CSFB declined to comment on whether it will appeal the decision, but Victoria Harmon, the company spokesperson, said it is “reviewing the court's judgment and will be evaluating the best course of action for shareholders.”

This lawsuit, filed last summer and submitted to the court this past January, involves the $100 million settlement reached between CSFB and financial regulators last year. CSFB had agreed to the arrangement last year after the Securities and Exchange Commission and National Association of Securities Dealers accused the investment bank of abusive practices on initial public offerings.

“In January 2002, the SEC and NASD accused CSFB of coercing customers into paying a portion of their profits to CSFB from flipping CSFB-underwritten IPO stock,” Karla Moskowitz, the New York County Supreme Court justice, wrote in her decision. (“Flipping” refers to investors selling their purchased shares in a hot IPO in the immediate aftermarket to realize a quick profit.)

Justice Moskowitz further noted, “SEC alleged that from at least April 1999 through June 2000, CSFB employees allocated shares of IPOs to over 100 customers who were willing to funnel between 33 and 66 percent of their profits to CSFB.”

These profits were passed on to the bank through excessively high commissions on unrelated stock sales from investors–a method also referred to as IPO “tie-in/laddering” practices. Regulators contend that customers funneled “tens of millions of dollars in profits” back to the bank this way, Judge Moskowitz noted.

But in its defense, CSFB said in its court argument that denying the coverage would make this E&O policy “illusory” and would deprive the company of coverage “for which it paid millions of dollars in premiums.” The investment bank also argued that since there was no verdict on its alleged misconduct, allowing coverage does not represent a wrongful benefit.

“In this lawsuit, the court is asked to decide whether insurance companies should reimburse CSFB for $70 million representing 'disgorgement' that it agreed to pay to settle these accusations,” Justice Moskowitz said. “I agree with the insurer that CSFB is not covered for the settlement amount,” she concluded.

Commenting on the decision, Mr. Finnerty explained that “CSFB has sought coverage for $70 million out of the $100 million that it has since paid in the settlement with the NASD and the SEC.” The issue before the court, he added, was whether the $70 million portion–which was noted in the settlement as disgorgement of monies that CSFB was accused of improperly obtaining–is covered under liability policies.

“And Justice Moskowitz decided, after the briefing and argument, that, indeed, the disgorgement payment was not something that is covered, as a matter of public policy,” Mr. Finnerty said. “The public policy is that, under the New York law, it would negate the remedial effect of the settlement if the party that had to give back the disgorged money is repaid by an insurance company.”

Mr. Finnerty noted that from Chubb's perspective, this decision clearly resolves the issue of whether or not the payment made into the settlement is covered by an E&O policy. He added: “The policy that is implicated here is an errors and omissions policy issued to the investment bank. But the precedent on disgorgement could apply regardless of the type of liability insurance.”

He also predicted this verdict could potentially influence other settlements. In particular, he pointed out investment banks involved in a $1.4 billion regulatory settlement for alleged conflicts of interest between their research and investment banking units.

This settlement, announced this past April, involves 10 leading investment banks in New York and breaks down the $1.4 billion figure into four separate categories: $487.5 million for penalty, $387.5 million for disgorgement, $432.5 million for funding independent research, and $80 million to help investor education.

And while these banks–which also include CSFB–have agreed not to seek “reimbursement or indemnification” from insurers or tax deductions or tax credits for any penalties, some have left open the possibility that they may seek insurance coverage in other categories.

JeanMarie McFadden, co-head of corporate communications at CSFB, which agreed to pay $200 million under this settlement, had told National Underwriter, “We are continuing to analyze the insurance connection. But we made no final determination on what, if any, specific claims we may pursue. No decision has yet been made.”

But Mr. Finnerty forecast that if any of the banks in the settlement chooses to pursue coverage from liability policies, “this Chubb decision will have a negative impact on those efforts to obtain insurance coverage.”

“It will now be up to CSFB to determine whether or not it will choose to appeal this decision,” he said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 28, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.