In re James River Grp. Holdings Ltd. Sec. Litig.

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IN RE JAMES RIVER GROUP HOLDINGS, LTD. SECURITIES LITIGATION

CIVIL No. 3:21 cv444 (DJN)

United States District Court, E.D. Virginia, Richmond Division

August 28, 2023

MEMORANDUM OPINION

David J. Novak United States District Judge

Lead Plaintiffs Employees' Retirement Fund of the City of Fort Worth d/b/a Fort Worth Employees' Retirement Fund (“Fort Worth”) and The City of Miami General Employees' & Sanitation Employees' Retirement Trust (“Miami”) (together “Plaintiffs”), bring this action against Defendant James River Group Holdings, Ltd. (“James River” or “the Company”) and Defendants Robert (“Bob”) P. Myron (“Myron”), J Adam Abram (“Abram”), Frank N. D'Orazio (“D'Orazio”) and Sarah C. Doran (“Doran”) (together, the “Executive Defendants”). Plaintiffs bring this action on behalf of themselves and similarly situated persons and entities who purchased or otherwise acquired James River common stock between February 22,2019, and October 25,2021. (ECF No. 69 at 1.) Plaintiffs allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Securities Exchange Commission (“SEC”) Rule 10b-5 promulgated thereunder. This matter now comes before the Court on Defendants' Motion to Dismiss the Second Amended Complaint with prejudice, (ECF No. 71), pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6) and the Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u-4.

For the reasons set forth below, the Court will DENY Defendants' Motion to Dismiss.

I. BACKGROUND

This securities fraud action arises out of Defendants' alleged series of fraudulent statements regarding the Company's financial position and their alleged systemic policy of under-reserving. Defendants' alleged fraud deceived investors, inducing Plaintiffs to purchase the Company's common stock at an artificially inflated price and thereby leading Plaintiffs to suffer losses when the facts of the Company's finances came to light.

A. Factual Background

At this stage, the Court must accept as true the facts set forth in the Second Amended Complaint (ECF No. 69). Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Against this backdrop, the Court accepts the following facts as alleged for purposes of resolving the instant motion.

The Second Amended Complaint alleges that the Richmond, Virginia-based insurance company James River, along with the Executive Defendants, made false statements of material fact, or omitted to state material facts that would have made their statements not misleading, to deceive investors into purchasing the Company's common stock at artificially inflated prices. (Second Amended Complaint (“SAC”) (ECF No. 69) at ¶ 397-99.) The core of the fraud, the SAC alleges, consisted of Defendants' deception of investors regarding James River's financial reserves set aside for insurance claims, as well as the Company's related internal controls and financial statements. (Id. ¶ 399.) Defendants exhibited a pattern of “pervasive and fundamental deficiencies in James River's reserves and reserve setting process.” (Id. ¶ 24.)

In 2014, the Company launched a specialty insurance product through its Excess and Surplus (“E&S”) Line for the rideshare company Uber, offering insurance coverage for Uber drivers during periods when drivers were logged into the Uber app but not actively transporting passengers. (Id. ¶ 1.) The Company's E&S Line specialized in supplying insurance products that standard insurance policies would not cover due to unique characteristics and risks, with the E&S Line accounting for 70 percent of the Company's net written premiums between 2018 and 2020. (Id.) James River's Uber-related business, based in the Company's Commercial Auto Division, comprised over 25 percent of the Company's total consolidated gross written premiums for 2018 and 2019. (Id. ¶ 3.) Defendants represented to investors that they were “comfortable with [the Company's] loss reserves,” and external financial analysts appeared to credit these assurances, with one analyst reporting that “‘stability in the commercial auto reserves is key to [James River's] stock's performance in the near/immediate term.'” (Id.) (emphases from SAC removed here, and in subsequent excerpts, for readability). Plaintiffs pinpoint February 22,2019 - when then-Chief Executive Offer (“CEO”) Defendant Myron announced Uber's renewal of its contract with James River and stated that the Company had a “long and collaborative relationship” with its “largest account” - as the start of the Class Period. (Id. ¶54.)

On October 8,2019, James River announced the early termination of the Uber contract, because the contract had “‘not met [James River's] expectations for profitability.'” (Id. ¶ 4.) Along with this announcement, the Company disclosed an adverse charge of $55-60 million that Defendants attributed largely to the Uber contract, resulting in a $25.2 million quarterly net loss (the Company's largest as of that date). (Id.) James River then put the Uber contract into “runoff”, a winddown process in which the Company still was liable for processing and paying claims that had accrued through 2019. (Id.) Following the Uber announcement, Defendant J. Adam Abram (the Company's founder and former CEO) stated on an investor call on November 7,2019, that the Company terminated the Uber contract due to excessive risk and that “‘candidly, in some years we mispriced the risk.'” (Id. ¶ 59.) Amid concern from analysts about the Company's future performance, Defendants represented in annual reports throughout the “Class Period” (i.e., between February 22, 2019, and October 25, 2021) that the Company established, monitored and adjusted reserves based on a process that included, for all Uber claims, “‘individual case-basis valuations'” that leveraged “‘historical information'” and James River's “‘past experience'” while making modifications for “‘current developments'” and “‘anticipated trends. '” (Id. ¶ 5.)

Specifically, Defendant Abram told investors on a November 7,2019 call that the reported reserves reflected a “a historically well-informed judgment.” (Id. ¶ 363.) On the same call, Defendant Doran responded to a question about the adverse charge on Commercial Auto losses by stating that James River had “standard practices and procedures” around reserves, adding that “we're doing a deep dive every single quarter... And we are certainly watching it very carefully and very closely, especially around claims and further development and behavior of that.” (Id. ¶ 364.) In addition, Defendant Abram stated during the Company's April 30,2020 earnings call that the Uber account runoff was “going well,” as James River was “settling commercial auto claims at a rapid pace for amounts that are consistent with our held reserves,” while Defendant Doran stated that the runoff was “performing well within our expectations.” (Id. ¶ 62.) And on a February 26, 2021 earnings call, Defendant D'Orazio described the Company's reserve process as involving a “‘claims audit'” by the “‘senior claims leadership team'” reviewing “‘a healthy sampling of the open files,”' claiming he was “‘comfortable'” with the Company's overall group reserve position as of QI 2021. (Id. ¶ 352-53.)

However, James River's troubles stemming from the Uber contract fallout continued. Eighteen months after the Company placed the Uber contract into runoff following the contract's early termination, James River announced a new $170 million charge “‘primarily driven'” by Uber-related losses. (Id. ¶ 7.) This $170 million charge extinguished the Company's profit for the previous two years, accounting for over 50 percent of the Commercial Auto Division's $337 million net reserves. (Id.) Financial analysts calculated that the $170 million charge translated into the Company under-reserving each Uber-related claim by an average 40 percent. (Id.)

Seeking to halt the financial impact of the $170 million charge, James River simultaneously announced a dilutive secondary offering of stock, with a $31.00 offering price, a 34 percent discount on the previous trading day's closing price. (Id. ¶ 8.) Following the Company's announcement of the $170 million charge and dilutive secondary offering, James River's share price dropped over 26 percent in one trading day. (Id.) At the same time as the $170 million charge announcement, Defendant Frank D'Orazio (the Company's CEO) stated on May 5,2021 that James River had ‘“meaningfully changed our actuarial methodology' because ‘using only our own loss experience in our paid and incurred reserve projections rather than the array of inputs that we had used in prior quarters, and giving greater weight to incurred methods would give us a better and more conservative estimate of ultimate losses on this account.'” (Id. ¶ 9.) D'Orazio stated that “[w]e got it wrong” with respect to reserves. (Id.) The Company announced an additional Uber-related loss of $29.6 million on October 26,2021, with James River's stock dropping more than 16 percent that day. (Id. ¶ 10.) Accordingly, over the course of the Class Period, James River's investors saw the Company lose over $450 million in shareholder market capitalization. (Id.)

Plaintiffs allege that during the Class Period, Defendants made fraudulent, material statements in the Company's regularly submitted financial disclosure statements. Specifically, Defendants represented in each 10-K form during the Class Period that the Company “‘continually monitor[ed] reserves using new information'” and “‘a variety of statistical techniques and adjust'” reserve estimates “‘as experience develops or new information becomes known'”, including through “‘individual case-basis valuations'” to set reserves. (Id. ¶ 119.) The 10-K forms also...