The D&O Diary’s European Sojourn finished up last week with a return visit to London. I returned to London in order to attend an event postponed from the week before. Although the postponement required me to extend my travels for a few more days, it did also mean that I got a bonus day in London, as reflected in the pictures below.
Continue Reading Back in London
The D&O Diary’s European assignment continued last week with a long weekend stopover in the French capital city of Paris. February is not the month usually associated with the French city’s romantic image, but the weather was not too bad and it turned out to be a fine time for a visit.
There were two primary purposes for our visit. The first was to attend the Van Gogh exhibit at the Musée d’Orsay and the second was to attend the Opera at the Théâtre des Champs-Élysées on Friday evening. Both events far exceeded expectations.
Our Paris tour also included visits to several lesser-know museums in the city. For example, on the recommendation of a work colleague, we visited the Musée National de la Marine, which is located in the Palais de Chaillot, across the river from the Eiffel Tower.
We also went to several smaller art museums throughout the city. Among Paris’s many great treasures are these numerous small little jewel box museums, many of which are full of unexpected delights.
The only bad part about visiting Paris is that eventually you have to leave — in my case, to go back to London for the event that had been postponed from the week before. But we did establish, as if there were any doubt, that even in February, Paris is still Paris.
In what is apparently the largest privacy and cybersecurity-related securities class action lawsuit settlement ever, the parties to the Alphabet Google+ user data securities suit have agreed to settle the action for $350 million. As discussed below, this massive settlement, which is subject to court approval, is significant for a number of important reasons. A copy of the parties’ February 5, 2024, Stipulation of Settlement can be found here. The plaintiffs’ February 5, 2024, motion for preliminary settlement approval can be found here.
Continue Reading Alphabet Google+ User Data Privacy-Related Securities Suit Settles for $350 Million
Three of the five largest bank failures in U.S. history took place over the course of just a few weeks last Spring. Because U.S. government officials acted forcefully at the time, this dangerous sequence did not trigger a contagion event across the banking sector generally. But while the Fed and others managed to stave off further bank failures, underlying problems persisted at certain banks – in particular, problems relating to the commercial real estate sector continued to weigh on banking institutions. As the Wall Street Journal put it in an article late last week, “Investors have wondered when the pain from the downturn in commercial property would hit banks.” As the Journal noted in the same article, the commercial property-related pain has now arrived for some banks. Several banks, including New York Community Bancorp (NYCB), suffered significant stock price drops after the banks last week announced steep increases in their loss reserves in their commercial real estate portfolios.
And now these developments have translated into securities litigation, as a plaintiff shareholder has launched a securities class action lawsuit against NYCB and certain of its executives. These developments and the filing of the lawsuit suggest while the Banking Crisis of 2023 may have been contained, continuing problems in the banking sector could be a factor in the number of securities class action lawsuit filings during the year. A copy of the February 6, 2024 complaint filed against NYCB can be found here.
Continue Reading Commercial Real Estate Woes Weigh on Bank, Lead to New Securities Suit
As I noted in a post at the time, last Fall, the U.S. Supreme Court in the Macquarie Infrastructure Corporation v. Moab Partners, L.P. case agreed to take up the question of whether whether the failure to make disclosure required by Item 303 of Reg. S-K is an actionable omission under Section 10(b) and Rule 10b-5. In January, the Court heard oral argument in the case. In the following guest post, Sarah Eichenberger and Jonathan Rotenberg, Partners in the Securities Litigation practice at the Katten law firm, discuss the questions the Justices as asked the oral argument and assess the possible outcomes of the case, as well as the potential significance of the outcomes. I would like to thank Sarah and Jonathan for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Sarah and Jonathan’s article.
Continue Reading Guest Post: Supreme Court Considers Whether Pure Omissions Can Support Section 10(b) LiabilityIn the following guest post, Anne Catapano, VP Financial Lines Claims, Ascot Insurance Company, Christina Errico, VP, Professional Liability Claims Manager, Ascot Insurance Company, Elan Kandel, Member, Bailey Cavalieri LLC, James Talbert, Associate, Bailey Cavalieri LLC and Tyler Hopkins, Associate, Bailey Cavalieri LLC, review the past year’s key management and professional liability insurance coverage decisions. I would like to thank the authors for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ article.
Continue Reading Guest Post: Year in Review: 2023 Key Management and Professional Liability Insurance Coverage Decisions
The D&O Diary was on assignment in Europe last week, with first stops in Dublin and London. Late January may not seem like the ideal time to visit Ireland and England. Though the weather was chilly and darkness gathered early in the afternoon, it turned out not to be a bad time to visit after all.
Continue Reading Dublin and London
Governance Issues frequently are the heart of corporate and securities lawsuits. For that reason, the testimony in this type of litigation of corporate governance and management practices experts can be indispensable. In the following guest post, Dr. Stephen Grace, President and Founder of H.S. Grace & Company, Inc., Alvin H. Fenichel, CPA, Senior Advisor at H.S. Grace & Company, Inc., and Joseph P. Monteleone, Esq., the Principal in Catamount Services LLC, take a look at the ways in which the testimony of these experts can be utilized in these kinds of lawsuits, as well as the related question of who is qualified to serve as a governance expert. I would like to thank the authors for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ article.
Continue Reading Guest Post: Is It Ever Too Early To Engage A Corporate Governance Expert?
Portions of the U.K. Economic Crime and Corporate Transparency Act 2023 went into effect just after Christmas 2023. Who are the senior manager that the Act affects and how worried should they be? These are the questions Francis Kean, Partner in Financial Lines Team at McGill and Partners, asks in the following guest post. A version of this article previously was published online by The Chartered Governance Institute for UK and Ireland. I would like to thank Francis for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Francis’s article.
****************************
On 26th December 2023, the attribution rules relating to corporate criminal responsibility for economic crimes were extended to senior managers under The Economic Crime and Corporate Transparency Act 2023 (ECTA). So, who are senior managers for this purpose, and should they be worried? ECTA also introduces a new corporate offence of failure to prevent fraud which will come into force when the Government publishes relevant guidance (expected early 2024). What are the implications of this for companies and their employees?
Background
The Serious Fraud Office and other prosecutorial authorities in the UK have long been campaigning for reform of the so called identification principle. The position in common law dating back to a House of Lords decision in 1971 is that only if those persons identified as the “directing mind and will” of a company commit an offence (and have the requisite guilty mind to commit such offence), will the company be guilty of it.
The problem here is that companies are legal constructs. For those corporate offences which require knowledge or intent, prosecutors must establish that such knowledge or intent resides with one or more individuals. That proved a challenge especially for companies with large executive teams which presided over complex businesses. (English courts, unlike the counterparts in the US, do not permit knowledge or intent to be aggregated between individuals.) Therefore, by expanding the net of individuals whose acts and knowledge can be attributed to the company, ECCTA addresses this issue for certain categories of crime while the common law rules are preserved for the rest.
Who are senior managers?
For better or worse, ECTA borrows the definition from the Corporate Manslaughter and Corporate Homicide Act 2007 (CMCHA) under which “senior management” means any person who plays a significant role in:
(a) the making of decisions about how the whole or a substantial part of the company or partnership’s activities are to be managed or organised, or
(b) the actual managing or organising of the whole or a substantial part of those activities.
The Explanatory Notes to the CMCHA state that this covers both those in the direct chain of management and those in, for example, strategic or regulatory compliance roles. Whilst directors and officers are plainly and deliberately in scope, it is less clear whether all those involved in taking decisions relating to corporate strategy and policy in areas such as finance, risk management and legal affairs will also be. Much will depend on the size and structure of the company concerned.
An obvious question is as to the meaning of “substantial” in this context. This has yet to be litigated under the CMCHA but prosecutors are likely to look at what an individual’s role and responsibilities are within the organisation and the level of managerial influence they exert, rather than solely their job title. A further fact-sensitive question (and requirement under ECTA) is whether the particular senior manager has acted within the scope of his or her “actual or apparent authority.”
The new offence of failure to prevent fraud
In addition to the expansion of the scope of corporate criminal liability to all companies and across a long list of offences based on economic crime including fraud and theft, Section 199 of ECTA introduces a new criminal offence of failure to prevent fraud. This is modelled on the equivalent offence created under Section 7 of The Bribery Act 2010 and applies to “relevant bodies” who are guilty of an offence when “a person associated with that body commits a fraud offence intending to benefit the relevant body.”
“Person” for this purpose is not limited to senior managers but extends to all employees and arguably also to other entities within the company’s supply chain.
“Relevant Body,” however, is limited to large organisations i.e. ones which in the year preceding the fraud:
As with the Bribery Act offence, a defence is available if the relevant body can demonstrate that it had in place fraud prevention measures that were reasonable in all the circumstances (or that it was reasonable not to have any). The Government has promised to publish guidance on what it considers constitutes “reasonable fraud prevention measures” early in 2024 and the new offence will come into force after that. It is nevertheless likely that large organisations will already be conducting reviews of their systems and controls aimed at preventing fraud and that this issue will (or should) be finding its way onto boardroom agendas in the near future.
Conclusion
A bit like London buses, after waiting a long time, two significant criminal legislative changes have come along at the same. Interestingly there does not seem to have been much discussion so far of the potential interplay between the two. It is now unquestionably, easier to bring a prosecution for fraud (among other economic crime offences) directly against virtually any company based on the extension of the identification principle to senior managers. At the same time, an additional weapon has been added to the prosecutors’ arsenal but only in respect of large organisations for failing to prevent fraud. It seems not impossible, however, that prosecutors may opt to pursue both options on the same set of facts.
What does this mean in practice for companies and senior managers? It is likely that companies will be taking advice from HR consultants, lawyers and others as to which categories of employees in a large organisation might qualify as “senior managers” and thus be potential vehicles for the new corporate offence. (It is worth emphasising that under the new attribution rules, prosecutors do not need to establish that the senior manager was seeking through his or her conduct to benefit the company in any way). Additionally, they may wish to focus on the particular job and role descriptions of such individuals and especially on the question as to their “actual or apparent authority” within the relevant company on which corporate criminal responsibility also rests.
Whilst the legislative changes may not directly increase personal liability of senior managers or other employees for any new substantive offences, they do place a new spotlight on the conduct of such individuals and make it perhaps more desirable than ever before that such individuals have access to independent legal advice before submitting to what may turn out to be a gruelling series of external and internal interviews regarding their conduct. In that context, it may be desirable to ensure that such advice is covered and paid for under any directors and officers (D&O) liability insurance.
Finally, a potential effect of this increased scope for corporate criminal liability in respect of future prosecutions is the corresponding increase in scope for deferred prosecution agreements between prosecutors and companies. Here, the scope for pursuing separate subsequent criminal proceedings against individuals based on their own conduct is usually expressly preserved. Again, in this context,
D&O insurance is likely to be of prime importance to senior managers, not least because the company may have little interest in indemnifying the individuals concerned.
This article is intended to highlight general issues and benefits relating to its subject matter and does not take into account the individual circumstances or requirements of individual recipients. Specific advice about your particular circumstances should always be sought separately before taking any action based on this publication.
Most readers of this site are acquainted with or at least aware of the Illinois Biometric Information Privacy Act (BIPA). In the following guest post, written by Jennifer Weinstein, Senior Claims Manager, Management Liability Claims, Intact Insurance Specialty Solutions, and Jamie Filipovic, Partner, O’Hagan Meyer, LLC, the authors explain that we are now likely going to have to be come familiar with the Illinois Genetic Information Privacy Act (GIPA), and for many of the same reasons. I would like to thank Jenn and Jamie for allowing me to publish their article as a guest post on this site. I welcome guest post submission from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ article.
Continue Reading Guest Post: What you Need to Know about Illinois’ Genetic Information Privacy Act