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D&O Professionals Series: BakerHostetler’s Greene discusses securities litigation

Financial, Executive and Professional Risks (FINEX)
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By John M. Orr | August 10, 2020

BakerHostetler Partner Douglas W. Greene talks about stock drop cases and COVID-19’s impact on securities cases and D&O insurance.

Our "D&O Professionals Series" features professionals from across the Financial, Executive and Professional risk (FINEX) industry, including securities litigation defense attorneys, insurance company underwriters and claims professionals, and insurer and policyholder coverage counsel.

In our first installment of the “D&O Professionals Series,” we discuss with Douglas W. Greene, BakerHostetler partner and leader of the firm’s Securities and Governance Litigation Team, stock drop cases and COVID-19’s impact on securities cases and D&O insurance.

Has the economic downturn had an impact on the behavior of plaintiffs in the litigation and resolution of previously pending matters?

Yes, I see three trends.

First, plaintiffs’ lawyers are carefully choosing new securities class actions to file. When the market dropped in late February through March 2020, many worried the plaintiffs’ bar would file a flurry of securities suits based on those stock drops. But they didn’t. I believe that was because every company was subject to the market adjustment and was surprised by COVID-19, so it was difficult for plaintiffs to identify and prove that any particular company’s disclosures or governance problems caused economic harm. And alleging poor disclosures or governance based on COVID-19 stock drops would feel opportunistic and unseemly, and risk offending judges, so we’ve seen only a handful of securities class actions based on the early COVID-19 disruption.

Second, plaintiffs’ lawyers have focused their time and attention on pre-pandemic stock drops: (1) filing cases they didn’t pursue before, (2) seeking lead plaintiff roles in securities class actions or related derivative litigation in cases filed earlier — in other words, piling on, and (3) seeming to work harder on amended complaints and oppositions to motions to dismiss. I haven’t sensed any extra eagerness by plaintiffs to settle existing cases.

Third, I believe these two approaches by the plaintiffs’ bar — carefully choosing new cases and focusing on matters already in the pipeline — are related to a third trend: Plaintiffs’ lawyers are watching companies’ current disclosure and governance practices like hawks. Companies must speak and act extra-carefully. Any meaningful disconnect between market expectations and reality is going to cause an outsized stock-price drop, and the plaintiffs’ bar is waiting. I wrote about this looming litigation boom in my article “Securities and Governance Litigation Risks of COVID-19.”

Have defense strategies shifted in any way?

I always try to be courteous toward my adversaries, and I try to be extra-courteous these days: I take time to visit with plaintiffs’ lawyers, give extensions, allow people extra time to get back to me, accept service, etc. Not only is it simply the right approach, but imagine a judge’s wrath over attempting to gain an advantage that shows disregard for someone’s logistical challenges or safety.

Other than avoiding even the appearance of discourtesy, I’m not defending cases differently. I’m not altering arguments, rushing to settle, or extending the schedule for any reason other than logistics. Courts have readily extended case schedules on their own or based on agreement, which allows litigation to otherwise proceed naturally.

That said, there are several important differences from litigation as usual, including for securities class actions:

  1. 01

    Clients’ financial difficulties

    Even more than usual, we defense counsel should flag our clients’ financial difficulties and resolve litigation early if it would help our clients turn a corner or survive.

  2. 02

    Hearings

    Telephonic and video hearings aren’t as effective as in-person arguments. When oral argument is elective, every lawyer needs to do a cost-benefit analysis. Remote arguments involve all of the burdens of an in-person argument — defense costs for the company and its insurers, investment in work-in-process for the plaintiffs’ lawyers, and time and distraction from other matters for the court — but may not have all of the benefits, because video and phone don’t allow for the full dynamic range of communication. So defense counsel needs to be highly thoughtful about whether, when and how to seek oral argument in the current circumstances, when so many court appearances are virtual.

  3. 03

    Depositions

    For similar reasons, remote depositions can work but aren’t as effective as in-person depositions. Examining and defending counsel need to be very thoughtful about the positions they take and decisions they make, based upon the importance of the deposition and the witnesses and their importance and ability to testify effectively remotely.

Have changes in the economy resulting from the COVID-19 outbreak impacted the substantive nature of allegations raised in newly filed securities litigation?

The mix of securities class action filings is interesting. As I mentioned, there are some COVID-19-specific cases, but the bigger COVID-19-related set of cases is going to be over stock drops due to disappointing results caused by COVID-19 business disruption or other bad news that may or may not have anything to do with COVID-19 other than increased market volatility that causes a greater drop.

Without identifying companies or insurers by name, have you experienced changes in claim handling behavior in the changing environment?

No. I’ve been highly impressed by insurers’ responsiveness and ability to work from home and still coordinate among themselves, the rest of the tower, the broker and defense counsel. I haven’t been subject to any push to settle, or to not settle or resistance to paying appropriate defense costs.

Have you experienced any fallout from the Delaware Supreme Court decision in the Blue Apron case? Has the state court initial public offering (IPO) litigation landscape changed as a result of the decision?

I have one state court 1933 Act case against a Delaware corporation filed after Blue Apron, but the company doesn’t have a federal-forum bylaw. However, as I discussed in my article “Is Blue Apron a Silver Bullet?” Blue Apron won’t fix the problem of concurrent state and federal jurisdiction in 1933 Act cases. The key to litigating those cases effectively and efficiently, with or without federal-forum bylaws, is a highly specialized defense bar and close strategic coordination among defense counsel, their insurers and brokers.

What do you envision the securities litigation environment looking like in the next 12 to 18 months?

I anticipate a wave of new filings based on disappointing COVID-19-related results or negative events that cause significant stock price drops. I also anticipate that an above-average number of these cases will be defensible on a motion to dismiss, class certification, and/or summary judgment, and subject to meaningful damages reduction because of overall market volatility. D&O insurers and brokers need to work together to help their customers/clients engage the right defense counsel for the particular case, so that this cohort of new cases can be litigated effectively and efficiently, to optimize outcomes and keep defense costs in line with the economics of the case and D&O insurance limits.

Improving this system has long been critical; because of skyrocketing defense economics, changes in the plaintiffs’ and defense bars, and the now-permanent shift to securities suits against public companies of all sizes — from micro-caps to mega-caps — most securities class actions can’t be defended both effectively and efficiently anymore. Ultimately, this structural problem will cause the current D&O product to become unsafe for insureds and unprofitable for insurers and brokers. Post-COVID-19, this crisis will become acute. For more background on my views, please see my article “Putting ‘Litigation’ Back in ‘Securities Litigation’.”

What else would you like us to know about how changes in the broader economy, and in business culture as a result of the pandemic, have impacted our industry and relationships among policyholders, defense counsel, insurers and brokers?

As everyone re-imagines the way we work, my hope for the D&O insurance and liability defense community — brokers, insurers and defense counsel — is to re-imagine the way we insure securities and governance litigation risk and handle and defend claims. With the right D&O insurance program and defense counsel in place, and with a collegial approach among the defense community, companies and insurers should fare well in COVID-related and post-COVID securities litigation.

Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage for COVID-19. Coverage may vary depending on the jurisdiction and circumstances. For global client programs it is critical to consider all local operations and how policies may or may not include COVID-19 coverage. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. Some of the information in this publication may be compiled by third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort, or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates. COVID-19 is a rapidly evolving situation and changes are occurring frequently. Willis Towers Watson does not undertake to update the information included herein after the date of publication. Accordingly, readers should be aware that certain content may have changed since the date of this publication. Please reach out to the author or your Willis Towers Watson contact for more information.

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