U.S. Bancorp Sued by Insurance Company for Failure to Protect Assets in Trust

The Wall Street Journal is reporting that U.S. Bancorp has been sued by South Carolina insurer Companion Property & Casualty Insurance Company for "allegedly failing to prevent $176 million of the insurer's funds from being replaced with illiquid or worthless assets." The article notes that this is "the latest fallout from a scandal involving 28-year-old financier Alexander Chatfield Burns."[1]
In the lawsuit, filed Friday in a federal court in Columbia, S.C., Companion Property & Casualty Insurance Co. claimed that the bank’s US Bank unit, which served as trustee for trust accounts being managed by Mr. Burns’s companies, negligently or recklessly allowed them to be 'depleted' in favor of securities that are 'illiquid and appear to have little or no value.'
According to the Wall Street Journal article, insurance regulators in Delaware and Louisiana seized two insurers controlled by Mr. Burns last year "because of concerns about the quality of their assets." Allegedly, the private-equity firm run by Mr. Burns had "siphoned off hundreds of millions from several insurers that he controlled or whose accounts he managed, replacing them with unusual holdings including rights to a purported Caravaggio painting, according to filings in the Delaware liquidation matter."[2]

Mr. Burns, who resigned from his firm last year, hasn’t been accused of any wrongdoing in any criminal or civil proceeding. He is also the subject of another prominent expose by the Wall Street Journal: Young Financier's Insurance Empire Collapses.

The Wall Street Journal details the allegations in the case against U.S. Bancorp made by Companion.
Companion had a so-called fronting arrangement with two insurers controlled by Mr. Burns, under which those insurers assumed risk from policies issued by Companion, for a fee. To ensure that they would make good on their obligations, the insurers established collateral trust accounts for the benefit of Companion.

As trustee, the lawsuit claims, US Bank was responsible for ensuring that any substituted assets in the accounts were of “comparable value” to those they replaced, and for providing monthly statements certifying that the fair-market value of the assets in the accounts was “true and correct.”

By early 2014, the complaint says, investments in “reputable bond companies such as PIMCO” had been sold and replaced by investments in obscure entities with little or no value.[3]
According to the article, many of these new holdings were allegedly "identical to those found on the books of Freestone Insurance Co., a Delaware insurer now in liquidation that was controlled by Mr. Burns."[4]

Approximately $86 million of Companion's trust assets were invested "in entities whose main assets are rights to the purported Caravaggio painting," as detailed in the article.[5]

Before being sold and renamed Sussex Insurance earlier this year, Companion posted a loss of $113 million, according to its regulatory filings.[6]

The Wall Street Journal quotes Talcott J. Franklin, "an expert on trust law who has litigated a number of cases involving the duties of trustees," as suggesting that, although the lawsuit is in the early stages, the "trustee appears to have the duties outlined in the complaint." Further, Franklin suggests that, if Companion's allegations are proven true, U.S. Bank "could be liable for the plaintiff's lost profits" and potentially exposed to treble damages under South Carolina state law.[7].


1Insurer Sues US Bancorp Over Asset Replacement, Wall Street Journal, Mark Maremont and Leslie Scism, 03/24/2015.
2Insurer Sues US Bancorp Over Asset Replacement, Wall Street Journal, Mark Maremont and Leslie Scism, 03/24/2015.
3Insurer Sues US Bancorp Over Asset Replacement, Wall Street Journal, Mark Maremont and Leslie Scism, 03/24/2015.
4Insurer Sues US Bancorp Over Asset Replacement, Wall Street Journal, Mark Maremont and Leslie Scism, 03/24/2015.
5Insurer Sues US Bancorp Over Asset Replacement, Wall Street Journal, Mark Maremont and Leslie Scism, 03/24/2015.
6Insurer Sues US Bancorp Over Asset Replacement, Wall Street Journal, Mark Maremont and Leslie Scism, 03/24/2015.
7Insurer Sues US Bancorp Over Asset Replacement, Wall Street Journal, Mark Maremont and Leslie Scism, 03/24/2015.

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