Economic Turmoil Could Spur A New Type Of D&O Claim

As the current economic turmoil leads to an escalation of lawsuits against directors and officers, one expert is warning that a new variety of D&O liability claims may be created related to government bailout efforts.

Kay Wilde, a partner in the Chicago offices of Lovells LLP–an international business legal practice–said banks and companies accepting bailout and Troubled Assets Relief Program (TARP) money could set the stage for D&O claims brought by both the government and shareholders.

The government, Ms. Wilde said, has essentially become a large stakeholder in companies that have accepted bailout or TARP money, and it could choose to file suits against directors and officers if it feels companies are using public money in ways that were not properly disclosed.

Ms. Wilde noted there were a few situations during the savings and loan crisis where the government and federal regulators filed suits against directors and officers over actions allegedly taken that caused damage to companies. These suits were not brought as regulatory actions, she explained, but shareholder derivative actions.

While Ms. Wilde said she was just speculating on what could happen, based on concerns expressed by her clients, she said government lawsuits are a possibility given the current politically charged environment.

Private shareholders may file suits against companies that accept TARP funds as well, Ms. Wilde said.

She cited one lawsuit filed already in The U.S. District Court for the Middle District of Alabama, Northern Division–Dees v. Colonial Bank Group–where a bank announced it was accepted to take TARP funds, and its stock went up. But the lawsuit alleges the bank did not properly disclose the terms under which the TARP funds were provided, including a requirement that the bank would have to raise $300 million in outside capital. When that was disclosed, the lawsuit alleges, the stock price fell.

Shareholders, Ms. Wilde said, could claim that by a company accepting TARP funds, the value of shareholders' equity has been overly diluted.

The biggest problem for D&O insurers in this environment, Ms. Wilde said, is trying to figure out which claims will end up being damaging.

She said there are a lot of claims being filed, and all are claiming large damages. But at this stage, she noted, there is a lot of uncertainty regarding which types of claims will materialize into large losses.