649 F. App'x 7
2d Cir.2016Background
- Plaintiffs (investors) alleged AmTrust and certain officers used fraudulent accounting to understate loss and loss adjustment expense (LLAE) in AmTrust Financial Services, Inc.’s consolidated GAAP statements for 2010–2012.
- Plaintiffs relied on comparisons between AmTrust’s consolidated GAAP statements filed with the SEC and statutory accounting principle (SAP) filings to insurance regulators, asserting SAP-reported subsidiary LLAE materially exceeded consolidated GAAP LLAE.
- Plaintiffs sued under Exchange Act § 10(b)/Rule 10b-5, § 20(a) and Securities Act § 11, asserting material misstatements/omissions and scienter; they filed a second amended complaint (SAC).
- The district court dismissed the SAC for failure to plead falsity and scienter with particularity, finding Plaintiffs’ GAAP-violation allegations conclusory and that GAAP permits judgment among reasonable alternatives.
- Plaintiffs appealed, arguing they pleaded falsity with specificity (identifying statements, speakers, dollar discrepancies) and that the district court improperly credited AmTrust’s 10-K disclosures about SAP/GAAP differences.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether SAC pleaded a material misrepresentation or omission under § 10(b)/Rule 10b-5 | Alleged specific false statements, identified speakers, quantified dollar misstatements by comparing SAP regulator filings to consolidated GAAP, and explained falsity | Discrepancy explained by permissible differences between SAP and GAAP; Plaintiffs’ allegations are conclusory and fail to show a GAAP violation | Dismissal affirmed: plaintiffs failed to plead falsity with the required particularity; observed discrepancy alone insufficient given AmTrust’s disclosures |
| Whether plaintiffs pleaded scienter (fraudulent intent) with the PSLRA’s "strong inference" standard | The magnitude of the alleged misstatements and comparisons to regulatory filings support a strong inference of intent | Plaintiffs offered no particularized facts showing conscious misbehavior or recklessness; alternative innocent inferences are at least as compelling | Dismissal affirmed: scienter not pleaded with the requisite cogency under Tellabs/PSLRA |
| Whether Exchange Act § 20(a) and Securities Act § 11 claims survive if primary violations fail | N/A (claims depend on primary liability) | N/A | Dismissal affirmed: § 20(a) and § 11 claims properly dismissed because primary securities fraud claims failed |
| Whether the district court erred by relying on AmTrust’s 10-K statements about SAP/GAAP differences | Plaintiffs contend the court improperly credited AmTrust’s disclosure over their allegations and that SAP/GAAP differences would not explain income statement variances | Defendants contend the 10-K disclosed plausible differences and that plaintiffs’ theory lacks factual support; court need not credit bare conclusions | Court did not credit the 10-K as true; it concluded Plaintiffs’ allegations were conclusory and inadequate, so no error in dismissal |
Key Cases Cited
- Pacific Inv. Mgmt. Co. LLC v. Mayer Brown LLP, 603 F.3d 144 (2d Cir. 2010) (elements of a private securities fraud action)
- ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (Rule 9(b) applies to securities fraud pleadings)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (PSLRA scienter requires a "strong inference" at least as compelling as opposing inferences)
- Kleinman v. Elan Corp., 706 F.3d 145 (2d Cir. 2013) ("strong inference" standard explained)
- Employees’ Ret. Sys. of Gov’t of the V.I. v. Blanford, 794 F.3d 297 (2d Cir. 2015) (PSLRA falsity and scienter requirements)
- Thor Power Tool Co. v. Comm’r, 439 U.S. 522 (1979) (GAAP tolerates reasonable alternative treatments and management judgment)
- ECA, Local 134 IBEW Joint Pension Tr. of Chi. v. JPMorgan Chase Co., 553 F.3d 187 (2d Cir. 2009) (standard of review on Rule 12(b)(6))
- In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347 (2d Cir. 2010) (§ 11 claim requires an untrue statement of material fact in the registration statement)