Burzotta et al v. Manulife Financial Corporation et al
Filing
37
OPINION AND ORDER: As discussed above, Lead Plaintiffs have failed adequately to state its claims for securities fraud under § 10(b) of the '34 Act or Rule 10b-5 and its control-person claims under § 20(a) of the '34 Act. Therefor e, Manulife and the Individual Defendants' motion to dismiss the Amended Complaint is GRANTED. Lead Plaintiffs are granted sixty (60) days from the entry of this Opinion and Order to file a second amended complaint. Manulife and the Individual Defendants shall answer or otherwise respond to this second amended complaint, if filed, within forty-five (45) days of service. (Signed by Judge John F. Keenan on 5/23/2011) Filed In Associated Cases: 1:09-cv-06185-JFK, 1:09-cv-07752-JFK(jfe)
Case 1:09-md-02013-PAC Document 57
UNITED STATES DISTRICT COURT
UNITED STATES DISTRICT OF NEW YORK
SOUTHERN DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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In re FANNIE MAE 2008 SECURITIES
:
IN RE: MANULIFE FINANCIAL CORPORATION : :
LITIGATION
SECURITIES LITIGATION
: :
----------------------------------------:
:
This document relates to all actions.
-----------------------------------------------------------x :
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Filed 09/30/10 Page 1 of 45
USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: May 23, 2011
08 Civ. 7831 (PAC)
09 09 MD 2013 (PAC)
Civ. 6185 (JFK)
OPINION AND ORDER
OPINION & ORDER
HONORABLE PAUL A. CROTTY, United States District Judge:
APPEARANCES
For Lead Plaintiffs Locals 302 and 612 1of the International
BACKGROUND
Union of Operating Engineers-Employers Construction
Industry Retirement Trust, Western Washington LaborersThe early years of Trust, saw boom in home Ironworkers Field
Employers Pension this decadeand aCalifornia financing which was fueled, among
Pension Trust:
other things, by low interest rates and lax credit conditions. New lending instruments, such as
ROBBINS GELLER RUDMAN & DOWD LLP
By: Samuel H. Rudman, Esq.
subprime mortgages (high credit risk loans) and Alt-A mortgages (low-documentation loans)
David A. Rosenfeld, Esq.
kept the boom Erin W. Boardman, aEsq.
going. Borrowers played role too; they took on unmanageable risks on the
For Defendants Manulife Financial Corporation, Dominic
assumption that the and would Rubenovitch:
D'Alessandro, marketPeter continue to rise and that refinancing options would always be
DEBEVOISE & PLIMPTON LLP
available in the future. Lending discipline was lacking in the system. Mortgage originators did
By: Edwin G. Schallert, Esq.
Gary W. Kubek, Esq.
not hold these high-risk mortgage loans. Rather than carry the rising risk on their books, the
Stuart C. Naifeh, Esq.
Julie S. Suh, Esq.
originators sold their loans into the secondary mortgage market, often as securitized packages
Scott N. Auby, Esq.
known as mortgage-backed securities (“MBSs”). MBS markets grew almost exponentially.
But then the housing bubble burst. In 2006, the demand for housing dropped abruptly
and home prices began to fall. In light of the changing housing market, banks modified their
lending practices and became unwilling to refinance home mortgages without refinancing.
1
Unless otherwise indicated, all references cited as “(¶ _)” or to the “Complaint” are to the Amended Complaint,
dated June 22, 2009. For purposes of this Motion, all allegations in the Amended Complaint are taken as true.
JOHN F. KEENAN, United States District Judge
1
JOHN F. KEENAN, United States District Judge:
Lead Plaintiffs Locals 302 and 612 of the International
Union of Operating Engineers-Employers Construction Industry
Retirement Trust, Western Washington Laborers-Employers Pension
Trust, and California Ironworkers Field Pension Trust
(collectively, "Lead Plaintiffs") bring this putative securities
fraud class action suit against Defendants Manulife Financial
Corporation ("Manulife" or the "Company"), former Manulife
President and Chief Executive Officer ("CEO") Dominic
D'Alessandro ("D'Alessandro"), and former Manulife Senior
Executive Vice President and Chief Financial Officer ("CFO")
Peter Rubenovitch ("Rubenovitch) (with D'Alessandro, the
"Individual Defendants").
In their Amended Class Action
Complaint ("Amended Complaint" or, in citation, "Am. Compl."),
Lead Plaintiffs--on behalf of a putative class including
investors who purchased or acquired Manulife common stock
between March 28, 2008 and March 3, 2009, inclusive (the "Class
Period")--bring claims against Manulife and the Individual
Defendants under Section 10(b) of the Securities Exchange Act of
1934 (the "'34 Act"), 15 U.S.C. § 78j(b), and Securities and
Exchange Commission Rule 10b-5 ("Rule 10b-5"), 17 C.F.R.
§ 240.10b-5.
Lead Plaintiffs also bring claims against the
Individual Defendants as "controlling person[s]" derivatively
liable for Manulife's alleged violations of the federal
-1-
securities laws during the Class Period pursuant to § 20(a) of
the '34 Act, 15 U.S.C. § 78t.
Before the Court is Manulife and the Individual Defendants'
motion to dismiss the Amended Complaint pursuant to Rule
12(b)(6) of the Federal Rules of Civil Procedure.
For the
reasons stated below, the Amended Complaint fails to state a
claim against Manulife or the Individual Defendants for
violations of § 10(b) of the '34 Act or Rule 10b-5.
Furthermore, because Lead Plaintiffs have failed adequately to
plead that Manulife violated the federal securities laws, the
Individual Defendants cannot be held liable pursuant to § 20(a)
of the '34 Act.
Accordingly, Manulife and the Individual
Defendants' motion to dismiss is granted.
However, the
dismissal is without prejudice, and Lead Plaintiffs are granted
leave to amend the first Amended Complaint.
I.
Background
Unless otherwise stated, the following facts are taken from
the Amended Complaint.
The Court accepts as true all factual
allegations in the complaint and construes all reasonable
inferences in favor of Lead Plaintiffs. See Staehr v. Hartford
Fin. Servs. Grp., Inc., 547 F.3d 406, 424 (2d Cir. 2008).
In
addition to the allegations in the Amended Complaint, the Court
considers written instruments attached to the Amended Complaint
as an exhibit and all statements or documents incorporated in it
-2-
by reference, "as well as public disclosure documents required
by law to be, and that have been, filed with the SEC." Rothman
v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000) (citations omitted);
see also DiFolco v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d
Cir. 2010).
The Court may also consider matters of which the
Court may take judicial notice, Tellabs, Inc. v. Makor Issues &
Rights, Ltd., 551 U.S. 308, 322 (2007), including wellpublicized stock prices and equity index levels, Ganino v.
Citizens Util. Co., 228 F.3d 154, 167 n.8 (2d Cir 2000).1
The Court does not consider new allegations raised by Lead
Plaintiffs in their Memorandum in Opposition to the Motion to
Dismiss, because long-standing precedent in the Second Circuit
prevents parties from amending the pleadings by raising new
issues in their briefs. Fadem v. Ford Motor Co., 352 F. Supp. 2d
501, 516 (S.D.N.Y. 2005)).
A.
The Parties
Lead Plaintiffs represent a putative class consisting of
all United States investors who purchased Manulife common stock
during the Class Period, excluding Manulife's officers and
directors, their immediate family members and fiduciaries, and
1
Values expressed in Canadian dollars are labeled "C$" while
values expressed in United States dollars are labeled "US$."
Unless taken from Amended Complaint, equity prices and index
data are taken from the Google Finance website, at http://www.google.com/finance.
-3-
"any entity in which Defendants have or had a controlling
interest." (Am. Compl. ¶ 28).
Manulife is a publicly traded financial services company
headquartered in Toronto, Ontario, and incorporated under the
laws of Canada, with shares traded on the Toronto and New York
Stock Exchanges as well as on the Stock Exchange of Hong Kong
and the Philippine Stock Exchange. (Am. Compl. ¶¶ 2, 19, 43).
In 2004, Manulife merged with John Hancock Financial Services,
Inc., a Massachusetts corporation.
Since the merger, Manulife
has operated as John Hancock in the United States. See Manulife
Financial Corp., Annual Report for the Fiscal Year Ended
December 31, 2007 (Form 40-F) (hereinafter, "2007 Form 40-F"),
Ex. 99.2 (Mar. 28, 2008), available at http://sec.gov/Archives/edgar/data/1086888/000119312508067981/dex992.htm.
Through its
subsidiaries in North America and Asia, Manulife provides life
insurance, long-term care insurance, and mutual fund investment
products to its customers as well as investment management and
reinsurance services. (Am. Compl. ¶ 34).
B.
Manulife's Operations
Both insurance regulators and securities regulators in the
U.S. and Canada regulate parts of Manulife's operations.
The
Canadian Office of the Superintendent of Financial Institutions
(the "OSFI"), as well as provincial insurance regulators in
Canada, state insurance regulators in the United States, and
-4-
insurance regulators in other markets in which it provides
insurance services, regulate insurance-related aspects of
Manulife's operations. (Am. Compl. ¶ 40).
As an issuer of
publicly traded securities, Manulife is subject to regulations
issued by the U.S. Securities and Exchange Commission (the
"SEC"), as well as Canadian provincial securities regulators
such as the Ontario Securities Commission (the "OSC"), and
securities regulators in other markets in which it offers
publicly traded securities. (Am. Compl. ¶ 43, 116).
Lead Plaintiffs' claims in this suit concern the financial
impact of Manulife's segregated fund and variable annuity
products on the value of Manulife common stock.
These two
investment products (the "Guaranteed Products") share common
features; both segregated funds and variable annuities are
"hybrids of mutual fund investments and insurance contracts."
(Am. Compl. ¶ 38).
The purchaser of a Guaranteed Product pays a
certain amount of money to the Company in exchange for payments
in the future, and Manulife invests the money on behalf of the
policyholder in assets including equity securities, giving
Guaranteed Product policyholders the potential to benefit from
equity market growth. (Am. Compl. ¶¶ 38-39, 45).
However,
unlike typical mutual fund investments, segregated fund and
variable annuity investments pay a guaranteed minimum to the
policyholders. (Am. Compl. ¶ 39).
-5-
To obtain the features of
stability and opportunity for growth, "customers pay hefty fees
and agree to hold the annuity for a specified period of time."
(Am. Compl. ¶ 39).
Manulife profits so long as the long-term
value of the funds exceeds the guaranteed payment obligations,
but may incur losses when the value of the funds are
insufficient to cover the guarantees. (Am. Compl. ¶ 39).
Temporary declines in the value of invested funds backing
the Guaranteed Products do not necessarily prevent Manulife from
satisfying its Guaranteed Product obligations, which are often
long-term obligations.
However, accounting rules and regulatory
capital requirements force Manulife to recognize some unrealized
losses when the value of the funds backing future guaranteed
payments falls below certain levels. (See Am. Compl. ¶¶ 40-42).
For Manulife's Canadian operations, the OSFI measures capital
adequacy by calculating a Minimum Continuing Capital and Surplus
Requirements ("MCCSR") ratio, which depends on available capital
and other risk metrics. (Am. Compl. ¶ 40).
Another metric, Risk
Based Capital, is calculated by U.S. regulators to assess
Manulife's capital adequacy. (Am. Compl. ¶ 40).
Canadian
Generally Accepted Accounting Principles ("Canadian GAAP")
require companies to assess capital adequacy based on
Conditional Tail Expectation ("CTE") levels. (Am. Compl. ¶ 41).
CTE measures the ability of a given amount of capital to cover
the average cost of a range of probable adverse events; a CTE
-6-
level of 80 indicates that there is capital sufficient to cover
the average cost of the top 20% of the scenarios tested with the
highest net cost. (Am. Compl. ¶ 41).
Lead Plaintiffs allege
that Manulife was required to maintain a CTE level between 60
and 80. (Am. Compl. ¶ 41).
Finally, Manulife is required to
report the confidence level of its capital reserves.
The
confidence level corresponds to the percentage of adverse
scenarios tested currently covered by the Company's capital; a
confidence level of 90 indicates that current reserves are
adequate to cover 90% of the adverse scenarios tested. (Am.
Compl. 41).
C.
Class Period Allegations
Lead Plaintiffs allege that during the Class Period,
between March 28, 2008 and March 3, 2009, Manulife and the
Individual Defendants defrauded investors when they concealed
risks to the value of Manulife stock by "touting the Company's
. . . prudent risk management and the diversified nature of its
investments, and by stating that Manulife was well positioned to
weather equity market declines." (Am. Compl. ¶ 6).
Lead
Plaintiffs allege that these statements artificially inflated
the value of Manulife stock, (see Am. Compl. ¶ 25, 136), so that
when "the truth was revealed to the market," the price of
Manulife common stock dropped and the investors lost a
-7-
substantial part of the value of their investments, (see Am.
Compl. ¶¶ 141, 144-148).
1.
The 2007 Annual Report
On March 28, 2008, the first day of the Class Period,
Manulife released its Annual Report for the 2007 fiscal year
(the "2007 Annual Report"). (Am. Compl. ¶ 43).
The 2007 Annual
Report discussed several features of Manulife's business
intended to mitigate risk.
One of these features was Manulife's
common investment platform, which provided Manulife's customers
with "a broad spectrum of diversified domestic and international
equity funds, domestic and global fixed income funds and
specialty funds . . . managed by a distinctive selection of
leading investment companies." 2007 Form 40-F, Ex. 99.1, at 3,
10.
In the "Management's Discussion and Analysis" section of
the 2007 Annual Report, Manulife stated that its risk management
systems were focused on "long-term revenue and earnings growth,"
accomplished by "capitalizing on business opportunities that are
aligned with the Company’s risk taking philosophy, risk appetite
and return expectations." 2007 Form 40-F, Ex. 99.2, at 21.
In the "Risk Management" portion of the 2007 Annual Report,
Manulife detailed its methods for identifying, measuring, and
controlling risk.
A number of officers and business divisions
played a role in Manulife's risk management operations.
Officers responsible for risk management included the CEO, CFO,
-8-
Chief Risk Officer, Internal Auditor, and Chief Actuary.
The
Executive Risk Committee, the Corporate Risk Management group,
and the Audit and Risk Management Committee of the Board of
Directors were among the groups responsible for risk management
at Manulife.
Manulife Financial Corp., 2007 Annual Report (Form
6-K) (hereinafter, "2007 Form 6-K"), Ex. 99.1, 21-22 (Mar. 28,
2008), available at http://sec.gov/Archives/edgar/data/1086888/000119312508067982/dex991.htm.
Manulife
represented that it performed stress tests on its "regulatory
capital adequacy over a five year projected timeframe,
incorporating both existing and projected new business
activities, under a number of significantly adverse but
'plausible' scenarios." 2007 Form 6-K, at 22.
It also
represented that it "performed various risk mitigation
activities, such as product and investment portfolio management,
hedging, reinsurance and insurance protection." Id.
These
efforts were designed to keep potential losses from the risk of
underperformance of non-fixed income investments "within
acceptable limits." Id. at 23.
The 2007 Annual Report quantified the immediate effects of
an increase or decrease of 10% on the economic value of
Manulife's common stock in a table captioned "Table 2:
Impact
on Shareholders Economic Value from Variable Products and Other
Managed Assets." 2007 Form 6-K, at 25 tbl. 2.
-9-
The table
indicated that a 10% decrease in equity prices could cause a
loss of C$209,000,000.00 in shareholder value due to its
Guaranteed Product obligations. Id. at 26.
captioned "Table 3:
Another table,
Variable Annuity and Segregated Fund
Guarantees," indicated that the expected average cost stemming
from its Guaranteed Products was C$2,268 million for 2007. Id.
tbl 3.
With respect to its John Hancock operation in the United
States, Manulife stated that it "continued to develop its
variable annuity portfolio with a clear focus on meeting the
needs of customers, maintaining competitiveness within the
market and managing the risk profile of the business." 2007 Form
40-F, at 13.
2.
Statements on May 8, 2008
On May 8, 2008, Manulife held a shareholders' meeting (the
"May 2008 Shareholders' Meeting") and an analyst conference call
(the "May 2008 Analyst Call"), and issued a press release (the
"May 2008 Press Release").
Lead Plaintiffs allege that Manulife
and the Individual Defendants are responsible for a number of
misstatements made in the May 2008 Shareholders' Meeting,
Analyst Call, and Press Release.
At the May 2008 Shareholders' Meeting, D'Alessandro
discussed Manulife's "diversified nature" and its "prudent risk
management." (Am. Compl. ¶ 58).
D'Alessandro also discussed
Manulife's future prospects; in D'Alessandro's view, Manulife's
-10-
"diverse asset portfolio and very, very stable funding base and
strong liquidity position" would permit Manulife "to do well no
matter what and how turbulent the financial markets may get."
(Am. Compl. ¶ 58).
Despite these optimistic statements in the May 2008 Press
Release, the Company warned that "sharp declines in global
equity markets . . . reduced reported earnings in the [first
quarter of 2008] by C$265 million or C$0.18 cents [sic] per
share." (Am. Compl. 62).
analyst asked:
During the May 2008 Analyst Call, one
"[A]t what point would [Manulife] want to start
hedging equities?"
Rubenovitch answered that Manulife was
already hedging and that further hedging would be costly in the
current economy.
He attributed the high cost of hedging against
equity market losses to low interest rates and high volatility.
Given the high cost of hedging and the long duration of
Manulife's Guaranteed Product liabilities, Manulife "would do
more [hedging] . . . commensurate with our risk appetite." (Am.
Compl. ¶ 63).
Another analyst asked, "To what extent would a
full hedging program [have] prevented some of this volatility?"
(Am. Compl. ¶ 64).
Rubenovitch stated in response that hedging
"would have reduced our income and reduced the volatility quite
materially." (Am. Compl. ¶ 64).
Later in the May 2008 Analyst Call, D'Alessandro stated
that the growth of Manulife's variable annuity offerings
-11-
suggested that it could face heightened exposure to losses in
equity markets. (Am. Compl. ¶ 65 ("[W]e see the day that the
amounts of equity exposure that are going to accumulate are
larger than we're comfortable with.").)
According to
D'Alessandro, Manulife would continue to engage in the hedging
program it had begun towards the end of 2007, but noted that due
to the high cost of hedging, Manulife would "be investigating
other avenues to reduce [its] volatility and exposure." (Am.
Compl. ¶ 65).
3.
Statements on August 7, 2008
Lead Plaintiffs allege that Manulife and D'Alessandro made
further misrepresentations in a press release issued on August
7, 2008 (the "August 2008 Press Release"), and during an analyst
conference call held on the same date (the "August 2008 Analyst
Call").
In its August 2008 Press Release, Manulife announced a drop
in net income of C$94 million for the second quarter of 2008 on
a year-to-year basis.
This reduction in profit was due in part
to a C$250 million earnings charge resulting from "weak . . .
equity markets, higher strain on increased sales, the
strengthening of the Canadian dollar and tax related
provisions." (Am. Compl. ¶ 67).
A statement in the August 2008 Press Release attributed to
Rubenovitch described Manulife's operating results as
-12-
"excellent," and statements attributed to D'Alessandro echoed
Rubenovitch's position. (Am. Compl. ¶¶ 67-68).
According to
D'Alessandro, Manulife's "strong balance sheet, excellent
distribution capabilities and leading market shares" permitted
Manulife "to compete in all market conditions." (Am. Compl.
¶ 68).
D'Alessandro was questioned by one analyst about
Manulife's reduced share repurchases and lower MCCSR levels, and
whether these two developments suggested that Manulife was
becoming "capital constrained." (Am. Compl. ¶ 70).
D'Alessandro
admitted that the MCCSR of 200 was "a bit lower than it has
historically been," and that the variable annuity products were
"capital intensive" under the current market conditions of
depressed equity values.
However, despite the high capital
costs of the Guaranteed Products, D'Alessandro asserted that
Manulife had "the mechanisms to monitor [the capital level
issue] and take appropriate action, come what may." (Am. Compl.
¶ 70).
4.
Fall 2008 Statements
The fall of 2008 was a time of global economic uncertainty,
characterized by extreme volatility in U.S. equity prices.
When
trading ended on August 7, 2008, the S&P 500 Index was at
1,289.19.
On September 15, 2008, Lehman Brothers Holdings,
Inc., one of the largest investment banks in the world, filed a
Chapter 11 bankruptcy petition. See Voluntary Petition (Chapter
-13-
11), In re Lehman Brothers Holdings Inc., Chapter 11 Case No.
08-13555 (JMP) (S.D.N.Y. Bankr. Sept. 15, 2008).
On October 13,
2008, the Dow Jones Industrial Average rose 936.42 points; it
fell 733.08 points just two days later.
By November 20, the S&P
500 Index was down to 752.44, representing a 41.63% decline from
August 7.
On December 11, 2008, federal authorities announced
the arrest of Bernard Madoff for a massive Ponzi scheme
perpetrated through Bernard L. Madoff Investment Securities LLC.
United States v. Madoff, 586 F. Supp. 2d 240, 244 (S.D.N.Y.
2009) (Ellis, Mag. J.).
By the close of trading on December 31,
2008, the S&P Index had rebounded slightly and closed at 903.25.
The fall of 2008 was also characterized by political and
legislative uncertainty, with the enactment (and later revision)
of the Troubled Asset Relief Program and a presidential
election.
Lead Plaintiffs allege that Manulife and the
Individual Defendants made a number of misstatements during this
period of equity market uncertainty.
On October 13, 2008 Manulife issued a press release (the
"October 2008 Press Release"), which according to Lead
Plaintiffs contained "misleading reassurances about the
sufficiency of Manulife's capital reserves backing its variable
annuity and segregated fund guaranteed" and false statements
indicating "that the Company would not need to issue equity to
shore up its capital levels." (Am. Compl. ¶ 74).
-14-
Lead
Plaintiffs allege that Manulife falsely represented that it was
"conservatively reserved," that it had "a high quality balance
sheet," and that it had "no plans to issue common equity." (Am.
Compl. ¶ 74).
During an analyst conference call held on October 14, 2008
(the "October 2008 Analyst Call"), D'Alessandro again discussed
the allegedly pervasive capital concerns.
He characterized the
concerns as "grossly exaggerated," and stated that Manulife
"remain[ed] very well capitalized and . . . [had] no intention
to issue equity capital." (Am. Compl. ¶ 77).
D'Alessandro
continued:
[T]he capital resources of the company, under almost
any reasonable expectation of what's going to happen,
are more than adequate today. Now, I can't predict
the future and . . . if markets do deteriorate we're a
big, strong company and we'll go and do something else
to re-establish our capital levels at . . . an
acceptable threshold.
(Am. Compl. ¶ 78).
D'Alessandro's comments on the October 2008
Analyst Call were echoed by Manulife Executive Vice President
and Chief Actuary, Simon Curtis, who stated that "[e]xternal
equity capital raising is not anticipated to be necessary to
maintain [Manulife's] fourth quarter capital ratios," and also
described Manulife's balance sheet as strong. (Am. Compl. ¶ 81).
Three weeks later, on November 6, 2008, Manulife issued a
press release (the "November 2008 Press Release").
In this
press release, Manulife announced that its shareholders' net
-15-
income for the quarter ending September 30, 2008, was C$510
million. (Am. Compl. ¶ 85).
These earnings reflected a C$574
million reduction due to "sharp declines in global equity
markets." (Am. Compl. ¶ 85).
Manulife also announced that it
obtained a loan from a coalition of six Canadian banks "to
provide a 5-year term loan of C$3 billion . . . to provide
additional regulatory capital for its operating subsidiaries."
(Am. Compl. ¶ 86).
The November 2008 Press Release also discussed the impact
of recent changes to the OFSI's MCCSR guidelines for the
calculation of required capital on segregated fund products.
The OFSI had increased capital required for short-term
obligations and reduced capital required to support distant
payment obligations. (Am. Compl. ¶ 87).
Due to the change in
capital requirements and the availability of regulatory capital
from the C$3 billion loan, Manulife estimated that its principal
Canadian operating company, Manufacturers Life Insurance
Company, had an MCCSR "estimated at a very robust 225 per cent,"
(Am. Compl. ¶ 87), as compared with an MCCSR of 193 prior to
revisions by the OFSI, (Df.'s Decl. Supp. Mot. Dismiss, Exh. 8,
at 6.)
In both the November 2008 Press Release and an analyst
conference call held on Noveber 6, 2008 (the "November 2008
Analyst Call"), Manulife described the benefits of the changes
-16-
to the capital requirements made by OFSI.
D'Allesandro
discussed the "enormous pressure" equity price declines were
putting on Manulife's capital reserves. (Am. Compl. ¶ 88).
Given these enormous declines, D'Alessandro stated that the
OFSI's modification of its capital requirements provided
"welcome relief" while keeping these requirements "robust." (Am.
Compl. ¶ 88).
Given the new capital requirements, Rubenovitch
stated that Manulife could withstand a further 10% decline in
market values and still maintain an MCCSR above 200, and that
"[i]t would take a market correction of 25% from the October
31st levels to reach the lower end of our targeted MCCSR range
of 180 to 200." (Am. Compl. ¶ 89).
Therefore, "barring a very
sizeable collapse in markets," D'Alessandro stated that he
expected Manulife to remain well capitalized at year end." (Am.
Compl. ¶ 88).
Due to the structure of the variable annuity and segregated
fund products, Rubenovitch stated that upcoming losses resulting
from a short-term failure of the equity markets to rebound would
"represent crystallized amounts" of loss; instead, according to
Rubenovitch, Manulife would "generate positive income when the
markets do eventually recover from the current low levels." (Am.
Compl. ¶ 89).
Rubenovitch also noted, in response to analyst
questions about Manulife's hedging strategy, that Manulife
"hedge[d] a substantial portion, but not 100% of the product,"
-17-
and was "hedging all the new business originated in the US."
(Am. Compl. ¶ 92).
Lead Plaintiffs allege that between November 6, 2008, and
March 3, 2009, the public learned that statements previously
made by the Defendants during the Class Period were false or
misleading.
5.
December 2008 through March 2009
On December 2, 2008, Manulife announced that it planned to
raise C$2.125 billion in common equity to strengthen its capital
reserves. (Am. Compl. ¶ 94).
Manulife also announced an
anticipated loss of C$1.5 billion for the quarter ending on
December 31, 2008.
Further capital reserve charges were
announced on February 12, 2009, along with a C$370 million
increase in the anticipated loss for the fourth quarter of 2008
that had been announced on December 2 of the previous year. (Am.
Compl. ¶ 97).
Manulife's net income for 2007 was C$4.302
billion; in 2008, its net income was C$517 million. (Am. Compl.
¶ 97).
As of February 12, Manulife's Guaranteed Product
obligations exceeded funds backing those obligations by C$27
billion. (Am. Compl. ¶ 99).
On February 27, 2009, citing
Manulife's "outsized, unhedged equity market exposure," Fitch
Ratings downgraded its rating of Manulife.
On March 2, 2009 Rubenovitch gave a presentation at a
conference organized by the Association of Insurance and
-18-
Financial Analysts in Scottsdale, Arizona.
The presentation
disclosed that declines in equity prices had reduced earnings
for 2008 by C$3.747; the bulk of this reduction in earnings was
attributable to capital expenses related to Manulife's
Guaranteed Products. (Am. Compl. ¶ 108).
The presentation also
discussed Manulife's hedging operations, addressing both its
past hedging practices and its planned future hedging. (Am.
Compl. ¶ 109).
6.
Manulife Stock Price Movement During the Class Period
In the Amended Complaint, Lead Plaintiffs refer to the
price of Manulife common stock following certain public
statements in order to support their theory of loss causation.
(See Am. Compl. ¶¶ 57, 84, 96, 105, 107, 110, 142-147).
Lead
Plaintiffs allege that Manulife's public statements artificially
inflated the price of Manulife stock, and that as these
statements were publicly revealed to have been false, "the price
of Manulife common shares fell precipitously as the prior
artificial inflation came out of the price of Manulife's
[common] stock." (Am. Compl. ¶ 140).
On the day Manulife issued the 2007 Annual Report, the
price of its common stock declined from US$37.96 to US$37.24 at
the close of trading.
To support their allegation that the 2007
Annual Report artificially inflated the price of Manulife common
stock, Lead Plaintiffs allege that the price "rose steadily"
-19-
between March 28 and April 3, 2008.
At the close of trading on
April 3, 2008, Manulife common stock was trading at US$40.11.
The movement in Manulife's stock price between the issuance of
the 2007 Annual Report and the October 2008 Press Release and
Analyst Call is not addressed in the Amended Complaint.
By the close of trading on Sunday, October 10, 2008, the
price of Manulife common stock had fallen to US$23.34.
Lead
Plaintiffs allege that statements made in the October 2008 Press
Release and during the October 2008 Analyst Call artificially
re-inflated the price of Manulife common stock.
Manulife common
stock was priced at US$26.31 at the close of trading on October
14, 2008.
Lead Plaintiffs allege that negative rumors relating to the
information that would be disclosed on December 2, 2008, caused
a decline in the price Manulife common stock from US$17.50 to
US$16.39 on December 1, 2008, but make no allegation about
where, when, or by whom these rumors were reported. (See Am.
Compl. ¶ 96).
After Manulife announced its need to raise
additional capital and forecast a fourth-quarter loss of C$1.5
billion on December 2, 2008, the price of its common stock fell,
closing at US$15.96 on December 2, and then at US$15.34 on
December 3.
As discussed above, in February 2009 Manulife confirmed
many of the negative forecasts it made in early December 2008.
-20-
After the February 2009 statements, the price of Manulife common
stock fell from US$15.75 on February 11 to US$14.15 at the close
of trading on February 13. (Am. Compl. ¶ 105).
The downgrade by
Fitch Ratings announced on February 27, 2009, is alleged to have
caused the decline in Manulife's common stock price from
US$10.93, its opening price on February 27, to US$10.15, its
closing price on that day.
The final decline in the price of
Manulife common stock alleged in the Amended Complaint took
place after the presentation given by Rubenovitch on March 2,
2009.
On March 2, Manulife common stock opened at US$9.80; on
March 3, 2009, Manulife common stock closed at US$7.90.
Lead Plaintiffs allege that the decline in Manulife's share
price from US$40.11 on April 3, 2008, to US$7.90 on March 3,
2009, "was a direct result of the nature and extent of
Defendants' fraud finally being revealed to . . . the market."
(Am. Compl. ¶ 148).
E.
Post-Class Period Allegations
Although Lead Plaintiffs allege that the full extent of
Manulife's equity market exposure resulting from its Guaranteed
Products offerings were known to the investing public by March
3, 2009, they rely on a number statements and events after the
Class Period to support their claims that certain of Manulife's
Class Period statements were made recklessly or with the intent
to deceive the public.
-21-
On March 26, 2009, Manulife filed with the SEC its Annual
Report for the fiscal year ending December 31, 2008 (the "2008
Annual Report"). (Am. Compl. ¶ 111).
The 2008 Annual Report
discussed the impact of the Guaranteed Products on Manulife's
earnings and balance sheet, and indicated that Manulife was
adopting a more comprehensive hedging program to reduce equity
market risk. (Am. Compl. ¶ 111). On May 7, 2009, Manulife
announced a loss of C$1.1 billion for the quarter ending March
31, 2009 in a press release (the "May 2009 Press Release") and
analyst conference call (the "May 2009 Analyst Call").
Both the
May 2008 Press Release and May 2009 Analyst Call addressed
Manulife's ongoing hedging efforts, and during the May 2009
Analyst Call, Rubenovitch disclosed that the C$27 billion gap
between Manulife's obligations on its Guaranteed Products and
the funds backing those obligations had increased by C$3
billion. (Am. Compl. ¶ 114).
In a press release issued on June 19, 2009, Manulife
announced that it had received a notice from the OSC that its
staff "had reached a preliminary conclusion that prior to March
2009, Manulife had failed to adequately disclose" its equity
market exposure. (Am. Compl. ¶ 116).
The OSC would determine
whether it would commence further proceedings after giving
Manulife an opportunity to respond. (Am. Compl. ¶ 117).
-22-
On the
same day, Manulife announced that Rubenovitch would resign as
CFO, effective June 22, 2009. (Am. Compl. ¶ 118).
The final post-Class Period allegations in the Amended
Complaint are quotations from various news sources.
The June
20, 2009 article from the Financial Post quoted in the Amended
Complaint states that certain investors "began asking questions
about Manulife's" Guaranteed Product exposure to declines in
equity prices after Manulife had obtained a C$3 billion loan
from a coalition of banks in November 2008. (Am. Compl. ¶ 118).
An article that appeared in the Toronto Star on June 20, 2009
suggested that they "were not properly informed" of Manulife's
equity market exposure. (Am. Compl. ¶ 120).
Lead Plaintiffs
also note that, in an article from the Globe and Mail published
on the same day, at least one expert states his belief that
investors would have changed their investment decisions "[i]f
more information would have been available." (Am. Compl. ¶ 121).
Other articles, published in the Globe and Mail and by Reuters
News on June 23 and 25, 2009, respectively, suggest that
Manulife had not fully disclosed the impact of potential
declines in equity prices. (Am. Compl. ¶ 122-123).
In their Memorandum in Opposition to Defendants' Motion to
Dismiss, Lead Plaintiffs attempt to support their allegations
that Manulife and the Individual Defendants acted with scienter
by requesting that the Court take judicial notice of an article
-23-
entitled "Inside the fortress:
Drama behind Manulife's doors,"
which appeared in the Canadian newspaper Financial Post on
January 30, 2010.
The introduction of new factual allegations
through a legal memorandum is not permitted, see Fadem v. Ford
Motor Co., 352 F. Supp. 2d 501, 516 (S.D.N.Y. 2005), and
therefore the Court does not consider any allegations not raised
in the Amended Complaint.2
F.
Procedural History
This case was initiated on June 7, 2009, when Eugene
Burzotta filed a class action complaint against Manulife and the
Individual Defendants in this Court.
Later, on September 8,
2009, Anthony Verdi filed a class action complaint against the
same defendants.
Both complaints alleged that Manulife and the
2
Though the Court does not consider the new allegations based in
the Financial Post article, the result of this motion would be
no different if the Court did consider the allegations in this
motion. For substantially the same reasons discussed below in
Sections II.B.1 and II.B.2, neither the fact that Manulife's
Chief Risk Officer believed in April 2006 that the Company
"could not absorb the growing equity risk," nor the fact that in
October 2008, the OFSI requested that Manulife raise capital by
entering into "a series of transactions" support the Lead
Plaintiffs' allegations that Manulife's public statements were
materially false or made with scienter. Similarly, the concerns
expressed by the OFSI in November and December 2008 and the
OFSI's request that Manulife retain "Deloitte & Touche to
conduct an independent examination of [its] risk-management
processes for its Guaranteed Products," (Lead Pls.' Decl. Opp.
Mot. Dismiss Exh. A), indicate that the OFSI was performing its
duty as an insurance regulator, but do not contradict any public
statements nor render any public statements of opinion
attributable to Manulife or the Individual Defendants actionably
false.
-24-
Individual Defendants violated the federal securities laws
between March 28, 2008 and June 22, 2009.
On November 2, 2009
the Court appointed Lead Plaintiffs under section 101(a) of the
Private Securities Litigation Reform Act, 15 U.S.C. § 77z-1.
Lead Plaintiffs filed the Amended Complaint on December 29,
2009, and Manulife and the Individual Defendants moved to
dismiss the Amended Complaint on April 29, 2010.
On October 19,
2010, the Court heard oral argument on the instant motion.
II.
A.
Discussion
Pleading Standard
Manulife and the Individual Defendants move pursuant to
Rule 12(b)(6) of the Federal Rules of Civil Procedure to dismiss
the Amended Complaint for failure to state a claim for which
relief can be granted.
In the absence of heightened or
particularized pleading requirements, a complaint states a claim
for relief when it contains "a short and plain statement of the
grounds for the court's jurisdiction," "a short and plain
statement of the claim showing that the pleader is entitled to
relief," and "a demand for the relief sought." Fed. R. Civ. P.
8(a)(1)-(3).
In making a determination as to whether the
factual allegations support the pleader's claim to relief, the
court accepts all well-pleaded facts alleged in the complaint as
true and draws "all inferences in favor of the plaintiff." In re
DDAVP Direct Purchaser Antitrust Litig., 585 F.3d 677, 692 (2d
-25-
Cir. 2009) (quotations omitted).
However, even when no
heightened or particularized pleading standards apply, a court
need not accept "[t]hreadbare recitals of the elements of a
cause of action, supported by mere conclusory statements."
Ashcroft v. Iqbal, 556 U.S. ----, 129 S. Ct. 1937, 1949 (2009).
Therefore, "only a complaint that states a plausible claim for
relief survives a motion to dismiss." Id. at 1950 (emphasis
added).
Two sources of heightened pleading requirements that apply
in this case are Federal Rule of Civil Procedure 9(b) and the
PSLRA.
Each is briefly discussed below.
Rule 9(b) permits a plaintiff alleging fraud or mistake to
allege "[m]alice, intent, knowledge, and other conditions of a
person's mind . . . generally," but requires that the plaintiff
"state with particularity the circumstances constituting fraud
or mistake."
Intended to provide a defendant with fair notice
of a plaintiff's claims, Rule 9(b) requires that a plaintiff:
"(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." ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493
F.3d 87, 99 (2d Cir. 2007) (citing Novak v. Kasaks, 216 F.3d
300, 306 (2d Cir. 2000)).
Though knowledge may be alleged
generally, Rule 9(b) requires a plaintiff to "plead the events
-26-
which they claim give rise to an inference of knowledge." In re
DDAVP Antitrust Litig., 585 F.3d at 695 (quotations omitted).
Under Section 101(b) of the Private Securities Litigation
Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u-4(b), a complaint
alleging fraud under the '34 Act which is brought as a class
action must "specify each statement alleged to have been
misleading, the reason or reasons why the statement is
misleading, and, if an allegation regarding the statement is
made on information and belief, the complaint shall state with
particularity all facts on which that belief is formed" and
"state with particularity facts giving rise to a strong
inference that the defendant acted with" scienter. 15 U.S.C.
§ 78u-4(b)(1)-(2).
The Second Circuit has recognized that the
PSLRA "establishes a more stringent rule for inferences
involving scienter because [it] 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) (emphasis added) (quotations
omitted).
B.
Defendants' Motion to Dismiss Lead Plaintiffs' Section
10(b) of the '34 Act and Rule 10b-5 Claims
To state a claim under Section 10(b) of the '34 Act and
Rule 10b-5 for fraudulent misrepresentation, a plaintiff must
allege that a defendant "(1) made misstatements or omissions of
-27-
material fact; (2) with scienter; (3) in connection with the
purchase or sale of securities; (4) upon which plaintiffs
relied; and (5) that plaintiffs' reliance was the proximate
cause of their injury." Lentell v. Merrill Lynch & Co. Inc., 396
F.3d 161, 172 (2d Cir. 2005) (quotations omitted).
Failure to
plead any of these required elements with the requisite level of
specificity necessitates dismissal of the claim under Rule
12(b)(6).
Additionally, in order to plead proximate causation, a
plaintiff must plead both "transaction" and "loss" causation.
Lentell, 396 F.3d at 172.
Due to the "fraud-on-the-market"
presumption of transaction causation in securities fraud cases
where the securities at issue were sold on an "impersonal,
efficient market," see Basic v. Levinson, 485 U.S. 224, 248
(1988), transaction causation is not in dispute in this case.
However, to plead loss causation, one must sufficiently plead
the existence of a "causal link between the alleged misconduct
and the economic harm ultimately suffered by the plaintiff,"
Lentell, 396 F.3d at 172 (quoting Emergent Capital Inv. Mgmt.,
LLC v. Stonepath Group, Inc., 343 F.3d 189, 197 (2d Cir. 2003)),
which is satisfied only where a plaintiff demonstrates that "the
risk that caused the loss was within the zone of risk concealed
by the misrepresentations and omissions alleged by a
-28-
disappointed investor," Lentell, 396 F.3d at 173 (emphasis in
original).
1.
Material Misrepresentations
The allegations of material misrepresentations or omissions
in the Amended Complaint fall into two categories.
One category
of allegations involves Manulife's public statements about its
actions to reduce risk posed by its Guaranteed Product
obligations. (See Am. Compl. ¶¶ 6, 7, 43-44, 46, 48, 50-51, 53,
55, 58, 62-65, 91-92).
The other category consists of
statements relating to the adequacy of Manulife's capital
reserves backing its Guaranteed Product obligations. (See Am.
Compl. ¶¶ 6, 8, 53, 58, 68, 70, 74, 77-78, 81, 85-87).
The
Court discusses each category below, in turn.
a.
Statements Regarding Manulife's Risk Management
Strategies
Lead Plaintiffs claim that Manulife and the Individual
Defendants made materially false and misleading statements about
the risk management strategies employed by Manulife in the 2007
Annual Report, and the May, August, and November 2008 Press
Releases, and during the May 2008 Shareholders' Meeting, and the
May, August, and November 2008 Analyst Calls.
As discussed
above, the statements allegedly misrepresenting Manulife's risk
management strategies discussed various details of Manulife's
risk profile, including Manulife's common investment platform
-29-
and the long-term duration of Guaranteed Product obligations, as
well as its risk philosophy, corporate-governance structure,
risk reporting mechanisms, and ability of its various business
segments to generate revenue.
Lead Plaintiffs argue that
Manulife deceived investors because, despite its public
statements to the contrary, Manulife employed inadequate and
ineffective risk management policies, (see, e.g., Am. Compl.
¶¶ 45), and thus misled its investors about the risks facing
Manulife as a company.
Lead Plaintiffs accuse Manulife of
retaining "substantially all of the risk associated with" its
Guaranteed Products, (see, e.g., Am. Compl. ¶ 59), failing to
include "the highly plausible contingency of equity market
declines greater than 10%" in its stress tests, (see, e.g., Am.
Compl. ¶ 47), and making unreasonably optimistic statements,
such as that it expected "to do well no [matter] what and how
turbulent the financial markets may get," (Am. Compl. ¶¶ 61).
The alleged misstatements here are not actionable because
they allege only "fraud-by-hindsight."
It is well-established
in the Second Circuit that a plaintiff alleging securities fraud
may not substantiate a claim by pleading "fraud by hindsight."
Jackson Nat'l Life Ins. Co. v. Merrill Lynch & Co., Inc., 32
F.3d 697, 703 (2d Cir. 1994) (quotation omitted); see also In re
Citigroup Inc. Secs. Litig., 753 F. Supp. 2d 206, 246 (S.D.N.Y.
2010) (claim failed where plaintiffs relied on subsequent
-30-
writedowns to argue that prior disclosures were misleading).
In
this case, Lead Plaintiffs' allegations that Manulife misled the
public about the effectiveness of its risk management policies
and the risk of a greater than 10% decline in equity prices fail
to include any explanation about why these statements were
misleading when made.
The fact that some concerns about
Manulife's disclosure of its equity market exposure were raised
in newspaper articles does not make up for this deficiency.
To substantiate its assertions about the inadequacy of
Manulife's risk management and reported stress tests, Lead
Plaintiffs rely solely on the fact that equity markets declined
during the Class Period, causing Manulife to set aside
additional capital to support its Guaranteed Products
obligations.
However, Lead Plaintiffs point to no facts
suggesting that Manulife misrepresented its risk management
practices or that it was negligent in reporting only a 10% drop
in equity prices in publicly available stress tests.
The
allegations that Manulife misrepresented its hedging program
take statements out of context by ignoring various other
statements about limitations on Manulife's hedging program.
With regard to the stress test statements, Lead Plaintiffs have
failed to show that Manulife was under any obligation to report
additional information; the fact that a greater than 10% drop
-31-
eventually materialized cannot retroactively make the
Defendants' statements misleading or deceptive.
Lead Plaintiffs' allegation that Manulife deceived
investors by concealing its exposure to equity markets is
contradicted by documents referenced in the Amended Complaint.
Section 101(b) of the PSLRA requires that plaintiffs explain
"the reason or reasons why [a] statement is misleading," 15
U.S.C. § 78u-4(b)(1), and therefore a failure to explain why
potential disclosures were inadequate constitutes a failure to
satisfy the particularity requirements of the PSLRA.
Manulife
and the Individual Defendants point to a number of disclosures
of equity market risk that the Amended Complaint fails to
address; Manulife disclosed limitations of its hedging
operations and the potential exposure resulting from its
Guaranteed Product obligations during the Class Period. (See,
e.g., Dfs.' Decl. Supp., Ex. 3, at 10).
Lead Plaintiffs'
argument that the Company made a "risky wager that markets would
continue to rise in the future," (Pl.'s Mem. Opp. Mot. Dismiss,
at 13), does not alter the fact that this risk was disclosed to
the public.
Lead Plaintiffs attempt to bolster their argument
by claiming that Manulife disclosed only the risk of a "nonlinear" impact on capital reserves and not the possibility of an
"exponential" impact on earnings, but this argument fails
because Lead Plaintiffs' claim that the investors would not have
-32-
understood the relationship between capital reserves and
earnings is not substantiated by factual allegations; it is
simply asserted in a conclusory fashion.
Therefore, reading the
allegedly fraudulent materials as a whole, it is clear that Lead
Plaintiffs have failed to explain why Manulife's disclosures of
its equity market exposure were inadequate.
Lead Plaintiffs also claim that Manulife and the Individual
Defendants made impermissible forward-looking statements about
Manulife's ability to withstand the looming financial crisis.
While a securities fraud claim cannot generally be based on
vague statements of corporate optimism, see Rombach v. Chang,
355 F.3d 164, 174 (2d Cir. 2004) (a company is "not required to
take a gloomy, fearful or defeatist view of the future"), a
forward-looking statement that is made recklessly or with
knowledge that it is false is actionable, In re Alliance Pharm.
Corp. Secs. Litig., 279 F. Supp. 2d 171, 192 (S.D.N.Y. 2003).
Among these allegedly fraudulent forward-looking statements
is D'Alessandro's discussion of Manulife's future prospects at
the May 2008 Shareholders Meeting.
On that occasion,
D'Alessandro stated that Manulife's "diverse asset portfolio and
very, very stable funding base and strong liquidity position"
would permit Manulife "to do well no matter what and how
turbulent the financial markets may get."
Lead Plaintiffs
assert in a conclusory fashion that this statement was false and
-33-
misleading, but fail to address the fact that when D'Alessandro
made this statement, he was discussing Manulife's entire
business and not merely its Guaranteed Products lines of
business.
When considered as a whole, Manulife did "weather the
storm," despite substantial losses resulting from capital
charges related to its Guaranteed Products obligations.
It is
true that Manulife sustained losses in certain quarters during
the Class Period, but it is uncontroverted that despite declines
in equity markets, Manulife maintained positive net shareholder
income annually in 2008 and 2009. See Manulife Financial Corp.,
Report of Foreign Issuer (Form 6-K), Ex. 99.1 (Mar. 26, 2010),
available at http://www.sec.gov/Archives/edgar/data/1086888/000119312510068392/0001193125-10-068392-index.htm.
Lead
Plaintiffs have not shown that D'Alessandro's forward-looking
statements about Manulife's ability to continue to be profitable
were in fact false, and have failed to show that they were made
with the intent to deceive investors.
The fact that, as
explained above, Manulife's equity market exposure was revealed
to the public at all times during the Class Period lends further
support to this conclusion.
b.
Statements Regarding the Adequacy of Manulife's
Regulatory Capital
Lead Plaintiffs allege that Manulife and the Individual
Defendants made a number of material misstatements and omissions
-34-
about the adequacy of Manulife's capital during the Class
Period, specifically in its 2007 Annual Report, in the 2008
Press Release, the October 2008 Press Release and Analyst Call,
and the November 2008 Press Release and Analyst Call.
allegations again fall into two categories:
These
statements about
the long-term adequacy of Manulife's regulatory capital and
statements about actions Manulife might take to raise capital if
doing so became necessary.
Lead Plaintiffs allege that Manulife and the Individual
Defendants made numerous misrepresentations about the adequacy
of its capital during the Class Period.
However, Lead
Plaintiffs do not allege that any defendants falsified capital
adequacy statistics released to the public.
Rather, Lead
Plaintiffs claim that Class Period statements to the effect that
Manulife was "well capitalized" misled investors about the risk
posed by Manulife's Guaranteed Products to Manulife's overall
capital levels.
As discussed above, Manulife clearly disclosed
the risks of an equity market downturn to its investors.
Lead
Plaintiffs' fail to exclude the most reasonable interpretation
of Manulife's capital adequacy statements:
that Manulife
believed its regulatory capital to be adequate given the range
of probable equity market declines and the long duration of its
Guaranteed Product obligations.
Given that Manulife explained
its reasoning along with its opinions about capital adequacy,
-35-
Plaintiffs have failed to show that these opinion statements
were false or misleading when read in context.
Therefore, Lead
Plaintiffs have not shown that Manulife's statements about its
capital adequacy are actionable misstatements under the federal
securities laws.
Lead Plaintiffs' allegations that Manulife misrepresented
its intent to raise additional capital through the dilutive
issuance of common stock raise issues of whether these
allegations satisfy the PSLRA.
In arguing that Manulife and the
Individual Defendants made misstatements about the Company's
intent to raise capital by issuing equity, Lead Plaintiffs
misconstrue statements in the October 2008 Press Release and
Analyst Call and in the November 2008 Press Release and Analyst
Call.
The defendants' statements in October and November 2008
were not--as the Lead Plaintiffs contend--"unequivocal"
assurances that Manulife would not raise capital through a
dilutive equity offering.
These statements merely indicated
that Manulife and the Individual Defendants did not believe that
a dilutive equity offering would be the best option for raising
capital at that point in time.
Subsequently, circumstances
changed and Manulife raised capital through a C$3 billion loan
and a C$2.125 billion equity offering, but these later
developments do not suggest fraud, particularly given the
extreme volatility in equity markets at the time.
-36-
Furthermore, the ongoing discussions between Manulife and
the OFSI regarding changes in OFSI's regulatory capital
requirement reinforce the Defendants' argument that their
statements suggesting additional capital would not be required,
or that it could be raised without resorting to a dilutive
equity offering, were made in good faith and therefore were nonactionable forward-looking statements.
2.
Scienter
As discussed above, a number of the alleged misstatements
and omissions do not qualify as well-pleaded "misstatements"
under the PSLRA.
A number of others are non-actionable forward-
looking statements as pleaded because Lead Plaintiffs have
failed to show that they were made with an actual intent to
deceive.
For these statements, Lead Plaintiffs have failed
adequately to plead that the "material misstatement" and
scienter elements of a securities fraud claim have been
satisfied.
However, even assuming that the Amended Complaint
sufficiently alleges that the Defendants made misstatements
during the Class Period, dismissal of Lead Plaintiffs' claims
would still be warranted because Lead Plaintiffs have failed
adequately to plead scienter.
Under the heightened pleading requirements of the PSLRA and
Rule 9(b), a plaintiff must "state with particularity facts
giving rise to a strong inference that the defendant acted with
-37-
the required state of mind." 15 U.S.C. § 78u-4(b)(3)(A).
This
may be accomplished "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, 493 F.3d at 99.
Lead Plaintiffs do not claim that Manulife or the
Individual Defendants possessed a motive to commit fraud, and
instead argue that the Amended Complaint alleges circumstances
strongly suggesting conscious misbehavior or recklessness.
Manulife and the Individual Defendants contend that the Amended
Complaint does not raise an inference of scienter that is as
plausible as competing, non-fraudulent inferences.
While a
plaintiff in a securities fraud suit need not prove his case to
survive a motion to dismiss, a plaintiff must at least "raise a
reasonable and strong inference of scienter." In re EVCI
Colleges Holding Corp. Secs. Litig., 469 F. Supp. 2d 88, 99
(S.D.N.Y. 2006).
In making this determination, the Court must
consider the allegations in the Amended Complaint as a whole.
Lead Plaintiffs argue that, the massive losses sustained by the
Guaranteed Products lines of business, the Individual
Defendants' admitted role in Manulife's risk management
apparatus, and their involvement in the production of various
press releases and analyst conference calls strongly suggest
that they were aware of risks posed by declining equity markets,
-38-
but ignored and disregarded those risks.
Lead Plaintiffs also
argue that Rubenovitch's resignation and the announcement of an
investigation into Manulife's Class Period disclosures by the
OSC in June 2009 strengthen the inference of scienter.
Lead Plaintiffs' allegations do not give rise to a strong
inference of scienter unless all competing inferences are
ignored; these allegations fail to raise an inference at least
as compelling as more plausible, non-fraud inferences.
Lead
Plaintiffs have failed to show that either Manulife or the
Individual Defendants intended to deceive the public by taking
on exposure to the equity markets; it is more plausible in light
of all the allegations that the Defendants believed the
Guaranteed Products would be profitable over the long term and
that in the short term, Manulife's other revenue streams and
accumulated capital would keep the Company afloat.
The
resignation of Rubenovitch in June 2009 is not alleged to have
been a result of his misconduct.
Lead Plaintiffs make much of
the timing of the resignation, but in the absence of a specific
allegation that the resignation resulted from Rubenovitch's
wrongdoing, the Court cannot say that the resignation raises any
inference of scienter.
The only allegation raising an inference
of scienter, the OSC investigation that was announced in June
2009, does not itself constitute a strong inference of scienter
and does not sufficiently strengthen the other allegations.
-39-
Securities regulators are obligated to examine the behavior of
public corporations, and the fact that a regulator is fulfilling
this role cannot be sufficient to allege scienter.
The Court
notes that the OSC has now completed its investigation and
informed Manulife that it will take no further action. See
Manulife Financial Corp., April Press Release (Form 6-K), Ex.
99.1 (April 21, 2011), available at http://www.sec.gov/Archives/edgar/data/1086888/000108688811000022/exhibit99-1.htm.
With respect to the December 2, 2008 announcement that
Manulife would issue common stock to raise capital, Lead
Plaintiffs' argue that the proximity in time between Defendants'
denials and the share issuance provides strong circumstantial
evidence of conscious misbehavior and recklessness.
However,
this argument takes no account of the massive economic and
political changes taking place during the Class Period,
particularly in the fall of 2008.
The Amended Complaint does
not raise the requisite strong inference of scienter to support
a securities fraud claim.
3.
Loss Causation
Manulife and the Individual Defendants argue that the
Amended Complaint fails adequately to plead loss causation.
In
Lentell, the Second Circuit contrasted the element of loss
causation in a claim under § 10(b) of the '34 Act and Rule 10b-5
to the proximate causation element of tort law, and stated that
-40-
loss causation is established where an investment loss is within
the "zone of risk" concealed by a misstatement or material
omission. 396 F.3d at 173.
Even when the "zone of risk"
requirement is satisfied, however, a plaintiff must specifically
allege:
(1) "facts sufficient to support an inference that it
was defendant’s fraud--rather than other salient factors--that
proximately caused plaintiff’s loss;" or (2) "facts sufficient
to apportion the losses" between the misrepresentation and other
salient factors. Id. at 177.
Lead Plaintiffs' theory of loss
causation is that public misstatements or material omissions of
information artificially inflated the price of Manulife common
stock, so that when the deceptive scheme was revealed and the
price declined, members of the Class sustained economic injury.
(Am. Compl. ¶ 140).
Lead Plaintiffs allege that the decline in
price of Manulife common stock that took place over the Class
Period was due solely to the revelation of a fraudulent scheme
on the part of Manulife and the Individual Defendants, and do
not apportion this decline between the alleged scheme and any
other salient factors, such as changed market conditions. (Am.
Compl. ¶ 148).
The first deficiency in Lead Plaintiffs' pleading of loss
causation is their failure to explain the decline in price of
Manulife common stock from US$40.11 on April 3, 2008 to US$23.34
at the close of trading on October 10, 2008.
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Though Lead
Plaintiffs allege loss causation on a theory of artificial
inflation followed by corrective disclosure, no corrective
disclosure is pleaded to explain the decline between April and
early October, which constitutes approximately one quarter of
the US$32.21 decline in the price of Manulife common stock over
the Class Period.
Indeed, Lead Plaintiffs take the position
that public statements made in the May 2008 Shareholders'
Meeting, Press Release, and Analyst Call, as well as the August
2008 Press Release and Analyst Call "maintained the artificial
inflation in Manulife's common stock price." (Am. Compl. ¶ 141).
In light of Lead Plaintiffs' failure to point to any corrective
disclosure prior to October 10, 2008 and their affirmative
statement that Class Period statements preceding October 10,
2008 maintained the artificial inflation, Lead Plaintiffs have
failed plausibly to allege that the declines in the price of
Manulife common stock prior to October 10, 2008 resulted from
Manulife's or the Individual Defendants' fraudulent acts.
Lead Plaintiffs next allege that statements made in the
October 2008 Press Release and during the October 2008 Analyst
Call artificially inflated Manulife's common stock price to
US$26.31 at the close of trading on October 14, 2008.
According
to the Amended Complaint, the next event that caused a decline
in the price of Manulife common stock took place on December 1,
when unspecified rumors about Manulife's need to raise
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additional capital were allegedly leaked to the market, and the
share price declined from an opening price of US$17.50 to a
closing price of US$16.39.
However, Lead Plaintiffs make no
attempt to show that any corrective disclosures caused the drop
between the October 14 closing price and the December 1 opening
price.
Furthermore, the bare allegation that rumors were
circulating in the market is not a "well-pleaded" factual
allegation.
While a complaint that provides a defendant with
notice of the claims against the defendant is not necessarily
sufficient to withstand a motion to dismiss, Iqbal, 129 S. Ct.
at 1949, an allegation so general that it fails even to provide
fair notice to a defendant fails to satisfy even the liberal
requirements of Federal Rule of Civil Procedure 8(a), see Van
Alstyne v. Ackerley Group, Inc., 8 Fed App'x 147, 154 (2d Cir.
2001) ("The function of the pleadings is to give opposing
parties notice of the facts on which the pleader will rely
. . . ."); see also Stratte-McClure v. Stanley, No. 06 Civ. 09
Civ. 2017 (DAB), 2011 WL 1362100, *14 (S.D.N.Y. Apr. 4, 2011).
Here, the rumor claim is so general that it fails to provide the
Defendants with proper notice of what rumors Lead Plaintiffs are
referring to.
Such a general claim cannot support an allegation
of loss causation.
Lead Plaintiffs argue that Manulife's December 2, 2008
announcement that it would raise capital through an offering of
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C$2.125 billion in common stock was a "corrective disclosure"
that caused the price of Manulife common stock to decline from
US$16.39 to US$15.96 per share on December 2, and then to
decline further to US$15.34 per share by December 4.
As stated
above, a loss causation allegation must support an inference
that a defendant's fraud proximately caused the loss.
396 F.3d at 177.
Lentell,
Manulife and the Individual Defendants argue
that Lead Plaintiffs' loss causation allegation is deficient
because it fails to explain a December 5, 2008 rebound in the
price of Manulife common stock back up to a closing price of
US$16.36--just three cents lower than the closing price
preceding the December 2 announcement.
While such a "rebound"
in a stock price after an alleged corrective disclosure does not
make the allegation implausible per se, the Lead Plaintiffs'
failure to address or explain this rebound renders their loss
causation allegation implausible in this case.
Lead Plaintiffs allege that additional corrective
disclosures were made:
on February 12, 2009, when Manulife
announced that its losses for the fourth quarter of 2008 would
be C$370 million higher than forecast on December 2, 2008 and
that it would need to increase capital reserves by approximately
C$2.7 billion; on February 27, 2009, when Fitch Ratings
downgraded Manulife's ratings; and on March 2, 2009, when
Rubenovitch discussed the impact of Manulife's Guaranteed
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Products on the Company's earnings for 2008.
However, in order
to qualify as a "corrective disclosure" for loss causation
purposes, an alleged disclosure must "reveal the falsity of an
alleged misstatement." In re Omnicom Group, Inc. Secs. Litig.,
541 F. Supp. 2d 546, 552 (S.D.N.Y.).
Manulife's downgrade by
Fitch Ratings does not qualify as such a corrective disclosure
because the Amended Complaint does not allege that any new
material information was revealed by the downgrade.
Additionally, the disclosures on February 27 and March 2, 2009
do not reveal any new information that relates to the alleged
fraud.
If there was any fraud about Manulife's equity market
exposure or its intention to raise capital by issuing dilutive
equity, the fact of this fraud would have been revealed on
December 2, 2008; the Lead Plaintiffs make no credible
allegation that the price of Manulife common stock was
artificially inflated beyond December 2.
There are also a
number of unexplained gaps in the price decline of Manulife
common stock between December 2, 2008 and March 3, 2009 that the
Amended Complaint does not account for.
For all of the above reasons, Lead Plaintiffs' assertion
that the "timing and magnitude of the price decline in Manulife
common stock negates any inference that the loss suffered by
Plaintiffs and the other Class members was caused by [factors]
unrelated to the Defendants' fraudulent conduct," (Am. Compl.
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¶ 148), is not supported by a careful analysis of the Amended
Complaint.
Because the Amended Complaint fails to allege facts
sufficient to attribute the Class members' economic loss to the
disclosure of an alleged fraudulent scheme, Lead Plaintiffs have
failed to show loss causation, and the claims against Manulife
and the Individual Defendants under § 10(b) of the '34 Act and
Rule 10b-5 must be dismissed.
C.
Defendants' Motion to Dismiss Lead Plaintiffs' Section
20(a) of the '34 Act Claims
Lead Plaintiffs claim that the Individual Defendants are
liable both as primary violators of the federal securities laws,
and as control persons liable due to their positions of
authority within the Company.
A prima facie "control person"
claim under § 20(a) of the '34 Act has two elements:
(1) a
primary violation of the '34 Act by a person controlled by the
targeted defendant; and (2) culpable participation by the
targeted defendant in the controlled person's alleged fraud.
Ganino v. Citizens Utilities Co., 228 F.3d 154, 170 (2d Cir.
2000) (quotations omitted).
The first element of a control
person claim under the '34 Act is not satisfied because, as
discussed above, the Amended Complaint fails to state a valid
claim against Manulife.
Therefore, Lead Plaintiffs' claims
under § 20(a) of the '34 Act must be dismissed.
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D.
Leave to Amend
Under the Federal Rules of Civil Procedure, a district
court must "freely give leave [to amend a pleading] when justice
so requires." Fed. R. Civ. P. 15(a)(2).
While a district court
may deny leave to amend "for good reason, including futility,
bad faith, undue delay, or undue prejudice to the opposing
party," Holmes v. Grubman, 568 F.3d 329, 334 (2d Cir. 2009),
Manulife and the Individual Defendants allege no good reason
warranting dismissal with prejudice.
III.
Conclusion
As discussed above, Lead Plaintiffs have failed adequately
to state its claims for securities fraud under § 10(b) of the
'34 Act or Rule 10b-5 and its control-person claims under
§ 20(a) of the '34 Act.
Therefore, Manulife and the Individual
Defendants' motion to dismiss the Amended Complaint is GRANTED.
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Lead
of this
Manulife
Plaintiffs are granted sixty
Opinion and
and the
(60)
Order to file a second amended complaint.
Individual
Defendants shall answer or otherwise
respond to this second amended complaint,
forty-five
(45)
days from the entry
days of
if filed,
within
service.
SO ORDERED.
Dated:
New York,
May
23,
New
York
2011
JOHN
United
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F.
States
KEENAN
District
Judge
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