The opinion of the court was delivered by: Marcy S. Friedman, J.
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the printed Official Reports.
In this action for alleged breach of an insurance contract, plaintiff Millennium Partners, L.P. ("Millennium"), sues its insurer, defendant Select Insurance Company ("Select"), to recover defense costs that Millennium paid in connection with the settlement of public investigations against it for "market timing" of mutual funds. Millennium incurred defense costs of over $19 million, but seeks reimbursement up to the policy limit of $10 million. Defendant Select moves for summary judgment dismissing Millennium's complaint.
Millennium is a private investment partnership, commonly known as a "hedge fund," which had more than $5 billion of investors' money under management as of the date of the settlements. (See Complaint, ¶ 1 [Ex. A to Select's Motion]; Aff. of Simon Lorne [Millennium's Chief Legal Officer, ¶ 12.) Millennium purchased from Select a Mutual Fund and Directors and Officers Errors and Omissions Liability Insurance policy (the "policy") (Ex. E to Select's Motion]), covering the period from December 17, 2002 to December 17, 2003. The policy covered losses of up to $10 million for all claims that were first made during the policy period. (Id., Item 3.) As defined in the policy:
" Loss' means that amount, including Defense Costs, which the Insured(s) or the Insured Company shall become legally obligated to pay or for which the Insured Company legally indemnifies the Insured(s) as a result of a Claim first made against the Insured(s) and/or the Insured Company during the Policy Period . . . provided, however, that Loss shall not include . . . punitive or exemplary damages, criminal or civil fines or penalties imposed by law . . . or matters uninsurable under the law pursuant to which this Policy is construed." (Id., § II [E].)
" Defense Costs' means that part of Loss consisting of costs, charges and expenses incurred in the defense of Claims." (Id., § II [B].)
" Claim' means any judicial or administrative proceeding . . . against (1) the Insured Company or any Insured(s) for a Wrongful Act as a result of which the Insured Company or such Insured(s) may be subjected to a binding adjudication of liability for damages or other relief . . ." (Id., § II [A].)
It is undisputed that in July and September 2003, respectively, the Attorney General of the State of New York ("NYAG") and the Securities and Exchange Commission ("SEC") commenced investigations into Millennium's trading practices relating to market timing and late trading of mutual funds. (See Complaint, ¶ 17.) In November 2005, the SEC and the NYAG both advised Millennium that it would be charged with state and federal securities laws violations for fraudulent market timing practices. (See Lorne Aff., ¶¶ 11, 12.) In order to resolve the contemplated proceedings, Millennium entered into settlement agreements in which it consented to the entry of an SEC "Order Instituting Administrative and Cease-and-Desist Proceedings" ("SEC Order") and to the entry of an "Assurance of Discontinuance" with the NYAG ("NYAG Discontinuance") (Exs. C and D to Select's Motion).
The SEC Order made factual findings based on Millennium's settlement offer. (See SEC Order, § III). These findings included the following: "From at least 1999 to 2003, Millennium . . . generated tens of millions of dollars in profits through market timing trades of mutual fund shares, a practice which mutual funds generally discouraged." (Id., § III .) Millennium "devised and carried out a fraudulent scheme to avoid detection and circumvent restrictions that the mutual funds imposed on market timing" in which it "(1) created approximately 100 legal entities to hide that Millennium was behind the mutual fund trading; (2) used those entities to create in excess of 1,000 accounts; (3) structured its trading to avoid detection by the mutual funds; (4) used omnibus accounts and variable annuities to further hide Millennium's identity; and (5) took advantage of certain sticky' asset arrangements." (Id.) The SEC order concluded that Millennium's conduct violated Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 of the Exchange Act. (Id., §III [27-28].)*fn1 The NYAG Discontinuance adopted as findings similar allegations contained in the NYAG's proposed complaint, and concluded that Millennium's acts violated the Martin Act, Section 349 of the General Business Law, and Executive Law Section 63(12). (See NYAG Discontinuance at 1, 4.)
Under the SEC Order, Millennium agreed to certain remedial measures and to pay "$148 million in disgorgement." Millennium's principals also agreed to pay substantial civil penalties. (SEC Order, § IV [J].) The NYAG Discontinuance provided for the same $148 million payment by Millennium "in disgorgement and restitution" and the same civil penalties. (NYAG Discontinuance at 5.)
Both the SEC Order and the NYAG Discontinuance provided that Millennium's consent to the relief was "without admitting or denying the findings" of the SEC or the NYAG. (SEC Order, § II; NYAG Discontinuance at 4.) In the NYAG Discontinuance, Millennium also expressly agreed not to seek reimbursement or indemnification from its insurer for any of the amounts payable under the settlement. (See id. at 6.)
Prior to the commencement of this action, Millennium requested reimbursement from Select of the legal fees and expenses that Millennium had paid as a result of the investigations. (See Complaint, ¶ 29.) By letter sent on or about August 15, 2005, Select denied liability for Loss resulting from the claims involved. (See id., ¶ 31.)
In the instant action, Millennium does not claim that Select is obligated to reimburse it for the payments it made for disgorgement and contends only that Select is obligated to reimburse it for the reasonable and necessary legal fees and expenses "incurred in connection with the Investigations and in defense of claims arising therefrom," up to its policy maximum of $10 million. (Complaint, ¶ 35.) Select contends that Millennium is not entitled as a matter of law to recover its defense costs because these costs were incurred in connection with claims that are not covered by the policy. More particularly, Select contends that the claims were for, and the settlements required, disgorgement of improperly acquired funds; that sums paid for disgorgement are losses uninsurable by law; and that the losses are therefore subject to the policy exclusion. In opposition, Millennium argues that there is a triable issue as to whether the settlement amounts for disgorgement in fact represented improperly acquired funds.
It is well settled that an exclusionary clause in an insurance policy is to be given a strict and narrow construction. (Seaboard Sur. Co. v Gillette Co., 64 NY2d 304 .) In order for an insurer "[t]o negate coverage by virtue of an exclusion, an insurer must establish that the exclusion is stated in clear and unmistakable language, is subject to no other reasonable interpretation, and applies in the particular case." (Continental Cas. Co. v ...