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Insurance might cover disgorgement, New York court rules

Kevin LaCroix has a post about a New York court decision Tuesday allowing Bear Stearns to seek D&O insurance coverage for $160 million in disgorgement it paid as part of an SEC enforcement action.

‘The New York Court of Appeals held that Bear Stearns is not barred from seeking D&O insurance coverage where Bear Stearns’ customers rather than Bear Stearns itself profited from alleged misconduct,’ LaCroix said on his D&O Diary.

The case doesn’t involve the FCPA but securities law violations related to market-timing abuses.

Due to its unusual facts, it will have limited application. But the case could impact the way corporate FCPA defendants attempt to structure their settlements with the SEC and how they characterize any disgorgement payments.

Bear Stearns (now part of JP Morgan) had been denied coverage. Its insurers argued that public policy prohibits insurance for disgorgement or related to behavior intended to harm others.

A lower court agreed. But the New York appeals court sided with Bear Stearns. It said intentional violations of the securities law don’t per se prove an intention to harm others. The appeals court also said the disgorgement wasn’t necessarily tied to gains earned by Bear Stearns as a direct result of its wrongful conduct but to gains by its customers.

‘The Court of Appeals opinion will be of no help to insureds seeking coverage for “disgorgement” under the more typical circumstances where the insured is alleged to have profited from the wrongful conduct that was the basis of the disgorgement,’ LaCroix said.

His full post, with links to the court decisions, is here.

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