Martinek v. AmTrust Financial Services, Inc.

Background

Jan Martinek brought a putative securities class action against AmTrust Financial Services, Inc., Barry D. Zyskind, George Karfunkel, and Leah Karfunkel. He alleged claims under Section 10(b) of the Securities Exchange Act of 1934, Securities and Exchange Commission Rule 10b-5, and Section 20(a) of that Act.

Martinek purchased six series of AmTrust preferred stock traded on the New York Stock Exchange. During a proposed transaction to take AmTrust’s common stock private, the defendants repeatedly stated that the preferred stock would remain outstanding and would continue to be listed on the exchange. The merger closed on November 29, 2018. On January 18, 2019, AmTrust announced that it would voluntarily delist all six series of preferred stock. The opinion states that the prices of the preferred stock then fell by almost 40 percent on the next trading day, according to allegations in the complaint.

The defendants moved to dismiss under Federal Rules of Civil Procedure 9(b) and 12(b)(6). Rule 12(b)(6) allows dismissal when a complaint does not plausibly state a legal claim. Rule 9(b) requires fraud allegations to identify the alleged false statements, who made them, when and where they were made, and why they were fraudulent.

Alleged Misstatements

The court grouped the challenged statements into five categories. It held that the defendants’ statements that the preferred stock “will” continue to be listed were actionable at the pleading stage. The court reasoned that the statements could have led a reasonable investor to understand that the defendants had decided to maintain the listing, not merely that the stock would remain listed for some brief period. The court also found that delisting less than two months after the merger, based on reasons the defendants allegedly knew or could have known earlier, supported the inference that the statements were misleading when made.

The court likewise held that statements expressing the defendants’ expectation that the preferred stock would continue to be listed were actionable. It found that general warnings about forward-looking statements did not meaningfully identify the specific risk that AmTrust would decide to delist the preferred stock. Even assuming the statements fell within the statutory safe harbor for some forward-looking statements, the court concluded that the complaint adequately alleged that the defendants knew the statements were false or misleading.

The court rejected other alleged misstatements. Statements that the preferred stock would remain outstanding “in accordance with their terms” did not promise that the stock would remain listed indefinitely. A presentation by the Special Committee’s financial adviser was too vague and was not an affirmative statement by the defendants that the stock would remain listed. Statements reported in a Barron’s article about representations to insurance regulators could not support Martinek’s claim because he did not allege that he knew about them before purchasing the stock.

Scienter

Scienter is the required state of mind for securities fraud, generally meaning an intent to deceive or conduct so reckless that it approaches intentional wrongdoing. The court held that Martinek adequately pleaded scienter under the heightened standard of the Private Securities Litigation Reform Act.

The court considered the allegations as a whole. It found that the complaint alleged a particular motive: the controlling stockholders sought to take AmTrust private while its common stock was trading at a low price, and delisting the preferred stock would eliminate the public reporting obligations that remained because the preferred stock was listed. The court also considered the defendants’ repeated assurances before the merger and their decision to delist the preferred stock shortly afterward. It described the allegations as supporting a “bait and switch” theory and found the inference of fraudulent intent sufficiently strong at this stage.

Control-Person Liability

Section 20(a) allows a claim against a person who controlled an entity that committed a securities-law violation and who meaningfully participated in that violation. Because the court found that Martinek adequately pleaded a primary Section 10(b) violation and scienter, it also held that he adequately pleaded control-person liability against the individual defendants.

Disposition

Judge Katherine Polk Failla denied the defendants’ motion to dismiss. The court ordered the defendants to file a responsive pleading by September 4, 2020, and ordered the parties to submit a proposed case-management plan by September 11, 2020. The ruling allowed the claims to proceed; it did not determine ultimate liability or damages.