When MF Global filed for bankruptcy yesterday, it not only became the eighth largest corporate bankruptcy in U.S. history. It also became the first U.S. company taken down by the troubles afflicting European sovereign debt. How big of a problem all of this represents depends on whether or not you think the MF Global demise reflected a unique set of circumstances or whether it reflects something deeper. Either way, there are some things about MF Global’s collapse that are worth thinking about.

 

First, although MF Global is the first U.S. company claimed by the European Sovereign debt crisis, at least one other company has also been imperiled by these circumstances. MF Global’s bankruptcy comes just three weeks after the bailout and restructuring of Dexia, S.A., the Belgian-French banking institution became was the first casualty of the crisis after writing down the value of the Greek debt it held on its balance sheet.

 

Second, though like Dexia what took down MF Global was its exposure to European sovereign debt, unlike Dexia, MF Global was not exposed to Greek debt. MF Global held the debt of other European countries. Its assets include $6.3 billion of Italian, Spanish, Belgian Portuguese and Irish debt. More than half of the total was Italian. It was the company’s exposure to these debts that led to regulatory scrutiny, downgrades, and margin calls that threatened the company’s liquidity.

 

Third, MF Global is far from the only victim of its demise. Its shareholders likely have lost the full amount of their investment. (Refer here for a run down of affected investors). In addition, there are creditors and others who have suffered a loss as a result of MF Global’s bankruptcy. Among others, investment bank J.C. Flowers reportedly stands to lose about $48 million due to MF Global’s collapse.

 

Fourth, the collapse of both Dexia and MF Global came quickly. Dexia’s crisis came less than three months after European stress tests had found Dexia one of Europe’s safest banks. MF Global’s bankruptcy filing came only about a week after the rating agencies initiated a series of downgrades of MF Global.

 

The speed of these companies’ collapses adds a layer of urgency to asking the question whether or not there are other companies similarly exposed – and as MF Global’s example shows, not just exposed to Greek debt but exposed to any of the troubled economies on the Europe’s periphery. The fact MF Global’s exposure to debt from Italy, one of the world’s largest economies, contributed to its demise is particularly troublesome. For that matter, the list of European countries whose debt could be a problem may not be limited just to the countries whose debt MF Global had on its balance sheet. As this European crisis evolves, there could be other problem counties added to the list.

 

Moreover, in thinking about which companies will have problems from all of this, the inquiry cannot stop just at those companies with exposures to European sovereign debt. There is also the question of which companies are exposed to companies that are exposed to European sovereign debt.

 

It is possible that MF Global’s collapse represents a unique set of circumstances, unlikely to be repeated (particularly given the late developing reports of supposed deficiencies in customer accounts, the discovery of which may have hastened MF Global’s bankruptcy). On the other hand, it is possible there are other companies who may also suddenly be perceived as over exposed to European sovereign debt and that may collapse just as quickly as MF Global did.

 

The uncertainty over how big of a problem all of this represent is not just a difficulty for investors. It also poses a challenge for regulators – according to news reports, regulators may also be investigating MF Global’s collapse and may even face criticism for not acting more quickly.

 

And though the larger problems for the global financial marketplace clearly are of a higher order, it is also worth mentioning here that these issues also pose a challenge for D&O insurance underwriters. As noted above, there is not just the question of whether or not a company is exposed to European sovereign debt. There is also the far more difficult to discern question of whether or not a company is exposed to a company that is exposed to European sovereign debt.  As MF Global’s rapid demise illustrates, these concerns are sufficient to send a company into bankruptcy. My guess is that the events at MF Global sent a chill through all of the offices of D&O underwriters everywhere, particularly (but not exclusively) at those carriers that are active in the financial sector.

 

There is no way to know for sure, but I suspect that before all is said and done, there will be a lot more to be said here on the topic of European sovereign debt risk.

 

Archeologists Uncover Ancient Race in the Great Lakes Region: Remains Of Ancient Race Of Job Creators Found In Rust Belt. Read the story here.

 

This Week in San Diego: This week I will be in San Diego for the PLUS International Conference. I am looking forward to seeing many of you there. If you see me at the conference, I hope you will take the time to say hello, particularly if we have never met before. While I am in San Diego, the pace of blog post publication may slow down. The normal publication schedule will resume next week.

 

On October 25, 2011, the FDIC filed its latest failed bank lawsuit, in connection with events surrounding the July 2009 failure of Mutual Bank of Harvey, IL. The FDIC’s complaint, which was filed in the Northern District of Illinois, names as defendants eight former directors and two former officers of the bank. But in addition, the complaint also names as defendants the bank’s outside General Counsel, who was also a director of the bank, and well as the General Counsel’s law firm. There are a number of other interesting things about this complaint as well.

 

The FDIC’s complaint alleges that Mutual Bank’s failure has cost the FDIC’s deposit insurance fund an estimated $775 million in losses. In its lawsuit, the FDIC seeks to recover over $115 million in losses the bank suffered on twelve commercial real estate loans, $10.5 million in unlawful dividend payments and $1.09 million in wasted corporate assets.

 

The complaint asserts claims against the director defendants and the officer defendants for gross negligence, negligence, and breach of fiduciary duty. The complaint alleges that the directors and the officers approved high-risk loans to uncreditworthy borrowers. The complaint also asserts the directors failure to supervise the bank’s lending activities, approval of unlawful dividend payment and corporate waste.

 

The complaint also asserts claims against James Regas and his law firm, Regas Frezadas & Dallas, for legal malpractice, breach of fiduciary duty and aiding and abetting the director and officer defendants’ breaches of fiduciary duty. The lawyer and his firm are allege to have facilitated the unlawful payment of dividends; failed to counsel and prevent the bank’s board from making grossly imprudent loans; ignoring federal lending regulations; and facilitating bank transactions to entities in which one of the attorney defendants held an interest, despite the conflict of interest.

 

Interestingly, the roster of director defendants does not include Pethinaidu Velchamy, the bank’s former Chairman, or Parameswari Velchamy, the former Chairman’s wife, who was also a director of the bank. The complaint alleges that the two have each filed a petition under Chapter 7 of the bankruptcy code, and that “despite” their respective “culpability for the events described,” the stay in bankruptcy “precludes” naming them as a defendant “unless the stay is modified or lifted.”

 

Among other things, the Complaint alleges (in paragraph 34) that the former Chairman has filed a lawsuit against the bank’s former auditors, in which the Chairman supposedly alleges that “the Bank’s balance sheet contained hundreds of millions of dollars in loans that had been funded on the basis of substandard, if not reckless underwriting and … were not identified for corrective action because of critical failure in the Bank’s internal credit risk review function.”

 

Though the former Chairman and his wife are not named as defendants in the lawsuit, their son and daughter, both of whom served as members of the board of directors, were named as defendants.

 

These family connections are particularly interesting in relation to the FDIC’s waste allegations. Among other things, the FDIC alleges that board facilitated the payment of $250,000 in bank funds for the wedding of the Chairman’s daughter; authorized $495,000 in “bonuses” to pay the criminal defense costs of the bank President’s wife, who had been indicted for Medicaid fraud; and approving the use of $300,000 in bank funds to hold a board meeting in Monte Carlo.

 

Regas, the lawyer defendant, and his law firm, are alleged to have been aware that loans referenced in the complaint were “grossly deficient” but that despite the awareness of the “imprudence, and in some cases, unlawful nature of these transactions,” the lawyer and his firm failed to protect the bank from foreseeable injury inherent in these transactions. The law firm is alleged to have received over $3 million in fees between January 2007 and April 2009.

 

Regas is also alleged to have participated in a 2006 land loan transaction involving undeveloped real estate. The $28.5 million loan was originated by another bank for which Regas also served as director. The individual that sold the land to the borrower is described in the complaint as Regas’s “close friend and business colleague.” After the other bank made the loan, Regas allegedly arranged for Mutual Bank to acquire a $24.5 million participation in the loan. Regas allegedly steered the loan through the Mutual Bank approval process and did not abstain from voting to approve the loan. Regas is alleged to have abandoned his fiduciary duty to Mutual Bank in favor of the other bank and his friend. The loss to the bank from the loan is alleged to be approximately $24.5 million.

 

This latest complaint is the 16th lawsuit that the FDIC has filed in connection with the current wave of bank failures, but so far as I am aware, it is the first in which the FDIC has named a failed bank’s outside lawyer and law firm as defendants. During the last round of bank failures in the S&L crisis, the FDIC pursued an aggressive litigation approach and often included failed bank’s lawyers or law firms as defendant. In many of those cases, as here, the lawyer defendants had served on the failed bank’s board and were alleged to have engaged in conflicts of interest. That prior history and the presence of those types of allegations here suggests that we are not about to see a comprehensive campaign against the outside law firms of failed banks. The firms or their lawyers are relatively unlikely to get drawn into the type of failed bank litigation if the firm did not have an attorney on the failed bank’s board or did not otherwise allegedly engage in conflicts of interest.

 

Out of the 16 failed bank lawsuits the FDIC has filed so far, this is the fourth involving an Illinois Bank (there have also been four lawsuits so far involving failed banks in California and Georgia, respectively). Like many of the lawsuit filed so far, this one was not filed until more than two years had elapsed since the bank’s closure. Given the fact that the bank closures did not really peak until late 2009 and early 2010, and allowing for that two year plus lag time, we could start to see increasing numbers of additional FDIC failed bank lawsuits in the months ahead.

 

Special thanks to a loyal reader for providing a copy of the Mutual Bank complaint.

 

According to data from the American Bankruptcy Institute, the high water market for business bankruptcies during the financial crisis occurred during the second quarter of 2009, when there were 16,014 business bankruptcies. The number of business bankruptcies has declined each quarter since then.  During the second quarter of 2011, there were 12,304 business bankruptcies, representing a decline of about 23% from the quarterly high two years prior.

 

But while the quarterly business bankruptcy filings are down from the credit crisis highs, they still remain at elevated levels. If you compare the 12,304 business bankruptcy filings during the second quarter of 2011 to the quarterly filing levels prior to the fourth quarter of 2008, the 2Q11 filing levels are higher than any quarter since the first quarter of 1998 (when there were 12,410 business bankruptcy filings). So even though the number of bankruptcy filings has declined over the last two years, there are still very significant numbers of businesses filing for bankruptcy.

 

In addition, there are some concerns that we could be in for a new round of increased bankruptcy filings. In an October 10, 2011 Reuters article entitled “New U.S. Bankruptcy Ripples May Emerge in Tough Economy” (here) the authors suggest that “corporate failures may be about to pick up again, with some big-name companies struggling for survival.” Among the factors the authors cite as possible causes for a new round of bankruptcy filings are “the weak economy, lackluster consumer spending, a shaky junk-bond market and increasingly tight lending practices.”

 

The authors also suggest that some companies that managed to get through the last couple of years by restructuring may now have to face the music. The article’s authors note that “confidence in the economy and easy access to debt allowed companies to complete restructurings in 2009 and 2010 with business plans and debt loads that were based on an economic pickup that has now faltered.” These circumstances “could create the potential for trouble at companies that have already restructured once.”

 

An October 26, 2011 article in Corporate Counsel entitled “Bankruptcies Are Down, But the Business Picture Still Isn’t Rosy” (here) sounds many of the same themes. The article’s author notes that while business bankruptcy filings are down, many lenders are burdened with underperforming and nonperforming loans.  Eventually, push will come to shove on these loans.  The article quotes one leading practitioner as saying that activity is up and that 2012 “will be a busy year” and that 2013 and 2014 will be “extraordinarily busy year for restructurings.” In addition there are “huge maturities” coming due in 2014 and 2015. These circumstances could force many companies to seek protection under the bankruptcy laws.

 

The Reuters article linked above identifies a number of high profile companies, including American Airlines and Kodak, that could face bankruptcy filings. The article also references struggling companies in “industries as diverse as shipping, tourism, media, energy and real estate.”

 

Of course whether there actually will be an uptick in business bankruptcy filings remains to be seen.  But the concerns expressed above underscore the vulnerabilities that financially insecure companies may still be facing. Because of the high claims frequency associated with bankruptcy, these vulnerabilities also imply heightened liability exposures as well. Unless and until the financial recovery picks up sufficient steam to provide positive economic momentum even for financially weak companies, these companies will continue to face both the vulnerabilities and liability risks.  

 

Perspective on U.S. Securities Laws:  In an earlier post (here), I noted the dismissal that had been granted in one of the securities class action lawsuits brought against a U.S.-listed Chinese company, North East Petroleum Holdings, Ltd. An October 27, 2011 China Daily article (here) discusses the ruling in the case. The article also contains some interesting commentary from a U.S-based executive of the company.

 

The article quotes Choa Jiang, described as senior vice-president of the company’s New York City office, as saying that as a result of “internal control deficiencies” the company’s CEO, CFO and a director were asked to resign. The company, Chao says, experienced “growing pains” as it made the transition from a private, family-owned business in China to a U.S.-listed company. But, Chao adds, the company “has learned its lesson,” adding that the company is “learning that the laws regulations, operations and culture in the U.S. are different from those in China.” Chao says that “what’s important is that you correct your mistakes, learn from them and move on.” Chao also said that company wants “to encourage other Chinese companies not to lose faith but vigorously defend themselves with the very best professionals.”

 

It seems that a number of Chinese companies will have the opportunity to defend themselves vigorously, as lawsuits against U.S.-based Chinese companies continue to mount. Just in the last several days there have been new securities class actions brought against JinkoSolar Holding Co. (about which refer here) CNInsure (refer here) and China Automotive Systems (refer here), all three U.S. listed Chinese companies. With the addition of these three latest lawsuits, the number of U.S. –listed Chinese companies that have been named in securities class action lawsuits during 2011 now stands at 35. These companies, like North East Petroleum Holdings, also have the opportunity to learn that in the U.S., laws, regulations, operations and culture are different than those in China.

 

That’s Billion With a “B”: Those readers interested in Bank of America’s massive $8.5 billion mortgage put-back settlement will want to read the October 19,  2011 Forbes article about Kathy Patrick, the plaintiffs’ lawyer who negotiated the settlement on behalf of a large group of institutional investors. The article, entitled “Wall Street’s New Nightmare” (here) makes it clear that, as far as Patrick is concerned, the Bank of America settlement is merely round one. Among other things, Patrick states that the institutional investor plaintiffs in the case “did not come together just to deal with Bank of America. They came together because they wanted a comprehensive industry wide strategy and an industry wide solution. They started with Bank of America because they thought they could achieve a template that they could extend to other institutions. “

 

In other words, at least according to Patrick, she is just getting started. Of course there is the small matter of defending the $8.5 billion BofA settlement from the all comers assault it is currently under. 

 

Did you go to bed in the Seventh Inning when Adrian Beltre and Nelson Cruz hit back to back jacks for the Rangers and the Rangers also added an additional insurance run to go up 7-4 in the Seventh Inning?

 

Did you go to bed  in the Eighth Inning when Mike Adams of the Rangers retired Rafael Furcal with the bases loaded and the score 7-5?

 

Did you go to bed in the 10th Inning when Josh Hamilton hit a two run shot to put the Rangers up 9-7?

 

Did you think when the Cardinals were down to their last strike – their last strike – in both the ninth and tenth innings that the game was over? Or even worse, were you one of those baseball purists who thought this was a boring World Series and so you missed the whole thing?

 

Too bad if you missed this game. This game was a classic and will be remembered forever as one of the great World Series games. And when hometown hero David Freese hit the game winning walk off home run on a 3-2 pitch in the bottom of the 11th inning to send the Series to Game Seven, those of us who were still awake – who were rewarded for our belief that if we kept watching amazing things would keep happening – we saw one of the most astonishing clutch performances of all times. Not once, but several times.

 

Just to put this in perspective. Down 7-4 in the Seventh, the Cardinals scored in the Eighth (to make it 7-5), in the Ninth (to make it 7-7), in the Tenth (to come back to tie it 9-9 after Josh Hamilton’s two-run homer in the top of the inning had put the Rangers ahead, 9-7) and in the Eleventh (when David Freese hit a homer to straight-away center field to win the game, 10-9).

 

David Freese not only hit the game winner in the Eleventh Inning, but in the bottom of the Ninth, and when down to his last strike, he also hit a game tying two run triple. And in the bottom of the Tenth, Lance Berkman, grey beard and all, and also down to his last strike, hit a bullet into right center to tie the game yet again.

 

How many ties? How many lead changes? How many times when it looked like the Rangers had this game put away? So much more to talk about. Like pitcher Kyle Lohse, who came in to pinch hit for the Cardinals in the Tenth Inning because Tony LaRussa was completely out of bench position players, and who executed an absolutely perfect bunt in the teeth of the wheel play to put runners on second and third. Yes, there were a ton of errors early in the game. But still and all, this was October baseball at its finest.

 

Is there anything better than a World Series that goes to seven games?

 

One final thought. I have always wanted to be a major league baseball player. Rangers pitcher Derek Holland has always wanted a moustache. I would say we are dead even.

 

After the October 19, 2011 news that Citigroup  had reached an agreement to pay $285 million settle SEC charges that it had misled investors in a $1 billion collateralized debt obligation linked to risky mortgages, a number of commentators raised questions about the settlement.

 

Among other concerns noted was that neither the SEC’s action nor settlement targeted or even identified the senior level executives who were responsible for the alleged misconduct. The proposed settlement was also compared unfavorably with the much larger settlement amount to which Goldman Sachs had agreed to pay to settle similar allegations. Commentators also noted that though upper level executives were not charged in the action, like the Goldman case a lower level operative was targeted, seemingly for having had the misfortune of having sent an indiscrete email. A particularly good critique of the settlement appears in Jesse Eisenger’s October 26, 2011 post on the New York Times Dealbook blog (here).

 

As luck would have it, the settlement (supposedly as a result of a random lottery) landed on the desk of Southern District of New York Judge Jed Rakoff, who famously refused to accept a prior settlement of the SEC”s action against BofA (about which refer here). In March 2011, Rakoff also challenged the SEC’s settlement with Vitesse Semiconductor (about which refer here).

 

As it turns out, Judge Rakoff has some questions about this settlement, too – nine of them, to be precise.

 

In a very pointed October 27, 2011 order (here), Judge Rakoff scheduled a November 9, 2011 hearing at which the parties were directed to be prepared to answer nine specific questions about the settlement. He also said that the parties were “permitted, but not required” to file written answers to his questions in advance of the hearing.

 

Among other things, Rakoff has asked why he should enter judgment in a case “In which the S.E.C. alleges a serious securities fraud but the defendant neither admits nor denies wrongdoing?” He also asked whether the SEC’s mandate to ensure transparency in the financial markets might provide “an overriding public interest in determining whether the S.E.C.’s charges are true,” particularly “when there is no parallel criminal case?”

 

Like many of the commentators, Judge Rakoff also viewed this proposed settlement in contrast to the $535 million Goldman Sachs settlement. He asked specifically how the $95 million penalty portion of the proposed $285 million settlement was calculated, given that it is “less than one-fifth” of the penalty assessed in the Goldman Sachs case.  

 

Judge Rakoff also questioned why the penalty is to be “paid in large part by Citgroup and its shareholders rather than by the ‘culpable individual offenders acting for the corporation.’”

 

The most challenging question Rakoff posed was his final query: “How can a securities fraud of this nature and magnitude be the result simply of negligence?”

 

Many of Judge Rakoff’s questions might well be asked in connection with many SEC enforcement action settlements, in which corporate parties routinely settle the action pay paying specified sums out of corporate resources without admitting or denying wrongdoing. However, the parties to these settlements are rarely challenged as Judge Rakoff has challenged the parties here to justify the settlement. However it is worth noting that Judge Rakoff asked several similarly challenging questions when he rejected the BofA settlement in 2009, but he ultimately (“reluctantly”) approved a revised settlement that arguably presented many of the same features of the original settlement. (Judge Rakoff discussed the BofA settlement in a speech at the Stanford Directors’ College in June 2010, as noted here.)

 

There will be those who believe that it is about time that somebody started asking these kinds of questions. But at the same time, it is worth noting that if companies must admit to wrongdoing in order to settle SEC enforcement actions, or if senior executives’ complicity must be alleged or even established in order for a settlement to be approved, it will be far more difficult for SEC enforcement actions to be resolved. Indeed, one clear implication if more courts start asking these kinds of questions about proposed SEC enforcement action settlements is that fewer cases will settle and more will have to go to trial. Even if more trials would advance the truth-telling function of SEC enforcement, it would also add enormous costs both for the SEC and for the corporate defendants. Whether the SEC could sustain the same level of enforcement activity if it had to absorb the added burdens and expense involved with more trials is one question. The added burden and expense for the corporate defendants presents other questions.

 

As noted in a guest post on this blog by Maurice Pesso of the White & Williams firm (here), the potential barriers to settlement posed by the kinds of questions Judge Rakoff has asked here may also present some significant challenges for D&O insurers, who often are paying the costs of defense associated with SEC enforcement actions.

 

An October 27, 2011 Bloomberg article discussing Judge Rakoff’s questions about the Citigroup settlement can be found here. Peter Lattman’s October 27, 2011 post on the New York Times Dealbook blog about Rakoff’s questions can be found here.

 

LexisNexis Corporate & Securities Law Community 2011 Top 50 Blogs

Everyone here at The D&O Diary is very proud that this blog has been named as one of the LexisNexis Top 25 Business Law Blogs for 2011 by the LexisNexis Corporate & Securities Law Community. The complete list of this year’s designees can be found here.

 

We are flattered and honored that our blog has been named to this list. It is a particular pleasure to be associated with the other fine blogs on the list, which includes many of the blogs that we regularly follow, such as  Broc Romanek’s TheCorporateCounsel.net blog, Francis Pileggi’s Delaware Corporate and Commercial Litigation Blog, Mike Kohler’s  FCPA Professor blog, Tom Gorman’s SEC Actions blog, The Corporate Library’s GMI blog, and the Conglomerate blog and the Race to the Bottom blog, both of which are written by teams of law school professors.

 

The voting process is not over yet. There is another round of voting yet to decide the Top Business Law Blog of the Year. In order to vote you have to be a registered member of the LexisNexis Corporate & Securities Law Community. The links to register and to vote can be found on the Community site, here. Please take a moment to vote for your favorite Business Law blog (particularly if your favorite happens to be The D&O Diary).

 

Early on during the current wave of bank failures, there were some pretty reckless predictions about how many banks might fail – indeed, some commentators suggested as many as 1,000 banks might ultimately fail, a prediction that I disputed at the time. But while it continues to seem highly unlikely that as many as 1,000 banks ultimately will fail, the failed banks are continuing to accumulate and we recently passed a significant failed bank milestone.

 

The total number of bank failures since January 1, 2008 now stands at 406. The 400th bank failed without much fanfare a couple of weeks ago, on October 14, 2011. Regulators took control of four different banks on October 14, and four more the following Friday, October 21, 2011. With these latest bank failures, the total number of failed banks in 2011 now stands at 84. This year’s total seems highly unlikely to reach the 157 banks that failed in 2010 or the 140 that failed in 2009. But with about nine or ten weeks left to go in the year, it is possible that the total number of bank failures this year could reach as many as 100, particularly if the FDIC continues to take control of as many as four additional banks each Friday evening.

 

Many of the bank failures since January 1, 2008 have been concentrated in just a small number of states. Indeed just four states account for 214 of the failed banks or about 52% of the total: Georgia (73); Florida (57); Illinois (46) and California (38). Even during this fourth year of the failed bank wave, these same states continue to have the largest numbers of bank failures, particularly Georgia, which has had 22 bank failures this year alone. During 2011, Florida has had 12, Illinois has had 11 and California has three. Together these four states account for 45 of the 84 bank failures during 2011, or roughly 53%.

 

By interesting contrast to these states that have experienced such a high number of failed banks, eleven states have had not bank failures at all so far. The eleven states without any failed banks are Connecticut, Delaware, Hawaii, Iowa, Maine, Montana, New Hampshire, North Dakota, Rhode Island, Tennessee and Vermont. Among other things, this list suggests that the New England states have fared pretty well during the bank failure wave.

 

As the banks have failed, the failed bank litigation has also accumulated —  although the FDIC’s failed bank litigation has accumulated gradually. So far the FDIC has initiated 15 lawsuits against the directors and officers of 14 different institutions. As of October 24, 2011, the FDIC has authorized lawsuits involving 34 failed institutions and 308 officers and directors for D&O liability of at least $7.3 billion. As the total number of failed banks continues to accumulate, the authorized number of lawsuits will only grow.

 

The lag time between the date of bank closure and the date of the FDIC’s lawsuit filing seems to be running at least two years or more. As Jon Joseph points out in an October 24, 2011 post on his law firm blog (here), more than more than 335 of the 406 total bank failures occurred after July 2009, which seems to suggest that we are about to enter an extended period of active FDIC failed bank litigation. Joseph states in his blog post that now that time has elapsed since the wave of bank failures began to accumulate significantly,” the pace of lawsuits against former bank officers and directors will increase markedly.” Joseph also points out two thirds of the 15 FDIC failed bank lawsuits so far have involved failed banks in Georgia, California and Illinois (which is slightly more than the distribution of failed banks among those states but hardly surprising given the number of bank failures in those states.)

 

Of course, time will tell whether and to what extent we will see an uptick in FDIC failed bank litigation. But not only does significant litigation activity seem likely, it seems likely that the litigation will continue to accumulate for some time to come, given that banks are continuing to fail in significant numbers. Indeed, the recent closures would seem to suggest that the FDIC failed bank litigation will be continuing to arise well into 2014. As banks continue to fail in the weeks and months to come, this projected date could move into 2015.

 

Better get used to FDIC failed bank litigation, because it is going to be a big part of the landscape in the directors’ and officers’ liability arena for some time to come. In light of these issues, Jon Joseph has some practical suggestions for the boards of the surviving banks, in the blog post I linked to above.

 

I inhabit a world in which hotels loom unfortunately large. During many work weeks, I spend more nights in hotels than at home. Many of these hotel nights involve nondescript rooms in cookie-cutter chain hotels. These chain hotels are neither good nor bad, merely boring. They are so lacking in distinctiveness that often I am unable even to remember where I am when I first wake.

 

Fortunately for me, there are hotels I enjoy and that I even look forward to visiting. The purpose of this post is to share my list of favorite hotels, ranked according to my own admittedly quirky criteria. My hope is that readers will respond and offer their own favorite hotels, as a way to share information with others and perhaps enrich each others’ travel experiences.

 

Let my begin by relating an experience that sums up what I dislike about so many hotels, while at the same time identifying my hotel ranking criteria. Due to a weather-related flight cancellation, I recently spent an unplanned night in Philadelphia. Many other travelers were in the same fix, and so hotel rooms were scarce. Just at the point when I began to fear I would spend the night in the airport, I managed to find a room – at the Ritz-Carlton. For those of you who are thinking “Sweet!” –let me relate what I experienced.

 

First of all, the hotel stay itself cost over $550. What do you get for $550? You get a cavernous atrium echoing with over-amplified rock music that made it impossible to hear or to be heard. You get a hotel room bathroom with enough marble for the mausoleum of an eastern potentate and his entire entourage. And you get a bed with 13 pillows. I don’t need or even want any of those things.

 

But wait – there’s more.

 

When I tried to check in, I found myself in a line behind six other people also hoping to speak to the beleaguered clerk behind the desk. When I had finally been able to check in, I went to my room and found out that for $550, I earned the privilege of paying another $9.95 for Internet access. I also found that my room lacked a TV remote control. When I called about that, they brought me one, held together by duct tape. And when I went to check out next morning, there was no one at the reception desk.

 

To summarize, the hotel was ridiculously over-priced (particularly given the added Internet charge) and featured a lot of pointless and even worthless “amenities.” The overall effort reflected poor execution.  The experience was a total disappointment.

 

Let me contrast that with my all-time favorite hotel, the Base2Stay Hotel in London (pictured above). This small hotel is clean, quiet and inexpensive. The rooms and common areas are decorated in a simple Scandinavian style, which though perhaps austere to the point of severity, are practical and efficient. The location may not be fashionable, but it is functional – it is located a block from the Earl’s Court tube stop, on the Piccadilly Line (which also serves Heathrow), in an area with pubs, shops and cafes, and on a quiet street full of school kids and Moms pushing prams. The people who work at the hotel are friendly and helpful.

 

To be sure, many Americans would find the rooms small, perhaps too small. Personally, I find them a wonder of efficiency, the hotel room equivalent of a Swiss Army knife. They manage to include a small kitchenette (with refrigerator), an ultramodern bathroom with all sorts of nifty plumbing fixtures, and a satellite cable connection with a global TV channel selection and music. Oh, and by the way, a single occupancy room runs around £105 a night – including Internet access at no additional charge.

 

This hotel hits all of my important criteria. It is clean, quiet and inexpensive. It is in a convenient location. It includes everything that is indispensable but avoids pointless amenities that add only to the cost but not to the overall experience. And it has its own distinct charm and character.

 

Many of the hotels on my list of favorites and that meet these criteria are in Europe. This preference isn’t the product of some snooty Europhilic distemper. Rather, it is due to the fact that when I travel to Europe I am unwilling to pay a premium to stay at a hotel that lacks charm, character and distinctiveness. Both to keep costs down and to improve my travel experience, I am willing to go further afield. With TripAdvisor.com as my guide, I have had some terrific experiences.

 

My most recent discovery was the hotel in which I stayed in Amsterdam. (More about my Amsterdam travels here.) I was fortunate enough to stay in the Citizen M Hotel, a “concept hotel” located on Beethovenstraat in a quiet, leafy residential area on one of the main tram lines. The hotel is a way station for a surprisingly cosmopolitan clientele. The hotel is ultra modern, with simple décor, complicated lighting fixtures and a lobby full of flat screen TVs. All of the rooms and common areas are WiFi enabled (at no additional charge). The ground floor is built around a bar/lounge where people actually do congregate and converse for breakfast in the morning and for cocktails in the afternoon. The rooms themselves are small but efficient, with very space age-y plumbing fixtures. The beds are enormous. And the wall phone was Skype enabled. I made a bunch of International phone calls and the charges didn’t even amount to a euro. And the best part of all is that a single occupancy room costs around €95 a night.

 

Another favorite European hotel is the small hotel in which I stay while in Cologne, the Domstern. The hotel is just a few blocks from the central train station, but it is on the opposite side of the station from the Cathedral and the main tourist areas, so it is quiet. The rooms and the common areas are decorated in basic Ikea. The hotel is quiet and clean. The rooms have a pan-European cable connection and the fastest Internet connection I have ever had in any hotel anywhere. But the thing that sets this hotel apart is the breakfast service, which is included in the cost of the room. The menu includes fresh breads and pastries; homemade jams, jellies and honey; meats, sausages and cheeses; fresh fruit and various kinds of yogurt; and excellent coffee. I would travel hours to stay in this hotel just for the breakfast. And the best part of all is that a single room runs only about €60 a night.

 

My favorite hotel in Paris is the Hotel de Fleurie, which is located in the Sixth Arrondissement, just a block off of the Boulevard St. Germain des Pres. Even though it is in a very lively area, the hotel itself is quiet, because it is on a one-block long one-way street that doesn’t really go anywhere. The hotel is located in a restored 18th century building and the rooms are charming and comfortably decorated. The location is about perfect – it is just a block from the Odeon metro stop and a short walk from the Jardin de Luxembourg. The Seine River, Notre Dame Cathedral and the Louvre are all within walking distance. Breakfast is included in the room charge, and features freshly baked breads and excellent coffee. The rooms and common areas have ultrazippy WiFi service (at no additional charge). This hotel is more upscale than the others, but a single room runs only about €120 a night.

 

I have other European hotels I particularly like, but the others are sufficiently quirky that I hesitate to go too far overboard about them here.

 

Because of the predominance in the U.S. of the chain hotels, it is a challenge trying to find hotels that are both inexpensive and charming. There are of course innumerable bed and breakfasts, many of which are quite wonderful. The best ones tend to be out in the country or in locations that are not always well suited to my business purposes and requirements. They also tend to be too frou-frou and Laura Ashley-ish for my tastes. There are a few bed and breakfasts that I have been able to enjoy on business travel, including the White Swan Inn in San Francisco. Readers’ suggestions in this category are welcome, particularly for inns that provide the indispensable combination of lower cost, charming environment, and functional location.

 

One U.S. chain that I am happy to patronize is Club Quarters. I have stayed in Club Quarters hotels in New York, Philadelphia, Chicago and San Francisco. The rooms in these hotels are small and ascetic. (The first time I stayed in one, I was sure the room had been designed by an architect whose prior assignment had been designing airplane lavatories.) But the hotels are clean and quiet and they tend to be in very useful locations – for example, the Chicago hotel is in the Loop near Wacker Drive, the Philadelphia Hotel is on Chestnut, the New York hotel is mid-town, and the San Francisco hotel is in the financial district adjacent to the Embarcadero. The room charge includes Internet access, and most of the hotels have exercise facilities. These hotels are functional, not charming. But the room charges run significantly less than other business hotels located nearby.

 

Not all of my favorite U.S. hotels are austere. For example, my favorite hotel in Denver is the Oxford Hotel, which is a beautifully restored 19th century hotel located in the renovated Lower Downtown area. The rooms in the hotel have fine period-piece furniture. Hotel guests have access to a great nearby health club, and the area around the hotel, which is just blocks from Coors Field, is full of bars, book shops, cafes and restaurants.

 

In Washington, my favorite hotel is the Georgetown Inn. It is on Wisconsin Avenue, just a few blocks north of M Street, in Georgetown. When I visit Washington, I try to set up my meetings in the hotel restaurant, The Daily Grill, or at my favorite bar in DC, Martin’s Tavern, which is just a block away. The rooms in this hotel have a comfortable, old-fashioned feel. The best part is the access the hotel affords to the residential area of Georgetown.

 

One of my favorite hotels to visit is the Claremont Hotel, located in the hills of Berkeley, California. Admittedly, this hotel is by no means a bargain hotel. It is more of a resort destination, with one of the best health clubs and fitness centers of any hotel I have every stayed in. The décor is early 20th century country club. (Indeed, the look and feel is very similar to the clubhouse of my home golf course.) On a clear day, the views of the bay and of San Francisco are fantastic.

 

I could go on and on (perhaps unfortunately so, as it bespeaks my itinerant lifestyle), but for purposes of this post and for today, that is my list of hotels. I don’t feel nearly as passionate about my U.S. recommendations as I do about my European ones, in part because I have had far less success in the U.S. finding inexpensive, charming hotels in useful locations. I hope readers will respond with their favorite hotels, particularly if you have suggestions of great, inexpensive places to stay in the U.S.

 

I will freely admit that a big factor in many of my assessments may have been random good or bad experiences. For example, I am sure I just caught the Ritz-Carlton in Philadelphia on a bad night. I may have had an unusually fortunate experience at some of the hotels I have recommended. I certainly can’t ensure that others visiting those hotels will enjoy them as much as I did. But on the other hand, I find the hotel reviews on TripAdvisor.com remarkably accurate, which sugests that random hotel experiences often are representative.

 

I hope many readers will use the Comment feature of this blog to share with other readers their favorite hotels – or for that matter, their worst hotels, that is useful information too.

 

Securities class action lawsuit filings continued to accumulate during the third quarter of 2011, and the filing levels remain on pace for an above average year of securities class action litigation. As was the case in earlier quarters this year, the third quarter filing level was significantly buoyed by merger-related litigation and by lawsuits involving U.S.-listed Chinese companies, although to a lesser extent than prior quarters. There are some other interesting trends emerging as well.

 

By my count, there were 49 new securities class action lawsuits filed in the third quarter of 2011, bringing the year to date total through September 30 to 154. (Please see below for some note about “counting “and the reasons my count may differ from other published tallies.) The third quarter filing levels held steady with the number in the second quarter of 2011, when 49 lawsuits were also filed. The 154 filings year to date implies an annual filing total of about 205, which would be above the 1997-2009 average of 195.

 

The two most significant factors in the securities lawsuit filings during the first nine months of the year are merger-related lawsuits and lawsuits involving U.S.-listed Chinese companies. Of the 154 federal securities lawsuits filed through September 30, 47 (30.51%) were merger-related. Non-U.S. companies were named as defendants in 43 of the securities lawsuits (27.9%) filed during the first three quarters, of which 32 involved U.S. listed Chinese companies (20.79%).

 

Though the merger-related filings and lawsuits against U.S.-listed Chinese companies both continued to accumulate in the third quarter, both trends were diminished in the third quarter compared to the year’s first half. During the third quarter, 11 of the 49 lawsuit filings (22.54%) were merger-related, and 6 of the 49 filings (12.24%) involved U.S.-listed Chinese companies, both figures down compared to the year to date as a whole.  

 

The 154 YTD lawsuit filings involve a surprising diversity of companies. The companies named as defendants in the securities lawsuit filings during the year’s first nine months represented 91 different Standard Industrial Classification codes (SIC). Unlike recent years, in which filings against financially-related companies predominated, the SIC code categories with the largest number of filings during the first three quarters of 2011 reflect industries that historically have been the focus of securities litigation.

 

Thus, the SIC code categories with the largest number of securities lawsuit filings so far this year are SIC code categoies 3674 (Semiconductor and Related Devices) and 7372 (Prepackaged Software). The next largest SIC code category includes one industrial group that has also been a frequent target in the past, SIC Code category 2834 (Pharmaceutical Preparations), in which six companies have been sued year to date. Another category that has also had six new filings so far this year is a group that in the past has not seen the same level of litigation activity, SIC Code category 1311 (Crude Petroleum and Natural Gas).

 

The federal securities class action lawsuits during 2011’s first nine months have been filed in 45 different federal district courts, but just two courts have accounted for more than half of the filings. During the first three quarters of the year, there were 33 new securities class action lawsuit filing in the Southern District of New York, and 29 in the Central District of California. Both of these figures were significantly increased by filings involving U.S.-listed Chinese companies. In the Southern District of New York, 21 of the 33 filings through September 30 involved non-U.S. companies, of which 13 were U.S.-listed Chinese companies. In the Central District of California, 13 of the 29 lawsuits filed during the first nine months of the year involved U.S.-listed Chinese companies.

 

In the overall category of corporate and securities litigation, including litigation filed in state courts, the merger-related litigation has been and remains the predominant story. By my count, during the first three quarters, there was merger objection litigation filed involving at least 129 transactions, and accounting for at least 185 different lawsuits (counting lawsuits filed in both federal and state court). These figures only take account of the lawsuits of which I am aware and are almost certainly understated. In other words, if you are attempting to track corporate and securities litigation and you are only monitoring federal securities class action litigation, you are missing a great deal of the action. In fact, you could be missing the majority of the action.

 

As I noted at the outset, my lawsuit count may differ from other published accounts for a number of reasons. First, I include in my count class action lawsuits asserting violation of the federal securities laws but that are filed in state court. There were at least two of these during the third quarter of 2011. In addition, I may not always decide to include the same merger-objection lawsuits in my tally as do other sources that track securities lawsuit filings. I include the merger-related lawsuit if it is in federal court and if it alleges a violation of the federal securities laws.

 

The decision to include the above described categories of cases and other factors will likely cause my count to be slightly higher than other published tallies. I think the tallies will remain directionally consistent but the differences might be enough to lead to differences of opinion about, for example, whether or not the number of annual filings is increasing or declining, or how the annual filing levels compare with annual averages.

 

The Towers Watson 2011 D&O Insurance Survey Form Released: Towers Watson has released the 2011 survey form for its annual survey of D&O insurance buying patterns. Everyone in the industry benefits from Towers Watson’s annual survey, the summary report for which Tower Watson makes freely available. Because everyone benefits from it, we all have a stake in making sure that there are sufficient responses to ensure that the survey results are meaningful. I hope everyone will take the time to ensure that as many D&O insurance buyers as possible will complete the survey. The survey can be found here.

 

In an interesting October 14, 2011 post-trial opinion, Delaware Chancellor Leo Strine entered a $1.263 billion award in the Southern Peru Copper Corporation Shareholder Derivative Litigation. The lawsuit relates to Southern Peru’s April 2005 acquisition of Minerva México, a Mexican mining company, from Groupo México, Southern Peru’s controlling shareholder. Chancellor Strine concluded that as a result of a “manifestly unfair transaction,” Southern Peru overpaid for Minerva Mexico. A copy of Chancellor Strine’s 106-page opinion can be found here.

 

Background

Southern Peru is a NYSE company. (After the events involved in this lawsuit, Southern Peru changed its name to Southern Copper Corporation. Its shares trade on the NYSE under the symbol “SCCO.”) Groupo México is the controlling shareholder of Southern Peru. In 2004, Groupo México owned 54.17% of Southern Peru’s outstanding stock and 63% of the voting power. In February 2004, Groupo México proposed that Southern Peru buy its 99.15% share stake in Minerva in exchange for 72.3 shares of newly-issued Southern Peru stock. At market price of Southern Peru’s stock then, the proposed deal had an “indicative” value of $3.05 billion.

 

The Southern Peru board appointed a special committee to assess the proposed transaction. The special committee in turn hired numerous outside experts, including Goldman Sachs, to assist the committee in assessing the transaction. As Chancellor Strine later concluded, when it became clear that Minerva’s value was substantially less than the value of proposed amount of Southern Peru stock, “the special committee and its financial advisor instead took strenuous efforts to justify a transaction at the level originally demanded by the controller.”

 

As a result, “the controller got what it originally demanded: $3.1 billion in real value in exchange for something worth much, much less — hundreds of millions of millions of dollars less.” Even worse, the special committee agreed to a fixed exchange ratio. Because Southern Peru’s stock price rose between the date the parties entered the deal and the date the deal closed, the actual value of the transaction was $3.75 billion. Even though the special committee had the ability to rescind the deal, the special committee did not seek to update the fairness opinion or otherwise alter the transaction. The upshot was that “a focused, aggressive controller extracted a deal that was far better than market, and got real, market-tested value of over $3 billion for something no member of the special committee, none of its advisors, and no trial expert was willing to say was worth that amount of actual cash.”

 

Shareholders then filed a derivative lawsuit alleging that the transaction was unfair to Southern Peru and its minority shareholders. By the time of trial, the defendants remaining in the case were Group México and its eight affiliate directors who were on the Southern Peru board at the time of the transaction. The plaintiffs argued that the 67.2 million shares of Southern Peru stock that Groupo México received in the transaction were worth substantially more that the 99.15% interest in Minerva that Southern Peru received. 

 

The October 14 Opinion

Following trial, Chancellor Strine concluded that “the process by which the Merger was negotiated and approved was not fair and did not result in the payment of a fair price.” He found that “from inception, the Special Committee fell victim to a controlled mindset and allowed Groupo México to dictate its terms and structure of the Merger.”

 

Strine also concluded that the committee was “not ideally served by its financial advisors,” Goldman Sachs, which having concluded that the value of what Southern Peru would receive in the transaction was substantially less than the value of stock Groupo México was to receive, “helped its client rationalize the one strategic option available within the controlled mindset that pervaded the Special Committee’s process.” But, as Strine found, “Goldman and the Special Committee could not generate any responsible estimate of the value of Minerva that approached the value of what Southern Peru was asked to hand over.”

 

Strine found that as a result, the transaction was “unfair” to Southern Peru, because the special committee’s “cramped perspective” resulted in a “strange deal dynamic,” in which “a majority shareholder kept its eye on the ball – actual value benchmarked to cash – and a Special Committee lost sight of market reality in an attempt to rationalize doing a deal of the kind the majority stockholder proposed.” As a result of this “game of controlled mindset twister,” the committee “agreed to give away over $3 billion worth of actual cash value in exchange for something worth demonstrably less, and to do so on terms that by consummation made the value gap even worse, without using any of its contractual leverage to stop the deal or renegotiate its terms.” Because the deal was “unfair,” Strine concluded that “the defendants breached their fiduciary duty of loyalty.”

 

Since the time of the merger, Southern Peru’s share price has continued to climb. For that reason, and because of “the plaintiff’s delay in litigating the case,” Strine concluded that a rescission-based approach would be “inequitable.” Instead, Strine, utilizing a “panoply of equitable remedies,” crafted “a damage award that approximates the differences between the price that the Special Committee would have approved had the Merger been entirely fair (i.e., absent a breach of fiduciary duties) and the price that the Special Committee actually agreed to pay.” Strine noted that given the differences in values involved, the record arguably could support a damages award of $2 billion or more.”

 

However, taking into account the “imponderables” involved in many of the valuations, Strine took an approach he characterized as “more conservative.” His approach basically consisted of coming up with a value for Minerva based on an average of three possible valuation methodologies. This method came up with a valuation for Minerva of $2.409 billion. The 67.2 million shares Groupo México received were worth $3.672 billion.

 

Based on the difference between these two figures, Strine entered an award of $1.263 billion. Strine also awarded interest, without compounding, at the statutory rate from the merger date, and also from the date of judgment until payment. He also awarded plaintiffs’ attorneys’ fees, to come out of the award, in an amount he directed the parties to agree upon. Strine added that Groupo México could satisfy the judgment by agreeing to return to Southern Peru the number of shares necessary to satisfy the award.

 

Discussion

The addition of pre- and post-judgment interest could as much as another $100 million to the value of this award, meaning that the total value of this award is arguably as much as $1.36 billion (and counting). But as massive as this amount is, it does not represent the largest amount awarded in a shareholder derivative suit. As far as I am aware, that distinction belongs to the $2.876 billion awarded in the shareholder derivative lawsuit filed against former HealthSouth CEO Richard Scrushy, about which refer here. (Actually, the total amount of the damages in Scrushy case was $3.115 billion. It was only the application of $239 million credit for judgments entered against other defendants that brought the number down to the $2.876 billion.) The Southern Peru award does likely represent the largest award in a derivative suit in Delaware Chancery Court.

 

In light of the dollars involved, Groupo México has a strong incentive to appeal, although the accumulation of post-judgment interest could provide a reason to carefully assess the likelihood of success on appeal.

 

If it comes down to payment of the award, it looks to me like Groupo México’s best option would be to return the number of Southern Peru shares required to satisfy the award. The shares have dramatically escalated since the transaction closed (at current market valuations, and allowing for stock splits, the shares appear to be worth more then ten times what they were in April 2005). Paying the award with an inflated currency would appear to allow Groupo México to retain substantial benefits of this transaction.

 

There are at least a couple of important things to be drawn from the outcome of this case. First, this case represents a very substantial refutation to the many commentators who regularly complain that derivative litigation in Delaware courts provide shareholders’ with a toothless remedy. This case shows that the Delaware derivative litigation definitely can have bite.

 

Second, this case has some very important implications for board’s duties when considering a transaction proposed by a controlling shareholder. In particular, Chancellor Strine seemed particularly concerned that the special committee considered only the deal that the controlling shareholder proposed, suggesting that in these circumstances, boards and the committees must consider all alternatives and not just the one proposed by the controlling shareholder. More broadly, the board and its committee have a duty to consider more than just trying to figure out a way to complete the transaction that the controlling shareholder has proposed.

 

In view of the massive size of the award, the presence or absence of D&O insurance to pay part of the cost of this award is unlikely to be a material consideration. Were Groupo México to try to get its D&O insurer to pay a part of this award, it would face at lest a couple of likely objections from its carrier(s). First the carrier would contend that its policy provides coverage if at all for Groupo México itself only for “securities claims,” a term that is usually defined with reference to the insured company’s own securities. Since this transaction involved Southern Peru’s securities not Groupo México’s, the carrier would contend that there is no coverage for the award against Groupo México, because the award did not arise out a securities claim.

 

The carrier would likely also contend that in any event, because of the rescissionary nature of the award, there is no coverage under the policy, nor is there coverage under the policy for the return of amount for which the insured is not legally entitled.

 

This latter argument would likely also take care of any contentions by the individual defendants that they are entitled to coverage. An interesting issue though is the question of which company’s policy is the relevant policy. Though the individual defendants were affiliated with Groupo México, they were sued in their capacities as directors of Southern Peru. Accordingly, it would look as though the relevant policy for them to seek to access would be Southern Peru’s (although they might have also potentially have outside directorship liability coverage under Groupo México’s policy on an excess basis, a likelihood that is probably remote because that coverage is usually restricted to service on nonprofit boards).

 

The individuals’ prospects for obtaining coverage for the award under the Southern Peru policy would depend as an initial matter on their ability to overcome the carrier’s likely objections that there is no coverage under its policy for rescissionary damages. Those objections may well be insurmountable, but assuming for the sake of argument that that obstacle could be circumvented, the question would then be whether the policy’s Side A coverage would kick in, as providing coverage for nonindemifiable loss.

 

Given the size of the award and the hurdles the defendants would have to overcome in order to establish coverage, these insurance questions could all be more theoretical than real.

 

In any event, the eye-popping amount of the award here makes this case a noteworthy, and Chancellor Strine’s analysis makes these circumstances interesting. I suspect this decision will occasion a great deal of discussion, particularly around the duties boards’ face when forced to assess transactions that will benefit a controlling shareholder.

 

Special thanks to a loyal reader for providing me with a copy of this opinion. 

 

Alison Frankel has a very interesting October 17, 2011 commentary on this case on her blog on Thomson Reuters News & Insight (here). Professor Davidoff also has an interesting commentary about the case on the Dealbook blog (here).