Risky business: the increase in US securities class action originating from Latin America

Tightrope walker concept of risk taking and challenge

Over the past 10 years, there has been a record increase in the filing of securities litigation against foreign companies that issue securities in the United States, most commonly via American Depository Receipts (ADRs). Between 2014 and 2018, 202 cases against foreign companies were filed in the United States, representing a 41% increase in filings, with nearly every region experiencing a major jump in the number of suits. 26 of these cases have specifically been filed against Latin American companies.[1]

In a correlated manner, the average settlement value of these actions has also increased at an astonishing rate over the past five years. From 2014 to 2019, total settlements increased 581% from US$657 million (2008-2014) to US$4.5 billion (2014-2018). The average settlement value for actions brought in Latin America is US$16.8 million; however, it is worth noting that there is an outlier — the settlement value entered into by Petrobras in the action arising out of the Lava Jato scandal, valued at US$3.3 billion.[2]

Our experience corroborates these findings, having seen more and more US securities actions filed against our clients’ insureds in Latin America. As an example, in addition to the Petrobras class action mentioned above, over the past years, we have dealt with US securities actions filed against Argentina’s largest real estate company, Peru’s largest construction company, and a Brazilian mining giant.

Given the increased prevalence, and potential exposure, arising out of US class actions filed against Latin American companies, we believe it would be useful to provide a brief overview of the most common type of securities action filed against Latin American companies in the United States, Section 10b-5 actions brought under the 1934 Securities Exchange Act, and a common problem (re)insurers face in adjusting these claims in the context of D&O (re)insurance and these policies’ willful misconduct exclusion.

The United States Congress enacted the 1934 Securities Exchange Act in response to the stock market crash of 1929 and the resulting Great Depression. The key provision of the Securities Exchange Act is Section 10(b), which, along with Security Exchange Commission (SEC) Rule 10b-5(b) promulgated thereunder, broadly prohibits deception, misrepresentation, and fraud “in connection with the purchase or sale of any security” based on any public corporate statement. Specifically, Rule 10b-5 prohibits the use of any “device, scheme, or artifice to defraud,” and creates liability for any misstatement or omission of a material fact, or one that investors would think was important to their decision to buy or sell a security.

Claims brought under Section 10(b) of the Securities Exchange Act are subject to a heightened pleading standard. Specifically the Second Circuit, which is the judicial circuit encompassing New York City where the vast majority of these actions are filed, has found that in order to succeed under these provisions, a plaintiff bears the burden to prove that (1) the defendant made a material misrepresentation or omission; (2) with scienter; (3) a connection between the material misrepresentation or omission and the purchase or sale of a security; (4) reliance by the plaintiffs on the alleged material misrepresentation or omission; (5) economic loss suffered by the plaintiffs; and (6) loss causation.[3]

A particularly interesting discussion can be had on the scienter requirement in 10b-5 claims and its relation to the willful misconduct exclusions typically found in D&O policies. Black’s Law Dictionary defines scienter as “a mental state consisting in an intent to deceive, manipulate, or defraud. In this sense, the term is used most often in the context of securities fraud.” Thus, scienter is a term comparable to the concept of dolo in Latin American jurisdictions.

Furthermore, in the Second Circuit, “a strong inference of scienter can be established by alleging facts either ‘(1) showing that the defendants had both motive and opportunity to commit the [alleged] fraud or (2) constituting strong circumstantial evidence of conscious misbehavior or recklessness.’”[4] Further backing this jurisprudence, the US Supreme Court has found that “every Court of Appeals that has considered the issue has held that a plaintiff may meet the scienter requirement by showing that the defendant acted intentionally or recklessly.”[5]

At the same time, recklessness is defined as “conduct whereby the actor does not desire harmful consequence but nonetheless foresees the possibility and consciously takes the risk; gross negligence; recklessness involves a greater degree of fault than negligence but a lesser degree than intentional wrongdoing.” As such, recklessness is a term comparable to the concept of culpa grave in Latin American jurisdictions.

Therefore, a guilty verdict in a 10b-5 action necessarily has the effect of triggering the willful misconduct exclusions typically found in D&O (re)insurance policies, which have the effect of precluding coverage for claims arising out of an insured’s intentional misconduct or gross negligence.

This leads to a scenario where (re)insurers and their insureds have conflicting interests in the litigation, with the (re)insurers potentially wishing to see litigation through to the end to assure that any potential indemnities are properly paid and with the insured, understandably, wishing to settle the matter to save themselves time, money, and the threat of an adverse judgment. However, it must be noted that because willful misconduct exclusions may only be applied once a final judgment confirming the insured’s guilt is rendered, (re)insurers must continue advancing defense costs to the insured. These defense costs also play an important equation in the decision of whether to settle a case or not, as they are quite costly—running an average, in our experience, of approximately US$20 million through trial.

Given the above, it is not only necessary for (re)insurers to conduct an intricate cost-benefit analysis when presented with a US securities claim in order to determine the strategy they wish to pursue in terms of defending or settling the action, but it is also important for underwriters to reconsider their pricing models for D&O (re)insurance policies issued to Latin American entities with exposure to the US securities market, especially when considering the current trend of US securities litigation against foreign companies becoming not just more prevalent, but more expensive as well.

This topic made for a lively discussion at this year’s annual Miami Latin American Claims (Re)Insurance Forum, where industry leaders gathered to give their perspectives on this notable trend. A particularly interesting point was raised regarding expert discovery. Usually, experts’ reports on damages, which are key to engaging in settlement negotiations, occur after fact discovery is completed, which in turn is a costly and time-consuming part of litigation. However, this extra expense could be avoided, and settlements could potentially be entered into quicker, if expert’s damages reports were set to be produced after fact discovery.

Find out more about the other topics discussed at this year’s Miami Latin American Claims (Re)Insurance Forum.

1 Why D&O Costs Are Soaring for Foreign Filers
2 Ibid.
3 GAMCO Inv’rs, Inc. v. Vivendi Universal, S.A., 838 F.3d 214, 217 (2d Cir. 2016).
4 In re Bear Stearns, Inc. Securities, Derivative, and ERISA Litigation, 763 F.Supp.2d 423 (S.D.N.Y.2011).
5 Tellabs, Inc. v. Makor Issues & Rights Ltd., 551 U.S. 308, 319 (2007).

Authors: Alex Guillamont, Head of Latin America and Caribbean and Javier Vijil, Associate at Kennedys’ regional hub in Miami.

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Are the recent deaths in the Dominican Republic a threat for future recovery actions?


The Dominican Republic is the second-largest Caribbean nation by area with approximately 10 million inhabitants, of whom approximately three million live in the metropolitan area of Santo Domingo, the capital city. The island is famous for its beaches, resorts, golf courses, hotels and for its friendly service.

However, during 2019, a series of deaths (at least twelve American tourists) have happened in different hotels and resorts, triggering alarms in an economy where last year, the tourism industry raised USD 7.6 billion, which represents over 17% of country’s GDP.

Although, online travel insurance companies have confirmed that these deaths have not affected travel interests in the Caribbean country, considering the impact that this kind of event can provoke in the insurance industry, we would like to give you a “sneak peek” on how the legal system works, as well as recovery actions against hotels, tour operators and third parties.

How the legal system works in the Dominican Republic?
The Dominican Judicial Branch is composed of three instances:

1. First Instance Courts sees all matters that are not attributed by law to another court and other matters expressly attributed to them by law;
2. The Second Instance Courts or Appeal Courts attends to the appeals against first instance judgements and other matters expressly attributed to them by law; and
3. The Supreme Court of Justice has the power to hear and rule on cassations filed for Civil, Commercial, Criminal, Labor and other matters.

The majority of actions in the Dominican Republic, which need to be filed within 2 years from the date of the loss or damage, go through the three instances, which usually take between 3 to 5 years in total.

The relationship between the hotels and their guests is considered contractual, commencing at the time the guest pays for their reservation directly to the hotel. When the reservation is made through a tour operator and/or third parties, although the contractual relationship is between the guest and the tour operator who would be sued if the guest files a complaint even when the hotel is responsible for the damages, the claimant may also file a claim directly against the hotel due to the hotel’s obligation to ensure the safety and well-being of its guests.

Most of the suits involving hotels are usually related to falls or accidents that occur in the facilities, such as drowning in the pools and some illnesses. In these claims, the plaintiff, on whom the burden of proof lies, must show that the accident or fall was caused by some damage in the area, such as a wet floor, a staircase whose steps have faults, etc. In cases that involve illnesses, the plaintiff also needs to exhibit a toxicological report showing that the disease is the consequence of the consumption of decomposed food or an adulterated drink. The lack of this evidence during trial can lead to a non-favorable judgement.

In regards to jurisprudence, despite the fact that Dominican law is governed by codes (Civil, Commercial, Criminal, etc.), case law exists in which the Supreme Court recognizes that the civil liability derived from defective products (i.e. rotten food, damaged equipment, use of non-approved pesticides) is not limited to the hotel but includes all of the people involved in the manufacturing process.

Is a recovery action possible in the Dominican Republic?
First of all, the plaintiff has to demonstrate the existence of the damage and/or the responsibility (or lack of it) of the defendant to present the case in court.

For any recovery action to be executed in the Dominican Republic, including those cases in which tour operators and/or third parties are involved, there must be:

– A final judgment recognizing the damage and ordering certain compensation;
– That the payment ordered by the court to the person who suffered the damage has been executed and;
– That the person responsible for the damage is solvent.

For those who may have interest in claims filed in the Dominican Republic, we can state that generally speaking, the chances of a successful recovery is 50/50. However, if all three requirements above mentioned are present, the chances of a successful recovery increase exponentially.

Authors: Alex Guillamont, Head of Latin America and Caribbean at Kennedys, Carlos Álvarez, lead partner of Kennedys’ associate office in the Dominican Republic, and Daniel Padrón, Associate of Kennedys in Miami.

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Day 3: 2019 Miami Latin American Claims (Re)Insurance Forum

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Day 2: 2019 Miami Latin American Claims (Re)Insurance Forum

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Day 1: 2019 Miami Latin American Claims (Re)Insurance Forum

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Welcome Cocktail Pictures: 2019 Miami Latin American Claims (Re)Insurance Forum

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Fiscal Liability Proceedings in Colombia


Bogota, Colombia - view of capital city downtown from Monserrate

In recent years, the amount of fiscal liability proceedings has been increasing substantially. Insurance companies have been called into those proceedings. This has resulted in many awards against insurers some of which have ignored the rules and principles of insurance contracts, and decisions by the Council of State and Supreme Court.
This situation has caused understandable concern in the market—the most relevant aspects of these proceedings are explained below.

What are fiscal liabilities proceedings?
The Office of the Comptroller General (CGR in Spanish) has a constitutional mandate to supervise the correct management of state property, including funds. Through fiscal liability proceedings, the CGR seeks to determine whether public officers and private parties that deal with public property funds have managed them properly.  If damage or financial detriment has been caused to the State due to fraud or gross negligence of those being investigated, those persons will be asked to pay monetary compensation for the damage caused.
The proceedings end with an administrative decision that, as in other civil code countries, is subject to appeal before the contentious-administrative courts.

Who can be held fiscally liable?
In this context, government agencies will never be liable as they are the victims—only public officers (civil servants) and private persons (whether people or companies) can be made liable. Sometimes the CGR adopts a broad interpretation of the notion of what is handling or administering public funds to broaden the spectrum of potentially liable parties and include persons who strictly are not performing those activities, thus going beyond its powers.

Insurers’ role 
Article 44 Law 610 2000 states that in cases where there is an insurance policy covering the possible liable person or the property or contracts that are being investigated by the Office of the General Comptroller, the insurer shall be called into the proceedings as a potentially liable third party and may be ordered to pay compensation to the State.

Types of policies likely to be involved in fiscal liability proceedings
1. Surety
2. D&O Policies for Public Officers
3. Crime Policies
4. D&O

Contraloría’s Decisions that affect the insurance market
Several decisions of the Contraloría have caused concern of late with high profile cases related to corruption being investigated. The most popular matters concern:

1. Multiple policies’ periods: In cases involving losses occurring over time by continued actions or omissions of public officers—or individuals that manage or administer public funds—the DGR has triggered multiple policy periods, accumulating insured limits. By doing so, the Contraloría ignores the insurance contract rules and principles, the agreed terms and conditions, and the insured limits.

2. Title V of the Colombian Commercial Code regulates the insurance contract.  The CGR determined that its provisions were not applicable to them, deeming that the provisions of the Code were only applicable to private contracts and theirs are investigations of public nature.

3. Exclusions: In some matters, the CGR has ordered insurers to pay in instances were exclusions were applicable, therefore ignoring the terms and conditions of the insurance contract.

4. Claims made: CGR has also ignored claims made clauses arguing that they are not essential to the insurance contract, they limit insurer’s responsibility unduly, are abusive, and that insurance contracts shall answer to the general interest.

The approach of the CGR goes against multitude of well settled principles of insurance and commercial law.

What is being done?

In addition to contesting the admin CGR decisions before the courts, local and international markets have been active before the Insurers Association (Fasecolda) and several government agencies to raise awareness of the implications and promote dialogue with  CGR and congress. Kennedys is acting for several markets in different appeals and initiatives.

Currently in Congress
There are two bill initiatives currently in Congress.

The first initiative was filed by the former Comptroller Edgardo José Maya (Bill No. 099 of 2018). This bill (i) modifies the requirements to start a fiscal liability proceeding making them more strict in respect of evidence of the damage, (ii) changes the fiscal liability limitation period, (iii) specifies that the payment for anticipated termination of the fiscal liability proceeding includes indexation, (iv) determines that the testimony of the investigated persons is not a requirement to issue an accusation writ or indictment and that those testimonies can take place after the accusation writ or indictment is issued, and (v) modifies the quantum required for a second instance appeal.

The second bill seeks to amend the Constitution and was filed by current Comptroller Carlos Felipe Córdoba (Constitutional Amendment No. 355 of 2019). The initiative (i) establishes that Fiscal control will be concomitant and preventive and not only subsequent and selective, (ii) unifies the Jurisdiction of the CGR specifying that said Office will have  prevailing competition to exercise fiscal control over any territorial entity, and (iii) determines that the CGR will have judicial functions and judicial police functions.
Very much a developing story that we will be following closely. We will be discussing these issues at the Miami Latin American Claims (Re) Insurance Forum this week.

Authors: Monica Tocarruncho, Partner, Kennedys in Colombia; Catalina Botero, Senior Associate, Kennedys in Colombia and Alex Guillamont, Head of Latin America and Caribbean practice at Kennedys.

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