By CLJ Staff (June 2, 2008) - In an opinion issued May 30, New York's high court has ruled that Bear Stearns violated the terms of its insurance policies by settling an SEC claim without the advance consent of the insurers. The ruling cost Bear Stearns the $45 million in coverage it had been seeking for the settlement.
At the end of 2002, an SEC investigation into the influence of investment banking concerns on research analysts led Bear Stearns to sign a settlement-in-principle document in which it agreed to pay $50 million in retrospective relief, plus $25 million to fund independent research and $5
million for investor education. The document indicated that the terms of the settlement were subject to approval by the SEC and other regulators. The terms of this agreement were later incorporated into a consent judgment in a federal lawsuit brought by the SEC, with Bear Stearns agreeing to pay a total of $80 million.
Three days after executing the consent agreement in the federal action, but before the agreement had been approved by the court, Bear Stearns sent letters to its insurers requesting their
consent to the settlement. Vigilant provided $10 million in coverage over a self-insured retention of $10 million. Federal and Gulf insurance companies provided an additional $40 million in follow-form excess. The policies provided that Bear Sterns would not settle any claim in excess of $5 million without the consent of the insurers.
The insurers denied coverage and filed a declaratory judgment action seeking a declaration
that the $45 million sought by Bear Stearns was not covered by the
policies. The insurers denied coverage based on violation of the consent to settle clause and an exclusion relating to investment banking activities. They also asserted that a portion of the required payments did not constitute "losses" within the meaning of the policies. The Appellate Division essentially ruled against Bear Stearns on all issues but granted it leave to appeal to the Court of Appeals.
Bear Stearns argued that it did not violate the terms of the policies by signing the consent agreement because the "settlement" did not occur until the federal judge entered the final judgment in the case. This occurred after notice had been given to the insurers.
The Court of Appeals was "unpersuaded" by this argument, noting that "having signed the consent agreement,
Bear Stearns was not free to walk away from it before entry of a
final judgment." The court concluded that "[i]n short, Bear Stearns did
everything within its ability to settle the matter and no further
action was required on its part." The court held that having elected to settle before informing the insurers, Bear Stearns violated the terms of its policies and therefore was not entitled to policy proceeds.
JPMorgan Chase & Co announced Saturday that it had completed its $1.4 billion takeover over Bear Stearns. The firm survived the Depression and numerous slumps in its 85 year history but could not manage the mortgage crisis. On the brink of bankruptcy, the company eventually accepted JPMorgan's $2-a-share offer, backed by a Federal Reserve bailout of $30 billion in Bear assets.
The Court of Appeals is New York State's highest court. It is composed of a Chief Judge and six Associate Judges, each appointed to a 14-year term.
