In re Acceptance Ins. Companies Securities

• Decision Date: 29 August 2005
• Docket Number: No. 04-2078.,04-2078.
• Parties: In re: ACCEPTANCE INSURANCE COMPANIES SECURITIES LITIGATION Lawrence I. Batt, P.C. Profit Sharing Plan and Trust, Individually and on Behalf of All Others Similarly Situated, Plaintiff, Jerome S. Richman, Co-Trustee of the Joe Sonken Trust; Diana L. Kinder; Barbara Winer Revocable Trust, on Behalf of Themselves and a Class of All Others Similarly Situated, Plaintiffs—Appellants, v. Acceptance Insurance Companies, Inc.; Kenneth C. Coon; Georgia M. Mace; AICI Capital Trust; John P. Nelson, Defendants—Appellees, William J. Gerber; Jay A. Bielfield; Edward W. Elliot, Jr.; Robert Lebuhn; Michael R. McCarthy; R.L. Richards; David L. Treadwell; Doug T. Valassis; Advest, Inc.; Everen Securities; Deloitte & Touche, LLP, Defendants.
• Court: U.S. Court of Appeals — Eighth Circuit

423 F.3d 899 In re: ACCEPTANCE INSURANCE COMPANIES SECURITIES LITIGATION
Lawrence I. Batt, P.C. Profit Sharing Plan and Trust, Individually and on Behalf of All Others Similarly Situated, Plaintiff,

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Jerome S. Richman, Co-Trustee of the Joe Sonken Trust; Diana L. Kinder; Barbara Winer Revocable Trust, on Behalf of Themselves and a Class of All Others Similarly Situated, Plaintiffs—Appellants,
v.
Acceptance Insurance Companies, Inc.; Kenneth C. Coon; Georgia M. Mace; AICI Capital Trust; John P. Nelson, Defendants—Appellees,
William J. Gerber; Jay A. Bielfield; Edward W. Elliot, Jr.; Robert Lebuhn; Michael R. McCarthy; R.L. Richards; David L. Treadwell; Doug T. Valassis; Advest, Inc.; Everen Securities; Deloitte & Touche, LLP, Defendants. No. 04-2078. United States Court of Appeals, Eighth Circuit. Submitted: February 14, 2005. Filed: August 29, 2005.

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Robert A. Wallner, argued, New York, New York (Shannon L. Hopkins, Marvin L. Frank, and Gregory B. Linkh, on the brief), for appellant.

Leah J. Domitrovic, argued, Chicago, Illinios (David H. Kistenbroker, Matthew J. Cannon, Joni S. Jacobsen, Michael S. Weisman, and Katten Muchin Zavis Rosenman, on the brief), for appellee.

Before MELLOY, HEANEY, and FAGG, Circuit Judges.

MELLOY, Circuit Judge.

This is an appeal of a shareholder liability suit against Acceptance Insurance Companies and some of its officers. The shareholder group appeals the district court's¹ orders granting a motion to dismiss and a motion for summary judgment as to all of their claims.

The Appellants raise three major issues in this appeal. First, they argue that the district court erred by granting the Appellees' motion to dismiss their claims under Sections 11 and 15 of the Securities Act. Second, the Appellants argue that the district court erred by denying their motion to amend their complaint as to Section 11 claims. Third, the Appellants argue that the district court should not have granted the motion for summary judgment on the Exchange Act Section 10(b) and SEC Rule 10b-5 claims. We affirm.

I.

The shareholders of Acceptance Insurance Companies, Inc. ("Acceptance"), a Delaware corporation, directly sued Acceptance, AICI Capital Trust ("AICI"), and the officers of Acceptance: Kenneth Coon, Georgia Mace, and John Nelson. AICI was and is a wholly-owned subsidiary of Acceptance. The primary allegation of the shareholders was that Acceptance failed to have adequate reserves in place prior to

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1999 to account for increased claims stemming from a California Supreme Court decision.

Reserves, as reported by an insurance company, are estimates of its liabilities and expenses that it will pay on claims already reported and claims that may exist, but have not yet been reported. In the area of unreported claims, an insurer must engage in some speculation and, as a result, could over- or under-estimate appropriate reserves. A company is said to have inadequate reserves if it does not allocate sufficient funds to offset a likely loss contingency scenario.

The officers of Acceptance reported the company's reserves quarterly with assistance from external accountants. In this case, Price Waterhouse Coopers ("PWC") reviewed the reserve estimates, and, after discussion with Acceptance, a final figure was reported in each quarter in Acceptance's public filings. Because the reserve figures were estimates of future contingencies, Acceptance and PWC offered a range of figures. From 1996 to 1999, PWC found that Acceptance's reserve figures met the requirements of Nebraska insurance law and were computed using generally accepted accounting principles ("GAAP"). During the relevant time period, Acceptance's and PWC's independent estimates were within five percent of each other, and Acceptance's numbers were both above and below PWC's figures.

In 1995, the California Supreme Court, in Montrose Chem. Corp. of Cal. v. Admiral Ins. Co., 10 Cal.4th 645, 42 Cal.Rptr.2d 324, 913 P.2d 878 (1995), issued an opinion that was significant for construction insurance claims. The decision applied a continuous injury trigger of coverage, broadening liability relative to previous law. Id. at 889-90. After the decision, Acceptance crafted explicit exclusions into its policies to avoid Montrose-related claims. However, for the policies written before 1995, an increase in the number of claims was anticipated due to the decision in Montrose.

In 1997, Nebraska amended its annual statement requirements to require greater detail for loss contingencies that could affect reserves. As a result, Acceptance added cautionary language alluding to the Montrose decision and its effect on reserves. Such language did not exist for the previous public filings made by Acceptance. In 1999, Acceptance made the decision to increase its reserve estimates due to increased claims for incidents prior to 1995 in California related to Montrose. Prior to Acceptance's decision, three other insurance companies had already begun reporting Montrose-specific reserves in their public filings.

In 2001, in another action against Acceptance, Magid v. Acceptance Ins. Co., 2001 WL 1497177, *8 (Del.Ch.2001), the Delaware Court of Chancery stated that the effect of Montrose was significant and the company may have needed to make timely adjustments to its reserves. The issue in Magid was more limited than the present matter, and the Magid court did not render any specific findings that Acceptance was under-reserved during the class period.

The district court granted a defense motion to dismiss one claim and a defense motion for summary judgment as to all others. The shareholders have appealed.

II.

On appeal, the Appellants argue that the district court erred by dismissing the shareholders' suit under Section 11 of the Securities Act of 1933 on the grounds that the complaint contained no factual allegations to support the claims described therein. The Securities Act is primarily designed to ensure that investors receive

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information concerning the issuance of securities. The Act prohibits misrepresentations and fraud in the sale of securities. Since the district court granted dismissal based upon a motion to dismiss under Federal Rules of Civil Procedure 12(b)(6), we review the issue de novo. Romine v. Acxiom Corp., 296 F.3d 701, 704 (8th Cir.2002).

There is liability under Section 11 if "any part of the registration statement, when such part became effective, contained an untrue statement of material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading." 15 U.S.C. § 77k(a). To establish a Section 11 claim, a plaintiff must show that he or she bought the security and that there was a material misstatement or omission. Herman & MacLean v. Huddleston, 459 U.S. 375, 382, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983). There is no scienter requirement for a Section 11 claim. In re NationsMart Corp. Sec. Litig., 130 F.3d 309, 315 (8th Cir.1997). Further, the particularity requirements of Federal Rule of Civil Procedure 9(b) do not...