By Joseph Monteleone, JD
Securities fraud class actions are the paradigm high exposure claims in the world of D&O insurance. In the so-called modern era of securities fraud class actions, incepting with passage of the Private Securities Litigation Reform Act of 1995, there have been nine (9) of these class actions that resulted in settlements over $1 billion. Median settlement value is well into the eight figures, and even the average or mean settlement value is close to $10 million. Even a “nuisance settlement” may range anywhere from a few hundred thousand to a little over a million dollars.
In this settlement context, there a fair number of cases (in some jurisdictions in excess of 35% of all securities fraud class actions brought) that are disposed with a complete win for the defendants via either a motion to dismiss or motion for summary judgment.
However, only a handful of cases are ever tried to a conclusion on the merits before a judge and jury. Most data surveys would peg the number at no more than about two dozen out of in excess of 2,000 companies sued in securities fraud class actions since the beginning of 1996. I’ll do the math for you – that is about 1%.
A fair number of these trials have resulted in defense verdicts. That would explain in part reluctance on the part of plaintiffs’ lawyers to try these cases. The plaintiffs’ bar handles these cases on a de facto contingency basis, i.e., no settlement/no trial win = no pay day. Those pay days, which can reach into the hundreds of millions of dollars in the mega billion dollar settlements, are perhaps too tempting to forego by trying a case and coming up empty.
What do defendants have to lose? Plenty.
Although many of these suits are still settled in their entirety with D&O insurance funds, exposures above and beyond the total D&O policy limits arise now with greater frequency. There have been a number of matters where defense costs have so eroded the available insurance limits that settlements had to be cobbled together with a combination of the remaining insurance limits, corporate contributions and even money from the individual directors and officers. The latter source becomes even more likely when the corporation becomes bankrupt or otherwise financially impaired. In a trial situation all bets are off for limiting the exposure of any of these contributors, including the insurers which, in certain circumstances, may face potential exposure beyond their policy limits if they unreasonably withhold consent to a settlement at or within their policy limit.
The most recent example of a securities class action proceeding to trial occurred in early May 2009 when a jury in federal court in the Northern District of Illinois returned a verdict I favor of the plaintiff class against the subprime lender Household International and certain of its executive officers. This was a trial on the causation and liability aspects of the case only, with the damages portion having been set aside for a subsequent trial if the litigation does not settle in the interim.
The jury had to consider some forty (40) allegedly false and misleading statements by the defendants and in fact found in favor of the defendants on most of these statements. However, the jury found reckless conduct on the part of all of the defendants and knowing misconduct on the part of the corporate defendant and its former CEO. Although we have no knowledge of Household’s D&O insurance program, the establishment of knowing misconduct may well have coverage consequences.
Household was one of the earlier subprime lending class actions to have been brought and this adverse verdict comes on the heels of a recently announced $30.5 million settlement in a class action involving the residential builder Beazer Homes. Hopefully, for the defendants and their insurers, these are not harbingers of a reversal of fortune after a number of early wins on motion practice in the subprime arena.
The takeaway here is certainly not to ever try a securities fraud class action. Certainly, in cases where the scope of potential damages may be limited and perhaps contained within the limits of the available of insurance, there is much to be said about the wisdom of trying a case where causation and liability defenses are strong, even after failures to knock out the case by motions. However, Household and prior cases gone to trial are illustrative of what can go wrong (or right, dependent upon perspective) in the event of a trial. Even for the Household plaintiffs, this win may prove ephemeral dependent upon post-trial and/or appellate challenges. An educated guess is that the case may now settle, albeit at a higher value than would have been attainable before the plaintiff “win”.
Joseph P. Monteleone, Esq. is a partner with Tressler, Soderstrom, Maloney & Priess LLP with over of 25 years of experience in the insurance industry, Joe is well-known for his special expertise in Director & Officers coverage. He is a co-author of the well-regarded coverage and risk-management book, Directors & Officers Liability: Guide to Risk Exposures and Coverage (National Underwriter 1999).
