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Company can’t dismiss securities class action

Virginia Lawyers Weekly//September 19, 2023

Company can’t dismiss securities class action

Virginia Lawyers Weekly//September 19, 2023//

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Where plaintiffs suing an insurance company for making material misstatements about its reserves plausibly pleaded claims under the Exchange Act and SEC Rule 10b-5, the motion to dismiss filed by the company and its executives was denied.


Plaintiffs bring this action against James River Group Holdings Ltd. and several of its executives on behalf of themselves and similarly situated persons and entities who purchased or otherwise acquired James River common stock between Feb. 22, 2019, and Oct. 25, 2021.

Plaintiffs allege violations of the Exchange Act and SEC Rule 10b-5 promulgated thereunder. This matter now comes before the court on defendant’ motion to dismiss the second amended complaint, or SAC.

Misrepresentation or omission

Defendants first argue that the alleged misstatements regarding James River’s underreported reserves constitute inactionable statements of opinion. To determine whether defendants’ statements of opinion that reserves were “reasonable” and “adequate,” the court examines whether plaintiffs have plausibly alleged that these statements contained “embedded” false facts or omitted irreconcilable, material facts. The court finds that plaintiffs have done so here.

Defendants next argue that plaintiffs’ SAC fails to plead misrepresentation, because plaintiffs rely on a theory of “fraud by hindsight.” The court finds that plaintiffs go beyond simply laying out the prior reserve estimates; they allege that defendants received information regarding the reserve process and policies (or lack thereof), including audit reports indicating the systemic under-reserving of Uber claims.

Third, defendants argue that companies’ ability under generally accepted accounting principles, or GAAP, to use factors beyond historical experience means that plaintiffs fail to plausibly plead that James River’s statements about GAAP compliance were false or misleading. Plaintiffs plausibly allege that after a pattern of significantly higher losses from Uber-related claims, the company “kept its reserves artificially low from the moment a claim was filed and then refused to increase those reserves based on its past loss experience with similar claims.” The court finds that the SAC plausibly alleges defendants’ reliance on data “not reflective of current reality,” and by extension demonstrates why Accounting Standard Codification 944-40-30-1 applies.

Defendants also contend that plaintiffs have failed to plausibly allege that defendants falsely certified internal controls to comply with Sarbanes-Oxley. Courts in this district have held that the failure to challenge independent auditors’ conclusions regarding a company’s financial statements weakens allegations that defendants violated GAAP. Here, however, plaintiffs go beyond conclusory allegations that defendants violated GAAP or maintained inadequate internal controls.

Defendants next argue that many of the SAC’s challenged statements qualify as forward­looking statements which the Private Securities Litigation Reform Act, or PSLRA’s “safe harbor” provision shields as inactionable. However plaintiffs’ allegations regarding James River’s systemic failures to establish, maintain or update reserve-setting procedures align with the pattern of alleged conduct that this court has found sufficient to create a question of fact about whether cautionary language qualified as meaningful. Furthermore, plaintiffs meet the particularity requirement of the PLSRA and Rule 9(b) for securities fraud claims.


Executive defendants’ personal involvement in the Reserve Committee, along with their public statements to investors regarding the “quarterly” and “careful[] review of reserves and importance of case reserves to overall loss reserves — at a time when Uber constituted James River’s “largest account” — support a reasonable inference that “Defendants possessed knowledge of the true state of affairs of the [Uber reserve situation], and thus had knowledge that their representations were misleading.”

Moreover, based on allegations that three senior managers managed a secret email portal and systemically denied reserves, the court finds that the scienter of these individuals, who occupied influential corporate positions regarding reserve setting and approvals, can be imputable to James River as a corporate defendant. Plaintiffs’ core-operations point and the magnitude of the discrepancy supports the plausibility of plaintiffs’ scienter allegations.

Loss causation

Defendants further claim that plaintiffs fail to adequately allege the loss causation element of securities fraud, because of plaintiffs’ “failure to allege any material misstatement or omission.” Because the court has found that plaintiffs have plausibly alleged a material misstatement or omission, defendants’ contention on this point is unavailing.

Section 20(a) claims

Defendants also argue that plaintiffs have failed to allege a claim for control person liability under § 20(a). Defendants’ arguments here hinge on their contention that plaintiffs have failed to allege a predicate violation of §10(b). Because the court finds that plaintiffs have plausibly alleged a predicate violation of § 10(b), and as defendants do not contest control over the primary violator (James River), the control person claims survive.

Defendants’ motion to dismiss denied.

In re: James River Group Holdings Ltd. Securities Litigation, Case No. 3:21-cv-444, Aug. 28, 2023. EDVA at Richmond (Novak). VLW 023-3-520. 59 pp.

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