Tech Companies' Insurers Agree To $1 B Settlement

Many of the major insurance companies involved in the settlement declined to comment, while an AIG spokesperson told National Underwriter that his company has "substantial reinsurance. And whatever net exposure we might have, we believe we are fully reserved for," he added.

The St. Paul Companies in St. Paul, Minn., another insurer involved in the deal, said the maximum impact of the settlement to The St. Paul would be minimal, at well under $1 million dollars out of the $1 billion.

The suit underlying this latest settlement alleged IPO issuer involvement in so-called IPO "tie-in/laddering" practices, or wrongdoing during the IPO share-allocation process. In the past couple of years, there have been "hundreds and hundreds" of individual tie-in/laddering lawsuits, according to Mr. Sirota.

In some cases, investment banks were accused of demanding excessively high commissions on unrelated stock sales from investors who wanted to get in on popular IPOs. Some banks were also accused of "laddering" arrangements, where investors were offered IPO shares only if they agreed to buy shares at progressively higher prices later, thus artificially pushing up the stock price.

"The lawsuit was first filed in the first quarter of 2001, and there are now 309 technology companies involved in this class action, and something like 270 individual proposed lead plaintiffs. Millions of American investors, who were defrauded by the best names in the business, would be part of this suit. We will have the exact number of plaintiffs after we have the class certified and send out a first-class mail notice to investors," Mr. Sirota told National Underwriter.

Mr. Sirota also noted that the potential payment from insurers hinges on the outcome of a separate class-action case between these plaintiffs and some 55 investment banks that underwrote the IPOs. That outcome could still be a few years away, he said, noting that the issuer settlement says that if a settlement or a jury award in the class action against investment banks tops $1 billion, the insurers for the tech companies would not have to pay any money at all.

If the banks prevail, however, or if their payout comes out to be below $1 billion, tech companies' insurers will have to make up the difference.

"This $1 billion is a guarantee. It may or may not have to be paid by insurers. So if we recover a greatly larger sum from investment banks, then the insurers never actually have to pay out the $1 billion," he explained.

"The real, ultimate target for us is investment banks, not the tech companies or [their] insurers. This settlement strengthens our case against investment banks. The tech companies, in effect, have agreed to cooperate with us in the lawsuit against the banks that underwrote these IPOs."

Mr. Sirota explained that the overall number of insurers involved in the settlement is large because of various excess layers involved. "Virtually all of the 309 tech companies had numerous excess layers, so there is quite a large crowd of insurers. But the main players are the principal D&O [directors and officers liability] insurers. It's concentrated among the major D&O line underwriters," he said.

One ironic aspect to keep in mind, though, is that many of these D&O insurers that have agreed to the settlement are also the professional liability insurers behind the investment banks that are named in the plaintiffs' separate class action suit. That raises the question of just how much the insurers would ultimately have to pay for Wall Street's alleged misdeeds when all the dust settles.

"It's ironic, but many of the same insurance companies that insured these tech companies also insured investment banks. The list is not identical, but there is a large overlap," Mr. Sirota said.

But Mr. Sirota also claimed that this settlement is a "very good deal" for those insurers that have insured these IPO tech companies as well as investment banks that underwrote these offerings. "In my opinion, this deal should work out very well for these insurers if the case works out as we think it will," he predicted.

In the class action against tech companies, there was a lot less available evidence of potential misconduct compared to investment banks, according to Mr. Sirota. Besides, some 20 of these companies already went out of business altogether, and another couple of dozen are in bankruptcy, which raises all sorts of complications.

"But if the intentional wrongdoing alleged against the investment banks can be shown, as I believe it will be, insurers can disclaim [coverage] as to the investment banks. They are going to say to investment banks, 'If you conspired to manipulate hundreds of stocks, you pay for it yourself.' That's one of the reasons they made a deal with us," he argued.

Mr. Sirota forecasted that insurers are going to take a hard line about reservation of rights, "that if this was what it's alleged to be–intentional, deliberate fraud by the best names among investment banks–that's not insurable."

"In fact, insurers already told us they won't pay a penny for deliberate, intentional manipulation of the market by investment banks," he said.

But Robert Hartwig, senior vice president and chief economist at the Insurance Information Institute in New York, took a more cautious view of the settlement.

"When you potentially have to pay hundreds of millions of dollars, that usually can't be considered a good deal," Mr. Hartwig said.

In his view, insurers have agreed to the settlement because it offers some limit on their payment amount. "Insurers now know, through endless litigation and with the experience in the crisis in the corporate governance to date, that in most cases, they will wind up being obliged to finance some of this no matter what," he said.

And while the settlement is good in the sense that it eliminates some uncertainties–it's possible that these insurers could have ended up paying more without the settlement–insurers, whether they are dealing with IPO tech companies or investment banks that managed them, are "unfortunately going to wind up paying for some of these nefarious activities," he said.

He commented that actual criminal convictions against people involved are the "gold standard," but class action suits do not result in criminal convictions of individuals. "And short of such convictions, insurers are going to wind up paying some of these activities. That's just the sad fact here," he said. "This has been a major problem ever since the Enron debacle which heralded in the current era of corporate governance scandals."

Reproduced from National Underwriter Edition, July 7, 2003. Copyright 2003 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.