This blog post is adapted from one that ran in the Securities Arbitration Commentator blog on 13 July 2020. Republished here with thanks to SAC.
While most explained Awards focus on factual issues, Alderson v. deVere USA, Inc., JAMS ID #1425027170 (New York, NY, 1/2/19), hinges on issues of law, primarily statutory and contract construction.
The actual issue was whether deVere USA Inc. (“deVere”), an investment advisory firm, owed a duty to pay the legal fees of one of its former officers and investment advisers, Robert Alderson (“Alderson”).
How We Got Here
Alderson’s employment agreement with deVere contained an arbitration clause and two provisions addressing the parties’ duties to defend and indemnify each other. Section 5.1 required Alderson to defend and indemnify deVere for any damages and attorney fees it incurred if Alderson’s “acts or omissions are found to be malicious or in reckless disregard to the rights, safety, or property of others,” and Section 5.2 required deVere to defend and indemnify Alderson for any damages or attorney fees he incurred, unless he is found to have engaged in the same standard of misconduct described in Section 5.1. The SEC opened an investigation against deVere, during which deVere paid for separate counsel for Alderson. After deVere settled with the Commission by paying an $8 million civil penalty, the SEC sued Alderson for, among other things, promoting certain investments while concealing conflicts of interest. Examples included: commissions he earned, failing to implement some of Alderson’s written compliance policies and procedures, and aiding and abetting deVere’s violations. When deVere refused to continue paying Alderson’s legal fees, Alderson filed a declaratory judgment action that the court ordered to arbitration.
The Award: Duties to Defend and Indemnify, the Same and Different
The following is taken verbatim from the sole Arbitrator’s Interim Award: Where, as in this case, the party assuming the obligation is not an insurance company, then unless stated otherwise, the duty to defend and indemnify are co-extensive and the duty to defend is strictly construed. Here, Alderson’s duty to defend and indemnify deVere is clearly dependent on a finding that Alderson acted maliciously or in reckless disregard, which hasn’t occurred yet. Section 5.2 of the employment agreement, on the other hand, imposes a different duty on deVere, requiring it to defend and indemnify Alderson to the fullest extent permitted by law. Moreover, its duty to defend Alderson is different than its duty to indemnify him; while the latter requires a judgment against him, the former is a literal right to defend with counsel and, while it does not mention advancing Alderson’s legal fees, that duty is implicit in the duty to defend.
deVere’s Other Assertions
deVere raised two other objections to defending Alderson. First, it argued that Florida law precluded doing so, because Alderson did not undertake to repay the advanced fees if the outcome of the SEC litigation disqualified him from indemnification. Secondly, Florida law restricts the duty to conduct within the scope of employment and the SEC allegations fall outside that area. However, Alderson did agree to the former undertaking. Furthermore, the duty to defend was not limited by Florida law and was, instead, governed only by the Employment Agreement, which itself expressly provided that it was to be construed under New York law and, therefore, under that State’s more relaxed standard of acting within the scope of employment. Finally, deVere’s counterclaim for advancement of its legal fees by Alderson fails because Alderson has not been found to have acted maliciously or in reckless disregard.
Conclusion and Aftermath
The Arbitrator concluded that deVere is obligated to advance Alderson his defense costs, but Alderson must execute an undertaking to repay any such advance should it ultimately be determined that he is not entitled to indemnification. Still, and even after the Court confirmed the Award, deVere continued to make excuses for failing to pay Alderson’s legal fees, including an unsubstantiated claim that Alderson released deVere from that duty. Finally, on May 26, 2020, the Court ordered deVere to pay the undisputed portion of Alderson’s legal fees and identify the disputed portions so that the Court may decide its duty to pay those.
(ed: *A summary of the Court’s May 26 decision appears in a recent edition of SAC’s Online Litigation Alert (SOLA 2020-22). That summary, by SOLA Editor Christopher G. Lazarini, Esq. of Bass Berry & Sims, Memphis, TN, also appears in SAC’s Blog. The decision notes that Alderson informed the Court that the SEC litigation was “settled in principle.” One presumes the settlement will not include a finding of malice or reckless disregard.)
Harry A. Jacobowitz is the owner and operator of HAJ Research and Writing LLC, a company specializing in researching and writing on legal issues and related subjects. A graduate of the University of Pennsylvania Law School with more than 30 years of experience in the legal and legal publishing fields, Mr. Jacobowitz is a former manager of SAC’s securities Awards database and currently serves, among his other activities, in a consulting capacity to SAC and the Alert.