The Takeaways:
- Mormon church and affiliated non-profit settled SEC charge with $5 million for hiding its vast investment portfolio, valued at $32 billion in 2018.
- The requirement to file timely and accurate information on Forms 13F applies to all institutional investment managers, including non-profit and charitable organizations.
- Although securities claims are major coverage under the Directors & Officers (D&O) insurance policies, many insurance contracts have exclusions, limits or deductions that make cases like SEC settlement difficult to receive D&O payment.
The News Involving the Mormon Church
Today on February 21, 2023, news has it that “The Church of Jesus Christ of Latter-day Saints, the leading Mormon denomination, and a nonprofit operating under it will pay $5 million to settle SEC charges that the church failed to disclose its relationship to shell companies.”
Turns out that “Ensign Peak Advisers Inc., the Utah-based nonprofit that manages the church’s investments, hid the size of the church’s equity portfolio under 13 limited liability companies — including 12 “clone LLCs” — from 1997 through 2019.”
“The nonprofit also failed to file Forms 13F, which are required to disclose the value of certain securities overseen by investment managers, according to the SEC. The forms were filed in the name of the shell companies, instead of Ensign Peak Advisers.”
More Interesting Details of the Case
The above CNBC report missed a few interesting details that were told by this report from Forbes. First of all, the whole case was disclosed by a whistleblower, David Nielsen—a member of the church and former Ensign Peak investment manager, who filed a complaint to the IRS in November 2019 and made the church agree to pay $1 million, while Ensign Peak agreed to pay $4 million.
Another interesting detail: The same whistleblower Nielsen “tipped the IRS that the firm had amassed $100 billion in a little-known charitable fund it collected from donations. None of that money had been spent for 20 years.”
Even more interesting is the potential motive behind hiding the huge funds. “Nielsen said the firm’s leader had instead suggested to staff that the church intended to keep the money for the ‘second coming of Christ,’ which, according to Mormon teachings, will be marked by war.”
How interesting is that for the church to prepare for highly unusual time when Chris himself is coming back to the world.
Similar Case Before
Turns out that this is not the first time Mormon church got itself into trouble with SEC. ChatGPT tells us another similar but smaller case:
In September 2021, the Church of Jesus Christ of Latter-day Saints (commonly known as the Mormon church) reached a settlement with the U.S. Securities and Exchange Commission (SEC) regarding allegations that the church had misled its members about a $100 billion investment fund it had established. As part of the settlement, the church agreed to pay $250,000 to the SEC.
The SEC had alleged that the church had created a non-profit entity, Ensign Peak Advisors, to manage its investment funds and had told members that the funds were being used for charitable purposes. However, the SEC claimed that the church had not disclosed that it was also using the funds for other purposes, such as building a shopping mall in Salt Lake City.
The church denied any wrongdoing in the settlement and stated that it was happy to put the matter behind it. The settlement does not include any admission of guilt or liability on the part of the church.
Nobody and No Cause Can Justify Financial Disguise
The question is, can a case of “noble” cause or causes (e.g., reserving a huge fund for the second coming of Jesus Chris) be used to justify for financial in-disclosure?
The answer must be “No,” otherwise there won’t be SEC action and payment of million dollars for settlement.
More generally, the same laws and regulations must apply to everyone in the society to make it powerful. If there is to be exceptions, they must be pre-installed and pre-stated. Otherwise the laws will have no “teeth” and people will find all kinds of excuses to be exempted from the laws.
D&O or E&O, Which Is Right for Me?
Most if not all entities (organizations, firms, agencies, even individuals) will buy commercial insurance, which can mean either Directors & Officers (D&O) insurance or Errors and Omissions (E&O) insurance. Both D&O and E&O are liability insurance, which is a type of insurance protecting individuals or businesses from being legally liable for something such as malpractice, injury, or negligence — but not intentional wrongdoings.
How do these two insurances differ from each other?
D&O insurance, which again stands for “Directors and Officers” insurance, is designed to protect the personal assets of company directors and officers in the event that they are sued for a wrongful act in their capacity as a director or officer of the company. It typically covers claims related to alleged breaches of fiduciary duty, neglect, errors or omissions, or misleading statements made by the insured person in their capacity as a director or officer of the company. D&O insurance is meant to protect individuals and organizations from management decisions that result in legal actions against them.
On the other hand, E&O insurance, also known as “Errors and Omissions” insurance, is designed to protect businesses from financial losses due to claims of inadequate or negligent work. It covers claims related to professional services, such as errors or omissions made by a professional, breach of duty, or failure to perform professional services. E&O insurance is typically purchased by businesses that provide services to clients, such as lawyers, doctors, or financial advisors.
Simply put, D&O is covering decision makers of an entity, while E&O is covering the entire entity.
Notice that some professionals just have oneself plus one or two staff members, like an attorney’s office or a financial service agency, protecting the entire entity therefore is like protecting the one principal.
Is Mormon Church Likely to Be Covered?
The Mormon church case fits D&O insurance better because it is the decision makers of the church that is directly responsible for the financial disguise. Now that the Church paid its money to SEC, could it file a claim with the insurer to ask payment for its loss of multi-million dollars? More importantly, will the insurer agree to pay for the Church?
This is a good case to ask ChatGPT for, which gives the following answer:
“It depends on the specific terms and conditions of the insurance policy in question.
“Some insurance policies may provide coverage for SEC settlements or fines, while others may not. Typically, insurance policies will have exclusions for intentional or criminal acts, which may include securities fraud or other violations of securities laws that could lead to SEC settlements.
“Additionally, even if an insurance policy does provide coverage for SEC settlements, the coverage may have limits or deductibles that could affect the amount of reimbursement the insured entity ultimately receives.
“If an entity is concerned about whether its insurance policy would cover SEC settlements, it should review the policy’s terms and conditions, and consult with its insurance broker or legal counsel.”
Basically the answer says the church may have a hard time to ask for D&O payment from its insurer. ChatGPT is right that we really need to take a look at the original policy to decide.
Difficulties with Securities Claims
Assuming the Church bought D&O insurance, then “securities claims” are a common type that can be covered under D&O insurance.
Securities claims generally arise when shareholders or investors allege that a company or its directors and officers have made misrepresentations or omissions in the company’s financial statements, public disclosures, or other communications related to the company’s securities. These claims can also arise from alleged violations of securities laws or regulations, such as insider trading or market manipulation.
The above statement fits well with the Mormon case: The Church did misrepresent the financial statements, did not follow the public disclosure rules and regulations and potentially violated securities laws or regulations, which explain the SEC involvement.
Under a D&O insurance policy, coverage for securities claims typically includes legal defense costs and damages that may be awarded to claimants in lawsuits or settlements. Of course, as pointed out by ChatGPT earlier, coverage may be subject to certain exclusions and limitations, depending on the specific terms of the policy.
Now let’s say the D&O policy the Mormon church bought did not exclude legal defense costs, meaning the insurance company must pay to cover the legal cost for the church. The only complication is that the case never went to court but settled outside the court. Should the insurer pay the $5 million to cover the church?
We don’t know the answer for sure because we have no access to the original insurance contract or policy. However, by looking at similar cases it does not seem good that the D&O insurer will pay that $5 million. Here is a historical case similar to the case we are talking about.
This legal article discusses a case involving the auto rental firm Hertz Global Holdings in 2013 that was settled in 2021.
A plaintiff (i.e., the one who filed lawsuit) shareholder filed a securities class action lawsuit against Hertz and certain of its directors and officers in the District of New Jersey. In September 2014, the SEC issues a formal order of investigation that specifically stated that the SEC had “information that tends to show” violations of the securities laws and authorized SEC officials to issue subpoenas for witnesses and documents. In December 2018, Hertz entered a settlement agreement with the SEC, which provided for a $16 million penalty. Hertz claimed to have incurred $27 million in connection with the investigation. Hertz sought to have its D&O insurers reimburse the company for its costs incurred in connection with the investigation.
Unsurprisingly, Hertz’s insurers denied coverage for the company’s investigative costs. The defendant insurers filed a motion to dismiss the coverage lawsuit on the grounds that the company had failed to state a claim for breach of contract.
Guess what made the insurer so sure and won in the end? Turned out there was a phrase in the insurance policy that defined securities claim specifically as “a Claim, other than an investigation of an Organization … alleging” violation of securities laws or regulations. This is the language that used by the judge to against Hertz and in favor of the insurer. The judge made it clear that if something is specifically excluded in writing, it must be honored in the court of law. Simple like that. The Mormon case does not fit exactly with Hertz’s because this time we have a whistleblower and the SEC investigation never really started before the church decided to settle by paying the money. What the insurer is most likely to argue is that the church intentionally committed something wrongdoing, which is excluded by most, if not all, insurance policies.