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Insuring Against Disgorgement

When companies disgorge profits to the SEC in FCPA settlements, can they claim reimbursement under their directors and officers liability insurance policies?

We’re not aware of coverage litigation in FCPA-related disgorgement cases. But on the superblog D&O Diary, Kevin LaCroix discussed a New York state court securities suit decided this week that denied coverage for disgorgement.

As part of a negotiated settlement with the SEC in 2006 for late trading and market timing, Bear Stearns agreed to pay $215 million, with $160 million as ‘disgorgement’ and $90 million as a penalty.

Bear Stearns claimed coverage of the disgorged amount under its D&O policy. The carrier denied the claim. Bear Stearns sued and won in the trial court.

But the appellate court ruled against Bear Stearns, holding that disgorgement of ‘ill-gotten gains or restitutionary damages’ are not insurable under New York’s state law.

It’s never easy to characterize disgorgement. Is it a penalty or a reimbursement? Earlier this year, Marc Alain Bohn talked about that in a guest post. He said,

As an equitable remedy, disgorgement is technically not intended as a tool to punish, but instead as a vehicle for preventing unjust enrichment. The SEC is therefore only permitted to recover the approximate amount earned from the alleged illicit activities (disgorging anything more would be considered punitive).

In LaCroix’s discussion of this week’s Bear Stearns decision, he said:

Carriers generally contend that insurance does not cover amounts that represent “disgorgement” or that are “restitutionary” in nature. But what makes a particular payment a “disgorgement”?  In a December 13, 2011 opinion, the New York Supreme Court, Appellate Department, First Division, held that amounts Bear Stearns paid in settlement of SEC late trading and market timing allegations represented a disgorgement that is not covered under its insurance program. Because the appellate court’s decision reversed the lower court ruling that the settlement payment did not constitute a disgorgement, the case provides an interesting perspective of the question of what makes a particular payment a “disgorgement” for purposes of determining insurance policy coverage.

Kevin LaCroix’s full post is here.

Bloomberg’s account of the case is here.

Our list of the top ten corporate disgorgements in FCPA-related cases is here.

The case is J.P. Morgan Securities Inc. v. Vigilant Insurance Co., 600979/2009, New York State Supreme Court (Manhattan). (JP Morgan Chase acquired Bear Stearns in September 2008).

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