Navigating today’s complex risk environment can be a monumental task. Steve Shappell, Alliant Claims & Legal, spearheads Executive Liability Insights, a monthly review of news, legal developments and information on executive liability, cyber risk, employment practices liability, class action trends and more.
FEATURED ARTICLE
9TH CIRCUIT UPHOLDS DELAWARE FORUM SELECTION CLAUSE, DISMISSING "CORPORATE DIVERSITY" DERIVATIVE SUIT
Shareholders of a large, multinational retailer filed a derivative lawsuit in a California federal court alleging breaches of fiduciary duty and securities laws violations. Specifically, the shareholders alleged the company and its directors failed to create meaningful diversity within leadership roles and issued false and misleading statements in connection with diversity initiatives. The defendants moved to dismiss the complaint, relying upon the company’s bylaws, which contained a forum selection clause requiring any derivative action to be adjudicated in the Delaware Court of Chancery. The trial court agreed with the defendants and dismissed the suit.
In This Issue:
9TH CIRCUIT UPHOLDS DELAWARE FORUM SELECTION CLAUSE, DISMISSING "CORPORATE DIVERSITY" DERIVATIVE SUIT
Lee v. Fisher, et al., No. 21-15923 (9th Cir. May 13, 2022)
Shareholders of a large, multinational retailer filed a derivative lawsuit in a California federal court alleging breaches of fiduciary duty and securities laws violations. Specifically, the shareholders alleged the company and its directors failed to create meaningful diversity within leadership roles and issued false and misleading statements in connection with diversity initiatives. The defendants moved to dismiss the complaint, relying upon the company’s bylaws, which contained a forum selection clause requiring any derivative action to be adjudicated in the Delaware Court of Chancery. The trial court agreed with the defendants and dismissed the suit.
Read More >>
FEDERAL JUDGE ALLOWS SECURITIES CLASS ACTION AGAINST GLOBAL BANK TO PROCEED
Karimi v. Deutsche Bank AG, No. 22-cv-2854 (S.D.N.Y. Jun. 13, 2022)
Shareholders of a bank were recently allowed to proceed with a securities class action suit against the bank and several of its directors and officers that alleges inadequacies concerning the bank’s anti-money laundering (“AML”) and Know-Your-Customer (“KYC”) practices. The court found ample evidence that the bank and its executives were well-aware its compliance processes were ineffective and largely ignored at the CEOs’ insistence.
Read More >>
CONTRACT EXCLUSION IN D&O POLICY PRECLUDES COVERAGE
SXSW, LLC v. Federal Ins. Co., No. 1:21-CV-00900-RP (W.D. Tex. May 24, 2022)
In this coverage dispute, an insured organized a festival that was cancelled due to COVID-19. Instead of issuing refunds to customers who purchased admission to the festival, the insured deferred customer costs. As a result, a class of customers rejecting the deferral arrangement filed suit against the insured alleging breach of contract, among other claims.
Read More >>
PRE-MERGER CONDUCT DOES NOT CONSTITUTE WRONGFUL ACT UNDER D&O POLICY
Liberty Ins. Underwriters, Inc. v. Cocrystal Pharma, Inc., No. 1:19-cv-02281-JDW-CJB (D. Del. May 23, 2022)
A pharmaceutical company purchased a directors and officers liability (“D&O”) policy with an extended policy period. In the middle of that policy period, the company received a subpoena from the U.S. Securities and Exchange Commission (“SEC”) requesting that it produce documents related to its formation by a reverse merger transaction, which took place before the inception of the D&O policy.
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D&O INSURERS TO PAY $124M OPIOID-RELATED DERIVATIVE SETTLEMENT
In Re Cardinal Health, Inc. Derivative Litig., No. 2:19-cv-02491 (S.D. Ohio 2021)
In the late 2000s, a multinational healthcare services company found itself accused of contributing to the opioid crisis through the improper distribution of prescription drugs. The company was targeted by the Drug Enforcement Agency (“DEA”) in a series of investigative and enforcement actions. Many state Attorneys General followed suit with their own investigations and lawsuits. Large cash settlements, fines, and admissions of guilt ensued.
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D&O INSURER'S DUTY TO DEFEND SEPARATE FROM DUTY TO INDEMNIFY
Starr Indem. & Liab., Co. v. Point Ruston, LLC, No. 21-35702 (9th Cir. Jun. 1, 2022)
Investors in a housing project brought a claim alleging mismanagement and breaches of duty against the entities involved in its development. The directors and officers liability (“D&O”) insurer for the entities initially agreed to defend the entities, but thereafter sought to withdraw its defense and recover all costs it paid in connection with the action. The insurer cited the policy’s “Insured v. Insured” exclusion, which barred coverage when insureds sue one another.
Read More >>
UNTIMELY NOTICE UNDER CRIME POLICY NOT EXCUSED BY NOTICE-PREJUDICE EXCEPTION
Mabrey Bancorporation, Inc., et al. v. Everest Nat’l Ins. Co., No. 4:19-cv-00571-RJS-JFJ (N.D. Okla. May 4, 2022)
A bank reported a claim to its crime insurer after several unauthorized withdrawals were made from the bank’s ATMs with counterfeit credit cards. The insurer denied coverage for the claim, determining that the bank’s notification of the loss was untimely and did not meet the policy requirements to report the matter “at the earliest practicable moment not to exceed sixty days after discovery of loss.” Coverage litigation ensued and the insurer contended that discovery occurred several months prior to the bank’s notification to the insurer, when bank executives were informed of unauthorized ATM withdrawals and discussed application of the “liability shift” with their third-party service provider.
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CYBER CORNER
Click to read the following cases:
- READY, FIRE, AIM! CALIFORNIA LEGISLATURE TARGETS SOCIAL MEDIA ADDICTION AMONG YOUTH
- FEDERAL CYBER-STALKING STATUTE IS CONSTITUTIONAL
- DEPARTMENT OF JUSTICE SLAPS SOCIAL MEDIA COMPANY WITH $150M FINE OVER PRIVACY VIOLATIONS
Read More >>
EPL CORNER
Click to read the following cases:
- PREMIUM PAY AMOUNTS TO WAGES IN CALIFORNIA
- SEVENTH CIRCUIT SIDES WITH FORMER CORRECTIONAL OFFICER ALLEGING FMLA VIOLATIONS
- EEOC CHARGES AND RESULTING LAWSUIT ARE CLAIMS "MADE OR BROUGHT" BEFORE APPLICABLE POLICY PERIOD
Read More >>
SEC CORNER
Click to view the following cases:
- SEC PUSHES ADVISORS TO CONSIDER ESG FACTORS IN INVESTMENT STRATEGIES
- COURT FINS SEC IN-HOUSE ADMINISTRATIVE PROCEEDINGS FOR SECURITIES FRAUD UNCONSTITUTIONAL
- SEC AWARDS NEARLY $3.5M TO FOUR WHISTLEBLOWERS
- JUNE 2022 NOTEWORTHY ENFORCEMENT ACTIONS FILED
- JUNE 2022 NOTEWORTHY SETTLEMENTS AND JUDGMENTS
Read More >>
SHAREHOLDER CORNER
Click to view the following:
- JUNE 2022 SECURITIES CLASS ACTION FILINGS
- JUNE 2022 M&A- RELATED SECURITIES CLASS ACTION FILINGS
Read More >>
9TH CIRCUIT UPHOLDS DELAWARE FORUM SELECTION CLAUSE, DISMISSING “CORPORATE DIVERSITY” DERIVATIVE SUIT
Lee v. Fisher, et al., No. 21-15923 (9th Cir. May 13, 2022)
Shareholders of a large, multinational retailer filed a derivative lawsuit in a California federal court alleging breaches of fiduciary duty and securities laws violations. Specifically, the shareholders alleged the company and its directors failed to create meaningful diversity within leadership roles and issued false and misleading statements in connection with diversity initiatives.
The defendants moved to dismiss the complaint, relying upon the company’s bylaws, which contained a forum selection clause requiring any derivative action to be adjudicated in the Delaware Court of Chancery. The trial court agreed with the defendants and dismissed the suit.
On appeal, the shareholders conceded that the forum selection clause was valid and applicable to the subject suit. Instead, they argued the clause was unenforceable in this instance because the federal district court in California was a more convenient and appropriate venue. In support of their argument, the shareholders asserted that forcing them to bring the suit in Delaware violated public policy because federal courts have a general obligation to adjudicate cases within their jurisdiction, federal securities laws confer exclusive jurisdiction upon federal courts, and prior Delaware case law indicated that the forum selection clause was unenforceable here. The shareholders cited the recent opinion of another federal appeals court, which held that an identical forum selection clause was “unenforceable because it was contrary to Delaware corporation law and federal securities law.”
The 9th Circuit disagreed with the shareholders and did not find the other appellate court’s decision persuasive. According to the court, the shareholders did not meet their “heavy burden” to show that enforcement of the forum selection clause “contravenes strong federal public policy.”
The Takeaway
In light of the recent split decisions between two federal appellate courts, additional litigation will likely ensue before there is a more uniform approach to the validity, applicability, and enforceability of forum selection clauses.
FEDERAL JUDGE ALLOWS SECURITIES CLASS ACTION AGAINST GLOBAL BANK TO PROCEED
Karimi v. Deutsche Bank AG, No. 22-cv-2854 (S.D.N.Y. Jun. 13, 2022)
Shareholders of a bank were recently allowed to proceed with a securities class action suit against the bank and several of its directors and officers that alleges inadequacies concerning the bank’s anti-money laundering (“AML”) and Know-Your-Customer (“KYC”) practices. The court found ample evidence that the bank and its executives were well-aware its compliance processes were ineffective and largely ignored at the CEOs’ insistence.
The complaint alleges that, following a series of scandals, the bank assured investors it had developed robust and effective compliance procedures for screening and monitoring clients. In reality, however, certain high-net-worth and politically connected wealth management clients were systematically exempted from any meaningful due diligence. When news eventually broke about the ineffectiveness of the bank’s AML and KYC practices, the bank’s stock value tumbled. Testimony of confidential witnesses was used to bolster claims that statements in financial filings and on the bank’s website were knowingly and materially false.
The bank contended that such statements were not material as the market had priced in process inadequacies, and that there could not be intent or knowledge of wrongdoing where such statements were merely “aspirational.” Moreover, the bank attempted to argue that any problems with its internal controls, as well as its efforts to remedy such failings, were already well-known to investors.
The court, however, disagreed, finding the bank knowingly subverted these processes through an “unwritten but pervasive practice” of exempting select clients from normal scrutiny. According to the court, the bank’s “repeated insistence … that it had implemented … process improvements [could not] be ameliorated by … general acknowledgement of weaknesses in unspecified internal controls and statements.” In denying the bank’s attempt to dismiss the suit, the court noted the “defendants have not remotely demonstrated how, if the specific descriptions of compliant AML & KYC processes were inaccurate, as alleged, they may be cured by highly general disclosures that some of the bank's unspecified internal control systems may be inadequate.”
The Takeaway
Rule 10b-5 of the Securities and Exchange Act of 1934 makes it illegal for anybody to directly or indirectly use any measure to defraud, make false statements, omit relevant information, or otherwise conduct business operations that would deceive another person in the process of conducting transactions involving stock and other securities. Furthermore, under section 20(a), a person who controls another person found liable for securities fraud under the Exchange Act is jointly and severally liable, “unless the controlling person acted in good faith and did not directly or indirectly induce” the violation. Proving the elements of rule 10(b)5 and section 20(a) claims can be challenging, but not insurmountable. We will continue to track rulings on the “truth-on-the-market” defense and attempts to rationalize false statements as “aspirational.”
CONTRACT EXCLUSION IN D&O POLICY PRECLUDES COVERAGE
SXSW, LLC v. Federal Ins. Co., No. 1:21-CV-00900-RP (W.D. Tex. May 24, 2022)
In this coverage dispute, an insured organized a festival that was canceled due to COVID-19. Instead of issuing refunds to customers who purchased admission to the festival, the insured deferred customer costs. As a result, a class of customers rejecting the deferral arrangement filed suit against the insured alleging breach of contract, among other claims.
The insured tendered notice of the suit under its directors and officers liability (“D&O”) policy, but the D&O insurer denied coverage, citing the policy’s exclusions for breach of contract and “Professional Services.” The court, siding with the insurer, ruled that the exclusion for breach of contract precluded coverage on all counts. According to the court, the exclusion applied to “unjust enrichment and conversion claims because those claims ‘arise from or are in consequence of any liability in connection with any oral or written contract or agreement.’ [W]hen an exclusion in an insurance policy precludes coverage for injuries ‘arising from’ or ‘arising out of’ described conduct, ‘the exclusion is given a broad, general and comprehensive interpretation.’”
The Takeaway
Policy review is critical, and the lead-in phrase for an exclusion can often determine coverage. The more general “for” language is preferable to “based upon, arising from, or inconsequence of” exclusionary language, which could be viewed as extending to other types of claims.
PRE-MERGER CONDUCT DOES NOT CONSTITUTE WRONGFUL ACT UNDER D&O POLICY
Liberty Ins. Underwriters, Inc. v. Cocrystal Pharma, Inc., No. 1:19-cv-02281-JDW-CJB (D. Del. May 23, 2022)
A pharmaceutical company purchased a directors and officers liability (“D&O”) policy with an extended policy period. In the middle of that policy period, the company received a subpoena from the U.S. Securities and Exchange Commission (“SEC”) requesting that it produce documents related to its formation by a reverse merger transaction, which took place before the inception of the D&O policy.
The company provided notice of the subpoena to its insurer several months after receiving it; however, the insurer denied coverage, stating that the subpoena did not constitute a “Claim” under the policy. After the company advised its insurer that additional subpoenas had been issued against several individual directors and officers, the insurer revised its position and agreed to reimburse expenses the company incurred in connection with the investigation.
Several years later, the SEC filed suit against the company and numerous individuals alleging they engaged in a scheme to inflate the value of the shares of an affiliated entity prior to the merger, resulting in ill-gotten profits to the individuals who became directors and officers of the successor entity. Thereafter, shareholders filed multiple derivative actions against the company and its directors and officers stemming from the scheme. Once again, the company provided its D&O insurer with notice of the actions, but the insurer denied coverage under the policy’s Prior Acts Exclusion, sought to recoup the costs it paid for the SEC investigation, and asked for a judicial determination that there was no coverage for same under the policy. The company argued the insurer breached its contract and engaged in bad faith, and coverage litigation ensued.
The court noted that the D&O policy provided coverage for a “Wrongful Act,” which was defined as “any actual or alleged error, misstatement, misleading statement, act, omission, neglect, or breach of duty, actually or alleged committed or attempted by the Insured Persons in their capacities as such.” According to the court, since the scheme that was the subject of the SEC investigation occurred before the merger and focused on conduct that occurred well before the merger was finalized—when the individuals could not have been acting in their insured capacities—that conduct did not constitute a “Wrongful Act” that triggered coverage under the policy. The court also found that the plain language of the policy stated the company must repay the defense costs that were advanced for the SEC investigation because the court determined the policy did not cover those expenses. Lastly, the court found the derivative claims were likewise not made during the applicable policy period because they arose from the same scheme outlined in the SEC action.
The Takeaway
Although there were many issues at play in this case, it is an important reminder that directors and officers can wear many hats during M&A transactions. Understanding the difference between insured and uninsured capacity is essential as it is a bedrock issue for D&O insurers.
D&O INSURERS TO PAY $124M OPIOID-RELATED DERIVATIVE SETTLEMENT
In Re Cardinal Health, Inc. Derivative Litig., No. 2:19-cv-02491 (S.D. Ohio 2021)
In the late 2000s, a multinational healthcare services company found itself accused of contributing to the opioid crisis through the improper distribution of prescription drugs. The company was targeted by the Drug Enforcement Agency (“DEA”) in a series of investigative and enforcement actions. Many state Attorneys General followed suit with their own investigations and lawsuits. Large cash settlements, fines, and admissions of guilt ensued.
Several years later, shareholders filed derivative lawsuits against current and former directors and officers, alleging the defendants “acted with reckless disregard” and ignored red-flags of non-compliance with the Controlled Substance Act. Shareholders alleged these breaches of fiduciary duty resulted in significant financial exposure and harm to the company by way of large settlements with federal, state, and local governments.
The court denied the defendants’ motion to dismiss the derivative suits because it found the shareholders “sufficiently alleged demand futility,” having satisfactorily alleged that a majority of the company’s board “acted with reckless disregard for the corporation’s best interests.” The parties agreed to a mediation, during which a $124 million settlement was reached. The settlement is pending court approval, and if approved, would mark the twelfth largest derivative settlement in history.
The Takeaway
In the past, it was uncommon for derivative settlements to include cash consideration. Instead, resolutions focused on corporate therapeutics and modest plaintiffs’ attorneys fees. Such cases were less of a financial impact to the D&O insurance markets. Times have changed, however, and the risk has increased. Headline derivative settlements such as this will continue to concern D&O underwriters and remain an upward driving force in D&O premium and retention levels.
D&O INSURER’S DUTY TO DEFEND SEPARATE FROM DUTY TO INDEMNIFY
Starr Indem. & Liab., Co. v. Point Ruston, LLC, No. 21-35702 (9th Cir. Jun. 1, 2022)
Investors in a housing project brought a claim alleging mismanagement and breaches of duty against the entities involved in its development.
The directors and officers liability (“D&O”) insurer for the entities initially agreed to defend the entities, but thereafter sought to withdraw its defense and recover all costs it paid in connection with the action. The insurer cited the policy’s “Insured v. Insured” exclusion, which barred coverage when insureds sue one another.
The lower court found the insurer had a duty to defend and indemnify the entities, and the insurer appealed. On appeal, the insurer made two arguments. First, the insurer contended the investors qualified as “members” of the company under the policy’s definition of “Insured.” Second, the insurer argued the claim was being “brought on behalf of Insureds,” an assumption it made that corporations act on behalf of their principals.
In concluding that the insurer had a duty to defend but not a duty to indemnify, the 9th Circuit held that the policy’s Insured v. Insured exclusion was not triggered, as the language of the policy was unambiguous and specifically defined “Insured” as a “management committee Member” or “Member of the Board,” and not merely a “member.” The court found no evidence that the entity undertook the action “on behalf of” an individual who might potentially benefit from the action. The lack of substantive argumentation on the duty to indemnify led to the court’s determination to reject it.
A bank reported a claim to its crime insurer after several unauthorized withdrawals were made from the bank’s ATMs with counterfeit credit cards.
The insurer denied coverage for the claim, determining that the bank’s notification of the loss was untimely and did not meet the policy requirements to report the matter “at the earliest practicable moment not to exceed sixty days after discovery of loss.” Coverage litigation ensued and the insurer contended that discovery occurred several months prior to the bank’s notification to the insurer, when bank executives were informed of unauthorized ATM withdrawals and discussed application of the “liability shift” with their third-party service provider.
Pursuant to the policy, “discovery occurs when an Executive Officer first becomes aware of facts which would cause a reasonable person to assume that a loss of a type covered by the bond will be incurred.” In coming to its decision that notice was untimely, the court noted that timely notice is a condition precedent to coverage, and since it was undisputed that legal responsibility for the theft was shifted to the bank from its third-party service provider when counterfeit cards were used to access money from ATMS that were not equipped with chip readers, notice was provided to the insurer three months after discovery of the loss. Nor was the court swayed by the bank’s argument that late notice should be excused for lack of prejudice, because under Oklahoma law, a showing of prejudice is not required by an insurer to deny coverage for late notice under a crime policy.
The Takeaway
Cyber Corner
READY, FIRE, AIM! CALIFORNIA LEGISLATURE TARGETS SOCIAL MEDIA ADDICTION AMONG YOUTH
Recently, the California State Assembly passed a bill that would give parents the right to sue tech companies on behalf of their minor children who become addicted to social media.
FEDERAL CYBER-STALKING STATUTE IS CONSTITUTIONAL
After a prospective law student was rejected for admission to the law school of his choice, he repeatedly harassed the admissions interviewer whom he blamed for his rejection.
DEPARTMENT OF JUSTICE SLAPS SOCIAL MEDIA COMPANY WITH $150M FINE OVER PRIVACY VIOLATIONS
A recent enforcement action by the U.S. Department of Justice (“DOJ”) underscores the importance for companies of abiding by their stated privacy policies and not misappropriating customer information for marketing purposes.
PREMIUM PAY AMOUNTS TO WAGES IN CALIFORNIA
Naranjo v. Spectrum Sec. Servs., Inc., No. S258966 (Cal. May 23, 2022)
SEVENTH CIRCUIT SIDES WITH FORMER CORRECTIONAL OFFICER ALLEGING FMLA VIOLATIONS
Ziccarelli v. Dart, No. 19-3435 (7th Cir. Jun. 1, 2022)
EEOC CHARGES AND RESULTING LAWSUIT ARE CLAIMS “MADE OR BROUGHT” BEFORE APPLICABLE POLICY PERIOD
PMTD Rests., LLC v. Houston Cas. Co., 2022 WL 1398149 (N.D. Ga. Mar. 23, 2022)
SEC Corner
SEC PUSHES ADVISORS TO CONSIDER ESG FACTORS IN INVESTMENT STRATEGIES
The U.S. Securities and Exchange Commission (“SEC”) recently announced it settled cease and desist charges and assessed a $1.5 million penalty against a mutual fund investment advisor for alleged misstatements and omissions in fund disclosures regarding the advisor’s incorporation of environmental, social, and governance (“ESG”) factors into its investment process.
COURT FINDS SEC IN-HOUSE ADMINISTRATIVE PROCEEDINGS FOR SECURITIES FRAUD UNCONSTITUTIONAL
Jarkesy v. Sec. & Exch. Comm’n, 34 F. 4th 446 (5th Cir. May 18, 2022)
In this case, the U.S. Securities and Exchange Commission (“SEC”) utilized its in-house adjudication process to bring an enforcement action against petitioners for securities fraud under the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940.
SEC AWARDS NEARLY $3.5M TO FOUR WHISTLEBLOWERS
The U.S. Securities and Exchange Commission (“SEC”) recently announced an award of nearly $3.5 million to four whistleblowers who provided information and assistance in a single, covered action. The information provided by three of the four whistleblowers caused the SEC staff to open a new investigation, and also prompted another agency to open an investigation.
|
Director/Officer |
Role |
Company |
|
Long Deng |
CEO |
iFresh, Inc. |
JUNE 2022 NOTEWORTHY SETTLEMENTS AND JUDGMENTS
|
Amount |
Director/Officer |
Role |
Company |
|
$103,591 |
John Henderson |
CEO |
Global Resources Leadership, LLC |
|
$225,000 |
Louis Schiliro |
Former COO |
United Health Products, Inc. |
| $666,913 | Willard Jackson | CEO | 420 Real Estate, LLC |
| $1,250,976.15 | Douglas Beplate | Former CEO | United Health Products, Inc. |
| $33,906,548 | Patrick Churchville | President | ClearPath Wealth Management, LLC |
Source: U.S. Securities and Exchange Commission
Shareholder Corner
JUNE 2022 SECURITIES CLASS ACTION FILINGS
Apyx Medical Corporation
Source: Stanford Law School Securities Class Action Clearinghouse
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Contributors
Abbe Darr, Esq.
Claims Attorney
abbe.darr@alliant.com
David Finz, Esq.
Claims Attorney
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Jacqueline Vinar, Esq.
Claims Attorney
jacqueline.vinar@alliant.com
Jaimi Berliner, Esq.
Claims Attorney
jaimi.berliner@alliant.com
Katherine Puthota
Senior Claims Advocate
katherine.puthota@alliant.com
Matia Marks, Esq.
Claims Attorney
matia.marks@alliant.com
Meaghan Fisher
Senior Claims Advocate
meaghan.fisher@alliant.com
Megan Padgett
Senior Claims Advocate
megan.padgett@alliant.com
Michael Radak
Claims Attorney
michael.radak@alliant.com
Robert Aratingi
Senior Claims Advocate
robert.aratingi@alliant.com
Robert Hershkowitz, Esq.
Claims Attorney
robert.hershkowitz@alliant.com
Steve Levine, Esq.
Claims Attorney
slevine@alliant.com