Claims And Issues

LOOK AT THIS MAN: WHAT SAYS $198,685,926/YEAR* TO YOU?

This is Jon Winkelried, the Chief Executive Officer of a Private Equity fund called TPG:

This picture of Jon and Abby Winkelried was supplied by the Winkelrieds to Vanderbilt University.

At TPG's Annual Meeting held this year on June 5, 2024, the following amendment available on TPG's website, was added to change its Articles of Incorporation.  It has the effect of eliminating, wherever possible, the liability of the Directors and Officers to TPG and its stockholders for breach of their fiduciary duties:

“7.1 Limited Liability of Directors and Officers. A director or officer of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director or officer, respectively, except to the extent such exemption from liability or limitation thereof is not permitted under the DGCL as the same exists or may hereafter be amended. All references in this Section 7.1 to “officer” shall have the meaning ascribed to such term in Section 102(b)(7) of the DGCL.”

["DGCL" refers to Delaware General Corporation Law.  Here is a link to the Delaware Code provided by the State of Delaware.]

          From the perspective of TPG stockholders, the answer to the question posed at the outset had better be "yes."

          From the perspective of everyone else, what are you saying?

*Reported by Jeff Sommer, A New Measure Shows C.E.O. Pay at Even More Astronomical Levels, NEW YORK TIMES, online June 7, 2024 (may be behind a paywall).

Please read the disclaimer.  ©2024 Dennis J. Wall.  All rights reserved.

PRIOR ACTS EXCLUSION AND LEGACY LENDING PRACTICES IN FLORIDA.

The insurance coverage issue in this case concerned coverage for bank officers before November 2008.  But that was the narrow issue.  More about that in a moment.

First, the opening paragraph of a coverage case that involved the standard prior acts exclusion in Director's and Officer's policies like the one at issue here:

    For want of good corporate officers, BankUnited Financial Corporation engaged in risky lending practices before November 2008. For want of good lending practices, BankUnited became insolvent. For want of solvency, BankUnited's transfers of money to its subsidiary were fraudulent.

Zucker v. U.S. Specialty Ins. Co., 856 F.3d 1343, 1344 (11th Cir. 2017) (Carnes, C.J., for the Court).

The appellate court ended up holding that the subject policy's prior acts exclusion applied, that there was no insurance coverage for acts committed before November 2008, and effectively holding that, in the end, the corporate officers were almost as much out of luck in terms of coverage, as the bank's creditors alleged that they were out of luck in terms of their investments in the bank while the defendants were in charge.

Please Read The Disclaimer.  ©2017 by Dennis J. Wall.  All Rights Reserved.

DEATH AND COVERAGE IN FLORIDA: A CONTINUING STORY.

First installment, "They Called But No-One Came:  Liability Insurance Coverage Questions":  Monday, 09.18.17.  The second of three installments focused on liability insurance coverage questions regarding the Florida power company, "IS YOUR GENERATOR WORKING?" also at http://insuranceclaimsissues.typepad.com/insurance_claims_and_issu/2017/09/is-your-generator-working-the-first-installment-they-called-but-no-one-came-liability-insurance-coverage-questions-monda.html .  In this the final installment, we will address liability insurance coverage questions concerning the Florida nursing home.

Here is the story that continues to develop behind our insurance coverage questions.  I cautioned from the beginning of the first installment that this is a developing story,  that we do not know all the facts, and that much more remains to be reported as time goes on.

Those cautions have been borne out in the past week since I posted my first article in this series.  There are now eleven people who reportedly died after Hurricane Irma struck Florida and specifically struck a Florida nursing home.   The nursing home's air conditioning went out.  It got hot.  Very hot.

Eleven people have died from the heat.

A number of people and corporations played a role in this story.  Together we addressed liability insurance coverage questions regarding the Florida governor in the first installment, and in the second installment we addressed some liability insurance coverage questions surrounding the Florida power company.  In this last installment, together we will address liability insurance coverage questions involving the Florida nursing home.  To write again what I wrote at the outset:  What follows is from the reporting so far on what happened.   The reporting is not complete even now.  There are competing stories on lots of points.  As yet, only some things have been finalized, but they are enough to see the outlines of some important liability insurance coverage questions.

The focus of this series of articles is not on whether there may be any good claims of potential liability, but on whether there are claims to potential liability insurance coverage.

1. The Florida nursing home: Questions of Liability.

The Florida nursing home seems to be a target of opportunity for placing blame on what went wrong at the nursing home that resulted in eleven people dying when the nursing home's air conditioning failed during Hurricane Irma.  Yet it should never be overlooked that there are many actors in this play.

"Somewhere in between, the misery of a nursing home teetering toward tragedy was reported to every official channel, but no attempt was made to transfer the residents to a safer place, or even to the air-conditioned hospital practically next door."  Ellen Gabler, Sheri Fink & Vivian Yee, "At Florida Nursing Home, Many Calls for Help, But None That Made a Difference" (New York Times online, posted Saturday, September 23, 2017), also available at https://www.nytimes.com/2017/09/23/us/nursing-home-deaths.html?hpw&rref=us&action=click&pgtype=Homepage&module=well-region&region=bottom-well&WT.nav=bottom-well.

After so many people died, the Florida governor insisted that his Florida Agency for Health Care Administration adopt emergency rules requiring nursing homes to have backup generators.  But that is not the way it was before Irma and before so many people died.

There were calls to require emergency backup generators at Florida nursing homes long before Hurricane Irma was a little breeze somewhere in the Atlantic Ocean.  The expense of operating a Florida nursing home caused these calls to go without any meaningful response.  To put it another way, money talked and people in power listened.

"Very few nursing homes had generators powerful enough to keep the air-conditioning running. In 2006, Florida lawmakers considered requiring nursing homes to maintain generators to ensure comfortable temperatures during disasters. But the industry raised concerns about the cost, according to The Miami Herald, and the bill died. Last week, after the Hollywood Hills deaths, Mr. Scott announced new rules requiring those generators."  Ellen Gabler, Sheri Fink & Vivian Yee, New York Times supra.

Certainly, the Florida nursing home is experiencing its share of allegations that it was either the sole cause or a contributing cause of these people's horrible deaths.  The current owners of the Florida nursing home have run a facility that received below-average ratings from Medicare even before Irma.  And they have experienced allegations related to Medicare and nursing homes before Irma, as well, including allegations of kickbacks.  See Ellen Gabler, Sheri Fink & Vivian Yee, New York Times supra (reporting that the current owners of the Florida nursing home "were among defendants who paid $15.4 million in 2006 to settle federal and state civil claims that they had paid kickbacks to doctors in exchange for patient admissions.").

No evidence of previous wrongdoing including kickbacks, even if admissible, would prove the allegations of wrongdoing now.  What evidence there is to prove the allegations now will depend in the end on what evidence is uncovered or introduced in the inevitable lawsuits that are the result of these tragic deaths.  See, e.g., "Report:  Before Deaths, Nursing Home Called Rick Scott's Emergency Number Three Times, To No Avail" (Tampa Bay Times staff, posted online on Friday, September 15, 2017), also available at http://www.tampabay.com/news/politics/stateroundup/report-nursing-home-called-rick-scotts-emergency-number-three-times-to-no/2337665.

("On Friday, a Miami law firm filed a complaint against the Hollywood facility ....); "'Red Flag' Calls Signaled Post-Irma Deaths at Nursing Home" (Associated Press copyrighted story published online in The New York Times on Saturday, September 16, 2017), also accessible at https://www.nytimes.com/aponline/2017/09/16/us/ap-us-hurricane-irma-nursing-home-deaths-.html (reporting that a family member of a surviving resident "hired an attorney after her 93-year-old mother became severely dehydrated on Wednesday.").

Our focus here remains on the liability insurance coverage questions arising from this tragedy.  In this final installment of a continuing series of articles, our particular focus here is on liability insurance coverage questions which confront the Florida nursing home.

2. Liability Insurance Coverage Questions and the Florida nursing home.

The liability insurance coverage questions surrounding the Florida nursing home in this circumstance are similar to the liability insurance coverage questions that surround the Florida power company which were previously asked here.

The questions that follow are not all the questions that can or will be raised concerning the Florida nursing home's liability insurance coverages.  Some of these questions may not apply.

"Occurrence":  Was there an accident neither expected nor intended from the standpoint of the insured, in this instance, neither expected nor intended from the standpoint of the Florida nursing home?  This is where the history of Medicare inspections and evaluations of the Florida nursing home may prove relevant.

In the context of Directors and Officers coverage if any for the operators of the Florida nursing home:  Is there any covered conduct at issue on the part of the Florida nursing home's directors and officers?  Alternatively or additionally, is any potentially "covered conduct" excluded because of the availability of liability insurance coverage, if any, under other liability insurance policies available to the directors and officers?

The number of occurrences, if any.  Was there one or were there 11 or more "occurrences," if any?  Was there one occurrence (if any) because, say, there was at least arguably one practice and procedure at the Florida nursing home which resulted in the damages that might be complained of here?  Or were there at least 11 occurrences (again, if any) because so far 11 people have died?  Or if there were any occurrences under the insurance policies at issue, were there more than 11, counting all the people who were injured but who have not died?

Time will tell, and it bears repeating:   Over time the answers to liability insurance coverage questions like these will likely be given by the Florida courts.

Please Read The Disclaimer.  ©2017 by Dennis J. Wall.  All Rights Reserved.

"IS YOUR GENERATOR WORKING?"

The first installment, "They Called But No-One Came: Liability Insurance Coverage Questions": Monday, 09.18.17. This is the second of three installments. This installment will address liability insurance coverage questions regarding the Florida power company. In the final installment, we will address liability insurance coverage questions concerning the Florida nursing home.

Here is the story behind our insurance coverage questions:

Eight people died in a nursing home in Hollywood, Florida during Hurricane Irma. The nursing home's air conditioning went out. It got hot. Very hot.

Eight people died from the heat.

A number of people and corporations played a role in this story. We addressed liability insurance coverage questions regarding the Florida governor on Monday, and today we address some liability insurance coverage questions surrounding the Florida power company. Our last installment will address liability insurance coverage questions involving the Florida nursing home. Their continuing stories will be featured here throughout the coming week, along with their related liability insurance coverage questions.

What follows is from the reporting so far on what happened.  The reporting is not complete even now. There are competing stories on lots of points. As yet, only some things have been finalized, enough to see the outlines of some important liability insurance coverage questions.

The focus of this series of articles is not on whether there may be any good claims of potential liability, but on whether there are claims to potential liability insurance coverage.

1. The Florida power company: Questions of Liability.

Eight people died in a nursing home in Florida when the air conditioning went out. "Survival also depended on phone tag between nursing-home administrators, state officials and utility providers." Aaron Davis, Katie Zezima & Mark Berman, "Officials at Nursing Home Where 8 Died Say They Called Florida Gov. Rick Scott 3 Times For Help" (Washington Post via Chicago Tribune posted on Friday, September 15, 2017), also available at http://www.chicagotribune.com/news/nationworld/ct-florida-nursing-home-deaths-rick-scott-20170915-story.html.

The nursing home called the power company when a transformer blew out and the air conditioning stopped. This was the first of several calls the Florida nursing home says it made to the Florida power company. "Report: Before Deaths, Nursing Home Called Rick Scott's Emergency Number Three Times, To No Avail" (Tampa Bay Times staff, posted online on Friday, September 15, 2017), also available at http://www.tampabay.com/news/politics/stateroundup/report-nursing-home-called-rick-scotts-emergency-number-three-times-to-no/2337665.

The Washington Post report via the Chicago Tribune linked above reflects that "[t]he nursing home provided ticket numbers for service requests that it had placed with" the Florida power company. "The Post was able to confirm two of the requests using state records and the utility's website." Id.

The same reporting further reveals what was not widely reported previously: The nursing home personnel were not the only ones who called the Florida power company. At least one relative of a nursing home resident, perhaps joined by others, "repeatedly called" the power company. "I told [the power company] the generators were going to give up soon. And it happened." Id. [Emphasis added.]

Finally, people also called 911, more than once, before anyone died. "'Red Flag' Calls Signaled Post-Irma Deaths at Nursing Home" (Associated Press copyrighted story published online in The New York Times on Saturday, September 16, 2017), also accessible at https://www.nytimes.com/aponline/2017/09/16/us/ap-us-hurricane-irma-nursing-home-deaths-.html.

The Associated Press story which has just been hyperlinked above, summarizes the calls to the Florida power company to restore power for the air conditioning in the sweltering heat: "The [nursing home] said the hurricane knocked out a transformer that powered the air conditioning. The center said in a detailed timeline of events released Friday that it repeatedly was told by [the Florida power company] that it would fix the transformer, but the utility did not show up until Wednesday morning, hours after the first patients began having emergencies."

For its part, before it stopped issuing statements or answering questions the Florida power company said that the nursing home "was supposed to have an operational generator."

As noted, the reporting is not complete even now. However, not one report has recorded that the power company ever asked this question to anyone at the nursing home:

Is your generator working?

The power company said in a statement using the passive voice, that "'other critical facilities were identified as higher priorities.'" Tampa Bay Times, supra.

"The utility refused to answer any specific questions about the nursing home case." Associated Press, supra. While the Florida power company conveyed "'our deepest sympathies,'" the power company "did not answer questions regarding the calls the nursing home said were made." Washington Post via Chicago Tribune, supra.

"'At the time this incident occurred, you have to remember when the first patients were dying, there were 150 nursing homes across the state that did not have power.'" Jim Defede, CBS4News, Miami, quoted in Tampa Bay Times, supra.

 

2. Liability Insurance Coverage Questions and the Florida power company.

The questions that follow are not all the questions that can or will be raised concerning the Florida power company's liability insurance coverages. Some of these questions may not apply. Answers, if any, may be forthcoming in newly filed lawsuits. See Tampa Bay Times, supra ("On Friday, a Miami law firm filed a complaint against the Hollywood facility ....); Associated Press, supra (reporting that a family member of a surviving resident "hired an attorney after her 93-year-old mother became severely dehydrated on Wednesday.").

Depending on the type of policy involved, including whether it is a "claims made and reported" policy or an "occurrence-based" policy, the foremost question of liability insurance coverage regarding the power company may involve this one:

"Occurrence": Was there an accident neither expected nor intended from the standpoint of the insured, in this instance, neither expected nor intended from the standpoint of the Florida power company?

Like unto it, the question arises in the context of Directors and Officers coverage if any: Is there any covered conduct at issue on the part of any of the power company's directors and officers? Or is such coverage excluded by the availability of liability insurance coverage, if any, under other liability insurance policies available to the directors and officers?

Is there potential liability of the Florida power company here only for breach of contract, which is ordinarily excluded under standard liability insurance policies? Or is the power company's potential liability the kind that it would have even if there had been no contract?

Finally, now a very significant question from the outset: the number of occurrences, if any. Was there one or were there 8 or more "occurrences," if any? Was there one occurrence (if any) because for example there was one practice and procedure at the power company which resulted in the damages that might be complained of here? Or were there 8 occurrences (again, if any) because 8 people died? Or if there were any occurrences under the insurance policies at issue, were there more than 8, counting all the people who were injured but who did not die?

Time will tell, and over time the answers to liability insurance coverage questions like these will likely be given by the Florida courts.

Please Read The Disclaimer. ©2017 by Dennis J. Wall. All Rights Reserved.

 

WELLS FARGO DIRECTORS' LOBBYISTS: COVERED BY D&O INSURANCE, OR SHAREHOLDERS?

A Labor Day Special.

In a first-of-its-kind development, the directors of Wells Fargo report that they paid for lobbyists to lobby for them personally, over and apart from the bank's own lobbying fees.  Directors have not ever done this before now, not the directors of any corporation, ever.  Before now.  See Gretchen Morgenson, "Fair Game / Wells Fargo's Testimony Left Some Feeling Shortchanged" (New York Times online, posted on Thursday, August 31, 2017), also available at https://www.nytimes.com/2017/08/31/business/wells-fargo-testimony.html?rref=collection%2Fsectioncollection%2Fbusiness&action=click&contentCollection=business&region=rank&module=package&version=highlights&contentPlacement=12&pgtype=sectionfront (subscription may be required).

This development has not been reported much.  In fact, I have not seen it reported elsewhere.  Many other developments at, with, and by Wells Fargo have gotten all the publicity, it seems.  The other developments are also discussed in the linked column by Gretchen Morgenson.

Wells Fargo, JPMorgan Chase, Citigroup, and Bank of America collectively spent about $22,200,000.00 on lobbyists during the 18 months through the quarter that ended on June 20, 2017, adding up their separate figures provided in the column.

The Wells Fargo directors have independently spent some $450,000.00 on lobbyists during one-half that period, or during the last 9 months that ended on June 30, 2017.  Id.

Ms. Morgenson asked Wells Fargo directly what value these director's individual lobbying expenses have to the shareholders, and what disclosures about this spending are being provided to shareholders.

Ms. Morgenson also reports that she asked "whether the lobbying expenditures were covered by directors' and officers' insurance or by shareholders."  Good questions.

 Wells Fargo's spokesperson "declined to comment" on any of these questions, Ms. Morgenson also reports.

Since there are no answers yet from Wells Fargo, what are your answers to these questions?  In particular for our purposes here, do you think that director's individual lobbying expenses are generally covered by the usual provisions found in a corporation's directors' and officers' insurance policy?

Please Read The Disclaimer.  ©2017 by Dennis J. Wall.  All Rights Reserved.

VOUCHERS: ACCIDENTS NEITHER EXPECTED NOR INTENDED, OR KNOWN LOSSES?

Vouchers take the place of public schooling so that people can pay for charter schooling.

Vouchers are paid by taking money from public school taxes.  This seems to be the trade-off for the prospect that the children of parents holding vouchers will perform well academically if they do not have to attend public schools but can choose to attend charter schools instead.

However, years of studies show that "private school vouchers may harm students who receive them." The most recent study reporting the same dismal results came in June from a proponent of school choice.  See also here.

This calls into question the availability of insurance coverage for those who enable or even mandate such choices.  Many kinds of insurance policies contain the equivalent of the Commercial General Liability or CGL "occurrence" definition, which many States including Florida equate with the standard CGL Exclusion 1:

There is to put it simply no coverage for an occurrence which is not an accident neither expected nor intended from the standpoint of the insured.

In the case of school vouchers, the relatively poor academic performance of voucherized students seems to qualify as an event that should not be covered by insurance.  This has ramifications on several different fronts.

Hedge Funds and other Investors in Charter Schools, and Charter School Administrators.  These people certainly have, or should carry, Errors and Omissions (E&O) or Directors and Officers (D&O) coverage or the equivalent.   If they push vouchers knowing of their consequences at this time, there seems to be a real insurance coverage issue over whether their choices could even potentially be covered as accidents neither expected nor intended from their standpoint.

School Boards and School Board Members.  Boards and their Members carry or should carry something like School Officials Professional Liability Policies, whatever the policies might be called.  Putting aside questions of immunity, if any, there is still a very real question of whether School Boards and their Members can claim insurance coverage in the face of years of such poor test results that choosing vouchers for children may not be capable of an argument that such choices, again, are accidents neither expected nor intended from the standpoint of the insured.

"Known Loss Doctrine" proponents.  Some judges and many lawyers have argued that insurance coverage is or should be "excluded" whenever the policyholder knows that a loss has happened for which the policyholder is now claiming coverage.  There is rarely any such exclusion written in any insurance policy, but the argument is made often, usually by people who do not practice insurance coverage law.

Insurance is not available however unless there is a risk to be covered.  In this situation, there does not seem to be much risk of the outcome with vouchers.  Once vouchers are chosen, the outcome seems to follow.  This may present another situation for the so-called "known loss doctrine," not as a supposed "exclusion" but simply because insurance arguably does not exist to cover known losses.

Please Read The Disclaimer.  ©2017 by Dennis J. Wall.  All Rights Reserved.

TOO SCARED TO TRY: FEDS BEG WALL STREET TO SETTLE …

…All the Big Cases.

This article is being posted simultaneously on Insurance Claims Bad Faith Law Blog and on Insurance Claims and Issues Blog.

HSBC was accused by the Federal Government of what amounts to laundering money for terrorists.  The Feds settled the HSBC matter although they had good chances of success if they went to trial against HSBC and especially against many of its officers and employees.  What trial lawyer would not want to have the prosecution side of a case against terrorists and their sympathizers?  Apparently the Feds.  See Gretchen Morgenson in her "Fair Game" column published in this morning's Sunday New York Times, "A Bank Too Big to Jail" (posted Online on July 15, 2016), which you can also post in your browser at http://www.nytimes.com/2016/07/17/business/a-bank-too-big-to-jail.html?ref=business&_r=0.  Ms. Morgenson's column features an unofficial report released by Republican staffers of the U.S. House Financial Services Committee without the Committee's approval.  Although obviously partisan, it appears that this investigative report offers a lot of actual evidence and not just opinions.

For example, after the Feds decided not to take the HSBC case to trial, they wanted so much to settle with HSBC that they offered immunity from prosecution to HSBC's officers and employees if only HSBC would settle.  The HSBC settlement apparently offers a lesson in settling on unfavorable terms.  Anyone who has ever settled a case knows that once the other side of a negotiation knows that your side wants to settle badly, that is exactly how your side will almost certainly end up settling, which is badly.

Please Read The Disclaimer.  © by Dennis J. Wall.  All Rights Reserved.  

D&O UNFAIR TRADE PRACTICES EXCLUSION HELD AMBIGUOUS …

… DOES NOT EXCLUDE "FRAUD-BASED CONSUMER-PROTECTION CLAIMS," ILLINOIS FEDERAL COURT HOLDS UNDER MINNESOTA LAW.

In Big Bridge Holdings, Inc. v. Twin City Fire Ins. Co., 132 F.Supp.3d 982 (N.D. Ill. 2015), the Federal District Court held that an "unfair trade practices exclusion" in a Directors and Officers Liability Policy was ambiguous under Minnesota law.  As a result, the exclusion did not bar all coverage for the underlying claims alleged against the policyholder, which the Court described "as fraud-based consumer-protection claims alleging deceptive (not anti-competitive) business practices."

Please Read The Disclaimer.  ©2016 by Dennis J. Wall, author of "Lender Force-Placed Insurance Practices" (American Bar Association 2015).  You are invited to visit the author's website.  All rights reserved.   

"INSURANCE CLAIMS AND ISSUES," THE BOOK: COMING IN 2016!

 

 Storm Clouds lined up over the Gulf of Mexico.  Photograph and text copyright 2015-2016 by Dennis J. Wall.

I am hard at work on an anthology of the best blogs from "Insurance Claims and Issues."  The anthology I submit to my publisher will keep all hyperlinks intact, including links to the Insurance Claims and Bad Faith Law blog.  When articles posted on Insurance Claims and Bad Faith Law blog are important to the anthology of "Insurance Claims and Issues," I am including them in the anthology too.

As each previously posted article is updated, the posted articles will remain just as available here as they always have been.  New articles will benefit from me being better informed and better equipped to discuss future insurance claims and issues.

I have contracted with Thomson Reuters (West Publishing Company to those fortunate to have the experience) to publish "Insurance Claims and Issues," the Book, in the late Spring or early Summer of 2016.  Best wishes to everyone for a joyous and Happy New Year!

Please Read The Disclaimer.  ©2016 by Dennis J. Wall, author of "Insurance Claims and Issues" (forthcoming Thomson Reuters 2016).  All rights reserved.

Related articles

Convincing Anyone Yet? Coverage, Contraception, and the Court.

CYBERINSURANCE:  MANY DATA-LESS RISKS TO UNDERWRITE & PREMIUMS TO CHARGE.

THE ALI RESTATEMENT PROJECT OF THE LAW OF LIABILITY INSURANCE.

Majority Holds No Negligence Cause of Action by Insured Against I.A.

Insurance Issues For the Ride-Selling, Room-Renting Economy.

There are an increasing number of reports raising questions about the extent of sellers' liability in the new ride-selling, room-renting economy.

Share these concerns?  In this climate, insurance issues are well worth a close examination given so many questions of liability in so many situations. A large top-tier law school is considering a symposium on the insurance issues shared by the potential liabilities of our new ride-selling, room-renting economy.  Let's leave it up to them to make their own announcement of who, when, and where.

Please Read The Disclaimer.  Copyright 2015 by Dennis J. Wall.  All rights reserved.

Related articles

What's in a Claim? A Defense, Possibly.

IS THERE D&O COVERAGE FOR GREED?

Blue moon over Washington, D.C. Image provided by NASA.

               Stock buybacks used to be a species of stock manipulation.  Then came the SEC.  Under President Reagan, the government regulated stock buybacks by issuing a new rule.  The SEC issued the new rule in 1982.  It is Rule 10b-18.

               Rule 10b-18 has been used as a so-called "safe harbor" by executives and the directors and officers that enable them to do so, to "buy back" stock of their corporation with immunity from prosecution for stock manipulation.  (Of course, the funds for the purchase of the corporation's own stock came then and come now from the profits of the corporation, profits which used to go in generally adequate numbers toward research and development, and worker compensation, among other competitive needs of the corporation.)

              The consequences of stock "buyback" for some 35 years have included increases in executive salary tied to increased earnings per share (earnings per share of stock trend upward, i.e., increase, as a result of buybacks) and increases in the value of shares held by executives (executives are riding a rising trend over the last three+ decades of being paid in shares of the corporation's stock, in addition to drawing down their rather hefty salaries).  See Andrew Ross Sorkin, "Dealbook / Stock Buybacks Draw Scrutiny From Politicians" p. B1, col. 5 (New York Times Nat'l ed., Tuesday, August 11, 2015).

               Is there director's and officer's coverage for these acts?  For corporate executives?  For the officers and directors who enable such acts?  Is that why Rule 10b-18 was promulgated by their SEC, to immunize them with its "safe harbor" from being sued for such acts?  Are the people who are the ones harmed by this conduct allowed by the law to sue?

              Follow the money, as they say.

              Is there anyone alive who seriously contends that the performance of U.S. corporations aside from making paper profits for their executives, directors, and officers has been competent by any other measure of performance in the last 35 years?  If so, let them stop buying things from China.  Has anyone been heard to say that the economy is in good shape at this time and that we as a society should keep running things the way they have been running for decades? Anyone?

P.S.

The writer of the linked newspaper article addresses the idea that government regulation of stock manipulation is not an answer to stock buybacks, but that the answer must come from the market.  If government regulation is not an answer to stock manipulation, and stock buybacks are stock manipulation regardless of whether government regulates them or not, then why did the SEC provide the immunity of Rule 10b-18 in the first place?  Until Rule 10b-18 was issued, stock buyback was not a problem because it was not done; it was stock manipulation, punishable as a crime as well as civilly.  So, why not withdraw Rule 10b-18, roll it back, make it void?  If issuing that rule in the first place caused the problem, then the solution would clearly seem to be to remove it.  In other words, to deregulate.   

Please Read The Disclaimer.  ©2015 by Dennis J. Wall, author of "Lender Force-Placed Insurance Practices" (American Bar Association 2015).  All rights reserved.

HELD: NO PRIVILEGE, NO WORK PRODUCT OVER REPORTS TO REINSURER.

          Two requests for production to a Director's and Officer's Liability Insurance Company, Progressive, were at issue in a recent decision by a U.S. Magistrate Judge, Progressive Casualty Insurance Co. v. Federal Deposit Insurance Corp., 2014 WL 4168477 (N.D. Iowa August 22, 2014)(Strand, U.S.M.J.).  They were requests for production of:

 

12.  All documents relating to the purchase, placement or ceding of any reinsurance by you [the liability insurance carrier] that relate to the Policy, including all status reports provided by you to such reinsurance companies and memoranda relating to meetings with reinsurers.

 

23.  All documents relating to any communications with any reinsurer about the Claims.

The discovery pleading defined "Policy" as the liability insurance policy at issue in the case, and "Claims" as "'any and all demands for insurance coverage and/or payment made by the FDIC and/or any officers or directors of Vantus Bank."  Progressive Casualty Insurance Co. v. Federal Deposit Insurance Corp., 2014 WL 4168477 *1 (N.D. Iowa August 22, 2014)(Strand, U.S.M.J.).

          The liability insurance company that received these requests contended that it could redact (black out) parts of reinsurance communications on the grounds of either attorney-client privilege or work product immunity or both, after a previous Order directing production of  the requested documents.

          The Court overruled objections based on work product immunity from discovery.  First, the Court agreed with FDIC, the plaintiff in this case and the party that propounded the requests, "because the information was created in the ordinary course of Progressive's business":

 The documents were prepared and distributed to the reinsurance companies and broker for business purposes. Progressive itself admits that the documents were provided for case updates pursuant to the reinsurance agreements, or in response to specific requests, and included the matter's history, its present posture, current activity, assessments of coverage and liability issues, amounts paid and reserve, and plans for future handling. Doc No. 75 at 10. Those are all typical business purposes for the reinsurance industry. Progressive has not met its burden of showing that these documents were “prepared or obtained because of the prospect of litigation.” [Citation omitted.]  Therefore, they are not subject to protection under the work product doctrine.

          The Court further overruled objections based on the attorney-client privilege, for two reasons.  First, "Progressive waived any applicable attorney-client privilege when it distributed the communications to its reinsurers and broker."  Progressive Casualty Insurance Co. v. Federal Deposit Insurance Corp., 2014 WL 4168477 *4 (N.D. Iowa August 22, 2014)(Strand, U.S.M.J.).

          Second, even assuming that the so-called "common interest doctrine" applied under the circumstances, still that doctrine as defined by the Court requires an identity of legal interests, not commercial interests.  "The relationship between Progressive and its reinsurers and broker is commercial and financial in nature, not legal."  Progressive Casualty Insurance Co. v. Federal Deposit Insurance Corp., 2014 WL 4168477 *4 (N.D. Iowa August 22, 2014)(Strand, U.S.M.J.).

          Based on the record before it, the Court granted the plaintiff's motion to compel production of the requested documents without redaction in this case.

© 2014 by Dennis J. Wall.  All rights reserved.  No claim to original U.S. Government works.

Please Read The Disclaimer.

 

Is There Enough D&O and EPLI For The Whole Football League?

   There is a question whether there is enough Directors and Officers Coverage and Employer's Liability Insurance for professional sports, starting with the football league.  It is pretty clear from the evidence in a report which the owners themselves paid for, that they are going to face claims that they are running some of the most hostile work environments in the world.  See Ben Shpigel, "'A Classic Case' of Bullying Seen in an N.F.L. Team / Miami Abuse Detailed / Report Says Crude Acts Included Racial Slurs and Homophobia," p. A1, col. 1  (New York Times Nat'l ed., Saturday, February 15, 2014).

   So, what made some people think that when the kind of people who are good at nothing else in their lives but playing football get older, that for some reason they necessarily morph into good people if they aren't already a good person to be around?  Or role models?  Or mature adults?  I guess that may be an issue for owners and the coaches they employ.  It certainly seems to be an issue already for sponsors of these professional leagues.  See Juliet Macur, "Sports of the Times / N.F.L. Sponsors Need to Act" p. B9, col. 3 (New York Times Nat'l ed., "SportsSaturday" Section, Saturday, February 15, 2014).  Sponsors who pay money to advertise these groups of people have the pleasant option of conditioning payment on compliance with certain minimum levels of acceptable behavior.

    If the sponsors do not require compliance, others may say that the sponsors are complicit, now that they have to know what they are sponsoring.  Continuing to sponsor the same repulsive behavior without requiring change just may not be acceptable now, either.

© 2014 by Dennis J. Wall.  All rights reserved.  No claim to original U.S. Government works.

Please Read The Disclaimer.

EMINENT DOMAIN AND THE PUBLIC ENTITIES POLICY.

          Cities across the country face a budding catastrophe.  In staggering numbers, houses are rapidly falling into ruin and homes are in foreclosure.  Empty dwellings that once were neighborhood homes and a part of the tax base, are largely inhabited now by criminals.

          To combat the rising crime rates and to solidify the home-ownership goals of their citizens, many cities are considering eminent domain.  Their consideration involves a twist from what might be thought of as traditional uses of eminent domain, however.  This case provides a good example of such traditional uses of eminent domain, in which the cities' powers of eminent domain could be exercised in condemning the property, throwing out the homeowners in the process, paying off the investors holding any mortgages and other liens, and hoping to resell the property.  This is always a losing economic proposition for the cities, it seems.

          Enter the consideration of exercising powers of eminent domain, with a twist from the traditional use of those powers.  Cities are currently considering whether to exercise powers of eminent domain to first negotiate with mortgagees and, if the negotiations are not successful, then condemning the mortgages and paying the same price as the cities offer in the negotiations except that now they are offering the same price in an eminent domain proceeding.  This creative use of eminent domain would terminate the mortgagees' rights over the properties in the process -- and thereby also terminate the mortgagees' rights over the homeowners.  The homeowners, neighbors all and taxpayers too, would not have to leave their homes or their neighborhoods.

          Not willing to stand for this invasion of their asserted rights to foreclose, and voicing no objections to traditional uses of foreclosures and of eminent domain during the course of both of which homeowners are evicted, "Wall Street and real estate interests" have filed lawsuits against cities which have exercised powers of eminent domain in this way, and they have threatened lawsuits against cities which have the audacity even to consider using eminent domain in this way.  See Shaila Dewan, "More Cities Consider Using Eminent Domain to Halt Foreclosures" p. B4, col. 1 (New York Times Nat'l ed., Saturday, November 16, 2013).

          Public Entities and Officials Liability Insurance Policies may provide some protection to many of these cities and municipal officials who are sued by the litigious "Wall Street and real estate interests".  Public Entities Insurance provides very similar coverage as Directors and Officers Liability Insurance Coverage provides to the private sector -- ironically, very similar coverage as the D&O Coverage passionately invoked by many of the same "Wall Street and real estate interests" who have been sued since they helped to cause the Great Recession in the first place.

Please Read The Disclaimer.  

INSURANCE COVERAGE, IF LIABILITY FOR ENABLING WASHINGTON NAVY YARD MURDERS?

            Newspaper reports point out that the Washington, D.C. Navy Yard mass murderer had glaring reasons in his background to deny him access to places like the Navy Yard.  "Federal contractors who conducted a background check on Aaron Alexis when he enlisted in the military knew that he falsely reported that he had never been arrested or charged with any firearms offenses but he nevertheless was granted a security clearance, Navy officials disclosed Monday."  Craig Whitlock, "Aaron Alexis Didn't Report Gun Arrest During Background Check, Received Clearance" (Washington Post Online Monday, September 23, 2013).    [Emphasis added.]  The background checkers knew more than that apparently.  They also allegedly knew, for example, that the mass murderer they were checking had been arrested a couple of times, and that on at least one police report the police wrote down that the killer told them that he heard voices before he got violent -- and the police sent a copy of the police report to the Navy to check it out.

          The background checker on the Navy Yard killer is a private contractor for the Office of Personnel Management.  Joe Davidson, "Does Profit Motive Affect Security Clearance Investigations?" (Washington Post Online Monday, September 23, 2013).  Parenthetically, the checker on the mass murderer's background is the same checker on the background of Mr. Ed Snowden who reportedly leaked NSA secrets to certain members of the public press.  Michael S. Schmidt, "Shooter Said Electronic Brain Attacks Drove Him to Violence, F.B.I. Says" p. A17, col. 1 (New York Times Nat'l ed., Thursday, September 26, 2013).  The background checkers on Mr. Snowden reportedly contacted his mom and his fiancée.  Those two are the only persons the checker checked with, allegedly.

          There is a clear possibility of claims against the contractor.  The claims will or may come in a multitude of ways.  There seem to be grounds for perhaps alleging intentional torts, or alleging negligence in that they knew or should have known the backgrounds, or some other bases of liability.

          When these claims are alleged, much will depend of course on how they are alleged, if at all, in the eyes of a Court.  Will Directors and Officers Coverage be implicated as to the directors and officers of the background checker of the mass murderer?  If he had not received clearance, he would not have been in the Navy Yard, his shotgun would not have been there either, and since he and his shotgun would not have been there, it can be argued, his finger could not have pulled the trigger and killed 12 people before he killed himself.

          Would there be CGL ("Commercial General Liability") Coverage or its equivalent under these reported circumstances, either for an "occurrence" resulting in "property damage" or "bodily injury," or for an "offense" resulting in "personal injury"?

          Would there be E&O Coverage or its equivalent, if any, for the Errors and Omissions of the background-checker-corporation?

          The insurance coverage questions will not be answered by the Courts until after the liability claims come, of course.  The application of Exclusions may prevent coverage under insurance policies altogether in cases like these.

Please Read The Disclaimer.

D&O COVERAGE EXCLUSION OF DIRECTOR DECISIONS ON CEO PAY?

          Decisions by Directors on CEO pay based on revenue over short performance periods are being called into question.  Alternatives are available, including basing CEO pay on return on the shareholders' investment and over a longer period of time than is currently used by most Directors.

          It seems clear that deliberately or negligently choosing a pay scheme for CEOs based on a model detrimental to shareholders while other, superior models are available is a breach of fiduciary obligations at common law or in equity.  This is a pretty clear result at least in most jurisdictions outside of Delaware, for example.

          Is there an Exclusion for D&O Coverage of such Directors' conduct, such as an excluded breach of fiduciary duties for example?

          The issues of CEO pay, performance periods, and Directors decisions concerning them are raised by Gretchen Morgenson, "Fair Game / Directors Disappoint By What They Don't Do" p. 1, col. 1 (New York Times Nat'l ed., "SundayBusiness" Section, Sunday, May 12, 2013).

Please Read The Disclaimer.

Related articles

Delaware's duty of disclosure

U.S. ATTORNEY PURSUES POLICY OF RECOVERING FHA MORTGAGE INSURANCE LOSSES.

 

This post updates the article published on Insurance Claims and Bad Faith Law Blog on Sunday, April 7, 2013, "FIRREA is Not a Furry Creature for D&O Insurer DJA".  See also the post on Insurance Claims Bad Faith Law Blog published on Tuesday, April 9, 2013, "MISCONDUCT INDUCING FHA INSURED MORTGAGES: LITIGATION ALLOWED DESPITE SETTLEMENT AGREEMENT ".

 

          The Department of Justice appears to have begun a policy of filing civil lawsuits to recover Insurance payments made by the Federal Housing Administration (FHA).  These lawsuits involve allegations against Directors and Officers of Mortgage loan originators inducing the FHA to insure Mortgages which has cost the FHA millions of dollars and will cost the FHA more in past and future Insurance payments on account of the bad and baseless Mortgages in question.  The enforcement of this policy clearly appears to be left to the local United States Attorneys.

For example, such a lawsuit was filed on Thursday, April 4, 2013 by the United States Attorney's Office for the Southern District of New York.  In it, the United States based its action on the following legal sources:  "The Government brings this action seeking damages and civil penalties under the False Claims Act, 31 U.S.C. §§ 3729 et seq., the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), 12 U.S.C. § 1833a, and the common law."  (Paragraph 1, page 2, Complaint, United States v. Movtady and Golden First Mortgage Corp., Filed April 4, 2013, S.D.N.Y. Case No. 13-cv-02227, 32 pages).  Download Complaint.United States of America v. Movtady and Golden First Mortgage Corp. (SDNY Filed 04.04.13, Case No. 13.cv.02227)

          The "common law" Claims include alleged "Gross Negligence," negligence, and Breach of Fiduciary Duty.

          If successful, this civil action and other lawsuits like it, may return substantial amounts of money to the Federal Treasury, which of course means returning substantial amounts of money to the Federal Taxpayers.  The United States Attorney's Office seeks not only Compensatory Damages in this Complaint, but also Penalties and Treble Damages.  The total award could be as much as $100 Million.

Please Read The Disclaimer.

SAY IT AIN'T SO, SHEILA: THE FDIC'S SECRET SETTLEMENTS.

          I am currently reading with interest Sheila C. Bair's book, "Bull By The Horns".  It is a description of the time spent in office by the Federal Deposit and Insurance Corporation's former Chairman, written by the Chairman herself to describe her office.  During her tenure, which ended on or about July 6, 2009, much of the Financial Crisis exploded on our economy.

           While I am reading Ms. Bair's account of her tenure, reports have surfaced concerning secret FDIC settlements made on her watch with Directors and Officers who allegedly caused or contributed to the cause of the Great Financial Fiasco.  In apparent violation of Federal law, the FDIC agreed to keep the settlements secret unless a specific request was made for disclosure of that particular settlement.  See, e.g.,  E. Scott Reckard, "FDIC Begins to Reveal Settlements Related to Financial Crisis" (Los Angeles Times Online, posted March 19, 2013); William K. Black, "Business Blog / Which Aspect of the FDIC's Litigation Failures is The Most Embarrassing and Damaging?" (Huffington Post, posted March 12, 2013).  Reportedly, Ms. Bair was leading the FDIC "when most of the settlements were completed".  See Scott Reckard, Los Angeles Times, supra.

           Sheila Bair does not mention the fact of FDIC settlements with Directors and Officers of failed banks in her book, let alone that the FDIC agreed to keep them secret, or at least I cannot find any mention of them in her book.  We shall now, perhaps, all hear her side of the story soon.

           In response to a recently published newspaper report in the Los Angeles Times, the FDIC has begun posting information concerning its previously secret settlements on its web site.  The documents will be posted in increments.  As of March 29, 2013, the initial postings consist of  about 45 sets of documents (not simply individual settlements, but in some cases, groups of settlements).  They are collectively labeled by the FDIC as "Professional Liability Agreements by State Since 2008".  The FDIC site also contains a list of 53 "Professional Liability Lawsuits" filed by the FDIC against "officers and directors, attorneys, accountants, appraisers, brokers or others" and "fidelity bond carriers and title insurance companies," between July 2, 2010 and March 7, 2013.

           Examining the 45 pdf's posted to date will take awhile.  If I find anything 'newsworthy' in them, I will post my reviews of these settlement documents as I am able to complete my reviews.  In the meantime, the settlement which has attracted the most popular interest at the present time is the December, 2012 settlement between the FDIC and Michael Perry, who was CEO of failed IndyMac Bank located in California.  IndyMac's failure "cost the [FDIC] $13 billion -- the biggest loss in its 80-year history."  Scott Reckard, Los Angeles Times, supra.  [Emphasis added.]

           The FDIC reportedly secretly settled its claims against Mr. Perry for his agreement to personally pay $1 Million, plus an agreement by Mr. Perry not to engage in the banking industry (for awhile, at least) and also with provisions guaranteeing the FDIC's pursuit of IndyMac's "liability insurers" for $11 Million more.  Professor William K. Black, Huffington Post, supra.

           The Perry settlement was so good that it was announced in EMails sent to news organizations -- reportedly by Mr. Perry's lawyers, not by the FDIC.  The terms of this particular settlement were therefore public knowledge in December, 2012 when the settlement was reached between Mr. Perry and the FDIC.  See Kevin LaCroix, "IndyMac CEO Settles FDIC's Failed Bank Suit" (The D & O Diary, posted December 17, 2012).   

           In contrast, one alleged seller and/or deliverer of Mortgages to IndyMac Bank, Quicken, agreed to pay 6.5 times as much money, or $6.5 Million, to settle the FDIC's claims against it, and "[w]ithout admitting liability".  (See the 65th page in the 230 page pdf labeled, "IndyMac2", among the FDIC's "Professional Liability Settlement Agreements by State Since 2008".)

           On the whole, it seems less expensive to be a failed CEO than it does to be a failed Mortgage 'seller and/or deliverer'.  On the whole, as well, there are many legal entanglements with secret settlements that make these agreements unwise, and the price of keeping them secret exorbitant.  This is a good rule of thumb to follow when making all types of insurance settlements, it seems:  As a general rule at least, keep them open and transparent.  See generally DENNIS J. WALL, 1 LITIGATION AND PREVENTION OF INSURER BAD FAITH § 3:107, "Settlement of Third Party Bad Faith Claims:  Confidentiality (protected) or Concealment (Void)" (West Third Edition; 2013 Supplement in process); 2 id. § 9:28, "Settlement of First Party Bad Faith Claims:  Confidentiality (Protected) or Concealment (Void)".    

 Please Read The Disclaimer. 

FLORIDA DUTY TO DEFEND INTENTIONAL TORT UNLESS "INTENTIONAL DAMAGES" EXCLUSION ....

.... AND CERTAINLY NOT WHEN THERE ISN'T EVEN  ONE IN THE POLICY.

             In Philadelphia Indemnity Insurance Co. v. Hamic, 2012 WL 5055558 (M.D. Fla. October 18, 2012), a Federal District Judge held that under Florida Insurance Law, there is a Duty to Defend a claimed Conspiracy to commit Malicious Prosecution.

            The Federal Court previously determined that there is a Duty to Defend a Malicious Prosecution Claim in the same underlying case.  An Attorney's Professional Liability Policy covering specified Errors and Omissions is at issue in the Federal case.   The Defendants in the underlying case, and also the Insureds on the Policy, are an attorney and his Law Firm.

            Philadelphia, the E & O Carrier, filed a Motion to Reconsider or to Amend the Summary Judgment of a Duty to Defend, specifically as to alleged civil conspiracy.  The Insurance Company argued that conspiracy is an intentional tort and is not covered by the Attorney's Professional Liability Policy at issue.

            The Professional Liability Policy at issue has no Exclusion for intentional torts, the Court observed.  Philadelphia Indemnity Insurance Co. v. Hamic, 2012 WL 5055558 *1 (M.D. Fla. October 18, 2012).

            Moreover, the Professional Liability Policy at issue covers Errors & Omissions some of which are intentional torts, "though not specifically malicious prosecution or conspiracies."  Philadelphia Indemnity Insurance Co. v. Hamic, 2012 WL 5055558 *1 (M.D. Fla. October 18, 2012).

            Even though conspiracy was claimed in the underlying case, conspiracy does not require an intent to cause the damages complained of, in order to allege it or to prove it.  Without an Exclusion of intent to cause the damages complained of, there is no doubt that there is a Duty to Defend such claims under settled Florida Insurance Law.   "The tort of civil conspiracy does not require a finding of specific intent to harm the plaintiff or to extract an intended result.  Essentially the intent to commit the tort does not also mandate an intent to do the harm that resulted, which was an arrest."  Philadelphia Indemnity Insurance Co. v. Hamic, 2012 WL 5055558 *2 (M.D. Fla. October 18, 2012), CITING LIME TREE VILLAGE COMMUNITY CLUB ASS'N v. STATE FARM GENERAL INSURANCE CO., 980 F.2d 1402, 1407 (11th Cir. 1993), in which the Author successfully represented a Florida Homeowner's Association when it and its elderly members were all denied a Defense under their Business Liability Coverage and under their Directors and Officers Liability Coverage, which was upheld on a Summary Judgment by a Federal District Judge, and which was unanimously reversed on appeal by the Eleventh Circuit in the decision relied on by other  Federal District Judges to determine a Duty to Defend, including in this October 18, 2012 decision.

Please Read The Disclaimer.     

D&O Wars II.

"Instead of an attack on the 1 percent, let's call it an attack on the very productive."

Max Abelson, "Bankers Join Billionaires to Debunk 'Imbecile' Attack on Top 1%" (Bloomberg Online, Tuesday, December 20, 2011), quoting what is described as a current Director [Chairman of the Board] and a former CEO of BB&T Corporation, "the ninth-largest U.S. bank".  [Emphasis added to quotation.]  The individual is also a current "Distinguished Professor of Practice" at Wake Forest.

   Some Directors and some Officers are very productive in producing D&O Claims at this time.  See generally "D&O WARS:  CORPORATE SHAREHOLDERS PAY PREMIUMS; DIRECTORS, OFFICERS DO NOT," posted here on December 21, 2011.  Without the unfortunate conduct of some Directors and some Officers before and during the Great Economic Fiasco through which we are all now living, there would definitely be many fewer opportunities for Courts to decide D&O Insurance Coverage issues. 

HAPPY HOLIDAYS TO ALL, AND TO ALL A HAPPY NEW YEAR!

   Please Read The Disclaimer.

D&O WARS: CORPORATE SHAREHOLDERS PAY PREMIUMS; DIRECTORS, OFFICERS DO NOT.

 

Underwriting vs. Claims, again.

    Directors and Officers Insurance Premiums are paid by their corporations.  That of course means that D&O Premiums are really paid by the Shareholders.  See Louise Story, "Ex-Bank Executives Settle F.D.I.C. Lawsuit" (New York Times Online, December 13, 2011).

   D&O Policies are Liability Insurance Policies of course.  D&O Policies provide Insurance Coverage for Defense and Indemnity.  Directors' and Officers' Defense Fees are paid as they are incurred.  The effect is that covered Directors and Officers hire large law firms to provide them with the best possible defense.  See the list of counsel representing the Defendant Officer in Federal Deposit Insurance Corp., as Receiver for Indymac Bank, F.S.B. v. Perry, 2011 WL 6178544 (C.D. Cal. December 13, 2011), Download FDIC as Receiver for Indymac Bank, FSB v. Perry (C.D. Cal. Case No. 11.5561, Order Denying Defendant's Motion to Dismiss, Filed Dec. 13, 2011) PUBLIC ACCESS.  Parenthetically, this is not a guarantee of success on the merits.  See id. at *2-*4 (Motion to Dismiss of Defendant Officer, based on California Business Judgment Rule or "BJR," was denied because, as the Court pointed out in its opinion, the California Business Judgment Rule "does not apply to corporate decisions of officers in California," no case has ever applied it to officers under California law, and California statutes on the Business Judgment Rule expressly apply to directors without conferring BJR protection on corporate officers at all).

   In yet the latest visible manifestation of a sometimes covert war between Underwriting and Claims, some Insurance Companies are marketing D&O Coverage to apply to "clawbacks," i.e., to claims for "the return of money people never should have received."  Reuters Breaking Views, "Pushing Back on Clawbacks" p. B2, col. 1 (New York Times Nat'l ed., "Business Day" Section, Tuesday, December 20, 2011), published in an edited version online with the headline, "Pushing Back on Clawbacks".

   It seems that there is an available argument that Public Policy should prohibit Insurance Coverage for the underlying acts that result in the clawback claims.  Since the Financial Institutions, Reform, Recovery and Reinforcement Act of 1989 ("FIRREA") provides for clawback claims in cases of "gross negligence" and in cases subject to State causes of action at least equal to "gross negligence," whatever the State causes of action may be labeled and even if the State claims are simply labeled as "negligence," see F.D.I.C. v. Perry, 2011 WL 6178544 at *1 n.1, it seems that Public Policy may be involved to raise an argument against providing the perpetrators with Insurance Coverage against clawback claims.

   This may not mean that Insurance Companies will not necessarily pay Defense or Indemnity expenses for clawback claims, however.  See Reuters Breaking Views in the New York Times of Tuesday, December 20, 2011, supra:  "And courts have ruled that insurance covering similar kinds of improper payments isn't enforceable.  But if insurers want to pay, there's nothing to stop them.  Most have agreed generally not to challenge reimbursement."

      In the end, unfortunately, Underwriting may still insist on marketing the "clawback coverage".

 

   Please Read The Disclaimer.

 

"Put Your Hands Up, Or ... We'll SETTLE!" Not Hardly, Pilgrim.

   The Securities and Exchange Commission "enforcement chief" says settlements leave your client better off than what they could get if they went to Trial.  Edward Wyatt, "House Panel to Examine Settlements By S.E.C." p. B6, col. 1 (New York Times Nat'l ed., "Business Day" Section, Saturday, December 17, 2011), quoting "Robert Khuzami, the S.E.C.'s director of enforcement".  That is true only when you lose at Trial all the time.

   Anyone who has actually litigated cases knows that you settle when the risks to your client are greater than the chances of recovery.  No active practitioner ever consistently recommends settlements of potentially successful lawsuits because the amount of the settlements is equal to the amount or as much as your clients could get if they went to Trial.

   Evidence of this truth is clear.  Private lawsuits against "banks" return far more money than settlements negotiated by the S.E.C. and other currently staffed Federal agencies.

   What Insurance Coverages such lawsuits will trigger is even now  being litigated, along with the lawsuits themselves.  The plaintiffs are voting with their filing fees that they will be made whole faster and more efficiently by doing the recovery actions themselves, you might say: 

   If the bank settled with the investors using the same loss ratio that was applied in the Bank of America settlement [of a lawsuit filed by private investors], it would cost JPMorgan about $1.9 billion.  Still the bank would have other exposure outstanding.  JPMorgan faces about $31 billion in class-action cases, according to McCarthy Lawyer Links, a legal consulting firm.

   Elizabeth Nowicki, a professor of securities law at Tulane University and a former lawyer at the Securities and Exchange Commission, said that the efforts by investors might turn out to be the costliest and most important way that banks are held accountable for their mortgage security creations, because the push for accountability is coming from bank clients.  For instance, in the one mortgage security case the S.E.C. has brought against JPMorgan, the bank settled the allegations in June for $153.6 million.

Louise Story, "Investors Scrutinizing JPMorgan's Mortgages" p. B1, col. 6 (New York Times Nat'l ed., "Business Day" Section, Saturday, December 17, 2011).

Please Read The Disclaimer.

Bank of America Directors, Officers May Pay Personally, Plus Insurance?

  The New York Times reports on a lawsuit pending against Bank of America, its former CEO Kenneth D. Lewis, and other former Directors and Officers.  The suit was brought by BOA Shareholders.  They accuse the Defendants of intentional fraud, according to the reporting, in connection with disclosure of a huge loss Merrill Lynch was experiencing and about to report.

   The Plaintiffs claim that Bank of America knew but did not disclose this information before BOA acquired Merrill Lynch's liabilities in late 2008 to early 2009.

   The Plaintiffs also claim that as soon as the acquisition of Merrill Lynch was completed, the Defendants disclosed "this staggering loss ... to ensure that Bank of America shareholders did not vote against the transaction."  Prof. Steven M. Davidoff, "Deal Professor / Dealbook / For Bank of America, a Looming $50 Billion Claim of Havoc" p. B7, col. 1 (New York Times Nat'l ed., Wed., September 28, 2011).

   The report by Professor Davidoff summarizes the lawsuit this way:

   The case shows how regulators' actions can be supplemented by private actions.  And if the plaintiffs win, this case may be the exceedingly rare event of directors and officers, particularly Mr. Lewis and Mr. [Joseph] Price [BOA's former CFO], actually having to pay money personally to settle a securities fraud claim.  If so, the two men would join the relatively few executives from the financial crisis who have been personally penalized.

   Whatever the outcome of this case, it appears that Bank of America shareholders were sacrificed in December 2008 so that the Merrill deal could be completed.  The bill may now be coming due for Bank of America.

Id.

   And to that summary should be added here the news that at last, Directors and Officers Liability Insurance may not pay alone, if at all.

  The 22nd Annual Bad Faith Litigation Conference of the American Conference Institute is being held in 2011 in Orlando, Florida.  The author will be speaking.  As a result, the ACI will offer you a large  discount if you choose to register for the Conference.  The last day announced by the ACI to obtain this discount, however, is Friday, September 30, 2011.  In order to register and receive this discount from the ACI, contact Amanda Waltmon, Esquire, Legal Analyst and Program Director at the ACI.  Ms. Waltmon's direct dial is 212.352.3220, ext. 5231 or send Ms. Waltmon an EMail at [email protected].  Here is a link to the American Conference Institute Website Page which features this Conference including registration, if you or someone you know would like to attend.

Please Read The Disclaimer.

Directors and Officers: Whose, How Attorney's Fees Are Funded ...

... May Just Determine the Outcome of the Cases Against Them.

   This idea was explored in a post here on August 3, 2011, "Director's and Officer's Liability Coverage:  Exhausted or No Coverage, Results?"  In that post, the idea was particularly exposed in the context of exhaustion of D&O Coverage vs. No D&O Coverage Available.  The Insurance Coverage context provided the question in that post, what results flowed from either the exhaustion or the total unavailability of D&O Coverage for Defense Expenses.

   As if on cue, a newspaper column on Saturday, August 6, 2011 was published around the question of what happens when a private corporation either does not fund or stops funding the Defense Expenses of Corporate Officers and Directors -- and, in at least one situation, stops funding the Defense Expenses of a private eye hired by the corporation.  See  James B. Stewart, "Common Sense / A Murdoch's Missed Opportunity"  p. B1, col. 1 (New York Times Nat'l ed., "Business Day" Section, Saturday, August 6, 2011).

   Here is the columnist's answer to that question:

   However controversial in Britain, the practice of companies' paying their officers and employees' legal expenses in criminal investigations is not only routine in America but has been elevated by some to the status of a constitutional right.  A little-discussed but open secret among defense lawyers and prosecutors alike is that who pays the legal fees often decides the outcome of an investigation.

Id.

   Now back to the idea of observing results of underlying liability claims against Directors and Officers, when their Defense Expenses have either exhausted the available D&O Coverage, or D&O Coverage is simply not available from the outset.  Time -- and the results -- will tell.

On related Insurance Coverage Issues under D&O Coverages, see Guest Post by Richard Bortwick and Micah Knapp, Introduction by Blog Host Kevin M. LaCroix, "2nd Circ. Holds D&O Policies Cover Voluntary Compliance Expenses and Special Litigation Committee Costs" posted July 29, 2011 on "The D&O Diary" Blog.

Please Read The Disclaimer.

 

Director's and Officer's Liability Coverage: Exhausted or No Coverage, Results?

   Expectations of D & O Coverage exhaustion have been raised by a "federal judge's decision to allow a securities fraud class-action lawsuit against the former officers and directors of Lehman Brothers to move forward".  Wayne State University Law Professor Peter J. Henning, "Legal Fees Keep Surging in Lehman Class-Action Suit" ("Dealbook" Blog Post on August 1, 2011 on New York Times Online).  Professor Henning estimates in his blog post that Lehman Brothers' original holding of $250,000,000.00 in Director's and Officer's Liability Coverage that a total of some $85,000,000.00 to $100,000,000.00 of it has been exhausted in paying "legal fees and other settlements."  See id.  Parenthetically, the Plaintiffs in the class-action securities fraud lawsuit allege that they bought $31,000,000,000.00 -- or $31 Billion -- in Lehman securities.  Id.

   The "former officers and directors of Lehman Brothers" may never realize how lucky they really are.  In an equally recent decision, another Federal Judge in another District held that a D&O Carrier had no Insurance Coverage for directors and officers sued for alleged misdeeds.   Download Sandburg Financial Corp. v. National Union Fire Insurance Co. (S.D. Tex. Case No. H.10.2332, Opinion and Order Filed July 25, 2011) PUBLIC ACCESS, also published as 2011 WL 3104406 (S.D. Tex. July 25, 2011)(authorized password required to access Westlaw).

   The facts of this case present a complicated puzzle.  In brief and general terms, one Murphy was Chairman of the Board and CEO of ERLY Industries.  "In 1987, Murphy and/or ERLY loaned Hansen Foods, Inc. ('Hansen') more than $20,000,000.00."  Sandburg Financial Corp. v. National Union Fire Insurance Co., 2011 WL 3104406 at *1.  The loan was secured partly with an interest in land held by Hansen.  Barrington Capital Corporation, Sandburg Financial's predecessor corporation, entered into a purchase agreement with Hansen with Murphy's and Barrington's consent.  Not only that, but Barrington received Murphy's and ERLY's agreement to indemnify Barrington if Barrington incurred losses in the sale, in essence.

   However, Hansen sold the property to someone else, not Barrington.  In 1996, Barrington obtained the first of three Judgments at issue in this D&O Insurance case in 2011:  Against Hansen, for $7,414,677.00 plus $211,378.16 in Attorney's Fees.  The 1996 Hansen Judgment was entered on February 15.

   Soon thereafter, Sandburg was in existence as Barrington's successor corporation.  One of the first things that Sandburg did, apparently, was to sue ERLY.  In 1998, Sandburg obtained a Judgment:  Against ERLY for $9,118,626.00.  Murphy, the Chair and CEO of ERLY it will be remembered, assigned all rights including for Bad Faith against ERLY's D&O Carrier, to Sandburg.  In 1999, Murphy filed for Bankruptcy.

   Ten years after Sandburg obtained the 1998 ERLY Judgment, in 2008, Sandburg sued Murphy for alleged wrongful acts as a Director and Officer of ERLY.  In 2009, Sandburg obtained a Judgment for $19,654,779.00 against Murphy.

   In 2010, Sandburg filed the instant D&O Insurance Coverage lawsuit.  It filed suit against National Union, the D&O Carrier which issued a Policy to ERLY.  Unfortunately for Sandburg, as recited by the Federal Court, "[h]ere, the policy claim arose from Barrington's June 1996 Demand that ERLY's officers and directors pay the 1996 Hansen Judgment."  Id. at *4.  The Endorsement changing the Named Insured is quoted in the Court's Opinon.  The Endorsement recites that it would take effect as of April 2, 1996.  It will be recalled that the 1996 Hansen Judgment was already entered by that time, or on February 15.

   The Federal Court in this case held that, for purposes of Insurance Coverage under the National Union D&O Policy before it, under the enforceable Endorsement changing the Named Insured, ERLY was no longer the Named Insured on the National Union D&O Policy.  Instead, an alleged subsidiary of ERLY became the Named Insured on that Policy.  The Federal Court held that by the clear terms of the D&O Policy at bar, there was no Coverage available for a parent corporation of the Named Insured.  Accordingly, the Federal Court dismissed Sandburg's Breach of Contract Claim against National Union on that ground alone.  Id. at *5.

   Whew.  And that is only a "summary" of the main points leading up to that Order of Dismissal.  The Court's holding by which it dismissed Sandburg Financial's Claim for Breach of the Duty of Good Faith and Fair Dealing, without citing any authority for the Dismissal of the Assignee's Bad Faith Claim, is disturbing.  The Court held, almost alone in the field of reported cases, that an "anti-assignment" clause in the Insurer's Policy is a bar to assignment of Bad Faith Claims.  Id. at *6.  Although the case may have been rightly decided for other reasons, the Federal Court's holding that an Assignee of Bad Faith Claims cannot sue for Bad Faith if the Insurance Policy contains a no-assignment clause is, to say again, virtually alone in the field of decided cases on this question.  See generally Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" § 7:2, "Actions by Third Parties -- Assignment" (West Publishing Co. Third Edition 2011).

   Will directors and officers in the future engage in activities like the conduct in question that is alleged in these decisions?  If so, will future conduct be deterred more by exhaustion of available D&O Coverage, or never having D&O Coverage available in the first place?  Results will tell.

The 22nd Annual Bad Faith Litigation Conference of the American Conference Institute is being held in 2011 in Orlando, Florida.  The author will be speaking.  As a result, the readers of this Blog are invited to a $200.00 discount if they choose to register for the Conference.  The authorized Code from the ACI is ICI 200.  Here is a link to the American Conference Institute Website Page which features this Conference including registration, if you or anyone you know would like to attend.

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D&O Insurance Coverage: Bank Director's Defense Against Criminal Charges?

   A Director's and Officer's Liability Insurance Carrier's Duty to Defend will be determined as an issue of fact on remand in Wintermute v. Kansas Bankers Surety Co., 2010 WL 31531 (8th Cir. Case No. 09-2806, Opinion Filed January 6, 2011)(authorized password required to access Westlaw).  A Liability Insurance Company's Duty to Defend is ordinarily held to be determined by the allegations in the complaint against the Insured.  See Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" § 3:48 (Shepard's/McGraw-Hill Second Edition, West Publishing Co. 2010 Supplement).

   The D&O Policy involved in the Wintermute case, however, required the Courts to look at facts to see whether two Exclusions applied under Arkansas law to defeat the Duty to Defend, or not.

1.  Personal Profit Exclusion.

   The Trial Court in Wintermute granted a Summary Judgment of No Duty to Defend based in part on a "Personal Profit Exclusion":

Exclusion 2 provides that KBS [the D&O Carrier] shall not be liable for payment or defense of any claim for Loss made against a Director "based upon or attributable to the Director[ ] ... gaining in fact any personal profit or advantage to which [she was] not legally entitled."

Id. at *6.  The Court of Appeals reversed.  It held that the actual language of the Insurance Policy Exclusion required proof of facts, not merely reliance on allegation in the underlying complaint against the Insured in that case.  "The term 'in fact' means 'actual or real' or 'resulting from the acts of parties rather than by operation of law.'"  Id. at *8.

2.  Dishonesty Exclusion.

   The Trial Court also based its grant of Summary Judgment of No Duty to Defend on a so-called "Dishonesty Exclusion" in the Policy at issue:

   Exclusion number 11 provides that KBS shall not be liable to make payment or provide any defense in connection with any claim for Loss against a Director "brought about or contributed to by the dishonesty of the Directors....  This exclusion shall not apply to any protection provided for any Director ... under the terms of this policy who was not involved in the dishonest acts."

Id. at *9.  Again the Court of Appeals reversed the District Court and opted instead for an examination of the facts which it held is required by the actual language of this particular Policy provision.  "We conclude that the last sentence of the dishonesty exclusion serves the same purpose as the "in fact" language contained in the personal profit exclusion.  The last sentence must be given some meaning."  Id. at *10.

   The Court of Appeals' examination of the requirements imposed by the actual language of the Policy at issue is focused on the case before the Court rather than on the application of general principles that may have no meaning in the particular case.  Whether other Courts follow this approach will be known over time.

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Foreclosure Failures Raise Insurance Coverage Issues, To Be Determined.

   In an action filed by servicing companies or banks on behalf of securitized trusts ("foreclosers"), the highest Court in Massachusetts affirmed lower court decisions and held itself that the Plaintiffs were not entitled to a declaration of perfection.  The Plaintiffs requested a judicial declaration that their real estate titles were perfected.  Instead, the Courts unanimously held that the foreclosers failed to obey the Law which allows nonjudicial foreclosures.   Download U.S. Bank National Association v. Ibanez (Mass., Opinion Filed January 7, 2011) PUBLIC ACCESS SLIPSHEET OPINION STATED SUBJECT TO REVISION.  You can also try this link for the Public Access Official Opinion:  http://weblinks.westlaw.com/result/default.aspx?action=Search&cnt=DOS&db=MA=ORS, or do an internet search for "Massachusetts Supreme Judicial Court" and click on decisions or opinions.

   Other aspects of this decision are posted on Insurance Claims and Bad Faith Law Blog. 

   There is potential resulting from this decision for a number of Insurance Coverage Issues under Director's and Officer's Liability Insurance Coverage and under Commercial General Liability Insurance Coverages, to name two examples.

   Further, as the Concurring Justice noted in this case:

   What is more complicated, and not addressed in this opinion, because the issue was not before us, is the effect of the conduct of banks such as the plaintiffs here, on a bona fide third-party purchaser who may have relied on the foreclosure title of the bank and the confirmative assignment and affidavit of foreclosure recorded by the bank subsequent to that foreclosure but prior to the purchase by the third party, especially where the party whose property was foreclosed was in fact in violation of the mortgage covenants, had notice of the foreclosure, and took no action to contest it.

   This decision, which clearly has landmark potential, is also the subject of reporting by, for example, E. Scott Reckard, "Foreclosure Ruling Could Be Setback for Banks" (Los Angeles Times Online, Friday, January 7, 2011), and by Gretchen Morgenson, "Massachusetts Ruling on Foreclosures is a Warning to Banks" p. A1, col. 1  (New York Times Nat'l ed., Saturday, January 8, 2011).

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Association Boards and Homeowners', Unit Owners' Personal Liability Without Insurance?

   Statutes in California reportedly immunize Homeowners and Unit Owners who are members of their Homeowners' Association or Condominium Association, respectively, if certain conditions are met.  One of those conditions is the purchase and maintenance of appropriate Commercial or other General Liability Insurance Coverage, and Directors and Officers Coverage.  If the required Insurance Coverage is maintained, then Statutes in California reportedly provide that "the individual owners in an association" shall not be personally liable for Damages assessed against the Association and, further, that a "'volunteer' director," i.e., member of the Association Board, cannot be held personally liable either so long as certain required Insurance Coverage is maintained by the Association.  [See your jurisdiction's Statutes to determine if these things hold true in your jurisdiction as well.]

   Parenthetically, another requirement for board members to be immunized from personal liability is that their acts must have been committed in Good Faith.  Stephen Glassman and Donie Vanitzian, "Homeowners Association Insurance Protects Board and Titleholders From Liability/Without The General Insurance and Directors and Officers Coverage, Directors and Officers Can Be Held Liable and Would Be Negligent in Permitting Individual Titleholders to Be Liable as Well" (Los Angeles Times Online, Sunday, November 7, 2010).

   In fact, there is a view in California that as a result of these Statutes and the immunities they confer if followed, that failure to purchase the Insurance Coverage the Statutes require may be Negligence:

   Without the general association insurance and directors and officers coverage, the individual directors and officers may not only be held liable but also would be negligent in permitting individual titleholders to be held liable.

Id.

   According to the authors of the linked Q and A report from California, if any Insurance can be canceled it "is the coverage for the management company and its personnel.  A professional company should carry and pay for its own insurance.  If the management [company] cannot provide its own insurance coverage, it should not be providing services to your association."  Id.

   Note that standard Commercial General Liability or "CGL" Policies ordinarily include "Your Real Estate Manager" as an Additional Insured, for which there typically will  not be a separately stated Premium.

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Prior Litigation Exclusion Applied to Bar All D&O Coverage: ...

   ... Primary and Following Form, Too.

   Acosta, Inc. and Acosta Sales, LLC were provided D&O Coverage pursuant to a series of Insurance Policies, both Primary and Excess.  National Union Fire Insurance Company's Policy was treated by the Courts in this case as Primary.  The National Union Fire Policy contained a "prior litigation" Exclusion which excludes all Loss in connection with a Claim made against the Insured, here, both Acosta corporations.  As published by the Florida Appellate Court, that Exclusion reads as follows:

(e) alleging, arising out of, based upon[,] or attributable to as of the Continuity Date [November 1, 2001], any pending or prior:  (1) litigation; or (2) administrative or regulatory proceeding or investigation of which an Insured had notice, or alleging any Wrongful Act which is the same or Related Wrongful Act to that alleged in such pending or prior litigation or adminstrative or regulatory proceeding or investigation[.]

Acosta, Inc. v. National Union Fire Ins. Co., Download Acosta, Inc. v. National Union Fire Insurance Co. (Fla. 1st DCA Case No. 1D09.3215, Substituted Opinion on Denial of Rehearing) PUBLIC ACCESS also published as 39 So. 3d 565 (Fla. 1st DCA July 30, 2010)(Westlaw subscription required to access Southern Third via Westlaw; page numbers not provided at time of this post).  [Bracketed material except for Continuity Date by the Court; Continuity Date added.]

   The Trial Court entered Summary Judgment in favor of National Union Fire under its "prior litigation" Exclusion, based largely upon the following observation:

The policy issued by National Union is a claims made policy.  These policies offer coverage for claims filed during the time when the policy is in effect[;] however[,] the exclusions protect the insurers from being "sandbagged" when the insured was aware of pending claims likely to be filed or as a result of prior litigation.  [citation omitted].

Id. [Bracketed material again by the First District.] 

   This is a case of first impression in Florida.  The First District affirmed the Trial Court's grant of Partial Summary Judgment to National Union and Summary Judgment to Arrowood in this case, based upon National Union's above-quoted prior litigation Exclusion:

The trial court determined that National Union and Arrowood properly denied coverage under a "prior litigation" exclusion due to the relationship between the underlying suit and a suit brought by Marketing Specialists Sales Co. ("Marketing Specialists") against Acosta in 2001 ("the turnover suit").

Id.  The Arrowood D&O Policy was excess and "following form" to the National Union Fire D&O Policy here.  Id. n.2.  The First District affirmed entirely on the basis of the National Union Fire prior litigation Exclusion.  Id.

"Relation of Primary Insurer With Excess Carriers and Reinsurers" is the subject of an entire Chapter in Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" Ch. 6 (Second Edition Shepard's/McGraw-Hill; 2010 Supplement West Publishing Company).

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Two Different Courts, Two Different Judges, Same Rejection: Settlement Deals.

   The evidence makes it clear that the Obama Administration is pursuing a three-part litigation strategy with respect to alleged fraud by executives and other officers of large corporations:  (1)  Suit will be filed against the corporation and only a few officers; and (2) the Federal Government will settle those suits, not prosecute them; and (3) in each case, the settlement will be paid by the shareholders for the corporation's share, while the defendant officers will pay comparatively far less.  The end result is that the Obama Administration is executing the law at the expense of corporate shareholders and, perhaps for that reason, the amounts to be paid on behalf of the settling corporations are so small as to trigger judicial scrutiny.

   The Securities and Exchange Commission has apparently taken the lead in executing this strategy, based on published reports.  Earlier in the same week that this post is written, for example, a Federal Judge in the District of Columbia demanded answers to questions which include why Citigroup was made the target defendant and the Citigroup officers responsible for the corporate conduct in question were not also investigated, identified, and made defendants too.  Newspapers have reported on this development without tying the strings of the Obama Administration litigation strategy together.  See, e.g., William McQuillen, "Citigroup-SEC $75 Million Subprime Accord Held Up by U.S. Judge's Doubts" (Bloomberg.com, Tuesday, August 17, 2010); Zachary A. Goldfarb, "Judge Rejects Citigroup's Settlement With SEC" (Washington Post Online, Tuesday, August 17, 2010).  The reporting is not the problem here; the problem is the lack of experience and capacity to put litigation and settlement strategies in context, to understand them, to recognize them as they begin to display a track record.

   The current proposed settlement in Washington, D.C. is very like Federal Judge Jed Rakoff's reaction on Monday, September 14, 2009 in a ruling rejecting the SEC's proposed sweetheart deal with Bank of America to settle the fraud claims which the SEC filed against BOA in the Southern District of New York.  The proposed settlement was denied because it was "neither fair, nor reasonable, nor adequate."  The main reason that the proposed settlement was neither fair nor reasonable nor adequate in the eyes of the Federal Court, was that the corporate shareholders would bear the major burden of paying the settlement -- which the officers caused, not the shareholders, any more than the shareholders caused the conditions which caused the SEC to sue for fraud in the first place.  "MORE and MORE:  Bonuses Bonked, Fiduciary Concerns Stifle SEC Settlement!," Insurance Claims and Bad Faith Law Blog, September 14, 2009, quoting  Download Securities and Exchange Commission v. Bank of America Corp. (S.D.N.Y. Opinion Filed September 14, 2009), attached Official Slipsheet Opinion at 3.  When the settlement was changed, including a nearly 500% increase in the agreed fine to be paid by BOA, it was reluctantly approved.   Download Securities and Exchange Comm'n v. Bank of Am. (SDNY Case No. , Opinion Filed -02.22.10 Approving Settlement).

   This is part of a pattern.  The S.E.C. is justifiably earning its nickname of the "Settle Every Claim" SEC.  Earlier this year, the SEC agreed with Goldman Sachs to settle its fraud claims for less than a week's worth of Goldman Sachs' profits.  "'Settle Every Case' S.E.C. Settles Another One," Insurance Claims and Issues, August 4, 2010.

   However, it is not just the Settle Every Claim SEC that is filing lawsuits against corporations, ignoring major and senior officers, and settling for proposed amounts that tax the shareholders far more than anything the officers might pay to settle a given case.  On the day that this post is written, The New York Times reports that yet a third Federal Judge rejected a proposed Federal Government "'sweetheart deal'," to use the Judge's own term.  This came in a criminal case filed by the Department of Justice against Barclay's Bank, it was reported.  "Judge Denounces a Barclays Settlement" p. B2, col. 1 (New York Times Nat'l ed., Reuters Report, Wednesday, August 18, 2010).

   The unfair consequences to corporate shareholders are clear.  Under this equally clear litigation and settlement strategy, the innocent shareholders are made to pay for the deficiencies of the culpable.  The consequences to Director's and Officer's Liability Insurance Companies and to Federal Taxpayers are clear too.  To the extent that Federal prosecutorial agencies deliberately avoid investigating and charging officers with the consequences of their own conduct, the percentage chances of recovery for covered offenses under their D&O Coverage are drastically reduced.  To the extent that the Government charges officers with offenses excluded from these D&O Insurance Policies, then to that extent the officers may have to bear their own expense, which after all, would in such cases be no more than the consequence of their own alleged conduct.

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