Some additional details on the settlements and fines listed above are as follows:
- Gordon: Administrative charges settled against CEO in January 2019 for $100,000. The SEC charged Benjamin Gordon, the former CEO of Cambridge Capital Acquisition Corporation, a SPAC, with failing to conduct appropriate due diligence to ensure that the SPAC’s shareholders voting on the merger were provided with accurate information concerning the target’s business prospects.
- Momentus: Settlement total of $8.04 million in July 2021. The SEC alleged that Momentus and the founder misled Stable Road, the SPAC with which it planned to merge, about its technology and national security issues and that Stable Road had failed to perform its due diligence to identify those issues.
- Nikola: Settlement total of $125 million in December 2021. The enforcement was preceded by a short seller report and an SCA and centered around misleading statements about Nikola’s products, technical advancements, and commercial prospects.
- Perceptive Advisors: Settlement of $1.5 million in September 2022. This case was the SEC’s first enforcement action against an investment adviser. The SEC charged the adviser with violating the Investment Advisers Act in connection with its involvement with SPACs.
- Morgenthau: Forfeiture of $5.1 million, restitution of $5.1 million, and 36 months in prison for the SPAC’s former CFO in April 2023. In January 2023, the SEC brought fraud charges against Cooper J. Morgenthau, the former CFO of African Gold Acquisition Corp., a SPAC. The charges revolved around Morgenthau orchestrating a scheme in which he stole more than $5 million from the company and from investors in two other SPACs that he incorporated.
- Corvex: Settlement of $1 million in April 2023. The SEC charged investment adviser Corvex Management LP with failing to disclose conflicts of interest regarding its personnel’s ownership of sponsors of several SPACs into which Corvex advised its clients to invest. Corvex also agreed to a cease-and-desist order and a censure.
Update on the D&O Insurance Market and Rates
The above data and trends have real implications on the risk and risk mitigation decisions that SPAC sponsors, their target companies, investors, and deal teams make. Higher risk of litigation or enforcement, for example, yields lower availability of D&O insurance coverage and higher premiums. Overall insurance market trends also dictate the kind of coverage and costs a team should expect.
As we noted at the end of 2022, the impossibly hard SPAC D&O market started to turn. In just a few months since the beginning of the year, we witnessed one of the fastest adjustments in the wider public company D&O market ever recorded.
Many new insurers have joined the ranks and now, with an oversupply of insurance capacity and very few IPOs, insurers are competing for public D&O new and renewal business, driving rates and retentions down for almost all companies. Mature public companies are experiencing significant rate relief, and newly public companies are seeing significant rate decreases due to higher starting premiums.
What This Market Means for SPAC D&O Insurance Rates
The pressure on carriers in the overall public D&O insurance market is good news for SPACs. We are seeing more carriers interested or willing to take a second look at SPAC tails, extensions, and new go-forward programs. Competition is driving premiums down. Self-insured retention benchmarks are also dropping. More carriers are willing to be flexible on the structuring of the coverage.
However, the likelihood of a SPAC-related company getting sued continues to be higher than that of a traditional IPO or a mature public company. Carriers are continuing to keep a very close eye on each new court decision and enforcement action. For example, a recent decision from Delaware led to many carriers being unwilling to renegotiate tail pricing on the SPAC IPO policy or imposing coverage exclusions. Many are still wary of granting long extensions or reducing premium pricing on those extensions.
As we predicted at the end of 2022, SPACs have enjoyed a period of reasonable D&O insurance pricing so far in 2023, and that will likely continue into 2024. However, SPAC teams and their target companies will need to make some program restructuring decisions (with the help of their insurance brokers) to adjust for the new trends in the direct fiduciary duty cases and other court decisions as they affect D&O carriers’ obligations.