2015 Could See First Private Action Under Rule 10b-5 Over Cyber Hacks

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By Yin Wilczek

Jan. 28 — This year could see the first private securities fraud lawsuit involving a cyber breach incident and an increase in shareholder derivative actions, insurance experts in the director and officer arena said Jan. 28.

Although there have been significant cases—including shareholder derivative actions—filed over cyber breach incidents, “I'm surprised” there hasn't yet been a shareholder case filed under 1934 Securities Exchange Act Rule 10b-5 alleging misrepresentations over cyber risks, said Steve Shappell, chief legal officer at JLT Specialty Insurance Services.

“But it will come,” he added. “We're going to see that litigation.”

Kevin LaCroix, an executive vice president at insurance broker RT ProExec and author of the D&O Diary blog, suggested that there is as yet no Rule 10b-5 action because in many cyber breaches, there hasn't been a significant fall in stock prices. However, plaintiffs attorneys are “choosing their battles, they're going to experiment until they find a way they can make money off of this,” he said. “They will find a way, but they're just not there yet.”

Wyndham Wake-Up Call 

Shappell and LaCroix also suggested that the recent dismissal of a shareholder derivative lawsuit involving Wyndham Worldwide Corp. data breaches is a “huge wake-up call” to boards to aggressively tackle cyber risks. 

The Wyndham case shows that “if you aggressively take some role and provide some guidance in addressing these issues, you will be rewarded at the company,” Shappell said. “A, your security will increase and B, your liability will be dramatically reduced because you did aggressively address these exposures.”

LaCroix and Shappell were part of a securities litigation webcast sponsored by insurance consultant Advisen.

According to an Advisen white paper on securities litigation, new securities class actions declined slightly in 2014 compared to 2013, falling to 183 from 188. The findings are in line with other studies, including ones by NERA and Cornerstone Research.

The number of shareholder derivative actions also has steadily declined, according to Advisen. In fact, it said the 164 derivative filings in 2014 was significantly below the 10-year average of 233 filings.

Shappell said that contrary to what the Advisen white paper might suggest, derivative litigation could very well increase this year. “I think we’ll continue to see a growth in such actions,” he said.

Interesting Developments 

Shappell noted that derivatives litigation is evolving into a “really interesting tool for the plaintiffs bar.” He cited Freeport-McMoRan's agreement earlier this month to pay $137.5 million to settle a derivative action over alleged conflicts of interest that caused the company to overpay to acquire two oil and gas companies in 2013.

Shappell observed that the $137 million will be distributed to the shareholders, which “sounds like a 10b-5 fund” and is a “really interesting mechanism.” He added that in his discussions with plaintiffs attorneys, “they like the idea.” He suggested that more and more plaintiffs lawyers will bring standalone derivative claims rather than join in a Rule 10b-5 resolution. “It's one of the key trends I'm worried about,” he said.

Kathryn Walker, second vice president at Travelers, agreed that derivative lawsuits could see a jump, especially if the market stays stable throughout 2015. “I think the plaintiffs bar will turn to such lawsuits,” she said.

In other discussions, the panelists said that the high settlements seen in the Foreign Corrupt Practices Act sphere inevitably will attract follow-on private litigation. Among other settlements, Alstom SA agreed in December to pay a record $772 million to end a Justice Department investigation into bribes paid to win power plant contracts in Indonesia and other countries.

“It's a trend worth watching,” Walker said. “They're just very attention-grabbing numbers.”

LaCroix also suggested that the increase in anti-corruption enforcement by some jurisdictions, including China and Brazil, could impact securities litigation in the U.S. He cited the anti-bribery case against Petroleo Brasileiro SA (Petrobras)—a non-U.S. investigation involving a non-U.S. company—in which U.S. shareholders holding the company's American Depositary Receipts have filed a U.S. class action lawsuit.

Whether the targets are U.S. companies, “the increased regulatory activity outside” the U.S. could lead to increased follow-on litigation both inside and outside the U.S., LaCroix said.

IPO Litigation 

Moreover, Shappell predicted that there may be litigation over initial public offerings given the large number that were filed in 2014. IPO litigation historically has been “very profitable” for the plaintiffs bar because unless they allege fraud, they only have to show material misrepresentation, Shappell said. In addition, the median IPO settlement is “almost double” that of a “pure 10b-5 settlement,” he added. “So I think we’ll see a lot of IPO litigation unless the market is really, really strong.”

Meanwhile, LaCroix said that other issues to watch in 2015 include:

• Litigation funding. LaCroix noted that firms that provide litigation funding in other countries have opened affiliates in the U.S. While those funding firms are primarily focused on intellectual property and antitrust, they eventually will turn their attention to the D&O area, he said.

• Developments in the Delaware Legislature with respect to fee-shifting bylaws.

• The U.S. Supreme Court's decision in Omnicare Inc. v. Laborers District Council Construction Industry Pension Fund, which is due by June. The case involves corporate liability under 1933 Securities Act Section 11 for sincerely held opinions or beliefs in a registration statement.


To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

The Advisen white paper is available at http://www.advisenltd.com/wp-content/uploads/do-claims-trends-2014-wrap-up-white-paper-2015-01-27.pdf.


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