Financial R&R: The GameStop Situation - What Might Come Next?

Intro (00:01):
Welcome to Financial R&R a show dedicated to financial insurance and risk management solutions and trends shaping the market today. Here are your hosts, Ron Borys and Ryan Farnsworth.

Ron Borys (00:13):
Welcome everybody, this is Ron Borys with the Alliant Financial Institution team. We're here for another one of our regular podcast discussions, with me is Ryan Farnsworth and Steve Shappell. And we wanted to talk today about what's going on in the last few days with regards to the market and just sort of the nuttiness out there with regards to the Reddit versus Wall Street type scenario. So, lots of things to think about here litigation already filed, regulatory investigations definitely forthcoming, so thought it would be a good opportunity to just talk through some of the key points that people should be thinking about from an insurance perspective. So, Steve, let's start with you. I mean, you've dealt with a lot of different investigations, regulatory sort of matters over the years in litigation. What’s your first take on the stuff that's happened so far over the last few days?

Steve Shappell (01:01):
I think the interesting take on what's happened the last few days is the unusual press, right? I mean, we've seen clients and particular issuers stock skyrocket in the past. What's really interesting here is you have now elected officials like Elizabeth Warren, writing letters to the SEC demanding investigation. You have unusual allies, Republicans and Democrats in Congress and the Senate agreeing on a point that we want to see an investigation, it looks like there's certain unacceptable behavior, favoring institutional investors versus others. And it's really an interesting dynamic and we saw lawsuits filed against Robinhood on Friday of last week. So, really interesting fast-moving dynamics here. I mean, I think the good point is we've seen this behavior before, not as condensed, but it really does present a fast paced challenge here, to the issuers and to the market in general with regulators being pressured to open investigations immediately.

Ryan Farnsworth (02:13):
And it's happening, right, at a very interesting time where the administration and the commissioner at the SEC is already changing over. The SEC comes out as we speak on this, Monday afternoon, February 1st, the SEC had come out on Friday afternoon with a statement as well, saying that the markets are functional and they're trusting it, but of course, they're going to protect the retail investor, right. Which is always interesting that the SEC is trying to protect the investor, and this is a time where the whole issue here is that retail versus institutional? Is it David versus Goliath, long versus short? And it's just a back-and-forth issue that just has so many questions on both sides, right? I mean, as of this morning you know, Greylock filed for chapter 11 and we expect potentially other hedge funds or other fallouts from this issue, maybe the hedge fund investment analyst will maybe not go out and put out YouTube videos discussing their short seller reports much anymore. But I mean, what we're anticipating is more noise to what we've seen in the D&O insurance marketplace in particular. And I think that's what we want to cover here in the next few minutes is what can our clients, what can our prospective clients expect as a result of all this volatility?

Ron Borys (03:31):
I think, when you think about the types of products that we're offering to our hedge fund clients, or even some of these other firms from a director & officer's liability perspective, right. You know, Steve Shappell's famous words early and often, right? Get to meet early and often, clients or any firms potentially caught up in this scenario need to be reaching out. Chances are, they've already retained counsel and are already incurring expenses. And as we know, these policies are all very different with regards to what could potentially trigger coverage. So, whether it's a regulatory event or some type of written demand or formal class action litigation, I just think it's extremely important for people to understand, what's in bounds with regards to their insurance and certainly making sure that they're getting out in front of this as quickly as possible.

Ryan Farnsworth (04:14):
And that strategy applies, right. Not just in terms of responding to litigation or filing for bankruptcy, but also in just your traditional insurance renewal process, right. Reach out to your insurance broker and say: Hey, look, we recognize our insurance renewal is not until August, but we have this going on here. What should we be thinking about? What are the things that we should think about communicating to the underwriters and differentiating our risks and talking through the issues so that they understand that we're on top of it and addressing it, you know, short squeezes and these type of things are nothing new, but it seems like we are entering a new territory. And to your point, Ron, addressing these issues early and often even on the underwriting side is critical.

Steve Shappell (04:57):
Yeah, and right. I couldn't agree more. So, you have issuers law GameStop, right. Caught up in this posturing for lack of a better word, in the marketplace who's now they've seen their market cap grow by almost 2000%, right. That is a substantial change in exposure that early and often reaching out to their broker, as well as I'm sure they're talking to their securities council to talk about the ramifications when your market cap increases 2000% over a short period of time, that's something that needs to be discussed and considered early and often.

Ron Borys (05:34):
Steve, is this event driven litigation, right? I mean, how should boards, how should companies be looking at this? I mean, at the end of the day, we know that at a lot of industries are extremely volatile when it comes to stock prices going up and down, and recently been some gold posts established with regards to, you know, a window of time in which the plaintiffs can pursue litigation. Can you talk a little bit about that?

Steve Shappell (05:54):
Yeah. While oddly, event-driven, right. This is event driven litigation, right, and this is what's challenging where someone like a game stop, right, they're really not in control of these events, right? These are events outside of their control that are being pushed along and driving some substantial exposure to them as their market cap fluctuates check, press releases and stories. And you see people are expecting fluctuation of this market cap and believe it's not sustainable.

Ron Borys (06:28):
Ryan, what are you hearing from underwriters so far? I mean, what do you think the underwriters take on this? We know we're coming off of a challenging market in 2020 all sign for pointing to potentially another challenge in year in 2021. I can't imagine they're really excited about all this stuff that's going on.

Ryan Farnsworth (06:43):
Well, I can't wait for the next round of interesting questions that we receive as part of underwriter meetings. Right. Whether it's as specific as did you short GameStop or have your investment analysts ever posted YouTube videos to describe their short seller report. Sorry, I still can't get over that.

Ron Borys (07:02):
Are we going to get a Reddit addendum to the application? I think that's the question.

Ryan Farnsworth (07:06):
Well, and it's just interesting too, right? Because you see it in the way that the SEC has made their public statements thus far as well, where they're clearly saying: Hey, look, remember we are here to protect the investor and to ensure that there's no abusive or manipulative trading activity, that's prohibited by federal securities laws. And it’s incumbent upon underwriters when they look at risk and try to analyze is that type of activity taking place and does my potential insured carry those responsibilities. It's been really interesting to see some of the platforms and exchanges that have come out and said: Hey, we're trying to use this as a time to try to ensure that education keeps up with participation in trading, because as we stand today, there are a lot of happy people. And as we see these markets go up and down, there's going to be some very unhappy people at some point, and what happens well, when we are unhappy, we sue each other, right?
It's always someone else's fault. And that's the concern. Steve, to your point, when you talk about, you know, GameStop and some of the other boards that are benefiting from this frenzy and that's what the underwriters are concerned about is. What is the claim that is going to be brought against my D&O insurance policy? What it is going to impact my insured, are they at risk of having redemptions at the next quarterly of redemption period? They don't like to see firms like Greylock in the news and already filing for that chapter 11 protection.

Ron Borys (08:33):
As a reminder to anyone who's listening, the time to check the adequacy of your terms and conditions is not after you've been involved in the event or had the claim, unfortunately with the way these products work, you need to make sure that your policy is keeping up with the times and that you're getting the broadest possible definition of claim, definition for a wrongful act, you're really narrowing some of those exclusions that are out there to make sure that the underwriters don't have an opportunity to trigger something prematurely. All these things are really important. And I think, anytime you have something like this that's going on and things sort of are moving at a really rapid pace. It's a great reminder to take that opportunity to review your coverage and make sure you're getting the best terms that you could possibly get.

Steve Shappell (09:12):
You’re spot on, right. This is a great opportunity to tabletop exercise, stress test what you have in place to make sure that it is going to perform exactly as you anticipate, particularly for unanticipated situations like this, right? This is an unusual fact pattern. And it's a great opportunity to sit down and make sure that its stress test the results that you like.

Ryan Farnsworth (09:37):
And Steve you're spot on. We expect this type of volatility, maybe not the exact GameStop stock or other things, but there will be more chapters in this book before it's all said and done and having a partner, like we have at Alliant where we're specialized in this product, in this industry. There could never be a more rewarding way to manage risk, as we think about all the risks that are prevalent here. And as they continue to evolve and grow, we are going to stay close to the pulse and communicate as quickly as we can with our clients to help anticipate changes that they have or head off any negative effects from litigation or other fallout from these activities.

Ron Borys (10:19):
Yeah. Listen, we're in this space every day, we do a ton of it. We have great visibility into what the underwriter's concerns are, certainly, how the market is progressing and certainly some of the activity both on the regulatory front and the claims front. So, if anyone's listening here and has any questions would love to talk to you about it, please feel free to visit our website, www.Alliant.com for more information on our practice. And we're really committed to trying to get out in front of this stuff in real time and share our thoughts and views, for you all, as you try to navigate these situations. So, early, and often is the key takeaway from this gauge, engage your council, engage your broker early and often. Hopefully, you'll come out of this sort of in a good place with that. We'll wrap up and we'll talk again soon.