Fryman v. Atlas Fin. Holdings
| Decision Date | 18 April 2022 |
| Docket Number | 18-cv-01640 |
| Parties | PHILIP FRYMAN, et al ., Plaintiffs, v. ATLAS FINANCIAL HOLDINGS, INC., SCOTT D. WOLLNEY, and PAUL A. ROMANO, Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
Philip Fryman and Aram Hovasapyan (collectively, Plaintiffs) bring this securities fraud class action against Atlas Financial Holdings, Inc. (Atlas), Scott D. Wollney (Wollney), and Paul A. Romano (Romano) (collectively, Defendants) on behalf of persons and entities that purchased or acquired Atlas securities between February 22, 2017 and April 30, 2019. R 97, Fourth Amended Complaint (FAC).[1]Plaintiffs allege that Defendants violated Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act) and Rule 10b-5 promulgated thereunder (Count I) and that Wollney and Romano violated Section 20(a) of the Exchange Act (Count II). Id. Before the Court is Defendants' motion to dismiss the FAC. R. 99, Mot. Dismiss.
For the reasons that follow, Defendants' motion to dismiss is granted in part and denied in part.[2]
Background[3]
Plaintiffs are purchasers of Atlas securities between February 22, 2017 and April 30, 2019 (the Class Period). FAC ¶¶ 44, 45.
Atlas is a financial services holding company, whose core business is the underwriting of commercial automobile insurance policies for the light commercial automobile sector, which includes taxi cabs, non-emergency paratransit, limousine, livery, and business automobiles. FAC ¶ 50. Atlas holds itself out as a specialty insurance company that has “extensive experience and expertise with respect to underwriting and claims management ....” Id. ¶ 51 (internal quotation marks and citation omitted). Atlas' business is conducted through insurance subsidiaries, which during the relevant period consisted of: (1) American Country Insurance Company (American Country); (2) American Service Insurance Company, Inc. (American Service); (3) Gateway Insurance Company (Gateway); and (4) Global Liberty Insurance Company of New York (Global Liberty). Id. ¶ 2.
Wollney was Atlas' Chief Executive Officer and Romano its Chief Financial Officer at all relevant times. FAC ¶¶ 47, 48.
Atlas, like other insurance companies, establishes loss reserves to ensure that Atlas has sufficient liquid capital to pay claims that are submitted from its insured customers. FAC ¶ 63. Loss reserves are a measure of financial health for an insurance company, as the reserves represent expected future losses that an insurance company will be required to pay out for claims on the insurance policies the company has issued and underwritten. Id. In fact, reserves serve as an integral financial metric because every dollar added to loss reserves comes at the expense of net income; an insurance company's value is largely assessed by the amount of capital it holds in excess of reserves, known as capital surplus. Id. ¶¶ 65-67.
Insurance companies are required to hold reserves sufficient to cover losses owing to both: (1) known claims on insurance policies that they have provided to customers (case reserves); and (2) presently unknown claims on those policies, which are incurred but not reported losses (IBNR). FAC ¶ 6.
On February 22, 2017, Atlas issued a press release announcing a substantial increase in its loss reserves (later revealed to be in the amount of $32.6 million, resulting in a 2016 net income of only $2.646 million). FAC ¶¶ 10, 91. In the press release, Defendants gave a primary and secondary reason for the increase in reserves. Id. ¶ 91. The primary reason provided was that there was an unanticipated increase of claims in the light commercial auto industry within the Michigan market. Id. The secondary reason for the reserve increase, according to Defendants, was the preacquisition claims of Global Liberty, which Atlas acquired during a March 2015 transaction. Id. ¶¶ 56, 91.
Defendants, however, made reassuring comments regarding the 2017 reserve increase in the press release, including Wollney's comments:
[o]ur team is confident that we have addressed the issues at the heart of this problem, have taken appropriate steps, and will learn from it .... We have isolated any remaining exposure with a clear plan in place for remaining claims .... While the impact of our reserve strengthening is significant, we believe it is isolated and that our overall book of business is sound, as will be demonstrated going forward.
FAC ¶ 91. Defendants further represented that “the Company believes that this reserve strengthening for past periods coupled with the use of advanced risk modeling has Atlas positioned correctly in 2017.” Id.
During a public conference call on March 14, 2017 with investors and analysts, Defendants offered further reassurances about the isolated nature of the reserve increase, including Wollney's statement that, “[w]e feel very strongly that we've isolated the issue and that we were open with investors as to both the cause and the short-term impact it had on our operating results.” FAC ¶ 92. Wollney likewise reassured investors that “the reserve charges that Atlas took surrounding our Michigan book of business is something that we believe has been isolated.” Id. ¶ 95.
On May 11, 2017, the Missouri Department of Insurance issued a report and order following its examination of Gateway, one of Atlas' subsidiaries. FAC ¶ 96. The Missouri Regulatory Order (the Missouri Report) documented violations relating to the under-reserving of Gateway, American Country, and American Service during the January 1, 2012 through December 31, 2015 timeframe. Id.; FAC Exh. A. The Missouri Report provided, in important part: Id.
The Missouri Report found that Gateway's overall reserves were deficient by approximately $6 million and that the reserve deficiency attributable to Atlas was $30.1 million. FAC ¶ 97. Finally, the Missouri Report ordered the reserve deficiencies to be rectified, ordered rectification of Gateway's reserve methodology, and stated “management's current reserve memo does not address IBNR, and thus does not fulfill the requirements of Statement of Statutory Accounting Principle 55 (SSAP).” Id. ¶ 98.
The Missouri Report found significant reserve deficiencies despite the fact that “[Gateway] strengthened reserves during 2016 due, largely to continued development on existing claims.” FAC ¶ 98. According to the Missouri Report, “[c]hanges to the reserving process implemented by [Gateway] during the year had not achieved the results anticipated by [Gateway].” Id.
Between November 8, 2017 and December 21, 2017, Wollney made a series of stock sales, in which he sold 36, 668 shares of Atlas stock, and realized $721, 880.00. FAC ¶ 214. Prior to this series of sales, Wollney had never sold Atlas stock. Id. During the same timeframe, Romano executed a similar series of stock sales, in which he sold 26, 668 out of his 102, 154 shares of Atlas stock (over 26% of his holdings) and realized $525, 675.00. Id. ¶ 215. Romano, like Wollney, had not sold any Atlas stock before this series of sales. Id.
On March 1, 2018, after the market closed, Atlas issued a press release announcing that the company expected to report a net loss of approximately $3.20 per share for fiscal year 2017. FAC ¶¶ 19, 101. The press release additionally announced that Atlas increased its reserve by $75.4 million for claims relating to accident years prior to 2016. Id. ¶ 102. By the next day, Atlas' stock price fell $7.70 per share, over 40%, to near $11.10 per share. Id. ¶ 103. Defendants continued to reassure investors that Atlas' reserve increase was based on isolated issues that would soon be resolved, and that Atlas' business model was viable. Id. ¶ 110. On March 16, 2018, Atlas disclosed that it was unable to timely file its 2017 Form 10-K, stating that it needed “additional time for the registrant and its auditor . . . to complete the year-end process.” Id. ¶ 111.
On March 29, 2018, the New York Department of Financial Services released its report (the New York Report) on its examination of Global Liberty, another Atlas subsidiary, concluding that Global Liberty's inadequate reserves were not in regulatory compliance during the timeframe of January 1, 2013 through December 31, 2016. FAC ¶ 112; FAC Exh. B. The New York Report stated, in addition, that Global Liberty's reserves failed to comply with SSAP 55 (), were deficient by $10.885 million, and that Global Liberty had recognized $9.674 million of that deficiency in its 2017 annual statement (leaving a reserve deficiency of $1.2 million). FAC ¶¶ 73, 112; FAC Exh. B. The New York Report recommended Id. ¶ 112.
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