In the midst of final preparations for the impending trial of Sam Bankman-Fried in the bustling streets of Manhattan, legal eagles representing the beleaguered former CEO of FTX were busy filing a lawsuit against Continental Casualty, a prominent insurance entity domiciled in the United States District Court of Northern California. This insurance provider had, allegedly, furnished Paper Bird and its subsidiary, FTX Trading, with Directors and Officers (D&O) coverage, setting the stage for a legal skirmish initiated by Bankman-Fried in his personal capacity.
Within the contours of the lawsuit, it was contended that Continental Casualty held a pivotal role as the guardian of Paper Bird’s “second-layer excess policy” in the intricate hierarchy of the D&O insurance edifice. This form of insurance serves as a protective shield for a company’s directors and officers, safeguarding their personal assets in the event of a legal maelstrom. The unique facet of such coverage lies in its stratified structure, akin to a towering fortress of policies, wherein each level comes into play when the preceding one reaches its financial limit.
According to the lawsuit, the primary stratum of D&O protection had generously bestowed $10 million for the defense of Bankman-Fried, courtesy of two insurers. Meanwhile, the Continental Casualty policy was ostensibly designed to provide an additional $5 million, subject to the caveat that payments must be disbursed promptly. The policy extended its protective embrace even to the realm of criminal charges, albeit with a conspicuous exclusion clause for “fraudulent, criminal, and similar acts.” Notably, no provision existed for clawing back any disbursements.
Adding to the intrigue, the third tier of Paper Bird’s D&O fortification, orchestrated by Hiscox Syndicates, found itself entangled in a legal conundrum of its own. Hiscox had initiated a Complaint for Interpleader against Paper Bird, alongside a substantial roster of insured individuals, among whom Bankman-Fried was prominently featured. In the legal labyrinth, an interpleader action serves as the crucible wherein the litigants are compelled to resolve their claims amongst themselves, often under the watchful gaze of the law.
Perusing through this labyrinthine complaint, which saw the light of day on August 9th, in the hallowed halls of the District Court of Northern California, it became evident that the Hiscox policy came into play after exhausting the $15 million earmarked for underlying coverage. As the legal document stipulated, Hiscox anticipated that claims totaling $5 million would be brought forth under its aegis, necessitating the complex dance of interpleading to ensure the equitable dispersion of policy funds.
This legal saga embroiled a cast of twenty individuals, all of whom bore some connection to FTX, occasionally adorned with prestigious titles such as “head of a department.”
In the pages of the esteemed Financial Times, the narrative painted Paper Bird as the sole proprietor of FTX Ventures, holding an impressive 89% stake in FTX Trading—anointed as the foundational bedrock enshrined in FTX’s legal disclaimers. Interestingly, Paper Bird stood as the exclusive domain of Bankman-Fried, lending an aura of personal ownership to this intricate corporate tapestry.
Bankman-Fried, undaunted by the legal quagmire, vigorously sought to extract D&O insurance payments from a policy entwined with West Realm Shires, more commonly known as FTX US. However, this tenacious endeavor was met with staunch opposition from FTX’s legal contingent and the vigilant creditors’ committee, ultimately finding itself thwarted by the judicious intervention of the U.S. Bankruptcy Court for the District of Delaware.