Countrywide Decision Underscores Lawsuit Threat

Officers and some 14 directors of embattled subprime mortgage lender Countrywide Financial must face the music in a shareholders lawsuit. That was the recent decision of a federal judge in Los Angeles in a case against Countrywide filed by shareholders including several large public pension funds.

Countrywide's predicament underscores a new surge of shareholders lawsuits that is bound to affect CEOs and directors everywhere. Suits have been filed against at least 73 lending firms and the number is likely to go up. Also likely to go up are premiums for directors' and officers' insurance policies.
It has happened before. Just a few years ago, a chain of events including the bursting of the high technology bubble and several high profile corporate scandals sent once-docile D&O premiums skyrocketing 30, 40 and even 50 percent. By some accounts, some rates went up 103 percent in 2002.

About three years ago, the D&O business quieted down as big-time scandals such as Tyco, Enron and WorldCom ran their course and the Sarbanes Oxley Act forced companies to be more forthcoming about their finances.

But as the Countrywide example shows, scandals are back with a vengeance. Federal judge Marianna R. Pfaelzer ruled that the companies officers and directors must face trial. Judgments could be levied that require the seizure of individual and personal assets.

In the Countrywide case, plaintiffs claim officers and directors sold off some $850 million in company stock from 2004 to 2007. The shares were being unloaded even as the firm was spending $2.4 billion to buy back its stock. Judge Pfaelzer wrote that in their suit, the plaintiffs identified numerous red flags suggesting that Countrywide was issuing increasingly risky loans.

What's your take on this? Have you checked with your D&O insurer to see if your rates are going up?