CURRENT TRENDS IN US D&O LITIGATION

PRESENTATION BEFORE: COLIN, BIGGERS & PAISLEY

PRESENTATION BEFORE: COLIN, BIGGERS & PAISLEY

PERRY S. GRANOF, OF COUNSELWILLIAMS KASTNER

AUGUST 26, 2010

PERRY S. GRANOF, OF COUNSELWILLIAMS KASTNER

AUGUST 26, 2010

Key Constituents of Directors and Officers

• The Corporation• The Shareholders• The Creditors• The Employees• The Regulators/Law

Enforcement Agencies

D&O LIABILITY TO THE CORPORATION

(DERIVATIVE CLAIMS)

D&O LIABILITY TO THE CORPORATION

(DERIVATIVE CLAIMS)

RECENT DELAWARE CASE LAW ADRESSING THE BUSINESS JUDGEMENT RULE:

LYONDELL CHEMICAL CO. VS. RYAN

[970 A.2d 235 (DEL. 2009)]A Claim for breach of the Duty of Care when applied to independent directors can be sufficiently extreme to override the business judgment rule only when the directors disregard their duties.

Gantler v. Stephens[965 A.2d 695 (Del. 2009)]

The plaintiff Rebutted the business judgment rule by pleading sufficient facts to show that the directors were financially motivated To maintain the status quo.

RECENT DELAWARE CASE LAW ADRESSING THE BUSINESS JUDGEMENT RULE:

LYONDELL CHEMICAL CO. VS. RYAN

[970 A.2d 235 (DEL. 2009)]A Claim for breach of the Duty of Care when applied to independent directors can be sufficiently extreme to override the business judgment rule only when the directors disregard their duties.

Gantler v. Stephens[965 A.2d 695 (Del. 2009)]

The plaintiff Rebutted the business judgment rule by pleading sufficient facts to show that the directors were financially motivated To maintain the status quo.

D&O LIABILITY TO THE CORPORATION

(Derivative Settlements)

D&O LIABILITY TO THE CORPORATION

(Derivative Settlements) Past Mega Derivative Action Settlements,

UnitedHealth Options Backdating Derivative Settlement - $895 million (2008)

Broadcom Options Backdating Derivative Suit - $118 (2009)

Recent Derivative Action Settlements in 2010 Sequenom Inc. - $14 million tentative settlement Comverse Technology, Inc. -$9.35 mil. Proposed

settlement Ican Enterprises LP, - $9.15 mil. (An Investor in

National Energy Group.

Derivative cases to Watch Deepwater Horizon

Past Mega Derivative Action Settlements, UnitedHealth Options Backdating Derivative

Settlement - $895 million (2008) Broadcom Options Backdating Derivative Suit -

$118 (2009)

Recent Derivative Action Settlements in 2010 Sequenom Inc. - $14 million tentative settlement Comverse Technology, Inc. -$9.35 mil. Proposed

settlement Ican Enterprises LP, - $9.15 mil. (An Investor in

National Energy Group.

Derivative cases to Watch Deepwater Horizon

D&O Liability to Shareholders (Shareholder Class Actions)

D&O Liability to Shareholders (Shareholder Class Actions)

TrendsFederal Securities Fraud Class Action Filings

Decreased in the First Six Months of 2010; Continuing a Trend that Started in 2009

The Credit Crisis No Longer Dominates Filings

Litigation Activity in the Financial Sector Continues

Market Capitalization Claims, associated with Announcements made at the end of a class, continues to decline.

TrendsFederal Securities Fraud Class Action Filings

Decreased in the First Six Months of 2010; Continuing a Trend that Started in 2009

The Credit Crisis No Longer Dominates Filings

Litigation Activity in the Financial Sector Continues

Market Capitalization Claims, associated with Announcements made at the end of a class, continues to decline.

D&O Liability to Shareholders (Shareholder Class Actions)

D&O Liability to Shareholders (Shareholder Class Actions)

Proposed & Actual Mega Settlements in 2010 (US + $100 MIL.)

American International Group Inc. - $750 Mil.Countrywide Financial Corp. - $600 Mil.Charles Schwab Corp. - $235 Mil (Proposed)Comverse Technology Corp. - $225 Mil

(Proposed)Maxim Integrated Products Inc. - $173 Mil. Juniper Networks, Inc. - $169.5 Mil.Broadcom Corp. - $160.5Refco Inc. - $140 Mil.

(Source: Advisen Quarterly Report - Q2 2010)

Proposed & Actual Mega Settlements in 2010 (US + $100 MIL.)

American International Group Inc. - $750 Mil.Countrywide Financial Corp. - $600 Mil.Charles Schwab Corp. - $235 Mil (Proposed)Comverse Technology Corp. - $225 Mil

(Proposed)Maxim Integrated Products Inc. - $173 Mil. Juniper Networks, Inc. - $169.5 Mil.Broadcom Corp. - $160.5Refco Inc. - $140 Mil.

(Source: Advisen Quarterly Report - Q2 2010)

D&O Liability to Shareholders (Shareholder Class Actions)

D&O Liability to Shareholders (Shareholder Class Actions)

Results at Trial Thane International Securities Class Action Lawsuit -

Defense Verdict (2010) Vivendi SA Securities Class Action Lawsuit - Plaintiff Verdict (2010)

(The Defendants acted recklessly and inflated its shares by misleading investors 57 times from 2000 to 2002)

Household International Securities Class Action Lawsuit - Plaintiff Verdict (2009)the jury found that all four defendants acted

recklessly with respect to 16 statements of 40 statements)

JDS Uniphase Securities Class Action lawsuit - Defense Verdict (2007)

(As per Kevin LaCroix: Of the nine post PSLRA cases: 5 for the Plaintiffs and 4 for the defendants.)

Results at Trial Thane International Securities Class Action Lawsuit -

Defense Verdict (2010) Vivendi SA Securities Class Action Lawsuit - Plaintiff Verdict (2010)

(The Defendants acted recklessly and inflated its shares by misleading investors 57 times from 2000 to 2002)

Household International Securities Class Action Lawsuit - Plaintiff Verdict (2009)the jury found that all four defendants acted

recklessly with respect to 16 statements of 40 statements)

JDS Uniphase Securities Class Action lawsuit - Defense Verdict (2007)

(As per Kevin LaCroix: Of the nine post PSLRA cases: 5 for the Plaintiffs and 4 for the defendants.)

D&O Liability to CreditorsD&O Liability to Creditors American Catholic Educational Programming

Foundation., Inc. v. Gheewalla, et al., 2007 WL 1453705 (Del. May 18, 2007). The Court ruled that individual creditors of an insolvent

corporation have no right to assert direct claims for breach of fiduciary duty against corporate directors when a company is in the zone of insolvency. However, the Delaware Supreme Court recognized a creditor’s right to step into the shoes of the shareholders, in the event of corporate insolvency.

In re Downey Financial Corp., Case No. 08-13041 (CSS) (US Bankruptcy Court, Dist. Of Delaware). Under the terms of the insurance contract at issue, the policy’s

proceeds did not constitute property of the estate, or alternatively, that the directors and officers were entitled to relief from the automatic stay to access policy proceeds.

American Catholic Educational Programming Foundation., Inc. v. Gheewalla, et al., 2007 WL 1453705 (Del. May 18, 2007). The Court ruled that individual creditors of an insolvent

corporation have no right to assert direct claims for breach of fiduciary duty against corporate directors when a company is in the zone of insolvency. However, the Delaware Supreme Court recognized a creditor’s right to step into the shoes of the shareholders, in the event of corporate insolvency.

In re Downey Financial Corp., Case No. 08-13041 (CSS) (US Bankruptcy Court, Dist. Of Delaware). Under the terms of the insurance contract at issue, the policy’s

proceeds did not constitute property of the estate, or alternatively, that the directors and officers were entitled to relief from the automatic stay to access policy proceeds.

D&O Liability To The EmployeesD&O Liability To The Employees

Will, et al. v. General Dynamics Corp (U.S. District Court for the S. D. Illinois (2006))

A class-action lawsuit that alleged tens of thousands participants in two General Dynamics 401K plan were charged excessive fees has been tentatively settled for US $15.5 mil. Large amounts of funds were allegedly handed to FAMCO without a competitive bidding process and that costs and fees for plan participants were inflated.

Will, et al. v. General Dynamics Corp (U.S. District Court for the S. D. Illinois (2006))

A class-action lawsuit that alleged tens of thousands participants in two General Dynamics 401K plan were charged excessive fees has been tentatively settled for US $15.5 mil. Large amounts of funds were allegedly handed to FAMCO without a competitive bidding process and that costs and fees for plan participants were inflated.

D&O Liability to Regulators/Law Enforcement Agencies

D&O Liability to Regulators/Law Enforcement Agencies

Recent Settlements with RegulatorsSEC v. Goldman Sachs - US $550 Mil.

(Settlement of charges that Goldman Sachs sold mortgage investments without telling buyers that securities had been structured with the input of a client who was hedging against their success.)

SEC v. Citigroup - US $75 Mil.(Settlement of charges that Citigroup[ made misleading statements in calls with analysts and regulatory filings about the extent of its holdings tied to high-risk mortgages.)

SEC v. Daimler AG - US $185 Mil.(Settlement with SEC and the DOJ of charges that Daimler violated the Foreign Corrupt Practices Act (FCPA).)

D&O Coverage For Government Investigations/Regulatory Proceedings??!!

Recent Settlements with RegulatorsSEC v. Goldman Sachs - US $550 Mil.

(Settlement of charges that Goldman Sachs sold mortgage investments without telling buyers that securities had been structured with the input of a client who was hedging against their success.)

SEC v. Citigroup - US $75 Mil.(Settlement of charges that Citigroup[ made misleading statements in calls with analysts and regulatory filings about the extent of its holdings tied to high-risk mortgages.)

SEC v. Daimler AG - US $185 Mil.(Settlement with SEC and the DOJ of charges that Daimler violated the Foreign Corrupt Practices Act (FCPA).)

D&O Coverage For Government Investigations/Regulatory Proceedings??!!

D&O Liability to Regulators/Law Enforcement Agencies

D&O Liability to Regulators/Law Enforcement Agencies

Dodd-Frank Wall Street Reform & Consumer Protection Act (Civil Reforms).(The Act mandates more than 40 different studies & expanded

SEC enforcement powers) SEC/CFTC authority to regulate derivatives and swaps SEC allowed to pursue aiding and abetting claims by

establishing the defendant acted recklessly in assisting a violation

SEC empowered to seek civil monetary penalties in administrative cease-and-desist proceedings without having to be required to file a civil proceeding in court.

SEC authorized to pursue pursue enforcement actions involving conduct outside of US, allowing for extraterritorial application of the federal securities laws

Dodd-Frank Wall Street Reform & Consumer Protection Act (Civil Reforms).(The Act mandates more than 40 different studies & expanded

SEC enforcement powers) SEC/CFTC authority to regulate derivatives and swaps SEC allowed to pursue aiding and abetting claims by

establishing the defendant acted recklessly in assisting a violation

SEC empowered to seek civil monetary penalties in administrative cease-and-desist proceedings without having to be required to file a civil proceeding in court.

SEC authorized to pursue pursue enforcement actions involving conduct outside of US, allowing for extraterritorial application of the federal securities laws

D&O Liability to Regulators/Law Enforcement Agencies

D&O Liability to Regulators/Law Enforcement Agencies

Dodd-Frank Wall Street Reform & Consumer Protection Act (Criminal Reforms).Expanded criminal enforcement powers

Review of Federal Sentencing GuidelinesReview of statute of limitations for securities fraud

prosecutionsOther Reforms

Establishment of the Bureau of Consumer Financial Protection (To fall under auspices of the Federal Reserve Board)

Establishment of the Federal Insurance Office (within the Department of Treasury)

Dodd-Frank Wall Street Reform & Consumer Protection Act (Criminal Reforms).Expanded criminal enforcement powers

Review of Federal Sentencing GuidelinesReview of statute of limitations for securities fraud

prosecutionsOther Reforms

Establishment of the Bureau of Consumer Financial Protection (To fall under auspices of the Federal Reserve Board)

Establishment of the Federal Insurance Office (within the Department of Treasury)

D&O Liability -Jurisdictional Issues

D&O Liability -Jurisdictional Issues

Morrison v. National Australian Bank(US Supreme Court - 2010)Impact of Decision

The end of F-cubed civil securities litigation in the USReduction of securities class sizes and damage amounts

Morrison v. National Australian Bank(US Supreme Court - 2010)Impact of Decision

The end of F-cubed civil securities litigation in the USReduction of securities class sizes and damage amounts

D&O Liability -Jurisdictional Issues

D&O Liability -Jurisdictional IssuesMorrison v. National Australian Bank

(US Supreme Court - 2010)Notwithstanding the decision

Foreign issuers who have ADR’s traded in the US will still continue to be subject to the Securities Exchange Act. The SEC has been empowered to file lawsuits involving foreign companies and transactions outside the U.S. The SEC has been empowered to consider whether private claimants should have the same rights as the SEC.Lawyers will likely test ways to circumvent this decision, such as filing individual lawsuits in state court under state law, and filing 1933 Securities Act Claims. Foreign institutional investors may seek legislative change in the U.S. and other jurisdictions to establish a new statutory basis for relief .

Morrison v. National Australian Bank(US Supreme Court - 2010)Notwithstanding the decision

Foreign issuers who have ADR’s traded in the US will still continue to be subject to the Securities Exchange Act. The SEC has been empowered to file lawsuits involving foreign companies and transactions outside the U.S. The SEC has been empowered to consider whether private claimants should have the same rights as the SEC.Lawyers will likely test ways to circumvent this decision, such as filing individual lawsuits in state court under state law, and filing 1933 Securities Act Claims. Foreign institutional investors may seek legislative change in the U.S. and other jurisdictions to establish a new statutory basis for relief .

D&O LIABILITY - Questions ?D&O LIABILITY - Questions ?