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 preliminary injunction.


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 "criminal conduct."


The money laundering exclusion does not apply "until such time as it is determined that the alleged act or acts did in fact occur."


In a January 26, 2010 opinion, Southern District of Texas Judge David 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 pending appeal.



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 these issues.


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).