The question of insurance coverage for the attorneys'
fees of Allen
Stanford and his co-defendants is at issue in a three-day bench trial
before Southern District of Texas Judge Nancy Atlas
that began on Tuesday, August 23, 2010 in Houston.
Stanford and several other individuals have been
criminally charged with financial fraud in connection with the collapse of the
Stanford Financial Group. The criminal trial is set to commence in January
2011. Stanford and several of the other individuals are also defendants in an
SEC enforcement action as well as numerous other civil proceedings.
Stanford Financial had $100 million in D&O insurance.
The primary policy contains a money laundering exclusion that the insurers
contend precludes coverage under the policies. The money laundering exclusion
specifies that it does not apply "until such time as it is determined that
the alleged act or acts did in fact occur."
In a January 26, 2010 opinion, Southern District of Texas
Judge David
Hittner entered a preliminary injunction prohibiting the insurers from
"withholding payment" of defense expenses from four individuals
(including Allan Stanford), as discussed here.
In a March 15, 2010 opinion (about which refer here), the Fifth Circuit reversed and remanded the case to
the district court, concluding that the money laundering exclusion's "in
fact" wording required a judicial determination to establish whether or
not the exclusion had been triggered, but also concluding that this
determination can be made in a separate proceeding such as a coverage action.
Based upon the trial that began on Tuesday in Houston,
the court will determine whether or not the money laundering exclusion has been
triggered, and therefore whether the insurers have any obligations to pay the
defendants' attorneys fees or other amounts on the defendants' behalf under the
policies.
According to news reports, there were a number of interesting
developments in the first day of trial.
First, the lawyer for Laura
Pendergest-Holt, Stanford Financial's former Chief Investment Officer, told
the court that Pendergest-Holt had entered a settlement with the insurers. The
details of the settlement were not disclosured.
Second, in response to a question from Judge Atlas as to
where the policy's unusual definition of "money laundering" had
originated, the lawyer for the insurers told the court that the language had
been in prior policies through several renewals, but the language originally
"been brought to the contract negotiation ...by Stanford's insurance
broker." The insurers' lawyer said that the insurer did not plan to offer
a witness on the origins of the language.
Judge Atlas commented: "All I can say, it's turning
out not to be such a bargain."
Third, the witnesses are unlikely to testify during the
coverage trial, given the risks that would entail for the criminal case. Judge
Atlas said she will not determine yet whether she will draw an adverse inference
about the individuals' guilt from the individuals' decision not to testify
during the coverage case.
Finally, the insurers revealed that to date the insurers
had advanced over $15 million dollars to pay for attorneys' fees on behalf of
the individuals and other insured persons under the policy.
Read
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.