Pendergest–holt v. Certain Underwriters At Lloyd's of London

• Decision Date: 13 October 2010
• Docket Number: Civil Action No. H–09–3712.
• Citation: 751 F.Supp.2d 876
• Parties: Laura PENDERGEST–HOLT, et al., Plaintiffs,v.CERTAIN UNDERWRITERS AT LLOYD'S OF LONDON and Arch Specialty Insurance Co., Defendants.
• Court: U.S. District Court — Southern District of Texas

751 F.Supp.2d 876

Laura PENDERGEST–HOLT, et al., Plaintiffs,

v.CERTAIN UNDERWRITERS AT LLOYD'S OF LONDON and Arch Specialty Insurance Co., Defendants.

Civil Action No. H–09–3712.

United States District Court, S.D. Texas, Houston Division.

Oct. 13, 2010.

Lee Howard Shidlofsky, Alan M. Cohen, Douglas Paul Skelley, Visser Shidlofsky LLP, Austin, TX, Kenneth E. Broughton, Jr., Haynes & Boone LLP, Houston, TX, Henry James Fasthoff, IV, Stumpf Cannon Fasthoff P.C., Houston, TX, Michael M. Essmyer, Essmyer Tritico & Rainey LLP, Houston, TX, Robert Stephen Bennett, Bennett Law Firm, Houston, TX, Richard B. Kuniansky, Kuniansky and Associates, Houston, TX, for Plaintiffs.Barry A. Chasnoff, Daniel McNeel Lane, Jr., Akin Gump et al., San Antonio, TX, Lee Howard Shidlofsky, Visser Shidlofsky LLP, Austin, TX, for Defendants.

OPINION

NANCY F. ATLAS, District Judge.

The Court held a preliminary injunction hearing in this insurance coverage case from August 24 through August 27, 2010, to address issues raised by the Motion to Vacate Preliminary Injunction [Doc. # 260] filed by Defendants Certain Underwriters at Lloyd's of London and Arch Specialty Insurance Co. (collectively, “Underwriters”). Plaintiffs Mark Kuhrt, Gilbert Lopez, and R. Allen Stanford ¹ seek coverage under Directors and Officers insurance policies issued by Underwriters for defense costs incurred as a result of criminal charges and civil litigation filed against them based on their conduct while involved with certain Stanford Financial Group (“SFG”) entities. Each party presented evidence through live witnesses, trial exhibits, matters of which the Court took judicial notice, and deposition testimony and exhibits. ²

The parties agree that the preliminary injunction standard applies ³ and that only the first prong of the standard is in issue. The question presented therefore is whether Underwriters have shown a substantial likelihood that one or more Plaintiffs engaged in money laundering as defined in the applicable insurance policies. Having observed the live witnesses and carefully considered all exhibits and all matters of record in this case, the arguments of counsel, and the governing legal principles, the Court makes the following findings of fact and conclusions of law.⁴ For the reasons stated, the Court grants Underwriters' Motion to Vacate the Preliminary Injunction.

I. FACTUAL BACKGROUND

R. Allen Stanford is, and at all times pertinent to this case was, the sole owner, directly or indirectly, of more than 100 separate Stanford-related entities, including Stanford International Bank Limited (“SIBL” or the “Bank”). These entities constituted a financial services network publicized and referred to internally as “Stanford Financial Group” (“SFG”) or “Stanford Financial.” SFG and certain relevant financial affiliates were headquartered in Houston, Texas. SIBL, which Stanford owned personally, directly or indirectly, was a private offshore bank with its principal place of business in Antigua. SIBL was not a normal commercial bank; it did not offer checking accounts or engage in general lending. The Bank's principal product offering, and principal source of funds, was its certificate of deposit (“CD”) program. SIBL's “purported business model was to invest proceeds of the CD sales in order to provide investment returns sufficient to cover inter alia the required interest payments on the CDs, redemptions of CDs, and overhead.” ⁵

The CDs primarily were marketed through “financial advisors” who worked for Stanford Group Company (“SGC”), a United States broker-dealer based in Houston, Texas, and an SFG affiliate. Plaintiffs Kuhrt and Lopez worked for Stanford Financial Group Company (“SFGC”), an SIBL and SFC affiliate, or its successor, Stanford Financial Group Global Management (“SFGGM”). SFGC and SFGGM provided administrative services, including accounting services, to other Stanford-related entities.

Plaintiffs are defendants in a criminal action pending in this Court before Senior United States District Judge David Hittner captioned United States v. R. Allen Stanford, et al., No. 4:09–CR–0342 (S.D. Tex. filed Jun. 18, 2009) (“Criminal Action”). Plaintiffs also are defendants in an action commenced by the Securities and Exchange Commission (the “SEC”) and pending before United States District Judge David Godbey in the United States District Court for the Northern District of Texas, Dallas Division, in the matter of Sec. & Exch. Comm'n v. Stanford Int'l Bank, Ltd., et al., No. 3:09–CV–298 (N.D. Tex. filed Feb. 17, 2009) (“SEC Action”).

The day before the SEC Action was filed in February 2007, the District Court for the Northern District of Texas, acting at the request of the SEC, froze the assets of several Stanford entities as well the assets of Stanford, Davis and Pendergest–Holt personally, and placed these entities and individuals into a Receivership. Ralph Janvey was appointed Receiver. That same day, the Receiver retained Karyl Van Tassel of FTI Consulting Services, Inc. (“FTI”) to assist him in investigating the alleged Stanford fraud. According to Van Tassel, FTI “perform[ed] a variety of services, including assisting in the capture and safeguarding of electronic accounting and other records of the Stanford Entities, and forensic accounting analyses of those records, including cash tracing.” ⁶ Van Tassel and FTI engaged in 18 months of detailed forensic investigation. While original SIBL documents have not been available, Van Tassel has had access to many other entities' tangible and electronic materials and has interviewed dozens of people who were formerly employed by or who worked with Stanford entities.⁷ Significantly, Van Tassel and her FTI staff examined many thousands of documents, such as available accounting and other records (including email files of certain former Stanford employees) relating to numerous Stanford entities located in and/or gathered from Texas, Mississippi, Tennessee, Florida, St. Croix, United States Virgin Islands, Antigua, Barbuda, and other Stanford locations within and outside the United States. Van Tassel and her staff also examined extensive “SIBL customer records, including but not limited to paper and electronic records documenting SIBL CD purchases, interest payments and redemptions.” ⁸ FTI also obtained and analyzed paper and electronic files from third party financial institutions where bank accounts of various Stanford entities are or were located, and electronic and other data from institutions that currently hold SGC customer accounts and former employee accounts, as well as SGC accounts. ⁹ The Court receives in evidence and credits Van Tassel's conclusions based on detailed analysis of documentary evidence, augmented by interviews of persons with firsthand knowledge, concerning the source and use of SIBL funds, SIBL's financial condition at various points in time, the timing and cost of assets acquired by various Stanford entities ( e.g., real estate and private equity investments), and the compensation of financial advisors who sold SIBL CDs.¹⁰

Following initiation of the SEC and Criminal Actions, Plaintiffs sought coverage for their defense costs under several related directors' and officers' insurance policies (collectively, the “Policy”) ¹¹ issued by Underwriters for the benefit of dozens of officers and directors of numerous Stanford-owned entities and affiliates.¹² Underwriters originally agreed to and did pay Plaintiffs' litigation defense costs, subject to a reservation of rights. In November 2009, however, Underwriters retroactively denied coverage back to August 27, 2009, and seeks reimbursement from Plaintiffs of all monies paid on Plaintiffs' behalf under the Policy.

The date of Underwriters' retroactive denial of coverage was not arbitrarily selected. August 27, 2009 was the date the Chief Financial Officer of SIBL, James M. Davis, entered into a plea agreement with the United States in the matter of U.S. v. James M. Davis, No. 4:09–cr–0335–01 (S.D. Tex., filed June 18, 2009). Davis entered a plea of guilty to conspiracy to commit wire, mail and securities fraud; mail fraud; and conspiracy to obstruct a proceeding before the SEC. Davis admitted that while employed with Stanford Financial Group he knowingly participated in a scheme to defraud purchasers of SIBL CDs by, among other things, misrepresenting to actual and potential CD purchasers the nature of SIBL's investment portfolio, creating fictitious financial statements, and concealing large unsecured loans to Stanford. These material misrepresentations were intended to, and in fact did, induce sales of billions of dollars of SIBL CDs. There is no dispute that Davis and others made use of interstate wire facilities and the mails in carrying out the scheme.¹³

In denying coverage, Underwriters relied on a “Money Laundering Exclusion” in the Policy. That exclusion “bars coverage for loss (including defense costs) resulting from any claim arising directly or indirectly as a result of or in connection with any act or acts (or alleged act or acts)” of money laundering, as that term is defined in the Policy.¹⁴

After Underwriters denied coverage, Plaintiffs instituted this proceeding to obtain a judgment declaring that Underwriters are obligated to pay for Plaintiffs' defense costs and expenses in the SEC and Criminal Actions, among other relief. On January 26, 2010, Judge Hittner granted Plaintiffs a preliminary injunction prohibiting Underwriters from “withholding payment” for defense costs “already incurred” by Plaintiffs and to be “incurred by them in the future ... until a trial on the merits in this case or such other time as this Court orders.” Pendergest–Holt v. Certain Underwriters at Lloyd's of London, 681 F.Supp.2d 816, 836 (S.D.Tex.2010), aff'd in part, rev'd in part, and modified by 600 F.3d 562 (5th Cir.2010).

On appeal, the Fifth Circuit disagreed with the District Court's reasoning, but affirmed the...