SEC Subpoenas & Formal Investigative Order Are “Claims”

The United States District Court for the Southern District of New York has held that subpoenas and a formal investigative order issued by the U.S. Securities & Exchange Commission (“SEC”) constituted “Claims” as defined under a D&O policy.  Patriarch Partners LLC v. AXIS Ins. Co., 2017 WL 4233078 (S.D.N.Y. Sept. 22, 2017).

In December 2009, as part of an informal inquiry, the SEC requested information from an insured investment firm regarding the structure and offering of the firm’s investment products.  The SEC subsequently sent additional, more specific information requests about those products.  Thereafter, on June 3, 2011, the SEC issued a formal order of investigation which authorized the SEC to investigate the firm.  The order stated that the SEC had information that “tends to show that . . . certain persons or entities . . . may have been or may be . . . employing devices, schemes, or artifices to defraud” investors and clients, in “possible violation of” the federal securities laws.  The SEC then issued a subpoena for documents dated July 1, 2011 to an executive of the firm pursuant to the formal order of investigation.  The SEC sent additional document requests and a subpoena for documents, and the firm sent notice of the investigation to its D&O insurers in March 2012.

One of the firm’s excess D&O insurers had issued a policy with a prior/pending exclusion for Claims pending prior to July 31, 2011.  That insurer denied coverage, asserting that the SEC investigation had become a Claim prior to that date.

In the ensuing coverage litigation, the court held that the claim had incepted prior to July 31, 2011.  The court did not consider whether the 2009 subpoena constituted a “Claim,” but it did consider whether the June 2011 subpoena constituted a “Claim.”  The court held that it did constitute a “demand” for “non-monetary relief,” and thus a “Claim,” because the subpoena was an “imperative solicitation” for documents.  In addition, the court held that the formal order of investigation constituted a “Claim.”  In this case, the definition of “Claim” also included “an order of investigation or other investigation by the Securities and Exchange Commission” that alleged a “Wrongful Act.”  The court rejected the insured’s argument that the order of investigation did not “allege” a “Wrongful Act” because the order “did not constitute an accusation by the SEC that [the firm] had committed fraud.”  The court found this definition of “allege” to be “inapposite” to a policy that specifically covered investigations, and found more relevant a definition of “allege” that “necessarily includes acts that may have been committed.”