Opinion ID: 220152
Heading Depth: 2
Heading Rank: 1

Heading: Investigation Costs Coverage

Text: The insurers' first argument involves the scope of coverage provided in Insuring Clause 3, which states: The Company [i.e., the insurers] shall pay on behalf of any Organization [i.e., MBIA and subsidiaries] all Securities Loss for which it becomes legally obligated to pay on account of any Securities Claim first made against it during the Policy Period.... A Securities Claim is defined as, in relevant part, 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. J.A. at 158. The question here is whether the expenses claimed in connection with the regulators' investigations fall within this definition. [2] To answer this question, we analyze the various items MBIA argues are Securities Claims: the NYAG's investigation of the AHERF transaction and the SEC's and the NYAG's investigation of the Capital Asset and U.S. Airways transactions. We proceed in that order.
We agree with the district court that the NYAG's subpoena on the AHERF transaction was a Securities Claim. Under New York law, the NYAG may commence an investigation when, in his discretion, he believes it to be in the public interest that an investigation be made. N.Y. Gen. Bus. Law § 352(1). The outward-facing form that investigation takes is the service of a subpoena, which, on its face, commands the production of documents and threatens criminal penalties for noncompliance. See, e.g., People v. Thain, 24 Misc.3d 377, 874 N.Y.S.2d 896, 899 (N.Y.Sup.Ct.2009) (stating that the NYAG may require information pursuant to the investigation and [t]o that end, he is empowered to subpoena witnesses and documents (internal quotation marks omitted)); Sanborn v. Goldstein, 118 N.Y.S.2d 63, 64 (N.Y.Sup.Ct.1952) (stating that the NYAG commenced an investigation pursuant to [the Martin Act] ... by service of a subpoena upon plaintiff); see also N.Y. Gen. Bus. Law § 352(4). Backed by the enforcement authority of the state, the NYAG subpoena is at least a similar document to a formal or informal investigative order that commenced a regulatory proceeding, as stated in the policies. Moreover, we agree with the district court's sensible intuition that a businessperson would view a subpoena as a `formal or informal investigative order' based on the common understanding of these words. MBIA, Inc., 2009 WL 6635307, at  (internal quotation marks omitted). In any event, the subpoena is, at absolute minimum, a similar document to those listed the definition of a Securities Claim because it is similar to other forms of investigative demands made by regulators. See, e.g., ACE Am. Ins. Co. v. Ascend One Corp., 570 F.Supp.2d 789, 796 (D.Md.2008) (subpoenas may constitute insurance claims when issued by a governmental investigative agency). We reject the insurers' crabbed view of the nature of a subpoena as a mere discovery device that is not even similar to an investigative order. The New York case law makes it crystalline that a subpoena is the primary investigative implement in the NYAG's toolshed. We also reject the insurers' argument that because the definition does not include a proceeding commenced by the service of a subpoena, a subpoena is not included. This reading puts form over substance; the fact that the definition does not say service of a subpoena is not dispositive. Because the plain-language understanding of a Securities Claim includes this subpoena, Securities Loss arising from this investigation is covered.
We now turn to whether Securities Loss in connection with the Capital Asset and U.S. Airways transactions is covered. This determination turns on two factors: whether the SEC's investigation of these transactions was within the scope of its formal order and whether the NYAG's similar investigation was within the scope of its AHERF investigation, which is a covered Securities Claim. We begin with the SEC investigation.
The text of the SEC's formal order stated that the SEC was empowered to investigate whether AIG and other insurance companies, including MBIA, engaged in securities fraud, accounting misstatements, reporting misstatements, or other acts, practices, or courses of business of similar purport or object. J.A. at 201. The district court held that the investigation into these two transactions was an investigation of a course[] of business of similar purport or object and, thus, within the scope of the formal order. We agree. As we described, the three transactions at issue here all involved MBIA's attempts not to report or to delay reporting a loss. The subpoena that accompanied the formal order stated that the SEC sought documents involving transactions designed to affect the timing or amount of revenue or expense recognized, including extinguishing liabilities, and deferring the recognition of a known and quantifiable loss. Id. at 212. Although the mechanics MBIA employed in each of the three transactions differed somewhat (as we described above), there can be no doubt that all of them involved efforts to delay, reduce, or eliminate the reporting of a loss, precisely as described in the subpoena. Indeed, the AHERF transaction involved an attempt not to book a loss at all, the Capital Asset transaction involved an attempt to spread the recognition of a loss out over time, and the U.S. Airways transaction involved an effort to avoid booking a loss (and, in fact, to represent that MBIA was making an investment in the airplanes it repossessed). These courses of business fall within the scope of the transactions for which documents were subpoenaed by the SEC as Non-Traditional Product[s]. This circumstance is highly probative of the scope of the investigation authorized by the SEC's formal order. The formal order authorized the SEC to investigate any of the broadly described acts and courses of business listed in the formal order. Combined with the specific definition of the items subpoenaed by the SEC, we conclude that the plain meaning of the formal order includes these transactions within its scope because they involved a course of business of similar purport or object to that described in the formal order. Cf. RNR Enters., Inc. v. SEC, 122 F.3d 93, 98 (2d Cir.1997) (concluding that a formal order predating company under investigation included the company because of similarly inclusive wording). The insurers essay several reasons why they think the formal order does not include the Capital Asset and U.S. Airways transactions. First, they point to the caption of the SEC's formal order, In re Loss Mitigation Insurance Products, to argue that this phrase delimits the scope of the SEC's investigation to a certain sub-class of financial transactions. This argument is unpersuasive. We do not doubt that [t]he purposes of such an order seem to be to define the scope of the ensuing investigation and to establish limits within which the staff may resort to compulsory process. SEC v. Jerry T. O'Brien, Inc., 467 U.S. 735, 738 n. 1, 104 S.Ct. 2720, 81 L.Ed.2d 615 (1984). But the caption alone does not serve these functions; the whole order does. The only place this phrase occurs is in the caption to the formal order, and the operative language contains no limitation in scope to a certain product, nor does it appear to contemplate such a limitation. Instead, it announces a broad but definite investigatory scope that includes these transactions as we described. In this way, it is quite telling that the actual subpoenas issued cover allegations involved in the Capital Asset and U.S. Airways transactions. And SEC subpoenas are enforceable only when they request reasonably relevant information in connection with the investigation. RNR Enters., 122 F.3d at 97 (quoting United States v. Morton Salt Co., 338 U.S. 632, 652, 70 S.Ct. 357, 94 L.Ed. 401 (1950)); see H.R.Rep. No. 96-1321, pt. 1, pt. 2 (1980), reprinted in 1980 U.S.C.A.A.N. 3874, 3889. In short, the caption to the formal order does not operate in the way advanced by the insurers here to narrow the scope of the SEC's investigatory authority as set out in the text of the order. Cf. RNR Enters., 122 F.3d at 97 (deferring to SEC's determination of relevance in challenge to subpoena by measuring value of information against general purposes of the agency's investigation). The insurers next argue that these investigations were conducted by way of oral request rather than subpoena or other formal process. This argument is meritless. The investigation, oral or by way of subpoena, was connected to the formal order. The sole reason the SEC did not issue subpoenas is that MBIA requested this procedure, and the SEC believed that MBIA would fully comply on a voluntary basis. The insurers cannot require that as an investigation proceeds, a company must suffer extra public relations damage to avail itself of coverage a reasonable person would think was triggered by the initial investigation. The insurers also argue that the SEC began investigating these transactions because it was tipped off by a disenchanted investor in Capital Asset and by New York insurance regulators questioning the U.S. Airways transaction. Whatever the accuracy of this assertion, we fail to see how the SEC's investigative source is relevant to the coverage determination. Finally, the insurers argue that because the SEC official who made the oral requests was not named on the formal order, the requests were not pursuant to that order. This argument, too, fails. The individuals named on the formal order are empowered to compel testimony, Jerry T. O'Brien, 467 U.S. at 737-38, 104 S.Ct. 2720, but the investigation authorized by the formal order need not be pursued only by those individuals. In addition, this policy provides coverage for informal investigative orders, and the oral inquiries fit that description. [3] As with the AHERF transaction, the SEC's investigation of the Capital Asset and U.S. Airways transactions was commenced by the SEC's formal order. MBIA's Securities Loss related to responding to it is therefore covered because the investigation was pursuant to a formal or informal investigative order.
Our analysis of MBIA's claim for coverage for Securities Loss related to the NYAG's investigation of the Capital Asset and U.S. Airways transactions proceeds similarly. By the time the NYAG's office began looking into these transactions, its AHERF investigation was already underway. The NYAG's subpoena contained the same definition of Non-Traditional Product[s] as the SEC's subpoena, so documents relating to these transactions were included in its scope. As with the SEC's investigation, MBIA requested that the NYAG issue no further subpoenas after the AHERF subpoena, promising that MBIA would comply fully with all demands. The NYAG agreed, like the SEC, to this procedure and continued its investigation with oral requests. Therefore, for the same reasons that Securities Loss related to the SEC's investigation into the Capital Asset and U.S. Airways transactions is covered, such loss related to the NYAG's investigation into these transactions also is covered.
For the reasons stated above, MBIA's Securities Loss related to (1) the NYAG's investigation into the AHERF transaction and (2) both the SEC's and the NYAG's investigations into the Capital Asset and U.S. Airways transactions is covered under the policy. Each of the investigations was commenced by a formal or informal investigative order or similar document and is therefore a Securities Claim.