In two different subprime securities suits, courts recently entered ruling with respect to dismissal motions going in opposite directions. In one case, the Second Circuit, in the second appellate ruling so far in connection with the subprime-related litigation wave, affirmed the lower court’s dismissal. In the other case, the district denied defendants’ motions to dismiss. Each may be significant in their own way.

 

The Centerline Holding Case

In a brief, five-page summary opinion issued on June 9, 2010 (here), the Second Circuit affirmed the lower court’s dismissal of the subprime-related securities class action lawsuit that had been filed against Centerline Holding Company and certain of its directors and officers.

 

As discussed here, on January Southern District of New York Judge Schira Scheindlin had dismissed the case without prejudice, finding that the plaintiffs had not sufficiently alleged that the defendants had had acted with scienter. In a August 4, 2009 order, Judge Scheindlin granted the defendants’ renewed motions to dismiss.

 

On appeal, the plaintiffs argued that they had sufficiently alleged the defendants had made material misrepresentations and omissions about the company’s plan to change its business model form one focused on the generation of distributable tax-exempt income to that of an asset manager focused on growth.

 

The Second Circuit affirmed the Judge Scheindlin’s dismissal, noting that "the effort in Plaintiffs’ amended complaint to characterize the Defendants’ class period statements as speaking to the company’s future plans – and this as misleading in light of Defendants’ undisclosed plans for Centerline – fails when the statements are reviewed in their entirety." These statements, the court found, "were not rendered misleading by the Defendants’ omissions."

 

Because the Defendants had not duty to disclose their plans, Plaintiffs’ had not adequately alleged conscious misbehavior or recklessness and "otherwise failed sufficiently to allege scienter."

 

The CIT Group Case

In a June 10, 2010 opinion (here), Judge Barbara Jones denied the defendants’ motion to dismiss in the subprime-related securities suit that had been filed against CIT Group and certain of its directors and officers.

 

As detailed here, the plaintiffs alleged that CIT’s public financial statements failed to account for tens of millions of dollars in loans to Silver State Helicopter, which were highly unlikely to be repaid and should have been written off. The plaintiffs also alleged that the company had misrepresented the performance of its subprime home lending and student loan portfolios.

 

Citing at length the recent dismissal motion denial in the Ambac case, Judge Jones concluded that the plaintiffs had adequately pled misrepresentation with respect the company’s deteriorating lending standards, which allegedly conflicted with the company’s public statements. She also concluded that the plaintiffs had adequately alleged actionable misstatements with respect to performance of CIT’s student loan portfolio.

 

Judge Jones also concluded that the plaintiffs had adequately alleged scienter. She found that the plaintiffs had adequately alleged that the defendants "knew about CIT’s lowered lending standards and in some cases affirmatively approve them – while publicly touting the company’s ‘conservative’ and ‘disciplined’ approach." She further noted, in connection with the conclusion that the plaintiffs had adequately alleged scienter, that the complaints adequately alleged that the defendants "learned of the deterioration of CIT’s home loan and student loan portfolios, which making public statements indicating that CIT was outperforming the market and would suffer only minimal losses."

 

Finally Judge Jones found that the ’33 Act plaintiffs’ claims met the pleading requirements to state a claim under Section 11.

 

Discussion

The Second Circuit’s affirmance of the Centerline Holding dismissal represents the second appellate court decision issued in connection with the subprime litigation wave. The first appellate decisions was the Eight Circuit’s September 1, 2009 opinion in the NovaStar Financial case, about which refer here. In NovaStar, the Eighth Circuit also affirmed the lower court’s dismissal.

 

Though coming later than the NovaStar ruling, the Centerline case could perhaps be more noteworthy, simply because such a large percentage of the subprime related cases have been filed in the Southern District of New York (which is located in the Second Circuit).

 

However, because the Second Circuit’s opinion was issued in the form of a summary order, its impact may be limited. By their own terms, summary orders, though they may be cited, "do not have precedential value" according applicable rules of the Second Circuit. Moreover the analysis in the Second Circuit’s opinion is quite limited.

 

Whatever the opinions impact may be on other cases, its greatest significance may have to do with simple scorekeeping – as in, two subprime related securities class action lawsuit appeals, two dismissal affirmances.

 

At the same time however, as the CIT case demonstrates, there are still cases in which the motions to dismiss are being denied. Among the more interesting things to me about the CIT ruling is the court’s reliance on the prior dismissal motion ruling in the Ambac case. I had speculated at the time of that the breadth of the language in the Ambac decision could make the court’s ruling influential. As the CIT decision confirms, the Ambac decision has proven to be influential.

 

I have in any event added these rulings to my running tally of the subprime-related securities class action lawsuit dismissal motion rulings. The tally can be accessed here.

 

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

　

The unexpected resignation of an outside director may indicate that a company is about to experience tough times, according to a recent academic study. The research shows that a company experiencing a surprise director departure is likelier to face a number of different future adverse events.

 

Among other things, a company with a surprise outside director departure has a "significantly higher likelihood of being named in a federal class action securities fraud lawsuit." The study’s authors call this risk of future adverse events following a director’s departure the "dark side of outside directors."

 

These findings are set forth in a March 2010 paper entitled "The Dark Side of Outside Directors: Do They Quit When They Are Needed Most?" (here) by Rüdiger Fahlenbrach of the Ecole Polytechnique Fédérale de Lausanne, Angie Low of the Nanyang Technological University and René M. Stultz of Ohio State University. Hat tip to the Harvard Law School Forum on Corporate Governance and Financial Reform for the link to the paper. I note here that the author’s paper is copyrighted – a notation that the authors require from anyone quoting their paper.

 

The Authors’ Analysis

The authors note that among the remedial measures imposed following the era of corporate scandals last decade were requirements for increased numbers of independent directors on corporate boards. Though these measures had salutary purposes, the addition of increased numbers of independent directors also has "costs" as well as benefits.

 

Among these "costs" is what the authors refer to as "a dark side" of increased outside director involvement arising because of outside directors’ "incentives." That is, outside directors have "incentives to leave when they anticipate that the firm on whose board they sit will perform poorly and/or disclose adverse information."
 

 

The directors have incentives to quit "to protect their reputation or to avoid increases in the workload when the firm on which board they sit is likely to experience a tough time." As the authors put it, outside directors are "more likely to quit when they expect the firm to perform poorly or to disclose bad news, so they can at least partly and possibly totally escape the reputation loss."

 

Because outside directors have these incentives, an unexpected director resignation from a company’s board may indicate that the company may be poised for future adverse events.

 

The authors tested this hypothesis by examining "surprise director departures." The authors tracked resignations by directors whose ages were below the average director retirement age and then plotted the resignations against future events at the companies from whose boards the directors had resigned.

 

The authors found that following "surprise director departures" the firms involved experienced "significantly worse stock and accounting performance," and "are significantly more likely to suffer from an extreme negative return event, are significantly more likely to restate earnings, and have a significantly higher likelihood of being named in a federal class action securities lawsuit."
 

 

These results, the authors concluded, are "consistent with the directors leaving in anticipation of adverse events to protect their reputation or to avoid an increased workload."

 

Discussion

The authors’ analysis of the "dark side" of increased outside director involvement is interesting, because it suggests that the outside directors readiness to head for the exits when the going gets tough undermines the very reasons for which increased outside director involvement was required in the first place. As the authors put it, their analysis suggests that "outside directors are more likely to resign precisely when experienced outside directors are needed the most."

 

The authors’ findings about the increased risk of securities litigation following a director’s resignation are particularly interesting. Back when I was part of a D&O underwriting facility, my colleagues and I were constantly involved in trying to identify factors that were positively correlated with the risk of securities litigation. The authors’ analysis suggests that a surprise outside director departure is such a factor.

 

Specifically, the authors found that a surprise outside director departure (that is, one that is not explained by the director having reached the average age for director retirement) is "highly statistically and economically significant" in terms of litigation risk. The authors specifically found that the surprise departure of an outside director increases the probability of a securities class action lawsuit filing by 31% to 35%, with the likelihood increasing as firm size increases; if a company’s stock and accounting performance were poor in the prior year’ and if the firm raised relatively more external financing in the prior year.

 

The authors’ work raises important questions about the role of outside directors. However, for D&O underwriters, the authors’ analysis about the correlation between surprise director resignations and securities litigation risk may be the most interesting finding. At a minimum, the authors’ analysis suggests a potentially important new underwriting criterion.

 

Questioning Rating Agencies’ First Amendment Defenses: In a recent post, I discussed the latest decision questioning the applicability of rating agencies’ first amendment defenses. Left unanalyzed in these cases is the larger question of why rating agencies’ ratings opinions are thought to be entitled to first amendment protection in the first place.

 

In a June 9, 2010 Am Law Litigation Daily article (here), Susan Beck questions both the rating agencies’ entitlement to rely on the First Amendment and the limitations of the judicial decisions to date where courts have found the First Amendment defense inapplicable because the ratings were given only to a small group of sophisticated investors. Beck asks, with respect to the latter point, "Why should big, sophisticated investors like CalPERS have more redress under the law than small (and large) investors who buy securities in public offerings?"

 

Beck also suggests that "the premise of First Amendment protection for credit ratings is shaky." After reviewing and questioning the case authority on which the rating agencies rely in asserting their First Amendment defenses, Beck concludes "I’m hoping that the next judge to address the First Amendment question reads the case law differently and concludes that a credit rating, by itself, is not a matter of public concern that deserves Constitutional protection. That’s not only fair, it’s right."

 

The FDIC in its status as receiver of a failed bank may not avoid rescission of a fidelity bond procured by material misrepresentation, notwithstanding the FDIC’s statutory receiver rights, according to a June 7, 2010 Second Circuit decision. This decision represents an important interpretation of the FDIC’s statutory rights as receiver, and could prove to be an important precedent in future insurance-related litigation arising out to the current round of failed banks. The Second Circuit’s June 7 opinion can be found here.

 

Background

In 1999, Connecticut Bank of Commerce (CBC) entered an agreement to acquire MTB Bank. The transaction closed March 30, 2000. Prior to the deal’s closing, two things happened of relevance to the subsequent insurance dispute.

 

First, MTB discovered that its agents had advanced $950,000 based on fraudulent invoices in connection a business deal involving Harmony Designs. MTB noticed its fidelity bond carrier regarding the Harmony Designs matter, although MTB ultimately reduced its loss below the amount of the deductible.

 

Second, in March 2000, before the CBC deal closed, MTB’s president and other officers were indicted in an alleged conspiracy involving the imposition of Argentinean minerals. MTB also noticed its fidelity bond insurer regarding the indictments.

 

After the CBC deal closed, CBC was added to MTB’s fidelity bond. As the bond’s June 30, 2000 expiration approached, CBC sought to renew it. The insurer declined to renew unless CBC came to London to provide additional information in connection with the renewal. The insurer also refused to extend the bond period 30 days.

 

CBC declined to visit London as the fidelity bond insurer had requested. Instead, CBC obtained replacement fidelity bond coverage from a different insurer. In order to secure this replacement coverage, CBC completed and submitted a policy application that required CBC, among other things, to disclose losses sustained during the preceding three years; whether there were additional circumstances relevant to the application; and whether insurance had been declined or canceled during the past three years. Post-binding, CBC completed the replacement insurer’s separate application form, which also asked questions related to past losses and whether CBC had had insurance declined or canceled.

 

CBC answered "None" or "No" to these application questions. CBC did not disclose or identify the Harmony Designs loss, the indictments, or the predecessor insurer’s actions in connection with the fidelity bond insurance renewal application.

 

CBC went into receivership in June 2002. In 2006, the FDIC as receiver sued CBC’s fidelity bond insurer alleging breach of contract for dishonoring claims under the bond for CBC’s losses related to a loan scheme used to fund MTB’s acquisition.

 

The district court granted the fidelity bond insurer’s motion for summary judgment on the ground that it properly rescinded the bond based on CBC’s application misrepresentations and omissions. The FDIC appealed.

 

The June 7, 2010 Opinion

In a June 7, 2010 opinion by Southern District of New York Judge John Keenan (sitting by designation on the Second Circuit), the Second Circuit affirmed the district court’s entry of summary judgment on behalf of the fidelity bond insurer.

 

In seeking to overturn the district court’s opinion, the FDIC had sought to rely on its rights under 12 U.S.C. Section 1823(e), which protects the FDIC from defenses not apparent on the face of an asset it acquires as a receiver of a failed bank. The FDIC argued that this provision bars the fidelity bond insurer’s misrepresentation defense.

 

The Second Circuit held (contrary to a prior holding in the Sixth Circuit) that a fidelity bond is in fact an "asset" to which this provision applies. However, the Second Circuit rejected the FDIC’s argument that this provision bars the fidelity bond insurer’s policy defenses.

 

The Second Circuit said that the provision is intended to "bar ‘secret’ defenses which would diminish the FDIC’s interests in a failed bank’s assets," but that "defenses raised by the bond itself may prevent recovery by the FDIC."

 

The Second Circuit found that "as the grounds for rescission were plainly stated on the face of the bond, there is nothing secret about [the fidelity bond insurer’s] misrepresentation defense." To recognize the FDIC’s position, the Second Circuit said, would be to "strike the rescission clause from the bond."

 

In the final portion of its opinion, the Second Circuit went on to hold that each of the three alleged misrepresentations separately provided sufficient ground to support rescission. The Second Circuit found that the omission of the information about the Harmony Designs loss, about the indictments, and about the prior insurer’s refusal to renew or extend each separately representing sufficient grounds for rescission.

 

The Second Circuit’s holdings about the sufficiency of the fidelity bond insurer’s basis for rescission are quite broad. Among other things, the Second Circuit said that "information about previous losses is presumptively material," and "the determination of risk is one properly left to the insurer, not the insured, and the insurer cannot make an accurate risk assessment without full disclosure from the applicant."

 

Discussion

It seems probable that in connection with the current wave of bank failures that the FDIC as receiver to the failed banks will attempt to recover under the failed banks’ insurance policies. The Second Circuit’s holding in the CBC case underscores the fact that notwithstanding the FDIC’s receivership status, and the statutory rights that status may entail, the FDIC’s ability to enforce the failed bank’s insurance coverage is subject to the defenses the insurer may have that appear in the relevant policies.

 

To that extent, at least, the Second Circuit’s opinion could be relevant to may arise in the wake of the FDIC’s attempt as receiver to recover under the failed banks’ insurance policies.

 

The CBC opinion is relevant for another reason that arguably is completely independent of the FDIC’s involvement in this dispute. That is, the opinion starkly demonstrates the critical importance of the policy application process and the extent of the insurer’s rights, under certain circumstances, to seek rescission. The Second Circuit’s view of the applicant’s obligation to provide responsive information is broad and encompassing.

 

The Second Circuit’s rescission holding seems to reflect a perception that CBC knew that if it disclosed the prior losses it would be unable to secure replacement fidelity bond coverage. To that extent, the rescission holding may reflect the somewhat distinct circumstances of the case. However, the Second Circuit’s rhetoric is broad and is not delimited to the referenced circumstances. The breadth of the ruling rescission ruling could well prove helpful to insurers in other rescission cases, even those lacking the distinctive characteristics of this case.

 

Financial Reform Impact on the Insurance Industry: In a prior post (here), I noted that the Senate’s version of the financial reform bill includes a number of specific reforms that particularly impact the insurance industry.

 

In a June 7, 2010 memo entitled "The Impact on the Insurance Industry of the Financial Regulatory Reform Bills: A Legislative Update" (here), the Simpson Thacher law firm examines and compares the various insurance industry reforms proposed in the House and Senate versions of the reform legislation.

 

The memo details the numerous insurance industry measures that are substantially similar in the two bills, suggesting that the provisions are likely to survive the current conference process. Among other things, the provisions intended to streamline the regulation of reinsurance and nonadmitted insurance are "substantially identical in both bills, and are therefore likely be enacted into law, as are a number of other measures.

 

Just as the financial crisis itself has gone through various phases, the resulting litigation has also changed and evolved. A June 4, 2010 report entitled "Credit Crisis Litigation Revisited: Litigating the Alphabet Soup of Structured Products" by my friend Faten Sabry, and her colleagues Anmol Sinha, Jesse Mark and Sungi Lee, all of NERA Economic Consulting, takes a detailed look at the credit crisis-related litigation wave, with a particular emphasis on the way that it has developed over time.

 

The focus of the NERA report is credit crisis-related "securities cases," which includes not only state and federal securities class action lawsuits, but also "ERISA claims, shareholder derivative actions, individual state and federal cases, [and] international cases." Thus, the universe of cases that NERA is tracking is considerably broader than the ones I have included in my running tally of subprime and credit crisis-related litigation, which can be accessed here.

 

The Report’s overall conclusion is that "there are conflicting signals about the future of this litigation." On the one hand, new credit crisis-related lawsuit filings have declined and almost half of the preliminary motion decisions to date have been dismissals. On the other hand, "types of allegations, products and defendants have continued to shift, and recent regulatory activity," such as the recent enforcement action against Goldman Sachs, "add to the uncertainty surrounding the direction and focus of the litigation."

 

According to NERA’s tally, there have been a total of 424 of the broad category of credit crisis cases filed since the beginning of 2007, 225 of which are securities class action lawsuits. The most active quarter both for credit crisis cases generally and for securities class action lawsuits specifically was the second quarter of 2008, when there were 48 new cases overall and 38 new securities class action lawsuits. Both overall credit crisis lawsuit filings and securities class action lawsuit filings declined every quarter during 2009.

 

The NERA report observes that there has "been a noticeable shift in the type of defendants as the credit crisis has progressed." Among other things, the incidence of cases involving corporate directors and officers has changed over time. The percentage of credit crisis filings that name directors and officers as defendants decreased between 2007 and 2009. In 2007 70% of the cases included director and officer defendants. The percentage of cases with director and officer defendants declined to 61% in 2008 and 52% in 2009. Early 2010 filings show a slightly increased percentage, with 67% of cases including director and officer defendants.

 

The types of companies involved in the cases have also shifted over time. For example, in 2007, mortgage lenders, home builders and REITs were named as defendants in 47% of filings, but by 2008, the kinds of companies were involved in only 20% of filings. Only 5% of the 2009 filings involved these kinds of companies, and so far none of the 2010 has involved these companies. With this shift away from residential mortgage defendants, the plaintiffs have changed, too, as the claimants have "shifted toward non-primary mortgage market participants."

 

While the percentage of filings against mortgage lenders, home builders, and REITs has declined over time, the percentage of cases naming securities issuers and underwriters has increased, from only 24% and 23% of filings in 2007 and 2008, to 37% of filings in 2009, and 60% so far in 2010.

 

The types of financial products involved in the credit crisis lawsuits have also shifted over time. Because the 2007 lawsuits largely involved lenders, mortgage originators and homebuilders, many of the 2007 suits involve mortgage loans – about 40% of the 2007 cases involved allegations relating to mortgage loans. By contrast only about 7% of 2010 cases involve mortgage loans, but "products such as ABS/MBS, CDOs and CDSs now make up the majority of the recent securities credit crisis lawsuits."

 

Slightly more than a third of the cases overall have either had dismissal motion rulings or been settled. I was a little puzzled by NERA statistics on case dismissals, as their data show that 61% of cases have been dismissed, with or without prejudice, which is considerably higher than my own figures reflect. (Refer here to access my own tallies of subprime and credit lawsuit dismissal motion rulings.)

 

However, NERA’s dismissal figures also include a number of voluntary dismissals. Removing those from the equation reduces the percentage of dismissal grants to 46%. In addition, NERA puts settled cases in a separate category and are counted neither as a dismissal motion denials or grants. Many of the case settlements followed dismissal motion denials, and so NERA’s figures on dismissal motion denials do not reflect those cases. All of these considerations should be taken into account when referring to the NERA data for purposes of determining how parties are faring in disputed dismissal motions.

 

Aggregate settlements to date in these cases total over $2.1 billion, with roughly $1.7 billion in settlements associated with securities class action lawsuit settlements. (My detailed list of subprime and credit crisis-related lawsuit settlements can be accessed here.)

 

Though the settlement numbers so far are impressive, there are clearly many more settlements yet to come, and the aggregate settlement figures are likely to grow. As the NERA report comments in closing, "settlements and judgments will be the next chapter in this story."

 

The NERA report contains a great deal of interesting and useful information and it is worth reading at length and in full. Very special thanks to Dr. Sabry for providing me with a copy of the report.

 

NERA also recently released a separate report entitled "Subprime and Synthetic CDOs: Structure, Risk and Valuation" which intended to provide a "plain English" explanation of many of the complex financial instruments that were involved with the financial crisis. This June 3, 2010 report can be accessed here.

 

My own recent status update on the subprime and credit crisis related litigation can be found here.

 

The rating agencies have been among the targets in many of the lawsuits filed as part of the subprime-related litigation wave. By and large, the rating agencies have been successful in knocking out these cases in the early stages, particularly the lawsuits seeking to hold them liable as "underwriters" under the federal securities laws.

 

At the same time, there is a small but growing number of cases in which the rating agencies’ preliminary motions have been unsuccessful, and there is a definite sense in which these decisions are building on each other, particularly with respect to the issues surrounding the First Amendment defenses on which the rating agencies are seeking to rely.

 

The latest example of a case where the rating agencies’ preliminary motion on First Amendment grounds have been unsuccessful is the negligence suit that Calpers filed in California state court against the three principal rating agencies.

 

Background

In July 2009, Calpers sued the three main rating agencies in California state court. Calpers alleged that it had invested about $1.3 billion in instruments issued by three structured investment vehicles (SIV). The investments carried the rating agencies highest ratings, which ratings Calpers alleged were "wildly inaccurate." Calpers claims to have lost over $1 billion on the investments.

 

Calpers alleged that it would not have invested in the securities if the securities had not carried the highest investment ratings. Calpers alleged that the rating agencies "did not have a reasonable basis" for giving the SIVs the highest investment ratings.

 

The ratings were flawed, Calpers alleged, because they failed to account for "foreseeable scenarios" and failed to account for the SIVs’ critical risk – that is, that the were highly concentrated in certain types of residential mortgages and residential mortgage backed securities. Calpers also alleged that the rating agencies used "inadequate mathematical and statistical models" and "employed increasingly lax standards" while giving the SIVs the highest ratings, in order to be able to continue to secure business providing ratings for structured financial products.

 

The rating agencies demurred to Calpers’ complaint, asserting that the allegations were legally insufficient. In early May 2010, California (San Francisco County) Superior Court Judge Richard Kramer announced from the bench that he would be overruling the rating agency defendants’ demurrer to Calpers’ negligence claims, but that he was sustaining the demurrers with leave to amend as to Calpers’ allegations of negligent interference with prospective economic advantage. Judge Kramer indicated at the hearing that the reasons for his reasons would appear in a forthcoming opinion.

 

The May 24 Opinion

In an opinion dated May 24, 2010 and filed on June 1, 2010 (and which can be found here), Judge Kramer set out the reasons for his rulings on the rating agency defendants’ demurrers.

 

The most noteworthy aspect of Judge Kramer’s opinion is his statement of the bases on which he rejected the defendants’ argument that they could not be held liable for their ratings opinions because the opinions are protected under the First Amendment. Judge Kaplan said (citing and relying on Judge Shira Sheindlin’s opinion in the Cheyne Financial case, about which refer here):

 

The court rejects Defendants’ arguments that the First Amendment to the United States Constitution preempts Plaintiff’s claims. The right to free speech allows us to give our opinions to things of public concern. The issuance of these SIV ratings is not, however, an issue of public concern. Rather, it is an economic activity designed for a limited target for the purpose of making money. That is not something that should be afforded First Amenment protection and the Defendants are not akin to members of the financial press.

 

Judge Kaplan also rejected the rating agency defendants’ arguments that the plaintiff’s claims are precluded by New York’s Martin Act or by the Credit Rating Agency Defense Act. However, he did find that plaintiff’s claim of negligent interference with prospective economic advantage was legally insufficient, although he allowed plaintiff leave to attempt to replead the claim.

 

Discussion

There have only been a handful of preliminary motion rulings so far that have been unfavorable to the rating agencies. But Judge Kaplan’s opinion in the Calpers case demonstrates that each of these rulings, even though seemingly limited, creates an opportunity for later plaintiffs to try to exploit the rulings in other cases.

 

For example, Judge Kaplan expressly relied on Judge Sheindlin’s September 2009 opinion in the Cheyne Financial case. Judge Sheindlin’s rejection of the rating agencies’ First Amendment defense in that case was by its own terms narrow; she said only that credit rating that is not directed to the public at large, but that is "provided instead to a select group of investors," is not entitled to First Amendment protection.

 

Though Judge Kaplan expressly quoted this narrowing language, his opinion arguable is not as narrow. To be sure, he emphasized that the SIV itself was designed for a "limited target. But he also said that the rating agencies are not the equivalent of the "financial press," and he indicated that the opinions were not entitled to protection where the opinions are not of "public concern." This analysis may or may not be sufficient to bar the First Amendment defense in a public-at-large kind of claim, but it nonetheless does seen to constrain the availability of the defense in a wide variety of circumstances – and a wider variety of circumstances than would the standard in Judge Sheindlin’s case.

 

Whether plaintiffs in other cases will be able to build further on Judge Kaplan’s opinion remains to be seen. It particularly remains to be seen whether Judge Kaplan’s analysis will prove useful in a public-at-large case, as opposed to a "select group of investors" kind of case.

 

Nevertheless the plaintiffs in these cases have shown themselves capable of building on openings in the defense. However, even the plaintiffs that have already survived preliminary motions are all still a very long way from any actual recovery. But surviving the motions to live for another day is the name of the game for plaintiffs in these kinds of cases. The small but growing number of rulings favorable to the plaintiffs seem to offer some reason to suspect that a number of these cases against the rating agencies may yet go forward.

 

Special thank to Henry Turner of the Turner Law Offices for providing me with a copy of Judge Kaplan’s opinion in the Calpers case.

　

At least one prominent commentator has suggested that the reason for the accumulation during late 2009 of a significant number of belated securities suits, where the filing date came well after the proposed class period cut-off date, is that plaintiffs lawyers are "trying to fill the litigation pipeline by bringing older lawsuits that weren’t attractive enough to file" as subprime- related cases mounted during earlier periods.

 

The further suggestion was that "these lawsuits are more likely to be dismissed and can be characterized as lower quality claims."

 

Whether or not the belated cases in general are or are not likelier to be dismissed, and even whether or not the cases are "lower quality claims," at least one of the first of the belatedly filed cases recently survived a motion to dismiss, suggesting that at least some of the belated cases could represent serious claims exposures

 

Background

As discussed at greater length here, Ambassadors Group was first sued in a securities class action lawsuit in July 2009. The complaint, filed in the Eastern District of Washington, purported to be filed on behalf of persons who bought company stock during the period February 8, 2007 to October 23, 2007. In other words, the initial filing date came some 21 months after the proposed class period cut-off date.

 

Ambassadors is in the business of providing student travel trips, primarily to middle school students. The plaintiffs alleged that the defendants had omitted to disclose that in December 2006, the mailing list company from which Ambassadors purchased its middle school names list ended its relationship for undisclosed reasons. Ambassadors purchased a replacement middle school names list from a different company.

 

On October 22, 2007, when the company released poor financial results, among the reasons given was the unexpected underperformance of the replacement mailing list. The company’s share price declined 44% on the poor financial news.

 

The plaintiffs alleged that the defendants’ statements during the class period were materially misleading because the company knew as early as summer 2007 that response rates were poor and had known in late 2006 that it had lost access to a key mailing list. The defendants moved to dismiss.

 

The June 2, 2010 Ruling

In a June 2, 2010 order (here), Judge Justin Quackenbush denied defendants’ motions to dismiss as to the July 24, 2007 statement of the company’s Executive Vice President that the company’s was launching its 2008 marketing campaigns, which were "similar in timing and delivery as previous years."

 

Plaintiffs had argued that this statement was "simply untrue" because the 2008 marketing campaign was note similarly in delivery to previous years, owing to loss and subsequent replacement of the mailing list, which represented 90% of the company’s marketing leads and 45% of the company’s business.

 

The court concluded that the plaintiffs’ complaint "pleads sufficient facts, that when taking as true, create a genuine issue of material fact regarding whether the 2008 campaign was not, in fact, similar to delivery in previous years."

 

However, Judge Quackenbush found that the defendants’ remaining statements on which the plaintiffs sought to rely were "general and vague" and constituted puffery and therefore could not serve as a basis of liability.

 

In finding that the plaintiffs had sufficiently alleged scienter, Judge Quackenbush found, in reliance on the "core functions" doctrine, that the company’s mailing campaign was "so integral to the operations of [the company that knowledge thereof cannot be denied by senior executives." The company’s CEO and Executive Vice President were also alleged to have sold over $4 million of their personal holdings in company stock between May and August 2007. The court noted that the insider trading was the subject of an SEC investigation.

 

Judge Quackenbush went on to observe that:

 

Ambassadors is a small company. There is no reasonable argument that the Defendants were not aware of the mailing list issue. The core operations inference in this case is a strong one, as the Middle School names list accounted for 45% of the marketing leads for Ambassadors. The inference is strengthened by the allegations of the confidential witnesses, the SEC investigation, and the stock sales.

 

The Company’s CEO and CFO each separately moved to dismiss the claims against them on the grounds that they themselves were not alleged to have made the allegedly misleading statements. After reviewing case law relating to the "group pleading" doctrine, Judge Quackenbush rejected the two individual defendants’ separate dismissal motions, observing that:

 

Corporate officers, however, may not stand idly by as investors and analysts, upon whose recommendations other investors rely, are mislead [sic]. Corporate exeutiveship often carries with it substantial financial remuneration, but with such remuneration comes duties and obligations to the company and its stockholders that must not be ignored, as the economic catastrophes befalling the company in the past two years have harshly illustrated. Affirmative steps are required to prevent fraud or to even merely clarify when a statements veers into a dangerous grey area. [The CFO] may not cloak himself in his silence and avoid liability for the misleading statements of his co-defendants made to public stock analysts during a conference call at which he was present.

 

Discussion

A single ruling arguably represents little from which to try to make any generalizations about the belated cases as a group. Moreover, there may be those who might want to argue that this case is going forward on the basis of a single seemingly neutral statement about the initiation of the marketing campaign.

 

Some observers might also note that Judge Quackenbush’s ruling is heavily dependent both on the "core functions" doctrine and the "group pleading" doctrine, the applicability of both of which under the PSLRA have been the subject of considerable debate.

 

Nevertheless, the case did survive the initial dismissal motion. The time lag between the class period ending date and the initial filing date was irrelevant to the court’s decision. The dismissal motion ruling suggests that at least some of the belated failings will survive dismissal motion rulings and that the mere fact that a case was belatedly filed may not necessarily mean that the case will be unable to overcome initial pleading thresholds.

 

It is interesting to note that in his discussion of the responsibility of corporate officers to prevent fraud, Judge Quackenbush invoked both concerns about executive compensation and about the possible role of corporate officials in the financial crisis, suggesting a judicial context within which the activities of corporate officers may be viewed, even in the absence of allegations that the officers whose conduct is at issue received disproportionate compensation or contributed to the financial crisis.

 

The suggestion is that the popular outrage growing out the financial crisis may inform judicial decision-making, even in cases that seemingly do not directly involve the financial crisis.

 

One final observation is that, whatever the reason for the increase in belated securities class action lawsuit filings, and whether or not they represent "poorer quality claims," the plaintiffs’ lawyers continue to file them, as I noted in my recent discussion of recent securities lawsuit filing trends, here.

 

Special thanks to a loyal reader for sending me a copy of the Ambassadors Group decision.

　

In two separate decisions, two courts issued opinions in cases that each related in different ways to Credit-Based Asset Servicing and Securitization, LLC, also known as C-Bass. As discussed below, Judge Rakoff has issued an opinion substantiating his prior dismissal motion rulings in the C-Bass subprime-related class action securities litigation, and in a separate opinion, Judge Mary McLauglin has dismissed with prejudice the subprime-related ERISA class action involving Radian Group and its investment in C-Bass.

 

The C-Bass Subprime-Related Securities Suit

 

As previously noted here, in a two-page March 31, 2010 order (here), Southern District of New York Judge Jed Rakoff issued an order denying in part and granting in part the defendants’ motions to dismiss in the C-Bass subprime-related securities suit. Judge Rakoff did not issue an opinion detailing his reasons for his rulings at the time. However, on June 1, 2010, Judge Rakoff issued his opinion substantiating his rulings. The opinion can be found here.

 

 

The most noteworthy aspect of Judge Rakoff’s decision is that he granted the rating agency defendants’ motion to dismiss, following Judge Kaplan’s ruling in the Lehman Brothers subprime-related securities suit that the rating agencies cannot be held liable under the ’33 Act as “underwriters.” Andrew Longstreth’s June 1, 2010 Am Law Litigation Daily article discussing this aspect of Judge Rakoff’s opinion can be found here.

 

 

Judge Rakoff said that similar reasoning requires him to dismiss three defendants (including C-Bass itself) who were merely “sponsors” of the offerings referenced in the plaintiffs’ complaint, as these defendants merely originated the mortgages underlying the securitizations, and therefore did not qualify as statutory underwriters. Judge Rakoff dismissed without prejudice the plaintiffs’ complaints against Merrill Lynch, holding that the specific allegations in the plaintiffs’ complaint were not sufficient to state a Section 11 claim against Merrill as an underwriter.

 

 

As to the defendants who actually were offering underwriters in connection with the offerings in dispute, Judge Rakoff said that the plaintiffs’ allegations that the mortgage originators had, contrary to representations in the offering documents about the originators compliance with underwriting guidelines, were sufficient to state a claim under the ’33 Act.

 

 

However, Judge Rakoff also granted the motion to dismiss plaintiffs’ claims as to 65 of the 84 securities offerings, in which the named plaintiffs had not purchased securities, on the basis of lack of standing.

 

 

One particularly interesting part of Judge Rakoff’s opinion is his ruling rejecting the defendants’ motion to dismiss on statute of limitations grounds. The defendants had argued that the plaintiffs were on inquiry notice prior to December 5, 2007 (that is, more than a year before the first complaint was filed) of their claims, and therefore the plaintiffs’ claims were time-barred.

 

 

In making this argument, the defendants had argued, as paraphrased by Judge Rakoff, that prior to December 2007, “questions about the bona fides of mortgage-backed securities were the subject of news reports, government investigations, public hearings, and civil complaints.” The plaintiffs argued that virtually none of these references referred to the defendants or to the securities at issue. Judge Rakoff said that at most, plausible inferences might be drawn for either side, making the issue inappropriate for resolution at the dismissal motion stage.

 

 

In reaching this ruling, Judge Rakoff expressly referenced the Supreme Court’s recent statute of limitations-related opinion in the Merck case (about which refer here). Judge Rakoff noted that Merck had addressed statutes of limitations issues under the ’34 Act, adding that the Second Circuit had not yet had occasion to determine how Merck might change statute of limitations issues under the ’33 Act.

 

 

However, with respect to Merck, Judge Rakoff noted that the Supreme Court had “rejected arguments of the defendants quite similar to the arguments made by the defendants here,” summarizing the Supreme Court’s ruling in Merck as holding that “a plaintiff would not be barred by the statute of limitations unless a reasonably diligent plaintiff similarly situated would have actually discovered facts showing the violations alleged in the plaintiffs’ complaint.”

 

 

Judge Rakoff’s ruling, though not dependent on the Merck case, is at least consistent with the general view that Merck itself could have a beneficial impact for plaintiffs in other securities class action lawsuits.

 

 

The Radian Group Suprime-Related ERISA Class Action

 

In a May 26, 2010 order (here), Eastern District of Pennsylvania Judge Mary McLaughlin granted with prejudice the defendants’ motion to dismiss in the Radian Group subprime-related ERISA class action.

 

 

The plaintiffs had alleged, on behalf of participants in the Radian Group benefits plan, that the defendants had misled the plan participants about the risks associated with investments in the plan in Radian stock due to Radian’s investment in C-Bass. The plaintiffs claimed that the plan participants were harmed with the value of the plan investments in Radian stock fell in value after Radian announced that its investment in C-Bass was materially impaired.

 

 

Judge McLaughlin had previously granted defendants’ motion to dismiss, without prejudice, and the plaintiffs amended their complaint. In her May 26 opinion, Judge McLaughlin granted the motions with prejudice, finding that the plaintiff has “once again failed to plead a breach of fiduciary duty.”

 

Judge McLaughlin specifically held that the plaintiff’s new allegations “do not demonstrate the inapplicability of the presumption of prudence, nor do they rebut the presumption.” She also found that the plaintiff had failed to state a claim for breach of the duty of disclosure.

 

 

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

 

 

Fifth Circuit Makes a Hash of the Climate Change Case: As I noted in a prior post, the October 2009 Fifth Circuit opinion in the Comer v. Murphy Oil Co. case, overturning the district court’s dismissal of the plaintiffs’ climate change related claims, raised the possibiltiy that other climate change cases might follow. However, the Fifth Circuit granted the defendants’ petition for rehearing en banc, in the process vacating the October 2008 opinion of the initial Fifth Circuit panel.

 

 

That’s when things started to get messy. One by one, different Fifth Circuit judges recused themselves, evenutally reaching the point where there weren’t enough judges left to take up the en banc rehearing.

 

 

As discussed in Alison Frankel’s June 1, 2010 Am Law Litigation Dailiy article here, the lack of a quorum for en banc review has left the case in a procedural netherword that she aptly describes as "weird."  It seems that the Fifth Circuit has dismissed the appeal, effectively reinstating the ruling of the district court. In its order dismissing the appeal, the Fifth Circuit expressly declined to reinstate the opinion of the three-judge panel. The Fifth Circuit said that there is no rule permitting them to reinstate a vacated opinion.

 

 

(You are excused if you feel a bit confused right now.)

 

 

 

My weekend reading over the Memorial Day holiday included a hefty selection from the stack of law firm memos that accumulated in my inbox in recent weeks. Many of the most recent memos related to the Senate’s passage of its version of the financial reform legislation, but the memos also reflected a variety of other developments, including recent significant case developments and the passage of the UK bribery bill. I have set out below some of the more noteworthy recent law firm memos that have crossed my desk.

　

The Senate Financial Reform Bill

The Senate’s passage of the Restoring American Financial Stability Act of 2010 has triggered a flood of law firm memos. Though many of the memos have attempted to provide an overall description of the sweeping legislation, some have concentrated on focused on a narrow part of the bill. Several law firms have released memos focused just on the bill’s proposed corporate governance.

 

A May 24, 2010 memo from Sullivan & Cromwell provides an overview of the bill’s corporate governance reforms, including the bill’s provisions relating to majority voting for directors, "say on pay," executive compensation clawbacks, compensation committee independence and disclosures, and limitations on broker non-votes. The Sullivan & Cromwell memo points out that a number of the provisions in the bill – whistleblower protections, amendments relating to whistleblowers, private placement provisions and broker voting—would apply to non-U.S. issuers.

 

A May 28, 2010 memo from the Bingham McCutchen law firm also discusses the bill’s corporate governance reforms. Of particular interest, the Bingham memo contains an extensive discussion of the proposed "say on pay" reforms, with particular emphasis on concerns about "the amount of power the change would place in the hanks of proxy advisory firms," which provide compensation guidelines in connection with the proxy advice.

 

The Morgan Lewis firm also issued a May 27, 2010 memo about the Senate bill, here. The Morgan Lewis firm memo has an interested in discussion about the provision in the Senate bill that would require the securities exchanges to include the adoption of a compensation clawback policy as a listing requirement (by which incentive based compensation would be clawed-back from company officials in the event of a financial restatement of the financial statement of prior periods to which the compensation relations). The memo details the way that this provision the existing clawback requirements promulgated by SOX.

 

A May 27, 2010 memorandum from the Sidley Austin firm also provides an overview of the corporate governance reforms in the bill, and notes that that the bill contains additional compensation limitations for bank holding companies, and a separate provision requiring public companies to file a special SEC report of they using certain specified mineral products that may have originated in the Democratic Republic of Congo.

 

　

The Senate bill contains provisions designed to encourage corporate employees to blow the whistle on securities fraud. A May 21, 2010 Morgan Lewis memo (here) points out that these new provisions "give whistleblowers significant enhanced incentives to make a report" as part of the SEC’s new whistleblower program, and also provides extensive additional retaliation protections. The provisions would allow whistleblowers to receive rewards of between 10% and 30% of the monetary recovery. The provisions would also allow the whistleblower claiming retaliation to bypass existing administrative procedure requirements and proceed directly in federal court. The provisions also proposed a much longer statute of limitations and would create a double-back-pay remedy for retaliation claims, which created an incentive to bring retaliation claims.

 

Finally, a May 25, 2010 memo from the Faegre & Benson firm reports that the Senate’s financial reform bill "may give plaintiffs little to celebrate," noting that Congress "largely has chosen not to empower private parties" to enforce the rules. Indeed, the House bill’s provisions that would create the new consumer protection agency specifies that "nothing" in the provision establishing the new consumer protection "shall be construed to create a private right of action."

 

The Faegre & Benson memo does note that both the House and the Senate versions of the bill have "carved out a role for private litigants" to "help safeguard the integrity of the rating process" by allowing investors to sue credit rating agencies for securities fraud. The two versions disagree on the standard of liability to be required. Though the two versions must now be reconciled, some allowance private civil litigation against the rating agencies seems likely.

 

Securities Law Case Developments

A number of law firms have written memoranda discussing the Second Circuit’s April 27, 2010 opinion in the Pacific Investment Management Co. v. Meyer Brown case. Though the case outcome, in which the Second Circuit affirmed the dismissal of the securities fraud lawsuit against Refco’s lawyer, may have been unsurprising given the Supreme Court’s decision in Stoneridge, the law firm memos make the point that we may not have heard the last of the case.

 

As detailed in Arnold & Porter’s May 2010 memo about the case (here), the Second Circuit rejected the "creator theory" that both the plaintiffs and the SEC (in an amicus brief) had urged the court to adopt and instead held that "a secondary actor can only be held liabile for false statements in a private damages action for securities fraud only if the statements are attributed to the defendant at the time the statements are disseminated."

 

The Arnold & Porter memo points out that the decision, adopting the attribution test and rejecting the creator theory, has "two crucial limitations"; that is that it relates only to private civil actions under Rule 10b-5 and "does not speak" to government enforcement actions; and the Second Circuit refrained from addressing the question whether attribution is required for claims against corporate insiders.

 

The memo also notes that "perhaps most significant" is the fact that the decision was accompanies by Judge Barrington Parker’s concurring opinion, essentially calling for en banc review and even inviting the Supreme Court to weigh in on the matter. In other words, the memo notes, the Second Circuit’s recent opinion may not be the "final word on the subject."

 

Chadbourne & Parke also has a May 6, 2010 memo on the case, here. The Paul Hastings firm’s May 2010 memo on the case can be found here.

 

Finally, a May 26, 2010 memo from the Pillsbury Winthrop law firm discusses the Second Circuit’s May 18, 2010 decision in Slayton v. American Express , in which the Second Circuit held that even though forward-looking statements in the defendant’s SEC filing was not accompanied by meaningful cautionary disclosure, the plaintiffs failed to show that the statements were made with actual knowledge that they were misleading.

 

The Pillsbury firm memo identifies two "key takeaways" from the case: first, that "meaningful cautionary language must be specifically tailored to the statement at issue," as "boilerplate disclosure can be turned against a registrant because of its inherent lack of specificity." The Second Circuit’s holdings confirm the importance of "regularly reviewing the cautionary statements and risk factor disclosures contained in their public filings to ensure that the disclosure continue to be current and meaningful."

 

Second, the Second Circuit considered it to be a close call whether the plaintiffs had carried the burden of proving actual knowledge of falsity, "executive officers should remain vigilant and thoughtful when evaluating whether they have a reasonable basis for a particular forward-looking statement."

　

The U.K.’s Bribery Act 2010

The Morgan Lewis firm has a May 2010 memo entitled "The New UK Regime on Bribery" (here) describing the "far reaching implications" of the U.K.’s Bribery Act 2010. Among other things, the memo notes that the new law expands the scope of behavior that is targeted; no longer limited just to bribes paid to foreign officials, the new law applies to all bribes including purely commercial bribes, and applies to both the person paying and the person accepting the bribe.

 

Even more significant, the Act’s new Section 7 creates a new strict liability offense for organizations if a person associated with the organization bribes another person with the intent of benefiting the organization. However, organizations have a defense if they can show that they have in place "adequate procedures" to prevent bribery. In essence, the new Act is mandating compliance programs, to create controls against improper payments.

 

The Act has what the memo describes as a "wide territorial scope," applying of an act or omission forming part of the violation occurs in the U.K, or if in is carried out by a person with a "close connection" to the U.K.

 

A May 24, 2010 memo from the Weil Gotshal firm says that the new Act "provides the UK with one of the toughest regimes for regulating corruption in the world.

 

The subprime and credit crisis-related litigation wave may now be in its fourth year, but lawsuits continue to come in. The latest of these suits – a securities class action lawsuit involving Las Vegas Sands – has a number of interesting features, and it also raises the question whether we may see even further new filings related the credit crisis in the months ahead.

 

On May 24, 2010, plaintiffs’ attorneys filed a securities class action lawsuit in the United States District Court for the District of Nevada against Las Vegas Sands Corp., its Chairman and CEO, Sheldon Adelson, and its former President and COO, William Weidner. The complaint can be found here. A May 24, 2010 Las Vegas Sun article describing the lawsuit can be found here.

 

The complaint alleges that the defendants’ misled investors concerning developments at the company’s Asian casino properties, as well as with respect to the company’s liquidity and the company’s vulnerability to the economic downturn. Specifically, the plaintiffs allege that defendants’ statements during the class period were false and misleading because, according to plaintiffs’ lawyers May 25, 2010 press release about the case:

 

(i) increasing competition in Macau was steadily eroding the Company’s foothold in the region, which undermined defendants’ representations that everything was proceeding according to plan; (ii) the Company was facing a significant liquidity crisis as a result of its ongoing expenditure of capital in Macau and Singapore, which forced the Company to divert funds from other operations to develop its Asian properties; (iii) that the Company, could not, in fact, weather the economic downturn, because the credit markets were drying up and Las Vegas Sands had failed to timely access those markets; and (iv) increasing visitor restrictions in Macau, which defendants represented would not impact the Company as significantly as its competitors, were expected by defendants to have just as devastating an effect on Las Vegas Sands.

 

There are several very interesting things about this new lawsuit. The first is that it follows in the wake of an unsuccessful shareholders’ derivative suit based largely on the same circumstances and similar allegations. The first of these lawsuits was filed in January 2009. A copy of the complaint can be found here. 

 

According to a November 6, 2009 Las Vegas Sun article (here), Clark County (Neb.) District Judge Allan Earl granted the defendants’ motions to dismiss these cases, citing, among other things, Adelson’s investment of over $1 billion of his personal fortune to try to rescue the company. Judge Earl found that the company’s predicament was the result of "reasonable business decisions," that, while risky, and that may have brought the company to the "brink of financial instability," might in the future "provide the economic stability to ensure the future success of the company."

 

Judge Earl also noted that the events played out against a "backdrop" that involved "a deteriorating global economy that struck with such frightening speed and force that it engulfed nearly every major banking, investment and gaming company in the world."

 

The other interesting thing about the new lawsuit, and that might be a direct consequence of the fact that it follows after the unsuccessful derivative suit, is that this case falls in the category of "belated lawsuits." This complaint was filed on May 24, 2010 but the class period is August 1, 2007 to November 6, 2008. In other words, the complaint was filed 18 months after the date of the proposed class period cutoff.

 

As I recently noted (here), belated lawsuit filings, where the filed date is more than a year after the proposed class period cut-off, have been a key component of 2010 securities class action lawsuits. The phenomenon first emerged in mid-2009, but the earliest cases related to nonfinancial companies. The speculation about the emergence of this filing trend has been that up until mid 2009, plaintiffs’ lawyers were preoccupied filing credit crisis lawsuits against financial firms, and a backlog of cases against nonfinancial firms built up.

 

The Las Vegas Sands securities lawsuit seems to represent something different – a belated case that is related to the credit crisis. Of course, Las Vegas Sands is not a financial company, and in that respect the new lawsuit is not inconsistent with the whole belated lawsuit filing phenomenon. But the case and its allegations about the company’s real estate developments, liquidity and funding problems are all related to the credit crisis.

 

For that matter the Las Vegas Sands case is not the first belatedly filed credit crisis-related securities suit in 2010. Cases filed earlier this year against The Hartford Financial Group (refer here) and the Morgan Keegan funds (refer here) each also were first filed more than a year after the proposed class period cutoff date and both reflect subprime meltdown or credit crisis related allegations.

 

The consensus view has been that the subprime and credit crisis-related litigation wave has largely ended, but the fact is that a number of subprime and credit crisis related securities suits have been filed in 2010—as many as 13, by my count. The possibility of further belated filings, relating back to events that unfolded a significant time ago, raises the prospect that there could be even further subprime and credit crisis-related cases yet to come.

 

Bottom line: it may be premature to suggest that the subprime and credit crisis-related litigation wave has ended. It may have quite a bit further to run.

 

I have in any event added the Las Vegas Sands case to my table of subprime and credit crisis-related lawsuit filings, which can be accessed here. I note that the list, which I first began compiling in April 2007, is now 214 cases long. I certainly never foresaw how lengthy or long-lived the list would be when I first began it so long ago.

 

Special thanks to Adam Savett of the Securities Litigation Watch blog for providing a copy of the Las Vegas Sands securities class action complaint.

 

The strange sequence of legal events surrounding R. Allen Stanford has taken yet another bizarre turn. The latest developments began earlier last week when Stanford yet again sought to fire his criminal defense lawyers. Then on May 21, 2010, Stanford, representing himself pro se in coverage litigation arising out of his and fellow criminal defendants’ efforts to secure insurance coverage for their defense expenses, wrote a letter to the court in the coverage action asserting that the insurers "have thwarted my every attempt to obtain counsel of my choosing." He also protests the insurers are controlling his defense and denying payments through a "reasonable and necessary" shield.

 

In his letter, Stanford requested that the court order the lead insurer to "approve and compensate my criminal attorneys and coverage attorneys of my choice."

 

In their May 24, 2010 response (here), the lead insurers contend, contrary to Stanford’s assertion  that they have "thwarted" his defense,  "nothing could be further from the truth," noting that he has "cycled through more than 10 different law firms (all of his own choosing and all at Underwriters’ expense) in the course of the SEC and Criminal Actions" adding that they have paid these attorneys "more than $ 6 million dollars."

 

The lead insurer further argues that it has withheld consent to Stanford’s latest defense counsel "only due to extraordinary and alarming circumstances" – including disagreements among Stanford’s own counsel, leading to Stanford’s latest criminal defense attorney to withdraw "only a month after entering an unconditional appearance" and while publicly asserting that the lawyer with which Stanford seeks to replace him is "often times" acting "against Stanford’s best interests." The lead insurer asserts that has "no obligation" and "in fact cannot in good faith approve counsel that has been fired by an insured or counsel that is alleged to have acted against an insured’s best interest."

 

The lead insurer bemoaned the "chaos" and "turmoil" surrounding Stanford’s choice of counsel, which threatens "serious harm" to the insurers’ interests as well as those of all other claimants to the policy. The insurer also pointed out that Stanford has no right under the policy to coverage counsel.

 

As discussed in greater detail here, the insurers have sought to deny coverage under the policy on the grounds that the criminal defendants’ conduct violated the policy’s Money Laundering exclusion. In a March 15, 2010 decision (here), the Fifth Circuit ordered that the question of whether or not the exclusion has "in fact" been triggered must be determined in a separate judicial proceeding, to take place on an expedited basis, so that the fundamental question of coverage for the criminal defendants’ attorneys’ fees can be determine.

 

In the meanwhile, Stanford remains jailed pursuant to a ruling by Judge David Hittner, denying Stanford bail.

 

In a May 25, 2010 Am Law Litigation Daily article (here), David Bario describes the May 25 hearing before Judge Nancy Atlas on these issues, at which Stanford apparently appeared shackled and unshaven. Stanford apparently argued that either his choice of criminal defense attorney should be approved or he should be released in order that he can prepare his defense.

 

According to a May 25, 2010 Bloomberg article (here), Judge Atlas said that she would urge Judge Hittner to "reconsider" his bail ruling. She proposed an arrangement subjecting Stanford to "very, very, very tight house arrest" so he can prepare his defense in the insurance case. "I would not be opposed to that," she said.

 

Judge Atlas reportedly told the insurers’ attorneys, as a warning that they will have to sustain their coverage defense in court, "You’ve got to prove there was some criminal act that gave rise to criminal property. And then you’ve got to prove what role each of these executives had to do with that."

 

According to the Am Law Litigation Daily article, Judge Atlas set a hearing date for early June to "sort through the crowded field of former, current and future Stanford lawyers to determine how they managed to rack up the $6 million tab." The Houston Chronicle reports that the hearing will take place on June 3, at which Atlas says, "We are going to get to the bottom of why so much money is being spent in Mr. Stanford’s defense."

 

Judge Atlas set an August 24, 2010 date for the hearing on the coverage issues, and said that Bob Bennett, Stanford’s current defense counsel, might represent him at that hearing. The criminal trial against Stanford and his co-defendants is set for January 2011.