In the Government’s Crosshairs? Government Investigations and Your D&O Coverage

2. In the Government’s Crosshairs?Government Investigations and Your D&O Coverage

3. Introductions MODERATOR: • Nancy D. Adams, Esq., CPCU, Partner, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC PANELISTS: • Kieran Hughes, JD, Vice President, Financial Lines Claims, Chartis Insurance • Mary E. McCutcheon, Esq., Partner, Farnella Braun • Carl E. Metzger, Esq., Partner, Goodwin Proctor LLP • Susan Miner, MS, Senior Vice President & Partner, Woodruff Sawyer & Company

4. Agenda • The Anatomy of an SEC Investigation • Coverage Issues Arising from Investigations • The D&O Policy and Investigations Coverage • The Legal Authority • New Investigation Products

5. Polling Question: • Which category do you fall into?: • Insurer • Broker • Attorney • In-House Counsel • Risk Manager • Other

6. Anatomy of an SECInvestigation in Three Easy Steps • Types of SEC Investigations • Types of SEC Enforcement Proceedings • Key Issues in SEC Enforcement Cases

7. Types of SEC Investigations • Inspections of Regulated Firms • Preliminary Inquiries • Informal Investigations • Formal Investigations • Criminal Referrals and Investigations

8. Types of SECEnforcement Proceedings • Injunctive Actions • Administrative Proceedings • Civil Claims Brought in Federal Court • Criminal Referrals and Actions

9. Key Issues in SECEnforcement Practice • Self-reporting to the government • Cooperation with the government • Legal representation of interested parties • Selective waiver (or not) of the attorney-client privilege • Available sanctions • Settlement, including amounts characterized as fines, penalties or disgorgement • “Neither admit nor deny” issues

10. Polling Question: • On behalf of a client, have you ever been involved in an investigation?: • Yes • No • If yes, was the investigation: • Informal • Formal

11. Coverage Issues • When is coverage triggered for the individual D&O? • Informal inquiry • Company internal investigation • Subpoena • Formal investigation • Wells notice • Complaint • When is coverage triggered for the Company? • Is the Company insured for the costs of its internal investigation? • Can pre-claim work be covered if it benefits defense of a later-filed claim? • Notice issues - traps for the unwary

12. Answers IT ALL DEPENDS ON THE POLICY LANGUAGE! Does Definition of “Claim” Include Investigation? • Expressly or by implication? • Against individuals (named)? • Against company? • What types of investigation are covered? • Internal v. external • How initiated • Does investigation “allege” a “Wrongful Act”? • What happens if “Claim” made but not noticed?

13. D&O Coverage: Historic Standardfor Regulatory Investigations • Traditional D&O policies only cover individuals for formalinvestigative costs, not the entity • Some policies will cover the entity if named & maintained throughout investigation with an Insured (doesn’t happen!) • Definition of Claim • Formal regulatory investigations against individual Ds and Os, but only if the D or O is specifically identified as the target of the formal investigation, or when a subpoena is served on the individual • “Claim” includes criminal investigations (once D or O is indicted) • Dedicated Broad Form A-side policies sometimes cover informal investigation when the company can’t indemnify

14. D&O Coverage: Current Standard Includes Pre-Claim Inquiry • What is a Pre-Claim Inquiry? • Request for an Insured Person to (a) appear at a meeting or interview; or (b) produce documents that concerns the business of the Organization or the Insured Person’s insured capacities but only if the request came from: • Any Enforcement Body – federal, state, local or foreign law enforcement authority or other governmental investigative authority or the enforcement unit of any securities or commodities exchange or other self-regulatory organization • The Organization (investigating shareholder derivative demands)

15. D&O Coverage: Current Standard Includes Pre-Claim Inquiry • What Pre-Claim costs are covered? • Reasonable and necessary fees, costs and expenses incurred by an Insured Person solely in connection with his/her preparation for and response to a Pre-Claim Inquiry • What is not covered? • Document Production. Note some insurers will add an endorsement to allow for costs associated with producing documents that are in the possession of the Insured Person

16. Enhanced D&O Policies Might beWorth Additional Premium • Enforcement Body is Broadly Defined • Not limited to the SEC, any governmental investigative authority (EPA, FDA) • Note- routine regulatory or internal supervision, inspection, compliance, review, production or audit conduction in an Enforcement Body’s normal review or compliance process ≠ a Pre-Claim Inquiry • Review your language carefully, particularly as to requirements for a Wrongful Act or notice • Consider new triggers such as search warrant

17. Enhanced D&O Policies Might be Worth Additional Premium • Dodd-Frank whistleblower provisions may change the landscape – could lead to heightened activity and potential earlier identification of Insured Person targets of the SEC

18. Polling Question: • For those of you who have been involved in an investigation, did the insurer pay the insured’s defense expenses? • Yes, no reservation • Yes, under a reservation of rights • No

19. The Legal Authority … Each side can cite to a “supporting” case – but look at the policy language • MBIA Inc. v. Fed. Ins. Co., 2011 U.S. App. LEXIS 13402 (2d. Cir. July 1, 2011) • Coverage for investigation costs triggered by State A.G. subpoena, oral request by SEC, SLC investigation. • Policy covered “formal or informal investigation order” and “similar documents.”

20. The Legal Authority … • Office Depot, Inc. v. Nat’l Union Fire Ins. Co. 734 F.Supp.2d 1304 (S.D. Fla. 2010) aff’d 2011 WL 4840951 (11th Cir. Oct. 14, 2011) (unpublished) • No coverage for costs incurred by Company in voluntarily responding to SEC investigation or for internal investigation costs. • Policy only covered proceedings also maintained against an Insured Person.

21. Other Cases Worth Considering • National Stock Exchange v. Federal Ins. Co., 2007 WL 1030293 (N.D. Ill. 2007) • An investigation “alleges” a “Wrongful Act.” • Hansen Natural Corp. v. St. Paul Mercury Ins. Co., CV 08-5067-VBF (C.D. Cal. 2009) • Costs to respond to SEC request for documents not a “Claim.”

22. Other Cases (cont’d) • Diamond Glass Companies, Inc. v. Twin City Fire Ins. Co. 2008 WL 4613170 (S.D.N.Y.) • No coverage for the Company based on an ongoing federal grand jury investigation where the Policy expressly required “the return of an indictment, filing of a notice of charges or similar document” as a condition of coverage for criminal proceedings.  

23. Questions & Answers

24. Many thanks to … • Nancy Adams • Kieran Hughes • Mary McCutcheon • Carl Metzger • Susan Miner