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Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 

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United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 04-2078

___________

In re: Acceptance Insurance Companies *

Securities Litigation *

*

Lawrence I. Batt, P.C. Profit Sharing *

Plan and Trust, Individually and on *

Behalf of All Others Similarly Situated, *

*

Plaintiff, *

*

Jerome S. Richman, Co-Trustee of the *

Joe Sonken Trust; Diana L. Kinder; *

Barbara Winer Revocable Trust, on *

Behalf of Themselves and a Class of All *

Others Similarly Situated, *

*

Plaintiffs - Appellants, *

* Appeal from the United States 

v. * District Court for the District of

* Nebraska

Acceptance Insurance Companies, Inc.; *

Kenneth C. Coon; Georgia M. Mace; *

AICI Capital Trust; John P. Nelson, *

*

Defendants - Appellees, *

*

William J. Gerber; Jay A.Bielfield; *

Edward W. Elliot, Jr.; Robert Lebuhn; *

Michael R. McCarthy; R. L. Richards; *

David L. Treadwell; Doug T. Valassis; *

Advest, Inc.; Everen Securities; Deloitte *

& Touche, LLP, *

*

Defendants. *

Appellate Case: 04-2078 Page: 1 Date Filed: 08/29/2005 Entry ID: 1945437
1

 The Honorable Thomas M. Shanahan, United States District Judge for the

District of Nebraska and The Honorable Laurie Camp Smith, United States District

Judge for the District of Nebraska both granted motions for the issues on appeal in

this case.

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___________

Submitted: February 14, 2005

 Filed: August 29, 2005 

___________

Before MELLOY, HEANEY, and FAGG, Circuit Judges.

___________

MELLOY, Circuit Judge.

This is an appeal of a shareholder liability suit against Acceptance Insurance

Companies and some of its officers. The shareholder group appeals the district

court’s1

 orders granting a motion to dismiss and a motion for summary judgment as

to all of their claims.

The Appellants raise three major issues in this appeal. First, they argue that the

district court erred by granting the Appellees’ motion to dismiss their claims under

Sections 11 and 15 of the Securities Act. Second, the Appellants argue that the

district court erred by denying their motion to amend their complaint as to Section 11

claims. Third, the Appellants argue that the district court should not have granted the

motion for summary judgment on the Exchange Act Section 10(b) and SEC Rule 10b5 claims. We affirm.

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I.

The shareholders of Acceptance Insurance Companies, Inc. (“Acceptance”),

a Delaware corporation, directly sued Acceptance, AICI Capital Trust (“AICI”), and

the officers of Acceptance: Kenneth Coon, Georgia Mace, and John Nelson. AICI

was and is a wholly-owned subsidiary of Acceptance. The primary allegation of the

shareholders was that Acceptance failed to have adequate reserves in place prior to

1999 to account for increased claims stemming from a California Supreme Court

decision. 

Reserves, as reported by an insurance company, are estimates of its liabilities

and expenses that it will pay on claims already reported and claims that may exist, but

have not yet been reported. In the area of unreported claims, an insurer must engage

in some speculation and, as a result, could over- or under-estimate appropriate

reserves. A company is said to have inadequate reserves if it does not allocate

sufficient funds to offset a likely loss contingency scenario.

The officers of Acceptance reported the company’s reserves quarterly with

assistance from external accountants. In this case, Price Waterhouse Coopers

(“PWC”) reviewed the reserve estimates, and, after discussion with Acceptance, a

final figure was reported in each quarter in Acceptance’s public filings. Because the

reserve figures were estimates of future contingencies, Acceptance and PWC offered

a range of figures. From 1996 to 1999, PWC found that Acceptance’s reserve figures

met the requirements of Nebraska insurance law and were computed using generally

accepted accounting principles (“GAAP”). During the relevant time period,

Acceptance’s and PWC’s independent estimates were within five percent of each

other, and Acceptance’s numbers were both above and below PWC’s figures.

In 1995, the California Supreme Court, in Montrose Chem. Corp. of Cal.v.

Admiral Ins. Co., 913 P.2d 878 (1995), issued an opinion that was significant for

construction insurance claims. The decision applied a continuous injury trigger of

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coverage, broadening liability relative to previous law. Id. at 889-90. After the

decision, Acceptance crafted explicit exclusions into its policies to avoid Montroserelated claims. However, for the policies written before 1995, an increase in the

number of claims was anticipated due to the decision in Montrose.

In 1997, Nebraska amended its annual statement requirements to require

greater detail for loss contingencies that could affect reserves. As a result,

Acceptance added cautionary language alluding to the Montrose decision and its

effect on reserves. Such language did not exist for the previous public filings made

by Acceptance. In 1999, Acceptance made the decision to increase its reserve

estimates due to increased claims for incidents prior to 1995 in California related to

Montrose. Prior to Acceptance’s decision, three other insurance companies had

already begun reporting Montrose-specific reserves in their public filings.

In 2001, in another action against Acceptance, Magid v. Acceptance Ins. Co.,

2001 WL 1497177, *8 (Del. Ch. 2001), the Delaware Court of Chancery stated that

the effect of Montrose was significant and the company may have needed to make

timely adjustments to its reserves. The issue in Magid was more limited than the

present matter, and the Magid court did not render any specific findings that

Acceptance was under-reserved during the class period.

The district court granted a defense motion to dismiss one claim and a defense

motion for summary judgment as to all others. The shareholders have appealed.

II.

On appeal, the Appellants argue that the district court erred by dismissing the

shareholders’ suit under Section 11 of the Securities Act of 1933 on the grounds that

the complaint contained no factual allegations to support the claims described therein.

The Securities Act is primarily designed to ensure that investors receive information

concerning the issuance of securities. The Act prohibits misrepresentations and fraud

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in the sale of securities. Since the district court granted dismissal based upon a

motion to dismiss under Federal Rules of Civil Procedure 12(b)(6), we review the

issue de novo. Romine v. Acxiom Corp., 296 F.3d 701, 704 (8th Cir. 2002). 

There is liability under Section 11 if “any part of the registration statement,

when such part became effective, contained an untrue statement of material fact or

omitted to state a material fact required to be stated therein or necessary to make the

statements therein not misleading.” 15 U.S.C. § 77k(a). To establish a Section 11

claim, a plaintiff must show that he or she bought the security and that there was a

material misstatement or omission. Herman & Maclean v. Huddleston, 459 U.S. 375,

382 (1983). There is no scienter requirement for a Section 11 claim. In re

NationsMart Corp. Sec. Litig., 130 F.3d 309, 315 (8th Cir. 1997). Further, the

particularity requirements of Federal Rule of Civil Procedure 9(b) do not apply to

Section 11 claims. Id. at 314. 

A related issue that the parties and the district court addressed with the Section

11 claim was whether Acceptance followed proper accounting principles. Under 17

C.F.R. § 210.4-01(a)(1), financial statements to the SEC must be made in accordance

with GAAP. The Appellants allege that Acceptance did not adhere to Financial

Accounting Standard No. 5 (FAS-5) in accounting for its contingencies. To comply

with FAS-5, a loss contingency statement must include information available prior

to the issuance of the financial statement explaining that an asset had been impaired

or the amount of loss in the future can be reasonably estimated. The Appellants’

claim under Section 11 is that the Appellees’ registration statement misstated the

reserve holdings of the company because they did not take into account the Montrose

decision. A registration statement is a set of documents, including a prospectus, that

a company disseminates in conjunction with an issuance of securities.

The district court held that the Appellants’ Section 11 claim was insufficient

as a matter of law. Even under the liberal pleading requirements of Federal Rule of

Civil Procedure 8(a), the district court found that the Appellants had failed to state

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any facts to support their claim. Notably missing was any fact alleged in the

complaint that indicated Acceptance’s reserves were inadequate in light of the

Montrose decision.

Appellants argue that numerous statements made by the Appellees after the

registration statement was issued show that Acceptance’s reserves were inadequate

at the time of issuance. However, this type of retrospective analysis of awareness

cannot be the basis for a claim. See, e.g., Scibelli v. Roth, 2000 WL 122193, *3

(S.D.N.Y. 2000) (noting that it is “not a reasonable inference” to assume prior

knowledge based upon actual knowledge at a later date). Under both FAS-5 and

Section 11, information is required to be included only if it is available prior to the

issuance of a financial statement. The Appellants’ complaint alleges no such facts to

support prior knowledge by the Appellees. The Appellants are only able to cite

comments after the statement was issued. Even those alleged facts close in time to

the issuance of the statement only speak to the general importance of the Montrose

decision, not the failure to assess any loss contingency.

While the Appellees did not mention the Montrose decision specifically in their

filings, they did include more general cautionary language about the risk of judicial

findings on specialty-type insurance programs. They mentioned that court holdings

could have an adverse effect on reserves and subsequent losses could occur as a

result. The Appellants allege no facts to suggest that this general language was

inadequate to provide warning of Montrose-related claims. Further, Appellants do

not cite any legal authority to support the contention that specific mention of the

Montrose decision was required by law.

As a result, we conclude that there is no error with the district court’s finding

that plaintiffs asserted no facts, other than mere conclusions, to show that Acceptance

was under-reserved during the class period.

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III.

After discovery, the Appellants sought leave to amend their Section 11 claim.

The district court denied the Appellants’ motion to amend because the Appellants had

unduly delayed seeking amendment, the Appellants acted in bad faith during

discovery, and the amendment would be futile. Generally, we review denial of leave

to amend for abuse of discretion. Wheeler v. Missouri Highway & Transp. Comm’n,

348 F.3d 744, 753 (8th Cir. 2003). However, for the narrow issue of futility, we

review de novo. In re K-Tel Int’l, Inc. Sec. Litig., 300 F.3d 881, 899-900 (8th Cir.

2002).

In making its argument that the district court erred regarding the denial of leave

to amend, the Appellants largely repeat the same arguments they made in support of

their Section 11 claim. Given that there are no substantive differences in the facts

offered in the proposed amendment, we conclude that the amendment would be futile.

In the alternative, we find no error in the findings of delay and bad faith.

Findings of bad faith and undue delay can support a denial of leave to amend. United

States ex rel. Gaudineer, L.L.P. v. Iowa, 269 F.3d 932, 936 (8th Cir. 2001).

Appellants offer no reason to find the district court was in error except to argue that

the district court approved the relevant scheduling order. This, however, does not

address the larger issue of bad faith, and we cannot find any argument to support the

notion that the district court abused its discretion. As a result, we find no error by the

district court in denying leave to amend. 

IV.

The Appellants also argue that summary judgment was inappropriate because

a reasonable jury could have found that the individual officer defendants knowingly

or recklessly misled the shareholders in violation of Sections 10(b) and 20(a) of the

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Exchange Act, 15 U.S.C. §§ 78j(b) and 78t(a), and SEC Rule 10b-5, 17 C.F.R. §

240.10b-5.

Rule 10b-5 effectively tracks Section 10(b), so we discuss those claims in terms

of Rule 10b-5. Our analysis applies to both claims. Rule 10b-5 makes it unlawful to

“make any untrue statement of material fact or to omit to state a material fact

necessary in order to make the statements made, in light of the circumstances under

which they were made, not misleading” concerning a publicly traded company.

Although not specified in Rule 10b-5, scienter of intentional misbehavior or

recklessness is required. Florida St. Bd. of Admin. v. Green Tree Fin. Corp., 270

F.3d 645, 653 (8th Cir. 2001).

Because the Appellants’ 10(b) and 10b-5 claims rely on the same basic material

misstatements as described for the Section 11 claim, all of the arguments in the

previous section apply here as well. There are, however, other reasons why the

district court granted summary judgment for the defendants on the 10(b) and 10b-5

claims.

The district court found that the Appellants were unable to meet the scienter

requirements of the relevant sections. The Appellants correctly assert that, in general,

state of mind issues are to be decided by the jury. However, issues of scienter can be

resolved as part of a summary judgment for the defendant if there is no genuine issue

of material fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986). Further,

issues of scienter under 10(b) and 10b-5 are subject to the more stringent pleading

requirements of the Private Securities Litigation Reform Act (PSLRA). Under the

PSLRA, the plaintiff must, “with respect to each act or omission alleged to violate

this chapter, state with particularity facts giving rise to a strong inference that the

defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). 

The Appellants argue that the district court failed to view all facts in a light

most favorable to them on the scienter issue. The most significant piece of evidence

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which the Appellants argue was undervalued by the district court was a statement

recorded in notes by an employee, Wilkins, attributed to Mace that the “[p]ast

problem was probably pressure for earnings. Sounded like we committed a sin in the

past.” The statement, however, was found to be inadmissible hearsay by the district

court. Although the statement was a business record, the second level of hearsay,

attributing the statement to Mace, did not fit into an exception.

The Appellants argue that the statement was an admission by a party opponent

and/or falls under the general hearsay exception. However, the district court was well

within its discretion in finding that the statement was not an admission to the facts in

this case. The Appellants can only offer conjecture to connect the statement with the

present case, and that is not sufficient for this court to override the judgment of the

district court on this evidentiary issue.

The district court also found that the Appellants’ expert affidavits were

inadmissible on this issue. The standard of review for excluding expert testimony is

abuse of discretion. General Electric Co. v. Joiner, 522 U.S. 136, 141 (1997).

Applying Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993), the district

court screened the expert testimony for relevance and reliability. The district court

found that the testimony was unreliable because it was not supported by any

methodology and not particularly helpful to the court. Ultimately, the district court

felt the opinions were mere legal conclusions with no analytical reasoning or support.

The two experts took the shareholders’ statements as true and did not review

the record to see if the statements were supported. The opinions themselves were

more or less legal conclusions about the facts of the case as presented to the experts

by the shareholders. As a result, the expert opinions were merely opinions meant to

substitute the judgment of the district court. S. Pine Helicopters, Inc. v. Phoenix

Aviation Managers, Inc., 320 F.3d 838, 841 (8th Cir. 2003). When the expert

opinions are little more than legal conclusions, a district court should not be held to

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have abused its discretion by excluding such statements. United States v. Ingle, 157

F.3d 1147, 1152 (8th Cir. 1998). 

The other statements offered by the Appellants to prove scienter do not show

knowing falsity about the reserves. They do show concern about the Montrose

decision, but they do not weigh on the issue of a failure to properly account for

reserves. Without evidence of intentional falsity, the Appellants’ claim cannot

survive summary judgment.

For the above reasons, as well as those cited in Section II, the district court was

within its discretion when it granted the motion for summary judgment on the Section

10(b) and Rule 10b-5 claims.

V.

For the reasons stated above, we affirm the judgment of the district court.

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