SEC Subpoenas & Formal Investigative Order Are Not “Claims” Alleging “Wrongful Acts”

The United States Court of Appeals for the Tenth Circuit, applying Colorado law, has held that a formal investigative order issued by the U.S. Securities & Exchange Commission (“SEC”) and related subpoenas did not constitute “Claims” alleging “Wrongful Acts” as defined under a D&O policy.  MusclePharm Corp. v. Liberty Ins. Underwriters, Inc., 2017 WL 4675701 (10th Cir. Oct. 17, 2017).

The SEC issued a formal investigative order that stated that an insured company “possibl[y]” violated provisions of the Securities Act of 1933 and the Exchange Act of 1934, and ordered that a private investigation be made to determine “whether” any persons or entities were engaging in conduct in violation of those laws.  Thereafter, the SEC sent subpoenas to the company and certain of its directors and officers.  The company sought coverage from its D&O carrier for legal expenses incurred in connection with its response to the formal investigative order and the related subpoenas.  The D&O carrier denied coverage.  In the ensuing coverage litigation, the trial court granted summary judgment to the insurer, holding that no “Claim” had been made.

In the subsequent appeal, the court agreed with the insurer that neither the subpoenas nor the formal investigative order initiated a “Claim” for a “Wrongful Act” as those terms were defined in the policy.  “Claim” was defined to include, inter alia, a “written demand for monetary or non-monetary relief” and “a formal administrative or regulatory proceeding.”  The court held that the subpoenas did not constitute written demands for relief because they did not seek redress or a benefit from the insureds, and therefore did not seek “relief.”  The court held that the formal investigative order did not initiate a “proceeding,” which it found to be distinct from an “investigation.”  Finally, the court held that the subpoenas and the order did not allege a “Wrongful Act.”  The court focused on the definition of “alleged,” which it defined as “asserted to be true or to exist.”  The court found that the SEC made no “allegations,” noting that the “SEC was not asserting that [the insured] had broken any laws; rather, the SEC was investigating to determine whether it had.”  As such, the appellate court affirmed the trial court’s grant of summary judgment in favor of the insurer.