Underreporting of Insurance Losses Not Fraudulent

complaint proves that 1) defendants sold or offered a security, 2) by means of a prospectus or registration statement that quanta had filed with the sec on december 5, rule 9(b) requires that, whenever a complaint contains allegations of fraud, the date); hinerfield v. united auto group, 1998 u.s. dist. lexis 10601, at *22 (s.d.n.y. complaint, at its core, is predicated on allegations of fraudulent conduct). various revenue and expense categories. (compl. � 79.) the report explained that "as a of the company's audit committee, resigned. (id. � 64.) timmeny had not signed the statement was false at the time it was made. as the court observed, "this type of than a rough account of initial estimated losses from the hurricanes. olkey v. hyperion � 62; ruffino decl., ex. l at s-24, 8, 29.) the net estimated loss figures took "into unpaid exposure to ultimate claim costs associated with these losses is (id.) period, and they too signed the prospectus (id. �� 13-15.) the next day, on october 27, quanta filed a shelf-registration form with the sec, the reporting of the loss to us. these incurred but not reported losses are industry loss estimates, the size and complexity of hurricanes katrina, rita, and wilma, (ruffino decl., ex. l at s-18, f-12, f-13; borden decl., ex. b at s-18, s-78.) the we're at. we're actively pursuing information. but we believe the downgraded, a.m. best awarded quanta an "excellent" (a-) rating. (compl. � 36.) [the company's] results of operations and financial condition." (compl. � 52; ruffino inherently complicated." (ruffino decl., ex. e at 7, 8, 11.) as a result, the company sound in fraud, rule 8(a) applies). however, under the lenient pleading standards of 3 possibly materially. the estimate was immaterial as a matter of law. ----------------------------------------------------------- lines of business and the efficacy of our catastrophe models over the next it warned about reporting lags, stating that "there always exists a reporting lag between a "continue to be estimates which are subject to a high level of uncertainty due to the knowledge of all hurricane-related claims and was intentionally hiding losses to maintain indeed, any hint of falsity in the initial estimate is belied by the fact that insurance reliable, quantified loss information was reported to the company, that the estimates were million. (compl. � 54; ruffino decl., ex. h [form 10-q filed 11/14/05] at 24.) the 46667, at *8-9 (s.d.n.y 2006) (because plaintiffs "disclaim any intention to plead fraud internal analysis of our technical risk property and property reinsurance quanta capital holdings ltd., et al. businesses. (compl. � 60; ruffino decl. ex. l at s-19.) the company was "working hurricanes. (ruffino decl., ex. h at 32, 35-36.) the $68.5 million amount was the "derived from a review of [the company's] potential exposure to these events." (compl. believed that upon raising capital, a.m. best would "conclude its review, [and] remove that the reserve estimates pertaining to hurricanes katrina and rita were simply estimates were the company's "best estimates based on all the information" the an adequate premium-to-surplus ratio, as the complaint alleges, it would not have shields v. citytrust bancorp. inc., 25 f.3d 1124, 1128 (2d cir. 1994) (quoting mills v. startup capital through an august 2003 private equity offering, the company began increases in losses reported by our reinsurance customers and additional as the preeminent rating agency within the insurance and reinsurance markets," bases its (ruffino decl., ex. n [march 2, 2005 press release] at 2, 6); compl. �� 68, 72.) the to plead a claim under section 15 of the securities act, a complaint must allege underwriters each separately filed motions to dismiss pursuant to federal rule of civil made, and (4) explain why the statements were fraudulent." rombach, 355 f.3d at 170; insurer of that loss." (ruffino decl. ex. l at 8, 11; borden decl. ex. b at s-58.) thus, defendant dodd, quanta's cfo, reiterated that the company's "total loss impact for not conservatively reserved for the katrina and rita losses," that quanta was "plagued by reasonable investor as having significantly altered the `total mix' of information made to $24.25. (compl. � 70.) solely in negligence, the applicable pleading standard is set forth in rule 8(a), under 356 (2d cir. 2002); kalnit v. eichler, 264 f.3d 131, 137 (2d cir. 2001). a court's the heightened pleading requirements of rule 9(b). see rombach, 355 f.3d at 171 (rule help "maintain [its] current rating with a.m. best." (compl. �� 43, 56-57; ruffino decl., the estimates we have right now are our best estimates based on all the united states district court (ruffino decl., ex. n at 10.) as the company explained in an analyst conference call development of hurricanes katrina and rita," as well as "other actuarial reserve 2 was derived from a "detailed review of affected contracts and discussion with clients, against defendants quanta capital holdings ltd. ("quanta" or the "company"), trial but merely to determine whether the complaint itself is legally sufficient." goldman relied too much on spreadsheets requiring the manual input of data and formulas; and 3) 13 inherently difficult to predict. because of the variability and uncertainty results. (compl. � 53; ruffino decl., ex. g at 23 [transcript of 11/01/05 earnings call].) was issued only 11 days before the end of the fourth quarter of 2005, and by that time, information from our loss adjusters in our primary insurance business ... (compl. �� 36, 41-46). in essence, the complaint implies an intentional scheme of 7 not conservative enough." (id.) the company did see, however, "favorable lippincott. (id. � 55.) on december 20, 2005, days after quanta raised capital through based on currently available information, claim notifications received to unprecedented nature of the catastrophe, complex coverage and regulatory investor could have been misled); seow lin v. interactive brokers group, 574 f. supp. untrue or misleading registration statements for securities offerings. (compl. �� 81-89; section 11 of the securities act of 1933, which imposes liability based on materially the complaint asserts a claim on behalf of those who purchased preferred shares 75 f.3d 801, 814 (2d cir. 1996) ("company's desire to maintain a high bond or credit reinsurance lines" pending an internal review. (compl. � 46; ruffino decl., ex. d.) the "scrubbed the reserves," implying that it had taken a close look at the reported losses estimate of net losses is subject to a high level of uncertainty due to the issues and the unknown impact of such losses on our reinsurers. our hurricanes katrina and rita, stating that the company's "total estimated net losses," uncertainty around the industry loss estimates, the size and complexity of the facts as they existed at the time of the offering"). here, the complaint alleges no loss reserves were "only estimates," as estimating loss reserves was a "difficult and loss event taking place" and "the reporting loss" to quanta, and that these "reported all others similarly situated, september 28, 2007 ("borden decl."), ex. b [prospectus] at s-51, s-52, s-58, s-61.) at the time it was made. twombly, 127 s. ct. at 1965 ("allegations must be enough to raise f. internal control deficiencies at quanta. [were] expected to be in the ranges of approximately $40 to $50 million and the relevant inquiry under the securities act is not whether the estimate disclosed time due to new information as insurance claims were reported, no reasonable investor reinsurance policies are a "means by which an insurance company can protect in the areas affected by these hurricanes. (compl. �� 37-44.) approximately $2 to $8 million, respectively," or $42-$58 million combined. (ruffino a plaintiff may establish section 11 and 12(a)(2) claims by alleging only 4 investor could have considered the $68.5 million estimate as a guarantee of much other company "hadn't received any information on that account." (ruffino decl., ex. n at put differently, after reading the prospectus and registration statement as a 22 circumstances constituting fraud shall be stated with particularity. see fed. r. civ. p. registration statement need contain a material misstatement or omission for liability to the shelf-registration statement reiterated that the estimated net losses from hurricanes and junior subordinated debt. (ruffino decl., ex. e [october 27, 2005 s-3 form], at 1.) estimate two and a half months later. must provide "plausible grounds" for the allegations with "enough fact to raise a prospectus became effective," particularly when the estimate had been based on a necessary to make such statements not misleading. 15 u.s.c. � 77l(a)(2). when a cannot be said that any reasonable investor could consider them important in light of chairman of quanta's board of directors, replacing tobey russ. (id. � 49.) in november jonathan dodd served as the company's chief financial officer, and defendant robert lippincott served (ruffino decl. ex. l at s-33, f-12, f-13; borden decl. ex. b at s-33, s-58, f-12, f-13.) re mobilmedia sec. litig., 28 f. supp. 2d 901, 924 (d.n.j. 1998) ("section 11 and during the company's november 1, 2005 third-quarter earnings conference call, "information was available to defendants enabling them to state the correct figure, which (compl. � 53; ruffino decl., ex. g at 23.) in a form 10-q released on january 11, 2006, the company reported a "receipt of sufficiency of the complaint is judged under the more lenient plausibility pleading 5 "company's best estimate of losses based upon information currently available," and it the prospectus reiterated that "[s]ignificant periods of time often elapse between the misstatement quanta made in the prospectus and registration statement -- that the result, our loss reserves may move positively or negatively depending robert p. patterson, jr., u.s.d.j. case involving an insurer, the company maintained reserves involving a claim at a certain mismanagement, is not actionable under federal securities laws"); shapiro v. ujb fin. raising plan" to fend off a potential ratings downgrade by a.m. best. (compl. � 46.) c. application of rule 9(b) to plaintiff's securities act claims. company's "internal control over financial reporting was not effective as of december the time of the offerings, the company had "received a limited number of claim 2005 have had a "material adverse effect" on the company's "ability to write new and further, while the crux of the complaint is that quanta systematically defendants' motions are granted, and the complaint is dismissed. result, our loss reserves may vary significantly from those affected." ii. legal standards on a motion to dismiss prospectus and registration statement were just estimates, and not fraudulent loss subject to a "high level of uncertainty," that the exact losses would not be known for and that they did so with scienter. in re jp morgan securities litig., 363 f. supp. 2d 595, the factual record evinces that quanta both underestimated and overestimated its itself against the risk of losses with other insurance companies." (compl. � 29.) [t]here always exists a reporting lag between a loss event taking place and the company further explained that it was "difficult to get a handle on the [form 8-k, press release dated 10/26/05]). the press release also emphasized that the quarter, quanta filed a prospectus for the secondary offering of three million shares of atlantic corp. v. twombly, 127 s. ct. 1955, 1965 (2007); atsi communications v. negligence. rombach, 355 f.3d at 171-72. where the underlying allegations sound offering documents noted: 9(b); chill v. gen. elec. co., 101 f.3d 263, 267 (2d cir. 1996); in re initial public rule 9(b) standards when securities act claims sound in fraud); see also ladmen $7 billion in damages, and in october 2005, hurricane wilma struck southern florida. who underwrote the december 14, 2005 preferred stock offering by the company. the must allege that: 1) a defendant is a signer of a registration statement or a director of the additionally, ceding companies will have the right to terminate a ruffino decl., ex. e.) the complaint also puts forth a claim against defendants quanta, of business and business opportunities ..." (ruffino decl., ex. e at 4, 6, 12.) it also company that experienced a stock price downturn to securities fraud liability). placement agent" for quanta, earning $38.5 million in fees and retaining a 5% ownership stake in the as more fully explicated in the factual section of this opinion, quanta expressly (ruffino decl., ex. m.) this reinsurance recovery was recognized in the fourth quarter reasonable expectation that discovery will reveal evidence" to support them. bell exposure to these events and [were] not based on actual reported losses." (compl. � 53; had been revised upwards by 15%. see halperin, 295 f.3d at 360 (holding that because (compl. � 61; ruffino decl., ex. l at f-12; declaration of george borden, dated few months. property book" stemming from the hurricanes. (id.; compl. � 72.) cir. 2007) (quoting twombly, 127 s. ct. at 1975)). company had "received a limited number of claim notifications relating" to the statement in the offering documents that the company's preliminary estimate of losses rating on a company's "available and required rated capital" to support its operations. 32, 35.) the company also stated, in numerous places, that the "actual amount of losses hurricane katrina struck louisiana, mississippi, and alabama on august 29, in a conference call held that day to discuss the 2005 year-end results, investment ruffino decl., exs. e at 7; l at 7, s-18, s-30, s-31.) the prospectus explained that the diligence investigation of quanta. (compl. � 59.) company had "to date," and the estimates were "derived from a review of our potential losses are inherently difficult to predict" because the "property catastrophe market [was] business interruption," and that as of "q3 and indeed through december 31," the our estimated losses. if our actual losses from hurricanes katrina and on december 14, 2005, approximately two weeks before the end of the fourth 6 retrospective analysis of awareness cannot be the basis for a claim." id. at 903-04; see an offering of preferred and common shares, wallace timmeny, a director and member "alleged misrepresentations in a stock offering are immaterial as a matter of law if it cautionary language is a relevant factor to be considered in deciding whether a reasonable offerings. (compl. �� 90-100; ruffino decl., ex. l.) lastly, the complaint asserts that 2005, was revised upward by $10.2 million (approximately 15%) on march 2, 2006, two that estimate was released in december 2005. rather, the complaint relies on the fact quanta from "b++" (very good) to "b" (fair), forcing quanta to "substantially cease result, quanta's products "require extensive technical underwriting skills and risk claim for relief that is plausible on its face." patane v. clark, 508 f.3d 106, 111-12 (2d hurricane related losses were approximately 15% higher than previously estimated. environmental loss and $8-13 million of additional general reserve strengthening. and processes covering the period leading up to december 31, 2005. (compl. � 79.) the to these events" and were not "based on actual reported losses." (ruffino decl., ex. d.) (id. � 30.) treaty reinsurance contracts provide for automatic reinsuring of a category of unprecedented nature of the catastrophes, complex coverage and regulatory issues and the attach under both sections. see steinberg v. prt group, inc., 88 f. supp. 2d 294, 299- premium-to-surplus ratio. (compl. � 63(e).) in a similar vein, the complaint, which losses." (id. at 8.) 24 (id.) with appropriate accounting skills in its financial reporting function; 2) the company maintaining an a.m. best "excellent" rating was of "paramount" importance for bbb-. (id. � 69.) the ratings downgrade was due to "unexpected loss reserve reserves established for losses that have been incurred but not yet reported to an legal and regulatory developments related to potential losses. as a result, a motive to maintain a higher financial rating to protect the viability of the although it ascribed a negative outlook to the rating. (compl. � 66.) the capital raising (compl. �� 61, 63(d), 72.) estimate of hurricane losses included in the offering documents was a material untruth at (compl. �� 39-40.) quanta provided insurance and reinsurance coverage for properties sec. litig., 471 f.3d 24, 43 (2d cir. 2006). an untrue statement of fact is material only complaint. rather, the court may consider the complaint and attached exhibits, developing a capital raising plan and implementing plans to conduct an number of brokers, and that brokers rely on a.m. best ratings to assess the quality of ("borden decl."), ex. b [same].) fbr, which in november 2005 owned 5% of quanta's in that call, defendant dodd stated that: d. the loss estimate is protected by the bespeaks caution doctrine. management" when the company had held an investor road show in "late november" of distillers & chem corp., 6 f.3d 63, 65 (2d cir. 1993). thus, the complaint here has not months between rita and the offerings." (compl. � 63(c).) lastly, the complaint cites a v. belden, 754 f.2d 1059, 1067 (2d cir. 1985). of 1933. see 15 u.s.c. �� 77k, 77l, 77o. and flood damages did make it difficult. we continually review where president of quanta technical services, mark cloutier, resigned after six months serving investigation of quanta and participated in the preparation of the prospectus. (compl. � the defendants increased loss reserves three weeks after completing an initial public violator. see garber v. legg mason, 537 f. supp. 2d 597, 610 (s.d.n.y. 2008); in re report stated that this figure was subject to "significant uncertainty" because the decl., ex. e at 7.) disclosed" so as to "bespeak caution"); cf. rubinstein v. collins, 20 f.3d 160, 171 (5th underwritten." (declaration of andrew ruffino, dated september 28, 2007 ("ruffino reported that it had carried out an evaluation of the effectiveness of its disclosure controls and regulatory developments related to potential losses. as a katrina and rita were $68.5 million. (compl. � 52; ruffino decl., ex. e at 7.) these metric" with which to evaluate the "overall financial strength of the prospective insurer fit the underwriting criteria of standard commercial products." (id. �� 29-31.) as a reserves related to the hurricanes by $3.0 million. (ruffino decl. ex. m.) and on march 18 rule 8(a), these allegations are insufficient to establish that the offering documents this particular allegation evinces an intent to defraud, and is therefore subject to purchased preferred stock between december 14, 2005 and march 2, 2006 (the "class ceding company cedes, and the reinsurer assumes all or part of a specific risk or risks. taken together, the complaint charges, in essence, that quanta's estimate of hurricane lead to a ratings downgrade that would "materially and adversely affect our ability to execute our business strategy and our competitive position resulting in a substantial loss 21 company's $68.5 million estimate was knowingly untrue, asserting that the prospectus c. hurricanes katrina and rita � changes in loss estimates over time hurricane-related losses prior to arriving at its revised estimate on march 2, 2006. in that estimate was based upon "a combination of a review of in-force contracts and polar molecular corp., 12 f.3d 1170, 1175 (2d cir. 1993)). put differently, a complaint company also stated that it would review its "capital structure and develop[e] a capital hurricane loss estimate was untrue do not directly sound in fraud. accordingly, the in determining whether rule 9(b) applies to securities act claims is whether the the shelf registration statement acknowledged that the hurricanes from 2004 and in that capacity. (id. � 67.) on march 2, 2006, quanta disclosed preliminary results for 2005 in a press affected. release, which included "$10.2 million of additional (fourth-quarter of 2005) costs related disclosed above. subsequent to this disclosure, the company's preferred stock price dropped from $26.01 the individual defendants and fbr are liable as controlling persons under section 15 of regard, on january 10, 2006, the company disclosed that it had overestimated its loss 2d 408 (s.d.n.y. 2008) ("if the alleged omission or misstatement is explicitly addressed contained untrue statements of material facts or omissions such that liability attached - against - opinion and order (rejected section 11 and 12(a)(2) claims where complaint alleged falsity simply because complex process involving many variables and subjective judgments. (id.) further, the 12(b)(6) for failure to state a claim upon which relief can be granted, a court must accept must convey by factual allegations that the defendants made materially false statements, our losses may vary significantly from our recorded estimates. under sections 11 and 12(a)(2) of the securities act. finally, in deciding a motion to dismiss, a court is not limited to the face of the false or omitted statement unreasonable"); halperin, 295 f.3d at 357 (presence of in the form 10-k annual report it filed with the sec on march 31, 2006, quanta significant portion of our reinsurance treaties below our current rating of underestimated the company's loss reserves to maintain an a.m. best "excellent" rating, on september 28, 2007 both quanta (and its individual employees) and the to the hurricanes, reporting that the "retained net losses from hurricanes katrina and rita the change in our estimate for hurricanes katrina and rita arises out of review with negative implications" by a.m. best was a risk factor, because this could also in re cit group, inc. sec. litig., 349 f. supp. 2d 685, 691 (s.d.n.y. 2004) quanta from negative watch." (id.) on december 21, 2005, after completion of the the facts as they existed when the registration statement became effective"); in re initial (id.) except with respect to the rule 10b-5 claims" and because the complaint does not directly 2005 to december 15, 2005, and in that time "more correct information would have been document was "fraudulent" at the time it was made. see san leandro v. philip morris, corp., 964 f.2d 272, 283 (3d cir. 1992) ("it is not a violation of securities laws to simply overstated loss estimates as well. this evinces that the disclosed estimates in the material adverse effect on [the company's] ability to write new and renewal business and strength rating and the company's "financial condition could be materially adversely adequate cautionary language set out in the same offering." rombach, 355 f.3d at 17; after the registration statement was issued to suggest that the disclosure in the registration on july 21, 2005, with no public reason given, chief financial officer john s. this case is similar that of kinder v. acceptance insurance cos., 423 f.3d 899, would have been surprised in the least to learn that two months later the loss estimates (ruffino decl., ex. l at 8.) defendants. hurricanes katrina, rita and wilma, limited claims data and potential to hurricanes katrina and rita," as well as $5.5 million related to a previously reported iii. application from the hurricanes. (compl. � 76.) also on march 2, 2006, a.m. best downgraded around the industry loss estimates, the size and complexity of "preliminary" estimates that were "inherently difficult to predict," that there was a 300 fn. 4 (s.d.n.y. 2000). in considering a motion to dismiss pursuant to federal rule of civil procedure brittain resigned. (compl. � 48.) on october 27, 2005, james ritchie was elected factual allegations contradicting the veracity of the $68.5 million loss estimate at the time southern district of new york the complaint supplies a number of reasons to support the claim that the cortec industries, inc. v. sum holding l.p., 949 f.2d 42, 47 (2d cir. 1991). the company's primary business consisted of providing "specialty lines" of or reinsurer." (id.) a.m. best, an independent credit rating company "widely recognized important in making a decision, kronfeld v. trans world airlines, inc., 832 f.2d 726, 14 discontinuing the writing of new business in the "technical risk property and property partners v. globalstar, 2008 u.s. dist. lexis 76670 (s.d.n.y. 2008) (ultimate question and a half months after the offering was completed. (compl. �� 68-70.) claim showing that the pleader is entitled to relief"). period"), filed an amended complaint ("compl.") in the above-captioned class action financial strength rating" because it kept the company within the mandatory 1.1-to-1 "excellent" (a-), under review with "negative implications." (compl. � 41.) the next insurance and reinsurance for "risks that are often unusual or difficult to place and do not complaint seeks recovery pursuant to sections 11, 12(a)(2), and 15 of the securities act a. quanta secondary offering, a.m. best affirmed the "a-" financial strength rating of quanta, pub. offering sec. litig., 358 f. supp. 2d 189, 205 (s.d.n.y. 2004) (same); see also in 19 defendants michael murphy, nigel morris, and w. russell ramsey served as directors during the class quanta was incorporated on may 23, 2003 as a bermuda holding company preliminary loss information from our clients, brokers and loss adjusters and the output of (id. � 34.) from the time of its founding through march, 2006, when quanta was 1998) ("the failure to anticipate the necessary reserves, even if it amounts to 618 (s.d.n.y. 2005); in re revlon sec. litig., 2001 u.s. dist. lexis 3265, at *7 11 which, a "complaint is sufficient if it alleges [plausible grounds] that the registration evaluation identified material weaknesses in internal controls over financial reporting. three weeks later, on october 26, 2005, quanta announced additional losses from in quanta's august 2003 private equity offering, fbr served as the "sole initial purchaser and exclusive 20 day, quanta responded to a.m. best's decision to review the company's rating by fail to provide adequate loan loss reserves"). all of the allegations set forth in the complaint as true, and must draw all reasonable based on the subsequent augmentation of the reserves, the complaint alleged that the during the class period, defendant james ritchie served as the company's chairman, defendant 58.) bb&t capital was the co-underwriter of the offering, and also performed a due 37-38.) on september 24, 2005, hurricane rita struck texas and louisiana, causing $4- proved difficult getting access into new orleans and the various curfews plaintiff, unknown impact of such losses to its reinsurers." (id.) as a result, "actual losses from minimize losses in order to not suffer a ratings downgrade from a.m. best. cedants and brokers" as well as "industry loss estimates." (ruffino decl., ex. h at 13, 2005, causing significant destruction with damages estimated at $16 billion. (compl. �� received by the company concerning such substantial developments in the almost two losses in the offering papers must have been untrue because the company revised its shelf registration statement for the preferred shares offering, quanta explained that: significant reporting lag between the time when losses were incurred and the time when communications, 493 f.3d at 98; rombach v. chang, 355 f.3d 164, 169 (2d cir. 2004); not know our exact losses for some time given the uncertainty shaar fund, 493 f.3d 87 (2d cir. 2007) (applying twombly in context of securities fraud (id. � 28.) 1999 term trust, 98 f.3d 2, 5 (2d cir. 1996) (finding no liability where prospectus gave securities; and 3) any part of the registration statement for the offering contained an adjustments and reported charges." (id.) on june 7, 2006, a.m. best downgraded company, which is what the complaint alleges here, is not enough, under the law of this a. the 1933 securities act. 15 16 07 civ. 851 (rpp) excuse the alleged failure to reveal known, material, adverse facts"). the central allegation in the complaint concerns quanta's allegedly untrue numbers we have right now are solid. survive a motion to dismiss, a complaint must provide "a short and plain statement of the limited claims data and potential legal and regulatory developments related to potential put forth sufficient factual allegations such that the court finds it "plausible" that the the complaint fails for another reason. under the "bespeaks caution" doctrine, ex. l at 7.) the prospectus further explained that the company's estimate of its: $25 per share. (compl. � 56; ruffino decl., ex. l [prospectus for preferred stock review of affected contracts and discussions with clients, cedants and offering filed 12/16/05]; declaration of george borden, dated september 28, 2007 shares, was the lead underwriter of the offering, and as such, performed a due diligence we believe that we will not know our exact losses for some time given the industry models"; the estimate was "not based on actual reported losses," but rather was million estimate, which was first released in an october 26, 2005 press release (compl. � 2005, defendant dodd was appointed chief financial officer. (id. � 50.) on november prospectus, 3) that included an untrue statement of material fact or omitted a material fact (compl. �� 63(a), (b).) the complaint contends that the size of the adverse development and repeatedly warned investors in both the registration statement and the prospectus 58 (2d cir. 2007). the question is whether the pleading alleges "enough facts to state a claims but rather on a single new business interruption claim regarding an offshore repeatedly noted that the insertion of a simple disclaimer of fraud is insufficient" to avoid reserve figures designed to maintain a favorable rating. internal controls problems during the class period," and that the company's "chief when there is a substantial likelihood that a reasonably prudent investor would consider it case). twombly "require[es] a flexible `plausibility standard,' which obligates a pleader the complaint also notes that even though hurricane rita struck on september two weeks later, on november 14, 2005, quanta filed a third-quarter earnings brokers. rita are materially greater than our estimated losses, our business, results upon which it relied in bring the suit, and matters subject to judicial notice. see atsi 9 even under rule 8(a) the complaint was insufficient because it relied on disclosures made company's "total estimated net losses related to hurricanes katrina and rita are amplification is needed to render the claim plausible." iqbal v. hasty, 490 f.3d 143, 157- related to hurricanes katrina and rita was $68.5 million. (compl. �� 61-62.) the $68.5 section 12(a)(2) claims must allege material misrepresentations or omissions based upon see also p. stolz family p'ship l.p. v. daum, 355 f.3d 92, 96 (2d cir. 2005) 17 1) a primary violation of the act, and 2) direct or indirect control by the defendant of the level at the time of the registration statement, but subsequently increased the reserves. preferred stock, and two days later, the company priced three million preferred shares at 23 the prospectus, the company stressed that the: re axis capital holdings ltd., 456 f. supp. 2d 576, 598 (s.d.n.y. 2006) ("courts have motion to dismiss, a complaint must "(1) specify the statements that the plaintiff contends the aforementioned reasons provided by the complaint concerning why the of quanta between december 14, 2005 and march 2, 2006, against all defendants under significant cautionary language repeatedly made in the offering documents in connection d. management resignations we note that there is still substantial uncertainty around all of these associated with loss estimation, it is possible that our individual case insurers with whom they might place business." (id.) pointed out that the company derived a "significant portion" of business "from a limited actual losses from hurricanes katrina and rita may differ materially from renewal business and [the company's] results of operations and financial condition," and circuit, to sufficiently put forth a claim that a statement contained in an offering untrue statement of a material fact or omitted to state a material fact necessary to make 2005. (id. � 65.) in the first week of january 2006, quanta's chief claims officer and statement was untrue. in re flag telecom holdings, ltd. sec. litig., 352 f. supp. 2d analyst ron bobman argued that it was "hard to sort of establish confidence in new "indicates the probability that defendants would have known of the fourth quarter it was announced, the complaint, which alleges only a securities act claim, alleges that result of the material weaknesses described above, management concluded" that the statements and documents incorporated by reference, legally required public disclosure documents filed with the sec, documents possessed by or known to the plaintiff and risk underwritten by the ceding company, while in facultative reinsurance contracts the diligently after the 2005 hurricanes to prevent a ratings downgrade from a.m. best. formed to provide specialty lines of casualty insurance, reinsurance, risk assessment, and whole, and after being informed that the loss estimates could materially change at any risk-consulting services.1 were fraudulent, (2) identify the speaker, (3) state where and when the statements were would "not know [its] exact losses for some time given the uncertainty around the rating" does not establish motive to commit fraud, for such motive would subject every "participate[s] in lines of business where claims may not be reported for some period which would be reflected in the company's third-quarter results, were "approximately adelphia communications corp., 2007 u.s. dist. lexis 66911, at *10 (s.d.n.y. 2007). date, industry loss estimates, output from industry models, a detailed losses by $5.5 million. (ruffino decl. ex. n.) clearly, if the company had complete when the adjusted estimate was based not on changes to estimates of multiple existing $68.5 million, including reinstatement premiums." (compl. � 51; ruffino decl., ex. f was at least $17.4 million greater than the $68.5 million given in the prospecus." argument was heard by the court on april 3, 2008. for the reasons that follow, lippincott iii, michael j. murphy, nigel w. morris, and w. russell ramsey), and the decl."), ex. o [quanta's 2005 annual report] at 1, 4.) quanta's attention in "early 2006." (compl. � 72; ruffino decl., ex. n at 10, 15.) and reinsurance portfolios." (id. � 78.) that more than two months later the company revised its estimate upward by 15%. a.m. best rating. in this regard, we are reviewing our capital structure, 9(b). "detailed review of affected contracts and discussions with clients, cedants and brokers." standards of rule 8(a). see in re prestige brands holding, inc., 2006 u.s. dist. lexis [a] ratings downgrade would adversely affect our ability to do business ... 358 f. supp. 2d at 206; see also erickson v. pardus, 127 s. ct. 2197, 2200 (2007) (to 15.) and, "applied actuarial estimates based on similar events in the past ... proved to be quanta's finance strength ratings from a- to b++, and its issuer credit ratings from a- to "cautionary language addresses the relevant risk directly ... neither offering these hurricanes may differ significantly from estimated losses." (id.) offering, 358 f. supp. 2d at 207-08 (quoting rombach, 355 f.3d at 170)). to survive a "business interruption claim from a single offshore energy account," which came to in an october 4, 2005 press release, quanta issued its first loss projections related the company further warned that it would: quanta's individual officers and directors (james j. ritchie, jonathan j.r. dodd, robert untrue statement based on the fact that defendants changed the loss estimate months after 903 (8th cir. 2005), which resulted in the dismissal of the securities act claims. in that knew or had reason to know, at the time the offering documents were filed, that the inferences in favor of the plaintiff. halperin v. ebanker usa.com, inc., 295 f.3d 352, energy account. these numbers were only "estimates" based on a "review of [quanta's] potential exposure 2005, and at that road show company management had stated that the company had reserves for each catastrophic event and other case reserves are incorrect, a right to relief above the speculative level"). this conclusion seems particularly correct 1986)). the complaint here does not meet the heightened pleading requirements of rule "some time," that the estimates might prove to be materially incorrect, and that adverse continue to be very aggressive in getting a hold of information, which has the prospectus incorporated the shelf registration statement in full, and prospectus further explained that: harold zirkin, individually and on behalf of issuer or an underwriter for the offering; 2) the plaintiff purchased the registered on october 5, a.m. best placed the financial strength of quanta, which was rated closely with a.m. best" to maintain its current "excellent" `a-' level, and the company cir. 1994) ("inclusion of general cautionary language regarding a prediction would not the shelf registration statement further warned investors that being "under 10 b. a.m. best substantive operations in september 2003.2 act of 1933). the complaint cannot escape this pleading standard by disclaiming any (id.) quanta wrote most of its reinsurance business on a treaty basis, with a limited 2, 2006, while the company announced a further $17.4 million loss from the hurricanes, number of internal problems at quanta, stating that the company admitted that it "had 12 independent rating agencies ascribe ratings to insurance and reinsurance aforementioned figures were "preliminary loss estimates." (ruffino decl., ex. f.) "prominent and specific" warnings of "exactly the risk the plaintiffs claim was not time after those claims are incurred." (ruffino decl., ex. h at 32, 35-36, 39-40, 49, 56.) (s.d.n.y. 2001). "allegations that are conclusory or unsupported by factual assertions to establish a claim under section 11 of the 1933 securities act, a complaint (compl. � 28.) after raising approximately $550 million in reliance on fraud while simultaneously alleging fraud to support their allegations. see in states it sounds only in negligence, repeatedly highlights that quanta was working 51) and was reiterated in the preferred-shares prospectus issued in mid-december of as the company's interim ceo; all three officer defendants signed the prospectus (compl. �� 10-12). in the offering documents later turned out to be correct, but rather whether the company notifications." (borden decl., ex. b at s-51, s-52.) and in the "risk factors" section of as time passes and their accuracy can be tested in retrospect." stephens v. national report, listing the same "estimated net [hurricane-related] losses" of approximately $68.5 adjustment to [the company's] 2005 consolidated financial statements. (id.) upon actual losses reported. quanta's business, stating that the rating was "an increasingly important factor in expected to be $68.5 million, including reinstatement premiums." (id. � 62.) offering); scibelli v. roth, 2000 u.s. dist. lexis 790 (s.d.n.y. 2000) (it is "not a on july 16, 2007, plaintiff harold zirkin ("zirkin") on behalf of those who insurance company are, by their nature, "extremely conjectural, and may need adjustment estimates and that we will not know our exact losses for some time. as a reasonable inference" to assume prior knowledge based upon actual knowledge at a later ----------------------------------------------------------- liability based on materially untrue or misleading prospectuses issued for securities available." tsc indus., inc. v. northway, inc., 426 u.s. 438, 449 (1976). e. subsequent developments stating that it may issue "up to $125 million" of securities in the form of preferred shares 31, 2005." (id.) however, the report noted, the "control deficiency did not result in an in light of such language, which is found throughout the registration statement statement contains a material misstatement or omission." in re initial public offering, with the $68.5 million hurricane loss estimate, any alleged misrepresentation surrounding 8 katrina and rita was $68.5 million," which was included in the company's third-quarter 429, 447 (s.d.n.y. 2005) ("truth of a statement made in the prospectus is adjudged by b. alleged untruth of $68.5 hurricane loss estimate. ruffino decl., ex. e at 7.) the company warned that these losses "have had ... a 731 (2d cir. 1987). an omission is material where it "would have been viewed by the and prospectus, and crucially, was specific about the risks involved, no reasonable retrocessional agreements and the effects of reinstatement premiums." (ruffino decl., (compl. � 36; ruffino decl., ex. e [form s-3 filed 10/27/05] at 6.) that morning, the hurricane-related additional losses were due to a $17.4 million 24, 2005, the $68.5 million figure in the prospectus had not changed from october 26, the statements not misleading. 15 u.s.c. � 77k(a); see, e.g., in re initial public offering disclosures in the registration statement had been false. the eighth circuit ruled that developments with respect to the losses could lead to a downgrade of quanta's financial from the hurricanes may vary significantly from the estimate," and that the company maintaining the competitive position" of quanta's "insurance and reinsurance" claims officer" resigned "just weeks after the offerings." (compl. �� 63(f), (g), (h), 67.) in the risk disclosures of the offering document, it is immaterial"). here, due to the companies such as quanta. (compl. � 34.) these ratings are a "critically important 9(b) applies to fraud claims brought under section 11 or section 12(a)(2) of the securities development of $5.5 million" related to its "reinsurance property book and technical risk decl., ex. d [form 8-k, press release dated 10/4/05].) the press release cautioned that allowed quanta to "stay in the good graces of a.m. best" (id. � 65.) in addition to the aforementioned warnings, the prospectus stated that the amount of facultative reinsurance for property, casualty, marine and aviation exposures. procedure 12(b)(6) for failure to state a claim upon which relief may be granted. 22, 2005, russ had resigned as president and ceo, and he was replaced by defendant two underwriters (friedman, billings, ramsey & co. ("fbr") and bb&t ("bb&t")) a-. we intend to work closely with a.m. best to maintain our current ex. l at s-2, s-3.) the prospectus reiterated the importance of a.m best's rating to changes with only eleven business days left in the fourth quarter from the date the function on a motion to dismiss is "not to weigh the evidence that might be presented at 1. the complaint and related documents would result in a substantial loss of business ... and would also constitute the securities act. (compl. �� 102-104.) these claims are premised on the alleged the "$68.5 million was key to satisfying a.m. best's requirements for keeping quanta's writing new insurance and reinsurance business" and to sell-off its "remaining insurance the company did not maintain effective controls over the reconciliation of accounts for to be legally sufficient, and therefore survive a motion to dismiss, the complaint of 2005. (id.) the form 10-q warned, however, that reported estimated losses would prospectus incorporates a registration statement as it does here, only the prospectus or in addition to the reasons discussed above which ask this court to infer a material account the receipt of anticipated recoverable amounts under reinsurance and of operations and financial condition could be materially adversely a default under our credit facility and under certain other agreements ... relatedly, a claim under section 12(a)(2) of the 1933 act is established when a reiterated the $68.5 million "estimate" for the 2005 hurricane losses. (compl. � 62; misconduct by defendants which was marked by the company's affirmative desire to quanta. (compl. �� 35-36.) in the "risk factors" section of quanta's october 27, 2005 the company also reported that it had again overestimated one aspect of its hurricane approximately $3.0 million in additional recovery" for losses related to hurricane rita. company. (compl. � 33.) assessment resources and, in many cases, engineering expertise, in order to be profitably preferred shares offering would increase the company's "available rated capital" and ("misrepresentation or omission will be considered immaterial if the registration reinsurance can be written either through treaty or facultative reinsurance arrangements. are insufficient." atsi, 493 f.3d at 98 (citing luce v. edelstein, 802 f.2d 49, 54 (2d cir. 2 information we have to date. we've been naturally very conservative, specifically, the evaluation determined that 1) quanta did not have enough personnel occurrence of an insured loss, the reporting of the loss to an insurer and payment by the fbr, and bb&t under section 12(a)(2) of the securities act of 1933, which imposes statement contains cautionary language sufficiently specific to render reliance on the hurricanes katrina and rita, limited claims data and potential legal to amplify a claim with some factual allegations in those contexts where such 1