New England Carpenters Guaranteed Annuity and Pension Funds v. AmTrust

• Court: Court of Appeals for the Second Circuit
• Decided: October 31, 2024
• Docket: 20-1643
• Status: Published

Opinion

20-1643-cv New England Carpenters Guaranteed Annuity and Pension Funds v. AmTrust Financial Services, Inc.

United States Court of Appeals For the Second Circuit August Term, 2020

(Argued: June 4, 2021 Decided: August 23, 2023 Amended: October 31, 2024)

Docket No. 20-1643-cv

_____________________________________

NEW ENGLAND CARPENTERS GUARANTEED ANNUITY AND PENSION FUNDS,

Lead 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.

Before:

LOHIER, NARDINI, Circuit Judges, and KOVNER, Judge. *

The Appellants, investors in the securities of AmTrust Financial Services, Inc., appeal from a judgment of the United States District Court for the Southern District of New York (Kaplan, J.) dismissing their complaint for failure to state a claim under Sections 11, 12, and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 against AmTrust, various AmTrust corporate officers and board members, AmTrust’s outside auditor, and multiple underwriters of AmTrust’s sale of securities. The District Court determined that certain public misstatements relating to AmTrust’s recognition of revenue generated by its extended warranty contracts and the expenses associated with its payment of discretionary employee bonuses were non-actionable statements of opinion. We conclude that these misstatements of opinions were actionable under the circumstances alleged in the Appellants’ complaint. We further conclude that the District Court erred in dismissing the Appellants’ claims under Section 10(b) and Rule 10b-5 against AmTrust’s outside auditor. We identify no error in the District Court’s dismissal of the Appellants’ remaining claims. We

*Judge Rachel P. Kovner, of the United States District Court for the Eastern District of New York, sitting by designation. 2 therefore AFFIRM in substantial part, VACATE in part, and REMAND the case for further proceedings.

ANDREW S. LOVE (Susan K. Alexander, Robbins Geller Rudman & Dowd LLP, San Francisco, CA; Samuel H. Rudman, David A. Rosenfeld, 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 Morgan Stanley & Co. LLC, Citigroup Global Markets Inc., UBS Securities LLC, RBC Capital Markets, LLC, and Keefe, Bruyette & Woods, Inc.

3 LOHIER, Circuit Judge:

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 also

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

1The named plaintiffs are New England Carpenters Guaranteed Annuity and Pension Funds, Stanley Newmark, Irving Lichtman Revocable Living Trust, Jupiter Capital Management, Sharon Albano, John Sachetti, and Joel Rubel.

4 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 Sections

11, 12, and 15 of the Securities Act of 1933 (the “Securities Act”), and Section

10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and

the corresponding Rule 10b-5.

The United States District Court for the Southern District of New York

(Kaplan, J.) dismissed the third amended complaint (the “Complaint”) under

Federal Rule of Civil Procedure 12(b)(6), holding that none of the misstatements

were actionable under the securities laws. We agree with the District Court’s

dismissal of the claims relating to most of the misstatements, and we therefore

AFFIRM in substantial part. But as we explain below, we disagree with the

District Court’s dismissal of the Appellants’ claims under Sections 11, 12(a)(2),

2 The Officer Defendants are Barry D. Zyskind (at all relevant times AmTrust’s President and Chief Executive Officer (“CEO”)) and Ronald E. Pipoly Jr. (at all relevant times AmTrust’s Executive Vice President and Chief Financial Officer (“CFO”)). The Director Defendants are Donald T. DeCarlo, Susan C. Fisch, Abraham Gulkowitz, George Karfunkel, and Jay J. Miller.

3 BDO USA, LLP (“BDO”).

4RBC Capital Markets, LLC, UBS Securities LLC, Citigroup Global Markets Inc., Keefe, Bruyette & Woods, Inc., and Morgan Stanley & Co. LLC. 5 and 15 of the Securities Act against AmTrust, its officers and directors, and the

Underwriter Defendants related to AmTrust’s accounting for revenue generated

by its extended warranty contracts and the expenses associated with

discretionary employee bonuses. We also conclude that the District Court

should not have dismissed the Appellants’ claims under Section 10(b) of the

Exchange Act and corresponding Rule 10b-5 against BDO. We therefore

VACATE the judgment insofar as it dismisses those claims and REMAND to the

District Court for further proceedings consistent with this opinion.

BACKGROUND

I. Factual Background

The following facts, which we assume to be true for purposes of this

appeal, are drawn from the Complaint and the documents it incorporates by

reference. See Litwin v. Blackstone Grp., L.P., 634 F.3d 706, 708 (2d Cir. 2011).

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

6 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 a 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

7 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 approach 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 filed on June 11,

8 2015 (the “2015 Registration Statement”). The transaction, underwritten by

Defendants Citigroup Global Markets Inc. (“Citigroup”) and Morgan Stanley &

Co. LLC (“Morgan Stanley”), occurred on November 11, 2015 and raised $320

million. In September 2016 AmTrust filed another preliminary prospectus

supplement and prospectus supplement under the 2015 Registration Statement,

this time announcing that the company planned to offer American depositary

shares in a transaction (the “September 2016 Offering”) underwritten by Morgan

Stanley, UBS Securities LLC (“UBS”), RBC Capital Markets, LLC (“RBC”), and

Keefe, Bruyette & Woods, Inc. (“KBW”). The prospectus supplement

accompanying the September 2016 Offering incorporated by reference AmTrust’s

annual financial report on Form 10-K for the year ending December 31, 2015, its

10-Q report for the quarter ending March 31, 2015, and various other reports the

company had previously filed with the SEC. The September 2016 Offering raised

$278.2 million.

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,

9 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

5To use the annual financial results for 2015 as an example, the errors meant that income before other income, income taxes, equity in earnings of unconsolidated subsidiaries, and non-controlling interest was overstated by 16.79 percent; income before income taxes, equity in earnings of unconsolidated subsidiaries, and non- controlling interest was overstated by 17.04 percent; net income was overstated by 11.56 percent; net income attributable to AmTrust common stockholders was overstated by 12.62 percent; diluted earnings per share was overstated by 12.45 percent; comprehensive income was overstated by 22.94 percent; and comprehensive income attributable to AmTrust Financial Services, Inc. was overstated by 23.55 percent. See Joint App’x 213–14. 10 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 first publicly disclosed the accounting errors at issue in this case.

Although there are two slightly different class periods during which the

Appellants purchased AmTrust securities—the first between February 14, 2013

and April 10, 2017 (the “AmTrust Class Period”) and the second between March

3, 2014 and April 10, 2017, during which BDO served as AmTrust’s outside

auditor (the “BDO Class Period”)—for our purposes, the distinction is

immaterial. The Appellants eventually filed a second amended complaint

asserting claims under Sections 11, 12(a)(2), and 15 of the Securities Act, 15 U.S.C.

6Although the Appellants challenged other statements below, they do not press those arguments on appeal and, as a result, we do not consider them. 11 §§ 77k, 77l(a)(2), 77o, Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C.

§§ 78j(b), 78t(a), and Rule 10b–5, 17 C.F.R. § 240.10b–5. The District Court

dismissed the second amended complaint without prejudice, concluding for the

most part that the alleged misstatements were nonactionable statements of

opinion. The Appellants filed a third amended complaint (the operative

complaint here), which the District Court also dismissed, largely for the same

reasons, this time with prejudice.

This appeal followed.

DISCUSSION

We review the District Court’s dismissal under Rule 12(b)(6) de novo,

accepting all factual allegations as true and drawing all reasonable inferences in

favor of the Appellants. Olagues v. Icahn, 866 F.3d 70, 74 (2d Cir. 2017).

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 Sections 11 and 15 of the Securities Act, as well as

their claims against AmTrust under Section 12(a)(2) of the Securities Act. The

Act requires that companies issuing securities make a “full and fair disclosure of

information” in connection with a public offering. Pinter v. Dahl, 486 U.S. 622,

12 646 (1988); see Fed. Hous. Fin. Agency for Fed. Nat’l Mortg. Ass’n v. Nomura

Holding Am., Inc., 873 F.3d 85, 98 (2d Cir. 2017). The Act aims to protect

investors and to “achieve a high standard of business ethics in the securities

industry.” Lorenzo v. SEC, 139 S. Ct. 1094, 1103 (2019) (quotation marks

omitted); see also SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1466 (2d Cir. 1996).

It thus permits purchasers of a public company’s securities to sue the company

and certain corporate officers for any material misstatements or for the omission

of material information in the company’s registration statements filed with the

SEC.

Section 11 of the Act, for example, provides:

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.

15 U.S.C. § 77k(a); see Omnicare, Inc. v. Laborers Dist. Council Const. Indus.

Pension Fund, 575 U.S. 175, 179 (2015). So “[i]n the event of such a misdeed, the

statute provides for a cause of action by the purchaser of the registered security

against the security’s issuer, its underwriter, and certain other statutorily

enumerated parties.” In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347,

13 358 (2d Cir. 2010). “Section 15, in turn, creates liability for individuals or entities

that ‘control[ ] any person liable’ under section 11.” Id. (quoting 15 U.S.C. § 77o).

And as relevant to this appeal, Section 12(a)(2) similarly imposes liability on any

person who offers or sells a security by means of a prospectus containing

material misrepresentations or omissions. 7

Appellants’ principal challenge under the Securities Act relates to the two

accounting errors described above that AmTrust identified in its restatement as

materially affecting its reported income during the relevant time: (1) its

recognition of revenue from administration services based on the time-of-sale

7 Section 12(a)(2) provides, in relevant part:

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 . . . .

15 U.S.C. § 77l(a)(2). 14 approach; and (2) its decision to record discretionary bonus payments as

expenses the year in which they were paid rather than the year in which the

bonuses were actually earned.

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 section 11

or 12 based upon a [defendant’s alleged] belief or opinion . . . liability lies only to

the extent that the statement was both objectively false and disbelieved by the

defendant at the time it was expressed.” Fait, 655 F.3d at 110. But we have since

recognized that the Supreme Court in Omnicare, which was decided after Fait,

unequivocally “rejected the proposition that there can be no liability based on a

15 statement of opinion unless the speaker disbelieved the opinion at the time it was

made.” Abramson, 965 F.3d at 175. By pointing out that a statement of opinion,

even if believed, may nonetheless be actionable if it contains a factual

misstatement or is rendered misleading by the omission of material facts,

Omnicare expanded the scope of issuer liability for statements of opinion.

Nevertheless, Fait continues to guide us in distinguishing between a statement of

fact and a statement of opinion in the first place.

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, marks the statement as reflecting the speaker’s impression or

point of view rather than an objective truth, and makes it easier to identify the

statement as one of opinion rather than fact. See id. at 183–84.

16 But not all statements of opinion include such qualifying language. In Fait,

for example, we held that unqualified estimates of goodwill and loan loss

reserves were statements of opinion because the estimates were clearly

“subjective . . . rather than objective factual matters.” Fait, 655 F.3d at 111

(quotation marks omitted). Certain statements address issues so plainly

subjective, we reasoned, that the statement is one of opinion not just by virtue of

the words used but also because of the nature of the information conveyed. In

Fait, we characterized the inquiry as turning on whether the relevant statement

reflects the speaker’s determination of “a matter of objective fact” or instead

expresses the speaker’s judgment about a matter that lacks “any objective

standard.” Id. at 109–10 (quotation marks omitted). The latter statement, we

said, is “inherently subjective.” Id. at 113.

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

17 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

18 opinion—or, otherwise put, about the speaker’s basis for holding that view.”

Omnicare, 575 U.S. at 188; see Abramson, 965 F.3d at 175–76. 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 issuer’s inquiry into or knowledge

concerning a statement of opinion, and if those facts conflict with what a

reasonable investor would take from the statement itself,” then the issuer may be

liable under Section 11’s omissions clause even though the statements convey an

opinion. Omnicare, 575 U.S. at 189. “By increasing the ability of plaintiffs to

plead material omissions with respect to statements of opinion . . . , Omnicare

reduced the significance of district courts’ classification of statements as those of

fact or opinion.” Abramson, 965 F.3d at 176.

19 Opinions are thus actionable under Section 11 of the Securities Act not

only when “the speaker did not hold the belief she professed,” Omnicare, 575

U.S. at 185–86, but also if the statement of opinion contains embedded statements

of fact that are untrue, or the statement omits information whose omission

conveys false facts about the speaker’s basis for holding that view and makes the

opinion statement misleading to a reasonable investor, id. at 186–88; see

Abramson, 965 F.3d at 175; Fait, 655 F.3d at 111 (noting that opinion “statements

may be actionable if they misstate the opinions or belief held, or, in the case of

statements of reasons, the actual motivation for the speaker's actions, and are

false or misleading with respect to the underlying subject matter they address”

(emphasis omitted)). The standard for opinion liability presents “no small task

for an investor” seeking to plead that an opinion is misleading. Omnicare, 575

U.S. at 194.

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

20 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.

Abramson, 965 F.3d at 175.

Statements of opinion are also actionable as false or misleading under

Section 11’s omission clause if the opinion “omits material facts about the issuer’s

inquiry into or knowledge concerning a statement of opinion, and if those facts

conflict with what a reasonable investor would take from the statement [of

opinion] itself.” Omnicare, 575 U.S. at 188; see Abramson, 965 F.3d at 175

(“[P]laintiffs can allege that a statement of opinion, without providing critical

context, implied facts that can be proven false.”). “With respect to this

[alternative] basis for challenging a statement of opinion, Omnicare held that the

appropriate perspective for identifying whether a statement of opinion implies

facts is that of the reasonable investor.” Abramson, 965 F.3d at 175.

Mindful of these background principles, we conclude that the Appellants

have stated a claim under Section 11 of the Securities Act against the AmTrust

21 Defendants and the Director Defendants based on AmTrust’s past recognition of

revenue for extended warranty contracts using the time-of-sale approach, as well

as its practice of recording discretionary bonuses as expenses when they were

paid rather than earned. 8 For the same reasons, we vacate the District Court’s

dismissal of the Appellants’ Section 12(a)(2) claims against AmTrust arising from

the same misstatements. See In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d

at 359.

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

8 The District Court dismissed the Appellants’ control-person liability claim under Section 15 of the Securities Act against AmTrust’s officers and directors because it found no primary liability under Section 11. Because we conclude that the Appellants have stated a claim for primary liability for the statements about the accounting treatment of warranty contracts and bonuses, we vacate the District Court’s dismissal of the corresponding Section 15 claims against Zyskind, Pipoly, DeCarlo, Fisch, Gulkowitz, Karfunkel, and Miller and remand for further proceedings consistent with this opinion. See In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d at 358 (noting that “the success of a claim under section 15 relies, in part, on a plaintiff’s ability to demonstrate primary liability under section[] 11”).

22 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

App’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

9The Accounting Standards Codification (“ASC”) is the “source of authoritative generally accepted accounting principles,” commonly referred to as “GAAP,” published by the Financial Accounting Standards Board (“FASB”) “to be applied by nongovernmental entities” such as AmTrust. Financial Accounting Standards Board, Accounting Standards Codification: Overview and Background 105-10-05-1 (2020), https://asc.fasb.org/1943274/2147479442; see also Ind. Pub. Ret. Sys. v. SAIC, Inc., 818 F.3d 85, 93 (2d Cir. 2016) (relying on FASB standards as a source of GAAP). 23 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 opinion, not fact,

because its determination of when to recognize the revenue associated with ESPs

was a subjective judgment call. In particular, AmTrust explains that its pre-

restatement decision to recognize this revenue upfront was “based on its

interpretation of the accounting guidance regarding ‘multiple-element revenue

recognition,’” including ASC 605-25-25-5. AmTrust Br. 31. ASC 605-25-25-5

governs when a “delivered item or items shall be considered a separate unit of

accounting.” Under that accounting standard, revenue from these multi-element

24 arrangements (also known as bundled contracts or sales) can be recognized upon

delivery only if the contracts or services “have value to the customer on a

standalone basis.” ASC 605-25-25-5(a), superseded by Accounting Standard

Update No. 2014-09 (May 28, 2014). Lastly, AmTrust observes that a contract or

service has “value on a standalone basis if [it is] sold separately by any vendor or

the customer could resell [it] on a standalone basis.” Id.

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 coverage 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 ASC 605 that require judgment

25 calls, nothing in the text of ASC 605, including ASC 605-25-55-1, on which

AmTrust also relies, refers to other methods for determining value.

In further support of their respective arguments, both the Appellants and

AmTrust turn to ASC 605-20-25-3, which provides:

[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.

ASC 605-20-25-3 (emphasis added), superseded by Accounting Standards

Update No. 2014-09 (May 28, 2014). On one hand, the Appellants suggest that

ASC 605-20-25-3 establishes an objective standard that generally requires the

recognition of this revenue on a straight-line basis. On the other hand, AmTrust

defends the District Court’s decision by relying on the exception contained in

ASC 605-20-25-3, claiming that the determination of whether historical evidence

is sufficient to permit non-straight-line treatment is “a quintessential question of

judgment” and that the standard is thus inherently subjective. AmTrust Br. 30–

31.

26 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 plaintiffs

have alleged adequately that the statement was an untrue or misleading

statement of opinion.”); see Abramson, 965 F.3d at 176.

The Appellants respond that they have alleged the objectively

determinable absence of historical evidence necessary to support the non-

straight-line accounting approach that AmTrust applied. See Joint App’x 152

(“ASC Topic No. 605 . . . does not permit the method of recognition employed by

AmTrust without historical evidence demonstrating the appropriateness of such

method, historical evidence AmTrust acknowledges it never possessed.”).

AmTrust’s reliance on the sufficiency of historical evidence to justify its

accounting treatment, the Appellants contend, runs headlong into the

27 Complaint’s allegation, which at this stage we accept as true, that there was in

fact no historical evidence to support its approach.

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 ASC 605-20-25-3. And no one disputes that

GAAP permits time-of-sale recognition only if some historical evidence justified

doing so. At the pleading stage, we think the alleged absence of such evidence, if

accepted as true, means that AmTrust’s representations about the warranty

contract revenue reported in its historical consolidated financial statements

misled investors to conclude that the company was aware of some historical

evidence in support of recognizing the revenue on a non-straight-line basis,

when in (alleged) fact it was not. In other words, AmTrust is plausibly alleged to

have “sa[id] one thing and [held] back another.” Omnicare, 575 U.S. at 192.

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 Section 11, and we

28 vacate the District Court’s dismissal of the Appellants’ Section 11 claims against

the AmTrust Defendants and the Director Defendants arising from those

statements.

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.

29 Joint App’x 83.

The parties agree that ASC 450 applies to determine how to account for

these bonuses. Under ASC 450-20-25-2, companies should expense costs when it

is “probable” that a liability has been incurred and when “[t]he amount of loss

can be reasonably estimated” within a range. 10 AmTrust asserts that its decision

to expense bonuses in the period they were paid rather than earned in its

previously issued consolidated financial statements is a classic exercise of

subjective judgment. Suggesting to investors that it is not “probable” that the

company would pay bonuses at a future time is, the company asserts, merely

stating a non-actionable opinion. Even assuming without deciding that these are

statements of opinion, we are not persuaded.

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

10See also ASC 450-10-55-3 (“Amounts owed for services received. . . are not contingencies even though the accrued amounts may have been estimated; there is nothing uncertain about the fact that those obligations have been incurred.”) 30 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 any 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,

11Under ASC 450-10-55, bonuses should have been expensed as incurred during the relevant period. ASC 710-10-25 likewise required AmTrust to expense an employee’s right to be compensated when earned. And ASC 270 required the bonuses to be expensed as incurred in interim periods. 31 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

Section 11 against the AmTrust Defendants and the Director Defendants arising

from AmTrust’s misrepresentation of reported income in its historical

consolidated financial statements based on the erroneous accounting treatment

relating to bonus payments.

C. SOX Certifications by AmTrust Executives

The remaining Section 11 claims against the AmTrust Defendants are a

different matter. They rest on certifications by company executives regarding,

32 among other things, the accuracy of AmTrust’s financial reporting, its conformity

with GAAP, and the effectiveness of AmTrust’s disclosure controls and

procedures. The District Court concluded that these certifications were non-

actionable statements of opinion. We agree.

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”), 15

U.S.C. § 7241(a); see also 17 C.F.R. §§ 240.13a-14, 240.13a-15, 240.15d-15. Their

certifications about the accuracy of AmTrust’s financial reporting, including that

financial statements were prepared in conformity with GAAP, signal that they

are opinions by stating that they are “based on [the] knowledge” of the officer.

See Joint App’x 103–04, 153. There is no allegation that the opinion is actionable

on the ground that it was not based on the officer’s knowledge. 12 Similarly, we

conclude that the two other challenged SOX certifications relating to (1)

12For the reasons discussed below, we disagree with the Appellants that the existence of the Warrantech SEC guidance letter demonstrates that the officers knew the financial reports were false or misleading or did not comply with GAAP, even with all reasonable inferences drawn in the Appellants’ favor. 33 disclosure controls and procedures, and (2) internal control over financial

reporting contain language that conveys management’s subjective judgments

about the company’s internal controls and thus constitute statements of opinion.

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

13The Appellants reference in passing on appeal that the SOX certifications contained embedded statements of fact. See Appellants’ Br. 41. We conclude that the argument is abandoned because the Appellants have failed to develop it. See Zhang v. Gonzales, 426 F.3d 540, 545 n.7 (2d Cir. 2005). 34 meaningful inquiry, other than the fact that the certification turned out to be

wrong.

For these reasons, we affirm the District Court’s dismissal of the

Appellants’ Section 11 claims relating to the SOX certifications.

II. The Exchange Act Claims Against the AmTrust Defendants

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

35 plaintiff must “state with particularity facts giving rise to a strong inference that

the defendant acted with [scienter].” 15 U.S.C. § 78u–4(b)(2)(A).

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

14As we explained in Fait, “[w]hile issuers are subject to virtually absolute liability under section 11, the remaining potential defendants under sections 11 and 12(a)(2) [of the Securities Act] may be held liable for mere negligence.” Fait, 655 F.3d at 109 (cleaned up). And “in contrast to claims brought pursuant to section 10(b) of the [Exchange Act], claims under sections 11 and 12 do not require allegations of scienter.” Id. 36 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 acted 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 prices high and to fuel the company’s acquisition strategy. But the

desire to sustain “the appearance of corporate profitability” is not itself the kind

of incentive or motivation that raises an inference of scienter. Chill, 101 F.3d at

37 268. The Appellants also direct us to allegations that Pipoly and other top

executive officers (but, notably, not Zyskind or the Board Defendants) sold a

significant number of shares of AmTrust stock during the AmTrust Class Period.

In doing so, however, the Appellants acknowledge that Pipoly’s significant

selloff began several months before the AmTrust Class Period, a fact that renders

his stock sales during this class period less unusual. See Ark. Pub. Emps. Ret.

Sys. v. Bristol-Myers Squibb Co., 28 F.4th 343, 355 (2d Cir. 2022).

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

38 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 ending 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 have 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

39 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 v. Kasaks, 216 F.3d 300, 312 (2d Cir. 2000).

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 the AmTrust Defendants under Section 10(b) and Rule 10b–5. 16 We also

affirm the District Court’s corresponding dismissal of the Appellants’ control-

person claim under Section 20(a) of the Exchange Act because such a claim is

“necessarily predicated on a primary violation of securities law.” Rombach v.

Chang, 455 F.3d 164, 177–78 (2d Cir. 2004).

15The Appellants also call our attention to purported “red flags” in the form of press coverage criticizing AmTrust’s accounting practices generally, although none of the press articles mentions the two central accounting issues that led to AmTrust’s restatement. Given the generality of these media reports, we are not persuaded that they support an inference of scienter that is at least as compelling as any opposing inference of nonfraudulent intent.

16We have applied the holding in Omnicare to claims brought under Section 10(b) of the Exchange Act. See Tongue v. Sanofi, 816 F.3d 199, 209–10 (2d Cir. 2016). Because, as we previously concluded, the Officer Defendants’ certifications are non-actionable statements of opinion, we also affirm the dismissal of the Appellants’ Section 10(b) claims based on these certifications. See City of Omaha, Neb. Civilian Emps.’ Ret. Sys. v. CBS Corp., 679 F.3d 64, 67–68 (2d Cir. 2012) (noting that Section 10(b) and Section 11 claims “share a material misstatement or omission element”). 40 III. The Securities Act Claims Against the Underwriter Defendants

The Appellants also assert claims against the Underwriter Defendants

under Sections 11 and 12(a)(2) of the Securities Act stemming from the two

securities offerings made pursuant to AmTrust’s 2015 Registration Statement.

The first is AmTrust’s November 2015 Offering, underwritten by Citigroup and

Morgan Stanley, of 5 million shares of common stock pursuant to a 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 depositary 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

41 overstated income numbers arising from the time-of-sale approach for the

warranty contracts and the improper expensing of bonuses.

As a threshold matter, 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 Section 12(a)(2), a

plaintiff has standing to bring an action against the seller of a security only if the

plaintiff is “the person purchasing such security from them.” Akerman v. Oryx

Commc’ns, Inc., 810 F.2d 336, 344 (2d Cir. 1987) (quotation marks omitted); see

also Freidus v. Barclays Bank PLC, 734 F.3d 132, 141 (2d Cir. 2013) (“In order to

have standing under § 12(a)(2), . . . plaintiffs must have purchased securities

directly from the defendants.”); 15 U.S.C. § 77l(a). A “statutory seller” may

include an underwriter who successfully solicited the transfer of title from issuer

17The Underwriter Defendants do not challenge Appellants’ standing to sue the underwriters of the November 2015 Offering—Citigroup and Morgan Stanley—or their standing to sue RBC for the September 2016 Offering.

42 to purchaser in exchange for some financial gain.18 Morgan Stanley, UBS, and

KBW assert that in a case involving multiple underwriters of a single offering,

the purchaser of a security must in its pleadings specifically identify which

underwriter sold the security at issue in order to have standing to sue that

underwriter. We have not yet addressed this question.

We conclude that the Appellants have adequately established standing

under Section 12(a)(2) by alleging that they purchased securities pursuant to the

“pertinent offering documents” or in the relevant offerings underwritten by the

defendants. In re Lehman Bros. Sec. & ERISA Litig., 799 F. Supp. 2d 258, 311

(S.D.N.Y. 2011) (Kaplan, J.). Here, according to the Complaint, the Appellants

bring their Section 12(a)(2) claims on their own behalf and on behalf of “other

members of the Securities Act Class who purchased AmTrust common stock or

[shares sold in connection with the September 2016 Offering] pursuant to the

Prospectuses.” Joint App’x 132 (emphasis added). We can reasonably infer from

18In a similar vein, a purchaser of a security has standing to bring an action under Rule 10b–5a against underwriters (and brokers, dealers, and non-issuer sellers) for material misstatements about the security “if those entities made material misstatements about the security, as long as the plaintiff[] purchased or sold the securities about which the misstatements were made.” Menora Mivtachim Ins. Ltd. v. Frutarom Indus. Ltd., 54 F.4th 82, 88 (2d Cir. 2022); see In re NYSE Specialists Sec. Litig., 503 F.3d 89, 102 (2d Cir. 2007). 43 these allegations that the Appellants acquired securities from the Underwriter

Defendants in connection with the September 2016 Offering. We are therefore

satisfied that the allegations suffice to establish the Appellants’ standing in this

case. See, e.g., John v. Whole Foods Mkt. Grp., Inc., 858 F.3d 732, 736–38 (2d Cir.

2017) (noting that “general factual allegations of injury may suffice” to establish

standing, “for on a motion to dismiss we presume that general allegations

embrace those specific facts that are necessary to support the claim” (cleaned

up)).

Turning to the merits, the District Court dismissed the Appellants’ Section

11 and Section 12 claims against the Underwriter Defendants, concluding that

the Appellants had “fail[ed] to allege any untrue or misleading statements of

material fact or opinion with respect to those claims.” Spec. App’x 73. In other

words, the District Court dismissed these claims, which it described as “identical

to those of the Securities Act claims asserted against the AmTrust [D]efendants,”

for effectively the same reasons it dismissed the claims against the AmTrust

Defendants. Spec. App’x 73. For reasons we have already provided, we disagree

with the District Court’s conclusion that the reported income statements related

to AmTrust’s warranty contracts and its employee bonuses were non-actionable

44 opinions. Insofar as the District Court dismissed the Appellants’ claims under

Section 11 and Section 12(a)(2) against the Underwriter Defendants arising from

those two categories of statements, we vacate the dismissal and remand for

further proceedings consistent with this opinion. As to any remaining claims

against the Underwriter Defendants, we affirm the District Court’s dismissal.

IV. The Claims Against BDO, AmTrust’s Outside Auditor

Finally, we address the Appellants’ claims against AmTrust’s outside

auditor, BDO, under Section 11 of the Securities Act in connection with BDO’s

audit reports on AmTrust’s financial statements and its system of internal

controls over financial reporting for each of the years ending December 31, 2013–

15, and under Section 10(b) of the Exchange Act and Rule 10b-5 in connection

with its audit report for the year ending December 31, 2013 (“2013 Audit

Opinion”), which was included in AmTrust’s 2013 Form 10-K.

We begin with the Securities Act claims. Section 11 provides in relevant

part that if “any part of the registration statement . . . contained an untrue

statement of material fact,” anyone acquiring the associated security may sue

“every accountant . . . who has with his consent been named as having prepared

or certified any part of the registration statement or . . . any report or valuation

45 which is used in connection with the registration statement.” 15 U.S.C.

§ 77k(a)(4). BDO is thus responsible under Section 11 for any material inaccuracy

in the AmTrust registration statements that it certified, or in financial reports

incorporated in those statements. Id.; see Miyahira v. Vitacost.com, Inc., 715 F.3d

1257, 1265 (11th Cir. 2013); Belizan v. Hershon, 495 F.3d 686, 692 (D.C. Cir. 2007);

see also Herman & MacLean v. Huddleston, 459 U.S. 375, 381 n.11 (1983).

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.

46 The Appellants contend that BDO is liable under Section 10(b) of the

Exchange Act for the 2013 Audit Opinion, which stated that BDO had conducted

its audit in accordance with standards promulgated by the Public Company

Accounting Oversight Board (“PCAOB”), and that the audit provided a

reasonable basis for BDO to determine that AmTrust’s financial statements were

fairly presented. Joint App’x 246–47.

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

47 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 with the relevant PCAOB standards.” Spec. App’x 78.

The Appellants have also adequately alleged that BDO’s statement that it

“believe[d] [its] audits provide a reasonable basis for [its] opinion,” Joint App’x

246–47, would lead a reasonable investor to conclude that BDO had conducted

“some meaningful . . . inquiry,” Omnicare, 575 U.S. at 188, when in fact,

according to the Complaint, BDO never conducted such an inquiry.

We part ways with the District Court, however, insofar as it concluded that

the alleged misstatements were not 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

48 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.

With these basic principles in mind, we conclude that the Appellants

adequately alleged that the misstatements in BDO’s 2013 Audit Opinion were

material. Although the challenged audit certification reflects standardized

language, it is not “so general that a reasonable investor would not depend on it

as a guarantee.” ECA, 553 F.3d at 206. Instead, BDO’s certification that the audit

was conducted in accordance with PCAOB standards succinctly conveyed to

investors that AmTrust’s audited financial statements were reliable. The absence

of BDO’s certification would have been significant, for without it, BDO could not

49 have issued an unqualified opinion, AU 508.07, which then would have alerted

investors to potential problems in the company’s financial reports, see United

States v. Arthur Young & Co., 465 U.S. 805, 818 (1984). The false certification

thus subjected unknowing investors to the risk that AmTrust’s financial

statements were unreliable. For that reason, contrary to the District Court’s

conclusion, the Appellants were not required to allege a link between BDO’s

false certification and specific errors in AmTrust’s financial statements to

establish that BDO’s false audit certification was material.

We also respectfully disagree with the District Court’s conclusion that the

Appellants failed to allege loss causation. Because the Appellants rely on a

corrective disclosure theory, they must show that “the loss caused by the alleged

fraud results from the relevant truth leaking out.” In re Vivendi, S.A. Sec. Litig.,

838 F.3d 223, 261 (2d Cir. 2016) (cleaned up). More specifically, the Appellants

“must plausibly allege a disclosure of” BDO’s misstatements by which “the

available public information regarding” BDO’s audit opinion “was corrected.”

Carpenters Pension Tr. Fund of St. Louis v. Barclays PLC, 750 F.3d 227, 233 (2d

Cir. 2014) (cleaned up).

50 The Complaint alleges that BDO’s misleading representations regarding

the 2013 Audit Opinion caused investor losses because the unqualified audit

opinion artificially inflated the price of AmTrust securities. As noted, at the time

BDO issued its audit opinion, it had not completed the necessary audit work. Its

auditors completed the work after BDO issued the unqualified opinion and

concluded that they did not need to revise the opinion. Even then, the audit

partners failed to note their assessment of omitted procedures or to revise the

audit documentation to show that the work was completed only after the opinion

had been issued.

An April 2017 article in the Wall Street Journal disclosed the debacle. The

article reported that BDO auditors failed to complete the necessary checks before

signing off on the audit paperwork. The article also described how BDO

auditors covered up their incomplete work by “loading unfinished documents

into an internal software system to show the right time stamp, then returned

later to complete some of the work.” Joint App’x 262 (quotation marks omitted).

After the article was published, the price of AmTrust’s securities dropped.

Relying on the three-year gap between BDO’s completion of the audit

work and the disclosure in the Wall Street Journal, the District Court concluded

51 that the Appellants failed to allege loss causation. In the District Court’s view,

the Appellants needed to allege a disclosure and corresponding decline in the

price of AmTrust’s securities between the time BDO issued its misleading audit

opinion and the time that BDO retroactively completed the work. See Lentell v.

Merrill Lynch & Co., 396 F.3d 161, 175 n.4 (2d Cir. 2005) (explaining that the

plaintiffs could not establish loss causation based on a disclosure that did not

“reveal to the market the falsity of the prior” statements).

We disagree with this view for two reasons. First, the Wall Street Journal

article was the first time that the problems with BDO’s audit were publicly

disclosed. Prior to the disclosure, the misleading nature of BDO’s audit

certification remained uncorrected, “continu[ing] to taint the total mix of

available public information.” Carpenters Pension Tr. Fund, 750 F.3d at 234

(cleaned up). Because the article revealed the specific deficiencies that rendered

the audit opinion misleading, there is a “clean match” between the misleading

audit opinion and the subsequent disclosure. Ark. Tchr. Ret. Sys. v. Goldman

Sachs Grp., Inc., 77 F.4th 74, 80 (2d Cir. 2023). Second, even after cleaning up

their auditing paperwork, BDO’s auditors still failed to correct that paperwork to

reflect the dates the work was actually completed or to document their

52 assessment of the omitted procedures. So BDO’s statement that it “conducted

[its] audits in accordance with the standards of the Public Company Accounting

Oversight Board,” Joint App’x 246, remained at the very least misleading. See,

e.g., AS 3.6 (requiring the auditor to document “the procedures performed” with

“sufficient information to enable an experienced auditor” to determine “the date

such work was completed as well as the person who reviewed the work and the

date of such review”). Accordingly, despite BDO’s belated completion of the

audit work, the Wall Street Journal article’s disclosure of the deficiencies in

BDO’s audit revealed the continuing falsity of its audit certification.

Because the District Court dismissed the Appellants’ Section 10(b) and

Rule 10b-5 claims against BDO on materiality and loss causation grounds, it did

not address scienter. Addressing that issue in the first instance on appeal, we

conclude that the Appellants adequately alleged that BDO acted recklessly in

conducting the audit and issuing the audit opinion. In particular, the Appellants

alleged that BDO senior partners and managers—Bertuglia, Green, and Lev

Nagdimov—knew that the audit did not comply with PCAOB standards and

consciously concealed their noncompliance. These allegations support a strong

inference of fraudulent intent. See Emps.’ Ret. Sys. of Gov’t of the Virgin Islands

53 v. Blanford, 794 F.3d 297, 308 (2d Cir. 2015) (holding that allegations describing

the defendants’ efforts to conceal information demonstrate fraudulent intent). 19

BDO argues that the Appellants failed to establish scienter because they

did not allege that BDO’s conduct “approximate[d] an actual intent to aid in the

fraud being perpetrated by” AmTrust. In re Advanced Battery, 781 F.3d at 644;

accord Novak, 216 F.3d at 309 (holding that accounting irregularities “do[] not

constitute reckless conduct sufficient for § 10(b) liability”). But the Appellants do

not rely on mere accounting irregularities or BDO’s failure to identify problems

with AmTrust’s accounting practices. Rather, they allege that BDO consciously

covered up its own misrepresentation that its audit complied with PCAOB

standards. For these reasons, we vacate the District Court’s dismissal of the

Appellants’ Exchange Act claims under Section 10(b) and Rule 10b-5 against

BDO.

19BDO argues that the Appellants failed to allege that any individual whose intent could be imputed to BDO acted with the requisite scienter. See Teamsters Loc. 445 Freight Div. Pension Fund v. Dynex Cap. Inc., 531 F.3d 190, 195 (2d Cir. 2008). We disagree. BDO concedes that Bertuglia, the engagement partner for the AmTrust audit, was the “maker” of the misleading audit certification. BDO Br. 45. And the Appellants alleged that Bertuglia did not review all of the audit paperwork or confirm that the auditors had obtained sufficient evidence to support their opinion, but he released the unqualified audit certification anyway. These allegations support a strong inference that Bertuglia knew that BDO’s audit opinion was misleading insofar as the opinion falsely asserted that BDO conducted its audit in accordance with PCAOB standards. 54 CONCLUSION

To summarize:

1. We vacate the dismissal of the Appellants’ Section 11 claims against the AmTrust Defendants and the Director Defendants, the Section 12(a)(2) claims against AmTrust, and the Section 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.

2. We vacate the dismissal of the Appellants’ claims under Section 11 and Section 12(a)(2) against the Underwriter Defendants relating to AmTrust’s accounting for certain warranty contracts and bonuses.

3. We vacate the dismissal of the Appellants’ claims under Section 10(b) and Rule 10b-5 against BDO. 20

4. 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 REMANDED for proceedings consistent with this opinion.

20After due consideration of the Appellants’ petition for rehearing, we grant the petition only insofar as it concerns the Appellants’ claims against BDO under Section 10(b) and Rule 10b-5—claims addressed by the revisions in this amended opinion. We deny the remainder of the Appellants’ petition. 55