Trump's 2nd term, SCOTUS waffle on securities law, set up a mixed bag for D&O liability insurance

By Isha Marathe

Feb 5 - (The Insurer) - President Donald Trump-nominated SEC chair and so-called 'anti-Gensler' Paul Atkins' intention to bring sanctions against individuals rather than entities will be a key feature of what is poised to be an unpredictable year for US D&O insurance in 2025.

That was just one of the opinions shared during a webinar on the Top 10 D&O Stories of 2024 hosted by RT ProExec executive vice president Kevin LaCroix, who also authors The D&O Diary blog.

Two key changes Atkins is likely to bring are reduced regulations on the cryptocurrency industry and a rollback of the President Biden and Gary Gensler-era focus on ESG initiatives like climate-change disclosure rules, LaCroix said.

While changes to the SEC are far from the only factor affecting D&O claims, they are an embodiment of how financial regulation and enforcement actions against directors, officers, and entities will shift over the next four years at least.

On the webinar, LaCroix said that a new president with a polarising political and economic agenda, the Supreme Court's opaque view of securities law, novel technologies like AI alongside geopolitical conflicts from the Middle East to the China Sea are set to usher in a different, if not more complicated, climate for D&O litigation.

"With all that is going on in the D&O liability arena, it might well be expected that underwriters might pull back or even seek to raise prices in the months ahead," LaCroix said.

"However, and despite everything discussed above, the D&O insurance marketplace remains competitive, with most buyers enjoying relatively advantageous pricing for relatively broad terms and conditions,” he added.

Trump impact

Perhaps the biggest factor affecting D&O is Trump's second presidential term, which kicked off on 6 January, LaCroix noted.

On the one hand, the Trump administration's "commitment to deregulation and lower taxes potentially could have a salutary benefit on the business environment", he said.

But in the long run, "the administration’s trade and immigration policies [including proposed tariffs] could create challenges" as global trade wars and supply chain issues lead to a spike in D&O claims similar to that following the Covid-19 pandemic, he suggested.

For instance, Wall Street is anticipating a spike in M&A activity under Trump's presidency as "spirits of the financial markets" are expected to be more bullish than they were under former President Joe Biden, he said.

"Whether any of that is true...M&A activity is a fruitful source of D&O claims.

“Not just the traditional merger objection lawsuits, but lawsuits having to do with valuations and the post-transactional lawsuits having to do with integration and whether the merged company lives up to the proposed advantages that were cited at the time that the merger was announced," LaCroix said.

Additionally, if his first term was any indication, then Trump is likely to bring in younger and more conservative federal judges, he said.

Sitting Trump appointees currently represent about 26 percent of all authorised federal judge slots, including one-third of the sitting SCOTUS bench.

As of inauguration day, Trump had as many as 45 federal judge seats to fill.

"From the perspective of potential D&O liability, a Trump-appointed judiciary potentially could be beneficial for companies and their executives, as Trump-appointed judges so far have tended to be business-friendly and conservative," LaCroix said in his blog.

These appointments, along with Atkins' nomination for SEC chair, will likely impact civil rights, environmental law, and consumer protection policies across organisations as a change in regime will bring a different political agenda.

Securities class actions and SCOTUS

The number of federal court securities class action lawsuits filed increased in 2024 for the second year in a row, up to its highest level since 2020, according to the D&O Diary.

"[This is] something that D&O underwriters watch very closely because it's a very important sign that [gives] them clues about their expected profitability for any given claims year.

“It's important data for them as they try to figure out what their profit-making price is and what they need to charge within certain industry classes and so on," LaCroix said about securities class action lawsuits.

He views these lawsuits by theme, each of which represents a potential trend for 2025: Covid-19 filings, SPACs, crypto filings, and AI-related filings.

While securities class actions and individual securities suits are still prevalent in state courts, LaCroix said that they have dropped significantly and concentrated in the federal courts over the last decade.

In 2024, merger-objection suits dropped all around. However, 222 federal court securities class action lawsuits were filed against companies in 100 different Standard Industrial Classification (SIC) codes, LaCroix said.

"The SIC Code with the highest number of 2024 filings was the SIC Code Category 7372 (Prepackaged Software), which had 24 federal court securities class action lawsuit filings in 2024, representing about 10.8 percent of all 2024 federal court securities suits," he wrote in the D&O Diary.

Another 83 were filed against biotechnology companies, while 37 were filed against companies organised under the laws of a country outside the US.

Where the highest federal court is concerned, LaCroix and other observers may have initially overestimated the exuberance within SCOTUS for securities law cases in 2024, he said in the D&O Diary.

While the court issued an opinion in two major cases – Macquarie Infrastructure Corp. v. Moab Partners and SEC v. Jarkesy – it dismissed two other cases without substantive opinion after arguments and briefs, LaCroix noted.

Jarkesy is a landmark case wherein the court held that the SEC must pursue enforcement actions seeking civil penalties in a jury trial proceeding in federal court rather than in an action before an administrative law judge.

In Macquarie, the court held that plaintiffs must plead an affirmative representation, or half-truth, in connection with omissions-based theories.

Practically, the effect of the decision will be that companies can choose not to speak on a given subject, said Lebaton Keller Sucharow partner James Christie and associate Jacqueline Meyers in a paper on the ruling.

The two dismissed cases were Facebook v. Amalgamated Bank rising out of the Cambridge Analytica scandal and NVIDIA Corp v. E. Ohman J:or Fonder AB.

"The dismissals mean that important legal questions regarding securities fraud and disclosure requirements remain unresolved at the highest judicial level," LaCroix said.

"This could lead to continued uncertainty and variability in how lower courts interpret and apply securities laws... [and it could] encourage more securities litigation as plaintiffs may feel emboldened by the Ninth Circuit’s rulings in the two cases that were left standing... [or it] could be interpreted to suggest a possible hesitance by the Supreme Court to engage in securities law disputes."

Within litigation, breach of the duty of oversight cases remains an important topic as certain courts, especially the Delaware court, have sustained a number of different plaintiffs’ assertions of breaches of the duty of oversight.

"The high water mark for these kinds of cases arguably was the Boeing 737 Max air crash case, which survived a motion to dismiss and ultimately settled for $237.5mn, all of which was funded by D&O insurance," LaCroix said.

While the Delaware Chancery Court has dismissed three recent plaintiffs’ claims in such cases, LaCroix warned that its skepticism toward breach of the duty of oversight claims shouldn't lull the industry.

"[There] is life for these kinds of suits, at least in some cases – including in cases filed outside of the Delaware state courts," he said.

AI and geopolitical risks

A cluster of issues that will affect the D&O market fall under the technology umbrella – from the surge of AI to cybersecurity threats.

"One of the hot topics in financial markets and in the D&O space has been artificial intelligence - it as a market phenomenon," LaCroix said.

AI startups like Astera Labs and Rubrik successfully completed IPOs in 2024, while companies like OpenAI and Nvidia soared. As interest in this novel technology has captured Wall Street’s attention, it may also lead to litigation and SEC and FTC scrutiny, he noted.

"[What] companies say about AI, their AI capabilities, and their AI prospects could have significant consequences for the companies’ corporate and securities litigation risks, as well as for their risks of regulatory scrutiny," LaCroix said.

"The SEC has also brought a number of other enforcement actions against investment advisers and other commercial companies, in each case alleging that the target companies misrepresented their use of AI or the AI-related capabilities of their products or services."

As regulations around AI continue to develop within the US and in international data pacts like the US-EU Data Privacy Framework – and with the new SEC likelier to focus on bringing enforcement against individuals within companies rather than the companies themselves – it's a space the D&O market should keep an eye on, LaCroix suggested.

He also mentioned major cybersecurity and data breach-related losses from 2024 like Crowdstrike or the Alphabet Google+ securities class action lawsuit, which led to a $350bn settlement.

"As long as there are recoveries like that out there, plaintiffs' lawyers are going to find it expedient to pursue these kinds of claims," LaCroix said.

While the new presidential administration along with new SEC leadership is likely to take some heat off companies in this realm when it comes to cyber disclosures and such regulatory obligations, as of now, the SEC's 2023 guidelines remain in place, LaCroix said.

"I don't know necessarily that we can assume that cyber incident disclosure requirements are going to be withdrawn, and even if the specific guidelines are withdrawn, there still will be general materiality obligations," he said. "It could be a complicated picture [in 2025]."