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Plumbers, Pipefitters & Mes Local Union No. 392 Pension Fund, On Behalf of Itself and All Others Similarly Situated v. Fairfax Financial Holdings Limited

August 13, 2012


The opinion of the court was delivered by: John F. Keenan, United States District Judge:


Currently before the Court is a motion to dismiss in this proposed securities class action. In an Opinion and Order dated October 12, 2011, the Court granted Plaintiff Plumbers, Pipefitters & MES Local Union 392's ("Plaintiff") unopposed motion to be appointed lead plaintiff and approved its selection of co-lead counsel.

Defendants Fairfax Financial Holdings Limited ("Fairfax"), Pricewaterhouse Coopers LLP, Toronto, Canada ("PwC"), V. Prem Watsa ("Watsa"), Trevor J. Ambridge ("Ambridge"), Greg Taylor ("Taylor"), M. Jane Williamson, Robert Hartog, Anthony F. Griffiths, Bradley P. Martin, and Brandon Sweitzer (collectively, "Defendants") have moved to dismiss. For the following reasons, Defendants' motion is granted.


The following facts are taken from the Complaint, unless otherwise noted. This proposed class action is brought on behalf of all purchasers of securities issued by Fairfax from May 21, 2003 to March 22, 2006 (the "class period"). Plaintiff asserts that Fairfax, several of its directors and officers, and PwC violated Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.

Fairfax is a financial services holding company headquartered in Toronto, Canada. Through its subsidiaries, Defendant Fairfax is engaged in property and casualty insurance and reinsurance, investment management, and insurance claims management. Defendant PwC is a limited liability partnership organized under the laws of the Province of Ontario, Canada. PwC was Fairfax's independent auditor during the putative Class period.

Plaintiff's pension fund is a collectively bargained multi-employer plan established and maintained by Local 392. Roughly 3,100 union members participate in the pension fund, which has approximately $211 million in total assets. During the class period, the pension fund purchased some 2,300 shares of Fairfax subordinate voting shares on the New York Stock Exchange.

Plaintiff's Complaint, which spans more than 200 pages and is 517 paragraphs long, alleges that Fairfax intentionally failed to properly account for "finite reinsurance" contracts, lacked internal controls, and fraudulently boosted its financials during the class period. Because PwC was Fairfax's auditor during the relevant period, Plaintiff alleges that PwC was complicit in the fraud.

According to Plaintiff, Fairfax suffered from a lack of liquidity, which caused the company's management to seek ways to create the appearance of adequate reserves, including raising capital in the United States securities market. However, Fairfax did not have the amount of money in reserves required by law before an insurance company can pay dividends to its shareholders. Plaintiff alleges that Fairfax entered into several reinsurance contracts with a number of different entities to hide business losses. The Complaint alleges that the Company accounted for these contracts as though they covered a portion of risk that in effect was not transferred. Plaintiff alleges that if the reinsurance contracts had been properly accounted for, Fairfax's liquidity crisis would have been exposed. Further, Plaintiff alleges that the Company overstated the strength of its internal controls, and used offshore entities to conceal losses. Plaintiff contends that these actions and corresponding representations formed part of a fraudulent scheme to inflate the stock price. The Complaint alleges that disclosures, in the form of press releases issued by Fairfax, a conference call with investors, and news articles, beginning in June of 2005, caused the Company's stock to decline.

In support of these allegations, Plaintiff relies on the following:

1) Governmental Investigations of Fairfax. Plaintiff states that in November 2004, state and federal officials began an investigation into the use of "finite reinsurance" contracts by major insurers and reinsurers. The SEC targeted many companies, including Fairfax and its subsidiaries, issuing subpoenas for records of Fairfax's reinsurance contracts and for Fairfax's CEO, Defendant Watsa.

As the SEC investigation continued, Fairfax issued press releases to notify its investors of the circumstances surrounding the investigation, ultimately issuing five press releases that are at issue in this case. In a press release issued March 22, 2006, Fairfax announced that the company's auditor, PwC, had also been subpoenaed. In each press release, Fairfax emphatically denied wrongdoing. Additionally, several news outlets, including the Wall Street Journal, wrote about the SEC and Department of Justice's industry-wide inquiry into the accounting of finite reinsurance contracts.

The SEC concluded its investigation of Fairfax with a "no action" letter issued on June 25, 2009.

Fairfax's common stock, which ranged from $154.86 to $187.20 during the class period, declined with news of the SEC investigation and financial restatements. Fairfax's share price dropped $19.17 per share on the day the Wall Street Journal reported the SEC's probe into Fairfax. Following the March 22, 2006 press release, the stock "suffered its biggest single day decline in approximately 3 years, falling from $130.90 to $113.93 per share." (Pl. Br. at 13).

2) Financial Restatements issued by Fairfax. Plaintiff alleges that the fact that Fairfax issued two financial restatements demonstrates fraud. One restatement was issued on February 8, 2006. In a February 10, 2006 conference call, Watsa told investors that the February 8 restatement was issued after the discovery of an accounting error for a finite reinsurance contract at a Fairfax subsidiary, OdysseyRe. Following this announcement, from February 8, 2006 through February 20, 2006, Fairfax's stock price declined from $150.45 per share to $147.00 per share.

Next, in July 2006, Fairfax announced that it would have to restate its financials going back to 2001, as a result of the Company's cancellation of a finite reinsurance contract. Plaintiff claims that the restatement, which was released in November 2006, demonstrates that Fairfax artificially inflated shareholder equity by 15% per year from 2001 to 2006.

3) Fairfax's "Deceptive" Accounting Practices. Plaintiff alleges that during the class period, Fairfax issued materially false and misleading statements regarding its business practices and financial results. With respect to the finite reinsurance contracts, Plaintiff alleges that Fairfax inflated the value of its assets and concealed its lack of liquidity by "fraudulently accounting for reinsurance contracts which were, in essence, loans."

Plaintiff also alleges additional deceptive acts by Fairfax and its subsidiaries, including: using privately held foreign assets domiciled in jurisdictions with lax oversight to permit the Company to manipulate its investment income; failing to properly account for losses in companies that should have been consolidated with Fairfax; and improperly accounting for intercompany transactions. Fairfax's subsidiaries and individual directors are also implicated in the complaint for, inter alia, improperly "funneling money to cash-strapped subsidiaries" and knowing of or recklessly disregarding Fairfax's fraud.

4) PwC's Audit Opinions. Plaintiff alleges that PwC rendered materially inaccurate audit opinions with respect to Fairfax's consolidated financial statements for 2002, 2003, and 2004. (PwC did not audit the financial statements for OdysseyRe.) Plaintiff alleges that PwC falsely stated: (i) that its audits for the Class Period conformed to Canadian Generally Accepted Auditing Standards, and (ii) that PwC ignored "red flags" that would have alerted the ...

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