Why New York’s Attorney General Objects to Trump’s Bond Insurer

New York’s attorney general has urged the state judge overseeing the state’s civil fraud case against Donald Trump to reject the former president’s $175 million appeal bond.

Attorney General Letitia James objects to Knight Specialty Insurance Co. (KSIC) as the underwriter of Trump’s bond because, according to her office’s court filing, Trump and KSIC have failed to demonstrate that the amount of the bond is sufficiently collateralized and that KSIC’s financial capacity adequately supports the undertaking.

James also objects because she contends KSIC’s management is not “sufficiently trustworthy and competent.”

Trump needs the appeal bond to prevent enforcement of a $454 million penalty levied against him in February by Judge Arthur Engoron for misrepresenting his assets for years to get better financial deals.

In its court filing, California-based KSIC told the court that it can cover the bond and a shortfall on the bond is “inconceivable” because it is backed by $175.3 million in cash Trump placed in a Charles Schwab account that is pledged to KSIC. KSIC also said it has than $539 million in assets, $138 million in equity, and access to billions more through a reinsurance agreement with its parent company, Knight Insurance Co.

KSIC refers to an affirmation from Gregory Serio, a former New York State Superintendent of Insurance, that in his expert opinion the surety on the undertaking given by KSIC is sufficient.

But in its filing, the attorney general’s office counters KSIC’s account of the situation.

First, the attorney general questions whether there is sufficient collateral backing the bond. For collateral, the Donald J. Trump Revocable Trust granted KSIC a priority lien on a Schwab brokerage with just over $175 million in it. But the trust retains ownership of the account and can withdraw funds or make trades in the account unless KSIC objects within two business days after receiving notice of the proposed transaction, according to the state.

“If the value of the funds held in the account dips below $175 million, the Trust promises to “true up” the balance by depositing additional funds in multiple permitted forms, including stocks—a promise that is hollow if the Trust does not have the funds to do so and concedes the value of the collateral will fluctuate based on market conditions,” the state maintains.

James also urges the court not to rely on KSIC’s financial summary attached to the bond as evidence that KSIC has sufficient capacity to justify writing a $175 million bond. “That is because KSIC sends 100% of its retained insurance risk to affiliates in the Cayman Islands, where lax regulations allow KSIC to use this risk transfer to reduce the liabilities it carries on its books in a way that artificially bolsters its surplus—a practice New York regulators have dubbed “shadow insurance” and about which they have sounded the alarm,” the state’s filing explains.

James acknowledges KSIC’s argument that it is permitted to issue insurance in New York on an excess lines basis through a New York-licensed excess lines broker and is authorized by the Delaware Insurance Department to write surety risks as an excess lines company.

But the attorney general’s office maintains that KSIC had never written a surety bond in New York or in the prior two years in any other jurisdiction, and questions whether policyholder surplus of $138 million is enough.

The attorney general also cites regulations that say a licensed excess lines broker may place business with an unauthorized insurer like KSIC only if it is satisfied that the insurer’s management is “trustworthy and competent.” She maintains KSIC is not qualified to act as the surety under the “trustworthy and competent” standard because its management has been found by federal authorities to have operated affiliated companies within KSIC in violation of federal law on several occasions.

The filing refers to a case in 2015 in which the Consumer Financial Protection Bureau (CFPB) found that an affiliate of KSIC Westlake and its subsidiary Wilshire Consumer Credit had pressured borrowers through the use of illegal debt collection tactics. The CFPB ordered the companies to provide restitution to consumers of $44.1 million and pay a civil penalty of $4.25 million. Two years later, the same two companies settled with the Department of Justice for $760,788 to resolve charges that they violated the Servicemembers Civil Relief Act by repossessing 70 vehicles owned by members of the armed forces without first obtaining the required court orders. In 2002, the same companies agreed to pay an additional penalty of $225,000 to settle charges they violated other provisions of the servicemembers act.

This record, James contends, shows that KSIC’s management does not meet the requirements of trustworthiness and competence under regulations governing insurance placed through a licensed excess lines broker.

The attorney general urged the court to deny the KSIC proposal and order Trump to post a replacement undertaking within seven days of the court’s ruling.

KSIC says the attorney general’s objection should be set aside with costs.

Photo: New York Attorney General Letitia James