NEW ENGLAND CARPENTERS GUARANTEED ANNUITY AND PENSION FUNDS, Lеad Plaintiff-Appellant, STANLEY NEWMARK, IRVING LICHTMAN REVOCABLE LIVING TRUST, JUPITER CAPITAL MANAGEMENT, Plaintiff-Movant-Appellants, SHARON ALBANO, Individually and On Behalf of All Others Similarly Situated, Consolidated-Plaintiff-Movant-Appellant, JOHN SACHETTI, Individually and On Behalf of All Others Similarly Situated, Consolidated-Plaintiff, JOEL RUBEL, Individually and On Behalf of All Others Similarly Situated, Plaintiff, v. DONALD T. DECARLO, SUSAN C. FISCH, ABRAHAM GULKOWITZ, GEORGE KARFUNKEL, JAY J. MILLER, Consolidated-Defendants-Appellees, AMTRUST FINANCIAL SERVICES, INC., BARRY D. ZYSKIND, RONALD E. PIPOLY, JR., BDO USA, LLP, RBC CAPITAL MARKETS, LLC, UBS SECURITIES LLC, CITIGROUP GLOBAL MARKETS INC., KEEFE, BRUYETTE & WOODS, INC., MORGAN STANLEY & CO. LLC, Defendants-Appellees.
Docket No. 20-1643-cv
United States Court of Appeals For the Second Circuit
August 23, 2023
August Term, 2020 (Argued: June 4, 2021)
Before: LOHIER, NARDINI, Circuit Judges, and KOVNER,
ANDREW S. LOVE (Susan K. Alexander, Robbins Geller Rudman & Dowd LLP, San Francisco, CA; Samuel H. Rudman, David A. Rosenfеld, Mark T. Millkey, William J. Geddish, Avital O. Malina, Robert D. Gerson, Vincent M. Serra, Robbins Geller Rudman & Dowd LLP, Melville, NY; Jeremy A. Lieberman, Pomerantz LLP, New York, NY; Thomas J. McKenna, Gainey McKenna & Egleston, New York, NY; Kim E. Miller, Kahn Swick & Foti, LLC, New York, NY, on the brief), Robbins Geller Rudman & Dowd LLP, San Francisco, CA, for Plaintiffs-Appellants.
STEVEN M. FARINA (John S. Williams, Matthew J. Greer, on the brief), Williams & Connolly LLP, Washington, D.C., for Defendants-Appellees AmTrust Financial Services, Inc., Barry D. Zyskind, Ronald E. Pipoly, Jr., Donald T. DeCarlo, Susan C. Fisch, Abraham Gulkowitz, George Karfunkel, and Jay J. Miller.
TIMOTHY E. HOEFFNER (Jason D. Gerstein, Ludwig von Rigal, on the brief), McDermott Will & Emery LLP, New York, NY, for Defendant-Appellee BDO USA, LLP.
GREGG L. WEINER (Christopher Thomas Brown, Ropes & Gray LLP, New York, NY; William T. Davison, Ropes & Gray LLP, Boston, MA), Ropes & Gray LLP, New York, NY, for Defendants-Appellees
When is a statement of opinion that reflects some subjective judgment nevertheless actionable under the federal securities laws?
On April 4, 2017, AmTrust Financial Services, Inc., one of the country‘s largest publicly traded property and casualty insurers, restated five years of its financial results to correct what it acknowledged were significant errors in its annual and quarterly reports filed with the Securities and Exchange Commission (“SEC“). Among other things, AmTrust disclosed that it had improperly recognized most of the expected revenue from certain extended warranty contracts at the start rather than over the life of the contracts. AmTrust аlso reported that it had improperly accounted for certain discretionary employee bonuses by treating the bonuses as expenses in the year they were paid rather than the year they were earned by employees.
AmTrust‘s restatement spurred the Appellants in this case, all investors in AmTrust securities,1 to sue AmTrust, its officers (the “Officer Defendants,” and, together with AmTrust, the “AmTrust Defendants“), members of its board of directors (the “Director Defendants“),2 its former auditor,3 and certain underwriters of AmTrust securities (the “Underwriter Defendants“),4 for misstating the company‘s financial condition and results in violation of
The United States District Court for the Southern District of New York (Kaplan, J.) dismissed the third amended complaint (the “Complaint“) under
BACKGROUND
I. Factual Background
The following facts, which we assume to be true for purposes of this appeal, are
AmTrust provides workers’ compensation, commercial automobile insurance, general liability, and extended service and warranty coverage. As relevant to this appeal, AmTrust promotes and markets extended service plans (“ESPs“)—essentially extended warranties. AmTrust receives two types of revenue from its ESP business. First, AmTrust and its subsidiaries sell contractual liability insurance to various retailers, covering the obligations that the retailers assume as part of the ESPs. Second, retailers pay AmTrust “for marketing and administrative services,” including “call center services,” related to the ESPs. Joint App‘x 67, 82. During the relevant time, AmTrust “recognize[d] revenue related to promotion, marketing and administration services at the time of the sale of ESP[s]” but “defer[red] a portion of service revenue based upon an estimate of administrative services to be provided in future periods.” Joint App‘x at 82.
Starting in 2010, AmTrust made а number of acquisitions that fueled much of its corporate growth. The acquisition most relevant to this appeal closed in 2010, when AmTrust bought Warrantech, a publicly traded company focused on providing ESPs and warranty programs for retailers, dealers, distributors, and manufacturers that became, after the acquisition, a core part of AmTrust‘s business. Prior to the acquisition, the SEC had investigated Warrantech‘s practice of recognizing the full amount of the revenue it received from its ESPs and other service contracts at the time the contract was entered and the initial sale of services commenced (we will at times refer to this as the “time-of-sale” approach). The SEC had instructed Warrantech instead to recognize the revenue generated by those contracts on a straight-line basis over the life of the contracts. Warrantech publicly announced that it would comply with the SEC‘s guidance, abandoned its time-of-sale approach, and revised its method of recognizing revenue relating to the ESPs. For reasons that are unclear, AmTrust, though aware of the SEC‘s prior guidance to the contrary, reverted back to the original time-of-sale approаch after it acquired Warrantech.
From 2012 to 2016 the price of AmTrust stock, which traded on the NASDAQ Global Market, skyrocketed. The company‘s gross written premiums, a central measure of its financial condition, grew from $2.75 billion to $7.95 billion. Yet as early as 2013, financial commentators and analysts began speculating publicly about AmTrust‘s actual financial condition. One commentator reported that AmTrust may have used accounting gimmicks to inflate its earnings and net equity. A financial journal, Barron‘s, questioned AmTrust‘s accounting practices.
The bad press failed to slow AmTrust‘s growth. In November 2015 AmTrust filed a preliminary prospectus supplement and prospectus supplement with the SEC announcing an offer of 5 million shares of common stock (the “November 2015 Offering“) pursuant to a registration statement
AmTrust‘s prospects took a turn for the worse in 2017. In February and March 2017 AmTrust announced that accounting errors had prompted it to delay the filing of its 10-K for the year ending December 31, 2016 and that it needed more time to complete its consolidated financial statements. On April 4, 2017, AmTrust finally filed its Form 10-K for 2016. The 2016 10-K included restated financial results for the years ending December 31, 2012, 2013, 2014, 2015, and 2016, as well as each interim period during 2015 and 2016. The restatement revealed that the company‘s income and earnings had been significantly overstated since 2012.5
The restatement identified two material accounting errors. First, according to a press release that AmTrust issued describing the errors, AmTrust had mistakenly relied on the “upfront recognition of a portion of warranty contract revenue associated with administration services, . . . instead of deferring recognition of the revenue over the life of the contract.” Joint App‘x 208. In other words, AmTrust had “historically recognized the majority of revenue related to administrative services at the time of sale of ESP,” but had “revised its application of the revenue recognition guidance to record revenue related to administration services on a straight-line basis over the term of the ESP contracts.” Joint App‘x 80. The second accounting error was that discretionary employee “bonuses . . . were expensed in the year paid but . . . should have been accrued [as an expense] in the year earned based on” accepted accounting standards. Joint App‘x 208. The restatement also identified other “miscellaneous adjustments” to AmTrust‘s financial statements that the company concluded were not material.6 Joint App‘x 208.
II. Procedural Background
The Appellants commenced this putative class action in March 2017, after AmTrust
This appeal followed.
DISCUSSION
We review the District Court‘s dismissal under
I. The Securities Act Claims Against the AmTrust Defendants and the Director Defendants
We begin with the Appellants’ claims against the AmTrust Defendants and the Director Defendants under
In case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security . . . [may] sue.
Relying largely on the Supreme Court‘s decision in Omnicare and our decision in Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011), the District Court determined that AmTrust‘s financial statements reflected the exercise of subjective judgment and were thus non-actionable statements of opinion. Cf. Omnicare, 575 U.S. at 184 (noting that an executive who expressed “a view, not a certainty” “could not be liable for a false statement of fact“). We respectfully disagree with this particular conclusion of the very able and experienced District Judge, who did not have the benefit of our latest guidance in this area. See Abramson v. Newlink Genetics Corp., 965 F.3d 165 (2d Cir. 2020).
In Fait, we explained that “when a plaintiff asserts a claim under
So what distinguishes a fact from an opinion under the federal securities laws? In general, a fact is “a thing done or existing or an actual happening,” while an opinion is “a belief, a view, or a sentiment which the mind forms of persons or things.” Omnicare, 575 U.S. at 183 (quotation marks omitted). A statement of fact “expresses certainty about a thing,” while a statement of opinion does not. Id. Statements of opinion often include qualifying language (like “I believe” or “I think“) that conveys a lack of certainty about the thing being expressed,
But not all statements of opinion include such qualifying language. In Fait, for example,
The rule we articulated in Fait was narrowly invoked in the context of estimates of goodwill and loan loss reserves, both of which we characterized as inherently requiring a substantial exercise of judgment. Estimates of goodwill “depend on management‘s determination of the ‘fair value’ of the assets acquired and liabilities assumed.” Id. at 110. Absent “any objective standard such as market price that” the company “should have but failed to use in determining” the value of its assets, “an estimate of the fair value of those assets will vary depending on the particular methodology and assumptions used.” Id. at 110–11. Likewise, in Omnicare, the Supreme Court described an opinion variously as a statement that “in ordinary usage . . . does not imply . . . definiteness . . . or certainty,” or as a statement that “rest[s] on grounds insufficient for complete demonstration.” 575 U.S. at 183 (quotation marks omitted).
If a statement turns on the exercise of subjective judgment, a plaintiff will be unable to establish that it is false merely by showing that other reasonable alternative views exist. Where those alternatives exist, the speaker making the statement (expressing an opinion) can choose among them without running afoul of the federal securities provisions at issue here. See Omnicare, 575 U.S. at 189–90 (“Reasonable investors understand that opinions sometimes rest on a weighing of competing facts.“) This is true even if most of the existing facts cut against the statement.
But opinions lead double lives. Most obviously, as the Supreme Court clarified in Omnicare and our Court more recently observed in Abramson, an opinion may implicitly convey “facts about how the speaker has formed the opinion—or, otherwise put, about the speaker‘s basis for holding that view.” Omnicare, 575 U.S. at 188. In the context of a securities transaction, a reasonable investor expects that opinion statements “rest on some meaningful . . . inquiry,” “fairly align[] with the information in the issuer‘s possession at the time,” and do not “reflect baseless, off-the-cuff judgments,” id. at 188–90; see Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1093 (1991) (noting that even “conclusory terms in a commercial context are reasonably understood to rest on a factual basis that justifies them as accurate, the absence of which renders them misleading“). If, for example, “a registration statement omits material facts about the
Opinions are thus actionable under
So one of the more straightforward ways a statement of opinion may be actionable is if it contains an embedded statement of fact that is not true. In other words, the opinion may be false or misleading if the embedded fact is
not one as to which reasonable minds can differ. This occurs where, for example, there is an accepted method for assessing whether the statement is true, but the statement is not justified by the accepted method and clearly contradicts the facts on which it purports to rest. Consider the following example from Abramson:
A statement structured, “I believe that x is so because y has occurred,” contains the factual and falsifiable statement, “y has occurred.” If y has in fact not occurred, the statement of opinion is actionable because an embedded but complete “statement of a material fact” . . . can be proven false.
Statements of opinion are also actionable as false or misleading under
Mindful of these background principles, we conclude that the Appellants have stated a claim under
The Appellants claimed that the Defendants were also liable for improper reporting of acquisition costs, foreign exchange gains and losses, software costs, interest expenses, intercompany transactions, and other accounting-related statements. They do not challenge the District Court‘s dismissal of those claims on appeal, and we therefore affirm the judgment insofar as it dismissed the claims. We focus instead, as do the Appellants, on the claims relating to the extended warranty contracts and the bonuses.
A. The Extended Warranties
We turn first to AmTrust‘s practice of recognizing “upfront” most of the revenue generated from its extended warranty contracts during the relevant time. In a March 2017 media release, AmTrust clarified that this revenue recognition practice was “based on the interpretation of ASC [Accounting Standards Codification] 605, Revenue Recognition, used in the previously filed financial statements related to multiple-element revenue recognition.” Joint Aрp‘x 670. The company conceded, however, that it should have instead “deferr[ed] recognition of the revenue over the life of the contract.”9 Joint App‘x 670. The restatement acknowledged that the time-of-sale approach resulted in material misstatements regarding AmTrust‘s income and revenue associated with the warranty contracts. Specifically, it explained:
The Company has historically recognized the majority of revenue related to administration services at the time of the sale of ESP. However, the Company revised its application of the revenue recognition guidance to record revenue related to administration services on a straight-line basis over the term of the ESP contracts. This correction of an error, which created an overstatement of service and fee income and an overstatement of other expenses that were also recognized upfront in current periods, required a restatement of the Company‘s previously issued financial statements.
Joint App‘x 568 (emphasis added).
On appeal, AmTrust describes its initial representations about the revenue related to administrative services for ESPs as statements of оpinion, not fact, because its
The company suggests that assessing value to the customer on a standalone basis — that is, determining whether the administrative services revenue received from vendors who administer the warranty programs is separable from revenue generated by the warranty cоverage provided to customers — is an inherently subjective enterprise. The problem with this argument is that AmTrust has never actually contended that its customers can resell the administrative services associated with the warranty contracts at issue here on a standalone basis or that vendors are able to sell them separately. Nothing in the Complaint suggests that doing so is even possible, and although AmTrust maintains that there are other ways to determine a contract‘s “value on a standalone basis” under the services section of
In further support of their respective arguments, both the Appellants and AmTrust turn to
[R]evenue from separately priced extended warranty or product maintenance contracts shall be deferred and recognized in income on a straight-line basis over the contract period except in those circumstances in which sufficient historical evidence indicates that the costs of performing services under the contract are incurred on other than a straight-line basis.
For its part, the District Court concluded that the restated financial statements were non-actionable opinions because determining the sufficiency of historical evidence that would support incurring costs on a non-straight-line basis “inherently requires a subjective judgment as to whether the exception applies.” Spec. App‘x 89. As the District Court itself recognized, however, the determination that AmTrust‘s statements are opinion, not fact, is not necessarily the end of the analysis. Spec. App‘x 42 (“The claim will survive . . . if
The Appellants respond that they have alleged the objectively determinable absence of historical evidence necessary to
We agree with the Appellants that subjective judgments about the sufficiency of historical evidence to support a particular accounting treatment presuppose the existence of some historical evidence. Indeed, AmTrust now acknowledges that it should have recorded revenue for its warranty contracts on a straight-line basis in reliance on
We therefore conclude that AmTrust‘s financial statements relating to the warranty contract revenue reported in its historical consolidated financial statements were actionable statements of opinion under
B. The Discretionary Bonuses
We turn next to AmTrust‘s practice of expensing certain discretionary employee bonuses in the year the bonuses were paid rather than the year the bonuses were earned.
According to the Complaint, in its restatement AmTrust “admitted that the financial statements it issued to investors during the relevant period were presented in violation of GAAP by failing to timely accrue compensation related expenses.” Joint App‘x 83. Specifically, AmTrust explained that:
In prior years, the Company had expensed discretionary bonuses paid to its employees in the year the bonuses were paid because the Company did not consider the discretionary bonuses to be “probable,” which is the standard required for accrual. Upon review of ASC 270, Interim Reporting, and ASC 450, Contingencies, management determined that its application was incorrect because, even though the bonuses were discretionary, the bonuses should have been estimated and expenses assigned to interim periods so that the interim periods bear a reasonable portion of the anticipated annual amount.
Joint App‘x 83.
The parties agree that
In our view, there is some reason to conclude that the Appellants have plausibly alleged that AmTrust‘s method of deferring the recognition of expenses related to bonuses until the bonuses were paid (thus delaying the charge to income) was objectively improper rather than an exercise of subjective judgment. In particular, the Appellants allege that AmTrust had a practice of paying bonuses. The Complaint thus plausibly alleges that there was no basis to conclude that the continued payment of earned bonuses was not “probable” and that such bonuses therefore could not be expensed when earned. There is no dispute that the bonuses at issue on appeal were earned during the relevant periods and, as AmTrust‘s restatement eventually acknowledged, that they should have been expensed during those periods. Although multiple accounting standards may have been relevant to determining when to expense a bonus, all of the standards in play here support the position that the bonuses should have been expensed in the year they were earned, not the year they were paid.11 We are not aware of a GAAP provision on which AmTrust relied that suggests otherwise. And the fact that these GAAP standards, together or alone, are subject to misreading, misinterpretation, or misapplication, as happened here, does not necessarily mean that they entail an exercise of subjective judgment.
But we do not need to decide whether these financial statements are statements of fact or, as AmTrust asserts, statements of opinion. See Abramson, 965 F.3d at 176. Even if they are statements of opinion (because, say, determining whether it is “probable” that the corporate officers would exercise their discretion to pay the bonuses at a future time is a matter of subjective judgment), we conclude that the statements are nonetheless actionable because the Complaint adequately alleges that it was improbable that the earned bonuses would not be paid. Accepting that allegation as true makes it quite plausible that the AmTrust Defendants did not base the company‘s statements of probability on a “meaningful . . . inquiry,” that their statements did not “fairly align[] with the information in the issuer‘s possession at the time,” and that there was no basis for AmTrust to state that the bonuses should be expensed in the year they were paid rather than earned. Omnicare, 575 U.S. at 188-89.
For these reasons, we conclude that the Complaint states a claim under
C. SOX Certifications by AmTrust Executives
The remaining
First, the Officer Defendants, Zyskind (the CEO) and Pipoly (the CFO), attested to (1) the accuracy of AmTrust‘s financial reporting, (2) the effectiveness of the company‘s disclosure controls and procedures, and (3) their disclosure of any weaknesses in internal controls over the company‘s financial reporting in certifications mandated by Section 302 of the Sarbanes Oxley Act (“SOX“),
The Appellants point to allegations that AmTrust later reversed course and that its restatement acknowledged a failure of internal controls. The Appellants insist that the reversal compels the inference that the SOX certifications were not believed when made. But AmTrust‘s change of opinion, standing alone, does not mean that the original certified opinions were disingenuous.13 Nor is a genuinely held opinion that “turned out to be wrong” necessarily actionable. Omnicare, 575 U.S. at 186. In any event, as noted, the Complaint fails to adequately allege that the AmTrust executives who signed the certifications did not believe what they certified.
Finally, Appellants contend that the certifications were misleading because they falsely conveyed the existence of “‘some meaningful . . . inquiry‘” conducted by the certifying executives. Appellants’ Br. 42 (quoting Omnicare, 575 U.S. at 188). But here too, the Complaint fails to allege any facts that establish a lack of meaningful inquiry, other than the fact that the certification turned out to be wrong.
The District Court also dismissed the Appellants’ claims against the AmTrust Defendants under Section 10(b) of the Exchange Act and Rule 10b-5. To survive a motion to dismiss under these provisions, “a plaintiff must allege that [each] defendant (1) made misstatements or omissions of material fact, (2) with scienter, (3) in connection with the purchase or sale of securities, (4) upon which the plaintiff relied, and (5) that the plaintiff‘s reliance was the proximate cause of its injury.” ATSI Commc‘ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 105 (2d Cir. 2007); see also Ind. Pub. Ret. Sys. v. SAIC, Inc., 818 F.3d 85, 93 (2d Cir. 2016). Under the Private Securities Litigation Reform Act of 1995, moreover, a plaintiff must “state with particularity facts giving rise to a strong inference that the defendant acted with [scienter].”
In contrast to the Securities Act claims under Section 11, which do not require a showing of scienter,14 the central question with respect to the Appellants’ claims under the Exchange Act is whether the Complaint adequately “pleaded facts giving rise to a strong inference that the . . . Defendants acted with ‘scienter, a mental state embracing intent to deceive, manipulate, or defraud.‘” In re Advanced Battery Techs., Inc., 781 F.3d 638, 644 (2d Cir. 2015) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319 (2007)). Scienter may be established by alleging facts “(1) showing that the defendants had both motive and opportunity to commit the fraud or (2) constituting strong circumstantial evidence of conscious misbehavior or recklessness.” ATSI Commc‘ns, 493 F.3d at 99; see Set Cap. LLC v. Credit Suisse Grp. AG, 996 F.3d 64, 78 (2d Cir. 2021). Any allegation of conscious misbehavior or recklessness should be “viewed holistically and together with the allegations of motive and opportunity” to determine whether the complaint supports a strong inference of scienter. Set Cap. LLC, 996 F.3d at 78. Although “the requisite intent of the alleged speaker of the fraud need not be alleged with great specificity,” Chill v. Gen. Elec. Co., 101 F.3d 263, 267 (2d Cir. 1996), the “inference of scienter must be more than merely plausible or reasonable—it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs, 551 U.S. at 314;
see also In re Advanced Battery, 781 F.3d at 644; ECA & Loc. 134 IBEW Joint Pension Tr. of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 198 (2d Cir. 2009).
Keeping that standard in mind, we agree with the District Court that the Complaint does not adequately allege that the AmTrust Defendants аcted with scienter.
First, the Complaint does not adequately plead scienter based on the AmTrust Defendants’ motive and opportunity to commit fraud. Urging otherwise, the Appellants rely on the AmTrust Defendants’ financial incentives to keep share
Nor does the Complaint allege facts that provide “strong circumstantial evidence of conscious misbehavior or recklessness.” ATSI Commc‘ns, 493 F.3d at 99. We have explained that “[s]cienter based on conscious misbehavior . . . requires a showing of deliberate illegal behavior, a standard met when it is clear that a scheme, viewed broadly, is necessarily going to injure.” Gould v. Winstar Commc‘ns, Inc., 692 F.3d 148, 158 (2d Cir. 2012) (quotation marks omitted). Recklessness, meanwhile, entails “an extreme departure from the standards of ordinary care . . . to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.” ECA, 553 F.3d at 198 (quotation marks omitted). None of the facts alleged in the Complaint—including the “magnitude” of the restatement and the duration of the period it covered—satisfy these requirements. Joint App‘x 213. In determining whether the AmTrust Defendants acted with scienter, it is not enough that it took a period of years for AmTrust to acknowledge its significant accounting errors.
Finally, the Appellants argue that the AmTrust Defendants did not believe their accounting judgments regarding the early recognition of revenue on the administration-service fees connected to AmTrust‘s warranty program. The Appellants allege that AmTrust knew its accounting treatment was wrong because Warrantech, the company AmTrust acquired in 2010, announced in its Form 10-K for the year ended March 31, 2006, that it had changed its revenue-recognition practices regarding its warranty contracts in response to SEC guidance. In particular, the Complaint alleges that AmTrust must hаve known, or recklessly disregarded, that the SEC earlier had advised Warrantech that its time-of-sale approach was improper and that its warranty business compelled a straight-line revenue recognition approach. But we think that AmTrust‘s subsequent resort to a time-of-sale approach for the contracts, though wrong, is more plausibly explained by the changes to the guiding accounting principles since 2006 to which AmTrust points us, or to AmTrust‘s negligence.15 See AmTrust Br. 42–44. Negligence, even in a “heightened form,” is not sufficient to allege scienter. Novak, 216 F.3d at 312.
For these reasons, we conclude that the Complaint fails to raise a strong inference of scienter, and we affirm the dismissal of the Appellants’ claims against
III. The Securities Act Claims Against the Underwriter Defendants
The Appellants also assert claims against the Underwriter Defendants under
preliminary prospectus supplement and a prospectus supplement. This preliminary prospectus supplement and prospectus supplement, together with the 2015 Registration Statement, incorporated by reference AmTrust’s annual financial report for 2014 and quarterly financial reports for the first three fiscal quarters of 2015. The second offering is AmTrust’s September 2016 Offering, underwritten by Morgan Stanley, RBC, UBS, and KBW, of 10 million depository shares pursuant to a preliminary prospectus supplement and a prospectus supplement that, together with the 2015 Registration Statement, incorporated by reference AmTrust’s annual financial report for 2015 and quarterly financial reports for the first two quarters of 2016. Each of the relevant financial reports contained overstated income numbers arising from the time-of sale approach for the warranty contracts and the improper expensing of bonuses.
As a threshold mattеr, three of the Underwriter Defendants—Morgan Stanley, UBS, and KBW—contend that the Appellants lack standing to even assert Section 12 claims against them in connection with the September 2016 Offering because the Complaint does not specifically allege that the Appellants purchased securities from those underwriters.17 Under
We conclude that the Appellants have adequately established standing under
Turning to the merits, the District Court dismissed the Appellants’
IV. The Claims Against BDO, AmTrust’s Outside Auditor
Finally, we address the Appellants’ claims against AmTrust’s outside auditor, BDO, under
As BDO observes, the Appellants have not developed the argument in their opening brief challenging the District Court’s dismissal of the Section 11 claim against BDO. The challenge, if it can be called that, appears in a footnote. See Norton v. Sam’s Club, 145 F.3d 114, 117 (2d Cir. 1998) (“[A]n argument made only in a footnote [i]s inadequately raised for appellate review.”). Although the Appellants develop the argument somewhat in their reply brief, that is too little too late. See JP Morgan Chase Bank v. Altos Hornos de Mexico, S.A. de C.V., 412 F.3d 418, 428 (2d Cir. 2005) (“[A]rguments not made in an appellant’s opening brief are waived even if the appellant . . . raised them in a reply brief.”). We thus conclude that the Appellants’ challenge to the dismissal of the Section 11 claim against BDO is abandoned, we affirm the District Court’s dismissal of that claim, and we proceed to examine the Exchange Act claims against BDO.
The Appellants contend that BDO is liable under
On its face, the 2013 Audit Opinion appears in the same guise as the SOX certifications that we have already concluded are non-actionable opinions. But the Complaint alleges some key facts that differentiate the audit opinion from those certifications. The Appellants allege that the BDO engagement partner on the audit, Richard J. Bertuglia, and another BDO partner, John W. Green, in fact failed to complete the necessary checks and audit work papers before issuing the audit opinion; that they signed several audit work papers without reviewing them; and that they failed to verify that all the necessary audit work was performed before issuing the opinion. The Appellants also allege that the SEC later found that (1) Bertuglia had violated the PCAOB standards by failing to supervise and exercise due professional care, properly examine journal entries for evidence of possible material misstatement due to fraud, or perform sufficient tests of internal controls and substantive audit procedures to support their final opinion, and (2) Green violated PCAOB standards by failing to perform the appropriate engagement quality review.
We agree with the District Court that the Appellants have adequately alleged that BDO’s audit opinion contained potentially actionable misstatements of opinion because the Complaint “render[s] it plausible that Bertuglia,” who signed the audit opinion, “disbelieved the statement that the audit was conducted in accordance
But we also agree with the District Court that the Appellants’ Section 10(b) and Rule 10b-5 claim against BDO must be dismissed because the Complaint does not adequately аllege that the misstatement in BDO’s 2013 Audit Opinion was material.
To state a claim under § 10(b) and the corresponding Rule 10b–5, a plaintiff must plead that the defendant, in connection with the purchase or sale of securities, made a materially false statement or omitted a material fact, with scienter, and that the plaintiff’s reliance on the defendant’s action caused injury to the plaintiff.
Ganino v. Citizens Utils. Co., 228 F.3d 154, 161 (2d Cir. 2000). “At the pleading stage, a plaintiff satisfies the materiality requirement . . . by alleging a statement or omission that a reasonable investor would have considered significant in making investment decisions.” Id. at 161–62; see Basic Inc. v. Levinson, 485 U.S. 224, 231–32 (1988). “[A] complaint may not properly be dismissed . . . on the ground that the alleged misstatements or omissions are not material unless they are so obviously unimportant to a reasonable investor that reasonable minds could not differ on the question of their importance.” Ganino, 228 F.3d at 162 (quotation marks omitted); see Litwin, 634 F.3d at 717.
As the District Court concluded, the Complaint fails to allege any link between BDO’s misstatements in the 2013 Auditor Opinion and the material errors contained in AmTrust’s 2013 Form 10-K. The audit statements to which the Appellants point were “so general” in this case “that a reasonable investor would not depend on [them] as a guarantee.” ECA, 553 F.3d at 206. Appellants’ “claim that these statеments were knowingly and verifiably false when made does not cure their generality, which is what prevents them from rising to the level of materiality required to form the basis for assessing a potential investment.” SAIC, 818 F.3d at 97–98 (quotation marks omitted). We do not mean to suggest that audit opinions will always fail the materiality test because the statements they contain are too general for investors to rely on. Rather, in this case, as the District Court held, Appellants have failed “to allege any facts relevant to the way or ways in which BDO‘s
For these reasons, we affirm the District Court’s dismissal of the Appellants’ Exchange Act claims under
CONCLUSION
To summarize:
- We vacate the dismissal of the Appellants’
Section 11 claims against the AmTrust Defendants and the Director Defendants, theSection 12(a)(2) claims against AmTrust, and theSection 15 claims against the Officer Defendants and Director Defendants (Zyskind, Pipoly, DeCarlo, Fisch, Gulkowitz, Karfunkel, and Miller) relating to AmTrust’s accounting for certain warranty contracts and bonuses. -
We vacate the dismissal of the Appellants’ claims under Section 11 andSection 12(a)(2) against the Underwriter Defendants relating to AmTrust’s accounting for certain warranty contracts and bonuses. - We otherwise affirm the judgment of the District Court.
We have considered the Appellants’ remaining arguments and conclude that they are without merit. Accordingly, for the reasons set forth above, the judgment of the District Court is AFFIRMED in part and VACATED in part, and the case is
Notes
Any person who . . . offers or sells a security . . . by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission, shall be liable . . . to the person purchasing such security from him . . . .