Broker-Dealer Professional Liability Policy Not Implicated Where Registered Representative Was “Selling Away”

The United States District Court for the Northern District of Illinois, applying Illinois law, has held that a registered representative was not performing Professional Services so as to implicate coverage under a securities broker-dealer professional liability policy where the representative advised clients to invest in what turned out to be a Ponzi scheme. Everest Nat’l Ins. Co. v. Komarek, 2023 WL 3074678 (N.D. Ill. Apr. 25, 2023). The investments were not approved by, or offered for sale through, the registered representative’s broker-dealer employer. A “selling away” exclusion also applied.

A securities broker-dealer purchased two professional liability policies. One of its registered representatives allegedly entered into a joint venture with an estate planning attorney who was later indicted for running a multi-million dollar Ponzi scheme. Pursuant to this alleged agreement, the registered representative set up client accounts with the insured broker-dealer and recommended that her clients invest in the Ponzi scheme, even though it was not an investment authorized by the insured. The clients suffered losses from their investments, and two lawsuits were brought against the registered representative, who sought coverage through her employer’s professional liability insurer. The insurer denied coverage and filed a coverage action seeking a declaration that it had no duty to defend or indemnify the registered representative in the two lawsuits.

The court concluded that the underlying lawsuits did not implicate the policies’ insuring agreement and granted the insurer’s motion for summary judgment. The policies provided specified coverage for Claims for Wrongful Acts by Registered Representatives only in the rendering of failure to render Professional Services. Professional Services were defined to include selling, servicing, or providing advice in connection with an Approved Product; or the provision of Investment Advisory Services. An Approved Product was defined as one approved by, and offered for sale through, the insured broker-dealer (i.e., the registered representative’s employer). Investment Advisory Services were defined to require services be approved by the broker-dealer, and, when such services involved the purchase or sale of an investment product, such product had to be an Approved Product. The court held that the registered representative was not performing Professional Services within the meaning of the policies because the investments in the Ponzi scheme were not approved by the policyholder nor were they offered for sale through the policyholder.  

The court further held that, even if the registered representative was performing Professional Services, a “selling away” exclusion would apply to bar coverage for the underlying lawsuits. “Selling away” is the practice of an individual registered representative selling securities outside the purview of their broker-dealer employer. The court noted that the lawsuits alleged that the registered representative was selling away when she advised the clients to invest in the Ponzi scheme and therefore the exclusion would apply.