SEC Enforcement Action Deemed a Single Claim With Prior SEC Investigation and Shareholder Suits

In a win for Wiley’s client, a Texas appellate court held that a D&O policy did not cover Wells notices issued by the United States Securities and Exchange Commission (SEC) or its enforcement action because they involved the same series of related facts as the SEC’s original investigation and shareholder litigation initiated before the claims-made policy period.  UniPixel, Inc. v. XL Specialty Ins. Co., 2020 WL 1528098 (Tex. App. Mar. 31, 2020).

The policyholder developed touchscreen technologies for use in phones and tablets.  In 2013, shareholders filed litigation alleging securities fraud in connection with statements about its readiness to ship a key touchscreen technology.  The SEC then issued a formal order of investigation and served subpoenas on the company and its directors and officers.  The order asserted that the company and its directors and officers made untrue statements or omissions about the viability and revenue potential of its technology products and may have failed to maintain adequate accounting controls.  In 2014, shareholders filed a derivative lawsuit alleging that the directors and officers falsely said that the company’s technology was ready to be shipped to customers.

The insurance policy at issue incepted on April 1, 2015.  In June 2015, the SEC sent Wells notices to the company’s officers stating that it had preliminarily decided to recommend an enforcement action against them based on its investigation.  In March 2016, the SEC sued the company and its officers, alleging misrepresentations about the company’s technologies and violations of accounting standards.

The insureds sought coverage for the Wells notices and the SEC lawsuit under the 2015 policy. The trial court ruled in favor of the insurer, holding that the insurer had properly denied coverage under the policy.  On appeal, the court refused to interpret the policy’s “Interrelated Claims” provision as an exclusion, noting that it fell under the policy’s “General Conditions” section.  It determined that the insured had the burden to show that the claims at issue were deemed made during the policy period.  The court reasoned that the Wells notices and the SEC lawsuit were claims that arose from the same “Interrelated Wrongful Acts” as the prior shareholder litigation and SEC investigation.  The court highlighted that all of these matters stemmed from the same wrongful acts arising out of the same series of related facts: the insured’s statements and representations regarding its technology and its accounting irregularities.  Therefore, the court concluded that these matters were subject to the policy’s “Interrelated Claims” condition and were deemed to be a single claim first made before the policy period and outside the scope of coverage.