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Securities ruling likely to hike IPO defense costs: Experts


NEW YORK — A U.S. Supreme Court securities ruling last year that permits initial public offerings cases to be filed in both state and federal courts will lead to significantly higher defense costs.

The court’s March 2018 unanimous ruling in Cyan Inc. et al. v. Beaver County Employee Retirement Fund held that class actions related to initial public offerings can be heard in state court.

The ruling’s practical effect is there will be litigation in federal courts “but then other plaintiffs will file in state courts,” said Douglas W. Greene, a partner with Baker & Hostetler LLP in Seattle.

He spoke during a session on significant directors and officers liability-related U.S. Supreme Court rulings at the Professional Liability Underwriting Society’s 2019 Directors & Officers Symposium in New York on Thursday.

“We have to assume there’s going to be multiple state court cases in addition to the federal cases,” said Mr. Greene. These cases could be brought in the headquarters of the firms involved “and we’re going to have to assume they can be brought in the plaintiffs’ home state,” he said.  Furthermore, purchasers of the securities involved could be in any state, he said.

John Favilla, New York-based assistant vice president, Berkley Professional Liability LLC, said, “Right now, we’ve got this pool of IPOs” and no pullback in IPO activity, which is increasing. “We might see some really large offerings. That means more litigation for us … and that’s a big deal for everybody in this room” from a defense cost and pricing perspective, said Mr. Favilla.

“These are typically not one-year cases,” said Beth Goldberg, New York-based chief underwriting officer for financial lines with Starr Cos. “Ultimately, you’re seeing separate retentions, but also the need for two separate law firms.”

Kevin LaCroix, executive vice president of RT ProExec, a division of R-T Specialty LLC, in Beachwood, Ohio, who moderated the session, said while before the Cyan ruling insurers could be expected to pay higher defense costs in California in connection with IPOs, “post-Cyan, lawsuits can be in any state. This is a bad situation from a defense perspective, from the insurance buyers’ perspective,” he said.

“Maybe that’s a signal for Congress to fix it,” said Mr. Favilla.

Mr. Greene pointed also to a December ruling by the Delaware Chancery Court, in Matthew Sciabacucchi v. Matthew B. Salzberg et al., which held against Delaware-incorporated companies putting a provision into their bylaws that IPO litigation must be filed in federal court.

“So, bylaws don’t work,” said Mr. Greene, who added parties “really need to exercise a lot of care...around how to handle these claims,” and must work together.

Mr. LaCroix noted the chancery ruling is being appealed to the Delaware Supreme Court.

Other rulings discussed during the session included the high court’s unanimous June ruling in Charles Kokesh v. Securities and Exchange Commission, in which the court held  that the SEC’s disgorgement recovery method is subject to a five-year statute of limitation. “Not many things make me smile as a claims person, but this does,” said Mr. Favilla. “The court is telling the SEC to pull back on SEC actions,” he said.

However, Ms. Goldberg said, “I still think it’s not going to change (the SEC’s) agenda. It’s just going to force them to be more creative.”

The panel also discussed the U.S. Supreme Court agreeing to consider the 9th U.S. Circuit Court of Appeals ruling in Gary Varjabedian v. Emulex Corp. et al., in which the appeals court held that plaintiffs need only claim defendants had acted negligently to prevail in tender offer cases. 

Mr. LaCroix, who noted that tender offer cases accounted for only 16% of the merger objection lawsuits filed last year, said in most of the country plaintiffs must establish that defendants had acted with scienter, which is an intent to defraud.







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