Current D&O ExposuresA Case Study Analysis

Maxine Cupitt, Partner, CMS Cameron McKenna LLPNoona 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. Regulatory & Criminal

2. Bankruptcy (far more in rest of Europe than in UK)

3. Company v. insured actions (i.v.i)

4. 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 VolumesD&O

0

50

100

150

200

250

May-1

0

Jun-1

0

Jul-10

Aug-1

0

Sep-1

0

Oct-

10

Nov-1

0

Dec-1

0

Jan-1

1

Feb-1

1

Mar-

11

Apr-

11

May-1

1

Jun-1

1

Jul-11

Aug-1

1

Sep-1

1

Oct-

11

Nov-1

1

Dec-1

1

Jan-1

2

Feb-1

2

Mar-

12

Apr-

12

MONTH/YEAR

0

500

1,000

1,500

2,000

2,500

3,000

NEW OP EN Linear (OP EN) Linear (NEW)

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

UK / 72864633.1

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 reformFCA → 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 EnforcementDirectors to be investigated as matter of courseRegulatory transparency

publication of Warning NoticesPrimarily financial firms

but market abuse…

UK / 72864633.1

Overview – Bribery

Bribery

UK Bribery Act now in forcePulls together earlier legislation

FSA/FCA can act in absence of briberyFailure to have appropriate systems and controls

UK / 72864633.1

Overview – US Shareholder Actions

Continue to make up large number of D&O claimscostly and difficult to dispose of

English system less attractive environment for class actionsclaims often derivative

on behalf of companydamages to companyno contingency feescosts shifting

Nevertheless attempts continueand 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

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

UK / 72864633.1

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 & OsCourt of Appeal 2010

Safeway submitted to multi-million fineby OFTfor price fixing

Safeway pursued former directors/employees for damagesamount of fine, interest, costs

Chairman to a quite junior staff junior employees

not managerial/supervisory rolesued as co-defendants

“Ex turpi causa” action does not arise from dishonourable causefine personal to Safewaycould 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 Appealwoncase defeated at early stage

Costly and stressful for individualsacting together single legal teambrought matters to early close

and saved limitfor fighting fund had this been needed

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 firmsBail BondsmenTranslators for non English speaking defendantsTravel 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’.

24

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.

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

Disclaimer

© Copyright Reserved 2011

CORPORATE GOVERNANCE“THE LEGAL LANDSCAPE”

2012

Nick WilliamsKennedys LLP

May 2012

Kennedys Law LLP

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

Investors sue Mark Zuckerberg and Morgan Stanley

What is the defence costs budget?

Facebook IPO

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.”

Kennedys Law LLP

• “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’.