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A federal appeals court has affirmed a lower court ruling and held a Chubb Ltd. unit is not obligated to compensate a settlement and clearing company for claims paid in connection with a former employee’s fraudulent scheme under its financial institution bond.
Chubb unit Federal Insurance Co. issued a financial bond to Omaha-based COR Clearing LLC, which allows independent broker-dealers to access public equities markets and place trades for their customers, according to Monday’s ruling by the 8th U.S. Circuit Court of Appeals in St. Louis in Federal Insurance Co. v. Axos Clearing LLC. San Diego-based Axos acquired COR in January 2019.
The bond was issued in April 2014 and April 2015, according to the ruling. In 2016, COR paid $2.1 million to settle investor claims that a former COR registered representative had conspired with others to defraud investors by carrying out a “pump-and-dump” scheme in a risky penny stock called VGTel.
A pump and dump scheme is one that tries to boost a stock’s price through recommendations based on false or misleading claims.
COR filed a claim with its liability insurer, a subsidiary of XL Specialty Insurance Co., now an Axa unit, for VGTel and other settlement payments, which it later settled for $3.6 million above the policy’s deductible, according to the ruling.
COR also filed a claim under Chubb’s bond to recover its losses for the VGTel settlements. Chubb denied coverage and filed suit in U.S. District Court in Omaha, seeking a declaratory judgment that COR’s claim was not covered under the bond’s insuring clauses. COR then filed a counterclaim for breach of contract.
The district court granted Chubb summary judgment.
A unanimous three-judge appeals court panel agreed with the district court that one of the bond’s insuring clauses did not apply because COR’s payments to settle claims did not directly result from the former representative’s actions.
It also agreed a second clause did not apply because there was no evidence the representative committed covered dishonest acts.
Attorneys in the case did not respond to requests for comment.
A federal appeals court has overturned a ruling in favor of Chubb Ltd. in a litigation dispute with a mortgage company over an abandoned laundromat, holding more information is needed to determine who controlled the property.