Abolishing Suits and Limiting Coverage

(1) The Wall Street Journal had another op-ed (subscrip. req’d) this week, by Peter Wallison of the American Enterprise Institute, advocating the abolishment of private securities class actions. (For coverage of a similar WSJ op-ed from last month, see this post.)
Quote of note: “Yet the odd mystique of this costly compensation system lives on. Despite all the reports indicting securities class actions, only Mayor Bloomberg and Senator Schumer called for more than a mere study: ‘The SEC,’ they said ‘should make use of its broad rulemaking and exemptive powers to deter the most problematic securities-related suits.’ It’s doubtbful that the SEC will pick up this baton, but even if it did history shows that courts cannot discipline themselves to distinguish effectively between the well-founded usits and the ‘problematic’ ones. The only solution is restoring what Congress originally intended – enforcement of Rule 10b-5 only by the SEC.”
(2) The D&O Diary has an interesting post on a federal district court decision holding that the settlement of a Section 11 claim (i.e., for misrepresentations in a prospectus or registration statement) was not covered by the company’s director and officer liability insurance. In CNL Hotel & Resorts, Inc. v. Houston Casualty Co., 2007 WL 788361 (M.D. Fla March 14, 2007), the court found that the settlement represented a disgorgement by the company of “wrongfully appropriated” money, which did not constitute a “loss” under the relevant policy provision and, therefore, was not insurable under applicable New York law.
Quote of note (The D&O Diary): “In light of the developing case law trend, and now a federal court’s affirmation of the trend, it is going to be indispensable for D & O insurers to clarify within the language of their policy the coverage that policyholders can expect for amounts paid in resolution of Section 11 claims. In that regard, it is critical to note that Judge Presnell specifically stated that ‘Section 11 claims are not per se uninsurable.'”
Addition: Thanks to Ted Frank for public links to Wallison’s op-ed and a longer article by Wallison on the same topic.

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