The 10b-5 Daily

Today’s Wall Street Journal (subscrip. req.) has a feature article on the rising cost of directors and officers liability insurance (for more on this topic see this post in The 10b-5 Daily). Insurers are both raising premiums and “holding firm on many of their efforts to rein in the generous terms and conditions they adopted during a price war in the late 1990s.” A side graph identifies AIG (34% of premiums; 19% of policies) and Chubb (16% of premiums; 21% of policies) as the D&O insurance leaders.

Quote of note: “And while the reforms of the Sarbanes-Oxley corporate-governance act may reduce corporate scandals, in the near future they could prove expensive. For example, the law increases the responsibility of audit-committee members for overseeing the company’s audits, potentially raising the stakes for individual committee members if problems are later found. ‘There’s a general confusion about what Sarbanes-Oxley really means,’ says Bill Cotter, chief underwriting officer for National Union Fire Insurance Co., of Pittsburgh, a unit of American International Group Inc., the leading underwriter of D &O insurance. ‘The fear is that it will be defined through litigation.'”

Quote of note II: “Companies have a variety of options to mitigate higher costs. These include buying less coverage and retaining more of their risk with higher deductibles or co-insurance, in which the policyholder pays a fixed portion of eventual claims, much as health-insurance often requires patients to pay part of their costs, brokers say. Deductibles, recently $1 million or even lower on even large policies, have risen to as high as $100 million. Co-insurance of 10% to 30% or more has become more commonplace as well.”

There is an interesting article on the ABA’s Business Law eSource (July 2003) entitled “Securities Litigation Against Third Parties: Pre-Central Bank Aiders And Abettors Become Targeted Primary Defendants.” The authors, Jay Eisenhofer and Cynthia Calder, offer a comprehensive summary of the post-Central Bank case law on who is a “primary violator” for purposes of Rule 10b-5, including separate sections on cases involving accountants, lawyers, underwriters/investment banks, and ratings agencies.

As noted previously in The 10b-5 Daily, the line between a “primary violator” (liable) and an “aider and abettor” (not liable) is becoming blurred. Eisenhofer and Calder conclude that “accountants, lawyers, and investment bankers ought to be taking a hard look at their relationships with their clients, and their own potential for primary liability under Rule 10b-5 in cases of corporate fraud.”

Quote of note: “Although neither has achieved majority acceptance, two different approaches – the ‘bright line’ and ‘substantial participations standards – have emerged from the lower courts. According to those courts that have adopted the ‘bright line’ standard, only if a defendant actually makes a statement to the plaintiff (or the investing public) which contains a misrepresentation or omission can that defendants be liable. By contrast, under the ‘substantial participation’ rubric, a defendant that plays a significant role in creating the statement can be held liable.”

TheLawyer.Com, a UK website, has an article on Judge Pollack’s decision in the Merrill Lynch analyst research cases. Notably, the article contains the words “loss causation.”

Quote of note: “Coffee [Columbia University law professor John Coffee] reckons that Judge Pollack’s most important line of reasoning is that the plaintiff has to prove ‘loss causation’. ‘They can’t simply prove that the plaintiff was fraudulently induced to buy the stock by the false inflated and insincere recommendation, but rather he has to prove first, and then later, that the recommendation was causally related to the stock’s ultimate fall.’ That is a very difficult burden for litigators to have to meet, he adds.”

Reuters reports that Rep. Baker has agreed to postpone a vote on the Securities Fraud Deterrence and Investor Restitution Act of 2003.

Quote of note: “The bill is largely aimed at boosting the SEC’s powers. But one section of it targets state officials, such as New York Attorney General Eliot Spitzer, by proposing barring them from writing securities law exceeding or adding to federal statute. State securities regulators have attacked the bill as a shield meant to protect Wall Street’s largest brokerages from state-level investigations like the one Spitzer mounted recently into stock analyst conduct at Merrill Lynch.”