City of Warren Police & Fire Ret. Sys. v. Prudential Fin., Inc.
| Citation | 70 F.4th 668 |
| Docket Number | 21-1147 |
| Decision Date | 13 June 2023 |
| Parties | CITY OF WARREN POLICE AND FIRE RETIREMENT SYSTEM, Individually and on behalf of all others similarly situated, Appellant v. PRUDENTIAL FINANCIAL, INC.; Charles F. Lowrey; Kenneth Y. Tanji; Robert M. Falzon |
| Court | U.S. Court of Appeals — Third Circuit |
70 F.4th 668
CITY OF WARREN POLICE AND FIRE RETIREMENT SYSTEM,
Individually and on behalf of all others similarly situated, Appellant
v.
PRUDENTIAL FINANCIAL, INC.; Charles F. Lowrey;
Kenneth Y. Tanji; Robert M. Falzon
No. 21-1147
United States Court of Appeals, Third Circuit
Argued: October 27, 2021
Filed: June 13, 2023
On Appeal from the United States District Court for the District of New Jersey (D.C. No. 2-19-cv-20839), District Judge: Honorable Stanley R. Chesler
Joseph D. Daley, Robbins Geller Rudman & Dowd, 655 West Broadway, Suite 1900, San Diego, CA 92101, Peter S. Pearlman, Cohn Lifland Pearlman Herrmann & Knopf, Park 80 West, Plaza One, 250 Pehle Avenue, Suite 401, Saddle Brook, NJ 07663, Daniel J. Pfefferbaum [Argued], Shawn A. Williams, Robbins Geller Rudman & Dowd, One Montgomery Street, Suite 1800, San Francisco, CA 94104, Douglas Wilens, Robbins Geller Rudman & Dowd, 225 North East Mizner Boulevard, Suite 720, Boca Raton, FL 33432, Counsel for City of Warren Police and Fire Retirement System
David D. Cramer, Tricia B. O'Reilly, Walsh Pizzi O'Reilly & Falanga, Three
Gateway Center, 100 Mulberry Street, 15th Floor, Newark, NJ 07102, Maeve L. O'Connor [Argued], Susan R. Gittes, Aasiya F.M. Glover, Debevoise & Plimpton, 66 Hudson Boulevard, New York, NY 10001, Counsel for Prudential Financial, Inc.; Charles F. Lowrey; Kenneth Y. Tanji; and Robert M. Falzon
Before: GREENAWAY, JR., KRAUSE, and PHIPPS, Circuit Judges.
OPINION OF THE COURT
PHIPPS, Circuit Judge.
Insurance companies typically set aside funds, known as reserves, to pay for anticipated benefit claims by their policyholders. As an exercise of actuarial judgment, a wide range of considerations bear on the determination of the amount to hold in reserves. And because circumstances change, an insurer's reserves may vary over time. But in this case, one of the country's largest publicly traded life insurance companies suddenly announced that it would need to increase its reserves by $208 million and that, in addition to a one-time charge in that amount, its earnings would be reduced by $25 million per quarter for the foreseeable future. After that news, the company's stock price dropped by more than twelve percent over two days.
A municipal retirement system that had purchased the company's common stock before the announcement now alleges that the company knew beforehand of problems with its reserves and misled investors about those issues. On that premise, the retirement system filed this putative class action against the company and three of its corporate executives, alleging securities fraud under § 10(b) and § 20(a) of the Securities Exchange Act of 1934.
In response to the retirement system's amended complaint, the insurance company and the executives moved to dismiss for failure to state a claim for relief. They argued that, under the heightened pleading standard for securities-fraud claims, the retirement system's complaint failed to plausibly allege three necessary elements of its claims: false or misleading statements; loss causation; and scienter.
The District Court granted that motion and dismissed the complaint with prejudice. It determined that the retirement system did not adequately plead falsity, and for that reason, it did not evaluate the sufficiency of the complaint's loss causation or scienter allegations. The retirement system then brought this appeal.
While most of the District Court's judgment holds up on de novo review, the retirement system's amended complaint does contain particularized and plausible allegations of falsity with respect to one set of statements by the insurance company. On a conference call with investors eight weeks before the company adjusted its reserves, its Chief Financial Officer stated that the recent mortality experience of the company's life insurance business was within the "normal" range of volatility or, at worst, only "slightly negative." App. at 76-77 (Am. Compl. ¶ 54 (emphasis removed)). But based on information from a confidential former employee, who qualifies as credible at the pleading stage, the complaint alleges that the insurance company was already contemplating a significant increase in reserves due to negative mortality experience at the time of the CFO's statements. And the magnitude of the company's reserve charge and its temporal proximity to the CFO's statements further undercut the CFO's assertion that recent mortality experience was within a normal range. Those particularized allegations satisfy the heightened standard for pleading falsity, and they plausibly allege the falsity of the CFO's statement.
Accordingly, we will partially vacate the District Court's judgment and remand the case to the District Court to consider in the first instance the adequacy of the amended complaint's allegations of loss causation and scienter with respect to the CFO's statement.
Founded over 140 years ago in Newark, New Jersey, Prudential Financial, Inc. offers a wide range of financial products and services. Those products and services include mutual funds, annuities, investment management, and life insurance. About ten percent of Prudential's revenue comes from its Individual Life business segment, which offers term, variable, and universal life insurance policies.
As part of its life insurance business, Prudential sets aside funds - reserves - to pay death-benefit claims under its policies. The amount of those reserves represents a liability for future policy benefits on its balance sheet, which Prudential publishes in its annual and quarterly reports with the Securities and Exchange Commission. To determine the amount to hold in reserves, Prudential exercises actuarial judgment in consideration of many factors, including policyholder mortality rates. Typically, during the second quarter of each fiscal year, Prudential reevaluates and, if necessary, updates the actuarial assumptions underlying those calculations. If the amount held in reserves will not cover anticipated death benefits, then Prudential increases that amount, and the corresponding charge reduces its income.
In January 2013, Prudential expanded its life insurance portfolio by acquiring 700,000 life insurance policies that were underwritten by another insurance company, The Hartford. Prudential paid $615 million for those policies, referred to as the 'Hartford Block.' Prudential was then able to collect premiums from the Hartford Block's policyholders, but it also assumed the obligation to pay the approximately $141 billion in death benefits owed under the policies as they came due. By 2015, Prudential had fully integrated the Hartford Block into its Individual Life business segment.
The Hartford Block proved problematic for Prudential. Those policies experienced negative mortality development, meaning that policyholders were not living as long as predicted, obligating Prudential to pay death benefits sooner than expected. As a result of that negative mortality development, the Hartford Block "regularly missed internal performance expectations" from the time Prudential acquired it in 2013. App. at 73 (Am. Compl. ¶ 53(a)). In 2016 and 2017, Individual Life reported poor results due in large part to one-time adjustments made to integrate the Hartford Block. And, following its annual assumptions review in the second quarter of 2018, Prudential announced a $65 million reserve increase (and corresponding charge against Individual Life's income), which the company attributed, in part, to updated mortality-rate assumptions.
The following year, Prudential made several public statements that disavowed any serious problems with Individual Life. In its 2018 Form 10-K annual report, filed with the SEC on February 15, 2019, Prudential explained its general methodology and procedure for calculating reserves. That annual report further suggested that the amount of its reserves was adequate, if not excessive, in light of low interest rates. The Form 10-K also reported Prudential's liability for future policy benefits as well as its net income. The next month, in a meeting with analysts from the Credit Suisse investment bank, the Vice Chairman of Prudential Financial and Prudential Insurance,
Robert M. Falzon, similarly assured investors that there were no systemic issues with underwriting or mortality assumptions in Individual Life. On May 3, Prudential filed its Form 10-Q for the first quarter of 2019 with the SEC, and that document, in reporting the company's net income and providing its end-of-quarter balance sheets, disclosed no problems with the reserves for Individual Life. And on June 5, during an Investor Day conference call, Prudential's CFO, Kenneth Y. Tanji, described Individual Life's recent mortality experience as within the range of "normal volatility" or, at worst, only "slightly negative." Id. at 76-77 (Am. Compl. ¶ 54 (emphasis removed)).
But eight weeks after that Investor Day call, Prudential disclosed a significant adjustment to its reserves. In a July 31 press release - issued after the stock market had closed - Prudential announced that, due to unfavorable updates to its mortality assumptions, it would charge $208 million to Individual Life's income to supplement its reserves. By Prudential's own benchmarks, a reserve charge of that size was unusual. In a Form 8-K that Prudential had previously filed with the SEC in December 2018, the company reported that negative mortality within one standard deviation from expectation would reduce Individual Life's annual pre-tax adjusted operating income by a comparatively smaller amount - between $55 million and $80 million. The $208 million adjustment to reserves, along with other unfavorable developments, drove Individual Life to report an adjusted operating loss of $135 million for the second quarter of 2019 - far below the company's expected quarterly income of $108...
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