J.P. Morgan Securities Inc., J.P. Morgan Clearing Corp., and the Bear Stearns Companies LLC, Plaintiffs,
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.
plaintiffs: Steven Obus, Esq., Proskauer Rose LLP
defendant Vigilant Ins. Co.: Joseph Finnerty, Esq., DLA Piper
Charles E. Ramos J.S.C.
insurance coverage action, plaintiffs  (together,
plaintiffs) seek a declaration that its insurers are required
to indemnify it for claims stemming from Bear Stearns'
monetary settlement of Securities and Exchange Commission
(SEC) and New York Stock Exchange (NYSE) investigations and
related private litigation arising out of Bear Stearns'
alleged facilitation of late trading and deceptive market
motion sequence 018, defendant National Union Fire Insurance
Company of Pittsburgh, Pa. (National Union) moves for partial
summary judgment declaring that there is no coverage for
plaintiffs' claims asserted under National Union Excess
Professional Liability Policy No. 278-73-26 on the basis that
all such claims for coverage are barred by the policy's
known wrongful acts exclusion. Plaintiffs cross-move for
partial summary judgment dismissing National Union's
defense based upon this exclusion.
motion sequence 019, plaintiffs move for summary judgment
dismissing defendants' defenses that 1) $140 million of
the loss for which Bear Stearns claims coverage is
uninsurable as ill-gotten gains; 2) the loss is otherwise
excluded under the Personal Profit Exclusion; 3) public
policy bars indemnification; and 4) the amounts Bear Stearns
paid to settle the claims against it were unreasonable.
motion sequence 020, defendants Vigilant Insurance Company
(Vigilant), The Travelers Indemnity Company (Travelers),
Federal Insurance Company (Federal), National Union, Liberty
Mutual Insurance Company (Liberty), Certain Underwriters at
Lloyd's, London (Lloyds), and American Alternative
Insurance Company (AAIC) (together, the Insurers) move for
summary judgment in their favor.
motion sequence 021, Lloyd's and AAIC (together, the
Underwriters) move for summary judgment dismissing all claims
asserted against them under Lloyd's excess policy under
the known wrongful acts exclusion.
motion sequence 022, plaintiffs move for partial summary
judgment dismissing the Underwriters' defense under the
known wrongful act exclusions.
motion sequence 023, plaintiffs move to supplement the record
on the Insurers' pending motion for summary judgment
sequence numbers 018 through 023 are consolidated for
2003, Bear Stearns subsidiaries, BS & Co., a registered
broker-dealer, and BSSCorp., a clearing firm, were the
subject of investigations conducted by the SEC and NYSE for
possible violations of federal securities law in connection
with their alleged facilitation of late trading and deceptive
market timing by certain customers involved in buying and
selling shares in various mutual funds. 
conclusion of its investigation, the SEC notified Bear Sterns
of its intention to formally charge it with violations of
federal securities law, to seek injunctive relief and
sanctions of $720 million. Bear Stearns disputed the proposed
charges in a Wells Submission, and entered into settlement
negotiations with the SEC. On March 16, 2006, pursuant to a
Bear Stearns offer of settlement and without any admission by
Bear Stearns of the SEC's findings, the SEC issued an
order resolving its investigation (SEC order). To resolve the
SEC claims, Bear Stearns agreed to pay a total of $250
million, of which $160 million was labeled
"disgorgement" and $90 million was a penalty, in
order to provide compensation to mutual fund investors for
the alleged damages caused by late trade and deceptive market
timing practices of Bear Stearns' customers. Bear Stearns
also entered into a settlement with the NYSE, which imposed a
disgorgement and penalty payment identical to that imposed by
the SEC, deemed satisfied by Bear Stearns' tender of
payment to the SEC (Plaintiffs' Response to Insurers'
Rule 19-A Statements, ¶ 29).
Stearns was also named as a defendant in thirteen civil class
actions (civil actions), commenced on behalf of mutual fund
investors allegedly damaged by Bear Stearns' conduct.
Bear Stearns ultimately agreed to pay $14 million to settle
the civil actions.
Stearns has sought indemnity from the Insurers under an
insurance program which provided professional liability
insurance coverage to Bear Stearns and its subsidiaries,
directors, officers and employees. The insurance program
provided Bear Stearns with $200 million in coverage, above a
$10 million retention. The Insurers disclaimed coverage on
the ground that the settlement constituted disgorgement of
ill-gotten gains which are not insurable as a matter of law.
plaintiffs commenced this insurance coverage action seeking a
declaration that the Insurers are obligated to indemnify Bear
Stearns for the non-penalty portion of the SEC settlement
(less a $10 million retention), plus defense costs and
pre-judgment interest. Bear Stearns also seeks a declaration
for entitlement to coverage arising out of its payment of $14
million to settle the civil actions. In their answers, the
Insurers maintain that Bear Stearns' claims for coverage
are barred under exclusions contained in the Policies and
violate public policy.
Insurers sought dismissal of the complaint pursuant to CPLR
3211, which this court denied in 2010 (J.P. Morgan
Securities Inc. v Vigilant Ins. Co., 2010 NY Slip Op
33799[U] [Sup Ct, NY County 2010]). The First Department
reversed this Court's denial of the Insurers' motion
to dismiss the complaint (J.P. Morgan Securities Inc. v
Vigilant Ins. Co., 91 A.D.3d 226');">91 A.D.3d 226 [1st Dept 2011]). In
June 2013, the Court of Appeals reversed the First
Department, and reinstated this Court's decision (21
N.Y.3d 324 ).
2014, this Court addressed defenses based upon the
applicability of the dishonest acts exclusion in
plaintiffs' motion for partial summary judgment. This
Court granted the motion and dismissed the affirmative
defenses based upon the exclusion, holding that Bear
Stearns' settlements with the regulatory agencies did not
constitute adjudications of wrongdoing (42 Misc.3d 1230[A]]).
2016, plaintiffs moved for partial summary judgment
dismissing certain Insurers' defenses based upon
assertions that Bear Stearns failed to obtain the
Insurers' consent to settle and breached the duty of
cooperation; several Insurers cross-moved for summary
judgment. With respect to the obligation to obtain the
Insurers' consent to settle, this Court held that Bear
Stearns was excused from complying because the Insurers
effectively disclaimed coverage prior to Bear Stearns'
settlement with the SEC (53 Misc.3d 694');">53 Misc.3d 694). With respect to the
duty to cooperate, this Court held that the Insurers'
failed to meet their burden that they diligently sought Bear
Stearns' cooperation or that Bear Stearns obstructed
these efforts (Id.).
Defenses Common to All Insurers
move for summary judgment to dismiss the Insurers'
remaining defenses on the grounds that Bear Stearns is
entitled to coverage for the $140 million disgorgement
payment because it is undisputed that this payment represents
the profits of third parties and not Bear Stearns, and it
suffered an insurable loss under the Policies.
opposition to plaintiffs' motion and in support of their
own motions for dismissal, the Insurers argue that plaintiffs
cannot demonstrate that the SEC ordered Bear Stearns to
disgorge its customers' ill-gotten gains as opposed to
its own ill-gotten gains. The Insurers additionally argue
that, irrespective of whether Bear Stearns can establish that
it was in fact ordered to disgorge only its customers'
ill-gotten gains, the $140 million payment is not insurable
because it was not a loss under the Policies.
stated by the Court of Appeals previously in this action,
under both public policy grounds and insurance contract
interpretation principles, "the return of improperly
acquired funds does not constitute a 'loss' or
'damages' within the meaning of insurance policies
(J.P. Morgan Sec. Inc. v Vigilant Ins. Co., 21
N.Y.3d 324, 335-36 ). Thus, an insured will be barred
from obtaining coverage for a settlement payment made to a
regulatory body that is labeled disgorgement where the
regulatory body's findings "conclusively link the
disgorgement payment to improperly acquired funds in the
hands of the insured" (Millennium Partners, L.P. v
Select Ins. Co., 68 A.D.3d 420');">68 A.D.3d 420 [1st Dept 2009],
appeal dismissed 14 N.Y.3d 856');">14 N.Y.3d 856 ).
the Policies' definition of loss is broad. The definition
lists both "damages" and "other costs"
that the insured is legally obligated to pay. It covers
"compensatory damages, multiplied damages, punitive
damages where insurable by law, judgments, settlements,
costs, charges and expenses or other sums the Insured shall
legally become obligated to pay as damages resulting from any
Claim, " and "costs, charges and expenses or other
damages incurred in connection with any investigation by any
governmental body or self-regulatory organization"
(Exhibit 8, § II.B, annexed to the Siegelaub Aff.).
on a plain reading of this term, the $140 million
disgorgement payment that Bear Stearns made to settle the
SEC's late trading and market timing claims clearly
constitutes a loss as damages resulting from a claim,
provided that this payment represented the gains of third
parties and not Bear Stearns. As noted by the Court of
Appeals, the SEC order does not establish that the $140
million payment, although labeled disgorgement, was
predicated on profits that Bear Stearns improperly acquired
(J.P. Morgan Sec. Inc., 21 N.Y.3d at 336). Indeed,
the SEC order emphasized that Bear Stearns facilitated and
enabled its customers, through Bear Stearns' provision of
clearing services, to receive millions of dollars of
improperly acquired gains. The SEC order makes no mention of
Bear Stearns' having improperly earned revenue as a
result of its facilitation of such trading practices.
the lack of a conclusive link in the SEC order between the
disgorgement payment and any improperly acquired funds in the
hands of Bear Stearns, plaintiffs go further by submitting
extensive evidence to demonstrate that the settlement payment
it made to the SEC actually represents the gains of its
customers, rather than its own gains. For the reasons set
forth below, the Insurers fail to rebut this showing with any
demonstrate that the settlement payment they are seeking
insurance coverage for is not ill-gotten gains, plaintiffs
submit the testimony and contemporaneous notes of Lewis
Liman, Esq., of Cleary Gottlieb Steen & Hamilton LLP
(Clearly Gottlieb) who represented Bear Stearns in its
defense of the regulatory investigations.
plaintiffs point to documents that Bear Stearns produced in
response to an April 2004 SEC subpoena, which requested the
production of documents sufficient to show Bear Stearns'
own profit or loss for those who placed late trading and
market timing trades through Bear Stearns, in addition to any
related revenue received by Bear Stearns for such trades
(Exhibit 30, annexed to the Siegelaub Aff.). In response to
this subpoena, Bear Stearns performed calculations - which it
presented to SEC staff - of the revenues Bear Stearns had
earned from these accounts and customers it had identified as
potentially engaging in deceptive market timing and late
trading (Exhibit 39, annexed to the Siegelaub Aff.).
addition, according to Liman's unequivocal testimony of
his firsthand discussions with SEC staff on behalf of Bear
Stearns, coupled with the testimony of other witnesses,
following the production of documents pursuant to the
subpoena, both the SEC and Bear Stearns engaged in a process
of identifying the universe of customers who may have been
engaged in late trading and market timing, in order to
calculate both Bear Stearns' revenues and the profits
earned by Bear Stearns' customers engaged in market
timing and late trading. To this end, Bear Stearns prepared a
"Combined Accounts List" which it presented to the
SEC in December 2004 (Exhibits 41-44, 82, Moreno Dep Tr 304,
annexed to the Siegelaub Aff.).
Combined Accounts List identified correspondent broker-dealer
accounts that the documents and trading data identified may
have employed a market timing strategy (Id.). The
Combined Accounts List also included an analysis of Bear
Stearns revenues from mutual fund trades in these accounts,
which showed that Bear Stearns' revenues from the mutual
funds transactions in the accounts the SEC determined were
associated with late trading and deceptive market timing
totaled $16.9 million (Liman Aff., Exhibit A, ¶ 4;
Exhibits 46, annexed to the Siegelaub Aff.). The SEC staff
accepted this revenue calculation, which became the basis of
the discussions between Bear Stearns and SEC staff with
respect to that component of the investigation (see
Liman Aff., ¶ 6; Liman Dep Tr 295-97, 822:5-11, Exhibits
81, annexed to the Siegelaub Aff.).
staff also requested the production of customer gain
information, based upon the understanding, from Bear
Stearns' perspective, that Bear Stearns should be held
liable through disgorgement for the gains of its customers.
Similarly, where there was a broker/customer relationship, it
was understood from communications with SEC staff that a
clearing broker should be liable for its own profits and also
for the profits of the brokers' customers (Exhibit 81,
annexed to the Siegelaub Aff.; (Liman Dep Tr 170-71,
173:5-16, 174:22-25, 175:12-18, 243:10-24-244:2-15). Liman
testified that SEC staff informed him that it was interested
in the fees and revenues ascribed to those customers that
were engaged ...