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D&O Insurance and 'Holding Claims'
A Supreme Court of California securities fraud decision sounds a warning to corporate policyholders to review their directors' and officers' (“D&O”) insurance policies. In Small v. Fritz Cos., 132 Cal. Rptr.2d 490 (Cal. 2003), the court upheld the validity of securities “holding claims” ' claims seeking redress for persons induced to hold stock instead of selling it. Unlike typical securities fraud claims, the claims in this case did not involve the purchase or sale of securities. D&O policies usually link the availability of entity coverage for the corporation to a “securities claim” having been filed against the corporation. Unfortunately, some policies define “securities claim” narrowly in a manner that arguably does not include coverage for “holding claims.” In light of the California decision, policyholders should insist that their policies define “securities claims” broadly in a manner that does include “holding claims.”
Securities fraud claimants typically seek redress in federal court and usually assert violations of Rule 10b-5, which was promulgated by the Securities and Exchange Commission in 1942 and later held to have implied a private right of action. See Basic Inc. v. Levinson, 485 U.S. 224, 230-31 (1988) (endorsing lower federal court decisions implying a private right of action). Rule 10b-5 makes it “unlawful for any person … to employ any device, scheme or artifice to defraud … to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made … not misleading or … [t]o engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.” 17 C.F.R. '240.10b-5.
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