About plushq

The Professional Liability Underwriting Society (PLUS) was founded in 1986 by industry professionals who recognized the need for a forum for individuals involved in the field of professional liability. The Society is a non-profit organization with membership open to persons interested in the promotion and development of the professional liability industry. Membership consists of over 6,500 individuals, representing over 1,000 companies active in the many fields of professional liability. PLUS currently receives the support of more than 200 companies through corporate membership. PLUS is recognized as the primary source of professional liability educational programs and seminars, assistance to its members to help serve clients, and information regarding professional liability. The Society is continually seeking new means to fulfill its mission statement and better serve its members.

Cybersecurity Litigation Review

This blog post was submitted in dialogue with the recent PLUS webinar “Cyber Risk is a D&O Risk.” You can view the recording of this webinar and past free webinars on the PLUS website here.

If you have blog content you’d be interested in submitting, please reach out to Katie Campbell at kcampbell@plusweb.org.

John Cheffers was hired to be a Director of Research for Watchdog Research in 2019 and creates content that is featured on the company blog.  He obtained his J.D. from Ave Maria School of Law in Naples Florida in 2019, where he was a member of the Law Review and graduated magna cum laude. Prior to that he worked for Audit Analytics as a Research Analyst.

Cybersecurity has gone from a niche concern to a hot topic in the D&O insurance world.  On September 23rd, this week, PLUS hosted a webinar on how companies can strategically handle cybersecurity concerns.  The speakers offered tremendous perspective on this dynamic and growing area, and we encourage everyone to listen to their fascinating conversation.

We are an independent research provider that uses an extensive database of public information to create easy-to-use reports for over 4,500 publicly traded companies.  Since we track cybersecurity incidents and all material litigation for public companies, we thought we could use this as an opportunity to provide a little color to the important discussions concerning cybersecurity.

Overview

We began by looking at incidents that occurred at companies listed on the NYSE and Nasdaq over the past ten years, and the growth rate of cybersecurity incidents is alarming: 

*The graphs and tables in this post were created by Joseph Burke, PhD, and derived the Audit Analytics database.

In 2010, only 0.1 % of companies reported a cybersecurity incident. In 2019, 2.2% of companies reported a cybersecurity incident. The growth of cybersecurity incidents over the past five years has been incredible and it is not clear when it will slow down. 

Another interesting facet is that the risk of a cybersecurity incident is much higher at a large company that it would be at a small company. Attacks on large companies are driving much of the growth in these numbers.

Cybersecurity Security Class Actions

A cyberbreach at a company creates all sorts of problems, including litigation. We identified all the security class action suits that were brought over cybersecurity issues and calculated the likelihood of being named in one of those suits. Unsurprisingly, the last ten years has shown significant growth in the risk of being named in a cybersecurity related lawsuit.

It is important to note that these percentages are for all companies.  Large cap companies have a significantly probability than is represented in the graph because they are both more likely to be the victim of a cybersecurity incident and are generally more likely to have a securities class action suit filed against them.  

Cybersecurity as a Leading and Covariate Indicator

Two of our researchers, Joseph Burke PhD and Joseph Yarbrough PhD, wrote a research paper calculating when particular flags from our reports were associated with an increased risk of securities class action litigation for 2014-2018. Companies with a cybersecurity incident were almost three times as likely to get named in a securities class action lawsuit the year that the incident occurred.

Additionally, cybersecurity incidents were one of the six leading indicators of securities class action suits.  An event is considered a leading indicator of litigation if the occurrence of that event is associated with an increased risk of litigation for the following year. 

Conclusion

The chance of being involved in a cybersecurity securities class action lawsuit is still relatively low, but it is increasing rapidly. Additionally, the risk profile is far higher for large companies, which are more likely to be a victim of a cybersecurity incident and more likely to get named in a securities class action lawsuit. 

If company boards wish to prevent having their company victimized twice (by hackers and by lawyers), then they need to make wise and strategic decisions to confront this growing threat.

Interview with LAMP Alumni

This is the first in a series of interviews with LAMP alumni on their experience in the industry, PLUS, and the program. For more content on diversity & inclusion from PLUS, you can read posts here on the PLUS Blog, watch our member webinar series, or attend the upcoming PLUS Foundation webinar, An Open Conversation About Race in the Professional Liability Industry, on Wednesday, October 14th at 10:00 a.m. ET (registration opening soon).

Jeremy J. Zacharias

Jeremy is a member of the Professional Liability Department of Marshall Dennehey where the focus of his practice is representing and defending attorneys, accountants, insurance producers, corporate directors and officers, and other licensed professionals.

Jeremy is an active member of PLUS where he is an alumni of the Leadership and Mentoring Program (LAMP). Through PLUS, Jeremy also completed training at PLUS University and served as a member of a PLUS task force to revitalize the curriculum of PLUS University to address current trends in the professional liability insurance marketplace. Jeremy also currently serves on the Future PLUS committee and the PLUS Conference Content committee.

In 2011, Jeremy earned his Bachelor of Science Degree in Business Administration with a co-concentration in Finance and Business Law, graduating magna cum laude from Drexel University’s LeBow College of Business. In spring 2014, Jeremy earned his juris doctor from the Rutgers University School of Law, graduating cum laude and in the top 15 percent of his class.

Jeremy is admitted to the bars of the states of New Jersey and Pennsylvania and is admitted to practice in federal court in the District of New Jersey.

How did you get your start in professional liability insurance?

I began my career in the professional liability insurance industry as an Associate for Marshall Dennehey Warner Coleman & Goggin, P.C. in Mount Laurel, NJ. I focus my practice in representing and defending attorneys, accountants, insurance producers, corporate directors and officers, and other licensed professionals.

How did you hear about LAMP? What made you decide to apply?

I became a member of PLUS one year before I decided to apply for the LAMP program. I saw the wide network that PLUS offered and knew that as an Indian American attorney, I was under-represented in the legal and insurance community. I saw LAMP as an opportunity to learn more about the professional liability insurance industry and to connect with my peers in different avenues to grow my network. Through LAMP, I have made countless contacts and expanded my network with people across North America. Without LAMP, I would not have had this opportunity.  

What was the most valuable aspect of the programming (e.g. orientation, webinars, mentor, attending PLUS events, relationships with your cohort)? Why?

For me, the most valuable aspect of the LAMP programming was the relationships formed with my cohort and expanding this network with each incoming cohort. Each cohort includes individuals that are ambitious in their careers and include like-minded professionals. LAMP offers a diverse group of individuals that share a commonality to transcend the professional liability insurance marketplace.

What takeaway(s) from the program have you implemented in your own life/career and how has it benefitted you?

The key takeaway that I took from LAMP was to see beyond merely practicing law. As a member of the professional liability insurance industry, I now see my role as a defense attorney as a collaboration with other professionals, including insurance claims representatives, brokers and underwriters.

How has LAMP changed your career path?

LAMP has allowed me to expand my network within the professional liability insurance industry while learning more about this industry. In turn, I am a more effective lawyer and advocate for my clients since I now understand the case reserving mindset and appreciate the insurance and claims strategies utilized.

How do you think LAMP has, or will, impact the PLUS community? Impact the industry?

LAMP has impacted that PLUS community by placing a focus on diversity and gave a voice to under-represented insurance professionals in the industry. The landscape in the professional liability insurance industry is changing, and under-represented professionals offer a unique voice and mindset to any company. LAMP has placed a spotlight on this and this program continues to effectuate change and acceptance within this industry.

What else do you think companies and individuals should be doing to bring about change?

Companies, in order to stay competitive in the market, must promote and celebrate diversity and must focus on the value professionals adds to an organization, regardless of race, color, or religion, among others.

What advice would you give to someone from an underrepresented group who is thinking of entering professional liability insurance? Someone who is in the field but looking to advance their career?

I often advise individuals new to the professional liability insurance to get involved with as many opportunities as possible. PLUS offers various opportunities at the local and national level to stay engaged with the current insurance trends and to fine-tune your professional network. I joined PLUS not knowing how useful my membership would be to my career as an attorney. However, getting involved with LAMP and later taking on a leadership role with PLUS has allowed me to maximize my membership benefit. I would encourage anyone seeking to learn more about this rewarding industry to get involved with PLUS and volunteer to offer a unique insight into this growing industry.

The “Robinhood Effect”

Rob Yellen
D&O and Fiduciary Liability Product Leader, FINEX, Willis Towers Watson

Rob is a recognized expert in directors and officers liability with a rare combination of Financial Lines experience that includes serving as a chief underwriting officer, global head of product development and a foreign general insurance chief legal counsel for a leading insurance carrier.  Today, Rob counsels clients and serves as a thought leader and technical expert, trouble shooter, and claims resource on Financial Lines issues with a focus on D&O and Fiduciary products.  He co-leads the Willis Towers Watson Strategic Solutions Group and chairs its North American and Global FINEX Advisory committees.

The legend of Robin Hood has been around 700 years or so–an enduring, popular fairy tale of an outlaw hero and his band of Merry Men who robbed the rich and gave to the poor.  By comparison, Robinhood Markets, Inc., formed in 2013, looks to “provide everyone with access to the financial markets, not just the wealthy.” What makes Robinhood particularly interesting is its growth, how it is different and its impact, this year, on financial markets.

If growth and trading volume are the measures, Robinhood is succeeding.  Bloomberg reports that 1.7 million people opened brokerage accounts with Charles Schwab in the second quarter of 2020 — a 328% increase from the same period a year ago.  The Robinhood app added 3 million accounts in the first four months of 2020 and its payment order flow revenue doubled from Q1 to Q2. In June, Robinhood saw 4.3 million daily average revenue trades (DARTS)—higher than all of the major incumbent brokerage firms and more than E-Trade and Charles Schwab combined. In May, Robinhood raised $280 million in venture funding suggesting a then pre-money valuation of $8.3 billion.   Then, on August 17th, Robinhood announced it had raised another $200 million suggesting a $11.2 billion valuation.  So, yes.  Successful.

Robinhood and its peers have made an impact.  The Wall Street Journal reported on August 24th that the S&P 500 hit a record close on the prior Friday—its first since February.  FactSet reported that price/earnings ratio on the S&P 500 @25.26—the highest since 2002—when the dot.com bubble burst and the Nasdaq Composite stock market index fell 78% from its peak. Meanwhile, unemployment is high and earnings remain under pressure from the COVID-19 pandemic.    One trend credited in part for fueling this market and upsetting long-standing norms in capital markets is the tsunami-sized wave of retail trading by newbie investors.  Many of them have begun investing with zero-fee trading apps such as Robinhood, Webull and Youinvest, but traditional brokers have seen massive growth, too.

But Robinhood seems different.

  • Tracking: Until recently, Robinhood’s investors’ trading data—available by API-was compiled and reported by Robintrack.net.  Robintrack would report how many Robinhood users hold a particular stock over time. It generates charts showing the relationship between price and popularity, and compiles some lists using the data. This data had become an obsession for investors and analysts looking to gauge the impact of retail investors on market behavior.
  • Fractional Shares: Also, Robinhood offers fractional shares.  So, users can trade stocks and ETFs in pieces of shares, in addition to trading in whole share increments.    Fractional shares on Robinhood can be as small as 1/1000000 of a share, and trading fractional shares is real-time and commission-free.  Want to by $25 of Tesla (trading at $2,170.02/share pre-market on August 24th)? No problem.  Bloomberg reports [here] that, “[s]tarting in late April, traffic to the site exploded, jumping from about 4,000 to anywhere between 20,000 and 50,000 unique users per day.”  Robinhood’s users trade the riskiest products and at the fastest pace, according to research firm Alphacution for The New York Times.  In the first three months of 2020, Robinhood users traded nine times as many shares as E-Trade customers and 40 times as many shares as Charles Schwab customers, per dollar in the average customer account in the most recent quarter.
  • Gamelike App: Trading on the Robinhood app is different, too.  In what has been described as from “easy to use” to “gamelike,” Robinhood’s app fills users’ screens with digital confetti and information on other stocks that its users are buying. A recent Wall Street Journal article [here] questioned whether the app made trading too easy—reporting that behavioral researchers say the app’s simplicity encourages novice investors to take bigger risks.  While Robinhood asserts it doesn’t make recommendations to buy and sell securities, the app does shows users related stocks that other Robinhood users also own.
  • Incentives: Free stock??  Really?  It’s true. According to Robinhood’s website [here], “for every new friend you invite to join Robinhood, you can both earn a free stock! As soon as the conditions in your promotion are satisfied, we’ll credit both of your accounts with a free stock. You’re eligible to receive up to $500 in reward stocks each calendar year—so feel free to tell all your friends.”
  • Day Trading: Others blame unlimited free trading rather than Robinhood’s app for encouraging day-trading—and Robinhood asserts, “[t]he vast majority of Robinhood customers are not day traders.”
  • Payment Order Flow Revenue Model: Robinhood derives its revenues from a controversial practice known as “payment for order flow” in which companies pay to be the other side of a trade or to at least get the first right refusal.  This process could mean that a Robinhood order isn’t happening on a public exchange. Some say the process helps market efficiencies, but others question whether the user is getting the best price for their trade.

The Robinhood Effect:  Why are Robinhood’s users and other newbie investors being blamed for the irrational market behavior?  Some had argued that Robintrack.net and other information Robinhood provides its users drove a momentum play that could become a self-fulfilling prophecy.  Half of Robinhood’s 13 million users had never invested before signing up.  Do these newbie investors understand the financial risks?  Leon Cooperman, billionaire investor, doesn’t think so.  In a recent CNBC interview, he cautioned, “[t]hey are just doing stupid things, and in my opinion, this will end in tears.”    Where do those many of the newbie Robinhood users look for information?  From Tik Tok and other social platforms, naturally.  TikTok videos under #robinhoodstocks have more than 3.1 million views and #investing tag on TikTok has grown to 527.6 million views (both as of August 24th).  Cooperman may be right!

Will recent changes temper the Robinhood Effect?  Recently, Robinhood announced that it plans to curtail access to its API and certain data used by Robintrack.net that provided hourly updates on retail stock demand, and that became hot fad on Wall Street. The data from the app showed broad trends among Robinhood users’ trading to display which stocks were popular with its clients. Robinhood will stop providing the feed on which the site’s information asserting the move is based out of concern that that data was often “misconstrued” and “misunderstood.”  If these changes mean Robintrack.net is done (as seems to be the case), that may help Robinhood avoid some of the market attention it has received lately; however, it may not eliminate the momentum effect that some have attributed to Robinhood users and that may continue to be fueled by any information Robinhood continues to provide its users on the purchases of other users.

The Robinhood Effect, to me, is a D&O liability enigma.  How should we factor in the sometimes seemingly non-traditional behavior its impact on momentum investing? How should Robinhood users’ non-traditional information sources (like Tik Tok) impact how those users may factor into securities claims? I offer a few more specific questions that we may see answered sometime soon:

  • Should we look at stocks with high Robinhood/retail investor trading as having greater exposure to heightened severity? From a D&O liability perspective, inflated markets can signal the potential for increases in D&O losses with a significant potential for higher than normal severity.  If Robinhood investors exacerbate that inflation, they may also increase potential D&O claim severity. Does that inflation warrant recalibrating upward how much D&O coverage is needed?
  • How will, if at all, the seemingly different mix of information underlying trading by Robinhood users change how those users are factored into securities class actions?
  • Can a user with 1/1000 of a share be included in a class of shareholders? I suspect yes, but wonder how this fractional share ownership could impact securities class action in the future.
  • Can users who relied solely on the information Robinhood provides about its other users’ trading avail themselves of a presumption of Fraud-on-the-Market? Can defendants with significant Robinhood trading in their stocks rebut any such presumption if it does apply?  Would doing so be worth the effort?
  • Could the Robinhood Effect impact how class damages are calculated? Would documented Robinhood Effect inflation serve to support defense efforts to reduce and undermine plaintiff’s-style damages or the impact of inflationary disclosures?

Worth us keeping an eye on this Robinhood Effect.  No fee trading is likely here to stay.  Fractional trading is too.  While the investor information mix provided by any trading app can change with each revision, we may be revisiting Fraud-on-the-Market again sometimes soon.  Some of this phenomenon, at least, is more than a short-term fad.