As the details about the Satyam Computer Services scandal have emerged and the U.S. securities lawsuits have begun to flood in, questions have also arisen about Satyam’s D&O insurance. At least some of the questions are answered in a January 8, 2009 article in The Economic Times (India’s largest financial daily) entitled "Satyam Scam Triggers Biggest D&O Claim" (here).

 

According to the article, Satyam carries a $75 million D&O insurance program led by Tata AIG, which is a joint venture of Tata Group and American International Group. The article also states that the Satyam claim "could trigger one of the largest Directors and Officers insurance claims in India."

 

Of course, knowing the limits of liability under Satyam’s insurance program does not necessarily tell you how much insurance ultimately will be available to defend and indemnify Satyam and its directors and officers. In a case where the company’s Chairman has publicly admitted fraud, the applicable terms and conditions will be absolutely critical. I discuss below a couple of issues that seem likely to arise.

 

The Fraud Exclusion

Without knowing more about the specific terms applicable under Satyam’s D&O insurance program, it is difficult to say anything with certainty. However, at least in the U.S., D&O insurance policies do not cover fraudulent, criminal or intentional misconduct.

 

But, again in the U.S., these exclusions typically do not kick in until there has been an "adjudication." Even though Satyam’s Chairman has admitted cooking the books, he has not (yet) been convicted of anything, so to the extent the policy’s exclusions have an "adjudication" requirement, the exclusions would not apply, at least in the interim.

 

Moreover, a well-constructed U.S. policy would also contain a "severability of exclusions" provision so that even if an exclusion would apply to preclude coverage based on the Chairman’s misconduct, it would not apply to others who were uninvolved in the conduct. Of course, many questions are now being asked about who else at Satyam might have been involved in the fraudulent accounting. The Chairman’s letter sought to establish that other board members were unaware of the fraud.

 

A prior post discussing the "adjudicated fraud" exclusion can be found here. A separate post discussing an interim decision in the Refco matter and relating to the interaction of the exclusion and the funding of defense costs can be found here.

 

Application Misrepresentations?

Another insurance issue that likely will be raised is the question of policy rescission. Given the magnitude of the fraud and the apparent length of time during which it was going on, the question may be asked whether the policy was procured through misrepresentations in the application process.

 

Under the typical current D&O policy in the U.S., application misrepresentations can serve as a basis on which the carrier can rescind the policy only as to persons with knowledge of the misrepresentations and as to persons to whom that knowledge is imputed. A well-constructed U.S. policy will limit "imputation" so that innocent persons do not risk rescission of their coverage because of another’s misrepresentation. The imputation language used in Satyam’s policy could well be critical.

 

A prior post discussing D&O insurance policy rescission issues can be found here (refer especially to my "final thoughts" toward the end of the post).

 

I welcome any insight readers can provide about the provision of the typical D&O insurance policy in the Indian market, as well as any additional information anyone can supply about the Satyam program, particularly any additional carriers involved.

 

Very special thanks to loyal reader Aruno Rajaratnam for providing a copy of The Economic Times article as well as other information about Satyam.

 

Global Accounting Outlook = Bleak: Fitch’s Ratings has issued a January 8, 2009 report entitled "Accounting and Financial Reporting: 2009 Global Outlook" (available here, registration required) with some very interesting observations about the year ahead for public company accountants. As the report states in its opening line, "these are indeed interesting times for accounting."

 

Among other things, the report notes the following with respect to the "going concern" questions that many companies and their accountants will face as the companies prepare their year-end 2008 financial statements:

 

The sharp decline in global debt and equity securities values and a very difficult credit environment have presented a unique set of chllenges to the interpretation and implementation of some pervasive accounting issues. An immediate question facing some companies preparing their full-year 2008 financial statements, is how best to justify a "going concern" basis, given the doubts some have about their abiltiy to refinance. Management statements on this issue should be required reading for investors and analysts. The determination of impairment charges on debt securities and the lack of clear-cut rules on the subject have pitted some issuers against their auditors. This is a particularly sensitive issue because profitability and regulatory capital adequacy are at state for many financial institutions.

 

Obviously, insurance companies are among the companies for whom the determination of impairment charges will be particularly sensitive. And among others who will want to read companies’ managers’ statements on the "going concern" issue, in addition to investors and analysts, are D&O underwriters.

 

A news article describing the Fitch report can be found here. Special thanks to a loyal reader for sending along the news article and a link to the report.

 

I encourage those that questioned my inclusion of FCPA issues in my list of top ten 2008 development to refer to the January 5, 2009 memo from the Gibson Dunn law firm entitled "2008 Year-End FCPA Update" (here).

 

As the memo puts it, 2008 was ‘by any measure …a monster year in Foreign Corrupt Practices Act (‘FCPA’) enforcement." The memo goes on to note that "2008 saw the FCPA’s enforcement regime mature like never before," adding that "there were no unimportant FCPA enforcement actions this year."

 

The memo highlights several enforcement trends. First, with particular emphasis on the recent massive Siemens FCPA fine, the report notes the trend toward escalating corporate financial penalties.

 

The memo reports that the Siemens fine eclipsed the prior record FCPA fine by nearly twenty times; in fact, the memo notes, the Siemens fine substantially exceeds "the aggregate of every dollar collected by the U.S. government in connection with FCPA settlements over the statute’s thirty-one year history." The memo also emphasizes the staggering costs that Siemens incurred in connection with the investigation. The memo notes that the company’s investigation and corporate remediation costs exceeded $1 billion.

 

To show that "enormous foreign prior settlements are certain not to be a fluke of 2008," the memo cites ABB’s recent announcement that it has reserved $850 million for potential costs associated with the continuing investigation of alleged improper practices.

 

The memo also addresses a theme I have frequently sounded (most recently here), that FCPA enforcement actions increasingly are accompanied by follow-on civil litigation. The memo notes that FCPA investigations increasingly have "spurred a variety of collateral civil suits, including securities fraud actions, shareholder derivative suits, and lawsuits initiated by foreign governments or business partners." Companies "can no longer assume that making peace with DOJ and the SEC will end the pain associated with their alleged FCPA violations."

 

With respect to securities litigation following on after FCPA investigations, the memo notes that "in recent years, courts have been trending towards finding that plaintiffs adequately alleged false or misleading statements, thereby meeting the heightened pleading standard under the PSLRA." However, as I noted in a recent post (here), the Ninth Circuit in the InVision Technologies case made it clear that "there are limits on the types of allegations that will meet this threshold."

 

The memo also reproduces an interesting bar graph showing the foreign jurisdictions having the "dubious distinction of being the most-referenced setting for FCPA allegations." Among the top countries are Nigeria, Iraq, China, Vietnam and Ecuador.

 

The memo, which is detailed and interesting, identifies a number of other important trends, including the increased internationalization of foreign anti-corruption endorsement.

 

Answer: Less Than One Day: In my January 7, 2009 post (here) regarding the accounting scandal dramatically disclosed at the Indian technology company Satyam Computer Services, I raised the question of how long it would take for plaintiffs’ lawyer to initiate a securities class action lawsuit against the company in a U.S. court.

 

The answer is – less than a single day.

 

Even before the close of business on January 7, plaintiffs’ lawyers announced (here) that they had filed a securities class action lawsuit in the Southern District of New York on behalf of purchasers of the company’s ADRs (which are traded, or at least were traded, on the NYSE) against the company and certain of its directors and officers. A copy of one of the Satyam complaints that has been filed can be found here.

 

The well of scandal is an ever-flowing stream, providing the plaintiffs’ bar with a constantly replenished source of new litigation targets. So much for the notion that the pool of potential securities litigation defendants is "fished out."

 

New Year’s Resolution: Some people resolve lose more weight, other people resolve to get more exercise. Even though I need to spend more time fooling around with technology like I need a hole in my head, my New Year’s resolution is to try to get more plugged into the new social media.

 

Along those lines, you will note that I have added a button in the right hand sidebar that links to my LinkedIn profile. I encourage everyone to check out my profile by clicking on the button. I would also like to strongly encourage other readers that are active on LinkedIn to "connect" with me. I am still trying to figure out what the site will lead to, but at least if readers of this blog start connecting we can try to work through it together.

 

In addition, I have recently signed up for Twitter. Again, I am still feeling my way along with the new technology, but I will say that I have used Twitter several times over the past couple of days to alert "followers" (in effect, subscribers) to developments before I had a chance to get a post up on my blog. For example, as soon as I saw the link to Cornerstone’s year end report, I posted a "tweet" on Twitter. I also added a "tweet" about the new Satyam lawsuit as soon as I learned about it. I encourage readers who may also be active on Twitter to sign up for future updates.

 

Finally, I welcome readers’ thoughts and comments on these new media. As I said, I am still trying to figure all of this out, and I am particularly interested in thoughts and comments about how best to take advantage of these new technologies.

 

Because of the dramatic events in the financial and credit markets, 2008 will undoubtedly go down in history as a dark and difficult year. 2008 was a challenging year for bloggers, too. So much happened of such significance that trying to find the time to comment and the words to express it all were almost overwhelming blogging challenges.

 

But dramatic headline events do not always make the best blog posts, because high profile events are exhaustively reported in the mainstream media. The blog posts that stand out in retrospect are those that analyze a specific detail of larger events reported elsewhere; that draw connections between otherwise disparate events; or that highlight developments that otherwise would be lost in the noise.

 

I have set out below my own list of The D&O Diary’s Top Ten Blog Posts of 2008. I have used a simple standard in determining which posts to include; I listed posts that stand up best to re-reading now. The Top Ten posts are presented chronologically.

 

1. "CDO Squared" Securities Lawsuit Hits MBIA (January 13, 2008): MBIA is only one of several bond insurers to get caught up in the subprime litigation wave. But the lawsuit against MBIA arose at a time when all of us were still just becoming acquainted with some of the complex financial instruments that have caused so much trouble.

 

This post attempted to explore the then-unfamiliar CDO-squared instruments, incorporating into the exercise both a detailed study of Warren Buffett’s condemnation of derivative securities as "financial weapons of mass destruction," as well as a reflection of the possible lessons for the current crisis from the near-collapse of Long Term Capital Management ten years earlier.

 

Little did I suspect at the time how relevant my observations about derivative securities or the lessons of LTCM would become later in 2008. (As an aside, I must note how instructive I found it to reread now all of January 2008’s posts. What an astonishing year 2008 was.)

 

2. Auction Rate Securities: The Next Subprime Litigation Wave? (February 13, 2008): This post commented on "a developing breakdown in an obscure corner of the credit market involving debt instruments called ‘auction rate securities.’" The post accurately foresaw the coming wave of auction rate securities litigation, which according to my tally involved at least 21 companies in new securities lawsuits during 2008. (My subprime and credit crisis-related litigation tally, which includes auction rate securities litigation, can be found here.)

 

Litigation involving auction rate securities remained one of the top securities litigation stories throughout 2008 (as reflected here, for example), and the lawsuits were a significant factor in the upsurge in new securities filings in 2008. My complete overview of the 2008 securities filings can be found here.

 

3. A Single "Toxic" CDO, A Multitude of Subprime Lawsuits (March 9, 2008): So many of 2008’s dramatic events were so large and their effects were so sweeping that they defy easy comprehension. An alternative way to try to understand what happened is to look at a single investment vehicle – in this case, a collateralized debt obligation (CDO) called "Mantoloking" – and examine the difficulties and litigation that has followed in its wake.

 

The extent and magnitude of the problems from just this one investment structure (among other things, it played a role in Bear Stearns’ demise) helps put some context around the problems now besetting the global financial marketplace.

 

4. D&O Insurance: Defense Expense and Limits Adequacy (June 2, 2008): Every now and then a set of circumstances come along that helps illustrate one of the perennial problems in D&O insurance. In this instance, the case involved was the criminal prosecution arising from the collapse of Collins & Aikman. The particular problem involved was the possibility that defense costs alone threatened to exhaust the company’s entire $50 million insurance program before the criminal case even went to trial.

 

As discussed in the post, the increasing possibility that defense costs could deplete or exhaust available insurance undermines traditional notions of limits adequacy and underscores the importance of issues involving program structure as part of the insurance acquisition process.

 

5. Section 11 Lawsuits: Coming Soon to a State Court Near You (July 21, 2008): One of the more interesting (yet little noted) features of the subprime and credit crisis-related litigation wave has been the frequency with which plaintiffs’ lawyers in reliance on the ’33 Act’s concurrent jurisdiction have chosen to file Section 11 lawsuits in state court rather than federal court.

 

As I speculated elsewhere (refer here), these state court lawsuits arguably represent an involved form of forum shopping. They also may represent an attempted end run around the PSLRA’s procedural requirements. But whatever the motivation may be, the plaintiffs’ bar has shown a heightened interest in proceeding in state court and have even has some success in opposing removal to federal court.

 

In the general hubbub of the current financial turmoil, this litigation development has not attracted nearly as much attention as it deserves. The anomalous phenomenon of federal class action litigation going forward – in significant volume – in state court represents a trend that deserves greater attention. As I have noted in this blog post, some "recalibration" may be required.

 

6. A Closer Look at the Fed’s $85 Billion AIG Bailout (September 17, 2008): Both the significance and consequences of the AIG bailout are still emerging, as reflected in Carol Loomis’s December 24, 2008 Fortune article (here). But in rereading a blog post written in the immediate aftermath of the first announcement of the AIG bailout, it appears that many of the continuing questions were immediately apparent.

 

7. WaMu: A Thrift Falls in the Forest: (September 28, 2008): It is one measure of the massive scale of this fall’s events that the largest bank failure in U.S. history is almost a footnote to the year’s events. Even though WaMu’s failure may be overshadowed by other events, that does not mean that the event lacks significance. Indeed, many of the consequences of WaMu’s collapse still have yet to emerge.

 

Moreover, WaMu was only one of 25 bank failures in the U.S. during 2008. Though overshadowed by other more dramatic events, these bank failures portend further difficulties in 2009.

 

8. More Damn Things to Worry About (September 30, 2008): So many things happened so quickly in September 2008 that we were all left wondering: what else could go wrong? This post embodies sheer frustration we felt at the time and the depth of the concern about what may lie ahead. Many of the specific fears expressed have indeed come to pass. Though written quickly and at a very late hour, the post withstands scrutiny now.

 

9. Reading the New Buffett Bio (October 8, 2008): In the midst of this Fall’s financial crisis, it was a reassuring pleasure to read about Warren Buffett’s life. I enjoyed Alice Schroeder’s new biography of Buffett, and I enjoyed writing about her book. Writing a book review is something of a departure for this blog, but it stands out perhaps for that very reason. Given everything that was happening at the time, it was a relief just to read a book.

 

10. The Evolving Credit Crisis Litigation Wave (December 3, 2008): As we head into 2009, it is critically important to understand that as 2008 progressed, not only did the credit crisis itself evolve into something much more extensive and dangerous, but so too did the related litigation wave. In an earlier post (here), I speculated that the litigation wave might have reached an "inflection point." Further lawsuit filings confirmed that the litigation wave has spread beyond the financial sector.

 

Because this litigation wave is likely to continue to spread in the weeks and months ahead, this development represents an important and noteworthy trend for the New Year.

 

And Finally: In addition to my favorite blog posts, I also had a favorite video of the year, the viral video Where the Hell is Matt? I not only smile every time I watch this video, I like it a little bit more with each viewing. YouTube reports that the video has been viewed over 16 million times. Matt’s website (here) reports that the video was shot in 42 countries and took 14 months to videotape and edit.

 

https://youtube.com/watch?v=zlfKdbWwruY%26hl%3Den%26fs%3D1

2009 has barely just begun but the year’s first corporate scandal, which has quickly been dubbed the "Indian Enron," has already arrived. Your radar might not have picked this one up yet, but you may want to take a quick look at today’s news involving Indian information technology company Satyam Computer Services, Ltd.

 

As reported in articles on Bloomberg (here) and the New York Times website (here), Satyam’s Chairman, Ramalinga Raju, has sent a January 7, 2009 letter of resignation to the company’s Board of Directors, with copies the Bombay stock exchanges, in which he reveals, as the Times puts it, that "the company’s financial position had been massively inflated during the company’s expansion from a handful of employees into an outsourcing giant with 53,000 employees and operations in 66 countries."

 

It appears that as much as 53.6 billion rupees (or about $1.04 billion) in cash that the company reported as of the end of the second quarter that ended in September, was nonexistent. The company’s reported second quarter revenue was actually 21 billion rupees, rather than the reported 27 billion rupees.

 

The Chairman’s letter, which can be found here, is an absolutely extraordinary document.

 

With "deep regret and a tremendous burden," the Chairman details the specific balance sheet accounts that were inflated due to "non-existent cash." The letter further explains how the balance sheet "gap" came to exist – it is, the Chairman reports, "purely on account of inflated profits over a period of the last several years."

 

The letter states matter-of-factly that "what started as a marginal gap between the actual operating profit and one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of the company operations grew." The letter goes on to describe how the company strained to maintain the gap over time." The letter further describes the company’s attempts to work out of its dilemma by merging with other companies, which the letter describes as the "last attempt to fill the fictitious assets with real ones." (The mergers fell through.)

 

It was, the letter says "like riding a tiger without knowing how to get off without being eaten."

 

In an apparent bid to exculpate himself, the Chairman notes that neither he nor the company’s Managing Director (or their spouses) sold any shares, nor have the taken "one rupee/dollar from the company" and they have not "benefitted in financial terms on account of the inflated results."

 

The Chairman graciously emphasizes that none of the past or present board members "had any knowledge of the situation in which the company is placed." After identifying each of these individuals by name, he states that none of them "were aware of the real situation as against the books of accounts."

 

The letter concludes with a description of the corrective actions the company will now take, an apology, and the Chairman’s resignation.

 

The company, whose name means "truth" in Sanskrit, trades its shares on the Bombay stock exchange and also has American Depository Receipts that trade on the New York Stock Exchange. Its shares also trade on the Euronext exchange.As of the close of trading on January 6, 2009, the company had a market capitalization of over $3 billion. However, the shares plunged 77% in trading on the Bombay exchange today.

 

The Times reports that the company is audited by PricewaterhouseCoopers.

 

According to a January 7, 2009 commentary on the Wall Street Journal’s website (here), Satyam’s scandal is already being called "India’s Enron." Perhaps that comparison was inevitable, but I think the scandal, particularly the Chairman’s extraordinary letter of confession, has overtones of the Madoff affair.

 

How long do you suppose it will be before a securities class action lawsuit is initiated in the U.S.?

 

UPDATE: The answer to this question is: less than one day. Plaintiffs’ lawyers January 7, 2009 press release about their newly filed securities lawsuits agasint Satyam and certain of its directors and officers on behalf of purchasers of the American ADRs can be found here. The case was filed in the Southern District of New York.

FURTHER UPDATE: A copy of one of the Satyam complaints can be found here.

 

Special thanks to a loyal reader for supplying a copy of the Chairman’s letter.

 

In recent posts discussing year-end trends, my observations included predictions that credit crisis related lawsuits would continue in 2009 and that increased levels of bank failures could lead to further "dead bank" litigation. As it turns out, 2009’s first-filed securities class action lawsuit appears to reflect both of these projected trends.

 

According to the plaintiffs’ attorneys’ January 6, 2009 press release (here), they have filed a securities class action lawsuit in the Central District of California alleging that PFF Bancorp and certain of its directors and officers issued false and misleading statements about the company’s financial condition and business practices in violation of the federal securities laws. Until the bank’s closure, PFF operated a community bank located in Pomona, California.

 

As the FDIC reported (here), on November 21, 2008, banking regulators closed PFF and its assets were transferred to U.S. Bankcorp. PFF is one of the twenty-five U.S. banks that failed during 2008. (The FDIC’s complete list of the failed banks can be found here.)

 

The only defendants named in the complaint (which can be found here) are the company’s former CEO and former CFO. According to the press release, the Complaint alleges that the defendants "concealed" the bank’s "improper lending to borrowers with little ability to repay the amount loaned and failed to inform investors of the impact of changes in the real estate market in San Bernardino and Riverside Counties."

 

Specifically, and according to the press release, the Complaint alleges that the defendants concealed that:

 

(a) PFF’s assets contained hundreds of millions of dollars worth of impaired and risky securities, many of which were backed by real estate that was rapidly dropping in value; (b) prior to and during the Class Period, PFF had been extremely aggressive in generating loans, including being heavily involved in offering Home Equity Lines of Credit ("HELOCs"), which would be enormously problematic if the value of residential real estate did not continue to increase; (c) defendants failed to properly account for PFF’s real estate loans, failing to reflect impairment in the loans; (d) PFF’s business prospects were much worse than represented due to problems in the Inland Empire market, which was a key focus of PFF’s business; and (e) PFF had not adequately reserved for loan losses on HELOCs and on other real estate-related assets.

 

In prior posts, I have speculated (most recently here) that the growing number of failed banks could lead to a wave of failed bank litigation. I also recently projected (here) the likelihood that credit crisis related litigation wave will continue in 2009. One case is obviously no basis from which to generalize, but it does at least indicate that the forces on which I based my speculations are at least at work.

 

The likely operation of these factors, as well as the Madoff litigation and the general turbulent conditions in the financial marketplace, are among the reasons that that 2009 could be a very active year for securities litigation.

 

The year has barely begun and the horizon is still wide open, but from my perspective we seemed to have picked up right where we left off.

 

In any event, I have added the PFF Bancorp case to my running tally of the subprime and credit crisis-related lawsuits, which can be accessed here. With the addition of the first-filed case of 2009 to the list, the number of subprime and credit crisis-related lawsuit filed during the period 2007 through 2009 now stands at 142.

 

On January 6, 2008, Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse released their report on the 2008 securities class action lawsuit filings entitled "2008: A Year in Review." The Report can be found here and the accompanying press release can be found here.

 

According to the Cornerstone Report, through December 15, 2008, there were 210 securities class action lawsuits filed in 2008, which represents an 18% increase over 2007 and an 80% increase over 2006. The Report also found that the 2008 filing levels represented a 9% increase over the average annual filing level of 192 for the 11 years ending in December 2007.

 

As discussed below, the Report’s analysis of the 2008 filing levels is consistent with my own previously released analysis, which can be found here.

 

Cornerstone’s release of its annual securities litigation report is a much-anticipated event, and this year’s Report does not disappoint. It contains a veritable treasure trove of detailed observations, including a multitude of complex comments about the magnitude of financial losses involved in securities cases over time. The Report also has a host of other detailed comments about the specifics of the 2008 filings.

 

The Report merits a thorough and comprehensive reading. I briefly summarize the Report’s findings below and follow with my own comments.

 

The Cornerstone Report’s Findings

The Report observes that the period of heightened filing activity began in the second half of 2007. The 317 filings during the last 18 months represent a 71 percent increase over the 185 filings during the preceding 18-month period.

 

The Report finds that the 2008 filing activity was "dominated by a wave of litigation against firms in the financial sector" and that "litigation against firms closest to the on-going subprime/liquidity."

 

The 2008 Report introduces a truly nifty innovation called the Securities Litigation Heat Map, which graphically shows how concentrated the 2008 securities filing activity was in the financial sector. Among other things, the Map shows that nearly a third of all large financial firms were named defendants in a securities class action in 2008.

 

The Heat Map also shows how over the years different sectors have been variously targeted in securities lawsuits.

 

The Heat Maps confirm what practitioners in this area have long known, which is the litigation activity is strongly driven by sectors slides and contagion effects, as a result of which over time industry alone has proven to be a very poor predictor of likely future securities litigation activity. Simply put, the plaintiffs lawyers simply move on to then next hot trend.

 

The Report also includes the annual analysis of what it calls Disclosure Dollar Losses (that is, market capitalization losses at the end of each class period). The Report finds that these losses for 2008 class actions totaled $227 billion, which is 48 percent more than 2007 and 75 percent more than the annual average for the 11 years ending in 2007, and also represents the highest level since 2000.

 

In its review of the status of database cases, the Report finds that of resolved cases, 41 percent were dismissed and 59 were settled. The majority of cases were resolved after the first ruling on the motion to dismiss but before the rulings on summary judgments. For class actions filed between 1996 and 2002 and resolved by the end of 2008, the median time to resolution was 33 months, the median time to settlement was 37 months, and the median time to dismissal was 25 months. The Report also concludes that class action with higher shareholder losses take longer to resolve.

 

The Report also notes that the percentage of cases involving Section 11 claims increased to its highest level in 2008. The Report also noted that with respect to alleged violations of GAAP, there has been a shift from allegations related to income line statements to allegations related to balance sheet components. The Report also notes that seven of the 192 companies named in class actions in 2008 subsequently filed for bankruptcy, compared to two out of 172 in 2007 (although five of the 2007 companies filed for bankruptcy in 2008).

 

The Number of 2008 Filings

The Report’s tally of 210 new securities filings through December 15, 2008 is essentially consistent with my own report’s conclusion (refer here) that there were 224 new securities lawsuits through December 31, 2008, as there were 13 new securities lawsuits filed after December 15 and before December 31. The 13 additional lawsuits I included in my tally but that were omitted from the Cornerstone Report account for virtually all of the difference between the two analyses.

 

The arrival of 13 new securities lawsuits in the last two weeks of the year is unusual, as December is usually a slower month for new filings. The late December influx was largely but not exclusively due to the flood of Madoff- related litigation.

 

Cornerstone’s Report’s cutoff at December 15 is significant in other respects as well. For example, the Report states that lawsuit filings dipped in the second half of the year, and even relies on the supposed second half decline as one of the grounds on which it suggests that financial sector securities lawsuit filings may diminish in 2009. The Report also devotes a great deal of effort to trying to reconcile this supposed second half decline with observations regarding stock market volatility.

 

However, when all of the lawsuits filed through year end are included, it turns out that filings actually increased in the second half of the year. Not only that, but as I pointed out in my report on the 2008 filings, the securities lawsuit filing levels in the fourth quarter 2008 and in December 2008 represent, respectively, the highest quarterly and monthly totals in over five years.

 

Projected 2009 Filing Trends

The Report contains no predictions regarding likely overall 2009 filing levels, but the accompanying press release quotes Stanford Law Professor Joseph Grundfest to the effect that securities litigation against the financial sector may decline in 2009 because "virtually all the major financial services firms have already been sued," as a result of which "the pool of major financial services defendants might be getting fished out." In support of this conclusion, the Report among other things cites the fact that of the 15 largest financial services companies by market capitalization at the beginning of 2007, 12 of them have already been sued.

 

Professor Grundfest does not actually predict that overall securities lawsuit filings will decline in 2009; however, in the press release, he is quoted as saying that, because all of the major financial institutions have already been sued, "the supply of new defendants might be drying up." He also suggests that "litigation activity against the financial sector may decline next year," and in the Report adds that "it is unclear as to whether the wave of litigation will extend significantly beyond the larges financial firms in the near future."

 

My own view is that 2009 could well be a very active year for securities litigation. This view is based in part on the surge of litigation in the latter part of 2008, which shows every sign of continuing. The fact that there were thirty new securities class action lawsuits in December 2008, including ten new credit crisis-related lawsuits, strongly suggests that plaintiffs’ lawyers are finding no shortage of targets.

 

In addition, the credit crisis litigation wave long ago ceased to be just about the large financial institutions, if indeed it ever was just about that. As time has gone by, the wave has continued to spread and evolve. One attribute of this evolution is that as 2008 progressed, the credit crisis litigation has extended far beyond the financial services sector, as I noted most recently here.

 

In other words, the plaintiffs’ lawyers may or may not find new targets in the financial sector. (Although I strongly suspect that as a result of the Madoff scandal the plaintiffs’ lawyers will find innumerable new financial sector targets, but that is a separate issue.) The likeliest scenario, borne out by filing patterns that are already emerging, is that the plaintiffs will simply move on to other sectors, as they have numerous times in the past.

 

I note parenthetically that the probable movement of the litigation to a new sector is graphically foreshadowed by the Cornerstone Report’s Securities Litigation Heat Maps, which vividly show how quickly plaintiffs’ lawyers have moved from sector to sector in the past.

 

All of which I believe suggests that the heightened filing levels show every likelihood of continuing into 2009. Indeed, given the strong likelihood of additional Madoff victim litigation, as well as the likely continued spread of the credit crisis litigation wave outside the financial sector, the likeliest possibility is that 2009 will be a very active year for securities litigation.

 

The WSJ.com Law Blog has a January 5, 2009 post (here) discussing the 2008 securities lawsuit filings and quoting both from the Cornerstone Report and from my analysis of the 2008 filings.

 

2008 was a remarkably eventful year, from the dramatic events that rocked the financial markets to the Presidential election that resulted in a change in national leadership. Virtually all of the significant events during 2008 also had an impact on the world of D&O insurance, one way or another. In all likelihood, significant developments will continue to emerge during 2009, with further implications for the D&O marketplace.

 

In a year as eventful as 2008, selecting as the most significant events is a challenging task. But with an eye toward the developments of greatest significance for the D&O industry, I have prepared the following list of the top ten stories of 2008.

 

1. Credit Crisis Becomes Global Financial Calamity: What began in 2007 as a subprime meltdown had by early 2008 become a credit crisis, which in turn evolved during Fall 2008 into a full blown global financial disaster.

 

Within the space of just a few short weeks, the government took control of Fannie Mae and Freddie Mac; the FDIC took over Washington Mutual, in the largest U.S. bank failure ever; Lehman Brothers collapsed, in the largest U.S. bankruptcy ever; Bank of America agreed to acquire Merrill Lynch in a government brokered deal; the government undertook a massive bailout of AIG; Congress enacted a colossal $700 billion bailout package; and Wells Fargo agreed to acquire Wachovia. And those events came after a raft of prior financial shocks, including the collapse of Bear Stearns, the seizure of the auction rate securities market, and the disintegration of U.S. residential real estate market.

 

Any one of these events on its own would be significant. Taken collectively these events represent an enormous upheaval, the full ramifications and consequences of which will only emerge over the months and years to come.

 

And those are just the headlines. In other developments reported "below the fold," companies around the world have grappled with a general business downturn, wrestled with the threat of their own insolvency or that of their customers or suppliers, and basically tried to maintain their ground in an increasingly hostile financial environment.

 

All of these developments have enormous potential significance, much of it yet to unfold. These events have not only fueled litigation, but they have also presented D&O underwriters with a dramatically altered underwriting environment. The perils involve not only the challenge of underwriting financially troubled companies, but also the trial of underwriting in the context of rapidly changing (and deteriorating) conditions in the financial and credit markets.

 

During 2008, the world became significantly more dangerous for D&O underwriters. All signs suggest the current perilous conditions will continue into 2009, and perhaps beyond.

 

2. Financial Market Disruptions Hit Major Insurers: The turmoil in the financial markets also battered three insurers that are major players in the D&O marketplace. AIG’s woes required an enormous government bailout. XL and Hartford both faced differing degrees of turbulence due to write-downs in their respective investment portfolios.

 

Each of one of these insurers is dealing with their own unique set of circumstances. Rating agencies have noted and responded to these developments. Insurance buyers remain anxious and wary. The implications of these developments, both for each of these insurers and for the marketplace as a whole, remain to be seen. At a minimum, these events have disrupted the D&O insurance marketplace and introduced a significant element of uncertainty. The disruptive impact from these developments is likely to continue to affect the D&O industry throughout 2009.

 

3. Subprime and Credit Crisis Litigation Wave Rolls On: The subprime litigation wave that began in 2007 continued to surge in 2008, as there were 101 new subprime and credit-crisis related securities lawsuits filed during 2008, bringing the two-year total to 141. My running tally of the subprime and credit crisis-related securities lawsuits can be accessed here.

 

As time has passed, the litigation wave has continued to evolve; for example, the 2008 subprime and credit crisis-related litigation included as many as 21 auction rate securities lawsuits all of which were filed in the earlier part of 2008. Later in the year, a string of lawsuits initiated by holders of preferred or subordinated securities emerged (as discussed here).

 

In February 2009, the subprime and credit crisis-related litigation wave will enter its third year, but the phenomenon shows no signs of abating. The credit crisis-related securities lawsuits continued to accumulate throughout 2008. Of the 101 subprime and credit crisis-related lawsuits filed in 2008, 45 were filed in the second half of the year, including ten in December alone.

 

The credit crisis lawsuit filings remained high as the year ended, suggesting that significant credit crisis litigation activity will continue well into 2009 and perhaps beyond.

 

4. Credit Crisis Litigation Spreads Beyond the Financial Sector: As massive as the subprime and credit crisis-related litigation wave has been, it had until recently been concentrated in the financial sector. But as 2008 wore on, and largely as a result of the dramatic events in the global financial markets during September and October 2008, the litigation wave spread beyond the financial sector.

 

The companies that have become involved in this extended litigation wave include, for example, those that had significant exposure to Lehman Brothers or other companies that collapsed this fall. (Refer here and here for discussion of these "new wave" credit crisis lawsuits). In addition, companies that have been drawn in include companies that made wrong way bets on commodities or currencies (about which refer here).

 

These developments suggest that the credit crisis-related litigation wave may have entered a dangerous new phase, as I discuss at greater length here. These developments also underscore the challenges for D&O underwriters in the current environment.

 

My complete rundown of all 2008 securities litigation can be found here.

 

5. Bank Failures Surge: Led by the FDIC’s assumption of control of Washington Mutual in the largest bank failure in U.S. history, bank failures surged in 2008. According to the FDIC’s website (here), there were 25 bank failures in 2008, the highest annual total since 1994, at the end of the last era of failed banks. Perhaps even more significantly, the pace of bank closures increased as the year progressed; 21 of the 2008 bank closures took place in the second half of 2008, 12 of them in the fourth quarter.

 

In many ways, other financial events have overshadowed this sudden surge in bank failures. Indeed, as I noted here, the WaMu failure, the largest in U.S. history, has largely been relegated to yesterday’s news pile. But the timing and pace of the bank closures during 2008 suggests that there are likely to be further bank failures ahead, carrying with it the threat of associated "dead bank" litigation, a possibility I previously discussed here.

 

6. Madoff Scandal Triggers Litigation Torrent: The revelation of the massive Ponzi scheme involving Bernard Madoff and his firm has triggered a wave of litigation as aggrieved investors scrambled to try to recoup their losses. The first Madoff-related lawsuits targeted Madoff and his firm. But given the unlikelihood of a significant recovery there, investors have quickly moved on to other targets. A running tally of the Madoff investor litigation can be accessed here.

 

The primary Madoff-related litigation targets are the so-called "feeder funds" that invested with Madoff on their clients behalf. Recent blog posts discussing these "feeder funds" lawsuits can be found here and here. Given the magnitude of the investor losses and the depth of investor outrage, these lawsuits are likely to continue to accrue for some time to come. Press reports (for example, here) suggest that lawyers are gearing up for a litigation onslaught.

 

7. Presidential Election Signals Changes: I don’t know whether you heard, but there was an election in November. The coming changes in the White House as well as the increased Democratic majority in Congress could signal significant future legislative and other developments.

 

The arrival of the new administration will likely mean a change in direction for judicial appointments. A more interesting question is whether the Democratic control of Congress and the White House could lead to legislative changes in the securities laws. As discussed at the PLUS International Conference in November (about which refer here), the current financial turmoil could be used as a justification for legislative reform efforts – for example, an attempt to overturn Central Bank and Stoneridge.

 

At a minimum, the coming changes in the leadership at the SEC, together with a different leadership interpretation of the meaning and value of regulation, could lead to a changed environment for the enforcement of the securities laws.

 

8. Largest-Ever Fine Underscores the Growing Significance of the FCPA: For some time now (most recently here), I have been writing about the growing importance of Foreign Corrupt Practices Act (FCPA) enforcement activity and associated civil litigation. The FCPA mounting significance was dramatically underscored recently when Siemens agreed to pay an $800 million fine.

 

The Siemens fine is the largest ever, dwarfing the previous record fine, paid by Baker Hughes, of $44 million (about which refer here). The outcome of the Siemens investigation is merely the latest development in a long chain of events highlighting the growing importance of the FCPA.

 

As I have previously noted (refer here), one of the usual accompaniments of an FCPA investigation is follow-on civil litigation. As the threat of FCPA-related exposure continues to grow, the threat of follow-on civil litigation will also increase.

 

The FCPA Blog has a detailed overview of 2008 FCPA enforcement activity here.

 

9. Defense Expense Tests Limits Adequacy: Companies ensnared in high stakes litigation may find themselves confronting an unexpected new challenge – the increasing likelihood that defense costs alone could exhaust the entire amount of available D&O insurance coverage. This threat was unfortuntately realized in connection with the Collins & Aikman bankruptcy and related criminal proceeding (about which refer here), where accumulated defense expense exhausted the company’s entire $50 million D&O insurance, before the criminal case even went to trial.

 

The possibility that escalating defense expense could entirely deplete available insurance presents a frightening prospect for individuals involved in a serious D&O claim, and also raises troubling questions about traditional notions of limits adequacy. In addition, the possibility of total limits exhaustion as the result of the requirements of multiple claims and multiple insureds underscores the need for insurance buyers to consider alternative insurance structures (such as, for example, separate insurance for an individual or a group of individuals) to ensure that segregated funds remain available in the event of a catastrophic claim.

 

10. Indemnity Developments Trigger Additional Insurance Structure Concerns: In the Schoon v. Troy case (about which refer here), the Delaware Chancery Court held that a board of directors properly could eliminate former directors’ advancement rights retroactively. The possibility that former directors could lose their rights to advancement or indemnification comes as unwelcome news to many directors.

 

This case development, like the development about limits adequacy noted above, highlights the need to address program structure as part of the insurance acquisition process. In general, directors and officers have become more concerned about the availability of insurance protection when they need it most. As a result, interest in a wider variety of auxiliary insurance structures has increased. These structures can include new insurance solutions designed for the needs of retiring directors.

 

In a year as eventful as 2008, reasonable minds could differ about what events deserve to be included in any Top Ten list. I am very interested in readers’ views about the top stories, particularly those who feel that other events deserved to be included on the list.

 

More "Top" Lists: Making year-end lists seems to be a nearly universal phenomenon, and Top Ten lists abound. Time Magazine simplified things by creating "The Top Ten of Everything of 2008," which can be found here.

 

Then  there are always the lists of the "Bottom Ten," like Business Week’s list of the Ten Worst Predictions About 2008 (here). Fortune has a list (here) of the "dumbest" business decisions of 2008, but given the kind of year 2008 was, a list of just ten was not enough – the magazine’s targets 21 business decisions as "dumbest."

 

Perhaps the most entertaining "Top" list is VideoGum’s list of the Top Viral Videos of 2008, which can be viewed below. (Viewer discretion is advised as some persons may find some of the content offensive.)

http://videogum.com/v/5l6uI1VbM4ULw

 

PLUS D&O Symposium: Readers will also want to be sure to register for the annual PLUS D&O Symposium, which will be held on February 25 and 26, 2009, at the Marriott Marquis Hotel in New York. Information about the Symposium, including registration instructions, can be found here.

 

The Symposium will feature an all-star cast, including keynote speakers Madeline Albright and NY Insurance Department Superintendant Eric Dinallo. Wilson Sonsini partner Boris Feldman will once again be moderating the annual panel on securities litigation developments. The schedule also includes a panel on Bankruptcies and Bailouts, with panelists including VJ Dowling of Dowling & Partners Securities and David Bradford of Advisen.

 

The conference will also include a replay of the excellent video, "The Rise and Fall of Bill Lerach" (a movie trailer for which can be found here). Stanford Law Professor Joseph Grundfest will lead a panel discussion of the video. The video was shown at the PLUS International Conference in November 2008 and received rave reviews.

 

Readers with any questions about the Symposium should feel free to drop me a note or give me a call.

 

Over the holidays, I added two blog posts that readers may find particularly interesting. To make sure that readers returning to their desks after the holidays do not overlook them, I have highlighted the two posts below, with links.

 

The List: Madoff Investor and Feeder Fund Litigation (December 26, 2008): This post is the access point to a table of Madoff Investor and Feeder Fund litigation. I have updated the litigation table numerous times since the initial publication, as several readers have helpfully provided relevant additional links and documents.

 

 

I will continue to update the table as new Madoff litigation arises. Readers are strongly encouraged to let me know of any new or additional information necessary to keep the table accurate and up to date.

 

 

A Closer Look at the 2008 Securities Lawsuits (January 2, 2009): As part of an annual feature on this blog, I reviewed last year’s securities lawsuit filings. As detailed in greater length in the post, the 224 new securities filings in 2008 represents the highest annual filing total since 2004.

 

 

The post also discusses the possible impact of the 2008 securities filing activity on the D&O insurance marketplace.

 

 

2008 Year in Review: On January 6, 2008, at 2:00 p.m. EST, I will be participating in a free webcast sponsored by the Securities Docket (here) entitled “2008 Year in Review: Securities Litigation and SEC Enforcement.”

 

 

The webcast will be moderated by Bruce Carton of the Securities Docket, and will feature several of my fellow bloggers, including Francine McKenna of the re: The Auditors blog (here); Tom Gorman of the SEC Actions blog (here); and Walter Olson of the Point of Law blog (here). Additional information about the webcast can be found here.

 

 

In a development that attracted little notice at the time, on December 10, 2008, the parties to the subprime-related securities lawsuit pending in the Northern District of California against Luminent Mortgage Capital and certain of its directors and officers filed a Stipulation of Settlement (here), in which the defendants agreed to pay $8 million to settle the case.

 

As far as I am aware, the Luminent settlement is only the second of the subprime-related securities lawsuits in which the parties have reached a settlement.

 

As discussed at greater length here, the plaintiffs had alleged that in certain public statements in July 2007, the defendants has misrepresented Luminent’s liquidity, the quality of its mortgage backed securities (MBS) portfolio, and the safety of its dividend for the second quarter of 2007, payable August 8, 2007.

 

 

The plaintiffs’ Amended Complaint (here) alleged that the defendants failed to disclose margin calls on the company’s MBS portfolio, a write-down on its portfolio and significant exposure to subprime debt that negatively impacted the company’s liquidity. The company’s share price dropped over 75% after the company announced on August 6, 2007 that it was cancelling payment of the second quarter dividend.

 

 

As reflected in the Stipulation of Settlement, the parties reached an agreement to settle the case while the defendants’ motion to dismiss was pending. The settlement followed the parties’ agreement to attempt to resolve the case through court-appointed mediation. The settlement is subject to court approval. The settlement also includes defendants’ agreement to pay $100,000 administrative costs. The parties agree that plaintiffs’ counsel may apply for and receive a fee award of up to 25% of the settlement amount.

 

 

Though the Stipulation of Settlement was not filed with the court until December 10, it is dated September 10, 2008. On September 5, 2008, Luminent and its subsidiaries had filed for bankruptcy protection in the District of Maryland Bankruptcy Court. On October 3, 2008, Luminent filed a motion in the bankruptcy court to lift the automatic stay to permit the securities lawsuits settlement to be consummated and to approve the settlement as in the best interests of the debtor. On December 2, 2008, the bankruptcy court approved Luminent’s application and authorized the parties to proceed with the settlement.

 

 

The Luminent settlement follows the only other subprime-related securities lawsuit settlement of which I am aware, the $4.85 million WSB Financial Group settlement (about which refer here). I have added the Luminent settlement to my running table of subprime and credit crisis-related securities lawsuit settlements, dismissals and dismissal denials, which can be accessed here.

 

 

Special thanks to Adam Savett of the Securities Litigation Watch blog (here) for providing a copy of the Stipulation of Settlement. 

As other commentators previously have noted (refer here), the pace of securities lawsuit filings increased significantly in 2008 compared to recent years. According to my tally, there were 224 new securities lawsuits filed in 2008. The 2008 total represents a 30% increase over the 172 securities lawsuits filed in 2007, and an 88% increase over the 119 securities lawsuits filed in 2006.

 

The 2008 filing total also represents the highest annual filing total since 2004. All signs seem to indicate that the heightened filing levels will continue into 2009.

 

My 2008 securities lawsuit filing tally reflects a lower number than the figures NERA Economic Consulting recently published (refer here), and in that regard I urge readers to refer to my comments below about the particular complications associated with "counting" securities lawsuits in 2008.

 

Overall Observations

The most significant factor in this year’s heightened securities litigation filing activity was the number of subprime and credit crisis-related securities lawsuit filings. Of the 224 new securities cases filed in 2008, 101 were subprime or credit crisis-related. As reflected on my running tally of subprime and credit crisis-related securities lawsuits, which can be accessed here, there have been 141 total of these cases filed overall during 2007 and 2008 combined.

 

One factor that increased the number of subprime-related lawsuit filings in 2008 was the influx of auction rate securities lawsuit filings (about which refer here). There were 21 of these auction rate securities lawsuits filed in 2008, largely in the first half of the year.

 

Another factor that increased the 2008 filings was the influx of Madoff-related litigation during December 2008. My running tally of the Madoff lawsuits can be found here. Investors have initiated Madoff-related securities class action lawsuits against at least seven distinct investment groups, and every sign is that this litigation will continue to flood in during the early weeks and months of 2009.

 

2008 Filings by SIC Code

The predominance of the subprime and credit crisis-related litigation during 2008 is borne out in the profile of the companies that were sued in securities lawsuits during the year. Though the companies targeted represent over 90 different Standard Industrial Classifications (SIC) Codes, fully 99 of the lawsuits hit companies with SIC Codes in the 6000 series (Finance, Insurance and Real Estate), including 19 in SIC Code 6021 (National Commercial Banks) and 20 in SIC Code 6211 (Security Brokers and Dealers).

 

There were a number of securities lawsuit defendants entities in 2008 that have no SIC Code designated. These defendants include mutual funds, private investment firms and other entities. By my count, there were as many as 23 new lawsuits filed in 2008 against entities that lack an SIC designation. In most cases, these entities are involved in investment or financial services-related businesses, which even further underscores the fact that much of the securities litigation activity in 2008 was concentrated in the financial sector.

 

But while securities suits against companies in the financial sector were a predominant factor in the 2008 securities lawsuits filings, there were other SIC Code categories that also saw significant litigation activity, including SIC Code 3674 (Semiconductors) which also saw ten filings; SIC Code 2834 (Pharmaceutical Preparations) which saw nine lawsuit filings; and SIC Code 3845 (Electromedical and Electrotherapeutic Apparatus) which had five.

 

In addition, while the credit crisis lawsuits hit the financial sector hard, the credit crisis litigation wave spread outside the financial sector as the year progressed and the financial turmoil spread. As I noted here, and as a result of the dramatic events in the financial markets during September and October 2008, a number of companies outside the financial sector were hit with credit crisis-related lawsuits, particularly those with exposure to Lehman Brothers, Fannie Mae and Freddie Mac, or those that made wrong-way bets on currencies or commodities.

 

State and Court Distribution of Filings and Defendants

The concentration of cases in the financial sector also affected the geographic distribution of the 2008 case filings. Though securities lawsuits were filed in 48 different federal district courts (as well as several state courts), 97 of the 224 securities filings in 2008 were filed in the Southern District of New York. The federal district with the second highest number of new lawsuit filings was the Northern District of California, where 12 new securities lawsuits were filed. Other districts with a significant number of filings include the District of Massachusetts (10), and the Central District of California (9).

 

Another factor contributing to the significant number of filings in the Southern District of New York was the number of lawsuits filed there against foreign-domiciled companies. Overall, there were 34 foreign companies sued in securities lawsuits in 2008, all but five of which were initiated in the Southern District of New York. The 34 foreign companies sued represented 17 different countries, with the largest number from Canada (8), China (5) and Switzerland (4).

 

The domestic U.S. companies hit with securities lawsuits were based in 31 different states, and the District of Columbia. The state with the largest number of new securities lawsuits was New York (42), followed by California (23), Massachusetts (13) and Ohio (10).

 

The Pace of Filings and Likely Future Trends

The pace of new lawsuit filings increased during the year, with 105 during the first half and 119 in the second half. The fact that the fourth quarter, with 67 new filings, was the most active quarter during the year, together with the fact that there were a significant number of filings (30) in December (typically a quiet month for securities lawsuit filings), suggests that the heightened level of securities filings will continue into 2009. Indeed, the filings in the fourth quarter of 2008 and during December 2008 represent, respectively, the highest quarterly and monthly totals in more than five years.

 

My conclusion that the increased securities litigation activity levels will continue in 2009 is reinforced by the likelihood that the credit crisis litigation wave will continue to spread outside the financial sector in 2009.

 

Some Comments about "Counting": One reason for the wide disparity in the various published versions of the 2008 securities lawsuit filings is that the seemingly simple task of counting lawsuits was particularly complicated during 2008.

 

One complication is that some companies were sued multiple different times by different sets of claimants, on different legal theories, or with respect to different sets of circumstances. For example, one historically unusual phenomenon that recurred during 2008 was the initiation of new securities lawsuits initiated by preferred shareholders or subordinate securities holders (about which refer here). The multiplication of lawsuits involving different claimants or different legal theories but related defendants raised a continuing series of questions whether or not a new action does or does not represent a separate lawsuit that should be separately counted.

 

This question whether or not a separate complaint represents a new lawsuit was particularly complicated with respect to the Madoff-related litigation that flooded in during the final weeks of December. As reflected in my running tally of these lawsuits, which can be accessed here, there have already been multiple lawsuits against related Madoff-feeder funds. Reasonable minds might well differ as to whether or not a particular complaint represents an entirely new lawsuit or simply a related or duplicate complaint.

 

Another attribute of this multiplicity of lawsuit filings is that the number of new lawsuits filed may be significantly different than the number of companies sued, as some companies were sued multiple times in multiple different lawsuits. As a result, there may be a certain amount of double counting associated with some of the lawsuit tallies or some of the analysis of lawsuit filings.

 

Yet another factor complicating the counting is that during 2008 plaintiffs initiated a number of securities class action lawsuits in state court (about which I previously commented here). In many instances these lawsuits are difficult simply to find. The inclusion of these cases, and the uncertainty around their numbers, could significantly affect the overall lawsuit tally.

 

As has been increasingly the case in recent years, it has become progressively more difficult simply to maintain definitional clarity about what exactly is being counted. To clarify what I have been tracking, I try to count class action lawsuits that allege violations of the federal securities laws. That said, I have excluded certain lawsuits that other reasonable minds might include. For example, I generally exclude merger objection lawsuits. In addition, I generally exclude lawsuits in which the securities allegation is simply that the defendants failed to register securities. On the other hand, I include lawsuits even if the defendant entity is not a publicly traded entity (for example, if the defendant is a private equity fund or a hedge fund.)

 

Because of these definitional issues, it is almost inevitable that various tallies of the 2008 securities lawsuits will differ.

 

UPDATE: The WSJ.com Law Blog has a January 5, 2009 post (here) regarding the 2008 securiteis class action filings. The Law Blog entry links to this post and includes comments from a number of commentators and practitioners in the field.

 

Impact on D&O Pricing?: The uptick in securities lawsuit filings in 2008 might well be expected to have an upward impact on D&O pricing, and indeed it may yet have that effect. But particular features of the 2008 filings might moderate that expected effect.

 

First, the concentration of the filings in the financial sector means that the impact from the heightened filing levels is not widespread throughout the D&O industry. D&O carriers are not yet experiencing the impact of the filing levels across their entire portfolio, and carriers that do not have significant financial industry exposure may not yet be experiencing elevated claims activity, although that likely will change as the credit crisis litigation wave spreads outside the financial sector.

 

Second, even with respect to the heightened activity levels, the impact is muted somewhat by the multiple different lawsuit filings against the same companies. The D&O impact from the third, fourth or fifth new lawsuit against the same company may not increase the aggregate losses to which insurance applies. Because the number of companies sued is less than the number of new lawsuits initiated, the aggregate claims frequency level is less than the overall filing levels might indicate.

 

Third, many of the defendant entities are not publicly traded companies. As I noted above, many of the defendant entities in new 2008 lawsuits were mutual funds, investment partnerships, hedge funds, or other investment vehicles. The incidence of litigation against these types of entities would have only an indirect impact at most on the market for public company D&O insurance.

 

Fourth, a significant amount of the securities litigation activity in 2008 involved claims likelier to create errors and omissions (E&O) insurance losses, rather than D&O losses. For example, the Madoff-related litigation and the auction rate securities litigation may or may not produce D&O insurance losses, but may well produce significant E&O losses. The spread of losses to other insurance lines could dilute the overall impact from the 2008 litigation on the D&O carriers.

 

Fifth, most of these cases are still in their earliest stages, and it will be some time yet before the losses begin to accrue. Until loss payments begin to mount, D&O pricing is unlikely to make dramatic changes (at least as a result of securities filing activity levels).

 

All of that said, the increase in litigation activity in 2008, together with the disruption involving market leader AIG and other leading carriers, as well as the prospect for continued significant litigation activity in 2009, are likely to create uncertain conditions in the D&O marketplace and could lead to increased carrier caution as 2009 progresses. Indeed, Advisen, a leading industry observer, is predicting that a hard market for insurance will develop toward the end of 2009 (about which refer here).

 

2008: The Year in Review: Readers interested in learning more about the 2008 securities litigation trends will want to the January 6, 2009 webcast sponsored by Securities Docket.

 

I will be participating in this free webcast, which will begin at 2 pm EST, along with a number of my esteemed fellow bloggers, including the Securities Docket’s own Bruce Carton; Walter Olson of the Point of Law blog; Tom Gorman of the SEC Actions blog; Francine McKenna of the Re: The Auditors blog; and Lyle Roberts of the 10b-5 Daily blog. Further information about the podcast can be found here.