Though 2010 was a "turnaround" year for banks, the number of problem institutions continued to increase  during the year, according to the FDIC’s Quarterly Banking Profile for the fourth quarter of 2010. A copy of the FDIC’s February 23, 2011 press release about the report can be found here, and the Quarterly Banking Profile itself can be found here.

 

The FDIC defines a problem institution as one the agency has rated as a 4 or 5 on a 1 to 5 scale of ascending regulatory concern. Problems institutions are those with financial, managerial or operational weaknesses that threaten their continued viability. The FDIC does not publish the names of the institutions that it defines as problem institutions.

 

Of the 7,667 institutions that were federally insured as of December 31, 2010, the FDIC rated 884 as problem institutions, or about 11.5% — or one out of nine — of all banks in the country. These problems banks represented $390 billion in assets. These year end 2010 figures compare with the 702 banks rated as problem institutions at the end of 2009, representing $402 billion in assets.

 

The year-end 2010 tally of problem banks is not only up from the end of 2009, it is also up from the end of the third quarter of 2010. There were 860 problem institutions as of September 30, 2010, representing $379 billion in assets.

 

Though the number of problem institutions has continued to increase, the rate of increase has slowed. The FDIC noted in its press release that the rate of increases in the number of problem institutions has declined in each of the last four quarters.

 

The number of problem institutions as of the end of 2010 is the largest number of problem institutions since March 31, 1993, when there were 928.

 

The number of problems institutions has continued to grow even as the number of bank failures has continued to mount, which has the effect of reducing the number of institutions rated as problems. The 157 bank failures in 2010 were the highest number of bank failures since 1992 (when 181 banks failed.) Though the FDIC stated in its press release that it expects 2010 to be the high water mark of the current bank failure wave, 22 additional banks have failed already in 2011, putting this year’s bank closure pace ahead of last year’s.

 

Overall, however, the news in the Quarterly Banking Profile was relatively good. The FDIC characterized 2010 as a "turnaround" year, one in which the banking industry reported four consecutive quarters of positive income. The industry’s fourth quarter aggregate profit of $21.7 billion represented a $23.5 billion increase from the industry’s $1.8 billion loss in the year prior quarter. Almost two thirds of reporting institutions reported improvements in quarterly net income from a year ago. Much of the improvement in earnings is attributable to reductions in provisions for loan losses.

 

The DealBook blog’s summary of the FDIC’s report can be found here.

 

More Investors Opting Out?: Luke Green has an interesing February 23, 2011 post on his Risk Metrics Insights blog (here) about the number of large institutional investors that have opted out of the $624 million Countrwide securities class action settlement. As many as 33 large investors have opted out of the settlement, which has resulted in changes to the class action settlement, including the reduction of the settlement amount to $601.5 million. Many of the opt outs apparently have initiated separate litigation, as well. Green notes that there are a host of arguments against and in favor of opting out, but he nevetheless asks whether the willingness of large investors to opt out possibly represents a larger trend.

 

D&O Case Law Survey: The policyholder side coverage law firm Lowenstein & Sandler has published a "Review of 2010 Case Law on D&O Insurance Coverage," which can be found here. The memo provides brief reviews of critical D&O insurance coverage decisions from the past year.

 

 

In the long-awaited rulings on the post-trial motions in the Vivendi securities case, Judge Richard Holwell has entered a February 22, 2011 order materially narrowing the plaintiff class based on the U.S. Supreme Court’s holding in Morrison v. National Australia Bank. A copy of Judge Holwell’s opinion, in which he eliminated ordinary shareholders from the class and further narrowed the class to only certain investors who purchased the company’s ADRs, can be found here.

　

The bulk of Judge Holwell’s 124-page opinion is taken up with the parties’ other post-trial motions, particularly Vivendi’s motion to set aside the verdict in whole or in part. Judge Holwell largely denied the motions. However, he declined to enter judgment for the plaintiffs, holding that Vivendi had the right to attempt to attempt to refute the presumption of reliance on an individual basis.

　

Background

Vivendi is one of the very rare securities class action cases to have gone to trial, and (as far as I know) the only case to have gone to trial involving so-called "f-cubed" claimants – that is, foreign domiciled shareholders of foreign companies who bought their shares on a foreign exchange. As discussed here, on January 29, 2010, following a four-month trial, a federal jury found that with respect to the 57 allegedly misleading statements at issue, Vivendi had violated Section 10(b). However the jury concluded that Vivendi CEO Jean-Marie Messier and CFO Guillame Hannezo had not violated Section 10(b).

　

The parties filed post-trial motions, and after the U.S. Supreme Court entered its opinion in Morrison v National Australia Bank, the parties submitted supplemental briefs.

　

With respect to the Morrison-related issues, it is important to note that during the relevant time period, Vivendi’s ordinary shares had traded only on the Paris Bourse. The company’s American Depositary Receipts (ADRs) were listed and traded on the NYSE. In its revised May 2007 order (here), the district court had certified a class in the Vivendi case consisting of Vivendi shareholders located in the U.S., France, England and the Netherlands.

　

The February 22, 2011 Opinion

In his February 22 opinion, Judge Holwell rejected the plaintiffs’ argument that because Vivendi ADRs were "listed" on the NYSE, the entire class of underlying shares (and not just the specific shares backing the ADRs) were "registered" with the SEC and therefore within the ambit of Section 10(b) (an argument on which the plaintiffs had elaborated in an earlier post on this blog, here).

　

Judge Holwell worked through the plaintiffs’ "listing" argument, an analysis that because somewhat abstruse as he labored with the complex factual questions whether or not the ordinary shares underlying the ADRs had somehow become "untethered" from the ADRs (perhaps through share redemptions or otherwise). Judge Holwell conceded that plaintiffs’ arguments did give him "pause," but ultimately he concluded that the argument "cannot carry the freight that plaintiffs ask it to bear."

　

Ultimately, Judge Holwell pushed past the complexity, and even stepped over the question whether Justice Scalia made a mistake in the way he used the word "listing" in the Morrison opinion. Judge Holwell finally dismissed the "listing" argument as "contrary to the spirit" of Morrison’s holding, citing with approval earlier district court opinions in the RBS case (refer here) and in the Alstom case (refer here), among others.

　

Judge Holwell also rejected the plaintiffs’ argument that Section 10(b)’s ambit extended to U.S. domiciled investors who purchased ordinary Vivendi shares outside the U.S (so-called "f-squared" claimants). In doing so, Judge Holwell, by his own account, joined other courts in "rejecting the argument that a domestic transaction occurs whenever the purchaser or seller resides in the United States." He observed that "there can be little doubt" that the phrase "domestic transaction" was "intended to be with relevance to the location of the transaction, not to the location of the purchaser."

　

On the basis of these Morrison-related rulings, Judge Holwell amended the class certification to exclude all purchasers of ordinary shares. As amended, the class certification includes persons in the U.S, France, England and the Netherlands who purchased or otherwise acquired Vivendi ADRs during the class period.

　

The (lengthy) balance of the opinion addresses the parties’ other post-trial motions, which Judge Holwell largely denied, except as to one of the 57 statements at issue, on which he granted Vivendi’s motion to set aside. Of particular interest, among Judge Holwell’s post trial motions is his conclusion that there want nothing fundamentally inconsistent about the jury’s finding of liability against Vivendi while at the same time finding no liability against the two individual defendants.

　

Finally, Judge Holwell denied plaintiffs’ motion for entry of judgment, holding that Vivendi was entitled to try to rebut the presumption of reliance as to individual investors.

　

Discussion

Given the prior district court rulings entered in the wake of Morrison, there is arguably nothing all that surprising about Judge Holwell’s Morrison-related rulings. To be sure, our friends in the plaintiffs’ bar had strong feelings about the "listed" argument, but at least one other judge had already rejected the argument, making Judge Holwell’s ruling that much less novel or noteworthy.

　

One issue that Judge Holwell did not address, because the parties apparently jointly conceded it, was the question whether or not the ADR transactions themselves did not did not come within the ambit of Section 10(b). At least one court has held, in light of Morrison, that ADR transactions are not "domestic transactions" within the meaning of Morrison. The Vivendi plaintiffs can at least be glad that they did not have the ADR transactions taken out of the class as well – there wouldn’t have been anything left.

　

But even with the ADR transactions (or at least some of them – see the discussion below) kept in the class, the class damages look materially smaller than they did when the verdict was first entered. At the time, the plaintiffs’ lawyers were quoted as saying that the aggregate class damages might be as much as $9.3 billion. In David Bario’s February 22, 2011 Am Law Litigation Daily article about Judge Holwell’s rulings (here), he quoted Vivendi’s counsel as saying that the effect of Judge Holwell’s rulings is to reduce the plaintiffs damages by 90%. (Of course, the 10% remaining still arguably represents a pretty big number – just not $9.3 billion.)

　

Though Judge Holwell substantially trimmed the class definition, the remaining class still has some rough edges as a result of the court’s prior class certification rulings. The complex process by which the court defined the class based on its determination that investors in certain countries might or might not enforce a securities law related judgment of a U.S. court is still a part of the revised class definition. Thus ADR investors in the U.S., France, England and the Netherlands are in the class, but not ADR investors in other countries (for example, Germany or Austria) are not . Though this particular issue does look different post Morrison, it is still a fundamental problem in the case left over from an earlier stage that is still out there as a potential source of further challenges, perhaps on appeal.

　

Judge Holwell’s final note about Vivendi’s right to rebut the presumption of reliance as to individual investors certainly poses some interesting procedural issues. It is not entirely clear how these issues are to be sorted out, although the possibility of individual trials certainly seems to be implied in Judge Holwell’s February 22 order. The possibility for further procedural wrangling seems high.

　

Special thanks to a loyal reader for sending along a copy of Judge Holwell’s ruling.

　

　

　

　

Great news – the survey is back. After year’s interruption, Towers Watson has resumed its annual D&O Liability Survey. The report for the 2010 survey (a copy of which can be found here) is full of valuable information about D&O insurance policyholders’ limits selection, program structure, and claims experiences, among many other things. The entire industry should celebrate the return of this venerable and highly valued survey report. Towers Watson’s February 22, 2011 press release about the survey report can be found here. Full disclosure: I was consulted in connection with the survey questionaire and results.

 

Preliminary Notes

The survey report contains numerous valuable insights, as discussed in detail below. However, a number of preliminary observations are in order, as these observations may aid in understanding the results.

 

First, the characteristics of the survey respondents provide important context for some of the report’s findings. In particular, the pool of 496 respondents to the 2010 survey was weighted toward large institutions and entities. Excluding nonprofit respondents, the survey respondents’ average revenues were $3.7 billion, and nearly two- thirds of all respondents had revenues over $1 billion.

 

The respondents’ average asset size is $4.6 billion, with about 70% of all respondents reported assets of over $1 billion. Even just the private company respondents include a significant number of very larger organizations. Thus, about 44% of the private company respondents reported assets of $1 billion or more.

 

The pool of public company respondents was also weighted toward large publicly traded companies. The average market capitalization of the public company respondents is $4.6 billion, with about 71% of public company respondents reporting market caps of $1 billion or over. Nearly a third of all public company respondents have market caps over $5 billion. 23% of all public company respondents have market capitalizations over $10 billion.

 

Second, the pool of respondents to this year’s survey is relatively smaller than prior years’. As the report itself notes, because "the sample size is smaller this year," the data are "less statistically reliable." (As I note below, everyone in the industry has a stake in trying to increase the size of the sample in future surveys, in order to try to address this concern.)

 

Third, the difference in the number of organizations represented in the survey response pools may be only one way that the two sets of survey respondents differ. The pool of respondents may well differ in other ways too, such as by industry or by size. Given the differences between the respondent pools, there is a possibility that apparent differences between the reported survey results may reflect only the change in the composition of the pool, rather than changes in the underlying behaviors. In other words, comparisons between different years’ survey results should be viewed cautiously.

 

The Survey Findings

1. The survey found that, excluding nonprofits, 53% of all respondents have international operations. Of the companies with international operations, 47% reported that they purchased local policies in foreign jurisdictions. (The 2008 survey found that only 2% of respondents purchased local policies in foreign jurisdictions.)

 

2. The average limits purchased among all private company respondents was $34 million. However, the average limit purchased by private companies with assets of less than $250 million was $7 million.

 

3. The average limit purchased among all public companies was $118.3 million. However, the average limits for public companies with market caps of less than $250 million were $26.1 million. The average limits for companies with market caps between $250 million and $499 million is $42.4 million, and the average limits for companies with market caps between $500 million and $999 million is $57.2 million.

 

4. 21% of survey respondents said they had increased their D&O limits at the last renewal. The survey report speculates that this could reflect a reaction "to the fact that D&O liability exposures are arguably at an all time high," but also acknowledges that at a time of generally declining prices, it "may also be likely that purchasers are reallocating a portion of their savings to buy additional limits."

 

5. The survey notes that 35% of nonprofit respondents and 22% of private company respondents were unsure of how their D&O insurance program is structures, about which the report notes that "brokers and other management liability consultants need to spend more time educating their nonprofit and private company clients about their insurance coverage."

 

6. 9% of all survey respondents reported that they purchase D&O insurance that covers only outside or independent directors. (The 2008 survey found that only 0.3% of all respondents purchased D&O insurance that covers only outside or independent directors.)

 

7. 75% of public company survey respondents reported that their company purchases Excess Side A insurance or Side A/DIC insurance, which the survey report notes is a "significantly higher" percentage than noted in the 2008 survey. 83% of companies with market caps over $10 billion purchased Excess Side A or Side A/DIC insurance, but only 50% of companies with market caps under $250 million purchased Excess Side A or Side A/DIC insurance.

 

8. The average amount of Excess Side A insurance purchased by public companies is $47.5 million, but only $14.5 million for companies with market caps of under $250 million, and $20 million for companies with market caps between $500 million and $999 million.

 

9. 35% of private organizations reported buying Excess Side A insurance, but only 20% of private companies with assets of under $250 million. The average amount of Excess Side A insurance purchased by private company respondents is $18.8 million, but only $6.2 million among private companies with assets under $250 million.

 

10. 31% of all respondents reported having a D&O claim in the last 10 years (up from only 17% in the prior survey report). Asset size had a direct bearing on the likelihood of a claim.

 

11. The most frequent type of claims for nonprofit respondents and private company respondents was employment related claims. Among public company respondents, the most frequent type of claim is the shareholder or investor suit.

 

Discussion

This year’s report is full of interesting and useful information that will be valuable to insurance buyers and their advisors. Though I have summarized the report above, the report is replete with additional interesting detail, and the report merits reading at length and in full.

 

Many of the observations noted in the report may reflect in part the weighting of the respondent pool toward larger organizations. Thus, for example, the report’s observations about the following phenomena may reflect the number of larger entities in the survey pool: the relatively higher prevalence of entities purchasing local policies in foreign jurisdictions; the larger number of entities purchasing insurance solely for the protection of outside or independent directors; the increased prevalence of Excess Side A insurance or Side A/DIC insurance; and the reported increase in the number of claims experienced.

 

Indeed, the survey report itself notes with respect to each of these categories that prevalence of these phenomena increased as the size of the responding entity increased. Accordingly, the use made of the report’s observations of each of these items should take into account the survey respondent pool’s relative weighting toward larger institutions. Some of the observations may or may not retain their validity when compared to the universe of all firms or entities, or perhaps even when compared to a range of smaller firms and entities.

 

All of that said, with respect to many of the items measured in the survey, the survey report may be the only publicly available source of information. Particularly with respect to the many items measured in the report for which there is no publicly available alternative source, the survey reports provides indispensible insight

 

It is this aspect of the survey which ultimately makes it invaluable – that is, there is no other place where D&O industry professionals and their clients and customers can go to get the kind of information in this report. For that reason, the report’s return after a one year interruption is, as I noted at the outset, a cause for celebration.

 

Because just about everyone in the industry refers to this survey and because the entire industry benefits from the availability of the information in the survey, everyone in the industry has an equal stake in making the survey as broad and valid as possible. All of us have a stake in trying to make sure that future surveys reflect a broad cross-section of all firms and entities, and that as many respondents as possible complete the survey.

 

Now that the survey is back again, we can all look forward to the survey’s continuation in future years. We should all plan on trying to encourage maximum participation in future surveys as well.

 

Many thanks to Larry Racioppo of Towers Watson for providing me with a copy of the survey report..

 

Auction Rate Securities Litigation Grinds On: The mess left behind when the market for auction rate securities froze in February 2008 still has not been cleaned up. But the mess did beget at least one tangible byproduct – a mountain of litigation that continues to grind its way through the system. And though many of these cases, like the MRU Holdings case described below, have failed to survive initial dismissal motions, there have been a a very few, like the Akamai case described below, that have managed to overcome the initial pleading hurdles.

 

As discussed at length here, the MRU Holdings case arguably was somewhat distinct amount the auction rate securities cases. Unlike most cases, it did not involve purchasers of the auction rate securities themselves alleging to have been misled by their broker dealers (or by their mutual fund). The case did not even involve shareholders’ claims that they had been misled about the extent of a company’s exposure to its own auction rate securities investments. Rather, the plaintiffs in the MRU Holdings case were investors in a company that originated student loans and securitized the loans by putting them into pools for securitization. The investors claim to have been misled about the company’s dependence on the artificially favorable auction rate securities marketplace as a way to generate capital and free up income.

 

Though the MRU Holdings case represented a variant on the usual auction rate securities litigation, the case itself did not fare better than many of the other auction rate securities litigation cases.

 

In a February 17, 2011 order (here), Southern District of New York Judge Richard Berman granted the defendants’ motions to dismiss in the MRU Holdings case. Among other things, Judge Berman concluded that the company’s disclosure documents fully disclosed the company’s vulnerability due to its resort to the ARS marketplace. The disclosures, he found, "appear to have been based upon an appraisal of MRU’s financial position during an economically difficult timeframe and when read in their entirety not only bespeak caution but shout it from the rooftops." (citations omitted) Judge Berman also concluded that the plaintiffs had failed to plead scienter adequately as well.

 

By interesting contrast, in a February 15, 2011 order (here), District of Massachusetts Judge Joseph Tauro denied the defendants’ motions to dismiss in the individual action that Akamai Technologies filed against Deutsche Bank. Akamai claimed that it had been misled in connection with the company’s purchase of $217 million of ARS. Judge Tauro had little trouble concluding that Akamai’s allegations satisfied the pleading requirements. Significantly, Judge Tauro concluded that Akamai did not need to plead scienter since the PSLRA’s heightened pleading standard for scienter is inapplicable to a claim to Akamai’s control person liability claim.

 

I have added these cases to my running tally of credit crisis-related litigation dismissal motion rulings, which can be accessed here.

　

In Memoriam: It is with sadness that I note here the passing of Judge Richard L. Williams of the United States District Court for the Eastern District of Virginia. It was my privilege and honor to have clerked for Judge Williams many years ago, when I was just out of law school and he had only recently gone on the federal bench. My year clerking for him was one of the best years of my life. Following my clerkship, Judge Williams remained a mentor and a friend, for me as he was for so many others. He was an avid outdoorsman, an unequalled story-teller, a good judge and a good man. He taught me so much about how life should be lived. Judge, we will miss you.

 

The February 21, 2011 obituary for Judge Williams from the Richmond Times-Dispatch can be found here.

　　

In a settlement that has a number of interesting features, Satyam Computer Services, an Indian technology outsourcing company, has agreed to pay $125 million to settle the consolidated securities class action litigation pending against the company in Southern District of New York.

 

The only settling defendant is the company itself, which is now known as Mahindra Satyam. The settlement does not resolve claims against the individual defendants, including certain of the company’s former directors and officers, or against PricewaterhouseCoopers-related entities.

 

The settlement is subject to court approval, as well as other regulatory and governmental approval. A copy of February 16, 2011 settlement stipulation can be found here.

 

Background

Satyam was quickly dubbed the "Indian Enron" when it was revealed in January 2009 – in a stunning letter of confession from the company’s founder and Chairman — that more than $1 billion of revenue that the company had reported over several years was fictitious. Investors immediately filed multiple securities class action lawsuits in the Southern District of New York.

 

The plaintiffs’ consolidated amended complaint alleges that in addition to fabricating revenues senior company officials siphoned off vast sums from the company to entities owned or controlled by the Chairman and members of his family. The defendants include ten former directors and officers of the company; certain entities affiliated with the company’s chairman and individuals associated with those companies; and certain PwC-related entities.The defendants filed motions to dismiss.

 

The Satyam Settlement

In the settlement stipulation, Satyam has agreed to pay $125 million into a settlement fund. The company, which is apparently funding the settlement entirely out of its own resources, is the only settling defendant. The claims against all of the other defendants remain pending.

 

In addition to the $125 million, Satyam also agreed to pay the settlement class 25% of any recovery the company may obtain against the PwC entities, in the event the company in its sole discretion decides to pursue a claim against the PwC entities.

 

There amount of plaintiffs’ attorneys’ fees specified or agreed to in the stipulation, however the settlement papers reflect that plaintiffs’ counsel intends to seek a fee award of 17% of the settlement fund, as well as out of pocket expenses not to exceed $2.5 million.

 

Lead counsel also intends to seek court approval to establish out of the settlement fund a $1 million litigation fund "to help pay for future litigation costs incurred during the continued litigation of the Action against the Non-Settling Defendants."

 

Discussion

There are a number of interesting things about this settlement, the first being its size. Even though it is only a partial settlement, the $125 million settlement amount would be tied for 69th on the list of the all-time largest securities class action settlements.

 

Another very interesting feature of the settlement is that it resolves only the claims against the company – leaving all of the company’s former directors and offices in the lawsuit. These individuals include not only the company’s former Chairman and founder and his family members who were at the center of the scandal, but also the various outside individuals who were serving on the company’s board while the alleged fraud was going on. The suggestion seems to be that the current company management is prepared to leave all of the former board members hanging out there on their own.

 

The fact that the company apparently is also funding this settlement out of its own resources is also interesting. Shortly after the scandal broke, there were press reports that the company carried $75 million of D&O insurance. Of course, these press reports may have been mistaken. Or perhaps the insurance was unavailable to the company, either because the insurance did not include entity coverage or because the carriers are asserting coverage defenses. The possible availability of insurance raises the question whether the coverage is available for the individuals’ defense or any future settlements (assuming it has not already been depleted or exhausted by prior defense fees).

 

Another interesting component of the settlement is the composition of the settlement class to which the parties stipulated as part of the settlement. The class includes not only investors who bought the company’s American Depositary Shares on the NYSE, but also U.S. residents who bought ordinary company shares on Indian stock exchanges.

 

The interesting question is whether, in light of the U.S. Supreme Court’s holding in Morrison v. National Australia Bank, the U.S.-based investors who purchased their shares on the Indian exchange actually have claims they can assert under U.S. securities laws. (Indeed, the settlement stipulation expressly notes that the defendants had supplemented their pending motions to dismiss, seeking in reliance on Morrison to dismiss the claim of the U.S. residents who purchased their shares on the Indian exchanges.)

 

Several U.S. district courts (refer for example here and here) have already ruled that Morrison precludes Section 10(b) claims of so-called "f-squared claimants" – that is, U.S. residents who bought share of non-U.S. companies outside of the U.S. Nevertheless, the proposed settlement class includes these f-squared claimants. In other words, the proposed settlement class includes claimants who may or may not have the ability to assert claims under Section 10(b) in light of Morrison. Indeed, as the remaining defendants might even succeed in having those claimants’ claims dismissed as the case goes forward.

 

However, in recognition of the hurdles that these investors face, the settlement agreement provides that the U.S. investors who bought their shares on the Indian exchange will not receive the same proportion of compensation as the ADS investors.

 

As Alison Frankel notes in her February 17, 2011 Am Law Litigation Daily article about the settlement (here), common share holders will take a 90 percent discount on their potential recovery, by comparison to the ADS investors. The agreement states that this discount is "in recognition of additional legal hurdles facing U.S. residents who purchased Satyam ordinary shares on markets outside the United States in seeking to recover under federal securities laws." The estimated average recovery would be $1.36 per ADS and 6 cents per ordinary share.

 

But though the proposed class definition arguably includes a class of claimants broader than Morrison might prescribe, the proposed class does not include non-U.S. residents who purchased their Satyam shares on the Indian exchanges. These investors’ claims apparently are not resolved or even addressed by this settlement.

 

Another interesting feature of this settlement is the extent to which it seemingly encourages further litigation against the Non-Settling parties. The settlement not only includes the company’s agreement to pay the settlement class 25% of any recovery the company may obtain from the PwC entities, but it also includes a $1 million war chest for the claimants to use in order to continue their claims against the other defendants. This settlement might be good news for Satyam and for the settlement class, but it seems like bad news for the remaining defendants and for the PwC entities.

 

In other words, the company may be settling, but this case is far from over.

 

Bankruptcy and D&O Insurance: On March 2, 2011 at from 1:00 pm EST to 2:30 EST, the Torts and Insurance Practice Section of the American Bar Association will be sponsoring a teleconference on the topic of "D&O Insurance in the Context of Bankruptcy." The teleconference will feature a number of distinguished speakers, including my good friend Perry Granof. Information about the teleconference can be found here.

 

In a February 14, 2011 order (here), an Ontario Superior Court Justice has denied the motion of the defendants in the IMAX securities lawsuit pending in Ontario for leave to appeal the December 2009 rulings of Ontario Superior Court Justice Katherine van Rensberg granting the plaintiffs leave to pursue securities claims in a class proceeding.

 

At its most basic the order is essentially just a ruling that the defendants have not satisfied the relevant standard to justify an appeal at this stage in the proceedings. However, the court’s explanation of its decision implicitly endorses Judge Van Rensberg’s prior decisions – including in particular her decision to certify a global class of all Imax investors. Overall, as detailed below, the February 14 ruling is quite favorable to the plaintiffs.

 

Background

As detailed here, in December 2009, in "groundbreaking" rulings representing the first application of Ontario’s newly revised securities laws, Judge van Rensberg entered two orders granting the plaintiffs leave to bring their case, as required under to proceed under the laws, and certifying the suit as a class action. These rulings allowed the plaintiffs leave to proceed with their case against several IMAX directors and officers over disclosures in the company’s 2005 financial statements.

 

Justice van Rensberg’s decisions were the first to test recent revisions to the Ontario Securities Act that potentially made it easier for disappointed investors to bring actions for civil liability against directors and officers of public companies for misrepresentations in public disclosure documents.

　

These statutory provisions, which became effective　in December 2005, were first passed by the Legislative Assembly of Ontario in legislation now referred to simply as Bill 198, which is codified as Section XXIII.1 of the Ontario Securities Act. The　provisions provide for the liability of certain specified individuals for misrepresentations in companies’ public disclosure documents.

 

Section 138.8 (1) of the statute specifies, however, that a liability action cannot be commenced "without leave of court granted upon motion with notice to each defendant." The court is to grant leave only "where it is satisfied" that the action "is being brought in good faith" and there is a "reasonable possibility" the plaintiff will prevail at trial.

 

In granting the plaintiffs’ motion for leave to proceed, Justice van Rensberg held that she "is satisfied that the action is brought in good faith and that the plaintiffs have a reasonable possibility of success at trial in pursuing the statuory claims against all… parties" other than with respect to two individual outside director defendants. 　

　

Justice van Rensberg also specifically held that the plaintiffs had satisfied the requirement for the certification of a global class to assert both the statutory claims and certain common law claims that the plaintiffs had raised. The approved class included both plaintiffs who had bought there IMAX shares on the TSX as well as those who had bought their shares on the NASDAQ exchange.

 

The defendants sought leave to appeal Judge van Rensberg’s rulings to the Divisional court.

　

The February 14 Ruling

Under applicable statutory provisions, leave to appeal may be granted at this stage in the proceedings, inter alia, when there is "good reason to doubt the correctness of the order." In his February 14 order, Superior Court Justice D.L. Corbett held that this standard had not been met and he denied the defendants’ motion for leave to appeal.

 

At its most basic, the order essentially just holds that the statutory standard has not been met. Indeed, throughout the February 14 order, Justice Corbett reiterates with respect to the various substantive issues presented that "appellate courts will be in a better position to address them on a full factual record, after trial."

 

However, in order to substantiate the ruling, Justice Corbett specifies the bases for the determination that "there is no good reason to doubt the correctness of the decision" – which is, as Justice Corbett specifically puts it, that "this is the sort of claim that ought to be permitted to proceed," adding, with respect to the plaintiffs’ substantive misrepresentation claims that "it seems that the plaintiffs have a good arguable case, one that is worthy of moving forward." As detailed in the Discussion section below, Justice Corbett’s analysis in this regard is quite favorable to the plaintiffs, and to plaintiffs generally.

 

Justice Corbett’s determination is most interesting with respect to Justice van Rensberg’s certification of a global class. In holding that there is "no reason to doubt the correctness" of Justice van Rensberg’s decision on these issues, Justice Corbett noted:

 

It would be wrong, of course, to compel foreign investors to be bound by Canadian proceedings, if they prefer to have their claims adjudicated elsewhere. But similarly, it would be wrong to preclude the from participating in Canadian proceedings if they wish their claims to be pursued in Ontario

 

Justice Corbett specifically found there is no prohibition of overlapping class proceedings in different jurisdictions, holding that the separate proceedings should not be viewed as "competing." Rather the proceedings should be "complementary" so as to "achieve a proper vindication of the rights of plaintiffs, fair process for the defendants and the plaintiffs, respect for the autonomous jurisdictions involved and an integrated and efficient resolution of claims." This process does not "required balkanization of class proceedings, but rather sensitive integration of them"

 

Discussion

For the parties, Judge Corbett’s ruling essentially means that the case will now go forward in Ontario. The larger significance may be that another court has corroborated Justice van Rensbert’s approach and conclusions with respect to the application of the new statutory provisions to the IMAX case.

 

But the most interesting aspect of Justice Corbett’s ruling is the determination that the certification of a global class was not clearly in error. The practical effect is a global class action might now go forward in Ontario courts under Ontario law under circumstances in which a global class might not be certified in U.S. courts under U.S. law.

 

As it happens, on December 22, 2010, Southern District of New York Naomi Reice Buchwald denied the motion for class certification in the parallel U.S. IMAX securities suit, holding that various circumstances prevented the lead plaintiff from serving as class representative.

 

But in any event, the plaintiffs in the U.S. case had not sought to include in the class the investors who had purchased their shares in IMAX on the Toronto stock exchange, having amended their motion for class certification in light of the U.S. Supreme Court’s decision in Morrison v. National Australia Bank, to limit their proposed class to those investors who purchased their shares on NASDAQ. That is, the plaintiffs essentially conceded that under Morrison the class in the U.S. class action could not include investors who purchased their shares outside the U.S.

 

In other words, the class certified by the Ontario court is more encompassing than the one that could be certified by a U.S. court. And Judge Corbett’s recent decision found no reason to doubt the correctness of Justice van Rensberg’s determination of these issues.

 

One of the questions commentators have asked in the wake of the U.S. Supreme Court’s decision in the Morrison case is whether plaintiffs’ counsel may seek to pursued securities claims outside of the U.S. The recent action filed in the Netherlands on behalf of Fortis investors provides some evidence that the plaintiffs’ attorneys are indeed pursuing alternatives to litigating cases outside of the U.S.

 

The recent affirmation that Ontario’s courts are authorized to certify a global class in a securities liability suit, in circumstances where a U.S. court cannot, highlights the question whether plaintiffs’ attorneys may look to Ontario’s courts as an alternative securities litigation forum, particularly in light of Justice van Rensberg’s earlier ruling that the threshold for establishing the right to pursue a securities claim under Ontario’s new legal provisions is a low one. Ontario’s courts certainly could be an attractive form at least with respect to Canadian companies.

 

I should add that even beyond the class certification issues, the February 14 opinion is favorable to plaintiffs. Among other things, Justice Corbett stated (in paragraph 29) that fraud alleged do "not require the plaintiffs to adduce direct evidence of the state of mind of the defendants" which "may be ‘inferred from all of the circumstances," which is "a common way of determining knowledge and intention." 

 

Justice Corbett also evinced his support (in paragraph 32) for the view that "a different standard of proof" applies to defendants affirmative defenses than is to be applied to plaintiffs to determine whether they should be permitted to proceed. The plaintiffs standard is "relatively low" while the defendants must establish their affirmative defenses "to a standard sufficient to grand summary judgment dismissing a claim." Indeed, Justice Corbett went on (in paragraph 37), the "constellation of facts" alleged "may well preclude the defendants’ affirmative defenses."

 

Finally, Justice Corbett also supported the view that reliance be established by showing reliance on the market (in a manner similar to a fraud on ther market theory) rather than by individual reliance, if supported by the facts.

 

Special thanks to Daniel Bach of the Siskinds law firm for providing me with a copy of the February 14 decision. The Siskinds law firm and the Sutts, Strosberg law firm represent the plaintiffs in the IMAX case in Ontario.

 

The Sports Highlight of the Decade?: In a February 14, 2011 article, The Wall Street Journal asked the rhetorical questoin whether Wayne Rooney’s game-winning goal in the 78th minute of Saturday’s game between Manchester United (Rooney’s team) and Manchester City is the "sports highlight of the decade." All I know is that when Rooney executed his amazing, backwards bicycle kick, I shouted so loud that my wife came downstairs to make sure I was alright. Best of the decade or not, it is simplty amazing. So here is the video footage — be sure to watch the slow motion replay to really appreciate how amazing the goal is.　

　

http://img.widgets.video.s-msn.com/flash/customplayer/1_0/customplayer.swf

In today’s global economy, business increasingly is conducted cross-jurisdictionally. Company officials and their advisors increasingly must grapple with liability issues arising under the laws of multiple jurisdictions. These liability issues in turn can present complex indemnification and insurance questions. Simply identifying the operative legal considerations can present a significant challenge.

 

A newly updated legal resource may afford valuable information for those struggling with these issues. Information about the new volume, entitled Directors’ Liability and Indemnification: A Global Guide, Second Edition, can be accessed here. This new edition was edited by UK Insurance maven, Ed Smerdon of the Sedgwick Detert law firm.

 

The book’s separate chapters describe the essential legal principles in 38 different countries. This latest edition includes new chapters on China, the Czech Republic, Kazakhstan, South Korea and the United Arab Emirates, among others. Each chapter has been written by a leading law firm in the relevant jurisdiction. For example, the chapter on the United States was written by Dan Bailey and Darius Kandawalla of the Bailey Cavalieri law firm.

 

Each chapter provides a country-specific overview of the legal principles governing directors’ duties and obligations. The text also contains a description of the claims environment in each country, including the relevant considerations regarding criminal and regulatory liability. The information also includes the principles governing the availability of indemnification and insurance in each country, as well.

 

The information for each country is presented succinctly and provides more of an introduction to the critical legal considerations than it does a comprehensive dissertation. This volume will be most useful to those looking for a quick impression of the legal environment. For those looking for a deeper understanding, this volume at least provides some starting points.

 

It seems likely that legal challenges arising from the cross-jurisdictional conduct of business will only increase in the months and years ahead. This volume will likely prove a valuable resource for insurance advisors and others called upon to counsel companies in connection with the associated liability exposures and related insurance considerations. We can only hope that this book’s editors and authors will continue to update and expand this volume in the years ahead.

 

Many thanks to Ed Smerdon for providing me with an opportunity to review an advance copy of the book.

 

D&O Insurance Implications of Dodd-Frank: The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 introduced sweeping reforms to every aspect of the country’s financial system. In addition, many of the Act’s provisions – including in particular its new whistleblower bounty sections — seem likely to lead to increased SEC enforcement activity. The enforcement activity could in turn lead to follow on civil litigation.

 

The Act’s potential enforcement and litigation implications also carry important D&O insurance implications. These considerations and implications are reviewed in detail in a February 2011 article entitled "Dodd-Frank, SEC Enforcement Activity, Whistleblowers and D&O Insurance" (here) by my friend Priya Cherian Huskins and her colleague Carolyn Polikoff of the Woodruff Sawyer firm. Among other things, the authors discuss particular problems that may arise in connection with the Dodd-Frank’s executive compensation clawback provisions, as well as D&O insurance concerns arising from the new whistleblower provisions. The article concludes with a list of eight D&O insurance recommendations.

 

My thanks to Priya for reaching out to me to include a link to the article on this site.

 

Failed Bank Litigation Resources: Most readers who are following the events surrounding the current failed bank litigation wave likely are already familiar with the FDIC’s Failed Bank List, which is updated every Friday evening to reflect the latest banks of which the FDIC has taken control.

 

Another page on the FDIC website of which readers may want to be aware is the FDIC’s Professional Liability Lawsuits page. I have previously linked to this page in prior blog posts, but the FDIC has been updating the page and it now has a number of additional useful features.

 

First, for some time now, the FDIC has been updating the page to reflect the latest number of former directors and officers of failed banks against whom civil actions have been authorized. The page has recently been updated to show that the FDIC has now authorized civil actions against 130 directors and officers. More importantly, it is clear that the FDIC will be regularly updating this page with new information as additional actions are authorized.

 

In addition, in the new feature that readers may find most useful, the FDIC has now provided specific details regarding each of the four civil actions it has filed so far against former directors and officers of failed banks. From the way the information is presented (at the bottom of the page), it appears that the FDIC intends to update this information as additional actions are filed. Accordingly, this page could prove to be a valuable resource over time as the number of FDIC actions grows.

 

I intend to continue to track — and link to –the FDIC litigation on my own as it is filed, as reflected here. At least for now, the FDIC itself also seems to be committed to tracking and providing this information as well. Many readers may find the FDIC’s page to be a highly credible and (we can hope) timely resource on these issues. I will continue to provide links to the lawsuits.

 

And speaking of failed banks, the FDIC did take control of four additional banks this past Friday night, as is reflected on the agency’s Failed Bank List. These four new closures bring the 2011 year to date number of failed banks to 18.

 

The 18 bank failures have been spread across 12 different states, though the largest number of closures this year has been in Georgia (4), which has led the way with the largest number of bank failures since the current wave began. The 18 failures so far in 2011 bring the total number of failed banks since January 1, 2008 to 340.

 

It is interesting to note that the pace of bank closure so far this year is running slightly ahead of the pace in 2010, when the FDIC closed more banks than it had in a single year since 1992. The FDIC did not close its 18th bank in 2010 until February 19.

 

Living in America: On Friday, the determination of peaceful demonstrators in Egypt resulted in the historic overthrow of their oppressive government, but the lead story in Saturday’s Cleveland Plain Dealer was that the Cleveland Cavaliers’ ended their 26-game losing streak on Friday night. The Cavs’ first victory since December also apparently merited a headline in larger type as well.

 

As a letter to the editor in Sunday’s edition put it, "Your newspaper failed to explain why all those Egyptians were so excited about the Cavs game."  

 

Web Animation Video Phenomenon Even Reaches the Insurance Industry: I know that many of you were as interested as I was in the February 11, 2011 Wall Street Journal article about the increasing numbers of customized computer-generated animated videos, which anyone can make on web sites such as Xtranormal.

 

One sure sign of how widespread this new phenomenon has become is the animated Xtranormal video now circulating that takes a light-hearted look at the perennial conversation about business between brokers and underwriters. For those of you who have not already seen it, here is the "I Need New Business" video. (The views, attitudes and opinions expressed in the video do not necessarily reflect those of The D&O Diary or its author.)

 

http://www.xtranormal.com/site_media/players/jwplayer.swf http://www.xtranormal.com/site_media/players/embedded-xnl-stats.swf

In a February 10, 2011 opinion (here), the Second Circuit reversed the lower court’s dismissal of the securities class action lawsuit relating to The Blackstone Group’s June 2007 IPO. The decision, which represents a noteworthy victory for plaintiffs, contains an extensive analysis of "materiality" requirements and could prove significant in the many other pending cases alleging misrepresentations or omissions regarding the subprime meltdown and the ensuing deterioration of the financial marketplace.

 

Background

Blackstone, a leading asset manager and financial advisory firm, conducted an IPO in June 2007. As reflected here, in April 2008, investors who had purchased securities in the offering filed the first of several securities class action lawsuits against Blackstone and certain of its directors and officers, alleging that the company had made material misrepresentations and omissions in its IPO offering documents.

 

The investors alleged that at the time of the offering, Blackstone knew that two of its portfolio companies (FGIC Corporation, a monoline financial guarantor, and Freescale Semiconductor), as well as its real estate fund investments, were experiencing problems. The investors allege that the defendants knew that these problems could subject the company to a claw-back of performance fees or result in reduced performance fees. The defendants moved to dismiss.

 

In a September 22, 2009 order (here), Southern District of New York Judge Harold Baer, Jr. granted the defendants’ motions to dismiss, holding that the alleged misrepresentations or omissions regarding FGIC and Freescale were neither quantitatively nor qualitatively material, and further holding that the alleged misrepresentations regarding Blackstone’s real estate investments were insufficient because the plaintiffs’ allegations failed to specify how the residential mortgage woes would have a foreseeable material effect on Blackstone’s real estate investments. The plaintiffs appealed.

 

The February 10 Order

In an opinion written by Judge Chester J. Straub for a three judge panel, the Second Circuit reversed the district court, holding that the lower court had erred in dismissing the plaintiffs’ complaint.

 

The Second Circuit’s analysis focused on Blackstone’s obligation under Item 303 of Reg. S-K to disclose material risks, trends and uncertainties that could affect the firm’s financial results.

 

In holding that the complaint’s allegations regarding the offering documents’ omission in connection with Blackstone’s investments in FGIC and Freescale met both the quantitative and qualitative materiality requirements, the Court rejected Blackstone’s argument that a loss in one of its portfolio companies might be offers by a gain in another. "Blackstone," the Court said, "is not permitted, in assessing materiality, to aggregate the negative and positive effects on its performance fees in order to avoid disclosure of a particular negative event."

 

The Court added that "were we to hold otherwise, we would effectively sanction misstatements in a registration statement or prospectus related to particular portfolio companies so long as the net effect on revenues of a public private equity firm like Blackstone was immaterial." The question is not whether an investment’s loss in value will affect revenues but the firm "expects the impact to be material."

 

In concluding that the district court had erred in holding that the plaintiffs’ allegations did not satisfy the qualitative materiality requirements, the Court noted that the firm’s Corporate Private Equity division was the firm’s "flagship segment," adding that because the segment "plays such an important role in Blackstone’s business and provides value to all of its other asset management and financial advisory services," a reasonable investor "would almost certainly want to know information related to that segment that Blackstone reasonable expects will have a material adverse effect on its future revenues."

 

The Court added that it could not conclude that Freescale’s loss of an exclusive contract with it larges customer was immaterial in connection with one of the firm’s Corporate Private Equity firm’s largest investments. The Court noted that the failure to disclose the negative developments at FGIC and Freeescale "masked a reasonably likely change in earnings, as well as a trend, event or uncertainly that was likely to cause such a change."

 

With respect to Blackstone’s real estate investments, the Court held that the district court erred in concluding that the plaintiffs’ allegations were deficient because they failed to identify specific real estate investments that might have been at risk. The Court said:

 

This expectation …misses the very core of plaintiffs’ allegations, namely that Blackstone omitted material information it had a duty to report. In other words, plaintiffs’ precise, actionable allegation is that Blackstone failed to disclose material details of its real estate investments, and specifically that it failed to disclose the manner in which those unidentified, particular investments might be materially affected by the then-existing downward trend in housing prices, the increasing default rates for sub-prime mortgage loans, and the pending problems for complex mortgage securities.

 

The Second Circuit concluded that "plaintiffs provide significant factual detail about the general deterioration of the real estate market and specific facts , that drawing all reasonable inference in plaintiffs’ favor, directly contradict statements made by Blackstone in the Registration Statement."

 

Finally, the Court rejected the suggestion that the plaintiffs’ view of materiality would require investment firms like Blackstone to issue compilations of prospectuses of every portfolio company or real estate asset in with the firm has any interest. In order for omitted information to give rise to a claim under the ’33 Act, the reporting company would have to have an obligation (for example under Item 303 of Reg. S-K) to disclose the information and the omitted information would have to be "deemed material."

 

Discussion

The Second Circuit’s opinion in this case represents both a noteworthy victory for the plaintiffs and a development with potential significance for the many other subprime meltdown and credit crisis-related securities pending in Second Circuit.

 

It is not just that the district court’s dismissal was overturned, although that obviously is of most immediate significance for the parties involved. Rather, it is that the reversal was an act of the Second Circuit, to which all of the District Courts in the Southern District of New York – where so many cases are filed — are answerable.

 

So many of the cases growing out of the subprime meltdown and the credit crisis were, like this case, filed in the Southern District of New York. As these cases have proceeded to the motion to dismiss stage, the courts have struggled with what is required to be alleged in order to survive the motion to dismiss. And although not all of the cases turn on questions of materiality, when materiality questions arise, the Second Circuit’s opinion in the Blackstone case could be important, particularly for plaintiffs in ’33 Act cases.

 

The Second Circuit emphasized that, in its view, materiality requirements may be satisfied relatively easily. The Court emphasized at the outset that a ’33 Act complaint "need only satisfy the basic notice pleading requirements" adding that "where the principal issue is materiality, an inherent fact-specific finding, the burden on plaintiffs to state a claim is even lower." With the Second Circuit specifying only minimal pleading requirements, the threshold standard, at least as far as materiality, should become less onerous for plaintiffs – at least in ’33 Act claims.

 

The significance of this is perhaps best seen with respect to the plaintiffs’ allegations concerning Blackstone’s real estate asset investments. Although the district court found that the allegations failed to link the general real estate downturn to Blackstone’s specific real estate investments, in essence the Second Circuit found the plaintiffs’ allegations about the general real estate downturn to be sufficient and required a relatively slight connection between these generalized allegations and Blackstone’s own circumstances.

 

Given that, at least in this case and under the circumstance alleged, allegations about the generalized real estate downturn were found to be sufficient could give heart to other plaintiffs in other subprime meltdown and credit crisis-related securities suits. The complaints in many of these other cases often contain extensive accounts of the generalized real estate downturn. These other plaintiffs will undoubtedly seek to rely on the Second Circuit’s opinion in the Blackstone case, at least in order to show that their allegations satisfy the materiality requirements.

 

All of that said, it should also be noted that a critical feature of this case is Blackstone’s status as a publicly traded private equity firm. Both the district court and the Second Circuit were trying to deal with the threshold issues of what a firm like Blackstone has to disclose about its private equity portfolio investments. This aspect of the case arguably could limit the applicability of the Second Circuit’s opinion. (I will say as an aside that the Second Circuit’s supposedly reassuring words at the end of the Opinion that a firm like Blackstone would not have compile prospectuses of all of its portfolio companies are both unconvincing and unhelpful. The problem is that if materiality is as broad as the Second Circuit suggests, it is very difficult to find the outer edge of what a firm like Blackstone might have to disclose about its portfolio companies.)

　

The fact that the plaintiffs prevailed in their appeal in the Blackstone case may be noteworthy in and of itself. Up to this point, the plaintiffs’ appellate track record in securities suits related to the credit crisis was, well, not particularly encouraging for them. As reflected here, the plaintiffs had failed to overturn dismissals in the first three credit crisis securities appellate decisions, although just last month the plaintiffs in the Nomura Securities subprime-related securities suit did succeed in overturning one part of the dismissal of that case. Plaintiffs generally will take heart from the success in overturning the Blackstone lawsuit dismissal on appeal.

　

The Second Circuit’s reversal serves as a reminder that it may be dangerous to jump to too many conclusions about how plaintiffs are faring in the subprime and credit crisis related cases. There are still many more cases to be heard, and, as this case shows, there is always the possibility that further proceedings may alter or even undo prior results.

 

David Bario’s February 10, 2011 Am Law Litigation Daily article about the Blackstone decision can be found here. Peter Lattman’s post on the Dealbook blog about the decision can be found here.

If the lawsuit filed on February 7, 2011 in the Northern District of Georgia is any indication, the FDIC’s efforts to pursue liability claims will not only include suits against the directors and officers of failed banks, but will also include in at least some instances the failed institutions’ outside law firms. The FDIC’s actions so far raise the question of how extensive the FDIC’s pursuit of these kinds of claims ultimately may prove to be.

 

As reflected in J. Scott Trubey’s February 8, 2010 Atlanta Journal Constitution article (here), the FDIC’s recent suit was filed against a Henry County, Georgia law firm, Smith Welch & Brittain, and J. Mark Brittain, in connection with the firm’s legal services on behalf of Neighborhood, Community Bank, a Newnan, Georgia bank that failed on June 26, 2009.

 

In its complaint, a copy of which can be found here, the FDIC as receiver for the failed bank seeks to recover damages "in excess of $6 million" plus legal fees, based on the defendants’ alleged legal malpractice in connection with the law firm’s handling of certain loans the bank made to a local real estate developer between 2005 and 2007. The complaint alleges that the bank hired the firm to process the documents for the bank’s loans to the developer, who allegedly was also a client of the law firm. The suit alleges the developer of obtaining loans based on inflated property values. The individual defendant allegedly facilitated this, among other things, by creating two sets of settlement statements.

 

The lawsuit filed Monday is the third liability suit filed in Georgia against a failed bank’s outside law firm. As reflected in press reports (here, scroll down), on October 19, 2010, the FDIC filed two separate lawsuits in the Northern District of Georgia against outside law firms for the failed Integrity Bank of Alpharetta, Georgia. (In January, the FDIC filed a separate suit against former directors and officers of Integrity Bank, as reflected here.) The defendants in one of these two lawsuits also include a title insurance company.

 

The FDIC has made no secret of the fact that it may pursue claims against the failed banks’ gatekeepers – not just banks’ former directors and officers, but also, according to the FDIC’s website, the banks’ "attorneys, accountants, appraisers, brokers, or others." The website also states that as of February 7, 2011, the FDIC has "authorized seven fidelity bond, attorney malpractice, and appraiser malpractice lawsuits." which presumably includes the suits described above. (As detailed here, the FDIC has to date filed four lawsuits against the directors and officers of failed banks as part of the current wave of bank failures.)

 

The FDIC’s pursuit of claims against lawyers and other outside professionals is entirely consistent with the actions the agency took during the FDIC crisis. According to NERA Economic Consulting’s August 2010 report about failed bank litigation, in connection with the 2,744 institutions that failed as part of the S&L crisis, the FDIC (or the Resolution Trust Corporation) filed a total of 205 legal malpractice claims and 139 accounting malpractice claims (about 7.5% and 5% of failed banks, respectively).

 

The outcome of the FDIC’s professional liability claims during the S&L crisis, more than anything else, explain the FDIC’s present actions to pursue these claims in connection with the current round of bank failures. According to the NERA report, as a result of the FDIC’s S&L crisis legal malpractice claims, the FDIC recovered $500 million, and as a result of its accounting malpractice claims, the FDIC recovered $1.1 billion. (By way of contrast, the FDIC’s S&L crisis related claims against the former directors and officers of failed banks resulted in recoveries of $1.3 billion). Given this track record, it is hardly surprising that the FDIC is pursing claims of the type described above now.

 

One question that all of this information raises is whether the FDIC will as part of the current round of bank failures pursue claims against the failed institutions’ accountants, as the FDIC did during the S&L crisis. The FDIC’s website does not specify whether or not the agency’s board has so far authorized any claims against accountants or accounting firms.

 

Thought the FDIC has not yet pursued (or indeed, apparently, authorized) claims against the accounting firms of failed banks, it may only be a matter of time until these claims emerge, at least according to a February 8, 2011 Legal Intelligencer article entitled "FDIC Professional Liability Group Set to Pursue Audit Firms" (here). The article lays out the legal theories on which the FDIC is likely to proceed in its claims against outside accounting firms, and also reviews the firms’ likely defenses.

 

Though there have only been a few legal malpractice claims to date and as yet no accounting malpractice claims, this process has really only just gotten started. The FDIC’s website describes an 18 month process that precedes the authorization for the filing of these types of claims. Indeed, the lawsuits discussed above were filed nearly two years after the failure of the related institution.. Given that the current bank failure wave really started to gain momentum in the second half of 2009, it seems likely that as this year progresses – and on into 2012 – we could be seeing a steadily growing number of these types of gatekeeper claims.

 

The fact that the first attorney malpractice claims were filed in Georgia may simply be a reflection of the fact that as part of the current found of bank failures, more banks have failed in Georgia than in any other state. Of the 336 banks that failed between January 1, 2008 and February 4, 2011, 51 have been located in Georgia (including four of the fourteen banks that have failed in 2011).

 

Special thanks to a loyal reader for providing a link to the Legal Intelligencer article.

 

Law Firm Memo Round Up: Among the long list of law firm memos that arrived in my inbox this past week were a number of noteworthy items. First, Jenner & Block attorney Lorelie Masters and her colleague Brian Scarbrough have a February 7, 2011 Law.com article entitled "5 Key Lessons from Stanford D&O Ruling" (here), which analyzes the implications of the Southern District of Texas’s October 13, 2010 ruling in the D&O insurance coverage case involving Allen Stanford. The article highlights the difficulties that that can arise from "in fact" wording in D&O insurance policy exclusions.

 

Second, the Lowenstein Sandler law firm has published a February 2011 memo entitled "Residential Mortgage-Backed Securities Litigation: 2010 Survey" (here), contains a helpful summary of the court rulings in securities lawsuits involving RMBS, and also includes a detailed description of a long list of significant cases.

 

Finally, the Simpson Thacher law firm’s January 2011 "Securities Law Alert" (here) contains a helpful review of recent significant securities law developments, including the district courts’ continuing application of the U.S. Supreme Court’s decision in Morrison v. National Australia Bank. The memo includes a detailed list of the cases to watch in 2011, including a description of the key cases currently before the U.S. Supreme Court.

　

The filing of new subprime meltdown and credit crisis-related securities suits dwindled as 2010 progressed, which some commentators interpreted to suggest that the litigation filing phenomenon might finally have run its course. But though we have now begun the fifth year since the first subprime-related securities suit arrived in February 2007, it appears the process may not yet have played itself out, as the first subprime mortgage and credit crisis related lawsuit of 2011 was filed last week.

 

Moreover, as discussed further below, the early 2011 securities suit filings have reflected the continuation of other prior year’s filings trends as well.

 

The latest credit crisis lawsuit filing grows out of the foreclosure documentation debacle that came to light late last year.

 

According to their February 2, 2011 press release (here), plaintiffs’ lawyers have filed a securities class action lawsuit in the Southern District of New York against Bank of America Corporation and certain of its directors and officers alleging that "concealed defects in the recording of mortgages and improprieties with respect to the preparation of foreclosure paperwork that harmed BofA’s investors when BofA had to temporarily discontinue foreclosures and admit to the problems it was experiencing."

 

According to the press release, the complaint (which can be found here) alleges that

 

(a) BofA did not have adequate personnel to process the huge numbers of foreclosed loans in its portfolio; (b) BofA had not properly recorded many of its mortgages when originated or acquired, which would severely complicate the foreclosure process if it became necessary; (c) defendants failed to maintain proper internal controls related to processing of foreclosures; (d) BofA’s failure to properly process both mortgages and foreclosures would impair the ability of BofA to dispose of bad loans; and (e) BofA had engaged in a practice known internally as "dollar rolling" to remove billions of dollars of debt from its balance sheet over the prior years.

 

The BofA lawsuit is the second securities class action lawsuit to arise in the wake of the foreclosure documentation brouhaha. The first, filed in November 2010, involved Lender Processing Services, which related to alleged disclosure violations relating, among other things, to the company’s alleged use of "robo-signers." Background on the Lender Processing Services case can be found here.

 

I have added the new BofA lawsuit to my list of subprime and credit crisis related securities class action lawsuits, which can be accessed here. David Bario’s February 3, 2011 Am Law Litigation Daily article about the BofA suit can be found here.

 

Chinese Take-Out: The credit crisis litigation wave is not the only litigation trend from prior years that appears to have carried over into early 2011. As I first noted here, one of the trends that developed in the second half of 2010 was a rash of filings involving Chinese domiciled companies. Some commentators speculated in their year end litigation overviews that this development would prove to be a short-lived phenomenon, but at least so far, the filing trend appears to have continued into the first few weeks of the New Year.

 

Just last Friday, February 4, 2011, there were two new securities class action lawsuits filing involving Chinese-domiciled companies.

 

First, according to their February 4, 2011 press release (here), plaintiffs’ lawyers have filed a securities suit in the Southern District of New York against China MediaExpress. The relatively short complaint, which can be found here, alleges that the company’s share price declined after a pair of analyst reports in late January and early February raised questions about the accuracy of many of the Company’s statements and the quality of the company’s earnings.

 

Second, according to their February 4, 2011 press release (here), plaintiffs’ lawyers have initiated a securities class action lawsuit in the Southern District of New York against China Valves Technology and certain of its directors and officers. The complaint, which can be found here, alleges that the company misrepresented the nature of its February 2010 acquisition of China-based Able Delight Valve Company, and also misrepresented Able Delight’s financial condition and circumstances. According to the complaint, the company later disclosed that the Able Delight acquisition was a related party-transaction, the Able Delight was a money losing operation, and that Able Delight is the target of a corruption investigation.

 

The China Valves complaint, like the China MediaExpress complaint, makes extensive references to the reports of securities analysis, who apparently are closely scrutinizing Chinese companies with U.S. listings.

 

The January 11, 2011 Citron Research report quoted in the China Valves case stated, among other things with respect to the Able Delight transaction, "it is almost as if China Valves was trying to break a record with how many securities laws can be broken with a single transaction," characterizing the company’s transaction-related omissions as a "4-in-1 disclosure failure." (The China MediaExpress complaint also cited a research report issued by an analyst from Citron Research.)

 

Nor are these two cases the first of the year involving a Chinese company. As reflected here, on January 12, 2011, plaintiffs’ lawyers filed a securities class action lawsuit in the Central District of California against Tongxin International Ltd. and certain of its directors and officers. Although technically Tongxin is organized in the British Virgin Islands, it operates as a trucking manufacturing company based in China. Like the China Valves case, the Tonxin complaint (which can be found here) also alleges supposed misrepresentation and omissions with respect to a related-party transaction.

 

Some might argue that it is making too much to generalize from the three filings, but the fact is that these cases bear a strong resemblance to ten cases filed in 2010 against Chinese companies. Moreover, there have been relatively few new securities cases filed this year, so these three cases represent roughly one-fifth of all the securities class action lawsuits filed so far this year.

 

In other words, it sure looks like the wave of cases against Chinese companies has continued undiminished into the New Year. With securities analysts apparently highly motivated to ferret out Chinese companies reporting deficiencies, plaintiffs’ lawyers apparently will not lack for further grist for the litigation mill.

 

Even if the 2011 securities class action lawuits filings overall are off to a slow start, the filings so far suggest that prior years’ trends remain at work and are driving many of the new securities suits so far this year.

 

Health Disclosures, Leadership and Legacies: Following Apple’s January 18, 2011 announcement that its CEO, Steve Jobs, would be taking his third health-related leave of absence from the company’s helm, an energetic debate arose on the question of how much a public company must disclose about the medical condition of a key official.

 

I had occasion to reflect on the circumstances and questions surrounding Steve Jobs’ health-related disclosures while reading University of Wisconsin history professor John Milton Cooper, Jr’s excellent one-volume biography of Woodrow Wilson.

 

In October 1919, while traveling the country to try to drum up public support for The League of Nations, Wilson suffered a debilitating stroke. Just a few days later, while recuperating at the White House, he suffered a dangerous prostate infection that according to Cooper left Wilson "near death." Though he emerged from these twin ordeals, Wilson was left weakened, and arguably incapacitated.

 

Notwithstanding the seriousness of Wilson’s condition, the information disclosed publicly about his condition was carefully measured and consistently "vague" and "upbeat." Over the ensuing weeks and months, Wilson would struggle to recover, but he never considered resigning. His Vice President, Thomas R. Marshall, fearful of appearing as if he were plotting some kind of a coup, resolutely stayed in the background.

 

Cooper’s biography overall presents a balanced but unquestionably favorable impression of Wilson. However, with respect to Wilson’s condition in the wake of the medical crises, Cooper’s assessment is harsh. He noted that "the psychological effects of the stroke were … striking" as Wilson’s "emotions were unbalanced and his judgment was warped." Though in the past Wilson had been able to "offset his driving determination, combativeness and overweening self-confidence with detachment, reflection and self-criticism," those compensating behaviors were now "largely gone." Worse, Cooper noted, "his denial of his illness and limitations was starting to border on delusion."

 

The most disturbing thing about Wilson’s condition, however, is that the American people were largely kept in the dark, as was most of official Washington. With the benefit of hindsight and the passage of nearly a century’s time, it seems unbelievable how little of Wilson’s incapacity was disclosed.

 

Though both their conditions and the particulars of their circumstances arguably are entirely different, I still think there may be lessons for Jobs and for Apple from the circumstances surrounding Wilson’s incapacity.

 

The first is how harsh the judgment of history is on the decision to withhold information from the American people about Wilson’s condition. Cooper, an unquestionably favorable biographer, can barely restrain his outrage over the insufficiency of the disclosure about Wilson’s condition. Admittedly, part of Cooper’s outrage is due to the fact that the mistaken picture given of Wilson’s health allowed his wife Edith to exercise a complete gatekeeper role over the President, and practically speaking to determine Presidential policy and action. But even allowing for this historically astonishing aspect of Wilson’s situation, the fact remains that the history’s judgment surrounding the disclosure questions are unforgiving.

 

The second is that the decisions and disclosures surrounding Wilson’s health unquestionably undermined Wilson’s legacy. Cooper’s biography makes a persuasive case that, until his illness, Wilson was an effective President. Cooper also seems to suggest that without the troublesome months after Wilson’s illness, Wilson could well be remembered as a great President. Instead, the turmoil and conflict that followed his illness cast a cloud over Wilson’s entire Presidency. Had he accepted his incapacity and stepped aside when he was no longer able to govern, Wilson’s legacy might have been preserved. But that would have required him to acknowledge – to himself, and more importantly, to the American people – that he was no longer fit for office.

 

There are obvious and important differences between these two circumstances. Jobs, by contrast to Wilson, has been willing to take several leaves of absence from his position. Yet even in the latest announcement, there was an apparently deliberate suggestion that despite everything Jobs is somehow still in control – thus, the company’s January 18 release expressly stated that Jobs will "remain involved in major strategic decisions during [his] leave of absence." Maybe his condition allows him to remain involved, but there is a sense of Jobs struggling to remain in charge.

 

But the questions that surround Apple’s announcement relate less to Jobs’ determination to remain involved than they do the limited information about Jobs’ medical condition and capacity. Since Jobs medical challenges first emerged in 2003, Apple has maintained the same consistently restrained approach toward medical disclosures. The company’s approach may meet applicable legal standards, and, from the perspective of Jobs’s privacy, may be completely understandable. But I wonder if the company might take a different approach if it were to consider the disclosure questions in light of the way it might all look in retrospect, with the benefit of hindsight and after the passage of time.

 

I know that many readers may find my attempt to draw parallels between Wilson’s circumstances and what has recently happened to Steve Jobs to be more than a stretch. There is no doubt that the differences between the circumstances arguably are more important than the similarities. Nevertheless, I still think there are lessons that can be drawn from the way that history has judged the nondisclosures surrounding Wilson’s health.

 

Admittedly, my effort to frame the analysis in terms of the earlier time period may reflect a personal predilection more than anything else. I confess that I have long been fascinated with the sequence of events that followed after the end of World War I. There are a number of first-rate books on the subject. One I have read several times is Margaret Macmillan’s Paris 1919: Six Months That Changed the World, which not only details the deep problems associated with Wilson’s personal involvement in the negotiations of the Treaty of Versailles, but also documents how the peace negotiations left indelible marks throughout the world and to this very day, in places as far flung as Iraq, Palestine, the Balkans and the Far East.

 

The story of the troublesome events surrounding Edith’s Wilson’s caretaker role during Wilson’s illnesses is well told in Phyllis Lee Levin’s book, Edith and Woodrow: The White House Years.　

　

The storm has passed and the sun is shining down on chilly Times Square for the second day of the PLUS D&O Symposium. For those at the conference and for those stranded at home by the weather, I wanted to pass along a couple of links as an accompaniment for today’s conference panels.

 

First, I wanted to pass along a link to a podcast posted yesterday on the webpage for the LexisNexis Corporate and Securities Law Community. The podcast, in which I discuss trends in corporate and securities litigation during 2010, can be found here. The podcast content provides a complement to the discussion during yesterday’s first panel at the conference.

 

Second, for those of you who have not seen it already, I wanted to make sure to pass along a link to the February 2011 Advisen report entitled "Merger Objection Lawsuits: A Threat to Primary D&O Insurers?" The report, which can be found here, provides useful statistical detail and additional commentary regarding the growing levels of M&A related litigation. Full disclosure: I provided commentary for the Advisen report.

 

To those at the conference, enjoy the rest of the day. Please say hello if we have not yet had a chance to meet yet.

 

By the way, I took the picture of Times Square accompanying this post this morniing using my camera phone. "I want to wake up/ in a city/ that doesn’t sleep…"