Madrid is a big city. Its population is almost 3.5 million, a little less than that of Los Angeles. Driving in from the airport, the city’s size and sprawl are apparent. But Madrid’s Centro de la Ciudad is quite compact. It is possible to walk the diameter of the city center, from the Palacio Real to the Museo del Prado, in an afternoon. But though it is physically possible to traverse the central city in a short time, to actually do so would be a mistake. There is so much to see within the city that a more leisurely pace is by far the better approach, and indeed Madrid’s own rhythm pretty much requires it anyway.

The city’s heart (and literally the country’s central point) is the sun-drenched, crescent-shaped Plaza Puerto del Sol (pictured above at the top of the post). Radiating northward from the plaza are busy upscale pedestrian shopping streets. Far more interesting are the streets to the west of the plaza, full of stores selling clocks, musical instruments, antique religious paraphernalia, coins, tapestries, hats, gloves, and assorted other remnants of time and history.

Just to the southwest of the Puerta del Sol is the Plaza Mayor, a sprawling, colonnaded quadrangle with an area of nearly 200,000 square feet enclosed by three-story residential structures mixing Habsburg, Bourbon and Georgian architecture. Today, the Plaza is ringed with shops, sidewalk cafes and restaurants, and thronged with sightseers snapping selfies with their cell phones. Enterprising young hustlers work the crowd, trying to sell French and Italian school kids little plastic wind up pieces of crap and bird whistles that make a sound like a duck with a hernia.

I had a particularly pleasant evening sitting at a sidewalk café in the Plaza Mayor, watching the peaceful procession of tourists while the sun set and the day turned to dusk. The Plaza has not always been so serene. At the Museo del Prado, I saw a painting from the time of the Spanish Inquisition depicting an auto de fe in the Plaza Mayor. The painting appeared to have been created in celebration of the event, which involved the trial of dozens of heretics. Among the attendees depicted in the painting was the then-monarch, King Charles II (who proved to be the last of the Spanish Hapbsburg monarchs). As I watched the darkness gather in the Plaza, I wondered whether the ancestors of the swifts and swallows that flitted about the twilight sky also flew about the heretics' pyres as well.

The sun sets unexpectedly late in Madrid -- after 9 pm local time while I was there. Turns out that Madrid has put itself in the “wrong” time zone. Madrid is actually a little bit further west than London, but rather than sharing Greenwich Mean Time with the U.K., Madrid has put itself on Central European Time, the same time as the rest of Western Europe. Madrileños adaptation to solar time explains in part – but only in part— their late-shift lifestyle. The hours around midnight are prime time in the cities many atmospheric neighborhoods. But it is not just the evenings that are late. The entire day is oriented later.

For one of my business meetings while there, I met a couple of industry colleagues for lunch. We met at my hotel at 1:30 pm, and we strolled around Malasaña, one of the many neighborhoods in the city center with atmospheric, narrow alleyways lined with tabernas, wine bars, and restaurants. From there, we made our way through a maze of city streets to the Mercado de San Miguel, a 19th century iron-canopied marketplace near the Plaza Mayor. After a renovation completed in 2009, the market is now full of small, upscale eateries, as well as shops selling upmarket meats, cheeses and wine. We paused there to share a plate of oysters from Galicia, which we ate standing up and which washed down with a glass of white wine. From there, we made our way westward toward the Palacio Real, to a traditional Spanish restaurant near the Plaza de las Vistillas (which affords an agreeable view of the green expanse of the enormous Casa de Campo and the Sierra de Guadarrama mountains beyond).

We finally sat down at our table for lunch at about 3:15 pm. The restaurant was packed. After many plates of sardines, clams, small squares of dried ham and toasted bread with tomato sauce, plus potatoes with eggs, fish cooked in garlic with onions and mushrooms, cheese, and much else besides, we finished our lunch around 5:30, about the same time as the rest of the lunchtime crowd. No wonder they eat dinner so late in Madrid.

In at least one respect, the city’s late-hour orientation worked to my advantage. One day, after I had finished my meetings for the day, I was able to sneak in a visit to the Museo del Prado, because it stays open until 8 pm. The Prado unquestionably is one of the world’s great art museums. Its collection holds over 7,000 paintings, including many masterpieces of Western Art, but from my perspective, the most interesting art works in the museum are the "pinturas negras" (black paintings) of Francisco Goya. The fourteen paintings, which were given their collective name due to the artist’s heavy use of dark pigment, were painted as murals in the artist’s rural retreat and apparently were never meant for exhibition. The paintings are intense and haunting, and present quite a contrast to the many galleries of well-fed Habsburgs and Bourbons upstairs. 

In a happy stroke of luck, my visit to Madrid coincided with the feast day of San Isidro. Because San Isidro is the patron saint of Madrid, his feast day is a city holiday. On the feast day, a number of people in traditional attire made a pilgrimage to the various sites around the city associated with the saint, including a well at which the saint is reported to have miraculously saved the life of his son through the intercession of angels. One of the day’s traditions includes drinking water from the well, a ritual (in which I joined) that is supposed to produce particularly salubrious effects, both physically and spiritually.

Most of the city’s residents seemed to be honoring the saint’s feast day by strolling through Madrid’s parks and ancient neighborhoods, with their narrow streets and tiny plazas. And why not? Madrid has to be one of the best cities in the world in which to just walk around. I got lost numerous times while I was there, which at first I found quite frustrating, as I have a certain pride in my sense of direction. But after a while, I realized that it didn’t matter, that I should just follow the streets where they led and enjoy the scene as I passed through.

Given the throngs of happy strollers on San Isidro’s feast day, the idea that Spain is the midst of an economic crisis seems wildly implausible. Nick Paumgarten explained this seeming paradox in a February 23, 2013 New Yorker article entitled “The Hangover” (here):

It is often hard to perceive an economic crisis. Debt doesn’t look like much. It has no shape and smell. But over time, it leaves a mark. In Spain, it manifested itself, first, as empty buildings, stillborn projects and idled machines. The country is now a museum of doomed developments – a white-elephant safari… In twenty years, Spain acquired an urbane opulence that turns out to have been built on debt that cannot be repaid…. Once the crisis came, foreign money dried up. No one, in either the private or public sector, wanted to finance Spain’s liabilities, and interest rates shot up. Spain is now stuck with an unaffordable currency and seemingly unpayable debt.

What may lie ahead for Madrid and for the country remains to be seen. The city and the country have been through very dark times before. Whatever may come, it seems likely the city will endure, as it has through centuries of change.

I opened this post about Madrid by mentioning Paris. My invocation of the romantic French city was deliberate. I know that for many Americans, Paris represents the urban ideal, as is captured in the old saying to the effect that when good Americans die, they go to Paris (a quotation variously attributed to Oliver Wendall Holmes and Oscar Wilde). With all due respect to our conditioned reverence for all things Parisian, I have to say that Madrid has every bit of Paris’s charm – perhaps even more. As one of my American friends in Madrid put it, Madrid is Paris without the Parisians. I wouldn’t quite put it that way, as I happen to have had only good experiences with Parisians. I would say that Madrid is Paris without the requirement for rigid adherence to certain aesthetic forms.

Whether or not the comparisons between the two cities are apt, or even necessary, the simple fact is that Madrid is a colorful city with a rich and complicated historical heritage, and a vibrant street life of which I think I could never grow tired.

I propose a revision to the old saying; how about this – when good Americans die, they wind up in Madrid on a warm spring evening, seated at an outdoor table at a tapas bar, with a bottle of Rioja and hours to go before the dawn.

More pictures of Madrid:

Fiesta de San Isidro:

Palacio Real

Paseo del Prado: 

Gran Via

The Streets of Madrid

As discussed in greater detail here, on July 10, 2012, Barclays shareholders filed a securities class action lawsuit in the Southern District of New York, against Barclays PLC and two related Barclays entities, as well as the company’s former CEO, Robert Diamond; and its former Chairman Marcus Agius. The complaint, which can be found here, was filed on behalf of class of persons who purchased Barclays ADRs between July 10, 2007 and June 27, 2012.

The complaint alleges that the defendants participating in an illegal scheme to manipulate the LIBOR rates, and that the defendants “made material misstatements to the Company's shareholders about the Company's purported compliance with their principles and operational risk management processes and repeatedly told shareholders that Barclays was a model corporate citizen even though at all relevant times it was flouting the law.” The defendants moved to dismiss.

In her May 13 order, Judge Scheindlin granted the defendants motion to dismiss, holding that Barclays’ representations about its business practices and its disclosures about its contingent liabilities were not actionable misstatements or omissions, and with respect to the remaining statements on which the plaintiffs, that even if they are actionable, that the statements were too attenuated from the company’s 2012 corrective disclosure to establish loss causation.

Judge Scheindlin found that many of the statements on which the plaintiffs sought to rely concerning the company’s business practices, particularly general statements about the company’s high standards, constituted mere “puffery.” She added that even as to the statements concerning the company’s Libor practices that arguably are not mere puffery, “plaintiffs’ allegations fail to connect the statements” to the company’s Libor practices. She added that “finding such statements actionable on these facts would render every financial institution liable to every investor for every act that broke the law or harmed reputation.”

Judge Scheindlin granted the motion to dismiss with prejudice, expressly denying plaintiffs leave to amend.

The Barclays securities suit was the first securities suit to be filed as part of the Libor scandal, and remains the only traditional securities suit filed in connection with the scandal. The only other lawsuit filed in connection with the Libor scandal in which securities law violations have been raised is the state court complaint that Schwab recently filed against the Libor rate setting banks. As discussed here, among the many other claims that Schwab asserted in the complaint, Schwab also asserted a claim against the banks under the ’33 Act, in reliance on the statutes concurrent jurisdiction provision. The Barclays suit is the only case in which the plaintiffs have filed a federal court action relating to Libor and primarily alleging a securities law violation.

There obviously is much further to go as the Libor-related litigation unfolds, and it is far too early to start making generalizations. Nevertheless, it does seem that at least so far, the claimants are not faring particularly well in the Libor-related litigation. Judge Scheindlin’s dismissal motion grant in the Barclays case follows Judge Buchwald’s March 2013 ruling in the consolidated Libor-related antitrust litigation largely granting the defendants’ motion to dismiss. To be sure, Judge Buchwald recently granted the plaintiffs in the consolidated case leave to seek to file and amended complaint (while at the same time throwing buckets of cold water on any hopes that she might actually allow the plaintiffs to file an amended complaint).

At a minimum, it looks as if the Libor-related litigation might involve a long slog for the claimants, possibly involving extensive appellate litigation. The claimants may yet have a day to celebrate in the Libor litigation, but so far things have not been going particularly well.

David Bario’s May 13, 2013 Am Law Litigation Daily article about Judge Scheindlin’s ruling the Barclays suit can be found here.

Class Actions: Coming Soon to a Palais du Justice Near You?: According to news reports, the government of French President François Hollande is trying to advance legislation that would allow consumers in France to pursue claims in a form of a class action. On May 2, 2013, the government submitted proposed legislation to the Council of Ministers that would permit consumer class actions. As described in a May 9, 2013 article in Commercial Risk Europe (here), the bill “will enable the public to get compensation for damages caused by mass-market products and anti-competitive practices, reducing the disadvantage that a consumer is prone to suffer when taking action alone against a big corporation.”

As discussed in a May 9, 2013 Economist article about the legislation (here), the collective action that the Act proposes is somewhat different than the U.S. class action process.

The proposed legislation faces significant opposition from business groups. And even if it were enacted, it would be limited to consumer-type representation; it would not represent the advent of securities class action litigation in France. However, if enacted, it would represent the latest development in the expansion of collective action processes outside the United States. Whether or not the development would lead to the future enactment of some type of securities-related collective action, it nevertheless represents an example of how non-U.S. litigation threats continue to expand and grow.

As the Economist article linked above discusses, many other countries have recently enacted provisions allowing for collective action, and other countries are considering it. Recent U.S. judicial decisions (including the Morrison decision) may have advanced this process as U.S. courts have begun to restrict access to non-U.S. claimants. The Economist article suggests that a competition of sorts may already be underway as countries vie to become the preferred venue.

Keeping Track of International D&O: With all the changes afoot, it is hard to keep track of where things stand among various countries with respect to the potential liabilities of directors and officers. A recently published directory does provide significant help in that regard. In its recent publication, “A Global Guide to Directors’ and Officers’ Issues Around the World in 2013” (here), Zurich Insurance provides an overview of D&O issues in 43 different countries. The massive 868-page publication continues extensive useful information with respect to each of the countries covered. It is a valuable resource for anyone who much advised companies regarding the potential liability exposures of directors and officers in a range of companies.

Very special thanks to a loyal reader for providing links to the article about the new French legislation and to the Zurich Insurance publication.

Barcelona is larger, busier and more beautiful than I had anticipated. The city sits on the Mediterranean Sea, with Tibidabo, a 1,600 ft. mountain to the northwest, and with Montjuic, a rocky prominence that was the site of the 1929 World Fair and the 1992 Barcelona Olympics, to the south. With a population of 1.6 million, Barcelona is about the size of Philadelphia (although all comparisons between the two cities stop there). While we think of Barcelona as Spanish, the locals consider their city to be Catalan. I don’t think I saw a single Spanish flag in Barcelona itself, but Catalan flags and banners fly everywhere.

Barcelona’s architecture is varied and much of it is beautiful. At many street corners, tourists stop to photograph façades and building ornaments. Many of Barcelona’s architectural gems are mixed into otherwise ordinary neighborhoods. For example, Antoni Gaudí’s famous Casa Milà was right around the corner from my hotel, on a busy upscale shopping street. The building for which Gaudí is best known, the stunning and still controversial and still unfinished Sagrada Família cathedral, bursts upward out of a quiet residential neighborhood like some sort of surreal volcano. The narrow alleyways of the Bari Gòtic, the medieval district inside Barcelona’s Ciutat Vella, its old city, are full of well-preserved medieval buildings as well as portions of the Roman Wall and the beautiful Plaça del Rei.

Running through the city center from the seafront northwestward into the upscale L’Eixample neighborhood is La Rambla (which at Plaçe de Catalunya becomes Rambla de Catalunya), a tree-lined avenue with a pedestrian walkway in its wide median.  Along the several kilometers-long promenade are sidewalk cafes, small shops and kiosks, street musicians, and squadrons of tourists looking for the right place to sit down and have a glass of sangria.

I don’t speak Spanish (much less Catalan), but I have mastered a few Spanish words, including one indispensable phrase: Una cerveza por favor. I was sitting at a sidewalk café along La Rambla, after having successfully deployed my indispensable Spanish phrase, when a German couple sat down next to me. When the waiter came up, it was clear that the waiter didn’t speak German and the Germans didn’t speak Spanish. With instantaneous tacit agreement, both the waiter and the Germans switched to English. This was one of many incidents during my visit to Barcelona that caused me to contemplate languages and communications and the way the forces of the global economy are shaping both. Among other things, I was able to communicate – in English – with all of the other conference participants, regardless of where they are from. Most of the people I met in Barcelona spoke multiple languages, while I spoke only one – fortunately for me, I grew up speaking the one that everyone else could speak.

On my way over to Barcelona, I read a history of the Spanish Civil War. In analyzing the war’s causes, the book noted that in the early '30s, high levels of unemployment had led to social unrest. The book reported that the unemployment rate in Spain in 1933 was 12%. The current rate of unemployment in Spain is approaching 25%. The country now has safety nets that it did not in the '30s, and Barcelona itself continues to project prosperity. But during my visit, there were unmistakable signs that the current poor economic conditions are taking a significant toll.

For example, on my first day in the city, when I entered the Bari Gòtic, I walked right into a massive demonstration, involving a huge crowd of people chanting, blowing whistles, and beating drums. They had gathered opposite the Palau de la Generalitat (which houses the offices of the President of Catalonia). They were protesting against educational spending cuts. Many of the protesters also carried signs (in Catalan) about Catalonian independence. The protest was peaceful and even had a festive air. But surrounding the protesters was a heavily armed cordon of riot police.  It doesn’t take much imagination to picture how the peaceful protest could quickly turn into something much more ominous. But for most of my visit, the troubles stayed well in the background.

My visit to Barcelona coincided with the annual Formula 1 Grand Prix of Spain. I had never been to a Formula 1 race before, or for that matter, a motorsports event of any kind. Here is what you need to know about a Formula 1 race: the noise from twenty-two F1 race cars as the race starts is the loudest sound that has occurred in the entire universe since the Big Bang itself. The cars accelerate from a standing start (pictured below, left) to over 120 miles an hour in five seconds. The race, which is a combination of noise, speed, raw power, skill and danger, is 66 laps of total sensory overload.

After the race is underway and the cars begin taking pit stops, the cars are scattered across the course, and it becomes, at least for an uninformed observer like me, impossible to tell what is going on. When the race ended (an event I had no idea was coming), I turned to the person next to me and asked him who had won. I gathered later that my question was the F1 racing equivalent of asking  -- after LeBron James has hit a buzzer-beater slam dunk to win an NBA playoff game -- who that guy was who scored the last basket. The winning driver, it turns out, was the local favorite, Fernando Alonzo, a Spanish driver for the Ferrari team. I believe that every single person there, other than me, knew which car was Alonzo’s and that he had crossed the finish line first at the checkered flag, ten seconds ahead of his closest competitor. Alonzo received a huge trophy and sprayed champagne on the crowd around the viewing stand. My ears were ringing for hours afterwards.

It has been many years since I have stayed out on the town past two in the morning. Because dinner time in Barcelona isn't until 10:00 p.m. or later, on two consecutive evenings, I did not return to my room until the early morning hours. However, it turned out that I was something of an early bird, by Barcelona standards. When I was in a cab on my way back to the hotel at the ungodly hour of 2 am, the city streets were still active and alive with revelers apparently planning on greeting the dawn. I know that I found the F1 race an absolutely overwhelming experience. I can only imagine how it felt to those who had come back from the nightclub at 5 or 6 am. The cars’ noise must have seemed the voice of an angry and vengeful god.

The central part of Barcelona is dense and bustling. But the city also has a great deal of green space, some spectacular parks and, of course, an absolutely stunning beach. Among the city’s parks is Parc Guell, which may be one of the most interesting and beautiful urban parks I have ever seen. The park sits on a ridge above the city and is full of fantastic buildings designed by Gaudí. Pathways lead up the hillside from the park’s eccentric, whimsical entrance, offering spectacular views of the city and the sea at every turn. On a sunny afternoon, a host of leisurely strollers made their way up the hill or sat at overlooks listening to the innumerable buskers. The view from the hilltop, pictured at the top of this post, is breathtakingly beautiful. As I stood there looking at the city spread below and the azure sea beyond, I was irrevocably confirmed in my certainty that Barcelona is a truly awesome place.

I would like to thank my friends at HCC Global for inviting me to be a part of their great event and for the opportunity to visit their beautiful city. It was a great pleasure to be able to meet so many industry colleagues from all over the world, and to find out that not only could I converse with all of them in my own language, but also that all of them read The D&O Diary. I must say that Barcelona is the perfect venue for …well, for just about anything as far as I can tell. 

Farewell to you, beautiful Barcelona. Sorry that I had to leave, but I needed to get some sleep.

More pictures: 

As I said, Barcelona is a truly awesome place: 

A view of the old city and the Placa del Rei:

La Sagrada Familia bursts up out of the surrounding quiet residential neighborhood like some sort of surreal volcano.

Barcelona -- great nightlife and a world class venue for anything

The report notes that as of April 22, 2013, the FDIC has filed twelve lawsuits against former directors and officers of failed banks during 2013. (I am aware of at least two additional suits that have been filed since that time; refer here, second item for the most recent). That brings the total number of lawsuits that the FDIC has filed since 2012, as of that date, to 56. The authors project that at the current filing rate, 2013 filings could total as many as 39.

Given the three year lag that generally follows after a bank fails before the FDIC files suit, and given that the peak number bank failures took place between the third quarter of 2009 and the third quarter of 2010, “this year will likely be a peak period for new filings.”

Though lawsuits have continued to emerge this year, bank failures themselves have slowed considerably during 2013, with only eight for the year so far compared to 51 during all of 2012. Since the beginning of 2007, 476 banks have failed. The authors project that as many as 26 banks total could fail this year.

To date, 12 percent of bank failures have resulted in D&O lawsuits. The lawsuits generally have targeted larger institutions and those whose failures produced larger costs. To date the FDIC has filed lawsuits against 21 percent of the banks that failed in 2009 and against 10 percent of banks that failed in 2010.

As I noted in an earlier post, the FDIC recently began publishing on its website information regarding settlements the agency has reached in connection with bank failure claims and lawsuits. The authors of this report have done the hard work of going through all of the settlements that agency has posted on its website.

Among other things, the authors report that the FDIC has obtained aggregate settlements of $601 million -- $115 million attributable to filed D&O lawsuits; $216 million attributable to 33 claims involving directors and officers of failed banks that did not result in a complaint; and $270 million attributable to claims against professional firms and non-D&O individuals. As many as 17 of the settlement agreements required out-of-pocket payment by individual directors and officers. The out-of-pocket payments totaled $8 million.

The report is interesting and worth reading in full. The authors merit our gratitude for working through and summarizing the settlement information on the FDIC’s website. The report contains a number of interesting insights, such as, for example, the authors’ observation about the number of settlements in which directors and officers were required to make out-of-pocket contributions to the settlements.

As detailed here, on March 29 2013, Judge Buchwald, in a ruling that she acknowledged at the time might be “unexpected,” granted the Libor benchmark- setting banks’ motions to dismiss the plaintiffs’ consolidated antitrust and RICO claims. In her massive 161-page opinion, Judge Buchwald held that the plaintiffs had failed to allege “antitrust injury” – that is, that the injury of which the plaintiffs’ complain was the result of the defendants’ anti-competitive conduct. Judge Buchwald dismissed the antitrust claims with prejudice.

Following her March 29 ruling, various groups of plaintiffs petitioned Judge Buchwald to try to obtain leave to amend their complaints. In her May 3 order, Judge Buchwald expressed skepticism that the plaintiffs could amend their pleadings sufficiently in order to address the concerns that led her to grant to the motion to dismiss. She noted that “although plaintiffs have described the allegations that they intend to add in their second amended complaint with regard to the issue of antitrust injury, we are inclined to think that none of these proposed allegations would change the outcome reached in our Memorandum and Order.”

Judge Buchwald cited a number of factors in support of her skepticism that the plaintiffs would be able to overcome the shortcomings of their prior complaints. First, she noted that as a result of the procedural history of the consolidated case and the revelations of the various regulatory investigations, the plaintiffs have in effect already effectively had opportunities to amend their pleadings. In addition, she noted that “plaintiffs have long been on notice that antitrust injury would be an important issue in this case,” adding that “plaintiffs never specifically argued, until after we issued our Memorandum and Order, that they would be able to satisfy the requirements for antitrust injury through additional allegations.”

Despite her skepticism that the plaintiffs will be able to address the antitrust injury issue in their amended pleadings, she nevertheless granted the plaintiffs leave to file a motion to amend and a proposed amended complaint. She added that “given the obvious magnitude f this litigation, we intend to proceed deliberately in evaluating plaintiffs’ request.”   However, in light of her concerns, as well as the “comprehensive manner” of her prior ruling and “the tremendous amount of resources already expended by defendants,” she said that she will review the proposed amended complaint prior to requiring the defendants to respond to any motion for leave to amend. Judge Buchwald allowed the plaintiffs two weeks in which to file a motion to amend, to which they must attach their proposed amended complaint.

Judge Buchwald’s May 3 order also addresses a number of other requests that other litigants have raised. Several of the defendants had sought to have her reconsider her denial of the motion to dismiss the exchange-based plaintiffs’ Commodity Exchange Act claims. Without ruling on the motion for reconsideration, she requested the parties to confer “regarding whether the exchange-based plaintiffs will be able to adequately allege their CEA claims against each moving defendant in a second amended complaint, in light of our rulings in our Memorandum and Order.”

In light of these other rulings, Judge Buchwald declined the request of several parties to lift the stay that has remained in place. She also decline to rule on the exchange-based plaintiffs’ request for leave to seek an interlocutory appeal, asking for additional briefing on the issue.

As a result of their efforts, the plaintiffs have at least managed to obtain leave to file a motion to amend. On the other hand Judge Buchwald gave them little reason from which to hope that they might overcome her concerns about their prior allegations. Indeed, among the possible outcomes is that Judge Buchwald could simply deny their motion for leave to amend. Nevertheless, Judge Buchwald’s May 3 ruling does raise the possibility, no matter how slight, that the antitrust allegations in the Libor-scandal might go forward after all.

Motion to Dismiss Granted in Securities Suit Against U.S.-Listed Chinese Company: In a May 6, 2013 order, Southern District of New York Judge Katherine B. Forrest granted the motion of China National Offshore Oil Co. (CNOOC) Limited, a U.S.-listed Chinese petroleum company, to dismiss the securities suit pending against the company. (The plaintiffs had previously voluntarily dismissed the claims they had filed against certain individual plaintiffs.) A copy of Judge Forrest’s May 6 order can be found here.

As discussed here, the plaintiffs filed their action in February 2012, alleging that the company had initially failed to disclose and then later down played two oil spills at the company’s production facilities in Bohai Bay. The company moved to dismiss the plaintiffs’ complaint.

Judge Forrest granted the defendants’ motion to dismiss, finding that the plaintiffs’ allegation were “insufficient to support a plausible inference of scienter.” In reaching this conclusion, she observed that “quite simply, there is not a single allegation in the complaint specifically identifying any information known to CNOOC at the time CNOOC made any of its allegedly false statements undermining the accuracy of those statements in any way.” Judge Forrest granted the motion to dismiss with prejudice.

Now This:  The most interesting Muppet in the world. (Hat tip to Cheezburger.com)

As discussed here, the Dewey & LeBoeuf firm was the result of a 2007 merger between the Dewey Ballantine firm and the LeBoeuf Lamb Greene & MacRae firm. After encountering financial difficulties, the firm filed for bankruptcy in May 2012. A detailed description of the firm’s collapse can be found here.  In the bankruptcy proceedings, as part of the firm’s liquidation plan, about 400 former Dewey partners agreed to repay the firm’s bankruptcy estate a portion of the compensation they had earned during 2011 and 2012. The total value of the partner contribution plan is $71.5 million. This agreement allowed these former partners to avoid further claims from the estate.

However, the committee representing the firm’s unsecured creditors sought and obtained leave of the bankruptcy court to pursue separate claims against the firm’s former leaders – former firm Chairman Steven Davis, former executive director Stephen DiCarmine and former Chief Executive Officer Joel Sanders. (These three individuals were expressly excluded from the agreement embodies in the $71.5 partnership contribution plan.)  Late last year, representatives of the estate sent Davis a demand letter, accusing Davis of mismanagement. In papers filed with the court seeking leave to pursue claims against the three men, the estate’s representatives alleged that the three firm leaders had, among other things, “over-distributed the Firm’s available cash to select partners; abusively relied on guarantee agreements that bore no economic rationality; and concealed the firm’s true financial condition from its partners, employees and creditors.” 

On April 22, 2013, representatives of the estate filed a settlement agreement reflecting that Davis, the bankruptcy estate and the law firm’s primary D&O insurer had reached an agreement to settle the estates claims against Davis. A copy of the settlement agreement can be found here.  A copy of the motion to the bankruptcy court to approve the settlement can be found here. Among other things, Davis agreed to pay $511,145 to the estate and in addition the firm’s primary D&O insurer agreed to pay $19 million in settlement of the claims against him. Sara Randazzo’s April 23, 2013 Am Law Litigation Daily article about the settlement with Davis can be found here.

On May 2, 2013, DiCarmine and Sanders, who are not parties to the Davis settlement, filed limited objections to the proposed settlement. A copy of their objections, in which they asked the bankruptcy court to reject or modify the settlement, can be found here. Among other things, the two men objected that the $19 million insurance settlement would, together with the $6 million “soft cap” on defense fees, deplete the $25 million limit of liability of the primary policy, while additional claims remain or have been threatened against the two of them. The two men also object that the release contained in the settlement agreement not only releases the primary D&O insurer but, according to the two men, the law firm’s excess D&O insurers as well. (According to the Am Law Litigation Daily article linked above, the law firm carried a total of $50 million D&O insurance, provided by three different insurers that the article identifies.) . Tom Huddleston’s May 2, 2012 Am Law Litigation Daily article discussing the objections can be found here.

The outcome of the efforts of Davis and of the firm’s primary management liability insurer to settle the claims against him, as well as the impact of the objections, remains to be seen. While the situation still has further to go before it is fully resolved, the circumstances also present some important insurance implications.

First and foremost, these circumstances underscore the importance for law firms of a separate program of management liability insurance. Attorneys are well aware of their need to procure and maintain errors and omissions insurance – or what they typically think of as malpractice insurance. But while they understand their need to have insurance in the event of claims against them asserting that they erred in the delivery of client services, attorneys, or at least some of them, can be reluctant to accept their need to also maintain insurance protecting their firm’s managers against claims for wrongful acts committed in the management of their firm.

As these circumstances demonstrate, law firm managers face the possibility of potential claims for a wide variety of potential claimants. Indeed, law firm managers at least potentially face potential claims from the same general range of claimants as does any privately held business and therefore the need for management liability insurance is the same. At a minimum these circumstances provide a vivid illustration to use to explain to law firm manager trying to understand the kinds of claims that might be asserted against them.

Second, the size of the proposed settlement with Davis has important implications for law firms when they consider how much management liability insurance to buy.  By the same token, the multiplicity of claims that have been asserted against the former firm managers (which are detailed in the filing the objectors presented to the court) underscore the breadth of litigation that can arise against firm management. Many law firms do not need to be persuaded that they need to carry hefty limits of liability for their E&O insurance, but they may underestimate their needs when it comes to their management liability insurance. As a reader pointed out to me in a recent email exchange, many law firms carry significantly greater levels of E&O insurance than management liability  insurance. The scale of the claims involved here could encourage some law firms to consider increasing the limits of liability for their management liability insurance program.

Third, this situation also raises important considerations with respect to the terms and conditions of a law firm’s management liability insurance program. In November 2012, when the unsecured creditors’ committee first sought leave of the bankruptcy court to pursue claims against the three former firm leaders, one concern that was raised was whether the firm’s management liability  insurance would provide coverage for a claim of that type, as the creditors committee in effect would be asserting the law firm’s own claims against the individuals.

The concern was that these claims might run afoul of the policy preclusion of coverage for claims filed by one insured against another insured. The fact that the estate and Davis have reached a settlement agreement to be funded largely by management liability insurance suggests that this potential coverage issue was resolved. But the fact that this concern was raised does have important implications about the need to ensure that the insured vs. insured exclusion is revised to insure that it does not preclude coverage for claims brought by representatives of the bankruptcy estate, such as a bankruptcy trustee or creditors’ committee.

There are other insured vs. insured exclusion concerns potentially affecting coverage under a law firm management liability insurance policy. For example, one type of claim that frequently arises in the law firm context is a claim by a law firm partner not involved in firm management against the firm’s managers. The way a law firm’s management liability policy would respond to this type of claim is an important coverage consideration, as is the policy’s response to partnership and compensation issues.

Many observers have chosen to interpret the demise of the Dewey & LeBoeuf law firm as a sort of a morality tale about the wages of supposed greed and excess. While some may find enough from the law firm’s demise to support that kind of an interpretation, it would be unfortunate if those lessons were the only ones drawn from these events. Even if the law firm’s collapse is the result of the firm’s own peculiar set of circumstances, there are still important lessons for other law firms, even those that consider their circumstances to be different from those of the late lamented Dewey LeBoeuf firm. Among the lessons that every firm would do well to heed is the message about the importance of management liability insurance for law firm managers.

Special thanks to a loyal reader for sending me a copy of the objection to the Davis settlement.

FDIC Files Another Failed Bank Lawsuit: On April 30, 2013, the FDIC filed its latest lawsuit against former directors and officers of a failed bank. In a suit the agency filed in the Northern District of Illinois in its capacity as receiver of the failed Midwest Bank and Trust Company of Elmwood Park, Illinois, which failed on May 14, 2010, the FDIC asserts claims for gross negligence, negligence and breaches of fiduciary duty against 18 former directors and officers of the bank. A copy of the FDIC’s complaint can be found here. The American Banker’s May 2, 2013 article about the lawsuit can be found here.

In its complaint, the FDIC alleges that the Defendants “exhibited an extreme departure from the standard of care and want of even scant care in agreeing to lend $100 million to six uncreditwortthy borrowers and affiliated parties” without employing care and diligence to ensure that the borrowers were creditworthy or that the proposed projects were even feasible or would likely result in repayment of the loans. The alleged misconduct allegedly took place after regulators had warned the bank about its lending practices. The complaint further alleges that the defendants “disregarded prior experience, criticism and the Bank’s specific policy” in connection with $85 million in investments in certain preferred stock. Despite prior bad experience with similar investments, the defendants “pursued an uninformed gamble and held the stock until it had most of its value,” producing a loss for the bank that allegedly could have been avoided if the bank had followed its own announced policies and practices. In its complaint the FDIC seeks to recover over “$128 million in damages.”

With the filing of this latest complaint, the FDIC has now filed a total of 58 lawsuits against former directors and officers of failed banks, including fourteen so far this year. As I discussed here, it seems likely there will be more to come, as well. Special thanks to a loyal reader who sent me a copy of the Midway Bank complaint.

Mugging for the Camera: Following its cameo appearance during Advisen’s recent quarterly claims update webinar, one of The D&O Diary’s coffee mugs also made a guest appearance on Twitter, as captured below. To find out how you can get one of The D&O Diary coffee mugs, refer here.

The liabilities of corporate officials are a reflection of the laws of the jurisdiction in which the corporation is chartered. The jurisdiction’s liability provisions in turn have important implications for the structure of the insurance put in place to protect the corporate officials.

In the following guest post, Michael Hendricks (pictured above left), the founder and head of the German D&O specialist broker HENDRICKS & CO GmbH and Burkhard Fassbach (pictured above right), licensed to practice law in Germany and standing legal counsel to the German operation of the London-based Howden Broking Group, take a close look at the particular need for separate D&O Insurance Cover for Supervisory Board Members in the German two-tier board system.

I am very grateful to Michael and Burkhard for their willingness to publish their post on this site. I welcome guest posts from responsible commentators on topics relevant to this blog. Any readers who are interested in publishing a guest post on this site are encouraged to contact me directly. Michael and Burkhard guest post follows:

Introduction

D&O Insurance Policies are widespread in Germany nowadays after initial adoption from its homeland in the United States. The product designation (Directors & Officers) directly refers to the American one-tier board system. If the German insurance industry would not have simply had assumed the American designation and had instead rather taken the German two-tier board system into account, the German product designation more precisely had better been labeled as Insurance for Supervisory and Executive Board Members – S&E rather than D&O Insurance.

Both, Members of the Supervisory Board and the Executive Board are “insured persons” under the D&O Company Policy and are subject to the potential liability of Board Members. Only the “insured persons” are entitled to the rights arising from the D&O Policy. However, the company is the sole Policyholder and pays the premiums. The insured event (Trigger) is foremost a claim made against an insured person due to alleged breach of duty.

In the framework of the liability regime set out by the German two-tier board system, the Supervisory Board is the competent corporate body in charge of triggering a claim against the Executive Board. The corporation (Policyholder) – represented by the Supervisory Board – takes legal action against the Executive Board due to alleged breach of duty.

The D&O claims experience gained in recent times clearly shows that significant conflicting interests occur because the D&O Insurance carrier cannot at the same time fulfill its fiduciary duty towards the Executive Board and the Supervisory Board. In particular, the problems arise in the event that the Executive Board - which has been sued by the company in the first place - issues a third-party notice towards the Supervisory Board in the court proceedings of the civil liability trial in order to take precaution for a later recourse against the Supervisory Board, more precisely against individual former or current Members of the Supervisory Board.

For the sake of avoiding such conflicting interests – in particular in the event of third-party notices – it is of utmost importance that the corporation buys an independent D&O cover for the Supervisory Board and thereby ensures full harmony with the German dual two-tier board system. It is essential that the D&O Insurance cover for the Supervisory Board is provided by a totally separate Insurance carrier which is definitely not participating in the company’s D&O Insurance program (Primary or Excess layers).

Twin Tower Model

In order to reflect the dual two-tier board system cleanly and properly in the concept of D&O Insurance programs, the Twin Tower Model would be the best solution: Tower 1 by Insurance carrier A only covers the Executive Board. Tower 2 by the Insurance carrier B only covers the Supervisory Board.

For reason of the „principle of equality of arms“, both towers should have the same limit of cover (insured amount). Any conflicting interests are destroyed at birth by implementing the Twin Tower Model. A powerful Supervisory Board should in any case explore such a solution. However, in a D&O market expected to become tougher the Twin Tower Model will only sell for high premiums. Therefore, the Two-Tier Trigger Policy for Supervisory Board Members outlined as follows is much more meaningful.

Two-Tier Trigger Policy

A special D&O Policy – only for the Supervisory Board – should solely align with the need for protection required by the Supervisory Board. The protection requirements shall tie in with the triggers (insured events). In contrast to the Twin Tower Model the Supervisory Board Members still remain insured persons under the Company’s D&O Policy for the time being. The Two-Tier Trigger Policy only steps in whenever a conflict of interests arises. A presentation of the several Triggers is shown as follows:

Trigger 1: Exhaustion of the insured limit of the Company’s D&O Policy

The first Trigger is the exhaustion of the insured limit of the Company’s D&O Policy (Primary and Excess layers). In this respect the Two-Tier Trigger Policy is functioning like an excess D&O Policy (Following Form to the Company’s D&O Policy). As a result an additional insured limit provided by a separate D&O insurance carrier is available exclusively to the Supervisory Board.

This Trigger in particular ensures the necessary independence to carry out the mandate of the Supervisory Board Member and this can be clearly shown by the following scenario:

As a general rule, claims in regard to breach of duty are foremost made against the Executive Board. Whilst asserting such claims the Supervisory Board runs the risk that the insured limit of the Company’s D&O Policy is exhausted (“eaten up”) by the Executive Board – perhaps only by defense costs – and the Supervisory Board is absolutely without any cover in the event of a later potential recourse litigation in the future. Should such a scenario become obvious, the defense lawyers of the Executive Board Members could solely by a tactical third-party notice served to the Supervisory Board demonstrate the defenselessness of the Supervisory Board. Thereby, the independence of the Supervisory Board mandate is concretely endangered. Individual Supervisory Board Members who are the recipients of a third-party notice could for their own personal interest – contrary to the company’s interest - work towards a settlement deal, what they possibly would not do if they had cover provided by their own independent D&O insurance policy.

Trigger 2: Third-Party Notice

Besides the trigger of the exhaustion of the insured limit, an independent D&O Policy for Supervisory Board Members shall certainly have to provide the third-party notice as a trigger. This trigger shall already come into action prior to the exhaustion of the insured limit of the company’s D&O policy. In the event of a third-party notice significant conflicting interests arise in the framework of the two-tier board system, which can be clearly shown by the typical course of action and the dynamics of a D&O claim case:

In the course of the decision-making of the Supervisory Board moving to a resolution regarding asserting a claim against the Executive Board, the company’s (claimant’s) lawyer reviews the likelihood of success of a lawsuit. The company / Policyholder has a primary interest in balance sheet protection and therefore tries to push the D&O insurance carrier towards adjusting the claim.

The insurance carrier has a statutory option right between adjusting the claim or defending against the claim.

Usually and as a first step, out-of-court claims adjustment negotiations between the parties are conducted on the basis of a draft statement of a claim (writ of summons). Should the insurance carrier only offer a very low quota, then a negotiated settlement could in an extreme situation be regarded as breach of fiduciary trust by the Supervisory Board, if the quota offered by the insurance carrier is disproportionate in relation to the amount of the asserted claim. The more so, as the Supervisory Board basically meets the duty to assert claims against the Executive Board pursuant to the highest-court case-law in Germany and failure to act accordingly results into potential liability of the Supervisory Board.
 

Should out-of-court settlement negotiations fail, a civil liability trial at the ordinary courts of law – oftentimes over the various stages of appeal - must determine if a negligent breach of duty occurred which has caused a financial loss.
 

In the event the Insurance carrier exercises its statutory option right and elects to bear the defense costs for the insured persons (Executive Board), then the insurance carrier obviously has an own interest in successfully defending the claims.
 

More and more often insurance carriers take the approach of an active liability defense. By a collaborative defense which is set out by the insurance carrier the D&O insurer can steer the entire defense strategy and tries to limit exceeding lawyer’s expenses. The defense lawyers can each present individual statements of the case on top of the basis of the collaborative defense. In the framework of an active liability defense the insurance carrier as an intervener accesses the legal court-proceedings on the side of the defendants by the rules of legal intervention stipulated in the Code of Civil Procedure.

The company / the Supervisory Board perceive the defense litigation brief by the lawyer appointed by the D&O Insurer as rather strange, hence the insurance carrier is still the contractual party and pockets the insurance premiums even if the D&O insurance is by construction insurance for the benefit of third parties (insured persons).

The mistrust results into escalation at the latest in the event individual Members of the Supervisory Board are recipients of third-party notices issued by the sued Executive Board Members. With a view to potential future recourse litigation the defense lawyers advise to issue a third-party notice towards the Supervisory Board Members. They argue that the Supervisory Board shares liability, had knowledge of the alleged breach of duty and has supported or approved such breach of duty. In the event a judgment against the Executive Board becomes final and res judicata – contrary to the expectation of the defense lawyer – then recourse claims against the Supervisory Board arise.

In particular current Members of the Supervisory Board will not necessarily take the decision to intervene the legal court-proceedings on the side of the defendant. Obviously, it would be highly contradictory if a Supervisory Board Member who is responsible for asserting the claim would subsequently intervene the legal court-proceeding on the side of the defendant. Should they do so, they certainly need to think about resigning from the Supervisory Board with immediate effect. However, in individual cases an intervention on the side of the defendant may make sense for former Members of the Supervisory Board or for Supervisory Board Members who had been outvoted in the framework of the resolution regarding asserting claims against the Executive Board.

Under the company’s D&O Policy the third-party notice is one of the triggers defined as an insured event. The Supervisory Board Members who are the recipients of a third party-notice will notify the occurrence of an insured event to the company’s D&O insurance carrier.
 

Apparently, the Members of the Supervisory Board who are recipients of a third-party notice are in need of legal consultation regarding questions of intervention to the court proceedings, whilst taking potential future recourse litigation into consideration. The lawyer appointed by the Supervisory Board Member - who had received a third-party notice - in a first step needs to review the entire records of the court case which are often very voluminous and as a second step needs to argue scenarios of liability and recourse with his client and finally provide legal advice regarding intervention of the court proceedings.

Should an intervention on the side of the defendant not be viable due to the reasons outlined above the alternative of intervention on the side of the plaintiff or no intervention at all needs to be reasoned. An intervention on the side of the plaintiff may make sense if it definitely needs to be ensured that the Member of the Supervisory Board who is the recipient of a third-party notice is accommodated in the distribution circle of the judicial post of the liability trial (litigation briefs) and is thereby not cut-off from the flow of information. Individual Members of the Supervisory Board do not always have access to the entire records of the court case in particular in the event they have already left the Board.

The assessment of the prospect of success regarding potential recourse litigation against the Supervisory Board Members - who are the recipients of the third-party notice - is at the core of the legal advice.

Subsequent to a third-party notice the Member of the Supervisory Board needs to make a request to the company’s D&O insurance carrier for a confirmation of cover regarding legal expenses; whereas exactly the same D&O insurance carrier had beforehand sided with the defendants as an intervener in the course of active liability defense and may have possibly even supported the third-party notice towards the Supervisory Board issued by a defendant.
 

Here massive conflicting interests arise! The D&O insurance carrier of the company’s policy cannot at the same time fulfill its fiduciary duty towards the Executive Board (Trigger: claims made / lawsuit) and the Supervisory Board (Trigger: Third-Party Notice).

Imagine the following case:

After the trigger of the third-party notice had been pulled, the affected Supervisory Board Member asked the company’s D&O insurance carrier - who had sided with the defendants as an intervener beforehand – for a confirmation of cover. Firstly, the D&O insurance carrier was asked to bear the legal expenses related to the questions of intervention to the court proceedings. After having basically agreed to the principle of hourly rates for the lawyer’s fees, the D&O insurance carrier wanted to limit the lawyer’s mandate to only strategically reviewing the facts of the case rather than a full blown legal review. In view of a solid legal opinion covering the potential recourse which is a requirement for the question of intervention to the court proceedings, the lawyer appointed by the Supervisory Board Members - who had received a third-party notice - has not agreed to limit the mandate to a strategic review due to his overall and extensive lawyer’s duties towards his client.

The time-sheets of the lawyer included the time spent for the legal opinion in respect to potential recourse litigation. The D&O insurance carrier asked for a copy of the legal opinion (prospects of potential recourse litigation) and stated that the D&O insurance carrier is entitled to receive a copy of the legal opinion; otherwise the lawyer’s bill would not be paid by the D&O insurer.
 

Due to the fact that the D&O insurer had in the first place sided with the sued Executive Board Members as an intervener, the lawyer appointed by the Supervisory Board Members - who received a third-party notice - has declined to hand over the legal opinion regarding the potential recourse litigation to the D&O insurer. Because of the active liability defense and the collaborative defense there was also the risk that confidential and sensible information from the legal opinion (recourse litigation) or significant contents hereof directly or indirectly leaked to the lawyers of the defendants, keeping in mind that the D&O insurer is steering the entire defense. A declaration by the D&O insurer whereas the contents of the legal opinion is subject to absolute confidentiality and are not shared with the lawyers of the defendants was not enough to convince the lawyer of the Supervisory Board Members of such a “Chinese Wall."

If the mere intention of the D&O insurer had been to get clear certainty about the actual work time of the lawyer and the correctness of the time-sheets, then the inspection of the legal opinion by a neutral third party would have absolutely served this purpose. If a mutually recognized neutral lawyer had inspected the legal opinion about potential recourse litigation and had then confirmed towards the D&O Insurer that the time-sheets regarding the legal opinion are correct, then the D&O Insurer actually should have been in a position to pay the lawyer’s bill. However, the D&O insurer has not agreed with this proposal and rather insisted to receive a copy of the legal opinion about recourse litigation.

The lawyer of the Supervisory Board has strongly advised not to hand over the legal opinion - under no circumstances - to the D&O insurer who had been biased by the active liability defense.

Due to a severe conflict of interests the D&O insurer was not able to fulfill its fiduciary duties in the described situation.

The concept of the Two-Tier Trigger Policy for Supervisory Board Members takes up such conflicting interests and defines the event of a third-party notice as a trigger!

The special need for protection of a single Member of the Supervisory Board also derives from the following aspect: In such a scenario massive conflicting interests can arise within the Supervisory Board. Members of the Supervisory Board who are not recipients of a third-party notice may regard their colleagues in the Supervisory Board who are recipients of a third-party notice as biased. It has already been outlined that such affected members could for personal interests – contrary to the company’s interest – work towards a negotiated settlement. In order to avoid such conflicting interests within the Supervisory Board, the competence for asserting the claims against the Executive Board is assigned to a Claims Adjustment Committee within the Supervisory Board. Such members of the Supervisory Board who are affected by the third-party notices cannot become members of the Claims Adjustment Committee. The Claims Adjustment Committee has its own bylaws – and also has employee’s representatives as members - and the committee has a chairman who is steering the litigation strategy against the Executive Board with the plaintiff’s lawyer. Whereas – for the sake of avoiding conflicting interests - the Members of the Supervisory Board who are recipients of third-party notices need to seek their own independent legal advice regarding complex questions of intervention to the liability court-proceedings and potential future recourse litigation.
 

Trigger 3: Rescission

Another trigger is the rescission of the company’s D&O policy. For instance, if a Member of the Executive Board had made false statements in the framework of a warranty statement towards the D&O insurer, there is a risk that the D&O insurer declares rescission of the entire D&O Policy with the effect that all insured persons – apparently also including the Members of the Supervisory Board – remain to stand unprotected without any D&O insurance cover.

Trigger 4: Special Representative pursuant to section 147 German Stock Companies Act

Further conflicting interests can arise in the event a special representative asserts claims at the same time against the Supervisory Board and the Executive Board.

Logically, conflicting interests between the Supervisory Board and the Executive Board arise, which derive from the different scope of functions and duties of both Boards in the dual two-tier board system, in particular in the event they are the target of a legal attack.

The dispute between both corporate Boards always centers on the core issue, if the Executive Board has informed the Supervisory Board or has provided sufficient or complete information (argument of the Executive Board) or if the Supervisory Board has not been sufficiently informed or even has been misled (argument of the Supervisory Board).

Future Triggers

The Two-Tier Trigger Policy shall always come into action if there is a need for the protection of the Supervisory Board and there is a conflict of interests between the Executive Board and the Supervisory Board, which has its origin in the dual two-tier board system. Certainly, the product is at an early stage yet and time will tell which additional triggers need to be defined as insured events in the future.

Individual-Policy

Last but not least an individual Member of the Supervisory Board may wish to have an individual D&O Policy. In this alternative the individual Supervisory Board Member is the sole Policyholder and has to pay the premiums out of his own pocket. For multiplayers this has the advantage that mandates in several Supervisory Boards of different companies - to be listed in the certificate of insurance - are covered.

Future-Outlook

Hopefully, a speedy distribution of the Two-Tier Trigger Policy for Supervisory Board Members will finally bring the concept of D&O insurance programs in Germany in harmony with the dual two-tier board system. This will most certainly not cloud the trustful co-operation between Executive Board and Supervisory Board in times of sunshine with mistrust. Rather, the clear separation and borderline between the D&O cover with separate D&O insurance carriers results in a strengthening of both mandates – Supervisory Board and Executive Board – and can therefore only be advocated in the light of “best practice“ and “Corporate Governance.“
 

Now one of the plaintiffs from the consolidated antitrust litigation has made a move. On April 29, 2013, the Charles Schwab Corporation and related Schwab entities (including several Schwab funds) filed an action in California (San Francisco County) Superior Court asserting a variety of state common and statutory law claims as well as claims under the Securities Act of 1933. A copy of the complaint can be found here (Hat Tip to Alison Frankel, who has an April 30, 2013 article on her On the Case blog, here, about the new Schwab lawsuit).

Schwab’s 125-page complaint essentially alleges that the Libor rate-setting banks manipulated the Libor benchmark rate, which cost Schwab and its various funds millions of dollars of interest income. Schwab claims that rate setting banks suppressed the benchmark borrowing rate, which permitted the banks to pay unjustifiably low interest rates on various securities tied to the Libor benchmark. The complaint alleges that the various Schwab entities invested billions of dollars based on alleged representations about the integrity of the benchmark rate-setting process.

Schwab’s complaint asserts multiple separate causes of action, including claims for fraud; deceit and concealment; violation of Section 17200 of the California Business and Professions Code (unfair business practices); breach of the implied covenant of good faith and fair dealing; violations of Sections 25400 and 25401 of the California Corporate Code (market manipulation); rescission of contract; unjust enrichment; and violation of Sections 11, 12 and 15 of the Securities Act of 1933. The only defendants named in the complaint are the Libor rate-setting banks themselves. There are no individual defendants named nor are there any other third parties named as defendants.

The defendants will of course have a variety of defenses on which they may attempt to rely in defending against the claims. Among other things, the defendants undoubtedly will seek to rely on statute of limitations defenses. In anticipation of this line of defense, Schwab devotes a certain amount of the complaint to detailing the ways that the defendants concealed the benchmark manipulation. The plaintiffs argue that the relevant statutes of limitations should be tolled until March 2011, when UBS disclosed that it was the subject of a regulatory investigation. The defendants will undoubtedly rely on the Wall Street Journal articles that appeared in spring 2008 raising questions about possible manipulation of the Libor rates.  And as Frankel points out in her blog post about the case, the defendants will also argue that the various Schwab entities can’t quantify their alleged damages.

The plaintiffs filed their ’33 Act claims as part of their state court action in reliance on the concurrent state court jurisdiction provisions in the ’33 Act. It will be interesting to see if the defendants seek to remove the action to federal court. Whether or not a state court ’33 action is removable is an issue that was extensively litigated in connection with several credit crisis-related suits. As reflected here, notwithstanding concurrent state court jurisdiction in the ’33 Act, the Luther v. Countrywide lawsuit, though initially filed in state court, wound up in federal court. The Ninth Circuit rulings in the Luther case could allow this case to be removed to federal court and to stay there.

Among the interesting issues with respect to Schwab’s assertion of claims under the Securities Act are the possible D&O insurance coverage implications. The only defendants in most of the Libor-scandal related lawsuits are the corporate entities. In general, with the exception of the Barclays securities class action lawsuit, there are no individual defendants. The corporate entity coverage under the typical public company D&O insurance policy provides coverage only for securities claims. Other than the Barclays action, the Libor-scandal related litigation had not involved securities claims, and therefore by and large likely had not triggered the entity coverage available in most D&O insurance policies.

With Schwab’s assertion of Securities Act claims in its new state court complaint, there have now been claims asserted against all of the Libor rate-setting banks that potentially could trigger the entity coverage found in the typical D&O insurance policy. (Whether the coverage under the various entities’ policies has actually been triggered will of course depend on the terms and conditions in the entities’ policies.) There is of course the possibility that other Libor-scandal plaintiffs will now file their own securities fraud actions. Either way, the assertion of these securities claims raises the possibility that at least a portion of the defendants’ defense expenses might be covered under their D&O insurance policies, and possibly a portion of future settlement amounts if any. In other words, there seems to be an increased possibility of more significant loss costs for affected D&O insurance.

It remains to be seen if other Libor scandal plaintiffs whose claims were dismissed in Judge Buchwald’s March ruling now seek to follow Schwab and try to pursue state law claims against the rate setting banks. The one thing that is clear is that Judge Buchwald’s dismissal was just one stage in what undoubtedly will be a protracted multistage process as the Libor-scandal related litigation makes its way through the courts. The bottom line is that the Libor-scandal related litigation has much further to run and will continue to unfold for months and perhaps years to come.

My New All-Time Favorite Soccer Goal Call: When Lionel Messi scored an incredible goal in a recent La Liga game between Barcelona and Atletico Bilbao, announcer Ray Hudson basically had a brain explosion. Among other things, Hudson said, of Messi’s ball movement past the defenders, that “he literally disperses his atoms inside of his body on one side of the defender, and then collects them on the other.” Literally? Watch the goal and listen to the call on this video.

Reeders reviewing the Advisen report will want to be very careful to note that the report uses its own terminology. In particular, the report uses the term “securities suits” to refer to all categories of corporate and securities litigation. Among the subsets within this larger category of “securities suits” is what the report calls “securities fraud” suits, which as used in the report refers to actions brought by regulatory and enforcement authorities, as well as private securities suits that are not brought as class actions. The category of “securities fraud” suits does not include securities class action lawsuits, which have their own separate category of “securities class action” suits, which part of the larger category of “securities suits.” Readers will want to be very attentive to the report’s usage of these terms.

According to the report, the first quarter, which traditionally is a busy period for corporate and securities litigation, saw a 40 percent decrease in the number of new corporate and securities lawsuits compared to the first quarter of 2012. Though the activity in 1Q13 was up slightly from the fourth quarter of 2012, the quarterly total of new corporate and securities lawsuits (313) was the third lowest quarterly total since 2009. The leading type of new corporate and securities lawsuits during the first quarter was what the report calls “securities fraud” suits (that is, the regulatory and enforcement actions plus securities suits that are not brought as class actions), which were up 13 percent from the fourth quarter of 2012 but down 33 percent from the 2012 quarterly average.

Many readers of this blog are aware that there has been an upsurge in M&A-related litigation in recent years. Interestingly, the report notes that although M&A activity increased during the first quarter of 2013, the number of M&A-related suits decreased, which is, the report notes, “a development that will require further review.”

For several years, Advisen has noted in its reports that securities class action lawsuits as a percentage of all corporate and securities litigation has been declining, from 22 percent in 2007 to 11 percent in both 2011 and 2012. The percentage ticked up slightly in the first quarter of 2013, when securities class action lawsuits represented 12 percent of all corporate and securities lawsuits. However, in absolute terms, the number of securities class action lawsuits continued a downward trend during the fourth quarter of 2013. During the first quarter of 2013, there were only 36 securities class action lawsuit filings, compared to 50 during the first quarter of 2012 (representing a decline of 28 percent).

Companies in the financial sector experienced the most new corporate and securities lawsuits in the first quarter of 2013. New lawsuits against companies in the sector represented 26 percent of all new corporate and securities lawsuits in 1Q13. While still the sector with the highest level of new lawsuit activity, the percentage of suits against companies in the sector has actually declined. For the forth quarter of 2012, the equivalent percentage was 31 percent and the 2012 quarterly average was 28 percent. The report attributes this decline to the continuing winding down of the subprime and credit crisis-related litigation wave.

The Advisen report concludes with a closer look at the recent wave of “say on pay” and other compensation-related litigation.

Speakers’ Corner:On Tuesday, April 30, 2013, I will be participating in Advisen’s Quarterly D&O Claims Trends Webinar, in which, among other things, the Advisen report will be discussed. In this free webinar, which will take place at 11:00 am EDT, I will be participating on a panel with Paul Ferrillo of the Weil Gotshal law firm, David Murray of AIG, and Jim Blinn of Advisen. The panel will discuss claims trends and developments during the first quarter of 2013. Registration information for the webinar can be found here.

PwC Releases 2012 Securities Litigation Study: Earlier this month, PwC released its annual study of the securities class action litigation. I had not previously linked to the study because for a time the study was not available on the firm’s website. The April 2013 study, which is entitled “At the Crossroads, Waiting for a Sign: 2012 Securities Litigation Study” now can be found here.

As other reports have previously noted, the PwC study notes that securities class action litigation declined in 2012 compared to prior years and compared to historical averages. The report also notes that the decline during the year was largely concentrated in the year’s second half; while securities class action litigation filings were at or near historical levels in the first two quarters of 2012, the number of new filings declined sharply during the year’s second half.

The PwC study also notes, consistent with prior studies that the number and value of securities class action settlements declined in 2012.

How Would You Look With a D&O Diary Coffee Mug?: Only one way to find out. Refer here for details. (Including the fact that the mugs are free. That’s right. Free).

Here at The D&O Diary, we are about to celebrate our seventh anniversary of providing information and commentary free of charge to readers around the world. Every now and then a concerned reader will ask, with furrowed brow, “You aren’t going to start charging me to visit your site are you?” Not to worry. For a lot of reasons, we are not about to start charging. The D&O Diary always has been and always will be free.

We are committed to keeping this site free because we think of our readers as our partners. In fact, we are so grateful for this sense of partnership that we would like to give our readers a token of our appreciation.

We would like readers who are interested to have one of our limited-edition designer coffee mugs, pictured above. Just to be clear, the price of the mug, like the price of visiting this site, is free.

If you email me at dandodiary@gmail.com and provide me with your name, address and e-mail address, I will mail you a mug. For free. (I promise that I will not use your information for any reason other than sending you the mug and for communicating with you about it. I will not share your information with anyone.)

That’s right. I am offering to mail you a D&O Diary coffee mug -- for free.

There’s just one little catch.

If I send you a mug, you agree that you will take a picture of the mug and send me the picture along with a 250-300 word description of the circumstances behind the picture. I will publish the best pictures and descriptions on this site – “best” meaning the most creative and imaginative.

What kinds of pictures and descriptions might readers send in? I don’t know. I have confidence that this blog’s resourceful readers, inspired by the experience of receiving a free D&O Diary coffee mug, will demonstrate unparalleled levels of ingenuity and inventiveness.

To get everyone started, here is an illustration of what a picture and description might look like.

In this picture, I am standing at the Ledges Overlook in the Cuyahoga Valley National Park, near Peninsula, Ohio. Yes, there is a National Park in Ohio, located less than 30 minutes from The D&O Diary’s world headquarters. By the way, the park, the headquarters, and in fact the entire state of Ohio are all located in the Eastern Time Zone. This picture was taken by Mrs. D&O Diary. Later, the two of us christened our new mugs with a ‘00 vintage bottle of Château Smith Haut Lafîtte. I purchased the bottle at the Chateau --which is located in the Graves wine region south of Bordeaux --when I traveled there with several industry colleagues in May 2004. (Right now, several old friends are smiling and nodding at the recollection of a great trip.) When I purchased the bottle, the wine steward fixed me with a cold look, shook her finger in my face and said, “Attention! Do not drink for ten years!” I am not sure whether she meant ten years from the grape harvest or ten years from the day I bought the bottle, but either way I think she would approve of our enjoyment of the wine as the inaugural beverage served in our new mugs.

More Pictures and an Afterword

“Information wants to be free/and so does The D&O Diary.” This is the Free Stamp, a Claus Oldenburg sculpture located on a bluff in downtown Cleveland next to City Hall and overlooking Lake Erie.

Cleveland Rocks, Baby. The Rock and Roll Hall of Fame is one of Cleveland's many beautiful buildings. I know that some of you, at this very moment, can hardly resist the urge to shout, “Play Freebird!"—because “free” is good.

Cleveland may be known for its harsh winters, but the truth is that Cleveland has four distinct seasons. And after a long winter, spring is a glorious thing. Here is a picture of springtime at Horseshoe Lake, in Shaker Heights, Ohio. While it is true that no one can do anything about the weather, the weather is, undeniably, free.

Do you know what the price of admission is for the Cuyahoga Valley National Park? You guessed it – free.

Afterword:  I hope that you are already thinking about the pictures you will take when you get your mug. Please let me know if you would like me to send you one. Due to my upcoming business travel, it will be a few days before I can actually send out the mugs. The first batch will go out around the middle of May. When you send in your pictures and descriptions, please send pictures in the JPEG format. Send the descriptions as a Word document without text formating (that is, no bold face, italics or underlining -- the  formatting doesn't translate well into the blogging software). I look forward to seeing what everyone comes up with.

The dispute over the adequacy of notice arose in the context of a protracted and procedurally complicated action in which UnitedHealth is seeking insurance coverage from its insurers for a series of claims in which the company was involved between December 1998 and December 2000. The company’s primary insurance policy has been exhausted by payment of loss and the company has settled with five of its excess insurers. Four excess insurers remain as defendants.

In his April 25 order, Judge Schlitz considered a number of different motions in the continuing coverage litigation, including the motion for summary judgment of one of the remaining excess insurers, based on its assertion that it had not been provided notice of a claim known as the AMA claim. The AMA claim later settled for $350 million.

The notice provision in the excess insurer’s policy specified that:

It consideration of the premium charged, it is hereby understood and agreed that notice hereunder shall be given in writing to [the excess insurer], Financial Services Claims Department, 175 Water Street, New York, New York 10038 (herewritten the “Insurer”)

(a) The Company or the Insureds shall, as a condition precedent to the obligations of the Insurer under this policy give written notice to the Insurer as soon as practicable during the Policy Period, or during the Extended Reporting Period (if applicable), or [sic] any claim made against the Insureds.

According to the court’s opinion, the parties agreed that UnitedHealth had not provided written notice of claim sent to the specified address. UnitedHealth nevertheless argued that it had satisfied the notice requirements because it had “substantially complied” with the provisions. Judge Schlitz agreed with UnitedHealth that because Minnesota law “generally disfavors technical and narrow objections to the existence of coverage, especially when it comes to matters of notice,” substantial compliance is sufficient to satisfy a “to whom” notice requirement. But, he added, “substantial compliance requires notice that is substantial.”

Judge Schlitz disagreed with UnitedHealth that the “to whom” requirement is satisfied if the company “provides any kind of notice to any kind of agent” of the excess insurer.  He found that under the policy’s provisions, the notice requirement “has not been substantially complied with unless the Claims Department received notice of claim – somehow, from someone --- during the policy period.” He added that if an agent of the insurer becomes aware of a claim “but the agent does not work in the Claims Department and does not notify the Claims Department of the claim, then there has not been substantial compliance with the ‘to whom’ requirement.” Judge Schlitz reasoned in that regard that:

“Compiance” with a provision of an insurance policy should not be deemed “substantial” if doing so would defeat the very purpose of the provision. And the very purpose of a “to whom” requirement – its entire reason for existing – is to ensure that notice is provided not just to the insurance company, but to a particular part of the insurance company. A large insurance company has a legitimate reason to require that notice of claim be given to a particular person or department with the company, rather than to any of the company’s thousands of employees and agents scattered around the globe. Otherwise, there is a substantial danger that the “notice” will not be recognized as such and will not serve its function.

Judge Schlitz added that “The Court can conceive of no reason why an insurer … should not be able to protect itself by requiring that notice be given to a particular person or department. And enforcing such a requirement does not place an onerous burden on an insured – particularly an insured such as United, which is itself a huge and sophisticated insurance company, and which has no excuse for failing to send notice of the AMA claim to the Claims Department, as [the excess insurer’s] policy clearly required United to do.” He concluded that in order for UnitedHealth to show that it substantially complied with the notice requirement, it must show that notice of the AMA claim was received by the Claims Department during the policy period.

Judge Schlitz then reviewed the various ways in which UnitedHealth claimed that it had provided notice of the claim. UnitedHealth argued that the AMA claim had been noticed in a monthly loss run report that the company’s broker supplied to the excess insurer and that the loss run report also was attached to UnitedHealth’s renewal insurance application. However, while Judge Schlitz found that there is sufficient evidence from which a jury could find that someone at the excess insurer received the loss runs, there was no evidence that that the loss runs were provided to the claims department.

And while the AMA claim apparently was discussed at a meeting in connection with UnitedHealth’s  insurance renewal, there was no evidence that anyone from the excess insurer’s claims department had attended the meeting. Judge Schlitz specifically concluded that there was no evidence to suggest that the excess insurer’s claims department had received information about the AMA claims from the underwriting department.

Judge Schlitz also rejected UnitedHealth’s argument that because it had provided notice of claim to the primary insurer that is owned by the same insurance holding company as the excess insurer asserting the notice defense that the notice requirements had been satisfied.

Because UnitedHealth had “failed to show that there is a genuine issue of fact about whether the Claims Department received notice of the AMA claim during the policy period,” Judge Schlitz granted the excess insurer’s motion for summary judgment.

Discussion

Judge Schlitz’s conclusion that an insurance notice requirement is not satisfied unless it can be shown that notice has been given to the specific department identified in the notice provision is a cautionary tale for practitioners in this area. In the press of day to day business, it would be far too easy for a notice to be sent to the right company but to a person, location or address other than the one specified in the policy. The clear lesson is that everyone involved in the process of providing notice of claim to needs to help to ensure that notice is sent not just to the correct insurer but also to the correct location – and to the correct location for each of the insurers in an insurance program. The case also underscores the value of having processes to require and obtain acknowledgement of receipt of notice of claim as well.

UnitedHealth’s apparent failure to provide the requisite notice of claim here is a little bit of a mystery. The claim was obviously very serious (or, at a minimum, it became very serious). It is clear from the Court’s opinion that the primary insurer on UnitedHealth’s insurance program was provided with the notice of claim required under its policy. It isn’t explained in the opinion how it came about the notice of claim had been sent to the prmary insurer (and apparentlyto other excess insurers as well) but not to the excess insurer involved in this motion. The court’s reference to the monthly loss runs is a reminder that UnitedHealth is a big, complex company that apparently became involved in a number of claims. The suggestion is that in the hubbub the notice of the AMA claim to this excess insurer somehow slipped through the cracks. Reading between the lines, there may also have been a confusion of or breakdown in responsibilities among the varaious process participants.

There is one aspect of this opinion that I find interesting. There is nothing in Judge Schlitz’s opinion to suggest that the excess insurer was prejudiced in any way by the absence of compliance with the policy’s notice provisions. At least as presented in the court’s opinion, it does not appear that the excess insurer argued that its interests had been prejudiced. The court was concerned only with the question whether or not the policyholder had satisfied the procedural requirements stated in the policy. There is no sense in the opinion of a consideration of a “no harm, no foul” point of view. .

The arguably harsh outcome of this dispute might be more comfortable if the analysis had been accompanied by some suggestion that UnitedHealth’s failure to satisfy the procedural requirements had somehow caused a problem for the excess insurer with reference to the AMA claim. Here’s my concern. Some  insurers try to enforce their policies’ notice requirements as if the implementation of the provions were a game of “Mother May I?” On some occasions, some insurers brandish supposed notice issues as if, as a result of the supposed notice defect, they have won the game because the policyholder failed to say “Mother May !?” D&O insurers are of course fully entitled to expect compliance with policy requirements. However, reasonable business considerations should temper the enforcement of the requirements.

Judge Schlitz commented that it was fair to strictly enforce the requirements of the notice provision against a large sophisticated company like UnitedHealth. Whether or not that is true, my concern is that the same analysis as he is applying to a big sophisticated company like UnitedHealth could also be applied to a company that isn’t as big or sophisticated.

In all fairness, however, it should be noted that isn’t a case where a notice of claim as such was sent to the wrong address or the wrong department. Notwithstanding UnitedHealth’s arguments, it looks as if for whatever reason, there really was not a notice of claim as such sent to any address or department. Without that, UnitedHealth was left to argue that various fragments of informatoin about the claim could be shown to have filtered through a complex pattern of interaction between the company and the excess insurer. That was aloways going to present some difficulties for UnitedHealth. The company was not in the best position it could have been in on these issues. 

As I said at the outset, this case is a cautionary tale for all of us working in this business. The lesson for all of us is to try to make sure that the notice of claim both goes to the specific address stated in the policy and that it goes to all of the insurers.

Ninth Circuit Reverses District Court Holding That E&O Insurance Policy Exclusion Precluded Coverage: On April 26, 2012, in a terse, unpublished four-page decision, a three judge panel of the Ninth Circuit reversed the district court’s dismissal of an insurance coverage action that Ticketmaster had filed against its error and omissions insurer. A copy of the Ninth Circuit’s opinion can be found here.

The errors and omissions insurance policy provided liability coverage for Ticketmaster for claims arising from the performance or the failure to perform professional services. The policy contained an exclusion, Exclusion E, specifying that the policy does not apply to any claim “based on or arising out of … any dispute involving fees, expenses or costs paid to or charged by the Insured.”

Ticketmaster was sued in a putative class action brought by ticketholders alleging that the company had made false representations regarding UPS delivery fees and order-processing charges for ticket events. Ticketmaster sought to have its E&O insurer defend it in the ticketholder claims. The insurer declined based on Exclusion E. Ticketmaster sued the insurer for breach of contract and bad faith. The district court granted the insurer’s motion for judgment on the pleading. Ticketmaster appealed.

In its April 26 opinion, the Ninth Circuit panel reversed the district court, holding that Exclusion E is “reasonably susceptible of at least two meanings, particularly in light of the Policy’s other 27 exclusions, and is thus ambiguous.” The appellate court identified the two possible meanings: “(i) Exclusion E may refer narrowly to a dispute regarding the monetary amount paid to or charged by Ticketmaster for uncontested services, or (ii) more generally, Exclusion E may refer to any dispute regarding a fee or charge for professional services, including a dispute regarding the relationship between services and the fees charged.”

The appellate court said that the E&O insurer had failed to carry its burden of showing that the second interpretation is the only reasonable one. The court noted that there are at least some allegations in the ticketholders’ action that do not involve the amount charged for uncontested services, such as the allegation that Ticketmaster performed no services in exchange for its order-processing charge. This allegation, the court said, did not dispute the amount charged but rather the relationship between any fee at all and the services provided. This dispute would be precluded by interpretation (ii) of Exclusion E but not interpretation (i).

The Ninth Circuit reversed the district court and reinstated the complaint, including Ticketmaster’s bad faith allegations.

FDIC Files Another Failed Bank Lawsuit and Two More Bank Fail: On April 26, 2013, the FDIC filed yet another lawsuit in its against the directors and officers of a failed bank. In its complaint (here), the FDIC, in its capacity as receiver of the failed Frontier Bank of Everett, Washington, has asserted claims for negligence, gross negligence and breach of fiduciary duty against twelve former directors and officers of the bank. The bank failed on April 20, 2010, so the FDIC filed its action just before the three-year statute of limitations expired.

The FDIC alleges that the defendants breached their duties to the bank by “causing the Bank to violate its own policies and prudent, safe and sound banking practices” in connection with the approval of at least eleven loans between March 2007 and April 2008. The FDIC sees to recover damages “in excess of $46 million.”  An April 26, 2013 Puget Sound Business Journal article regarding the FDIC’s new Frontier Bank lawsuit can be found here.

Not only did the FDIC file the lawsuit against the former Frontier Bank directors and officers, but the agency also took over as receiver of two more failed banks on Friday. The two banks are the Douglas County Bank of Douglasville, Georgia and the Parkway Bank of Lenior, North Carolina. Between January 1, 2013 and April 20, 2013, there were only five bank failures total,  but just in the last two weeks there have now been five more, for a total of ten so far during 2013. As I recently noted, though it has seemed as if the bank failure wave had just about played itself out, it now appears that there may yet be more bank failures yet to come.

With the failing of the latest lawsuit, the FDIC has now filed a total of 57 lawsuits against the former directors and officers of failed banks, including 13 so far this year alone. As I discussed here, it seems likely there will be more to come, as well.

Speakers’ Corner: On Tuesday, April 30, 2013, I will be participating in Advisen’s Quarterly D&O Claims Trends Webinar. In this free webinar, which will take place at 11:00 am EDT, I will be participating on a panel with Paul Ferrillo of the Weil Gotshal law firm, David Murray of AIG, and Jim Blinn of Advisen. The panel will discuss claims trends and developments during the first quarter of 2013. Registration information for the webinar can be found here.

In a November 2012 article entitled “Executives’ Good Luck in Trading Own Stock” (here), the Journal took a look at the way corporate officers’ use of trading plans facilitated profitable trades in their company stock.   The newspaper’s analyzed thousands of trades by executives. Among other things, the newspaper found numerous instances where executives, trading in company shares pursuant to Rule 10b5-1 plans, managed to extract trading profits just before bad news sent share prices down or to capture gains with purchases executed just before unexpected good news.

In an April 24, 2013 article entitled “Directors Take Shelter in Trading Plans” (here) the Journal examined trades by outside directors pursuant to Rule 10b5-1 plans. The Journal found that directors’ use of the plans has jumped; the newspaper identified 2.210 nonexecutive directors who reported using the plans to sell stock since 2006. The Journal found that rather than use the plans to sell a fraction of their shares at regular intervals, “some directors use the plans to sell heavily in a short time.”

The Journal found that from 2006 through 2011, nearly a quarter of nonexecutive directors with trading plans sold more stock in one month under the plans than in the surrounding two years. Some used their plans “to unload all or the bulk of an investment fund’s holding in a company, in a spate of selling.

The article includes a detailed discussion of the share sales of a director of one specific company. The director had joined the company’s board when two funds managed by his private equity firm had invested in the company. Under a plan established in November 2011, one of the two funds sold 83% of its holdings in a series of trades during every trading day between January 3, 2011 and February 1, 2012. The trades during that period constituted 25% of the stock’s trading volume. Six days after the last trade, the company announced disappointing financial results and the company’s share price slumped. The article describes in detail the complaints of one of the company’s shareholders to the director and to company management about the trades. The article also reports the director’s explanation that the fund sold the shares in order to address a debt issue and that the private equity firm’s other fund had not sold any of its shares.

The use of trading plans by directors as a means to facilitate their investment funds’ trades in company shares was not really what the SEC had in mind when it promulgated the rule. An SEC spokesman quoted in the latest Journal article conceded that the Rule did not prohibit directors from using the plans to allow outside investment funds to trade shares, but added that the use of plans in this way also “wasn’t specifically contemplated.” The SEC spokesman described the use of plans in this way as an “exotic permutation.”

Insider trading has been an enforcement focus of the SEC and of the DoJ for some time now. So it came as no surprise after the initial Journal article late last year that the question of possible misuse of Rule 10b5-1 trading plans sparked interest with regulators. The SEC launched investigations in connection with trading activities at several of the companies mentioned in the prior Journal article.

The more recent Journal article notes that the plans “have drawn the attention of law enforcement” and reports that prosecutors have urged compliance executives “to be vigilant about trading by directors who also run investment funds.” Given the SEC”s interest in the examining the issues mentioned the prior Journal article, it seems likely that the SEC also will look into the use of trading plans described in the more recent article as well.

There is more than a small amount of irony in these concerns about Rule 10b5-1 plans. The Rule was established more than a decade ago to allow executives (whose wealth often is entirely locked up in company shares) to trade in the company’s stock without incurring possible liability under the securities laws.

There are in fact a number of cases in which courts have held that the inference of scienter that might otherwise arise from insider sales is rebutted when the sales were executed pursuant to Rule 10b5-1 trading plans. Refer here and here for a discussion of recent cases where defendants were able to rely on the Rule 10b5-1 trading plan in order to have the securities claims against them dismissed.

There is no doubt that these various allegations involving insider trading plans have put the plans in a negative light. However, as discussed here, a well-designed and well-executed plan can still provide substantial liability protection by allowing insiders to trade in their holdings of company stock without incurring securities liability exposure. Notwithstanding these recent developments, a well-designed Rule 10b5-1 plan remains an important part of securities litigation loss prevention.

There have been a number of law firm memos recently advocating the use of Rule 10b5-1 plans and providing points on proper implementation of the plans in light of the recent questions that have been raised about the plans. For example, the Covington & Burling law firm recent published a memo entitled “Rule 10b5-1 Trading Plans: Avoiding the Heat” (here). The Wilson Sonsini’s March 2013 memo entitled “Rule 10b5-1 Trading Plans: Considerations in Light of Increased Scrutiny” notes that “the aggressive use (or misuse) of Rule 10b5-1 trading plans is likely to become a significant area of focus for regulatory enforcement and securities lass action plaintiffs” and suggests steps companies can take to avoid problems.

For its part, the agency says that it has “ramped up” its staffing and the program has “gained momentum.” As evidence of the value the program has already delivered, the article cites the agency’s investigation of Knight Capital. The SEC was already investigating problems the trading company was having following the company’s bungled installation of new trading software. The investigation had been narrow until a whistleblower came forward and “the agency was able to shift gears and expand the investigation.”

According to the article, with the help of a whistleblower, the agency’s investigation of the Oppenheimer’s investment firm’s alleged overstatement of the performance of a private equity fund resulted in a fine of nearly $3 million.

The article also details an enforcement action that resulted in the first whistleblower bounty payment under the Dodd Frank Act’s whistleblower provisions. According to the article, Dee Stone, an outside consultant to China Voice Holding Corp, received a whistleblower bounty of $46,000 (so far) for providing documents showing that the company was operating a Ponzi scheme. (Refer here for more about this award, which was the first and is so far the only award under the Dodd-Frank whistleblower bounty program). The identity of the whistleblower and the subject of her whistleblower report had not previously been disclosed.

But though the program has had its successes, the SEC has also encountered obstacles from companies. Some companies have “drafted policies compelling their staffs to report fraud internally,” while other companies require employees to “attest annually that they never witnessed any fraud, a certification that could be used to discredit employees who later blew the whistle.”

The article also notes that companies have been accused of retaliating against whistleblowers. The article cites the September 2012 complaint that James Nordgaard filed in the Southern District of New York against his employer, Paradigm Capital Management and related entities, as well as against its founder and President, in which Nordgaard alleged that his employer retaliated against him after he notified the employer that he had reported what he believed to be illegal activities to the SEC.

In his complaint, a copy of which can be found here, Nordgaard sought to recover damages for retaliation under the Dodd-Frank Act. Nordgaard alleged that after he made his report, he was stripped of trading duties and “constructively terminated.” Initially, the company sought to have the dispute submitted to arbitration. In December 2012, Nordgaard voluntarily withdrew his complaint.

Discussion

Even though the article highlights the successes that the whistleblower program has already produced, the article nevertheless also suggests that company efforts may undermine the program or limits its usefulness. It may be true that some companies may succeed in diverting would be whistleblowers to internal programs, but even that could still be useful as long as the whistleblower’s reports are not swept under the rug but are dealt with.

And while company retaliation could well deter whistleblowing, the specific example of company retaliation that the article notes suggests that retaliation could be as big of a problem for the retaliating company than for the employee, given the retaliation protection available to whistleblowers under the Dodd-Frank Act.

The fact is that during the first full fiscal year of the whistleblower’s operation, the SEC received 3,001 whistleblower reports (as discussed in the agency’s 2012 annual whistleblower report, a copy of which can be found here). And while that number may be, as an unnamed source in the article suggests, “somewhat exaggerated,” it is clear that the SEC is receiving a very substantial number of whistleblower reports – and that is despite the deterrent efforts of some companies noted in the article.

The agency has at this point made only a single whistleblower bounty award. As the agency makes further awards and as those awards attract publicity, would-be whistleblowers will likely be even further motivated to come forward. As a plaintiffs’ law firm noted in a press release earlier this week, whistleblower awards provide “a reason for taking a risk.” (And it should not be overlooked that the plaintiffs’ bar clearly sees the development of a whistleblower practice as a growth opportunity. The efforts of the plaintiffs’ bar may not by itself be sufficient to cancel out the efforts of companies to try to deter whistleblowers but it does at a minimum represent a countervailing force.)

My take is that though companies may be taking steps to avert whistleblower problems, the whistleblower program ultimately will prove, as the article suggests, to be “one of the most effective weapons in the new enforcement arsenal.”

As I have said previously on this blog, if 2012 was the year in which the Dodd-Frank whistleblower program finally got off the ground, 2013 will likely be the year when the program picks up serious momentum. It seems likely  that – notwithstanding the impediments noted in the Times article -- we will not only see increased enforcement activity as a result of whistleblowers’ tips, but that we will see increased numbers of whistleblowers’ bounty awards, as well as the possibility of increased private civil litigation following in the wake of the enforcement actions.

As the cyber threats “become more pervasive,” smaller businesses are “taking out insurance policies designed to bolster their protection form the potentially crippling costs that can accompany data breaches and other cyber attacks.” Take up for this product is, according to the article, particularly strong for companies in the high-technology, financial services and health-care industries. As the article explains, these policies may be particularly valuable for smaller companies that lack the resources to undertake as robust of a preventive program as a larger company might.

As the article explains, the policies provide both first-party coverage (such as notification costs) and also protect against third party liability claims (such as lawsuits for damages). In a serious incident, this insurance protection, according to one commentator quoted in the article “can sometimes be a life-or-death issue for smaller companies.” The policies also cover forensic IT examinations to determine how a breach occurred and some policies even provide for public relations services to mitigate negative publicity. Again, these services could be particularly valuable for a smaller company that may not have sufficient crisis management resources available.

This type of insurance is of course no substitute for proactive cybersecurity risk management, “such as sound data-protection protocols and employee education.” In any event, as part of the application process, the insurance company will want reassurance that these kinds of efforts and protocols are in place. The insurance provides company owners and managers reassurance that the company will be able to weather the storm if problems do emerge.

According to the article, as news about cyber breaches become increasingly common, more and more companies will conclude that the cost-benefit analysis weighs in favor or purchasing this type of insurance.

The parties’ April 17, 2013 memorandum of understanding regarding the settlement can be found here. The plaintiffs’ lawyers’ April 22, 2013 press release in which, among other things, the plaintiffs’ lawyers state that the settlement is “the largest cash derivative settlement on record” can be found here. The lead plaintiffs’ press release can be found here. As reflected in the press releases as well as is stated in the many media reports about the settlement (refer for example, here), the entire cash portion of the $139 million settlement is to be funded by D&O insurance.

The first of the lawsuits against the News Corp. board was filed in Delaware Chancery Court in March 2011, asserting claims in connection with the company’s $675 million acquisition of Shine Group, Ltd., a U.K.-based television production company owned by Elizabeth Murdoch, daughter of News Corp. Chairman Rupert Murdoch. Elizabeth Murdoch allegedly made $250 million in the acquisition.. Later complaints expanded on claims relating to the Shine Group acquisition and  added extensive additional claims seeking to hold the company’s directors accountable for the scandal surrounding the company’s use and attempted cover-up of illegal reporting tactics of some News Corp. journalists in the U.K. The various cases were later consolidated in the Delaware Chancery Court.

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In their Third Amended Consolidated Complaint (here), the plaintiffs alleged that the company’s board’s oversight of the company’s affairs represented a “textbook example of failed corporate governance and domination by a controlling shareholder.” The complaint alleges that for years “the Board has condoned Murdoch’s habitual use of News Corp. to pursue his quest for power, control and political gain and to enrich himself and his family members, at the Company’s and its public shareholders’ expense.” The complaint alleges that the ongoing scandals have not only harmed the company’s reputation and cost it millions of defense costs and other expenses, but also that the company’s share price is artificially depressed because of the negative association of the company with Murdoch.

The defendants filed a motion to dismiss the consolidated amended complaint. The parties argued the motion to dismiss on September 19, 2012 (refer here). While the dismissal motion was pending, the parties engaged in mediation that ultimately resulted in settlement.

The plaintiffs’ lawyers claim that this is the largest cash shareholders’ derivative settlement ever, and I am certainly in no position to dispute that. I have been tracking derivative suit settlements for years. There have been several shareholder derivative suit settlements that were nearly as large as the News Corp. settlement but as far as I can tell none that were quite as big:

• The El Paso/Kinder Morgan merger-related derivative suit settled in September 2012 for $110 million (refer here)

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• In 2005, the Oracle derivative suit settled based on the payment by Oracle CEO Larry Ellison of a total of $122 million (refer here and here).

• In September 2009, the parties to the Broadcom Corp. options backdating-related shareholders’ derivative suit agreed to settle the case, as to most but not all of the defendants, for the D&O insurers’ agreement to pay $118 million (as discussed here).

• In September 2008, the parties to the 2002 AIG shareholders’ derivative lawsuit agreed to settle the case for a payment of $115 million (of which $85.5 million was to paid by D&O insurance) in what was touted at the time as the largest Delaware Chancery Court derivative lawsuit settlement (about which refer here).

These settlements are all dwarfed by the  $2.876 billion judgment entered in June 2009 against Richard Scrushy in the HealthSouth shareholders' derivative lawsuit in Jefferson County (Alabama) Circuit Court, but that astronomical judgment represents its own peculiar point of reference, like some odd parallel universe. It also was of course a judgment following trial rather than a settlement.

Another peculiar point of reference is the $1.262 billion judgment that Chancellor Leo Strine entered in October 2011 the Southern Peru Copper Corporation Shareholder Derivative Litigation (about which refer here). That case also represents its own form of litigation reality, and it too represents a derivative suit judgment following trial, rather than a settlement.

Another derivative lawsuit resolution that is worth considering in the context of the “largest ever” question is the December 2007 settlement of the UnitedHealth Group options backdating-related derivative lawsuit. As discussed here, the lawsuit settled for a total nominal value of approximately $900 million. However, while the press reports at the time described the settlement as the largest derivative settlement ever, the value contributed to the settlement consisted of the surrender by the individual defendants of certain rights, interests and stock option awards, not cash value in that amount.

Aside from the question of the News Corp. derivative suit settlement’s sheer size, there is also the fact that the settlement was funded entirely by D&O insurance. Given the amount of the settlement, the settlement costs undoubtedly were distributed across the several carriers that participated in News Corp.’s D&O insurance program. This large settlement not only represents a serious and unwelcome development for the specific carriers involved but it also represents a potentially unwelcome event for the D&O insurance industry in general, for what it might represent as far as the severity potential of shareholders’ derivative litigation.

In the past, going back ten years or so, shareholders’ derivative suits typically did not present the possibility of significant cash payouts for D&O insurers, at least in terms of settlements or judgments. The cases did present the possibility of significant defense expense and also of the possibility of having to pay the plaintiffs’ attorneys’ fees, but by and large there was usually not a cash settlement component. As the significant examples above show, that has clearly changed in more recent years.

This trend gained particular momentum with the options backdating scandal. Many of the options backdating cases were filed as derivative suits rather than as securities class action lawsuits (largely because the options backdating disclosures did not always result in the kinds of significant share price declines required to support a securities class action lawsuit). Many of the options backdating cases settlements included a cash component, and as illustrated by the Broadcom case mentioned above, some of the options backdating derivative suit settlements included very substantial cash components

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The inclusion of a significant cash component has also been a feature of the settlements of some of the merger objection suits that have been filed as part of the current upsurge in M&A-related lawsuit that have been filed in recent years, as illustrated by the El Paso settlement mentioned above.

This upsurge in the number of derivative suit settlements that include a significant cash component can only be viewed with alarm by the D&O insurance industry. For many years, D&O insurers have considered that their significant severity exposure consisted of securities class action lawsuits. The undeniable reality is that in at least some circumstances, derivative suits increasingly represent a severity risk as well. And the settlement amounts themselves represent only part of the D&O insurers’ loss costs. The D&O insurers also incur millions and possibly tens of million of defense cost expense in these derivative suits. I can only imagine that in the News Corp. derivative suit, for example, that the cumulative defense expense was in the millions of dollars.

An even more concerning aspect of the rise of significant cash settlements in derivative cases for D&O insurers is that these settlement amounts represent so-called “A Side” losses. That is, the losses are paid out under the portion or the D&O insurance policy that provide insurance for nonindemnifiable loss. A derivative suit settlement obviously is not indemnifiable, because if it were to be indemnified, the company’s would make the indemnity payment to itself. For the “traditional” D&O insurance carriers, there is perhaps no particular pain associated with the fact that the loss is paid under the “Side A” portion of the policy, as opposed the other policy coverage (that is, the “Side B” or “Side C” coverage that are more typically called into play). But these days many companies carry --in addition to their traditional D&O insurance that includes all three coverages (that is, they include Sides A, B and C coverage) -- additional layers of excess Side A insurance.

This excess Side A insurance would not be available to provide funding for, say, a securities class action lawsuit, at least if the corporate defendant were solvent, because the settlement of a securities class action lawsuit is an indemnifiable loss to which coverages B and C might apply but to which coverage A does not apply. However, the Side A coverage does apply to a shareholders’ derivative lawsuit settlement because the settlement amount represents a nonindemnifiable loss. So while a jumbo securities class action settlement typically would not trigger coverage under an Excess Side A policy, a jumbo derivative settlement would trigger the Excess Side A policies.

The question for the carriers providing this type of excess Side A insurance is whether or not the premiums they are getting are adequate to compensate them for the risks of the kinds of losses associated with large cash shareholders derivative settlements. By and large, the carriers providing this insurance consider that their most significant exposure is related to claims in the insolvency context. But as this settlement and the Broadcom settlement mentioned above demonstrate, it is also possible that the Side A insurance can be implicated in a jumbo derivative settlement as well as in a settlement in the insolvency context.

The increasing risk of this type of settlement represents a significant challenge for all D&O insurers, but particularly for those D&O insurers concentrating on providing Excess Side A insurance. Those insurers will have to ask how they are to underwrite the risks associated with these kinds of exposures, and how they are to make certain that their premiums adequately compensate them for the risk.

Dan Fisher has an interesting April 22, 2012 article in Forbes (here) discussing the questions associated with the funding of this type of settlement exclusively through D&O insurance.

Finally, as Alison Frankel points out in an April 22, 2013 post on her On the Case blog (here), the News Corp. settlement includes what she describes as an “historic concession”: in the settlement, News Corp. agreed “to disclose its campaign and political action committee contributions to shareholders and its lobbying and Super PAC spending to the board.” Frankel quotes sources to the effect that the News Corp. case represents the first time that a derivative lawsuit has been used as a vehicle to obtain enhanced disclosure of corporate political spending.

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In order to examine these issues, the authors examined the 652 securities class action lawsuits filed between 2006 and 2010. Of the 652 cases, 119 (18%) are ongoing, 257 (40%) have settled, 206 (32%) have been dismissed with prejudice, and 74 (11%) have been voluntarily dropped. Disregarding amounts paid in settlement by third parties (such as offering underwriters), of the cases from this period that settled, the mean settlement amount is $36 million and the median is $9 million.

The authors followed the progression of these cases through the motion to dismiss stage. They found that, among other things, as a result of a combination of dismissal motion rulings, voluntary withdrawls and settlements reached before a dismissal motion ruling, over half of all securities class action lawsuits “end well before discovery and before even a second complaint is filed.”

In 25% percent of cases, the motion to dismiss is granted with prejudice, on average within 19 months of the date on which the complaints were first filed. An additional 9% of cases were voluntarily dropped before the dismissal motion was heard, and another four percent were dropped after the motion to dismiss was granted without prejudice. Thus, a total of 38% of cases “ended relatively quickly and painlessly for defendants.”

In addition, another 13% of cases settled before the motion to dismiss was heard and another 2% of cases settled after the court granted a motion to dismiss without prejudice but before the plaintiffs filed an amended complaint. These cases “entailed costs to defendants and their insurers, but they did not involve extended litigation.”

In 34% of cases, the court granted the motion to dismiss without prejudice, of which 85% of plaintiffs filed a second complaint. The outcome of the second complaint cases roughly parallels the outcomes at the first complaint stage. On average about 30 months passed between the initial filing and the resolution of these second complaint stages. Only five percent of cases reached the third complaint stage, and even fewer involve subsequent complaints. The authors conclude that “relatively few cases entail the filing of a second, third or later consolidated complaint.”

Of all cases that are ultimately dismissed with prejudice, 66% are dismissed at the first complaint stage, 28% are dismissed at the second complaint stage, and 6% are dismissed at the third complaint stage. (Only one case was dismissed at the fourth complaint stage and one was dismissed at the fifth complaint stage.)

Certain factors clearly affect the likelihood of dismissal. For example, when a securities suit involves a parallel SEC enforcement action, the class action was dismissed in only 12% of cases. Cases that involved restatements “were dismissed less frequently than cases that involve non-restatement accounting issues, which in turn were dismissed less frequently than are non-accounting cases.”

In looking at the timing of settlement, the authors categorized the procedural stages of the cases as early pleading (that is, up through the first dismissal motion ruling), later pleading (involving the pleading stages following the first ruling but before the final determination), and discovery (involving the period after the dismissal motion has finally been denied). Forty three percent of settlements occur in the early or late pleading stage, that is while there is still a possibility of dismissal. Just under 60% of settlements occur in the discovery stage, some shortly after the motion to dismiss is denied.

For cases that settle after the motion to dismiss is denied, the time it takes the cases to settle ranges from one month to 46 months, but the mean length of time for a case to settle after the dismissal motion is denied is 16 months.

The authors found that settlement size is related to settlement timing. Settlement size increases as the cases move through the early pleading stage to the discovery stage. The mean settlement for cases that settle in the discovery stage is over $60 million, while the mean settlement of cases that settle in the early pleading stages is less than $20 million.

However, though the settlements tend to grow larger as the cases progress, the settlements as a percentage of shareholder losses decline as the cases advance through the various stages. The authors attribute this seeming contradiction to company size, as larger companies tend to settle later than smaller companies. Though cases involving larger companies settle for larger amounts in terms of absolute numbers of dollars, smaller companies tend to settle for a larger fraction of shareholder losses.

The authors concluded by noting that their findings in this latest updated study are consistent with the finding in their prior study, which had focused on cases filed between 2000 and 2004. The authors note that “it appears that the forces shaping the patterns of dismissal and settlement over the past decade have remained stable.”

The conflict mineral disclosure requirements are intended to identify the use in manufactured products of certain specified minerals from the Democratic Republic of Congo and adjacent countries. The four specific conflict minerals are tin, tantalite, tungsten and gold (the so-called 3TGs). The minerals are found in many high tech products. For example, tantalite is an essential part of most cellphones. The countries covered by the disclosure rules are, in addition to the DRC, Angola, Burundi, Central African Republic, the Republic of Congo, Rwanda, South Sudan, Tanzania, Uganda and Zambia (the “Covered Countries”)

On a positive note, some companies are in fact undertaking aggressive efforts to try to be able to determine whether its parts suppliers on rely on conflicts minerals. For example, as described in an April 15, 2013 post on the New York Times Bits blog (here), Hewlett-Packard has identified ore smelters around the world that are identified with its products in order to enable its part suppliers to ensure that their minerals were not obtained from conflict zones. (H-P’s April 15, 2013 announcement regarding the ore smelters can be found here.) H-P intends to rely on a third-party to audit the smelters documentation as a way to monitor the possible presence of conflicts minerals.

However, a recent article in the Wall Street Journal suggests how difficult it may be for companies to rely on documentation to monitor their parts suppliers’ compliance. In an April 14, 2013 article entitled “Inside Congo’s Link in the Gold Chain” (here), the Journal showed how easily smugglers are able to obtain false documentation for gold smuggled out of the DRC. Smuggler networks ferry gold out of the DRC to neighboring counties (such as Uganda or the South Sudan), where it is recertified and then flown to key entry points around the Middle East (particularly Dubai). As the Journal notes, “the faint paper trail disappears as soon as it arrives in Dubai.” In Dubai, the smuggled minerals are mixed into scrap bars, which are then sold for cash or smuggled into other countries.

Even worse, these highly profitable smuggling operations may be a direct result of the new disclosure requirements.  The disclosure requirements are built on the belief that if minerals’ source of origin is identified and disclosed, buyers can avoid minerals from the conflict regions. Because the flow of minerals is helping to finance the conflict within the DRC, the hope is that reducing the global market for the minerals will create incentives for peace there. However, as the Journal article shows, “the opportunities for illicit gains only increased” after Congress created the disclosure requirements with the Dodd-Frank Act. The smugglers’ potential profits are significantly boosted because the new disclosure requirements have “squeezed the legitimate market for the Congolese minerals.” Perversely, the requirements could actually increase the profits available for those trading in the conflict minerals.

Just to add to the confusion, the SEC’s conflicts minerals disclosure rules have been challenged in the courts. As I discussed previously, on October 19, 2012, the U.S. Chamber of Commerce and the National Association of Manufacturers filed a petition for review with the Court of Appeals for the District of Columbia requesting that the SEC’s rule be set aside in whole or in part. The challenge remains pending.

As if that were not enough, the situation could be even further complicated with the introduction of additional conflicts minerals rules from other countries and organizations. For example, Canada and the European Union are both considering new disclosure requirements that may differ from the U.S. requirements. The requirements under consideration in Canada could be broad than those in the U.S. and could include additional countries and minerals, raising the possibility of overlapping yet inconsistent rules, which has the potential to create confusion and inefficiencies.

With all of the murkiness surrounding the situation, many companies are slow of the mark in getting ready to meet the new disclosure guidelines. As discussed in an April 16, 2013 Compliance Week article (here), a recent PwC survey determined that many company have “intentionally delayed” conflicts minerals compliance efforts. Though of course there are companies (such as H-P) that are actively working to be able to meet the initial disclosure mandates, many other companies are, according to the PwC study, are “playing the waiting game.” Nearly 17 percent of respondents in the PwC survey “haven’t done much or are waiting to see what happens” with the legal challenge. As noted by a PwC representative in the article, “waiting until the legal challenge is resolved to begin compliance efforts is a huge gamble and n unwise approach.” There is a real concern that “many companies are getting too late a start to adequately meet the May 2014 deadline.”

In short, the landscape surrounding the conflict minerals disclosure requirements is fraught with peril. On the one hand, companies taking a more passive approach run a significant risk of being unable to meet the initial disclosure deadline. On the other hand, murky and potentially changing or conflicting requirements make it difficult for the companies to proceed efficiently. And finally, the complex and uncertain circumstances surrounding the global distribution of conflict minerals present significant challenges for all of the process participants to make the source of origin determinations that underlie the disclosure requirements mandate.

In other words, there is a great deal of risk surrounding the new disclosure requirements. The murkiness and confusion surrounding the requirements and the challenging nature of the compliance obligations suggest that, unless the courts set the requirements aside, the conflicts mineral disclosure requirements will become an increasing source of concern as the first disclosure deadline approaches.

I expect that conflicts minerals disclosure is going to an increasingly important source of comment and concern in the months ahead.

With respect to the bank failures, the FDIC announced on its website this past Friday night the closure of three more banks, two in Florida and one in Kentucky. The two Florida banks are the Chipola Community Bank of Marianna, Florida and the Heritage Bank of Northern Florida of Orange Park, Florida. The Kentucky bank is the First Federal Bank of Lexington, Kentucky. Prior to the closure of these three banks on Friday, there had only been a total of five bank closures so far during all of 2013, and only two since February 1, 2013. It really did seem as if the bank failure wave might finally have played itself out and that the banking crisis of the past few years had safely moved into the moping up phase. These three latest bank failures suggest that the banking failure wave may yet have further to go and that we could continue to see still more bank closures as the year unfolds.

With respect to the failed bank lawsuits, just this past Tuesday I had noted that pace of the FDIC’s new lawsuit filings seemed to have slowed. In the preceding month, the FDIC had filed just one new lawsuit and the agency had filed only four new lawsuits since February 1, 2013. However, I did also note that late April 2010 had been a particularly busy period for bank failures and that during late April 2013 nearly two dozen banks would be reaching the third anniversary of their closure date. (The FDIC typically files its failed bank lawsuits close to the third anniversary owing to statute of limitations considerations.)

As I anticipated might happen given the number of bank closures in April 2010, this past week the FDIC filed at least two new failed bank lawsuits in connection with two banks whose third year anniversary date fell just after the date on which the FDIC filed its complaints.

First, on April 15, 2013, the FDIC filed a lawsuit in its capacity as a receiver for the failed City Bank of Lynwood, Washington filed a complaint against the bank’s founder and former CEO and against a loan officer in the bank’s real estate department. City Bank failed on April 16, 2010, so the FDIC filed its complaint the day before the third anniversary of the bank’s closure. In its complaint, a copy of which can be found here, the FDIC asserted claims against the two defendants for negligence, gross negligence and for breaches of fiduciary duties for “approving, in violation of the City Bank Loan Policy and prudent, safe and sound lending practices, at least 26 loans between May 2005 ad October 2008.” The FDIC’s complaint seeks damages of “not less than $41 million.” An April 16, 2013 Seattle Times article about the lawsuit can be found here.

Second, and also on April 15, 2013, the FDIC in its capacity as receiver of the failed Riverside National Bank of Ft. Pierce, Florida, filed a complaint in the Southern District of Florida against eight former directors and officers of the failed bank. Riverside National Bank also failed on April 16, 2010, so again the FDIC took it right down to the wire, filing its complaint the day before the three year statute of limitations period expired. In its complaint, a copy of which can be found here, the FDIC seeks to recover “in excess of $8 million” in damages caused by the defendants’ alleged breaches of duties, gross negligence and negligence “based on defendants’ permitting an excessive number of poorly underwritten loans to be made that were secured solely or largely by the stock of [affiliates of the bank’s holding company].” Owing to the familiarity with the circumstances involving these affiliates, the defendants “had personal knowledge of the dangers inherent in such stock loans.” An April 17, 2013 South Florida Business Journal article about the lawsuit can be found here.

So after filing only two lawsuits between March 1, 2013 and April 12, 2013, the FDIC filed two new lawsuits in a single day on April 15, 2013. As I noted in my recent post, there were 22 bank failures during the period between April 16, 2010 and April 30, 2010. I speculated that this large group of bank failures in a compressed period in late April 2010 might produce a flurry of new lawsuit filings during the last two weeks of April 2013; the arrival of these two latest lawsuit bears out this supposition and suggests that we may see further suits in the next few days as the third anniversary of these various April 2010 bank closures approaches. In any event, the arrival of these two new suits puts to rest any suggestion of a “lull” in the filing of new failed bank lawsuits.

In addition to these two latest lawsuits against former directors and officers of failed banks, the FDIC has also recently filed a lawsuit against the outside law firm of a failed bank. On March 15, 2013, the FDIC, in its capacity as receiver for the failed Orion Bank of Naples Florida, filed a lawsuit in the Middle District of Florida against the Nason Yeager Gerson White & Lioce law firm, and against two partners of the firm, Alan I. Armour II and Ryan P. Aiello. Orion Bank failed in November 2009. In its complaint, a copy of which can be found here, the FDIC alleges that the defendants “inexcusably failed to recognize a slew of glaring red flags.”

The complaint alleges that the bank had retained the firm in connection with certain loans to entities controlled by a local businessman, Francesco Mileto, a borrower who already owed the bank $43 million. The complaint alleges that by June 29, 2009, the date the new loans closed, the defendants “should have known that these loans were in fact the center of a conspiracy among the Bank’s officers to manipulate the Bank’s accounting, deceive the Bank’s Board of Directors … and illegally finance the purchase of stock in the Bank’s own holding company.” The “obvious red flags” did not dissuade the defendants from disbursing $26.5 million in violation of the terms and conditions of the loans and in violation of the law. The defendants’ allegedly “turned a blind eye to the Bank’s officers’ brazen disregard for the internal and legal constraints on their lending.” As a result, the bank allegedly sustained losses in excess of $31 million. The complaint asserts claims of legal malpractice, professional negligence and breach of fiduciary duty.

According to a April 17, 2013 South Florida Business Journal article about the lawsuit, here, Mileto and Orion Bank’s former CEO have both previously been sentenced to prison for inflating the bank’s capital levels through a scheme to purchase bank stock using  the proceeds of loans from the bank. 

The arrival of this lawsuit against the failed bank’s outside law firm is interesting. In many ways, the FDIC’s litigation approach during the current bank failure wave has been quite similar to the approach that the FDIC and the other banking regulatory agencies followed during the S&L Crisis. The one way the FDIC’s approach this time seemed to differ is that the last time around, the banking regulators had aggressively pursued the outside professionals that had advised the failed banks and the failed banks’ boards of directors. From my perspective, the FDIC has not been as aggressive in pursuing the FDIC’s outside professionals.

To be sure, there have been some noteworthy cases where the FDIC has filed claims against failed banks’ outside professionals. For example, as discussed here, in November 2012, the FDIC filed an action against PwC and Crowe Horvath, the former accountants for the failed Colonial Bank of Montgomery, Alabama. In addition, as discussed here, in the October 2011 lawsuit that the FDIC filed its capacity as receiver of the failed Mutual Bank of Harvey, Illinois, the FDIC’s complaint named as defendants not only certain former directors and officers of the bank, but also the bank’s outside General Counsel, who was also a director of the bank, and the General Counsel’s law firm.

But even though as these cases show there have been instances where the agency has pursued claims against failed banks’ former accountants or former lawyers, the FDIC has not as actively pursued claims against outside professionals as it did during the S&L crisis. The FDIC states on the professional liability lawsuit page on its website that, other than lawsuits involving the former directors and officers of failed banks, the agency has authorized an additional 51 lawsuits for “fidelity bond, insurance, attorney malpractice, appraiser malpractice, accounting malpractice, and RMBS claims.” The website does not specify from among these 51 additional authorized lawsuits how many relate specifically to attorney or accountant malpractice. The FDIC’s recent filing against the former outside law firm for the failed Orion Bank, as well as the prior two cases cited above, does show that at least in certain instances the FDIC does intend to pursue claims against failed banks’ outside attorneys and accountants.

In any event, with the FDIC’s filing of the latest two failed bank D&O lawsuits described above, the FDIC has now filed a total of 56 lawsuits against the former directors and officers of failed banks during the current bank failure wave, including 12 so far during 2013. The professional liability lawsuit page on the FDIC’s website states that as of April 12, 2013, the agency has authorized lawsuits against former directors and officers of in connection with 109 failed institutions, inclusive of the now 56 lawsuits involving 55 failed institutions that have already been filed. The gap between the number of suits authorized and the number filed suggests the possibility of as many as 53 additional lawsuits are yet to come. In addition, each month for the past several months, the FDIC has increased the number of lawsuits it has authorized, so the number of potential lawsuits in the pipeline likely is even greater than the current gap between the numbers of authorized and filed lawsuits suggests. In other words, it seems likely that we will continue to see the arrival of additional failed bank lawsuits in the weeks and months to come.

One final note. As I previously noted, in response to media pressure, the FDIC recently has added a new page to its website on which the agency has linked to settlement agreements that the agency has reached in connection with claims and lawsuits that agency has failed or asserted as part of the current bank failure wave. There is a lot of information in the settlement agreements to which the agency has linked on the page. As Joe Montelone notes in an interesting April 19, 2013 post on his blog, The D&O and E&O Monitor, the agency’s publication of these agreements on its website raises a number of interesting issues and presents some potential challenges for defendants and D&O insurers in other claims and lawsuits.

A Note to Readers: This past Wednesday, I added a new post about the $500 million settlement agreement that the parties reached in the Countrywide mortgage backed securities litigation. I composed and published the post while sitting in the boarding area at the Cleveland airport, waiting to board a delayed flight to Chicago (I spent quite a bit of time this past week sitting in airports waiting for various delayed flights). In my haste to publish the post before boarding the flight, I put the post up on my site with a typo in the blog post title – I referred to “Countrywide” as “Countywide.” I am grateful to a number of readers who caught the typo and who sent me notes about it. However, I have not corrected the error, for a very simple reason. If I were to make the change, the software running my blog would think I had added a new blog post, and would send out emails to all of my readers as if I had added a new post.

We all get too many emails. I don’t want to add to the burden by having a bunch of potentially confusing emails going out to all of my readers. Because I don’t want to burden everyone with a completely unnecessary email, I am just going to have to live with the typo. So – my apologies for the error, it is just one of the side effects of the way in which this blog is created, developed and maintained. I hope that readers can look at the typo and recognize that I am living with the embarrassment of the error rather than contributing to email pollution. My thanks to everyone who sent me notes about the typo. I always appreciate it when people help me out by spotting possible errors. In this instance, the error will have to stand uncorrected.

The consolidated litigation that has been settled involves several different lawsuits and several different sets of claimants. Background regarding the litigation can be found here.  All of the claimants allege that they purchased mortgage-backed securities that had been issued by Countrywide prior to its acquisition by Bank of America, and that the offering documents accompanying the offering contained misrepresentations and omissions about the mortgages underlying the securities. Among other things, the claimants alleged that the defendants had misrepresented the underlying process that had been used in the origination of the mortgages and the creditworthiness of the mortgage borrowers.

This litigation has a long and complicated procedural history. Among other cases that are consolidated in this litigation is the Luther v. Countrywide case, which I have written about several times in the past, as pertains to questions of concurrent state court jurisdiction under Section 22 of the ’33 Act. (Refer here for the background of the Luther case and a discussion of the jurisdictional issues involved.)

Further complicating the attempts to settle the case is that during the pendency of the case, Central District of California Judge Marianne Pfaelzer entered several orders dismissing certain groups of claimants on standing and tolling issues. These dismissed claimants preserved rights to appeal these rulings. However, all of the claimants claims are settled through this settlement, including even those whose claims had been dismissed and who might have appealed the dismissal rulings.

According to Steve Toll of the Cohen Milstein Sellers & Toll law firm, who is lead counsel for the class plaintiffs, a plan of allocation will have to be agreed to in order to apportion the settlement amount among the various groups of plaintiffs. The plaintiffs’ lawyers will have to negotiate a proposed allocation amongst themselves and submit a plan of allocation when the settlement papers are submitted to the court.

The $500 million settlement is by far the largest settlement of a mortgage-backed securities class action lawsuit (MBS) as part of the current subprime and credit crisis litigation wave. The next largest MBS securities suit settlement is the December 2011 $315 million Merrill Lynch mortgage backed securities settlement, followed by the $125 million Wells Fargo mortgage backed securities suit settlement. There have of course been larger subprime and credit crisis-related securities class action settlements, led by the massive $2.43 billion BofA/Merrill Lynch merger settlement, among others. However, these other larger settlements did not relate to mortgage backed securities, which, as the procedural history of these cases show, posed a different set of hurdles for the prospective claimants. Overall, this settlement ranks as the sixth largest settlement among all subprime and credit crisis-related securities suit settlements, as shown by the settlement table that can be found here.

I have in any event added the Countrywide Mortgage Backed securities settlement to my running tally of settlements and other case resolutions of the subprime and credit crisis-related lawsuits, which can be accessed here.

Since its last update last month, the FDIC did initiate one lawsuit in its capacity as receiver for New Century Bank of Chicago, Illinois, which failed April 23, 2010. On March 26, 2013 (that is, just a few weeks before the third anniversary of the bank’s failure), the agency filed a complaint in the Northern District of Illinois alleging that the six former directors and officers named as defendants “acted negligently and grossly negligently and breached their fiduciary duties by disregarding the Bank’s loan policy, prudent lending practices, and regulatory warnings in connection with numerous commercial real estate and other loans during the period April 2005 through July 2008.” The FDIC seeks to recover “more than $33 million in losses.”

With the addition of just this one lawsuit, the FDIC has filed only two new complaints against former directors and officers of failed banks since March 1, 2013 and only four new complaints since February 1, 2013. By contrast, during January 2013, the FDIC filed five new complaints, just in that one month alone. In the two month period including December 2012 and January 2013, the FDIC filed a total of nine new lawsuits.

This relative slowdown since February 1, 2013 is all the more noteworthy given the number of banks that failed during the corresponding period three years ago. During the period February-April 2010, there were a total of 49 bank closures. By way of comparison, there were only 51 bank closures during all of calendar year 2012, and there have only been five so far during 2013. Early 2010 was a very active period for bank closures, and so given that the FDIC tends to file its suits, if at all, as the third anniversary approaches, it seemed that 2013 was going to be an active period of new lawsuit filing.

In addition, each month the agency updates its website to show the increased numbers of lawsuits that have been authorized. At its most recent update, the agency indicated that the number of lawsuits authorized has once again increased during the past month. As of April 12, 2013, the FDIC has now authorized suits in connection with 109 failed institutions against 888 individuals for D&O liability. This figure of 109 authorized lawsuits is inclusive of the 54 filed D&O lawsuits naming 407 former directors and officers that have already been filed. These figures suggest that there is a backlog of 55 cases that have been approved and not yet filed. The backlog seems to be growing. Given the monthly increase in the number of authorized lawsuits, you would really expect to see the agency’s new lawsuit pace moving along an active clip, not as seems to be the case, entering some sort of a lull.

There are a number of possible reasons for the apparent slowdown in the number of failed bank lawsuit filings. The first is just timing. I mentioned above that during the period February to April 2010, 49 banks closed, but of those 49 bank failures, 23 occurred in April 2010 alone (a very busy month for bank failures). Of the 23 bank closures in April 2010, 22 took place on or after April 16, 2010. In other words a very large percentage of the banks that failed during this period failed in late April 2010, and thus still have not yet reached the third anniversary of their closure. The third anniversary is coming up, but we are not quite there yet. There could be a flurry of new failed bank lawsuit filings in the next few days.

Another possible explanation for the apparent lull of new failed bank lawsuit filings over the last few weeks is that the agency may have entered tolling agreements with the failed banks directors and officers to see if they agency can reach a negotiated settlement with the directors and officers and with their bank’s D&O insurer. If the parties have entered tolling agreements, lawsuits involving some of the banks still could be filed later.

Finally, there are a number of cases in which the agency has reached a negotiated settlement with the directors and officers and with the D&O insurer without the agency actually filing the lawsuit. If the agency was able to reach a settlement agreement of this type in a number of cases, that too might account for the apparent filing slowdown over the past several weeks. (The agency has posted the settlement agreements in a number of these kinds of settlements on its website.)

Nevertheless, given the number of banks that failed in the first half of 2010 and given the growing number of lawsuits the agency has filed, it seems as if the failed bank lawsuit filing pace should be picking up again soon. As I have previously noted, there have previously been lulls in the FDIC's failed bank lawsuit filing activity (refer here, for example, wiht respect to the two month lull during mid-year 2012). But the prior lulls have in most instances been quicly followed by a period of quickened filing actiivity (as discussed, for example, here).. Circumstances may be poised for the same filing pattern again now.

Another FCPA Civil Lawsuit: There is no private right of action in the FCPA. Nevertheless, civil litigation has followed in the wake of the proliferation in the number of governmental enforcement actions alleging violations of the FCPA, as investors allege that company management have violated their corporate duties in allowing the bribery to take place or that, by failing to disclose the briber, management has misrepresented the company’s internal controls or financial condition.

The latest example of these kinds of civil suits is interesting because at least so far there is no formal enforcement action against the company involved or its senior officials, although the bribery allegations have been the subject of very high-profile publicity.

According to their April 12, 2013 press release, plaintiffs’ lawyers have filed a securities class action lawsuit in the Southern District of New York against Wal-Mart de Mexico SAB (“Walmex”) and Ernesto Vega, the Chairman of Walmex’s board of directors and Chairman of the Board’s audit and corporate practices committee. The complaint, a copy of which can be found here, purports to be filed on behalf of investors who purchased ADRs of Walmex between February 21, 2012 and April 22, 2012. The complaint alleges seeks damages under the ’34 Act.

The investors’ complaint alleges that during the class period the defendants made false and misleading statements about Walmex’s business practices with respect to unlawful or unethical bribery conduct. Specifically, according to the plaintiffs’ lawyers press release, the complaint alleges that Walmex “failed to disclose that it had been involved in a bribery scheme,” and that as a result of the defendants’ misleading statements the company’s ADRs traded at inflated prices during the class period.

Unlike many of these kinds of civil actions, the plaintiffs do not base their assertions on allegations derived from a prior regulatory enforcement action; so far, there has been no formal regulatory enforcement action taken against the company. Rather, the plaintiffs’ allegations rely heavily on information in an April 22, 2012 New York Times article entitled “Wal-Mart Hushed Up a Vast Mexican Bribery Case” (here). The lengthy article detailed the extensive payment program that executives at Walmex allegedly had pursued in order to obtain Mexican zoning approvals, reductions in environmental impact fees and the allegiance of neighborhood leaders. According to the article, an internal Wal-Mart investigation not only found evidence of the payments, but also that Walmex executives knew about the payments and took steps to conceal the payments from Wal-Mart’s headquarters. The lead investigator recommended that Wal-Mart expand the investigation, but instead, according to the article, Wal-Mart’s leaders shut it down.

The new compliant quotes extensively from the New York Times article; parts of the complaint are nothing more than lengthy block quotes from the article. Among other things, the Times article notes that in December 2011, after learning of the Times’s reporting in Mexico, Wal-Mart informed the Justice department that it had begun an internal investigation into possible FCPA violations. In subsequent regulatory filings, the company has stated that it is investigating possible improper payments in other countries. To date, there have been (so far as I am aware) no formal regulatory actions taken against Wal-Mart or its officials.

Nevertheless, though there had to date been no enforcement action, the Walmex investors have initiated a securities class action lawsuit based on the information provided in the Times article. The case is not the first civil action seeking damages in connection with alleged FCPA violations in the absence of a formal regulatory action. However, it does provide a high-profile example of the way in which FCPA allegations can lead to private civil litigation.

One other interesting feature of the Walmex situation is that the alleged bribery allegations first came to light in September 2005 when a whistleblower contacted a senior Wal-Mart lawyer. It is an interesting question of what might happen in similar circumstances today, given the potentially rich whistleblower bounty payments potentially available under the Dodd-Frank whistleblower provisions. The bounty provisions provide a significant incentive for a whistleblower of the kind involved here to go straight to the SEC. These circumstances provide a powerful illustration of the kinds of circumstances that could make the Dodd-Frank whistleblower provisions so significant and could lead to increased regulatory and enforcement activity.