Tenth Circuit Rules That SEC Investigation Is Not A Covered “Claim” Under Claims-Made Policy
11.28.17
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(Article from Insurance Law Alert, November 2017)
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The Tenth Circuit ruled that an investigation and issuance of subpoenas by the Securities and Exchange Commission (“SEC”) are not covered “claims” under a claims-made policy. MusclePharm Corp. v. Liberty Ins. Underwriters, Inc., 2017 WL 4675701 (10th Cir. Oct. 17, 2017).
MusclePharm sought coverage under a Liberty policy for defense costs incurred in connection with an SEC investigation. The investigation began in May 2013 when the SEC sent a letter indicating that an inquiry was being conducted. In July 2013, the SEC issued an order stating that it had “information that tends to show” that MusclePharm “possibly violated” federal securities laws. Thereafter, the SEC issued subpoenas directing testimony and the production of documents. In February 2015, the SEC issued Wells Notices to MusclePharm executives, stating that a preliminary determination had been made to recommend an enforcement action against the individuals.
Liberty Mutual denied coverage for all costs incurred prior to the Wells Notices, arguing that prior events did not constitute a “claim” alleging a “wrongful act” under the policy. A Colorado district court agreed and ruled in the insurer’s favor. See September 2016 Alert. Last month, the Tenth Circuit affirmed.
The policy covers losses incurred as a result of a “Claim first made during the Policy Period . . . for a Wrongful Act.” Claim is defined as “a written demand for monetary or non-monetary relief” or a “formal administrative or regulatory proceeding.” The Tenth Circuit ruled that the July 2013 order and related subpoenas were not a written demand for non-monetary relief, reasoning that “the SEC was not seeking relief, but was only gathering information.” The court also ruled that the July 2013 order was not a formal administrative proceeding notwithstanding a caption on the document stating that it “is a proceeding of the United States of America Before the Securities and Exchange Commission.” Finally, the court held that there was no “claim” prior to the Wells Notices because there had been no allegations of wrongdoing.