By now, it is well-established that the recent heightened securities lawsuit filing activity has been largely concentrated in the financial sector. However, litigation involving companies in other sectors has by no means gone away. In addition, recent filings suggest that while the plaintiffs’ lawyers have been concentrating on the financial sector, a backlog of actions against other companies may have been piling up, and that the plaintiffs’ lawyers are now getting around to working off the backlog by initiating long-deferred cases against companies outside the financial sector.

 

The most recent example of this apparently postponed activity against nonfinancial companies involved the online auction company, Bidz.com. As reflected in their May 7, 2009 press release (here), plaintiffs’ counsel has initiated a securities class action in the Central District of California against the company and one if its officers. Though the case was just launched this past week, the purported class period runs from August 13, 2007 to November 26, 2007. That is, the proposed class period ends more than a year and half before the case was filed.

 

The Bidz.com action joins several other recently filed securities class action lawsuits filed against nonfinancial companies where the end of the proposed class period is well before the date on which the cases were first filed.

 

For example, the securities class action first filed in the Southern District of New York on April 28, 2009 against fashion apparel company Liz Claiborne and certain of its directors and officers (about which refer here) has a proposed class period of February 28, 2007 through April 30, 2007. The proposed class period end is nearly two full years prior to the date on which the action was finally commenced.

 

In addition, in the securities action first filed on April 14, 2009 in the Southern District of New York against Coach, Inc., the fashion accessory and leather goods company, the class period proposed runs from January 23, 2007 to October 22, 2007 (refer here for background about the case).

 

These cases join other securities suits filed earlier this year against nonfinancial companies in which the filing date came considerably after the proposed class period end. The Sprint Nextel action (here), first filed on March 10, 2009, has a proposed class period of October 26, 2006 through February 27, 2008. The Rackable Systems case (here), first filed on January 16, 2009, has a proposed class period of October 30, 2006 through April 4, 2007.

 

At one level, there may be nothing remarkable about the timing of these actions’ filings, given the applicable statute of limitation (refer here), which allows actions to be brought up to two years after the discovery of the alleged fraud. These lawsuits are in that sense by no means "stale."

 

But as a practical matter, it is noteworthy that these lawsuits are only now arising, in some cases as much as nearly two years after the supposed revelation of the underlying events. Particularly when these cases are viewed collectively, there is a definite suggestion that these cases may have been deferred while plaintiffs’ lawyers were preoccupied with other things.

 

All of which raises the possibility that while the plaintiffs’ lawyers were caught up in the litigation frenzy concentrated in the financial sectors following the subprime meltdown and the credit crisis, they were also building up a backlog of deferred cases against other companies, to which they are now finally getting around.

 

Of course, this flurry of apparently belated activity against nonfinancial companies could be purely coincidental. Time will tell. The challenge in the interim for D&O underwriters is that the perennial problem of assessing the continuing litigation risk for a company that had some adverse news some time ago may be even trickier now. It is always difficult to know for sure when a company that has had a problem is "out of the woods," and with the possibility that plaintiffs’ lawyers may now be working off a backlog, this assessment may be dicier than ever.

 

The suggestion that plaintiffs’ lawyers may be working off a backlog of cases against nonfinancial companies raises the possibility that the focus of securities litigation activity in coming months may shift to companies outside the financial sector. And as I recently noted (here), the mounting number of corporate bankruptcies may also drive litigation activity outside the financial sectors. Of course, it remains to be seen whether or not these apparent trends will continue to emerge. But the prospect for increased securities litigation involving nonfinancial companies is certainly one of the critical issues to watch as the year progresses.

 

Climate Change and D&O Issues: Regular readers know that I have in the past written extensively (more recently here) about the possibility of a growing D&O exposure arising from climate change-related disclosure issues. My good friend Carol Zacharias, General Counsel of ACE Professional Risks, has written an article published in the Spring 2009 issue of The John Liner Review entitled "Climate Change is Heating Up D&O Liability" (here) that provides a comprehensive overview of the topic, including a review of related litigation that has already arisen.

 

Along with her many interesting observations, Zacharias concludes that "the question is no longer whether there will be actions arising out of how a company and its leadership assess, quantify, and disclose climate change risks, but rather how extensive the litigation will be and when it will be lodged against directors and officers."

 

Hat tip to Mason Power at MAPO Online (here) for the link to the article.

 

Several of the lawyers for the plaintiffs in the Bisys Group securities lawsuit are concerned with the whereabouts of more than $9 million from the $65.8 fund established in connection with the settlement of the case.

 

As reflected in the transcript of the April 20, 2009 hearing before Southern District of New York Judge Jed Rakoff (here), in response to a question from the court about the missing $9.3 million, counsel for plaintiffs’ attorney Gene Cauley (sole signatory on the settlement fund escrow account) reported that “the funds are presently unavailable to be delivered,” and when asked why, counsel responded by saying that “if I go into anymore detail, I think I might violate a privilege against self-incrimination.”

In response, Judge Rakoff said that “it appears not unlikely… that Mr. Cauley may have committed a crime or several crimes” and that “he may have committed disbarrable conduct in one or many ways.” Judge Rakoff also said that he was drawing the inference from Cauley’s taking the Fifth that “Mr. Cauley has either misappropriated or otherwise misallocated these funds” and that because of that possibility, Rakoff “asked the U.S. Attorney to have someone here today.” There was in fact an AUSA in the courtroom at the hearing, and Rakoff observed that “I trust there will be a prompt investigation of this matter by the U.S. Attorney’s office.”

When the Bisys Group litigation settled in October 2006, Cauley’s former law firm, Cauley Bowman Carney & Williams, was a co-lead counsel in the case and appointed as custodian for the settlement fund. Cauley was designated as sole signatory on the escrow account in which the funds were deposited.

Rakoff had ordered distribution of the settlement funds to the class plaintiffs through a class action settlement administrator, AB Data. The class funds were to be provided to administrator in a series of payments, the last of which, in the amount of $9.3 million, was to have taken place on April 2, 2009. Apparently Cauley advised A.B. Data that the funds for the April 2 installment were invested in a 90-day Treasury bill and that the funds would be available by April 8. However, the $9.3  million is yet to be provided to A.B. Data.

On April 15, several of the lawyers from Cauley’s former firm, now part of a firm called Carney Williams, faxed Rakoff a letter advising him of the situation. Though Rakoff was out of the country at the time, he directed his law clerk to convene a joint conference call, in which Cauley apparently declined to participate. Rakoff then issued an order requiring Cauley’s appearance at the April 20 hearing.

At the April 20 hearing, Rakoff ordered the funds that have been deposited so far with the settlement administrator to be distributed to the plaintiff class.

In a WSJ.com Law Blog post about these remarkable circumstances here, Cauley’s counsel is quoted as stating with respect to the missing $9.3 million that Cauley is “working to be able to find the money and to pay it in 90 days.” The lawyer also said that Cauley “expects to make everyone 100% whole.”

Judge Rakoff closed the April 20 hearing with a brief peroration reflecting on the unusual circumstances in the Bisys Group case: “When I hear people cracking lawyer jokes, I always take umbrage and point out that the profession of Lincoln, the profession of Madison and Jefferson often represents the highest ideals in our society. But recent events give me pause about how true that is.”

Cauley was the subject of a past, somewhat colorful WSJ.com Law Blog post (here), which makes for even more interesting reading in light of these more recent circumstances.

Special thanks to a loyal reader who also forwarded me a copy of the hearing transcript.

On May 7, 2009, a jury in the Northern District of Illinois entered a mixed verdict finding in plaintiffs’ favor on several counts in the Household International securities fraud securities class action lawsuit, a long-running case with overtones of the current subprime meltdown. Background regarding the case can be found here.

 

The verdict form the jury entered (which can be found here) is quite complex and very detailed. The jurors were asked to make specific findings with respect to 40 allegedly false and misleading statements. The jury found in favor of the defendants with respect to 23 of the statements. However, the jury found in favor of the plaintiffs with respect to 17 of the statements. Table A to the verdict form identifies and assigns a number to each of the 40 statements.

 

As detailed in by Adam Savett of the Securities Litigation Watch blog (here), the jury found that all four defendants acted recklessly with respect to the 16 statements on which the jury found in favor of plaintiffs. In addition, with respect to an additional statement (Statement No. 14), two defendants (Household and former Chairman and CEO William Aldinger) were found to have acted knowingly, one defendant (Gary Gilmore, the former Vice-Chair of Consumer Lending was found to have acted recklessly, and one defendant (David Schoenholz, the former CFO and COO) was found not liable.

 

 

With respect to the recklessly misleading statements, the jury assigned 55% of the responsibility to Household; 20% to Aldinger; 20% to Schoenholz; and 10% to Gilmer.

 

 

The jury found that from March 23, 2001 (the date of Statement No. 14, with respect to which two of the defendants were found to have acted knowingly), the allegedly misleading statements inflated Household’s share price by as much as $23.94.As the class period progressed, however, the amount of inflation the jury found changed; it ranged between $23.94 a share and negative $4.66 a share. (Negative share inflation is a puzzling concept that I am sure will have to be sorted out at a later date.)

 

 

The available record does not explain how these findings will translate into damages. However, as discussed in press coverage at the time the trial commenced (here), the case was bifurcated with liability issues to be tried first and damages to be tried later if necessary. Apparently there will be further proceedings, based on the jury’s findings in the initial phase, the fix the amount of damages.

 

 

Significance for Current Subprime Cases?: The verdict in the Household case arguably has significance with respect to many of the cases filed in connection with the current subprime litigation wave. Even though the Household case was initially filed in 2002, it involved allegations in connection with representations about residential real estate lending practices.

 

In their complaint, the plaintiffs had alleged that during the class period, the defendants concealed that Household "was engaged in a massive predatory lending scheme." The plaintiffs had alleged that Household "engaged in widespread abuse of its customers through a variety of illegal sales practices and improper lending techniques." Household also reported "false statistics" that were intended to "give the appearance that the credit quality of Household’s borrowers was more favorable that it actually was." The plaintiffs allege that the "defendants’ scheme" allowed them "to artificially inflate the Company’s financial and operational results."

 

In the third quarter of 2002, the company took a $600 million charge and restated its financial statements for the preceding eight years, and in October 2002, the company announced that it had entered into a $484 regulatory settlement regarding its lending practices. On November 14, 2002, the company announced that it was to be acquired by HSBC Holdings. (In recent months, HSBC’s results have been significantly affected by losses in the subprime mortgage portfolio it acquired in the Household deal and its chairman has publicly admitted that "with the benefit of hindsight, this is an acquisition that we wish we had not undertaken.")

 

Securities Lawsuit Trials Are Very Rare: Trials in subprime related securities class action lawsuits are extremely rare. According to data compiled by the Securities Litigation Watch (here), only 21 cases have gone to trial since the PSLRA was enacted in 1995. Only seven of those 21 cases involved conduct that occurred after the PSLRA’s enactment.

 

Two recent high profile securities class action trials involved JDS Uniphase and Apollo Group. As noted here, on November 27, 2007, the jury in the JDS Uniphase trial returned a defense verdict. The Apollo Group trial initially resulted in a January 2008 plaintiffs’ verdict and an award of $277.5 million in damages, but as detailed here, on August 4, 2008, the judge granted the defendants’ motion for judgment as a matter of law, which set aside the jury verdict. A detailed discussion of the two cases can be found here.

 

Not only are verdicts susceptible to post-trial motions, but they are also susceptible to reversal on appeal, as happened in connection with the defense verdict in the Thane International case, where the Ninth Circuit overturned the jury verdict on appeal and ordered a new trial (about which refer here). The retrial in the Thane case resulted in a defense verdict.

 

With the inclusion of the Household International verdict and adjusting for the post-trial motion in the Apollo Group case and the post-appeal verdict in Thane, the scoreboard for the seven post-PSLRA trials – as adjusted for post-trial proceedings–  now stands at three wins for the plaintiffs and four for the defendants.

 

Analysis: While there are further procedures yet to go, the verdict in the Household case nevertheless represents a significant development. The subprime overtones in the case and the defendants’ connection to financial giant HSBC guarantee that the verdict will be very high profile, and it could well cast a shadow over the many other more recently filed cases where questionable lending practices are involved. It is unlikely that many other litigants will be encouraged to push their cases to trial, but the settlement potentially could influence settlement discussions in the other cases.

 

The way that plaintiffs might try to use the Household verdict in the current litigation can be clearly discerned in the statement from Patrick Coughlin, whose firm Coughlin Stoia Geller Rudman & Robbins represented the plaintiffs in the Household case. Coughlin states that “The jury’s verdict is a victory for the million of Americans suffering as a result of deceptive predatory lending practices and a victory for all investors fighting for greater corporate transparency, honesty and integrity. “

 

Andrew Longstreth of AmLaw Daily has a May 7, 2009 article about the Household verdict, here.

 

Securities Litigation Update: On Friday May 8, 2009, I will be participating in a webinar sponsored by Advisen in which Advisen’s finding regarding 1Q09 securities lawsuit filings will be discussed. The hour-long webinar, which is free, will begin at Noon EDT. Registration for the webinar is available here. Advisen’s report on first quarter filings can be accessed here.

 

Though the subprime and credit crisis-related securities litigation wave is now well into its third year, relatively few of the cases have yet settled or otherwise finally been resolved. However, the parties to one of the securities lawsuits filed in the earliest stages of the litigation wave have announced that they have settled the case, in a development that potentially may have significance for the many other pending cases.

 

On May 5, 2009, Beazer Homes announced (here) the settlement of the securities lawsuit that had been filed in the Northern District of Georgia in March 2007 against the company and certain of its directors and officers. In the settlement, the plaintiffs agreed to dismiss the case with prejudice and release all claims against the defendants in exchange for the payment of $30.5 million. According to the press release, the settlement is to be “funded from insurance proceeds” on behalf of the Company and the individual defendants and “there will be no financial contribution by the Company.” The settlement agreement is subject to court approval.

 

 

As reflected in the May 5, 2009 memorandum the plaintiffs’ filed in support of their request for judicial approval of the settlement (here), the settlement apparently also applies to the company’s auditor, Deloitte and Touche, which had been named as a defendant in the case.

 

 

Beazer Homes is a residential home builder that also provided home loan and mortgage finance services to home buyers. As reflected at greater length here, in quick succession in March 2007, the company announced the resignation of its CFO and that the company had received inquiries regarding its mortgage lending practices. The company’s share price declined and plaintiffs filed several securities class action lawsuits. On May 12, 2008, Beazer restated its financial statements for the previous nine years.

 

 

As reflected in their amended complaint, the plaintiffs’ alleged that the audit committee of the company’s board concluded that the company’s mortgage practice violated certain federal and/or state origination requirements and also discovered accounting and financial reporting errors or irregularities that required restatement because of improper accumulation of reserves, improper revenue recognition and other accounting and financial misstatements. The plaintiffs allege that the company’s disclosures during the class period had misled investors about the company’s origination practices and financial condition.

 

 

Relatively few of the many subprime and credit crisis-related securities lawsuits filed to date have yet been settled or otherwise resolved to date. (A complete list of the subprime and credit crisis-related lawsuit settlements, dismissals, and dismissal motion denials can be accessed here.) The outsized Merrill Lynch settlement (about which refer here) is noteworthy for its sheer size, but otherwise may have relatively little to say about many of the other pending cases that involve relatively smaller companies, and relatively smaller investment losses. In this context then, the Beazer Homes settlement may be significant for a number of reasons.

 

 

First, the case appears to have been settled before the court had ruled on the plaintiffs’ motions to dismiss. Particular cases may settle for any number of reasons, so that fact that the Beazer Homes case settled prior to the dismissal motion ruling may or may not imply anything about other cases – but nevertheless, the settlement prior to dismissal motion ruling does at least raise the possibility for other cases. Along those lines it should be noted that the memorandum the plaintiffs filed in support of their request for settlement approval reports that the parties settled the case as a result of mediation in April 2009, while the dismissal motions were fully briefed by not yet argued.

 

 

The Beazer Homes case is also significant because it represents a substantial settlement funded entirely with proceeds of the company’s insurance. If the number of aggregate dollars required to resolve the many other pending subprime and credit cases is extrapolated out from the Beazer settlement, the implied resulting figure – even allowing for the likelihood that a substantial number of the cases will be dismissed – is potentially huge. There have in fact been some noteworthy estimates of the likely aggregate cost to the insurance industry required to resolve all of these cases; whether or not these estimates ultimately prove accurate, the Beazer settlement suggests at least for now that the final resolution of these cases could in the aggregate required some truly impressive sums from insurers.

 

 

All of that said, there are some material attributes of the Beazer case that might suggest that its settlement may not necessarily be representative of what to expect from other subprime and credit crisis cases. The first is that the company’s own audit committee concluded that it had violated certain applicable mortgage origination laws. The second is that (at least according to the amended complaint) the company remains under investigation from governmental and regulatory authorities, including the SEC. These circumstances may distinguish Beazer from many of the other cases that have been drawn into the subprime and credit crisis litigation wave, and to that extent at least the settlement may or may not provide a useful indication of likely future settlements in other cases.

 

 

I have in any event added the Beazer Homes settlement to my list of subprime and credit crisis-related lawsuit settlements and other case resolutions, which can be accessed here.

 

 

Delaware Amends Corporations Code to Address Indemnification and Advancement Concern: As I noted in an earlier post (here), in a March 2008 decision in the Schoon v. Troy case, the Delaware Chancery Court raised concerns when it held that a subsequent board may retroactively eliminate the advancement rights of a prior director.

 

 

As explained in the April 2009 issue of the Tressler, Soderstrom firm’s Special Lines Advisory (here, see page 3), the Delaware legislature has now amended Section 145 of the state’s General Corporation code to provide that “rights to indemnification may not be eliminated after the date an act giving rise to a claim takes place, unless a corporation’s indemnification provisions expressly preserve the right to retroactively eliminate the individual’s right to indemnification as permitted by the court in Schoon.“ The amendments are effective August 1, 2009.

 

 

Special thanks to my good friend Joe Monteleone for providing me with a copy of his firm’s memo.

 

 

Elliptically Speaking Awards (Euphemism Category): I might have considered this a bad parody if I had not seen for myself that this is an actual press release on the website of Nokia Siemens Networks. On November 11, 2008, the company announced (here) the following update on its “synergy-related headcount-adjustment goal.”

 

 

Nokia Siemens Networks has completed the preliminary planning process to identify the proposed remaining headcount reductions necessary to reach its previously announced synergy-related headcount adjustment goal. … To date, the company has achieved an adjustment of more than 6,000 employees and continues to expect a total synergy-related adjustment of approximately 9,000 employees. …Simon Beresford-Wylie, chief executive officer of Nokia Siemens Networks, [said] “With the successful completion of these plans, we will have the vast majority of the synergy-related headcount reductions completed and we can then start to put this chapter of our history behind us and focus on creating a world-class company.”

 

 

The proposed headcount adjustments are a result of merger-related synergies, including changes to the product portfolio; site optimization; streamlining of various functions; strategic, long-term R&D and workforce balancing; and other factors designed to build a competitive Nokia Siemens Networks. “We have now completed the preliminary planning necessary to identify the specific areas where we have additional synergy-related reduction needs,” said Bosco Novak, head of human resources at Nokia Siemens Networks. “It is our goal to engage constructively with employee representatives in Finland, Germany and other countries to quickly and fairly achieve these needed changes so we are able to remove the ongoing uncertainty that our employees have about synergy-related headcount reductions.”

 

 

Hat tip to Harper’s Magazine, which reproduced the press release in its May 2009 issue (here).

 

As the subprime meltdown has become a more generalized economic crisis, the adverse consequences have moved far beyond the residential real estate sector where the trouble first began. Until recently, however, the worst effects were concentrated in the financial sector. But as Chrysler’s recent bankruptcy filing shows, the turmoil is no longer limited to the finance sector alone. The infiltration of the credit crisis into the larger economy not only threatens a rise in bankruptcies, but could also include increased bankruptcy-related securities litigation, much of which may be outside the financial sector.

 

An indication of how these developments might arise can be seen in the securities class action lawsuit filed in the Northern District of Texas on April 30, 2009, against certain former officers of Idearc, Inc. A copy of the complaint can be found here. Idearc "manages and delivers print, online and wireless publishing and advertising services on multiple platforms," including yellow and white pages, online directories and search services. Idearc itself filed for protection under the U.S. bankruptcy laws on March 3, 2009, and so is not named as a defendant in the securities lawsuit.

 

The complaint alleges that in 2006 and 2007, the company had "touted" its credit and collection policies and procedures, which it claimed had resulted in a steady decline in its bad debts. However, the complaint alleges, during 2007, the company "relaxed" its credit policies "in order to increase the dollar amount" of reported revenue.

 

The complaint further alleges that the company, "by selling to non-creditworthy customers, effectively reported tens of millions of dollars of sales that it otherwise would not have reported while accumulated tens of million of dollars of uncollectible receivables." However, the complaint alleges, in mid-2008, the company admitted that it had relaxed its credit policies in 2007, and "began to write off these uncollectible receivables in a piecemeal fashion over several quarters."

 

The complaint alleges that by year end 2008, the company had written off $47 million of receivables, which among other things "materially contributed to the company’s need to file for bankruptcy protection." The complaint alleges that investors were misled by the company’s disclosures regarding its credit and collection policies and procedures as well as by the piecemeal revelation of its company’s growing problems with receivables collections and reserve for bad debts.

 

As the economy sours, many companies – including companies outside the financial sector, like Idearc – are likely to experience increasing difficulties realizing the anticipated benefits from customer, vendor or counterparty obligations. By the same token, reduced economic activity may render many companies unable to meet their own obligations to their creditors, suppliers and others.

 

As these problems accumulate, other companies will find it necessary to seek protection under the bankruptcy laws. The officers and directors of many of these bankrupt companies, like those at Idearc, may find themselves the target of a post-filing securities class action lawsuit. Another recent example of a post-filing bankruptcy lawsuit involves former directors and officers of MRU Holdings, about which I previously wrote here.

 

The increase of these kinds of bankruptcy related lawsuits may be the means by which the current wave of subprime and credit crisis-related litigation spreads outside the financial sector. In its recent quarterly report on securities litigation (here), Advisen suggested that "it is likely that the wave of subprime-related suits, and in particular suits filed against financial services companies, will crest in 2009." The report goes on to suggest that "as bankruptcies rise through the economy, hitting all sectors, and securities suits are filed as a consequence, suits filed will become more dispersed …broadly affecting all sectors."

 

More Failed Banks: In what is now a standard weekend ritual, this past Friday evening the FDIC closed three more banks, bringing the year to date total number of failed banks to 32. The three banks closed this Friday night were: Silverton Bank of Atlanta, Georgia, which prior to its closure had assets of $4.1 billion, making it the fifth largest bank to fail since the beginning of 2008 (further details about the bank can be found here); Citizens Community Bank of Ridgewood, N.J. , which had assets of $45.1 million (refer here); and America West Bank of Layton, Utah, which had assets of $299.4 million (refer here).

 

Silverton is the sixth Georgia bank to be closed this year and the eleventh since January 1, 2008, the highest total for any state during either of those two periods.

 

In light of their relatively small size, both Citizens Community Bank and America West Bank qualify as community banks. As I recently noted (here), the 2009 bank failures have largely involved these kinds of smaller community banks. Indeed, 27 of the 32 banks that have failed so far this year have involved financial institutions below $1 billion in assets, which is one standard measure of community banks.

 

Silverton was quite a bit larger than these community banks, and it is also somewhat unusual in that Silverton did not take deposits from the general public or make loans to consumers. Silverton was a wholesale bank, providing services, according to the Wall Street Journal (here), to one in every five banks in the country. Silverton was known as the Bankers Bank until last year. Its customers, depositors and investors are all banks. Banks that had invested in Silverton will incur losses as a result of its failure, which could pose problems other banks.

 

The FDIC’s complete list of failed banks since October 2008 can be found here. The Wall Street Journal has a nifty interactive table of all the failed banks here, which can be sorted by name, closure date, asset and deposit size, and other factors. (The Journal’s list does not yet include Citizens Community Bank and America West Bank.)

 

Speakers’ Corner: On Monday, May 4, 2009, I will be in New Orleans at the spring meeting of the Casualty Actuarial Society, participating on a panel entitled "An Update on the Credit Crisis and Related Issues for D&O Insurers." The panel will be chaired by Joe Lebens of the Towers Perrin firm, and will include Stephanie Plancich from NERA Economic Consulting and David Bradford from Advisen. More information about the session and the conference can be found here.

 

Securities class action lawsuits filings are on pace to make 2009 the most active for securities class action filings in years, according to Advisen’s May 1, 2009 Securities Litigation Quarterly (here). According to the report, there were 67 securities class action lawsuits in the first quarter of 2009, up from 56 a year earlier. The first quarter filings represent an annualized filing rate of 268 securities class action lawsuits, which would not only represent a significant increase over 2008 but would even be greater that the "relatively litigious year of 2004."

 

My own analysis of the first quarter 2009 securities class action filings can be found here.

 

The overall purpose of the Advisen report is to analyze "securities lawsuits" in the first quarter of 2009. As used in the Advisen report, the term "securities lawsuits" refers not just "securities class action lawsuits," but also includes SEC enforcement actions, state court fiduciary duty cases, and even lawsuits filed in non-U.S. courts.

 

In addition, the report uses yet a different term – "securities fraud lawsuits" – as a subset of "securities lawsuits," to describe SEC enforcement proceedings and other regulatory actions.

 

So in the report "securities class action lawsuits" and "securities fraud lawsuits" are each separate and distinct subcategories of the larger category of "securities lawsuits."

 

According to the Advisen report, filings in the broadest category — "securities lawsuits" — were up significantly in the first quarter of 2009, with 169 of these actions, compared with only 125 in the fourth quarter of 2008, and 134 in the first quarter of 2008. These filings (which, again, represent a broader category than just "securities class action lawsuits") were significantly increased by Madoff-related lawsuit filings, which represented 30% of all the "securities lawsuits" in the first quarter. The report notes that "2009 might end up as a year with a heavy front-end load of lawsuits" due to the "flurry of Madoff-related cases" in the first quarter.

 

Using its own categorization, the report notes that fewer of the "securities cases" plaintiffs are filing are "securities class action lawsuits," and that plaintiffs increasingly have been filing securities lawsuits alleging common law torts, contract law violations, and breach of fiduciary duties." The report speculates that plaintiffs’ counsel may be pursing these alternatives in order to be able to proceed in state court and to avoid having their case consolidated with the larger class action suit.

 

With respect to "securities lawsuits" other than "securities class action lawsuits," the enforcement and regulatory actions that the report categorizes as "securities fraud lawsuits" accounted for 34 suits filed in the first quarter, up from 19 in fourth quarter of 2008, but down from 54 in third quarter of 2008. The "securities fraud lawsuits" filed in first quarter of 2009 represent an annualized filing rate136 cases, flat with 2008 but down from 175 in 2007.

 

Other types of "securities lawsuits" other than "securities class action lawsuits" filed in the first quarter of 2009 were: breach of fiduciary duties (26), collective actions in non-US courts (20), derivative shareholder actions and other derivative cases (14), and others (8).

 

The Advisen report notes that suits against financial firms dominated the "securities lawsuit" filings in the first quarter. The report notes that 117 out of the 169 "securities lawsuits" filed (or 69%) in the first quarter involved financial services firms (including insurance companies). These financial services claims fall in four basic groups: the Madoff-related claims; subprime and credit crisis-related claims; specialist improper trading claims; and Stanford Group-related claims.

 

With respect to the subprime and credit crisis-related claims, the report suggests that these claims "will crest in 2009," adding that "as bankruptcies rise through the economy, hitting all sectors, and securities suits are filed as a consequence, suits filed will become more dispersed…broadly affecting all sectors."

 

The report notes that many of the cases will not only potentially trigger D&O insurance policies, but "may also trigger coverage under errors and omissions (E&O) and fiduciary liability policies" which is true with respect to may of the Ponzi scheme cases as well as with to some of the subprime and credit crisis-related cases.

 

First Quarter Report Webinar: On Friday May 8, 2009, at Noon EDT, I will be joining David Bradford and Jim Blinn of Advisen for a free one-hour webinar to discuss the findings in the Advisen quarterly report and to discuss the implications for the liability insurance market. Registration for this free webinar is available here.

 

Several of the recipients of TARP funding have also been the targets of securities class action lawsuits and other litigation. In an April 29, 2009 post on the DealBook blog (here), Dan Slater, formerly of the WSJ.com Law Blog, raises the concern that TARP money could be used “to line the pockets of allegedly aggrieved shareholders and the lawyers who, wrapped in the flags of corporate governance, are in the process of making a billion-dollar cottage industry out of filing strike suits.”

 

As an example, Slater cites the case of Merrill Lynch, which, on the same day as its new corporate parent Bank of America announced that it was receiving an additional $20 billion in TARP money, announced that it would pay $550 million to settle a securities class action lawsuit and an ERISA lawsuit. (For further detail regarding the Merrill settlement, refer here.) Slater contends that as a result of the settlement either BofA will be less able to repay its TARP obligation or must cut its TARP allotment to settle up

 

 

Slater also notes that 19 of the 32 recipients of $1 billion or more of TARP money have since January 2008 been sued in securities class action lawsuits. “Put another way,” Slater states, “of the more than $300 billion that’s been paid out in TARP money, nearly $240 billion of it, or 78 percent, is subject to shareholder suits.”

 

 

Slater argues that while there has always been a circularity involved in the funding of securities lawsuit settlements, now, “in the world according to TARP,” the securities settlement money could be coming from taxpayers.

 

 

Slater raises an interesting point, and the example of Merrill Lynch is particularly telling. I think his analysis is incomplete, however, to the extent that it disregards the existence of D&O insurance, E&O insurance, and fiduciary liability insurance, which will be funding a very substantial amount for the defense and settlement of these lawsuits.

 

 

However, the Merrill Lynch settlement unquestionably raises the concern, given its sheer size, that the resolution of these cases could require funding that far exceeds that amount of insurance available. To that extent, at least, there arguably is a concern that TARP money could fund, or at least offset the cost of, securities class action settlements.

 

 

Slater’s points are, to that extent at least, well taken. I think it should be noted that plaintiffs’ lawyers are well aware of these concerns – many of the lawsuits to which Slater refers were filed before TARP was instituted, and since the TARP payments were first made, plaintiffs’ attorneys have had to take these kinds of concerns into account on deciding whether or not to file new cases.

 

 

These kinds of issues may also be part of the constellation of considerations that has been affecting courts’ reactions to the early motions to dismiss. As I have previously noted (most recently here), while it is still early, many of the subprime and credit crisis-related cases have not been faring particularly well in the courts at the motions to dismiss stage, and concerns like those that Slater has raised may be part of the reason.

 

 

An April 29, 2009 Am Law Litigation Daily post discussing Slater’s article can be found here.

 

 

Madoff Redemption Clawbacks?: One of the more interesting and complicated questions that has arisen lately is the extent to which Irving Picard, the trustee for the Bernard Madoff Investment Securities liquidation, wil be able to "clawback" amounts from BMIS investors who redeemed their investors who redeemed their investments prior to the firm’s collapse. An April 28, 2009 paper by NERA Economic Consulting entitled "Clawbacks from Madoff Investors: Questions of Economics, Equity and Law" (here) takes a detailed look at the issues surrounding the extent of the trustee’s ability to recover the amounts previously redeemed. As the paper reviews at length, there are a variety of competing considerations that will have to be balanced in determing the extent to which the trustee appropirately may clawback these amounts.  

With the addition of four more bank closures this past Friday night, the YTD number of bank failures now stands at 29, which already exceeds 2008’s total of 25 and is the highest annual total since 1993, at the end of the last era of failed banks. All signs are that the number of bank failures will continue to grow in the months ahead, a prospect that is already affecting the D&O insurance marketplace, even for smaller community banks. 

 

The four banks that closed this past week were: American Southern Bank of Kennesaw, Georgia, which prior to its closure had assets of $112.3 million (for further details about its closing, refer here); Michigan Heritage Bank in Farmington Hills, Michigan, which previously had assets of $184.6 million (refer here); First Bank of Beverly Hills in Calabasas, California, which previously had assets of $1.5 billion (refer here); and First Bank of Idaho in Ketchum, Idaho, which has assets of $488.9 million (refer here). 

 

 

Although the assets of three of the banks were sold to other financial institutions, the FDIC was unable to find a buyer for First Bank of Beverly Hills, forcing the FDIC to assume the financial institutions assets. 

 

 

The closure of American Southern Bank adds to the growing list of failed banks in Georgia, which, as I noted at length here, leads the nation in number of bank failures. With the addition of American Southern, there have been ten bank failures in Georgia since January 1, 2008, including five already in 2009. California is a close second behind Georgia in number of failed banks, and the failure of First Bank of Beverly Hills brings the number of California bank closures since January 1, 2008 to nine. 

 

 

But the overall geographic distribution of the latest four banks to fail, and indeed of the banks closed so far in 2009, highlights the fact that the bank woes are not concentrated in any one geographic area. Rather, the banking troubles seem to be distributed around the country. Banks have failed in 16 different states already this year, sprinkled across the national map. The FDIC’s complete list of failed banks since October 1, 2000 can be found here. 

 

 

These latest four closures also highlight the fact that the banking woes are not limited just to the largest banks; to the contrary, the bank failures increasingly seem to involve the smaller community banks. Three of the four most recently closed banks had assets below $500 million, and many of the other banks closed this year also were similarly smaller banks.

  

 

One generally accepted definition of a community bank is a banking institution with assets below $1.0 billion (refer here). By this definition, 25 of the 29 banking institutions that have failed this year are community banks, as only four the failed banks had assets over $1 billion. Indeed, most of the failed banks are very small; only seven of the 29 banks that have failed in 2009 had assets over $500 million. 

 

 

For many years, and even throughout the recent financial turmoil, community banks have been viewed as relatively safe. Their lack of involvement both in commercial lending and in subprime loans seemingly spared them the most significant problems that have characterized the current crisis – until now. The growing problems in residential real estate and rising unemployment levels are raising problems even in the community banking sector, as the bank closures described above demonstrate. Based on the 2009 bank closures, the community banking sector may now have become the leading edge for problems in the banking sector. 

 

 

Unfortunately, all signs are that these difficulties will continue in the months ahead. In the FDIC’s most recent Quarterly Banking Profile (as of December 31, 2008), the FDIC counted 252 institutions with assets of $159 billion on its “Problem List,” up from 171 institutions with $116 billion in assets at the end of the third quarter of 2008. (The FDIC does not identify the problem banks by name.) With unemployment growing and the number of troubled loans increasing, the number of banks on the “Problem List” undoubtedly will have grown when the FDIC releases its Quarterly Banking Profile for the first quarter of 2009 in a few weeks. And the bank closures are likely to continue to accumulate. 

 

 

The D&O insurance marketplace for the community banking sector had been a placid, quiet area where many insurers were willing to offer broad terms at low prices. However, as a result of the recent deterioration in the sector, the D&O insurance marketplace has very recently begun to change. There are still a number of carriers active in this space, but a number of players have recently started to take more conservative positions, even nonrenewing insureds in certain geographic areas or with certain characteristics. 

 

 

More restrictive terms that had largely disappeared, such as the regulatory exclusion, are suddenly reappearing in coverage proposals for some accounts. And banks that have been declined by several carriers may find they can only place their coverage at significantly increased premiums. The D&O insurance marketplace for community banks is placid no more. 

 

 

Perhaps the most noteworthy thing about these changes is how quickly they have taken place. This heretofore quiet corner of the D&O marketplace has very quickly become characterized by rapid chance. Although I have been and remain skeptical of some of the predictions about when we may see a hard insurance market, the speed of the changes in community banking sector represents the type and velocity of change that can occur in a market turn. It is still premature to say definitively that we are headed into a hard market anytime soon, even just for community banks, but there is some evidence to suggest that a harder market could well lie ahead.

 

 

Bank of America’s acquisition of Merrill Lynch went through, so we will (fortunately) never know what would have happened if the deal had collapsed. But as detailed in the April 23, 2009 letter (here) from New York AG Andrew Cuomo to Sen. Chris Dodd, Rep. Barney Frank and others, if it had been up to BofA, the deal would not have closed, and it was only as a result of a combination of threats and inducements from Henry Paulson and Ben Benanke that BofA and its Chariman, Kenneth Lewis, were convinced to complete the deal.

 

In his letter, Cuomo urged Congressional and regulatory officials to examine the pressure that Paulson and Bernanke applied to Lewis and to BofA. Cuomo wrote that the federal officials’ actions "raise fundamental questions about the interactions of regulators and those they regulate, as well as important issues of corporate responsibility and shareholders’ rights." 

 

The information in the April 23 letter and accompanying documents is fascinating, but the still-incomplete picture of the December meetings in which BofA was convinced to complete the deal raise a number of serious questions. The letter and the accompanying exhibits can be found here.

 

1. Why did Lewis contact Paulson and Bernanke to tell them that BofA wanted to invoke the "material adverse event" clause and kill the deal? Presumably, the merger agreement was a private transaction between two private parties. Right? Well, maybe not. Apparently, as a result of its role in having brokered the Merrill deal, the government retained something more than a gaming interest in the transaction.

 

But why did Lewis have to report to the feds? Doesn’t it seem like he was asking their permission? Why? Was there a prior strong-arm session, perhaps back in September, where the government previously offered threats and inducements to BofA to get them to accept the deal in the first place? Did BofA make a commitment to the feds, and vice versa, as part of the events that led to the original deal?

 

2. Did Lewis and the BofA board accede to the fed officials’ demands in order to preserve their positions? Cuomo’s letter certainly intends to communicate that Lewis was convinced to go through with the deal in order to be able to keep his job. Lewis undeniably testified when examined by NYAG’s office personnel that Paulson threatened BofA’s board and Lewis with a loss of their positions. (A transcript of Lewis’s testimony can be found here.)

 

BofA’s December 22, 2008 Board of Directors Meeting minutes (here) reflect that Lewis reported to the board that Paulson had threatened them (Lewis and the board) with the loss of their positions if the deal failed to go through. Cuomo’s letter also reports that Paulson told the NYAG’s officials that the job threat to Lewis "changed his mind about invoking the MAC clause and terminating the deal."

 

To be sure, the December 22 board minutes also very carefully recite that "the Board clarif[ied] that is [sic] was not persuaded or influenced by the statement by federal regulators that the Board and management would be removed if federal regulators if the Corporation were to exercise the MAC clause and failed to complete the acquisition by Merrill Lynch." And both the December 22 and December 30, 2008 board minutes (here) reflect concerns about the possible damage to the global economy if the deal failed to go through.

 

But there doesn’t seem to be any doubt that the threats were made, that Lewis reported the threats to the BofA board, that the board and Lewis discussed the threats, and Paulson at least seems to think the threats had the effect he intended.

 

3. Realistically, could BofA have turned down the fed officials’ demands? It is not as if just that the Secretary of the Treasury and the head of the Federal Reserve Board alone were strong-arming BofA. BofA’s December 30 board minutes reflect that Bernanke was communicating about the deal to the Office of the Comptroller of the Currency, the FDIC, and the "incoming economic team of the new administration." The existence of these communications were revealed to reassure BofA that it could count on promised additional TARP money, but the existence of the communications also carried an unsubtle implied threat for a high profile company in a highly regulated industry.

 

At a minimum, BofA had to wonder how regulators might respond, at a very precarious time for the company, if it walked away.

 

4. Who said what to whom about disclosure? The April 23, 2009 Wall Street Journal led with the story, supported by the transcript from Lewis’s testimony before NYAG officials, that Paulson directed Lewis to withhold disclosure of BofA’s concerns with the deal in order to ensure that it went through. Whether or not these directions took place will be the central issue in the investigative frenzy that is no doubt about to unfold.

 

The one thing that is clear is that the BofA board was concerned about disclosure. Among other things, the minutes of the BofA’s December 30 board meeting show that the reason the federal officials could not give BofA written assurance that additional TARP funds would be forthcoming if the deal closed is that "written assurances would require formal action by the Fed and the Treasury, which formal action would require public disclosure." The wording of this sentence makes it unclear whether it is BofA or the feds that were worried about disclosure, but it seems clear that the feds were aware of and involved in the disclosure question.

 

A December 22 email from Paulson to the BofA board (here) seems to suggest that Lewis and the board was concerned about preventing disclosure, but the email arguably is ambiguous. In the email Lewis told the board that Paulson "could not send a letter of any substance without public disclosure, which of course, we do not want." The problem with this sentence is the question of who the word "we" refers to? Is Lewis reporting that Paulson used the word "we" (referring, perhaps, Paulson and his fellow regulators, or perhaps, to Paulson and Lewis), or is does the statement attributed to Paulson stop at the comma, and is the clause after the comma a statement of Lewis’s own, with the word "we" referring to BofA’s board?

 

 

Cuomo’s letter and Lewis’s transcript both seem to suggest that disclosure was not just a concern on the part of the BofA board, but that it was also a concern of Paulson’s, and that he actibvly sought to avoid disclosure related to the unreported Merrill losses. Disclosure was a concern, a topic of discussion and focus in discussions between Lewis and Paulson. Which leads to my next two questions.

 

5. Did Paulson or Bernanke provide Lewis with immunity assurances? We are talking about some very smart guys, and they were fully aware of the legal requirements of disclosure, even if they didn’t pause to analyze the legal particulars. Lewis had to have known that by going through with the deal even though the Company felt entitled to invoke the MAC clause, and that by withholding disclosure of Merrill’s huge and unexpected fourth quarter losses, he and even perhaps the BofA board were potentially undertaking a massive legal exposure – at a minimum, a civil lawsuit exposure, and possibly even much worse exposures.

 

Did Lewis raise these issues with Paulson and Bernanke? (I find it almost impossible to believe that he did not.) Did they provide any assurances to him? Was he given assurances of immunity or indemnity? Did they promise him a "get out of jail free" card? Without these assurances, how could he possibly have been persuaded to "take one for the team"? Doesn’t it seem wildly improbable that these issues were not discussed?

 

6. Are Paulson and Bernanke or others potentially exposed to aiding and abetting liability? This question is not facetious and in fact it is particularly important to me, because I have former colleagues from GenRe, people whom I knew and whom I respect, who are going to jail for their complicity in a deal that seems miniscule and trivial compared to this minuet. Certainly, if the federal regulators directed Lewis and BofA not to disclose material nonpublic information, their involvement in nondisclosure that is later found to constitute securities fraud could implicate them as well.

 

But could they be implicated even if they did not direct the nondisclosure but simply accommodated and facilitated it (for example, by not following through on required federal processes that would have compelled public disclosure)? That is certainly all the Gen Re officials did, and as a result they are going to be spending some serious time in the federal penitentiary.

 

Let me hasten to add that I am not suggesting that criminal prosecution is something that I think will happen here, or even that I think should happen here. But if these kinds of questions are later raised, the questions clearly should be followed all the way to their logical conclusion.

 

7. The strong-armed deal may have hurt BofA shareholders, but could it have been worse for them if the deal crumbled? There is no doubt that Paulson’s demand that BofA go through with the deal despite the BofA’s view that it was entitled to invoke the MAC clause had the effect of requiring the BofA shareholders to take a big hit for the sake of the global economy. But that does not necessarily mean it was contrary to the BofA’s shareholders’ interests for BofA to go through with the deal.

 

Given how massively disruptive Lehman Brothers’ collapse was to the global financial marketplace, it is almost inconceivable how disruptive it could have been if the Merrill deal had fallen through. Merrill would have been cast off, and the revelation of its staggering and unexpected fourth quarter losses would have triggered its immediate collapse – or maybe federal officials could have tried a huge AIG-style rescue of Merrill while somehow trying to reassure that global financial marketplace that there was no reason to panic.

 

My point is that if the Merrill deal had fallen through, the collateral damage from the ensuing firestorm could have substantially damaged BofA’s near and longer term interests.. It is impossible to know now, but the fact is that it may well have been in the BofA shareholders overall best interests for the firestorm to have been averted. Of course, it does seem like the BofA shareholder ought to have had the right to decide for themselves, doesn’t it?

 

8. Is there a national interest exception to the disclosure requirements in the federal securities laws? Imagine for a second if BofA had come right out and disclosed that it felt entitled to invoke the MAC clause but that in order to support the global economy and in exchange for some additional TARP money, it was going through with the deal anyway. Now basic principles dictate that they should have disclosed all of this. But if they had, the chaos that would have followed might have been as bad or even worse than what happened if the deal failed to close – which might well have happened anyway in the wake of these kinds of disclosures.

 

It is easy for commentators to try to argue now what should have been done, as if this were just an amusing question in a parlor game. At the time, however, the principals had no way of knowing how close they were running to potentially catastrophic financial disruption. In view of the weakness in the financial markets and the economy, it was no time for any experiments.

 

But do their fears, even if well founded, earn them a pass for their silence? If they get a pass, on what basis? What is the legal justification and where is it found? On what standard is it based? And who gets to decide when interests are sufficiently important to override the securities laws – can any government official decide that national interests override disclosure requirements? And what precedent would be set for the future? And isn’t it a duty of public officials to ensure compliance with the law, rather than encouraging noncompliance?

 

9. Given the facts on the table at the time and the surrounding revelations about Merrill’s fourth quarter losses, how is it possible that the controversial Merrill bonuses were permitted? Obviously, there is a lot more to be told on this score, but if the federal regulators had the authority to tell BofA it had to complete the deal, and if they felt empowered simply to override federal disclosure requirements, surely these same people had the clout to shut down the bonuses? If they felt they had the ability to trample, or simply disregard, BofA shareholders’ rights, why would they hesitate to bar the payment millions in bonuses for billions of losses?

 

Given all that was going on, that the bonus payments happened seems even more incomprehensible to me – and I am sure I am not the only one.

 

10. How long will it be before this all gets sorted out? I suspect this will go on for years and years to come. Expect the most immediate steps to include a cycle of sessions in Congressional hearing rooms, replete with the revolting spectacle of speechifying politicians grandstanding at the expense of public dignity. The various judicial processes, some of which are already well underway, some of which will be launched in the months ahead, will grind on for years, with at least two or three round trips to the Supreme Court. My prior post about lawsuits already filed about these circumstances can be found here.

 

At some point, possibly in the near future, a coalition of crusaders, a lynch mob, or a gang of zealots will try to organize Lewis’s ouster, and who knows, maybe they may well succeed this time. Indeed, for those wondering why all of this is coming to light all of the sudden now, the timing was obviously due to the fact that the BofA shareholders’ meeting is next week — leaving just enough time for the voices of outrage to get fully tuned up for the meeting.

 

Whatever else you want to say about these circumstances, the spectacle to which we are all about to be subjected will not be pretty and is unlikely to be edifying.

 

The recent Environmental Protection Agency (EPA) proposal to find that greenhouse gases "contribute to air pollution that may endanger public health or welfare" is just the latest in a series of actions and events suggesting that climate change related issues could affect a large number of companies, in a variety of ways, including most specifically with respect to at least some companies’ disclosure obligations. These trends could have important implications for potential liability exposures of directors and officers of public companies.

 

On April 17, 2009, the EPA released a proposed "endangerment finding" with respect to six greenhouse gases (including carbon dioxide). The EPA’s April 17 press release can be found here and a summary of the proposal can be found here. Under the EPA’s proposed finding (which can be found here), the EPA is proposing that the six gases "threaten the public health and welfare of current and future generations." The EPA also proposes to find that motor vehicle emission of these gases "contribute to concentrations of these key greenhouse gases and hence to the threat of climate change."

 

The proposed endangerment finding was promulgated in response to the 2007 U.S. Supreme Court decision in Massachusetts v. EPA (discussed at length here). The EPA’s proposed finding, which is now in its public comment period, does not itself include any specific regulatory action or requirements. However, if the proposed finding is adopted, regulatory and even legislative action seems probable, especially given the politics and inclinations of the current President and Congress. Indeed, the adoption of the proposed finding could motivate legislators to act preemptively, to try to avert regulatory provisions they might find unacceptable.

 

The potential scope of any future regulatory or legislative action can be gauged by the specific observations in the EPA’s proposed endangerment finding. That is, the proposed finding not only concludes that climate change "impacts human health in several ways" (such as increased threat of catastrophic weather activity or harm to water and other natural resources), but also that the effects of climate change will have a "disproportionate impact" on certain vulnerable segments of the populations, such as the very poor, the elderly and those already in poor health.

 

The EPA’s report also includes the suggestion that climate change has "serious natural security concerns" based on the instability that could follow in the wake of "increasing scarcity of resources."

 

With these kinds of concerns as a starting point, the potential for any ensuing regulatory or legislative activity to have a disruptive impact on many industries and companies seems high. Indeed, if the risk assessments in the EPA’s findings are anywhere near accurate, the climate change itself, independent of any governmental action, could have a disruptive impact on many industries and companies.

 

Many of the industries and companies likeliest to be affected already are under pressure to anticipate these changes and assess their possible future impact.

 

The most recent effort to mandate these kinds of assessments is the disclosure requirement adopted on March 17, 2009 by the National Association of Insurance Examiners (NAIC). The NAIC’s March 17 press release can be found here and further background regarding the NAIC’s disclosure initiative can be found here.

 

The NAIC’s new disclosure requirements specify that no later than May 1, 2010, all insurance companies with annual premiums over $500 million must complete a Insurer Climate Risk Disclosure Survey. The Survey is designed to require the insurers to disclose "the financial risks they face from climate change, as well as the actions the companies are taking to respond to those risks."

 

Under the NAIC’s mandate, insurers will be required to report on "how they are altering their risk-management and catastrophe-risk modeling in light of the challenges posed by climate change." Insurers must also report on "steps they are taking to engage and educate policymakers and policyholders on the risk of climate change," as well as "whether and how they are changing their investment strategies." As discussed below, the requirement for insurers to disclose how they are "engaging and educating" policymakers and policyholders could be the bridge that extends the NAIC’s initiative to many other industries.

 

Another industry under pressure to analyze and assess climate change impacts is the utilities industry. As discussed (here), in August 2008, New York Attorney General Andrew Cuomo reached the first of several regulatory settlements with utilities companies, in which the settling companies agreed "to disclose financial risks that climate change poses to investors."

 

Among other things, the settling utilities have undertaken to disclose risks associated with probable future climate change regulation; climate change related litigation; and the physical impacts of climate change. In his press release relating to the first of these settlements, Cuomo expressly stated that he expected these companies’ disclosure undertakings to "establish a standard."

 

The insurance and utilities industries may be the most likely industries but they are far from the only industries that potentially will be affected by climate change regulation and the physical impacts of climate change. Other obvious possibilities include auto manufacturing; oil and gas extraction, production and distribution; transportation and shipping; mining; agriculture; tourism; and forestry.

 

But the comprehensive nature of climate change suggests that the potential impacts will not be restricted just to these more obvious industries; the regulatory and the physical impacts of climate change are likely to extend to any business that is engaged in manufacturing; owns or operates vehicles; owns or operates buildings or other physical facilities; or has any other process or activity that has carbon outputs.

 

In other works, the impacts could well reach every company and enterprise. This assessment may seem overly dramatic, but at a minimum it seems likely that the kinds of disclosure requirements now facing insurance companies and the utilities industry could come to be expected of many other companies. As Cuomo said in connection with the settlement described above, he expects that the disclosure requirements will "establish a standard."

 

Whether these changes will actually take place remains to be seen. But whether or not they ultimately happen, the prudent course would seem to be to anticipate that they will. Which leads to the point referenced above, about the prospect that insurers could wind up driving change for many other companies.

 

That is, with insurers themselves obliged to start reporting next May among other things on what steps they are taking to engage and educate policymakers and policyholders on climate change, one possibility is that insurers could take the lead in communicating the message that prudent companies should assume that these changes are coming. Insures could wind up spurring their policyholders to undertake the same kind of risk assessment and disclosure that Cuomo is requiring in the regulatory settlements with the utilities.

 

Specifically, it seems possible that D&O insurers, in order to fulfill their own disclosure obligations under the NAIC’s mandate (and to look proactive while doing so) could undertake to "educate" their policyholders about the need to assess both the possible regulatory and physical impacts of climate change on their operations and financial condition, and to disclose those assessments to investors, as a way to manage a variety of climate change related risks.

 

In any event, whether or not insurers actually take that step, well-advised companies may independently conclude on their own that given the possible regulatory and physical impacts of climate change, risk assessment and disclosure is simply prudent.

 

One of the lurking dangers when a single issue predominates, as the global financial crisis recently has, is that all other concerns may seem trivial and unimportant by comparison. For many companies, especially those outside the insurance and utilities industries, climate change issues may now seem subordinate and remote to the point of irrelevance. But when we finally emerge from the current crisis, we may find that the climate change risks loom larger than ever and are more important than anyone now imagines.

 

This is not the first time I have raised these climate change related issues (refer for example here). I know there are those who think I am alarmist about this issue, and I suppose the skeptics could be right. However, even the most hardened cynic will have to acknowledge that, given the EPA’s recent pronouncement and given the current political environment in Washington, regulatory and even legislative activity seems likely, which is clearly a risk, trend or uncertainly that prudent companies will be assessing and disclosing.

 

And allow yourself for a moment to consider the possibility that the risk assessments in the EPA report could actually come to pass. At a minimum, if these things are possible, shouldn’t companies also be assessing the possible impact of climate change on their operations and financial condition?

 

Many companies today might conclude that there will be time enough tomorrow to deal with tomorrow’s problems. That was exactly the logic that led Detroit to keep grinding out SUVs and Hummers for the last twenty years, when more forward-looking competitors were already capturing market share by making hybrid vehicles. Just as Detroit’s past leaders are now criticized for their lack of vision, so too may other corporate leaders who now defer on these issues find themselves later under siege for failing to look ahead and anticipate the changes and problems just ahead.

 

Somehow, on Earth Day, these issues seemed particularly important for me. And for my kids.