Eastern District Of New York Grants Motion To Dismiss Exchange Act Claims Against Life Insurance Company In Connection With Its Retirement And Income Solution Program
On January 7, 2021, Judge Sterling Johnson, Jr. of the Eastern District of New York granted a motion to dismiss, with prejudice, in a putative securities class action asserting claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), and SEC Regulation S-K, Item 303, against a life insurance company (the “Company”) and certain of its executives. Parchmann v. Metlife, et al., No. 18-cv-00780-SJ-RLM (E.D.N.Y. Jan. 7, 2021). Plaintiff alleged that defendants made materially misleading statements regarding the Company’s financial condition and internal controls with respect to one of the Company’s Retirement and Income Solution (“RIS”) programs. The Court granted defendants’ motion to dismiss with prejudice, holding, among other things, that plaintiffs failed to adequately plead falsity, loss causation, and scienter.
According to the complaint, the Company made misleading statements concerning amounts due under the Company’s retirement group annuities program. On December 15, 2017, the Company disclosed in its Form 8-K that it inadvertently failed to provide annuities payments to approximately 600,000 individuals. On January 29, 2018, the Company ascertained that the issue was caused by a mistake in its annuities estimation procedure, which wrongly determined that a group of beneficiaries were deceased, when they were in fact alive. To compensate these annuitants, the Company increased its reserves by $525–575 million. The stock price dropped after the December 15 and January 29 disclosures. In its March 1, 2018 Form 10-K, however, the Company indicated the financial impact of the expected increased reserves was immaterial because of an unrelated coinciding accounting error that offset that increase, and which the Company attributed to “operational failure” and “material weakness in internal control.”
Assessing the Exchange Act claims, the Court first addressed falsity with respect to the Company’s financial statements. In connection with plaintiff’s allegation that the Company’s financial statements during the putative class period were materially misstated because the Company erroneously recognized over $500 million in profits, the Court noted that the Company had in fact not made statements about its 2017 profits or reserves prior to the stock price drop but rather merely stated in its December 2017 filing that it would provide further disclosure in its 2017 Form 10-K. Moreover, the Court determined that plaintiff could not prove that the Company allegedly misstated its profits because of the coinciding accounting error which offset the increased reserves. Although investors did not know of the coinciding accounting error, the Court held that “investors’ knowledge . . . is irrelevant to the factual falsity or truthfulness of the issuer’s statement.”
The Court also held that plaintiff failed to plead loss causation with respect to allegedly false statements made by the Company concerning its net income and loss because “[n]o economic loss followed the disclosure or non-disclosure” of this data in the March 2018 10-K.
The Court then held that plaintiff failed to sufficiently plead scienter with respect to the Company’s alleged omission of certain facts because “neither the two individual Defendants . . . nor other [Company] officers gives rise to a strong inference of scienter that can be imputed to [the Company].” Plaintiff primarily pointed to other, and according to plaintiff, more accurate, methods to estimate annuitants. The Court held that “it is far-stretched and unfounded to infer that Defendants intentionally kept the flawed practice in place to defraud investors.” Instead, the Court found more compelling defendants’ theory that the individual defendants were unaware of the issues due to internal control weaknesses. The Court also held scienter could not be inferred because of the resignation of the key officials and state sanctions imposed after disclosure, because “scienter must exist at the time the misleading statements were made, irrelevant to the knowledge gained in hindsight.”
The Court further held that because plaintiff failed to adequately plead scienter, it failed to plead its Item 303 claim because that rule “requires disclosure of any known uncertainties that the issuer would reasonably expect to have material impact on its liquidity, revenues, or incomes.”
Having held that plaintiff failed to allege primary liability under Section 10(b), the Court also dismissed plaintiff’s Section 20(a) control person claims as to the individual defendants.