The Securities and Exchange Commission recently filed an amicus brief in the Vigilant Ins. Co. et al. v. The Bear Stearns Cos., Inc. insurance coverage litigation. On June 19, 2007, an intermediate New York State appellate court held that a question of fact existed as to whether a component of an SEC settlement that was specifically labeled as disgorgement actually constituted the kind of disgorgement that many courts have deemed uninsurable as a matter of public policy. (Previous post on this decision here). Recognizing the significance of the legal issues presented, the appellate court certified an appeal to the New York Court of Appeals (New York’s highest court) and granted the SEC’s motion to file an amicus (i.e., “friend of the court”) brief in connection with the appeal.
In its amicus brief, available here, the SEC takes the position that there is no triable issue of fact here, and that the Bear Stearns settlement labeled as a “disgorgement” was in fact a disgorgement of ill-gotten gains. The SEC’s position runs contrary to Bear Stearns’ argument that the settlement component labeled “disgorgement” was a “legal fiction,” and simply represented compensatory damages, a form of relief that is not permitted in an SEC action under the federal securities laws. Interestingly, the SEC appears to be concerned that, if the appeals court accepts Bear Stearns’ argument, the SEC could be seen to be stepping outside its bounds of authority by obtaining compensatory damages, notwithstanding Congress’ expressed intent to limit SEC recoveries to fines, penalties and disgorgements.
The SEC does not take a position in its amicus brief on the substantive insurance issue presented in the case, i.e., whether a settlement representing disgorgement is uninsurable as a matter of law. This is consistent with past SEC practices of refusing to be dragged into ancillary legal disputes that do not fall within the SEC’s regulatory territory.
