Iron Workers Local 16 Pension Fund v. Hilb Rogal & Hobbs Co.Iron Workers Local 16 Pension Fund v. Hilb Rogal & Hobbs Co.
MEMORANDUM ORDER
THIS MATTER is before the Court on Defendants’ Hilb Rogal & Hobbs Co. (“HRH”), Andrew L. Rogal (“Rogal”),
The Court holds that the Plaintiffs securities fraud and control person liability claims must be dismissed because: (1) Plaintiff fails to plead that Defendants made a material misstatement or omission; (2) the Complaint fails to raise a strong inference that Defendants acted intentionally, consciously, or recklessly; and (3) without facts to support Plaintiffs claims of securities fraud, Defendants cannot be held liable based upon control person liability. Additionally, the Court dismisses Plaintiffs First Amended Complaint with prejudice because Plaintiff has already had two full opportunities to state a claim and failed to do so.
I. BACKGROUND
This is a securities fraud case. Plaintiff Iron Workers Local 16 Pension Funds, and the remaining members of the class action, are all persons and entities who purchased, or otherwise acquired HRH securities, during the Class Period. (CompLf 5.) 1 HRH is an insurance intermediary firm based in Glen Allen, Virginia. (Comply 29.) HRH serves as an intermediary between businesses seeking to purchase insurance and insurance companies seeking to sell insurance. (Def.’s Br. in Support of Mot. to Dismiss Amend. Compl. (“Def.’s Br.”), at 3.) HRH is publicly traded on the New York Stock Exchange. (Comply 29.) Defendants Rogal, Vaughan, Jones, and Lockhart (collectively “Individual Defendants”) were officers and directors of HRH during the Class Period.
This securities fraud class action arises from a series of alleged statements and omissions by HRH that Plaintiff claims wrongfully hid HRH’s significant reliance on non-standard commissions
2
in reporting its revenue and earnings. Plaintiff alleges that Defendants were engaged in a long running scheme to raise HRH’s stock price by inflating revenue and earnings through “careful[ly] concealing] illicit! ] steering agreements.”
3
(Pl.’s Br. in Sup
(a) that non-standard commissions received from insurance carriers represented an important revenue source and generated nearly forty (40) percent of HRH’s net income (Pl.’s Br., at 1-2.);
(b) the true nature of its Carrier Consolidation Initiative (PL’s Br., at 1-2.); and
(c) the significant risks that the material portion of its revenue generated by non-standard commissions was subject to fines, penalties, claims for restitution, and damages. (PL’s Br., at 1-2.)
HRH’s Disclosure of Revenue Derived From Non-Standard Commissions
Non-standard commissions have been regularly used in the insurance industry. (Def.’s Br., at 4.) During the Class Period, HRH received non-standard commissions. Instead of reporting the revenues derived from its non-standard commissions separately on its financial statements, HRH reported the combined total of non-standard and standard commissions. HRH made no distinction concerning what amount or percentage was attributable to non-standard commissions.
New York Attorney General Investigation
In October 2004, the New York Attorney General’s Office (“NYAG”) made pub-lie its investigation of Marsh & McLennan Companies (“Marsh”), an HRH competitor. The NYAG’s investigation focused upon the impropriety of the New York insurance industry’s practices of receiving non-standard commissions. (ComplY 23.) Plaintiff alleges that on October 14, 2004, Marsh implicated other insurance brokers which caused HRH’s stock to fall by 9.5% because investors in the market believed that HRH was engaged in similar improper behavior. (Id.)
On October 27, 2004, Defendants maintained that HRH was not engaged in practices comparable to Marsh and allegedly stated that it was not engaged in special arrangements or bid-rigging. (Comply 24.) However, on May 26, 2005, HRH disclosed that it had received improper payments in connection with the placement of insurance policies and had terminated Defendant Lockhart as a result. 4 (Comply 26.)
Settlement of Connecticut State Attorney General’s Investigation
On August 31, 2005, HRH settled a claim with the Connecticut State Attorney General (“CTAG”), resolving allegations that HRH violated Connecticut’s Unfair Trade Practices and Unfair Competition Acts by failing to disclose certain commissions to consumers when they purchased their insurance policies. (Def.’s Br., at 7.) The CTAG did not allege that HRH failed to disclose commission arrangements to HRH investors, and CTAG did not assert
II. DISCUSSION
A. Standard of Review
1. Fed. R. Civ. P. 12(b)(6) — Failure to State a Claim Upon Which Relief May be Granted
A Rule 12(b)(6) motion should not be granted unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief. Fed. R. Crv. P. 12(b)(6);
Conley v. Gibson,
All reasonable inferences must be made in favor of the nonmoving party.
See In re MicroStrategy,
2. Section 10(b) of the Securities Exchange Act of 1931, & Federal Rule of Civil Procedure 9(b)
To establish liability under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78j(b) (2000), and under Rule 10b-5, 17 C.F.R. § 240.10b-5, a plaintiff must allege “(1) a material misrepresentation (or omission); (2) scienter, ... (3) a connection with the purchase or sale of a security; (4) reliance, often referred to in cases involving public securities markets (fraud-on-the-market cases) as ‘transaction causation[;]’ (5) economic loss; and (6) ... a causal connection between the material misrepresentation and the loss[.]”
Dura Pharmaceuticals, Inc. v. Broudo,
AVhen proceeding under a fraud on the market theory, a plaintiff need not plead direct reliance or that the fraudulent practice was in connection with a particular sale or purchase of securities. Instead, the plaintiff need only show the means of dissemination and the materiality of the misrepresentation.
SEC v. Texas Gulf Sulphur Co.,
In addition to meeting the requirements under Section 10(b), a plaintiff must also
The Private Securities Litigation Reform Act (the “PSLRA” or “Reform Act”)
The PSLRA codifies the requirements of Rule 9(b) and further requires that the complaint “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omissions is made on information and belief, ... state with particularity all the facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(l) (2000). In order to meet this requirement, the complaint must contain the time, place, speaker, and contents of the allegedly false statement.
Glaser v. Enzo Biochem, Inc.,
The Fourth Circuit has chosen not to focus the scienter inquiry on categories of facts such as motive and opportunity.
See Ottmann v. Hanger Orthopedic Group, Inc.,
The Fourth Circuit has held that a plaintiff may allege the required state of mind, or scienter, for securities fraud liability by pleading intentional misconduct or recklessness.
See Ottmann,
B. Analysis
The Court holds that Plaintiffs securities fraud and control person liability claims must be dismissed because: (1) Plaintiff fails to plead that Defendants made a material misstatement or omission; (2) the Complaint fails to raise a strong inference that Defendants acted intentionally, consciously, or recklessly; and (3) without facts to support Plaintiffs claims of securities fraud, Defendants cannot be held liable based upon control person liability.
See Longman v. Food Lion, Inc.,
Additionally, the Court dismisses Plaintiffs First Amended Complaint with prejudice because Plaintiff has already had two full opportunities to state a claim and failed to do so.
1. Statement-by-Statement Analysis
Courts have employed a statement-by-statement analysis in evaluating whether the complaint “specifies] each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omissions is made on information and belief, ... state with particularity all the facts on which that belief is formed.” 15 U.S.C. § 78u-4(b);
see also Arnlund v. Smith,
Rule 9(b) requires that allegations of fraud be pled with specificity. Fed. R. Crv. P. 9(b). Along these lines, plaintiffs must plead specific facts concerning, for example, when each defendant or other corporate officer learned that a statement was false, how that defendant learned that the statement was false, and the particular document or other source of information from which the defendant came to know that the statement was false.
In re First Union Corp. Sec. Litig.,
Additionally, actionable false or misleading statements must also be material.
See First Union,
a. Defendants’ Alleged Failure to Disclose their Big Three Strategic Alliances
The Court finds that Plaintiff fails to plead an actionable omission — that Defendants failed to disclose their “Big Three” strategic alliances — for two reasons. First, Plaintiff fails to plead an actionable omission because the information was available to investors through analyst reports. Second, Plaintiff fails to plead an actionable omission because Plaintiff fails to show that Defendants had a duty to disclose the “Big Three” strategic alliances. The Complaint alleges that the “Big Three” agreements were contracts between HRH and three insurers, which provided that “in exchange for ... contingent or override commissions, HRH would steer a high volume of profitable business” to those insurers. (Comply 13.) The Complaint further alleges that this omission rendered all of the Company’s statements during the Class Period false or misleading. (CompU 137.)
i. Information Regarding the “Big Three” Strategic Alliances was Available to Investors through Public Analyst Reports.
The Court finds that Plaintiff fails to plead an actionable omission — that Defendants failed to disclose their “Big Three” strategic alliances — because the information was publicly available to investors through analyst reports. Plaintiff claims that HRH had a duty to disclose non-standard commission as a line item so that investors would know that non-standard commissions were a substantial revenue stream. (Compile 14, 19, 21.) Instead, Plaintiff alleges, that HRH failed to disclose the “Big Three” agreements because HRH wanted to secretly “limit competition by steering a select number of insurers in return for substantial contingent and/or override commission payments.” (Compl.lHI 10,13.) Plaintiff alleges that the revenue earned from the “Big Three” agreements “resulted in high margin revenues [that] required little cost and were high in profit.” (Comply 15.) Plaintiff alleges that this business practice created tremendous risk and liability for HRH and was in violation of state and federal antitrust laws. (Comply 18.)
Securities laws “require disclosure of information that is not otherwise in the public domain, not information that has already been publicly — indeed, officially— disclosed.... ”
Hillson Partners Ltd. v. Adage, Inc.,
Here, as early as 1999, there existed publicly available analyst reports explaining HRH’s strategy to consolidate its business with fewer insurance carriers. (Def.’s Ex. 19, Analyst Report by Hugo J. Warns, III, Initiating Coverage of HRH, Legg Mason (May 4, 1999), at 2 (reporting that HRH was focusing on “placing business with fewer insurance carriers and intend[ed] to solidify relationships with several companies” in order to “expand[] product offerings for clients and more favorable contingency and commission terms”).) Additionally, there were several other reports that announced HRH’s strategy. (Def.’s Ex. 20, Analyst Report by Hugo K. Warns, III, Gloves Off, Ready to Rumble, Legg Mason (Sept. 22, 1999), at 3 (reporting that HRH’s “[mjargin improvement” would be driven by its “consolidation of insurance carrier relationships”).); (Def.’s Ex. 21, Analyst Report by Stephens Inc., Research Bulletin — HRH (Feb. 17, 2000), at 1 (referring to “steady margin improvement” from a combination of factors, including “consolidation of carrier relationships”).); (Def.’s Ex. 22, Analyst Report by Hugo Warns, III, HRH Reports Solid bQ99 Results, Legg Mason (Feb. 18, 2000), at 2 (reporting HRH’s efforts to “harvest the overrides associated with consolidating business with fewer carriers”).) The Court finds that because this information was available to Plaintiff during the Class Period, it cures any potential omissions by HRH. Plaintiff argues that any press releases about Defendants’ plans to consolidate insurance carriers did not inform the industry because those reports provided insufficient information. (Pl.’s Br., at 13.) The Court disagrees because the plain language of the analyst reports refers to, and explains, HRH’s efforts to consolidate its insurance carriers in order to obtain favorable steering agreements.
Plaintiff further argues that the Court should not consider the industry analyst reports announcing Defendants’ insurance carrier consolidation efforts because those matters are not alleged on the face of the complaint. (Pl.’s Br., at 13.) Plaintiff maintains that “[Booking beyond the amended complaint to find Plaintiffs reliance on [analyst] reports ... is not proper on a motion to dismiss.”
(Id.
at 14.) The Court finds that it is proper to consider the analyst reports in considering this Motion to Dismiss because it is integral to the Complaint. In securities fraud actions, the Court will consider the facts stated in the complaint, as well as the documents referred to in the complaint and relied upon by the plaintiff bringing the action.
Phillips,
Additionally, considering analyst reports is ’ appropriate here because Plaintiffs claim is based on the fraud on the market theory. In securities actions asserting fraud on the market claims, courts “examine the ... information that was publicly available to reasonable investors at the time the defendant made [the allegedly false] statements.”
Arnlund,
The Court finds that Plaintiff fails to plead an actionable omission — that Defendants failed to disclose their “Big Three” strategic alliances — because the information was publicly available to investors through analyst reports. 5
ii. Plaintiff Fails to Show that HRH had a Duty to Disclose Information about the “Big Three” Agreements.
The Court finds that even if information about the “Big Three” agreements was not available to investors through analyst reports, Plaintiff fails to plead an actionable omission because Plaintiff fails to show that Defendants had a duty to disclose the information. Under Rule 10b-5, a company has the duty to disclose “when silence would make other statements misleading or false.”
Taylor v. First Union Corp.,
Here, Plaintiff has not explained how HRH’s alleged silence regarding its consolidation initiative rendered any particular statement false or misleading over the Class Period.
See Taylor,
However, Plaintiff argues that Defendants had a duty to disclose pursuant to SEC Regulation S-K, all information necessary to have an understanding of HRH’s financial condition, a description of what increases in revenue were attributable to, and material contracts. (PL’s Br., at 12.) The Court disagrees for two reasons. First, there is no private right of action under SEC Regulation S-K.
Oran v. Stafford,
b.Defendants’ Alleged Failure to Disclose that Nortr-Standard Commissions Contributed Materially to HRH’s Revenues
The Court finds that Plaintiff fails to plead an actionable omission — that Defendants failed to disclose that non-standard commissions contributed materially to HRH’s revenues — because Defendants disclosed the commission income information in its financial reports. Securities laws “require disclosure of information that is not otherwise in the public domain, not information that has already been publicly — indeed, officially — disclosed.”
Hillson Partners Ltd.,
Here, Defendants argue that HRH repeatedly disclosed that non-standard commissions were an important element of its financial performance:
a. “[CJommissions and fees from operations ... increased 9.3%. This increase principally reflects new business production, firming of premium levels and higher non-standard commissions.” (Def.’s Ex. 4, HRH Form 10Q, at 12 (May 9, 2002) (emphasis added).)
b. “Commission income was lower during the second quarter due to lower contingent commissions, the majority of which are historically received during the first quarter.” (Def.’s Ex. 5, HRH Form 10Q, at 16 (Aug. 14, 2002) (emphasis added).)
c. “The increase [in operating margin] reflects higher non-standard commissions and the impact of HRH’s Best Practices program.” (Def.’s Ex. 6, HRH Press Release, at 1 (Apr. 15, 2003) (emphasis added).)
d. “The weakness of property and casualty insurance pricing and the decline in contingent and override commissions further pressured organic growth, which, in turn, contributed to disappointing financial results.” (Def.’s Ex. 7, HRH Press Release, at 1 (July 21, 2004) (emphasis added).)
e. “Excluding the effect of acquisition and dispositions, commissions and fees decreased 0.2%. This decrease principally reflects a softening rate environment and lower contingent and override commissions.” (Def.’s Ex. 8, HRH Form 10Q, at 9 (Aug. 6, 2004) (emphasis added).)
(Def.’s Br., at 4.) Plaintiff argues that these statements are insufficient to disclose that non-standard commissions were a significant percentage of revenue because they fail to state specifically that the non-standard commissions “were material, or even a significant ... element of HRH’s financial performance!]]” (PL’s Br., at 8; Compl. ¶¶ 21(b), (c), (d), and (e); Compl. ¶ 137.) The Court disagrees because, even though HRH never affixed the words “material” or “significant,” the statements speak for themselves. The Court will not “attribute to investors a childlike simplieity[,]” and, therefore, the Court finds that these statements disclosed the fact that the non-standard commissions were material.
Hillson,
The Court finds that Plaintiff fails to plead an actionable omission — that Defendants failed to disclose that non-standard commissions contributed materially to HRH’s revenues — because Defendants disclosed the commission income information in its financial reports. 6
c. Defendants’ Alleged Failure to Disclose on a Line Item Basis the Amount of Revenue Attributable to Non-Standard Commissions.
The Court finds that Plaintiff fails to plead an actionable omission — that Defendants failed to disclose on a line item basis the amount of revenue attributable to non-standard commissions — because Plaintiff fails to plead that Defendants had a duty to disclose non-standard commissions on a line item basis. Courts have recognized that, in dealing with disclosure statements of companies, there are likely to be additional details that could have been disclosed but were not.
Brody v. Transitional Hospitals Corp.,
Plaintiff argues that Defendants’ duty to disclose revenue attributable to non-standard commissions on a line item basis arises from GAAP, SEC Regulation S-K, Staff Accounting Bulletin (“SAB”) No. 101 and SEC Interpretive Release No. 34-26831. (PL’s Br., at 8.) The Court has
Therefore, the Court finds that Plaintiff fails to plead an actionable omission because Plaintiff failed to establish that Defendants had a duty to disclose non-standard commissions on a line item basis.
d. Defendants’ Alleged Failure to Disclose that the Receipt of Non-Standard Commissions Was Likely To Cease After “Adequate Disclosure.”
The Court finds that Plaintiff fails to plead an actionable omission — that the receipt of non-standard commissions was likely to cease after “adequate disclosure” — for three reasons. First, Plaintiff fails to plead facts supporting its conclusion that adequate disclosure would have put an end to non-standard commissions. Second, Plaintiff fails to plead that HRH had a duty to disclose that its revenues were unlikely to be sustained or might be discontinued. Third, to the extent that Complaint paragraph 21(f) is construed as alleging that HRH should have disclosed that its practices were illicit and improper, securities law does not require HRH to accuse itself of wrongdoing.
i. Plaintiff fails to plead facts supporting its conclusion that adequate disclosure would have put an end to non-standard commissions.
The Court finds that Plaintiff fails to plead an actionable omission — that the receipt of non-standard commissions was likely to cease after “adequate disclosure” — because Plaintiff fails to plead facts supporting its conclusion that adequate disclosure would have put an end to nonstandard commissions. Plaintiff argues that, because Defendants knew about the likelihood of litigation stemming from their override agreements and the changing regulatory landscape, and in light of the settlement with CTAG, Defendants had a duty to disclose that non-commissions would cease. (Pl.’s Br., at 11-12.) “[Predictions not ‘substantially certain to hold,’ like most matters of opinion, simply do not come within the duty of disclosure.”
See In re Sofamor,
Therefore, the Court finds that Plaintiff fails to plead an actionable omission — that the receipt of non-standard commissions was likely to cease after “adequate disclosure” — because Plaintiff fails to plead facts supporting its conclusion that adequate
ii. Plaintiff fails to plead that HRH had a duty to disclose that its revenues were unlikely to be sustained or might be discontinued.
The Court finds that Plaintiff fails to plead an actionable omission — that the receipt of non-standard commissions was likely to cease after “adequate disclosure” — because Plaintiff fails to plead that HRH had a duty to disclose that its revenues were unlikely to be sustained or might be discontinued.
The Court finds the ruling in
In re Citigroup
instructive here.
Here, Plaintiff similarly fails to cite specific statements where HRH guaranteed that revenues would continue. The general allegation that the reporting of revenues implicitly represented that such results would continue is insufficient. Therefore, the Court finds that Plaintiff fails to plead an actionable omission — that the receipt of non-standard commissions was likely to cease after “adequate disclosure” — because Plaintiff fails to plead that HRH had a duty to disclose that its revenues were unlikely to be sustained or might be discontinued.
iii. Securities law does not require HRH to accuse itself of wrongdoing.
The Court finds that Plaintiff fails to plead an actionable omission — that the receipt of non-standard commissions was likely to cease after “adequate disclosure” — because, to the extent that Complaint paragraph 21(f) is construed as alleging that HRH should have disclosed that its practices were illicit and improper, securities law does not require HRH to accuse itself of wrongdoing. “[F]ederal securities laws do not require a company to accuse itself of wrongdoing.”
In re Citigroup,
Therefore, the Court finds that Plaintiff fails to plead an actionable omission — that the receipt of non-standard commissions was likely to cease after “adequate disclosure” — because, to the extent' that Complaint paragraph 21(f) is construed as alleging that HRH should have disclosed that its practices were illicit and improper, securities law does not require HRH to accuse itself of wrongdoing.
e. Defendant’s Alleged Failure to Establish a Reserve for Non-Standard Commissions.
The Court finds that Plaintiff fails to plead an actionable omission — that Defendant failed to establish a reserve for non-standard
commissions
— for
two
reasons. First, Plaintiff, fails to plead facts indicating when, during the Class Period, there was a reasonable possibility that an additional loss may have been incurred, or when such a loss was probable or reasonably estimable, thus requiring Defendants to establish a reserve.
Smith,
i. Plaintiff fails to plead facts indicating when, during the Class Period, there was a reasonable possibility that an additional loss may have been incurred or when such a loss was probable or reasonably estimable.
The Court finds that Plaintiff fails to plead an actionable omission — that Defendant failed to establish a reserve for nonstandard commissions — because Plaintiff fails to plead facts indicating when, during the Class Period, there was a reasonable possibility that an additional loss may have been incurred, or when such a loss was probable or reasonably estimable, therefore requiring the establishment of a loss reserve. Under GAAP, a company must establish a loss reserve if it is both “probable” that a liability has been incurred, and if the amount of that liability can be “reasonably estimated.”
See
Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies ¶ 8 (Fin.Acet.Stands.Bd., March 1975). To state a claim, a plaintiff must cite more than the language of the applicable GAAP provision.
PEC Solutions,
Here,, Plaintiff tracks the language of SFAS No. 5 and avers that “HRH’s probable liability as a result of its improper conduct was reasonably estimable[.]” (CompLf 151.) The Court finds that such conclusory allegations are insufficient under the PSLRA.
See PEC Solutions,
Additionally, this Court has held previously that the fact that a plaintiff does not challenge an independent auditor’s opinion of financial statements “weakens an allegation that a defendant violated GAAP.”
PEC Solutions,
Plaintiff argues, however, that because of the existence of the Connecticut Attorney General settlement during the Class Period, litigation was substantially certain and that Defendants’ secretive behavior confirms their awareness of the risks of subsequent litigation. (PL’s Br., at 11-12.) As such, Defendants should have established a reserve. The Court finds that such an allegation amounts to fraud by hindsight and is precluded by
Smith.
ii. Plaintiff fails to allege the amount that should have been reserved at any particular time during the Class Period.
The Court finds that Plaintiff fails to plead an actionable omission — that Defendant failed to establish a reserve for nonstandard commissions — because even if HRH should have established a reserve, Plaintiff fails to allege the amount that should have been reserved at any particular time during the Class Period. A court may dismiss a Complaint for failing to “provide any particulars regarding the amount” at which the reserves should be set.
California Pub. Employees’ Ret. Sys.,
f. Defendant’s Alleged Failure to Disclose Risks Associated with the Company’s Receipt of Nom-Standard Commissions.
The Court finds that Plaintiff fails to plead an actionable omission — that HRH failed to disclose risk associated with HRH’s receipt of non-standard commissions — for two reasons. First, HRH disclosed the risk to investors. Second, even if HRH did not disclose the risk, HRH had no duty to disclose.
i. HRH disclosed the risk to investors.
The Court finds that Plaintiff fails to plead an actionable omission — that HRH
ii. HRH had no duty to disclose.
Even if HRH did not disclose the risks associated with their receipt of nonstandard commissions the Court finds that Plaintiff fails to plead an actionable omission because HRH had no duty to disclose such risks. Under Rule 10b-5, a company has a duty to disclose “when silence would make other statements misleading or false.”
Taylor,
The Court finds that
In re Citigroup
is again instructive. There, the court found that Citigroup was not required to disclose future litigation because the “[defendants’ fail[ed] to disclose all possible future litigation is not actionable under section 10(b).”
In re Citigroup,
g. Defendant’s Alleged Misrepresentation that HRH Did Not Engage in Practices Comparable to Marsh’s Practice.
The Court finds that Plaintiff successfully pleads an actionable misrepresentation — that HRH stated it did not engage in practices comparable to Marsh — because viewed in the light most favorable to the plaintiff, Defendants did make a misrepresentation of a material fact. Here, Defendants argue that HRH never said that it did not engage in override agreements like Marsh. Rather, the September 30, 2004, press release cited by Plaintiff states that fifteen (15) percent of HRH’s non-standard commissions came from
The Court finds that analyzing these statements would require the Court to make a factual determination in interpreting their meaning, and thus is inappropriate to consider on a motion to dismiss.
See In re MicroStrategy,
2. Scienter
Even if Plaintiff successfully pleads actionable omissions for a securities fraud claim, the Court dismisses the Complaint because Plaintiff fails to plead facts that give rise to a strong inference of scienter for three reasons. First, Plaintiff fails to plead that Individual Defendants had a motive to defraud investors. Second, Plaintiff fails to plead conscious misconduct or recklessness. Third, the Individual Defendants’ substantial acquisition of HRH stock during the Class Period negates an inference of scienter.
As noted above, the PSLRA requires plaintiffs to plead “with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). Mere negligence will not suffice, there must be evidence of scienter.
See Phillips,
In support of its • claims of scienter, Plaintiff argues that: (1) Defendants (Indi
a. Motive
The Court finds that Plaintiff fails to plead that the Individual Defendants had a motive to defraud investors based on their desire to obtain increased executive compensation and their desire to expand the business by corporate acquisitions.
i. Executive Compensation
[22] Plaintiffs allegation that the individual officers failed to disclose information based on their desire to increase their executive compensation is insufficient to support a strong inference of scienter.
In re Trex. Co., Inc. Sec., Litig.,
ii. Desire to Complete Company Acquisitions
The Court finds that Plaintiff fails to allege a strong inference of scienter based on HRH’s desire to expand business by corporate acquisitions because the desire to expand business through corporate acquisitions is insufficient to support a strong inference of scienter. The Fourth Circuit has rejected generalized motives, which all companies share, as insufficient to plead scienter.
Ottmann,
b. Misconduct or Recklessness
The Court finds that Plaintiff fails to plead facts that give rise to conscious misconduct or recklessness by the Individual Defendants based solely on the Individual Defendants’ executive positions and Individual Defendants’ knowledge of HRH’s use of steering agreements. The Fourth Circuit has held that a plaintiff may allege the required state of mind, or scienter, for securities fraud liability by pleading intentional misconduct or recklessness.
See Ottmann,
i. Executive Positions
The Court finds that Plaintiff fails to allege a strong inference of scienter based on the Individual Defendants’ executive position because holding an executive position alone does not necessarily lead one to infer that Individual Defendants knew that the alleged omissions were false or misleading. Allegations that a defendant must have known that a statement was false and misleading because of his or her position in the company are “precisely the types of inferences which [courts], on numerous occasions, have determined to be inadequate to withstand Rule 9(b) scrutiny.”
City of Philadelphia,
ii. Knowledge of Steering Agreements
The Court finds that Plaintiff fails to allege a strong inference of scienter based on the Individual Defendants’ knowledge of HRH’s steering agreements. The relevant inquiry for purposes of pleading scienter in a securities fraud action is whether any Individual Defendant knew that a particular public statement was false or misleading, or that the Company’s financial statements where somehow incorrect.
See In re First Union Corp. Sec. Litig.,
Here, Plaintiff fails to allege how each Individual Defendant acted with an intent to deceive investors. The Complaint fails
iii. Defendants’ Attempt to Keep Sensitive Business Information Confidential
The Court finds that Defendants’ attempt to keep sensitive business information confidential does not support a strong inference of scienter. Plaintiff argues that Defendants’ attempt to conceal their use of steering agreements through confidential internal memoranda creates a strong inference of HRH’s intent to defraud investors. (PL’s Br., at 18-19.) Specifically, Plaintiff alleges that Defendant Vaughan admitted in a December 2000 memorandum that he was aware that the cash flow from the steering arrangements and the “Big Three” agreement “went straight to bottom line and [was] a primary driver in [HRH’s] financial success” and had been a principal proponent of entering into the agreements within the Company; and Defendant Rogal announced in an internal confidential memorandum that HRH had agreed in principle to the steering agreements with the “Big Three” and was a principal negotiator. (Compl.1ffl 30, 31, 177, 178.) The Court notes that adopting this argument would mean that anytime a company designates a memorandum confidential, that action would be a strong indicator of an intent to defraud investors. If this were the case, then every business across our great land would have potential liability. Instead, the Court finds that Defendants’ attempt to keep sensitive business information confidential does not support a strong inference of scienter. Cf.
Phillips,
iv. Retirements and Resignations
The Court finds that retirements and resignations are insufficient to show that Defendants acted with the requisite scienter. Subsequent resignations by executives are insufficient to support a strong inference of scienter.
See Southland Sec. Corp. v. Inspire Ins. Solutions, Inc.,
c. Acquisition of HRH Stock During the Class Period
The Court finds that Individual Defendants’ substantial acquisition of HRH stock during the Class Period negates an inference of scienter. The fact that a defendant acquires stock during a class period further negates any idea that Defendants had a motive to commit fraud.
PEC,
3. Group Pleading in General
The Court dismisses Plaintiffs Complaint because group pleading is insufficient to plead with the particularity required by Rule 9(b). A complaint must plead with particularity the time, place, speaker, and contents of the allegedly false statements.
See also Glaser v. Enzo Biochem, Inc.,
plaintiffs must plead specific facts concerning, for example, when each defendant or other corporate officer learned that a statement was false, how that defendant learned that the statement was false, and the particular document or other source of information from which the defendant came to know that the statement was false.
In re First Union Corp. Sec. Litig.,
Therefore, the Court dismisses Plaintiffs Complaint because group pleading is insufficient to plead with the particularity, as required by Rule 9(b).
4. Leave to Amend
The Court dismisses Plaintiffs Amended Complaint with prejudice because Plaintiff has already had two full opportunities to state a claim and have failed to do so. “A party may amend the party’s pleading once as a matter of course at any time before a responsive pleading is served or, if the pleading is one to which no responsive pleading is permitted and the action has not been placed upon the trial calendar .... ” Fed. R. Civ. P. 15(a). A party requires leave of court to amend a pleading more than once, but such leave “shall be freely given when justice so requires.” Fed. R. Civ. P. 15(a). Nevertheless, if a proposed amendment is futile, a court should deny leave to amend.
See Edwards v. City of Goldsboro,
In the Eastern District of Virginia, an amendment may be considered futile where Plaintiffs have previously had two full opportunities to plead their claim.
Travelers Cas. & Sur. Co. v. Danai,
No. Civ. A. 05-356,
Here, Plaintiff has had two full opportunities to state its claim because it filed this action in this Court and then amended its complaint to the version at issue here. Therefore, the Court dismisses Plaintiffs Amended Complaint with prejudice because Plaintiff has had already had two full opportunities to state a claim.
II. CONCLUSION
The Court holds that the Plaintiffs securities fraud and control person liability claims must be dismissed because: (1) Plaintiff fails to plead that Defendants made a material misstatement or omission; (2) the Complaint fails to raise a strong inference that Defendants acted intentionally, consciously, or recklessly; and (3) without facts to support Plaintiffs claims of securities fraud, Defendants cannot be held liable based upon control person liability. Additionally, the Court dismisses Plaintiffs First Amended Complaint with prejudice because Plaintiff has already had two full opportunities to state a claim and failed to do so.
For the foregoing reasons, it is hereby
ORDERED that Defendants’ Hilb Rogal & Hobbs, Andrew L. Rogal, Martin L. Vaughan, III, Carolyn Jones, and Robert B. Lockhart, Motion to Dismiss Plaintiffs First Amended Complaint is GRANTED. It is further
ORDERED that Plaintiffs First Amended Complaint is DISMISSED WITH PREJUDICE.
The Clerk is directed to ENTER JUDGMENT in favor of Defendants Hilb Rogal
&
Hobbs Co., Andrew L. Rogal, Martin L. Vaughan, III, Carolyn Jones, and Robert B. Lockhart and against Plain
Notes
. For the purposes of this opinion the record citation “Compi.” refers to Plaintiff's First Amended Complaint, which was filed on October 24, 2005.
. Non-standard commissions are those commissions not based on the sale of any particular insurance policy. Instead, they are based on the aggregate business placed by an intermediary with a particular insurer! Depending on the profit or overall volume of businesses placed with the insurer by the intermediary, the insurer pays a commission to the intermediary above and beyond any standard commission paid on a particular policy. (Def.'s Br., at 4.) Non-standard commissions are commonly referred to as "contingent” or “override commissions.” {Id. at 3.)
.“Steering Agreements” are agreements where an intermediary steers consumers to a select number of insurers in return for sub
. HRH announced that it had discovered that "beginning in 1998, an employee in the Company's Hartford, Connecticut, office arranged or attempted to arrange for payments to be made ... in connection with the placement of professional liability insurance policies for three different organizations, which may have been improper.” (Def.’s Ex. 14, HRH Form 8K, at 2 (May 26, 2005).) Additionally, HRH "terminated the employee who was involved with the three accounts” and announced that Defendant Lockhart, who had served as "president of the Hartford Office ... at the time of certain ... payments,” had resigned from the Company. Id.
. The Court also notes that, in support of its disclosure of its consolidation of insurance carriers, Defendants issued a press release on June 8, 1999, stating that it had appointed John McGrath as Senior Vice President to oversee HRH's “carrier consolidation efforts.” (Def.'s Ex. 24, HRH Press Release (June 8, 1999), at 1.)
. The Court takes judicial notice of the recent decision in
Roth v. Aon Corp., et al.,