CFO’s statement reveals criminal activity, voiding Lloyd’s policy

Lawyers for Lloyd’s have said that admissions made by Sir Allen Stanford’s former chief financial officer James Davis, when he pleaded guilty to his role in an alleged $7bn Ponzi scheme, mean Lloyd’s does not have to pay for Stanford’s defence.

Lloyd’s lawyers told US district court judge David Hittner in Houston that the statements made by Davis in his plea agreement revealed criminal activity. These are outside the terms of the directors’ and officers’ insurance.

Stanford, chief investment officer Laura Pendergest-Holt and two other former employees are accused of running the fraud scheme. Each has pleaded not guilty. Davis, who was charged separately, agreed to forfeit $1bn as part of his plea. He is co-operating with investigators.

“We’re in uncharted territory,” Judge Hittner told the lawyers for each side, after hearing more than three hours of argument. “I know we’re dealing with a matter of law, but there’s an issue of fairness here.” The judge repeatedly said that the decision by Lloyd’s to deny coverage was based “not on facts but on someone who stated something under oath”. He ordered both sides to submit proposed orders to him no later than 4 December, one of which he would adopt as his decision.

Lloyd’s lawyer Barry Chasnoff, a partner at law firm Akin Gump Strauss Hauer & Feld, told the judge: “We’ve paid a total of $4.2m for work done prior to 27 August. We believe under the contract we don’t owe any more.”

Pendergest-Holt is suing Lloyd’s in Houston’s federal court, seeking a judge’s declaration that the insurer honours its policy and pay for her defence.