On May 31, 2017, Former SEC Chair, Mary Jo White and former SEC Director of Enforcement, Andrew Ceresney presented a retrospective on recent enforcement trends and their insights on where the SEC might be heading. Here are a few takeaways:
1. SEC enforcement actions are on the rise. From 2013 through 2016, 2,850 enforcement actions were filed. Judgments and orders over this period totaled more than $13.8 Billion. The use of big data contributed to the enforcement division’s increase in activity.
2. The number of enforcement actions involving accounting firms and auditors is also seeing an upward trend. From 2013 through 2014, the SEC brought 37 Rule 102(e) proceedings against accountants for improper professional conduct. That number rose to 76 proceedings from 2015 to 2016. The alleged improper conduct in these proceedings arose from claims of audit failure or independence violations. The SEC sees auditors as gatekeepers and partners in protecting investors and the integrity of the markets.
3. The SEC’s numbers show a steady increase in financial reporting cases since 2013. From 2013-2014, 53 financial reporting cases were filed and 128 parties were charged. From 2015-2016, those numbers increased to 114 financial reporting cases and 191 parties charged. Despite the increase in cases, the SEC hasn’t uncovered any massive fraud cases on the level of Enron and WorldCom. Ms. White and Mr. Ceresney attribute this to improved financial reporting and internal controls promoted by Sarbanes Oxley. The SEC would likely reconcile the touted effectiveness of Sarbanes Oxley with the increase in enforcement actions by arguing that regulations have deterred major crimes, allowing the Commission to focus on enforcing other violations.
4. We can expect to see some changes with the new leadership. The new chair, Jay Clayton, appears focused on capital formation. Consistent with the overall focus on reducing regulation, Chair Clayton has expressed a desire to reduce barriers to going public. This may lead to an increase in enforcement activity around initial public offerings.
Three Take-Aways from the PLUS Seminar on Mediating Complex Director & Officer (D&O) Claims:
Mediation is not a day-of event. Counsel are well served to work very hard before the mediation to set expectations of parties, carriers, other counsel (including coverage counsel), and the mediator. The panel noted that, even when a mediation is conducted in person, plaintiffs and carriers often have a range of authority that can be difficult to alter the day of mediation. Surprises at mediation frustrate the process and do not materially advance settlement potential. Counsel for all sides must engage constituent decision makers so that they are well informed and understand the risks so that they can bring appropriate authority to a mediation.
- Informational asymmetries may hinder the mediation process before, during, and after a mediation. Participants need to understand what risk plaintiffs are presenting in a case. Defendants must offer honest assessments to carriers—it does not help to tell a carrier that there is no liability throughout a case and then ask for a large check in mediation. Likewise, if you expect coverage to play a role in the negotiation, in most cases it makes sense to brief the mediator and plaintiff so that they can factor a coverage issue into their calculus. Finally, no one is scared by a plaintiff or defendant who says they have a persuasive case but is reluctant to present detailed facts about the elements of a claim.
- Defendants should be up-front with insurers about their settlement preferences. Broadly speaking, litigants fall into two camps at a negotiation: (a) pay a plaintiff as much as needed to end litigation today and (b) pay defense counsel as much as needed to defeat the claim. While the party’s attitude towards settlement won’t be dispositive of the carrier’s willingness to negotiate, it will inform the carrier’s authority and attitude about the case. Psychology matters more than people care to admit.
On May 9, 2017, Governor Deal signed House Bill 192 into law. For claims arising after July 1, 2017, O.C.G.A. §§ 14-2-830(a) (directors); 14-2-842(a) (officers) will provide:
A [director or officer] shall discharge his perform his or her duties as a [director or officer], including his duties as a member of a committee:
(1) In a manner he believes in good faith to be in the best interests of the corporation; and with the degree of
(2) With the care an ordinarily prudent person in a like position would exercise under similar circumstances.
That strike through of “to be in the best interests of the corporation” is pretty stark, right? Perhaps all of an officer’s or director’s duty of loyalty to a company will be placed in the duty of good faith. But perhaps the legislature wanted to bar an end-run around its duty-of-care enactment by narrowing the statutory duty of loyalty to violations of O.C.G.A. § 14-2-861(interested party transactions) and O.C.G.A. § 14-2-832 (unlawful distributions), which are still prohibited. Time will tell…
The main thrust of the legislative amendment was to enhance protections for corporate decision making by adding this text:
There shall be a presumption that the process [a director or officer] followed in arriving at decisions was done in good faith and that such [director or officer] has exercised ordinary care; provided, however, that this presumption may be rebutted by evidence that such process constitutes gross negligence by being a gross deviation of the standard of care of [a director or officer] in a like position under similar circumstances.
O.C.G.A. §§ 14-2-830(c) (directors); 14-2-842(c) (officers).
These amendments are a response to FDIC v. Loudermilk, in which the Georgia Supreme Court held that the substance or wisdom of a corporate decision was unreviewable in court absent gross misconduct. 295 Ga. 579, 581 (2014). But the Court also held that in order to obtain deference for their decisions, corporate actors’ process for making their decisions was reviewable under a simple negligence standard: officers and directors “may be liable for a failure to exercise ordinary care with respect to the way in which business decisions are made.” Id. at 593.
In amending the statute, the legislature addressed the obvious point that deference to ultimate corporate decisions is of little value if the there is no deference to the decision-making process. Once this law is in effect, corporate officers and director are presumed to have acted in good faith in the process used to make business decisions.
If you want to know more, look out for a more in-depth treatment in our next firm newsletter.
I had the pleasure of attending the Ascent 2017 Conference in Atlanta, on invitation from Sloane Perras, Chief Legal Officer for The Krystal Co. & On The Border Mexican Grill & Cantina and one of the conference organizers. The conference was a great success and brought together more women in-house and outside counsel at one time than any other event I’ve attended. A few points I took away:
- Pay equity, diversity, and social awareness are all being embraced by many large companies, with the view that those policies raise all boats. These companies are using their leverage to encourage adoption of these initiatives by their vendors and outside counsel.
- To be a successful partner as outside counsel, we must understand the client’s business above all else: the financials, the product lines, the risk factors, and the business objectives. Both inside and outside counsel must find and capture the tone that will speak to the decision-makers while uncovering any blind spots or potential liabilities not considered.
- Data breaches remain front of mind for many. The alphabet soup of regulations, laws, and governing watch-bodies that might be implicated in any given industry continues to grow. Class action lawyers stand at the ready to push the bounds of what constitutes damages.
- Leaders must create a culture of compliance. The risks of not doing so far outweigh the costs.
- Finally, when pushing for change, leaders must be unafraid and confident in their decisions. Innovation must be balanced with risk management; if you understand the core of the problem and have a vision for moving forward, you can convince stakeholders change is necessary.
Takeaways from State of the LPL Market Panel Presentation at ABA National Legal Malpractice Conference – Boston 2017
- Big Data is changing Underwriting, Broking and Claims Handling and helps to keep the LPL and APL markets highly competitive and insurance reasonably priced.
- P & C events, such as Hurricanes in the Caribbean, no longer drive rates up for Lawyers and Accountants because carriers now distinguish between Casualty and Professional Liability risks.
- The Great Recession, the largest economic crisis in 70 years, created a hard market that only lasted about six weeks.
- Capital to insure professionals keeps pouring into the market, despite an increase in huge claims individually exceeding hundreds of millions of dollars.
- Despite all the positive developments, premiums have increased between 2 and 4% on average for Lawyers E and O insurance in 2017. While 20 years ago this would have been classified as an annual inflation adjustment, now it may be the closest thing we will see to a hard market for some time.
Billy Newcomb and I recently won summary judgment for a top 100 accounting firm. A publicly traded company had sued in a Florida court, alleging negligent failure to detect fraud and claiming damages well into eight figures. Six other defendants, including a top 10 accounting firm, settled with the Plaintiff just after suit was filed, leaving our clients as the sole defendants. At court-ordered mediation, the Plaintiff, perhaps a little too confident in its home court advantage, refused to lower its demand under $5 million. Immediately after the mediation failed, the trial court granted summary judgment to CCS’ clients and dismissed all of the Plaintiff’s claims with prejudice.
Billy practiced law in Florida for five years and regularly litigates Florida cases, and he and I have done well in Florida over the years. We felt strongly about our liability and damages defenses and didn’t want to waste our clients’ money on an excessive settlement. Our clients agreed and had the confidence to stand up to the Plaintiff. If early summary judgment had not been granted, Billy and I planned to prevail on another dispositive motion or at trial.
When a Plaintiff makes a reasonable demand, we often recommend settlement to our clients. But, when the plaintiffs are unreasonable, we know how to get a better result at the courthouse.
As Churchill announced:
we shall fight on the beaches,
we shall fight on the landing grounds,
we shall fight in the fields and in the streets,
we shall fight in the hills;
we shall never surrender…
There are no sure things in litigation, but if you want to know what a case is worth, sometimes you must have the courage to fight. We are both very grateful to our clients for their courage in letting us go forward.
Last Saturday I was, once again, Player Coach for the Lawyers in the Jawbones v. Sawbones Charity Basketball Game. This is the 6th year of the Event and I have played, and Carlock Copeland has been a sponsor, every year. The event usually raises about $80,000 for the Side By Side Brain Injury Clubhouse and this year the Lawyers won again in a relatively close game. While our team was once again stacked with some pretty good ex-college talent, that was not what I thought about while leaving the Mercer University gym. The game started when a young woman was given a microphone in the middle of the Court and welcomed us all to the event. She only spoke about 20 brave but halting words to the assembled multitude. She had worked at the Clubhouse for five years trying to regain the powers of speech following a stroke. Her welcome was just a step along the way of recovery. Other brain damage victims happily passed out towels or worked the concession stand. After six years I have seen many of the same family members again and again.
Many of us are blessed to practice law or medicine or accounting. The joy of counseling clients and handling sophisticated work is something that we hopefully grow to value more and more over the years. I was reminded on Saturday night that many are not so blessed and we should appreciate all that we have. Link to learn more or support The Clubhouse: http://www.sidebysideclubhouse.org/giving-volunteering/donate/.
In its recent Opinion No. 27707, Rogers Townsend & Thomas, P.C. v. Peck, et al., Appellate Case No.: 2011-199626, the South Carolina Supreme Court found that Community Management Group (“CMG”), a management company for homeowners associations and condominium associations, engaged in the unauthorized practice of law when it (1) represented its association clients in Magistrate’s Court; (2) filed judgments in Circuit Court; (3) prepared and recorded liens to recover unpaid assessments and other charges; and (4) advertised that it could perform the services the Supreme Court now deems the practice of law.
CMG argued that the administrative order In re Unauthorized Practice of Law Rules Proposed by South Carolina Bar, 309 S.C. 304, 422 S.E.2nd 123 (1992), allowed a non-lawyer officer, agent, or employee to represent a business, and that it, as an agent of its association clients, could therefore represent them. The Supreme Court disagreed and clarified In re Unauthorized Practice, finding that non-lawyer third-party entities or individuals, such as CMG, are not “agents” because they have no nexus or connection to the business arising out of its corporate structure.
CMG further argued that suing in Magistrate’s Court on behalf of associations to collect unpaid assessments was not the unauthorized practice of law because it did not require specialized legal skill or knowledge. The Court disagreed. Likewise, the Court found that filing judgments from Magistrate’s Court in Circuit Court constituted the unauthorized practice of law, as did preparing and recording liens and other legal instruments. The Court chose not to rule on whether (1) interpreting covenants for homeowners; (2) addressing disputes between homeowners and associations; and (3) advising the associations on remedies to collect unpaid assessments constituted the unauthorized practice of law because petitioner did not include specific facts or details about CMG performing those services.
This Opinion offers some clarity on what can be a blurred line between performing legal and non-legal services on behalf of community associations. As management companies continually offer and perform expanded services to community associations, they must remain diligent in considering the implications of their conduct. Similarly, community associations and their lawyers must ensure legal tasks are appropriately assigned to, and performed by, lawyers. The convenience or financial benefit of allowing a non-lawyer to address these tasks is outweighed by the risks it may be completed improperly, the Court could deem it the unauthorized practice of law, and it could lead to a criminal charge . The unauthorized practice of law in South Carolina is a felony requiring a fine of up to $5,000 or imprisonment for up to 5 years, or both, once the Supreme Court has deemed the charged activity is the practice of law.
Takeaways from Professional Liability Underwriting Society (PLUS) International Conference 2016:
1. Law firms fail because of: too much debt, rapid expansion, guaranteed salaries, and/or cultural divides.
2. We are all expecting a U.S. law or accounting firm to get hit with a Panama Papers style data breach which brings down the firm and probably yields management liability claims as well.
3. The IRS will continue its attack on captive insurance companies utilized to avoid tax with no real risk transfer.
4. Mary Jo White will be missed and you might expect the SEC to focus less on Wall Street and more on Main Street in the next four years.
Just last week the ABA’s Standing Committee on Lawyers’ Professional Liability (LPL) released its Survey of Legal Malpractice Claims 2012-2015. Items of note include:
1. Total legal malpractice claims increased by 20% from the 2012 survey. This might appear to be a big increase but it looks small when you read on.
2. There was a huge increase in the number of claims in which claimants received over $1 million. There were only 52 such claims reported in the 2011 study but there were 440 such claims reported in the 2015 study for more than a 700% increase. Perhaps you should check my math, as a lawyer with a calculator is a scary thing; nonetheless, we should all check our limits and make sure we have enough coverage in a world of big dollar claims.
3. Total real estate claims dropped 21% when 2015 is compared to 2012. This is true despite the fact that commercial real estate transactions have increased during that time and many commercial real estate lawyers are experiencing the best of times. Not many real estate deals are failing and that helps keep the pressure off the lawyers who do the deals.
4. 46% of the claims arose from administrative errors, client relations or intentional wrongs. While this is a slight reduction from prior surveys, it still emphasizes the importance of basic blocking and tackling.
- Keep your administrative machine running smoothly, return client calls, be nice, don’t intentionally hurt your client, and your E & O risk is cut in half.
- The seamless web of the law is vast and can’t be perfectly understood by any of us. Let’s all do the easy stuff and reduce our risk dramatically.
5. Claims against bankruptcy and collection lawyers have only dropped off about 4% from the 2011 study to the 2015 study. Despite the precipitous decline in consumer bankruptcy filings, commercial bankruptcy filings are said to be on the rise and so are claims against the lawyers involved.
The Standing Committee puts out the Profile on Claims every third year and also sponsors two great conferences annually. If you are interested in getting involved in our work feel free to reach out to Joe Kingma or just say hello at our spring meeting in Boston.