Securities Litigation

Securities Suits Come Back Strong in Q3 2009 An Advisen Quarterly Report – Q3 2009 Executive summary Securities lawsuit filings came in at a relatively high clip in the third quarter, but below frantic first quarter levels. With 169 suits, Q3 2009 was up 11 percent compared to Q2 2009. Both securities class action and securities fraud cases grew solidly, representing approximately three-quarters of all filings. Non-US companies saw a significant number of suits, continuing a trend of global exposure. Suits filed against financial firms remained strong, but new filings were more disperse among other industry sectors as new Madoff- and credit crisis-related suits dropped substantially. Although not quite at the level of a record-setting 249-suit first quarter, which was driven by the credit crisis and the Madoff scandal, litigators showed their swagger with a solid third quarter in 2009. Securities cases tracked in Advisen’s Master Significant Case and Action Database (MSCAd) in Q3 2009 came back strongly, with 169 suits up Securities Lawsuits from the second quarter at 152 suits, and at a rate 1000 above most past years. On an annualized basis, 800 securities suits filed in Q3 2009 were at 676 cases. The annualized Q3 number represented a 32 600 percent drop from an annualized Q1 of 996 cases, 400 and a mere 3 percent drop from a robust 2008, but higher than any previous year since the scandal200 rich 2001 with 684 cases. Securities class action suits (SCAS), no longer 2004 2005 2006 2007 2008 2009 2009 2009 leading the pack, showed a bit of a comeback with Q1 Q2 Q3 All Securities SCAS Securities Fraud 55 cases filed in Q3 2009, up from 38 cases the Note: 2009 Qs are annualized. quarter before, but down from 59 cases a year earlier. This translates to an annualized Q3 2009 figure of 220 SCAS cases filed, below the 230 filed in 2008 but well within its historical range. Securities fraud cases continued to bull forward as regulators with newfound vitality flex their muscles. Securities fraud filings led the way for the third straight quarter with 70 cases, up from 50 in the second quarter. These types of cases reached an annualized 280 cases, up from 230 cases in 2008. Although they fell short of the 92 securities fraud cases in the regulatory-hyperactive first quarter, securities fraud cases represented 41 percent of all securities cases, an all-time high. Madoff-related and credit crisis-related cases dropped off substantially. Madoff-related new filings fell to six cases in Q3 2009, down from 17 cases in Q2, and fell off a cliff compared to 54 in the Madoff-dominated first quarter. Credit crisis-related cases came in at a still-significant nine cases in Q3 2009, but down from 24 cases in Q2 and 46 in Q1. Looking at the first three quarters of 2009, the annualized suits filed represent 760 securities suits, higher than the record-setting 697 suits of 2008. Annualizing quarterly numbers is useful for comparing 2009 with prior years, but can easily result in misleading numbers, as is seen in the somewhat disparate first quarter and second quarter numbers in 2009. A heavy front-end loaded 2009 is likely due to a flurry of Madoff-related cases that rolled in during the first quarter. However, 0 despite the falloff from the first quarter, subsequent quarters in 2009 have been relatively strong compared to most prior years. Securities suits defined The purpose of this report is to examine all sources of securities-related suits that impact management liability insurance policies other than ERISA liability suits. In addition to SCAS cases, this report encompasses a much broader set of suits, such as securities fraud, breach of fiduciary duties, derivative actions, collective actions and Ponzi schemes, among others. Several analytic firms publish tallies of suits filed, but rarely do these tallies agree. In addition to the broad array of securities suits that Advisen covers, another issue is the way events are counted. In some cases, multiple companies (and their respective directors and officers) are named in the same complaint. Advisen counts each company for which securities violations are alleged in a single complaint as a separate suit. The specific definition of each type of suit can vary as well, resulting in different lawsuit tallies. Advisen defines the major types of suits in this report as follows: • Securities Class Action: suits alleging violations of federal securities laws, principally the Securities Act of 1933 and the Securities Exchange Act of 1934, filed by a private party on behalf of a class of persons injured by alleged violations. Securities Fraud: suits charging violations of securities fraud laws filed by regulators or law enforcement agencies. They also include cases brought by private parties alleging violations of securities laws that are not styled as class actions, and where more specific securities law violations are not made. Collective Action: similar to Securities Class Action; used in jurisdictions, outside of the US, where class action laws do not exist. Breach of Fiduciary Duty: suits alleging breach of fiduciary duty owed under the federal securities laws, primarily 15 USC Sec. 80a-35, or direct claims of breach related to stock or product whose sale or transfer is covered by securities laws. This includes merger, privatization or other transactions that involve public companies. • • • Master Significant Case and Action Database (MSCAd).1 Advisen tracks significant lawsuits filed against companies and their directors and officers in MSCAd. MSCAd is the most complete and accurate database of such lawsuits, consisting of almost 40,000 events and over $900 billion in aggregate losses. Securities cases in MSCAd represent almost 6,000 events and over $80 billion in aggregate losses. Advisen’s MSCAd covers a full range of securities cases, categorized by type. Lists of suits and filing details are available at Advisen’s online store, Advisen Corner, at http://corner.advisen.com/reports_topical_securities_quarter3_home.html and available at no extra charge to Advisen members through their advisen.com logins. For more information please call +1.212.897.4800 or e-mail corner@advisen.com. 1 On Advisen.com, MSCAd cases can be found under the “Losses & Exposures” tab, then click on “MSCAd”. 2 Case breakdown Types of Securities Lawsuits - Q3 2009 Of the 169 securities cases filed in Q3 2009, the 55 SCAS cases formed the second largest category. Securities fraud Securities represented the largest category, accounting for 70 suits All Fraud Derivative filed, up from 50 in Q2 2009, and increased in percentage to 41 percent from 33 percent of cases. On an annualized basis, securities fraud cases filed in Q3 2009 represented Fiduciary Duty 280 cases, up from 230 in 2008 and 229 in 2007, and were significantly higher than 2006, 2005 and 2004, coming in Ponzi at 158, 112 and 133, respectively. Securities fraud cases Scheme SCAS largely are the result of actions by regulatory and law enforcement agencies such as lawsuits or proceedings by the US Securities and Exchange Commission (SEC). States’ Attorneys General and regulators are increasingly important actors in this arena. In third place was breach of fiduciary duties at 27 suits, rounding out the top three types of suits at 90 percent of all suits for the third quarter. Other types of cases filed in Q3 2009 were derivative shareholder actions and other derivative cases (9) and Ponzi scheme and other cases (8). SCAS cases comprised the majority of securities lawsuits in most prior years. Continuing a trend that began in 2008, they to remain proportionately lower, with Q1 2009 at 28 percent and Q2 at 25 percent. The third quarter saw a rise in SCAS cases, to 33 percent. Interestingly, collective actions in non-US courts were significant in Q1 2009 (20, or 8 percent), but non-existent in Q2 2009 and just one suit in Q3 2009. The drop in collective actions cases is a direct consequence of the falloff in Madoff-related cases, an international phenomenon. Collective actions are lawsuits filed outside the US that are similar to class-action lawsuits in the US, but often with much more stringent filing requirements, as well as limits on the types of plaintiffs allowed to file. However, a significant number of other types of securities suits were filed against non-US companies. The major jurisdictions of securities suit filings during Q3 2009 include: • • • • • • • 32 suits in state courts; 27 suits in US District Court, Southern District of New York (mostly New York City); 18 suits in US District Court, Northern, Central and Southern Districts of California; 12 suits in US District Court, Northern and Southern Districts of Texas; Eight suits in US District Court, Middle and Southern Districts of Florida; Six suits in US District Court, Western District of Washington; and Five suits in US District Court, Northern District of Georgia. As concerns securities litigation against non-US companies, 20 suits (12 percent) were filed, with four filed in non-US courts. 3 Sector Impact Metric™ (SI Metric™) Advisen Ltd. is introducing two new Impact Metrics: Sector Impact Metric™ (SI Metric™) and Market Cap Impact Metric™ (MCI Metric™). The SI Metric™ measures the degree that securities lawsuits have played in each industry sector over the past decade. The Metric provides a visual compass tracking the changing seas of securities litigation throughout the past decade. As demonstrated by the SI Metric™ charts, certain industries have been hit harder by securities litigation than others. Business news of the past couple of years has been dominated by the credit crisis and Ponzi schemes, resulting in financial services firms as targets of litigation. Scandals and alleged wrongdoings, however, have shifted throughout the economy over the past decade, providing ample fodder for law firms, shareholders, and regulators to initiate lawsuits against companies in other sectors. The SI Metric™ gives two visual indicators of securities lawsuits in each sector per year, providing an effortless way to track trends by industry sector. The height of the bars indicates the percentage of securities suits that fell in each sector per year. The bars are color-coordinated to also reflect the intensity of suits per year for each sector: green (0%-5%); light green (5%-15%); yellow (15%-25%); orange (25%-40%); and red (40% and over). Scale 0% - 5% 5% - 15% 15% - 25% 25% - 40% 40% and up 4 SI Metric™ 2000 Sector Energy Materials 1% 1% 2% 3% 3% 3% 3% 2% 5% 2001 2002 2003 2004 2005 2006 2007 2008 2009 (YTD) 3% 3% 2% 3% 2% 1% 1% 1% 2% 2% 2% 12% 7% 9% 11% 11% 9% 8% 8% 8% 8% Industrials 14% 13% 12% 16% 14% 19% 16% 12% Consumer Discretionary 4% 8% 11% Cons. Staples 8% 2% 3% 4% 6% 6% 5% 5% 4% 3% 13% 6% 11% 13% 13% 15% 11% 12% 10% Healthcare 44% 29% 17% 20% 45% 18% 7% 21% 25% 23% Financials 50% 32% 24% 19% 20% 22% 22% 14% 12% 28% Information Technology 5% 7% 6% Telecom. Utilities Other 2% 1% 5% 4% 4% 3% 2% 2% 1% 1% 2% 2% 1% 1% 3% 1% 0% 5% 2% 3% 2% 2% 3% 1% 1% 2% 1% 5 Market Cap Impact Metric™ (MCI Metric™) The second Impact Metric introduced by Advisen Ltd. is the MCI Metric™, a measure of potential damages due to SCAS lawsuits. This Metric measures the aggregate and average market capitalization drop around the “class period” of SCAS cases, which is the period of the alleged wrongdoing. For SCAS cases initiated by shareholders, courts will typically award shareholders who purchased shares in a company during the class period an amount based on their estimated loses due to the alleged wrongful act. A shareholder’s initial purchase price during the class period is the court’s typical starting point. Since the stock price will often rebound somewhat shortly after the class period, courts will usually consider the price on approximately 30 days following the class period end date to consider an investor’s losses. The MCI Metric™ considers the market capitalization loss experienced by companies with SCAS suits, considering the typical starting and ending points for calculating damages to shareholders. Since claimants in any one case could have purchased shares on any date during the class period, Advisen considers the average market capitalization during the class period as the starting point. Advisen also uses the market capitalization 30 days after the class period end date as the ending point for considering the company’s market capitalization loss. This market capitalization loss is calculated for most companies with a SCAS suit filed against it during each year of the past decade, with certain SCAS cases eliminated. SCAS cases eliminated from the calculations are those whose alleged losses are not tied to defendants’ stock price losses, thus their potential damages are not tied to market capitalization losses. For example, Madoff-related SCAS cases with investors that experienced losses due to feeder funds investments in the Ponzi scheme claim losses that are not tied to the defendants’ stock price. Other examples include losses experienced by auction rate securities investors, which are tied to the underlying security as opposed to the stock price of investments banks named in many of these SCAS cases. Aggregate losses and average losses are calculated by the MCI Metric™. The aggregate loss measures the total fall-off in market capitalization, using the method described, for companies with SCAS suits filed against them for each year. This number is a starting point for calculating damages, and is a useful benchmark for comparing across years. The average loss measures the average fall-off in market capitalization per company and lawsuit. It provides insight into the impact the average SCAS lawsuit could potentially have on the MCI MetricTM average company for each 9,000 period. The aggregate and average market capitalization loss has risen in recent years. Aggregate losses were $829 billion in 2009, through the third quarter, and 2008 saw $1.2 trillion in losses. The losses in these years reflect that most of the class periods occurred during the large stock market losses of the 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 YTD Aggregate Mkt Cap Drop ($bil) Average Mkt Cap Drop ($mil) 6 past couple of years. The average losses per lawsuit were $8.5 billion in 2009 and $6.7 billion in 2008, possibly predicting record payouts for securities lawsuits. These losses compare to those of 2002, when losses also resulted from class periods occurring during stock market downturns, which saw aggregate losses of $1.3 trillion and average loses of $5.7 billion. The credit crisis brought Credit Crisis MCI MetricTM about its own set of related 14,549 cases, which dominated 13,046 15,000 securities litigation over the past few years. The hardest 12,000 hit year for aggregate market 8,156 capitalization loss was 2008, 9,000 with $900 billion in losses. As the number of credit 6,000 crisis-related securities 900 509 lawsuits began to fall off 326 3,000 from the mid-2009, so have 0 the aggregate market cap 2007 2008 2009 YTD losses, while coming in still Aggregate Mkt Cap Drop ($bil) Average Mkt Cap Drop ($mil) higher than 2007, at $509 billion. Interestingly, the average market capitalization losses for credit crisis-related cases far exceeded the overall average numbers, with 2009 at $14.5 billion per lawsuit, and 2008 at $13.0 billion. This metric suggests that the average credit crisis-related securities lawsuit may pay out higher sums than other securities lawsuits. Globalization of securities litigation The globalization of securities litigation is seen in the long-term trend of a growing number of suits filed against non-US companies. Non-US companies once felt immune from US-style class action suits in courts in both the US and abroad. However, an increasing number of European companies agreeing to settlements in excess of $100 million makes one point crystal clear: securities litigation has become a reality of doing business for companies around the world. Any company with operations in the US, and particularly any company with shares trading on US exchanges, is subject to securities litigation in US courts. Furthermore, many countries around the world, especially in Europe, are “modernizing” their civil legal systems by providing greater access to court remedies through various collective action mechanisms. The end results are systems closer to the US class action system, and ultimately more suits with greater payouts from courts outside of the US. 7 As the chart on the right shows, the number of large securities suit filings against non-US companies tracked by Advisen’s MSCAd is on a long-term growth path. Given legal reforms around the world, growth is expected to continue. The chart displays both the number of large securities suits filed against non-US companies over the past decade, and the percentage these suits represent of total securities suits filed. 120 100 80 60 40 20 0 2000 2001 Large Filings Against Non-US Companies 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2002 2003 2004 2005 2006 2007 2008 # non-US Cos % non-US Cos 2009 YTD Settlements and awards In Q3 2009, 63 cases were settled/awarded, meaning that either a judgment came down awarding damages or a settlement was reached. Of the 63 suits, four were cases with non-US companies as defendants. The average settled/awarded amount for the quarter fell substantially to $11.6 million, from the $66.3 million average of the second quarter. The Q3 2009 results were slightly lower than full year 2008, which had an average settled/awarded amount of $16.4 million. In addition to the third quarter being a low-settlement quarter, it came off of Q2 2009, which was disproportionately influenced by one derivative action suit The one suit in the second quarter awarded almost $2.9 billion to shareholders derivatively on behalf of HealthSouth Corporation, against its former CEO Richard M. Scrushy. Without this one suit, the average settled/awarded amount for the second quarter would have been $22.0 million. Nevertheless, the average amount for Q3 2009 remained on the low side when compared to historical fluctuation, with 2007 at $32.0 million, $48.5 million in 2006, $22.0 million in 2005, and $32.3 million in 2004. By type of suit, SCAS cases led the way with an Avg Settle/Award Amount - Q3 2009 average of $25.5 million. The top three cases, with a All settlement amount of $365 million, were all SCAS 30 cases. The largest settlement was in a case naming SCAS 25 Merrill Lynch as the defendant, which has tentatively 20 Securities settled for $150 million. The shareholders of First Fraud 15 Republic Bank sued Merrill Lynch, and its directors Derivative 10 and officers, after the 2007 acquisition, claiming that Merrill Lynch failed to disclose the extent of their 5 Sales financial troubles due to their positions in sub-prime Practices 0 loans and collateral debt obligations (CDOs). Sales practices claims resulted in the second spot with an average of $8.9 million. Included in this group is the fourth highest settlement, proposed for $50 million, against MRT LLC. The principals of the money management firm were accused by fund ($millions) 8 investors of making false statements, omitting material information, and failing to register the company and the investment contracts it sold to the public. After an elevated first quarter of $18.3 million average settlement, settlements for securities fraud cases came back to historical norms at an average of $5.3 million in the third quarter. Securities fraud cases, however, have hardly become a benign threat. In addition to leading the number of cases filed in the third quarter, securities fraud suits also led in the number of cases settled/awarded for the quarter at 33, the majority of all cases settled/awarded. The fifth and sixth largest settlements for the quarter were securities fraud cases, totaling $100 million. Both were Securities and Exchange Commission (SEC) allegations against General Electric, accusing the company of manipulating earnings to meet analyst expectations. Derivative action cases averaged $3.6 million. Trends Non-SCAS gaining in importance, but SCAS makes a comeback. SCAS fell from the most frequent type of suit filed in past year to consistently below securities fraud in all quarters of 2009, and even in third place in Q2 behind breach of fiduciary duties suits. Although SCAS suits once again became the second most frequently filed suit and increased from 38 in Q2 to 55 in Q3, as a percentage of total securities suits it remained at a comparatively low level in the third quarter at 33 percent. The percentage has been on a long-term downward trend, as historically SCAS suits comprise the majority of securities suits. In the first quarter, SCAS represented a mere 28 percent of all securities filings and only 25 percent of total securities suits tracked by MSCAd in the second quarter. In an effort to differentiate themselves in the competitive securities litigation marketplace, plaintiffs’ attorneys increasingly have filed securities lawsuits alleging common law torts, contract law violations, and breaches of fiduciary duties. This often results in two advantageous outcomes for plaintiffs and their attorneys: (1) it may avoid having the suit consolidated with others in a large class action suit by alleging unique claims; and (2) by filing in state court, as opposed to federal, plaintiffs’ attorneys have more flexibility to seek out states with more plaintiff-favorable laws and lower pleading standards. Complaints that allege breaches of fiduciary duties in Q3 2009 fell from a recent high of 29 percent in the second quarter to 16 percent in the third quarter, matching the first quarter. In 2008, breach of fiduciary duty cases began to increase, reaching 19 percent, and 29 percent in the fourth quarter. Levels before 2008 were often in the single digits, with 2007 at 4 percent, indicating a new trend that began in 2008 and continued through Q3 2009. These suits are often connected with M&A activities, alleging that the directors of the defendant company didn’t negotiate a high enough price. With the economic crisis exposing weaker companies, M&A activities are likely to pick up as stronger companies seek strategic acquisition opportunities. More suits that allege breach of fiduciary duties will certainly follow, and the cost of settling such suits is considered by most when acquiring targets. These suits are often tried in state courts, with 18 of the 27 cases in the third quarter filed in state courts. The relative number of securities fraud cases has been growing since 2007. In Q3 2009, 70 securities fraud suits were filed, 40 percent higher than the second quarter, and increased in percentage of all securities suits to 42 percent from an already high level of 33 percent in the second quarter. In 2008, securities fraud cases were at 33 percent, and in 2007 the percentage was at 41 percent. This level is significantly higher than the approximately 25-percent-level of prior years. Although the 9 settled/awarded average for this type of case is down for Q2 and Q3 2009, at $5.5 million and $5.3 million, respectively, compared to $18.3 million in the first quarter, it remains higher than the sub-$5 million average of past years. More importantly, concerning securities fraud cases, the SEC plans to become more proactive in light of recent not-so-stellar events, exposing an image of the SEC as sleeping at the wheel. According to Reuters, SEC Chairperson Mary Shapiro told reporters “I like to tell the staff we are going to act like our hair is on fire.” The fiscal 2011 budget (beginning October 2010) calls for 400 additional full-time equivalent employees, and the Obama Administration’s proposed regulatory overhaul plan envisions much enhanced SEC authority. Securities fraud settlements often contain fines and penalties not typically covered under directors & officers (D&O) policies, although defense costs are often covered. Furthermore, SEC actions often have a carryover effect on other types of securities suits, such as SCAS and derivative actions. SCAS cases remain a vital watermark for securities litigation trends. SCAS suits made a bit of a comeback, increasing by 33 percent in suits filed for the third quarter. In addition to remaining one of the most frequent types filed, SCAS suits were first for the average settled/awarded amounts for Q3 2009, paying an average of $25.5 million. The top three settlements/awards for the quarter were SCAS suits, totaling $365 million. More suits in state courts? A tactic explored by plaintiffs’ attorneys in 2008 was filing SCAS suits in state courts. The advantages of state class action claims over federal include forum-shopping for a more sympathetic state court, as well as avoiding the higher pleading standards for class-action status in federal courts. These suits take advantage of a non-removal provision in Section 22 of the Securities Act of 1933 that permits cases alleging violations of the ’33 Act to be tried in state courts. However, the Class Action Fairness Act of 2005 (CAFA), requiring larger multi-state class actions to be removed to federal courts, is considered a potential impediment to this movement. For this reason, most plaintiffs’ attorneys have shifted strategies away from SCAS in state courts, and toward other types of securities suits in state courts, such as claiming breaches of fiduciary duties. The issue of SCAS in state courts is not dead, as CAFA’s interpretation is being debated in the courts. In July 2008, the US Ninth Circuit Court ruled that no securities claims alleging violation of the ’33 Act could be removed to federal courts in what was seen as a precedent-setting case, Luther v. Countrywide, a sub-prime mortgage-related suit originally filed in California Superior Court for Los Angeles County. In claiming that the provisions in the ’33 Act trump CAFA, the court relied on a canon of statutory construction stating that the specific should control the general. This case potentially opened the floodgates to securities-related cases filed in state courts. However, in January 2009, the Seventh Circuit Court in Katz v. Gerardi reached exactly the opposite conclusion: the provisions of CAFA trump Section 22 of the ’33 Act. The court noted that the ’33 Act’s non-removal provision is incompatible with CAFA’s jurisdiction and removal provisions. But the court claimed that it was unnecessary to consult canons of statutory construction, dismissing such canons as mere “doubt resolvers.” The court points out that CAFA specifically addresses its applicability to securities cases, as it specifically lists exceptions to removal of securities cases. How this issue plays out in other federal circuits and appeals courts is yet to be seen. It appears that plaintiffs’ attorneys are mostly avoiding this issue by filing other types of suits, other than SCAS, in state courts such as breach of fiduciary duty. In Q3 2009, 32 securities suits (19 percent) were filed in state jurisdictions. Although down from 51 suits (34 percent) in the second quarter, it is up from 28 suits (11%) in the first quarter, and state courts viewed as one jurisdiction remained the No. 1 jurisdiction for new filings for the second quarter in a row. Of the 32 suits in the second quarter: 18 10 involved breach of fiduciary duties; six securities fraud; five derivative actions; two SCAS; and one a state-level regulatory action. Since most were brought by shareholders, a number could have conceivably been filed in federal courts as SCAS cases, steering clear of the non-removal issue. E&O and fiduciary liability policies could take a hit. Although securities cases have traditionally triggered coverage under D&O policies, recent securities cases may also trigger coverage under errors & omissions (E&O) and fiduciary liability policies. In a trend that started in 2008 and continued into 2009, many cases have dealt with credit crisis issues, and with Madoff and other Ponzi scheme issues. These suits, dealing with professional judgment and fiduciary duties may be excluded under D&O policies and covered under E&O policies. Fiduciary liability suits alleging violations of the Employee Retirement Income Security Act of 1974 (ERISA), the claim in many Ponzi scheme cases, may trigger fiduciary liability policy coverage. In some cases, the same underlying cause of loss will trigger losses under D&O, E&O and fiduciary liability policies, resulting in aggregations across lines of business. Some allegations found in a securities suit that triggers E&O coverage may resurface in shareholder derivative suits, which can trigger coverage under Side A of a D&O policy. A recent trend for some Side A DIC D&O policies is wording that clearly covers ERISA liability, sparking D&O policy liability for ERISA suits. Financial services still lead, but more disperse filings coming to the fore. Financial services firms have been much more likely to have a securities lawsuit filed against them since 2008 than firms from any other sector. Out of the 169 securities suits filed in the third quarter, 56 of them named financial services firms, or 33 percent of all securities suits filed. This level is down from 38 percent in Q2 2009, and fell substantially from the credit crisis- and Madoff-laden Q1 2009 with 56 percent of defendants from the financial services industry sector. All of 2009, through the third quarter, saw 45 percent of suits involving financial services firms, which was in line with 2008 at 44 percent. These numbers, even the lower Q3 2009, are significantly higher than the approximate 20 percent-level of past years. Since 2008, most of the activity against financial services firms dealt with segments outside of insurance. As the litigation evolves beyond the credit crisis, more of the wrath of litigation seems to be targeting insurance-related firms, attracting 10 of the 56 financial services sector suits in Q3 2009. The reason for the preponderance of suits filed against financial services firms since 2008 is due primarily to two types of related cases: credit crisis; and the Madoff Ponzi scheme. Other types of related cases that resulted in cases filed against financial services firms in 2009 were: auction rate securities; specialist improper trading; and the Stanford alleged Ponzi scheme. The credit crisis and Madoff categories need no introductions. Auction rate securities related cases are suits filed against organizers of auctions for the purposes of creating a marketplace for municipal bonds and certain asset-backed securities, such as securities backed by student loans. The organizers, mostly investment banks, are charged with abandoning these auctions when credit markets began to fall off, leaving investors with un-tradable securities. The specialist improper trading cases refer to a claim that Goldman Sachs, ETrade, and Bodel, among others, inserted option trades for their own accounts before and between customer trades. R. Allen Stanford, a Texas billionaire who ran his activities from offshore locales of the Caribbean, has been charged with an alleged $8-billion fraud of operating a Ponzi-scheme similar to Madoff’s. A flood of other alleged pyramid schemes have been unveiled by an uptick in investor redemptions in the current recessionary economy. 11 Lawsuits filed in response to the credit crisis started Types of Credit Crisis Securities Suits growing in number beginning in February 2007. SubSecurities Fraud prime mortgage suits, which hail back to 2005 and are the genesis of the credit crisis, fall within the larger creditFiduciary crisis umbrella. Through the end of Q3 2009 was 967 total Duty credit crisis suits have been filed. Of this total, 335 were SCAS securities suits. In Q3 2009, nine securities suits were filed Others related to the credit crisis issue, which is at an annualized Derivative rate of 36 cases. This level of filing was down from 24 in Action Q2 2009 (annualized 96), 46 in Q1 2009 (184 annualized), 181 in 2008, and 72 filed in 2007. The 335 all-time securities suits filed related to this issue consist of: SCAS (201); derivative suits (52); securities fraud (46); breach of fiduciary duties (22); and others (14). It remains to be seen if credit crisis suits will be dismissed or won at a higher rate than most types of suits. Judges and juries might be reluctant to blame the results of an economic crisis on a company’s management, particularly for non-financial companies. Of the 335 credit crisis related securities cases filed, 24 have been settled/awarded as of the end of Q3 2009. Just three cases have been settled/awarded for over $100 million, including: a $475 million proposed settlement against Merrill Lynch in a SCAS case in Q2 2009; a $406.5 million award against Credit Suisse in a securities fraud case in Q1 2009; and a $150 million tentative settlement against Merrill Lynch in a SCAS case in Q3 2009. Madoff-related cases filed since the fraud was disclosed on December 11, 2008 comprise 238 lawsuits in total through the end of Q3 2009, with 43 filed in Q3 2009. Securities-only filings totaled 109 suits since December 11, with six in Q3 2009 down from 17 in the second quarter and 54 in the first quarter. The 109 securities suits consisted of: breach of fiduciary duties (44); collective actions (24); SCAS (12); securities fraud (13); derivative actions (8); Ponzi scheme (6); and others (2). Types of Madoff Securities Suits Collective Action Others Derivative Action SCAS Fiduciary Duty It appears that the wave of credit crisis- and MadoffPonzi related suits, and in particular suits filed against financial services companies, hit a crest in Q1 2009. As bankruptcies rise through the economy, hitting all sectors, and securities suits are filed as a consequence, suits filed will become more dispersed and broadly affecting all sectors. Additionally, as the impact of the credit crisis subsides, plaintiffs’ attorneys will turn their sights to other causes of loss. A wider spread of suits was observed in the third quarter, as financial services firms dropped in percentage of total suits to 33 percent, and other sectors picked up such as healthcare (18 percent), consumer discretionary (14 percent), and information technology (14 percent). International exposure remains significant. The number of suits filed against non-US companies in US courts has been on a long-term upward trend, and so have been the number of suits filed against both US and non-US companies in courts outside the US. The third quarter, however, saw the international component of the equation drop a bit. Of the 169 securities cases filed in Q3 2009, 20 were filed against non-US companies, for a significant 12 percent of cases. Four securities suits were filed in courts outside of the US, all against non-US companies. Securities Fraud 12 The third quarter’s international numbers are down from the first two quarters. The first quarter saw 56 securities suits, or 22 percent, filed against non-US companies, and 29 securities suits filed outside of the US court system. The second quarter was somewhere in between, with 26 securities suits (17 percent) filed against non-US companies, and nine securities suits filed outside of the US. For 2009 through Q3, 18 percent of securities suits were filed against non-US companies and 7 percent filed in courts outside of the US. These numbers are significantly higher than in previous years. Credit crisis-related suits are more global than most types of suits. Of the 335 all-time securities suits related to this issue, 54 were filed against non-US companies, and 10 of the total suits were filed in courts outside of the US. The true global lawsuit phenomenon is Madoff. Of the 109 all-time Madoff-related securities cases, 42 were filed against non-US companies, and 27 were filed outside of the US. This translates to 39 percent of Madoff-related securities suits filed against non-US companies, and one-quarter were filed in courts outside of the US. Critical cases Six events made up the large majority of the settled/awarded amounts for Q3 2009, totaling $515 million. The breakdown by type includes: three SCAS cases, two securities fraud cases, and one sales practices violations case. All were in US federal courts and involved US companies as defendants. Lists of suits and filing details are available at Advisen’s online store, Advisen Corner, at http://corner.advisen.com/reports_topical_securities_quarter3_home.html and available at no extra charge to Advisen subscription members through their advisen.com logins. For more information please call +1.212.897.4800 or e-mail corner@advisen.com. This report was written by John W. Molka III, CFA, Senior Industry Analyst and Editor, 212.984.2753, jmolka@advisen.com. Special thanks to: David Bradford, EVP and Co-Founder; William Brown, Consultant; Anne Wallace, Senior Legal Analyst and Editor; James Blinn, Principal; and Dan Dube, Senior Insurance Analyst and Modeler; for their analysis and legal expertise. About Advisen Advisen manages business information and market data for the commercial insurance industry and maintains critical risk analytics and time-saving workflow tools for over 530 industry leading firms. Through its work for the broadest customer base among information service providers, Advisen delivers actionable information and risk models at a fraction of the cost to have them built internally. Designed and evolved by risk and insurance experts, and used daily by more than 100,000 professionals, Advisen combines the industry’s deepest data sets with proprietary analytics and offers insight into risk and insurance that is not available on any other system. Advisen is headquartered in New York. For more information, visit http://www.advisen.com or call +1.212.897.4800 in New York or +44(0)20.7929.5929 in London. 13