In re Scottish re Group Securities Litigation, No. 06 Civ. 5853(SAS).

CourtUnited States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
Writing for the CourtShira A. Scheindlin
Citation524 F.Supp.2d 370
PartiesIn re SCOTTISH RE GROUP SECURITIES LITIGATION.
Docket NumberNo. 06 Civ. 5853(SAS).
Decision Date02 November 2007

Page 370

524 F.Supp.2d 370
In re SCOTTISH RE GROUP SECURITIES LITIGATION.
No. 06 Civ. 5853(SAS).
United States District Court, S.D. New York.
November 2, 2007.

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Max W. Berger, Esq., Salvatore J. Graziano, Esq., John C. Browne, Esq., Eric T. Kanefsky, Esq., Bernstein Litowitz Berger & Grossmann LLP, New York, NY, John R. Climaco, Esq., David M. Cuppage, Esq., Scott D. Simpkins, Esq., Climaco, Lefkowitz, Peca, Wilcox & Garofoli Co., Cleveland, OH, for Lead Plaintiff and the Class.

Marvin L. Frank, Esq., Murray, Frank & Sailer, LLP, New York, NY, David Kahn, Esq., Mark E. King, Esq., David B. Kahn & Associates, Ltd., Northfield, IL, for Plaintiff Richard Baehr Trust.

Evan M. Rosen, Esq., Lyle Roberts, Esq., George Anhang, Esq., LeBoeuf, Lamb, Greene & MacRae LLP, Washington, D.C., for Defendants Scottish Re Group Limited, Elizabeth Murphy, Dean E. Miller, Michael C. French, Michael Austin, William Caulfeild-Browne, Robert Chmely, Lord Norman Lamont, Hazel O'Leary and Glenn Schafer.

Dennis E. Glazer, Esq., Elliot Moskowitz, Esq., Davis Polk & Wardwell, New York, NY, for Defendant Scott Willkomm.

William R. Maguire, Esq., Marc A. Weinstein, Esq., Sarah L. Cave, Esq., Hughes Hubbard & Reed LLP, New York, NY, for Defendant Ernst & Young LLP.

James E. Brandt, Esq., Jeff G. Hammel, Esq., Latham & Watkins LLP, New York, NY, for Defendants Lehman Brothers Inc., Bear Stearns & Co. Inc., Banc of America Securities LLC, Keefe Bruyette & Woods, Inc., Oppenheimer & Co. Inc., Advest, RBC Dain Rauscher Inc., Stifel, Nicolaus & Company, Incorporated, Goldman, Sachs & Co., Wachovia Capital Markets, LLC, A.G. Edwards & Sons, Inc., Fox-Pitt, Kelton Incorporated, Lehman

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Brothers OTC Derivatives, and Bear Stearns International Limited.

OPINION AND ORDER

SHIRA A. SCHEINDLIN, District Judge.


This putative class action is brought on behalf of a class of shareholders of Scottish Re Group Ltd. ("Scottish Re" or the "Company") against (1) Scottish Re and certain of Scottish Re's officers and directors, (2) Ernst & Young LLP ("E & Y"), the Company's outside auditor, and (3) underwriters and forward purchasers involved in two of the Company's offerings. The Consolidated Class Action Complaint (the "Complaint") alleges that defendants violated federal securities laws in connection with Scottish Re's accounting for deferred tax assets in its financial statements and its certifications of the adequacy of the Company's internal controls.1 All defendants now move to dismiss the Complaint. For the reasons discussed below, defendants' motions are granted in part and denied in part.

I. BACKGROUND

A. Facts2

During the period from February 17, 2005 through July 31, 2006 (the "Class Period"), Scottish Re was a holding company engaged in the international reinsurance business and incorporated in the Cayman Islands, with its principal offices located in Bermuda.3 Scottish Re was cofounded in 1994 by Sam Wyly, Charles J. Wyly, Jr. and Michael C. French.4 The Company has been trading on the New York Stock Exchange (both under its prior name, Scottish Annuity & Life Holdings, Ltd., and its current name) since its initial public offering on November 30, 1998 (the "IPO").5

The "Officer Defendants" are Scott Willkomm, Elizabeth Murphy, Dean E. Miller, and French. Willkomm served as Chief Executive Officer ("CEO") of Scottish Re from January 1, 2005 until his resignation on July 31, 2006.6 Murphy served as Chief Financial Officer ("CFO") of Scottish Re from April 2002 until August 10, 2005 and Executive Vice President of Finance from August 11, 2005 until her resignation on March 31, 2006.7 Miller served as Executive Vice President and CFO from August 10, 2005 through the end of the Class Period.8 French served as Chairman of the Board of Directors of Scottish Re, from March 2000 to May 3, 2006, and as a director from the time the Company was founded through the end of the Class Period.9 He also served as CEO of the. Company from May 1998 to December 31, 2004.10 Scottish Re and the Officer Defendants are referred to collectively as the "Scottish Re Defendants."

The "Director Defendants" are Michael Austin, William Caulfeild-Browne, Robert

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Chmely, Lord Norman Lamont, Hazel O'Leary, and Glenn Schafer.11 Each of the Director Defendants was a director of Scottish Re during the Class Period and signed the registration statements pursuant to which Scottish Re Preferred Shares and Ordinary Shares were offered and sold to the public during the Class Period.12

1. The ING Acquisition and the Ballantyne Re Securitization Transaction

As a life reinsurance company operating within the United States, insurance regulations require Scottish Re to maintain certain minimum levels of reserves.13 As of January 1, 2000, those reserves requirements were increased (known as "Regulation XXX" and "Regulation AXXX" reserves).14 On December 31, 2004, Scottish Re acquired the in-force life reinsurance business of ING (the "ING Acquisition").15 As a result of the ING Acquisition, by the start of the Class Period, Scottish Re purported to be the third largest life reinsurer in the United States.16 The ING Acquisition also greatly increased Scottish Re's Regulation XXX and Regulation AXXX reserve requirements.17

In order to meet the reserve requirements, the Company entered into an agreement with ING pursuant to which ING would maintain, for a fee, collateral for the XXX and AXXX reserves (the "ING Collateral Agreement").18 The ING Collateral Agreement was merely a temporary solution for funding the ING-related reserves until Scottish Re could make satisfactory alternative collateral arrangements.19 Scottish Re's plan was to fund the XXX and AXXX reserves through the use of securitizations.20 Securitization involves the transfer of assets with reasonably predictable cash flows to a separate special purpose entity, which then sells debt securities backed by the cash flows from those assets on the capital markets.21 Once an asset is securitized, it is no longer capable of generating net income on that company's books because the cash flows from that asset are committed to the debt holders of the separate entity.22

On February 17, 2005, the first day of the Class Period, Willkomm stated during the Company's investor conference call for the first quarter of 2005 that Scottish Re planned to securitize the ING-related reserves in the near future.23 That intention was reiterated during conference calls for the second and third quarters of 2005.24

In order to securitize the ING-related reserves, Scottish Re completed several separate financings. In December 2005, Scottish Re completed a $450 million XXX securitization through an orphaned special purpose entity, Orkney Re II, plc, incorporated

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in Ireland.25 In May 2006, Scottish Re completed a $2.1 billion securitization of all ING Acquisition assets that had Regulation XXX and AXXX reserve requirements through a special purpose entity called Ballantyne Re plc, also incorporated in Ireland (the "Ballantyne Re transaction").26 As a result, those assets were no longer capable of generating net income for Scottish Re.

2. Scottish Re's Financial Statements

The Financial Accounting Standards Board ("FASB") is a non-profit entity responsible for developing generally accepted accounting principles ("GAAP").27 FASB Statements of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") governs the maintenance of deferred taxes on a company's balance sheet.28 Deferred tax assets arise when a company will be able to benefit in future years by offsetting past tax losses against future taxable income.29 In accordance with SFAS 109, however, deferred tax assets may be maintained on a company's balance sheet only when it is expected that they will be realized, i.e., that these losses will be used to reduce taxes payable in future years.30 The SFAS 109 Summary states that "`[a] valuation allowance [i.e., a reduction in the booked value of the deferred tax asset] is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized.'"31 Cumulative losses in recent years or "`unsettled circumstances' that if not resolved would adversely affect operations or profits in the future make it "`difficult'" to conclude that a tax valuation allowance or charge is not needed.32

In the Form 10-K for the year ended December 31, 2004, Scottish Re reported: "[W]e believe that it is more likely than not that all gross deferred tax assets will reduce taxes payable in future years except for a valuation allowance of $22.1 million established in 2004."33 In the Company's Form 10-K for the year ended December 21, 2005, it reported: "[W]e believe that it is more likely than not that all gross deferred tax assets will reduce taxes payable in future years except for a valuation

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allowance of $18.5 million."34 The Company reported that the valuation allowances resulted from the deferred acquisition costs of the ING Acquisition.35

During the Class Period, Scottish Re stated repeatedly that it maintained its deferred tax assets based on management's estimates of the future profitability of its taxable entities, which in turn were based on current forecasts and forecasts for the period for which losses may be carried forward.36 However, in August 2006, the Company stated that because there was no history of taxable income, it must rely heavily on tax planning strategies for support of the gross deferred tax assets.37

Scottish Re never disclosed to investors the potential impact of the Company's securitization plans on the deferred tax assets.38 These securitization plans had materialized in December 2005 and May 2006 and had resulted in the transfer of incomeproducing assets from Scottish...

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156 practice notes
  • Sang v. Ming Hai & Law Offices of Ming Hai, P.C., No. 12 Civ. 7103(JPO).
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • June 27, 2013
    ...but “may [also] consider,” inter alia, “any written instrument attached [951 F.Supp.2d 517]to the complaint....” In re Scottish, 524 F.Supp.2d 370, 382 (S.D.N.Y.2007) (internal quotation marks omitted). While Federal Rule of Civil Procedure 8(a) requires only a “short and plain statement of......
  • In Re Bear Stearns Companies Inc. Securities, 08 MDL 1963
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • January 19, 2011
    ...no reasonable accountant would have made the same decisions if confronted with the same facts." In re Scottish Re Group Sec. Litig., 524 F. Supp. 2d 370, 386 (S.D.N.Y. 2007) (citation omitted) (alteration in original). See also Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir. 2000); In re Oxford......
  • Deangelis v. Corzine (In re MF Global Holdings Ltd.), No. 11 Civ. 7866(VM).
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • November 12, 2013
    ...the class period it was more likely than not that the Company would not be able to realize” DTA); In re Scottish Re Grp. Sec. Litig., 524 F.Supp.2d 370, 389–90 (S.D.N.Y.2007) (same). Despite this, MF Global did not acknowledge its loss position as negative evidence until its 2011 Form 10–K.......
  • Levy v. Maggiore, No. 13–CV–2219 MKB.
    • United States
    • United States District Courts. 2nd Circuit. United States District Court (Eastern District of New York)
    • September 29, 2014
    ...position would possess the information alleged”), aff'd, 371 Fed.Appx. 212 (2d Cir.2010) ; In re Scottish Re Grp. Sec. Litig., 524 F.Supp.2d 370, 392–93 (S.D.N.Y.2007) (finding that plaintiff's submission of statements from confidential witnesses, “all of whom claim knowledge of a systemic ......
  • Request a trial to view additional results
156 cases
  • Sang v. Ming Hai & Law Offices of Ming Hai, P.C., No. 12 Civ. 7103(JPO).
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • June 27, 2013
    ...but “may [also] consider,” inter alia, “any written instrument attached [951 F.Supp.2d 517]to the complaint....” In re Scottish, 524 F.Supp.2d 370, 382 (S.D.N.Y.2007) (internal quotation marks omitted). While Federal Rule of Civil Procedure 8(a) requires only a “short and plain statement of......
  • In Re Bear Stearns Companies Inc. Securities, 08 MDL 1963
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • January 19, 2011
    ...no reasonable accountant would have made the same decisions if confronted with the same facts." In re Scottish Re Group Sec. Litig., 524 F. Supp. 2d 370, 386 (S.D.N.Y. 2007) (citation omitted) (alteration in original). See also Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir. 2000); In re Oxford......
  • Deangelis v. Corzine (In re MF Global Holdings Ltd.), No. 11 Civ. 7866(VM).
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • November 12, 2013
    ...the class period it was more likely than not that the Company would not be able to realize” DTA); In re Scottish Re Grp. Sec. Litig., 524 F.Supp.2d 370, 389–90 (S.D.N.Y.2007) (same). Despite this, MF Global did not acknowledge its loss position as negative evidence until its 2011 Form 10–K.......
  • Levy v. Maggiore, No. 13–CV–2219 MKB.
    • United States
    • United States District Courts. 2nd Circuit. United States District Court (Eastern District of New York)
    • September 29, 2014
    ...position would possess the information alleged”), aff'd, 371 Fed.Appx. 212 (2d Cir.2010) ; In re Scottish Re Grp. Sec. Litig., 524 F.Supp.2d 370, 392–93 (S.D.N.Y.2007) (finding that plaintiff's submission of statements from confidential witnesses, “all of whom claim knowledge of a systemic ......
  • Request a trial to view additional results

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