Facebook Gives Insurers D&O Jitters on Future IPOs

"Right now, the D&O market for initial public offerings is—I think our official term is jittery," says Ann Longmore, executive vice president of D&O product management for FINEX North America for Willis Group Holdings.

She says this applies to programs that have gotten quotes or are waiting for quotes. Some carriers are considering adding exclusions to their policies, specifically not to indemnify the investment brokers under the D&O policy.

Traditionally, it has been a practice in the financial industry for the investment brokers to ask for indemnification. If the exclusions are applied, the company making the IPO will have to bear the costs associated with any litigation, the insurance brokers say. The alternative is the investment bankers will need to rely on their own errors and omissions coverage or other liability coverage in the future.

All the buzz over Facebook may point to premium increases for D&O covering IPOs, says Phil Norton, president of the professional-liability division for Arthur J. Gallagher, but he stresses these changes will not be immediate because there have been no settlements and these issues traditionally take years to resolve.

"This segment is carefully underwritten," Norton says.

"It's important to note that there have been a lot of headlines, but it has only traded a few days," Norton explains. "We have to see where this stands in 90 days and see how the stock performs."

One surprise about the Facebook IPO is how quickly lawsuits were brought. Longmore says this might be the shortest period of time for a lawsuit to be filed in regard to an IPO, saying the shortest period she is aware of previously was seven days.

Facebook began trading on May 18 and a suit was brought in U.S. District Court Southern District of New York by Phillip Goldberg (Case # 1:12-cv-04054) on May 22, claiming that Nasdaq Stock Exchange failed to properly handle share transactions.

Another suit was filed against Facebook, the company's executives and the investment brokers on May 23 charging there were material defects in the company's prospectus that led to a loss in the share price from its initial $38 offering.

Wayne Borgeest, a partner in the law firm of Kaufman, Borgeest & Ryan in New York, says while the lawsuits may have come quickly, it is not premature because in class-action suits, the attorney able to collect the most clients traditionally becomes the lead attorney.

What makes this case unique is the size of the offering—with over 421 million shares at an offering price of $38 a share, "the damages would be substantial" should the plaintiffs prevail, says Borgeest.

"This is a case Facebook wants to win quickly on a motion," he says, noting that this would be an expensive case to litigate otherwise.

However, the facts will take months to come out.

"This thing is going to unfold over time and it may or may not be a case that has legs," says Borgeest. "It's premature in terms of people making judgments on the merits of the case. It's not premature in the sense that people have already bought the stock and lost money, and if there was a material omission in the offering materials, then those people are already, potentially, entitled to damages.

"I don't think anyone really knows what the facts are of what really happened," he continues. "It could turn out to be that everything can be explained and there were no violations of the law." 

Corrects first sentence to show that Facebook's IPO was almost two weeks ago, rather than just over two weeks ago.