Presentation is loading. Please wait.

Presentation is loading. Please wait.

Your source for professional liability education and networking. Emerging Private Equity Professional and Management Liability Risks Tuesday, March 31,

Similar presentations


Presentation on theme: "Your source for professional liability education and networking. Emerging Private Equity Professional and Management Liability Risks Tuesday, March 31,"— Presentation transcript:

1 Your source for professional liability education and networking. Emerging Private Equity Professional and Management Liability Risks Tuesday, March 31, 2015 Sponsored by PLUS Diamond Sponsors:

2 Professional Liability Underwriting Society The information and opinions expressed by our panelists today are their own, and do not necessarily represent the views of their employers or of PLUS. The contents of these materials may not be relied upon as legal advice. A copy of the presentation slides will be available following this webinar, on the PLUS website at: 2 Emerging Private Equity Professional and Management Liability Risks

3 Professional Liability Underwriting Society Meet The Presenters 3 M. Machua Millett Senior Vice President Marsh USA, Inc. Jennifer C. Hickox, RPLU Vice President HCC Global, Inc. Jeremy Salzman, Esq. Assistant Vice President Arch Insurance Group Moderator – Elan Kandel, Esq. Member Cozen O’Connor

4 Professional Liability Underwriting Society How Does Private Equity Work? Private equity firms (the general partners – GPs) raise capital from investors (or limited partners – LPs) in a limited partnership legal structure. Private equity GPs sponsor funds, which invest this capital along with funds borrowed from banks and other lenders, in “portfolio companies.” Private equity GPs typically hold investments in portfolio companies for three to five years, and then sell them, hoping to realize a gain on the sale as a result of the increased value they have created during their period of ownership. Private equity firms receive “carried interest” and charge management fees to the funds and portfolio companies (among other fees). 4

5 Professional Liability Underwriting Society Private Equity Overview Point 1 o Sub 5

6 Professional Liability Underwriting Society The Private Equity Insurance Policy Overview of a Typical Policy The Insuring Agreements -Directors & Officers Liability coverage (including management liability) -Outside Entity Executive Liability -Errors & Omissions/Professional Services -Employment Practices Liability -Fiduciary Liability 6

7 Professional Liability Underwriting Society Who is an Insured? The private equity firm The firm’s sponsored funds Subsidiaries Employees and directors and officers of the above 7

8 Professional Liability Underwriting Society Who is Not an Insured? The fund’s limited partners Portfolio companies 8

9 Professional Liability Underwriting Society The SEC’s “Broken Windows” Enforcement Strategy “…minor violations that are overlooked or ignored can feed bigger ones, and, perhaps more importantly, can foster a culture where laws are increasingly treated as toothless guidelines. And so, I believe it is important to pursue even the smallest infractions.” -SEC Commissioner Mary Jo White, Oct. 9,

10 Professional Liability Underwriting Society “First-of-their Kind” Enforcement Actions I.Fee and expense allocations  In re Clean Energy Capital, LLC and Scott Brittenham  In the Matter of Lincolnshire Mgmt., Inc. II. “Pay-to-Play”  In the Matter of TL Ventures, Inc. III.Dodd-Frank Anti-Retaliation  In the Matter of Paradigm Capital Management, Inc. and Candace King Weir 10

11 Professional Liability Underwriting Society On the SEC’s Horizon…. More Fee and Expense Allocation Actions  The use of “Operating Partners”  Shifting of expenses from the private equity management entity to the fund or portfolio company during the middle of the fund’s life without adequate disclosure. Hidden Fees  Monitoring fees charged beyond the typical portfolio company holding period  Undisclosed administration fees  Exceeding expense limits  Affiliated expense limits Marketing and Valuation  Valuation methodologies  Performance marketing where projections might be used in place of actual valuations in marketing materials – without proper disclosure  Changing valuation methodologies without proper disclosure 11

12 Professional Liability Underwriting Society Foreign Corrupt Practices Act Risks  The FCPA remains a hot button issue for the DOJ and SEC  Fund interactions with sovereign wealth funds  Potential liability for actions committed by portfolio companies  Other jurisdictions have also enacted similar statutes (i.e., UK Bribery Act) 12

13 Professional Liability Underwriting Society Coverage Issues The nature of the relief sought by the SEC and DOJ is “disgorgement.” The definition of “loss” may exclude matters deemed uninsurable under the relevant law or expressly exclude disgorgement and restitution. Potential applicability of fraud/dishonesty exclusion. Is the SEC/DOJ investigation a “claim”? In what capacity are the PE firm’s D&Os ensnared in the investigation? 13

14 Professional Liability Underwriting Society Transparency Litigation American Nat. Ins. Co. v. Lincolnshire Mgmt., et al. – Limited partner brought derivative action and direct claims on behalf of funds against private equity management firm. – Limited partner alleged that the management firm wrongfully deducted “fees,” “expenses,” and “interest,” in contravention of the limited partnership agreements. 14

15 Professional Liability Underwriting Society Coverage Issues Among other things, plaintiffs asserted a breach of fiduciary duty cause of action against the defendants. Nature of relief sought included money damages, disgorgement and attorneys’ fees. 15

16 Professional Liability Underwriting Society Collateral Consequences of the IPO Boom  Private equity firms routinely named as defendants as primary actors under Section 10(b) of the ’34 Act and as controlling persons under Section 15 of ’33 Act and Section 20(a) of the ‘34 Act.  Directors appointed to the issuer’s board by the private equity firm and its affiliated funds are also named under theories of primary and secondary liability. 16

17 Professional Liability Underwriting Society Recent Filings Baker v. Seaworld Entertainment, et al., 14-CV MMA-JMA (S.D.Cal., Sept. 9, 2014). Waterford Township Police & Fire Retirement Sys. v. Regional Management, et al., 14-CV LTS (S.D.N.Y., Nov. 24, 2014). 17

18 Professional Liability Underwriting Society Coverage Issues Definition of Loss Allocation issues 18

19 Professional Liability Underwriting Society Cyber Liability SEC OCIE Cybersecurity Initiative Private equity firms host sensitive data Private equity is a prime target Firms should consider purchasing a standalone cyber liability product to cover first-party losses 19

20 Professional Liability Underwriting Society M&A Litigation Going private “inadequate consideration” litigation Less frequency as a result of fewer number of going private deals. Still, when big deals are announced, litigation is certain to follow (i.e., Petsmart, Riverbend and Tibco Software) 20

21 Professional Liability Underwriting Society M&A Litigation 21

22 Professional Liability Underwriting Society Coverage Issues Definition of Loss How broad is your policy’s “bump-up” exclusion (if your policy has one)? Allocation issues 22

23 Professional Liability Underwriting Society Portfolio Company Derived Liability Bankruptcy Adversary Proceedings – Fraudulent transfer allegations – Direct breach of fiduciary duty and aiding and abetting claims resulting from actions taken during the “zone of insolvency” – Coverage issues involve loss definition, allocation and fraud/dishonesty exclusion 23

24 Professional Liability Underwriting Society Portfolio Company Derived Liability “Deep Water Horizon” – Many private equity firms heavily involved in energy sector – Liability is predicated on alter ego and general agency principles – How broad is your policy’s pollution exclusion? 24

25 Professional Liability Underwriting Society Portfolio Company Derived Liability Employment Practices/Breach of Contract Claims – WARN/FLSA How broad is the policy’s exclusion? – ERISA pension contribution claims Does the policy’s exclusion preclude claims at the portfolio company level? – Tortious interference with contract (both employment and otherwise) Subsumed within the scope of the breach of contract exclusion or not? 25

26 Professional Liability Underwriting Society Questions 26

27 Professional Liability Underwriting Society Panelist Contact Information 27 M. Machua Millett Senior Vice President Marsh USA, Inc. Jennifer C. Hickox, RPLU Vice President HCC Global, Inc. Jeremy Salzman, Esq. Assistant Vice President Arch Insurance Company Moderator – Elan Kandel, Esq. Member Cozen O’Connor

28 Professional Liability Underwriting Society 28 Thank You Diamond Sponsors

29 Professional Liability Underwriting Society 29 Thank you for your time. A replay of this webinar will be available to PLUS Members at:


Download ppt "Your source for professional liability education and networking. Emerging Private Equity Professional and Management Liability Risks Tuesday, March 31,"

Similar presentations


Ads by Google