Because issuers typically indemnify underwriters in securities cases, underwriters often rely on the issuer’s counsel to lead the defense and negotiate any settlement. In booming, or even ordinary, economic times, this can be a financially sensible strategy. Issuers will pay the underwriters’ defense and settlement costs but are loathe to pay underwriters’ counsel to perform the same tasks that the issuer’s counsel are handling. Likewise, issuers have little appetite to pay for the underwriters’ unique defenses when such cases ordinarily settle based on issuers’ almost strict liability under the Securities Act.
But the recent economic downturn reveals this strategy’s potential flaw. With many issuers in or near bankruptcy, some underwriters now find themselves exposed, without any real indemnification, to Securities Act claims not subject to heightened scienter pleading standards.
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