FILED: NEW YORK COUNTY CLERK 09/12/ :15 AM INDEX NO /2009 NYSCEF DOC. NO. 984 RECEIVED NYSCEF: 09/12/2017

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1 FILED NEW YORK COUNTY CLERK 09/12/ AM INDEX NO /2009 NYSCEF DOC. NO. 984 RECEIVED NYSCEF 09/12/2017 SUPREME COURT OF THE STATE OF NEW YORK, COUNTY OF NEW YORK COMMERCIAL DIVISION x J.P. MORGAN SECURITIES INC., J.P. MORGAN CLEARING CORP., and THE BEAR STEARNS COMPANIES LLC, Plaintiffs, - against - VIGILANT INSURANCE COMPANY, THE TRAVELERS INDEMNITY COMPANY, FEDERAL INSURANCE COMPANY, NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., LIBERTY MUTUAL INSURANCE COMPANY, CERTAIN UNDERWRITERS AT LLOYD S, LONDON, and AMERICAN ALTERNATIVE INSURANCE CORPORATION, Defendants x Index No /09 PRE-ARGUMENT STATEMENT Defendants-Appellants Vigilant Insurance Company, The Travelers Indemnity Company, Federal Insurance Company, National Union Fire Insurance Company Pittsburgh, Pa., Liberty Mutual Insurance Company, Certain Underwriters at Lloyd s, London, and American Alternative Insurance Corporation (collectively, the Insurers ), as and for their pre-argument statement pursuant to NYCRR , state as follows 1. Title of the Action As captioned above. 2. Full Names of the Original Parties and Any Change in the Parties As captioned above. 1 of 9

2 FILED NEW YORK COUNTY CLERK 09/12/ AM INDEX NO /2009 NYSCEF DOC. NO. 984 RECEIVED NYSCEF 09/12/ Names, Addresses and Telephone Numbers of Counsel for Appellants For Appellants Vigilant Insurance Company and Federal Insurance Company DLA PIPER LLP (US) Joseph G. Finnerty III Megan Shea Harwick Eric S. Connuck 1251 Avenue of the Americas New York, New York (212) For Appellant National Union Fire Insurance Company of Pittsburgh, Pa. D AMATO & LYNCH, LLP Luke D. Lynch, Jr. Kevin J. Windels Liza A. Chafiian 2 World Financial Center New York, New York (212) For Appellant Liberty Mutual Insurance Company KAUFMAN BORGEEST & RYAN LLP Scott A. Schechter Andrew E. Oldis Matthew Mawby 120 Broadway, 14th Floor New York, New York (212) For Appellant Travelers Indemnity Company DRINKER BIDDLE & REATH LLP Marsha J. Indych 1177 Avenue of the Americas, 41st Floor New York, New York (212) David F. Abernethy Erin M. Turner One Logan Square, Ste Philadelphia, PA (215) of 9

3 FILED NEW YORK COUNTY CLERK 09/12/ AM INDEX NO /2009 NYSCEF DOC. NO. 984 RECEIVED NYSCEF 09/12/2017 For Appellant Certain Underwriters at Lloyd s, London CLYDE & CO. US LLP Edward J. Kirk Deborah Elsasser 405 Lexington Avenue, 16th Floor New York, New York (212) For Appellant American Alternative Insurance Corporation BATESCAREY LLP Kristi S. Nolley R. Patrick Bedell 191 North Wacker Drive Suite 2400 Chicago, Illinois (312) Of Counsel LANDMAN CORSI BALLAINE & FORD P.C. Michael L. Gioia 120 Broadway, 27th Floor New York, New York (212) Name, Address and Telephone Number of Counsel for Plaintiffs-Respondents For Plaintiffs J.P. Morgan Securities Inc., J.P. Morgan Clearing Corp., and the Bear Stearns Companies LLC (collectively, Bear Stearns ) PROSKAUER ROSE LLP Steven E. Obus Seth B. Schafler Francis D. Landrey Matthew J. Morris Eleven Times Square New York, New York (212) Court and County from Which the Appeal Is Taken Supreme Court of the State of New York, Commercial Division, County of New York. 3 3 of 9

4 FILED NEW YORK COUNTY CLERK 09/12/ AM INDEX NO /2009 NYSCEF DOC. NO. 984 RECEIVED NYSCEF 09/12/ Nature and Object of the Cause of Action In 2006, after three years of investigation into Bear Stearns mutual fund trading conduct, the Securities and Exchange Commission ( SEC ) entered a final order in an administrative enforcement proceeding finding that Bear Stearns intentionally orchestrated a late trading and market timing trading scheme that stole hundreds of millions of dollars of mutual fund share value from innocent shareholders (the SEC Order ). At the same time, the New York Stock Exchange (the NYSE ) issued a Hearing Panel Decision of guilty as set forth by unanimous vote (emphasis added) against Bear Stearns, finding that Bear Stearns had engaged in exactly the same illegal trading scheme (the NYSE Decision ). The SEC Order and NYSE Decision both contain 40 pages of factual findings that Bear Stearns had directed and operated an illegal late trading and market timing scheme, had knowingly processed its customers illegal late trades as if they had been submitted hours earlier, had falsified internal order tickets to misrepresent that it had received late trading orders before the 400 P.M. deadline, and had cancel[led] unprofitable trades the next day. The SEC and NYSE also found that Bear Stearns executed market timing mutual fund trades despite thousands of demands that Bear Stearns received from the mutual funds to stop allowing market timing in their funds. Bear Stearns assured the funds that it would take measures to prevent market timing trades, but instead of doing so, Bear Stearns actively worked with its clients to evade the blocks and restrictions [on market timing] imposed by the mutual funds by [h]iding the identity of its customers and traders who were known market timers, and assigning account numbers and registered representative numbers to disguise their deceptive market timing. The SEC Order and the NYSE Decision required Bear Stearns to disgorge $160 million of the illicit gains generated by the scheme, and to pay an additional $90 million as a penalty. The SEC and the NYSE both also concluded that Bear Stearns had willfully violated and 4 4 of 9

5 FILED NEW YORK COUNTY CLERK 09/12/ AM INDEX NO /2009 NYSCEF DOC. NO. 984 RECEIVED NYSCEF 09/12/2017 willfully aided and abetted and caused violations of a litany of federal securities laws. The SEC censured Bear Stearns for its willful violations, ordered it to cease and desist from future violations, and mandated that Bear Stearns restructure its business to prevent future illegal trading. After settling with the SEC and NYSE, Bear Stearns agreed to pay an additional $14 million to settle thirteen shareholder class action lawsuits in which the plaintiffs had alleged that Bear Stearns had facilitated the same illegal mutual fund trading that was at issue in the regulatory findings. In 2009, Bear Stearns commenced this litigation alleging that the Insurers breached their obligations to Bear Stearns under their respective insurance policies and seeking insurance coverage for $140 million of its $160 million disgorgement payment, the $14 million it paid to settle the civil actions, and approximately $46 million in legal fees and costs that it claims to have incurred in defense of the regulatory investigations and civil claims. The Insurers answered and denied any breach of their respective contracts of insurance based on several defenses. In July 2016, the parties moved for summary judgment (Motion Sequence Nos ). 7. Results Reached in the Court Below The court below granted Plaintiffs motions for summary judgment, denied Insurers motions for summary judgment, and entered judgment in favor of Plaintiffs against Defendants Vigilant Insurance Company, Travelers Indemnity Company, Federal Insurance Company, National Union Fire Insurance Company of Pittsburgh, Pa., and Liberty Mutual Insurance Company. 5 5 of 9

6 FILED NEW YORK COUNTY CLERK 09/12/ AM INDEX NO /2009 NYSCEF DOC. NO. 984 RECEIVED NYSCEF 09/12/2017 Prior to the entry of judgment by the court below, Insurers filed a motion for leave to renew the prior motions for summary judgment based on the June 5, 2017 decision by the United States Supreme Court in Kokesh v. SEC, 137 S. Ct (2017), which conclusively defines the nature of the SEC disgorgement remedy paid by Bear Stearns as an uninsurable penalty as a matter of law and requires a change in the decision by the court below on those prior motions. Insurers motion to renew remains pending. 8. Grounds for Reversal Without limiting the arguments that may be presented on appeal, each and all of which are expressly reserved, Insurers seek an order reversing the judgment, decisions and orders of the court below and granting Insurers motion for summary judgment as a matter of law because, among other things, (1) the definition of Loss in the insurance policies and New York public policy bar coverage for Bear Stearns SEC disgorgement payment, (2) the Profit or Advantage Exclusion bars coverage for Bear Stearns claims, (3) public policy bars coverage for Bear Stearns intentionally harmful conduct, (4) Exclusion 13 bars coverage for Bear Stearns liability for its customers ill-gotten gains, and (5) Bear Stearns has not met its burden to prove that its settlements with its regulators and the civil plaintiffs were reasonable. Alternatively, Insurers seek an order (1) striking the portion of the judgment, decision and order entering pre-judgment interest against defendants Travelers Indemnity Company, Federal Insurance Company, National Union Fire Insurance Company of Pittsburgh, Pa., and Liberty Mutual Insurance Company because the insurance coverage underlying the excess policies issued by those defendants has not been exhausted, and (2) striking the portion of the judgment, decision and order entering pre-judgment interest on the ground that the application of 6 6 of 9

7 FILED NEW YORK COUNTY CLERK 09/12/ AM INDEX NO /2009 NYSCEF DOC. NO. 984 RECEIVED NYSCEF 09/12/2017 New York s prejudgment interest statute violates the Due Process and Takings Clauses of the United States and New York State Constitutions. Insurers reserve the right to raise such other issues as may be presented upon a review of the Record on Appeal. 9. Other Actions, Proceedings and Appeals No related action or proceeding is pending in any court. 7 7 of 9

8 FILED NEW YORK COUNTY CLERK 09/12/ AM INDEX NO /2009 NYSCEF DOC. NO. 984 RECEIVED NYSCEF 09/12/2017 Dated New York, New York September 12, 2017 DLA PIPER LLP (US) DRINKER BIDDLE & REATH LLP By /s/ Joseph G. Finnerty III Joseph G. Finnerty III Megan Shea Harwick Eric S. Connuck 1251 Avenue of the Americas New York, New York (212) By /s/ Marsha J. Indych Marsha J. Indych 1177 Avenue of the Americas, 41st Floor New York, New York (212) David F. Abernethy Erin M. Turner One Logan Square, Ste Philadelphia, Pennsylvania (215) Attorneys for Vigilant Insurance Company and Federal Insurance Company Attorneys for Travelers Indemnity Company KAUFMAN BORGEEST & RYAN LLP CLYDE & CO. US LLP By /s/ Scott A. Schechter Scott A. Schechter Andrew E. Oldis Matthew Mawby 120 Broadway, 14th Floor New York, New York (212) By /s/ Edward J. Kirk Edward J. Kirk Deborah Elsasser The Chrysler Building 405 Lexington Avenue, 16th Floor New York, New York (212) Attorneys for Liberty Mutual Insurance Company Attorneys for Certain Underwriters at Lloyd s, London 8 8 of 9

9 FILED NEW YORK COUNTY CLERK 09/12/ AM INDEX NO /2009 NYSCEF DOC. NO. 984 RECEIVED NYSCEF 09/12/2017 D AMATO & LYNCH LLP BATESCAREY LLP By /s/ Luke D. Lynch, Jr. Luke D. Lynch, Jr. Kevin J. Windels Liza A. Chafiian Two World Financial Center New York, New York (212) By /s/ Kristi S. Nolley Kristi S. Nolley R. Patrick Bedell 191 N. Wacker Drive, Suite 2400 Chicago, Illinois (312) Attorneys for National Union Fire Insurance Company of Pittsburg, Pa. Attorneys for American Alternative Insurance Corporation To Steven E. Obus Seth B. Schafler Francis D. Landrey Matthew J. Morris Proskauer Rose LLP Eleven Times Square New York, New York (212) Attorneys for J.P. Morgan Securities Inc., J.P. Morgan Clearing Corp., and The Bear Stearns Companies LLC 9 9 of 9