Last year was yet another record-breaking one for the amount of securities class actions filed against public companies in the US. According to Woodruff Sawyer’s 2019 Mid-Year DataBox Update report, plaintiffs filed 217 securities class action cases in 2018, and judging on the pace of the first half of this year, 2019 could see upwards of 268 cases.
“As our report reflects, we’ve seen unprecedented levels of directors’ and officers’ (D&O) litigation, both from a frequency and a cost perspective,” said Priya Cherian Huskins, senior vice president, management liability, Woodruff Sawyer. “Unfortunately, there are many drivers of this trend, including a very frothy level of securities class action lawsuits, as well as an increasing interest in plaintiffs using derivative suits (breach of fiduciary suits) to sue directors and officers.”
Securities class action litigation has been impacted by the 2018 Supreme Court decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, according to Huskins. On March 20, 2018, the Supreme Court ruled unanimously that class actions may be brought in state court and are not removable to federal court. This means “courts in all 50 states are open for business,” and it also results in a lower pleading standard, meaning that “state courts are more plaintiff friendly,” Huskins explained.
“With regards to event-driven litigation, we’re seeing a few very large derivative settlements,” Huskins told Insurance Business. “The ones that stand out this year are Wells Fargo ($320 million) and Yahoo ($29 million). My observation is twofold: one is that these are much larger settlement figures than we’re used to seeing; and secondly, in the case of Yahoo, it’s the first significant dollar settlement in a breach of fiduciary claim involving what I call a ‘cyber stumble’. Not only are these derivative settlements significant in and of themselves, but their size and the type of litigation they are is very encouraging for plaintiffs, and so we expect to see more similar litigation in the future.”
Why is the plaintiff’s bar so brazen about chasing public companies after large settlements? Huskins looks all the way back to the Options Backdating scandal, which came to light during an investigation by the Securities and Exchange Commission (SEC) in the mid-2000s. The scandal involved high-profile companies like Apple, UnitedHealth Group, Broadcom, and Staples, and essentially involved executives falsifying documents in order to earn more money by deceiving regulators, shareholders and the Internal Revenue Service (IRS).
There were about 220 companies spotlighted in the SEC investigation, but only about 20 of those companies had securities class action lawsuits based on clear evidence of stock price movements. However, all of the companies found guilty had breach of fiduciary cases, and a large percentage of those cases had a significant dollar settlement.
“The Options Backdating scandal taught the plaintiffs bar that these cases can be very lucrative,” Huskins commented. “Move forward in time, and we continue to see these cases being brought, and it’s something that directors and officers need to keep a close eye on. I think what we’re seeing now is the result of the plaintiffs bar taking the lessons they learned from the Options Backdating scandal and applying them.”
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Despite the large dollar settlements hitting the headlines, it’s important to remember that there are many more derivative suit settlements that settle for nothing beyond plaintiff’s fees, Huskins stressed. The reason directors and officers, and their insurance partners, should be concerned about derivative lawsuits is that: “First of all, by their nature, they’re very surprising; and secondly, there’s no obvious way to predict where they will settle,” she said.
“In the case of Yahoo’s ‘cyber stumble,’ the plaintiffs had the unusual situation of being able to show exactly what was lost, which was the $350 million discount that Verizon insisted on taking to complete their acquisition of Yahoo,” Huskins explained. “In that situation, they had a clear dollar amount of shareholder value being lost – but that’s abnormal. My observation is, it’s axiomatic that when plaintiffs see higher settlements, they start to expect settlements to continue to trend higher. In a negotiation where one party has heightened expectations, it’s difficult to have lower settlements.”
Are companies buying more D&O insurance limits to make up for this concerning trend? Not necessarily. Huskins pointed out: “If all things were equal, there’s no doubt that companies would be increasing their D&O insurance limit purchase, particularly for the part of D&O insurance that responds to the settlement of derivative suits (Side A). However, just as clients are studying the terrible litigation environment, carriers are experiencing it directly. This has translated into carriers making, in some cases, dramatic increases, not only with the premium rates but also the self-insured retention.
“Given escalating prices, we’re seeing clients take a very careful look at the amount of insurance they’re purchasing and in most cases not dramatically increasing the amount they’re buying because the prices are so high right now.”