Current D&O Exposures
A Case Study Analysis
Maxine Cupitt, Partner, CMS Cameron McKenna LLP
Noona 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.
2.
3.
4.
Regulatory & Criminal
Bankruptcy (far more in rest of Europe than in UK)
Company v. insured actions (i.v.i)
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 Volumes
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
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 reform
FCA → 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 Enforcement
Directors to be investigated as matter of course
Regulatory transparency
publication of Warning Notices
Primarily financial firms
but market abuse…
UK / 72864633.1
Overview – Bribery
Bribery
UK Bribery Act now in force
Pulls together earlier legislation
FSA/FCA can act in absence of bribery
Failure to have appropriate systems and
controls
UK / 72864633.1
Overview – US Shareholder Actions
Continue to make up large number of D&O claims
costly and difficult to dispose of
English system
less attractive environment for class actions
claims often derivative
on behalf of company
damages to company
no contingency fees
costs shifting
Nevertheless attempts continue
and 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
UK / 72864633.1
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
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 & Os
Court of Appeal 2010
Safeway submitted to multi-million fine
by OFT
for price fixing
Safeway pursued former directors/employees
for damages
amount of fine, interest, costs
Chairman to a quite junior staff
junior employees
not managerial/supervisory role
sued as co-defendants
“Ex turpi causa”
action does not arise from dishonourable cause
fine personal to Safeway
could 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 Appeal
won
case defeated at early stage
Costly and stressful for individuals
acting together
single legal team
brought matters to early close
and saved limit
for fighting fund had this been needed
UK / 72864633.1
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 firms
Bail Bondsmen
Translators for non English speaking defendants
Travel 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’.
Disclaimer
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
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.
© Copyright Reserved 2011
24
CORPORATE GOVERNANCE
“THE LEGAL LANDSCAPE”
2012
Nick Williams
Kennedys LLP
May 2012
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
Kennedys Law LLP
•
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
Kennedys Law LLP
• But BOE & FSA joint papers say:• “….may well be fines for firms and
individuals to ensure remedial actions..”
Kennedys Law LLP
Financial Conduct Authority
 Business regulation of ALL firms
 Prudential Regulation of “non-PRA” firms
Kennedys Law LLP
3 Main Aims
1. Protect Consumers
2. Protect UK Financial System
3. Promote Effective Competition
Kennedys Law LLP
New Powers
 To block imminent product launches
 To require firms to withdraw/amend
misleading financial promotions
 To publish start of enforcement proceedings
Kennedys Law LLP
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
Kennedys Law LLP
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
Facebook IPO
 Investors sue Mark Zuckerberg and Morgan
Stanley
 What is the defence costs budget?
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..]
Kennedys Law LLP
The Dentist Syndrome
• So….. pre-plan your costs
• arrangements
Kennedys Law LLP
Alternative Fee Arrangements
•
Valorem “We focus on the values which
are important to you, not hours”….
• Fixed fee
• Value billing
• Capped fees
Kennedys Law LLP
• “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..”
Kennedys Law LLP
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
Kennedys Law LLP
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
Kennedys Law LLP
 Days of depositions
 Insignificant witnesses
 Pointless motions
 Limitless eDiscovery
 The 20 million document database
Kennedys Law LLP
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’.
Kennedys Law LLP