Bear Stearns Insurers Can’t Shake Bill for 2006 Settlement

  • Bear agreed to pay $250 million to regulators in March 2006
  • Judge rules insurers must face suit seeking reimbursement

A decade ago, Bear Stearns Cos. agreed to pay $250 million to resolve regulators’ claims that it was at the center of a system that allowed clients to break mutual-fund trading rules.

JPMorgan Chase & Co., which acquired the company in 2008, is still trying to get insurers to foot part of the bill.

A New York state judge on Monday rejected a bid by a unit of Chubb Ltd. and other insurers to dismiss a suit filed by JPMorgan in 2009 seeking to force them to reimburse it for the claims. The ruling shows how companies are still dealing with a financial crisis that nearly toppled global markets in 2008, the same year Bear Stearns failed.

The settlement resolved claims that Bear Stearns enabled market timing, which involves buying a fund’s shares and then quickly selling them to profit from changes in the value of the underlying holdings, and late trading, an illegal practice where orders are placed after the market closes. Bear Stearns didn’t admit or deny wrongdoing in the settlement.

JPMorgan demanded that insurers reimburse it for $160 million of the settlement, as well as $40 million in defense costs and a $14 million settlement with mutual funds over lawsuits based on similar allegations.

Insurers Refuse

The insurers refused, and JPMorgan sued them in 2009 in New York state court, accusing them of breach of contract. Justice Charles Ramos on July 11 denied the insurers’ bid to dismiss the suit before trial.

As part of the ruling, Ramos eliminated two of the insurers’ key defenses in the case -- that Bear Stearns violated a condition of its policies that required it to obtain their consent to settle the claims and that it failed to cooperate with them.

The insurers denied coverage before the settlement and therefore Bear Stearns didn’t have to comply with the provision to get the insurers’ consent, Ramos said.

“There is no doubt that the insurers have failed to meet their heavy burden that they diligently sought Bear Stearns’ cooperation, or that Bear Stearns willfully obstructed these efforts,” Ramos wrote.

Brian Marchiony, a spokesman for JPMorgan, and Jeffrey Zack, a Chubb spokesman, declined to comment on the ruling.

The case is J.P. Morgan Securities Inc. v. Vigilant Insurance Co., 600979/2009, New York State Supreme Court (Manhattan).

Before it's here, it's on the Bloomberg Terminal. LEARN MORE