Stanford Financial's D&O insurers do not have to
continue to advance the criminal defense attorneys' fees of R. Allen Stanford
and two other former Stanford related individuals, according to an October 13,
2010 ruling by Southern District of Texas Nancy Atlas.
The ruling, which can be found here, follows a four day evidentiary hearing in August
2010, the purpose of which was to determine whether or not to continue a
preliminary injunction compelling the insurers to advance the defense fees. In
her October 13 opinion, Judge Atlas granted the insurers' motion to vacate the
The insurers had denied coverage in reliance on the
D&O policy's money laundering exclusion. The exclusion applies if insured
persons took any of a number of specified actions with respect to
"criminal property," which is a benefit the Plaintiff knew of
suspected , or reasonably know or should have suspected was obtained through
The money laundering exclusion does not apply "until
such time as it is determined that the alleged act or acts did in fact
In a January 26, 2010 opinion, Southern District of Texas
Hittner entered a preliminary injunction prohibiting the insurers from
"withholding payment" of defense expenses, as discussed here. Judge Hitner required the insurers to continue paying
the fees "until a trial on the merits in this case or such other time as
this Court orders."
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.
As discussed at here, the purpose of the August 2010 evidentiary hearing
was to determine whether or not the insurers had shown a substantial likelihood
that one or more of the three individuals has engaged in money laundering as
defined in the applicable insurance policies.
In her October 13, 2010 opinion, Judge Atlas concluded
that the insurers met their burden of showing a substantial likelihood that
"the preponderance of the evidence would demonstrate that the Money
Laundering Exclusion applies to each Plaintiff and that coverage of defense
costs in the Criminal or SEC Action or related litigation, for Plaintiffs is not
required under the Policy," and accordingly she granted the insurers'
motion to vacate the preliminary injunction.
The October 13 opinion reflects a detailed review of the
evidence presented at the preliminary injunction hearing; however, Judge Atlas
also stressed that her "findings and conclusions are neither final
findings of fact nor conclusions of law for use in the criminal or SEC cases
pending against each Plaintiff."
Judge Atlas considered the facts as applicable to Allen
Stanford separately from the other two individuals, Gilbert Lopez and Mark
Kurht, who were, respectively, Stanford Financial's chief accounting officer
and global controller.
In concluding that the underwriters had carried their
burden of showing by a preponderance of the evidence a substantial likelihood
that Lopez and Kuhrt had violated the money laundering exclusion, she concluded
that the two knew or reasonably should have known that the investment
information they were provided, and that were included in annual reports and marketing
materials, "were fictitious, or at the very least, were not accurate
reflections" of Stanford Financial's investment performance. The two
individuals were also aware of but did not report personal loans to Allen
Stanford of at least $1.7 billion.
In reaching a similar conclusion with respect to Allen
Stanford, she concluded that he was aware that Stanford Financial's affiliates
were marketing certificates of deposit based on "important
misrepresentations" about Stanford Financial's assets, investment
allocations and the performance of those investments. Stanford was also aware
that the financial statements did not reflect the massive personal loans that
had been made to him.
After having reached these conclusions, Judge Atlas
reiterating that her ruling was "narrow," adding that
The Court does not reach the issue of whether the
evidence supports a finding that Stanford personally engaged in criminal
conduct. The ruling is limited to analysis of conduct found by a preponderance
of the evidence on a necessarily restricted record.
Judge Atlas declined to enter a stay of her ruling
Judge Atlas's ruling is indeed narrow, since it was in
the context only of the preliminary injunction. Because of this procedural
context, her determinations represent only a conclusion that evidence presented
established "a substantial likelihood" that the exclusion has been
triggered, and therefore the continuation of a preliminary injunction until an
ultimate determination on the merits is not appropriate.
There are other significant attributes of her ruling that
would limit any potential general applicability. First and foremost is the
money laundering exclusion itself which is an uncommon exclusion (you don't see
this exclusion in very many D&O policies).
In addition, many other D&O policy exclusions
(including even other exclusions in Stanford Financial's D&O insurance
policy) specify that they only apply "after adjudication" that the
prohibited conduct has occurred. The money laundering exclusion, by contrast,
specified that it was triggered if "in fact" the prohibited conduct
occurred. This distinction was critical in the Fifth Circuit's consideration of
So, to recap, what we have is a procedurally narrow
context, an unusual set of coverage issues, and some very case specific factual
determinations. Moreover the factual determinations were made only pursuant for
purposes of determining whether or not the preliminary injunction should remain
in force - as Judge Atlas specifically stated, these determinations were not
"final findings of fact."
Judge Atlas was accurate in stating that her conclusions
were "narrow." But nevertheless, the determination, unless overturned
on appeal prior to the criminal trial, will leave Allen Stanford and the other
two individuals without insurance for their defense expenses as they prepare
for their January 2011 criminal trial.
An October 13, 2010 Bloomberg article discussing Judge
Atlas's opinion can be found here. (Full disclosure, I was interviewed in connection
with the article).
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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