Dickstein Shapiro gives companies under investigation a light at the end of the tunnel with their recently published legal alert, which suggests that directors & officers that are the subjects of subpoenas may indeed be able to recoup costs related to the subpoenas from their D&O insurance companies.
The alert specifically addresses a situation in New York, where the Attorney General has subpoenaed three energy companies as part of an investigation into hydraulic fracturing disclosure. The subpoenas – which made headlines a few days ago in the New York Times – were sent under the authority of the Martin Act (NY General Business Law Article 23-A, sections 352-353), which gives an AG “extraordinary powers” (according to Wikipedia) when fighting financial fraud.
The specific disclosure the AG is interested in relates to potentially misleading reports to investors regarding the prospects and profitability of the companies’ natural gas wells. One of the companies’ larger investors is New York State itself, which has invested more than $45 million of its pension money with the companies under investigation.
According to Dickstein Shapiro, the costs of “responding to and defending” such investigations could cause the target companies “to incur significant sums of money, perhaps millions of dollars.” Yet the firm sees cause for optimism.
A recent 2nd Circuit decision, MBIA Inc. v. Federal Insurance Co., held that a subpoena constitutes a “claim” covered under the D&O policy in question, where “claim” is typically defined to include “a formal or informal administrative or regulatory proceeding or inquiry commenced by the filing of a notice of charges, formal or informal investigative order or similar document.” (emphasis added) The 2nd Circuit agreed (with a district court’s previous decision) that a subpoena is “at absolute minimum, a ‘similar document’.”