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Court of Appeals of New York
November 23, 2021, Decided
[**445] [*557] [***853] DiFIORE, Chief Judge:
This appeal involves a dispute between the insured securities [*558] broker-dealers and certain excess insurers concerning the availability of coverage under a "wrongful act" liability policy for funds the insureds "disgorged" as part of a settlement with the Securities and Exchange Commission. We conclude that the settlement payment in question was not excluded from insurance coverage as a "penalt[y] imposed by law" under the policies at issue and therefore reverse.
In 2000, The Bear Stearns Companies purchased a primary insurance policy from defendant Vigilant Insurance Company providing coverage for "wrongful acts" of the Companies and its subsidiaries. The Bear Stearns Companies also purchased various excess insurance policies [****2] from defendants Travelers Indemnity Company, Federal Insurance Company, National Union Fire Insurance Company of Pittsburgh, Pa., Liberty Mutual Insurance Company, Certain Underwriters at Lloyd's London, and American Alternative Insurance Corporation or their predecessor entities that followed form to the policy issued by Vigilant. As relevant here, the policies provided coverage for "loss" that Bear Stearns became liable to pay in connection with any civil proceeding or governmental investigation into violations of laws or regulations, defining "loss" as including various types of damages—including compensatory and punitive damages ("where insurable by law")—but not "fines or penalties imposed by law."
In 2003, the Securities and Exchange Commission (SEC) and other regulatory agencies began investigating Bear, Stearns & Co. Inc. and Bear, Stearns Securities Corporation—securities broker-dealers that processed and cleared trades for clients (collectively, Bear Stearns). The investigation concerned allegations that, between 1999 and 2003, Bear Stearns had facilitated late trading and deceptive market timing practices1 by its customers in connection with the purchase and sale of shares [****3] of mutual funds. Bear Stearns notified the Insurers of the pending [*559] investigation, but the Insurers effectively disclaimed coverage (151 AD3d 632, 633, 58 N.Y.S.3d 38 [1st Dept 2017]). Eventually, the SEC informed Bear Stearns that it intended to commence a civil action or administrative proceeding charging violations of federal securities laws and that it would seek, among other things, $720 million in monetary sanctions. Although Bear Stearns disputed the proposed charges, in early 2006 it settled with the SEC.
Pursuant to the settlement order, the SEC censured Bear Stearns and ordered it to cease and desist from any future securities law violations. Among other "findings," the administrative settlement order stated that Bear Stearns "facilitated late trading" and "the deceptive market timing activity" of certain clients. "[W]ithout admitting or denying the findings" and "[s]olely for the purpose of these proceedings," Bear Stearns agreed to a $160 million [***854] [**446] "disgorgement" payment and a $90 million payment for "civil money penalties." Both payments were to be deposited in a "Fair Fund" to compensate mutual fund investors allegedly harmed by the improper trading practices (see 15 USC § 7246). Further, "[t]o preserve the deterrent effect of the [****4] civil penalty," the settlement order directed that the $90 million payment—but not the disgorgement payment—was ineligible to offset any sums owed by Bear Stearns to private litigants injured by the trading practices. Bear Stearns was also required to treat the $90 million payment as a penalty for tax purposes. Following the settlement, Bear Stearns transferred the $160 million disgorgement and $90 million penalty payments to the SEC. Bear Stearns also eventually settled a series of class actions brought on behalf of injured private investors based on similar late trading and market timing allegations.
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37 N.Y.3d 552 *; 183 N.E.3d 443 **; 162 N.Y.S.3d 851 ***; 2021 N.Y. LEXIS 2519 ****; 2021 NY Slip Op 06528; 2021 WL 5492781
 J.P. Morgan Securities Inc., et al., Appellants, v Vigilant Insurance Company, et al., Respondents.
Notice: THE PAGINATION OF THIS DOCUMENT IS SUBJECT TO CHANGE PENDING RELEASE OF THE FINAL PUBLISHED VERSION.
THIS OPINION IS UNCORRECTED AND SUBJECT TO REVISION BEFORE PUBLICATION IN THE OFFICIAL REPORTS.
disgorgement, Insurers, gains, settlement, coverage, funds, compensatory, wrongdoer, profits, investors, ill-gotten, damages, trading, compensate, insurance policy, practices, punitive, summary judgment, deterrence, wrongdoing, parties, deter, hedge, civil penalty, mutual fund, calculated, violations, customers, policies, losses
Insurance Law, Policy Interpretation, Ambiguous Terms, Construction Against Insurers, Reasonable Expectations, Reasonable Person, Evidence, Burdens of Proof, Allocation, Procedure, Evidence & Trial, Burdens of Proof, Commercial General Liability Insurance, Exclusions, Claim, Contract & Practice Issues, Claims Made Policies, Exclusions, Contracts Law, Damages, Types of Damages, Liquidated Damages, Policy Interpretation, Civil Procedure, Remedies, Punitive Damages, Business Insurance, Damages, Compensatory Damages, Securities Law, Securities Exchange Act of 1934 Actions, Insider Trading, Disgorgement of Profits