It is a point I have made before but it is worth saying again – private companies are not immune from scrutiny under the federal securities laws. In a series of recent enforcement actions – most notably the SEC’s March 2018 enforcement action against Theranos and two of its executives – the SEC has made of point of emphasizing that its regulatory reach extends to private companies. Last week, the SEC announced the resolution of another enforcement action against private company executives. The latest action, involving a failed Silicon Valley start-up, underscores the SEC’s readiness to pursue securities law violations by private company executives.
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In a number of recent posts (most recently here), I have emphasized the importance of the wording of the securities exclusion in private company D&O insurance policies. A recent case out of Florida underscores the importance of the securities exclusion wording and illustrates how an unusual wording can lead to the preclusion of coverage for claims that might otherwise be covered. The decision also highlights the extent of the preclusionary effect from exclusions written on a very broad basis. Middle District of Florida Judge William Jung’s January 2, 2019 decision can be found here. A March 5, 2019 Law 360 article from the Jenner & Block firm about the decision can be found here.
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Although it is not always appreciated or taken into account, the fact is that executives of private companies can be held liable for statements or other actions made in violation of the federal securities laws. One very recent and high-profile example where this happened involved the SEC enforcement action (and subsequent criminal proceedings) involving the high-profile medical testing company Theranos. Recent SEC and Department of Justice actions involving an Indiana-based company underscores the fact that private companies can draw the attention of federal securities regulator, and that it is not just high profile Silicon Valley firms that are potentially at risk.
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Everyone involved in any way in D&O insurance transactions has seen an insurance buyer choose to buy a policy that while less expensive provides narrower coverage. Sometimes the price difference might be slight, sometimes the difference could be significant. But the fact is, the most expensive policy is the one that doesn’t provide coverage when it should, and in the event of a claim, narrower coverage can translate into a claims denial.  Anyone who wants to see what this might look like in action will want to consider the recent ruling out of the Middle District of Florida, in which the court held that the securities exclusion in a private company D&O insurance policy precluded coverage for an underlying claim against the policyholder and certain of its directors and officer. The January 2, 2019 decision in the case can be found here. A January 25, 2019 post on the Wiley Rein law firm’s Executive Summary Blog about the decision can be found here.
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