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Investment Center v. Great American Insurance

April 20, 2006


The opinion of the court was delivered by: Martini, U.S.D.J.


This matter comes before the Court on Defendant Great American Insurance's ("GA") motion for summary judgment and Plaintiff The Investment Center's ("TIC") cross-motion for summary judgment. There was no oral argument. Fed. R. Civ. P. 78. For the reasons set forth below, GA's motion is GRANTED,TIC's motion is DENIED,and TIC's complaint is DISMISSED.

I. Introduction

This is a declaratory action for coverage under a fidelity bond issued to TIC by GA. The sole issue for resolution of this case is whether TIC had knowledge of a former employee's fraudulent activity prior to GA issuing the bond.

II. Statement of Facts

In January 1999, GA, an insurance provider, issued a fidelity bond to TIC, a broker-dealer firm, covering losses resulting from fraudulent acts of employees. The bond period ran from January 1, 1999 through January 1, 2000 and covered only losses discovered by TIC during this period. Further, the bond would immediately terminate as to any employee if and when TIC became aware of dishonest or fraudulent acts committed by the employee.

Between June 1997 and May 1998, TIC employed a broker named Jeffrey Barber in its Casper, Wyoming office. During that time, TIC employee Dorian Fox served as Barber's supervisor. In March 1998, Fox received a telephone call from a TIC client, Joe Fuller ("Fuller"), who indicated to Fox that he had loaned Barber money and was trying to locate him. Concerned that Barber was borrowing money from clients in contravention to company policy, Fox reported the incident to TIC's compliance department. When Fox attempted to follow up with Fuller, however, Fuller explained that he and Barber had resolved the issue and that he did not wish to participate in an investigation.

In April 1998, Fox received another phone call from from a TIC client, Jim Mason ("Mason"), who told Fox he had given money to Barber to open a TIC account, but had not been receiving any statements on his investments. Fox discovered that no account had ever been opened. Fox confronted Barber, who explained that he had opened a trading account for Mason in a discount brokerage account outside of TIC. Once again, when Fox attempted to follow up with Mason, Mason indicated he had resolved the issue with Barber and did not want to proceed with an investigation.

Following this April phone call, Fox contacted Neil White in TIC's compliance department, stating he did not wish to continue supervising Barber. With White's approval, Fox wrote a letter to Barber terminating his supervisory relationship with him. In May 1998, TIC gave Fox authority to fire Barber on the basis of "low production" and "noncompliance issues." (Hilliard Decl. Exh. 12.) At this point, Barber was given the option to resign voluntarily, which he did.

Following Barber's departure, in August 1998, Fox received an NASD letter regarding a complaint the NASD had received from a TIC client named Christine Coleman ("Coleman") about Barber. Although the precise contents of the letter are not known, Fox forwarded the letter onto White. White responded to it by submitting to the NASD documentation regarding Coleman's TIC account and further stating that TIC did not have "any other complaints directed against Mr. Barber." (Dratch Decl. Exh. N.)

Shortly thereafter, in October 1998, Barber was arrested in Wyoming on fourteen felony counts including securities fraud, forgery, grand larceny, and check fraud. Barber had apparently been taking money from people, including Coleman, with the representation he would invest it without actually doing so. Barber plead guilty to four counts in October 1999.

Following the arrest, in December 1998, TIC applied for a fidelity bond with GA to cover a one-year period beginning January 1, 1999. In its application, TIC did not inform GA of any potential losses with respect to Barber. When TIC finally did inform GA of the potential loss in September 1999, GA declined coverage based on its belief that TIC had knowledge of Barber's fraudulent activity prior to inception of the bond. In April 2001, various victims of Barber filed a civil suit against Barber, Fox, and TIC. TIC now asks this Court to declare that GA had an obligation to indemnify TIC for costs of the defense.

III. Summary Judgment Standard

Summary judgment eliminates unfounded claims without resorting to a costly and lengthy trial. Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986). However, a court should grant summary judgment only "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). The burden of showing that no genuine issue of material fact exists rests initially on the moving party. Celotex, 477 U.S. at 323. A litigant may discharge this burden by exposing "the absence of evidence to support the nonmoving party's case." Id. at 325. In evaluating a summary judgment motion, a court must view all ...

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