As I have noted in earlier posts, questions of whether or not two sets of circumstances are interrelated for purposes of determining insurance coverage can be vexing; at a minimum, they are always fact-intense. In a recent decision, the Tenth Circuit examined the question of whether or not a later civil lawsuit was interrelated with an earlier SEC investigation, and therefore deemed first made at the earlier date (prior to the policy period). The appellate court affirmed the district court’s conclusion that the lawsuit was interrelated with the investigation, precluding coverage for the claim. As discussed below, while the appellate court’s conclusion arguably is unremarkable, it still does highlight the elusive problems involved with relatedness issues. The Tenth Circuit’s September 10, 2018 decision in the case can be found here.
Belsen Getty LLC is a registered investment adviser owned by Terry Deru. Belsen Getty was the subject of a formal SEC investigation and ultimately an SEC administrative cease-and-desist proceeding relating to alleged misconduct in four ventures during the period 2005 to 2009. The four ventures were Nine Mile, Axxess, ProFire, and Vermillion. The SEC alleged that the firm’s clients were promised too much with respect to these ventures and were not warned of the advisers’ conflicts of interest based on the advisers’ undisclosed stakes in the ventures. The SEC proceeding resulted in a cease-and-desist order against Belsen Getty and Deru relating to Nine Mile, Axxess, and ProFire.
In October 2011, four months after the entry of the cease-and-desist order, James, Jenalyn, and Wade Morden filed state court claims against Belsen Getty and Deru alleging improper and misleading investment advice. The Mordens’ lawsuits raised a number of federal and state law claims. The alleged factual basis of the claims related to alleged misconduct relating to investments in Nine Mile, Axxess, ProFire and Vermillion. As the court noted in the subsequent insurance coverage action, the two paragraphs in the Mordens’ complaint summarizing the misconduct are “virtually identical to the language in the SEC order.”
Belsen Getty was insured under a liability policy. The policy period for the policy ran from October 9, 2010 to October 9, 2011. In 2014, Belsen Getty settled the Mordens’ lawsuit. Though the lawsuit raised claims about all four ventures, the settlement referred only to alleged misconduct relating the Vermillion venture. As part of the settlement, Belsen Getty assigned its rights to its insurance policy to the Mordens.
The Mordens then sued the insurer asserting claims for breach of contract and bad faith. The Mordens and the insurers filed cross motions for summary judgment. In its motion for summary judgment, the insurer argued that the SEC’s formal investigation pre-predated the policy period, and that though the Mordens’ lawsuit was filed during the policy period, the Mordens’ lawsuit was based upon interrelated wrongful acts with the SEC investigation, and therefore was deemed first made prior to the inception of the policy. The district court granted the insurer’s summary judgment motion and the Mordens appealed.
The policy’s “Interrelated Wrongful Acts” provision specifies that “All Claims arising from Interrelated Wrongful Acts shall be deemed to constitute a single Claim and shall be deemed to have been made at the earliest time at which the earliest such Claim is made.” The policy defines “Interrelated Wrongful Acts” as “Wrongful Acts which are based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any of the same or related or series of related facts, circumstances, situations, transactions or events.”
The September 10, 2018 Opinion
In a September 10, 2018 opinion written by Judge Harris Hartz for a unanimous three-judge panel, the Tenth Circuit affirmed the district court’s entry of summary judgment in favor of the insurer and against the Mordens.
The Mordens had argued in their appeal that the Wrongful Acts underlying their claims about Vermillion – the only ones that form the basis their settlement with Belsen Getty – were too distinct from the misconduct relating to the other ventures to constitute Interrelated Wrongful Acts. The Tenth Circuit disagreed, stated that the Vermillion-based Wrongful Acts and the Wrongful Acts involving the other ventures in the SEC’s initial notices were “interrelated.”
In reaching this conclusion, the appellate court said that the test under the policy whether or not Wrongful Acts are interrelated is “quite broad.” The court said the policy’s test was “satisfied here” because the Wrongful Acts relating to Vermillion involved the same entity (Belsen Getty), against the same victims (the Mordens and other clients), using the same techniques (understating risk, overstating upside potential, and concealing financial interests of the advisers), during the same time frame (2005-2009).
The Mordens’ complaint, the appellate court said, “alleges a practice – a scheme – of defrauding investors over a period of several years by means of ‘related’ misconduct.” Belsen Getty, the court said, “obtained investors in ventures in which the defrauders had undisclosed financial stake by misrepresenting the risks and rewards of the ventures.”
In a general sense, the appellate courts conclusion here arguably is unremarkable. In my description above, I telescoped the relevant factual details for the sake of brevity, but in consideration of the full scope of the facts, there undeniably is a sense that the claims the Mordens raised in their lawsuit (including even their allegations relating to Vermillion) are interrelated with the matters that were the subject of the SEC investigation prior to the policy period.
Though the outcome of this specific case may be unobjectionable given the specific factual circumstances, there is still for me a sense in which the court’s analysis is uncomfortable. The court’s very broad reading of the policy’s Interrelated Wrongful Act provision is sufficiently wide open that it might sweep any alleged misconduct by the investment firm during the period 2005-2009 involving the firm’s clients and having shared attributes (or “techniques,” as the court put it). Assume a completely different alleged misconduct during that time period – say, for example, an alleged Ponzi scheme — supposedly involving the firm’s clients; the court’s broad interpretation of the Interrelated Wrongful Act provision would interpret even completely different misconduct as interrelated and therefore deemed first made during the policy period.
My real concern here is the problem I previously noted on this blog of the elusive concept of relatedness. The problem is determining what characteristics must be similar in order for any two circumstances to be considered related. Is it enough if the circumstances involve the same players (say, Belsen Getty and its clients), time frame (say, the time period 2005-2009), and “techniques”? If those attributes are sufficient to constitute relatedness for purposes of determining the claims made date, it starts to run pretty close to saying that anything that involved a firm that does business a certain way during the specified time and involving its clients is “interrelated.”
None of this is to criticize the outcome in this case. I am not challenging the Tenth Circuit’s conclusion here, nor in fairness do I think I could. I just worry about the way courts go about “relatedness” analyses from time to time. To be sure, analyses of these issues are always going to be a reflection of the facts presented, the policy language at issue, and (to a certain extent) the case law involved in a given jurisdiction. Given these factors, it is always going to be difficult for courts to craft overarching principles that are going to be sufficient to address all “relatedness” disputes. But in the absence of general principles, the case outcomes in relatedness cases have an ad hoc characteristic that can be, as I noted above, less than satisfying.
Perhaps it is inevitable that these kinds of disputes will be fact-intensive. The problem with any conclusion that any two circumstances are related is that the terms used in establishing the relatedness may or may not be sufficient when other circumstances are involved. All of which is, I suppose, part of the elusive concept of relatedness.
Special thanks to a loyal reader for sending me a copy of the Tenth Circuit’s complaint.