Applying Texas law, the Fifth Circuit has held that a D&O policy’s securities exclusion barred coverage for a suit for misrepresentation and misconduct that arose out of a sale of equity interests.  Gleason v. Markel Am. Ins. Co., 2019 WL 3437642 at *1 (5th Cir. July 30, 2019).

The owners of an insured ice cream company sold their equity interests to a holding company.  After the sale, the holding company sued the owners, alleging that they misrepresented the ice cream company’s financial condition and committed other misconduct.  The owners submitted the claim to their insurer, which denied coverage under the ice cream company’s D&O policy. The owners then sued the insurer for allegedly breaching its duties to defend and indemnify.

In the ensuing coverage litigation, the insurer moved for summary judgment, arguing that the owners’ claim was barred by a policy exclusion for “any Claim made against any Insured…. based upon, arising out of or in any way involving … the actual, alleged, or attempted purchase or sale, or offer or solicitation of an offer to purchase or sell, any debt or equity securities.”

In turn, the owners argued that the lawsuit fell under an exception to the exclusion for “any Claim … based upon, arising, out of, or in any way involving the purchase or sale, or offer or solicitation of an offer to purchase or sell, any debt or equity securities in a private placement transaction exempt from registration under the Securities Act of 1933, as amended.”  The owners argued that the equity sale at issue was exempt from registration under section 4(a)(2) of the Securities Act of 1933, which exempts “transactions by an issuer not involving any public offering.”  In the alternative, the owners argued that the equity sale was exempt under section 4(a)(1) as a “transaction by any person other than an issuer, underwriter, or dealer” – but the owners failed to cite any relevant case law or authority to support this argument.

The district court held that the lawsuit fell under the policy exclusion and that the equity sale was not exempt from registration under section 4(a)(2) because the owners were not “issuers.”  The owners moved for reconsideration, arguing that the equity sale was exempt from registration under section 4(a)(1).  The district court denied the owners’ motion, finding that the owners failed to adequately raise the section 4(a)(1) argument in their initial opposition to the insurer’s motion for summary judgment.  On review, the Fifth Circuit agreed with the district court’s judgment, concluding that its “reasoning was sound,” and affirmed the decision to deny the motion for reconsideration.