Top Ten D & O Stories of 2007
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With the year-end fast approaching, it is time to take a look back and review the top D & O stories of 2007. It was an eventful year, with some important developments that will have implications for the year ahead, and perhaps for years to come. Here are the top stories, with the year’s most important story leading the way.
1. Subprime Meltdown Launches Litigation Wave: When I first started tracking subprime-related litigation in April (here), I already knew that the subprime meltdown was going to be an important story. By July (here), I knew that the subprime story was "this year’s model"—that is, the hot litigation trend being driven by the business scandal most prominent at the time. By August, I wrote (here) that the developing story had become "All Subprime, All the Time." But even at that point, I don’t think I really appreciated what the subprime story would become. I certainly didn’t envision that it would lead to a surge of lawsuits against some of the giants of the financial services world, such as Merrill Lynch (refer here), Citigroup (refer here), Washington Mutual (refer here), and UBS (refer here).
As of year end, my current tally (refer here) of subprime-related lawsuits stands 34; the recently released NERA year-end securities litigation survey (here) put the number at 38. The litigation includes lawsuits against accountants (here), real estate brokers (here), and many others. The securities lawsuits have come not just against the lenders and the investment banks, but home builders, bond insurers, credit rating agencies, mutual funds, and a host of others. Even more ominously, there is an unmistakable sense of foreboding that the worst may lie ahead (refer here). But whatever may actually lie ahead, there is no doubt that the litigation resulting from the subprime meltdown is the 2007 D & O story of the year.
2. Two-Year Lull in Securities Filings Comes to an End: In mid-year 2007 studies, NERA (here) and Cornerstone (here) both observed that securities filings had been well below historical averages since mid-2005. Stanford Law Professor Joseph Grundfest questioned (here) whether or not there might have been a "permanent shift" to a lower level of securities lawsuit filings.
But as I detailed more thoroughly here, and as further documented in NERA’s recent 2007 year end survey (here), the two-year lull came to an end in the second half of 2007. Indeed, the 81 securities lawsuits filed during the period between August 1, 2007 and November 30, 2007 represents the highest level of lawsuit filings in a four-month period since June-October 2004, and the 25 new securities lawsuits filed in November 2005 represents the highest monthly total since January 2005.
Perhaps even more noteworthy is the fact that the new lawsuit activity is not being driven exclusively by the subprime litigation wave; while the subprime lawsuits collectively represent one important factor, the lawsuits are actually hitting a wide variety of companies for a wide variety of reasons, many having nothing to do with the subprime meltdown. The likelihood of continued financial marketplace volatility suggest that litigation levels may remain elevated for some time to come.
3. Supreme Court Issues Tellabs Decision: The Supreme Court does not take many securities cases; for that reason, and because the Tellabs case had the potential to significantly affect the threshold resolution of many securities cases, the Supreme Court’s opinion in the Tellabs case was much anticipated. When the Tellabs opinion finally came out in June 2007, it was a victory for defendants, although perhaps not as extensive a defense victory as it could have been, as detailed further here and here.
The Tellabs opinion reversed the Seventh Circuit’s ruling and held, interpreting the securities lawsuit pleading standards described in the Private Securities Litigation Reform Act, that for an inference that a defendant acted with scienter to be "strong," the inference "must be cogent and at least as compelling as any opposing inference of nonfraudulent intent." The majority opinion expressly rejected the position urged by concurring Justices Scalia and Alito that "the test should be whether the inference of scienter (if any) is more plausible than the inference of innocence."
While the Tellabs court’s more balanced approach seemed less likely to have a dramatic impact on dismissal motions as would the position urged by the concurring justices, the early returns suggest that the Tellabs case has made it more difficult for securities cases to survive a motion to dismiss (as discussed on this post on the 10b5-Daily blog, here). The Tellabs case has, in fact, proven to be an important factor in many of the motions to dismiss in the options backdating cases (about which refer here). The Tellabs decision and the Supreme Court’s 2005 opinion in the Dura Pharmaceuticals case are now important tools for defendants to try to use at the motion to dismiss stage in securities class action litigation.
4. Top Plaintiffs’ Lawyers Face Criminal Woes: Even a short time ago, who would have thought that the two leading securities plaintiffs’ attorneys would face criminal prosecution? Yet on October 29, 2007, Bill Lerach entered a guilty plea (refer here), and on September 20, 2007, Mel Weiss was indicted on criminal charges (here). (For more about Lerach’s criminal charges, refer here; for Weiss’s, refer here).
The impact of the criminal issues involving the two leading securities plaintiffs’ lawyers is perhaps incalculable, but it does not seem a mere coincidence that shortly after Lerach left his former law firm (now reconstituted as Coughlin, Stoia,Geller, Rudman & Robbins) the firm seemingly went into high gear, filing numerous new securities class action lawsuits. The Milberg Weiss firm, meanwhile, which also faces its own criminal charges, has essentially filed no new lawsuits since 2005.
While there are many opportunistic lawyers hoping to capitalize on the changes at the leading plaintiffs’ firms, it remains to be seen whether any of these firms can duplicate the role that the erstwhile leading firms have played in the past.
5. Largest Derivative Settlement Ever in UnitedHealth Option Backdating Case: The 2006 D & O story of the year undoubtedly was the options backdating scandal. The story has faded from the headlines in 2007 as the subprime scandal has emerged, but the numerous backdating lawsuits (refer here for a complete tally) are now working their way through the system. Although many of the options backdating lawsuits have been dismissed or have settled for relatively nominal amounts (refer here for a complete list of options backdating case dispositions), there have been some exceptions. The most exceptional outcome is the record settlement in the UnitedHealth Group options backdating derivative lawsuit, which apparently represents the largest derivative settlement ever.
As detailed here, in the settlement, former UnitedHealth CEO William McGuire and several other former UnitedHealth directors and officers agreed to a combination of surrender or relinquishment of stock others and other interests; repayment of certain compensation; and the repricing of other stock option awards, all of which collectively represents a value to the company in excess of $900 million. The value of McGuire’s contribution alone reportedly was valued at more that $600 million.
The sheer magnitude of these values makes this settlement noteworthy. The more interesting question is the extent to which this settlement will affect the resolution of the options backdating cases that remain pending, as well as future shareholders’ derivative lawsuit resolutions.
6. Stoneridge Case Argued: The Tellabs decision was not the only important D & O story out of the Supreme Court this year. On October 9, 2007, the Supreme Court head argument in the Stoneridge v. Scientific Atlanta case. At the time, the case was described as the "business case of the year." How important it will ultimately be remains to be seen, but it could have a very significant impact, as detailed at greater length here.
The case will determine the extent to which a third-party that did not actually make a misrepresentation or misleading statement can be held liable under for securities fraud under Section 10 of the ’34 Act and Rule 10b-5 thereunder. The seemingly likeliest outcome is a narrow holding that does not expand the scope of Section 10(b) liability. The Court’s opinion will be released some time before the end of the current Supreme Court term in June 2008. Until the outcome is known, the possibility (however remote) that the Court might overturn the Eighth Circuit and find an expansive basis for "scheme liability" makes this an important case to watch.
7. Global Warming Disclosure Issues Heat Up: Because global warming is one of the predominant social, political and economic issues of our age, it is almost inevitable that it would be come an important D & O issue as well. As I discuss at length here, the Supreme Court’s April 2007 decision in the Massachusetts v. EPA case provided a new context within which global warming has emerged as a concern for corporate officials. Existing disclosure requirements and activists’ proxy ballot initiatives ensure that this issue will remain as a significant corporate challenge.
Several developments that emerged as the year progressed underscore that global climate change is likely to remain a hot button issue for the foreseeable future, as detailed further here. The first occurred on September 14, 2007, when the New York Attorney General subpoened (refer here) five energy companies demanding that they disclose the financial risks of their greenhouse gas emissions to shareholders. The second is the petition submitted to the SEC by 22 different groups seeking to have the SEC require companies to assess and fully disclose their financial risks from greenhouse gas emissions and global climate change.
The activists’ focus on disclosure issues has serious implications because issues surrounding are at the heart of most D & O claims. Because this issue is likely to grow in importance in coming years, companies may face even greater disclosure pressures and a corresponding increase in liability exposures.
8. Busted Buyouts Beget Litigation: The bursting of the private equity buyout bubble has not only left a raft of busted buyouts in its wake, but has also led to a host of new securities lawsuits. Disappointed target companies that have not become the target of securities class action lawsuits included Radian (about which refer here), Harman Industries (refer here), United Rentals (refer here), and Genesco (refer here). Disappointed target companies that have also lawsuits against their erstwhile acquirers include United Rental’s unsuccessful lawsuits against Cerberus Management Company (refer here) and Genesco’s lawsuit against Finish Line (refer here).
There are a host of other deals that are dead or on life support, as detailed on the M & A Law Prof blog (here). There may be one or more of the companies on this list that may yet find themselves with a securities lawsuit to complement their woes. In any event, the busted deal securities lawsuits collectively represent just one more factor driving the increase in securities lawsuits in 2007.
9. Qwest Opt-Out Settlements Exceed Amount of Class Action Settlement: There have always been opt-outs from securities class action settlements, but during 2007, a number of separate and very substantial opt-out settlements raised potentially important implications for future class action settlements, as well as for D & O insurers’ severity assumptions and policyholders’ views of limits adequacy.
The case with the highest dollar value of publicly reported opt-out settlements is the AOL Time Warner securities litigation, where the nine publicly disclosed opt-out settlements total $795 million, as detailed here. But perhaps even more significant is the Qwest securities litigation, where the $411 million aggregate value of the collective opt-out settlements exceeded the $400 million class action settlements, as further detailed here. When the value of the opt outs settlements tops the value of the class settlement, you know you've got a problem.
The emergence of the opt-out settlements presents a host of potentially complicating problems for current and future securities class action litigants, particularly if significant opt-out settlements become a regular part of securities litigation. These developments could increase litigation expense and aggregate settlement expense in civil securities litigation, and even further complicate efforts to resolve class action lawsuits.
10. Section 11 Settlement Held Not Covered "Loss": Although there had been a prior case holding that a Section 11 settlement is not a covered "loss" under a D & O policy, the prior decision was an intermediate state appellate court decision from Indiana, and was viewed as an anomaly in some quarters. So there was quite a reaction when, on March 14, 2007, Judge Gregory Presnell of the United Stated District Court for the Central District of Florida held (refer here) that the $35 million settlement to which CNL Hotels & Resorts agreed to resolve Section 11 claims does not constitute covered "loss" under a D & O policy and was not insurable as a matter of law.
While at one level, Judge Presnell’s decision was merely an extension of existing case law, it did pose a challenge for the D & O insurance industry to address Section 11 settlement issues in the policy itself. Judge Presnell did specifically note that Section 11 settlements are not "per se" uninsurable. Since the CNL Hotels & Resorts opinion came down, the industry has been scrambling to come up with a policy-based solution, to address policyholder expectations of coverage for Section 11 settlements. The industry is still struggling toward equilibrium on this issue, which remains potentially very important for insured companies and their directors and officers.
Top Top Ten Lists: What could top a top ten list but a list of top top ten lists-- Time Magazine has compled fifty top ten lists for 2007 here.
With the year-end fast approaching, it is time to take a look back and review the top D & O stories of 2007. It was an eventful year, with some important developments that will have implications for the year ahead, and perhaps for years to come. Here are the top stories, with the year’s most important story leading the way.1. Subprime Meltdown Launches Litigation Wave: When I first started tracking subprime-related litigation in April (here), I already knew that the subprime meltdown was going to be an important story. By July (here), I knew that the subprime story was "this year’s model"—that is, the hot litigation trend being driven by the business scandal most prominent at the time. By August, I wrote (here) that the developing story had become "All Subprime, All the Time." But even at that point, I don’t think I really appreciated what the subprime story would become. I certainly didn’t envision that it would lead to a surge of lawsuits against some of the giants of the financial services world, such as Merrill Lynch (refer here), Citigroup (refer here), Washington Mutual (refer here), and UBS (refer here).
As of year end, my current tally (refer here) of subprime-related lawsuits stands 34; the recently released NERA year-end securities litigation survey (here) put the number at 38. The litigation includes lawsuits against accountants (here), real estate brokers (here), and many others. The securities lawsuits have come not just against the lenders and the investment banks, but home builders, bond insurers, credit rating agencies, mutual funds, and a host of others. Even more ominously, there is an unmistakable sense of foreboding that the worst may lie ahead (refer here). But whatever may actually lie ahead, there is no doubt that the litigation resulting from the subprime meltdown is the 2007 D & O story of the year.
2. Two-Year Lull in Securities Filings Comes to an End: In mid-year 2007 studies, NERA (here) and Cornerstone (here) both observed that securities filings had been well below historical averages since mid-2005. Stanford Law Professor Joseph Grundfest questioned (here) whether or not there might have been a "permanent shift" to a lower level of securities lawsuit filings.
But as I detailed more thoroughly here, and as further documented in NERA’s recent 2007 year end survey (here), the two-year lull came to an end in the second half of 2007. Indeed, the 81 securities lawsuits filed during the period between August 1, 2007 and November 30, 2007 represents the highest level of lawsuit filings in a four-month period since June-October 2004, and the 25 new securities lawsuits filed in November 2005 represents the highest monthly total since January 2005.
Perhaps even more noteworthy is the fact that the new lawsuit activity is not being driven exclusively by the subprime litigation wave; while the subprime lawsuits collectively represent one important factor, the lawsuits are actually hitting a wide variety of companies for a wide variety of reasons, many having nothing to do with the subprime meltdown. The likelihood of continued financial marketplace volatility suggest that litigation levels may remain elevated for some time to come.
3. Supreme Court Issues Tellabs Decision: The Supreme Court does not take many securities cases; for that reason, and because the Tellabs case had the potential to significantly affect the threshold resolution of many securities cases, the Supreme Court’s opinion in the Tellabs case was much anticipated. When the Tellabs opinion finally came out in June 2007, it was a victory for defendants, although perhaps not as extensive a defense victory as it could have been, as detailed further here and here.
The Tellabs opinion reversed the Seventh Circuit’s ruling and held, interpreting the securities lawsuit pleading standards described in the Private Securities Litigation Reform Act, that for an inference that a defendant acted with scienter to be "strong," the inference "must be cogent and at least as compelling as any opposing inference of nonfraudulent intent." The majority opinion expressly rejected the position urged by concurring Justices Scalia and Alito that "the test should be whether the inference of scienter (if any) is more plausible than the inference of innocence."
While the Tellabs court’s more balanced approach seemed less likely to have a dramatic impact on dismissal motions as would the position urged by the concurring justices, the early returns suggest that the Tellabs case has made it more difficult for securities cases to survive a motion to dismiss (as discussed on this post on the 10b5-Daily blog, here). The Tellabs case has, in fact, proven to be an important factor in many of the motions to dismiss in the options backdating cases (about which refer here). The Tellabs decision and the Supreme Court’s 2005 opinion in the Dura Pharmaceuticals case are now important tools for defendants to try to use at the motion to dismiss stage in securities class action litigation.
4. Top Plaintiffs’ Lawyers Face Criminal Woes: Even a short time ago, who would have thought that the two leading securities plaintiffs’ attorneys would face criminal prosecution? Yet on October 29, 2007, Bill Lerach entered a guilty plea (refer here), and on September 20, 2007, Mel Weiss was indicted on criminal charges (here). (For more about Lerach’s criminal charges, refer here; for Weiss’s, refer here).
The impact of the criminal issues involving the two leading securities plaintiffs’ lawyers is perhaps incalculable, but it does not seem a mere coincidence that shortly after Lerach left his former law firm (now reconstituted as Coughlin, Stoia,Geller, Rudman & Robbins) the firm seemingly went into high gear, filing numerous new securities class action lawsuits. The Milberg Weiss firm, meanwhile, which also faces its own criminal charges, has essentially filed no new lawsuits since 2005.
While there are many opportunistic lawyers hoping to capitalize on the changes at the leading plaintiffs’ firms, it remains to be seen whether any of these firms can duplicate the role that the erstwhile leading firms have played in the past.
5. Largest Derivative Settlement Ever in UnitedHealth Option Backdating Case: The 2006 D & O story of the year undoubtedly was the options backdating scandal. The story has faded from the headlines in 2007 as the subprime scandal has emerged, but the numerous backdating lawsuits (refer here for a complete tally) are now working their way through the system. Although many of the options backdating lawsuits have been dismissed or have settled for relatively nominal amounts (refer here for a complete list of options backdating case dispositions), there have been some exceptions. The most exceptional outcome is the record settlement in the UnitedHealth Group options backdating derivative lawsuit, which apparently represents the largest derivative settlement ever.
As detailed here, in the settlement, former UnitedHealth CEO William McGuire and several other former UnitedHealth directors and officers agreed to a combination of surrender or relinquishment of stock others and other interests; repayment of certain compensation; and the repricing of other stock option awards, all of which collectively represents a value to the company in excess of $900 million. The value of McGuire’s contribution alone reportedly was valued at more that $600 million.
The sheer magnitude of these values makes this settlement noteworthy. The more interesting question is the extent to which this settlement will affect the resolution of the options backdating cases that remain pending, as well as future shareholders’ derivative lawsuit resolutions.
6. Stoneridge Case Argued: The Tellabs decision was not the only important D & O story out of the Supreme Court this year. On October 9, 2007, the Supreme Court head argument in the Stoneridge v. Scientific Atlanta case. At the time, the case was described as the "business case of the year." How important it will ultimately be remains to be seen, but it could have a very significant impact, as detailed at greater length here.
The case will determine the extent to which a third-party that did not actually make a misrepresentation or misleading statement can be held liable under for securities fraud under Section 10 of the ’34 Act and Rule 10b-5 thereunder. The seemingly likeliest outcome is a narrow holding that does not expand the scope of Section 10(b) liability. The Court’s opinion will be released some time before the end of the current Supreme Court term in June 2008. Until the outcome is known, the possibility (however remote) that the Court might overturn the Eighth Circuit and find an expansive basis for "scheme liability" makes this an important case to watch.
7. Global Warming Disclosure Issues Heat Up: Because global warming is one of the predominant social, political and economic issues of our age, it is almost inevitable that it would be come an important D & O issue as well. As I discuss at length here, the Supreme Court’s April 2007 decision in the Massachusetts v. EPA case provided a new context within which global warming has emerged as a concern for corporate officials. Existing disclosure requirements and activists’ proxy ballot initiatives ensure that this issue will remain as a significant corporate challenge.
Several developments that emerged as the year progressed underscore that global climate change is likely to remain a hot button issue for the foreseeable future, as detailed further here. The first occurred on September 14, 2007, when the New York Attorney General subpoened (refer here) five energy companies demanding that they disclose the financial risks of their greenhouse gas emissions to shareholders. The second is the petition submitted to the SEC by 22 different groups seeking to have the SEC require companies to assess and fully disclose their financial risks from greenhouse gas emissions and global climate change.
The activists’ focus on disclosure issues has serious implications because issues surrounding are at the heart of most D & O claims. Because this issue is likely to grow in importance in coming years, companies may face even greater disclosure pressures and a corresponding increase in liability exposures.
8. Busted Buyouts Beget Litigation: The bursting of the private equity buyout bubble has not only left a raft of busted buyouts in its wake, but has also led to a host of new securities lawsuits. Disappointed target companies that have not become the target of securities class action lawsuits included Radian (about which refer here), Harman Industries (refer here), United Rentals (refer here), and Genesco (refer here). Disappointed target companies that have also lawsuits against their erstwhile acquirers include United Rental’s unsuccessful lawsuits against Cerberus Management Company (refer here) and Genesco’s lawsuit against Finish Line (refer here).
There are a host of other deals that are dead or on life support, as detailed on the M & A Law Prof blog (here). There may be one or more of the companies on this list that may yet find themselves with a securities lawsuit to complement their woes. In any event, the busted deal securities lawsuits collectively represent just one more factor driving the increase in securities lawsuits in 2007.
9. Qwest Opt-Out Settlements Exceed Amount of Class Action Settlement: There have always been opt-outs from securities class action settlements, but during 2007, a number of separate and very substantial opt-out settlements raised potentially important implications for future class action settlements, as well as for D & O insurers’ severity assumptions and policyholders’ views of limits adequacy.
The case with the highest dollar value of publicly reported opt-out settlements is the AOL Time Warner securities litigation, where the nine publicly disclosed opt-out settlements total $795 million, as detailed here. But perhaps even more significant is the Qwest securities litigation, where the $411 million aggregate value of the collective opt-out settlements exceeded the $400 million class action settlements, as further detailed here. When the value of the opt outs settlements tops the value of the class settlement, you know you've got a problem.
The emergence of the opt-out settlements presents a host of potentially complicating problems for current and future securities class action litigants, particularly if significant opt-out settlements become a regular part of securities litigation. These developments could increase litigation expense and aggregate settlement expense in civil securities litigation, and even further complicate efforts to resolve class action lawsuits.
10. Section 11 Settlement Held Not Covered "Loss": Although there had been a prior case holding that a Section 11 settlement is not a covered "loss" under a D & O policy, the prior decision was an intermediate state appellate court decision from Indiana, and was viewed as an anomaly in some quarters. So there was quite a reaction when, on March 14, 2007, Judge Gregory Presnell of the United Stated District Court for the Central District of Florida held (refer here) that the $35 million settlement to which CNL Hotels & Resorts agreed to resolve Section 11 claims does not constitute covered "loss" under a D & O policy and was not insurable as a matter of law.
While at one level, Judge Presnell’s decision was merely an extension of existing case law, it did pose a challenge for the D & O insurance industry to address Section 11 settlement issues in the policy itself. Judge Presnell did specifically note that Section 11 settlements are not "per se" uninsurable. Since the CNL Hotels & Resorts opinion came down, the industry has been scrambling to come up with a policy-based solution, to address policyholder expectations of coverage for Section 11 settlements. The industry is still struggling toward equilibrium on this issue, which remains potentially very important for insured companies and their directors and officers.
Top Top Ten Lists: What could top a top ten list but a list of top top ten lists-- Time Magazine has compled fifty top ten lists for 2007 here.
posted by Kevin LaCroix at 1:24 PM
1 Comments:
Congratulations on a fine, informative year, Kevin. 2007 was also in a year in which we started hearing more frequently that the blogosphere is riddled with gabbling, pseudonymous rumor-mongers, noise, and pumping and dumper. Which it is. But it does not have to be. A blog written in a straightforward, no-nonsense way by someone who knows what he is talking about can be extremely worthwhile. I want my blog to be as good as D&OD when and if it ever grows up.
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