By Mark Maremont And Leslie Scism 

US Bancorp was sued by a South Carolina insurer for allegedly failing to prevent $176 million of the insurer's funds from being replaced with illiquid or worthless assets, in the latest fallout from a scandal involving 28-year-old financier Alexander Chatfield Burns.

In the lawsuit, filed Friday in a federal court in Columbia, S.C., Companion Property & Casualty Insurance Co. claimed that the bank's US Bank unit, which served as trustee for trust accounts being managed by Mr. Burns's companies, negligently or recklessly allowed them to be "depleted" in favor of securities that are "illiquid and appear to have little or no value."

"We are still evaluating the complaint that was just filed," a US Bank spokesman said. "However, we can say that we strongly deny the allegations being made against US Bank and we intend to defend ourselves vigorously through the legal process."

Insurance regulators in Delaware and Louisiana seized two of Mr. Burns's insurers last year because of concerns about the quality of their assets. Mr. Burns's private-equity firm allegedly had siphoned off hundreds of millions from several insurers that he controlled or whose accounts he managed, replacing them with unusual holdings including rights to a purported Caravaggio painting, according to filings in the Delaware liquidation matter.

Mr. Burns, the focus of a Saturday page one article in The Wall Street Journal, has said he believes his firm "complied with all relevant laws." He resigned from his firm last year and hasn't been accused of any wrongdoing in any criminal or civil proceeding.

Companion had a so-called fronting arrangement with two insurers controlled by Mr. Burns, under which those insurers assumed risk from policies issued by Companion, for a fee. To ensure that they would make good on their obligations, the insurers established collateral trust accounts for the benefit of Companion.

As trustee, the lawsuit claims, US Bank was responsible for ensuring that any substituted assets in the accounts were of "comparable value" to those they replaced, and for providing monthly statements certifying that the fair-market value of the assets in the accounts was "true and correct."

By early 2014, the complaint says, investments in "reputable bond companies such as PIMCO" had been sold and replaced by investments in obscure entities with little or no value.

Many of the new holdings were identical to those found on the books of Freestone Insurance Co., a Delaware insurer now in liquidation that was controlled by Mr. Burns.

About $86 million of Companion's trust money was invested in entities whose main assets are rights to the purported Caravaggio painting, according to exhibits filed with the new lawsuit and documents in Delaware Chancery Court.

Companion, which had been owned by Blue Cross Blue Shield of South Carolina, was sold early this year and renamed Sussex Insurance. Before being sold, Companion posted a loss of $113 million after ending its dealings with Mr. Burns's former companies, its regulatory filings show.

"The trustee appears to have had the duties outlined in the complaint," said Talcott J. Franklin, an expert on trust law who has litigated a number of cases involving the duties of trustees.

He said the lawsuit is in early stages, but if the allegations are proven, US Bank "could be liable for the plaintiff's lost profits" and potentially to treble damages under South Carolina law.

Write to Mark Maremont at mark.maremont@wsj.com and Leslie Scism at leslie.scism@wsj.com

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