Terra Extraneus

As an Oklahoma based trial lawyer, I do not have the luxury of a continuous stream of cases all in the same genre or even area of law. Largely originating on one of the three coasts (including the Gulf Coast), cases usually come in waves. I just completed a three year group of 41 cases, ten of which were tried, against Goldman Sachs & Company. This particular wave of cases was actually the second tidal surge because during the three years prior to the just concluded three years, I was counsel against Goldman Sachs in a predecessor wave of cases.

Goldman Sachs manages its exposure somewhat idiosyncratically and not quite like the other wire houses or other member firms in the securities industry. For instance, Goldman Sachs is far more concerned about its image than it is winning or losing, or even the economics of any particular case. Because the securities industry effectively gags its associated persons thus creating a conspiracy of silence, Goldman Sachs can litigate endlessly with associated persons and face little risk that the image it jealously guards will be tarnished by inconvenient media exposure.

The news media has no effective means of penetrating this conspiracy of silence, because no member firm is going to allow its associated persons to speak freely to the media, even about other member firms (or previous employers). Also, one has to wonder if the media will even try to break the code of silence, because of the possible back lash by one or more member firms.

Abusive personnel practices have been a hall mark of about half the securities industry, and avoided by the other half. Goldman Sachs’ abuse of registered representatives was largely the result of institutional errors made when investment bankers attempted to “fix” the firm’s “brokerage” and “advisory” personal wealth management business. It reminded me of watching a newly minted teenage driver. You constantly have to remind them at first to look back over their shoulder while backing out of the driveway. Goldman Sachs was so intent upon socially engineering the lives of its registered representatives that it back over half of them.

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Errors and omissions insurance policies for registered representatives and broker-dealers have been offered at different times by different companies and usually, quickly withdrawn from the market. One of the companies that has stayed in the market longer than most has been AIG / National Union.

But, as demonstrated in a consolidated case, Ryan v National Union, United States District Court, District of Connecticut, AIG / National Union has a strange way of handling these cases.

First, the policy excluded coverage for discretionary accounts or the exercise of discretion. Second, the policy excluded outside activities that included “any entity other than the broker-dealer.” Third, the policy had a relatively short “tail,” in that it excluded coverage for acts pre-dating the policy effective dates and additional time coverage in the “tail” provision.

In other words, about the only thing covered, if the insurance company had its way, would be claims arising during the policy period resulting from acts during the policy period in brokerage accounts (not fee based advisory accounts in which discretion was exercised rightly or wrongly), which typically would include only the old fashioned stock broker, commission and sales of securities. In the Ryan case, the federal court held that the exclusions did not exclude all possible claims that might be implicated by the pleadings in the arbitration proceedings, and therefore there was a duty to defend all the claims in the arbitration proceedings.

It is sad that the AIG / National Union product has become so prevalent among the few who can afford or do buy insurance. A better product issued by a company that was more concerned about its insureds would probably lead to a broader market. A broader coverage market would lead to lower premiums because there would be more buyers among which to spread the risks.

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While the annals of Oklahoma insurance law may not be whipped into a froth, the Supreme Court ruled that “actual cash value” in the insurance code means the same as other insurance code terms such as “fair value” and “actual value.” Tyler v. Shelter Mutual Insurance Company, 2008 OK 9. The opinion was issued in response to a certified question from a federal court. It took ten judges to decide the issue.

In another case, a jury was asked to decide whether an insured of Oklahoma Farmers Union Mutual Insurance Company was entitled to indemnity payments for a substandard wood roof. Because both parties admitted the policy was unambiguous, there was no fact question to submit to the jury, so the jury verdict was superfluous as a matter of law. Based on the unambiguous policy, the Court reversed and rendered, finding coverage and ordering a hearing to set damages. The question under the policy was whether the replacement of the hail damaged wood roof shingles with plywood decking and composition shingles would be covered. Farmers attempted to cover only the repair of the composition shingles because the policy limited coverage to materials of like kind and quality, and the wood shingles were not the same as the composition shingles and plywood decking. Gutowski v Oklahoma Farmers Union Mutual Insurance Company, 2008 OK CIV APP 8.

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