Stanford Ponzi and D&O / E&O Insurance Coverage

The Chief Investment Officer of Stanford is the only one against whom criminal charges have been filed...so far. Her assets and the assets of Stanford being frozen, she isn't finding takers for legal representation on contingent fees.

In today's news (story here) she sues Lloyd's for coverage under Stanford's D&O and Company Indemnity policy seeking $5m in actual damages and to get the media to cover the story and try to embarrass the Lloyd's Managing Agents involved, $40m in punitive damages.

Paraphrasing from what I've been told by law firms involved in bankruptcy protection and unwinding these matters, the following is how I understand it to go. Do you the readers agree with what I've been told?

The law firm defending the Stanford group in its bankruptcy goes to court and as the first act, asks for estimated legal fees (big sum) to be set aside in escrow.

That law firm then discusses all of the claims for money against Stanford with the claimants to do an off-the-record assessment of the merits.

The cases are ranked by the anticipated outcome (from must pay to no chance) and then the lawyers for the claimants are notified of their standing (again off the record). The lawyers for the claimants have their own assessment of the merits and they either proceed to settlement or an actual review of the merits through court. But guiding the discussions is the fact that the assets available (net of legal fees) is always a small fraction of what's been claimed in lawsuits.

The D&O or E&O insurance firms are in very close contact with the bankruptcy law firm and when the cases are ranked, they act. If these insurance companies are to pay the legal fees and then not get anything returned if fraud is proven, they are wasting money so they wait for the first assessments of the merits.

The tough part for everyone involved (including information outlets like Advisen) is that there is no transparency to the real horse-trading here. And because everyone knew that Lerach was straightforward and predictable as a deal-maker, the D&O or E&O guys could reserve accordingly. But with the new bumper crop of Lerach wannabes, it's anybody's guess.