328 F. Supp. 3d 956
D. Neb.2018Background
- COR Clearing, LLC (a clearing firm with offices in NE, CA, NJ) paid ~$2M to settle FINRA claims arising from unauthorized VGTL trades tied to employee Cervino and outsiders.
- Cervino, a registered representative in COR's NJ office, was alleged to have placed unauthorized trades; he was later criminally convicted.
- COR submitted claims under a Federal Insurance Company financial institution bond (effective 2014–2016); Federal denied coverage.
- Federal sued for declaratory relief asserting several bond exclusions and lack of coverage; COR counterclaimed for breach of the bond under insuring clauses 1.A, 1.B, 1.D, and 4.
- The district court applied New Jersey law and granted Federal's motion for summary judgment, holding COR's bond claim not covered and dismissing COR's counterclaim with prejudice.
Issues
| Issue | Plaintiff's Argument (Federal) | Defendant's Argument (COR) | Held |
|---|---|---|---|
| Choice of law | Nebraska choice-of-law; bond interpretation should follow forum (NE) | New Jersey law applies because misconduct occurred in NJ office | New Jersey law governs bond interpretation |
| Insuring Clause 1.A (employee dishonesty except trades) | Inapplicable because conduct arises from trades covered by 1.B | 1.A should cover employee dishonesty | 1.A inapplicable (conduct falls under 1.B exception) |
| Insuring Clause 1.B (loss from employee dishonest acts arising from any trade) — causation | No direct loss to COR; settlements are third-party/indirect losses | Settlements are direct losses proximately caused by employee acts (Gentilini approach) | COR failed to show genuine dispute that losses were directly caused by Cervino; 1.B does not provide coverage |
| Insuring Clause 1.B — intent element | Cervino lacked intent to cause COR loss (no evidence) | Intent is factual and disputed; summary judgment improper | Court found intent a triable issue but rejected coverage on direct-loss ground; overall 1.B fails |
| Insuring Clause 1.D (loss of customer's property from registered rep solicitation/withdrawal/liquidation) | No covered conduct occurred | Clause should cover registered-rep schemes | 1.D inapplicable — no evidence of soliciting, advising withdrawals or liquidations |
| Insuring Clause 4 (forgery / fraudulent written instructions) | No forgery or material alteration; where involved, employee collusion defeats coverage; Exclusion 3.a bars employee-caused loss | Clause could cover forged instruments or written instructions | 4 inapplicable — no evidence of forgery/material alteration and Exclusion 3.a excludes employee-caused loss |
Key Cases Cited
- Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487 (choice-of-law rules govern diversity cases)
- Auto Lenders Acceptance Corp. v. Gentilini Ford, Inc., 181 N.J. 245 (2004) (New Jersey adopts proximate-cause test for "direct loss" in fidelity coverage)
- Sieden v. Chipotle Mexican Grill, Inc., 846 F.3d 1013 (8th Cir. 2017) (summary-judgment standard cited)
- Scirex Corp. v. Federal Ins. Co., 313 F.3d 841 (3d Cir. 2002) (examples of direct-loss analysis in fidelity/insurance context)
- FDIC v. Nat'l Union Ins. Co., 205 F.3d 66 (2d Cir. 2000) (distinguishing direct losses from third-party settlement obligations)