On January 27, 2010, NERA Economic Consulting released its updated annual review of Canadian securities class litigation entitled "Trends in Canadian Securities Class Actions: 2009 Update" (here). The report presents an interesting study of the evolution of class action litigation in a jurisdiction outside the U.S.

 

According to the report, there were eight new securities class action lawsuits filed in 2009, which is fewer that the ten filed in 2008 "but still greater than filings in previous years." With the addition of the eight new cases, there are now 23 pending securities class actions, representing more than $14.7 billion in claims. Most of these cases were filed in the last three years although some of the pending cases were filed almost 10 years ago.

 

Though the number of new filings is noteworthy, the more significant developments may be the class certifications in three cases and the ruling allowing the IMAX securities class action plaintiffs leave to proceed under the new Ontario securities laws. (My prior detailed discussion of the rulings in the IMAX case can be found here.). The NERA report comments that these rulings "may ultimately prove to be an inflection point" for securities class action litigation in Canada.

 

Though there were significant new filings in 2009, one noteworthy feature of the cases that were filed is the "absence in Canada of class actions filings relating to the credit crisis." This absence may be due in part to the relatively smaller impact of the credit crisis in Canada compared to the U.S. and the negotiated $32 billion restructuring of the Canadian Asset Backed Commercial Paper market, which may have preempted further litigation.

 

Six cases settled in 2009 for a total of approximately $51 million, for an average of approximately $8.5 million and a median of approximately $9 million (which is roughly comparable to the median settlement of U.S. securities class action lawsuits). 2009 settlements averaged 13.7% of the amount of claimed damages. Cases with cross-border litigation counterparts in the U.S. tended to settle for larger amounts both in terms of absolute dollars and as a percentage of claimed damages.

 

According to a January 27, 2010 article in the Vancouver Sun (here), the number of filings and the procedural developments (including the rulings in the IMAX case) are "a wake up call for publicly traded companies." Law firms are "advising their clients to revisit their compliance and corporate-governance procedures to protect against similar suits."

 

One lawyer quoted in the article says that he is also advising his clients to review their corporate insurance, as well. He goes on to state that "We’ve seen over the years there are a lot of problems in terms of clients don’t really have the type of coverage they need."

 

Yet, as for the question of whether there may be a flood of litigation, one plaintiffs’ attorney quoted in the article sounds a note of caution. The attorney, Dimitri Lascaris, who is one of the lead attorneys in the IMAX case, notes that that the Canadian system still provides for adverse costs, and even the liberalized standard under the new Ontario law are time consuming and expensive. So, he says, "we’re never going to achieve the level of activity in securities class actions that we see in the United States."

 

In light of these developments and their potential significance regarding insurance coverage, the session planned for the upcoming PLUS D&O Symposium (scheduled next Wednesday and Thursday in New York) on the topic of Canadian Securities Class Action Litigation is quite timely. The panel will be moderated by my friend Dave Williams from Chubb (Canada) and planned speakers include a number of prominent players in the area in Canada, including Dimitri Lascaris. Information about the Symposium can be found here.

 

The Securities Litigation Watch blog has a post about the NERA study here.

 

Excess Side A Carrier Contributes to Options Backdating Settlement: On January 25, 2010, a judge in the Western District of Pennsylvania preliminarily approved the settlement of the options backdating lawsuit that had been filed against Black Box, as nominal defendant and certain of its directors and officers. As part of the settlement, the company agreed to pay plaintiffs’ counsel $1.6 million and the company agreed to adopt certain corporate governance measures.

 

As reflected in the parties’ stipulation of settlement (here), as part of the settlement, the company is to receive a payment of $1.5 million from its Excess Side A carrier as well as another $500,000 from its EPL carrier.

 

According to a January 25, 2010 article about the settlement in the Pittsburgh Tribune-Review (here), the company also separately settled a claim against the company by its former CEO, who left the company in connection with the options backdating related matters. At the time he left, the CEO claimed, the company took away over $19.6 million in options related compensation. The company settled these claims for its agreement to pay $4 million.

 

The Black Box settlement marks the second instance of which I am aware in which an Excess Side A carrier contributed toward an options backdating related derivative lawsuit settlement. (The first instance is the Broadcom settlement, about which refer here.) This is yet another instance where Excess Side A insurance is being called on to provide protection outside of the insolvency context. As I have previously noted, the Excess Side A carrier’s contribution to these settlements may be a significant development for the carriers, who have offered the product in a largely low loss environment, at least outside the insolvency context.

 

The settlement with the CEO is an odd component of this settlement. There aren’t many of these cases where the former CEO who left as a result of backdating related issues walked away with a cash payment.

 

I have in any event added the Black Box settlement to my table of options backdating related lawsuit settlements and dismissal motion rulings, which can be accessed here.

 

SEC Will Issue Guidance on Climate Change Disclosure: On January 27, 2010, the SEC voted 3-2 to provide interpretive guidance on existing dislosure requirements to require climate change related disclosure under certain circumstances. The SEC’s January 27 release can be found here. The SEC’s release states that the interpretive release will be posted on the SEC web site as soon as possible. The news release identifies several examples of situations that might trigger disclosure requirements, including: impact of legislation and regulation; impact of international accords; indirect consequences of regulation or business trends; and physical impacts of climate change.

 

Suit Against Rating Agencies Dismissed, But Without Reaching First Amendment Issues: According to a January 27, 2010 Am Law Litigation Daily article by Andrew Longstreth (here), Judge Lewis Kaplan has granted the motions of Moody’s and S&P to be dismissed from a securities lawsuit filed by certain investors who had invested in certain mortgage-backed securities underrwitten by Lehman Brothers. Judge Kaplan has not yet issued a written opinion but according to the article his opinion was based solely on the fact that the rating agencies didn’t have anything to do with the offering documents at issue in the case. HIs ruling reportedly did not reach the rating agencies first amendment defenses (about which refer here.)  

　

The problems facing many banks in the current economic environment are well-documented. For troubled banks’ directors and officers, the banks’ D&O insurance may represent a last line of protection. But what if the insurers could just cancel the policies? Surprisingly, many bank D&O insurers have that right under their policies, and while cancellation is rare, it is not unprecedented, and some insurers are now invoking that right to shed the risks associated with failing or problem institutions.

 

As reflected in a January 24, 2010 FinCri Advisor article entitled "Your D&O Insurer Might Be Scouring Your Call Report Looking to Cancel Coverage" (here), the policy forms of many bank D&O insurers have cancellation clauses that permit the insurer to cancel the policies mid-term, either because there is a "material change in the risk" or for any reason at all.

 

Many of these clauses are found only in policies that were issued on a multiyear basis, but even some single-year bank D&O insurance policies contain cancellation clauses. While many policies also specify that the insurer must give the policyholder 60 days (or more) notice so that the policyholder can try to replace coverage, the fact is that if something serious enough to cause the insurer to cancel coverage has occurred, it likely will be a very difficult time for the policyholder to try to find replacement coverage.

 

For D&O insurance practitioners who don’t venture into the Financial Institutions arena (or FI as it is known), the very existence of these clauses in bank D&O policies may come as a surprise, since these clauses do not appear in most mainstream commercial D&O insurance policies.

 

The obvious question is how did a cancellation clause get into bank D&O policies when it is rarely if ever seen in other kinds of D&O insurance policies? Part of the answer is that, particularly with respect to community banks, the D&O insurance marketplace has over the years become both very specialized and intensely competitive.

 

Before the current troubled bank era began, D&O insurance for community banks became increasingly less expensive. But as buyers became increasingly (or even exclusively) focused on price, some carriers looked for ways to trim coverage. And so a term such as the cancellation clause that isn’t seen in other D&O insurance policies found its way into the basic forms of several community bank D&O insurance carriers.

 

A neutral observer might question the value of a contract that one party can simply cancel unilaterally. The promise to provide insurance seems tenuous indeed if the insurer can walk away because problems have emerged – which is of course the very circumstance for which buyers purchase insurance in the first place.

 

All of this does raise the question of why any buyer would agree in the first place to accept a policy that has a cancellation clause. The answer is either that the buyer is unaware the clause is there or the buyer has no other choice.

 

Given the number of bank D&O insurers that have cancellation clauses in the policy forms, there undoubtedly are many banks whose policies have these clauses. I am guessing only a very small number of these banks (many of whom may have purchased their insurance on a direct basis) have any idea the clauses are there.

 

The problem is that the market for D&O insurance for banking institutions is in turmoil now due to the number of failed and troubled banks. For banks that are struggling, it may be challenging in the current environment to obtain a policy without a cancellation clause. Or, if they can a policy without a cancellation clause, the coverage afforded may otherwise be restricted (as for example, by the inclusion of a regulatory exclusion or the absence of past acts coverage).

 

Healthy financial institutions in many instances can still get coverage on a relatively attractive basis. Healthier banks should not have to accept a policy with a cancellation clause. However, even the healthy banks can only avoid the cancellation clause and other undesirable policy features if their advisor is well-informed and knows what to look and ask for.

 

One added note is that even some bank D&O policies that do not have cancellation clauses have other undesirable features that are almost as bad. For example, the policy form of at least one D&O insurer that is active with community banks does not allow the policyholder the option of purchasing extended reporting period coverage, even in the event of nonrenewal, which could have a similarly negative impact on a bank whose D&O insurance is not renewed. Again the presence or absence of an extended reporting period option is a term that the bank’s D&O insurance advisor will, if well-informed and knowledgeable, be looking for.

 

For the banks whose D&O insurers hit them with a notice of cancellation, the only recourse may be for the banks to provide their insurers with a "laundry list" notice of circumstances that may give rise to a claim – always a challenging proposition because of the uncertainty of knowing what claims may arise later. But the laundry list may be the only chance the bank has to lock in coverage before it is unilaterally taken away.

 

All of this underscores the critical importance for banks and for all insurance buyers of involving a knowledgeable and experience advisor in the acquisition of D&O insurance. Without informed advice, policyholders can be left with inadequate insurance protection when problems arise.

 

The individual defendants in the various Stanford Financial-related SEC enforcement and criminal proceedings have been engaged in a long-running and procedurally complicated battle over whether the firm’s D&O insurers must advance the individuals defense expenses. In a sweeping January 26, 2010 opinion (here), Southern District of Texas Judge David Hittner rejected the grounds on which the insurers sought to avoid coverage and ruled that the insurers must advance the individuals’ defense costs.

 

Background and the January 26 Opinion

The defense fee dispute has a complex procedural history but for purposes of the January 26 opinion the critical fact is that on November 16, 2009, the insurers sent the individuals letters "retroactively declining to extend coverage for costs." The insurers contended that coverage was precluded by the Policy’s "money laundering" exclusion. The exclusion precludes coverage for loss "arising directly or indirectly as a result of or in connection with any act or acts (or alleged act or acts) of Money Laundering," as that term is defined in the policy.

 

In his opinion, Judge Hittner noted that the carrier’s were not seeking to avoid coverage based on the exclusion precluding coverage for fraud or criminal misconduct, because that exclusion has a requirement of an "adjudication" that the precluded conduct had occurred. The money laundering exclusion has no "adjudication" requirement, leaving, the insurers’ argued, the determination that money laundering has in fact occurred, to the insurers.

 

Judge Hittner also noted parenthetically that the insurers urged this position even though only one of the twenty-one counts in the criminal action alleges money laundering or conspiracy to commit money laundering. (The insurers argued that the policy’s definition of money laundering was broad enough to encompass all of the allegations.)

 

The plaintiffs first opposed the insurers’ position based on the "eight corners" rule, arguing under Texas law that in determining an insurer’s defense obligations, a court may not consider anything beyond the four corners of the policy and the four corners of the complaint. Judge Hittner found that despite the insurers’ arguments to the contrary, the Supreme Court of Texas "never has recognized an exception to the eight corners rule."

 

Judge Hittner was in any event strongly against a broader view of what a court properly might consider in determining the insurers’ obligations.

 

If a contemporaneous duty to advance or reimburse defense costs were judge on an "actual facts" basis, an insurer’s contractual obligation to pay defense costs could change on a daily basis as additional "facts" are developed. Essentially, coverage that directors and officers relied upon and expected when the Policies were purchased on their behalf could be withdrawn at the insurer’s whim. If, as Underwriters suggest, the Policies afford Underwriters absolute discretion to withhold payments whenever charges of intentional dishonesty are leveled against directors and officers, then insurers will be able to withhold payment in virtually every case at their discretion. That would leave directors and officers in an extremely vulnerable postion , as any allegation of dishonesty, not matter how groundless, could bring financial ruin on a director or officer. Essentially an insurer could act as judge and jury and convict its own insureds, thus avoiding any further financial responsibility for the insureds’ defense. This simply cannot be the case. (Citations omitted.)

 

The court found in applying the eight corners rule that the allegations were insufficient to establish that the precluded conduct had occurred. The insurers nevertheless sought to argue that the individuals refusal to testify in support of the application for a preliminary injunction is proof enough that the allegations against the individuals are true. The insurers sought to argue that the refusal to testify supported an inference that money laundering did in fact occur.

 

Judge Hittner held that the "given the magnitude, complexity and nature of the charges," he declined to draw the inference, and that in any event, because of the eight corners rule, the insurers’ reliance on the supposed inference from the individuals refusal to testify is "misplaced."

 

Judge Hittner, applying the standard required for a preliminary injunction motions ruled that though the money laundering exclusion does not require a judicial determination to apply, the exclusion’s requirements "also may mean much more than an insurer’s own determination." He said that he need not decide what level of factual determination must be made, and instead ruled only that plaintiffs have a substantial likelihood of succeeding on the merits at trial, satisfying the standard for awarding preliminary injunctive relief.

 

The court, in further consideration of the preliminary injunction standard, noted that the plaintiffs would suffer "irreparable harm" if the relief they sought was withheld. He noted that it is "unmistakable and cannot be seriously disputed" that the harm the individuals will suffer is "real, immediate and irreparable." He rejected the insurers contrary position that, he said, would "essentially require [the individuals] to prove their innocence." Judge Hittner commented that
 

 

Underwriters’ position is absurd because these circumstances are precisely why corporations procure D&O insurance on behalf of their directors and officers. Indeed, it would contravene the very purpose of the Policies – as well as the policy language itself – to require Plaintiffs to prove their innocence before being entitled to funds for their defense.

 

Judge Hittner found the harm to the insurers from granting the preliminary injunction was relatively slight and that public interest also weighed in favor of granting the preliminary injunction. He finally held that the individuals did not have to post a bond.

 

Discussion

Given the nature of the allegations against the individuals and the notoriety of the circumstances, as well as the number of people who lost money as a result of the collapse of Stanford Financial, the tone and temperature of Judge Hittner’s words are a little surprising. If nothing else is clear, Judge Hittner was certain that individuals needed to be able to defend themselves, and the insurers were obliged to provide the defense. The depth of Judge Hittner’s discussion of these defense cost issues are such that his words may prove useful for other individuals who are seeking to have their defense expenses paid under their policies.

 

You do get the sense that Judge Hittner ducked the hard issue – that is, if the money laundering exclusion, unlike the fraud exclusion, doesn’t have an "adjudication" requirement, then an adjudication can’t be required, so what is sufficient? Given Judge Hittner’s certainty that the eight corner rule is absolute under Texas law, there might be no way to meet the requirement. It does make you wonder whether it matters from a practical perspective whether or not there is an "adjudication" requirement.

 

Even though the usefulness of Judge Hittner’s determinations for others seeking insurance coverage arguably might be limited to those jurisdictions that also absolutely enforce the eight corners rule, the breadth of his pronouncements about the limitations on insurers’ ability to make preclusive coverage determinations virtually guarantees that his phrases will appear in the legal briefs of other individuals who are seeking defense cost coverage. His unwillingness to allow the individuals’ refusal to testify on their own behalf in the preliminary injunction proceeding may also prove helpful to other policyholders.

 

Because of the tone of Judge Hittner’s rhetoric and the high profile nature of the case, I suspect there may be some strong views about this decision. I invite readers who have thoughts about this decision to add their views to this post using the blog’s comments feature.

 

A January 26, 2010 Bloomberg article about Judge Hittner’s ruling can be found here.

 

Special thanks to Bill Schreiner of the Zuckerman Spaeder law firm for providing me with a copy of the decision.

 

Vivendi Watch: The Vivendi securities class action case went to the jury on January 11, 2010, but still no verdict. The parties are anxiously awaiting the verdict and in the meantime debating what the length of the jury deliberations may mean, according to a January 26, 2010 article by Andrew Longstreth on AmLaw Litigation Daily (here). The article also reports that almost regardless of the verdict, there will likely be an appeal, if for no reason that because of the potential jurisdictional implications of the National Australia Bank case now pending before the Supreme Court. Stay tuned (to the second power, apparently).

 

In a January 14, 2010 order (here), Southern District of New York Judge Robert W. Sweet granted the motion to dismiss in the ACA Capital Holdings subprime-related securities class action lawsuit. The decision is noteworthy in and of itself, but also because the plaintiffs’ securities claims were asserted under the ’33 Act. Subprime securities lawsuits asserting only ’33 Act claims have generally survived dismissal motions, but in the ACA Capital case the dismissal was granted — with prejudice.

 

ACA Capital, which went public on November 10, 2006, was in the business of offering financial guaranty insurance products to participants in the global derivatives markets, and in its asset management business, it structured and managed collateralized debt obligation (CDO) transactions. During 2007, ACA began to experience deterioration in the credit obligations underlying the CDO transactions. ACA experienced losses in its portfolio, which caused its share price to decline. In November 2007, credit rating agencies downgraded ACA. In August 2008 ACA entered a global settlement with its structured credit counterparties, as a result of which the company effectively ceased operations.

 

Plaintiffs initially filed their securities class action lawsuit against ACA and its CEO in November 2007. Background regarding the lawsuit can be found here. In their consolidated amended complaint, Plaintiffs alleged that the defendants ACA’s prospectus had failed to disclose that "at the time of the IPO, the Company had materially increased its exposure to highly risky sub-prime CDOs and was planning to complete several more sub-prime CDO deals in early 2007 that would greatly increase the Company’s exposure."

 

The plaintiffs further alleged that the Prospectus failed to disclose that due to "the rising default rates on sub-prime mortgages, it was highly likely that the Company would experience losses on the policies it had written to insure numerous CDOs and it would experience losses on its [collateralized debt securities] positions."

 

The defendants moved to dismiss, and in his January 14 order, Judge Sweet granted the defendants’ motion with prejudice.

 

Judge Sweet first held that, with respect to each of the sets of facts the plaintiffs alleged the defendants had failed to disclose that the allegedly omitted facts were disclosed in the Prospectus. He held that "the Prospectus’s disclosure of information alleged in the Complaint to have been withheld from prospective investors renders the Complaint insufficient as a matter of law."

 

The plaintiffs had also argued that the Prospectus had failed to comply with Item 303 of Regulation S-K by failing to describe "known trends and uncertainties" that the company faced. The plaintiffs argued that the Prospectus failed to disclose the existence of a "rising trend" of subprime foreclosures and delinquencies at the time of the IPO.

 

Judge Sweet held that the defendants could not be held liable for failing to disclose a trend of which they were unaware, and found that "the Complaint does not allege that the Defendants were actually aware of any purported ‘trend of delinquencies and foreclosures.’" Rather, many of the source on which the plaintiffs relied to try to establish the existence of a trend were not published until after the IPO. Only three of the sources on which plaintiffs relied were created prior to the IPO, one of which makes no references to delinquencies and foreclosures, another of which contains data reflecting less than a single calendar quarter (insufficient to show a "trend"), and material that was not publicly available at the time of the IPO.

 

Finally, Judge Sweet also granted the defendants’ motion to dismiss on the grounds of "negative causation" – that is, because, he found, that the complaint and the public filings on which the plaintiffs rely "establish that the decline in ACA’s stock was not caused by the allegedly false and misleading statements in the Prospectus." Instead, he found, "Plaintiffs cannot establish a causal relationship between Defendants’ alleged misrepresentations and subsequent declines in ACA’s stock price."

 

While there have been other dismissal motions granted with prejudice in subprime-related securities class actions, this dismissal stands out because the ACA plaintiffs’ claims were asserted under the ’33 Act. As I discussed in a recent post (here), research by Jon Eisenberg of the Skadden law firm regarding subprime dismissal motion rulings showed that all of the cases he studied that only asserted ’33 Act claims had survived motions to dismiss, in part, he speculated because of the absence of scienter pleading requirements for ’33 Act claims. Even claims that alleged ’33 Act claims in addition to claims under the ’34 Act tended to have a better survival rate than claims that asserting ’34 Act claims alone.

 

In light of the other dismissal motion rulings, Judge Sweet’s dismissal of the ACA Capital complaint with prejudice makes the case a noteworthy victory for the defendants. A significant number of the subprime and credit crisis-related cases asserted only ’33 Act claims, so the defendants in those other cases undoubtedly will be closely reviewing the ACA decision to see if they can use the decision in their cases.

 

I have in any event added the ACA Capital decision to my list of subprime and credit crisis-related securities class action lawsuit dismissal motion rulings, which can be accessed here.

 

Special thanks to the several readers who sent me a copy of the ACA Capital decision.

 

Small World: Wikipedia reports (here) that Eliot Spitzer served as one of Judge Sweet’s law clerks. And in light of my reference above to the research of Skadden attorney Jon Eisenberg, it seems relevant to note that prior to going onto the federal bench in 1978, Judge Sweet was in private practice at the Skadden law firm.

 

Every now and then, I read a court opinion on a coverage issue, and though I can understand how the court reached its decision, I still find the outcome surprising and troubling. A January 19, 2010 per curiam opinion from the Connecticut Supreme Court (here) involving a coverage dispute under an Employment Practices Liability (EPL) policy presents a recent example of this kind of decision. The court’s analysis is internally logical, but I suspect the outcome would surprise most EPL policyholders and even many insurance practitioners. The decision may have important implications for the placement and administration of EPL insurance.

 

Background and the Connecticut Supreme Court’s Decision

National Waste Associates was purchased an EPL policy for the period February 15, 2007 to February 15, 2009. On May 12, 2007, a former employee brought a wrongful discharge action against National Waste. National Waste submitted the claim to its EPL carrier. The carrier refused to provide a defense or to indemnify the firm. National Waste filed a lawsuit seeking a judicial declaration of coverage.

 

The carrier took the position that coverage was precluded by the EPL policy’s prior or pending action exclusion. The exclusion provides that the policy does not provide coverage for any claim "based upon, arising out of, [etc.] … any fact, circumstance, situation, transaction, event or wrongful act underlying or alleged in any prior or pending civil, criminal or administrative or regulatory proceeding."

 

The carrier contended that the prior or pending action exclusion had been triggered by the proceedings the employee had brought in 2005 to obtain unemployment benefits. As later recited by the Connecticut Supreme Court in its review of the case, the former employee had claimed, both in pursuing unemployment benefits and in the later wrongful discharge action, that she had been wrongfully discharged after resisting National Waste’s alleged invasion of her privacy.

 

The trial court agreed with the carrier that the unemployment benefit proceedings clearly constituted prior "administrative proceedings" within the meaning of the policy and granted the carrier’s motion for summary judgment. National Waste appealed.

 

In its January 19 per curiam opinion, the Connecticut Supreme Court affirmed the trial court, adopting the trial court’s reasoning.

 

Discussion

The court’s reasoning is straightforward and internally logical, particularly if the unemployment benefits proceeding is, as seems to be the case, fairly characterized as an "administrative proceeding" within the meaning of the policy.

 

But as noted in a January 21, 2010 memorandum about the ruling from the Murtha Cullina law firm entitled "Employment Practices Liability Insurance: Surprise Coverage Interpretation" (here), the outcome "no doubt shocked" the employer. The law firm memo identifies the sharp distinction between, for example the circumstances that might be involved had the former employee raised an EEOC charge of discrimination in a prior period, and the circumstances actually presented, with the former employee’s prior filing of proceedings for unemployment benefits.

 

As the law firm memo observes:

 

Unemployment compensation claims are not only very common, but they are typically handled very differently by employers. (For example, employers rarely if ever engage legal counsel to attend unemployment compensation hearings.) The standard for denying unemployment benefits is so high that employers often do not even contest the claims. Even if they do contest, most former employees who lose their jobs for any reason collect benefits. If fact, a claim for unemployment benefits is not even really a claim "against" the employer – it is a claim for state benefits that are funded by a tax on all employers. Moreover no EPLI policy provides coverage for unemployment claims.

 

In light of all of these practical circumstances, it would come as an unexpected and inexplicable revelation to most employers to learn that an unemployment benefits claims in one policy period could preclude coverage for an employment practices claim in another period. The implication is that the employer has to notify their EPL carrier of the unemployment benefits claim in order to preserve EPL coverage if the former employed later files an employment practices claim.

 

Most employers would be completely astonished to learn that their EPL carrier expects to be provided with notice of unemployment benefits proceedings. Indeed the revelation of this expectation is so unanticipated that it has the feel of a trap for the unwary.

 

The message for policyholders and their advisors hoping to avoid the trap seems to be that companies should provide carriers with notice of every single instance where an employee or former employee seeks unemployment benefits. However, given the frequency of these types of proceedings, I suspect strongly that if policyholders gave notice of every instance where an employee or former employee is seeking unemployment benefits, the carriers would quickly find themselves drowning in paper. I doubt the carriers would really want what would ensue.

 

And regardless of what the carriers may want or even expect, it is a serious question whether, as a practical matter, it is fair to penalize companies for failing to take actions that the most companies would have no idea are required of them.

 

This may be one of those instances where the professional liability industry needs to come together to craft a solution to prevent an outcome that no one could possibly really want. (I have in mind the recent sequence of events where the D&O industry, in order to avert the consequences of an unexpected coverage decision, quickly took steps to try to eliminate the possibility of a carrier arguing that a Section 11 settlement did not represent covered "Loss.)

 

Maybe I am being optimistic, but perhaps policyholder representative and the carriers can find a solution that will ensure that EPL insurers will not take the position that an action for employment benefits is not a "claim" or an "administrative action" within the meaning of the policy.

 

I recognize that some readers may take exception, perhaps strong exception, to my analysis. I invite readers to submit their views using the comment feature on this blog.

　

Last year’s wave of bank failures had clearly carried over into the New Year. On Friday, January 22, 2010, the FDIC closed five more banks, already bringing the year to date number of bank closures to nine. (At this same point last year, the FDIC had only closed three banks, before eventually closing 140 banks for the entire calendar years.).

 

The nine banks that have failed so far this year are a surprisingly diverse bunch. The closures are distributed across eight different states. While three of the failed banks were tiny, with assets of under $70 million, three of then nine were pretty good sized, with assets of over $1 billion. Perhaps the most noteworthy discernable trait of the group is that three of them were located in the Pacific Northwest, two in Washington, one in Oregon. Bank failures are not unknown to that part of the country – including, of course, the Washington Mutual closure, the largest bank failure of all time.

 

But though the bank failures have continued to flood in, litigation involving the directors and officers of the failed institutions has – at least so far— been relatively light. Nevertheless, I continue to believe that it will only be a matter of time before the FDIC begins to file significant numbers of lawsuits. My expectation in this regard is largely driven by the fact that during the S&L crisis in the 80s and early 90s litigation was such an important component of the FDIC’s efforts to recoup its losses. The FDIC has filed a number of notices of claims with some bank officials and their D&O carriers, but so far it has not filed lawsuits in significant numbers.

 

While we all wait to see what the FDIC will do, investors in some failed banks are moving ahead with their own claims. For example, as reported in the January 15, 2010 Greeley (Colo.) Tribune (here), almost 60 investors filed a lawsuit on December 15, 2009 in Weld County (Colo.) District Court former directors and officers of New Frontier Bank. The bank, which was located in Greely, Colorado, was taken over by regulators in April 2009. Prior to its closing, the bank had assets of over $2 billion.

 

The circumstances surrounding New Frontier’s demise were the subject of a June 16, 2009 Wall Street Journal article entitled "Town’s Friendly Bank Left Nasty Mess" (here). Among other things, the article reports that the bank’s failure "is expected to set off a cascade of bankruptcies and foreclosures across several counties" and that companies that relied on the bank for financing "are cutting staff and curtailing payments to suppliers."

 

At least as depicted in the Journal article, New Frontier’s failure represents something of a modern day morality tale reflecting the excesses that can cause a banking crisis. New Frontier was particularly dependent on so-called "hot money" – that is, brokered deposits on behalf of investors seeking higher rates of return on their deposits. The flood of hot money facilitated the bank’s business lending, "leading to meteoric growth and favorable press." But, according to comments by the bank’s competitors quoted in the article, the bank "had looser credit requirements that virtually any other bank in town." The other banks reportedly used New Frontier as a safety valve, by urging their own customers that had fallen behind on their payments to refinance their loans at New Frontier.

 

One factor that proved particularly dangerous for the bank was its heavy concentration in agricultural loans, particularly for local dairies. A number of the borrowers fell behind or defaulted after prices for milk and other products fell. Many of the defaulting borrowers themselves now face ruin. The Journal’s photo essay about the bank’s failure, here, reflects the community and many of the individuals hit by the bank’s closure.

 

A flood of public accusations have followed in the wake of the bank’s failure. For example, the December 30, 2009 Denver Post had an article (here), reporting supposedly improper practices at the bank and also that the bank’s practices are the subject of a Department of Justice investigation.

 

According to the Greely Tribune article, the investors allege in their lawsuit that senior bank officials engaged in a host of improprieties including reckless lending activities without regard to loan quality, insider deals that improperly benefited board members and many instances of conflicts of interest among board members. Among other things, the complaint alleges that insiders received huge loans on preferred terms, and that the bank’s headquarter building was built by the construction company owned by one board member and that rather than owing the building outright, the bank leased it from a company owned by other board members, on terms that were heavily favorable to the leasing company.

 

The New Frontier circumstances may be unusual because of the nature of the concerns. But the level of scrutiny the bank is now facing in the wake of its closure is not uncommon. In many instances, the questions will eventually take the form of accusations presented in the form of a lawsuit. Before all is said and done, there will be many more lawsuits like that filed by the New Frontier investors. And that does not even take into account the lawsuits we are likely to see from the FDIC. I continue to believe that the arrival of failed bank lawsuits will be one of the top litigation stories of 2010.

 

None of this has been lost on the D&O insurance carriers. D&O insurance for many commercial banks has become a much more expensive proposition, and for some banks an outright challenge. As reflected in a January 15, 2010 article in the Atlanta Business Chronicle (here, registration required), banks’ D&O insurance costs have begun to "skyrocket across the board" and terms and conditions have narrowed substantially. The insurance marketplace is particularly difficult for banks operating under regulatory orders. In light of the continued wave of bank failures and the anticipated arrival of claims, the insurance marketplace conditions seem unlikely to improve anytime soon.

 

Special thanks to the several loyal readers who sent me many of the various items to which I linked in this post. I am always grateful when readers send me material, it helps me and it helps other readers as well.

 

Reflections on the Citizens United Case: The Internet is awash with instant analysis from the commentariat about the U.S. Supreme Court’s 5-4 decision in the Citizens United case. I will leave it to the pundits to sound off about the case’s outcome. For myself, I was struck by the heated rhetoric of the majority opinion and the vehemence of the dissent. (Justice Stevens took the extraordinary step of reading his dissent from the bench, in a special session apparently scheduled for the purpose of allowing him to do so.)

 

The narrowness of the margin of decision is nothing new, since 5-4 opinions have been an unfortunate staple of the divided court for the last several years. But the tone of the language used in the opinions in the Citizens United case suggest that the Court’s proceedings have taken on a deeply personal character, with emotional overtones that have become all too public. It does kind of make you wonder what the heck is going on up there.

 

I have to admit that I am a sucker for the genre of popular literature in which the Court’s inner workings are "revealed." I devour books like Jeffrey Toobin’s The Nine: Inside the Secret World of the Supreme Courtand Supreme Conflict: The Inside Story of the Struggle for Control of the United States Supreme Court by Jan Crawford Greenburg. Among other things, these books underscore the fact that one of any President’s most enduring legacies is the identity of the justices he has named to the Court. The books also make clear that the shifting currents in Presidential politics in recent years have dramatically shaped the current Court’s composition. (For those interested in a casual but entertaining read about the Court, I particularly commend Toobin’s book.)

 

Because the Court is called on to decide some of our country’s most difficult and divisive issues, it is hardly surprising that the Court sometimes expresses itself in multiple voices. But even when issues are of paramount importance, a divided court is not inevitable.

 

I recently stumbled across the excellent biography of Earl Warren by journalist Jim Newton, entitled Justice for All: Earl Warren and the Nation He Made. Newton’s entertaining and readable book convincingly argues that Warren was one of the most important Americans of the 20th Century. Warren’s career prior to ascending to the Court is itself fascinating, and his three terms as California’s governor transformed the state (although I couldn’t help but thinking that the Warren’s terms as governor may also have planted the seeds of many of California’s current financial woes.) Warren could easily have become President in 1948 or even 1952 (he was the Republican vice presidential candidate in 1948), if the Republicans could have overcome their East Coast bias.

 

Warren’s tenure on the court of course continues to be highly controversial, and there are many who will always carry virtual "Impeach Earl Warren" billboards around in the foremost part of their conscious brain. In many quarters, the Warren Court is a byword for reckless judicial activism. But it is almost impossible to imagine what our country would have been like were it not for the civil rights decisions of the Warren Court.

 

At the time Eisenhower nominated Warren to the bench, the Court had already heard oral argument on the Brown vs. Board of Education case, involving the racial segregation of Topeka’s public schools. However, under Warren’s predecessor, Fred Vinson, the justices had been unable to reach even a majority opinion on any of the issues presented and the case was put over to the following term for reargument. In the interim, Vinson died from a heart attack, and Warren came onto the bench.

 

After Warren joined the Court, the case was reargued. Newton shows how under Warren’s leadership and as a result of Warren’s formidable political skills, the Court was able to reach agreement on a single, unanimous opinion, reversing Plessy v. Ferguson and holding that "separate but equal is inherently unequal."

 

No one ever accused Warren of being the most intellectual justice. But his leadership skills and his ability to unite powerful personalities with strongly divergent views proved to be indispensible. Warren’s incomparable abilities allowed the Court to speak with a united, single voice. The moral authority this unanimity gave the Court finally allowed the country to move purposefully to try to start removing the shameful legacies of legalized racial segregation.

 

It all too easy to forget now, but it was only ten short years from the Supreme Court’s opinion in Brown v. Board of Education to Congress’s enactment of the Civil Rights Act of 1964. Can you imagine what this country would have been like if the Court had not spoken forcefully and with a unified voice during the civil rights era? I grew up in Virginia in the 60’s and I can still remember the "Coloreds Only" counter at the soda fountain inside the local drug store. How long would absolutely appalling conditions like that have continued if the Court had dithered?

 

The Warren Court was of course not always unanimous and many of its legacies remain highly controversial. But at its finest, the Warren Court showed how powerful the Court can be when it is strong and united.

 

For some time and for many reasons, the Supreme Court has been much more prone to speaking with multiple, deeply disparate voices. 5-4 opinions that overturn recent cases (which include opinions both by the Court’s liberal wing and its conservative wing) risk undermining the authority with which the court speaks, because voting majorities can shift so easily. If such slight variations are sufficient for the Court to cast aside even its most recent decisions, then its work becomes of little more enduring value than yesterday’s newspapers. The Court’s haphazard demolition of its own precedents not only begets inconsistency and unpredictability but it risks breeding a disrespect of the authority of the law.

 

It may be that the Court’s divisions are simply are reflection of divisions within our country, and of the way those divisions have driven the outcomes of Presidential elections in recent years. But I wonder if part of the problem might not be the kind of person that all recent Presidents have preferred for the Court. Because of certain explicit and implicit litmus tests, recent Presidents have overwhelmingly preferred to nominate to the court only judges with long judicial track records, on the theory that the judicial record provides some reassurance of the nominee’s ideology.

 

I wonder if the Court might shed some of its venomous division if there were more justices nominated whose qualifying experience was not limited to service in the judiciary. After all, the circuit courts are more than just a farm team for the highest bench, and the Supreme Court would benefit from the judgment of men and women whose world views reflected more than what can be gleaned on the inside of an appellate courtroom. I wonder whether a President would have the courage to nominate persons of intelligence and integrity whose experience includes more than just prior judicial service and who would bring with them more than mere ideological reliability.

 

In any event, it is worth remembering that the Supreme Court is not inevitably divided. Perhaps the most important legacy of the Warren Court is the reminder that at a critical moment in the country’s history, the Court was united. For those of us of moderate views who recoil instinctively from ideological extremism, the Court’s inability to command greater moral authority by speaking with a more consistent, more unified voice, and in particular its willingness to exploit a fragile majority to run roughshod over its own recent decisions, is deeply distressing.　

　

Over the years, legislative reforms of the U.S. securities laws have cycled back and forth, between initiatives, on the one hand, to discourage abusive litigation and, on the other hand, to restrain corporate misconduct. In the current Wall Street bailout, post-Madoff environment, sentiment may be running high for legislative reforms that could expand liabilities under the federal securities laws. But though the time for reform may be now, the window of opportunity may be short.

 

According to a January 2010 Wall Street Lawyer article by Boris Feldman of the Wilson Sonsini firm entitled "The Coming Counter-Reformation in Securities Litigation" (here), the best shot for reforms favorable to the plaintiffs’ bar "may be right now—before the mid-term elections in 2010 can create a filibuster firewall in the Senate." In his article, Feldman looks at the most likely areas of reform and the likelihood of the initiatives’ success.

 

The "most important priority for the plaintiffs’ bar" will be the institution of private securities liability for aiding and abetting violations of the securities laws. (There are in fact already current Congressional initiatives to accomplish that very change, about where refer here and here.) This change, were it enacted, would made the biggest difference in the "big frauds," where the "primary wrongdoer is usually bust." If the company’s professionals were "on the hook," then the "entire calculus would change," as the "pot" would then "consist of more than a claim in bankruptcy and some D&O insurance policies."

 

The "real battle" about prospective aiding and abetting liability, according to Feldman, will be how — not whether– it is instituted. Questions such as who bears the burdens of proof and persuasion and the state of mind required for liability "will determine whether aiding and abetting liability is a measured response to the current situation or a license to subject outside advisors to in terrorem risk."

 

The next likely target for the plaintiffs’ lawyers, Feldman suggests, is the discovery stay, which has been one of the PSLRA’s "great frustrations" for the plaintiffs’ bar. Feldman suggests that the plaintiffs’ will seek to modify the discovery stay, rather than try to have it overturned. He suggests that one alternative might be a "good cause" exception to the stay. Another alternative is the creation of an exception to the stay for documents already produced to governmental authorities.

 

Feldman also suggest that the plaintiffs’ bar may attack the PSRLA’s pleading requirements, or alternatively seek to rely on initiatives to set aside the "facial plausibility" pleading standard of Twombley and Iqbal (about which refer here).

 

Finally, Feldman suggests that the plaintiffs’ bar may see to limit the impact of Dura Pharmaceuticals, perhaps through reforms specifying that the loss causation issue is to be addressed only at the summary judgment or trial stage.

 

One area Feldman suggests that plaintiffs are unlikely to seek reforms is with respect to the PSLRA’s lead plaintiff requirements. Though these provisions were controversial when first enacted, the plaintiffs’ bar has now "adapted happily" to the requirements, and with institutional investor relationships firmly in place, there is "no incentive for the plaintiffs’ bar to tinker with these provisions."

 

Feldman closes by noting that the "electoral clock is ticking," with the likelihood of legislative action, if any, before fall 2010. He confesses "surprise" that the legislative reforms were not launched a year ago, when the 2008 electoral results were still fresh. Feldman notes that the fact that the plaintiffs’ bar missed this opportunity "may have something to do with absences in their leadership ranks in recent years."

 

Feldman suggests that the "most likely" way these reforms may come about is through the activities of the Financial Crisis Inquiry Commission, which, Feldman notes, has "strong ties to the plaintiffs’ bar" (about which refer here), a fact that may allow the plaintiffs’ bar "to try to get some of their reforms into the recommendations of the Commission."

 

I note that Feldman published his article before last week’s special election in Massachusetts. The election of Republican Scott Brown to the Senate seat vacated by the late Edward Kennedy seems to have scrambled everything. Although I don’t profess to have any particular insight into Congressional dynamics, I wonder whether the possible November effect Feldman anticipates in his memo has now been pushed forward through the calendar. The "filibuster firewall" may already be gone. Without a doubt, every member of Congress facing election this fall is proceeding with significantly greater wariness in the wake of the recent Massachusetts senatorial election. All of which makes me wonder whether or not the window of opportunity on some of these legislative proposals may have been substantially narrowed, if not altogether closed.

 

Opt-Outs Down and Out: Much has been written (refer for example here) about the growing phenomenon of class action securities lawsuit settlement opt-outs – that is, the investor class members who choose not to participate in the class action lawsuit settlement and instead pursue their own individual claims. One of the recurring themes has been how much better the opt-outs do than they would have if they remained in the class.

 

However, as shown in the outcome of a recent case involving Aspen Technology, there is no guarantee that the opt outs will do better by proceeding separately.

 

Aspen and several of its directors and officers had been sued in a securities class action lawsuit in November 2004 (about which refer here). The securities class action lawsuit ultimately settled for $5.6 million, but several class members representing 1.4 million shares of common stock opted out of the class action settlement and filed their own "direct action" lawsuit against the defendants in Massachusetts state court.

 

As reported on the Securities Litigation Watch blog (here), the Aspen Technology investors’ direct action lawsuit didn’t go so well for them. In a January 13, 2010 opinion (here), Massachusetts (Suffolk County) Superior Court Justice Judith Fabricant ruled that "no fraud occurred" and that "defendants are entitled to judgment on all counts of the complaint." In a memo about the decision (here), Skadden, the defense firm in the case, reports that Justice Fabricant also awarded defendants recovery from the plaintiffs of their costs in the case.

 

Options Backdating Securities Suit Dismissal Affirmed: One of the 39 options backdating related securities class action lawsuits involved claims against Jabil Circuit. The case may have been among the more noteworthy options backdating-related securities lawsuit filings, because Jabil Circuit was among the small group of companies specifically mentioned by name in the original March 2006 Wall Street Journal article ("The Perfect Payday") that launched the options backdating scandal. Among other things, the article calculated the likelihood that the Jabil options grants occurred randomly as "one in a million."

 

As noted in an earlier post (here), the Jabil Circuit options backdating-related securities lawsuit was dismissed without prejudice in April 2008. In a January 2009 order (here) on the defendants’ renewed motion to dismiss, the complaint was dismissed with prejudice.

 

In a January 19, 2010 decision (here), the Eleventh Circuit Court of Appeals affirmed the lower court’s dismissal of the case, holding the plaintiffs’ allegations "fail to meet the heightened pleading standards" under the PSLRA.

 

Among other things, the court said that "the allegations of misrepresentations, responsibility for granting misdated options, and personal profiteering fail to raise a strong enough inference of scienter" and that "the allegations contained in the complaint do not create an inference of scienter that is at least as probable as a non-fraudulent explanation—namely that none of the Appellees knew of the accounting errors until the investigation began in 2006"

 

I have updated my table of the outcomes in the Options Backdating-related lawsuits to reflect the Eleventh Circuit’s decision in Jabil Circuit. The table can be accessed here.

 

In an earlier post (here), I wrote about a December 30, 2009 ruling in the MBIA coverage litigation that  special litigation committee investigation expense are covered under a D&O liability insurance policy. As I anticipated, the decision has proven to be controversial.

 

Two law firms that traditionally act as coverage counsel for D&O carriers recently released memoranda discussing the opinion. The Wiley Rein issued a brief memo (here) discussing the case and its holding. The Edwards Angell Palmer & Dodge law firm released a longer memorandum (here) also discussing the opinion.

 

 

The Edwards Angell memo, written by my friend John McCarrick and his colleagues, Maurice Pesso and Peter de Boisblanc, is particularly interesting because opens by reviewing the justification for the insurers’ standard position that special litigation committee expenses are not covered under the typical D&O insurance policy.

 

 

 

 The Edwards Angell memo also includes a review of implications of and the likely consequences that flow from the decision. Among other things, the memo stresses that the decision did not hold that special litigation committee expenses will always be covered, but only under the facts presented. The memo also recites the difficulties and logical problems involved with characterizing the special litigation committee expenses as “defense costs” (including the likelihood that plaintiffs might use the characterization as a way of challenging the independence of the special litigation committee.).

 

 

 

The Edwards Angell memo concludes with the observation that

 

 

 

Unless and until the D&O insurers in MBIA press a successful appeal of this ruling to the Second Circuit Court of Appeals, D&O insurers should brace themselves for the likelihood that the MBIA ruling will be cited by policyholder counsel and brokers in an effort to significantly expand the scope of coverage for these kinds of legal expenses and costs, as well as to cover other fees and expenses that an insured can argue were incurred “in connection with” a covered D&O claim.

 

 

 

The memo provides an interesting presentation of the carrier perspective on the decision. Reading the memo, I wondered whether any policyholder-side coverage attorneys had written their own analyses of the decision from the perspective of insured companies. I hope that any readers aware of these alternative perspectives will please send them along to me. I will update this post with any additional materials that are sent to me about the case.

 

 

 

NAB Update: The closely watched National Bank of Australia case pending before the U.S. Supreme Court on a writ of certiorari from the Second Circuit has now been scheduled for oral argument. According to a post on The 10b5-Daily (here), oral argument in the case, which will address the question of the extraterritorial jurisdiction of U.S. courts over foreign domiciled companies under the U.S. securities laws, is now set for March 29, 2010.

 

 

 

The 10b-5 Daily post also has a link to the Petitioners’ Brief., which argues that under the federal securities laws there are no extraterritorial limitations on the U.S. courts’ jurisdiction. Finally, the blog post also links to a National Law Journal article (here) written by Columbia Law School Professor John Coffee suggesting that, in light of various pending legislative proposals, Congress and the Supreme Court are on a “collision course” on the question of extraterritorial jurisdiction of the U.S. securities laws. Coffee concludes by suggesting that “a legal train wreck might result from opposing approaches to global class actions.”

 

 

 

Detailed background regarding the NAB case can be found here.

 

 

 

Another Belated Securities Lawsuit Filing: In prior posts (for example, here), I have noted the phenomenon that developed in the second-half of 2009 where plaintiffs’ lawyers were filing securities class action lawsuit complaints well after the proposed class period cutoff date. In a more recent post (here), I noted that at least one lawsuit first filed in January suggested that this trend has continued in the New Year.

 

 

 

Yet another case filed this week suggests that this trend is continuing. In a January 21, 2010 press release (here), plaintiffs’ lawyers announced that they had filed a securities class action lawsuit in the Northern District of Illinois against Motorola and certain of its directors and officers. The lawsuit relates to alleged misrepresentations about the company’s sales of its RAZR2 telephone handset. The complaint in the case can be found here.

 

 

 

Though the complaint was only just filed, the proposed class period cutoff date is January 22, 2008, a full one year and 364 days prior to the filing date, and just before the expiration of the two-year statute of limitations applicable to ’34 Act claims.

 

 

 

In his comments in connection with the recent release of Cornerstone’s year-end analysis of the securities class action lawsuits, Stanford Law School Professor Joseph Grundfest had a number of choice comments about these belated securities class action lawsuit filings, essentially suggesting that the plaintiffs are scraping the bottom of the barrel (my words, not his) to file these belated lawsuits because they had run out of more meritorious cases to file. Public statements by leading plaintiffs’ attorneys (refer, for example, here) suggest more neutrally that they are just getting around to filing cases that were “backburnered” while the lawyers were concentrating on getting the subprime and credit crisis cases on file.

 

 

 

But whatever the explanation may be for the belated case filings, it is a very distinct phenomenon that has appears to be continuing as move well into 2010.

 

 

 

New SEC Climate Change Disclosure Guidance Ahead?: In prior posts (here), I discussed the possibility that the SEC could issue guidelines for public companies’ disclosures about climate change related issues and exposures. As discussed on the FEI Financial Reporting Blog (here), the SEC has announced (here) that in a meeting on January 27, 2010, it will be considering “a recommendation to publish an interpretive release to provide guidance to public companies regarding the Commission’s current disclosure requirements concerning matters relating to climate change.”

 

 

 

As the FEI Financial Reporting Blog explains, an interpretive release of this type is designed to provide final guidance on existing disclosure requirements. The blog post speculates that the guidance could be effective immediately upon release.

 

 

 

Cheers: I have joined the Facebook group "A Glass of Wine Solves Everything" (here). Although I can’t account for every glass, I can testify that I have developed an appreciation for two very different reds, Oregon Pinot Noir and Argentine Malbec. Although I must admit that these preferences manifest one of my biggest problems, which is the mismatch between my tastes and my pocketbook. Somehow, I don’t  think I will be able to work my way a glass of wine at a time to the point where I can afford the Burgundys, Bordeauxs and Super Tuscans that I would really prefer to apply to solving my problems.

 

On January 21, 2010, the insurance information firm Advisen released the latest in a series of various observers’ year end analyses of 2009 securities litigation. Advisen’s year report can be accessed here. The Advisen report takes a somewhat different approach than the other reports, and reaches some strikingly different conclusions. Among other things, the Advisen report, perhaps by contrast to prior studies, concludes that "securities litigation" (as that term is used in the report) is actually increasing.

 

Warning! Terminology Matters!

In order to appreciate the Advisen report, it is absolutely indispensible to understand that the Advisen report uses its own unique terminology.

 

The most important thing to understand is that the Advisen report uses the term "securities litigation" to include a very broad range of kinds of lawsuits, including not just securities class action lawsuits, but also derivative actions, regulatory and enforcement actions, individual lawsuits, and collective actions in courts outside the United States.

 

The Advisen report also apparently includes within the category "securities lawsuits" claims alleging "common law torts, contract violations and breaches of fiduciary duties."

 

So the report uses the term "securities lawsuits" basically to mean any type of corporate or securities litigation (other than ERISA litigation), regardless even of whether or not the legal action was commenced in the U.S. or even apparently whether it alleges a violation of the securities laws. Because of the enormous variety of litigation encompassed within this category, throughout this post I have put the phrase "securities lawsuits" or "securities litigation" in quotation marks.

 

The Advisen report also uses the phrase "securities fraud" lawsuits as a subset of the larger group of "securities lawsuits." Contrary to what you might expect, however, the category of "securities fraud" lawsuits does not include class action lawsuits alleging securities fraud – securities fraud class action lawsuits are their own separate category ("SCAS"). Instead, the phrase is used to refer to regulatory and enforcement actions — yet somehow also includes private securities lawsuits that are not filed as class actions.

 

So the "securities fraud" lawsuit category includes lawsuits alleging fraud under the federal securities laws if the fraud is alleged by an individual but not if it is alleged on behalf of a class.　

The Report’s Conclusions

Perhaps the most important contribution that the Advisen report makes to understanding what happened from a litigation standpoint is its observation that "securities litigation" — as broadly defined in the report – actually increased in 2009 by comparison to prior years. Thus the report states that in 2009 the number of "securities lawsuits" actually grew to 910 suits, up 13% from 2008, which in turn was up 33% from 2007.

 

This observation is interesting and seemingly contrasts with conclusions reported in other studies suggesting that securities litigation declined in 2009. The difference in the analysis is due to the fact that the other studies concentrated exclusively on securities class action lawsuit filings in the United States, whereas the Advisen report is focused more broadly on corporate and securities litigation generally, and on litigation both inside and outside the United States.

 

It appears that for several years, securities class action lawsuits as a percentage of all "securities lawsuits" have been declining. As recently as 2004, securities class action lawsuit filings represented as much as half of all " securities lawsuits" filed, whereas in 2009 securities class action lawsuits represent only about one quarter of all "securities lawsuits."

 

The point here is an important one – that is, even if absolute numbers of securities class action lawsuit filings are declining, that does not mean that overall claims activity is decreasing. To the contrary, claims activity is actually increasing, while at the same time the mix of cases filed is changing. So if you were to focus only on securities class action lawsuit filing levels, you might mistakenly conclude that overall claims susceptibility is decreasing. It is not. It is increasing.

 

But even with respect to the narrower issue of securities class action lawsuit filings ("SCAS"), the Advisen report reflects a different perspective than other studies.

 

The Advisen report reports a relatively higher number for the number of securities class action lawsuit filings in 2009 (234) compared, for example, to the Cornerstone tally of 169 securities class action lawsuit filings in 2009, but the Advisen study also reports a much slighter decline in securities class action lawsuit filings from 2008 to 2009 (234 in 2009, 239 in 2009), than does the Cornerstone study (223 in 2008 to 169 in 2009).

 

Part of the explanation for this seemingly enormous difference is categorization. Thus, the Advisen study counts securities class action lawsuits that were filed in state courts (there apparently were 15 state court securities class action lawsuit filings in the fourth quarter of 2009 alone), but the Cornerstone study does not.

 

Part of the explanation for the difference is methodological. As stated in its report, Advisen "counts each company for which securities violations are alleged in a singled complaint as a separate suit." As far as I can tell, the Cornerstone study would count that single complaint only once regardless of the numbers of corporate defendants named in the complaint – that is certainly the approach I use in my own tallies. The Advisen approach will inevitably lead to higher numbers than are reported in some other studies.

 

Part of the explanation for the difference is simply timing. The Advisen report includes filings through December 31, 2009, whereas the Cornerstone report only counts filings through December 21, 2009.

 

Among other things, the Advisen report states that the aggregate losses claimed in the "securities lawsuits" filed in 2009 was $1.3 trillion, compared to $1.2 trillion in 2008. The average losses per "securities lawsuit" were $9.8 billion in 2009, compared to $6.4 billion in 2008, which may be interpreted to suggest the possibility of "record payouts" for the securities lawsuits filed in 2009.

 

The report also contains an extensive discussion of the growing significance of "securities lawsuits" against non-U.S. companies. According to the study, there were 117 "securities lawsuits," or 13 percent of the total, filed against non-U.S. companies in 2009, including 46 "large cases" filed in non-U.S. courts. (The report does not specify what constitutes a "large case.") However, the report also notes that one subset of these "securities lawsuits" against non-U.S. companies, that is, the filings in the subcategory of "collective actions" were almost entirely concentrated in the first quarter and largely driven by Ponzi scheme cases.

 

The Advisen report is quite extensive and contains a wealth of information, and is worth reading at length and in full (albeit very carefully). But of all the observations contained in the report, by far the most important one is that even if securities class action lawsuit filings may have declined, overall "securities litigation" has not decreased – in fact, in 2009, "securities litigation," as that term is used in the Advisen report, increased materially and for the second consecutive year.

 

Securities Litigation Webinar: On Friday January 22, 2010 at 11:00 a.m. EST, I will be participating in a free one-hour "Review of Securities Litigation 2009 and Expert Views for the Year Ahead." The other panelists include Travelers’s Mark Lamendola, Beecher Carlson’s Jeff Lattmann, and Advisen’s Dave Bradford. Advisen’s Jim Blinn will moderate the panel. You can register for the webinar here.

 

In an earlier post (here), I wrote about a December 30, 2009 ruling in the MBIA coverage litigation that special litigation committee investigation expenses were covered under a D&O liability insurance policy. As I anticipated, the decision has proven to be controversial.

 

Two law firms that traditionally act as coverage counsel for D&O carriers recently released memoranda discussing the opinion. The Wiley Rein issued a brief memo (here) discussing the case and its holding. The Edwards Angell Palmer & Dodge law firm released a longer memorandum (here) also discussing the opinion.

 

The Edwards Angell memo, written by my friend John McCarrick and his colleagues, Maurice Pesso and Peter de Boisblanc, is particularly interesting because opens by reviewing the justification for the insurers’ standard position that special litigation committee expenses are not covered under the typical D&O insurance policy.

 

The Edwards Angell memo also includes a review of implications of and the likely consequences that flow from the decision. Among other things, the memo stresses that the decision did not hold that special litigation committee expenses will always be covered, but only under the facts presented. The memo also recites the difficulties and logical problems involved with characterizing the special litigation committee expenses as "defense costs" (including the likelihood that plaintiffs might use the characterization as a way of challenging the independence of the special litigation committee.).

 

The Edwards Angell memo concludes with this observation:

　

Unless and until the D&O insurers in MBIA press a successful appeal of this ruling to the Second Circuit Court of Appeals, D&O insurers should brace themselves for the likelihood that the MBIA ruling will be cited by policyholder counsel and brokers in an effort to significantly expand the scope of coverage for these kinds of legal expenses and costs, as well as to cover other fees and expenses that an insured can argue were incurred "in connection with" a covered D&O claim.

 

The memo provides an interesting presentation of the carrier perspective on the decision. Reading the memo, I wondered whether any policyholder-side coverage attorneys had written their own analyses of the decision from the perspective of insured companies. I hope that any readers aware of these alternative perspectives will please send them along to me. I will update this post with any additional materials that are sent to me about the case.

 

One final note on a related subject — the Wilmer Hale law firm has an interesting memo about recent developments in shareholder derivative litigation (here), which, among other things, discusses court’s’ increased scrutiny of special litigation committees, particularly with respect to the  question whether or not the committees are in fact independent.

　

NAB Update: The closely watched National Bank of Australia case pending before the U.S. Supreme Court on a writ of certiorari from the Second Circuit has now been scheduled for oral argument. According to a post on The 10b5-Daily (here), oral argument in the case, which will address the question of the extraterritorial jurisdiction of U.S. courts over foreign domiciled companies under the U.S. securities laws, is now set for March 29, 2010.

　

The 10b-5 Daily post also has a link to the Petitioners’ Brief., which argues that under the federal securities laws there are no extraterritorial limitations on the U.S. courts’ jurisdiction. Finally, the blog post also links to a National Law Journal article (here) written by Columbia Law School Professor John Coffee suggesting that, in light of various pending legislative proposals, Congress and the Supreme Court are on a "collision course" on the question of extraterritorial jurisdiction of the U.S. securities laws. Coffee concludes by suggesting that "a legal train wreck might result from opposing approaches to global class actions."

　

Detailed background regarding the NAB case can be found here.

　

Another Belated Securities Lawsuit Filing: In prior posts (for example, here), I have noted the phenomenon that developed in the second-half of 2009 where plaintiffs’ lawyers were filing securities class action lawsuit complaints well after the proposed class period cutoff date. In a more recent post (here), I noted that at least one lawsuit first filed in January suggested that this trend has continued in the New Year.

 

Yet another case filed this week suggests that this trend is continuing. In a January 21, 2010 press release (here), plaintiffs’ lawyers announced that they had filed a securities class action lawsuit in the Northern District of Illinois against Motorola and certain of its directors and officers. The lawsuit relates to alleged misrepresentations about the company’s sales of its RAZR2 telephone handset. The complaint in the case can be found here.

 

Though the complaint was only just filed, the proposed class period cutoff date is January 22, 2008, a full one year and 364 days prior to the filing date, and just before the expiration of the two-year statute of limitations applicable to ’34 Act claims.

 

In his comments in connection with the recent release of Cornerstone’s year-end analysis of the securities class action lawsuits, Stanford Law School Professor Joseph Grundfest had a number of choice comments about these belated securities class action lawsuit filings, essentially suggesting that the plaintiffs are scraping the bottom of the barrel (my words, not his) to file these belated lawsuits because they had run out of more meritorious cases to file. Public statements by leading plaintiffs’ attorneys (refer, for example, here) suggest more neutrally that they are just getting around to filing cases that were "backburnered" while the lawyers were concentrating on getting the subprime and credit crisis cases on file.

 

But whatever the explanation may be for the belated case filings, it is a very distinct phenomenon that has appears to be continuing as move well into 2010.

　

New SEC Climate Change Disclosure Guidance Ahead?: In prior posts (here), I discussed the possibility that the SEC could issue guidelines for public companies’ disclosures about climate change related issues and exposures. As discussed on the FEI Financial Reporting Blog (here), the SEC has announced (here) that in a meeting on January 27, 2010, it will be considering "a recommendation to publish an interpretive release to provide guidance to public companies regarding the Commission’s current disclosure requirements concerning matters relating to climate change."

　

As the FEI Financial Reporting Blog explains, an interpretive release of this type is designed to provide final guidance on existing disclosure requirements. The blog post speculates that the guidance could be effective immediately upon release.

 

Cheers: I have joined the Facebook group "A Glass of Wine Solves Everything." (here). In vino veritas, dude. I recently have developed an affinity for two very different kinds of red, Oregon Pinot Noir and Argentine Malbec — in part because one of the problems I have to solve is that I can’t afford the Burgundys, Bordeauxs and Super Tuscans I would prefer. In my next life, my blog will be about wine.