In a recent post (here) discussing the New York state court lawsuit recently filed against Banco Santander and related entities on behalf of Madoff-related victims, I mentioned that among the claims asserted in the complaint is a cause of action under New York General Business Law Section 349. This item caught the attention of Albany Law School professor Christine Sgarlata Chung, who has a particular interest in the question whether Section 349 is applicable to securities claims.

 

At my invitation, Professor Chung has submitted the following brief guest post relating to the plaintiffs’ Section 349 claims:

 

I read with interest your recent post on the Madoff-related class action filed by the Coughlin Stoia firm.  As you note, the complaint asserts a variety of state law claims, including claims under §349 of the New York General Business Law.   This is an interesting approach, given the reluctance of some New York courts to apply §349 to securities transactions. 

 For example, in Gray v. Seaboard Securities, Inc., 788 N.Y.S 2d 471 (N.Y. App. Div. 2005), plaintiffs alleged that they opened accounts at Seaboard, purchased stock recommended by Seaboard, and paid full service brokerage commissions to Seaboard based on Seaboard’s promise to provide proprietary research.   Plaintiffs alleged that Seaboard engaged in a deceptive business practice within the meaning of §349 by failing to provide the promised investment advice.

The district court dismissed the plaintiffs’ claims on the grounds that §349 does not apply to securities transactions.  On appeal, plaintiffs argued that §349 does not contain a "wholesale exclusion" for securities transaction.  They also argued that their claims arose from Seaboard’s furnishing of services (i.e., investment advice) and not from securities transactions per se. 

The appellate court affirmed the dismissal of the plaintiffs’ claims, noting that the "vast majority of [New York] courts which have considered the issue have found general Business Law §349 inapplicable to securities transactions for essentially two reasons."   First, the court reasoned "individuals do not generally purchase securities in the same manner as traditional consumer products, such as vehicles, appliances or groceries, since securities are purchased as investments and not goods to be consumed or used."  Second, the court held that because the securities arena is highly regulated at the federal level, "it is questionable that the legislature intended to give securities investors an added measure of protection beyond that provided by securities acts." 

It is important to note that in 2001, a different department of the New York appellate court held that § 349 does not contain a blanket exception for securities transactions.   See Scalpe & Blade, Inc.  v. Advest, Inc., 722 N.Y.S. 2d (N.Y. App. Div. 2001).  Still, given Gray and its ilk, I am curious to see how the Coughlin Stoia plaintiffs fare with their § 349 claim.

 

Special thanks to Professor Chung for her interesting commentary on this issue. The D&O Diary welcomes guest posts from responsible commentators and we are always interested in submissions and contributions from readers.

 

Other Madoff-Related Notes: A February 18, 2009 Wall Street Journal article entitled "Accounting Firms that MIssed Fraud at Madoff May be Liable" (here) suggests that accounting firms for Madoff feeder funds could be "legally vulnerable to claims that they should have uncovered red flags, according to legal and accounting experts."

 

And a February 17, 2009 article in The (London) Times reports (here) that lawyers from firms in 21 different countries (including the U.S.) recently met in Madrid and formed a global alliance to represent claimants who lost money as a result of the Madoff scheme. Hat tip to the Securities Docket (here) for the linkl to the Times article.  

 

Deteriorating economic conditions threaten a massive wave of corporate defaults. Corporate borrowers’ inability to fulfill debt obligations not only could prompt a bankruptcy filing surge, but also could result in a flood of ensuing lawsuits and claims as creditors and shareholders seek to recoup their losses. These claims could present a host of challenging D&O coverage issues.

 

The Growing Default Threat

According to a February 13, 2009 Wall Street Journal article entitled "Wave of Bad Debt Swamps Companies" (here), "the U.S. is entering a period likely to feature the most corporate-debt defaults, by dollar amount, in history." The article reports estimates that "U.S. companies are poised to default on $450 billion to $500 billion in corporate bonds and bank loans over the next two years."

 

In percentage terms, the default rate could "approach levels last seen in 1933." High yield default rates peaked around 15% in 1930. The Journal reports that S&P estimates that default rates will hit 13.9% this year "but could go as high as 18.5% if the downturn is worse than expected."

 

The "growing wave of souring debt" has already resulting in rising numbers of bankruptcies, including, just in the last few days, Muzak Holdings LLC; Pliant Corp.; Aleris International; and Midway Games.

 

However, as the Journal article observes, corporate defaults do not always result in Chapter 11 filings. Borrowers are sometimes able to restructure their debt outside of bankruptcy, and sometimes give creditors ownership stakes in exchange for reducing or elimination debt.

 

The Risk of Increased Numbers of Claims

In addition to the possibility of a growing number of bankruptcies, the prospect of surging corporate defaults also raises the possibility of an upsurge in claims against the directors and officers of the struggling or bankrupt companies.

 

Companies whose financial stability is deteriorating may as one consequence of their struggles get hit with a "going concern" opinion from their auditor. As the securities lawsuit filed against NextWave Wireless illustrates, the question whether a company can continue as a going concern alone can become an allegation in a shareholders’ class action complaint.

 

Claims may arise even when companies attempt a work out to try to avoid bankruptcy. These claims can come from shareholders, who may content that the workout resulted in a dilution of their interests, or it can even come from other bondholders, who may claim that their interests have been harmed or improperly subordinated, as demonstrated in the recent Station Casino bondholder claim (complaint here). Bondholders also recently filed a similar lawsuit against Harrah’s Entertainment and certain of its directors and officers (refer here).

 

But a bankruptcy filing is particularly likely to be followed by claims against the bankrupt company’s directors and officers. These claims can come in the form of securities lawsuits brought against the individuals by the bankrupt company’s shareholders, as reflected for example in the recent cases filed against Pilgrim Pride’s corporate officials (refer here); against Britannia Bulk’s senior officers (here); or against the directors and officers of Charys Holding Company (here).

 

In addition, the Trustee in bankruptcy may also assert claims against the company’s directors and officers, as evidenced in the now infamous Just for Feet claim (about which refer here). As the Just for Feet bankruptcy also demonstrates, these various claims can arise simultaneously, which presents its own set of issues.

 

The Potential Coverage Issues

The advent of claims following bankruptcy presents a number of challenges in the context of any potentially applicable directors and officers’ liability insurance. Some of these challenges are a reflection of the size and structure of the insurance program; other challenges arise from the nature and extent of the coverage afforded.

 

With respect to the overall program, one critically important issue may simply be the amount of insurance available. The prospect for multiple simultaneous claims is increased dramatically when a company files for bankruptcy. The simultaneous prosecution of multiple claims presents the very real possibility that the insurance could be substantially depleted or even entirely exhausted. As demonstrated in the claims surrounding the Collins & Aikman bankruptcy (about which refer here), defense costs alone potentially could deplete the available limits.

 

And as demonstrated in connection with the multiple claims filed against the directors and officers of Just for Feet following that company’s bankruptcy, the proceeds of a traditional D&O insurance program alone may be insufficient to resolve all claims that can arise in the bankruptcy context. Both the Collins & Aikman and the Just for Feet examples have important implications for policy structure, as discussed below.

 

The interplay between the provisions of the Bankruptcy Code and the terms and conditions of the D&O policy may present certain specific challenges. As I discussed at greater length in a prior post (here), a recurring issue since so-called "entity coverage" has become a standard part of the D&O policy has been whether or not the D&O policy proceeds are property of the bankrupt estate under Bankruptcy Code Section 541(a) and subject to the automatic stay in bankruptcy under Bankruptcy Code Section 362.

 

A particularly good article discussing these questions regarding the D&O policy proceeds and the operation of the bankruptcy stay written by my good friend Kim Melvin of the Wiley Rein law firm can be found here.

 

Another frequently recurring D&O insurance coverage issue arising in the bankruptcy context is whether claims asserted by the Trustee or other receivers or liquidators against the company’s directors or officers funs afoul of the policy’s exclusion for claims brought by one insured against another insured. The "insured vs. insured" issue arises because of the concern that the Trustee or other claimant is "standing in the shoes" of a policy insured, the company itself.

 

Addressing the Insurance Concerns

A number of policy solutions to these recurring bankruptcy issues have developed in recent years. For example, a coverage carve-back to the insured vs. insured exclusion, now a standard provision in most policies, has continued to evolve over the years to address concerns about coverage for claims brought by Trustees and others.

 

In addition, many policies now contain "priority of payments" provisions as a way to try to address questions surrounding the availability of the D&O policy’s proceeds for the payment of defense expense or the resolution of claims notwithstanding the bankruptcy stay.

 

Perhaps even more importantly, to address concerns about the susceptibility of the policy proceeds to depletion or exhaustion from multiple simultaneous claims, particularly in the bankruptcy context, the D&O industry has developed a number of structural solutions designed to ensure that whatever may happen, a fund of money will remain available for specified individuals so they can defend and resolve claims against them. These structures might take any one of a number of forms, including a so-called Side A/DIC policy, or even an individual director liability (IDL) policy.

 

The complexity of these coverage and structural issues underscores the need to involve a skilled insurance professional in the D&O insurance acquisition process. Financial troubled companies in particular require the contributions of an informed and experienced advocate in structuring their coverage. The structure and the terms and conditions of a company’s insurance program could determine whether or not insurance coverage is available for individual directors and officers in the event of bankruptcy and related claims.

 

One final note about the likelihood of increasing corporate defaults. That is, the current deteriorating economic conditions not only present challenges for insurance buyers, they also present serious concerns for D&O underwriters. As the Journal article cited above notes, the defaults "will likely spread across many industries." Among the industries the article specifically mentions are "media, entertainment, casino and hotel companies, car makers and retailers."

 

Up to this point, the most significant consequences of the credit crisis have been concentrated in the financial sector. D&O underwriters have had the ability to segment risk arising from the credit crisis according to whether or not companies were financially related. However, with the growing threat of corporate defaults across many industry sectors, risk segmentation will be much more challenging. At a minimum, it will no longer be sufficient for underwriters to presume that risk is limited to the financial sector alone.

 

In a February 12, 2009 FINRA Dispute Resolution Award, a panel of three arbitrators ruled that Credit Suisse must pay ST Microelectronics more than $400 million based on the company’s claims that Credit Suisse misled the company into buying subprime-exposed auction rate securities. A copy of the award can be found here.

 

The FINRA Award

As I detailed in an earlier post (here), ST Microelectronics had filed the FINRA claim against Credit Suisse (USA) LLC, while also separately filing a civil lawsuit against Credit Suisse Group, the U.S. affiliate’s Switzerland-based parent. The separate lawsuit complaint can be found here.

 

According to the February 12 Award, the FINRA complaint against the U.S. affiliate asserted claims under Section 10 of the ’34 Act and Rule 10b-5, alleging that the claimant "requested investments in student loan securities backed by U.S. government guarantees" but that instead their funds were invested in what the civil lawsuit complaint described as "illiquid, risky and unsustainable auction rate securities consisting of collateralized debt obligations and credit linked notes, some of which were backed by subprime real estate loans." (The separate complaint alleged that Credit Suisse had an "intentional strategy" of "dumping into the accounts of unsuspecting clients some of the worst ARS on the market.")

 

The Award makes no specific findings of fact but instead simply species the amounts to be awarded to ST Microelectronics. Credit Suisse is ordered to pay the claimant "compensatory damages" of $400 million, which is to be "paid immediately in exchange for Claimant’s entire portfolio." The award also orders the payment of certain of fees and costs, interest, and $3 million attorney’s fees.

 

Discussion

The FINRA award has a number of significant implications, the most immediate of which may be those relating to Credit Suisse itself. The separate lawsuit complaint filed against the Credit Suisse parent company alleges that "at least a dozen other multinational corporations are victims of the same scheme," carried out by two Credit Suisse brokers who, in fact, are the subject of a current criminal prosecution (about which refer here). The complaint alleges that the supposed scheme involves "more than $2 billion of these clients’ money."

 

A July 31, 2009 Wall Street Journal article (here) listed ten overseas companies (including ST Microelectronics) that have initiated arbitration proceedings against Credit Suisse-affiliated companies based on auction rate securities. The February 12 FINRA Award may bode ill for Credit Suisse in these other proceedings.

 

In addition, the outcome, magnitude and prominence of the February 12 Award could also spur similar claims by other aggrieved parties against other broker-dealers, particularly other aggrieved institutional investors. By and large, institutional investors were excluded from the massive auction rate securities regulatory settlements that have been announced to great fanfare. These excluded investors may be encouraged by ST Microelectronics’ success, and seek to pursue their own claims. A February 13, 2009 Bloomberg article (here) discussing the Award quotes one observer as saying "this decision will likely lead to either more arbitrations or settlements between investors and broker-dealers."

 

To be sure, the circumstances relating to Credit Suisse’s involvement with auction rate securities may be distinct. As noted above, criminal proceedings have arisen from its brokers’ activities. Other prospective claimants’ claims may not be as sympathetic.

 

It is important to emphasize that while the Award itself describes the relief granted as "compensatory damages," what it actually accomplished is a rescission of the underlying securities transaction. Credit Suisse basically has to buy back the company’s securities at face value. (In that regard, the Award itself noted that what the claimant had requested was "relief equivalent to rescission" – which appears to what the claimant got.) Though the Award provides for the payment of other fees and costs, it does not award any other type of damages. The Award expressly denied the claimant’s request for punitive damages.

 

The absence of the award of other damages potentially could affect other prospective claimants. That is, while these cases may provide an avenue of relief, there is nothing about this Award to suggest that that a claim of this type is going to produce some kind of a bonanza. On the other hand, for many prospective institutional investor claimants, the opportunity to return their auction rate securities for face value at this point would be more than enough incentive for them to pursue a claim.

 

The Award does provide one very particular kind of encouragement for these kinds of claims. The panel’s award of $3 million in attorneys’ fees undoubtedly will capture the imagination of many would-be claimants’ attorneys. The prospect of this kind of fee recovery undoubtedly will encourage many attorneys to seek out and pursue these claims.

 

It is unclear from the Award what preclusive or superseding effect the Award might have on the separate federal court lawsuit ST Microelectronics filed against the Credit Suisse corporate parent. It seems that the company secured the relief it sought. What reason or even opportunity there might be to continue to prosecute the civil case is not immediately apparent.

 

Hat tip to the WSJ.com Law Blog (here) for the link to the FINRA Award.

 

Don’t Tell Me How to Fix It, Just Tell Me Who to Blame: If you missed it, you may want to take a look at the list of the "25 People to Blame" (here) in the February 23, 2009 issue of Time Magazine. The magazine’s attempt to identify the individuals responsible for the current financial mess is actually kind of interesting, even thought provoking.

 

The list includes the usual suspects: Dick Fuld, Jimmy Cayne Angelo Mozillo and Stan O’Neill.( I agree that Angelo Mozillo of Countrywide also belongs on the list, although I don’t think I would have put him first, as Time Magazine did.) Time also included, correctly in my view, Fred Goodwin of Royal Bank of Scotland, whose ill-fated and ill-time take over assault on ABN AMRO is record setting in a number of extremely negative ways.

 

The list also recognizes others who rightfully should shoulder some of the blame, but who sometimes elude the harsh spotlight. In this category I would put Marion and Herb Sandler, whose Golden West Savings bank initiated the Option ARM mortgage. Sandy Weill also (correctly, in my view) appears on the list for the mess he made of Citigroup.

 

A couple of U.S. Presidents make the list — Bill Clinton and George W. Bush. Alan Greenspan, Hank Paulson and Chris Cox are also there. There is also one former Prime Minister, Davíð Oddsson of Iceland, and one Premier, Wen Jiabao of China.

 

There are a several interesting names on the list. For example, John Devaney appears as a sort of a stand in for the whole hedge fund industry, and Lew Ranieri gets belated recognition for having fathered mortgage securitization. Kathleen Corbett, the former head of rating agency Standard & Poor’s also gets a nod for the plethora of triple-A rating on mortgage backed securities that encouraged so much misdirected investment. Joe Casano gets due recognition for basically taking down AIG.

 

There are others whom I think are misplaced on this list. For one thing, what is Bernie Madoff doing there? He may have been a big crook, but in the end he is just a crook.

 

There are also at least two very significant omissions from the list.

 

First and foremost, the U.S. Congress deserves to be recognized for its encouragement of housing policy that was misguided and disproportionate to the requirements and limitations of sound principles. Congress is great at holding hearings and making speeches when things go wrong. Their own abysmal record of implementing policies that prevent problems warrants its own set of hearings. I’d like to put some of them in the dock and subject them to the same kind of sneering cross-examination that they have been imposing on others in recent days. (To be fair to the list-makers, they did slot former Texas congressman Phil Gramm at No.2 on the list, which arguably is a Congressional designation by proxy.)

 

And finally, why isn’t the American Homebuyer on the list? Yes, the American Consumer is recognized, but I think we need to be specific here. Within the larger group of well-intentioned home buyers are those who were driven by some weird form of housing lust to buy gigantic houses they couldn’t afford. There also appear to have been some who were all too willing to hide or even misrepresent their true financial condition to secure credit. Sure, the lenders were complicit, but as long as we are assigning blame, let’s put some everywhere that it belongs.Of course, many homeowners who are now struggling had nothing to do with any of this kind of conduct, but there are also those who were involved.

 

When you come right down to it, there is no shortage of culprits. Sadly, there are many, many victims. Some of them are even the same people.

 

In a case demonstrating the range of both the potential legal theories and the prospective litigants that could become involved in Madoff-related litigation, a pension fund has filed an ERISA class action against an investment advisory firm for the advisory firm’s investment of the pension fund’s assets in a Madoff "feeder fund."

 

On February 12, 2009, the Pension Fund for Hospital and Health Care Employees – Philadelphia and Vicinity filed an ERISA lawsuit against Austin Capital Management Ltd. in the Eastern District of Pennsylvania, on its own behalf as well as on behalf of all employee benefit funds for whom Austin acted as investment manager and whose assets were invested in whole or in part by Austin in any Madoff-related investment during the period February 12, 2005 to the present.

 

A copy of the complaint can be found here. A copy of the plaintiffs’ lawyers February 13, 2009 press release can be found here. A February 17, 2009 Law.com article describing the lawsuit can be found here.

 

The complaint alleges that in June 2008, the plaintiff’s investment consultant retained Austin "for the purpose of managing a portion of the [plaintiff’s] assets, to be invested in hedge funds." At the time, Austin, which is a wholly-owned subsidiary of Cleveland-based KeyCorp, had approximately $2.3 billion of assets under management.

 

In July 2008, the plaintiff’s investment consultant placed $10 million of the plaintiff’s assets with Austin for investment with the Austin Capital Safe Harbor Dedicated ERISA Fund, Ltd., an exempt corporation operating under the laws of the Cayman Islands. Austin is the investment manager for Austin Safe Harbor.

 

The complaint alleges that Austin invested a portion of Austin Safe Harbor assets in "Madoff-related investments, specifically funds managed by Tremont Holdings." According to a February 3, 2009 Bloomberg article (here), Tremont in turn "placed money through its Rye Select Broad Market Prime Fund, L.P.," which in turn invested with Madoff’s firm.

 

The complaint alleges that Austin was a fiduciary to the class of benefit funds, but that Austin failed to conduct adequate due diligence prior to recommending and investing monies in Madoff-related funds. The complaint also alleges that Austin ignored "red flags."

 

The complaint identifies several other public pension funds for which Austin acted as investment manager. The complaint states that Austin managed $170 million for the Massachusetts Pension Reserves Investment Management Board, of which $12 million was exposed to Madoff-related investment, and also managed $170 million for the New Mexico Education Retirement Board, of which $8-10 million was in Madoff-related investments. According to news reports (here), the Massachusetts pension fund recently voted to fire Austin due to the Madoff-related losses.

 

There are a number of interesting things about this lawsuit. The first is that it seeks relief under ERISA. So far as I am aware, this is the first Madoff-related lawsuit asserting claims under ERISA. The interesting thing about an ERISA class action, as opposed to a securities class action, is that the ERISA action is not subject to the PSLRA’s discovery stay and other procedural requirements. So the ERISA plaintiff is free to conduct discovery even while the dismissal motion is pending.

 

The opportunity under ERISA to avoid some of the challenges of litigating under the federal securities laws clearly was one of the plaintiffs’ attorney’s motivations in bringing the action. The Law.com article linked above quote the attorney as saying that ERISA provides "an easier and quicker route in repairing the damage."

 

By was of comparison, the attorney cites as the shortcomings (from his perspective) of seeking relief under the securities laws, the "high burden of proving fraud" and the "limitations on showing third parties were at fault." The attorney said that while Madoff may have been involved in fraud, "it would be much more difficult to prove that third-party investment funds that invested with Madoff were also defrauding clients."

 

The other interesting thing about the fact that this lawsuit was filed under ERISA is that it at least potentially draws into the mix yet another type of insurance. Up to this point, the likeliest source of insurance funds in connection with the prior Madoff-related lawsuits has been the target defendants’ D&O insurance or errors and omissions (E&O) insurance. A claim under ERISA at least potentially triggers coverage under applicable fiduciary liability policies (if any). The spread of Madoff-related insurance exposure to include fiduciary liability coverage may not have been among the factors considered in earlier estimates about aggregate Madoff-related insurance losses.

 

The final interesting thing about this lawsuit is what it says about just how broad the pool of Madoff-related defendants has become. The plaintiff pension fund in this lawsuit did not invest with Madoff. It did not even invest with a Madoff feeder fund. Instead, it invested with an investment advisor that invested with a feeder fund that in turn invested with Madoff. (Got that?) The sheer span of these increasingly remote connections required to establish the Madoff-related link underscores just how widespread the Madoff litigation may yet become.

 

I have in any event added the new lawsuit to my running tally of all Madoff-related litigation, which can be accessed here.

 

The pace of bank failures is accelerating. This past Friday night the FDIC took control of four more banks, representing the largest number of bank closures yet on a single date and bringing the year to date total to 13 — including ten just in the last three weeks alone.

 

On February 13, 2008, the FDIC announced that it had taken control of Riverside Bank of the Gulf Coast, of Cape Coral, Florida, which previously had assets of $539 million (about which refer here); Sherman County Bank of Loup City, Nebraska, which previously had assets of $129.8 million (refer here); Corn Belt Bank and Trust Co. of Pittsfield, Illinois, which had assets of $271.8 million (refer here); and Pinnacle Bank of Beverly, Oregon, which had assets of $73 million (refer here).

 

The geographic distribution of these banks, including the presence of three banks outside the most challenged real estate markets in California and Florida, together with the fact that these are smaller community banks, are both particularly troublesome notes.

 

The FDIC has now taken control of 34 banks just since July 1, 2008. (The FDIC’s failed bank list can be found here.) The accumulated effect of these regulatory actions is starting to strain the agency, as detailed in a February 14, 2009 New York Times article entitled "Failed Banks Pose Test for Regulators" (here). The article states that the agency is in the midst of a "military-style buildup as it undertakes one of the greatest fire sales of all times." The FDIC is, according to the article, "struggling to deal with a miserable stew of failed real estate projects, vacant land, boarded-up houses and loans to defunct or bankrupt businesses."

 

In all likelihood, the situation will only get worse for some time to come. To be sure, we are a long way from the dark days of 1989, when regulators took control of 534 lenders (including 327 savings and loans). But we could be headed in that direction.

 

According to a February 9, 2009 Bloomberg article (here), an RBC Capital Markets analyst has predicted that as many as 1,000 U.S. banks may fail in the next three to five years. The analyst said that most of the failures will probably occur at banks with less than $2 billion in assets as their commercial loans default.

 

Both the analyst’s emphasis on smaller banks and on the banks’ exposure to commercial loans are particularly disturbing observations. By and large, the worst (or at least the most public) consequences from the credit crisis have been concentrated among the largest banks and have arisen from problems involving residential real estate lending. The expansion of the meltdown’s ill effects to a wider variety of financial institutions and other types of credit could have serious implications – and not just for the threatened banking institutions, but for the economy as a whole.

 

In any event, the four bank closures this past Friday night is the most yet on a single day as part of the current wave of bank failures. The seven banks closed so far in February already represent the highest monthly total yet. Unfortunately it appears that many of these kinds of records will be established and broken in the weeks and months ahead.

 

Motley Fool, commenting (here) on the FDIC’s practice of announcing bank closures on Friday evening, observed that "evidently the U.S. head-in-sand department has decreed that all such unpleasant announcements should be made when the least people will read them." The Fool might be right; the FDIC could in fact be worried about what might happen if people were to focus too closely on the accumulating number of bank failures. It may or may not be a real concern (yet) that depositors might lose confidence in the banking system, but the FDIC might well have that possibility in mind.

 

Conduct Unbecoming of a Gentleman: As described in a February 13, 2009 Las Vegas Sun article (here), Station Casino bondholders have sued the company and certain of its directors and officers, as well as certain related entities, alleging that the company’s debt-reduction plan is unfair to some of the company’s bondholders.

 

While the claims themselves may seem commonplace, the bondholders’ complaint (here) displays a rather unusual literary flair. Among other things, in what is effectively a prologue, the complaint quotes Count Leo Tolstoy as having said: "A gentlemen is a man who will pay his gambling debts even when he knows he has been cheated." Perhaps even more flamboyantly, the complaint then goes on to state that the defendants are "not acting Gentlemanly."

 

Shocking bevior, indeed.

 

Hat tip to Courthouse News Service for the Station Casino complaint.

 

Strangely, the Judge Couldn’t Be Found Inside the Mailbox at the UPS Store: According to the February 12, 2009 Atlanta Constitution (here), Fulton County deputies have yet to serve suit papers filed on December 12, 2008 against a Fulton County Superior Court Judge, even though the deputies and the Judge all work in the same courthouse building and even though the summons was addressed to the Judge at the courthouse. However, the deputies did attempt to serve the Judge at his campaign headquarters mailbox at a UPS store.  (Map courtesy of Fulton County deputies.)

 

Hell: According to a February 10, 2009 Minneapolis Star Tribune article (here), local police in Texas have seized 22 urine-soaked dogs found with their owner inside a locked station wagon. The ammonia level inside the car was measured as 23 parts per million. Humans reportedly start experiencing health issues at 12 parts per million. The article does not explain the simultaneous combination of owner, dogs, urine and locked station wagon.

 

Her Whole World Came to an End in an Instant: You might say, she broke a nail, big deal, right? However, Lee Redmond of Salt Lake City has not cut her nails since 1979. The total length of her nails in 2008 was over 28 feet, including a right thumbnail that measured nearly 3 feet long. She has appeared in the Guiness Book of World Records. The Associated Press reports (here) that she broke her nails after she was thrown from an SUV in a vehicle collision. She was hospitalized for serious injuries that are not considered life threatening – unless of course your life consists of being famous for having long fingernails. Everyone here at The D&O Diary hopes for the best for Ms. Redmond.

 

I Wonder, Did They Check Bernie Madoff’s Shoes?: According to a February 11, 2009 San Jose Mercury News article (here), a mortgage fraud suspect stopped at the Canadian border had $70,000 stuffed in his boots. (Don’t ask, of course they were cowboy boots.) He also had $1 million in Swiss bank certificates and four ounces of platinum valued at $1,420 an ounce. What an idiot. With the global economy in the tank, he probably could have written off the value of the certificates and gotten a tax loss carry forward for the next five years, and with commodities prices what they are, he was probably carrying the platinum at a loss too.

 

A Strange World, Indeed, Mr. Mum:  Ordinarily, I find material for my blog posts basically by roaming around the Internet and after a while someting worth writing about just kind of shows up. For whatever reason, last night, all I could find was a bunch of really weird stories. After a while, it occured to me, when life hands you lemons, or whatever, you basically just have to make a blog post out of it.

 

The hardest part was figuring out how to categorize this post. Categorization is a mandatory publication prerequisite within the blog software I use. I finally decided to put this post in the "SOX (Generally)"  category, because, after all, what is more absurd than the word "SOX"? 

 

All of this reminds me of the old comic strip, written by Irving Phillips, entitled "The Strange World of Mr. Mum." As shown in these examples, Mr. Mum was a silent but observant witness to all of the world’s absurdities. Many of the strips ended with Mr. Mum in a bar, contemplatively drinking a glass of carrot juice. (I just hope his dogs weren’t locked in the car outside.)

 

 When the Madoff scandal news first broke, I thought it would be like so many other fraud controversies, dominating the headlines briefly and then fading into the background – as seemingly has happened with the Marc Dreier debacle. But perhaps as a result of the scale and breadth of the harm caused, the Madoff scandal story just seems to keep escalating.

 

Today’s headline revelation is the widely reported news (refer here), that Ruth Madoff, Bernard Madoff’s wife, allegedly withdrew a total of $15.5 million from a brokerage account just prior to Mr. Madoff’s now-famous confession to his sons and subsequent arrest.

 

This allegation first arose in a footnote of a complaint filed on February 11, 2009 by Massachusetts Secretary of State William F. Galvin to revoke the broker-dealer registration of Cohmad Securities Corporation. The complaint and related exhibits can be found here.

 

The Enforcement Section of the Massachusetts Securities Division of the Officer of the Secretary of the Commonwealth had "sought to determine whether the businesses of Cohmad and Madoff Investments were so intertwined that they could be viewed as a common enterprise, and not as separate entities, for purposes of imputing liability and obtaining investor relief." The complaint alleges that Madoff was one of Cohmad’s co-founders and directors.

 

As detailed in the complaint, Galvan contends that Cohmad "categorically refuses to discuss its actions with regulators" and therefore "has no right to continue to engage in the securities business in the The Commonwealth of Massachusetts."

 

As part of the complaint’s contention that Cohmad and Madoff’s securities firm are "so intertwined that they could be viewed as a common enterprise," Galvin cites, among other things (in footnote 4, on page 25 of the complaint) wire transfer records showing the "flow of funds" between the two enterprises, referring specifically to documents showing that "Ruth Madoff withdrew [from Madoff-related accounts at Cohmad] $5,500,000 on November 25, 2008 and withdrew $10,000,0000 on December 10,2008." Madoff was arrested on December 11, 2008.

 

The documents reflecting these two wire transfers can be found on the last two pages of Exhibit 16 (refer to pages 51 and 52, here).

 

A news wire story (here) quotes a spokesman from Galvin’s office as saying "We’re not accusing her of anything wrong." The spokesman added "Now, what someone in New York or the feds may think of it may be entirely different."

 

A Painful Situation: And under the general heading of marital complications related to the Madoff scandal, I reference the difficulties facing Steven Simkin, formerly married to Laura Blank. On February 3, 2008, Simkin filed a complaint in New York State (New York County) Supreme Court (here) against his former wife in connection with the Madoff-related investment the couple had maintained prior to their divorce.

 

According to the complaint, the couple entered a June 27, 2006 agreement providing for the division of their marital assets. The couple "mistakenly believed" that their largest asset was their account with Madoff Investment Securities, which they believed to be valued at $5.4 million. As part of the agreement, Simkin agreed to pay Blank half of the assumed account value in cash. (Ouch.)

 

The account is now "worthless, literally not worth the paper on which the parties’ valuation rested." Simkin’s complaint alleges that

 

As a result of the parties’ clear mistake of fact, Steven paid Laura millions of dollars believing, as did Laura, that it represented her share in the "Account" (as the parties understood it to be) and retained the "Account" as a portion of his equitable share of the couple’s assets. As a result, Laura obtained a windfall and Steven did not receive an equitable share of the couple’s joint assets. Accordingly, by this action, Steven seeks to reform the Agreement, which is grounded upon a material and mutual mistake respecting the couple’s assets at the time …and recover from Laura so as to accomplish the goal the parties intended by executing the Agreement.

 

Mr. Simkin, you have my sympathy.

 

Special thanks to the several readers who send me links to the Massachusetts Secretary of State’s complaint and to Jon Jacobson for help in finding the Simkin complaint. I have added the two complaints to my register of Madoff-related litigation, which can be accessed here.

 

A Clawshank Redemption?: And under the general heading of trying to recover previously paid out amounts, one issue that has gained a great deal of attention is whether the trustee in the Madoff liquidation proceeding can recover ("clawback") amounts paid out to fund investors who cashed out before the scandal was revealed. The Securities Docket has a post on the topic (here), discussing efforts that some of the investors who redeemed their shares to change the claims bar date in the Madoff liquidation proceeding out of concern for anticipated clawback efforts. .

 

In a February 2009 memorandum entitled "How Long and Strong is Trustee Piccard’s Claw?" (here), the Seyfarth Shaw law firm takes a detailed look at the trustees’ powers, and reviews the similar clawback efforts undertake in the Bayou funds scandal.

 

The memo concludes that the trustee’s ability to clawback redemption payments is "not unbridled" and that there are "powerful defenses that can and will be advanced, including the good faith defense that protected many redeeming investors in the Bayou case." The memo also notes that "additional defenses also are likely to be developed as the facts surrounding what Madoff did come into sharper focus."

 

Meanwhile, in Europe:  According to press reports (here), European investor rights group Deminor has initiated a legal proceeding in a Luxembourg court in order to compel two Luxembourg units of UBS to provide informatoin and materials relating to the entities’ role in steering clients to Madoff-related investmens.

 

The action, which Deminor initiated on February 11, 2009, is filed against UBS S.A. and UBS Fund Services, as well as against the Luxalpha SICAV Fund, Luxembourg Third Party Management Company SA and Access Management Luxembourg SA.

 

According to the news reports, the action seeks information regarding contracts between the UBS units, Madoff, and Luxalpha, an investment fund that UBS allegedly promoted. Regulators closed Luxalpha last week for not complying with regulatory requirements. The action also seeks to obtain audit reports of the fund, prepared by Ernst & Young.

 

Deminor claims that it represents individual and institutional investors that had lost over $1.3 billion as a result of the Madoff scheme.

 

I would be very grateful to any reader who might be able to provide me with a copy of the new Luxembourg complaint.

 

Gender Issues: A February 11, 2009 Washington Post article entitled "In Banking Crisis, Guys Get the Blame" (here) raises the question whether the current global economic crisis is a result of the fact that the financial industry and its regulators are "overwhelmingly male-dominated."

 

The article quotes one commentator as saying that "you can argue that the men have made a right mess of it, and now the ladies should have a go." Another commentator observes that "maybe if we had some more women in the boardrooms, we may not have seen as much risk-taking behavior."

 

Finally, one commentator with an odd notion of human anatomy, commenting on London’s top financial sector officials, observed that "there are quite a lot of alpha males with testosterone steaming out their ears."

 

At least when it comes to relying on women to clean things up, Iceland "is leading the way," having appointed a female prime minister as well as two women to lead two of its major banks. The prime minister’s spokesperson is quoted as saying "Men, especially young men, made a mess of things. There is a strong discussion that women would have taken a more cautious approach in the financial sector."

 

And Finally: I have added a Twitter button in the right hand column. Readers interested in receiving Twitter updates (or "tweets" as they are known) between blog posts will want to click on the Twitter button and register to become a "follower" of my Twitter site. I also add "tweets" when I have added new blog posts. I have come to appreciate that there are many web denizens who prefer to receive their information as "tweets", so that is why this blog now has a Twitter button.

 

The New York Times has a nice February 11, 2009 article (here) with a good overview of what Twitter is all about.

I have previously tried to anticipate the future direction of the credit crisis litigation wave (refer, for example, here), but what I failed to foresee is that as the credit crisis itself has entered the remedial phase – or what we all hope turns out to be the remedial phase – there also would be litigation arising from the administration of the remedies. A recent securities lawsuit demonstrates how circumstances surrounding the government’s bailout efforts can lead to litigation.

 

As reflected in their February 9, 2009 press release (here), plaintiffs’ lawyers have filed a securities class action lawsuit in the Middle District of Alabama against Colonial BancGroup and certain of its officers. Colonial is a bank holding company that operates Colonial Bank, N.A., which has 347 bank branches in Florida, Alabama, Georgia, Nevada and Texas, and over $26 billion in assets.

 

The lawsuit relates to Colonial’s efforts to obtain TARP money, and in particular to the company’s December 2, 2008 and January 27, 2009 press releases discussing the company’s TARP-related efforts. A copy of the complaint can be found here. Special thanks to Courthouse News Service for the complaint.

 

In its December 2, 2008 press release entitled "Colonial BancGroup Received Preliminary Approval from the U.S. Treasury for $550 Million in Capital" (here), Colonial announced that it had "received preliminary approval" to participate in the Treasury Department’s capital purchase program, pursuant to which Colonial "will receive $550 million from the Emergency Economic Stabilization Act of 2008."

 

In the December 2 press release, Colonial also stated that in exchange for its investment, the Treasury was to receive preferred shares paying a 5% dividend for the first five years. If the preferred shares are not redeemed within five years, the dividend rate increases to 9%. The press release also stated that the Treasury will also receive warrants to purchase shares of Colonial.

 

According to the plaintiffs’ lawyers’ February 9 press release, in response to Colonial’s December 2 announcement, Colonial’s share price "surged over 50 percent from its $2 per share close on December 1, 2008 to close at $3.08 per share on December 2, 2008."

 

However, the complaint alleges that the defendants failed to disclose that "Colonial would be required to raise additional outside capital of $300 million before it could receive the $550 million in TARP funding." The complaint further alleges that Colonial "belatedly disclosed" this requirement after the markets closed on January 27, 2009. The complaint alleges that in response to the company’s January 27 announcement, Colonial’s share price declined 45%, from $1.58 per share to $0.85 per share.

 

Colonial’s January 27, 2009 press release, which can be found here, stated that Colonial’s participation in TARP is "subject to Colonial’s increasing equity by $300 million." The January 27 press release also states that Colonial is "actively pursuing a variety of capital raising alternatives to increase equity by $300 million, which should satisfy this condition of the TARP preliminary approval."

 

As discussed in a February 6, 2009 Birmingham Business Journal article (here), Colonial’s announcement that it must raise $300 million of additional funds to qualify for TARP "is raising eyebrows among some banking analysts and banking experts." The article quotes one commentator as saying that this item represents "a pretty significant omission" on Colonial’s part in its announcement of the TARP funding. The article also quotes an analyst as saying she felt "deceived" by the bank because it "withheld important information."

 

The Colonial lawsuit is far from the first credit crisis-related securities lawsuit in which governmental intervention of one sort or another is involved. For example, the government’s role in brokering Bank of America’s acquisition of Merrill Lynch features prominently in the securities lawsuit recently filed against BofA (about which refer here). The need for governmental rescues has also featured in a number of other credit crisis-related securities lawsuits, including for example, the lawsuits filed against Fortis (refer here), ING (refer here), and the Royal Bank of Scotland (refer here). But so far as I know, the Colonial case is the first securities lawsuit where the allegations are tied directly to the TARP funding program.

 

I supposed that after more than two years of credit crisis litigation, as well as massive governmental involvement in the financial markets, it should come as little surprise that we have reached the point where lawsuits relating to the bailout efforts themselves are starting to arise. I suppose we should start getting ready now for the inevitable stimulus-related lawsuits which undoubtedly will follow not long after Congress finishes its current efforts.

 

The Colonial lawsuit does raise an interesting categorization issue, which is whether the case properly should be counted as credit crisis-related and grouped with the previously filed credit crisis-related securities lawsuits. After reviewing Colonial’s press releases and considering the reasons why the company needed TARP money in the first place, I have concluded that the lawsuit is related to the ongoing credit crisis and therefore it belongs in my running tally of credit crisis related securities lawsuits.

 

My running tally of the subprime and credit crisis-related securities lawsuits can be accessed here. With the addition of the Colonial lawsuit, the tally of subprime and credit crisis-related securities lawsuits that have been filed during the period 2007 through 2009 now stands at 156, of which 15 have been filed in 2009. A spreadsheet showing the 2009 credit crisis related securities lawsuits can be accessed here.

 

One final note about TARP — the Bank Lawyer’s Blog reports (here) that some banks in the Dallas area are advertising the fact that they haven’t taken TARP money because they don’t need to. That line of analysis could get awfully murky under the Treasury department’s proposed updated bailout approach, under which banks will be "stress tested" and only the likeliest to survive will receive aid.

 

Madoff Update: Regular readers know that in addition to my running tally of the subprime and credit crisis-related securities lawsuits, I have also been maintaining a separate tally of Madoff-related litigation. The Madoff-related litigation register, which can be accessed here, is subdivided into multiple tables, reflecting the various types of litigation that has arisen out of the Madoff scandal.

 

I recently updated the Madoff lawsuit register by adding a number of new Madoff lawsuits, based on excellent information, materials and links provided by several readers, including in particular Jon Jacobson of the Greenberg Traurig law firm. My special thanks to all for the contributions.

 

And Finally: Describing it as "the beginning of a long process," the SEC Actions blog has a post (here) discussing the partial settlement that Bernard Madoff has reached with the SEC. The WSJ.com Law Blog also has a post here describing the partial settlement. A link to the SEC’s litigation release regarding the partial settlement can be found here.

 

Even though Madoff victims previously filed a securities class action lawsuit against Banco Santander and other parties in the Southern District of Florida (as discussed here), a different group of claimants has now filed a separate lawsuit in the Southern District of New York against substantially the same set of defendants. However, the new lawsuit purports to represent a different approach, and also presents specific allegations pertaining to Banco Santander’s public offer (here) to compromise the Madoff-related claims.

 

On February 4, 2009, plaintiffs filed a purported class action lawsuit in the Southern District of New York "on behalf of all persons or entities who owned shares of Optimal Strategic U.S. Equity Ltd. on December 10, 2008." The defendants include Banco Santander S.A. and related entities; Optimal Investment Services; PricewaterhouseCoopers; several HSBC-related entities; and several individual defendants. A copy of the complaint can be found here.

 

Both the purported class and cast of defendants named in this new lawsuit are similar to the class and defendants named in the previously filed Southern District of Florida lawsuit (about which refer here). However, unlike the prior lawsuit, the most recent lawsuit does not assert any claims under the federal securities laws.

 

Even though the new lawsuit purports to involve a class action, it asserts, rather than alleged violations of the federal securities laws, common law claims against all defendants for negligent misrepresentation, breach of fiduciary duty, and unjust enrichment. The complaint also asserts a claim for aiding and abetting a breach of fiduciary duty claim against PricewaterhouseCoopers. In addition, the complaint asserts a claim against all defendants under Section 349 of the New York General Business Law.

 

What makes this class action complaint’s lack of securities law allegations noteworthy is that it was filed by one of the leading plaintiffs’ securities class action law firms. A number of possibilities suggest themselves as to the reasons for the omission of a claim based on the firm’s area of specialty.

 

The first is the possibility that the firm hopes to maintain its own lawsuit separately and without consolidation with the previously filed lawsuits.

 

Another more interesting possibility is that the law firm wants to avoid the discovery stay under the PSLRA. Indeed, press reports (here) relating to the lawsuit expressly noted that "unlike other Madoff-related cases, the suit does not contain a securities claim, meaning plaintiffs can receive relevant information about the case before any trial that could bring to light previously unknown details on the case."

 

A leading plaintiffs’ securities firm’s use common law claims as a tactical way to insert a discovery tentacle, possibly to support later amended securities claims, is a disturbing possibility that would represent a circumvention of the PSLRA’s intended protections. Of course, there is always the possibility that the plaintiff lawyers in fact intend to pursue the common law claims without later adding securities claims, which would represent an interesting development in and of itself.

 

Yet another reason the plaintiffs’ lawyers may have dispensed with a federal securities claim is suggested in the claim asserted against PricewaterhouseCoopers. Under Stoneridge, the plaintiffs have no aiding and abetting claim against the audit firm under the securities laws. The complaint nevertheless asserts an aiding and abetting claim against the audit firm, but for fiduciary duty violations, not Securities law violations, suggesting an attempt to avoid Stoneridge’s limitations.

 

The new complaint in any event expressly references Banco Santander’s public offer to compromise the Madoff-related claims (about which refer here). Among other things, the complaint describes Santander’s offer as "woefully inadequate," citing the fact that the offer "does not compensate Class members for any interest or gain their money would have earned," and asserting that the preferred stock Banco Santander is offering would be substantially discounted in the open market.

 

For their part, the plaintiffs in the action previously filed in the Southern District of Florida have filed an "emergency motion" to enjoin Banco Santander from contacting putative class members to try to secure a release from them of their claims. In the memorandum filed in support of the motion (a copy of which can be found here), the plaintiffs allege that Santander "has launched a misleading and coercive campaign to pick off class members one by one, by pressuring them to release their claims based on incomplete and misleading information."

 

The memorandum cites Santander’s supposed use of closed door meetings, in which class members are presented with "onerous conditions and take-it-or-leave-it terms with quick expiration dates." The memorandum also references Santander’s "failure" to inform the putative class members of the existence of the lawsuit that "seeks recovery in excess of the compensation proposed."

 

The motion seeks to enjoin Santander from contacting class members, in order to prevent an "end-run around the Court’s jurisdiction and power to preside over this Class Action."

 

Whatever else may be said about the multidirectional litigation, it seems fairly certain that Banco Santander is getting a quick indoctrination into the battlefield tactics of the U.S. plaintiffs’ bar.

 

I have in any event added the new lawsuit to my running tally of the Madoff-related litigation, which can be accessed here. The new lawsuit appears in Table IV, in which I have identified "additional lawsuits against related defendants" and that are distinct from the federal securities class action lawsuits separately listed in the document.

 

Special thanks to Adam Savett of the Securities Litigation Watch blog for a copy of the complaint of the new lawsuit.

 

More Bank Closures: The expanding wave of bank failures swelled again this past Friday night when the FDIC announced the closure of three more banks, bringing the number of 2009 year-to-date closures to nine.

 

The three latest bank closures are Alliance Bank, previously a $1.14 billion asset bank in Culver City, CA (about which refer here); County Bank, previously a $1.3 billion bank in Merced, California (refer here); and First Bank Financial, previously a $279 million asset bank in McDonough, Georgia (refer here). The FDIC’s complete list of failed banks can be found here.

 

The closure of nine banks already in 2009, including in particular the closure of six banks in just the last two weeks, is extraordinary in and of itself. It is also noteworthy in context, as the number of bank closures just in the opening weeks of this year already exceeds the total number of all bank closures during the four years between January 1, 2003 and January 1, 2007. Indeed, during the period January 1, 2000 to January 1, 2008, only one year (2002, with 11 closures) had more bank closures than the nine already in the first six weeks of the year.

 

As I recently noted (here), the increasing number of bank closures is a difficult and disturbing trend, Unfortunately, all signs are that the number of bank closures will continue to grow as the year progresses.

 

Event Registration Update: If you are planning on attending the PLUS D&O Symposium on February 25 and 26, 2009 at the Marriott Marquis hotel in New York but you have not yet registered, you may want to get your registration in at your earliest opportunity. Event registration is rapidly filling, and so you may want to register now before it is too late. Registration information can be found here.

 

This year’s conference promises to be particularly interesting and informative. I am co-Chairing this year’s Symposium with my good friends, Chris Duca of Navigators Pro and Tony Galban of Chubb. The key note speakers include former Secretary of States Madeline Albright and New York Insurance Superintendent Eric Dinallo. Other panelists and speakers include a number of noteworthy individuals, including Stanford Law Professor Joseph Grundfest, Wilson Sonsini partner Boris Feldman and many others.

 

The Symposium will also feature a reprise of the excellent video, first shown at the PLUS International Conference in November, of "The Life and Times of Bill Lerach." The Securities Docket recently featured a trailer of the video, here.

 

The numbers are unambiguous – there were more securities lawsuits filed in the second half of 2008 than there were in the first half. Nevertheless commentators and observers continue to repeat the mistaken conclusion that there were fewer lawsuits filed in the second half, and even to try to discern some significance from a decline that never, in fact, occurred.

 

Here are the facts. As reflected on the Stanford Law School Clearinghouse Securities Class Action Clearinghouse website, which helpfully indexes the securities class action filings by quarter (here), there were 112 securities lawsuits filed in the first half of 2008 and 114 in the second half.

Not only were there more lawsuits filed in the second half of the year, but there were more lawsuits filed in the fourth quarter (65) than any other quarter during the year. Indeed, there were more lawsuits filed in December (30) than any other month during the year.

 

 

Clearly, the fact that securities lawsuit filings in fact accelerated at the end of 2008 potentially has far different implications for the future than the mistaken impression that lawsuit filings were declining.

 

 

The source of the impression that there were fewer lawsuits in the second half of 2008 is the year-end securities lawsuit filing Report jointly published by the Stanford Law School Clearinghouse and Cornerstone Research. The Report, which can be found here, considered only lawsuit filings through December 15, 2008. As I noted at the time the Report was first published (here), by omitting the last two weeks’ lawsuit filings, the Report not only excluded at least 12 lawsuit filings from its analysis, but it also reached a conclusion, inconsistent with the actual aggregate year-end data, that lawsuit filings had declined in the year’s second half. When lawsuit filing data through December 31 are considered, it is clear that the number of filings did not decline in the year’s second half.

 

 

What difference does it make whether or not lawsuit filings declined in the second half? Well, a discussion of the reasons for a lawsuit filing decline is a far different conversation that a debate over the reasons why lawsuit filings accelerated in the year’s final quarter and month. The repetition of the impression that lawsuit filings were declining when in fact they were accelerating not only perpetuates a misunderstanding of what actually happened, but it also allows the possibility that decisions could be made or conclusions reached based on a faulty premise.

 

 

Unfortunately the conclusion that securities lawsuit filings declined in the second half of 2008 continues to be repeated. As reflected in a February 9, 2009 Business Insurance article (here), industry observers continue to distract themselves and perhaps others as well debating the reasons for a lawsuit filing decline that never happened, when in fact the actual discussion ought to be the reason why lawsuit filings actually accelerated at the end of the year.

 

 

The danger from this mistaken conclusion is apparent in the remarks of one leading industry observer at a recent conference. As quoted in the Business Insurance article, the observer noted, in apparent reliance on the Cornerstone report, that “in this last quarter, there were actually fewer cases filed. It got better, not worse at the end of the year.” The world certainly looks a lot different if you think things recently “got better”; unfortunately, they didn’t get better, they got worse.

 

 

The D&O insurance industry has a hard enough time behaving rationally and making sense of what has actually happened. It would be extremely unfortunate if the industry were to become even further confused by a conclusion that unsupported by full-year data.

 

 

I entreat readers to do everything they can to make sure that the misimpression about securities lawsuit filing activity levels is not perpetuated. The industry faces too many other challenges to have to deal with the added burden of laboring under misimpressions.