Alleghany unit sues trading company over coverage for spoofing lawsuit

RSUI, the excess and surplus lines subsidiary of Alleghany, has sued trading and technology company Tower Research Capital (TRC) seeking a declaratory judgment that no coverage exists under its excess liability policy for a settlement related to futures manipulation.

The complaint – filed in the Southern District of New York on 10 September – arises from a class action lawsuit filed in 2018 that alleged three traders formerly employed by TRC participated in a scheme to manipulate the prices of E-mini Index Futures contracts traded on the Chicago Mercantile Exchange (CME) using a technique called “spoofing”.

It was alleged that the traders placed orders for E-mini Index Futures and then cancelled them prior to execution to send false supply and demand signals to the market.

A Department of Justice (DOJ) investigation resulted in a criminal charge against TRC which was settled in a deferred prosecution agreement under which TRC agreed to pay $67.5mn, including a criminal penalty of $24.4mn, criminal disgorgement of $10.5mn, and victim compensation of approximately $32.5mn.

RSUI’s policy provided a $3mn excess layer, while a $3mn primary layer was written by XL Specialty Insurance Company.

TRC initially noticed a claim to RSUI which included a CME investigation, a US Commodity Futures Trading Commission investigation, the DOJ investigation, and the underlying lawsuit.

RSUI’s lawsuit said in April this year TRC advised RSUI for the first time that it had made a settlement offer to the plaintiffs in the underlying lawsuit in January 2020, which implicated RSUI’s entire policy limit.

The insurer responded by stating that TRC was in breach of the consent-to-settle provision applicable to the policy.

RSUI said that at the time of the April 2020 discussions it was told by TRC that XL had not yet exhausted its $3mn primary limit. “However, RIC understands that XL’s limit may have since been exhausted,” the lawsuit said.

Later in April, TRC informed RSUI that it had agreed in principle with the underlying plaintiffs’ counsel to settle the lawsuit for an amount in excess of RSUI’s $2mn limit of liability.