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Issue July 6, 2009 |
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| A New York federal judge, citing the "extraordinarily evil" multibillion-dollar investment fraud by Bernard Madoff, last week sentenced him to the maximum term of 150 years in prison. PHOTO: JASON DECROW/RAPPORT |
While Bernard Madoff's jail time is set, it will take years before courts and insurers untangle the “messy” flood of litigation his Ponzi scheme unleashed against financial entities, insurance observers agree.
Investment funds, banks and money managers continue to be named in individual lawsuits and class action filings potentially covered by directors and officers liability policies and errors and omissions coverage.
Last week, a judge sentenced Mr. Madoff to the stiffest penalty allowable under federal sentencing guidelines: 150 years in prison for the massive fraud that bilked investors of billions of dollars.
Before sorting out ultimate liability in all the litigation, however, the judicial system likely will grapple with consolidating numerous lawsuits, dozens of which name the same defendants but filed in different state and federal courts across the country by various plaintiffs, several sources said.
“There will be a lot of duplication, a lot of back and forth, and a lot of trying to shift the liability around,” said Howard Mills, chief adviser in New York for the insurance industry group at Deloitte Services L.P. “I do think it is going to be messy, messy. It will be protracted.”
The lawsuits filed since December remain in the early stage of litigation, while plaintiffs continue filing new actions daily, said Maurice Pesso, senior associate in the D&O and financial institutions group at Edwards Angell Palmer & Dodge L.L.P. in New York.
“But there are already a significant amount of defense costs even in the early stages,” Mr. Pesso said.
“You have cases filed by certain investors in different states and different courts and it takes awhile to consolidate or coordinate all those cases,” Mr. Pesso said. “In some instances, the cases may not be consolidated or coordinated at all. Each individual investor may be asserting something different. Sometimes, the cases are not ripe for class action treatment and will proceed independently.”
Some suits name financial institutions that invested directly with Mr. Madoff; others name “feeder funds” or investment advisers that placed money with the entities that directly invested.
The further the defendants get from Mr. Madoff, the more difficult it will be to determine liability, legal sources said.
In January, reinsurance intermediary Aon Benfield said it would take years to unravel the costs associated with Mr. Madoff's Ponzi scheme. But it estimated the maximum exposed insurance limits to be more than $6 billion, with most of that falling on D&O liability, E&O and fidelity policies.
Aon Benfield has not updated its January estimate.
While many of the existing lawsuits contain allegations that could trigger D&O liability or E&O insurance claims, “which way it gets sorted out remains to be seen,” said Kevin M. LaCroix, a partner in Beachwood, Ohio, for executive liability insurance intermediary OakBridge Insurance Services L.L.C.
Mr. LaCroix said he expects E&O policies, rather than D&O liability insurance, ultimately will be most affected because the suits typically contain allegations questioning the “suitability or appropriateness” of fund managers.
Many potential plaintiffs likely still are determining a legal strategy to pursue, said Renee L. Siemens, a D&O liability expert and policyholder attorney at Proskauer Rose L.L.P. in Los Angeles.
Likewise, many defendants already named in lawsuits still are evaluating their legal options, he said.
“I don't think their insurance companies, in a lot of cases, have figured out exactly what their positions are on coverage,” Mr. Siemens said.
Because many financial entities purchase a relatively small amount of D&O and E&O limits, most insurance proceeds are expected to go toward litigation rather than to plaintiffs, several sources said.
Several insurers declined to comment.
For reprints of this story, please contact Lauren Melesio at 212-210-0707 or email lmelesio@crain.com
