The SEC has been an active cop on the beat, as reflected in its recently released Enforcement Division statistics for the 2023 fiscal year, ended September 30, 2023. Both the total number of SEC enforcement actions and the number of “standalone” enforcement actions rose in FY 2023 compared to the prior year. The agency also filed the most enforcement actions against public companies since FY 2019. In addition, the SEC obtained the second highest annual amount of financial remedies in SEC history.

Continue Reading SEC Stats Show the Agency is an Active Enforcement Cop

According to Renaissance Capital (here), in the heady days during the two-year period 2020 and 2021, 618 traditional U.S. IPOs were completed, raising over $220 billion. (These stats do not include SPAC IPOs). By contrast, in the period 2022-2023 YTD, there have only been 171 traditional U.S. IPOs completed, raising just $27 billion. While many market observers yearn for a return of the buoyant IPO market that prevailed two years ago, signs are that it could be a while before the IPO market takes off again. As detailed in a November 14, 2023, Wall Street Journal article about the state of the IPO market, and as discussed below, there are a host of concerns weighing on the IPO market.

Continue Reading It Could be a While Before a Buoyant IPO Market Returns
Priya Cherian Huskins

In a recent post in which I discussed the cyber incident-related enforcement action the SEC brought against the software company SolarWinds, I noted that the defendants named in the action included the company’s Chief Information Security Officer(CISO), adding that the SEC’s naming of the CISO as an enforcement action defendants “is sure to send a shiver down the collective spines of the CISO community.” In the following guest post, Priya Cherian Huskins, Senior Vice President and Partner, Woodruff Sawyer, takes a detailed look at the agency’s action against the SolarWinds CISO, and considers the key liability and insurance implications. A version of this article previously published on Woodruff Sawyer’s D&O Notebook here. I would like to thank Priya for allowing me to publish her 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 Priya’s article.

Continue Reading Guest Post: CISO Liability in Focus: SEC Enforcement, Insurance, and [Personal] Risk Mitigation

One factor that contributed significantly to the total number of securities class action lawsuits filed in 2021 and 2022 was the proliferation of SPAC-related securities suit filings. Although diminished in number this year relative to the two prior years, and while the filing pace has declined as the year has progressed, SPAC-related securities suits continue to be filed in 2023. In the latest example of this continuing trend, last week a plaintiff shareholder filed a securities suit against the executives and sponsor of a SPAC that merged with a health monitoring technology company that later went bankrupt. The named defendants include officers of the bankrupt company. While the suit is interesting as an example of the continuing threat of SPAC-related litigation, it may be even more important as an illustration of the way that geopolitical risk increasingly can translate into securities litigation.

Continue Reading SPAC-Related Suit Shows How Geopolitical Risk Can Translate into Securities Litigation

Policyholders and their representatives have long pushed to have the definition of “claim” in professional and management liability insurance policies expanded, to bring an increasingly larger kinds of circumstances within the policies’ coverage. However, there are consequences when more kinds of circumstances constitute a “claim,” such as, for example, with respect to the claims-made date and notice obligations. A recent insurance coverage ruling by a New York state court interpreting a lawyers’ professional liability insurance policy underscores how an expanded definition of the term “claim” — in this case, pertaining to a request to toll the statute – can affect the availability of coverage. The court, applying New York law, determined that a tolling request prior to the policy period met the applicable policy’s definition of claim, and therefore, because the claim was first made before the policy incepted, the subsequent claim during the policy period was not covered.

Continue Reading Tolling Agreement Prior to the Policy Period Precludes Coverage for Later Claim

The drama surrounding former crypto mogul Samuel Bankman-Fried’s criminal prosecution and conviction has dominated the business pages for weeks. In addition, and as the news reports noted at the time, just before the criminal trial began, SBF sued one of FTX’s excess D&O insurers, alleging the insurer was refusing to pay his legal bills. Earlier this week, it emerged that SBF has withdrawn his insurance coverage lawsuit. But while the coverage lawsuit apparently now will not go forward, the interesting questions the situation presented are still worth asking. And the short-lived coverage litigation also unearthed some interesting stuff, as discussed below. Daphne Zhang’s November 7, 2023, Bloomberg article about the coverage litigation, which contains a comprehensive overview of the coverage dispute, can be found here.

Continue Reading FTX Legal Drama Includes D&O Coverage Fight (Now Withdrawn, but Not Forgotten)

Earlier this year, three of the largest banks failed in a sequence of events that was dubbed the Banking Crisis of 2023. With the passage of time, fears that the three failures could foreshadow further failures and deeper woes seemingly subsided, though a wave of banking institution downgrades in August 2023 briefly rekindled concerns. More recently, things have been quiet. Does that mean it is time to sound the all-clear signal? Perhaps, but there are signs out there suggesting continued vigilance may be in order.

Continue Reading Checking in on the 2023 Banking Crisis

Whenever the discussion turns to the question of emerging risks, among the first topics to come up these days is artificial intelligence (AI). But just as AI technology itself is still taking shape, the legal risks that the emergence of AI may present are still forming as well. On October 30, 2023, in what is unquestionably a key step in the development of a regulatory and legal framework for the administration of AI, the White House issued an Executive Order on the development and use of AI. The Order, which is entitled “Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence,” can be found here. At a minimum, the Executive Order has important implications for AI-related corporate risk management. The order may also point toward the future development of regulatory and legal standards pertaining to AI, as well as the litigation risks that AI may present.

Continue Reading Thinking About Emerging AI Risks

Jeffrey Epstein’s life, misdeeds, and death make for a sordid and scandalous tale. Epstein’s story is the backdrop of a new securities class action lawsuit that has been filed against Barclays, its former CEO, James “Jes” Staley, and certain other company executives, in which the plaintiff alleges that Staley and Barclays misled investors about the relationship Staley had with Epstein during Staley’s prior position at JP Morgan Chase Bank. This new complaint’s filing follows shortly after the U.K Financial Conduct Authority in October announced its decision to fine Staley and ban him from officer positions in the financial services industry based on its finding that Staley “recklessly approved a letter to the FCA” that the agency said “misled” the FCA and the Barclays board about Staley’s relationship with Epstein. A copy of the new securities lawsuit complaint, filed on November 1, 2023, can be found here.

Background

During the period 1999 through 2013, Staley worked at JP Morgan, first as head of the bank’s private banking division and later as head of the bank’s asset management division. In December 2015, Staley became CEO of Barclay’s. During his time at JP Morgan, Staley became acquainted with Epstein, who was a client of JP Morgan’s. After the Epstein scandal later came to light, questions arose about the nature and extent of Staley’s relationship with Epstein during Staley’s time at JP Morgan.

In July 2019, Epstein was charged with sex trafficking and conspiracy to commit sex trafficking of minors. In August 2019, Epstein was found dead in his jail cell of apparent suicide. Following Epstein’s indictment and subsequent suicide, news reports circulated about the extent of Epstein’s relationships with various Wall Street executives, including Staley. In response to these articles, Staley and Barclays contended that Staley’s relationship with Epstein was strictly professional.

In its 2019 Annual Report, Barclays disclosed that the FCA had initiated a regulatory inquiry regarding Staley’s relationship with Epstein. The Annual Report also disclosed that Staley had given the company’s board an “explanation” of his relationship with Epstein. The Report stated that based on Staley’s representations and on a review by outside counsel, the board believed that Staley had been “transparent” about his relationship with Epstein, and further that the board recommended Staley for re-election as CEO.

The complaint alleges that these statements were misleading because at the time the board was in possession of emails showing that Epstein and Staley’s relationship went well beyond “professional.” The complaint alleges that Staley’s “close involvement” with Epstein included Stein’s supposed “awareness of Epstein’s crimes and his possibly witnessing or participating in sex crimes.”

In November 2021, Barclays disclosed that it had received the FCA’s “preliminary conclusions” about Staley’s characterizations of his relationship with Epstein; the bank stated that Staley expressed his intention to contest the FCA’s conclusions, and that the Board and Staley had agreed that he would step down as the bank’s CEO. The bank emphasized that the FCA made no findings that Staley saw or was aware of any of Epstein’s crimes.

On November 12, 2021, the Financial Times published an article stating that Staley and Epstein had exchanged 1,200 emails during Staley’s time at JP Morgan and that the emails contained “unexplained phrases,” such as a reference to “snow white.” The FT article further reported that the Barclays board was aware of the emails since at least early December 2019.

In March 2023, JP Morgan filed a third-party complaint against Staley in connection with an action that alleged victims of Epstein’s sex trafficking previously had filed against JP Morgan. The JP Morgan complaint against Staley sought indemnity and contribution in the event that JP Morgan was found liable in the sex trafficking victims’ case. The claimants in the sex trafficking victims’ action alleged that Staley was aware of and observed Epstein’s criminal misconduct prior to his 2013 departure from JP Morgan.

Finally, on October 12, 2023, the FCA announced on its website its decision to fine Staley £1.8 million and to ban him for holding senior management positions in the financial services industry. The announcement included the FCA’s findings, although the announcement also states that Staley has appealed the decision to the Upper Tribunal and accordingly that the findings recited in the decision are “provisional” and reflect the FCA’s belief of what occurred.

The decision states that Staley “recklessly approved” a letter sent by Barclays to the FCA which the FCA says “misled both the FCA and the Barclays Board about the nature of his relationship with Mr. Epstein.” The letter claimed that Staley “did not have a close relationship with Epstein,” while, “in reality,” the FCA says, in emails between the two men Staley described Epstein as “one of the ‘deepest’ and ‘most cherished’ friends.” The letter’s representation of Staley’s relationship with Epstein was “misleading,” and by failing to correct the “misleading statements” in the letter, “Mr. Staley recklessly misled the FCA and acted with a lack of integrity.”

The Lawsuit

On November 1, 2023, a plaintiff securityholder filed a securities class action lawsuit in the Central District of California against Barclays, Staley, and certain other company executives. The complaint purports to be filed on behalf of investors who purchased Barclays American Depositary Receipts (ADRs) between July 22, 2019, and October 12, 2023.

The complaint alleges that the defendants made false or misleading statements or failed to disclose that: “(1) Contrary to his false public assertions, Jes Staley had a close relationship with Jeffrey Epstein; (2) Staley was reportedly aware of Jeffrey Epstein’s criminal activities and may have even sexually assaulted a victim who had previously been trafficked by Jeffrey Epstein; (3) Staley’s close, personal relationship with Jeffrey Epstein, and potential criminal activity, if discovered, could bring reputational, legal, and financial harm to Barclays; (4) as a result, Barclays response to the FCA’s inquiry regarding Staley’s relationship with Epstein was materially false; (5) Barclays, having become aware of information contradicting its response to the FCA’s inquiry, then failed to update the response so that it would be accurate, or otherwise take any meaningful action; and (6) as a result, Defendants’ statements about its business, operations, and prospects, were materially false and misleading and/or lacked a reasonable basis at all times.”

The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the plaintiff class.

Discussion

As I noted in a recent post (here), one of the more provocative ongoing discussions in the world of corporate and securities litigation these days is whether everything and anything can be turned into a securities fraud allegation. At one level, the scandalous details of Epstein’s alleged criminal misconduct certainly seem far afield from the sort of financial misrepresentations that more traditionally have served as the basis of securities lawsuits. However, there is within the sordid backdrop of this lawsuit the basicl question about whether or not Staley misled Barclays and the FCA about his relationship to Epstein, and whether Barclays and Staley in turn misled investors about the relationship.

The complaint’s allegations raise a host of murky questions about whether the relation between the two men was “professional” or “personal,” and if “personal” what that implies. Many of the accusations in this complaint depend a lot on implication and suggestion rather than direct confirmation; for example, it is entirely possible that in the course of a multiyear business relationship between a bank executive and a client of the bank that they might exchange 1,200 emails, yet the number of emails is meant, in the complaint, to suggest that there was a lot more going on than a relationship Staley tried to tell the world was only “professional.”

There are obviously very disturbing allegations in this complaint (apparently derived from the allegations in the lawsuit filed against JP Morgan by sex trafficking victims) that Staley knew about or was even involved in Epstein’s misconduct. However, the FCA made no findings suggesting that Staley was aware of or involved in the criminal misconduct. It is hard to know what to make of all this.

One detail that did not make its way into the securities lawsuit complaint is fact that the lawsuit that the sex trafficking victims filed against JP Morgan settled in June 2023 based on JP Morgan’s agreement to pay the victims $290 million. At the time the settlement was announced JP Morgan issued a statement saying that Mr. Epstein committed “heinous crimes” and “any association with him was a mistake and we regret it.” The sheer size of this settlement suggests the victims’ allegations – including, it may be asked, the allegations against Staley? – were substantial.

This lawsuit has only just been filed and it remains to be seen how it will fare. One thing that is important to keep in mind is that the claimants in the securities lawsuit are not Epstein’s victims; rather, the claimants are investors. One challenge the plaintiff may face is showing whether and to what extent the investors were harmed.  The price of Barclays ADRs moved only very small amounts in response to the various supposed “revelations” cited in the complaint; in some instances, the price movement was less than one half of one percent of its value. And if even if this really is securities fraud, whose fraud is it?  – it seems to me that if Staley misrepresented his relationship to Epstein, the bank and its board are among those that were misled.

In any event, the annals of securities fraud litigation are once again expanded as increasingly diverse kinds of allegations make their way into securities lawsuit complaints.

One final note. Epstein’s connections with his bankers were serially toxic. Apparently after Epstein ended his connection with JP Morgan in 2013, he moved his banking relationship to Deutsche Bank. After the criminal charges were raised against Epstein, a class of sex trafficking victims filed a separate lawsuit against Deutsche Bank. The victims’ lawsuit against Deutsche Bank settled earlier this year for $75 million. In 2020, Deutsche Bank paid New York banking regulators a $150 million fine over allegations that it failed to sufficiently police its financial dealings with the disgraced financier among other compliance failures.

Readers may recall that in a recent guest post, Francis Kean of McGill & Partners discussed the developments in the UK insolvency proceedings involving the former British multinational construction firm, Carillion plc. A recent interesting video created by the London-based insurer Rising Edge examines what happened with Carillion as well as the exposures and risks that corporate executives face in insolvency. The video features an all-star panel of D&O experts: Francis Kean of McGill; Ed Smerdon of Coverage Matters; James Cooper of Clyde & Co; and Owen Dacey of Rising Edge. The session was moderated by Phillipe Gouraud of Rising Edge. The video can be found here.