new yorkIn what seems like the culminating trial court clash in the long-running effort of J.P. Morgan, as successor in interest to Bear Stearns, to try to obtain insurance coverage for amounts Bear Stearns paid to settle charges that it had facilitated market timing and late trading, New York (New York County) Supreme Court Judge Charles E. Ramos, applying New York law, on April 17, 2017 entered a summary judgment order (here) comprehensively rejecting the insurers’ various remaining coverage defenses. While further appellate proceedings in the case seem likely, Judge Ramos’s order makes for interesting reading.



In 2006, the SEC notified Bear Stearns that the agency was investigating late trading and market timing activities units of Bear Stearns had undertaken for the benefit of company clients. The agency advised the company that it intended to seek injunctive relief and monetary sanctions of $720 million.


Bear Stearns ultimately made an offer of settlement and –without admitting or denying the agency “findings” – consented to the SEC’s entry of an Administrative Order, in which, among other things, Bear Stearns agree to pay a total of $215 million, of which $160 million was labeled “disgorgement” and $90 million as a penalty.


At the relevant time, Bear maintained a program of insurance that, according to the subsequent complaint, totaled $200 million. Bear Stearns sought to have the carriers in the program indemnify the company for the $160 million amount in the settlement labeled as “disgorgement.” However, the insurers contended that because the $160 million payment was labeled “disgorgement” in the Administrative Order, it did not represent a covered loss under the insurance policies.


In 2009, J.P. Morgan (into which Bear Stearns merged in 2008) filed an action seeking a judicial declaration that the insurers were obliged to indemnify the company for the amount of the $160 million payment in excess of the $10 million self-insured retention, as well as the approximately $14 million paid to settle the parallel securities class action lawsuit, and defense fees.


Many of the issues presented in the declaratory judgment action have already been extensively litigated, and the case has already made its way to the New York Court of Appeals, New York’s highest court (as discussed in prior posts on this blog, herehere and here). Indeed, the insurer’s appeal of Judge Ramos’s earlier ruling that the insurers’ coverage denial relieved Bear Stearns of its obligation to obtain the insurers’ consent to settlement is currently pending in a New York intermediate appellate court. Judge Ramos’s latest order addressed the parties’ cross-motions for summary judgment on what Judge Ramos referred to as the insurers’ “remaining defenses” to coverage.


The April 17, 2017 Order

In his April 17 Order, Judge Ramos granted J.P. Morgan’s motions for summary judgment and denied the insurers’ motions for summary judgment.


First, Judge Ramos rejected the insurers’ argument that there is no coverage for the Bear Stearns payment to the SEC because, the insurers contended, it represented disgorgement of ill-gotten gains. The amount of the payment, Judge Ramos said, represented the gains of third parties whose improper trading Bear Stearns facilitated, and not the gains of Bear Stearns itself. Judge Ramos also noted that the policy’s definition of “loss” is broad, encompassing both “damages” and “other costs” that the insured is legally obligated to pay.


Based on a “broad reading” of the policy’s definition of loss, Judge Ramos concluded that Bear Stearns disgorgement payment to the SEC “clearly constitutes a loss as damages resulting from a claim, provided that this payment represented the gains of third parties and not Bear Stearns.” J.P. Morgan submitted extensive evidence that the disgorgement payment was based on a calculation of customer gains from the trading. The insurers, Judge Ramos said, provided “no competent evidence sufficient to raise a triable issue of fact in opposition to [J.P. Morgan’s] showing.”   Judge Ramos concluded that “the documentary and testamentary evidence largely and overwhelmingly supports the conclusion that Bear Stearns’ misconduct enabled its customers to generate millions of dollars in profits rather than its own ill-gotten gains.”


Second, Judge Ramos rejected the insurers’ contention that coverage for the SEC payment was barred by the policy’s personal profit exclusion. The exclusion precludes coverage for claims against the insured “based upon or arising out of the Insured gaining in fact any personal profit or advantage to which the Insured was not legally entitled.” Judge Ramos concluded that because SEC’s order contained no allegations or findings that Bear Stearns’ profit or gain was in itself illegal, the exclusion does not apply to bar coverage.


Judge Ramos also rejected the insurers’ argument that because $20 million of the $160 million SEC payment represented fees that Bear Stearns had earned in processing the improper trades, coverage was barred for the remaining $140 million payment. In rejecting this argument, he noted there was no allegation that Bear Stearns was not lawfully entitled to earn a fee from performing clearing services, adding that the profit Bears Stearns derived from facilitating its customers’ trading was not the basis for liability on which the SEC’s claims were brought. Judge Ramos noted further that “accepting the Insurers’ construction that any profit or advantage gains by an insured is sufficient to trigger the exclusion essentially renders the coverage afforded by the Policies illusory, as it would exclude most coverage for securities violations that the Policies are intended to grant.”


Third, Judge Ramos rejected the insurers’ argument that coverage was precluded by the public policy exception, which bars coverage for loss arising out of intentionally harmful conduct. In reaching this conclusion, Judge Ramos noted that in the SEC order, Bear Stearns neither admitted nor denied the order’s findings, and further that the insurers did not “submit any evidence that raises a triable issue that Bear Stearns deliberately intended to cause injury to investors.” He rejected as “hearsay” the insurers’ effort to rely on various communications between Bear Stearns employees that the insurers contended showed that Bear Stearns knew fund investors were being harmed by Bear Stearns facilitation of market timing, adding that J.P Morgan countered with testamentary evidence that Bear Stearns employees did not intend to harm the fund investors.


Fourth, Judge Ramos rejected the insurers’ argument that coverage was precluded because the allegedly wrongful conduct was not undertaken in an insured capacity, because it was based on the liability of third parties. The predicate for Bear Stearns’ liability was its own violation of the federal securities laws in its capacity as a broker/dealer.


Fifth, Judge Ramos rejected the argument of several of the insurers that coverage was precluded by an exclusion barring coverage for prior known acts. The exclusion precluded coverage for wrongful acts that took place before March 21, 2000, if any officer of the insured could reasonably have foreseen that the wrongful acts would lead to a claim. Judge Ramos found the term “officer” as used in this exclusion to be ambiguous, and rejected the insurers’ argument that the knowledge of certain lower level company employees who were aware of the late trading was sufficient to trigger the exclusion. He also concluded that the insurers had not established that it reasonably could have been foreseen that the trading would lead to a claim.


Finally, Judge Ramos rejected the insurers’ arguments that the amounts of the SEC settlement and civil action settlement were unreasonable. He rejected the insurers’ argument that J.P. Morgan had blocked the insurers’ efforts to discover the bank’s assessment of its liability exposures and that it should not now be allowed to attempt to prove these facts on summary judgment, noting that over the course of seven years of litigation, J.P. Morgan had produced “voluminous, non-privileged material” related to the underlying cases, their defense, and the negotiations that preceded settlement.



This case, which has been grinding on for years, has a long and complicated procedural history. Yet after all of the time and all of the various procedural twists and turns, Judge Ramos’s latest ruling in the case seems almost precipitous. To be sure, his order is thorough, but the overall impression is that he had concluded that it was about time to be done with this case. It is very hard for me not to picture him putting down his pen and then dusting off his hands after his labors – that takes care of that.


From my perspective, on reading the order, it is hard to shake the feeling that Judge Ramos was determined to rule in the bank’s favor on every issue, no matter what. The result is a comprehensive win for J.P. Morgan. Just the same, given the procedural history of this case, it would be premature for the bank to declare victory. As I noted above, another appeal in this case is already pending, and the insurers likely will appeal this order as well. Given the procedural history in the case, it may well be Judge Ramos may only have cleared this case off of his docket for the time being only.


For their part, the insurers may well believe they have numerous grounds of appeal. Among many other issues, the insurers may well contend that many of Judge Ramos’s conclusions depend on what amount to credibility determinations or findings of fact of the sort more suitable following trial on a full evidentiary record rather than on summary judgment. The insurers may also feel that Judge Ramos gave short shrift to arguments that merited greater consideration; for example, and among other things, the insurers may feel that their arguments based on the personal profit exclusion – and in particular that Bear Stearns profited by facilitating improper trading – were entitled to greater  respect.


There are so many interesting things about this case, but to me the most interesting is that in the end, a payment amount that was on its face labelled as “disgorgement” did not represent a “disgorgement” of the type for which coverage is precluded. That the payment did not represent the bank’s return of its own ill-gotten gains but rather of the gains of third parties helps explain this conclusion. Judge Ramos did not say that the policy covers disgorgement, but rather he was saying that the payment was not the kind of disgorgement payment for which coverage is precluded. The distinct factual circumstances may limit the usefulness of this ruling for other policyholders trying to establish coverage for amounts their insurer is disclaiming as disgorgement; the ruling will be most useful in circumstances in which the policyholder can argue that the amount for which coverage is sought does not represent the policyholder’s own ill-gotten gains.


In any event, I suspect strongly that there is more of this story yet to be told. Many of the issues discussed in Judge Ramos’s latest order likely will be further aired in New York’s appellate courts.


For further discussion of the disgorgement issue in the context of another case in which the court concluded that payments involved did not represent disgorgement, refer here.