John Keogh, Chubb. Courtesy photo

If anyone understands the financial impact of often frivolous securities class action litigation on a company and its officers, it is Chubb, the world's largest publicly traded property and casualty insurance company.

Zurich-based Chubb, which includes insurance coverage for corporate directors and officers, has pulled together an array of data and analyses from expert sources in a white paper showing the alarming rate of suit filings with ever-climbing costs.

Released Tuesday, the report, “From Nuisance to Menace: The Rising Tide of Securities Class Action Litigation,” aims to “raise awareness about this problem and to work on behalf of American business to effect meaningful reform”—especially among general counsel.

John Keogh, Chubb's executive vice chairman and chief operating officer, told Corporate Counsel, “This isn't just an insurance problem. General counsel need to understand that ultimately this is all going to come back as costs to their companies.”

Keogh said he has had to deal with general counsel who are friends and have had to go tell their board of directors that their D&O insurance costs are going way up, or that they can't have the same coverage as they've had in the past.

“We want them to see the impact and the cost to American business. We want them to get involved and lend their voices to the issues and support the reforms,” he added.

He said the impact is primarily in the U.S., because of its unique legal system. Two other places where he sees similar trends in skyrocketing securities litigation and costs are the U.K. and Australia.

Keogh explained in 2017 and 2018 the number of securities class action lawsuits filed in federal court broke new records each year, and the volume of suits is now twice the rate of 2014. “And this is likely the new norm,” he said.

The main financial awards from these lawsuits, Keogh said, are going to lawyers, both those who bring the cases and defend them. In the last five years, half of the nearly $23 billion in securities claims costs have gone to the lawyers, according to the report.

“The system is broken,” Keogh said, when over 5,000 cases have been filed since 1996 but less than 25 went to trial.

Most of the cases are settled, he said, and in 85% of those settlements, no money went to the shareholders who brought the suits. “What's the point?” Keogh asked. “Just to make the lawyers rich?”

The report offers five reform ideas, recommending Congress should:

• Legislate to end the filing of the class actions in both state and federal courts, and restrict them to federal courts.
• Take action to require that fees paid to lawyers be proportional to the amount of damages paid to the class, perhaps by appointing a special “fees” master. Keogh said he thinks proportionality is the most important reform of all.
• Require plaintiffs to actually be present and involved in the cases.
• Require the disclosure of the relationship between plaintiffs and their lawyers, especially lawyers who serve only as third-party intermediaries and refer plaintiffs but do no actual work on the case. Some experts suggest no referrals should be allowed.
• Fast-track decisions on motions to dismiss, allowing interlocutory appeals if the motion is denied.

Several experts quoted in the report also supported getting the U.S. Securities and Exchange Commission involved in reforms.

Gerard Pecht, global head of dispute resolution and litigation at Norton Rose Fulbright US, said the commission could take a closer look at litigation and identify repeat filers and attorneys who abuse the system.

“The SEC can then join the most problematic cases as an amicus in support of dismissal,” says Houston-based Pecht.

Bruce Vanyo, head of securities litigation at Katten Muchin Rosenman, suggests the SEC could refine its rules on what must be disclosed in a proxy statement for a merger transaction.

Chubb's Keogh has one more suggestion: Take the meritless cases to trial.

“Plaintiffs' lawyers are of a mind that general counsel at defending companies are going to decide that cases aren't worth the fight, even if they are meritless and highly defensible, because of the cost and the involvement of company executives and board members,” Keogh said.

“But I would encourage them to take these cases to a courtroom rather than settling,” he said. “And we as an insurance company would stand right there beside them.”

He said if the companies and their general counsel don't want to bother with the litigation and just want to settle, the insurance company usually has to honor that decision.

But he warned that such decisions will impact the future cost and coverage of corporate insurance.