Jonathan Stempel

NEW YORK (Reuters) – New York’s highest court ruled on Tuesday that JPMorgan Chase & Co (NYSE:) is entitled to insurance coverage for $140 million of a U.S. Securities and Exchange Commission settlement with the former Bear Stearns Cos over improper mutual fund trading.

In reversing a previous court decision, the Court of Appeals ruled that $140m was derived from estimates of wrongful customers profits and investor harm and that it wasn’t a penalty that could be used to exempt JPMorgan insurances from covering the loss.

Bear Stearns was ordered in 2006 to pay $160 million in ill-gotten gains and a $90 million civil penalty. This was to clear the SEC of charges it had allowed customers of preferred hedge funds to trade market timings from 1999 to 2003.

Market timing meant rapid trading that was incompatible with funds rules, at the expense and inconvenience of ordinary investors. Later trading included illegal after-hours trades at stale prices.

The settlements were paid by banks, mutual fund companies, and individuals to end regulatory investigations into these practices. They were first exposed in 2003, when Elit Spitzer (then-New York Attorney general) highlighted them.

Bear Stearns (which JPMorgan purchased in 2008) had asked for insurance coverage for $140million of the disgorgement. The amount excludes $20 millions of revenue generated by the improper trading.

Vigilant, Lloyd’s of London and Travelers (NYSE). Insurers said $140 million was not client profit under policies. They also stated that it did not reflect public policy which made the amount insurable.

Janet DiFiore the Chief Judge wrote that Tuesday’s majority was a failure of the insurers to prove that Bear Stearns could reasonably have believed its policies preclude coverage.

Additionally, she stated that the $140m was a compensatory goal, rather than a punishment, unlike Bear Stearns’ fine.

Brian Marchiony, a JPMorgan spokesperson said that the bank’s largest U.S. branch was happy with its decision. Requests for comment were not returned by the lawyers for the insurers immediately.

JP Morgan Securities Inc et al v Vigilant Insuring Co et al. New York Court of Appeals. 61.