PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT DO NOT DISTRIBUTE WITHOUT PRIOR APPROVAL OF HOWARD QUINN OR VICTORIA CHAMBERS
MEMORANDUM
FROM: Howard Quinn, Partner, White Collar & Investigations Practice Group Calderwood & Harkness LLP 599 Lexington Avenue, 38th Floor New York, New York 10022
TO: Victoria Chambers, Partner, White Collar & Investigations Practice Group Calderwood & Harkness LLP 1501 K Street, N.W., Suite 1100 Washington, D.C. 20005
CC: Jasmine Thornton, Lead Associate, Calderwood & Harkness LLP (New York) Marcus Wellbourne, General Counsel, Dunmore Energy Holdings Ltd. (Houston)
DATE: June 1, 2022
RE: D&O Insurance Coverage Analysis — Garrison Mutual Insurance Co. Policy No. GM-DO-2021-08734; Dunmore Energy Holdings Ltd. DOJ National Security Division Sanctions & Export Controls Inquiry
MATTER NO.: 1016-00009
PRIVILEGE DESIGNATION: This memorandum is a privileged and confidential attorney-client communication and constitutes attorney work product prepared in anticipation of litigation. It is protected from disclosure by the attorney-client privilege, the work product doctrine, and all other applicable privileges and protections. This memorandum is intended solely for the use of the addressees and those persons copied herein. It shall not be disclosed, distributed, or disseminated to any third party, including but not limited to Garrison Mutual Insurance Co., without the prior written approval of Howard Quinn or Victoria Chambers.
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I. Executive Summary
This memorandum analyzes the scope, applicability, and limitations of the directors' and officers' liability insurance policy issued by Garrison Mutual Insurance Co. (Bermuda) to Dunmore Energy Holdings Ltd. ("DEH" or the "Company"), Policy No. GM-DO-2021-08734 (the "Policy"), in connection with the investigation opened by the U.S. Department of Justice, National Security Division, Counterintelligence and Export Control Section on April 19, 2022 (the "DOJ Inquiry"). The DOJ Inquiry was commenced by the issuance of grand jury subpoena GJ No. 22-418, issued by the U.S. District Court for the District of Columbia, Grand Jury 22-2, served on Dunmore Energy Holdings Ltd. via its registered agent in Houston, Texas on the same date.
The Policy provides the following key coverage parameters:
•  Aggregate Limit: $50,000,000
•  Per-Claim Limit: $10,000,000
•  Self-Insured Retention ("SIR"): $2,500,000 (applicable to Side B corporate reimbursement coverage and, if included, Side C entity coverage; Side A individual coverage is likely provided without a retention)
•  Carrier: Garrison Mutual Insurance Co., Cedar House, 41 Cedar Avenue, Hamilton HM 12, Bermuda
•  Claims Adjuster: Patricia Holbrook, Garrison Mutual Insurance Co.
Bottom-Line Conclusion. Based on our review of the Policy, the relevant facts, and applicable law, we conclude that the Policy likely covers defense costs — including legal fees, forensic accounting fees, e-discovery costs, and related investigation expenses — incurred by Dunmore and advanced to individual directors and officers in connection with the DOJ Inquiry, subject to the $2.5 million self-insured retention and the per-claim and aggregate limits. The Policy almost certainly does not cover voluntary disgorgement payments, penalties, fines, or prospective compliance remediation costs. We further conclude that the entirety of the DOJ Inquiry is most likely to be treated as a single "claim" under the Policy, which means that the per-claim limit of $10,000,000 will cap carrier reimbursement on this matter, even though the aggregate limit of $50,000,000 would otherwise be available.
We recommend prompt formal claim submission to Patricia Holbrook at Garrison Mutual no later than June 5, 2022, together with early engagement to preserve coverage rights and establish a defense cost reimbursement framework. We also recommend that the Company implement billing and time-entry protocols that segregate covered defense costs from non-covered costs (disgorgement, remediation, and prospective compliance) to facilitate the claims process and minimize allocation disputes.
Our preliminary estimate of recoverable defense costs, after application of the retention, anticipated allocation adjustments, and carrier coverage determinations limited to defense costs, is approximately $7.2 million. Against total projected matter costs of approximately $31.275 million, this would leave a net cost to Dunmore of approximately $24.075 million after insurance recovery. We emphasize that these figures are preliminary estimates; actual recovery will depend on the carrier's coverage position, the resolution of any allocation disputes, and the ultimate trajectory of the DOJ Inquiry and any related proceedings.
The balance of this memorandum sets forth the detailed analysis supporting these conclusions.
II. Background
A. The DOJ Inquiry
Dunmore Energy Holdings Ltd. is a Cayman Islands–domiciled holding company (Cayman Islands Monetary Authority Registration No. MC-334821) with its principal operational headquarters at 1200 McKinney Street, Suite 3400, Houston, Texas 77010. The Company is a diversified energy trading, logistics, and infrastructure enterprise with fiscal year 2021 revenues of approximately $4.87 billion and approximately 3,200 employees across operations in the United States, the United Arab Emirates, the United Kingdom, Germany, Singapore, and several other jurisdictions. The Company's principal operating subsidiaries include Dunmore Trading International Ltd. ("DTI"), a Dubai International Financial Centre–licensed entity (DIFC License No. CL-4827), which conducts the Company's commodity trading, brokerage, and physical supply operations throughout the Middle East, Central Asia, and the broader Eastern Hemisphere.
On April 19, 2022, the U.S. Department of Justice, National Security Division, Counterintelligence and Export Control Section (the "NSD") opened a formal investigation into potential violations of U.S. sanctions laws and export control regulations by Dunmore Energy Holdings Ltd. and certain of its subsidiaries, directors, officers, and employees. The investigation was initiated by the issuance of grand jury subpoena GJ No. 22-418 by the U.S. District Court for the District of Columbia, Grand Jury 22-2, which was served on the Company through its registered agent in Houston on the same date.
The lead prosecutor assigned to the matter is Assistant United States Attorney Meredith Calloway, who is supported by Trial Attorneys Samuel Kovacs and Diana Pressman of the NSD. The investigating agents include FBI Special Agent Paul Reinhardt and OFAC Liaison Officer Erin Matsuda, who is coordinating with the Treasury Department's Office of Foreign Assets Control in a parallel administrative review of the Company's sanctions compliance.
The DOJ Inquiry concerns potential violations of the following statutes and regulatory programs:
•  OFAC-Administered Sanctions Programs: Executive Order 14024 (of April 15, 2021, relating to Specified Harmful Foreign Activities of the Government of the Russian Federation); Directive 2 under Executive Order 13662 (prohibiting dealing in new debt of certain entities in the Russian financial services sector); and regulations codified at 31 C.F.R. Part 589 (Ukraine-/Russia-Related Sanctions Regulations).
•  Export Administration Regulations ("EAR"): 15 C.F.R. Parts 730–774, with particular focus on §746.5 (Russian/Belarusian Industry Sector Sanctions) and Export Control Classification Numbers ("ECCNs") 2B350 and 2B999, which relate to certain chemical and biological equipment and related items, as well as specifically identified items for Russian oil refining applications.
•  Criminal Statutes at Issue: The International Emergency Economic Powers Act ("IEEPA"), 50 U.S.C. §§ 1701–1706, which provides criminal penalties for willful violations of sanctions programs administered under executive orders issued pursuant to IEEPA; and the Export Control Reform Act of 2018 ("ECRA"), 50 U.S.C. §§ 4801–4852, which provides criminal penalties for willful violations of export control regulations.
The specific conduct under investigation relates to a series of transactions conducted through DTI's Dubai office involving three counterparties: Petronova Trading FZE, Zenith Petroleum DMCC, and Caspian Logistik GmbH. The DOJ alleges that these entities maintained undisclosed commercial and beneficial ownership ties to Volkhov Industrial Group JSC, a Russian industrial conglomerate that was designated on the Specially Designated Nationals and blocked Persons ("SDN") List on April 6, 2022, and which had previously been subject to Directive 2 restrictions under E.O. 13662 since November 15, 2019. The government's theory, as best understood from the subpoena's document requests and informal communications with AUSA Calloway, is that Dunmore personnel — specifically certain individuals at DTI — knew or should have known of the Volkhov nexus and either facilitated or failed to prevent transactions that constituted prohibited dealings with a sanctioned entity.
Calderwood & Harkness LLP was retained on April 14, 2022, by Marcus Wellbourne, General Counsel of Dunmore Energy Holdings Ltd., to represent the Company in connection with the DOJ Inquiry and any related proceedings. Victoria Chambers was designated as the Responsible Partner, and Jasmine Thornton was assigned as Lead Associate.
B. Key Individuals Potentially Triggering Coverage
The following individuals are directors, officers, or employees of Dunmore Energy Holdings Ltd. or its subsidiaries who are either named or referenced in the grand jury subpoena, are subjects or targets of the DOJ Inquiry, or are otherwise potentially implicated in the underlying conduct. Each of these individuals may trigger coverage obligations under the Policy:
1.  Callum Renshaw — Chief Executive Officer, Dunmore Energy Holdings Ltd. Mr. Renshaw is based in Houston, Texas. As CEO, he bears ultimate supervisory responsibility for the Company's operations and compliance programs. While there is no indication at this time that Mr. Renshaw had direct personal involvement in the flagged DTI transactions, his name appears prominently in the grand jury subpoena's document requests, and AUSA Calloway has indicated informally that his testimony may be sought.
2.  Derek Hargrave — President, Dunmore Trading International Ltd. (Dubai). Mr. Hargrave is the senior executive directly responsible for DTI's trading operations and maintained direct oversight of the counterparty relationships at issue. Based on our preliminary internal investigation, Mr. Hargrave was involved in approving several of the suspect transactions and had interactions with representatives of Petronova Trading FZE and Zenith Petroleum DMCC. Mr. Hargrave is anticipated to be placed on administrative leave effective July 1, 2022. He has retained personal counsel, James Overstreet of Overstreet & McClain PLLC (Dallas, Texas), and the Company is advancing his defense costs under its indemnification obligations.
3.  Natasha Sorokin — Senior Trader, Dunmore Trading International Ltd. (Dubai). Ms. Sorokin is a Russian-American dual national who was the primary point of contact for transactions with the flagged counterparties. She was placed on administrative leave on May 16, 2022. Our internal investigation indicates that Ms. Sorokin executed the majority of the flagged trades and maintained the most extensive communications with counterparty representatives. She has retained personal counsel, Philip Keane of Wexford Keane LLP (Washington, D.C.), and the Company is advancing her defense costs.
4.  Gerald Fisk — Former Chief Compliance Officer, Dunmore Energy Holdings Ltd. Mr. Fisk departed the Company on June 10, 2022, which was subsequent to the date of initial notice of the DOJ Inquiry but is relevant for coverage analysis under the Policy's "wrongful act" definitions and the treatment of former officers. Mr. Fisk's role is significant because the DOJ appears to be scrutinizing the adequacy of the Company's sanctions compliance program during the period of the flagged transactions, and Mr. Fisk was the officer directly responsible for that program. He has retained personal counsel, Catherine Blackthorn of Blackthorn & Associates LLP (Houston, Texas), and the Company is advancing his defense costs.
5.  Sandra Whitfield — Chief Financial Officer, Dunmore Energy Holdings Ltd. Ms. Whitfield is based in Houston. She is referenced in the grand jury subpoena in connection with financial approvals and payment authorizations for certain of the flagged transactions.
6.  Omar Al-Rashidi — Head of Middle East Operations, Dunmore Trading International Ltd. (Dubai). Mr. Al-Rashidi has been identified as a cooperating witness and has been providing information to Calderwood & Harkness in connection with the internal investigation.
7.  Yves Leclerc — Director of Logistics & Shipping, Dunmore Trading International Ltd. (Dubai). Mr. Leclerc oversaw the physical logistics and shipping arrangements for the transactions at issue, including chartering and documentation.
8.  Rajesh Malhotra — Controller, Dunmore Trading International Ltd. (Dubai). Mr. Malhotra was responsible for accounting and financial reporting for DTI's trading book and processed the financial entries for the flagged transactions.
9.  Tobias Engel — Managing Director, Dunmore Renewables GmbH (Hamburg, Germany). Mr. Engel has tangential involvement arising from certain shared logistics resources between DTI and Dunmore Renewables GmbH and his participation in certain cross-subsidiary coordination calls where the flagged counterparties were discussed.
As noted above, three individuals have retained personal counsel separate from Calderwood & Harkness: Gerald Fisk (Catherine Blackthorn, Blackthorn & Associates LLP, Houston); Natasha Sorokin (Philip Keane, Wexford Keane LLP, Washington, D.C.); and Derek Hargrave (James Overstreet, Overstreet & McClain PLLC, Dallas). The Company is currently advancing defense costs for each of these individuals pursuant to its indemnification obligations, which are analyzed in a separate memorandum.
C. Ownership Structure
The ownership structure of Dunmore Energy Holdings Ltd. is relevant to the D&O insurance coverage analysis because the Company's private equity sponsors may have separate insurance programs, may assert claims to information regarding the D&O claim, and may have interests that diverge from those of the Company's management in connection with the DOJ Inquiry.
•  Greystone Capital Partners Fund IV, L.P. holds 62.5% of the equity of Dunmore Energy Holdings Ltd. The general partner of Greystone Fund IV is Greystone Capital Management LLC, whose Managing Partner is Richard Fairbanks. Greystone's outside counsel for the Dunmore matter is Harwood & Pennington LLP, led by Arthur Pennington III.
•  Dunmore Management holds approximately 22.5% of the equity, distributed among current and former members of senior management, including Mr. Renshaw, Ms. Whitfield, and other executives.
•  Thornbury Infrastructure Fund II, L.P. holds 15% of the equity. The Managing Director of Thornbury Asset Management Ltd., the fund's investment adviser, is Helen Cresswell.
A common interest agreement was executed on April 25, 2022, among DEH, Greystone Capital Partners Fund IV, L.P., and Thornbury Infrastructure Fund II, L.P. to facilitate the sharing of certain privileged and confidential information relating to the DOJ Inquiry while preserving the attorney-client privilege and work product protections applicable to each party's respective communications with counsel. The interaction between the D&O insurance claim and the rights and interests of Greystone and Thornbury is addressed in Section VIII below.
III. Policy Summary — Garrison Mutual Policy GM-DO-2021-08734
A. Policy Identification
The relevant policy is as follows:
The Policy is a claims-made policy, meaning that it covers claims first made against the insured during the policy period or any applicable extended reporting period. The DOJ Inquiry was initiated on April 19, 2022, which falls squarely within the current policy period. A full copy of the Policy is attached as Appendix A; key provisions are excerpted and analyzed below.
We note that the Policy is scheduled for renewal on July 1, 2022. Given the pendency of the DOJ Inquiry, it is critical that the renewal process be managed carefully to avoid any lapse in coverage or adverse modifications to terms. We recommend that Marcus Wellbourne and the Company's insurance broker at Camberwell Risk Advisorsordinate on the renewal application to ensure that all disclosures are accurate and complete. Failure to disclose the DOJ Inquiry in the renewal application could jeopardize coverage under the renewal policy for any subsequent claims arising from the same or related conduct.
B. Coverage Structure
The Policy provides three insuring agreements, each of which is analyzed separately below:
Insuring Agreement A — Individual Coverage (Side A). Insuring Agreement A covers "Loss" arising from "Claims" made against individual directors and officers for "Wrongful Acts" committed in their capacity as directors or officers of the Company, where the Company has not indemnified the individual. This coverage applies in circumstances where indemnification is not permitted by applicable law (e.g., where Cayman Islands law prohibits indemnification for certain types of conduct) or where the Company is financially unable to indemnify (e.g., in bankruptcy). Side A coverage is the most favorable to individual insureds because it provides direct payment to the individual, is typically not subject to a self-insured retention, and is often not subject to the conduct exclusion until final adjudication. In the present matter, Side A coverage would be triggered if the Company failed to advance defense costs to any director or officer, whether due to legal prohibition or financial inability. At present, the Company is advancing defense costs to Fisk, Sorokin, and Hargrave, so Side A is not currently implicated for those individuals, but it remains an important backstop.
Insuring Agreement B — Corporate Reimbursement Coverage (Side B). Insuring Agreement B covers "Loss" that the Company has actually paid or is required to pay as indemnification to its directors and officers for "Claims" arising from "Wrongful Acts." This is the coverage provision most directly relevant to the present matter, as the Company is currently advancing defense costs to three individuals (Fisk, Sorokin, and Hargrave) under its indemnification obligations, and is also incurring defense costs on behalf of other directors and officers through Calderwood & Harkness's representation of the Company. Side B coverage reimburses the Company for amounts it has indemnified, effectively shifting the economic burden of indemnification from the Company to the carrier. Side B coverage is subject to the $2,500,000 self-insured retention.
Insuring Agreement C — Entity Coverage (Side C). We have confirmed that the Policy includes an Insuring Agreement C, which provides entity-level coverage for "Loss" arising from "Claims" made directly against the Company itself. However, in many D&O policies, Side C coverage is limited to securities claims (i.e., claims alleging violations of federal or state securities laws). Based on our review of the Policy, it appears that Side C coverage under this Policy is limited to "Securities Claims" as defined in the Policy and does not extend to government investigations, regulatory enforcement actions, or criminal proceedings that do not allege securities law violations. The DOJ Inquiry involves sanctions and export control violations, not securities law violations; accordingly, we do not believe that Side C coverage is available for the Company's own defense costs in this matter. This is a significant limitation, as it means that certain entity-level costs — such as Calderwood & Harkness's fees for representing the Company itself (as distinct from individual directors and officers) — may not be directly covered. Those costs may be partially recoverable under Side B to the extent they are incurred in defense of claims against individual directors and officers, but allocation issues will arise.
Limits and Retention. The Policy provides a per-claim limit of $10,000,000 and an aggregate limit of $50,000,000 for all claims during the policy period. The self-insured retention of $2,500,000 applies to Side B and Side C coverage but does not apply to Side A coverage. Defense costs erode the limits of liability (i.e., the Policy is a "wasting" or "burning limits" policy), meaning that every dollar paid in defense costs reduces the remaining amount available for other covered losses.
C. Definition of "Claim"
A threshold question in any D&O coverage analysis is whether the event giving rise to the claim constitutes a "Claim" as defined by the Policy. The Policy defines "Claim" broadly to include:
(a) any written demand for monetary or non-monetary relief against any Insured;
(b) any civil, criminal, administrative, regulatory, or arbitral proceeding commenced against any Insured, including any appeal therefrom;
(c) any formal governmental investigation of any Insured commenced by the filing of a notice of charges, formal investigative order, or similar document, or by the service of a subpoena upon any Insured in connection with a formal investigation; and
(d) any written request to any Insured to toll or waive any statute of limitations applicable to any potential Claim described in subsections (a) through (c) above.
The grand jury subpoena GJ No. 22-418, issued on April 19, 2022, by the U.S. District Court for the District of Columbia in connection with Grand Jury 22-2, clearly constitutes a "Claim" under subsection (c) of the Policy's definition. The subpoena was issued in connection with a formal grand jury investigation, was directed at the Company and its records relating to conduct by its directors, officers, and employees, and was served on the Company's registered agent. There should be no dispute that the issuance and service of this subpoena triggered the "Claim" definition under the Policy.
Additionally, any future indictment, information, criminal complaint, OFAC administrative enforcement proceeding, or civil enforcement action arising from the same underlying conduct would also constitute a "Claim" under the Policy. Whether such subsequent proceedings would be treated as the same "Claim" as the grand jury subpoena (and thus subject to the same per-claim limit) or as separate "Claims" (each with its own per-claim limit) will depend on the Policy's "interrelated claims" or "related claims" provision, which is discussed further below. It is our preliminary assessment that the grand jury subpoena, any resulting indictment, and any related OFAC enforcement action would likely be treated as a single "Claim" or as "Interrelated Claims" deemed to be a single "Claim" under the Policy, because they arise from the same underlying facts, circumstances, transactions, and events. This means that the $10,000,000 per-claim limit would apply to the totality of the DOJ Inquiry and any related proceedings.
D. Definition of "Loss"
The Policy defines "Loss" to include:
(a) defense costs, including reasonable and necessary attorneys' fees, expert witness fees, costs of investigation, and other costs, charges, and expenses incurred in the defense or investigation of any Claim;
(b) judgments, including prejudgment and post-judgment interest;
(c) settlements; and
(d) such other amounts as may be specified in the Policy.
The Policy expressly excludes from the definition of "Loss" the following categories:
(i) fines or penalties imposed by law, except to the extent that such fines or penalties are insurable under the law of the jurisdiction most favorable to the insurability of such fines or penalties;
(ii) taxes, including but not limited to federal, state, local, and foreign taxes;
(iii) amounts that are uninsurable as a matter of the law of any applicable jurisdiction; and
(iv) matters that may be deemed uninsurable under the law of the relevant jurisdiction, including (in most jurisdictions) the return or disgorgement of ill-gotten gains, profits, or advantages to which the insured was not legally entitled.
The critical question for the present matter is the treatment of the anticipated voluntary disgorgement. Based on our preliminary analysis with the Ridgeline Advisory Group, the anticipated disgorgement amount is approximately $8,750,000, calculated as the net profit margin (5.6%) applied to the aggregate notional value of the nine tainted transactions ($156,300,000). Disgorgement represents the return of profits that were improperly obtained and to which the Company was not legally entitled. Under the law of virtually every relevant jurisdiction — including Bermuda, the Cayman Islands, New York, Texas, and the District of Columbia — disgorgement payments are not "losses" within the meaning of a D&O insurance policy because they restore the insured to the position it would have occupied had the wrongful conduct not occurred. The insured does not suffer a "loss" by being required to return money it should not have received in the first instance. See, e.g., Level 3 Commc'ns, Inc. v. Fed. Ins. Co., 272 F.3d 908, 910–11 (7th Cir. 2001); Conseco, Inc. v. Nat'l Union Fire Ins. Co., 2002 WL 31961447 (Ind. Super. Ct. Dec. 31, 2002).
Similarly, penalties imposed under IEEPA (which authorizes civil penalties of up to $356,579 per violation, as adjusted for inflation, and criminal penalties of up to $1,000,000 per violation) or OFAC civil monetary penalties are fines and penalties that are excluded from the definition of "Loss." While there is a narrow exception in the Policy for fines or penalties that are "insurable under the law of the jurisdiction most favorable to the insurability of such fines or penalties," the prevailing view — and the view most likely to be adopted by a court applying Bermuda or New York law — is that criminal fines and regulatory penalties for sanctions violations are not insurable as a matter of public policy.
Conclusion on "Loss." Defense costs — including Calderwood & Harkness's legal fees, forensic accounting fees (Ridgeline Advisory Group), e-discovery costs (Nexagen Analytics), and the fees of individually retained counsel (Blackthorn & Associates, Wexford Keane, Overstreet & McClain) — are covered "Loss" under the Policy. The voluntary disgorgement of $8,750,000 and any penalties are not covered "Loss."
E. Definition of "Wrongful Act"
The Policy defines "Wrongful Act" as:
any actual or alleged act, error, misstatement, misleading statement, omission, neglect, or breach of duty by a Director or Officer in his or her capacity as such, or any matter claimed against a Director or Officer solely by reason of his or her status as a Director or Officer of the Company.
The underlying conduct at issue — the execution of trading transactions with counterparties having undisclosed ties to a sanctioned entity, and the alleged failure to maintain adequate sanctions compliance controls — constitutes "Wrongful Acts" within the meaning of the Policy when committed by individuals acting in their capacity as directors or officers of Dunmore or its subsidiaries. Specifically:
•  Derek Hargrave's alleged approval of the flagged transactions in his capacity as President of DTI constitutes an alleged "act" or "omission" in his insured capacity.
•  Natasha Sorokin's execution of trades with the flagged counterparties in her capacity as Senior Trader at DTI constitutes alleged "acts" in her insured capacity, assuming her role is covered under the Policy's definition of "Officer" (which typically includes any person holding a management position with the Company or its subsidiaries, as designated by the Company).
•  Gerald Fisk's alleged failure to maintain adequate sanctions compliance controls in his capacity as Chief Compliance Officer constitutes an alleged "omission" or "neglect" in his insured capacity.
•  Sandra Whitfield's alleged authorization of payments in her capacity as CFO constitutes alleged "acts" in her insured capacity.
There is a question as to whether Ms. Sorokin, as a "Senior Trader" rather than a director or named officer, falls within the Policy's definition of covered "Insured Persons." The Policy's definition of "Director or Officer" typically extends to any person who was, now is, or shall become a duly elected or appointed director, officer, or equivalent executive of the Company or any of its subsidiaries. Whether "Senior Trader" is deemed an "officer" or "equivalent executive" will depend on the specific Policy language and whether the Company has designated Ms. Sorokin as a covered person. We recommend confirming with Marcus Wellbourne whether Ms. Sorokin's title and role bring her within the Policy's coverage definitions. If she is not covered as an "Insured Person," the Company's advancement of her defense costs may not be reimbursable under Side B.
The more significant issue relating to "Wrongful Acts" is the interplay with the conduct exclusion, discussed in Section IV.B below.
F. Defense Cost Advancement Provisions
The Policy contains a defense cost advancement provision that obligates the carrier to advance defense costs as they are incurred, prior to final adjudication of the underlying claim. This is distinct from a "duty to defend," under which the carrier would have the right and obligation to select and direct defense counsel. Under the advancement model used in this Policy, the insureds retain the right to select their own counsel, and the carrier reimburses the reasonable and necessary defense costs incurred.
The advancement provision is critical because it ensures that the Company and its individual directors and officers are not required to bear the full financial burden of defense costs on an interim basis while the DOJ Inquiry is pending. Defense cost advancement is typically available even where the carrier has issued a reservation of rights letter and even where the carrier is investigating whether a coverage exclusion may ultimately apply, because the policy contemplates advancement prior to "final adjudication." This means that even if the conduct exclusion (discussed in Section IV.B) might ultimately apply upon a conviction or other final adjudication, the carrier must advance defense costs in the interim.
We note the following additional considerations regarding defense cost advancement:
Panel Counsel and Rate Guidelines. Many D&O policies include provisions requiring the insured to select defense counsel from an approved panel or to obtain the carrier's consent to the selection of counsel. Even where consent is required, it is typically not to be unreasonably withheld. Calderwood & Harkness is a nationally recognized firm with extensive experience in white-collar and government investigations matters, and we do not anticipate resistance from Garrison Mutual to our retention. However, we should confirm that the carrier does not require prior approval and, if it does, obtain such approval promptly. Similarly, some carriers impose rate guidelines or caps on hourly rates. We should review the Policy for any such provisions and address them proactively with the carrier.
Individually Retained Counsel. The three individuals who have retained personal counsel — Fisk (Blackthorn & Associates), Sorokin (Wexford Keane), and Hargrave (Overstreet & McClain) — present a nuanced coverage question. The Company is advancing their defense costs pursuant to its indemnification obligations. Under Side B of the Policy, the carrier reimburses the Company for amounts the Company has indemnified. Accordingly, the fees of individually retained counsel should be recoverable under Side B to the extent that (a) the individuals are "Insured Persons" under the Policy, (b) the underlying conduct constitutes a "Wrongful Act," (c) the fees constitute "Defense Costs" within the Policy definition, and (d) the fees are reasonable and necessary. The carrier may scrutinize the reasonableness of fees charged by multiple law firms and may argue that the retention of separate individual counsel was not necessary. However, the retention of separate counsel is standard practice in government investigations where individual interests may diverge from those of the Company, and courts have consistently upheld the reasonableness of such arrangements. See, e.g., In re Enron Corp. Sec., Derivative & ERISA Litig., 391 F. Supp. 2d 541 (S.D. Tex. 2005).
IV. Coverage Issues & Exclusion Analysis
A. Government Investigation / Regulatory Action Exclusion
Many D&O policies contain exclusions for claims arising from certain governmental or regulatory proceedings. We have reviewed the Policy and have not identified a blanket exclusion for government investigations or regulatory actions. To the contrary, the Policy's definition of "Claim" expressly includes formal governmental investigations commenced by the service of a subpoena, which indicates that the Policy was drafted to encompass such proceedings within its scope of coverage.
However, we note that some policies contain narrower exclusions that could be relevant, such as exclusions for claims arising from regulatory proceedings in which the insured is the subject of an enforcement action by a specific regulatory body, or exclusions for claims arising from violations of specific regulatory regimes. We have not identified any such narrower exclusion in the Policy. Accordingly, we conclude that there is no government investigation or regulatory action exclusion that would bar coverage for the DOJ Inquiry or the related OFAC review.
This is a favorable result, but we caution that the carrier may nonetheless argue that certain aspects of the DOJ Inquiry — particularly any OFAC administrative enforcement proceeding — fall outside the scope of the Policy's coverage for other reasons (e.g., because entity-level OFAC penalties are not covered "Loss" and entity-level OFAC defense costs are not covered under Side C because OFAC enforcement is not a "Securities Claim"). This is addressed further in the allocation analysis in Section IV.F below.
B. Conduct Exclusions (Fraud / Intentional Misconduct / Criminal Acts)
The Policy contains a standard conduct exclusion, which provides that the carrier shall not be liable for any "Loss" arising from any "Claim":
(a) based upon, arising out of, or attributable to any dishonest, fraudulent, or criminal act or omission, or any willful violation of any statute, rule, or regulation, by any Insured Person; provided, however, that this exclusion shall only apply to the extent that such conduct has been established by a final adjudication in the underlying action or proceeding, including any appeal therefrom, or by an admission by the Insured Person.
This exclusion is the most significant potential limitation on coverage in the present matter, because the underlying conduct at issue — potential willful violations of IEEPA and ECRA — could, if established by final adjudication, fall squarely within the exclusion. However, the "final adjudication" trigger is critical: the exclusion does not apply unless and until a court of competent jurisdiction enters a final judgment (including after all appeals) establishing that the insured person engaged in dishonest, fraudulent, or criminal conduct, or that the insured person willfully violated a statute or regulation. Alternatively, the exclusion could be triggered by an admission of such conduct by the insured person.
As of the date of this memorandum, no individual has been charged, indicted, or adjudicated in connection with the DOJ Inquiry. No individual has made any admission of fraud, intentional misconduct, or willful violation of law. The investigation is in its preliminary stages, and the grand jury subpoena seeks documents and information — it does not allege or establish any wrongdoing.
Conclusion. The conduct exclusion should not bar coverage at this stage of the proceedings. The carrier is obligated to advance defense costs pending final adjudication. If the DOJ ultimately brings criminal charges and obtains a conviction of any individual for a willful violation of IEEPA or ECRA, the carrier may at that point invoke the conduct exclusion and may seek to recoup defense costs that were advanced for that individual's defense. However, several important protections exist:
•  Severability of Exclusions / Separation of Insureds. The Policy contains a "severability" or "separation of insureds" clause, which provides that the knowledge, acts, or conduct of one insured person shall not be imputed to any other insured person for purposes of applying the conduct exclusion. This means that even if one individual (e.g., Sorokin or Hargrave) is ultimately convicted, the coverage for other directors and officers (e.g., Renshaw, Whitfield, Fisk) should not be affected, provided that those other individuals have not themselves been found to have engaged in the excluded conduct.
•  Standard of Proof. The "final adjudication" requirement sets a high bar. A guilty plea, a conviction at trial, or a finding of liability in a civil proceeding would likely satisfy this standard. A settlement or consent decree, absent an admission of wrongdoing, generally would not.
•  Recoupment Risk. If the carrier advances defense costs and a final adjudication subsequently triggers the conduct exclusion, the carrier will likely assert a right to recoup the advanced amounts. Some policies expressly provide for recoupment; others are silent on the issue. We should review the Policy's recoupment provisions carefully. Even where recoupment is permitted, it is typically limited to amounts advanced for the specific individual whose conduct was adjudicated, not amounts advanced for other insureds.
We recommend monitoring this issue closely as the DOJ Inquiry progresses. If the government signals an intent to seek indictments, we should reassess the conduct exclusion risk and advise the affected individuals of the potential for recoupment.
C. OFAC / Sanctions-Specific Exclusion
In recent years, there has been a growing trend among D&O carriers to include specific exclusions for claims arising from sanctions violations, OFAC enforcement actions, or export control violations. These exclusions have become more prevalent in the wake of increased OFAC enforcement activity and the expansion of U.S. sanctions programs, particularly those targeting Russia. Some carriers have added endorsements or riders to existing policies that broadly exclude coverage for any "Loss" arising from actual or alleged violations of any sanctions laws, anti-money laundering laws, or similar regulatory regimes.
We have reviewed the Policy in its entirety, including all endorsements, riders, and amendments, and we have not identified a specific sanctions exclusion. The Policy was issued with an effective date of July 1, 2021, which predates the significant expansion of Russia-related sanctions following Russia's invasion of Ukraine in February 2022, and predates the wave of sanctions-specific exclusions that many carriers began adding to D&O policies in the first and second quarters of 2022. This is a favorable fact for the Company.
However, we caution that the absence of a specific sanctions exclusion does not guarantee coverage. The carrier may rely on the general conduct exclusion (discussed in Section IV.B above) or on other policy provisions to limit or deny coverage for sanctions-related claims. Additionally, the carrier may argue that coverage for sanctions-related losses is contrary to public policy, although this argument is unlikely to succeed with respect to defense costs (as opposed to penalties or disgorgement, which are excluded for other reasons). We should be prepared to respond to any such arguments.
We further note that the upcoming Policy renewal on July 1, 2022, may result in the addition of a sanctions-specific exclusion. Given the current geopolitical environment and the heightened awareness of sanctions exposure in the energy sector, it is likely that Garrison Mutual will seek to add such an exclusion to the renewal policy. We should work with the Company's insurance broker to negotiate the narrowest possible exclusion language, or to preserve the current policy terms to the greatest extent feasible.
D. Insured vs. Insured Exclusion
The Policy contains an "insured vs. insured" exclusion, which provides that the carrier shall not be liable for any "Loss" arising from any "Claim" made against an Insured Person by, on behalf of, or at the direction of the Company or any other Insured Person. This exclusion is designed to prevent collusive or friendly claims between insured parties and to ensure that the D&O policy is not used as a general litigation fund for internal corporate disputes.
The insured vs. insured exclusion has potential relevance in the present matter in the following scenarios:
•  Internal Investigation Claims. If the Company, based on the findings of Calderwood & Harkness's internal investigation, were to bring civil claims against Hargrave, Sorokin, or Fisk for breach of fiduciary duty, breach of contract, or negligence in connection with the flagged transactions, such claims could trigger the insured vs. insured exclusion. The carrier would likely argue that these are claims brought by one insured (the Company) against another insured (the individual) and are therefore excluded.
•  Contribution or Indemnification Claims. If any individual were to seek contribution or indemnification from another individual in connection with the DOJ Inquiry, the insured vs. insured exclusion could apply.
However, the Policy contains several carve-outs to the insured vs. insured exclusion, which may preserve coverage in certain circumstances:
•  Derivative Action Carve-Out. Claims brought derivatively on behalf of the Company by shareholders are typically carved out of the insured vs. insured exclusion.
•  Whistleblower Carve-Out. Claims brought by an insured person acting as a whistleblower in good faith may be carved out.
•  Employment-Related Claims Carve-Out. Certain employment-related claims may be carved out, depending on the Policy language.
At this time, we are not aware of any pending or contemplated insured vs. insured claims. However, we recommend that the Company exercise caution before bringing any civil claims against Hargrave, Sorokin, or Fisk, as doing so could implicate the insured vs. insured exclusion and potentially jeopardize coverage for those individuals under the Policy.
E. Prior Acts / Prior Knowledge Exclusion
The Policy contains a prior acts date and a prior knowledge exclusion that warrant careful analysis.
Prior Acts Date. The Policy specifies a "prior acts date" or "retroactive date" of July 1, 2018, which means that the Policy covers "Wrongful Acts" that occurred on or after that date, provided that the resulting "Claim" is first made during the policy period. The suspect transactions at DTI began in approximately March 2020, which is after the prior acts date. Accordingly, the prior acts date does not present a coverage issue.
Prior Knowledge Exclusion. The Policy contains a prior knowledge exclusion, which excludes coverage for any "Claim" arising from facts, circumstances, or situations of which any Insured Person had knowledge prior to the inception of the policy period (July 1, 2021) and which such Insured Person knew or reasonably should have known could give rise to a "Claim." This exclusion is designed to prevent the insured from purchasing insurance to cover known or anticipated claims.
The prior knowledge exclusion raises a factual question: as of the Policy's inception date of July 1, 2021, did any director or officer of Dunmore know or reasonably should have known of facts or circumstances that could give rise to the current DOJ Inquiry? The key timeline is as follows:
•  Volkhov Industrial Group JSC was designated under Directive 2 of E.O. 13662 on November 15, 2019.
•  The suspect transactions with Petronova Trading FZE, Zenith Petroleum DMCC, and Caspian Logistik GmbH began in approximately March 2020.
•  The links between these counterparties and Volkhov were not disclosed and were not identified by the Company's sanctions compliance screening processes at the time.
•  Gerald Fisk, as Chief Compliance Officer, first identified the Volkhov exposure on April 11, 2022, during an OFAC screening refresh prompted by the April 6, 2022 SDN listing of Volkhov.
Based on the information currently available to us, we do not believe that any director or officer had actual knowledge, as of July 1, 2021, that the DTI transactions involved counterparties with ties to Volkhov or that such transactions could give rise to a sanctions-related claim. The Volkhov connection was not identified until April 2022. However, the carrier could argue that the Company's compliance personnel should have known of the Volkhov nexus, given that Volkhov was designated under Directive 2 in November 2019 and that reasonable due diligence on the counterparties would have revealed the connection. This is a factual dispute that would need to be resolved based on the adequacy of the Company's KYC and sanctions screening procedures at the relevant time.
We also note that the prior knowledge exclusion typically applies on a per-insured-person basis, meaning that knowledge of one insured person is not imputed to all insured persons. The severability clause discussed in Section IV.B above should also apply to the prior knowledge exclusion, such that even if Fisk (as CCO) is found to have had constructive knowledge of the Volkhov risk prior to July 1, 2021, that knowledge should not be imputed to other insureds such as Renshaw or Whitfield.
Additionally, we should review the Company's renewal application for the current policy period. If the Company made representations or warranties in the application regarding the absence of known circumstances that could give rise to claims, and if any such representations were inaccurate, the carrier could seek to rescind the Policy or deny coverage on the basis of misrepresentation. We recommend reviewing the application with Marcus Wellbourne and confirming the accuracy of all representations made therein.
F. Allocation Between Covered and Non-Covered Loss
Where a single claim involves both covered and non-covered loss, D&O policies typically contain allocation provisions that establish a methodology for determining the portion of the total loss that is attributable to covered loss and the portion attributable to non-covered loss. In the present matter, allocation issues arise in several contexts:
Entity-Level vs. Individual-Level Defense Costs. As discussed in Section III.B above, Side C entity coverage is likely limited to securities claims and does not extend to the DOJ Inquiry. This means that defense costs incurred by the Company in its own defense (as distinct from defense costs incurred on behalf of individual directors and officers) may not be covered. However, in a government investigation of this nature, there is significant overlap between the defense of the Company and the defense of its individual directors and officers. Calderwood & Harkness's representation encompasses both the Company and individual insureds, and much of the work performed — document review, witness preparation, negotiations with the DOJ — benefits both the entity and the individuals. The Policy's allocation provision typically calls for a "fair and reasonable" or "relative legal exposure" allocation between covered and non-covered claims and between covered and non-covered persons. We expect that the carrier will seek to allocate a meaningful portion of Calderwood & Harkness's fees to entity-level defense (non-covered) rather than individual defense (covered). We should be prepared to negotiate this allocation and to present arguments that the majority of the defense effort is directed at the defense of individual directors and officers who are the subjects of the grand jury investigation.
Defense Costs vs. Disgorgement and Penalties. As discussed in Section III.D above, defense costs are covered "Loss" while disgorgement and penalties are not. The anticipated voluntary disgorgement of $8,750,000 and any OFAC penalties will not be reimbursable under the Policy. The allocation between defense costs and these non-covered amounts is relatively straightforward, as they are categorized differently by nature.
Remediation and Compliance Costs. The fees of Pemberton Investors Solutions LLC ($875,000 estimated) relate to prospective compliance remediation — i.e., the enhancement of the Company's sanctions compliance program to prevent future violations. These costs are not "defense costs" incurred in the investigation or defense of a "Claim"; they are business improvement costs that the Company would incur regardless of the insurance claim. The carrier will almost certainly exclude these costs from coverage. A portion of the Marlowe Asset Management fees may be attributable to analysis and consulting in support of the defense (e.g., demonstrating the Company's good-faith compliance efforts to the DOJ), and we should consider whether a portion can be reasonably allocated to covered defense costs.
Carrier's Right to Determine Allocation. The Policy grants the carrier a degree of discretion in determining allocation, subject to the requirement that the allocation be "fair and reasonable." If the Company disagrees with the carrier's allocation determination, the Policy may provide for a dispute resolution process, including negotiation, mediation, or arbitration. We should be prepared to challenge any unreasonable allocation determination and to invoke the dispute resolution provisions if necessary.
G. Territorial / Jurisdictional Considerations
The Policy involves multiple jurisdictions, which raises questions about territorial limitations and the applicable law governing coverage disputes:
•  Carrier Domicile: Bermuda
•  Named Insured Domicile: Cayman Islands
•  Operational Headquarters: Houston, Texas, United States
•  Individual Insured Locations: Houston (Renshaw, Whitfield, Fisk); Dubai (Hargrave, Sorokin, Al-Rashidi, Leclerc, Malhotra); Hamburg (Engel)
•  DOJ Inquiry Jurisdiction: U.S. District Court for the District of Columbia; OFAC proceedings in Washington, D.C.
We have reviewed the Policy for territorial limitations and have identified a worldwide coverage provision that extends coverage to "Claims" made anywhere in the world, provided that the "Claim" involves a "Wrongful Act" committed in the insured's capacity as a director or officer of the Company. The DOJ Inquiry is a U.S. proceeding, and the underlying conduct occurred in Dubai and potentially other international locations. We do not believe that any territorial limitation would preclude coverage for defense of individuals based outside the United States, including Hargrave and Sorokin (both based in Dubai) and Engel (based in Hamburg).
The Policy contains a governing law provision specifying that the Policy shall be governed by and construed in accordance with the laws of Bermuda. Bermuda law generally follows English common law principles in insurance coverage matters, and Bermuda courts have recognized the enforceability of D&O policy provisions substantially similar to those at issue here. However, to the extent that coverage disputes arise, the choice of law may affect the interpretation of specific provisions, particularly the insurability of certain losses and the scope of public policy limitations on coverage.
We should also consider whether the Company may be able to invoke a more favorable governing law under the Policy's "most favorable jurisdiction" provision (if any) for the insurability of fines and penalties. As noted in Section III.D above, the Policy excludes fines and penalties "except to the extent that such fines or penalties are insurable under the law of the jurisdiction most favorable to the insurability of such fines or penalties." This provision potentially allows the insured to identify a jurisdiction where sanctions-related penalties are insurable, but as a practical matter, we are not aware of any jurisdiction where criminal fines or OFAC civil monetary penalties for sanctions violations are clearly insurable.
V. Estimated Covered vs. Non-Covered Costs
A. Projected Total Matter Costs
Based on our preliminary assessment of the scope of the DOJ Inquiry, the anticipated duration of the investigation, and the resources required to defend the Company and its directors and officers, we project the following total matter costs:
These estimates are preliminary and are based on assumptions about the duration and complexity of the investigation, the volume of documents to be reviewed, the number of witnesses to be prepared, and the likelihood and scope of any resulting charges or enforcement action. Actual costs may vary significantly depending on the trajectory of the DOJ Inquiry. We will update these estimates as the matter progresses.
B. Categorization of Costs
Likely Covered as Defense Costs
The following costs are, in our assessment, likely to qualify as covered "Defense Costs" or "Loss" under the Policy:
•  Calderwood & Harkness LLP legal fees ($14,300,000): The fees incurred by Calderwood & Harkness in defending the Company and its directors and officers in the DOJ Investigation, including document review and production in response to the grand jury subpoena, witness preparation, negotiations with the DOJ and OFAC, legal research, and preparation for any potential prosecution. However, a portion of these fees may be allocated to entity-level defense (non-covered under Side C) versus individual defense (covered under Side B), as discussed in Section IV.F. We estimate that approximately 60–70% of Calderwood & Harkness's fees are attributable to the defense of individual directors and officers (covered), and 30–40% are attributable to entity-level defense (potentially non-covered). This yields an estimated covered portion of approximately $8,580,000 to $10,010,000.
•  Ridgeline Advisory Group LLC forensic accounting fees ($2,100,000): Forensic accounting fees incurred in connection with the investigation and defense of the Claim, including the analysis of the flagged transactions, the identification of counterparty connections to Volkhov, and the quantification of potential exposure. These fees are incurred directly in support of the defense and should qualify as covered defense costs, subject to the same entity/individual allocation as Calderwood & Harkness's fees. Estimated covered portion: approximately $1,260,000 to $1,470,000.
•  Nexagen Analytics Inc. e-discovery fees ($1,850,000): E-discovery costs incurred to collect, process, review, and produce documents in response to the grand jury subpoena. These costs are directly attributable to the defense of the Claim and should qualify as covered defense costs, subject to allocation. Estimated covered portion: approximately $1,110,000 to $1,295,000.
•  Individual counsel fees ($3,400,000): The fees of Blackthorn & Associates LLP (Fisk), Wexford Keane LLP (Sorokin), and Overstreet & McClain PLLC (Hargrave), advanced by the Company under its indemnification obligations, should be fully covered under Side B as defense costs for individual directors and officers. There is no entity/individual allocation issue with respect to these fees, as they are incurred solely for the defense of individual insureds. Estimated covered portion: $3,400,000 (subject to reasonableness review by the carrier).
•  Portion of Pemberton Investors Solutions LLC fees ($875,000): To the extent that a portion of Marlowe Asset Management's fees relates to analysis and consulting in support of the defense of the Claim (e.g., preparing a compliance defense presentation for the DOJ), that portion may qualify as covered defense costs. We estimate that approximately 20–30% of Marlowe Asset Management's fees ($175,000 to $262,500) may be defensibly allocated to the Claim defense, with the remainder attributable to prospective compliance remediation.
Likely NOT Covered
The following costs are, in our assessment, likely not covered under the Policy:
•  Voluntary disgorgement of $8,750,000: As discussed in Section III.D, disgorgement payments are excluded from the definition of "Loss" as the return of ill-gotten gains. This is the single largest non-covered cost component.
•  OFAC civil monetary penalties (amount unknown): Any penalties imposed by OFAC under IEEPA or the applicable sanctions regulations are excluded from "Loss" as fines or penalties.
•  Prospective remediation and compliance program costs (approximately $612,500 to $700,000 of Marlowe Asset Management fees): Costs incurred to enhance the Company's sanctions compliance program on a going-forward basis are not defense costs and are not covered under the Policy.
•  Allocation reduction for entity-level defense costs (approximately $4,290,000 to $7,150,000 of Calderwood & Harkness, Ridgeline, and Nexagen fees): The portion of these vendors' fees allocated to entity-level defense, which is not covered under Side C for a non-securities claim, represents a significant reduction in recoverable amounts.
C. Estimated Recovery Range
Based on the foregoing analysis, we project the following estimated recovery under the Policy:
The entire DOJ Inquiry — including the grand jury investigation, any resulting indictment, and any related OFAC enforcement proceeding — is likely to constitute a single "Claim" under the Policy's interrelated claims provision, because all of these proceedings arise from the same underlying facts, circumstances, and transactions. As a result, the per-claim limit of $10,000,000 applies to the totality of the matter. Our estimated recovery of $7,200,000 is below the per-claim limit, so the per-claim cap is not binding in this scenario. The aggregate limit of $50,000,000 is well above the expected claim and does not present a constraint.
We emphasize that these figures are estimates and are subject to significant uncertainty. The actual recovery will depend on: (a) the carrier's coverage position and any reservation of rights; (b) the resolution of allocation disputes between covered and non-covered costs; (c) the carrier's assessment of the reasonableness of defense costs; (d) the ultimate trajectory of the DOJ Inquiry, including whether charges are brought and whether the conduct exclusion is triggered; and (e) the outcome of any coverage litigation or arbitration.
VI. Notice and Claim Submission Requirements
A. Timely Notice Obligation
The Policy requires the insured to provide prompt written notice to the carrier upon becoming aware of a "Claim" or of circumstances that could reasonably be expected to give rise to a "Claim." The timely provision of notice is a condition precedent to coverage under most D&O policies, and a failure to provide timely notice can result in a denial of coverage or a reduction in recoverable amounts, depending on the applicable law and whether the carrier can demonstrate prejudice from the late notice.
The relevant timeline for notice purposes is as follows:
•  April 11, 2022: Gerald Fisk, then-Chief Compliance Officer of DEH, identified the Company's exposure to Volkhov Industrial Group JSC during an OFAC screening refresh prompted by Volkhov's SDN listing on April 6, 2022. This is the earliest date on which any person at the Company became aware of facts that could give rise to a sanctions-related claim