THE TABLE OF CASES LINKED BELOW WAS LAST UPDATED ON September 28,  2010.

All signs are that the collapse of Bernard Madoff’s Ponzi scheme will produce a flood of litigation. By my count, there have already been at least seven federal securities class action lawsuits against Madoff, his firm, or the "feeder firms" that invested their clients’ funds with Madoff. There have also been a number of state court lawsuits as well.

 

It is already difficult to keep track of the lawsuits that have been filed. In all likelihood, there will be extensive additional litigation against other feeder funds and other third party defendants, which will make it even more difficult to keep track.

 

In order to monitor the Madoff-related litigation in a more orderly way, I have created a table of the lawsuits that have been filed to date.

 

The table can be found here.

 

I believe the table is complete, but I welcome any additional or clarifying information that readers may wish to bring to my attention.

 

I will update the table as new or different lawsuits emerge. Readers are strongly encouraged to let me know about any additional litigation I may have missed or to provide me with any information necessary to make the table more accurate.

 

UPDATE: A regularly updated list of all Madoff investor litigation, including in particular Madoff "feeder fund" litigation, can be accessed here.

As further proof that the losses associated with the Madoff fraud scheme will trigger a wave of litigation, on December 23, 2008, plaintiffs’ lawyers initiated a lawsuit in the Southern District of New York on behalf of investors in the FM Low Volatility Fund, against Family Management Corporation ( the Fund’s general partner and manager) and certain of FMC’s directors and officers; three "fund of funds" in which FMC invested investor funds (Andover, Beacon and Maxam); and the Funds’ auditor.

 

The complaint, which can be found here, alleges violations of the federal securities laws and related stated and common law violations, and also asserts derivative breach of fiduciary duties on behalf of the Funds.

 

According to the plaintiffs’ lawyers’ December 24, 2008 press release (here), FMC

 

concentrated more than half of the Fund’s investment capital with at least three funds of funds ("FOFs") — Andover, Beacon and Maxam — that, in turn, all heavily invested in entities managed by Bernard Madoff ("Madoff") or Madoff-related entities. Investors who entrusted their savings to FMC suffered millions in damages as a result of Madoff’s fraudulent scheme.
 

 

The complaint further alleges that the defendants failed to perform requisite "due diligence" and "knew or should have known" about Madoff’s Ponzi scheme.

 

The plaintiffs’ also allege that FMC and its defendant directors and officers issued misleading offering documents that

 

falsely stated that FMC would not invest more than 35% of the Fund’s net asset value with any one investment vehicle, but, in reality, more than 60% of the Fund’s assets were funneled through three FOFs – Defendants Andover, Beacon and Maxam – and invested in Madoff-related entities. The Offering Memorandum also falsely stated that FMC would (i) endeavor to verify the integrity of each manager of a FOF in which the Fund was invested; (ii) attempt to monitor the performance of each manager; and (iii) request detailed information regarding the historical performance and investment strategy of each of the selected investments for the Fund. Plaintiffs allege that Defendants, with no or inadequate due diligence or oversight, abdicated their responsibilities and entrusted the Fund’s assets to Madoff-run investment vehicles.

 

Even More Madoff Investor Litigation: In earlier post (here), I noted the class action lawsuit that had been filed against Tremont Group Holdings, certain of its directors and officers, and its corporate parents, on behalf of investors in the American Masters Prime Fund, whose assets Tremont managed and that had suffered losses due to Tremont’s investment of those funds with Bernard Madoff and his firm.

 

On December 23, 2008, plaintiffs filed a similar but separate lawsuit against Tremont and related entities, but on behalf of the class of investors in the Rye Funds, who also claim that they lost their investment due to Tremont’s investment with Madoff and his firm. The Rye Funds complaint also includes as a defendant Tremont’s auditor, KPMG. A copy of the Rye Funds’ investors’ complaint can be found here. A copy of the plaintiffs’ lawyers December 23 press release can be found here.

 

In addition, according to a December 24, 2008 Bloomberg article (here), New York University has initiated a New York state court lawsuit against J. Ezra Merkin, Gabriel Capital, and Ariel Fund, in which it alleges that $24 million of endowment investments due to the defendants’ investment of the assets with Madoff and his firm. A copy of the NYU lawsuit complaint can be found here.

 

An earlier class action lawsuit that previously had been filed against Gabriel and related defendants can be found here.

 

Special thank to Adam Savett of the Securities Litigation Watch (here) for providing a copy of the Rye Funds Complaint.

 

Keeping Track: By my tally, the Family Management Corporation case is at least the seventh federal class action lawsuit filed in the wake of the revelation of the Madoff fraud. Of these, six of these seven are directed against so-called "feeder funds," the seventh directly against Madoff and his firm. In addition, there are several other state court lawsuits, including the one identified above and the earlier lawsuit filed against the Fairfield Greenwich fund firm (about which refer here).

 

If the early returns are any indication, there could be a flood of litigation yet to come. Of course it remains to be seen whether or to what extent any of these claims succeed. But in the meantime, indications are that these Madoff-related lawsuits will continue to mount.

 

In the latest ruling on a motion to dismiss in a subprime-related securities lawsuit, on December 22, 2008, Judge Legrome Davis of the Eastern District of Pennsylvania granted in part and denied in part defendants’ motion to dismiss the suit that plaintiffs’ filed in August 2007 against RAIT Financial Trust and certain of its officers and trustees. The opinion can be found here.

 

Judge Davis’s ruling largely denied defendants’ motions, other than with respect to the plaintiffs’ ’33 Act claims concerning the company’s July 2007 secondary offering, which were dismissed due to the plaintiffs’ lack of standing. Otherwise, Judge Davis ruled in plaintiffs favor. The plaintiffs’ remaining ’33 Act claims and all of the plaintiffs’ ’34 Act claims will now go forward.

 

Background

RAIT is a real estate investment trust providing debt financing to home builders, mortgage lenders and other real estate companies. As more fully set forth here, plaintiffs’ complaint relates to the July 30, 2007 failure of American Home Mortgage to make a payment due under certain trust preferred securities, resulting in a net equity exposure to RAIT of at least $95 million. Shortly thereafter, the company disclosed that it had $373 million of similar exposures. The plaintiffs allege that the defendants failed to disclose its exposure to these types of investments and failed to reserve adequately for the risk of nonpayment or default.

 

The plaintiffs’ complaint asserts claims under both the ’33 Act and the ’34 Act. The defendants in the ’33 Act claims include the offering underwriters that facilitated RAIT’s January 2007 common stock offering and July 2007 preferred stock offering, as well as the company’s auditor, Grant Thornton. The defendants’ moved to dismiss.

 

The December 22 Opinion

First, the court dismissed the ’33 Act claims relating to the July 2007 preferred stock offering due to lack of standing, because none of the named plaintiffs purchased securities traceable to the offering.

 

However, the court denied the defendants’ motion to dismiss the ’33 Act claims raised in connection with the January 2007 offering. Judge Davis found that the plaintiffs had adequately alleged falsity and materiality, and rejected defendants’ contentions that the plaintiffs’ arguments represented nothing more than "fraud by hindsight." Judge Davis also rejected the defendants’ contentions that the alleged misrepresentations "bespoke caution" or were "mere puffery."

 

Judge Davis also found that his rulings that the plaintiffs had adequately pled falsity and materiality applied to the plaintiffs’ ’34 Act claims as well.The defendants nevertheless sought to have the ’34 Act claims dismissed, arguing that the plaintiffs had not adequately pled scienter.

 

Judge Davis found that "despite the demanding standard of recklessness imposed in pleading a strong inference of scienter," the plaintiffs nevertheless had adequately pled scienter. His ruling depended on the "core business operations" theory, with respect to which he stated:

 

Because the alleged misstatements involved RAIT’s core business operations and because the Officer Defendants had ample reason to know of the falsity of the statements, there is a strong inference of scienter in this case.

 

Judge Davis also found that though the core business operations allegations alone were sufficient, other allegations also supported the inference of scienter, including "the sheer size of the impairment eventually taken by RAIT," which he found adds to "the imputation" that defendants "must have had some awareness that problems were brewing." Judge Davis also found that "familial and business relationships involved" in a RAIT acquisition were "relevant in our consideration of scienter."

 

Discussion

Other than the ’33 Act claims relating to the July 2007 offering (which was dismissed for lack of standing), the plaintiffs largely prevailed on the dismissal motions. Judge Davis’s ruling is significant not only because it seems to run counter to the early trend other courts arguably have established (albeit with some notable exceptions) of general skepticism toward subprime-related allegations. Judge Davis’s ruling is noteworthy in that regard for its rejection of the defendants’ "fraud by hindsight" arguments.

 

Judge Davis’s opinion is perhaps most noteworthy in its acceptance of the "core business operations" theory in concluding that the plaintiffs had adequately pled scienter. Though earlier courts had rejected this theory as inconsistent with the PSLRA’s pleading requirements, more recently courts, for example, in the Ninth Circuit (refer here) and the Seventh Circuit (refer here), have taken it up. As noted in a recent commentary by the Katten Muchin law firm entitled "Reform Act Under Attack?" (here), the core operations theory "has made a comeback in 2008," which the authors contend is inconsistent with the PSLRA’s meaning and intent.

 

Were other courts similarly willing to take up the core operations doctrine, it could substantially impact the many pending dismissal motions in various subprime-related securities lawsuits.

 

In any event, I have added the RAIT opinion to my table of subprime and credit crisis-related securities lawsuit settlements, dismissals, and dismissal denials, which can be accessed here.

 

Special thanks to a loyal reader for alerting me to the RAIT opinion.

 

In the latest of what undoubtedly will prove to be a surge of Madoff-related litigation, investors have filed two more lawsuits against investment firms that invested their clients’ money with Bernie Madoff, resulting in massive investor losses.

 

UPDATE: Please note that a regularly updated table of all Madoff investor litigation, including in particular Madoff "feeder fund" litigation, can be accessed here.

 

The Tremont Lawsuit

First, as reflected in their December 22, 2008 press release (here), plaintiffs’ lawyers have filed a securities class action lawsuit in the Southern District of New York on behalf of investors in the American Masters Broad Market Prime Fund, L.P., a Delaware limited partnership which is managed by Tremont Group Holdings, which is also the Fund’s General Partner. The defendants in the lawsuit include Tremont; Oppenheimer Acquisition Corporation, which acquired Tremont in 2001; Massachusetts Mutual Life Insurance Company, Oppenheimer’s parent; and Ernst & Young, the Fund’s auditor.

 

The complaint (which can be found here) alleges violations of the federal securities laws as well as state common law fraud, negligence and breach of fiduciary duty. The complaint also assets derivative breach of fiduciary duty claims on behalf of the Fund.

 

According to the plaintiffs’ lawyers’ press release, the complaint alleges that

 

defendant Tremont, general partner of the Fund, concentrated over half of its investment capital with entities that participated in the massive, fraudulent scheme perpetrated by Bernard Madoff ("Madoff"). Investors who entrusted their savings to Tremont have suffered millions in damages and are faced with financial ruin.
 

 

The complaint also alleges that the defendants "failed to perform the necessary due diligence that they were being compensated to perform as investment managers and fiduciaries" and that the defendants "either knew or should have known that the Fund’s assets were employed as part of a massive Ponzi scheme and took no steps in a good faith effort to prevent or remedy that situation, proximately causing billions of dollars of losses and possible complete collapse of the Fund." Oppenheimer and Mass Mutual are named defendants as controlling persons of the Fund.

 

The complaint alleges with respect to Ernst & Young that the firm was "reckless or grossly negligent" in connection with its performance of its auditing duties, and specifically that the firm failed to detect "a myriad of ‘red flags’ indicating a high risk to Tremont from concentrating its investment exposure in Madoff."

 

The complaint alleges that the defendants allowed Tremont to invest $3.3 billion, over half of its assets, with Madoff.

 

The Fairfield Lawsuit

In addition, investors have also initiated a lawsuit in New York County (New York) Supreme Court against the Fairfield Greenwich Group, the hedge fund firm that has as much as $7.5 billion invested with Madoff. A December 22, 2008 Bloomberg article describing the Fairfield lawsuit can be found here. A copy of the complaint can be found here.

 

The lawsuit, which is filed as a class action on behalf of in the Fairfield Sentry fund, names as defendants Fairfield itself; Fairfield’s founding partners, as well as two principals of a Bermuda affiliate of Fairfield. It alleges breach of fiduciary duty, negligence, and unjust enrichment.

 

According to the news reports, the complaint alleges that the fund’s managers "had an obligation to look into Madoff’s investment methods and that the team ignored the ‘red-flag warning’ that Madoff’s investment produced small, steady gains in a declining market." The article also quotes the plaintiffs’ attorney as saying that the case has been filed in state court rather than federal court so that discovery can go forward quickly.

 

The arrival of these new lawsuits, following closely in the wake of the prior Madoff-related litigation suggests that there could substantial associated litigation yet to come, particularly with respect to the so-called feeder funds that invested clients’ assets with Madoff. The press coverage certainly suggests that there will be extensive additional litigation, as reflected, for example, in the December 22, 2008 National Law Journal article entitled "Lawyers from Florida to New York Besieged by Madoff Investors" (here).

 

The Tremont lawsuit’s inclusion of Ernst & Young corroborates an article published in the December 22, 2008 New York Times entitled "In Madoff’s Wake, Scrutiny of Accounting Firms" (here), which suggests that investors suffering losses from their investments in Madoff feeder funds may attempt to target the firms’ auditors. As noted in the article, the lawsuit filed last week against Madoff feeder fund Ascot Partners (about which I wrote here) also named the fund’s auditor, BDO Seidman, as a defendant in that case.

 

Credit Crisis Litigation Issues: A November 17, 2008 paper entitled "Legal and Economic Issues is Litigation Arising from the 2007-2008 Credit Crisis" (here) written by Harvard Law Professor Allen Ferrell, and Jennifer Bethel and Gang Hu of the Babson Business School surveys the marketplace conditions behind the credit crisis litigation and reviews the legal issues that are likely to arise as the litigation goes forward.

 

The article focuses on three principles that the authors believe will be critical in the credit crisis related securities litigation (1) no fraud by hindsight; (2) truth on the market defenses; and (3) loss causation issues.

 

With respect to the truth on the market defense, for example, the authors contend that "the quality of disclosures in the mortgage backed securities registration statements (and virtually all mortgage backed securities were registered) actually improved between 2001 to 2006 (in part due to the promulgation of Regulation AB in 2004) and that it was quite clear from these registration statements that the quality of the underwriting in a number of instances had declined."

 

With respect to the "loss causation issue," the authors contend with respect to the banks that suffered massive writedowns during 2007 and 2008, that the banks"suffered substantial losses due to their ‘super senior’ positions in CDOs and various liquidity guarantees to asset backed commercial paper conduits, rather than directly on their mortgage-backed security holdings."

 

Hat tip to The Harvard Law School Corporate Governance Blog (here) for the link to the authors’ paper.

 

The initiation of a criminal investigation against a company or its directors and officers can be a watershed moment in the life of any company. In addition to the question of how it will respond, the company must also determine how it will fund the associated legal expense. It is at this critical juncture that the company confronts issues surrounding the availability and limitation of D&O insurance in connection with criminal investigations.

 

These issues are explored in a December 2008 article by Patricia Bronte of the Jenner & Block firm entitled "D&O Coverage for Corporate Criminal Investigations" (here). As Bronte notes, the availability of coverage for a criminal investigation depends upon the particular language in the applicable policy, particularly the policy’s definition of the term "claim." The critical question will be whether or not the particular circumstances presented constitute a "claim."

 

The article opens with a review of case law from an earlier era, when D&O policies did not routinely define the term "claim." However, as the article discusses, the typical D&O policy now defines the term and includes within its definition a specific reference to a "criminal proceeding," which usually is further defined as having been "commenced by the return of an indictment."

 

One of the useful things Bronte’s article does is that by reviewing the early case law, she shows how the carriers came to insert the language limiting coverage for criminal proceedings to post-indictment matters. Prior cases where carriers were compelled to fund a wide range of expenses related to investigations and other pre-indictment matters clearly led to this change.

 

However, Bronte’s article also illustrates the difficulties, from the policyholder’s perspective, of this post-indictment limitation of coverage for criminal matters. That is, "a corporation’s best hope for a favorable outcome – and sometimes the best way to avoid disaster – is to persuade the prosecutor not to file any formal criminal charges at all."

 

As a consequence of this need to try to avert indictment, the corporation can incur considerable expense pre-indictment in respond to subpoenas, addressing a grand jury investigation, or otherwise attempting to answer the investigative threat. Costs incurred in connection with these efforts represent defense expenses, whether or the investigation ultimately results in an indictment.

 

Disputes over these kinds of legal costs are among the perennial battles in the D&O claims arena. Invariably, policyholders will argue that these expenses were indispensible to their post-indictment defenses, or even that they helped avert an indictment. Further complicating these discussions is the fact that these expenses associated with the pre-indictment criminal investigation often are being incurred at the same time that the company is also incurring legal expense in connection with an SEC investigation and also separate civil litigation. These various proceedings may be covered in whole or in part under the policy.

 

Because all of these various legal matters are going forward simultaneously and usually pertain to a single set of circumstances, sorting out which legal expenses relate to which proceeding (and therefore which expenses are covered under the policy) can become a vexing problem and source of tension between the policyholder and the carrier.

 

Exacerbating these problems is the fact that among all these proceedings, the criminal matter usually looms the largest and therefore may consume the larges amount of legal effort and expense. This is particularly true if, as is often the case, the individuals involved each retain separate counsel. The potentially massive expense associated with the criminal investigation underscores why these issues can be so critical.

 

In light of these considerations, the article offers some practical suggestions. Bronte notes:

 

Brokers and risk managers should press for "claim" definitions and coverage limits that adequately protect the corporate entity from the expense of criminal investigations, which almost inevitably involve multiple teams of lawyers defending the corporation and its employees.

 

In that regard, many D&O insurers now include within the definition of the term "claim" not only a reference to post-indictment (or post-information) criminal proceedings, but also a separate explicit reference to "investigations" (including criminal investigations), usually delimited in some way around the requirement for the naming of an insured person as a target of a possible indictment. The precise wording of the definitional provisions relating to "investigations" potentially could be critical.

 

In addition, at least one major carrier now has a form that removes any reference to an indictment requirement, and instead refers simply to "criminal proceedings." The removal of the indictment requirement, together with the reference to "proceedings," at least potentially opens the door to coverage for grand jury investigations, subpoenas, and other matters. While this alternative wording is not universally or even widely available, it does present an alternative for consideration.

 

The article also notes, in connection with efforts to secure coverage for criminal proceedings that "policyholders do not advance their position if they or their brokers characterize the criminal investigation as merely a ‘potential claim.’" An alternative possibility is to refer to the matters involved as a claim, or, in the alternative, a potential claim.

 

The article correctly points out that "the high cost of defending against accusations of criminal wrongdoing is one of the reasons that corporations purchase D&O insurance." Nevertheless, the extent of coverage for criminal proceedings remains one of the perennially disputed claims issues. The further development of D&O policy wordings that better address policyholder expectations is a continuing challenge for the D&O insurance industry and one on which there are fruitful areas for further discussion.

 

More About NERA’s Year-End Securities Litigation Study: In a prior post (here), I linked to NERA Economic Consulting’s year-end report on 2008 securities litigation activity. (The report itself can be found here). In a December 19, 2008 post (here), the Securities Docket has an interesting interview with the report’s authors, my good friends Stephanie Plancich and Svetlana Starykh. Among other things, the interview quotes the authors as saying, with respect to their projections for litigation activity in 2009:

While our paper does not forecast trends into the next year, our best guess is that filing activity will remain high into 2009. As mentioned above, there have been a number of new filings in late December — traditionally a slow time for litigation activity — indicating that the rate of filings has yet to decrease.

And while the first credit crisis cases were concentrated in the financial industry, there has been an emerging trend of credit crisis- and recession-related filings emerge outside of the financial sector.

 

Ghost of Christmas Preset, 2008 Version: With apologies to Charles Dickens, I excerpt below an imagined version of his holiday classic, updated for current circumstances. We can only hope that the Ghost of Christmases Yet-to-Come bears happier tidings. 

 

And taking Scrooge by the arm, the Spirit lifted him high above the financial landscape. Below him, Scrooge could see a parade of spectacles he scarcely could have imagined: the largest bank failure ever; the largest bankruptcy ever; the largest government bailout; the collapse of the housing market and the near-collapse of the entire financial system. 

"Spirit!" said Scrooge. "Show me no more! Conduct me home. Why do you delight to torture me?"

"One Shadow More!" exclaimed the Ghost.

And below, in the mist, Scrooge could see an avuncular man. Oddly and incongruously, the man wore a baseball cap. 

"Who is that man, Spirit?" Scrooge asked.

"Those who used to think of themselves as his friends called him ‘Bernie’" the Spirit said.

"No more!" cried Scrooge. "No more, I don’t wish to see it. Show me no more!"

 

Break in the Action: I think we could all use a break. I will discontinue my regular publishing schedule for the next few days. Regular publication will resume after the New Year.

 

Securities lawsuit filings reached a six-year high in 2008, according to a year-end report released today by NERA Economic Consulting. The report, entitled "2008 Trends in Securities Class Actions" (here), was written by NERA economists Stephanie Plancich and Svetlana Starykh, and reports that through December 14, 2008, there were 255 securities class action filings, up from only 131 filings in 2006 and 195 filings in 2007. NERA’s December 18, 2008 press release regarding the report can be found here.

 

If the "atypical" cases (e.g., IPO laddering) are excluded from the comparison, the 2008 filings are "on pace to reach a 10-year high." The filings are also on pace for a 37% increase over 2007 and the highest annual increase since 2002 (the year of the corporate scandals).

 

The report attributes the "surge" in filings to the credit crisis. Of the 255 YTD filings, 110 were credit crisis related, and almost 50% of cases involved defendants in the financial sector, as compared to only 16% of cases in the 2005-06 period. (My table of the credit crisis-related securities lawsuit filings can be accessed  here.)

 

But while the financial sector saw increased litigation activity, "other sectors also saw continued filing activity." For example, though lawsuits against companies in the health technology sector declined as a percentage of all filings, the absolute number of filings against companies in the health technology sector increased, as there were 29 filings against health technology companies in 2008, compared to only 19 in 2006.

 

The 2008 filings have been concentrated in the second and ninth circuits. The second circuit filings were increased by the large number of filings in the Southern District of New York, particularly financial companies domiciled there.

 

Though the pattern of increased filing activity in 2008 is clear, "there have been no clear increasing or decreasing trends in the patter of resolutions." The report notes that median settlements have "remained relatively stable." The 2008 median settlement of $7.5 million is slightly below the 2007 median of $9.4 million, but above the 2006 median of $7.0 milllion.

 

Average settlements, which can be substantially affected by large settlements, were up in 2008 relative to 2007. The average settlement in 2008 was $38 million, up from $31 million in 2007, but well below the post-Sarbanes Oxley average from 2003 to 2008 of $45 million. (The annual average settlement has ranged from $21 million to $82 million during this six-year period.)

 

The report does observe that over time there has been an increase in the dollar value of claimed investor losses, from about $120 million ten years ago, to around $340 million during 2008. However, the ratio of median settlement to median investor losses has "stayed relatively steady in the 2-3% range over the past few years."

 

Looking forward, the report notes that there could be "two opposing factors" that could determine whether or not average or median settlements will increase in the future. On the one hand, investor losses associated with the credit crisis lawsuits in 2008 are very large, which could be "an indicator of big settlements to come." On the other hand, the credit crisis has "dramatically shrunk the size of many defendants’ pockets." Lower financial wherewithal might operate as a downward force on settlement values.

 

The report concludes that "only time will tell if the huge investor losses for credit crisis filings may put upward press on median settlements in the future, or if the financial distress faced by defendant companies may pull median settlement values down."

 

My own observations on the 2008 securities litigation activity will be detailed in my year-end analysis, which will be forthcoming after the first of the new year. UPDATE: My year end analysis can be found here. For now, I note a few things.

 

First, this has been an extraordinarily difficult year in which to just try and count the cases. For example, many litigation targets have been sued multiple times by different claimants, whether they are shareholders who acquired their shares over different time periods, or they are security holders with different classes of equity interests. Whether a new filing should or should not be "counted" has been difficult. Further complicating this has been the large number of state court filings, which are difficult just to find. I emphasize this point simply because there is going to be a significant variation in the various commentators’ year-end reports about how many filings there were this year. My own count is lower than NERA’s.

 

Second, while the 2008 filings were significantly increased by filings against companies in the financial sector, as the year has progressed and the impact of the credit crisis has become more widespread, the credit crisis-related filings have spread outside the financial sector (refer for example here).

 

Third, you may see comments elsewhere that the 2008 filings were inflated by one-time sector events, like the auction rate securities lawsuits. While this is true, the recent surge of litigation activity involving the Madoff victims demonstrates that in many ways the pace of securities litigation activity is simply a reflection of a series of supposed one-time events. The mere fact that there is an identifiable event arguably may be irrelevant to analyses of current or future filing trends.

 

Fourth, the NERA report makes no projections about what is likely to happen to the pace of filing activity in 2009. My own view is that the current active filing pace is likely to continue well into 2009 and perhaps beyond. Among other things, filing activity has been elevated over the last several weeks, which is unusual for December, historically a slow month. The continued spread of credit crisis filings outside the financial sector is likely to continue in 2009. Moreover, the impacts of the financial downturn will begin to emerge as company’s report their 2008 results and as the year progresses, which could contribute to litigation activity.

 

As I said, my own report will be forthcoming. I am very interested in hearing readers’ thoughts and reactions in the interim.

 

Special thanks to Ben Seggerson of NERA for providing me with a copy of the NERA report.

 

If today’s filings are any indication, a huge wave of Madoff victim lawsuits could be coming. Madoff investors were quick to sue Madoff and his firm, with the first complaint filed last Friday (as noted here). But with Madoff’s firm in liquidation and the money likely long gone, investors who lost money as a result of Madoff’s scheme are casting around for other targets from whom to try to recover their losses. Early returns suggest that investment firms and Madoff "feeder funds" could find themselves facing substantial Madoff victim litigation.

 

UPDATE: Please note that a regularly updated table of Madoff investor litigation, including "feeder fund" litigation can be accessed  here.

 

First, as reflected in their December 16, 2008 press release (here), plaintiffs’ lawyers have filed a securities lawsuit in the Southern District of New York against investment partnership Ascot Partners L.P., its founder and general partner (Merkin), and its auditor, BDO Seidman. The class members are persons who purchased limited partnership interests in Ascot.

 

According to the press release, the complaint alleges that Ascot and Merkin

 

caused and permitted $1.8 billion — virtually the entire investment capital of Ascot — to be handed over to Madoff to be "invested" for the benefit of plaintiff and the other limited partners of Ascot. Plaintiff’s investment in Ascot has been wiped out, as a direct result of: (a) defendant Merkin’s abdication of his responsibilities and duties as General Partner and Manager of Ascot and its investment funds and; (b) the failure of Ascot’s auditor Seidman, in light of "red flags" indicating a high risk to Ascot from concentrating its investment exposure in Madoff as sole third-party investment manager for all of the Partnership’s assets, to perform its audits and provide its annual audit reports in conformance with generally accepted auditing standards.

 

The press release states that the complaint alleges ’34 Act violations as well as related statutory and common law breaches. A copy of the complaint can be found here.

 

UPDATE: On December 16, 2008, investors also filed a separate lawsuit against a different fund affiliated with Merkin, Gabriel Partners. A copy of the December 17, 2008 press release can be found here.  A copy of the complaint can be found here.  A WSJ.com Law Blog post about the Ascot and Gabriel lawsuits can be found here.

 

Second, and also on December 16, another plaintiffs’ firm initiated a separate securities lawsuit in the Central District of California. The lawsuit is filed against Madoff and his firm, but also names as defendants Brighton Company, a California limited partnership and a so-called "feeder fund," and its principal ( Stanley Chais). The firm’s press release (here) states that Brighton was "one of the many feeder funds that directed investor capital" to Madoff and his firm. The press release says that Chais "managed several investment groups [including Brighton], the monies for which were given to Madoff" and his firm.

 

The complaint (here) alleges that the plaintiff invested money through CMG Ltd., a California limited partnership. The complaint alleges that CMG provided all of its investment capital to Chais as general partner for Brighton, which in turn invested all of CMG’s money with Madoff. The complaint alleges that "all defendants contributed to the false, misleading, unlawful, unfair and fraudulent acts and practices associated with the Ponzi scheme."

 

The purported class consists of two groups; all persons who invested capital with Chais and Brighton, and all persons who invested with Madoff and his firm. The complaint alleges violations of the ’34 Act.

 

The press release also states that "the firm is investigating the actions of other feeder firms on behalf of investors." The December 17, 2008 Wall Street Journal has an article (here) discussing Stanley Chais and his investment funds’  (and charitable organizations’) relation to Madoff
 

 

Given the magnitude and widespread dispersion of the Madoff losses, and given the fact that there appears to be little money left with Madoff and his fund, it seems highly likely that there will be other (perhaps many other) investment funds, "feeder funds," hedge funds, funds of funds, and other entitles, targeted by Madoff victims. The attention in the press (for example, here) to alleged failures of investment firms to catch supposed red flags or to conduct due diligence will only increase the likelihood of this kind of litigation. The inclusion of the auditor in the Ascot lawsuit suggests that some of these claims could range pretty far afield.

 

A December 16, 2008 Business Week article discussing the likelihood of Madoff investor claims against hedge funds and others, also discussing the Ascot lawsuit, can be found here.

 

The Wall Street Journal is helpfully collecting a list of Madoff’s victims here. It is a long list but it is also clearly incomplete; for example, Fairfield Greenwich Advisors may have been hit with $7.5 billion in losses, but those amounts in reality represent the losses of Fairfield’s own investors. The list would be substantially longer if all of these and other fund investors and customers were listed individually. The fund investors are the ones, like the plaintiffs in the cases described above, that will likely target the investment funds.A December 17, 2008 Wall Street Journal article entitled "Fairfiled Group Forced to Confront its Madoff Ties" (here) conveys some pretty strong suggestions along those lines.

 

In any event, going forward, the number one question D&O insurance underwriters will be asking financial institution applicants will be whether the applicant invested funds with Madoff.

 

Meanwhile, the Credit Crisis Litigation Wave Churns On: It seems as if the plaintiffs’ lawyers have kicked it into high gear as the year end approaches. There has been a flood of new securities lawsuit filings so far in December. By my informal count, there have already been at least 20 new securities lawsuit filings so far this month (if you count the two cases described above), an unusually high number for December, which historically is a quiet month for securities filings.

 

And though the filings have included a diversity of cases (as I discussed here), the filings have also included a number of new subprime and credit crisis related lawsuits, including at least four new cases that have been filed or become public this week.

 

For example, as reflected in their press release (here) on December 16, 2008, plaintiffs’ lawyers initiated a securities class action lawsuit in the Southern District of New York against investors in the C-Bass Trust Certificates backed by residential mortgage loans and issued by Credit-Based Asset Servicing and Securitization LLC. The defendants include C-Bass, the issuing trusts, and the offering underwriters. The complaint, which can be found here, asserts claims under the ’33 Act.

 

In addition, on December 4, 2008, plaintiffs’ initiated a securities class action on behalf of investors who purchased AIG shares in shelf offerings conducted during the period 2003 to 2007. The complaint (here) asserts claims against AIG, certain of its directors and officers, and its offering underwriters under the ’33 Act.

 

And on December 8, 2008, defendants removed to federal court a lawsuit that previously had been filed in New York County (New York) Supreme Court against Residential Asset Securitization Trust (which issued certain residential mortgage pass-through certificate), its offering underwriter, and two rating agencies. A copy of the removal petition, to which the original complaint is attached, can be found here.

 

Finally, plaintiff shareholders have initiated a securities class action lawsuit (here) against private equity firm American Capital Ltd. in the District Court of Maryland, alleging among other things that the firm failed to disclose its exposure to disruptions in the credit market.

 

I have added these new lawsuits to my running tally of subprime and credit-crisis related litigation, which can be accessed here. With the addition of these new lawsuits, the running tally of subprime and credit-crisis securities lawsuits now stands at 138, of which 98 have been filed during 2008.

 

Special thanks to Adam Savett of the Securities Litigation Watch blog (here) for providing information and links about these new lawsuits.

 

And Finally: Before writing this post, I had no prior acquaintance with the phrases "Madoff victims" and "feeder funds." I guess I better get used to them.

 

A December 15, 2008 opinion (here) in a Delaware bankruptcy court adversary proceeding provides a rare judicial interpretation of an "inadequate consideration" exclusion in a D&O insurance policy. I have reproduced with permission below a summary of the case prepared by the Wiley Rein law firm, followed by my own brief commentary. The firm’s case summary, which appears in the indented text below, can also be found here.

 

Case Summary

A federal bankruptcy court, applying New York law, has dismissed an adversary proceeding brought by a bankrupt home mortgage company against its directors and officers liability insurers, holding that coverage for a pre-petition lawsuit against the mortgage company was barred by application of an "inadequate consideration" exclusion. Delta Fin. Corp. v. Westchester Surplus Lines Ins. Co., Case No. 07-11880 (CSS) (Jointly Administered) (Bankr. D. Del. Dec. 15, 2008).  The court also held that the coverage dispute was a non-core proceeding.  Wiley Rein LLP represented one of the insurers in this case.

The underlying lawsuit arose from the mortgage company’s 2001 restructuring transaction.  In connection with that transaction, the mortgage company allegedly first convinced its unsecured and senior secured note holders to surrender their notes to a newly-formed holding company for which the note holders were granted certain interests in the holding company.  Next, the holding company returned the senior notes to the mortgage company, and, in exchange, the mortgage company transferred excess "cash flow certificates" to the holding company.  The mortgage company and the holding company intended that value of the exchanged senior notes and cash flow certificates would each be approximately $153 million.

In 2003, the former note holders filed suit against the mortgage company and its directors and officers alleging that, at the time of the restructuring transaction, the cash flow certificates had an actual fair market value of only $43 million.  The plaintiffs ultimately asserted eight causes of action against the defendants concerning various aspects of the restructuring transaction.  The mortgage company tendered the suit to its directors and officers liability insurers, and the primary insurer denied coverage based in part on the inadequate consideration exclusion.  In 2007, the mortgage company filed for Chapter 11 and brought an adversary proceeding against the insurers seeking damages and a declaratory judgment that the insurers were obligated to advance defense costs and provide indemnification for the underlying lawsuit.

In considering the insurers’ motions to dismiss, the bankruptcy court focused on the primary policy’s inadequate consideration exclusion, which provided that "[t]he insurer shall not be liable for Loss on account of any Claim made against any Insured: . . . based upon, arising out of, or attributable to the actual or proposed payment by the Company of allegedly inadequate or excessive consideration in connection with the Company’s purchase of securities issued by any company."  Noting that New York courts rely on a "but for" causation test to interpret insurance exclusions with "arising from" lead-in language, the bankruptcy court conducted a three-part analysis to determine whether the pre-petition lawsuit was excluded by the inadequate consideration exclusion. 

 

First, the bankruptcy court noted that each of the plaintiffs’ eight causes of action sought damages related to the harm caused by the alleged difference between the senior notes, worth $153 million, and the cash flow certificates, worth $110 million less. 

 

Second, the bankruptcy court determined that this harm would not have existed "but for" the restructuring transaction, and, thus, the restructuring transaction was the "operative act." 

 

Finally, the bankruptcy court concluded that the operative act was explicitly encompassed by the inadequate consideration exclusion because the restructuring transaction involved an "actual payment" by the mortgage company of "inadequate consideration"—the cash flow certificates—in connection with the mortgage company’s purchase of "securities issued by any company"—in this case, its own senior notes.  Accordingly, the bankruptcy court determined that the exclusion barred coverage for the underlying complaint in its entirety.  As a result of that determination, the court did not reach the insurers’ other argument that the amount at issue in the underlying case did not constitute "Loss" as defined by the policies.

After concluding that all of the mortgage company’s claims in the adversary proceeding were barred by the inadequate consideration exclusion, the bankruptcy court rejected the mortgage company’s waiver and estoppel arguments, which were based on the passage of 18 months before the primary insurer denied coverage.  The bankruptcy court noted that, under New York law, an insurer could not waive a defense to coverage, and the mortgage company had failed to allege sufficient facts demonstrating its reliance on the failure to issue a coverage position.  Finally, relying on the reasoning in In re Stone & Webster, Inc., 367 B.R. 523 (Bankr. D. Del. 2007), the bankruptcy court agreed with the insurers that the adversary proceeding was a non-core proceeding.

 

Commentary

In recent years, it has become increasingly common for D&O carriers to issue policies containing "inadequate consideration" exclusions, or as they are sometimes known, "bump up" exclusions. Carriers designed these exclusions to address disputes that sometimes arise in connection with merger objection lawsuits.

 

These kinds of lawsuits routinely emerge after the announcement of a merger or acquisition. Invariably, plaintiffs’ attorneys file a lawsuit claiming that the acquired company’s shareholders were receiving inadequate consideration for their shares in the acquired company. These lawsuits sometimes end with the defendant acquirer agreeing to pay some additional consideration. The acquirers then sometimes try to pass these increased acquisition costs to the D&O insurers. The carriers object to paying amounts that they contended was merely a transaction cost and did not "loss" as a result of a wrongful act.

 

In order to try to avoid disputes over these increased consideration, or "bump up," amounts, some carriers have attempted to insert exclusions for "inadequate consideration" claims into their policies. These kinds of provisions are not always included in D&O policies, nor is the wording in the various exclusions used in the marketplace uniform. In addition, there is very little case law interpreting these kinds of provisions.

 

The Delta Financial decision highlights a number of noteworthy aspects of the particular exclusion language used in the applicable policy that may be important in connection with the wording of these kinds of exclusions.

 

First, it is important to note that the allegations of inadequate consideration were made in connection with the company’s acquisition of its own securities, rather than those of another company. The court’s ruling certainly underscores the significance of the exclusion’s use of the word "any" in the phrase "the securities issued by any company," as opposed to, for example, the possible alternative use of the word "another." Had the exclusion used the word "another" rather than "any," the outcome could well have been different.

 

Although it was not relevant in the context of this particular dispute, the exclusion’s reference only to "securities" also highlights the possible outcome determinative impact in other situations if the exclusion were also to refer to "assets of" in addition to the "securities issued by" any company. The exclusion’s reference only to securities, as opposed to both securities as well as assets, is narrower, as a result of which the exclusion would, in this respect at least, have a narrower preclusive effect.

 

Many readers undoubtedly noted that this case arose out of the bankruptcy of a residential mortgage origination and servicing company that funded its lending operations by selling interests in securitized pools of mortgages, a business pattern that is not unfamiliar these days (nor indeed is the bankruptcy itself unfamiliar these days). The procedural context, and perhaps even the substantive dispute, may presage a host of disputes that may lie ahead in connection with the subprime and credit crisis-related litigation wave.

 

In any event, the outcome of the coverage dispute underscores a point that I have made many times in the past on this blog—that is, the critical importance of policy wording.

 

Very special thanks to Dan Standish of the Wiley Rein firm for providing a copy of the Delta Financial opinion and for allowing me to reproduce his firm’s case summary.

 

In the latest preliminary ruling in a subprime or credit crisis-related securities lawsuit, Southern District of Florida Judge Ursula Ungaro in a December 11, 2008 opinion (here) granted the defendants’ motion to dismiss the plaintiffs’ complaint, with leave to amend.

 

Background

BankAtlantic Bancorp is a bank holding company that offers consumer and banking lending services, through its wholly-owned subsidiary. The plaintiffs complaint alleged securities law violations against the holding company and five present and former directors and officers of the holding company or of the subsidiary. The plaintiff purports to represent persons who purchased the holding company’s stock during the period November 9, 2005 though October 25, 2007. Background regarding the case can be found here.

 

As summarized in the December 11 opinion, the complaint alleges that the company "sought to capitalize on the Florida real estate boom through expansion of its commercial real estate loan portfolio." To fuel the growth, the company "cut corners" including "ignoring the Company’s internal lending guidelines." The company also allegedly "failed to adequately reserve for loan losses" in its commercial real estate loan portfolio, "resulting in material misstatements in the Company’s financials." After the Florida real estate market "entered a free fall in 2007," borrowers "began defaulting" and the company was "forced to reveal the true extent of the Company’s exposure in its real estate portfolio."

 

The Opinion

In her December 11 opinion, Judge Ungaro held that the complaint "adequately alleges misrepresentations and omissions in a manner sufficient to withstand a motion to dismiss," and that the complaint "is legally sufficient in so far as it pleads loss causation." However, she found that the complaint did not adequately allege scienter.

 

As a preliminary matter, Judge Ungaro addressed the complaint’s reliance on confidential witness statements. She found that "there is no specific information as to the confidential witnesses’ positions in the Company, their employment duties, the foundation or basis for their knowledge, or whether they were even employed with the company during the relevant time period." Accordingly, she concluded that she is "unable to give any significant weight to the allegations made by those confidential witnesses.

 

She then considered the scienter allegations against the individual defendants. With respect to the allegations against the Vice Chairman, the current CEO and the Chairman, she found that the "factual allegations do not give rise to a strong inference of scienter." She said that even assuming the confidential witness statements could be given weight, the allegations are insufficient; "the confidential witness’s vague and conclusory assertion that it was ‘common knowledge’ that the Company had risky loans on its books is not the type of particularized allegations required under the PSLRA."

 

She also noted that the defendants’ "knowledge of the company’s lending or accounting practice by virtue of their high-level positions…does not create a strong inference of scienter." She also found that the fact that these individuals received "Exception Reports" establishes "nothing about what these Defendants knew or should have known about the Company’s lending practices."

 

Judge Ungaro also rejected the contention that the defendants’ $7.8 million in insider stock sales established scienter, because the complaint "does not allege that the amount or percentage of shares sold …were unusual," nor does the complaint alleged "that the sales were inconsistent with their prior trading history."

 

With respect to the scienter allegations against the company’s former and its current CFO, Judge Ungaro concluded that the complaint "does not contain factual allegations that would support a finding that [the defendants’] statements were made with scienter." The complaint "lacks particularized allegations" that these two officials "played a role in approving loans or in setting loan loss reserves," and the complaint does not allege that they were "presented with information that would have shown the falsity of the Company’s financial statements or that they were confronted with concerns regarding the Company’s lending practices or loan loss reserves."

 

Finally, with respect to the company (but without reference to more generalized theories regarding "collective scienter"), Judge Ungaro held that the plaintiff "has not adequately pled scienter as to any of the Individual Defendants; therefore, Plaintiff has failed to adequately pled [sic] scienter as to BankAtlantic."

 

The court’s grant of the defendants’ dismissal motion is without prejudice and the plaintiffs have 20 days in which to file an amended complaint.

 

Discussion

The BankAtlantic case joins a growing list of subprime and credit crisis related securities cases that failed to survive preliminary motions. To be sure, the dismissal motions in the Countrywide subprime securities case (refer here) and the New Century Bankcorp subprime securities case (refer here) were both recently denied in strongly worded opinions. But as reflected in my running tally of subprime and credit crisis-related securities lawsuit settlements, dismissal and motion denials (which can be accessed here), a greater number of dismissal motions have been granted than denied.

 

It should be noted that at this point only a handful of dismissal motions have been resolved one way or the other. And many of the dismissals that have granted have been without prejudice. The plaintiffs in these cases may yet successfully amend their complaints and survive a subsequent motion to dismiss. Nevertheless, the early returns seem to suggest that many of these cases are facing judicial resistance.

 

On a related note, I have observed elsewhere (refer here) that the growing wave of bank failures could lead to an increased number a new wave of "dead bank" litigation. To the extent these cases do emerge, the Bank Atlantic opinion may suggest that the cases could face significant pleading hurdles.

 

In any event, I have added the BankAtlantic opinion to my running tally of subprime and credit crisis-related lawsuit settlements, dismissals and dismissal denials, which can be accessed here.

 

Court Rejects KLA-Tencor’s Special Litigation Committee’s Motion to Dismiss Backdating Case: In a December 11, 2008 opinion (here) that is extensively redacted due to its reliance on evidence submitted under seal, Judge James Ware of the Northern District of California denied the motion of KLA-Tencor’s Special Litigation Committee (SLC) to dismiss the options backdating derivative lawsuit pending against the company, as nominal defendant, and certain of its directors and officers.

 

The plaintiffs had filed a complaint alleging that the defendants "permitted senior KLA insiders to unlawfully manipulate the grant dates associated with KLA stock options, resulting in hundreds of millions of dollars of losses to KLA." (Background regarding the options backdating allegations at KLA-Tencor can be found here.) In response to the filing of the complaint, the company’s board formed the SLC and appointed two directors to serve as its members. The SLC prepared a report and filed a motion to dismiss the derivative action, concluding that the derivative action "is no longer in the interests of KLA or its shareholders."

 

Judge Ware considered the motion under Delaware law. Because of the redactions in his opinion, his reasoning is not always entirely evident. Basically, he was concerned that one of the SLC members "was on the Board and on the Audit Committee at a time when continued backdating may have been occurring at KLA." This raises the "possibility" that the one SLC member was "tasked with investigation corporate malfeasance that he had previously, if unintentionally, approved," which in turn raised questions about his independence.

 

Because of the independence concerns, the Court was also "concerned by the overall size of the SLC, as it consisted of only two members." On these grounds, the court found that the SLC had not carried its burden, noting that

 

Although no single factor is dispositive in the Court’s determination, evaluation of the totality of the circumstances, including the size of the SLC, questions surrounding its independence, and the depth and focus of its inquiry leads to this conclusion.

 

Accordingly, the court denied the SLC’s dismissal motion, denied certain individual defendants’ proposed (unspecified) settlements, and scheduled the case to go forward.

 

Without having statistical evidence to support the observation, I note that it is relatively unusual for a court to reject an SLC’s recommendation to drop a derivative case. On the other hand it is also unusual for an SLC to have only two members, and these two unusual features wound up being related. A December 17, 2008 Law.com article discussing these aspects of Judge Ware’s opinion can be found here.

 

In any event, I have added the KLA-Tencor decision to my table of options backdating related lawsuit settlements, dismissal and dismissal denial, which can be accessed here. KLA-Tencor’s $65 million settlement of the options backdating securities class action lawsuit that had been filed against the company is discussed here.

 

Are European Investor Groups Turning to U.S. Court for Subprime Claims?: A December 16, 2008 post (here) on PomTalk, the blog of the securities plaintiffs’ firm Pomerantz Haudek Block Grossman & Gross, noting that "pension funds around the globe have lost hundreds of billions of dollars" in the credit crisis, as a result of which "increasingly, they are turning to U.S. courts to seek recovery of losses."

 

The article notes that "in recent years, European funds have begun to play a more prominent role" in U.S. class actions, and that according to a U.K. pension fund group, "23% of British pension funds have now actively participated in a U.S. securities class action."

 

The article suggests that European funds "will be particularly affected by three categories of suits": suits against financial services companies; suits involving structured financial instruments; and suits involving agency obligations and preferreds (this latter category is a reference to the securities of government sponsored entities). The article concludes by noting that "European funds are certain to remain a fixture in U.S. securities class action."

 

Readers of this blog may be interested to read the article’s observations in connection with litigation against financial services companies:

 

A major question in suits against banks is whether they have the ability to satisfy a large judgment or enter into a reasonable settlement. Many banks have already gone under or are hanging by a thread. But even failed banks generally have D&O insurance, and there may be other viable defendants like underwriters.

 

Ah, yes. Round up the usual suspects. Be sure to frisk them for insurance, as well as the presence of any professional advisors.

 

We interrupt our regularly scheduled stream of dispatches from the credit crisis front to provide a quick update on the now seemingly remote options backdating scandal. Even though the whole world has moved on and though options backdating pales by comparison to what followed, many options backdating cases continue to grind on. At least a couple of these cases recently settled, and there appear to be many more yet to come.

 

First, on December 11, 2008, Amkor Technologies announced (here) that it had reached an agreement to settle the option backdating-related securities class action lawsuit that had been filed against the company and certain of its current and former directors and officers in connection with the company’s historical stock option practices. Background regarding the lawsuit can be found here.

 

According to the company’s press release, the plaintiffs have agreed to dismiss the case in exchange for a payment of $11.25 million. The company said that its directors and officers liability insurance carrier has agreed to pay $9 million of the settlement amount and the company will pay the balance.

 

Second, and also on December 11, 2008, the parties to the options backdating-related shareholders’ derivative suit filed against Foundry Networks, as nominal defendant, and certain of its directors and officers, filed a notice of a proposed settlement (here). According to the parties’ filing, the company will receive cash payments of $2.117 million, of which $1.637 represents payments from the individual defendants and $400,000 represents payments from the company’s insurer. Certain shares granted to certain individuals have been repriced and the company also agreed to certain governance changes. The company also agreed to pay plaintiffs’ attorney’s fees and expenses of $1.2 million.

 

I have added these two settlements to my running table of options backdating-related lawsuit settlements, dismissals and motion denials, which can be accessed here. The Amkor settlement is, by my count, the sixteenth options backdating-related securities lawsuit settlement, and approximately six of the cases were also dismissed. Given that there were according to my count (refer here) 39 options backdating-related securities lawsuits filed in total, there still may be as many as 17 of these cases yet to be resolved.

 

The individuals’ cash contribution toward the Foundry Networks settlement, if not indemnified, would represent an unexpected element, as it remains an unusual settlement element for directors and officers to make cash settlement contributions out of their own assets.

 

OK, enough about that. We now resume our regularly scheduled programming, which is already in progress.

 

California Countrywide Subprime-Related Derivative Case Dismissed: In a December 11, 2008 order (here), Judge Mariana Pfaelzer dismissed the Countrywide subprime-related derivative case pending in the Central District of California.

 

Judge Pfaelzer previously had denied the defendants’ motion to dismiss the derivative case, in a strongly worded May 2008 opinion (about which refer here). However, in July 2008, Bank of America acquired Countrywide in a stock for stock merger. As a result, and as discussed here, in October 2008, the Delaware federal court dismissed the parallel Countrywide subprime-related derivative case pending in that court, because of the plaintiffs’ lack of standing to pursue the claim owing to the plaintiffs’ inability to show "continuous ownership" due to the BoA transaction.

 

The plaintiffs in the California Countrywide subprime-related derivative case argued that, notwithstanding the merger, they could still satisfy the "continuous ownership" rule and therefore still had standing based on a merger-related exception to the rule recognized in the Ninth Circuit. After detailed consideration of Erie Doctrine issues, Judge Pfalzer declined to exercise equitable powers associated with the merger-related exception, and granted the defendants’ motions to dismiss the derivative claims due to the plaintiffs’ lack of standing.

 

Judge Pfaelzer’s ruling on the derivative claims was without effect on the plaintiffs’ merger related class claims, which she previously had stayed in favor of parallel proceedings pending in Delaware Chancery Court. In addition, the Countrywide subprime-related securities class action lawsuit remains pending before Judge Pfaelzer, as a result of her recent dismiss motion denial in that case, discussed here.

 

In any event, I have added the dismissal of the California Countrywide Derivative lawsuit to my list of subprime lawsuit settlements, dismissals and motions denials, which can be accessed here.

 

Special thanks to Michael Delhegan of the Tressler Soderstrom firm for providing a copy of Judge Pfalzer’s December 11, 2008 opinion.

 

Standalone Insurance for Independent Directors: In prior posts (most recently here), I have noted the considerations that may militate in favor of standalone insurance protection for independent directors. In a December 12, 2008 memorandum entitled "Independent Directors Require Additional Protection in Financial Crisis Litigation" (here), the Baker & McKenzie firm suggests that "there is an increasing interest by independent directors in coverage that protects only a company’s independent or outside directors, not its officers."

 

The memo reviews the origins of IDL insurance and examines why "it may be a useful tool for both attracting high quality independent directors, and as a means of protecting and retaining the best talent." Among other reasons suggesting the need for IDL protection is the increasing susceptibility of traditional D&O insurance limits to erosion or depletion through defense expense or indemnity protection for other persons insured under the D&O policy, a phenomenon on which I previously commented here.

 

More About the NY Insurance Commissioner’s Recent Opinion: In a recent post (here), I commented on the recent opinion of the New York Insurance Commissioner’s office requiring D&O insurance policies to incorporate a duty to defend. The opinion and its implications are reviewed at greater length in a December 2008 Client Advisory from the Edwards, Angell, Palmer & Dodge law firm entitled "The New York Insurance Department Will No Longer Approve D&O Policies Lacking ‘Duty-to-Defend’Coverage Feature" (here).

 

This memo contains a detailed analysis of the opinion and raises a number of important considerations about what the opinion does and does not mean. The memo also notes difficulties that carriers may face as the attempt to adapt to the opinion, and also suggests alternative responses available to the carriers, including seeking legislative relief.

 

Special thanks to John McCarrick of the Edwards Angell firm for sending along a copy of the memo.

 

And Finally: By far the best thing I have seen written on the Madoff scandal is the column that Wayne State Law Prof. Peter Henning wrote as a guest column on the DealBook blog, here.