US v. Stockman and the Burn Rate on the D&O Policy

We have been following the criminal action filed against David Stockman, the former director of OMB under Ronald Reagan. Most of the parties are mired in discovery, with the Government having produced somewhere around 10 million documents.

With one exception. Defendant, Paul Barnaba, is pushing for a quick trial, having originally sought a date this summer. One (but by no means the only) reason for the quick trial date has been concern over the burn rate of the D&O policy. The Government described the concern as "wholly speculative and unsubstantiated."

In reply, Barnaba vigorously disagrees. In so doing, he provides considerable insight into the terms of the D&O insurance policies applicable in this case. Total coverage is $50 million, with the first tranche exhausted in June 2007 and has an estimated $1.67 million per month burn rate. As the memorandum provides:

• the impending exhaustion of these funds is neither speculative nor unsubstantiated. The D&O Policy in question provides four layers of coverage—a total of $50 million. It provides coverage to a wide array of former Collins & Aikman (“C&A”) executives and employees, including those who have been charged in this case, those who have been sued or subpoenaed in the civil SEC matter, and those who have been sued or subpoenaed in various class actions and other civil suits taking place around the country. The first $15 million layer of coverage was exhausted on or about June 15, 2007. The second $15 million layer of coverage was exhausted on or about March 31, 2008. Invoices were submitted to the second layer carrier between in or around July 2007, and in or around March 2008, invoicing for work performed between in or around June 2007 and in or around February 2008. In other words, the second $15 million layer of coverage was exhausted in nine months at a rate of approximately $1.67 million per month. The monthly burn rate was higher at the end than at the beginning of this nine-month period.

The bottom line? The remainder of the policy may well be exhausted by year's end.

• This leaves $20 million of coverage remaining, but this amount is for invoices submitted beginning on or about April 1, 2008 for work that was performed beginning on or about March 1, 2008. Assuming a monthly burn rate of $2 million to $3 million, which is realistic and likely conservative, all policy proceeds will be exhausted sometime between mid-September 2008 and December 31, 2008.

The $50 million amount seems typical for a company the size of C&A.  The burn rate is substantial but then so is the amount of litigation swirling around the company, with charges filed by the Securities and Exchange Commission augmenting the criminal proceedings. 

Barnaba likewise continues to assert that his efforts at a speedy trial are supported by his limited role in the criminal charges, something born out in the indictment.  As he notes: 

• And even if those usual rationales, such as the public’s interest in economy, convenience, and prompt trials, are not trumped, they are of limited application here. Here, granting Barnaba’s severance request will insure the accused’s prompt trial. Here, because of Barnaba’s relatively limited role in the charged offenses, because he is the only Purchasing Department employee charged with a crime, and because he has virtually no involvement in any alleged scheme other than the Supplier Rebate Fraud Scheme, severing him will entail only limited duplicative effort.

We are redoing the corporate governance web site.  Once completed, we will post this pleading.