Inside This Article:
- Federal regulators are claiming that former Lottery.com Inc. executives misled investors by falsely inflating revenues, according to reports.
- The Securities and Exchange Commission lawsuit follows guilty pleas by two former executives reportedly involved in a fraudulent $30 million financing deal, Bloomberg Law reported.
- Directors & Officers (D&O) Insurance can respond to these types of allegations, though coverage may depend on fraud exclusions and final non-appealable adjudication language in policies.
- Companies considering public offerings or complex transactions should review their D&O Insurance with an experienced broker to confirm limits and coverage.
Federal regulators have filed a lawsuit accusing several former executives of Lottery.com Inc. of misleading investors about the company’s financial performance as it prepared to enter the public markets through a merger with a special purpose acquisition company, or SPAC, a shell company formed to take firms public, Bloomberg Law recently reported.
The Securities and Exchange Commission (SEC) complaint, filed in federal court in Manhattan on Jan. 22, alleges the executives were involved in a fraudulent $30 million financing deal and an overpriced acquisition of a gaming company — both transactions reportedly designed to inflate the company’s revenues, according to the outlet. The lawsuit names multiple former Lottery.com executives as well as the former CEO of the SPAC, Trident Acquisitions Corp.
“These are very serious accusations,” said Phillip Hawes, Broker, Professional Liability, Burns & Wilcox, Brokerage Division, Chicago, Illinois. “You made a representation to shareholders or investors about your revenues and operations, and it was not accurate. That is a problem.”
These are very serious accusations. You made a representation to shareholders or investors about your revenues and operations, and it was not accurate. That is a problem.
Companies facing this type of litigation may have coverage under their Directors & Officers (D&O) Insurance, a type of Management Liability Insurance that can help protect corporate leaders from personal financial exposure when shareholders or regulators make allegations such as misstatements or governance failures.
Directors and officers can face personal liability in a variety of circumstances, particularly when allegations involve breaches of fiduciary duty or misrepresentations to investors. Publicly traded companies often face heightened exposure due to the number of potential claimants, and when a company becomes insolvent or cannot indemnify its leadership, Directors & Officers (D&O) Insurance can play a critical role in protecting individual decision-makers from personal financial exposure.
Lawsuits surged after SPAC transaction boom
Lawsuits tied to SPAC transactions have become more common in recent years, particularly following the surge in “blank-check companies” during the pandemic era. In 2021, the Wall Street Journal reported on a wave of legal action targeting SPAC-related transactions. In December, cybersecurity company Hub Security agreed to pay $11 million to settle claims that it misled investors before its SPAC merger in 2023, and crypto mining company Core Scientific agreed in November to a $14.75 million settlement after investors accused its SPAC partner of misleading shareholders before their merger.
The surge in SPAC-related transactions during and immediately following the pandemic brought many companies into the public markets at an accelerated pace, raising co ncerns about whether some organizations were adequately prepared for the regulatory, governance, and reporting requirements associated with being publicly traded.
Though the frequency of these lawsuits has slowed somewhat, “we still see these cases every year,” Hawes said, and they are a reminder of the importance of D&O Insurance. “That is D&O 101,” he said. This type of insurance can cover initial defense costs while investigations unfold, which is often one of the most costly elements. “Everyone involved is going to have to talk to a lawyer,” Hawes said.
Beyond defense costs, the full extent of expenses “depends on what kind of lawsuit is filed, the legal environment, what you are accused of misrepresenting,” he said.
Another emerging source of potential liability involves corporate disclosures related to artificial intelligence (A.I.). Regulators and investors are increasingly scrutinizing whether companies accurately represent the extent of their AI capabilities and use cases, particularly when those statements could influence investment decisions.
The financial impact of regulatory claims
When a regulatory action or shareholder lawsuit is filed against a company’s directors, the length and complexity of the dispute can magnify the financial impact, particularly when multiple defendants are involved, Hawes said. “If the officers plead guilty and the lawsuit is buttoned up quickly, costs could be $1 million or less. If it drags on, there is no plea, multiple board members are named, and there are counterclaims, costs could be hundreds of millions of dollars.”
For companies with D&O Insurance in place, these policies may help absorb a significant portion of defense and settlement costs, though coverage and limits can vary based on policy language and how allegations are ultimately resolved. According to Hawes, key D&O Insurance features to consider include additional Side A limits, which provide coverage for directors and officers when companies cannot indemnify them in the event of a claim, as well as antitrust coverage, “even if it is only coverage for defense costs.”
“Fortunately, I have not really seen a lot of antitrust litigation in my own books, but it is a tough situation and could definitely cause a company to go bankrupt,” he said.
Hawes also said companies should look to remove product advertising and professional services exclusions, when possible, and pay close attention to network security or data breach exclusions. “That is not meant to cover a cyber claim, but if a cyber incident leads to a separate D&O claim, you want to make sure there is at least a Side A chargeback to that exclusion,” he said. “Otherwise, those claims could potentially cause them to go bankrupt or lose significant funds.”
Private companies face many of the same management liability exposures as public organizations and should not assume D&O Insurance is only necessary for publicly traded firms. Claims against directors and officers can arise from a variety of stakeholders, including employees, customers, vendors, competitors, creditors, and other third parties.
Understanding fraud exclusions
Many D&O Insurance policies exclude fraudulent activity but may continue to fund defense costs while a case is pending. “In a lot of D&O Insurance policies, there is a final non-appealable adjudication clause tied to the fraud exclusion,” Hawes said.
In a lot of D&O Insurance policies, there is a final non-appealable adjudication clause tied to the fraud exclusion.
If fraud is alleged, D&O policies often continue advancing defense costs while the matter is being litigated. Coverage may be impacted only after a final, non-appealable adjudication establishes fraudulent or criminal conduct, depending on the policy wording. In some cases, insurers may seek recoupment of previously advanced defense costs following such a determination.
Understanding D&O Insurance coverage is particularly important for companies pursuing public offerings, mergers, acquisitions, SPAC transactions, or other complex financing arrangements. Organizations should review their insurance programs well in advance of these transactions to ensure they understand available coverage, exclusions, and potential coverage gaps.
Current market conditions in the D&O Insurance sector continue to create opportunities for many organizations to evaluate coverage options, compare policy terms, and potentially secure broader protection or more favorable pricing. Companies that have not recently reviewed their D&O programs may benefit from revisiting their coverage with an experienced insurance broker.
Working with an experienced broker remains essential as liability risks evolve. “No two D&O policies are exactly alike,” Hawes said. “You want to work with a wholesale broker or retailer who is very sophisticated and understands the market.”
