On Wednesday December 29, 2010 at 1 p.m. EST I will be participating in a free webcast sponsored by Securities Docket, entitled "2010 Year in Review: Securities Enforcement, Litigation & Compliance."

 

The webcast panel, which will include Compliance Week editor Matt Kelly, Francine McKenna (re: The Auditors) , Mike Koehler (aka the "FCPA Professor"), Francis Pileggi (Delaware corporate law guru), Tracy Coenen (The Fraud Files), Lyle Roberts (The 10b-5 Daily) and Securities Docket’s Bruce Carton, will look back at 2010’s most significant events and trends in the areas of corporate compliance, auditor issues, the Foreign Corrupt Practices Act, Delaware corporate law, D&O insurance issues, white collar fraud issues, securities class actions and SEC enforcement.

 

For further information and to register, please visit the Securities Docket webinsar webpage, here.

 

New York Attorney General Andrew Cuomo’s December 21, 2010 filing of a civil fraud lawsuit against Ernst & Young in connection with the audit firm’s services to Lehman Brothers has captured headlines in business pages around the world. The complaint itself, which can be found here, raises some serious allegations. But the complaint also raises a number of interesting questions, as discussed below. The NYAG’s December 21, 2010 press release about the lawsuit can be found here.

 

The Complaint

The 32-page complaint alleges that between 2001 and September 2008, E&Y "facilitated" Lehman Brothers’ "massive accounting fraud." The complaint alleges that during that period E&Y earned over $150 million in compensation from Lehman, which allegedly was one of E&Y’s largest clients.

 

The complaint alleges that Lehman manipulated its balance sheet through quarter-end sales of billions of dollars of fixed-income securities to European banks, with the express understanding that the Lehman would repurchase the securities days later. Lehman’s use of these transactions, know as Repo 105 transactions, allowed Lehman to mask its balance sheet leverage. The scale of these transactions grew as Lehman’s financial condition deteriorated in 2007 and 2008.

 

The complaint alleges that E&Y was aware of Lehman’s use of these transactions, yet approved Lehman’s use of financial statements that did not disclose the existence of the transactions or their effect on Lehman’s balance sheet. These actions, the complaint alleges, "directly facilitated a major accounting fraud, and helped mislead the public."

 

The complaint alleges that these actions by E&Y violated New York’s Martin Act. The complaint seeks to compel E&Y to repay the fees it earned from Lehman as well as investor damages.

 

Discussion

There are a number of very interesting things about the NYAG’s complaint against E&Y.

 

The first is that the only defendant in the lawsuit is E&Y itself. There are no other individuals or entities names as defendants.

 

On the one hand, it is hardly a surprise that a governmental authority has decided to pursue a regulatory claim against E&Y, in light of the March 2010 report by the Lehman Brothers bankruptcy examiner Anton Valukas (about which refer here). In his report, Valukas had concluded "there are colorable claims" against E&Y for its "failure to question and challenge improper or inadequate disclosures." Given the bankruptcy examiner’s conclusions it seemed probable that there might eventually be some kind of regulatory action taken against E&Y.

 

On the other hand, the bankruptcy examiner’s report not only concluded that there are "colorable claims" against E&Y, but also concluded that there are "colorable claims" against the senior Lehman officials who "oversaw and certified the misleading financial statements," including Lehman’s CEO Richard Fuld and its CFOs, Christopher O’Meara, Erin Callan and Ian Lowitt. Moreover, the NYAG’s complaint expressly refers to other financial executives at Lehman who were involved in the company’s use of the Repo 105 transactions.

 

The NYAG’s complaint does not name any of these individuals as defendants. Indeed, one of the very curious aspects about the NYAG’s complaint is that it is virtually silent about the role or involvement of the most senior Lehman officials in the Repo 105 transaction; the individuals referred to by name in the complaint are by and large not the most senior executives.

 

And just as the complaint names no Lehman executives as defendants, the complaint also names no E&Y-related individuals as defendants. The sole defendant is E&Y itself, even though the individual E&Y audit partners responsible for Lehman’s audit and financial reporting are identified by name in the NYAG complaint. Yet it is the audit firm itself that is named as defendant, not the individuals.

 

The complaint’s firm-level focus is all the more interesting as allegations in the complaint do not seem to suggest that the decision to allow Lehman the accounting treatment it received was made at a firm-wide level or that anyone at E&Y other than the specific individual audit partners were aware of Lehman’s use and reporting of the Repo 105 transactions.

 

Setting aside the question of who been sued, there is also the question of the timing of the filing of this complaint. The complaint was filed by New York’s departing AG, Andrew Cuomo, who is just days away from taking up his duties as New York’s incoming Governor. Of course, it was his deputies and assistants who prepared and filed the complaint, but the timing of their actions means that this case will shortly become the responsibility of the incoming NYAG Eric Schneiderman.

 

Given that the incoming AG will be responsible for the case, it seems odd that he was not allowed control over its filing. On the other hand, under the heading of media relations, it may not be surprising that the outgoing AG wanted to make sure that everybody knew this complaint was filed on his watch.

 

Another question that combines these questions of targets and timing is the question of sequencing. The sequencing issue has two aspects – the first is why the NYAG has proceeded first against E&Y without at the same time or first going against any company officials. The second issue is the question of why the NYAG’s office is proceeding forward in advance of any action by the federal regulators.

 

The NYAG may be proceeding first against E&Y for tactical reasons, as a way to secure a settlement and/or the firm’s cooperation in connection with a later action against the corporate officials. Peter Lattman reported on December 20, 2010 on the Dealbook blog (here) that E&Y and the NYAG’s office have been in settlement negotiations. The complaint may simply represent negotiations in another form.

 

As for the NYAG’s moves ahead of the federal regulators, Lattman speculates that the action may in fact spur the SEC or the DoJ to act – which may or may not have been an intended consequence of the move.

 

But the most interesting question of all is – what will happen next? Will E&Y reach a settlement with the incoming NYAG? Will the NYAG file a separate action against senior Lehman officials? Will the SEC or the DoJ now take action, either against E&Y or former Lehman officials?

 

Whatever else might be said about the NYAG’s complaint, its very presence begs the question why there has yet been no federal regulatory action related to Lehman, a question further highlighted by the bankruptcy examiner’s report. My own view of the reason the federal regulators have not yet acted is that they know all too well that the Lehman collapse is the highest profile event related to the credit crisis.

 

Given that high profile, they know they can’t take any chance that their Lehman-related enforcement actions might fail. The unacceptable consequences (to the federal regulators) of a failed regulatory action are compelling them to build the most durable case they think they can construct before proceeding. I still think it is a question of when, nor if, the federal regulators will initiate their own Lehman-related enforcement actions.

 

Assuming for the sake of argument that the federal regulators will eventually launch their own Lehman action, it will be interesting to see if the federal action will target E&Y. Francine McKenna suggests on her Accounting Watchdog blog on the Forbes website (here), that when it comes to pursuing the accountants, the feds are all too happy to have the NYAG do the "dirty work."

 

For the record, I disagree with the media voices trying to suggest this is the "beginning of the end" of E&Y. This is not a criminal case of the kind that killed Arthur Anderson. This is a civil action. E&Y has taken a massive reputational hit and it likely will  have to pay substantial amounts to extricate itself from this case. But the firm’s continued existence is in no danger from this case.

 

Susan Beck has an interesting December 21, 2010 article on the Am Law Litigation Daily (here) about the defenses that E&Y has raised to similar allegations in investor litigation relating to the Lehman collapse.

　

"Year in Review" Webcast: On December 29, 2010 at 1 p.m. I will be participating in a free webcast sponsored by the Securities Docket, entitled "2010 Year in Review: Securities Enforcement, Litigation & Compliance."

　

The panel, which will include Compliance Week editor Matt Kelly, Francine McKenna (re: The Auditors) , Mike Koehler (aka the "FCPA Professor"), Francis Pileggi (Delaware corporate law guru), Tracy Coenen (The Fraud Files), Lyle Roberts (The 10b-5 Daily) and Securities Docket’s Bruce Carton, will look back at 2010′s most significant events and trends in the areas of corporate compliance, auditor issues, the Foreign Corrupt Practices Act, Delaware corporate law, D&O insurance issues, white collar fraud issues, securities class actions and SEC enforcement.

　

For further information and to register, please visit the Securities Docket webinsar webpage, here.

　

Season’s Greetings: Over the next few days, The D&O Diary will be taking a short holiday break. We will resume our normal publication schedule after the New Year. In the meantime, we would like to thank everyone for their support this past year and wish everyone a healthy and happy holiday season.

　

As our final holiday gesture, we would like to share this video (which has quickly gone viral) of the flash-mob-in-the-mall performance of The Hallelujah Chorus from Handel’s Messiah. Apparently the flash mob performance of this work has become quite the phenomenon this holiday season, to the point that a Sacramento choir’s December 20, 2010 attempt to stage its own flash mob scene resulted in a mall’s closure, as reported here.

　

Fortunately, the performance in this video reflects a more peaceful scene. Happy Holidays.

　

　

https://youtube.com/watch?v=SXh7JR9oKVE%3Ffs%3D1%26hl%3Den_US

Even after two years, the Madoff scandal continues to fascinate. Following close on the heels of last week’s news of Mark Madoff’s tragic suicide is the absolutely arresting news of Jeffry Picower’s estate’s $7.2 billion settlement with the U.S. government – to be specific, the precise amount of the settlement is $7,206,157,717, according to the Southern District of New York U.S. Attorney’s December 17, 2010 press release.

 

 

According to the press release, the settlement amount represents “all the profits Picower withdrew over the years.” Picower apparently first invested with Madoff in the late 70’s, and withdrew billions over time. After Madoff’s scheme was exposed “it became clear” that Picower had “profited at the expense of more recent [Madoff] investors.”

 

 

 

One aspect of the settlement, and apparently a critical condition on which Picower’s widow had insisted, is the provision that “neither Picower nor any of the related entities participating in the settlement had any involvement in, or knowledge of, Madoff’s fraud.”

 

 

 

This settlement will not leave Picower’s widow destitute. Most of this money had been intended for a philanthropic foundation, not for Picower’s heirs. According to the Washington Post (here), Picower’s widow will retain $200 million and his daughter will retain $25 million, the funds for all of which reportedly derived from sources other than Madoff-related profits.

 

 

 

Those readers who are curious to know exactly how a $7.2 billion civil forfeiture works will want to take a look at the U.S. Attorney’s December 17, 2010 forfeiture complaint. The complaint, which can be found here, is styled as an action by the United States against the “Defendant in rem” – specifically, “$7,206,157,717 on Deposit at J.P. Morgan Chase Bank, N.A..”

 

 

 

Among other interesting tidbits, the complaint reveals that, in order to generate those $7.2 billion in profits, the total amount that Picower had invested with Madoff’s investment advisory services was $617,456,578 – which by my calculation means that Picower’s investment with Madoff had supposedly generated lifetime returns of over 1,100%)

 

 

 

The estate’s December 17, 2010 stipulation of settlement with the government, which can be found here, represents in effect the estate’s agreement to forfeit the Defendant in rem to the government, to be effected, the stipulation recites, by the Clerk of Court’s issuance of “a warrant for the arrest of the Defendant in rem.”

 

 

 

Southern District of New York Judge Thomas Greisa approved the forfeiture case settlement. The settlement remains subject to the bankruptcy court’s approval.

 

 

 

This dual judicial approval is required because the settlement actually represents two different funds to be paid in settlement of two different matters. One fund, in the amount of $5 billion, is to be paid in settlement of the adversary proceeding the SIPC Trustee Irving Picard had filed against Picower in the bankruptcy court. The remaining $2.2 billion is actually in settlement of the civil forfeiture proceeding itself. Picard is to administer both funds for the benefit of the Madoff victims according to the detailed procedural specifications in the settlement stipulation.

 

 

 

 

The New York Times speculates that as a result of this and other recoveries, those who lost the amount of their principal investment by investing with Madoff may recover as much as 50 percent of their losses.

 

 

 

Special thanks to a loyal reader for providing the Picower settlement documents.

 

 

 

The Next Act of this Icelandic Saga Will Not be Staged in New York: Many readers may recall my May 2010 post about the events surrounding the failure of Iceland’s Glitnir Bank and the subsequent lawsuit filed in New York state court against the bank’s controlling shareholder and his wife, certain former bank directors and officers, and the Bank’s auditor.

 

 

 

At the time, I noted that “the obvious question about this case is what the heck is it doing in state court in New York?”

 

 

 

Apparently, the New York state court judge in charge of the case had exactly the same question. As reflected in Julie Triedman’s December 17, 2010 Am Law Litigation Daily article (here), on December 15, 2010, Judge Charles Ramos has thrown out the lawsuit on forum non conveniens grounds.

 

 

 

According to the article, among other issues with which Ramos was concerned was the practical problem associated with language translation. Judge Ramos seemed to accept the argument of counsel for one of the defendants, who had asked the Judge to “imagine the burden of trying to translate that all? We can’t even pronounce the names, much less translate this all.” (In that regard, I note that in typing my prior post about this case, I was unable to accurately reproduce the individual defendants’ names, as the requisite typographic symbols are simply unavailable.)

 

 

 

Judge Ramos also seemed annoyed by the very idea that this case could be added to his judicial burdens. The article reports that Judge Ramos said “you know something, we don’t need extra work. How many cases does the average judge in Iceland have in their inventory?…I’ve got 350.”

 

 

 

Demonstrating the true New Yorker’s perception of geography, Ramos added that “what I see unfolding is a case that is going to show me that the conspiracy was hatched in Iceland or Denmark or some place, but not necessarily New York.”

 

 

 

Ramos conditioned his dismissal on the defendants’ acceptance of jurisdiction in Icelandic courts. He advised the plaintiffs’ counsel to “get yourself a plane ticket.”

 

 

 

And Speaking of Failed Banks: Meanwhile, while everyone was distracted with other things, the FDIC quietly closed six more banks this past Friday night, bringing the 2010 YTD total to 157. There could be more bank failures yet to come this year, but given that next Friday is Christmas Eve and the following Friday is New Year’s Eve, the FDIC might be done closing banks, for this year at least.

 

 

 

Though the monthly totals fluctuated throughout the year from a monthly low of seven failed banks in February 2010 to a monthly high of 23 in April 2010, it definitely seems as if the bank closure pace slowed as the year progressed. There have been only 71 bank failures in the second half of 2010, compared with 86 in the first half. Moreover, after the FDIC closed 22 banks in July 2010, the agency closed only 49 banks over the following give months (an average of just under 10 banks a month).

 

 

 

The six bank closures this past Friday included three more bank in Georgia. There have been 51 bank failures total in Georgia since January 1, 2008, the highest total for any state during that period.

 

 

 

But the state with the highest number of bank closures in 2010 is Florida, which with one more bank closure this past Friday now has had 29 bank failures this year. (Georgia is second in 2010 bank failures with 21.) Florida also has the second highest number of bank failures since 2010, with 45.

 

 

 

Since January 1, 2010, there have now been a total of 322 bank failures. With 860 banks ranked as “problem institutions” in the agency’s most recent Quarterly Banking Profile, it seems likely that bank failure will likely continue as we head into 2010.

 

 

 

A Spectral Italian Vintner, Perhaps?: Novelist Jay McInerney’s wine column in this Saturday’s Wall Street Journal (here) contained this sentence: “When the elder brother died, he returned to Italy to run the family business.” In fairness, the surrounding context makes some sense out of this otherwise incomprehesible sentence. Nevertheless, The D&O Diary feels compelled to throw a flag on this sentence for unnecessary roughness in the use of the English language.

 

 

 

And Finally: If you have not yet had someone send you a link to the marvelous December 16, 2010  “Let it Dough!” illustrations on Christoph Niemann’s Abstract City blog on the New York Times website, give yourself a treat and take a few minutes to check them out here. (The “Hot Toddies” illustration alone justifies the time to visit the site.)

 

 

In its December 15, 2010 filing of Form 8-K (here), Ambac Financial Group announced that it had entered a memorandum of understanding to settle the subprime-related securities class action lawsuits pending against the company and certain of its directors and officers for a payment of $27.1 million, of which $24.6 million is to be paid by the company’s D&O insurers.

 

UPDATE: An informed source advises that in addition to the settlement on behalf of Ambac and its directors and officers, the plaintiffs in this case also entered a separate $5.9 million settlement with Ambac’s offering underwriters, bringing the total value of this settlement to $33 million.

 

The settlement is interesting in and of itself, but it is also interesting for the perspective it provides on the mountain of remaining unresolved subprime and credit crisis-related securities suits, as discussed below.

 

As discussed in greater detail here, in January 2008 Ambac and certain of its directors and officers were sued in a series of securities class action lawsuits filed in the Southern District of New York. These actions were later consolidated. The plaintiffs’ consolidated amended class action complaint can be found here. Further background regarding the case can be found here.

 

The plaintiffs’ allegations in the case largely related to the company’s provision of insurance coverage for collateralized debt obligations. The plaintiffs allege, among other things, that the defendants failed to disclose that the company lacked internal controls sufficient to ensure that the company’s standards for underwriting CDOs were adequate, and that the company had a far greater exposure to CDO-related losses and defaults than the company had previously disclosed.

 

In addition to the consolidated securities case, a separate securities suit was filed in December 2008 in the Southern District of New York against Ambac and certain of its directors and officers on behalf of invertors in the company’s Structured Repackaged Asset-Backed Trust Securities (STRATS), as reflected here. The STRATS lawsuit, which proceeded separately from the consolidated case, alleged that the defendants had issued false and misleading statements concerning Ambac’s financial results and operations.

 

On February 22, 2010, Southern District of New York Naomi Reice Buchwald granted in part and denied in part the defendants’ motion to dismiss in the consolidated securities case.

 

As I noted in a prior post discussing the dismissal motion ruling (here), Judge Buchwald’s decision was particularly noteworthy for her rejection of defendants’ attempts to argue that the company’s woes were not the result of fraud but rather were the result of the global financial meltdown; among other things, she stated that "the conduct that plaintiffs’ allege, if true, would make Ambac an active participant in the collapse of their own business, and of the financial markets in general, rather than merely a passive victim."

　

According to the company’s recent 8-K, the $27.1 million would resolve both the consolidated case and the STRATS lawsuit. As noted above, $24.6 million of the settlement is to be paid by the company’s D&O insurers, and the remaining $2.5 million is to be paid by Ambac. The settlement is subject to a number of conditions, including court approval.

 

This settlement is interesting because it would resolve one of the higher profile subprime cases, after a portion of the case survived a dismissal motion.

 

But the more interesting thing to me about this settlement is the fact that it has happened at all, or at least that it has happened now. My point is that even though about 230 subprime and credit crisis-related lawsuits have been filed since February 2007, very few of these cases have yet settled, even among the many cases that have survived motions to dismiss.

 

By my count, even taking the Ambac settlement into account, there still have been only 17 settlements of the subprime and credit crisis related securities class action lawsuits. (My list of the subprime and credit crisis-related securities lawsuit case resolutions can be accessed here.) To be sure, those settlements represent an aggregate amount of settlements of over $1.925 billion (although that impressive figure is largely a reflection of just four settlements – Countrywide, Merrill Lynch, Merrill Lynch Bond, and Schwab Yield Plus – which account for about $1.5 billion of the total.)

 

Regardless of the aggregate dollars involved in the 17 settlements to date, those settlements represent only a small part of the overall number of cases that have been filed. Moreover the subprime and credit crisis-related litigation wave will soon enter its fifth year, so you would start to think that more of these cases would be settled. Nevertheless, only eight subprime and credit crisis-related securities class action lawsuits have settled so far in 2010.

 

According to statistics the NERA Economic Consulting reported earlier this week in its 2010 study of securities class action lawsuits, of the 230 cases that NERA has identified as credit crisis-related, "only 8% have settled, 29% have been dismissed, and 63% remain unresolved."

 

Of course, a certain number of those 63% of all cases that are unresolved were filed fairly recently, and you wouldn’t expect those later filed cases to yet be near settlement. (NERA reported that there were 31 new credit crisis-related cases filed during 2010.) But many of these cases are now several years old.

 

These older unresolved cases, or at least those that survive dismissal motions, will eventually start moving toward settlement. (Relatively few will actually make it to trial, although the BankAtlantic credit crisis-related securities suit, in which the jury recently returned a plaintiffs’ verdict, is the rare case that did head to trial.)

 

I am going to go out on a limb here and predict that in 2011, there will be many more settlements of subprime and credit crisis-related securities cases than there were in 2010. We may soon get to the point that a settlement of the size of Ambac’s will no longer be particularly noteworthy. But we are not there yet.

 

As these cases move toward settlement, the insurers aggregate claim losses will begin to mount. In that regard it is worth noting that the average settlement of the 17 cases that have settled is over $110 million (although substantially lower if the four mega settlements noted above are disregarded). The implied losses that these 160-170 unresolved subprime cases represent is enormous – and that is not even taking defense costs into account.

 

Yes, not all of the settlement amounts will be paid by insurance. And yes, there will be a substantial number of those cases that will be dismissed. But many will eventually settle and much of the costs of settlement will be borne by the insurers.

 

To the extent that the carriers have adequately reserved for these losses, the settlements will not cause a ripple in the D&O insurance industry. But if the insurers are not adequately reserved for these losses, the resolution of these cases potentially could hit the industry as losses mount.

 

It would be interesting to conduct a survey amongst participants in the D&O insurance industry to find out whether people think that D&O insurers (a) are adequately reserved for these future losses; (b) think they are adequately reserved but will find out in the future they are not adequately reserved; or (c) are not adequately reserved.

 

A Couple of Interesting Law Firm Memos: A lot of law firm memos cross my desk every day, and not all of them are worth reading. But a couple of memos I recently reviewed were of particular interest.

 

First, in a December 9, 2010 memo entitled "Directors’ and Officers’ Liability: Shareholder Derivative Litigation Developments" (here), Joseph McLaughlin of the Simpson Thacher law firm summarized important recent judicial developments in federal and Delaware state court shareholder derivative litigation.

 

Second, in a December 6, 2010 memo entitled "The Board’s Expanded Role in an IPO" (here), David Westenberg of the WilmerHale law firm takes a brief look at the burdens and responsibilities of board of directors of companies that are going public.

 

In a prior post, I speculated how WikiLeaks-style disclosures might fuel claims against corporate officials, to the extent that the previously nonpublic information conflicted with public statements. The latest round of WikiLeaks disclosures includes revelations that provide a more specific example of this type of process at work.

 

The latest revelations are in the form September 2009 diplomatic cables from the U.S. Embassy in London, published in The Guardian on December 13, 2010. The cables can be found here. The cables summarize meetings held September 2-7, 2009 between two U.S. senators and three members of the House of Representatives and various Members of Parliament, U.K. government officials and leading banking executives.

 

The meetings largely involved the discussion of the causes and lessons of the global financial crisis.

 

Among the sessions summarized in the cables is a separate meeting between the three congressmen and RBS Chairman Philip Hampton. Hampton was appointed to the post by the U.K government in February 2009. In the meeting, Hampton commented on the involvement of RBS in the financial crisis.

 

The cables quote Hampton as having said that RBS "had made several enormous mistakes," the most significant of which were the bank’s "heavy exposure to the U.S. subprime market and the bank’s purchase of ABN Amro."

 

With respect to the ABN Amro purchase, Hampton commented that it had "occurred at the height of the market and without RBS doing proper due diligence prior to the purchase." Hampton commented that "the board of directors never questioned this purchase," which Hampton termed "a failure of their fiduciary responsibilities."

 

The timing of these revelations is awkward, to say the least, both for RBS and for the U.K. Financial Services Administration, coming as it does just days after the FSA announced that it had closed its RBS investigation and would take no further regulatory or enforcement actions.

 

In a December 2, 2010 statement (here), the FSA said it was closing its supervisory investigation of RBS, noting that while its investigations had revealed a number of "bad decisions" at the bank, the FSA had concluded that those "bad decisions" were "not the result of a lack of integrity by any individual." The FSA statement added that "we did not identify any instances of fraud or dishonest activity by RBS senior individuals or a failure of governance on the part of the Board."

 

A December 13, 2010 article in The Guardian (here) suggests that the latest WikiLeaks investigations could lead to "pressure" on the FSA to reopen the RBS probe. The Guardian article also attributes statements to attorneys that Hampton’s reported remarks "could be crucial for any shareholders trying to bring legal action for the losses they sustained on their shares." particularly with respect to losses shareholders sustained in connection with the company’s 12 billion pound share offering in March 2008.

 

Whether or to what extent these revelations will lead to new or augmented litigation involving RBS and its current and former directors and officers remains to be seen. But regardless of what might arise as a result of this specific disclosure, the event itself highlights the problems that companies may face as a result of WikiLeaks-type disclosures.

 

As I have previously noted, the WikiLeaks-type of disclosure of internal or confidential communications potentially could represent a new type of threat for corporate officials. There may be and likely will be WikiLeaks imitators willing to ambush companies and executives with undisclosed communications obtained in any number of ways, which could not only be embarrassing but could also subject them to claims.

 

"Structural Corruption": James Fallows has an interesting commentary in a December 10, 2010 post on his blog on the Atlantic Monthly website about the decision of former Office of Management and Budget director Peter Orzag to accept a senior position at Citibank, a financial institution that received substantial federal bailout support during the financial crisis.

 

Among other observations, Fallows notes the "structural corruption" Orzag’s move represents (drawing a distinction to "personal corruption) in that, which there may be nothing formally wrong with the move, it "says something bad about what is taken for granted in American public life.."

 

I think Fallows’ comments are worth contemplating. I am sure I am not the only one that found the depth of involvement of Wall Street insiders during the financial crisis more than a little disturbing. What Fallow describes as the structural corruption is the very thing that left so many Americans suspicious that the bailout was an inside job, meant to protect financial interest at the expense of American taxpayers. The certainty that Washington insiders can look forward to making millions on Wall Street merely reinforces this perception of corruption. And yet, as Fallows note, it is taken for granted.

 

Introduction to D&O Insurance: Many readers may be familiar with my series of posts on the Nuts and Bolts of D&O Insurance, which can be accessed by clicking on the link in the right hand column. Readers who are interested in the basics of D&O insurance may also want to read "Directors and Officers Insurance: An Overview" (here) by my friend David Gische of the Troutman Sanders law firm, and his colleague Meredith Werner. The article includes important historical background on the development of the insurance product.

 

On December 14, 2010, NERA Economic Consulting released its annual year-end study of securities class action lawsuit filings and settlements. The report, entitled "Trends 2010 Year-End Update," can be found here. Among other things, the NERA study reports that class action filings "picked up substantially" in the second half of 2010, and that median class action settlements reached an all-time high in 2010.

 

There are a couple of important considerations to be taken into account with respect to the NERA report. The first is that its analysis is with respect to filings and settlements through November 30, 2010. The report does incorporate a number of projections to account for the year’s final month.

 

In addition, the NERA report’s "counting" methodology, as reflected in footnote 3 of the study, may differ from the methodology used in other publicly available analyses of securities class action filings.

 

The NERA report states that "until cases are consolidated, we report multiple filings that potentially are related to the same allegations if complaints are filed in different circuits." And until cases are consolidated, "we report multiple filings if different cases are filed on behalf of investors in common stock and other securities." If the cases are ultimately consolidated, the data are adjusted. NERA’s methodology differs from that used by other observers (including The D&O Diary), and may result in a filing count that is higher than reported elsewhere.

 

The study does report a number of interesting findings, including the fact that class action filings accelerated in the second half of 2010. In fact, the study reports, the number of new class action filings in September (25) represents the highest monthly total of new "standard"  filings since August 2004.

 

According to the NERA report, there were a total of 219 filings in the year’s first eleven months. NERA projects a total of 239 filings by year end, which would represent an increase over the 220 filed in 2009 and would be "broadly consistent with the long-term average."

 

Though companies in the financial sector remain the most frequently targeted, the number of credit crisis-related lawsuits continues to decline. There were only 31 credit crisis related filings in 2010, compared to 57 in 2009 and 103 in 2008. More than half of the new lawsuits against companies in the financial sector in 2010 were unrelated to the credit crisis. About 40% of all 2010 cases named companies in the financial sector, which, while well below the peak of 72% in 2008, still remains above the 28% in 2005 and 2006, prior to the credit crisis.

 

Other sectors that also saw significant amounts of securities class action litigation included health technology firms, electronic technology and technology services sector. As I previously noted (here), there was also a sharp upturn in cases against companies in the for-profit education sector.

 

Despite the U.S. Supreme Court’s holding in Morrison v. National Australia Bank (about which refer here), the anticipated drop in cases against non-U.S. companies did not really materialize, largely do to the "spate of suits against Chinese-domiciled companies" (about which I recently commented here).

 

On the other hand, the number of belated filings of securities lawsuits declined in the second half of 2010. As I previously noted, there had been an upsurge in new case filings reflecting a substantial time lag between the date of filing and the proposed class period cutoff. The NERA study reports that for 2010 filings, the median time to file was only a month, compare to nearly six months for cases in the second half of 2009.

 

Among trends in factual allegations, the NERA study reports that filings of cases alleging breach of fiduciary duty more than doubled in 2010. Many of these cases were related to mergers or acquisitions.

 

With respect to case resolutions, the NERA study reports a number of interesting filings. Among other things, the study reports that the average settlement for cases settled in 2010, adjusted for outlier settlements, was $42 million, which is in line with 2009’s record high but well above the $30.4 million average for the period 2003 to 2010.

 

Even more significantly, the NERA study reports that in 2010, the median settlement jumped to $11.1 million, which not only represents an all-time high, but is more than a third higher than the 2009 median of $8.5 million. However, the report also notes that median investor losses for cases filed in 2010 were down substantially and more in line with pre-credit crisis cases. These more recently filed cases may push median settlements down in future years closer to the historical median.

 

Consistent with this last point, though average and median settlements are elevated, the settlements as a percentage of investor losses were consistent with similar ratios going back to 2002. The percentage in 2010 was 2.4%, well within the 2.2% to 3.1% range between 2002 and 2009.

 

One factor that may affect average and median settlements in the near term is the substantial overhang of unresolved subprime and credit crisis-related lawsuits. Even though several high-profile credit crisis cases have been resolved, many more remain pending. The NERA study reports that of the 230 credit crisis-related securities class action lawsuits, only about 8% have been settled, and another 29% have been dismissed, but fully 63% remain unresolved. These cases will continue to work their way through the system in the months ahead.

 

The NERA report is full of a wide variety of interesting information and insights, and is worth reading at length and in full. I hope to have my own study of the 2010 filings shortly after year end.

　

As reflected in detail below, noted D&O maven Dan Bailey of the Bailey & Cavalieri law firm has submitted the following guest blog post in response to an earlier guest post on this site. I would like to thank Dan for his willingness to have his comments published here. Dan’s guest blog post is as follows:

　

Kevin,I am responding to thearticle in your November 15, 2010 blog by John Iole at Jones Day regarding the "no broader than underlying" provision in virtually all excess D&O policy forms. I normally do not comment on articles which I think are misguided since conducting a public debate often elevates the visibility of the article and usually accomplishes little. However, in this instance it appears that John’s article has resulted in a number of brokers requesting the deletion of the "no broader than underlying" provision from excess D&O policies without fully appreciating the issues involved and the importance of that provision.

 

As summarized below, I think John’s article overstates the alleged concerns with such a provision and ignores the purpose and value of such a provision. Here is a brief summary of many of my concerns about the article.

 

     

  1. Purpose of Provision

    The primary purpose of this provision in excess policies is to avoid an excess insurer covering loss which is not covered under an underlying policy and thus to avoid the risk the excess policy would drop down in that situation. Excess policies typically state that liability attaches to the excess policy only if and when the underlying insurers and/or the Insureds pay loss which is covered under the underlying policies in an amount equal to the Underlying Limit.

     

    If the excess policy covers a loss not covered by the underlying policies, the Underlying Limit presumably would never be depleted by such loss since such loss is not covered by the underlying policies. In that event, a literal reading of the excess policy’s attachment provision would result in liability never attaching to the excess policy for such loss even though such loss is otherwise covered under the excess policy.

     

    That nonsensical result could cause a Court to conclude the excess insurer must pay the loss notwithstanding the fact that the Underlying Limit has not be exhausted as required by the attachment provision in the excess policy. In other words, there would be a risk that the excess policy would be forced to drop down and pay that loss at a much lower level within the insurance program than the excess insurer intended. Such a result would violate the intent of the parties and force the excess insurer to incur far greater loss exposure than was reflected by the excess insurer’s pricing and underwriting analysis.

    　

    Other purposes of this provision include (i) allowing the excess insurer (which is receiving substantially less premium that the underlying insurers) to rely on the underwriting analysis of underlying insurers (i.e. if an underlying insurer identifies and excludes an unacceptable risk, the excess insurer gets the benefit of that analysis), and (ii) providing assurance to the excess insurer 　that all of the underlying insurers will be actively involved in monitoring and adjusting any claim covered under the excess policy. Those purposes would obviously be lost if the provision is deleted from the excess policy.

     

    Therefore, this provision is important in order to preserve the integrity of the excess program structure and in order to avoid an excess insurer paying more losses than the excess insurer intended or contractually agreed to pay.

     

     

  2. Concerns with Provision

John’s article identifies several purported problems or concerns with this very standard provision, each of which are addressed below. It is important to note, though, that the article fails to even identify – much less address – the very important purposes and value of the provision from the excess insurers’ perspective. Plus, one should note that although this provision has been in virtually all excess D&O policy forms for decades, virtually no caselaw exists with respect to the meaning and applicability of this provision, thus indicating that in practice the provision does not create the controversies touted in the article.

 

     

  1. The article states that the provision allows the excess insurer to "pick and choose"　 among various underlying policy terms in defining the coverage afforded by the excess policy. That is simply incorrect. The provision is clear and absolute – if a loss is not covered under an underlying policy, that loss is not covered under the excess policy. There is no discretion involved, and the excess insurer cannot and need not "pick and choose" which provisions in the underlying policies the excess insurer does or does not want to adopt. The article cites to several examples of situations where this discretion could purportedly exist. However, those examples (e.g. different arbitration provisions in different underlying policies) are not valid examples since they deal with different procedural provisions in the underlying policies. The "no broader" provision only applies to the scope of coverage (i.e. is a loss covered or not) and does not apply to other procedural provisions, such as the notice, claims participation, cooperation, ADR, etc. provisions.

     

  2. The article states that this provision creates a "bewildering patchwork of coverage arguments". That is simply incorrect. Actually, the provision creates greater consistency within an insurance program by better aligning the scope of coverage among different policies within the program. By including this provision in all the excess policies, all of the excess polices will provide more consistent coverage throughout the program. It is only if the provision is deleted will the "bewildering patchwork of coverage arguments" be increased since there would be a higher likelihood that each policy within the program will have a different scope of coverage.

     

  3. The article states that the provision can create the risk that different insurers could apply inconsistent interpretations to the same term in an underlying policy. But that risk exists with or without this "no broader" provision. Even if the provision is deleted, the excess policies follow the terms of the Primary Policy and thus there is a risk the primary insurer may interpret a term of the Primary Policy differently than an excess insurer may interpret that provision.

     

  4. The article questions what does "broader coverage" mean for purposes of this provision. That is answered simply: is loss otherwise covered under the excess policy but not covered under the underlying policy?

     

  5. The article states that one cannot determine if coverage is broader until the loss is incurred. That is correct in many instances, but that dynamic is not due to the "no broader" provision. Under any policy, coverage typically cannot be determined until the loss is incurred, and deleting the "no broader" provision will not change that result.

　

In summary, the stated concerns regarding this provision are either not valid or not material, particularly when compared with the compelling purpose and value of this provision.The provision has survived the test of time over several decades without creating undue problems for Insureds while accomplishing some important benefits to excess insurers. Therefore, on balance I think the provision should be retained in excess policies.

 

*******

Once Again, I would like to thank Dan for his willingness to have his comments published here. The D&O Diary welcomes guest blog post submissions from responsible commentators. Please contact me if you think you might be interested in submitting a guest blog post.

 

An insurance broker’s settlement of claims for disgorgement of undisclosed contingent commissions does not represent covered loss under a combined lines professional liability insurance policy, according to a December 3, 2010 decision of the Illinois (Cook County) Circuit Court. A copy of the December 3 opinion can be found here.

 

Background

Aon Corporation was first sued in 1999 in a class action lawsuit brought on behalf of its customers who alleged the firm had acted improperly with respect to its receipt of certain contingent commissions from insurance carriers. This class action lawsuit came to be known as the Daniel action. Aon was also the subject of certain regulatory investigations from several states’ Attorneys General based on the same allegations.

 

As originally pled, the Daniel action sought damages as well as other relief. However, the Daniels action was amended multiple times. As ultimately pled, the Daniel action sought only a disgorgement into a constructive trust of the amounts allegedly improperly received.

 

On March 4, 2005, AON entered into a settlement with the Attorneys’ General in which it agreed to deposit $190 million into a fund to be paid to former clients of the firm. The agreement specified that the firm would not seek indemnification from its insurers for the funds paid in the settlement.

 

On March 9, 2005, AON entered a separate settlement in the Daniel action, in which the firm agreed to pay an additional $38 million. The Danies action was approved by the Court.

 

Aon sought indemnification from its insurers for the amounts paid in settlement of the Daniels case as well as defense expenses incurred in the Daniel case and the Attorneys General action.

 

Aon’s insurance program included a Combined Lines Policy which combined certain lines of professional liability insurance, including directors and officers liability insurance, errors and omissions insurance and other lines as well. The Combined Lines Policy insurance program consisted of a layer of primary insurance and multiple layers of excess insurance.

 

In August 2006, AON initiated an action in Illinois (Cook County) Circuit Court seeking a judicial declaration of coverage under the Combined Lines Policy for loss incurred in connection with the Daniels action and related matters. The parties filed cross motions seeking to establish whether or not the Danies settlement and the defense costs incurred in the Daniel and the Attorneys General actions represented covered loss under the Combined Lines Policy.

 

The December 3 Order

In arguing that there was no coverage under the Combined Lines Policy for the settlement and defense expenses, the carriers argued that "Loss" covered under the Policy does not include "disgorgement of an ‘ill-gotten’ gain, that is, money of property an insured allegedly had no right to receive in the first place." The insurers argued that the Daniel plaintiffs sought only a constructive trust, not individualized damages, making it clear "that they were seeking disgorgement as their only remedy." The carriers also argued that it would be against Illinois public policy to allow the firm to pay restitution or fund a constructive trust with insurance proceeds.

 

AON in turn argued that there were genuine issues of material fact whether or not the remedies the Daniel plaintiffs sought were restricted solely to restitution. AON argued further that even if the pleadings as amended sought only restitutionary relief, the original pleadings had sought damages, and therefore the firm was entitled to its costs of defending the original pleadings. AON also argued that there was a genuine issue of fact whether the Attorneys General actions sought only restitutionary relief.

 

In her December 3 opinion, Judge Kirie Kinnaird rejected AON’s arguments and held that the relief sought in the Daniel action was "restitutionary and not an insurable loss." Judge Kinnaird rejected the firm’s contention that it was entitled to the defense expenses incurred before the pleadings were amended to remove the damages allegations, since the ultimately operative complaint, and the one to which AON filed its motion to dismiss, sought only restitutionary relief.

 

Judge Kinnaird also rejected AON’s argument that because there had been no determination in the Daniel action that the contingent commissions were "ill-gotten," the commissions represented amounts the firm was entitled to receive, and therefore the Daniels settlement represented covered "Loss." Judge Kinnaird said:

 

Insurability does not depend on whether a claim has merit, but rather what the settled claim sought….This Court will not make a finding or determination of whether AON’s alleged actions in the Daniel litigation were "ill-gotten gains" or unlawful. The lawfulness of collecting contingent commissions was not at issue in the Daniel litigation and is not relevant here. It was the Daniel plaintiffs’ allegation that AON failed to disclose its eligibility to receive the contingent commissions and the retention thereof that gave rise to AON’s potential liability.

 

Finally, Judge Kinnaird held that the firm was not entitled to recover its expenses incurred in defending the Attorneys General actions because the matters were in the nature of disgorgement and restitution. Judge Kinnaird rejected AON’s argument that the way that the claims were characterized in the settlement documents altered this conclusion. Because the underlying claims were not covered, the expenses incurred in the defending the matters likewise were not covered.

 

Discussion

There is an extensive body of case law holding that D&O insurance does not cover disgorgement or amounts incurred that are restitutionary in nature. What makes this holding interesting is Judge Kinnaird’s express observation that the question of coverage for the amounts AON sought does not depend on whether or not the amounts themselves were "ill-gotten."

 

Rather, the Judge held, the question of coverage for the amounts sought depending solely on the fundamental nature of the relief sought. Because the relief sought in both the Daniel action and the Attorneys General action was fundamentally restitutionary in nature, there was no coverage under the policy at issue.

 

The part of Judge Kinnaird’s holding worth thinking about is the ruling with respect to defense expenses. I think most would accept that liability insurance can’t be used as a way for insured’s to finance their repayment of amounts that were not the insured’s in the first place. However, the determination of noncoverage for the amounts incurred in defending against wrongful acts may or may not be as obviously reasonable to many observers.

 

I would be interested in knowing readers’ thoughts on the defense expense question. I think there may be some difficult issues there to consider, especially with respect to individual defendants (particularly in the bankruptcy context).

 

Special thanks to a loyal reader for providing me with a copy of the AON decision.

　

SafeNet’s Excess Carrier’s Rescission Action to Go Forward: On December 7, 2010, Southern District of New York Judge Naomi Buchwald denied the motion to dismiss an action to determine whether or not there is coverage under SafeNet’s excess D&O insurance policy for the settlement of the company’s options backdating related securities class action lawsuit. A copy of the opinion can be found here.

 

The excess carrier’s action seeks to rescission. In her December 7 opinion, Judge Buchwald held that neither the underlying carrier nor individual directors and officers who had not been named as defendants in the rescission action were indispensible parties to the rescission action.

 

Judge Buchwald also rejected the argument that the rescission action was not yet ripe, because the primary policy had not yet been exhausted by payment. She held that the rescission action represented a ripe controversy notwithstanding the fact that the underlying limit had not been exhausted because the securities class action lawsuit settlement presented the "practical likelihood" that the excess limits would be called upon.

 

Semtech Options Backdating Securities Class Action Lawsuit Settles: On December 8, 2010, Semtech announced that it had settled what is one of the last remaining options backdating-related securities class action lawsuits. As reflected in Semtech’s December 8 press release, which can be found here, the case has settled for $20 million.

 

I have added the Semtech settlement to my running tally of options backdating related class action lawsuits, which can be accessed here.

 

According to data compiled by Adam Savett of the Claims Compensation Bureau, of the 39 options backdating related securities class action lawsuits, seven (or 18% were dismissed) and 31 have been settled or partially settled. The total value of all options backdating related securities class action lawsuit is $2.38 billion. The average settlement is $68.7 million, and the median settlement is $14 million. Savett’s data also reflects average and median insurer settlement contributions.

　

R-T Specialty, LLC Acquires Oakbridge Insurance Services, LLC

 

 

Acquisition Broadens RT’s Presence in the Executive and Professional Liability Segment   

 

Oakbridge is one of the nation’s leading specialty insurance intermediaries with extensive experience and exclusive focus on executive and professional liability exposures and insurance solutions. The company was organized in 2005 as the successor to Carpenter Moore Insurance Services’ Eastern U.S. operations. Oakbridge’s main office in Bloomfield, Connecticut is strategically located within a 15 mile radius of many of the underwriting facilities with whom the company transacts business. In addition, the company maintains offices in California, Minnesota, New Jersey and Ohio.

 

Tim Turner, President and CEO of RT Specialty, says of the acquisition, "At RT Specialty, our mission is to assemble the best and the brightest wholesale brokers in the country; brokers committed to providing our clients with the best resources available. The RT Specialty team, retail agents and brokers, and specialty insurance markets have long recognized Oakbridge’s reputation as an outstanding organization whose brokers are widely regarded as among the very best nationwide in the executive and professional liability arena. By combining our teams in these segments, we will solidify our position as the preeminent executive and professional liability wholesaler in the minds of retail brokerage firms, their clients, and the specialty markets that underwrite this insurance."

 

Jose Medina and Alex Jezerski, the Managing Members of OakBridge offer the following commentary. Jose Medina states: "For over 15 years, we have been steadily executing on a business model which depends on constant innovation, attracting and retaining the best people in the industry and staying true to our core mission of being the leading executive and professional liability wholesale intermediary in the country." Alex Jezerski adds: "RT Specialty has presented us with a once in career opportunity that will allow us to combine the expansive RT resources and existing talent pool with our unique business model, intellectual property and claims advocacy skills. The synergies between the two firms will be extraordinarily beneficial to our existing retailers and prospects, as we develop and expand the relationships that will continue to bring innovative products and solutions for our partners’ clients." 

 

About R-T Specialty, LLC

 

R-T Specialty, LLC is a subsidiary of Ryan Specialty Group, LLC specializing in wholesale brokerage, MGU/MGA underwriting facilities and other services to agents, brokers and carriers. In California: R-T Specialty Insurance Services, LLC License #OG97516 

 

About Oakbridge Insurance Services, LLC

OakBridge Insurance Services is one of the nation’s leading Executive and Professional Liability insurance intermediaries. The firm provides its services through co-brokerage alliances with strong, regional insurance brokers across the country.

#####

In the wake of Pfizer’s record-setting September 2009 $2.3 billion settlement of charges that it had engaged in off-label marketing of Bextra and other drugs, Pfizer investors filed shareholders derivative lawsuits against the company, as nominal defendant, and 19 of the company’s directors and officer, alleging that the defendants breached their fiduciary duties by failing to detect and prevent the illegal marketing.

 

The parties have now entered a $75 million settlement of the derivative lawuits. The settlement has several interesting features, particularly with respect to the insurance, which is funding the entire settlement amount. The settlement is subject to court approval.

 

Background

On September 2, 2009, the Department of Justice announced that Pfizer had agreed to pay a total $2.3 billion dollars in settlment of the off-label marketing allegations.. In its press release describing the settlement, the DoJ said that the settlement – which represented a criminal fine of $1.195 billion and a civil False Claims Act settlement of $1 billion, as well as certain additional civil forfeitures – represented the largest health care fraud settlement in the DoJ’s history.

 

Following the announcement of this settlement, investors filed a number of shareholder derivative lawsuits, which ultimately were consolidated in a single action in the Southern District of New York before Judge Jed Rakoff. Background regarding the derivative litigation can be found here. The plaintiffs’ consolidated amended complaint can be found here.

 

The Settlement

On December 2, 2010, the plaintiffs filed a motion for preliminary approval of the derivative litigation. The motion, to which the settlement stipulation is attached, can be found here (Hat tip to the Seeking Alpha blog for the settlement documents.).

 

In the settlement, Pfizer and the other defendants have agreed to set up a Regulatory and Compliance Committee to report to the company’s board and to take appropriate steps to prevent future drug marketing violations. Among other things the committee will review compensation policy and practices to ensure they are consistent with the compliance objectives.

 

One of the things that makes this settlement unusual is the way the committee’s activities are to be funded. As part of the settlement, a pool of funds – to be financed entirely by insurance – will be used to pay for the committee’s activities for five years.

 

Under the settlement stipulation, four of the company’s D&O insurers "shall pay a total of $75 million into an escrow account under the control of Pfizer." After payment of fees and expenses, the remaining escrow funds "shall be subject to the exclusive control of the Regulatory Committee for funding activities of the Regulatory Committee for its initial five years." If the committee spends more than the funds available, Pfizer will make up the difference. If the committee spends less that the remaining funds, unspent amounts are to be returned to the insurers. (The four insurers involved are listed on page 9 of the settlement stipulation.)

 

A further provision of the settlement stipulation specifies that settlement contribution by the fourth of the four insurers is subject to arbitration. Pfizer may have to pay the insurer up to $20 million depending on the outcome of the arbitration.

 

An exhibit to the settlement stipulation specifies that the plaintiffs’ lawyers will seek attorneys’ fees of $22 million plus costs of $1.9 million. The amount of the plaintiffs’ fees awarded is to come out of and thereby reduce the $75 million. If plaintiffs are awarded the full amount of fees and costs sought, the net funds remaining of the original $75 million would be $51.1 million.

 

At least one news report suggests that the company’s entry into this derivative settlement, together with the earlier DoJ settlement, may have hastened or even directly led to the abrupt departure of Pfizer CEO Jeff Kindler.

　

Discussion

A frequent component of derivative lawsuit settlements is the company’s agreement to adopt certain governance reforms or to implement certain corporate therapeutics. So from that perspective, Pfizer’s agreement as part of this settlement to set up a compliance committee to ensure good behavior is not unusual.

 

One of the things that is unusual about this arrangement is that, among other things, there is a specific pot of money that is to be set aside to fund the compliance reforms to which the company has agreed as part of a derivative settlement.

 

And what is even more unusual, and arguably unprecedented, is that the funds to be set aside for these activities are to be provided for exclusively by the company’s D&O insurers.

 

I am sure the D&O insurers’ contribution toward this settlement was the subject of extensive negotiation. I can certainly imagine the carriers taking the position that the cost of the company’s compliance or governance activities represents corporate overhead expenses and as such is not covered loss under the company’s D&O liability insurance. I expect these kinds of questions had to be sorted out in the course of the negotiation of this settlement. (The fact that one of the four D&O insurer’s contribution toward the settlement is subject to arbitration suggests further that these questions were not fully sorted out as part of the settlement negotiations.)

 

On the other hand, the idea behind the settlement may be that the individual defendants nominally agreed to pay for the remedial measures, and the insurers are simply paying on the individuals’ behalf. From that perspective, the prospect of the D&O insurers undertaking to pay those amounts on the individuals’ behalf may make the arrangement more consistent with the D&O insurance policy’s basic proposition.

 

But while this latter analysis may make the insurers’ contribution explainable in insurance terms, the fact that the insurers are basically paying for corporate governance reforms arguably represents something of a novel development and may represent a noteworthy precedent going forward.

 

Another noteworthy aspect of this settlement of this settlement is its sheer size. The $75 million dollar value of the settlement makes it one of the largest shareholders derivative settlements of which I am aware, exceeded only by a very small handful of other derivative settlements, including the UnitedHealth Group settlement ($900 million, refer here ); Oracle ($122 million, refer here), Broadcom ($118 million, refer here), AIG ($115 million, refer here), and the AIG/Greenberg settlement ($90 million, refer here).

 

There was a time when a significant cash payment was not a part of shareholders’ derivative lawsuit settlements. However, as this growing list of jumbo settlements underscores, derivative suit settlements involving a large cash component are becoming increasingly common – which , among other things, has important implications for D&O insurers and their policyholders.

 

Along those lines, one thing the Pfizer settlement has in common with these other jumbo derivative settlements is that each of these settlements involves solvent entities. The relevance to me from the fact that Pfizer is solvent derives from the added fact that this settlement almost certainly represented a payment of the Side A of the company’s insurance program – indeed, the identity of the insurers involved strongly suggests that this settlement represents a Side A insurance loss.

 

If as I assume to be the case this settlement represents a Side A insurance loss, this settlement represents yet another case in which insurers have been called upon to fund a substantial Side A loss outside of the insolvency context. (Please see my discussion of the Broadcom settlement, here, for a more detailed review of the significant of the Side A loss payment outside of the insolvency context.)

 

These kinds of settlements provide concrete evidence of the value to policyholders of significant amounts of Side A insurance even outside of the insolvency context.

 

These settlements also underscore the fact that even Excess Side A insurers are exposed to potential losses – even outside of the insolvency context – and that this exposure seems to be increasing over time. Only the insurers themselves can answer the question of whether or not they are actually pricing their products for the risk of Side A losses outside the insolvency context.