* Judge: XL must advance legal fees in insider trading probe
* XL said analyst's guilty plea, cooperation voided policy
* Balance of hardships favors Level Global - judge
* XL co-founder Chiasson pleaded not guilty
By Jonathan Stempel and Katya Wachtel
June 13 A Manhattan federal judge has ordered an
insurer to keep advancing legal fees of a hedge fund implicated
in a criminal insider trading probe, saying the insurer was not
excused because a fund analyst knew there might be a fraud when
the policy was taken out.
Wednesday's decision by U.S. District Judge Paul Engelmayer
is a defeat for XL Specialty Insurance Co, which had sought to
rescind its $10 million policy for Level Global Investors LP and
recoup more than $7.3 million already advanced, including to
co-founder Anthony Chiasson.
Lawyers involved with the hedge fund industry have said a
ruling favoring XL could have forced hedge funds to review their
insurance policies. Level Global had claimed it would cause
The case stemmed from a secret April 2011 guilty plea by
former Level Global analyst Spyridon Adondakis, who unbeknownst
to XL and Level Global admitted to fraud over activities that
predated the policy and had begun cooperating with prosecutors.
XL, a unit of Dublin, Ireland-based XL Group Plc,
said this triggered a policy exception that excused it from
providing coverage for the Greenwich, Connecticut-based fund.
Level Global countered that the fund's general counsel, who
signed the policy application a year earlier, did not know about
any alleged wrongdoing, despite having made an appropriate
internal inquiry prior to signing.
In a 46-page decision, Engelmayer said the defendants raised
"sufficiently serious" claims that XL's interpretation of its
exclusion was improper and would deprive them of the coverage
for which they bargained.
Engelmayer also said "the balance of hardships tips, not
only decisively but lopsidedly" in favor of coverage.
The judge said XL's maximum remaining exposure was just $2.7
million, while the defendants might lose access to coverage in
an amount several times larger.
"From a human perspective, they stand to lose much that is
far more consequential, including their liberty," he wrote.
Engelmayer delayed his order for 14 days, to give XL a
chance to appeal. The specialty insurance unit has offices in
XL spokeswoman Christine Weirsky declined to comment, citing
the ongoing litigation.
James Sottile, a lawyer for Level Global, said: "We are
gratified about this victory and were also pleased that XL's
attorney told the court the insurance company does not claim in
this case that Level Global did anything wrong."
Lawyers and people familiar with hedge fund insurance said
they were surprised by XL's stance and said the case had caused
hedge fund managers to question their own policies and insurers.
"XL must have thought they had misrepresentation from the
insured at a very high level in order to deny coverage - they
must have thought they have 'the smoking gun,'" said Richard
Canter, president of SKCG Group in White Plains, New York, which
specializes in hedge fund insurance.
Hedge funds are already facing greater U.S. regulatory
scrutiny and have been at the center of a wide-ranging federal
insider trading probe that has since October 2009 resulted in
criminal charges against several dozen people.
Prosecutors in January accused Chiasson and six others, who
collectively worked at five hedge funds, of forming a "circle of
friends" that reaped a $62 million profit from inside tips on
computer maker Dell Inc.
Four of the seven defendants in that case have pleaded
guilty. Chiasson has pleaded not guilty.
Level Global no longer manages money, but still exists for
legal matters surrounding Chiasson's case.
Canter said XL is large enough to afford to lose some
insurance business from hedge funds "as long as they think they
have sent a message to the hedge fund industry: that hedge funds
can't misrepresent themselves on their applications."
The case is XL Specialty Insurance Co v. Level Global
Investors LP et al, U.S. District Court, Southern District of
New York, No. 12-01598.