Matlick v. Amtrust Fin. Servs., Inc.
| Citation | 126 N.Y.S.3d 311 (Table),67 Misc.3d 1202 (A) |
| Decision Date | 16 March 2020 |
| Docket Number | INDEX NO.: 651349/2019 |
| Parties | Lonny MATLICK, Linda Karp Ira, Chelsea Shoe Pension Plan, Bart Nydish Ttee, John Kuckku, Joanne Spiers, Robert Freed, Plaintiff, v. AMTRUST FINANCIAL SERVICES, INC., Defendant. |
| Court | United States State Supreme Court (New York) |
The following e-filed documents, listed by NYSCEF document number (Motion 003) 134, 135, 136, 137, 138, 139, 140, 141, 142, 143, 144, 145, 146, 147, 148, 149, 150, 151, 152, 153, 154, 155, 156, 157, 158, 159, 160, 161, 162, 163, 164, 165, 166, 167, 168, 169, 170, 171, 172, 173, 174, 175, 176, 177, 178, 181, 182, 183, 186 were read on this motion to/for DISMISS
The critical question raised by this lawsuit is whether an issuer can be held liable under the Securities and Exchange Act of 1933 (the 1933 Act ) for the failure to disclose the risk that certain securities could be delisted when the issuer never guaranteed the listing of such securities in the first instance. Because the court answers that question in the negative, and for the reasons set forth below, AmTrust Financial Services, Inc.'s (AmTrust ) motion to dismiss the second amended complaint (the Complaint ) is granted, and the Complaint is dismissed in its entirety.
This action stems from AmTrust's January 18, 2019 announcement that it would delist and deregister certain securities (the Securities ) issued by it between 2013 and 2016 effective February 7, 2019 (Compl., ¶¶ 6, 86). The Securities included six series of preferred stock known as the Series A, B, C, D, E, and F shares (the Preferred Stock ), which apart from the Series A shares, principally consisted of depositary shares representing receipts for fractional interests in preferred stock (the ADRs ), as well as interest-bearing subordinated notes (the Subordinated Notes ). Holders of the Subordinated Notes receive quarterly interest payments (NYSCEF Doc. Nos. 160, 163).
AmTrust described the Securities in a series of prospectuses and prospectus supplements. The prospectuses gave investors "a general description of the securities [AmTrust] may offer" (NYSCEF Doc. No. 138, p. 1). With respect to preferred stock, the prospectuses told investors that the governing terms would be found in a "Certificate of Amendment" and the description contained in the prospectuses was "not complete and is subject to any Certificate of Amendment fixing the preferences, limitations and relative rights of a particular series of preferred stock" (id. , p. 15). Similarly, with respect to the ADRs, the prospectuses advised that "it will be the deposit agreement entered into with respect to a particular offering of securities, and not [the] summary [contained in the prospectus], that will define a holder's rights as a holder of depository shares" (NYSCEF Doc. No. 144, p. 20). Finally, for debt securities, AmTrust's prospectuses instructed investors that the descriptions contained therein were "not complete" and advised investors to "review the form of the Indenture and the form of the applicable debt securities" (id. , p. 6).
The Complaint alleges that the Securities were offered and sold to the public pursuant to certain Underwriting Agreements (as hereinafter defined) and were registered with the Securities and Exchange Commission (SEC ) (Compl., ¶¶ 60-63). Each offering of Securities was registered and solicited through registration statements, prospectuses, supplemental prospectuses and other documents specifically incorporated by reference therein (the Offering Documents ) (id. , ¶¶ 24-53). The Complaint alleges that the Offering Documents made a number of representations as to the terms of the Securities, including that (i) the Securities were listed with the SEC, and that (ii) AmTrust would "list" the Securities on the New York Stock Exchange (NYSE ) and maintain those listings (id. , ¶¶ 3, 45, 66-78). The Plaintiffs contend that these representations were material to investors because the listing would (i) ensure AmTrust's SEC reporting requirements and corporate governance standards, and (ii) ensure that the Securities would be sellable on a recognized market, particularly as the Preferred Shares had no maturity date and the Notes would not mature until 2055 (id. , ¶¶ 3, 32).
The Plaintiffs allege that they were left "devastated" when AmTrust announced that it would delist the Securities as of February, 2019 because, following this announcement, the price of Securities fell by approximately 35%, and, upon the delisting, liquid trading markets were no longer available for them to sell the Securities (id. , ¶ 88).
The Plaintiffs now bring this action asserting claims for violations of Sections 11 and 12(a)(2) of the 1933 Act, based upon AmTrust's alleged material misstatements and omissions from the Offering Documents, claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and claims for promissory and equitable estoppel.
AmTrust entered into a number of underwriting agreements (the Underwriting Agreements ) with investment banks that would be the initial purchasers of the Securities (Compl., ¶¶ 60-63; NYSCEF Doc. Nos. 141, 146, 150, 154, 162, 165, 170). The Underwriting Agreements each contained a section titled "Covenants of the Company," in which AmTrust "covenants with each Underwriter" to a number of terms (e.g., NYSCEF Doc. No. 141, § 6 [emphasis added] ). Among the covenants, AmTrust undertook "[t]o use its commercially reasonable efforts to list the Securities on the NYSE within 30 days of the Closing Date and to maintain the listing of the Securities on the NYSE" (id. , § 6 [j] ). Nothing in the Underwriting Agreements obligated the Underwriter to sell the securities at all or to anyone (i.e., they could be held for the Underwriters' own account) or otherwise indicated that the Underwriting Agreements were made or entered into for the benefit of any third party.
In early 2018, AmTrust announced that it was considering an offer by its founding shareholders and an investor to take the company private, and in March of 2018, AmTrust entered into a merger agreement (Compl., ¶¶ 79-80). As part of the merger agreement, AmTrust agreed that "each share of Preferred Stock shall remain outstanding in accordance with its terms" (id. , ¶ 82). AmTrust then issued a proxy statement in which it assured investors that the Preferred Stock would continue to be listed on the NYSE and recommended that AmTrust's common stockholders vote for the transaction (id. ¶ 81). In a section titled "Questions and Answers About the Special Meeting and the Merger," AmTrust states that shares of common stock would cease to exist post-merger, but that "each outstanding share of preferred stock of the Company will remain outstanding and will continue to be listed on the [NYSE] following the merger" (NYSCEF Doc. No. 173 at 18). The proxy statement advised that the "Question and Answers" section contained "forward-looking statements" and that AmTrust "cannot assure you that the actual results or developments we anticipate will be realized (id. at 82).
As noted above, on January 18, 2019, AmTrust's Board of Directors approved the delisting and announced that it intended to file a Form 25, i.e., the application that an issuer files "to notify the [SEC] of its withdrawal of such securities from listing on [a] national securities exchange and its intention to withdraw the securities from registration" ( 17 CFR § 240.12d2-2 [c][1]; NYSCEF Doc. No. 174). The press release announcing the delisting stated as follows:
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