Directors & Officers Liability | Litigation Trends, Regulatory Environment and

D&O Insurance Response

Spence Hoole

Susan Miner

Kieran Hughes

The Shifting Landscape of D&O / Securities Litigation

Spence Hoole

Managing Partner

Diversified Insurance Group

Federal Shareholder Class Actions by Year of Filing

Other Securities Cases on the RiseBefore 2006, Securities Class Actions comprised one-third of all securities suits; by 2011, that number dropped to 13%. Securities Class Actions still remain most significant from a severity perspective.

Securities Class Actions – Traditional shareholder lawsuits brought in Federal court.

Securities Regulators (Securities Fraud) - Cases brought by the SEC or other regulators. In 2011, the SEC opened a whistleblower focused office.

Merger & Acquisition (Fiduciary Duty) - Merger, privatization or other transactions involving public companies.

Derivative Actions - Shareholder lawsuits brought on behalf of the corporate entity typically brought in State court.

Other – This category includes a variety of cases, but nearly 60% of these cases are either FINRA violations or Ponzie schemes.

M&A Related Suits Create a Troubling TrendM&A Lawsuits: All Size Targets

M&A Lawsuits 2010-2011: Targets valued over $100 million

• 91% of all deals were targeted with an average of 5.1 lawsuits each• 67% were settled• 28% were voluntarily dismissed by the plaintiffs• 4% were dismissed in the merits • None went to trial

Sourc e: Cornerstone Research, as cited by US Chamber Institute for Legal Reform, “The Trial Lawyers’ New Merger Tax” (2012)

Overview of 2012 D&O Litigation LandscapeSecurities Litigation Environment Frequency of federal securities class action litigation remains low relative to

historical levels, but is balanced by a decline in the number of public companies over the last ten years.

M&A litigation and other state common law claims on the rise.

Increase in regulatory actions noticed to D&O policies - SEC procedural changes make it easier for them to investigate, although their activity is difficult to track.

FCPA continues to be of serious significance.

Dodd-Frank Act may inspire more whistleblower activity.

Average & median settlement costs decreased in 2011, but the median is still above the 10-year high.

Defense costs skyrocket on complex cases [growing segment of costs are allocated to uncovered loss (SEC and internal investigation costs for the entity)].

Regulatory Environment |Impact on D&O Litigation

Kieran Hughes Susan Miner

Senior Vice President Senior Vice President, Corporate & Executive Protection

AIG Woodruff-Sawyer & Co.

Current Regulatory Environment and Trends

Thoughts on . . .

SEC View over multiple administrations

DOJ Foreign Regulators

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Sarbanes Oxley 304 & Dodd-Frank 954

Recent Sarbanes Oxley 304 enforcement actions may give clues to how the SEC will proceed. In several recent high profile cases, there were no charges of misconduct despite significant settlement values:

CSK Auto Corporation’s CEO & Chairman Maynard Jenkins: $2.8 Million Beazer Homes USA CEO Ian McCarthy: $6.5 Million and large equity grants Beazer Homes USA CFO James O’Leary: $1.4 Million

Final rules for Dodd-Frank 954 expected in the second half of 2012, executives are focused on the key differences between the clawback rules in Sarbanes Oxley and Dodd-Frank.

Sarbanes-Oxley 304 Dodd-Frank 954

Who is impacted CEO & CFO All executive officers

Liability threshold Culpability Strict liability

At risk Entire bonus Delta only

Enforced by SEC TBD (company)

Whistleblowers (Section 21F of the Sec Exch. Act)

Dodd-Frank Whistleblower Program: Bounties! Voluntary, original information, successful enforcement of >$1 Million 10 to 30% of sanctions

Motivating? FCPA (Siemens: $330 Million; Halliburton: $177 Million) Financial Fraud (Goldman Sachs: $550 Million; GE: $50 Million)

Who Qualifies as a Whistleblower: “Reasonable belief” / No materiality threshold Not your attorneys, auditors, compliance and internal audit personnel,

investigators, Ds & Os are informed of potential misconduct….

Corporate Concerns? Not required to report internally (but awards can be increased if do) Anti-retaliation provision (Private right of action and SEC enforcement) Plaintiffs bar gearing up. Ex. SECSnitch.com Corporate policy (Thank You!), process and tone

Anti-Bribery, Including FCPA FCPA Prohibits

Corruptly making a promise or offer, or authorizing the payment of a bribe or anything of value, directly or indirectly, to a foreign government official to obtain or retain business or to gain an improper business advantage

Two Parts Anti-Bribery Books & Records

Not Just a US Issue …… ex. UK Bribery Act Not just public officials (anyone) Not just foreign, domestic too No facilitation payments

Enforcement Trends, Actions & Investigations

Say on Pay Litigation

Background On January 1, 2011, Say on Pay (“SOP”) provisions contained in the Frank-Dodd Act went into effect. Most public companies are now required to submit named executive officer compensation to a non-binding, or advisory, shareholder vote.

2011 Proxy Season During the 2011 proxy season, 3,189 companies held standard SOP votes. Of these, only 40 (<2%) received negative SOP votes. Shareholder derivative lawsuits have been filed against 17 (~43%) of these companies.

2012 Proxy Season As of September 2012, the 2012 proxy season has seen a slight increase in the number of failed SOP votes (53 of 2,025 reported votes). However, only three companies that received a failed SOP vote have been sued to date (Citigroup Inc., First Merit Corp. and Simon Property Group, Inc.) and one company that received approval was sued (Johnson & Johnson).

Other Litigation Drivers The Economy The Market Derivative Suits

M&A Non-monetary settlement Plaintiff fees

The Delaware Chancery Court Environmental concerns / Fracking / Carbon

Footprint Social Media Impact on D&O

Twitter / LinkedIn / Facebook

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D&O Insurance |Response

Susan Miner Spence Hoole

Senior Vice President, Managing Partner

Corporate & Executive Protection Diversified Insurance

Woodruff-Sawyer & Co.

Traditional ABC Coverage

Traditional ABC policy strikes a balance between personal asset protection and corporate balance sheet protection

Vast majority of companies incorporate primary ABC coverage as a means of risk transfer

Key Public Policy Terms & Conditions Definition of Claim

Broadly covers allegations against Ds & Os acting in such capacity for the Company Includes written demands, and formal civil/administrative/regulatory/criminal and

arbitration proceedings Includes pre-Claim inquiries (informal regulatory) wherein Ds & Os compelled to appear

at meeting or produce document

Definition of Loss Includes defense costs, judgments and settlements Generally excludes taxes, fines and penalties (although coverage granted for non-willful

FCPA penalties per 2(g)(2)(B)) Covers defense and “tangential costs” such as loan origination fees for SOX 304 and

Dodd Frank 954 Expressly excludes from cover the amounts requested or required to be repaid

“Company vs. Insured Person” Exclusion with Exceptions For: Independent derivative claims including any form of whistleblower activity Bankruptcy trustee or creditors committee Claims brought in non common law jurisdictions

Conduct Exclusions Relative to Illegal Profit and Fraudulent/Dishonest Acts Preferred format of “final adjudication in the underlying proceeding” Fully severable between natural person Ds and Os Only knowledge/conduct of CEO and CFO are imputed to the Company

D&O Coverage

D&O Insurance Market - Outlook for 2013D&O Market Conditions

D&O rates are firming with 53% of companies seeing primary rate increases in 2012. For the most part, excess carriers are following the same rate increases, but in some cases they are seeking more where excess rates are thin.

Overall capacity relatively stable, but fewer carriers willing to quote primary.

Quality of coverage is stable - most carriers are willing to renew with similar scope of coverage.

Carriers focused on exposure to M&A litigation – some seeking higher M&A retentions or restrictions on coverage.

In 2011, Chartis released a new form Investigation Edge that covers costs incurred by a company arising from government investigations related to securities (formal & informal); other carriers mulling competing solutions, but few clients have pursued this coverage given the high cost.

Q&A