Claims And Issues

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.

Please Read The Disclaimer.

 

"Settle Every Case" S.E.C. Settles Another One: ...

   ... Citigroup Pays $75 Million For $40 Billion.

   The Securities and Exchange Commission has settled its claims against Citigroup.  Rather than try any of the fraud or misrepresentation claims lodged by the S.E.C. against Citigroup regarding some $40,000,000,000.00 or $40 Billion of Citigroup's subprime mortgage "investment" offers, the S.E.C. accepted payment of $75 Million to settle them.  This comes in a year that began with a $150 Million settlement of similar claims which the S.E.C. filed against Bank of America.  Zach Goldfarb, Market Cop Blog on Washington Post Online, post of July 29, 2010, "Citigroup to Pay $75 Million to Settle SEC Charges it Misled Investors Over Subprime Investments".

   The S.E.C. also settled its fraud claims with Goldman Sachs for a payment of $550 Million.  This reportedly represents several days of Goldman's take in profits.  After the settlement, Wall Street voted with its money, so to speak:  Goldman shares sacked an additonal 5% rise.   In short, Goldman turned a profit on its settlement with the S.E.C.  "Take that, you evildoers!" 

Please Read The Disclaimer.

Oil Spill Insurance Coverage: The Role of "Concealment or Misrepresentation".

  In what may be a preview of some Claims resulting from the BP Oil Spill Catastrophe, a Federal Court in Washington State has denied a Motion for Summary Judgment on an Affirmative Defense based on a Concealment and Misrepresentation provision in the Insurance Policy at issue, in Goodman v. New Hampshire Insurance Co., Download Goodman v. New Hampshire Insurance Co. (W.D. Wash. Case No. 2.2009.1493, Order Filed July 22, 2010) FREE ACCESS also published as 2010 WL 2871186 (W.D. Wash. July 22, 2010)(Westlaw subscription required to access Westlaw).

   "This case arises from a diesel fuel leak aboard plaintiff's yacht, the Conundrum, which is insured by defendant New Hampshire Insurance Company ("New Hampshire")."  A leaking starboard (right-hand side) fuel tank triggered the yacht's "automatic bilge pumps which pumped the diesel fuel overboard into the water."  Goodman v. New Hampshire Insurance Co., 2010 WL 2871186 at *1.

   The plaintiff-Insured paid cleanup costs for the oil spill.  He then sought Coverage for all his repair losses including the costs of replacing both fuel tanks, and rebuilding and replacing the boat's superstructure, cockpit, and deck, from New Hampshire.  "When defendant declined to pay the amount requested to reimburse plaintiff for his loss, plaintiff filed this action for breach of contract, bad faith, and violation of the Washington Consumer Protection Act."   Id.

   As a matter of alleged fact, New Hampshire contended "that the invoices submitted by plaintiff include work on the boat that was not directly related to repairing the fuel tank and fuel leak damage, as well as items that are expressly excluded from coverage under the policy."  Id.

   The New Hampshire Insurance Policy contains a Paragraph numbered 10 under "GENERAL CONDITIONS AND EXCLUSIONS," which reads in full as follows:

10.  CONCEALMENT OR MISREPRESENTATION:  Any relevant coverage[s] shall be voided if you intentionally conceal or misrepresent any material fact or circumstance relating to this insurance, or your insurance application, whether before or after a loss.

Id. at *3.  {Boldface in original.]  New Hampshire raised this provision in an Affirmative Defense that all relevant coverages were voided "by plaintiff's 'intentional concealment and/or misrepresentation.'"  Id.

   On the record of this case and in the eyes of the Court, there were genuine issues of material fact which prevented Summary Judgment for the Plaintiff-Insured on this Affirmative Defense.  "Whether he [the plaintiff-Insured] intentionally misrepresented any claimed amounts is a question of fact for the jury.  Plaintiff's motion for summary judgment on this affirmative defense is accordingly DENIED."  Id. at *4.  [Emphasis added.]

   It is reasonable to anticipate that there will be more than one Claim to Coverage resulting from the BP Oil Spill Catastrophe which may involve alleged 'concealment or misrepresentation of any claimed amounts,' as well.  The Goodman v. New Hampshire Insurance Company decision may offer a preview, for some cases, of what is to come in that regard.

Dennis Wall is Co-Author of the leading book on Insurance Coverage for Catastrophe Claims, "CATClaims:  Insurance Coverage for Natural and Man-Made Disasters" (West Publishing Company 2008; 2010 Supplement in process).  Mr. Wall will speak on a panel at the American Conference Institute's Bad Faith Litigation Conference in Orlando, Florida on November 30, 2010 on "Dealing With Catastrophic Disasters:  How to Properly Investigate and Handle Overwhelming Claims".

Please Read The Disclaimer.

Instead ... Was SEC (and Chair) Victorious in Settlement With Goldman?

   This post continues from July 19, 2010, "'Settle Every Case' S.E.C. Settles With Victorious Goldman:  Sacks Unopened".

   Written In the course of expressing optimism about the outcome of the Securities and Exchange Commission's upcoming consideration of "whether to require brokers to have a 'fiduciary duty' to investors," their clients, here is an alternative version of the recent SEC settlement with Goldman Sachs of misrepresentation Claims filed against Goldman by the SEC:

   The most notable enforcement case of Ms. [Mary] Schapiro's tenure can be read as an indication that she cares deeply about such issues.

   Under current law, brokers serving retail investors are held to a limited standard requiring that investments be "suitable" to the buyer.  But brokers for institutional investors have not faced even that minimal rule.  That freed brokers to let clients view them as trusted advisers when pitching an investment.  If and when the product blows up, the broker disclaims any responsibility for the bad investment decision made by the customer.  The broker was simply a "counterparty" who took the other side of a trade that the customer wanted to do.

   That essentially was Goldman Sachs's defense when the commission filed suit against it over a disastrous mortgage-backed securities deal that Goldman sold without telling customers that it had been partly created by the firm that wanted to bet it would fail.  Goldman's settlement helps to establish a precedent that such sophistry must end.

Floyd Norris, "Perfect For a Job She Created" p. B1, col. 1 (New York Nat'l ed., "Business Day" Section, Friday, July 23, 2010).

  Such sophistry most certainly must end, but even the SEC's Inspector General reportedly does not take an optimistic or positive view of whatever "precedent" was established in the SEC's recent settlement with Goldman.  See Edward Wyatt, "Inquiry Begun of S.E.C. Timing in Goldman Fraud Case" p. B3, col. 3 (New York Times Nat'l ed., "Business Day" Section, Saturday, July 24, 2010).

Please Read The Disclaimer.

One Bankruptcy Judge to Decide BP Fiasco Insurance Coverage Issues?

    Recent newspaper reports reflect anxiety over an unlikely possibility:  that BP will file for Bankruptcy.  BP's exposure to many Damages Claims of many kinds may force it to seek reorganization under the U.S. Bankruptcy Code, it is reported.  See, for example, John Schwartz, "Weighing the Possibility of Bankruptcy for BP/Liability Claims Expected to be Enormous" p. A11, col. 5 (New York Times Nat'l ed., Saturday, July 10, 2010).

   If BP filed for Bankruptcy in the United States, then under the U.S. Bankruptcy Code and established practice, the many Insurance Coverage Issues arising out of the Drilling Explosion Fiasco may well be decided by one (Bankruptcy) Judge.

   However, why must BP file for protection from creditors and Claimants in the United States?   Perhaps it will seek that protection in the Courts and Laws of the United Kingdom.  It used to be called "British Petroleum" for a reason.

Please Read The Disclaimer.

Federal Courts, Fraud Claims, Rule 9(b), and Insurance Companies.

   "Misrepresentation" claims against Insurance Companies, as against any other Defendant in a Federal Case, run afoul of Federal Rule of Civil Procedure 9(b).   That Rule requires that Fraud be pled "with specificity."  Merely alleging "misrepresentation," like yelling, "Fraud," is not enough in a Federal Court action.  "There is no specificity as to when and where the statements were made, which individuals received them, and which person or persons relied on them in deciding to purchase a policy from [the Defendant Insurance Company]."  Destiny Springs Condominium Ass'n v. Praetorian Specialty Insurance Co., Download Destiny Springs Condominium Ass'n v. Praetorian Specalty Insurance Co. (M.D. Fla. Case No. 6.10cv352, Opinion Filed March 29, 2010) also published as 2010 WL 1257657 *1 (M.D. Fla. March 29, 2010)(Presnell, J.), dismissing Misrepresentation Claim against Insurance Company accordingly.

Please Read The Disclaimer.

"Who's in Charge, Me or the SEC" Asks Goldman ...

...No Longer Sure of the Answer.

  Except to say that anyone who pays a Premium for Credit Default Swaps, i.e., Unregulated Credit Insurance, 'are sophisticated buyers who know what they are getting into and therefore you cannot defraud them.'  So, that is who is responsible for the Great Collapse through which we are now living, the victims!

   Investment Banks which did not allow for Deposits acted like they were in charge of the economy.  The People and their Government appeared to be helpless.  Regulation and reform seemed to be at the mercy of lobbyists hired by the Investment Banks.  The SEC's answer is a Complaint.  Download SEC v. Goldman Sachs & Fabrice Tourre (S.D.N.Y. Complaint Filed April 16, 2010, Case No. 10 cv 3229).  Here is the SEC's Press Release describing why they filed a Complaint and what the Claims are that are in it:  Download Press Release.041610.SEC Charges Goldman Sachs With Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages; 2010-59; April 16, 2010.

   The stock of one of the Fraud Defendants in the SEC's Lawsuit, Goldman, dropped almost as soon as the SEC's Complaint was filed.  The stock of other Investment Banks plummeted, too.  Tom Braithwaite, "Goldman Case Likely to Spur Efforts on Reform" (FT.com, Friday, April 16, 2010); Javier C. Hernandez, "Winning Streak For Wall Street Ends at 6 Days" p. B1, col. 6 (New York Times Nat'l ed., "Business Day" Section, Saturday, April 17, 2010);   Since the Complaint was filed, Goldman's stock reportedly has continued to fall.  Whatever else happens, the effects have already begun to be felt.  See Eric Dash, "Goldman Executives are Expected to Testify Before Senate Panel" p. B1, col. 2 (New York Times Nat'l ed., "Business Day" Section, Thursday, April 22, 2010).

   In addition to the effects of the Lawsuit on share prices in Investment Banks, there have also been dramatic effects on the chances of regulation and reform.  As stocks of Investment Banks have fallen, chances of reforming Derivatives -- including the sale and use of the Unregulated Credit Insurance known as Credit Default Swaps -- have risen dramatically.  E.g., Tom Braithwaite, "Goldman Case Likely to Spur Efforts on Reform" (FT.com, Friday, April 16, 2010); Walter Hamilton & Nathaniel Popper, "SEC Targets Goldman Sachs With Fraud Suit" (latimes.com, Saturday, April 17, 2010); Javier C. Hernandez, "Winning Streak For Wall Street Ends at 6 Days" p. B1, col. 6 (New York Times Nat'l ed., "Business Day" Section, Saturday, April 17, 2010); Jim Puzzanghera & Nathaniel Popper, "Goldman Sachs Case Likely to Increase Calls for Wall Street Reform" (latimes.com, Saturday, April 17, 2010);  Louise Story and Gretchen Morgenson, "S.E.C. Files a Fraud Suit Against Goldman Sachs" p. A1, col. 5 (New York Times Nat'l ed., Saturday, April 17, 2010); and Gretchen Morgenson and Landon Thomas, Jr., "A Glare on Goldman, From U.S. and Beyond" p. B1, col. 5 (New York Times Nat'l ed., "Business Day" Section, Monday, April 19, 2010).

Please Read The Disclaimer. 

 

Fiduciary Disclosure: Only You Can Prevent Fraud Lawsuits, Says S.E.C.

   The Securities and Exchange Commission has filed a Civil Suit alleging Fraud against Goldman Sachs and one of its Officers, one Fabrice Tourre.  Download S.E.C. v. Goldman Sachs and Fabrice Tourre (S.D.N.Y. Case No. 10 Civ. 3229 Complaint Filed 04.16.10).  Here is the SEC's Press Release describing its Complaint:  Download Press Release.041610.SEC Charges Goldman, Sachs With Fraud in Connection With the Structuring and Marketing of a Synthetic CDO.

   The filing of this lawsuit set off a tremendous number of newspaper reports from Coast to Coast, and across the world.  Many reports highlight Goldman's apparently well-founded fear of potential future Criminal charges and "Investor Lawsuits" which may be filed on the same or similar Claims.  There are so many reports that a large sample will be grouped here by publication, in an effort to maintain some sort of order among them:  E.g., Bloomberg:  Joshua Gallu & Christine Harper, "Goldman Sachs Sued by SEC for Fraud Tied to CDOs (Update 4)" (Bloomberg.com, Friday, April 16, 2010); Christine Harper, "Goldman Sachs-First Promise Undercut by SEC Fraud Suit (Update 1)" (Bloomberg.com, Saturday, April 17, 2010); Jody Shenn & Bob Ivry, "Abacus Allowed Goldman to Shuffle Mortgage Risk Like Beads (Update 1)" (Bloomberg.com, Saturday, April 17, 2010); Financial Times:  Tom Braithwaite, "Goldman Case Likely to Spur Efforts on Reform" (FT.com, Friday, April 16, 2010) (pointing out a fact not noted in other reports that Fraud Lawsuits involving alleged Losses on CDO investments have been filed by private parties long before the SEC filed its lawsuit on Friday, April 16, 2010); Aline van Duyn, "Regulator's Move Risks Opening Lawsuit Floodgates" (FT.com, Sunday, April 18, 2010); Los Angeles Times:  Walter Hamilton & Nathaniel Popper, "SEC Targets Goldman Sachs With Fraud Suit" (latimes.com, Saturday, April 17, 2010); Jim Puzzanghera & Nathaniel Popper, "Goldman Sachs Case Likely to Increase Calls for Wall Street Reform" (latimes.com, Saturday, April 17, 2010);  and the New York Times:  Javier C. Hernandez, "Winning Streak For Wall Street Ends at 6 Days" p. B1, col. 6 (New York Times Nat'l ed., "Business Day" Section, Saturday, April 17, 2010); Joe Nocera, "Talking Business/A Wall Street Invention That Let the Crisis Mutate" p. B1, col. 1 (New York Times Nat'l ed., "Business Day" Section, Saturday, April 17, 2010).

   To be clear, the SEC's lawsuit is not based on the inherent characteristics or the very nature of Collateralized Debt Obligations (CDOs).  This Case involved a CDO called Abacus.  Inside the CDO were subprime mortgage securities with Credit Default Swaps (CDSs), or credit insurance policies, taken out on them.  The mortgage securities were selected for their lousy performance by a hedge fund which took out CDSs to bet against the securities it selected.  When the securities failed, the hedge fund people became even wealthier than when they started out.  Goldman allegedly issued the Credit Default Swaps -- for which they were paid hefty Premiums -- and allegedly did not tell investors in Abacus who was selecting the securities in it, or why.  To the contrary, the SEC Complaint contains allegations that Goldman actually told investors in Abacus that the securities inside it were being selected by an impartial third party.  The SEC lawsuit is based on Claims of Fraud.

   The SEC lawsuit may be a loud explosion in the world of financiers.  It is not intended to be a long-term solution, and it is not a long-term solution.  The most effective solution to the problems posed by CDOs is to dismantle them.  If CDOs are not going to be dismantled, then the next best solution may be to disclose all the arrangements made in arriving at them.

   The solution to the problems posed by CDSs is similar.  The first choice would be to dismantle them.  If CDSs are not dismantled, the same sort of crisis through which we are now living is likely to happen again; the next best solution after dismantling Credit Default Swaps is to regulate them as Credit Insurance, or as securities, or both depending on the Credit Default Swaps at issue in any given scheme.

Please Read The Disclaimer.

Postscript of Monday Morning, April 19, 2009:  On the S.E.C. Lawsuit targeting not CDOs as such, but Fraud in the use of a CDO:

"It is one thing to know that there are others betting against you; it is quite another to know that the people betting against you are selecting the bets."

Securities Law Professor Adam Pritchard, University of Michigan Law School, quoted by Gretchen Morgenson and Landon Thomas, Jr., "A Glare on Goldman, From U.S. and Beyond" p. B1, col. 5 (New York Times Nat'l ed., "Business Day" Section, Monday, April 19, 2010).

Again, Please Read The Disclaimer.