Corruption and Bribery Compliance – Significant Measurable Metric

November 21, 2011

 

Bribery in your organization? Can you picture any one of your employees saying “all my competitors are doing it, so I am forced to grease the wheels just to compete”, or “there is a small chance that my (corrupt) activities will be uncovered, and even if they are uncovered I may or may not be disciplined; but, if I miss my budget for three quarters I will definitely lose my job.”

Canada is not known for its enforcement of corruption laws. In fact, it is a haven for fraudsters specifically because our weak history of enforcement. However, this is changing and your only protection is a documented effort to reduce corruption. There is considerable international political pressure on Canada to make Anti-Corruption and Anti-Bribery a top enforcement priority. The OECD (here) Phase 3 “Report on the Application of the Convention on Combating Bribery of Foreign Public Officials” mentions “enforcement more generally of the Corruption of Foreign Public Officials Act (CFPOA) may be uncertain, due to significant concerns that remain about Canada’s framework for implementing the Convention.” The OECD has been critical of Canada and our legislation because it is limited to “real and substantial” link to Canada, our interpretation of OECD Convention has been too limited, our enforcement has been “too low to be effective, proportionate and dissuasive”, and we have not committed enough resources to the prosecution of cases. According to the report we are on a tight leash and obligated to provide multiple reports on our progress through 2013. Perhaps the best evidence of our future focus is the Niko Resources case (see previous blog post, here,) which came out shortly following this report.

The enforcers of anti-corruption in other countries have a lot of power, and they are willing to exert it. Recently, the US Department of Justice (DOJ) and the UK Serious Fraud Office (SFO) joined forces in the Aluminium Bahrain B.S.C. (Alba) and Alcoa case. (This case has a Canadian spin, but not on the enforcement side, it just happens that one of the individuals recently arrested in London England on corruption charges was a Canadian citizen.) The case originated as a civil suit in 2008 in the US where Alba accused Alcoa, here, of misappropriating “$2 billion in Alba’s payments under supply contracts passed from Bahrain to tiny companies in Singapore, Switzerland, and the Isle of Guernsey, and that some of the money was then used to bribe Bahraini officials involved in granting the contracts.” The DOJ had a stay of prosecution executed in the civil suit to give them time to purse FCPA options.

I am going to hazard a guess that the top stated priority and top action item for most Compliance Officers in Canada is not controlling corruption. If controlling corruption is not a top priority in your organization, then I doubt you are comfortable that you can quickly document a host of “Significant Measureable Metrics” for Anti-Bribery and Anti-Corruption activities. There is not a lot of guidance to Canadian Officers on the subject of CFPOA loss control, but that is where we can learn from our US, UK and Australian counterparts.

The DOJ provides extraordinary information on its anti-corruptions initiatives. This is a key priority for US companies, and there are many examples of loss control initiatives coming out of US companies and their third party service providers. Thomas Fox and Howard Sklar team up in a production called This Week in FCPA, and in one of their recent sessions concentrated on Tone at the Top. They suggest that this is a key issue in FCPA defense and settlement negotiations. Here are seven ideas for Corporate Compliance Officers:

  1. Have CEO author a letter and attach it to the Code of Conduct and send to every employee in every country and region stating that breaching this Code of Conduct will not be tolerated;
  2. Have CEO record a video message to be played at every compliance training session, stating that breaching the Code of Conduct will not be tolerated;
  3. Have CEO send a quarterly email to every direct report reminding them of the Code of Conduct and that she/he will hold them to that Code and she/he expects them to disseminate this same message to each of their direct reports,
  4. Put compliance metrics in employee score cards, including the sales team,
  5. Train CEO to use the six most powerful words in compliance, “What does compliance think about that?” whenever she/he hears of a new market, new idea, new product, new effort, new program – every time, (and document this action),
  6. Everyone in the organization needs training but the workforce has to be grouped by risk category and the highest priority groups should get “in-person” training specific to their function and to the company’s Codes, Policies and Procedures that are in-force in that organization; and the underlying law (and document this action),
  7. Every person in the organization needs to know their internal alternative reporting options for conduct that breaches the codes and policies and procedures,
  8. Incorporate Audit Rights, (see here for more info on Audit Rights) into every contract; the DOJ demands that audit rights exist in every high-risk (anyone who is spending your money) third party contracts, (but there must be evidence of these rights being exercised).

This is very simple, but almost every good loss control technique is simple (see previous blog post “Risk Management is in the Details”). But I recognize this is much easier to say than do. CEO’s might not be the easiest people to train, but they will be the one in the spotlight of the RCMP / SFO / DOJ, and there are many examples (including the Canadian one) of the ultimate punishment being directly related to the value of policies, procedures and related actions of the company and its executives at the time the corruption and/or investigation became known to the executive team.

The above comments will add to the “measureable metric” list and improve the overall compliance evaluation and ultimately reduce the fine or penalty and other loss from an FCPA / CFPOA / UK Bribery Enforcement Action. However, a message is not enough, there must be Evidence of Action. Compliance has to be an integrated business force, not an outside nuisance.

Greg Shields is a Directors’ and Officers’ Liability, Professional Liability, Employment Practices Liability, Fiduciary Liability and Crime insurance specialist and a Partner at the University and Dundas (Toronto) branch of Mitchell Sandham Insurance Services. He can be reached at gshields@mitchellsandham.com,  416-862-5626, or Skype at risk.first.

CAUTION: This article does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered and truly independent insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decisions. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this document from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.

 


No Defence Costs from a D&O Policy

November 11, 2011

It is common in Canada that Defence Costs under a D&O policy will stop upon exhaustion of the limit of liability. There is the exception for Quebec where defence costs are outside of the limit of liability, but even Quebec risk does not guarantee unlimited defence costs. If there is any question regarding “jurisdiction” (ie. any part of the plaintiff, defendant, wrongful act, or policy construction was outside of Quebec) you can be sure the insurer will attempt to push the case into another jurisdiction that does provide defence costs within the limit of liability. You can also be sure that the insurer will regularly apply to the court to relieve them from the burden of defence costs based on, 1) their offer to settle having been made or 2) the policy limits being exhausted or
potentially exhausted by indemnity. There is no rule as to how much the insurer will be responsible for above the limit of liability, but the insurer will eventually be relieved from their defence obligations.

The concerning new precedent (here – provided by Kevin LaCroix, OakBridge Insurance Services and his The D&O Diary) is out of the New Zealand High Court (Auckland Registry) in a case where a real estate development and investment firm went bankrupt. The liquidators and receivers made a charge against the D&O policy limits of liability because their claim are “for a sum significantly greater than the amount of cover available under the D&O policy,’ and the insurer is “bound to keep the insurance fund intact.” The court agreed, and directors are left to fund their own defence of a number of large civil and criminal lawsuits.

If you are a Canadian director or officer, with no exposure to New Zealand, this case should not keep you up at night. But it should not be ignored. It is a great example of the risk of erosion or complete exhaustion of large limits of liability on defence costs. It is great example of the need to restrict some or all of the D&O limits to specific “loss.” Broad policies are not in the best interest of every insured. The conflicts between the various insured’s should be front and centre, not hidden in a hundred pages of insurance contract. Priorities for the insurance coverage should be balanced over the interests of each insured, and the priorities should be established long before the contract language is negotiated. And it is warning that jurisdictional differences should be examined to determine the need for locally issued policies, but also that “legal risk” is present in almost every country in the World due to
underdeveloped case law regarding D&O insurance.

Kevin LaCroix offers an explanation of the case, details on “choice of law provision”, and broad “discussion” commentary in his blog post, here.

Greg Shields is a D&O, Professional Liability, Employment Practices Liability, Fiduciary Liability and Crime insurance specialist and a Partner at the University and Dundas (Toronto) branch of Mitchell Sandham Insurance Services. He can be reached at gshields@mitchellsandham.com,  416-862-5626, or Skype at risk.first.

CAUTION: This article does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered and truly independent insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decisions. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this document from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.

 


Long Tail Liability for Canadian Directors and Officers

August 4, 2011

This new case, based on old alleged wrongful acts, hits home because it is a Canadian Company in the insurance industry that is active in the US but not listed on a regulated US exchange. The case involves a July 2011 class action securities suit against Fairfax
Financial Holdings Limited (USA) and its Pink Sheet OTCBB trading, here. The allegations are common “violations of the Securities Act of 1933 and the Securities Exchange Act of 1934” and issuing “materially false and misleading statements regarding the Company’s business practices and financial results.” These allegations surround certain reinsurance contracts and the alleged
concealment of its lack of liquidity. Even the significant alleged financial damage (“a decline in market capitalization of approximately $300 million”), and the lead plaintiff being a pension fund, is not a surprise in the securities class action world. The interesting thing is the class period of May 21, 2003 to March 22, 2006. This is a great example of the very long period that can exist between the alleged “wrongful act” and the ultimate litigation and resulting claim that is noticed to the insurer.

This case is also a great example of systemic risk in the D&O insurance business. The Fairfax case is not unique because “in November 2004 the SEC and Attorney General for the State of New York began inquiries into the use of so-called “finite reinsurance” contracts” and launched a number of investigations against many well-known industry players.

Systemic risk in the long-tail, high-severity products should be a key concern for industry-based insurance programs (reciprocals, risk retention groups, group captives.) These programs may have value as a risk-management, defence management, deductible/retention management, political lobby or loss control tool, but should be used very carefully as a pure risk transfer vehicle.

The risk management spin: the plaintiff lawyer’s website, Robbins Geller Rudman & Dowd LLP, here, provides the complaint, here, which details the alleged “gimmicks” used to “artificially inflate the value of its assets” as well as the “lack of internal controls.” Complaints and legal decisions can present useful information for corporate governance risk identification and loss control activities, and with every public case there comes an increased expectation that other boards and senior management will learn for such cases. Here are a few of the governance issues I took from this case:

  1. Procedures to assess whether finite reinsurance contracts meet the prerequisites for risk transfer,
  2. Product inventory and coverage / risk explanations and evaluations of traditional and non-traditional products,
  3. Use of “reinsurance accounting” or “deposit accounting” and the risk transfer test, and understanding of the local accounting practices,
  4. Evaluation of management assumptions for reporting of profit or loss in foreign private investments,
  5. Evaluation of consolidated financial reporting,
  6. Controls for reporting of intercompany purchases and sales, write-offs, advances and foreign currency accounting, receivables,
  7. Adequate internal controls and (discoverable) communication regarding those controls, including bid/quote tracking, expense guidelines,
  8. Public statement oversight for accuracy of details and forward-looking statements,

The insurance spin: don’t let your insurance broker convince you that the only way to get coverage for a securities claim is to purchase “securities coverage” or the “side C” insuring agreement as part of your directors’ and officers’ liability insurance program. This coverage is very valuable, but that value may favour of the corporate entity. Depending on the structure and fine details of your D&O insurance program, the addition of “securities coverage” could be damaging to individual directors and officers of the organization.

The Towers Watson, 2010 Directors and Officers Liability Survey, here, suggested that 54% of respondents did not conduct any independent review of their D&O liability policy. The survey did not comment on the breadth or value of that independent review done for the other 46%. My question would be if that review included all areas in the policy that presented a risk of limit erosion or limit exhaustion to the detriment of individual directors and officers (not just “insuring clauses” or “definition of insured”, but “severability”, “allocation”, “predetermined defence costs”, “exceptions to exclusions”, “final adjudication in the conduct exclusions”.) My assumed answer “no in 98% of the 46%”, because most insurance brokers will provide a “free audit” of an insurance program, and in most of those cases, you get what you pay for.

The survey also suggests that 60% of participants purchased Side A/B/C coverage, and 14% were not sure how their program was structured. 24% said their coverage was blended with other non-D&O coverage like employment practices and fiduciary liability (but this could also include professional liability, crime, and others, even workers comp.) This blending of “first party” and “third party” claim, “entity” and “individual” coverage, and “claims-made (and reported)” and “occurrence/sustained” triggers can create very significant complications for eventual claim handling.

On the issue of exclusive policy limits for independent/outside directors only 4% said there was some such coverage in place. 80% of public company respondents said they purchased an “Excess Side A” or and “Excess Side A with Difference In Conditions (DIC)” features. Note, Side A is the “non-indemnified” loss insuring agreement for individual insured persons, it is not specific to independent or outside directors.

The Fairfax case could become a very good example for insurance company risk management, as the case may be part D&O, party Entity Coverage for Securities Claims, part Insurance Company Errors and Omissions (professional liability), and part Outside Directorship Liability insurance. The insurance risk is that the defence costs, judgments and/or settlement loss may be only partially or not at all covered by any of these policies. But the reality is that though the class action securities litigation risk may be very public, the resulting insurance risk will not likely see the light of day. The lack of publicity of insurance risk means the learning opportunity and loss control lessons are much more difficult to find.

If you would like to learn more about insurance risk, securities class action risk, D&O/E&O/Fidelity insurance or loss control for publicly traded companies or insurance companies; or if you would like to have an in-depth review of your insurance program,
please contact me directly.

Greg Shields is a D&O, Professional Liability and Crime insurance specialist and a Partner at the University and Dundas (Toronto) branch of Mitchell Sandham Insurance Services. He can be reached at gshields@mitchellsandham.com,  416 862-5626, or Skype at risk.first. And more details of risk and loss control can be found on the Mitchell Sandham blog at http://mitchellsandham.wordpress.com/

CAUTION: This article does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered and truly independent insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decisions. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this document from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.


Mitchell Sandham Featured in Canadian Insurance Top Broker Magazine!

July 8, 2011

 

Mitchell Sandham is excited to have an article featured in Canadian Insurance Top Broker Magazine, called “D&O and E&O: How much is enough?” by Greg Shields.  Please click here to access the article.   

 


What is the Direction of Canadian Corporate Fraud?

June 23, 2011

 

Interesting article on Corporate Fraud and Executive Compensation available, here, at Marketwatch.

I will let you read it, but the Greg’s notes on it, 1) “97% of companies on the S&P 500 Index pay incentive compensation to executives even when the company is underperforming its peers”, and 2) “FBI Director Robert Mueller recently told Congress that the FBI had 667 ongoing probes into corporate fraud and 1,700 open cases of securities fraud.”

In case the authors are correct in their observation that crime is not down we are just numb to it, why don’t we do a quick “lest we forget” and recount: Bernard Madoff, Jeffrey Skilling, Kenneth Lay, Dennis Kozlowski, John Rigas, Joe Nacchio, James McDermott Jr., Sam Waksal, Sam Israel, Bernie Ebbers (see the Time article, here, called Top 10 Crooked CEOs).

Now, just in case you are like many Canadians who have allowed themself to be lulled into a false sense of security, based on a lack of fraud enforcement in Canada and extraordinarly little media coverage attention to corporate fraud and a Canadian moral superiority complex, here is the Canadian content.

Please keep in mind that thanks to the absence of criminal enforcement in Canada, some of these cases should be classified as securities concerns and not allegations of fraud against any individuals. Based on the low level of media coverage, you may never have heard about these incidents – Barry Landen (here, Penna estate fraud, not huge, but very sad), Peter Sbaraglia and Robert Mander (here, accused by OSC of $40 million fraud), Milowe Brost and Gary Sorenson (here, Brost was jailed this year for forgery, but accused with Sorenson of a Ponzi scheme which could reach $400 million), Wolfgang Stolzenberg (here, accused of a $1 billion fraud in the Castors Holdings case), Ronald Weinberg, Hasanain Panju, and Lino Pasquale Matteo and John Xanthoudakis (here, facing 36 charges including fraud and publishing a false prospectus in the Cinar case, with Xanthoudakis also being part of Norshield (here, $215 million alleged fraud) and Matteo also part of Mount Real (here), Earl Jones (here, surrendered and pleaded guilty (so I don’t know how quick I would be to count that as a win for our justice system) to two fraud charges related to a $50 million Ponzi scheme that ran from 1982 to 2009),  Ian Thow (here, originally accused of a $32 million Ponzi fraud but pleaded guilty on amounts totaling $8 million and sentenced to 9 years). There are many more, but I have run out of time, and hopefully opened a few eyes.

I have decided to avoid pure Canadian class actions securities claims due to the risk of suggesting fraud in any of these cases, and/or the risk of reprisal for any such inference. But I can assure you that we have had more than our share of securities related games played in Canada resulting in massive losses suffered by Canadian investors.

Now the risk management spin. There are many ways for investors, fund managers, investment advisors, directors and officers to protect yourself.

  1. If things are going absolutely great and you have no complaints or concerns about your current position: pull your head out of the sand and start your own investigation immediately. Take two, three, four hours, pull out a recent prospectus, annual report or one of those intentionally complicated sell sheets, and read the fine print, notes and management assumptions. If it does not make any sense, read it again. If it still doesn’t make any sense, start asking questions and preface each question with “pretend you are answering this question like I am your mother or your five year old” (keep in mind that some of the people above did actually defraud their mother);
  2. If a few things are bugging you but you can’t put your finger on it, see point 1 above.
  3. If you have not invested or accepted the board position, see the points above;
  4. Request evidence of Fidelity/Crime insurance. You can’t rely on this in place of the points above, but at least you will get some comfort that the company and the individuals have been vetted by a large financial institution who shares a financial exposure to the company. Then take the evidence of insurance, Google the name of the insurer, call the company from the info online, not the one on the evidence of insurance, and confirm the company and policy actually exist. This four minutes will be more due diligence than most stakeholders perform, and it will improve your comfort level with your risk;
  5. Repeat point 4 for Directors’ and Officers’ liability insurance (D&O) and Professional Liability insurance (E&O). Many, but not all, fraudsters avoid any additional audit, review or questions, (unfortunately they don’t seem to be subject to much of that from regulators, auditors, lawyers, suppliers or investors), so they reject any suggestion of insurance coverage as a waste of money;
  6. Find the references to a contract, sales agreement, independent third party review, or other “feel good statement” attributed to any third party in any company document, pick two (or if you are really diligent, three) and take four minutes to Google the name, call the company or person from the online information, and confirm the details of the pronouncement;
  7. Read the Ian Thow link above and the victim statements detailed in the sentencing decision, and be thankful they allowed their tragic and embarrassing stories to be publicized so that we can learn without having to suffer more loss that we already have (yes, every mutual fund holder, pensioner, bank client and insurance buyer pays a significant amount for fraud losses every year.) It could be the most valuable 20 minutes of your life.

With prosecutions being rare and convictions (without a guilty plea) being almost non-existent, one can only surmise the actual number for frauds that are currently being perpetrated in Canada.

So what is the direction of Canadian corporate (aka, white collar, or financial) fraud? It doesn’t matter, there is plenty of it right now to warrant concern and the 4 hours and 44 minutes of time suggested above.

Greg Shields is a D&O, Professional Liability and Crime insurance specialist and a Partner at the University and Dundas (Toronto) branch of Mitchell Sandham Insurance Services. He can be reached at gshields@mitchellsandham.com,  416 862-5626, or Skype at risk.first. And more details of risk and loss control can be found on the Mitchell Sandham blog at http://mitchellsandham.wordpress.com/

CAUTION: This article does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered and truly independent insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decisions. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this document from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.


Skip Arbitration, Go Straight to Class Action

April 12, 2011

The Supreme Court of Canada has released a new decision in Seidel v. TELUS Communications, here, that will be followed closely by Canadian class action plaintiff lawyers. If you don’t want to read the whole case, Osler has released a paper, here, by Jennifer Dolman and Matthew Thompson, discussing the decision, some of the SCC precedent cases like Dell v Union des consommateurs, here, and Rogers v Muroff, here, the conflicting precedent, the narrow 5-4 decision and dissenting opinion with the court,  and the impact. The most interesting quote from this article “be prepared for an increased number of claims proceeding to the court system.” Interestingly, this paper makes a specific reference to franchisors and generous interpretation of the Arthur Wishart (Franchise Disclosure) Act, 2000 favouring franchisees.

This Supreme Court decision will put smiles on the faces of plaintiff and defence lawyers, but it will also help identify existing and new risks that must be managed by corporations, their management, directors, shareholders, and their insurers. 

If you still don’t want to read the case or paper, here is my short summary:

Plaintiff (P) entered into a consumer contract for cellular service and later alleged false representation in how the defendant (D) calculated air time for billing. The contract included “private and confidential” mediation and arbitration and waiver of right to commence or participate in a class action. P sought certification of a class action; D was denied its application for a stay on proceedings by the trial judge but Court of Appeal stayed P’s action and sent the case to arbitration. P appealed and The Supreme Court of Canada (SCC) lifted the stay of the class action but only in relation to claims regarding Section 172 of the Business Practices and Consumer Protection Act, S.B.C. 2004, c. 2 (the BPCPA), saying this legislation “should be interpreted generously in favour of consumers”, supporting a “public interest plaintiff” and encouraging “private enforcement in the public interest” through a “well-publicized court action to promote adherence to consumer standards.”

The conflict seems obvious. The SCC suggested they did not negate their decisions in Dell, Rogers and others, which supported arbitration as a means to avoid lawsuits. In par 41 of the decision they explain by suggesting “the outcome turned on the terms of the Quebec legislation” and “contained no provision similar to s. 172 of the BPCPA.”

This court was specifically looking for “public denunciation” and notoriety that could not have been achieved through private and confidential arbitration.

The risk management spin:

If you have used or expect to use arbitration clauses to quash any rebellion by clients, you better hope you are not subject to any legislation where indirect statutory interpretation could suggest that such legislation was “enacted to encourage private enforcement in the public interest” and intended to “shine a spotlight on allegations of shabby corporate conduct.”

Good luck avoiding such legislation, because this case dealt  directly with section 172 of the BPCPA, but cited cases reference the Copyright Act, the Labour Code, the Insurance Act, and others.

Continue to use the arbitration and mediation provisions (as well as “hold-harmless” and “limitation of liability” clauses) in your customer agreements, but also invest in a corporate communication system (CRM) that will help identify and classify customer claims on a real time basis. Also create policies and procedures to deal with individual consumers before they become sufficiently upset to take their complaints to the social networks. Today, versus even two years ago, consumers have exponentially greater ability to reach similarly-minded individuals, and class-action remedy is far more popular. Data-mining in twitter, facebook, myspace, and the broader blog-world is a reality, so use it to your advantage, because it is impossible to determine which complaints will go viral, and no containment strategy can move as fast as a viral complaint.

As for insurance, don’t rely on anything you currently have, unless you have recently “stress-tested” your program for this exact risk exposure.

If the consumer lawsuit names individual directors and officers, the D&O policy might respond to the defence costs of the individuals, excess of the corporate retention (if the corporation is financially and legally able to indemnify the individuals.) But it won’t likely respond to the costs of the corporate entity because a consumer complaint would not be classified as a “securities claim”, which is where most “entity coverage” under a D&O policy can be found. Some private company management liability policies provide entity coverage that is not limited to a securities claim, but the exclusions (which are also hidden in the definition of Loss) typically exclude “fines or penalties”, costs of remedial relief, or any circumstance or situation existing prior to the inception of the policy, and many others.

If a lawsuit of this nature actually gets through the definitions and exclusions in the policy, most D&O and Management Liability policies require that an individual director or officer be continuously named in the case in order for the policy to respond. And the double edge sword to this case is that if the lawsuit is covered by the policy, there is only one policy limit of liability, and exhaustion of that limit based on loss of the corporation entity, could ultimately be to the detriment of individual directors and officers for their downstream personal liability.

The Commercial General Liability policy would not typically respond to claims brought with regards to consumer protection from a consumer contract or agreement because there is no underlying “bodily injury” or “property damage” to trigger the policy.

A Professional Liability policy (aka Errors and Omissions (E&O)) might respond, but there is no standard or regulated wording in this product, so the policy will have to be examined closely. Also, E&O is more commonly purchased in the commercial products industry (where arbitration provisions are more likely to survive), and less often purchased in the retail consumer products industry.

There comments are not meant as fear-mongering. The reality is that the SCC did not allow all of the P’s allegations to go through to private litigation, and the decision is not a certification of a class proceeding. However, whenever a SCC decision goes in favour of an individual P seeking class action status and remedy that includes disgorging of profits, it presents financial and reputational risk exposures that cannot be ignored by any company of any size.

Greg Shields, Partner, Mitchell Sandham Insurance Brokers, 416 862-5626, gshields@mitchellsandham.com  

CAUTION: The information contained in the Mitchell Sandham website or blog does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making and insurance or legal decision. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this site from any external website must seek the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.


Class Actions, Lawyers E&O and Law Firm ODL

October 6, 2010

Will Lawyers’ E&O (aka Errors and Omissions or Professional Liability for Lawyers and potentially their firm) insurance and Law Firm Outside Directorship Liability (ODL) insurance (see former post) get more expensive in Canada? I would suggest that the recent certification of a few Ontario based class action claims should not create panic. But, this risk should not be ignored.

Regarding lawyers’ E&O, even despite the increased limits capacity, largely from Lloyds syndicates, premium reductions seem to be flattening. It can be argued that the large real losses experienced in Canada (see here for Torys LLP and Hollinger) were not priced into the market. The early stage cases that are being watched by law firms and their insurers are Allen v. Aspen Group Resources (here), because it names Weirfoulds LLP and one of its lawyers, Robinson v. Rochester et al. (here), because it names Fraser Milner Casgrain LLP, and, most importantly, the claim brought by Trillium Motor World Ltd. (here), because it alleges up to $750 million in damages and names Cassels Brock & Blackwell LLP and two of its partners as defendants. Potential insured losses from these claims are definitely not built into market pricing. Therefore, I suggest that a premium increase of 10-15% should not be a surprise.

Regarding Law Firm ODL premiums, I should first make sure there is no confusion of the term. First, I am not making any reference to ‘Employed Lawyers’ (lawyers on the company side) liability or insurance, as such coverage has very little market acceptance and is a topic for a future post. Second, ‘Outside Director’ usually refers to a member of a board of directors who is not also an executive, officer or employee of that company (but does not mean they are automatically considered ‘independent’, which is a topic for another post.) Third, ‘Outside Director Liability’ may refer to the personal risk exposure of such individual. But, the insurance world seems to (and for this blog I will) use the term Outside Directorship Liability (ODL) describe insurance coverage for any members of a board of directors (or even any officer or employee of that company) who also act in the capacity as a director of an Outside (not a subsidiary or direct affiliate) Entity. As a side comment, this ‘ODL’ cover can be an extension to the company’s D&O policy (thereby, potentially exhausting limits of liability otherwise available to the other members of the board) or purchased on a ‘stand-alone’ basis with limits of liability dedicated to all combined Outside Entity exposures of the board and therefore not share the limit of liability of the company’s D&O policy – again, a topic of a previous post. A common condition of ODL coverage is that the holder and  directorship be at the knowledge and/or written request of the company, and specifically endorsed onto the policy. So get your position, public, private or non-profit, in writing with your entity and in its D&O program, preferable on a standalone ODL basis.   ODL insurance is most commonly provided by extension to a company’s D&O policy. Law firms usually have a standalone ODL policy, partly because law firms are less likely (than public companies of similar size) to even buy a D&O policy, partly because lawyers are better aware of the risk of holding board positions and the pitfalls of indemnity (for another post), and partly because they know their E&O policy won’t cover them for this exposure. Other concerns and warnings about ODL and Lawyers E&O insurance will have to be left for another blog.

Now back to law firm ODL premiums. This is a much smaller market, which seems to be dominated by a few ‘programs’ rather then negotiated and priced on a client-by-client, risk-by-risk basis. This arguably should mean greater volatility in pricing. However, product acceptance not readily available, and loss experience is not public and very determine, so there is either a lack of significant market upheaval, or it is just very quiet. Therefore, the volatility could be coming, and I would budget for increased premium (I cannot offer a range), reduced coverage, and more strict underwriting criteria. To reduce uncertainty, my best suggestion is to seek alternatives. This will not be easy or cheap. There is a lack of underwriting and loss experience in the domestic, competitive marketplace, based on a long period of ‘program underwriting’. Therefore, underwriters entering, or reentering the lawyers ODL market may only be motivated by opportunistic pricing. To the buyer this may seem like ‘pound of flesh’ mentality from underwriters who have not profited from this class of business for an extended period. However, underwriters add premium for risk and the lack of data will mean more risk premium. They will be willing to listen to individual prospective clients who have made the effort to manage their ODL risk. This means identifying the exposure and making every attempt to mitigate it. Documentation and classification of risk, for each individual, each Outside Directorship position and each Outside Entity, will payoff in overall risk management value. Criteria for classification will require a significant amount of information on each Outside Entity, as well as its unique relationship with each lawyer/director (I call it the risk matrix criteria.) The exercise might already be happening, and, if its not, it should. Risk information, along with any related loss experience or potential claims, will become the insurance submission. Based on the possible ‘double-down’ nature of D&O insurance in Canada (because the potential ODL Insurer might already have a significant exposure to the underlying Outside Entity), this submission may need to be marketed to a number of different insurance carriers, but based on the sensitive nature of the information it should not be a shotgun submission.

There is a great article by Luis Millan in Lawyers Weekly, that includes quotations from very experienced Canadian lawyers and goes further than the financial exposure by appropriately discussing “the distraction, effort and impact” a lawsuit or class action can have on a lawyer and his or her law firm. It also discusses the reputational damage to the lawyer and the plaintiff lawyer’s attempt to increase the number of deep pockets in their suit.  

I am not attempting to ‘fear-monger’. In fact, despite the cases Cloud v. Canada (here), Cassano v. The Toronto-Dominion Bank (here), and Markson v. MBNA Canada Bank (here), which may suggest increased certification of class actions based on the Ontario Class Proceedings Act, there are still very few successful cases creating personal liability for individual outside directors in Canada. But, there are a number of current situations where directors are funding their own legal fees because of a failure of their indemnification from their Outside Entity and failure of their D&O or ODL insurance policy. The number of cases testing the law is increasing, and the costs to defend are significant. Therefore, loss costs will continue to rise, and risk management efforts need to be increased.

Please note, there are many more issues, concerns and nuances that I have not covered. But I would be happy to discuss them in person.

Greg Shields, Partner, Mitchell Sandham Insurance Brokers, 416 862-5626, gshields@mitchellsandham.com

 CAUTION: The information contained in the Mitchell Sandham website or blog does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making and insurance or legal decision. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this site from any external website must seek the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.


Value of Communities and other Social Media, and Media / Advertising Risk

October 3, 2010

 

The value of Canadian electronic communities and other social media may be going up soon. The proposed legislation in Bill C-28 – the Fighting Internet and Wireless Spam Act (FISA) – will make some significant changes to the law. It will require consent for any email or text messages. Senders of electronic messages will be required to identify themselves, provide contact information and include an unsubscribe feature. Consent will be required for any software or program installation and the consent feature must first disclose any undesirable functions, including the collection of personal information. The FISA will prohibit alteration of data or the diverting of messages to an unintended destination.

The risks to electronic advertisers and media companies will also increase, because the Office of the Privacy Commissioner (OPC), the CRTC and the Competition Bureau will have new powers to share information and evidence with foreign counterparts to pursue violators outside of Canada, and therefore purse Canadians violating our laws in other countries. Penalties of violation of the FISA can be up to $1 million for individuals and up to $10 million for businesses. The Competition Act will be extended to false or misleading marketing in electronic messages. Certain exceptions within the Personal Information Protection and Electronic Documents Act (PIPEDA) will be restricted. And a private right of action will be extended to consumers and businesses to allow lawsuits for violation of FISA. The suggested damage awards are fierce, including $200 per violation to a maximum of $1 million per day, and actual loss, damages and expenses. And, if the Consumer Protection Act can be brought into play, the  recent Appeals Court decision in Riendeau v. Brault & Martineau (a great description of the risk was presented in an article No Crime, Lots of Punishment, here, available in Mondaq, by Donald Bisson and Shaun Emery Finn, of McCarthy Tetrault, here,) could mean substantial punitive damages, even without compensatory damages, and Class Action exposures. (The insurance aside to this is that many Professional Liability and D&O policies can only be triggered based on ‘compensatory’ damages, and if this portion of potential loss is not triggered then there might be no defence costs available from the policy.) There is a great article by Arnold Ceballos, here, in Lawyers Weekly, here, provides much better description of bill C-28.

The intent of most evolving legislation on electronic communication is to deter spyware, malware, phishing and the other vehicles used for theft of private information, identity or direct money. FISA might not accomplish that on its own, but it looks like it is going to make waves. The promotion on this bill suggests it is focused on ‘criminal spammers’ and that taking the ‘pro-spam’ side could be political suicide. However, I am sure the law of unintended consequences (are they really unintended by everyone?) will apply and the bill could significantly alter the way legitimate businesses operate, and it could very likely increase the current cost and risks of doing business.

When we think of Social Networks, we think of Facebook and Twitter, but there is a universe of ‘electronic communities’. Message boards, interactive blog sites, membership based information providers, are all communities based on ‘opt-in’ or ‘consent’ based interaction, even if some privacy aspects were not fully understood or communicated. If FISA is farther reaching than criminal spamming and has the affect of stopping other legitimate unsolicited contact, opt-in communities might be the only way to legally reach a large audience. However, the use of a community for distribution has risks. If you want to avoid the direct advertising costs to reach the members of a community, you will have to go through the slow and painstaking task of building your own membership within each community by producing content that is attractive to users. Some companies might urge employees to help with this new method of distribution by building their individual social networks to help promote the company. The result is a lack of control and oversight or what is legitimately considered media and advertising activity.

It was not that many years ago that it was impossible for the average person or small company to reach a very large audience with any message. Now, one blog comment, tweet or video can ‘go viral’ and be viewed by millions of people within minutes. A few weeks ago I was sitting in my office, looking South down University, and could see a mass of black smoke billowing from a high-rise. I could not tell which building or the location, so I searched a number of different main-stream media sites, and could not find any information. It took them at least ten minutes to report on the story, but I had already gone to twitter and viewed multiple pictures from different angles, and knew the exact building and location of the fire, all within 60 seconds of seeing the smoke. One tweet about beg-bugs in a movie theatre is seen by millions of people and immediately broadcasted on mainstream media.

Many companies seeking to get that ‘viral’ hit for free corporate publicity will have almost no media experience and have few or no controls regarding copyright (music, art, video, image or print), libel, slander or defamation, and no planned response to a publication crisis. Many will say “there is no bad publicity” or “I will worry about that after I am able to reach 6 million people.” The problem is that electronic media cannot be controlled, it can’t be erased or deleted, and even an effort to mitigate a loss by ‘printing a retraction’ will not have the same affect because there is no chance the retraction will reach the same audience.

We have incredible opportunity to share information and promote ourselves and our businesses, but it does not come without risk. Legislative changes, like the proposed Bill C-28, PIPEDA and many others, might reduce annoying, invasive or even harmful electronic communication; might reduce the current level of disruption of online commerce; might increase consumer confidence and the electronic marketplace; but it won’t do any of this with risk.

Greg Shields, Partner, Mitchell Sandham Insurance Brokers, 416 862-5626, gshields@mitchellsandham.com

CAUTION: The information contained in the Mitchell Sandham website or blog does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decision. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this site from any external website must seek the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.


INSIDER TRADING and CANADIANS IN THE NEWS

July 21, 2010

 

Unlike many recent news events, this connection to Canada is a positive one because it showcases the efforts of Canadian researches, even if not involving Canadian statistics. From the Wall Street Journal Online, July 3, 2010, by Gregory Zuckerman, here, author of The Greatest Trade Ever, called Hedge-Fund Lending Draws Scrutiny, here, refers to a “coming publication in the Journal of Financial Economics” by 4 academics, Debarshi Nandy, Nadia Massoud and Keke Song, at York University’s Schulich School of Business in Toronto, and Anthony Saunders, at New York University’s Stern School of Business. The publication tracks the short-selling of U.S. company securities and compares such activity between companies that have borrowed money from a hedge fund and companies that have borrowed money from a bank. By studying over 350 companies and the short-selling activity in the five days leading up to the public announcement of company borrowing or loan agreement amendments,  and comparing it with the 60 day period before the deal, there is material difference between the companies that borrowed from banks and those that borrowed from hedge funds. The difference could suggest that the trading activity “raises questions about whether the very firms lending money are using nonpublic information to trade against their borrowers, or whether information is leaking out to others.

I look forward to reading the full study and to learning that securities regulators are acting on this information to identify and prosecute illegal insider trading and market manipulation.

The term insider trading is not by definition an illegal activity, but that is the way it is most commonly used. A 2005 article in CBC News, here, does a great job of explaining the term, and there are many more recent articles and publications to help update the legal and regulatory landscape.

The connection to insurance – illegal insider trading is commonly alleged within securities litigation. It can help motivate early settlement, but it can also increase the possibility of personal contribution out-of-pocket payment by directors and officers to this settlement. And YES I DO MEAN IN CANADA.

My concern is that many directors do not fully understand their insurance coverage, and may be misled into believing they need a Securities Claim Insuring Agreement in order to get coverage for a securities based lawsuit and for their defence against illegal insider trading allegations. This is simply not true. Most Directors’ and Officer’s Liability or Management Liability policies, even those without a Securities Claims Insuring Agreement, will respond to a securities claim and an insider trading allegation, subject to certain exclusions and terms which cannot be fully developed here, to individual directors and officers.

The Securities Claims Insuring Agreement, commonly referred to as ‘Side C’ may actually limit coverage, because it may extend the policy limit (and there is usually only one available) to the corporate entity, thereby increasing the possibility of exhausting limits otherwise available to the individual directors or officers, or it may apply exclusionary language that is not found in a standard Side A/B policy.

The protection of corporate assets is important, but directors are not obliged to do it out of their own pocket. The insurance agreement should be quoted, with full explanation and details made available for decision purposes, but that decision needs to be an educated one. It should include additional options of very high limits of liability, excess Insured Person’s coverage, excess independent director’s coverage, full explanation of severability, non-rescindable language, priority of payments (not just the CEO determined kind), etc., etc.

Subsequent to writing this Post, I enjoyed an exchange of emails with one of the Researchers, Mr. Nandy. He offered his permission to provide a link to the research paper, here, My comment and question for Mr. Nandy was “Cracking down on insider trading is necessary for Canada to promote its securities markets, but most good research material is U.S. focused. Your research in the study suggested your review of 360 US companies, did you attempt to gather the short-selling activity in Canadian company securities, and would a similar Canadian study even be possible based on publicly available information?

 His answer did nothing to improve my comfort in the Canadian Securities Regulator regime; “Unfortunately, we do not have similar data that is publicly available for the Canadian markets.”

Feel free to contact me for more information on identifying the needs of your ‘Insureds’ and structuring appropriate insurance coverage.
Greg Shields, Partner, Mitchell Sandham Insurance Brokers,       416 862-5626, gshields@mitchellsandham.com

CAUTION: The information contained in the Mitchell Sandham website or blog does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a truly ‘independent’ registered insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decision. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this site from any external website must seek the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.


IFRS and D&O Insurance Implications

June 30, 2010

For many years (on and off) I have followed the writings of Al Rosen, principal of Rosen & Associates, a forensic accounting firm in Toronto, and of Accountability Research Corp., an independent research company “free from money management conflicts,” here and here. The first thing that caught my attention was the business card Al Rosen, PhD, MBA, FCA, FCMA, FCPA, CGA, CFE, CIP, CPA, CA.IFA.

From most of what I have read, he is not a big fan of some of the activities of the big 4 auditing firms, and I can’t imagine they are big fans of his. Mr. Rosen’s accounting firm seems to keep itself very busy with forensic investigation of accounting fraud and providing professional testimony related to auditors’ professional negligence. But instead of keeping his head down, thereby maintaining the flow of scandals and his firm’s future revenue, he is writing articles, speaking at events and looking for people who will heed his warnings about ‘financial tricks’, ‘corporate cover-ups’ and the environment that allows and supports this behavior.  But, if you are one of the people, and unfortunately there seem to be many, who believe that Canadian Corporate Management, and their third party advisors, are all trustworthy, (the ‘bad things can’t happen to you’ group I will call ostriches) then you probably won’t listen, and you shouldn’t bother reading his stuff, or mine.

Trusting your management team and advisors doesn’t automatically mean you are in the ostrich group, but to stay out of it you need to, 1) believe that not all officers, directors, and advisors are completely honest in mind or deed, and 2) create an environment and corporate culture that protects the corporation, its shareholders, the board of directors, and the management team, and 3) agree that a good risk management structure does not cast doubt on the management team, it protects them.

If you are in the group of trusting but cautious people, and are still reading, you don’t have to like or agree with what Mr. Rosen says to benefit from it.

At a recent breakfast seminar for the Institute of Corporate Directors, Mr. Rosen reminds us of a very important precedent-setting case in Canada, Hercules Managements Ltd. v. Ernst & Young, here. I find it very interesting that this case has been cited 492 times, making it one of the most cited in Canada. I encourage you to read it because my summary is extremely short and will miss important points. Hercules is a case of accountant alleged negligence and accountants’ duty of care to the investors in the corporation audited by the accountant. The conclusion was the accountant owed a prima facie duty of care to the investors, but such duties are “negated by policy considerations”, “would be to expose auditors to the possibility of indeterminate liability” and “would amount to an unacceptably broad expansion of the bounds of liability drawn by this Court in Haig, supra.” (see case above)

Mr. Rosen suggests this case effectively removes any direct relationship between the shareholder of the corporation and the outside auditor of the financial statements of the corporation; and this, along with other case law upholding audit restrictions and disclaimers, and the strength of the auditors’ Self-Regulating Organizations (SRO), leaves “Directors to assume the “Shareholders’ Auditor” position.”

The connection to IFRS in this post will not do justice to Mr. Rosen, so I have attached a few articles, here, here, here. But, what I see as the theme: 1), IFRS takes a big step back from current North American accounting standards, 2) the gap between financial reporting and corporate performance measurement will become too large, 3) increased flexibility for management’s interpretation regarding revenue recognition (quality and timing) and cost of assets will weaken, not improve, comparability, and 4) all of these issues will make accountability and liability of auditors and management more difficult to determine, at the expense of investors and directors.

The key concern is that if the final implementation of IFRS actually creates too much reliance on broad principals, and leaves too many financial statement values open to the interpretation of, and assumptions by, executives, the size and likelihood of future scandals will increase. Arguments by IFRS proponents, that the transition to IFRS should be easy for Canadians because we already work in a ‘principals’ based system (vs the U.S. being ‘rules’ based), would suggest that we have no accounting rules. That is simply not true. Our history of major financial failures have provided us valuable experience and resulted in ‘rules’ to help plug the loopholes in our accounting principals. Al and Mark Rosen, in their four part series on IFRS in the National Post, “Financial Reporting in Canada Steps Backwards”, here, provide the example, “After the failures of two Canadian banks more than 20 years ago, our accounting rules were changed. We plugged loopholes that allowed uncollectible mortgages to remain on balance sheets at seemingly unimpaired values, and interest revenue to be recorded on bad loans. Without such clear requirements to report default and late payment rates and collateral values, troubled companies can appear healthy for years. This is precisely the sort of illusion that IFRS will invite again to Canada.

Some of the key areas where too much flexibility can be dangerous, 1) ‘fair-valuing’ of long term assets, make debt to equity and ROA ratios less useful, 2) allowing only two years of historical financial statements when assets are revalued, 3) “recognition, amount and timing of assets impairment charges, which are critical to establishing profitability”, 4) transparency of related-party transaction, because “inadequate related party measurement is already an epidemic under Canadian rules”, and 5) revenue recognition,  because “we have already been told of cases where revenue under IFR is higher than what is allowed under Canadian regulations”

The connection to insurance in this post will be directed at Directors’ and Officers’ liability insurance (D&O), rather than Fidelity (Crime, Fraud, Employee Theft, Financial Institution Bond) insurance, because there is far less public information about Fidelity insurance payments, probably due to privacy laws and the ‘first party’ nature of this coverage, vs the public lawsuit and ‘third party’ nature of D&O. And, a fidelity discussion would make this post far too long.

Difficulty determining accountability and liability will not reduce the number of lawsuits and will not make them cheaper to defend or settle, at least in the short run. And based on the current frequency and severity of D&O lawsuits in Canada, even a short term up-tick might last longer than we (except perhaps the lawyers) like, and be far more expensive than we have budgeted for.

This article will skip D&O personal liability 101 and indemnification, but feel free to read other posts for these references, or call to discuss.

Canadian D&O lawsuits (for this comment, see Part XXIII.1 of the Ontario Securities Act, R.S.O. 1990, c. S.5 as amended (“OSA”), (aka Bill 198)) commonly allege misrepresentation of financial statements, improperly recognizing certain sales as revenue, that did not fairly present the defendant’s financial results. These cases regularly include as defendants the corporate entity as well as directors, officers, and outside auditors. They cost many millions of dollars to defend and settle, as they are rarely litigated. And, Canadian cases are even seeing personal contribution to settlement of suits (see here).

The wording of the D&O policy is designed to respond to a securities suit, whether that policy is traditional coverage for non-indemnified directors and officers (aka Side A) and the corporate entity for amounts incurred defending indemnifying the directors and officers for their personal liability (Side B), or later policies which cover the corporate entity for amounts it incurs on its own (Side C, or hidden side c.) Just because a corporation has securities exposures doesn’t mean it has to buy Side C, but that is a discussion for another post.

If Al Rosen is right, “that IFRS is different because management controls all the numbers, because few restrictions or prohibitions exist”, and therefore increases the likelihood, duration and size of future securities frauds; and if Hercules continues to be upheld, thereby reducing auditors’ liability and their contribution to securities claims settlements and making the board “the shareholders auditor”; and if D&O coverage ‘limits of liability’ continue to be extended to more and more parties and matters, subjecting the board erosion of policy proceeds, then all board members should be turning their mind to risk management, not just risk transfer, and learning more about their current D&O coverage.

Loss control measures like:

  1. independence on the board and board committees,
  2. demanding and regularly questioning full disclosure of non-arm’s length transaction and all related party matters including all sources of officer remuneration,
  3. investigation by board committee of lender and supplier and customer background and their relationships, 
  4. internal audit reporting directly to board or board committee,
  5. whistle-blower protocol and whistle-blower protection established and monitored by the board,
  6. risk management reporting and exception reporting for management override activity,
  7. revenue recognition guidelines determined and overseen by board committee,
  8. and many more,

will go a long way to reducing risk, reducing loss costs, and reducing D&O insurance premiums.

In summary, let us learn from past mistakes, let us learn from knowledgeable people even if we don’t agree with everything they say, and let’s implement to tools to reduce risk.

I honestly believe that Al and Mark Rosen and their impressive group of colleagues would rather make their money advising boards and monitoring financial statements on behalf boards to prevent financial fraud, than responding to an investigation after the investors have suffered loss, which even the best forensic investigator can’t restore. But unfortunately I think the latter will cover more mortgage payments (and see more investor mortgage default), than the former.

Thank you for reading,

Greg Shields, Partner, Mitchell Sandham Insurance Brokers, 416 862-5626, gshields@mitchellsandham.com

CAUTION: The information contained in the Mitchell Sandham website or blog does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a truly ‘independent’ registered insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decision. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this site from any external website must seek the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com.


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