460 F.3d 215 (2nd Cir. 2006), 04-2405, Salyton v. American Exp. Co.

Docket Nº:04-2405-cv.
Citation:460 F.3d 215
Party Name:Andrew Keith SLAYTON, On behalf of himself and all others similarly situated, Glickenhaus & Company, Adam Craig Slayton, On behalf of himself and all others similarly situated, Plaintiffs-Appellants, Atlas Equities, Loretto Arzu, Charles Hovanesian, Sam Wietsxhner, Shiraz Sidi, William M. Palese, Scott Barrentime, Yvette Yeidman, Malka Rubin, Julie
Case Date:August 07, 2006
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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460 F.3d 215 (2nd Cir. 2006)

Andrew Keith SLAYTON, On behalf of himself and all others similarly situated, Glickenhaus & Company, Adam Craig Slayton, On behalf of himself and all others similarly situated, Plaintiffs-Appellants,

Atlas Equities, Loretto Arzu, Charles Hovanesian, Sam Wietsxhner, Shiraz Sidi, William M. Palese, Scott Barrentime, Yvette Yeidman, Malka Rubin, Julie Dross, Brown Family Trust, Consolidated Plaintiffs,

v.

AMERICAN EXPRESS CO., Harvey Golub, Kenneth I. Chenault, David R. Hubers, James M. Cracchiolo, Richard Karl Goeltz, Daniel T. Henry, and Gary L. Crittenden, Defendants-Appellees.

No. 04-2405-cv.

United States Court of Appeals, Second Circuit.

Aug. 7, 2006

Argued: April 5, 2005.

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Ann Meredith Lipton, Milberg Weiss Bershad Hynes & Lerach LLP, New York, N.Y. (Sanford P. Dumain, Kirk E. Chapman; Christopher Lovell, Christopher J. Gray, Lovell Stewart & Halebian LLP, New York, NY, co-lead counsel; Lawrence Soicher, Law Offices of Lawrence Soicher, New York, NY, of counsel), for Plaintiffs-Appellants.

Robert E. Zimet, Skadden Arps Slate Meagher & Flom LLP, New York, N.Y. (Christpher P. Malloy, Sharon Garb, William Clarke, Jr.), for Defendants-Appellees.

Before: WINTER, CABRANES, and POOLER, Circuit Judges.

WINTER, Circuit Judge.

Andrew and Adam Slayton and Glickenhaus & Company appeal from Judge Pauley's dismissal of their amended class action complaint alleging securities fraud by the American Express Co. and individual defendants associated with it (collectively "Amex"). The district court dismissed two claims asserted in the amended complaint as time-barred and the remaining claims on the merits under Fed.R.Civ.P. 12(b)(6). Amex claims that we lack jurisdiction because

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the only notice of appeal was from a non-final judgment dismissing the amended complaint with leave to replead. Amex further contends that all claims against the individual defendants Goeltz, Crittenden, and Henry are time-barred. We hold that we have jurisdiction and that the district court erred in dismissing two claims as time-barred. Because the allegations in the amended complaint relate back to the original complaint, we vacate the judgment. Furthermore, we hold that Amex waived the statute of limitations defense as to appellees Goeltz, Crittenden, and Henry. Finally, we grant leave to replead as to only those claims dismissed as time-barred.

BACKGROUND

Amex is a publicly traded financial services corporation. American Express Financial Advisors ("AEFA") is a subsidiary of Amex and provides a variety of financial products, including insurance and annuities. AEFA's subsidiary, IDS Life Insurance Company, sells insurance products and invests the premiums in fixed income securities with a broad range of maturities. Because the returns from these investments are used to pay benefits, the returns must exceed the benefits payable for IDS Life to remain profitable.

a) The Original Complaint

We describe in the margin the relevant positions in Amex held by the individual appellees. 1 The original class action complaint was filed against Amex and Chenault, Golub, Hubers, and Cracchiolo on July 17, 2002, one day before the end of the pertinent one-year limitations period. 2 The original complaint included as class members "all persons who purchased, converted, exchanged or otherwise acquired" Amex common stock between July 18, 1999, and July 17, 2001.

The following was alleged by the complaint. Beginning in 1997, Amex commenced investing in high-yield, high-risk instruments such as below-investment-grade bonds--popularly termed "junk bonds"--and collateralized debt obligations ("CDOs"). 3 Ultimately, AEFA's portfolio contained $3.5 billion worth of CDOs, exceeding the portfolio diversification standards followed by most insurance companies with regard to high-yield investments.

Default rates in the high-yield bond market increased during the third quarter 1999 and throughout 2000. At the end of the fourth quarter 2000, Amex announced a $49 million write-down in its high-yield investments. In connection with the write-down, Chenault publicly stated that the "high yield issue" was "the most significant

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item in the quarter for AEFA" and that "[g]oing forward, [Amex] will continue to invest directly in high-yield bonds because of their generally high overall returns," even though these "returns came with higher risk." On April 2, 2001, an Amex press release announced that first quarter earnings per share were expected to be eighteen percent below the previous year's earnings due to $185 million in losses "from the write-down and sale of certain high-yield securities" held in AEFA's investment portfolio. Despite assurances by Amex that losses in Amex's high-yield portfolio for the remainder of 2001 would likely be far lower than those in the first quarter, Amex announced on July 18, 2001 a steep decline in its second quarter earnings due to a pre-tax charge of $826 million. This charge reflected write-downs in AEFA's high-yield portfolio and losses from "rebalancing the portfolio towards lower-risk securities." In response to this additional write-down, Chenault stated that "it is now apparent that our analysis of the portfolio at the end of the first quarter did not fully comprehend the risk [of Amex's high-yield investments] during a period of persistently high default rates."

Based on these allegations, the complaint alleged three material misstatements and/or omissions of material fact: (i) "failing to disclose that [Amex] had invested in a risky portfolio of high-yield or 'junk' bonds that carried the potential for substantial losses if default rates in the junk bond market increased"; (ii) failing to disclose the true extent of Amex's total exposure as a result of the risky portfolio after Amex wrote down its junk bond portfolio by $182 million in April 2001; and (iii) "failing to disclose that [Amex] was taking a substantial and unnecessary risk by investing in high-yield securities involving complex risk factors that [Amex] management and personnel did not fully comprehend." These allegations formed the basis of claims for damages asserted under Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), Section 20(a) of the Exchange Act, 15 U.S.C. § 78t (a), and common law fraud.

With regard to scienter, the original complaint alleged that appellees either knew the statements disseminated by Amex were materially false and misleading (or rendered misleading by omission of material facts) or recklessly disseminated the statements in disregard of facts Amex either knew or should have known. There was also a motive-and-opportunity allegation--that appellees had a motive to make false statements to increase the value of their call options, and that Chenault, Hubers, and Cracchiolo had a motive to make false statements because they sold Amex stock during the class period.

b) The Amended Complaint

The amended complaint--styled the Consolidated Amended Class Action Complaint--was filed on December 20, 2002. It shortened the class period by eight days. The amended complaint described the pertinent events as follows. Although Amex disclosed the amount invested in high-yield investments, it did not alter its investment strategy in response to high default rates in the high-yield market beginning in 1999 and continuing through 2000. Moreover, Amex did not report significant losses or take significant charges despite the erosion of value of the high-yield securities held by AEFA. While admitting some "deterioration" in its high-yield portfolio in 2000, Amex's 2000 Form 8-Ks continued to describe AEFA's asset quality as "strong." Ultimately, however, in the first quarter 2001, Amex wrote off $185 million in charges but maintained that subsequent writedowns were expected to be substantially lower. Nevertheless,

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one quarter later, Amex followed with a $826 million write-down for high-yield securities. After this write-down, Amex announced that, consistent with industry standards, it would reduce its high-yield investments to seven percent of its portfolio from the ten to twelve percent previously maintained. In August 2001, Amex centralized risk controls in the Corporate Risk Management Committee "to supplement the risk management capabilities resident within its business segments."

The amended complaint stated that the "action arises out of the materially false and misleading representations and omissions contained in the public statements of American Express and made by its senior officers and directors." This conduct "disguised [Amex's] true operating results, lack of management controls, and huge losses suffered in risky junk bonds...."

The amended complaint set out "four primary misrepresentations or omissions of material fact," namely that Amex: "(1) misrepresented Amex's high-yield investments as conservative when, in fact, they were high-risk; (2) concealed the extent of Amex's high-yield exposure; (3) failed to disclose the lack of risk management controls; and (4) failed to disclose the lack of proper valuation methods, and the fact that Amex's accounting was not in accordance with GAAP ["Generally Accepted Accounting Principles"]."

The amended complaint added details not present in the original complaint, again as follows. First, because so much of AEFA's portfolio consisted of high-yield investments--ten to twelve percent--there was a need to monitor these investments closely in order to determine current value and assess their risks accurately. Nevertheless, AEFA "failed to adequately monitor and evaluate the extent of its exposure during the...

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