United States: Letter From America (2015 Edition)

Last Updated: April 28 2015
Article by Edward J. Kirk

Ill-gotten gains, hackers and Robocop as well as the U.S. Supreme Court's continuing interest in securities class action litigation; the US landscape is never dull. This article takes a look at some of the trends that emerged in 2014 and what may be on the horizon in 2015.


Following the numerous sizeable and highly publicized data breaches taking place in 2014, including at Target, Michaels, Ebay, JP Morgan and several other banks, Home Depot and, of course, Sony Pictures, there can be little doubt that cyber risks are a major concern for US regulators, lawmakers and corporate America. The cost to prevent, respond and mitigate against cyber attacks is significant and rising, and the common view is that it is not a matter of if, but when, a company will be targeted by hackers.

Cyber risks are, perhaps unsurprisingly, under increasing scrutiny by federal and state regulators in the U.S. In 2015, we can expect more regulatory actions against companies that have incurred a data breach.

Companies that have a data breach must comply with a complex web of regulations. 46 states and the District of Columbia currently have notification laws that apply in the event of a data breach, and which states' laws will apply is determined by the residence of the individual whose information was taken. In addition, a number of federal statutes apply in this area and new federal legislation is expected this year. All this means that companies must often navigate through multiple laws following a data breach and may be subject to exposure for failing to properly comply with applicable regulations.

Public companies and their directors and officers (D&Os) may also face exposure to regulators if they fail to properly address and disclose cyber risks in their public filings. The sufficiency of cyber disclosures has already been the subject of an SEC guidance issued in October 2011 regarding when a public company is required under current rules governing SEC filings to disclose cyber risks to the company's operations, liquidity and financial condition. The SEC's guidance specified what a company should disclose regarding known and potential cyber risks, including a description of its relevant insurance coverage. A company's failure to follow this guidance could lead to regulatory action.

In addition to regulatory action, companies and their D&Os may face an increasing amount of shareholder litigation following a breach. At least for the near future, shareholder lawsuits will likely be in the form of shareholder derivative actions brought on behalf of the company against its D&Os.

To date, a number of cyber-related derivative actions have been filed, including cases against Target and Wyndham D&Os. In those cases, shareholders allege that the D&Os breached their fiduciary duties of care and loyalty, and wasted corporate assets by failing to take reasonable steps to protect customer information, implement sufficient controls and caused the company to conceal breaches from investors and customers. If the D&Os failed to implement sufficient systems and consciously oversee the company's operations, they could be found liable for harm to the company.

However, shareholders will face a number of formidable hurdles in pursuing derivative actions. For example, the business judgment rule protects a director's informed and good faith decision unless there is no rational business purpose. Also, shareholders must first make a demand that the board take action against the D&Os and show bad faith if that demand is declined. These are difficult standards for shareholders to meet in many cases.

In a recent decision in the Wyndam derivative action, the court found that the board's refusal of a shareholder's demand was protected by the business judgment rule. The board had implemented a cyber security program before the breach, and it had made an informed decision to reject the shareholder demand. Thus, at a minimum, D&Os must implement sound reporting and control systems regarding cyber risks to avoid liability following a data breach.

The plaintiff securities bar certainly has its eye on cyber risks, but to date there have been few securities class actions following a cyber breach. This is likely because in most cases, there has not been a statistically significant stock drop after disclosure of a breach. However, as cyber attacks increase in number and severity, and the markets begin to better understand and appreciate their impact on public companies, stock prices may react more strongly to such news and investors may sue.

US Business Litigation Trends

During 2014, the US economy strengthened, the stock markets rose and business litigation receded to numbers not seen since well before the subprime/credit crunch crisis in 2007-2008. The number of new filings as well as average settlement amounts decreased for most types of business lawsuits.

The 170 new securities class actions filings in 2014 was slightly above the 167 cases filed in 2013, which is well below the average annual filings of 189 since 1997. The average settlement in such actions also dropped significantly from $55 million in 2013 to $34 million in 2014. It is important to keep in mind, however, that there were almost twice as many public companies in the US in 1998, so it is actually more likely now that companies trading on a US exchange will be sued.

There were no new major filing trends in 2014, and previous trends such as Chinese reverse mergers and subprime lawsuits, appear to have run their course.

The number of new shareholder derivative actions also fell to 164 in 2014, which is well below the annual average of 233 over the past 10 years. The number of derivative settlements is also down substantially, although we have seen some noteworthy settlement payments in the past few years, including a $275 million payment to resolve the Activision shareholder action in December 2014.

While the litigation picture therefore looks fairly rosy by US standards, there are a number of trends to watch which could significantly increase FI/D&O exposures, particularly if the economy and stock markets take a turn for the worse, as they are bound to do.

First, the number of foreign companies sued in US courts continues to go up, despite the U.S. Supreme Court's 2010 ruling in Morrison v. National Australia Bank, which held that that the U.S. securities laws do not apply extraterritorially to so-called F-cubed plaintiffs. Plaintiffs continue to target companies issuing American Depository Receipts in the US markets, and Chinese and European companies were a particular focus this past year.

Another trend to watch is the potential rise in IPO securities class actions. The number of US IPOs in 2014 was higher than since 2000 (at the end of the tech bubble). We might be seeing the same kind of irrational exuberance in the markets that led to a record number of 309 IPO securities class actions in the early 2000s. If a company's share price falls after an IPO, investors may sue, as they did following Alibaba's September 2014 US IPO. These types of cases often have a lower pleading standard and may be harder to dismiss at an early stage.

More positively, fee-shifting provisions in corporate bylaws could have a dampening effect on shareholder derivative lawsuits by requiring non-prevailing parties in intra corporate lawsuits to pay attorneys' fees and costs. However, we may see new legislation that limits or precludes such provisions this year.

Finally, the US Supreme Court continues to take an active interest in securities class actions and has issued a number of decisions favorable to defendants in the past few years. In June 2014, however, in Halliburton Co v Erica P John Fund Inc., the Supreme Court declined to overturn the fraud on the market doctrine and the presumption of reliance for 10(b) misrepresentation cases. This decision has not been the "game changer" defendants had hoped for, and it has had a relatively limited impact to date. However, a March 2015 decision in Omnicare Inc. v. The Laborers District Council Construction Industry Pension Fund could have a more significant impact on claims brought under Section 11 of the Securities Act of 1933, which may be on the rise due to the increasing numbers of IPOs. In Omnicare, the Court vacated a ruling (with the effect that the judgment was rendered void) that a Section 11 plaintiff need only allege that an opinion was "objectively false", regardless of the issuer's understanding at the time the statement was made. That court held that a statement of opinion in a registration statement may not support Section 11 liability merely because it is ultimately found incorrect, and an issuer may be held liable under Section 11 for an opinion in a registration statement if the issuer did not hold the professed belief or failed to disclose material facts about the basis for the opinion that rendered it misleading.

Continuing Regulatory Aggression

Increasing regulatory aggression remains an enduring theme and we continue to see exposures not only with respect to the high costs involved in responding to regulatory actions, but also from follow on shareholder litigation.

The SEC's 2014 report shows that it filed 755 enforcement actions, up from 686 the year before. These high numbers are largely the result of the expanded powers and resources given to regulators in the aftermath of the subprime crisis, including the SEC's very successful whistleblower program, new technological tools to detect fraud such as the SEC's Accounting Quality Model or "Robocop" initiative, and the continuing aggressive enforcement of the FCPA, money laundering and insider trading laws.

Coverage Issues

A number of recurring coverage issues impacting claims under FI/D&O policies were addressed by US courts in 2014.

For example, recent decisions have addressed coverage for settlement payments to resolve regulatory and civil claims for disgorgement or restitution. It is well-established under US law that the return of ill-gotten gain is uninsurable under applicable public policy rules or simply does not constitute insurable "damages" or a "loss' as those terms are used in an insurable policy. In some recent decisions, however, US courts have held that coverage might be available for such settlement payments if the insurer could not conclusively establish that the payment constituted the insured's return of ill-gotten gain it actually received, rather than the insured's payment to resolve its liability for funds obtained by a third party.

Another increasingly common coverage issue is whether multiple actions or investigations are interrelated and therefore constitute a single claim in the policy period when the first claim was made. In Biochemics v. Axis, the District Court of Massachusetts held in January 2015 that there was no coverage under a D&O policy for an SEC investigation and action as the insured company was served with a subpoena before the policy period. In W.C. and A.N. Miller Development v. Continental, the District Court of Maryland found in November 2014 that a 2010 action to enforce a judgment was interrelated with a 2006 adversary action and therefore the claim was not first made in the 2010 policy period.

Further, coverage issues often arise in the context of bankruptcy actions. For example, in the MF Global bankruptcy case, a New York bankruptcy court held in September 2014 that D&O policy proceeds were not assets of the estate and therefore could be accessed by the D&Os. The court reasoned that when a policy provides direct coverage to a debtor, the proceeds are property of the estate, but when a policy covers D&Os exclusively, the proceeds are not.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions