Judge tells insurer in Stanford case to pay lawyers [Houston Chronicle]

Jan. 27--A federal judge on Tuesday ordered Lloyd's of London to pay for the criminal defense lawyers for R. Allen Stanford and other officers of his company who were indicted for allegedly operating a $7 billion Ponzi scheme.

Senior U.S. District Judge David Hittner issued a preliminary injunction and told the Lloyd's insurers to pay the lawyers for Stanford and two co-defendants within 10 days for work already billed, and to keep paying them under a company policy that covers legal costs for directors and officers.

Lloyd's has refused to pay for criminal defense after August, when the company's former chief financial officer, James Davis, pleaded guilty to a role in the scheme. Lloyd's insurers determined that the accused defendants participated in money laundering and thus it need not pay. But Davis did not plead guilty to money laundering, and no court has found that anyone involved in the case laundered money.

Lloyd's lawyers argued that the refusals of Stanford and co-defendants Laura Holt and Gilbert Lopez to testify in a hearing about these payments should be taken as proof they are guilty, even though they have pleaded not guilty to criminal charges.

The position taken by Lloyd's "is absurd because these circumstances are precisely why corporations procure D&O insurance on behalf of their directors and officers," Hittner wrote in his 42-page opinion. "Indeed, it would contravene the very purpose of the policies -- as well as the policy language itself -- to require (the accused) to prove their innocence before being entitled to funds for their defense."

Found likely to prevail

In granting the injunction, the judge found Stanford and the others were likely to prevail in the future on this demand for insurance coverage and would be irreparably harmed if they did not receive money to pay their lawyers now.

He also noted since all Stanford's and Holt's assets are frozen, the alternative is for the taxpayers to pay for lawyers, which is an undesirable outcome.

Lloyd's Dallas-based lawyer, Neel Lane, said he can't comment on pending litigation. The insurance company has argued that its contract with Houston-based Stanford Financial Group allowed the insurer to determine if its definition of money laundering was met and did not require a criminal standard of proof.

"Of course they'll appeal the case and ask the 5th Circuit Court of Appeals to stay the ruling. But a stay is not automatic," said Kent Schaffer, a lawyer for Stanford.

Schaffer and Holt's lawyer, Dan Cogdell, said Hittner's decision was well-reasoned and is likely to stand

"If Lloyd's isn't forced to pay on this case, every entity that purchases a D&O policy has just thrown away their money," Cogdell said.

Schaffer said the lawyers estimate that with all the accountants, investigators and experts needed to cull through the 7 million pages of documents in the case, it will cost $30 million to defend Stanford, Holt and Lopez in the trial set for January 2011.The insurance policy's limit is $95 million.

Stanford, the founder and chairman of Stanford Financial Group, faces 21 charges of conspiracy, fraud and obstruction of justice. Holt, former chief investment officer, Lopez, former chief accounting officer, and Mark Kuhrt, former global controller, each face fewer charges. Kuhrt was not covered by the insurance policy and already has a court-appointed lawyer.

In federal detention

Stanford, a native Texan, has been in federal detention since he was indicted in July. The others are free on bond.

If the appellate court overrules Hittner's order that Lloyd's pay the lawyers, the judge likely will appoint counsel. An appointed defense is not likely to have the millions of dollars that might ordinarily be poured into a behind-the-scenes investigation in a white-collar defense of this magnitude.

[email protected]

To see more of the Houston Chronicle, or to subscribe to the newspaper, go to http://www.HoustonChronicle.com.

Copyright (c) 2010, Houston Chronicle

Distributed by McClatchy-Tribune Information Services.

For reprints, email [email protected], call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.