According to industry reports, education technology companies experienced unprecedented demand during COVID‑19, fueled by remote learning mandates and significant public investment in digital infrastructure. School districts rapidly deployed laptops, software platforms, and immersive learning tools while students were learning remotely. However, now that classrooms have largely returned to in‑person instruction, a growing backlash against ed‑tech has begun to emerge.  In the last month, both the New York Times and Wall Street Journal have reported on the backlash from educators and parents, as well as study results showing the deteriorating effect of technology use in classrooms.

This recent reporting has coincided with certain ed‑tech companies confronting tightening capital markets, operational challenges, and increasing scrutiny from investors and regulators. A complaint filed against zSpace, Inc (zSpace) and its directors and officers on April 23, 2026  (zSpace SCA), may demonstrate how these converging dynamics are now beginning to manifest in securities litigation.  The following will discuss the zSpace SCA allegations, the company’s purported financial pressures, and potential D&O exposure for companies in the ed‑tech industry.

The zSpace Securities Class Action

The complaint against zSpace and certain of its directors, officers, and underwriters arises from the company’s December 2024 initial public offering and asserts claims under Sections 11, 12(a)(2), and 15 of the Securities Act. As alleged, zSpace, which provides augmented and virtual reality educational tools, raised approximately $9.4 million in its IPO at $5.00 per share. Its stock price subsequently declined significantly, falling well below the offering price.

The zSpace SCA focuses on alleged material misstatements and omissions in the company’s registration statement, including claims that the company failed to disclose a significant purchaser of its Series E and Series F preferred stock, despite representing that all major beneficial owners had been identified. Allegedly, this purchaser emailed company executives, including a named executive officer, regarding unmet financial obligations purportedly owed under a preferred stock purchase agreement.

The complaint further alleges that the company characterized the risk of litigation as hypothetical, even though disputes with this investor were already underway, and that subsequent litigation revealed discrepancies in the investor’s ownership interest. According to the complaint, these issues rendered the offering documents materially misleading with respect to the company’s capitalization, governance, and litigation risk.

Discussion

Of note, before it’s December 2024 IPO, zSpace announced its intention to complete a SPAC merger with EdtechX Holdings Acquisition Corp. II, in the fourth quarter of 2022, in which zSpace was valued at approximately $195 million.  However, the SPAC merger was later terminated following alleged breaches of the merger agreement.  At the time of its IPO in December 2024 with shares priced at $5, and in early 2025, zSpace was reported to have a market capitalization of approximately $112.3 million. However, recent reporting indicated that zSpace has secured a relatively modest $3 million investment while simultaneously facing the possibility of Nasdaq delisting in January 2026.

The financial and litigation pattern faced by zSpace is not occurring in a vacuum. Pandemic-related securities cases involving education-adjacent companies provides additional context for how these risks may develop. For example, a securities suit was filed against Chegg, a provider of online tutoring and research services and other educational resources, following pandemic-driven growth and subsequent performance challenges. While not a traditional ed-tech platform in the classroom sense, the company’s experience reflects how businesses tied to remote learning demand may face scrutiny when usage patterns shift. Similarly, litigation was filed against K12 Inc. (now Stride, Inc.), alleging misrepresentations regarding enrollment growth and educational outcomes during the pandemic. Although that case was ultimately unsuccessful, it demonstrates that plaintiffs have already tested theories linking pandemic-era demand, educational efficacy, and corporate disclosures.

These cases may be instructive in framing the potential trajectory of claims against ed-tech companies. Many companies in the sector scaled rapidly based on extraordinary, and arguably non-recurring, conditions. As those conditions recede, plaintiffs may examine whether offering documents and public disclosures adequately address the risk of declining demand, dependence on government funding, and the sustainability of pandemic-driven growth metrics.

Beyond pandemic normalization, artificial intelligence introduces an additional and evolving risk vector. As seen in the experience of Chegg, whose business model relied heavily on paid homework assistance, emerging AI tools such as ChatGPT have the potential to disrupt core revenue streams. Chegg’s reported loss of users to AI-powered alternatives, without any corresponding securities litigation to date, nonetheless highlights an important point: D&O risk may arise not only from a company’s use of AI, but from external AI-driven competitive pressures that alter market dynamics. This underscores that AI-related risk confined to implementation, governance, or disclosure of internal AI use, but extends to strategic displacement risk where technology erodes demand for a company’s core product.

Add to the strategic displacement risk recent negative reporting surrounding use of ed-tech in classrooms. A March 29, 2026, New York Times article highlighted dissatisfaction among educators and parents with the outcomes of these ed‑tech investments, including concerns about student distraction, overreliance on screens, and whether these technologies delivered meaningful educational value. And, on April 29, 2026, the Wall Street Journal, in an article titled “How YouTube Took Over The American Classroom,” reported that a survey touted by YouTube executives shows 94% of teachers use YouTube in their roles.  The study further highlighted the integration of chrome books into American classroom, including granular data provided by parents indicating the scale of use on YouTube on classroom devices used by students.  With a second grader in New York watching over 700 videos in two months during school hours and, on one day, a tenth grader in Oregon scrolling through more than 200 YouTube videos within an hour and half during the school day. 

The WSJ article then cited multiple neuroscientists involved in studying the impact of ed-tech in education stating that “[t] he impact of 1:1 Chromebooks on learning is incredibly bad.” Thus, with multiple studies and academic findings which question the effectiveness of education technology tools, questions about whether companies may have overstated the benefits of their products or relied on adoption metrics that do not necessarily correlate with improved educational outcomes may be raised. These issues can become fertile ground for misrepresentation claims if corporate disclosures are not carefully calibrated to reflect both opportunities and limitations.

In addition, the unique characteristics of the education market could introduce additional layers of risk. School districts can be highly budget-sensitive, politically influenced, and subject to public accountability, meaning that shifts in sentiment or policy can quickly affect purchasing decisions. As a result, disclosures relating to customer concentration, contract renewals, and public funding exposure may take on heightened importance.

From a D&O liability perspective, the zSpace SCA, when viewed alongside the Chegg and K-12 litigation examples, may underscore certain key considerations. First, the cases highlight the importance of accurate and contemporaneous disclosure, particularly where known issues, such as investor disputes or demand headwinds, may be characterized as hypothetical risks. Second, the litigation reflects the fragility of capital markets for smaller, publicly traded ed-tech companies, where stock price volatility and liquidity constraints can magnify the impact of adverse developments.

Third, these recent developments illustrate a potential disconnect between operational narratives and shifting market realities, particularly in a sector undergoing rapid reassessment. Companies that positioned themselves as beneficiaries of long-term digital transformation trends may now face scrutiny as those assumptions are tested. Finally, the emergence of AI as a disruptive force introduces a forward-looking disclosure challenge, requiring companies to assess and communicate not only current risks, but also the potential for technological displacement.

Taken together, the ed-tech sector appears to be entering a phase defined less by expansion and more by recalibration. The convergence of post-pandemic normalization, increased skepticism regarding educational outcomes, tighter funding conditions, and technological disruption may create an environment in which securities litigation becomes a more common response to business underperformance. The zSpace SCA may represent an early example of how these forces can intersect, transforming operational, financial, and strategic challenges into D&O exposure.

One of the perennial D&O insurance issues involves the question whether “disgorgement” amounts awarded in SEC proceedings represent “penalties” for which insurance coverage is precluded. In the latest example of a case involving these issues, the Delaware Superior Court recently held, in reliance on the statutory provisions defining the SEC’s authority to seek monetary remedies, that the disgorgement amounts and prejudgment interest awarded against the media company Clear Channel are not “penalties” for which coverage is precluded. As discussed below, the court’s analysis of the issues, and its reference to the relevant statutory provisions, is both detailed and instructive.

The Delaware Superior Court’s April 28, 2026, opinion in the case can be found here. A May 1, 2026, LinkedIn post about the Clear Channel decision by Geoff Fehling of the Hunton Andrews Kurth law firm can be found here.

Background

In January 2018, Clear Channel became aware of financial improprieties at a Chinese subsidiary. Clear Channel voluntarily disclosed what it then knew of the situation to the SEC. The SEC commenced an investigation. After several years of investigation, the SEC and Clear Channel engaged in negotiations to try to resolve the matter.

On September 28, 2023, the SEC entered, pursuant to the negotiated resolution with Clear Channel, a Cease-and-Desist Order. Among other things, the Order required Clear Channel to “pay disgorgement” of approximately $16.3 million, prejudgment interest of approximately $3.7 million, and a “civil money penalty” of $6 million.

Clear Channel had sought to have its D&O insurer pay defense costs incurred in responding to the SEC’s investigation. Following the entry of the Cease-and-Desist Order, Clear Channel sought indemnification for the disgorgement and prejudgment interest amounts, but not for the civil money penalty. The insurer took the position that neither the disgorgement amount nor the associated prejudgment interest constituted covered Loss under the policy and that the payment of insurance for these amounts would also be contrary to public policy.

Clear Channel commenced coverage litigation against the insurer, seeking coverage for the disgorgement amount and the prejudgment interest. The parties filed cross-motions for summary judgment.

Relevant Policy Language

The policy’s definition of the term “Loss” provided that Loss “shall not include … civil or criminal fines or penalties imposed by law” [a provision that the court referred to as the Civil Penalties Exclusion] or “matters which may be deemed uninsurable under the law pursuant to which this policy shall be construed” [a provision that the court referred to as the Uninsurability Exclusion].

The April 28, 2026, Opinion

In a detailed April 28, 2026, opinion, Delaware Superior Court Judge Patricia Winston, applying Delaware law, granted Clear Channel’s summary judgment motion and denied the insurer’s summary judgment motion. In granting Clear Channel’s motion, Judge Winston rejected the insurer’s argument that the disgorgement was a “penalty” for which the policy precluded coverage and also rejected the insurer’s argument that the disgorgement amount was uninsurable as a matter of public policy, and held that “the insurance contract provides coverage for the disgorgement and prejudgment interest amounts in the SEC settlement.”  

The insurer had tried to argue that the disgorgement amount, like the civil money penalty amount awarded in the Cease-and-Desist Order, represented “penalties” within the meaning of the Civil Penalties Exclusion in the definition of Loss, and urged the court to “look past the label.”  In rejecting this argument, the court considered the SEC’s statutory authority for seeking monetary remedies, noting that the relevant statutory language “delineates” between civil penalties on the one hand, and “equitable relief” and “disgorgement” on the other hand. Judge Winston said that that the policy’s definition of Loss “mirrors” this distinction. The policy’s definition of Loss, like the relevant statutory provisions, expressly references “penalties” but not “equitable relief” or “disgorgement.”

The “most natural reading” then, the court said, is to conclude that “the Civil Penalties Exclusion concerns the remedy the securities laws call a “civil penalty,” and “not the other remedy that the exclusion does not reference.” This reading, the court said, gives the provision’s words their “plain and ordinary meaning” and properly considers the “securities regulation context.” 

The insurer sought to try to refute this reading of the policy by referring to dictionary definitions of the word “penalty.” Although the court acknowledged that dictionary definitions can assist in interpreting contract terms, the court noted in this case that the policy provision does not refer to “penalties” in general, but rather “civil or criminal … penalties imposed by law.” The relevant law here is the SEC’s statutory authority for awarding monetary penalties, in the context of which “civil penalties” has a particular meaning distinct from disgorgement, and “that meaning is of greatest import here.” The court declined to assign the word “penalty” a meaning based on “dictionary and non-securities law definitions” as that required “plucking” the word from its surrounding policy language and legal context.

The insurer further relied on two Supreme Court decisions – the 2017 Kokesh decision (about which refer here) and the 2020 Liu decision (about which refer here) – for the proposition that “disgorgement” is a “penalty” within the meaning of the securities laws. While those cases did conclude that “disgorgement” was a “penalty” within the meaning of relevant statute of limitations provisions, the U.S. Supreme Court expressly cautioned that “its ruling should not be read to address matters beyond the sole question in the case” having to do with the relevant limitations period.

Judge Winston also referenced the New York Court of Appeals’ 2021 decision in the J.P. Morgan/Bear Stearns case (about which refer here), in which the New York court rejected the insurer’s argument in that case, made in reliance on Kokesh, that “disgorgement” is a “penalty.” Judge Winters cited with approval to the New York court’s holding that Kokesh does not control because the court in Kokesh “was not interpreting the term ‘penalty’ in an insurance contract” and that “the meaning of that term may vary based on context.” With express reference to the New York court’s opinion, Judge Winters also concluded that the U.S. Supreme Court’s opinions in Kokesh and Liu do not control the insurance coverage issue here.

Judge Winston concluded that the Civil Penalties Exclusion “unambiguously excludes SEC civil monetary penalties but not SEC disgorgement or prejudgment interest paid in settlement.”

Finally, Judge Winston also rejected the insurer’s argument that coverage for the disgorgement amount and the prejudgment interest is “uninsurable as a matter of public policy.” She concluded that “there is no clear Delaware public policy, from the General Assembly or otherwise, so strong as to vitiate the parties’ freedom of contract.” The insurer, she said, “cannot escape its contract on public policy grounds.”

Discussion

In numerous prior posts on this site, I have commented (here, for example) that the Delaware Superior Court is a particularly friendly forum for policyholders. It would be tempting, therefore, for me to try to explain the court’s decision in the Clear Channel case as just one more example of the court’s apparent proclivity to side with policyholders in insurance coverage disputes.

Although I continue to view the Delaware Superior Court as generally favorable to policyholders, I don’t think this generalization explains the court’s decision here. I don’t think the court’s decision here can be understood as yet another example of this court’s policyholder proclivity.

The court’s reasoning here about whether or not “disgorgement” is a “penalty,” and therefore precluded from coverage, is based on the language of the statutory provisions authorizing the monetary remedies the SEC may seek. The court found a distinction in the statutory language between “penalties” on the one hand and “disgorgement” on the other, and, more importantly for purposes of the issues in dispute here, the court found further that the words used in the relevant policy provision “mirror” those securities law statutes. Both the statute and the policy provision, the court said, “delineate” between penalties on the one hand and disgorgement on the other.

In other words, the court’s decision is grounded in the relevant statutory provisions and corresponding policy language. Moreover, this connection to the relevant statutory provisions was sufficient for the court to reject the insurer’s attempt to rely on seemingly contradictory dictionary definitions of the term “penalties.”

I was also struck by the fact that the court not only rejected the insurer’s attempt to rely on the U.S. Supreme Court’s Kokesh and Liu decisions – for the proposition that “disgorgement” is a “penalty” – but that the court did so in express reliance on the New York Court of Appeals’ holding in the J.P. Morgan/Bear Stearns case. Readers of this blog know that New York is, arguably by contrast to Delaware, not necessarily a policyholder friendly jurisdiction. (Though to be sure, even at the time, I noted that the New York highest court’s decision in the J.P. Morgan/Bear Stearns case was uncharacteristically policyholder friendly.) At a minimum, the court’s reliance on the New York court’s decision reinforces the view that the court’s decision in this case is grounded in relevant authority.

The Delaware court’s decision here is by no means the final word on these issues about “disgorgement.” For starters, the insurer here is free to appeal and undoubtedly will. There could be more of the “disgorgement” story to be told, even just in this case.

But more to the point, the question of whether or not “disgorgement” amounts are insurable are long-running and almost certainly will continue. I do wonder sometimes why insurers, if they really are so convinced that their policies should not cover disgorgement amounts, don’t just go ahead and say so in their policies. It could be that they just don’t want to undercut their arguments in many pending cases, involving language lacking any reference to disgorgement, in which the insurers are trying to argue that coverage for disgorgement is precluded. It may also be that in the current competitive market, it would be hard to sell a policy wording change that would be universally viewed as coverage restrictive.

In the absence of changes to the standard wording, disputes about whether or not D&O insurance policies provide coverage for disgorgement will continue. I suspect that in the future policyholders seeking coverage for disgorgement amounts will try to marshal the arguments that were successful here – that is, that the relevant statutory authority allowing the SEC to seek monetary remedies draws a distinction between “penalties” on the one hand, and disgorgement on the other hand, and that the relevant policy language “mirrors” this distinction.

In the following guest post, Evan Bundschuh and Burkhard Fassbach share and analyze their research into the AI-related Form 10-K disclosures of 26 U.S.-listed public companies, in order to assess the level and significance of public companies’ disclosure statements pertaining to artificial intelligence. Evan is Vice President at GB&A, a retail insurance brokerage in New York, and Burkhard is a D&O lawyer in private practice in Germany. My thanks to Evan and Burkhard for allowing us to publish their article on this site. Here is their article.

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Introduction: The 2025 10-K Season as a Pivotal Moment for AI Transparency

The fiscal year 2025 represents the definitive watershed moment for corporate transparency regarding artificial intelligence. As AI transitioned from an experimental capability to a core operational engine, the Securities and Exchange Commission (SEC) 10-K filings for the year ending December 31, 2025, offer the first comprehensive mapping of the global AI risk landscape. These filings reflect a systemic shift in the corporate narrative: AI is no longer merely a strategic opportunity highlighted in investor decks; it is now a documented material risk managed at the highest levels of corporate governance.

The trajectory of cyber disclosures may also provide some insight into where AI disclosures could be headed. While initial cyber disclosures were mainly focused on the disclosures of security incidents, they quickly matured in terms of their breadth, transparency and specificity, extending well beyond just material incidents, to include regulatory compliance, emerging threats, and implementation of formal policies and procedures. AI disclosures are on track to follow a similar path. What initially began as disclosures aimed at the integreation of AI and its capabilities, is developing into a much more mature, multi-faceted governance framework, and its trajectory will continue upward as corporate officers better understand the entirety of AI specific risks, and investors expect greater transparency.

For securities litigation attorneys and D&O insurance professionals, these disclosures provide the evidentiary baseline required to assess fiduciary oversight and the potential for “Event-Driven” litigation in the years ahead.

Cross-Sector Analysis: The Expansion of AI Risk Profiles

The 2025 filing season demonstrates that AI risk has successfully permeated every major industrial sector. Our analysis of 26 unique companies across 10 distinct sectors (totaling 27 sectoral entries as Tesla’s profile spans both Technology and Automotive) underscores that AI-related materiality is now a universal concern.

The Technology and Automotive Pioneers: Leaders such as Alphabet, Amazon, Meta, and Netflix have fundamentally shifted their disclosures from “innovation-led growth” to “material operational risk.” These filings highlight the immense capital expenditures required to maintain AI parity and the potential for model failure to disrupt core revenue streams. In the automotive sector, Ford and General Motors, alongside Tesla, emphasize the liability risks associated with autonomous systems and the reliance on complex, AI-driven supply chain logistics.

Financial Services: Banking and Insurance: Within the financial sphere, JPMorgan Chase, Citigroup, Wells Fargo, and Bank of America have introduced granular disclosures regarding AI in credit scoring, fraud detection, and algorithmic trading. These filings are designed to preempt allegations of “black box” decision-making. Similarly, insurance heavyweights AIG and Berkshire Hathaway are now documenting risks associated with AI-driven underwriting models and the potential for systemic loss events triggered by automated financial correlations—what underwriters are increasingly viewing as “Interrelated Wrongful Acts.”

Healthcare and Life Science: Healthcare giant UnitedHealth Group, alongside pharmaceutical leaders Pfizer, Eli Lilly, and Merck, have identified AI as a critical, yet volatile, component of drug discovery and patient care delivery. Their 2025 filings emphasize the risks of clinical reliance on unproven algorithms and the legal vulnerabilities inherent in AI-assisted diagnostics, where a failure could trigger catastrophic professional liability claims.

Consumer, Infrastructure, and Energy: A sophisticated wave of disclosures has emerged in the Food & Beverage (Coca-Cola, PepsiCo, McDonald’s) and Telecommunications (AT&T, Verizon) sectors, focusing on supply chain automation and the ethical implications of AI-driven consumer targeting. In the Energy sector, Exxon Mobil and Chevron have integrated AI risk factors not just for efficiency, but as a mechanism to mitigate Environmental, Social, and Governance (ESG) underperformance and ensure operational safety in high-stakes infrastructure.

Industrial and Chemical Leaders: In the Industrial and Chemical sectors, 3M Company and Dow Inc. have introduced disclosures concerning AI’s role in material science R&D. These filings highlight the risk that AI-generated chemical formulations may carry unforeseen long-term liabilities or environmental impacts, necessitating robust oversight of the “Inquiry” prong of the board’s fiduciary duties.

Core Thematic Clusters in AI Disclosures

The 2025 filings reveal some critical themes, indicating which disclosures are curently being made, and which disclosures may need to be considered moving forward, providing a “ready-made” roadmap for potential plaintiffs.

Implementation and Integration of AI: The implementation of artificial systems, and its associated risks, is the core driver of disclosures. Companies are increasingly disclosing the risk of discriminatory outcomes in automated systems. From a litigation perspective, these disclosures acknowledge that failure to mitigate bias can lead to severe reputational damage and regulatory enforcement actions that impair corporate value. In addition to hallicunations, bias and other AI failures, companies also need to consider disclosing any financial impact posed by the implementation and integration of its AI infrastructure such as; increased data processing costs, potential cannabalization of other products, and even AI related workforce reductions, as evidenced by disclosures made by companies like IBM, Salesforce and Pinterest following large layoffs.

Cybersecurity and Data Privacy: The integration of Large Language Models (LLMs) has introduced vulnerabilities. Filings highlight the risk of proprietary data leakage through the usage of third-party AI tools and the threat of AI-enhanced cyber-attacks that could compromise sensitive corporate data.Unlawful or unrecognized collection of data is another emerging risk. Failing to mention LLMs are collecting data in order to train their models, can subject companies to litigation and enforcement alike. The third party governance required to mitigate such risk, can also prove challenging. While the direct risk posed by such wrongful acts should be coverd by an appropriate cyber policy, such claims can create follow-on litigation creating D&O liaiblity in the form of securities and derivative litigation and enforcement actions.

Intellectual Property (IP): Challenges regarding the ownership of AI-generated content and the “fair use” of protected data for training are now categorized as material risks. Companies are disclosing the high degree of uncertainty surrounding pending training-data litigation, which could strip them of key competitive advantages.

Regulatory Compliance: The current regulatory environment is a patchwork of AI-specific regulations and amendments to existing cyber security, discrimination, and consumer protection laws, among others – all being developed and implemented at a rapid pace and varying greatly at the state level, creating considerable compliance challenges for corporate officers. To demonstrate the pace at which AI legistlation is being introduced and passed: in 2023, there were fewer than 200 bills introduced, with a minority of those being passed – as of today, that number has gown to over 1,500 such bills being introduced with 100 AI regulations being pass in 2025 alone. Reference is made to this report. Compliance with emerging frameworks is cited as a risk that could result in substantial fines and operational injunctions.

Policies, Procedures and 3rd Party Governance: According to a recent report by Glass Lewis research assessing AI governance of S&P 100 companies, “65% of US investors believe companies should provide clear disclosure of the board’s oversight of AI governance issues and AI ethics“, however only 28% of those companies were reported to have an established AI policy with board level oversight. The Glass Lewis report can be found here. This percentage is likely even smaller for companies with lower market caps. These figures indicate a big disconnect with investor expectations, and are in stark contrast to the robust cyber security governance frameworks currently maintained by the vast majority of public companies.

Implications for D&O Liability and Board Oversight

For the D&O community, the 2025 10-Ks are a double-edged sword.

Securities Litigation Risks: The specificity of these 10-K risk factors raises the bar for “AI-washing” protection. If a company fails to meet its touted AI capabilities, overstates the extent to which services are performed by AI, falsely advertises its AI, or if a disclosed risk (such as a bias event) manifests after being dismissed as “immaterial” in previous statements, the company and its officers face a high probability of Rule 10b-5 class action lawsuits. Recently some companies have even been accused of falsely attributing AI as the cause for mass layoffs, which can also be considered a form of AI washing. The Guardian article can be found here. These detailed risk factors make it significantly harder for defendants to argue a lack of scienter when trying to survive a Motion to Dismiss.

Caremark Duties and Board Oversight: Under the Caremark doctrine, boards have a fiduciary duty to monitor “critical” business risks. By moving AI risks into the 10-K, companies have formally conceded that AI is a critical operational component. Boards that fail to implement “reasonable” reporting systems for AI performance and safety are now vulnerable to derivative claims for breach of the duty of oversight.

Individual Accountability: While there’s currently no specific SEC rule requiring the designating of individuals to oversee AI risk, disclosure requirements may emerge as regulatory scrutiny increases. Such requirements have previously been proposed by California’s SB468 and have already been adopted by EU’s AI Act which impose “designated party“ requirements for certain providers. Much of the increased liability related to the integration of artificial systems will utimately fall on the shoulders of the company’s CISO’s and technology officers (particularly in the context of privacy, security, and data collection) who will now need to navigate a more complex risk landscape including more complicated 3rd party governance, and emerging internal risks such as employee’s usage of AI systems. Individual liability is also likely to arise from regulatory enforcement, as regulators target individuals responsible for any AI failures and misleasing statements. Last year in a landmark enforcement action, the DOJ and SEC jointly brought their first AI washing action against the CEO of Nate Inc , over allegations that the the company misreprensented its AI capabilities to its investors. The press release can be found here.

Determining Materiality: Determining materiality in the context of cyber disclosures created considerable challenges for public companies, particularly as SEC guidance was in its infancy and still developing. Given the operational impact AI has on organizations, and considering the complexity of risks associated with artificial systems, companies are likely to encounter even greater challenges when considering materiality for AI related disclosures. When does a known LLM error meet the threshold for becoming material? At what point do inflated AI expenses, and/or a competitor’s adoption of AI (that could absorb a company’s market share) become material enough to require disclosures?

Insurance Underwriting Impact: D&O underwriters are using these expanded risk factors to distinguish between companies with mature AI governance and those relying on boilerplate language. The presence of localized, specific AI risk factors is becoming a primary differentiator for Side A/B/C coverage pricing. Furthermore, underwriters are increasingly focused on “Interrelated Wrongful Acts” to ensure that a single AI failure does not trigger multiple policy years or different coverage towers.

Actionable Insights for Boards and Underwriters

Enforce Disclosure Precision: To prevent “AI-washing” allegations, internal legal teams must ensure that every AI claim in the 10-K is backed by demonstrable technical capabilities and documented internal audits.

Mandate Board-Level AI Oversight: Boards should formalize AI governance through dedicated committees that include External AI Ethics Counsel. This bolsters the defense against Caremark claims by proving a robust information-gathering system was in place.

Adopt Holistic Governance Frameworks: Litigation risk is best mitigated by adopting standardized AI ethical guidelines and rigorous technical testing protocols that are applied consistently across all global business units.

Execute Integrated Data Audits: Companies must conduct regular audits of datasets used for AI training. This explicitly links the mitigation of IP infringement risks to the reduction of algorithmic bias, creating a cohesive narrative of proactive risk management.

Dynamic Regulatory Mapping: Establish a real-time compliance map to stay ahead of AI legislative shifts. For underwriters, the absence of such a map should be viewed as a significant red flag during the renewal process.

Careful Policy Coordination and D&O Audits: From an insurance policy perspective, both public and private companies alike will need to perform refreshed insurance coverage audits on all of their policies, specifically with AI in mind. While still rare, some D&O insurers are attaching AI specific exclusions. Equally problematic however are any “silent” exclusions that could preclude coverage, such as overly broad professional services exclusions, IP exclusions, contract exclusions, product defect exclusions, bodily Injury and property damage exclusions (that also preclude coverage for invasion of privacy), and cyber specific exclusions. CISOs, any desginated officers and those serving on any AI oversight commitees should ensure they qualify as insured persons under the policy’s defintinitions, and corporate officers should re-assess their Side A limits, accouting for the increased potential for new derivative litigation.

Lessons for the Private Sphere: Applying 10-K Insights to Non-Public Entities

While non-public companies are not bound by the same SEC reporting mandates as the 27 market leaders identified in recent filings, the 2025 10-K disclosures serve as a critical risk-mapping tool for private firms. The transparency provided by giants across sectors such as Technology (Alphabet, Meta), Banking (JPMorgan Chase, Citigroup), and Healthcare (UnitedHealth Group) offers a blueprint for identifying “blind spots” in AI implementation.

Regulatory Trickle-Down and Standard Setting: Private companies often operate within the supply chains or service ecosystems of the large public corporations listed in the sources. For instance, the rigorous AI risk frameworks disclosed by the banking sector—including Wells Fargo and Bank of America—frequently become the de facto industry standard. Private firms should anticipate that D&O liability standards will eventually mirror the “best practices” established by these public leaders, particularly regarding algorithmic transparency and data privacy.

Cybersecurity as a Shared Burden: The 10-K filings for 2025 emphasize that AI is a “double-edged sword” in cybersecurity. Companies like AT&T and Verizon highlight the risks of AI-driven social engineering and sophisticated phishing. For non-public companies, the lesson is clear: AI-related cyber-readiness is no longer optional. Directors and officers of private firms can be held liable for failing to oversee the implementation of AI-resistant security protocols that are now considered standard in the public sphere. As previously mentioned, improper data collection and failing to obtain consent is also driving litigation. The recent class action lawsuit: Lisota v Heartland Dental is one example of the risks posed by such failures. In the complaint, the plaintiff alleges that Heartland Dental and RingCentral’s AI enabled phone answering system, used by her dental practice, collected patient data without consent, in violation of Federal Wiretap Act. Similarly Runway AI, Perplexity AI and Clearview AI are among the growing list of private companies that have encountered litigation alleging unlawful data collection.

Disclosure Failures and Operational and Competitive Displacement: The disclosures from the Automotive (Ford, GM) and Chemical (3M, Dow) sectors illustrate how AI is fundamentally altering production and R&D. Non-public entities in these sectors must recognize that “AI-washing” is not their only risk; the failure to adopt AI—a risk frequently cited by Amazon and Netflix—can be just as damaging. Private boards must document their AI strategy to protect themselves against claims that they breached their duty of care by ignoring transformative technological shifts.

Ethical and Biometric Risks: With Meta Platforms and UnitedHealth navigating complex landscapes of user data and health algorithms, private firms in the consumer and medical space should use these 10-Ks to benchmark their own ethical AI guidelines. The litigation risks regarding bias and discrimination, which public companies must now disclose in detail, apply equally to private organizations and can lead to significant D&O claims if not proactively managed.

In summary, the 2025 10-K filings are not just a regulatory hurdle for the “world-famous” public elite; they are a forward-looking risk registry for the entire corporate world.

Reference Appendix

The following 26 unique companies provided the foundational data for this analysis through their Form 10-K filings for the fiscal year ended December 31, 2025.

Technology

• Alphabet Inc.
• Amazon.com, Inc.
• Meta Platforms, Inc.

• Netflix, Inc.
• Tesla, Inc.

Automotive

• Ford Motor Company
• General Motors Company
• Tesla, Inc. (Also listed under Technology)

Banking

• JPMorgan Chase & Co.
• Bank of America Corporation
• Citigroup Inc.
• Wells Fargo & Company

Insurance

• American International Group, Inc.
• Berkshire Hathaway Inc.

Healthcare / Health Insurance

• UnitedHealth Group Incorporated

Pharmaceutical

• Pfizer Inc.
• Eli Lilly and Company
• Merck & Co., Inc.

Food & Beverage

• The Coca-Cola Company
• McDonald’s Corporation
• PepsiCo, Inc.

Telecommunications

• AT&T Inc.
• Verizon Communications Inc.

Energy / Oil & Gas

• Exxon Mobil Corporation
• Chevron Corporation

Chemical

• 3M Company
• Dow Inc.

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Evan Bundschuh is Vice President at GB&A, a retail insurance brokerage in New York with a special focus on management liability risks including D&O, E&O, and cyber insurance programs.

Burkhard Fassbach is a D&O lawyer in private practice in Germany.

In a rare trial in a securities class action lawsuit, a federal jury has ruled that hedge fund Armistice Capital and certain of its executives had not, as the plaintiffs alleged, committed insider trading or engaged in a pump-and-dump scheme in selling over $200 million in vaccine company Vaxart stock during the COVID-19 pandemic. The jury specifically held that the plaintiffs had not proven that the defendants had engaged in a scheme to defraud and had not proven their insider trading allegations.

The April 28, 2026, verdict form in the case can be found here. Law360’s April 28, 2026, article about the verdict can be found here.

Background

Vaxart was (and is) a vaccine development company. By October 2019, hedge fund Armistice Capital (and related entities) had acquired 65.2% ownership of Vaxart, having purchased the shares at prices between 33 cents and 37 cents per share.

In early 2020, the company’s shares began to climb following company statements about its efforts to develop a COVID-19 vaccine.

On June 25, 2020, the company issued a press release announcing that it had entered into an agreement to enable the production of one billion or more COVID-19 vaccine doses annually. The company’s share price doubled on the announcement, from $3.61 per share to $6.26 per share.

On June 26, 2020, the company issued another press release stating that Vaxart’s vaccine had been selected for the U.S. government’s “Operation Warp Speed” (a government initiative to encourage the development of a COVID-19 vaccine). This announcement caused the company’s share price to rise to a high of $14.30.

Between June 26 and June 29, 2020, the securities lawsuit complaint alleged, Armistice sold over 27.6 million Vaxart shares, reaping profits of approximately $200 million.

As discussed here, in August 2020, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of California against the company; certain of its executive officers; and Armistice, related entities, and certain of its executives. After the plaintiffs’ complaint survived a motion to dismiss as to the company and the company’s executives, the plaintiffs settled with the company defendants for approximately $12 million.

The case went forward as to the Armistice defendants – Armistice Capital LLC, Armistice Capital Master Fund Ltd., Armistice founder Steven Boyd, and Keith Maher, Armistice’s managing director. The plaintiffs alleged and sought to prove that the Armistice defendants relied on supposedly false Vaxart press releases in order to be able to sell Armistice’s Vaxart shares at inflated prices. The plaintiffs also alleged that Boyd and Armistice were in possession of material nonpublic information about Vaxart when they sold their Vaxart shares.

The Trial

On April 14, 2026, trial commenced in the United States District Court for the Northern District of California in the plaintiffs’ case against the Armistice defendants, with Judge Vince Chhabria presiding. The trial continued for eight days.

Key evidence at trial related to Vaxart’s June 25 and June 26, 2020, press releases. Among other things, the plaintiffs contended that the press releases misleadingly omitted that Vaxart had not been selected for federal vaccine funding as part of “Operation Warp Speed,” and that what the company had been selected for was a request to test its COVID-19 vaccine on nonhuman primates. As the plaintiffs argued at trial, the press releases misleadingly suggested that Vaxart was receiving “a huge infusion of government cash to develop a vaccine.” Investors were not told “it was a monkey study.”

The Armistice defendants, for their part, argued that they were not responsible for the content of the disputed press releases, but rather that the press release contents were the responsibility and product of company management. Armistice also presented testimony it contended showed that the press releases were in fact accurate and true. Armistice also argued that the plaintiffs were trying to prove their case by cherry-picking headlines and words in the press releases, arguing further that a reasonable investor would not read or understand the press releases in that way.

According to the Law360 article to which I linked above, the jury deliberated for less than four hours over the course of two days before reaching its verdict. The jury specifically held that the plaintiffs had not proven that the defendants had engaged in a scheme to defraud and had not proven their insider trading allegations.

Discussion

As readers undoubtedly are aware, trials in securities class action lawsuits are exceedingly rare. Almost all securities class action lawsuits settle or are dismissed. Based on my sources, I estimate that out of the more than 7,000 securities class action lawsuits that have been filed in the United States since the beginning of 1996, only around 30 have gone to trial. (That is, less than half of one percent of all securities class action lawsuits filed since the beginning of 1996 have gone to trial.)

Although securities suit trials are quite rare, this case is in fact the second securities suit to go to trial in just the last few weeks. As discussed at length here, in March 2026, the class action securities lawsuit investors filed against Elon Musk in connection with his acquisition of Twitter went to trial, resulting in a split verdict that included jury findings that Musk had violated the securities laws with respect to at least some of the securities law violations the investor plaintiffs alleged in that case.

Though the trial in this case followed the trial in the Musk/Twitter acquisition case by just a few short weeks, before the March 2026 Musk/Twitter acquisition trial it had been (as far as I can tell from my sources) over three years before that since there had been a trial in a securities class action lawsuit. The most recent trial before the Musk/Twitter acquisition trial was the January/February 2023 trial in the Musk/Tesla “take private” case, as discussed here.

The defense verdict in this trial abets a cynical view I have long harbored (mostly silently), which is that if more securities class action lawsuits went to trial, fewer would get filed. Knowing they almost certainly will never have to substantiate their allegations, plaintiffs’ lawyers feel free to file securities lawsuit complaints with reckless abandon. More defense verdicts of the kind the jury reached here might (I have conjectured, at least to myself) check the aggressive impulses of at least some plaintiffs’ lawyers.

Of course, there are some obvious responses to this view – among other things, the plaintiffs in this case did prevail on the motion to dismiss and did secure a $12 million settlement from the Vaxart defendants. Moreover, the split verdict in the Musk/Twitter trial resulted in a plaintiffs’ verdict as to some of the claims in that case, claims that according to the plaintiffs’ counsel in that case could result in a damages award of over $2.5 billion.

In other words, notwithstanding the defense verdict in this case, there still are very good reasons why many defendants might choose not to go to trial, and there are no guarantees that even if more securities suits were to go to trial that the upshot would be that fewer cases would get filed, as I might have cynically supposed.

As I said in advance of the Musk/Telsa “take private trial,” these cases  “rarely go all the way to trial. In part because you are putting all of the outcome determination in the hands of a bunch of strangers.” 

The D&O Diary has chronicled mounting stress in the private credit market, underscored by the high-profile collapses of borrowers such as Tricolor and First Brands, and the resulting migration from borrower insolvency into securities litigation against private credit lenders themselves. This escalation highlights sharpening scrutiny from private credit fund investors and public shareholders alike. Exemplifying this trend, Blue Owl Capital Corporation (“Blue Owl”) recently moved to limit redemptions following a historic surge in withdrawal requests. This liquidity strain coincides with putative class actions filed in December 2025 and January 2026 (Blue Owl SCAs) as well as a derivative suit filed on April 27, 2026 (Blue Owl Suit).  

While the Blue Owl SCA alleges that Blue Owl’s leadership concealed pressures on the firm’s direct lending vehicles, the Blue Owl Suit additionally alleges that Blue Owl was acting in a dual capacity when determining illiquid private credit fund valuations.  Below, we discuss the allegations against Blue Owl and the developing D&O and E&O risks for private credit funds.

The Blue Owl Litigation

The Blue Owl SCAs, both filed in the United States District Court for the Southern District of New York (SDNY), allege that Blue Owl misrepresented the firm’s liquidity and mounting investor redemption pressures within its business development company (BDC) vehicles. Both cases claim that the firm artificially inflated its stock price by keeping shareholders in the dark about these material operational risks and, once redemption news became public, Blue Owl’s share price dropped significantly.  

The Blue Owl Suit, also filed in the SDNY, is brought by a shareholder on behalf of Blue Owl Capital Corporation, a publicly traded business development company (BDC), against its investment adviser, Blue Owl Credit Advisors LLC. The derivative complaint asserts claims under Section 36(b) of the Investment Company Act of 1940, alleging that the adviser breached its fiduciary duty by charging excessive fees that were not the product of arm’s-length bargaining.

The Blue Owl Suit centers on what it characterizes as a structurally conflicted arrangement. According to the allegations, the adviser serves both as portfolio manager and as the “valuation designee” responsible for determining the fair value of the fund’s largely illiquid private credit investments. Because the adviser’s compensation is tied to asset values, the plaintiff alleges that this dual role creates an inherent incentive to inflate valuations. The complaint contends that the adviser systematically overstated portfolio values, thereby increasing management and incentive fees.

The derivative lawsuit plaintiff also challenges the adviser’s compensation structure, which includes a management fee based on gross assets and an incentive fee tied to investment income, including non-cash income. A key focus is the use of payment-in-kind (PIK) interest, under which borrowers satisfy interest obligations by adding to the principal balance rather than making cash payments. The complaint alleges that PIK income was included in both net asset value and income calculations, increasing fees even where the income may never be realized. The Blue Owl Suit further alleges that the advisory agreement lacks a clawback provision, allowing the adviser to retain fees tied to unrealized or uncollectible income.

Discussion

The Blue Owl litigation highlights several structural features of private credit that are increasingly relevant to D&O and E&O risk.

Valuation opacity sits at the center of the derivative allegations and represents a growing source of D&O and E&O exposure for private credit funds. Because private credit portfolios frequently consist of illiquid Level 3 assets lacking observable market prices, valuations depend heavily on internal models and judgment. In the Blue Owl Suit, the plaintiff alleges that this risk was exacerbated by a structurally conflicted arrangement in which the investment adviser both determined asset values and benefited economically from higher valuations through management and incentive fees.

When compensation is directly tied to internally generated marks, plaintiffs may argue that boards failed to exercise adequate oversight of valuation processes or to manage disclosed conflicts. From an E&O perspective, these allegations implicate the adviser’s professional services in valuing and managing portfolio assets, potentially giving rise to claims that valuations were unreasonable, biased, or inconsistent with prevailing credit conditions.

The litigation also highlights increasing scrutiny of private credit fee mechanics, particularly where compensation is linked to gross assets or non‑cash income. The Blue Owl derivative complaint focuses on the adviser’s receipt of management fees based on gross assets and incentive fees that include payment‑in‑kind (PIK) interest, income that may never be realized in cash. According to the plaintiff, the absence of meaningful clawback provisions compounds this risk by allowing the adviser to retain fees tied to unrealized or uncollectible income. While framed as a fiduciary-duty claim under the Investment Company Act, these allegations also carry potential E&O implications, as they challenge how advisory services are structured, administered, and disclosed to investors.

Liquidity management is emerging as another potential fault line for both disclosure‑based liability and professional liability exposure. Many private credit vehicles offer periodic redemption features while holding inherently illiquid assets, creating a structural tension during periods of increased withdrawal requests. The securities class action allegations against Blue Owl, that management failed to disclose mounting redemption pressures and the likelihood of withdrawal limits, illustrate how liquidity strain can translate into allegations of misleading statements or omissions. Similar claims may also support E&O exposure where investors contend that liquidity risks, redemption mechanics, or product suitability were inadequately explained in offering materials or marketing disclosures.

Finally, broader market concerns about loan quality are amplifying these risks. Recent reporting has highlighted that large direct lenders may be extending increasingly risky loans to highly leveraged borrowers, raising concerns about default rates and portfolio resilience. These concerns are consistent with the allegations in the Blue Owl litigation regarding sector concentration and borrower stress. As credit conditions tighten, these underlying risks may translate into both performance deterioration and increased scrutiny from investors, regulators, and plaintiffs’ firms.

From a D&O insurance perspective, the Blue Owl litigation could highlight the importance of governance, disclosure, and oversight of conflicts. Boards of private credit vehicles may face heightened scrutiny regarding their approval of advisory agreements, oversight of valuation processes, and management of liquidity risks. At the same time, from an E&O perspective, there may be increased scrutiny over a private credit fund’s underwriting standards, portfolio construction, and fee mechanics. The convergence of these risks suggests that claims may have the potential to implicate both coverages.

With respect to credit funds themselves, the Blue Owl case may represent an early indicator of how private credit risks will be litigated in the coming years. As the asset class continues to grow and encounters more challenging economic conditions, issues of valuation, liquidity, underwriting discipline, and fee alignment are likely to remain at the forefront.

Artificial intelligence (AI) is an increasingly important part of business strategy for many companies. As AI has become increasingly important in the corporate world, some commentators suggest that corporate boards not only need AI fluency but in fact need a specialized AI expert.  These suggestions about board expertise may present challenges for many boards, as boards seek to balance a host of competing objectives and interests. An April 15, 2026, memo from the Debevoise & Plimpton law firm (here) takes a pragmantic approach, proposing that the appropriate AI governance framework “will differ for each company and should align with the company’s strategic needs and relationship to technology.”

The law firm memo opens by noting that many corporate boards are “considering whether they have the expertise necessary to maintain effective oversight of AI-related opportunities and risks.” The memo suggests that there are three considerations for boards evaluating the need for AI expertise in the boardroom.

The first consideration the memo identifies is that “adding a dedicated AI expert may present challenges.” For starters, the “pool of individuals with both deep AI expertise and the qualifications to serve effectively as a public company director is limited.” In addition, the percentage of companies for which AI is “so fundamental to their business that it requires an AI expert on the board is very small.” Moreover, appointing a director with AI expertise could raise questions about the adequacy of board expertise for other areas of enterprise risk (such as, for example, cybersecurity, political risk, or environmental risk.)

In addition, the memo points out, having an AI expert could “inadvertently undermine effective board dynamics,” for example, by causing other directors to defer to the expert, a deference that could “undermine the collective decision-making that is at the heart of board function.” The expert’s presence could also “reduce other directors’ incentives to learn about AI.”

Finally, any individual with sufficient AI expertise is likely to have extensive technology industry experience, and therefore may have conflicts of interest, such as AI investments or relationships with vendors, that could require “careful management.”

The second consideration that the memo notes for companies considering their need for board AI expertise is the fact that boards may rely on management and experts with respect to certain matters. Delaware General Corporation Law Section 141(e) provides that directors shall be “fully protected” in relying in good faith on information, opinions, or reports from corporate officers, employees, and experts who have been selected with reasonable care. Company boards therefore often rely on experts when exercising corporate oversight. Accordingly, directors may appropriately rely on management or experts to assist the board in assessing AI-related risks and opportunities.

The third consideration that the memo notes is that “management and outside advisors can supplement board expertise,” by providing appropriate education and regular reporting on the company’s use of AI and the associated risks. Legal consulting and technical advisors can also provide board-level education to assist boards in understanding emerging legal and regulatory developments and to assist board in identifying opportunities and risks associated with the use of AI.

At a minimum, the memo suggests, boards should possess “a baseline AI literacy.” As AI becomes increasingly important, investors “increasingly expect disclosure of relevant board skills and expect companies to establish appropriate oversight processes to manage evolving AI-related risks and opportunities.”  The memo concludes by noting that “clear disclosure of the board’s oversight framework, use of internal and external expertise, and approach to AI governance can help shareholders better understand the company’s risk management processes and strategic positioning.”

Discussion

Like many of you, over recent months I have read and seen a lot about AI and corporate governance. I am skeptical of commentators who suggest that all corporate boards must bring on directors with specialized AI expertise. My instincts are consistent with the message in this law firm memo, which is that a dedicated AI expert is not going to be the correct solution for every company. For starters, as the memo correctly points out, there is not a large universe of individuals who have sufficient AI knowledge to qualify as an AI expert and who also are otherwise qualified to serve on a corporate board.

There is another reason I am skeptical of the position that every corporate board needs an AI expert. That is, pretty much every corporate board has a wide variety of concerns and issues it must be prepared to monitor, assess, and address. My specific objection is that over the years, observers and commentators have tried to suggest that corporate boards should include individuals with specific expertise in a wide range of concerns and topics.

Among other things, at various times commentators have tried to suggest that corporate boards should have not only individuasl in expertise in financial reporting and accounting, but also with respect to cybersecurity; risk management and enterprise risk; Environmental, Social, and Governance (ESG) issues; human capital management; and geopolitical or supply chain risk. While having access to expertise in these areas may well be indispensable for corporate boards, that does not necessarily mean that the only approach to address this need is to appoint a director with the requisite specialized expertise.

My deeper concern with this push toward enlisting directors solely because of their specialized expertise in a single area is that it necessarily reduces the number of individuals in the boardroom who can muster the kind of industry-specific or operational knowledge and expertise that can be indispensable for the success of any enterprise. To be effective, a board room should include individuals who know what it takes for an enterprise (and more importantly, the enterprise) to succeed.

To be sure, that does not mean boards are at liberty to disregard the risks and opportunities related to areas of specific concerns, such as, for example, with respect to AI. It does mean that the well-advised board will want to ensure they marshal the right kind of expertise so that the board is sufficiently well informed to fulfill its duties. Moreover, boards should not only have these processes in place, but should fully document their execution of these processes, in order to substantiate that theyhave taken steps to ensure that they can show that they appropriately took steps to fulfill their oversight responsibilities.

There is no doubt that in the weeks, months, and years ahead, boards will face heightened scrutiny with respect to AI-related issues.  While this observation may be true of most enterprises, that does not mean there is a single governance approach or structure that will be the best solution for every company. Each board should assess the company’s specific circumstances in order to determine whether having a board member with AI expertise is the bests solution for the enterprise. As the law firm memo suggests, boards will want to take a pragmatic approach to these questions.

The recent Chapter 11 filing of QVC Group, Inc. (QVC) underscores a trend that has been building over the past year: consumer-facing companies, facing a combination of leverage, shifting consumer behavior, and tightening credit conditions, are increasingly turning to the bankruptcy courts to restructure their obligations. As recent reporting has highlighted, the QVC’s filing follows mounting losses and ongoing pressure on its traditional television-based retail model, as consumers continue to migrate toward digital and social commerce platforms. Against this backdrop, the QVC filing reflects not only company-specific challenges but also broader structural shifts affecting legacy retail and media-driven commerce businesses.

As D&O Diary readers are aware, bankruptcy filings do not just represent financial events; they often mark the beginning of a complex sequence of claims and coverage issues that can have significant implications for directors, officers, and their insurers. The QVC filing provides a timely reminder of the types of risks that can arise when a company restructures under Chapter 11, and the potential impact on D&O insurance programs in anticipation of these scenarios.

The QVC Chapter 11 Filing

On April 16, 2026, QVC and numerous affiliated entities filed voluntary petitions for relief under Chapter 11 in the United States Bankruptcy Court for the Southern District of Texas. The filing reflects a prepackaged restructuring effort, with the company indicating that a plan of reorganization had already been negotiated and that creditor acceptances had been solicited prior to the filing. 

QVC, a video retailing, ecommerce, and social commerce company, reported significant scale at the time of the filing, including estimated assets and liabilities each in the range of $1 billion to $10 billion, and a creditor base estimated between 50,001 and 100,000 creditors. These figures highlight both the size of the enterprise and the breadth of potential stakeholders involved in the restructuring process.

The filing was part of a broader restructuring supported by agreement and accompanied by debtor-in-possession financing, including a letter of credit facility of up to $300 million. According to the bankruptcy filings, QVC relies on letters of credit to provide security for vendors and anticipates a greater need for such security instruments during its bankruptcy. The debtor had about $281 million in face amount of letters of credit as of the petition date, which was up from $108 million in December 2024. 

Discussion

In QVC’s case, the pressures that led to its Chapter 11 bankruptcy include declining traditional television viewership, migration to digital and social commerce platforms, rising costs, and substantial leverage. These challenges purportedly translated into mounting losses and continued pressure on the company’s legacy business model, reinforcing the broader industry shift away from traditional home-shopping formats toward more interactive, digital-first commerce channels.

Layered with D&O insurance coverage disputes in the bankruptcy context, a corporate bankruptcy filing may mark the beginning of potentially prolonged liability exposure for directors and officers. Indeed, the period leading up to a bankruptcy filing, as well as the restructuring process itself, can give rise to the types of claims that may implicate D&O insurance.

First, bankruptcy can shift the identity of the likely plaintiffs. Following a Chapter 11 filing, claims are often brought not by shareholders, but by bankruptcy trustees, creditors’ committees, or litigation trusts established under a plan of reorganization. These parties may assert breach of fiduciary duty claims, alleging that directors and officers failed to properly manage the company as it approached insolvency.

Bankruptcy filings raise questions about the availability and structure of D&O coverage. In many cases, a bankruptcy filing or related transaction may trigger a change-of-control provision in the D&O policy, converting the policy into runoff and limiting coverage to pre-filing wrongful acts. As a result, decisions made during the Chapter 11 process may be at its highest and may be accompanied by D&O coverage issues.

Companies that require significant post-petition financing may face increased scrutiny from lenders and other stakeholders, potentially leading to additional claims. Thus, D&O underwriters may want to consider the impact of DIP financing and restructuring dynamics on exposure. New lenders and stakeholders may have both the incentive and the resources to pursue D&O claims against the debtor, particularly if the restructuring does not achieve the intended outcome.

With respect to D&O coverage, Bankruptcy can also raise issues relating to insured versus insured exclusionary language. Because many post-bankruptcy claimants, such as trustees or litigation trusts, may be deemed to stand in the shoes of the company, coverage for these claims can depend on D&O policy carvebacks. Given the central role that trustees, creditors’ committees, and litigation trusts play in post-bankruptcy litigation, the breadth of these carvebacks can significantly affect the practical availability of coverage.

While it may not necessarily be the case for QVC, another D&O coverage consideration is how bankruptcy proceedings can accelerate erosion of policy limits. Defense costs associated with restructuring-related disputes, regulatory inquiries, and early-stage litigation may consume available limits, leaving less protection available for later, potentially more significant claims.

For D&O underwriters the risk that a company may file for bankruptcy during the policy term consideration is often given over change-of-control provisions, the scope of runoff coverage, and the availability of Side A protection for individual directors and officers. More broadly, the various recent bankruptcy filings reflect the continuing relevance of the issues discussed we have discussed concerning bankruptcy-related coverage disputes.

Notably, many of the most significant coverage issues do not arise until after a bankruptcy filing, when competing interests among insureds, claimants, and insurers come into sharper focus. In the end, the various recent bankruptcy filings may serve as yet another reminder that bankruptcy is not merely a financial restructuring process, but also a legal and insurance event with significant implications for D&O liability.

In recent months, securities class action litigation patterns involving AI-related disclosures have emerged and developed, as has been documented on this site (most recently, for example, here). There has of course been a great deal of other kinds of AI-related litigation, including lawsuits involving intellectual property issues, privacy and data-collection concerns, discrimination and bias claims, and a variety of different kinds of tort allegations.

In a shareholder derivative lawsuit recently filed against the board of software firm Adobe, these two lines of AI-related litigation crossed; the plaintiff shareholder alleges that the defendants violated their board duties by knowingly permitting the company to train its artificial intelligence tools using material copyrighted by others and in a way that subjected the company to IP-related litigation. As discussed below, the new lawsuit illustrates how the broader range of AI-related litigation can translate into follow-on D&O claims, representing yet another area of AI-related D&O risk.

Background

Adobe is a software firm that provides a variety of services including AI services. Among the firm’s AI services is its SlimLM series of small language model (SLM) software optimized for document assistance tasks on mobile devices. The firm’s SLM tools are trained, according to the subsequently filed securities lawsuit complaint, by “ingesting datasets that are chosen by Adobe personnel.” These training tasks involved the “collection and use of millions of lines of text.”

According to the complaint, among the datasets Adobe used to train its SLM tools are the Books3 dataset, which, according to the complaint, “contains hundreds of thousands of copyrighted books that were pirated without authorization or consent of the authors”; and the “Common Crawl” dataset, which, the complaint alleges “is also known to contain copyrighted and unauthorized materials.”

The complaint alleges that Adobe’s directors and officers “knew of the copyright violations being perpetrated through” Adobe’s SLM platform. Rather than “use a clean dataset,” Adobe’s executives, the complaint alleges, “followed a ‘ask forgiveness not approval’ model and adopted and implemented an unlawful plan to use a pirated data set” to develop the firm’s AI services. This misconduct, the complaint alleges, “constitutes bad faith and a violation of positive law” in “directing, approving, or permitting” the misconduct.

The complaint goes on to allege that this alleged misconduct has “resulted in multiple copyright holders filing lawsuits” against Adobe based on the firm’s alleged “failure to compensate [copyright holders] for downloading, copying, storing, or using their copyrighted works,” for which Adobe now faces “potential massive liability.” The company’s executives, the complaint alleges, were well aware of the issues with using the copyright holders’ copyrighted works, as well as of the potential liability for the company’s unauthorized use of copyrighted materials. The company has now been hit with multiple IP-related lawsuits filed on behalf of persons who allege that Adobe violated their copyrights.

The complaint alleges that after the first of several IP related lawsuits were filed against Adobe, its share price declined more than 25%. The complaint also alleges that as a result of “all of this misconduct and violations,” Adobe’s CEO and Chairman, Shantanu Narayen, stepped down from his position on March 12, 2026. Narayen’s departure was “specifically linked to Adobe’s failed AI strategy.”

The D&O Lawsuit

On April 24, 2026, a plaintiff shareholder filed a shareholder derivative lawsuit in the Northern District of California against Narayen and 13 other current and former officers and directors of Adobe, as well as against Adobe itself as nominal defendant. A copy of the complaint can be found here.

The complaint includes four substantive counts: first, a count alleging that all defendants violated their fiduciary duties; second, a count against all defendants alleging waste; third, a count against the director defendants alleging their violation of Section 14(a) of the Securities Exchange Act of 1934, in connection with the company’s proxy statements; and fourth, a count against defendants Narayen and Adobe CFO Daniel Durn for alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder in connection with alleged misrepresentations in the company’s disclosures and public statements.

The complaint seeks to recover damages Adobe allegedly sustained as a result of the alleged violations, and also seeks corporate governance reforms.

Discussion

The new Adobe derivative complaint has only just been filed and it remains to be seen how it will fare as it progresses. Readers of this site know well that derivative lawsuits are subject to formidable defenses, including, among other things, the demand requirement and the business judgment rule. The defendants undoubtedly will file motions to have the complaint dismissed based on these standard derivative suit defenses.

Regardless of how this complaint ultimately fares, the complaint itself is interesting for those whose jobs it is to worry about the potential liabilities of corporate directors and officers. That is, the complaint represents an example of how other kinds of AI-related liability exposures and litigation risks can translate into D&O claims.

It is not news that AI tool developers have been sued based on allegations that the companies have violated the copyrights of content owners by using the content to train their AI models. But while this kind of litigation is not new, what is new is for this type of litigation to lead to D&O related claims through follow-on litigation.

This development is important for what it represents in terms of potential AI-related D&O exposure. There is a great deal of discussion (and even arguably even agitation) in the insurance world in general, and in the D&O insurance world in particular, as industry professional try to assess and understand what kind of liability exposures will arise out of companies’ widespread adoption of AI strategies, AI processes, and AI tools. This new lawsuit, filed as a follow-on to intellectual property litigation involving AI-related allegations, represents a concrete example of a kind of D&O related liability exposure can arise from a company’s AI-based strategy.

It is important in thinking about the potential significance of this development to understand that the many other kinds of AI-related litigation – not only IP-related litigation, but privacy; discrimination and bias; and other types of tort litigation – could similarly lead to follow-on D&O litigation involving the same kinds of duty breach allegations raised in this complaint. To be sure, this phenomenon may be yet another example of the ways in which everything sooner or later becomes a D&O claim. While this observation about everything becoming a D&O claim may these days be a commonplace, that does not make it any less real.

The bottom line is that as allegedly aggrieved parties continue to conjure up ways in which they alleged that they have been harmed by artificial intelligence, these allegedly aggrieved parties’ claims may at least potentially trigger parallel follow-on D&O lawsuits, in which the underlying allegations are relied up on to support D&O liability claims.

As D&O professionals these days increasingly are called upon to assess how the widespread adoption of AI can contribute to D&O risk, it will be important to consider the risks associated with this type of AI-related follow-on litigation.

The D&O Diary’s European travels continued earlier this week with a first-time ever visit to Albania, the rugged country on the Adriatic and Ionian coasts of the Balkan Peninsula, tucked between Montenegro and Greece. The country still retains many vestiges of its 20^th century communist era, but it is modernizing quickly, and it remains a topographically diverse, naturally beautiful country.

Albania is geographically small, only about the size of the U.S. state of Maryland. The country has a population of about 2.4 million people, with the largest number located in its capital, Tirana. For most of the 20^th century, Albania was one of Europe’s poorest countries, owing to its economic and political isolation, and infrastructure limitations. Since the 1991 collapse of the country’s communist regime, and particularly in the most recent years, the country has made great strides, particularly in infrastructure development and education. Many of the vestiges from the country’s earlier struggles remain, however.

The first stop on my Albania tour was to the country’s capital city of Tirana, located in the country’s center and surrounded by mountains. Tirana is a big, busy city, now bristling with a number of new, taller buildings in the city center. Some areas of the city –particularly in outlying areas — still retain a ramshackle feel from the the country’s 20^th century isolation, while the center city projects an air of aspirational dynamism that is palpable.

After my brief visit to Tirana, I was off to explore other areas of Albania. I went next to Vlorë (pronounced VLOR-uh), two hours south by car from Tirana and part of the coastal area of the country known as the “Albanian Riviera.” Vlorë, which has a population of just under 100,000, is at the northern end of Albania’s Ionian coast. The city was briefly the capital of Albania at the time the country first became independent in 1912.

Vlorë is great and by all rights I should have enjoyed a great visit there. Unfortunately something unexpected happened on the day of my first visit. A dog bit me. I had seen the group of about five or six dogs lounging on the beach on the outbound leg of my first seashore walk upon arrival. They paid no attention to me and I paid no attention to them. On my return, I noticed that the dogs were up and moving around, but again I paid no attention. Before I realized what was happening, one of the dogs had wheeled around behind me, and bit me on the leg. This was not a friendly nip. This was a forceful, vicious bite that was intended to do damage. My first instinct was to retaliate, but when I shouted and wheeled around to face the dog that attacked me, the other dogs suddenly perked up their ears and took three or four steps toward me. I realized that if I took even one more step, I would be dealing with six dogs, not just one dog. I backed away and headed to my hotel room and cleaned out my wound. (I always keep a stash in my backpack of those alcohol wipes that the airlines started to give out to passengers during the pandemic.) Enough time has passed that I think I can be sure that the bite wound won’t get infected, but the incident certainly affected my perception of Vlorë. Travel can be so much fun, but it can all go bad in a big hurry, too.

I know from my convesations with other Americans as I was planning to on this trip that there are three things I need to address about Albania as part of this travel post.

First, is Albania safe? Pretty much every single American to whom I mentioned that I was going to Albania asked me this questoin. (They were not asking about the dog problem in Vlorë; they were asking about crime.) I would say that Albania is as safe as any other European country. I certainly saw nothing (other than the stupid dogs) that gave me even the slightest concern. I think Albania’s vague reputation for crime reflects the fact that its prior communist regime was a corrupt mafia state. I have to say, at no point during my visit did I have even the slightest concern about my safety or security (at least as pertains to other humans).

Second, what about the currency? It is true that Albania is mostly a cash only country. Perhaps this is a vestige of the day when it was a corrupt mafia state, as a result of which there is little trust in the financial system, so cash is king. I also was told that the bias in favor of cash is reflection of tax aversion. The local currency in Albania is the lek. The current exchange rate is roughly 80 leke to the U.S. dollar. However, many shops and restaurants will take Euros. On each occasion when it was time for me to pay, I found myself wresting with a pocketfull of bills and coins. My main objective was to make sure I spent all of my leke, as they certainly were not going to be useful anywhere else. It has been a very long time since I have had to mess around with cash while traveling, and I have to say it is a huge pain.

Third, what about the language? It may come as no surprise to you that I do not know a single word of the Albanian language. As it turned out, my ignorance of the Albanian language was never a problem. Pretty much every one I interacted with spoke at least a little bit of English. In fact, most people started out addressing me in English. The young people in particular seem very comfortable interacting in English.

Overall, I had a great visit to Albania. I know I should not let the stupid dog bite color my perception, but I would be lying if I tried to pretend that it did not. To the extent I can put the dog bite out of my mind, I am able to say that otherwise I enjoyed my Albanian visit, and subject only to a warning about the dogs, I would recommend Albania as an interesting, different kind of place to visit.

Federal regulators are increasingly adopting a more crypto-friendly, and more formal approach to bank supervision, one that may have important implications for D&O liability.  Following the President’s August 2025 “Guaranteeing Fair Banking” Executive Order (EO), the Office of the Comptroller of Currency (OCC) issued bulletins in September 2025 to curb “debanking”.  This guidance forces banks to base service decisions on objective risk, rather than social or political motives. Guidance that is further reinforced by the February 26, 2026 Federal Register release and proposal to restrict banking officials from forcing banks to cut ties with clients engaging in controversial but lawful activities.

This shift comes at a pivotal moment for digital assets. As we recently discussed, the SEC has issued detailed guidance distinguishing between digital assets that are subject to the federal securities laws and those that are not, while also clarifying how and when assets may transition into securities status. Taken together, these developments suggest a broader regulatory effort to normalize the treatment of crypto-related activities within existing financial frameworks.

The End of “Reputation Risk”

Notable, an October 2025 Notice of Proposed Rulemaking by the Federal Deposit Insurance Company (FDIC) and OCC asserted that, for years, “reputation risk” has functioned as a catch-all concept within bank supervision. While often framed as a legitimate concern, i.e., the risk that negative public perception could harm a bank’s financial condition, it has also been criticized as inherently subjective and difficult to apply consistently.

The recent regulatory developments, immediately following the President’s EO, reflect a clear effort to eliminate that subjectivity. By directing examiners to focus on measurable risks, like credit, liquidity, operational, and legal risks, regulators appear ready to sideline instances of supervisory discretion and prevent informal pressure on banks to disengage from certain industries.  This may mean that banks may no longer rely on regulatory expectations tied to reputational concerns when deciding whether to serve customers in controversial sectors. Nor may regulators encourage or compel such decisions.

Crypto and Access to the Banking System

The implications for the digital asset sector could be immediate. As has been widely observed, one of the most persistent challenges facing crypto companies has been access to traditional banking services. Even where activities were lawful, financial institutions may decline relationships due to perceived regulatory scrutiny and reputational concerns.

The removal of “reputation risk” from the supervisory framework may ease those constraints. Banks that previously avoided crypto-related clients, whether exchanges, custodians, or stablecoin issuers, may now reassess those decisions in light of clearer regulatory expectations.

At the same time, this shift does not eliminate underlying risks. As we have also previously discussed, crypto-related businesses continue to face significant governance, fraud, and disclosure challenges. These underlying risks are amplified by escalating geopolitical threats, such as reports that Iran is actively using cryptocurrency to circumvent Western sanctions and finance operations during the current conflict with the United States.

Reframing Risk Oversight

There may also be broader D&O underwriting takeaways, aside from the impact to the cryptocurrency, from the federal government’s clear signal to stop institutional “debanking.” Reputational risk has often been treated as a core component of enterprise risk management. The federal government’s regulatory retreat from that concept, with respect to banking, may prompt boards of companies that are in the business of or invest in digital assets and other “morale hazards” to reconsider how such risks are categorized and monitored.

There may be D&O exposure risk, however, if boards fail to appropriately oversee emerging risks particularly in fast-moving areas such as digital assets.  Taking a more laze fare approach could result in shareholder scrutiny claims that a board breached its oversight obligations, even if those risks were not framed in traditional “reputational” terms.

Disclosure Challenges and Securities Litigation Risk

The divergence between regulatory policy and securities law obligations presents another area of potential D&O exposure. Public companies may disclose reputational risk as a material factor in their filings. The question now is whether those disclosures should evolve considering the regulatory shift of what could be considered “reputational harm.”

As our readers may recall, failure to sufficiently disclose material reputational risks may expose a company to potential securities litigation. This tension could become pronounced in the crypto sector and for companies that have created crypto treasures. Market volatility may heighten the importance of accurate and complete disclosure. Statements about regulatory compliance, banking relationships, and business continuity may all become focal points in subsequent litigation.

“Debanking” and Emerging Liability Theories

Furthermore, the effort to curb debanking could introduce new potential avenues of liability. Financial institutions that terminate customer relationships may now face increased scrutiny, particularly if those decisions cannot be tied to objective, documented risk factors.

Without the ability to point to regulatory pressure grounded in reputational concerns, banks may be more vulnerable to claims that account closures or service denials were arbitrary, discriminatory, or inconsistent with stated policies. These disputes could broaden governance and oversight issues.

From a D&O perspective, this may raise the prospect of being drawn into litigation involving customer selection, risk management practices, and internal decision-making processes.

Conclusion

Federal regulators’ retreat from “reputation risk” could reflects an effort to bring greater objectivity and consistency to bank supervision, while addressing concerns about debanking and access to financial services. At the same time, it coincides with a broader shift towards normalization of digital asset activities within the regulatory framework. For D&O underwriters, the implications could be more complex.

Reputational considerations remain highly relevant. Regulatory change does not eliminate exposure but could reshape it. And in this instance, the retreat from “reputation risk” may ultimately heighten the importance of how companies identify, manage, and disclose the risks that regulators are no longer explicitly naming.