The United States Court of Appeals for the First Circuit Considers Whether an SEC Subpoena is Interrelated with a Pre-Policy Investigation Order Under a D&O Policy
In BioChemics, Inc. v. AXIS Reinsurance Co., 2019 WL 2223125 (1st Cir. May 23, 2019), the United States Court of Appeals for the First Circuit held that a D&O policy did not provide coverage for an SEC action related to an investigation that began prior to the policy incepting.
In May 2011, the SEC issued a Formal Order for a “Non-Public Formal Investigation” to BioChemics, a pharmaceutical company, and its President and CEO, John Masiz, for possible securities violations. The purported violations began as early as 2009 and involved distorting the value of BioChemics’s securities through fraud and misrepresentations. Numerous document and deposition subpoenas followed the Formal Order; in 2011 they received subpoenas in May and September, and in 2012 they received another round of subpoenas in January and March.
BioChemics was insured under a D&O policy issued by AXIS effective from November 2011 to November 2012. The policy provided coverage for a Loss because of a “D&O Claim” alleging a Wrongful Act first made against the Insured during the Policy Period. D&O Claim was defined, in part, as a “written demand against an Insured for monetary or nonmonetary relief” or “a civil, arbitration, administrative or regulatory proceeding against any insured” commenced by “a written notice or subpoena from an authority identifying such Insured as an entity or person against whom a formal proceeding may be commenced.” The policy treated all D&O Claims arising from interrelated Wrongful Acts as one Claim.
BioChemics tendered the claim to AXIS upon their receipt of the 2012 subpoenas. AXIS denied coverage on the basis that the subpoenas were interrelated with the Formal Order, making them a single Claim first made against BioChemics prior to the inception of the Policy Period. In December 2012, the SEC initiated an Enforcement Action against BioChemics and Mr. Masiz. Thereafter, BioChemics sued AXIS for breach of contract seeking to recover the costs associated with the SEC’s investigation. The parties filed competing motions for summary judgment. The district court granted summary judgment in favor of AXIS, and BioChemics appealed.
On appeal, BioChemics advanced several arguments for coverage: (1) that each of the subpoenas were individual Claims; (2) that the Formal Order did not allege a Wrongful Act; and (3) that the Formal Order, subpoenas, and Enforcement Action were not interrelated Wrongful Acts. In affirming the district court’s ruling, the Court reasoned that the subpoenas were not individual Claims because they did not seek “relief.” Relying on the Black’s Law Dictionary, the Court determined that “relief” is redress “a party asks of a court.” As the subpoenas were requests of a party for information, the Court concluded that the subpoenas were not Claims.
The Court also rejected BioChemics’s argument that the Formal Order did not allege a Wrongful Act, as the Formal Order referred to various actions and “possible” violations that, if they occurred, would violate securities law. In the Court’s view, these qualified references to misconduct were sufficient allegations of Wrongful Acts. The Court next rejected the argument that the Formal Order, subpoenas, and Enforcement Action did not share a common nexus of facts; BioChemics argued that any Wrongful Acts alleged in the Formal Order were too diffuse to allow the conclusion that its allegations were interrelated with the subpoenas and Enforcement Action. BioChemics reasoned that this was evident because one Wrongful Act alleged in the Enforcement Action occurred after the Formal Order and subpoenas were issued. The Court was unpersuaded by BioChemics’s argument because it failed to explain how the “bulk” or “heart” of the Wrongful Acts did not overlap. Therefore, the Court held that the Claim was first made at the time of the initiation of the Formal Order, prior to the policy period.
Accordingly, the Court affirmed the judgment of the district court.