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D&O risks line up against firms


Insider trading, “opt-out” litigation, Libor-related lawsuits and Federal Deposit Insurance Corp.-initiated actions are among the “hot-button” litigation and regulatory issues on the horizon for corporations, say experts surveying the directors and officers liability coverage landscape.

Insider trading is a popular issue for the U.S. Securities and Exchange Commission and “increasingly a hot button for governments around the world,” although as recently as a few years ago it was exclusively a U.S. issue, said Ann Longmore, New York-based executive vice president at FINEX North America, a unit of Willis North America Inc.

If there are a sufficient number of shares involved, “the SEC is picking it up” and prosecuting, seeking disgorgement — which refers to funds that must be repaid — fines and penalties, as well as questioning firms' general counsels as to what they have been doing “to prevent this kind of trading at their organization,” said Ms. Longmore.

She said insider trading is “not yet a significant proportion of all litigation brought by the SEC, but they are now tracking it separately from their other lines, indicating at least in their minds it is something worth separate consideration.” Certainly, this is an issue that can become “very messy, very sensitive,” as well as costly for firms, Ms. Longmore said.

However, litigation concerning options backdating has cooled (see story, page 14).

Experts say they are seeing an increase in opt-out litigation by large institutional investors. They “are opting out of the settlement agreements because they think if they go it alone, they can get a bigger recovery, a more substantial recovery,” said Mary-Pat Cormier, a partner with law firm Edwards Wildman Palmer L.L.P. in Boston.

This also makes things difficult for D&O insurers, because this additional litigation may not produce the one thing they hope for, which is a final settlement of the litigation, said Kevin LaCroix, an attorney and executive vice president of RT ProExec, a division of R-T Specialty L.L.C., in Beachwood, Ohio. “It creates a complicated dynamic that introduces possible inefficiencies and could increase costs” for defense and the overall costs of litigation, he said.

Another possible issue is FDIC litigation against failed banks, said Mr. LaCroix.

According to a December study by Cornerstone Research Inc., the FDIC filed 23 lawsuits against directors and officers of failed financial institutions in 2012, compared with 16 in 2011 and just two in 2010.


Trevor Howard, New York-based senior vice president of U.S. management liability for Liberty International Underwriters, said Libor-related litigation — which has already led to fines that include a $1.5 billion fine against Swiss bank UBS A.G. as investigations continue — also is a concern.

“There's plenty of potential exposure remaining from this scandal, particularly in the form of securities class action suits, although it is questionable how much of this will be covered by D&O insurance,” he said.

Brenda Shelly, New York-based D&O practice leader for Marsh Inc.'s FINPRO unit, said another possible hot button is litigation associated with the SEC's Rule 10b5-1, which allows corporate executives to set up a trading plan for selling stocks they own. “They were designed to give insiders a way to trade at regular intervals irrespective of what may be going on with the company,” she said.

The problem, though, is “there isn't a lot of regulation around these plans in terms of enforcement,” Ms. Shelly said. “Since the plans aren't regulated, or required to be filed or disclosed, it results in a lack of transparency and transparency is certainly a big issue these days. Shareholders may not even know if executives have a trading plan in place,” she said.

Carl E. Metzger, a partner with Goodwin Procter L.L.P. in Boston, said there is “heightened concern” about the Foreign Corrupt Practices Act “and how that might impact directors and officers liability and corporate liability.”

“The idea behind the act is to create a level, fair playing field for all U.S. companies that are doing business abroad and to help discourage any kind of business improprieties,” said Mr. Metzger. “The problem is the law has been written very broadly” so “companies can potentially run afoul of the FCPA when no bribe was intended.”

For instance, paying the travel and entertainment costs of a government regulator with which a company did business “could be problematic,” he said.

“The U.S. government has certainly made clear that they are looking to enforce these rules with increased vigor,” Mr. Metzger said.

Meanwhile, Joseph P. Monteleone, a partner with Tressler L.L.P. in New York, warned, “There's always something in any given year that nobody anticipated at the beginning of the year.”