Published: Wednesday, 13 Oct 2010 | 1:53 PM ET

http://www.cnbc.com/id/39654107

A federal judge in Houston has ruled Lloyd's of London does not have to pay legal fees for accused fraudster Allen Stanford and two of his co-defendants in an alleged $7 billion Ponzi scheme, because there is "substantial evidence" the defendants engaged in money laundering.

The ruling by Judge Nancy Atlas is a major blow to Stanford, who is scheduled to go on trial on 21 criminal counts in January.

Attorneys have estimated Stanford's legal defense could cost $20 million or more. With Stanford's assets frozen by another federal judge, it is unclear how his legal team will be paid.

A spokesman for Stanford lead attorney Robert Bennett in Houston could not immediately be reached for a comment.

Stanford and former accounting executives Gilbert Lopez and Mark Kuhrt had been counting on a Directors and Officers policy issued by Lloyd's of London to pay for their defense, but the policy underwriters sought to deny coverage based on an exclusion in the policy for money laundering, and Judge Atlas agreed.

The Lloyd's underwriters had invoked the clause in August 2009, after Stanford's Chief Financial Officer, James Davis, plead guilty to fraud charges and implicated Stanford, Kuhrt and Lopez.

Lloyd's had also sought to deny coverage for a fourth defendant, former Chief Investment Officer Laura Pendergest-Holt, but the parties agreed to a settlement prior to the judge's ruling.