• Southern District Of New York Allows Securities Act Claims To Proceed Based On Material Omissions Regarding Loss Reserves 
   

  11/21/2016
  On November 10, 2016, Judge Lewis A. Kaplan of the United States District Court for the Southern District of New York granted in part and denied in part the motion to dismiss filed by defendants MetLife, Inc. (“MetLife”), certain of its officers and directors, and the underwriters of certain MetLife offerings.  City of Westland Police & Fire Ret. Sys. v. MetLife, Inc., No. 12-cv-0256 (LAK) (S.D.N.Y. Nov. 10, 2016).  Plaintiff alleged that MetLife misled investors regarding its financial performance because certain loss reserves underlying its financial statements failed to take into consideration policy holders who had died but had not filed claims yet.  The Court dismissed plaintiff’s claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) because plaintiff failed to plead that defendants acted with scienter, but the Court ruled that plaintiff had adequately alleged a material omission and permitted plaintiff’s claims under Sections 11, 12, and 15 of the Securities Act of 1933 (“Securities Act”) to proceed. 
  
  Plaintiff alleged that MetLife misled investors by failing to accurately reflect in its loss reserves certain incurred but not reported (IBNR) death benefits, which are insurance claims that the company owed but that had not yet been claimed by beneficiaries.  In support, plaintiff noted that MetLife reviewed a Social Security database of all deaths recorded in the United States and based on that review, MetLife increased its reserves by $25 million for individual life insurance plans.  Despite performing this cross-check for its individual plans, plaintiff alleged that MetLife never performed a similar cross-check for its group plans, which (if it had done so) would have revealed that MetLife’s loss reserves were inadequate. 
  
  In ruling on the motion to dismiss, the Court noted that MetLife’s implicit representation about the adequacy of its IBNR reserves was a statement of opinion, not of fact.  The Court held, however, that plaintiff’s allegation that MetLife had discovered a $25 million IBNR shortfall in reserves for individual insurance plans by cross-checking against a national registry, but did not run a similar cross-check for group plans called into question whether MetLife’s opinion was aligned with the information in its possession at the time it issued the opinion.  The Court nevertheless dismissed the Exchange Act claims because it determined that plaintiff failed to sufficiently plead scienter. 
  
  In connection with the Securities Act claims, the Court denied plaintiff’s motion to dismiss because, among other reasons, plaintiff adequately alleged that MetLife omitted to state material facts about its inquiry into or knowledge concerning its implicit representations with respect to the adequacy of its IBNR reserves, thereby rendering those representations misleading. 
  
  This decision highlights the difference between the requirements to plead that an opinion is misleading and the requirements to plead scienter.  Here, the Court ruled that plaintiff adequately pleaded that MetLife’s statement of opinion was misleading because “MetLife knew that its estimated IBNR reserves were insufficient to meet its life insurance policy obligations,” but nevertheless concluded that more was required to plead a strong inference of scienter under the PSLRA.  
  Categories: Misstatement/Omission, Scienter
  

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• City of Westland Police & Fire Ret. Sys.