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Crown Capital Securities, L.P. v. Endurance American Specialty Insurance Co.

California Court of Appeals, Second District, Fifth Division

April 10, 2015

CROWN CAPITAL SECURITIES, L.P., Plaintiff and Appellant,

APPEAL from a judgment of the Superior Court of Los Angeles County, No. BC474442 Steven J. Kleifield, Judge.

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[Copyrighted Material Omitted]

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Jones, Bell, Abbott, Fleming & Fitzgerald, Craig R. Bockman and William M. Turner for Plaintiff and Appellant.

Locke Lord, Michael F. Perlis, Richard R. Johnson, and F. Phillip Hosp for Defendant and Respondent.




Customers of a securities firm made claims against that firm based on real estate investments the firm’s broker-dealers recommended. An entity that had an interest in and operated each of the real estate investments filed for bankruptcy, and at least some of the real estate investments became debtors in that bankruptcy proceeding. The appointed examiner in the bankruptcy proceeding found that the entity was engaged in a fraudulent “Ponzi scheme.”[1] When the securities firm applied for professional liability insurance, it disclosed one of the customer claims but not the facts that would support other potential customer claims arising out of investments through the same entity as that involved in the disclosed claim. The insurer refused to defend the securities firm against undisclosed claims because the policy’s application included an exclusion for nondisclosure of facts that might lead to a claim. In affirming the judgment, we hold that the trial court correctly entered judgment in favor of the insurer on the ground that there was no insurance coverage because all of the undisclosed claims arose out of the same events as the disclosed claim and therefore the facts underlying the undisclosed claims should have been disclosed.


On November 10, 2008, DBSI, Inc. (DBSI) and various subsidiaries filed for bankruptcy. On October 19, 2009, a court appointed examiner filed a “Final Report of the Examiner” with respect to the operation of DBSI.

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On October 26, 2009, investor George Bou-Sliman transmitted a letter to plaintiff and appellant Crown Capital Securities, L.P., (Crown Capital), which letter attached a summary of the Final Report of the Examiner (Bou-Sliman Claim). In his letter, Bou-Sliman said, “My investment advisor and friend, Mr. Frank Naylor, discussed his relationship with Crown Capital in honest detail a few years ago. Mr. Naylor was convinced that Crown Capital would do a thorough investigation of any and all investment choices it recommended to it’s [sic] representatives. Frank assured me that we could invest comfortably with this knowledge. [¶] Now, after having lost a sizeable portion of our investment, comes this document describing the principal of DBSI, the operator of a ‘ponzi scheme’. [¶] We believe that your plan was Flawed. (Evidence contained in the enclosed ‘Examiner’s Final Report’). This report contains sad evidence contrary to your plan. [¶] We feel a conviction that your company owes us for this flawed investigation resulting in our loss of investment capital.”

The e-mail attached to the Bou-Sliman letter stated, “In short, the Examiner confirmed what we all suspected/feared as being true-that is, DBSI generally (and Douglas Swenson specifically) masterminded at least an eight year long ponzi scheme to defraud and misappropriate funds from investors.” The summary reported, among other things, that DBSI was “burdened by huge high interest debt and master lease payment obligations, excessive insider distributions, and unrestrained losing investments”; DBSI “booked profits from inflated markups of real estate for sale to outside investors”; DBSI used “tenant-in-common... investor and bond and note money interchangeably and pooled such money to make required payments when they came due”; “Investor funds from all sources were commingled and treated as fungible funds”; DBSI’s “guarantees of investments were illusory and were based on the cultivated false appearance that DBSI had substantial value”; and “the marketing claim that ‘no investors had ever lost money’ was also illusory and reflected that newly raised investor funds were being used to pay off existing investors.”

On April 20, 2010, Darol Paulsen, on behalf of Crown Capital, executed an “Application for Professional Liability Insurance” from defendant and respondent Endurance American Specialty Insurance Company (Endurance) for a professional liability insurance policy for work performed by its security broker-dealers and investment advisors. Concerning Crown Capital’s claims experience, question 9 of the application asked, “Have any claims, suits or proceedings (including without limitation: any shareholder action or derivative suit; or any civil, criminal, or regulatory action, or any complaint, investigation or proceeding related thereto) been made during the past five years against: (a) the Applicant: (b) ...

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