With the temperatures reaching mind-bending levels, we
considered it advisable to stay inside, drink plenty of fluids, and limit our
exertions. So in lieu of a more elaborate post, we have simply noted some
mid-summer quick hits below.
Action against U.S.-Listed Chinese Companies
Auditors Allowed to Proceed: A recurring question during the
current wave of lawsuit filings involving U.S.-listed Chinese companies has
been how the plaintiffs will pursue their claims and enforce any judgments
against the Chinese defendants. One likely counter to these problems has been
for plaintiffs to pursue the claims against the Chinese defendant company's
more accessible outside professionals. A number of recent suits have named
outside auditors and other professionals as defendants (refer for example here).
Given recent U.S. Supreme Court case law, making these claims against the
outside professionals stick could be tough.
But in a July 18, 2011
decision in a case filed prior to the current wave of lawsuit filings
against Chinese companies, a judge had held that the plaintiffs' allegations
were sufficient for the claims against the auditor to proceed. As reflected here, the plaintiff
first filed its lawsuit against China Expert Technology in 2007. The original
complaint included among the defendants the company's outside auditors
including affiliates of BDO Seidman and affiliates of PKF.
The case had been through several rounds of pleading. The
defendants' motions to dismiss were initially granted, but the dismissal as to
the PKF parties was without prejudice. The plaintiff twice attempted to amend
his complaint in an attempt to overcome the pleading concerns, but each time
the motion as to the PKF parties was granted, without prejudice.
In the July 18 order, which is handwritten, Southern
District of New York Judge Alvin Hellerstein
concluded with respect to the plaintiff's fourth
amended complaint that "enough has been alleged to make out a plausible
claim for relief." Unfortunately for other litigants who might want to try and
rely on or cite Judge Hellerstein's ruling, his brief order does not provide
But despite the brevity of the ruling and the fact that
it took four amended complaints for the China Expert technology plaintiff to
overcome the pleading hurdle, the fact is that the plaintiff was ultimately
able to present allegations sufficient to meet the pleading hurdles. That fact
alone may provide comfort for the plaintiffs in pursuing claims against the
Chinese companies' outside professionals in other cases.
Success in overcoming the hurdles in pleading claims
against the auditor in this particular case is for this plaintiff critical. As
Nate Raymond pointed out in his July 20, 2011 Am Law Litigation Daily article
about the case (here),
China Expert Technology has never appeared in the case and a default was
previously entered against the company. Plaintiffs in other cases may face
similar challenges, and so the ability to pursue claims against the outside
professionals may prove to be critical in other cases as well. Whether or not
those claimants will be able to make their claims stick remains to be seen. But
in at least one case, the plaintiff's claims against a Chinese firm's outside
auditor are going forward.
A July 21, 2011 Reuters article about the decision can be
Who's Paying for News Corp.'s Legal Costs?: The
media frenzy over News Corp.'s phone hacking scandal has led to a host of
actual and potential legal proceedings involving News Corp. and its senior
managers. The legal bills no doubt are starting to mount, which inevitable
leads to the question of who will be paying the lawyers. A July 20, 2011 Reuters
speculates that the company's D&O insurance may be paying for the the legal
The article appropriately notes some of the questions
surrounding the availability of D&O insurance coverage for the legal fees.
Among other things, depending on its terms and conditions, the D&O policy may
not cover substantial amounts of the expense, even if there is coverage under
the policy for some of the company's expense. The fees the company and its
senior officials incur in defending the various civil suits are likely to be
most likely to be covered. The various investigations and criminal proceedings
may or may not be covered depending on the nature of the proceedings and the
specific wordings of the company's policy.
And Speaking of D&O Insurance: As
suggested in the prior item, the specific wording in a D&O insurance policy
is critically important. Subtle wording differences can make a significant
difference in whether or to what extent insurance is available for claims
related expenses, settlements and judgments. In a competitive insurance marketplace
, the more advantageous wordings often are available and are often available at
little or no additional cost.
2011 memo from the Lowenstein Sandler law firm describes the
availability of more favorable coverage terms as "D&O Coverage at
Little or No Additional Cost." The memo explores some of the policy
alternations that can increase the scope of coverage available under the
D&O insurance policy.
They're Getting Litigation Weary North of the
Border, Too: In changes that went into effect in 2005,
Ontario modified its securities laws to provide a different liability regime
for holding corporate officials accountable to shareholders for material
misrepresentations and omissions. One of the new law's features was the
inclusion of a procedural requirement that prospective litigants obtain
judicial leave to proceed. The leave requirement was introduced at companies'
insistence as a way to try to ensure that only meritorious cases proceed.
But as discussed in a July 20, 2011 Reuters article (here),
the leave requirement itself is proving to be burdensome, as the process of
determining whether or not the case should be allowed to go forward is proving
to be protracted and expensive. The article also reports that there are
concerns in some circles that the courts have set the bar for granting leave
It was perhaps inevitable that there would be grumbling
in the wake of claims under the new regime. From that perspective, the
complaints are hardly surprising. But it does seem as if the actual process
under the new rules is turning out differently than at least some had
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
more information about LexisNexis products and solutions connect with us
through our corporate site.