A conflict between a payment technology company and…
A federal judge in Pennsylvania last week reaffirmed her ruling calling for a jury to evaluate what Cantaloupe Corp. leaders knew about inflated sales and federal securities regulator investigations when applying for directors and officers insurance. The court declined to rule that the widely used “prior knowledge” exclusion relieved Axis Insurance from its duty to foot the bill for the payer’s legal problems.
A closely watched Pennsylvania court ruling and upcoming trial could give companies and their directors some leeway to obtain coverage for alleged wrongdoing that occurred before the start of the policy period, insurance lawyers and policyholders say.
“The court’s reading is troubling,” said Mike Manire of Manire Galla Curley LLP, which represents the insurance companies. If a company runs into a problem before purchasing insurance, its executives can “just ask the CEO to give a speech saying there’s nothing substantive about what’s going on” and the company can still qualify for coverage, he said.
The Pennsylvania court said that although Cantaloupe managers knew of the potential fraud before purchasing the insurance, they testified that they did not anticipate subpoenas from the SEC and Department of Justice or class actions that would result in insurance claims. The Cantaloupe, Pennsylvania-based company — formerly known as USA Technologies Inc. — has filed. – A $70 million secondary stock offering in May 2018 based on false sales numbers, according to the lawsuits.
Lawyers representing the insurance companies say the court’s decision is unusual and contradicts previous rulings on D&O insurance. A 2009 to rule of the US Court of Appeals for the Tenth Circuit on the same prior knowledge exclusion with similar underlying facts, holding to the contrary, as Axis argued.
“I’ve seen a lot of cases of prior knowledge exclusion; I’ve never seen it done that way at all” in D&O insurance, Maneri said.
high level
District Judge Jane E. K. Prater’s initial ruling against Axis “establishes a high bar for insurers to prevail on the prior knowledge exclusion,” said Paul Curley, a partner at Kaufman Borgest & Ryan LLP who represents insurers. Although it is not binding on other jurisdictions, the November decision will likely be cited in other D&O coverage fights, he said.
The decision will encourage companies to push for jury trials when there are disputed facts about what their directors knew about alleged fraud, said Jeffrey Fehling, a partner at Hanton Andrews Kurth who represents policyholders.
The insurance does not cover events that occur before the start of the policy period. Cantaloupe’s D&O policy specifically prohibits coverage for claims of which the executives were aware before the policy began. But the question is: How can an insurance company prove that its directors were aware of potential wrongdoing that could lead to enforcement action or a lawsuit at the time they purchased the insurance?
It’s not uncommon for companies to quickly purchase coverage after getting a whiff of violations. Ozy Media Inc. filed. It filed for a D&O policy in August 2021, a month before The New York Times revealed that its CEO Carlos Watson had defrauded investors. FTX, the collapsed cryptocurrency exchange, bought its D&O insurance two months after creating seven replacement balance sheets for investors.
In the case of Cantaloupe, the company said managers did not learn how bad the accounting errors were until after purchasing insurance protection. Cantaloupe said they realized the company would miss the deadline to file its 10K annual report with the Securities and Exchange Commission in August 2018, just days after purchasing the D&O policy.
Showing that company directors knew about the misconduct is not enough for insurers to deny coverage, said Bradley Nash, a partner at Hoguet Newman Regal & Kenney, LLP who represents policyholders. He added: “All the time, companies are accused of committing violations.”
Other policyholder attorneys shared similar views.
“We hope this will prevent insurers from jumping the gun and looking for ways to avoid coverage,” said Diana Shafter Glidman, an Anderson Kill shareholder who represents policyholders.
“Self-belief”
Cantaloupe executives reasonably anticipated shareholder claims and regulatory subpoenas in July 2018 when they purchased a $5 million D&O policy, Axis said. Priyanka Singh, Cantaloupe’s chief financial officer at the time, had already warned the company of SEC whistleblower lawsuits alleging fake sales, and had hired her own attorney to handle the potential risks a few weeks before the lockup period began, Access reported. .
The insurer said the court should have focused on whether the directors knew there were problems, rather than what they thought.
Allowing companies to manipulate coverage by “asserting their personal belief” that a claim lacks merit could encourage companies to hide fraud, Access said.
Other industry lawyers agreed.
“However, if you muddy things enough, you can create some questions about the truth about what people were subjectively understanding at the time,” said Michael Steinlage, a partner at Larson King LLP who represented insurers and policyholders.
A public company would never say it thinks some facts are bad, Manier said. “That’s the way companies work: Anytime you get sued, you’re going to say it’s not material,” he said.
Cantaloupe is represented by Affeld Grivakes LLP and LeVan Stapleton Segal Cochran LLC. Werner Ahari Mangel LLP represents the pivot.
The case is Cantaloupe v. Access, ED Pa., 2:22-cv-00030.