J.P MORGAN SECURITIES INC., J.P. MORGAN CLEARING CORP., and THE BEAR STEARNS COMPANIES LLC, Plaintiff,
VIGILANT INSURANCE COMPANY, THE TRAVELERS INDEMNITY COMPANY, FEDERAL INSURANCE COMPANY, NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, P.A., LIBERTY MUTUAL INSURANCE COMPANY, CERTAIN UNDERWRITERS AT LLOYD'S, LONDON and AMERICAN ALTERNATIVE INSURANCE CORPORATION, Defendants. Index No. 600979/09
Charles Edward Ramos, J. S.C.
In this insurance coverage action, plaintiffs seek a declaration that its insurers are required to indemnify it for losses stemming from a disgorgement and penalty payment that it made to the Securities and Exchange Commission (SEC) following its settlement of charges that it facilitated its customers' deceptive market timing and late trading.
Motion sequence numbers 001 and 002 are consolidated for disposition.
In motion sequence numbers 001 and 002, defendants Vigilant Insurance Co., The Travelers Indemnity Company, Federal Insurance Company, National Union Fire Insurance Company of Pittsburgh, P.A. and Liberty Mutual Insurance Company (together, Insurers) move to dismiss Bear Stearns' amended complaint (CPLR 3211 [a], , ).
The Insurers are participating carriers in an insurance program that provided professional liability coverage to Bear Stearns for the period May 5, 2000 through May 5, 2003, with an extended discovery period of one year providing coverage for claims made through May 5, 2004 (Exhibit A, annexed to the Sharp Aff.). Within the limits of the policies and in accordance with a primary policy (Vigilant Policy), the Insurers are required to pay Bear Stearns for losses that it becomes legally obligated to pay as the result of any claim for any "Wrongful Act."
In addition, the Insurers issued an excess policy (Excess Policy) applicable to their layer that contain exclusions for Wrongful Acts committed prior to March 21, 2000, if "any officer knew or could have reasonably foreseen that such Wrongful Act(s) could lead to a Claim" (Known Wrongful Acts Exclusion), and for claims made against the Insured arising out of its gain of personal profit or advantage to which it was not entitled (Profit/Advantage Exclusion) (Exhibit 1, annexed to the Sonenshein Aff.).
Prior to merging with JP Morgan, Bear Stearns was the subject of investigations by the SEC, the New York Stock Exchange (NYSE), and other regulatory authorities for allegedly facilitating, as a broker-dealer and securities clearing firm, certain of its customers' late trading and deceptive market timing in connection with the buying and selling of shares in mutual funds, that resulted in the dilution of the shareholders' value in the affected mutual funds.
In early 2006, the SEC commenced a civil enforcement action against Bear Stearns seeking broad injunctive relief and monetary sanctions of $720 million (Exhibit 2, annexed to the Landrey Aff.) .
Bear Stearns refuted the charges, and in a detailed response to the SEC, it asserted that it did not actually share in the profits enjoyed or otherwise receive any special fees or financial benefits for permitting these trading practices (Exhibit 2, annexed to the Landrey Aff.).
Nonetheless, Bear Stearns made an offer of settlement, and without admitting or denying the findings contained therein, it consented to the entry of the Administrative Order and its f findings (Administrative Order at 1-2, Exhibit B, annexed to the Sharp Aff.). To resolve the claims, Bear Stearns agreed to pay $215 million, of which $160 million was labeled "disgorgement" and $90 million as a penalty. In February 2009, the SEC approved the plan of distribution of the funds.
In addition, Bear Stearns was named as defendants in thirteen civil class actions commenced on behalf of mutual fund investors allegedly damaged by Bear Stearns' conduct, which Bear Stearns subsequently settled for $14 million.
Following Bear Stearns' payment to settle the charges, the Insurers refused to indemnify it for the losses that it incurred. The Insurers assert that, because the Administrative Order labeled a portion of the payment as disgorgement, it does not constitute a "loss" under the Policies.
Following the Insurers' refusal to indemnify it, Bear Stearns commenced this action seeking $150 million (the $160 million non-penalty portion of the SEC settlement less a $10 million retention), plus defense ...