SDV Insights

New York Court of Appeals Holds SEC Disgorgement Payment is a Covered Loss in Policyholder Win

The New York Court of Appeals recently took a pragmatic, policyholder- friendly approach in a coverage dispute over a $140 million payment to the SEC for “disgorgement.” In the long- running case, J.P. Morgan Securities Inc. v. Vigilant Ins. Co.,1 New York’s highest court tackled the issue of whether SEC-ordered disgorgement payments constituted “penalties imposed by law” such that they would not constitute an insurable “loss” as defined by a policy covering “wrongful acts” of the insureds. The Court concluded – over a vigorous dissent and despite U.S. Supreme Court precedent to the contrary – that the term “penalty” does not clearly and unambiguously apply to SEC disgorgement payments for third-party gains. Accordingly, the insurers could not rely on the policy’s carveout from the definition of covered “loss” for “penalties imposed by law” to deny coverage.

The case arose out of the settlement of investigations. It threatened civil actions by the SEC against Bear Sterns2 based on allegations it had facilitated late trading and deceptive market timing practices by its customers in the purchase and sale of mutual funds. Among other things, the settlement with the SEC required Bear Sterns to pay a $160 million “disgorgement” payment ($140 million of which represented Bear Sterns clients’ gains) and a $90 million payment for “civil and money penalties.” Payments were deposited in a fund to compensate investors allegedly harmed by improper trading practices.

Subsequently, J.P. Morgan (as Bear Sterns’ successor) brought a coverage action against Bear Sterns’ professional liability insurers seeking coverage for losses in connection with the SEC investigation and settlement. After protracted litigation, the issue of whether Bear Sterns’ $140 million “disgorgement” payment for its clients’ allegedly wrongful gains constituted a covered “loss” under the pertinent policies became a central focus of the coverage dispute.

Under the policies, the insurers agreed to pay all “loss” Bear Sterns became legally obligated to pay as a result of a claim for any wrongful act of Bear Sterns or its employees while providing services as a securities broker and dealer. “Loss” was defined to include compensatory damages, punitive damages, multiplied damages, judgments, settlements, and expressly included costs resulting from investigations by the SEC. However, the definition of “loss” contained an exception for “fines or penalties imposed by law.” The narrow issue before the New York Court of Appeals was whether the $140 million “disgorgement” payment constituted a penalty imposed by law.

The Court observed that the carveout for a “penalty” from the definition of “loss” amounted to an exclusion because, absent that language, the definition of “loss” would otherwise encompass such payments. Accordingly, the Court held that the insurers had the burden to demonstrate that a reasonable insured purchasing the policies in 2000 would have understood the phrase “penalties imposed by law” to preclude coverage for disgorgement payments. The Court noted that the term “penalty” is commonly understood as a sanction to address a public wrong for purposes of deterrence and punishment rather than to compensate injured parties. Additionally, the Court pointed to its prior holdings drawing the same distinction. It reasoned that an insured would expect the term “penalty” to refer to non-compensatory, purely punitive monetary sanctions.

Examining the evidence below, the Court found that Bear Sterns established that the disgorgement payment was calculated based on wrongfully obtained profits or a measure of the harm or damages caused. Significantly, this was in contrast to the $90 million payment in the settlement that was denominated explicitly as a “penalty” and the $20 million in disgorgement that represented Bear Sterns own wrongful gains. Further, the Court found it significant that the $140 million payment served a compensatory goal in that it was to be placed in a fund for the injured parties and would be allowed to offset any private claims against Bear Sterns. In total, the Court determined that the payment could not fairly be understood as a “penalty” within the context of a policy covering wrongful acts of the insured.

The policy was purchased to cover liability arising from “wrongful acts” relating to Bear Sterns’ business as a securities broker and dealer and expressly covered settlements of investigations by a government regulator. When the policy was purchased, the Court considered that the SEC viewed its power to disgorge profits wrongfully obtained by third parties as an equitable remedy, while it also had the enforcement power to use injunctive relief or monetary penalties. Accordingly, the Court did not find subsequent changes in the understanding of the primary purpose of SEC enforcement actions persuasive. Specifically, in 2017 the Supreme Court issued its decision in Kokesh v. SEC, holding as a matter of statutory interpretation that the five-year statute of limitations for actions to enforce a “penalty” encompassed “disgorgement” claims. However, the New York Court of Appeals pointed out that this decision could not have informed the parties’ understanding of the meaning of the term “penalty” nearly two decades earlier. Further, as Kokesh sought to resolve substantial disagreement over the issue of whether disgorgement was a penalty, this actually supported a finding that the exclusion for “penalties” in the policy at issue should not apply given a strict and narrow construction.

For all these reasons, the Court held that the insurers had not met their burden to show that the $140 million disgorgement payment clearly and unambiguously fell within the policy exclusion for “penalties imposed by law.” In addition, the opinion contains a lengthy dissent that Bear Sterns failed to establish that the $140 million disgorgement was based on the SEC’s calculation of victim harm rather than Bear Sterns’ own ill-gotten gains. Specifically, the dissent took issue with the $140 million settlement number being far below other calculations of third-party gains based on different methodologies as well as the SEC’s initial demand, and Bear Sterns’ inability to establish why the SEC rejected the former, higher estimate.

While J.P. Morgan Securities Inc. v. Vigilant Ins. Co. represents a policyholder win, it comes as a narrow and long-belated victory to the insureds in the case that will now return to the lower courts again after its second trip to the New York Court of Appeals. However, this decision highlights the importance of organizations closely managing the defense and settlement of any governmental investigations and assessing all potential insurance coverage for any payments to the SEC in securities-related investigations.

For more information about this case and managing the coverage implications of decisions in the litigation process, you can contact Jeffrey J. Vita at or Eric M. Clarkson at

1--- N.E.3d ---, 2021 N.Y. Slip Op. 06528 (N.Y. Nov. 23, 2021).
2As a result of mergers that took place subsequent to the allegedly improper actions, Bear Sterns companies became J.P. Morgan companies.


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