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THE NEW TRIFECTA OF D&O EXPOSURES MODERATOR: Megan G. Colwell, Senior Vice President, Woodruff -Sawyer & Company PANELISTS: Paul R. Berger, Esq., Partner,

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Presentation on theme: "THE NEW TRIFECTA OF D&O EXPOSURES MODERATOR: Megan G. Colwell, Senior Vice President, Woodruff -Sawyer & Company PANELISTS: Paul R. Berger, Esq., Partner,"— Presentation transcript:



3 MODERATOR: Megan G. Colwell, Senior Vice President, Woodruff -Sawyer & Company PANELISTS: Paul R. Berger, Esq., Partner, Debevoise & Plimpton LLP Timothy Braun, MBA, Executive Vice President, AXIS Insurance Company Thomas D. Long, Esq., Partner, Nossaman, LLP Rob Robinson, Esq., Assistant General Counsel, FDIC Eric S. Waxman, Esq., Partner, Skadden, Arps, Slate, Meagher & Flom LLP Introductions

4 FDIC: Authority, Action & Accountability Dodd-Frank Wall Street Reform and Consumer Protection Act Foreign Corrupt Practices Act/UK Bribery Act The New Trifecta of D&O Exposures

5 FDIC: Authority, Action and Accountability

6 Structure and Powers The Current Crisis in Perspective Professional Liability Claims Alternative Methods of Ensuring Accountability FDIC: Authority, Action & Accountability

7 FDIC: Structure & Powers Role: Maintain Stability and Confidence in U.S. Banking System – Regulator for 4,240 State Non-Member Banks – Receiver to liquidate assets of failed banks/thrifts and to pay claims – Dodd-Frank Act makes FDIC Regulator for all state- chartered thrifts

8 FDIC: Structure & Powers FDIC as Receiver: Steps into Shoes of Failed Institution – Acquires all rights, titles, powers and privileges of a failed institution – Receivership assets include professional liability claims – Some defenses available against the failed institution may not be available against the Receiver

9 FDIC: Authority, Action & Accountability Structure and Powers The Current Crisis in Perspective Professional Liability Claims Alternative Methods of Ensuring Accountability

10 YearNumber of Institutions 2007 3 2008 25 2009140 2010 157 2011 (as of 10/14/11) 80 Current Crisis In Perspective: Bank and Thrift Failures, 2007 - 2011

11 Years Number of Failed Institutions Assets Assets - Inflation Adjusted 1982 - 19942,341$657.1 B$1.12 T Jul. 2004 – Jan. 2007 000 2008 – Oct. 14, 2011 402$666.0 B$697.8 B Current Crisis In Perspective: Bank and Thrift Failures, 1982 - 2011 (Excludes Years With Fewer Than 10 Failures)

12 State Number of Failures Assets Georgia72$32.7 B Florida56$36.7 B Illinois46$32.5 B California38$103.5 B Current Crisis In Perspective: Bank and Thrift Failures by State (2007 – October 14, 2011)

13 State Number of Failures Assets Nevada11$315.5 B California38$103.5 B Florida56$36.7 B Georgia72$32.7 B (2007 – October 14, 2011) Current Crisis In Perspective: Bank and Thrift Failures by Assets

14 FDIC Professional Liability Civil Actions* 1992 – 2011 *Includes RTC for 1992-1995. As of January 1, 1996, RTC was abolished and FDIC handled all RTC cases. Figures do not include mortgage malpractice and fraud or other related matters such as individual bankruptcies, arbitrations or garnishments. Figures include pending and filed cases through September 30, 2011.

15 Professional Liability Civil Actions Recoveries and Expenses: 1986 – 2011* (in $Billions) *As of June 30, 2011

16 Professional Liability Claims Investigate Cause(s) of Every Failure Pursue Meritorious and Cost-effective* Claims * Analysis of cost-effective includes an evaluation of insurance and other assets

17 Professional Liability Claims: Litigation Authority FDIC has its own Litigation Authority for its Civil Actions DOJ has Responsibility for Criminal Matters

18 Professional Liability Claims: Legal Theories for PL Claims Tort claims against directors and officers Malpractice claims against accountants, attorneys, appraisers, brokers or other professionals Breach of contract claims – Fidelity Bonds – Mortgage Fraud – CPLs, Closing Instructions, Indemnification RMBS claims

19 Professional Liability Claims: State Statutes State Statutes will NOT insulate from liability for gross negligence: FIRREA preempts any state law that insulates directors and officers from gross negligence or worse conduct FDIC may pursue simple negligence claims if state law permits

20 Professional Liability Claims: Statutes of Limitations FIRREA Re-starts the Limitations Period – Torts – 3 years from failure – Contracts – 6 years from failure State Law Applies if Longer Tort claims based on fraud or intentional misconduct that expired within 5 years before failure are revived

21 Professional Liability Claims: Fidelity Bonds Most Based on Employee Dishonesty Competition with Holding Companies – Holding company bankruptcy – automatic stay – Joint assured and sole use and benefit clauses – Nature of harm – direct vs. derivative

22 Professional Liability Claims: RMBS Claims Investigation FDICs Investigation of RMBS Claims – ~ 23 underwriters under review – ~ $18 billion face value of RMBS portfolios Primary Claims: – Violation of state Blue Sky law(s) – Violation of 1933 Securities Act

23 Professional Liability Claims: Residential Mortgage Fraud Cases 176 MMF Lawsuits Pending Common Defendants: – Loan originators (mortgage bankers/brokers) – Closing agents/attorneys – Appraisers – Title insurance companies Note: Borrowers are rarely sued…only if they knew of fraud or received wrongful benefit

24 FDIC: Alternative Methods Directors, Officers and others may still face actions… Administrative or enforcement actions against wrongdoers who caused failure Possible actions against IAPs – Removal & Prohibition – Civil Money Penalties – Cease & Desist Orders

25 Dodd-Frank Wall Street Reform and Consumer Protection Act

26 Most Significant Piece of Financial Regulatory Reform Enacted Since the 1930s Signed into law July 21, 2010 Addresses almost every aspect of the financial services industry Creates new regulatory agencies and schemes Could substantially increase liability to companies in the financial services industry

27 Dodd Frank: Todays Focus High Level Overview of the Act Two Significant/New Components: – Whistleblower bounty program – Corporate Governance & Executive Compensation Say-on-Pay votes Proxy Access rules

28 Dodd-Frank: High Level Overview Addresses systemic risk Reorganizes/enhances agency oversight responsibilities Creates new consumer protection watchdog Creates Federal Insurance Office Increases regulation and risk of liability for credit rating agencies Enhances Whistleblower bounties

29 Dodd-Frank: High Level Overview Systemic Risk Includes systemic risk as supervisory consideration Minimize potential collapse of financial firms previously thought of as too big to fail Establishes Financial Stability Oversight Council – Mandate: to identify emerging systemic risks and activities that should be subject to enhanced prudential standards – Chaired by Treasury Secretary – Includes heads of 8 different agencies + a member with insurance expertise

30 Dodd-Frank: High Level Overview Nonbank Company Designation Designated non-bank financial firms will be subject to supervision & enhanced potential supervision requirements Council designates Nonbank Financial Company based on: – Amount /nature of assets, liabilities; reliance on short-term funding – Extent and type of off-balance sheet exposure – Extent of leverage – Importance as a source of liquidity for U.S. financial system – Degree to which company is already regulated – Any other risk related factors the Council deems appropriate

31 Dodd-Frank: High Level Overview Changes in Agency Oversight Major Agency Changes Through the Creation of: – Financial Stability Oversight Council – Office of Financial Research (Treasury) – Bureau of Consumer Financial Protection (Federal Reserve) – The Office of National Insurance (Treasury) – The Office of Credit Rating Agencies (SEC) Major Changes in Agency Oversight – Federal Reserve regulates thrift holding companies, State member banks – OCC will regulate national banks and federal thrifts – FDIC will regulate state thrifts – OTS will be eliminated

32 Dodd-Frank: High Level Overview Consumer Protection Sweeping changes to the current system of regulating consumer financial products and services New regulator: the Bureau of Consumer Financial Protection (the Bureau) – Broad rule making & enforcement authority – Housed within (but independent of) the Federal Reserve – Can ban unfair, deceptive, or abusive acts or practices

33 Dodd-Frank: High Level Overview Federal Insurance Office (FIO) FIO Established Within Treasury Department – Authority extends to all lines of insurance except health, most long-term care and crop insurance Maintains Primacy of State-based Authority Has Diverse Powers and Administrative Authority

34 Dodd-Frank & Whistleblowers Broader coverage Protection of anonymity New anti-retaliation provision – Right of action for reinstatement – Potential recovery: 2X back pay + interest & litigation costs Does not require exhaustion of administrative remedies

35 Dodd-Frank Whistleblower Bounties Dodd-Frank ensures substantial bounty awards: – New SEC authority to pay awards in all enforcement actions – Whistleblowers must provide original information that results in a successful enforcement action – Bounties = 10%-30% of monetary sanctions collected by the SEC, DOJ or certain other agencies

36 Corporate Governance and Executive Compensation New Stock Exchange Listing requirements for Compensation Committees – New executive compensation/clawback provisions – New independence standards for consultants and advisors – Enhanced disclosure regarding executive compensation

37 Corporate Governance and Executive Compensation (cont.) Say-on-Pay Votes – No SEC requirement for specific language or form of resolution, but: Instruction does include non exclusive example of permissible resolution Votes must take place at least once every 3 years Vote on frequency at least once every 6 years

38 Corporate Governance and Executive Compensation (cont.) Proxy Statement Disclosure – This Year – Required disclosure regarding say-on-pay and frequency votes – Brief explanation that the votes are non-binding Proxy Statement Disclosure – Future Years – Required disclosure in the CD&A: Whether the most recent say-on-pay vote influenced executive compensation policies and decisions If so, how that consideration affected policies & decisions

39 Corporate Governance and Executive Compensation (cont.) Say-on-Golden Parachute Votes and Related Disclosure – New disclosure requirement for golden parachute arrangements – Applies to any compensation agreement that relates to a merger or similar transaction – Requires disclosure in an acquiring companys proxy statement – Requires vote when shareholders are being asked to approve a merger or similar transaction

40 The Foreign Corrupt Practices Act and The UK Bribery Act

41 Todays Topics The FCPA and Its Key Features Penalties and Consequences Recent Activity The UK Bribery Act

42 The FCPA /Key Features Enacted in 1977; Expanded in 1998 Two Parts: – Prohibits corrupt payments to government officials (anti- bribery) – Accounting provisions (books and records/internal controls) Applies to: – Any issuer under the federal securities laws – U.S. citizens/residents and U.S-based companies/partnerships – Any person or entity committing a proscribed act that is facilitated by conduct in the U.S.

43 FCPA Penalties/Consequences Two Categories of Fines and Penalties – Anti-bribery – Books and Records/ Internal Controls Apply Separately to Companies and Individuals – Criminal fines – Civil penalties – Other civil penalties – Alternative Fines Act

44 FCPA Penalties/Consequences (cont.) Collateral Consequences to Violators of FCPA: – Reputational damage – Loss of ability to do business under state insurance regulations – Disqualification or suspension from acting as a broker- dealer and investment advisor – Loss of government contracting qualifications – Violation of Sarbanes-Oxley Section 404 – Shareholder litigation

45 Aggressive Enforcement Efforts 150 Open DOJ Investigations ~ 70 Companies with Active FCPA Investigations More Resources @ SEC, DOJ, FBI New Tactics: – Wiretaps, search warrants and other investigative techniques – Streamlined procedures for SEC subpoenas – Policies designed to encourage cooperation of individuals

46 Top 10 FCPA Enforcement Actions 1.Siemens (Germany): $800 million (2008) 2.KBR/Halliburton (USA): $579 million (2009) 3.BAE (UK): $400 million (2010) 4.Snamprogetti Netherlands B.V. / ENI S.p.A (Holland/Italy): $365 million (2010) 5.Technip S.A. (France): $338 million (2010) 6.JGC Corporation (Japan) $218.8 million (2011) 7.Daimler AG (Germany): $185 million (2010) 8.Alcatel-Lucent (France): $137 million (2010) 9.Panalpina (Switzerland): $81.8 million (2010) 10. Johnson & Johnson (USA): $70 million (2011)

47 Recent Cases Lindsey Manufacturing (2011) – California-based company; eight-count indictment – Bribery of officials at a Mexican state-owned utility CFE – 1 st time a company has been convicted at trial for FCPA violations – Individual convictions of President, CFO and Mexican sales agent Control Components, Inc. (2009) – California-based company; violations from 1998-2007 – 236 corrupt payments in 30+ countries – Company pled guilty to violations of the FCPA and the Travel Act – DOJ Fine: $18.2 million + corporate therapeutics

48 U.K. Bribery Act 2010 Potentially broader than the FCPA Applies to: – Officers/directors/employees/agents of any entity doing business in U.K. – All persons whose actions benefit any entity doing business in U.K. Makes it a crime to receive as well as pay bribes No exception for facilitation payments No exceptions for product promotion or contract execution Strict corporate liability for failure to prevent bribery – Adequate corporate compliance program is enumerated defense

49 Questions & Answers

50 Paul Berger Tim Braun Megan Colwell Tom Long Rob Robinson Eric Waxman Many thanks to …

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