Crime policy exclusion shields AIG from 3M’s theft lossesReprints
Insurers including an American international Group Inc. unit are not obligated to indemnify 3M Corp. for lost earnings caused by its investment advisers’ “Ponzi scheme" theft under an exclusion in its crime policy, says a federal appeals court in affirming a lower court ruling.
Maplewood, Minnesota-based 3M began investing its employee retirement plan assets in New York-based WG Trading Company L.P. in 1999, according to Wednesday’s ruling by the 8th U.S. Circuit Court of Appeals in St. Louis in 3M Co. v. National Union Fire Insurance Company of Pittsburgh, Pa.
It structured the investment as a limited partnership interest in WG Trading, according to the ruling. Stephen Walsh and Paul Greenwood founded and served as managing partners of WG Trading and two related entities, Westridge Capital Management Inc. and WG Trading Investors.
3M eventually learned that Messrs. Walsh and Greenwood had fraudulently diverted hundreds of millions of dollars from WG Trading and WG Investors.
The two men ultimately pleaded guilty to federal criminal charges. In 2009, the U.S. Commodity Futures Trading Commission and the Securities and Exchange Commission began civil lawsuits against the two men and the companies, according to court papers.
The U.S. District Court in New York seized the defendants’ assets and placed the assets into receivership, according to the ruling.
The receiver distributed the assets among the defrauded claimants, including 3M, which recovered its capital contribution but not its lost earnings that WG Trading made in legitimate investment products that produced legitimate earnings, according to the ruling.
3M’s employee benefit plans are insured under a “blanket” crime policy that includes an “employee dishonesty” provision. The policy also includes, however, an endorsement that says the insured property must be owned or held by the insured.
3M filed suit against primary insurer National Union Fire Insurance Company of Pittsburgh, Pa., a unit of AIG, seeking coverage for lost profits under the crime policy.
Also named in the litigation were the policy’s excess insurers: Cincinnati-based Great American Insurance Co.; St. Paul-based St. Paul Fire & Marine Insurance Co., a Travelers Cos. Inc. unit; Warren, New Jersey-based Federal Insurance Co., a Chubb Ltd. unit; and Schaumburg, Illinois-based Zurich American Insurance Co.
The U.S. District Court in Minneapolis, which described Messrs. Walsh and Greenwood as operating a “huge Ponzi scheme” that lasted over many years, rejected 3M’s ownership claim in a September 2015 ruling.
It held the company’s limited partnership interest in WG Trading did not confer ownership over the lost earnings, because until the point when the earnings were distributed to the partners, they were owned by WG Trading, and not by 3M or any of the other limited partners.
On appeal, a three-judge panel unanimously upheld the lower court’s ruling. “Finding that 3M’s purported interest in the lost earnings does not satisfy the ownership requirement” of (the endorsement), we affirm the judgment of the District Court, said the ruling.