547 F.3d 406 (2nd Cir. 2008), 06-3877, Staehr v. Hartford Financial Services Group, Inc.

Docket Nº:06-3877-cv.
Citation:547 F.3d 406
Party Name:Steve STAEHR, on behalf of all others similarly Situated, Alaska Laborers Employers Retirement Fund and The Communication Workers of America Plan for Employees' Pensions and Death Benefits, Plaintiffs-Appellants, Kevin Montoya, Individually and on Behalf of All Others Similarly Situated, Philip Stampfel, on behalf of Hartford Financial Services Gro
Case Date:November 17, 2008
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

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547 F.3d 406 (2nd Cir. 2008)

Steve STAEHR, on behalf of all others similarly Situated, Alaska Laborers Employers Retirement Fund and The Communication Workers of America Plan for Employees' Pensions and Death Benefits, Plaintiffs-Appellants,

Kevin Montoya, Individually and on Behalf of All Others Similarly Situated, Philip Stampfel, on behalf of Hartford Financial Services Group Inc., Consolidated-Plaintiffs,

David Wexler, d/o/b Hartford Financial Services Group Inc., Consolidated-Plaintiff-Appellant,


The HARTFORD FINANCIAL SERVICES GROUP, INC., Thomas M. Marra, Ramani Ayer, David K. Zwiener and David M. Johnson, Defendants-Appellees,

Edward J. Kelly III, Paul G. Kirk, Jr., Gail J. McGovern, Robert W. Selander, Charles B. Strauss, H. Patrick Swygert, Gordon I. Ulmer, Ronald E. Ferguson, Rand V. Araskog, Donald R. Frahm, and Robert J. Price, Consolidated-Defendants-Appellees.

No. 06-3877-cv.

United States Court of Appeals, Second Circuit.

November 17, 2008

Argued: June 19, 2008.

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[Copyrighted Material Omitted]

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William S. Lerach, Eric Alan Isaacson, Tor Gronborg, Debra Wyman, Tami Falkenstein Hennick, Lerach Coughlin Stoia Geller Rudman Robbins LLP, for Appellants.

David R. Scott, Erin Green Comite, Scott & Scott LLP, for Appellants.

Jack C. Auspitz, Jamie A. Levitt, John W.R. Murray, Morrison & Forrester LLP, for Appellees.

Timothy A. Diemand, Wiggin & Dana LLP, for Appellees.

Before: PETER W. HALL, DEBRA ANN LIVINGSTON, Circuit Judges, and COLLEEN McMAHON, District Judge.[*]

McMAHON, District Judge:

This case is one of many stemming from the so-called “ contingent commission" arrangements between insurers and brokers that were prevalent prior to October 2004. “ Contingent commissions" is a euphemism for kickbacks-insurance brokers would receive payments from insurers for steering business their way.

Appellants purport to represent all persons who acquired common stock of The Hartford Financial Services Group, Inc. (“ The Hartford" ) during the period of August 6, 2003 through October 13, 2004 (the “ Class Period" ). (Joint Appendix (“ J.A." ) at 2.) They bring this action against The Hartford and its senior officers (collectively, “ Appellees" ), alleging that investors acquired The Hartford's stock at prices that were artificially inflated due to Appellees' omissions, misrepresentations, and fraudulent concealment regarding kickbacks, bid rigging, and price manipulation schemes engaged in by insurers and brokers.

The District Court (Droney, J. ) granted Appellees' motion to dismiss the complaint as barred by the statute of limitations. Taking judicial notice of materials that purportedly constituted “ storm warnings" about The Hartford's alleged fraud, see, e.g., Dodds v. Cigna Securities, Inc., 12 F.3d 346, 350 (2d Cir.1993), the District Court concluded that Appellants were on inquiry notice of the fraud no later than July 25, 2001. Since the two-year statute of limitations began to run on that date, it expired in July 2003-more than a year before the suit was filed.

We disagree with the District Court's conclusion that Appellants were on inquiry notice of their claims against The Hartford by July 25, 2001. Accordingly, we vacate the judgment and remand the case to the District Court for further proceedings.



The Hartford is a large insurer in the property-casualty and life insurance industries. Through its subsidiaries, The Hartford markets and sells investment

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products and insurance to individuals and businesses.

Commercial insurance brokers act as intermediaries between insurance companies and their policyholders. These brokers are hired by clients to assist them in soliciting price quotes, recommending insurers, and purchasing insurance products. After a period of consolidation in the insurance brokerage industry, Marsh, Inc. (“ Marsh" ) and Aon Corporation (“ Aon" ) emerged as the dominant brokers, controlling more than seventy percent of the market by 2003. (J.A. 11.) 1

Appellants allege that The Hartford entered into contingent commission kickback arrangements with insurance brokers in order to increase The Hartford's market share and artificially inflate its insurance prices. According to Appellants, The Hartford paid brokers fees based on: the volume of the premiums the brokers steered to The Hartford; the growth and retention of business; and the profitability of the products purchased by the brokers' clients. (J.A. 11-14.)

The contingent commission/kickback arrangements, Appellants allege, were memorialized in “ placement service agreements" or “ market service agreements" between The Hartford and insurance brokers who steered business its way. These agreements allegedly bound The Hartford to make payments that could amount to $150 million per year, creating a conflict of interest by motivating brokers to serve the interests of the insurers-with whom they had kickback arrangements-rather than to serve the interest of their clients. (J.A. 12-13.)

Insurers, including The Hartford, also allegedly engaged in “ bid rigging" with insurance brokers, to eliminate competition and artificially inflate the price of insurance products.

Appellants contend that throughout the Class Period, The Hartford and its senior officers misled investors by failing to disclose The Hartford's participation in the insurer-broker contingent commission kickback and bid-rigging schemes. (J.A. 13-16.)

On October 14, 2004, the Office of the New York Attorney General (“ NYAG" ) filed a lawsuit against Marsh detailing “ the undisclosed commission pay-offs and bid-rigging schemes that a cartel of large insurers and insurance brokers were using to prop up their businesses and cause customers to purchase insurance at higher prices and less favorable terms than the market otherwise would have dictated." (J.A. 2-3.) The complaint cited The Hartford for its role in paying undisclosed contingent commissions and providing inflated bids. (J.A. 3.) The NYAG lawsuit, and The Hartford's purported involvement in the practices the lawsuit alleged, were the subject of widespread media attention; Eliot Spitzer, then Attorney General of New York, commented publicly that The Hartford was “ involved in the scheme" and that “ the corruption is remarkable." (J.A. 32.)

After the NYAG lawsuit was filed, The Hartford disclosed that it had paid $145 million in kickbacks to brokers in 2003 alone. It announced that it had ceased paying contingency commissions in the wake of the suit. (J.A. 32-33.)

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The day after the NYAG announcement, Appellant Steve Staehr filed his original complaint in this action on behalf of a putative class of shareholders. Several similar complaints followed. (J.A. 819-35.)

On February 10, 2005, the District Court issued an order consolidating those complaints and appointing Alaska Laborers Employers Retirement Fund and the Communication Workers of America Plan for Employees' Pensions and Death Benefits as Co-Lead Plaintiffs. (J.A. 828.)

Appellants filed their Consolidated Amended Complaint on April 12, 2005 (the “ Complaint" ). On June 10, 2005, Appellees moved to dismiss the Complaint for failure to state a claim on multiple grounds, including (1) the statute of limitations had run; (2) Appellees' alleged omissions were immaterial; (3) loss causation could not be established; (4) the Complaint failed to allege scienter; and (5) Appellants could not establish control person liability against the individual defendants. Staehr v. Hartford Fin. Svcs. Group, Inc., et al, 460 F.Supp.2d 329 (D.Conn.2006) Appellees submitted various materials along with their motion to dismiss-materials that were not attached to or specifically referenced in the Complaint. These exhibits include various reports from the mainstream media and from insurance industry newsletters, complaints filed in four lawsuits, and filings made by The Hartford with state regulatory agencies. Appellees argue that, when viewed together, these exhibits illustrated the public nature of the alleged fraud and should have put Appellants on inquiry notice far earlier than two years prior to the commencement of this action.

Appellants opposed the motion and cross-moved to strike exhibits that were neither referenced in nor attached to the Complaint, or, alternatively, to convert the motion to dismiss into a motion for summary judgment. (J.A. 613-15, 630-77.)

On July 13, 2006, the District Court issued an opinion and order granting Appellees' motion to dismiss. Staehr v. Hartford Fin. Svcs. Group, Inc., 460 F.Supp.2d 329 (D.Conn.2006). The District Court took judicial notice of the exhibits introduced into the record by Appellees pursuant to Federal Rule of Evidence 201. Id. at 334. The District Court emphasized that it did not take judicial notice of the documents for the truth of the matters asserted, and it denied Appellants' request to convert the motion to dismiss into a motion for summary judgment. Id. at 335. Addressing the merits of the motion, the District Court held that ‘ Appellants' suit was time-barred by the applicable two-year statute of limitations. Id. at 340. The District Court found it unnecessary to rule on any of the other grounds for dismissal urged by Appellees. Staehr, 460 F.Supp.2d at 340.

Appellants timely filed their Notice of Appeal on August 17, 2006. (J.A. 814.)


The crux of Appellants' claims is that The Hartford's shareholders were misled because they believed they were investing in a company whose success (and concomitant high stock price) was premised on the strength of its business, when it was in fact the product of kickbacks and bid-rigging schemes that were not disclosed to investors. The Complaint alleges that Appellees' statements:

failed to disclose that defendants had guaranteed tens of millions of dollars in commission-oriented kickbacks to insurance brokers ... in exchange for...

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