Securities Case Over Insuring The $160M in Disgorgement Paid to the SEC Goes Back to Trial Court

New York’s highest court has revived a declaratory judgment action against D & Liability insurers after finding that the Securities and Exchange Commission order mandating that Bear Stearns (BSC) pay $160M in disgorgement failed to establish in a conclusive manner that payment could not be insured. The securities lawsuit is J.P. Morgan Securities, Inc., et al. v. Vigilant Insurance Company, et al.

Claiming that Bear Stearns engaged in market timing mutual fund trades and illegal late trading and for certain clients over a four-year period, the SEC wanted $720M in sanctions from the firm. The financial firm, however, argued that the activities only caused it to make $16.9M in revenues. A settlement was reached ordering Bear Stearns to pay $160M in disgorgement and $90M in penalties, with the firm not having to deny or admit to the Commission’s claims.

A declaratory action followed with a plaintiff in the New York Supreme Court seeking to have D & O insurers pay for $150M of the $160M disgorgement. Citing New York law, the insurers argued that the case should be dismissed, noting that under state law disgorgement is not insurable. A lower court turned down these contentions, denying the motion.

Then, the Appellate Division, First Department reversed the ruling on appeal, finding that Bear Stearns’ settlement offer, the Commission’s order, and associated documents are not prone to any other interpretation besides that the firm knew and purposely took part in illegal late trading on behalf of certain clients that received preferential treatment and, also, the Commission’s order required disgorgement of money obtained via activities that were not legal.

Holding, the First Department said that disgorgement can be determined per matter of law when settlement funds are considered “disgorgement,” facts show that the funds came from an enterprise that was not legal, and what was paid makes up a reasonable estimation of all of the profits made. The court also said that the party doesn’t have to profit from all of the money that ends up being disgorged. Following further appeal, the New York Court of Appeals reversed this decision, returning the action to a lower court for resolution and discovery.

“Remember the old movie thrillers about Godzilla fighting King Kong (or the language-dubbed Japanese version when the G’ monster battled “Mothra,” to the death)?” said Institutional Investor Fraud Lawyer William Shepherd. “ I guess “art” imitates life as we now have a live 21st century behemoth battle as the Insurance Industry takes on Wall Street. Maybe this would have been a fair fight a decade ago, but today – not even close. Banks buy Wall Street firms. Wall Street firms parlay bank deposits into war chests, and … advantage Wall Street. It’s not that J.P. Morgan (JPM) needs Vigilant Life’s money, it’s just that, well, the money is there for the taking – candy from a baby. Politicians, judges and the rest of us take note: There’s a new gang in town and they get what they want when they want it.”

Contact our securities lawyers at The SSEK Partners Group today.