VALERIE CAPRONI, District Judge:
Relying almost entirely on a negative report published by a short seller
AmTrust is an insurance company that underwrites and reinsures property and casualty insurance, workers' compensation insurance, special risk insurance, and warranty insurance through a network of domestic and foreign subsidiaries, including subsidiaries in Bermuda and Luxembourg. Am. Compl. ¶¶ 3, 56-59. Lead Plaintiff alleges that AmTrust's Consolidated Financial Statements for fiscal years 2010 through 2012 fraudulently underreported losses associated with insurance policies, the premiums for which had been ceded to reinsurance subsidiaries located in Luxembourg.
AmTrust's domestic insurance subsidiaries underwrite the majority of AmTrust's
Luxembourg reinsurance companies are financed differently than U.S. reinsurers. A reinsurance company formed under Luxembourg law is required to establish an "Equalization Reserve" to cover unforeseen catastrophes or major losses. Rosen Decl. Ex. 2 ("Jan. 16 Letter") at 4-5; Am. Compl. ¶¶ 61-62. Under Luxembourg generally accepted accounting principles ("Luxembourg GAAP"), the company can draw from its Equalization Reserve to offset or absorb excess losses while recognizing no taxable income and, in so doing, can deplete the Equalization Reserves over time. See Jan. 16 Letter at 4-5; Am. Compl. ¶¶ 62, 130. AmTrust's 2012 Annual Report disclosed that a subsidiary Luxembourg holding company:
Tully Decl. Ex. 4 ("2012 Annual Report") at 23.
Equalization Reserves are not a feature of U.S. reinsurance companies. See Letter of Ronald E. Pipoly, Jr., AmTrust Financial Services, Inc., to Jim B. Rosenberg, U.S. Securities and Exchange Commission (Dec. 4, 2013) (via EDGAR) ("Dec. 4 Letter") at 4.
The market reacted as GeoInvesting no-doubt hoped to the allegations that AmTrust had falsified its financial reports and was a "house of cards": on December 13, 2012, AmTrust's common stock price dropped 12%, closing at $33.64. Am. Compl. ¶ 32.
Although the Amended Complaint, like the GeoInvesting Report, alleges wrongdoing solely because there was a difference between the reported losses,
The Amended Complaint does not allege that AmTrust inaccurately reported its total expenses, but instead it alleges that AmTrust manipulated its reported losses and loss ratios when it eliminated intra-company transactions by eliminating loss and loss adjustment expense entries and reporting only other underwriting expense entries, while leaving premium revenue entries intact. Id. ¶ 142. The alleged misclassification resulted in underreporting underwriting loss expense by $70.97 million in 2010, $102.3 million in 2011, and $116.7 million in 2012. Id. ¶¶ 72, 78, 84. This, in turn, allegedly skewed AmTrust's loss ratio, a "key financial performance metric[]" that investors use to gauge an
The Amended Complaint alleges that the expenses were misclassified because "properly" recorded elimination entries would not "cause one type of an expense to appear as another on a consolidated entity's financial statements" or "cause losses transferred from one subsidiary to another to simply disappear." Id. ¶ 139; see also id. ¶ 136 (citing Financial Accounting Standards Board Accounting Standards Codification ("ASC") § 810-10-10-1, for the proposition that the purpose of consolidating financial statements is to "make them more meaningful than separate financial statements and ... are usually necessary for a fair presentation when one of the entities in the consolidated group ... has a controlling financial interest in the other entities").
Id. ¶ 138; see 2012 Annual Report. The Amended Complaint alleges that AmTrust violated GAAP when it eliminated transactions because eliminating entries "should... have a zero net effect" on AmTrust's reported premiums and loss and loss adjustment expense and, in any event, "would have been unnecessary." Am. Compl. ¶¶ 140-41. The Amended Complaint alleges that the elimination of transactions did have a "net effect" on AmTrust's consolidated loss and loss adjustment expense because it did not match the aggregate of the subsidiaries' losses. See id. ¶ 142. The Amended Complaint does not provide any factual or legal support for its conclusions that AmTrust's elimination entries or reported losses were, in fact, improper.
The Amended Complaint also alleges that Regulation S-X, Rule 7-04, requires that insurance companies' financial statements include line items reflecting, inter alia, "benefits, claims, losses and settlement
The Amended Complaint also takes issue with the assumptions that went in to AmTrust's financial statements. See id. ¶ 5 ("AmTrust accomplished this fraud by making knowingly unrealistic actuarial assumptions as to the amount of expected future losses from insurance policies it wrote."); see also id. ¶¶ 15-16, 20, 163-69. The Amended Complaint claims that a "unique aspect" of preparing an insurance company's financial reports is that "management is able to manipulate underwriting income by making unrealistically low estimates of the future costs of resolving claims." Id. ¶¶ 15-16. The Amended Complaint alleges that AmTrust makes "unreasonably generous actuarial assumptions" about "incurred but not reported" ("IBNR") losses (a component of total recorded loss and loss adjustment expense) because it uses "unrealistically low loss ratio assumptions." Id. ¶¶ 162-63, 165, 167. According to the Amended Complaint, AmTrust misclassified the ceded losses to "avoid[] discovery" when its "knowingly unrealistic actuarial assumptions" inevitably "come home to roost." Id. ¶¶ 5, 17-21, 165.
In further support of its allegations that AmTrust's financial reports were fraudulent, the Amended Complaint alleges that an inference of fraud can be drawn from AmTrust's results, which it alleges were simply "too good to be true." Id. ¶ 157; see also id. ¶¶ 148-75. According to the Amended Complaint, AmTrust "has grown exponentially while reporting loss and expense ratios that are vastly superior to its competitors." Id. ¶ 149. The Amended Complaint alleges that the premium growth AmTrust reported defies credulity given its high-volume, low-price underwriting strategy because premiums for the rest of the market were "shrinking." Id. at ¶¶ 21, 170-72; see also id. ¶ 172 ("It is implausible to grow exponentially in a shrinking market without underpricing the competition ... to gain market share ....
According to the Amended Complaint, AmTrust had motive to commit fraud in order to conceal its allegedly "increasing losses" and fund its underwriting strategy in the wake of "unrealistically low" future cost estimates, which required "access to more and more capital." Id. ¶¶ 21-24. Demonstrative of the alleged need for more capital to finance its operations, AmTrust obtained over $600 million of equity and debt financing in the forms of stock, note, and loans, and lines of credit during the class period. Id. ¶¶ 175-85. Allegedly, AmTrust's "bank borrowings and lines of credit required it to maintain financial metrics that would have been violated had the losses not been concealed." Id. ¶ 177.
Lead Plaintiff alleges that the "misclassification" of ceded losses violated unspecified GAAP, materially understated AmTrust's consolidated loss and loss adjustment expenses, overstated AmTrust's consolidated underwriting income,
The Amended Complaint alleges that the Individual Defendants are liable because they signed the Annual Reports knowing that the losses were understated and made statements to investors "touting" AmTrust's low loss ratios. Id. ¶¶ 71, 77, 83, 128-29; see Emps. Ret. Sys. of Gov't of the Virgin Islands v. Blanford, 794 F.3d 297, 305 (2d Cir.2015) ("Section 20(a) of the Exchange Act provides that individual executives, as `controlling person[s]' of a company, are secondarily liable for their company's violations of the Exchange Act." (citing 15 U.S.C. § 78t(a))).
The Amended Complaint alleges that, as CEO and CFO of AmTrust, the Individual Defendants "knew of contemporaneous facts, and had access to and reviewed, the financial reports filed with ... insurance regulators showing that AmTrust's loss and loss adjustment expense was greater" than AmTrust reported in its consolidated financial statements. Id. ¶ 127. It also alleges that Zyskind and Pipoly knew "that AmTrust was not reporting all of the loss and loss adjustment expense that it was incurring" because they "would have reviewed and approved the statutory financial statements of each of AmTrust's subsidiaries
The Amended Complaint alleges that the Individual Defendants are liable under § 10(b) of the Exchange Act because, "by virtue of their positions," they knew (or acted with reckless disregard) that statements of material fact contained in the annual reports were untrue, or omitted material facts necessary in order to make the statements that were made not misleading, in violation of their duty to disseminate timely, accurate, and truthful information. Id. ¶¶ 215-18. It alleges that the Individual Defendants are liable under § 20(a) of the Exchange Act because they are "controlling persons" of AmTrust within the meaning of § 20(a) and controlled the allegedly misleading reports disseminated in the marketplace concerning the results of AmTrust's operations. Id. ¶¶ 223-30. Finally, it alleges that they are liable under § 11 of the Securities Act because the prospectus and registration statement for the June 10, 2013, public offering that they signed contained untrue statements of fact or omitted material facts, but as to this claim, the Amended Complaint does not allege that the Individual Defendants acted with fraudulent intent. Id. ¶¶ 232-37.
"To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). The Court may consider "any written instrument attached to the complaint, statements or documents incorporated into the complaint by reference, legally required public disclosure documents filed with the SEC, and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit." ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir.2007). The plaintiff must plead sufficient factual matter "to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555, 127 S.Ct. 1955. Although the Court "must accept as true all of the [factual] allegations contained in the complaint," the Court is "not bound to accept as true a legal conclusion couched as a factual allegation." Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (citing Twombly, 550 U.S. at 555, 127 S.Ct. 1955).
To maintain a private securities class action under § 10(b) of the Exchange Act:
Pac. Inv. Mgmt. Co. LLC v. Mayer Brown LLP, 603 F.3d 144, 151 (2d Cir.2010) (quoting Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 157, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008)).
Securities fraud claims under § 10(b) of the Exchange Act and Rule 10b-5 must satisfy two layers of heightened pleading requirements: first, a complaint alleging securities fraud must satisfy Rule 9(b) of the Federal Rules of Civil Procedure, and, second, private securities fraud class actions must satisfy the pleading requirements set forth in PLSRA, 15 U.S.C. § 78u-4(b)(1). See ATSI Commc'ns, 493 F.3d at 99. "The PSLRA builds on Rule 9's particularity requirement, dictating the pleading standard for claims brought under the Exchange Act." Blanford, 794 F.3d at 304. "PSLRA specifically requires a complaint to demonstrate that the defendant made `[m]isleading statements [or] omissions ... of a material fact,' 15 U.S.C. § 78u-4(b)(1), and acted with the `[r]equired state of mind' (the `scienter requirement'), id. § 78u-4(b)(2)." Id. at 305.
"To state a claim under section 11 [of the Securities Act], the plaintiff must allege that (1) she purchased a registered security, either directly from the issuer or in the aftermarket following the offering; (2) the defendant participated in the offering in a manner sufficient to give rise to liability under section 11," e.g., was an issuer, underwriter, or signed the registration statement, or was a director or partner of the issuer; and "(3) the registration statement `contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.'" In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 358-59 (2d Cir.2010) (quoting 15 U.S.C. § 77k(a)).
Although § 10(b) and § 11 claims "share a material misstatement or omission element," City of Omaha, Nebraska Civilian Employees' Retirement System v. CBS Corp., 679 F.3d 64, 68 (2d Cir.2012), "[p]laintiffs need not allege scienter, reliance, or causation," to state a claim under § 11 of the Securities Act, City of Pontiac Policemen's & Firemen's Retirement System v. UBS AG, 752 F.3d 173, 182 (2d Cir.2014). Section 11 imposes on issuers "`virtually absolute' liability," while "the remaining potential defendants... may be held liable for mere negligence." In re Morgan Stanley, 592 F.3d at 359 (citing Pinter v. Dahl, 486 U.S. 622, 646, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988); Herman & MacLean v. Huddleston, 459 U.S. 375, 381-82 & n. 12, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983)).
In this case, the Amended Complaint declares that its § 11 claim "does not sound in fraud. Any proceeding [sic] allegations that might imply fraud, fraudulent conduct, or improper motive are specifically excluded from this Count. In this Count, Plaintiffs do not allege that Defendants had scienter or fraudulent intent, which are not elements of this claim." Am. Compl. ¶¶ 232. As an initial matter, forcing the Defendants (and the Court) to discern which statements in the 61-page, 243-paragraph Amended Complaint "imply fraud, fraudulent conduct, or improper motive" and thus are "excluded" from the § 11 count yields a puzzle, not a "plain statement" of the § 11 claim. See Fed. R.Civ.P. 8(a)(2). But a directive to provide
In order to satisfy Rule 9(b) and the pleading requirements of PSLRA as to its § 10(b) claim, the complaint must specify the false or misleading statement about which it complains and must allege the reason or reasons why the statement is false or misleading. Rombach v. Chang, 355 F.3d 164, 170 (2d Cir.2004) (quoting 15 U.S.C. § 78u-4(b)(1)(B)). While a § 11 claim can be based on negligent conduct, the complaint must still allege a false or misleading statement or omission in more than conclusory terms. In re Morgan Stanley, 592 F.3d at 360; accord Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, ___ U.S. ___, 135 S.Ct. 1318, 1332-33, 191 L.Ed.2d 253 (2015) (emphasizing that to state a claim for an actionable omission regarding an opinion statement under § 11 of the Securities Act, a complaint "must identify particular (and material) facts going to the basis of the issuer's opinion ... whose omission makes the opinion statement at issue misleading to the reasonable person reading the statement fairly and in context" (citing Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 ("Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice."))).
Despite its length, the be all and end all of the allegations of the Amended Complaint is that the loss and loss adjustment expenses, underwriting income, and loss ratio reported in AmTrust's SEC-filed financial reports must be fraudulent because the reported loss and loss adjustment expense cannot be ticked and tied to the aggregate insured losses that AmTrust's subsidiaries reported to insurance regulators in documents prepared in accordance with SAP. See Pl. Mem. at 12 (AmTrust "violated GAAP by failing to include and report in its consolidated financial statement all of its" loss and loss adjustment expenses that were "reported by each subsidiary to insurance regulators"). Lead Plaintiff alleges that "the sum of the premium revenue and losses and loss adjustment expense reported" to insurance
The fact that Lead Plaintiff cannot tick and tie the loss and loss adjustment expense reported in AmTrust's consolidated financial statement to the losses its individual subsidiaries reported to insurance regulators, without more, does not plausibly allege a misstatement. It is well-settled that GAAP provisions are subject to interpretation and "tolerate a range of `reasonable' treatments, leaving the choice among alternatives to management." Thor Power Tool Co. v. C.I.R., 439 U.S. 522, 544, 99 S.Ct. 773, 58 L.Ed.2d 785 (1979). According to the Amended Complaint, "management has tremendous discretion to determine the current year's loss and loss adjustment expense by estimating the expected future cost of claims." Am. Compl. ¶ 15. Given this discretion when calculating loss and loss adjustment expense and given AmTrust's express disclosure that financial statements prepared in accordance with GAAP (as compared to SAP) reflect "different assets and liabilities and different amounts of assets and liabilities," 2012 Annual Report at 29, an observed discrepancy between the two does not plausibly allege that the loss and loss adjustment expenses as disclosed in the financial statements are false. The Amended Complaint has alleged no facts indicating that AmTrust exercised its judgment in a way that violated GAAP beyond its disagreement with management's choices among alternative estimates; but "section 10(b) was not designed to regulate corporate mismanagement." Acito v. IMCERA Grp., Inc., 47 F.3d 47, 53 (2d Cir.1995) (citation omitted). Disagreement with AmTrust's judgment calls is insufficient to allege that AmTrust misstated facts in its consolidated financial statements in violation of § 10(b) of the Exchange Act, or that AmTrust violated § 11 of the Securities Act by incorporating those financial statements into its prospectus and offering statements. Accord Stevelman v. Alias Research Inc., 174 F.3d 79, 85 (2d Cir.1999) (complaint adequately alleged violations of GAAP and a retroactive announcement of lowered earnings, but the "misrepresentations indicated only mismanagement, not fraud," and "accounting irregularities and overly optimistic disclosures, by themselves, ... amount to allegations of `fraud by hindsight,' which [the Second Circuit] has rejected as a basis for a securities fraud complaint" (citations omitted)).
The same is true for the alleged "misclassification" of losses when AmTrust eliminated entries when consolidating its financial statements. Not only does the Amended Complaint fail to include factual support for its ipse dixit that loss and loss adjustment expenses were "misclassified" as "other underwriting expenses," it provides no support for the notion that the way AmTrust classified its loss and loss adjustment expenses violated GAAP. See Am. Compl. ¶¶ 27, 143, 147.
In sum, the Court finds that the Lead Plaintiff has not alleged facts that support its conclusory allegation that AmTrust violated GAAP. In the absence of a restatement or allegations pointing to objective facts that Defendants' accounting methods violated GAAP, carping about Defendants' application of GAAP amounts to no more than a "`naked assertion' devoid of `further factual enhancement;'" it does not permit the Court to infer that the Defendants committed accounting fraud. Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (quoting Twombly, 550 U.S. at 557, 127 S.Ct. 1955). Cf. Kuriakose v. Fed. Home Loan Mortg. Corp., 897 F.Supp.2d 168, 180-81 (S.D.N.Y.2012) (complaint failed to allege facts that plausibly supported its allegations that the defendant violated GAAP and Federal Accounting Standards; court declined to "intervene in a business and accounting judgment simply because... accountants reached different conclusions" about how the defendant should have exercised its judgment), aff'd sub nom., Central States, Se. & Sw. Areas Pension Fund v. Fed. Home Loan Mortg. Corp., 543 Fed.Appx. 72 (2d Cir.2013); Stratte-McClure v. Morgan Stanley, 784 F.Supp.2d 373, 386 (S.D.N.Y.2011) (complaint failed to allege a GAAP violation because the complaint cited only generalized "broad provisions" that could not "form the basis for a Section 10(b) violation"), aff'd, 776 F.3d 94 (2d Cir.2015), and aff'd, 598 Fed.Appx. 25 (2d Cir.2015) (summary order); In re Fannie Mae 2008 Sec.
Nor does the Amended Complaint plausibly allege false statements by taking aim at AmTrust's actuarial or accounting assumptions (which are, by definition, not statements of fact). See Fait v. Regions Fin. Corp., 655 F.3d 105, 110-11 (2d Cir.2011) (estimates of goodwill are statements of opinion because they depend on "management's determination of the `fair value' of the assets acquired and liabilities assumed," which "will vary depending on the particular methodology and assumptions used," and are not "objective factual matters" (citations omitted)). If AmTrust's allegedly outstanding performance was attributable to the "unreasonable" assumptions to which the Amended Complaint alludes (but fails specifically to identify, see Am. Compl. ¶¶ 21-22, 152-74), the Amended Complaint does not plausibly allege a misstatement of fact; at best it alleges a difference of opinion regarding the reasonableness of AmTrust's actuarial or accounting assumptions.
Even if the Amended Complaint had adequately alleged a misstatement or omission, the claims pursuant to § 10(b) of the Exchange Act would nonetheless fail because the Amended Complaint does not adequately allege scienter. To plead scienter, a plaintiff must "state with particularity the facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2)(A). The "required state of mind" is an "intent to deceive, manipulate, or defraud," or recklessness. Blanford, 794 F.3d at 305 (citations omitted). The Court must "take into account plausible opposing inferences" and consider "plausible, nonculpable explanations for the defendant's conduct, as well as inferences favoring the plaintiff." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 323-24, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). The inference "must be more than merely plausible or reasonable — it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent." Id. at 314, 127 S.Ct. 2499. "The plaintiff may satisfy this requirement by alleging facts (1) showing that the defendants had both motive and opportunity to commit the fraud or (2) constituting strong circumstantial evidence of conscious misbehavior or recklessness." ATSI Commc'ns, Inc., 493 F.3d at 99.
In the context of private securities fraud actions, recklessness means "conscious recklessness — i.e., a state of mind approximating actual intent." S. Cherry St., LLC v. Hennessee Grp., LLC, 573 F.3d 98, 109 (2d Cir.2009) (quoting Novak v. Kasaks, 216 F.3d 300, 312 (2d Cir.2000) (emphasis omitted)). Examples of recklessness are "highly unreasonable" conduct that "represents an extreme departure from the standards of ordinary care," failing to review or check information they had a duty to monitor, or ignoring obvious signs of fraud. Id. It is "not merely a heightened form of negligence." Id. "Circumstantial evidence can support an inference of scienter in a variety of ways, including where defendants `(1) benefitted in a concrete and personal way from the purported fraud; (2) engaged in deliberately illegal behavior; (3) knew facts or had access to information suggesting that their public statements were not accurate; or (4) failed to check information they had a duty to monitor.'" Blanford, 794 F.3d at 306 (quoting ECA, Local 134
Lead Plaintiff argues that the circumstantial evidence alleged adequately establishes scienter, including (1) the failure to cross check AmTrust's loss and loss adjustment expenses reported in its Annual Reports with reports to insurance regulators by its subsidiaries, Pl. Mem. at 19; (2) imputed knowledge of the disparity between the sum of losses calculated under SAP and under GAAP for purposes of calculating the loss ratio and loss and loss adjustment expense to the Individual Defendants as "key officers" of AmTrust under the "core operations inference," id. at 19-20; (3) the "obviousness" of the "falsity of AmTrust's consolidated [loss and loss adjustment expense]" because uncovering the disparity "only required summing the [loss and loss adjustment expense] of its subsidiaries," id. at 20; (4) an inference of the Individual Defendants' familiarity with the "key metrics" because they discussed the reports on investor conference calls, id. at 21; (5) AmTrust's correction of an error regarding how it recorded ceding commissions to third-party reinsurers, id. at 21; (6) AmTrust's correction of an error to report the Equalization Reserves as a deferred tax liability rather than a statutory liability, id. at 21-22; and (7) a motive to conceal its actual losses "in order to obtain more than $600 million from a series of debt and equity offerings during the Class Period at lower costs," id. at 22. None of these allegations, individually or collectively, comes close to supporting a strong inference of scienter under established Supreme Court and Second Circuit precedent.
In order adequately to plead scienter on the basis that defendants "knew facts or had access to information suggesting that their public statements were not accurate," plaintiffs "must specifically identify the reports or statements containing this information." Novak, 216 F.3d at 308, 311. "[B]road reference to raw data [that] lacks even an allegation that these data had been collected into reports that demonstrated" the inaccuracy of public statements does not give rise to an inference of scienter. Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 196 (2d Cir. 2008). The Amended Complaint's broad allegations that Defendants "knew" that the aggregate loss and loss adjustment expenses reported to insurance regulators by AmTrust's subsidiaries differed from the loss and loss adjustment expense reported in AmTrust's consolidated financial statements, either because of their review of regular financial reports or their statements on investor calls, lacks the specificity required to plead a securities fraud claim — the Amended Complaint does not allege that the raw data had been collected into reports that demonstrated the difference or that, even if it had, the explanation that SAP reporting is different from GAAP reporting would not have adequately explained the discrepancy. Similarly, the Amended Complaint failed to plead an inference of scienter based on defendants' "fail[ure] to review or check information that they had a duty to monitor" because it failed to "specifically identif[y] ... reports or statements that would have come to light in a reasonable investigation [or] that would have demonstrated the falsity of the allegedly misleading statements." Id. The Amended Complaint identifies no such reports.
Although the Amended Complaint alleges that AmTrust has a "pattern of misclassifying items on its income statement" because AmTrust "reclassified" how it reported commissions for policies ceded to third-party reinsurers, Am. Compl. ¶ 34, a
Finally, the Second Circuit has "consistent rejected as insufficient in securities fraud pleading" allegations that a defendant has fraudulent intent "based on motives possessed by virtually all corporate insiders," Teamsters Local 445, 531 F.3d at 196-97, including "the desire to maintain a high corporate credit rating ... or otherwise sustain the corporate appearance of corporate profitability," and "the desire to maintain a high stock price in order to increase executive compensation,... or prolong the benefits of holding corporate office," Novak, 216 F.3d at 308 (internal citations omitted). Thus, the Amended Complaint's allegations that Defendants were motivated to commit securities fraud because they wanted to maintain the appearance of profitability and access to capital does not suffice to allege scienter.
"Any claim for `control person' liability under § 20(a) of the Exchange Act must be predicated on a primary violation of securities law." Pac. Inv. Mgmt. Co. LLC, 603 F.3d at 161 (citing 15 U.S.C. § 78t(a)). Because Lead Plaintiff has failed to state a
The Amended Complaint fails adequately to allege actionable misstatements or omissions necessary to state claims pursuant to §§ 10(b) and 20(a) of the Exchange Act and § 11 of the Securities Act and fails adequately to allege scienter necessary to state claims pursuant to §§ 10(b) and 20(a). Accordingly, Defendants' motion to dismiss is GRANTED. The Clerk of Court is requested to terminate No. 14-cv-736 and all pending motions therein, and the consolidated action, No. 14-cv-945.
The Court notes that Plaintiffs would do well to familiarize themselves with the adage that "less is more." The Amended Complaint spans 61 pages and has 243 paragraphs. Many of those paragraphs were either irrelevant or merely recycled allegations from earlier paragraphs. Moreover, in responding to Defendants' Motion to Dismiss, Plaintiffs violated Local Civil Rule 11.1(b)(3), which requires memoranda of law to be double spaced, by manipulating the line spacing to fit 27 lines of text per page rather than the standard 23 lines per page. Not satisfied with what amounts to 4 additional pages of briefing (4 lines per page in a 25-page memorandum), Plaintiffs filed a letter on February 3, 2015, intending to serve as a sur-reply. Dkt. 53. The Court denied the request to file a sur-reply and does not consider Plaintiffs' arguments contained therein. Dkt. 55.
In re WorldCom, Inc. Sec. Litig., 352 F.Supp.2d 472, 478 (S.D.N.Y.2005) (quoting Guernsey Mem. Hosp., 514 U.S. at 100, 115 S.Ct. 1232 (alteration in In re WorldCom)).
2012 Annual Report at 29.
17 C.F.R. § 210.4-01(a).
"To plead loss causation, plaintiffs must allege `that the subject of the fraudulent statement or omission was the cause of the actual loss suffered.'" Carpenters Pension Trust Fund of St. Louis v. Barclays PLC, 750 F.3d 227, 232 (2d Cir.2014) (quoting Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 95 (2d Cir.2001)). "They may do so either by alleging (a) `the existence of cause-in-fact on the ground that the market reacted negatively to a corrective disclosure of the fraud;' or (b) that `that the loss was foreseeable and caused by the materialization of the risk concealed by the fraudulent statement.'" Id. at 232-33 (quoting In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501, 511, 513 (2d Cir.2010)).
The Amended Complaint does not allege either type of loss causation with respect to AmTrust's "misclassification" of ceded losses or unreasonable actuarial assumptions. It alleges that the risks of the unreasonable actuarial assumptions will "come home to roost," Am. Compl. ¶¶ 20, 22, but not that they actually have come home to roost. The only actual losses identified in the Amended Complaint occurred between December 12 and 18, 2013, following publication of the GeoInvesting Report, when the share price dropped by $6.63 per share, or 20.2%. See id. ¶¶ 33, 94, 101; see Pl. Mem. at 23-25. There are, however, no facts alleged in the Amended Complaint that tie the Lead Plaintiff's theory of fraud to the share price drop on which it relies to allege loss. Indeed, the Amended Complaint acknowledges that the GeoInvesting Report was "mistaken" about its "hypothesis" that AmTrust made its "losses `disappear' by ceding them to its Luxembourg subsidiaries," but adopts its conclusion that AmTrust underreported its loss and loss adjustment expense. Am. Compl. ¶ 135; see id. ¶ 93 (explaining the "relevant assertions" of the GeoInvesting Report). The Amended Complaint fails to allege any facts to show that the price decline was caused, in whole or in part, by the cherry picked pieces of the report that it contends are true and not the allegations that Lead Plaintiff has cast aside. The GeoInvesting Report is a 17-page dissertation explaining why "short sellers have the winning position in AmTrust Financial Services," Am. Compl. Ex. J at 1; it concludes that "once [its] findings become apparent," AmTrust "will be worth $3.87" per share (at that time, AmTrust was trading at $40.42 per share), id. at 16. Cf. Police & Fire Ret. Sys. of City of Detroit v. SafeNet, Inc., 645 F.Supp.2d 210, 228 (S.D.N.Y.2009) (plaintiffs did not adequately allege loss causation based on a 12-page press release about quarterly results that disclosed two accounting errors unrelated to the alleged stock option backdating fraud and failed to explain "why the disclosure on page eight — as opposed to all the other information in the extended 12-page press release — caused the price decline").
Moreover, the Amended Complaint fails plausibly to allege that the GeoInvesting Report was a corrective disclosure. "A corrective disclosure can be a revelation of a prior statement's falsity or of a material omission, such that the price of a stock declines as the market absorbs the newly revealed information." In re Bristol Myers Squibb Co. Sec. Litig., 586 F.Supp.2d 148, 164 (S.D.N.Y.2008) (citation omitted). "[A] particular disclosure constitutes a sufficient foundation for loss causation allegations only if it somehow reveals to the market that a defendant's prior statements were not entirely true or accurate." In re Take-Two Interactive Sec. Litig., 551 F.Supp.2d 247, 283 (S.D.N.Y.2008) (citation omitted). To be sure, a short seller's report can constitute a corrective disclosure if the report reveals accurate information about a company that exposes actual misstatements by the company. See, e.g., In re Winstar Commc'ns, No. 01-CV-3014(GBD), 2006 WL 473885, at *12-15 (S.D.N.Y. Feb. 27, 2006) (plaintiffs adequately alleged loss causation based on a report by a short seller that the company had insufficient cash flow to fund its operations and would likely default on its credit obligations; the company filed for bankruptcy six weeks later).
Here, however, time has shown that the GeoInvesting Report did not "correct" public knowledge about the company. AmTrust has not restated its financial statements. AmTrust did alter how it recorded its Equalization Reserves at the SEC's suggestion, but that change had no impact on its loss and loss adjustment expense. See Tully Decl. Ex. 1 ("AmTrust 2013 Report") at 75 (explaining reclassifications). Rather than injecting new information into the market that was absorbed into a corrected stock price, the GeoInvesting Report caused a temporary price drop (which presumably resulted in a pecuniary gain for its author). Cf. In re Winstar Commc'ns, 2006 WL 473885, at *14 (observing that the Supreme Court's "paramount concern" in Dura was "the inherent veracity of the information," and that "the exposure of the falsity of the fraudulent representation" is "the critical component of loss causation"); id. at *15 ("Allegations that the market reacted negatively to an opinion or speculation which in fact exposes the falsity of defendants' representations can be sufficient to plead loss causation.").
In sum, the Amended Complaint does not plead sufficient facts to show that the alleged misstatements actually caused the plaintiffs any losses. Cf. Lentell, 396 F.3d at 175 (affirming dismissal of a securities class action because the complaint did not allege "that the market reacted negatively to a corrective disclosure regarding the falsity of" the subject of the defendant's statements (buy/accumulate recommendations regarding a stock that went under) and contained no allegation that the defendant "misstated or omitted [investment] risks that did lead to the loss").
