United States District Court, S.D. New York
March 31, 2004.
IN RE; AMERICAN EXPRESS CO. SECURITIES LITIGATION
The opinion of the court was delivered by: WILLIAM PAULEY, District Judge
MEMORANDUM AND ORDER
This consolidated class action combines twelve suits alleging
securities fraud by American Express Company ("Amex" or the "Company")
and several of its officers Harvey Golub, Kenneth I. Chenault,
Richard Karl Goeltz, Gary L. Crittenden, Daniel T. Henry, David R. Hubers
and James M. Cracchiolo (the "Individual Defendants").*fn1 Plaintiffs
are purchasers of Amex common stock between July 26, 1999 and July 17,
2001 (the "class period"). The Consolidated Amended Class Action
Complaint (the "Amended Complaint" or "Amended Compl.") alleges
violations of section 10(b) of the Securities Exchange Act of 1934 (the
"Exchange Act"), 15 U.S.C. § 78j(b) (2000), and SEC Rule 10b-5
promulgated thereunder, 17 C.F.R. § 240.10b-5 (2000). Plaintiffs also
assert a "control person" claim against the
Individual Defendants under Section 20(a) of the Exchange Act,
15 U.S.C. § 78t(a) (2000). Defendants move to dismiss the Amended
Complaint pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of
Civil Procedure, and Sections 21D and 21E of the Exchange Act,
15 U.S.C. § 78u-4, 78u-5 (2000). For the following reasons, defendants' motion
Amex is a publicly traded financial services corporation. (Amended
Compl. ¶ 40.) Through its subsidiary, American Express Financial
Advisors ("AGFA"), Amex provides a variety of financial products
including insurance and annuities. (Amended Compl. ¶¶ 40-41.) IDS Life
Insurance Company ("IDS"), an AEFA subsidiary, sells insurance products
and invests the premiums on its own account in fixed income securities
with a broad range of maturities. (Amended Compl. ¶ 41.) The returns
generated from these investments are used to pay benefits under those
insurance policies. (Amended Compl. ¶ 41.) According to plaintiffs, a
direct correlation exists between the return on AEFA's investments and
the premiums charged to the holders of IDS insurance policies: the higher
the return, the lower the premium. (Amended Compl. ¶ 41.)
Plaintiffs allege that, beginning in 1997 Golub set aggressive earnings
targets for Amex. (Amended Compl. ¶ 42.)
Under pressure to meet Golub's publicly announced earnings goals,
AEFA allegedly under-priced its insurance products to undercut
competitors. (Amended Compl. ¶ 42.) To maintain profitability, AEFA
relied increasingly on high-yield, high-risk instruments such as
below-investment-grade, or "junk," bonds and collateralized debt
obligations ("CDOs").*fn2 (Amended Compl. ¶¶ 47, 51.) In contrast to
the typical insurance industry portfolio, where high-yield investments
comprise approximately 7 percent of the total value, AEFA's high-yield
holdings constituted approximately 10 to 12 percent of its portfolio.
(Amended Compl. ¶ 46.)
Plaintiffs assert that because AEFA's portfolio was heavily reliant on
high-yield investments, it was exposed to volatility in the equity
markets. (Amended Compl. ¶ 51.) Accordingly, plaintiffs contend that
it was imperative for AEFA to monitor its investments to obtain accurate
valuations for its holdings and gauge its risk exposure. (Amended Compl.
¶ 52.) Plaintiffs allege that AEFA did not monitor and evaluate the
extent of its exposure during the class period because it failed to
take steps to obtain reliable information about its investments and the
state of the market. (Amended Compl. ¶¶ 52, 54, 59-65.) For example,
AEFA allegedly valued certain of its high-yield holdings based on
estimates that brokers, who simply act as agents for issuers, assigned to
those securities. (Amended Compl. ¶¶ 59-60.) Because AEFA did not
employ reliable methods for valuing and overseeing its holdings,
plaintiffs claim that it could not monitor the risk in its portfolio.
(Amended Compl. ¶¶ 59-65.)
Throughout the class period, AEFA disclosed to investors the amount of
money it invested in high-yield instruments. (Amended Compl. ¶ 80.)
Nevertheless, plaintiffs allege that various statements by defendants
pertaining to the value and extent of AEFA's high-yield investments were
materially misleading. Amex's 1998 10-K stated that "[t]he company's
objective is to realize returns commensurate with the level of risk
assumed while achieving consistent earnings growth." (Amended Compl.
¶ 66.) This statement was repeated in Amex's 10-K for 1999, which was
filed with the SEC in March 2000 and signed by defendants Golub, Goeltz,
Chenault and Henry. (Amended Compl. ¶ 72.) The 1999 10-K also stated:
AEFA's owned investment securities are, for the
most part, held by its life insurance and
investment certificate subsidiaries, which
primarily invest in long-term and
intermediate-term fixed income securities to
provide their clients with a competitive rate of
return on their investments while minimizing risk.
Investment in fixed income securities provides
AEFA with a dependable and targeted margin between
the interest rate earned on investments and the
interest rate credited to clients' accounts. AEFA
does not invest in securities to generate trading
profits for its own account.
(Amended Compl. ¶ 72.) Amex's 2000 10-K repeated this and
similar statements. (Amended Compl. ¶ 73.)
Defendants also issued statements during the class period concerning
the internal controls that Amex had in place to monitor its risk
exposure. For example, in its 1998 10-K, Amex stated that:
Management establishes and oversees implementation
of Board-approved policies covering the company's
funding, investments and use of derivative
financial instruments and monitors aggregate risk
exposures on an ongoing basis.
(Amended Compl. ¶ 66.) Two years later, defendant Chenault told
investors that Amex could weather the economic downturn in 2001 because
its "risk management staff are among the best in the business. They are
highly skilled and experienced, and have continually improved [Amex's]
processes over the years."
(Amended Compl. ¶ 140.) Plaintiffs assert that these statements
were materially misleading because they misrepresented Amex's high-yield
holdings as conservative and because Amex did not
have reliable risk management policies in place during the class
period. (Amended Compl. ¶¶ 54-55, 62, 64, 75.)
Beginning in the third quarter of 1999 and continuing through 2000,
default rates in the high-yield bond market increased, thus eroding the
value of high-yield securities held by AEFA. (Amended Compl. ¶ 76.)
Despite these negative developments, Amex did not write down investments
in its high-yield portfolio in 1999 or 2000. (Amended Compl. ¶ 102.)
Plaintiffs allege, therefore, that Amex's financial statements were false
and misleading because they significantly overvalued AEFA's holdings.
(Amended Compl. ¶¶ 86, 102.)
Plaintiffs further allege that defendants misled investors by
representing that Amex's financial statements were prepared in accordance
with generally accepted accounting principles ("GAAP"), which require
companies to account for impairments in the value of an investment.
(Amended Compl. ¶ 94.) Plaintiffs contend that defendants' statements
to this effect were false and misleading because most of AEFA's
high-yield investments were valued at amortized cost rather than written
down in accord with GAAP. (Amended Complaint ¶¶ 87, 93, 102.)
The Amended Complaint also alleges that defendants' statements
concerning Amex's risk management and financial reporting were materially
misleading because defendants knew or
recklessly disregarded that Amex's internal controls over the
valuation of its high-yield securities were "severely deficient or
non-existent." (Amended Compl. ¶ 111.) Plaintiffs claim,
additionally, that such statements were materially misleading because
defendants knew or recklessly disregarded that Amex continued to hold its
investments "in a manner that was contrary to its publicly stated
investment philosophy and controls." (Amended Compl. ¶ 111.)
As the equity market downturn deepened, Amex began to disclose the
existence of some "deterioration" in its high-yield portfolio. (Amended
Compl. ¶ 117.) The Company issued successive statements to this
effect in its Form 8-Ks, filed on April 24, 2000, July 24, 2000 and
January 26, 2001. (Amended Compl. ¶ 117.) These Form 8-Ks, however,
described AEFA's overall asset quality as "strong." (Amended Compl. ¶
In a presentation on February 7, 2001, which was later incorporated in
a Form 8-K, Chenault acknowledged that the Company had had some problems
with its high-yield investments, especially in the fourth quarter of
2000. (Amended Compl. ¶ 136.) During that presentation, Chenault
stated that "we have significantly scaled back our activity" in
"structured investments, such as collateralized debt obligations."
(Amended Compl. ¶ 136.) Chenault also characterized AEFA's
"fundamental business model" as "sound." (Amended Compl. ¶ 137.)
claim that Chenault's statements were materially false and
misleading because AEFA's practice of under-pricing IDS insurance
policies and making up the difference with high-yield investments, which
AEFA failed to monitor adequately, bore significant risk and was
fundamentally unsound. (Amended Compl. ¶ 137.)
Two months after Chenault's February 7 presentation, Amex announced
that it would take a write-down of $185 million in losses on its
high-yield portfolio for the first quarter of 2001 in addition to a $123
million loss realized on its high-yield investments for 2000. (Amended
Compl. ¶ 144.) On April 2, 2001, Amex issued a press release
announcing that its earnings for the first quarter of 2001 would decrease
by 18 percent from its 2000 earnings period. (Amended Compl. ¶ 144.)
Amex attributed this decline to a "pre-tax loss of about $185 million
from the write-down and sale of certain high-yield securities held in the
investment portfolio of its subsidiary [AEFA]." (Amended Compl. ¶
144.) The press release also stated that "[t]otal losses on these
investments for the remainder of 2001 are expected to be substantially
lower than in the first quarter." (Amended Compl. ¶ 144.) These
losses caused Amex to revise an earlier prediction that it would meet its
earnings targets for 2001. (Amended Compl. ¶ 145.) News of this
writedown resulted in a 3.8 percent drop in Amex's share price,
representing $2 billion in market capitalization. (Amended Compl.
In the wake of this announcement, several of the Individual Defendants
made statements that these losses were expected to be lower for the
remainder of 2001 than they had been in the first quarter. (Amended
Compl. ¶¶ 148-50.) Plaintiffs claim that these statements implied that
the problems underlying those losses were sudden, when in fact they had
roots as far back as 1999. (Amended Compl. ¶ 148.) Chenault, for
example, stated "our analysis of the portfolio at the end of the first
quarter did not fully comprehend the risk underlying these structured
investments during a period of persistently high default rates."
(Affidavit of Robert E. Zimet, dated February 14, 2003 ("Zimet Aff."),
Ex. D at 2.)*fn3 Plaintiffs claim that such statements were false and
misleading because: (1) AEFA
still remained exposed to risks from its high-yield holdings; and
(2) the deterioration in the value of high-yield investments began in
1999, when default rates surged, not 2001. (Amended Compl. ¶ 151.)
On July 18, 2001, Amex issued a press release announcing that its
earnings for the second quarter of 2001 would likely decline 76 percent
from the prior year, partly due to an $826 million pre-tax charge to
recognize "additional write-downs in the high-yield portfolio at [AEFA]
and losses associated with rebalancing the portfolio towards lower-risk
securities." (Amended Compl, ¶ 156.)
Chenault subsequently announced that Amex would be scaling back its
high-yield assets to 7 percent of its portfolio. (Amended Compl. ¶
162.) Amex also announced that it was revising its risk control policies
by creating a centralized committee to supplement the risk management
capabilities of each of its business segments, (Amended Compl. ¶
172.) Plaintiffs filed this action on July 17, 2002 and amended it on
December 10, 2002. (Defendants' Memorandum of Law in Support of Their
Motion to Dismiss the Complaint ("Defs. Mem.") at 19.)
I. Section 10(b) and Standards for A Motion to Dismiss
On a motion to dismiss, a court must accept the material facts
alleged in the complaint as true and construe all reasonable inferences
in a plaintiff's favor. Grandon v. Merrill Lynch & Co.,
147 F.3d 184, 188 (2d Cir. 1998). A court should not dismiss a complaint for
failure to state a claim unless "it appears beyond doubt that the
plaintiff can prove no set of facts in support of his claim which would
entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46
(1957). In this limited task, the issue is not whether a plaintiff will
ultimately prevail on his claim, but whether the plaintiff is entitled to
offer evidence in support of allegations in the complaint. Hamilton
Chapter of Alpha Delta Phi, Inc. v. Hamilton Coll., 128 F.3d 59, 62
(2d Cir. 1997).
"To state a cause of action under section 10(b) and Rule 10b-5, a
plaintiff must plead that the defendant made a false statement or omitted
a material fact, with scienter, and that plaintiff's reliance on
defendant's action caused plaintiff injury." San Leandro, 75 F.3d at 808.
Proof of reckless conduct satisfies the requirement of scienter in a
section 10(b) claim. Glickman v. Alexander & Alexander Servs.,
Inc., No. 93 Civ. 7594 (LAP), 1996 WL 88570, at *3 (S.D.N.Y. Feb.
A complaint alleging securities fraud under section 10(b) must satisfy
the heightened pleading requirements of Rule 9(b) of the Federal Rules
of Civil Procedure and the PSLRA. Kalint v. Eichler, 264 F.3d 131, 138
(2d Cir. 2001). Under Rule 9(b), the circumstances constituting fraud
must be stated with particularity, meaning that such allegations must
"(1) specify the statements that the plaintiff contends were fraudulent,
(2) identify the speaker, (3) state where and when the statements were
made, and (4) explain why the statements were fraudulent." Novak v.
Kasaks, 216 F.3d 300, 306 (2d Cir. 2000) (internal quotations
omitted). The PSLRA similarly requires that "the complaint shall specify
each statement alleged to have been misleading [and] the reason or
reasons why the statement is misleading." 15 U.S.C. § 78u-4(b)(1).
Additionally, under the PSLRA, if allegations concerning fraud are made
on information and belief, "the complaint shall state with particularity
all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1).
Moreover, the PSLRA's scienter provision provides 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).*fn4
Plaintiffs can satisfy this requirement either by alleging facts
showing that defendants had both the motive and opportunity to commit
fraud, or by alleging facts constituting strong circumstantial evidence
of conscious misbehavior or recklessness. Kalint, 264 F.3d at
138 (recklessness is "conduct which is highly unreasonable and which
represents an extreme departure from the standards of ordinary care to
the extent that the danger was either known to the defendant or so
obvious that the defendant must have been aware of it."). More
specifically, plaintiffs can raise a strong inference of fraudulent
intent by pleading that the defendant: (1) benefited in a "concrete and
personal way" from the alleged fraud; (2) engaged in "deliberately
illegal" behavior; (3) "knew facts or had access to information
suggesting that their public statements were not accurate"; or (4) failed
to verify information that they had a duty to monitor. Novak,
216 F.3d at 311.
II. Statute of Limitations
As a threshold matter, defendants contend that plaintiffs' claims are
time-barred under the Exchange Act's one-year statue of limitations
because the initial complaint in this action was filed more than a year
after plaintiffs should have been on notice of the alleged fraud.
Defendants' argument is unavailing.
Section 10(b) provides that "[n]o action shall be maintained . . .
under this section, unless brought within one year after the discovery of
facts constituting the violation and within three years after such
violation." 15 U.S.C. § 78i (e) (2000). The one-year limitations
period begins to run after the plaintiff "obtains actual knowledge of the
facts giving rise to the action or notice of the facts, which in the
exercise of reasonable diligence, would have led to actual knowledge."
LC Capital Partners LP v. Frontier Ins. Group, Inc.,
318 F.3d 148, 154 (2d Cir. 2003) (internal quotations omitted). Such a duty of
inquiry arises when circumstances would suggest to a reasonable investor
of ordinary intelligence the probability that he has been defrauded.
Dodds v. Cigna Sees., Inc., 12 F.3d 346, 350 (2d Cir. 1993).
These circumstances are commonly referred to as "storm warnings." Dodds,
12 F.3d at 350. However, to trigger a plaintiff's duty of inquiry, the
indicated by the storm warnings must be probable, not merely
possible. Newman v. Warnaco. Group, Inc., 335 F.3d 187, 193 (2d
Cir. 2003) ("Inquiry notice exists only when uncontroverted evidence
irrefutably demonstrates when plaintiff . . . should have discovered the
The storm warnings on which defendants rely were insufficient to put
plaintiffs on inquiry notice of the alleged fraud as a matter of law.
Compare, e.g., LC Capital, 318 F.3d at 155 ("a series
of three charges in substantial and increasing amounts for the same
purpose within four years" sufficient to put plaintiffs on inquiry notice
of possible fraud); de la Fuente v. PCI Telecomm., Inc.,
206 F.R.D. 369, 382 (S.D.N.Y, 2002) (company restated its financials in two
SEC filings and revised its accounting at request of SEC, which ordered a
ten-day suspension of trading in defendant's stock); Westinghouse
Elec. Corp. v. 21 Int'l Holdings, Inc., 821 F. Supp. 212, 222
(S.D.N.Y. 1993) (numerous analyst reports suggested issuer would be
taking large write-downs in amounts similar to announcement that
plaintiffs acknowledged had placed them on notice); Norniella v.
Kidder Peabody & Co., 752 F. Supp. 624, 628 (S.D.N.Y. 1990)
(plaintiff received 169 confirmation slips and 24 monthly statements
revealing activity inconsistent with plaintiff's investment objectives),
with In re Worldcom, Inc. Sees. Litig., Nos. 02 Civ. 3288
(DLC), 03 Civ. 6592 (DLC), 2003
WL 22738546, at *11-12 (S.D.N.Y. Nov. 21, 2003) (insufficient storm
warnings to put plaintiff on inquiry notice "as a matter of law" where
defendant took large write down and numerous news stories discussed
defendant's accounting problems); Walther v. Maricopa Int'l Inv.
Corp., No. 97 Civ. 4816 (HB), 1998 WL 186736, at *4 (S.D.N.Y. Apr.
17, 1998)(6.5 percent decline in principal invested did not amount to
storm warning sufficient to put plaintiff on inquiry notice).
While there were harbingers that might have alerted plaintiffs to the
possibility of wrongdoing, those signs did not raise a probability of
wrongdoing sufficient to put plaintiffs on inquiry notice of fraud. Other
than Amex's mention of minimal deterioration in the value of its
high-yield holdings in April and July 2000, and January 2001 (Amended
Compl. ¶ 117), the sole warning to which defendants can point is the
April 2001 write-down.*fn5 (Amended Compl. ¶¶ 144.)
To conclude that one write-down, albeit significant, put plaintiffs on
inquiry notice of defendants' alleged fraud would be inconsistent with
the objectives of the PSLRA, which was enacted in large part to
discourage premature and frivolous securities fraud suits. See
H.R. Conf. Rep. No. 104-369, at 31
(1995)." [T]he receipt of one bit of bad news, unless
earth-shattering, should not function as the equivalent of a shot fired
from a starter gun that sets off a mad dash to the courthouse."
Walther, 1998 WL 186736, at *4; see also Nivram Corp. v.
Harcourt Brace Jonanovich, 840 F. Supp. 243, 252 (S.D.N.Y. 1993)
(sharp decline in stock price, standing alone, not dispositive as a storm
warning). Accordingly, the warning signs to which defendants point do not
"irrefutably" demonstrate that plaintiffs were on inquiry notice one year
before plaintiffs commenced this action on July 17, 2002.
Newman, 335 F.3d at 193; see also Nivram,
840 F. Supp. at 249 ("defendants bear a heavy burden in establishing
that the plaintiff was on inquiry notice as a matter of law").
Applying the developing "storm warnings" jurisprudence of this Circuit
to the Amended Complaint, this Court concludes that plaintiffs were on
inquiry notice as of July 18, 2001, when: (1) Amex announced a 76 percent
decrease in earnings from the previous year owing largely to a write-down
in AEFA's high-yield holdings, and stated that it was scaling back its
investments in high-yield securities; and (2) Chenault acknowledged that
"[Amex] took on securities that didn't have the appropriate balance for
[the Company] between risk and reward" (Amended Compl. ¶ 162), after
characterizing the Company's risk management capabilities as among the
best in the
business (Amended Compl. ¶ 140). The cumulative effect of the
April and July 2001 write-downs, coupled with Amex's announcement of the
deteriorating value of its high-yield holdings, would have suggested to a
reasonable investor of ordinary intelligence the probability of fraud.
See Dodds, 12 F.3d at 350; see also Walther, 1998 WL 186736, at *3-4
(sufficiency of storm warnings depends on quantum of information
available to plaintiff and time period during which fraud allegedly
occurred) (citing cases). Because the initial complaint was filed within
one year of the July 18, 2001 announcement, it is not barred by the
Exchange Act's statute of limitations.
B. Relation Back
Defendants further argue that even if plaintiffs' initial complaint was
timely, the Amended Complaint filed on December 10, 2002, includes new
claims that do not relate back to the initial complaint and thus are
time-barred. Under Rule 15(c)(2) of the Federal Rules of Civil Procedure,
allegations in an amended complaint relate back to the date of the
original filing when the amended claim "arose out of the conduct,
transaction, or occurrence set forth or attempted to be set forth in the
original pleading." Fed.R.Civ.P. 15(c)(2). The main inquiry under
this Rule is whether adequate notice of
matters asserted in the amended pleading have been timely given to
the opposing party by the general facts alleged in the original pleading.
Stevelman v. Alias Research, Inc., 174 F.3d 79, 87 (2d Cir.
1999) ("Where no new cause of action is alleged . . .this Court liberally
grants relation back under Rule 15(c)."). However, an amended pleading
does not relate back if it introduces a different set of operative facts.
Bank Brussels Lambert v. The Chase Manhattan Bank, N.A., No.
93 Civ. 5298 (LMM), 1999 WL 672302, at *2 (S.D.N.Y. Aug. 27, 1999)
(allegations relate back only "if the [new] allegations amplify the facts
alleged in the original pleading or set forth those facts with greater
While the Amended Complaint asserts claims under the same statutes as
the initial pleading sections 10(b) and 20(a) of the Exchange Act
it alleges different facts. The Amended Complaint alleges four
primary misrepresentations or omissions of material fact as the
foundation for plaintiffs' claims, namely that defendants: (1)
misrepresented Amex's high-yield investments as conservative when, in
fact, they were high-risk; (2) concealed the extent of Amex's high-yield
exposure; (3) failed to disclose the lack of risk management controls;
and (4) failed to disclose the lack of proper valuation methods, and the
fact that Amex's accounting was not in accordance with GAAP. (Amended
Compl. ¶¶ 59-66, 72, 74-75, 86, 102, 111.)
The initial complaint also alleges that Amex misrepresented the risks
of its high-yield investments and failed to disclose the extent of its
risk exposure, especially in the wake of the April 2001 write-down.
(Zimet Aff. Ex. FF: July 17, 2002 Complaint, ¶¶ 1, 16-17, 23.) The
initial complaint asserts, for example, that defendants failed "to
disclose that American Express had invested in a risky portfolio of
high-yield or `junk' bonds that carried the potential for substantial
losses if default rates in the junk bond market increased." (Zimet Aff.
Ex. FF ¶ 23.) This allegation is amplified in the Amended Complaint,
which claims that defendants portrayed Amex's high-yield investment as
safe and thereby misled shareholders about the risks of Company's
portfolio. (See, e.g., Amended Compl. ¶¶ 72-73.) The
initial complaint also alleges that defendants failed "to disclose the
true extent of American Express's total exposure . . . after American
Express wrote down $182 million of its junk bond portfolio in April
2001." (Zimet Aff. Ex. FF ¶ 23.) The Amended Complaint expands on
this claim and alleges that defendants intentionally downplayed the
Company's exposure after the April 2001 writedown. (Amended Compl. ¶
145 ("defendants continued to understate the extent of the damage [of
the April 2001 writedown] by falsely assuring the investing public that
[t]otal losses on these investments for the remainder of 2001 are
expected to be substantially lower than in the first quarter.'").) This
Court finds, therefore, that the allegations in the Amended Complaint
concerning defendants' failure to disclose the risks of Amex's high-yield
investment strategy and its high-yield exposure relate back to the July
17, 2002 complaint.*fn6 See, e.g., Siegel v. Converters Transp.,
Inc., 714 F.2d 213, 216 (2d Cir. 1983) (allegations in amended
complaint relate back where "gist" of original suit and amended complaint
are the same).
In contrast, plaintiffs' allegations in the Amended Complaint that
Amex's financial statements were misleading due to improper valuation
methods and defendants' statements that the Company's accounting
practices accorded with GAAP were false have no such mooring in the
initial pleading. Nor does the initial complaint contain allegations that
Amex lacked adequate risk controls. The initial complaint simply avers
that defendants did not disclose management's failure to "fully
comprehend" the risks associated with Amex's high-yield holdings. (Zimet
Aff. Ex. FF ¶ 23.) The Amended Complaint, on the other hand, claims
that "the procedures for valuing and evaluating AEFA's holdings made it
impossible to monitor and gauge risks accurately, and no such risk
analysis was taking
place." (Amended Compl. ¶ 74.) These allegations are therefore
distinct from those in the initial complaint, as they involve different
"operative facts." See Bank Brussels, 1999 WL 672302, at *4-6
(allegations that defendant concealed accounting fraud to induce loan did
not relate back to initial allegations that defendant concealed extent of
bank fees for same purpose).
Because the allegations in the Amended Complaint concerning Amex's
valuation, accounting methods, and risk management controls were not
introduced in the initial complaint, defendants did not have adequate
notice of these matters within section 10(b)'s one-year statute of
limitations. Accordingly, this Court finds that these allegations do not
relate back to the initial complaint and are thus time-barred because
they fall outside of the one-year statute of limitations, which expired
on July 18, 2002.*fn7
Defendants further contend that certain documents referenced in the
Amended Complaint are time-barred because they were not mentioned in the
initial complaint.*fn8 To support this
argument, defendants rely on In re Bausch & Lomb, Inc.
Securities Litigation, which held that a press release referenced
solely in the Amended Complaint did not relate back to the original
complaint because it "constitute [d] a separate alleged act of fraud."
941 F. Supp. 1352, 1366 (W.D.N.Y. 1996). However, in that case the
initial pleading gave no indication that plaintiffs were alleging fraud
for the period during which the press release was issued. Bausch
& Lomb, Inc., 941 F. Supp. at 1366. Here, by contrast, the
documents first mentioned in the Amended Complaint relate primarily to
Amex's alleged misstatements concerning the risk of its high-yield
holdings and its exposure to these investments after the April 2001
writedown. (See Amended Compl. ¶¶ 70, 73, 115, 117, 124-31, 136-37,
148-50, 154.) Therefore, plaintiffs are not time-barred from relying on
the documents referenced in the foregoing paragraphs of the Amended
Complaint, as they relate to the same "conduct and transactions"
discussed in the initial complaint. See Stevelman, 174 F.3d at
Accordingly, plaintiffs may rely on the press releases, and 8-K, 10-K,
and 10-Q reports referenced in Paragraphs 70, 73, 115, 117, 124-31,
136-37, 148-50 and 154 of the Amended Complaint.
III. Defendants' Statements Concerning Amex's Investment
The Amended Complaint alleges that defendants misrepresented Amex's
high-yield portfolio as low risk when precisely the opposite was true.
(Amended Compl. ¶¶ 72-75.) Defendants argue that these allegations
fail to state a claim for which relief can be granted because defendants
disclosed the risks of these investments in an objectively reasonable
manner, and plaintiffs merely disagree with defendants' characterization
of those risks.
To state a claim under section 10(b) and Rule 10b-5, plaintiffs are
required to identify a false statement of material fact or the
omission of a material fact. I. Meyer Pincus & Assocs. P.C. v.
Oppenheimer & Co., 936 F.2d 759, 761 (2d Cir. 1991);
Sheppard v. TCW/DW Term Trust 2000, 938 F. Supp. 171, 174
(S.D.N.Y. 1996). However, where a defendant fully discloses the material
facts, plaintiffs cannot predicate a Rule 10b-5 claim on the defendant's
failure to disclose those facts in critical terms. See Novak,
216 F.3d at 309 ("as long as the public statements are consistent with
reasonably available data, corporate officials need not present an overly
gloomy or cautious picture of current performance and future prospects");
Sheppard, 938 F. Supp. at 175 ("Defendants were not obligated
describe in pejorative terms the types of Mortgage-backed
securities in which the Trusts invested.").
The parties agree that defendants fully disclosed the risks of Amex's
high-yield investments. (Defs. Mem. at 26-28; Plaintiffs' Memorandum of
Law in Opposition to Motion to Dismiss ("Pls. Mem,") at 34.) Indeed,
plaintiffs acknowledge that "investors were warned of the risks
associated with high-yields." (Pls. Mem. at 34.) Plaintiffs assert,
nevertheless, that defendants misrepresented these holdings as
conservative by referring to them as "fixed income" investments capable
of providing a dependable return. (Amended Compl. ¶ 75.) Having
conceded that defendants fully disclosed the risks presented by Amex's
high-yield portfolio, plaintiffs' disagreement with defendants'
characterization of those risks is insufficient to support a claim under
section 10(b). See Sheppard, 938 F. Supp. at 174-75 ("Because
. . . the Trusts truthfully represented and adequately disclosed their
investment strategies and the inherent risks therein, plaintiffs' claims
under [sections 11 and 12 of the Securities Act of 1933 and section 10(b)
of the Exchange Act] must be dismissed."). Accordingly, plaintiffs'
allegations concerning defendants' disclosures about the risks of Amex's
high-yield investments are dismissed.
IV. Statements Concerning Amex's High-Yield Exposure
Defendants argue that their statements regarding Amex's high-yield
exposure, including those made after the April 2001 write-down, were
forward-looking expressions of opinion accompanied by cautionary
warnings, and are therefore protected by the "bespeaks caution" doctrine
and the PSLRA safe harbor for forward-looking statements. Pursuant to the
judicially-created bespeaks caution doctrine, a forward-looking statement
is considered immaterial if accompanied by cautionary language that is
sufficiently specific to render reliance on the false or omitted
statement unreasonable. In re Nortel Networks Corp. Sees.
Litig., 238 F. Supp.2d 613, 628 (S.D.N.Y. 2003) ("cautionary
language `must precisely address the substance of the specific statement
or omission that is challenged'") (internal quotations omitted);
Credit Suisse First Boston Corp. v. ARM Fin. Group, Inc., No.
99 Civ. 12046 (WHP), 2001 WL 300733, at *4-5 (S.D.N.Y. Mar. 28, 2001).
Under the PSLRA safe harbor, which is modeled on that doctrine, a
statement is not actionable if it is "identified as a forward-looking
statement, and is accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those in the forward-looking statement."
15 U.S.C. § 78u-5(c)(1)(A); In re GlobalStar Sec. Litig., No. 01 Civ. 1748
(SHS), 2003 WL 22953163, at *8 (S.D.N.Y. Dec. 15,
2003). Such statements, even if unaccompanied by cautionary
language, are protected under the PSLRA if a plaintiff fails to allege
that they were made with "actual knowledge" that they were false and
misleading. In re GlobalStar, 2003 WL 22953163, at *8. However,
a statement will not be protected as forward-looking under the PSLRA or
the bespeaks caution doctrine if it also includes representations as to
current or historical facts. In re Nortel Networks,
238 F. Supp.2d at 629; Credit Suisse, 2001 WL 300733, at *5.
Defendants contend that Chenault's statements during the February 7,
2001 presentation, which were later filed with the SEC on a Form 8-K, are
protected as forward-looking statements. The first such statement, in
which Chenault "assured investors that American Express would meet its
12-15% earnings per share targets by year-end" (Amended Compl. ¶
142), was clearly a projection of earnings within the PSLRA safe harbor.
See 15 U.S.C. § 78u-5 (i)(1)(A). Moreover, this statement was
accompanied by numerous cautionary warnings, including that "[c]ontinued
persistency of defaults is likely to have a negative impact on earnings."
(See Zimet Aff. Ex. Z at 1-2, 9.) Because the Amended Complaint
fails to allege that Chenault knew that this specific projection was
false as of February 7, 2001, his statement assuring investors that Amex
would meet its earnings targets during the presentation is not
actionable under the PSLRA or bespeaks caution doctrine. See
Novak, 216 F.3d at 308 (plaintiffs must specifically allege
knowledge of facts contradicting defendant's public pronouncements).*fn9
In another statement during the February 2001 presentation, Chenault
characterized AEFA's business model as "sound." (Amended Compl. ¶
137.) This statement described a present fact and thus is not protected
by the PSLRA or the bespeaks caution doctrine. Credit Suisse,
2001 WL 300733, at *5. Nevertheless, this statement is not actionable
because plaintiffs' bases for claiming that it was misleading are
themselves not actionable. Plaintiffs cannot claim that Chenault's
characterization was false or misleading owing to the lack of risk
management controls because this Court has determined that those
allegations are time-barred. (See supra Section II.B.)
Plaintiffs also cannot claim this statement to
be false based on the "questionable" practice of under-pricing IDS
insurance policies while investing in high-risk securities because such
claims amount merely to allegations of mismanagement, which are not
actionable under section 10(b). Santa Fe Indus, v. Green,
430 U.S. 462, 479 (U.S. 1977); accord Ciresi v. Citicorp,
782 F. Supp. 819, 821 (S.D.N.Y. 1991) ("Even if well-pled, allegations of
mismanagement are not actionable under section 10(b)."); Lerner v.
FNB Rochester Corp., 841 F. Supp. 97, 101 (W.D.N.Y. 1993)
(dismissing allegations based on "displeasure with the judgment calls
made by management, which turned out to have been poorly made, and with
management's failure to anticipate that its portfolio would be
particularly vulnerable in an economic slump.").
Similarly, Chenault's statement during the same presentation that
"[f]or structured investments, such as [CDOs], we have significantly
scaled back our activity" (Zimet Aff. Ex. Z at 8.), is not
forward-looking, as it plainly refers to past and current facts.
Credit Suisse, 2001 WL 300733, at *5. This statement therefore
is not covered by the PSLRA's safe harbor or the bespeaks caution
doctrine. Credit Suisse, 2001 WL 300733, at *5.
Amex's statement in the April 2, 2001 press release that losses on
high-yield investments for the rest of 2001 were expected to be
substantially lower than in the first quarter of
2001 qualifies as a projection. (Amended Compl. ¶ 144.) This
statement was accompanied by the warning that "potential deterioration in
the high-yield sector . . . could result in further losses." (Zimet Aff.
Ex. C at 5.) That warning, however, does not insulate the April 2001
press release under the PSLRA safe harbor or the bespeaks caution
doctrine because it was not based on specific facts, and therefore was
insufficiently precise. See Credit Suisse, 2001 WL 300733, at
*8 ("[W]arnings of specific risks . . . do not shelter defendants from
liability if they fail to disclose hard facts critical to appreciating
the magnitude of the risks described.").
Finally, Cracchiolo's statements during conference calls on April 2,
2001, in which he assured analysts that problems with Amex's high-yield
investments had largely been put to rest (Amended Compl. ¶¶ 148-50)
are not protected. Defendants can point to no cautionary language that
would bring these statements within the cover of the PSLRA's safe harbor
for forward-looking statements or the bespeaks caution doctrine.
Accordingly, Chenault's statements during the February 7, 2001
presentation as described in Paragraphs 137 and 142 of the Amended
Complaint are not actionable. However, Chenault's statement concerning
Amex's scale-back of its structured investments described in Paragraph
136 of the Amended Complaint
is not protected by the PSLRA safe harbor. Further, Amex's
statement that losses for the first quarter of 2001 were expected to be
lower than in the first quarter (Amended Compl. ¶ 144) is not
protected by the PSLRA or bespeaks caution doctrine and is therefore
actionable, as are Cracchiolo's statements during conference calls on
April 2, 2001 (Amended Compl. ¶¶ 148-50.)
Having determined that several of defendants' statements may be
actionable,*fn10 the question arises whether plaintiffs have adequately
pled scienter to proceed on those claims. Defendants contend that
plaintiffs fail to allege scienter because they have not pleaded facts
raising a strong inference of fraudulent intent or that demonstrate
motive and opportunity.
To establish scienter, plaintiffs must allege circumstances supporting
an inference that defendants knew, or but for recklessness, should have
known of specific facts contradicting their public material statements,
thereby demonstrating conscious wrongdoing or recklessness. Rombach
v. Change, 355 F.3d 164, 177 (2d Cir. 2004); Kalint, 264
F.3d at 138. Plaintiffs can also establish scienter by alleging facts
that show both motive and opportunity to commit fraud. Kalint,
264 F.3d at 138. Such facts must be pleaded with particularity.
15 U.S.C. § 7Su-4(b)(1). "[A] `pleading technique [that] couple [s] a factual
statement with a conclusory allegation of fraudulent intent' is
insufficient to `support the inference that the defendants acted
recklessly or with fraudulent intent.'" Rombach, 355 F.3d at
177 (quoting Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124,
1129 (2d Cir. 1994)).
As to Chenault's February 7, 2001 statement that the Company had
significantly scaled back its structured investments such as CDOs,
plaintiffs allege that AEFA remained highly exposed to such investments
and wrote off $403 million in CDOs in July of that year. (Amended Compl.
¶ 136.) However, plaintiffs have not "specifically alleged
[Chenault's] knowledge of facts or access to information contradicting
[this] public statement" at the time the statement was made. Novak v.
Kasaks, 216 F.3d 300, 308 (2d Cir. 2000).*fn11 Therefore,
plaintiffs have not sufficiently alleged that Chenault acted with
conscious misbehavior or recklessness in making this statement.
See Kalint, 264 F.3d at 138.
Similarly, plaintiffs have not adequately alleged motive and
opportunity for Chenault individually. Sufficient motive allegations
involve "concrete benefits that could be realized by one or more of the
false statements and wrongful nondisclosures alleged." Novak, 216 F.3d at
307. Additionally, plaintiffs "must assert a concrete and
personal benefit to the individual defendants resulting from the fraud."
Kalint, 264 F.3d at 139. Here, plaintiffs allege that
defendants had the motive to inflate Amex's reported profits and the
market price of its stock because "Golub's incentive payments were tied
to American Express's financial performance." (Amended Compl. ¶¶
193-94.) These allegations do not sufficiently allege motive because
incentive compensation alone has been rejected as a foundation for fraud
claims absent a more specific link to the fraud. See Novak, 216
F.3d at 307 (motive to sustain "the appearance of corporate
profitability, or . . . the success of an investment" is possessed by
all corporate officers and is
thus insufficient); San Leandro, 75 F.3d at 814
(company's desire to maintain high bond or credit rating insufficient
motive for fraud); Acito v. IMCERA Group, Inc., 47 F.3d 47, 54
(2d Cir. 1995) (holding insufficient allegations that officers were
motivated to inflate value of stock to increase compensation).*fn12
As to the remaining statements,*fn13 plaintiffs "do not allege facts
and circumstances that would support an inference that defendants knew of
specific facts that are contradictory to their public statements."
Rombach, 355 F.3d at 177. First, plaintiffs allege that Amex's
statement that losses for the rest of 2001 were expected to be lower than
in the first quarter was false because AEFA had adopted an accounting
change requiring close examination of its high-yield securities, which
had previously been carried at cost. (Amended Compl. ¶ 145.)
Plaintiffs further claim that the veracity of Amex's statement
is undermined because there was no significant change in the
high-yield bond market between April and July 2001, and, therefore, the
July write-down was not attributable to any sudden change. (Amended
Compl. ¶ 145.) However, these allegations do not demonstrate Amex's
fraudulent intent since this Court cannot conclude that defendants
foresaw or, but for their recklessness, could have foreseen that losses
from AEFA's high-yield holdings would increase in the remainder of 2001
due to continued deterioration of high-yield securities. Pleading fraud
by hindsight is impermissible. See Novak, 216 F.3d at 309
("Allegations that defendants should have anticipated future events . . .
do not suffice to make out a claim of securities fraud."); accord
Bond Opportunity Fund v. Unilab. Corp., No. 99 Civ. 11704 (JSM),
2003 WL 21058251, at *10 (S.D.N.Y. May 9, 2003), The PSLRA was not
intended to punish defendants for their lack of Delphic
Plaintiffs' conclusory allegation that "AEFA was aware that the
portfolio was still unbalanced and overvalued due to junk bonds and risky
CDOs" (Compl. ¶ 145) cannot establish scienter on the part of Amex.
See Rombach, 355 F.3d at 177 ("a pleading technique [that]
[couplets] a factual statement with a
conclusory allegation of fraudulent intent' is insufficient to
`support the inference that the defendants acted recklessly or with
fraudulent intent.'") (quoting Shields, 25 F.3d at 1129).
Accordingly, plaintiffs have not adequately pled scienter as to Amex's
statement in Paragraph 145 of the Amended Complaint.
Finally, plaintiffs assert that Cracchiolo's statement regarding
"asbestos problems and fallen angels" falsely implied that the problems
underlying Amex's April 2001 write-down were new and unexpected. (Amended
Compl. ¶ 149.) Additionally, plaintiffs allege that Cracchiolo's
statement that Amex had put a significant amount of exposure behind it by
reducing its reliance on high-risk structured investments was false
because "defendants knew or recklessly disregarded" that "AEFA remained
exposed to CDOs." (Amended Compl. ¶ 151.) However, these allegations
are based on plaintiffs' interpretations of Cracchiolo's statements. The
securities laws do not afford relief based on the implications of
statements that plaintiffs claim are misleading. Rule 9(b) and the PSLRA
entail consideration of the statements that a plaintiff
contends were false, not plaintiff's interpretations of those statements.
See Fed R. Civ. P. 9(b); 15 U.S.C. § 78u-4(b)(1)*fn15;
see also San
Leandro, 75 F.3d at 813 ("Since plaintiffs have not alleged
circumstances indicating that any of the statements identified in the
Complaint were false, the plaintiffs have failed to adequately plead
fraud."); In re Merrill Lynch, 273 F. Supp.2d at 358 ("[T]he
federal securities laws at issue here only fault those who, with
intent to defraud, make a material misrepresentation or
omission of fact."). Accordingly, plaintiffs have not adequately pleaded
that Cracchiolo acted with fraudulent intent in making the statements
described in Paragraphs 148 through 150 of the Amended Complaint.*fn16
For the foregoing reasons, defendants' motion to dismiss the Amended
Complaint is granted as to all defendants with leave to replead scienter
as to defendants' statements in
Paragraphs 136, 144, and 148-50- of the Amended Complaint.