Okay, the “unreported dead” aren’t as exciting as the undead, and this decision will never form the basis of a decent zombie movie. Still, the world depends upon its accountants and their delicious but uneaten brains.
On September 11, 2015, the U.S. District Court, Southern District of New York dismissed (most of) a complaint brought by the City of Westland Police and Fire Retirement System against MetLife Inc., named directors and officers of MetLife, and several securities firms that underwrote MetLife securities during the decade prior to 2007. It dismissed the several charges in the complaint that failed to meet the tests created by the U.S. Supreme Court in the Omnicare decision earlier this year, which protects public corporation defendants from 10(b) lawsuits on the basis of statements of opinion by executives.
The significance of Westland, then, is that it shows us what happens when the rubber hits the road. It indicates that the Omnicare rule will matter. Omnicare will do more than simply require plaintiffs’ attorneys to re-work their complaints: it will effectively bar certain sorts of claims.
This new application of that bar arose out of litigation over the unreported dead.
Opinion is Not Securities Fraud
In Omnicare, the Supreme Court held that statements of opinion are not normally actionable under securities fraud. That is, plaintiffs who want to bring a case that alleges, as part of its underlying theory, that the CEO s of Widgetmaking Giant Inc. spoke quite optimistically about prospects for his company’s newest line of widgets and that this rosy-scenario-based oratory artificially inflated prices of the stock of WGI, will now have to allege further that (1) the CEO didn’t believe what he was saying when he said it, or (2) his speechifying included an untrue statement of fact, or (3) his speech omitted mention of a related fact so material as to make the opinion, in its absence, misleading.
The Westland case was pending before the trial court when the U.S. Supreme Court granted cert in the Omnicare case. Since the legal issues were similar, Judge Lewis A. Kaplan told the litigants before him: let’s freeze it for now, wait on this. After SCOTUS ruled, Kaplan thawed out the matter before him, heard further arguments from both sides, and issued this opinion.
The twist in Westland case it that it turns on the proper accounting treatment of IBNR reserves. These are the loss reserves a life insurance company must hold against the possibility that it will have to make pay-outs for death benefits “incurred by not reported.”
In 2007 MetLife apparently compared its own roster of individual life insureds to the Social Security Administration Death Master File. The plaintiffs alleged that this cross-check uncovered $80 million in unclaimed benefits that were due. Plaintiffs asserted that this cross-check was more of a jolt than it had to be, to MetLife’s stock price, because MetLife had failed to maintain a proper loss reserve against just this possibility over the preceding several years. Chiefly because it hadn’t done such checks as a regular matter. So … the inadequate accounting methods of MetLife had functioned like the CEO’s puffery in our widget hypothetical: it had resulted in an overvaluation of the price, setting up a sharp decline and damage to stockholders when the truth came out.
But does Omnicare protect MetLife and its co-defendants here? Consider the three points listed above. The first and third were the ones contested here. First, Judge Kaplan found that the plaintiffs had failed to allege that MetLife’s executives disbelieved anything they were saying about unreported deaths or loss reserves.
Further, as to the omission of material facts, Kaplan said that the plaintiffs had not alleged either that “it was a custom or practice among life insureds to estimate IBNR reserves by conducting a cross-check of the SSA-DMF against all life insureds” [which would give factual support to the contention that the 2007 check was well overdue], or that the actuarial foundation on which MetLife did rest its IBNR reserve estimates “did not comport with what a reasonable person … fairly and in context would have expected.”
As Kaplan also observed, drawing on a 1991Second Circuit decision, GAAP doesn’t specify a precise actuarial method for determining IBNR, it only says that insurers must make a reasonable estimate of such liabilities.