In re Pxre Group, Ltd., Securities Litigation

• Decision Date: 04 March 2009
• Docket Number: No. 06 Civ. 3410 (RJS).,06 Civ. 3410 (RJS).
• Citation: 600 F.Supp.2d 510
• Parties: In re PXRE GROUP, LTD., SECURITIES LITIGATION.
• Court: U.S. District Court — Southern District of New York

600 F.Supp.2d 510

In re PXRE GROUP, LTD., SECURITIES LITIGATION.

No. 06 Civ. 3410 (RJS).

United States District Court, S.D. New York.

March 4, 2009.

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Jeremy Alan Lieberman and Marc Ian Gross, Pomerantz Haudek Block Grossman & Gross LLP, New York, NY, for Plaintiff Chad S. Condra.

Bruce Domenick Angiolillo, John Cummings Anderson, and Jonathan K. Youngwood, Simpson Thacher & Bartlett LLP, New York, NY, for Defendant PXRE Group Ltd.

David Spencer Karp, Debevoise & Plimpton LLP, New York, NY, and Jonathan Rosser Tuttle, Debevoise & Plimpton LLP, Washington, DC, for Defendant Jeffrey L. Radke.

Justin Matthew Garbaccio and M. William Munno, Seward & Kissel LLP, New York, NY, for Defendant John M. Modin.

Brad Scott Karp and Jonathan Hillel Hurwitz, Paul, Weiss, Rifkind, Wharton & Garrison LLP, New York, NY, for Defendant Guy Hengesbaugh.

OPINION AND ORDER

RICHARD J. SULLIVAN, District Judge:

Lead Plaintiff Chad S. Condra ("Plaintiff") brings this putative class action lawsuit against Defendants PXRE Group, Ltd. ("PXRE" or the "Company"), a Bermuda reinsurance corporation, and three of its officers, Jeffrey L. Radke ("Radke"), John M. Modin ("Modin"), and Guy Hengesbaugh ("Hengesbaugh").¹ Plaintiff alleges that Defendants engaged in a scheme to understate PXRE's losses arising out of the series of hurricanes that devastated the Gulf Coast in 2005. Plaintiff asserts that this scheme caused injury to himself and to all other purchasers of PXRE stock during the period from September 11, 2005 through February 22, 2006 (the "Class Period"), in violation of section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder, and section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a).

Before the Court are Defendants' motions to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure and Plaintiff's motion to amend pursuant to Rule 15(a)(2) of the Federal Rules of Civil Procedure. For the reasons that follow, Defendants' motions are granted and Plaintiff's motion is denied.

I. BACKGROUND

A. Facts

The following facts are taken from the Proposed Second Consolidated Amended Class Action Complaint ("PSAC") submitted by Plaintiff.² The Court also considers any written instrument attached to the PSAC, statements or documents incorporated into the PSAC by reference, legally required public disclosure documents filed with the Securities and Exchange Commission, and documents upon which Plaintiff relied in bringing the suit. See ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir.2007). The Court assumes all alleged facts to be true for the purpose of deciding the motions before it, and construes all alleged facts in the light most favorable to Plaintiff. See Cleveland v. Caplaw Enters., 448 F.3d 518, 521 (2d Cir.2006).

1. The Parties

Plaintiff purchased shares of PXRE stock during the Class Period, and brings this putative federal class action lawsuit on behalf of all purchasers of PXRE common stock during the Class Period. (PSAC ¶¶ 1, 16.) Plaintiff asserts claims against PXRE and the three individual Defendants, all of whom were officers of PXRE during the time period relevant to this action. (Id. ¶¶ 18-20.)

Defendant PXRE was a Bermuda corporation whose stock was publicly traded on the New York Stock Exchange. (Id. ¶¶ 14, 17.) PXRE is a reinsurance company, or an "insurer's insurer," providing insurance coverage both to primary insurers and to other reinsurance companies. (Id. ¶¶ 17, 27.)³ PXRE provides reinsurance coverage to other property insurance companies (known as "cedents") that have sold policies to homeowners and businesses. (Id. ¶ 27.) By so doing, PXRE assumes the contractual obligations set forth in the cedents' underlying policies, and is bound to cover claims arising from losses occurring under those policies. (Id. ¶¶ 27-28.) Since 1987, PXRE has specialized in offering catastrophe and "risk excess" reinsurance related to, among other events, hurricanes. (Id. ¶¶ 17, 27.)

As noted, the three individual Defendants were all officers of PXRE during the relevant time period. Individual Defendant Radke was PXRE's President and Chief Executive Officer. (Id. ¶ 18.) Individual Defendant Modin was PXRE's Executive Vice President and Chief Financial Officer prior to his resignation on January 6, 2006. (Id. ¶ 19.) Individual Defendant Hengesbaugh was PXRE's Chief Operating Officer. (Id. ¶ 20.) Further, all of the individual Defendants were members of PXRE's "Ceded Reinsurance Underwriting Committee," which was allegedly responsible for "[a]ll underwriting decisions." (Id. ¶ 22.)

2. The Alleged Scheme

Beginning in August 2005, a series of hurricanes landed on the Gulf Coast. The first, and most devastating, was Hurricane Katrina, which hit the Gulf Coast on August 29, 2005, causing extensive and unprecedented damage to the city of New Orleans and the surrounding region. (See id. ¶¶ 32-33.) Much of the damage was caused by the fact that Hurricane Katrina resulted in a "storm surge," which overtopped the levees designed to protect New Orleans, culminating in the flooding of water from the Mississippi River into the city of New Orleans. (Id. ¶ 33.) As a result of the broken levees, river water submerged over eighty percent of New Orleans. (Id.) More than 1,800 people lost their lives in the wake of the storm, making Hurricane Katrina the deadliest United States hurricane since 1928. (Id. ¶ 32.)

Soon after, on September 24, 2005, Hurricane Rita arrived, "causing billions of dollars in damages along the Texas-Louisiana border." (Id. ¶ 34.) Finally, on October 23, 2005, Hurricane Wilma struck the Gulf of Mexico, killing at least sixty-three people and causing billions of dollars in damages to affected areas, including the Gulf Coast. (Id.) Through its reinsurance policies, PXRE "had exposure" for all three storms, with Hurricane Katrina providing the "largest exposure." (Id. ¶ 35.)

According to Plaintiff, PXRE, as a reinsurance company, was obligated to estimate losses arising from claims covered by its cedents' policies once any catastrophic event like Hurricane Katrina occurred. (Id. ¶ 29.) These loss estimates had to be prepared "even before actual claims were filed and processed." (Id.) Plaintiff asserts that such loss estimates were "closely watched" by rating agencies such as A.M. Best and Standard & Poor's, which issue ratings based on evaluations of whether a company has sufficient capital relative to potential claims and liabilities to support the sale of new policies. (Id. ¶ 30.) Plaintiff claims that "it was imperative that PXRE maintain a rating of A- or higher from the insurance rating agencies," because if PXRE's rating fell below A-, cedents were contractually bound not to purchase reinsurance policies from PXRE, and were also contractually entitled to cancel their reinsurance policies with PXRE. (Id. ¶ 31.) In other words, "[a]ny downgrades below A- would essentially put [PXRE] out of business." (Id. ¶ 75.)

Plaintiff further alleges that, "[a]t the outset of the Class Period, PXRE was especially vulnerable to a ratings downgrade," due to the exhaustion of PXRE's own retrocessional insurance policies⁴ and due to the fact that PXRE's capital surplus was low relative to the initial estimates of the losses incurred by Hurricane Katrina. (Id. ¶¶ 74, 76.) "If PXRE's reported loss estimates from Katrina were too high relative to its capital surplus, [its] ability to pay claims would be deemed at risk, likely resulting in a ratings downgrade." (Id. ¶ 75.)

Plaintiff posits that because of this pressure to maintain an A- credit rating and to raise capital, "Defendants were motivated to materially understate PXRE's estimate of losses, as well as engage in a string of offerings to raise cash, which they did throughout the Class Period." (Id. ¶ 77.) In essence, Plaintiff alleges that the loss estimate reports created by PXRE in the wake of the three hurricanes that hit the Gulf Coast in 2005 were prepared in a reckless and/or willfully deceptive manner; that, as a result, the loss estimates issued in a series of press releases and public documents were false and misleading; and that Defendants disseminated these false and misleading reports with the intention of deceiving insurance rating agencies and investors as to the true extent of PXRE's losses arising from the three hurricanes.

Below, the Court details the factual allegations from the PSAC involving (1) the preparation of the loss estimate reports, and (2) the allegedly false and misleading statements, issued during the Class Period.

i. The Preparation of the Loss Estimate Reports

Based on information allegedly provided by confidential informant ("CI") #2, PXRE's Vice President in charge of risk modeling,⁵ Plaintiff alleges that PXRE's loss estimate reports were prepared by a team consisting of Radke, Hengesbaugh, Modin, and James Matusiak ("Matusiak"), PXRE's "Chief Actuary." (Id. ¶ 40.) Plaintiff further alleges that the losses were estimated on the basis of (1) "top down" computer modeling, whereby PXRE used software designed by outside risk modelers, as well as its own "proprietary software," to generate an estimate of PXRE's losses in relation to industry-wide losses; and (2) a "ground-up" contract-by-contract analysis of reinsurance contracts held by PXRE, whereby its underwriters would examine PXRE's own contracts in order to determine the extent of PXRE's exposure to losses. (Id. ¶ 41.) According to CI #2, individual Defendants Radke and Hengesbaugh allegedly "had the most influence over the final loss estimate figures and had the final say on the estimates that were disseminated to the public." (Id. ¶ 40.)

a. PXRE's "Top-Down" Modeling

In regard to the "top-down" analysis conducted by PXRE following Hurricane Katrina, Plaintiff asserts that PXRE's estimates "were based in...