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.　

 

Among 2010 securities class action lawsuit filing trends are two phenomena that emerged in the second-half of the year – the flurry of lawsuits filed against for-profit education companies and the proliferation of suits involving companies domiciled in China. These two filing trends converged in a single case filed last week against a Chinese for-profit education company.

 

According to their December 2, 2010 press release (here), plaintiffs’ lawyers have filed a securities class action lawsuit against China Education Alliance, Inc. and certain of its directors and officers. The complaint, which was filed in the Central District of California, can be found here.

　

According to the complaint, the company provides educational resources and training through its Internet websites and training facilities in China. The complaint seeks to hold the defendants liable for misrepresenting the company’s financial performance. According to the press release, the complaint alleges that

 

contrary to the Company’s annual reports filed with the SEC for fiscal 2008, which reported $24.9 million of revenue, an annual report for the Company’s main operating subsidiary filed with the Chinese authorities reported less than a million of revenue for 2008. This discrepancy, along with other accounting inconsistencies, and contradictions about the Company’s online education and training center operating segments, has raised red flags of fraud. When this adverse information was released to the market on November 29, 2010 the price of China Education Alliance stock fell substantially damaging investors.

 

In my prior post discussing the recent outbreak of securities suits targeting Chinese companies, I noted that a recurring theme in the suits is the allegation that the companies had reported different financial information to Chinese authorities than they reported in their SEC filings. The new complaint against China Education Authority echoes this recurring allegation.

 

The complaint also cites sources reporting that the company’s Internet sites are not functional and its training centers appear to be inactive, suggesting that the company may not even be an operating business as claimed in its U.S. public filings. (These allegations, which make for rather interesting reading, are detailed in paragraph 37 of the complaint.)

 

In any event, the plaintiffs’ firm that filed the suit against China Education Alliance apparently has concluded that suing Chinese companies is a growth business. In addition to the new suit against China Education Alliance, the same firm also filed a separate lawsuit in the Southern District of New York last week against Mecox Lane Limited, a Chinese company that just completed its U.S. debut in an IPO on Nasdaq in October 2010.

 

According to the plaintiffs’ firm’s December 4, 2010 press release (here), the online apparel company’s share price declined significantly on November 29, 2010 when the company disclosed that "contrary to the company’s registration statement filed with the SEC, the company’s gross margins had been adversely impacted by increased costs and expenses, which made it impossible for Mecox to achieve the results defendants projected at the time of the IPO."

 

The extent to which the plaintiffs’ firm that filed these suits perceived an opportunity in suing Chinese companies is underscored in firm’s press release about the new Mecox Lane lawsuit. Among other things the press release cites about the firm, it also states that the firm "has substantial experience litigating matters involving companies based in the People’s Republic of China."

 

In any event, of the roughly 162 new securities class action lawsuits filed so far this year, nine of them (or about 5.5%) have involved Chinese companies. Seven of these nine have been filed just since September 17, 2010.

 

Ten of the 162 YTD 2010 securities suits (or about 6%) have involved for-profit education companies. All of those suits have been filed since mid-August.

 

The plaintiffs’ firm that filed these suits may well be on to something, as all signs suggest that problems involving Chinese companies may continue to emerge. According to a December 3, 2010 Audit Integrity memo (here, registration required), "many U.S.-listed Chinese companies have little to no intrinsic value."

 

The Audit Integrity memo adds that "many of these companies have relied on the ‘China’ brand in order to go public," but "the vast majority of these companies are thinly capitalized and are in lines of business that are neither unique nor innovative." Many of the Chinese company stocks "may prove to be valueless" and in many cases the companies "appear to be manipulating their financial results."

 

Even though the U.S. Supreme Court’s June 2010 decision in the Morrison case may restrict the scope of suits that may be filed against foreign domiciled companies in certain respects, foreign companies may still be sued under U.S. securities laws in connection with securities transactions taking place in the U.S.

 

Since many Chinese companies have pursued U.S. listings in recent years, these companies are susceptible to securities suits in the U.S., at least as to investors who purchased their shares on U.S. exchanges. The Audit Integrity analysis suggests that many more Chinese companies could well find themselves as U.S. securities suit targets, in addition to the nine companies that have been sued so far this year.

 

Message From the Fringe: Our San Francisco correspondent filed this report via text message Friday evening: "There’s a wookie in the BART station."

 

Accompanying the various print media stories this past week about the latest judicial developments involving jailed former Tyco CEO Dennis Kozlowski was the iconic photo of Kozlowski draping his arms over the shoulders of a couple of beauties at his wife’s infamous $2 million birthday bash on Sardinia.

 

There’s something about this photo that captures the ego-centric excessive essence of the era of corporate scandals. Maybe it’s the look of self-impressed arrogance on Koslowski’s face. It certainly is no surprise that the pictures and videos from the birthday party were a featured part of Kozlowski’s criminal trial.

 

The reproduction of the picture in connection with last week’s story highlights the fact that if you happen to have your arms around a couple of babes at a $2 million birthday bash on Sardinia paid for by persons to whom you owe a fiduciary duty, it is a really bad idea to allow pictures. (In fairness, at his criminal trial Kozlowski argued that the company paid only half of the cost of the event, which ostensibly also had some business-related purposes.)

 

The universality of this "no pictures" principle suggested to me that it might be worthwhile to assemble in one place all of the lessons that may be derived from the various corporate scandals over the years.

 

First, there is what I will call the Fabulous Fab Rule, which is that it is a really bad idea to write emails so provocative that they wind up reproduced above the fold on the front page of the Wall Street Journal.

 

Second, there’s the the Gen Re Executives Rule, which is that it is a good idea, if you discussing by telephone a transaction to recharacterize a public company’s reported financial results, to remember that all telephone calls at your Irish trading desk are recorded.

 

Third, there is the Smartest Guys in the Room Rule, which is that if an analyst is asking a probing question that targets sensitive issues (like the fact that Enron released its financial results without a cash flow statement or a balance sheet), it is a bad idea allowing yourself to be recorded referring to the analyst as an "asshole." (Actually, Skilling’s statement was "Well, thank you very much, we appreciate that …asshole.")

 

There undoubtedly are many other similar rules in the same vein that might be added to this list, and I encourage readers that have additional thought along these lines to add them to the list using this blog’s comment feature.

 

The Faithless Servant: The news stories this past week about Kozlowski related to the December 1, 2010 order by Southern District of New York Judge Thomas Griesa in the lawsuit Tyco filed against Kozlowski about the approximately $100 million of compensation that Kozlowski claims the company owes him under certain deferred compensation agreements. Tyco contended that the agreements were fraudulently induced or that the benefits were otherwise forfeit under New York’s "faithless service doctrine."

 

Based on the jury findings in the criminal trial, Judge Griesa concluded that under the faithless servant doctrine, Kozlowski must forfeit compensation and benefits earned during his period of disloyalty. Judge Griesa also concluded that various agreements entered during the period of Kozlowski’s disloyalty were fraudulently induced.

 

However, Judge Griesa also held that Kozlowski was entitled to trial on the question of his entitlement to benefits earned prior to the time at which the jury determined his disloyalty began. He also concluded that Tyco was not entitled to summary judgement on the company’s claim for contribution for legal expense incurred in defending lawsuits arising from Kozlowski’s breach of fiduciary duty.

 

The December 3, 2010 Wall Street Journal article about Judge Griesa’s ruling can be found here.

 

O.K., We Missed the Bridge Implosion, But You Don’t Get to See an Angry Troll Everyday: This video has quickly gone viral. From the WGN Morning News, here’s live local television in all of its glory:

　

https://youtube.com/watch?v=y9HiJVBA0CE%3Ffs%3D1%26hl%3Den_US

Though it quickly recovered, Bank of America’s share price declined earlier this week on speculation that the company is the bank whose internal documents WikiLeaks intends to post on the Internet at some future date. According to news reports, the WikiLeaks  founder Julian Assange has asserted that he has five gigabytes of Bank of America documents, which translates to roughly 600,000 pages of information. Assange has asserted that the documents to be disclosed contain highly damaging information.

 

Assange is a master of bombastic overstatement (as well as a world champion self-promoter). But let’s assume for the sake of discussion the documents are as revealing as Assange has tried to suggest and also assume that the documents do relate to Bank of America.

 

The WikiLeaks disclosure of internal company information potentially could have a couple of immediate litigation related impacts. First, to the extent relevant, the documents could affect the vast of amount of litigation that is pending against Bank of America as a result of the company’s takeover of Merrill Lynch or relating to other business activity before and during the financial crisis. It is entirely possible the revelations could aid the plaintiffs in these various cases.

 

On the other hand, and to the extent the documents relate to events or activities about which there has previously been no prior company disclosure, the WikiLeaks disclosure potentially could lead to entirely new litigation unrelated to existing cases. Were that to occur, the lawyers for the prospective plaintiffs’ complaint drafting would be substantially aided by the disclosures of internal company documents.

 

The potential revelation of internal company documents that were never intended for public consumption could also lead to a wide variety of other types of claims. If the company were to be harmed in some way by the ultimate revelation – say, for example, by a stock price drop or by reputational damage – shareholders might well file claims against senior company officials for failing to implement controls to prevent this kind of disclosure or for misrepresenting the quality of controls that were in place.

 

Depending on the type of information revealed, there could be other types of claimants. For example, customers, vendors or competitors about whom damaging information is revealed could well file suits seeks damages for the company’s failure to prevent the revelations.

 

It is one thing to consider these possibilities exclusively within the context of the threatened disclosure of Bank of America documents. It is something else entirely to consider the possibility that the threat of this type of guerilla disclosure of internal corporate documents represents a new and serious exposure for all companies. After all, what Assange is now threatening to do to Bank of America could be repeated against other companies by other zealots who somehow get access to internal communications.

 

At a minimum, it seems likely that companies and their senior executives may be mobilized to undertake vigorous new efforts to prevent future information leaks of this type. The problem for everyone is that, in the U.S. at least, we have proven to have a peculiar talent for overreacting to the most recent security breach. Due to this phenomenon, the unsuccessful efforts of the shoe and underwear bombers have managed to make air travel excruciatingly unpleasant. Corporate (over)reaction to the threatened WikiLeaks disclosure could lead to the imposition of information security constraints that could make daily life for corporate technology users extremely inconvenient and unpleasant.

 

But beyond the potential operational effects, the threat of this type of information disclosure event could also represent a new category of corporate executive exposure. Shareholders and others may expect company officials to prevent this type of disclosure from happening and may hold the officials accountable if information disclosures occur. Finally, persons whose interests are harmed by disclosures of internal company information could seek to hold the company and its senior executives liable of harm that might arise from this type of disclosure.

 

It is of course entirely likely that none of these things will ever come to pass. But even if the threatened WikiLeaks disclosure never happens or represents something less than threatened, these risks are still out there lurking in the realm of possibilities.

 

Put these issues down as one more damned category of things to worry about.

　

　

　

Settlement is the critical goal in every claim that cannot be resolved otherwise. It terminates the open dispute, it provides the parties with finality, and, perhaps, most importantly, it provides the parties with repose. After a settlement is final, everyone is free to get on with their lives.

 

Notwithstanding these fundamental settlement values, are there times when a D&O insurer may nevertheless seek to recoup from its own insured the amount the insurer previously paid in settlement of a third-party claim? A November 22, 2010 Eastern District of Virginia decision, applying Kansas law, in a case involving Sprint Nextel Corporation, addressed this issue. The court held that an excess D&O insurer could not, two years after a settlement was final and based upon post-settlement case law developments, recoup from its insured the amount the insurer paid toward settlement.

 

Background

In February 2004, Sprint Nextel’s board voted to recombine the company’s two separate tracking stocks, leaving a single surviving equity interest. The holders of shares to be retired received, in exchange for their shares, additionally issued shares of the surviving share class.

 

In March 2004, investors who had held shares of the retired class of stock filed class action lawsuits alleging that the company’s board breached its fiduciary duty by implementing a conversion ratio that undervalued the retired shares.

 

Sprint Nextel provided notice of claim to its D&O insurers. At the time of the shareholder claims, Sprint Nextel carried a total of $100 million in D&O insurance, which was written over a $25 million self-insured retention. The first three layers of the D&O insurance program consisted of three layers of $15 million each, arranged between a primary layer of $15 million, and two excess layers of $15 million.

 

In 2007, as a result of mediation, the parties to the shareholder litigation agreed to a $57.5 million settlement. The settlement was to be funded by Sprint Nextel’s payment of the $10 million remaining under the deductible, as well as full $15 million contributions from the primary, first excess and second excess carriers. The fourth level excess carrier contributed the remaining balance.

 

The second level excess carrier agreed to pay its limit but sought in its letter of consent to "reserve its rights to deny coverage and seek repayment."

 

The carriers ultimately funded their respective contributions toward the settlement. On December 12, 2007, the court entered final judgment in the shareholder litigation. The second level excess carrier closed its claim file.

　

However, in December 2009, after the District of Massachusetts issued its opinion, in the Genzyme case, the second level excess carrier filed a complaint against Sprint Nextel in the Eastern District of Virginia against its insured, seeking to recover the $15 million it had paid in the 2007 settlement.

 

As I discussed in a prior post, here, the district court held in the Genzyme case that under Massachusetts law Genzyme’s D&O insurance did not cover amounts Genzyme paid to settle the claims of individuals who asserted they had received inadequate consideration in an exchange for their tracking shares of an internal Genzyme division.

 

The second level excess carrier and Sprint Nextel filed cross-motions for summary judgment.

 

The November 22, 2010 Decision

In seeking to recover its settlement payment, the second level excess carrier argued that the settlement did not represent covered loss under the policy because it represented a delayed payment of a preexisting obligation (in that the company had preserved the Board’s right to decide to recombine the two separate classes of tracking stock into a single class). The second level excess carrier also argued that the settlement represented a mere redistribution of assets among different classes of Sprint shareholders.

 

In making these arguments, the second level excess carrier relied on the Massachusetts District Court’s September 28, 2009 opinion in the Genzyme case. As I as discussed at length here, the district court’s opinion in Genzyme was overturned by the First Circuit on October 13, 2010.

 

In rejecting the second level excess carrier’s argument that the settlement merely represented a preexisting obligation, Judge Claude Hilton wrote that "it is no understatement to say that one of the principal reasons for D&O insurance is to cover D&Os when they are alleged to have breached such preexisting obligations. The mere existence of generalized obligations to follow the law and honor one’s fiduciary duty does not render uninsurable a lawsuit alleging that corporate directors failed to do so."

 

Judge Hilton also rejected the second level excess carrier’s further argument that there is a general public policy against insuring this type of settlement. Judge Hilton also noted that the second level excess carrier only decided to file its recoupment action after the Massachusetts District Court entered its opinion in Genzyme, which the second level excess insurer characterized as "a case of first impression" – which contention, even if true, is inconsistent with the notion that there is a clear and pervasive public policy against payment of these types of settlements.

 

To the contrary, Judge Hilton found, Kansas public policy "favors enforcement of D&O insurance policies" and the second level excess carrier had not identified any grounds that would justify restitution or recoupment of the settlement payment.

 

Judge Hilton specifically noted that though the D&O policy allows the reinsurer to seek repayment of defense costs if the costs were not covered, "there is no basis under the policies for an insurer to make a settlement advance and later to seek its return."

 

Judge Hilton said that he would not allow the second level excess carrier "to retroactively amend its policy by trying to infer a recoupment right or attempt to circumvent the policy’s terms by invoking restitution." Although the carrier may have made its payment "grudgingly," there "can be no question that the payment was made voluntarily." Judge Hilton also found there was no excuse for the second level excess carrier’s delay in brining its action.

 

Discussion

I can certainly see the argument that amount paid in the underlying settlement represents nothing more that a payment by or on behalf of the company to make up for the inadequate consideration the company allegedly paid to the holders of the retired shares in the share recombination.

 

But in the end, I don’t think that Judge Hilton’s grant of summary judgment in favor of Sprint Nextel necessarily depended on the merits of the second level excess carrier’s arguments about the nature of the settlement amount or even on the fortuity that the Genzyme decision was reversed after the second level excess carrier filed this action.

 

I think the summary judgment ruling is best understood as a reflection of the second level excess carrier’s timing. It might have been one thing if the second level excess carrier had asserted its position and resisted its settlement obligation while the underlying claim was still pending. The simple fact is that the second level excess carrier did not bring its recoupment action until two years after the settlement of the underlying claim was final.

 

Moreover, as Judge Hilton noted, the grounds on which the second level excess carrier sought to recover the amounts it had paid in settlement was not "fraud, duress or mistake of fact," which might justify setting a prior settlement aside and requiring a restoration of funds. Rather, the second level excess carrier’s bid to recoup funds was based solely on a district court opinion entered two years after the underlying claim was finally settled.

 

If carriers were able to seek the return of settlement payments years after the fact based on nothing more than post-settlement case decisions, the case resolution process could be seriously compromised. Settlements could become nothing more than a contingent arrangement, a state of affairs which frankly is in no one’s interest.

 

Whatever else might be said about second level excess carrier’s decision to pursue this belated action, one can only hope that the outcome of this case and the impression it makes might deter other carriers from seeking to recoup settlement payments long after the fact, at least in the absence of fraud or other similar factor.

 

Our beat here at The D&O Diary is basically restricted the world of directors’ and officers’ liability. So, regrettably, we don’t often have the occasion to write about college football. But a story making the rounds on the Internet manages to connect Colonial Bank (the third largest bank to fail during the current bank failure wave) and the evolving pay-to-play scandal surrounding Auburn University quarterback and Heisman candidate Cam Newton. So we felt empowered to write a post about it.

 

From the moment the Montgomery, Alabama bank closed in August 2009, observers have been asking what the bank failure might mean for Auburn football. As noted at the time on Time Magazine’s Curious Capitalist blog (here), Colonial’s founder, CEO and Chairman, Bobby Louder was also "the dominant force at Auburn University since George Wallace appointed him to [Auburn’s] board of trustees in 1983." ESPN.com called Louder "The Most Powerful Booster in College Football."

 

Many readers undoubtedly are aware that the news wires have been buzzing recently with stories about how Cam Newton’s father allegedly demanded payment from Mississippi State in order for Cam Newton to play there coming out of junior college. Since Newton did not wind up attending Mississippi State, but does play for Auburn, many have questioned whether or not there may have been similar payment demands at Auburn.

 

The lines of the Colonial Bank and the Cam Newton stories have started to cross, at least on the Internet. At least according to stories making the rounds online, the government authority’s investigation of circumstances surrounding the collapse of Colonial Bank has led to the discovery of information suggesting the possibility of payments made in order for Newton to play at Auburn.

 

I have linked in the next paragraph to a site that contains an exhaustive summary of the various details of this story that are available on the Internet. I would like to emphasize that in linking to this site, I am in no way indicating that I necessarily think any of the information on the site is true. The web site’s host himself indicates that he has not verified any of the information. The newsworthiness of these unproven allegations consists of the fact that these allegations are being raised, in that they suggest how far reaching the investigation into a bank’s failure potentially may spread. (Besides, as I noted at the outset, they involve college football, which is another reason I am writing about them here)

 

With all disclaimers duly noted, the site, which can be found here, makes for some awfully interested reading and I would suggest making some time to read all the way through the page. The page is assembled rather awkwardly and you will have to scroll down multiple times. Special thanks to a loyal reader for forwarding me the link to the site.

 

While we cannot now know what among the various things asserted on this site are factual, I would have to say that it would hardly come as a surprise that there might be some sort of a governmental investigation in connection with the collapse of Colonial Bank. Colonial Bank had assets of $25 billion, making its closure the third largest failure in the current wave of failed banks. Its failure caused a $2.8 billion loss to the FDIC insurance fund. Given the numbers involved, an investigation seems probable.

 

In addition, one of the former directors of Colonial, Milton McGregor, also a prominent casino owner and a prominent Auburn football booster, was recently arrested in Alabama in connection with a vote buying scandal that followed FBI wiretaps. The inflammatory question is whether or not the wiretaps divulged anything about payments to Cam Newton. There are news articles denying that the wire taps revealed anything about Cam Newton. However, it does seem clear that for whatever reason the FBI is involved in investigating the Cam Newton allegations.

 

A couple of observations, one D&O related and one not. On the D&O side, the information on the linked site (even if ultimately unproven) potentially could implicate at least two D&O insurance policies, the policy for Colonial and the policy of the Auburn University Board of Trustees. (Please note that I am not expressing an opinion here whether or not anything on the Internet constitutes a claim under any policy or even constitutes circumstances that might give rise to a claim)

 

Because of the significant overlap in membership between the two boards, there are at least a couple of complicated insurance questions. One has to do with the capacity in which the various individuals were acting in connection with the various misconduct alleged, as the capacities seemed to have overlapped in many important ways.

 

The other insurance problem is, well, an other insurance problem. The "other insurance" clause in each of the policies could lead to some roundabout analysis between the two policies.

 

I will reserve for another day (and perhaps another blog site entirely) my views about the insanity of a system in which college football players, who risk potentially crippling injuries and whose athletic displays produce billions of dollars of economic activity, are deprived of any financial benefit for their efforts. This grotesque system inevitably leads to scandals like the current one involving Cam Newton.

 

And Now From Our Vietnam Bureau: Under the heading of things we did not really expect to find ourselves writing about, we also note that Bloomberg news reports (here) that regulators in Vietnam have brought there first securities enforcement action, accusing a pharmaceutical company official of stock price manipulation. Apparently regulators and market participants around the world recognize the need to maintain marketplace integrity.

 

The foreclosure paperwork and processing mess has been unfolding on the front pages of the nation’s news papers for several weeks now. While the situation has created a lot of uncertainty, the one thing that seemed probable was that litigation would follow. But while the likelihood for lawsuits seemed high, it did not necessarily follow that there would be D&O claims arising out of the mess.However, at least one D&O claim has now arisen out of the foreclosure muddle.

 

According to their November 23, 2010 press release (here), plaintiffs’ lawyers have filed a securities class action lawsuit in the Middle District of Florida against Lender Processing Services, Inc. and certain of its directors and officers. The complaint, which can be found here, alleges that the defendants failed to disclose that

 

(i) that the Company had engaged in improper and deceptive business practices; (ii) that the Company’s subsidiary Docx had been falsifying documents through the use of robo signers; (iii) that the Company had engaged in improper fee sharing arrangements with foreclosure attorneys and/or law firms, including, but not limited to, undisclosed contractual arrangements for impermissible legal fee splitting, which are camouflaged as various types of fees; (iv) as a result of the Company’s deceptive business practices, the Company reported misleading financial results; and (v) further, as a result of the foregoing, at all relevant times, the Company’s financial outlook lacked a reasonable basis.

 

On October 4, 2010, after the company released a statement responding to what it described as "mischaracterization of its services," the company’s share price declined.

 

It remains to be seen whether or not there will be further securities suits growing out of the foreclosure mess (although I have to say the possibility of additional lawsuits growing out of this situation seems likely.)

 

The one thing that has definitely become clear is that the plaintiffs’ securities bar is riding in the wake of the business headlines. Toyota has a problem with sudden acceleration? Wham, in comes the securities class action lawsuit. Massey Energy has a coal mining catastrophe? Pow, in comes the securities lawsuit. BP suffers a massive oil spill? The next thing that follows is a securities class action claim. The same goes for the disclosures of possible student loan fraud at for-profit education companies, as basically every company in the industry has now been hit was a suit. I am sure if the plaintiffs’ lawyers could figure out how to file a securities suit against the North Koreans for launching missles against South Korea on Monday, the would do that too.

 

It has pretty much gotten to the point that the way to determine who will be sued next is simply to read the newspapers. And by that indicator, we can probably expect to see more securities suits arising out of the foreclosure mess.

 

While the condition of commercial banks continues to improve overall, the number of "problems institutions" also continues to grow, in both absolute and percentage terms, according to the FDIC’s latest report on the banking industry. The FDIC’s Quarterly Banking Profile, dated November 23, 2010 and reporting figures through September 30, 2010, showed that the FDIC now rates 860 banks as problem institutions, up 829 at the end of the second quarter.

 

The increased numbers of problem banks stands in contrast to the overall tenor of the report. Tthe FDIC said that during the thing quarter the banking industry was characterized by "resilient revenues and improving asset quality." Year over year earnings improved for the fifth consecutive quarter. Indeed almost two out of three institutions reported higher net income than a year earlier.

 

Other signs are also positive. Quarterly provisions for loan losses were at the lowest quarterly amount since the fourth quarter of 2008, net charge-offs were lower than both the previous quarter and the year-earlier quarter, and industry assets continued to improve.

 

However, within this good news, some evidence of continuing difficulties also emerged. One in five banks continues to be unprofitable. The 860 institutions reported as problem institutions represent more than 11 percent of all 7,780 insured institutions. In other words, the FDIC ranks about one our of nine of all banks in the country as problem institutions.

 

(The FDIC considers a bank a "problem institution" if it is ranked as either a "4" or a "5" on the agency’s 1 to 5 scale of supervisory concern. Problem institutions are "those institutions with financial, operational, or managerial weaknesses that threaten their continued financial viability." The FDIC does not publish the names of the banks it considers to be problem institutions.)

　

The 860 problem institutions at the end of the third quarter represent an increase of 308 problem institutions during the twelve months since September 30, 2009, or about 56%. This increase is all the more noteworthy given that 172 banks closed during that period and so fell off of the problem list.

　

The number of problem institutions at the end of the third quarter is the largest number of problem institutions since March 31, 1993, when there were 928.

 

One positive note is that while the number of problem institutions continues to increase, the aggregate assets represented by these problem institutions declined in the third quarter, to $379.2 billion, from $403.2 at the end of the second quarter. This is the second quarter in a row that the assets of problem banks have declined. The fact that aggregate assets are declining even as the total number of problem banks is increasing suggests that many of the newly added problem banks are smaller institutions.

 

A total of 314 banks have failed since January 1, 2008, with 149 during 2010 alone (so far). Yet the number of problem institutions continues to grow, which suggests that there could be more, possibly many more, bank failures yet to come. Although there had been some hope that the number of bank failures might have peaked and would now begin to taper off, the FDIC’s latest report suggests that we could continue to see bank closures well into 2011 and possible beyond.

 

In the meantime, as I recently noted, the FDIC reportedly is gearing up to pursue both civil and criminal proceedings against former directors and officers of the failed banks, while at the same time investors have also been pursuing their own separate claims. It seems highly probable that these claim-related activities will escalate in the months ahead.

 

A November 23, 2010 New York Times article about the FDIC’s report can be found here.

　

The lead article in the November 17, 2010 Wall Street Journal reported that the FDIC is conducting 50 criminal investigations of directors, officers and employees of failed banks. Given that (as of November 19, 2010) 314 banks have failed since January 1, 2008, this report suggests that the FDIC is investigating possible criminal charges in connection with a pretty hefty percentage of the bank failures — about 16%, if each of the 50 investigations relates to a separate bank.

　

These reports of as many as 50 criminal investigations are all the more striking because up to this point, the FDIC has not conspicuously pursued criminal charges. The most prominent criminal charges filed as part of the current wave of bank failures related to the May 2010 indictment of two former officials from Integrity Bank in Alpharetta, Georgia. Integrity Bank failed in August 2008, which was fairly early in the current failed bank wave. Many more banks have failed since then, and so the FDIC may just now be completing its investigations of many of the later bank failures.

 

In the meantime, banks are continuing to fail. Just this last Friday night, the FDIC closed three more banks, bringing the 2010 YTD total number of bank failures to 149. (The Journal article does note that FDIC officials "expect the failure wave to peak this year.")

 

Obviously, the FDIC has not even had an opportunity to investigate the most recent bank failures, which suggests that the figure of investigations could grow.

 

The Journal article quotes one FDIC official, speaking of possible civil actions to be brought against former officials of failed banks, "these numbers will continue to grow as time goes on." (The Journal article repeats the information, now widely circulated, that the FDIC has authorized civil actions against more than 80 directors and officers of failed banks.) The Journal article also reports that it takes up to 18 months for the FDIC to determine whether to bring an action, meaning that "the surge in scrutiny is likely to continue for years."

 

One particularly noteworthy step the FDIC has taken as it readies itself to pursue actions in connection with the failed banks is that it has begun to try to recover documents from outside law firms that were advising the directors and officers of failed institutions before they were closed.

 

As detailed in a November 20, 2010 Bloomberg story (here) the FDIC has sued one law firm and threatened to sue another in order to recover documents bank executives gave the lawyers before the institutions failed.

 

A copy of the November 9, 2010 complaint filed against the Bryan Cave law firm can be found here; a copy of the November 10, 2010 consent order attempting to resolve the matter can be found here. A November 12, 2010 Am Law Daily article about the dispute can be found here. .

 

In the dispute involving the second law firm, the law firm itself initiated an action, in the form of a November 17, 2010 declaratory judgment action. The law firm had received a letter from the FDIC demanding the immediate return of the documents their clients had supplied them.

 

It may be, as suggested in the Journal article, that the wave of bank failures will peak this year. But the FDIC’s recent actions seem to be preliminary to an onslaught of litigation activity (both civil and criminal) and suggest that the FDIC claims-related activities have only just begun but will be accelerating for some time to come.

 

Special thanks to a loyal reader for copies of the pleadings in the FDIC’s law firm related litigation.

　

Meanwhile, Investors Pursue Securities Suits Against Banks: While the FDIC’s moves toward litigation involving failed banks has been a long time coming, investors in failed and troubled banks have much more assertive. As I have previously observed, a noteworthy feature of the current round of bank failures has been the significant numbers of investor suits involving failed and troubled banks.

 

The numbers of investor related suits involving failed or troubled banks continues to mount. Just in the last week, investors filed two more securities class action lawsuits involving failed banks.

 

First, as reflected in their November 18, 2010 press release (here), plaintiffs’ lawyers have initiated a securities class action lawsuit in the District of Delaware against Wilmington Trust Corporation and certain of its directors and officers. A copy of the complaint can be found here.

 

Second, in a separate November 18, 2010 press release (here), another plaintiffs’ firm announced that they had filed a securities class action lawsuit in the Eastern District of Tennessee against Green Bankshares and certain of its directors and officers. A copy of the complaint can be found here.

 

With the addition of these two latest lawsuits, as many as thirteen of the approximately 154 new securities class action lawsuit filed during 2010 have involved commercial banks, or roughly 8.5% of all 2010 securities class action lawsuits. The banking related securities suit activity has been one of the most significant factors in 2010 securities filing activity (not even taking into account the claims that have arisen involving banking companies that were not publicly traded).

 

Perhaps the only other group of companies that has been so specifically targeted in lawsuits this year is the for-profit education sector, which has been hit with nine separate securities class action lawsuits this year, or about 6 percent of all 2010 securities suits.

 

Schwab YieldPlus Settlement Back On?: As I reported in an earlier post, the Charles Schwab Corporation had announced its decision to withdraw from the $235 Schwab YieldPlus Fund subprime-related securities class action settlement, due to a dispute about whether or not the settlement stipulation released the California state law claims of non-California class members.

 

However, according to November 18, 2010 news reports (here), the parties to the YieldPlus case have reached a revised settlement The revised settlement is intended to make it clear that all of the claims of the class are released, including the California state law claims of non-California residents.

 

A copy of the parties’ November 17, 2010 amendment to their settlement stipulation, reflecting the revised understanding, can be found here. A copy of the parties’ joint motion regarding the revised settlement stipulation can be found here. The parties’ amended settlement stipulation is subject to the approval of Northern District of California Judge William Alsup.

 

QE II: Here at The D&O Diary we have followed with interest the debate about the Federal Reserve’s latest round of "quantitative easing." Because we feel unqualified to comment on the Fed’s actions, we express no views of our own here about the wisdom of the Fed’s approach.

 

Others have not been as restrained.

 

In that vein, a video critical of the Fed’s actions has been making the rounds and I have attached it below. I want to stress that this video does not necessarily reflect my views, and I am linking to it here only because I think it is pretty amusing and because it has been a while since I have had occasion to link to a video on this site. Special thanks to a loyal reader for the link to the video. 

https://youtube.com/watch?v=PTUY16CkS-k%3Ffs%3D1%26hl%3Den_US