both actions accused the individual defendants of having knowledge of the alleged wrongdoing or having ignored red flags. But, Parsons noted, the derivative plaintiff “makes these arguments on behalf of the corporation while the Securities Class Action plaintiffs make them against SunPower.”

 

Parsons said that “it is not practical for two actors … to pursue divergent strategies in two simultaneous actions on behalf of the same entity.” As a result, “simultaneous prosecution of both actions” would be “unduly complicated, inefficient and unnecessary.” The prosecution of the derivative suit would involve “taking actions designed to refute the merits of the Company’s defense of the Securities Action and vice versa.” This creates a “significant risk that the prosecution of [the derivative suit] will prejudice SunPower.” Parsons notes there is also a significant risk of inconsistent rulings.

 

Parsons also rejected the plaintiffs’ argument that the derivative suit was ripe for adjudication because at least a portion of the claimed damages are not contingent. Because the fill extent of the alleged damages cannot be known until the class action is resolved, “the wisdom as a practical matter of treating the indemnification claims as unripe until the liability for which the indemnification is sought is determined is plain.” Because the derivative claims cannot be adjudicated in full, the sensible ordering of events is for the class action to go first.

 

Accordingly, Parsons ordered the derivative suit to be stayed indefinitely, allowing the plaintiff to seek to have the stay lifted upon the earlier of the final dismissal of the securities class action or December 31, 2012.

 

Discussion

As discussed in a January 27, 2012 memorandum from the Morrison Foerster law firm (here), Vice Chancellor Parsons ruling provides “the clearest articulation to date of the danger follow-on derivative actions poste to corporations on whose behalf they are supposedly brought.” The ruling, according to the memo, “should prove a valuable guide to courts” trying to manage simultaneous derivative and class action litigation in the future.

 

The larger context for the problems Vice Chancellor Parson addressed is the increasing proliferation of conflicting litigation surrounding any type of corporate event. The phenomenon of multiple class action lawsuit filings following a stock drop has long been part of the corporate and litigation scene. These kinds of cases are more easily consolidated and managed. What has changed is increasing numbers of follow on derivative lawsuits, often, as here, filed in multiple jurisdictions, and which are not so easily consolidated or coordinated.

 

Just to quantify this problem and to proviide a little bit of historical context, in its 2011 securities class action litigation report, NERA Economic Consulting reported that the number of settled securities class action cases that were accompanied by parallel derivataive lawsuits has grown dramatically in recent years. NERA reports that prior to 2002 (when the Sarbanes-Oxley Act was enacted) the number of settled cases that were accompanied by a parallel derivative action ranged between 11 and 22 percent a year. However, from 2007 through the first half of 2011, the range was from 56 to 65 percent.

 

The threat of prejudicing the defense of the securities class action lawsuit is only one of the problems associated with the increase in follow-on derivative litigation. The proliferation of multiple simultaneous suits in multiple jurisdictions imposes a costly and vexatious burden on the companies involved. The SunPower case provides a good illustration of these problems. The Delaware derivative plaintiffs alleges that the company “is largely self-insured so that expense, settlements or damages in excess of $5 million in these actions will not be recoverable” under insurance. The costs associated with the derivative plaintiffs’ action simply add to this burden. As NERA noted in its year-end securities litigation report, in commenting on the phenomenon of folllow-on derivative lawsuits, "to the extent [the individual defendants] have indemnification agreements or continue to hold board or management positions, derivative litigation may prove expensive for the issuer." 

 

Unfortunately for the company, the derivative action has merely been stayed, not dismissed, which raises the question of what will happen in the future. The likelihood is that the class action lawsuit will settle at some point. (Yes there is a chance that it will be resolved on summary judgment, and an even smaller chance that it will be resolved at trial, but the greatest likelihood is that it will be settled.) Given the apparent limited amount of insurance available, the class action settlement will likely be modest. And if the case settles, the stipulation undoubtedly will include the usual defense disclaimers of liability or wrongdoing.

 

At that point, the stayed derivative litigation will finally be ripe. But at that point, the remaining insurance will almost certainly be gone. The derivative plaintiffs, without the benefit of any factual findings in the class action suit, will have to try to establish liability, forcing the individual defendants to incur additional defense expenses (which almost certainly would be advanced to the defendants under the company’s indemnification provisions), all to try to extract some payment out of the personal assets of the individual defendants. Given these factors, it seems highly probable that any ultimate recovery in the derivative suit – and therefore any benefit to the company – would be slight. But in the meantime, the company and its senior management are forced to endure the burden and expense of continued, redundant litigation.

 

There may be (infrequent) occasions where this kind of liltigation-about-litigation is not burdensome, vexatious and wasteful. Nevertheless, it is very hard to observe the expansion of this kind of follow-on derivative litigation with anything but alarm. If, as seems likely at least for now, this kind of litigation is going to continue to increase, it is going to be increasingly important for courts to develop rules of the road, if for no other reason to make sure that these suits do not further harm the very companies on whose behalf they supposedly are brought. That is the reason I think Vice Chancellor Parsons ruling is important, because it represents a practical recognition that the courts are going to have to police things to prevent the whole process from getting out of control.

 

I know that the plaintiffs’ attorneys behind these cases will argue that the cases are necessary to protect companies from the expenses the corporate defendants are forced to incur when alleged management misconduct leads to shareholder litigation. Other observers might perhaps more accuratey characterize these cases as nothing more than a vehicle by which the plaintiffs’ firm involved is seeking to extract a fee.  I would argue that a better way to address the cost of litigation problem is through a prudent risk management approach including a comprehensive program of D&O insurance. If the company has an appropriate D&O insurance program in place, the class action litigation costs would not fall on the company, and there would be no even theoretical need for (or indeed any justification for) these types of follow-on lawsuits in most circumstances.

 

At least from the allegations Vice Chancellor Parsons recites in his opinion, it appears that this company carried only nominal amounts of D&O insurance. The amount and extent of litigation in which this company has become involved underscores the fact that in this day and age, well-advised firms should carry more than minimal amounts of insurance. Indeed, this case shows that in a changing litigation environment, traditional notions of limits adequacy may no longer be sufficient. The possibility that companies may have to be prepared to fund a multi-front defense suggests that companies may need more insurance than in the past in order to be fully protected.

 

A Dated Debate: We generally refer to the year 1901 as “nineteen-oh-one.” Similarly, 1909 is “nineteen-oh-nine.” But we refer to 1910 as “nineteen-ten” not “nineteen-and-ten.” My point here is that conversational conventions eventually tend toward to simplest and most economical expression.

 

In our current century, 2001 is referred to as “two thousand and one.” 2009 is referred to as “two thousand nine.” I suspect the convention will shift as the century progresses. For example, when we finally reach 2020 (if we do in fact make it that far), I feel quite certain the year will be referred to as “twenty-twenty” and not as “two thousand twenty.” Similarly, 2021 will be “twenty-twenty-one,” not “two thousand twenty one.”

 

Which brings me to the current year, 2012. Why do we refer to it as “two thousand twelve” rather than “twenty twelve”? I am not sure why, but “twenty twelve” is not in widespead usage. I feel quite certain that eventually we will all shift to the “twenty – “ formulation, just as a century ago, usage shifted to the “nineteen –“ custom.

 

Maybe it won’t be until 2020, but the “twenty –“nomenclature will eventually be the conversational way to refer to years during the current century. It may be too late now to change the way we refer to the current year, but it still may be possible to make some progress on this now.

 

As part of our forward-looking mission here at The D&O Diary, we would like to propose that we all get an early start on the rest of the century. Specifically, and with next year still a good eleven months off, we would like to respectfully suggest that everyone make a mutual commitment to refer to next year as “twenty-thirteen” rather than as “two thousand thirteen.” Why wait until 2020 to get on with the future?

 

I am sure many of you are wondering why I am so concerned about this. Here at The D&O Diary, we consider it part of our job to worry about these things so you don’t have to. Now remember, its “twenty thirteen,” not “two thousand thirteen.” O.K., everybody back to work.

 

There’s Nothing Quite Like a Real Book: Ironically, I first saw this video on my iPad. Ironically, it is a video about the magic of books. Irony notwithstanding, it is still a pretty cool video.

 

The changing mix of corporate and securities litigation is a recent phenomenon on which I have frequently commented on this blog. While identifying the fact of the change is relatively straightforward, explaining it is more challenging. According to a January 11, 2012 article in The Review of Securities & Commodities Regulation entitled “Shareholder Litigation After the Fall of an Iron Curtain” (here), written by Boris Feldman of the Wilson Sonsini law firm, the changing pattern in corporate and securities litigation filings is a result of changes in the plaintiffs’ securities litigation bar – particularly, the elimination of a dominant plaintiffs’ firm. These changes, according to Feldman, have resulted in the five recent securities litigation trends he identifies in his article.

 

For many years, according to the article, the Milberg Weiss law firm was the “dominant securities plaintiffs’ law firm.” Even after it split into two separate law firms on the East and West Coasts, it was, according to Feldman, “the 800-pound gorilla of the shareholder litigation jungle.” In addition to dominating the litigation, the firm “exercised some discipline” on the rest of the plaintiffs’ securities bar, demonstrating “substantial influence over smaller firms and parvenus.”

 

Now, “for reasons of retirement and incarceration,” the familiar patterns of the past have been disrupted. Feldman analogizes this disruption in the standard order of the securities litigation world to the disruptions that followed in the political world in the wake of the fall of the Iron Curtain.

 

Without a dominant firm, smaller firms are now “free agents,” and new entrants have appeared. These smaller and newer players are “less predictable (and often less rational).” According to Feldman, these changes in the plaintiffs’ bar explain five trends in shareholder litigation he identifies in his article.

 

First, Feldman notes the recent rise in multi-jurisdiction litigation, where a single company can face multiple suits in different jurisdictions arising out of the identical factual circumstances. Feldman notes that although this might have happened from time to time in the past, when it did, the plaintiffs firms worked things out among themselves. But this is far less common now. Instead, firms that have “decided they have a better shot at participating in the litigation” have consciously chosen to file outside the company’s home jurisdiction, particularly in connection with shareholder derivative litigation. This multiplication of litigation has forced corporate defendants to have to defend themselves in multiple courts, resulting in added expense and uncertainty.

 

The second trend Feldman notes is the proliferation of demand letters. In the past, plaintiffs would bypass this statutory prerequisite to the filing of derivative litigation, out of a concern that the demand represented a concession that demand was not futile. More recently, however, demand letters have become “fashionable,” as secondary players, eager “to get in on the action,” will submit a demand even if derivative litigation has already been filed. Feldman notes that this may “actually be advantageous to defendants,” as courts will often stay derivative litigation while the defendant company considers the demand.

 

Third, Feldman notes the rise of derivative litigation paralleling shareholder class action lawsuits. In the past, the type of stock drop that would trigger a 10b-5 class action would not also spawn a derivative suit, at least in the absence of a major accounting problem and restatement. Now, parallel derivative suits are “de rigeuer.” The plaintiffs bar now “just cannot resist cribbing the class complaints,” even though the company’s setback does not suggest any breach by the company’s board. This change is attributable to a simple explanation: “different suits for different folks.”

 

The fourth trend Feldman notes is the automatic filing of litigation when a merger is announced. When “giants roamed the earth,” there was merger objection litigation, but not every single time a merger was announced. Now the litigation is pervasive and it follows a standard pattern of an initial suit alleging a breach of fiduciary duty after the deal is announced, followed by an amended complaint alleging disclosure violations after the proxy has been filed. The other change Feldman notes about this litigation is that in the past, the litigation went away once the deal closed, as the defendants defeated the preliminary injunction seeking to block the deal. Now the merger suits are increasingly surviving the closing, based on amended allegations that “range from weak to laughable.” Though few of these suits result in a payout, the plaintiffs’ lawyers “persist,” seeking “a place in the sun.’

 

Finally, Feldman notes the rise in actions under Section 220 of the Delaware Code seeking to inspect the corporate defendant’s books and records. Feldman says there has been more of this litigation in the past year than in all prior recorded history. In part this rise is due to encouragement from members of the Delaware judiciary. But this rise is also attributable to a cottage industry of plaintiffs’ firms eager to “get in on the action.” Defendant companies find these suits impossible to avoid; whatever they produce, the plaintiffs ask for more until they have “created an impasse and gotten a ticket to sue.” Feldman suggests that this “epidemic” of Section 220 litigation is “unlikely to be solved without intervention by the Delaware legislature.”

 

Feldman closes by suggesting that in the current, rapidly changing world, the “more fragmented world of plaintiffs’ securities lawyers will continue to amaze and surprise us with their innovation and resilience.”

 

Very special thanks to Boris Feldman for sending me a link to his article.

 

In the FDIC’s latest lawsuit filed in its role as receiver of a failed bank, the FDIC not only named as defendants nineteen former directors and officers of the failed bank, but also included as defendants seventeen of their spouses and the failed bank’s D&O insurer. A copy of the FDIC’s January 18, 2012 complaint, filed in the agency’s capacity of receiver of the failed R-G Premier Bank of Puerto Rico, can be found here. UPDATE: See also the note below regarding the separate actoin filed in the District of Puerto Rico, involving the directors and officers of teh failed Westernbank Puerto Rico, which also involves D&O insurer defendants.

 

As discussed here, R-G Premier Bank failed on April 30, 2010. According to the FDIC’s complaint, its closure represented “one of the largest bank failures in Puerto Rico’s history, costing the Deposit Insurance Fund over $1.46 billion in losses.”

 

In its complaint, the FDIC asserts claims for gross negligence against certain former directors and officers of the failed bank, alleging that the bank’s losses and ultimate failure arose from the bank’s aggressive commercial lending. The complaint alleges that the commercial lending operations were essentially unsupervised, even though the commercial lending department “recklessly” pursued “explosive commercial loan growth.” The complaint alleges that the director and officer defendants “ignored numerous warnings from multiple sources about serious problems” in the bank’s management and lending operations.”

 

The complaint alleges that the director and officer defendants “exacerbated and accelerated” the bank’s loan losses “by robotically approving virtually any loan request that crossed their desks, even though such loan requests had been processed through the obviously deficient lending structure they had created at the Bank.” The FDIC bases its claims against the directors and officers on the individuals’ alleged “grossly negligent failure to exercise due care and any business judgment”; “grossly negligent failure to inform themselves about and to exercise adequate oversight over the Bank’s lending functions” and on the allegations that the defendants “knew or should have known” that the alleged problem loans identified in the complaint “were extremely unlikely to be paid back, and also the equally clear risks of injury to the Bank from the Bank’s inappropriate lending structure.”

 

The FDIC seeks to recover damages “in excess of $257 million” the bank allegedly incurred “as a result of the breaches of fiduciary duties and gross negligence” of the director and officer defendants in connection with 77 transactions identified in the complaint. The claims against the 17 spouses and conjugal partners who are also named as defendants “are based on their legal relationship to the Directors and Officers.”

 

The complaint also names as a defendant the insurer that issued two D&O liability insurance policies to the bank’s holding company. The two policies consist of a primary $25 million policy and a $10 million excess policy, both issued by the same insurer. Both policies are alleged to have had policy periods running from November 30, 2008 to December 30, 2009, with an optional extension period until December 30, 2010. The FDIC alleges in its complaint that the optional extension period was exercised on December 29, 2009. The complaint also alleges that on December 23, 2010, the FDIC sent a demand for civil damages to the directors and officers, with a copy of the demand also sent to the D&O insurer.

 

In Count III of the complaint, which is denominated as a “Claim for Direct Relief,” the FDIC alleges that its claims against the directors and officers “fall within the coverage provided” under its policies, and that the insurer is “liable” for “$35 million in damages caused to the Bank by the gross negligence of the Defendants.” The complaint seeks a judgment against the insurer “for at least $35 million.”

 

Discussion

In prior posts discussing the FDIC’s litigation against former director of failed banks, I have suggested that the real battleground for many of these suits may be the FDIC’s coverage disputes with the failed bank’s D&O insurer. This case, in which the FDIC named the D&O insurer as a defendant along with the former directors and officers, seems to make that aspect of these circumstances explicit.

 

This is not the first occasion on which the FDIC has directly named a failed bank’s D&O insurer as a defendant in a liability action. (For a prior example, refer here). Those readers uncertain how the FDIC is purporting to proceed directly against the insurer without first obtaining a judgment against the individual insureds may be interested to know that, at least according to sources I have reviewed online, Puerto Rico has a direct action statute, allowing those claiming injury from a torfeasor’s action to proceed directly against the tortfeasor’s liability insurer. At least based on my quick review of the subject, that would seem to explain the FDIC’s move of including the D&O insurer as a defendant in the suit.

 

Without being able to go behind the scenes it is hard to know for sure what the basis of the coverage action may be. Just based on the date on which the D&O policies originally incepted, it is not unlikely that the policies when issued included a regulatory exclusion. Some insurers have also taken the position that the insured vs. insured exclusion found in most D&O policies precludes coverage for claims brought by the FDIC as receiver, which is an issue that undoubtedly will be litigated heavily in connection with many of these failed bank coverage disputes.

 

It is also possible that the D&O insurer is asserting coverage defenses arising from the fact that the bank did not fail and the FDIC did not assert claims against the directors and officers until after the inception of the policies’ extensions. The insurer may be asserting defenses based on the timing of these various events relative to the policies termination dates and reporting deadlines. At least according to the FDIC’s recitation in the complaint, it appears that the FDIC did assert its claim against the directors and officers prior to the expiration of the extension.

 

The FDIC’s assertion of claims against the spouses and conjugal partners are obviously designed to allow the FDIC to be able to enforce any judgment against property jointly held by the individual directors and officers and their spouses. This is not the first occasion on which the FDIC has asserted claims against spouses of failed bank directors and officers. For example, in connection with the FDIC’s lawsuit against the certain former officers of Washington Mutual, the FDIC also asserted claims there against two of the officers’ spouses. The FDIC’s assertion of claims against the spouses is an illustration of the importance of the language found in many D&O policies which extends the definition of the term “Insured Persons” to include the spouses or domestic partners of the insured entity’s directors and officers, but only to the extent the spouses or partners is a party to a claim as a spouse to the director or officer.

 

One anomalous feature of the bank’s D&O insurance structure is that the both the bank’s primary D&O insurance policy and its excess D&O insurance policy were both  issued by the same D&O insurer. That is an unusual arrangement for many reasons, not the least of which is that many insurers would be reluctant to have such concentrated exposure to any one risk. The extent of the insurer’s exposure is one more reason I suspect that the insurer may considered its insurance of this risk as well defended, for example through the inclusion of a regulatory exclusion or even perhaps the preclusion of coverage for acts that incurred prior to the policies’ November 30, 2008 inception.

 

Of course, I could be wrong about the presence of these defensive features, but I still think it is unusual that the insurer would have take a full $35 million exposure to one financial institution, especially given the events that were taking place in the global financial marketplaces at that time.

 

The FDIC’s lawsuit against the former directors and officers of R-G Premier Bank of Puerto Rico is the nineteenth lawsuit the FDIC has filed in connection with the current wave of bank failures, and the second so far during 2012. The FDIC undoubtedly will be filing many more suits in the months ahead. Indeed, on the FDIC’s website page providing information about the agency’s litigation efforts, the FDIC states that as of January 18, 2012, the FDIC has authorized suits in connection with 44 failed institutions against 391 individuals for D&O liability with damage claims of at least $7.7 billion. This includes 19 filed D&O lawsuits (2 of which have been dismissed after settlement with the named directors and officers) naming 161 former directors and officers. In other words, even just looking at the suits authorized so far, there are many law suits yet to come. And the FDIC has been authorizing increased numbers of suits every month, so the likelihood is that many more lawsuits will be authorized and filed as we head forward in 2012 and beyond.

 

UPDATE: Following my initial publication of this post, a loyal reader provided me with a copy of the January 20, 2012 Amended and Restated Complaint in Intervention that the FDIC filed in the District of Puerto Rico in an action involving both the former directors and officers of the failed Westernbank and certain of their spouses, as well as the D&O insurers for Westernbank’s holding company. A copy of the FDIC’s complain can be found here.

 

Regulators closed Westernbank on April 30, 2010, which according to the FDIC’s complaint, cost the insurance fund $4.25 billion. In October 2011, certain of the former Westernbank directors and officers had sued the bank’s primary D&O insurer in state court in Puerto Rico. The FDIC as receiver for Westernbank moved ot intervene in the state court action, and on December 30, 2011, removed the state court action to the District of Puerto Rico. On January 20, 2012, the FDIC filed its amended complaint in intervention, in which it named as defendants certain additional directors and officers, as well as the excess D&O insurers in the bank’s D&O insurers program. The FDIC expressly asserts its claims against the D&O insurers under Puerto Rico’s direct action statute. Certain of the individual direcrors and officers have moved to remand the action back to state court.

 

The FDIC’s action against the former directors and officers of Westernbank represents the twentieth action that the agency has filed so far as part of the current wave of bank failures, and also represents yet another example of a case where the real battleground may be the D&O insurance coverage dispute.

 

The First Bank Closures of 2012:  This past Friday night, the FDIC also took control of the first three failed banks of 2012, as reflected here. The FDIC closed banks in Florida, Pennsylvania and Georgia, the first three banks to fail in over a month. The presence of a Georgia bank among the first group of bank failures is hardly a surprise, as the bank’s 74 bank failures during the period January 1, 2008 through December 31, 2011 is by far the highest total for any state during the period. Florida, with 58 bank failures during that period, has the second highest total.

 

Is Morrison the "Global Securities Case of the Decade"?: In a very interesting and thorough January 20, 2012 article on the Am Law Litigation Daily (here), Michael Goldhaber asks the qustion whether or not the Supreme Court’s 2010 decision in Morrison v. National Australia Bank is the Global Securities Case of the Decade (so far, at least). Among other things, Goldhaber reviews the wide swath that Morrison has cut through cases pending in the district courts, noting that "perhaps no other precedent has ever cut down so many claims of such value so rapidly." The article details the effects that the Morrison opinion has had and is likely to continue to have.

 

Teaching Fellowship at UCLA Law School: Some readers of this blog may be very interested to know that the Lowell Milken Institute for Business Law and Policy at the UCLA Law School is now accepting applications for the Lowell Milken Institute Law Teaching Fellowship. The fellowship is a full-time, year-round, one or two-year academic year-position beginning in July 2012. The position involves teaching, research and writing, as well as other duties. Applicants must already hold a JD. The application deadline is March 1, 2012. Further information about the fellowship program can be found here.

 

Now for Something Different: For today’s musical interlude, and as a complete contrast to the North Korean Kindergarten Guitar Quintet whose oddly disturbing video I posted a few days ago, here is a video of a very different kind of guitar quintet, involving as it does one guitar and ten hands. I understand this video and the song are both very popular in certain circles. I suspect it would not catch on in North Korea. The song is “Somebody That I Used to Know” by the group Walk Off the Earth.

 

Securities class action filings rise slightly in 2011 compared to the prior year but remained below historical averages according to the annual study of Cornerstone Research, prepared in conjunction with the Stanford Law School Securities Class Action Clearinghouse, which was released today. A copy of the report can be found here, and Cornerstone Research’s January 19, 2012 press release can be found here. My own analysis of the 2011 securities class action lawsuit filings can be found here.

 

According to the report, there were 188 securities class action lawsuit filings in 2011, compared to 176 in 2010, and compared to the 1997 to 2010 average annual average number of filings of 194. The two largest factors in the number of 2011 filings were the heightened number of M&A-related filings (43) and the elevated number of filings involving U.S.-listed Chinese companies. (33).

 

The Cornerstone Research report contains a number of insights about the 2011 filings beyond those that have appeared in previously published analysis of the filings. Among other things, the report notes that three percent of companies listed on the three major U.S. exchanges (NYSE, NASDAQ and Amex) were sued in securities suits in 2011. This represents the highest annual percentage since 2004 and is above the 1997 to 2010 annual average percentage of 2.4 percent.

 

On the other hand, in 2011 only 3.2 percent of S&P 500 companies were sued, “making it the least litigious year for S&P 500 companies since 2000.” Historically, larger companies have been more likely to be sued in a securities class action lawsuit, and that trend continued in 2001. Thus, while only 3.2 percent of the S&P 500 companies were sued in 2011, those companies represented 5.1% of the S&P 500 market capitalization.

 

This year’s Cornerstone Research report also contains a number of new analyses, including an analysis of the number of private securities class action lawsuits filed between 1996 and 2011 involving Foreign Corrupt Practices Act allegations. The report shows that there were four such filings in 2011, the highest annual number of filings since 2006 (when there were also four filings).

 

The report also contains a new analysis of the experience of the judges handling securities class action lawsuits during the period 1996 to 2011. The analysis shows that while there are a relatively small number of judges that handled more than ten cases during that period (65), a much larger number of judges (329) handled only one case, and the vast majority of judges (582) handled only three or fewer cases. The inference is that many securities cases are being handled by judges who are relatively inexperienced with securities cases – although there is also a smaller number of judges that are very experienced with these types of cases.

 

The report also reflects some interesting insight about the plaintiffs’ law firms’ involvement in these cases. The report sets out which law firms are selected most often as lead counsel in securities class action cases that do not involve M&A related allegations and then separately lists the firms most often selected as lead counsel in the M&A cases. The interesting thins is that the lineup of law firms leading the M&A cases looks very different than the lineup for the other cases. These differences shed some light on the changing mix of corporate and securities lawsuits and the growth in the number of M&A cases, suggesting that among other things the rising M&A related litigation activity may reflect dynamics within the securities’ plaintiffs’ bar.

 

Speaking of M&A related cases, Cornerstone Research has also recently released a separate companion report specifically focused on M&A related litigation, which can be found here.

 

Investors have a number of rights under federal and state law which they can enforce through litigation, including for example the right to file individual or class actions for damages. But can investors be required to submit these kinds of claims to binding arbitration in lieu of litigation? That is the question posed by a two different initiatives corporate reformers are currently pursuing.

 

One of the basic features of our system of corporate laws is that aggrieved shareholder can enforce their rights or seek damages by filing a lawsuit. But at the same time, our litigation system is costly and court processes can be both time-consuming and burdensome. For that reason, there have been many proposals over the years to provide for the arbitration of shareholder disputes. For example, in its November 2006 report (here), the Committee on Capital Markets recommended that public companies be allowed to have shareholder votes on the use of arbitration to resolve shareholder claims.

 

A couple of different developments are bringing these issues to the forefront now. First, on January 10, 2012, the Carlyle Group, an investment partnership preparing to conduct a public offering, submitted to the SEC an amended filing on Form S-1 that, among other things, specifies that its partnership agreement will provide that all limited partners must submit any claims to binding arbitration.

 

 A January 18, 2012 Bloomberg article by Miles Weiss entitled “Carlyle Seeks to Ban Shareholder Lawsuits Before IPO” (here) discusses the mandatory arbitration provisions described in Carlyle’s filing. Susan Beck’s January 18, 2012 Am Law Litigation Daily article about the Carlyle filing can be found here.

 

The Carlyle offering is a little unusual, because the firm does business as a limited partnership and the securities in the planned offering will consist of limited partnership units. The rights acquired with the units are defined by a limited partnership agreement. According to the company’s filing, the partnership agreement will provide that every limited partner “irrevocably agrees” that “any claims, suits, actions or proceedings arising out of or relating in any way to the partnership agreement or any interest in the partnership…shall be finally settled arbitration.” The filings explain that the kinds of actions to which this dispute resolution provision apply include without limitation disputes under the Delaware Limited Partnership Act and the federal securities laws. The filing also explains that the dispute resolution provisions specify that the each limited partner “irrevocably waives” any objection he or she may have to arbitration. (The filing’s disclosures relating to the partnership agreement’s dispute resolution provisions can be found here.)

 

The arbitration requirements reported in the filing are quite detailed. The dispute resolution provisions specify that the arbitration must take place in Wilmington, Delaware. The arbitration proceedings must be confidential and the amount of any award will not be disclosed. The provisions further specify that the person bringing the claim may only pursue arbitration in an individual capacity “and not as a plaintiff, class representative or class member,” and the arbitrators may not consolidate more than one person’s claim.

 

UPDATE: As discussed in Victor Li’s February 3, 2012 Am Law Litigation Daily article (here), Carlyle Group has announced that in response to pressure from the SEC and others, it as decided to withdraw its proposed provision requireing investors to arbitrate claims.

 

A separate unrelated development involves the efforts of certain investors to put a proposal on 2012 proxy ballots to require shareholder claims to be arbitrated. According to information provided to me by University of Michigan Law Professor Adam Pritchard, shareholders at Pfizer and Gannett are currently seeking to have proposals included on upcoming proxy ballots that would amend the companies’ corporate charters to require the arbitration of shareholder disputes.

 

The companies are seeking SEC authorization to omit the shareholder arbitration proposals from their proxy ballots, arguing that the arbitration requirement would violate both state and federal law. The companies contend that the arbitration requirement would violate Delaware law, which they contend provides shareholders with the right to litigate claims in the Delaware Court of Chancery absent a clearly expressed intent to arbitrate. The companies also argue that the arbitration requirement would violate Section 29 of the ’34 Act, which voids any contractual provision that would seek to waive any right under the statute. Finally, the companies contend that the SEC itself historically has taken the position that a mandatory arbitration charter provision would be against public policy.

 

Advocates for the shareholders seeking to introduce the shareholder proposals argue that there is liberal federal policy favoring arbitration agreements and that there is no support for the argument that an arbitration requirement would violate state law. They contend that Delaware law allows the use of corporate charters to embody agreements between a corporation and its shareholders.

 

They also argue that the Supreme Court has dealt with anti-waiver clauses in federal statutes and has consistently supported arbitration. In its January 10, 2012 opinion in CompuCredit v. Greenwood, the Court held that a right to sue provision in the federal consumer credit statute does not prohibit the enforcement of an arbitration agreement. The advocates for the shareholders argue the antiwaiver clause in Section 29 prohibits the waiver only of substantive rights, not procedural rights and is not a barrier to the enforcement of an arbitration requirement. The advocates (who include Professor Pritchard) contend that arbitration would not undermine the remedial and deterrent purposes of the federal securities law, arguing in further reliance on the CompuCredit case that the Supreme Court has said that arbitration is the equivalent of litigation.

 

Each of these initiatives is poised to be addressed shortly. The SEC will be called upon to respond to the Carlyle Group’s offering document and decide whether the offering may go forward with the dispute resolution requirement unchanged. Among other things, the SEC will have to determine whether or not Carlyle’s partnership ownership structure is a differentiating consideration. According to the Bloomberg article linked above, in 1990 the SEC refused to allow the offering of a savings and loan to go forward until the firm removed the arbitration clause from its corporate charter.

 

The SEC will also have to determine whether or not Pfizer and Gannett can omit the shareholder proposals from their proxy ballots. With deadlines for proxy mailings approaching, the SEC will have to reach a decision in time to allow the companies to prepare their proxy ballots. Of course even if the shareholder initiatives are included on the proxy ballots, a majority of shareholders would have to vote in favor of the proposals in order for them arbitration requirements to come into force.

 

Discussion

The motivations behind these efforts to require shareholder disputes to be arbitrated rather than litigated are perfectly understandable. Anyone who has ever been involved in any way in a material shareholder lawsuit knows that they are terribly costly and that they impose enormous burdens on all of the litigants. Taken collectively, shareholder litigation imposes an enormous cost on corporations in our country.  Reducing these costs is a highly desirable objective.

 

On the other hand, requiring shareholders to arbitrate their corporate claims would represent a massive change in the way that investor rights are addressed. Even if the U.S. Supreme Court thinks arbitration is equivalent to litigation, the fact is that in arbitration certain procedures are unavailable – like, for example, the ability to appeal.  And there are features of the Carlyle requirements that are clearly designed to ensure that arbitration would not be equivalent to litigation (for example, the prohibition against claimants proceeding collectively).

 

A change of this magnitude that has at least been approved by a shareholder vote has more of a sympathetic appeal. But even if the Carlyle offering is allowed to go forward with its offering with the dispute resolution procedures in its partnership agreement, or if Pfizer or Gannett have a mandatory arbitration shareholder proposal on this year’s proxy ballot, it would remain to be seen what would happen and how the arbitration provisions would be enforced when claims arise later. Court would then have to determine whether or not the provisions were valid and enforceable.

 

If any of these initiatives are permitted to go forward, it will be interesting to see what happens next. If Carlyle were able to include the mandatory arbitration provision in its charter (and if the reason Carlyle is permitted to do so is not linked to the fact that it is a partnership), it would seem likely that other companies would seek to implement similar provisions in the charters prior to their initial public offerings. And if the activist shareholders are successful in getting the mandatory arbitration issue on the Pfizer or Gannett proxy ballots, it seems likely that shareholders at other companies would pursue these same initiatives.

 

Though I could see these kinds of initiatives quickly spreading to other companies, these initiatives may not be popular with all shareholders. Indeed, I could easily imagine many shareholders actively opposing these types of efforts, taking the view that the opportunity to resort to the courts to seek redress of grievances is a basic and important right and an important tool to ensure that corporate officials abide by their legal duties.  The plaintiffs’ securities bar undoubtedly would become actively involved in resisting efforts to introduce these kinds of changes elsewhere.

 

Thus even of these current initiatives succeed, we would still be a very long way from the elimination of our current system of shareholder litigation. Nevertheless, it will be very interested to see where these current initiatives lead. The possibility for the adoption of a requirement for the mandatory arbitration of shareholder claims presents at least the theoretical chance for a radial revision on our current system of shareholder litigation.

 

One final note. The arbitration provision in the Carlyle partnership provision is far from the only restrictive aspect of the Carlyle structure. As Ohio State Law Professor Steven Davidoff notes in a January 18, 2012 post on the Dealbook blog (here), Carlyle "is propsing the most shareholder-unfriendly corporate goverance structure in modern history."  He notes that under the Carlyle structure shareholders have no right to elect directors and the company will not hold annual meetings of shareholders. In light of thse constraints and the arbitration provision, "the real question is whether prospective shareholders protest and refuse to participate in Carlyle’s IPO because of the governance issues."

 

Thanks to the several readers who sent me links to the Bloomberg article and very special thanks to Professor Pritchard for sending me the information about the Pfizer and Gannett shareholder proposals.

 

Jobs Link: One of the great blogs that I follow closely is The FCPA Professor blog, which is written by Butler University Law Professor Mike Koehler. Professor Koehler’s posts are always interesting and well written. Now there is another reason to visit the site. Professor Koehler has added a Jobs link to his site (here), in which he will post job openings in his field. Great to see a fellow blogger expanding the universe of blogging possibilities.

 

The M&A Litigation Problem: In the latest issue of InSights, entitled “Why Mergers and Acquisitions Related Litigation is Such a Serious Problem” (here), I take a look at the issues arising from the growing levels of litigation surrounding M&A transactions.  These kinds of cases are becoming increasingly common and increasingly costly, both of which pose significant problems for companies and for D&O insurers. 

 

On January 17, 2012, in a development with important implications for the evolution of post-Morrison remedies for non-U.S. investors, a Dutch court has held for the first time that a collective securities settlement is legally binding. Of even greater significance, the decision arose in a circumstance where none of the liable parties and few of the claimants were domiciled in the Netherlands. The court’s action suggests the possibility of a potentially important mechanism for aggrieved investors who bought shares outside the U.S. to obtain compensation.

 

A January 18, 2012 memorandum from the De Brauw, Blackstone and Westbroek law firm describing the Dutch court’s ruling can be found here. A January 18, 2012 memo from the Deminor Group about the ruling can be found here.

 

Background

The Non-U.S. investor proceedings in the Netherlands follow the settlement of related proceedings the U.S. As discussed at length here, Converium investors first filed a securities class action in the Southern District of New York in October 2004. The plaintiffs alleged Converium and certain of its officers and directors, as well its corporate parent, Zurich Financial Services, had made misleading statements about Converium’s financial condition, including the adequacy of its loss reserves for its North American business during the class period. (Converium had spun out of Zurich in a 2001 IPO.)

 

In 2007, while the U.S. case was pending, SCOR Holding (Switzerland) acquired the voting rights of Converium pursuant to a tender offer.

 

In rulings dated March 6 and March 19, 2008 (refer here and here, respectively) Southern District of New York Judge Denise Cote, applying pre-Morrison standards for determining the reach of the U.S. Securities laws, certified a class consisting of all persons who purchased Converium American Depositary Shares on the NYSE, and all U.S residents who purchased their Converium Shares on a non-U.S. exchange. Excluded from the class were investors who had purchased their shares on any non-U.S. exchange who were not U.S. residents at the time of their purchased.

 

The U.S. action ultimately settled for a total of $84.6 million, consisting of $75 million from SCOR and $9.6 million from Zurich. The Southern District of New York approved this settlement and entered final judgment on December 22, 2008.

 

As detailed here, in July 2010, two groups acting on behalf of the non-U.S. Converium investors entered settlement agreements with Scor and Zurich. The total amount of the two settlements is $58.4 million, of which $40 million is to come from SCOR and $18.4 million is to come from Zurich. The SCOR settlement agreement can be found here and the Zurich settlement agreement can be found here. The two groups acting on the investors’ behalf were Stichting Converium Securities Compensation Foundation, Dutch foundation formed for the purpose of seeking recoveries on behalf of the Non-U.S. Converium investors. Dutch investors in particular were represented by Vereniging VEB NCVB.

 

Pursuant to the Dutch Collective Settlement of Mass Damages Claims Act (known as WCAM), enacted in 2005, the parties then petitioned the Amsterdam Court of Appeals for approval of the settlement. An English translation of the parties’ petition, as amended, can be found here. The Act basically allows parties to seek court approval for collective settlement of mass actions entered for the benefit of class members who do not opt out.

 

On November 12, 2010, the Amsterdam Court of Appeals entered a provisional judgment acknowledging its right to recognize the settlements and scheduling a hearing for interested parties to appear and present their arguments with respect to the petition. Interestingly, the November 12 order specifically references the U.S. Supreme Court’s Morrison decision and the impact the decision has on the ability of Non-U.S. investors to pursue securities claims in U.S. courts.  The hearing to determine whether the settlement agreements will be binding was held on October 3, 2011.

 

On January 17, 2012, the Amsterdam Court of Appeals issued its ruling holding the settlements to be binding. As discussed in the De Brauw law firm memo, there two principal objections to the non-U.S. settlements. First, the objectors contended that the amount of the settlement was unreasonable because the benefit amount under the U.S. settlement was relatively greater than was the case under the non-U.S. settlement. The objectors also took exception to the amount of fees awarded to U.S. counsel was unreasonable.

 

In its January 17 ruling the Amsterdam Court rejected these objections. The rejected the objection about the settlement amount because the legal position of the non-U.S. investors was weaker than that of U.S. investors because the non-U.S. investors had been rejected from the U.S. class action. In dismissing the objection about the U.S. lawyers’ plaintiffs’ fees, the Court noted that much of the work in support of the settlement had been carried out in the U.S. by U.S. law firms, and that what was considered customary in the U.S. could be taken into account by the Dutch court.

 

Discussion

The significance of the Amsterdam court’s decision to accept the settlements as binding is that it represents the first time that the Amsterdam Court has approved a settlement “regarding the securities of a company which is not based in the Netherlands and whose securities are not traded on an exchange in the Netherlands.” At least in principle all EU member states, as well as Switzerland, Iceland and Norway will have to recognize the Amsterdam court’s ruling as binding.

 

The Court’s acceptance of the settlement, particularly given the limited connection of the settlement to the Netherlands, is particularly significant in light of the fact that the Netherlands is “the only European country where a collective settlement can be declared binding on an entire class on an ‘opt out’ basis.” As the DeBrouw law firm’s memo states, the Dutch courts not only have the power to declare the settlement to be binding but “it has the appetite to facilitate such settlements even if the parties to the settlement and the class members only have a limited connection to the Netherlands.” The decision confirms that the Netherlands is “Europe’s most attractive venue for facilitating international settlements.”

 

As a more general level, as the Deminor memo notes, the settlement also shows that “there is a legally binding settlement mechanism available in Europe that can help to solve complex securities litigation in Europe in an orderly way.”

 

These settlements represent the latest occasion when the new Dutch procedures have been used to reach settlements on behalf of non-U.S. investors in connection with securities claims that were also the subject of U.S. securities class action lawsuit claims and settlements.

 

The first and highest profile of these prior settlements was the $381 million settlement on behalf of non-U.S. Royal Dutch Shell investors. As discussed here, in May 2009, the Amsterdam Court of Appeals approved the settlement and authorized payment to Non-U.S. investors. The Dutch settlement followed an earlier settlement of a parallel U.S. securities class action lawsuit settlement on behalf of U.S. investors and arising out of the same factual allegations.

 

The Royal Dutch and the Converium settlements illustrate possible means by which, even in the wake of Morrison, non-U.S. investors can obtain recoveries for their investment losses. As plaintiffs’ attorneys cast about for alternatives for non-U.S. investors to pursue in the wake of Morrison, the use of settlements under the Dutch procedures may provide a possible remedy.

 

On the other hand, there are limitations on the usefulness of the Dutch procedure for investors. Only court authorized representatives can pursue claims on behalf of investors, and representatives cannot seek damages. Instead, the Dutch courts can only certify the class and approve out of court settlements. In addition, while the judgment of the Dutch court is in principle enforceable in courts outside the Netherlands, it remains to be seen whether or not other courts will in fact recognize the judgment.

 

But those limitations notwithstanding, the decision of the Dutch court to recognize the settlements as binding represents a significant step in the evolution of remedies for non-U.S. investors in the wake of Morrison. There is some irony that one of Morrison’s consequences is that has spurred investors to seek remedies elsewhere and thereby advance the development of remedial mechanisms outside the U.S Indeed in its preliminary ruling in the case the Dutch court specifically cited the advent of the Morrison decision as one reason that it should provide relief. In the one of Morrison’s consequences may be the encouragement of the process for developing investor remedies outside the U.S.

 

Special thanks to the several good friends who alerted me to this development and who sent me links to the law firms’ memos.

 

For policyholders whose interests are insured in London, it can be critically important to understand the Lloyd’s claims processes. In the following guest post, my good friend Perry Granof  (pictured) takes a look at recent changes to the Lloyd’s claims processes effective January 1, 2012 that will affect a wide variety of professional liability claims.  Perry is Managing Director of Granof International Group LLC, an insurance consulting and claims service firm specializing in global executive, professional and financial institutions liability. He is also also Of Counsel at the Williams Kastner law firm in Seattle, Washington.

 

 

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

 

 

Here is Perry’s guest post.  

 

 

 

 

I travelled to London in late November 2011 where I met with Lloyd’s claims representatives and first learned about the Lloyd’s Claims Transformation Programme (CTP). According to Lloyd’s, CTP is intended to provide improved customer service and greater flexibility for managing agents.

 

 

CTP was introduced to the Lloyd’s market on January 1, 2010, as a pilot program for marine hull, property, and casualty treaty classes of business. The pilot was deemed successful, achieving a 40% average improvement in claims transaction time.  According to Market Bulletin Y45221, dated September 30, 2011, the program was expanded to new claims in Financial Institutions (FI), Professional Indemnity (PI), which includes D&O, and medical malpractice, to be effective as of January 1, 2012.

 

 

CTP is intended to modernize, add quality and streamline the Lloyd’s claims handling process. However, it may give way to new disputes and potential opportunities for conflict resolution. Among the various procedural guidelines introduced by CTP is a streamlining of the triage categories from three to two. They are now “Standard” and “Complex” claim categories. The threshold is a specified dollar amount of exposure plus a sundry of other factors such as a potential or actual denial of coverage or allegations of fraud.

 

 

All complex claims, unlike Standard claims under the new Lloyd’s protocol, additionally have a second tier lead Managing Agent called a “Second”, which functions in conjunction with the “Lead” Managing Agent. Previously the Second underwriter only played a claims agreement role in certain circumstances, and an oursourced service provider represented the interests of the followers on every claim. The Second helps to ensure that an appropriate strategy is in place to help facilitate a proper resolution of the claim and that the other Managing Agents on the slip that make up the following market are fully represented and kept abreast of developments.

 

 

The Second  reviews the documentation and other considerations, which the Lead relied on in its recommendations to the market, and confers with the Lead in connection with: the “Handling of the Claim”; the “Ongoing management of the Claim”; the “Contingent Financial Planning (Reserves, Costs, etc.)”; Experts” and the “Settlement Process." The protocol also makes it clear that the “Followers”, are entitled to “contact the Lead (or Second) to raise queries or share their views on the proposed strategy to resolve the claim.”

 

 

A review of the relevant Market Bulletins, in particular Ref: 4522 and 4531, certainly justifies Lloyd’s optimism in touting the advantages of CTP. CTP will lead to an open and more effective claims handling regime among syndicates engaged in the adjustment of Complex claims. However, it could also lead to an increase in conflicts arising between the Lead, the Second and the Follower Lloyd’s syndicates, by giving non-Lead syndicates more voice and responsibilities.

 

 

Under the CTP, non-Lead syndicates clearly have standing to raise queries and share their views and can offer platforms for followers in which to dissent to positions offered by Lead carriers. Some emerging conflicts that I can foresee, especially in the PI/FI and D&O classes of business include drop down issues. When an exposure potentially exceeds the available insurance program, a lead insurer may propose a drop down arrangement to save policy limits for itself and possibly throughout the entire tower of coverage. A Second or Follower may respond arguing that the Lead must fully exhaust its coverage before the rest of the market begins contributing to the resolution of the claim. This issue has recently been addressed in the case of Citigroup, Inc. v. Federal Ins. Co., 10-20445, 2011 U.S. App. LEXIS 16316 (5th Cir. Aug. 5, 2011). In Citigroup, the Court held that the excess policies unambiguously required that the primary carrier pay its full policy limit as a condition precedent to the excess carriers filling the gap by dropping down and providing coverage. Still, Citigroup is only binding in the 5th Circuit and the case was determined by the specific policy wordings at issue.

 

 

Another source of conflict could involve situations where a Lead, a Second or Followers disagree over the placement of claims in an insurance tower covering one particular policy year, over another. This may become contentious where participating insurers have different reinsurance treaties covering different policy years, impacting their net exposures. Also, if the exposure is significant, it can become a dispute, which may not be easily soluble.

 

 

A third source of conflict could involve situations where Second and Followers may perceive a given policy limits claim, directed by the Lead resulting in disproportionate and inequitable payments of insurance proceeds, constituting a waste, and possibly giving rise to extra – contractual damages.

 

 

All of these situations, and others that I am unable to currently foresee, may require an efficient and effective dispute resolution mechanism to insure that disagreements among the syndicate companies to a tower are resolve quickly cheaply and confidentially. In reviewing Section 5.0 "Resolution of Disagreements" under Market Bulletin Ref: Y4531, which describes the 2010 “Claims Scheme Process Guidelines," there does not appear to be any mention of a disputes resolution process, other than a meet and confer provision. Also Lloyd’s underwriters are required to use their best endeavours to reach a consensus under Market Bulletin Ref: Y4522 which also makes reference to a mediation and arbitration process as "prescribed by Lloyd’s from time to time". These provisions are designed to make it easier for Lloyd’s co-insurers as opposed to non-Lloyd’s co-insurers to resolve issues amongst themselves without recourse to formal dispute resolution proceedings. Although it represents an effort to address future disputes among Lloyd’s co-insurers, this may not entirely avoid the risk of formal proceedings, especially considering the types of disputes that could arise from the issues I set forth above.

 

 

The CTP may require a new and expedited regime to resolve FI, PI & D&O coverage disputes among Lloyd’s carriers, quickly, quietly and efficiently, minimizing any disruptions of the claims handling process. This may ultimately give rise to mediation and arbitration opportunities in the United States and abroad to resolve disputes among Lloyd’s syndicates in connection with US and non-US venued claims.

 

 

Cornerstone Releases M&A Related LItigatoin Study: Iin a recent post (here), I previewed a then-forthcoming study from Cornerstone Research with regard to M&A related litigation. Cornerstone Research has now released its study, entitled "Recent Developments in Sharholder Litigation Involving Mergers and Acquisitions" (here). The final report contains additional information beyond the specific items I reviewed in my prior blog post. Special thanks to Cornerstone Research for sending me a link to the final report.

 

 

 

The North Korean Kindergarten Quintet: For today’s music interlude we are featuring a video that is simultaneously impressive and deeply disturbing. Watch these children perform and see if, in addition to being slowly but completely creeped out, you don’t find yourself gaining a little insight into the reason there were real tears when Kim Jong-Il died in December. The more basic question is why they aren’t crying all the time.

 

https://youtube.com/watch?v=gsiYtsSQYfA

There seems to be a general consensus that the amount of M&A-related litigation is increasing. The question of how to quantify the increase has attracted quite a bit of attention lately. In a recent post, I previewed a forthcoming report from Cornerstone Research that will provide detailed statistic analysis of the M&A litigation phenomenon.

 

My post attracted considerable commentary, and also drew a communication from NERA Economic Consulting, which has released its own statistical analysis of M&A-related litigation, and which they shared with me.

 

In addition, this week I separately received from Ohio State University Law Professor Steven Davidoff a copy of the January 1, 2012 paper that he and Notre Dame Finance Professor Matthew Cain have written entitled “A Great Game: The Dynamics of State Competition and Litigation” (here), in which they analyze M&A related Litigation from 2005-2010., with particular attention to the question of whether or not there is now competition between the states for this type of corporate litigation. Davidoff should be familiar to many readers as The Deal Professor from the New York Times Dealbook blog.

 

These two reports add substantial additional quantitative and analytic support for the general observations surrounding the growth in M&A-related litigation. Both of these reports corroborate the explosive growth in M&A-related litigation in recent years. I examine both of these reports below, starting first with Professors Davidoff and Cain’s analysis.

 

Professors Davidoff and Cain’s Paper

The Professors’ primary interests relate to the question of whether or not the states are competing for corporate litigation. Their interest in this question is driven in part by recent analyses suggesting that Delaware may be losing “market share” for this type of litigation. In order to determine how “both attorneys and courts interact in this game,” the authors examine state court merger litigation. The authors analyzed 955 merger transactions that took place between 2005 and 2010 and having a transaction value great than $100 million.

 

The authors found that 49.7 percent of transactions during that period attracted at least one shareholder lawsuit, and that the litigation rate increased “sharply” during the period, with only 38.7 percent of the transactions incurring litigation in 2005, compared to 84.2 percent in 2010. In addition, merger transactions increasingly are attracting multiple lawsuits. In 2005, only 8.6 percent of the deals attracted litigation in more than one jurisdiction, compared to 46.5 percent in 2010.

 

The authors found that during the sample period, 69.8 percent of cases settled, while 30.2 percent were dismissed. Only 4.9 percent of the settlements involved in increased in the amount of the transaction consideration, while 52.1 percent of the settlements involved only the disclosure of additional information. The average plaintiffs’ attorneys’ fee for settled suits is $1.4 million. Cases that settled for additional disclosure only pay the lowest level of attorneys’ fees (average attorneys’ fees of $793,000) while settlements involving an increase in the deal consideration  pay the most (average attorneys fees $8.5 million)

 

The authors used this information to calculate an expected dismissal and attorneys’ fee baseline, as a way to measure “unexplained” dismissal rates and attorneys fees. The authors used these unexplained amounts as an “indicator for state competition.” The authors found significant variation across states, with certain states awarding higher fees than others. Delaware awarded fees $400,000 to $500,000 higher while dismissing a greater portion of cases than other states.

 

The authors found some statistical support for the claims that Delaware is losing the state court litigation competition, but they also found that “the game” is complex and that the dynamic varies depending on which states are compared. The authors also found evidence that Delaware’s courts are responsive to this competition, concluding that Delaware’s courts award” higher attorneys’ fees to compensate for a higher dismissal rate,” and adjust “dismissal rates down when it loses prior cases to other jurisdictions.” The authors cite the recent $300 million award in the Southern Peru Copper case as an indication that Delaware is” competing more overtly in this game.”

 

The NERA Economic Consulting Presentation

In a December 6, 2011 presentation done in conjunction with the Wilson Sonsini law firm and entitled “Merger Objection Litigation” (here), NERA provided a detailed statistical review of M&A-related litigation. The NERA study is based on the firm’s examination of the 731 merger transactions it identified as having been announced between 2006 and 2010 and that were completed by February 28, 2011, and that had a value equal to or greater than $100 million. NERA found that 285 of those transactions were challenged in a state or federal lawsuit, through June 20, 2011. NERA also found that litigation settlements had been reached in connection with 162 of the deals.

 

The NERA study found that while there were fewer deals overall in the last three years of the 2006-2010 study period, the incidence of M&A related litigation escalated significantly in those three later years. Thus, while only 26.1% of the 2006 deals and only 21.9% of the 2007 deals attracted litigation, 45.4% of the 2008 deals, 78.6% of the 2009 deals, and 60.7% of the 2010 deals attracted litigation. Though the 2010 figure represent a slight decline from the prior year, the 2010 level of litigation still represents a significant increase compared to the earlier years in the study period.

 

The NERA study also found that throughout the 2006-2010 period, the litigation rate increased as the size of the deal increased. Thus, only about 25% of the deals under $500 million attracted litigation, but 38.7% of the deals between $500-$999 million, 40.8% of the deals between $1 billion and $1.9 billion, 53.0% of the deals between $2 billion and $4.9 billion and 70.1% of the deals equal to or greater than $5 billion attracted litigation.

 

Merger objection litigation can be expected to arise fairly quickly after the deal is announced. The NERA study shows that a third of the litigation arrives in the first two days after the deal is announced and about 60% arrived in the first week. 81% of the merger litigation arrives within the first thirty days after the deal is announced. Although the takeover target is consistently named as a defendant in this litigation, 70% of the time the named defendants also include the acquirer.

 

The vast majority of the litigation is filed in state court only. 83% of the deals that were litigated attracted only state court litigation. Another 14% attracted both state and federal litigation. Only three percent of the deals attracted only federal court litigation.

 

The NERA study suggests that many of the deals that attract litigation are attracting litigation outside Delaware. Of the deals that were litigated, 20% were litigated only in Delaware and another 13% were litigated in both Delaware and another state. So about one third of the deals that attracted litigation were litigated at least in part in Delaware. The remaining two thirds of the deals were litigated only outside Delaware. However, the presentation does not show how many of the deals that were litigated only outside Delaware involved target companies that were incorporated in Delaware. The presentation also does not show whether or not the prevalence of litigation outside Delaware changed during the 2006-2010 study period.

 

With respect to the M&A-related lawsuits in the study period that had settled, the NERA report found that the vast majority of the settlements involved cash payments of less than $1 million. 106 of the 154 settlements in the settlement analysis (nearly 69%) settled for less than $1 million. Another 33 out of the 154 in the settlement analysis settled for less than $10 million. Only 15 of the 154 settlements in the analysis settled for amounts of $10 million or greater, including only 4 with settlements between $100 million and only one with a settlement greater than $1 billion. (The NERA presentation includes a detailed list of the largest settlements at slide 19.)

 

Thus, while the settlement period included a few very large settlements, the vast majority of the settlements were for less than $10 million, and more than two-thirds were below $1 million.

 

In fully 87% of the litigated deals that had settled, the only beneficiary from the monetary settlement was the plaintiffs’ attorneys. In only 9% of the settlements did the beneficiaries include both the plaintiffs’ attorneys and class members. Thus the vast majority of monetary settlements pay only for the plaintiffs’ attorneys’ fees and expense, and the “benefits” to the class, although occasionally monetary, more often take another form, such as reduced target company termination fee; fuller disclosure; or improved corporate governance.

 

Discussion

The information in these two studies provides valuable additional perspective on the increasingly important M&A-related litigation phenomenon. The two studies corroborate that in creasing numbers of M&A transactions are attracting litigation. The NERA data also provides some interesting additional information that has not been a part of other statistical perspectives on this litigation phenomenon, including in particular the data showing how quickly the lawsuits arrive and the information showing the range of settlement outcomes.

 

The Professors’ report provides additional information about the increasing prevalence of multi-jurisdiction litigation, as well as average attorneys’ fees and dismissal rates. Perhaps most significantly, the Professors’ study provides important insight into the question of state competition for corporate litigation.

 

The data in these studies are directionally consistent with the previously released studies, including the information I previewed in a recent post about the forthcoming Cornerstone Research report. They are also directionally consistent with each other, while differing somewhat in their details. The two reports also differ somewhat from the Cornerstone Research data I previously reviewed.  (The Cornerstone Research analysis suggests a higher litigation rate both in 2007 and in 2010 than the analysis in either of the two studies discussed above, although all three of the analyses agree that that the litigation rate increased between 2007 and 2010.)

 

The difference between the analyses may be attributable to the differing data sources used in the studies. There may have been methodological differences as well. For those of use who are studying and trying to understand the growing M&A-related litigation phenomenon, it will be important to understand these differences. We can certainly hope as the various research sources release their analyses that they will help the rest of us understand not only where their data came from and how it was analyzed, but how the approach they used may differ from other analyses that have been published.

 

In any event, no matter how you slice it, the level of M&A related litigation is growing. The defense expenses and settlement amounts associated with this litigation represent a growing problem as well. All signs are that this phenomenon will remain a significant part of the corporate and securities litigation landscape for the foreseeable future. For that reason it will remain important to understand what this litigation means. The willingness of NERA and of the Professors to share their analysis is extraordinarily helpful in that regard. Along those lines, I would like to express my deep thanks here to NERA and to Professor Davidoff for their willingness to share their presentations with me.

 

Seven Nation Army: Even though I was not even really focusing on it, I had noticed recently that marching bands and sporting fans everywhere have picked up the same tune, as a rallying cry, as a communal chant, as basic crowd background noise. But if you had asked me to focus on it, I still might not have been able to name the tune. A January 13, 2011 article on Deadspin identified the tune, and also explained how it managed to take over the sportworld.

 

The song is “Seven Nation Army,” a 2003 tune from the alternative rock band, The White Stripes. Just in case you don’t think you know the tune, I have included a video below of the band performing the song. (I guarantee you if you listen to it, you will say – “Oh yeah, that song. I always wondered what that was.”) I was on the alert for it this past weekend, and I noticed that both the San Francisco crowd at the 49ers/Saints game and the west London crowd at the English Premier League game between Chelsea and Sunderland were chanting the tune during their respective games on Saturday. All very odd for an alternative rock song. But I guess it isn’t any weirder than that fact that a lot of marching banks have also picked up “Carmina Burana” from classical composer Carl Orff.

 

In any event, for today’s musical interlude, here’s The White Stripes performing “Seven Nation Army.” Now you will know what the heck all of those fans are trying to chant. (My apologies to all of those rock music aficionados – most half my age — who think I am an idiot for not knowing the song before; please consider my age, location and occupation, and I think you will see how unlikely it is that I would be fully versed in the contemporary alternative rock scene.)

 

In a January 12, 2012 opinion that quotes from (and relies upon) former Treasury Secretary Henry Paulson’s credit crisis memoirs, Southern District of New York Judge Richard Holwell granted in part and denied in part the motion to dismiss in the subprime and credit crisis related securities class action lawsuit that investors had filed against General Electric, certain of its directors and officers, and its offering underwriters. A copy of Judge Holwell’s opinion can be found here.

 

Background

As discussed in greater detail here, the plaintiffs first filed their action in March 2009, alleging that the company had failed to disclose information regarding the company’s health and the health of its financial subsidiary, GE Capital, at the height of the financial crisis. As Judge Holwell summarized it, the plaintiffs allege that “during a time when the financial markets were crumbling and companies across the United States were scrambling to disclose their holdings in subprime loans, GE withheld information regarding its substantial holdings in subprime and non-investment grade loans and touted GE as safe in comparison to its competitors, despite the fact that GE was also feeling the impact of the financial crisis.”

 

Specifically, the plaintiffs allege that GE made misstatements about its ability to fund itself through commercial paper; the quality of its loan portfolio; its ability to maintain its dividend; and its projected 2009 profits. The plaintiffs also alleged that GE violated GAAP by improperly recharacterizing certain of its assets from short-term to long term and by maintaining inadequate loan loss reserves. The plaintiffs allege that the defendants made misleading statements on these topics throughout the class period from September 25, 2008 to March 19, 2009, in violation of the Section 10 (b) of the ’34 Act; and in connection with GE’s October 7, 2008 stock offering, in violation of Section 11 of the ’33 Act.

 

Three particular alleged statements on which the plaintiffs sought to rely proved to be particularly important in Judge Holwell’s rulings on the motion to dismiss. First, with respect to the plaintiffs’ allegations regarding the company’s ability to rely on commercial paper as the credit crisis peaked in September 2008, the plaintiffs’ rely on statements in Henry Paulson’s book, On the Brink, in which Paulson states that GE CEO Jeffrey Immelt called Paulson at least twice that month  allegedly to report that the company was finding it very difficult to sell its commercial paper for any term longer than overnight.

 

Second, the plaintiffs’ relied on Immelt’s statements in December 2008 with respect to the company’s $1.24 annual dividend: “What can you count on? You can count on a great dividend,” specifically referencing the $1.24 dividend level. The company later cut its quarterly dividend for the second half of 2009 from 31 cents a quarter to ten cents per quarter.

 

Third, according the plaintiffs, throughout the class period the defendants made statements describing their loan asset portfolio as “very high quality” and using various similar descriptions. The plaintiffs contrasted this with GE’s March 2009 release in which it specified that 42% of GE Capital’s $183 billion in consumer loans were made to non-prime borrowers and at least $145 billion of its $230 billion commercial lending and leasing portfolio consisted of loans to non-investment grade companies.

 

Judge Holwell’s Opinion

In his January 12 opinion, Judge Holwell held that the plaintiffs had adequately alleged falsity as to their allegations about the GE’s ability to access the commercial paper marketplace; as to the quality of its loan asset portfolio (and in particular its exposure to subprime credits); and with respect to the reliability of the company’s annual dividend. He concluded that the plaintiffs had not adequately alleged falsity as to the other allegations.

 

In concluding that the plaintiffs had adequately alleged that Immelt had acted with scienter, Judge Holwell found, in reliance on the statements from Paulson’s book, that the plaintiffs had adequately alleged that Immelt himself made “contradictory statements to Henry Paulson.” With respect to Immelt’s December 2008 statements about the reliability of GE’s dividend, Judge Holwell rejected the competing inference that Immelt made the statements while struggling to come to terms with a rapidly changing environment:

 

Immelt’s categorical statements that investors could “count on” a dividend and that GE was having “no difficulties issuing commercial paper are not the sort of cautious statements one would expect of a CEO attempting to come to grips with the effects of the economic crisis on his company. Instead, it can be argued that Immelt was attempting to convince the public that the economic crisis was not affecting GE too drastically and that they should continue to invest in GE. Of course, a CEO is allowed to convince the public to invest in his company, but not at the expense of providing it with accurate information about the company’s financial health.

 

In concluding that GE’s CFO Keith Sherin acted with scienter with respect to certain statements about the quality of the company’s loan asset portfolio, Judge Holwell essentially said that the plaintiffs had adequately alleged that Sherin should have known the extent to which GE Capital had made extensive loans to lower quality borrowers. Judge Holwell said “it is highly improbable that Sherin, the CFO of a company 50% of whose revenues were derived from financial services in 2008, would not inquire whether his company was exposed to the subprime consumer borrower and its counterpart in the commercial sector.”

 

Significant parts of the plaintiffs’ ’33 Act claims also survived the motion to dismiss, including in particular plaintiffs’ allegations about the company’s ability to access commercial paper and the quality of the company’s loan asset portfolio and its exposure to subprime credits. Judge Holwell found that the plaintiffs’ remaining ’33 Act allegations were insufficient, but his denial of the motion to dismiss with respect to at least some of plaintiffs’ allegations means that the offering underwriter defendants remain in the case.

 

Victor Li’s January 13, 2012 Am Law Litigation Daily article about Judge Holwell’s ruling can be found here.

 

Discussion

At least a part of plaintiffs’ case would have survived the defendants’ motions to dismiss even without the benefit of Henry Paulson’s statements in his book about his September 2008 telephone conversations with Jeffrey Immelt. But Paulson’s account of the conversations clearly had an impact. At a minimum, Judge Holwell referenced the Paulson’s account of the conversations several different times in his opinion.

 

I am not aware of a prior case where the statements of a former cabinet secretary in his or her memoirs has provided even a partial basis for the denial of a motion to dismiss in a securities class action lawsuit. The plaintiffs’ reliance on Paulson’s memoirs has to qualify as one of the more unusual ways that plaintiffs have established (at least for pleading purposes) that there was a difference between what the company was saying publicly and what its officials were saying behind closed doors. (The defendants will of course argue that there was no difference or if there was it is entirely explainable, which of course are arguments they will raise as the case goes forward.)

 

It is interesting to reflect on the sheer fortuity of the fact that Paulson chose to report on those conversations in his book, and that his book was published at a time that allowed the plaintiffs to be able to rely on those statements in their amended complaint. Of course, all of this does mean that as (or perhaps if) the case goes forward, Paulson’s deposition in this case would appear to be inevitable. (Of course, this case is not the only one in which the underlying narrative involved Paulson; Paulson’s conversations with BofA CEO Ken Lewis in December 2008 also play a central role in the securities class action lawsuit arising out of the BofA/Merrill Lynch merger.)

 

It is also interesting to reflect that in the middle of one of the worst financial crises in the country’s history, Immelt could pick up the telephone and call the Treasury Secretary to tell him about the problems his company was having. The CEOs of a vast number of companies were also going through crises at that very moment, but very few of them had the option to call the Treasury Secretary to complain to him about their companies’ problems. It is rather remarkable, even given how large a company GE is, that Immelt had this option. Indeed, given what we know about what else Paulson had on his plate during September 2008 (i.e., avoiding the collapse of the entire  global financial system), it really is kind of astonishing that Immelt could just call him up and that Paulson could take his call.

 

In any event, this case will now be going forward. Given the size and prominence of the company, and the fact that the case has now survived the motion to dismiss, this case has to be added to the list of pending high-profile subprime and credit crisis-cases worth watching. Very few of these cases go to trial; most settle. In this and some of the other high profile credit crisis cases – Citigroup; the BofA/Merrill Lynch merger case; Bear Stearns; AIG – it will be very interesting to see how the likely settlements of these cases will unfold. Without knowing for sure how any one of them ultimately will turn out, there undoubtedly will be some very interesting settlements from among these cases.

 

I have added Judge Holwell’s ruling to my tally of subprime and credit crisis-related lawsuit dismissal motion rulings, which can be accessed here.

 

More About the $40 Million Lehman Brothers Mortgage Backed Securities Settlement: The news that the parties to the Lehman Brothers mortgage-backed securities case had settled the suit for $40 million was announced in November 2011 (refer here). But the complete papers related to the settlement have only just been filed in the court docket. The papers reveal a few interesting details about the settlement.

 

First, the $40 million settlement is to be funded in two ways; $31.7 million of the settlement is to come from the company’s D&O insurance and $8.3 million is to come from Lehman Brothers Holdings itself. As the January 13, 2012 memorandum in support of the plaintiffs’ unopposed motion for preliminary approval of the settlement states, the bankruptcy court supervising the Lehman bankruptcy has approved the release of funds for these purposes.

 

Second, the parties’ settlement stipulation contains in interesting detail about the source of the D&O insurance funds for the settlement. The stipulation states (at page 15) that the $31.7 million insurance contribution to the settlement is to be paid by “certain insurers (‘Insurers’) that issued directors and officers insurance policies to LBHI, for the 2007-2008 and 2008-2009 policy periods.” What is interesting about this statement is that it suggests that the funds for this settlement are coming from two different policy periods.

 

In an earlier post (here), in which I discussed the $90 million settlement of the securities suit involving former Lehman executives, I had determined that the $90 million amount, together with defense expenses and other amounts, exhausted about $200 million of the applicable $250 million insurance tower. Based on that analysis of Lehman’s insurance, I would have assumed that the $31.7 million insurer contribution was drawn from what was left of the $250 million tower.

 

However, the reference in the parties’ settlement stipulation to the two different policy years suggests that a second tower of insurance has been broached and is being drawn upon in payment of losses arising from Lehman’s collapse.

 

In an earlier post (here) about how rapidly defense expenses were eroding Lehman’s D&O insurance, I had determined that during the 2007-08 policy period, Lehman carried a total of $250 million in insurance. I had noted that, though Lehman did not file for bankruptcy until September 2008, the May 2007-May 2008 insurance tower was the one implicated, because the first of the securities class action lawsuits was filed during that policy period and the subsequent matters related back to that initial filing (or so the insurers) argued. I noted that Lehman carried a separate $250 million tower of insurance for the May 2008 to May 2008 policy period, but that up to that point the losses had accumulated only with respect to the earlier of the two insurance programs. When I later analyzed the $90 million settlement on behalf of the directors and officers, I assumed for purposes of analysis that only a single $250 million tower was available for all purposes in connection with the Lehman collapse.

 

The cryptic note in the parties’ settlement stipulation in connection with the $40 million Lehman Brothers mortgage-backed securities settlement suggests, for the first time to my knowledge, that the second tower of insurance had been drawn in and is funding losses attributable to the events surrounding Lehman’s collapse. It would certainly change things (for example, the way that the prior $90 million settlement looks) if there were to be two insurance towers totaling $500 million potentially available in connection with these matters, rather than only a single $250 million tower.

 

If there were to be two towers rather than just one, the losses from the Lehman debacle could wind up being far more costly for the D&O insurance industry than has been assumed (depending of course on how extensive the second tower’s involvement ultimately proves to be). I suspect there are a number of readers out there who may have additional insight on these issues. I welcome additional perspective that any reader may be willing to provide (anonymously if that is the preferred approach).

 

In any event, this settlement is just further corroboration for a point I have long made about the litigation arising out of the subprime meltdown and credit crisis – that is, when all is said and done, this litigation, taken collectively, will prove to have been a massive loss event for the D&O insurance industry.

 

The Totally Awesome Sledding Crow: Here at The D&O Diary, we never, ever waste our time looking at Internet videos of animals doing amusing things. Just the same, we were distracted by this video of a crow that to all appearances is engaged in trying to perfect his snowboarding style. Watch this video carefully. The crow, standing at the apex of a snow covered roof, slides down the incline on a plastic lid. The crow then picks up the lid and tries to slide down another part of the roof. But when that doesn’t work, the crow picks up the lid, returns to the original spot, and slides down the roof again.

 

A scientific discussion of the crow’s behavior can be found in this January 13, 2012 article in The Atlantic (here). While science cautions against ascribing anthropomorphic explanations for animal behavior, I find myself imagining that as the crow is sliding down the roof, he is singing to himself “If everybody had an ocean/across the U.S.A./then everybody’d be surfin’/like Caiforn-Aye-Yay…”

 

 

https://youtube.com/watch?v=DYcgL7Nif30