Stanford Directors And Officers Insurance Barred By Money Laundering Exclusion

Stanford Directors And Officers Insurance Barred By Money Laundering Exclusion

HOUSTON -- (Mealey's) Insurers have proven that their policies' money laundering exclusion precludes coverage for directors and officers insureds' defense costs in underlying criminal and SEC litigation involving the alleged Stanford Ponzi scheme, a Texas federal judge held Oct. 13, granting the insurers' motion to vacate a preliminary injunction ordering them to pay defense costs and expenses (Laura Pendergest-Holt, et al. v. Certain Underwriters at Lloyd's of London, et al., No. 09-3712, S.D. Texas).

The U.S. Securities and Exchange Commission sued Robert Allen Stanford, chairman of the board of directors of Stanford International Bank Ltd. (SIBL); Laura Pendergest-Holt, chief investment officer of Stanford Financial Group (SFG); James Davis, chief financial officer of SIBL and SFG; SIBL; Mark Kuhrt and Gilbert Lopez, employees of Stanford Financial Group Co., an SIBL and SFC affiliate, or its successor, Stanford Financial Group Global Management; Stanford Group Co. and Stanford Capital Management in the U.S. District Court for the Northern District of Texas. The SEC allege that the defendants orchestrated a "massive, ongoing fraud" via their companies by selling "approximately $8 billion of self-styled 'certificates of deposits' by promising high return rates that exceed those available through true certificates of deposits offered by traditional banks."

The defendants sought coverage for defense costs under a directors and officers liability policy and an associated "follow form" excess policy issued by Certain Underwriters at Lloyd's of London and Arch Specialty Insurance Co. (collectively, Underwriters).  On Nov. 16, Underwriters issued denial letters to each of the defendants, retroactively declining to extend coverage for defense costs in the SEC and criminal actions after Aug. 27, which was when Davis entered a plea of guilty to conspiracy to commit wire, mail and securities fraud, mail fraud and conspiracy to obstruct an SEC proceeding.

Underwriters asserted that coverage was precluded under a money laundering exclusion.  The next day, the defendants sued Underwriters in the Southern District of Texas, seeking a declaration that Underwriters is required to pay their defense costs in the criminal and SEC actions.  The plaintiffs moved for a preliminary injunction, seeking an order requiring Underwriters to withdraw its retroactive denial of coverage and compelling the insurer to pay all reasonable defense costs and expenses.

Judge David Hittner granted the plaintiffs' request for emergency preliminary injunction. Underwriters moved to stay Judge Hittner's order, which the Fifth Circuit granted, remanding the case to determine whether the alleged money laundering acts did "in fact" occur.  Before the preliminary injunction hearing, Holt settled her dispute with the insurers.

Underwriters argued that the "funds from purchasers of SIBL CDs are Criminal Property because such funds were derived from Criminal Conduct."

Judge Nancy F. Atlas agreed, finding that "Davis engaged in Criminal Conduct as defined under the Policy in connection with CD purchasers' funds."

The judge further found that Underwriters has satisfied its burden to prove a substantial likelihood that a preponderance of the evidence would show that the money laundering exclusion applies to both Kuhrt and Lopez and that they "engaged in Money Laundering under the Policy."  In addition, Judge Atlas concluded that Underwriters has also demonstrated a substantial likelihood that a preponderance of the evidence would prove that "Stanford knew or suspected, or reasonably should have known or suspected, that CD holders' funds were Criminal Property under the Policy definition" and that he "knowingly engaged in acts constituting Money Laundering under the Policy with regard to those funds."

[Editor's Note:  Full coverage will be in the Oct. 21 issue of Mealey's Emerging Insurance Disputes.  In the meantime, the opinion is available at or by calling the Customer Support Department at 1-800-833-9844.  Document #13-101021-021Z.  For all of your legal news needs, please visit]

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For more information, call editor Jennifer Hans at 610-205-1149, or e-mail her at