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Click here for the full text of this decision FACTS:Patrick Green was the largest shareholder, chairman and former CEO of PinkMonkey.com, an Internet site providing literature study aids. The company had five other officers, and John Kim was a PinkMonkey securities dealer. TIG issued PinkMonkey a director and officer liability insurance policy in 1999 that was retroactive to April 24, 1997. Under the policy, TIG was to pay “for a Wrongful Act committed, attempted or allegedly committed or attempted by such Insured,” and the policy provided for coverage for securities claims (defined in the policy) made against the company. Additionally, there was a personal profit exclusion, which stated: “[t]his insurance does not apply to any Claim made against any Insured arising out of [ ] the following: . . . any Claim based upon, arising from, or in consequence of an Insured having gained in fact any personal profit, remuneration, or advantage to which such Insured was not legally entitled.” All in all, while the policy explicitly covered securities claims against PinkMonkey and the insureds, it excluded coverage of claims arising from an insured having gained a personal profit to which such insured was not legally entitled. Five investors sued PinkMonkey and the company’s officers for control person liability. Citing the Texas Blue Sky Act and the Texas Deceptive Trade Practices Act, the investors asserted: 1. that Kim and Greene falsely promised that 30 percent of the PinkMonkey stock they bought would be registered under federal securities laws; 2. Kim and Greene falsely referred to PinkMonkey as a “no risk and good investment” and 3. Kim and Greene falsely claimed that PinkMonkey was scheduled to distribute shares of stock it held in another company and that the investors would receive five shares of that company for every 100 shares of PinkMonkey they purchased. The investors settled with all other officers except Greene. At trial, the jury found that PinkMonkey sold stock based on an untrue or omitted statement of material fact; that Greene and Kim materially aided PinkMonkey; that Greene and Kim made negligent misrepresentations to the investors; that PinkMonkey and Green defrauded the investors under Business & Commerce Code 27.01; and that Greene benefited from his false representation or promise. The jury also found that Kim did not benefit from his actions. PinkMonkey, Greene and Kim sought payment of the judgment against them by TIG. TIG eventually denied coverage, then filed for a declaratory judgment that the parties were not covered by the policy. The district court granted TIG’s motion for summary judgment, ruling that the personal profit exclusion barred the claims because Greene personally profited from the sale of the stock to the investors. The district court also found that the claims against PinkMonkey and Kim were excluded since they were based upon the claims against Greene. On appeal, the investors, who were third-party intervenors in the declaratory judgment act, argue that Greene did not gain anything to which he was not legally entitled. They further argue that even if the personal profit exclusion applies to Greene it does not apply to PinkMonkey or the other officers. HOLDING:Affirmed. The district court correctly ruled that the Personal Profit Exclusion excluded insurance coverage for the claims against Greene, Kim, the other officers and directors, and PinkMonkey. The jury’s finding that Greene engaged in stock fraud required a finding that Greene benefited from a false representation or promise, which indicates that he gained a personal profit or advantage. The court finds, however, that the jury’s finding is not alone sufficient to trigger the exclusion. TIG must also establish that Greene was not legally entitled to his gain. Therefore, the court goes over exactly what Greene was legally (and not) entitled to gain. A majority shareholder in a small startup company gains a personal advantage from a sizeable capital investment in the company because it gives the majority shareholder the opportunity to become the owner of a successful business. Additionally, person is not legally entitled to an advantage or profit resulting from his violation of law if he could be required to return such profit. Here, Greene’s advantage resulted from his violation of 27.01, for which the equitable remedies include the return of any money paid. “Because return of the capital investment in PinkMonkey could have been required, there was no legal entitlement to the capital investment. Greene’s fraud resulted in the capital investment, which lead directly to his personal advantage. Greene was not legally entitled to profit from his fraud.” The court disagrees that its findings would eviscerate the securities claims endorsement of the policy because that endorsement only applies to an insured, and insureds are separate from a company. When both the company and insured are sued based upon the same wrongful act, not all claims against the company will be considered a claim against an insured. The court then considers whether the personal profit exclusion should apply to the company or the other officers. The court finds that the use of the phrase “an insured” in the personal profit exclusion indicates that coverage is excluded for all insureds, not just the insured who profited. Considering the entire provision, “it is clear that a claim arising out of an Insured having gained a personal profit is not limited to a claim against the Insured who profited.” Therefore if the claims against Kim and the others officers are claims against the insureds that arise out of Greene’s personal profit, the exclusion is applicable to them as well. Looking to the definition of “insured” in the policy, the court rules that the other officers and Kim are all insureds. The claims made against the officers were control liability claims, which depend on a finding that the control person is in a position to prevent the securities violation at issue. The claims against the officers, therefore, were based on Greene’s fraud. Kim materially aided Greene in selling stock, so the claims against him, too, were based on Greene gaining an advantage he was not legally entitled to. OPINION:Garza, J.; Barksdale, Garza and Pickering, JJ. CONCURRENCE AND DISSENT:Pickering, J. “I concur with the majority as to the result reached in this case as to Greene . . . and the result reached as to all of the other directors of the company, except [one]. I do not agree that this case should be affirmed as to the securities dealer, John Kim, and [the other] director of PinkMonkey[.] I likewise do not agree that the decision should be affirmed as to PinkMonkey.”

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