Regular readers know that I have been tracking subprime-related class-action lawsuits (here). In a recent post, I noted my interest in trying to develop a similar list of subprime-related derivative lawsuits. In response to my request, a number of readers supplied helpful information, and as a result I have been able to develop a list of subprime-related derivative lawsuits, which can be accessed here.

The list is accurate but it may not be complete. Readers aware of any other subprime-related derivative lawsuits are encouraged to let me know, so that I can address any omissions. I will update the list as new lawsuits come in or as new information becomes available.

The table of cases I have compiled lists the companies that have been named as nominal defendants in shareholders’ derivative lawsuits. Some of the companies listed actually have been sued in multiple derivative suits, and some companies have been sued in multiple jurisdictions. However, where the allegations relate to substantially similar allegations, each company has only been listed once, regardless of the number of actual derivative lawsuits pending. Where I have been able to supply relevant links (in most cases to the actual complaint), the link pertains to the first filed suit.

As the list reflects, a total of 20 companies have been sued as nominal defendants in subprime-related derivative lawsuits. The derivative suits against seven of these companies were first filed in 2008, the rest in 2007. Most (but not all) of the companies named in the derivative suits have also been named in subprime-related securities class action lawsuits. Most of the companies sued in the derivative lawsuits are in the lending and banking industries, but the list also includes insurance companies, home builders, and REITs, among other.

Special thanks to Adam Savett of the Securities Litigation Watch (here) for providing information and links to several of the lawsuits, and thanks to all readers who provided information and suggestions in response to my inquiry.

Another Auction Rate Securities Lawsuit: On April 8. 2008, plaintiffs’ lawyers filed another purported securities class action lawsuit on behalf of auction rate securities investors against the companies that allegedly sold them the securities, in this case Raymond James Financial. A copy of the plaintiffs’ lawyers’ April 8 press release can be found here, and a copy of the complaint can be found here.

This brings the total number of auction rate securities lawsuits to eleven. My prior post discussing the auction rate securities lawsuits can be found here. I have been tracking the auction rate securities lawsuits as part of my running tally of subprime-related class action lawsuits, about which more below.

Adjusting the Subprime-Related Class Action Litigation Tally: Also as a result of my efforts to build the list of subprime-related derivative lawsuits, I received additional information regarding three previously filed securities class action lawsuits. In the past, I had determined that these three lawsuits were not appropriately categorized as subprime-related. However, upon further inquiry and based on conversations with some readers, I have now added these three additional lawsuits to my running tally of subprime-related securities class action lawsuits. The three added lawsuits related to Municipal Mortgage & Equity (about which refer here), WSB Financial Corp. (refer here), and CBRE Realty Finance (refer here).

With the addition of these three lawsuits, and with the addition of the Raymond James auction rate securities lawsuit referenced above, my running tally of subprime-related lawsuits now stands at 68. One unfortunate consequence of my decision to add these three cases is that now my running tally may no longer agree with others’ tallies, such as the Stanford Law School Securities Class Action website (here). There is an inherent categorization problem in trying to track the subprime lawsuits. Reasonable minds will disagree about whether a case is or is not appropriately categorized as subprime related. There are almost always going to be some disagreements at the margins.

Many thanks to the readers who supplied the information and commentary about the three class action lawsuits.

Subprime ERISA Lawsuit Update: As most readers know, I have also been tracking subprime-related ERISA lawsuits (here). As a result of my research and inquiries regarding subprime derivative lawsuits, I identified three additional subprime-related ERISA lawsuits of which I previously had been unaware. These three additional ERISA lawsuits pertain to Huntington Bankshares (refer here), National City Corp. (refer here), and Impac Mortgage (refer here).

With the addition of these three suits to my list, the number of subprime-related ERISA lawsuits now stands at 14, five of which have been filed in 2008, and the remainder of which were filed in 2007.

Two Options Backdating Case Developments: Two courts recently issued rulings on motions to dismiss in options backdating-related lawsuits.

First, on March 31, 2008, in the Juniper Networks option backdating-related securities litigation (about which refer here), Judge James Ware of the United States District Court for the Northern District of California largely denied the defendants’ motion to dismiss, except that he granted the motion (with leave to amend) as to one individual defendants, and he granted the motion to dismiss all alleged misrepresentations that took place prior to July 14, 2001, as time barrred. A copy of the March 31 order in the Juniper Networks case can be found here.

Second, and also on March 31, 2008, in the Microtune options-backdating related derivative litigation, Judge Richard Schiff of the United States District Court for the Eastern District of Texas granted the defendants’ motion to dismiss, albeit with leave to amend as to certain individuals on certain claims. A copy of the Microtune opinion can be found here. Judge Schell first concluded the Congress had not created a private right of action under Section 304 of the Sarbanes-Oxley Act, and dismissed that claim. Judge Schell also granted the dismissal with prejudice of claims of allegedly misleading proxy statements as to the individual defendants who were not on the board at the time of the proxy. The proxy allegations were dismissed without prejudice as to the remaining individual defendants. Similarly, the plaintiffs’ claims based on Section 10(b) were also all dismissed, but with prejudice as to some defendants and without prejudice as to others. The court declined to exercise jurisdiction over the plaintiffs’ state law claims.

I have added these two decisions to my table of options backdating related case dispositions, which can be accessed here. Readers are encouraged to let me know about case dispositions of which they become aware so that I can add them to the list.

Special thanks to Nick Even of the Haynes and Boone firm for the link to the Microtune decision.

New Century Updated: In an earlier post (here), I noted that the court had granted (with leave to amend) the defendants’ motion to dismiss in the first-filed subprime related securities class action lawsuit, involving New Century Financial Corporation. On March 24, 2008, the plaintiffs filed their amended complaint (here), which names as defendants not only certain former directors and officers of the company, but also the company’s former auditor, KPMG, and the company’s offering underwriters.

Readers will recall that in connection with the New Century bankruptcy proceeding, the bankruptcy examiner recently released a detailed report (about which refer here) in which, among other things, the examiner reviewed the question of the auditors’ and the company’s directors and officers’ potential responsibility for certain accounting practices and statements at the company. In light of the bank examiner’s report, the plaintiffs sought (and the defendants’ agreed not to oppose) leave to file a second amended complaint, which the court granted. The plaintiffs’ must file their second amended complaint by April 30, 2008. The court also set a briefing schedule for the anticipated motion to dismiss, to be argued September 8, 2008. A copy of the court’s order granting leave and setting the scheduling can be found here.

A German Securities Trial?: The Securities Litigation Watch has an interesting post (here) about the apparent mass securities lawsuits trial that has commenced in Germany involving Deutsche Telecom. An April 7, 2008 Business Week article discussing the trial can be found here.

Add E*Trade and SunTrust Bank to the growing list of companies that have been sued in purported class action lawsuits on behalf of auction rate securities investors against companies that sold them the instruments. The plaintiffs’ attorney’s April 2, 2008 press release regarding the E*Trade auction rate securities lawsuit can be found here, and the complaint can be found here. The plaintiffs’ attorneys’ April 2, 2008 press release regarding the SunTrust lawsuit can be found here and the SunTrust complaint can be found here. With the addition of these two new suits, there have now been a total of ten companies sued in these auction rate securities class action lawsuits.

The auction rate lawsuits are interesting. Clearly the plaintiffs’ lawyers think they are worth pursing. And if the intensity of the auction rate securities investors’ anger is an accurate gauge, then the plaintiffs’ lawyers filing of these lawsuits ultimately could be justified. As a result of prior posts on this blog (here and here) about auction rate securities, I have received numerous emails and inquiries from upset auction rate securities investors. Notwithstanding the investor anger, it is probably worth noting that so far as I can tell the leading plaintiffs’ securities firms are not (at least not yet) active in this space. Most of the auction rate securities class action lawsuits thus far have been filed by two plaintiffs’ firms (refer here and here).

The allegations in these auction rate securities class action lawsuits are largely identical. Essentially the plaintiffs contend that the defendants failed to disclose material facts about the instruments. In particular, the defendants are alleged to have failed to disclose that the auction rate securities were not cash alternatives, but rather that there were only liquid at the time of auction. More to the point, the complaints allege that the defendants failed to disclose that the auction rate securities would become illiquid as soon as the broker-dealers stopped maintaining the auction market.

In each of these class action lawsuits, the complaint names as defendants a specific financial institution and its broker-dealer affiliate. No individual defendants are named. While each complaint contains substantially identical generalized allegations of misrepresentations or omissions, the complaints contain virtually no allegations about specific statements the particular defendants companies are alleged to have made.

And even though the complaints purport to allege breaches of Section 10(b) of the ’34 Act, the complaints’ only basis for alleging scienter are generalized allegations of knowing falsity; there are no allegations of insider trading, and no particularized factual allegations supporting the general allegations of knowing falsity. The complaints similarly depend on the failure of the auction rate market itself as satisfying the loss causation requirement, rather than referring to any alleged curative disclosures or anything else in particular about the specific securities in which the class members invested.

The defendants undoubtedly will argue that these generalized allegations are insufficient to meet the threshold pleading requirements, in reliance in particular on Tellabs and Dura Pharmaceuticals. But while the defendants may seek to have the actions dismissed, the plaintiffs’ lawyers clearly intend to keep filing these actions.

The lawsuits potentially may also raise some interesting D & O liability insurance coverage issues. Because the complaints do not name any individuals as defendants, the sole potential coverage under the typical D & O policy that these claims might trigger is the so-called “entity coverage” found in most policies. In most public company D & O policies, the entity coverage is strictly limited to “securities claims.” While the auction rate securities lawsuits purport to raise claims under the securities laws, these allegations may or may not trigger the potentially applicable entity coverage, depending on how the term “securities claim” is defined in the applicable policy.

There are two general variants of the “securities claim” definition. One variant defines the term “securities claim” by reference to the securities laws themselves, including within the definition claims that assert breaches of federal or state securities laws or their equivalent. The other definitional variation defines “securities claim” by reference to the claimants and securities allegation with respect to which would be recognized as a securities claim. For example, this latter category might limit a “securities claim” to claims brought by holders of the company’s securities, or alternatively, might limit a securities claim to alleged breaches in connection with trading of the company’s own securities.

Clearly this definitional distinction could make a difference in connection with these recently filed auction rate securities lawsuits, as these claims might assert a “securities claim” and trigger the entity coverage in policies that use the former variants, but may or may not trigger the entity coverage in the policies that have the latter variant.

It is probably also worth noting that a number of the companies (for example, E*Trade) that have been sued in these auction rate securities class actions have also separately been sued in securities class action lawsuits by the companies’ own shareholders. These companies’ available insurance coverage may be under significant pressure already.

With the accumulation of these lawsuits, whose numbers are likely to continue to grow, it may well be time for these lawsuits to be broken out into their own separate statistical category, much as the IPO laddering cases were when the were filed in 2001. The auction rate securities lawsuits clearly represent a litigation category distinct from the more typical securities class action brought by public company shareholders.

But with the addition of the two latest lawsuits, the total number of subprime related lawsuits, as reflected on my running subprime lawsuit tally (which may be accessed here), now stands at 64, of which 26 have been filed in 2008. As noted above ten of these 64 lawsuits represent lawsuits brought by auction rate securities investors. Two of the 64 were brought by asset-backed securities investors against the investment banks who created the instruments. Two of the 64 were brought by mutual fund investors against the fund companies and fund managers. The remaining lawsuits were brought by public company shareholders.

Subprime Derivative Lawsuits: In addition to securities lawsuits, some shareholders have also filed subprime-related shareholders’ derivative lawsuits against company management alleging breach of fiduciary duty and other legal breaches. The latest of these subprime-related derivative lawsuits was filed on April 1, 2008 in the United States District Court for the District of Maryland against Municipal Mortgage & Equity (“Muni Mae”) , as nominal defendant, and certain of its directors and officers (complaint here). Muni Mae has previously been sued in a subprime-related securities lawsuit (refer here).

The derivative suit against Muni Mae joins other subprime-related derivative lawsuits that previously have been filed against, among others, Countrywide, American International Group, Regions Financial, and Bear Stearns. I have not been separately tracking the subprime-related derivative lawsuits, basically because I failed to anticipate that shareholders would file as many subprime-related derivative actions as they have. In response to readers’ inquiries, I will now endeavor to track the subprime-related derivative suits.

Unfortunately, because I am coming at this task belatedly, I may fail to account for derivative lawsuits that were filed previously and of which I am unaware. I would be grateful if readers would let me know of any pending subprime-related derivative lawsuits of which they are aware, so that I can add them to my tally and the list will be as complete as possible.

Subprime Litigation Overview: The field of subprime-related litigation has continued to grow and expand, to the point where it is difficult to get an organized sense of the range of issues and litigants involved. An April 1, 2008 memorandum from the Gibson Dunn law firm entitled “Subprime-Related Securities Litigation: Where Do We Go From Here?” (here) provides a top-level overview of current exposures facing companies involved in subprime-related businesses. The paper identifies early trends and key defenses, takes a brief look at likely D & O insurance issues, and describes the factors that are likely to affect the likely future direction of this litigation.

A Canadian Backdating Lawsuit: Though the backdating scandal now seems like ancient history, it seems that the lawsuits are still continuing to come in, although the most recent instance involves a Canadian company sued in a Canadian court.

According to news reports (here), a shareholder of Savanna Energy Services Corp. has filed an action in Alberta’s Court of Queen’s Bench against eleven current or former directors and officers of the company, alleging that the defendants manipulated the company’s stock options in order to profit personally. The lawsuit seeks damages equal to the defendants’ ill-gotten gains and a ban on issuing options to the company’s executives. The plaintiffs’ complaint relies on an affidavit from Eric Lie, the University of Iowa professor whose research initially triggered the options backdating scandal. Lie’s affidavit reports “a high statistical probability” that individuals at Savanna backdated options between 2004 and 2007.

Because Savanna is a Canadian company whose shares trade only on the Toronto Stock Exchange and because it has been sued in Canadian court under Canadian law, I have not tried to shoehorn the case into my running tally of options backdating lawsuits (which may be accessed here). The Savanna lawsuit may represent its own unique category of one.

Delaware Corporate Law Update: Francis Pileggi has posted on his Delaware Corporate and Commerical Litigation Blog (here) an interesting series of posts (here, here and here) reporting on the proceedings at Tulane University’s Corporate Law Institute, which took place this past week. The posts include a number of interesting commentaries from members of the Delaware judiciary. Francis’s post (here) about Delaware law regarding the sale of companies is particularly noteworthy and interesting, particularly Vice Chancellor Strine’s remarks about the duties of boards of companies in the process of the sale of a company.

Death by Blogging?: Readers who may not appreciate how stressful it can be to maintain a blog may want to review the April 6, 2008 New York Times article entitled “In Web World of 24/7 Stress, Writers Blog Till They Drop” (here), which surveys the toll that blogging is taking on some authors.

While no one here at The D & O Diary seems to be in any immediate danger, maintaining the blog is unquestionably stressful. The authors described in the Times article are (or rather, were) at least getting paid for their troubles, whereas The D & O Diary lacks even that consolation. Our blogging efforts defy Samuel Johnson’s sage words that “No man but a blockhead ever wrote except for money” — words that we frequently contemplate to our distress. Yet on we blog, as if by compulsion. A blog is indeed a harsh mistress.

On April 1, 2008, the Wilmer Hale law firm released a report entitled “West Coast Securities Litigation & Enforcement” (here), in which the law firm reports, among other things, that “investors sued 44 public companies in the West in 2007, a striking 56 percent increase over 2006, reversing what some had hoped was a permanent post-Enron decline in securities class actions.” A copy of the law firm’s April 1 press release about the report can be found here.

The report attributes the “surge” in filings against West Coast companies to the “subprime crisis” which “precipitated lawsuits.” The report also attributes the apparent “upswing in filings” to the “increased capacity of the dozen-plus law firms that bring most of these class actions.”

The report notes that while there were more lawsuits filed, there were also more lawsuits dismissed (29) than settled (18) in the Ninth Circuit during 2007, from which the report happily concludes that “last year’s spike in filings was the product of opportunistic lawyers filing in a falling stock market, and not an indication that corporate malfeasance is on the rise.”

The report also considers 2007 settlement developments and concludes that “it has become cheaper to settle in the Ninth Circuit,” based on the fact that in 2007, the median West Coast settlement was $6 million, the “lowest point since 2004” and 40% below the national median of $9.6. The report concludes because of the lower settlement figures that “the recent wave of California cases appears weaker than those filed in New York and elsewhere and –as in the past – negotiated settlements reflect the financial condition of the defendant issuer or the magnitude of the market loss.” The report also notes that “favorable dismissal rates may have – indeed, should have – encouraged plaintiffs’ lawyers to scale back their expectations.”

The report also has a number of interesting observations about the backlog of pending options backdating cases. The Ninth Circuit courts have been “far less receptive to those cases than have courts in the other regions.” In addition, West Coast issuers “have successfully defended a large number of [options backdating-related] derivative actions; by year end, courts had dismissed 14 such cases and allowed only two to proceed.” The report notes that West Coast courts have thrown out a number of options backdating-related securities lawsuits, while courts in other jurisdictions have permitted these cases to go forward.

The report concludes with a number of observations about the activities of the SEC’s West Coast enforcement offices, which offices apparently remain active.

The law firm’s report is interesting, but many of the report’s statistical observations consist of numerators yearning for denominators to give their existence meaning.

First, while the number of lawsuits against companies based in the Ninth Circuit may well have increased 56% percent between 2006 and 2007, lawsuits overall increased 43% (going from 116 lawsuits in 2006 to 166 in 2007, according to Cornerstone, here). The report’s feature stat would be significantly less compelling had the report more accurately stated that increase in the number of lawsuits on the West Coast in 2007 was 13% greater than the increase nationwide.

Second, the methodology used to conclude that California companies were 63% likelier to be sued than companies elsewhere in not revealed. For example, is report saying that the ratio of California companies sued to the total number of companies in California is 63% higher than the same ratio for all other states? Or is the report just making some comparison about the raw numbers of 2007 lawsuits against companies inside and outside California? It would have been helpful for the report to specify its methodology, because this particular conclusion is, well, challenging, given that 52 of the 166 securities lawsuits in 2007 were filed in the Southern District of New York, far more than any other federal district. (Refer here for my full analysis of the 2007 lawsuit filings.)

Third, the report seems to imply that the West Coast companies are being sued because they are located on the West Coast.. The report is written by the law firm’s West Coast office and is clearly intended for West Coast companies, and the statistical analysis is clearly intended to convey meaning for those companies as West Coast companies.

But if plaintiffs’ lawyers really were targeting West Coast companies as West Coast companies in 2007, you would expect the lawsuits against the West Coast firms to have continued in 2008. Actually, the exact opposite has happened. While West Coast companies arguably were sued frequently in 2007, they have been sued infrequently in 2008. Through the first quarter of 2008, only six companies located in the Ninth Circuit have been sued in securities lawsuits, even though the number of filings overall in the first quarter  (52) was up compared the number of filings in 2006 and 2007, as I detailed in yesterday’s post.

The increased number of lawsuits against West Coast companies in 2007 can only have meaning for those companies as West Coast companies if the reduced number of lawsuits against West Coast companies so far in 2008 also has meaning for the companies as West Coast companies. The strong suggestion is that something other than geography alone explains both ends of this equation.

(As an aside, the potential role of geography in predicting securities lawsuit frequency was a recurring statistical question in my former life as a D & O underwriter. Brokers in the Midwest contended that Midwestern companies were less likely to be sued, and therefore all Midwestern companies should receive a D & O insurance premium discount. We could never prove that geography alone was an accurate predictor of securities litigation frequency; rather, what we found was that geography coincided with some other factor – usually industry – that was the true frequency predictor. An esteemed former colleague who taught me everything I know on this topic referred to this phenomenon as “multicollinearity “.)

The report also strains when it attempts to use the 2007 dismissals and settlements to analyze the 2007 filings.

Obviously, the cases that were dismissed or settled in 2007 were mostly filed before 2007. The fact that cases filed before 2007 were dismissed in 2007 really doesn’t tell you whether or not the cases filed in 2007 are meritorious or if “corporate malfeasance” is or is not “on the rise.” It is likely that the cases dismissed or settled in 2007 were actually filed over the course of several calendar years, so the raw numbers of dismissals, settlements and filings in a single calendar year may have little or no meaningful interrelationship, and further data (such as, for example, the total number and filing dates of pending cases) is required to make any useful comparisons or even to try to conclude, for example,  that West Coast courts have become "less receptive."  

The fact that median settlements in 2007 in the Ninth Circuit were lower than prior years’ median settlements tells you only that the median was lower. It does not tell you whether or not the 2007 settlements were “cheaper” than settlements in prior years in the Ninth Circuit or than 2007 settlements elsewhere, as these kinds of comparisons require not only the dollar figure at which the cases settled, but also the amount of investor loss that was at stake for each case category compared. Without further information, there is no way to know whether or not the lower 2007 median is simply due to smaller cases being settled in 2007 than in prior years in the Ninth Circuit, or in 2007 elsewhere. There is certainly nothing about the lower 2007 median alone that analytically supports the view that 2007 cases filed in California are “weaker than those filed in New York and elsewhere.”

The report’s commentary about the options backdating cases is interesting, and the most useful addition I can make to the report’s analysis about option backdating case dispositions is to refer readers to my running list of options backdating settlements, dismissals and denials, which can be accessed here.

And finally, because I can’t seem to write a concluding paragraph for this post without discretion making me hit the delete button, that’s a wrap.

Driven by the growing wave of subprime-related litigation (particularly a spate of auction rate securities lawsuits), the number of new securities class action lawsuit filings surged in March 2008. The total number of new securities class action lawsuit filings — 25 – matches the number of new filings in November 2007, which in turn represented the highest monthly total of new filings since January 2005.

The 25 new securities lawsuits in March included 14 new subprime-related suits, taking account the new auction rate securities filed against J.P. Morgan Chase on March 31, 2008 (about which refer here). Of the 14 subprime-related suits, eight (including the new J.P. Morgan Chase lawsuit) were brought on behalf of auction rate securities investors against the companies that sold them the instruments. The remaining lawsuits (both those that are subprime-related and those that are not) were brought on behalf of public company shareholders against the companies and their directors and officers, other than one lawsuit brought on behalf of mutual fund investors.  

Largely because of the subprime-related litigation, many of the March lawsuits were filed in the United States District Court for the Southern District of New York – a total of 11 of March’s 25 new securities lawsuits were filed in the S.D.N.Y. Six of the new securities lawsuits filed in March involved companies domiciled overseas.

With the addition of the 25 new lawsuits in March, the total number of new securities lawsuits filed in the first quarter of 2008 totaled 52, of which 24 are subprime-related. All of the auction rate securities lawsuits were filed in March. (A complete list of the subprime-related lawsuits can be found on my running tally of subprime lawsuits, which may be accessed here.)

The 52 new securities class action filings in the first quarter of 2008, if extrapolated across four quarters, imply an annual filing rate of 208 new securities class action lawsuits, which is consistent with historical norms. (According to Cornerstone’s year-end 2007 securities analysis, here, the average number of securities class action filings during the period 1997 to 2006 is 1994). However, while this filing rate is consistent with historical levels, it is well above the annual levels seen in the most recent years, particularly 2006 (116) and 2007 (166).

Again, largely due to the number of subprime-related filings, the S.D.N.Y had the largest number of first quarter filings, with 21. The federal district with the next highest numbers of filings, D.Mass., had only five.

The companies sued in new securities lawsuits in the first quarter represented 31 different Standard Industrial Classification (SIC) Code categories, which might suggest that a broad diversity of companies were sued, but in most of those 31 categories only a single company was sued. The SIC Code categories with the largest numbers of companies sued were SIC Code category 6211 (Security Brokers and Dealers), with 7 companies sued, and 6021 (National Commercial Banks), with 6 companies sued. In all 29 companies in the 6000 SIC Code series (Finance, Insurance and Real Estate) were sued in the first quarter.

Nine of the companies sued for the first time in the first quarter of 2008 were domiciled overseas, representing eight different countries (including Switzerland, in which two of the companies are domiciled; the other seven countries had only one each.)

Six on the companies sued for the first time in the first quarter of 2008 had completed an initial public offering less than 12 months before the date of the first-filed lawsuit.

A final word about my lawsuit count: I am largely dependent on publicly available sources for my information about securities class action filings, although I have been able to supplement my information with data and links supplied by readers. (I am always grateful when readers bring information to my attention). I have compared my count to the information available on the Stanford Law School Securities Class Action Clearinghouse website (here) and have elected to omit certain cases that the Stanford site has included, largely because at least three of the cases listed on the Stanford site do not involved publicly traded companies. I will say that the diversity and variation of cases that have arisen in the last few months have created some very difficult categorization issues, and reasonable minds clearly could differ as to whether any particular case should or should not be “counted.”

While the securities class action lawsuit filing rate has fluctuated since mid-2007, the evidence remains consistent that the "lull" in filings that occured between mid-2005 and mid-2007 is over. It does remain to be seen if the filings will continue at their current rate, especially whethter factors such as the auction rate securities crisis will continue to drive litigation. On the other hand, the litigation activity is being driven by so many different aspects of the current crisis, it seems probable that subprime and other credit-related litigation will continue to accumulate. The more interesting question may be the extent to whcih the credit crisis litigation will spread beyond the financial sector.

A Further Thought about Securities Class Action Settlements: Earlier today I posted about the new Cornerstone report on 2007 class action settlements. The report is interesting and includes useful analysis and information. But upon reflection, it occurred to me that it is increasingly the case that class action settlement data alone may not provide all of the information necessary to understand the costs involved in resolving securities lawsuits. As I have noted in numerous prior posts (refer here), class opt outs are an increasingly important part of securities lawsuit resolution, a development that gained considerable momentum during 2007. Indeed, as I note here, the aggregate amount required to settle the Qwest opt-out actions actually exceeded the amount of the class settlement, and the amount paid in settlement of other opt actions is also very substantial.

For that reason, any assessment of the total costs involved in securities case resolution cannot be limited to class action settlements alone. The costs involved with separate opt-out actions must also be considered.

On March 31, 2008, Cornerstone Research released its review and analysis of 2007 securities class action settlements. Cornerstone’s press release can be found here and the full report can be found here. The Cornerstone Report differs in certain particulars from the previously released NERA Economic Consulting report (about which refer here), but the two reports are directionally consistent.

Cornerstone’s press release emphasizes that the aggregate dollar value of all settlements was down 60% compared to 2006, but the full report emphasizes that, when the four largest settlements are removed from the analysis, the aggregate value of all settlements in 2007 exceeded all prior years except the unprecedented year of 2006.

The full report also highlights that the median securities class action settlement reached an all-time high of $9.0 million in 2007, compared to a median of $6.9 million for the years 1996 through 2006. The increase in the median settlement in 2007 is “partly due to the fact that the percentage of cases settling for $10-20 million increased substantially from prior years.” On the other hand, the number of settlements in excess of $100 million declined from 14 in 2006 to only nine in 2007.

According to the Cornerstone report, the average securities class action settlement fell from $105 million in 2006 (excluding the Enron settlement) to $62.7 million in 2007. But the 2007 average still exceeded the average of $54.7 million for the years 1996 through 2006.

The Cornerstone report examines the factors affecting settlement amounts and concludes that the presence of institutional investors lead plaintiffs and the existence of parallel shareholders’ derivative lawsuits both tend to have an upward effect on settlement values.

The press release quotes Stanford Law Professor Joseph Grundfest as saying that “it seems clear that the aggregate dollar value of settlements over the next two or three years is likely to decline significantly because the inventory of large cases in the pipeline just isn’t there. The interesting open question is whether the subprime crisis will cause an uptick in securities fraud settlement activity that might, given the settlement cycles in the litigation industry, only become apparent three to five years from now.”

The differences between the analysis in the Cornerstone and NERA Economic Consulting reports appears to be due at least in part to the different methods the two studies used to categorize settlements by settlement year, with one report categorizing the settlements by the year in which the settlement was announced and the other report categorizing the settlement by the year in which it was approved.

As the markets for various types of subprime-related assets have seized up, many companies find themselves faced with complicated issues concerning asset valuation and disclosure. These issues have in turn both subjected companies to the possibility of litigation and encouraged investors to target the entities and institutions that sold them the assets in the first place. The extent of the asset valuation and disclosure issues suggests that the turmoil, and the ensuing litigation, will continue to spread.

One example where the valuation and disclosure issues have already led to litigation involves the securities class action lawsuit filed in the United States District Court for the District of Minnesota on March 28, 2008 against MoneyGram International and certain of its directors and officers. A copy of the plaintiffs’ attorneys’ press release can be found here and a copy of the complaint can be found here.

The complaint against Moneygram relates to the company’s January 14, 2008 press release (here) in which the company stated that it had completed its valuation of its investment portfolio as of November 30, 2007, as a result of which the company said that it had “experienced net unrealized losses of $571 million from September 30, 2007, bringing cumulative net unrealized losses to $860 million.” The company also announced that it has commenced a process to “realign is portfolio away from asset-backed securities,” as a result of which it had realized in January a loss of $200 million on asset sales of $1.3 billion.

According to the plaintiffs’ lawyers’ press release, the complaint alleges that the defendants “concealed from the investing public” that:

(a) the Company lacked requisite internal controls to ensure that the reserves for the Company’s investments in asset-backed securities were adequate, and, as a result, the Company’s projections and reported results issued during the Class Period were based upon defective assumptions and/or manipulated facts; and (b) the Company concealed the extent of its potential losses arising from its exposure to asset-backed securities containing uncollectible debt.

The prospect of securities litigation arising from asset valuation and disclosure issues is a potentially very substantial problem, because so many companies are facing these same kinds of issues due to asset-backed securities in their investment portfolio. Similarly, companies holding auction rate securities are facing particularly challenging valuation and disclosure issues, and as I have previously noted (most recently here), these challenges are not limited to companies in the financial sector, but indeed are widely dispersed throughout the economy. For example, a March 28, 2008 Wall Street Journal article entitled “’Auction Rates’ Clip Tech Firms’ Profits” (here) discusses the financial impacts that a variety of technology companies are facing because of the companies’ inability to convert their auction rate securities holdings into cash.

One measure of the depth of the problems arising from the failure of the auction rate securities market is that it is not just companies whose balance sheets are under pressure. Many households and individuals are also now about to recognize their own personal balance sheet hits due to the auction rate problem. According to a March 29, 2008 Wall Street Journal article entitled “UBS Plans Auction-Rate Price Cut” (here), UBS is going to lower the values of the auction rate securities held by its customers. The reduced values, which will be based on computer models and “will range from a few percentage points to more than 20%” will be reflected on their customers’ forthcoming statements.

As I have previously noted (most recently here), investors have already filed a number of class action lawsuits against the companies that sold them auction rate securities, and on March 27, 2007, Citibank became the latest to be sued in a securities class action on behalf of investors for its sale of auction rate securities (see press release here and complaint here). The reduction of the carrying values of auction rate securities on investors’ statements will likely further bestir investors and could lead to even more litigation. But making no adjustments could create a different set of issues and lead to greater problems later.

The question of how best to reflect the valuation of assets for which there is no current market is one that potentially affect participants at all levels of the economy. And while there undoubtedly will be more lawsuits on behalf of investors against the companies that sold them the auction rate securities, a potentially greater litigation threat may arise from shareholders who may contend they were misled about a company’s balance sheet exposure to these kinds of assets. There could well be a great deal of litigation in which it is alleged, as asserted in the complaint in the MoneyGram case, that a company failed to disclose the “extent of its potential losses arising from its exposure to asset-backed securities containing uncollectible debt.”

The extent of the problem shall be revealed in the fullness of time. But meanwhile the subprime-related securities class action litigation still continues to accumulate. With the addition of the MoneyGram and Citigroup lawsuits, my running tally of subprime-related securities lawsuits (which can be accessed here) now stands at 61, 23 of which have been filed in 2008, and seven of which are filed on behalf of auction rate investors against the companies who sold them the securities.

As I have noted in prior posts (most recently here), due to increasing average claims severity and escalating defense expense, excess D & O insurance is an increasingly important factor in the resolution of claims involving directors and officers of public companies. The greater involvement of excess D & O insurance has also meant an increasing number of claims disputes involving excess D & O insurers.

A recurring issue has been the question of the excess carrier’s obligations when the primary carrier has paid less than its full policy limits as a result of a compromise with the primary carrier. A March 25, 2008 opinion (here) by California’s intermediate appellate court held, that given the policy language involved, an excess D & O insurance policy was not triggered where the underlying insurer neither paid nor was obligated to pay its full policy limit of liability.

For the policy period March 15, 1999 through March 15, 2000, Qualcomm had $40 million of D & O insurance, structured with a primary layer of $20 million and an excess “follow form” layer of $20 million above the primary $20 million. During the policy period, Qualcomm employees and former employees brought lawsuits asserting rights to unvested company stock options. Qualcomm later settled these lawsuits and sought reimbursement from its D & O insurers for its defense expense and the settlement amounts.

Qualcomm ultimately reached a compromise with its primary D & O insurer, whereby Qualcomm gave the primary insurer a full policy release in exchange for the primary carrier’s payment of $16 million. Even with this $16 million payment, however, Qualcomm still had unreimbursed defense expense of $3.6 million and also had an additional unreimbursed $9 million in settlement expense.

In October 2006, Qualcomm sued its excess D & O insurer for breach of contract and declaratory relief, seeking compensatory damages as well as a judicial declaration that the excess carrier was obligated to indemnify Qualcomm for more than $9 million in unreimbursed expenses. The excess carrier contended, among other things, that the underlying policy had not been “exhausted” as required by the excess policy. The excess policy’s exhaustion clause provided that the excess carrier “shall be liable only after the insurers under each of the Underlying policies have paid or have been held liable to pay the full amount of the Underlying Limit of Liability.”

The trial court sustained the excess carrier’s demurrer (in effect, granted the carrier’s motion to dimiss) without leave to amend on the grounds that the excess policy had not been triggered, and Qualcomm appealed.

On appeal, Qualcomm argued that an excess carrier was liable for losses exceeding the actual limits of underlying primary insurance, even where the primary carrier settled for less than the actual policy limit. Qualcomm also argued that denying excess coverage in the circumstances presented would be contrary to public policy because such a denial would work a forfeiture, provide a windfall to the excess carrier, and encourage litigation by discouraging settlement.

The court of appeals declined “to reach a broad holding on public policy considerations” and instead concluded that “the literal policy language in this case governs.” The court said that the excess policy was not triggered because Qualcomm’s pleadings “establish that the primary insurer neither paid the ‘full amount’ of the liability limit nor had it become legally obligated to pay the full amount of the primary limit.” The court said that

the exhaustion clause here compels us to conclude that the parties expressly agreed that [the primary carrier] was required to pay (or be legally obligated to pay) no less than $20 million as a condition of [the excess carrier’s] liability. Because [the primary carrier] did not so pay, [the excess carrier’s obligations] did not arise.

The Qualcomm decision is consistent with the 2007 decision in the Comerica case, about which I wrote here, and which the Qualcomm court said presented “factual circumstances almost identical to those present in this case." This developing line of case authority has important implications both for the claims resolution and for the insurance acquisition processes.

Let me say at the outset that I am not attempting to criticize the position taken by the excess carrier in the Qualcomm case. Given the court’s ruling, it would be difficult to suggest that the carrier’s legal position was not well founded, and I do not propose to do so here.

In general, however, a claims outcome where a policyholder is stuck with millions of dollars of unexpectedly uninsured claims, after having funded a coverage gap as a result of a compromise with the primary insurer, and after having paid substantial insurance premiums, is highly undesirable from the policyholder’s perspective. Indeed, everyone involved in the D & O insurance industry, including ultimately even excess D & O insurers, has an interest in avoiding claims outcomes where policyholders gets “stuck,” as the value component of the insurance equation—the very thing that insurers’ sell – depends on the policyholders’ not getting “stuck.”

By the same token, the industry could be doing its customers and itself a service by keeping track of claims activity that produces adverse policyholder outcomes, whether it is a primary carrier that is hotboxing the policyholder into making a compromise or an excess carrier that is refusing to play along. Our industry could be improved were it to keep track of the carriers whose claims decisions result in policyholders getting “stuck” – by keeping track the industry might ensure that claims decisions involve not only detached legal analysis but also due consideration of the concrete business assumptions on which our industry ultimately depends.

At a minimum, it is increasingly clear that policyholders should consider only global compromises, involving all insurers, as any other arrangement could leave the policyholder exposed.

The Qualcomm decision has lessons for the policy acquisition process as well. The outcome in the Qualcomm case was a direct reflection of the excess policy’s exhaustion trigger language. While alternative language was not generally available at the time Qualcomm placed the D & O program involved in that case, many excess D & O carriers now offer exhaustion trigger language that reduces the restrictions on the kinds of payments that could trigger the excess carrier’s payment obligation. Indeed, many policies recognize payment by the policyholder as satisfying the underlying limit. The need for these issues to be address in the insurance placement process underscores the need to have skilled insurance professionals involved in the D & O insurance acquisition process.

Special thanks to John McCarrick of the Edward Angell Palmer & Dodge law firm for providing me with a copy of the Qualcomm decision. I should add that the views expressed in this post are solely my own.

In a sweeping 581-page report (here), the examiner appointed in connection with the New Century Financial Corporation bankruptcy found that New Century “engaged in a number of significant improper and imprudent practices related to its loan originations” that “created a ticking time bomb that detonated in 2007.”

Bankruptcy examiner Michael J. Missal issued his report as part of the investigation he undertook at the request of New Century’s bankruptcy trustee to examine “any and all accounting and financial statement irregularities, errors and misstatements.” The report is dated February 29, 2008, but it was unsealed on March 26, 2008 at the request of former New Century Employees.

The examiner’s report concludes that New Century “had a brazen obsession with increasing loan originations, without due regard to the risks associate with that business strategy.” The report also concludes that New Century “engaged in at least seven wide-ranging accounting practices in 2005 and 2006” that “resulted in material misstatements of the Company’s financial statements.” The examiner did not find sufficient evidence to conclude that New Century engaged in earnings management or manipulation “although its accounting irregularities almost always resulted in increased earnings.”

The report also states that New Century’s outside accounting firm, KPMG, “contributed to certain of these accounting and financial reporting deficiencies by enabling them to persist and, in some instances, precipitating the Company’s departure from applicable accounting standards.”

The report states that as a result of New Century’s accounting failures New Century understated its repurchase reserve in the third quarter of 2006 by 100%, and reported a quarterly profit of $63.5 million when it should have reported a loss.” In addition, the accounting errors resulted in the payment of performance bonuses to key executives in 2005 “that were at least 300% more than they should have been.” New Century also made “a number of false and misleading statements in its public filings, press releases and other communications.”

Based on his investigation, the examiner believes that “several causes of action may be available to the estate.” First, the report concludes that the estate may be able to assert causes of action against KPMG for “professional negligence and negligent misrepresentations.” Second, the estate may be able to assert causes of action against former officers “to recover certain of the bonuses… that were tied, directly or indirectly, to the incorrect financial statements.” These causes of action, the report states, “could seek million of dollars of recoveries.”

The examiner also considered whether the company’s former officials breached their fiduciary duties, and whether the estate has possible claims against the officials. The report notes that any assertion of these claims would have “strong defenses to overcome, particularly the business judgment rule and statutory and other limitations.”

While the examiner’s conclusions may (and undoubtedly will) be the subject of substantial debate, the report’s analysis of the company’s loan origination practices and accounting shortcomings is remarkably detailed. The sheer sweep and magnitude of the report and the depth of its detail could make New Century the poster child for the excesses of the subprime lending boom, evoking inevitable comparisons with Enron as the byword for an entire era. Indeed, the report suggests a number of echoes from that earlier period, including in particular the accounting firm’s supposed complicity in the company’s alleged excesses.

The fallout from the subprime meltdown will continue to accumulate in the months and years to come, but the New Century bankruptcy examiner’s report may represent the first installment on the history of the era.

A March 26, 2008 Bloomberg.com article discussing the examiner’s report can be found here. A March 27, 2008 Wall Street Journal article discussing the report can be found here.

Subprime litigation may be all the rage, but the consolidated IPO Laddering case is back in the news, a seemingly distant reverberation from a long-gone era that may nonetheless still vex the same investment banks caught up in the current subprime crisis. The consolidated Initial Public Offering Securities Litigation is going forward in the district court after the Second Circuit reversed the district court’s grant of class certification (refer here regarding the Second Circuit’s reversal). On remand back to the district court, the plaintiffs have amended their Master Allegations and Complaints in the six focus cases, and the defendants moved to dismiss.

In a March 26, 2008 opinion (here), Judge Shira Scheindlin substantially denied the defendants’ motion to dimiss and also made is unmistakably clear that the litigation is going forward.

Judge Scheindlin’s rulings in the March 26 opinion are largely consistent with her prior rulings in the case, and, indeed, in significant parts of her opinion she simply repeats her prior ruling and states “I see no reason to reconsider this decision.” However, in two particular areas, intervening Supreme Court case law required Judge Scheindlin to reassess her prior analysis. Judge Scheindlin made it clear that the intervening case law did not change her view of the case.

First, Judge Scheindlin reexamined the plaintiffs’ scienter allegations in light of the Tellabs decision. The plaintiffs assert two separate claims under Section 10(b). One is asserted solely against the Underwriter defendants and is based on alleged market manipulation (based on the alleged tie-in arrangement that required IPO share buyers to purchase additional shares at higher prices). The other Section 10(b) claim is asserted against all defendants and alleges misrepresentations and omissions regarding the alleged manipulation scheme.

With respect to the market manipulation claim, Judge Scheindler reaffirmed her prior ruling, reiterating that the alleged conduct was so obviously manipulative that “it could not have been done inadvertently,” and therefore the inference of scienter was at least as compelling as the competing inference.

With respect to the misrepresentation allegations, Judge Scheindlin focused on the allegation that the issuer defendants’ officers and directors allegedly held shares that were inflated by the price manipulation. She viewed this consideration with the fact that each of the issuer defendants used “inflated shares as currency” to acquire target companies, as well as the fact that two of the issuer companies (from among the six focus companies) “raised additional capital through secondary offerings.” Judge Scheindlin said that “when these and other allegations against each issuer are viewed as a whole, they are sufficient to plead scienter in each case.”

Judge Scheindlin also reconsidered her prior ruling on the issue of loss causation, in light of the Supreme Court’s decision in the Dura case. Judge Scheindlin found that the intervening case law does “not support a reversal of my earlier decision.” Judge Scheindlin said

the misstatement and omissions concealed the alleged market manipulation that caused plaintiffs’ losses, and without such misstatements and omissions, plaintiffs’ losses could not have occurred. Further, plaintiffs’ losses are those that could be expected to result from the concealment of the market manipulation scheme. Plaintiffs have thus pled loss causation.

Judge Scheindlin did grant the defendants’ dismissal motion on two narrow grounds. First, consistent with her prior rulings in the case, she dismissed claims brought under Section 11 by those plaintiffs who sold their securities for a price in excess of the initial offering price. Second, she dismissed certain plaintiffs who purchased their shares outside the previously certified class period.

And so the Initial Public Offering Securities Litigation will grind on, a vestige of an earlier time and place, its significance seemingly eclipsed by more recent and more momentous events. Yet the collective litigation nonetheless remains significant. Its sheer bulk and scale makes the prospect of any definitive global resolution challenging, a prospect even further complicated by the Second Circuit’s class certification ruling. The current circumstances make future course of the litigation seem even more uncertain.

I welcome readers thoughts on the immediate procedural direction likely in the litigation, as well as any views about where the litigation ultimately is headed.

Special thanks to Edward Carleton of the Boundas Skarzynski Walsh & Black law firm for providing a copy of the March 26 opinion.

Add Merrill Lynch and Morgan Stanley to the growing list of companies that have been sued in securities class action lawsuits by investors for allegedly deceptive representation in connection with the sale of auction rate securities. According to the plaintiffs’ attorneys’ March 25, 2008 press release (here), the plaintiffs’ have filed a securities class action lawsuit in the United States District Court for the Southern District of New York against Merrill Lynch and its asset management company on behalf of investors who purchased auction rate securities from Merrill Lynch between March 25, 2003 and February 13, 2008.  A copy of the complaint can be found here.

According to the press release, Merrill Lynch “offered and sold auction rate securities to the public as highly liquid cash-management vehicles and as suitable alternatives to money market mutual funds.” The complaint alleges that Merrill Lynch failed to disclose that  

(1) the auction rate securities were not cash alternatives, like money market funds, but were instead, complex, long-term financial instruments with 30 year maturity dates, or longer; (2) the auction rate securities were only liquid at the time of sale because Merrill Lynch and other broker-dealers were artificially supporting and manipulating the auction rate market to maintain the appearance of liquidity and stability; (3) Merrill Lynch and other broker-dealers routinely intervened in auctions for their own benefit, to set rates and prevent all-hold auctions and failed auctions; and (4) Merrill Lynch continued to market auction rate securities as liquid investments after it had determined that it and other broker dealers were likely to withdraw their support for the periodic auctions and that a “freeze” of the market for auction rate securities would result.

According to news reports (here), plaintiffs also filed a separate but substantially similar lawsuit against Morgan Stanley, raising more or less the same allegations on behalf of a class of investors who purchased auction rate securities from Morgan Stanley during the same class period as proposed in the Merrill Lynch lawsuit. I have not located the Morgan Stanley complaint itself, but will add a link when I get a copy.

UPDATE: A copy of the plaintiffs’ lawyers’ March 25, 2008 press release announcing the Morgan Stanley auction rate securities lawsuit can be found here and a copy of the complaint can be found here.

These two new lawsuits join a group of similar lawsuits, all filed by the same law firm on behalf of auction rate securities investors, against Deutsche Bank, Wachovia, TD Ameritrade and UBS. The law firm’s webpage describing these various lawsuits can be found here.

With the addition of these two new subprime-related securities class action lawsuits, my running tally of subprime related securities lawsuits, which can be accessed here, now stands at 59, of which 21 have been filed in 2008. Two of these 59 represent lawsuits brought on behalf of investors against mortgage-backed asset securitizers, six are class action lawsuits on behalf of auction rate securities investors, two are brought on behalf of mutual fund investors, and the remaining 49 of which are brought on behalf of public company shareholders.

Subprime Litigation Wave Hits Regions: Birmingham, Alabama-based Regions Financial Corporation has been hit with a couple of different subprime-related lawsuits as the subprime wave continues to spread beyond New York, California, and Florida, the states where the subprime litigation originally was concentrated.

First, according to a March 25, 2008 Birmingham News article (here), the Catholic Medical Mission Board, a Regions shareholder, has filed a shareholders’ derivative lawsuit against Regions, as nominal defendant, and certain Regions directors and officers, alleging that the defendants failed to disclose the extent of Regions’ lending exposure to residential homebuilders, which permitted company insiders to sell their shares in company stock at inflated prices. According to the news report, the complaint alleges that "Regions Financial’s stock was artificially inflated because the defendants directed the company to hide the true extent of its subprime exposure.’

The derivative complaint (which can be found here) asserts claims for breach of fiduciary duty, waste of corporate assets, unjust enrichment, and breach of Section 10(b) of the ’34 Act.

Second, Regions has also been hit with a lawsuit filed under ERISA on behalf of its participants in the Regions defined contribution plan. A copy of the complaint can be found here. The complaint alleges that the offered plan participants Regions stock and investment options in Regions Morgan Keegan funds “when it was imprudent to do so.” The complaint also alleges that the investment in Regions stock and the Regions Morgan Keegan funds was maintained “when it was no longer prudent to do so.”  The complaint alleges that the defendants knew or should have known that these investments were imprudent because of Regions and the funds heavy investment in or vulnerability to subprime mortgage investments, loans and securities. The complaint also alleges that the defendants failed to communicate the risks of investing in the plan and also failed to communicate conflicts of interest.

As noted on my running tally of subprime related litigation (which can be accessed here), with the addition of the Regions ERISA litigation, my running tally of subprime-related ERISA lawsuits now stands at 11.

I have not been keeping a running tally of subprime-related derivative litigation (basically because the primarily state court oriented litigation is hard to track), but there has been substantial subprime related derivative litigation, involving, among others, Bear Stearns, American International Group, and Countrywide.

Special thanks to alert reader Rob Lichenstein for the links to the two Regions lawsuits and the Birmingham News article.

About the Bear Stearns Deal: If as I do you find many of the articles discussing the updated Bear Stearns deal confusing, you will want to read a couple of interesting posts on the Conglomerate blog, that provide insight into a couple of points about the revised deal that have received significant press attention.

First, there has been a great deal of discussion in the press about the possibility that the improved buyout offer may have resulted in part from drafting errors in the initial deal documents. BYU law professor Gordon Smith deconstructs this issue in a detailed Conglomerate blog post here (here), with helpful citations and cross-references to other blogs. Smith’s analysis of the differences between the original and the revised deal documents raise some interesting questions about what J.P. Morgan seems to have sought by offering revised terms. Bottom line, in exchange for the improved merger price, J.P. Morgan has eliminated the provisions that would have kept the deal open for a full year, and also obtained a 39.5% ownership interest as a means to try to ensure that the deal is concluded.

Second, and with respect to that 39.5% ownership interest transfer, Smith has a separate post on Conglomerate (here), that explores the Delaware case law behind the 39.5% interest and the limitations on share transfers to lock in shareholder merger approvals. As Professor Smith’s post notes, there is no automatic cutoff under Delaware law whereby a company can sell up to 40% of itself without shareholder approval, and suggestions to that effect in the mainstream media are “what is known in the law biz as ‘wrong.’” Practitioners have evolved the 40% rule of thumb, but “none of this has been tested in court.”

More About the FCPA: Regular readers know that I have frequently commented (most recently here) on the growing importance of Foreign Corrupt Practices Act enforcement proceedings and follow on civil litigation. Two recent publications provide significant additional information on this topic.

First, a March 25, 2008 Law.com article entitled “Today, No Bribe is Too Small” (here), takes a look at the expanding reach of enforcement activities. As the title suggests, the article looks at some seemingly small corrupt transactions that have attracted regulatory attention. The article states that “it seems that no bribe is too small to earn the attention of the department.” The article also focuses on regulatory actions that have been taken by middlemen and third party contractors, and how those seemingly remote actors’ actions have come back to haunt the sponsoring company.

Second, in a much more detailed look at recent FCPA enforcement activity, Porter Wright attorney Tom Gorman has recently posted a running series on the issues involved in recent FCPA regulatory actions on his SEC Actions blog. The most recent post can be found here. Taken collectively, these posts present an excellent overview of the current state of FCPA regulatory actions.

Finally, readers who recall my recent post (here) about the civil litigation arising from potentially problematic activities involving Alcoa’s operations in Bahrain will be interested to note that the U.S. Department of Justice has initiated a criminal investigation of the activities, and in that connection has asked for the entry of stay in the civil proceedings,  as discussed in a March 21, 2008 Wall Street Journal article entitled “U.S. Opens Alcoa Bribery Probe” (here).