Last week’s Halliburton webcast: a round-up of our discussion
Our February 27th webcast received an early morning boost thanks to the Wall Street Journal‘s piece “Securities Class Action: Endangered Species?” outlining the potential impact of the Supreme Court’s ruling on the Halliburton case. Securities Class-Actions have been the bane of U.S. publicly held companies since 1988 when the Supreme Court ruling on Basic vs Levinson established the “fraud -on-the- market “ theory which plaintiffs’ securities lawyers quickly exploited for the benefit of their clients, and themselves .
To provide some idea of the overall size and financial impact of the Securities Class-Action cottage industry, consider the following:
- 3,200 + securities class-actions filed between 1997 and 2013 (Cornerstone Research)
- $75B + paid to settle those actions (Cornerstone Research)
- $50B (est.) in fees for plaintiffs’ and defense lawyers
- $2.5B (est.) paid in D & O premiums annually by US public companies
Oral arguments begin on March 5th for Erica P. John Fund, Inc. vs Halliburton Co. with the Supreme Court expected to hand down its ruling by June 15th. As noted by panelist John Hughes, a Partner at Edwards Wildman, the Supreme Court will be addressing two questions which shape the D & O liability landscape:
- Should the Supreme Court reverse Basic vs. Levinson, reject the “fraud-on-the-market” theory in its entirety and require evidence of reliance by each plaintiff?
- Alternatively, should defendants be allowed, at the class certification stage, to present evidence that the alleged misrepresentation and subsequent disclosure did not have “price impact” on the company’s stock, thus rebutting the presumption that the plaintiffs relied on the stock as reflecting all publicly available information?
The question which was then posed to our panelists was: “ What will the likely impact be on both the liability of, and insurance for, Directors and Officers in the event the Supreme Court either reverses or revises the lower Court’s ruling on Halliburton?” Many Directors, Officers and buyers of D & O insurance have assumed (hoped?) that any new ruling which restricts the plaintiffs’ bar ability to bring securities class actions would also reduce their exposure to shareholder litigation along with their D&O insurance premiums. John Doernberg, from WGA’s ExecutiveRisk Claims, dampened this assumption by noting that any change, in any ruling, leads to the same result – more litigation as both plaintiffs’ and defense attorneys spend years fleshing out the contours of the ruling, with plaintiffs’ lawyers looking for sympathetic lower courts in different jurisdictions. If the Supreme Court rejects the “fraud-on-the-market” theory and requires evidence of reliance by each plaintiff, we can also expect plaintiffs’ lawyers to bring multiple large actions involving a company’s largest institutional shareholders. And, as institutional holders have demonstrated in “opt-out” cases, they may seek larger settlements than have been the norm in class-action cases. What is certain is that the plaintiffs’ bar will continue to find ways to sue Ds/Os when their actions (or lack thereof) allegedly result in financial loss for shareholders.
Rob Yellen, AIG’s Head of Product Development for Global Financial Lines, then cautioned the audience to be prepared for increased D&O premiums in the event of any change in the Halliburton ruling. He cited both the need for increased use of attorneys and the uncertainty of an ecosystem which loses one of its time-tested pillars. While all agree that no one (except for plaintiffs’ attorneys) likes securities class actions, they also agree that it is an efficient, well-known system for providing shareholders with a private remedy when the value of their shares declines due to fraudulent/poor management.
Jennifer Sharkey, WGA’s ExecutiveRisk Practice Leader, then suggested to the audience that they break Halliburton into three phases:
- Now until the ruling in June ‘14: Her advice is to renew D & O programs with a current risk profile in mind and not to re-design D&O programs based on assumptions regarding the outcome of the Halliburton case.
- From June ‘14’s ruling until June ‘15: Should there be a refined or overturned ruling; companies should not make any quick decisions nor make any significant changes to their D&O programs and/or limits. As the plaintiffs’ bar is unlikely to retreat, ample time will be needed to monitor the plaintiffs’ reaction and response to the decision. During this period, it’s also likely that: shareholder suits may be more expensive to litigate; there will be increases both in derivative settlements and SEC investigations. Companies should be in close contact with their D&O broker to discuss the impact of the ruling and review their overall D&O program design. Depending upon the outcome of the case and its implications; further considerations may be given to adding coverage for investigations targeting the company and additional, or a conversion of existing full sided, Side A limits (non-indemnifiable coverage for Ds/Os).
- After June ’15: Although difficult to predict, at least some of (but far from all) the decision’s ramifications should be better understood in a year. This would be the time to start analyzing D&O program structure/limits and to watch closely for adjustments in D&O rates.
In closing, the panel was asked to gaze into the crystal ball as to how the justices would rule. Our consensus was there would be a revision, but not a reversal, which guts “presumption of reliance”. Such a revision would significantly impair the plaintiffs’ lawyers ability to certify a class. So, are securities class actions an endangered species? More than likely. Extinct? Not in our lifetime.
We look forward to briefing you again once the ruling has been handed down.
(For more details on the 2/17 webcast, or to listen to the recording, click here.)
About the Author
Rich Leavitt is a Principal and the Risk Management Practice Leader at WGA, he is responsible for the firm’s overall strategy for attracting and retaining large clients with complex risks and dynamic needs, as well as the delivery of solutions and services to those organizations.