Schnall v. Annuity & Life, et al

Memorandum in Opposition to 68 Motion to Dismiss

D. Conn.January 7, 2004

1 UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT SHERRY SCHNALL, Individually and On Behalf of All Others Similarly Situated, Plaintiffs, v. ANNUITY AND LIFE RE (HOLDINGS), LTD., XL CAPITAL, LTD., LAWRENCE S. DOYLE, FREDERICK S. HAMMER, JOHN F. BURKE, WILLIAM W. ATKIN, BRIAN O’HARA, AND MICHAEL P. ESPOSITO, JR., Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) Civil Action No. 02-CV-2133 (GLG) Consolidated Action January 7, 2004 LEAD PLAINTIFFS’ MEMORANDUM IN FURTHER OPPOSITION TO THE MOTION TO DISMISS FILED BY DEFENDANTS XL CAPITAL, LTD., MICHAEL ESPOSITO, AND BRIAN O’HARA On December 19, 2003, Defendants XL Capital, Esposito, and O’Hara submitted a Reply Memorandum of Law (“Reply”) in further support of their motion to dismiss the Consolidated Amended Class Action Complaint (“Complaint”) filed in this action. On page 6 of their Reply, defendants for the first time addressed Lead Plaintiffs’ allegation in ¶296 of the Complaint, namely, that XL Capital admitted its status as a control person of Annuity and Life Re (Holdings), Ltd. (“ANR”) in its own 2000 10-K by stating that “Although the Company [XL] has beneficial ownership of only 11% of ALRe’s [ANR’s] outstanding common shares, XL is deemed to have significant influence as the Company has representatives on ALRe’s board of directors.” According to defendants, XL Capital’s Case 3:02-cv-02133-EBB Document 104 Filed 01/07/2004 Page 1 of 6 2 admission that it exercised “significant influence” over ANR was a technical requirement of the accounting rules (which they cited but did not submit to the Court), and therefore should not be deemed to have legal significance for this litigation. See Reply at 6. Defendants mischaracterize the accounting rule in question. Attached is a copy of the rule, APB Opinion No. 18, on which defendants rely. See Exhibit A. As described in Paragraph 5 of the Opinion, when the reporting entity – here, XL Capital – owns common stock of another corporation, the reporting entity must decide whether to account for that stock as an equity investment, or instead as an ordinary asset under the cost method. According to Paragraph 17 of the Opinion, the choice depends on whether the investor has the ability to exercise “significant influence” over the “operating and financial policies” of the subsidiary corporation. Such influence is presumed when the investing corporation owns 20% or more of the voting stock of the subsidiary, and a lack of ability to influence is presumed when the investing company owns less than 20% of the voting stock, “unless such ability can be demonstrated.” The rule states that such an ability may be demonstrated in many ways, including “representation on the board of directors, participation in policy making processes, material intercompany transactions, interchange of managerial personnel.” Critically, the rule emphasizes that “The Board recognizes that determining the ability of an investor to exercise such influence is not always clear and applying judgment is necessary to assess the status of each investment.” APB Op. No. 18, Paragraph 17. In other words, the investing company must use its own judgment in order to determine whether the equity method is appropriate, particularly when, as here, stock ownership falls below the 20% threshold for a presumption of control. The fact that XL Capital chose to proclaim its Case 3:02-cv-02133-EBB Document 104 Filed 01/07/2004 Page 2 of 6 3 “significant influence” over ANR (without even qualifying its statement by claiming only an ability to influence ANR) means that XL Capital’s own personnel determined, as a matter of judgment, that XL Capital did, indeed, have significant influence over ANR’s policies. Thus, contrary to defendants’ contention, the admission by XL Capital of its control over ANR was not a mere mechanical application of an arcane accounting principle; moreover, this factual issue may not properly be decided on a motion to dismiss. DATED: January 7, 2004 Respectfully submitted, SCOTT + SCOTT, LLC _______/s/______________________ David R. Scott (Juris No. 16080) Erin Green Comite (Juris No. 24886) 108 Norwich Avenue P.O. Box 192 Colchester, CT 06415 Telephone: (860) 537-5537 Facsimile: (860) 537-4432 MILBERG WEISS BERSHAD HYNES & LERACH LLP Beth Kaswan Ann M. Lipton One Pennsylvania Plaza New York, NY 10119 Telephone: (212) 594-5300 Facsimile: (212) 868-1229 Co-Lead Counsel for Lead Plaintiffs Case 3:02-cv-02133-EBB Document 104 Filed 01/07/2004 Page 3 of 6 4 CERTIFICATE OF SERVICE I hereby certify that on January 7, 2004, I caused a true and correct copy of the foregoing .to be served by first-class, postage prepaid U.S. mail on counsel of record listed on the attached Service List. _____/s/_________________________ Erin Green Comite Case 3:02-cv-02133-EBB Document 104 Filed 01/07/2004 Page 4 of 6 5 Annuity and Life Re (Holdings), Ltd. Service List Attorneys for Plaintiffs Andrew M. Schatz Jeffrey S. Nobel Patrick A. Klingman SCHATZ & NOBEL 330 Main Street Hartford, CT 06106-1817 James E. Miller SHEPHERD FINKELMAN MILLER & SHAH, LLC One Lewis Street Hartford, CT 06103 Attorney Elias A. Alexiades ATTORNEY ELIAS A. ALEXIADES 215 Church Street New Haven, CT 06525 Beth Kaswan Ann Lipton MILBERG WEISS BERSHAD HYNES & LERACH One Pennsylvania Plaza New York, NY 10119 Marc Edelson HOFFMAN & EDELSON 45 West Court St. Doylestown, PA 18901 Attorneys for Defendants Gary R. Battistoni Stuart A. Law Edward Posner DRINKER BIDDLE & REATH One Logan Square 18th and Cherry Streets Philadelphia, PA 19103-6996 John W. Cannavino CUMMINGS & LOCKWOOD, LLC Four Stamford Plaza 107 Elm Street Stamford, CT 06902 James F. Stapleton Kenneth W. Ritt Terence J. Gallagher DAY, BERRY & HOWARD, LLP One Caterbury Green Stamford, CT 06901 Thorn Rosenthal Tammy Roy CAHILL GORDON & REINDEL, LLP 80 Pine Street New York, NY 10005-1702 Lawrence W. Andrea LAW OFFICES OF LAWRENCE W. ANDREA 57 North Street, Suite 313 Danbury, CT 06810 Case 3:02-cv-02133-EBB Document 104 Filed 01/07/2004 Page 5 of 6 6 Peter S. Olson James T. Shearin PULLMAN & COMLEY, LLC 850 Main Street P.O. Box 7006 Bridgeport, CT 06601-7006 Thomas J. Sansone John R. Horvack, Jr. CARMODY & TORRANCE 50 Leavenworth Street P. O. Box 1110 Waterbury, CT 06721-1110 Francis S. Chlapowski Randi B. Pincus Morgan, Lewis & Bockius, LLP 101 Park Avenue, 44th Floor New York, NY 10178 John J. Robinson McCarter & English, LLP One Financial Plaza 755 Main Street, 18th Floor Hartford, CT 06103 R. Nicholas Gimbel McCarter & English, LLP Mellon Bank Center 1735 Market Street, Suite 700 Philadelphia, PA 19103 Case 3:02-cv-02133-EBB Document 104 Filed 01/07/2004 Page 6 of 6