Any list of the most important and influential Americans of the 20th century would have to include William Brennan, whose 34-year tenure as an associate justice of the U.S. Supreme Court coincided with –and in many ways both reflected and influenced – a period of extraordinary change both in American society and in its jurisprudence. Liberal icon and lightening rod for conservative rancor, Brennan was at the center of many of the Court’s highest profile decisions.

 

In an authorized biography entitled "Justice Brennan: Liberal Champion," journalist Stephen Wermeil and attorney Seth Stern provide a balanced and thorough overview of Brennan’s long and extraordinary life. Because Wemiel had the opportunity to interview Brennan before his death in 1997 and because the authors had access to Brennan’s personal notes and files, the book provides significant insight into the Supreme Court’s inner workings.

 

The book explores Brennan’s early life, including his childhood and his years at Harvard Law School, where he took classes with Felix Frankfurter (with whom Brennan would later serve on the U.S. Supreme Court – Frankfurter did not remember Brennan, who had not been a particularly brilliant law student). The book also examines Brennan’s early career as a labor lawyer in Newark and then as a state court judge in New Jersey.

 

But the bulk of the book is devoted to Brennan’s years on the Supreme Court. Brennan was nominated for the Court by Republican President Dwight Eisenhower, though Brennan was a lifelong Democrat. With an eye on the 1956 presidential election, Eisenhower wanted to nominate a youthful Catholic, preferably one with state judicial experience. Few candidates met all of these criteria, so Brennan found himself on the Supreme Court at age 50, with only seven years of state trial and appellate court judicial experience. (Eisenhower is reported to have later regretted the nomination.)

 

Brennan would quickly become a key ally and working partner of Chief Justice Earl Warren, together exercising an expansive vision of judicial authority. The authors refer to Brennan’s collaborative relationship with Warren as "one of the most enduring friendships important alliances in the history of the Supreme Court," resulting, among other things in an historic and surprisingly enduring expansion of civil rights.

 

Brennan arrived after the Court’s landmark Brown v. Board of Education decision declaring "separate but equal" to be "inherently unequal." However, he soon became an indispensible part of the working majority on the court that operated with the view that for too long the Court had, in the name of judicial restraint, abdicated its responsibility to protect civil liberties.

 

Brennan himself developed an activist, results-oriented approach, first manifest in cases dealing with segregation and racial inequality, but soon extended to a host of other areas, including criminal procedure, privacy, voting rights and obscenity. Brennan would be in the majority in a wide range of controversial opinions, including those involving abortion, school prayer, busing and affirmative action.

 

As a result of these decisions, the Court attracted fierce criticisms that it was acting in the role of Platonic Guardian and operating as a "roving commission" to do justice as they conceived it, in the process trammeling majoritarian institutions.

 

The activist judicial approach of Brennan and his liberal colleagues on the Court triggered a strong political backlash. Barry Goldwater’s 1964 presidential campaign, as well as Richard Nixon’s campaign in 1968, was in many ways built around criticisms of the Court and its liberal agenda. As the Court’s membership changed in the 70’s and 80’s due to the conservatives political successes, Brennan found himself dissenting more frequently and sometimes isolated – but still able to influence colleagues and, to a certain extent, to protect decisions of the Warren Court era.

 

Though the biography is generally favorable, the portrait that emerges is relatively balanced. Brennan appears as a conscientious and effective jurist who, as a result of the strength of his personal charm, principles and intellect became, as the authors claim "one of the most influential justices of the 20th century."

 

Brennan’s life story is well told in this detailed account, which not only examines his judicial career, but also his life off the court, including his marriage, his friendships, his religious life and even his finances. The book is filled with interesting insights and anecdotes, such as Brennan’s passionate opposition to the death penalty, and, on a more personal note, his marriage to his long-time secretary, Mary Fowler, just three months after the death of his first wife, Marjorie, to whom had had been married for nearly all of his adult life.

 

Along the way, the authors provide deep insight into how the Court works and how it has had such an extraordinary influence on so many aspects of American life and society.

 

Despite the many years of conservative majorities that followed Brennan’s tenure on the Court, a surprisingly large part of Brennan’s legacy remains intact. In areas such as civil rights, privacy, voting rights and criminal procedure, decisions that when first made were highly controversial remain the law of the land. It is perhaps fitting that in his confirmation hearing, David Souter, Brennan’s replacement on the Court, referred to Brennan as "one of the most fearlessly principled guardians the Constitution ever had."

 

I enjoyed reading this book and I have no hesitation recommending it. I will say that reading the book occasioned much thought and even concern as I reflected on Brennan’s brand of judicial activism. Though the Warren Court’s civil rights decisions were essential to removing deep racial injustices, the activist approach the Court employed led to other decisions about which it is difficult for me to feel quite as comfortable, even if just from an analytical point of view.

 

Moreover, an activist approach that finds rights and legal requirements without an explicit textual basis in the Constitution can be used for conservative as well as liberal purposes, as it might be argues subsequent courts have proven.

 

Reflecting on this afforded me a new appreciation for the merits of judicial restraint. In reading this book, I found it striking that after the first few years of the civil rights cases, Justices Hugo Black and John Marshal Harlan II, who had been important participants in many of the Warren Court’s early civil rights decisions, began pulling back and increasingly began refusing to follow the liberal majority. The book suggests the two justices (particularly Black) may have just been getting old. Perhaps I am getting old too, because I found myself appreciating their perspective.

　

It has been a long road — one that included among other things, an amicus brief filed at the U.S. Supreme Court in connection with Morrison v. National Australia Bank – but the defendants in the Infineon Technologies securities suit have managed to have the court dismiss the claims of company shareholders who purchased their securities outside the U.S. Northern District of California Judge James Ware’s March 17, 2011 order granting the defendants’ motion can be found here.

 

The plaintiffs first initiated their suit in September 2004, as detailed here. The plaintiffs allege that the company had participated in an illegal conspiracy to fix the prices of Dynamic Random Access Memory (DRAM) and then misrepresented the company’s financial condition as a result of the artificially inflated DRAM prices. Infineon’s American Depositary Shares and ordinary shares are listed on the NYSE, but during the class period 92% of its securities were traded on the Frankfort Stock Exchange.

 

Following the U.S. Supreme Court’s June 2010 decision in the Morrison case, the defendants moved to dismiss from the case the shareholders who purchased their Infineon shares outside of the U.S. In opposing the motion, the plaintiffs – citing Morrison’s holding that Section 10(b) of the ’34 Act applies only to "transactions in securities listed on domestic exchanges" and "domestic transactions in other securities" – argued that because Infineon’s ordinary shares are "listed on" the NYSE, Section 10(b) applies to all ordinary shares, even those purchased on the Frankfurt Stock Exchange.

 

Consistent with Southern District of New York Judge Deborah Batts’ January 2011 opinion in the RBS securities suit (about which refer here), Judge Ware had little trouble rejecting the plaintiffs’ "listed on" argument. Judge Ware stated that under Morrison "a securities transaction must occur on a domestic exchange to trigger application of Section 10(b) of the Exchange Act."

 

Judge Ware said that the plaintiffs’ "listed on" argument was "misplaced," noting that in the Morrison case itself, National Australia Bank had ADRs listed on the NYSE, but the plaintiffs in Morrison were unable to state a Section 10(b) claim because "that Section of the Exchange Act focuses only on securities transactions that take place in the United States."

 

Accordingly, Judge Ware granted the motion to dismiss with respect to "all claims asserted on behalf of individuals who purchased Infineon ordinary shares on the Frankfurt Stock Exchange."

 

Judge Ware’s opinion in the Infineon case joins a growing list of decisions in which federal district courts have dismissed from securities suits the shareholder claimants who purchased their shares of the defendant company’s stock outside of the U.S. What makes Judge Ware’s opinion noteworthy is that it is one of the first such opinions outside of the Southern District of New York. As far as I know, it is the first in the Northern District of California.

 

(Central District of California Judge Dale Fischer interpreted and applied Morrison for purposes of a July 2010 lead plaintiff ruling in the Toyota securities suit, but did not reach the question whether Morrison precluded the claims of shareholders who purchased their shares outside the U.S.)

 

It is increasingly clear that the district courts are applying Morrison broadly and are refusing to be persuaded to trim the decision’s effect or to reduce its impact on the claims of securityholders who purchased shares on foreign exchanges.

 

Plaintiffs seeking to circumvent Morrison may be forced to proceed by other means – as for example, are claimants whose federal securities suit against Porsche was dismissed based on Morrison. As reflected in their March 15, 2011 complaint (here), these plaintiffs are now attempting to assert state law claims of common law fraud and unjust enrichment against Porsche. The plaintiffs will face numerous obstacles as they attempt to chart an alternative course. But claimants barred by Morrison from asserting securities claims under the federal securities laws will continue to search for ways to try to assert their claims, both inside and outside the U.S.

 

Susan Beck’ March 19, 2011 Am Law Litigation Daily article about Judge Ware’s decision in the Infineon case can be found here.

 

Transatlantic Cable: Writing about the Infineon decision seems fitting as I am now in London for this week’s C5’s 20th Forum on D&O Liability Insurance. I will be speaking on Thursday March 24, 2011 on a panel with my friend Rick Bortnick of the Cozen O’Connor firm on the topic "The Latest U.S. Judicial Decisions." If you are attending the conference, I hope you will take the time to say hello, particularly if we have not previously met.

 

As recently as this past Monday, commentators were grumbling that the FDIC is moving too slowly in pursue claims against former directors and officers of failed banks. The FDIC has responded in dramatic fashion with a March 16, 2011 lawsuit filing in the Western District of Washington against three former Washington Mutual executives, as well as two of the executives’ wives.

 

According to news reports (here), the lawsuit seeks damages of as much as $900 million. The media stories also suggest that there is an agreement by WaMu’s outside directors to pay $125 million to settle claims by the FDIC is pending approval. A copy of the FDIC’s recent complaint against the WaMu executives and their wives can be found here.

 

WaMu’s September 2008 failure (about which refer here), represents by far the largest bank failure in U.S. history. The events surrounding its failure have already been the subject of extensive litigation, not the least of which is a pending securities class action lawsuit filed on behalf of WaMu’s shareholders, which, as noted here, survived a renewed motion to dismiss after the lead plaintiffs amended their complaint.

 

The FDIC filed its recent lawsuit in its capacity as WaMu’s receiver. The lawsuit names as defendants WaMu’s former CEO, Kerry Killinger, its former President and COO, Stephen Rotella, and its chief of home lending, David Schneider. In a rather unusual twist that shows just how aggressively the FDIC may be prepared to get in pursuing these claims, the complaint also names Killinger’s wife, Linda Killinger, and Rotella’s wife, Esther as explained below.

 

The complaint asserts claims against the three executives for Gross Negligence, Ordinary Negligence and Breach of Fiduciary Duty.

 

The complaint alleges that the three defendants caused the bank to take "extreme and historically unprecedented risks with WaMu’s held-for-investment loan portfolio." The three allegedly focused on short term gains, to the disregard of the bank’s long term safety and soundness. The executives, lead by Killinger, allegedly developed an executed a strategy to make billions of dollars of risky residential mortgages, increasing the risk profile of the bank’s held for investment mortgage portfolio.

 

The bank’s business strategy dictated a lending approach for which few lenders were turned away. The bank also layered multiple levels of risk with particularly risk loan products such as option ARM mortgages, the riskiness of which was further compounded by allowing stated income lending and other questionable lending practices.

 

The complaint alleges further that these executives continued to pursue their aggressive growth strategy even at a point when housing prices "were unsustainably high" and while relying upon an aging infrastructure that was inadequate to keep up with the enormous loan volume. The complaint alleges that the three executives knew the strategy was risky, knew the process weaknesses, and even knew there was a housing price bubble. Yet, the complaint alleges, the three executives marginalized the company’s risk management department.

 

As a result, when the bubble collapsed, the bank "was in an extremely vulnerable position" and, as a result of the three executives "gross mismanagement" the bank suffered losses of "billions of dollars."

 

The complaint also includes fraudulent conveyance claims against Killinger and his wife Linda, and against Rotella and his wife Esther.

 

The complaint alleges that in August 2008, Killinger and his wife transferred two residential properties to qualified personal residence trusts and appointed themselves as trustees. The complaint alleges that these transfers were made with the intent to hinder, delay or defraud Killinger’s future creditors.

 

The complaint contains similar allegations against Rotella and his wife with respect to an April 2008 residential real estate transfer and a September 2008 transfer from Rotella to his wife of $1 million.

 

In statements to the Wall Street Journal, here, Killinger and Rotella said the FDIC’s allegations are "baseless" and "lack credibility" and that the lawsuit is "unworthy of the government." I recommend that readers take a few minutes and read these two individuals’ statements. Whatever may be the merits of this and similar cases brought by the FDIC, it is very clear from these statements that there will be a personal price to pay for the individuals involved. The personal pain these men are feeling is palpable, and there will be more of this kind of pain for other former bank officials as more of these kinds of lawsuits are filed.

 

With the filing of this complaint, the FDIC has unmistakably demonstrated that it will pursue claims against former directors and officer of failed banks when it chooses to do so. Indeed, the claims against the two executives’ wives clearly show that the FDIC will proceed aggressively.

 

Given that WaMu represented the largest bank failure in U.S. history, it may come as no surprise that the FDIC is pursuing these kinds of claims. What has been surprising to some, and what occasioned the criticism I mentioned in my opening paragraph, is how deliberate the FDIC has been in choosing to pursue claims. WaMu failed nearly two and one half years ago. If the FDIC were to act with similar deliberation in pursing other claims, it could well be some time before we know for sure how extensive the FDIC’s litigation activity ultimately will be in pursing claims as part of the current bank failure.

 

It is, however, quite clear that the FDIC will be pursuing more of these types of claims. The FDIC recently updated the Professional Liability Lawsuits page on its website (here) to show that the FDIC’s board has approved lawsuits against 158 individual directors and officers of failed banks. Since the six lawsuits the FDIC has filed to date only amount to about 40 individual defendants in total, there are many more lawsuits to come, just based on the actions that have been approved so far.

 

One particularly interesting detail about the news surrounding the FDIC’s recent lawsuit is the report that WaMu’s outside directors have agreed to pay $125 million to settle claims. It is interesting that the outside directors agreed to pay this amount without the intervening step of a lawsuit against them. One question that immediately occurs to me is whether and to what extent this $125 million payment is to be funded by D&O insurance.

 

WaMu’s D&O insurance program was undoubtedly already under pressure due to the significant presence of other claims already pending against its former directors and officers. One possibility that occurs to me is that the bank may have carried a significant layer of Side A DIC protection, which may well have been triggered by the bank holding company’s bankruptcy. Because of the bankruptcy, all of the claims represent potential Side A losses, suggesting that the bank’s Excess Side A/DIC program could well have been called in to contribute. All these are details that those of us on the outside can only wonder about; however, comments from knowledgeable persons who are closer to the situation are always welcome.

 

Whatever may be the case, it is clear that D&O insurance may be playing a role of some kind in all of this. At least Stephen Rotella thinks so. In his statement to the Wall Street Journal to which I linked above, he speculated that the lawsuit itself "may be a way for the FDIC to collect a payout from insurers who provided officers and directors liability coverage for the time they worked at WaMu."

 

As noted, with this lawsuit, the total number of lawsuits the FDIC has filed as part of the current wave of failed bank litigation is now up to six. A list of the six lawsuits can be found here.

 

A March 17, 2011 Bloomberg article about the FDIC’s lawsuit can be found here. A March 17, 2011 Seattle Post-Intelligencer article about the suit can be found here.

　

I am pleased to be able to print below a guest post from my friend and industry colleagueDonna Ferrara. Donna is Senior Vice President and Managing Director, Management Liability Practice Group, at Arthur J. Gallagher & Co. As Donna indicates, this guest post is the result of an email exchange between Donna and myself following one of my recent blog posts about to a recent coverage decision. Because I recognized the depth of Donna’s feelings about the need for professionalism in the insurance claims process, I invited her to submit a guest post on the topic, which she has done and which I have set out below.

 

I want to emphasize that I welcome proposed guest posts from responsible commentators throughout the industry. I also encourage readers who have reactions to Donna’s guest post to please add their thoughts using the blog’s comment function. Here is Donna’s guest post:

　

After I posted a comment on Kevin’s blog, he asked if I would write about the need for professionalism in our business. The following is my opinion and does not reflect that of my employer or colleagues. In the interest of full disclosure, I currently work for a major insurance broker. In the past, I have represented both insurers and insureds, which provides, I believe, an unusual point of view.

 

First, this is not a sniveling request for a return to the days of elaborately false good manners and courtly lawyering, if there ever were such a time.

 

Rather, this is an unscientific discussion of how civil – or Rational – behavior is good business.

 

Navigating the arcane world of D&O insurance requires a fairly high level of expertise. One would hope that this would be matched by a high level of professionalism and respect, but that is not always the case.

 

Rationally, D&O disputes should not create feelings of betrayal and personal peril. Unlike criminal or civil rights cases, the ultimate issue is money. Yet often disputes are ratcheted to an emotional level more appropriate for armed combat.

 

Recently, I looked at cases in which D&O coverage disputes had been litigated to appeals courts, an expensive and unusual event. Most litigation settles long before there is anything to appeal. At Kevin’s request, I am not including the names or identifying information of the litigants. I have no knowledge of the cases reviewed, beyond what is publically available.

 

In each case, someone was pressing an argument which was, at best, difficult. For example, in one case, a carrier asserted that even if a court ordered a litigant to pay plaintiffs’ costs, that litigant was not "legally obligated to pay" those costs. In another, the insured argued that the policy provided coverage for investigations of the corporation, although the policy limited such coverage to individuals. In a third, the parties claimed that a provision which provided only defense coverage actually provided no coverage (in the carrier’s view) or full defense and indemnity (in the insured’s view).

 

Unsurprisingly, these arguments did not succeed. After the parties had expended substantial legal fees, appeals courts found, in effect, that the policies said what they said.

 

Why did the parties fight so hard to reach what should have been an obvious conclusion?

 

The reason may be found in the pleadings and motion practice.

 

In each case, there was a substantial amount of money at stake, but probably not a "bet the company" sum for either party. Still, the dockets reveal extensive and vitriolic communications between the parties and their respective counsel. Carriers complained that their advice had been ignored. Insureds claimed deception and bad faith. Both sides bickered over discovery. Sanctions were demanded. The exhibits to the pleadings included emails and letters demonstrating that animosity had been the tone of the parties’ relationship from the beginning.

 

In short, the litigants subscribed to the Tough theory of business and litigation.

 

Probably the parties felt that the sums involved justified their mutually Tough stance. Possibly, they felt that "It was the Principle" – although, again, the issue was really only money. In any case, being Tough virtually assured that they would end up in court, yet in none of these cases did one side succeed completely.

 

Rationally, the parties might have realized that courts are poor places to make difficult arguments. Courts are not equipped to make decisions based on business considerations. With few exceptions, judges were litigators in their past lives. They come from an adversarial background and are limited to deciding specific issues. They cannot make compromises or force settlements (at least not overtly). Every issue has to be reviewed. At the end of the process, there has to be a "winner" and a "loser" on every point, even if no one actually "wins" the entire case.

 

Moreover, most judges have more cases than they can handle. Aggressive tactics slow the docket, annoying judges and magistrates. True, Tough tactics mean more money for lawyers who bill on an hourly basis. Clients, however, resent high legal fees that are not accompanied by clear success (and even those that are).

 

I suspect that, at the end of the cases reviewed, no one felt victorious or vindicated.

 

In a Rational world, the parties in this litigation would have met before a claim had even been made. The contract would have been openly discussed. There would be a Rational presumption that good coverage costs more than poor coverage, that no insurer wants to accept unlimited risk and that the insured would want the policy to respond as its words – and advertising – indicated it would.

 

It is unlikely this discussion ever took place.

 

D&O insurance is sold in a market where price is often the primary, if not the sole, consideration and that price is set by competition, not by risk.

 

Underwriters, pressured to write business, tweak their forms, but price according to what other carriers charge. Because D&O claims are historically infrequent, but relatively severe, claims handlers do not have the chance to manage and pay many claims. Insureds demand the broadest possible coverage, for the lowest cost – a Bentley for the price of a bicycle. Brokers are in the middle, often an untenable situation. They must be seen as Tough, or risk losing the business.

 

Lawyers may exacerbate the situation: Often both client and lawyer perceive attorneys as the "hired gun". As a brash young attorney once said, "If my clients wanted to make nice, they would have called a florist." D&O is especially fertile ground for disputes: policy language varies and insurance is governed by the state law. Whatever position a party takes can find support somewhere.

 

The present economic climate increases the pressure on everyone: "bad" results can have bad personal consequences. Carriers’ personnel may be fired, lawyers dismissed and brokers replaced. Rationality may be perceived as weakness or lack of commitment.

 

Rather than suggest that the other side may have merit, parties feel compelled to press every point against equally committed adversaries.

 

In my own experience, there can and should be a Rational approach to D&O issues. While difficult and even counterintuitive, it is possible for insurers and insureds to listen to each other, discuss differences and come to appropriate business decisions. Everyone should know that their position had been heard. Lawyers can recognize that their clients might benefit more from compromise than scorched earth. Although we are bound to be advocates for our clients, we can and should be counselors as well.

 

This is just good business.

 

In the cases discussed, it is easy to imagine that the relationships among the litigants were damaged irreparably. The insureds were unlikely to ever purchase insurance from the carriers again, but the brokers and lawyers may have lost their clients as well.

 

I am not so naïve as to envision a world in which carriers and their insureds are "partners", in the sense that they will both benefit from the same outcome. While I passionately serve my clients, I know that insurance is a business of trading services for money. As with any business, rational, civil behavior can be mutually beneficial.　

　

In resolution of a securities case that at one time had actually been dismissed and that even after being revived was substantially narrowed based on the U.S. Supreme Court’s Morrison decision, the parties to the Credit Suisse subprime-related securities class action lawsuit have reached a settlement by which the company has agreed to pay the plaintiff class $70 million. A copy of the parties’ March 10, 2010 settlement agreement can be found here. The settlement is subject to court approval.

 

As reported in greater detail here, the plaintiffs filed their initial complaint in this action in April 2008. The plaintiffs alleged that the defendants had made material misrepresentations about the company’s asset valuation system, its internal controls (which allegedly allowed unauthorized placement of high risk mortgage-backed assets in client accounts), and its own exposure to losses related to subprime mortgages. Credit Suisse is domiciled in Switzerland. Its shares trade on several securities exchanges outside the U.S. and its ADRs trade on the NYSE.

 

In an October 5, 2009 order (here), Southern District of New York Judge Victor Marrero granted the defendants’ motion to dismiss, having concluded based on pre-Morrison standards that the court lacked subject matter jurisdiction over the claims of claimants who reside outside the U.S. and who had purchased their shares on foreign exchanges (so-called f-cubed claimants). The complaint had not identified the domicile of some other named plaintiffs, but Judge Marrero dismissed their claims as well.

 

Thereafter, the plaintiffs amended their complaint and the defendants renewed their motions to dismiss. As discussed here, on February 11, 2010, Judge Marrero held that the plaintiffs’ amended complaint was sufficient to overcome the initial defects and he allowed the case to go forward as to plaintiff shareholders who had purchased Credit Suisse ADRs on the NYSE and as to U.S.-based shareholders who had purchased Credit Suisse shares on the Swiss Stock Exchange. However, he also ruled that the court lacked jurisdiction over the claims of plaintiffs that resided outside the U.S. and that had purchased their shares outside the U.S.

 

In June 2010, the U.S. Supreme Court issued its opinion in Morrison v. National Australia Bank case. The defendants in the Credit Suisse case moved to dismiss the claims by Americans who bought their Credit Suisse shares on the Swiss exchange – that is, the so-called "f-squared" claims. In a July 27, 2010 opinion, Judge Marrero ruled that Morrison also precludes the f-squared claims. As discussed here, Judge Marrero was the first to hold that under Morrison applied to preclude f-squared as well as f-cubed claims.

 

The parties then initiated a mediation process that resulted in the settlement agreement filed with the court on March 10.

　

The settlement agreement has a number of interesting features. First, the settlement agreement specifies that following the settlement’s preliminary approval Credit Suisse "and/or its insurers" will cause the payment of the $70 million settlement fund to the escrow agent. The settlement agreement itself does not specify how much of the settlement ultimately is to be borne by Credit Suisse’s insurers. The use of the word "or" in the phrase "or its insurers" suggests that the insurers contribution could possibly be as much as the entire $70 million, but there is simply no way to tell for sure from the face of the settlement document. However, the clear suggestion is that at least some portion of the settlement is to be paid by Credit Suisse’s insurers.

　

Second, even though Judge Marrero dismissed out the Americans who bought their Credit Suisse shares on the Swiss exchange, the proposed settlement class consists not only of all purchasers who acquired Credit Suisse ADRs on the U.S. Exchange, but also "all U.S. Residents who purchased [Credit Suisse] securities on the Swiss Stock Exchange during the class period." Clearly, plaintiffs counsel was not prepared to concede – at least for settlement purposes – that Judge Marrero’s ruling on this issue was correct.

　

However, it appears that the Judge Marrero’s ruling dismissing out the f-squared claimants was taken into account in the settlement. The Americans who bought Credit Suisse shares on the Swiss exchange will enjoy only a limited recover compared to the ADR purchasers. 90% of the net settlement amount is to go to settlement class members who purchased ADRs on the NYSE, and 10% is to go to the U.S. shareholders who purchased common shares on the Swiss exchange. (ADR holders will receive $1.38 per share and the U.S. shareholders will or 13 cents a share..)

　

As Alison Frankel points out in her March 11, 2011 Am Law Litigation Daily article about the Credit Suisse settlement (here), the settlement split between the ADR holders and the U.S. common shareholders is similar to the settlement split in the recent $125 million Satyam settlement (about which refer here) in which the ADS holders were to receive $1.38 a share and common shareholders were to receive 6 cents a share.

　

Third, although the settlement agreement itself does not specify the amount of plaintiffs’ attorneys’ fees, the accompanying settlement papers discloses that the plaintiffs’ counsel intends to move the court and seek attorneys’ fees "not to exceed 27-1/2 percent of the settlement proceeds" plus $350,000 in expenses. If the plaintiffs’ counsel were to receive the full 27.5 percent amount, that would translate into a fee award of $19.25 million.

　

Beyond its specific features, the settlement is also interesting for what it represents. For starters, it is represents one of the few settlements so far of the more that 230 subprime and credit crisis-related securities class action lawsuits that accumulated during the period 2007 to 2010. By my count, the Credit Suisse settlement represents only the 19th settlement of a credit crisis securities suit overall and only the second such settlement so far in 2011.

　

As Cornerstone Research discussed in its recently released study of 2010 securities class action lawsuit settlements (refer here), the credit crisis cases have "settled at a slower rate than traditional cases." Though many of these cases have been dismissed, others have survived dismissal motions. (And some, like the Credit Suisse case itself, were initially dismissed but survived renewed dismissal motions.) As I have noted elsewhere there is a backlog of unresolved credit crisis lawsuits. Though these cases are in many instances still working their way through the system, more of these cases will be moving toward settlement in the months ahead.

 

The size of the Credit Suisse settlement is also noteworthy. The $70 million settlement amount makes the case the fifth largest credit crisis securities suit settlement so far. Many of the credit crisis lawsuit settlements have been large – the Cornerstone study shows that the average and median credit crisis settlements have run substantially higher than the average and median settlements of securities suits generally. The suggestion is that the aggregate costs of all of these settlements could represent a very substantial figure, a possibility that, among other things, could have important implications for the D&O insurance industry.

 

Break in the Action: The D&O Diary’s publication schedule will be intermittent for the next two weeks. The normal publication schedule will resume on March 28, 2011.　

　

On March 7, 2011, in the latest development in a long-running securities suit that is among the few securities class action lawsuits to go to trial and that had previously resulted in a $277.5 verdict in plaintiffs’ favor, the U.S. Supreme Court denied Apollo Group’s petition for writ of certiorari. As a result, the ruling of the Ninth Circuit reinstating the jury’s verdict will now stand. In addition, as a result of the decision to decline taking up the case, the interesting and arguably important issues the cert petition raised will now not be reviewed by the Supreme Court.

 

As detailed in greater length here, plaintiffs filed the suit after the company’s share price declined following the disclosure of a U.S. Department of Education report alleging that the company had violated DOE rules. On September 7, 2004, the company agreed to pay $9.8 million to settle the allegations. News of the settlement first became public on September 14, 2004, but the company’s share price did not actually decline until September 21, 2004, when a securities analyst issued a report expressing concern about the company’s possible exposure to future regulatory issues.

　

On January 16, 2008, a civil jury entered a verdict in favor of the plaintiff class on all counts, awarding damages of $277.5 million. Under the verdict, Apollo is responsible for 60 percent of the plaintiffs’ losses, former Apollo CEO Tony Nelson is responsible for 30 percent, and former CFO Kenda Gonzales is responsible for 10 percent. The jury verdict is discussed at greater length here.

　

As discussed in greater length here, on August 4, 2008, Judge James Teilborg of the United States District Court for the District of Arizona entered an order (here) granting the defendants’ motion for judgment as a matter of law, based on his finding that the trial testimony did not support the jury’s finding of loss causation. Judge Teilborg’s order vacated the judgment and entered judgment in defendants’ favor.

 

In its post-trial motion, Apollo argued that the evidence at trial was insufficient to support a finding that the analyst reports represented "corrective disclosure," because they did not contain any new fraud-revealing information. Judge Teilborg found that "the evidence at trial undercut all bases on which [the plaintiff] claimed the (analyst) reports were corrective."　

 

Accordingly, the court concluded that although the plaintiff "demonstrated that Apollo misled the markets in various ways concerning the DoE program review," the plaintiff "failed to prove that Apollo’s actions caused investors to suffer harm." The court therefore concluded that "Apollo is entitled to judgment as a matter of law."

 

In a June 23, 2010 opinion (here), a three-judge panel of the Ninth Circuit held that the district court "erred in granting Apollo judgment as a matter of law." The opinion states that "the jury could have reasonably found that the (analyst) reports following various newspaper articles were ‘corrective disclosures’ providing additional or more authoritative fraud-related information that deflated the stock price."

　

The Ninth Circuit further held that Apollo is not entitled to a new trial and that there is no basis for remittitur (reduction of the verdict). The Ninth Circuit reversed and remanded the case with "instructions that the district court enter judgment in accordance with the jury’s verdict." The company filed a petition for writ of certiorari to the U.S. Supreme Court.

　

The basis for the company’s cert petition was basically that if the efficient market hypothesis means anything, then the information about the DoE investigation was fully incorporated into the company’s share price when the news first hit the market on September 14. Either the market did not efficiently incorporate this information, in which case the market for the company’s stock is not efficient and the plaintiffs ought not to be able to rely on the fraud on the market theory to establish reliance, or the market is efficient and the company’s share price simply did not decline at the time of the corrective disclosure.

　

In a June 28, 2010 guest post on this blog (here), noted securities litigation defense attorney Tower Snow of the Howard Rice law firm articulated the inherent tension between these two positions as follows:

　

The courts can’t rely on the efficient market theory for purposes of creating a rebuttable presumption of reliance for purposes of class certification and then ignore its underpinnings for purposes of evaluating loss causation. Either one embraces the theory or one does not. If one embraces it, then once it is established that the prior disclosures revealed the truth about the allegedly misstated or omitted information, there is nothing left for the jury to decide. The later disclosure, by definition, cannot be corrective, as the market already had absorbed the information. Here, the "corrective" disclosure came out seven days after the information had been previously released. Seven days is an eternity in the financial markets.

　

As discussed in March 2011 memo from the Jones Day law firm discussing the U.S. Supreme Court’s cert denial in the Apollo Group case (here), the Circuits are split on the question of how soon after a corrective disclosure a stock price decline must occur in order for the loss causation requirement to be satisfied. At least two Circuits – the Second and the Third – have held that the claimant must show that the market immediately reacted. At least three Circuits – the Fifth, Sixth and Ninth – have head that the price decline may occur weeks or even months after the initial corrective disclosure.

　

In light of the Supreme Court’s refusal to take up the Apollo Group case, this split in the Circuits will remain unresolved. Moreover, the relatively plaintiff friendly standard articulated by the Ninth Circuit remains standing in that Circuit, where so many securities class action lawsuits are filed.

 

Finally, the Supreme Court’s cert denial means that the Ninth Circuit’s ruling in the Apollo Group case stands. The Ninth Circuit had remanded the case for "entry of judgment in accordance with the jury’s verdict." In other words, the Supreme Court’s cert denial means that the plaintiffs’ verdict in one of the very rare securities cases to go to trial will stand.

 

The Supreme Court’s cert denial was disclosed with little fanfare, as part of a long list of other rulings at the same time. Looking at the Apollo Group cert denial among the list of rulings might convey the impression that this is no big deal. But actually it is a little surprising. The U.S. Supreme Court has shown an active willingness to take up securities cases, having taken numerous cases up in each of the last few terms. And part of the willingness to take up these cases seemed to involve persistent hostility against securities suits in general. The opportunity to trim a plaintiffs’ victory and to resolve a circuit split certainly seemed to suggest the possibility that the Supreme Court might well grant the cert petition.

 

In any event, with the cert petition denial, the plaintiffs’ trial victory in this case appears as if it will stand. Even with the recent dramatic narrowing of the plaintiffs’ class in the Vivendi case, the plaintiffs overall are on a bit of a roll when it comes to securities lawsuit trials. The last three securities cases to go to trial (the Homestore case, refer here; the BankAtlantic case, refer here; and the Vivendi case, refer here) have all resulted in plaintiffs’ verdicts.

　

Trials in these cases are extremely rare, and these recent developments involve a very small percentage of all securities cases. Nevertheless, the plaintiffs’ bar undoubtedly will find this sequence of events, including the cert petition denial in the Apollo Group, to represent heartening developments.  Even with the cert denial in the Apollo Group case, however, there are still a couple of securities cases still pending before the court this term — the Matrixx Initiative case (refer here) and the Janus Capital Group case (refer here) — and it remains to be seen how plaintiffs will fare in those cases.　

　

　

Though the average dollar value of securities class action settlements approved in 2010 declined slightly compared to 2009, the median settlement amount reached record levels, according to Cornerstone Research’s annual 2010 Securities Class Action Settlement Study. Cornerstone’s March 10, 2010 press release about the study can be found here, and the study itself can be found here.

 

Largely as a result of the decline in the number of mega-settlements, the average securities class action lawsuit settlement approved in 2010 declined to $36.3 million, compared to S37.2 million in 2009. Both of these figures are well the 1996-2009 average settlement of $54.8 million. Even if the post-Reform Act settlement average is "normalized" by excluding the top-three settlements during that era, the 2010 average is still below the adjusted 1996-2009 average of $38.8. (All historical averages are adjusted for inflation.)

 

The median average class action lawsuit settlement approved in 2010 increased to $11.3 million from a 2009 median of $8.0 million. This 40% increase represents the largest single year increase in the median settlement in the last ten years.

 

The sizeable gap between the averages and medians is a reflection of the presence of a few significant larger settlements During the post-Reform Act era, more than half of the securities class actions have settled for less than $10 million, about 80% have settled for under $25 million.. Only 7 percent of cases have settled for more than $100 million. Thus, "while large settlements tend to receive substantial attention, they tend to occur infrequently."

 

The Cornerstone study reports the number of securities class action lawsuit settlements approved during 2010 is the lowest in ten years. The "more likely cause" for this decline is combination of the substantial drop in the number of new securities class action lawsuit settlements and the fact that the credit-crisis suits have taken longer to settle. The average time to settlement for cases settled in 2010 was 4.1 years, compared to 3.9 years for the cases settled in 2009.

 

Obviously, the most significant factor with respect to the overall size of securities suit settlements is the overall amount of investor losses (although the proportionate relationship between the size of the settlement and the size of investor losses decreases as the size of "plaintiff-style" damages increases.)

 

There are a number of other lawsuit features that present statistically significant differences in the size of the settlements. First, cases involving accounting allegations are resolved with larger settlements than cases without accounting allegations. For example, cases involving a restatement settled during the 1996-2010 period settled for 3.9% of "plaintiff-style" damages, but cases without a restatement settled for 3.1% of those amounts. In addition, filings that do not involve accounting allegations are more likely to be dismissed than filings with accounting allegations.

 

The report goes on to observe that the increased complexity of cases involving accounting allegations means these cases may take longer to resolve, which may be a factor contributing to the increased interval between the filing date and the settlement date observed over time.

 

Second, the presence of public pension plans as lead plaintiffs is associated with higher settlements as well. Though this observation could be explained by these investors choosing to participate in stronger cases, the study reports that even controlling for observable factors that affect settlement amounts, "the presence of a public pension plan as a lead plaintiff is still associated with a statistically significant increase in settlement size."

 

Other lawsuit features that are associated with statistically significant settlement amounts are the presence of Section 11 and/or Section 12(a)(2) claims; the presence of a remedy of a corresponding SEC action; and the presence of companion derivative claims. On the latter point, the report notes that class actions accompanied by derivative actions tend to be associated with other factors important to settlement amounts, such as accounting allegations, the presence of related SEC action and the involvement of public pension fund plaintiffs.

 

The credit crisis cases have settled more slowly than "traditional cases." There have also been relatively few settlements of these cases to date, as well. Of the credit crisis cases that have settled so far, they have tended to settle for larger amounts (median settlements of $31.3 million and average settlements of $103.1 million) but for lower percentage of estimated "plaintiff-style" damages (3.2% on average compared to 4.9% for all cases). My compilation of all credit-crisis settlements can be accessed here.

 

Some readers may note slight variations between the averages and median settlement figures reported in the Cornerstone report compared to those reported elsewhere. Thought there are differences, the figures are directionally consistent. The differences may be due to a combination of timing and methodology. The Cornerstone report designates the settlement year as the year in which the hearing to approve the settlement was held. Cases involving multiple settlements are reflected in the year of the most recent partial settlement (subject to certain additional considerations).

 

Though all of the report’s findings are interesting and important and the report is well worth reading at length and in full, for me the most significant finding is the report’s conclusion about the dramatic increase in the size of the median settlement. Averages can be driven by outliers, but medians are more reflective of the overall direction of settlements in general.

 

The rapid increase in the median settlement amount has important implications for corporate insurance buyers as well as for their insurers, particularly at a time when costs of defense are also escalating rapidly. For buyers, the rising median settlement amount clearly has important implications for purposes of limits selection and limits adequacy. I think the unmistakable conclusion is that the questions of limits adequacy may now involve larger levels of insurance than may have been the case in the past.

 

For insurers, and particularly those insurers who more typically are involved in the excess layers, the rising median may have important implications for likely loss experiences. The clear implication is that higher attaching excess layers are increasingly likely to be called upon to participate in case resolution, particularly in light of rising costs of defense. Losses are likelier to push up into higher layers.

 

For the second time, a court has given investors leave to proceed and also certified a plaintiff class in a secondary market misrepresentations claim under the revised Ontario Securities Act. In an order dated March 1, 2011, Ontario Superior Court Justice Wolfram Tausendfreund granted leave to investors to proceed against Arctic Glacier Income Fund, its trustees and related entities and executives. A copy of Justice Tausendfreund’s order can be found here.

 

As discussed at length here, effective in 2005, Ontario revised its securities laws (in legislative provisions now generally referred to as Bill 198) potentially making it easier for disappointed investors to bring actions for civil liability against directors and officers of public companies for alleged secondary market misrepresentations.

 

Section 138.8 (1) of the revised Ontario Securities Act 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 a "landmark" December 2009 ruling, discussed here, Ontario Superior Court Justice Katherine van Rensberg granted plaintiffs in the Imax securities class action lawsuit leave to proceed with their claims. Justice van Rensberg also granted the plaintiffs’ motion to certify a global class in that case. In a February 2011 order (discussed here), another Superior Court Justice denied the defendants’ motion for leave to appeal Justice van Rensberg’s rulings.

 

The March 1 ruling involved an action brought by investors who had purchased shares of the Arctic Glacier Income Fund. The Income Fund is an unincorporated mutual fund trust that is a reporting issuer in ten Canadian provinces. Interests in the Income Fund trade on the Toronto stock exchange. The Income Fund’s sole assets are shares of Arctic Glacier Inc., a corporation organized under Alberta law. The company and its wholly owned subsidiary, Arctic Glacier International, provide packaged ice to consumers in Canada and the United States.

 

In March 2008, the Income Fund announced that it had become aware of an U.S. Department of Justice antitrust investigation involving the packaged ice industry. In 2009, Arctic International pleaded guilty to a criminal, anticompetitive conspiracy in the U.S. In the plea agreement, Arctic International agreed to pay a US$9 million fine and admitted that it had participated in a conspiracy to suppress competition in the packaged ice business in Michigan between 2001 and 2007. Following the announcement of the investigation, Income Fund’s unit price declined. The plaintiffs initiated an action alleging that they had been misled in connection with the company’s alleged legal and regulatory compliance programs.

 

As required under the revised Ontario Securities Laws, the plaintiffs moved for leave to proceed. In order to determine whether or not the plaintiffs had met the statutory requirement in order to obtain leave – that is, that "there is a reasonable possibility that the action will be resolved at trial in favor of the plaintiff" – Justice Tausendfreund followed the analysis of Justice van Rensberg in the Imax case with respect to the requirements to meet this standard. After noting that he saw no reason to depart from her analysis, Justice Tausendfreund said that "the applicable standard is more than a mere possibility of success, but is a lower standard than a probability."

 

Justice Tausendfreund concluded that the plaintiffs had met this "leave test" under Section 138.8 and granted them leave to pursue statutory claims for misrepresentation in the secondary market. He also granted the plaintiffs’ motion to certify a class of all investors who had purchased the Income Fund units during the class period, declining the defendants’ request to narrow the class.

 

The significance of Justice Tausendfreund’s ruling is that now a second set of plaintiffs has been granted leave to proceed with a claim for secondary market misrepresentations under the revised Ontario Securities Laws. In addition, Justice Tausendfreund, like Justice van Rensberg in the Imax case, found that the showing required to satisfy the "leave test" is relatively low.

 

It would is possible to overgeneralize from just these two cases, but at least so far that the plaintiffs have been relatively successful in overcoming the initial procedural hurdles in pursing secondary market misrepresentation claims under the revised Ontario Securities Act.

 

In addition, the plaintiffs have also succeeded in having a broad class certified as well. The certification of a global class in the Imax case may be of greater significance, given that Imax shared traded on both the Toronto and New York stock exchanges, whereas the Arctic Glacial Income Fund shares traded only on the Toronto exchange. But nevertheless, the relatively low initial threshold for leave and the courts’ willingness to certify broad classes are positive developments for the plaintiffs in these cases, and may make the remedies available under the revised Ontario Securities Act more attractive to other claimants.

 

An interesting and detailed March 8, 2011 analysis of the Arctic Glacier decision by the Osler, Hoskin & Harcourt law firm can be found here. The law firm memo raises a number of interesting questions about the decision, particularly with respect to the class certificaiton ruling. A March 4, 2011 Globe and Mail article about the recent ruling can be found here.

 

We Are All One: In her fascinating article in the March 7, 2011 issue of The New Yorker entitled "The View from the Stands" (here) about soccer in Turkey, Elif Batuman reported the following comments of one fan of the Beşiktaş team about the team and its followers (who are known as Çarşi):

 

He characterized Beşiktaş as the team of the unexpected, the team of underdogs, and talked about Çarşi’s slogans, which are unveiled on giant banners during matches. “We are all Black,” proclaimed one banner, after rival fans had made references to the race of the French-Senegalese Beşiktaş star Pascal Nouma. When [competitior] Fenerbahçe disparaged a Beşiktaş manager whose father had been a janitor, there were banners saying “We Are All Janitors.” And when an international committee of astronomers removed Pluto from the list of planets Çarşi took up the cause: “We Are All Pluto.”

 

 

Among the questions that followed in the wake of the U.S. Supreme Court’s Morrison v. National Australia Bank decision has been whether and to what extent plaintiffs’ lawyers will resort to courts outside the U.S. to pursue securities claims on behalf of investors who purchased the defendant company’s shares outside the U.S. The action recently filed in the Netherlands on behalf of non-U.S. investors in Fortis presents shows that plaintiffs’ lawyers will be pursuing these claims.

 

A recent announcement involving prior Dutch settlements underscores that efforts to obtain recoveries outside the U.S. on behalf of non-U.S. investors have actually been underway for some time. The settlements show how parallel (or at least sequential) proceedings can resolve the claims of both U.S. and non-U.S. investors, respectively. These procedures, which have been used before in the same way, may afford a means by which all investors – including even non-U.S. investors – potentially may obtain recoveries, notwithstanding the constraints of Morrison.

 

On March 3, 2011, the Stichting Converium Securities Compensation Foundation issued a Hearing Announcement in connection with the settlements totaling $58.4 million on behalf of investors who purchased shares of Converium Holding AG between January 7, and September 2, 2004 and who did not purchase their shares on a U.S. exchange and who were not residents of the U.S. at the time they purchased their shares. The hearing, to be held on October 3, 2011 in the Amsterdam Court of Appeals, will determine whether or not the settlements will be held binding.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

However, as Luke Green noted in a recent detailed post on the Risk Metrics Group Insights blog (here), there are a number of limitations on the usefulness of this Dutch procedure for investors seeking recoveries. First, only court authorized representatives can pursue claims on behalf of investors, and representatives cannot seek damages. Rather, the Dutch courts can only certify the class and approve out of court settlements. Green also notes that absent a chance in EU regulations, the class representative may have difficulty enforcing the settlement outside the Netherlands. A detailed discussion of the potential conflict between the Dutch Act and the laws of other jurisdictions can be found here.

 

In the circumstances where there is no prior U.S.-based settlement or U.S. action to provide both leverage and a path to settlement, the non-U.S. investors will have to try another approach – as was the case for the Fortis investors who recently filed an action in the Netherlands in which they seek to assert claims on behalf of investors who affirmatively joined the action. Of course, it remains to be seen how successful that approach will be.

 

In the meantime, it seems probable that investors will continue in the wake of Morrison to explore jurisdictional alternatives, in the Netherlands and elsewhere. As I recently noted (here), Canada could represent yet another alternative, at least to the extent the recent Ontario court certification of a global class in the Imax securities class action proves to represent the potential reach and applicability of the Ontario securities laws. Developments in yet other jurisdictions could present additional possibilities.

 

In any event, it is probably worth noting that post-Morrison, the class certified in the U.S. action would not have included the U.S. residents who purchased their Converium shares outside the U.S. Following Morrison, several district courts have ruled (e.g., refer here) that the claims of these so-called "f-squared" investors are outside the ambit of the U.S. securities laws. These investors would essentially be in the same boat with the non-U.S. investors who purchased their shares outside the U.S.

　

Is the SEC Targeting Outside Directors?: A March 3, 2011 memo from the Haynes and Boone law firm entitled "SEC Enforcement: Spolighting Outside Directors" (here) takes a look at a recent SEC enforcement action that specifically targeted outside directors for their allegedly failure to fulfill their responsibilities as Board member at a company that engaged in fraudulent misconduct.

 

The memo suggests that although the specific case involved "egregious" misconduct, the SEC’s actions signal "a new willingness to prosecute those directors who disregard or neglect their duties." The memo suggests a number of lessons from the case, including in particular that outside directors must respond to "red flags."

 

Another Sarbanes-Oxley Clawback Action: In a separate March 3, 2011 action (here), the SEC also entered a negotiated settlement with the former CEO of Beazer Homes, in which the CEO agreed to reimburse the company $6.4 million in cash and also various company securities the CEO had received as part of his incentive bonus compensation during 2006. The SEC alleged that the company had filed fraudulent financial statements during the period for which the CEO had been awarded the bonus compensation.

 

The SEC had asserted its right to compel the return (or to "clawback") the bonus compensation under Section 304 of the Sarbanes Oxley Act. Under Section 304, it is not necessary for the individual target to have participated or even to have been aware of the conduct resulting in the company’s misstatement. The Beazer Homes CEO neither admitted nor denied the SEC allegations.

 

This is not the first time the SEC has used Section 304 to clawback compensation. As noted here, the SEC has previously sought to clawback compensation from the CEO of CSK Auto. The SEC also previously entered a clawback settlement with the CEO of Diebold (refer here).

 

As I noted in a prior post (here), these kinds of clawback actions present a host of complex D&O coverage issues. In any event, we are likelier to see more clawback actions in the future, in light of the expanded clawback requirements in the Dodd-Frank Act.

 

Academy Awards Retrospective: In the academy awards ceremony last week, The King’s Speech carried away a host of trophies. And perhaps appropriately so. It is an entertaining movie with excellent acting. And as I noted in an earlier post when I saw it, the movie made excellent use of music.

 

But I agree with Joe Queenan’s February 20, 2011 column in the Wall Street Journal. For all of its finery and as good as it is, The King’s Speech is a formulaic movie. As at least one Internet reviewer before me has observed, it is The Karate Kid with a British accent and better costumes. Take nothing away from Colin Firth, who was excellent, but were it not for our general enchantment with British royalty, this movie would not likely have swept the statuettes.

 

For my money, True Grit was the best movie of the year. If you saw the movie, you will recall the dreamlike sequence after Rooster Cogburn rescues Mattie and races through the night on horseback to try to get her medical attention. An absolute stunning visual sequence that was all the more remarkable because you didn’t notice it until you thought about it later.

 

Not only that, but Haille Steinfeld deserved the Oscar for best supporting actress. Anyone who can portray a 14 year old hung upside down in a cave filled with a decaying corpse and poisonous snakes and manage to convey simultaneously both terror and a sense of self-control has to win the award. And if you really want to appreciate how fantastic Haille Steinfeld was as the most recent version of Mattie, you should see how Kim Darby in the same role in the older version absolutely killed the movie. (I ask you, how could anyone play Mattie as a whiny simp?)

 

I am sure that like me many viewers enjoyed the unusual characters, odd but amusing dialog and unexpected plot of True Grit. The recent version of the movie more faithfully reproduced the feel of the novel on which the movie was based. Charles Portis wrote book. I know this because Portis wrote another book which I would argue is one of the funniest books out there.

 

Ten years after he wrote True Grit, Portis published The Dog of the South, which is the story Ray Midge’s headlong plunge from Little Rock into Mexico and then Belize. Midge is chasing his friend, Dupree, who ran off with Midge’s wife and took his car. And Midge wants his car back. It would be hard to quickly summarize Midge’s meandering quest and the oddball assortment of characters he encounters. The book is full of curious observations and busted bicycle wheel conversations that somehow make sense and are always funny (albeit often incorrect politically). Here’s a short excerpt to give a flavor of the book:

 

In South Texas I saw three interesting things. The first was a tiny girl, maybe ten years old, driving a 1965 Cadillac. She wasn’t going very fast, because I passed her, but still she was cruising right along, with her head tilted back and her mouth open and her little hands gripping the wheel

 

Then I saw an old man walking up the median strip pulling a wooden cross behind him. It was mounted on something like a golf cart with two-spoked wheels. I slowed down to read the hand-lettered sign on his chest. "Jacksonville Fla or Bust."

 

I had never been to Jacksonville but I knew it was the home of the Gator Bowl and I had heard it was a boom town, taking in an entire county or some such thing. It seemed like an odd destination for a religious pilgrim. Penance maybe for some terrible sin, or some bargain he had worked out with God, or maybe just a crazed hiker. I waved and called out to him, wishing him luck, but he was intent on his marching and had no time for idle greetings. His step was brisk and I was convinced he wouldn’t bust.

 

The third interesting thing was a convoy of stake-bed trucks all piled high with loose watermelons and cantaloupes. I was amazed. I couldn’t believe that the bottom ones weren’t being crushed under all that weight, exploding and spraying hazardous melon juice onto the highway. One of nature’s tricks with curved surfaces. Topology! I had never made it that far in my mathematics and engineering studies, and I knew now that I never would, just as I knew that I would never be a navy pilot or a Treasury agent. I made a B in Statics but I was failing in Dynamics when I withdrew from the field. The course I liked best was one called Strength of Materials. Everybody else hated it because of all the tables we had to memorize but I loved it. I had once tried to explain to Dupree how things fell apart from being pulled and compressed and twisted and bent and sheared but he wouldn’t listen. Whenever that kind of thing came up, he would always say – boast, the way those people do – that he had no head for figures and couldn’t do things with his hands, slyly suggesting the presence of finer qualities.　

　

In the fifth FDIC lawsuit against former directors and officers of failed banks as part of the current bank wave, on March 1, 2011, the FDIC as receiver for the failed Corn Belt Bank and Trust Company filed suit in the Central District of Illinois federal court against four former officer and directors of the bank, seeking to recover losses of at least $10.4 million.. A copy of the FDIC’s latest complaint can be found here.

 

According to the Complaint, examiners began criticizing the bank’s lending practices as early as 2003. The Complaint alleged that between 2003 and 2008 the bank "failed to address recurring criticisms by examiners regarding imprudent lending practices," and April 2, 2007, the bank entered a memorandum of understanding (MOU) with examiners. In November 2008, after the bank failed to comply with the MOU, the FDIC issued a cease and desist order. The bank ultimately failed on February 13, 2009.

 

The lawsuit itself is failed against the four members of the bank’s loan committee. These four individuals include the bank’s CEO, its chief lending officer and two outside directors. The complaint alleges that the four defendants "failed to adequately inform themselves of the relevant risks and acted recklessly in approving one or more of five high-risk commercial loans."

 

The five loans, all of which were made between 2005 and 2007 and all of which related to the long-haul trucking business, allegedly were "improperly underwritten and extended 100 percent financing to out of state, start-up businesses, and were primarily secured by rapidly depreciating semi-tractors." The complaint further alleges that the CEO and Chief Loan officer unilaterally funded the fifth of the five loans after the loan committee tabled its approval, and they failed to unsure that the loans were properly administered.

 

The complaint alleges that the defendants’ alleged conduct was "particularly egregious" because they approved one or more of the five loans "after Bank examiners repeatedly warned the Bank that it suffered from weak loan administration, and that it was facing risks posed by out of area lending, high loan-to-value ("LTV") loans, and excessive exposure to loan concentrations within its loan portfolio." All five of the loans at issue allegedly shared these characteristics.

 

The complaint alleges gross negligence under FIRREA and negligence under Illinois law against the four individuals for approving the loans. The complaint also specifically alleges gross negligence under FIRREA and negligence under Illinois law against the former CEO and the former chief lending officer in connection with the approval of the fifth of the five loans. Finally, the complaint alleges gross negligence under FIRREA and negligence under Illinois law against the former CEO and former chief lending officer for failing to properly administer the loans and for failing to protect the bank’s security interest in the collateral.

 

The FDIC’s complaint against the four former Corn Belt officials is just the fifth complaint filed so far as part of the current bank wave, and first since the FDIC filed two complaint’s the same day in January 2011. It is the second of the five to be filed against officials of a failed bank that had been based in Illinois. The complaint is interesting because it not only names the two bank officers as defendants, but it also names two outside directors who had served on the bank’s loan committee, as well.

 

Like the four prior lawsuits the FDIC filed as part of the current wave of bank failures, this lawsuit was filed over a year after the institution itself failed. Although the FDIC’s motivations can only be inferred, it appears that what may have provoked this suit is what the FDIC attempted to describe as the defendant’s "particularly egregious" conduct of having approved these particularly loans in the fact of examiners’ warning about loans sharing the characteristics of the five loans at issue.

 

In the Professional Liability Litigation page on the FDIC’s website (here), the FDIC has said, as of its last update, that it has approved lawsuits against a total of 130 individuals. The four previous lawsuits that had been filed named a total of 35 individuals as defendants. With the addition of the four individuals named as defendants on the Corn Belt lawsuit, a total of 39 individuals have now been named as defendants, suggesting that lawsuits to be filed against 91 additional individuals remain pending. Of court, the total number of individuals against who lawsuits have been authorized is likely to continue to grow as well.

 

My table of the lawsuits the FDIC has filed against former directors and officers of failed banks as part of the current failed bank wave can be accessed here.

 

Special thanks to a loyal reader for alerting me to the Corn Belt lawsuit.