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3 MODERATOR: Nancy D. Adams, Esq., CPCU, Partner, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC PANELISTS: Kieran Hughes, JD, Vice President, Financial Lines Claims, Chartis Insurance Mary E. McCutcheon, Esq., Partner, Farnella Braun Carl E. Metzger, Esq., Partner, Goodwin Proctor LLP Susan Miner, MS, Senior Vice President & Partner, Woodruff Sawyer & Company Introductions

4 Agenda The Anatomy of an SEC Investigation Coverage Issues Arising from Investigations The D&O Policy and Investigations Coverage The Legal Authority New Investigation Products

5 Polling Question: Which category do you fall into?: 1.Insurer 2.Broker 3.Attorney 4.In-House Counsel 5.Risk Manager 6.Other

6 Anatomy of an SEC Investigation in Three Easy Steps 1.Types of SEC Investigations 2.Types of SEC Enforcement Proceedings 3.Key Issues in SEC Enforcement Cases

7 Types of SEC Investigations Inspections of Regulated Firms Preliminary Inquiries Informal Investigations Formal Investigations Criminal Referrals and Investigations

8 Types of SEC Enforcement Proceedings Injunctive Actions Administrative Proceedings Civil Claims Brought in Federal Court Criminal Referrals and Actions

9 Key Issues in SEC Enforcement Practice Self-reporting to the government Cooperation with the government Legal representation of interested parties Selective waiver (or not) of the attorney-client privilege Available sanctions Settlement, including amounts characterized as fines, penalties or disgorgement “Neither admit nor deny” issues

10 Polling Question: On behalf of a client, have you ever been involved in an investigation?: 1.Yes 2.No If yes, was the investigation: 1.Informal 2.Formal

11 Coverage Issues When is coverage triggered for the individual D&O? – Informal inquiry – Company internal investigation – Subpoena – Formal investigation – Wells notice – Complaint When is coverage triggered for the Company? Is the Company insured for the costs of its internal investigation? Can pre-claim work be covered if it benefits defense of a later-filed claim? Notice issues - traps for the unwary

12 Answers IT ALL DEPENDS ON THE POLICY LANGUAGE! Does Definition of “Claim” Include Investigation? Expressly or by implication? Against individuals (named)? Against company? What types of investigation are covered? – Internal v. external – How initiated Does investigation “allege” a “Wrongful Act”? What happens if “Claim” made but not noticed?

13 Traditional D&O policies only cover individuals for formal investigative costs, not the entity Some policies will cover the entity if named & maintained throughout investigation with an Insured (doesn’t happen!) Definition of Claim – Formal regulatory investigations against individual Ds and Os, but only if the D or O is specifically identified as the target of the formal investigation, or when a subpoena is served on the individual – “Claim” includes criminal investigations (once D or O is indicted) – Dedicated Broad Form A-side policies sometimes cover informal investigation when the company can’t indemnify D&O Coverage: Historic Standard for Regulatory Investigations

14 D&O Coverage: Current Standard Includes Pre-Claim Inquiry What is a Pre-Claim Inquiry? – Request for an Insured Person to (a) appear at a meeting or interview; or (b) produce documents that concerns the business of the Organization or the Insured Person’s insured capacities but only if the request came from: Any Enforcement Body – federal, state, local or foreign law enforcement authority or other governmental investigative authority or the enforcement unit of any securities or commodities exchange or other self-regulatory organization The Organization (investigating shareholder derivative demands)

15 What Pre-Claim costs are covered? – Reasonable and necessary fees, costs and expenses incurred by an Insured Person solely in connection with his/her preparation for and response to a Pre-Claim Inquiry What is not covered? – Document Production. Note some insurers will add an endorsement to allow for costs associated with producing documents that are in the possession of the Insured Person D&O Coverage: Current Standard Includes Pre-Claim Inquiry

16 Enhanced D&O Policies Might be Worth Additional Premium Enforcement Body is Broadly Defined – Not limited to the SEC, any governmental investigative authority (EPA, FDA) – Note- routine regulatory or internal supervision, inspection, compliance, review, production or audit conduction in an Enforcement Body’s normal review or compliance process ≠ a Pre-Claim Inquiry – Review your language carefully, particularly as to requirements for a Wrongful Act or notice – Consider new triggers such as search warrant

17 Enhanced D&O Policies Might be Worth Additional Premium Dodd-Frank whistleblower provisions may change the landscape – could lead to heightened activity and potential earlier identification of Insured Person targets of the SEC

18 Polling Question: For those of you who have been involved in an investigation, did the insurer pay the insured’s defense expenses? 1.Yes, no reservation 2.Yes, under a reservation of rights 3.No

19 The Legal Authority … Each side can cite to a “supporting” case – but look at the policy language MBIA Inc. v. Fed. Ins. Co., 2011 U.S. App. LEXIS 13402 (2d. Cir. July 1, 2011) – Coverage for investigation costs triggered by State A.G. subpoena, oral request by SEC, SLC investigation. – Policy covered “formal or informal investigation order” and “similar documents.”

20 The Legal Authority … Office Depot, Inc. v. Nat’l Union Fire Ins. Co. 734 F.Supp.2d 1304 (S.D. Fla. 2010) aff’d 2011 WL 4840951 (11 th Cir. Oct. 14, 2011) (unpublished) – No coverage for costs incurred by Company in voluntarily responding to SEC investigation or for internal investigation costs. – Policy only covered proceedings also maintained against an Insured Person.

21 Other Cases Worth Considering National Stock Exchange v. Federal Ins. Co., 2007 WL 1030293 (N.D. Ill. 2007) – An investigation “alleges” a “Wrongful Act.” Hansen Natural Corp. v. St. Paul Mercury Ins. Co., CV 08-5067-VBF (C.D. Cal. 2009) – Costs to respond to SEC request for documents not a “Claim.”

22 Other Cases (cont’d) Diamond Glass Companies, Inc. v. Twin City Fire Ins. Co. 2008 WL 4613170 (S.D.N.Y.) – No coverage for the Company based on an ongoing federal grand jury investigation where the Policy expressly required “the return of an indictment, filing of a notice of charges or similar document” as a condition of coverage for criminal proceedings.

23 Questions & Answers

24 Many thanks to … Nancy Adams Kieran Hughes Mary McCutcheon Carl Metzger Susan Miner


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