The financial relationship between plaintiffs’ securities firms and the clients they represent has long been questioned, and not only because of the kinds of improper kickback payments for which Bill Lerach and Mel Weiss, among others, wound up in jail. Another practice that has raised recurring concerns is what is referred to as "pay-to-play" – which in this context refers to the plaintiffs’ lawyers’ payment of political contributions to elected officials in charge of public pension funds, supposedly in exchange for the lawyers’ selection as the funds’ class action counsel.

 

But while these kinds of concerns are frequently raised, a preliminary question is often overlooked – that is, regardless of questions about the effect the practice might have on the counsel selection process, are the plaintiffs’ lawyers in fact making political donations to elected officials who have authority over public funds?

 

That is the question examined in a recent New York University Law Review article by Drew T. Johnson-Skinner entitled "Paying to Play in Securities Class Actions: A Look at Lawyer’s Campaign Contributions" (here). The article’s author notes that while alleged pay-to-play practices are often discussed, and have even been the subject of various reform proposals, many commentators have simply "skipped" the "first stage of the analysis," which is the question "whether law firms are contributing to investment funds’ leadership at all."

 

In order to analyze the question, the article’s author looked at all 1076 securities class action lawsuits that were filed from 2002 to 2006, and then narrowed the data set to the 74 cases where "the filing lead plaintiff was an institutional investor with at least one state-level elected official or a person appointed by a state-level elected official, on its controlling board."

 

The author then looked at whether the law firms selected as counsel in each of the 74 cases had made campaign contributions to any elected officials affiliated with the funds that selected the firm. Reviewing publicly available information, the author found that "in a majority of cases where pay-to-play was possible, at least one law firm made a political contribution to an elected official with a lead plaintiff pension fund in the case."

 

The author concluded that his analysis "confirms that plaintiffs’ law firms are contributing to the pension funds that select them as counsel," and that "campaign contributions that could be the basis of paying-to-play are present across a broad range of cases." Moreover, the amount of money contributed by firms is also "significant."

 

However, the author cautioned that his research "does not explain why firms contribute to pension funds or the role that campaign contributions actually play in funds’ counsel-selection decisions." Rather, the author suggests that the value of his research is that it rules out any possible contention, in response to pay to play allegations, that law firms are not contributing to pension funds. In fact, they are.

 

While the law review article’s author declined to question whether the plaintiffs’ law firms’ political contributions are a form of pay-to-play, a separate legal study suggests at a minimum that the existence of political contributions may affect the attorneys’ fees that a public pension fund may pay.

 

A December 22, 2009 article (here) by New York University law professor Stephen Choi, Drew T. Johnson-Skinner, and University of Michigan law professor Adam Pritchard suggests that "state pension funds generally pay lower attorneys’ fees when they serve as lead plaintiffs in securities class actions than do individual investors serving in that capacity," but that when the authors controlled "for campaign contributions made to officials with influence over state pension fund" the differential disappears. Thus, the authors conclude, pay to play "appears to increase agency costs borne by shareholders in securities class actions."

 

In any event, questions continue to arise whether plaintiffs’ lawyers campaign contributions to officials that control public pension funds represents a form of improper influence.

 

For example, in connection with the class certification motion in the Countrywide subprime-related securities class action lawsuit, the Defendants had argued that the lead counsel in the case had made a series of campaign contributions to the New York State Comptroller, the sole trustee of the New York State Common Retirement Fund, one of the lead plaintiffs in the case. (The other lead plaintiff group is the New York City Pension Funds.) The various contributions for the lawyers at the firm ranged in amount from $6,200 to $9,600, all made within four days’ time, after the law firm had been selected as lead counsel. The payments totaled "precisely $50,000."

 

In her December 9, 2009 order certifying the class (here), Central District of California Judge Mariana Pfaelzer noted that any suspicion of pay-to-play activity "would be relevant to attorney-class conflicts and the willingness of [the State Fund] to monitor its attorneys and make decisions for the benefit of the class rather than its attorneys," but she found that any such suspicion "may be somewhat speculative" in the Countywide case.

 

Judge Pfaelzer noted as a preliminary matter that "attorneys are free to exercise their right to donate to politicians who support their views" and that the defendants "do not allege that the donations violated any law." She also noted that "though not exactly correlative," lawyers and parties on the defense side have "similar political-donation freedom."

 

Perhaps more importantly, in rejecting the defendants’ objections, Judge Pfaelzer found that the lead plaintiffs’ firm had been retained for the case "after career staff recommended" the firm, following "reasonable ethics protocols" and based on the law firm’s "independent investigation of the case."

 

A December 10, 2009 WSJ.com Law Blog post about Judge Pfaelzer’s ruling can be found here.

 

The suggestion of similar concerns surfaced more recently in connection with the composition of the Financial Crisis Inquiry Commission, which commenced its high profile investigation of the financial crisis on Wednesday. As detailed in a January 13, 2010 Wall Street Journal article (here), one of the individuals on the ten-member commission is a lawyer with the Coughlin Stoia law firm. In addition, a senior commission staffer is on leave as a partner in the Coughlin Stoia law firm.

 

The Journal article reports that the commission chairman, Phil Angelides, received $250,000 in contributions from the law firm during his 2006 campaign for governor. The article quotes a representative of the U.S. Chamber Institute for Legal Reform as saying that the appointment of plaintiffs’ class action attorney to the commission and its staff "raises a very real concern as to whether they will use the important work of the commission ultimately to feather their own nest." A law professor is also quoted as saying that the ties to the law firm could hurt the commission, noting that "the commission must maintain its distance from the perception that this is all a ‘gotcha’ exercise."

 

These kinds of concerns about plaintiffs’ law firms’ political contributions at a minimum draw upon a suggestion of at least the appearance of impropriety. As one way to try to avert this appearance, Florida has instituted a public process, conducted by its State Board of Administration, which oversees the state employee pension funds, to determine which firms will represent the Board in future securities class action lawsuits.

 

According to Allison Frankel’s December 14, 2009 AmLaw Litigation Daily article (here), 31 firms submitted proposals, from which a field of 12 candidates was selected. In a January 12, 2010 update (here), Frankel reported on the outcome of the process and the names of the five law firms finally selected. Her January 12 article also reports on the many "interesting tidbits" revealed in the law firms’ public submissions, including the firms’ hourly rates and the portfolio monitoring services the firms provide for many public pension funds.

 

Though the Florida process has all the virtues of transparency, the process itself did not eliminate the phenomenon of plaintiff’s lawyers’ campaign contributions to influential public officials. According to a December 12, 2009 St. Petersburg Times article (here), in the preceding 14 months, "lawyers and others tied to the firms interested in representing the SBA have spent at least $850,000 on Florida politics." The article quoted critics who suggested that "Florida’s short list mirrors the entrenched, pay-to-play culture between public pension funds and prominent class-action law firms."

 

In other words, as the law review article cited above demonstrates, the plaintiff’s law firms are in fact making political contributions to elected officials who are in a position to influence the counsel selection process. Whether or not the contribution are made for the purpose of influencing the counsel-selection process and whether the process is in fact influenced may be questions about which there may be a diversity of views; the plaintiffs’ lawyers are quick to defend their actions.

 

But I wonder whether this is going to be one of those kinds of issues that is out there and frequently noted, but then suddenly blows up when some very specific development moves it to the front burner. This is the kind of issue that could get people very excited if a certain combination of facts and circumstance should come to light. Even absent some dramatic revelation, the questions will continue, simply because of the way it looks.

 

Indeed, given the shadow it inevitably casts over plaintiffs’ attorneys and their motivations, you do wonder why they continue these practices. More cynical minds might suggest that it is obvious why the plaintiffs lawyers don’t stop.

 

　

Since the outset of the subprime securities class action litigation wave I have tried to keep track both of the lawsuits as they are filed (refer here) and on the outcome of the cases as they are resolved, including in particular the outcome of the defendants’ motions to dismiss (refer here). But these tabulations alone don’t tell you who is winning and who is losing, or why.

 

Those questions are the subject of a thorough and interesting December 30, 2009 Bloomberg.com article by Jon Eisenberg of the Skadden Arps law firm entitled "Subprime Securities Class Action Decisions: Who’s Winning, Who’s Losing and Why?" (here).

 

Eisenberg looks at dismissal motion rulings in 16 of the cases that have reached the dismissal motions stage. (Eisenberg explains that he narrowed the pool of decisions he reviewed from the universe of all subprime and credit crisis-related dismissal motion rulings in order "to focus exclusively on subprime cases…in which plaintiffs have alleged that defendants misrepresented or omitted material facts regarding the quality of subprime loans that the defendant company was making or financing or rating.")

 

He found that out of the 16 decisions, plaintiffs’ complaints survived motions to dismiss in ten cases and failed to survive in six cases.

 

Eisenberg has a number of observations about these dismissal motion rulings. First, he noted that all seven cases that asserted claims under Sections 11 and 12 (a)(2) of the Securities Act survived motions to dismiss. Indeed, even in cases in which ’33 Act claims were combined with claims under Section 10(b) of the ’34 Act, the Section 10(b) claims survived as well. By contrast, in the nine decisions involving standalone Section 10(b) claims, the dismissal motions were denied in only three cases.

 

Although the defendants asserted a number of defenses in their dismissal motions, scienter "turns out to be the perfect predictor of outcomes across all 16 cases." If plaintiffs were not relying on claims that required pleading scienter (i.e., the ’33 Act claims) or convinced the court that the scienter allegations were sufficient, they survived the motion to dismiss. And in the Section 10(b) cases in which the plaintiffs met the standard for pleading scienter, "they also convinced the court to reject the merits of the other defenses asserted in the motion to dismiss."

 

Plaintiffs were successful in pleading scienter when relying on statements by confidential witnesses that "allegedly detail executives’ knowledge of facts inconsistent with public statement" and when relying on "reliable external sources of information," such as bankruptcy examiner’s report, as well as when relying on "market events linked with questionable internal practices and representations fundamentally at odds with a company’s core business."

 

Plaintiffs were unsuccessful in pleading scienter when the factual allegations on which the plaintiffs are relying might "easily coincide with non-fraudulent misstatements or omissions." For example allegations such as senior level positions, certifications under Sarbanes-Oxley, resignations of senior executives, normal selling by insiders, GAAP violations, restatements and even decisions by auditors to not continue as auditors were found not to create a strong inference of scienter.

 

Eisenberg found further that massive complaints do not necessarily establish scienter and often backfire on plaintiffs. Similarly, though many complaints seek to rely on confidential witnesses, confidential witness statements "do not ensure that a complaint will survive." Courts have dismissed fraud claims where "the confidential witness statements failed to show what the executives knew or how the confidential witnesses knew what the executives knew."

 

Eisenberg concludes his article with an analysis of the problem of "hindsight bias" – the tendency for people with knowledge of an outcome to exaggerate the extent to which they believe the outcome should have been predicted. The risk of hindsight bias in the subprime cases exists because of the competing narratives; that is, the plaintiffs argue that defendants were reckless in not seeing what was coming and adjusting their business practices accordingly, and defendants argue that they, along with the entire rest of the global financial marketplace, were blindsided by events "so severe, unexpected and unprecedented" that no one saw them coming.

 

"The good news for defendants," Eisenberg concludes is that at least in cases involving standalone Section 10(b) cases, "defendants’ narrative is often persuasive and courts have granted motions to dismiss because they are not convinced that defendants knew, or were reckless in not knowing, of the calamity that lay ahead."

 

Very special thanks to Jon Eisenberg for providing me with a copy of his article.

 

My own status report, as of September 2009, on the subprime and credit crisis-related securities lawsuits can be found here.

 

The FDIC has picked up where it left off at the end of 2009, with its first bank closure of the New Year. On Friday, January 8, 2010, the FDIC took control of Horizon Bank of Bellingham, Washington, for the first bank closure of 2010. While the FDIC’s continuation of its regulatory actions regarding troubled banks seems likely in the near term, what remains to be seen is whether the FDIC’s actions will include litigation against the former directors and officers of the failed banks.

 

Though the FDIC has yet to launch D&O litigation, the lawsuits may be just ahead. The FDIC is taking a series of steps clearly designed to prepare for litigation.

 

First, as reported in a January 10, 2010 article in FinCri Advisor (here), the FDIC is "subpoenaing bank officials and workers, hoping to gather evidence to use in potential litigation." By way of illustration, a recent motion filed by bank officials in connection with the bankruptcy proceedings involving Haven Trust Bancorp, the holding company for a Duluth, Georgia bank that failed in December 2008, states that certain of the officials "received subpoenas…issued by counsel to the [FDIC] regarding the FDIC’s investigation of certain matters relating to the failure of Haven Trust Bank." (The former officials’ motion sought access to the D&O insurance policy proceeds in order for the officials to be able to defend themselves.)

 

Second, as I noted in a prior post, the FDIC is sending civil demand letters to former directors and officers of failed banks. According to the FinCri Advisor article, former directors in Florida, California, Illinois, Texas and Georgia have received FDIC claims letters. According to a commentator in the article, one obvious trigger for a demand letter is the approaching expiration date of the D&O insurance policy.

 

An example of one of these demand letters is described in a January 8, 2010 Atlanta Business Chronicle article, here (registration required). The article describes a September 28, 2009 letter sent to the D&O liability insurer for Georgian Bank, an Atlanta bank that the FDIC closed on September 25, 2009. According to the article, the letter details the potential claims the FDIC might make against the bank’s former directors and officers, including allegations of "unsafe and unsound banking practices."

 

Industry experts quoted in the Atlanta Business Chronicle article say that "such letters likely have been filed with insurers by all 30 banks that have failed in Georgia since August 2008."

 

But while the FDIC is clearly pursing investigations and taking steps to try to preserve the right to try to recover D&O insurance proceeds, it "has not filed any D&O lawsuits in connection with the bank failures since the crisis began in 2008," according to an FDIC spokesman quoted in the article.

 

According to the FinCri Advisor article, "the FDIC spends about a year conducting an investigation into a failed bank before deciding whether it can pursue a claim against former directors and officers."

 

Because of the FDIC’s many continuing investigations, 2010, according to an attorney quoted in the FinCri Advisor article, "will be the year of investigation and tolling agreements." One reason for the FDIC to proceed carefully is that it doesn’t want to push cases early that may set bad precedents, which could "doom subsequent cases."

 

But though the FDIC is now proceeding cautiously, when the litigation ultimately comes, there is likely to be a lot of it. The FinCri Advisor article quotes the FDIC’s former head of litigation as saying that "about half" of the bank failures will "see some director litigation." Before all is said and done, the coming litigation "could rival the litigation that occurred in the 80s and 90s as a result of the many thrift failures."

 

Special thanks to loyal reader Henry Turner for providing me with a copy of the Haven Trust pleading and the Atlanta Business Chronicle article.

 

Another Perspective: As a continuation of my early post in which I linked to a variety of Top Ten lists, I note here the recent post on the Corporate Disclosure Alert blog (written by my law school classmate and investor advocate, Sanford Lewis) about "10 Questions of Risk Management for the New Decade" (here). Lewis contends that "far more must be done to turn the patchwork of risk management approaches into viable public policy and corporate governance solutions." The list of issues that Lewis contends should be addressed is interesting and provocative.

 

We Aren’t What We Watch – Are We?: On New Year’s Day, my hyperkinetic eldest daughter — collegiate swimmer, rugby player – who rarely sits still long enough to watch TV, announced "I think I’ll watch some college football" and she plopped herself down beside me on the couch. Unfortunately for the nascent possibility of a little father-daughter bonding, the game broadcast at that moment was in the middle of the Flomax halftime report, and the commercial had just reached the point where it advised that Flomax’s adverse side effect may include a "reduction in semen."

 

As she was leaving the room, my daughter offered the observation that at least on TV college football is clearly meant for a "different demographic."

 

Indeed. But what exactly is the intended demographic?

 

The commercials themselves suggest that the target audience consists of people who are basically worried. They are not only worried just because they have to go pee all the time. They are worried about their credit scores. They are worried that their nest eggs have shrunk. They are worried about figuring out their taxes. They are worried because their computers are too slow and because their 3G network’s coverage areas are too small.

 

So many things to worry about. Too bad for you if all you want to do is watch a little football.

 

But in the midst of all of this apprehension and fear, there is cause for hope. For the overweight, for example, Taco Bell would like to communicate the optimistic message that you can lose weight by eating fast food. (I am not making this up.)

 

If playing time alone is any measure, the most important message for our society seems to be that Taco Bell now has a five-layer burrito for 89 cents. For those of you thinking, "No Way!" — you have to understand that they are not offering to pay you 89 cents to eat that thing. They are expecting you to pay them. Seriously. As my son said, "Is that supposed to be food?"

 

Perhaps (I can hope optimistically) we are all in the wrong demographic. How much more fortunate are the viewers of the UK premier league soccer games. Since the game clock never stops, there are no commercial interruptions – which obviously is the reason that soccer has never been allowed to catch on commercially in the U.S. Of course, the soccer games do have halftimes, which does hold open the theoretical possibility for Flomax halftime reports.

　

According to its January 6, 2010 press release (here), the U.S. Equal Employment Commission announced that near record numbers of workplace discrimination charges were filed with the agency in the fiscal year ending September 30, 2009. As reflected in the agency’s statistical presentation, there were 93,277 charges filed in FY 2009, which is the second-highest number the agency has recorded.

 

The highest annual number filings occurred in FY 2008, when 95,402 charges were filed. The FY 2009 filing levels were about 2.2% below the FY 2008 levels, but still well above any prior year. After 2008, the next closest year in terms of filing activity was FY 2002 (during the prior economic downturn), when there were 84,442 filings.

 

Consistent with recent historical trends, the most frequently alleged types of discrimination are race (36%), retaliation (36%) and sex-based discrimination. (A single charge filing may allege multiple types of discrimination.) Allegations based on age-based disability (up about 10%), religion (up 3%) and/or national origin (up 5%) hit record highs. Allegations of age-based discrimination reached the second-highest level ever.

 

The EEOC also reported that through its enforcement, mediation and litigation programs, the agency "recovered more than $376 million in monetary relief for thousands of discrimination victims."

 

The EEOC’s press release states that the "near-historic level of total discrimination charge filings [in FY 2009] may be due to multiple factors," including "greater accessibility of the EEOC to the public, economic conditions, increased diversity and demographic shifts in the labor force, [and] employees’ greater awareness of their rights under law."

 

The sustained record level of EEOC charge filings during the fiscal years 2008 and 2009 should be a matter of concern for every employer. These figures not only underscore the need for every employer to adopt and implement best employment practices, they also highlight the need for every employer to procure employment practices insurance as a critical and indispensible part of their insurance program.

 

The EEOC’s suggestion that the heightened level of filings of individual charges is due in part to the economic conditions and to employees’ greater awareness of their rights also suggests that, as the current economic downturn drags on, the elevated filing levels could continue for some time to come.

 

A January 6, 2010 National Law Journal article about the EEOC’s statistical release can be found here (registration required).

 

Another Securities Class Action Trial: We are all awaiting the outcome of the long running Vivendi trial, which is just wrapping up this week in the Southern District of New York. But while all eyes were on the Vivendi trial, few of us noted that another securities class action trial was going on in the Central District of California, in the American Mutual Funds Fee Litigation.

 

Kudos to Adam Savett of the Securities Litigation Watch blog, who first brought this development to my attention in his blog post here.

 

The case apparently went forward as a bench trial this past summer before Judge Gary Feess, whose December 28, 2009 post-trial Findings of Fact and Conclusions of Law can be found here. Essentially, the plaintiffs alleged that the defendants had violated the federal securities laws by charging excessive advisory and distribution fees. Judge Feess concluded that the plaintiffs had not sustained their burden of proving that the fees were so "disproportionately large" that they bore "no reasonable relationship" to the services, as the plaintiffs were required to show in order to prevail.

 

As the Securities Litigation Watch details here, there have now been 22 post-1996 securities class action lawsuit cases that have gone to trial (not counting Vivendi), eight of which involved post-PSLRA conduct and that have actually gone to verdict. Taking into account post-verdict motions and appeals, the current scoreboard on these post-PSLRA lawsuit verdicts (according to the SLW’s data) now reads: Defendants 5, Plaintiffs 3. (Soon to be updated, I suppose, after the Vivendi jury reaches a verdict.)

 

Andrew Longstreth’s January 6, 2009 American Lawyer article about the American Mutual Funds Fee Litigation verdict can be found here.

 

In a January 4, 2010 order (here), Southern District of Texas Judge Nancy Atlas held that an insurance broker’s Professional Liability Insurance insurer must defend the broker and one of its employees in connection with claims arising out of the Stanford Group fraud.

 

Background

The Bowen Miclette & Britt insurance brokerage and one of its employees (Winter) have been named as defendants in several civil actions filed following the revelations of the Stanford Group fraud. The plaintiffs in the cases had deposited money in or invested in Certificates of Deposit issued by the Stanford International Bank (SIB).

 

The plaintiffs in the underlying lawsuits alleged that the brokerage provided the Stanford Group with "safety and soundness letters" that Stanford used in marketing. Among other things, the letters allegedly asserted that SIB was "insured by various Lloyd’s insurance policies" and that SIB had "qualified" for the Lloyd’s policies.

 

The defendants sought to have their insurer under the brokerage’s Professional Liability Insurance policy defend them in the underlying actions. The insurer denied coverage, and in July 2009, the insurer initiated an action against the brokerage and Winter in the Southern District of Texas, seeking a judicial declaration that there was no coverage under the policy for the claims. The defendants counterclaimed, alleging breach of contract and seeking a judicial declaration of coverage. The parties filed cross motions for summary judgment.

 

The January 4 Order

In her January 4 order, Judge Atlas denied the insurer’s summary judgment motion and granted the defendants’ motions, ruling that the allegations in the complaint gave rise to a duty for the insurer to defend. Judge Atlas’s ruling was without prejudice as to the duty to indemnify, the issues with respect to which she held were not yet justiciable because the underlying actions remain pending.

 

Judge Atlas first concluded that the allegations in the underlying cases about the defendants’ provisions of the "safety and soundness letters" were claims for "Professional Services" within the meaning of the policy.

 

The insurer argued that coverage under the policy nevertheless was precluded by the policy’s securities exclusion, which excluded coverage for any claim "based upon or arising out of any violation or alleged violation" of federal or securities laws. The insurer argued that the underlying complaints alleged securities violations and therefore the exclusion precluded coverage.

 

Judge Atlas agreed that the underlying complaints alleged violations of the securities laws, but noted that the complaints also "alternatively asserted negligence-based claims" that were not within the securities exclusion, and therefore the insurer owed the defendants a duty to defend all claims in the underlying lawsuit.

 

Winter had also sought to have the insurer defend him. Winter was an employee of the brokerage who allegedly had provided and signed the "safety and soundness" letters. The plaintiffs in the underlying case alleged that Winter had not disclosed that he was also a director of SIB.

 

Judge Atlas found that "in none of the three underlying lawsuits are there allegations against Winter in his capacity as a member of SIB’s Board or in any capacity other than an employee of BMB." She found that the allegations against him are based on professional services Winter provided in his capacity as a BMB employee and that the insurer owed him a duty to defend.

 

Discussion

High-profile cases, particularly those charged with headline grabbing fraud allegations, can sometimes be difficult from an insurance perspective. Insurers may well feel that the kinds of things alleged are not the kinds of things for which they undertook to provide insurance. On the other hand, at the outset of a case, the allegations are as yet unproven. And the defendants dragged into a high profile cases need to be able to defend themselves.

 

There may or may not ultimately be indemnity coverage under the policy for the claims against BMB and Winter. But in the meantime, the defendants – who are insureds under the policy – face very serious allegations for which they would likely have trouble defending themselves if there were no insurance available. Unfortunately, in addition to having to defend themselves against very serious allegations in the underlying cases, they also had to deal with a lawsuit brought against them by the insurer from whom they were hoping to obtain a defense.

 

As Judge Atlas found, the complaint contained allegations that potentially come within the policy’s coverage, and so the insurer was obliged to provide a defense. If the defendants (and their insurer) are fortunate, their defense will succeed and the need to address the indemnity issues will never arise.

　

In an earlier post (here), I discussed legislation that Senator Arlen Specter introduced in July 2009 to legislatively overturn the U.S. Supreme Court’s decision in Stoneridge and allow private actions for aiding and abetting liability. Though this proposed legislation is a matter for serious concern, there was always the possibility that given everything that Congress has on its plate, this particular initiative might not make the cut.

 

There is, however, some significant likelihood that some form of financial reform legislation eventually will be enacted into law. Indeed, as discussed here, the House of Representatives has already passed its version of financial reform legislation.

 

The Senate has yet to act, but among the leading proposed Senate financial reform bills under consideration is Senator Chris Dodd’s proposed "Restoring American Financial Stability Act of 2009" (here).

 

As noted in a January 4, 2009 memo by K. Stewart Evans, Jr. of the Pepper Hamilton law firm (here), the bill contains a provision "hidden on page 795 of 1,136" that amends the ’34 Act to provide liability for any person that "knowingly or recklessly provides substantial assistance" to a person whose conduct violates the securities laws. Evans notes further that the provision would impose liability without the claimant having to even prove that reliance on the secondary actors’ statements.

 

My concerns about the possible imposition of aiding and abetting liability are reflected in my prior post. Evans has his own concerns, arguing that the proposed amendment would be "dangerous and destructive to American business."

 

But regardless of the merits of the proposal, the fact that it proposed amendment creating private aiding and abetting liability is no longer just its own free-floating suggestion, but has now been incorporated into a comprehensive piece of financial reform legislation does seem to suggest that the proposal could be that much closer to being enacted into law.

 

Of course, there is still a long way to go before we know whether or not the Senate will get around to enacting any financial reform legislation, much less what form that legislation might ultimately take. In addition, any bill passed by the Senate would have to be reconciled with the House’s bill, so what might finally emerge is at the point anybody’s guess.

 

But all of that said, the incorporation of the aiding and abetting provision into Dodd’s proposed Senate bill does seem to suggest the possibility that the aiding and abetting initiative will not simply fall by the wayside as the proposed legislation goes forward. Rather, at this point it looks like somebody is going to have to affirmatively knock the proposal out to prevent it from remaining in.

 

Dismissal of BAE Bribery Civil Suit Affirmed: As I have noted in prior posts (most recently here), allegations of bribery in connection with BAE’s fighter aircraft contract with Saudi Arabia – and in particular the UK’s election not to investigate the allegations due to national security concerns — not only have proven highly controversial, but also has generated follow on civil litigation.

 

As discussed in a recent post on the FCPA Blog (here), on December 29, 2009, the Court of Appeals for the D.C. Circuit affirmed the lower court’s dismissal of the derivative lawsuit that had been filed against BAE, as nominal defendant, and certain of its directors and offices Judge Edwards, writing for the court found that under the 1843 English case of Foss v. Harbottle, 2 Hare 461, 67 E.R. 189, "the company, not a shareholder, is the proper plaintiff in a suit seeking redress for wrongs allegedly committed against the company."  The court further found that the BAE case did not come within any exceptions to the rule.

 

And Speaking of U.S. Lawsuits Against Foreign Companies: According to a January 6, 2010 Law.com article by Andrew Longstreth (here), the three-month long securities class action jury trial against Vivendi and certain of its directors and officers is drawing to a close. According to the article, the parties are now completing their closing statements, and the case will be submitted to the jury later this week.

 

Look for A Lot More Cases Like This in 2010: Though thecomplaint was actually filed in the Northern District of Georgia on December 31, 2009, the plaintiffs’ lawyer press release is dated January 4, 2010, and the investor lawsuit involving a failed bank make prefigure many more lawsuits of the same kind in the months ahead in 2010.

 

The lawsuit arises out of the failure of Haven Trust Bancorp, whose operating banking subsidiary was taken over by the FDIC on December 12, 2008. On February 23, 2009, the holding company filed for bankruptcy. The defendants include certain former officers of the holding company and the bank. The plaintiffs allege that the defendants misrepresented the bank’s financial condition and lending practices in order to induce the plaintiff investors to invest in the holding company. The plaintiffs assert claims under the federal securities laws, Georgia securities laws, as well as certain common law claims.

 

 In light of the 140 banks that failed during 2009, there undoubtedly will be more claims like this to come, both filed on behalf of investors and on behalf of the FDIC as receiver of the failed institutions.

 

Among perennial D&O insurance issues are questions whether policy coverage is available for defense expenses incurred in connection with investigative costs, subpoenas and the costs associated with special litigation committees. A December 30, 2009 decision in the coverage lawsuit brought by MBIA against its D&O insurers considered all of these recurring issues, and reached some interesting decisions.

 

Background

For the policy period February 15, 2004 to August 15, 2005, MBIA carried $30 million of D&O insurance, arranged in a primary layer of $15 million and an additional $15 million layer of excess insurance.

 

In 2001, prior to the policy period, the SEC had issued an Order Directing Private Investigation in connection with certain of MBIA’s loss mitigation insurance products. In November and December 2004, the SEC issues subpoenas to MBIA concerning "nontraditional products." The New York Attorney General also issued subpoenas in November and December 2003 regarding nontraditional products. Both the SEC and the NYAG issues additional subpoenas in March 2005. In spring 2005, MBIA, because of concerns about the cumulative impact in the marketplace, asked regulators to forbear from issuing additional subpoenas and agreed to comply voluntarily with informal document requests.

 

In October 2005, MBIA submitted an offer of settlement to the SEC in connection with certain specific transactions. In the offer of settlement, MBIA undertook to retain an independent consultant to review MBIA’s accounting for the transactions. In January 2007, the SEC entered a Cease and Desist Order and the NYAG entered an Assurance of Discontinuance, both of which documents largely incorporated the company’s prior offer of settlement. Thereafter the company hired a consultant to undertake the proposed review.

 

In additional to these regulatory investigations, the company, as nominal defendant, was also sued in two derivative lawsuits, as a result of which the company organized a Special Litigation Committee. An outside law firm "represented the SLC," and according to MBIA, also "represented MBIA through its representation of the SLC." The derivative lawsuits were later dismissed.

 

MBIA claimed that it has spent $29.5 million in defending or responding to the regulatory investigations and the follow-on litigation. The primary insurer had reimbursed $6.4 million but disputed that it was obliged to reimburse other amount incurred. MBIA filed an action against the two insurers alleging breach of contract and seeking a judicial declaration that the insurers were obligated to reimburse the company for legal fees and other costs associated with the regulatory investigations and the derivative actions. The parties filed cross motions for summary judgment.

 

The December 30 Ruling

The defendant insurance companies had disputed coverage for the investigative items, in part of the grounds that the matters in connection with which the defense costs were incurred were not "securities claims" within the meaning of the primary policy.

 

The primary policy defined a "securities claim as "a formal or informal administrative or regulatory proceeding or inquiry commenced by the filing of a notice of charges, formal or informal investigative order or similar document" that "in whole or in part, is based upon, arises from or is in consequence of the purchase or sale of, or offer to purchase or sell, any securities issued by" the company.

 

In his December 30 Order, Southern District of New York Judge Richard M. Berman reviewed each category of defense expense separately.

 

Judge Berman first considered the defendants’ arguments that there was no coverage for fees incurred in responding to the NYAG’s subpoenas because the subpoenas were not a proceeding commenced by the filing of an "order or similar document." Judge Berman first found that the subpoena, which literally "commanded" compliance, was an "order" within the "common understanding" of "an ordinary businessman." He found further than even if it were not an "order" it was "sufficiently a ‘similar document’ that triggers coverage under the policy."

 

Judge Berman then considered the certain aspects of the SEC’s investigation, which the defendant insurers contended pertained to "traditional reinsurance" rather loss mitigation products. The defendants argued that the SEC’s 2001 Order Directing Private Investigation pertained only to the investigation of loss mitigation products, and so the SEC’s investigation of traditional reinsurance transactions was not pursuant to an "order."

 

Judge Berman rejected this argument among other reasons on the grounds that "Defendants have offered no persuasive evidence to support their argument that the SEC ran a series of concurrent investigations."

 

The defendant insurers also argued that the NYAG’s oral requests for documents pertaining to traditional reinsurance transactions were not pursuant to an "order." Judge Berman found that "defendants point to no persuasive evidence to suggest that the NYAG’s request for documents" relating to the reinsurance transactions "were part of separate investigations."

 

MBIA had also sought reimbursement for its costs incurred in connection with the independent consultant. Judge Berman found that there was no coverage under the policy for the costs associated with the independent consultant because MBIA "did not permit Defendants to effectively associate with it" because it did not inform the insurers about the independent consultant (and arguably did not get the insurers consent to agree to the independent consultant) "until at least ten months after it had committed to retaining" the independent consultant.

 

Finally, Judge Berman found that there was coverage under the policy for the fees incurred by counsel for the special litigation committee. MBIA had argued that the law firm had represented MBIA through its representation of the SLC. The carriers argued that the SLC was, by definition, independent, and therefore its counsel could not have represented the company.

 

In rejecting the insurers’ arguments, Judge Berman found that the SLC’s counsel had appeared as counsel for MBIA in the derivative actions and had filed pleading in the actions on behalf of MBIA. But even assuming that the law firm represented only the SLC, Judge Berman found there would still be coverage, because the SLC was composed of individual members of MBIA’s board who were acting pursuant to delegated authority from the board. Judge Berman noted that "the SLC could readily reach independent decisions without being independent of [MBIA]."

 

Discussion

The questions whether the kinds of defense fees in dispute in this case will be covered is often going to be a factor both of the policy language at issue and the specific facts involved. To a certain extent, Judge Berman’s decision may simply be a reflection with a very distinctive set of facts. In particular, it is a rather unusual feature of this set of circumstances that all of the disputed legal fees were incurred after the SEC had entered a formal order of investigation. Given that, it seems as if the only remaining dispute was whether or not the other investigative actions of the regulators were or were not related to the Order.

 

Judge Berman’s finding of coverage for the SLC legal counsel’s expense may also be a reflection of the fact that the law firm also entered an appearance on the company’s behalf in the derivative suit. These circumstances are not always present in connection with disputes over SLC’s counsel’s fees (although that fact certainly does not answer the question of the SLC’s counsel’s fees incurred prior to making an appearance in the derivative suit.)

 

But even though the decision may be a reflection of the particular facts involved, Judge Berman’s ruling nevertheless is significant as an example where a court found coverage for fees incurred with regulatory subpoenas, oral document requests, and special litigation counsel fees.

 

In particular, Judge Berman’s finding that, at least under these circumstances, the policy covered oral document requests and that the policy would have covered the SLC counsel’s defense even if it had not been counsel of record for the company in the derivative suit are particularly noteworthy.

 

Judge Berman’s finding the policy covered the SLC counsel’s expense because the SLC, though independent, was a committee of the Board operating pursuant to the Board’s delegated authority, is particularly noteworthy, and may represent a basis on which other insureds may seek to argue for coverage for SLC counsel fees.

 

This interesting case combines a number of frequently disputed issues. I expect that many readers may have reactions to this ruling and I would be very interested in hearing readers’ thoughts.

 

Securities class action lawsuit filings were "down sharply" according to the annual study of securities class action litigation released jointly today by the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research. The full report can be found here and the January 5, 2010 press release accompanying the report can be found here.

 

According to the study, which found that there were a total of 169 securities class action lawsuit filings through December 21, 2009, the 2009 filings were both 24% below the 223 filings in 2008 and 14% below the annual average of 197 filings during the years 1997 through 2008.

 

The Stanford study reports a lower lawsuit count than previously published studies of the 2009 securities lawsuit filings, including the prior report of NERA Economic Consulting (refer here) as well as my own prior analysis (refer here). I discuss these differences below.

 

The relative decline in the number of lawsuit filings in 2009 compared to prior years, according to the Stanford report, is attributable in part to the decline in subprime and credit crisis related filings. Among other things, the report notes that there were only 17 subprime and credit crisis related lawsuits in the second half of 2009.

 

The press release accompanying the report also quotes Dr. John Gould of Cornerstone Research as saying that the observed decline is consistent with the decline in stock market volatility during 2009, noting that after increasing during the preceding two years, volatility declined both in the first and second halves of 2009.

 

The study also details the large number of filings that were characterized by "a substantial lag between the end of the class period and the filing" date, a phenomenon about which I written extensively in the past (most recently here). The report notes that the percentage of filings with a lag of more than a year has increased steadily from 5% in 2005 to a historical high of 18% in 2009.

 

According to the study, historically, class action lawsuit with longer filing lags "have been dismissed at a higher rate than class actions with shorter filings lags," at a rate of 55% for the one-year lag filings versus 42% for filings with a lag between one year and six months, and 36% with a lag of less than six months.

 

The study also notes that the lag filings are largely the work of the Coughlin Stoia law firm, which was "involved in 63% of the filings with lags longer than six months and 58% of filings with lags longer than a year." This activity levels compares to the firms involvement in 39% of all filings and 29 percent of filings with lags shorter than six months.

 

The press release quotes Stanford Law Professor Joseph Grundfest as saying, with respect to the lag filings, that the belated filings suggest that "plaintiffs are trying to fill the litigation pipeline by bringing older lawsuits that weren’t attractive enough to file while the firms were busy pursuing financial sector claims," adding that "these lawsuits are more likely to be dismissed and can therefore be characterized as lower quality claims" and that the filings may "reflect factors idiosyncratic to one large plaintiff firm’s strategy, and have little to do with larger market forces."

 

In addition to tracking the overall number of filings, the report also notes the number of lawsuits filed against unique issuers, which declined even more sharply than the overall number of filings. Thus, while the report found that overall filings declined by 24% between 2008 and 2009, the total number of unique issuers involved in securities lawsuits decreased by 32 percent. The difference in the attributable to the number of multiple filings against the same target, as well as the relatively large number of filings against private companies and other non-exchange traded entities.

 

The report further notes that of all exchange traded companies, 1.8 percent were defendants in federal securities class action lawsuits filed in 2009 compared to 2.6% in 2008 and compared to a 2.4% annual average for the 12 years ending December 2008.

 

The number of lawsuits against foreign issuers also declined in 2009, according to the study. After peaking at 16.4% of all filings in 2007, the percentage of filings against foreign issuers declined to 12.4% in 2009. The study attributes the relative decline to the falling off of the credit crisis lawsuits, because so many of the suits against foreign companies were related to the subprime and credit crisis.

 

Finally, the decline in 2009 credit crisis filings was also associated with a decline in market capitalization losses in 2009. The disclosure dollar loss attributable to 2009 class actions was $83 billion, a 62 percent decrease from 2008.

 

Some Thoughts about the Numbers: As noted above, the Stanford study’s 2009 lawsuit count varies from previously published figures, including my own. NERA reported 235 filings in 2009, and I reported 189 (I discuss the difference between my count and NERA’s in my prior post, here), compared to the 169 reported by Stanford.

 

I know that part of the explanation lies in the fact that the Stanford report cutoff at December 21, 2009, which meant that the Stanford study missed at least three more lawsuits filed before year end.

 

The Stanford study also counts multiple filings related to the same allegation against the same companies only once. This provides a partial explanation for the differences between the Stanford study and the NERA study, which separately counts separate actions in separate circuits unless and until the lawsuits are later consolidated.

 

Another difference between the studies may be the fact that the NERA study reported a projected year end number, as the result of an extrapolation from filings through mid-December. Though the Stanford study ended prior to year end, it did not incorporate any extrapolation for cases filed after the cutoff date and before year end.

 

All of these factors clearly are relevant but even collectively they don’t seem sufficient to explain the entire difference. Of course, another factor may simply be differences in information, but given that the plaintiffs’ lawyers put out press releases when they file lawsuits, the information differences likely account for only a small part of the differences in lawsuit counts.

 

All of this underscores a point that I made at length in connection with my own study of the 2009 filings, which is that readers would benefit enormously from knowing more about what protocols the various study publishers use when the are deciding what "counts."

 

The Stanford analysis is certainly easier to decode in this respect that other reports since the Stanford Clearinghouse publishes its list of lawsuits on its website — for free, which is a tremendous public service for which all of us should be grateful. But merely knowing which cases were put on the list does not tell us why those cases were included, nor does it tell us what other cases might have been omitted and why. (Indeed, the reason I continue to do my own count and analysis every year, even though Stanford publishes its own list for free on the web, is the uncertainty about what the list does and does not include.)

 

The Stanford report also gets high marks for stating right on its cover what it is included in its "research sample," which is very helpful and very commendable. But even taking this very explicit information into account, it still seems like there must be more going on that would explain the differences between the various reports.

 

Here are some illustrations of questions that would be helpful to know: Are securities lawsuits filed in state courts included? Are merger objection suits included? Are proxy solicitation misrepresentation cases included? How about lawsuits filed separately on behalf of equity shareholders and bondholders – one lawsuit or two? How about lawsuits that only allege state securities law violations? What kinds of cases are omitted from the count? What other sorting criteria are used?

 

The more of this type of information that readers are provided, the more helpful the published reports would be for readers. The approach that would be most helpful to readers would be for the reports to identify the way that their counting protocols differ from those used by other studies, in order to help readers understand the differences.

 

2009 was an eventful year, with significant developments across a wide variety of economic, financial, judicial and legislative fronts. With the arrival of the New Year, it seems appropriate to take a look back at the past year’s most significant D&O developments.

 

So, in the finest tradition of year-end punditry, here is The D&O Diary’s list of The Top Ten D&O Stories of 2009.

 

1. Credit Crisis Litigation Wave Wanes: The subprime and credit crisis-related litigation wave that began in February 2007 continued to surge as 2009 began, but as the year progressed, the long-running wave finally seemed to lose momentum. During the wave’s nearly three-year duration, there were by my count 205 subprime and credit crisis-related securities class action lawsuits filed, 62 of which were filed in 2009, primarily during the first half of the year.

 

NERA’s annual securities litigation survey noted that during 2008, over 40% of all filings had involved credit crisis cases, but that this proportion decreased to "around 30%" in 2009, and "by the second half of the year, credit crisis filings began to slow down." Nevertheless, the NERA report also noted that "total levels of filings have remained relatively high," as "standard cases appear to have made up much of the decrease in filings related to a slowdown in credit crisis litigation" during the second half of 2009.

 

2. Plaintiffs’ Lawyers Turn to "Backburnered" Cases: One of the main drivers in the return to the filing of "standard cases" in the second half of 2009 was belated filing of cases to which the plaintiffs’ lawyers returned after the credit crisis cases died down. Many of the cases during the second half of 2009 were filed long after the purported class period cut off date, a phenomenon I noted most recently here. According to public statements of one leading plaintiffs’ attorney, the plaintiffs’ lawyers are going back to cases that they have "backburnered for two years."

 

By my count, 22 of the 94 securities class action lawsuits in the second half of the year were filed more than a year after the proposed class period cut-off date. Indeed, NERA noted with respect to the cases that were filed in the second half of 2009 that the average time to filing from the end of the class period to the filing date had grown to 279 days, compared to historical averages of 161 days, and only 69% of the cases in the second half of the year were filed within one year of the end of the class period, compared to historical averages of 84%.

 

The plaintiffs’ lawyers efforts to work off the backlog that developed while they were concentrating on the credit crisis cases poses a challenge for D&O underwriters, because it means that companies with long distant stock price drops could still find themselves getting dragged into securities litigation long after the event. As a result, it is hard for underwriters to be sure when a company is "out of the woods."

 

Moreover, the arrival of the belated filings still seems to be going strong, as a number of the new securities suits filed in December 2009 presenting these same backlog characteristics. It seems probable that this trend will continue, at least for the short run, as we head into 2010.

 

3. The Stockpile of Subprime and Credit Crisis Cases Slowly Makes Its Way through the System: The number of subprime and credit crisis-related filings may finally have slowed, but due to this nearly three-year onslaught of new cases, there is a stockpile of accumulated lawsuits that still are just beginning to be resolved.

 

As NERA noted in its annual securities litigation survey, over 80% of the subprime and credit crisis cases remain pending. About 15% of the cases have been dismissed, and only about 4% have been settled. This proportion of settlements to dismissals is consistent with historical experience, in which cases are more likely to be dismissed than to settle in the first few years after filing.

 

As reflected in my own running tally of subprime and credit crisis-related lawsuit dismissal motion rulings (here), there have been 28 dismissal motion rulings granted (eleven with prejudice) — although in three cases in which dismissal motions were initially granted, the subsequently filed amended complaint survived renewed dismissal motions. The three cases in which the renewed motions were denied include the Washington Mutual and PMI Group cases (about which refer here and here). One dismissal (in the NovaStar Financial case) has already withstood appeal.

 

On the other hand, dismissal motions have been denied in whole or in part in 14 subprime and credit crisis-related cases, including several high profile cases, such as the cases involving New Century (here), Countrywide (here) and Accredited Home Lenders (here).

 

Though only a small number of subprime and credit crisis cases have settled, the settlements to date are impressive. The settlements include not only the outsized Merrill Lynch settlements (about which refer here), but also include significant settlements in other cases as well, including the Beazer Homes and Accredited Home Lenders cases.

 

With only a small percentage of these cases yet resolved, it is clear that the resolution of the subprime and credit-crisis related cases will remain an important part of the litigation landscape for years to come.

 

4. Bank Failures Mount: In a troublesome development with many worrisome implications, 140 lending institutions failed in 2009, by far the largest number of annual bank closures since the end of the S&L crisis. (By way of comparison, in 2008, there were 25 bank closures.) The number of bank failures increased as the year progressed, as 95 of the 140 bank failures (or roughly 68%) took place in the second half of 2009.

 

Though the bank closures were spread across 32 states, more than half of 2009 failed banks were concentrated in just four states: Georgia (25), Illinois (21), California (17) and Florida (14).

 

Despite the mounting numbers of bank failures, there has not yet been significant amounts of D&O litigation involving former directors and officers of the failed institutions. The are significant signs, however, that significant amounts of failed bank litigation ahead. Not only have investors and even employees of some failed banks filed lawsuits (about which refer here), but the FDIC has also shown a commitment to preserving its prerogative to assert claims against the directors and officers of failed banks. The FDIC has also begun to file notices of claims, in an attempt to preserve insurance against which to recover for claims against the directors and officers.

 

The FDIC’s latest quarterly banking report shows that it reckons there were 552 "problem" institutions as of September 30, 2009, up from just 416 at the end of 2Q09. With the numbers of both failed and troubled banks growing, and with the signs already pointing toward increased litigation involving these institutions, it seems likely that failed bank litigation will be a significant part of D&O litigation activity in 2010.

 

5. Business Bankruptcies Swell: According to the latest quarterly report of the Administrative Office of the U.S. Courts (about which refer here), business bankruptcy filings were up 52 percent in the 12 months ended September 30, 2009. The number of business-related bankruptcy filings has increased in the 12-month period preceding the quarter end of each quarter since the end of the third quarter 2006. The highest monthly total was in April 2009, when there were 5,621 business-related bankruptcies, compared to 4,853 in September 2009.

 

The possibility of a bankruptcy filing remains a significant threat for financially troubled businesses. As a general rule, D&O claims follow the filing of a bankruptcy petition.

 

Bankruptcy-related claims present a host of complications, not least of which is the intricate way that D&O insurance policies respond in the bankruptcy context. One recent development illustrating the difficulties that can arise in the bankruptcy context was the July 2009 decision in the Visitalk case (about which refer here), in which the Ninth Circuit upheld the carriers’ denial of coverage for a lawsuit brought be a company as debtor in possession against former directors and officers of the company, as a result of the policies insured vs. insured exclusion.

 

The likelihood of further business bankruptcies, with the prospect of related D&O claims, suggests that these kinds of coverage complications will appear frequently during 2010.

　

6. Rising Derivative Lawsuit Settlements: Threaten Increased Excess Side A Losses: The $118 million settlement in August 2009 of the Broadcom options backdating-related derivative lawsuit is the latest in a series of massive derivative lawsuit settlements. But perhaps even more significantly from the D&O insurance industry’s perspective, the Broadcom settlement appears to be the first instance where Excess Side A insurers were called upon outside of the insolvency context to contribute significantly toward settlement.

 

As detailed in greater length here, Broadcom’s Excess Side A insurers contributed $40 million toward the $118 million settlement. If nothing else, the settlement certainly underscores the value to companies (and their directors and officers) of the Excess Side A product, even outside the insolvency context.

 

The Broadcom settlement also represents a significant development for D&O insurers, who up until now have enjoyed the opportunity to offer Excess Side A insurance in a relatively low cost environment, particularly outside of the insolvency context. The Broadcom settlement highlights the potential for Excess Side A insurers to sustain significant losses on this product. The increasing incidence mega settlements, along with the growing numbers of business insolvencies, underscore the growing possibility for these kinds of losses.

　

7. Ponzi Schemes Emerge, Lawsuits Follow: The dramatic December 2008 revelation of Bernard Madoff’s massive Ponzi scheme proved to be only the first in a series of Ponzi scheme disclosures. According to a December 29, 2009 AP story (here), more than 150 Ponzi schemes collapsed in 2009, compared to "only" 40 in 2008. Among others, the schemes revealed in 2009 included the alleged Stanford Financial Group fraud and the alleged fraud of disbarred Florida attorney Scott Rothstein.

 

The one inevitable product of these disclosures has been the subsequent emergence of related litigation. The Madoff scandal along is its own litigation phenomenon. Indeed, the list of just the Madoff-related lawsuits – most of which were filed during 2009 – runs to over 25 pages. The Stanford Financial scandal also generated its own mass of litigation, beginning shortly after the fraud was revealed in February 2009. Many of the other Ponzi schemes have also generated their own burst of related litigation activity.

 

All of this litigation has produced a flood of claims activity for insurers. To be sure, many of these claims are more likely to trigger losses under E&O or even Fiduciary liability policies, rather than D&O policies. However, D&O insurance is implicated in a number of these suits, and the sheer claims volume as well as the accumulating costs of defense undoubtedly will adversely affect the results of D&O (and E&O) insurers for some time to come.

 

8. Supreme Court Grants Cert in Two Securities Cases: There was a time not too long ago when the U.S. Supreme Court only rarely took up securities lawsuit appeals. But in recent years, securities cases have become increasingly common on the Supreme Court’s docket. Just within the last couple of terms, the Court has handed down the Tellabs and Stoneridge cases (about which refer here and here).

 

Even with these recent developments, it remains noteworthy when the Supreme Court agrees to hear securities related cases, and for that reason it is significant that during 2009 the Supreme Court agreed to hear the appeals of two different securities suits. These two cases potentially could have a material impact on securities litigation procedure and jurisdiction.

 

First, in May 2009, the Supreme Court granted Merck’s petition for a writ of certiorari in the securities class action relating to the company’s disclosures about Vioxx. The Supreme Court will in this case address the question of what is required to establish "inquiry notice" sufficient to trigger the running of the two-year statute of limitations for private securities suits under the ’34 Act. Background on the Merck case can be found here.

 

Second, in November 2009, the Supreme Court granted cert in the National Australia Bank case. As a result of taking the case, the Supreme Court is likely to confront generally the question of extraterritorial application of the U.S. securities laws and will address specifically the question of when U.S. court properly can exercise jurisdiction over the claims of so-called "f-cubed" claimants (that is, foreign investors who bought their shares in foreign-domiciled companies on foreign exchanges). Background on the NAB case can be found here.

 

Both of these cases are likely to be decided during 2010. The Supreme Court heard argument in the Merck case in late November and it will likely hear argument in the NAB case during 2010. These cases potentially could have a significant impact on many securities lawsuits. The Merck case could affect frequently recurring statute of limitations issues and the NAB case could affect jurisdictional issues, and perhaps other concerns, in cases involving foreign companies (though pending Congressional initiatives could wind up superseding the Court on the jurisdiction question, about which see below).

 

While the outcome of these cases remains to be seen, the very fact of the Supreme Court’s involvement makes these cases significant. The anticipated rulings likely will represent among the more significant developments in 2010.

 

9. Congress Tackles Financial Reform: As a result of the political and financial events of the past two years, Congress is now poised to address a host of issues affecting both the financial markets and the securities laws, and some of the Congressional initiatives commenced in 2009 likely will have a significant impact on securities litigation.

 

The House of Representatives has already approved "The Wall Street Reform and Consumer Protection Act of 2009" H.R. 4173 (here), a sprawling 1279-page Bill that would institute a number of reforms that could have dramatic impact on the financial services industry.

 

As I detailed in a prior post (here), the Act also incorporates a number of provisions that could significantly affect securities litigation. Among other things, the Act provides a statutory standard for extraterritorial jurisdiction of the securities laws in certain circumstances. The Act also clarifies the pleading standard applicable to private securities lawsuits against the credit rating agencies. The Act would also significantly increase the SEC’s funding.

 

The House Bill must now be reconciled with several financial reform proposals pending in the Senate. Among other competing Senate initiatives are two bills introduced by Senator Arlen Specter.

 

The first of these, "The Liability for Aiding and Abetting Securities Violations Act of 2009," S. 1551 (here), would legislatively overturn Stoneridge and allow private securities suits for aiding and abetting claims. (Refer here for a discussion of this Bill.)

 

The second of the bills, "The Notice Pleading Restoration Act of 2009," S. 1504 (here, would legislatively overturn the Iqbal case and set aside the "facial plausibility" pleading requirement. (Refer here for a discussion of this Bill.)
 

 

While the legislative proposals are likely to go through many changes before financial reform legislation finally is enacted, these initiatives suggest that whatever finally becomes law will likely include provisions that could significantly impact securities litigation in the years ahead. It seems probably that Congress will enact financial reform legislation in some form during 2010, and so these Congressional initiatives could prove to be among next year’s top stories as well.

 

10. Significant D&O Exposures Emerge Outside the United States: For many years, the increasing threat of significant D&O exposures outside the United States has been a recurring theme amongst D&O insurance professionals. But in 2009, there were several significant developments demonstrating that D&O exposures outside the U.S. are no longer merely theoretical possibilities.

 

Perhaps the most significant developments in that regard are the two December 2009 rulings by Ontario Superior Court Justice Katherine van Rensberg allowing the securities lawsuit pending against IMAX and certain of its directors and officers to go forward, and certifying a global class of investors on whose behalf the case will now proceed. Legislation permitting this type of lawsuit in Ontario had been enacted several years before, but the IMAX case represented the first instance in which a lawsuit filed under the relatively new statutory provisions was allowed to proceed, as discussed at greater length here.

 

Though the IMAX case is still only in its earliest stages, a separate development in the liability case filed in Germany against certain directors and officers of Siemens underscores the fact that lawsuits outside the U.S. are potentially capable of producing massive D&O insurance losses.

 

As discussed at greater length here, in December 2009, Siemens reached a 100 million euro settlement with its D&O insurers in connection with claims arising from the company’s bribery scandal.

 

These developments are interesting and significant in and of themselves. But they are perhaps even more significant to the extent they underscore the fact that D&O exposures outside the U.S. are both growing and substantial. Clearly, the U.S. no longer has serious liability exposures for directors and officers.

 

Conclusion

One of the most noteworthy aspects of the 2009’s top D&O stories is that extent to which many of them indicate the trends we can expect to emerge or to continue in the year ahead. Certainly, the number of banks that failed during 2009 suggests the probability during 2010 of extensive litigation against the directors and officers of failed banks. The anticipated decisions of the Supreme Court and the probable Congressional action on financial reform legislation are also likely to be among the significant developments in 2010.

 

For that matter, the continued resolution of credit crisis-related litigation and the Ponzi scheme lawsuits are also likely to be a significant part of the litigation activity in 2010 (and for years to come).

 

What lies ahead in the coming year remains to be seen. But based solely on the events during the year we just concluded, 2010 promises to be both interesting and action packed. All I can say is that it is a great time to be a blogger.

 

More Year End Lists: As we head into 2010, a number of my fellow bloggers have also produced retrospective posts about the year we just concluded.

 

Francis Pileggi of the Delaware Corporate and Commercial Litigation Blog has published a list of the "Top 5 Corporate and Commercial Cases from Delaware for 2009" (here).

 

In an interesting complement to Pileggi’s post, University of Denver Law Professor Jay Brown has begun a series on his Race to the Bottom blog of "Delaware’s Top Five Worst Shareholder Decisions for 2009" (here). This list apparently will be published in a series of posts, the first of which may be found here, and the rest to be published in the days ahead.

 

The FCPA Blog has published its annual "FCPA Enforcement Index" (here), which among other things, tallies up the SEC and DOJ enforcement actions under the FCPA, as well as FCPA-related civil litigation.

 

The Drug and Device Law Blog has a list of the "Top Ten Prescription Medicine/Medical Device Decisions of 2009" (here).

 

Legally related but more on the entertainment end of the continuum, Above the Law published its list of its "Top Ten Most Popular Stories of 2009" here.

 

Randy Maniloff and Sarah Damiani’s "Ninth Annual Review of the Year’s Ten Most Significant Insurance Coverage Decisions" (including the "Second Annual Insurance Coverage for Dummies) can be found here.

 

And finally, with a look ahead, my friend Evan Rosenberg of Chubb has written "A D&O Liability Wish List for 2010" which appeared in the January 2010 issue of Directors & Boards magazine, here.

 

Early January Observation: It is a truth universally acknowledged that early January is a rotten time to use a health club. I have belonged to many different clubs in many different cities, and the invariable pattern regardless of the facility or the location is that after New Year’s the clubs fill up with earnest, first-time users. This year has proven no exception.

 

Usually, by the 15th of the month or so, all of the hubbub dies down and the only ones in the club are the regulars. My advice to anyone who has made a New Year’s resolution this year to start going to the gym is – don’t get discouraged, working out will be much more enjoyable after the middle of the month or so. Hang in there.

　

What a difference a year makes. Just 12 months ago, the subprime and credit crisis litigation wave was in full spate, and the onslaught of Madoff and other Ponzi scheme cases had just begun to surge. And while both of these lawsuit filing trends continued well into 2009, by year’s end both of these phenomena had largely played out. At the same time, however, other litigation trends emerged as the year progressed, and in the end, the number of new securities class action lawsuits filed during 2009, though significantly below the number filed in 2008, was well within historical norms.

 

First, let’s run the numbers. By my count — please see the note below about how I "counted" — there were 189 new securities class action lawsuits in 2009, which is just below but within range of the 1966-2007 annual average of 192, although 15.6% below the 2008 total of 224 new securities lawsuits.

 

As was the case for the two preceding years, the 2009 lawsuit filings were largely driven by lawsuits against financially-related firms. Of the 189 new securities suits in 2009, 69 were against companies in the 6000 Standard Industrial Classification (SIC) code series (Finance, Insurance, and Real Estate). In addition, another 39 of the defendant firms targeted in 2009 securities class action lawsuits lacked SIC Codes. These lawsuit targets without SIC code designations included mutual funds, ETFs, and closed end funds. In general, the defendant entities that lacked SIC codes were all financially related.

 

If these two groups, the companies in the 6000 SIC code series and the entities that lacked SIC code designations, are added together, the total is 108. So these two groups together represented roughly 57.1% of the new lawsuits filed in 2009.

 

A significant factor driving this concentration of filings in the financial sector was the number of credit crisis-related lawsuits. By my count, there were 62 new credit crisis-related securities lawsuits filed in 2009, bringing to 205 the total number of credit crisis related securities lawsuits that were filed since the litigation wave commenced in February 2007. (My complete list of the subprime and credit crisis-related securities suits can be found here.)

 

But though the credit crisis litigation wave carried over into 2009, as the year progressed the number of credit crisis-related filings dropped off. So too did the concentration of filings against financial companies. Thus, while 72.6% of the lawsuits in the first half of 2009 were against financially-related companies, only 41.3% of the filings in the year’s second half involved financial companies.

 

And even though the lawsuits filed against financially related companies declined in the second half of the year, by and large, the rate of lawsuit filings overall did not decline. Thus, while there were 95 new securities class action lawsuits in the first half of 2009, there were 94 in the second half – virtually the same filing rate in both halves of the year.

 

Part of the reason that the overall lawsuit filing rate did not decline in the second half of the year even though the credit crisis-related lawsuits trailed off is that a couple of filing trends emerged in the second half of the year that fueled lawsuit filings and took up the slack.

 

The first of these two trends was the outbreak of a rash of lawsuits against leveraged exchange-traded funds (ETFs), which I discussed in a prior post here. By my count, there were twelve separate securities lawsuits filed against ETFs, all during the second half of 2009. These suits largely have been filed against leveraged ETFs drawn from within a single fund family, and all present more or less the same allegations (essentially that investors were not told that the funds would track their target measures or ratios only for very short periods). Because these lawsuits represent more than 6% of all new 2009 securities lawsuits, they represent a significant part of the year’s securities litigation activity.

 

The second trend that emerged during the second half of 2009 was the emergence of a significant number of belated lawsuit filings, where the lawsuit filing date came long after the proposed class period cut-off date, a phenomenon I discussed several times in the latter half of the year (most recently here). These belated filings appear to be the result of a lawsuit backlog that developed while the plaintiffs’ lawyers were preoccupied with the credit crisis related lawsuit filings.

 

By my count, 22 of the 94 securities lawsuits filed during the second half of 2009 were filed more than a year after their proposed class period cut-off date. In some instances, the lawsuit filings came at the very end of the two-year limitations period. For example, the Pitney Bowes securities class action lawsuit was filed one year and 364 days after the proposed class period cutoff date. Indeed, in at least two cases (the Avanir Pharmaceuticals case and the Regions Financial case), the filing came nearly three years after the proposed class period cutoff, raising a rather obvious question about how these cases will withstand statute of limitations objections.

 

The belated filings continued to arrive right through the end of the year, with several of December’s filings including cases with filing dates more than a year after the proposed class period cutoff date, including the new lawsuits filed against Siemens (about which refer here), NightHawk Radiology Holdings (here), and Terex (refer here).

 

Almost all of these backlog cases have been filed against companies outside the financial sector, which accounts in part for the shift in filings away from financial companies in the second half of 2009. That is, it appears that while the plaintiffs’ lawyers were rushing to file credit crisis-related lawsuits during the period mid-2007 through mid-2009, they were also building up a backlog of cases against nonfinancial companies, and now they are working off the backlog.

 

And so, while over half of the new securities lawsuits filed in 2009 involved financial companies, by year’s end, the 2009 securities lawsuits overall involved a broad spectrum of kinds of companies. The 2009 securities lawsuits were filed against firms in 90 different SIC Code categories. Many of these categories had lawsuits against only a single company. Outside the financial sector, the SIC code categories with the highest number of lawsuits were SIC Code category 2834 (Pharmaceutical Preparations), which had five lawsuits, and SIC Code category 2836 (Biological Products), which had four lawsuits.

 

The 2009 securities lawsuits were filed in 38 different federal district courts, but, due to the number of lawsuits against financial companies, the largest number of lawsuits (78, or about 41% of all 2009 lawsuits) were filed in the S.D.N.Y. The courts with the next highest number of 2009 securities lawsuit filings were N.D. Cal (12) and C.D. Cal. (9). There were five different courts — D.N.J., E.D.N.Y., N.D. Ill., S.D. Fla., and S.D. Tex. – that had six securities lawsuit filings each. The eight courts with the highest number of 2009 filings together had 128 new lawsuits, or 67.7% of all 2009 securities lawsuit filings.

 

24 (or 12.7%) of the 2009 securities lawsuit filings involved companies that are domiciled outside the United States. These lawsuits involved companies from 12 different countries. The countries with the highest number of companies suit were the U.K. (with 6), Germany (with 5), and Canada (3).

 

Some Thoughts about Counting Securities Lawsuits: I know that many readers wonder why the various annual securities litigation studies report such materially different lawsuit filing numbers. The reason the studies’ lawsuit counts vary so widely is not just that the various studies’ authors have different information; another significant factor is that the different studies use different protocols to count lawsuits.

 

For example, some of the studies count duplicate complaint filings in separate circuits as a single lawsuit (that is, the case counts only once), while other studies count duplicate complaints filed in different circuits as separate lawsuits until they are formally consolidated (that is, the case can be counted multiple times). For my purposes, I count duplicate complaints only once regardless of whether there are duplicates filed in different circuits, which is one reason why my 2009 securities lawsuit count appears lower than, for example, NERA’s 2009 securities litigation study.

 

There is of course absolutely no reason why separate studies should not use their own preferred counting protocol. But I do believe that the studies’ readers would be enormously benefitted if each study would explicitly state what their study "counted" – that is, what does the study include in its tally of securities lawsuits, and what does it omit?

 

In the best of all worlds, the studies would also explain how their methodology differs from those used by other published reports. These reports do not after all exist in a vacuum, and by and large the audience for each of the various reports basically consists of the same group of readers. It would be helpful, I think, if the reports were to recognize both the fact that their audience reads the other reports and that these readers want to understand any and all identifiable reasons why the various reported numbers differ.

 

In my own analysis of the 2009 securities lawsuit filings, I have tried to tally up the separate class action lawsuits seeking to recover damages under the federal securities laws. I don’t count lawsuits that were not filed as class actions; that do not seek to recover damages; or that don’t allege violations of the federal securities laws. Thus, for example, I would not count a lawsuit that alleges common law fraud but that does not allege a securities fraud under the federal statutes. I would not count an indiviudal lawsuit that does not purport to proceed as a class action.

 

Two particular recurring lawsuit categories that I do not count are merger objection lawsuits, where the lawsuit’s goal is simply to increase a proposed acquisition price; and lawsuits against private entities in which the plaintiffs’ allegation is that the defendants failed to register securities.

 

Even within my overall counting criteria, it can sometimes be very difficult to determine whether or not a new complaint represents a new lawsuit or is merely a duplicate of a previously filed complaint. For example, in December, when plaintiffs’ lawyers filed a complaint on behalf of Bank of America bondholders relating to the Merrill Lynch acquisition and bonus payments, the question arose whether the complaint counted as a separate lawsuit, or was just a duplicate of the suit filed earlier in the year on behalf a purported class of Bank of America equity securityholders?

 

In the end, I concluded that because the two complaints involved separate classes of claimants, the bondholder suit represented a separate lawsuit that should be counted separately. This is undeniably a very close question, and reasonable minds might well reach a different conclusion.

 

Because there are many of these kinds of close questions in the course of trying to keep a count of securities lawsuit filings, it is almost inevitable that different lawsuit counts will vary. But though the variance of lawsuit counts may be inevitable, readers at least want to be able to understand the reasons why the lawsuit counts vary. The publishers of the various annual securities litigation studies would significantly benefit their readers if they were to explicitly and expressly state (and not just in footnotes or endnotes, but in a conspicuous way) what their study purports to be counting, and what protocols were used to determine what was and what wasn’t included in the count.

 

It would be even more helpful to readers if the reports were to recognize that their readers also read the other reports and to state explicitly and expressly how their methodology may differ from the other annual litigation studies.

 

I know the various annual litigation study publishers view themselves as in competition with each other, and so it may be difficult for them to acknowledge each other’s existence. They may believe that it as not their job to explain competing analyses. However, each publisher’s silence on these issues means the readers are left on their own trying to figure out why the numbers vary so widely.

 

The fact is that most of us read all of the reports. I feel quite confident in saying that readers would find it extremely helpful to have better information to understand why the studies’ numbers differ. The reports that recognize and their readers’ needs into account would win their readers’ loyalty, gratitude and appreciation.

 

Speakers’ Corner: On January 4, 2010, I will be presenting with Jason Cronic of the Wiley Rein law firm on a panel entitled "Directors and Officers Liability Insurance" at the Practicing Law Institute’s Current Developments in Insurance Law 2010 conference. Background regarding the conference can be found here.