OPINION OF THE COURT

ANDRIAS, J.

The disgorgement payment to the Securities and Exchange Commission (SEC) in settlement of charges that plaintiffs' predecessors wilfully facilitated illegal mutual fund trading practices does not constitute an insurable loss under the primary professional liability policy issued by defendant Vigilant Insurance Company or the "follow the form" excess policies issued by the other insurer defendants. Accordingly, we reverse and grant defendants' motions to dismiss the complaint.

In 2006, the SEC notified Bear Stearns & Co., Inc., an introducing broker, and Bear Stearns Securities Corp., a clearing firm, (collectively Bear Stearns), that it intended to institute proceedings against them seeking broad injunctive relief and monetary sanctions of $720 million. The SEC alleged that between 1999 and September 2003, Bear Stearns, in violation of securities law, knowingly facilitated a substantial amount of late trading and deceptive market timing for certain customers, predominantly large hedge funds, and affirmatively assisted them in evading detection, which enabled those customers to earn hundreds of millions of dollars in profits at the expense of mutual fund shareholders.1 Bear Stearns disputed these allegations in a "Wells Submission" in which it asserted that for the most part it was a clearing broker that processed transactions initiated by others, that it did not knowingly violate any law or regulation, that its management and supervisory personnel did not facilitate either market timing or late trading, and that it did not share in the profits or benefit in any way from the late trading, which generated only $16.9 million in revenue to Bear Stearns.

On or about November 17, 2005, Bear Stearns made a formal offer of settlement which the SEC accepted. On March 16, 2006, the SEC issued an "Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15 (b) and 21C of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions" (SEC Order) in which Bear Stearns, "without admitting or denying the findings [made pursuant to its offer of settlement]," agreed to pay "disgorgement in the total amount of $160,000,000" and "civil money penalties in the amount of $90,000,000."2 The SEC also censured Bear Stearns for its willful violations, ordered it to "cease and desist" from future violations and mandated business restructuring to prevent future illegal trading. On March 10, 2006, the New York Stock Exchange (NYSE) issued Exchange Hearing Panel Decisions that included factual findings substantively identical to the SEC's. NYSE levied a sanction of "$160,000,000 as disgorgement" and "$90,000,000 as a penalty," which would be deemed satisfied by Bear Stearns's payment of the sanctions imposed by the SEC.

The insurance program at issue obligates the insurers to indemnify Bear Stearns for all "Loss which the insured shall become legally obligated to pay as a result of any Claim ... for any Wrongful Act" on its part. The term "Loss" includes

The term "Wrongful Act" means "any actual or alleged act, error, omission, misstatement, misleading statement, neglect or breach of duty by the Insured(s) in providing services as a Security Broker/Dealer and/or Investment Advisor and/or Administrator."

The program excludes claims made against the insured "based upon or arising out of any deliberate, dishonest, fraudulent or criminal act or omission," provided there has been an adverse final adjudication to that effect. It also excludes claims "based upon or arising out of the Insured gaining in fact any personal profit or advantage to which the Insured was not legally entitled." The Lloyd's of London excess policy also includes a "Known Wrongful Acts Exclusion" which excluded claims for Wrongful Acts committed before March 21, 2000 "if any officer of the Assured, at such date, knew or could have reasonably foreseen that such Wrongful Act(s) could lead to a Claim."

Plaintiffs demanded that defendant insurers indemnify Bear Stearns for the disgorgement payment under the program. Defendant insurers refused on the ground that the payment was not an insurable loss, or was excluded from coverage. Plaintiffs then commenced this action for breach of contract and a declaration that defendants had a duty to indemnify them, asserting that the disgorgement payment, despite its label, constituted compensatory damages.

Disgorgement is an equitable remedy aimed at "forcing a defendant to give up the amount by which he was unjustly enriched" through violations of the federal securities laws (Securities & Exch. Commn. v Tome, 833 F.2d 1086, 1096 [2d Cir 1987]; see also Securities & Exch. Commn. v Fischbach Corp., 133 F.3d 170, 175 [2d Cir 1997] ["The primary purpose of disgorgement orders is to deter violations of the securities laws by depriving violators of their ill-gotten gains"]). Securities Act section 8A (e), Securities Exchange Act section 21B (e), and Securities & Exchange Act section 21C (e) authorize the SEC to seek disgorgement in a cease-and-desist proceeding and a proceeding in which a civil money penalty may be imposed (15 USC § 77h-1 [e]; § 78u-2 [e]; § 78u-3 [e]).

Under New York law, "[t]he risk of being directed to return improperly acquired funds is not insurable" (Vigilant Ins. Co. v Credit Suisse First Boston Corp., 10 A.D.3d 528, 528 [2004]). Thus, disgorgement of ill-gotten gains or restitutionary damages does not constitute an insurable loss (see Millennium Partners, L.P. v Select Ins. Co., 68 A.D.3d 420 [2009], appeal dismissed 14 N.Y.3d 856 [2010]; Reliance Group Holdings v National Union Fire Ins. Co. of Pittsburgh, Pa., 188 A.D.2d 47, 55 [1993], lv dismissed and denied 82 N.Y.2d 704 [1993]). The public policy rationale for this rule is that the deterrent effect of a disgorgement action would be greatly undermined if wrongdoers were permitted to shift the cost of disgorgement to an insurer, thereby allowing the wrongdoer to retain the proceeds of his or her illegal acts (see Vigilant Ins. Co. v Credit Suisse First Boston Corp., 6 Misc.3d 1020[A], 2003 NY Slip Op 51747[U] [2003], mod 10 A.D.3d 528 [2004], supra).

In Millenium Partners, the insured disgorged $148 million in connection with a market timing investigation by the SEC. Although the settlement agreements did not specifically state that the disgorgement was for improperly obtained funds, we affirmed the grant of summary judgment to the insurers on the ground that the findings recited in the orders with the SEC and the Attorney General of the State of New York "conclusively link[ed] the disgorgement to improperly acquired funds," notwithstanding that the plaintiff consented and agreed to these orders "without admitting or denying the findings [t]herein" (68 AD3d at 420; see also Reliance Group v National Union, 188 AD2d at 55 [the settlement of the action was essentially equivalent to a determination, reached through agreement of the parties, that plaintiff had been unjustly enriched through its actions]). Here too, read as a whole, the offer of settlement, the SEC Order, the NYSE order and related documents are not reasonably susceptible to any interpretation other than that Bear Stearns knowingly and intentionally facilitated illegal late trading for preferred customers, and that the relief provisions of the SEC Order required disgorgement of funds gained through that illegal activity.

The SEC Order illustrates how the Bear Stearns timing desk actively collaborated with Bear Stearns's clients to execute illegal mutual fund trading. Specifically, Bear Stearns processed these late trades as if they had been submitted hours earlier and then "falsified internal order tickets" to misrepresent that it had received late trading orders prior to the 4:00 P.M. deadline.

The SEC Order details how Bear Stearns operated its late trading and market timing scheme in direct disregard of demands by mutual funds that Bear Stearns stop allowing timing in their funds. In response, rather than prevent the timing activity, Bear Stearns assigned "multiple account numbers to customers so that the mutual funds could not identify them as customers whose trades they had previously blocked, or by assigning multiple [registered representative] numbers to registered representatives at [Bear Stearns] to try to conceal the identity of the traders." The SEC Order also specifies that in multiple taped telephone conversations, a Bear Sterns supervisor and a timing desk employee specifically advised a new customer (broker) that late trades would be "populated" at either "4:00 or 3:59." Further, the "PCS Administrative Head," and the "MFOD Administrative Head," when recruiting a new broker, discussed the "cut off" time to do trades (5:45 P.M.), and certain department heads discussed the cut off time with a new customer, a large Texas hedge fund, and a Florida correspondent broker. Based on these findings, the SEC concluded that Bear Stearns:

Given these findings, it cannot be seriously argued that Bear Stearns was merely found guilty of inadequate supervision and a failure to place adequate controls on its electronic entry system.3

The fact that the SEC did not itemize how it reached the agreed upon disgorgement figure does not raise an issue as to whether the disgorgement payment was in fact compensatory.4 Although the disgorged amount must be "causally connected to the violation" (see Securities & Exch. Commn. v First Jersey Sec., Inc., 101 F.3d 1450, 1475 [2d Cir 1996]), the SEC "is not required to trace every dollar of proceed[s]" or "to identify misappropriated monies which have been commingled" (Securities & Exch. Commn. v Anticevic, 2010 WL 3239421, *5, 2010 US Dist LEXIS 83538, *14 [SD NY 2010] [internal quotation marks omitted]). Accordingly, a disgorgement calculation requires only a "reasonable approximation of profits causally connected to the violation" (Securities & Exch. Commn. v First Pac. Bancorp, 142 F.3d 1186, 1192 n 6 [9th Cir 1998] [citation omitted]), and the amount of disgorgement should include "all gains flowing from the illegal activities" (Securities & Exch. Commn. v JT Wallenbrock & Assoc., 440 F.3d 1109, 1114 [9th Cir 2006]). Further, joint and several liability for combined profits may be imposed on collaborating or closely related parties (see Securities & Exch. Commn. v AbsoluteFuture.com, 393 F.3d 94, 97 [2d Cir 2004]; see also SEC v Anticevic, 2010 WL 3239421, *5, 2010 US Dist LEXIS 83538, *14 [SD NY 2010], supra [in insider trading cases, the tipper may be held jointly and severally liable for the profits obtained by his tippees]). Here, in addition to admittedly generating at least $16.9 million in revenues for itself, Bear Stearns knowingly and affirmatively facilitated an illegal scheme which generated hundreds of millions of dollars for collaborating parties and agreed to disgorge $160 million in its offer of settlement.

Nor is the nature of the disgorgement payment altered by the fact that the $250 million sanction was to be placed in a Fair Fund pursuant to section 308 (a) of the Sarbanes-Oxley Act of 2002 to be distributed to compensate investors harmed in the mutual funds.

Accordingly, the order of the Supreme Court, New York County (Charles E. Ramos, J.), entered September 14, 2010, which denied defendants' motions to dismiss the complaint, should be reversed, on the law, without costs, and the motions granted. The Clerk is directed to enter judgment dismissing the complaint.

Order, Supreme Court, New York County, entered September 14, 2010, reversed, on the law, without costs, and the motions granted. The Clerk is directed to enter judgment dismissing the complaint.