(Article from Insurance Law Alert, March 2024)
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Holding
A Delaware court ruled that a Securities and Exchange Commission (“SEC”) subpoena and a subsequent securities action were not “meaningfully linked” for purposes of applying an Interrelated Wrongful Acts provision and a Prior Notice Exclusion in a D&O policy. Alexion Pharmaceuticals, Inc. v. Endurance Assurance Corp., 2024 Del. Super. LEXIS 103 (Del. Super. Ct. Feb. 15, 2024).
Background
In March 2015, Alexion, a pharmaceutical company, received an SEC Order notifying the company of an investigation relating to, among other things, allegedly improper accounting practices, bribes to foreign officials, and matters relating to the recall of a drug called Soliris. In a subpoena issued in May 2015, the SEC sought documents related to Alexion’s foreign and domestic grant-related activities, its compliance with the Foreign Corrupt Practices Act (“FCPA”) and the recall of Soliris. In July 2020, Alexion settled with the SEC and agreed to remedy certain areas of noncompliance and pay over $21 million in penalties.
In December 2016, a class of stockholders filed a securities suit against Alexion and its executives, alleging that they “overpaid for stock that was propped up by illegal activity.” The complaint alleged that the defendants misled investors and violated ethical standards and federal securities law.
Alexion sought coverage for the securities action under two towers of insurance: a 2014-2015 program, and a 2015-2017 program. The operative primary policy in the 2015-1017 program provided that all claims arising out of “Interrelated Wrongful Acts” are deemed to be one claim—first made on the date the earliest of such claims were made. Additionally, a “Prior Notice Exclusion” barred coverage for any claim attributable to any wrongful act that was the subject of any written prior notice under that policy or any previous policy for which the instant policy was a renewal or replacement.
In ensuing coverage litigation, Alexion moved for summary judgment on the issue of “relatedness,” arguing that the SEC subpoena and the securities action were not related as a matter of law, and therefore that the securities suit “is properly placed in the 2015-2017 coverage tower.” The court granted the motion.
Decision
The court ruled that the question of relatedness between the SEC subpoena and the securities action for purposes of applying the Prior Notice Exclusion and the Interrelated Wrongful Acts provision, is determined by a “meaningful linkage” analysis. The court then concluded that there was no meaningful linkage between the two actions.
The court explained that the SEC subpoena was “broadly concerned with Alexion’s compliance with the FCPA,” and ultimately involved findings related to accounting controls and payments to foreign officials, whereas the securities action focused on the artificial inflation of Alexion’s value through various acts of misconduct. The court acknowledged that certain alleged activity in Brazil was relevant to both actions, but concluded that this “tangential link” was insufficient to establish meaningful linkage between the two actions. Additionally, the court emphasized that the actions involved different parties, raised “entirely different” theories of liability, relied on different evidence and sought different relief.
Comments
This decision illustrates the distinction Delaware courts may draw between two actions being “related” for purposes of applying an Interrelated Wrongful Acts provision or Prior Notice Exclusion, as opposed to two actions involving “related” evidentiary material. Here, the securities action plaintiffs relied on the SEC findings in arguing that Alexion engaged in a pattern of illegal conduct. Deeming this reliance “unremarkable,” the court stated: “[t]hough accusations of general wrongdoing may lend support to the sweeping allegations in the Securities Action, such abstract notions are not helpful to a relatedness analysis.”