The recent securities and derivative litigation involving e.l.f. Beauty reflects a familiar D&O liability pattern: a high-growth narrative challenged by operational headwinds, followed by securities litigation and a derivative action. While e.l.f. and its D&Os achieved meaningful success at the motion to dismiss stage, the survival of certain securities claims and a recently filed a derivative complaint in Delaware highlights the potential of prolonged D&O exposure.

The Securities Class Action Complaint

The securities class action against e.l.f. and certain of its senior executives was filed on March 6, 2025, in the Northern District of California and alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act arising from alleged misrepresentations concerning demand, inventory, and financial performance (e.l.f. SCA).

According to the e.l.f. SCA, the company repeatedly emphasized its “exceptional, consistent, category-leading growth” while allegedly concealing a deterioration in consumer demand that began to emerge in 2024. The plaintiffs contend that, as demand slowed, inventory levels increased significantly; not as a result of strategic planning to meet demand, but rather because products were not selling at anticipated levels. The complaint alleges that the company mischaracterized these inventory increases, attributing them to supply chain timing and growth initiatives rather than weakening demand.

The complaint also focuses on the distinction between “sell-in” and “sell-through” sales and cites a November 20, 2024, Muddy Waters report alleging concealed inventory challenges. Plaintiffs argue that limited visibility into key retail channels, including Ulta Beauty, created an informational gap between internal performance data and public disclosures. Plaintiffs also rely on confidential witnesses who claim that internal data reflected declining sales trends, excess inventory, and missed projections during the latter half of 2024.

Following the publication of the Muddy Waters report and subsequent company disclosures addressing slowing growth and demand trends, the company’s share price declined significantly. Plaintiffs allege that these events revealed the extent to which prior statements may have been misleading, resulting in investor losses.

The e.l.f. SCA Partial-Dismissal Order

On February 6, 2026, the Northern District of California granted the defendants’ motion to dismiss in part while allowing certain claims to proceed.

The court found that many of the challenged statements were either made before the alleged adverse trends emerged, were consistent with the alleged facts, or constituted non-actionable puffery and corporate optimism. Generalized statements regarding growth, confidence, and performance were insufficient to support a securities fraud claim.

However, the court concluded that plaintiffs adequately alleged falsity and scienter with respect to a narrower set of statements made in November 2024, including statements by the company’s CEO during a televised interview responding to the Muddy Waters report. In that context, the court found that statements asserting that inventory levels were built to meet strong demand could be misleading if, as alleged, demand was in fact weakening at the time.

Accordingly, the court sustained Section 10(b) claims against the company and one executive based on these statements, while dismissing all other claims.

The Follow-On Derivative Action

The Verified Stockholder Derivative Complaint, filed on April 9, 2026, asserts claims that largely track the allegations in the e.l.f. SCA.

The derivative complaint alleges that the company’s directors and officers breached their fiduciary duties by failing to oversee operations adequately, disseminating misleading information, and allowing inventory levels to rise while demand declined. The complaint also includes insider trading allegations, asserting that certain executives sold stock while in possession of material nonpublic information.

Notably, the derivative complaint relies on the partial denial of the motion to dismiss in the securities action to support its claims and to bolster its demand futility arguments, illustrating how even a limited survival of claims can fuel follow-on litigation.

Discussion

From a D&O underwriting perspective, the e.l.f. litigation highlights the exposure associated with companies whose valuation narratives depend heavily on sustained growth. When a company emphasizes consistent, category-leading performance, even modest deviations from that trajectory, particularly when executives publicly address emerging concerns about demand or performance, can give rise to allegations that prior disclosures were misleading.

In addition, the case provides an example of litigation risk associated with informational asymmetries. Here, the alleged lack of visibility into “untracked” sales channels allegedly created a gap between internal data and public disclosures. For D&O underwriters, companies that rely on metrics that may not be independently verifiable by investors can present increased disclosure risk, particularly where those metrics are central to the company’s valuation narrative.

The court’s ruling may also illustrate, for both courts and market participants, the importance of distinguishing between non-actionable corporate optimism and actionable misstatements. While many of the challenged statements were dismissed as puffery, the survival of claims tied to specific, contextual statements, particularly those made in response to negative external reports, demonstrates that a discrete set of statements can sustain a securities claim where plaintiffs adequately allege contemporaneous contradictory facts.

More broadly, the decision reflects a practical reality in securities litigation: dismissal of most claims may not materially reduce overall D&O exposure. Even a narrow surviving claim can sustain a securities class action through discovery and, as this case demonstrates, provide a foundation for follow-on derivative litigation.

Finally, the derivative action highlights the extended lifecycle of D&O claims. Even where defendants achieve meaningful success at the motion to dismiss stage, the survival of any securities claims can lead to additional litigation, prolonging defense costs and increasing overall exposure. Derivative suits also introduce distinct risks, including the potential for non-indemnifiable loss, corporate governance reforms, and fee awards.

For D&O underwriters, a key takeaway should be that litigation outcomes are often more nuanced than they initially appeared. A “partial win” at the motion to dismiss stage may still carry significant downstream consequences, particularly where it enables plaintiffs to proceed into discovery and fuels parallel or follow-on actions.

Historically, companies have resolved SEC enforcement proceedings by agreeing to pay a fine or penalty, with the payment funds drawn from the corporate treasury. More recently, the agency has signaled an interest in ensuring that enforcement action resolutions involving individual liability, as a means of encouraging both accountability and deterrence. In the following guest post, Ashwin J. Ram, a partner at the Buchalter LLP law firm, examines the SEC’s individual accountability approach and considers the implications. I would like to thank Ashwin for allowing us to publish his article as a guest post on this site. Here is Ashwin’s article.

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For the better part of a decade, SEC enforcement followed a familiar script: the company pays a substantial penalty, neither admits nor denies the findings, and everyone moves on. Officers and directors watched from the sidelines while the corporate treasury absorbed the blow. Shareholders — the people the SEC is supposed to protect — ended up paying for the misconduct through diluted earnings and depleted reserves.

That script may be a relic of the past.

At SEC Speaks 2026, Acting Enforcement Director Sam Waldon and Deputy Director Nekia Hackworth Jones made the new posture explicit: the Commission is no longer interested in collecting large corporate penalty checks while individuals escape accountability. Waldon framed it as a quality-over-quantity mandate; Hackworth Jones provided the operational details — evaluating individual culpability, scienter, and severity before recommending remedies. Individual liability is now the primary deterrent mechanism. The 2006 Statement Concerning Financial Penalties — largely dormant for years — is back as the governing framework for corporate penalty recommendations. And the threshold question the staff must now answer before recommending a corporate penalty is whether the penalty will harm the very shareholders the enforcement action is meant to protect.

Assuming this is not rhetoric, it is an operational directive that will likely reshape how SEC investigations are conducted, how cases are resolved, and how companies, officers, and D&O carriers should respond.

The 2006 Penalty Statement: What It Actually Says

The 2006 Statement was the Commission’s attempt to articulate when corporate financial penalties are appropriate. It identified two threshold considerations: (1) whether the penalty will harm innocent shareholders more than it deters future misconduct, and (2) whether individual liability — rather than entity penalties — would be a more effective and equitable deterrent.

The Statement also adopted the so-called Seaboard factors for evaluating corporate cooperation: self-reporting, remediation, cooperation with the investigation, the quality of compliance programs, and whether the entity obstructed the investigation. These factors never went away in theory. In practice, they were overwhelmed by a regime that prioritized headline penalty numbers.

What changed at SEC Speaks is that the Commission publicly recommitted to applying the Statement as written: start with the individual, and calibrate the corporate penalty to cooperation and remediation rather than headline impact.

Why This Shift Matters More Than It Appears

On the surface, prioritizing individual liability sounds like a narrowing of enforcement. It is the opposite.

Under the old regime, a company could resolve an SEC investigation by negotiating a penalty amount, implementing remedial measures, and moving on — often without any individual officer facing charges. The investigation ended when the check cleared. Defense counsel for individuals could reasonably argue that the matter was resolved and that bringing a follow-on case against their client would be duplicative or disproportionate.

The new posture eliminates that off-ramp. The Commission is now building individual cases from the outset of an investigation, not as an afterthought once the corporate resolution is complete. Waldon’s remarks made clear that Enforcement is hiring — and that the quality-over-quantity directive does not mean fewer cases. It means each case will be more focused on individual conduct, individual scienter, and individual consequences.

For corporate officers, this means several things simultaneously.

Separate counsel is no longer optional — it is a necessity. Joint representation between a company and its officers has always been fraught with the potential for conflicts. Under the new regime, those potential conflicts will be tested early. The company’s interests — cooperate, remediate, minimize the penalty — might be structurally adverse to the officer’s interests in a way they were not when the corporate penalty was the endgame. Officers who delay retaining personal counsel risk having their fate negotiated by lawyers whose primary obligation runs to the entity.

D&O carriers need to re-evaluate their exposure models. The shift toward individual liability directly increases the frequency and severity of D&O claims. Under the prior regime, many investigations resolved at the entity level without triggering Side A coverage (which covers individual officers when the company does not indemnify). Under the new regime, individual enforcement actions will become more common, individual defense costs will increase, and individual settlements or judgments will be larger. Carriers underwriting D&O risk based on historical claims data that reflected the old enforcement posture are pricing an outdated risk exposure model.

Early notice to D&O carriers is now a strategic imperative, not an administrative task. When the SEC opens an investigation that may target individual officers, the notice clock starts. Late notice remains one of the most litigated coverage defenses. Under the old regime, companies sometimes delayed notice because the investigation appeared headed toward a corporate resolution that would not trigger individual coverage. That calculation is no longer safe. Defense counsel should advise immediate notice to all potentially implicated towers upon learning of any SEC investigation that involves individual conduct — even if no Wells notice has been issued to any officer.

The Cooperation Calculus Flips

The Seaboard factors have always incentivized corporate cooperation. But under the new framework, cooperation means something different — and something more uncomfortable for the individuals involved.

The Commission evaluates whether the company made individuals available for testimony, produced communications promptly, and refrained from impeding the investigation of individual conduct. Under the old regime, companies could cooperate at the entity level while quietly coordinating with officers to present a unified narrative. That coordination is now riskier: a company that appears to be protecting its officers will not receive cooperation credit — and may face an enhanced corporate penalty on top of individual charges. The revised Enforcement Manual codifies cooperation credit factors but creates no tiers, no fixed credits, and no declination grid. It remains a qualitative, case-specific judgment with full staff discretion.

This creates an acute tension in the boardroom. Directors must balance their duty to the corporation (which favors maximum cooperation credit) against officers who may be investigation targets (which requires careful attention to individual rights). Boards that do not establish clear protocols for managing this tension — including retaining independent counsel for the board itself — will find themselves exposed on both sides.

What the ADM Case Tells Us

The Commission highlighted the In re Archer-Daniels-Midland Co. accounting fraud case as a paradigm for the new approach. In January 2026, the SEC charged ADM and three former executives — Vince Macciocchi, the former President of ADM’s Nutrition segment; Ray Young, the CFO; and Vikram Luthar, the former CFO of ADM’s Nutrition segment who later served as ADM’s overall CFO — for manipulating inter-segment transactions to inflate Nutrition’s operating profit. When Nutrition was in danger of missing its forecasts, management pressured employees to identify “adjustments” — retroactive rebates and pricing changes not available to third-party customers — that shifted operating profit from other ADM segments into Nutrition. The result was that ADM’s public disclosures claiming inter-segment transactions were recorded at amounts “approximating market” were false.

ADM paid a $40 million civil penalty. But the individual consequences tell the real story: Macciocchi agreed to disgorgement, a civil penalty, and a three-year officer-and-director bar. Young agreed to disgorgement and a penalty. Luthar is contesting the charges and preparing for trial.

Three features make this case a template. First, the enforcement action targeted individuals by name — not as an afterthought to the corporate resolution, but as the core of the case. Second, the evidentiary theory centered on the gap between what management knew internally (that the adjustments were artificial) and what it communicated externally (that inter-segment pricing approximated market). That gap — between private knowledge and public statements — is the template for the individual liability cases the Commission intends to focus on going forward. Third, the penalty structure tracks the new philosophy exactly: a corporate penalty calibrated to avoid excessive shareholder harm, paired with personal consequences (bars, disgorgement, penalties) designed to deter the individuals who made the decisions.

Defense counsel should advise clients to audit that gap now, before an investigation begins. The question is not whether the company’s disclosures are technically accurate. The question is whether internal communications — emails, Slack messages, board decks, earnings call prep materials — tell a different story than the public filings. If they do, the new enforcement regime makes it far more likely that the individuals responsible for that divergence will face personal consequences.

Practical Steps for Boards, Officers, and Carriers

For boards: Establish investigation-response protocols before the investigation arrives. Identify independent counsel for the board. Create clear guidelines for when individual officers should retain separate counsel. Review indemnification provisions and ensure they are current with the company’s actual exposure profile.

For officers: Retain personal counsel at the first sign of an SEC investigation touching your area of responsibility. Do not rely on company counsel to protect your individual interests. Preserve all communications — the document retention obligation attaches when an investigation is reasonably anticipated, and destruction of evidence in the current environment is an accelerant, not a defense.

For D&O carriers: Recalibrate loss models to account for increased frequency of individual SEC enforcement actions. Review notice provisions and ensure policyholders understand their obligations. Consider whether current Side A limits are adequate in an environment where individual defense costs and settlement values will increase. Engage proactively with insureds about early-notice protocols.

The SEC’s message is clear: the era of corporate penalty checks substituting for individual accountability is finished. Companies, officers, and their insurers who recognize this shift and prepare for it will navigate the new landscape far better than those who treat it as a temporary policy preference.

Ashwin J. Ram is a partner at Buchalter LLP in Los Angeles. A former Assistant U.S. Attorney in the Major Frauds Section, he focuses on white collar defense, securities litigation, and crisis management. He has successfully navigated D&O coverage issues in a variety of investigations, securities class actions, and SEC investigations. He can be reached at aram@buchalter.com.

The U.S. Securities and Exchange Commission’s move to formally rescind its 2024 climate disclosure rule represents a significant turning point in the evolution of ESG-related regulation and the associated D&O risks. According to the federal regulatory tracking website, SEC staff submitted a proposed rule entitled “Rescission of Climate-Related Disclosure Rules” to the Office of Information and Regulatory Affairs for review on May 4, 2026, formally initiating the withdrawal process. 

The SEC further confirmed its position in a May 7, 2026, letter submitted to the U.S. Court of Appeals for the Eighth Circuit in the consolidated litigation challenging the rule, advising the court that the Commission “does not intend to renew its defense of the Rules” and that it had submitted the rescission proposal for review. The move follows the Commission’s earlier March 2025 vote to end its defense of the rule in the pending litigation.

The rescission effort reflects the priorities of SEC Chair Paul Atkins, whose leadership has emphasized a return to what the agency describes as a “materiality-focused” approach to securities regulation. While many companies may view the rollback as a regulatory reprieve, the reality may prove more complicated. As prior ESG-related cases discussed on the D&O Diary have demonstrated, ESG disclosure-related exposure is unlikely to disappear simply because the federal regulatory environment has shifted.

Indeed, in several respects, the withdrawal of a uniform federal framework may increase disclosure complexity and litigation risk.

The Climate Disclosure Rule and the Iowa Litigation

When the SEC adopted its climate disclosure rules in March 2024 under then-Chair Gary Gensler, the agency framed the regulation as a response to growing investor demand for standardized and comparable climate-related information. The rules would have required public companies to disclose climate-related risks, governance oversight processes, and greenhouse gas emissions metrics, including Scope 1 and Scope 2 emissions disclosures for many issuers. 

The SEC argued at the time that climate-related risks increasingly impacted financial performance and therefore fell squarely within the agency’s investor protection mandate. Gensler stated that the rules would provide investors with “consistent, comparable, decision-useful information” while offering issuers clearer reporting standards. 

The rules immediately generated substantial opposition. Business groups, industry organizations, and Republican-led states filed multiple lawsuits that were ultimately consolidated before the Eighth Circuit in State of Iowa et al. v. U.S. Securities and Exchange Commission. The plaintiffs argued that the SEC exceeded its statutory authority by attempting to impose environmental regulation through securities disclosure requirements. 

In response to the litigation, the SEC voluntarily stayed the rule’s compliance deadlines pending judicial review. Following the change in administration, the Commission informed the court that it would no longer defend the rules and now has formally moved toward rescission through notice-and-comment rulemaking. 

At least for now, the SEC’s climate disclosure regime appears likely to come to an end in its current form. However, the issues that gave rise to the rules, investor scrutiny of climate-related risks and ESG disclosures, remain very much in place.

Europe and California

Even as the SEC steps back, other jurisdictions continue to move forward with climate-related disclosure requirements, although the dynamics have shifted meaningfully from where they stood even a year ago.

Most notably, the European Union’s Corporate Sustainability Reporting Directive (CSRD) imposes extensive disclosure obligations on thousands of companies, including many non-European issuers with significant EU operations. The CSRD requires disclosures relating to emissions, climate risks, transition planning, governance oversight, and sustainability impacts. Unlike the SEC’s traditional disclosure framework, the CSRD adopts a “double materiality” standard, requiring companies to disclose not only how ESG-related issues affect corporate financial performance, but also how the company’s operations impact society and the environment.

However, as discussed in prior D&O Diary posts, the European Parliament recently voted to delay portions of the CSRD implementation timeline and pare back certain requirements amid growing concerns regarding compliance burdens and economic competitiveness. 

Similarly, California continues to advance climate-related disclosure obligations through statutes such as the California Climate Corporate Data Accountability Act and related legislation requiring many companies doing business in the state to report greenhouse gas emissions data, including Scope 1, Scope 2, and potentially Scope 3 emissions.

At the same time, California’s initiatives now face increasing political and legal pressure. In April 2025, the White House issued the Executive Order entitled “Protecting America from State Overreach,” targeting certain state climate-related initiatives and signaling potential federal resistance to state-level ESG regulation. As previously discussed on the D&O Diary, that Executive Order may create additional uncertainty regarding the future implementation and enforcement of California’s disclosure statutes. 

The result is not a straightforward expansion of ESG regulation, but rather a more fragmented and evolving regulatory environment in which disclosure obligations continue to develop unevenly across jurisdictions.

Even as the SEC steps back, other jurisdictions are moving aggressively forward with expansive ESG reporting requirements.

Discussion

From a D&O liability perspective, the SEC’s retreat from prescriptive climate disclosure regulation may actually heighten certain forms of disclosure risk.

Most notably, the absence of a uniform federal framework increases uncertainty regarding what ESG information companies should disclose and how those disclosures should be framed. Companies now must exercise greater judgment in determining what climate-related information may be material to investors. Those judgments may later be second-guessed in securities litigation if plaintiffs allege that disclosures were incomplete, inconsistent, or misleading.

At the same time, multinational companies face increasingly difficult consistency challenges across jurisdictions. Climate disclosures appearing in European sustainability reports, California-related filings, SEC reports, investor presentations, and public sustainability statements must remain sufficiently aligned to avoid creating discrepancies that plaintiffs or regulators may later exploit.

For example, a company making expansive climate commitments in Europe under a double materiality framework while providing more limited U.S. disclosures could face scrutiny regarding whether its statements are consistent across reporting regimes. The fragmentation itself may become a source of litigation risk.

These developments also may heighten board oversight expectations. D&Os are often expected to oversee ESG governance, disclosure controls, operational resiliency, and climate-related risk management processes. Failure to do so may give rise to derivative claims framed as oversight failures, particularly where ESG-related risks intersect with operational, reputational, or financial challenges.

Importantly, the SEC’s withdrawal from prescriptive rulemaking does not eliminate enforcement exposure. The Commission retains broad authority under existing antifraud provisions to pursue allegedly misleading disclosures, including ESG-related statements.

Perhaps the most important takeaway from these developments is that companies should not conclude that climate change and ESG-related issues no longer matter simply because the political environment has changed.

As previously discussed in the D&O Diary’s 2025 Top Ten post, the underlying operational realities associated with climate risk have not disappeared. Companies and boards still must grapple with issues such as supply chain resiliency, operational preparedness, alternative sourcing, physical climate exposure, and long-term business adaptability.

This is particularly true in sectors with significant exposure to climate-related operational risk, including agriculture, oil and gas exploration and development, brewing, manufacturing, and other water-intensive industries.

Five or ten years from now, boards may well be judged not based on what the political environment looked like in 2026, but on whether they adequately prepared their companies for changing operating conditions. Future plaintiffs could challenge the extent to which boards addressed climate resiliency, anticipated operational disruption, or implemented appropriate governance and disclosure controls.

In that sense, while the SEC’s rescission effort clearly reflects a significant political and regulatory shift, the long-term D&O risks associated with climate change and ESG-related governance have not disappeared. If anything, the current fragmentation and uncertainty may place an even greater premium on disciplined disclosure practices, strong internal controls, and thoughtful board oversight.

Following the U.S. Supreme Court’s decision invalidating tariffs imposed under the International Emergency Economic Powers Act (IEEPA), litigation risk has entered a new phase. As previously noted on The D&O Diary, early lawsuits seeking recovery focused on companies that passed tariff costs on to consumers. A newly filed class action against Sony Interactive Entertainment suggests a second wave may now be emerging; one targeting companies for allegedly pursuing a “double recovery” by retaining both higher consumer prices and government tariff refunds.

The legal backdrop continues to evolve. For example, following the Supreme Court’s IEEPA ruling, on March 5, 2026, the U.S. Court of International Trade struck down a second round of tariffs imposed under Section 122 of the Trade Act of 1974, in litigation led state attorney generals. The ruling shows that the administration’s tariff efforts remain subject to challenge and reversal, further complicating the landscape for companies that adjusted pricing in response.

The following discusses the Sony lawsuit in more detail, including the evolving tariff-related litigation trend and potential D&O exposures.

The Sony Complaint and the Emerging “Double Recovery” Theory

The lawsuit filed against Sony in the Northern District of California by PlayStation purchasers alleges that Sony retained what they characterize as a “substantial windfall” tied to unlawful tariffs. The complaint follows the U.S. Supreme Court’s decision in Learning Resources, Inc. v. Trump, which held that tariffs imposed under IEEPA exceeded the statutory authority granted to the President.

The plaintiffs’ theory is relatively straightforward. During the tariff period, Sony allegedly incurred increased costs associated with importing PlayStation consoles manufactured abroad. Like many companies facing tariff-related pressures, Sony purportedly responded by raising retail prices on its products. According to the complaint, Sony increased prices on certain PlayStation models by as much as $150 over the course of the tariff period. 

Following the Supreme Court’s ruling, the plaintiffs allege that Sony, like other importers, is now entitled to seek refunds from U.S. Customs and Border Protection for tariffs previously paid. The complaint contends this creates an inequitable result because Sony has already recovered those costs through higher prices charged to consumers. 

The plaintiffs characterize this as an unjust “double recovery” or “windfall.” They argue that the tariff-related portion of the purchase price paid by consumers effectively belongs to them and that any refund of those amounts should be returned to the consumers who bore the economic burden.

Notably, the complaint contrasts Sony’s alleged conduct with that of other companies, such as logistics providers, that have publicly stated an intention to pass tariff refunds back to customers. The plaintiffs emphasize that Sony has made no such commitment, which they argue strengthens the case for judicial intervention.

In addition, the plaintiffs seek declaratory relief establishing that any tariff refunds obtained by Sony must be returned to consumers. The complaint also requests injunctive relief, restitution, and monetary damages on behalf of the proposed class. 

Discussion

The Sony lawsuit, along with similar actions against Nike, Fabletics, and Costco, arises as the federal government works to unwind the approximately $166 billion in tariff collections. Following the Supreme Court’s decision, the Trump Administration terminated the tariff regime and implemented a refund process through U.S. Customs and Border Protection.

Central to this process is the CAPE (Consolidated Administration and Processing of Entries) portal, through which importers can submit applications seeking refunds for previously paid duties. According to the complaint, Customs indicated that refunds could potentially be processed within 60 to 90 days after approval of an application. 

The lengthy refund process itself may be contributing to a new category of litigation risk, and the Sony lawsuit may represent a further expansion of that trend. Rather than focusing solely on disclosure deficiencies, the plaintiffs seek affirmative recovery based on the alleged inequity of companies retaining refunds tied to costs already borne by consumers.  Thus, from a D&O liability perspective, the litigation developing around the invalidated IEEPA tariffs may present several important considerations.

First, these cases may raise increasingly complex disclosure issues for public companies. During the tariff period, many companies characterized price increases as responses to inflationary pressures, supply chain disruption, and tariffs. Few companies appear to have disclosed the possibility that tariffs could later be invalidated, creating potential refund-driven windfalls and corresponding litigation exposure. Plaintiffs may now attempt to argue that companies failed to adequately disclose the extent to which tariff-related pricing decisions could later generate windfall recoveries or restitution exposure.

In addition, the emerging litigation may highlight board-level governance concerns. Decisions regarding pricing, cost pass-through strategies, and whether to return tariff refunds to consumers are inherently sensitive from both a legal and reputational perspective. Boards that fail to actively oversee these decisions could face allegations that they inadequately managed foreseeable litigation or reputational risks.

The recently filed cases may further underscore the importance of internal escalation procedures and coordinated disclosure controls. The Sony complaint repeatedly contrasts Sony’s alleged conduct with companies that are publicly committed to returning refunds to customers. Plaintiffs may increasingly attempt to use those distinctions to argue that certain companies act more responsibly or transparently than others.

Finally, these developments reflect a broader category of “after-the-fact” litigation risk. In these scenarios, liability does not necessarily arise from the initial business decision itself, in this case, increasing prices during the tariff period, but instead from subsequent developments that change the legal or economic landscape. These types of claims can be particularly difficult to predict and underwrite because they depend on future judicial rulings, administrative actions, and policy reversals.

Taken together, the recent tariff-related litigation reinforces an increasingly familiar theme: macroeconomic and political events can create litigation exposure that extends far beyond the original government action itself. The recently filed Sony lawsuit suggests that plaintiffs may now be targeting the economic aftermath of tariff reversals themselves.

If this trend continues, companies with significant import exposure and consumer-facing pricing models may face scrutiny not only for how they responded to tariffs, but also for how they respond to their unwinding. The emerging “double recovery” theory suggests that plaintiffs’ lawyers are now focused not just on the impact of tariffs, but on who ultimately keeps the money once they are gone.

As Sarah Abrams noted in a post on this site last September, President Trump, in a social media post, proposed eliminating quarterly report for public companies. On May 5, 2026, the SEC acted on the President’s suggestion and proposed a rule that would provide companies currently subject to the agency’s quarterly reporting requirements with the option to instead file interim reports semiannually. It seems likely that optional semiannual reporting will soon be put into effect. The question is whether this is a good idea or will produce the intended benefits, as discussed below.

The SEC’s May 5, 2026, press release about the proposed rule can be found here. The text of the proposed rule can be found here. The SEC’s two-page fact sheet about the proposed rule can be found here.

The Proposed Rule Change

The SEC’s quarterly reporting rule has been in place since 1970. Under this interim reporting rule, reporting companies are required to submit each year three quarterly reports on Form 10-Q and one annual report on Form 10-K.

Under the SEC’s proposed new interim reporting rule, if adopted, reporting companies would have the option to elect to file one semiannual report on new Form 10-S rather than three quarterly reports on Form 10-Q. New Form 10-S would require the same narrative disclosures (e.g., MD&A, material changes in risk factors, legal proceedings, etc.) and financial statements as Form 10-Q, but over a six-month period rather than a three-month period. The proposed rules, if adopted, would not change the existing interim reporting requirements applicable to foreign private issuers.

In its release proposing the rules, the SEC cited a number of potential benefits from the rule change. Among other things, the agency observed that companies electing semiannual reporting “may see a reduction in compliance costs of time and money.” Companies may also realize other benefits, including “less distraction from running the day-to-day business; reallocation of attention from interim reporting to company strategy; additional time spent on new product development; and the ability to engage in transactions that might not be possible when management is focused on preparing interim reports.”

The agency cited one other potential benefit from allowing optional semiannual reporting, which is that “reducing the compliance costs associated with quarterly reporting may contribute to more public companies deciding to enter the public markets and more companies deciding to go public.” SEC Chair Paul Atkins made a similar point in his May 5, 2026, statement about the proposed rules (here) saying that the flexibility that the proposed optional reporting rule would provide “might reduce some of the burdens of being a public company and potentially influence a company’s decision to become or remain public.”

Atkins also emphasized in his statement that this proposed rule change is just “the first step” of a “larger, comprehensive effort to review and reshape the current SEC rules governing public companies with respect to their ongoing reporting obligations.” Atkins said that “over the next few months, I expect the Commission will be considering a series of proposals that, if adopted, will not only redefine what it means to be a public company, but will make being public attractive again.”

The comment period for the proposed rule changes is now open and will remain open until 60 days after the proposed rule is published in the Federal Register.

Discussion

It seems likely that at some point in the not too distant future that the proposed optional semiannual reporting period will go into effect. I have no doubt that there will be companies that avail themselves of the rule and opt for the semiannual reporting model. Semiannual reporting may be of particular interest to newer and smaller companies. In a May 6, 2026, memo about the proposed rule changes, the Sullivan & Cromwell law firm said, “We expect smaller issuers to be more likely than large, seasoned issuers to forgo quarterly disclosures.”

Many companies may be more interested in what their shareholders want; they may find that their shareholders don’t want semiannual reporting. It is worth noting that, last fall, when President Trump first proposed semiannual reporting,  institutional investors panned the idea; indeed, one commentator noted at the time that:

Quarterly reporting provides investors with regular insight into company performance, reducing uncertainty and lowering the cost of capital. Semiannual reporting would work against investors by increasing information gaps, raising the risk of surprises, and creating more room for insider advantage. Investors would be left with stale data, and when results finally arrive, the adjustment to new information could be sharper and more volatile.

The Sullivan & Cromwell law firm memo noted its expectation that the investor community, shareholder advocates, and proxy advisors will submit comments in connection with the rulemaking process consistent with these observations.

In light of investor concerns about transparency and possible stale data, many companies that opt for semiannual reporting may still continue to release financial information quarterly. The Sullivan & Cromwell memo above speculates that even semiannual reporting companies may continue quarterly earnings releases, “at least initially,” in order to “maintain dialogue with their investors …, [and] to access capital markets and facilitate the opening of trading windows.”

I have my own concerns about reducing the frequency of interim reporting. Among other things, the longer the time between reporting periods, the more information there is available to insiders that is not available to investors. For that reason, I think longer reporting periods could contribute to more insider trading, as trading windows inevitably would be open longer, providing more opportunities for managers with insight into company performance to trade on their awareness of how the company is doing.

I also worry that a longer reporting period could mean increasing uncertainty in the later months, which could hurt share prices, or at least make them more volatile. Longer reporting periods also increases the possibility of news disclosure surprises, of the kind that could lead to sharp share price declines – that is, declines of the type and magnitude that can lead to securities class action litigation.

It is also a fair question to ask whether the proposed rule changes will produce any of the intended benefits. In a Wall Street Journal editorial published last September after President Trump’s initial proposal for semiannual reporting, there is precedent worth considering in thinking about what benefits could be realized by allowing semiannual reporting.

As the Journal noted, the U.K. made quarterly reporting optional, so the U.K. circumstances provide what the Journal called a “useful case study.” As the Journal noted, the U.K. experience is that for companies that switched to half-yearly reporting, “there was no effect on investment or research spending,” suggesting that the companies “didn’t start to think more about the long term.”

However, the reality is that while we can debate whether or not allowing companies to move to semiannual reporting is a good idea, the likelihood, as noted above, is that optional semiannual reporting will soon become a reality.

Which makes me think of one other audience companies may want to consider in deciding whether or not to select the semiannual reporting option – that is, D&O underwriters. I could easily imagine D&O underwriters taking a narrow view of companies with longer reporting periods, because of the concerns about transparency and share price volatility noted above. Concerns about longer reporting intervals could lead some underwriters to consider a pricing debit for companies opting for semiannual reporting.

To be sure, in the current competitive market, there are limits on how much room insurers may have to maneuver on pricing. But even in today’s competitive environment, I can easily imagine that companies with longer reporting cycles could be viewed less favorably by D&O underwriters.

One final thing worth noting here is Paul Atkins’s final comment about further possible future steps to reshape the SEC rules governing public companies. It remains to be seen what this proposition could entail. Many things are possible. I concur with the view the Sullivan & Cromwell firm noted in its memo that one thing the agency may want to consider is “whether the existing ‘one-size-fits-all’ regulatory framework applied to periodic reporting by emerging growth companies, pre-revenue companies, and other small issuers, is appropriate or should be revised to permit additional scaling.”

The current conflict in Iran has enormous implications for the global and regional Middle East economy. The conflict also has important insurance implications, including with respect to D&O insurance in the Middle East region. In the following guest post, Shabnam Karim and Simon Lamb examine the ways that the current military, political, and diplomatic circumstances in the region are affecting both corporate risk exposure and the D&O insurance underwriting and claims environment. Shabnam is a partner and Simon is an associate at the Norton Rose Fulbright law firm’s Dubai office. We would like to thank Shabham and Simon for allowing us to publish their article on this site. Here is Shabnam and Simon’s article.

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The current period of heightened regional tension in the Middle East presents a distinct set of challenges for directors and officers liability insurers and claims professionals operating in the region. As businesses navigate supply chain disruptions and mounting economic pressures, Middle East D&O claims are likely to follow familiar patterns observed globally during previous crises, while also presenting challenges unique to the Middle East’s legal and commercial environment.

In this article, we examine the Middle East claims trends and coverage issues that D&O insurers and claims professionals should anticipate whilst the consequences of the present regional instability unfold.

Supply Chain Disruption and Mismanagement Claims

Regional conflict inevitably disrupts supply chains. Shipping routes through the Red Sea and Gulf of Aden face heightened risk, port operations may be compromised, and cross-border trade can slow or halt entirely. For companies dependent on the timely receipt of goods or raw materials, the consequences can be severe, including production delays, contract breaches, lost revenue, and reputational harm.

When these disruptions translate into financial losses, shareholders and creditors often look to company management for answers. The question that typically arises in subsequent litigation is whether the board took adequate steps to anticipate and mitigate foreseeable risks. Did the company have a robust supply chain contingency plan? Were alternative suppliers or routes identified? Did management disclose material supply chain vulnerabilities to investors?

The COVID-19 pandemic provides instructive precedent. In the United States, a wave of securities class actions followed the outbreak, with shareholders claiming that management had misrepresented companies’ exposures to supply chain delays and logistics failures.[i]

This precedent translates directly to the current tensions in the Middle East. Companies operating in or through the region that suffer conflict-related supply chain disruption may face claims alleging that directors failed to conduct adequate risk assessments, implement contingency measures, or disclose material exposures.

Looking specifically at onshore UAE, and Federal Decree-Law No. 32 of 2021 on Commercial Companies, there exists a legal framework that allows board members and senior executives to be held  jointly liable to the company, shareholders, and third parties for acts of fraud, abuse of power, violations of law, and errors in management (Article 162). In practice, the concept of “errors in management” is broadly construed and may extend to serious failures of oversight, including inadequate risk management or contingency planning in the face of foreseeable disruptions.

In the DIFC and ADGM, which are freezones in the UAE that apply common law legal systems, directors owe duties derived from common law principles, including duties of care, skill, and diligence, and duties to act in good faith in the best interests of the company. The ADGM Courts directly import English law and jurisprudence and the DIFC Courts draw on both English and other common law jurisprudence. In practice, the test before these courts will be to scrutinise whether directors exercised reasonable care in overseeing risk management frameworks, including whether they took adequate steps to anticipate, mitigate, or disclose material supply chain risks.

It is also relevant to consider the express regulatory obligations that apply to companies in the region regarding business continuity. A number of regulatory frameworks across the Gulf (for example, regulations applicable to entities regulated by the Central Bank of the UAE, the DFSA, and the FSRA) impose explicit requirements on companies to maintain business continuity plans and operational resilience frameworks.[ii] Non-compliance with these requirements may strengthen the basis for claims that directors failed to safeguard operations against foreseeable disruptions, or may lead to regulatory exposure under such frameworks.

A particular issue of consideration is that litigation exposure for Middle East businesses may now be more international than it was in previous periods. Over the last five years in particular, companies in the Gulf region (in particular) have benefitted from significant international investments coming from international investors, private equity firms, or other stakeholders based outside the region, such as from the UK, Europe, the US and Canada. The globalized ownership and investment structures of Middle East companies present a scenario where disputes could arise from stakeholders outside the region, who have may have access to courts in other jurisdictions, including jurisdictions such as the US or Europe where there are more developed litigation and class action mechanisms and plaintiff-friendly litigation environments.

Share Price Decline and Securities Claims

Geopolitical instability and share price volatility are closely linked. When regional tensions escalate, companies may see their valuations decline. Where that decline is sudden or substantial, shareholder litigation often follows.

In Saudi Arabia, there is a securities class action regime under the Capital Market Law, which provides a mechanism for investors to bring a class action against directors for misleading disclosures or failures to disclose material risks. The Saudi Committee for the Resolution of Securities Disputes (CRSD) has jurisdiction over such claims and has demonstrated a willingness to hold directors accountable for disclosure failures in several recent cases.[iii] Notably, the Saudi regime is distinct from the class action regimes of the US and Europe in many ways, in that that the regulator can, through its website, invite affected parties (who did not hitherto file a claim) to join an approved class action lawsuit.

Elsewhere in the Gulf, in onshore UAE, a new securities regulatory framework came into force in 2026 following the passing of Federal Law No 32 and 33 of 2025. The UAE Capital Markets Authority (the regulator of listed companies in onshore UAE) now has expanded supervisory powers and enhanced criminal penalties can be imposed, including imprisonment. The relevant laws expressly affirm liability on board and management members for misleading disclosures. This new law paves the way for an increase in securities litigation before the onshore Dubai Courts.

Similar regimes exist or are developing in other Gulf jurisdictions.

D&O insurers should anticipate claims where companies are alleged to have downplayed their exposure to regional instability, failed to disclose material supply chain or operational risks, or made forward-looking statements that proved overly optimistic. The timing of disclosures will be critical: plaintiffs will scrutinise what management knew, when they knew it, and whether they disclosed it in a timely and accurate manner.

Adequacy of Insurance Procured

A less obvious but increasingly significant source of D&O claims in conflict scenarios arises where companies discover gaps in their insurance coverage. Property and business interruption policies frequently contain broad war exclusions, and where a company suffers losses that fall within those exclusions, it must absorb the cost from its own balance sheet. Further, particularly in the Gulf countries, there has historically been a lack of uptake of political violence, war, and terrorism insurance. These products were not routinely purchased by many companies in the region to date, meaning that many businesses may have had no relevant coverage for such risks.

Where uninsured losses are substantial, shareholders and liquidators may turn their attention to the board, alleging that directors breached their duty of care by failing to purchase insurance coverage or to procure adequate coverage for foreseeable risks. There may be arguments made that a prudent board should have ensured that appropriate coverage was in place or, at minimum, should have disclosed the existence of coverage gaps to investors.

While specific case law on director liability for insurance procurement failures remains fairly limited, the risk is recognised within the D&O insurance market. The existence of “failure to maintain insurance” exclusions in some D&O policies evidences an awareness that such claims could arise,[iv] and there have been cases in other jurisdictions where company directors have faced claims for an alleged failure to take out appropriate insurance.[v]

Economic Distress, Insolvency, and Fraud

The broader economic fallout of regional conflict extends beyond immediate supply chain disruption. Prolonged instability may affect consumer confidence, impact foreign investment, and create conditions in which businesses across multiple sectors face financial pressure. When companies face distress, D&O claims historically increase.

Common allegations include wrongful trading, where directors continued to incur debts when they knew or ought to have known that the company could not avoid insolvent liquidation; breaches of fiduciary duty, where directors allegedly prioritised their own interests or those of particular stakeholders over the company as a whole; and fraud, where financial distress reveals previously concealed misconduct.

While insolvency regimes vary across the region, the financial free zones in the UAE (the DIFC and the ADGM) have developed sophisticated frameworks that permit liquidators and creditors to pursue claims against directors, and onshore jurisdictions are also increasingly active in this space.

A further dimension relates to bad debt and loan defaults. Under UAE law, courts have in certain cases held directors personally liable for the repayment of company debts, particularly where there are allegations of mismanagement.[vi] D&O insurers should be alert to the potential for claims arising from such scenarios.

Notably, many D&O policies contain insolvency exclusions that bar coverage for claims arising from a company’s insolvency, bankruptcy, or financial distress although buy-backs are available at extra cost. Insurers and policyholders should consider the scope of any potential exclusions carefully, and the availability of insolvency buyback endorsements.

Cyber Risk in a Conflict Environment

Regional conflicts are frequently accompanied by heightened cyber activity. State-sponsored actors, hacktivists, and opportunistic criminals exploit periods of instability to launch attacks on critical infrastructure, financial institutions, and commercial enterprises. The Middle East has been a particular target in recent years, with significant incidents affecting entities across the Gulf.

According to reports from various authorities in the GCC, the recent scale of attempted intrusions is significant. For example, as of 18 February 2026, UAE authorities were intercepting between 90,000 and 200,000 cyberattacks per day, with more than 70% linked to state-sponsored threat actors.[vii]

Where a company suffers a cyber incident and is found to have lacked adequate cyber resilience or pre-incident compliance, directors risk facing claims and scrutiny. In the aftermath of a significant breach, shareholders may contend that the resulting financial and reputational damage, which may include the cost of responding to regulators and paying fines and penalties, was attributable to mismanagement.

D&O insurers should remain attentive to the broader potential management exposures arising from cyber risks in the current environment.

Regulatory Investigations and Enforcement

The Middle East has seen a rise in both internal and external investigations in recent years, fueled by companies’ heightened compliance obligations and an increasingly rigorous and proactive regulatory enforcement appetite.

Regulators across the region, such as the Securities and Commodities Authority in the UAE, the Capital Market Authority in Saudi Arabia, and the financial services regulators in the DIFC and ADGM, have become more active in scrutinising corporate conduct, particularly in areas such as financial reporting, disclosure obligations, anti-money laundering compliance, and market conduct. Recent analysis by AJMS Global notes that between July 2024 and July 2025, UAE regulators imposed approximately AED 658 million in monetary penalties (with the Central Bank of the UAE alone imposing 22 fines and sanctions totalling around AED 512 million during this period), alongside a strategic shift towards holding senior management personally liable for compliance failures.[viii]

When companies enter distress (a common impact of operating in a turbulent economic time), both internal stakeholders and external regulatory bodies often increase their scrutiny. Insurers and businesses should be aware of the increased risk at this time and that adverse regulatory findings can also serve as the precursor to civil litigation, as shareholders and creditors may use adverse regulatory findings as a basis for a civil claim against directors.

Coverage Considerations for Insurers

The foregoing analysis raises a number of coverage issues that policyholders and D&O insurers should monitor closely:

1. Potential exclusions

Many D&O policies contain exclusions for losses arising from war or hostile acts. Insurers should review the scope (and precise wording) of such exclusions and consider if and how they might be argued to apply in these unusual circumstances and in particular how they apply  to claims arising from the indirect consequences of regional conflict, such as supply chain disruption or economic distress.

As noted above, insolvency exclusions also warrant careful attention. If economic pressure builds and corporate failures increase, the scope of insolvency exclusions and the availability of buyback coverage will become increasingly relevant.

The enforceability of policy exclusions is a critical issue. In many Middle East jurisdictions, including under onshore UAE law, policy exclusions are upheld only where they are drafted clearly, prominently displayed or highlighted in the policy (often in a contrasting colour/font), and specifically approved/initialled by the insured. Failure to meet these formal requirements may undermine an insurer’s ability to rely on such exclusions.

2. Overlapping Coverage and Allocation Issues

Where losses could fall within the scope of more than one policy, questions of overlapping coverage and allocation between policies may arise. For example, a company may hold separate standalone political violence, war, and terrorism insurance, alongside its D&O coverage. Each may respond to different aspects of the same underlying event.

Similar allocation complexities may arise in respect of cyber-related losses. For example, state-linked cyberattacks may trigger both a standalone cyber policy and a D&O policy where shareholders allege inadequate cybersecurity governance. A D&O policy may contain broad conduct-based exclusions or specific cyber or war exclusions, while the cyber policy may include hostile-act carve-outs invoked where an attack is attributed to a state actor.

The interplay of “other insurance” clauses across policies further complicates matters, as each may seek to render itself excess over other available coverage.

Policyholders and insurers should carefully consider all potentially responsive policies to understand how coverage may interact and to identify gaps and overlaps.

3. Notification Issues

Policyholders should be mindful of time limits for notifying claims under their D&O policies. Most D&O wordings impose strict reporting timelines, typically requiring notification of any claim or circumstance “as soon as practicable.” Policyholders should ensure they notify potential claims promptly and in accordance with policy requirements and the requirements of the applicable governing law.

The consequences of late notification may vary depending on the policy’s governing law across the Middle East. For example, under UAE law, although insurers have a remedy for late notification, an insurer may not be entitled to decline a claim solely on that basis where the insured demonstrates a reasonable excuse for the delay. This “reasonable excuse” defence can therefore provide a degree of protection to policyholders who have failed to comply strictly with notification timelines, although the scope and application of this defence will depend on the facts of each case and should not be treated as a substitute for timely notification.

A related issue arises in the reinsurance context. In the Middle East market, reinsurance capacity commonly changes from year to year even though the direct insurer remains the same. Where a direct insurer fails to notify reinsurers promptly, it may lose the benefit of its reinsurance cover if the relevant reinsurance contract’s conditions on notification are not met even though the insurer may in fact be liable to the policyholder due to being on cover continuously across multiple policy years.

4. Governing Law and Jurisdiction

Finally, governing law and jurisdiction issues warrant careful attention in the Middle East D&O market.

D&O policies placed in the region may be governed by different laws or subject to different courts or tribunals, depending on where the policy was issued, the insured’s domicile, and the specific terms negotiated at placement.

This can materially affect coverage outcomes. The same wording may be interpreted differently under onshore UAE law, DIFC law, ADGM law, English law, or the law of another jurisdiction. Substantive issues such as the enforceability of exclusion clauses, the duty of utmost good faith, and the availability of late notification defences may all be resolved differently across different legal systems.

Policyholders and insurers should give early consideration to governing law and jurisdiction provisions and their strategic implications, as these may shape coverage dispute outcomes as much as the substantive policy terms themselves.

Conclusion

The current regional tension in the Middle East presents a complex and evolving risk landscape for D&O insurers and claims professionals. While the precise trajectory of events remains uncertain, the patterns observed in other jurisdictions and in previous crises provide a useful guide to the claims trends that are likely to emerge.

In particular, supply chain disruption, share price decline, inadequate insurance, economic distress, and regulatory investigations all present potential catalysts for increased D&O claims. Insurers who understand these dynamics and engage proactively with their policyholders will be better positioned to manage their exposures and respond effectively when claims arise.

For policyholders, robust risk management, transparent disclosure, and comprehensive insurance coverage are the best defences against the claims that follow periods of instability. Directors who can demonstrate that they took reasonable steps to anticipate and mitigate foreseeable risks will be in a far stronger position than those who cannot. In an uncertain environment, preparation remains the most reliable form of protection.

[i] See, e.g., Ryan v. FIGS, Inc. et al., No. 2:22-cv-07939-ODW (AGRx) (C.D. Cal. filed Nov. 1, 2022).

[ii] DFSA GEN 5.3.23 Guidance | Rulebook; ADGM GEN 3.3.33 Guidance | Rulebook.

[iii] https://www.saudiexchange.sa/wps/portal/saudiexchange/newsandreports/issuer-news/news-detail-wcm/?newsId=9112&locale=en#:~:text=2025%2020:34-,CMA:%20Obligating%20Some%20Members%20of%20the%20Board%20of%20Directors%20and,on%2022/04/2025.

[iv] Failure to Maintain Insurance Exclusion Precludes Coverage for Defense Costs Incurred in a Lapsed Life Insurance Dispute | The D&O Diary

[v] Campbell v Peter Gordon Joiners Ltd (in liquidation) and another (2016) UKSC 38.

[vi] See, e.g., Dubai Court of First Instance Case No. 14 of 2019 dated October 10, 2021, in which the Court held the directors of a public company personally and jointly liable for the company’s outstanding debts, totalling close to AED 450 million.

[vii] Emirates News Agency: 71.4% of cyber threats targeting UAE state-sponsored: Cybersecurity Council

[viii] AJMS Global – Business Management Consultancy Services – UAE Regulatory Enforcement: A New Era of Compliance

As followers of the financial markets know, in recent months, trouble has been brewing in the private credit sector. In at least some cases, the problems in the private credit markets have translated into D&O claims, including both securities class action lawsuits (for example, here) and shareholder derivative lawsuits (here). In the latest example of a private credit-related D&O claim, a shareholder plaintiff has filed a securities class action lawsuit against one of KKR’s private credit ventures, alleging that the firm overstated asset valuations and the effectiveness of its restructuring efforts. A copy of the May 4, 2026, securities class action lawsuit complaint can be found here.

Background

FS KKR Capital Corp. is a publicly traded Business Development Company (BDC). The firm specializes in making private, non-bank loans to companies. For five consecutive quarters ending in the first quarter of 2025, the company stated that it was establishing an improved loan portfolio credit profile and that any non-accrual issues with legacy investments were being adequately addressed through restructuring.

On August 6, 2025, the company released its 2Q25 financial results, disclosing, among other things, that its net asset value and total fair value of investments had declined. It also disclosed that its earnings per share (actually an operating loss) had declined and its net accrual status had increased from the prior quarter. In explaining these results, the company said that it had been “impacted by company specific issues affecting four companies, each of which have been discussed in prior earnings calls.”

Then on February 25, 2026, when the company released its results for 4Q and the full year 2025, the company disclosed that its net asset value and total fair value of investments had continued to decline; that its earnings had further declined; and that investments on a non-accrual basis had increased. The company also cut its dividend. The Company “acknowledged specific challenges” with additional companies, noting further that its ‘recent underperformance reflects challenges in certain legacy investments” in addition to those previously discussed.

The securities lawsuit complaint alleges that these disclosures showed that the “challenges ran much deeper than previously disclosed,” as the previously identified legacy customers’ problems accounted for only about 50% of net realized and unrealized losses. The company also acknowledged that its non-accrual rate is above long-term BDC industry average costs. The complaint alleges that the company’s share price declined over 15% on this news.

The Lawsuit

On May 4, 2026, a plaintiff shareholder filed a securities class action lawsuit in the Eastern District of Pennsylvania against FS KKR Capital and certain of its executives. The complaint purports to be filed on behalf of a class of investors who purchased the company’s securities between May 8, 2024, and February 25, 2026.

The complaint alleges that during the class period, the defendants failed to disclose to investors that: “(1) the Company overstated the effectiveness of its portfolio restructuring efforts for its nonaccrual companies; (2) the Company overstated the valuation of its portfolio investments and/or overstated the effectiveness of the Company’s portfolio valuation process; (3) the Company overstate the durability of its quarterly distribution strategy; 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

This new securities class action lawsuit is the latest in a series of securities suits filed against private credit lenders. (There has also been a series of D&O claims filed against private credit borrowers, as discussed here and here.)

For example, with respect to the suits against lenders, beginning in December 2025, several securities suits have been filed against private credit lender Blue Owl – and in addition, Blue Owl has also been hit with a shareholder derivative lawsuit as well.

In addition, in recent months, shareholders have also filed securities suits against private credit lenders Hercules Capital (about which refer here) and Blackrock TCP (refer here).

As these lawsuits accumulate, it is becoming clear that lawsuits arising out of the problems in the private credit sector could turn out be an important contributing factor in the total number of securities class action lawsuit filings this year.

These lawsuits are accumulating due to a number of different kinds of underlying problems in the private credit sector. The lenders are under pressure for a host of reasons, among other things because of rising defaults (due in part to an increase in the sector in recent years of weaker borrowers); loan concentrations (particularly in the software sector, where valuations have recently declined because of the perceived threat of AI); liquidity issues, as investors seek near-term redemptions, while investment portfolios are longer-tail; growing concerns about valuations of debt assets and about accruals for underperforming loans; and questions about management and service fees.

As if these factors were not problems enough, the private credit now apparently is under SEC scrutiny. As discussed here, earlier in the week SEC Chair Paul Atkins said that the SEC is investigating alleged fraud in the private credit sector. Among other things, Atkins said (without naming any specific private credit firms) that “We are taking it very seriously, we are monitoring the situation.”

The likelihood for now is that these problems are likely to continue to weigh on the private credit sector in the months ahead. A bigger question may be whether or not there is a risk of a contagion effect, as problems in the private credit sector spill over into other segments. There is some concern that problems in the non-bank private credit sector could lead to problems in the commercial bank sector, as some private credit funds have drawn on significant bank loans. At least some life insurance companies are heavily invested in the private credit sector, as are some pension and sovereign wealth funds. However, at least for now, the likelihood of major contagion event for now at least seems unlikely.

In any event, as the problems in the private credit sector continue to develop, it seems likely that we will continue to see private credit sector-related securities class action lawsuits filed, with an increasing likelihood that these private credit related suits will represent an important factor in the total number of securities suits filed this year.

The Quinn Emanuel law firm, in a very detailed April 26, 2026 memo about emerging litigation risk in the private credit sector (here), observed that “Private credit does not need to trigger a financial crisis before it will create litigation. The market’s defining features — illiquidity, bespoke documentation, manager-driven valuation, retail distribution, and a growing interconnection with banks and insurers — create the kind of factual record from which complex disputes grow.” The memo concludes by noting that “For sponsors, lenders, fund managers, boards, insurers, banks, and plan fiduciaries, this moment is less about predicting collapse than about preparing for the inevitable disputes.”

The U.S. Supreme Court’s June 2024 decision in SEC v. Jarkesy continues to generate follow-on litigation, as regulated entities increasingly challenge the constitutionality of administrative enforcement proceedings. As D&O Diary readers will recall, Jarkesy held that when the SEC seeks civil penalties for securities fraud, claims the Court characterized as “legal in nature,” defendants are entitled to a jury trial under the Seventh Amendment. That ruling is now fueling a growing wave of challenges to state administrative regimes, including a pending appeal in Delaware and a closely watched case before the Arizona Supreme Court.

These emerging cases raise the question of whether state regulators, like their federal counterparts, can continue to pursue monetary penalties through in-house proceedings, or whether such claims must instead be brought in courts of law before juries. The following discusses the cases pending before the Delaware and Arizona Supreme Courts and D&O implications.

Delaware

On April 22, 2026, the Delaware Supreme Court heard oral argument in Swan Energy, Inc. v. Investor Protection Unit, which squarely presented the question of whether Jarkesy’s reasoning applies to state-level administrative enforcement actions.

In that case, originally filed on December 1, 2023, Swan Energy and its executives (collectively “Swan”), filed suit in Delaware Chancery Court seeking declaratory and injunctive relief against the Delaware Department of Justice’s Investor Protection Unit (IPU). The underlying administrative action, commenced in 2020, alleges that the company engaged in securities fraud and sold unregistered securities, and seeks civil penalties that could reach approximately $710,000.

The presiding officer in the IPU administrative case issued an order directing Swan to raise its jury trial argument in state court. Swan initially sought an injunction in the Delaware Chancery Court, after the parties agreed to stay the administrative proceeding, mooting the injunction request, the case was transferred to the Delaware Superior Court, which denied Swan Energy’s request for a jury trial.

On appeal, Swan challenges the proceeding on constitutional grounds, arguing that the IPU’s in-house adjudication, where the agency both prosecutes the action and adjudicates it, violates its rights to a jury trial and due process. Swan’s appeal relies heavily on Jarkesy, arguing that securities fraud claims seeking monetary penalties are analogous to common-law fraud and therefore must be tried before a jury. The brief emphasizes that the IPU is seeking fines and other monetary relief, remedies historically associated with actions at law and contends these claims fall squarely within the scope of the constitutional jury trial right.

The state, in its response, argues that Jarkesy is not controlling. Its answering brief emphasizes that Delaware’s constitutional framework differs from the federal Seventh Amendment analysis and instead turns on whether a cause of action existed at common law. The state further contends that securities enforcement actions are modern statutory creations, not direct analogs to common-law claims, and therefore do not trigger a jury trial right under the Delaware Constitution.

Arizona

A related challenge is pending before the Arizona Supreme Court, where litigants are pressing similar arguments grounded in state constitutional law.

The case raises the question of whether the Arizona Corporation Commission may impose civil penalties through internal administrative proceedings without affording defendants a jury trial. The challengers argue that the Arizona Constitution’s protection of the right to a jury trial, described as “inviolate,” is at least as strong as the Seventh Amendment right at issue in Jarkesy. Relying on the U.S. Supreme Court’s reasoning, they contend that when the government seeks monetary penalties for conduct analogous to common-law claims, those claims must be adjudicated in a court of law before a jury.

The Arizona Corporation Commission argues that its constitutionally established role permits specialized, non-jury adjudication, and that its enforcement actions are part of a broader regulatory framework rather than traditional common-law litigation.

D&O Implications and Discussion

The Swan appeal and Arizona Supreme Court proceeding underscore how Jarkesy may extend beyond the SEC and potentially reshape the procedural framework for a wide range of enforcement actions.

The Supreme Court in Jarkesy reaffirmed that administrative agencies may adjudicate matters involving “public rights,” even where monetary penalties are involved, on the theory that such matters arise within a regulatory scheme between the government and regulated entities. Where the government seeks punitive monetary relief for conduct closely analogous to common-law fraud, the Court signaled that such actions are “legal in nature” and therefore fall within the traditional domain of Article III courts and juries.

Even so, state regulators may continue to argue that their enforcement actions fall within the permissible scope of administrative authority, particularly where the governing statutory framework is comprehensive and specialized. The Arizona case illustrates this tension, as the state’s Corporation Commission contends that its constitutionally grounded authority permits in-house adjudication notwithstanding the jury trial concerns raised by challengers.

For D&O underwriters and claims professionals, the potential shift away from administrative forums toward judicial proceedings could have meaningful consequences. Administrative enforcement actions are often more streamlined and predictable, with limited discovery and specialized adjudicators. If those actions are instead brought in court, the result could be longer timelines, broader discovery, and increased defense costs. From a D&O coverage perspective, this may accelerate the erosion of policy limits, particularly in complex, multi-forum disputes.

The shift to judicial forums may introduce additional exposure. Jury trials inherently carry greater unpredictability than administrative proceedings, particularly in cases involving allegations of fraud or investor harm. The availability of a jury may also influence settlement dynamics, potentially increasing settlement values in cases where reputational considerations or litigation risk loom large. These factors, in turn, could affect how insurers assess severity risk in underwriting and reserving.

Another consideration is the increased likelihood of parallel proceedings. As illustrated by Swan, defendants may pursue constitutional challenges in court while simultaneously defending against underlying administrative actions. This dual-track approach can create significant inefficiencies and costs, as well as complex questions regarding coverage allocation, timing of notice, and the coordination of defense strategies. In some instances, insureds may face overlapping investigations, enforcement actions, and constitutional litigation arising out of the same core set of facts.

In addition, procedural shifts following Jarkesy may have implications for the types of claims that trigger D&O coverage in the first instance. To the extent enforcement actions are recharacterized or refiled as civil actions in court, questions may arise as to whether those proceedings more clearly fall within policy definitions of a “Claim,” particularly where policies distinguish between administrative proceedings and civil litigation.

In sum, the post-Jarkesy environment introduces increased uncertainty into the enforcement landscape. While defendants may benefit from enhanced procedural protections, those protections may come at the cost of more complex and protracted litigation. For D&O insurers and policyholders, the key will be to monitor how courts, including state high courts, resolve these issues and adjust risk assessments accordingly.

It was 20 years ago this week – on May 6, 2006 – that The D&O Diary published its first blog post. Two decades and literally thousands of blog posts later, The D&O Diary is still at it, still a “Periodic Journal,” still publishing “Items of Interest from the World of Directors and Officers Liability, With Occasional Commentary.”  

The D&O Diary’s Origins

How did this come about? In early 2006, Kevin had changed jobs, going from D&O underwriting to wholesale D&O broking. At the beginning, the phone wasn’t exactly ringing off the hook. So, to stay active, and as a part of an experiment with what was at the time a new tech application, a Google app called “Blogger,” Kevin created The D&O Diary.

At the very beginning, there was no particular plan to maintain the blog, or even to have a blog. Kevin certainly had no idea that twenty years later he would still be at it, blogging away. Nor could he have foreseen that twenty years later he would view it as indispensable to prepare the blog for the future by bringing in the site’s first co-author, Sarah Abrams.

A few early developments clearly helped get the blog going. At the outset, at the very moment that the blog was coming into being in the early spring and summer of 2006, the Options Backdating Scandal was unfolding. It turned out to be a huge scandal, providing months and months of blog-worthy content. Prospective readers’ interest in the scandal drove traffic to the site. And from that point, The D&O Diary was up and running.

Next came the 2008 Global Financial Crisis. The D&O Diary began publishing items about mortgage-backed securities and collateralized debt obligations. It seemed the world of D&O insurance wanted – indeed, needed – to know more and more about these things. And so it has been throughout the years. The rise of cybersecurity concerns. The pandemic. The SPAC frenzy. The 2023 bank failures. The rise of AI. Geopolitics and D&O risk.  And with each twist and turn, the site explored new topics and reached new readers.

The D&O Diary’s Readers

What do the numbers tell us? The site has about 9,000 subscribers. But perhaps more interestingly, since February 2013 (when the site implemented its current tracking protocols), the site has had over 9 million unique visitors, from over 160 countries.  

Sarah was one of those subscribers. She was assigned The D&O Diary as required reading by a senior public company underwriter early on in her claims career when she began handling D&O matters in the early 2010s.  From time to time, there were blog posts discussing cases in which she was involved, with useful discussion by Kevin or guest authors that provided helpful insight and ways to think about D&O coverage and litigation.

Sarah submitted her first guest post to Kevin and The D&O Diary in March 2021, “Achieving Organizational Diversity in the Wake of the Pandemic.” Sarah still remembers when Kevin responded that he would accept her submission for publication on The D&O Diary – it was, and remains, a professional highlight.

For both Sarah and Kevin, having the opportunity to publish articles on topics we find interesting is so rewarding. It allows us to communicate with fellow professionals throughout the industry and, more importantly, to form connections and friendships around the world.

The D&O Diary’s Values and Publications

Another thing that is very important to us is that over the last 20 years, The D&O Diary has developed some defining traditions – for example, the annual What to Watch issue, published in early September each year, and the annual Top Ten Stories from the World of D&O post, published in early January each year.

Another great tradition that we are very proud of is that we regularly feature guest posts from other professionals around the industry. We are happy to give others a platform to express their views and to share their ideas and information. We are grateful to everyone who has allowed us to publish their guest posts on this site.

One of the great things we have discovered over the years is that the flexibility of the blog format affords opportunities for some “off-road driving,” including the opportunity to publish off-topic articles, such as, for example,  persistent time zone confusion (here), the future supply of fresh water and the reason you will be moving to Cleveland sometime in the 21^st century (here), and the beautiful music of European football (soccer) players’ names (here). Indeed, the blog post with the single highest number of readers ever is our 2011 post entitled “The Single Best of Baseball Ever?” (here), Sadly, over the years, we have also found ourselves publishing obituaries as well.

The highest-profile examples of The D&O Diary’s off-topic articles are Kevin’s Travel Posts. Kevin enjoys writing these posts so much that he would continue to write and publish them even if no one read them. The good news is that many readers tell us that while they really appreciate the info on D&O insurance, they LOVE the travel posts. While we, too, love the travel posts, all of them, our favorite one of all is the very first one, about Kevin’s October 2011 visit to Amsterdam (here). For more about the Travel Posts, please see below.

Highs and Lows

Not everything we have tried over the years has worked out. One project Kevin tried to get going was a feature called Sunday Arts. It was intended as a weekend forum for cultural topics – the arts, literature, and history. Kevin still thinks that there were some pretty good articles in the Sunday Arts series. Our favorite is the 2021 article about the art of Francisco Goya (here).

Kevin learned two things in pursuing the Sunday Arts project. The first is that the Sunday Arts posts required an immense amount of time to plan and prepare, much more time and effort than more conventional blog posts. Second, Kevin learned that, sadly, there was not much interest in the Sunday Arts – or maybe it was just that there wasn’t interest in the arts on Sundays  (except from Sarah, who minored in Art History in college).

Kevin remains proud of the Sunday Arts posts, but he recognized he had to make a concession to reality and allow the series to die a natural death.

The D&O Diary Merch

On the other hand, there have been some interesting projects that did work out. Possibly the project that generated the most reader interest was The D&O Diary mugs. The deal for readers was that they could get a free D&O Diary mug, but in exchange the readers had to send back a photo of their mug, preferably in an interesting setting. The pictures readers sent in included pictures taken at The White House, at the U.S. Supreme Court, in Sydney, in Rotterdam, in Jerusalem, in Singapore, in Alaska, and innumerable other locations as well. It was all great fun. There was a follow-up project involving Tenth Anniversary D&O Diary frisbees as well.

It would have been fun to have a D&O Diary giveaway for the 20^th anniversary, but shipping costs recently have escalated so substantially that the idea of a 20^th anniversary giveaway proved to be prohibitively expensive.

Deep Thoughts and Favorite Posts

There are a number of the more conventional posts that we are also quite proud of, as well. Among the many articles we published over the years, one particular item that stands out for us is the 2012 post entitled “Meditations on the Meaning of Relatedness” (here), which is noteworthy, at least in Kevin’s mind, for the following paragraph:

“Relatedness” is not self-defining. It is, in fact, a concept that recedes away from you the harder you try to think about it. At a certain level of generalization, everything in the universe is related, all joined together in the all-powerful and all-knowing mind of almighty God. Yet from another perspective, nothing is related, as all of creation consists of nothing more than chaotic, swirling bits of matter randomly spinning away within the cosmic void.

But of all the posts over all the years, Kevin’s favorite post is his 2012 post entitled “Summer Time,” about life at his lake house in Pentwater, Michigan (here). Kevin likes the post so much that it has become an annual feature of this site, reprinted annually every July 4 weekend, to encourage everyone to be sure to savor summertime.

Sarah has her own favorite D&O Diary posts from the many years she was one of the blog’s readers. She particularly liked the post with our Readers’ Travel Pictures and Hacks and the Sunday Arts post that discussed the artist J.M.W. Turner. Sarah also found The D&O Diary’s June 2016, cyber disclosure post to be an early and important identification of the ways that cyber disclosure concerns that can give rise to securities litigation. And the first D&O Diary Post discussing COVID-era event-driven litigation against Norwegian Cruise Lines reinforced that real world events often translate into D&O claims.  As we have discussed on the D&O Diary recently with conflicts in Ukraine and the Middle East, event-driven litigation continues to be a driver of securities suits. 

Final Thoughts

What will the next 20 years bring for The D&O Diary? We hope we will continue to provide you with timely articles about Items of Interest from the World of Directors and Officers Liability. Kevin hopes that Sarah will figure out a way to fulfill one of his long-standing ambitions for the site, by figuring out how to publish a scratch-and-sniff edition.

Sarah’s hope as co-author of the D&O Diary is, above all, to maintain the standards that this platform has set over the past 20 years.  Sarah also hopes that over time, the site will launch and establish new traditions, as well.

Both Kevin and Sarah also recognize that, over time, the way our readers consume information has changed. That has implications for the way we deploy our content.  We recently created a D&O Diary LinkedIn page for followers to engage with and we plan to launch a D&O Diary Podcast Series soon.  We hope that diversifying the way we distribute our content will allow us to reach and connect with more people.  The engagement we have built with the professional liability insurance community is so important to us and we hope to continue and to deepen that engagement, for years to come.

Our final act as part of this anniversary celebration is to thank our readers. Your interest and communications have kept us motivated. So many of our best ideas and blog post topics have come from readers’ suggestions. It never ceases to amaze us – we type up our little blog posts and publish them on the Internet, and people from all over the world come to our site and read what we have written. That is a very special thing, for which we are eternally grateful.

Thank you, dear readers, from the bottom of our hearts.

Two Decades of Travel Pictures: As one last celebratory gesture in recognition of this site’s 20th anniversary, Kevin wanted to share a small sampling of the many travel pictures he has posted to this site. The travel pictures are relevant here because the blog itself made so much of the travel possible. Kevin freely concedes that including the travel pictures is totally self-indulgent, but he hopes that including the pictures will add a bit of color and flash to the anniversary celebration. Please enjoy the pictures.

The picture of Jerusalem seems like the obvious and natural place to end the photo retrospective, but Kevin couldn’t resist adding one more picture. In and of itself, the last picture below is seemingly unremarkable and undoubtedly at first glance will seem out of place with the other pictures shown above. The seemingly humdrum picture captures something important.

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.