Originally published in The D&O Diary by Kevin M. LaCroix, who will be participating in Advisen’s April 23 webinar, Quarterly D&O Claims Trends: Q1 2015.
In one of the more troublesome recent developments for corporate officials who find themselves targeted by government investigations, both the U.S. Department of Justice and the Southern District of New York U.S. Attorney’s Office have made it clear that as part of the settlement of civil fraud actions, the governmental authorities intend to seek both admissions of misconduct as well as sanctions against the corporate executives involved. These developments are not only troublesome in and of themselves but also for the collateral consequences they could have for related proceedings. In addition, the admissions could have important implications for the continued availability of D&O insurance for the companies and executives involved.
As discussed in an April 6, 2015 article entitled “DOJ’s Pursuit of Admissions – And the Risks of Settling” (here) by Matthew Previn, Michelle Rogers and Ross Morrison of the Buckley Sandler law firm, both the DOJ and the S.D.N.Y. U.S. Attorney’s office have made it clear that they will “increasingly require” admissions of misconduct and individual accountability in the form of sanctions against corporate executives in resolving civil fraud actions.The most recent example of this phenomenon the authors cite is the March 19, 2015 settlement that the S.D.N.Y. U.S. Attorney’s Office reached with Bank of New York Mellon in connection with the government’s allegations that bank engaged in fraud and other misconduct in providing foreign exchange services to its customers, in violation of FIRREA. The bank not only agreed to pay $714 million as part of the settlement, but the settlement also included specific admissions from the bank and one of its executives with regard to the alleged misconduct. For its part, the bank agreed that it would “admit, acknowledge and accept responsibility for” certain of the allegations as part of the settlement. The executive involved, David Nichols, agreed that he “admits and accepts responsibilities for” conduct the government had alleged in its complaint. The bank also agreed to terminate “certain executives,” including Nichols. The U.S. Attorney’s Office’s March 19, 2015 press release about the settlement can be found here.
As the authors note, the S.D.N.Y. U.S. Attorney’s Office has “been a leader among U.S. attorney’s offices in requiring such admissions in civil fraud settlements.” The Manhattan U.S. Attorney’s Offices has obtained admissions of wrongdoing in several recent civil fraud cases. For example, as part of the office’s July 1, 2014 settlement with HSBC bank relating to the bank’s alleged failure to monitor fees submitted for mortgage-related services, the bank not only agreed to pay $10 million, but it also “admitted, acknowledged and accepted responsibility” for certain misconduct specified in the settlement agreement.
For the individuals involved, these issues are particularly fraught. The admissions of the type the government is requiring can have important consequences for the individuals. It is not just the employment implications, as was the case with the individual involved in the Bank of New York Mellon foreign exchange settlement referenced above, whose employment was terminated as part of the settlement. These kinds of admissions can, as the memo’s authors point out, put both the corporate and individual defendants in a position where they “could face increased exposure to criminal charges,” which is a particularly concern with respect to allegations of wrongdoing under FIRREA, as “its underlying predicate acts are violations of criminal charges.”
In addition, the “collateral consequences” from the kinds of admissions that the government is requiring include possible complication of parallel proceedings that are not resolved as part of the settlement with the government. A good example of this kind of problem is the False Claims Act action referenced in connection with the HSBC settlement described above; the settlement with the government did not resolve the whistleblower’s False Claims Act case, which remains pending and obviously was aided by the admissions the government required as part of the settlement. Many of these governmental civil fraud actions are accompanied by parallel civil litigation, such as shareholder litigation or other type of claims, that in most instances would not be resolved in a settlement with the government. The admissions the government and the individuals are required to make in their settlements with the government often will be helpful to the claimants in the parallel cases, often substantially so.
Another potential concern has to do with the D&O insurance of the companies involved. In most instances, there would be no coverage for the fines and penalties paid as part of the settlements. But the deeper concern for the entities and individuals forced to make these kinds of admissions in reaching settlements with the government is that the admissions might possibly trigger exclusions in the company’s D&O insurance policy. The triggering of the exclusions might not only preclude coverage going forward defense expenses but could also cause the insurer to seek to recover amounts that have already been paid. The loss of going forward defense cost coverage could be a particular concern where there are further parallel proceedings that will continue even after the settlement with the government. The individuals and the entity might face the prospect of having to fight continuing proceedings without insurance.
Whether a particular admission could trigger an exclusion will depend both on what specifically was admitted and on the specific wording of the exclusion involved. A careful litigant aware of these concerns might be able to negotiate admissions that are acceptable to the government but that might not trigger the exclusion. (For example, if the exclusion is only triggered if there were “deliberate” misconduct, the admission could be crafted to avoid any admission that the misconduct was “deliberate.”) Another factor in determining whether or not the exclusion is triggered where the exclusion has an “adjudication requirement” will depend on the procedures surrounding the admission; the carriers may seek to argue where the admissions are incorporated into the court’s judgment that the “adjudication” requirement has been met. Obviously, this concern also could be relevant during the settlement negotiations with respect to the specific forms in which the admissions will be made.
It is clear that the government authorities will increasingly seek to require admissions in connection with the settlement of civil fraud actions. As the memo’s authors state, given this likelihood, “corporate and individual defendants now more than ever need to weigh the possible consequences of a settlement incorporating those elements against the risks of litigating against the government.” Among the consequences that corporations and individuals will have to consider are the possible D&O insurance consequences.
Kevin M. LaCroix is an attorney and executive vice president, RT ProExec, a division of R-T Specialty. RT ProExec is an insurance intermediary focused exclusively on management liability issues.
Kevin has been involved in directors’ and officers’ liability insurance for nearly 30 years. He began his career as a coverage attorney and partner at the Washington, D.C law firm of Ross, Dixon and Bell. More recently, Kevin served as President of Genesis Professional Liability Managers, a D&O underwriter and part of the Berkshire Hathaway group of companies.
