AlphaStar Insurance Group Ltd. (“AlphaStar”) (f/k/a Stirling Cooke Brown Holdings Ltd) was a group of companies which provided, among other services, reinsurance brokerage and intermediary services through companies in London, Bermuda and the United States. The companies collapsed and eventually declared bankruptcy, largely as a result of their involvement in the personal accident reinsurance market. Richard E. O'Connell, the chapter 7 trustee (the “Trustee”), commenced this proceeding against AlphaStar's former officers and directors, Arthur Andersen LLP, and several entities affiliated with Goldman Sachs. Goldman Sachs essentially controlled AlphaStar prior to its 1997 initial public offering. By 1999, special investigations revealed that the activities of the companies “were run or had been run by or associated with unsavory, dishonest people who had engaged in questionable transactions,” and that the businesses “were rife with fraud; its subsidiaries had made material misrepresentations to counterparties, who were thus entitled to rescind their contractual obligations; most of AlphaStar’s assets were impaired; its businesses were no longer viable; it could not afford to defend against the recent onslaught of litigation claims and it ‘faced a probable loss of staggering proportions.’” Prior management was terminated, but the litigation exposure arising out of their activities matured into a series of lawsuits and arbitrations with disastrous results. The thrust of the allegations in the Trustee's Amended Complaint was that the defendants, in light of these problems, used fraudulent and other improper means to continue AlphaStar's corporate existence to advance their personal interests to the detriment of AlphaStar. Another words, the Amended Complaint contended that the defendants should have pulled the plug instead of attempting to clean up the companies. The defendants moved to dismiss the Amended Complaint with prejudice.
The court concluded that the efforts to shift the losses of the companies to third parties was unsupported by any evidence, and that the claims were based upon information that allegedly was concealed by the defendants, but which the public knew. “In the end, his conscious misbehavior claim is impermissibly based on 20/20 hindsight, as he candidly admitted.” Motions to dismiss were granted, except that the motions to dismiss the avoidance claims were denied, and the motion to dismiss the contract claim was granted, but with leave to replead. In dismissing the trustee’s fraud based claims, the Court concluded that the Amended Complaint did not allege facts that gave rise to a strong inference of fraudulent intent, and that the motives alleged by the Trustee were insufficient as a matter of law, and failed to identify specific information that would support the inference of conscious misbehavior. The Court also dismissed the breach of fiduciary duty cause of action concluding that, under Bermuda law, no fiduciary duty existed. In re AlphaStar Ins. Group Ltd., No. 03-17903 (Bankr. S.D.N.Y., Feb. 19, 2008).
This post written by Lynn Hawkins.