NEW YORK TRIAL COURT DENIES INSURED’S CLAIM FOR ATTORNEYS FEES AND COSTS PAID IN CONNECTION WITH THE SETTLEMENT OF PUBLIC INVESTIGATIONS FOR “MARKET TIMING” OF MUTUAL FUNDS

On March 10, 2009, the Supreme Court of the State of New York, County of New York, granted Summary Judgment in favor of Select Insurance Company against Millennium Partners, L.P. with respect to Millennium’s claim to recover defense costs that it paid in connection with the settlement of public investigations against it for market timing of mutual funds.  Millennium Partners, L.P. v. Select Insurance Company, et al., Index No: 601878/2007(Sup. Ct. N.Y. Mar. 10, 2009).  In its suit, Millennium alleged that it incurred defense costs of over $19 million, but sought reimbursement up to the policy limit of $10 million.  Select issued Mutual Fund and Directors & Officers Errors and Omissions Liability Insurance to Millennium, which provided coverage for losses up to $10 million for all claims that were first made during the policy period.  The policy defined loss to exclude punitive or exemplary damages, criminal or civil fines or penalties imposed by law or matters uninsurable under the law pursuant to which the policy in construed. 

In July and September 2003, the Attorney General of the State of New York and the SEC commenced investigations into Millennium’s trading practices relating to market timing and late trading of mutual funds.  In November 2005, the SEC and the Attorney General both advised Millennium that it would be charged with State and Federal securities law violations for fraudulent market timing practices.  Millennium entered into settlement agreements, in which it consented to the entry of an SEC order instituting administrative and cease and desist proceedings and to the entry of an assurance of discontinuance with the Attorney General’s office.  The SEC order made factual findings based on Millennium’s settlement offer.  Under the SEC order, Millennium agreed to certain remedial measures and to pay “$148 million in disgorgement”.  Additionally, Millennium’s principals also agreed to pay substantial civil penalties.  The Attorney General’s discontinuance provided for the same $148 million payment by Millennium “in disgorgement and restitution” and the same civil penalties. 

Millennium requested reimbursement from Select for the legal fees and expenses that Millennium had paid as a result of the investigations.  Select denied liability from the loss resulting from the claim, contending that Millennium was not entitled as a matter of law to recover its defense costs, because these costs were incurred in connection with claims that are not covered by the policy.  Particularly, Select contended that the claims were for, and the settlement required, disgorgement of improperly acquired funds; that sums paid for disgorgement  by losses uninsurable by law; and, that the losses are therefore subject to policy exclusion.  Millennium argued in opposition to Select’s Motion for Summary Judgment that a tribal issue of fact existed as to whether the amount it was required to disgorge in its settlement agreements represented improperly acquired funds. 

The Court rejected Millennium’s argument, noting that the very purpose of disgorgement is to “deprive a party of ill-gotten gains and to deter improper misconduct.”  Furthermore, the Court reasoned that contrary to Millennium’s contention, the settlements conclusively link the disgorgement to improperly acquired funds.  Based on these considerations, the Trial Court entered Summary Judgment in favor of Select.