*1 employee that Amendment retaliation claim and remand against fellow crimination proceedings. the case for further the access of the courts directly implicated testimony, agree cannot we to truthful court “centered
with the district solely per- related to [her]
around issues with the terms and
sonal dissatisfaction The mo- employment.” of her
conditions Kenny’s speaking out on
tive of Konits personal griev- was not to “redress
behalf pub- rather “had broader [the] ances” but CALIFORNIA PUBLIC EMPLOYEES' assisting Kenny of to redress purpose” lic SYSTEM, RETIREMENT on behalf gender of discrimination. Kenny’s claims similarly and all situ of itself others (2d Cowen, 165 F.3d 163-64 Lewis v. ated; York Re New State Common Cir.1999). therefore hold that We Fund; tirement *The Butler Wick speech on a matter of 1996 lawsuit was Company, Trust The of the Executor City public concern. See Thomas v. Deceased, Teeple, N. Estate of John (9th Beaverton, 802, 809, Appellants Cir.2004) (finding speech disapproving v. discriminatory treatment of another public employee speech on matter CORPORATION; The CHUBB Dean R. concern). O'Hare; Kelso; Henry David B. B. Schram; Inc.; Executive Risk Ste Because the district court held Kon- phen Sills; Kullas; H. J. Robert Rob on a matter of speech its’s lawsuit was not ert V. Deutsch. concern, public it did not address the other No. 03-3755. establishing for a First requirements two claim, namely, Amendment retaliation Appeals, United States Court of whether Konits suffered an adverse em- Third Circuit. whether a causal con- ployment action and speech nection existed between Argued Oct. 2004. employment the adverse action. We Filed Dec. therefore remand this case the district proceedings court for further on Konits’s
retaliation claim and the related recon- municipal
sideration of Konits’s claim of
liability, qualified immunity, the defense supplemental jurisdic-
and the exercise
tion over the state law claims.
CONCLUSION reasons, foregoing
For the we vacate the granting
decision of the district court sum-
mary judgment to defendants on the First
* Pursuant to the Court’s Order of 10/5/04 *8 Isaacson, Lerach, Eric A. S'.
William Stoia, Geller, Lerach, Coughlin, (Argued), Robbins, Diego, for Appel- pleaded allegations Rudman & San in the Second Amend Complaint ed and lants. consider the documents incorporated by reference therein. See In Wachtell, (Argued), Herbert Jonathan Burlington re Factory Litig., Coat Sec. Piekhardt, Savarese, Wachtell, F. E. John (3d 1410, 1420, 1426 Cir.1997). F.3d Katz, York, Mary & New Lipton, Rosen C. Drinker, Reath, & Roper, Biddle Philadel- Background to Class Period phia, Appellees Corpora- for The Chubb Plaintiffs are acquired investors who O’Hare; tion; Kelso; Dean R. David B. 27, Chubb common April stock between Schram; Henry B. Executive Risk Inc. (the 1999 and October “Class O’Shaughnessy, (Argued), William J. Period”), including the former sharehold- Newark, English, Appel- & McCarter ers of exchanged Executive Risk who their Sills; Kullas; Stephen lees J. Robert H. Executive Risk shares for shares of Chubb Robert Y. Deutsch. stock pursuant merger to a of the compa- July nies that occurred on 1999. The SLOVITER, Before VAN Chubb, Risk, Defendants are Executive COWEN, ANTWERPEN and Circuit officers, and top corporate their former Judges. (“CEO”) Chubb Chief Executive Officer O’Hare, Dean R. Chief Financial COWEN, Officer Judge. Circuit (“CFO”) Kelso, David B. Accounting Chief This is a securities class action lawsuit Henry Schram, Officer B. and Executive brought on behalf of shareholders of the Sills, Stephen Risk CEO J. Board Chair- (“Chubb”) Corporation against Chubb Kullas, man Robert H. and CFO Robert V. (“Executive Chubb, Risk, Inc. Executive Deutsch. Risk”), and several and Chubb Executive Chubb is a compa- diversified insurance Risk officers. Plaintiffs aver that Defen- ny Warren, headquartered in Jersey, New dants artificially defrauded investors with local branch and service offices inflating the value of Chubb’s common throughout North America and interna- stock through accounting manipulations tionally. personal, Chubb sells standard designed false statements to effectuate commercial specialty in- commercial a stock-for-stock between merger Chubb surance largest and is one of the national Risk, alleged Executive and avoid an underwriters of directors’ and officers’ lia- hostile attempt. takeover The District bility insurance. The claims this securi- granted Court Defendants’ motion to dis- ties class action concern Chubb’s standard miss Plaintiffs’ Second Amended Com- business, commercial insurance which ac- plaint pursuant 12(b)(6), to Fed.R.Civ.P. approximately counts for one-third of Litigation the Private Securities Reform premiums. Chubb’s total (“PSLRA”), §§ Act 15 U.S.C. 78u-4 et 9(b), seq., and Fed.R.Civ.P. and denied Beginning continuing Plaintiffs leave to file a Third Amended through perform- Chubb’s financial Complaint. We will affirm. ance deteriorated. consistently
cited competitive standard commer- *9 I. cial insurance market as the cause of its poor performance during period. this On A. 2, 1999, February reported disap- Chubb In reviewing the factual background of pointing quarter year- fourth 1998 and this litigation, we accept as true the well- end results. Defendant O’Hare assured bers, Deutsch, Sills, Kullas, including and aggressive taking are “[w]e investors that special payments benefits and given for this adequate prices steps to achieve Executive endorsing for the transaction to business, to the im- see expect and we Final approval Risk shareholders. through we actions as move of these pact 17.) merger subject to a of Executive was vote (Comply cycle.” the renewal Risk’s shareholders. to ad- employed strategies two O’Hare Ex- impending Plaintiffs claim that the First, to flagging business. Chubb’s dress and ecutive Risk shareholder vote fixed continuing diminution of the combat ratio exchange placed pres- tremendous price earnings-per- and stock Chubb’s Chubb, O’Hare, Kelso, on and sure Schram (“EPS”) 1998, in latter half of the share price,1 to halt the stock decline Chubb’s refer promulgated Plaintiffs O’Hare what result in any further decline would because the non-renewal increase/policy to as “rate for less consideration Executive Risk (hereinafter referred to as the initiative” thereby jeopardize shareholders and initiative”). in October “rate Announced such, merger allege Plaintiffs vote. As disappointing following the release Defendants issued false the Chubb results, initia- quarter 1998 the rate third misleading representing statements com- sought the standard revamp tive to ameliorating the rate initiative was by increasing operations mercial insurance problems the standard commercial unprofit- to refusing renew premiums business, doing so lines it was Second, in effort an able business. This, anticipated. more than quickly difficulties the standard counter the allege, artificially inflated the Plaintiffs profita- and increase commercial business portrayed value of Chubb’s stock and sought acquire profitable a bility, Chubb merger to Executive as more beneficial company. According- insurance specialty truly Risk than it was. shareholders 1998, targeted ly, Executive also claim that the Chubb Defen- Plaintiffs Risk, special- profitable carrier insurance to continue artifi- dants were motivated liability in- and officers’ izing directors’ cially stock price inflate the Chubb’s 6, surance, February acquisition. On acquisition consummation of the following 1999, following negotiations which took threatened with a hos- because Chubb was and December 1998 between October place tile takeover. investigations conducted diligence and due 1999, January Defendants O’Hare and False Financial False Statements agree- merger publicly Sills announced Quarter 1999 First Results: included a stock-for- ment. The terms Plaintiffs, al- Defendants’ According exchange at fixed ratio acquisition stock to inflate the legedly fraudulent scheme to each share of of 1.235 Chubb shares with the began value stock of Chubb’s 5, February Risk stock. On Executive re- quarter first release of Chubb’s 1999, represented a agreed-to-ratio April issued on press sults via a release 63%, stock val- premium of as Chubb 1999. at and Executive Risk stock ued $58 1/16 addition, were bet- The first results at was valued $44. improved an expected, revealing mem- ter than Executive Risk’s Board contend that 5, 1999, day however, February before immediately prior to closed on Notably, quarter 1999 results Risk release of Chubb's first of the Executive announcement price April closed Chubb's share merger. 1/16, price $58 at which had same *10 a combined EPS and ratio2 of 117.9% in of a growth series of begun initiatives lines, the standard commercial insurance year. late last down from in quarter 119.5% the fourth It represented also that Chubb’s standard report. Plaintiffs claim that commercial insurance combined ratio was intentionally Chubb Defendants falsified 117.9%,down from quarter the fourth results, including these the calculation of combined ratio of 119.5%. Plaintiffs claim ratio, by the combined violating generally that in a follow-up conference call held on (“GAAP”) accepted accounting principles 27, April in and follow-up conversa- SEC, addition, and rules. Plaintiffs al- tions with analysts, individual money and lege days that in the and weeks following portfolio managers, institutional investors release, quarter the first 1999 re- large shareholders, and Defendants sults, promulgated Chubb Defendants O’Hare and Schram maintained that numerous falsely statements attributing (a) the rate only initiative was not work- the favorable first quarter 1999 results to ing, but actually was exceeding manage- success the rate initiative turning expectations, ment’s and this accounted in around the standard commercial lines and large part for Chubb’s better-than-expect- forecasting even further improvement. results; ed first Plaintiffs assert that statements con- (b) as a result of the successful turn- tained April Chubb’s press around of Chubb’s standard commercial false, release were as were statements insurance operations, part of Chubb’s by made individual Chubb Defendants in business would show 5 premi- to 6% 1/2% follow-up conversations and conference growth um throughout 1999, as Chubb’s analysts calls with and investors. Chubb’s rate increases for new or renewal standard April 1999 press release stated that commercial policies insurance were stick- pricing strategy [0]ur in standard com- ing; mercial lines has begun to show the impact we are looking for our (c) renewal the momentum of rate increases in month, by business. Month renewal Chubb’s standard commercial insurance rate momentum, increases are building operations was growing by month; month and we expect this trend to continue. (d) Chubb was successful at retaining the Moreover, we have been successful in higher priced standard commercial insur- retaining business we want to keep at ance rate which it desired and profit- was rates, higher while at the same time we able; are walking away from business where (e) although Chubb prepared to lose we can’t adequate obtain pricing. By between and $250 million in $300 standard maintaining this profit oriented disci- commercial business, insurance as this pline, standard commercial lines will would make that business profitable, more likely show a premiums decline in Chubb was not losing as much of its stan- throughout year produce im- dard commercial insurance business due to proved combined ratios. This decline rate feared; increases as it had premiums by should be offset continued premium growth (f) personal special- the combined ratio of Chubb’s standard ty commercial lines the benefits commercial insurance business would de- 2. The “combined compares ratio” the in- ums. A ratio over generally 100% indicates curred plus losses operating expenses of an underwriting an loss. insurance business to premi- its total earned
137 2, 1999, by In a 1999 conference attended to June about 110% throughout cline shareholders, 1998, securities ana- by Chubb year-end at from 119.5% year-end money and lysts, investors institutional underwriting prof- an producing ultimately speech a managers, reiterated in O’Hare byit 2000. private in his follow-up and conversations Plaintiffs, Furthermore, according to of Chubb’s stan- optimistic assessments “[y]ou are so guys O’Hare stated and dard commercial lines his forecasts try- bloody disgusting. it’s We’re negative EPS, ratio, premi- improved combined and you strong signal a to ing to send throughout 1999. He further growth um I don’t know things getting are better. standard commercial predicted “the ... dam say god to it This [sic] how else produce an would un- insurance business thought than I ship has turned faster year a profit by the 2000 and derwriting 38.) going (ComplJ to.” was (Id. by on 2001.” equity total return 6% ¶ 52.) re- The individual Chubb Defendants 15, 1999, at a times, On June luncheon with in- these statements several
peated analysts ex- several securities O’Hare with vari- cluding private conversations 27, optimistic he “more than pressed that April analysts subsequent to ous added that Chubb would realize call, usual” and during 1999 conference and 1999 on equity a 6% return the standard on Meeting Annual Chubb Shareholders’ by lines late 2000. commercial Based Moreover, 27, De- 1999. the Chubb April 25, meeting a 1999 between upon June analysts of Chubb’s de- fendants informed Stearns, from analyst and an Bear O’Hare 1999 EPS cision to increase its forecasted reported Bear Stearns O’Hare’s statement + to and its EPS to $4.10+ $4.50 the company’s repricing/underwrit- “that better-than-expected pace because of project standard commercial ing of Chubb’s standard turnaround ... make progress” to and lines continues business. commercial insurance appears “the decline in retentions have 12, meeting May private On bottomed, management expects and these analysts, inves- with securities institutional (Id. higher.” move figures begin Boston, money managers in De- tors and ¶ 61.) allegedly maintained that fendant O’Hare the falsified first Plaintiffs contend that rising in the rates were standard premium and the Defen- quarter results Chubb and a 1999 commercial lines forecasted immedi- subsequent representations dants’ EPS of 2000 EPS $4.28 $4.70. stock to ately the value Chubb caused 10-Q for first Report Form rise.3 Chubb’s 1999, by filed signed Schram and quarter j Registration The Executive Risk Chubb 1999, May 14, provided on
with the SEC Proxy Merger Statement premiums had decreased total Statement as a commercial lines 3.9% the standard initiative, 17, 1999, on Executive the rate but that June Chubb and result of On Registration “rates increased moder- Risk with the SEC the renewed business filed Proxy Merger 1999 and we related ately in the first Statement 51.) ¶ (Id. proposed merger. The individual to continue.” expect this trend high) $70 per closed at on on Class Period $57 3. stock traded share 9/16 7, 15, per May April share $70 June 5/16 1999, (the per May $76 share on 3/8 *12 signed Registration quarter Chubb Defendants the results. The second had on closed Statement, the individual Executive allege 1999. June Plaintiffs that the Proxy. wrote the Merger Risk Defendants of per reported EPS share com- $1.00 bined ratio of were “well 120.8% below Proxy was to Execu- Merger The mailed 64.) expected (ComplA results.” Al- , on tive Risk June shareholders though previ- O’Hare admitted he had Proxy recom- Merger unanimously The “overly been ously optimistic at. the end of of merger mended the approval quarter” regarding the first of turnaround company’s shareholders and concluded lines, is in merger that “the the best interests of standard commercial Plaintiffs and its shareholders.” quarter Executive Risk contend the second re- 1999 Proxy also Merger incorporated The misleading, sults were false and and that analysts, opinions of certain securities the Chubb continued to Defendants con- “the is Execu- merger consideration fair to ceal the true extent the rate initiative’s tive from a financial Risk stockholders with purportedly failure false and mislead- Proxy point Merger The includ- view.” ing statements. quarter ed Chubb’s first 1999 results ' July press Chubb’s 1999 release pro- first quarter
reference to Chubb’s vided, part: in statement, 10-Q Form and it detailed the climb in stock value between Feb- premiums Standard commercial lines 5,1999 15,1999. ruary and June in the quarter second declined 9% million allege representations
Plaintiffs and had combined ratio $455.4 Registration in contained Statement of 120.8%. progress “We made continued Proxy Merger false and mislead- in improving pricing our standard ing they were upon because based Chubb’s during commercial lines the quarter,” results, quarter falsified first Mr. pricing said O’Hare. “Our initiative Chubb Defendants’ false statements re- momentum, building with rates on garding the standard commercial insur- renewal continuing business to acceler- thereto, ance made artifi- business and the ate. We have retained business' we cially price of inflated Chubb stock. rates, to keep want at more attractive assert that further the Executive while walking away unprofitable from ” Risk merg- Defendants recommended the under-priced renewals.... for, er to exchange shareholders magnitude “Given the moderate alia, inter special millions of dollars early stages rate increases benefits from Chubb. repricing program,” O’Hare, Mr. said “it approved Executive Risk’s shareholders will take at least cycles two renewal 19, 1999, the merger July and it adequately reprice the entire standard following day. Anticipating executed the book, commercial during that time the release of lower-than-forecast second we will continue to have losses from non- results, quarter price Chubb’s stock policies. renewed ... Thus will be began to fall immediately thereafter. mid-2000 before benefits of these significantly actions flow to the bottom
False Statements and False Financial line.” Quarter Results: Second (Id.) 27, 1999, On July follow-up conference call approximately one and in week following merg- subsequent analysts, consummation of the conversations with er, quarter Chubb released its second 1999 O’Hare and Kelso stated: allegedly from standard commercial (a) Premiums actions to turn around Management’s insurance, of our represent which 34% insurance commercial standard Chubb’s by 6.4% the writings, total decreased re- by raising prices and not operations months 1999 and 9.1% in the first six fact policies were in unprofitable newing the simi- compared with second longer take than ex- would working, but *13 in The were periods lar 1998. decreases EPS; pected to benefit Chubb’s place in strategy put result of the we the (b) in standard the rate increases Chubb’s good late to business at in renew operations were still insurance commercial not under- adequate prices and renew growing; accounts where we cannot performing On the business price adequacy. attain (c) the ratio of standard combined Chubb’s renewed, that was rates have increased de- business would commercial insurance steadily in first modestly yet the six 1999; the of during cline balance expect 1999 and we this trend months of (d) changes in standard com- Chubb’s the continue. Retention levels were low- to produce would mercial insurance business first six months of com- er underwriting by a 6% profit 2000 and an period 1998. pared with same by equity on 2001. total return of the non-renewals Approximately half result of business we chose not repeated O’Hare and Kelso Defendants of to and half were the result renew in private this conversations information price in- accepting customers analysts, and indicated with various at instituted. It will take creases we expected a 1999 EPS of over Chubb still cycles adequately to least renewal two of and a EPS over $4.50. $4.00 standard commercial reprice the entire re- disappointing In these response to during that time we will con- book and sults, to to drop stock continued Chubb’s have from non-renewal tinue to losses July 1999. Plain- low on as $58 5/8 Thus, it will be mid-2000 be- policies. however, maintain, that Chubb’s stock tiffs a significant pos- have fore these actions artificially inflated levels traded our results. itive effect on Pe- throughout the of the Class remainder ¶ 74.) (Id. of the Chubb Defendants’ riod because completely disclose the failure refusal to Period: Third Class Close of impact, and its financial initiative rate Quarter 1999 Results quarter 1999 their use of falsified second 15, 1999, the close of the October On data, and their continued circulation Period, its third Chubb revealed Class misleading statements. addi- false and reported quarter 1999 results. Chubb tion, failed Plaintiffs aver Chubb per EPS $.40 $.45 lower-than-forecast inte- the adverse effects its disclose share, in part caused losses attributable gration with Executive Risk. Floyd.4 reported Hurricane Chubb’s combined commercial insurance purportedly fraudulent second standard Chubb’s analysts, Several ratio increased 130%. quarter 1999 statements were included negative impact of 10-Q report, recognizing filed while quarter second Form results, main- Floyd on these August report Hurricane with the SEC 1999. This poor performance tained that stated: catastrophe losses from Hurricane press explained a result of release Chubb’s 538.) Floyd.” (App. at "primarily as third results were down commercial lines contributed to ile “True Alleged standard Facts” and earnings shortfall. Accounting Chubb’s October Fraudulent 15,1999 press release stated: Practices aggressive said its initiative to Plaintiffs maintain that Defendants reprice standard commercial business knew failing the rate initiative was unprofitable prune and to accounts con- Period, throughout the Class and conse- meet tinues to with success. The aver- quently falsified the first and second age price policies increase renewed quarter 1999 results and issued false higher each successive month of statements thereto to an effect artificial unprofitable quarter, the third busi- inflation of Chubb stock value. Further- *14 being ness is renewed. more, Plaintiffs assert that the Chubb De- right in
“We are headed direction fendants at the that knew outset even if in the standard commercial fixing busi- successful, was ultimately initiative O’Hare, ness,” Dean chairman and said any would not significant positive manifest “However, chief executive officer. it will impact until at least mid-2000 because “it time for the of the pricing take benefits would take ‘at least two annual renewal to initiative reverse the losses from un- cycles’ for reprice Chubb to the standard in derpriced business written the ex- premiums commercial lines after and tremely competitive past market of the premiums repriced were it would take an- years.” few year higher other for the premiums to be ¶¶ 24(h), 48(h).) earned into income.” {Id. 538.) (App. at 10-K, signed 1999 Form by supposed Chubbte The “true by facts” asserted Schram, part O’Hare and in provided that Plaintiffs can be summarized follows: (1) in earnings “[t]he decrease 1999 was attempts premiums Chubb’s to raise due in underwriting to deterioration re- were it to causing profitable lose business by in large part sults caused resulting increasing continued losses the stan- in the standard weakness commercial dard commercial lines of because an ex- tremely classes” and that “net premiums' from competitive market which the (2) competition rates;5 standard commercial insurance lowering decreased was compared 8% in with 1% decrease rate that actually increases were obtained Moreover, in 1998.” will take at “[i]t least from new and renewal standard commer- two to cycles adequately annual renewal cial policies insurance too small to reprice the entire compensate standard commercial the growing for underwriting book, during and we that time will contin- losses in the standard commercial insur- (3) ue underpriced business;6 to have losses from busi- ance was keeping Chubb Thus, ness. it will part be the latter of approximately high-risk, unprof- 60% of its our pricing expect- before initiative is itable customers that the rate initiative (4) ed to on eliminate; have noticeable effect our stan- was supposed to it was too 83.) dard commercial (CompU results.” soon for the rate to initiative have 5. Complaint While the Second ac- Amended itable business Chubb wanted retain.” 48(a).) 24(a), (Compl.lffl knowledges that Chubb disclosed that the rate
initiative resulted in
of
losses
hundreds of
allege
6.
renewing
Plaintiffs
Chubb
business,
"good”
millions of dollars of
Plain-
policies
of its
either
50%
customers
tiffs
aver
Chubb lost "additional undis-
premiums
flat rates
even at
reduced
closed
prof-
hundreds of millions of dollars in
keep these customers.
September
On
Complaint by
financial re-
on
impact
Chubb’s
significant
26, 2002,
(5)
granted
the District Court
sults;
results
the financial
June
on
the Amend-
were based
motion
dismiss
percentages
ratio
Defendants’
combined
permitted Plaintiffs
accounting.7
Complaint, but
ed
fraudulent
Ac-
a Second Amended Class
leave
file
charge
Defendants
the Chubb
Complaint. Plaintiffs filed the Second
tion
first
deliberately falsifying Chubb’s
with
9, 2002.
Complaint
August
Amended
by
results
flout-
and second
The District Court dismissed
Second
calcu-
governing
and SEC rules
ing GAAP
prejudice
on Au-
Complaint
Amended
earnings
purposes
for the
of its
lation
12, 2003.
gust
rate initiative
failure of the
concealing the
Specifically,
stock.
boosting
Chubb’s
alleg-
gravamen
The
Plaintiffs’ action
lev-
manipulated reserve
allegedly
Chubb
defrauded investors
es
Defendants
proper-
in its
commercial and
standard
els
artificially
and Executive Risk
lines,
insurance
specialty
marine
ty and
stock with
inflating the value
Chubb’s
losses and ex-
report
to properly
failed
regarding
statements
Chubb’s stan-
false
com-
with its standard
associated
penses
insurance business
dard commercial
business,
recog-
prematurely
mercial
*15
effecting a stock-for-stock
purpose
the
of
on
premiums
policies
nized revenue
and Executive
merger between Chubb
until some
up
not
for renewal
which were
causes
action.
Plaintiffs aver three
of
Risk.
that
policies
on
had
point
future
and
10(b)
§
of the
1
violations of
Count
asserts
Plaintiffs,
According
yet been written.
Rule
promulgated
Act and
10b-5
1934
the
results
enabled
Chubb’s falsified
on be-
against all Defendants
thereunder
EPS
to render
false
Defendants
Chubb
during
of
stock
purchasers
half of
Chubb
2000, false com-
for 1999 and
projections
allegedly
the Class Period. Defendants
quar-
the first and second
bined ratios for
making material-
purchasers by
defrauded
1999,
growth.
premium
false
ter
and
misleading
regard-
statements
ly false and
per-
condition and future
ing the financial
B.
commercial
of Chubb’s standard
formance
History
Procedural
insurance
II asserts
business. Count
against
§
of
Act
11
the 1933
claims under
Employees’
Public
Plaintiff California
Chubb, O’Hare,
and
Defendants
Schram
(“Calpers”)
pu-
filed a
System
Retirement
of
of Execu-
on behalf
shareholders
31, Kelso
August
complaint
action
tative class
17,
the June
1999
14,
alleging
Risk
that
10(b),
tive
§§
of
asserting violations
by Chubb for
20(a)
filed
Registration Statement
Act
Exchange
the Securities
and
of
(“1934
Executive Risk sharehold-
78a,
issued to
§
shares
seq.,
et
of
15 U.S.C.
merger of the
10b-5,
in the
Act”),
ers
stock-for-stock
Rule
C.F.R.
SEC
misleading.
false and
240.10b-5,
companies
§§
15 of
was
§
and
11 and
the Secu-
III,
a cause
action
77a,
alleging
§
also
of
seq.,
et
Act
U.S.C.
Count
rities
of
shareholders,
(“1933 Act”).
Executive Risk
the lead
on behalf of
appointing
After
proxy
provided
materials
of
that the
their choice
asserts
approving
plaintiffs
included
Risk shareholders
counsel,
granted Plain-
to Executive
District Court
the
in viola-
misleading
statements
Action false
file an Amended Class
tiffs leave to
report
the
of
in the first
that
combined ratio
stated
7. Plaintiffs ^sert
quarter report
in the second
stated
commercial lines reached 130%
120.8%
the standard
decline
the Chubb
and the further
forecast
during
quarter 1999 and climbed
the first
thereafter,
higher
above
Defendants.
far
the 117.9%
even
14(a)
Act, thereby
§
of the
essentially
of
Risk Defendants were
deriva-
tion
causing the Executive Risk shareholders
tive of the claims
against
asserted
merger
companies.
Defendants,
of the
approve
dismissed them for a
lack
particularity
of
as well.
It further
vari-
The Chubb Defendants advanced
noted that Plaintiffs failed
al-
properly
their
arguments
support
motion
ous
lege
falsity of
the Executive Risk De-
Com-
to dismiss the Second Amended
fendants’ conclusion that the
merger
First,
Amended
plaint.
Second
in the best
interest of Executive Risk
allege
particularity
fails to
Complaint
shareholders, even assuming that the value
falsity
sufficient to demonstrate the
facts
artificially
of Chubb’s stock was
inflated.
to be
of the statements claimed
false
dispositions,
Given these
the District Court
Second,
misleading.
that Plaintiffs
and/or
did not consider Defendants’
ar-
additional
Third,
adequately plead
fail to
scienter.
guments that
plead
Plaintiffs failed to
alleged
the statements
to be false
scienter
particularity,
with sufficient
misleading are not actionable as a
and/or
many
allegedly
false statements
Risk
matter
law. The Executive
Defen-
nothing
statutorily pro-
more than
if
argued
further
dants
even Plaintiffs
looking
opti-
tected forward
statements
sufficiently pled
against
causes of action
Regarding
mism.
Act
Plaintiffs’ 1933
sec-
Defendants,
claims
the Chubb
none-
14(a) claims,
tion 11 and 1934 Act section
against
fail as averred
theless
Execu-
Court
District
determined that those
Risk
tive
Defendants.
claims “sound
fraud” and thus are sub-
The District Court dismissed all Plain
ject
heightened
pleading
standards
prejudice.
tiffs’ claims with
The District
9(b).
Fed.R.Civ.P.
accordance with
*16
Court dismissed Plaintiffs’ 1934 Act sec
prior finding
its
that Plaintiffs had failed
10(b)
claims, finding
tion
securities fraud
plead
falsity
to
the
of
rep-
the Defendants’
satisfy
height
that Plaintiffs failed to
the
resentations with
requisite particulari-
the
pleading requirements
imposed by
ened
ty, the District Court dismissed Plaintiffs’
PSLRA. Specifically, employing
the
the
claims under section 11 of
Act
the 1933
approach
by
fashioned
Circuit
the Second
14(a)
and section
of the 1934Act for failure
(2d
Kasaks,
Cir.),
in
v.
Novak
143
of such rules
contrivance
contravention
jurisdiction pursuant
28
appellate
may
as
plenary
regulations
§
re-
the Commission
1291. We exercise
U.S.C.
necessary
appropriate
decision to
or
prescribe
Court’s
as
over the District
view
protection
or
of
public
motion to dismiss. See
the
interest
for the
Defendants’
grant
78j(b).
§
Inc.
Props.,
Ctr.
Sec.
15 U.S.C.
Rule 10b-
In re
investors.”
Rockefeller
(3d Cir.2002).
illegal
it
“make
untrue
Litig.,
5 renders
over
plenary review
the
also exercise
a material fact or to omit to
statement of
We
interpretation
fed-
necessary
District Court’s
a
fact
state material
order
Stafford,
v.
laws. Oran
eral securities
in the
light
statements made
make the
Cir.2000).
(3d
In
re-
n.
F.3d
they
under which
the circumstances
the
viewing
dismissal of
Second made,
...
connection
misleading
we
the same
Complaint,
apply
Amended
any security.”
purchase
with the
sale
District Court.
applied
240.10b-5(b).
standards
§
To
a
17 C.F.R.
state
10(b),
under
plain
claim for relief
section
under the fed-
Plaintiffs’ claims arise
As
(1)
demonstrating
plead
tiff must
facts
laws, we
the relevant
review
eral securities
materially
made a
false or
the defendant
to motions to dismiss
applicable
standards
omitted
misleading statement or
to state
requires
particular context. This
in that
necessary to make
material fact
a state
of conventional motion
dis-
an overview
(2) the
misleading;
ment not
defendant
how
interact with
they
standards and
miss
(3)
scienter;
plaintiffs
acted with
heightened pleading re-
appropriate
the defendant’s misstatement
reliance on
quirements.
re
injury.
Burling
him or her
In
caused
to Fed.
pursuant
A motion to dismiss
Factory
Litig., 114 F.3d
ton Coat
Sec.
12(b)(6)
if,
may
only
granted
be
R.Civ.P.
(3d Cir.1997).
addition,
In
allegations in
accepting
pleaded
all well
satisfy
must
being
claim
asserted
true,
drawing all
complaint
Rule
heightened pleading requirements of
in favor of
reasonable factual inferences
id.,
9(b),
and the
re Rock
see
PSLRA.
beyond doubt that
plaintiff,
appears
efeller, 311 F.3d
prove
can
no set
facts
plaintiff
warrant
support
the claim that would
*17
of
III
a violation
Count
asserts
Oran,
making
In
14(a)
Elec.
v.
claim. See Gen.
Co. Cath
into their allegations of fraud.’”
In re
(3d Cir.1992).
cart,
927,
Rockefeller,
F.2d
932
To
311 F.3d at
(quoting
980
216
In re
14(a),
Systems,
Nice
Litig.,
Ltd. Sec.
plaintiff
state a claim under section
a
135
(D.N.J.2001)).
551,
(1)
F.Supp.2d
577
Rule
proxy
must aver that
statement con
9(b) governs Plaintiffs’ 1934 Act claims.
misrepresentation
tained a material
below,
9(b)
explained
As
Rule
applies
also
(2)
plaintiff
omission which
caused the
in
claims,
Plaintiffs’ section 11
Act
1933
(3)
jury
proxy
solicitation
because those claims are based on aver-
itself,
than
particular
rather
defect
ments of
Shapiro
fraud. See
v. UJB Fin.
materials,
an
solicitation
essential
272,
(3d Cir.1992)
Corp., 964 F.2d
288
link
accomplishment
in the
of the transac
(“[W]e
12(2)
§
§
hold that
when
tion. Id.
grounded
claims are
in fraud rather than
Chubb,
alleges
II
Count
Defendants
9(b)
negligence,
applies.”).
Rule
O’Hare,
and Kelso
Schram
violated section
9(b),
In addition to Rule
plain
of the 1933 Act.
section
Under
alleging
tiffs
pursuant
securities fraud
person acquiring
security
pursu-
issued
the 1934 Act must also comply with the
materially
ant
to a
misleading
false or
heightened pleading requirements of the
registration
may
statement
recover dam-
PSLRA,
78u-4(b)(l), (b)(2).
§§
U.S.C.
ages.
§
See 15 U.S.C.
77k.
Significantly, the
“imposes
PSLRA
anoth
Independent
ap
of the standard
layer
er
of factual particularity
allega
12(b)(6) motions,
plicable to Rule
Fed.
tions of securities fraud.” In re Rocke
9(b)
R.Civ.P.
requires that
all aver
“[i]n
feller,
with the state- plaintiffs specify each requiring 9(b) Act and the Reform by Rule misleading, to have been alleged ment [PSLRA], may not from infer they benefit however, plaintiffs to the PSLRA directs unspecific al flowing vague from ences may arguably legations why the reason or reasons specify “the —inferences a traditional justified under have been misleading.” 15 U.S.C. statement 12(b)(6) analysis.” Rockefeller, In re Rule 78u-4(b)(l). such, it is the “true § As words, pursuant at 224. In other Amended facts” recited the Second 12(b)(6) analysis, Rule to this “modified” paramount impor- Complaint that are that do or “blanket” assertions “catch-all” they provide inquiry tance in this because require comply particularity with the for Plaintiffs’ claims the exclusive basis Fl. Bd. disregarded. are See State ments through- made that the various statements Corp., Tree Fin. v. Green Admin. materially false the Class Period were out Cir.2001). (8th F.3d the first and second misleading, falsified, III. 1999 results were falsity of the knew of the that Defendants A. Accord- and financial results. statements Failure To Plead Fraud facts” alle- respect to the “true ingly, with Particularity With pled on information gations, which are District Court’s de- appeal the the Second prejudice cision to dismiss 10(b) pursuant both of made dismissal of claims addition to Plaintiffs’ section *19 claims, 14(a) Similarly, explicated in provisions. these section Plaintiffs' Rule 10b-5 below, 11 1933 part Plaintiffs’ section particularity III.B. meet the PSLRA claims must and, for the grounded in fraud grounded Act claims are they requirements because are here, NAHC, the fail to meet discussed at same reasons re 306 F.3d 1329. See In fraud. Thus, requirements of Rule heightened pleading particularity ruling PSLRA that the 9(b). compels requirements been satisfied have not
belief,10
requires
larity
the' PSLRA
Plaintiffs' to
support
facts to
those
sufficient
all
particularity
“state with
facts on which
beliefs. Accordingly,
plaintiffs
where
§
that
is formed.” 15
belief
U.S.C.
78u-
rely
personal
on confidential
sources but
4(b)(1). In an effort to meet this pleading
facts,
also on
they
other
need not name
burden,
rely primarily
Plaintiffs
on confi-
long
their sources as
as the latter facts
sources,
personal
dential
as well as an
provide an adequate
believing
basis for
internal memorandum.
that
the defendants’ statements were
Moreover,
false.
personal
even if
yet
This Circuit has not
addressed
identified,
sources must be
there is no
the dimensions of the PSLRA’s criterion
requirement
named,
they
provid-
be
pleadings
for
on information and be
made
they
ed
are described in the complaint
lief. The District Court below elected to
particularity
with sufficient
support
interpretation
follow the moderate
of sec
the probability
person
that a
posi-
the
78u-4(b)(l)
tion
espoused by the Second
tion occupied by the
pos-
source would
Kasaks,
in Novak
Circuit
v.
Securities assessing approach nom., Novak Cir.), denied sub Scholastic cert. The Truncellito, 1071, 122 on particularity Corp. made v. 534 U.S. (2001). Scho necessarily S.Ct. 151 L.Ed.2d entails information belief plaintiff relying that a lastic instructs provided by the detail an examination of “specify must the internal reports internal sources, the basis the confidential sources’ when, prepared them and reports, who sources, knowledge, reliability of the firm were or com how the numbers which other al nature of facts the corroborative at 72- reviewed them.” Id. pany officers sources, the including from other leged, Arbitrage The 73. Fifth Circuit ABC the allega plausibility coherence in the standard found this to be sensible tions, and similar indicia. 9(b)’s and Rule context of the PSLRA standards, Plaintiffs’ Applying these requirements. heightened pleading Complaint does not meet Indeed, Amended Second the level of detail F.3d particularity standards for the PSLRA’s Arbi provided by plaintiffs ABC reports trage describing “information and be- internal allegations made on in stark upon in that case stands relied lief.” *21 here to what Plaintiffs furnish. Chubb’s local branch offices for informa- contrast id, concerning Far from tion Chubb’s business on a na- requiring See at 357. the Moreover, matter, tional evidentiary many scale. of these of detailed pleading employees sources were branch who sketch of this internal Plaintiffs’ barebones in departments worked other than stan- utterly memo fails to meet this standard in dard commercial. Plaintiffs’ failure to any respect.12
make these is significant also Character- Sources: General speculate because we are left to whether Confidential istics anonymous the sources obtained the infor- they purport possess by mation to first- confidential
Plaintiffs’ reliance knowledge hand or rumor. requisite particulari- supply sources to ty for their thus assumes a Losing fraud claims Sources: Confidential Profitable heightened importance given inadequa- Customers An cy documentary analy- of their source. First, Plaintiffs contend that by sis of the confidential sources cited working, part rate initiative was not in purpose pleading Plaintiffs for the because the rate increases were not stick requisite statutory “true facts” with the ing and in Chubb’s standard commercial reveals, however, that, particularity underwriting surance losses increas they exceptions, few are not “described ing. specifically, More the raising of rates ... particularity support with sufficient to competitive in a insurance market caused probability person that a posi- profitable Chubb to lose “numerous” cus occupied by possess tion the source would that it keep. support tomers wanted to Novak, alleged.” the information contention, of this Plaintiffs cite to: at 313-14. A former marketing commercial lines matter, general Seattle; As a almost all of underwriter um- former anonymous sources are former Chubb em- brella and excess insurance manager aver, ployees. however, Colorado; Englewood, Plaintiffs fail to independent an any when employed by them were insurance broker for A.O.N. Risk Ser- allege Chubb. Nor do Plaintiffs the dates vices in Michigan Southfield who did acquired Chubb; that these sources the informa- business with a former senior they purportedly possess, tion or how customer services team leader in Los employees of these former had Angeles access to op- Seattle who worked in such information. The lack of allegations erations supervising employees who en- regarding why such employees premiums how tered and claims and coded would have access to the they policies information into computer system; Chubb’s purport because, possess problematic a former commercial lines customer ser- below, heavily rely Seattle; illustrated representative/rater vice employees on former who worked in former multi-national account specialist attempted particulars 12. Plaintiffs to add re- District Court did not consider the submission garding the internal memorandum submit- dismissing in its Memorandum Order ting Recently a “Notice of Discovered Evi- Complaint, Plaintiffs’ Second Amended al- Opposition dence Motions Dismiss though it noted that consideration of the sub- Complaint’’ Second Amended to the District mission would not have altered its decision. 20, 2002, following Court on December argue Plaintiffs do not that the District Court briefing argument. conclusion of and oral refusing erred in to entertain the submission. Construing this submission as an amendment We likewise do not consider it here. Complaint, Plaintiffs' Second Amended *22 why employees or Warren, Jersey alleging out how such New head- in Chubb’s a under- knowledge expanded and former renewal that be- would have quarters, in center in the account service writer vague descriptions suggest yond what Park, Jersey. New Florham that, general the claim as a to substantiate matter, 48(a).) “lost undisclosed Chubb additional (Comply profitable of in hundreds of millions dollars one these sources were except All of to retain.” business that Chubb wanted Only in branch offices. two employed (Id.) rely on former senior Plaintiffs a appear affiliated with the stan- sources An- business, team in Los and customer services leader those dard commercial Seattle; in and employed marketing an insur- geles independent sources were and ap- It is capacities. service not customer in ance broker for A.O.N. Risk Services descriptions that parent from these brief Southfield, who with Michigan did business noticeably an include these sources—which Chubb; energy under- a former resources company— broker for another insurance Depart- writer in the Commercial Lines that the stan- possess information would Son, Inc., in ment of & Cincinnati Chubb succeeding was commercial business dard former lines Pittsburgh; and a commercial level, that a or failing on national Chubb Seattle; and a marketing underwriter in “profitable” and losing “numerous” was in specialist former multi-national account nationwide, or whether Chubb customers Warren, Jersey, headquar- New Chubb’s customers, retain to those expected (Id.) allege Plaintiffs do when ters. not is Complaint devoid Amended Second employees left Chubb. it explanation. Similarly, further indepen- that “an intuitively probable however, It virtue of appears, broker for A.O.N. Risk dent insurance Chubb, person a positions their former Michigan” in would Southfield Services position confidential of several of the “independent up brokers moved know depend support to upon sources Plaintiffs their from to to clients Chubb 80% los- overall assertion Chubb 48(a).) (Comply lower-priced insurers.” retain as a ing good business wanted to may possess result of the rate initiative vein, cite In the same to low- to level, alleged.13 the information We hesitate locally employees sited with- former alleges that Western who Chubb lost sources attle 13. These include: Wireless, provided with which had Chubb (who (cid:127) pro- A former renewal underwriter $400,000-$500,000 premium. annual policies ac- cessed renewed on established (Id.) Park, counts) Jersey in Florham New who (cid:127) manager of customer A Chubb’s former independent alleges that “an insurance alleges Troy, Michigan who care unit in sys- agency Group named NIA Insurance Chubb to initiative caused that the rate tematically go along refused to area, King Burger in the lose restaurants many rate and moved Chubb's increases large represented loss "which other insurers.” customers (Id.) Chubb.” 48(a).) (Comply (cid:127) underwriting technical A Chubb former (cid:127) marketing lines un- A former commercial Englewood, Colorado who assistant derwriter for Chubb based Seattle who caused the rate states that initiative Washington claims “in the states profitable policy provid- to lose the Chubb Oregon, profit- Echo-Star, its lost all of "as four to five ed well as paid premi- annual premiums customers who able other customers with annual $500,000 (Id.) $1 million because of equal ums of to Echo-Star's.” (cid:127) (Id.) specialist increases.” A account rate former multi-national Warren, Jersey (cid:127) its New lines customer ser- for Chubb in A former commercial that Chubb headquarters who claims representative/rater for Chubb in Se- vice the Novak conclude that standard has listed above. The Second Amended Com- respect been met with to these sources plaint defers to: fail to allege because Plaintiffs when these (a) A property casualty former Chubb, employed by sources when director’s and officer’s underwriter they they alleg- the information obtained the financial institutions section Chi- *23 edly possess, supposed and whether their (“and cago ... other former Chubb em- or knowledge is first second hand.14 Nev- ployees provide specific who examples as ertheless, heightened if the pleading even such”) for the blanket claim that “[t]o respect standards have been met with keep the already customers that had not sources, these Plaintiffs’ claims fail under lower-priced insurers, left Chubb for 12(b)(6) Rule because the information began give Chubb remaining their purportedly possess these sources is not customers either no rate increase or allegedly inconsistent with Chubb’s false much smaller planned ones than it had misleading statements. is This dis- (Id.) under the ... initiative.” cussed below. (b) A former underwriting manager for Renewing Sources: at Inade- Confidential Executive in Simsbury Con- Risk/Chubb Flat, quate, Rates Reduced allegation necticut for the' that “Chubb Next, plead Plaintiffs on information and renewing policies was of 50% of its belief proposition rate in- “[t]he customers either at flat rates even at were, being creases that in fact obtained (Id.) premiums.” reduced on new and renewal standard commercial (c) A former underwriting technical as- policies very insurance small and well in Englewood, sistant Colorado for the below necessary the levels to have allegation that “Chubb keeping ap- was materially impact favorable on Chubb’s 99 proximately high-risk, unprof- 60% of its results, growing or even to lessen the un- itable customers the rate in- derwriting losses Chubb’s standard crease/policy non-renewal initiative was 48(b).) commercial (Comply business.” ¶ (Id. 48(c).) purportedly eliminating.” on Plaintiffs’ reliance confidential sources in its effort particu- to state this claim with The Second Complaint Amended fails to larity poses many problems of the same explain how local employees specialize who another, Mary Kay lost "also the account of Cos- forced one that was clear from the metics, large, high-technology various complaint employees that the were familiar huge firms and multi-national account discussed, with the activities that the sources Washington, from Chubb’s D.C. area of- detail, and, provided an abundant level of increase/policy fice because of the rate significantly, that strong the sources have a (Id.) non-renewal initiative.” knowledge they basis of for the claims make. pleadings regarding Detailed the Cabletron’s comparison 14. A with the held system inputting returns bolstered the ba- pleading sufficient for on "information and anonymous sis knowledge. of the sources’ As Cabletron, belief” under the PSLRA in In re apparent from the discussion thus far and 30-31, 311 F.3d at is instructive. In follows, what pled here case, have not the First Circuit noted that Plain- nearly plaintiffs the level of detail as the in In pled employees tiffs that the former Cabletron Conspicuously re Cabletron. absent are they rely alle- on whom Company worked at the gations support anonymous that would during personal the Class Period and had addition, knowledge. sources' basis knowledge practices they of the described. Moreover, plaintiffs Appeals provided adequate Cabletron also the Court of found that the provided supporting specific descriptions sources documentation. Id. at 31-32. through means alleged which the fraud oc- Plaintiffs’ reliance on In re Cabletron is mis- curred, placed. that their consistent accounts rein- tradiet Defendants’ other than standard commercial Class Period state- lines specific nationwide ments. would have obtained the standard commer- regarding
statistics Renewing Sources: Unprofit- Confidential Furthermore, it is far from cial business. able Business em- clear how an Executive Risk/Chubb ployee have access to information would Third, Plaintiffs aver that Chubb “was renewing policies renewing hundreds of millions of dollars of half of its at flat or reduced customers policies standard commercial insurance rates, given that Executive did Risk/Chubb premium unprof- levels Chubb knew were until consummation of not exist adversely impact itable and thus would 20,1999. merger July going Chubb’s results forward.” *24 48(c).) (Comply support In of this ex- rely Plaintiffs also on a former customer assertion, tremely broad rely Plaintiffs Pleasanton, supervisor service in Califor- upon a former umbrella excess insur- nia, regional supervisor a former for Colorado; manager Eaglewood, ance in Denver, Colorado, in and a former Chubb supervisor former customer in service customer repre- commercial lines service Pleasanton, California; a former under- in as Seattle the basis for sentative/rater writing Englewood, technical assistant in naming specific customers who were not Colorado; a energy former resources un- given regardless rate increases of their in derwriter the Commercial Lines De- profitability. According prop- to former in partment Pittsburgh; Cincinnati and Boston, erty adjuster in “underwrit- claims property casualty and a former ers had the incentive to resist rate increas- in director’s and officer’s underwriter compensation their own es because Chicago. financial institutions section in (Id.) dependent keeping on customers.” sources, According to although these these Again, possible exception unprofitable unnamed customers renewed repre- commercial lines customer service agreed pay higher pre- with Chubb and to sentative, speculate we are left on a miums, premiums “were still far too local service worker’s and re- customer profitable low to make these customers gional supervisor’s knowing basis of because the customers were such precise terms of renewal of commercial (Id.) insurance risks.” Plaintiffs cite bad policies spe- and the lines between Chubb only specific two accounts—McDonald’s Moreover, cific customers. Plaintiffs Corporation Langenscheidt Publishing plead failed to the dates in which these cus- Group examples unprofitable at flat policies prices, were renewed ren- —as respective policies tomers whose re- were dering impossible to determine the rela- flat, respective- at a and lower rate newed tionship policies these and the between ly. Notably, the source of information success of the rate initiative.15 Once section, Langenscheidt Publishing Group about the again, explicated as the next representa- is a former customer service if these limited meet the even (Id.) Washington, tive in The use of requirements pleading PSLRA’s strict for D.C. belief, they satisfy particularity on information and do not con- these sources to is shrewdly appear 15. The District Court observed that this would to conflict with Plaintiffs’ fact, would, claim that customers left as a if Plaintiffs assertion that the initiative during quar- result of the rate increases first policies have little effect in 1999 because were policies ter claim that renewed and/or January July up for not renewal until rates, during period were renewed flat into specific accounting detailed that went the com- for the same reasons problematic pany’s reporting. financial above. claim that the first and second Plaintiffs Timing Rate Ini- Sources: Confidential quarter grossly 1999 combined ratios Impact
tiative’s improper overstated as a result of account- that, Fourth, contrary contend Plaintiffs ing practices. support of their asser- the rate representations, to Defendants’ tion that the first combined successful, not initiative, if “would even 130%, ratio was in fact and not as 117.9% positive impact have any significant represented, Plaintiffs cite Defendants and, in during results Chubb’s financial only employees two former former —a fact, commercial insur- Chubb’s standard Rapids, manager branch Grand Michi- very ance continue to ad- problems would gan, and commercial a former Chubb lines throughout versely impact Chubb’s results marketing in Seattle. underwriter This 48(d).) In an effort (Comply most unquestionably lacking particularity, of 99.” particularize, Plaintiffs a “former provided any cite have facts indi- president personal cating any vice lines insurance” that the probability two branch employees “a proposition type because vast would have access this *25 policies” (implicitly in- of national information. majority of Chubb statistical Nor do policies) Plaintiffs that was only plead lines the data used to cluding commercial arrive at couple year, figure. a a this came for renewal times up “would take to three rate initiative two maintain that Plaintiffs also the com- years significant im- positive [to show] improperly bined ratio a was inflated as (Id.) more, pact.” Again, without it is not manipulations result of occurring reserve sufficiently employee that an probable in the standard commercial and property possess lines would working personal lines, contrary to marine GAAP.16 regarding commercial lines information Plaintiffs, however, neglect plead to these policies impact on the rate initia- and their purported requi- GAAP violations with the sufficiently not Similarly, proba- tive. it is particularity. Again, site Plaintiffs do not commercial ble that a former lines under- allege enough support probability to Beach, California, Newport writer in would that their possess sources would the infor- policies know none of that “almost mation claim to they possess. Plaintiffs renewing January [nationwide] rely on a general adjuster former claims were renewed in accordance with the rate in Boston and a former senior customer initiative.” increase/policy non-renewal Angeles services in Los team leader (Id. (emphasis original).) that, proposition “upper Seattle for the management pressured managers branch Accounting Sources: Fraud Confidential reserves, to reduce improperly and or- Fifth, attempt Plaintiffs to sub adjusters dered to refrain from recording accounting by stantiate fraud claims reserves until after the Executive ac- Risk ¶ (Id. 48(e) (em- employ reference to a number of quisition former complete.” added).) ap ees who that positions phasis held would Plaintiffs refer to this pear privy them compa render same customer services team leader for ny’s practices, bold “the bookkeeping majority let alone the that assertion 210.10-01(a). § reported C.F.R. Financial results in violation of presumptively misleading. GAAP See 17 are ... manipulating Rapids, “defendants knew branch offices were Grand Chubb’s added)) (Id. reserves,” and for (emphasis premium forecasts of Chubb’s 5-l/2%-6% “up to 25% of the nationwide statistic growth its standard commercial insur- manipulated down- reserves were Chubb’s during falling ance business 99 and a com- ¶ 143.) (Id. pro- The sole basis ward.” bined ratio for its standard commercial knowledge source’s vided for this business were false and could not be ob- that he “worked for ¶ latter assertion is (Id. 48(j).) tained” It is far from clear nearly years, Chubb for six and was thus how a manager branch would have knowl- very oper- familial’ with Chubb and how edge of what senior Chubb executives (Id.) disputed It cannot be ated.” knew. Plaintiffs’ reliance on other confi- wholly description this insufficient provide particularity dential sources to employee how a former demonstrate claim manipulations for their of reserve working capacity a customer service fails for the same reasons.17 that, nationally, would know 25% identify fail particulari- manipulated Chubb’s reserves were down- ty any accounting source for their fraud majority ward or that of branch of- reasonably claims that would have knowl- manipulating re- fices nationwide were edge supporting Remarkably, serves. Plaintiffs cite to Chubb’s financial statements were false. manager Michigan former branch West Complaint Nor does the Amended Second contrary speculation guar- for the that “I data, data, identify the or source of used you they padded loss [defendants] antee to arrive at its calculations. Nor do Plain- (Id.) reserves.” Plaintiffs further attrib- provide any regarding particulars tiffs grandiose ute the assertion that the first distorted, amount which reserves were deliberately 1999 results were fal- *26 improperly or how much revenue was rec- to the former customer services sified ognized.18 Burlington, See In Re Angeles in and team leader Los Seattle. (“[WJhere fraud, plaintiffs allege at accounting a ac- F.3d 1417-18 As result cording manager to a former branch in that defendants distorted certain data dis- (cid:127) marketing rely personal a lines underwriter in Chi- Plaintiffs on “former former 17. that, president" vice for the observation that "re- cago for the claim in violation of 'conveniently manipulated' can be GAAP, serves "defendants caused Chubb to rec- industry” the insurance and that Chubb there- policy premium the ord the for renewal “ 'managing' fore must have been its reserves days policy revenue ... 90 before the was artificially earnings its boost 99.” ¶ (Id. 154.) up even renewal.” 143.) (Compl.H (cid:127) any Incredulously, providing without fur- (cid:127) Plaintiffs attribute the claim that Chubb description, ther Plaintiffs attribute to stepping” was "stair its reserves to for- employees bald these same former Park, manager mer in Florham New Jer- assertion that "this conduct occurred sey, property manager and a claims throughout Company, in all lines of ¶ (Id. 144.) Troy, Michigan. Plaintiffs (Id.) business.” provided have no information which employees would that these had indicate Again, comparison allegations to the held 18. personal knowledge manipu- of reserve revealing. sufficient in In re Cabletron is Con- in the lines. lations standard commercial case, trary to the lack of in this (cid:127) general According to a claims ad- former plaintiffs pled estimates of the actu- Cabletron Boston, juster "the was reserve freeze recognized improperly al amount of revenue. ¶ (Id. 145.) occurring Company-wide.” plaintiffs at 24. The also Cabletron (cid:127) respect With to Plaintiffs' averments of provided adequate supporting documentation. recognition, they improper revenue cite to at Id. 31-32. the former senior customer services team Angeles, leader in Seattle and Los Warren, by using Jersey headquar- unreasonable public to the Chubb’s New
closed ..., required quarterly we have ters Chubb held meet- accounting practices, the unreasonable ings, present— to state what with O’Hare and Kelso plaintiffs they distorted the the heads were and how where of each Chubb business practices data.”)- allegations do the status gave reports Plaintiffs’ unit detailed on disclosed According of their business. to this not suffice. meetings ... were [source] same these to Disclose Duty Sources: Confidential held two weeks after the close of each Sixth, contend that De such, quarter. Q As the 2nd because an to disclose obligation had fendants 6/30/99, 2Q meeting on ended quarter 1999 disappointing second Chubb’s approximately held on to the Risk shareholders results Executive days merg- full before the 7/14/99—five merger advance of the vote oc er vote on that at each Given fail July 1999. Defendants’ curred meetings, according of these to the same information, Plaintiffs ure to disclose this president, vice reports pre- former rendered contained allege, the statements sented to O’Hare included and Kelso Proxy Registration in the Statements numbers, figures graphs’ ‘detailed Plaintiffs fail to al misleading. false and analyzing current results of each Chubb however, that any particularity, lege with O’Hare, unit, business defendants Kelso quar knew of the final second Defendants fully and Schram were aware that merger time the ter 1999 results at the 2Q 99 be far Chubb’s results would conclusory place. vote took The assertion expected, worse than but defendants had that “O’Hare and the other defendants purposely disclosing withheld Chubb’s far in ad access to these financial results 2ndQ worse-than-expected 99 financial announced, they vance of when results until Executive Risk’s after before the Executive Risk shareholders shareholders voted in favor of Chubb’s 126) (Comply patently voted” insuffi acquisition of Executive Risk because cient, speculation that defen “[i]f as is the they announcing feared that these re- ... paying any attention dants were sults beforehand would cause the share- problems in the second serious to vote against acquisition. holders *27 glaringly apparent have been should ¶ (Compl. (emphasis original).) time by July them the of the 19 sharehold ’ 34; Br. re Advan er vote.” Pls. at see In not allege Plaintiffs do that this former (3d Litig., Corp. ta Sec. president vice was employed appro- at the Cir.1999). attempt to claim that Plaintiffs’ Indeed, priate time. that he appears quarter the release of second the not, given was the of conspicuous absence just eight days following the vote results allegation an or not a regarding whether an supports inference Defendants’ meeting actually July was held on or about prior knew of them is unwar to the vote quarter 1999 to discuss the second given consistency timing ranted the general allegation says results. This noth- timing this release with the of Chubb’s a ing particularity about whether prior releases. Plaintiffs’ resort to confi in fact meeting prior was held to the Exec- to provide requisite dential sources vote, utive Risk shareholder whether particularity again ineffectual. once present Defendants were fact at such a
According, meeting, to a former Chubb sen- or whether [sic] the second vice-president ior managing director 1999 results were available at that even business, of surety who was based in time. Specu- Summary Rumors and Sources: Sources: Confidential
Confidential lation sum, repeatedly In attribute allegations about the rate initiative in addition, interspersed through In Chubb’s commercial lines business to for- Complaint’s Amended dis out the Second employees mer who worked other busi- of the “true facts” are number cussion segments, ness who did not work for no that are attributed to source statements all, company furnishing any without nothing specu than and are based on more explanation as to how such sources would on the particularity lation. Plaintiffs claim knowledge .regarding have an initiative basis of such statements as: particular confined to division of the (a) “It Chubb was well known within company they for apparently which had no [renewing unprofit- policies Furthermore, this responsibility. Plaintiffs re- at flat or reduced rates] able customers peatedly specific attribute nationwide in- throughout Company occurring regarding was formation and statistics Chubb’s performance employees to former management pressuring because who worked in local branch offices. These employees to meet certain revenue tar- sources have not been with suffi- described gets impossible which were to achieve particularity support probabili- cient increase/policy under the rate non-re- ty person that a in the position occupied by initiative, newal and so the initiative was possess the source would the information with, simply being ignored, complied alleged. Consequently, Plaintiffs have applied haphazard in a fashion.” and/or falsity plead failed to of the Defen- (Mt 48(c).) dants’ and accounting statements -fraud (b) “It was well known within Chubb particularity with the demanded increase/policy that the rate non-renewal PSLRA. initiative did not have the immediate The sheer volume confiden impact represented defendants it did compensate tial sources cited cannot very positive and would have little effect inadequacies. Citing large these to a num ¶ (Id. 48(d).) in 99....” may ber of varied sources in some instanc (c) circulated within the “[R]umors help provide particularity, es when the artificially had Company supplied by accounts the sources corrobo financial reported perform- boosted its one another. rate and reinforce this ” (Id. accounting ance with tricks.... case, however, underlying prerequi ¶ 48(1).) site—that each source is described’ suffi (d) ciently support probability operations employees “Chubb’s alleged— possesses source the information openly manipulations reserve discussed *28 respect overwhelming not the is met with Company meetings.” at majority Cobbling of Plaintiffs’ sources. (e) known within “[I]t was well litany inadequate allegations together the the rate during period Class allegations particu does not render those increase/policy non-renewal initiative 9(b) larized in accordance with Rule or the ¶ (Id. 48(g).) failing.” was Consequently, argu PSLRA. Plaintiffs’ conclusory allegations Generic and based particularity by ment that is established upon conjecture undisputedly rumor or are looking to the “accumulated amount of de satisfy plead- heightened unparticular allega insufficient to tail” that their source 78u-4(b)(l). § ing provide standard of 15 U.S.C. tions when considered as whole Rockefeller, falsity allegedly In re 311 the of Defendants’ false unavailing. is See and misleading Class Period disclosures. (rejecting argument similar F.3d ana- allegations “fraud should be because that Plaintiffs Keeping may in mind not individually to determine lyzed whether stemming benefit from inferences from incident of fraud has been alleged each unparticularized allegations may If, alleg- after pleaded particularity. with have otherwise been warranted under a ing purportedly of events sub- a number 12(b)(6) analysis, traditional Rule even as- fraud, none of those stantiating a claim suming that Plaintiffs’ confidential source pleading satisfies the independently events allegations statutory pleading meet their requirement particularity, of factual burden, taking or into consideration those subject to dismissal under 15 complaint is meager allegations arguably meet (internal 78u-(b)(3)(A)”) § citations U.S.C. standard, examples prof- this anecdotal omitted). that, charge Plaintiffs Finally, policies itable lost or customers renewed allegations even “true foregoing its facts” at flat rates slightly raised does not anonymous employee allega- and former demonstrate that the rate initiative was tions, adequately pled why De- they have failing, especially light of Defendants’ statements were mislead- fendants’ various Class Period disclosures.19 Plaintiffs’ ar- ing by with the in accordance PSLRA gument that Defendants’ own disclosures demonstrating public that Defendants’ own and the confidential source information contradict Defendants’ earlier statements falsity demonstrate Defendants’ representations, prior July made representations earlier Period ut- Class 1999 Executive Risk shareholder vote and terly merit, without re- merger, that Chubb’s standard commercial peatedly take Defendants’ statements out turning quickly was around so business of context and draw unreasonable infer- already contributing to a Indeed, it was ences. supposed Defendants’ bottom line stronger-than-expected “admissions,” provid- and the information explained are, first fact, 1999. As detail ed sources confidential below, generally Plaintiffs distort Defendants’ “ad- consistent with what Plaintiffs by taking state- deem missions” Defendants’ were Defendants’ false statements Moreover, ments out of context. Defen- disclosures. not, fact, do public dants’ statements First, in accordance with those purportedly contradict the false and mis- confidential source that refer
leading throughout statements made specific ence customers that Chubb lost as Class Period. initiative, a result of the rate Defendants fully throughout disclosed before A Failure To State Claim Class that the initiative expect Period causing ed to and was indeed the loss of to meet Plaintiffs’ failure the threshold profitable business. by Rule pleading requirements mandated 9(b) (a) support apart dismissal According PSLRA to Chubb’s 1998 Form 12(b)(6). 10K, from if priorities Rule Even the “true for 1999 are to “[o]ur facts” requisite particu- renew pled good adequate prices business at larity, however, they fail to demonstrate underperforming renew ac- *29 because, alia, 19. Washington, particular GSCPartners CDOFund v. statement inter Cf. 228, (3d Cir.2004) (finding plaintiffs’ specific example 241-42 reliance on one plaintiffs adequately alleged allegedly have not de- was insufficient to contradict false assertion). knowledge falsity fendants had actual of the price counts where cannot attain cific we ade- customers where the rate increases quacy. aggressive pricing strategy supposedly This “sticking,” not could cause us to lose some business. ignore contemporaneous Defendants’ pub- Therefore, we overall expect premium lic statements acknowledging that Chubb’s growth (App. to be flat in 1999.” at reported price only increases were aver- 212a.) ages: (b) 27, April Earnings Re- (a) April In an 1999 Bloomberg Call, stated,
lease Conference “I Chubb Interview, News emphasized O’Hare say did that we’d lost 50% busi- that the expected rate only increases are ... really ness due to the fact that we averages: “I fully expect that [commer- didn’t want goddamn to renew the busi- cial price lines increases build rath- will] half, ness .The other that which left rapidly er Now those 5—1/2%—6%. ... price, us for it would have good been , 268a.) averages_” are (App. , at business .... lost business is accelerat- (b) quarter The second 10-Q 1999 Form (Id. 261a.) ing.” O’Hare and Schram states: “On the business that was re- further in stated this call that Chubb newed, rates modestly have increased “was, however, prepared to lose $250- yet in steadily the first six months of million in standard commercial $800 expect and we this trend to contin- 38.) (ComplJ business.” 74.) ue.” (Comp^ (c) The quarter 10-Q second 1999 Form report, which allegedly includes Chubb’s Plaintiffs’ that specific policies assertions quarter results, fraudulent second were renewed at flat or reduced rates does reveals, levels in were lower “Retention reported average indicate that the rate the first compared six months of 1999 increases were false. period with the same Approxi- 1998. Third, Plaintiffs’ reference to the mately half of the non-renewals were the internal that allegedly memorandum states result of business we chose not to renew targeted that “the. premium 10%—15% in and half were the result of customers creases had not been achieved” does not not accepting price in- increases we support alleged falsity of Defen ¶ (Id. 74.) stitute.” public dants’ statements. The Second (d) July report PaineWebber’s Complaint Amended allegation contains no Chubb, which upon was based infor- reported Defendants 10% to 15% rate provided by O’Hare, Kullas, mation public, to the it simply increases does July Sills 1999 Conference not follow that the rate initiative fail Call and follow-up quotes conversations ing because such rate increases were not O’Hare: losing “[W]e are more business above, achieved. As mentioned Chubb than we did the first projected public average premium writing we’re less new than business we growth throughout of 5.5% to 6.5% ¶ (Id. 67.) did in quarter.” the first appeal, On falsity, an effort to show contradiction, Far suggesting from that Plaintiffs theorize that “the nature of particular some accounts chose not to re- cycle, Chubb’s renewal with two and three- Chubb, new with alleged by various year policies, to achieve pre 6% 5-1/2% sources, confidential completely consis- growth mium require 1999would tent public with Chubb’s statements. targeted to make its increases of 10%-15%
Second, regard to the policies coming Second on the up for renewal.” Amended Complaint’s spe- theory illustrations Pis.’ Br. at 47-48. requires This *30 of this unsupported you the inference that can’t turn a business size
acceptance
quarter,
signs
in one
but the
bode
the memorandum referred to
around
that when
263a.)
249a,
(App.
it was re-
for the future.”
at
increases”
well
premium
“10%-15%
par-
April
the
In another
1999 interview cited
only to
increases on
ferring
rate
renewal,
Plaintiffs,
emphasized, “it
up
opposed
again
as
O’Hare
policies
ticular
big ship
in
and it
take a while to
average
premiums
increase
is a
does
to the
(Id.
267a.)
up
attempt
for renewal
turn.”
at
Plaintiffs’
to
policies,
all
whether
across
the
characterize these statements as amount
paucity
not. Given
memorandum,
that the
ing
representation
it is not rea-
to a
initiative
describing this
already
strong
“contributing
was
to
bot
to draw this inference.
sonable
not reason
quarter”
tom line
the first
is
Fourth, Plaintiffs contend that
manufactured from
able. Fraud cannot be
“admission,”
July 27,
made
the
O’Hare’s
quar
these statements. After the second
call and included
the
1999 conference
released,
ter 1999 results were
O’Hare ex
10-Q report,
Form
that
quarter
second
analysts
in a
plained
conference call with
cycles
take at
two renewal
to
will
least
“[i]t
quarter
that “I think the second
has
reprice
standard commer
adequately
the
I
brought me back to where
started be
during
that
time we will
cial book
really
year
cause
first half of the
is
to have
from non-renewed
continue
losses
flowing
exactly
original
out
sort of
as our
Thus,
policies.
...
it will be mid-2000
quarter,
models had
The first
assumed.
signifi
of these actions
before
benefits
said,
might
ship
I think I
as
have
was
to
line”
cantly
flow
bottom
turning
thought
faster than I
it was.
I
64, 67)
contradicts his earlier
(Compl.lffl
say
right
would
we are now
on course. I’m
27, 1999,
representation
April
made on
any way
I admit
discouraged,
but
has
god
ship
that
dam
turned
“[t]his
[sic]
at
being
overly optimistic
somewhat
thought
going
i.e.,
I
to”
faster than
it was
(Id. at
quarter.”
end of the first
493a-
exerting
posi
that the rate initiative was
494a.)
that
We have been clear
fraud
impact
quarter
tive
the first
“
merely
cannot be inferred
because
‘[a]t
remain
conveniently ignore
firm
one time the
itself in a favor
bathes
statement,
state
der of O’Hare’s
his later
light’
able
but ‘later the firm
discloses
Period,
during
made
the Class
ments
”
things
rosy.’
are less than
In re Advan
his
that it would be mid-2000
qualification
ta,
DiLeo,
at
(quoting
significant
before
effects would be felt.
627.)
long rejected
at
F.2d
We have
at
entirety of O’Hare’s statement
The
tempts
plead
by hindsight.
fraud
all
follows: “I think what we’re
concerned
about,
bluntly,
god
pled
it
this
putting
very
adequately
Neither the
“true
public
damn
faster than I
facts” nor
ship has turned around
Defendants’
statements
thought
big
alleged falsity
it
But it is a
of Defen
going
to.
demonstrate
ship.” He further
all
Period
qualified: “We
know dants’ Class
disclosures.20
cycles
adequately
20. The disclosures made in connection with
two annual renewal
re-
book,
price
the entire
the release
Chubb's third
standard commercial
during
results at the close
the Class Period are
we will continue to have
time
Thus,
representations
underpriced
also consistent with
made
losses from
business.
it
throughout
example,
part
For
will be the latter
of 2000 before our
Class Period.
pricing
expected
take
initiative is
to have a
Defendants reiterated that "it will
time
notice-
pricing
for the benefits of
initiative
able effect on our
commercial re-
standard
733a). Moreover,
(Id.
underpriced
at
is not
reverse the losses from
business"
sults”
rea-
538a)
(App.
reported prior
take at
to infer
Chubb’s
will
least
sonable
"[i]t
*31
reap
special
payments
Executive Risk
the
benefits and
Individual
Defendants
accompanying
merg-
consummation of the
Defen
against
Plaintiffs’ claims
er.22
Sills, Kullas, and
arise ex
dants
Deutsch
10(b)
section
clusively under section
and
lodged against
As
the individu
14(a)
the
Act.21
Plain
Specifically,
of
Defendants,
al
Risk
Executive
Plaintiffs’
that the
Risk De
tiffs contend
Executive
10(b)
section
claims must fail.
Dis
The
merger
that
was
opinion
fendants’
the
properly
trict Court
that
these
observed
“in
of Execu
“fair” and
the best interests”
essentially
claims
the sec
are
derivative of
when
tive Risk shareholders was false
10(b)
tion
Rule 10b-5
claims Plaintiffs
opinion
impart
made. This “fairness”
was
the
against
asserted
Chubb Defendants.
ed to Executive Risk shareholders via the
such,
holding
allega
As
our
that Plaintiffs’
Proxy
Risk
Executive
Statement.
regarding
falsity
tions
the
of
first
Chubb’s
significant
It
to note at
that
affir
the outset
second
results and
allegations
fraud
in this case
while the
mative statements made thereto do
exclusively on
under
problems
pass
focus
associated
muster
the PSLRA a fortiori
standard commercial busi- necessitates dismissal of the
as lev
Chubb’s
claims
ness,
Risk,
specialty
against
Executive
a
insurance
eled
the individual
Risk
Executive
they
is not involved
standard
to the
company,
with the
Defendants
extent
are based
insurance
Plaintiffs
incorporating
commercial
business.
same information
however,
aver,
that the
Execu-
merger proxy
individual
the
materials and in recom
Defendants
become
mending approval
merger.
tive Risk
must have
Like
wise,
sparse
regard
fraud at
alleged
aware of
internal
Plaintiffs’
diligence in
conducting
ing why
Chubb while
due
Executive Risk
Defendants’
preparation
merger.
position
merger
It is further
that the
was in
best
that,
spite
and fair
alleged
purported
of their
interest of
Risk
Executive
sufficiently
knowledge,
these individual Defendants
shareholders was false are not
from
misrepresented
merger
particularized.23
as “fair”
Plaintiffs have not of
point
particularized allegations
financial
of view and “in
best
fered
artificially
Executive Risk
value of
stock was
in
interests”
shareholders
Chubb’s
vote,
thereby
sufficiently
have
facilitate
favorable
flated. Nor
23.Indeed,
suggests
combined ratios were fraudulent from the fact
the available information
merger
reported
ratio in-
that Chubb’s
that the
was fair for Executive Risk
combined
especial-
quarter,
creased to
in the third
Don-
130%
shareholders. Executive Risk retained
aldson,
ly
light
recognized impact
Corpora-
of the
of Hurri-
& Jenrette
Lufkin
Securities
Furthermore,
Floyd
cane
on this
Barney Incorporat-
number.
tion and Salomon Smith
allegation
unaccepta-
such an
constitutes an
opine
potential
ed to
on the fairness of the
attempt
plead
by hindsight.
ble
fraud
merger with Chubb. Each financial advisor
independently
public
reviewed
infor-
financial
alleged
provided by
person
21. Plaintiffs also
control
liabil-
mation and information
both
ity
against
expressly
companies
Defendants
and Kullas
claims
Sills
concluded that
20(a)
pursuant
merger
to section
of the
Act. The
“fair” to Executive Risk share-
any predicate
Complaint
Securi-
lack of
violation of the
Second
holders. The
Amended
Exchange Act
compels
any allegation
ties
of 1934
dismissal
does not include
person
claims.
control
the individual Executive Risk Defendants
concluding
that the valua-
were reckless
by
Proxy
tions furnished
the investment bankers
22. The
Statement disclosed all benefits
Sills, Kullas,
fair,
they intentionally
issued
to be received
Defendants
upon
merger.
knowing
completion
falsity.
of its
and Deutsch
this conclusion
*32
do
re-
predicate
individual
ments on claims that
not
how the
Executive
particularized
covery
They
of
also
showing
on a
fraud.
aware of Chubb’s
Risk Defendants became
in
argue that their section 11 claims are
financial
and the
results
purportedly false
liability
fact
that do not
strict
claims
rate
of
initiative.
supposed failure Chubb’s
question
“sound in fraud.” The
of whether
conclusory allegation that
vague,
A
pleading
articu-
heightened
standard
Risk Defendants must
individual Executive
9(b)
brought
lated
applies
in Rule
to claims
finan-
been aware of Chubb’s falsified
have
11 of the
Act that
under section
1933
diligence
in due
through partaking
cials
subject
question
sound in fraud is a
of law
Moreover, Plaintiffs’ as-
does not suffice.
Parent-
plenary
review. See Planned
that
Sills and Kullas
sertions
Defendants
v. Attorney
hood Cent. N.J.
General of
of
analysts
misstatements to securities
made
(3d Cir.2002).
N.J.,
253, 259
297 F.3d
We
in
by participating with Defendant O’Hare
affirm District
Court.
analysts on
conference calls to securities
particularized
1999
and is
July
is
First, an examination of the factu
fact
light
in
that Second
baseless
support
al
that
Plaintiffs’ sec
allegations
attributes all those
Complaint
Amended
tion 11 claims establishes that the claims
July
alleged
1999
misstatements exclu-
unparticular
are
indisputably immersed
sively to O’Hare.
ized
of
allegations
fraud. The one-sen
of
tence disavowment
fraud24 contained
requirements
particularity
The
of
within Plaintiffs’ section 11 Count—Count
allegations
govern
PSLRA also
sur-
II of
Complaint—
the Second Amended
14(a)
rounding Plaintiffs’ section
claims be-
require
does not
us to infer that the claims
they sound in fraud. See In re
cause
claims,
liability
negligence
are strict
or
As
NAHC
Section 11 19SSAct Claims permeates of fraud the entire Second Plaintiffs next contest the District Complaint Amended underlies all of their Court’s dismissal of section linchpin Plaintiffs’ claims. The of Plain- Act claims for to meet particu failure allegations tiffs’ their action is that Defen- 9(b). larity requirement of Fed.R.Civ.P. dants knowingly intentionally commit- violations, The District found Plaintiffs’ Court accounting ted a series issued allegations section “sound fraud” and misleading regard- false and statements allegations accordingly dismissed those ing improvements standard Chubb’s 9(b). business, failure to Rule comply with commercial insurance and omit- assert Court erred in ted the District critical information that would tend imposing pleading require- representations of contin- heightened negate fraud, intent, allegations Paragraph knowledge, Second 166 of the Amended Complaint incorporate states: “Plaintiffs scienter.” ¶¶ any expressly 1-161. Plaintiffs disclaim hinge allegation of ef- claim cannot on an purposes for the improvement ued 9(b) merger be- fraud. Rule does not fectuating stock-for-stock discriminate Risk, Executive tween Chubb and In- between various of fraud. attempt. The avoiding stead, a hostile takeover claim that applies includes Complaint completely Amended Second of fraud or Recog- “averments mistake.” any allegations that Defendants devoid nizing neither fraud nor mistake is a *33 language The negligently. acted necessary element of a cause of action II itself further be- employ within Count 11, under section we nonetheless held in that their 1933 Act lies their contention 12(2) § § Shapiro that “when 11 and II liability claims are strict claims. Count grounded claims are in fraud than rather Complaint of the Second Amended ex- 9(b) negligence, applies.” Rule 964 F.2d pressly incorporates by reference all of at 288. allegations, including the preceding sections entitled “scienter and scheme al- Shapiro Plaintiffs counter 172-177) 166,
legations,” (Compl.M
passage
does not survive
PSLRA
¶¶
28).
(Id.
24,
facts”
II
the “true
Count
light
Congress’ apparently
deliberate
Registration
describes the
Statement as
impose heightened pleading
choice not to
¶
(Id. 169),
misleading,”
“false and
and re-
requirements
brought pursuant
on claims
peatedly
upon
relies
the “false statements
to
Act.
position
the 1933
Plaintiffs’
is tanta
accounting manipulations
detailed
claiming
implicitly
mount to
that Congress
as the
in-
“artificial[ ]
herein” as well
9(b)
abrogated application of Rule
in secu
support
flat[ion]” Chubb’s stock
this
brought
rities suits
under the 1933 and
(Id.)
speaks
It
characterization.
Defen-
argument
1934 Acts. This
cannot be recon
“concealing] key facts from pub-
dants
its
that “[a]brogation
ciled with our view
of a
until
merger
lic disclosures
after
procedure
generally inappropri
rule of
is
closed,”
“concealing
the continued ser-
expression by
ate
the absence of a direct
ious deterioration in Chubb’s standard Congress
depart
of its intent to
from the
(Id.)
commercial insurance
It
business.”
of trying
usual course
‘all suits of a civil
further describes Defendants’ EPS fore- nature’ under the Rules established for
casts,
forecasts,
premium growth
and com-
purpose.”
Temporary
Weiss v.
In
predictions
bined ratio
as “false when
(3d
Fund,
928,
vestment
936
Cir.
(Id.)
Shapiro,
made.”
As in
Plaintiffs’
1982) (internal
omitted),
citation
judgment
claims
with references to defen-
“brim[]
1001,
grounds,
vacated on other
465 U.S.
misrepre-
dants’ intentional and reckless
(1984).
104
Second, past precedent from this recognized standards. This Circuit has proposition Circuit makes evident vitality independent the continued of Rule 11 ground section 1933 Act claims that are 9(b) in suits. v. securities See Oran subject ed in of fraud are Staf (3d Cir.2000) 9(b). ford, 226 F.3d 288 despite This is correct Fed.R.Civ.P. (“Both the and the Federal Rule fraud, mistake, PSLRA negligence that neither 9(b) impose heightened of Civil Procedure required prima is facie section plead pleading requirements plaintiffs on who logically 11 claim. It does not follow from fraud.”). allege Significantly, necessary the fact that fraud is not a ele securities recently 11 11 reaffirmed its rea- ment of section claim a section this Court has 162 straightforward applica- are with a Shapiro.25 Digital See re faced
soning (3d F.3d 322 Cir. Litig., 357 procedural Island Sec. tion of a rule. 2004) upon reasoning of relying (explicitly Finally, Plaintiffs’ on Lone Star reliance 9(b) height that Rule holding Shapiro Inc., Schlotzsky’s, Inv. v. 238 Ladies Club requirements apply pleading ened (5th Cir.2001), F.3d for the notion that offer brought under tender claims strip the section the District Court should Act, rule” the 1934 price U.S.C. “best of their fraudulent elements and claims 240.14d-10(a), 78n(d)(7); § § 17 C.F.R. negligence construct a claim based fraud); grounded in those claims are
when misrepresentation inap- innocent and/or Golf, Litig., Inc. In re Sec. see also Adams Ladies, it was posite. In Lone Star (3d Cir.2004) n. 5 F.3d who, court, plaintiffs, not the district (“[C]laims Act that do not under the 1933 *34 9(b), light Rule of a dismissal under sub- to height fraud not held the sound in are dropped complaint amended mitted an Fed. requirements of pleading ened 9(b).”). all 1934Act fraud claims and instead relied R.CivJP. solely on non-fraud 1933 Act claims. In- Equally unavailing is Plaintiffs’ conten deed, Fifth the Circuit held that while Shapiro squared with tion that cannot be under the circumstances the district court subsequent decisions Supreme the Court’s amendment, allowed should have the County in Leatherman v. Tarrant Narcot made abundantly clear that “a district Unit, 507 Intelligence & Coordination ics allega- court to required through not sift is 163, 1160, 122 517 113 S.Ct. L.Ed.2d U.S. tions fraud in search of some of ‘lesser N.A., (1993), v. and Swierkiewicz Sorema liability. may claim of strict It included’ 992, 506, 152 1 122 L.Ed.2d 534 U.S. S.Ct. respon- Id. at 368. It is not the (2002). dismiss.” re Leatherman and Swierkiewicz sibility of the District to serve as heightened plead Court jected judicially created judice, ing In the case sub we Plaintiffs’ advocate. standards. ty]"); Seasonings, Appeals to the v.
25. Other Courts of
consider
accord
Celestial
Schwartz
Inc.,
1246,
pre
post passage
(10th
1997)
of
issue both
and
the PSLRA
Cir.
124 F.3d
1252
9(b) applies
also concluded that Rule
to
have
("[a]ssuming
deciding”
ap
without
that the
See,
sounding
e.g.,
section 11 claims
in fraud.
proach
by
Shapiro
set out
Circuit in
Third
164,
(2d
Chang,
Rombach v.
355 F.3d
171
applies,
holding
§
that "the
11 claim
and
in
Cir.2004) ("We
heightened
hold that
9(b)
trigger
at bar ... does not
Rule
case
9(b)
pleading
applies
Sec
standard of Rule
to
scrutiny”
premised
because “it
is not
on
12(a)(2)
11 and
claims
as
tion
Section
insofar
fraud.”);
Digital Equip. Corp.,
v.
Shaw
82
premised
allegations
are
the claims
of
1194,
(1st
("[I]f
Cir.1996) (dictum)
F.3d
1223
fraud.”);
v.
Lone Star Ladies Inv. Club
plaintiff
attempt
a
were to
to establish viola
363,
Inc.,
(5th
Schlotzsky's,
238 F.3d
368
Cir.
12[a](2)
11
well
tions of Sections
and
as
2001) (approving
court’s
district
reliance on
provisions
Exchange
Act
anti-fraud
1097,
Morris,
(5th
Melder v.
27 F.3d
1100 n. 6
allegations
though
single complaint
in
or a
9(b)
1994)
proposition
for
is
Cir.
Rule
of
...
unified course
fraudulent conduct
applicable to
Securities Act claims that
1933
9(b)
particularity requirements of Rule
would
fraud);
grounded
are
in
In re Stac Elecs. Sec.
11, 12[a](2),
probably apply to the Sections
1399,
(9th Cir.1996) ("We
Litig.,
F.3d
1404
89
alike.”).
claims
But see In
Rule 10b-5
re
clarify
particularity require
now
309,
Corp.
Litig.,
Sec.
F.3d
NationsMart
130
9(b)
brought
apply
of Rule
to
ments
claims
(8th Cir.1997) (holding
particu
314
that "the
when,
they
grounded
...
are
under section 11
9(b)
larity requirement
apply
does not
Rule
Likens,
fraud.”);
Sears v.
893
Act,
§
to claims under
the Securities
Cir.1990)
(7th
satisfy
(plaintiffs "fail[ed] to
proof
not
9(b)
because
of fraud or mistake is
applicable to
this
standard”
their Securi
liability
prerequisite
establishing
to
sounding
under
ties Act claims
"their
fraud where
complaint
any [particulari-
[was] bereft of
11.”).
§
particularity
Amended Com-
for failure to meet the
stan
Plaintiffs’ entire Second
9(b).
claims,
dards dictated
Rule
the section
plaint-including
PSLRA,
for
failure to state a claim
fraud. Plain-
grounded
12(b)(6). First,
under Rule
the District
accordingly
11 claims are
sub-
tiffs’ section
determined that
Court
Plaintiffs failed to
9(b).
exhaustively
ject to Rule
As detailed
plead their fraud claims
with
accordance
section,
preceding
in the
Plaintiffs have
9(b)
the mandates of Rule
PSLRA.
pleading
met
their burden of
fraud
Specifically, Plaintiffs neglected
plead
such,
particularity. As
the District
with
“who,
when,
what,
particularity
dismissed Plaintiffs’
appropriately
Court
and how”
each
alleged
statement
be
section
claims.
9(b),
required by
false as
Rule
and failed
satisfy
provided by
the. strict standard
C.
the Second Circuit’s decision Novak v.
Leave to Amend
(2d
Kasaks,
Cir.),
165
afforded ments of fraud.
guidance the District Court
Plaintiffs chose at their
clear
peril not to
the District
Plaintiffs,
disregard
guid-
of that
heed
Court’s
to
Plaintiffs’
ance and
themselves of an opportuni-
avail
advice,
propose
and Plaintiffs’ failure to
ty
rectify
the deficiencies of the Amend-
remedy
additional amendments that would
scenario, justice
Complaint.
ed
Under this
pleading
deficiencies
Second
require
does not
that leave to amend be
Complaint,
Amended
the District Court
15(a).
given.28 See Fed.R.Civ.P.
The rea-
denying
did not abuse its discretion in
provided by
sons
the District Court for its
Plaintiffs leave to amend their deficient
previously recognized
decision have been
complaint.
proper grounds
denying
as
leave to
argue
Plaintiffs nonetheless
complaint,
amend a
even when the com-
they
permitted
should at least be
to plaint
lacking particular-
was dismissed for
strip their 1933 Act section
claims of
See,
NAHC,
pleadings.
e.g.,
ized
In re
replead
fraud
these claims
(recognizing
F.3d at 1332
delay,
“undue
pursuant
theory
liability
to a
of strict
faith,
motive,
dilatory
prejudice,
bad
negligence. Ordinarily, leave to amend is
futility”
proper grounds
as
for denying
granted
complaint
when
is dismissed on leave to amend claims dismissed under the
9(b) particularity grounds
Rule
alone. See PSLRA);
Invs.,
Krantz v. Prudential
Burlington,
In re
defendants.” the dismissal with change Act and only in that case replead plaintiffs lowed specific these claims was prejudice as to no such court made “the [district] because of the court’s proper not in the exercise determination, cannot make that and we I dis- Accordingly respectfully discretion. record us.” on the before determination sent, in from Parts III.B and III.C of part, Id. majority opinion. Plaintiffs provided The District Court curing the roadmap for with a detailed I. Plaintiffs’ claims. Sec- in their deficiencies 1999, 17, and Executive Chubb On June did not cure Complaint ond Amended registration their statement Risk filed have al- Defendants these deficiencies. pursuant proposed to the merger proxy against three forced to defend ready been closed quarter The second merger. decision District Court’s complaints. The 30, Risk share- 1999. Executive on June having yet from an- Plaintiffs prevent merger on approved proposed holders complaint revise their chance to other later, 19, days July Only eight 1999. within its discretion. properly 27, quarter July released its second results, earnings projec- which fell short IV. Although by per tions four cents share. reasons, judgment foregoing For the lay to a may appear significant this August entered on of the District Court by person, these results were described affirmed. 2003 will be “shocking analysts disap- as a securities pointment.” SLOVITER, Judge, Dissenting Circuit that Defendants had a argue in part. mid-sec- duty disappointing disclose I, major- join II and III.A of the
I Parts results in their June ond certainly I un- merger proxy can ity’s thorough opinion. registration statement Judge, present- ren- why allegedly the District Failure to do so derstand materials. which, gave pages misleading, of 125 false and complaint ed with a dered them amendment, only to correct cause of action not private failed rise to even after 10(b) Exchange § Act but noted under previously inadequacies 14(a) § of the same Act and court, giv- should be also under that Plaintiffs decided See, e.g., Her- § 11 of the Act. to state a Securities opportunities en no further Huddleston, however, believe, Plaintiffs man & MacLean v. U.S. claim. I 375, 382-83, L.Ed.2d 548 § 11 of 103 S.Ct. claims under may have colorable multiperil were terrible.... Premi- complaint quotes results PaineWebber's Plaintiffs' *38 27, stating: July report up as about 1999 in total were flat rather than ums expected. perceived shocking a dis- as as 5% [i]n what reported premiums appointment, (ellipses original). flat App. at 727 earnings ... for the second with report Securities issued a on Prudential Manage- Street consensus.... ''[sjtandard short of the July stating 1999 dampened its earlier enthusiasm for ment total results were awful.... The commercial conditions, had improving market which reported a book com- standard commercial early up expectations in the sec- ratcheted slightly a better than bined ratio of 120.8% commer- quarter.... ond Total standard year ago from the but deteriorated 117.9% 9.0%, more than ex- cial business shrank App. quarter.” at 728 reported in the first pected. combined ratio remained The original). (ellipse in unacceptably high at Commercial 120.8%.
167 (1983) II. (holding that action under sections 10(b) disclo- may 11 and arise from same §11 A Colorable Claim Exists Under sure). 14(a) § the Securities Act and fact that Despite the averments under the Exchange Act 14(a) scienter, § allege §11 and need not disagree majority I do not with the It is well established that a statutory “grounded pled these claims as duty exists disclose all material informa- therefore, subject fraud” and to the registered tion connection with a stock heightened pleading requirements of Fed. offering, proxy solicitation or shareholder 9(b) and the Private R.Civ.P. Securities 11 vote. Section of the Act Securities (PSLRA). Litigation Reform Act See In provides private damages that a action for NAHC, Litig., re Inc. Sec. may “by be brought any person acquiring (3d Cir.2002); Shapiro v. Fin. 1329 UJB security” statement, if registration such (3d Cir.1992). Corp., 964 F.2d 288-89 (1) as of its effective date: “contained an majority applies sweep- The thus the same (2) fact”; untrue statement of material ing particularity analysis applicable under required “omitted to state a material fact 9(b) and Rule to Plaintiffs’ the PSLRA (3) therein”; to be stated or omitted to 10(b) § § as it to Plaintiffs’ claims does “necessary state a material fact to make 14(a) § It claims. then concludes misleading.” the statements therein not “ allegations, pur- ‘true facts’ which 77k(a). to, § Liability 15 U.S.C. attaches portedly why demonstrate Defendants’ alia, persons sign inter all who the regis- various ... disclosures ... were material- statement, “issuer, including tration its ly pled by with false” were officers,” principal executive officer or Maj. requisite particularity. op. See Act, § pursuant 15 of the Securities majority 145. Accordingly, the affirms the every person party control of a liable un- District Court’s dismissal under Fed. 78f(a). 77k(a); § §§ 11. der See 15 U.S.C. 12(b)(6) R.Civ.P. and its denial of leave to amend. Likewise, Exchange provision Act’s solicitations, 14(a),30 governing proxy § agree majority’s I with the deci-
While promulgated and Rule 14a-9 pursuant sion to dismiss the Second Amended Com- thereto,31 provide private cause of action plaint particularity grounds, majori- proxies ty the solicitation of contain may fails to discuss whether Plaintiffs any materially § misleading have false or informa- colorable claims under 14(a). 78n; § § tion. See U.S.C. C.F.R. 14(a) 78n(a). Exchange § § Act states: U.S.C. any person, by It shall be unlawful for provides: 31. Rule 14a-9 by any use of the mails or means or instru- mentality any of interstate commerce or of regulation subject No solicitation to this facility exchange of a national securities or any proxy state- shall be made means of otherwise, in contravention of such rules which, containing any ment ... statement regulations may as the Commission light at the time and in the of the circum- necessary prescribe appropriate in the made, stances under which it is is false or public vestors, protection interest or for the of in- misleading respect material permit to solicit or to the use of his *39 fact, any or which omits to state material any proxy name to solicit or consent or necessary in order the state- fact to make any security respect authorization in (other misleading.... or exempted security) regis- ments therein not false than an 240.14a-9(a). pursuant § tered to section 781 of this title. 17 C.F.R.
168 240.14a-9; v. turn out to an extreme depar- Case Co. Bo ter would be see also J.I. § 1555, 426, from trends un- rak, publicly 12 ture known U.S. 84 S.Ct. 377 14(a) (1964). Id. 1211. The certainties.” defendant’s liability L.Ed.2d 423 Section in that case registration statement became negligently parties all who exe attaches to offering and its took statement, place effective . stock pursuant to proxy a cute prior “11 of the Act, days to the close 20(a) any person Exchange § of the three progress, then in and about weeks indirectly,' directly any or controls “who to the announcement of an prior company’s negligently proxy a executes who person” earnings report 78t(a).’ unexpectedly negative for § 15 U.S.C. statement. quarter.” The that Id. at 1199. court § 11 an action under Significantly, “corporate pos- reasoned issuer in that 14(a) allegation require any not § does information, nonpublic of material session with scienter. See that a defendant acted must, like other insiders in the same situa- Huddleston, MacLean v. 459 Herman & tion, its disclose that information to share- 683, 375, 382, 103 74 L.Ed.2d S.Ct. U.S. trading holders or refrain from (1983); Golf, In re Adams Inc. Sec. 548 (internal quotations Id. at them.” 1203-04 (3d Cir.2004) 267, 274 n. 7 Litig., 381 F.3d omitted). citation Such disclosure is (“Section[ virtually 11 ... [is absolute ] a] especially liability provisionf], which re do[es] public crucial in the context of a offer- allege that defendants quire plaintiffs ing, rely where typically investors must scienter.”); Gould Ameri possessed v. ... offering price by on an determined 761, Co., F.2d can-Hawaiian S.S. 535 777 underwriters issuer and/or (in (3d Cir.1976) imposing negligence stan offering.... Accordingly disclosure dard, language section “[t]he we stated a requirements associated with stock of- 14(a) 14a-9(a) sug Rule contains no than, fering stringent are more for ex- requirement, merely of a scienter gestion ample, regular periodic disclosures proxy for establishing quality standard for in company’s called annual Form material”). ... “primary purpose Their quarterly 10-Q 10-K or filings Form by requiring publica protect investors under the Exchange Act. thought information tion of material neces (internal omitted). Id. at 1208 citation them make informed ... sary allow concerning offerings of public decisions se rejected “any bright-line Shaw rule” as Dahl, 622, Pinter v. 486 U.S. curities.” mid-quarter to when disclosures must be 638, 2063, 100 L.Ed.2d made, 108 S.Ct. stating circumstances, in “many (1988); Sec. see also & Exch. Comm’n v. relationship nonpublic between the in- Co., Purina Ralston 346 U.S. plaintiffs formation claim should have disclosed, (1953); Desaigou 97 L.Ed. S.Ct. actual been and the results or (9th 1020, 1024 Meyercord, v. dar events the undisclosed information Cir.2000). supposedly presaged would have will be so attenuated the undisclosed informa- Digital Equip. Corp., v. Shaw F.3d may tion be deemed immaterial a mat- (1st Cir.1996), superseded statute Id. The ter law.” at 1210-11. situation grounds, Appeals on other the Court of for us is of those before not one instances. cogni- legally First Circuit held that a § made claim under 11 could be Akin to the factual zable circumstances Shaw, registration failure results its mid-quarter to disclose filed state- registration statement, thirteen to the days prior which ment close of a “indicatfe] quar- disappointing some that the quarter, substantial likelihood second results
169
14(a)
accounts,
§
which,
product
would be actionable under
by all
fluc-
“Only
than a mere “minor business
Act.
Exchange
proxy
of more
when
reports
Analysts’
at 1211.
tuation.” Id.
fully
fairly
all the
statement
furnishes
“shocking
were a
stated that these results
objective material facts
a
enable
rea
that
the “standard
disappointment” and
prudent
an
sonable
stockholder
make
awful.” See su-
commercial results were
informed investment decision is the federal
a
pra,
Surely,
note 1.
“there is
substantial
purpose in the securities law served.”
that a reasonable shareholder
likelihood
667,
Greenberg,
Mendell v.
927 F.2d
674
impor-
[such information]
would consider
(2d
Indus.,
Cir.1991); see
Inc. v.
TSC
In-
deciding
tant
how vote.” TSC
Inc.,
438, 448,
Northway,
426
96
U.S.
S.Ct.
dus.,
Inc.,
438,
Northway,
Inc. v.
426 U.S.
(1976).
2126,
For the same
14(a)
§
claim under
and Rule 14a-9
valid
failure to disclose Chubb’s mid-second
proxy
against
results in the
materials
all Defendants.
Co.,
Corp.
Litig.,
Sec.
33. See Gould v. American-Hawaiian S.S.
32. See also In re Scholastic
(2d Cir.2001) (holding
(3d Cir.1976)
70-71
(holding
252 F.3d
earnings
14(a)
that material decline in sales or
materiality in a
"the basic test of
section
disclosed);
that must be
In re
information
setting
probable
is whether it is
reason-
Litig.,
F.Supp.2d
Campbell Soup Co.
Sec.
importance
able shareholder would attach
(D.N.J.2001) (same);
590-91
see also
falsified,
the fact
in de-
misstated
omitted
Inc.,
Brewing,
v.
III. The also same differences in the of circuit courts. Compare decisions other 11(a) § § 11 Amend the Leave to Enters., Inc., Miller v. Champion be Should Granted Claims Cir.2003) 660, (6th (stating 690-92 dic- provides party 15 that a Fed.R.Civ.P. prevent harassing tum that “to strike suits may pleading its once before a amend company’s price filed the moment a stock served, is responsive pleading or thereaf- falls ... frustrated would be if district or by ter of court con- “by leave written required repeated courts were to allow party.” sent of the adverse Such “leave complaints amendments to filed under the justice when re- freely given shall be so PSLRA”) (internal quotations and citation quires.” Id. omitted), McWhorter, with Morse v. 290 Cir.2002) (6th 795, F.3d (reasoning 800 the District dis- affirming Court’s particularly that “leave to amend is appro- Second Amended Com- missal of Plaintiffs’ priate complaint allege where the does not plaint majority implicit- the prejudice, with particularity”); fraud with see also Emi- ly the District conclusion approves Court’s Inc., Aspeon, nence v. Capital, LLC 316 context of securities fraud that the “[i]n Cir.2003) (9th curiam) (per F.3d 1052 ... Rule 15 must more actions be viewed (“Adherence principles [governing to these to vitiate strictly heightened so as not leave to especially important amend] of Act pleading requirements the Reform the context of the PSLRA.... In this by providing plaintiffs opportuni- unlimited law, demanding technical and corner of the App. (citing ties to amend.” 895 In re drafting cognizable of a complaint can Litig., Cybershop.com F.Supp.2d Sec. 189 error.”). abe matter of trial and (D.N.J.2002)). 214, 237 We not need resolve issue raised in amend- The. tension between liberal the above cases because Plaintiffs should ment of Fed.R.Civ.P. 15 and the approach be able complaint to file an amended based pleading requirements strict 14(a) that, § § on 11 if divorced from noted by PSLRA has been the courts. fraud, would not sub- be given Our to have court seems inconsistent ject heightened pleading requirements NAHC, signals. In re Compare Inc. Sec. allowing any PSLRA. Whereas fur- Cir.2002) (3d 1314, 1333 Litig., 306 F.3d 10(b) § ther amendment to Plaintiffs’ goals (stating in dictum of PSLRA claims an would be abuse of discretion if, considering “would be thwarted the his- because, states, majority as the “Plaintiffs tory case, plaintiffs liberally of this proffered here have no additional facts permitted again”), leave to amend pleading would cure the deficiencies Werner, (3d Werner v. F.3d claims],” Maj. op. see at p. [such Cir.2001) (“we will add to the strict § same cannot be said for Plaintiffs’ discovery restrictions the ... PSLRA 14(a) § claims. ... by narrowly construing in this Rule 15 case, stage otherwise, litiga- at this late in the if given even Stated leave to amend, high may tion. burdens the PSLRA be pled Given these claims in a justice placed plaintiffs, and fairness manner which survive a would motion to 12(b)(6). require plaintiffs before us be dismiss under Rule Lone See opportunity Inc., an amend their allowed Star Ladies Inv. Club v. Schlotzsky’s (5th Cir.2001) allegations relating to include to 238 complaint F.3d 363 (holding newly meeting discovered Board min- district prejudice court’s dismissal with utes.”). 10(b) § complaint alleging § both 1989) (internal quotations citations and of discretion because claims was abuse *42 omitted); § 11 claim and see also & v. had colorable Cornell Co. Occu- plaintiffs Comm’n, complaint, ab- plead pational Safety it in amended & Health Review could fraud). (3d Cir.1978). 820, of For any allegation pur- sent 573 F.2d 823 15, poses prejudice of Rule the term adopted ap- has a liberal This court difficulty [defending] “means undue to pleadings to the amendment of proach change lawsuit as a result of a in tactics or claim will be particular ensure that “a on the part party.” theories of other rather than on tech- decided on the merits Lewes, Deakyne v. Comm’rs 416 F.2d Co., 921 of nicalities.” Dole v.Arco Chem. (3d Cir.1969). 290, 300 In the absence (3d Cir.1990). 484, Supreme The F.2d 487 prejudice, substantial denial instead must Davis, holding in Foman v. 371 Court’s “truly unexplained be based on undue or 178, 227, 222 9 L.Ed.2d U.S. 83 S.Ct. delay futility ... or of amendment.” Lor- (1962),is axiomatic: enz, 1414; 1 at also In re Bur- F.3d see any or de- apparent the absence of [i]n Factory Litig., 114 lington Coat Sec. F.3d delay, as undue bad clared reason —such (3d Cir.1997). 1410, 1434-35 dilatory part faith or motive on the movant, repeated failure to cure de- The District concluded that “to Court by previously al- ficiencies amendments action, require defendants defend the lowed, opposing to the prejudice undue ultimately to incur the effort and ex- party by virtue of allowance of the pense of a third motion to dismiss after amendment, amendment, futility of motions, two successful dismissal would should, sought etc.—the leave as the clearly prejudice constitute undue to the freely given.” required rules “be at App. defendants.” 182, 227; Id. at 83 S.Ct. see also Oran v. The District Court’s determination that (3d 275, Cir.2000); 291 Stafford, 226 F.3d preju- leave to amend cause undue would (3d 1406, Corp., Lorenz v. 1 F.3d 1414 CSX dice was made in connection with the com- Cir.1993). whole, as a which included Plaintiffs’ plaint majority The affirms District 10(b) essentially § If Plain- futile claims. denying Court’s order leave to amend the given tiffs were leave to amend to assert Complaint, stating that Second Amended 14(a) § § only their colorable 11 and claims, respect “with to the section 11 claims, why it is difficult to see Defendants explicitly Plaintiffs warned to either prejudice being would suffer undue re- plead claims in accordance with Rule those quired respond to a Third Amended 9(b), strip them of all averments of Complaint. Defendants have been on no- peril fraud. Plaintiffs chose at their not to inception tice of such claims since the guidance and heed the District Court’s any action and thus amend- present opportunity of an avail themselves recti require respond ment would not them to fy the of the Amended Com deficiencies any novel or unrelated tactics or theories. Maj. plaint.” typescript op. See 168 10(b) fact, § In elimination of fraud Fund (citing Krantz v. Prudential Invs. complaint claims from future would (3d LLC, 140, 144 Mgmt., 305 F.3d Cir. materially scope complexity limit the 2002)). present action. While obtuse, may they have not ex- repeatedly “prejudice have held that have been We any showing of faith or caused non-moving party to the is the touchstone hibited bad “Limit- delay. an to suffer undue for the denial of amendment.” Bechtel Defendants (3d Robinson, 644, delays prejudice and the to a defendant v. 886 F.2d 652 Cir. ed 278; Shapiro, 964 F.2d at Luce granted); are reali- of a lawsuit pendency from (2d Edelstein, accept- be F.2d 56-57 Cir. that have to v. system ties of Cvetkov, 1986); v. Nutrition Ash v. Yoder Orthomolecular ed.” See (2d (9th Cir.1984). Inst., Inc., F.2d 562 n. 6 Cir.1985). my opinion, Plaintiffs should majority’s persuaded I am not to assert their given opportunity be a final the fact that Plaintiffs heavy reliance 14(a) § § claims with instructions the District the advice of failed to heed *43 any allegations plead such claim absent in complex have stated Court. We of fraud. a claimant has the mere fact that litigation, comply plead- with attempts had several a is not itself sufficient
ing requirements preju- complaint to dismiss a
basis WorldCom, Inc., Graphnet, Inc. v.
dice. (3d Cir.2003); n. ac- Aspeon, v. Capital, LLC
cord Eminence (9th Cir.2003)
Inc., 1048, 1053 F.3d (Reinhardt, J., concurring) (noting that America, UNITED STATES undeservedly common ‘three bites at “the Appellant ... a provides too often apple’ cliche analysis”).
substitute for reasoned v. effort, a third al- not be This would Fred E. COOPER. majority implies. so Plaintiffs’ though the No. 03-2854. Complaint, Amended issue Second attempt first at a only this was appeal, Appeals, United States Court of amendment; the First Amend- substantive Third Circuit. merely re-filing Complaint ed after the District Court original complaint 11, 2004. Argued March Thus, appointed lead Plaintiffs. Decided Jan. given only opportunity one have been complaint. properly amend their course, given if Plaintiffs were
Of §
opportunity replead 14(a) claims, they comply
§ need to would they
with the do so in “a requirement plain
short and statement” of the claims. 8(a)(2). Admittedly,
See Fed.R.Civ.P. not shown either the
Plaintiffs’ counsel has
ability disposition to do so. Their brief wordy complaint. their None-
was as
theless, preclude I them the would meritori-
opportunity possibly to assert plead-
ous claim because of defects Burlington Factory
ings. See In re Coat Litig., (stating
Sec.
where is complaint dismissed ordinarily
larity grounds, leave to amend