Goldberger v. Pxre Group Ltd. et al
Filing
71
OPINION AND ORDER:# 97215 For the foregoing reasons, Plaintiffs motion to amend is denied, and Defendants' motions to dismiss are granted. In light of the fact that the PSAC constitutes Plaintiffs fourth attempt at pleading this matter, the dism issal is with prejudice. Accordingly, the motions located at docket numbers 37, 43, and 51 shall be terminated. The Clerk of Court shall enter judgment accordingly and close this case. (Signed by Judge Richard J. Sullivan on 3/4/2009) (jfe) Modified on 3/13/2009 (jab).
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
_____________________ No 06 Civ. 3410 (RJS) _____________________
IN RE PXRE GROUP, LTD., SECURITIES LITIGATION
___________________ OPINION AND ORDER March 4, 2009 ___________________
RICHARD J. SULLIVAN, District Judge: Lead Plaintiff Chad S. Condra ("Plaintiff") brings this putative class action lawsuit against Defendants PXRE Group, Ltd. ("PXRE" or the "Company"), a Bermuda reinsurance corporation, and three of its officers, Jeffrey L. Radke ("Radke"), John M. Modin ("Modin"), and Guy Hengesbaugh ("Hengesbaugh").1 Plaintiff alleges that Defendants engaged in a scheme to understate PXRE's losses arising out of the series of hurricanes that devastated the Gulf Coast in 2005. Plaintiff asserts that this scheme caused injury to himself and to all other purchasers of PXRE stock during the period from September 11, 2005 through February 22, 2006 (the "Class Period"), in violation of
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section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, and section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). Before the Court are Defendants' motions to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure and Plaintiff's motion to amend pursuant to Rule 15(a)(2) of the Federal Rules of Civil Procedure. For the reasons that follow, Defendants' motions are granted and Plaintiff's motion is denied.
The Court will utilize the term "Defendants" to refer to all of the Defendants collectively, and the term "individual Defendants" to refer only to Radke, Modin, and Hengesbaugh.
I. BACKGROUND A. Facts The following facts are taken from the Proposed Second Consolidated Amended Class Action Complaint ("PSAC") submitted by Plaintiff.2 The Court also considers any written instrument attached to the PSAC, statements or documents incorporated into the PSAC by reference, legally required public disclosure documents filed with the Securities and Exchange Commission, and documents upon which Plaintiff relied in bringing the suit. See ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007). The Court assumes all alleged facts to be true for the purpose of deciding the motions before it, and construes all alleged facts in the light most favorable to Plaintiff. See Cleveland v. Caplaw Enters., 448 F.3d 518, 521 (2d Cir. 2006). 1. The Parties Plaintiff purchased shares of PXRE stock during the Class Period, and brings this putative federal class action lawsuit on behalf of all purchasers of PXRE common stock during the Class Period. (PSAC ¶¶ 1, 16.) Plaintiff asserts claims against PXRE and the three individual Defendants, all of whom were officers of PXRE during the time period relevant to this action. (Id. ¶¶ 18-20.) Defendant PXRE was a Bermuda corporation whose stock was publicly traded on the New York Stock Exchange. (Id. ¶¶ 14, 17.) PXRE is a reinsurance company, or an "insurer's insurer," providing insurance coverage both to primary insurers and to other
reinsurance companies. (Id. ¶¶ 17, 27.)3 PXRE provides reinsurance coverage to other property insurance companies (known as "cedents") that have sold policies to homeowners and businesses. (Id. ¶ 27.) By so doing, PXRE assumes the contractual obligations set forth in the cedents' underlying policies, and is bound to cover claims arising from losses occurring under those policies. (Id. ¶¶ 27-28.) Since 1987, PXRE has specialized in offering catastrophe and "risk excess" reinsurance related to, among other events, hurricanes. (Id. ¶¶ 17, 27.) As noted, the three individual Defendants were all officers of PXRE during the relevant time period. Individual Defendant Radke was PXRE's President and Chief Executive Officer. (Id. ¶ 18.) Individual Defendant Modin was PXRE's Executive Vice President and Chief Financial Officer prior to his resignation on January 6, 2006. (Id. ¶ 19.) Individual Defendant Hengesbaugh was PXRE's Chief Operating Officer. (Id. ¶ 20.) Further, all of the individual Defendants were members of PXRE's "Ceded Reinsurance Underwriting Committee," which was allegedly responsible for "[a]ll underwriting decisions." (Id. ¶ 22.) 2. The Alleged Scheme Beginning in August 2005, a series of hurricanes landed on the Gulf Coast. The first, and most devastating, was Hurricane Katrina, which hit the Gulf Coast on August 2 9 , 2005, causing extensive and unprecedented damage to the city of New Orleans and the surrounding region. (See id.
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2
See infra Part III.A.1 (discussing the Court's reliance on the PSAC).
The insurance policies that one reinsurer buys from another reinsurer to spread more widely the risk are called "retrocessional" insurance policies. (PSAC ¶ 27.)
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¶¶ 32-33.) Much of the damage was caused by the fact that Hurricane Katrina resulted in a "storm surge," which overtopped the levees designed to protect New Orleans, culminating in the flooding of water from the Mississippi River into the city of New Orleans. (Id. ¶ 33.) As a result of the broken levees, river water submerged over eighty percent of New Orleans. (Id.) More than 1,800 people lost their lives in the wake of the storm, making Hurricane Katrina the deadliest United States hurricane since 1928. (Id. ¶ 32.) Soon after, on September 24, 2005, Hurricane Rita arrived, "causing billions of dollars in damages along the Texas-Louisiana border." (Id. ¶ 34.) Finally, on October 23, 2005, Hurricane Wilma struck the Gulf of Mexico, killing at least sixty-three people and causing billions of dollars in damages to affected areas, including the Gulf Coast. (Id.) Through its reinsurance policies, PXRE "had exposure" for all three storms, with Hurricane Katrina providing the "largest exposure." (Id. ¶ 35.) According to Plaintiff, PXRE, as a reinsurance company, was obligated to estimate losses arising from claims covered by its cedents' policies once any catastrophic event like Hurricane Katrina occurred. (Id. ¶ 29.) These loss estimates had to be prepared "even before actual claims were filed and processed." (Id.) Plaintiff asserts that such loss estimates were "closely watched" by rating agencies such as A.M. Best and Standard & Poor's, which issue ratings based on evaluations of whether a company has sufficient capital relative to potential claims and liabilities to support the sale of new policies. (Id. ¶ 30.) Plaintiff claims that "it was imperative that PXRE maintain a rating of A- or higher from the insurance rating agencies," because if PXRE's rating fell 3
below A-, cedents were contractually bound not to purchase reinsurance policies from PXRE, and were also contractually entitled to cancel their reinsurance policies with PXRE. (Id. ¶ 31.) In other words, "[a]ny downgrades below A- would essentially put [PXRE] out of business." (Id. ¶ 75.) Plaintiff further alleges that, "[a]t the outset of the Class Period, PXRE was especially vulnerable to a ratings downgrade," due to the exhaustion of PXRE's own retrocessional insurance policies4 and due to the fact that PXRE's capital surplus was low relative to the initial estimates of the losses incurred by Hurricane Katrina. (Id. ¶¶ 74, 76.) "If PXRE's reported loss estimates from Katrina were too high relative to its capital surplus, [its] ability to pay claims would be deemed at risk, likely resulting in a ratings downgrade." (Id. ¶ 75.) Plaintiff posits that because of this pressure to maintain an A- credit rating and to raise capital, "Defendants were motivated to materially understate PXRE's estimate of losses, as well as engage in a string of offerings to raise cash, which they did throughout the Class Period." (Id. ¶ 77.) In essence, Plaintiff alleges that the loss estimate reports created by PXRE in the wake of the three hurricanes that hit the Gulf Coast in 2005 were prepared in a reckless and/or willfully deceptive manner; that, as a result, the loss estimates issued in a series of press releases and public documents were false and misleading; and that Defendants disseminated these false and misleading reports with the intention of deceiving insurance rating agencies and investors as to the true extent of PXRE's losses arising from the three hurricanes.
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See supra note 3.
Below, the Court details the factual allegations from the PSAC involving (1) the preparation of the loss estimate reports, and (2) the allegedly false and misleading statements issued during the Class Period. i. The Preparation of the Loss Estimate Reports Based on information allegedly provided by confidential informant ("CI") #2, PXRE's Vice President in charge of risk modeling,5 Plaintiff alleges that PXRE's loss estimate reports were prepared by a team consisting of Radke, Hengesbaugh, Modin, and James Matusiak ("Matusiak"), PXRE's "Chief Actuary." (Id. ¶ 40.) Plaintiff further alleges that the losses were estimated on the basis of (1) "top down" computer modeling, whereby PXRE used software designed by outside risk modelers, as well as its own "proprietary software," to generate an estimate of PXRE's losses in relation to industry-wide losses; and (2) a "ground-up" contract-by-contract analysis of reinsurance contracts held by PXRE, whereby its underwriters would examine PXRE's own contracts in order to determine the extent of PXRE's exposure to losses. (Id. ¶ 41.) According to CI #2, i n d i v i d u a l Defendants Radke and Hengesbaugh allegedly "had the most influence over the final loss estimate figures and had the final say on the estimates that were disseminated to the public." (Id. ¶ 40.) a. PXRE's "Top-Down" Modeling In regard to the "top-down" analysis conducted by PXRE following Hurricane Katrina, Plaintiff asserts that PXRE's estimates "were based in part on industrywide projections of $30-$40 billion of insured
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losses arising from the Katrina catastrophe." (Id. ¶ 93.) However, Plaintiff alleges that in utilizing this industry-wide loss projection, Defendants "ignored the much higher estimates [of $40 billion to $60 billion in losses] published by [one modeling agency called Risk Management Solutions, Inc. (`RMS')] . . . a well-respected catastrophe modeler." (Id.) According to the PSAC, RMS allegedly included in its industry-wide loss projections "a significant amount of damages from commercial and covered residential flooding in New Orleans." (Id.)6 Specifically, RMS estimated that "river flooding in New Orleans" was likely to result in $15 billion to $25 billion of those losses. (Id. ¶ 37 (emphasis in original).) The PSAC does not specifically allege that PXRE's computer modeling system failed to account for commercial flooding in New Orleans. However, Plaintiff does assert, on the basis of information purportedly obtained from CI #2, that PXRE's "modeling system" had two specific flaws. (See id. ¶¶ 43-44.) First, Plaintiff claims that PXRE's proprietary software, as well as the software previously purchased by PXRE from outside risk modelers, was only capable of calculating losses due to ocean flooding, and was incapable of calculating losses incurred by river flooding. (Id. ¶ 43.) Second, Plaintiff asserts that PXRE's loss modeling system
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Commercial property insurance contracts may cover damages for flooding. (PSAC ¶ 38.) Most residential property insurance contracts do not cover damages for flooding. (Id.) However, even if residential or commercial property owners lack coverage for flooding, both may purchase additional flood insurance. (Id.) Plaintiff refers to "covered residential flooding" to signify homeowners who purchased this additional flood insurance. (Id.)
See infra Part III.A.2 (describing CI #2 in full).
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was "unreliable once loss estimates [arising from a storm] exceeded $35 billion, since the hurricanes [below] that threshold were fundamentally different from Katrina's trajectory and thus not predictive of the storm." (Id. ¶ 44.) Plaintiff alleges that this second flaw "effectively capped PXRE's estimate of industry losses at the $35 billion range." (Id.) b. PXRE's "Ground-Up" Contract-ByContract Analysis In regard to PXRE's "ground-up" contract-by-contract analysis following Hurricane Katrina, Plaintiff alleges that, according to CI #2, PXRE's underwriters calculated loss estimates for each contract and r e p o r t e d those estimates to either Hengesbaugh, Radke, and/or Modin at both informal and formal meetings held in PXRE's Bermuda office. (Id. ¶ 42.) Plaintiff alleges that, although CI #2 neither participated in nor was "present" at these meetings, he "often heard the discussions that occurred" because the Bermuda office had an open floor plan and CI #2's desk was "right near the location of the meetings." (Id.) Based on CI #2's knowledge of these meetings, Plaintiff asserts that individual Defendants "Radke and Hengesbaugh exerted the most influence over the determination of the loss estimates." (Id.) In addition, Plaintiff asserts that the "ground-up" contract-by-contract analysis conducted by PXRE failed to correct one of the flaws in PXRE's "top-down" modeling system -- namely, the alleged lack of consideration given to PXRE's losses arising from "river flooding" in New Orleans. (Id. ¶ 45.) Therefore, although CI #2 "fully a n t i c i p a t e d that significant upward adjustments would be made" to the "topdown" loss estimates prepared by PXRE's 5
underwriters, the publicly available loss estimates "`closely matched the reports'" prepared by the top-down modeling system. (Id. (quoting CI #2).) Plaintiff alleges that the defects in both PXRE's "ground-up" and "top-down" loss estimate reports were responsible for PXRE's inability "to account for the $15-$25 billion of industry wide commercial (and covered residential) flooding losses triggered by the breached levees in New Orleans." (Id. ¶ 46.) ii. The Allegedly False and Misleading Statements Issued During the Class Period During the Class Period, Plaintiff alleges that PXRE, relying on its loss estimate reports, made several false statements before and after engaging in a string of offerings to raise cash. a. The September 11, 2005 Press Release On September 11, 2005, within two weeks of Hurricane Katrina's arrival on the Gulf Coast, PXRE issued a press release (the "September 11 release") indicating that its preliminary estimate of net losses7 arising from Hurricane Katrina was approximately $235 million, and that PXRE calculated this estimate, at least in part, on the basis of industry-wide loss estimates of $30 billion to $35 billion. (Id. ¶ 47.) According to the PSAC, PXRE stated that it expected to report a net operating loss of $85 million to $100
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The PSAC defines "net loss" as "the Company's coverage obligations after adjustments for tax, reinsurance recoveries on its outwards reinsurance program and the impact of inwards and outwards reinstatement and additional premiums." (PSAC ¶ 47 n.2.)
million for 2005. (Id. ¶ 48.)8 PXRE indicated in the September 11 release that it calculated the preliminary estimate of its net loss from Hurricane Katrina on the basis of "extensive modeling, a ground-up review of all exposed r e i n s u r a n c e contracts and numerous discussions with PXRE's clients." (Id. ¶ 50.) Also in the September 11 release, individual Defendant Radke was quoted as stating, in relevant part, "[w]e expect that the unprecedented industry losses arising from Hurricane Katrina . . . are likely to have a significant impact on reinsurance pricing, . . . and we believe that we are well positioned to take advantage of the opportunities that are likely to present themselves in the wake of Hurricane Katrina." (Id. ¶ 49.) The September 11 release also included the following cautionary language that was not quoted in the PSAC: It is difficult . . . to accurately estimate losses in the immediate aftermath of any major catastrophe. The unique circumstances of Hurricane Katrina, including the unprecedented flooding, limited access by claims adjustors and the potential legal and regulatory issues, add even more uncertainty to the normal difficulties of estimating catastrophe losses. PXRE will continue to monitor the situation and provide updates if its current estimate changes materially.
(Anderson Aff. Ex. C (the September 11 release); see PSAC ¶¶ 49-50 (quoting the September 11 release).)9 Plaintiff alleges that, as a result of Defendants' statements, the insurance rating agency A.M. Best gave PXRE a rating of "A" with "negative implications." (PSAC ¶ 52.) Plaintiff also claims that PXRE announced on September 15, 2005, "a shelf registration of up to $300,000,000 of debt securities, common shares, preferred shares, depositary shares, warrants, and trust preferred securities." (Id. ¶ 53.) b. The September 19, 2005 Press Release On September 19, 2005, PXRE issued a second press release (the "September 19 release"), updating its preliminary loss estimates for Hurricane Katrina. (Id. ¶ 54.) This new loss adjustment was based in part on a revised estimate of industry-wide losses of $30 billion to $40 billion, an increase from the previous industry-wide loss estimate of $30 billion to $35 billion. (Id. ¶ 55.) The
The Court takes judicial notice of the entirety of the press releases issued by PXRE on September 11, 2005, September 19, 2005, September 28, 2005, and October 27, 2005, on the ground that each is partially quoted in the PSAC, and "integral" to Plaintiff's claims. See, e.g., San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 80809 (2d Cir. 1996); Int'l Audiotext Network, Inc. v. Am. Tel. & Tel. Co., 62 F.3d 69, 72 (2d Cir. 1995); Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d Cir. 1991). Further, there is no dispute regarding the authenticity, accuracy, or relevance of these press releases. Cf. Faulkner v. Beer, 463 F.3d 130, 134 (2d Cir. 2006) (noting that consideration of materials outside the complaint is permissible on a 12(b)(6) motion if the documents are integral to the complaint, it is clear on the record that no dispute exists regarding the authenticity or accuracy of the document, and the relevance of the document is undisputed).
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The Court notes that the PSAC makes use of at least three distinct preliminary estimates of "net loss" figures: (1) the net loss directly incurred as a result of one or more of the three hurricanes; (2) the net loss for the third quarter of 2005; and (3) the net loss for the entire year 2005.
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updated loss estimates also indicated that PXRE would suffer a net loss from Hurricane Katrina in the range of $235 million to $300 million, resulting in an expected net operating loss of up to $165 million for 2005. (Id. ¶ 54.)10 As with the September 11 release, the September 19 release indicated that the updated preliminary estimate was "based on extensive modeling, a ground-up review of all exposed reinsurance contracts and numerous discussions with PXRE's clients." (Id. ¶ 56.) The September 19 release also included cautionary language similar to the language found in the September 11 release: It is difficult . . . to accurately estimate losses in the immediate aftermath of any major catastrophe. Moreover, the unique circumstances of Hurricane Katrina, including the unprecedented level of flooding and limited access by claims adjustors, make our estimates subject to a higher level of uncertainty than normal. In addition, further uncertainty is created by potential legal and regulatory issues . . . . To date, the Company has only received a limited number of written loss notices. PXRE will continue to monitor the situation and provide additional updates as necessary.
(Anderson Aff. Ex. D (the September 19 release); see PSAC ¶ 56 (quoting the September 19 release).) On September 23, 2005, A.M. Best issued a report regarding PXRE, indicating that: Further catastrophe losses in the short term may expedite A.M. Best's review and potentially result in a ratings downgrade. A.M. Best will continue to hold discussions with PXRE's management in order to assess the company's risk management capabilities and to reevaluate the level of capital necessary to support PXRE's profile. (PSAC ¶ 58.) c. The September 28, 2005 Press Release Hurricane Rita made landfall on September 24, 2005. (Id. ¶ 59.) On September 28, 2005, PXRE issued a third press release (the "September 28 release"), indicating that its preliminary estimate of net losses arising from Hurricane Rita was in the range of $30 million to $40 million. (Id.) This raised PXRE's total expected net loss for the third quarter to the range of $230 million to $320 million. (Id.) PXRE also stated that it expected to report a net operating loss of $125 million to $200 million for 2005. (Id.) Like the two earlier press releases, the September 28 release contained language explaining PXRE's reliance on "modeling and a review of all exposed reinsurance contracts" (id. ¶ 60), as well as cautionary language warning, inter alia, that "the ultimate impact of losses from Hurricane Katrina and Hurricane Rita on the Company's results of operations might . . . differ substantially from 7
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Specifically, according to the September 19 release, PXRE announced that it expected to incur a net operating loss within the range of $85 million to $165 million for 2005. (Anderson Aff. Ex. D (the September 19 release); see PSAC ¶ 56 (quoting the September 19 release).)
the Company's current estimates." (Anderson Aff. Ex. E (the September 28 release); see PSAC ¶ 60 (quoting the September 28 release).) In response to these increased estimates, on September 30, 2005, A.M. Best and Standard & Poor's downgraded PXRE to a rating of "A-" with "negative implications." (PSAC ¶ 62.) On that same day, Defendants announced that PXRE intended to make a public offering of approximately $100 million of its common shares, and that it had agreed to sell $375 million of its series D perpetual preferred shares in a private placement. (Id. ¶ 63.) PXRE announced that it had completed both of these sales on October 7, 2005. (Id. ¶ 64.) d. The October 17, 2005 Proxy Statement On October 17, 2005, PXRE filed a Proxy S t a t e m e n t (the "October 17 Proxy Statement") calling for a Special General Meeting of Shareholders, at which it would seek shareholder approval of a proposal to convert the perpetual D shares recently offered by PXRE into regular common stock. (Id. ¶ 65.) The October 17 Proxy Statement also reiterated some of the statements made in the September 19 release. (See id. ¶¶ 65-66.) Specifically, it stated that on September 19, 2005, PXRE had increased its earlier loss estimates due to the net impact of Hurricane Katrina to the range of $235 million to $300 million. (Id. ¶ 65.) The October 17 Proxy Statement also noted that "losses from Hurricane Katrina will materially negatively impact third quarter financial results and shareholders' equity and PXRE Group expects to have a net loss for calendar 2005." (Id.) As with the previous press releases, the October 17 Proxy Statement also noted that the "estimates were based mainly on 8
modeling, a review of exposed reinsurance contracts and discussions with certain clients." (Id. ¶ 66.) e. The October 27, 2005 Press Release On October 27, 2005, PXRE issued a fourth press release (the "October 27 release"), announcing results for the third quarter ending September 30, 2005. (Id. ¶ 68.) This announcement included revised loss estimates for Hurricane Katrina and Hurricane Rita. (Id.) Specifically, PXRE announced that the Company incurred net losses of approximately $349.9 million from the storms. (Id.) Of those losses, $330 million was attributable to Hurricane Katrina. (Id.) This raised PXRE's total expected net losses to $317.311 million. (Id.)12 In the October 27 release, individual Defendant Radke was quoted as saying: Hurricanes Katrina and Rita will make the third quarter of 2005 the most costly quarter in history for the reinsurance industry in terms of insured catastrophe loss. PXRE's loss for the quarter is correspondingly l a r g e but the storms again demonstrated the strength of PXRE's risk management, as our losses were
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In the PSAC, Plaintiff alleges that PXRE raised its expected net loss to $317.3 million. (PSAC ¶ 17.) However, the October 27 release indicates that the amount was $317.4 million. (See Anderson Aff. Ex. H (the October 27 release); see PSAC ¶ 69 (quoting the October 27 release).) Although the PSAC is not specific, the October 27 release itself makes clear that the $317.4 million figure refers to an estimate of net losses for the third quarter 2005. (See Anderson Aff. Ex. H (the October 27 release); see PSAC ¶ 69 (quoting the October 27 release).)
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within our expectations for such major events. . . . . The strategic market position we have earned over the past 23 years through our dedication to customer service and prompt claims payment gives us confidence in our ability to thrive in the wake of Hurricanes Katrina and Rita, and recent feedback from c o m m u n i c a t i o n s with brokers validates that confidence. Indeed, our recent success in raising $474 million of equity capital reflects investors' belief in the strength of PXRE's franchise, which flows from our focused strategy and proven risk management. (Anderson Aff. Ex. H (the October 27 release); see PSAC ¶ 69 (quoting the October 27 release).) The October 27 release also stated that "[g]iven the current uncertainty of the net impact of Hurricane Wilma on the Company's fourth quarter results, PXRE has withdrawn its previously disclosed guidance for the year and will not be providing revised guidance for 2005 at this time." (Anderson Aff. Ex. H (the October 27 release).) f. The Form 10-Q On October 28, 2005, PXRE filed its quarterly report on Form 10-Q with the Securities and Exchange Commission (the "Form" or the "Form 10-Q"). (PSAC ¶ 70.)13
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P l a i n t i ff characterizes this Form as "reaffirm[ing] the Company's previously announced financial results." (Id.) Plaintiff also quotes Defendants as making the following statement in the Form 10-Q: "Accordingly, our estimates of the ultimate liability for gross loss . . . arising from Hurricanes Katrina and Rita of $577.2 million is based mainly on modeling, a review of exposed reinsurance contracts and discussions with numerous clients." (Id.)14 The Form 10-Q also contained the following language, not quoted by Plaintiff in the PSAC: [I]n establishing our best estimate of liability for loss and loss expenses relating to Hurricanes Katrina and Rita, we have made several complex and subjective assumptions and judgments. For example, we have assumed that the industry-wide insured loses from Hurricane Katrina
SEC . . . ." Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000) (citing Cosmas v. Hassett, 886 F.2d 8, 13 (2d Cir. 1989)). Here, the Form 10-Q is indisputably a "public disclosure document[] required by law to be . . . filed with the SEC . . . ." Id. Moreover, the PSAC incorporates the Form 10-Q by quoting certain portions thereof (see PSAC ¶ 70), and consideration of the "full text" of the Form 10-Q is appropriate because the document is "integral" to the claims set forth in the PSAC. See supra note 9 (providing support for this proposition of law). Further, there is no dispute regarding the authenticity, accuracy, or relevance of the Form 10-Q. See id.
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The Court takes judicial notice of the entire Form 10-Q. (See Anderson Aff. Ex. B (the Form 10-Q).) In considering a motion to dismiss under Rule 12(b)(6), the Court may take judicial notice of "any statements or documents incorporated in [the complaint] by reference, as well as public disclosure documents required by law to be, and that have been, filed with the
The Court notes that the $577.2 million figure quoted from the Form 10-Q refers to PXRE's estimate of gross losses. (See Anderson Aff. Ex. B (the Form 10-Q) at 36; see PSAC ¶ 70 (quoting the Form 10-Q).) The figures released in PXRE's press releases, as noted, refer to PXRE's estimate of net losses. Although Plaintiff defines net loss in the PSAC, see supra note 7, Plaintiff fails to define gross loss.
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will be approximately $30.0 billion to $40.0 billion, and those from Hurricane Rita will be approximately $2.5 billion to $6.0 billion. A variety of industry sources have published estimates for these events. AIR Worldwide and Risk Management Solutions are two of the leading firms that develop and sell probabilistic catastrophe modeling technology. AIR Worldwide has estimated that industry-wide insured losses for Katrina will be approximately $34.0 billion and for Rita will be approximately $4.0 billion to $5.5 billion. Risk Management Solutions have estimated industry-wide insured losses are approximately $40.0 billion to $60.0 billion for Hurricane Katrina and $3.0 billion to $5.0 billion for Hurricane Rita. Lastly, ISO's Property Claim Services unit has estimated that insured losses for Hurricane Katrina will be approximately $34.4 billion. (Anderson Aff. Ex. B (the Form 10-Q) at 37; see PSAC ¶ 70 (quoting the Form 10-Q).)15
On November 23, 2005, PXRE announced that it had filed a shelf registration statement for a proposed offering of up to $700 million of its securities. (PSAC ¶ 73.) 3. PXRE's Subsequent Disclosure of the Full Extent of its Losses Plaintiff alleges that, according to CI #2, "prior to January 2006," PXRE began to receive loss notices from its cedents indicating that PXRE's loss estimates for Hurricane Katrina were "far too low." (Id. ¶ 91.) Additionally, Plaintiff alleges that CI #2 "recalls that `by January, we were assembling year-end numbers . . . and there was anxiety at the company [because] the numbers were bigger than reported.'" (Id. (quoting CI #2) (alterations in original).) Plaintiff also alleges that "the cause of the increase in losses stemmed in large part from the Company's exclusion of river flooding from New Orleans." (Id.) On February 16, 2006, PXRE issued a press release (the "February 16 release"), partially disclosing the full extent of its losses from Hurricanes Katrina, Rita, and Wilma. (Id. ¶ 103.) Specifically, PXRE raised its loss estimates for all three storms to the range of $758 million to $788 million, up from the range of $425 million to $440 million. (Id.) PXRE also reported a net loss of $446.5 million. (Id. ¶ 104.) As a result of these d i s c l o s u r e s , A.M. Best immediately downgraded PXRE's rating to B++. (Id. ¶ 105.) On February 17, 2006, PXRE shares fell 66% "on extraordinarily high trading volume." (Id. ¶ 106.) On February 20, 2006, Standard & Poor's downgraded PXRE's debt to BBB+. (Id. ¶ 107.) On February 22, 2006, PXRE raised its loss estimates for Hurricanes Katrina, Rita, 10
On November 9, 2005, PXRE issued a fourth press release (the "November 9 release"), indicating that its preliminary estimate of net losses arising from Hurricane Wilma was between $75 million and $90 million, and that PXRE calculated this estimate based in part on industry-wide loss estimates of $14.5 billion for Hurricane Wilma. (See PSAC ¶ 72.) PXRE also indicated in the November 9 release that it incurred an estimated $425 million to $440 million in total losses from all three hurricanes. (Id.) Plaintiff does not allege that the statements contained in the November 9 release are false and misleading, as he does for the September 11 release, the September 19 release, the September 28 release, the October 17 Proxy Statement, the October 27 release, and the Form 10-Q. (See id. ¶¶ 51, 57, 61, 67, 71.)
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and Wilma to $807 million, and announced that, as a result of these losses, it had an accumulated deficit of $527.3 million. (Id. ¶¶ 108, 110.) In a teleconference with analysts the same day, individual Defendant Radke "identified `un-modeled commercial flood damages' as a reason for the increased estimates." (Id. ¶ 109.) Following this news, A.M. Best downgraded PXRE's credit rating to B+ and Standard & Poor's downgraded PXRE to BBB-. (Id. ¶ 111.) PXRE shares a g a i n fell, this time by 6%, "on extraordinarily high trading volume." (Id. ¶ 112.) On April 11, 2006, PXRE announced that it had requested that the major credit rating agencies withdraw their ratings for PXRE and its operating subsidiaries. (Id. ¶ 113.) On April 18, 2006, individual Defendant Hengesbaugh left PXRE, "triggering the golden parachute he negotiated in December, 2005." (Id. ¶ 114.) By August 8, 2006, PXRE announced that it had ceased writing new policies, and that 82% of its contracts had been canceled by clients as a result of its rating downgrade below A-. (Id. ¶ 115.) On May 8, 2007, PXRE announced that it would be merging with Argonaut Group. (Id. ¶ 116.) On August 7, 2007, PXRE merged with Argonaut Group, and the combined entities now conduct business as Argo Group International Holdings, Ltd. (Id. ¶ 17 n.1.) B. Procedural History The initial Complaint against Defendants was filed on May 3, 2006.16 Thereafter, three additional putative class action lawsuits were
filed in this District.17 On May 15, 2006, the initial case was reassigned from the Honorable Shirley Wohl Kram, District Judge, to the Honorable Kenneth M. Karas, District Judge. By Order dated March 30, 2007, Judge Karas appointed Chad S. Condra as lead plaintiff, appointed Condra's counsel as lead counsel, and consolidated these cases under the caption "In re PXRE Group, Ltd. Securities Litigation." On September 4, 2007, the case was reassigned to the undersigned. On June 15, 2007, Plaintiff filed the Consolidated Amended Class Action Complaint ("CAC"). Defendants filed their motion to dismiss and a memorandum in support of that motion on August 15, 2007 ("Defs.' Mem."). Individual Defendant Hengesbaugh filed a separate memorandum in support of his own motion to dismiss on September 12, 2007 ("Hengesbaugh Mem."). On October 15, 2007, Plaintiff submitted the PSAC and filed a cross-motion to amend the CAC, as well as a memorandum in support of his motion to amend and in opposition to Defendants' motions to dismiss ("Pl.'s Mem."). On November 16, 2007, Defendants filed their Reply memorandum in support of their motions to dismiss and in opposition to Plaintiff's motion to amend ("Defs.' Reply"). On November 28, 2007, Plaintiff filed his Reply memorandum in opposition to Defendants' motions and in support of his own ("Pl.'s Reply"). The Court heard oral argument on the pending motions on May 15, 2008 ("Oral Argument").
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16
This Complaint was docketed as No. 06 Civ. 3410.
The Complaint in No. 06 Civ. 3440 was filed on May 4, 2006, the Complaint in No. 06 Civ. 3544 was filed on May 10, 2006, and the Complaint in No. 06 Civ. 4638 was filed on June 16, 2006.
11
II. LEGAL STANDARDS A. Motion to Dismiss On a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, the Court must accept as true all of the factual allegations in the Complaint and draw all reasonable inferences in Plaintiff's favor. ATSI Commc'ns, 493 F.3d at 98; Grandon v. Merrill Lynch & Co., 147 F.3d 184, 188 (2d Cir. 1998). Nonetheless, "[f]actual allegations must be enough to raise a right of relief above the speculative level, on the assumption that all of the allegations in the complaint are true." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (citation omitted). Ultimately, the Plaintiff must allege "enough facts to state a claim to relief that is plausible on its face." Id. at 570. The PSAC must therefore satisfy "a flexible `plausibility standard,' which obliges a pleader to amplify a claim with some factual allegations in those contexts where such amplification is needed to render the claim plausible." Iqbal v. Hasty, 490 F.3d 143, 157-58 (2d Cir. 2007). If Plaintiff "ha[s] not nudged [his] claims across the line from conceivable to plausible, [his] complaint must be dismissed." Twombly, 550 U.S. at 570. B. Motion to Amend Rule 15(a) of the Federal Rules of Civil Procedure permits a party to amend its pleadings by leave of the court, and further directs that "[t]he court should freely give leave when justice so requires." Fed. R. Civ. P. 15(a). "In the absence of any apparent or declared reason -- such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of 12
allowance of the amendment, futility of amendment, etc. -- the leave sought should, as the rules require, be `freely given.'" Foman v. Davis, 371 U.S. 178, 182 (1962); accord McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 200-02 (2d Cir. 2007). Here, Defendants do not argue that they would be unduly prejudiced by permitting the amendments or that there was undue delay by Plaintiff in seeking leave to amend. Rather, Defendants oppose the proposed amendments solely on the ground that such amendments would be futile. (See, e.g., Defs.' Reply at 5.) "An amendment to a pleading is futile if the proposed claim could not withstand a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6)." Lucente v. Int'l Bus. Machines Corp., 310 F.3d 243, 258 (2d Cir. 2002) (citing Dougherty v. N. Hempstead Bd. of Zoning Appeals, 282 F.3d 83, 88 (2d Cir. 2002)); see also Chill v. Gen. Elec. Co., 101 F.3d 263, 272 (2d Cir. 1996) (noting that "futility is a `good reason' to deny leave to amend"); Ricciuti v. N.Y.C. Transit Auth., 941 F.2d 119, 123 (2d Cir. 1991) ("When the plaintiff has submitted a proposed amended complaint, the district judge may review that pleading for adequacy and need not allow its filing if it does not state a claim upon which relief can be granted."). Accordingly, the Rule 12(b)(6) standard applies both to Defendants' motions to dismiss as well as to Plaintiff's cross-motion to amend. C. Securities Fraud "Securities fraud claims are subject to heightened pleading requirements that the plaintiff must meet to survive a motion to dismiss." ATSI Commc'ns, 493 F.3d at 99. The heightened pleading requirements are set forth in Rule 9(b) of the Federal Rules of Civil Procedure and the Private Securities
Litigation Reform Act (the "PSLRA"), 15 U.S.C. § 78u-4(b). 1. Rule 9(b) While the rules of pleading in federal court usually require only "a short and plain statement" of the plaintiff's claim for relief, Fed. R. Civ. P. 8, averments of fraud must be "state[d] with particularity," Fed. R. Civ. P. 9(b). See ATSI Commc'ns, 493 F.3d at 99. "This pleading constraint serves to provide a defendant with fair notice of a plaintiff's claim, safeguard his reputation from improvident charges of wrongdoing, and protect him against strike suits." Id. (citing Rombach v. Chang, 355 F.3d 164, 171 (2d Cir. 2004)). Thus, in order to satisfy Rule 9(b), the plaintiff must: "(1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent." Rombach, 355 F.3d at 170 (internal quotation marks and citation omitted); see also ATSI Commc'ns, 493 F.3d at 99. "Allegations that are conclusory or unsupported by factual assertions are insufficient." ATSI Commc'ns, 493 F.3d at 99. 2. PSLRA In the context of securities fraud allegations, the PSLRA has expanded on Rule 9(b)'s pleading requirements. See 15 U.S.C. § 78u-4(b). "The statute insists that securities fraud complaints `specify' each misleading statement; that they set forth the facts `on which [a] belief' that a statement is misleading was `formed'; and that they `state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.'" Dura Pharms., Inc. 13
v. Broudo, 544 U.S. 336, 345 (2005) (quoting 15 U.S.C. §§ 78u-4(b)(1), (2)). "Therefore, `[w]hile we normally draw reasonable inferences in the non-movant's favor on a motion to dismiss,' the PSLRA `establishes a more stringent rule for inferences involving scienter' because the PSLRA requires particular allegations giving rise to a strong inference of scienter." ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir. 2009) (quoting Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190, 194 (2d Cir. 2008)) (alteration in original). III. DISCUSSION A. The PSAC 1. The Relevance of the CAC As an initial matter, the Court identifies the pleading that will be the subject of this decision. In responding to Defendants' motion to dismiss the CAC, Plaintiff has abandoned his initial pleading, indicating that he "will defend the sufficiency of the [PSAC] rather tha[n] the initial [CAC]," and crossmoved for leave to file the PSAC. (Pl.'s Mem. at 1.) Accordingly, the Court will evaluate the viability of Plaintiff's claims as set forth in the PSAC, not the CAC. Moreover, in evaluating Defendants' motion, the Court declines to rely upon facts alleged in the initial CAC and omitted from the PSAC, but which Defendants nevertheless deem relevant to their motion. Defendants correctly point out the Second Circuit's holding that "[t]he amendment of a pleading does not make it any the less an admission of the party." Andrews v. Metro N. Commuter R.R. Co., 882 F.2d 705, 707 (2d Cir. 1989)
(citing, inter alia, United States v. McKeon, 738 F.2d 26, 31 (2d Cir. 1984)). However, the Second Circuit formulated that rule in the context of a district court's refusal to admit a prior, inconsistent pleading as evidence at trial, finding "that the district court's refusal to permit the jurors to be informed of the amendment [of the complaint] and to examine the original complaint so that they could contrast it with the amended complaint was a substantial abuse of discretion." Id.; see also id. (holding that the plaintiff "cannot advance one version of the facts in [his] pleadings, conclude that [his] interests would be better served by a different version, and amend [his] pleadings to incorporate that version, safe in the belief that the trier of fact will never learn of the change in stories" (alterations in original) (internal citation and quotation marks omitted)). Defendants have failed to present any persuasive authority that a similar rule should apply upon consideration of a motion to dismiss, where the Court is obliged to evaluate the sufficiency of the pleading itself, as well as any materials attached thereto or within the scope of judicial notice. Defendants cite one district court decision where the court, citing Andrews, concluded that "[a]dmissions in earlier complaints remain binding when a plaintiff files subsequent pleadings." Sulton v. Wright, 265 F. Supp. 2d 292, 295 (S.D.N.Y. 2003). However, the court in Sulton failed to explain why the Second Circuit's ruling in Andrews regarding the admissibility of prior pleadings as evidence at trial -- where the jury is charged with resolving disputed issues of fact -- bound the plaintiff to the facts alleged in his prior pleading at the motion to dismiss stage -- where the court is required to accept as true the facts alleged in the version of the
pleading before the Court. 448 F.3d at 521.
See Cleveland,
Rather, to adopt the approach urged by Defendants runs contrary to the Federal Rules' pronouncements that leave to file amended pleadings shall be freely given, see Fed. R. Civ. P. 15(a), and that "[a] party may state as many separate claims or defenses as it has, regardless of consistency," Fed. R. Civ. P. 8(d)(3). See In re Parmalat Sec. Litig., 421 F. Supp. 2d 703, 713 (S.D.N.Y. 2006) ("While prior inconsistent pleadings normally are admissible against a party, they ordinarily a r e `controvertible, not conclusive' admissions."); accord The Limited, Inc. v. McCrory Corp., 683 F. Supp. 387, 395 n.5 (S.D.N.Y. 1988). As another district court has noted: It is not uncommon for litigants to amend pleadings in response to deficiencies pointed out by an adversary or even by the Court, either before a dispositive motion is filed or in response to a ruling on a motion that grants leave to replead and offers specific guidance as to how any flaws in the pleadings may be cured to survive dismissal. . . . Not surprisingly, some later pleadings made in this context necessarily may be at odds with allegations the party asserted in the original pleadings. It would be a harsh rule of law indeed if a litigant were to change a statement in an amended pleading to repair a weakness cited by an adversary or by the Court, only to have the case dismissed because the conforming change in some way may conflict with an allegation in the earlier pleadings.
14
Streit v. Bushnell, 424 F. Supp. 2d 633, 639 n.4 (S.D.N.Y. 2006). The Court therefore looks to the PSAC as the legally operative pleading for purposes of Defendants' motion to dismiss. 2. The Confidential Informants In the PSAC, Plaintiff relies, at least in part, on information allegedly obtained from four confidential informants ("CI"). (See PSAC ¶¶ 23-26.) CI #1 was allegedly an underwriter at PXRE during the Class Period who "reported to [individual] [D]efendant Hengesbaugh" and left the Company in April 2006. (Id. ¶ 23.) CI #2 allegedly served as PXRE's Vice President "in charge of . . . risk modeling" from 1999 to mid-2006, and, in that role, was "directly involved in preparing loss estimates for Katrina." (Id. ¶ 24.) CI #2 "routinely communicated with PXRE's underwriters and its Chief Actuary" and "sometimes overheard conversations between the [i]ndividual Defendants, the Chief Actuary, and in-house underwriters due to PXRE's open floor plan." (Id.) CI #3 is allegedly the "Chief Actuary of a reinsurance company" that, according to Plaintiff, is a "peer" company of PXRE. (Id. ¶¶ 25, 95.) CI #4 was allegedly an underwriter and Vice President of international operations at PXRE during the Class Period, before leaving the Company in May 2007. (Id. ¶ 26.) The Second Circuit has held that "where plaintiffs rely on confidential personal sources but also on other facts, they need not name their sources as long as the latter facts provide an adequate basis for believing that the defendants' statements were false." Novak v. Kasaks, 216 F.3d 300, 314 (2d Cir. 2000). "Moreover, even if personal sources must be identified, there is no requirement that they be named, provided they are 15
described in the complaint with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged." Id. For purposes of the following analysis, the Court finds no deficiency in Plaintiff's failure to provide the names of the four Confidential Informants. Accordingly, the Court assumes all facts alleged in Plaintiff's PSAC to be true, including those facts provided by the four Confidential Informants.18 B. Section 10(b) Claim "Section 10(b) of the Exchange Act is designed to protect investors by serving as a `catchall provision' which creates a cause of action for manipulative practices by defendants acting in bad faith." In re
The Court recognizes that, in light of the Supreme Court's ruling in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007), the Seventh Circuit has held that allegations from confidential witnesses must be discounted, because "[i]t is hard to see how information from anonymous sources could be deemed `compelling' or how we could take account of plausible opposing inferences. Perhaps these confidential sources have axes to grind. Perhaps they are lying. Perhaps they don't even exist." Higginbotham v. Baxter Int'l, Inc., 495 F.3d 753, 757 (7th Cir. 2007). The Court declines to follow this approach absent guidance from the Second Circuit, and will continue to consider allegations based on information provided by confidential sources without discounting those allegations due solely to the anonymity of the information's source. Other courts in this District have proceeded similarly. See, e.g., City of Brockton Ret. Sys. v. Shaw Group Inc., 540 F. Supp. 2d 464, 474 (S.D.N.Y. 2008) (declining to adopt the Higginbotham standard); In re Xethanol Corp. Sec. Litig., No. 06 Civ. 10234 (HB), 2007 WL 2572088, at *3 n.3 (S.D.N.Y. Sept. 7, 2007) (noting that "anonymous sources do not have to be identified," and finding that the provided descriptions of the confidential sources were sufficient to allow the court "to infer that the witnesses are likely to posses the information contained in their statements").
18
Openwave Sys. Sec. Litig., 528 F. Supp. 2d 236, 249 (S.D.N.Y. 2007) (citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 206 (1976)). The Securities and Exchange Commission implemented section 10(b) of the Exchange Act by promulgating Rule 10b-5, 17 C.F.R. § 240.10b-5. In relevant part, Rule 10b-5 provides that it is unlawful "[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5. In order to sustain a private cause of action19 for securities fraud under section 10(b) and Rule 10b-5, a plaintiff must a d e q u a t e l y plead: (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation. See Heller v. Goldin Restructuring Fund, L.P., 590 F. Supp. 2d 603, 613 (S.D.N.Y. 2008). In this case, Defendants argue that Plaintiff has failed to plead sufficiently two of the necessary elements: scienter and materiality. As the Court finds that Plaintiff has failed to plead scienter adequately, the Court does not consider the issue of materiality. Under the PSLRA, in order to plead scienter adequately and state a claim under section 10(b) and Rule 10b-5, it is necessary
19
to "state with particularity 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) (emphasis added). "The requisite state of mind in a Rule 10b-5 action is `an intent to deceive, manipulate or defraud.'" Ganino v. Citizens Utils. Co., 228 F.3d 154, 168 (2d Cir. 2000) (quoting Ernst & Ernst, 425 U.S. at 193 n.12). Second Circuit case law, which predates the passage of the PSLRA, provides that "[t]he requisite `strong inference' of fraud may be established either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circums t a nt i a l evidence of conscious misbehavior or recklessness." Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994). In Kalnit v. Eichler, 264 F.3d 131 (2d Cir. 2001), the Court of Appeals explicitly noted that "both options for demonstrating scienter, either with motive and opportunity allegations or with allegations constituting strong circumstantial evidence of conscious misbehavior or recklessness, survive the PSLRA." Id. at 138-39; see also, e.g., Lerner v. Fleet Bank, N.A., 459 F.3d 273, 290-91 (2d Cir. 2006) (quoting Shields, 25 F.3d at 1128). The Supreme Court, in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007), has interpreted the PSLRA's "strong inference" requirement, and has held that, "in determining whether the pleaded facts give rise to a `strong' inference of scienter, the court must take into account plausible opposing inferences." Tellabs, 127 S. Ct. at 2509. "A complaint will survive . . . only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw 16
Although the text of the Exchange Act does not explicitly provide for a private cause of action for section 10(b) violations, "[i]t is now established that a private right of action is implied under § 10(b)." Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 13 n.9 (1971).
from the facts alleged." Id. at 2510. In so assessing, a court must be careful to consider whether "all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard." Id. at 2509 (emphasis in original). "The inference that the defendant acted with scienter need not be irrefutable, i.e., of the `smoking-gun' genre, or even the `most plausible of competing inferences.'" Id. at 2510 (internal citation omitted). Rather, the question before a court on a motion to dismiss is: "When the allegations are accepted as true and taken collectively, would a reasonable person deem the inference of scienter at least as strong as any opposing inference?" Id. at 2511. In short, to determine whether Plaintiff's purported inferences of scienter are sufficiently "strong," the Court "must consider both the inferences urged by the [P]laintiff and any competing inferences rationally drawn from all the facts alleged, taken collectively." ECA, 553 F.3d at 198. In analyzing whether Plaintiff has pleaded the requisite "strong" inference of scienter, the Court will utilize the Second Circuit's overarching framework of "motive and opportunity" and "conscious misbehavior or recklessness."20 Within each prong of that
20
framework, the Court will assess (1) whether Plaintiff's allegations suffice to plead a "strong" inference of scienter as required by the Second Circuit's case law, as well as (2) whether Plaintiff's allegations give rise to an inference of scienter that is "at least as compelling as any opposing inference one could draw from the facts alleged," as required by Tellabs, 127 S. Ct. at 2510. While the Court distinguishes the Tellabs analysis from the analysis under the Second Circuit's case law, the Court finds that the two analyses are very much interrelated, and that the determination of whether Plaintiff has pleaded the proper "strong" inference of scienter under Second Circuit case law serves as a significant, if not determinative, factor in assessing whether Plaintiff has pleaded the proper "strong" inference of scienter under Tellabs.21
inadequate allegations of recklessness . . . to demonstrate scienter. Plaintiff offers no support for his approach, and we decline to accept it. . . . To the extent that plaintiff argues that our decision in Novak . . . created a third method of demonstrating scienter, we reject such a contention."). Although the Court of Appeals has not explicitly ruled on whether this language in Kalnit has survived the Supreme Court's decision in Tellabs, the Court will continue to follow Second Circuit precedent and analyze securities fraud allegations under the two-pronged "motive and opportunity" and "conscious misbehavior or recklessness" framework.
21
While at least one court in this District has noted that "[e]xamining the allegations separately under the rubrics of `motive and opportunity' and `conscious misbehavior or recklessness' is unduly formalistic and not required by the PSLRA," In re GeoPharma, Inc. Sec. Litig., 399 F. Supp. 2d 432, 451 n.146 (S.D.N.Y. 2005), the Second Circuit continues to utilize this twopronged framework, see ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co. 553 F.3d 187, 198-203 (2d Cir. 2009), and has explicitly rejected the adoption of a "third method of demonstrating scienter," see Kalnit v. Eichler, 264 F.3d 131, 141 & n.5 (2d Cir. 2001) ("Here, plaintiff seeks to combine inadequate allegations of motive with
The Court notes that the Second Circuit has not clarified the exact relationship between its own case law, pre-dating (but surviving the passage of) the PSLRA, which requires the pleading of a "strong" inference of scienter, and the Supreme Court's recent ruling in Tellabs, which interprets the PSLRA's requirement that a securities fraud plaintiff plead a "strong" inference of scienter. However, in Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190 (2d Cir. 2008), the Court of Appeals indicated that the two analyses are interrelated, finding that, "[a]s a result" of the plaintiff's failure to allege that any of the defendants possessed a "compelling
17
In any event, for the reasons that follow, the Court finds that Plaintiff has failed to sufficiently plead the requisite strong inference of scienter.22
1. Motive and Opportunity It is undisputed that Defendants had an "opportunity" to commit fraud.23 Cf. Chill, 101 F.3d at 268 (noting that it is "indisputable that key directors and officers have [the] ability to manipulate their company's stock price" (citing San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 813 (2d Cir. 1996))); see also, e.g., Pension Comm. of Univ. of Montreal Pension Plan v. Banc of Am. Sec., LLC, 446 F. Supp. 2d 163, 181 ( S . D . N . Y . 2006) ("Regarding the `opportunity' prong, courts often assume that corporations, corporate officers, and corporate directors would have the opportunity to commit fraud if they so desired."). Therefore, the issue before the Court is whether Plaintiff has adequately pleaded "motive." In essence, Plaintiff argues that Defendants "had the motive to keep the loss estimates low to protect the very survival of PXRE." (Pl.'s Mem. at 15.) Specifically, Plaintiff alleges that PXRE was vulnerable to a disaster like Hurricane Katrina because PXRE's initial loss estimate of $235 million for Katrina-related losses, as set forth in the September 11 release, represented 39% of the Company's capital surplus as of June 30, 2005. (PSAC ¶ 76.) Given these figures, and the knowledge that a downgrade below Awould have "catastrophic" consequences and "essentially put the Company out of business" (see id. ¶¶ 3, 75), Plaintiff alleges that Defendants were motivated to materially misstate loss estimates in order to avoid being
23
motive to mislead investors," "a number of competing inferences regarding scienter arise." Id. at 197. Indeed, a finding by a court that a securities fraud plaintiff has failed to allege a proper "concrete and personal" benefit, as required by Second Circuit case law to allege "motive and opportunity" to commit fraud, see infra, certainly makes competing, non-fraudulent inferences more "compelling" for purposes of the Tellabs analysis. Likewise, it follows naturally from a finding that a securities fraud plaintiff has failed to allege recklessness under Second Circuit case law that the more "compelling" inference is that the defendants were merely negligent.
22
In Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531 F.3d 190 (2d Cir. 2008), the Second Circuit held that "[w]hen the defendant is a corporate entity, this means that the pleaded facts must create a strong inference that someone whose intent could be imputed to the corporation acted with the requisite scienter." Id. at 195. The Court finds that the only individuals whose intent could be imputed to PXRE on the pleaded facts are the individual Defendants. The Court thus focuses its analysis on the alleged fraudulent intent of the individual Defendants, which the Court imputes to PXRE. The Court disagrees with Plaintiff's contention, see Letter dated July 8, 2008, that the intent of Matusiak, PXRE's Chief Actuary, should be imputed to PXRE. However, even if the Court were to find that Matusiak's intent should be imputed to PXRE, Plaintiff fails to allege that Matusiak (1) possessed a motive to defraud, or (2) engaged in behavior that exhibited conscious misbehavior or recklessness. Instead Plaintiff alleges that Matusiak was "concerned" with PXRE's loss estimate reports, and subsequently resigned from PXRE due to a fear that the loss estimate reports would "damage his professional reputation." (See PSAC ¶¶ 89-90.) Thus, the Court finds that there are no allegations of fraudulent intent on Matusiak's part that could be imputed to PXRE. The Court's conclusions regarding Matusiak, see infra, further preclude a finding of scienter based on Matusiak's knowledge of the alleged fraudulent scheme alone.
In this context, opportunity "entail[s] the means and likely prospect of achieving concrete benefits by the means alleged." Novak v. Kasaks, 216 F.3d 300, 307 (2d Cir. 2000) (quoting Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1130 (2d Cir. 1994)) (internal quotation marks omitted).
18
downgraded below an A- credit rating (see id. ¶ 117(j)). Doing so allowed PXRE to raise "desperately needed new capital," and prevented the triggering of cancellation clauses in PXRE's current reinsurance contracts. (See id.) It is undisputed that PXRE disclosed the full extent of its losses in February 2006, which resulted in the immediate downgrade of PXRE's rating to below the critical A- level, thereby triggering the "catastrophic" consequences of such a downgrade. (See id. ¶¶ 103-116). Thus, at first blush, it would appear that PXRE's alleged scheme accomplished little more than putting off the inevitable collapse of the Company for several months. However, to meet the required "strong" inference of scienter, Plaintiff argues that "Defendants may well have thought that they could delay the release of the bad news until PXRE had raised $700 million in additional capital, and that this amount, together with the $475 million already raised, would be sufficient for PXRE to maintain the A- rating when disclosures were belatedly made." (Pl.'s Mem. at 17.) For the reasons that follow, the Court holds that Plaintiff has failed to allege a "strong" inference of scienter under the motive and opportunity prong. First, Plaintiff has failed to allege a "concrete and personal" benefit resulting from the fraud, as required by the Second Circuit to plead the requisite "strong" inference of scienter. See Kalnit, 264 F.3d at 139; Novak, 216 F.3d at 307-08. Second, and related, Plaintiff has not alleged a motive that is "at least as compelling as any opposing inference one could draw from the facts alleged," as required by the Supreme Court. Tellabs, 127 S. Ct. at 2510.
i. Plaintiff Fails to Allege a "Concrete and Personal" Benefit In determining whether motive allegations entail the requisite "concrete and personal" benefit, the Second Circuit has held that "[m]otives that are generally possessed by most corporate directors and officers do not suffice" to plead securities fraud. Kalnit, 264 F.3d at 139. The Court of Appeals has provided four examples of such "generally possessed," and therefore, insufficient motives: (1) the desire to maintain a high corporate bond or credit rating, see Philip Morris, 75 F.3d at 813-14; (2) "the motive to maintain the appearance of corporate profitability, or of the success of an investment," Chill, 101 F.3d at 268; (3) the desire to maintain a high stock price in order to increase executive compensation, see Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995); and (4) the desire to prolong the benefits of holding corporate office, see Shields, 25 F.3d at 1130. See Novak, 216 F.3d at 307. By contrast, the Second Circuit has cited insider trading as the classic example of a "concrete and personal" benefit that suffices to plead motive to commit securities fraud. See Novak, 216 F.3d at 308 (noting that "in the ordinary case, adequate motive arose from the desire to profit from extensive insider sales"); see also, e.g., In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 74-76 (2d Cir. 2001) (finding motive sufficiently pleaded where allegations supported the inference of "unusual" insider trading); Stevelman v. Alias Research, Inc., 174 F.3d 79, 85-86 (2d Cir. 1999) (same). This case, involving the alleged inflation of a credit rating in order to raise capital, falls in an ambiguous middle ground, situated 19
between these two poles. To determine whether these circumstances suffice to raise a strong inference of scienter, the Court is mindful of the Second Circuit's instruction that "what is required when endeavoring to plead facts supporting a strong inference of scienter by showing motive and opportunity is not a bare invocation of `magic words such as `motive and opportunity'' but an allegation of facts showing the type of particular circumstances that our case law has r e c o g n i z e d will render motive and opportunity probative of a strong inference of scienter." Rothman v. Gregor, 220 F.3d 81, 90 (2d Cir. 2000) (quoting Novak, 216 F.3d at 311)). Accordingly, the Court looks to the "particular circumstances" of the two leading Second Circuit cases on this point. In the first case, In re Time Warner Inc. Securities Litigation, 9 F.3d 259 (2d Cir. 1993), the defendant, Time Warner Inc. ("Time"), found itself with over $10 billion in debt after a merger. Id. at 262. To alleviate this burden, Time subsequently embarked on a n unsuccessful campaign to find international "strategic partners" who would provide the necessary capital to the company. Id. Due to the failure of this campaign to fully alleviate Time's debt burden, Time was forced to seek an alternative method of raising capital, specifically, "a new stock offering that substantially diluted the rights of the existing shareholders." Id. The plaintiff's claim for securities fraud in Time Warner alleged that Time was motivated to misrepresent the status of the negotiations with "strategic partne
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