5 Financial News Stories You May Have Missed — And Holy Foreclosures

Church Foreclosure

1. Hardly Shocking: Hedge Funds Premiums Increase After Multiple Lawsuits

The New York Times doesn’t always report on insurance premium movements but after the number of news stories about insider trading and hedge fund scandals over the last year they decided it was important to note.  While rates are nowhere near their 2009 levels (post-crash & post-Madoff), rates for hedge funds are steadily rising as a result of the widespread Galleon and “expert-network” scandals. (Calling your group an expert-network can be a much more professional sounding way to describe a crew of insider traders.) With little in the way of empirical evidence, the Times is citing sources that claim that hedge fund premiums have risen 5-10 percent in recent months. Insurer Chubb recently announced that in the fourth quarter of last year they raised renewal rates for professional liability coverage for the first time since 2009. However, given the extensive press coverage and the SEC’s numerous announcements about expanding insider trading investigations the fact that insurers are gradually raising premiums can scarcely come as a surprise. What makes this article newsworthy is that the general business press is talking about insurance premiums.

The High Cost of Insider Trading

2. Bank Gamble Pays Off

Like a very high-stakes hand of Texas Hold ’em, Texas billionaire Gerald Ford bet large and won large. In so doing, the savvy investor has single-handedly established that there is money to be made in the current market reviving distressed banks crippled by the recent economic crisis. In 2010 Ford bought a very troubled Pacific Capital (parent of Santa Barbara Bank & Trust) and invested $500 million in the California institution.  Putting new management and controls in place the bank has gone from a 2009 loss of $421 million to a profit last year of over $70 million.  Japanese megabank Mitsubishi UFJ’s California subsidiary was impressed by what it saw and will be buying Pacific Capital for $1.5 billion. Ford will double his investment. The FDIC, as preferred shareholder in the nearly failed bank, will also profit nicely. I have no doubt we will see other investors profiting handsomely from investment in troubled banks over the next couple of years. As Kenny sang, you do have to “know when to hold ’em.”

Texas Billionaire, Treasury Win in $1.5 Billion Bank Sale

3. Recouping the Missing Madoff Money

New York Mets owners Saul Katz and Fred Wilpon were investors with Bernie Madoff who  withdrew the bulk of their funds well before the felon’s Ponzi scheme came to light. In fact, Irving Picard the court-appointed trustee for the Madoff’s victims is seeking $83.3 million in purported profits that Katz & Wilpon withdrew in the two years prior to Mr. Madoff’s arrest. Before the pair can be ordered  to return the money, Mr. Picard must establish that they were “willfully blind” to the fraud acting in bad faith. In Global-Tech Appliances v. SAB the Supreme Court’s found two requirements to prove someone was willfully blind:

  1. The defendant must subjectively believe that there is a high probability that a fact exists.
  2. The defendant must take deliberate actions to avoid learning of that fact.

The outcome now rests on the determination of whether the two wealthy investors were blind to Madoff’s scam.

Front-Row View of the Madoff Civil Suit

4. Our Father Who Art… Foreclosed

Charles Street African Methodist Episcopal Church

Charles Street African Methodist Episcopal Church in 1889

Residential homes weren’t the only houses impacted by the financial crisis. Houses of worship have suffered as well. Until 2008 it was rare to see a church foreclosure. In the last two years, 270 churches have been sold as a result of defaults. Most church loans aren’t standard mortgages; they are short-term, often 5 year, commercial loans that generally mature with the entire balance due at maturity.  In the past, banks were generally willing to work with churches to refinance overdue loans. However, in the current environment, with regulators and nervous shareholders watching, banks are becoming much tougher with ecclesiastical borrowers. Once again, the banks are placed in the role of villain as they foreclose on churches around the country, including some well-known historical places of worship like Boston’s Charles Street African Methodist Episcopal Church built in 1818. The numbers are relatively small when compared to the general housing market, but angry congregations may bring litigation and attract substantial press attention.  Keep the churches, and even the bankers, in your prayers.

Banks foreclosing on churches in record numbers

5. “5 Stories You May Have Missed…”

And no stories you didn’t. You don’t need me to tell you about that infamous resignation letter in The New York Times.

WHITE HOT DEVELOPMENTS by Michael White
Recheck for Rescission

Michael White

Michael White

In case you have ever wondered why we make such a big deal out of the policy language in your insurance policies and applications, look no further than the predicament in which the former directors and officers of the now defunct hedge fund Level Global find themselves. You may recall that in November of 2010, the SEC filed insider trading charges against the firm and several of its directors and officers in connection with $55 million in profits. Several of the individual defendants entered into plea bargains and provided testimony for the prosecution. Earlier this year the FBI filed insider trading charges against one of the co-founders. The outfit ultimately closed its operations as a result of the charges. Fortunately, or so it seemed, the fund had purchased management and professional liability coverage which has already paid out $7.45 million to date in connection with these charges.

Looks like things couldn’t get much worse? Well, earlier this week they did as Level Group’s insurer commenced a declaratory judgment action seeking to rescind the policy and recover all payments made to date. The carrier alleged false representation made in the initial application in 2010, which stated they were not aware of any situation that could lead to a claim. In addition to naming the entity, the suit also has named several individual directors and officers, including a co-founder against whom no charges have been filed!

Rescission actions by carriers are rare, and even more so for D&O lines as we can negotiate terms making the policies non-rescindable and providing that the representations or knowledge of a wrongdoer cannot be imputed to another insured for the purposes of avoiding coverage. Details are important.

IBR:XL Group sues Level Global over insider trading
Level Global sued by its insurer for $7.45m
For one Level Global founder, the party is over

Michael White is the Financial Services Industry Leader for Willis’ FINEX North America division. He last appeared February 24 in 5 Financial Stories You May Have Missed – And a White Hot Development.

About Richard Magrann-Wells

Richard is a Senior Vice President and Willis’ Financial Services Practice Leader, based in New York. During his …
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  • Alex Levine

    Re: Recouping Missing Madoff Money. According to Wikipedia:

    “In many countries, if an individual has accepted possession of goods or property and knew they were stolen, then the individual is typically charged with a misdemeanor or felony, depending on the value of the stolen goods. If the individual did not know the goods were stolen, then the goods are returned to the owner and the individual is not prosecuted. However, there are often exceptions, due to the difficulty of proving or disproving an individual’s knowledge that the goods were stolen. ”

    The assets distributed to the Wilpon’s excess of their contributions to Madoff were essentially stolen by Madoff and redistributed. While they are not property, receiving them with or without knowledge would only determine whether or not a crime had been committed by the Wilpon’s. However, if the assets in this case were treated as stolen property, they would have to be returned to the rightful owner in either case. So why is the pre-knowledge of the Madoff crime a precondition to Wilpon’s returning the assets to the pool for victims?

    • Richard Magrann-Wells

      The law protects “buyers in the ordinary course of business” even when the goods they are buying are stolen as long as they purchased them in good faith. The reason is simple. Capitalism begins to break down if you have to question the origin of every product you buy and must wonder if someone may have a better claim on the goods. Imagine if you invested with a reputable money manager (which Madoff was at the time) and received your profts and proceeded to spend those funds on your children’s education – only to have someone knock on your door claiming that your money manager had stolen from them and they want you to reimburse their losses. What if you were broke but had used the funds to pay someone else. Could the victim go to the person you had paid? How many degrees of separation would we require before the claim on the stolen property is negated? It’s a bit of a rabbit hole. So we keep it simple. If a person transacts in good faith in the ordinary course of business – we generally uphold transactions – unless they knew, or had reason to know – that there was fraud involved. At least that’s the way I remember my first year law school contracts class. Comments from others with more practical experience always welcome.