THE NEW TRIFECTA

OF D&O EXPOSURES

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

• 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

FDIC: Authority, Action and Accountability

• Structure and Powers

• The Current Crisis in Perspective

• Professional Liability Claims

• Alternative Methods of Ensuring Accountability

FDIC: Authority, Action & Accountability

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

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

FDIC: Authority, Action & Accountability

• Structure and Powers

• The Current Crisis in Perspective

• Professional Liability Claims

• Alternative Methods of Ensuring Accountability

Year Number of Institutions

2007 3

2008 25

2009 140

2010 1572011

(as of 10/14/11) 80

Current Crisis In Perspective:Bank and Thrift Failures, 2007 - 2011

YearsNumber of

Failed Institutions

AssetsAssets - Inflation Adjusted

1982 - 1994 2,341 $657.1 B $1.12 T

Jul. 2004 – Jan. 2007 0 0 0

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)

State Number of Failures Assets

Georgia 72 $32.7 B

Florida 56 $36.7 B

Illinois 46 $32.5 B

California 38 $103.5 B

Current Crisis In Perspective: Bank and Thrift Failures by State

(2007 – October 14, 2011)

State Number of Failures Assets

Nevada 11 $315.5 B

California 38 $103.5 B

Florida 56 $36.7 B

Georgia 72 $32.7 B

(2007 – October 14, 2011)

Current Crisis In Perspective: Bank and Thrift Failures by Assets

FDIC Professional Liability Civil Actions*1992 – 2011

0

50

100

150

200

250

300

350

400

450

500

550

FDIC Pending* 493 531 432 455 354 219 136 93 56 21 20 22 19 11 8 9 17 25 24 47

FDIC Filed* 204 189 89 77 13 9 3 1 2 4 3 4 3 3 2 0 1 1 6 20

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 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.

Professional Liability Civil Actions

Recoveries and Expenses: 1986 – 2011*

(in $Billions)

$6.42

$1.75

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

*As of June 30, 2011

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

Professional Liability Claims:Litigation Authority

• FDIC has its own Litigation Authority for its Civil Actions

• DOJ has Responsibility for Criminal Matters

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

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

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

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

Professional Liability Claims: RMBS Claims Investigation

• FDIC’s 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

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 orreceived wrongful benefit

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

Dodd-Frank Wall Street Reform and Consumer Protection Act

Dodd-Frank Wall Street Reform and Consumer Protection Act

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

Dodd Frank: Today’s 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

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

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

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

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

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”

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

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

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

Corporate Governance and Executive Compensation

• New Stock Exchange Listing requirements for Compensation Committees

– New executive compensation/clawback provisions

– New independence standards for consultantsand advisors

– Enhanced disclosure regarding executive compensation

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

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

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 company’s proxy

statement– Requires vote when shareholders are being asked to

approve a merger or similar transaction

The Foreign Corrupt Practices Act and

The UK Bribery Act

Today’s Topics

• The FCPA and Its Key Features

• Penalties and Consequences

• Recent Activity

• The UK Bribery Act

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.

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

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

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

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): $365million (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)

Recent Cases

• Lindsey Manufacturing (2011)– California-based company; eight-count indictment– Bribery of officials at a Mexican state-owned utility CFE– 1st 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

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

Questions&

Answers

• Paul Berger• Tim Braun• Megan Colwell• Tom Long• Rob Robinson• Eric Waxman

Many thanks to …