Directors & Officers Claims Scenarios

The bankruptcy trustee for a company alleges breach of fiduciary duty, negligence and intentional misrepresentation against certain directors and officers. Specifically, it is alleged that the D&Os adopted an overly aggressive business strategy of incurring additional debt while insolvent, made misrepresentations regarding the company's growth and financial position to induce investor loans while bankruptcy was imminent and mismanaged personnel.

Outcome: Settlement and defense approached $2 million

A lender to a company alleges that its directors and officers made negligent misrepresentations and misstatements to induce loans of many millions of dollars. It is alleged that directors and officers opened secret bank accounts to conceal transactions and assets from the lender by diverting receivables, engaging in self-dealing and incurring additional debt, all of which resulted in the company filing for bankruptcy. The company asserts that it was forced into bankruptcy by the lender claiming a default on its promissory notes, and by a large block of shareholders refusing to consent to further rounds of financing for fear of their shares being diluted.

Outcome: Settlement and defense exceeded $3 million

A non-profit organization under severe financial constraints took out a bridge loan that was personally backed by a board member. The creditor alleges that the organization is in default on the debt and demands immediate payment.

Outcome: Defense costs exceeded $30k

Plaintiff filed a complaint against individual D&Os of a company alleging that its CEO, CFO, & COO conspired to use the plaintiff’s services to furnish, install and repair the company’s equipment knowing that it was insolvent and was planning to file for bankruptcy protection. Causes of action included: (1) fraud, misrepresentation and non-disclosure; (2) deceptive trade practices; and (3) civil conspiracy.

Outcome: Total settlement and defense of the individually named defendants exceeded $100,000.

The bankruptcy trustee of a start-up bitcoin mining hardware company alleges breach of fiduciary duty, breach of loyalty, self-dealing and improper transfers against three of its officers. This company required payment up front from its customers, but was not able to timely fill orders, if it could even fill them at all. The company asserts that its ability to manufacture and deliver the hardware was plagued by delays caused by third party suppliers. As more and more customers demanded refunds, the company eventually had to file for bankruptcy. Though the officers blame the company's downfall on supplier issues rather than their own alleged unscrupulous acts, a settlement was reached with the bankruptcy trustee.

Outcome: Settlement and defense exceeded $800,000

A distributor of computer components to companies in Latin America plunges into bankruptcy when the Venezuelan economy collapses. The company's unsecured creditors blame the bankruptcy on the breach of fiduciary duty and corporate waste by the directors and officers.

Outcome: Settlement and defense exceeded $1.5 million

A competitor who successfully bid for the assets of a bankrupt company and the bankruptcy trustee both allege breach of fiduciary duty and fraudulent transfer by certain directors and officers in that they used company funds to purchase personal real estate, paid well above market rates for office space in a building owned by D&Os, and improperly transferred other assets out of the company including its intellectual property which they then used to start up a similar venture.

Outcome: Settlement and defense approached $750k.

A wealthy benefactor agreed to donate over two million dollars to a local non-profit organization. In exchange for the large donation, the organization agreed to put up an engraving recognizing the claimant in making this generous gift. The Insured later decided not to put up the engraving in the agreed upon area because of “aesthetic” concerns. 

Outcome: A court ruled that the organization was obligated to put up the engraving in the agreed upon location. The defense costs exceeded $150k.

A shareholder who invested over four million dollars in a land management company files a complaint against the company and its directors and officers alleging breach of fiduciary duty, conspiracy and fraud. In particular, it is alleged that the company (insured) failed to make quarterly distributions, wrongfully transferred funds out of certain properties and participated in sham transactions to the detriment of all shareholders.

Outcome: Settlement and defense exceeded $1,200,000

A company enters into an investment agreement with a third party and agrees not to negotiate with another entity regarding financing or a potential acquisition for a two-week period. During the exclusivity period the company engages in negotiations with another investment group. The third party alleges breach of investment agreement and intentional and negligent misrepresentation.

Outcome: Total defense costs and settlement exceeded $350,000.

Five founders of the company who once shared ad 40% ownership interest allege that through the years a group of venture capital firms assumed management and engaged in a series of self-interested and dilutive stock offerings under terms that were grossly unfair to the common shareholders which resulted in them receiving less than $50k from a $80 million merger.

Outcome: Defense costs exceeded $250,000.

A shareholder files a lawsuit against D&Os alleging breach of fiduciary duty. Specifically, they allege that a large shareholder used its control and influence over appointed and related directors and officers to dilute certain classes of stock, while extracting value for itself from simultaneous transactions with other entities controlled by that large shareholder.

Outcome: Settlement and defense exceeded $2.5 million

Shareholders allege breach of fiduciary duty against the company's D&Os in regards to its merger into another company. Specifically, the shareholders allege that certain D&Os rushed the approval of the merger to benefit themselves personally in the form of accelerated stock options and senior positions in the new entity, and to the detriment of all shareholders in the form of a below market valuation for the company.

Outcome: Settlement and defense exceeded $750k

A derivative lawsuit was filed alleging that certain D&Os usurped control of the Board of Directors through false pretenses, fired key personnel including the company's CEO and hand-picked new directors to support their scheme to enrich themselves and their affiliates to the detriment of the shareholders.

Outcome: Settlement and defense exceeded $2.5 million

After the death of a part owner of a company and his shares were bequeathed to his children, those children/shareholders noticed that their share of the profits was drastically reduced from what their father was receiving while he was still alive. The children alleged breach of fiduciary duty, conspiracy and fraud against the D&Os. Specifically, they alleged that once the D&Os were no longer under the watchful eye of their father, they allegedly began to drain the profits of the company through self-dealing, large personal purchases and other unscrupulous activities.

Outcome: Defense and settlement exceeded $500k.

An investor in a startup night club alleges misrepresentation, breach of contract, breach of fiduciary duty and unjust enrichment stemming from the failure of the company to pay him the proper profits from the venture. The investor alleges that the directors and officers diverted the profits out of this venture and into their own accounts.

Outcome: Settlement and defense exceeded $500k.

A company that provides medical billing services to a certain client is paid a set percentage of the amount it bills. A Medicare audit of the client determines that over a $1 million worth of services was improperly billed to it. The client is forced to repay Medicare and the company is forced to repay the commissions. While this investigation is ongoing, the company conducts a round of financing but fails to mention that its cash flow could be greatly hindered should it be required to repay the commissions. An investor in that round of financing alleges breach of fiduciary duty and fraud when the company is incapable of paying interest on the security.

Outcome: Settlement and defense exceeded $250k

A company seeking to establish itself in an industry based on its new technology raises $5 million by issuing subordinated convertible promissory notes to an investor. As the company's costs and expenses to implement its business plan increased, it rendered its revenue growth projections unachievable and it eventually went bankrupt. The investor alleges that it was induced to invest based on negligent misrepresentations and fraud in that the company's existing debt was not disclosed, it did not own the patents that it represented it had, and its growth projections were unobtainable.

Outcome: Settlement and defense exceeded $1.5 million.

The plaintiff alleges that certain directors have exerted complete domination and control over the company and used the company as a vehicle for their own business purposes at the expense of the company and minority shareholders. Specifically, the plaintiff alleges that certain directors helped to renegotiate a service contract and booked all of the revenue during one quarter instead of over the three year life of the contract. The plaintiff also contends that this service contract received steep discounts and would cause other customers to request similar discounts resulting in lost revenue to the company.

Outcome: The defense and settlement of this case exceeded $500,000.

A Midwest domiciled home products company retained an independent research firm to evaluate its new home product. Based on a favorable review by the outside firm, the company raised in excess of $10 million for the production and marketing of the new product. Prior to releasing the product, the company’s internal evaluation team discovered, after extensive testing, that the new product did not work properly. Shareholders have brought suit against the company and the directors and officers for misrepresentation in the offering documents. The plaintiffs assert causes of action for violation of various state securities laws and the Securities and Exchange Act of 1934.

Outcome: Damages alleged in the lawsuit exceed $15 million.

A shareholder derivative action is taken against a company for breach of fiduciary duties on behalf of the directors. The plaintiffs contend that the defendants have failed to provide them with certain information, such as shareholder listings, financial data and other corporate records. They also allege that certain directors borrowed money from the company without the Board’s approval and subsequently these loans were forgiven.

Outcome: Total defense costs and settlement exceeded $500,000.

A shareholder filed a lawsuit alleging that she was fraudulently induced to make a very large investment in the company based on misrepresentations regarding its future growth and business prospects as well as already being insolvent at the time of the solicitation.

Outcome: Settlement and defense totaled $2 million

Shareholders allege that they were fraudulently induced to invest in a start-up company based on financial misrepresentations and the failure to disclose that the company paid a kick-back to the financial advisor (was later sanctioned by SEC) who brought the investment opportunity to them. The company later went bankrupt.

Outcome: Settlement and defense exceeded $3 million