15‐3342 Michael D. Harris, et al. v. AmTrust Fin. Servs., Inc., et al.
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals for the Second Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the 16th day of May, two thousand and sixteen.
PRESENT: ROBERT D. SACK, RICHARD C. WESLEY, GERARD E. LYNCH, Circuit Judges. ______________________
MICHAEL D. HARRIS, individually and on behalf of all other persons similarly situated, STUART SCHAPIRO, as co‐lead plaintiff,
Plaintiffs‐Appellants,
DAVID SEARS, individually and on behalf of all other persons similarly situated,
Plaintiff.
‐v.‐ No. 15‐3342
AMTRUST FINANCIAL SERVICES, INC. BARRY D. ZYSKIND, RONALD E. PIPOLY, JR.,
Defendants‐Appellees. ______________________
FOR PLAINTIFFS‐APPELLANTS: LAURENCE ROSEN, The Rosen Law Firm, P.A., New York, NY (Jacob A. Goldberg, Keith Lorenze, The Rosen Law Firm, P.A., Jenkintown, PA, on the brief).
FOR DEFENDANTS‐APPELLEES: Jessica P. Corley and Joseph G. Tully, Alston & Bird LLP, New York, NY.
Appeal from the United States District Court for the Southern District of New York (Caproni, J.).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,
ADJUDGED AND DECREED that the judgment of the District Court is
AFFIRMED.
Plaintiffs‐Appellants (“Plaintiffs”) appeal from an order of the United
States District Court for the Southern District of New York (Caproni, J.), dated
September 29, 2015, granting the motion of Defendants‐Appellees
(“Defendants”) to dismiss Plaintiffs’ second amended complaint (“SAC”) in its
entirety. The gravamen of the SAC is that Defendants used fraudulent
accounting practices to manipulate the reported loss and loss adjustment
2 expense of the Company Defendant, AmTrust Financial Services, Inc.
(“AmTrust”), for the years 2010 through 2012.1
To maintain a private securities action under § 10(b) of the Securities
Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78j(b), and Securities and
Exchange Commission (“SEC”) Rule 10b‐5, “a plaintiff must prove (1) a material
misrepresentation or omission by the defendant; (2) scienter; (3) a connection
between the misrepresentation or omission and the purchase or sale of a security;
(4) reliance upon the misrepresentation or omission; (5) economic loss; and (6)
loss causation.” Pac. Inv. Mgmt. Co. LLC v. Mayer Brown LLP, 603 F.3d 144, 151
(2d Cir. 2010) (internal quotation marks omitted).
Securities fraud claims under § 10(b) of the Exchange Act and Rule 10b–5
must satisfy two layers of heightened pleading requirements. First, a complaint
alleging securities fraud must satisfy Rule 9(b) of the Federal Rules of Civil
Procedure. ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007).
Rule 9(b) requires that the complaint “(1) specify the statements that the plaintiff
contends were fraudulent, (2) identify the speaker, (3) state where and when the
1 We review de novo a district court’s decision to dismiss a complaint for failure to state a claim under Rule 12(b)(6). ECA, Local 134 IBEW Joint Pension Tr. of Chi. v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir. 2009). We assume the parties’ familiarity with the facts and record below, which we reference only as necessary to explain our decision.
3 statements were made, and (4) explain why the statements were fraudulent.” Id.
Second, private securities fraud class actions must satisfy the pleading
requirements set forth in PSLRA, 15 U.S.C. § 78u‐4(b)(1). ATSI Commc’ns, 493
F.3d at 99. The PSLRA “specifically requires a complaint to demonstrate that the
defendant made ‘[m]isleading statements [or] omissions . . . of a material fact,’ 15
U.S.C. § 78u‐4(b)(1), and acted with the ‘[r]equired state of mind’ (the ‘scienter
requirement’), id. § 78u‐4(b)(2).” Employees’ Ret. Sys. of Gov’t of the V.I. v. Blanford,
794 F.3d 297, 305 (2d Cir. 2015).
The PSLRA further requires that a plaintiff “state 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)(A). This means that a plaintiff’s allegations
“must give ‘rise to a strong inference’ of fraudulent intent.” Kleinman v. Elan
Corp., 706 F.3d 145, 152 (2d Cir. 2013) (quoting 15 U.S.C. § 78u‐4(b)(2)(A)). The
Supreme Court has instructed that, “[t]o qualify as ‘strong,’ . . . an 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, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007).
4 Noting that “[i]t is well‐settled that GAAP provisions are subject to
interpretation and ‘tolerate a range of reasonable treatments, leaving the choice
among alternatives to management,’” Special App’x 18–19 (quoting Thor Power
Tool Co. v. Comm’r of Internal Revenue, 439 U.S. 522, 544 (1979), the District Court
found that Plaintiffs had “not alleged facts that support [their] conclusory
allegation that AmTrust violated GAAP,”2 id. at 20. The District Court found
specifically that the SAC “alleged no facts indicating that AmTrust exercised its
judgment in a way that violated GAAP beyond its disagreement with
management’s choices among alternative estimates.” Id. at 19. It found further
that “[n]ot only does the [SAC] fail to include factual support for its ipse dixit that
loss and loss adjustment expenses were misclassified as other underwriting
expenses, it provides no support for the notion that the way AmTrust classified
its loss and loss adjustment expenses violated GAAP.” Id. at 19–20 (internal
quotation marks omitted).
On appeal, Plaintiffs argue that their falsity claim was sufficiently
particular under Rule 9(b) because they “identifie[d] the misleading statements,”
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15‐3342 Michael D. Harris, et al. v. AmTrust Fin. Servs., Inc., et al.
UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals for the Second Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the 16th day of May, two thousand and sixteen.
PRESENT: ROBERT D. SACK, RICHARD C. WESLEY, GERARD E. LYNCH, Circuit Judges. ______________________
MICHAEL D. HARRIS, individually and on behalf of all other persons similarly situated, STUART SCHAPIRO, as co‐lead plaintiff,
Plaintiffs‐Appellants,
DAVID SEARS, individually and on behalf of all other persons similarly situated,
Plaintiff.
‐v.‐ No. 15‐3342
AMTRUST FINANCIAL SERVICES, INC. BARRY D. ZYSKIND, RONALD E. PIPOLY, JR.,
Defendants‐Appellees. ______________________
FOR PLAINTIFFS‐APPELLANTS: LAURENCE ROSEN, The Rosen Law Firm, P.A., New York, NY (Jacob A. Goldberg, Keith Lorenze, The Rosen Law Firm, P.A., Jenkintown, PA, on the brief).
FOR DEFENDANTS‐APPELLEES: Jessica P. Corley and Joseph G. Tully, Alston & Bird LLP, New York, NY.
Appeal from the United States District Court for the Southern District of New York (Caproni, J.).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,
ADJUDGED AND DECREED that the judgment of the District Court is
AFFIRMED.
Plaintiffs‐Appellants (“Plaintiffs”) appeal from an order of the United
States District Court for the Southern District of New York (Caproni, J.), dated
September 29, 2015, granting the motion of Defendants‐Appellees
(“Defendants”) to dismiss Plaintiffs’ second amended complaint (“SAC”) in its
entirety. The gravamen of the SAC is that Defendants used fraudulent
accounting practices to manipulate the reported loss and loss adjustment
2 expense of the Company Defendant, AmTrust Financial Services, Inc.
(“AmTrust”), for the years 2010 through 2012.1
To maintain a private securities action under § 10(b) of the Securities
Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78j(b), and Securities and
Exchange Commission (“SEC”) Rule 10b‐5, “a plaintiff must prove (1) a material
misrepresentation or omission by the defendant; (2) scienter; (3) a connection
between the misrepresentation or omission and the purchase or sale of a security;
(4) reliance upon the misrepresentation or omission; (5) economic loss; and (6)
loss causation.” Pac. Inv. Mgmt. Co. LLC v. Mayer Brown LLP, 603 F.3d 144, 151
(2d Cir. 2010) (internal quotation marks omitted).
Securities fraud claims under § 10(b) of the Exchange Act and Rule 10b–5
must satisfy two layers of heightened pleading requirements. First, a complaint
alleging securities fraud must satisfy Rule 9(b) of the Federal Rules of Civil
Procedure. ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007).
Rule 9(b) requires that the complaint “(1) specify the statements that the plaintiff
contends were fraudulent, (2) identify the speaker, (3) state where and when the
1 We review de novo a district court’s decision to dismiss a complaint for failure to state a claim under Rule 12(b)(6). ECA, Local 134 IBEW Joint Pension Tr. of Chi. v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir. 2009). We assume the parties’ familiarity with the facts and record below, which we reference only as necessary to explain our decision.
3 statements were made, and (4) explain why the statements were fraudulent.” Id.
Second, private securities fraud class actions must satisfy the pleading
requirements set forth in PSLRA, 15 U.S.C. § 78u‐4(b)(1). ATSI Commc’ns, 493
F.3d at 99. The PSLRA “specifically requires a complaint to demonstrate that the
defendant made ‘[m]isleading statements [or] omissions . . . of a material fact,’ 15
U.S.C. § 78u‐4(b)(1), and acted with the ‘[r]equired state of mind’ (the ‘scienter
requirement’), id. § 78u‐4(b)(2).” Employees’ Ret. Sys. of Gov’t of the V.I. v. Blanford,
794 F.3d 297, 305 (2d Cir. 2015).
The PSLRA further requires that a plaintiff “state 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)(A). This means that a plaintiff’s allegations
“must give ‘rise to a strong inference’ of fraudulent intent.” Kleinman v. Elan
Corp., 706 F.3d 145, 152 (2d Cir. 2013) (quoting 15 U.S.C. § 78u‐4(b)(2)(A)). The
Supreme Court has instructed that, “[t]o qualify as ‘strong,’ . . . an 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, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007).
4 Noting that “[i]t is well‐settled that GAAP provisions are subject to
interpretation and ‘tolerate a range of reasonable treatments, leaving the choice
among alternatives to management,’” Special App’x 18–19 (quoting Thor Power
Tool Co. v. Comm’r of Internal Revenue, 439 U.S. 522, 544 (1979), the District Court
found that Plaintiffs had “not alleged facts that support [their] conclusory
allegation that AmTrust violated GAAP,”2 id. at 20. The District Court found
specifically that the SAC “alleged no facts indicating that AmTrust exercised its
judgment in a way that violated GAAP beyond its disagreement with
management’s choices among alternative estimates.” Id. at 19. It found further
that “[n]ot only does the [SAC] fail to include factual support for its ipse dixit that
loss and loss adjustment expenses were misclassified as other underwriting
expenses, it provides no support for the notion that the way AmTrust classified
its loss and loss adjustment expenses violated GAAP.” Id. at 19–20 (internal
quotation marks omitted).
On appeal, Plaintiffs argue that their falsity claim was sufficiently
particular under Rule 9(b) because they “identifie[d] the misleading statements,”
2 “GAAP” refers to generally accepted accounting principles, which are used to compile losses in AmTrust’s consolidated financial statements. These are different from statutory accounting principles (“SAP”), which are used to report the aggregate losses of AmTrust’s domestic subsidiary to insurance regulators. See J.A. 25 ¶ 63; 36 ¶¶ 106– 07; 46 ¶ 138.
5 “identifie[d] the speakers who made the false and misleading statements,”
“describe[d] . . . to the dollar . . . by how much the Company’s financial
statements were false and misleading,” and “detail[ed] why the financial
statements in question were false and misleading.” Appellants’ Br. 22–24. They
argue that although “the sum of all of AmTrust’s subsidiaries’ [loss and loss
adjustment expenses] from its insurance regulatory filings should not vary
materially from the [loss and loss adjustment expense] the Company includes in
the consolidated financial statements it files with the SEC,” in fact AmTrust’s
financial statements filed with insurance regulators “show[ed] combined
aggregate [loss and loss adjustment expense] that are materially greater than the
combined aggregate losses AmTrust reported in its consolidated financial
statements filed with the SEC.” Appellants’ Br. 24.
Plaintiffs argue further that the District Court erred by relying on language
in AmTrust’s 2012 Annual Report (Form 10‐K) “for the truth of the matter” that
differences may exist between SAP and GAAP financial statements. Appellants’
Br. 26–28. Plaintiffs claim that “[o]n the face of the Company’s description about
SAP and GAAP differences—one that the district court improperly adopted for
the truth of the matter—it is more plausible than not that differences between
6 SAP and GAAP would relate to balance sheet items—assets and liabilities—and
not to income statement components such as [loss and loss adjustment
expenses].” Appellants’ Br. 27.3
Plaintiffs’ assertion that the District Court erred by “accepting for the truth
of the matter Defendants’ vague statement in AmTrust’s 2012 10‐K that SAP and
GAAP financial statements may differ,” Appellants’ Br. 13, mischaracterizes the
District Court’s holding. Rather than crediting as true any of AmTrust’s
disclosures regarding potential differences between SAP and GAAP accounting,
the District Court concluded only that “an observed discrepancy” between the
financial statements could not sustain the claims asserted, particularly without
more specific factual allegations, especially when AmTrust disclosed that such a
3 As legal support, Plaintiffs purport to rely on cases holding that complaints sufficiently pled falsity by showing “that the aggregate revenue or profit of an issuer’s individual subsidiaries’ financial statements filed with regulators materially differed from the consolidated revenues reported to the SEC.” Appellants’ Br. 25. They lean particularly heavily on Ho v. Duoyan Global Water, Inc., a case in which plaintiffs alleged that the consolidated financial statements filed by a company were materially misleading because those statements included segment reporting for a Chinese subsidiary that differed materially from financial statements that same subsidiary had filed with Chinese regulators. 887 F. Supp. 2d 547, 567 (S.D.N.Y. 2012). These cases are inapposite because, unlike this case, they all involve allegations that a single legal entity had reported materially different results in different jurisdictions. In Ho, for example, the plaintiffs alleged that the company made “two markedly different representations of the financial position of [certain of its subsidiaries]” in two separate jurisdictions. Id.
7 discrepancy was likely. Special App’x 19. In other words, rather than crediting
AmTrust’s statements about the differences between SAP and GAAP accounting
over Plaintiffs’ allegations on that subject, the District Court concluded only that
Plaintiffs’ allegations were wholly conclusory and thus inadequate to plead
falsity.
Because the SAC fails to adequately plead a material misrepresentation or
omission by Defendants, Plaintiffs’ claims under § 20(a) of the Exchange Act, 15
U.S.C. § 78t(a), and § 11 of the Securities Act of 1933 (the “Securities Act”), 15
U.S.C. § 77k, were also properly dismissed by the District Court. See In re Morgan
Stanley Info. Fund Sec. Litig., 592 F.3d 347, 358–59 (2d Cir. 2010) (to state a claim
under § 11 of the Securities Act, a plaintiff must allege, inter alia, that a
registration statement “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” (quoting 15 U.S.C. § 77k(a))); ATSI
Commc’ns, 493 F.3d at 108 (a claim under Exchange Act § 20(a) may properly be
dismissed with prejudice when a complaint fails to plead a primary violation of
the Act).
8 We have considered all of Plaintiffs’ remaining arguments and find them
to be without merit. Accordingly, we AFFIRM the judgment of the District
Court.
FOR THE COURT: Catherine O’Hagan Wolfe, Clerk