In 2023, Clear Channel Outdoor Holdings (a public subsidiary of iHeartMedia and one of the world’s largest outdoor advertising corporations) resolved a $26.1 million FCPA enforcement action.
The SEC stated: “This matter concerns violations of the anti-bribery, recordkeeping, and internal accounting controls provisions of the FCPA by Clear Channel in connection with the actions of its agent, a former indirect, majority-owned Chinese subsidiary, Clear Media Limited. From at least 2012 through 2017, Clear Media bribed Chinese government officials, both directly and through third parties, to obtain concession contracts required to sell advertising services to public and private sector clients for display on public bus shelters, street furniture, and billboards. In addition, Clear Media used sham intermediaries and false invoices to generate cash for off-book consultants engaged to win advertising business from government and private customers. From at least 2012 through 2019, Clear Channel failed to ensure that sufficient internal accounting controls were in place at Clear Media. Clear Channel received approximately $16.4 million in benefits as a result of Clear Media’s improper payments, which were inaccurately recorded as legitimate business expenses in Clear Channel’s consolidated books and records.”
Without admitting or denying the SEC’s findings, Clear Channel agreed to pay approximately $26.1 million (disgorgement of $16,355,567, prejudgment interest of $3,760,920, and a civil monetary penalty in the amount of $6,000,000).
Thereafter, a dispute arose between Clear Channel and its insurance company AIG concerning the SEC settlement amounts and the cost of the SEC investigation.
As summarized in this recent Delaware Superior Court decision:
“In this action, Clear Channel seeks insurance coverage from Defendant AIG for the “disgorgement” and prejudgment interest amounts, as well as for costs of defending the SEC proceedings. Throughout the more than seven years since Clear Channel first notified AIG of the investigation, the parties have quarreled over AIG’s coverage obligations, first regarding defense costs and later regarding indemnification for the settlement. Now, the parties move for summary judgment on three issues.
First, the parties cross-move on AIG’s obligation to indemnify Clear Channel for the settlement. The parties agree that the civil monetary penalty is a “civil . . . penalt[y] imposed by law” uncovered by the Policy. AIG contends that there is no coverage for the amount labeled “disgorgement” either, because it too is a penalty, in substance. AIG also asserts that the disgorgement amount is uncovered because it is uninsurable as a matter of public policy.”
Neither argument is persuasive. The Policy separately addresses “civil . . . penalties” and disgorgement, the two monetary remedies the SEC can impose. AIG’s interpretation is contrary to the Policy’s plain meaning, taking account of the context of SEC enforcement and the contract as a whole. As to public policy, Delaware courts seldom invalidate parties’ contractual choices and will only hold matters uninsurable when required by a strong public policy clearly expressed by the General Assembly. No public policy sufficient to overcome the parties’ contract exists here. The insurance contract provides coverage for the disgorgement and prejudgment interest amounts in the SEC settlement. Accordingly, Clear Channel is entitled to summary judgment that AIG must indemnify it for those amounts.
Second, AIG moves for judgment that it has no obligation to pay additional defense costs. Because indemnification on the disgorgement and prejudgment interest amounts will exhaust the Policy limits, the defense costs issue is moot.
Last, AIG seeks judgment that it is not liable for extracontractual damages for bad faith. Although the Court disagrees with the arguments AIG has raised against indemnity, those arguments were not made in bad faith. Considering that AIG has raised a bona fide coverage dispute, Clear Channel’s complaints about AIG’s claims handling conduct do not rise to the level of bringing a bad faith claim before a jury.
In sum, AIG must indemnify Clear Channel for the SEC settlement up to the Policy limit. Clear Channel is not entitled to extracontractual damages.”
In so ruling, the Court rejected AIG’s arguments about two recent Supreme Court cases regarding disgorgement. As stated by the Court:
“Seeking a different result, AIG invokes two United States Supreme Court cases. Although both concern the SEC’s disgorgement remedy generally, they do not touch upon insurance, nor do they require a different interpretation of the specific Policy at issue in this case.
In Kokesh, the Supreme Court determined that “[d]isgorgement in the securities-enforcement context is a ‘penalty’ within the meaning of” a statute of limitations codified at 28 U.S.C. § 2462. The Court explained that, in general, whether a sanction is a penalty depends on “two principles.” “First, whether a sanction represents a penalty turns in part on ‘whether the wrong sought to be redressed is a wrong to the public, or a wrong to the individual.’”
“Second, a pecuniary sanction operates as a penalty only if it is sought ‘for the purpose of punishment, and to deter others from offending in like manner’—as opposed to compensating a victim for his loss.”
Applying these principles, the Court determined that “SEC disgorgement constitutes a penalty within the meaning of § 2462.” That was because, first, disgorgement is sought for violations “committed against the United States rather than an aggrieved individual.” Second, disgorgement “is imposed for punitive purposes” because its primary purpose is “to deter violations of the securities laws by depriving violators of their ill-gotten gains.” Last, “in many cases, SEC disgorgement is not compensatory” because, although disgorged funds are sometimes “paid to victims,” in other cases they are “dispersed to the United States Treasury.”
The Court cautioned that its ruling should not be read to address matters beyond “the sole question presented in this case” of “whether disgorgement, as applied in SEC enforcement actions, is subject to § 2462’s limitations period.”
Three years later, in Liu, the Supreme Court addressed the question it had reserved in Kokesh: “whether courts possess authority to order disgorgement in SEC enforcement proceedings.” The Court held that they do, as long as the award is “consistent with the equitable principles” underlying the statute authorizing SEC disgorgement. After surveying the history of disgorgement and its predecessor remedies, the Court determined that courts could order SEC disgorgement where it “does not exceed a wrongdoer’s net profits and is awarded for victims.” The Court
then remanded the case for the lower courts to determine whether the disgorgement award was consistent with these principles.”[…]
Here […] Kokesh and Liu are not controlling. Neither Supreme Court case interpreted insurance contracts, let alone insurance coverage exclusions that must be given a “strict and narrow construction.” Nor could they have informed the parties’ reasonable expectations at the time of contracting. Although Kokesh was decided a few months before the Policy period began, that opinion expressly cautioned that it was limited to the meaning of a specific limitations statute. And Liu was decided after the Policy period, meaning it “could not have informed the parties’ understanding of the meaning of the term ‘penalty.’”
