Lawyers Warn D&O Insurers Of More Legal Threats
Plaintiffs representatives say insurers, accountants being targeted, but no bounty on WorldCom chief

New York

A renowned plaintiffs lawyer issued a warning of more lawsuits at a directors and officers insurance conference recently, indicating that some will target the insurance industry as more of its misdeeds come to light.

The tone of the remarks by William Lerach, a partner with Lerach Coughlin Stoia Geller Rudman & Robbins in San Diego, were such that when he told insurers, “See you next year,” the remark seemed more like a promise of courtroom confrontation than a prediction he'd remain on the conference guest list.

Mr. Lerach, whose firm represents plaintiffs in many high-profile securities class actions, including one against Enron, made the comment after describing a Barrons article that had recently gotten his attention a Jan. 31 cover story about finite insurance and reinsurance transactions.

“The insurance industry is racked with dishonesty and price-fixing,” Mr. Lerach told more than 1,300 insurance underwriters, brokers and litigators in attendance during a panel discussion on securities litigation trends on which he is traditionally a participant.

Mr. Lerach was in the midst of describing the last of five trends he foresees in the securities litigation arena a trend of continuing executive misconduct, greed and class actions to be filed against such bad actors. “It's not going away. It's continuing,” he said.

“I find it absolutely amazing that in the last four months, a cover of Business Week titled Fuzzy Numbers outlined current [pension] accounting schemes that are going on and then there was last week's Barrons cover on the bubble about to burst on the dishonest accounting by the insurance industry.” Giving his summary of the Barronis article about finite insurance and reinsurance deals, “Letting The Air Out: How Insurers Are Pumping Up Earnings And Why The Practice May End,” Mr. Lerach said, “Apparently, when Wall Street banks decided to get out of fixing corporate earnings, they [insurers] stepped in and filled that void.”

“So see you next year,” he said, not so subtly suggesting that the arcane world of finite reinsurance and loss mitigation insurance were not beyond his grasp to explore for class action lawsuits.

During the first session of the Professional Liability Underwriting Society D&O Symposium, he and Max Berger, a partner with another active plaintiffs firm Bernstein Litowitz Berger & Grossmann in New York also confirmed that lawyers are being paid extra to get settlement contributions from certain high-profile individual defendants that have participated in financial frauds. Mr. Berger went on to predict the demise of a Big Four accounting firm by next year, and Mr. Lerach said that Marsh & McLennan will face individual lawsuits from institutional investors in addition to class actions already filed.

The last prediction lined up with an overall prediction that there would be a rise in individual actions filed by institutional investors generally, as companion suits to large class-action cases.

“Virtually all the big class-action cases Enron, WorldCom, AOL-Time Warner, Qwest, and Adelphia have companion individual actions [filed] that involve billions of dollars of claims thatare firmly rooted in favorable state court venues,” he said.

“I guarantee there are going to be private actions in Marsh and Merck,” he said, referring to the troubled insurance broker and the pharmaceutical giant forced to pull an arthritis drug from the market precipitating investor losses. “I'm talking to an institution in Marsh that had about a $250 million loss. There's no way that it's not going to happen. It makes economic sense to bring those claims,” he said, noting that if an institutional investor doesn't have enough losses to serve as lead plaintiff in a class action, it might strike out separately to control its own fate in an individual action.

Continuing to give his take on overall trends, he said:

? There will be a rebirth of the derivative lawsuits (brought by shareholders on behalf of a company, naming directors and officers as defendants).

? Plaintiffs are having and will continue to have an easy time surmounting pleading standards that were supposed to be toughened with the passage of the Private Securities Litigation Reform Act in 1995.

? Future settlements will be bigger and broader.

To the last point, Mr. Berger said, “Our clients are interested in getting a much more substantial percentage of the recovery of the damages in cases than you would have seen in the past,” highlighting the fact that institutional investors, who have now embraced their roles as lead plaintiffs, are very actively involved in the progression of cases. “They mean business, and not business as usual.”

He revealed some behind-the-scenes information about the biggest class-action securities settlement recorded to date $2.8 billion in the Cendant case to prove his point. In that situation, he said his firm retained investment bank Lazard to run business models to determine exactly how much Cendant could pay without negatively impacting its business or stock price long term. “It was inconceivable that an investment bank would ever work for a plaintiffs firm before. But because we represented large institutions, they [the investment bankers] were willing to do this.”

Mr. Berger said, “For egregious and asleep-at-the-switch boards, you're going to see attempts to force them to pay from their own pockets especially if it's a bankruptcy situation.”

Mr. Lerach agreed. “We're also seeing initial emergence of holding individuals personally accountable,” he said, referring to recent settlements in which WorldCom and Enron directors were required to pay part of proposed settlements without the benefit of insurance.

(The two lawyers spoke before news broke that a New York district court judge rejected the WorldCom settlement in the interests of non-settling defendants because it was at odds with a proportionate liability provision of the PSLRA.)

“I don't know if that's going to be a trend” to hold individual directors personally accountable. “But I'll tell you one thing the institutional investor community is furious [about] the level of executive misconduct and greed,” Mr. Lerach said.

Panel moderator, Tower Snow, a defense lawyer for Clifford Chance in Palo Alto, Calif., asked if the two plaintiffs attorneys were being offered premiums to get certain individuals to contribute to settlements. “I?ve heard that a bounty was offered on Bernie Ebbers,” Mr. Snow said, referring to WorldCom's chief executive.

“That's not part of our retainer agreement,” said Mr. Berger, whose firm represents plaintiffs in the WorldCom case. “But my understanding is that that is included in retainers by some institutions in other cases.”

Mr. Lerach reported that in some cases that allege insider trading, institutions want insider trading proceeds taken back from insiders so badly that they have offered to pay his firm a fee equal to a full 50 percent of any disgorgement in order to get at those proceeds.

As for other trends, Mr. Berger foresees attempts to hold more outside directors, accountants, investment advisors, investment bankers, and lawyers accountable in securities cases.

“I think there's a real possibility that one of the final four [accounting firms] may not be in business after this coming year. The liability that they are facing is extraordinary,” he said, without fingering any particular firm. “I'm not sure that they can all sustain a hit if one of those cases goes to trial and the plaintiffs win,” he said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, February 11, 2005. Copyright 2005 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Lawyers Warns D&O Insurers Of More Legal Threats

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