Cryptocurrencies, White Collar Crime, Health Care Fraud, You Name It. Why Heavier Regulatory Risk Is Upon Us

SEC enforcement activity generally is trending upward. The agency reported that it filed 434 new enforcement actions in fiscal year 2021, representing a seven percent increase over the prior year.

By: Nina Luckman | December 9, 2021

The Biden administration is cracking down on white collar crime.

In his first year, the president and new attorney general have announced a series of policy changes that aim to toughen up the federal response to white-collar crime.

Among their top concerns include increasing transparency around corporate misconduct, address COVID-related fraud and increased regulation.

Other federal and state agencies are likely to follow their lead, with new regulatory actions and substantial a double-down on enforcement efforts into next year.

COVID Scams Abound

From cyber scams to the business of selling fake vaccine cards, COVID-related crime is surging.

Michael B. Himmel, chair of Lowenstein Sandler’s white collar criminal defense practice and partner in the securities litigation practice, notes the rainbow of fraudulent activity surrounding COVID relief programs, and more recently, vaccine attestation as new risks to be contended with.

“As a consequence of the CARES Act, five different types of fraud emerged that I know the government has been looking at,” he explained.

Michael B. Himmel, chair, white collar criminal defense, Lowenstein Sandler

He laid out the following examples:

“One is price gouging; the second is misrepresentation of individuals seeking reimbursement from the government; the third is the use of stolen identity in which individuals are applying for unemployment insurance claiming they lost their jobs due to COVID,” he said.

“[Another] is cyber fraud, which is for example when an entity or individual emails another entity or individual about seeking an SBA loan but they’re actually phishing, and then last but not least, is the sale of phony vax cards. That last one is happening more than ever before.”

As recently as October 25th, 2021, the Department of Justice underscored Himmel’s point with a bulletin urging Americans to be on high alert for COVID-related scams.

One of the main COVID scams Himmel is seeing relates to the CARES program. Cyber criminals are sending out phishing attacks that claim to come from the U.S. government.

“Law enforcement has seen fraud schemes using smartphone apps or websites that claim to be a government office associated with CARES Act programs. These fake sites are requesting PII, including banking information, to deposit stimulus payments. Perpetrators then will use this information to debit money from the consumers’ bank accounts.”

The bulletin further lists among scams attempts at phishing by asking for stimulus fund balances to be returned and unsolicited calls from agencies like the IRS.

Expanding SEC Oversight

Aside from COVID, Himmel also has his eye on new priorities from the U.S. Securities and Exchange Commission (SEC).

In particular, those related to diversity, equity, and inclusion and how investment firms are selling these values as part of a larger investment strategy.

“The SEC recently has said that they’re going to take a look at funds that are getting investors to invest based upon certain entities where they promote diversity, equity and inclusion,” Himmel explained.

“What we’re going to start seeing is the SEC looking at some of these entities that these funds are investing in to really see if, in fact, they are promoting DEI. In particular I’m talking about funds – hedge funds, whatever the funds might be – that are suggesting to investors that they are investing in entities that promote this. The SEC is going to take a peek and see what’s really happening.”

What this new aspect looks like in terms of enforcement is not yet clear, however. SEC enforcement activity generally is trending upward. The agency reported that it filed 434 new enforcement actions in fiscal year 2021, representing a 7% increase over the prior year.

In the same press release, the SEC also touted “judgments and orders for nearly $2.4 billion in disgorgement and more than $1.4 billion in penalties, which represented a respective 33% decrease and 33% increase over amounts ordered in the prior fiscal year in these categories.”

Cryptocurrency, already a priority for the IRS, has its own section in the SEC enforcement action report, and Himmel sees that as another area to watch.

“The IRS takes the position that cryptocurrency is an asset, and I’m not suggesting they’re wrong,” he said.

“What they’ve tried to do in viewing it as an asset is developing what I’ll call money laundering cases. I’m not sure how successful they have been in the past, but what the Department of Justice and the U.S. Attorney’s office have been looking at has been several things —scams where initial coin offerings are fabricated, Ponzi schemes, market manipulation schemes where they’re trying to enhance the value of the coin when it really shouldn’t be.”

“And most recently, the U.S. Attorney’s office in California seized $56 million that they believe was fraudulently obtained by an individual.”

Michael B. Himmel, partner, securities litigation, Lowenstein Sandler

In that case, against BitConnect, the defendant pleaded guilty on September 1 to defrauding investors. The DOJ is still actively seeking victims of this scam.

Regulatory Trends in 2022

As we approach a brand-new enforcement year, Himmel says he’s following the trends coming out of the U.S. Attorney’s Office very closely. “Our clients in the business space are concerned,” he said, noting the track records and public statements of both Attorney General Merrick Garland and new Deputy Attorney General Lisa Monaco.

“Lisa has spoken on a few occasions about prosecuting cases from consumer protections to the environment. And it’s been years, and years, and years since we’ve heard about criminal cases involving the environment,” Himmel said.

“I think that’s real and it’s going to come back.”

In terms of general advice, Himmel opined that the financial services sector should expect firm but fair oversight.

“I would say as a consequence of Garland and Monaco and Gary Gensler [current head of the SEC] they’re going to be vigilant. They’re going to be looking at Wall Street; they’re going to be looking at the banks.”

“And I think compliance officers — including compliance officers I’ve spoken to — are going to be on the lookout. Unlike in the past, DOJ and SEC have said that the financial space is going to be a priority.”&

Nina Luckman is a business journalist based in New Orleans, focusing primarily on the workers' compensation industry. Over the last several years, Nina has served as Editor of Louisiana Comp Blog, a news site she started in 2014 under the auspices of a group self-insurance fund. She can be reached at [email protected].

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.