As I have frequently noted on this blog (most recently here), a recurring D&O insurance issue is the question of coverage for costs incurredin responding to SEC investigations. This question can be complicated both by the features of the specific SEC investigation involved as well as by the specific wording of key policy provisions. These complications were definitely involved in a recent case before the Tenth Circuit, in which the appellate court concluded that policy coverage did not extend to the costs MusclePharm incurred in responding to SEC subpoenas issued pursuant to a formal order of investigation. The decision raises a number of important issues, as discussed below. The Tenth Circuit’s October 17, 2017 opinion can be found here.



On May 16, 2013, MusclePharm received a letter from the SEC stating that the agency was “conducting an inquiry” and requesting that MusclePharm “voluntarily produce documents.” The request noted that “this inquiry is non-public and should not be construed as an indication that the Commission or its staff believes and violation of law has occurred.”


On July 8, 2013, the SEC issued an “Order Direction Private Investigation and Designating Officers to Take Testimony.” The Order states that the SEC “has information that tends to show that from at least January 1, 2011,” MusclePharm “possibly” violated sections of the federal securities laws. It ordered that a “private investigation be made to determine whether any person or entities have engaged in, or are about to engage in” prohibited conduct. The footer on each page of the Order stated that “it should be understood that the Commission has not determined whether any of the persons or companies mentioned in the order have committed any of the acts described or have in any way violated the law.”


Pursuant to the Order, the SEC issued 21 subpoenas to MusclePharm and to individual directors and officers, directing that the company should produce documents and the individuals should produce documents and appear for testimony. The subpoenas’ cover letters stated that “the investigation is confidential and nonpublic and should not be construed as an indication by the Commission or its staff that any violation of the law has occurred.”


On February 13, 2015, the SEC issued Wells Notices to the company’s current and the company’s former CFO. On September 8, 2015, the parties settled and the SEC issued Cease-and-Desist order to the company and several individual directors and officers.


MusclePharm spent more than $3 million responding to the investigation. It sought coverage for these costs from its D&O insurer. The insurer agreed that with its issuance of the Wells Notices, the matter qualified as a claim under the policy. However, the insurer took the position that that neither the May 16, 2013 letter nor the subpoenas issued pursuant to the July 8, 2013 Order representing a Claim under the Policy. The insurer also contended that there was no coverage for the costs the company incurred in responding to the May 16, 2013 letter and the subpoenas because neither involved an actual or alleged Wrongful Act.


MusclePharm filed a coverage lawsuit against the insurer alleging that the SEC investigation was a Claim within the meaning of the policy and contending that the D&O insurer must cover all of the costs the company incurred in responding to the investigation. The parties filed cross-motions for summary judgment. As discussed here, the District Court granted the insurer’s motion for summary judgment finding, among other things that the July 8 Order did not allege a Wrongful Act within the meaning of the Policy.


The policy defined “Claim” as, among other things: “(a) a written demand for monetary or non-monetary relief against an insured person or, with respect to Insuring Agreement 1.3, against the Insured Organization … (c) a formal administrative or regulatory proceeding against an Insured Person; or (d) a formal criminal, administrative, or regulatory investigation against an Insured Person when such Insured Person receives a Wells Notice or target letter in connection with such investigations.”


The policy defines the term Wrongful Act to mean “any actual or alleged error, misstatement, misleading statement, act, omission, neglect, or breach of duty, actually or allegedly committed or attempted by the Insured Persons in their capacities as such or in an Outside Position or … by the Insured Organization.”


The October 17, 2017 Opinion

In an October 17, 2017 per curiam opinion, a three-judge panel of the Tenth Circuit, applying Colorado law, affirmed the district court’s grant of summary judgment on the insurer’s behalf.  In affirming the district court, the appellate court concluded that the SEC’s July 8 order and related subpoenas did not meet the policy’s definition of the term “Claim,” and that the July 8, 2017 order and related subpoenas did not allege a “Wrongful Act.”


In arguing the July 8 Order and the related subpoeans represented a “Claim” or “Claims” under part (a) of the definition, MusclePharm had argued that the subpoenas represent written demands for non-monetary relief. In rejecting this argument, the appellate court said through the investigative process, including its use of subpoenas, “the SEC sought to determine through documents and testimony whether there would ultimately be any basis for seeking monetary and/or non-monetary relief from MusclePharm. By this action, the SEC was not seeking relief, but was only gathering information.”


MusclePharm also sought to argue under part (c) of the definition of the term “Claim” that the July 8 Order “constitutes a formal administrative or regulatory proceeding.” In rejecting this argument, the appellate court observed that merely because the Order was captioned as a “proceeding” does not result in coverage, adding that the Order explicitly states that it was investigation to determine wither any persons or other entities has engaged in, or are about to engage in, any of the reported acts or practices. This language, the appellate court said, “makes clear that this was an SEC investigation, not a proceeding, and coverage under the policy for a “regulatory investigation” was conditioned on the issuance of a Wells Notice or a target letter. Thus, the court said, part (c) was not implicated and a claim did not arise until the SEC issued Wells Notices.


MusclePharm also sought to argue that the district court had misconstrued the meaning of “alleged” in determining whether or not the SEC actions involved a “Wrongful Act” within the meaning of the policy. The appellate court said that “relying on the provisional language of the July 8 Order and its disclaimers, we conclude that it did not contain an allegation of wrongdoing,” adding that “a request for information is not a wrongful act.”



The fact that amount of fees for which MusclePharm was seeking reimbursement was as much as $3 million underscores how important these issues are for the companies involved. The determination of whether or not an SEC investigation presents all of the elements necessary to trigger D&O insurance coverage can have a material financial impact on the concerned companies. Because of the magnitude of the issues involved, the question of insurance coverage for the costs of responding to an SEC investigation recurs frequently.


Though these issues come up frequently, a quick review of the case law addressing these questions will reveal that the coverage outcomes are both very-fact dependent (that is, having to do with the specific steps the SEC has taken), and very dependent on the specific wording of the policies at issue. Given these case- specific differences, the outcomes of the various coverage disputes can be very hard to reconcile.


For example, in this case, the appellate court concluded that the SEC’s subpoenas did not represent a demand for non-monetary relief within the meaning of the Policy. This holding stands in contrast to the September 2017 holding by Southern District of New York Judge Valerie Caproni in the Patriarch Partners case (discussed here) that SEC subpoenas did constitute a demand for non-monetary relief. There are important factual and policy language differences between the two cases, and, indeed, the Tenth Circuit expressly purported to distinguish the Patriarch Partners case, but the fact is that the Judge Caproni found that SEC subpoenas represent a demand for non-monetary relief, which this Tenth Circuit here said that they did not.


It should be noted that in light of the definitions of Claim now found in many contemporary D&O policies, many of the issues involved in this case would not arise today. For example, many D&O insurance policies today specify that a subpoena represents a claim. Many policies also specify that a Formal SEC order of investigation represents a claim. Policies with this type of language would eliminate many of the kinds of questions that arise in connection with the question of whether or not various SEC actions meet the definition of Claim.


However, even if the SEC actions involved meet the definition of the term “Claim,” the question still remains of whether or not the actions involve and actual or alleged Wrongful Act. The specific circumstances involved here presented a particularly challenging set of circumstances for MusclePharm in seeking to argue that the SEC’s actions involved an actual or alleged Wrongful Act. The various documents that SEC presented to MusclePharm contained express disclaimers of wrongdoing. These circumstances appear to contrast with the circumstances involved in the recent Patriarch Partners case, in which the district court had no difficulty in concluding that the SEC’s actions involved an actual or alleged Wrongful Act. The difference seems to be that the SEC documents involved in the Patriarch Partners case apparently did not contain the express disclaimer language that the SEC used in the documents it served on MusclePharm.


One further comment about the Wrongful Act issue. The definition of the term Wrongful Act in the policy at issue in this case is extremely broad, in ways that I do not think the appellate court recognized. The policy defines Wrongful Act to include an “act.” Not a wrongful act, just an “act.” It seems to be that if any actual or alleged “act” is sufficient, then the requirements of the definition have been met here, as they should be in just about any circumstance. In my view, it could be argued that the appellate court’s analysis failed to take account of the extreme breadth of the definition of the term “Wrongful Act.” At a minimum, I think it could be argued that the definition is sufficiently broad that the question of whether or not the definition of Wrongful Act was met here raises disputed questions of material fact sufficient to preclude the entry of summary judgment.


It is worth noting that there are now products available in the marketplace providing entity investigative cost coverage. These insurance products are sold either as stand-alone policies or as accessories to the primary D&O insurance policy. Under either of these arrangements, the policy or extension are underwritten and priced separately from the cost of the D&O insurance itself. These policies tend to be perceived as expensive, particularly in light of the hefty retentions that the carriers typically require for the policies. But as this case shows, while these entity investigative cost products may be costly, the cost of not having the coverage can be substantial as well.


Special thanks to a loyal reader for providing me with a copy of the Tenth Circuit’s opinion.