Lawyers Warn D&O Insurers Of More LegalThreats
Plaintiffs representatives sayinsurers, accountants being targeted, but no bounty on WorldComchief

New York

A renowned plaintiffs lawyer issued a warning of more lawsuitsat a directors and officers insurance conference recently,indicating that some will target the insurance industry as more ofits misdeeds come to light.

The tone of the remarks by William Lerach, a partner with LerachCoughlin Stoia Geller Rudman & Robbins in San Diego, were suchthat when he told insurers, “See you next year,” the remark seemedmore like a promise of courtroom confrontation than a predictionhe'd remain on the conference guest list.

Mr. Lerach, whose firm represents plaintiffs in manyhigh-profile securities class actions, including one against Enron,made the comment after describing a Barrons article thathad recently gotten his attention a Jan. 31 cover story aboutfinite insurance and reinsurance transactions.

“The insurance industry is racked with dishonesty andprice-fixing,” Mr. Lerach told more than 1,300 insuranceunderwriters, brokers and litigators in attendance during a paneldiscussion on securities litigation trends on which he istraditionally a participant.

Mr. Lerach was in the midst of describing the last of fivetrends he foresees in the securities litigation arena a trend ofcontinuing executive misconduct, greed and class actions to befiled against such bad actors. “It's not going away. It'scontinuing,” he said.

“I find it absolutely amazing that in the last four months, acover of Business Week titled Fuzzy Numbers outlinedcurrent [pension] accounting schemes that are going on and thenthere was last week's Barrons cover on the bubble about toburst on the dishonest accounting by the insurance industry.”Giving his summary of the Barronis article about finiteinsurance and reinsurance deals, “Letting The Air Out: How InsurersAre Pumping Up Earnings And Why The Practice May End,” Mr. Lerachsaid, “Apparently, when Wall Street banks decided to get out offixing corporate earnings, they [insurers] stepped in and filledthat void.”

“So see you next year,” he said, not so subtly suggesting thatthe arcane world of finite reinsurance and loss mitigationinsurance were not beyond his grasp to explore for class actionlawsuits.

During the first session of the Professional LiabilityUnderwriting Society D&O Symposium, he and Max Berger, apartner with another active plaintiffs firm Bernstein LitowitzBerger & Grossmann in New York also confirmed that lawyers arebeing paid extra to get settlement contributions from certainhigh-profile individual defendants that have participated infinancial frauds. Mr. Berger went on to predict the demise of a BigFour accounting firm by next year, and Mr. Lerach said that Marsh& McLennan will face individual lawsuits from institutionalinvestors in addition to class actions already filed.

The last prediction lined up with an overall prediction thatthere would be a rise in individual actions filed by institutionalinvestors generally, as companion suits to large class-actioncases.

“Virtually all the big class-action cases Enron, WorldCom,AOL-Time Warner, Qwest, and Adelphia have companion individualactions [filed] that involve billions of dollars of claims thatarefirmly rooted in favorable state court venues,” he said.

“I guarantee there are going to be private actions in Marsh andMerck,” he said, referring to the troubled insurance broker and thepharmaceutical giant forced to pull an arthritis drug from themarket precipitating investor losses. “I'm talking to aninstitution in Marsh that had about a $250 million loss. There's noway that it's not going to happen. It makes economic sense to bringthose claims,” he said, noting that if an institutional investordoesn't have enough losses to serve as lead plaintiff in a classaction, it might strike out separately to control its own fate inan individual action.

Continuing to give his take on overall trends, he said:

? There will be a rebirth of the derivative lawsuits (brought byshareholders on behalf of a company, naming directors and officersas defendants).

? Plaintiffs are having and will continue to have an easy timesurmounting pleading standards that were supposed to be toughenedwith the passage of the Private Securities Litigation Reform Act in1995.

? Future settlements will be bigger and broader.

To the last point, Mr. Berger said, “Our clients are interestedin getting a much more substantial percentage of the recovery ofthe damages in cases than you would have seen in the past,”highlighting the fact that institutional investors, who have nowembraced their roles as lead plaintiffs, are very actively involvedin the progression of cases. “They mean business, and not businessas usual.”

He revealed some behind-the-scenes information about the biggestclass-action securities settlement recorded to date $2.8 billion inthe Cendant case to prove his point. In that situation, he said hisfirm retained investment bank Lazard to run business models todetermine exactly how much Cendant could pay without negativelyimpacting its business or stock price long term. “It wasinconceivable that an investment bank would ever work for aplaintiffs firm before. But because we represented largeinstitutions, they [the investment bankers] were willing to dothis.”

Mr. Berger said, “For egregious and asleep-at-the-switch boards,you're going to see attempts to force them to pay from their ownpockets especially if it's a bankruptcy situation.”

Mr. Lerach agreed. “We're also seeing initial emergence ofholding individuals personally accountable,” he said, referring torecent settlements in which WorldCom and Enron directors wererequired to pay part of proposed settlements without the benefit ofinsurance.

(The two lawyers spoke before news broke that a New Yorkdistrict court judge rejected the WorldCom settlement in theinterests of non-settling defendants because it was at odds with aproportionate liability provision of the PSLRA.)

“I don't know if that's going to be a trend” to hold individualdirectors personally accountable. “But I'll tell you one thing theinstitutional investor community is furious [about] the level ofexecutive misconduct and greed,” Mr. Lerach said.

Panel moderator, Tower Snow, a defense lawyer for CliffordChance in Palo Alto, Calif., asked if the two plaintiffs attorneyswere being offered premiums to get certain individuals tocontribute to settlements. “I?ve heard that a bounty was offered onBernie Ebbers,” Mr. Snow said, referring to WorldCom's chiefexecutive.

“That's not part of our retainer agreement,” said Mr. Berger,whose firm represents plaintiffs in the WorldCom case. “But myunderstanding is that that is included in retainers by someinstitutions in other cases.”

Mr. Lerach reported that in some cases that allege insidertrading, institutions want insider trading proceeds taken back frominsiders so badly that they have offered to pay his firm a feeequal to a full 50 percent of any disgorgement in order to get atthose proceeds.

As for other trends, Mr. Berger foresees attempts to hold moreoutside directors, accountants, investment advisors, investmentbankers, and lawyers accountable in securities cases.

“I think there's a real possibility that one of the final four[accounting firms] may not be in business after this coming year.The liability that they are facing is extraordinary,” he said,without fingering any particular firm. “I'm not sure that they canall sustain a hit if one of those cases goes to trial and theplaintiffs win,” he said.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, February 11, 2005.Copyright 2005 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.