Securities Mosaic® Blogwatch
July 31, 2015
This Week In Securities Litigation (Week ending July 31, 2015)
by Tom Gorman

The Government requested that the Supreme Court overturn U.S. v. Newman, the Second Circuit's decision on tipping and the personal benefit test. Previously, the Second Circuit had declined a request to either rehear the case or consider it en banc.

The SEC filed another settled FCPA action this week. It centered on payments made by a medical supply company to health care personnel employed by state owned enterprises in China. The Commission also filed and offering fraud case and a settled action involving an investment adviser who did not fully disclose compensation received in under agreements with a broker and two funds.

Supreme Court

Insider trading: The government filed a petition for certiorari in U.S. v. Newman, seeking to overturn the Second Circuit's controversial tipping decision. The petition argues that the Second Circuit panel decision conflicts with the Supreme Court's decision Dirks and the decision of the Ninth Circuit in Salman. U.S. v. Newman (S.Ct. Filed August 30, 2015).

SEC Enforcement - Filed and Settled Actions

Statistics: During this period the SEC filed 1 civil injunctive cases and 2 administrative actions, excluding 12j and tag-along proceedings.

Offering fraud: SEC v. Griffin (N.D.N.Y. Filed July 30, 2015) is an action which names as defendants James Griffin, John Wolle, 54Freedom Inc. and several related entities. Mr. Griffin is the founder and CEO of 54Freedom while Mr. Wolle is the CFO. Beginning in 2007, and continuing until at least 2014, the defendants are alleged to have engaged in a series of offering frauds, selling interest in 54Freedom with outlandish promises. About $8 million was raised, at least $1.2 million of which was misappropriated. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. Parallel criminal charges have been brought by the U.S. Attorney’s Office for the Northern District of New York.

Misrepresentations: SEC v. ABS Manager, LLC, Civil Action No. 13-cv-00319 (S.D. Cal.) is a previously filed action against ABS Manager, LLC and George Price. The complaint alleged that beginning in 2009, and continuing until early 2013, the defendants made material misrepresentations and omissions to investors regarding the risks associated with investing in three investment funds they managed. The defendants settled with the SEC and the Court entered final judgments of permanent injunctions based on Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4). In addition, the defendants were, jointly and severally, directed to pay $362,648.83 in disgorgement, prejudgment interest and, respectively, penalties of $725,000 and $150,000. See Lit. Rel. No. 23313 (July 30, 2015).

Unregistered brokers: In the Matter of David B. Hananich, Jr., Adm. Proc. File No. 3-16354 (July 28, 2015) is a previously filed action which named as Respondents Mr. Hananich, a cofounder and director of Diversified Energy Group, Inc.; Carmine DellaSala, also a co-founder of Diversified; Matthew Welch, a vice president of Diversified and a board member of St. Vincent, a firm investors were told was a charity; Richard Scurlock, III, the owner of RTAG, a state registered investment adviser; RTAG Inc.; Tax Advisory Group; Jose Carrio and Dennis Karasik, co-founders of Respondent Carrio, Karasik & Associates, LLP, a wealth management firm; and Michael Salovay, a one-time registered representative. From 2006 through 2008 investors were solicited to purchase interests in Diversified and offered stock at prices ranging from 20 cents to $1.55 per share. A PPM was used. The shares were unregistered. Subsequently, from 2009 through 2012 investors were solicited to purchase Diversified bonds which had a coupon rate of 8% to 10.25%. Some of the bonds included an option to acquire stock. There was no registration in effect for the bonds. About $16.5 million was raised. To effectuate the sales of Diversified interests, unregistered sales agents were used. Those agents were paid a commission of either 5% or 10%. The agents included Mr. Scurlock and RTAG and Messrs. Carrio and Karasik and CKA and Mr. Salovay. In soliciting investors misrepresentations regarding the financial performance of Diversified were made. Additional misrepresentations were made regarding the firm’s use of experts for advice. In addition, Messrs. Havanich, Dellasla and Welch touted their relationship with St. Vincent. The firm had no relationship to the well-known charity of St. Vincent de Paul, a voluntary Catholic organization. The Order alleges violations of Exchange Act Section 15(a). Messrs. Karasik, Carrio and their firm, Carrio, Karasik and Associates resolved the charges, each consenting to the entry of a cease and desist order based on Section 15(a). Each also agreed to be barred from the securities business and from participating in any penny stock offering. In addition, each settling Respondent agreed to pay disgorgement and to future proceedings which will determine the amount plus prejudgment interest if, ordered, and a penalty if appropriate.

Disclosure of fees: In the Matter of Dion Money Management, LLC, Adm. Proc. File No. 3-16702 (July 24, 2015). Dion Money Management is a registered investment adviser. Most clients used Broker A for custody. Beginning in 2002 the adviser entered into service agreements with an administrator to a Family of Funds B, a distributor for Family of Funds C and a Custodial Support Agreement with Broker A. With Family of Funds B the adviser had an arrangement under which it was paid a fee based on the amount of client assets invested in select funds in exchange for providing recordkeeping and administration services for those clients. After a number of modifications, in 2005 the adviser received a payment of 20 basis points up to certain limits. With Fund Family C the adviser entered into a similar arrangement, although the payment rate was 30 basis points. Under the arrangement with Broker A the adviser was compensated on a quarterly basis based on the percentage of client assets held in custody with the Broker that were invested in certain mutual funds on the brokers no-transaction–fee platform. Dion Money Management made certain disclosures regarding the arrangements listed above in its Form ADV which disclosed them but did not specifically state it could receive payments greater than 30 basis points as a result of the arrangement with Broker A. The Order alleges violations of Advisers Act Section 206(2) and 207. Dion Money Management resolved the charges. The firm will implement a series of undertakings which include amending the provisions of its current Form ADV and providing notice to clients of the Order and certifying compliance. The adviser also consented to the entry of a cease and desist order based on the Sections cited in the Order and to a censure. It will pay a civil money payment of $50,000. Disgorgement was not ordered.


In the Matter of Mead Johnson Nutrition Company, Adm. Proc. File No. 3-16704 (July 28, 2015). Mead Johnson is a global manufacturer and marketer of infant formula and child nutrition products. The firm has subsidiaries which operate in various parts of the world. Subsidiary Mead Johnson China operates in the PRC where the firm began doing business in the1990s. By 2013 the company had operations in 241 cities in China.

Part of Mead Johnson's marketing from 2008 through 2013 was through the medical sector which included health care facilities and health care professionals. The firm's China subsidiary used third-party distributors to market, sell and distribute products in the country. Mead Johnson China's sales personnel marketed through medical channels and health care facilities. Health care professionals at the facilities were encouraged to recommend the company products. Incentives to make that recommendation and collect certain information were provided in the form of cash payments and other things, contrary to company policy. The payments were made from the distributor allowance retained by the distributor but controlled by the firm. The firm failed to devise and maintain adequate systems of internal controls over the operations of its China subsidiary to ensure that the sales expenditures through its distributors were not used for unauthorized or improper purposes.

In 2011 the firm received information about possible violations of the FCPA which an investigation failed to uncover, although later the practices were halted. A second investigation, commenced in 2013, discovered the violations. The company cooperated with the SEC and undertook significant remedial measures. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). To resolve the matter the company consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, the company will pay disgorgement of $7,770,000, prejudgment interest and a civil monetary penalty of $3 million.


Data reporting: The regulator fined Goldman Sachs Execution & Clearing, L.P. $1.8 million for failing to accurately submit trade reports to the appropriate FINRA Trade Reporting Facility. Specifically, the firm failed to transmit all applicable order information for Order Audit Trail System or OATS in a complete and accurate manner for about seven years. The firm also furnished inaccurate data for a large number of order-related events for over eight years and did not have adequate supervisory systems.

Criminal cases

Insider trading: U.S. v. Braverman, No. 1:14-cr-00748 (S.D.N.Y.) is an action charging former Dimitry Braverman, formerly a clerk at Wilson Sonsini, with insider trading. The charges alleged that he traded on inside information misappropriated from the firm on at least four occasions. He pleaded guilty to one count of securities fraud and as sentenced to serve twenty-four months in prison. See also SEC v. Braverman, Civil Action No. 14 cv 7482 (S.D.N.Y.).


Unregistered broker: The Australian Securities and Investment Commission initiated a proceeding against Dr. Roger Munro and Mrs. Kathleen Munro who are alleged to have raised about $1.5 million from investors for trading without registering with the agency as required. Although investors have been told the trades are profitable, records suggest the contrary. Portions of the investor funds have been transferred to a brokerage account in the name of Mrs. Munro.

Expenses: The ASCI announced that beginning July 29, 2015 it will seek to recover the cost of investigations where there has been a successful prosecution or civil proceeding against a person. The action is being taken under a provision of the Australian Securities and Investments Commission Act of 2001.

Directors: The ASIC banned Trevor Seymour, formerly a director of financial services firm Provident Capital Limited, from managing a corporation and providing financial services for three years. The action is based on the filing of false and misleading reports and a false prospectus used for a debenture offering. Mr. Seymour is the third director of the firm to be penalized.

Unregistered securities: The regulator secured a judgment against Astra Resources PLC and its subsidiary, Astra Consolidated Nominees Pty Ltd, for selling securities without registering a prospectus. About $6.5 million was raised from 300 investors over a period of about one year beginning September 2011. Remedies will be considered in the future.

Hong Kong

Reporting: The Securities and Futures Commission fined Nomura International (Hong Kong) Limited $4.5 million for failing to report significant misconduct by a former trader in a timely fashion. Specifically, when the firm reported on June 11, 2013 that a trader had lost US$3.5 million and had been sent back to Japan, it also knew he had made false entries to cover the transactions and had launched an investigation into the matters, none of which was reported until later.

Disclosure: The SFC initiated a proceeding against AcrossAsia Ltd and its chairman, Albert Cheok and CEO, Vincent Ang, for failing to disclose material information as soon as practicable. The action arose from a related litigation in Indonesia involving the company where in fact the information was disclosed.

July 30, 2015
7th Circuit Opens Door to Data Breach Class Actions
by Natasha G. Kohne, Anthony T. Pierce, Michelle A. Reed, David S. Turetsky & William F. Mongan

On July 20, 2015, the U.S. Court of Appeals for the 7th Circuit issued an opinion that could dramatically change the class action landscape for companies that are victims of hackers. In Remijas v. Neiman Marcus Gp., the 7th Circuit reversed the district court, ruling that Neiman Marcus(NM) customers whose credit card information was compromised had standing to bring a class action suit against the retailer.

Sometime in 2013, hackers attacked NM and stole the credit card numbers of its customers. In mid-December 2013, NM learned that approximately 350,000 cards were exposed to malware and that 9,200 of those cards were discovered to have been used fraudulently. In 2014, the plaintiffs-on behalf of the 350,000 other customers whose data may have been hacked-brought a suit for negligence, breach of implied contract, unjust enrichment, unfair and deceptive business practices, invasion of privacy and violation of multiple state data breach laws.

Upon a motion from NM, the district court dismissed for lack of standing for failure to show "injury in fact."  The plaintiffs appealed, alleging (among other injuries) that their lost time and money resolving the fraudulent charges and protecting themselves against future identity theft, and their increased risk of future identity theft, amounted to concrete, particularized injuries.

The Remijas court agreed that these allegations were sufficient to confer standing. With regard to the potential for future harm, the court distinguished this type of data breach from the suspected privacy incursions in Clapper v. Amnesty Int'l USA, 133 S.Ct. 1138 (2013). Once a breach has occurred, plaintiffs are not required to "wait for the threatened harm to materialize in order to sue"-the breach itself amounts to a substantial risk of harm.

The 7th Circuit also found that a customer's mitigation efforts taken after a breach, such as subscribing to a credit monitoring service, qualified as a concrete injury sufficient to confer standing. It therefore reversed the district court’s dismissal and remanded.

In dicta, the opinion took a dim view of some of the plaintiffs' other asserted injuries. It declined to give weight to the argument that plaintiffs were harmed because they spent more on NM goods than they would have had they known that NM did not take the necessary precautions to secure their data. The court also refused to create a property right for plaintiffs' "private information," whereby they could be harmed even if they were automatically reimbursed and there was no risk of further use of the stolen information.

Although it was not a part of the district court's decision, the Remijas court also ruled against NM’s causation argument that the harm could have been caused by another retailer-such as Target-who was subject to similar data breaches in 2013. In such a situation, it is a company's burden to show that it is not the cause of the injury.

The 7th Circuit raised other questions for the district court to consider on remand, including the length of time that a potential victim is truly at risk of injury following a data breach. "The [Government Accountability Office] suggests at least one year, but more data may shed light on this question."  Questions of causation and damages will dominate as more data breach class actions move past the motion-to-dismiss stage.

The Remijas decision highlights the dynamic litigation landscape for companies after data breaches. Federal courts across the country disagree on what is sufficient harm to confer standing, but the 7th Circuit has now opened the door to viable data breach class actions premised on the fear of future harm from identity theft. Now, companies may have just as much to fear from the plaintiff lawyers as they do from the hackers themselves.

July 31, 2015
Chapter 11 Duration, Preplanned Cases, and Refiling Rates: An Empirical Analysis in the Post-BAPCPA Era
by Foteini Teloni

The Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"),[1] enacted in 2005, has been the subject of extensive commentary over the effects that the Act might have on the chapter 11 landscape and the debtor's reorganization chances.

In my article, "Chapter 11 Duration, Preplanned Cases, and Refiling Rates: An Empirical Analysis in the Post-BAPCPA Era," I use multivariate regression models to examine empirically and quantify, for the first time, BAPCPA's effect on three distinct aspects of the chapter 11 process: (a) the duration of traditional chapter 11 cases; (b) the use of preplanned bankruptcies, that is, prepackaged and prenegotiated cases;[2] and (c) debtor refiling rates. My study shows that BAPCPA fulfilled, on the one hand, a long-standing desire of having shorter business reorganization cases, but on the other increased the proportion of debtors that have to refile for bankruptcy soon after exiting their previous filing.

Indeed, BAPCPA reduced the length of chapter 11 cases by amending and enacting several provisions that had the effect of accelerating the chapter 11 reorganization process, and encouraging the use of the inherently quick preplanned cases. As Table 1 below indicates, the average duration of reorganization cases dropped from 480 days to 261 days in the post-2005 era. Further, the proportion of companies undergoing preplanned bankruptcies rose to 58%, that is, 23 percentage points up from the corresponding pre-BAPCPA proportion.

Table 1: Chapter 11 Duration and Prepackaged and Prenegotiated Cases Before and After BAPCPA
Two-tail t-test comparing the mean in duration (measured in days), as well as the proportion of prepackaged and prenegotiated cases before and after the enactment of BAPCPA. The upper cell is split in order to reflect the figures corresponding to the BAPCPA and post-BAPCPA period respectively.
Chapter 11 Duration Prepackaged & Prenegotiated Bankruptcies
Mean/Proportion 480 261 35% 58%
P-value 1.38773E-06 5.08609E-05

Statistically significant at the 1% level

Multivariate regression models controlling for various factors, including the companies' pre-filing profitability, liquidity, and leverage confirmed that BAPCPA is correlated at a statistically significant level with shorter chapter 11 duration and more preplanned bankruptcies. Indeed, as Table 2 indicates, BAPCPA was correlated with a decrease in time within reorganization at the statistically significant level of 1%. Similarly, BAPCPA was correlated at the statistically significant level of 1% with the increased use of prepackaged and prenegotiated bankruptcies.

Table 2: BAPCPA's Effect on Duration and Prepackaged & Prenegotiated Bankruptcies
This table displays BAPCPA' s effect on chapter 11 duration and prepackaged and prenegotiated cases after controlling for various factors, including the companies' pre-filing profitability, liquidity, and leverage.
Chapter 11 Duration Prepackaged & Prenegotiated Bankruptcies
Coefficient -180.299 0.9
P-value <10-8 0.04%

Statistically significant at the 1% level.

Naturally, speedy reorganization cases are advantageous in various respects. The debtor is able to return to normal operations much faster, thereby avoiding the reputational harm that a protracted stay in chapter 11 might entail. More importantly, the shorter the chapter 11 case is, the less are the costs associated with it, leaving more value available for distribution to the creditors.

The downside, however, is that reorganization cases that are too quick do not allow the debtor to effectuate a thorough restructuring. Instead, the debtor has merely enough time to effectuate a deleveraging of its balance sheet, without addressing core operational and structural problems that would allow it to exit bankruptcy as a truly rehabilitated and healthy company.

Therefore, what we observe in the post-2005 era is companies that exit bankruptcy only to refile some time later. Indeed, as Table 3 below indicates, 48% of the companies of the sample tested refiled for bankruptcy within five years of their emergence in the post-2005 era, while the corresponding proportion for the pre-2005 period was 18%.

Table 3: Two-Tail T-test Comparing Refiling Rates Before and After BAPCPA
Two-tail t-test comparing the proportions in refiling rates before and after the enactment of BAPCPA. A company is considered to have refilled, if it filed for bankruptcy within five years since its emergence.
Proportion 18% 48%
P-value 0.0004

Statistically significant at the 1% level

In order to examine more rigorously BAPCPA's effect on recidivism, a multivariate regression model controlling for a number of factors, including the companies' post-emergence profitability and leverage, was employed. As Table 4 below indicates, BAPCPA was correlated at a statistically significant level with an increase in refiling rates.

Table 4: BAPCPA's Effect on Refiling Rates
This table displays BAPCPA’ s effect on refiling rates after controlling for various factors, including the companies' post-emergence profitability, and leverage. A debtor is considered to have refilled, if it filed for bankruptcy within five years since its emergence.
Coefficient 3.473
P-value <10-8

Statistically significant at the 1% level.

As mentioned above, this finding suggests that the post-2005 debtor emerges from its chapter 11 proceeding hastily, effectuating only a "financial" restructuring, and a not core operational and structural one. As a result, the debtor is susceptible to another bankruptcy filing in the near future. And if one measure for successful bankruptcies is refiling rates, then BAPCPA seems to have failed in this respect.


[1] Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23 (2005).

[2] Prepackaged and prenegotiated cases entail pre-filing negotiations between the debtor and its creditors, and thus are concluded faster than a traditional reorganization case in which negotiations start after the filing of the chapter 11 petition.

This post comes to us from Foteini Teloni. It is based on the article "Chapter 11 Duration, Preplanned Cases, and Refiling Rates: An Empirical Analysis in the Post-BAPCPA Era", which she wrote while an Adjunct Professor and Doctoral Fellow at Fordham University School of Law and is forthcoming in the American Bankruptcy Institute Law Review. Ms. Teloni is currently a practicing attorney.

July 31, 2015
Where Women Are On Board: Perspectives from Gender Diverse Boardrooms
by Diane Lerner and Christine Oberholzer Skizas
Editor's Note:

Diane Lerner is a Managing Partner and Christine Oberholzer Skizas is a Partner at Pay Governance LLC. This post is based on a Pay Governance memorandum.

Interest in, and momentum toward, greater diversity in the boardrooms of U.S. publicly traded companies is increasing. We believe this is due to a combination of international developments, workplace trends and investor sentiment.

Although all aspects of diversity are meaningful topics, this post is solely focused on gender diversity. Currently, females represent approximately 15% of outside board member seats in the S&P 1500 and about 18% of the S&P 500 seats. This equates to a median of 1-2 female board members in a group of 9-11 board members.

While the overall statistics for U.S. companies are regularly reported, relatively little has been written about those U.S. public company boards that have moved farther down the path of gender diversity. For the purpose of our review, we define "gender diverse" at 30% female directors or more, using a standard typical in countries who have enacted legislation. Assuming more companies will want to reach a 30%+ level of gender diversity over the next decade, we wanted to study companies that have already achieved this level. We wanted to identify any specific similar characteristics that can be found at these companies and to learn more through selected interviews about the paths to a gender diverse board.

Context for Change

  • There have been several studies released in the past few years indicating better performance at companies with gender diverse boards
  • The topic of board gender diversity (and overall diversity) is increasingly part of proxy advisor and institutional investor guidelines
  • Germany made headlines as the latest country to mandate 30% female representation on large corporate boards
  • Most articles on this topic mention the U.S. is seen to be lagging Europe 
A Snapshot on the International Trends

Many countries have enacted legislation to increase the percentage of female board members. Norway did so first in 2003, requiring 40% female board members by 2008, and they have achieved that goal. Other countries have followed suit in passing legislation mandating gender diversity on public company boards, including Belgium, Finland, France, India, Italy, the Netherlands, Spain, the and Belgium. Earlier this year, Germany passed a law requiring 30% of board seats to be filled by women by 2016. In most countries, the "target" or "quota" was set somewhere between 30% and 40%.

"Gender Diverse" Boards in the S&P 500

For this study, we define "gender diverse" as having 30% or more female outside (non-officer) directors. If we use the S&P 500 as our sample, 27 of the S&P 500 companies (5.4%) are gender diverse. We originally identified these companies using 2013 proxy information, and then updated our diversity calculations for these same companies using the most currently reported information.

Of those with gender diverse boards, the range for numbers of directors is 3 to 7 female directors, with a median of 4. In terms of percentages, these boards have a range of 33% to 64% female, with a median of 38%.

Gender diverse boards span a wide range of sectors, with financial services having the highest representation:

Industry # of Companies
Financial Services 6
Consumer Products/Food & Beverage 3
Beauty/Fragrances 3
Apparel/Retail 3
Technology 2
Other 10

Within the "Other" group, there are some unexpected sectors represented, including Aerospace/Defense and Mining.

While we did not see any pattern in terms of sector or geographic location, we did find that the companies with gender diverse boards have a higher prevalence of female CEOs. Although most companies (20) have male CEOs, 7 of the 27 companies (26%) have female CEOs (2), versus 4.6% overall for the S&P 500. Upon further review of those 7 companies, board gender diversity generally increased after the female CEO was appointed. That change suggests the appointment of a female CEO had a positive change on future board diversity. It is also possible that a positive experience with a female CEO (and willingness to/interest in hiring a female CEO) is indicative of a board that is more focused on gender diversity.

Themes from Gender Diverse Boardrooms

We conducted interviews with members of gender diverse boards to understand better the path to greater board member diversity and the impact it has had on the board and the company. We spoke with a number of directors, including: Cathy Halligan, Chairman of the Compensation Committee of ULTA Beauty (44% female), Fred Hubbell, Lead Director of VOYA Financial (43% female), Ann Korologos, Lead Director of Harman International (33% female) and Chairman of the Compensation Policy Committee of Host Hotels and Resorts (38% female), and Liz Tallett, Lead Director of Principal Financial (33% female). Here are some of the key themes from those interviews:

  1. These companies had board gender diversity as a top near-term priority. Frequently, given the typical corporate demographics, a male CEO or male leadership team first determines that having more women on the board is critically important. The gender diverse companies proactively executed on a priority that the board should reflect the customer, employee and shareholder base-the constituents the board represents. 
  1. There are necessary steps in the path to successful board diversity
    1. Gender diverse boards value a broad range of experience beyond CEO experience. A criterion for many traditional director searches is CEO experience. Given that only about 5% of U.S. public companies have a female CEO, if a board wants primarily current and retired CEOs on the board, the likely case is that the board will be primarily male. The gender diverse boards involve CEO experience but also value expertise in specific areas including finance, legal, customer segmentation, technology and human capital experience.
    2. Presenting very diverse slates to the Board is important in finding qualified candidates. A number of the Boards represented in our interviews used external recruiters. In communicating with their recruiters, they insisted on seeing many qualified female candidates on the slate, not just a choice of one. Once a truly diverse slate is presented, these boards did not find it difficult to find qualified candidates

      "Some organizations may want to "tick the box"...we made it clear we wanted half of the candidates on the slate to be women"

      "A good recruiter will provide critical support to the candidate spec, making sure that the desired candidate is a good fit for the board, including filling talent/experience gaps and addressing diversity...if female candidates are not presented, rethink your choice of recruiter"

    3. Success on female diversity breeds success. If the first female board member is well qualified and a good fit with the Board, this better enables increasing gender diversity in the future. Our interviewees indicated their female board members were selected based on qualifications and were "the best qualified candidates", and were not selected to meet any diversity targets.
    4. Boards must be willing to give first timers a chance. Previous board experience is a common criteria for both men and women, making it hard to get the first board assignment. However, given the paucity of female board members in the U.S., if more companies want to achieve gender diversity, they will need to give a woman her first board spot since there is an insufficient pool of experienced female board members.
  1. Gender diversity on the board has proven to be valuable.
    1. There is a customer imperative for gender diversity. Women make the decisions for many household purchases, including financial investment decisions (which may be why financial services had the largest number of gender diverse boards in the S&P 500). While not every consumer necessarily looks at board composition in making a decision, for a board to provide effective leadership and counsel it should be able to understand and represent the customer.

      "We looked where the money was...two-thirds of our customers and employees are women and we wanted the board to reflect the customer and employee base"

    2. Having gender diversity improves the quality of boardroom dialogue and decision making. There was consensus that diversity made the quality of the conversation better, more professional and more effective.

      "Women are good at asking questions and can be inclusive-both of which lead to more thoughtful, quality conversations"

      "Women are more about engagement than process. While process is necessary, engagement is the real goal"

  1. Legislation is not the solution to enhancing board gender diversity.
    1. Voluntary change or shareholder pressure to enact change would be more effective in the U.S. than specific, generic one-size fits all legislation to increase gender diversity at the board level. U.S. business has generally not been in favor of legislating change, and the area of board diversity is no different. Our interviewees told us that the better path was for companies to voluntarily diversify their boards or for shareholders to put pressure on them to do so. Pay Governance research indicates that shareholder proposals related to board gender diversity policies have been gaining ground receiving, on average, 30% shareholder support, suggesting shareholder pressure on this topic will continue to increase.

      "It is very legitimate for shareholders to think about whether performance is benefitted by more gender diversity and communicate to companies if they want to see changes made"

    2. Ultimately, shareholders decide where to put their money and their votes. Research has shown that gender diversity is related to company performance, which may drive shareholders to push for more diversity. There have been a number of quantitative studies on the relationship between gender diversity and its financial imperatives.

In a research article written by Corrine Post and Kris Byron in late 2014, they "found that female board representation is positively related to profitability and market performance in countries with stringent shareholder protections," including the United States.

A recent Thomson Reuters study shows companies with greater board gender diversity have lower volatility in stock price-and have similar or better gains in stock price across more than 4,000 companies traded globally.


Board gender diversity is likely to increase given international trends and shareholder interest. As companies look to fill director vacancies, we expect an increasing number of qualified female candidates will be presented, which will result in an increase in the percentage of female directors on public company boards. However, our interviews suggest that gender diversity does not happen on its own: it will require a reconsideration of experience requirements and the recruiting process.

July 31, 2015
Advancement Claim Addressed in Receivership Context
by Francis Pileggi

The Chancery opinion in Andrikopoulos v. Silicon Valley Innovation Company, LLC, C.A. No. 9899-VCP (Del. Ch. July 30, 2015), addressed the priority of an advancement claim in the context of a receivership under Delaware law. Bottom line: The court ruled, on this issue of first impression, that the claims for advancement in this case are not entitled to administrative priority, and should be treated as pre-petition, unsecured claims without administrative priority.

The odd procedural context of this case is not likely to be replicated often for the average practitioner of corporate or commercial litigation, but the court does refer to some of the well-known and frequently applied Delaware principles and policy of advancement. I suggest that this opinion may be most useful to those dealing with the priority of claims generally in receiverships under Delaware law, as well as bankruptcy lawyers to the extent the court refers to bankruptcy by analogy to a receivership, and cites to many decisions of bankruptcy courts that have dealt with advancement under Delaware law (though the decision refers to some courts that conflate the concepts of advancement and indemnification-which is not uncommon among some courts and lawyers alike.)

July 31, 2015
The Future of Securities Class Action Litigation
by Douglas W. Greene

Securities litigation has a culture defined by multiple elements: the types of cases filed, the plaintiffs' lawyers who file them, the defense counsel who defend them, the characteristics of the insurance that covers them, the way insurance representatives approach coverage, the government's investigative policies - and, of course, the attitude of public companies and their directors and officers toward disclosure and governance.

This culture has been largely stable over the nearly 20 years I've defended securities litigation matters full time. The array of private securities litigation matters (in the way I define securities litigation) remains the same – in order of virulence: securities class actions, shareholder derivative litigation matters (derivative actions, board demands, and books-and-records inspections), and shareholder challenges to mergers. The world of disclosure-related SEC enforcement and internal corporate investigations is basically unchanged as well. And the art of managing a disclosure crisis, involving the convergence of shareholder litigation, SEC enforcement, and an internal investigation, involves the same basic skills and instincts.

But I've noted significant changes to other characteristics of securities-litigation culture recently, which portend a paradigm shift. Over the past few years, smaller plaintiffs' firms have initiated more securities class actions on behalf of individual, retail investors, largely against smaller companies that have suffered what I call "lawsuit blueprint" problems such as auditor resignations and short-seller reports. This trend – which has now become ingrained into the securities-litigation culture – will significantly influence the way securities cases are defended and by whom, and change the way that D&O insurance coverage and claims need to be handled.

Changes in the Plaintiffs' Bar

Discussion of the history of securities plaintiffs' counsel usually focuses on the impact of the departures of former giants Bill Lerach and Mel Weiss. But although the two of them did indeed cut a wide swath, the plaintiffs' bar survived their departures just fine. Lerach's former firm is thriving, and there are strong leaders there and at other prominent plaintiffs' firms.

The more fundamental shifts in the plaintiffs' bar concern changes to filing trends. Securities class action filings are down significantly over the past several years, but as I have written, I'm confident they will remain the mainstay of securities litigation, and won't be replaced by merger cases or derivative actions. There is a large group of plaintiffs' lawyers who specialize in securities class actions, and there are plenty of stock drops that give them good opportunities to file cases. Securities class action filings tend to come in waves, both in the number of cases and type. Filings have been down over the last several years for multiple reasons, including the lack of plaintiff-firm resources to file new cases as they continue to litigate stubborn and labor-intensive credit-crisis cases, the rising stock market, and the lack of significant financial-statement restatements.

While I don't think the downturn in filings is, in and of itself, very meaningful, it has created the opportunity for smaller plaintiffs' firms to file more securities class actions. As D&O Discourse readers know, the Reform Act's lead plaintiff process incentivized plaintiffs' firms to recruit institutional investors to serve as plaintiffs. For the most part, institutional investors, whether smaller unions or large funds, have retained the more prominent plaintiffs' firms, and smaller plaintiffs' firms have been left with individual investor clients who usually can't beat out institutions for the lead-plaintiff role. At the same time, securities class action economics tightened in all but the largest cases. Dismissal rates under the Reform Act are pretty high, and defeating a motion to dismiss often requires significant investigative costs and intensive legal work. And the median settlement amount of cases that survive dismissal motions is fairly low. These dynamics placed a premium on experience, efficiency, and scale. Larger firms filed the lion's share of the cases, and smaller plaintiffs' firms were unable to compete effectively for the lead plaintiff role, or make much money on their litigation investments.

This started to change with the wave of cases against Chinese issuers in 2010. Smaller plaintiffs' firms initiated the lion's share of them, as the larger firms were swamped with credit-crisis cases and likely were deterred by the relatively small damages, potentially high discovery costs, and uncertain insurance and company financial resources. Moreover, these cases fit smaller firms' capabilities well; nearly all of the cases had "lawsuit blueprints" such as auditor resignations and/or short-seller reports, thereby reducing the smaller firms' investigative costs and increasing their likelihood of surviving a motion to dismiss. The dismissal rate has indeed been low, and limited insurance and company resources have prompted early settlements in amounts that, while on the low side, appear to have yielded good outcomes for the smaller plaintiffs' firms.

The smaller plaintiffs' firms thus built up a head of steam that has kept them going, even after the wave of China cases subsided. For the last year or two, following almost every "lawsuit blueprint" announcement, a smaller firm has launched an "investigation" of the company, and they have initiated an increasing number of cases. Like the China cases, these cases tend to be against smaller companies. Thus, smaller plaintiffs' firms have discovered a class of cases – cases against smaller companies that have suffered well-publicized problems that reduce the plaintiffs' firms' investigative costs – for which they can win the lead plaintiff role and that they can prosecute at a sufficient profit margin.

To be sure, the larger firms still mostly can and will beat out the smaller firms for the cases they want. But it increasingly seems clear that the larger firms don't want to take the lead in initiating many of the cases against smaller companies, and are content to focus on larger cases on behalf of their institutional investor clients.

These dynamics are confirmed by recent securities litigation filing statistics. Cornerstone Research's "Securities Class Action Filings: 2014 Year in Review," concludes that (1) aggregate market capitalization loss of sued companies was at its lowest level since 1997, and (2) the percentage of S&P 500 companies sued in securities class actions "was the lowest on record." Cornerstone's "Securities Class Action Filings: 2015 Midyear Assessment" reports that two key measures of the size of cases filed in the first half of 2015 were 43% and 65% lower than the 1997-2014 semiannual historical averages. NERA Economic Consulting’s "Recent Trends in Securities Class Action Litigation: 2014 Full-Year Review" reports that 2013 and 2014 "aggregate investor losses" were far lower than in any of the prior eight years. And PricewaterhouseCoopers' "Coming into Focus: 2014 Securities Litigation Study" reflects that in 2013 and 2014, two-thirds of securities class actions were against small-cap companies (market capitalization less than $2 billion), and one-quarter were against micro-cap companies (market capitalization less than $300 million).* These numbers confirm the trend toward filing smaller cases against smaller companies, so that now, most securities class actions are relatively small cases.

Consequences for Securities Litigation Defense

Securities litigation defense must adjust to this change. Smaller securities class actions are still important and labor-intensive matters – a "small" securities class action is still a big deal for a small company and the individuals accused of fraud, and the number of hours of legal work to defend a small case is still significant. This is especially so for the "lawsuit blueprint" cases, which typically involve a difficult set of facts.

Yet most securities defense practices are in firms with high billing rates and high associate-to-partner ratios, which make it uneconomical for them to defend smaller litigation matters. It obviously makes no sense for a firm to charge $6 million to defend a case that can settle for $6 million. It is even worse for that same firm to attempt to defend the case for $3 million instead of $6 million by cutting corners – whether by under-staffing, over-delegation to junior lawyers, or avoiding important tasks. It is worse still for a firm to charge $2 million through the motion to dismiss briefing and then, if they lose, to settle for more than $6 million just because they can't defend the case economically past that point. And it is a strategic and ethical minefield for a firm to charge $6 million and then settle for a larger amount than necessary so that the fees appear to be in line with the size of the case.

Nor is the answer to hire general commercial litigators at lower rates. Securities class actions are specialized matters that demand expertise, consisting not just of knowledge of the law, but of relationships with plaintiffs’ counsel, defense counsel, economists, mediators, and D&O brokers and insurers.

Rather, what is necessary is genuine reform of the economics of securities litigation defense through the creation of a class of experienced securities litigators who charge lower rates and exhibit tighter economic control. Undoubtedly, that will be difficult to achieve for most securities defense lawyers, who practice at firms with supercharged economics. The lawyers who wish to remain securities litigation specialists will thus face a choice:

  1. Accept that the volume of their case load will be reduced, as they forego smaller matters and focus on the largest matters (which Biglaw firms are uniquely situated to handle well, on the whole);
  2. Reign in the economics of their practices, by lowering billing rates of all lawyers on securities litigation matters, and by reducing staffing and associate-to-partner ratios; and/or
  3. Move their practices to smaller, regional defense firms that naturally have more reasonable economics.

I've taken the third path, and I hope that a number of other securities litigation defense lawyers will also make that shift toward regional defense firms. A regional practice can handle cases around the country, because litigation matters can be effectively and efficiently handled by a firm based outside of the forum city. And they can be handled especially efficiently by regional firms outside of larger cities, which can offer a better quality of life for their associates, and a more reasonable economic model for their clients.

Consequences for D&O Insurance

D&O insurance needs to change as well. For public companies, D&O insurance is indemnity insurance, and the insurer doesn't have the duty or right to defend the litigation. Thus, the insured selects counsel and the insurer has a right to consent to the insured's selection, but such consent can't be unreasonably withheld. D&O insurers are in a bad spot in a great many cases. Since most experienced securities defense lawyers are from expensive firms, most insureds select an expensive firm. But in many cases, that spells a highly uneconomical or prejudicial result, through higher than necessary defense costs and/or an early settlement that doesn’t reflect the merits, but which is necessary to avoid using most or all of the policy limits on defense costs.

Given the economics, it certainly seems reasonable for an insurer to at least require an insured to look at less expensive (but just as experienced) defense counsel before consenting to their choice of counsel - if not outright withholding consent to a choice that does not make economic sense for a particular case. If that isn't practical from an insurance law or commercial standpoint, insurers may well need to look at enhancing their contractual right to refuse consent, or even to offer a set of experienced but lower-cost securities defense practices in exchange for a lower premium. It is my strong belief that a great many public company CFOs would choose a lower D&O insurance premium over an unfettered right to choose their own defense lawyers.

Since I'm not a D&O insurance lawyer, I obviously can't say what is right for D&O insurers from a commercial or legal perspective. But it seems obvious to me that the economics of securities litigation must change, both in terms of defense costs and defense-counsel selection, to avoid increasingly irrational economic results.


* Median settlement values are falling as well. In 2014, the median settlement was just $6.5 million according to NERA and $6.0 million according to Cornerstone. NERA found that "[o]n an inflation-adjusted basis, 2014 median settlement was the third-lowest since the passage of the PSLRA: only in 1996 and in 2001 were median settlement amounts lower on an inflation-adjusted basis." Cornerstone reports that 62% of settlements in 2014 were $10 million or less, compared to an average of 53% over 2005-13. Since settlements in 2014 were of cases filed in earlier years, when the size of cases was larger, it stands to reason that median settlements should remain small or decrease further in future years.

July 31, 2015
'34 Act Reports: Benchmarking Law Firm Bills
by Broc Romanek

I probably haven't been touting our numerous checklists - over 300 of them now - sufficiently. For example, this one on "'34 Act Reports - Benchmarking Law Firm Bills" provides practical guidance – for those in-house – about benchmarking your '34 Act bills and how to best create a RFP for '34 Act work...

SCOTUS: Poised to Address Insider Trading Standard

Yesterday, as noted in this Orrick memo, the Solicitor General filed a petition for a writ of certiorari in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), asking the United States Supreme Court to address the standard for insider trading in a tipper-tippee scenario. Specifically, the Solicitor General argues that the Second Circuit's Newman decision is in conflict with the Supreme Court's 1983 decision in Dirks v. SEC, 463 U.S. 646 (1983), and the Ninth Circuit's recent decision in United States v. Salman, No. 14-10204 (9th Cir. July 6, 2015). Because the Supreme Court grants certiorari in nearly three out of four cases filed by the Solicitor General, the likelihood of a cert grant in Newman is particularly high...

Europe: Shareholder Rights Directive II Moves Ahead

A few weeks ago, as noted in this article, the European Parliament passed the Shareholder Rights Directive – and it will now be considered by member states before a final vote. Some provisions were watered down – but new ones were added. Among others, the topics include say-on-pay (non-binding every 3 years, instead of binding originally proposed); investor disclosure (disclose how investments align with long-term interests and how engagement policies are implemented, but only on a comply-or-explain basis); and proxy advisors (adopt code of conduct & describe changes annually). The prior Shareholder Rights Directive in Europe was enacted in ’09...

– Broc Romanek

July 31, 2015
The Continuing Problem of the Lack of Impartiality with Respect to the Disclosure of Preliminary Voting Tallies (Part 2)
by J Robert Brown Jr.

We are discussing the remarks made by Mike Garland, the Assistant Comptroller for Corporate Governance and Responsible Investment at New York City Office of the Comptroller, on his experience obtaining preliminary voting results during the prior proxy season.  His remarks have been webcast, can be found here, and the relevant remarks start at 2:17.  The quotes were taken from the audio so may not be precisely accurate.  

During the prior proxy season, his Office engaged in a number of exempt solicitations in support of shareholder proposals seeking proxy access.  In his remarks, he addressed his experience in obtaining preliminary voting results.  How important is this information?  Very.  See 2:45 (describing the information as "among the most important.  That's what really helps to inform strategic decisions and resource allocations.").  How successful was he in obtaining this important information?  Not very.   

Requests for preliminary results were made at 18 companies (or, as he put it, "what we [actually] requested was their agreement to permit Broadridge to provide us with preliminary tallies").  Of that number:  "Eight companies failed to acknowledge even our request which was sent by email.  Three companies had the courtesy to respond and declined the request.  Seven companies agreed in some cases fairly readily." 

So 60% of the companies either ignored the request or said no.

With respect to the seven companies that agreed to allow Broadridge to provide the preliminary voting information, the actual results were no better.  As Garland stated:  

  • But not withstanding their willingness to execute the Broadridge confidentiality agreement, Broadridge refused to provide the tallies because we did not pay Broadridge to distribute our materials to shareowners.  At that point we realized we had that problem we stopped making additional requests from companies because it became a moot point.    

Some of the companies did provide the information directly but that left the companies in the position of acting as gatekeeper with respect bot to timing and content.  Id. ("But I will say that some of these companies that did agree ended up sending us the tallies which we appreciate but it not a substitute for receiving them from Broadridge without the company having the right to play the role of gatekeeper.").  

Later in the Q&A period, Garland was asked (by me) about the self-help efforts whereby CII, Corporate Secretaries and others sought to iron out a three party confidentiality agreement governing the release of preliminary results to shareholders (the discussion is at 2:44 on the video).  The talks, however, had broken down.    

Garland indicated that he had been a participant in the discussion.  He stated that the "process is not a substitute for SEC action.  Were it to make more headway, which it has failed to do, it would  potentially be a stopgap incomplete solution but it will never provide I think an acceptable solution."  Instead, the he did not "think his problem will be fixed absent action by the Commission."  

Why?  First, there was the problem of Broadridge's refusal to provide the data even when companies agreed to disclosure.   

  • The good faith efforts with CII and the society of corporate secretary's.  What that was moving toward and came close to was a regime whereby if the company agreed and both parties with Broadridge all collectively executed a confidentiality agreement that Broadridge would then provide the preliminary information directly to the shareholder.  And as I mentioned previously it turns out A. Broadridge won't do that unless you actually distribute your materials through Broadridge so companies can pay them to distribute materials and they get the benefit of the preliminary tallies rules as a courtesy.  There's no requirement as you know. 

Second, the approach, even if it worked, puts the company in control of the disclosure process.  They could always decline.  

  • The problem even if it worked better it assumes that the information is the company's.  It puts the company in the position of being a gatekeeper; some companies will agree; some won't.  I don't think it's our position that the voting information, the preliminary voting information, belongs to the company.  I'm not a lawyer but my understanding is that's an unsettled legal question. 

So where does this leave things?  As the IAC recommendation requested, the Commission needs to step into this space and ensure that preliminary voting information is disclosed not in a manner that favors one side over the other in an exempt solicitation but on an impartial basis.

7/31/2015 posts

SEC Actions Blog: This Week In Securities Litigation (Week ending July 31, 2015)
AG Deal Diary: 7th Circuit Opens Door to Data Breach Class Actions
CLS Blue Sky Blog: Chapter 11 Duration, Preplanned Cases, and Refiling Rates: An Empirical Analysis in the Post-BAPCPA Era
HLS Forum on Corporate Governance and Financial Regulation: Where Women Are On Board: Perspectives from Gender Diverse Boardrooms
Delaware Corporate and Commercial Litigation Blog: Advancement Claim Addressed in Receivership Context
D&O Discourse: The Future of Securities Class Action Litigation Blog: '34 Act Reports: Benchmarking Law Firm Bills
Race to the Bottom: The Continuing Problem of the Lack of Impartiality with Respect to the Disclosure of Preliminary Voting Tallies (Part 2)

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