Strategies For Minimizing Risk In Securities Litigation Storm

Plaintiffs attorneys are increasingly using allegations of accounting fraud to avoid dismissal of their claims at the pleading stage and to obtain much higher settlement amounts than in nonaccounting cases. Recent statistics show that cases involving accounting-fraud allegations, particularly those involving restatements, generally settle for much larger amounts than nonaccounting cases. And New York-based PricewaterhouseCoopers' study of securities class actions filed last year revealed that nearly two-thirds of all claims involved allegations of accounting fraud.

Indeed, a series of mega-settlements has boosted the average settlement cost to approximately $24 million per case. To make matters worse for underwriters, the median settlement amount has also been on the rise.

The end-result is that more claims and more funds, including defense costs, are expended to resolve these lawsuits. Suffice it to say, the cost of defending securities actions is not headed downward.

To address the challenges for companies and their insurers in the current environment, we suggest three strategies for managing risk and protecting capital.

The first strategy involves analysis and education. Clearly, the best possible outcome is to avoid securities-fraud claims entirely.

A vast number of accounting-fraud allegationsincluding even those involving restatements of financialscan potentially be defused by disclosure in a companys public filings. This is particularly true for companies that work with distributors or are themselves distributors of products.

Given these facts, one significant means of minimizing risk is to focus on an insureds or potential insureds accounting and disclosure policies and practices. This can be as simple as analyzing all relevant policies and procedures, or as elaborate as meeting with the insureds accounting team and experienced counsel to review risks and issues relating to the companys accounting.

From a risk-prevention standpoint, education and training should also be considered key elements of this process. Education on accounting risks and issues related to fraud and litigation should be provided for the insureds accounting team, senior executives and board of directors. Their training should include practical counsel that encourages robust disclosure of key accounting policies and their application.

With the Sarbanes-Oxley Act requiring senior management to attest to the accuracy of a companys financial statements, companies now have added incentive to implement these initiatives.

Secondly, when an insured is targeted with securities-fraud allegations, it is crucial that the insured be represented by experienced, skillful counsel. Already, a number of insurers require their clients to select from a panel of approved counsel, but this is not enough.

Analysis of public court orders and settlement terms make clear that some counsel consistently achieve outstanding results in both motion practice and in settlement amounts. Insurers and their policyholders would be well served to consider carefully the objective results achieved by defense counsel in similar cases.

This means checking into counsels record for (1) obtaining dismissals on the pleadings, (2) defeating class certification, and (3) winning motions for summary judgment. Moreover, with securities class actions 80 times more likely to be resolved in mediation rather than in the courtroom, it is also essential to scrutinize counsels track record for resolving cases efficiently and cost effectively.

Finally, if securities litigation cannot be avoided and experienced, effective counsel has been retained, it is imperative that the insurer and defense counsel team up to provide the insured with the highest quality representation possible. This means working collaboratively and cohesively to identify and address litigation issues and risks.

Both D&O underwriters and seasoned defense counsel will bring to the table a wealth of experience and insighteverything from knowledge of particular judges and plaintiffs counsel to analysis of legal and factual arguments that have prevailed in other securities actions.

To this end, many top-notch firms and insurers are creating pleading databases to capture and leverage existing legal research and briefing.

Moreover, many insurers and defense counsel find value in meeting to discuss case strategy at the outset of litigation. Such open communication and teamwork will improve the quality of legal representation and help avoid the prospect of unpleasant surprises for the insurer or the policyholder.

In summary, while there is no substitute for thoughtful and disciplined underwriting, insurers can minimize the risk inherent in existing policies with focused training and education of the insureds senior management team, rigorous standards for retention of defense counsel, and constructive communication and partnering with defense counsel.

Paul Bessette is head of the securities litigation practice at Washington, D.C.-headquartered law firm Akin Gump Strauss Hauer & Feld LLP. Steven Kaufhold is a partner at Akin Gump Strauss Hauer & Feld, specializing in securities litigation, including shareholder class actions.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 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.