Second Circuit Upholds Dismissal Of Claims Against Reinsurer Regarding Securities Fraud Action Resulting From Hurricane Katrina


Plaintiffs filed this class action against the reinsurer alleging claims under section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. The genesis of the complaint centers around statements made by officer’s of the reinsurer concerning the possible losses that its company endured as a result of Hurricane Katrina. Specifically, plaintiffs allege that the reinsurer manifestly underestimated the impact Hurricane Katrina would have on its business. As a result of Hurricane Katrina, the reinsurer become insolvent and operated in run-off causing the plaintiffs to lose their investments into the company. The District Court granted the reinsurer’s motion to dismiss on the basis that plaintiffs failed to establish that the reinsurer and/or its officers intended to deceive actual and possible investors.

On appeal, plaintiffs argued that the district court failed to appreciate the “strong inference of scienter” in order for their complaint to survive a motion to dismiss. Furthermore, plaintiff argued that the district court failed to take into consideration the level of misrepresentations made by the reinsurer’s officers shortly after Hurricane Katrina. The Second Circuit analyzed the standard in which to plead scienter under the Private Securities Litigation Reform Act of 1995. The Second Circuit concluded that in order to survive a motion to dismiss, a plaintiff must allege “with particularly ‘facts giving rise to a strong inference that the defendant acted with therequired state of mind’” to deceive and/or defraud. The Second Circuit, in analyzing the complaint, found that the plaintiffs failed to lay out the necessary facts that survive a motion to dismiss.

IMPACT (REINSURANCE): Practitioners who represent reinsurers in runoff must be cognizant of this case in counseling clients on the importance to minimize, if not reduce, liability exposure as the company winds down. Here, the courts found that the class action failed to demonstrate the necessary facts to survive a motion to dismiss but with the Private Securities Reform Act of 1995, reinsurers and their counsel, must be cognizant that there are certain causes of action available to investors to potentially recoup capital investment.

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