20-1643-cv
New England Carpenters Guaranteed Annuity and Pension Funds v. AmTrust Financial Services, Inc.
United States Court of Appeals
For the Second Circuit
August Term, 2020
(Argued: June 4, 2021 Decided: August 23, 2023)
Docket No. 20-1643-cv
_____________________________________
NEW ENGLAND CARPENTERS GUARANTEED ANNUITY AND
PENSION FUNDS,
Lead Plaintiff-Appellant,
STANLEY NEWMARK, IRVING LICHTMAN REVOCABLE LIVING TRUST,
JUPITER CAPITAL MANAGEMENT,
Plaintiff-Movant-Appellants,
SHARON ALBANO, Individually and On Behalf of All Others Similarly
Situated,
Consolidated-Plaintiff-Movant-Appellant,
JOHN SACHETTI, Individually and On Behalf of All Others Similarly
Situated,
Consolidated-Plaintiff,
JOEL RUBEL, Individually and On Behalf of All Others Similarly Situated,
Plaintiff,
v.
DONALD T. DECARLO, SUSAN C. FISCH, ABRAHAM GULKOWITZ,
GEORGE KARFUNKEL, JAY J. MILLER,
Consolidated-Defendants-Appellees,
AMTRUST FINANCIAL SERVICES, INC., BARRY D. ZYSKIND, RONALD E.
PIPOLY, JR., BDO USA, LLP, RBC CAPITAL MARKETS, LLC, UBS
SECURITIES LLC, CITIGROUP GLOBAL MARKETS INC., KEEFE,
BRUYETTE & WOODS, INC., MORGAN STANLEY & CO. LLC,
Defendants-Appellees.
_____________________________________
Before:
LOHIER, NARDINI, Circuit Judges, and KOVNER, Judge. *
The Appellants, investors in the securities of AmTrust Financial Services, Inc.,
appeal from a judgment of the United States District Court for the Southern
District of New York (Kaplan, J.) dismissing their complaint for failure to
state a claim under Sections 11, 12, and 15 of the Securities Act of 1933 and
Section 10(b) of the Securities Exchange Act of 1934 against AmTrust, various
AmTrust corporate officers and board members, AmTrust’s outside auditor,
and multiple underwriters of AmTrust’s sale of securities. The District Court
determined that certain public misstatements relating to AmTrust’s
recognition of revenue generated by its extended warranty contracts and the
expenses associated with its payment of discretionary employee bonuses
were non-actionable statements of opinion. We conclude that these
misstatements of opinions were actionable under the circumstances alleged in
the Appellants’ complaint. We identify no error in the District Court’s
dismissal of the Appellants’ remaining claims. We therefore AFFIRM in
*Judge Rachel P. Kovner, of the United States District Court for the Eastern District
of New York, sitting by designation.
2
substantial part, VACATE in part, and REMAND the case for further
proceedings.
ANDREW S. LOVE (Susan K. Alexander, Robbins
Geller Rudman & Dowd LLP, San Francisco, CA;
Samuel H. Rudman, David A. Rosenfeld, Mark T.
Millkey, William J. Geddish, Avital O. Malina,
Robert D. Gerson, Vincent M. Serra, Robbins Geller
Rudman & Dowd LLP, Melville, NY; Jeremy A.
Lieberman, Pomerantz LLP, New York, NY; Thomas
J. McKenna, Gainey McKenna & Egleston, New
York, NY; Kim E. Miller, Kahn Swick & Foti, LLC,
New York, NY, on the brief), Robbins Geller Rudman
& Dowd LLP, San Francisco, CA, for Plaintiffs-
Appellants.
STEVEN M. FARINA (John S. Williams, Matthew J.
Greer, on the brief), Williams & Connolly LLP,
Washington, D.C., for Defendants-Appellees
AmTrust Financial Services, Inc., Barry D. Zyskind,
Ronald E. Pipoly, Jr., Donald T. DeCarlo, Susan C.
Fisch, Abraham Gulkowitz, George Karfunkel, and
Jay J. Miller.
TIMOTHY E. HOEFFNER (Jason D. Gerstein, Ludwig
von Rigal, on the brief), McDermott Will & Emery
LLP, New York, NY, for Defendant-Appellee BDO
USA, LLP.
GREGG L. WEINER (Christopher Thomas Brown,
Ropes & Gray LLP, New York, NY; William T.
Davison, Ropes & Gray LLP, Boston, MA), Ropes &
Gray LLP, New York, NY, for Defendants-Appellees
Morgan Stanley & Co. LLC, Citigroup Global
Markets Inc., UBS Securities LLC, RBC Capital
Markets, LLC, and Keefe, Bruyette & Woods, Inc.
3
LOHIER, Circuit Judge:
When is a statement of opinion that reflects some subjective judgment
nevertheless actionable under the federal securities laws?
On April 4, 2017, AmTrust Financial Services, Inc., one of the country’s
largest publicly traded property and casualty insurers, restated five years of
its financial results to correct what it acknowledged were significant errors in
its annual and quarterly reports filed with the Securities and Exchange
Commission (“SEC”). Among other things, AmTrust disclosed that it had
improperly recognized most of the expected revenue from certain extended
warranty contracts at the start rather than over the life of the contracts.
AmTrust also reported that it had improperly accounted for certain
discretionary employee bonuses by treating the bonuses as expenses in the
year they were paid rather than the year they were earned by employees.
AmTrust’s restatement spurred the Appellants in this case, all investors
in AmTrust securities, 1 to sue AmTrust, its officers (the “Officer Defendants,”
and, together with AmTrust, the “AmTrust Defendants”), members of its
1The named plaintiffs are New England Carpenters Guaranteed Annuity and
Pension Funds, Stanley Newmark, Irving Lichtman Revocable Living Trust, Jupiter
Capital Management, Sharon Albano, John Sachetti, and Joel Rubel.
4
board of directors (the “Director Defendants”), 2 its former auditor, 3 and
certain underwriters of AmTrust securities (the “Underwriter Defendants”), 4
for misstating the company’s financial condition and results in violation of
Sections 11, 12 and 15 of the Securities Act of 1933 (the “Securities Act”), and
Section 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange
Act”) and the corresponding Rule 10b-5.
The United States District Court for the Southern District of New York
(Kaplan, J.) dismissed the third amended complaint (the “Complaint”) under
Federal Rule of Civil Procedure 12(b)(6), holding that none of the
misstatements were actionable under the securities laws. We agree with the
District Court’s dismissal of the claims relating to most of the misstatements,
and we therefore AFFIRM in substantial part. But as we explain below, we
disagree with the District Court’s dismissal of the Appellants’ claims under
2The Officer Defendants are Barry D. Zyskind (at all relevant times AmTrust’s
President and Chief Executive Officer (“CEO”)) and Ronald E. Pipoly Jr. (at all
relevant times AmTrust’s Executive Vice President and Chief Financial Officer
(“CFO”)). The Director Defendants are Donald T. DeCarlo, Susan C. Fisch,
Abraham Gulkowitz, George Karfunkel, and Jay J. Miller.
3 BDO USA, LLP (“BDO”).
4RBC Capital Markets, LLC, UBS Securities LLC, Citigroup Global Markets Inc.,
Keefe, Bruyette & Woods, Inc., and Morgan Stanley & Co. LLC.
5
Sections 11, 12(a)(2), and 15 of the Securities Act against AmTrust, its officers
and directors, and the Underwriter Defendants related to AmTrust’s
accounting for revenue generated by its extended warranty contracts and the
expenses associated with discretionary employee bonuses. We therefore
VACATE the judgment insofar as it dismisses those claims and REMAND to
the District Court for further proceedings consistent with this opinion.
BACKGROUND
I. Factual Background
The following facts, which we assume to be true for purposes of this
appeal, are drawn from the Complaint and the documents it incorporates by
reference. See Litwin v. Blackstone Grp., L.P., 634 F.3d 706, 708 (2d Cir. 2011).
AmTrust provides workers’ compensation, commercial automobile
insurance, general liability, and extended service and warranty coverage. As
relevant to this appeal, AmTrust promotes and markets extended service
plans (“ESPs”)—essentially extended warranties. AmTrust receives two types
of revenue from its ESP business. First, AmTrust and its subsidiaries sell
contractual liability insurance to various retailers, covering the obligations
that the retailers assume as part of the ESPs. Second, retailers pay AmTrust
6
“for marketing and administrative services,” including “call center services,”
related to the ESPs. Joint App’x 67, 82. During the relevant time, AmTrust
“recognize[d] revenue related to promotion, marketing and administration
services at the time of the sale of ESP[s]” but “defer[red] a portion of service
revenue based upon an estimate of administrative services to be provided in
future periods.” Joint App’x at 82.
Starting in 2010, AmTrust made a number of acquisitions that fueled
much of its corporate growth. The acquisition most relevant to this appeal
closed in 2010, when AmTrust bought Warrantech, a publicly traded
company focused on providing ESPs and warranty programs for retailers,
dealers, distributors, and manufacturers that became, after the acquisition, a
core part of AmTrust’s business. Prior to the acquisition, the SEC had
investigated Warrantech’s practice of recognizing the full amount of the
revenue it received from its ESPs and other service contracts at the time the
contract was entered and the initial sale of services commenced (we will at
times refer to this as the “time-of-sale” approach). The SEC had instructed
Warrantech instead to recognize the revenue generated by those contracts on
a straight-line basis over the life of the contracts. Warrantech publicly
7
announced that it would comply with the SEC’s guidance, abandoned its
time-of-sale approach, and revised its method of recognizing revenue relating
to the ESPs. For reasons that are unclear, AmTrust, though aware of the
SEC’s prior guidance to the contrary, reverted back to the original time-of-sale
approach after it acquired Warrantech.
From 2012 to 2016 the price of AmTrust stock, which traded on the
NASDAQ Global Market, skyrocketed. The company’s gross written
premiums, a central measure of its financial condition, grew from $2.75 billion
to $7.95 billion. Yet as early as 2013, financial commentators and analysts
began speculating publicly about AmTrust’s actual financial condition. One
commentator reported that AmTrust may have used accounting gimmicks to
inflate its earnings and net equity. A financial journal, Barron’s, questioned
AmTrust’s accounting practices.
The bad press failed to slow AmTrust’s growth. In November 2015
AmTrust filed a preliminary prospectus supplement and prospectus
supplement with the SEC announcing an offer of 5 million shares of common
stock (the “November 2015 Offering”) pursuant to a registration statement
filed on June 11, 2015 (the “2015 Registration Statement”). The transaction,
8
underwritten by Defendants Citigroup Global Markets Inc. (“Citigroup”) and
Morgan Stanley & Co. LLC (“Morgan Stanley”), occurred on November 11,
2015 and raised $320 million. In September 2016 AmTrust filed another
preliminary prospectus supplement and prospectus supplement under the
2015 Registration Statement, this time announcing that the company planned
to offer American depositary shares in a transaction (the “September 2016
Offering”) underwritten by Morgan Stanley, UBS Securities LLC (“UBS”),
RBC Capital Markets, LLC (“RBC”), and Keefe, Bruyette & Woods, Inc.
(“KBW”). The prospectus supplement accompanying the September 2016
Offering incorporated by reference AmTrust’s annual financial report on
Form 10-K for the year ending December 31, 2015, its 10-Q report for the
quarter ending March 31, 2015, and various other reports the company had
previously filed with the SEC. The September 2016 Offering raised $278.2
million.
AmTrust’s prospects took a turn for the worse in 2017. In February and
March 2017 AmTrust announced that accounting errors had prompted it to
delay the filing of its 10-K for the year ending December 31, 2016 and that it
needed more time to complete its consolidated financial statements. On April
9
4, 2017, AmTrust finally filed its Form 10-K for 2016. The 2016 10-K included
restated financial results for the years ending December 31, 2012, 2013, 2014,
2015, and 2016, as well as each interim period during 2015 and 2016. The
restatement revealed that the company’s income and earnings had been
significantly overstated since 2012. 5
The restatement identified two material accounting errors. First,
according to a press release that AmTrust issued describing the errors,
AmTrust had mistakenly relied on the “upfront recognition of a portion of
warranty contract revenue associated with administration services, . . . instead
of deferring recognition of the revenue over the life of the contract.” Joint
App’x 208. In other words, AmTrust had “historically recognized the
majority of revenue related to administrative services at the time of sale of
ESP,” but had “revised its application of the revenue recognition guidance to
5To use the annual financial results for 2015 as an example, the errors meant that
income before other income, income taxes, equity in earnings of unconsolidated
subsidiaries and non-controlling interest was overstated by 16.79 percent; income
before income taxes, equity in earnings of unconsolidated subsidiaries and non-
controlling interest was overstated by 17.04 percent; net income was overstated by
11.56 percent; net income attributable to AmTrust common stockholders was
overstated by 12.62 percent; diluted earnings per share was overstated by 12.45
percent; comprehensive income was overstated by 22.94 percent; and
comprehensive income attributable to AmTrust Financial Services, Inc. was
overstated by 23.55 percent. See Joint App’x 213–14.
10
record revenue related to administration services on a straight-line basis over
the term of the ESP contracts.” Joint App’x 80. The second accounting error
was that discretionary employee “bonuses . . . were expensed in the year paid
but . . . should have been accrued [as an expense] in the year earned based
on” accepted accounting standards. Joint App’x 208. The restatement also
identified other “miscellaneous adjustments” to AmTrust’s financial
statements that the company concluded were not material. 6 Joint App’x 208.
II. Procedural Background
The Appellants commenced this putative class action in March 2017,
after AmTrust first publicly disclosed the accounting errors at issue in this
case. Although there are two slightly different class periods during which the
Appellants purchased AmTrust securities—the first between February 14,
2013 and April 10, 2017 (the “AmTrust Class Period”) and the second between
March 3, 2014 and April 10, 2017, during which BDO served as AmTrust’s
outside auditor (the “BDO Class Period”)—for our purposes, the distinction is
immaterial. The Appellants eventually filed a second amended complaint
asserting claims under Sections 11, 12(a)(2), and 15 of the Securities Act, 15
6Although the Appellants challenged other statements below, they do not press
those arguments on appeal and, as a result, we do not consider them.
11
U.S.C. §§ 77k, 77l(a)(2), 77o, Sections 10(b) and 20(a) of the Exchange Act, 15
U.S.C. §§ 78j(b), 78t(a), and Rule 10b–5, 17 C.F.R. § 240.10b–5. The District
Court dismissed the second amended complaint without prejudice,
concluding for the most part that the alleged misstatements were
nonactionable statements of opinion. The Appellants filed a third amended
complaint (the operative complaint here), which the District Court also
dismissed, largely for the same reasons, this time with prejudice.
This appeal followed.
DISCUSSION
We review the District Court’s dismissal under Rule 12(b)(6) de novo,
accepting all factual allegations as true and drawing all reasonable inferences
in favor of the Appellants. Olagues v. Icahn, 866 F.3d 70, 74 (2d Cir. 2017).
I. The Securities Act Claims Against the AmTrust Defendants
and the Director Defendants
We begin with the Appellants’ claims against the AmTrust Defendants
and the Director Defendants under Sections 11 and 15 of the Securities Act, as
well as their claims against AmTrust under Section 12(a)(2) of the Securities
Act. The Act requires that companies issuing securities make a “full and fair
disclosure of information” in connection with a public offering. Pinter v.
12
Dahl, 486 U.S. 622, 646 (1988); see Fed. Hous. Fin. Agency for Fed. Nat’l
Mortg. Ass’n v. Nomura Holding Am., Inc., 873 F.3d 85, 98 (2d Cir. 2017). The
Act aims to protect investors and to “achieve a high standard of business
ethics in the securities industry.” Lorenzo v. SEC, 139 S. Ct. 1094, 1103 (2019)
(quotation marks omitted); see also SEC v. First Jersey Sec., Inc., 101 F.3d 1450,
1466 (2d Cir. 1996). It thus permits purchasers of a public company’s
securities to sue the company and certain corporate officers for any material
misstatements or for the omission of material information in the company’s
registration statements filed with the SEC.
Section 11 of the Act, for example, provides:
In case any part of the registration statement,
when such part became effective, contained an
untrue statement of a material fact or omitted to
state a material fact required to be stated therein or
necessary to make the statements therein not
misleading, any person acquiring such security
. . . [may] sue.
15 U.S.C. § 77k(a); see Omnicare, Inc. v. Laborers Dist. Council Const. Indus.
Pension Fund, 575 U.S. 175, 179 (2015). So “[i]n the event of such a misdeed,
the statute provides for a cause of action by the purchaser of the registered
security against the security’s issuer, its underwriter, and certain other
13
statutorily enumerated parties.” In re Morgan Stanley Info. Fund Sec. Litig.,
592 F.3d 347, 358 (2d Cir. 2010). “Section 15, in turn, creates liability for
individuals or entities that ‘control[ ] any person liable’ under section 11.” Id.
(quoting 15 U.S.C. § 77o). And as relevant to this appeal, Section 12(a)(2)
similarly imposes liability on any person who offers or sells a security by
means of a prospectus containing material misrepresentations or omissions. 7
Appellants’ principal challenge under the Securities Act relates to the
two accounting errors described above that AmTrust identified in its
restatement as materially affecting its reported income during the relevant
7 Section 12(a)(2) provides, in relevant part:
Any person who . . . offers or sells a security . . . by the
use of any means or instruments of transportation or
communication in interstate commerce or of the mails,
by means of a prospectus or oral communication,
which includes an untrue statement of a material fact
or omits to state a material fact necessary in order to
make the statements, in the light of the circumstances
under which they were made, not misleading (the
purchaser not knowing of such untruth or omission),
and who shall not sustain the burden of proof that he
did not know, and in the exercise of reasonable care
could not have known, of such untruth or omission,
shall be liable . . . to the person purchasing such
security from him . . . .
15 U.S.C. § 77l(a)(2).
14
time: (1) its recognition of revenue from administration services based on the
time-of-sale approach; and (2) its decision to record discretionary bonus
payments as expenses the year in which they were paid rather than the year
in which the bonuses were actually earned.
Relying largely on the Supreme Court’s decision in Omnicare and our
decision in Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011), the
District Court determined that AmTrust’s financial statements reflected the
exercise of subjective judgment and were thus non-actionable statements of
opinion. Cf. Omnicare, 575 U.S. at 184 (noting that an executive who
expressed “a view, not a certainty” “could not be liable for a false statement of
fact”). We respectfully disagree with this particular conclusion of the very
able and experienced District Judge, who did not have the benefit of our latest
guidance in this area. See Abramson v. Newlink Genetics Corp., 965 F.3d 165
(2d Cir. 2020).
In Fait, we explained that “when a plaintiff asserts a claim under
section 11 or 12 based upon a [defendant’s alleged] belief or opinion . . .
liability lies only to the extent that the statement was both objectively false
and disbelieved by the defendant at the time it was expressed.” Fait, 655 F.3d
15
at 110. But we have since recognized that the Supreme Court in Omnicare,
which was decided after Fait, unequivocally “rejected the proposition that
there can be no liability based on a statement of opinion unless the speaker
disbelieved the opinion at the time it was made.” Abramson, 965 F.3d at 175.
By pointing out that a statement of opinion, even if believed, may nonetheless
be actionable if it contains a factual misstatement or is rendered misleading by
the omission of material facts, Omnicare expanded the scope of issuer liability
for statements of opinion. Nevertheless, Fait continues to guide us in
distinguishing between a statement of fact and a statement of opinion in the
first place.
So what distinguishes a fact from an opinion under the federal
securities laws? In general, a fact is “a thing done or existing or an actual
happening,” while an opinion is “a belief, a view, or a sentiment which the
mind forms of persons or things.” Omnicare, 575 U.S. at 183 (quotation marks
omitted). A statement of fact “expresses certainty about a thing,” while a
statement of opinion does not. Id. Statements of opinion often include
qualifying language (like “I believe” or “I think”) that conveys a lack of
certainty about the thing being expressed, marks the statement as reflecting
16
the speaker’s impression or point of view rather than an objective truth, and
makes it easier to identify the statement as one of opinion rather than fact.
See id. at 183–84.
But not all statements of opinion include such qualifying language. In
Fait, for example, we held that unqualified estimates of goodwill and loan
loss reserves were statements of opinion because the estimates were clearly
“subjective . . . rather than objective factual matters.” Fait, 655 F.3d at 111
(quotation marks omitted). Certain statements address issues so plainly
subjective, we reasoned, that the statement is one of opinion not just by virtue
of the words used but also because of the nature of the information conveyed.
In Fait, we characterized the inquiry as turning on whether the relevant
statement reflects the speaker’s determination of “a matter of objective fact”
or instead expresses the speaker’s judgment about a matter that lacks “any
objective standard.” Id. at 109–10 (quotation marks omitted). The latter
statement, we said, is “inherently subjective.” Id. at 113.
The rule we articulated in Fait was narrowly invoked in the context of
estimates of goodwill and loan loss reserves, both of which we characterized
as inherently requiring a substantial exercise of judgment. Estimates of
17
goodwill “depend on management’s determination of the ‘fair value’ of the
assets acquired and liabilities assumed.” Id. at 110. Absent “any objective
standard such as market price that” the company “should have but failed to
use in determining” the value of its assets, “an estimate of the fair value of
those assets will vary depending on the particular methodology and
assumptions used.” Id. at 110–11. Likewise, in Omnicare, the Supreme Court
described an opinion variously as a statement that “in ordinary usage . . . does
not imply . . . definiteness . . . or certainty,” or as a statement that “rest[s] on
grounds insufficient for complete demonstration.” 575 U.S. at 183 (quotation
marks omitted).
If a statement turns on the exercise of subjective judgment, a plaintiff
will be unable to establish that it is false merely by showing that other
reasonable alternative views exist. Where those alternatives exist, the speaker
making the statement (expressing an opinion) can choose among them
without running afoul of the federal securities provisions at issue here. See
Omnicare, 575 U.S. at 189–90 (“Reasonable investors understand that opinions
sometimes rest on a weighing of competing facts.”) This is true even if most
of the existing facts cut against the statement.
18
But opinions lead double lives. Most obviously, as the Supreme Court
clarified in Omnicare and our Court more recently observed in Abramson, an
opinion may implicitly convey “facts about how the speaker has formed the
opinion—or, otherwise put, about the speaker’s basis for holding that view.”
Omnicare, 575 U.S. at 188. In the context of a securities transaction, a
reasonable investor expects that opinion statements “rest on some meaningful
. . . inquiry,” “fairly align[] with the information in the issuer’s possession at
the time,” and do not “reflect baseless, off-the-cuff judgments,” id. at 188–90;
see Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1093 (1991) (noting
that even “conclusory terms in a commercial context are reasonably
understood to rest on a factual basis that justifies them as accurate, the
absence of which renders them misleading”). If, for example, “a registration
statement omits material facts about the issuer’s inquiry into or knowledge
concerning a statement of opinion, and if those facts conflict with what a
reasonable investor would take from the statement itself,” then the issuer may
be liable under Section 11’s omissions clause even though the statements
convey an opinion. Omnicare, 575 U.S. at 189. “By increasing the ability of
plaintiffs to plead material omissions with respect to statements of
19
opinion. . . , Omnicare reduced the significance of district courts’ classification
of statements as those of fact or opinion.” Abramson, 965 F.3d at 176.
Opinions are thus actionable under Section 11 of the Securities Act not
only when “the speaker did not hold the belief she professed,” Omnicare, 575
U.S. at 185–86, but also if the statement of opinion contains embedded
statements of fact that are untrue, or the statement omits information whose
omission conveys false facts about the speaker’s basis for holding that view
and makes the opinion statement misleading to a reasonable investor, id. at
186–88; see Abramson, 965 F.3d at 175; Fait, 655 F.3d at 111 (noting that
opinion “statements may be actionable if they misstate the opinions or belief
held, or, in the case of statements of reasons, the actual motivation for the
speaker's actions, and are false or misleading with respect to the underlying
subject matter they address” (emphasis omitted)). The standard for opinion
liability presents “no small task for an investor” seeking to plead that an
opinion is misleading. Omnicare, 575 U.S. at 194.
So one of the more straightforward ways a statement of opinion may be
actionable is if it contains an embedded statement of fact that is not true. In
other words, the opinion may be false or misleading if the embedded fact is
20
not one as to which reasonable minds can differ. This occurs where, for
example, there is an accepted method for assessing whether the statement is
true, but the statement is not justified by the accepted method and clearly
contradicts the facts on which it purports to rest. Consider the following
example from Abramson:
A statement structured, ‘I believe that x is so
because y has occurred,’ contains the factual and
falsifiable statement, ‘y has occurred.’ If y has in
fact not occurred, the statement of opinion is
actionable because an embedded but complete
‘statement of a material fact’ . . . can be proven
false.
Abramson, 965 F.3d at 175.
Statements of opinion are also actionable as false or misleading under
Section 11’s omission clause if the opinion “omits material facts about the
issuer’s inquiry into or knowledge concerning a statement of opinion, and if
those facts conflict with what a reasonable investor would take from the
statement[of opinion] itself.” Omnicare, 575 U.S. at 188; see Abramson, 965
F.3d at 175 (“[P]laintiffs can allege that a statement of opinion, without
providing critical context, implied facts that can be proven false.”). “With
respect to this [alternative] basis for challenging a statement of opinion,
21
Omnicare held that the appropriate perspective for identifying whether a
statement of opinion implies facts is that of the reasonable investor.”
Abramson, 965 F.3d at 175.
Mindful of these background principles, we conclude that the
Appellants have stated a claim under Section 11 of the Securities Act against
the AmTrust Defendants and the Director Defendants based on AmTrust’s
past recognition of revenue for extended warranty contracts using the time of
sale approach, as well as its practice of recording discretionary bonuses as
expenses when they were paid rather than earned. 8 For the same reasons, we
vacate the District Court’s dismissal of the Appellants’ Section 12(a)(2) claims
against AmTrust arising from the same misstatements. See In re Morgan
Stanley Info. Fund Sec. Litig., 592 F.3d at 359.
8The District Court dismissed the Appellants’ control-person liability claim under
Section 15 of the Securities Act against AmTrust’s officers and directors because it
found no primary liability under Section 11. Because we conclude that the
Appellants have stated a claim for primary liability for the statements about the
accounting treatment of warranty contracts and bonuses, we vacate the District
Court’s dismissal of the corresponding Section 15 claims against Zyskind, Pipoly,
DeCarlo, Fisch, Gulkowitz, Karfunkel, and Miller and remand for further
proceedings consistent with this opinion. See In re Morgan Stanley Info. Fund Sec.
Litig., 592 F.3d at 358 (noting that “the success of a claim under section 15 relies, in
part, on a plaintiff’s ability to demonstrate primary liability under section[] 11”).
22
The Appellants claimed that the Defendants were also liable for
improper reporting of acquisition costs, foreign exchange gains and losses,
software costs, interest expenses, intercompany transactions, and other
accounting-related statements. They do not challenge the District Court’s
dismissal of those claims on appeal, and we therefore affirm the judgment
insofar as it dismissed the claims. We focus instead, as do the Appellants, on
the claims relating to the extended warranty contracts and the bonuses.
A. The Extended Warranties
We turn first to AmTrust’s practice of recognizing “upfront” most of
the revenue generated from its extended warranty contracts during the
relevant time. In a March 2017 media release, AmTrust clarified that this
revenue recognition practice was “based on the interpretation of ASC
[Accounting Standards Codification] 605, Revenue Recognition, used in the
previously filed financial statements related to multiple-element revenue
recognition.” Joint App’x 670. The company conceded, however, that it
should have instead “deferr[ed] recognition of the revenue over the life of the
23
contract.” 9 Joint App’x 670. The restatement acknowledged that the time-of-
sale approach resulted in material misstatements regarding AmTrust’s
income and revenue associated with the warranty contracts. Specifically, it
explained:
The Company has historically recognized the
majority of revenue related to administration
services at the time of the sale of ESP. However,
the Company revised its application of the
revenue recognition guidance to record revenue
related to administration services on a straight-line
basis over the term of the ESP contracts. This
correction of an error, which created an
overstatement of service and fee income and an
overstatement of other expenses that were also
recognized upfront in current periods, required a
restatement of the Company’s previously issued
financial statements.
Joint App’x 568 (emphasis added).
On appeal, AmTrust describes its initial representations about the
revenue related to administrative services for ESPs as statements of opinion,
9The Accounting Standards Codification (“ASC”) is the “source of authoritative
generally accepted accounting principles,” commonly referred to as “GAAP,”
published by the Financial Accounting Standards Board (“FASB”) “to be applied by
nongovernmental entities” such as AmTrust. Financial Accounting Standards
Board, Accounting Standards Codification: Overview and Background 105-10-05-1
(2020), https://asc.fasb.org/1943274/2147479442; see also Ind. Pub. Ret. Sys. v. SAIC,
Inc., 818 F.3d 85, 93 (2d Cir. 2016) (relying on FASB standards as a source of GAAP).
24
not fact, because its determination of when to recognize the revenue
associated with ESPs was a subjective judgment call. In particular, AmTrust
explains that its pre-restatement decision to recognize this revenue upfront
was “based on its interpretation of the accounting guidance regarding
‘multiple-element revenue recognition,’” including ASC 605-25-25-5.
AmTrust Br. 31. ASC 605-25-25-5 governs when a “delivered item or items
shall be considered a separate unit of accounting.” Under that accounting
standard, revenue from these multi-element arrangements (also known as
bundled contracts or sales) can be recognized upon delivery only if the
contracts or services “have value to the customer on a standalone basis.” ASC
605-25-25-5(a), superseded by Accounting Standard Update No. 2014-09 (May
28, 2014). Lastly, AmTrust observes that a contract or service has “value on a
standalone basis if [it is] sold separately by any vendor or the customer could
resell [it] on a standalone basis.” Id.
The company suggests that assessing value to the customer on a
standalone basis — that is, determining whether the administrative services
revenue received from vendors who administer the warranty programs is
separable from revenue generated by the warranty coverage provided to
25
customers — is an inherently subjective enterprise. The problem with this
argument is that AmTrust has never actually contended that its customers can
resell the administrative services associated with the warranty contracts at
issue here on a standalone basis or that vendors are able to sell them
separately. Nothing in the Complaint suggests that doing so is even possible,
and although AmTrust maintains that there are other ways to determine a
contract’s “value on a standalone basis” under the services section of ASC 605
that require judgment calls, nothing in the text of ASC 605, including ASC
605-25-55-1, on which AmTrust also relies, refers to other methods for
determining value.
In further support of their respective arguments, both the Appellants
and AmTrust turn to ASC 605-20-25-3, which provides:
[R]evenue from separately priced extended
warranty or product maintenance contracts shall
be deferred and recognized in income on a
straight-line basis over the contract period except
in those circumstances in which sufficient
historical evidence indicates that the costs of
performing services under the contract are
incurred on other than a straight-line basis.
ASC 605-20-25-3 (emphasis added), superseded by Accounting Standards
Update No. 2014-09 (May 28, 2014). On one hand, the Appellants suggest that
26
ASC 605-20-25-3 establishes an objective standard that generally requires the
recognition of this revenue on a straight-line basis. On the other hand,
AmTrust defends the District Court’s decision by relying on the exception
contained in ASC 605-20-25-3, claiming that the determination of whether
historical evidence is sufficient to permit non-straight-line treatment is “a
quintessential question of judgment” and that the standard is thus inherently
subjective. AmTrust Br. 30–31.
For its part, the District Court concluded that the restated financial
statements were non-actionable opinions because determining the sufficiency
of historical evidence that would support incurring costs on a non-straight-
line basis “inherently requires a subjective judgment as to whether the
exception applies.” Spec. App’x 89. As the District Court itself recognized,
however, the determination that AmTrust’s statements are opinion, not fact, is
not necessarily the end of the analysis. Spec. App’x 42 (“The claim will
survive . . . if plaintiffs have alleged adequately that the statement was an
untrue or misleading statement of opinion.”); see Abramson, 965 F.3d at 176.
The Appellants respond that they have alleged the objectively
determinable absence of historical evidence necessary to support the non-
27
straight-line accounting approach that AmTrust applied. See Joint App’x 152
(“ASC Topic No. 605 . . . does not permit the method of recognition employed
by AmTrust without historical evidence demonstrating the appropriateness of
such method, historical evidence AmTrust acknowledges it never
possessed.”). AmTrust’s reliance on the sufficiency of historical evidence to
justify its accounting treatment, the Appellants contend, runs headlong into
the Complaint’s allegation, which at this stage we accept as true, that there
was in fact no historical evidence to support its approach.
We agree with the Appellants that subjective judgments about the
sufficiency of historical evidence to support a particular accounting treatment
presuppose the existence of some historical evidence. Indeed, AmTrust now
acknowledges that it should have recorded revenue for its warranty contracts
on a straight-line basis in reliance on ASC 605-20-25-3. And no one disputes
that GAAP permits time-of-sale recognition only if some historical evidence
justified doing so. At the pleading stage, we think the alleged absence of such
evidence, if accepted as true, means that AmTrust’s representations about the
warranty contract revenue reported in its historical consolidated financial
statements misled investors to conclude that the company was aware of some
28
historical evidence in support of recognizing the revenue on a non-straight-
line basis, when in (alleged) fact it was not. In other words, AmTrust is
plausibly alleged to have “sa[id] one thing and [held] back another.”
Omnicare, 575 U.S. at 192.
We therefore conclude that AmTrust’s financial statements relating to
the warranty contract revenue reported in its historical consolidated financial
statements were actionable statements of opinion under Section 11, and we
vacate the District Court’s dismissal of the Appellants’ Section 11 claims
against the AmTrust Defendants and the Director Defendants arising from
those statements.
B. The Discretionary Bonuses
We turn next to AmTrust’s practice of expensing certain discretionary
employee bonuses in the year the bonuses were paid rather than the year the
bonuses were earned.
According to the Complaint, in its restatement AmTrust “admitted that
the financial statements it issued to investors during the relevant period were
presented in violation of GAAP by failing to timely accrue compensation
related expenses.” Joint App’x 83. Specifically, AmTrust explained that:
29
In prior years, the Company had expensed
discretionary bonuses paid to its employees in the
year the bonuses were paid because the Company
did not consider the discretionary bonuses to be
“probable,” which is the standard required for
accrual. Upon review of ASC 270, Interim
Reporting, and ASC 450, Contingencies,
management determined that its application was
incorrect because, even though the bonuses were
discretionary, the bonuses should have been
estimated and expenses assigned to interim
periods so that the interim periods bear a
reasonable portion of the anticipated annual
amount.
Joint App’x 83.
The parties agree that ASC 450 applies to determine how to account for
these bonuses. Under ASC 450-20-25-2, companies should expense costs
when it is “probable” that a liability has been incurred and when “[t]he
amount of loss can be reasonably estimated” within a range. 10 AmTrust
asserts that its decision to expense bonuses in the period they were paid
rather than earned in its previously issued consolidated financial statements
is a classic exercise of subjective judgment. Suggesting to investors that it is
not “probable” that the company would pay bonuses at a future time is, the
10See also ASC 450-10-55-3 (“Amounts owed for services received. . . are not
contingencies even though the accrued amounts may have been estimated; there is
nothing uncertain about the fact that those obligations have been incurred.”)
30
company asserts, merely stating a non-actionable opinion. Even assuming
without deciding that these are statements of opinion, we are not persuaded.
In our view, there is some reason to conclude that the Appellants have
plausibly alleged that AmTrust’s method of deferring the recognition of
expenses related to bonuses until the bonuses were paid (thus delaying the
charge to income) was objectively improper rather than an exercise of
subjective judgment. In particular, the Appellants allege that AmTrust had a
practice of paying bonuses. The Complaint thus plausibly alleges that there
was no basis to conclude that the continued payment of earned bonuses was
not “probable” and that such bonuses therefore could not be expensed when
earned. There is no dispute that the bonuses at issue on appeal were earned
during the relevant periods and, as AmTrust’s restatement eventually
acknowledged, that they should have been expensed during those periods.
Although multiple accounting standards may have been relevant to
determining when to expense a bonus, all of the standards in play here
support the position that the bonuses should have been expensed in the year
31
they were earned, not the year they were paid. 11 We are not aware of a GAAP
provision on which AmTrust relied that suggests otherwise. And the fact that
these GAAP standards, together or alone, are subject to misreading,
misinterpretation, or misapplication, as happened here, does not necessarily
mean that they entail an exercise of subjective judgment.
But we do not need to decide whether these financial statements are
statements of fact or, as AmTrust asserts, statements of opinion. See
Abramson, 965 F.3d at 176. Even if they are statements of opinion (because,
say, determining whether it is “probable” that the corporate officers would
exercise their discretion to pay the bonuses at a future time is a matter of
subjective judgment), we conclude that the statements are nonetheless
actionable because the Complaint adequately alleges that it was improbable
that the earned bonuses would not be paid. Accepting that allegation as true
makes it quite plausible that the AmTrust Defendants did not base the
company’s statements of probability on a “meaningful . . . inquiry,” that their
statements did not “fairly align[] with the information in the issuer’s
11Under ASC 450-10-55, bonuses should have been expensed as incurred during the
relevant period. ASC 710-10-25 likewise required AmTrust to expense an
employee’s right to be compensated when earned. And ASC 270 required the
bonuses to be expensed as incurred in interim periods.
32
possession at the time,” and that there was no basis for AmTrust to state that
the bonuses should be expensed in the year they were paid rather than
earned. Omnicare, 575 U.S. at 188-89.
For these reasons, we conclude that the Complaint states a claim under
Section 11 against the AmTrust Defendants and the Director Defendants
arising from AmTrust’s misrepresentation of reported income in its historical
consolidated financial statements based on the erroneous accounting
treatment relating to bonus payments.
C. SOX Certifications by AmTrust Executives
The remaining Section 11 claims against the AmTrust Defendants are a
different matter. They rest on certifications by company executives regarding,
among other things, the accuracy of AmTrust’s financial reporting, its
conformity with GAAP, and the effectiveness of AmTrust’s disclosure
controls and procedures. The District Court concluded that these
certifications were non-actionable statements of opinion. We agree.
First, the Officer Defendants, Zyskind (the CEO) and Pipoly (the CFO),
attested to (1) the accuracy of AmTrust’s financial reporting, (2) the
effectiveness of the company’s disclosure controls and procedures, and (3)
33
their disclosure of any weaknesses in internal controls over the company’s
financial reporting in certifications mandated by Section 302 of the Sarbanes
Oxley Act (“SOX”), 15 U.S.C. § 7241(a); see also 17 C.F.R. §§ 240.13a-14,
240.13a-15, 240.15d-15. Their certifications about the accuracy of AmTrust’s
financial reporting, including that financial statements were prepared in
conformity with GAAP, signal that they are opinions by stating that they are
“based on [the] knowledge” of the officer. See Joint App’x 103–04, 153. There
is no allegation that the opinion is actionable on the ground that it was not
based on the officer’s knowledge. 12 Similarly, we conclude that the two other
challenged SOX certifications relating to (1) disclosure controls and
procedures, and (2) internal control over financial reporting contain language
that conveys management’s subjective judgments about the company’s
internal controls and thus constitute statements of opinion.
The Appellants point to allegations that AmTrust later reversed course
and that its restatement acknowledged a failure of internal controls. The
Appellants insist that the reversal compels the inference that the SOX
12For the reasons discussed below, we disagree with the Appellants that the
existence of the Warrantech SEC guidance letter demonstrates that the officers knew
the financial reports were false or misleading or did not comply with GAAP, even
with all reasonable inferences drawn in the Appellants’ favor.
34
certifications were not believed when made. But AmTrust’s change of
opinion, standing alone, does not mean that the original certified opinions
were disingenuous. 13 Nor is a genuinely held opinion that “turned out to be
wrong” necessarily actionable. Omnicare, 575 U.S. at 186. In any event, as
noted, the Complaint fails to adequately allege that the AmTrust executives
who signed the certifications did not believe what they certified.
Finally, Appellants contend that the certifications were misleading
because they falsely conveyed the existence of “‘some meaningful . . .
inquiry’” conducted by the certifying executives. Appellants’ Br. 42 (quoting
Omnicare, 575 U.S. at 188). But here too, the Complaint fails to allege any
facts that establish a lack of meaningful inquiry, other than the fact that the
certification turned out to be wrong.
For these reasons, we affirm the District Court’s dismissal of the
Appellants’ Section 11 claims relating to the SOX certifications.
13The Appellants reference in passing on appeal that the SOX certifications
contained embedded statements of fact. See Appellants’ Br. 41. We conclude that
the argument is abandoned because the Appellants have failed to develop it. See
Zhang v. Gonzales, 426 F.3d 540, 545 n.7 (2d Cir. 2005).
35
II. The Exchange Act Claims Against the AmTrust Defendants
The District Court also dismissed the Appellants’ claims against the
AmTrust Defendants under Section 10(b) of the Exchange Act and Rule 10b-5.
To survive a motion to dismiss under these provisions, “a plaintiff must
allege that [each] defendant (1) made misstatements or omissions of material
fact, (2) with scienter, (3) in connection with the purchase or sale of securities,
(4) upon which the plaintiff relied, and (5) that the plaintiff’s reliance was the
proximate cause of its injury.” ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493
F.3d 87, 105 (2d Cir. 2007); see also Ind. Pub. Ret. Sys. v. SAIC, Inc., 818 F.3d
85, 93 (2d Cir. 2016). Under the Private Securities Litigation Reform Act of
1995, moreover, a plaintiff must “state with particularity facts giving rise to a
strong inference that the defendant acted with [scienter].” 15 U.S.C. § 78u–
4(b)(2)(A).
In contrast to the Securities Act claims under Section 11, which do not
require a showing of scienter, 14 the central question with respect to the
14As we explained in Fait, “[w]hile issuers are subject to virtually absolute liability
under section 11, the remaining potential defendants under sections 11 and 12(a)(2)
[of the Securities Act] may be held liable for mere negligence.” Fait, 655 F.3d at 109
(cleaned up). And “in contrast to claims brought pursuant to section 10(b) of the
[Exchange Act], claims under sections 11 and 12 do not require allegations of
scienter.” Id.
36
Appellants’ claims under the Exchange Act is whether the Complaint
adequately “pleaded facts giving rise to a strong inference that the . . .
Defendants acted with ‘scienter, a mental state embracing intent to deceive,
manipulate, or defraud.’” In re Advanced Battery Techs., Inc., 781 F.3d 638,
644 (2d Cir. 2015) (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551
U.S. 308, 319 (2007)). Scienter may be established by alleging facts “(1)
showing that the defendants had both motive and opportunity to commit the
fraud or (2) constituting strong circumstantial evidence of conscious
misbehavior or recklessness.” ATSI Commc’ns, 493 F.3d at 99; see Set Cap.
LLC v. Credit Suisse Grp. AG, 996 F.3d 64, 78 (2d Cir. 2021). Any allegation of
conscious misbehavior or recklessness should be “viewed holistically and
together with the allegations of motive and opportunity” to determine
whether the complaint supports a strong inference of scienter. Set Cap. LLC,
996 F.3d at 78. Although “the requisite intent of the alleged speaker of the
fraud need not be alleged with great specificity,” Chill v. Gen. Elec. Co., 101
F.3d 263, 267 (2d Cir. 1996), the “inference of scienter must be more than
merely plausible or reasonable—it must be cogent and at least as compelling
as any opposing inference of nonfraudulent intent.” Tellabs, 551 U.S. at 314;
37
see also In re Advanced Battery, 781 F.3d at 644; ECA & Loc. 134 IBEW Joint
Pension Tr. of Chicago v. JP Morgan Chase Co., 553 F.3d 187, 198 (2d Cir.
2009).
Keeping that standard in mind, we agree with the District Court that
the Complaint does not adequately allege that the AmTrust Defendants acted
with scienter.
First, the Complaint does not adequately plead scienter based on the
AmTrust Defendants’ motive and opportunity to commit fraud. Urging
otherwise, the Appellants rely on the AmTrust Defendants’ financial
incentives to keep share prices high and to fuel the company’s acquisition
strategy. But the desire to sustain “the appearance of corporate profitability”
is not itself the kind of incentive or motivation that raises an inference of
scienter. Chill, 101 F.3d at 268. The Appellants also direct us to allegations
that Pipoly and other top executive officers (but, notably, not Zyskind or the
Board Defendants) sold a significant number of shares of AmTrust stock
during the AmTrust Class Period. In doing so, however, the Appellants
acknowledge that Pipoly’s significant selloff began several months before the
AmTrust Class Period, a fact that renders his stock sales during this class
38
period less unusual. See Ark. Pub. Emps. Ret. Sys. v. Bristol-Myers Squibb
Co., 28 F.4th 343, 355 (2d Cir. 2022).
Nor does the Complaint allege facts that provide “strong circumstantial
evidence of conscious misbehavior or recklessness.” ATSI Commc’ns, 493
F.3d at 99. We have explained that “[s]cienter based on conscious
misbehavior . . . requires a showing of deliberate illegal behavior, a standard
met when it is clear that a scheme, viewed broadly, is necessarily going to
injure.” Gould v. Winstar Commc'ns, Inc., 692 F.3d 148, 158 (2d Cir. 2012)
(quotation marks omitted). Recklessness, meanwhile, entails “an extreme
departure from the standards of ordinary care . . . to the extent that the danger
was either known to the defendant or so obvious that the defendant must
have been aware of it.” ECA, 553 F.3d at 198 (quotation marks omitted).
None of the facts alleged in the Complaint—including the “magnitude” of the
restatement and the duration of the period it covered—satisfy these
requirements. Joint App’x 213. In determining whether the AmTrust
Defendants acted with scienter, it is not enough that it took a period of years
for AmTrust to acknowledge its significant accounting errors.
39
Finally, the Appellants argue that the AmTrust Defendants did not
believe their accounting judgments regarding the early recognition of revenue
on the administration-service fees connected to AmTrust’s warranty program.
The Appellants allege that AmTrust knew its accounting treatment was
wrong because Warrantech, the company AmTrust acquired in 2010,
announced in its Form 10-K for the year ended March 31, 2006, that it had
changed its revenue-recognition practices regarding its warranty contracts in
response to SEC guidance. In particular, the Complaint alleges that AmTrust
must have known, or recklessly disregarded, that the SEC earlier had advised
Warrantech that its time-of-sale approach was improper and that its warranty
business compelled a straight-line revenue recognition approach. But we
think that AmTrust’s subsequent resort to a time-of-sale approach for the
contracts, though wrong, is more plausibly explained by the changes to the
guiding accounting principles since 2006 to which AmTrust points us, or to
AmTrust’s negligence. 15 See AmTrust Br. 42–44. Negligence, even in a
“heightened form,” is not sufficient to allege scienter. Novak, 216 F.3d at 312.
15The Appellants also call our attention to purported “red flags” in the form of press
coverage criticizing AmTrust’s accounting practices generally, although none of the
press articles mentions the two central accounting issues that led to AmTrust’s
40
For these reasons, we conclude that the Complaint fails to raise a strong
inference of scienter, and we affirm the dismissal of the Appellants’ claims
against the AmTrust Defendants under Section 10(b) and Rule 10b–5. 16 We
also affirm the District Court’s corresponding dismissal of the Appellants’
‘control person’ claim under Section 20(a) of the Exchange Act because such a
claim is “necessarily predicated on a primary violation of securities law.”
Rombach v. Chang, 455 F.3d 164, 177–78 (2d Cir. 2004).
III. The Securities Act Claims Against the Underwriter Defendants
The Appellants also assert claims against the Underwriter Defendants
under Sections 11 and 12(a)(2) of the Securities Act stemming from the two
securities offerings made pursuant to AmTrust’s 2015 Registration Statement.
The first is AmTrust’s November 2015 Offering, underwritten by Citigroup
and Morgan Stanley, of 5 million shares of common stock pursuant to a
restatement. Given the generality of these media reports, we are not persuaded that
they support an inference of scienter that is at least as compelling as any opposing
inference of nonfraudulent intent.
16We have applied the holding in Omnicare to claims brought under Section 10(b) of
the Exchange Act. See Tongue v. Sanofi, 816 F.3d 199, 209–10 (2d Cir. 2016).
Because, as we previously concluded, the Officer Defendants’ certifications are non-
actionable statements of opinion, we also affirm the dismissal of the Appellants’
Section 10(b) claims based on these certifications. See City of Omaha, Neb. Civilian
Emps.’ Ret. Sys. v. CBS Corp., 679 F.3d 64, 67–68 (2d Cir. 2012) (noting that Section
10(b) and Section 11 claims “share a material misstatement or omission element”).
41
preliminary prospectus supplement and a prospectus supplement. This
preliminary prospectus supplement and prospectus supplement, together
with the 2015 Registration Statement, incorporated by reference AmTrust’s
annual financial report for 2014 and quarterly financial reports for the first
three fiscal quarters of 2015. The second offering is AmTrust’s September
2016 Offering, underwritten by Morgan Stanley, RBC, UBS, and KBW, of 10
million depository shares pursuant to a preliminary prospectus supplement
and a prospectus supplement that, together with the 2015 Registration
Statement, incorporated by reference AmTrust’s annual financial report for
2015 and quarterly financial reports for the first two quarters of 2016. Each of
the relevant financial reports contained overstated income numbers arising
from the time-of sale approach for the warranty contracts and the improper
expensing of bonuses.
As a threshold matter, three of the Underwriter Defendants—Morgan
Stanley, UBS, and KBW—contend that the Appellants lack standing to even
assert Section 12 claims against them in connection with the September 2016
Offering because the Complaint does not specifically allege that the
42
Appellants purchased securities from those underwriters. 17 Under Section
12(a)(2), a plaintiff has standing to bring an action against the seller of a
security only if the plaintiff is “the person purchasing such security from
them.” Akerman v. Oryx Commc’ns, Inc., 810 F.2d 336, 344 (2d Cir. 1987)
(quotation marks omitted); see also Freidus v. Barclays Bank PLC, 734 F.3d
132, 141 (2d Cir. 2013) (“In order to have standing under § 12(a)(2), . . .
plaintiffs must have purchased securities directly from the defendants.”); 15
U.S.C. § 77l(a). A “statutory seller” may include an underwriter who
successfully solicited the transfer of title from issuer to purchaser in exchange
for some financial gain. 18 Morgan Stanley, UBS, and KBW assert that in a case
involving multiple underwriters of a single offering, the purchaser of a
security must in its pleadings specifically identify which underwriter sold the
17 The Underwriter Defendants do not challenge Appellants’ standing to sue the
underwriters of the November 2015 Offering—Citigroup and Morgan Stanley—or
their standing to sue RBC for the September 2016 Offering.
18 In a similar vein, a purchaser of a security has standing to bring an action under
Rule 10b–5a against underwriters (and brokers, dealers, and non-issuer sellers) for
material misstatements about the security “if those entities made material
misstatements about the security, as long as the plaintiff[] purchased or sold the
securities about which the misstatements were made.” Menora Mivtachim Ins. Ltd.
v. Frutarom Indus. Ltd., 54 F.4th 82, 88 (2d Cir. 2022); see In re NYSE Specialists Sec.
Litig., 503 F.3d 89, 102 (2d Cir. 2007).
43
security at issue in order to have standing to sue that underwriter. We have
not yet addressed this question.
We conclude that the Appellants have adequately established standing
under Section 12(a)(2) by alleging that they purchased securities pursuant to
the “pertinent offering documents” or in the relevant offerings underwritten
by the defendants. In re Lehman Bros. Sec. & ERISA Litig., 799 F. Supp. 2d
258, 311 (S.D.N.Y. 2011) (Kaplan, J.). Here, according to the Complaint, the
Appellants bring their Section 12(a)(2) claims on their own behalf and on
behalf of “other members of the Securities Act Class who purchased AmTrust
common stock or [shares sold in connection with the September 2016
Offering] pursuant to the Prospectuses.” Joint App’x 132 (emphasis added).
We can reasonably infer from these allegations that the Appellants acquired
securities from the Underwriter Defendants in connection with the September
2016 Offering. We are therefore satisfied that the allegations suffice to
establish the Appellants’ standing in this case. See, e.g., John v. Whole Foods
Mkt. Grp., Inc., 858 F.3d 732, 736–38 (2d Cir. 2017) (noting that “general
factual allegations of injury may suffice” to establish standing, “for on a
44
motion to dismiss we presume that general allegations embrace those specific
facts that are necessary to support the claim” (cleaned up)).
Turning to the merits, the District Court dismissed the Appellants’
Section 11 and Section 12 claims against the Underwriter Defendants,
concluding that the Appellants had “fail[ed] to allege any untrue or
misleading statements of material fact or opinion with respect to those
claims.” Spec. App’x 73. In other words, the District Court dismissed these
claims, which it described as “identical to those of the Securities Act claims
asserted against the AmTrust [D]efendants,” for effectively the same reasons
it dismissed the claims against the AmTrust Defendants. Spec. App’x 73. For
reasons we have already provided, we disagree with the District Court’s
conclusion that the reported income statements related to AmTrust’s
warranty contracts and its employee bonuses were non-actionable opinions.
Insofar as the District Court dismissed the Appellants’ claims under Section
11 and Section 12(a)(2) against the Underwriter Defendants arising from those
two categories of statements, we vacate the dismissal and remand for further
45
proceedings consistent with this opinion. As to any remaining claims against
the Underwriter Defendants, we affirm the District Court’s dismissal.
IV. The Claims Against BDO, AmTrust’s Outside Auditor
Finally, we address the Appellants’ claims against AmTrust’s outside
auditor, BDO, under Section 11 of the Securities Act in connection with BDO’s
audit reports on AmTrust’s financial statements and its system of internal
controls over financial reporting for each of the years ended December 31,
2013–15, and under Section 10(b) of the Exchange Act and Rule 10b-5 in
connection with its audit report for the year ending December 31, 2013 (“2013
Audit Opinion”), which was included in AmTrust’s 2013 Form 10-K.
We begin with the Securities Act claims. Section 11 provides in relevant
part that if “any part of the registration statement . . . contained an untrue
statement of material fact,” anyone acquiring the associated security may sue
“every accountant . . . who has with his consent been named as having
prepared or certified any part of the registration statement or . . . any report or
valuation which is used in connection with the registration statement.” 15
U.S.C. § 77k(a)(4). BDO is thus responsible under Section 11 for any material
inaccuracy in the AmTrust registration statements that it certified, or in
46
financial reports incorporated in those statements. Id.; see Miyahira v.
Vitacost.com, Inc., 715 F.3d 1257, 1265 (11th Cir. 2013); Belizan v. Hershon, 495
F.3d 686, 692 (D.C. Cir. 2007); see also Herman & MacLean v. Huddleston, 459
U.S. 375, 381 n.11 (1983).
As BDO observes, the Appellants have not developed the argument in
their opening brief challenging the District Court’s dismissal of the Section 11
claim against BDO. The challenge, if it can be called that, appears in a
footnote. See Norton v. Sam’s Club, 145 F.3d 114, 117 (2d Cir. 1998) (“[A]n
argument made only in a footnote [i]s inadequately raised for appellate
review.”). Although the Appellants develop the argument somewhat in their
reply brief, that is too little too late. See JP Morgan Chase Bank v. Altos
Hornos de Mexico, S.A. de C.V., 412 F.3d 418, 428 (2d Cir. 2005)
(“[A]rguments not made in an appellant’s opening brief are waived even if
the appellant . . . raised them in a reply brief.”). We thus conclude that the
Appellants’ challenge to the dismissal of the Section 11 claim against BDO is
abandoned, we affirm the District Court’s dismissal of that claim, and we
proceed to examine the Exchange Act claims against BDO.
47
The Appellants contend that BDO is liable under Section 10(b) of the
Exchange Act for the 2013 Audit Opinion, which stated that BDO had
conducted its audit in accordance with standards promulgated by the Public
Company Accounting Oversight Board (“PCAOB”), and that the audit
provided a reasonable basis for BDO to determine that AmTrust’s financial
statements were fairly presented. Joint App’x 246–47.
On its face, the 2013 Audit Opinion appears in the same guise as the
SOX certifications that we have already concluded are non-actionable
opinions. But the Complaint alleges some key facts that differentiate the
audit opinion from those certifications. The Appellants allege that the BDO
engagement partner on the audit, Richard J. Bertuglia, and another BDO
partner, John W. Green, in fact failed to complete the necessary checks and
audit work papers before issuing the audit opinion; that they signed several
audit work papers without reviewing them; and that they failed to verify that
all the necessary audit work was performed before issuing the opinion. The
Appellants also allege that the SEC later found that (1) Bertuglia had violated
the PCAOB standards by failing to supervise and exercise due professional
care, properly examine journal entries for evidence of possible material
48
misstatement due to fraud, or perform sufficient tests of internal controls and
substantive audit procedures to support their final opinion, and (2) Green
violated PCAOB standards by failing to perform the appropriate engagement
quality review.
We agree with the District Court that the Appellants have adequately
alleged that BDO’s audit opinion contained potentially actionable
misstatements of opinion because the Complaint “render[s] it plausible that
Bertuglia,” who signed the audit opinion, “disbelieved the statement that the
audit was conducted in accordance with the relevant PCAOB standards.”
Spec. App’x 78. The Appellants have also adequately alleged that BDO’s
statement that it “believe[d] [its] audits provide a reasonable basis for [its]
opinion,” Joint App’x 246–47, would lead a reasonable investor to conclude
that BDO had conducted “some meaningful . . . inquiry,” Omnicare, 575 U.S.
at 188, when in fact, according to the Complaint, BDO never conducted such
an inquiry.
But we also agree with the District Court that the Appellants’ Section
10(b) and Rule 10b-5 claim against BDO must be dismissed because the
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Complaint does not adequately allege that the misstatement in BDO’s 2013
Audit Opinion was material.
To state a claim under § 10(b) and the
corresponding Rule 10b–5, a plaintiff must plead
that the defendant, in connection with the
purchase or sale of securities, made a materially
false statement or omitted a material fact, with
scienter, and that the plaintiff’s reliance on the
defendant’s action caused injury to the plaintiff.
Ganino v. Citizens Utils. Co., 228 F.3d 154, 161 (2d Cir. 2000). “At the
pleading stage, a plaintiff satisfies the materiality requirement . . . by alleging
a statement or omission that a reasonable investor would have considered
significant in making investment decisions.” Id. at 161–62; see Basic Inc. v.
Levinson, 485 U.S. 224, 231–32 (1988). “[A] complaint may not properly be
dismissed . . . on the ground that the alleged misstatements or omissions are
not material unless they are so obviously unimportant to a reasonable
investor that reasonable minds could not differ on the question of their
importance.” Ganino, 228 F.3d at 162 (quotation marks omitted); see Litwin,
634 F.3d at 717.
As the District Court concluded, the Complaint fails to allege any link
between BDO’s misstatements in the 2013 Auditor Opinion and the material
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errors contained in AmTrust’s 2013 Form 10-K. The audit statements to
which the Appellants point were “so general” in this case “that a reasonable
investor would not depend on [them] as a guarantee.” ECA, 553 F.3d at 206.
Appellants’ “claim that these statements were knowingly and verifiably false
when made does not cure their generality, which is what prevents them from
rising to the level of materiality required to form the basis for assessing a
potential investment.” SAIC, 818 F.3d at 97–98 (quotation marks omitted).
We do not mean to suggest that audit opinions will always fail the materiality
test because the statements they contain are too general for investors to rely
on. Rather, in this case, as the District Court held, Appellants have failed “to
allege any facts relevant to the way or ways in which BDO's failure to
supervise, review, document, and perform in good faith the 2013 audit would
have been significant to a reasonable investor in making investment
decisions.” Spec. App’x 79. We might have come to a different conclusion
had such facts been alleged.
For these reasons, we affirm the District Court’s dismissal of the
Appellants’ Exchange Act claims under Section 10(b) and Rule 10b-5 against
BDO.
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CONCLUSION
To summarize:
1. We vacate the dismissal of the Appellants’ Section 11 claims
against the AmTrust Defendants and the Director Defendants,
the Section 12(a)(2) claims against AmTrust, and the Section
15 claims against the Officer Defendants and Director
Defendants (Zyskind, Pipoly, DeCarlo, Fisch, Gulkowitz,
Karfunkel, and Miller) relating to AmTrust’s accounting for
certain warranty contracts and bonuses.
2. We vacate the dismissal of the Appellants’ claims under
Section 11 and Section 12(a)(2) against the Underwriter
Defendants relating to AmTrust’s accounting for certain
warranty contracts and bonuses.
3. We otherwise affirm the judgment of the District Court.
We have considered the Appellants’ remaining arguments and
conclude that they are without merit. Accordingly, for the reasons set forth
above, the judgment of the District Court is AFFIRMED in part and
VACATED in part, and the case is REMANDED for proceedings consistent
with this opinion.
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