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Page 1
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Carol A.N. ZachariasDeputy General Counsel
ACE North America
Leslie A. LambDirector of Global Risk ManagementCisco Systems, Inc.
Edward M. JoycePartnerJones Day
Demystifying D&O Liability & Insurance:Numbers, Basics, & Trends
Page 2
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The views expressed by the speakers are not those of the speaker’s employer, firm, clients, or any other organization.
The opinions expressed do not constitute legal or risk management advice.
The views discussed are for educational purposes only, and provided only for use during this session.
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• The Numbers• The Basics of D&O Coverage• International Coverage• Current Trends in D&O Liability
Agenda
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4
The Numbers: SCA Filings
Number of Securities Class Action Filings, 1997-2013 (Average: 191)
19971998
19992000
20012002
20032004
20052006
20072008
20092010
20112012
20130
50
100
150
200
250
300
174
242209 216
180224
192228
182
120
177
223
167 176 188152 166
Cornerstone Research, “Securities Class Action Filings: 2013 Year in Review”, www.cornerstone.com.
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The Numbers: SCA Filings
Cornerstone Research, “Securities Class Action Filings: 2013 Year in Review”, www.cornerstone.com.
Number of Companies Listed on U.S. Exchanges1997-2013
• Listings• 1997: Over 8000• 2013: Just over 4,000
• 46% decline• Declined 6% annually 1998-2004• Declined 3% annual decline thereafter
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The Numbers: SCA Filings
Industry Sector Avg. Filings1997-2012
2011Filings
2012Filings
2013Filings
Financial 37 25 15 18Consumer/Non-Cyclical 45 45 49 45Industrial 17 25 14 16Technology 25 21 12 20Consumer Cyclical 21 21 15 19Communications 31 24 19 23Energy 7 18 14 17Basic Materials 4 5 9 5Utilities 3 4 3 1Unknown/Unclassified - - 2 2Total 190 188 152 166
Cornerstone Research, “Securities Class Action Filings: 2013 Year in Review”, www.cornerstone.com.
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The Numbers: SCA Filings
Filings By Statute (Percentage of Total Filings)
Statute
2009 2010 2011 2012 2013
Sec. 10(b)5 Claims
69% 66% 71% 85% 84%
Sec. 11 Claims
23% 15% 11% 10% 9%
Sec. 12(2) Claims
25% 10% 9% 9% 7%
None of above
claimed
1% 23% 23% 9% 11%
Percentages do not add to 100% as complaints may include multiple statutory allegations
Cornerstone Research, “Securities Class Action Filings: 2013 Year in Review”, ww.cornerstone.com
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The Numbers: SCA Filings
Filings by Allegations (Percentage of Total Filings1)Allegations 2009 2010 2011 2012 2013
Misrepresentations in financials (Halliburton) 89% 93% 94% 95% 97%
False forward looking statements 51% 45% 56% 62% 54%
Insider trading 14% 16% 12% 17% 17%
GAAP violations2 37% 26% 37% 23% 24%
Announced Restatements3 10% 7% 11% 11% 11%
Internal Control Weaknesses4 14% 23% 24% 20% 20%
Announced Internal Control Weaknesses5 4% 3% 6% 8% 8%1Percentages do not add up to 100% as complaints may include multiple allegations
2Allegations represent GAAP allegations even if GAAP not expressly referenced3First identified complaint alleges GAAP violation even if GAAP not expressly referenced, and refers to restatement announcement
4First identified complaint t alleges internal control weakness over financial reporting 5First identified complaint alleges internal control weakness over financial reporting and refers to an internal controls weakness announcement
4
4
Cornerstone Research, “Securities Class Action Filings: 2013 Year in Review”, ww.cornerstone.com
Cornerstone Research, “Securities Class Action Filings: 2013 Year in Review”, www.cornerstone.com.
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The Numbers: SCA Filings
0%
20%
40%
60%
80%
100%
99%
80%
40%CEOCFOOutside Director
Note: Percentages are for cases filed between 2000 and 2003. Michael Klausner and Jason Hegland, 2010, “How protective is D&O insurance in securities class actions? - Part I”, Professional Liability Underwriting Society Journal, Vol. 23, No. 2, pp. 1-4, cited by Jason D. Schloetzer, ”Corporate Misconduct and the Market for Directorships”, Director Notes, No. DN-016, November 2010.
Defendants in Securities Class Actions
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• Cases without public pension fund lead plaintiff: $ 3mm• Cases with public pension fund as lead plaintiff: $23mm • 43% of settling cases had public pension fund as lead plaintiff:
The Numbers: SCA Settlements
Series10%
10%
20%
30%
40%
50%
12% 14%22%
26%33% 34%
38% 40%47% 43%
Median Settlements 2013
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Cornerstone Research, “Securities Class Action Settlements: 2013 Review and Analysis”, www.cornerstone.com.
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The Numbers: SCA Settlements
Cornerstone Research, “Securities Class Action Settlements: 2013 Review and Analysis”, www.cornerstone.com.
Settlements by Select Industry Sectors 1996-2013 (Dollars in Millions)
Industry No. Settlements Median Value
Financial 169 $8.1
Telecommunications 141 $6.5
Pharmaceuticals 94 $10.3
Healthcare 56 $6.0
Technology 324 $12.0
Retail 117 $8.7
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12
The Numbers: SCA Settlements
Cornerstone Research, “Securities Class Action Settlements: 2013 Review and Analysis”, www.cornerstone.com.
Settlements by Select Industry Sectors
• Credit crisis cases settling out:
2011: 18% 2012: 30% 2013: 22%
• Shift of settlements to pharmaceutical sector:
1996-2012: 6% 2013: 18%
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13
The Numbers: SCA Settlements
Settlements By Statutory Basis(Dollars in Millions)
Statutory Basis
Number of Settlements
Median Settlement
Section 11 and/or 12(a)(2) Only
80 $3.4
Both Rule 10(b)5 and Section 11
and/or 12(a)(2)
246 $11.7
Rule 10(b)5 Only 1,049 $6.8
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• The Numbers• The Basics of D&O Coverage• International Coverage• Current Trends in D&O Liability
Agenda
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Types of D&O Coverage
• Side A:–Covers losses of D&Os which are not
indemnified by the company–No coverage for claims against the entity
• Side B:–Reimburses entity for its indemnification
of losses incurred by D&Os–No coverage for claims against the entity
15
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Types of D&O Coverage
• Side C:–Covers losses of entity on account of claims
against the entity–No coverage for losses of D&Os–Typically limited to securities claims if the
entity is a public company; no such limitation if the entity is a private or not-for-profit company.
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Types of D&O Coverage
• Side A Policies: –Non-indemnifiable loss:
• Derivative settlements or judgments (circular)• Some statutory violations (FCPA; adjudicated
securities violations)–Non-indemnified loss:
• Changes to right to indemnity under law/articles• Financial inability• Polarized former D&O
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Types of D&O Coverage
• Side A Policies: –Non-dilution of limits by entity–Broad coverage (DIC; exclusions)
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“Claim”
• Written demand
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“Claim”
• Written demand
• Civil proceeding
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“Claim”
• Written demand
• Civil proceeding
• Criminal proceeding
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“Claim”
• Written demand
• Civil proceeding
• Criminal proceeding
• Regulatory, administrative proceeding
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“Claim”
• Written demand
• Civil proceeding
• Criminal proceeding
• Regulatory, administrative proceeding
• Investigations- formal/informal
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“Claim”
Complaint
Indictment
Formal Order
Subpoena
• Written demand
• Civil proceeding
• Criminal proceeding
• Regulatory, administrative proceeding
• Investigations- formal/informal
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“Claim”
Complaint
Indictment
Formal Order
Subpoena
• Written demand
• Civil proceeding
• Criminal proceeding
• Regulatory, administrative proceeding
• Investigations- formal/informal
• Against an insured
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“Claim”
Complaint
Indictment
Formal Order
Subpoena
• Written demand
• Civil proceeding
• Criminal proceeding
• Regulatory, administrative proceeding
• Investigations- formal/informal
• Against an insured
• Seeking damages/relief
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“Claim”
Complaint
Indictment
Formal Order
Subpoena
• Written demand
• Civil proceeding
• Criminal proceeding
• Regulatory, administrative proceeding
• Investigations- formal/informal
• Against an insured
• Seeking damages/relief
• Monetary/non-monetary
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“Claim”
SEC investigation may not be a claim or a securities claim:
• Binding adjudication for relief not possible• Insured person may not be identified as
object of potential proceeding• May be excluded by policy language
Foster v. Summit Med. Sys. Inc., 601 N.W.2d 350 (Minn. App. 2000), Office Depot, Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa., 734 F. Supp. 2d 1304 (S.D. Fla. 2010), aff’d 453 F. App’x 871 (11th Cir. 2011)
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“Claim”
SEC investigation may be a claim:• Policy language expressly covers informal
inquiries• SEC subpoenas and orders seeking
testimony and documents are ‘demands’ for ‘relief’
Minuteman Int’l, Inc. v. Great Am. Ins. Co., 2004 U.S. Dist. LEXIS 4660 (N.D. Ill. March 18, 2004), MBIA, Inc. v. Fed. Ins. Co., 2009 U.S.Dist. LEXIS 124335 (S.D.N.Y. Dec. 30, 2009), aff’d in part, 652 F.3d 152 (2d Cir. 2011)
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“Claim”
State criminal investigation may be a claim:
• Threat of criminal indictment constitutes a demand for non-monetary relief, in policy definition
• Investigation constitutes a criminal proceeding as well as a state or local proceeding, in policy definition
Gold Tip, LLC v. Carolina Cas. Ins. Co., 2012 U.S. Dist. LEXIS 120166 (D. Utah Aug. 23, 2012)
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“Claim”
Grand jury proceedings may not be a claim:
• No adjudication for liability for damages or other relief.
• No indictment or demand for relief • No allegation of wrongful act of insured
JB Oxford Holdings, Inc. v. Certain Underwriters at Lloyd’s, London, 2001 Cal. App. Unpub. LEXIS 111 (Cal. Ct. App. Oct. 5, 2001); Diamond Glass Cos., Inc. v. Twin City Fire Ins. Co., 2008 U.S. Dist. LEXIS 86752 (S.D.N.Y. Aug. 18, 2008); Fed. Ins. Co. v. Illinois Funeral Director’s Ass’n, 2010 U.S. Dist. LEXIS 129747 (N.D. Ill. Dec. 8, 2010)
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“Loss”
• Damages
• Defense costs
• Insured legally obligated to pay
• On account of a claim
• For a wrongful act for which coverage applies
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“Loss”
Disgorgement: Return to shareholders of the value of overpayment for stock
Level 3 Communications, Inc. v. Federal Insurance Company, 272 F.3d 908 (7th Cir. 2001) and progeny
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“Loss”
Disgorgement: Settlement with the SEC – for overpayment by shareholders
Vigilant Insurance Company v. Credit Suisse First Boston, 800 N.Y.S.2d 358 (N.Y. Sup. Ct. 2003), aff’d on appeal, 782 N.Y.S.2d 19 (N.Y. App. Div. 2004)
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“Loss”
Disgorgement:Express disavowals in settlement agreement
CNL Hotels & Resorts, Inc. v. Houston Cas. Co., 505 F. Supp. 2d 1317 (M.D. Fla. 2007)
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“Loss”
Disgorgement:Coverage for associated defense costs
Millennium Partners, L.P. v. Select Ins. Co., 882 N.Y.S.2d 849 (N.Y. Sup. Ct. 2009)
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“Loss”
Disgorgement:Settlement with the SEC – for improper profits acquired by customers
J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 21 N.Y.3d 324 (N.Y. 2013)
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Executive Compensation
• Loss
• Remuneration
• Personal Profit
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Interrelated Wrongful Acts
Policy definitions:• ‘Causally connected’• ‘Common nexus’
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Interrelated Wrongful Acts
Impact:• Late notice
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Interrelated Wrongful Acts
Impact:• Late notice• Prior claim
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Interrelated Wrongful Acts
Impact:• Late notice• Prior claim• Multiple limits
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Interrelated Wrongful Acts
Impact:• Late notice• Prior claim• Multiple limits• Multiple retentions
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Interrelated Wrongful Acts
Impact:• Late notice• Prior claim• Multiple limits• Multiple retentions• Multiple policy terms and conditions
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Personal Conduct Exclusions
Illegal or improper profit/advantage• “arising out of, based upon or attributable to the
gaining in fact of any profit or advantage to which the Insured was not legally entitled“
Fraud, willful violations or criminal conduct• “arising out of, based upon or attributable to the
committing in fact of any deliberate criminal or deliberate fraudulent act by the Insured”
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Personal Conduct Exclusions
“Final adjudication” v. “in fact”• “final adjudication” – established in the underlying
action, not the insurance coverage action• “in fact” – established by any fact finder
Non-imputation clause (severability)• facts pertaining to or knowledge possessed by one
insured shall not imputed to another insured
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Other Exclusions
Insured v. insured exclusion• excludes any claim “brought or maintained by
or on behalf of any insured”• exceptions:
o shareholder derivative claimso claims by bankruptcy trustee/examiner or other
officials appointed by court re bankrupt estateo whistleblower claims – maybe?
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Other Exclusions
Contractual liability exclusion• “for any actual or alleged liability of any Insured
under any express contract or agreement”• exception/carve back for defense costs – maybe• insurer funds uncovered settlement to avoid further
defense costs• future estimated defense costs if no settlement• allocation provisions promising 100% defense costs
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Advancement of Defense Costs
• Payment of defense costs per policy provisions• Allocation determination – who controls• Pay on a “contemporaneous basis” – means what?• Failure to make timely payments – breach?• Duty to defend v. advancement of defense costs
Gon v. First State Ins. Co. (9th Cir. 1989); Federal Ins. Co. v. Kozlowski (N.Y. App. Div. 1st Dept. 2005)
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Excess
Limits:• Failure of primary to pay full limit• Insolvency of underlying causing
failure to pay full limit • Ability of insured to pay gap
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Excess
Limits:• Failure of primary to pay full limit• Insolvency of underlying causing
failure to pay full limit • Ability of insured to pay gap
Inconsistent terms between layers
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Excess
Limits:• Failure of primary to pay full limit• Insolvency of underlying causing
failure to pay full limit • Ability of insured to pay gap
Inconsistent terms between layersSub-limits within layers
Page 53
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• The Numbers• The Basics of D&O Coverage• International Coverage• Current Trends in D&O Liability
Agenda
Page 54
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Option 1: U.S.- based tower
Option 2: U.S.- based tower and international tower
Option 3: U.S.- based tower + individual country policies/FOS
Option 4: U.S.- based tower + Lloyd’s USA coverholder Side A wrap
Global Programs Today
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U.S
. To
wer
Excess DIC
Side A
Excess D&O Follow Form
U.S. Primary D&O ABC
Option 1: U.S. – Based Tower
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U.S
. To
wer
Excess DIC
Side A
Excess D&O Follow Form
U.S. Primary D&O ABC
International Tower?
Option 2: U.S. – Based Tower & International Tower
Page 57
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Limits Tied to U.S. Primary
Local Germany
Local France
Local Brazil
U.S
. To
wer
Excess DIC
Side A
Excess D&O Follow Form
U.S. Primary D&O ABC
EXCESS INTERNATIONAL D&O COVERAGE?
Option 3: U.S. – Based Tower & Individual Country/FOS Policies
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Jurisdictions in which Lloyds has a license or is otherwise authorized and where D&O is permitted*
Anguilla Bulgaria Finland Hungary Liechtenstein Namibia South AfricaAntigua Canada France Iceland Lithuania Netherlands SpainAustralia Cayman I. French Guiana Ireland Luxembourg Norway St. Barthelemy
Austria Cyprus Germany Isle of Man Malawi PolandSt. Kitts & Nevis
Bahamas Czech Rep. Gibraltar Israel Malta Portugal St. LuciaBarbados Denmark Greece Italy Martinique Reunion St. MartinBelgium Dominica Grenada Jamaica Mauritius Romania St. VincentBelize Estonia Guadeloupe Japan Monaco Singapore SwedenBermuda F. Polynesia Guernsey Jersey N. Caledonia Slovakia Switzerland
British V.I. Falkland I. Hong Kong Latvia N. Zealand SloveniaTrinidad & Tobago
United Kingdom USA Vanatu
Wallis & Futuna Zimbabwe
Lloyd’s accesses up to 75 countries through licenses:
*Certain countries may require individual policies to be issued
• Simplified access to coverage• Ease of use — one underwriter handles transaction• Common terms and conditions, except on local forms
Option 4: U.S. – Based Tower & Lloyd’s USA Side A Wrap
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• Same terms and conditions;• Same English language; and • Access up to 75 jurisdictions where Lloyds is licensed
U.S. Policy + Lloyd’s USA Side A Policy:
U.S
. To
wer Excess DIC
Side A
Excess D&O Follow Form
U.S. Primary D&O ABC
Lloyd’s USA Side A Wrap
Valid for France and Germany (and up to 75 other countries)
Option 4: U.S. – Based Tower & Lloyd’s USA Side A Wrap
Lloyd’s USAPolicy
Local Brazil Policy(Limits Tied)
Valid for France and Germany (and up to 75 other countries)
Page 60
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• The Numbers• The Basics of D&O Coverage• International Coverage• Current Trends in D&O Liability
AgendaAgenda
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61
• U. S. “class actions”:• similarly situated plaintiffs• motion for class certification
• U.S. securities fraud action:• misrepresentations case• reliance• at class motion stage
Halliburton
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62
Halliburton
Filings by Allegations (Percentage of Total Filings1)Allegations 2009 2010 2011 2012 2013
Misrepresentations in financials 89% 93% 94% 95% 97%
False forward looking statements 51% 45% 56% 62% 54%
Insider trading 14% 16% 12% 17% 17%
GAAP violations2 37% 26% 37% 23% 24%
Announced Restatements3 10% 7% 11% 11% 11%
Internal Control Weaknesses4 14% 23% 24% 20% 20%
Announced Internal Control Weaknesses5 4% 3% 6% 8% 8%1Percentages do not add up to 100% as complaints may include multiple allegations
2Allegations represent GAAP allegations even if GAAP not expressly referenced3First identified complaint alleges GAAP violation even if GAAP not expressly referenced, and refers to restatement announcement
4First identified complaint t alleges internal control weakness over financial reporting 5First identified complaint alleges internal control weakness over financial reporting and refers to an internal controls weakness announcement
4
4
Cornerstone Research, “Securities Class Action Filings: 2013 Year in Review”, ww.cornerstone.com
Cornerstone Research, “Securities Class Action Filings: 2013 Year in Review”, www.cornerstone.com.
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Old rule: Prove individual reliance New rule, 1988: Reliance presumed
(Basic v. Levinson) Misrepresentations impact price In a stock traded in an “efficient market” Hence reliance may be presumed for
that stock
Halliburton
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Halliburton v. John Fund U.S. Supreme Court Argued March 5, 2014; decision by June? Issues: 1. Should class-wide reliance be derived from the
fraud on the market theory?2. Whether the presumption of reliance may be
rebutted by evidence that the alleged misrepresentation did not distort market price?
Halliburton
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Options:
Affirm Basic Only recovery vehicle for many smaller
investors Impact: Litigation and coverage
environment stays the same
Halliburton
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Options:
Overrule Basic- require proof of individual reliance
Fewer SCA filed? But still:
- Omissions cases- Section 11 and 12 cases- Individual actions- Collective actions- Regulatory actions- State actions
Halliburton
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Options:
Permit the resumption of reliance to be rebutted by evidence that the alleged misrepresentation did not distort market price
Impact: More discovery, experts, motions, hence
higher costs Potentially more dismissals, but at the
higher cost Potentially cheaper settlements?
Halliburton
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68
Private Bar:
3,050 SCA 1997-2012 $73.1 billion recovered ($12B/yr)
Securities & Exchange Commission
Halliburton Co. v. Erica P. John Fund, Inc., Brief for Former SEC Commissioners and Officials and Law Professors as Amici Curiae.
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Securities & Exchange Commission
Series1620640660680700720740760
664681
735 734
686
SEC Enforcement Actions Per Fiscal Year
2013:• 20% increase in formal orders of investigations by Enforcement Division• 3.4B in disgorgement and penalties for resolved cases
• 10% higher than FY2012• 22% higher than FY2011 (which was highest number of filings in
agency history)SEC Press Release 2013-264, SEC Announces Enforcement Results for FY 2013 (Dec. 17, 2013).
2009 2010 2011 2012 2013
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70
Securities & Exchange Commission
SEC Press Release 2013-264, SEC Announces Enforcement Results for FY 2013 (Dec. 17, 2013).
Securities Offer-ing
20%Market Manipu-
lation10%
Financial Fraud/Issuer Disclosure
13%
Insider Trading8%
Investment Ad-visor/Invest-
ment Company27%
Broker-Dealer23%
2013: Types of Enforcement Actions
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71
Securities & Exchange Commission
SEC Press Release 2013-264, SEC Announces Enforcement Results for FY 2013 (Dec. 17, 2013).
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$1.90 $1.60$2.30
$1.09 $0.77
$2.09 $1.82 $1.88 $2.08 $2.26
$1.20 $1.50
$0.98
$0.51
$0.26
$0.35 $1.03 $0.93$1.02
$1.17
Monetary Sanctions in SEC Enforcement Actions (in billions & by fiscal year)
Disgorgement Penalties
22%
10%
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72
Three major shifts:
1. Looking first at individuals (targeting) 2. Admissions may be required3. Increased aggressive use of penalties
Securities & Exchange Commission
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73
Three exposure issues:
Removal of corporate indemnification Application of policy exclusions Application of state law on
uninsurability of intentional wrongful acts
Securities & Exchange Commission
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Questions?
• The Numbers• The Basics of D&O Coverage• International Coverage• Current Trends in D&O Liability
Page 75
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Carol A.N. ZachariasDeputy General Counsel
ACE North America
Leslie A. LambDirector of Global Risk ManagementCisco Systems, Inc.
Edward M. JoycePartnerJones Day
Demystifying D&O Liability & Insurance:Numbers, Basics, & Trends