Case 1:14-cv-00736-VEC Document 29 Filed 07/07/14 Page...
Transcript of Case 1:14-cv-00736-VEC Document 29 Filed 07/07/14 Page...
Case 1:14-cv-00736-VEC Document 29 Filed 07/07/14 Page 1 of 42
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
Michael Harris and Stuart Schapiro ) Individually and on Behalf of All Other ) Civil Action No.: 14-CV-736 (VEC) Persons Similarly Situated, )
) CONSOLIDATED AMENDED Plaintiff, ) COMPLAINT
) v. CLASS ACTION
AMTRUST FINANCIAL SERVICES, INC., BARRY D. ZYSKIND, and RONALD E. JURY TRIAL DEMANDED PIPOLY, JR.,
Defendants.
)
Lead Plaintiffs Michael Harris and Stuart Schapiro ("Plaintiffs"), individually and on
behalf of all other persons similarly situated, by their undersigned attorneys, for their complaint
against defendants, alleges the following based upon personal knowledge as to themselves and
their own acts, and information and belief as to all other matters, based upon, inter alia, the
investigation conducted by and through their attorneys, which included, among other things, a
review of the defendants' public documents, conference calls and announcements made by
defendants, United States Securities and Exchange Commission ("SEC") filings, wire and press
releases published by and regarding AmTrust Financial Services, Inc. (“AmTrust” or the
“Company”), analysts' reports and advisories about the Company, and information readily
obtainable on the Internet. Plaintiffs believe that substantial evidentiary support will exist for
the allegations set forth herein after a reasonable opportunity for discovery.
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NATURE OF THE ACTION
1. This is a federal securities class action under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 (the “Exchange Act”) on behalf of all persons other than
defendants who purchased AmTrust common stock and preferred stock between February 15,
2011 and December 11, 2013, inclusive (the “Class Period”) and who did not sell such
securities prior to December 12, 2013, seeking damages against the Company and two of its
top officials.
2. In addition, lead plaintiff Stuart Schapiro brings claims against AmTrust under Section
11 of the Securities Act of 1933 on behalf of a sub-class of persons and entities who purchased
AmTrust Series A preferred stock in or traceable to the public offering on June 5, 2013 (the
“Preferred Offering”) and did not sell those shares prior to December 12, 2013.
3. AmTrust offers insurance coverage to policyholders including
property/casualty, workers’ compensation, special risk, and warranty insurance, and extended
service plans.
4. During the Class Period, AmTrust understated its losses from its insurance
operations for the fiscal years ended 2010 through 2012, in the amount of approximately
$289.9 million. Consequently, AmTrust also overstated its net income earned during the same
period by $289.9 million.
5. Using undisclosed accounting machinations, AmTrust gave investors the
misleading impression that its insurance operations were much more profitable than they really
were.
6. On December 12, 2013, a report by analyst firm Geoinvesting exposed AmTrust
as a “House of Cards”. Drawing on financial information AmTrust’s subsidiaries filed with
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State insurance commissioners in the U.S., and in Bermuda, Geoinvesting demonstrated that
from fiscal 2010 through 2012, AmTrust concealed $289.9 million of losses through an
unknown accounting manipulation. 1
7. AmTrust’s subsidiaries’ individual financial reports filed with insurance
regulators showed aggregate loss and loss adjusted expense for 2010 through 2012 that was
$289.9 million greater than the loss and loss adjusted expense that AmTrust reported in its
consolidated financial statements in its annual reports on Form 10-K filed with the SEC for
2010 through 2012.
8. The sum of the total loss and loss adjusted expense reported for AmTrust’s
subsidiaries should match the total loss and loss adjusted expense reported for AmTrust’s
consolidated operations. That AmTrust’s consolidated financial statements did not include all
of the loss and loss adjusted expense and was in fact missing $289.9 million of loss and loss
adjusted expense reported by its subsidiaries to insurance regulators proves that AmTrust’s
consolidated financial statements filed with the SEC understated losses and overstated net
income by $289.9 million from 2010 to 2012.
9. On this news, AmTrust securities declined $4.63 per share or 12%, to close at
$33.67 per share and its Series A preferred shares declined $2.55/share on December 12, 2013.
10. AmTrust understated these losses in order to conceal from investors that its
insurance underwriting practices are unprofitable.
1 Geoinvesting hypothesized that AmTrust hid the losses by having its U.S. subsidiaries cede the losses them to its Bermuda reinsurer, which then ceded them to its Luxembourg subsidiaries, while retaining the corresponding insurance premiums in its Bermuda subsidiary. It then consolidated its entire operations without ever recognizing or revealing to investors at least $276.9 million of losses ceded to its Luxembourg subsidiaries. It cannot be determined at this time whether or not this explanation really was the actual accounting manipulation that AmTrust utilized.
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11. As a result of Defendants’ wrongful acts and omissions, and the precipitous
decline in the market value of the Company's securities, Plaintiffs and other Class members
have suffered significant losses and damages.
JURISDICTION AND VENUE
12. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a)
of the Exchange Act (15 U.S.C. §78j(b) and 78t(a)) and Rule 10b-5 promulgated thereunder
(17 C.F.R. §240.10b-5) and under Sections 11 of the Securities Act (15 U.S.C. §§ 77k and
77o).
13. This Court has jurisdiction over the subject matter of this action pursuant to §27
of the Exchange Act (15 U.S.C. §78aa), Section 22 of the Securities Act (15 U.S.C. §77v) and
28 U.S.C. §1331.
14. Venue is proper in this District pursuant to §27 of the Exchange Act, 15 U.S.C.
§78aa, Section 22 of the Securities Act (15 U.S.C. §77v) and 28 U.S.C. §1391(b) as the
Company's executive offices are located in this District.
15. In connection with the acts, conduct and other wrongs alleged in this Complaint,
defendants, directly or indirectly, used the means and instrumentalities of interstate commerce,
including but not limited to, the United States mail, interstate telephone communications and
the facilities of the national securities exchange.
PARTIES
16. Lead Plaintiff Mark Harris purchased AmTrust common stock at artificially
inflated prices during the Class Period and has been damaged upon the revelation of the alleged
corrective disclosures. Mark Harris’s PSLRA certification has previously been filed with the
Court and is incorporated by reference herein.
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17. Lead Plaintiff Stuart Schapiro purchased AmTrust Series A preferred stock at
artificially inflated prices during the Class Period pursuant and traceable to the Preferred
Offering and was damaged upon the revelation of the alleged corrective disclosures. Stuart
Schapiro’s PSLRA certification has previously been filed with the Court and is incorporated by
reference herein.
18. Defendant AmTrust is a Delaware corporation with its headquarters located at
59 Maiden Lane, 6th Floor, New York, NY 10038. The Company's common stock is traded on
the NASDAQ Stock Market ("NASDAQ") under the ticker symbol “AFSI”.
19. During the Class Period the Company issued 4.6 million shares of Series A
preferred stock in the Preferred Offering. The Series A preferred stock traded on the New York
Stock Exchange under the ticker symbol “AFSI-PA” during the Class Period.
20. Defendant Barry D. Zyskind ("Zyskind") has served at all relevant times as the
Company's Chief Executive Officer, President and director.
21. Defendant Ronald E. Pipoly, Jr. ("Pipoly") has served at all relevant times as the
Company's Chief Financial Officer. Prior to AmTrust, Pipoly was the controller and an
executive officer at PRS Insurance Group, the parent company of Credit General, a property
and casualty insurer that was liquidated in 2001 by Ohio regulators after it was revealed that its
CEO, Robert Lucia, had committed fraud, and stolen $30.0 million through transactions with a
series of related party offshore entities. Lucia was federally indicted for his fraud at PRS, pled
guilty, and was sentenced to 10 months in prison and a fine of over $56,000. Another former
Credit General executive officer, Michael Saxon, serves as AmTrust’s Chief Operating Officer.
22. Mr. Pipoly’s knowledge of the fraud at Credit General, particularly the illegal
payments to Mr. Lucia, was recognized by the Bankruptcy Judge overseeing a proceeding to
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appoint a trustee to replace Mr. Pipoly’s stewardship of the company following Mr. Lucia’s
removal. In re PRS Insurance Group, Inc., 274 B.R. 381, 387 (Bkrtcy.D.Del. 2001) (“When
confronted with the Hradisky report evidencing over $3.5 million in transfers to Mr. Lucia and
his family, Mr. Pipoly did not pursue an investigation of those transfers. He did not even ask
Mr. Lucia for an explanation.”). Pipoly testified before the Court in an attempt to prevent
appointment of a trustee and the Court found his testimony not credible, as it was contradicted
by the evidence. Id. at 386-87. Interestingly, in the proceedings, Allstate Insurance accused
Lucia and Pipoly of selling assets of PRS Insurance Group to AmTrust at less than fair market
value to benefit themselves.
23. While Mr. Pipoly was CFO of AmTrust he also served as interim CFO of
Maiden Holdings, a public company founded and controlled by the same family that controls
AmTrust (Karfunkle and Zyskind). In the same time period that Pipoly was its CFO, Maiden
Holdings and PriceWaterHouseCoopers concurred that Maiden Holding “had deficiencies that
in combination represented a material weakness in [its] internal control over financial reporting
due to under-resourcing of the finance department and the concentration of duties in our Chief
Financial Officer.”2 These deficiencies included:
• failure to give appropriate consideration to U.S. GAAP accounting rules or to have
documentation of the basis for [the company’s] opinion and conclusion regarding the
application of U.S. GAAP;
• lack of an independent preparer and reviewer for various accounting tasks,
including the preparation of the financial statements and disclosures; and
• lack of formality regarding certain controls surrounding the control environment.
2 Maiden subsequently replaced PWC with BDO USA LPP, which also serves as AmTrust’s auditor.
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24. Defendants Zyskind and Pipoly are sometimes collectively referred to herein as
the “Individual Defendants.”
BACKGROUND
25. AmTrust underwrites and provides property and casualty insurance in the
United States and internationally. Its insurance business consists primarily of workers
compensation policies that it underwrites for businesses. Workers compensation insurance is
mandatory for nearly all employers in the United States. It is a highly competitive business.
26. AmTrust and Zyskind are relative newcomers to the insurance business.
AmTrust began in 1998 when it acquired a bankrupt computer warranty insurance business
from Wang Laboratories. Zyskind began working at AmTrust in 1998 and had no prior
insurance experience. He became AmTrust CEO in 2005 at the age of 34 after being in the
insurance business for seven years. Zyskind’s father-in-law, George Karfunkle, is one of the
major shareholders of AmTrust and serves as Chairman of its Board of Directors.
27. Pipoly became CFO of AmTrust after he assisted AmTrust in purchasing certain
assets from PRS Group (the parent of Credit General), which as stated earlier, Allstate alleged
were sold at less than fair market value.
AMTRUST’S CORPORATE STRUCTURE
28. AmTrust operates eleven domestic U.S. insurance subsidiaries that write
policies, take in insurance premiums and pay out losses incurred on those policies.
29. AmTrust owns a Bermuda reinsurance subsidiary, AmTrust International
Insurance, Ltd. (“AII”), which reinsures the bulk of its US insurance subsidiaries’ written
premiums.
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30. AmTrust also owns an Irish insurance subsidiary, AmTrust (“AIUL“) and a
United Kingdom insurance subsidiary (“AEL”).
31. AmTrust’s Luxembourg operations include AmTrust Capital Holdings Limited
(“ACHL”, a Luxembourg holding company). ACHL in turn, owns nine Luxembourg
insurance subsidiaries, each of which has substantial “equalization” balances. 3 Equalization
balances are essentially a balance sheet item that can be used to offset or absorb increases in
loss reserves occasioned by the incurrence of net losses on the income statement.
32. AmTrust bought ACHL in March 2009. Then AmTrust purchased 8 more
Luxembourg-domiciled captive reinsurance companies that became subsidiaries of ACHL. In
total, these Luxembourg subsidiaries had approximately $688 million of equalization reserves.
The equalization reserves are permitted under Luxembourg GAAP to offset or absorb losses so
that the losses do not affect earnings, thus “smoothing earnings”. These reserves are also tax-
deductible in Luxembourg so that ACHL will receive a tax benefit for the losses in
Luxembourg.
33. Pursuant to a stop-loss agreement, AII agrees to cede up to $100 million of
losses to AmTrust’s Luxembourg subsidiaries annually.
34. Under U.S. GAAP, when AmTrust consolidates the results of its Luxembourg
subsidiaries, these equalization reserves are not permitted to be used to absorb or offset the
losses. Thus, any losses incurred by or ceded to the Luxembourg subsidiaries must be
recognized as losses in AmTrust’s consolidated financial statements.
35. In its SEC reported financial statements, the eleven domestic subsidiaries, along
with the Irish, UK and Luxembourg subsidiaries financial statements are consolidated. Thus
3 Two of the Luxembourg subsidiaries were acquired in December 2012.
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all of the revenue, losses and income from all AmTrust’s subsidiaries are consolidated and
reported in AmTrust’s Form 10-K annually.
MATERIALLY FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD
36. On February 15, 2011, the Company issued a press release announcing its
financial results for the year ended December 31, 2010. For the year, the Company reported
net income of $142.5 million and loss and loss adjustment expense of $471.5 million.
37. In an investor conference call that same day, Zyskind and Pipoly touted
AmTrust’s fiscal 2010 financial performance. In particular, Pipoly and Zyskind discussed the
amount of adverse development and incurred loss that AmTrust incurred in 2010, as well as its
loss ratios. Zyskind and Pipoly also made in depth statements about the reasons for AmTrust’s
losses, loss ratios and net income, and the trends it was experiencing for these key metrics.
38. On March 15, 2011, the Company filed its annual report for the year ended
December 31, 2010 on Form 10-K with the SEC signed by, among others, Defendants Zyskind
and Pipoly, and reported net income of $142.5 million and loss and loss adjustment expense of
$471.5 million.
39. In addition, the Form 10-K contained signed certifications pursuant to the
Sarbanes- Oxley Act of 2002 ("SOX") by Defendants Zyskind and Pipoly stating that the
financial information contained in the Form 10-K fairly presents, in all material respects, the
financial condition and results of operations of AmTrust, and that they were not aware of any
fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
40. In the February 15, 2011 press release and the 10-K, AmTrust understated loss
and loss adjusted expense for fiscal 2010 by $70.97 million because it failed to report $70.97
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million of losses and loss adjusted expenses that were reported by its subsidiaries to State and
Bermuda insurance regulators, but were not included and recognized in AmTrust’s 2010 year-
end consolidated financial statements. As a result, AmTrust overstated fiscal 2010 net income
by $70.97 million.
41. On February 15, 2012 the Company issued a press release announcing its
financial results for the fiscal year ended December 31, 2011. For the year, the Company
reported net income of $170.4 million and loss and loss adjustment expense of $678.3 million.
42. In an investor conference call that same day, Zyskind and Pipoly touted
AmTrust’s fiscal 2011 financial performance. In particular, Pipoly and Zyskind discussed the
amount of adverse development or insurance loss that AmTrust incurred in 2011, as well as its
loss ratios and net income. Zyskind and Pipoly also made in depth statements about the
reasons for AmTrust’s losses, loss ratios and net income, and the trends it was experiencing for
these key metrics.
43. On March 15, 2012, the Company filed an annual report for the period ended
December 31, 2011 on a Form 10-K with the SEC signed by, among others, Defendants
Zyskind and Pipoly. The 10-K reported net income of $170.4 million and net loss and loss
adjustment expense of $678.3 million.
44. In addition, the Form 10-K contained signed certifications pursuant to SOX by
Defendants Zyskind and Pipoly stating that the financial information contained in the Form 10-
K fairly presents, in all material respects, the financial condition and results of operations of
AmTrust, and that they were not aware of any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
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45. In the February 15, 2012 press release and the fiscal 2011 10-K, AmTrust
understated loss and loss adjusted expenses and overstated fiscal 2011 net income by $102.3
million because it failed to recognize $102.3 million of losses and loss adjusted expense that
were reported by its subsidiaries to State and Bermuda insurance regulators, but were not
included and recognized in its 2011 year-end consolidated financial statements.
46. On February 14, 2013, the Company issued a press release announcing its
financial results for the fiscal year ended December 31, 2012. For the year, the Company
reported net income of $178 million and loss and loss adjusted expense of $922.7 million.
47. In an investor conference call that same day, Zyskind and Pipoly touted
AmTrust’s fiscal 2012 financial performance. In particular, Pipoly and Zyskind discussed the
amount of adverse development or insurance loss that AmTrust incurred in 2012, as well as its
loss ratios, and net income. Zyskind and Pipoly also made in depth statements about the
reasons for AmTrust’s losses, loss ratios and net income, and the trends it was experiencing for
these key metrics.
48. On March 1, 2013, the Company filed an annual report for the period ended
December 31, 2012 on a Form 10-K with the SEC signed by, among others, Defendants
Zyskind and Pipoly. The 10-K reported net income of $170.4 million and net loss and loss
adjustment expense of $922.7 million.
49. In addition, the Form 10-K contained signed certifications pursuant to SOX by
Defendants Zyskind and Pipoly stating that the financial information contained in the Form 10-
K fairly presents, in all material respects, the financial condition and results of operations of
AmTrust, and that they were not aware of any fraud, whether or not material, that involves
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management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
50. In the February 14, 2013 press release and in the 10-K for fiscal 2012, AmTrust
understated loss and loss adjusted expenses and overstated fiscal 2012 net income by $116.7
million because it failed to recognize $116.7 million of losses and loss adjusted expense that
were reported by its subsidiaries to State and Bermuda insurance regulators, but were not
included and recognized in its 2012 year-end consolidated financial statements..
AMTRUST SELLS $115,000,000 OF PREFERRED STOCK
IN REGISTERED OFFERING
51. On June 5, 2013, AmTrust filed a registration statement and prospectus to offer
and sell 4,600,000 shares of Series A preferred stock at $25.00 per share. On June 10, 2013,
AmTrust completed the offering receiving net proceeds from the offering of $111,377,500.
52. The registration statement and prospectus incorporated by reference AmTrust’s
financial statements filed with the SEC on Form 10-K for fiscal years 2012.
53. The registration statement and prospectus also provided detailed income
statement and balance sheet items for fiscal years 2010 through 2012.
54. The registration statement and prospectus was false and misleading because it
understated loss and loss adjusted expense and overstated net income for fiscal years 2010
through 2012 by material amounts.
55. AmTrust’s individual subsidiaries reported to insurance regulators $289.9
million more loss and loss adjusted expense during fiscal years 2010, 2011 and 2012 than
AmTrust reported for those fiscal years on a consolidated basis in the registration statement
and prospectus for the Preferred Offering.
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56. The discrepancies between the loss and loss adjusted expense amounts in the
financial reports that AmTrust’s subsidiaries filed with State and Bermuda insurance regulators
and the loss and loss adjusted expense amounts AmTrust reported when it consolidated all of
those subsidiaries is shown in the following chart:
Loss and Loss Adjusted Expense (amounts in thousands) Total All Consolidated
Year US Subs AEL AIUL AII ACHL Subs in SEC 10K Difference
2010 174.31 29.0 27.5 249.5 62.1 542.4 471.5 (71.0)
2011 232.25 51.8 26.7 373.8 96.1 780.6 678.3 (102.3)
2012 291.05 95.0 31.3 535.1 86.9 1,039.4 922.7 (116.7) Source: AM Best AM BestAM BestAM BestC Sched N/A 10K N/A
57. The above chart shows that AmTrust understated loss and loss adjusted expense
by $71 million in 2010, $102.3 million in 2011 and $116.7 million in 2012 in the registration
statement and prospectus. As a result, AmTrust overstated its net income by the same amounts
in each year.
58. AmTrust also stated in the registration statement and prospectus that: “We
continue to carefully monitor and maintain appropriate levels of reserves ... .” This statement
was false because AmTrust consistently selected loss ratios and provided for loss reserves that
were materially lower than industry averages from 2007 through 2012.
THE TRUTH EMERGES
59. On December 12, 2013, Geoinvesting published a report entitled, “AmTrust
Financial Services: A House of Cards?” The Geoinvesting report is attached as Exhibit J to
this complaint and incorporated herein.
60. The report asserted in relevant part:
It seems suspicious that a company could take on so many different types of risk while beating consensus estimates for 14 consecutive quarters. We find it difficult to believe that AFSI could quickly enter areas where they had no
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previous experience and at such a pace without ever missing a step. This has led us to take a deeper look into AFSI’s books and accounting.
... it appears that management is ceding/sending losses to offshore captive reinsurance companies it has purchased since 2009, but not disclosing these losses in SEC financial statements as required.
We will show that AFSI appears to be inflating earnings/net equity via offshore entities, making it difficult for regulators to see the complete picture and/or get accurate information. We think that AFSI could be next in line to face regulatory scrutiny.
Summary of Findings
A cross section of public documents (AFSI SEC filings, Statutory financial filings by AFSI subsidiaries and Credit Rating information) shows that AFSI appears to be excluding losses of wholly-owned subsidiaries in its SEC filings.
• From 2009 to 2012 we believe that AFSI has not disclosed a total of $276.9 million in losses ceded to Luxembourg subsidiaries.
61. On this news, AmTrust’s common stock share price declined $4.63 per share or
12%, to close at $33.67 per share on December 12, 2013. That same day AmTrust’s Series A
preferred stock share price declined $2.55/share from $21.02/share to close at $18.47/share.
62. AmTrust immediately responded by denying the facts asserted by Geoinvesting.
Zyskind stated: “Recent negative articles that individuals have distributed are false and
misleading and are being distributed with the intention of manipulating the shares of AmTrust
in order to benefit those who own short position in our shares.”
63. George Karfunkle, AmTrust’s Chairman, major shareholder and father in law of
Zyskind, also attempted to shore investor confidence by purchasing $6.5 million of AmTrust
stock. Unfortunately, the market did not view Karfunkle’s gesture as significant relative to his
wealth (he’s reported to be a billionaire).
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64. On December 16, 2013, after the close of trading, AmTrust held an investor
conference call specifically to assuage investors’ concerns that it was concealing losses.
Zyskind and Pipoly denied the Geoinvesting report in a conclusory fashion, but failed address
Geoinvesting’s evidence showing that the sum of the losses reported by each AmTrust
subsidiary exceeded the consolidated losses reported in AmTrust’s 10K.
65. The market was convinced by AmTrust’s anemic response on December 16, to
the Geoinvesting report, and its failure to address Geoinvesting’s allegations meaningfully. As
a result, AmTrust’s share price dropped another $6.63/share or 20.2% on December 17 and
18.4
66. On January 2, 2014, AmTrust announced that it would repurchase $150 million
of its common stock in the open market in an effort to increase its stock price following the
share price drop caused by the Geoinvesting article.
67. AmTrust’s responses had the effect of maintaining the artificial inflation of its
share price resulting from its concealment of its incurred losses.
68. And while Zyskind and Pipoly vehemently denied in investor conference calls
held on December 16, 2013 and February 13, 2014 that AmTrust was concealing losses as
asserted by Geoinvesting, neither Zyskind, Pipoly, nor anyone else has ever attempted to
explain how it is even possible for the total losses incurred and reported by AmTrust’s
subsidiaries to be $289.9 million greater than the amount of incurred losses reported by
AmTrust in its consolidated financial statements filed with the SEC.
THE EVIDENCE SHOWING AMTRUST HAS CONCEALED LOSSES
No other significant AmTrust news was released between December 16 and December 18, 2013.
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69. Insurer companies authorized to do business in the United States and its territories are
required to prepare statutory financial statements in accordance with statutory accounting
principles (“SAP”) and file them annually with State insurance departments. Statutory
Accounting Principles are detailed within the National Association of Insurance
Commissioners (“NAIC”) Accounting Practices and Procedures Manual.
70. AII filed audited financial statements with the Bermuda Monetary Authority,
prepared in accordance with U.S. GAAP. AII is also required to file annual statutory financial
statements in Bermuda.
71. If an insurance company files false financial reports with a State insurance
department, including understating losses incurred, the insurance department may bring legal
proceedings against the company and its officers and directors, including seeking financial
sanctions and closure, liquidation or sale of the company. The same is true with Bermuda
regulators. Filing false financial reports with a State insurance department can be a crime.
72. The States maintain at the NAIC the world’s largest insurance financial
database, which provides a 30- year history of annual and quarterly filings on more than 5,200
insurance companies. Periodic financial examinations occur on a scheduled basis. 5 State
financial examiners investigate a company’s accounting methods, procedures and financial
statement presentation. These exams verify and validate what is presented in the company’s
annual statement to ascertain whether the company is in good financial standing. When an
examination of financial records shows the company to be financially impaired, the state
insurance department takes control of the company. Aggressively working with financially
troubled companies is a critical part of the regulator’s role. The examination by the state
5 Onsite exams usually occur at least once every three years.
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insurance department is much more detailed and comprehensive than is the scrutiny that the
SEC gives to a public company’s filings.
73. State and Bermuda insurance regulators scrutinize the statutory filings of
insurance companies very closely to ensure that the insurance companies are sufficiently
capitalized and capable of covering expected losses. If an insurer appears to a State insurance
department to be experiencing greater loss than it is financially capable of absorbing and
paying out, the State will take action to close down the insurer, liquidate it, appoint a receiver,
order it to obtain additional capital, find a sufficiently capitalized acquirer, or take such other
measure deemed appropriate to protect the insurance company’s policy holders, creditors and
other stakeholders.
74. Insurers who fail to comply with regulatory requirements are subject to license
suspension or revocation, and states may exact fines for regulatory violations. In a typical year
as many as 300 insurance companies have their licenses suspended or revoked.
75. A.M. Best is a US-based rating agency that focuses on the insurance industry.
Both the United States Securities and Exchange Commission and the National Association of
Insurance Commissioners have designated the company as a Nationally Recognized Statistical
Rating Organization (NRSRO) in the United States. A.M. Best issues financial-strength
ratings measuring insurance companies’ ability to pay claims. It also rates financial instruments
issued by insurance companies, such as bonds, notes, and securitization products
76. Geoinvesting obtained financial information as to the premiums written and
ceded by each of AmTrust’s subsidiaries for the years from 2009 through 2012.6 The reports
6 The regulatory filings include Schedule Y filed annually for AmTrust’s Technology Insurance Company – its largest domestic insurer and also audited 2010 financial statements for AII.
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also show the loss and loss adjusted expense incurred for each AmTrust subsidiary for fiscal
years 2010, 2011 and 2012.
77. The chart in ¶ 79 below shows the Net Premium Written (“NPW”), 7 the Net
Earned Premium (“NEP”) 8 and the Net Losses and Loss Adjusted Expense (“Net L/LAE”)
incurred for each of AmTrust’s insurance subsidiaries. The data for the US subsidiaries, AEL,
AIUL and AII were obtained from A.M. Best reports. The data for ACHL was obtained from
the Schedule Y that AmTrust’s Technology Insurance Company subsidiary files with the
National Association of Insurance Commissioners.
78. The loss and loss adjusted expense, as well as NPW and NEP, in the financial
reports AmTrust files with State and Bermuda insurance regulators are calculated in the
identical manner that loss and loss adjusted expense, NPW and NEP are calculated under U.S.
generally accepted accounting principles, which AmTrust is obligated to follow when it
consolidates and reports its financial statements with the SEC.
79. The NPW, NPE and Net L/LAE for each subsidiary is shown separately and
then totaled. The total amounts for NPW, NPE and Net L/LAE are then compared to the
amounts the totals for each item that AmTrust reports to the SEC in its annual financial
statements on Form 10-K. This comparison shows that AmTrust failed to report in its
consolidated financial statements $289.9 million of losses that it reported in its statutory
financial statements filed with State and Bermuda insurance regulators.
7 Net Written Premium is gross written premium less that portion of premium that AmTrust cedes to third party reinsurers under reinsurance agreements. 8 Net Earned Premium is the earned portion of net written premiums.
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Total per AM Best
and 10K 2012 NPE & LAE US Subs AEL AIUL AII ACHL Sched. Y Consolidated Difference NPW 487.20 190.08 40.95 934.67 - 1,652.90 1,648.04 (4.86)
NPE 403.10 163.91 34.64 821.37 - 1,423.02 1,418.85 (4.17)
Net L/LAE 291.05 95.03 31.30 535.08 86.91 1,039.37 922.68 (116.70)
Source: AM Best AM Best AM Best AM Best TIC Sched Y
N/A 10K N/A
Total per AM Best
and 10K 2011 NPE & LAE US Subs AEL AIUL AII ACHL Sched. Y Consolidated Difference NPW 361.63 172.32 33.09 701.40 - 1,268.44 1,276.60 8.15
NPE 302.05 128.05 29.08 568.70 - 1,027.88 1,036.86 8.98
Net L/LAE 232.25 51.78 26.72 373.83 96.06 780.63 678.33 (102.30)
Source: AM Best AM Best AM Best AM Best TICSched Y
N/A 10K N/A
2010 NPE & LAE USSubs NPW 289.04
NPE 255.37
Net L/LAE 174.31
AEL AIUL AII 95.23 29.72 412.03
67.55 25.47 395.04
28.97 27.52 249.53
ACHL ‐
62.12
Total per AM Best
& Sched. 10K Y Consolidated Difference
826.02 827.23 1.21
743.44 745.66 2.22
542.45 471.48 r (70.97)
80. For each fiscal year, the total NPW and NPE from A.M. Best and Schedule Y
match the total NPW and NPE that AmTrust reported in its consolidated financial statements in
its 10K.
81. However, in its 10-Ks for 2010 through 2012, AmTrust reported total Net
L/LAE that was materially lower than the total Net L/LAE that AmTrust’s subsidiaries
reported to State and Bermuda regulators as reported in AM Best and Schedule Y. 9
9 AII’s audited financial statements show $62.1 million of losses being ceded to ACHL and that no premiums were ceded to ACHL by AII. This matches and confirms the accuracy of the Net L/LAE figures reported in the Schedule Y. In addition, the NPW and NPE reported in AII’s audited financial statements, which do not consolidate ACHL, match the NPW and NPE reported by AM Best. This shows that AM Best used the same financial information in AII’s
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82. Thus, AmTrust understated its Net L/LAE in its 10-K by approximately $70.97
million, $102.3 million and $116.7 million for fiscal years 2010, 2011 and 2012 respectively.
83. Had AmTrust reported Net L/LAE in its 10-K in the same amounts as it did in
its State and Bermuda filings, its net income would have been reduced by 49%, 54% and 61%
in 2010, 2011 and 2012 respectively – all very material reductions in net income.
84. Given that the NPW and NPE totals from AM Best and Schedule Y for
AmTrust’s subsidiaries match up to the 10-K consolidated totals almost exactly with only an
immaterial difference of between 0.1% and 0.9%, the Net L/LAE totals from AM Best and
Schedule Y should also match the 10-K consolidated totals. However, the Net L/LAE totals
differ by 15.1% in 2010 and 2011 and by 12.1% in 2012.
85. AmTrust therefore understated its Net L/LAE in its 10-K by material amounts.
86. A similar comparison of the balance sheet items Net L/LEA Reserves 10 and Net
Unearned Premium 11 reported in AmTrust’s fiscal 2010 10K against the figures reported for
each AmTrust subsidiary in AM Best and AII’s audited financial statements confirms that
AmTrust is understating the extent of its losses.
audited financial statements when preparing its reports and that it did not include ACHL’s financial statements when reporting the financial statements of AII. 10 Reserves for insurance losses and loss adjustment expenses are established for the unpaid cost of insured events that have occurred as of a point in time. More specifically, the reserves for insurance losses and loss adjustment expenses represent the accumulation of estimates for both reported losses and those incurred but not reported, including claims adjustment expenses relating to direct insurance and assumed reinsurance agreements. 11 Net Unearned Premium is the premium corresponding to the time period remaining on an insurance policy, less that portion ceded to reinsurers under reinsurance agreements. Unearned premiums are proportionate to the unexpired portion of the risk, for which coverage has been sought by the insured party. Thus, it is deemed to have not yet been earned by the insurer. It appears as a liability on the insurer's balance sheet, as it would have to be paid back upon cancellation of the insurance policy.
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87. Net L/LEA Reserves are calculated as: [Loss and Loss Expense Reserves] +
[reinsurance payable] – [Reinsurance Recoverable]. 12
88. The following chart shows how the total of net loss reserves reported by
AmTrust’s subsidiaries are materially greater than the net loss reserves reported by AmTrust
when it consolidates those subsidiaries and reports the results in its Form 10-K filed with the
SEC.
2010 US Subs AEL AIUL AII ACIIL Net L/LAE Reserves 223.40 20.70 9.90 244.90 93.98 Net Unearned Premium 192.09 60.72 25.90 261.08 0.00
Source: AM Best AM Best AM Best AM Best & AII Financials
Total per AM Best
10K & AII Financials
Consolidated Difference
592.88
499.45 93.43
539.79 540.01 -0.22 10K
AII Financials
89. Given that the Net Unearned Premiums reported by each subsidiary match the
total Net Unearned Premiums reported in AmTrust’s consolidated financial statements, but the
Net loss and loss adjusted reserves are $93.43 million greater for the unconsolidated
subsidiaries, this provides further evidence that AmTrust is not recognizing the true amount of
its losses in its consolidated financial statement.
90. The amount of AmTrust’s loss and loss adjusted expense, its loss ratios, as well
as its loss and loss adjusted reserves are key financial performance metrics that are
fundamental to the core operations of the Company. Zyskind and Pipoly as CEO and CFO
knew of contemporaneous facts, and had access to and reviewed, the financial reports filed
with State and Bermuda insurance regulators showing that AmTrust’s loss and loss adjusted
12 The loss and loss adjusted reserves and net unearned premium amounts in the financial reports AmTrust files with State and Bermuda insurance regulators is calculated in the identical manner that loss and loss adjusted reserves is calculated under U.S. generally accepted accounting principles which AmTrust is obligated to follow when it consolidates and reports its financial statements filed with the SEC.
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expense was $289.9 million greater for fiscal 2010-2012, than AmTrust reported in its
consolidated financial statements for that same period. 13
GEOINVESTING’S HYPOTHESIS AS TO THE MECHANISM OF AMTRUST’S
UNDERSTATEMENT OF LOSSES NEED NOT BE ESTABLISHED
91. Based on the discrepancies between the total Net L/LAE reported to State and
Bermuda insurance regulators and those totals reported in AmTrust’s 10K for fiscal 2010-
2012, Geoinvesting hypothesized that AmTrust was making these losses “disappear” by ceding
them to its Luxembourg subsidiaries. Geoinvesting believed that ACHL was using its
equalization reserves to absorb the losses which is permissible under Luxembourg GAAP, but
was not consolidating these losses as required under US GAAP in AmTrust’s consolidated
financial statements in its 10-K.
92. The reason Geoinvesting believed the Luxembourg subsidiaries accounting was
the source of the “disappearance” is that the losses ceded to ACHL represented 87.5%, 93.9%
and 74.5% of the discrepancy in 2010 through 2012 respectively, together with the fact that
ACHL has the equalization balances that are used to “smooth” or absorb losses.
93. AmTrust states that its Bermuda subsidiary, AII, cedes up to $100 million of
loss each year (without ceding associated premium) through a stop-loss agreement. The
$289.9 million of concealed losses from 2010 to 2012 nearly matches the $300 million of loss
that may be ceded to Luxembourg subsidiaries over the same three year period.
94. In addition, the aggregate amount of loss and loss adjusted reserves reported by
AmTrust’s individual subsidiaries to State and Bermuda insurance regulators was $93.43
13 Zyskind served as president of Technology Insurance Company and Rochdale Insurance Company, and reviewed and/or signed its statutory filings with State insurance departments.
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million greater than the amount AmTrust reported in its consolidated financial statements on
Form 10-K filed with the SEC. The Schedule Y showed that nearly an identical amount of loss
and loss adjusted reserves ($93.98 million) was reported at ACHL – further pointing to the
Luxembourg subsidiaries as the source of the discrepancies.
95. Whether AmTrust engaged in accounting machinations in its Luxembourg
subsidiaries to conceal or eliminate these losses or whether it engaged in some different or
additional accounting machinations in its other subsidiaries does not change the fact that
AmTrust mislead its investors. Whatever accounting machinations AmTrust employed, the
end result is that AmTrust understated its losses in its insurance business in its consolidated
financial statements by $289.9 million from 2010 to 2012.
96. Whether or not AmTrust’s financial statements complied technically with
GAAP (and it isn’t clear yet) does not determine whether or not AmTrust misled investors.
AmTrust painted a false picture of its financial performance by understating its losses and
misrepresenting key financial performance metrics.
97. By concealing or eliminating $289.9 million of losses incurred in its
subsidiaries from 2010 to 2012, and not recognizing those same losses when consolidating its
financial statements, AmTrust misleadingly represented its insurance operations as highly
profitable, when in fact, they were not.
ADDITIONAL EVIDENCE THAT AMTRUST IS CONCEALING ITS TRUE LOSSES
98. AmTrust is a relative newcomer to the insurance industry, having been
incorporated in 1998. It has been run for the last 9 years by Barry Zyskind who today has a
total of 16 years of experience in the insurance industry.
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99. AmTrust claims to miraculously have materially lower loss ratios than its
competitors – many who have been in the industry for fifty or more years.
100. Notwithstanding that AmTrust’s business is “green”, that is relatively new
compared to the rest of the industry, AmTrust has consistently claimed to materially out-
perform the industry by having a loss ratio substantially less than the industry average. A loss
ratio is the ratio of incurred losses to earned premium. It is an important metric as to whether
an insurer is underwriting risk profitably.
101. From 2007 through 2012, for its US subsidiaries, AmTrust has consistently had
a loss ratio well below that of the industry average, resulting in its reporting losses much lower
than had its loss ratio been at the industry average.
Year 2007 2008 2009 2010 2011 2012
Net Earned Premium 446,236 439,097 573,882 745,659
1,036,861 1,418,852
Industry AmTrust Loss Ratio Loss Ratio
67.8% 62.4%
77.1% 54.3%
72.0% 57.1%
73.7% 63.2%
79.5% 65.4%
74.3% 65.0%
Percentage Absolute % Difference Difference
8.0% 5.4%
29.6% 22.8%
20.7% 14.9%
14.2% 10.5%
17.7% 14.1%
12.5% 9.3%
Dollar difference
24,097 100,114 85,508 78,294
146,197 131,953
566,163
102. The above chart 14 shows that AmTrust has consistently reported much lower
loss as a percentage of net earned policy premium than its competitors. Exhibit F (attached
hereto) presents similar data for fiscal years 2008 through 2012. Exhibit G shows that when
one examines in isolation AmTrust’s domestic loss ratio, it has also been consistently and
suspiciously lower than the industry average.
14 Data from AM Best and SEC filings. Numbers in 000’s. Industry average loss ratios are for U.S. business only. Tower and AmTrust have non-U.S. exposure.
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103. But given that insurance underwriting is based on the law of large numbers,
there is absolutely no basis to believe that the workers, products or property that AmTrust
insures will be injured less, break less or be damaged less than those that its competitors insure.
Nor is there any basis to suggest that AmTrust is able to charge more for its policies. On the
contrary, in order to achieve such spectacular growth in gross premiums written, in the last ten
years, AmTrust has consistently been underpricing its policies relative to its competitors.
104. The extent of AmTrust’s failure to select realistic actuarial loss estimates (loss
ratios) and book realistic reserves is quantified and fully appreciated by looking at its stated
reserves at year end 2012, which were $2,426,400,000. Had AmTrust calculated and reported
its loss reserves using the industry average loss ratio during the period 2007-2012, its loss
reserves would have been $2,992,563,000. This means that had AmTrust used the same
industry average loss ratios to calculate its reserves that most of its competitors use, it would
have reported an additional $566,163,000 in losses from 2007 to 2012.
105. The most logical explanation for AmTrust’s “too good to be true” loss
performance is that it is improperly concealing or eliminating incurred losses through
undisclosed accounting machinations.
106. One good example of another insurance company that had “too good to be true”
loss ratios is Tower Group International, Ltd., which recently collapsed like a house of cards
(stock down over 90%) and is headed towards bankruptcy. Tower reported that it would have
to take at least an additional $470 million of incurred net losses. Tower also consistently
reported much lower loss ratios than the industry in the same period, as the chart below
demonstrates.
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Tower Insurance Group
Net Earned Year Premium 2007 286,106 2008 314,551 2009 854,711 2010 1,292,669 2011 1,593,850 2012 1,721,542
Industry Loss Ratio
67.8% 77.1% 72.0% 73.7% 79.5% 74.3%
Tower Loss Percentage Absolute % Ratio Difference Difference
55.2% 18.6% 12.6%
51.7% 32.9% 25.4%
55.6% 22.8% 16.4%
60.6% 17.8% 13.1%
68.5% 13.8% 11.0%
72.8% 2.0% 1.5%
Dollar difference
36,049 79,896
140,173 169,340 175,324 25,823
626,605
107. Meadowbrook Insurance Group, Inc., another publicly traded insurance
company was blessed by similarly below industry average loss ratios for the period from 2007
through 2011. Meadowbrook ran into trouble in August 2013, when it was downgraded
several times and forced to take an impairment charge of $115.4 million. Meadowbrook
suffered an operating loss for fiscal 2013, and had adverse reserve development of $68.4
million. The following chart shows Meadowbrook’s loss ratios from 2007 through 2012.
Meadowbrook Insurance Group
Year 2007 2008 2009 2010 2011 2012
Net Earned Premium 268,197 369,721 539,602 659,840 747,635 854,259
Industry Meadowbrook Percentage Absolute % Loss Ratio Loss Ratio Difference Difference
67.8% 61.2% 9.7% 6.6%
77.1% 62.0% 19.6% 15.1%
72.0% 60.7% 15.7% 11.3%
73.7% 60.6% 17.8% 13.1%
79.5% 66.3% 16.6% 13.2%
74.3% 79.3% -6.7% -5.0%
Dollar difference
17,701 55,828 60,975 86,439 98,688
(42,713)
276,918
108. Thus, Tower and Meadowbrook are examples what will likely befall AmTrust.
109
When something seems too good to be true, it usually is. That is how and why
Harry Markopolos first detected and then alerted the SEC to Bernie Madoff’s Ponzi scheme in
May 2000. However, the SEC failed to appreciate this evidence and Madoff continued to
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defraud investors for eight more years. Subsequently, Markopolos testified before Congress
that this was like a baseball player batting .966 for the season "and no one suspecting a cheat."
110. One of the reasons AmTrust must find a way to conceal its incurred losses is
because it selects such unreasonably generous actuarial assumptions as to the ultimate losses it
expects its policies to incur. As these unreasonable assumptions generate larger than
anticipated losses, AmTrust must find a way to conceal them.
111. “Incurred but not reported losses” known as “IBNR” is a balance sheet liability
that represents the estimated liability for future payments on losses which have already
occurred but have not yet been reported. In AmTrust’s case, IBNR reserves also include
aggregate changes in case incurred losses as well as the unpaid cost of recently reported claims
for which an initial case reserve has not yet been established.
112. To the extent IBNR loss reserves are understated, earnings are overstated.
113. AmTrust has consistently selected IBNR loss estimates that conceal its true
losses.
114. For example, analysis of the IBNR amounts AmTrust's Technology Insurance
Company (“TIC”) selects for its workers compensation policies shows that AmTrust selects
IBNR amounts at levels materially lower than industry data would indicate is appropriate. The
following chart shows TIC's IBNR, and what its IBNR would be if it utilized the US average
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(countrywide) or California only IBNR factors. 15
IBNR Analysis (000's)
TIC Net Countrywide California
Year IBNR IBNR IBNR 2007 454 2,338 6,177 2008 934 3,078 8,405 2009 1,094 5,442 14,721 2010 1,974 7,232 19,348 2011 5,527 11,256 27,718
2012 14,717 22,298 50,072
2013 64,731 60,140 101,125
89,431 111,784 227,566
115. The chart shows that if AmTrust had selected industry average actuarial
estimates for its IBNR loss reserves, it would have reported at least $22.4 million greater loss
from 2007 through 2013. However, given that more than 25% of its worker’s compensation
business is in California, its additional IBNR losses would have been at least $52.4 million
greater.
116. AmTrust’s too good to be true performance is also shown by Exhibit A, which
visually shows that while the rest of the worker’s compensation insurance industry’s premium
revenue was shrinking materially from 2006 through 2013, AmTrust grew its premium revenue
by over 400%. AmTrust accomplished this incredible growth in a very “soft” or competitive
market, where the pricing for the same risk was dropping lower – meaning insurers’ were
insuring the same risk for less premium and less profit. Exhibits B and C show the industry
15 The TIC IBNR figures are reported in Schedule P, Part 1D, Workers Compensation part of its 2013 Annual Statement. Countrywide and California IBNR figures are derived by applying National Council on Compensation Insurance (“NCCI”) loss development factors to TIC’s stated ultimate net loss. For example, based upon TIC’s projected 2007 ultimate losses, NCCI (industry) data indicates TIC should have IBNR reserves equal to $2,338,000 vs. the $454,000 it actually reported.
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average rate levels for new workers compensation and general lines insurance policies were
dropping from the 2006 base year, stabilized in 2006, but still remained materially lower than
the 2006 base year through 2013.
117. At the same time that its policies were being sold cheaper in the market
(insuring the same risk for less money) and AmTrust’s premium revenue was quadrupling,
AmTrust consistently reported materially lower losses per dollar of premium than the industry
average from 2006 to 2013.
118. Exhibits D (chart) and E (graph), show that AmTrust’s net loss ratio for its
worker’s compensation business was consistently and substantially lower than its competitors.
It is implausible to grow exponentially in a shrinking market without underpricing the
competition. And the competition reports that AmTrust has been consistently underpricing its
competitors to gain market share during this time frame. AmTrust’s lower revenue per
assumed risk cannot result in such consistently lower net loss ratios, particularly given its
400% growth in a shrinking market.
119. Not surprisingly, Tower Group also racked up tremendous premium growth,
while policy rate levels were shrinking during the same time frame. See Exhibit H. Tower
reported similarly miraculous below industry average loss ratios, while it racked up double
digit premium growth from 2006 to 2012. See Exhibit I. Tower’s miracle ended up badly with
its stock down 90%, insurance regulators threatening to take it over, and it desperately seeking
another insurer to acquire it.
120. AmTrust claims that in a market where it’s policies were being sold cheaper
each year, and total premium revenue in the market shrunk, it was nonetheless able to grow its
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premium revenue 400%, while maintaining an annual loss ratio that was between 12% and
30% lower than the industry average.
121. AmTrust has represented to investors that it accomplished the impossible. Its
reported financial performance is just that.
AMTRUST HAD SUBSTANTIAL MOTIVE TO CONCEAL ITS LOSSES
122. AmTrust had a motive to conceal its losses and inflate its net income because it
completed a number of stock, note, and bond offerings during the Class Period.
123. In addition its bank borrowings and lines of credit required it to maintain
financial metrics that would have been violated had the losses not been concealed.
124. In December 2011, the Company issued $175,000,000 aggregate principal
amount of 5.50% convertible senior notes in a private placement.
125. During February 2011, AmTrust entered into a seven year secured loan
agreement in the aggregate amount of $10.8 million
126. During third quarter of 2011, AmTrust entered into a letter of credit facility for
$75.0 million
127. Also during 2011, AmTrust issued $298 million of new debt.
128. During 2012, AmTrust issued $25 million of new debt.
129. In September 2012, the Company entered into two promissory notes totaling
$8,000,000.
130. In June 2013, AmTrust offered and sold $115 million of Series A preferred
stock to investors in the Preferred Offering.
131. All told, during the Class Period, AmTrust obtained over $600 million of equity
and debt financing by understating its losses and overstating net income.
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ZYSKIND AND PIPOLY HAD FINANCIAL MOTIVE TO CONCEAL LOSSES
132. Zyskind and Pipoly both receive bonuses and incentive compensation tied to
AmTrust’s reported profit levels creating a strong motive for them to conceal AmTrust’s
losses.
133. Mr. Zyskind is entitled to an annual profit bonus equal to two percent (2%) of
AmTrust’s pre-tax profit if certain financial goals are met, subject to a cap equal to four times
his salary.
134. Mr. Pipoly receives a similar annual profit bonus, though he has no specific
target or threshold.
135. A chart showing the incentive compensation earned by Zyskind and Pipoly
resulting from understating AmTrust’s losses is set forth below.
Barry D. Zyskind 2013 $ 2012 2011 2010 -
Total $
Incentive Plan Bonus Stock Awards Compensation
- $ - $ 3,900,000 - 14,177,500 2,925,000 - - 2,925,000 - - 2,925,000
- $ 14,177,500 $ 12,675,000
Total $ 3,900,000 $ 17,102,500 $ 2,925,000 $ 2,925,000
$ 26,852,500
Ronald Pipoly 2013 $ 200,000 2012 133,333 2011 - 2010 -
Total $ 333,333
$ 700,007 566,679 500,092 509,222
$ 2,276,000
$ 1,400,000 1,000,000 1,000,000
733,334
$ 4,133,334
$ 2,300,007 $ 1,700,012 $ 1,500,092 $ 1,242,556
$ 6,742,667
136. Zyskind earned $12.7 million cash in incentive plan compensation directly tied
to a percentage of AmTrust’s profits. In addition he earned $14.2 million of restricted stock
awards in 2012 based on AmTrust’s financial performance. This included 275,000
“performance shares”.
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137. Pipoly earned $4.1 million of incentive plan compensation, though not
specifically tied to a percentage of AmTrust’s profits, it was directly related to, and dependent
on, AmTrust earning a profit in each of those years.
PLAINTIFFS’ CLASS ACTION ALLEGATIONS
138. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or
otherwise acquired AmTrust securities during the Class Period (the "Class"); and were
damaged thereby. Excluded from the Class are defendants herein, the officers and directors of
the Company, at all relevant times, members of their immediate families and their legal
representatives, heirs, successors or assigns and any entity in which defendants have or had a
controlling interest.
139. The members of the Class are so numerous that joinder of all members is
impracticable. Throughout the Class Period, AmTrust securities were actively traded on the
NASDAQ and NYSE. While the exact number of Class members is unknown to Plaintiff at
this time and can be ascertained only through appropriate discovery, Plaintiff believes that
there are hundreds or thousands of members in the proposed Class. Record owners and other
members of the Class may be identified from records maintained by AmTrust or its transfer
agent and may be notified of the pendency of this action by mail, using the form of notice
similar to that customarily used in securities class actions.
140. Plaintiffs’ claims are typical of the claims of the members of the Class as all
members of the Class are similarly affected by defendants' wrongful conduct in violation of
federal law that is complained of herein.
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141. Plaintiffs will fairly and adequately protect the interests of the members of the
Class and have retained counsel competent and experienced in class and securities litigation.
Plaintiffs have no interests antagonistic to or in conflict with those of the Class.
142. Common questions of law and fact exist as to all members of the Class and
predominate over any questions solely affecting individual members of the Class. Among the
questions of law and fact common to the Class are:
• whether the federal securities laws were violated by defendants’ acts as alleged herein;
• whether statements made by defendants to the investing public during the Class Period misrepresented material facts about the business, operations and management of AmTrust;
• whether the Individual Defendants caused AmTrust to issue false and misleading financial statements during the Class Period;
• whether defendants acted knowingly or recklessly in issuing false and misleading financial statements;
• whether the prices of AmTrust securities during the Class Period were artificially inflated because of the defendants’ conduct complained of herein; and
• whether the members of the Class have sustained damages and, if so, what is the proper measure of damages.
143. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable. Furthermore, as
the damages suffered by individual Class members may be relatively small, the expense and
burden of individual litigation make it impossible for members of the Class to individually
redress the wrongs done to them. There will be no difficulty in the management of this action
as a class action.
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PRESUMPTION OF RELIANCE
144. Plaintiffs will rely, in part, upon the presumption of reliance established by the
fraud-on-the-market doctrine in that:
• AmTrust’s common and Series A preferred stock met the requirements for listing, and were listed and actively traded on the Nasdaq and NYSE respectively, both highly efficient markets;
• AmTrust’s common and Series A shares were liquid and traded with moderate to heavy volume during the Class Period: Its common shares’ average weekly trading volume as a percentage of the float was 5.3%, and its Series A shares’ average weekly trading volume as a percentage of the float was 3.2% during the Class Period;
• More than five analyst firms regularly issued research reports on AmTrust that were disseminated to investors in the market during the Class Period;
• As a regulated issuer, AmTrust filed periodic public reports with the SEC and was eligible S-3 registration statements during the Class Period;
• AmTrust regularly communicated with public investors via established market communication mechanisms, including through regular dissemination of press releases on the national circuits of major newswire services and through other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services;
• Unexpected material news about AmTrust was rapidly reflected in and incorporated into the its common stock and Series A preferred stock price during the Class Period; and
• There were several dozens of market makers for AmTrust’s common stock on the Nasdaq, and there was a Designated Market Maker for the Series A preferred stock on the NYSE at all times during the Class Period.
145. Based upon the foregoing, Plaintiffs and the members of the Class are entitled
to a presumption of reliance upon the integrity of the market.
COUNT I
(Against All Defendants For Violations of Section 10(b) And Rule 10b-5 Promulgated Thereunder)
146. Plaintiffs repeat and reallege each and every allegation contained above as if
fully set forth herein.
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147. This Count is asserted against defendants and is based upon Section 10(b) of
the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the SEC.
148. During the Class Period, defendants made various untrue statements of material
facts and omitted to state material facts necessary in order to make the statements made, in
light of the circumstances under which they were made, not misleading in connection with the
purchase and sale of securities.
149. Defendants participated directly in the preparation and/or issuance of the annual
reports, SEC filings, press releases and other statements and documents described above,
including statements made to securities analysts and the media that were designed to influence
the market for AmTrust securities. Such reports, filings, releases and statements were
materially false and misleading in that they failed to disclose material adverse information and
inaccurately represented AmTrust's financial and business performance.
150. By virtue of their positions at AmTrust, defendants had actual knowledge of the
materially inaccurate and misleading statements and material omissions alleged herein, or, in
the alternative, defendants acted with reckless disregard for the truth in that they failed or
refused to ascertain and disclose such facts as would reveal the materially false and misleading
nature of the statements made, although such facts were readily available to defendants. Said
acts and omissions of defendants were committed with reckless disregard for the truth. In
addition, each defendant knew or recklessly disregarded that material facts were being
misrepresented or omitted as described above.
151. Information showing that defendants acted knowingly or with reckless
disregard for the truth is peculiarly within defendants' knowledge and control. As the senior
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officers of AmTrust, the Individual Defendants had knowledge of the details of AmTrust's
internal financial affairs.
152. The Individual Defendants are liable both directly and indirectly for the wrongs
complained of herein. Because of their positions of control and authority, the Individual
Defendants were able to and did, directly or indirectly, control the content of the statements of
AmTrust. As officers of a publicly-held company, the Individual Defendants had a duty to
disseminate timely, accurate, and truthful information with respect to AmTrust's businesses,
operations, future financial condition and future prospects. As a result of the dissemination of
the aforementioned false and misleading reports, releases and public statements, the market
price of AmTrust securities was artificially inflated throughout the Class Period.
153. In ignorance of the adverse facts concerning AmTrust's business and financial
condition which were concealed by defendants, Plaintiffs and the other members of the Class
purchased AmTrust securities at artificially inflated prices and relied upon the price of the
securities, the integrity of the market for the securities and/or upon statements disseminated by
defendants, and were damaged thereby.
154. By reason of the conduct alleged herein, defendants knowingly or recklessly,
directly or indirectly, have violated Section 10(b) of the Exchange Act and Rule 10b-5
promulgated thereunder.
155. As a direct and proximate result of defendants' wrongful conduct, Plaintiffs and
the other members of the Class suffered damages in connection with their respective purchases
and sales of the Company's securities during the Class Period, upon the disclosure that the
Company had been disseminating inaccurate financial statements to the investing public.
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156. This action was timely filed within two years of discovery of the inaccurate and
misleading financial statements and within five years of the dates of purchase of the subject
securities.
COUNT II
(Violations of Section 20(a) of the Exchange Act Against The Individual Defendants)
157. Plaintiffs repeat and reallege each and every allegation contained in the
foregoing paragraphs as if fully set forth herein.
158. During the Class Period, the Individual Defendants participated in the operation
and management of AmTrust, and conducted and participated, directly and indirectly, in the
conduct of AmTrust's business affairs. Because of their senior positions, they knew the adverse
non-public information about AmTrust's financial statements.
159. As officers and/or directors of a publicly owned company, the Individual
Defendants had a duty to disseminate accurate and truthful information with respect to
AmTrust's financial condition and results of operations, and to correct promptly any public
statements issued by AmTrust which had become materially false or misleading.
160. Because of their positions of control and authority as senior officers, the
Individual Defendants were able to, and did, control the contents of the various reports, press
releases and public filings which AmTrust disseminated in the marketplace during the Class
Period concerning AmTrust's results of operations.
161. Throughout the Class Period, the Individual Defendants exercised their power
and authority to cause AmTrust to engage in the wrongful acts complained of herein. The
Individual Defendants therefore, were "controlling persons" of AmTrust within the meaning of
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Section 20(a) of the Exchange Act. In this capacity, they participated in the unlawful conduct
alleged which artificially inflated the market price of AmTrust securities.
162. Each of the Individual Defendants, therefore, acted as a controlling person of
AmTrust. By reason of their senior management positions and/or being directors of AmTrust,
each of the Individual Defendants had the power to direct the actions of, and exercised the
same to cause, AmTrust to engage in the unlawful acts and conduct complained of herein. Each
of the Individual Defendants exercised control over the general operations of AmTrust and
possessed the power to control the specific activities which comprise the primary violations
about which Plaintiff and the other members of the Class complain.
163. This action was timely filed within two years of discovery of the inaccurate and
misleading financial statements and within five years of the dates of purchase of the subject
securities.
164. By reason of the above conduct, the Individual Defendants are liable pursuant to
Section 20(a) of the Exchange Act for the violations committed by AmTrust.
COUNT III
(Violation of Section 11 of the 1933 Act
Against All Defendants)
165. Plaintiffs repeat and incorporate each allegation contained above as if fully set
forth herein.
166. This Count does not sound in fraud. Any proceeding allegations that might
imply fraud, fraudulent conduct, or improper motive are specifically excluded from this Count.
In this Count, Plaintiffs do not allege that Defendants had scienter or fraudulent intent, which
are not elements of this claim.
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167. This Count is brought by Schapiro against all Defendants, pursuant to Section
11 of the 1933 Act on behalf of a subclass of persons who acquired shares of the Company’s
Series A preferred stock in or traceable to the Preferred Offering pursuant to the false
prospectus and registration statement issued in connection with the Preferred Offering.
168. The prospectus and registration statement for the Preferred Offering contained
untrue statements of material facts, omitted to state other facts necessary to make the statement
made not misleading, and/or omitted to state material facts required to be stated therein.
169. The defendants named herein were responsible for the content of the prospectus
and registration statement for the Preferred Offering.
170. Zyskind and Pipoly signed the registration statement.
171. None of the defendants named herein made a reasonable investigation or
possessed reasonable grounds for the belief that the statements contained in the prospectus and
registration statement were true and without omissions of any material facts and were not
misleading.
172. By reasons of the conduct herein alleged, each defendant violated Section 11 of
the 1933 Act.
173. Schapiro and other purchasers of the Series A preferred shares sustained
damages in that the value of AmTrust shares declined substantially subsequent to and because
of defendants’ wrongful conduct and violations of the law.
174. At the time of their purchases of AmTrust’s Series A preferred stock, Schapiro
and other members of the Securities Act subclass were without knowledge of the facts
concerning the untrue statements or omissions herein and could not have reasonably
discovered those facts until just prior to the date of the filing of the initial complaint herein.
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175. By virtue of the foregoing, Schapiro and the other members of the Securities
Act subclass are entitled to damages from these defendants and each of them, jointly and
severally.
176. This claim is timely, as Plaintiffs’ Consolidated Complaint For Violations Of
The Federal Securities Laws was filed within one year after the Preferred Offering and within
one year after Schapiro discovered or reasonably could have discovered the untrue statements
and omissions in the Preferred Offering prospectus and registration statement, thereby tolling
and complying with the statute of limitations under Section 13.
PRAYER FOR RELIEF
A. Determining that the instant action may be considered a class action under Rule
23 or the Federal Rules of Civil Procedure, and certifying Plaintiffs as Class representatives;
B. Requiring defendants to pay damages sustained by Plaintiffs and the Class by
reason of the acts and transactions alleged herein;
C. Awarding Plaintiff and the other members of the Class prejudgment and post
judgment interest; and
D. Awarding such other and further relief as this Court may deem just and proper.
DEMAND FOR TRIAL BY JURY
Plaintiffs hereby demand a trial by jury.
Dated: July 7, 2014 THE ROSEN LAW FIRM P.A.
/s/ Laurence Rosen
Laurence Rosen Phillip Kim Sara Fuks 275 Madison Avenue, 34th Floor
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New York, NY 10016 Telephone: (212) 686-1060 Facsimile: (212) 202-3827 [email protected] [email protected] [email protected]
POMERANTZ LLP Marc I. Gross Jeremy A. Lieberman Michelle Carino 600 Third Avenue, 20th Floor New York, New York 10016 Telephone: (212) 661-1100 Facsimile: (212) 661-8665 [email protected] [email protected]
Lead Counsel for Plaintiffs and the Class
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PROOF OF SERVICE BY ELECTRONIC POSTING PURSUANT TO THE SOUTHERN DISTRICT OF NEW YORK ECF AND LOCAL RULES
I, the undersigned say:
I am a citizen of the United States and am a member of the Bar of this Court. I am over the age of 18 and not a party to the within action. My business address is 275 Madison Avenue, 34 th
Floor, New York, NY 10016.
On July 7, 2014 I caused to be served the following document:
CONSOLIDATED AMENDED CLASS ACTION COMPLAINT
By posting the document electronically to the ECF website of the United States District Court for the Southern District of New York, for receipt electronically by the parties registered to the Court’s CM/ECF system.
I certify under penalty of perjury under the laws of the United States of America that the foregoing is true and correct. Executed on July 7, 2014, at New York, New York.
/s/ Laurence M. Rosen
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