Today it was announced that six banks settled with the U.K. Financial Conduct Authority and other regulators for a combined total of approximately $4.3 billion for their roles in the manipulation of the $5.3 trillion-a-day Forex market. The six banks involved in the settlement include Citigroup, UBS, HSBC, Royal Bank of Scotland, JP Morgan and Bank of America. While the settlement is larger than fines levied to date in connection with the Libor scandal, this may be just the beginning. For example, Barclays was not part of these initial settlements and is reportedly still under investigation. Further, the settlement does not include a settlement with many of the U.S. regulators that are conducting their own investigations, including criminal investigations by the U.S. Department of Justice which will likely involve individuals at the various banks. The banks that settled today likely wanted to get ahead of the curve to limit their exposure as much as possible. From the size of the fines, there must have been strong evidence against traders which resulted in the banks considering a settlement at this stage. Additionally, the banks also face civil litigation in the U.S., which if successful could also present large exposures. Click here to see an article from January 2014 authored by Sedgwick Chicago’s Jennifer Quinn Broda and Eric Scheiner on the regulatory scrutiny and potential insurance implications.
Archive for the ‘Directors & Officers’ Category
Today, the U.S. Supreme Court issued a unanimous¹ decision in the securities fraud case, Halliburton Co. v. Erica P. John Fund, which was highly anticipated by many who follow the federal securities laws, including D&O insurers. 573 U. S. ____ (June 23, 2014). Although Halliburton expressly upheld Basic’s “fraud-on-the-market” presumption in order to satisfy the reliance requirement for a class of investors, Halliburton also held that defendants will be able to rebut this presumption earlier – at the class certification stage – with evidence that the misrepresentation did not, in fact, affect stock price. Thus, while Halliburton does not scrap the fraud-on-the-market theory and its ability to satisfy reliance, as announced in Basic Inc. v. Levinson, 485 U. S. 224 (1988), Halliburton certainly changes the landscape as there likely will be additional costs incurred in connection with a defendant’s efforts to rebut the presumption of reliance at an earlier stage of the case; however, some classes may not be certified following those efforts. Both of these issues may have implications for D&O insurers.
In its decision, the Supreme Court addressed whether to continue to apply the Basic holding, which permits securities fraud plaintiffs to establish a presumption of class-wide reliance for alleged misrepresentations based on the fraud-on-the-market theory. Under this approach, plaintiffs are not required to demonstrate each class member’s individual reliance on the alleged misstatements, based on the theory that securities markets operate efficiently, and thus the price of publically traded securities accurately reflects all publically available information about the traded company – including the impact of the “public material misrepresentations.” Basic, therefore, enabled class plaintiffs to establish collective reliance on the misstatement(s) based on the market price of the security, and avoid individualized issues that could defeat class certification. Prior to Halliburton, defendants were allowed to rebut the presumption at trial, but not at the class certification stage.
Petitioner Halliburton, the defendant in the underlying securities action, challenged the economic assumptions of the efficient market theory, which it believes have been “widely rejected” by economists since the Basic decision. In its brief, Halliburton argued that Basic “was wrong when decided, and time has only made things worse.” Halliburton argued that a securities plaintiff should be required to demonstrate that the “alleged misrepresentations actually affected the stock price” in order for a presumption of reliance to apply or, at the very least, that defendants should be allowed to rebut the presumption at the class certification stage with evidence establishing that “the misrepresentation did not distort the market price[.]”
The respondents argued that Basic is “well-settled[,]” has been cited repeatedly and favorably in recent Supreme Court securities decisions, and is essential to maintain and supplement the enforcement of the federal securities laws. Respondents also contended that Congress considered, but flatly rejected, calls to overrule Basic when it enacted the PSLRA in 1995, and argued against an additional evidentiary step at the class certification stage, claiming that it would improperly and prematurely insert a merits inquiry into an otherwise preliminary stage of the litigation. Respondents characterized such a move as incompatible with federal class certification rules, and other Supreme Court decisions on class issues.
Ultimately, the Supreme Court took a measured approach in rejecting the defendant’s outright calls to overturn Basic’s presumption of reliance, finding that there has not been a “fundamental shift in economic theory” to overrule a signature doctrine in securities-fraud laws. However, the Halliburton Court seemingly agreed with Basic that the presumption was not conclusive, but rather rebuttable, in expressly empowering defendants with the ability to rebut plaintiff’s presumption of reliance at or before class certification. (Halliburton at 22.) (“[Price impact] thus has everything to do with the issue of predominance at the class certification stage. That is why, if reliance is to be shown through the Basic presumption, the publicity and market efficiency prerequisites must be proved before class certification. Without proof of those prerequisites, the fraud-on-the-market theory underlying the presumption completely collapses, rendering class certification inappropriate.”). As a result, when plaintiffs seek to rely on the presumption, defendants will seek to rebut the presumption earlier. We expect the class certification stage to be even more contentious, with increased briefing, evidentiary submissions, and expert testimony/analysis to the trial court on the issue of price impact.
Clearly, Halliburton’s continued affirmance of Basic’s fraud-on-the-market presumption of reliance, while somewhat unsurprising based on the line of questioning during oral arguments that were heard in March, is nonetheless disappointing for directors, officers, and entity defendants (and their insurers), because it makes it easier for a plaintiff to claim class-wide reliance based on alleged misrepresentations. The silver lining for defendants, however, is that they may now challenge the application of this presumption earlier, at the class certification stage. While this presents an opportunity for defendants potentially to avoid class-wide liability, and may cause some cases not to be certified (a benefit to D&O insurers), it also may increase the cost of defending such matters earlier in the process. Thus, Halliburton may create additional cost pressures for D&O insurers as there will be, among other things, additional expert and evidentiary efforts at the class certification stage to review the misrepresentations and any actual price impact. Along with the potential long-term implications of the decision, insurers should also be aware that a number of securities cases stayed, pending a decision in Halliburton, will recommence in the short-term.
¹ Roberts, delivered the opinion of the Court, in which Kennedy, Ginsburg, Breyer, Sotomayor, and Kagan joined. Ginsburg, filed a concurring opinion, in which Breyer and Sotomayor, joined. Thomas, filed an opinion concurring in the judgment, in which Scalia and Alito, joined.
Second Circuit Vacates Judge Rakoff’s Rejection of SEC Settlement: Consent Decree “Fair and Reasonable” Even Without Admission of WrongdoingFriday, June 13th, 2014
D&O insurers should be mindful of a recent development in the Second Circuit that could have implications for D&O insurers. The developments stem from a key decision in the Southern District of New York in 2011. On November 28, 2011, in a surprising and much-publicized decision, Judge Jed S. Rakoff refused to approve a consent decree jointly proposed by the SEC and Citigroup Global Markets. See SEC v. Citigroup Global Markets Inc., 827 F. Supp. 2d 328 (S.D.N.Y. Nov. 28, 2011). The consent decree required Citigroup to pay $285 million and refrain from future Securities Act violations after allegedly misrepresenting the company’s structuring and marketing of a billion dollar fund largely collateralized by subprime securities. During the settlement hearing, Judge Rakoff asked, among other things, why the court should approve a consent judgment in which Citigroup neither admitted nor denied any of the “serious securities fraud violations” alleged by the SEC. Apparently unpersuaded by the parties’ response, Judge Rakoff concluded that the proposed settlement was “neither fair, nor reasonable, nor adequate, nor in the public interest … because it does not provide the court with a sufficient evidentiary basis to know whether the requested relief is justified[.]” According to Judge Rakoff, “when a public agency asks a court to become its partner in enforcement … the court, and the public, need some knowledge of what the underlying facts are[.]” Unsurprisingly, the SEC and Citigroup appealed.
Last week, applying an “abuse of discretion” standard, the Second Circuit vacated and remanded Judge Rakoff’s decision. SEC v. Citigroup Global Markets Inc., ___ F.3d ___, 2014 WL 2486793 (2d Cir. June 4, 2014). Among other things, the Second Circuit concluded that it was “an abuse of discretion to require … that the SEC establish the truth of the allegations against a settling party as a condition for approving the consent decrees.” As the court explained, “[t]rials are primarily about the truth. Consent decrees are primarily about pragmatism. … It is not within the district court’s purview to demand cold, hard, solid facts, established either by admissions or by trials as to the truth of the allegations in the complaint as a condition for approving a consent decree.”
Although the Second Circuit noted that other cases may require more of a showing (such as where a district court suspects a consent decree has been entered into as a result of improper collusion between the SEC and the settling party), such circumstances did not appear to be present here. Indeed, the Second Circuit noted that Judge Rakoff, “with the benefit of copious submissions by the parties, likely had a sufficient record before it on which to determine if the proposed decree was fair and reasonable.” Of course, if Judge Rakoff “deem[ed] it necessary” on remand, the Second Circuit noted he could ask the SEC and Citigroup to provide “additional information sufficient to allay any concerns … regarding improper collusion between the parties.”
If Judge Rakoff’s decision had been affirmed, meaning that SEC consent decrees likely would need to include party admissions to the wrongful acts alleged, then the “personal profit” and/or “fraud” exclusions typically present in D&O policies would be triggered, as “final adjudication” language often incorporated into those exclusions would be satisfied. D&O insurers’ exposure, therefore, would be significantly limited in such matters, with defense costs likely presenting the only exposure. Thus, the Second Circuit’s reversal significantly blunts, if not outright kills, the immediate trigger of the personal profit and/or fraud exclusion(s) which could have been available to insurers had Judge Rakoff’s decision been affirmed.
Despite potentially disarming the “personal profit” and “fraud” exclusions, the Second Circuit’s decision does not affect a typical D&O policy’s “loss” definition. The amounts due from the insured in the usual consent decree, which include mostly fines, penalties, and disgorgement, arguably fall outside the typical “loss” definition. As a result, while the Second Circuit’s decision may be disappointing to D&O insurers, other strong coverage defenses such as the definition of “loss” continue to be viable with respect to both consent decrees and any parallel civil actions that exist.
In Glascoff v. OneBeacon Midwest Ins. Co., 2014 WL 1876984 (S.D.N.Y. May 8, 2014), the U.S. District Court for the Southern District of New York held that two claims – which seemingly contained allegations concerning deficient corporate structure, and lack of board oversight – did not share a sufficient factual nexus to be considered Interrelated Wrongful Acts to allow coverage for the second claim that was made post-policy period. The decision, which references several New York decisions on related claims, likely will make it more difficult to argue that claims are related absent specific factual circumstances common to both matters.
The claims were submitted by the former board of directors (the “Board”) of the insured, Park Avenue Bank (“PAB”), which was closed by state banking authorities and placed into receivership with the Federal Deposit Insurance Corporation (“FDIC”). Shortly after PAB’s closure, Charles Antonucci (“Antonucci”), PAB’s president, chief executive and a director, was arrested and charged with defrauding a federal bank bailout program and for self-dealing with PAB funds.
The initial claim, made during the policy period, involved FDIC demands against the Board alleging breach of fiduciary duty, negligence and gross negligence in connection with the failure of PAB (the “FDIC Claim”). The FDIC primarily alleged that the Board failed to supervise and conduct PAB’s business, and ensure compliance with banking regulations, focusing on PAB’s deficient internal and underwriting controls. The FDIC also generally asserted that the Board failed to act on allegations of improper conduct by Antonucci, which caused harm to the bank. PAB’s insurer, OneBeacon Midwest Insurance Co. (“One Beacon”), accepted the FDIC Claim for coverage under the D&O Policy (the “Policy”).
The second claim, made two years after the FDIC Claim and post-policy period, involved a lawsuit brought by investors under state securities laws, and sought control person liability against the Board and Antonucci (the “Securities Claim”). Plaintiffs alleged that Antonucci made false statements, misrepresentations, and omissions in inducing them to invest with PAB customers; however, the investments were used to fund Antonucci’s self-dealing. The Securities Claim also alleged “lax corporate oversight” by the Board, and PAB’s lack of “sound corporate governance.”
Following submission under the Policy, OneBeacon rejected the Board’s attempts to argue that the Securities Claim and FDIC Claim involved “Interrelated Wrongful Acts,” and denied coverage for the Securities Claim as made outside the policy period. In response, the Board initiated a suit against OneBeacon.
The District Court found that the relevant policy provisions were unambiguous, including the term “Interrelated Wrongful Act,” defined as “Wrongful Acts which have as a common nexus any fact, circumstance, situation, event, transaction or series of related facts, circumstances, situations, events or transactions.” In reviewing a wide body of New York case law, the District Court determined that the “factual overlap…is tenuous at best,” and rejected the Board’s attempts to view the claims as arising out of the deficient corporate structure at PAB or the Board’s lack of oversight, finding that the Board’s conclusory allegations of similarity between the matters lacked factual support. The District Court noted that claims could theoretically have a sufficient factual nexus even though they involved different aggrieved parties and varied theories of liability, however, it ultimately held that there was not an adequate overlay here between the wrongful acts alleged in the two matters to consider them interrelated, and a single claim made during the policy period.
2013 was a year characterized by continued pressure on the financial sector, a new regulatory landscape and further challenges for the insurance industry branching into emerging risks and economies. The lawyers in our London office authored this update which reviews the key developments and trends for various classes of business during 2013, together with commentary on what we can expect from 2014.
To view and download a PDF copy, click here.
2013 was a particularly eventful year in Washington insurance law. This paper, authored by Sedgwick Seattle’s Robert Meyers, summarizes the holdings of several notable Washington insurance decisions that were filed in 2013. Download a copy of the paper here.
In June 2013, Bob gave a webinar on The State of Bad Faith in Washington. The WA program, and the others in our bad faith series, are are available for on demand viewing. Please click here to request a link.
Here We Go Again? Financial Institutions Face Heightened Regulatory Scrutiny Over Forex and Other Unregulated RatesThursday, January 16th, 2014
In May 2012, Sedgwick Chicago’s Eric Scheiner and Jennifer Quinn Broda wrote an article for the PLUS Journal on the investigations into the manipulation of the London InterBank Offered Rate (Libor) and the civil actions that followed. As a follow-up to their article on Libor manipulation, Eric and Jennifer have published a second article focusing on alleged manipulation in the Forex market. Specifically, they look at how the Forex market works, the conduct at issue and the special role “chat rooms” may be playing with regard to the investigations. They also discuss the ongoing investigations and litigation, as well as the potential coverage implications these investigations and civil suits may have on insurers. Their latest article can also be found in the current issue of the PLUS Journal and in the D&O Diary.
Download a PDF of the article here.
By John S. Na, Sedgwick Los Angeles
A federal district court in Missouri granted insurer Philadelphia Indemnity Insurance Company’s Motion for Summary Judgment in a coverage dispute finding that the insured, Secure Energy, Inc., did not provide timely notice of a claim as required under the D &O Policy. In Secure Energy, Inc. v. Philadelphia Indemnity Insurance Company, case number 4:11-cv-01636 (E.D. Mo. May 16, 2013), the court found that not only did Secure Energy wait too long before reporting the claim, but also that the insurer did not have to demonstrate it was prejudiced by the late notice.
Secure Energy was insured under several D&O policies issued by Philadelphia between October 11, 2007 and October 11, 2012, which provided coverage on a “claims made” basis. The policies required that Secure Energy provide notice to Philadelphia of all claims as soon as practicable but no later than 60 days after the expiration of the policy. On December 20, 2007, Secure Energy received a memorandum from a former employee seeking payment of unpaid commissions totaling $1,800,000. On May 16, 2008, the former employee filed suit against Secure Energy seeking his commission plus $2,000,000 in punitive damages. Secure Energy’s first notice to Philadelphia was on May 4, 2011. Philadelphia denied Secure Energy’s tender on the ground that the notice was untimely. Secure Energy filed suit seeking a declaratory judgment that Philadelphia was obligated to provide coverage for the defense and indemnity costs incurred in the former employee’s lawsuit.
Secure Energy argued that, although it did not strictly comply with the notice requirement under the D&O policies, Philadelphia could not deny coverage unless it first established that it was prejudiced by the late notice. In support of its position, Secure Energy cited to a number of decisions in Missouri which held that under an “occurrence” policy the insurer must first demonstrate that it was prejudiced by the insured’s late notice. The federal district court rejected Secure Energy’s argument, finding that the Missouri Supreme Court distinctly held that an insurer is not required to show prejudice resulting from an untimely notice under a “claims made” policy. In reaching its decision, the court noted that, unlike an “occurrence” policy where the occurrence of an act or omission during the coverage period triggers coverage, a “claims made” policy provides coverage when the act or omission is discovered and brought to the attention of the insurer, regardless of the occurrence date. Because there was no question that Secure Energy failed to provide timely notice, the court held that, under Missouri law, Philadelphia was not required to demonstrate that it was prejudiced by the late notice.
New York Court Rules that Professional Services Exclusion Bars Coverage for Underlying Actions Brought By FINRA and Private InvestorsThursday, April 11th, 2013
By Eryk Gettell, Sedgwick San Francisco
In David Lerner Associates, Inc. v. Philadelphia Indemnity Insurance Company, 2013 WL 1277882 (E.D.N.Y. Mar. 29, 2013), the United States District Court for the Eastern District of New York affirmed the plain meaning of the words “professional services”.
Philadelphia Indemnity Insurance Company (“Philadelphia”) – represented by Sedgwick LLP in the coverage action – issued a D&O liability policy to the brokerage firm David Lerner Associates, Inc. (“DLA”). The policy contained a “professional services” exclusion, however it did not define the words “professional services”.
The Financial Industry Regulatory Authority (“FINRA”) brought a disciplinary proceeding against DLA, alleging that it misrepresented the value of certain real estate investment trust (“REIT”) shares sold to investors, and failed to perform adequate due diligence in marketing those shares. Shortly thereafter, three related class action lawsuits were brought against DLA. DLA tendered the FINRA proceeding and the related class actions to Philadelphia for coverage.
Philadelphia denied coverage based on the “professional services” exclusion. DLA sued for declaratory relief and breach of contract.
The court was asked to consider whether the due diligence carried out by DLA in the course of providing investment advice constituted a “professional service” for purposes of the exclusion, and concluded it did. In rejecting DLA’s argument that the exclusion was ambiguous merely because the words “professional services” were not defined, the court reasoned that undefined terms “should be read in light of common speech and the reasonable expectations of a business person”.
The court was not persuaded by DLA’s argument that financial advisors do not perform “professional services” because they are not considered professionals in the malpractice sense, explaining that in the context of liability insurance “professional services” encompassed a broader range of activities.
The court also rejected the theoretical argument that DLA’s actions were only “ministerial” in nature because “performing a due diligence analysis and marketing financial products requires specialized knowledge and training, and is not a rote activity performed by a professional”.
Discovery was unnecessary to determine whether the exclusion applied because DLA’s alleged failings fell within the scope of the exclusion on their face.
We are pleased to announce that three of the editors of the Insurance Law Blog have been elected to the firm’s partnership, effective January 1, 2013. Alex Potente, David Dolendi and Maria Cousineau are longstanding members of Sedgwick’s editorial team and helped transition our insurance and property coverage newsletters to a blog format. A few other of our insurance attorneys were promoted, including Valerie Rojas (LA – Fidelity/Bond and D&O) and John Seybert (NY – Healthcare). Congratulations to all!
Please click here for more information.