Staehr v. Hartford Financial Services Group, Inc.
| Decision Date | 13 July 2006 |
| Docket Number | No. 3:04CV1740 (CFD).,3:04CV1740 (CFD). |
| Citation | 460 F.Supp.2d 329 |
| Parties | Steve STAEHR, Individually and On Behalf of All Others Similarly Situated, Plaintiffs, v. The HARTFORD FINANCIAL SERVICES GROUP, INC., et al., Defendants. |
| Court | U.S. District Court — District of Connecticut |
David Randell Scott, Erin Green Comite, Scott & Scott, Colchester, CT, Debra Wyman, Tor Gronborg, Udoka Nwanna, Lerach Coughlin Stoia Geller Rudman & Robbins, San Diego, CA, James E. Miller, Patrick A. Klingman, Sheperd Finkelman Miller & Shah, Chester, CT, Elias A. Alexiades, New Haven, CT, Shane Rowley, Faruqi & Faruqi, Llp, New York City, for Plaintiffs.
Jack C. Auspitz, Jamie A. Levitt, John W.R. Murray, Morrison & Foerster, New York City, Timothy Andrew Diemand, Wiggin & Dana-Htfd., Hartford, CT, Timothy Diemand, Wiggin and Dana, New Haven, CT, for Defendants.
RULING GRANTING MOTION TO DISMISS
The lead plaintiffs, Communications Workers of America Plan for Employees' Pensions and Death Benefits and Alaska Laborers Employers Retirement Fund, brought this putative class action against The Hartford Financial Services Group, Inc. ("The Hartford"), and four senior officers of The Hartford: Ramani Ayer, David M. Johnson, Thomas M. Marra and David K. Zwiener. The lead plaintiffs allege that they and other class members purchased the publicly-traded securities of The Hartford between August 6, 2003 and October 13, 2004. The consolidated amended complaint ("complaint") alleges that the defendants failed to disclose The Hartford's participation in "insurer-broker contingent commission and bid-rigging schemes" thereby misleading investors and the market about the basis for The Hartford's' business performance. The action is brought pursuant to §§ 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5. The defendants now move to dismiss this action on various grounds.1 For the reasons that follow, the motion is GRANTED.
For the purposes of deciding this motion, the court assumes that the following allegations contained in the complaint are true.
The Hartford is one of the largest insurers in the property-casualty and life insurance industries. Through its subsidiaries, The Hartford sells investment products and insurance to both individuals and businesses. The individual defendants are all senior officers of The Hartford.
Commercial brokers operate between insurance companies such as The Hartford and their policy holders. The brokers are hired by clients to assist in the purchase of insurance products, including soliciting price quotes and recommending particular insurers.
Some years ago, the insurance brokerage industry underwent a period of intense consolidation so that by 2003, more than 70% of the market was controlled by two brokers: Marsh, Inc. ("Marsh") and Aon Corporation ("Aon"). The plaintiffs allege that The Hartford entered into contingent commission kickback arrangements with Marsh," Aon and Willis Group, the third largest broker, to control market share and artificially inflate insurance prices. The Hartford would pay the brokers undisclosed fees based on the volume of the premiums generated by the brokers, the growth of business and renewal of business, and the profitability of the book of business purchased by the brokers' clients.
The contingent commission kickback arrangements were memorialized in "placement service agreements" or "market service agreements" between The Hartford and the brokers. It is also alleged that these agreements were negotiated and executed at the senior corporate level and bound The Hartford to make undisclosed payments that could exceed $150 million per year. The agreements altered the market for insurance by motivating brokers to serve the interests of select insurers rather than clients and by eliminating natural market price controls.
The Hartford, as well as other insurers, also allegedly colluded with brokers to manipulate the bidding process, thereby eliminating competition and artificially inflating the price.
The complaint states that the defendants failed to disclose The Hartford's participation in the contingent commission and bid-rigging schemes, thereby misleading investors and the market about the basis for its business performance. Additionally, the defendants violated generally accepted accounting principles ("GAAP") by failing to properly report, disclose and account for the contingent commissions in the financial statements filed with the SEC for the second, third and fourth quarters of 2003 and the first and second quarter of 2004.
Between November of 2003 and September of 2004, the individual defendants sold in excess of $37 million worth of their personal holdings in The Hartford.
In summary, Count 1 of the complaint alleges that The Hartford and the individual defendants violated Section 10(b) of the 1934 Act and Rule 10b-5 promulgated thereunder by engaging in undisclosed contingent commission and bid-rigging schemes with insurance brokers for the purposes of maintaining artificially high market prices for The Hartford's publicly traded securities. Count 2 alleges that the individual defendants also violated Section 20(a) of the 1934 Act because they acted as "controlling persons" of The Hartford within the meaning of the Act.
When considering a Rule 12(b) motion to dismiss, the court accepts as true all factual allegations in the complaint and draws inferences from these allegations in the light most favorable to the plaintiff. See Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974); Flores v. Southern Peru Copper Corp., 343 F.3d 140, 143 (2d Cir.2003). In its review of a motion to dismiss, the court may consider "only the facts alleged in the pleadings, documents attached as exhibits or incorporated by reference in the pleadings and matters of which judicial notice may be taken." Samuels v. Air Transport Local 504, 992 F.2d 12, 15 (2d Cir.1993). Dismissal is inappropriate unless it appears beyond doubt that plaintiff can prove no set of facts in support of his claim which would entitle him to relief. See Davis v. Monroe County Bd. of Educ., 526 U.S. 629, 654, 119 S.Ct. 1661, 143 L.Ed.2d 839 (1999); Sweet v. Sheahan, 235 F.3d 80, 83 (2d Cir.2000). "`The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.'" York v. Ass'n of the Bar, 286 F.3d 122, 125 (2d Cir.) (quoting Scheuer, 416 U.S. at 236, 94 S.Ct. 1683), cert. denied, 537 U.S. 1089, 123 S.Ct. 702, 154 L.Ed.2d 633 (2002). In other words, "`the office of a motion to dismiss is merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof.'" Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of New York, 375 F.3d 168, 176 (2d Cir.2004) (quoting Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir.1980)). However, "conclusory allegations or legal conclusions masquerading as factual conclusions will not suffice to prevent a motion to dismiss" from being granted. Smith v. Local 819 I.B.T. Pension Plan, 291 F.3d 236, 240 (2d Cir.2002) (internal quotation marks and citation omitted).
The defendants move to dismiss the complaint on five grounds: (1) the plaintiffs' claims are barred by the statute of limitations; (2) the plaintiffs cannot establish that the alleged omissions were material because the information was publicly known and available prior to the class period; (3) the plaintiffs cannot establish that any loss was caused by the defendants; (4) the complaint fails to allege scienter; and (5) the plaintiffs cannot establish control person liability against any of the defendants.
1. Statute of Limitations
The defendants contend that The Hartford's payments of contingent commissions to insurance agents have been published in the news media and disclosed in state and federal filings, as well as in four lawsuits. Accompanying their motion to dismiss, the defendants have attached 33 exhibits that purport to illustrate the news coverage and disclosure, and ask that the court take judicial notice of the material. They argue that this publicity and disclosure put the plaintiffs on inquiry notice by no later than July 2001. As the statute of limitations for the plaintiffs' claims is two years, and this action was not commenced until October 2004, the defendants conclude that the claims are time-barred.
The plaintiffs argue by way of a separate motion to strike, that the court, in deciding a motion to dismiss, must limit itself to facts stated in the complaint, documents attached to the complaint and documents incorporated by reference in the complaint. As the exhibits presented by the defendants are not referred to by the complaint in any way, the court should not consider them. The plaintiffs further respond that if the court should decide to consider the exhibits, it must convert the motion to dismiss into a motion for summary judgment to give them the opportunity to do discovery on the issue. Finally, the plaintiffs argue that even if the court should decide to consider the exhibits on the motion to dismiss, they are insufficient for the court to find that the plaintiffs were put on inquiry notice.
The Second Circuit has stated that "whether a plaintiff had sufficient facts to place it on inquiry notice is often inappropriate for resolution on a motion to dismiss under Rule 12(b)(6)." LC Capital Partners, L.P. v. Frontier Ins. Group, 318 F.3d 148, 156 (2d Cir.2003)(internal quotation marks and citation omitted). Nevertheless, "[w]here ... the facts needed for determination of when a reasonable investor of ordinary intelligence would have been aware of the existence of fraud can be gleaned from the...
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