In the following guest post, James Sterling, Claims Counsel, Euclid Financial & Professional Risks, and Mike Newham, Partner, RPC, consider the economic and underwriting risks associated with the private credit markets. A version of this article previously was published on LinkedIn and on Euclid’s website. My thanks to James and Mike for allowing me to publish their article as a guest post on this site. Here is the authors’ article.

**********************

With the US leading the way in growing the Private Credit space and the European and AsiaPac markets also on the up, this article outlines the basics of the private credit market, as well as how this may impact the Financial Institutions (PI, D&O and Crime) underwriting space.

What is Private Credit

Private Credit is essentially: “commercial loans extended by traditionally non-bank financial institutions”. A nascent market at the turn of the century, it picked up speed after the GFC (when it was more commonly referred to as “shadow banking”), continued to strengthen during the COVID era and is now very much in vogue.

This is primarily due to commercial borrowers needs not being met by traditional bank loans, more relaxed financial regulations and potentially superior investor returns. Supply and demand is higher than ever (typical borrower enterprise values are between USD 25m – 1bn), with the larger banks also now competing in this space, alongside more traditional institutional investor vehicles (dominated by large-scale fund managers).

The definition is so wide and the market so big that it is impossible to avoid for any FI insurance specialist, with exposure existing across asset management, credit and insurance markets. This is not to say that all Private Credit businesses are risky but, within any expansive market – particularly if applicable regulation is more relaxed – issues will occur, whether misconduct or more ordinary failures.

The Economic Risk

Regulators in major financial centres are looking proactively at the industry, seeking to strike a balance between supporting the economy and innovation but also getting ahead of any systemic financial issues.

Concerns include:

• The current frequency of adverse financial headlines and potential for wider market contagion.
• The development of a secondary trading market and opaque loan portfolio valuations (potentially masking poor or under-performance): remember the GFC sub-prime crash?
• Though default rates seem lower, there is less public information, more investor patience and more willingness to restructure. In particular, the use of Payment in Kind (PIK) notes which allow debtors to defer repayments avoiding default but at an extra cost.
• More traditional lenders being double-parked: both lending to the institutional investors and having their own lending skin directly in the game.
• The growing interrelationship between the investment/growth in AI (another  potential “bubble”) and Private Credit funding of the same.
• And, of course, the increasingly volatile geopolitical and macroeconomic landscape (e.g. the recent war in Iran and the impact on oil prices and interest rates).

Regulators on Watch

ASIC (the Australian Securities and Investments Commission) has probably been the most engaged in this space, with the iProsperity Group collapse one of the most notorious ongoing criminal and civil cases emanating out of ponzi scheme and associated Private Credit fraud. The UK has also been stepping up its oversight, with the FCA (Financial Condict Authority) reviewing net asset (loan) valuation (NAV) processes (March 2025) and the Bank of England announcing plans to stress-test the sector (December 2025). This is seemingly in good time, given the February 2026 insolvency of Market Financial Solutions and purported wider market contagion (including inter-private credit lending).

And US Regulators have also had to increase monitoring and enforcement activity, with their hand forced by the collapses of auto enterprise borrowers First Brands & Tricolor (and the seemingly significant frauds subsequently exposed). There has also been recent high-profile news surrounding liquidity/redemption mechanics and portfolio valuation scrutiny impacting large fund managers such as Blue Owl, Blackstone and Blackrock, not least as a result of the concern over the impact AI may have on borrower software firms.

The Underwriting Opportunity

With risk comes opportunity and this certainly extends to the FI underwriting arena, where theoretically every risk is writeable at the right price and with suitable policy terms and conditions. When evaluating Private Credit risks, relevant underwriting factors might include:

• The Insured:
  • What is the Insured’s role (investment manager, originator, lender, arranger, servicer or other FI)?
  • What asset types are in scope (direct lending, real estate debt, NAV finance, specialty finance, structured credit)?
  • How material is Private Credit to the overall business (AUM, % revenue, concentration by fund)?
  • Are fund investors sophisticated enough to understand the risks?
  • How are loans funded and structured and who are the key counterparties?

• Due Diligence:
  • How diversified is the portfolio by sector, geography, borrower size and sponsor concentration?
  • What are typical leverage metrics and underwriting standards (e.g. EBITDA multiples, covenants, loan to value ratios)?
  • Are loans (or fund interests) sold, syndicated or otherwise traded, and what controls govern pricing and transfer?
  • What stress-testing is performed (rate shocks, recession/default spike, liquidity squeezes) and how are results used in decision-making?

• Portfolio performance:
  • What metrics are applied to arrears, defaults, restructurings and recoveries?
  • To what extent are PIK features used and what is the rationale and monitoring approach?
  • How common are “bullet” repayment structures and what refinancing/liquidity assumptions underpin them?
  • How are loans valued (policy, frequency and governance) and is there independent third-party validation?
  • What is the claims and incident history (including near-misses) and how has underwriting/growth affected controls and reporting?

• Compliance:
  • Is governance clear and documented (tone from the top, committee structure, delegated authorities and MI)?
  • What regulatory regimes apply (by domicile and investor base) and how is compliance with relevant guidance evidenced?
  • What conflicts of interest exist (e.g., “double-parked” lending, affiliated transactions) and what controls/independence safeguards apply?
  • What are the key macro sensitivities (interest rates, inflation, refinancing risk, sanctions, tariffs and other geopolitical factors) and how are they managed?

Policy Response

Whilst FI policies are not written to be a financial backstop to failed investments, coverage is often triggered as a result of the decisions/acts which lead to that failure. For example, when underwriting investment managers (who are increasingly prolific in this space), Private Credit might still be seen as a slightly novel “investment management” activity: do the IMI policies recognise that some managers are directly originating loans? Therefore, consideration should be given as to the scope cover being sought, not least for claims arising out of lending (including failure or refusal to lend) and valuation activity, as well as any restructuring/insolvency liabilities.

Claim Types

These are mainly claim types we have seen before, just with some different FIs now being implicated and potentially evolved policy terms:

• PI
  • Investors: alleging negligent underwriting, monitoring or valuation of loans (including whether reliance on offering materials was reasonable versus investors’ own due diligence).
  • Borrowers: challenging enforcement/recovery/default proceedings (particularly where insurance policies do not exclude  lenders’ liability claims).
  • Versus Service Providers: trustees, fund custodians, accountants, valuers, lawyers, brokers and insolvency specialists can all find themselves targets.

• D&O
  • Investor/shareholders: alleging misrepresentation of strategy, risk appetite, leverage or portfolio composition and for failures of oversight/governance.
  • Insolvency: alleging breach of directors’ duties in the period proceeding entering into an insolvency process.
  • Conflicts of Interest: Actual or perceived conflicts of interest.
  • Regulatory: investigations and enforcement actions.

• Crime
  • Internal/External Fraud: misappropriation of funds, fictitious borrowers/loans, collateral issues (non-existent, misvalued, multiple-pledged).

Concluding Comments

As the law firm RPC highlight: “private credit is not the one-size fits all, low-risk and high-reward panacea that its most enthusiastic proponents promote”.  Insurance market participants should understand that, with the growth of Private Credit, comes risk and opportunity. Clients who demonstrate robust risk management and transparency in their approach to exposures – through diversification, rigorous due diligence and expert delivery – will attract more underwriter competition. Brokers can help Underwriters understand each prospective client’s business model, funding structure, and approach to compliance and ensure coverage is tailored to the specific risks operating in the fast evolving Private Credit industry.                                                                                      

March 2026

Public company D&O insurance policies restrict “entity coverage” (that is, coverage for claims directly against the corporate entity, as opposed to those against individual directors and officers) to “Securities Claims.” If a claim against the company is not Securities Claim then there is no coverage for the company’s defense fees, settlements, and judgments. This obviously creates a huge incentive for the companies to try to show that the claims against them are Securities Claims – which, in turn, has spawned a great deal of coverage litigation addressing the question whether or not a particular corporate lawsuit is or not a Securities Claim.

In the latest example of these kinds of coverage disputes, last week the District of Maryland, applying Maryland law, held that an antitrust claim filed against a corporate entity was not a securities claim within the meaning of the applicable policy – not because the antitrust claim was not “Securities Claims,” but rather because the dispute did not involve alleged transactions in the securities of the company or its subsidiaries. The Maryland court’s March 24, 2026, opinion can be found here.

Background

Supernus Pharmaceuticals is a pharmaceutical company based in Maryland. In 2020, as a way to acquire the rights to distribute Apopkyn, a prescription medication for the treatment of Parkinson’s disease, Supernus acquired USWM Enterprises (“Enterprises”).

In 2022, Sage Chemical and TruPharma, two competitors of Supernus, sued Supernus, alleging that Supernus’s acquisition of Enterprises, and specifically its acquisition of the rights to distribute Apokyn, violated the antitrust laws, and that Supernus otherwise engaged in uncompetitive behavior.

Supernus submitted the antitrust lawsuit to its D&O insurer as a claim under its policy. The insurer denied coverage for the claim, on the grounds that the underlying action is not a “Securities Claim” within the meaning of the policy.

Supernus sued the insurer, seeking a declaratory judgment that the insurer improperly denied coverage for the claim, and alleging that the insurer breached its contract and the implied covenant of good faith and fair dealing. The insurer filed a motion to dismiss the coverage lawsuit.

Relevant Policy Terms

The policy defines the term “Securities Claim” as “any claim … which in whole or in part is: …  2. based upon, arising out of or attributable to the purchase or sale of, or offer to purchase or sell, any securities issued by the Company….”

The policy defines “Company” to be Supernus and its “Subsidiaries.” The term “Subsidiaries” is defined as (1) “any organization in which” Supernus (or one of its subsidiaries) owns “more than 50% of the outstanding voting securities representing the present right to vote” for directors or managers; (2) “any organization in which one or more Companies, in any combination”  have the right to elect a majority of directors or managers; or (3) “charitable foundations or trusts controlled by a Company.”

The March 24, 2026, Opinion

On March 24, 2026, District of Maryland Judge Adam B. Abelson, applying Maryland law, granted the insurer’s motion to dismiss on the ground that the underlying action does not trigger the Securities Claim coverage.

In finding that the underlying action was not a Securities Claim, Judge Abelson noted that the acquisition in dispute in the underlying action was a cash transaction and did not involve “securities issued by the Company.” To the extent the acquisition involved any securities, the securities were issued by Enterprises prior to its acquisition by Supernus, not by Supernus or by Enterprises at a time when Enterprises was a subsidiary of Supernus. The relevant policy provisions, Judge Abelson said, “are plain and unambiguous” – “because the claims in the Underlying Action do not arise from securities issue by the Company, Supernus is not entitled to Securities Claim coverage.”

Supernus had tried to argue that it nevertheless was entitled to coverage because Enterprises was a subsidiary of Supernus by the time the insurance claim was made. Judge Ableson rejected this argument, saying that “accepting all of Supernus’s allegations as true there is no reasonable way to conceive of [the underlying] claims as arising out of securities ‘issued by the company.’” The relevant question is not whether Enterprises was a subsidiary at the time the underlying claim was made; the relevant question, the court said, “is whether Enterprises was a subsidiary of Supernus when it issued securities.” It was not, the court said, and so “under the plain language of the policy,” the underlying claims do not give rise to coverage.

The court did briefly acknowledge the question whether or not the fact that the underlying action was an antitrust claim rather and a claim for violation of the securities laws should or should not bar coverage. Judge Abelson did not address this issue on the merits, noting simply that the insurer did not deny coverage because the underlying antitrust action was not a Securities Claim. Rather, the insurer based its coverage denial on the fact that the underlying action did not arise out of the issuance of securities by Supernus or its subsidiaries, so, the court found, it did not need to address whether the underlying claims arose out of alleged antitrust law violations rather than claims alleging violations of the securities laws.

Discussion

The starting point for any analysis of this decision – as indeed for any insurance coverage related decision – is the policy language at issue. Here, the relevant portion of the definition of Securities Claim specifically referenced the purchase or sale, or offer to purchase or sell, and securities “issued by the Company,” with the definition of Company including any company Subsidiaries. The “issued by the Company” language was, in the end, outcome determinative here, as the court concluded that the underlying acquisition did not involve any securities issued by the company.

I emphasize this point that the phrase “issued by the Company” was critical to the outcome because it is not found in all public company D&O insurance policies’ definitions of the term “Securities Claim.” Or, to put it another way, the specific policy wording matters. I make this point because it is absolutely indispensable in reviewing the many court decision interpreting the meaning of the term “Securities Claim” to focus on the specific policy language at issue in any particular case. In many of the cases, the specific policy language at issue explains the outcome in any particular case, which can make it difficult to differentiate among the various coverage case decisions.

I will say this, it is interesting to me that the court felt it did not need to reach the issue whether or not the underlying antitrust claim came within the meaning of the phrase “Securities Claim.” The court felt it did not need to reach this issue because it was not the basis of the insurer’s coverage denial.

Though the court did not reach the issue, the question whether or not the underlying antitrust claim could fairly be characterized as a Securiteis Claim within the meaning of the policy presents an interesting question. It is worth noting that while the the court not reach the issue, it did quote authority on which Supernus sought to rely to the effect that “courts interpreting materially identical definitions of ‘Securities Claim’ have consistently confirmed that coverage does not require an express allegation of a securities law violation.”

Certainly, in prior cases, other policyholder have tried to argue that a wide variety of other kinds of disputes can be brought within the definition of the term “Securities Claim.”

Disputes of this kind, seeking an expansive definition of the term securities claim, have required courts to find, for example, that a bankruptcy trustee’s fraudulent transfer claim is not a Securities Claim, as discussed here. Indeed, the Delaware Supreme Court has in fact twice been called in to rule that a fraudulent transfer claim is not a Securities Claim, both times in cases involving bankrupt companies that had previously spun out of Verizon, as discussed here.  The Delaware Supreme Court has also separately held that an appraisal action is not a “Securities Claim,” as discussed here.

Other court have held that a tolling agreement is a “Claim” but not a “Securities claim,” as discussed here; that a breach of fiduciary duty claim is not a “Securities Claim, as discussed here; and that a formal SEC investigation is not a “Securities Claim,” as discussed here.

In a separate proceeding the Ninth Circuit held that the claims against a mortgage originator and securitizer involving the company’s issuance of mortgage-backed securities were not  “Securities Claims” on ground similar to those involved here, in that the mortgage backed securities the company issued as part of its ongoing business were not securities “of the Company” within the meaning of the policy.

These cases arise because of the incentives the public company D&O policy creates. Because the entity coverage is limited to “Securities Claim,” companies have an incentive to try to argue that they claims that have been filed against them are, in fact, Securities Claims. Indeed, there undoubtedly will be another case another day involving allegations that underlying antitrust claims come within the policy’s definition of the term “Securities Claim.” When that day comes, it will worth remembering that even though the court here granted the insurer’s motion to dismiss, the court did not hold that the antitrust claims asserted here were not Securities Claims.

The recently filed securities class action against Beyond Meat (Beyond Meat SCA) illustrates how accounting judgments, industry-wide demand shifts, and corporate turnaround narratives can create D&O exposure. Filed in January 2026, the complaint alleges that Beyond Meat and senior executives misled investors during 2025 by failing to timely disclose a material asset impairment while publicly emphasizing operational discipline and a path toward EBITDA-positive performance. As discussed below, the allegations arise amid a broader deterioration in the plant-based meat sector, documented in a March 10, 2025, CNBC report, and alongside emerging academic research questioning the assumed health advantages of plant-based meat alternatives.

Taken together with the allegations of the Beyond Meat SCA, the marketplace shift and emerging academic findings may provide a useful lens for assessing certain D&O underwriting risk.

Beyond Meat SCA

The Beyond Meat SCA asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 on behalf of investors who purchased Beyond Meat securities between February 27 and November 11, 2025. The Beyond Meat SCA plaintiffs allege that, as demand for plant-based meat products weakened and the company suspended or downsized operations in key markets, the carrying value of these assets exceeded their fair value well before the third quarter of 2025, making a material impairment charge reasonably likely.

However, despite the alleged conditions, the Beyond Meat SCA asserts that the company repeatedly represented in its public filings that no impairment of long-lived assets had occurred and framed impairment risk in generic, forward-looking terms. According to the investor plaintiffs, those disclosures were misleading because they portrayed impairment as a hypothetical future contingency rather than as an imminent accounting consequence of already-known operational conditions.

The complaint emphasizes that under GAAP, specifically ASC 360 (Property, Plant, and Equipment), impairment testing is triggered by indicators such as declining demand, excess capacity, facility underutilization, or adverse changes in expected cash flows. Plaintiffs allege that these indicators were present for Beyond Meat well before Q3 2025 and were, in fact, acknowledged by management in earnings calls and restructuring announcements. The plaintiffs frame Beyond Meat’s alleged repeated statements that no impairment had been identified as obscuring the degree to which the company’s balance sheet no longer reflected its operational reality, and therefore constituted an actionable omission.

In addition, purportedly throughout the class period, Beyond Meat’s executives emphasized cost reduction, operational efficiency, and a path toward EBITDA-positive operations by the end of 2026. The plaintiffs allege that the repeated references to “optimization,” facility rationalization, workforce reductions, and demand-driven restructuring were not merely strategic initiatives but signals that the economic utility of certain assets had materially declined; conditions that should have been accompanied by more fulsome impairment disclosure rather than continued assurances that the balance sheet remained unimpaired.

Finally, the Beyond Meat SCA alleges that Beyond Meat’s risk factor and MD&A disclosures failed to satisfy Item 303 of Regulation S-K, which requires disclosure of known trends or uncertainties reasonably likely to have a material impact on financial results. Rather than identifying impairment as a known and likely consequence of declining revenues, suspended operations in China, underutilized manufacturing facilities, and efforts to sublease or exit headquarters space, the company allegedly relied on boilerplate warnings that impairments “may” or “could” occur.  When Beyond Meat disclosed an October 2025 an unquantified material impairment, delayed its earnings release, and eventually took a $77.4 million non-cash impairment charge, the stock sharply declined.

Discussion

The Beyond Meat SCA illustrates how quickly accounting judgments can become disclosure disputes when industry conditions deteriorate, and corporate narratives lag operational reality. Notably, in sectors experiencing demand contraction and shifting consumer perceptions, like plant-based meat, impairment analyses, risk factor disclosures, and forward-looking performance messaging may face heightened scrutiny.

As the March 10, 2025, CNBC article detailed, the plant-based meat industry had lost much of its early momentum due to declining consumer demand, retailer pullbacks, pricing pressure, and oversupply. While this reporting predated many of the disclosures at issue in the complaint, it provides context for plaintiffs’ argument that Beyond Meat’s challenges were not sudden or unforeseeable.  

Also, academic research, like that published in the June 2024 American Journal of Clinical Nutrition, examined diets incorporating plant-based meat alternatives and found no clear cardiometabolic advantage over comparable animal-based diets. While the study is not referenced in the Beyond Meat SCA, it undercuts a foundational assumption that helped fuel early enthusiasm for plant-based meat products, namely, that they delivered inherent health benefits. For D&O exposure purposes, such research might lead to scrutiny of growth projections, asset valuations, and strategic investments tied to industries like life sciences, nutrition, or consumer products.

Thus, the Beyond Meat SCA highlights how impairment timing may be a securities litigation trigger, particularly when an industry may be contracting. Asset impairments coinciding with declining demand, excess capacity, and restructuring activity can become support for investor-plaintiff arguments that impairment risk was not speculative but already known. For boards and executives, the challenge lies in balancing reasonable accounting discretion with the obligation to disclose when assumptions underlying asset valuations have materially shifted. And D&O underwriting exposure may increase when management’s intent and knowledge are contested.

In addition, the Beyond Meat SCA underscores the tension between non-GAAP performance narratives and GAAP balance-sheet realities. Beyond Meat’s emphasis on EBITDA-positive goals may have sought to reassure its investors during a period of volatility; however, it became support for plaintiffs’ argument that the Beyond Meat narrative was misleading when it was not reconciled with contemporaneous balance-sheet impairments. For D&O carriers, this may reinforce the importance of scrutinizing how management teams frame profitability pathways relative to underlying asset values.

Finally, the Beyond Meat SCA may also reinforce the vulnerability of boilerplate risk disclosures. The complaint repeatedly characterizes the company’s impairment-related risk factor language as “generic” and not tailored to the alleged known risks of a likely material impairment affecting PP&E, lease ROU assets, and prepaid lease costs. Naming senior executives likewise underscores potential D&O exposure given the prominence of signed Sarbanes-Oxley certifications and management’s role in SEC filings and investor-facing communications that can become focal points when an impairment charge surfaces abruptly.

In the months since the current Trump administration first announced the so-called “Liberation Day” tariffs, some companies have struggled to deal with the tariffs’ economic impacts, and in at least some cases, companies’ tariff-related problems have led to securities class action litigation (as discussed, most recently, for example, here). In the latest example of this phenomenon, earlier this week the social media company Pinterest was hit with a securities suit after the company announced that tariff-related headwinds had caused its business partners to cut back on advertising on the company’s site. A copy of the March 30, 2026, Pinterest complaint can be found here.

Background

Pinterest is a social media platform. Its site’s users organize projects they hope to complete on the company’s site. Often the users’ site content refers to products or services that advertisers sell to Pinterest’s users. Pinterest generates substantially all of its revenue from advertising. A “substantial portion” of Pinterest’s revenue comes from “a small number of advertisers” in the retail and consumer packaged goods industry.

The complaint alleges that during the class period, the company assured investors of its confidence in its ability to navigate uncertain or adverse macroeconomic environments, including one in which its advertising partners faced increased margin pressure from tariffs.

On November 4, 2025, when Pinterest announced its results for the fiscal quarter ending September 30, 2025, the company reduced its revenue guidance for the year’s final quarter, saying, among other things that the company “faced pockets of moderating ad spend… as larger U.S. retailers navigate tariff-related margin pressure in the current environment.” The company’s stock price fell on this news.

Then on February 12, 2026, the company announced fourth quarter and year end revenue and first quarter 2026 guidance below consensus estimates. The company’s press release quoted the company’s CEO as saying that the company’s 2025 performance was due to “an exogenous shock this year related to tariffs, which are disproportionately affecting ad spend from our top retail advertisers.” The company’s CFO was quoted as saying that “we expect these tariff headwinds will continue and may become slightly more pronounced in Q1.” The complaint alleges that the company’s share price fell an additional nearly 17% on this news.

The Lawsuit

On March 30, 2026, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of California against Pinterest and certain of its executives. The complaint purports to be filed on behalf of investors who purchased the company’s securities between February 7, 2025, and February 12, 2026.

The complaint alleges that during the class period, the defendants made false or misleading statements or failed to disclose that: “(i) Pinterest was experiencing and/or was likely to experience reduced revenues from its advertising partners; (ii) Pinterest overstated its ability to manage the impact of U.S. tariffs on the macroeconomic environment in which the Company operated, including the foreseeable impact on its advertising partners; (iii) the impact of the foregoing in Pinterest’s advertising revenue was significant enough that Pinterest was facing and/or likely to face an imminent restructuring; and (iv) as a result, Defendants’ public statements were materially false and misleading at all times.”

The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the class.

Discussion

As noted above, there have been prior securities lawsuits arising out of circumstances involving the Trump administration’s tariff program. What makes this case different is that this case does not involve the defendant company’s own direct exposure to the tariffs. Indeed, as a services company that does not import or distribute goods made overseas, or made from materials imported from overseas, the company itself experienced no direct tariff impact. Rather, the adverse circumstances underlying this case involve the impact of the tariffs on its revenue partners, rather than on the company itself. The tariff-related impact on this company’s financial results was not direct, but indirect.

The circumstances underlying this lawsuit illustrate how the tariffs’ impact ripples through the global economy. As Pinterest’s business partners deal with the tariffs headwinds, it has resulted in its business partners’ reduction of purchases of the company’s advertising services. The fact that the tariff’s impact was indirect rather than direct makes them no less meaningful – indeed, the impact on Pinterest’s financial performance was substantial.

The underlying circumstances in this case suggest that as the impacts of the tariffs ripple through the economy, a variety of companies could be affected, and not just those on whom the tariffs are having a direct impact, but also those, like Pinterest, whose financial results are affected indirectly by the tariffs.

There is an important element of timing to consider here. The end of the class period in this complaint is February 12, 2026, which was just days before the U.S. Supreme Court’s February 20, 2026, decision striking down the current Trump administration’s IEEPA tariffs. To be sure, immediately after the court announced its tariff decision, the White House announced new temporary tariffs under a different statutory authority at a different tariff rate. These new tariffs have also been challenged. The net result is a changing, shifting, uncertain tariff environment, which makes the ongoing and future economic effects of the tariffs difficult to predict or project.

In light of this changing environment, it is difficult to speculate about whether and to what extent the tariffs will continue to roil the business economy. Moreover, on a going forward basis, it may be difficult to separate out the adverse effects of the tariffs from the negative impacts arising from the Iran war.

The one thing that is certain is that in the weeks and months ahead businesses will face a challenging set of circumstances. It seems likely that “macroeconomic headwinds” – including but not limited to the impact of the current Trump administration’s tariff policies – will not only affect companies’ business results but could in at least some cases lead to securities litigation. I strongly expect that by year end, there will have been a significant number of new securities class action lawsuits filed arising out of geopolitical factors, including as a result of the impacts of the adminstration’s tariff policies.

As the D&O Diary reported earlier this year, the Trump Administration has increasingly turned to the False Claims Act to support policy priorities, including anti-DEI and tariff-related initiatives. The President’s March 16, 2026, Executive Order (EO) may signal that FCA enforcement activity will only continue to accelerate. In particular, the President’s EO establishes a multi-agency “Task Force to Eliminate Fraud,” directing the federal government to “use all available resources” to combat fraud, enhance coordination, and strengthen enforcement across federally funded programs.  

White collar defense lawyers cited in a March 24, 2026, Law360 article indicated that the initiative will drive “an appreciable uptick in all kinds of investigations across the country,” particularly in FCA matters.  While the EO does not expand the substantive scope of the FCA, it underscores an intent to intensify coordination, prioritization, and resource allocation across agencies, factors that may correlate with increased investigative activity.

The following will discuss how the anticipated deployment of a fraud task force may have direct implications for corporate governance and D&O exposure.

EO Directives

By way of brief summary, the EO states that the newly established task force is meant to establish a coordinated federal strategy to address what policymakers view as systemic fraud across programs ranging from healthcare to housing and education. According to the EO, the federal government estimates annual fraud losses between $233 billion and $521 billion.  As a result, the EO specifically emphasizes that inter-agency coordination, data sharing, and the development of uniform anti-fraud standards will help identify patterns of fraud and pursue enforcement more efficiently across jurisdictions. 

In addition, the EO states that it will promote whistleblower activity by, in part, mandating the DOJ promote meritorious pursuit of FCA qui tam actions and require Attorney General to ensure prompt review of whistleblower actions. As noted in the March 24 Law360 article, this emphasis could lead to a “marked increase” in FCA filings, including cases involving smaller damages that might previously have been overlooked.   

Discussion

By setting clear priorities for the fraud task force and concentrating enforcement efforts, the EO may contribute to an increase in both the frequency and diversity of FCA claims, which may, in turn, impact corporate governance and D&O policies providing investigation coverage.

First, as I have previously noted, the expansion of FCA enforcement into areas such as tariff compliance underscores how operational and regulatory risks can quickly escalate into enterprise-level liability events. Tariff-related FCA cases may demonstrate how a company’s alleged inaccuracies in import classifications or country-of-origin disclosures can be reframed as fraud against the government.  With the EO’s new federal coordination and strategy, what might once have been treated as a customs issue could quickly escalate into a federal investigation and enforcement, resulting in D&O investigation coverage exposure.

In addition, the EO’s emphasis on aggressive enforcement and whistleblower engagement could increase the likelihood that companies will face investigations not only for clear instances of misconduct but also for more ambiguous or technical compliance issues. This raises the risk of what Law360 describes as potentially “overzealous” enforcement prosecutions. Even where allegations ultimately prove unfounded, defense costs associated with responding to subpoenas, investigations, and defending parallel proceedings may be significant.

From a governance perspective, the EO directives may highlight the importance of board-level oversight. At this point in time, FCA exposure is no longer niche and may become a core enterprise risk stemming from failing to monitor the current Administration’s policies, which include anti-DEI and tariff-related directives. Directors’ fiduciary duties, particularly oversight obligations, generally require that boards implement and monitor systems reasonably designed to identify and address material compliance risks. A fraud task force investigation may not only result in regulatory exposure but potential shareholder scrutiny and derivative litigation alleging breaches of fiduciary duty.

And, because FCA investigations can serve as the catalyst for follow-on litigation, including securities class actions and derivative suits, investigations by the newly established task may have an immediate impact on D&O carriers. For example, a company facing an FCA investigation related to tariff practices may subsequently be accused of failing to disclose material compliance risks or misrepresenting its regulatory posture to investors. These follow-on claims fall squarely within the traditional scope of D&O exposure.

Finally, the task force’s coordinated approach, combined with the expansion of FCA theories into new areas, suggests that companies may face more complex, multi-front enforcement scenarios. A single underlying issue, such as alleged tariff misclassification, could trigger parallel FCA claims, regulatory investigations, and shareholder litigation, all of which place significant demands on corporate leadership and risk management frameworks.

If FCA activity increases because of the task force’s initiatives, near‑term D&O exposure may increase as well. Thus, D&O underwriters may want to consider whether certain risks have strong governance controls and are tracking Administration priorities.

Financial news sites were ablaze recently with the news that a co-founder and board member of the data server company Super Micro Computer had been indicted, along with two other company executives, for allegedly conspiring to smuggle high-end Nvidia chips into China, in violation of U.S. export control laws. With news that sensational, and in light of the ensuing stock price drop, it was only a matter of time before plaintiffs’ lawyers would file a securities class action lawsuit. And, sure enough, late last week, a plaintiff shareholder did file a securities suit against the company.

The complaint in the new lawsuit, which can be found here, is interesting in and of itself, relating as it does to the sensational circumstances involved. But the lawsuit is arguably even more interesting for what it represents – that is, as an illustration of the ways that geopolitical issues can – and increasingly are – translating into securities class action lawsuits.

Background

Super Micro Computer designs, develops, and manufactures data server and storage systems. The company’s flagship products are servers that integrate Nvidia Corporation’s graphics processing units (GPUs) and are subject to strict U.S. export controls barring their sale to China without a license.

On March 19, 2026, the U.S. Department of Justice announced the unsealing of an indictment  against three Super Micro executives – including company senior VP, board member, and co-founder Yih-Shyan “Wally” Liaw – of “conspiring to divert high-performance servers assembled in the United States and integrating sophisticated U.S. artificial intelligence technology to China, in violation of U.S. export control laws.”

The DOJ’s press release quotes the U.S. Assistant Attorney General for National Security, John Eisenberg, as saying “The indictment unsealed today details alleged efforts to evade U.S. export laws through false documents, staged dummy servers to mislead investigators, and convoluted transshipment scheme, in order to obfuscate the true destination of restricted AI technology – China.”

Super Micro, which was not named as a defendant in the indictment, said that upon learning of the indictment, the company had placed Liuw on leave. The next day, Liuw resigned from the company’s board.

According to the complaint, Super Micro’s stock price declined over 33% on the news of the indictment.

The Lawsuit

On March 25, 2026, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of California against Super Micro and two of its executives (neither of whom were named as defendants in the criminal indictment). The complaint purports to be filed on behalf of investors who purchased the company’s shares between April 20, 2024, and March 19, 2026.

The complaint alleges that during the class period the defendants failed to disclose to investors that: “(1) a significant portion of the Company’s sales of servers were to companies based in China; (2) these transactions violated U.S. export control laws; (3) there were material weaknesses in the Company’s controls to ensure compliance with applicable export control laws and regulations; and (4) that, as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis.”

The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the class.

Discussion

As Sarah Abrams noted in a recent post on this site (here), in the current political environment, geopolitics represents an increasingly important component of D&O risk.

Among other things, as I have detailed in previous posts on this site (for example, here), the current Trump administration’s tariff policies have not only had a significant impact on the U.S. trade and the global economy, but have also translated into a series of recent D&O claims.

Other geopolitical sources of D&O stress also pertain to global trade issues, particularly export controls and trade sanctions. In many instances, stresses involving these trade issues have translated directly into D&O claims, as this new lawsuit against Super Micro shows. Indeed, securities class action lawsuit filings arising export control issues are, in fact, nothing new.

For example, as I noted here, in March 2020, a U.S. semiconductor company was hit with a securities class action lawsuit after disclosing that it was under investigation from the U.S. Department of Justice regarding the company’s compliance with export controls relating to business transactions with the Chinese technology company Huawei.

Similarly, in 2015, the software firm Vasco Data Security was sued in a securities class action lawsuit after the company disclosed that it had self-reported a possible violation of federal prohibitions against sales of goods to parties in Iran, as discussed here.

Interestingly, among the claims in the list of prior securities suits involving export control issues is a securities suit filed in October 2024 against none other than Super Micro Computers. The lawsuit, which drew heavily on a short seller report, contained a number of allegations, including the assertion that the company had misrepresented its compliance with trade control regulations restricting exports to Russia, as I discussed in a blog post at the time the suit was filed. That case remains pending in the Northern District of California. The court heard oral argument on the defendants’ motion to dismiss on March 12, 2026.

It should be emphasized that tariff concerns and export control issues are not the only geopolitical factors contributing to D&O risk. Other areas of geopolitical concern include money laundering laws, trade sanctions, and anti-bribery and corruption laws.

A recent example of a securities suit arising out of trade sanction-related issues is the December 2024 lawsuit filed against the U.S.-listed Kazakhstan banking corporation Kaspi.kz,  in which the plaintiff alleged that the company had misrepresented the extent to which its bank subsidiary was being used for unlawful purposes, including assisting Russians to evade sanctions imposed in the wake of the 2022 invasion of Russia. The lawsuit is discussed in detail here.

In an example of a shareholder derivative lawsuit arising out of trade sanction-related issues, as discussed here, a shareholder of J.P. Morgan Chase filed a derivative lawsuit against the company, as nominal defendant, and certain of its directors and officers alleging breaches of fiduciary duty in connection with the company’s $88.3 settlement with the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC).

And in an example of the ways in which alleged money laundering law (AML) violations can translate into securities litigation, in January 2025, as discussed here, a plaintiff shareholder filed a securities suit against the money transfer firm Block based on allegations that the company’s failure to maintain basic AML protocols had created a “haven for criminal and illicit activities,” allegedly contrary to the company’s representations.

Geopolitical Issues Seem Likely to Become Increasingly Important This Year: Under the current conditions, the influence of geopolitical factors on D&O risk is only likely to increase — among other things, because of the war in Iran. The Iran war has not only disrupted the global flow of oil, gas, and diesel fuel, it threatens the global food supply; it has snarled global supply chains; it is driving up shipping costs; and it is boosting prices for a wide range of goods and products, including fertilizer, helium, cotton, and aluminum, among many other things. All of these things are likely to drive economic inflation.

In other words, it seems likely that in the weeks and months ahead that geopolitical concerns are likely to have an enormous impact on economies and businesses alike. I expect that as the year progresses we will have many more occasions on this blog to write about geopolitical issues

A Final Note About This Lawsuit Filing: One final note about this new lawsuit against Super Micro is that qualifies as an AI-related securities suit. Indeed, in its press release to which I linked above, the DOJ went out of its way to emphasize that the technology at issue in the indictment is critically important precisely because it relates to artificial intelligence. The agency emphasized that the smuggled servers contained “artificial intelligence technology,” and also highlighted that the purpose of the indictment was to “bring justice to bad actors who aim to profit from illegally exporting U.S. artificial intelligence technology.” As far as the DOJ was concerned, the fact that the trade control violation related to sensitive AI technology was at the crux of the seriousness of the alleged criminal violation.

So for that reason I have no difficulty categorizing this new lawsuit as AI-related, making this case the seventh AI-related securities suit filed this year, and suggesting that as the year progresses AI-related securities suits will represent a significant part of the year’s overall securities suit filings.

The Backstory on the Super Micro Allegations: As interesting as I think these larger geopolitical issues are, it is also undeniably true that the underlying allegations in the criminal indictment are also quite interesting. If you have a few minutes, I highly recommend taking the time to read the DOJ press release, which describes in detail how the defendants allegedly managed the scheme to smuggle the prohibited technology into China. The alleged scheme was quite involved, including dummy servers, false labelling, encrypted messages, and the unlicensed movement of goods.

There is an interesting backstory to these allegations, including, among other things, the prior allegations noted above that the company supposedly had previously misrepresented its compliance with trade controls on the shipment of prohibited items to Russia.

However, there apparently is even more to the backstory than that. As Jonathan Weil detailed in a March 20, 2026 Heard on the Street column in the Wall Street Journal (here), Liaw’s recent resignation as a director of Micro Computer was in fact not the first time he had been forced to resign from the company. As Weil details in his column, Liaw previously resigned from the company in 2018, along with the company’s finance chief, after an investigation by the company’s audit committee led the company to restate its financial results. Super Micro paid $17.5 million in 2020 to settle SEC allegations of widespread accounting violations.

Weil reports that Liaw returned to Super Micro as a consultant in 2021, then as senior vice president in 2022, and was re-appointed to the board in late 2023. The short seller report that was the basis of the 2024 lawsuit against the company (involving the Russian trade control violation allegations) included in its litany of concern with the company that Liaw had been rehired notwithstanding the 2018 accounting mess.

The rise of Artificial Intelligence (AI)-based tools and applications has also meant the rise in AI-related infrastructure, such as data centers and power generation support. And just as we have seen the rise of securities litigation relating to companies’ adoption of AI tools and processes, we have also seen securities suits relating to AI infrastructure development.

In the latest example of this kind of AI infrastructure-related litigation, on March 20, 2026, a plaintiff shareholder filed a securities class action lawsuit against the engine and power systems company Power Solutions International, alleging that the company’s new strategy of providing power generation solutions for AI data centers had fallen short of the company’s representations. A copy of the new complaint against Power Solutions can be found here.

Background

Power Solutions designs, manufactures, and sells engines and power systems. In the past, its sales primarily involved small engines for industrial and transportation uses. After experiencing declines in its traditional sales in the first half of 2025, the company, as the complaint puts it, “pivoted to lean into the booming data center market.” The company, according to the complaint, “claimed that providing power generation solutions amid the AI-drive data center expansion was driving both strong present and future performance,” citing these new sales as “high growth, higher-margin” business.

On March 2, 2026, the company released its fourth quarter and full year 2025 financial results, disclosing that rather than increasing due to the higher margin AI data center business, it gross margin had in fact decline 8% year over year due to “operating inefficiencies related to the Company’s accelerated production ramp-up for data center product lines.” In its outlook for 2026, the company projected, according to the complaint, only “moderate margin improvement from the products servicing the data center markets.” According to the complaint, the company’s share price declined nearly 29% on this news.

The Complaint

On March 20, 2026, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of Illinois against Power Solutions and certain of its directors and officers. The complaint purports to be filed on behalf of investors who purchased the company’s securities between May 8, 2025, and March 2, 2026.

The complaint alleges that during the class period, the defendants failed to disclose to investors that: “(1) the Company overstated its ability to capture sales demand for its power systems solutions, particularly within the data center market; (2) the Company understated the impact of its enhancements to manufacturing capacity to meet demand  with the data center market, including the expected costs and the nature of the related ‘inefficiencies’; and (3) that as a result of the foregoing Defendants’ positive statements about the Company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis.”

The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the plaintiff class.

Discussion

It has already become apparent that AI-related securities class action lawsuit filings will include not only lawsuits filed against companies in connection with their adoption of AI tools and processes. We have already seen securities suit filings that involve AI-related infrastructure companies, as well.  

For example, in early January this year, a plaintiff shareholder filed a securities class action lawsuit against the start-up AI energy support company Fermi, which aims to build multiple power generation centers intended to provide dedicated power for AI workloads. The Fermi lawsuit is discussed in detail here.

Similarly, in February, CoreWeave, a AI cloud computing company delivering infrastructure and services through large data centers, was hit with a securities lawsuit after the company experienced delays in its data center development due to design revisions, weather delays, and other difficulties, as discussed here.

These prior lawsuits, and the new lawsuit against Power Solutions, involve allegations that the companies overstated their AI-related prospects and opportunities based on the companies’ AI infrastructure strategy. Meaning that these lawsuits could be categorized as “AI-washing” type lawsuits, a type of AI-related litigation that is well-developed.

Another common thread among these lawsuits is that the companies allegedly announced AI-centered business strategies that garnered significant investor enthusiasm, only for the companies to experience difficulties and set backs, as a result of which the company’s actual experience fell short of expectations, resulting in a share price decline.

This fact pattern seems highly likely to continue to recur in the weeks and months ahead. There is a great deal of investor interest in companies poised to take advantage of AI. Company management is understandably quite interested in trying to tap into this investor enthusiasm. Indeed, there appear to be quite a number of companies in the IPO pipeline with AI Infrastructure business strategies. Some of these AI infrastructure-focused companies will succeed in executing on their strategies. Others, like the defendant companies in these AI infrastructure-related suits, may encounter difficulties. It seems likely that many of these companies experiencing difficulties in executing on their AI strategies could also experience securities class action litigation.

In thinking about the extent of the potential exposure among these kinds of AI-adjacent companies, it is important to think about what industries and sectors might be affected by this dynamic.

Obviously, as the cases already filed show, these risks affect construction companies, energy supply companies, and data center infrastructure and services companies. There are also a host of other industries that potentially will be affected by the advent of AI; many companies in those industries will also face execution risk as they adopt AI-centered strategies. These other industries include, for example, finance; healthcare; logistics and transportation; education; professional services.

Based on this analysis, I think there is a probability (perhaps even a likelihood) that we will see cases like this, where companies face execution risk as they adopt AI-based strategies. These risks are most obvious for companies directly involved in the business of AI, as well as the AI infrastructure companies. But the risks are also there in many other industries, as increasing numbers of companies seek to adopt AI-centered strategies.

In any event, it is also worth noting that we are not yet even a quarter of the way through the year, yet, according to my tally, this case is the sixth AI-related securities suit to be filed in 2026. It seems increasingly likely that AI-related securities litigation will be a significant part of the overall volume of securities lawsuit filings in 2026.

In the wake of the February 20, 2026, U.S. Supreme Court decision to invalidate tariffs imposed under the current Administration’s use of the International Economic Emergency Powers Act (IEEPA), litigation has been filed by companies seeking tariff refunds and by shareholders alleging securities violations against a company whose operations and financial results were impaired by “tariff headwinds.”   A new category of litigation is also beginning to appear: consumer class actions alleging that companies improperly passed tariff costs on to customers.

On March 6, 2026, a putative class action filed against Fabletics, a private athleisure company, founded by actress Kate Hudson, alleged that the company violated Illinois Consumer Fraud and Deceptive Practices Act (ILFCA) by passing through IEEPA tariffs.  Days later, on March 11, 2026 another putative consumer class action lawsuit was filed against Costco Wholesale Corporation (Costco) in the Northern District of Illinois (Costco Complaint), alleging that the Costco also improperly passed through IEEPA tariffs in violation of multiple state consumer protection statutes.   

The following will discuss the Fabletic and Costco Complaint allegations and the management liability exposure faced by Fabletics, Costco and similarly situated companies that may have passed down tariff charges to customers.

The Fabletics Complaint

The putative class action against Fabletics was filed in the Circuit Court of Cook County of Illinois and alleges that the company improperly charged consumers tariff-related fees on certain purchases through its website (Fabletics Complaint). Along with violations of ILFCA, the Fabletics Complaint asserts a claim for unjust enrichment. The plaintiff alleges that these charges were presented to consumers as necessary to cover tariffs imposed on imported goods and contends that tariff charges were deceptive or otherwise improper because consumers were allegedly required to pay amounts that were not legally owed or that were mischaracterized as mandatory tariff obligations. The Fabletics Complaint alleges damages, restitution, disgorgement, and other equitable relief. The complaint also seeks attorneys’ fees and other litigation costs.

The Costco Complaint

The Costco Complaint was brought by a Costco member on behalf of consumers who purchased tariff-affected goods between February 2025 and February 2026 and alleges that the company improperly retained profits associated with tariffs imposed under IEEPA.  In particular, the Costco Complaint alleges that the company passed the cost of the tariffs on to customers through higher retail prices while simultaneously seeking refunds of those same tariffs from the federal government through litigation in the U.S. Court of International Trade. Costco’s recovery of government refunds without returning those amounts to customers would constitute unjust enrichment and deceptive business practices. The lawsuit asserts claims under multiple state consumer protection statutes as well as claims for unjust enrichment and money had and received, and seeks restitution of the tariff-related price increases, damages, and other equitable relief. 

Discussion

As we have previously discussed on the D&O Diary, the tariffs imposed under IEEPA during the second Trump administration have resulted in refund and securities claims. The Fabletics and Costco Complaints highlights what may be an expanding landscape of litigation arising out of the invalidation of the IEEPA tariffs. Specifically, an emerging effort by consumer plaintiffs to target companies that allegedly passed-through tariff costs through to customers. Both putative class actions thus raises a number of issues that may be relevant for private company management liability exposures.

In particular, the Fabletics and Costco Complaints illustrates how business decisions relating to pricing and cost pass-through strategies can become the subject of consumer litigation. During periods of economic disruption or regulatory uncertainty, companies often must decide whether to absorb increased costs or to pass those costs through to customers. In the context of tariffs, many companies elected to implement tariff surcharges or other pricing adjustments designed to offset the increased costs associated with importing goods. Shifting operational costs to consumers may result in similar consumer class actions who may implicate private company D&O insuring agreements.

Most private company D&O policies contain coverage provisions analogous to the traditional public company Side A, Side B, and Side C insuring agreements. Side A coverage generally protects individual directors and officers when the company is unable to indemnify them, while Side B coverage reimburses the company for amounts it pays to indemnify its directors and officers. Side C coverage, often referred to as “entity coverage,” typically provides direct coverage to the company itself for certain types of claims.

In the case of a consumer class action alleging deceptive business practices, potentially relevant coverage includes Side C entity coverage. Unlike public company D&O policies, where entity coverage is typically limited to securities claims, private company policies often provide entity coverage for a broader range of claims including certain consumer protection lawsuits, if not excluded or limited by endorsement.  However, allegations of fraud or deceptive trade practices could be subject to exclusions, including fraud, intentional misconduct, or the gaining of profit or advantage to which the insured was not legally entitled.  Such exclusions typically apply only after a final adjudication establishing such conduct.

In addition, the nature of relief sought in consumer class actions may include restitution, disgorgement, or other equitable relief designed to return allegedly improper charges to consumers. Whether restitutionary relief constitutes covered “loss” under a management liability policy may be disputed because it represents the return of amounts that the insured allegedly was not entitled to retain. Jurisdictions finding restitution insurable vary, and disputes over whether restitution or disgorgement constitutes covered loss may become turn into coverage litigation.

Defense costs, by contrast, may result in exposure to management liability policies, even where the underlying claims involve allegations of consumer fraud or deceptive practices. As a result, even if indemnity coverage for settlements or judgments is disputed, substantial defense costs associated with defending consumer class action may continue to be incurred during the pendency of litigation.

Consumer class actions relating to tariff-related pricing practices may also result in investors or private equity owners potentially asserting derivative claims alleging that company leadership failed to adequately oversee pricing strategies, regulatory compliance, or legal risk management. These types of derivative claims might implicate Sides A and B coverage parts if individuals are named.

Regulatory investigations represent another potential exposure. Consumer class actions sometimes attract the attention of regulators such as the Federal Trade Commission (FTC) or state attorneys general (AG). If regulators begin investigating whether tariff-related surcharges were misleading or improperly disclosed to consumers, companies could incur substantial costs responding to investigative subpoenas, civil investigative demands, or other regulatory inquiries. If a management liability policy includes formal investigation coverage, inquiries and enforcement actions brought by the FTC or AGs may trigger coverage for investigation costs.

Conclusion

Retailers, apparel companies, electronics manufacturers, and other consumer goods companies were among many businesses most directly affected by tariffs imposed on imported products. And, these companies may have adopted pricing strategies designed to offset the increased cost of imported goods, including tariff surcharges or other price adjustments. If courts determine that tariffs were improperly imposed, plaintiffs’ lawyers may attempt to pursue similar consumer claims against other companies that implemented comparable pricing strategies.

For management liability insurers, these developments highlight the importance of appreciating how continued tariff policy shifts may translate into a variety of litigation exposures for consumer-facing companies. Whether the Fabletics or Coscto litigation ultimately prove to be the beginning of a broader trend remains to be seen.

Nevertheless, the case underscores how pricing decisions made in response to government trade policy may result in management liability exposure stemming from consumer protection claims, regulatory investigations, and derivative litigation implicating corporate governance and oversight.

As detailed in prior posts on this site (here and here), turbulence in the private credit markets has roiled the financial marketplace. Collapses (and related scandals) involving high profile private credit borrowers – including Tricolor and First Brands– have led to bankruptcies, civil lawsuits, and criminal indictments. The disruption in the private credit markets has also recently led to securities class action lawsuits involving private credit lenders. In the most recent example of this phenomenon, late last week a plaintiff shareholder filed a securities class action lawsuit against private credit lender Hercules Capital, after a short seller published a report suggesting that the company had misrepresented its borrower due diligence processes. A copy of the March 20, 2026, lawsuit can be found here.

Background

Private credit refers to non-bank lending, in which investors fund loans made directly to businesses or investors. Estimate vary, but some observers estimate that the private credit market had assets under management as of year end 2025 of as much as $3.5 trillion.

Hercules Capital is a private credit firm, operating as a Business Development Company (BDC) that specializes in making private loans to companies. The company describes itself as “the largest non-bank source of venture funding in the market.” As of year-end 2025, the company managed more than $5.7 billion in assets. Among other things, the company claims to maintain a “disciplined and robust deal origination process, including vigorous sourcing, due diligence, and valuation in order to maintain the value and stability of its portfolio.”

On February 27, 2026, Hunterbrook Media, which operates as the journalism arm of Hunterbrook Capital, a hedge fund that shorts the stock of companies being investigated, issued a report stating that a former Hercules employee had said that the company’s deal sourcing essentially consisted of simply copying the investments from the Google Ventures website, relying on other investors to have done the due diligence, instead of doing their own. The report also cited another former employee as saying that the company’s finance team was “a small, overstretched team with few checks in place.” The report also claimed that Hercules understated its significant exposure to the debt of software companies and that the company valued the software debt at 100 cents on the dollar even though the debt across the software industry was “falling into distressed territory.”

According to the complaint, the company’s share price declined nearly 8% on this news.

The Lawsuit

On March 20, 2026. A plaintiff shareholder filed a securities class action lawsuit in the Northern District of California against Hercules and certain of its directors and officers. The complaint purports to be filed on behalf of investors who purchased the securities of Hercules during the period May 1, 2025 through February 27, 2026.

The complaint alleges that during the class period, the defendants failed to disclose that: “(1) the Company overstated the due diligence with which it conducted its deal sourcing and/or loan origination process; (2) the Company overstated the due diligence with which it conducted its portfolio valuation process; (3) the Company reported misclassified portfolio investments; (4) as a result of the foregoing, the Company overstated and/or misrepresented its portfolio valuations; and (5) that as a result of the foregoing, Defendants’ positive statements about the Company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis.”

The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the plaintiff class.

Discussion

As I noted at the outset, beginning late last year, a host of questions began to surround the private credit markets. According to a March 18, 2026, memo from the K&L Gates law firm (here), the financial press recently has reported on “a wave of investor withdrawals hitting major funds simultaneously, firms publicly announcing mark downs in the valuation of certain loans,” and that “various firms are capping redemptions to maintain adherence to pre-established limits.” Securities analysts have warned that the private credit sector “may be entering a ‘reckoning’ following years of ostensible aggressive lending and weaker underwriting standards.”

The short seller involved here delivered its report into this already febrile atmosphere, fraught as the industry already was with concerns that the industry growth may have been due to lax standards. The short seller’s report, attributing statements to anonymous ex-employees raising questions about the company’s lending processes and practices was sure to hit the company’s share price (which of course is the objective of a short seller putting out an attack report like the one involved here). Reasonable minds could differ about whether a manufactured share price drop of less than eight percent reflects a perception that confidence in the company has been entirely undercut, but it was at least a large enough drop to attract the attention of at least one plaintiffs’ law firm.

As I have detailed in previous posts on this site (most recently here), there are reasons why courts should be skeptical of securities class action lawsuits based solely on allegations from financially motivated short seller reports, particularly where the short seller reports are based solely on alleged statements of anonymous former employees. Indeed, some court have recognized these concerns; for example, the Ninth Circuit said in one recent case that “we should not credit anonymous posts on a website notorious for self-interested short-sellers trafficking in rumor for their own pecuniary gain.” All of these reasons for caution are present here, and undoubtedly will become relevant in this case at the motion to dismiss phase.

In any event, this case does represent the latest in a series of securities class action lawsuits filed against private credit lenders; there have already been several securities suits against private credit lenders.

For example, and as discussed here, in December 2025, Blue Owl Capital, one of the largest private credit lenders, was sued in a securities class action lawsuit, in a case alleging that Blue Owl and the other defendants misrepresented the firm’s liquidity, redemption conditions, and the merger risks involving its private credit vehicles. A different investor filed a separate lawsuit against Blue Owl in January 2026, as discussed here, alleging that the company had misrepresented the level of investor redemptions the company was facing.

In addition, as discussed in detail here, in early February 2026, a plaintiff shareholder filed a securities class action lawsuit against BlackRock TCP Capital Corp., the private credit arm of finance giant BlackRock, alleging that the company’s investments were not being appropriately valued and that the company’s unrealized losses were understated. Interestingly, the corporate defendant in that case, like the corporate defendant in the Hercules case, operated as a Business Development Company (as indeed to many of the private credit lending firms).

In addition, prior high profile corporate failures involving private credit borrowers — including for example, Tricolor and First Brands – have resulted in D&O claims against the firms and their executives, as discussed here and here.

Signs are that problems in the private credit market are likely to continue in the months ahead, with the potential for further securities litigation and other D&O claims against both private credit borrowers and private credit lenders.

There is also the possibility that the problems (and potential D&O claims) could spread beyond just the immediate private credit borrowers and lenders. As a recent Wall Street Journal article noted (here), the stock prices of traditional banks are also getting beat up over the problems in the private credit sector. The problem is that the private credit lenders are themselves borrowers, often from traditional banks. In light of the distress in the private credit markets, banks are reexamining their lending commitments to the private credit funds.

The Journal article attributed a recent drop in banks’ share prices to concerns that banks could be “left holding the bag” as the private credit market becomes increasingly disrupted. These concerns are heightened by revelations that some of the private credit loans (for example, with respect to Tricolor and First Brands), which were used to collateralize bank loans, were fraudulent. All of these questions arise at a time when some private credit funds, facing unexpectedly high redemption requests, are drawing further on their bank lines of credit.

In light of all of these factors, at least some observers have raised the question whether the problems in the private credit sector could become a banking industry contagion event, the possibility of which is even further heightened by the ever-lengthening list of adverse macroeconomic factors (such as inflation, the war in Iran, disruption to global trade due to U.S. tariffs, and so on).

The bottom line is that there is much more of this story to be told, and there appear to be reasons to be concerned that the story in the months ahead could involve further D&O claims related to the private credit sector.

Most readers have undoubtedly seen a recent and significant increase in attention paid to prediction markets, like Kalshi and Polymarket. The rise of prediction markets has also led to regulatory and other concerns.  But amid all the scrutiny, questions remain about what prediction market companies may represent as D&O risks. A newly filed securities complaint against a now-defunct crypto platform company may create new disclosure, governance, and insider-trading-related D&O exposures.

The Gemini Complaint

The putative securities class action, filed on March 18, 2026, in the Southern District of New York, alleges that Gemini Space Station, Inc. (Gemini), the crypto exchange founded by Cameron and Tyler Winklevoss, conducted a September 2025 IPO premised on its identity as a crypto exchange, emphasizing projected growth through increased trading activity, expanding users, and international expansion (Gemini Complaint).  According to Gemini’s shareholder plaintiffs, the company’s offering documents failed to disclose that its core crypto business was allegedly less viable than represented and that the company was at risk of a significant restructuring shortly after going public.

The Gemini Complaint further asserts that within months of the IPO, Gemini began moving toward a materially different business model. In December 2025, the company announced the launch of a prediction market product offering event contracts. According to the plaintiffs, however, this was not simply a new product line. By early February 2026, Gemini disclosed a broader transformation to what it called “Gemini 2.0,” which would place prediction markets “front and center,” reduce its workforce by approximately 25%, and exit key international markets it had previously described as central to its growth strategy.

At the same time, Gemini allegedly experienced a significant loss of senior leadership. The complaint alleges that Gemini’s Chief Financial Officer, Chief Operating Officer, and Chief Legal Officer all departed near the strategic pivot, with Gemini later linking those departures to the “Gemini 2.0” transformation.  The leadership exit was allegedly accompanied by disclosures of increased operating expenses and financial strain, which plaintiffs allege reflected the costs associated with restructuring and executive turnover.

The Gemini shareholder plaintiffs allege that the market reacted negatively. Following the February 2026 disclosures regarding the pivot to “Gemini 2.0” and the restructuring, Gemini’s stock price declined sharply, and analysts reportedly downgraded the company’s outlook, citing concerns about the abrupt change in strategy, leadership instability, and financial performance. The complaint further alleges that these disclosures revealed the “truth” about the company’s business prospects, giving rise to claims under Sections 11 and 15 of the Securities Act and Sections 10(b) and 20(a) of the Exchange Act.

Discussion

By way of brief background, prediction markets operate through the trading of event contracts, typically binary derivatives that pay out if a specified event occurs. Participants buy and sell “yes” or “no” contracts, and the contract price reflects the market’s collective belief about the probability of the event occurring.

An acceleration in prediction market use occurred after the September 6, 2024, ruling by the U.S. District Court for the District of Columbia which found in favor of KalshiEx LLC (“Kalshi”) and lifted a September 2023, CFTC order prohibiting Kalshi from allowing users of its platform to place bets on the outcome of upcoming U.S. congressional elections. Prior to the September 2023 order, Kalshi attempted to offer derivative event contracts that would allow participants to trade on the outcome of such elections.  

While the Gemini Complaint may appear to be a relatively conventional post-IPO securities class action involving alleged misstatements and omissions in offering documents, what makes the case notable is its connection to prediction markets. The complaint effectively frames the company’s pivot to a prediction-market-centric model as part of the alleged undisclosed risks facing the company at the time of the IPO. Prediction markets function as “information aggregation vehicles,” where contract pricing reflects the collective expectations of participants.

However, as  Columbia Law professor John C. Coffee Jr. recently noted, those expectations may not always be based solely on public information; they may instead reflect inputs from participants with superior, or even insider, knowledge. Thus, if prediction markets expand to include corporate-specific outcomes, such as executive departures, strategic pivots, or financial performance, they could create a form of external signaling that plaintiffs may attempt to use in securities litigation.

For example, if a prediction market begins to price in a high probability of a CEO’s departure while the company continues to emphasize leadership stability publicly, plaintiffs may argue that the company failed to disclose material information. If contracts tied to corporate leadership (such as whether a CEO will remain in position) become widely traded, they could create a new form of “shadow signaling” to investors. In the event of an unexpected executive departure or governance change, plaintiffs may attempt to use prediction market activity as circumstantial evidence that the company failed to disclose material information, reframing ordinary corporate developments as alleged Rule 10b-5 disclosure failures.

Potential claim scenarios could include a securities class action alleging that a company’s disclosure controls were deficient where prediction market pricing suggested a high likelihood of a CEO departure, yet the company continued to issue statements about leadership stability. Another possibility might be a derivative action asserting that the board failed to implement or monitor adequate controls around employee participation in prediction markets, particularly if insiders were later found to have traded contracts tied to corporate events.

While the Gemini Complaint does not allege use of prediction markets resulted in securities markets, the allegations of the lawsuit illustrate how a rapid and dramatic shift in business strategy, coupled with executive departures, can form the basis of securities claims that earlier disclosures were misleading. Notably, the complaint highlights how emerging technologies and business models may give rise to familiar categories of liability.

Still, the company’s pivot from a crypto exchange to a prediction market platform adds a new dimension, particularly as regulators continue to examine whether these platforms raise concerns related to market integrity, insider trading, and consumer protection. While prediction markets are still developing, the Gemini Complaint provides an initial example of a securities case tied to an effort to capitalize on this newly popular and scrutinized.