Current D&O ExposuresA Case Study Analysis
Maxine Cupitt, Partner, CMS Cameron McKenna LLPNoona Barlow, Head of Commercial Lines Claims, Chartis Europe (UK)
Agenda• Overview of the D&O Landscape
• What Do Directors Fear?
• Whare are the claims coming from?
• Case Studies
SFO
FSA
The Company (i. v. i)
SOCA
• Questions
D&O European Landscape - 2011
- Chartis paid €700 million in Financial Lines Claims in Europe
- Received more than 5,000 D&O notifications
- D&O notifications continue to be 20% higher than 2009/2010
- Many European countries now have long and expensive regulatory investigations
- Many European countries now facing more indigenous claims
Top 5 sources of exposure 1. Regulatory & Criminal
2. Bankruptcy (far more in rest of Europe than in UK)
3. Company v. insured actions (i.v.i)
4. Co-defendant actions – 3rd parties against company, naming director/officer/employee as defendant
5. M&A actions – claims by minority shareholders alleging unfair treatment or valuation in sale, acquisition or merger
The Numbers- Top 20 claim payments (ever) made in relation to claims
brought against D&Os of European companies (Chartis as lead primary insurer):
-$580,000,000 losses assumed on 20 claims
-50% of total claim payments relate to claims brought outside US
-Non-securities related claims (private as well as public companies) represent 47% of top 20 payments
UK D&O Claims VolumesD&O
0
50
100
150
200
250
May-1
0
Jun-1
0
Jul-10
Aug-1
0
Sep-1
0
Oct-
10
Nov-1
0
Dec-1
0
Jan-1
1
Feb-1
1
Mar-
11
Apr-
11
May-1
1
Jun-1
1
Jul-11
Aug-1
1
Sep-1
1
Oct-
11
Nov-1
1
Dec-1
1
Jan-1
2
Feb-1
2
Mar-
12
Apr-
12
MONTH/YEAR
0
500
1,000
1,500
2,000
2,500
3,000
NEW OP EN Linear (OP EN) Linear (NEW)
What do directors fear?- 84% of directors believe that regulatory and other
investigations and enquiries pose the greatest significant risk of director/officer liability
- 64% believe criminal and regulatory fines and penalties pose the greatest significant risk to directors and officers
- 63.2% of directors believe that anti corruption legislation, (including the Bribery Act) pose the greatest significant risk to directors and officers
Allen & Overy/Willis 2011 Directors’ Liability Survey
UK / 72864633.1
Overview – Where the Claims Are Coming From
SFO
FSA
Bribery
US Shareholder Actions
I v I
UK / 72864633.1
Overview - SFO
- Large/high profile cases
- Often complex
Trial by jury
- Much at stake
Livelihood and liberty
- “Sheer incompetence”
“ Failing to see the wood for the trees.”
what this means for future
In any event costly to defend
UK / 72864633.1
Overview - FSA
Regulatory reformFCA → Financial Conduct Authority
“… credible deterrence is here to stay…. Where we do not see improvements from our actions, we will be willing to take tougher action – just as we have done in prosecuting insider dealing, in increasingly using our powers to prohibit individuals from the industry and in our continuing focus on senior management responsibility”. (Tracey McDermott, Acting Head of Enforcement February 2012)
Expect FCA to continue recent work on EnforcementDirectors to be investigated as matter of courseRegulatory transparency
publication of Warning NoticesPrimarily financial firms
but market abuse…
UK / 72864633.1
Overview – Bribery
Bribery
UK Bribery Act now in forcePulls together earlier legislation
FSA/FCA can act in absence of briberyFailure to have appropriate systems and controls
UK / 72864633.1
Overview – US Shareholder Actions
Continue to make up large number of D&O claimscostly and difficult to dispose of
English system less attractive environment for class actionsclaims often derivative
on behalf of companydamages to companyno contingency feescosts shifting
Nevertheless attempts continueand some European jurisdictions more favourable
UK / 72864633.1
Overview – Insured v Insured
Boards Change- as result of actions of old board- change in strategic direction
Scrutiny of old board actions
Directors owe duties to company- Company may feel obliged to seek redress
Former directors may be targets- when have moved on- or even retired
Case Studies – The SFO- Allegations of bribery and corruption to obtain contracts
- Bribes paid through consultants
- Investigation in the UK and in 5 other jurisdictions around the globe
- The DOJ became involved
- Also a US shareholder derivative class action filed
- Threat of investigations by local regulators in other jurisdictions
SFO – The Fallout- £6 million in defence costs paid
- Derivative action dismissed
- DOJ investigation not covered as no employees were the target of the investigation
- SFO dropped one investigation due to fears of national security
- Insured settled with DOJ/SFO
- No further developments with respect to potential foreign authority investigation
UK / 72864633.1
Case Studies – The SFO
5 Directors prosecuted by SFO- alleged improper recognition of provisional contracts as income- deliberate inflation of company’s value
Directors held different positions- Chairman to Sales Director
Matter went to trial- many years’ preparation- trial lasting 11 months- complex submissions- lay jury
Directors’ positions different - in some cases “cut throat”- 5 separate legal teams
- white collar crime lawyers- leading QCs- expert accountants/actuaries
Costs of £20 million funded by D&O policy - All 5 defendants acquitted
UK / 72864633.1
Case Studies – The FSA
Firm investigated in connection with fraud at director level
FSA also investigated Director A who perpetrated fraud Director B who failed to spot/stop
Director A prohibited from holding approved function
Director B private warning
part of compliance history disclosable to employers
Time intensive and costly to deal with lot at stake specialist regulatory lawyers
“Regulator transparency” if Warning Notice disclosed?
UK / 72864633.1
Case Studies – The Company (I v I)
Safeway v Twigger & OsCourt of Appeal 2010
Safeway submitted to multi-million fineby OFTfor price fixing
Safeway pursued former directors/employees for damagesamount of fine, interest, costs
Chairman to a quite junior staff junior employees
not managerial/supervisory rolesued as co-defendants
“Ex turpi causa” action does not arise from dishonourable causefine personal to Safewaycould not lay off
UK / 72864633.1
Case Studies – The Company (I v I) cont
Tried at first instance argument not accepted
Taken to Court of Appealwoncase defeated at early stage
Costly and stressful for individualsacting together single legal teambrought matters to early close
and saved limitfor fighting fund had this been needed
Case Study – SOCA/DOJ- Joint investigation driven by DOJ
- Insured self reported suspicious payments to customers
- DOJ requested interviews with employees who were either targets of the investigation or witnesses
- Wide-ranging investigation resulting in 6 indictments for violation for the FCPA and alleged improper payments in 30+ countries totalling almost $7 million
- Insured settled for $18.2 million and continued cooperation with DOJ
- Other directors also settled
SOCA/DOJ – the Fallout- Power of joint investigations/collaboration between regulators
- Claim notified August 2007 and closed (but not resolved) October 2011
- Payments to:More than 10 different law firmsBail BondsmenTranslators for non English speaking defendantsTravel costs for travel to various locations by defence counsel to interview
witnesses
- 2 directors extradited
- Chartis limits £15 million
- Primary layer exhausted
- Claim now in hands of the excess carrier
- Trial scheduled for June 2012
Lessons Learned
- Read your D&O policy
- Greatest value of D&O policy is funding defence costs to fight claims, regardless of how ill-conceived
- Remember personal impact – duration of claims, impact on family, impact on ability to ever work as director again
- Remember “Director B” – you can be guilty of doing nothing
- Pay attention to where the money is going
Questions ?
Do you have a question for Noona or Maxine?
Roving mics are now available in the auditorium
Alternatively, send a question via Twitter to @Chartis_UK_News #cg2012
or text us, on 075811 86529, including the title ‘claims’.
24
Chartis is a world leading property-casualty and general insurance organisation serving more than 70 million clients around the world. With one of the industry’s most extensive ranges of products and services, deep claims expertise and excellent financial strength, Chartis enables its commercial and personal insurance clients alike to manage risk with confidence. Within the UK, Chartis Europe Limited is one of the largest providers of general insurance. With offices throughout the country, we insure many of the UK’s top businesses, thousands of mid sized and smaller companies, as well as many public sector organisations and millions of individuals. For additional information please visit our website at www.chartisinsurance.com\uk.
Whilst every effort has been taken to ensure the accuracy of the information in these pages, we make no representation and/or warranty express or implied that the financial information and/or information is correct, complete or up to date. The financial information and/or information is subject to change at any time without notice. You should not take (or refrain from taking) any action in reliance on the financial information and or information and we will not be liable for any loss or damage of any kind (including, without limitation, damage for loss of business or loss of profits) arising directly or indirectly as a result of such action or any decision taken. Chartis Europe Limited is authorised and regulated by the Financial Services Authority. Registered in England: Company Number 1486260. Registered Address: The Chartis Building, 58 Fenchurch Street, London EC3M 4AB
Disclaimer
© Copyright Reserved 2011
CORPORATE GOVERNANCE“THE LEGAL LANDSCAPE”
2012
Nick WilliamsKennedys LLP
May 2012
Kennedys Law LLP
The Tchenguiz Case
Judicial review
SFO admits “Factual Errors”
Offers to return documents
“Sheer incompetence”
Kennedys Law LLP
SFO negotiating a £50m donation to charity from Vincent
Undercover agents in Annabels
What the _ _ _ _ was going on?
£100m lawsuit from Vincent
3 x annual budget
Kennedys Law LLP
National Crime Agency
Fully operational by December 2013
Will SFO be swallowed?
Kennedys Law LLP
Financial Services Bill 2012/13
• 22 May 2012
• All House of Commons Stages Completed
New structure to be in place by end of 2012
Kennedys Law LLP
3 Cornered System
• TWIN PEAKS REGULATION
• “Forward-looking, proactive, judgement based supervision.” - Hector Sants
- Many companies will have 2 regulators
Kennedys Law LLP
Financial Policy Committee - FPC
Prudential Regulation Authority - PRA
Financial Conduct Authority - FCA
Kennedys Law LLP
Financial Policy Committee
• Macro Prudential Regulation
• “Macro Prudential Measures”• (Tools set to be specified – in secondary legislation)
• See Government statement of 23rd March 2012
• Proposals for initial set of tools
• TASK IS TO IDENTIFY AND REMOVE SYSTEMIC RISKS TO UK’S FINANCIAL
SYSTEM
Kennedys Law LLP
Prudential Regulation Authority
• Micro-Prudential Regulation
Of systemically important firms
Banks, building societies, credit unions, insurers & investment firms
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• New power to publish the fact that it has issued a warning notice to a firm
• PRA will require remedial action before problems emerge
• More proactive steps, fewer disciplinary actions
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• But BOE & FSA joint papers say:-
• “….may well be fines for firms and individuals to ensure remedial actions..”
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Financial Conduct Authority
Business regulation of ALL firms
Prudential Regulation of “non-PRA” firms
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3 Main Aims
1. Protect Consumers
2. Protect UK Financial System
3. Promote Effective Competition
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New Powers
To block imminent product launches
To require firms to withdraw/amend misleading financial promotions
To publish start of enforcement proceedings
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Mass Detriment Reference
Financial Ombudsman Service – focuses on individual claims
FCA takes lead on widespread problems such as PPI misselling
Kennedys Law LLP
What is the test?
A regulated person may have regularly breached requirements
Consumers may suffer damage
If a consumer complained it is likely he would be successful
Kennedys Law LLP
“Super – Complaint”
• Who can make it?Designated consumer bodies
• When can they make it? If they consider a feature of the UK
financial services market is/appears to be significantly damaging to the interest of consumers
Kennedys Law LLP
What is the Result?
• FCA must respond to Reference/Super Complaint within
90 days• Possible responses: Plans to consult on issue Timetable for regulatory action Consumer Redress Scheme s.404 FS &
MA 2000 Explanation of steps they are taking Why they are not taking steps
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Martin Wheatley –Speech.. 4 May 2012
1. Firms must build business models where the fair treatment of customers is central.
2. Those in Executive Management will be expected to step up in their engagement with this side of the business and take it seriously.
3. FCA will follow the money to see what lies behind profitability.
4. Good profits – not profit at any cost.
5. Banks should be simply getting on with TCF not waiting for it to be pointed out.
Kennedys Law LLP
Hector Sants – Farewell Speech – 24 April 2012
3 KEYS TO EFFECTIVE GOVERNANCE
1. Board must set “the right tone from the top” and must ask “what if” questions.
2. Chair must construct a diverse board.
3. Board must see focussed, relevant MI, not get swamped with it.
Regulators and companies should be in a constant state of constructive tension rather
than working in partnership
Kennedys Law LLP
Costs
Investors sue Mark Zuckerberg and Morgan Stanley
What is the defence costs budget?
Facebook IPO
Kennedys Law LLP
• Why does the “costs spend” matter to Insured (and Broker) as well as to Insurers?
Kennedys Law LLP
Don’t spend all your cover on costs
D&O’s cannot afford to be left unprotected
High defence costs can hit future premiums
Kennedys Law LLP
The Challenges
If D&Os are in danger they want the best
Lawyers understand costs, clients do not
Costs are “impossible to predict” [say the lawyers..]
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The Dentist Syndrome
•So….. pre-plan your costs
•arrangements
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Alternative Fee Arrangements
• Valorem “We focus on the values which are important to you, not hours”….
•Fixed fee•Value billing•Capped fees
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• “Lawyers are the only people who price after the services have been
delivered.”
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• “I can find great lawyers but I cannot find great Project
Managers..”
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The Lessons
Pre-plan
Show the lawyer you care about costs
Ensure your case is project managed well
Require transparency and involvement on major resource decisions
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Which one is best value?
£20,000 40 hours advising Client (25 years of experience)
£280 per hour x 200 = £56,000
28 year old lawyer reviewing documents
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Days of depositions Insignificant witnesses Pointless motions Limitless eDiscovery The 20 million document database
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THE KEY
As a client demand control Always ask for options on deploying
resources Good lawyers narrow the tasks to those
which are relevant Bad lawyers pursue all possible
avenues, however costly Do not confuse “Rolls Royce” service
with overkill
Kennedys Law LLP
Questions ?
• Do you have a question for Nick?
• Roving mics are now available in the auditorium
• Alternatively, send a question via Twitter to @Chartis_UK_News #cg2012
• or text us, on 075811 86529, including the title ‘legal’.
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