NY Court Ruling Among Bear Stearns' Woes

The state Court of Appeals concluded the investment bank's insurers were not liable for covering $45 million of the cost since Bear Stearns reached the conflict of interest settlement without giving them advance notice as required by an "unambiguous" provision of its insurance contracts. The six judges unanimously rejected the argument that the settlement actually happened when approved by a federal court months later.

"Having signed the consent agreement, Bear Stearns was not free to walk away from it before entry of a final judgment," Judge Victoria Graffeo wrote in Thursday's ruling.

The ruling only added to the company's recent troubles.

Bear Stearns shares lost nearly half their value Friday after JPMorgan Chase & Co. said it and the Federal Reserve Bank of New York would prop up the troubled company after days of speculation about liquidity problems. On Monday, that became a $2-a-share buyout as the Federal Reserve approved Bear Stearns sale to JPMorgan Chase.

Under the December 2002 settlement with the nation's 10 largest brokerage firms, analysts were barred from being paid for equity research by investment banking arms and no longer allowed to accompany investment bankers "on pitches and road shows" to lure investment banking clients.

The Bear Stearns settlement included a $25 million penalty, $25 million disgorgement, $25 million for independent research and $5 million for investor education. It resolved actions by the Securities and Exchange Commission, the New York Stock Exchange and various state regulators, including then New York Attorney General Eliot Spitzer.

Bear Stearns sent letters to its insurers requesting their consent three days after executing the agreement, Graffeo wrote. A few months later, it executed a settlement agreement in the SEC's lawsuit, which was accepted by the U.S. District Court in the Southern District of New York in October 2003.

After Bear Stearns exhausted $10 million in self-insurance, it had another $10 million of coverage with Vigilant Insurance and excess liability policies with Federal Insurance and Gulf Insurance for $40 million, according to court papers. All required the company not to settle any claim more than $5 million without first obtaining the insurers' consent, Graffeo wrote.

Joseph G. Finnerty III, the lead attorney for the insurers, said the ruling left Bear Stearns responsible for the entire $80 million since the penalty portion wasn't covered. There are no similar cases pending with other investment banks, he said.

Finnerty said the ruling "will change the way as a matter of New York law that people approach insurance company consent provisions."

John Gross, attorney for Bear Stearns, declined to comment.