Securities Litigation Landscape To Challenge D%amp;O Underwriters

Developments in securities litigation will pose new challenges to directors and officers underwriters, driven by continued fallout from the subprime crisis, the alleged Madoff fraud, and the jailing of two prominent plaintiffs attorneys, a new Advisen report said.

The report, "Securities Litigation in 2008: Implications for the D&O Market in 2009 and Beyond," compares the securities class action environments in 2007 and 2008, noting that "on the surface, 2008 seemed little different than 2007" with respect to the number of class action suits filed. The report notes that financial firms were targeted in half of the securities suits filed in 2008, continuing a trend that started in 2007 because of the subprime mortgage market meltdown.

But the report states 2008 saw some challenges beyond those in 2007, and those challenges will likely continue into 2009.

Two plaintiffs attorneys who held a "duopoly" on securities class action litigation cases, according to the report, have been jailed for paying kickbacks to lead plaintiffs. The two, Bill Lerach and Mel Weiss "were the bane of corporations and their D&O insurers," the report says. But it adds that defense lawyers knew what to expect from them, and regarded them as "tough but reasonable negotiators."

With them out of the picture, the landscape has changed, the report suggests. "Securities litigation, in the opinion of some defense lawyers, is now the 'Wild West,' with dozens of brash young hired guns vying to be the biggest and baddest gunslinger in town," said the report.

Securities suits are also undergoing "viral morphing," which the report--citing John McCarrick of the law firm Edwards Angell Palmer and Dodge--defines as "a process of adaptation to rapidly unfolding economic, regulatory and litigation events."

Traditional securities class action suits accounted for less than half of new securities litigation in 2008, notes the report, while suits alleging common law torts, contract law violations, breach of fiduciary duty, and "violations of rarely-cited securities laws became more common."

Defense costs also rose "relentlessly" in 2008 according to the report.

In 2009, corporations and D&O insurers will also have to deal with suits stemming from the Bernard Madoff alleged Ponzi scheme. The report notes 37 Madoff-related suits were filed in the final weeks of 2008, and adds, "Alleged Ponzi schemes and other investor frauds have emerged as significant sources of securities suits in 2009."

But the report also states that the impact of securities class action suits on D&O insurers will not be directly proportional to the number of suits filed in 2008 relative to other years.

The increase in suits in 2007 and 2008, compared to the "unusually quiet 2006," is mainly because of the subprime and credit crisis. The report explains, "It is likely that a higher than average number of these suits will be dismissed since judges may be reluctant to hold individual companies and their directors and officers responsible for the effects of a global financial meltdown."

Additionally, the report states subprime and credit crisis D&O claims "will be borne largely by the three insurers that together write more than 50 percent of the financial institution D&O market." Non-financial institution segments of the D&O market, the report adds, had a comparatively benign year with respect to securities class action suits.

The report also says that for firms sued more than once in 2008, only a single D&O program limit usually will be available.

Advisen's report is available for purchase at: http://corner.advisen.com/reports_topical_Securities_Litigation_2008_DO_Market.html.