September 28, 2015
When the Supreme Court issued its decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015), plaintiff and defense counsel had warring views on what its practical impact would be, particularly at the motion to dismiss stage of securities class actions brought under Section 10(b) of the Securities Exchange Act of 1934. A recent decision from the Southern District of New York, City of Westland Police and Fire Retirement System v. MetLife, Inc., 2015 WL 5311196 (S.D.N.Y Sept. 11, 2015) (Kaplan, J.), shows that Omnicare will serve as a meaningful bar to plaintiffs who seek to base federal securities law claims on statements of opinion, but cannot plead sufficient underlying facts.
The Omnicare Decision
In Omnicare, the Supreme Court resolved a circuit split on the scope of liability under Section 11 of the Securities Act of 1933 for alleged false statements of opinion. The Court addressed two issues: (1) when a statement of opinion constitutes a factual misstatement; and (2) when a statement of opinion may be rendered misleading by the omission of a factual representation. With respect to the first issue, the Court held that statements of opinion are not actionable under Section 11 unless the speaker did not genuinely hold the opinion that was stated or the opinion included a statement regarding a fact that was untrue. With respect to the second issue, the Court held that statements of opinion are misleading and actionable under Section 11 if material facts about the basis for the speaker’s opinion are omitted and those facts conflict with what a reasonable investor would take from the statement of opinion.
City of Westland: Factual Background
In City of Westland, the plaintiffs challenged statements of opinion relating to the loss reserves that MetLife reported that it held against incurred but not reported ("IBNR") death benefit claims. GAAP requires insurance companies to maintain loss reserves based on "estimates of what they will have to pay to cover insured losses incurred during a given period," including "a reasonable estimate of IBNR liabilities," but does not provide "a precise actuarial method" for determining the proper amount of reserves. 2015 WL 5311196, at *2.
In 2007, MetLife allegedly compared the Social Security Administration Death Master File ("SSA-DMF"), a database of deaths recorded in the U.S., against its roster of individual life insureds to identify those individual insureds who had died, but for whom death benefit claims had not been submitted. Id. at *3. Although this cross-check in 2007 allegedly uncovered $80 million in unclaimed individual life insurance benefits that were due to the beneficiaries of deceased life insureds, plaintiffs allege that at the time MetLife had not cross-checked the SSA-DMF against its roster of group life insureds and that the cross-check would have exposed its IBNR reserves as inadequate. Id. at *3. On October 6, 2011, MetLife disclosed that it would take a $115-$135 million charge to increase its reserves to account for additional payments owed to beneficiaries identified as part of a cross-check it had not performed of SSA-DMF against its roster of group life insureds. Id. at *6.
Plaintiffs brought suit, but did not identify any statement by MetLife concerning the amount if its IBNR reserves, much less claim that any such statement was false. Id. at *9. Instead, plaintiffs alleged that MetLife’s financial statements were false and misleading because the amount of its allegedly inadequate reserves, whatever it was, was necessarily reflected in the financial statements. Id. In addition, plaintiffs alleged that MetLife made qualitative statements that were misleading in light of the alleged inadequacy of the IBNR reserves. Id. Plaintiffs asserted both a fraud claim under Section 10(b) of the Securities Exchange Act of 1934 and a non-fraud claim under Section 11 of the Securities Act of 1933.
City of Westland: The District Court’s Application of Omnicare
Because IBNR reserves are estimates that "necessarily require judgment," the district court in City of Westland explained that representations regarding the adequacy of the IBNR reserves were statements of opinion and that it had deliberately awaited the Supreme Court’s decision in Omnicare before ruling on MetLife’s motion to dismiss. Id. at *7, *10. Although Omnicare only addressed liability for statements of opinion under Section 11, the district court applied Omnicare‘s principles equally to its assessment of whether plaintiffs had pled an actionable misstatement or omission for their Section 10(b) claim. Id. at *10-12.
Applying the Omnicare framework, Judge Kaplan turned first to the question of whether MetLife genuinely believed that its IBNR reserves were adequate. Plaintiffs argued that the court could infer that MetLife was aware that its reserves were inadequate based on "the existence of $80 million in outstanding death benefits on individual life insurance policies in 2007 and the fact that MetLife’s IBNR reserves later proved inadequate to cover the unpaid benefits discovered as a result of the Company’s 2011 cross-check of the SSA-DMF against its group life insureds." Id. at *15. Judge Kaplan determined that Omnicare required plaintiffs to plead far more:
To allege adequately that MetLife’s representations regarding the sufficiency of its IBNR reserves were misstatements of material fact, Central States had to plead facts that, if true, would be enough to show, assuming materiality, that MetLife did not believe those representations. It could have alleged, for example, facts concerning the size of MetLife’s IBNR reserves; the size of those reserves relative to MetLife’s existing liabilities; the relative sizes of MetLife’s group and individual life insurance pools and how the $80 million in unpaid individual life insurance benefits revealed as a result of the 2007 SSA–DMF cross-check might have affected what estimated reserves should have been preceding the 2011 SSA–DMF cross-check; MetLife’s methodology for calculating its reserves; whether MetLife’s methodology accounted for unreported deaths; or the impact of various states’ policies for collecting unclaimed benefits. . . .
Judge Kaplan then turned to the question of whether MetLife’s representations about the adequacy of its IBNR reserves were rendered misleading by an omission of fact. The district court determined that plaintiffs had not come close to meeting their pleading burden:
Central States has provided no indication that the stated basis for MetLife’s IBNR reserve estimates—namely, "actuarial analyses of historical patterns of claims and claims development"—ran afoul of the customs and practices of the life insurance industry. Indeed, it has not alleged any facts suggesting that there is a particular custom or practice in the life insurance industry for fixing IBNR reserves. Nor does the SAC allege adequately that either (1) it was a custom or practice among life insurers to estimate IBNR reserves by conducting a cross-check of the SSA–DMF against all life insureds, or (2) the "foundation" upon which MetLife did rest its IBNR reserve estimates did not comport with what a reasonable person reading the Company’s financial statements fairly and in context would have expected. And it alleges no facts tending to show that MetLife’s IBNR reserves did not fairly align with information it possessed at the time.
Id. at *16.
Based on this analysis, Judge Kaplan not only dismissed plaintiffs’ claims relating to representations about the adequacy of MetLife’s IBNR reserves, but also dismissed plaintiffs’ claims relating to statements expressing MetLife’s belief that a regulatory investigation into its retained asset accounts was "without merit." Id. at *19-20. As a result, all of plaintiffs’ claims relating to statements of opinion have been dismissed from the case.
As City of Westland vividly illustrates, Omnicare will be an important precedent for cases premised on opinion statement liability. Indeed, the district court in City of Westland observed that Omnicare had made it "substantially more difficult for a securities plaintiff to allege adequately (or, ultimately, to prove) that . . . a statement [of opinion] is false than it is to allege adequately (or prove) that a statement of pure fact is false."
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