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.

 

Broadcom Corporation, which previously settled its options backdating related derivative suit for $118 million, announced on December 29, 2009 (here) that it had settled the separate options backdating related securities class action lawsuit pending against the company and certain of its directors and officers in exchange for its agreement to pay $160.5 million. The settlement is subject to court approval.

 

Because the company provided its D&O insurers with complete releases in connection with the prior derivative settlement, Broadcom apparently is funding the class action settlement entirely out of its own resources. Broadcom’s press release states that it will be recording the settlement amount as a one time charge in its fourth quarter 2009 financial statements.

 

Broadcom’s option backdating issues were of course recently in the news in connection with Judge Cormac Carney’s dramatic December 15, 2009 dismissal of the criminal indictments that were pending against several individual former directors and officers of the company. With the dismissal of the criminal charges and the settlements of the derivative and class action cases, Broadcom seems one step closer to finally putting its option backdating issues to rest. Judge Carney also dismissed the options backdating-related SEC enforcement action as well, though the SEC action dismissal was without prejudice. Judge Carney did also "discourage" the SEC from refilng its complaint.

 

In light of the circumstances surrounding Judge Carney’s dismissal of the criminal indictments, the size of the class action settlements is interesting. It certainly seems that given the concerns that Judge Carney noted in dismissing the indictments that the class action plaintiffs might face some formidable obstacles on key aspects of their case, including in particular in establishing that the defendants acted with scienter.

 

The dismissal of the criminal indictments doesn’t seem to have prevented a very substantial settlement of the class action, however. Indeed, the timing of the class action settlement, coming just two short weeks after the indictments were dismissed, seems to suggest that the elimination of the criminal case somehow opened the way for the class action settlement. Who knows, perhaps with the prosect of finally putting the options backdating woes in the past, the company moved quickly to get the class action case settled so that it might move on.

 

The Broadcom class action settlement is the third largest of the options backdating-related class action settlements, after the UnitedHealth Group settlement ($925.5 million) and the Comverse Technology settlement ($225 million). The Broadcom settlement, at $160.5 million, is just slightly larger than the $160 million Brocade Communications class action settlement.

 

With the addition of the Broadcom settlement, 32 of the 39 options backdating-related securities class action lawsuits that were filed have now been resolved. 23 of the cases have been settled and nine have been dismissed. My complete list of options backdating related lawsuit resolutions can be accessed here.

 

According to data that Adam Savett of the Securities Litigation Watch has been maintaining (here) , and with the addition of the Broadcom class action settlement, the 23 options backdating related settlements total approximately $1.94 billion. The average options backdating class action settlement has been $84.3 million, but if the massive UnitedHealth Group settlement is taken out of the equation, the average drops to about $44.1 million.

　

In a December 28, 2009 press release (here), the plaintiffs’ lawyers announced the settlement of the Comverse Technology options backdating-related derivative lawsuit. This derivative lawsuit settlement is separate from, but related to, the previously announced $225 million settlement of the Comverse Technology options backdating-related securities class action lawsuit (about which refer here).The bulk of the derivative lawsuit settlement consists of the previously disclosed agreement of Comverse’s former CEO Kobi Alexander to pay Comverse $60 million to be applied to the class action lawsuit settlement.

 

The derivative lawsuit stipulation of settlement (which can be found here), is dated December 17, 2009, the same day as the class action lawsuit settlement was announced. The settlement consists of a number of different components, the most significant of which is Alexander’s agreement to pay the $60 million to Comverse. As reflected in the company’s December 18, 2009 filing of Form 8-K (here), Alexander is to pay the $60 million into the derivative settlement fund and then the amounts are to be transferred to the class action settlement fund.

 

Alexander, as readers will no doubt recall fled to Namibia to evade options backdating charges, where he remains a fugitive. Due to his absence in Namibia, the arrangements for his payment of the $60 million are complicated, and are set out in a separate agreement (here). Among other things, Alexander has agreed to transfer certain investment accounts, real estate assets, insurance policies and other assets. Among other things, Alexander also agreed to relinquish his counterclaims against the company.

 

The company’s former General Counsel, William Sorin (who previously pled guilty to options backdating related criminal charges), also agreed to make two payments for the benefit of Comverse totaling $1 million, in addition to the more than $3 million he previously paid to the SEC. He also agreed to relinquish his counterclaims against Comverse seeking $2.2 million in damages relating to deferred compensation, lost wages and cancelled or revoked options and restricted stock.

 

The company’s former CFO, David Kreinberg, agreed to pay $75,000 for the benefit of Comverse, in addition to the $2.39 million he previously paid to the SEC. Kreinberg also agreed to relinquish his counterclaims for $4.3 million in damages relating to deferred compensation, lost wages, and cancelled or revoked options or restricted stock, as well as an additional $1 million in attorneys’ fees for which he had been seeking indemnification.

 

Comverse’s auditor during the time of the backdating scheme, Deloitte & Touche, agreed to pay the company $275,000.

 

Several individual defendants who had served on Comverse’s compensation committee will also collectively forfeit 155,000 in unexercised stock options.

 

The derivative lawsuit settlement stipulation also provides that "Comverse shall cause Comverse’s insurance carrier, on behalf of the Individual Defendants except for Mr. Alexander, Mr. Sorin, and Mr. Kreinberg, to pay to Comverse $1 million" by the later of either August 30, 2010 or thirty days after the derivative lawsuits and class action lawsuits are finally dismissed.

 

Finally, Comverse agreed to adopt or to keep in place certain corporate governance reforms.

 

Neither the company’s 8-K nor the plaintiffs’ lawyers’ press release mentions it, but the derivative suit’s stipulation of settlement also provides that Comverse will pay the plaintiffs’ attorneys’ fees of $9.35 million. Neither the settlement documents nor the company’s 8-K specify whether this amount will be offset in whole or in part by the payment of insurance.

 

Given the fact that insurance is expressly mentioned in the stipulation in connection with the $1 million payment, the inference is that, other than with respect to the $1 million payment, insurance funds are making no other contributions to the settlement. (There is also nothing in the documents expressly confirming that the carrier has agreed to pay the $1 million amount.)

 

In the absence of insurance payments (other than with respect to the $1 million payment), the $9.35 million in plaintiffs’ attorneys’ fees seems like a heavy burden to impose on the company, which may explain why neither the plaintiffs’ lawyers’ press release nor the company’s 8-K mentioned this amount.

 

It is complicated to calculate the relation between the burdens the derivative lawsuit imposed on the company compared to the benefit to company from the lawsuit. On the one hand, the plaintiffs in the derivative suit would cite Alexander’s agreement to pay the $60 million as benefit the derivative suit produced. I hope some of us can be forgiven for being confused about which lawsuit produced the $60 million payment.

 

Setting the $60 million aside, the other benefits to the company from the derivative settlement appear, at least relative to the size of the derivative plaintiffs’ $9.35 million attorneys’ fees, relatively modest. 

 

That said, the plaintiffs’ lawyers’ undoubtedly would argue that the $60 million settlement contribution should not be set aside but rather represents a very significant benefit to the company from the derivative lawsuit, and that benefit is the context within which the $9.35 million attorneys’ fees should be assessed. The size of Alexander’s $60 million settlement contribution is noteworthy, but Alexander’s fugitive status and location in Namibia, as well as the complex state of his financial affairs given his fugitive status, unquestionably add an extraordinary degree of difficulty to the negotiation of his contribution.

 

Another insurance question arises from the settlement’s requirement that Kreinberg relinquish his claim for indemnification of $1 million in attorneys’ fees. The agreement appears to be silent on the question whether Kreinberg can, notwithstanding his indemnification relinquishment, still seek payment of his attorney’s fees from the company’s D&O insurance carrier.

 

Kreinberg might contend (assuming for the sake of argument that policy funds remain) that he is entitled to have his fees paid under Side A of the policy, relating to amounts for which indemnification is unavailable. An interesting question is the extent to which the policy’s presumptive indemnification clause would presume indemnification notwithstanding Kreinberg’s indemnification relinquishment, which the carrier might assert as a basis to assert that Side A has not been triggered. (I suspect the carrier might well assert other defenses to coverage as well.)

 

I have in any event added the Comverse derivative settlement to my register of options backdating-related lawsuit resolutions, which can be accessed here.

　

　

　

Beazer Homes has announced in its December 22, 2009 filing on Form 8-K (here) that it has settled the subprime-related shareholder’s derivative lawsuit that had been filed against the company, as nominal defendant, and certain of its directors and officers. According to the filing, the case has been settled in recognition of the corporate governance reforms the company has enacted and in exchange for the agreement to pay the plaintiff’s attorneys’ fees of $950,000. As reflected below, this appears to be the first settlement of a subprime-related derivative lawsuit.

 

The Derivative Lawsuit and Settlement

The plaintiff had filed a shareholders’ derivative complaint in Northern District of Georgia in April 2007. (A separate complaint filed in Delaware was later dismissed.). According to the plaintiff’s amended consolidated derivative complaint (here), the individual defendants breached their fiduciary duties and violated the federal securities laws by ignoring "numerous and obvious ‘red flags’ existing even prior to 2006 that alerted them or would have alerted them had they not consciously disregarded such red flags, to a plethora of improper loan practices at Beazer." The loan practices "eventually led to a vast amount of foreclosures and other problems, materially impacting the company’s stability."

 

The amended complaint also alleges that the defendants’ mismanagement has led to investigations of the company’s mortgage and accounting practices by the IRS, the Department of Justice, the FBI, HUD, and the SEC.

 

As part of the settlement and as reflected in the parties’ October 30, 2009 stipulation of settlement (here), Beazer acknowledged "that the commencement, prosecution and settlement of the Derivative Action were material contributing factors in causing the Company to agree to adopt and/or implement the corporate governance reforms and remedial measures" described in an attachment to the stipulation.

 

In addition, the stipulation provides that "Beazer and the individual defendants shall pay, or cause their insurers to pay, upon Court approval, an aggregate amount of $950,000 to Plaintiff’s Counsel for their attorneys’ fees and reimbursement of expenses."

 

There is nothing in the agreement to indicate that the company’s insurers have affirmatively agreed to pay these amounts.

 

Related Litigation

Beazer Homes and certain of its directors and officers had also been separately sued in a securities class action lawsuit, that later resulted in a $30.5 million settlement (here), that was, according to the company’s press release at the time, to be funded from insurance proceeds." Subsequent to the class action settlement, certain mutual fund investors in Beazer elected to opt out of the class action settlement and in September 2009 filed their own separate opt-out complaint in the Northern District of Georgia.

 

Beazer is now engaged in coverage litigation with its third level excess D&O insurer, as reflected in the declaratory judgment complaint that Beazer filed against the carrier on December 17, 2009, in the Northern District of Georgia. According to the coverage lawsuit, Beazer’s third level excess carrier "wrongfully denied coverage for Beazer Homes in connection with the Opt-Out Litigation." The complaint goes on to recite that the carrier’s "sole ground" for denying coverage "is the assertion that Beazer Homes purportedly breached a so-called ‘warranty letter.’" (My recent post discussing "warranty letters" can be found here.}

 

Discussion

With Beazer’s top level excess carrier denying coverage and engaged in coverage litigation with the company, it is unclear whether or to what extent insurance is presently available to fund the cash portion of the Beazer derivative settlement, even assuming insurance would otherwise apply to an agreement to pay the plaintiff’s attorneys’ fees.

 

But setting aside the issues surrounding the availability of insurance to fund the payment of the plaintiff’s attorneys’ fees, there is the overall question of the benefit of litigation that is settled in "recognition of" remedial actions that the company has already taken, undoubtedly due to the onslaught of regulatory and legal problems the company has encountered.

 

To be sure, the stipulation recites that the derivative litigation was a "material contributing factor" in causing the reforms to be initiated. Some observers may question whether the reforms would have been enacted in any event regardless of the derivative lawsuit, and might even question the social utility of a process the most tangible result of which is the transfer of monies to the plaintiffs’ lawyers who initiated the process. Those same observers would likely also note that the stipulation’s concession about the role of the derivative suit in the implementation of the governance reforms was simply a price the defendants had to pay to put an end the derivative suit, the same as the agreement to pay plaintiffs’ attorneys’ fees.

 

By my count, there were twenty seven subprime and credit crisis related derivative lawsuits filed, as reflected here. As far as I can determine, the Beazer Homes derivative settlement is the first of the subprime and credit crisis-related derivative suit to settle. There undoubtedly will be other settlements ahead.

 

Though Beazer Homes derivative suit is not options backdating related, it reflects the same settlement pattern as many of the options backdating derivative suits. As shown on my table of options backdating related derivative lawsuit case resolutions (which can be found here), many of the backdating derivative cases resulted in settlements comprised of an agreement to adopt corporate therapeutics and governance reforms, together with the payment of plaintiffs’ attorneys’ fees.

 

It remains to be seen whether others of the subprime and credit crisis related derivative suits will settle on the same or similar grounds. The plaintiffs’ lawyers that make their living off of these kinds of cases will have to accept that there will be questions about the value for shareholders and for society from this process, where the most visible thing that is accomplished is the plaintiffs’ lawyers collection of their fees. Of course, the plaintiffs’ lawyers themselves will cite the corporate reforms, a point which in the interest of balance, I acknowledge here.

 

I have in any event added the Beazer Homes derivative settlement to my tally of subprime and credit crisis related lawsuit resolutions, which can be accessed here.

 

Break in the Action: The D&O Diary will be on a short break over the next few days. We will resume the "normal" publication schedule after the holidays.

 

But before I go, I wanted to leave something to make you smile. Here, if you have not yet seen it, is Jill and Kevin’s Wedding Dance. Enjoy. (My oldest daughter says: "I like the bridesmaids’ dresses. They seem like people I would like, too –they dance the same way I do.")

 

https://youtube.com/watch?v=4-94JhLEiN0%26hl%3Den_US%26fs%3D1%26

Since the sole remaining Friday in December is also Christmas Day, the seven banks the FDIC closed last Friday night may represent the last bank failures of 2009. Of course, there is no legal requirement that Friday is the only day of the week on which the FDIC can close a bank. The FDIC could close additional banks on any of the few remaining business days left this year. But given the holiday season, the 140 year-to-date number of bank failures seems likely to be where we will end the year.

 

The 140 bank closures were both widely dispersed and narrowly concentrated. The FDIC took control of banks in 32 different states, but the closures were particularly clustered in four states: Georgia (with 25 closures), Illinois (21), California (17), and Florida (14). These four states alone account for 77 of the bank failures this year, more than half of the year to date total. Indeed, no other state had double digit numbers of bank failures. The next closest states were Minnesota (6), Texas (5) and Arizona (5).

 

Though the bank closures have been geographically dispersed, certain regions have been spared. For example, there were no 2009 bank failures in the New England states of Maine, Vermont, New Hampshire, Massachusetts, Connecticut or Rhode Island, and only one each in New York and Pennsylvania. And though Georgia and Florida have seen high numbers of bank failures, much of the rest of the South has been relatively untouched – there were no 2009 bank failures in West Virginia, South Carolina, Tennessee, Mississippi, Arkansas and Louisiana, and only one each in Virginia, Kentucky and Oklahoma.

 

Among the banks that failed in 2009 were some of the country’s largest, including Colonial Bank (with assets of $25 billion), Guaranty Bank ($13 billion), and BankUnited ($12.8 billion). However, these banks all are smaller than two of the larger banks that failed in 2008, Washington Mutual ($307 billion) and IndyMac ($32 billion).

 

But though there the list of failed banks includes these larger banks, the list of bank closures really has been predominated by smaller banks. Of the 140 banks that failed in 2009, 112 (80%) involved institutions with less than $1 billion in assets. Indeed, 97 of the 140, or about 69%, had assets of under $500 million. 21 of the 2009 failed banks, or 15%, has assets of under $100 million.

 

Lest anyone might optimistically hope that with the end of 2009 we have put these sad tidings in the past, the 2009 bank closure timeline seems to suggest to the contrary. Of the 140 banks that closed in 2009, 95 (or about 68%) closed in the second half of the year, compared to 45 in the first half of the year. Though the highest monthly total was in July (when 24 banks were closed, nearly as many as the 25 banks that failed in all of 2008), there were significant numbers of closures in October (20) and December (16).

 

The FDIC’s latest Quarterly Banking Profile stated that as of September 30, 2009, it graded 552 banks as "problem" institutions (about which refer here), which suggests there could be many bank closures yet to come – which helps explain why FDIC Chairman Sheila Bair last week proposed to increase the agency’s budget and staff, in order for the agency to be able to deal with the anticipated increasing numbers of banking failures in 2010.

 

I have previously commented the high numbers of bank failures in Georgia, which has been referred to as the "bank failure capital of the world." In that regard, it is noteworthy that there were as many 2009 bank failures in Georgia (25) as there were in the entire country in 2008. In the two year period, Georgia has a total of 30 failed banks, as detailed here.

 

Who Might Sue When Banks Fail: In prior posts (for example, here), I have noted developments in claims being asserted against directors and officers of failed financial institutions by disappointed investors and by banking regulators. But in addition to these two groups that potentially might assert claims against the directors and officers of failed banks, another group of potential claimants also has recently emerged – the employees of the failed banks.

 

For example, as reflected in their December 17, 2009 press release, plaintiffs’ attorneys filed a class action lawsuit in the Western District of Washington against Venture Financial Group, the parent of Venture Bank, which regulators closed on September 11, 2009. The lawsuit is filed on behalf of the participants in the bank’s retirement plans. The defendants include the holding company’s directors and officers, some of whom also served on the bank’s board, as well as the individual members of the plans’ administrative committees.

 

The complaint, which can be found here, alleges that the bank engaged in "a number of large, high-risk and inappropriate investment practices." These practices, "combined with its hazardous lending practices produced more than $200 million losses" and "exposed the retirement plans," which included investments in the holding company’s stock, and which allegedly sustained more than $12 million in losses. The complaint seeks to recover damages on behalf of the plan participants under ERISA.

 

On December 16, 2009, the same plaintiffs’ firm also announced (here) that it is investigating the possibility of a similar ERISA class action behalf of participants in the benefits plans of Sterling Financial Corporation, which, though it is not among the banks that the FDIC has closed,  was also recently hit with a securities class action lawsuit.

 

This new lawsuit and the plaintiffs’ lawyers’ investigation announcement underscore that in the wake of a bank failure there are a variety of constituencies might consider initiating claims against the failed institution’s directors and officers. This is all just one more reason I think that one of the key litigation trends we will see in 2010 is an upsurge in litigation against the directors and officers of failed banks.

 

The Receiver’s Right to Stay Failed Bank Litigation and Require Exhaustion of Administrative Remedies: Though other constituencies may seek to assert claims, the FDIC has rights to seek a stay of the other claimants’ lawsuits under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA), as reflected in a December 10, 2009 order in the Northern District of Texas lawsuit involving Millennium State Bank. Millennium failed on July 2, 2009 (refer here). Investors who had purchased Millennium stock filed a state court action against the bank, its directors, its auditors and its offering underwriter. The investors claimed they had been provided incomplete and inaccurate information about the bank. The investors alleged violations of Texas securities law and common law, and they sought to rescind their investment traction and/or damages.

 

The FDIC moved to intervene in the state court suit and then removed the case to the Northern District of Texas. The FDIC then filed a motion under FIRREA, arguing that the investors’ case should be stayed and that the plaintiffs’ and intervenors’ claims must be "exhausted under the administrative claim procedure of FIRREA."

 

The court granted the motion, holding that the FDIC was entitled to the stay, saying that "the law is well established that a stay is mandatory for any claim subject to FIRREA, if the receiver requests one." The court rejected the investors’ argument that the FDIC was not entitled to a stay because they had not named the bank as a party. The court found that "the mandatory stay applies to all claims against the bank and any related third parties" and found further that under FIRREA the "stay is required as to all parties."

 

The court quoted case authority from the prior era of failed banks to the effect that refusing to grant a stay "would largely defeat FIRREA’s purpose of allowing the agency to evaluate claims in a streamlined administrative procedure."

 

The court granted the stay until the earlier of the date on which the FDIC as receiver disallows the claims or until the 180-day administrative review period has expired.

 

In other words, though there may be many constituencies that may seek to pursue claims in the wake of a bank’s failure, the FDIC has rights under FIRREA to sort out which claims will go forward. It seems likely one consideration that might affect whether the FDIC will allow a claimant’s case to go forward would be whether the FDIC intends to pursue its own claims as receiver against the defendants (and, it should probably be added, to try to maximize its own recovery from D&O insurance proceeds). As I previously noted (here), the FDIC has already established that it is going to be aggressive in asserting its priority rights to assert claims against the directors and officers of failed financial institutions.

 

So if, as I expect, there will be an upsurge in failed bank litigation in 2010, the FDIC is going to call the shots.

 

In a December 4, 2009 order (here), Southern District of Ohio Judge Michael H. Watson granted the defendants’ motion to dismiss the consolidated subprime-related securities class action lawsuit against Huntington Bancshares. Judge Watson granted the motion based on his findings that plaintiffs had failed to adequately allege both falsity and scienter. The dismissal is with prejudice.

 

Background

In December 2006, Huntington and Sky Financial announced their plans to merge. In July 2007, Huntington’s $3.3 billion acquisition of Sky closed. For many years, one of Sky’s clients had been Franklin Credit Mortgage Corporation. Franklin originated subprime mortgage loans, some of which it sold in the secondary mortgage market. For seventeen years, Sky made loans to Franklin that Franklin used to finance its mortgages. In July 2007, Sky had $1.5 billion exposure to Franklin.

 

On November 16, 2997, Huntington alerted its investors that Franklin recently announced the deterioration of its mortgage portfolio. Huntington announced that because of Franklin’s announcement, it (Huntington) would be taking a fourth quarter after-tax charge of $300 million to build up its allowance for loan losses. Huntington also stated that it expected to report a fourth quarter loss. On this news, Huntington’s share price declined from $16.08 to $14.75.

 

Plaintiffs filed a securities class action lawsuit on behalf of investors who purchased Huntington shares between the date of the merger and November 16, 2007. Plaintiffs allege that Huntington’s acquisition of Sky subjected Huntington to significant subprime exposure because of Sky’s relationship with Franklin. The plaintiffs allege that Huntington misled investors regarding its ability to weather the deteriorating real estate and subprime mortgage market. The defendants moved to dismiss.

 

The December 4 Order

In his December 4, Judge Watson granted the defendants motion to dismiss, on the grounds that the plaintiffs had failed to adequately allege falsity and scienter.

 

In reaching the conclusion that the defendant had not adequately alleged falsity, Judge Watson noted that:

 

The Complaint does not allege any specific facts that Huntington’s disclosures were incompatible with any reports, data, or signs that Franklin would be unable to pay its loans to Huntington, nor does the Complaint do anything more that allege Defendants should have known the continuing erosion of the real estate market would render the loan portfolio precarious. Significantly, Huntington’s public statements all address the faltering real estate market, … increases in delinquencies in the industry, and the prospect of increases of allowances for loan and lease losses. No information suggests Huntington knew of Franklin’s situation prior to Franklin’s own announcement that it was having problems.

 

Even though Judge Watson concluded that the plaintiffs’ failure to allege falsity was a sufficient basis on which to dismiss the complaint, he separate analyzed the scienter issue as "an alternative basis" for his ruling.

 

After reviewing the plaintiffs’ allegations, Judge Watson found that the Plaintiffs "fail to establish a strong inference of scienter." He noted that:

 

Viewed in their aggregate, Plaintiffs’ allegations do not give rise to a "cogent" inference that Defendants possessed the requisite knowing or reckless intent to manipulate, deceived or defraud. The allegations concerning Huntington’s alleged knowledge after the due diligence period during the acquisition, the self-interested motives of Defendants, and the closeness in time of the supposed fraudulent statements and later disclosures, all lack the factual particularity that would support an inference of fraudulent intent that is "at least as compelling as any opposing inference."

 

Judge Watson’s dismissal ruling was with prejudice.

 

I have added the Huntington Bancshares dismissal to my register of subprime and credit crisis-related lawsuit dismissal motion rulings, which can be accessed here.

 

Special thanks to Adam Savett of the Securities Litigation Watch blog for providing me with a copy of the Huntington Bancshares ruling.

 

Amended Complaint Survives Former IndyMac’s CEO’s Dismissal Motion: In a contrary development in a high profile west coast subprime-related lawsuit, on December 11, 2009, Central District of California Judge George Wu’s denied the motion of former IndyMac CEO Michael Perry to dismiss the plaintiffs’ Fifth Amended Complaint. Judge Wu’s minute order entry of his ruling can be found here.

 

The tortured procedural history of the IndyMac case, which among things led up to the filing of five amended complaints, can be found here. As a result of this twisted procedural path and Judge Wu’s December 11 ruling, this IndyMac suit will now go forward solely as to Perry.

 

Judge Wu’s December 11 ruling adds the IndyMac case to the now growing list of subprime lawsuits that were initially dismissed but that following amended pleading survived renewed motions to dismiss, including, for example, the WaMu case (here) and the PMI Group case (here).

 

I have in any event also added the December 11 ruling in the IndyMac case to my tally of dismissal motion rulings, linked above.

 

Apology: I sincerely apologize for the faulty link to the transcript of the hearing in the Broadcom case in yesterday’s blog post. Readers who were frustrated because they could not access the transcript can find a correct link to the transcript here. I have also corrected the link on the blog post.

 

Again, I apologize for the error, which is just one of those things that can happen with late-night blogging.

 

Sometimes I really wish I had a fact-checker or editor following along behind me to protect against blogging boo-boos like that.

　

According to a December 17, 2009 press release from the lead plaintiff’s attorneys, the parties to the Comverse Technology options backdating related securities lawsuit have agreed to settle the case for $225 million dollars. A particularly noteworthy feature is that the settlement amount includes a $60 million individual contribution from the company’s former CEO, Kobi Alexander, who famously fled to Namibia after the options backdating allegations surfaced.

 

The $225 million settlement represents the second largest of settlement of an options backdating-related securities class action lawsuit. The only larger backdating settlement is the mammoth $925 million settlement of the UnitedHealth Group options backdating securities suit (about which refer here and here). A complete list of options backdating settlements and case resolutions can be found here.

 

According to data compiled by Adam Savett of the Securities Litigation Watch, and taking into account this latest settlement, of the 39 options backdating related securities class action lawsuits that have been filed, 22 have now settled, along with nine that have been dismissed, meaning that there are still nine of the securities suits yet to be resolved. The $225 million settlement far exceeded the prior average options backdating securities suit settlement of about $74 million (or $31.82 million if the outsized UnitedHealth Group settlement is dropped out of the equation). The aggregate amount of all the options backdating securities suit settlements is, with the Comverse settlement, now up to $1.785 billion. UPDATE: The Securities Litigation Watch has updated its analysis to reflect the Comverse settlement, here.

 

Alexander’s extraordinary agreement to contribute $60 million to the settlement out of his own funds represents something of a milestone. The plaintiffs’ lawyers press release says that the amount "one of the largest recoveries from a former executive to settle a federal securities class action." By way of comparison, former UnitedHealth Group CEO William McGuire agreed to pay $30 million in settlement of the securities class action claims against him, as well as to have certain unexercised options grants canceled.

 

Regardless of where the amount falls in terms of size of individuals’ settlement contributions, it undoubtedly is the largest contribution by an individual defendant while simultaneously evading extradition. Alexander’s getaway to Namibia provided one of the more interesting subplots of the entire options backdating episode. You do kind of wonder exactly how he is going to handle the currency transfers. UPDATE: The parties’ agreement regarding this settlement, which can be found here, specifically references various investment accounts of Alexanders that were seized by the U.S. Marshall’s service. The agreement indicates (see page 17-19) that Alexander will cooperate and facilitate in the forfeiture of those accounts.

 

In addition, none of the information available to date about the securities class action settlement reveals whether the settlement resolves or even addresses the separate lawsuit that Comverse filed against Alexander and the firm’s former General Counsel, in which the company sought to recover $70 million in damages. Nor does the available information disclose whether or not the settlement resolves or addresses the separate lawsuit that Alexander filed against Comverse for more than $72 million of severance and other compensation.

 

The details surrounding the settlement contributions from Comverse itself are not entirely clear, either As of the time and date of this blog post entry, the parties have not yet filed their settlement agreement with the court, not has the company made any disclosures about the settlement. The information publicly available about the settlement does not disclose whether or not insurance will make any contribution to the settlement. However, at least one media story about the settlement suggests that the company will make its contribution in a number of payments during 2010, which, at least to the extent of those payments, seems inconsistent with funding for the settlement from insurance. UPDATE: According to Ben Hallman’s December 18, 2009 article in the AmLaw Litigation Daily (here), Comverse intends to finance its $165 million share of the settlement by selling auction rate securities back to UBS, and if that doesn’t work it will cover the amount with a a mix of cash and stock. Under the settlement agreement, Comverse’s payments are to be paid into the settlement escrow account in a series of staged payments during 2010 and 2011.

 

Clearly there are still some details yet to be revealed about the settlement. I will supplement this post if I am able to unearth more details about the settlement.

 

One final note about the Comverse Technology options backdating issues is that this is one case that has resulted in a successful criminal prosecution. Even though the company’s former CEO is still evading extradition in Namibia, prosecutors did secure a criminal guilty plea from the company’s former General Counsel. In the wake of the dismissal of all of the individual indictments in the Broadcom case that I blogged about yesterday, it is notable that this is one case where the criminal charges stuck – again, notwithstanding Alexander’s evasion of arrest.

 

There has been widespread news coverage of the dramatic December 15, 2009 decision of Central District of California Judge Cormac Carney to throw out the options backdating related criminal charges against Broadcom co-founder Henry T. Nicholas III and CFO William Ruehle, based on prosecutorial misconduct.

 

But even though many of press accounts have reproduced some of Judge Carney’s harshest words – particularly his statement that the government’s treatment of a third defendant, Henry Sameuli, was "shameful and contrary to American values of decency" – the excerpts do not come close to capturing the depth and breadth of the Judge’s condemnation of the prosecutor’s conduct.

 

The transcript of the December 15 hearing at which Judge Carney delivered his ruling can be found here. I strongly recommend taking a few minutes and reading the entire transcript (it is relatively short), because only a complete reading truly conveys the extent of Judge Carney’s censure.

 

His reproach of the prosecutors is comprehensive, extensive and scathing. Judge Carney dropped a bomb on the prosecution. Not by accident, as if he got a little angry and then got carried away. No. Judge Carney clearly and consciously intended to summon every molecule of the power of his position and marshalled every tool in the arsenal of language. Judge Carney’s decision is a case-hardened, bunker-buster, heat -seeking bomb — that hit the bulls-eye.  

 

Among other things, he cites the prosecutors for "intimidating and improperly influencing" witnesses, which "compromised the truth process and compromised the integrity of the trial"; for making improper leaks to the media; for improperly pressuring Broadcom to terminate Samueli; for obtaining an "inflammatory indictment" of Samueli; and crafting "an unconscionable plea agreement" with Samueli.

 

Assistant U.S. Attorney Andrew Stolper, the lead prosecutor in the case, received particularly sharp criticism. Among other things, Judge Carney said that "the lead prosecutor somehow forget that truth is never negotiable." Of the case against Ruehle, Judge Carney said that to submit it to the jury "would make a mockery of Mr. Ruehle’s constitutional right to compulsory process and a fair trial."

 

In addition to the sheer potency of Judge Carney’s rhetoric, there are several other interesting aspects to Judge Carney’s rulings, some of which have not been fully noted in press reports.

 

The first is that Judge Carney’s decision to dismiss the case against Nicholas came during Ruehle’s trial. Nicholas was to be tried separately later. There was not even a motion on behalf of Nicholas pending. Moreover, Judge Carney’s dismissal of the indictment of Nicholas came just days after Judge Carney dismissed Samueli’s prior guilty plea, following Samueli’s testimony at Ruehle’s trial. Judge Carney’s decisions to first dismiss Samueli’s guilty plea and then to dismiss the case against Nicholas shows the extent of the concerns that were raised in Judge Carney’s mind as Ruehle’s trial unfolded.

 

Second, Judge Carney not only dismissed the criminal cases, he dismissed the SEC’s options backdating related enforcement action without prejudice –again, even though that SEC enforcement action was not formally before Judge Carney at the time. Judge Carney allowed the SEC thirty days to file an amended complaint, but he did also "discourage" the SEC from proceeding further, since "the government’s misconduct has compromised the integrity and legitimacy of the case" and the evidence during Ruehle’s trial "established that the SEC will have great difficulty proving that the defendants acted with reckless scienter."

 

Judge Carney also ordered the government to show cause why the separate drug distribution-related indictment against Nicolas should not be dismissed, and scheduled a date in February 2010 for the matter to be heard. Among concerns Judge Carney noted about the drug indictment is "government’s threats to issue a grand jury subpoena to Dr. Nicolas’ 13-year old son and force the boy to testify against his father."

 

Third, as part of discouraging the SEC from refiling its complaint, Judge Carney raised fundamental questions that go to the heart of the entire options backdating brouhaha –immediately after he had said that the SEC will have difficulty proving scienter. He said:

 

The accounting standards and guidelines were not clear, and there was considerable debate in the high-tech industry as to the proper accounting treatment for stock option grants. Indeed, Apple and Microsoft were engaging in the exact same practices as those of Broadcom.

 

These remarks suggest that, in addition to all of Judge Carney’s other concerns about the prosecutor’s misconduct, he also has fundamental concerns about whether there could possibly have been a culpable state of mind in connection with backdating. His reference to the uncertainty of the applicable standards and extent of the practices (even Apple and Microsoft!) certainly seems to raise questions about whether any criminal prosecution or even enforcement action is appropriate, not just the one against the Broadcom defendants.

 

Judge Carney clearly is quite sure that there was something wrong with the prosecutor’s actions in prosecuting the case, but he doesn’t seem to be sure at all whether or not there is actually anything wrong with backdating itself. Could these two points be related? Hmmm…

 

Indeed, this fundamental problem with the backdating allegations may explain why prosecutors have had so much trouble obtaining and retaining backdating convictions. Thus, for example, the conviction of former Brocade Communications CEO Gregory Reyes was overturned, again for prosecutorial misconduct (based on improper statements prosecutors made to the jury), and McAfee’s former general counsel, Kent Roberts, was acquitted.

 

It does sort of make you wonder whether Kobe Alexander might  now having second thoughts about his decision to flee to Namibia rather than face the criminal charges for alleged options backdating at Comverse.

 

Though the Broadcom criminal indictments have been dismissed and the SEC enforcement action has also been dismissed, possibly for good, an enormous amount of damage has been done. There is not only the terrible toll that the legal actions took on the lives of the individual criminal defendants. There is the almost unbelievable cost that all of these actions imposed on the company and its insurers.

 

As I noted in a prior post (here), Broadcom agreed, as part of the settlement of the options backdating-related shareholders’ derivative lawsuit, to settle its claims against its directors’ and officers’ liability insurers for $118 million, all of which represented a payment to the company in reimbursement of defense expenses incurred in connection with the various backdating-related legal proceedings. In the recitals to the insurance settlement, the parties stated that at point Broadcom’s cumulative legal expenses exceeded $130 million.

 

It is very hard not to conclude that entire sorry options backdating scandal has been an enormous waste, of time, talent and money.

 

There have been a number of interesting blog posts about Judge Carney’s dismissals of the Broadcom indictments, including items on the SEC Actions blog (here) and on the Ideoblog (here). The WSJ.com Law Blog has a post (here) comparing Judge Carney to Judge Rakoff.

 

Special thanks to Nancy Adams of the Mintz Levin firm for forwarding me a copy of the hearing transcript.

 

Even More Failed and Troubled Banks Next Year?: According to yesterday’s Wall Street Journal (here), the FDIC is looking to increase its budget by 35% next year and to add 1,600 new staffers, as the agency struggles to deal with the complications from the wave of failed and troubled banks. Among the reasons that agency Chairman Sheila Bair cited to justify moves is that the increases  "will ensure that we are prepared to handle an even larger number of bank failures next year, if that becomes necessary, and to provide regulatory oversight for an even larger number of troubled institutions"

 

The suggestion that the FDIC must be prepared for even more failed and troubled banks in 2010 is disturbing. There have already been 130 failed banks this year, and at the time of the FDIC’s last Quarterly Banking Profile, the FDIC reported that there were 552 Problem Institutions as of September 30, 2009, as noted here. Put simply, the FDIC thinks in order to be prepared for 2010, it has to be ready to deal with more than 130 additional bank failures next year and more than 552 troubled institutions.

 

Clearly, the banking industry’s problems are deep and continuing. The problems associated with failed and troubled banks are among the most significant concerns as we head into 2010.

 

Goodbye to All That: The blogosphere is losing one of its most talented and esteemed members. Yesterday, our friend, law-school compatriot and fellow blogger, Mark Herrmann, of the incomparable Drug and Device Law Blog, announced that he is retiring from blogging. Alas.

 

Herrmann, who has been a partner at Jones Day since before dinosaurs roamed the earth, is leaving Big Law to go be a client — I mean , to become Vice President and Chief Counsel – Litigation at AON Corporation. As a result, Herrmann no longer thinks he will have as much time to write about legal issues surrounding medical drugs and devices — go figure. 

 

Herrmann is moving on to do God’s work, defending against unscrupulous types who would presume to sue insurance brokers. But as a result, the blogosphere is losing one of its most intelligent, cantankerous and amusing voices. Have no fear, his blogging partner (A blogging partner! What a concept! I should have thought of that!), Jim Beck, will be carrying on the fine tradition of the Drug and Device Law Blog.

 

Everyone here at The D&O Diary wishes Herrmann every success at AON. May the force be with you, Mark. Welcome the world of insurance brokerage, dude.

 

On December 15, 2009, NERA Economic Consulting released its annual study of securities class action litigation trends. The study, entitled "Recent Trends in Securities Class Action Litigation: 2009 Year-End Update," and written by my friends Stephanie Plancich and Svetlana Starykh, can be found here. The study concludes that, notwithstanding the decline in credit crisis related filings in the second half of 2009, the projected year-end filing levels will be within historical norms. Average and median securities class action settlements are also consistent with recent trends.

 

According to the study, credit crisis related filings, which predominated class action filings during 2007 and 2008, "gradually declined" as 2009 progressed. Despite this decline, the total number of securities suit filings has not dropped off, "as other types of cases replaced credit crisis filings."

 

Based on NERA’s own counting methodology (which, as is explained in footnote 2 of the report, counts separate filings in separate circuits as separate lawsuits until the cases are consolidated), NERA counted 215 securities class action lawsuit filings through November 30, 2009, which projects to 235 filings by year end. Though the projected total of 235 would be below the 2008 level of 253 filings, it is well within the 1997-2004 average of 231 annual filings.

 

Although the 2009 filing levels look as if they will fall within historical levels, the 2009 filings were swollen by at least a several phenomena that may be short lived. Thus, for example, 36 of the 2009 filings involve Ponzi schemes. Though there may continue to be Ponzi scheme revelations as we head into 2010, it does seem likely that there may be fewer of those stories ahead.

 

Similarly, the 2009 filings were also increased by 13 new cases related to leveraged ETFs. (My prior post about ETF-related lawsuits can be found here). Though there may be further ETF cases yet to come, this group of cases seems likely to decline, as virtually all of these filings relate to a single family of funds and all relate to a single set of disclosures about the funds’ performance over time.

 

A third filing pattern that may not continue going forward is the number of cases in which the filing date falls well after the proposed class action cutoff date. (My most recent post about these apparently belated securities suit filings can be found here.) The NERA study shows that during the second half of 2009, the average time between the end of the class period and the date of the first filing lengthened to 279 days (versus a period of 161 days for suits filed during the preceding three years). The NERA study speculates that this may be a reflection of the fact that plaintiffs firms have been "focused on the large credit crisis cases over the last two years," but that they are "now able to focus on bringing other, non-credit-crisis cases with older class periods."

 

The NERA study reports that cases in 2009 continued to be clustered in the financial sector, with 53% of all filings naming a defendant in the finance sector. Another sector that has continued to see substantial activity is the health technology and services sector.

 

As far as case resolutions, the NERA study reports that for cases that were filed in 2000, 36% have been dismissed and 61% have settled, but that "even almost a decade after filing, there are still approximately 3% of cases that have yet to reach a final resolution," which underscores the fact that in some instances these cases can take as much as a decade or more to resolve.

 

Of course, the majority of cases filed in recent years remain pending. For these most recent cases, a higher proportion of resolutions have been dismissals rather than settlements, which the NERA study notes "is unsurprising, as motions to dismiss are usually fled relatively early in the litigation process, often before settlement discussions commence." Ultimately however, the NERA study comments, "we expect that a higher proportion of these recent filings will result in settlements."

 

With respect to the credit crisis cases, the NERA study notes that over 80% of the cases remain pending, with only 15% of the cases dismissed compared to only 4% (nine cases that have settled.) My running tally of subprime case resolutions can be accessed here. The NERA report comments that this pattern is consistent with observed patterns in which early on more cases are dismissed but that ultimately over time a large proportion of cases settle than are dismissed.

 

As far as settlements, the NERA study reports that the average securities class action settlement in 2009, if the IPO laddering settlement is removed from the equation, was $42 million, which is substantially above the 2003-2009 average of $29 million, but which is consistent with the overall trend, which is that "there has been a general increase in the average settlement values since 1996."

 

But though the average settlements continue to increase, median settlements have held relatively steady. In 2009, the median settlement was $9 million, similar to the medians in 2007 ($9.4 million) and 2008 ($8.0 million).

 

Over the past several years, the ratio of settlement to investor losses has held steady at around 2.5%. The NERA study speculates that because this ratio has held reasonably steady and because investor losses historically have been correlated with settlement values, the fact that investor losses in cases filed during 2007 and 2008 were significantly higher than prior years may be "a signal of potentially higher settlements in the future," as the 2007 and 2008 cases move toward settlement.

 

As always, the 2009 version of the NERA study provides interesting and thorough analyses. It is worth noting that, because the NERA study "counts" separate filings in separate circuits as separate filings as separate cases, the NERA filing will differ from (and almost certainly be higher than) the figures that other commentators may report in their year end reports.

 

One thing about the average and median settlement figures that I think all observers should keep in mind is that these figures do not include defense expense, which can be considerable and in many cases can represent a significant percentage of the settlement amounts. In addition, these class settlement figures do not reflect the value of any separate opt-out settlements, nor do they reflect the amounts of other litigation settlements, such as might be incurred in connection with parallel derivative or ERISA class action lawsuits.

 

My point is that as impressive as the settlement figures reflected in the NERA report are, they represent only a portion of the litigation exposure that the affected companies may have faced, and therefore represent only a partial and incomplete measure, for example, of what insurance limits may be sufficient to protect companies and their directors and officers from their claim exposures.

 

NERA’s December 15, 2009 press release regarding the 2009 study can be found here.