Earlier this month, PWC published is 13th annual evaluation of private securities class action lawsuits. PWC’s analysis found that federal securities class actions increased for a second year in a row, with the financial services industry unseating high-technology companies for the dubious distinction of most frequently sued. PWC also noted that, perhaps not surprisingly, accounting-related lawsuits declined as a percentage of total filings, while the number of settlements recorded declined to the lowest number this decade. The study also notes that CEOs and CFOs are most frequently named in lawsuits, and that plaintiffs are increasingly targeting Fortune 500 companies (also due to the financial services effect). Given these trends, 2009 could be shaping up to be a high water mark for private securities litigation.
Executive Compensation Litigation Heating Up Too
Kevin LaCroix provides an excellent overview of the latest developments in executive compensation litigation today in The D & O Diary blog. Kevin notes:
“Drawing on popular anger evidenced most recently in the outrage surrounding the AIG bonuses, these most recent compensation-related cases could represent an even more pronounced litigation threat than prior lawsuits over pay. The same forces driving the litigation have also produced a variety of other corporate and social responses, some of which may or may not fully serve the purposes of overall social utility.
Among other recently filed lawsuits involving executive compensation is the derivative complaint filed on April 1, 2009 in California (Los Angeles County) Superior Court against the current AIG CEO Edward Liddy and several other AIG directors and officers. The complaint (copy here) among other things alleges that ‘there was no rational business purpose or justification for these lucrative additional payments, particularly given AIG’s deteriorating financial condition and dismal financial performance,’ and described Liddy’s explanation of the bonus payments as ‘outrageous on its face’ and ‘absurd.’ The complaint seeks to recover damages for corporate waste, breach of fiduciary duty, abuse of control and unjust enrichment.
The bonuses paid to Merrill Lynch employees at year end just prior to the consummation of the company’s merger with Bank of America also features prominently in the shareholders’ litigation filed against Bank of America earlier this year, following the revelation of Merrill’s massive and previously unreported losses.”
The D&O Diary blog also notes the outcome in the recent Citigroup case in Delaware involving Charles O. Prince’s $68 million exit package, discussed in Broc’s blog on the topic from last month.
While shareholder-initiated litigation is taking off in the current anger-fueled environment, it seems that now may be the time when we will also see more SEC Enforcement focus on executive compensation. The “honeymoon” with the 2006 compensation rules is long over, and thus now may be the time when we will start to see Enforcement bring some high profile cases to demonstrate attention to the issue. A couple of roadblocks that could stand in the Enforcement Division’s way in bringing these sorts of cases is that the principles-based aspects of the rules might make it more difficult, in some circumstances, to bring fraud or reporting violation cases, given that the lack of bright lines gives companies a significant degree of latitude in deciding what is and is not material. Further, the heightened sensitivity to compensation issues, more engagement by compensation committees, and the voluminous disclosure that is now required may reduce the ability to hide or mischaracterize compensation that could give rise to Enforcement’s interest. Unlike shareholders, the SEC is limited to disclosure violations and can’t pursue claims such as corporate waste.
Goldman CEO’s Remarks on Wall Street Pay Reform
Earlier this week, at the same Council of Institutional Investors meeting where Chairman Schapiro laid out the SEC’s regulatory agenda, Goldman Sachs CEO Lloyd Blankfein called for changes to the compensation model on Wall Street. As noted in this story appearing in the LA Times, Blankfein faced some angry protestors while delivering his address – certainly a sign of these times of extraordinary public anger.
Blankfein noted that compensation decisions must be made in the context a multi-year evaluation of risk to get a full picture of an individual’s decisions, and that performance should not be judged in isolation. Among the specific guidelines that he suggested are:
1. Compensation should include salary and deferred compensation, which is “appropriately discretionary” because it is based on performance over the year.
2. The proportion of equity comprising and individual’s compensation should increase significantly as total compensation increases.
3. Senior employees should get most of their compensation in deferred equity, while junior people should get most of their compensation in cash.
4. Individual performance should be evaluated over time to avoid excessive risk taking and to allow for a clawback effect.
5. Equity awards should be subject to future delivery and/or deferred exercise over at least a three-year period.
6. Senior executive officers should retain the bulk of their equity until they retire, and equity should not be accelerated once someone leaves the firm.
– Dave Lynn