UBS FINANCIAL SERVICES, INC. OF PUERTO RICO AND UBS TRUST COMPANY OF PUERTO RICO, Plaintiffs, Appellants,
XL SPECIALTY INSURANCE CO., AXIS REINSURANCE CO., AND HARTFORD FIRE INSURANCE CO., Defendants, Appellees.
FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF
PUERTO RICO [Hon. Francisco A. Besosa, U.S. District Judge]
T. Smith, with whom Rajesh R. Srinivasan, Michael I. Verde,
David L. Goldberg, Philip A. Nemecek, Tenley Mochizuki,
Katten Muchin Rosenman LLP, Jaime E. Toro-Monserrate, Nayda
I. Pérez-Román, and Toro, Colón, Mullet
Rivera & Sifre PSC were on brief, for appellants.
Tseng Duffield, with whom Karen L. Toto, Kimberly M. Melvin,
John E. Howell, and Wiley Rein LLP were on brief, for
appellee XL Specialty Insurance Company.
Francisco E. Colón-Ramírez and Colón
Ramírez LLC on brief, for appellees XL Specialty
Insurance Company, AXIS Reinsurance Company and Hartford Fire
D. Weinberg and Shipman & Goodwin LLP on brief, for
appellee Hartford Fire Insurance Company.
Michael R. Goodstein, James M. Young, and Bailey Cavalieri
LLC on brief, for appellee AXIS Reinsurance Company.
Howard, Chief Judge, Torruella and Kayatta, Circuit Judges.
TORRUELLA, CIRCUIT JUDGE.
case, titans of their respective industries clash as to the
interpretation of an exclusion clause in an insurance policy
representing millions of dollars in potential coverage. In
the process of deciding this appeal, we are granted a glimpse
into the ethics that apparently prevail in some sectors of
the financial industry.
UBS Trust Company ("UBS-Trust") and UBS Financial
Services Inc. of Puerto Rico ("UBS-PR") filed suit
against their primary insurance provider, XL Specialty Co.
("XL"), as well as their secondary insurance
providers, claiming that the insurers' refusal to cover
certain legal disputes constituted a breach of their
insurance contract. XL argues that those disputes fall under
a "specific litigation exclusion" clause in the
insurance policy that excepts from coverage claims related to
prior matters specified therein. UBS-Trust and UBS-PR
(collectively, "UBS"), on the other hand, assert
that the specified prior matters and the disputed matters at
issue in this case are not sufficiently related and XL is
misinterpreting the scope of the exclusion.
the parties filed cross-motions for summary judgment, the
district court held that the prior and disputed matters were
sufficiently related such that the exclusion clause applied,
and granted summary judgment in favor of the insurers. UBS
appealed. After careful review, we affirm, finding that the
clear and unambiguous language of the specific litigation
exclusion bars coverage of the disputed litigation matters
was an underwriter for various tax-exempt Puerto Rican
municipal bonds. UBS-PR, also a licensed broker-dealer,
sold shares of closed-end funds ("CEFs") to
brokerage customers in Puerto Rico. UBS-Trust, on the other
hand, was responsible for managing or co-managing
twenty-three CEFs. From 2009 to 2012, UBS was the subject of
various proceedings concerning the CEFs, two of which are
relevant here: (1) a 2009 Securities and Exchange Commission
("SEC") investigation, and (2) a 2010 lawsuit filed
by CEF investors (collectively, the "Prior
2009 SEC Investigation
August 2009, the SEC began investigating UBS-PR for
violations of securities laws (the "2009 SEC
Investigation"). The SEC ultimately concluded that
UBS-PR misrepresented the risks associated with its CEF
shares. Although UBS-PR told customers that the share price
was determined by supply and demand, the investigation
concluded that UBS-PR was effectively setting the price of
shares by controlling sales in the secondary market. In
addition, the SEC found that by not informing investors it
purchased millions of dollars of CEF shares into its
inventory, UBS-PR made CEF shares appear more liquid and in
higher demand than they actually were. The SEC further
concluded that UBS-PR offloaded shares it owned by selling
them at lower prices while "numerous UBS PR customers
were also attempting to sell their holdings[, ] . . .
effectively prevent[ing] certain customers from selling their
CEF shares." Ultimately, UBS-PR settled with the SEC
through the entry of an "Order Instituting
Administrative and Cease-and-Desist Proceedings," in
which UBS-PR agreed to pay over $26 million in disgorgement,
prejudgment interest, and civil money penalties.
2010 Unión Lawsuit
2010, CEF investors filed a lawsuit concerning UBS's
management of four CEFs, derivatively on behalf of the four
funds and directly as a putative class of fund investors (the
"2010 Unión Lawsuit"). See
Verified Shareholder Derivative Action and Class Action
Complaint, Unión de Empleados de Muelles de P.R.
PRSSA Welfare Plan v. UBS Fin. Servs. of P.R., No.
10-1141-ADC (D.P.R. Mar. 31, 2011) (ECF No. 1). The CEFs
incorporated pension bonds issued by Puerto Rico's
Employee Retirement System ("ERS"), which were
underwritten by UBS-PR and purchased by UBS-Trust. The
investors alleged that: (1) in 2007, UBS-PR became financial
advisor to the ERS; (2) afterwards, it served as underwriter
when ERS sold $2.9 billion in pension bonds, which resulted
in approximately $27 million in fees for UBS-PR and its
co-underwriters; (3) ERS pension bonds were rated just one
step above junk by Moody's Investors Service and other
rating agencies; (4) UBS-Trust purchased more than half of
the total bond offering; and (5) "near-junk" ERS
bonds were concentrated in the four CEFs at issue, creating
an over-concentration of low-quality ERS bonds.
plaintiffs claimed that UBS, "[o]perating on all sides
of mutual fund and bond transactions . . . manipulated the
[CEF] Funds and the bond market to the detriment of the Funds
and its unsuspecting investors." They alleged that by
serving as "investment advisor, bond underwriter, and
mutual fund manager," UBS's actions "created a
disabling conflict of interest which caused [it] . . . to
breach [its] fiduciary and other duties to the Funds."
They further alleged that UBS caused "millions of
dollars in . . . losses which [were] exacerbated . . . [by]
the illiquidity of the market for the Funds, which [was] in
large part controlled by [UBS]." To that end, investors
claimed UBS engaged in "material misstatements and
fraudulent omissions," including the withholding of
information that demand was created through large-scale
purchases of ERS bonds, thereby "artificially
inflat[ing]" the price and masking the bonds'
substantial risk. As a result, investors claimed UBS used the
CEFs as a "dumping ground for the toxic pension bonds .
. . in order to maximize the [bonds'] offering
The Insurance Policies
2011, UBS began searching for a new insurance provider to
cover legal disputes. UBS's broker, Marsh, approached XL
for primary coverage and Axis Reinsurance ("Axis")
and Hartford Fire Insurance ("Hartford")
(collectively, "Insurers") for secondary coverage.
UBS negotiated the terms of the policies with the advice of
Marsh and coverage counsel, Covington & Burling LLP. In
the process, UBS requested numerous changes to the policy
language proposed by XL. While XL agreed to many of UBS's
requested changes, it did not agree to alter the terms of a
specific litigation exclusion. Ultimately, XL issued a
primary $10 million policy, Axis issued a $5 million first
excess policy, and Hartford issued a $5 million second excess
policy in UBS's favor. The primary and secondary policies
(together, the "Policy") shared most terms and
conditions, including a specific litigation exclusion. The
exclusion precluded coverage of:
any Claim in connection with any proceeding set forth below,
or in connection with any Claim based on, arising out of,
directly or indirectly resulting from, in consequence of,
or in any way involving any such proceeding or any
fact, circumstance or situation underlying or alleged
Unión de Empleados de Muelles de Puerto Rico PRSSA
Welfare Plan, et al. v. UBS Financial Services Incorporated
of Puerto Rico, et al., Case No. 10-1141, U.S. District
Court, District of Puerto Rico.
The  investigation by the Securities and Exchange
Commission captioned "in the Matter of UBS (Certain
Puerto Rico Bonds and Funds)" SEC File No. FL-3491.
(the "Specific Litigation Exclusion") (emphasis
added). Hence, if a new claim was related to either the 2009
SEC Investigation or the 2010 Unión Lawsuit
as described in the clause above, it was not covered by the
Policy. Crucially, during negotiations, UBS attempted to
narrow the scope of the Specific Litigation Exclusion, but XL
rejected the proposed changes. Specifically, UBS sought to
replace "any fact, circumstance or situation underlying
or alleged therein" with "the same Wrongful Acts
alleged in any such proceeding," and to remove the
phrase "in any way."
the Policy protected UBS against claims alleging wrongful
acts made during the policy period. A "claim" included
any "written notice received by an Insured that any
person or entity intends to hold any Insured responsible for
a Wrongful Act," any "proceeding in a court of law
or equity," or "any formal, civil, criminal,
administrative, or regulatory investigation of an
Insured." Moreover, a "wrongful act" was
"any actual or alleged act, error, omission,
misstatement, misleading statement or breach of fiduciary
duty . . . committed by [UBS] in the performance of, or
failure to perform, Professional Services."
"Professional services" meant "financial,
economic or investment advice given or investment management
services performed for others for a fee or commission by
addition, the Policy included a "notice of claim
endorsement" that required written notice of any claim
"as soon as practicable after it is first made . . . but
in no event later than ninety (90) days after the expiration
of the Policy Period." Lastly, the Policy contained an
"interrelated claims" provision mandating that all
claims resulting from interrelated wrongful acts constitute a
Legal Disputes Since 2012
the beginning of the policy period, UBS has litigated, as
pertinent here, two civil actions (the
"Fernández" Litigations), two
regulatory investigations (by the SEC and the Financial
Institutions Regulatory Association ("FINRA")), and
hundreds of FINRA arbitrations (collectively, the
"Disputed Matters"). UBS contends that the
financial crisis in the Puerto Rico bond market catalyzed
litigation against it.