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FINEX Alert Perfect D&O Storm '16
1. A Perfect D&O Storm For 2016
By
Rob Yellen
Talene Megerian
Anthony Rapa
Andrew Doherty
Economic headwinds, individual accountability and disruptive
change, like forces of nature, are converging in a way that
could change the game of directors & officers (D&O) risk.
In today’s on-demand, hyper-connected world, boards and
executives find themselves caught between the seemingly
insatiable performance demands of short-termism and
potentially hurricane-force economic and geopolitical
headwinds that can test the leaders’ mettle and spike volatility.
To get ahead of these risks, we recommend that C-Suite and
risk managers place financial/executive/cyber/professional
liability insurance on their short list of priorities— with an eye
toward assessing how well an organization’s coverage will
respond to today’s heightened and dynamic exposures.
Economic Headwinds
In 2016, even historically successful companies may find it
challenging to meet expectations. Global economic forecasts
have ranged from slight growth to considerably ominous—like
George Soros’s dire warning of a looming 2008-like crisis.
Today’s economic pressures are no small problem. Many on
Wall Street expect the U.S. dollar will continue to strengthen,
likely undermining the value of successful growth outside the
U.S. and increasing deflationary pressures at home. Many
experts also expect that 2016 will see upward pressure on
wages, raising expenses for many companies and compressing
profit margins. To make matters worse, it turns out that cheap
oil may prove bad for the overall economy. Meanwhile, the Fed
is expected to continue tightening its belt.
Headwinds also exist in the current geo-political climate. Think
terrorism, instability in the Middle East, and unpredictability
in Russia, China and in parts of Latin America. Thanks to
innovations in connectivity and imperfect cyber security,
once-local political instability now has a greater potential to
reverberate globally. Perhaps even more concerning, the
threats have broadened with the rise of numerous, diverse,
capable non-state actors utilizing technology for crime and
other nefarious purposes with unprecedented assertiveness
and success.
FINEX Alert
January 2016
“When I look at the financial markets there is a serious
challenge which reminds me of the crisis we had in 2008.”
George Soros, January 7, 2016
2. 2 FINEX Cyber Alert
Individual Accountability in a New Age of
Enforcement
Politicians around the world have been making hay appealing
to disappointment and anger over perceived failures to
prosecute individuals in the wake of the 2008 financial crisis.
As a result, we will see more regulatory enforcement focus on
individual accountability in 2016.
The Justice Department’s “Yates Memo” made it official that
companies will not get cooperation credit for investigations
unless they spill “all relevant facts about the individuals
involved in corporate misconduct”. As if these game-changing
prosecutorial rules were not enough, SEC Chair Mary Jo
White has been active in the world of individual accountability
as well. Under pressure from Capitol Hill, the SEC instituted
new guidance for Pay Disparity Ratio Disclosure and
proposed a clawback rule requiring executives to pay back
certain incentive-based compensation, on a pre-tax basis,
should an accounting restatement establish that they were
overpaid. As regulatory enforcement authorities make the
pursuit of individuals a higher priority, companies too must
make changes to their internal investigations and inquiries.
Disruptive Change—The New Normal
Companies chasing the opportunity of disruptive change in
today’s fast paced world may find the tables quickly turned on
them.
Cyber security concerns continue to predominate, now
transcending data security into business interruption,
infrastructure and vendor management. Things are likely
to get worse, too. The internet of things is projected to add
millions of new devices to the web, allowing companies— and
criminals— to connect like never before. Cyber security-
related litigation continues to evolve in concerning ways,
highlighted by last year’s decision to allow a consumer class
action to proceed against Neiman Marcus absent a showing
of fraud on the customers’ accounts.
More change? Activist investors had a banner year in
2015, and there is no reason to suspect this trend will slow.
Securities claims may become more expensive to resolve as
the Supreme Court’s looming decision in Merrill Lynch, Pierce,
Fenner & Smith Inc. v. Manning may give plaintiffs’ bar a new
opportunity to forum shop and unleash a wave of securities
class actions in state courts. Securities claim frequency is
up year over year since 2012, and as a recent $830 million
securities class action demonstrates, the potential for
dramatic severity lives on. Another high court case, Universal
Health Services v. United States ex rel Escobar, threatens
new wave of False Claims Act claims.
If all of that wasn’t enough, M&A litigation may get more
complex, too. The Delaware Supreme Court in RBC Capital
Markets v. Jervis affirmed Rural/Metro confirming that
financial advisers may be held liable for aiding and abetting a
breach of directors’ fiduciary duties— even without a finding
of gross negligence on the part of the directors.
“The failure to prosecute the crooks on Wall Street for their
illegal and reckless behavior is a clear indictment of our
broken criminal justice system,” said Sen. Bernie Sanders,
presidential candidate. “We can no longer tolerate a criminal
justice system that treats Wall Street executives as too big
to jail when their actions have ruined the lives of so many
Americans.”
Federal Securities Class Action Litigation 2008 – YTD
(Stanford Class Action Clearinghouse)
“We live in a time of extraordinary change — change that’s
reshaping the way we live, the way we work, our planet and
our place in the world. It’s change that promises amazing
medical breakthroughs, but also economic disruptions that
strain working families. It promises education for girls in the
most remote villages, but also connects terrorists plotting
an ocean away. It’s change that can broaden opportunity, or
widen inequality. And whether we like it or not, the pace of
this change will only accelerate.” President Barak Obama,
2016 State of the Union Address
