A state appeals court on Tuesday tossed a lawsuit filed by JPMorgan asserting that a $250 million settlement between Bear Stearns and the Securities and Exchange Commission should be covered by the bank's insurers.
Reversing Supreme Court Justice Charles Ramos, the Appellate Division, First Department, held that the money paid in the settlement did not constitute an "insurable loss" because the actions that led to the agreement represented an intentional violation of the law.
The 2006 deal settled the SEC's claim that Bear Stearns had facilitated late trading and deceptive market timing for certain customers, mostly hedge funds, between 1999 and 2003, providing them with hundreds of millions of dollars in profits at the expense of mutual-fund shareholders. JPMorgan acquired Bear Stearns in 2008 after it collapsed during the subprime mortgage crisis.
In agreeing to settle the case, Bear Stearns paid $160 million in disgorgement and $90 million in civil penalties. While the brokerage specifically did not admit or deny the findings, as is common in SEC settlements, a five-judge panel ruled that the evidence overwhelmingly supported the company's culpability.
"[R]ead as a whole, the offer of settlement, the SEC Order, the NYSE order and related documents are not reasonably susceptible to any interpretation other than that Bear Stearns knowingly and intentionally facilitated illegal late trading for preferred customers, and that the relief provisions of the SEC Order required disgorgement of funds gained through that illegal activity," Justice Richard Andrias wrote for the panel.
Vigilant Insurance Company and several other insurers, including Travelers, Liberty Mutual and Lloyd's of London, were not responsible for paying losses incurred through "any deliberate, dishonest, fraudulent or criminal act or omission," according to the policy, as long as there was an "adverse final adjudication to that effect," Andrias wrote.
Lawyers for both sides did not immediately comment on the ruling. A call to JPMorgan was not immediately returned.