On Tuesday, the New York Supreme Court ruled that JPMorgan Chase & Co is entitled to insurance coverage for $140 million of a Securities and Exchange Commission settlement with the former Bear Stearns Cos over improper mutual fund trading.
The Court of Appeals ruled 6-1, overturning a lower court ruling, that the $140 million was derived from estimates of wrongful customer profits and investor harm, and was not a “penalty” that would excuse JPMorgan’s insurers from providing coverage.
In 2006, Bear Stearns agreed to pay a $90 million civil fine and forfeit $160 million in ill-gotten gains to settle SEC charges that it allowed favored hedge fund customers to conduct market timing and late trading from 1999 to 2003.
Market timing entailed rapid trading that violated fund rules and harmed ordinary investors, whereas late trading entailed illegal after-hours trading at stale prices.
Banks, mutual fund companies, and individuals paid billions of dollars to settle regulatory investigations into the practices, which were first brought to light by then-New York Attorney General Eliot Spitzer in 2003.
Bear Stearns, which JPMorgan acquired in 2008, sought insurance coverage for $140 million of the disgorgement, minus $20 million in revenue generated by the improper trading.
Insurers such as Lloyd’s of London, Travelers, and Vigilant said the $140 million did not represent client gains under the policies and that the amount was uninsurable due to public policy.
However, Chief Judge Janet DiFiore wrote for the majority on Tuesday that the insurers had failed to show that Bear Stearns could have reasonably believed its policies precluded coverage.
She also stated that, unlike the fine, which Bear Stearns was required to treat as a tax penalty, the $140 million served a “compensatory” rather than a punitive purpose.
JPMorgan spokesman Brian Marchiony expressed satisfaction with the decision. The insurers’ lawyers did not immediately respond to requests for comment.