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OMEGA ADVISORS, INC v. FEDERAL INSURANCE COMPANY

November 30, 2010

OMEGA ADVISORS, INC., PLAINTIFF,
v.
FEDERAL INSURANCE COMPANY, DEFENDANT.



The opinion of the court was delivered by: Pisano, District Judge.

OPINION

Plaintiff Omega Advisors, Inc. ("Omega" or "Plaintiff") brings this action against defendant Federal Insurance Company ("Federal" or "Defendant") alleging that Federal breached a duty to indemnify Omega for a loss allegedly covered under an insurance policy. Presently before the Court is Federal's motion to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons below, Defendant's motion is granted.

I. Background*fn1

According to the complaint, Omega and its subsidiaries were insured under a Financial Institution Bond policy of insurance issued by Federal bearing Bond number 81391640 DFI (the "Policy"). The Policy was in force during the following periods: April 13, 2007 to April 13, 2008; May 13, 2008 to April 13, 2009; and April 13, 2009 to April 13, 2010. Among other things, the Policy provided coverage for employee dishonesty and had a single loss limit of $5 million and an aggregate limit of $5 million.

Clayton Lewis was a senior employee of Omega who was head of Omega's Emerging Markets Group. During his employment with Omega, Lewis was tasked with evaluating an investment opportunity in privatization securities issues by the Republic of Azerbaijan (the "Azeri Investment"). In connection with this investment, the Republic of Azerbaijan issued two types of securities, "Vouchers" and "Options." Vouchers were sold to Azeri citizens and could be used to bid for state-owned companies in government-sponsored privatization auctions. Vouchers could be sold in the secondary market, but Voucher holders who were not Azeri citizens could exercise the Vouchers only if they purchased one Option for each Voucher they wished to exercise.

This investment was introduced to Omega and Lewis by a Czech businessman, Viktor Kozeny. Lewis was responsible for evaluating the proposal, making recommendations to Omega about the proposal, overseeing due diligence, negotiating the terms of the investment and ensuring that Kozeny complied with such terms. After studying the investment, Lewis advised Omega and its clients that he considered the investment "the best opportunity he had ever seen." Compl. ¶ 14.

Consequently, Omega and its clients committed approximately $164 million to the Azeri investment. Lewis was charged with overseeing the investment on behalf of Omega and its clients, and he had control of the Omega funds allocated for the purchase of the Vouchers and Options. However, the complaint alleges that Lewis conspired with Kozeny and "engaged in serious wrongdoing with respect to the Azeri Investment." Id. ¶ 18.

On February 10, 2004, Lewis pleaded guilty in United States District Court in the Southern District of New York to a charge that he violated and conspired to violate the Foreign Corrupt Practices Act in connection with the Azeri investment. In October 2005, the United States government unsealed the Information to which Lewis had pleaded guilty. In his plea, Lewis admitted that, prior to Omega's investment, Lewis had been told by Kozeny of corrupt arrangements with Azeri government officials and, further, that Lewis was aware of payments to Azeri officials in connection with purchases of the Vouchers. Lewis also pleaded guilty to a charge of perjury in New York state court in connection with his testimony before a grand jury.

On February 2, 2006, Omega filed an action in the Southern District of New York against Lewis captioned Omega Advisors, Inc. v. Lewis, Civil Action No. 06-834 (the "New York Action"). Affidavit of Michael Simmons ("Simmons Aff.") at Ex. 2. That action alleged that "Lewis committed fraud, and breaches of contract and fiduciary duty, which caused Omega damages in excess of $485 million." Id., Ex. 2 at ¶ 4. The complaint sought damages "in excess of $465 million" for fraud and breach of fiduciary duty and damages "in excess of $30 million" for breach of contract. Id. 17-18. The complaint also alleged that Lewis conveyed approximately $15 million to one or more trusts for his or his family's benefit fraudulently intending to preclude recovery by Omega, and Omega sought an order restraining Lewis from disposing his interest in the trust and/or setting aside the conveyance.

In 2007, Omega entered into a non-prosecution agreement with the United States Attorney for the Southern District of New York pursuant to which Omega agreed to pay $500,000 to the Department of Justice in connection with Lewis's action. Omega then paid this amount.

Shortly thereafter, by letter dated August 2, 2007, Omega notified Federal of a claim under the Policy. Omega advised Federal that is was seeking reimbursement from Federal for monies paid to the United States and for legal fees and costs incurred in connection with the U.S. government's investigation. That letter also advised Federal that Omega had filed a civil lawsuit against Lewis and planned to tender a formal claim with respect to Omega's losses relating to the Azeri Investment.

Omega filed its proof of claim with respect to its Azeri Investment losses on November 28, 2007. In this proof of claim Omega asserted "(i) a potential loss based on the assertion that Lewis profited from defrauding Omega by retaining funds by Omega for the Vouchers and/or Options, and that Lewis received from Kozeny a significant quantity of Options and/or Vouchers and/or other things of value in compensation for his participation in the scheme; (ii) reimbursement for legal fees and expenses incurred in connection with its discussions, meetings, presentations, etc., with the United States Attorney's office; and (iii) recover of the $500,000 paid to the U.S. government." Compl. ¶ 27. Omega specifically advised Federal that, with respect to the fraud that Lewis allegedly perpetrated on Omega, that "the current state of facts may not squarely fall within the Bond's requirement for 'discovery of loss,'" but "counsel's investigation continues." Id. ¶ 28. Federal acknowledged this claim and took the position that, with respect to any fraud that Lewis may have perpetrated on Omega, Omega should have provided notice to Federal at the time it filed its civil suit in February 2006. Federal also requested further information about the claim, however, as of November 2007 Omega did not have any further details or evidentiary support of Lewis's misconduct. As such, by letter dated September 25, 2008, Federal advised Omega that it was closing the file on the matter.

At an unspecified time in "late 2008," Omega obtained information from an unspecified criminal case related to the Azeri privatization program. Compl. ¶ 32. Upon review of these materials, Omega discovered that (1) Kozeny gave Lewis millions of dollars worth of Vouchers and/or Options for either no consideration or at prices far less than prevailing market prices and below the price paid by Omega; (2) Lewis sold some of these illicitly obtained Vouchers and Options to Omega at a large markup, secretly profiting approximately $5 million; (3) Lewis received from Kozeny a kick-back of an amount equal to 4% of Omega's potential profit in the Azeri Investment. On February 26, 2009, Omega provided Federal with this newly-learned information and made a specific claim under the Policy. Federal responded by letter dated May 27, 2009, disclaiming any coverage under the Policy, "principally on the ground that the 2009 Claim was untimely in that Omega had been aware of the relevant facts at least as far back as February 2, 2006 when it filed the Complaint" in the civil action. Id. ¶ 37.

Omega brings this suit alleging that Federal breached its obligations to Omega under the Policy by (1) refusing to pay for losses arising from Lewis's alleged misconduct on the ground that Plaintiff was obligated to provided notice of claim in 2006, at the time it filed its federal lawsuit against Lewis; and (2) rejecting Omega's 2009 claim as untimely. Omega seeks damages in the amount of $5 million.

II. Legal Discussion A. Motion to Dismiss Standard

Under Federal Rule of Civil Procedure 12(b)(6), a court may grant a motion to dismiss if the complaint fails to state a claim upon which relief can be granted. The Supreme Court refashioned the standard for addressing a motion to dismiss under Rule 12(b)(6) in Bell Atl. Corp. v. Twombly, 550 U.S. 544, 562, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The Twombly Court stated that, "[w]hile a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, ... a plaintiff's obligation to provide the grounds of his entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do[.]" Id. at 555 (internal citations omitted); see also Baraka v. McGreevey, 481 F.3d 187, 195 (3d Cir.2007) (stating that standard of review for motion to dismiss does not require courts to accept as true "unsupported conclusions and unwarranted inferences" or "legal conclusion[s] couched as factual allegation[s]." (internal quotation marks omitted)). Therefore, for a complaint to withstand a motion to dismiss under Rule 12(b)(6), the "[f]actual allegations must be enough to raise a right to relief above the speculative level, ... on the assumption that all the allegations in the complaint are true (even if doubtful in fact) ..." Twombly, 550 U.S. at 555 (internal citations

More recently, the Supreme Court has emphasized that, when assessing the sufficiency of a civil complaint, a court must distinguish factual contentions and "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements." Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009). A complaint will be dismissed unless it "contain[s] sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Id. at 1949 (quoting Twombly, 550 U.S. at 570). This "plausibility" determination will be "a context-specific task that requires the reviewing court ...


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