California Public Employees' Retirement System v. Chubb Corp.

Opinions of the United

2004 Decisions States Court of Appeals

for the Third Circuit

12-30-2004

CA Pub Empl Ret Sys v. Chubb Corp

Precedential or Non-Precedential: Precedential

Docket No. 03-3755

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 03-3755

CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT

SYSTEM, on behalf of itself and all others similarly situated;

NEW YORK STATE COMMON RETIREMENT FUND;

*THE BUTLER WICK TRUST COMPANY, THE

EXECUTOR OF THE ESTATE OF JOHN N. TEEPLE,

DECEASED,

Appellants

v.

THE CHUBB CORPORATION; DEAN R. O’HARE; DAVID

B. KELSO; HENRY B. SCHRAM ; EXECUTIVE RISK INC.;

STEPHEN J. SILLS; ROBERT H. KULLAS;

ROBERT V. DEUTSCH

*Pursuant to the Court’s Order of 10/5/04

On Appeal from the United States District Court

for the District of New Jersey

(D.C. Civil No. 00-cv-04285)

District Judge: Hon. Garrett E. Brown, Jr.

Argued October 7, 2004

BEFORE: SLOVITER, VAN ANTWERPEN and COWEN,

Circuit Judges

(Filed December 30, 2004 )

William S. Lerach, Esq.

Eric A. Isaacson, Esq. (Argued)

Lerach, Coughlin, Stoia, Geller,

Rudman & Robbins

401 B Street

Suite 1700

San Diego, CA 92101

Counsel for Appellants

Herbert Wachtell, Esq. (Argued)

Jonathan E. Pickhardt, Esq.

John F. Savarese, Esq.

Wachtell, Lipton, Rosen & Katz

51 West 52 nd Street

New York, NY 10019

Mary C. Roper, Esq.

Drinker, Biddle & Reath

18 th & Cherry Streets

One Logan Square

Philadelphia, PA 19103

Counsel for Appellees The Chubb Corporation;

Dean R. O’Hare; David B. Kelso;

Henry B. Schram; Executive Risk Inc.

William J. O’Shaughnessy, Esq. (Argued)

McCarter & English

100 Mulberry Street

Four Gateway Center

Newark, NJ 07102-0652

Counsel for Appellees Stephen J. Sills;

Robert H. Kullas; Robert V. Deutsch

2

OPINION OF THE COURT

COWEN, Circuit Judge

This is a securities class action lawsuit brought on behalf of

shareholders of the Chubb Corporation (“Chubb”) against Chubb,

Executive Risk, Inc. (“Executive Risk”), and several Chubb and

Executive Risk officers. Plaintiffs aver that Defendants defrauded

investors by artificially inflating the value of Chubb’s common

stock through accounting manipulations and false statements

designed to effectuate a stock-for-stock merger between Chubb and

Executive Risk, and avoid an alleged hostile takeover attempt. The

District Court granted Defendants’ motion to dismiss Plaintiffs’

Second Amended Complaint pursuant to Fed. R. Civ. P. 12(b)(6),

the Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C.

§§ 78u-4 et seq., and Fed. R. Civ. P. 9(b), and denied Plaintiffs

leave to file a Third Amended Complaint. We will affirm.

I.

A.

In reviewing the factual background of this litigation, we

accept as true the well-pleaded allegations in the Second

Amended Complaint and consider the documents incorporated

by reference therein. See In re Burlington Coat Factory Sec.

Litig., 114 F.3d 1410, 1420, 1426 (3d Cir. 1997).

Background to Class Period

Plaintiffs are investors who acquired Chubb common

stock between April 27, 1999 and October 15, 1999 (the “Class

Period”), including the former shareholders of Executive Risk

who exchanged their Executive Risk shares for shares of Chubb

stock pursuant to a merger of the companies that occurred on

July 20, 1999. The Defendants are Chubb, Executive Risk, and

their top former corporate officers, Chubb Chief Executive

Officer (“CEO”) Dean R. O’Hare, Chief Financial Officer

3

(“CFO”) David B. Kelso, Chief Accounting Officer Henry B.

Schram, and Executive Risk CEO Stephen J. Sills, Board

Chairman Robert H. Kullas, and CFO Robert V. Deutsch.

Chubb is a diversified insurance company headquartered

in Warren, New Jersey, with local branch and service offices

throughout North America and internationally. Chubb sells

personal, standard commercial and specialty commercial

insurance and is one of the largest national underwriters of

directors’ and officers’ liability insurance. The claims in this

securities class action concern Chubb’s standard commercial

insurance business, which accounts for approximately one-third

of Chubb’s total premiums.

Beginning in 1995 and continuing through 1998, Chubb’s

financial performance deteriorated. Chubb consistently cited the

competitive standard commercial insurance market as the cause

of its poor performance during this period. On February 2, 1999,

Chubb reported disappointing fourth quarter 1998 and year-end

results. Defendant O’Hare assured investors that “[w]e are

taking aggressive steps to achieve adequate prices for this

business, and we expect to see the impact of these actions as we

move through the renewal cycle.” (Compl. ¶ 17.)

O’Hare employed two strategies to address Chubb’s

flagging business. First, to combat the continuing diminution of

Chubb’s stock price and earnings-per-share (“EPS”) in the latter

half of 1998, O’Hare promulgated what Plaintiffs refer to as the

“rate increase/policy non-renewal initiative” (hereinafter referred

to as the “rate initiative”). Announced in October 1998

following the release of disappointing third quarter 1998 results,

the rate initiative sought to revamp the standard commercial

insurance operations by increasing premiums and refusing to

renew unprofitable business. Second, in an effort to counter the

difficulties in the standard commercial business and increase

profitability, Chubb sought to acquire a profitable specialty

insurance company. Accordingly, in 1998, Chubb targeted

Executive Risk, a profitable insurance carrier specializing in

directors’ and officers’ liability insurance, for acquisition. On

February 6, 1999, following negotiations which took place

4

between October and December 1998 and due diligence

investigations conducted in January 1999, Defendants O’Hare

and Sills publicly announced the merger agreement. The terms

included a stock-for-stock acquisition at a fixed exchange ratio

of 1.235 Chubb shares to each share of Executive Risk stock.

On February 5, 1999, the agreed-to-ratio represented a premium

of 63%, as Chubb stock was valued at $58 1/16 and Executive

Risk stock was valued at $44. In addition, Plaintiffs contend that

Executive Risk’s Board members, including Sills, Kullas, and

Deutsch, were given special benefits and payments for endorsing

the transaction to Executive Risk shareholders. Final approval

of the merger was subject to a vote of Executive Risk’s

shareholders.

Plaintiffs claim that the impending Executive Risk

shareholder vote and fixed exchange ratio placed tremendous

pressure on Chubb, O’Hare, Kelso, and Schram to halt the

decline of Chubb’s stock price,1 because any further decline

would result in less consideration for Executive Risk

shareholders and thereby jeopardize the merger vote. As such,

Plaintiffs allege that the Chubb Defendants issued false and

misleading statements representing that the rate initiative was

ameliorating the problems in the standard commercial lines

business, and that it was doing so more quickly than anticipated.

This, Plaintiffs allege, artificially inflated the value of Chubb’s

stock and portrayed the merger as more beneficial to Executive

Risk shareholders than it truly was. Plaintiffs also claim that the

Chubb Defendants were motivated to continue to artificially

inflate the price of Chubb’s stock following consummation of

the acquisition because Chubb was threatened with a hostile

takeover.

False Statements and False Financial Results: First Quarter

1999

1

Notably, however, immediately prior to the release of Chubb’s

first quarter 1999 results on April 27, 1999, Chubb’s share price closed

at $58 1/16, the same price at which it had closed on February 5, 1999,

the day before the announcement of the Executive Risk merger.

5

According to Plaintiffs, Defendants’ allegedly fraudulent

scheme to inflate the value of Chubb’s stock began with the

release of Chubb’s first quarter 1999 results via a press release

issued on April 27, 1999.

The first quarter 1999 results were better than expected,

revealing an improved EPS and a combined ratio 2 of 117.9% in

the standard commercial insurance lines, down from 119.5% in

the fourth quarter 1998 report. Plaintiffs claim that the Chubb

Defendants intentionally falsified these results, including the

calculation of the combined ratio, by violating generally

accepted accounting principles (“GAAP”) and SEC rules. In

addition, Plaintiffs allege that in the days and weeks following

the release of the first quarter 1999 results, the Chubb

Defendants promulgated numerous statements falsely attributing

the favorable first quarter 1999 results to the success of the rate

initiative in turning around the standard commercial lines and

forecasting even further improvement.

Plaintiffs assert that statements contained in Chubb’s

April 27, 1999 press release were false, as were statements made

by individual Chubb Defendants in follow-up conversations and

conference calls with analysts and investors. Chubb’s April 27,

1999 press release stated that

[O]ur pricing strategy in standard commercial lines

has begun to show the impact we are looking for in

our renewal business. Month by month, renewal

rate increases are building momentum, and we

expect this trend to continue. Moreover, we have

been successful in retaining business we want to

keep at higher rates, while at the same time we are

walking away from business where we can’t obtain

adequate pricing. By maintaining this profit

oriented discipline, standard commercial lines will

likely show a decline in premiums throughout the

2

The “combined ratio” compares the incurred losses plus

operating expenses of an insurance business to its total earned premiums.

A ratio over 100% generally indicates an underwriting loss.

6

year and produce improved combined ratios. This

decline in premiums should be offset by continued

premium growth in personal and specialty

commercial lines and by the benefits of a series of

growth initiatives begun late last year.

It also represented that Chubb’s standard commercial insurance

combined ratio was 117.9%, down from the fourth quarter 1998

combined ratio of 119.5%. Plaintiffs claim that in a follow-up

conference call held on April 27, 1999, and in follow-up

conversations with individual analysts, money and portfolio

managers, institutional investors and large Chubb shareholders,

Defendants O’Hare and Schram maintained that

(a) the rate initiative was not only working, but was actually

exceeding management’s expectations, and this accounted in

large part for Chubb’s better-than-expected first quarter 1999

results;

(b) as a result of the successful turnaround of Chubb’s standard

commercial insurance operations, that part of Chubb’s business

would show 5 1/2% to 6% premium growth throughout 1999, as

Chubb’s rate increases for new or renewal standard commercial

insurance policies were sticking;

(c) the momentum of rate increases in Chubb’s standard

commercial insurance operations was growing month by month;

(d) Chubb was successful at retaining the higher priced standard

commercial insurance rate which it desired and was profitable;

(e) although Chubb was prepared to lose between $250 and $300

million in standard commercial insurance business, as this would

make that business more profitable, Chubb was not losing as

much of its standard commercial insurance business due to rate

increases as it had feared; and

(f) the combined ratio of Chubb’s standard commercial

insurance business would decline throughout 1999, to about

110% by year-end from 119.5% at year-end 1998, ultimately

7

producing an underwriting profit by 2000.

Furthermore, according to Plaintiffs, O’Hare stated that “[y]ou

guys are so bloody negative it’s disgusting. We’re trying to send

a strong signal to you that things are getting better. I don’t know

how else to say it . . . This god dam [sic] ship has turned faster

than I thought it was going to.” (Compl. ¶ 38.)

The individual Chubb Defendants repeated these

statements several times, including in private conversations with

various analysts subsequent to the April 27, 1999 conference

call, and during the 1999 Annual Chubb Shareholders’ Meeting

on April 27, 1999. Moreover, the Chubb Defendants informed

analysts of Chubb’s decision to increase its forecasted 1999 EPS

to $4.10+ and its 2000 EPS to $4.50+ because of the better-than-

expected pace of the turnaround of Chubb’s standard

commercial insurance business.

On May 12, 1999 in a private meeting with securities

analysts, institutional investors and money managers in Boston,

Defendant O’Hare allegedly maintained that premium rates were

rising in the standard commercial lines and forecasted a 1999

EPS of $4.28 and a 2000 EPS of $4.70.

Chubb’s Form 10-Q Report for first quarter 1999, signed

by Schram and filed with the SEC on May 14, 1999, provided

that total premiums had decreased by 3.9% in the standard

commercial lines as a result of the rate initiative, but that on

renewed business “rates increased moderately in the first quarter

of 1999 and we expect this trend to continue.” (Id. ¶ 51.)

In a June 2, 1999 conference attended by Chubb

shareholders, securities analysts, institutional investors and

money managers, O’Hare reiterated in a speech and in follow-up

private conversations his optimistic assessments of Chubb’s

standard commercial lines and his forecasts for improved EPS,

combined ratio, and premium growth throughout 1999. He

further predicted that “the standard commercial insurance

business would produce an underwriting profit by the year 2000

and a 6% total return on equity by 2001.” (Id. ¶ 52.)

8

On June 15, 1999, at a luncheon with several securities

analysts O’Hare expressed that he was “more optimistic than

usual” and added that Chubb would realize a 6% return on equity

in the standard commercial lines by late 2000. Based upon a

June 25, 1999 meeting between O’Hare and an analyst from

Bear Stearns, Bear Stearns reported O’Hare’s statement “that the

company’s repricing/underwriting project in the standard

commercial lines . . . continues to make progress” and “the

decline in retentions appears to have bottomed, and management

expects these figures to begin to move higher.” (Id. ¶ 61.)

Plaintiffs contend that the falsified first quarter 1999

results and the Chubb Defendants’ subsequent representations

immediately caused the value of Chubb stock to rise.3

The Executive Risk / Chubb Registration Statement and Merger

Proxy Statement

On June 17, 1999, Chubb and Executive Risk filed with

the SEC the Registration Statement and Merger Proxy related to

the proposed merger. The individual Chubb Defendants signed

the Registration Statement, and the individual Executive Risk

Defendants wrote the Merger Proxy.

The Merger Proxy was mailed to Executive Risk

shareholders on June 18, 1999. The Merger Proxy unanimously

recommended approval of the merger to the company’s

shareholders and concluded that “the merger is in the best

interests of Executive Risk and its shareholders.” The Merger

Proxy also incorporated the opinions of certain securities

analysts that “the merger consideration is fair to Executive Risk

stockholders from a financial point of view.” The Merger Proxy

included Chubb’s first quarter 1999 results by reference to

Chubb’s first quarter 1999 Form 10-Q statement, and it detailed

the climb in Chubb stock value between February 5, 1999 and

June 15, 1999.

3

Chubb stock traded at $57 per share on April 26, 1999, $70 5/16

per share on May 7, 1999, $76 3/8 per share on May 14, 1999 (the Class

Period high) and closed at $70 9/16 on June 15, 1999.

9

Plaintiffs allege that the representations contained in the

Registration Statement and Merger Proxy were false and

misleading because they were based upon Chubb’s falsified first

quarter 1999 results, the Chubb Defendants’ false statements

regarding the standard commercial insurance business made

thereto, and the artificially inflated price of Chubb stock.

Plaintiffs further assert that the Executive Risk Defendants

recommended the merger to the shareholders in exchange for,

inter alia, millions of dollars in special benefits from Chubb.

Executive Risk’s shareholders approved the merger on

July 19, 1999, and it was executed the following day.

Anticipating the release of lower-than-forecast second quarter

1999 results, Chubb’s stock price began to fall immediately

thereafter.

False Statements and False Financial Results: Second Quarter

1999

On July 27, 1999, approximately one week following

consummation of the merger, Chubb released its second quarter

1999 results. The second quarter had closed on June 30, 1999.

Plaintiffs allege that the EPS of $1.00 per share and reported

combined ratio of 120.8% were “well below expected results.”

(Compl. ¶ 64.) Although O’Hare admitted that he had previously

been “overly optimistic at the end of the first quarter” regarding

turnaround of the standard commercial lines, Plaintiffs contend

that the second quarter 1999 results were false and misleading,

and that the Chubb Defendants continued to conceal the true

extent of the rate initiative’s failure with purportedly false and

misleading statements.

Chubb’s July 27, 1999 press release provided, in part:

Standard commercial lines premiums in the second

quarter declined 9% to $455.4 million and had a

combined ratio of 120.8%. “We made continued progress

in improving pricing in our standard commercial lines

during the quarter,” said Mr. O’Hare. “Our pricing

initiative is building momentum, with rates on renewal

10

business continuing to accelerate. We have retained

business we want to keep at more attractive rates, while

walking away from unprofitable or under-priced renewals

. . . .”

“Given the moderate magnitude of rate increases

in the early stages of the repricing program,” said Mr.

O’Hare, “it will take at least two renewal cycles to

adequately reprice the entire standard commercial book,

and during that time we will continue to have losses from

non-renewed policies. Thus . . . it will be mid-2000

before the benefits of these actions significantly flow to

the bottom line.”

(Id.) In a follow-up conference call and in subsequent

conversations with analysts, O’Hare and Kelso allegedly stated:

(a) Management’s actions to turn around Chubb’s standard

commercial insurance operations by raising prices and not

renewing unprofitable policies were in fact working, but would

take longer than expected to benefit Chubb’s EPS;

(b) the rate increases in Chubb’s standard commercial insurance

operations were still growing;

(c) the combined ratio of Chubb’s standard commercial

insurance business would decline during the balance of 1999;

and

(d) the changes in Chubb’s standard commercial insurance

business would produce an underwriting profit by 2000 and a

6% total return on equity by 2001.

Defendants O’Hare and Kelso repeated this information

in private conversations with various analysts, and indicated that

Chubb still expected a 1999 EPS of over $4.00 and a 2000 EPS

of over $4.50.

In response to these disappointing results, Chubb’s stock

continued to drop to as low as $58 5/8 on July 30, 1999.

11

Plaintiffs maintain, however, that Chubb’s stock traded at

artificially inflated levels throughout the remainder of the Class

Period because of the Chubb Defendants’ refusal to completely

disclose the failure of the rate initiative and its financial impact,

their use of falsified second quarter 1999 data, and their

continued circulation of false and misleading statements. In

addition, Plaintiffs aver that Chubb failed to disclose the adverse

effects of its integration with Executive Risk.

Chubb’s purportedly fraudulent second quarter 1999

statements were included in second quarter Form 10-Q report,

filed with the SEC in August 1999. This report stated:

Premiums from standard commercial

insurance, which represent 34% of our total

writings, decreased by 6.4% in the first six months

of 1999 and 9.1% in the second quarter compared

with the similar periods in 1998. The decreases

were the result of the strategy we put in place in

late 1998 to renew good business at adequate

prices and not renew underperforming accounts

where we cannot attain price adequacy. On the

business that was renewed, rates have increased

modestly yet steadily in the first six months of

1999 and we expect this trend to continue.

Retention levels were lower in the first six months

of 1999 compared with the same period in 1998.

Approximately half of the non-renewals were the

result of business we chose not to renew and half

were the result of customers not accepting the

price increases we instituted. It will take at least

two renewal cycles to adequately reprice the entire

standard commercial book and during that time we

will continue to have losses from non-renewal

policies. Thus, it will be mid-2000 before these

actions have a significant positive effect on our

results.

(Id. ¶ 74.)

12

Close of Class Period: Third Quarter 1999 Results

On October 15, 1999, the close of the Class Period,

Chubb revealed its third quarter 1999 results. Chubb reported a

lower-than-forecast EPS of $.40 to $.45 per share, in part caused

by losses attributable to Hurricane Floyd.4 Chubb’s reported

standard commercial insurance combined ratio increased to

130%. Several analysts, while recognizing the negative impact

of Hurricane Floyd on these results, maintained that the poor

performance of the standard commercial lines contributed to the

earnings shortfall. Chubb’s October 15, 1999 press release

stated:

Chubb said its aggressive initiative to

reprice standard commercial business and to prune

unprofitable accounts continues to meet with

success. The average price increase on policies

renewed was higher in each successive month of

the third quarter, and unprofitable business is not

being renewed.

“We are headed in the right direction in

fixing the standard commercial business,” said

Dean O’Hare, chairman and chief executive

officer. “However, it will take time for the

benefits of the pricing initiative to reverse the

losses from underpriced business written in the

extremely competitive market of the past few

years.”

(App. at 538.)

Chubb’s 1999 Form 10-K, signed by O’Hare and Schram,

provided in part that “[t]he decrease in earnings in 1999 was due

to deterioration in underwriting results caused in large part by

the continued weakness in the standard commercial classes” and

4

Chubb’s press release explained that the third quarter results

were down “primarily as a result of catastrophe losses from Hurricane

Floyd.” (App. at 538.)

13

that “net premiums from standard commercial insurance

decreased 8% in 1999 compared with a 1% decrease in 1998.”

Moreover, “[i]t will take at least two annual renewal cycles to

adequately reprice the entire standard commercial book, and

during that time we will continue to have losses from

underpriced business. Thus, it will be the latter part of 2000

before our pricing initiative is expected to have a noticeable

effect on our standard commercial results.” (Compl. ¶ 83.)

The “True Facts” and Alleged Fraudulent Accounting Practices

Plaintiffs maintain that Defendants knew that the rate

initiative was failing throughout the Class Period, and

consequently falsified the first and second quarter 1999 results

and issued false statements thereto to effect an artificial inflation

of Chubb stock value. Furthermore, Plaintiffs assert that the

Chubb Defendants knew at the outset that even if the initiative

was ultimately successful, it would not manifest any significant

positive impact until at least mid-2000 because “it would take ‘at

least two annual renewal cycles’ for Chubb to reprice the

standard commercial lines premiums and after the premiums

were repriced it would take another year for the higher premiums

to be earned into income.” (Id. ¶¶ 24(h), 48(h).)

The supposed “true facts” asserted by Plaintiffs can be

summarized as follows: (1) Chubb’s attempts to raise premiums

were causing it to lose profitable business resulting in increasing

losses in the standard commercial lines because of an extremely

competitive market in which the competition was lowering

rates;5 (2) the rate increases that actually were obtained from

new and renewal standard commercial insurance policies were

too small to compensate for the growing underwriting losses in

5

While the Second Amended Complaint acknowledges that

Chubb disclosed that the rate initiative resulted in losses of hundreds of

millions of dollars of “good” business, Plaintiffs aver that Chubb lost

“additional undisclosed hundreds of millions of dollars in profitable

business that Chubb wanted to retain.” (Compl. ¶¶ 24(a), 48(a).)

14

the standard commercial insurance business;6 (3) Chubb was

keeping approximately 60% of its high-risk, unprofitable

customers that the rate initiative was supposed to eliminate; (4) it

was too soon for the rate initiative to have any significant impact

on Chubb’s financial results; and (5) the financial results and

combined ratio percentages were based on fraudulent

accounting.7

Plaintiffs charge the Chubb Defendants with deliberately

falsifying Chubb’s first and second quarter 1999 results by

flouting GAAP and SEC rules governing calculation of its

earnings for the purposes of concealing the failure of the rate

initiative and boosting Chubb’s stock. Specifically, Chubb

allegedly manipulated reserve levels in its standard commercial

and property and marine specialty insurance lines, failed to

properly report losses and expenses associated with its standard

commercial business, and prematurely recognized revenue for

premiums on policies which were not up for renewal until some

future point and on policies that had not yet been written.

According to Plaintiffs, Chubb’s falsified results enabled the

Chubb Defendants to render false EPS projections for 1999 and

2000, false combined ratios for the first and second quarter

1999, and false premium growth.

B.

Procedural History

Plaintiff California Public Employees’ Retirement System

(“Calpers”) filed a putative class action complaint on August 31,

6

Plaintiffs allege that Chubb was renewing the policies of 50%

of its customers either at flat rates or even at reduced premiums to keep

these customers.

7

Plaintiffs assert that the combined ratio of the standard

commercial lines reached 130% during the first quarter 1999 and

climbed even higher thereafter, far above the 117.9% stated in the first

quarter 1999 report and the 120.8% stated in the second quarter report

and the further decline forecast by the Chubb Defendants.

15

2000, asserting violations of §§ 10(b), 14, and 20(a) of the

Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq.,

(“1934 Act”), SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, and §§

11 and 15 of the Securities Act of 1933, 15 U.S.C. § 77a, et seq.,

(“1933 Act”). After appointing the lead plaintiffs and approving

their choice of counsel, the District Court granted Plaintiffs

leave to file an Amended Class Action Complaint by September

3, 2001. On June 26, 2002, the District Court granted

Defendants’ motion to dismiss the Amended Complaint, but

permitted Plaintiffs leave to file a Second Amended Class

Action Complaint. Plaintiffs filed the Second Amended

Complaint on August 9, 2002. The District Court dismissed the

Second Amended Complaint with prejudice on August 12, 2003.

The gravamen of Plaintiffs’ action alleges that

Defendants defrauded investors in Chubb and Executive Risk by

artificially inflating the value of Chubb’s stock with false

statements regarding Chubb’s standard commercial insurance

business for the purpose of effecting a stock-for-stock merger

between Chubb and Executive Risk. Plaintiffs aver three causes

of action. Count 1 asserts violations of § 10(b) of the 1934 Act

and Rule 10b-5 promulgated thereunder against all Defendants

on behalf of purchasers of Chubb stock during the Class Period.

Defendants allegedly defrauded purchasers by making materially

false and misleading statements regarding the financial condition

and future performance of Chubb’s standard commercial

insurance business. Count II asserts claims under § 11 of the

1933 Act against Defendants Chubb, O’Hare, Schram and Kelso

on behalf of shareholders of Executive Risk alleging that the

June 17, 1999 Registration Statement filed by Chubb for shares

issued to Executive Risk shareholders in the stock-for-stock

merger of the companies was false and misleading. Count III,

also alleging a cause of action on behalf of Executive Risk

shareholders, asserts that the proxy materials provided to

Executive Risk shareholders included false and misleading

statements in violation of § 14(a) of the 1934 Act, thereby

causing the Executive Risk shareholders to approve the merger

of the companies.

The Chubb Defendants advanced various arguments in

16

support of their motion to dismiss the Second Amended

Complaint. First, that the Second Amended Complaint fails to

allege with particularity facts sufficient to demonstrate the falsity

of the statements claimed to be false and/or misleading. Second,

that Plaintiffs fail to adequately plead scienter. Third, that the

statements alleged to be false and/or misleading are not

actionable as a matter of law. The Executive Risk Defendants

further argued that even if Plaintiffs sufficiently pled causes of

action against the Chubb Defendants, the claims nonetheless fail

as averred against the Executive Risk Defendants.

The District Court dismissed all Plaintiffs’ claims with

prejudice. The District Court dismissed Plaintiffs’ 1934 Act

section 10(b) securities fraud claims, finding that Plaintiffs

failed to satisfy the heightened pleading requirements imposed

by the PSLRA. Specifically, employing the approach fashioned

by the Second Circuit in Novak v. Kasaks, 216 F.3d 300 (2d

Cir.), cert. denied, 531 U.S. 1012 (2000), the District Court

found that Plaintiffs failed to plead the falsity of the Defendants’

statements and accounting fraud with the requisite particularity,

i.e. that they failed to plead with particularity the “true facts”

purporting to show how or why those statements are false. In

addition, the District Court determined that many of the

purported “true facts” are actually consistent with Defendants’

public statements throughout the Class Period, implying that

these unsupported allegations did not state a claim for relief.

Because the District Court determined that the section 10(b) and

Rule 10b-5 claims asserted against the Executive Risk

Defendants were essentially derivative of the claims asserted

against the Chubb Defendants, it dismissed them for a lack of

particularity as well. It further noted that Plaintiffs failed to

properly allege the falsity of the Executive Risk Defendants’

conclusion that the merger was in the best interest of Executive

Risk shareholders, even assuming that the value of Chubb’s

stock was artificially inflated. Given these dispositions, the

District Court did not consider Defendants’ additional arguments

that Plaintiffs failed to plead scienter with sufficient

particularity, and that many of the allegedly false statements

were nothing more than statutorily protected forward looking

statements of optimism. Regarding Plaintiffs’ 1933 Act section

17

11 and 1934 Act section 14(a) claims, the District Court

determined that those claims “sound in fraud” and thus are

subject to the heightened pleading standards of Fed. R. Civ. P.

9(b). In accordance with its prior finding that Plaintiffs had

failed to plead the falsity of the Defendants’ representations with

the requisite particularity, the District Court dismissed Plaintiffs’

claims under section 11 of the 1933 Act and section 14(a) of the

1934 Act for failure to state a claim. Because control person

liability under section 20(a) of the 1934 Act and section 15 of

the 1933 Act is premised upon a predicate violation of the 1934

Act and 1933 Act, respectively, those claims were dismissed as

well. Finally, the District Court denied Plaintiffs leave to file a

Third Amended Complaint because Plaintiffs were already

provided ample opportunity to state a cognizable cause of action,

and because of undue prejudice to Defendants.

II.

The District Court properly exercised jurisdiction under

28 U.S.C. § 1331, and 15 U.S.C. §§ 77v, 78aa. We have

appellate jurisdiction pursuant to 28 U.S.C. § 1291. We exercise

plenary review over the District Court’s decision to grant

Defendants’ motion to dismiss. See In re Rockefeller Ctr.

Props., Inc. Sec. Litig., 311 F.3d 198, 215 (3d Cir. 2002). We

also exercise plenary review over the District Court’s

interpretation of the federal securities laws. Oran v. Stafford,

226 F.3d 275, 281 n.2 (3d Cir. 2000). In reviewing the dismissal

of the Second Amended Complaint, we apply the same standards

applied by the District Court.

As Plaintiffs’ claims arise under the federal securities

laws, we review the relevant standards applicable to motions to

dismiss in that particular context. This requires an overview of

conventional motion to dismiss standards and how they interact

with the appropriate heightened pleading requirements.

A motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6)

may be granted only if, accepting all well pleaded allegations in

the complaint as true, and drawing all reasonable factual

inferences in favor of the plaintiff, it appears beyond doubt that

18

the plaintiff can prove no set of facts in support of the claim that

would warrant relief. Oran, 226 F.3d at 279. In making this

determination, we need not credit a complaint’s “bald

assertions” or “legal conclusions.” Morse v. Lower Merion Sch.

Dist., 132 F.3d 902, 906 (3d Cir. 1997).

In the Second Amended Complaint, Plaintiffs allege three

separate violations of the federal securities law. Count 1 alleges

violations of section 10(b) of the Securities and Exchange Act of

1934 and Rule 10b-5 promulgated thereunder. Section 10(b)

makes it unlawful for any person to “use or employ, in

connection with the purchase or sale of any security registered

on a national securities exchange or any security not so

registered, any manipulative or deceptive device or contrivance

in contravention of such rules and regulations as the

Commission may prescribe as necessary or appropriate in the

public interest or for the protection of investors.” 15 U.S.C. §

78j(b). Rule 10b-5 renders it illegal to “make any untrue

statement of a material fact or to omit to state a material fact

necessary in order to make the statements made in the light of

the circumstances under which they were made, not misleading .

. . in connection with the purchase or sale of any security.” 17

C.F.R. § 240.10b-5(b). To state a claim for relief under section

10(b), a plaintiff must plead facts demonstrating that (1) the

defendant made a materially false or misleading statement or

omitted to state a material fact necessary to make a statement not

misleading; (2) the defendant acted with scienter; and (3) the

plaintiff’s reliance on the defendant’s misstatement caused him

or her injury. In re Burlington Coat Factory Sec. Litig., 114

F.3d 1410, 1417 (3d Cir. 1997). In addition, the claim being

asserted must satisfy the heightened pleading requirements of

Rule 9(b), see id., and the PSLRA. In re Rockefeller, 311 F.3d

at 217.

Count III asserts a violation of section 14(a) of the 1934

Act against all Defendants. In pertinent part, section 14(a) states

that

[i]t shall be unlawful for any person . . . in

contravention of such rules and regulations as the

Commission may prescribe as necessary or

19

appropriate in the public interest or for the

protection of investors, to solicit . . . any proxy or

consent or authorization in respect of any security

(other than an exempted security) registered

pursuant to Section 781 of the Act.

15 U.S.C. § 78n(a). In contrast to section 10(b) and Rule

10(b)(5), scienter is not a necessary element in alleging a section

14(a) claim. See Gen. Elec. Co. v. Cathcart, 980 F.2d 927, 932

(3d Cir. 1992). To state a claim under section 14(a), a plaintiff

must aver that (1) a proxy statement contained a material

misrepresentation or omission which (2) caused the plaintiff

injury and (3) that the proxy solicitation itself, rather than the

particular defect in the solicitation materials, was an essential

link in the accomplishment of the transaction. Id.

Count II alleges that Defendants Chubb, O’Hare, Schram

and Kelso violated section 11 of the 1933 Act. Under section

11, any person acquiring a security issued pursuant to a

materially false or misleading registration statement may recover

damages. See 15 U.S.C. § 77k.

Independent of the standard applicable to Rule 12(b)(6)

motions, Fed. R. Civ. P. 9(b) requires that “[i]n all averments of

fraud or mistake, the circumstances constituting fraud or mistake

shall be stated with particularity.” This particularity requirement

has been rigorously applied in securities fraud cases. In re

Burlington, 114 F.3d at 1417. As such, plaintiffs asserting

securities fraud claims must specify “‘the who, what, when,

where, and how: the first paragraph of any newspaper story.’” In

re Advanta Corp. Sec. Litig., 180 F.3d 525, 534 (3d Cir. 1999)

(quoting DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.

1990)). “Although Rule 9(b) falls short of requiring every

material detail of the fraud such as date, location, and time,

plaintiffs must use ‘alternative means of injecting precision and

some measure of substantiation into their allegations of fraud.’”

In re Rockefeller, 311 F.3d at 216 (quoting In re Nice Systems,

Ltd. Sec. Litig., 135 F.Supp.2d 551, 577 (D.N.J. 2001)). Rule

9(b) governs Plaintiffs’ 1934 Act claims. As explained below,

Rule 9(b) also applies to Plaintiffs’ section 11 1933 Act claims,

20

because those claims are based on averments of fraud. See

Shapiro v. UJB Fin. Corp., 964 F.2d 272, 288 (3d Cir. 1992)

(“[W]e hold that when § 11 and § 12(2) claims are grounded in

fraud rather than negligence, Rule 9(b) applies.”).

In addition to Rule 9(b), plaintiffs alleging securities

fraud pursuant to the 1934 Act must also comply with the

heightened pleading requirements of the PSLRA, 15 U.S.C. §§

78u-4(b)(1), (b)(2). Significantly, the PSLRA “imposes another

layer of factual particularity to allegations of securities fraud.”

In re Rockefeller, 311 F.3d at 217. It requires any securities

fraud claim brought under the 1934 Act to

specify each statement alleged to have been

misleading, the reason or reasons why the

statement is misleading, and, if an allegation

regarding the statement or omission is made on

information and belief, the complaint shall state

with particularity all facts on which that belief is

formed.8

15 U.S.C. § 78u-4(b)(1). If this requirement is not met, “the

court shall . . . dismiss the complaint.” 15 U.S.C. § 78u-

4(b)(3)(A). While claims brought pursuant to section 14(a) of

the 1934 Act do not require that scienter be pleaded, any claims

brought under the 1934 Act must meet the PSLRA particularity

requirements quoted above if a plaintiff elects to ground such

claims in fraud. See In re NAHC Sec. Litig., 306 F.3d 1314,

1329 (3d Cir. 2002) (applying PSLRA particularity standards to

8

In addition, with respect to securities fraud claims in which

recovery of monetary damages is contingent on proof that the defendant

acted with a particular state of mind, the PSLRA requires that “the

complaint shall, with respect to each act or omission alleged to violate

this chapter, state with particularity facts giving rise to a strong inference

that the defendant acted with the required state of mind.” 15 U.S.C. §

78u-4(b)(2). In dismissing the Second Amended Complaint, the District

Court did not address whether Plaintiffs’ scienter allegations met this

heightened burden, instead confining its analysis to the particularity

requirement of 15 U.S.C. § 78u-4(b)(1), quoted above.

21

section 14(a) claims). As fully discussed in this Court’s past

jurisprudence, in enacting the current version of the PSLRA,

“Congress expressly intended” to “substantially heighten” the

existing pleading requirements. In re Rockefeller, 311 F.3d at

217.

The interplay between Rule 12(b)(6), and Rule 9(b) and

the PSLRA is important. Failure to meet the threshold pleading

requirements demanded by the latter provisions justifies

dismissal apart from Rule 12(b)(6). Accordingly, “unless

plaintiffs in securities fraud actions allege facts supporting their

contentions of fraud with the requisite particularity mandated by

Rule 9(b) and the Reform Act [PSLRA], they may not benefit

from inferences flowing from vague or unspecific allegations--

inferences that may arguably have been justified under a

traditional Rule 12(b)(6) analysis.” In re Rockefeller, 311 F.3d at

224. In other words, pursuant to this “modified” Rule 12(b)(6)

analysis, “catch-all” or “blanket” assertions that do not comply

with the particularity requirements are disregarded. See Fl. State

Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 660 (8th

Cir. 2001).

III.

A.

Failure To Plead Fraud With Particularity

Plaintiffs appeal the Disriict Court’s decision to dismiss

with prejudice the Second Amended Complaint for failure to

allege fraud with particularity. 9 We agree with the District Court

9

In addition to Plaintiffs’ section 10(b) and Rule 10b-5 claims,

Plaintiffs’ section 14(a) claims must meet the PSLRA particularity

requirements because they are grounded in fraud. See In re NAHC, 306

F.3d at 1329. Thus, a ruling that the PSLRA particularity requirements

have not been satisfied compels dismissal of claims made pursuant to

both of these provisions. Similarly, as explicated in part III.B. below,

Plaintiffs’ section 11 1933 Act claims are grounded in fraud and, for the

same reasons discussed here, fail to meet the heightened pleading

22

that the facts alleged by Plaintiffs fail to meet the applicable

pleading requirements. Our analysis focuses primarily upon

Plaintiffs’ “true facts” allegations, which purportedly

demonstrate why Defendants’ various Class Period disclosures

and financial results were materially false and misleading. As

illustrated below, Plaintiffs’ allegations are insufficient to satisfy

either Fed. R. Civ. P. 9(b)’s particularity requirement or the

PSLRA’s information and belief pleading requirement.

Undoubtedly, Plaintiffs identify Defendants’ allegedly

false and misleading statements with particularity. In addition to

requiring plaintiffs to specify each statement alleged to have

been misleading, however, the PSLRA directs plaintiffs to

specify “the reason or reasons why the statement is misleading.”

15 U.S.C. § 78u-4(b)(1). As such, it is the “true facts” recited in

the Second Amended Complaint that are of paramount

importance in this inquiry because they provide the exclusive

basis for Plaintiffs’ claims that the various statements made

throughout the Class Period were materially false and

misleading, that the first and second quarter 1999 results were

falsified, and that Defendants knew of the falsity of the

statements and financial results. Accordingly, with respect to the

“true facts” allegations, which are pled on information and

belief,10 the PSLRA requires Plaintiffs to “state with particularity

all facts on which that belief is formed.” 15 U.S.C. § 78u-

4(b)(1). In an effort to meet this pleading burden, Plaintiffs rely

primarily on confidential personal sources, as well as an internal

memorandum.

This Circuit has not yet addressed the dimensions of the

PSLRA’s criterion for pleadings made on information and belief.

The District Court below elected to follow the moderate

interpretation of section 78u-4(b)(1) espoused by the Second

requirements of Rule 9(b).

10

Plaintiffs admit that the allegations comprising the “true facts”

are based upon the investigation of counsel, and do not challenge on

appeal the District Court’s conclusion that such allegations are therefore

based on “information and belief.”

23

Circuit in Novak v. Kasaks, 216 F.3d 300 (2d Cir.), cert. denied,

531 U.S. 1012 (2000), and subsequently found persuasive by the

First and Fifth Circuits. See ABC Arbitrage Plaintiffs Group v.

Tchuruk, 291 F.3d 336, 351-54 (5th Cir. 2002); In re Cabletron

Systems, Inc., 311 F.3d 11, 29-31 (1st Cir. 2002). See also Fla.

State Bd. of Admin v. Green Tree Fin. Corp., 270 F.3d 645, 667-

68 (8th Cir. 2001). 11 Pursuant to this view:

[O]ur reading of the PSLRA rejects any notion that

confidential sources must be named as a general

matter. In our review, notwithstanding the use of

the word “all,” paragraph (b)(1) does not require

that plaintiffs plead with particularity every single

fact upon which their beliefs concerning false or

misleading statements are based. Rather, plaintiffs

need only plead with particularity sufficient facts to

support those beliefs. Accordingly, where

plaintiffs rely on confidential personal sources but

also on other facts, they need not name their

sources as long as the latter facts provide an

adequate basis for believing that the defendants’

statements were false. Moreover, even if personal

sources must be identified, there is no requirement

that they be named, provided they are described in

the complaint with sufficient particularity to

support the probability that a person in the position

11

There may be a circuit split on the appropriate meaning of this

provision. The Ninth Circuit’s decision in In re Silicon Graphics Sec.

Litig., 183 F.3d 970, 984-85 (9th Cir. 1999), has been cited for the

proposition that anonymous sources must be named at the pleading stage

to satisfy the heightened pleading requirement for pleading on

information and belief. But it is the opinion of the district court in In re

Silicon Graphics that sets forth a strong per se rule requiring

identification of confidential sources. While not entirely clear, the Ninth

Circuit’s interpretation of the statutory command, which requires

plaintiffs to “provide a list of all relevant circumstances in great detail,”

id. at 984, can be read as stopping short of endorsing the district court’s

per se rule.

24

occupied by the source would possess the

information alleged.

216 F.3d at 314 (emphasis in original).

We join the Second Circuit and adopt this standard as the

appropriate standard for courts to employ when assessing the

sufficiency of allegations made on information and belief

pursuant to 15 U.S.C. § 78u-4(b)(1). We agree with Novak’s

observation that

[p]aragraph (b)(1) is strangely drafted. Reading

“all” literally would produce illogical results that

Congress cannot have intended. Contrary to the

clearly expressed purpose of the PSLRA, it would

allow complaints to survive dismissal where “all”

the facts supporting the plaintiff’s information and

belief were pled, but those facts were patently

insufficient to support that belief. Equally

peculiarly, it would require dismissal where the

complaint pled facts fully sufficient to support a

convincing inference if any known facts were

omitted. Our reading of the provision focuses on

whether the facts alleged are sufficient to support a

reasonable belief as to the misleading nature of the

statement or omission.

216 F.3d at 314 n.1.

Far from commanding that confidential sources be named as a

general matter, the PSLRA is silent regarding the sources of a

plaintiff’s facts. Thus, so long as plaintiffs supply sufficient

facts to support their allegations, there is no reason to inflict the

obligation of naming confidential sources. Indeed, “[i]mposing

a general requirement of disclosure of confidential sources

serves no legitimate pleading purpose while it could deter

informants from providing critical information to investigators in

meritorious cases or invite retaliation against them.” Id. at 314.

Accordingly, a complaint can meet the pleading requirement

dictated by paragraph (b)(1) by providing sufficient documentary

25

evidence and/or a sufficient description of the personal sources

of the plaintiff’s beliefs.

The Novak approach to assessing the particularity of

allegations made on information and belief necessarily entails an

examination of the detail provided by the confidential sources,

the sources’ basis of knowledge, the reliability of the sources,

the corroborative nature of other facts alleged, including from

other sources, the coherence and plausibility of the allegations,

and similar indicia.

Applying these standards, Plaintiffs’ Second Amended

Complaint does not meet the PSLRA’s particularity standards

for allegations made on “information and belief.”

Documentary Source

We begin by ascertaining whether Plaintiffs’ documentary

evidence “provide[s] an adequate basis for believing that the

defendants’ statements [regarding the success of the rate

initiative] were false.” Novak at 314. It does not. Plaintiffs

attempt to particularize the allegations regarding the “true facts”

with a single internal memorandum. “According to a former

property and casualty underwriter for small business accounts in

Chubb’s Pittsburgh, Pennsylvania branch, and a former vice

president of personal lines in Chubb’s Warren, New Jersey

headquarters, at the end of 1stQ 99 a memo went to the Chubb

branch and commercial managers admitting the rate

increase/policy non-renewal initiative had not worked and the

targeted 10% -15% premium increases had not been achieved.”

(Compl. ¶ 109.) This is plainly insufficient. Plaintiffs fail to

identify who authored the alleged report, when it was authored,

who reviewed the report, and what data its conclusions were

based upon. The statement that the initiative was a failure is

wholly conclusory and lacks data to support it. Buttressing this

conclusion of inadequacy is the Second Circuit’s post-Novak

decision in In re Scholastic Corp. Securities Litigation, 252 F.3d

63, (2d Cir.), cert. denied sub nom., Scholastic Corp. v.

Truncellito, 534 U.S. 1071 (2001). Scholastic instructs that a

plaintiff relying on internal reports must “specify the internal

26

reports, who prepared them and when, how firm the numbers

were or which company officers reviewed them.” Id. at 72-73.

The Fifth Circuit in ABC Arbitrage found this to be a sensible

standard in the context of the PSLRA and Rule 9(b)’s

heightened pleading requirements. 291 F.3d at 356. Indeed, the

level of detail provided by the plaintiffs in ABC Arbitrage in

describing the internal reports relied upon in that case stands in

stark contrast to what Plaintiffs here furnish. See id. at 357. Far

from requiring the pleading of detailed evidentiary matter,

Plaintiffs’ barebones sketch of this internal memo utterly fails to

meet this standard in any respect.12

Confidential Sources: General Characteristics

Plaintiffs’ reliance on confidential sources to supply the

requisite particularity for their fraud claims thus assumes a

heightened importance given the inadequacy of their

documentary source. An analysis of the confidential sources

cited by Plaintiffs for the purpose of pleading the “true facts”

with the requisite statutory particularity reveals, however, that,

with few exceptions, they are not “described . . . with sufficient

particularity to support the probability that a person in the

position occupied by the source would possess the information

alleged.” Novak, 216 F.3d at 313-14.

As a general matter, almost all of the anonymous sources

are former Chubb employees. Plaintiffs fail to aver, however,

when any of them were employed by Chubb. Nor do Plaintiffs

12

Plaintiffs attempted to add particulars regarding the internal

memorandum by submitting a “Notice of Recently Discovered Evidence

in Opposition to Motions to Dismiss Second Amended Complaint” to

the District Court on December 20, 2002, following the conclusion of

briefing and oral argument. Construing this submission as an

amendment to Plaintiffs’ Second Amended Complaint, the District Court

did not consider the submission in its Memorandum and Order

dismissing Plaintiffs’ Second Amended Complaint, although it noted

that consideration of the submission would not have altered its decision.

Plaintiffs do not argue that the District Court erred in refusing to

entertain the submission. We likewise do not consider it here.

27

allege the dates that these sources acquired the information they

purportedly possess, or how any of these former employees had

access to such information. The lack of allegations regarding

how or why such employees would have access to the

information they purport to possess is problematic because, as

illustrated below, Plaintiffs heavily rely on former employees

who worked in Chubb’s local branch offices for information

concerning Chubb’s business on a national scale. Moreover,

many of these sources were branch employees who worked in

departments other than standard commercial. Plaintiffs’ failure

to make these allegations is also significant because we are left

to speculate whether the anonymous sources obtained the

information they purport to possess by firsthand knowledge or

rumor.

Confidential Sources: Losing Profitable Customers

First, Plaintiffs contend that the rate initiative was not

working, in part because the rate increases were not sticking and

Chubb’s standard commercial insurance underwriting losses

were increasing. More specifically, the raising of rates in a

competitive insurance market caused Chubb to lose “numerous”

profitable customers that it wanted to keep. In support of this

contention, Plaintiffs cite to:

A former commercial lines marketing underwriter

in Seattle; a former umbrella and excess insurance

manager in Englewood, Colorado; an independent

insurance broker for A.O.N. Risk Services in

Southfield Michigan who did business with

Chubb; a former senior customer services team

leader in Los Angeles and Seattle who worked in

operations supervising employees who entered

premiums and claims and coded policies into

Chubb’s computer system; a former commercial

lines customer service representative/rater in

Seattle; a former multi-national account specialist

in Chubb’s Warren, New Jersey headquarters, and

a former renewal underwriter in the account

service center in Florham Park, New Jersey.

28

(Compl. ¶ 48(a).)

All except one of these sources were employed in branch

offices. Only two of the sources appear affiliated with the

standard commercial business, and those sources were employed

in marketing and customer service capacities. It is not apparent

from these brief descriptions that these sources--which

noticeably include an insurance broker for another company--

would possess information that the standard commercial

business was succeeding or failing on a national level, or that

Chubb was losing “numerous” and “profitable” customers

nationwide, or whether Chubb expected to retain those

customers, and the Second Amended Complaint is devoid of any

further explanation. Similarly, it is not intuitively probable that

“an independent insurance broker for A.O.N. Risk Services in

Southfield Michigan” would know that “independent brokers

moved up to 80% of their clients from Chubb to lower-priced

insurers.” (Compl. ¶ 48(a).)

In the same vein, Plaintiffs cite to low-level, locally sited

former employees without alleging how or why such employees

would have knowledge that expanded beyond what the vague

descriptions suggest to substantiate the claim that, as a general

matter, Chubb “lost additional undisclosed hundreds of millions

of dollars in profitable business that Chubb wanted to retain.”

(Id.) Plaintiffs rely on a former senior customer services team

leader in Los Angeles and Seattle; an independent insurance

broker for A.O.N. Risk Services in Southfield, Michigan who

did business with Chubb; a former energy resources underwriter

in the Commercial Lines Department of Chubb & Son, Inc., in

Cincinnati and Pittsburgh; a former commercial lines marketing

underwriter in Seattle; and a former multi-national account

specialist in Chubb’s W arren, New Jersey, headquarters. (Id.)

Plaintiffs do not allege when the employees left Chubb.

It appears, however, that by virtue of their former

positions at Chubb, a person in the position of several of the

confidential sources Plaintiffs depend upon to support the

overall assertion that Chubb was losing good business it wanted

29

to retain as a result of the rate initiative may possess the

information alleged.13 We hesitate to conclude that the Novak

standard has been met with respect to these sources because

Plaintiffs fail to allege when these sources were employed by

Chubb, when they obtained the information they allegedly

possess, and whether their supposed knowledge is first or second

hand.14 Nevertheless, even if the heightened pleading standards

13

These sources include:

• A former renewal underwriter (who processed renewed policies

on established accounts) in Florham Park, New Jersey who

alleges that “an independent insurance agency named NIA

Insurance Group systematically refused to go along with Chubb’s

rate increases and moved many customers to other insurers.”

(Compl. ¶ 48(a).)

• A former commercial lines marketing underwriter for Chubb

based in Seattle who claims that “in the states of Washington and

Oregon, Chubb lost all of its profitable customers who paid

annual premiums of $500,000 to $1 million because of rate

increases.” (Id.)

• A former commercial lines customer service representative/rater

for Chubb in Seattle who alleges that Chubb lost Western

Wireless, which had provided Chubb with a $400,000-$500,000

annual premium. (Id.)

• A former manager of Chubb’s customer care unit in Troy,

Michigan who alleges that the rate initiative caused Chubb to

lose Burger King restaurants in the area, “which represented a

large loss to Chubb.” (Id.)

• A former Chubb underwriting technical assistant in Englewood,

Colorado who states that the rate initiative caused Chubb to lose

the profitable policy provided to Echo-Star, “as well as four to

five other customers with annual premiums equal to Echo-

Star’s.” (Id.)

• A former multi-national account specialist for Chubb in its

Warren, New Jersey headquarters who claims that Chubb “also

lost the account of Mary Kay Cosmetics, various large, high-

technology firms and a huge multi-national account from

Chubb’s Washington, D.C. area office because of the rate

increase/policy non-renewal initiative.” (Id.)

14

A comparison with the allegations held sufficient for pleading

on “information and belief” under the PSLRA in In re Cabletron, 311

30

have been met with respect to these sources, Plaintiffs’ claims

fail under Rule 12(b)(6) because the information these sources

purportedly possess is not inconsistent with Chubb’s allegedly

false and misleading statements. This is discussed below.

Confidential Sources: Renewing at Inadequate, Flat, and

Reduced Rates

Next, Plaintiffs plead on information and belief the

proposition that “[t]he rate increases that were, in fact being

obtained on new and renewal standard commercial insurance

policies were very small and well below the levels necessary to

have any materially favorable impact on Chubb’s 99 results, or

even to lessen the growing underwriting losses in Chubb’s

standard commercial business.” (Compl. ¶ 48(b).) Plaintiffs’

reliance on confidential sources in its effort to state this claim

with particularity poses many of the same problems listed above.

The Second Amended Complaint defers to:

(a) A former property and casualty and director’s

and officer’s underwriter in the financial

institutions section in Chicago (“and . . . other

F.3d at 21, 24, 30-31, is instructive. In that case, the First Circuit noted

that Plaintiffs pled that the former Cabletron employees on whom they

rely worked at the Company during the Class Period and had personal

knowledge of the practices they described. Moreover, the Court of

Appeals found that the sources provided specific descriptions of the

means through which the alleged fraud occurred, that their consistent

accounts reinforced one another, that it was clear from the complaint that

the employees were familiar with the activities discussed, that the

sources provided an abundant level of detail, and, significantly, that the

sources have a strong basis of knowledge for the claims they make.

Detailed pleadings regarding the Cabletron’s system for inputting returns

bolstered the basis of the anonymous sources’ knowledge. As is

apparent from the discussion thus far and what follows, Plaintiffs here

have not pled nearly the level of detail as the plaintiffs in In re

Cabletron. Conspicuously absent are allegations that would support the

anonymous sources’ basis of knowledge. In addition, the Cabletron

plaintiffs also provided adequate supporting documentation. Id. at 27,

31-32. Plaintiffs’ reliance on In re Cabletron is misplaced.

31

former Chubb employees who provide specific

examples as such”) for the blanket claim that “[t]o

keep the customers that had not already left Chubb

for lower-priced insurers, Chubb began to give

their remaining customers either no rate increase

or much smaller ones than it had planned under the

. . . initiative.” (Id.)

(b) A former underwriting manager for Executive

Risk/Chubb in Simsbury Connecticut for the

allegation that “Chubb was renewing the policies

of 50% of its customers either at flat rates or even

at reduced premiums.” (Id.)

(c) A former underwriting technical assistant in

Englewood, Colorado for the allegation that

“Chubb was keeping approximately 60% of its

high-risk, unprofitable customers that the rate

increase/policy non-renewal initiative was

purportedly eliminating.” (Id. ¶ 48(c).)

The Second Amended Complaint fails to explain how

local employees who specialize in lines other than standard

commercial would have obtained specific nationwide statistics

regarding the standard commercial business. Furthermore, it is

far from clear how an Executive Risk/Chubb employee would

have access to information that Chubb was renewing the policies

of half of its customers at flat or reduced rates, given that

Executive Risk/Chubb did not exist until the consummation of

the merger on July 20, 1999.

Plaintiffs also rely on a former customer service

supervisor in Pleasanton, California, a former regional

supervisor for Chubb in Denver, Colorado, and a former

commercial lines customer service representative/rater in Seattle

as the basis for naming specific customers who were not given

rate increases regardless of their profitability. According to a

former property claims adjuster in Boston, “underwriters had the

incentive to resist rate increases because their own compensation

was dependent on keeping customers.” (Id.) Again, with the

32

possible exception of the commercial lines customer service

representative, we are left to speculate on a local customer

service worker’s and regional supervisor’s basis of knowing the

precise terms of renewal of commercial lines policies between

Chubb and the specific customers. Moreover, Plaintiffs failed to

plead the dates in which these policies were renewed at flat

prices, rendering it impossible to determine the relationship

between these policies and the success of the rate initiative.15

Once again, as explicated in the next section, even if these

limited allegations meet the PSLRA’s strict requirements for

pleading on information and belief, they do not contradict

Defendants’ Class Period statements.

Confidential Sources: Renewing Unprofitable Business

Third, Plaintiffs aver that Chubb “was renewing hundreds

of millions of dollars of standard commercial insurance policies

at premium levels Chubb knew were unprofitable and thus

would adversely impact Chubb’s results going forward.”

(Compl. ¶ 48(c).) In support of this extremely broad assertion,

Plaintiffs rely upon a former umbrella and excess insurance

manager in Eaglewood, Colorado; a former customer service

supervisor in Pleasanton, California; a former underwriting

technical assistant in Englewood, Colorado; a former energy

resources underwriter in the Commercial Lines Department in

Cincinnati and Pittsburgh; and a former property and casualty

and director’s and officer’s underwriter in the financial

institutions section in Chicago. According to these sources,

although these unnamed unprofitable customers renewed with

Chubb and agreed to pay higher premiums, the premiums “were

still far too low to make these customers profitable to Chubb

because the customers were such bad insurance risks.” (Id.)

Plaintiffs cite only two specific accounts--McDonald’s

15

The District Court shrewdly observed that if Plaintiffs claim

that customers left as a result of the rate increases during first quarter

1999, and/or claim that policies renewed during that period were

renewed at flat rates, this would appear to conflict with Plaintiffs’

assertion that the initiative would, in fact, have little effect in 1999

because policies were not up for renewal until January or July 1.

33

Corporation and Langenscheidt Publishing Group--as examples

of unprofitable customers whose respective policies were

renewed at a flat, and lower rate respectively. Notably, the

source of information about the Langenscheidt Publishing Group

is a former customer service representative in Washington, D.C.

(Id.) The use of these sources to satisfy particularity is

problematic for the same reasons detailed above.

Confidential Sources: Timing of Rate Initiative’s Impact

Fourth, Plaintiffs contend that, contrary to Defendants’

representations, the rate initiative, even if successful, “would not

have any significant positive impact on Chubb’s financial results

during 99 and, in fact, Chubb’s standard commercial insurance

problems would continue to very adversely impact Chubb’s

results throughout most of 99.” (Compl. ¶ 48(d).) In an effort to

particularize, Plaintiffs cite a “former vice president in personal

lines insurance” for the proposition that because “a vast majority

of Chubb policies” (implicitly including commercial lines

policies) only came up for renewal a couple times a year, the rate

initiative “would take two to three years [to show] significant

positive impact.” (Id.) Again, without more, it is not sufficiently

probable that an employee working in personal lines would

possess information regarding commercial lines policies and

their impact on the rate initiative. Similarly, it is not sufficiently

probable that a former commercial lines underwriter in Newport

Beach, California, would know that “almost none of the policies

[nationwide] renewing on January 1, 1999, were renewed in

accordance with the rate increase/policy non-renewal initiative.”

(Id. (emphasis in original).)

Confidential Sources: Accounting Fraud

Fifth, Plaintiffs attempt to substantiate claims of

accounting fraud by reference to a number of former employees

who held positions that would not appear to render them privy to

the company’s bookkeeping practices, let alone the specific

accounting that went into the company’s financial reporting.

Plaintiffs claim that the first and second quarter 1999

34

combined ratios were grossly overstated as a result of improper

accounting practices. In support of their assertion that the first

quarter 1999 combined ratio was in fact 130%, and not 117.9%

as Defendants represented, Plaintiffs cite only two former

employees--a former branch manager in Grand Rapids,

Michigan, and a former Chubb commercial lines marketing

underwriter in Seattle. This is unquestionably lacking in

particularity, as Plaintiffs have not provided any facts indicating

any probability that the two branch employees would have

access to this type of national statistical information. Nor do

Plaintiffs plead the data that was used to arrive at this figure.

Plaintiffs also maintain that the combined ratio was

improperly inflated as a result of reserve manipulations

occurring in the standard commercial and property and marine

lines, contrary to GAAP. 16 Plaintiffs, however, neglect to plead

these purported GAAP violations with the requisite particularity.

Again, Plaintiffs do not allege enough to support a probability

that their sources would possess the information they claim to

possess. Plaintiffs rely on a former general claims adjuster in

Boston and a former senior customer services team leader in Los

Angeles and Seattle for the proposition that, “upper management

pressured branch managers to improperly reduce reserves, and

ordered adjusters to refrain from recording reserves until after

the Executive Risk acquisition was complete.” (Id. ¶ 48(e)

(emphasis added).) Plaintiffs refer to this same customer services

team leader for the bold assertion that “the majority of Chubb’s

branch offices were manipulating reserves,” (Id. (emphasis

added)) and for the nationwide statistic that “up to 25% of

Chubb’s reserves were manipulated downward.” (Id. ¶ 143.) The

sole basis provided for this source’s knowledge of the latter

assertion is that he “worked for Chubb for nearly six years, and

was thus very familiar with Chubb and how it operated.” (Id.) It

cannot be disputed that this description is wholly insufficient to

demonstrate how a former employee working in a customer

service capacity would know that, nationally, 25% of Chubb’s

reserves were manipulated downward or that the majority of

16

Financial results reported in violation of GAAP are

presumptively misleading. See 17 C.F.R. § 210.10-01(a).

35

branch offices nationwide were manipulating reserves.

Remarkably, Plaintiffs cite to a former branch manager in West

Michigan for the contrary speculation that “I guarantee you they

[defendants] padded loss reserves.” (Id.) Plaintiffs further

attribute the grandiose assertion that the first quarter 1999 results

were deliberately falsified to the former customer services team

leader in Los Angeles and Seattle. As a result of the accounting

fraud, according to a former branch manager in Grand Rapids,

“defendants knew . . . that Chubb’s forecasts of 5-1/2%-6%

premium growth for its standard commercial insurance business

during 99 and a falling combined ratio for its standard

commercial business were false and could not be obtained” (Id. ¶

48(j).) It is far from clear how a branch manager would have

knowledge of what senior Chubb executives knew. Plaintiffs’

reliance on other confidential sources to provide the particularity

for their claim of reserve manipulations fails for the same

reasons.17

17

• Plaintiffs rely on a “former marketing vice president” for the

observation that “reserves can be ‘conveniently manipulated’ in

the insurance industry” and that Chubb therefore must have been

“‘managing’ its reserves to artificially boost its earnings in 99.”

(Compl. ¶ 143.)

• Plaintiffs attribute the claim that Chubb was “stair stepping” its

reserves to a former manager in Florham Park, New Jersey, and

a property claims manager in Troy, Michigan. (Id. ¶ 144.)

Plaintiffs have provided no information which would indicate

that these employees had personal knowledge of reserve

manipulations in the standard commercial lines.

• According to a former general claims adjuster in Boston, “the

reserve freeze was occurring Company-wide.” (Id. ¶ 145.)

• With respect to Plaintiffs’ averments of improper revenue

recognition, they cite to the former senior customer services team

leader in Seattle and Los Angeles, and a former personal lines

underwriter in Chicago for the claim that, in violation of GAAP,

“defendants caused Chubb to record the premium for the renewal

policy as revenue . . . 90 days before the policy was even up for

renewal.” (Id. ¶ 154.)

• Incredulously, without providing any further description,

Plaintiffs attribute to these same former employees the bald

assertion that “this conduct occurred throughout the Company,

36

Plaintiffs fail to identify with particularity any source for

their accounting fraud claims that would reasonably have

knowledge supporting the allegations that Chubb’s financial

statements were false. Nor does the Second Amended

Complaint identify the data, or source of data, used to arrive at

its calculations. Nor do Plaintiffs provide any particulars

regarding the amount by which reserves were distorted, or how

much revenue was improperly recognized.18 See In Re

Burlington, 114 F.3d at 1417-18 (“[W]here plaintiffs allege that

defendants distorted certain data disclosed to the public by using

unreasonable accounting practices, we have required plaintiffs to

state what the unreasonable practices were and how they

distorted the disclosed data.”). Plaintiffs’ allegations do not

suffice.

Confidential Sources: Duty to Disclose

Sixth, Plaintiffs contend that Defendants had an obligation

to disclose Chubb’s disappointing second quarter 1999 results to

the Executive Risk shareholders in advance of the merger vote

that occurred on July 19, 1999. Defendants’ failure to disclose

this information, Plaintiffs allege, rendered the statements

contained in the Registration and Proxy Statements false and

misleading. Plaintiffs fail to allege with any particularity,

however, that Defendants knew of the final second quarter 1999

results at the time the merger vote took place. The conclusory

assertion that “O’Hare and the other defendants had access to

these financial results far in advance of when they were

announced, and before the Executive Risk shareholders voted”

(Compl. ¶ 126) is patently insufficient, as is the speculation that

“[i]f defendants were paying any attention . . . any serious

in all lines of business.” (Id.)

18

Again, comparison to the allegations held sufficient in In re

Cabletron is revealing. Contrary to the lack of allegations in this case,

the Cabletron plaintiffs pled estimates of the actual amount of

improperly recognized revenue. 311 F.3d at 24. The Cabletron

plaintiffs also provided adequate supporting documentation. Id. at 27,

31-32.

37

problems in the second quarter should have been glaringly

apparent to them by the time of the July 19 shareholder vote.”

Pls.’ Br. at 34; see In re Advanta Corp. Sec. Litig., 180 F.3d 525,

539 (3d Cir. 1999). Plaintiffs’ attempt to claim that the release

of the second quarter 1999 results just eight days following the

vote supports an inference that Defendants’ knew of them prior

to the vote is unwarranted given the consistency of the timing of

this release with the timing of Chubb’s prior releases. Plaintiffs’

resort to confidential sources to provide the requisite particularity

is once again ineffectual.

According, [sic] to a former Chubb senior vice-

president and managing director of surety business,

who was based in Chubb’s Warren, New Jersey

headquarters . . ., Chubb held quarterly meetings,

with O’Hare and Kelso present - where the heads

of each Chubb business unit gave detailed reports

on the status of their business. According to this

same [source] . . . these meetings were held two

weeks after the close of each quarter. As such,

because the 2nd Q 99 ended on 6/30/99, the 2Q 99

meeting at Chubb was held on approximately

7/14/99 - five full days before the merger vote on

7/19/99. Given that at each of these meetings,

according to the same former vice president, the

reports presented to O’Hare and Kelso included

‘detailed numbers, figures and graphs’ analyzing

current results of each Chubb business unit,

defendants O’Hare, Kelso and Schram were fully

aware that Chubb’s 2Q 99 results would be far

worse than expected, but defendants purposely

withheld disclosing Chubb’s worse-than-expected

2ndQ 99 financial results until after Executive

Risk’s shareholders voted in favor of Chubb’s

acquisition of Executive Risk because they feared

that announcing these results beforehand would

cause the shareholders to vote against the

acquisition.

(Compl. ¶ 126 (emphasis in original).)

38

Plaintiffs do not allege that this former vice president was

employed at the appropriate time. Indeed, it appears that he was

not, given the conspicuous absence of an allegation regarding

whether or not a meeting actually was held on or about July 14,

1999 to discuss the second quarter results. This general

allegation says nothing with particularity about whether a

meeting was in fact held prior to the Executive Risk shareholder

vote, whether any Defendants were in fact present at such a

meeting, or whether the second quarter 1999 results were even

available at that time.

Confidential Sources: Rumors and Speculation

In addition, interspersed throughout the Second Amended

Complaint’s discussion of the “true facts” are a number of

statements that are attributed to no source and are based on

nothing more than speculation. Plaintiffs claim particularity on

the basis of such statements as:

(a) “It was well known within Chubb that this

[renewing policies of unprofitable customers at flat

or reduced rates] was occurring throughout the

Company because management was pressuring

employees to meet certain revenue targets which

were impossible to achieve under the rate

increase/policy non-renewal initiative, and so the

initiative was simply being ignored, not complied

with, and/or applied in a haphazard fashion.” (Id. ¶

48(c).)

(b) “It was well known within Chubb that the rate

increase/policy non-renewal initiative did not have

the immediate impact defendants represented it did

and would have very little positive effect in 99 . . .

.” (Id. ¶ 48(d).)

(c) “[R]umors circulated within the Company that

Chubb had artificially boosted its reported financial

performance with accounting tricks . . . .” (Id. ¶

48(I).)

39

(d) “Chubb’s operations employees openly

discussed reserve manipulations at Company

meetings.”

(e) “[I]t was well known within Chubb during the

Class period that the rate increase/policy non-

renewal initiative was failing.” (Id. ¶ 48(g).)

Generic and conclusory allegations based upon rumor or

conjecture are undisputedly insufficient to satisfy the heightened

pleading standard of 15 U.S.C. § 78u-4(b)(1).

Confidential Sources: Summary

In sum, Plaintiffs repeatedly attribute allegations about the

rate initiative in Chubb’s commercial lines business to former

employees who worked in other business segments, or who did

not work for the company at all, without furnishing any

explanation as to how such sources would have knowledge

regarding an initiative confined to a particular division of the

company for which they apparently had no responsibility.

Furthermore, Plaintiffs repeatedly attribute specific nationwide

information and statistics regarding Chubb’s performance to

former employees who worked in local branch offices. These

sources have not been described with sufficient particularity to

support the probability that a person in the position occupied by

the source would possess the information alleged. Consequently,

Plaintiffs have failed to plead the falsity of the Defendants’

statements and accounting fraud with the particularity demanded

by the PSLRA.

The sheer volume of confidential sources cited cannot

compensate for these inadequacies. Citing to a large number of

varied sources may in some instances help provide particularity,

as when the accounts supplied by the sources corroborate and

reinforce one another. In this case, however, the underlying

prerequisite--that each source is described sufficiently to support

the probability that the source possesses the information alleged--

is not met with respect the overwhelming majority of Plaintiffs’

sources. Cobbling together a litany of inadequate allegations

40

does not render those allegations particularized in accordance

with Rule 9(b) or the PSLRA. Consequently, Plaintiffs’

argument that particularity is established by looking to the

“accumulated amount of detail” that their unparticular source

allegations provide when considered as a whole is unavailing.

See In re Rockefeller, 311 F.3d at 224 (rejecting similar

argument because “fraud allegations should be analyzed

individually to determine whether each alleged incident of fraud

has been pleaded with particularity. If, after alleging a number

of events purportedly substantiating a claim of fraud, none of

those events independently satisfies the pleading requirement of

factual particularity, the complaint is subject to dismissal under

15 U.S.C. § 78u-(b)(3)(A)”) (internal citations omitted). Finally,

Plaintiffs charge that, even foregoing its “true facts” allegations

and anonymous former employee allegations, they have

adequately pled why Defendants’ various statements were

misleading in accordance with the PSLRA by demonstrating that

Defendants’ own public statements contradict Defendants’

earlier representations, made prior to the July 19, 1999 Executive

Risk shareholder vote and merger, that Chubb’s standard

commercial business was turning around so quickly that it was

already contributing to a stronger-than-expected bottom line in

the first quarter 1999. As explained in detail below, Plaintiffs

distort Defendants’ “admissions” by taking Defendants’

statements out of context. Moreover, Defendants’ public

statements do not, in fact, contradict the purportedly false and

misleading statements made throughout the Class Period.

Failure To State A Claim

Plaintiffs’ failure to meet the threshold pleading

requirements mandated by Rule 9(b) and PSLRA support

dismissal apart from Rule 12(b)(6). Even if the“true facts” were

pled with the requisite particularity, however, they fail to

demonstrate the falsity of Defendants’ allegedly false and

misleading Class Period disclosures.

Keeping in mind that Plaintiffs may not benefit from

inferences stemming from unparticularized allegations that may

have otherwise been warranted under a traditional Rule 12(b)(6)

41

analysis, even assuming that Plaintiffs’ confidential source

allegations meet their statutory pleading burden, or taking into

consideration those meager allegations that arguably meet this

standard, anecdotal examples of profitable customers lost or

policies renewed at flat or slightly raised rates does not

demonstrate that the rate initiative was failing, especially in light

of Defendants’ Class Period disclosures.19 Plaintiffs’ argument

that Defendants’ own disclosures and the confidential source

information demonstrate the falsity of Defendants’ earlier Class

Period representations is utterly without merit, as Plaintiffs

repeatedly take Defendants’ statements out of context and draw

unreasonable inferences. Indeed, Defendants’ supposed

“admissions,” and the information provided by the confidential

sources are, in fact, generally consistent with what Plaintiffs

deem were Defendants’ false statements and disclosures.

First, in accordance with those confidential source

allegations that reference specific customers that Chubb lost as a

result of the rate initiative, Defendants fully disclosed before and

throughout the Class Period that the initiative was expected to

and was indeed causing the loss of profitable business.

(a) According to Chubb’s 1998 Form 10K, “[o]ur

priorities for 1999 are to renew good business at

adequate prices and not renew underperforming

accounts where we cannot attain price adequacy.

This aggressive pricing strategy could cause us to

lose some business. Therefore, we expect overall

premium growth to be flat in 1999.” (App. at

212a.)

(b) In the April 27, 1999 Earnings Release

Conference Call, Chubb stated, “I did say that we’d

lost 50% of the business . . . due to the fact that we

19

Cf. GSC Partners CDO Fund v. Washington, 368 F.2d 228,

241-42 (3d Cir. 2004) (finding plaintiffs have not adequately alleged that

defendants had actual knowledge of the falsity of a particular statement

because, inter alia, plaintiffs’ reliance on one specific example was

insufficient to contradict allegedly false assertion).

42

really didn’t want to renew the goddamn business. .

. . The other half, that which left us for price, . . . it

would have been good business. . . . lost business is

accelerating.” (Id. at 261a.) O’Hare and Schram

further stated in this call that Chubb “was,

however, prepared to lose $250-$300 million in

standard commercial business.” (Compl. ¶ 38.)

(c) The second quarter 1999 Form 10-Q report,

which includes Chubb’s allegedly fraudulent

second quarter 1999 results, reveals, “[r]etention

levels were lower in the first six months of 1999

compared with the same period in 1998.

Approximately half of the non-renewals were the

result of business we chose not to renew and half

were the result of customers not accepting the price

increases we institute.” (Id. ¶ 74.)

(d) Painewebber’s July 27, 1999 report on Chubb,

which was based upon information provided by

O’Hare, Kullas, and Sills in the July 27, 1999

Conference Call and follow-up conversations

quotes O’Hare: “[W]e are losing more business

than we did in the first quarter and we’re writing

less new business than we did in the first quarter.”

(Id. ¶ 67.)

Far from suggesting contradiction, that some particular

accounts chose not to renew with Chubb, as alleged by various

confidential sources, is completely consistent with Chubb’s

public statements.

Second, with regard to the Second Amended Complaint’s

illustrations of specific customers where the rate increases were

supposedly not “sticking,” Plaintiffs ignore Defendants’

contemporaneous public statements acknowledging that Chubb’s

reported price increases were only averages:

(a) In an April 27, 1999 Bloomberg News

Interview, O’Hare emphasized that the expected

43

rate increases are only averages: “I fully expect that

[commercial lines price increases will] build rather

rapidly to 5-1/2%-6%. Now those are averages . . .

.” (App. at 268a.)

(b) The second quarter 1999 Form 10-Q states:

“On the business that was renewed, rates have

increased modestly yet steadily in the first six

months of 1999 and we expect this trend to

continue.” (Comp. ¶ 74.)

Plaintiffs’ assertions that specific policies were renewed at flat or

reduced rates does not indicate that the reported average rate

increases were false.

Third, Plaintiffs’ reference to the internal memorandum

that allegedly states that “the targeted 10%-15% premium

increases had not been achieved” does not support the alleged

falsity of any of Defendants’ public statements. The Second

Amended Complaint contains no allegation that Defendants

reported 10% to 15% rate increases to the public, and it simply

does not follow that the rate initiative was failing because such

rate increases were not achieved. As mentioned above, Chubb

projected to the public average premium growth of 5.5% to 6.5%

throughout 1999. On appeal, in an effort to show falsity,

Plaintiffs theorize that “the nature of Chubb’s renewal cycle,

with two and three-year policies, to achieve 5-1/2% to 6%

premium growth in 1999 would require Chubb to make its

targeted increases of 10%-15% on the policies coming up for

renewal.” Pls.’ Br. at 47-48. This theory requires acceptance of

the unsupported inference that when the memorandum referred

to “10%-15% premium increases” it was referring only to rate

increases on the particular policies up for renewal, as opposed to

the average increase in premiums across all policies, whether up

for renewal or not. Given the paucity of allegations describing

this memorandum, it is not reasonable to draw this inference.

Fourth, Plaintiffs contend that O’Hare’s “admission,”

made in the July 27, 1999 conference call and included in the

second quarter Form 10-Q report, that “[i]t will take at least two

44

renewal cycles to adequately reprice the standard commercial

book and during that time we will continue to have losses from

non-renewed policies. Thus, . . . it will be mid-2000 before the

benefits of these actions significantly flow to the bottom line”

(Compl. ¶¶ 25, 64, 67) contradicts his earlier representation made

on April 27, 1999, that “[t]his god dam [sic] ship has turned

faster than I thought it was going to” i.e., that the rate initiative

was exerting a positive impact in the first quarter 1999.

Plaintiffs conveniently ignore the remainder of O’Hare’s

statement, his later statements made during the Class Period, and

his qualification that it would be mid-2000 before significant

effects would be felt. The entirety of O’Hare’s statement is as

follows: “I think what we’re all concerned about, putting it very

bluntly, this god damn ship has turned around faster than I

thought it was going to. But it is a big ship.” He further

qualified: “We all know that you can’t turn a business of this

size around in one quarter, but the signs bode well for the

future.” (App. at 249a, 263a.) In another April 27, 1999

interview cited by Plaintiffs, O’Hare again emphasized, “it is a

big ship and it does take a while to turn.” (Id. at 267a.) Plaintiffs’

attempt to characterize these statements as amounting to a

representation that the initiative was already “contributing to a

strong bottom line in the first quarter” is not reasonable. Fraud

cannot be manufactured from these statements. After the second

quarter 1999 results were released, O’Hare explained in a

conference call with analysts that “I think the second quarter has

brought me back to where I started because really the first half of

the year is sort of flowing out exactly as our original models had

assumed. The first quarter, as I think I might have said, the ship

was turning faster than I thought it was. I would say we are now

right on course. I’m not in any way discouraged, but I admit to

being somewhat overly optimistic at the end of the first quarter.”

(Id. at 493a-494a.) We have been clear that fraud cannot be

inferred merely because “‘[a]t one time the firm bathes itself in a

favorable light’ but ‘later the firm discloses that things are less

than rosy.’” In re Advanta, 180 F.3d at 538 (quoting DiLeo, 901

F.2d at 627.) We have long rejected attempts to plead fraud by

hindsight.

Neither the adequately pled “true facts” nor Defendants’

45

public statements demonstrate the alleged falsity of Defendants’

Class Period disclosures.20

Individual Executive Risk Defendants

Plaintiffs’ claims against Defendants Sills, Kullas, and

Deutsch arise exclusively under section 10(b) and section 14(a)

of the 1934 Act.21 Specifically, Plaintiffs contend that the

Executive Risk Defendants’ opinion that the merger was “fair”

and “in the best interests” of Executive Risk shareholders was

false when made. This “fairness” opinion was imparted to

Executive Risk shareholders via the Executive Risk Proxy

Statement.

It is significant to note at the outset that while the fraud

allegations in this case focus exclusively on problems associated

with Chubb’s standard commercial business, Executive Risk, a

specialty insurance company, is not involved with the standard

commercial insurance business. Plaintiffs aver, however, that the

20

The disclosures made in connection with the release of Chubb’s

third quarter 1999 results at the close of the Class Period are also

consistent with representations made throughout the Class Period. For

example, Defendants reiterated that “it will take time for the benefits of

the pricing initiative to reverse the losses from underpriced business”

(App. at 538a) and that “[i]t will take at least two annual renewal cycles

to adequately reprice the entire standard commercial book, and during

that time we will continue to have losses from underpriced business.

Thus, it will be the latter part of 2000 before our pricing initiative is

expected to have a noticeable effect on our standard commercial results”

(Id. at 733a). Moreover, it is not reasonable to infer that Chubb’s

reported prior combined ratios were fraudulent from the fact that

Chubb’s reported combined ratio increased to 130% in the third quarter,

especially in light of the recognized impact of Hurricane Floyd on this

number. Furthermore, such an allegation constitutes an unacceptable

attempt to plead fraud by hindsight.

21

Plaintiffs also alleged control person liability claims against

Defendants Sills and Kullas pursuant to section 20(a) of the 1934 Act.

The lack of any predicate violation of the Securities Exchange Act of

1934 compels dismissal of control person claims.

46

individual Executive Risk Defendants must have become aware

of the alleged internal fraud at Chubb while conducting due

diligence in preparation for the merger. It is further alleged that,

in spite of their purported knowledge, these individual

Defendants misrepresented the merger as “fair” from a financial

point of view and “in the best interests” of Executive Risk

shareholders to facilitate a favorable vote, and thereby reap the

special benefits and payments accompanying consummation of

the merger.22

As lodged against the individual Executive Risk

Defendants, Plaintiffs’ section 10(b) claims must fail. The

District Court properly observed that these claims are essentially

derivative of the section 10(b) and Rule 10b-5 claims Plaintiffs

asserted against the Chubb Defendants. As such, our holding

that Plaintiffs’ allegations regarding the falsity of Chubb’s first

and second quarter 1999 results and affirmative statements made

thereto do not pass muster under the PSLRA a fortiori

necessitates dismissal of the claims as leveled against the

individual Executive Risk Defendants to the extent they are

based on incorporating that same information in the merger

proxy materials and in recommending approval of the merger.

Likewise, Plaintiffs’ sparse allegations regarding why the

Executive Risk Defendants’ position that the merger was in the

best interest of and fair to Executive Risk shareholders was false

are not sufficiently particularized.23 Plaintiffs have not offered

22

The Proxy Statement disclosed all benefits to be received by

Defendants Sills, Kullas, and Deutsch upon completion of the merger.

23

Indeed, the available information suggests that the merger was

fair for Executive Risk shareholders. Executive Risk retained

Donaldson, Lufkin & Jenrette Securities Corporation and Salomon

Smith Barney Incorporated to opine on the fairness of the potential

merger with Chubb. Each financial advisor independently reviewed

public financial information and information provided by both

companies and expressly concluded that the merger was “fair” to

Executive Risk shareholders. The Second Amended Complaint does not

include any allegation that any of the individual Executive Risk

Defendants were reckless in concluding that the valuations furnished by

the investment bankers were fair, or that they intentionally issued this

47

particularized allegations that the value of Chubb’s stock was

artificially inflated. Nor have Plaintiffs sufficiently

particularized how the individual Executive Risk Defendants

became aware of Chubb’s purportedly false financial results and

the supposed failure of Chubb’s rate initiative. A vague,

conclusory allegation that the individual Executive Risk

Defendants must have been aware of Chubb’s falsified financials

through partaking in due diligence does not suffice. Moreover,

Plaintiffs’ assertions that Defendants Sills and Kullas made

misstatements to securities analysts by participating with

Defendant O’Hare in conference calls to securities analysts on

July 27, 1999 is not particularized and is baseless in light of the

fact that Second Amended Complaint attributes all those July 27,

1999 alleged misstatements exclusively to O’Hare.

The particularity requirements of the PSLRA also govern

the allegations surrounding Plaintiffs’ section 14(a) claims

because they sound in fraud. See In re NAHC 306 F.3d at 1329.

As discussed in detail above, Plaintiffs’ allegations made in

connection with the Proxy Statement are insufficiently

particularized. Accordingly, the District Court appropriately

dismissed these claims as to the Executive Risk Defendants as

well.

B.

Section 11 1933 Act Claims

Plaintiffs next contest the District Court’s dismissal of

their section 11 1933 Act claims for failure to meet the

particularity requirement of Fed. R. Civ. P. 9(b). The District

Court found that Plaintiffs’ section 11 allegations “sound in

fraud” and accordingly dismissed those allegations for failure to

comply with Rule 9(b). Plaintiffs assert that the District Court

erred in imposing heightened pleading requirements on claims

that do not predicate recovery on a showing of fraud. They also

argue that their section 11 claims are in fact strict liability claims

that do not “sound in fraud.” The question of whether the

conclusion knowing of its falsity.

48

heightened pleading standard articulated in Rule 9(b) applies to

claims brought under section 11 of the 1933 Act that sound in

fraud is a question of law subject to plenary review. See Planned

Parenthood of Cent. N.J. v. Attorney General of N.J., 297 F.3d

253, 259 (3d Cir. 2002). We affirm the District Court.

First, an examination of the factual allegations that

support Plaintiffs’ section 11 claims establishes that the claims

are indisputably immersed in unparticularized allegations of

fraud. The one-sentence disavowment of fraud 24 contained

within Plaintiffs’ section 11 Count--Count II of the Second

Amended Complaint--does not require us to infer that the claims

are strict liability or negligence claims, and in this case is

insufficient to divorce the claims from their fraudulent

underpinnings. We noted in Shapiro that because “Rule 9(b)

refers to ‘averments’ of fraud,” we must “examine the factual

allegations that support a particular legal claim.” Shapiro v. UJB

Fin. Corp., 964 F.2d 272, 288 (3d Cir. 1992).

Such inquiry reveals that a core theory of fraud permeates

the entire Second Amended Complaint and underlies all of

Plaintiffs’ claims. The linchpin of Plaintiffs’ action is their

allegations that Defendants knowingly and intentionally

committed accounting violations, issued a series of false and

misleading statements regarding improvements in Chubb’s

standard commercial insurance business, and omitted critical

information that would tend the negate the representations of

continued improvement for the purposes of effectuating a stock-

for-stock merger between Chubb and Executive Risk, and

avoiding a hostile takeover attempt. The Second Amended

Complaint is completely devoid of any allegations that

Defendants acted negligently. The language Plaintiffs employ

within Count II itself further belies their contention that their

1933 Act claims are strict liability claims. Count II of the

Second Amended Complaint expressly incorporates by reference

all of the preceding allegations, including the sections entitled

24

Paragraph 166 of the Second Amended Complaint states:

“Plaintiffs incorporate ¶¶ 1-161. Plaintiffs expressly disclaim any

allegations of fraud, knowledge, intent, or scienter.”

49

“scienter and scheme allegations,” (Compl. ¶¶ 166, 172-177) and

the “true facts” (Id. ¶¶ 24, 28). Count II describes the

Registration Statement as “false and misleading,” (Id. ¶ 169), and

repeatedly relies upon the “false statements and accounting

manipulations detailed herein” as well as the “artificial[]

inflat[ion]” of Chubb’s stock to support this characterization.

(Id.) It speaks of Defendants “conceal[ing] key facts from its

public disclosures until after the merger closed,” and “concealing

the continued serious deterioration in Chubb’s standard

commercial insurance business.” (Id.) It further describes

Defendants’ EPS forecasts, premium growth forecasts, and

combined ratio predictions as “false when made.” (Id.) As in

Shapiro, Plaintiffs’ claims “brim[] with references to defendants’

intentional and reckless misrepresentation of material facts.”

Shapiro, 964 F.2d at 288.

Second, past precedent from this Circuit makes evident

the proposition that section 11 1933 Act claims that are grounded

in allegations of fraud are subject to Fed. R. Civ. P. 9(b). This is

correct despite that neither fraud, mistake, or negligence is

required to plead a prima facie section 11 claim. It does not

logically follow from the fact that fraud is not a necessary

element of a section 11 claim that a section 11 claim cannot

hinge on an allegation of fraud. Rule 9(b) does not discriminate

between various allegations of fraud. Instead, it applies to any

claim that includes “averments of fraud or mistake.” Recognizing

that neither fraud nor mistake is a necessary element of a cause

of action under section 11, we nonetheless held in Shapiro that

“when § 11 and § 12(2) claims are grounded in fraud rather than

negligence, Rule 9(b) applies.” 964 F.2d at 288.

Plaintiffs counter that Shapiro does not survive passage of

the PSLRA in light of Congress’ apparently deliberate choice

not to impose heightened pleading requirements on claims

brought pursuant to the 1933 Act. Plaintiffs’ position is

tantamount to claiming that Congress implicitly abrogated

application of Rule 9(b) in securities suits brought under the

1933 and 1934 Acts. This argument cannot be reconciled with

our view that “[a]brogation of a rule of procedure is generally

inappropriate in the absence of a direct expression by Congress

50

of its intent to depart from the usual course of trying ‘all suits of

a civil nature’ under the Rules established for that purpose.”

Weiss v. Temporary Investment Fund, 692 F.2d 928, 936 (3d Cir.

1982) (internal citation omitted), judgment vacated on other

grounds, 465 U.S. 1001 (1984). Moreover, Plaintiffs’ argument

disregards the fact that Rule 9(b) and the PSLRA impose distinct

and independent pleading standards. This Circuit has recognized

the continued independent vitality of Rule 9(b) in securities suits.

See Oran v. Stafford, 226 F.3d 275, 288 (3d Cir. 2000) (“Both

the PSLRA and the Federal Rule of Civil Procedure 9(b) impose

heightened pleading requirements on plaintiffs who allege

securities fraud.”). Significantly, this Court has recently

reaffirmed its reasoning in Shapiro.25 See In re Digital Island

25

Other Courts of Appeals to consider the issue both pre and post

passage of the PSLRA have also concluded that Rule 9(b) applies to

section 11 claims sounding in fraud. See, e.g., Rombach v. Chang, 355

F.3d 164, 171 (2d Cir. 2004) (“We hold that the heightened pleading

standard of Rule 9(b) applies to Section 11 and Section 12(a)(2) claims

insofar as the claims are premised on allegations of fraud.”); Lone Star

Ladies Inv. Club v. Schlotzsky’s, Inc., 238 F.3d 363, 368 (5th Cir. 2001)

(approving district court’s reliance on Melder v. Morris, 27 F.3d 1097,

1100 n.6 (5th Cir. 1994) for proposition that Rule 9(b) is applicable to

1933 Securities Act claims that are grounded in fraud); In re Stac Elecs.

Sec. Litig., 89 F.3d 1399, 1404 (9th Cir. 1996) (“We now clarify that the

particularity requirements of Rule 9(b) apply to claims brought under

section 11 when, . . . they are grounded in fraud.”); Sears v. Likens, 912

F.2d 889, 893 (7th Cir. 1990) (plaintiffs “fail[ed] to satisfy this 9(b)

standard” applicable to their Securities Act claims sounding in fraud

where “their complaint [was] bereft of any [particularity]”); accord

Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1252 (10th Cir.

1997) (“[a]ssuming without deciding” that the approach set out by the

Third Circuit in Shapiro applies, and holding that “the § 11 claim in the

case at bar . . . does not trigger Rule 9(b) scrutiny” because “it is not

premised on fraud.”); Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1223

(1st Cir. 1996) (dictum) (“[I]f a plaintiff were to attempt to establish

violations of Sections 11 and 12[a](2) as well as the anti-fraud

provisions of the Exchange Act though allegations in a single complaint

or a unified course of fraudulent conduct . . . the particularity

requirements of Rule 9(b) would probably apply to the Sections 11,

12[a](2), and Rule 10b-5 claims alike.”). But see In re NationsMart

Corp. Sec. Litig., 130 F.3d 309, 314 (8th Cir. 1997) (holding that “the

51

Sec. Litig., 357 F.3d 322 (3d Cir. 2004) (explicitly relying upon

reasoning of Shapiro in holding that Rule 9(b) heightened

pleading requirements apply to claims brought under the tender

offer “best price rule” of the 1934 Act, 15 U.S.C. § 78n(d)(7); 17

C.F.R. § 240.14d-10(a), when those claims are grounded in

fraud); see also In re Adams Golf, Inc. Sec. Litig., 381 F.3d 267,

274 n.5 (3d Cir. 2004) (“[C]laims under the 1933 Act that do not

sound in fraud are not held to the heightened pleading

requirements of Fed. R. Civ. P. 9(b).”).

Equally unavailing is Plaintiffs’ contention that Shapiro

cannot be squared with the Supreme Court’s subsequent

decisions in Leatherman v. Tarrant County Narcotics

Intelligence & Coordination Unit, 507 U.S. 163 (1993), and

Swierkiewicz v. Sorema N.A., 534 U.S. 506 (2002). Leatherman

and Swierkiewicz rejected judicially created heightened pleading

standards. In the case sub judice, we are faced with a

straightforward application of a procedural rule.

Finally, Plaintiffs’ reliance on Lone Star Ladies Inv. Club

v. Schlotzsky’s, Inc., 238 F.3d 363 (5th Cir. 2001), for the notion

that the District Court should strip the section 11 claims of their

fraudulent elements and construct a claim based on negligence

and/or innocent misrepresentation is inapposite. In Lone Star

Ladies, it was the plaintiffs, not the district court, who, in light of

a dismissal under Rule 9(b), submitted an amended complaint

that dropped all 1934 Act fraud claims and instead relied solely

on non-fraud 1933 Act claims. Indeed, while the Fifth Circuit

held that under the circumstances the district court should have

allowed the amendment, it made abundantly clear that “a district

court is not required to sift through allegations of fraud in search

of some ‘lesser included’ claim of strict liability. It may

dismiss.” Id. at 368. It is not the responsibility of the District

Court to serve as Plaintiffs’ advocate.

Plaintiffs’ entire Second Amended Complaint, including

particularity requirement of Rule 9(b) does not apply to claims under §

11 of the Securities Act, because proof of fraud or mistake is not a

prerequisite to establishing liability under § 11.”).

52

the section 11 claims, is grounded in allegations of fraud.

Plaintiffs’ section 11 claims are accordingly subject to Rule 9(b).

As detailed exhaustively in the preceding section, Plaintiffs have

not met their burden of pleading fraud with particularity. As

such, the District Court appropriately dismissed Plaintiffs’

section 11 claims.

C.

Leave to Amend

Finally, Plaintiffs challenge the District Court’s refusal to

grant them leave to file a Third Amended Complaint. The

District Court denied Plaintiffs leave to amend because Plaintiffs

had already been given “ample opportunity [three complaints] to

state a cognizable cause of action” and “continu[ing] to require

defendants to defend the action, and to ultimately incur the effort

and expense of a third motion to dismiss after two successful

dismissal motions, would clearly constitute undue prejudice to

the defendants.” (App. at 896.) We review the denial of leave for

abuse of discretion. In re Adams Golf Inc. Sec. Litig., 381 F.3d

267 (3d Cir. 2004). We hold that the District Court’s denial of

leave did not constitute an abuse of discretion.

To effectively evaluate the propriety of the District

Court’s decision to deny Plaintiffs leave to amend their Second

Amended Complaint, it is vital to outline the reasons provided by

the District Court for dismissing the Amended Complaint, the

guidance it provided to Plaintiffs regarding the Amended

Complaint’s deficiencies, and Plaintiffs’ efforts to address the

District Court’s concerns in its Second Amended Complaint.

The District Court granted Defendants’ motion to dismiss

the Amended Complaint for failure to meet the particularity

standards dictated by Rule 9(b) and the PSLRA, and for failure

to state a claim under Rule 12(b)(6). First, the District Court

determined that Plaintiffs failed to plead their fraud claims in

accordance with the mandates of Rule 9(b) and the PSLRA.

Specifically, Plaintiffs neglected to plead with particularity the

“who, what, when, and how” of each statement alleged to be

53

false as required by Rule 9(b), and failed to satisfy the strict

standard provided by the Second Circuit’s decision in Novak v.

Kasaks, 216 F.3d 300 (2d Cir.), cert.denied, 531 U.S. 1012

(2000), for pleading 1934 Act fraud claims made upon

“information and belief.” In addition to Plaintiffs’ failure to offer

either adequate documentation or any sources who would likely

have knowledge of the allegations set forth in the Amended

Complaint, the District Court found that Plaintiffs did not plead

with particularity the data used to calculate, or simply the source

of, financial calculations that further supply the groundwork of

Plaintiffs’ fraud claims. Next, the District Court held that

Plaintiffs’ 1933 Act section 11 and 1934 Act section 14(a) claims

fall within the purview of the heightened pleading requirements

of Rule 9(b) and the PSLRA, respectively. While such claims

can be asserted without pleading scienter, they are subject to

heightened particularity requirements when plaintiffs nonetheless

elect to ground them in fraud. The District Court observed that

Plaintiffs’ claims here “sound in fraud” and found their attempt

to insulate their section 11 and 14(a) counts through a one-

sentence disavowal of fraud allegations unavailing. Third, The

District Court found that Plaintiffs’ scienter allegations were

insufficient. Finally, the District Court characterized many of the

statements Plaintiffs alleged to be false as inactionable forward

looking statements of optimism.

The District Court’s decision to dismiss the Amended

Complaint thus provided Plaintiffs with a detailed blueprint of

how to remedy the defects in their claims. Plaintiffs were

effectively instructed to support fraud claim allegations with

particularity, either by adequately describing a source that

occupied a position such that the source would probably possess

the information alleged, and/or providing documentation.

Plaintiffs were further admonished to either plead section 11 and

section 14(a) claims without averring fraud or to meet the

requisite particularity requirements. As illustrated in our analysis

above, however, Plaintiffs’ Second Amended Complaint utterly

failed to comply with the District Court’s directives.

An examination of the changes--or lack thereof--instituted

between the Amended Complaint and Second Amended

54

Complaint is illuminating. With respect to those false statement

and accounting fraud allegations made on “information and

belief,” Plaintiffs neglected to supplement the existing

allegations of the Amended Complaint with sufficiently

particularized confidential source descriptions. Instead, as

discussed above, Plaintiffs chose to repeat the same allegations

from the Amended Complaint and attach a deluge of vague

confidential source allegations. With respect to their section 11

claims, the District Court explicitly informed Plaintiffs of the

reasons why their section 11 claims sound in fraud, including

that Count II of the Amended Complaint expressly incorporates

by reference all prior factual allegations of the complaint,

including the “scienter and scheme allegations.” Moreover, the

District Court cautioned that its assessment “is not altered by

plaintiffs’ attempt at transforming an action in fraud into a

negligence cause of action by adding a boilerplate assertion

under counts II and III ‘expressly disclaim[ing] any allegations

of fraud, knowledge, intent or scienter.’” (App. at 656.) Yet

notwithstanding this evident direction, Plaintiffs neglected to

make even a single adjustment to the Amended Complaint to

avoid having their section 11 claims subjected to Rule 9(b). 26

Instead, Plaintiffs regurgitated the exact same one-sentence

disavowal of fraud that the District Court had already rejected as

insufficient.

Fed. R. Civ. P. 15(a) provides that leave to amend “shall

be freely given” by the court “when justice so requires.” We have

previously acknowledged and discussed the PSLRA’s unique

impact of narrowing application of this standard in securities

fraud cases. Allowing leave to amend where “‘there is a stark

absence of any suggestion by the plaintiffs that they have

developed any facts since the action was commenced, which

would, if true, cure the defects in the pleadings under the

heightened requirements of the PSLRA,’” would frustrate

26

Actually, Count II’s incorporation of allegations located

elsewhere in the Complaint, including the scienter and scheme

allegations, was amended to reflect the paragraph renumbering that

occurred as a result of other amendments made to the Amended

Complaint.

55

Congress’s objective in enacting this statute of “‘provid[ing] a

filter at the earliest stage (the pleading stage) to screen out

lawsuits that have no factual basis.’” GSC Partners CDO Fund v.

Washington, 368 F.3d 228, 246 (3d Cir. 2004) (quoting In re

NAHC, 306 F.3d at 1332, 1333). Plaintiffs here have proffered

no additional facts that would cure the pleading deficiencies of

the Second Amended Complaint. 27 In light of the clear guidance

the District Court afforded to Plaintiffs, Plaintiffs’ disregard of

that advice, and Plaintiffs’ failure to propose additional

amendments that would remedy the pleading deficiencies of the

Second Amended Complaint, the District Court did not abuse its

discretion in denying Plaintiffs leave to amend their deficient

complaint.

Plaintiffs nonetheless argue that they should at least be

permitted to strip their 1933 Act section 11 claims of fraud

allegations and replead these claims pursuant to a theory of strict

liability or negligence. Ordinarily, leave to amend is granted

when a complaint is dismissed on Rule 9(b) particularity grounds

alone. See In re Burlington, 114 F.3d at 1435. Leave to replead,

however, is often properly denied on other grounds, such as

undue delay, bad faith, dilatory motive, prejudice and futility. Id.

at 1434. Significant to the District Court’s decision to deny

leave to amend is the fact that it had set forth in detail the

applicable heightened pleading standards and the deficiencies in

Plaintiffs’ Amended Complaint. Indeed, as described above,

27

Plaintiffs did present the District Court with a new source to

provide further detail regarding the alleged internal memo cited in the

Second Amended Complaint. The new source, a former underwriter in

Chubb’s Southern Zone, asserts that Defendant O’Hare was the author

of the memo and that the memo merely stated that the targeted 10% to

15% premium increases were not being achieved. While this

amendment may resolve some of the particularity concerns regarding the

alleged internal memo, it does not address its primary deficiencies,

including when the memo was authored, the basis for the opinion

contained within, the data upon which that opinion relies, and who, if

anyone, reviewed the memo. Although the Second Amended Complaint

alleges that this internal memo was sent to branch and commercial

managers, the new source is not identified as a branch or commercial

manager.

56

with respect to the section 11 claims, Plaintiffs were explicitly

warned to either plead those claims in accordance with Rule 9(b),

or strip them of all averments of fraud. Plaintiffs chose at their

peril not to heed the District Court’s guidance and avail

themselves of an opportunity to rectify the deficiencies of the

Amended Complaint. Under this scenario, justice does not

require that leave to amend be given.28 See Fed. R. Civ. P. 15(a).

The reasons provided by the District Court for its decision have

been previously recognized as proper grounds for denying leave

to amend a complaint, even when the complaint was dismissed

for lacking particularized pleadings. See, e.g., In re NAHC, 306

F.3d at 1332 (recognizing “undue delay, bad faith, dilatory

motive, prejudice, and futility” as proper grounds for denying

leave to amend claims dismissed under the PSLRA); Krantz v.

Prudential Invs., 305 F.3d 140, 144 (3d Cir. 2002) (“A District

Court has discretion to deny a plaintiff leave to amend where the

plaintiff was put on notice as to the deficiencies in his complaint,

but chose not to resolve them.”). We recognized the validity of

the District Court’s reasoning in In re Burlington Coat Factory

where we stated that “[o]rdinarily where a complaint dismissed

on Rule 9(b) . . . grounds alone, leave to amend is granted,” but

because “the Complaint in this case was plaintiffs’ second . . . it

is conceivable that the district court could have found undue

delay or prejudice to the defendants.” 114 F.3d at 1435. We

28

Plaintiffs’ contention that the District Court’s dismissal with

prejudice somehow ran afoul of the Supreme Court’s decision in Foman

v. Davis, 371 U.S. 178 (1962), is similarly unpersuasive given Foman’s

holding that

[i]n the absence of any apparent or declared reason --

such as undue delay, bad faith or dilatory motive on the

part of the movant, repeated failure to cure deficiencies

by amendments previously allowed, undue prejudice to

the opposing party by virtue of allowance of the

amendment, futility of amendment, etc. --the leave

sought should, as [Rule 15(a)] require[s], be “freely

given.”

371 U.S. at 182 (emphasis added). In this case, the District Court clearly

declared valid reasons for denying leave.

57

allowed plaintiffs to replead in that case only because “the

[district] court made no such determination, and we cannot make

that determination on the record before us.” Id.

The District Court provided Plaintiffs with a detailed

roadmap for curing the deficiencies in their claims. Plaintiffs’

Second Amended Complaint did not cure these deficiencies.

Defendants have already been forced to defend against three

complaints. The District Court’s decision to prevent Plaintiffs

from having yet another chance to revise their complaint was

properly within its discretion.

IV.

For the foregoing reasons, the judgment of the District

Court entered on August 12, 2003 will be affirmed.

58

Calpers v. The Chubb Corporation, No. 03-3755.

SLOVITER, Circuit Judge, Dissenting in part.

I join Parts I, II and III.A of the majority’s thorough

opinion. I can certainly understand why the District Judge,

presented with a complaint of 125 pages which, even after

amendment, failed to correct the inadequacies previously noted

by the court, decided that Plaintiffs should be given no further

opportunities to state a claim. I believe, however, that Plaintiffs

may have colorable claims under § 11 of the Securities Act and §

14(a) of the Exchange Act and that the dismissal with prejudice

as to these specific claims was not in the proper exercise of the

court’s discretion. Accordingly I respectfully dissent, in part,

from Parts III.B and III.C of the majority opinion.

I.

On June 17, 1999, Chubb and Executive Risk filed their

registration statement and merger proxy pursuant to the proposed

merger. The second quarter 1999 closed on June 30, 1999.

Executive Risk shareholders approved the proposed merger on

July 19, 1999. Only eight days later, on July 27, Chubb released

its second quarter results, which fell short of earnings projections

by four cents per share. Although this may not appear significant

to a lay person, these results were described by securities analysts

as a “shocking disappointment.” 29

29

Plaintiffs’ complaint quotes PaineWebber’s July 27, 1999

report as stating:

[i]n what was perceived as a shocking disappointment,

Chubb reported flat premiums for the second quarter

with earnings . . . short of the Street consensus . . . .

Management dampened its earlier enthusiasm for

improving market conditions, which had ratcheted up

expectations early in the second quarter. . . . Total

standard commercial business shrank 9.0%, more than

expected. The combined ratio remained unacceptably

high at 120.8%. Commercial multiperil results were

terrible. . . . Premiums in total were flat rather than up

about 5% as expected.

App. at 727 (ellipses in original).

Prudential Securities issued a report on July 27, 1999 stating that

the “[s]tandard commercial results were awful. . . . The total standard

commercial book reported a combined ratio of 120.8% slightly better

than a year ago but deteriorated from the 117.9% reported in the first

quarter.” App. at 728 (ellipse in original).

60

Plaintiffs argue that Defendants had a duty to disclose the

disappointing mid-second quarter results in their June 17, 1999

registration statement and merger proxy materials. Failure to do

so allegedly rendered them false and misleading, and gave rise to

a private cause of action not only under § 10(b) of the Exchange

Act but also under § 14(a) of the same Act and § 11 of the

Securities Act. See, e.g., Herman & M acLean v. Huddleston,

459 U.S. 375, 382-83 (1983) (holding that action under sections

11 and 10(b) may arise from same disclosure).

Despite the fact that averments under § 11 and § 14(a)

need not allege scienter, I do not disagree with the majority that

these claims as pled were “grounded in fraud” and therefore,

subject to the heightened pleading requirements of Fed. R. Civ.

P. 9(b) and the Private Securities Litigation Reform Act

(PSLRA). See In re NAHC, Inc. Sec. Litig., 306 F.3d 1314,

1329 (3d Cir. 2002); Shapiro v. UJB Fin. Corp., 964 F.2d 272,

288-89 (3d Cir. 1992). The majority thus applies the same

61

sweeping particularity analysis applicable under the PSLRA and

Rule 9(b) to Plaintiffs’ § 10(b) claims as it does to Plaintiffs’ §

11 and § 14(a) claims. It then concludes that the “‘true facts’

allegations, which purportedly demonstrate why Defendants’

various . . . disclosures . . . were materially false” were not pled

by Plaintiffs with the requisite particularity. See Majority

typescript op. at 27. Accordingly, the majority affirms the

District Court’s dismissal under Fed. R. Civ. P. 12(b)(6) and its

denial of leave to amend.

While I agree with the majority’s decision to dismiss the

Second Amended Complaint on particularity grounds, the

majority fails to discuss whether Plaintiffs may have colorable

claims under § 11 and § 14(a).

II.

A Colorable Claim Exists Under § 11

of the Securities Act and § 14(a) of the Exchange Act

It is well established that a statutory duty exists to disclose

62

all material information in connection with a registered stock

offering, proxy solicitation or shareholder vote. Section 11 of

the Securities Act provides that a private action for damages may

be brought “by any person acquiring such security” if a

registration statement, as of its effective date: (1) “contained an

untrue statement of material fact”; (2) “omitted to state a material

fact required to be stated therein”; or (3) omitted to state a

material fact “necessary to make the statements therein not

misleading.” 15 U.S.C. § 77k(a). Liability attaches to, inter alia,

all persons who sign the registration statement, including the

“issuer, its principal executive officer or officers,” and pursuant

to § 15 of the Securities Act, every control person of a party

liable under § 11. See 15 U.S.C. §§ 77k(a); 78f(a).

Likewise, the Exchange Act’s provision governing proxy

solicitations, § 14(a)30 , and Rule 14a-9 promulgated pursuant

30

§ 14(a) of the Exchange Act states:

It shall be unlawful for any person, by the use of the

63

thereto,31 provide a private cause of action for the solicitation of

proxies that contain any materially false or misleading

information. See 15 U.S.C. § 78n; 17 C.F.R. § 240.14a-9; see

also J.I. Case Co. v. Borak, 377 U.S. 426 (1964). Section 14(a)

mails or by any means or instrumentality of interstate

commerce or of any facility of a national securities

exchange or otherwise, in contravention of such

rules and regulations as the Commission may

prescribe as necessary or appropriate in the public

interest or for the protection of investors, to solicit or

to permit the use of his name to solicit any proxy or

consent or authorization in respect of any security

(other than an exempted security) registered pursuant

to section 781 of this title.

15 U.S.C. § 78n(a).

31

Rule 14a-9 provides:

No solicitation subject to this regulation shall be

made by means of any proxy statement ... containing

any statement which, at the time and in the light of

the circumstances under which it is made, is false or

misleading with respect to any material fact, or

which omits to state any material fact necessary in

order to make the statements therein not false or

misleading . . . .

17 C.F.R. § 240.14a-9(a).

64

liability attaches to all parties who negligently execute a proxy

statement, and pursuant to § 20(a) of the Exchange Act, any

person “who directly or indirectly, controls any person” who

negligently executes a proxy statement. 15 U.S.C. § 78t(a).

Significantly, an action under § 11 or § 14(a) does not

require any allegation that a defendant acted with scienter. See

Herman & M acLean v. Huddleston, 459 U.S. 375, 382 (1983); In

re Adams Golf, Inc. Sec. Litig., 381 F.3d 267, 274 n.7 (3d Cir.

2004) (“Section[] 11 . . . [is a] virtually absolute liability

provision[ ], which do[es] not require plaintiffs to allege that

defendants possessed any scienter.”); Gould v. American-

Hawaiian S.S. Co., 535 F.2d 761, 777 (3d Cir. 1976) (in

imposing negligence standard, we stated “[t]he language of

section 14(a) and Rule 14a-9(a) contains no suggestion of a

scienter requirement, merely establishing a quality standard for

proxy material”). Their “primary purpose . . . is to protect

investors by requiring publication of material information

65

thought necessary to allow them to make informed . . . decisions

concerning public offerings of securities.” Pinter v. Dahl, 486

U.S. 622, 638 (1988); see also Sec. & Exch. Comm’n v. Ralston

Purina Co., 346 U.S. 119, 124 (1953); Desaigoudar v.

Meyercord, 223 F.3d 1020, 1024 (9th Cir. 2000).

In Shaw v. Digital Equip. Corp., 82 F.3d 1194 (1st Cir.

1996), superseded by statute on other grounds, the Court of

Appeals for the First Circuit held that a legally cognizable claim

under § 11 could be made for failure to disclose mid-quarter

results in a registration statement, which “indicat[e] some

substantial likelihood that the quarter would turn out to be an

extreme departure from publicly known trends and

uncertainties.” Id. at 1211. The defendant’s registration

statement in that case became effective and its stock offering

took place “11 days prior to the close of the quarter then in

progress, and about three weeks prior to the company’s

announcement of an unexpectedly negative earnings report for

66

that quarter.” Id. at 1199. The court reasoned that the “corporate

issuer in possession of material nonpublic information, must, like

other insiders in the same situation, disclose that information to

its shareholders or refrain from trading with them.” Id. at 1203-

04 (internal quotations and citation omitted). Such disclosure is

especially

crucial in the context of a public offering, where

investors typically must rely . . . on an offering

price determined by the issuer and/or the

underwriters of the offering. . . . Accordingly the

disclosure requirements associated with a stock

offering are more stringent than, for example, the

regular periodic disclosures called for in the

company’s annual Form 10-K or quarterly Form

10-Q filings under the Exchange Act.

Id. at 1208 (internal citation omitted).

Shaw rejected “any bright-line rule” as to when mid-

quarter disclosures must be made, stating that in “many

circumstances, the relationship between the nonpublic

information that plaintiffs claim should have been disclosed and

the actual results or events that the undisclosed information

67

supposedly would have presaged will be so attenuated that the

undisclosed information may be deemed immaterial as a matter

of law.” Id. at 1210-11. The situation before us is not one of

those instances.

Akin to the factual circumstances in Shaw, Chubb filed its

registration statement thirteen days prior to the close of a

disappointing second quarter, the results of which, by all

accounts, were the product of more than a mere “minor business

fluctuation.” Id. at 1211. Analysts’ reports stated that these

results were a “shocking disappointment” and that the “standard

commercial results were awful.” See supra, note 1. Surely,

“there is a substantial likelihood that a reasonable shareholder

would consider [such information] important in deciding how to

vote.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449

(1976) (defining element of materiality as “a substantial

likelihood that the disclosure of the omitted fact would have been

viewed by the reasonable investor as having significantly altered

68

the ‘total mix’ of information made available”); see also Basic,

Inc. v. Levinson, 485 U.S. 224, 232 (1988).

Furthermore, following the First Circuit in Shaw, I see no

reason not to accept Plaintiffs’ allegations that Chubb was in

possession of information concerning the Company’s quarter-to-

date performance at the time it issued its registration statement.

Shaw, 82 F.3d at 1211 (accepting assumption that corporations

regularly monitor their financial performance). Thus, at this

early pleading stage, I conclude that Plaintiffs may entertain an

actionable claim under § 11 of the Securities Act against

Defendants Chubb, O’Hare, Schram and Kelso.32

For the same reasons, it appears that failure to disclose

Chubb’s mid-second quarter results in the proxy materials would

32

See also In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 70-71

(2d Cir. 2001) (holding that material decline in sales or earnings is

information that must be disclosed); In re Campbell Soup Co. Sec. Litig.,

145 F. Supp. 2d 574, 590-91 (D. N.J. 2001) (same); see also Steckman

v. Hart Brewing, Inc., 143 F.3d 1293 (9th Cir. 1998) (noting that

material mid-quarter “slowdown” in business or orders would need to be

disclosed).

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be actionable under § 14(a) of the Exchange Act. “Only when

the proxy statement fully and fairly furnishes all the objective

material facts as to enable a reasonable prudent stockholder to

make an informed investment decision is the federal purpose in

the securities law served.” Mendell v. Greenberg, 927 F.2d 667,

674 (2d Cir. 1991); see TSC Indus., Inc. v. Northway, Inc., 426

U.S. 438, 448 (1976). Furthermore, Rule 14a-9 “specifically

requires that solicitation material which has become false or

misleading must be corrected by subsequent materials.” Gould v.

American-Hawaiian S.S. Co., 351 F. Supp. 853, 868 (D. Del.

1972), rev’d and remanded on different grounds, 535 F.2d 761

(3d Cir. 1976). Thus, even assuming that the proxy materials

were accurate when initially prepared by Defendants, Rule 14a-9

mandates that they be amended to reflect the disappointing

second quarter results at some point prior to the Executive Risk

shareholder vote, a vote which incidently occurred nearly three

weeks after the second quarter ended.

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Although this court has imposed a slightly higher standard

of materiality in the § 14(a) and rule 14a-9 context than in the §

11 context, 33 I cannot conclude, as a matter of law, that these

non-disclosures were immaterial. Therefore, in my opinion,

Plaintiffs also appear to have a facially valid claim under § 14(a)

and Rule 14a-9 against all Defendants.

III.

Leave to Amend the § 11 and §14(a) Claims Should be Granted

Fed. R. Civ. P. 15 provides that a party may amend its

pleading once before a responsive pleading is served, or

thereafter “by leave of court or by written consent of the adverse

party.” Such “leave shall be freely given when justice so

requires.” Id.

33

See Gould v. American-Hawaiian S.S. Co., 535 F.2d 761, 771

(3d Cir. 1976) (holding that “the basic test of materiality in a section

14(a) setting is whether it is probable that a reasonable shareholder

would attach importance to the fact falsified, misstated or omitted in

determining how to cast his vote on the question involved”) (emphasis

added).

71

In affirming the District Court’s dismissal of Plaintiffs’

Second Amended Complaint with prejudice, the majority

implicitly approves the District Court’s conclusion that “[i]n the

context of securities fraud actions . . . Rule 15 must be viewed

more strictly so as not to vitiate the heightened pleading

requirements of the Reform Act by providing plaintiffs unlimited

opportunities to amend.” App. at 895 (citing In re

Cybershop.com Sec. Litig., 189 F. Supp. 2d 214, 237 (D. N.J.

2002)).

The tension between the liberal amendment approach of

Fed. R. Civ. P. 15 and the strict pleading requirements of the

PSLRA has been noted by the courts. Our court seems to have

given inconsistent signals. Compare In re NAHC, Inc. Sec.

Litig., 306 F.3d 1314, 1333 (3d Cir. 2002) (stating in dictum that

goals of PSLRA “would be thwarted if, considering the history

of this case, plaintiffs were liberally permitted leave to amend

again”), with Werner v. Werner, 267 F.3d 288, 297 (3d Cir.

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2001) (“we will not add to the strict discovery restrictions in the

. . . PSLRA . . . by narrowly construing Rule 15 in this case, even

at this late stage in the litigation. Given the high burdens the

PSLRA placed on plaintiffs, justice and fairness require that the

plaintiffs before us be allowed an opportunity to amend their

complaint to include allegations relating to the newly discovered

Board meeting minutes.”).

The same differences also appear in the decisions of other

circuit courts. Compare Miller v. Champion Enters., Inc., 346

F.3d 660, 690-92 (6th Cir. 2003) (stating in dictum that “to

prevent harassing strike suits filed the moment a company’s

stock price falls . . . would be frustrated if district courts were

required to allow repeated amendments to complaints filed under

the PSLRA”) (internal quotations and citation omitted), with

Morse v. McWhorter, 290 F.3d 795, 800 (6th Cir. 2002)

(reasoning that “leave to amend is particularly appropriate where

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the complaint does not allege fraud with particularity”); see also

Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052

(9th Cir. 2003) (per curiam) (“Adherence to these principles

[governing leave to amend] is especially important in the context

of the PSLRA. . . . In this technical and demanding corner of the

law, the drafting of a cognizable complaint can be a matter of

trial and error.”).

We need not resolve the issue raised in the above cases

because Plaintiffs should be able to file an amended complaint

based on § 11 and § 14(a) that, if divorced from any allegations

of fraud, would not be subject to heightened pleading

requirements of the PSLRA. Whereas allowing any further

amendment to Plaintiffs’ § 10(b) claims would be an abuse of

discretion because, as the majority states, “Plaintiffs here have

proffered no additional facts that would cure the pleading

deficiencies of [such claims],” see Maj. typescript op. at p. 65,

the same cannot be said for Plaintiffs’ § 11 and § 14(a) claims.

74

Stated otherwise, if given leave to amend, these claims

may be pled in a manner which would survive a motion to

dismiss under Rule 12(b)(6). See Lone Star Ladies Inv. Club v.

Schlotzky’s Inc., 238 F.3d 363 (5th Cir. 2001) (holding that

district court’s dismissal with prejudice of complaint alleging

both § 10(b) and § 11 claims was abuse of discretion because

plaintiffs had colorable § 11 claim and could plead it in amended

complaint, absent any allegation of fraud).

This court has adopted a liberal approach to the

amendment of pleadings to ensure that “a particular claim will be

decided on the merits rather than on technicalities.” Dole Arco

Chem. Co., 921 F.2d 484, 487 (3d Cir. 1990). The Supreme

Court’s holding in Foman v. Davis, 371 U.S. 178 (1962), is

axiomatic:

[i]n the absence of any apparent or declared reason

– such as undue delay, bad faith or dilatory motive

on the part of the movant, repeated failure to cure

deficiencies by amendments previously allowed,

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undue prejudice to the opposing party by virtue of

allowance of the amendment, futility of amendment, etc. – the

leave sought should, as the rules required “be freely given.”

Id. at 182; see also Oran v. Stafford, 226 F.3d 275, 291 (3d Cir.

2000); Lorenz v. CSX Corp., 1 F.3d 1406, 1414 (3d Cir. 1993).

The majority affirms the District Court’s order denying

leave to amend the Second Amended Complaint, stating that

“with respect to the section 11 claims, Plaintiffs were explicitly

warned to either plead those claims in accordance with Rule 9(b),

or strip them of all averments of fraud. Plaintiffs chose at their

peril not to heed the District Court’s guidance and avail

themselves of an opportunity to rectify the deficiencies of the

Amended Complaint.” See Maj. typescript op. at 66-67 (citing

Krantz v. Prudential Invs. Fund Mgmt., LLC, 305 F.3d 140, 144

(3d Cir. 2002)).

We have repeatedly held that “prejudice to the non-

moving party is the touchstone for the denial of an amendment.”

76

Bechtel v. Robinson, 886 F.2d 644, 652 (3d Cir. 1989) (internal

citations and quotations omitted); see also Cornell & Co. v.

Occupational Safety & Health Review Comm’n, 573 F.2d 820,

823 (3d Cir. 1978). For purposes of Rule 15, the term prejudice

“means undue difficulty in [defending] a lawsuit as a result of a

change in tactics or theories on the part of the other party.”

Deakyne v. Comm’rs of Lewes, 416 F.2d 290, 300 (3d Cir.

1969). In the absence of substantial prejudice, denial instead

must be based on “truly undue or unexplained delay . . . or

futility of amendment.” Lorenz, 1 F.3d at 1414; see also In re

Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1434-35 (3d

Cir. 1997).

The District Court concluded that “to require defendants

to defend the action, and ultimately to incur the effort and

expense of a third motion to dismiss after two successful

dismissal motions, would clearly constitute undue prejudice to

the defendants.” App. at 896.

77

The District Court’s determination that leave to amend

would cause undue prejudice was made in connection with the

complaint as a whole, which included Plaintiffs’ essentially futile

§ 10(b) claims. If Plaintiffs were given leave to amend to assert

only their colorable § 11 and § 14(a) claims, it is difficult to see

why Defendants would suffer undue prejudice in being required

to respond to a Third Amended Complaint. Defendants have

been on notice of such claims since the inception of the present

action and thus any amendment would not require them to

respond to any novel or unrelated tactics or theories. In fact,

elimination of the § 10(b) fraud claims from any future complaint

would materially limit the scope and complexity of the present

action. While Plaintiffs may have been obtuse, they have not

exhibited any showing of bad faith or caused Defendants to

suffer undue delay. “Limited delays and the prejudice to a

defendant from the pendency of a lawsuit are realities of the

system that have to be accepted.” See Ash v. Cvetkov, 739 F.2d

78

493, 496 (9th Cir. 1984).

I am not persuaded by the majority’s heavy reliance on the

fact that Plaintiffs failed to heed the advice of the District Court.

We have stated that in complex litigation, the mere fact that a

claimant has had several attempts to comply with pleading

requirements is not itself a sufficient basis to dismiss a complaint

with prejudice. Worldcom, Inc. v. Graphnet, Inc., 343 F.3d 651,

657 n.3 (3d Cir. 2003); accord Eminence Capital, LLC v.

Aspeon, Inc., 316 F.3d 1048, 1053 (9th Cir. 2003) (Reinhardt, J.,

concurring) (noting that “the undeservedly common ‘three bites

at the apple’ cliche . . . too often provides a substitute for

reasoned analysis”).

This would not be a third effort, although the majority so

implies. Plaintiffs’ Second Amended Complaint, at issue in this

appeal, was only the first attempt at a substantive amendment;

the First Amended Complaint was merely a re-filing of the

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original complaint after the District Court appointed lead

Plaintiffs. Thus, Plaintiffs have been given only one opportunity

to properly amend their complaint.

Of course, if Plaintiffs were given the opportunity to

replead the § 11 and § 14(a) claims, they would need to comply

with the requirement that they do so in “a short and plain

statement” of the claims. See Fed. R. Civ. P. 8(a)(2).

Admittedly, Plaintiffs’ counsel has not shown either the ability or

disposition to do so. Their brief was as wordy as their complaint.

Nonetheless, I would not preclude them the opportunity to assert

a possibly meritorious claim because of defects in the pleadings.

See In re Burlington Coat Factory Sec. Litig., 114 F.3d at 1435

(stating that where complaint is dismissed on particularity

grounds, leave to amend is ordinarily granted); Shapiro, 964 F.2d

at 278; Luce v. Edelstein, 802 F.2d 49, 56-57 (2d Cir. 1986);

Yoder v. Orthomolecular Nutrition Inst., Inc., 751 F.2d 555, 562

n.6 (2d Cir. 1985). In my opinion, Plaintiffs should be given a

80

final opportunity to assert their § 11 and § 14(a) claims with

instructions to plead such claim absent any allegations of fraud.