Conviction of Wire Fraud Requires Defendant to Repay Funds Advanced by Employer and Insurers
Post 4852
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Defendant Dr. W. Scott Harkonen was the Chief Executive Officer of InterMune, Inc. (“InterMune” or the “Company”). Following the issuance of a misleading press release in 2002, Dr. Harkonen became a criminal defendant. To fund his sophisticated and well-resourced defense, Dr. Harkonen requested and accepted very sizeable advancements from the Company that funded the advancements via several director and officer (“D&O”) insurance policies and from its own coffers. The advanced sums were subject to repayment if the litigation was found to be non-indemnifiable. A federal jury subsequently convicted Dr. Harkonen of felony wire fraud in 2009. Dr. Harkonen then embarked on nearly a decade of unsuccessful appeals to overturn that conviction.
In Intermune, Inc. and Roche Holdings, Inc. v. W. Scott Harkonen, M.D., C. A. No. 2021-0694-NAC, Court of Chancery of Delaware (August 1, 2024) multiple motions were considered and resolved by the Court.
In light of the wire fraud conviction, two of the Company’s excess D&O insurance providers demanded that InterMune and Dr. Harkonen repay the sums advanced to Dr. Harkonen to litigate the wire fraud charge. In 2019, InterMune and Dr. Harkonen settled with the two insurers. InterMune paid the settlements in full and retained its right to sue Dr. Harkonen for recovery. InterMune exercised that right with this litigation.
FACTUAL BACKGROUND
On March 22, 2000, the Company and Dr. Harkonen entered into an indemnity agreement (the “Indemnity Agreement”), whereby the Company “agree[d] to hold harmless and indemnify [Dr. Harkonen] to the fullest extent authorized or permitted by the provisions of the Bylaws and the [DGCL.]” Dr. Harkonen executed an agreement to repay the amounts incurred in his defense “if it shall be determined ultimately that [he] is not entitled to be indemnified under the provisions of this Agreement, the Bylaws, the [DGCL] or otherwise.”
Prosecution and Insurance Policies
On March 18, 2008, a grand jury indicted Dr. Harkonen “for fraudulently promoting . . . Actimmune (interferon gamma-1b) by putting out false and misleading information about the drug’s effectiveness in treating [IPF].” Dr. Harkonen was indicted on one count of felony misbranding and one count of felony wire fraud.
The cost of litigating Dr. Harkonen’s charges with a large and prestigious legal team was substantial and depleted the burning limits of the D&O policies.
On September 29, 2009, regardless of the efforts of his high priced lawyers, following a six-week trial and four days of jury deliberation, the jury acquitted Dr. Harkonen of the misbranding charge but found him guilty of felony wire fraud.
Reining In Fees
On December 13, 2011, the Company and Dr. Harkonen entered into a settlement agreement (the “2011 Settlement Agreement”) to address the Company’s obligation to advance Dr. Harkonen’s legal expenses. In the 2011 Settlement Agreement, the Company agreed to pay almost $2 million of Dr. Harkonen’s outstanding legal expenses.
More Federal Court Litigation
On May 16, 2011, Dr. Harkonen unsuccessfully appealed his wire fraud conviction to the U.S. Court of Appeals for the Ninth Circuit.
Medical Board of California Disciplinary Action
Dr. Harkonen’s wire fraud conviction also had professional ramifications. Dr. Harkonen did not fulfill the terms of disciplinary action and remains unlicensed, and his medical license has been canceled.
This Litigation
The court granted partial summary judgment in favor of the Company (the “Summary Judgment Opinion”), holding that although he received a Presidential Pardon from President Biden, the Pardon did not render Dr. Harkonen’s wire fraud litigation successful on the merits or otherwise for purposes of indemnification Delaware law. Dr. Harkonen had a full and fair opportunity to challenge the conviction through the appellate process.
LEGAL ANALYSIS
The corporation, rather than the employee, bears the burden of proof in an advancement claw-back action. The Bylaws provide that “the corporation shall indemnify its directors and officers to the fullest extent not prohibited by the DGCL or any other applicable law[.]”
D&O Settlement Indemnification
Dr. Harkonen is precluded from establishing good faith because his wire fraud conviction is conclusive evidence that he acted in bad faith.
Dr. Harkonen was convicted of felony wire fraud. Accordingly, Dr. Harkonen was found to have acted in bad faith.
VERDICT
Dr. Harkonen must repay the Company the $5,906,927.02 it seeks in this action as repayment of advanced sums for which Dr. Harkonen is not entitled to indemnification. Dr. Harkonen voluntarily demanded their payment and gave the Undertaking to repay.
CONCLUSION
Dr. Harkonen is ultimately responsible for those legal expenses incurred in litigating his wire fraud conviction.
ZALMA OPINION
This case is an example of an abuse of a corporation’s obligation to pay to defend its CEO. The corporation and its insurers paid almost six million dollars to defend Dr. Harkonen to claims of wire fraud and tried to even obtain money from the corporation when he sought, and received, a Presidential pardon. His guilt did not go away with the Pardon and he must now repay the corporation almost $6 million plus interest. Dr. Harkonen was a criminal who took advantage of the by-laws of the corporation, the Directors and Officers insurance policies and every court with whom he was involved. I expect him to appeal this ruling as well as he continues an effort to abuse the corporation he led and the law.
(c) 2024 Barry Zalma & ClaimSchool, Inc.
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Jury’s Findings Interpreting Insurance Contract Affirmed
Post 5105
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Madelaine Chocolate Novelties, Inc. (“Madelaine Chocolate”) appealed the district court’s judgment following a jury verdict in favor of Great Northern Insurance Company (“Great Northern”) concerning storm-surge damage caused by “Superstorm Sandy” to Madelaine Chocolate’s production facilities.
In Madelaine Chocolate Novelties, Inc., d.b.a. The Madelaine Chocolate Company v. Great Northern Insurance Company, No. 23-212, United States Court of Appeals, Second Circuit (June 20, 2025) affirmed the trial court ruling in favor of the insurer.
BACKGROUND
Great Northern refused to pay the full claim amount and paid Madelaine Chocolate only about $4 million. In disclaiming coverage, Great Northern invoked the Policy’s flood-exclusion provision, which excludes, in relevant part, “loss or damage caused by ....
Failure to Name a Party as an Additional Insured Defeats Claim
Post 5104
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Contract Interpretation is Based on the Clear and Unambiguous Language of the Policy
In Associated Industries Insurance Company, Inc. v. Sentinel Insurance Company, Ltd., No. 23-CV-10400 (MMG), United States District Court, S.D. New York (June 16, 2025) an insurance coverage dispute arising from a personal injury action in New York State Supreme Court.
The underlying action, Eduardo Molina v. Venchi 2, LLC, et al., concerned injuries allegedly resulting from a construction accident at premises owned by Central Area Equities Associates LLC (CAEA) and leased by Venchi 2 LLC with the USDC required to determine who was entitled to a defense from which insurer.
KEY POINTS
Parties Involved:
CAEA is insured by Associated Industries Insurance Company, Inc. ...
Exclusion Establishes that There is No Duty to Defend Off Site Injuries
Post 5103
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Attack by Vicious Dog Excluded
In Foremost Insurance Company, Grand Rapids, Michigan v. Michael B. Steele and Sarah Brown and Kevin Lee Price, Civil Action No. 3:24-CV-00684, United States District Court, M.D. Pennsylvania (June 16, 2025)
Foremost Insurance Company (“Foremost”) sued Michael B. Steele (“Steele”), Sarah Brown (“Brown”), and Kevin Lee Price (“Price”) (collectively, “Defendants”). Foremost sought declaratory relief in the form of a declaration that
1. it owes no insurance coverage to Steele and has no duty to defend or indemnify Steele in an underlying tort action and
2. defense counsel that Foremost has assigned to Steele in the underlying action may withdraw his appearance.
Presently before the Court are two ...
ZIFL Volume 29, Issue 10
The Source for the Insurance Fraud Professional
See the full video at https://lnkd.in/gK_P4-BK and at https://lnkd.in/g2Q7BHBu, and at https://zalma.com/blog and at https://lnkd.in/gjyMWHff.
Zalma’s Insurance Fraud Letter (ZIFL) continues its 29th year of publication dedicated to those involved in reducing the effect of insurance fraud. ZIFL is published 24 times a year by ClaimSchool and is written by Barry Zalma. It is provided FREE to anyone who visits the site at http://zalma.com/zalmas-insurance-fraud-letter-2/ You can read the full issue of the May 15, 2025 issue at http://zalma.com/blog/wp-content/uploads/2025/05/ZIFL-05-15-2025.pdf
This issue contains the following articles about insurance fraud:
Health Care Fraud Trial Results in Murder for Hire of Witness
To Avoid Conviction for Insurance Fraud Defendants Murder Witness
In United States of America v. Louis Age, Jr.; Stanton Guillory; Louis Age, III; Ronald Wilson, Jr., No. 22-30656, United States Court of Appeals, Fifth Circuit (April 25, 2025) the Fifth Circuit dealt with the ...
Professional Health Care Services Exclusion Effective
Post 5073
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This opinion is the recommendation of a Magistrate Judge to the District Court Judge and involves Travelers Casualty Insurance Company and its duty to defend the New Mexico Bone and Joint Institute (NMBJI) and its physicians in a medical negligence lawsuit brought by Tervon Dorsey.
In Travelers Casualty Insurance Company Of America v. New Mexico Bone And Joint Institute, P.C.; American Foundation Of Lower Extremity Surgery And Research, Inc., a New Mexico Corporation; Riley Rampton, DPM; Loren K. Spencer, DPM; Tervon Dorsey, individually; Kimberly Dorsey, individually; and Kate Ferlic as Guardian Ad Litem for K.D. and J.D., minors, No. 2:24-cv-0027 MV/DLM, United States District Court, D. New Mexico (May 8, 2025) the Magistrate Judge Recommended:
Insurance Coverage Dispute:
Travelers issued a Commercial General Liability ...
A Heads I Win, Tails You Lose Story
Post 5062
Posted on April 30, 2025 by Barry Zalma
"This is a Fictionalized True Crime Story of Insurance Fraud that explains why Insurance Fraud is a “Heads I Win, Tails You Lose” situation for Insurers. The story is designed to help everyone to Understand How Insurance Fraud in America is Costing Everyone who Buys Insurance Thousands of Dollars Every year and Why Insurance Fraud is Safer and More Profitable for the Perpetrators than any Other Crime."
Immigrant Criminals Attempt to Profit From Insurance Fraud
People who commit insurance fraud as a profession do so because it is easy. It requires no capital investment. The risk is low and the profits are high. The ease with which large amounts of money can be made from insurance fraud removes whatever moral hesitation might stop the perpetrator from committing the crime.
The temptation to do everything outside the law was the downfall of the brothers Karamazov. The brothers had escaped prison in the old Soviet Union by immigrating to the United...
