Zealous Institutions Drive D&O Settlement Skyward

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With the noise of IPO laddering claims figuring into this year'sstatistics, there isn't total agreement about whether the level ofmore traditional securities cases in 2001 will be slightly up orslightly down from last year. But the dismissal rate of such casesis no longer rising and settlement values are ballooning, accordingto a plaintiffs' attorney.

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“I believe the trends are positive for plaintiffs' securitiesclass action litigation–and, conversely, negative for yourindustry,” Sherrie Savett, managing principal for Berger &Montague in Philadelphia, told insurers and brokers gathered at theannual meeting of the Professional Liability Underwriting Societyin November.

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“When the year is out, I think you'll see approximately the samenumber of cases” as last year, excluding laddering cases, she said,putting the range for the last few years at somewhere between 225and 265 per year.

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A 2001 phenomenon, laddering cases by themselves might alsoswell from 180 to 250, defense attorney Tower Snow Jr., of Brobeck,Phleger & Harrison in San Francisco, reported at the same PLUSsession.

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Laddering cases have been filed against securities underwritersof initial public offerings, the companies that had offerings, andtheir directors and officers. Such cases allege that allocations ofIPO shares were made in exchange for excessive commission payoutsto securities underwriters or in connection with undisclosedagreements to buy more shares in the exchange trading market.

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(For a comprehensive look at laddering cases, see NU,Nov. 12, page 10.)

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Speaking about more traditional, non-laddering cases, Ms. Savettsaid the dismissal rate has remained steady this year. Indicatingthat dismissals are now between 25 and 30 percent nationally, shesaid that the percentage of dismissals had been growing for anumber of years as pleading standards of the Private SecuritiesLitigation Reform Act of 1995 “were vetted out” by the courts.

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With the Reform Act, Congress intended to end the “race to thecourthouse” in which “frivolous” lawsuits were brought as soon asstock prices fell, by raising procedural hurdles for federalsecurities class-action filings. Among the hurdles introduced werehigher pleading standards, which have now been interpreted by allU.S. district courts, Ms. Savett said.

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While dismissal rates are constant, “the cases that remain afterundergoing the strong scrutiny of the pleading motion are strongercases. That's why we're seeing the mega-settlements,” she said.

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Before the Reform Act, she said, there were less than five casesover $100 million–”and even just a handful over $50 million”–goingon to list eight settlements ranging from a low of $95.2 million toa high of more than $3 billion in recent years. (See chart, page23.)

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Ms. Savett also reasoned that tougher economic conditions willlead to more accounting impropriety, fueling additionalmultimillion-dollar cases.

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“Another trend is that the securities class action bar isconsolidating. There are fewer firms willing to do this type ofwork,” she said. “It has become a winner-take-all mentality becauseof the provisions of the PSLRA which allow the plaintiff with thelargest loss to control the entire case,” she said, noting thatmore institutional investors are emerging as lead plaintiffs.

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“For a lot of the smaller plaintiffs' class action firms,there's very little opportunity to really participate in thesecases,” she said, noting that institutions tend to hire large firmswith more resources. As a result, she said, the smaller firms thatused to work in the securities class action arena are looking forother avenues, such as consumer class actions, employmentdiscrimination cases, and ERISA cases, suggesting that the trendcreates “a double-barrel problem” for the insurance industry

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“I don't think you can underestimate just how important theparticipation of large institutions is,” she added. “Many of themare state pension funds–teachers funds, employee funds–and theyview themselves as having fiduciary duties for theirconstituents.”

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“They're zealots and when they get involved in a case, theycan'tconceive of getting 50 percent of the damages. We lawyers mightthink that's a good result because we see all the risks. Butthey're going for very big, complete recoveries,” she said.

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Informing the D&O insurers and brokers that the lawyersinside the institutions “are of the most sophisticated nature,” shesaid, “these cases will not settle as easily as they may have atanother time.” They are very involved “and that is a big threat toyour coverage,” she said.

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While Mr. Snow said he believed that the number of non-ladderingcases had fallen to about 200 in 2001, he nonetheless agreed thatthe number would jump right back up in 2002, along with a continuedincrease in mega-payouts.

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(According to statistics compiled by PricewaterhouseCoopers asof Nov. 19, 397 securities cases have been filed in 2001, including210 laddering cases. For the same date, the Stanford Law SchoolSecurities Class Action Clearinghouse Web site indicates there are385 suits, with 225 including laddering allegations.)

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“Over $10 billion was paid out in settlements in the 1990s,” hesaid, adding that with 700 cases outstanding, “theres probablyanother $10 billion that's going to be paid.”

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Don Bailey, managing director of Aon Financial Servicessuggested that “one of the takeaways” from the discussion of therising severity of securities claims for D&O insurers is theneed to “revisit program structure.”

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“We've got to stop selling Fortune 100 companies $50 million inlimits and $100,000 retentions,” he said. “There is volatilityexisting today where it never existed before. [So] we've got to sitdown with our clients and talk about this as a catastrophic type ofcover and not a working layer type of cover. We should be sittingdown and talking to these companies about $5, $10, and $15 millionretentions and selling them $500-to-$800 million policies,” hesaid.

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Kim Hogrege, senior vice president of Chubb & Son in Warren,N.J., added that “an aggressive defense in these casesis worththinking about,” suggesting, in particular, that defense andinsurer counsel join forces to attack the soundness of plaintiffsdamage theories.

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“And God forbid I mention the word, but we might want to 'try'some of these cases–put some of these cases in front of a jury andsee what a jury would do.”

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“We don't know what the jury value of these cases is because sofew of them are tried,” he said, noting that the few that have goneto trial resulted in favorable decisions for defendants andinsurers. When institutional investors start losing some cases,then “some sense of normalcy will come back,” he said.

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Ms. Savett responded. “Some of you feel that more cases ought tobe tried. We feel that way too,” she said. “We don't get to try thegood cases because they settle, because there's too much risk,” sheasserted.

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“I would welcome the defense to put forth all their technicalexperts on how we count their damage when there's a revelation of arestatement or some awful economic condition that causes the priceof a stock to decline 30 percent in one day,” she added.

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“You have five economic experts saying, based on their negativeregression analysis, that the 30 percent decline that took placeupon the announcement was not caused by fraud or the thingsalleged, but by every other conceivable factor in the market,” shetold the D&O insurers. “I think jurors are people of goodcommon sense. They will see the relationship between that loss andwhat wasn't disclosed before.”

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As for the other topic of the session, the IPO laddering cases,both Ms. Savett and Mr. Snow agreed that issuers and directors andofficers likely have a lot less liability than securitiesunderwriters in these cases and, in fact, may have been the victimsof an alleged wrongdoing.

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“Theres even a securities class action filed on behalf of theissuers asserting exactly the theory that [issuers] wereundercompensated in the offerings because of practices they did notknow about,” Ms. Savett said, referring to a case brought inFlorida, MDCM Holdings Inc. v. Credit Suisse First BostonCorp.

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Mr. Snow, who noted that plaintiffs attorneys in the ladderingcases have proposed a plan to put cases against the the directorssand officers on the back burner, still said he had one naggingconcern about the laddering cases.

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“As discovery goes downstream, facts [may] surface which wouldsuggest that there might be cases for a traditional garden varietyclass action in conjunction with the offering–and some of thesecases may morph into traditional class actions,” he said. “Maybethat's an unfounded fear, but it's in the back of my mind. I justfigure that the more facts the plaintiffs look at, the moreopportunity” there is to find something, he added.


Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, December 3, 2001.Copyright 2001 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.


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