LONDON (Bloomberg) — Lloyd's of London said admissions made by accused Ponzi scheme operator Allen Stanford's former chief financial officer when he pleaded guilty relieves the insurance syndicate of the obligation to pay defence costs for Stanford and his co-defendants.

Lloyd's lawyers told US District Court Judge David Hittner in Houston yesterday that the statements made by James Davis in his August 27 plea agreement reveal criminal activity that takes the defendants actions outside the terms of their directors' and officers' insurance coverage.

Stanford, chief investment officer Laura Pendergest-Holt and two other former Stanford Group Co. employees are accused by the US of running a $7 billion fraud scheme, centered on the sale of certificates of deposit by Antigua-based Stanford International Bank Ltd. Each of them has pleaded not guilty.

Davis, who was indicted separately, agreed to forfeit $1 billion as part of his plea. He is cooperating with the US government in its probe.

"We're in uncharted territory," Hittner told the lawyers for each side after hearing more than three hours of argument. "I know we're dealing with a matter of law, but there's an issue of fairness here." The judge repeatedly said Lloyd's decision to deny coverage was based "not on facts but on someone who stated something under oath."

He ordered both sides to submit proposed orders to him no later than December 4, one of which he would adopt as his decision.

"We made a contract and believe we paid what we owe," Lloyd's lawyer Barry Chasnoff, a partner in the San Antonio office of Washington-based Akin Gump Strauss Hauer & Feld LLP, told the judge. "We've paid a total of $4.2 million for work done prior to August 27. We believe under the contract we don't owe anymore."

Hittner in September appointed the Houston Federal Public Defender's Office to represent Stanford while his assets remained frozen by court order in a lawsuit brought by the US Securities and Exchange Commission against the financier in Dallas.

US District Judge David Godbey in Dallas last month ruled that Stanford and the other defendants could tap their insurance proceeds to defray defense costs, enabling Stanford to retain defense lawyer Kent Schaffer, who commands a fee of $600 per hour.

Schaffer, who previously agreed to represent Stanford at the public defender rate of $110 per hour, told Hittner yesterday that he and co-counsel Mac Secrest had already devoted more than 500 hours to the case and spent more than $200,000 for investigators and support staff.