More Securities Suits Ahead, Experts Say

The Deepwater Horizon oil spill, for example, drove an 82 percent jump in new suit filings against energy companies, according to New York-based Advisen, which reported that those suits were a primary driver of a 19 percent increase in securities suits across all industries.

Jim Blinn, an Advisen principal and moderator of a webinar showcasing results of the recent report, asked experts whether a different trend underlying the latest numbers–a low level of credit crisis suits in the quarter (just seven, with five naming Goldman Sachs in the wake of a suit filed by the U.S. Securities and Exchange Commission)–heralds good news to come for D&O insurance underwriters. "Or is there potentially a new catalyst" that might push suit levels up again, he asked.

Carol Zacharias, senior vice president and deputy general counsel at ACE North America in New York, pointed to an improving economy as one possible driver of securities suits fueling D&O claims.

"As we slowly climb out of the economic downturn, companies will necessarily engage in certain kinds activities that do present some liability exposures," she said, listing the following:

o Bad news:

"Some companies are going to have to disclose adverse financial results as they move forward, [and] some may go into bankruptcy," according to Ms. Zacharias.

"Shareholders will ask if this was done and disclosed in a timely fashion," she said, adding that bankruptcy exposes financially challenged companies to many more litigants–new boards, creditors and vendors, for example.

o M&A activity:

"Other companies will move into profit mode, and their stock values will go up," she said, noting that as they do, these firms will be looking at consolidations, initial public offerings, takeovers (perhaps hostile ones) and sales of assets, noting that "those are all classical stimulants for litigation."

o Regulatory activism and new laws:

"Regulators are under more pressure. Regulators have responded," she said, predicting that ramped-up SEC enforcement activities will continue, with the newly enacted Dodd-Frank Act providing some new tools to attack securities law violators.

o Increasing enforcement of old laws:

"We are definitely experiencing an increase in the enforcement of old laws," Ms. Zacharias said, pointing to the Foreign Corrupt Practices Act on 1977 as a classic example.

The FCPA is a federal law containing antibribery and accounting requirements. The antibribery provisions make it unlawful to pay a foreign official for the purpose of obtaining or retaining business, and firms are exposed to criminal and civil penalties for payments, or promises of payments, to foreign officials that could be considered bribes. (See related articles published by NU at http://bit.ly/cOdGgD and http://bit.ly/bwHcOj.)

Ms. Zacharias noted that the FCPA has "been sitting around for quite awhile," with only four companies sued under that law in first-quarter 2008. That number soared to 36 in first-quarter 2010, however, she said, noting that the SEC and the U.S. Department of Justice have come out with more aggressive efforts, realigning their staffs to create special FCPA prosecutors.

o Foreign exposures:

Other worries with respect to exposures that may be created by doing business in foreign countries come on the heels of a seemingly favorable U.S. Supreme Court decision earlier this year, known as Morrison v. National Australia Bank.

During the Advisen webinar, Carl Metzger, a partner at Goodwin Procter in Boston, explained that the court, in its June decision, ruled that the antifraud provision of U.S. securities laws do not apply to foreign plaintiffs who are suing foreign defendants for wrongdoing that relates to securities traded on foreign exchanges.

Plaintiffs had argued that because executives engaged in deceptive conduct and made misleading statements in the United States, U.S. securities laws should apply. Basically, the court shut down those kinds of suits, commonly referred to as F-cubed cases, Mr. Metzger said.

"They held that the antifraud provisions of U.S. securities laws only apply to purchases or sales of securities either listed on U.S. exchanges or purchases or sales of some other security within the United States," he explained.

While the ruling cut off "a relatively material type of securities litigation here in the United States, I think [this] ultimately will be a catalyst for more foreign jurisdictions to come up with securities laws of their own," Mr. Metzger said. Such new laws could apply "where a plaintiff from their jurisdiction sues a defendant under the exchange in their country," he suggested.

In addition, Ms. Zacharias urged directors and officers to prepare themselves for the "flip-side" of F-cubed cases. "Don't just look at whether or not overseas shareholders are filing [suits] in the United States," she said. "What we're seeing now is the start of a nascent trend of litigation brought outside the United States against American-headquartered companies that have subsidiaries or operations overseas."

Numerous countries have now put together collective action laws, and some "have ways of providing what we would call contingencies fees through companies that fund private litigation," she said. She also noted there are now more than 30 shareholder rights groups that have sprouted up throughout Europe, and that there has been takeover litigation both in Europe and in the Asia Pacific.

"It's here. It's happening. It's not just F-cubed, it's F. It's foreign cases against American companies, and we're watching that very carefully," she said.

"It's not a tidal wave by any stretch….It's just beginning, but the reason it is relevant is that many countries restrict the application of a non-local insurance policy," Ms. Zacharias said, highlighting Brazil as one such jurisdiction.