Tag Archives: law firm

5 Changes Needed in Securities Litigation

I am committed to helping shape a system for securities litigation defense that helps directors and officers get through securities litigation safely and efficiently, without losing their serenity or dignity, or facing any real risk of paying any personal funds.

But we are actually moving in the opposite direction of this goal, and, unless some changes are made, securities litigation will pose greater and greater risk to individual directors and officers. It is time for the “repeat players” in securities litigation defense – D&O insurers and brokers, defense lawyers and economists – to make some fundamental changes to how we do things.

Although most cases still seem to turn out fine for the individual defendants, resolved by a dismissal or a settlement that is fully funded by D&O insurance, the bigger picture is not pretty. The law firms that have defended most cases since securities class actions gained footing through Basic v. Levinson – primarily “biglaw” firms based in the country’s several largest cities – are no longer suitable for many, or even most, securities class actions. Fueled by high billing rates and profit-focused staffing, those firms’ skyrocketing defense costs threaten to exhaust most or all of the D&O insurance towers in cases that are not ended on a motion to dismiss. Rarely can such firms defend cases vigorously through summary judgment and toward trial anymore.

Worse, these high prices too often do not yield strategic benefits. A strong motion to dismiss focuses on the truth of what the defendants said, with support from the context of the statements, as directed by the U.S. Supreme Court in Tellabs and Omnicare. Yet, far too often, the motion-to-dismiss briefs that come out of these large firms are little more than cookie-cutter arguments based on the structure of the Reform Act. And if a motion is lost, settlements are higher than necessary because the defendants often have no option but to settle to avoid an avalanche of defense costs that would exhaust their D&O insurance limits. On the other hand, if settlement occurs later, it can be difficult to keep settlement within D&O insurance limits – and defense counsel’s analysis of a “reasonable” settlement can influenced by a desire to justify the amount it has billed.

At the same time that defense costs are continuing to soar, securities class actions are becoming smaller and smaller, with two-thirds of cases brought against companies with market caps less than $2 billion, and almost half less than $750 million. Although catawampus securities litigation economics is a systemic problem, affecting cases of all sizes, the problem is especially acute in the smaller half of cases. Some of those cases simply cannot be defended both well and economically by typical defense firms. Either defense costs become ridiculously large for the size of the case and the amount of the D&O insurance limits, or firms try to reduce costs by cutting corners on staffing and projects – or both. We see large law firms routinely chase smaller and smaller cases. From a market perspective, it makes no sense at all.

So how do we achieve a better securities litigation system?  Five changes would have a profound impact:

  1. Require an interview process for the selection of defense counsel, to allow the defendants to understand their options; to evaluate conflicts of interest and the advantages and disadvantages of using their corporate firm to defend the litigation; and to achieve cost concessions that only a competitive interview process can yield.
  2. Move damages expert reports and discovery ahead of fact discovery, to allow the defendants and their D&O insurers to understand the real economics of cases that survive a motion to dismiss, and to make more informed litigation and settlement decisions.
  3. Increase the involvement of D&O insurers in defense-counsel selection and in other strategic defense decisions, to put those that have the greatest overall experience and economic stake in securities class action defense in a position to provide meaningful input.
  4. Increase the involvement of boards of directors in decisions concerning D&O insurance and the defense of securities litigation, including counsel selection, to ensure their personal protection and good oversight of the defense of the company and themselves.
  5. Make the Supreme Court’s Omnicare decision a primary tool in the defense of securities class actions. Obviously, Omnicare should be used to defend against challenges to all forms of opinions, including statements regarded as “puffery” and forward-looking statements protected by the Reform Act’s Safe Harbor. But defense counsel should also take advantage of the Supreme Court’s direction in Omnicare that courts evaluate challenged statements in their full factual context. Omnicare supplements the court’s previous direction in Tellabs that courts evaluate scienter by considering not just the complaint’s allegations, but also documents incorporated by reference and documents subject to judicial notice.  Together, Omnicare and Tellabs allow defense counsel to defend their clients’ honesty with a robust factual record at the motion to dismiss stage.

These five changes are among the top wishes I have to improve securities litigation defense, and to preserve the protections of directors and officers who face securities litigation.

New Attack Vector for Cyber Thieves

It has become commonplace for senior executives to use free Web mail, especially Gmail, interchangeably with corporate email. This has given rise to a type of scam in which a thief manipulates email accounts. The goal: impersonate an authority figure to get a subordinate to do something quickly, without asking questions. The FBI calls this “CEO fraud,” and a surge of these capers has resulted in scammers stealing a stunning $750 million from more than 7,000 U.S. companies from October 2013 through August 2015.

Here is an example where the scammer targets an attorney from a big city in the Northeast.

Attack vector: The scammer gathers intelligence about real estate transactions handled by an attorney and drills down on a specific deal in which the law firm is handling the purchase of a $450,000 home for a client. The scammer learns this attorney is in the habit of using his personal Gmail account interchangeably with his law firm’s email. As the transaction approaches the final step, the attorney’s paralegal receives a spoofed email that appears to come from her boss. She instantly follows a directive to cancel a check for $450,000 that she is about to mail and instead wires the funds into an account designated by the scammer.

More video: Scammers exploit trust in Google’s platform

Distinctive technique: The funds initially get routed to another law firm in the Southwest. A subordinate in this law firm also appears to have been spoofed by the scammer to be prepared to move funds once again, this time into an account set up in a U.S. branch office of Sumitomo Bank, a giant global institution with headquarters in Tokyo. “At this point, it is not likely the $450,000 will ever be recovered,” says IDT911 Chief Privacy Officer Eduard Goodman. “Once a transfer like this is made, you can’t really unring that bell.”

Wider implications: U.S. consumers are well protected by federal law, and banks usually will reimburse individual consumers victimized by cyber criminals. However, banks are under no legal obligation to offer any relief to businesses, large or small, that have been tricked like this. Most of the $750 million lost in documented cases of CEO fraud has most likely been absorbed by the duped business entities.

Infographic: More Americans living with data insecurity

Excerpts from ThirdCertainty’s interview with Goodman. (Answers edited for length and clarity.)

3C: Businesses are losing one heck of a lot of money to CEO fraud.

Eduard Goodman, IDT911 chief privacy officer

Goodman: Yeah, absolutely. This one was for about $450,000. There is another woman with a ballet company who recently lost about $100,000. It’s significant chunks, let’s put it that way. And because this is happening in a business setting, it’s a little bit different in that your bank won’t stand behind you. It’s caveat emptor. There is no consumer protection. When something like this happens to your business, you’re out of luck.

3C: Why aren’t suspicious transactions flagged more often?

Goodman: The government will tend to go after companies for anything that may have to do with consumer violations. But when businesses impact other businesses, the government doesn’t do a damn thing, even if the victim is a really small business and they’re essentially consumers in and of themselves. Banks have that unfair advantage to say, ‘Well, sorry, should have flagged it, but we just process it for you.’

3C: So by using free Web mail this attorney sort of invited spoofing?

Goodman: He kind of comingled accounts, that’s the thing. He had his law firm’s email, and he also had a personal Gmail account. He would send emails from both accounts. That is something that has become a very common practice. He probably had previously emailed himself something from his actual work account into his Gmail account. This scammer probably got into his Gmail account, and then made the connection to his law firm account.

Then it was off to the races. The paralegal gets the wire transfer request from an email that’s very close to an authentic law firm email except there’s an extra letter in the domain name. It looks very credible.

3C: Could this have been avoided?

Goodman. Yes, by taking the extra 45 seconds to make a phone call. Pick up the phone and verify things instead of getting caught up in the workday.

‘Twas the Night Before Mediation

‘Twas the night before mediation
And all through the firm
Not a creature was stirring,
Not even a worm

But then one lawyer
Asleep on a couch
Shot up, hit his head
And said with an “Ouch”

Oh my, I’ve got
That mediation tomorrow
I didn’t do a brief
Much, much to my sorrow

Then what to his exhausted eyes should appear
But a mediator with news of good cheer

You don’t need it fancy
You don’t need it long
Just give me some clues
So the time’s not spent wrong

Just send me an “e”
It’s all confidential
Tell me the issues
What’s the dollar potential?

With that she was gone
The lawyer banged out a brief
He’d be ready tomorrow
Oh what a relief.

This holiday season
When your time seems too short
Turn to mediation
And stay out of court.

Happy Holidays!

How Law Firms Can Win Panel Positions

Managing partners at many insurance defense law firms across the country are on an elusive quest to get on more insurance panels.

Defense law firms traditionally build client relationships with insurance carriers, self-insured entities and municipalities over many years. In today’s rapidly changing legal climate, however, these relationships are increasingly being replaced with a formalized application process.

Being named as panel counsel is not easy. For starters, it is frequently difficult to determine who is in charge of the hiring process.

This article provides some insight into the panel counsel selection process.

How to Become Panel Counsel for an Insurance Company

At one level, every insurance company panel is different. Listed below are the most common ways that insurance companies are organized to manage the panel process:

  • National overseers may review all panel counsel applications
  • Regional managers may have responsibility for multiple states
  • State-level coordinators may be the point of entry
  • Panels for multi-subsidiary insurance companies may be consolidated in one division
  • Purchasing departments increasingly are screening interested vendors
  • Online applications are also becoming popular

In some insurance companies, there may be multiple points of entry that could be used to gain consideration for a panel. Many carriers, for example, maintain multiple panels. Examples might include a separate employment practices (EPLI) panel or a construction defect panel. There may be an independent panel manager for each of these claims areas who has some independent hiring capabilities. While a variety of panels adds opportunities to counsel selection, it also adds to the complexity of the business development effort.

There are also many similarities in the panel application process:

  • Personal referrals are the best way to gain panel consideration
  • Periodic panel reviews (every one to two years) may be used
  • Even if a law firm gets on a panel, it may take time to establish a consistent stream of new cases

Finding the Panel Manager

There are several ways to identify the best point of contact within an insurance company, including:

  • Ask around within your network
  • Attend industry conferences
  • Conduct Internet research
  • Review insurance company websites
  • Make telephone calls to the carrier

Insurance company websites typically do not specifically identify an individual as the actual panel manager, but they might point an interested party in the right direction.

Claims adjusters used to play a significant role in panel counsel selection, but this is becoming less common. A law firm in search of new insurance defense panel positions may, however, find it worthwhile to explore professional meetings of insurance adjusters in its geographic area, particularly if there is an active claims association. A recommendation from a local adjuster can certainly help to reinforce a panel application.

Starting the panel research process from a blank piece of paper can be an extremely time-consuming and frustrating process. Trying to balance this research with the demands of a very busy law practice is particularly challenging.

Background on the Insurance Market

There are 2,700 property and casualty (P&C) insurance companies in the U.S., according to the U.S. Federal Insurance Office and A.M. Best. Insurers are regulated at the state rather than the federal level, meaning that each state maintains a department of insurance with information on the insurance carriers admitted to do business in that state. Insurers with primary corporate headquarters located in a given state are called domestic insurers.

Law firms starting a search for panel positions may find data posted on the website of their state’s insurance commissioner to be useful. Annual market share reports are frequently available, which identify the top 25 carriers in the state by service line, such as auto, commercial general liability, medical liability, etc.

Additionally, the department of insurance within each state typically provides an online list of all carriers admitted to sell insurance in that state. While this may appear to be helpful at first glance, the researcher who downloads a list of admitted carriers is frequently faced with hundreds of different insurance company names to sift through. Upon closer inspection, it becomes clear that many of the carriers admitted within a state are actually subsidiaries of larger insurance companies.

Business Development Is a Numbers Game

As discussed earlier, a personal introduction to the panel manager is generally the most productive approach. In today’s world of carrier consolidation and litigation centralization, however, it can be difficult to stay abreast of panel managers.

The law firm is faced with the challenge of first identifying the panel manager and collecting accurate contact information. Next, the firm’s managing partner or lead rainmaker needs to reach out to the manager and make an introduction to the firm. An in-person meeting is ideal, but difficult to achieve initially. Generally, an introductory letter or email can be used to try and arrange a phone call to start the business development process.

Here are some of the responses a law firm is likely to get from panel managers during this early outreach effort:

  • Request for more information about rates and services
  • Agreement to set up an in-person meeting (which is likely to involve travel)
  • Notification of the panel review cycle, with a promise of notification prior to the next cycle
  • Indication that the panel is full, with a promise to contact the firm in the event of a conflict
  • Silence (meaning no response)

While many law firms optimistically hope to be engaged by one out of every two or three carriers they contact, the more common reality is that business development can be a long and arduous process.

A law firm is best served by constantly screening dozens of insurance carriers, self-insureds and other prospective clients for business development opportunities. Firms that are expanding geographically or into new product lines may also be creating panel opportunities. Insurance companies that are consolidating because of mergers or the growth of in-house counsel should be avoided.

Never Stop Marketing

The best time to start looking for new clients is while the law firm is operating from a position of strength. Business development can have a long timeline, and it is impossible to predict when a prospect’s needs for legal services may develop. Delaying the start of a campaign until the law firm is desperate for new business is not advisable, because the firm may then be forced to accept a lower-quality client at less than ideal rates.

After making an initial introduction to a carrier, the challenge is to keep the conversation going. Reaching out to the panel manager in a substantive way every four to six months can be an effective way to build a positive impression for the law firm. Meaningful ways to stay in touch can include the following:

  • Send an article written by the law firm.
  • Keep carriers informed of favorable case outcomes
  • Offer to teach an in-house CLE
  • Submit an analysis of pending legislation or emerging market trends
  • Maintain an active social media profile, especially on LinkedIn

Dropping the ball on prospect communications, while understandable, can be deadly to a business development effort. Rejection is a common first response, but the successful rainmaker will be best served by considering a negative initial response from a panel manager to simply mean “not now.” An exception is the carrier that says something like, “We have used ABC law firm exclusively for the past 10 years and have no reason to change” or “Our case volume is so low that we handle most matters internally.”

The administrative assistant to the panel manager can also be your friend. Treat all members of the panel management team respectfully to build a positive impression of the law firm.

Industry conferences can be an ideal forum for meeting panel managers. Of course, many law firms are thinking the same thing, so it can be helpful to make advance appointments. The Claims & Litigation Management Alliance (CLM) and DRI are two leading organizations that bring claims executives together with insurance defense lawyers.

Specialized organizations targeting selected industries can also be helpful. Examples include the Trucking Industry Defense Association (TIDA) and the National Retail and Restaurant Association (NRRDA).

Maintain Attractive Marketing Materials

The business development cycle will generate the best results when backed by attractive and informative marketing materials.

The law firm’s website is an important foundation for any marketing effort, because the attorney bio pages are frequently the starting point in a prospect’s effort to become better acquainted with a candidate.

A “beauty contest” can be an apt descriptor for the competitive process of vying for coveted panel positions. While the primary goal is to have a law firm stand out from the competition in substantive ways, the techniques outlined below can significantly enhance an RFP or business presentation.

  • Graphic design. Extend the law firm’s brand by using the logo, color scheme and photo styles from the website.
  • Attorney photos. Four-color head shots start the get-acquainted process and help the prospect to envision a lawyer in a court representation.
  • Credential icons. Martindale, A.M. Best and the CLM logos all have high recognition value within the insurance industry.

When including a list of clients or references, client confidentiality guidelines suggest that the law firm first obtain written informed consent from each client.

In Summary

Marketing is a process and not an event. Managing partners of insurance defense law firms are advised to get started on a serious business development effort, perhaps backed to an active law firm marketing committee. Staying actively committed to an expansion effort, while challenging, will yield the best results in the long run.

The Revenue Threat to Defense Lawyers

Thousands of insurance defense law firms across the country have built a steady business over the years by defending the claims of insurance carriers and self-insured clients.

The traditional business model for defense lawyers is undergoing significant change, however, as the personal client relationships that served as the foundation for many law firms are giving way to highly sophisticated litigation management programs maintained by carriers.

This article will explore the risks faced by insurance defense law firms in today’s competitive market, as well as risk management actions that can be taken to protect the law firm’s revenue base.

By way of background, it is important to understand that insurance defense law firms must typically be approved in advance by the litigation manager of an insurance carrier before they are assigned any cases. Getting on a “panel” of approved outside counsel can be a difficult process for two primary reasons. First, the market for panel positions is intensely competitive. Secondly, it is not easy for a law firm to determine who is in charge of a panel to get the initial introduction.

Panels of interest to a law firm will vary with the firm’s areas of expertise. Many law firms concentrate their practice in certain types of cases, like the defense of auto injury, inland marine, premises liability, product liability or professional liability. Other firms take more of a full-service approach by handling cases across a wide range of practice areas.

On the carrier side, multiple panels might be managed by a single gatekeeper or could each have a separate panel manager. The litigation management chain of command within an insurance carrier or self-insured varies from firm to firm, adding complexity to the law firm’s business development process.

While rates paid in the insurance defense market can be significantly less than a law firm’s “retail” rates, the attraction is in the high case volume that can result once a law firm gets named to an insurance panel as approved defense counsel.

Insurance defense law firms that have been approved as panel counsel for multiple insurance companies can inadvertently find that their revenue base is threatened by a shrinking number of insurance accounts over time. In the section that follows, we will address the primary revenue risks facing insurance defense law firms.

The Imperative of Client Diversification

Insurance is about risk management, specifically the process of identifying, assessing and quantifying risk. Attorneys practicing in the area of insurance defense may find it beneficial to apply some risk assessment principles to the business development efforts within their own law firms.

There are three primary practice management mistakes that managing partners make, as outlined below. The solution is to establish a business development process that seeks to reduce the risk associated with unexpected account loss.

Risk #1: Too Many Eggs in One Basket

A leading risk facing insurance defense law firms is that a small number of clients can represent a large portion of the firm’s revenue base. In fact, many law firms (large and small) rely on three to five primary insurance clients to generate the majority of their revenue stream. While reliance on a handful of clients is a common situation early in any law firm’s lifecycle, the lack of client diversity puts the long-term viability of a firm in great danger.

There is no hard and fast rule regarding the number of clients needed for the long-term success of a law firm. Rather, the managing partner should start to worry when the loss of any single client would put the firm at a serious financial disadvantage. For many firms, this might be when one client starts to approach 15% to 20% of total revenue.

While the loss of any client is not desirable, an account that represents only 5% of total revenue presumably can be offset relatively easily by the inflow of other small accounts.

A long-term negotiated agreement with one primary client can look appealing initially but suddenly turns into a major risk factor when the viability of the account comes into question.

Risk #2: Failure to Recognize Changing Dynamics Within the Insurance Market

The times they are a-changin, as Bob Dylan warned in his well-known ballad. Listed below are several real-world examples where insurance defense managing partners either lost or risked losing a major insurance account.

The Industry Consolidation Scenario

“We were the lead insurance defense law firm in our state for a respected insurance company,” a managing partner for a Midwest law firm recalls. “Suddenly, without any advance notice, our insurance client was acquired by a larger insurance company. Not only did we lose the work, but many of the claims managers at our insurance client lost their jobs in the post-merger consolidation.”

The “Out for Bid” Scenario

“After its founding, our law firm grew extremely rapidly in response to the needs of our primary client,” a founding member of a Southeastern law firm reports. “We opened new offices and added attorneys simply to keep up with the client’s case load. The quality and pricing for our legal services was widely acclaimed, but a new vice president of claims brought in by the insurance carrier after a reorganization decided that he wanted to put our work out for bid. We eventually retained our work, fortunately, but it was a hard-fought RFP process.”

The Attrition Scenario

“Our insurance defense practice has a 20-year history of success,” explains the managing partner of a six-attorney firm who spends his work day as one of the lead litigators. “Over the years, however, I did not have the time to develop new business while also serving the needs of current clients. We found ourselves overly reliant on one client, and without the benefit of an established business development process.”

The “No One Told Me” Scenario

“I suddenly noticed that we were not receiving the same level of incoming cases,” reports a practice group chair with a long history of providing specialized legal services to one of the country’s leading banks. “In researching the problem, not even our internal contacts could tell us who was now responsible for panel appointment decisions. It took many days to identify the bank’s panel manager and realize that they had decided to favor regional law firms over single-location firms like ours. We ultimately got back on the panel, but it was a very nerve-wracking process.”

Insurance defense law firms also face more routine risks, including:

  • Departure of a partner who leaves with her book of business
  • Retirement of a founding member who served as the primary rainmaker
  • Insurance clients that decide to hire more in-house attorneys
  • Centralization of the insurer’s litigation management team

Risk #3: Lack of Time to Expand the Book of Business

Once approved as outside panel counsel, law firms frequently enjoy a steady stream of cases that arrive at their doorstep with little additional business development effort.

Of course, panel members must perform satisfactorily, maintain good relations, be available around-the-clock for the infrequent (one hopes) emergency and offer billing rates that are attractive to the insurance company.

The challenge is that existing clients, particularly large accounts, can easily consume all available capacity within a law firm, leaving little time for courting new clients.

It is indeed a juggling act to manage the day-to-day requirements of meeting court deadlines and responding to client requests, while also trying to devote time to business development.

Looking at the risks, however, it may be easier to make time for marketing after considering what would happen if you lost one of your largest clients. The loss of a major account could result in lay-offs, as well as possible difficulty making lease and other overhead payments. In an extreme case, a law firm may need to quickly affiliate with another firm, thereby losing its independent status.

Minimize Revenue Risk With a Law Firm Marketing Committee

Insurance defense law firms or practice groups that plan for long-term success may find it helpful to create a marketing committee responsible for establishing panel counsel relationships among a broader range of insurance companies and other entities.

Marketing committee members can address issues like:

  • Where to expand geographically. This can be a difficult question, because it may involve an acquisition or opening an office.
  • Development of new insurance defense skill sets. A firm that handles auto cases may want to expand into related forms of transportation, like trucking, railroads or aviation.
  • Exploration of adjacent market segments. Staying with auto for the moment, law firms could try to create business opportunities with fleet managers or delivery services.
  • Growth in the self-insured market. Many large retail, municipal or corporate accounts self-insure up to a certain level (known as “self-insured retentions”).

The time to start looking for more clients is now! Attracting a new account takes time, so it is advisable to work on business expansion while the firm has a satisfactory level of business already in place.

In Summary

The best defense is a good offense. Paying close attention to existing clients, while maintaining an active business development process, is an effective way to minimize revenue risk in the insurance defense sector.

Start early. Marketing for insurance defense success is a long-term process that benefits from a continuous focus on business development campaigns.