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In Re: Manulife Financial Corporation Securities Litigation

September 19, 2012


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


This document relates to all actions.

On May 23, 2011, this Court dismissed the First Amended Complaint filed by lead plaintiffs Locals 302 and 612 of the International Union of Operating Engineers--Employers Construction Industry Retirement Trust, Western Washington Laborers--Employers Pension Trust, and California Ironworkers Field Pension Trust ("Plaintiffs"), but granted Plaintiffs leave to replead. Three months later, Plaintiffs filed their Second Amended Complaint and thereafter, defendants Manulife Financial Corporation ("Manulife"), Dominic D'Alessandro ("D'Alessandro), and Peter Rubenovitch ("Rubenovitch") (together, "Defendants") moved to dismiss it pursuant to Rule 12 of the Federal Rules of Civil Procedure.

Currently before the Court is Defendants' motion to dismiss the Second Amended Complaint ("SAC"). For the reasons explained below, the SAC fails to correct the deficiencies identified in the Court's Opinion and Order dated May 23, 2011 ("first Opinion"). Accordingly, Defendants' motion to dismiss is granted with prejudice.

I. Background

The Court presumes familiarity with the allegations made in Plaintiffs' First Amended Class Action Complaint (the "FAC") and the procedural history of this litigation prior to the entry of its first Opinion. See In re Manulife Financial Corp. Secs. Litig., 276 F.R.D. 87 (S.D.N.Y. 2011) (hereinafter "Op."). Briefly stated, this putative securities fraud class action suit concerns whether Manulife, D'Alessandro, former Manulife Chief Executive Officer, and Rubenovitch, former Manulife Senior Executive Vice President and Chief Financial Officer, defrauded a class of investors who acquired Manulife common stock between March 28, 2008 and March 2, 2009, inclusive (the "class period"). The fraud allegations relate to Manulife's public statements about the financial impact of Manulife's segregated fund and variable annuity products on the value of Manulife common stock. These two investment products (the "Guaranteed Products") are profitable for Manulife so long as the long-term value of the funds exceeds the guaranteed payment obligations, but may incur losses when the value of the funds are insufficient to cover the guarantees.

A.The Court's Dismissal of the FAC

The Court dismissed the FAC on the grounds that Plaintiff failed to adequately plead materiality, scienter, and loss causation. Specifically, the Court found that the misstatements alleged in the FAC were not actionable because they allege only "fraud-by-hindsight." Op. at 31 (citing Jackson Nat'l Life Ins. Co. v. Merrill Lynch & Co., Inc., 32 F.3d 697, 703 (2d Cir. 1994), In re Citigroup Inc. Secs. Litig., 753 F. Supp. 2d 206, 246 (S.D.N.Y. 2010) (claim failed where plaintiffs relied on subsequent writedowns to argue that prior disclosures were misleading)). Moreover, the Court found that other statements were not false or misleading, and others were taken out of context. Op. at 33-35. The Court also held that "Plaintiffs' allegations do not give rise to a strong inference of scienter unless all competing inferences are ignored." Op. at 38. Finally, the Court dismissed the FAC because the Plaintiffs "failed to allege facts sufficient to attribute the Class members' economic loss to the disclosure of an alleged fraudulent scheme." Id. at 46.

In the Plaintiffs' papers opposing Defendants' motion to dismiss the FAC, Plaintiffs attempted to support their allegations by requesting that the Court take judicial notice of an article entitled "Inside the Fortress: Drama Behind Manulife's Doors," which appeared in the Canadian newspaper Financial Post on January 30, 2010. While the Court adhered to precedent and declined to consider facts not alleged in the Complaint, the court noted in a footnote that "the result of this motion would be no different if the Court did consider the allegations in this motion." Id. at 24.

B.The Allegations of the SAC

Now, in their second attempt to plead its case before the Court, Plaintiffs have revamped their Complaint. The SAC is ten paragraphs and three pages longer than the FAC and covers the same time period. Many of the allegations in Plaintiffs' SAC are identical to or substantially the same as the allegations in the FAC. See, e.g., SAC ¶¶ 1--3, 5--8, 11--12, 13-32. The Court notes that Paragraphs 163--169, which comprise Counts I and II of the SAC, are unaltered from the original, and the "Prayer for Relief" is identical to that found in the FAC, except that Plaintiffs withdraw their petition for "rescission or a rescissory measure of damages." Id. ¶ D. The Court will focus only on Plaintiffs' pertinent new allegations. These allegations fall generally into three categories: (1) information set forth in an article published by the Financial Post on January 30, 2010; (2) statements made by Manulife and its representatives; and (3) the downgrade by Fitch Ratings.

1.Financial Post Article

Paragraphs 42-43 of the SAC allege that the Financial Post article reported that Manulife was warned about "growing equity risk" arising from Manulife's Guaranteed Products, by its Chief Risk Officer and "internal company documents." Id. ¶ 42. As a result, Paragraph 43 alleges, D'Alessandro was encouraged to increase hedging of its equity market exposure. The article also published statements from Manulife investors about "a real credibility issue" with past management and the board. Id. ¶¶ 50-51, 134.

Next, the SAC provides additional detail to the FAC's allegations about an investigation by Canada's Office of the Superintendent of Financial Institutions (the "OSFI"), which began in September 2008 and was reported in the Financial Post article. Id. ¶¶ 44-50. The OSFI is alleged to have raised questions about the adequacy of Manulife's risk controls and exposure to equity markets, and to have "insisted" that Manulife "shore up its capital provisions" at unspecified times in October 2008. Id. ¶¶ 45, 46, 78, 82, 85, 137.

The SAC also cites the Financial Post for the proposition that the OSFI issued a "supervisory letter" expressing concerns about Manulife's capital adequacy and recommended that Manulife retain the accounting firm Deloitte & Touche to review its risk-management processes. Id. ¶¶ 47-49.

2.Statements by Manulife and its Representatives

Paragraph 9 of the SAC adds an allegation that during the class period, Manulife publicly represented that its capital reserves were adequate, that it could "withstand a stock market downturn," and that it would not need to issue equity while at the same time, the OSFI expressed concerns about Manulife's capital reserves and was privately insisting that Manulife engage "in a series of transactions to raise capital."

In paragraph 10, Plaintiffs add the allegation that Manulife announced a $2 billion equity offering to bolster its capital reserves on December 2, 2008, and that it would increase its capital reserves to $5 billion by the end of 2008, thus incurring a $1.5 billion loss in the fourth quarter of 2008.

Similarly, paragraphs 57 and 58 allege that Manulife's 2007 Annual Report contained false and misleading statements as to its stress tests of regulatory capital. Plaintiffs allege that Manulife did not disclose the results of its stress tests under the scenario of a 10% or greater market decline, "despite the ...

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