UNITED STATES DISTRICT COURT 

EASTERN DISTRICT OF PENNSYLVANIA 

In re ACE LIMITED SECURITIES 

LITIGATION 

) 

) 

) 

) 

MDL No. 1675 

CLASS ACTION

PLAINTIFFS’ RESPONSE TO THE 

COURT’S OCTOBER 16, 2008 ORDER 

AND IN FURTHER SUPPORT OF THE 

OPPOSITION TO DEFENDANTS’ MOTION 

TO DISMISS THE CONSOLIDATED 

COMPLAINT FOR VIOLATIONS OF THE 

FEDERAL SECURITIES LAWS 

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TABLE OF CONTENTS 

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Question 1: Is the efficient market hypothesis always a reliable indicia of 

materiality? ..............................................................................................................1 

Question 2: Should the efficient market hypothesis be revisited in light of the 

PSLRA? ...................................................................................................................2 

Question 3: Has application of the efficient market hypothesis been questioned 

by any court or commentator? .................................................................................3 

Question 4: Can a court, at the motion to dismiss stage, assess the allegations of 

the financial impact of the alleged fraud against the company’s total 

financial picture?......................................................................................................3 

Question 5: If the amounts involved in the contingent commissions and bidrigging schemes are insignificant, are they material?..............................................5 

Question 6: What is the economic loss if the stock price rebounded within six 

weeks?......................................................................................................................6 

Question 7: How is the $500,000 advance to Willis fraudulent? .......................................8

Question 8: Is the loss causation element satisfied when there is a drop in stock 

price on the basis of allegations of wrongdoing that soon proved 

insignificant or without foundation?........................................................................9 

Question 9: Has the Tellabs decision affected the application or the viability of 

the efficient market theory? ...................................................................................11 

Question 10: What facts, if any, can the plaintiffs add in an amended complaint 

relating to the elements of scienter, loss causation and economic GAAP 

violations?..............................................................................................................11 

Question 11: Can a court consider pre- and/or post-class period 

admissions/proofs about the schemes? ..................................................................13 

Question 12: Can the class be limited to those who purchased and sold shares 

during the class period? .........................................................................................15 

Question 13: Does 15 U.S.C. §78u-4(e), which governs limitations on damages, 

affect the maximum amount of damages the plaintiffs can recover? ....................15 

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TABLE OF AUTHORITIES 

Page 

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CASES 

Aviva Partners LLC v. Exide Techs., 

No. 05-3098 (MLC), 2007 U.S. Dist. LEXIS 17347 

(D.N.J. Mar. 13, 2007).......................................................................................................14 

Basic Inc. v. Levinson, 

485 U.S. 224 (1988)...............................................................................................1, 2, 3, 11 

Berckeley Inv. Group, Ltd. v. Colkitt, 

455 F.3d 195 (3d Cir. 2006).................................................................................................9 

Dura Pharms., Inc. v. Broudo, 

544 U.S. 336 (2005).......................................................................................................9, 12 

Galati v. Commerce Bancorp, Inc., 

No. 04-3252, 2005 U.S. Dist. LEXIS 26851 

(D.N.J. Nov. 7, 2005)...........................................................................................................6 

Glover v. DeLuca, et al., 

No. 2:03-CV-0288, 2006 U.S. Dist. LEXIS 76093 

(W.D. Pa. Sept. 29, 2006) ..................................................................................................14 

Greebel v. FTP Software, Inc., 

194 F.3d 185 (1st Cir. 1999)..............................................................................................13 

GSC Partners v. Washington, 

368 F.3d 228 (3d Cir. 2004)...............................................................................................12 

In re Burlington Coat Factory Sec. Litig., 

114 F.3d 1410 (3d Cir. 1997).......................................................................................1, 2, 4 

In re Comverse Tech., Inc., 

No. 06 CV 1825 NGG RER, 2006 WL 2792757 

(E.D.N.Y. Sept. 27, 2006)..................................................................................................10 

In re DVI Inc. Sec. Litig., 

249 F.R.D. 196 (E.D. Pa. 2008).........................................................................................13 

In re Merck & Co., Inc. Sec. Derivative & ERISA Litig., 

No. 07-2431, 2008 U.S. App. LEXIS 19230 

(3d Cir. Sept. 9, 2008)..........................................................................................................3 

In re Merck & Co. Sec. Litig., 

432 F.3d 261 (3d Cir. 2005).................................................................................3, 5, 13, 14 

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In re Res. Am. Sec. Litig., 

202 F.R.D. 177 (E.D. Pa. 2001)...........................................................................................2 

In re Scholastic Corp. Sec. Litig., 

252 F.3d 63 (2d Cir. 2001).................................................................................................14 

In re Suprema Specialties, Inc. Sec. Litig., 

438 F.3d 256 (3d Cir. 2006)...............................................................................................12 

In re Westinghouse Sec. Litig., 

90 F.3d 696 (3d Cir. 1996)...............................................................................................1, 3 

Marsden v. Select Med. Corp., 

No. 04-4020, 2007 WL 1725204 

(E.D. Pa. June 12, 2007) ......................................................................................................9 

Nathenson v. Zonagen, Inc., 

267 F.3d 400 (5th Cir. 2001) .............................................................................................13 

Novak v. Kasaks, 

216 F.3d 300 (2d Cir. 2000)...............................................................................................14 

Oran v. Stafford, 

226 F.3d 275 (3d Cir. 2000).................................................................................1, 3, 10, 13 

Peil v. Speiser, 

806 F.2d 1154 (3d Cir. 1986)...............................................................................................2 

Pinker v. Roche Holdings, Ltd., 

292 F.3d 361 (3d Cir. 2002).................................................................................................3 

Register v. PNC Fin. Servs. Group, Inc., 

477 F.3d 56 (3d Cir. 2007).................................................................................................10 

RMED Int’l, Inc. v. Sloan’s Supermarkets, Inc., 

No. 94 Civ. 5587 (PKL) (RLE), 2002 U.S. Dist. LEXIS 23829 

(S.D.N.Y. Dec. 11, 2002)...................................................................................................13 

Roeder v. Alpha Indus., 

814 F.2d 22 (1st Cir. 1987)..............................................................................................6, 8 

Semerenko v. Cendant Corp., 

223 F.3d 165 (3d Cir. 2000).................................................................................................4 

Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 

__ U.S. __, 128 S. Ct. 761 (2008)........................................................................................2 

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Tellabs, Inc. v. Makor Issues & Rights, Ltd., 

__ U.S. __, 127 S. Ct. 2499 (2007)........................................................................10, 11, 12 

TSC Indus. v. Northway, Inc., 

426 U.S. 438 (1976).........................................................................................................1, 4 

STATUTES, RULES AND REGULATIONS 

15 U.S.C. 

§78u-4(e)....................................................................................................................6, 7, 15 

Federal Rules of Civil Procedure 

Rule 8(a)(2)..........................................................................................................................9 

Rule 9(b) ......................................................................................................................11, 13 

Rule 12(b)(6)......................................................................................................................10 

Federal Rules of Evidence 

Rule 201.............................................................................................................................10 

17 C.F.R. 

§240.10b-5 ...........................................................................................................................6 

Request for Comments, Subcommittee Reports of the SEC Advisory 

Committee on Improvements to Financial Reporting 

73 Fed. Reg. 29808 (May 22, 2008) ....................................................................................4 

SECONDARY AUTHORITIES 

Nathaniel Carden, Comment: Implications of the Private Securities Litigation Reform 

Act of 1995 for Judicial Presumptions of Market Efficiency 

65 U. Chi. L. Rev. 879 (1998) .............................................................................................3 

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Lead Plaintiffs, the Sheet Metal Workers’ National Pension Fund and Alaska Ironworkers 

Pension Trust (“Plaintiffs”), on behalf of ACE Limited investors, respectfully submit this response 

to the Court’s October 16, 2008 Order and in further support of the Opposition to Defendants’ 

Motion to Dismiss the Consolidated Complaint for Violations of the Federal Securities Laws.1

Question 1: Is the efficient market hypothesis always a reliable indicia of materiality? 

Yes, investor reaction to the disclosure of information is a reliable indicia of materiality. In 

In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1425 (3d Cir. 1997), the Third Circuit set a 

standard for measuring the materiality of statements or omissions in the context of an efficient 

securities market.2 In an efficient market, such as the New York Stock Exchange on which ACE 

traded, “information important to reasonable investors . . . is immediately incorporated into stock 

prices.” Burlington, 114 F.3d at 1425. As a result, “when a stock is traded in an efficient market, 

the materiality of disclosed information may be measured post hoc by looking to the movement, in 

the period immediately following disclosure, of the price of the firm’s stock.” Oran v. Stafford, 226 

F.3d 275, 282 (3d Cir. 2000). Conversely, “to the extent that information is not important to 

reasonable investors, it follows that its release will have negligible effect on the stock price.” 

Burlington, 114 F. 3d at 1425. 

In this case, ACE’s stock price dropped $3.78 per share on October 14, 2004 and $7.05 per 

share over four trading days – an 18% decline on extremely high trading volume – in response to 

 

1

 Defendants are ACE Limited (“ACE” or the “Company”) and the Company’s senior officers 

who directed and approved the fraud, Evan G. Greenberg, Brian Duperreault and Philip V. Bancroft 

2

 A fact or omission is material if there is “‘a substantial likelihood that the disclosure of the 

omitted fact would have been viewed by the reasonable investor as having significantly altered the 

“total mix” of information made available.’” Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) 

(adopting standard set forth in TSC Indus. v. Northway, Inc., 426 U.S. 438 (1976)). See also In re 

Westinghouse Sec. Litig., 90 F.3d 696, 714 (3d Cir. 1996) (material information is information that 

would be important to a reasonable investor in making her investment decision). Unless otherwise 

indicated, all internal citations are omitted. 

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news about ACE’s “‘sordid business practices’” involving contingent commission and bid-rigging 

schemes. See Consolidated Complaint, ¶¶67-68, 104-105 (Docket No. 5). The substantial reduction 

in ACE’s stock price immediately following the disclosures about the contingent commission and 

bid-rigging schemes evidences the materiality of those schemes and Defendants’ false statements 

and omissions about ACE’s business practices and results. 

Question 2: Should the efficient market hypothesis be revisited in light of the PSLRA? 

No, the validity of the efficient market hypothesis and the Supreme Court’s holding in Basic

were not impugned by the Private Securities Litigation Reform Act of 1995 (“PSLRA”) or courts 

interpreting the PSLRA. The efficient market hypothesis, as adopted by the Supreme Court in Basic

and by the Third Circuit in Peil v. Speiser, 806 F.2d 1154, 1161 (3d Cir. 1986), simply holds that 

“publicly available information is reflected in [the] market price” of a security. Basic, 485 U.S. at 

247; see also Burlington, 114 F.3d at 1425 (an efficient market is one in which “information 

important to reasonable investors (in effect, the market . . .) is immediately incorporated into stock

prices”).3

Nothing in the PSLRA invalidated or questioned the use of the efficient market hypothesis, 

or the related fraud-on-the- market presumption, in securities fraud class actions. Indeed, just this

year the Supreme Court, in Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., __ U.S. __, 128 

S. Ct. 761 (2008), reconfirmed in a securities fraud class action that “reliance is presumed when the 

statements at issue become public. The public information is reflected in the market price of the 

 

3

 There are three versions of the efficient market hypothesis. The strong form of the 

hypothesis states that stock prices reflect all public and private information. The semi-strong form 

of the efficient market hypothesis holds that stock prices reflect all publicly available information. 

The weak form of the hypothesis states that historical price data is fully reflected in stock prices. For 

purposes of securities fraud claims, the Supreme Court in Basic and the Third Circuit have adopted 

the semi-strong form of market efficiency. See In re Res. Am. Sec. Litig., 202 F.R.D. 177, 189-90 

(E.D. Pa. 2001). 

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security.” Id. at 769 (citing Basic, 485 U.S. at 247). Following the adoption of the PSLRA, the 

Third Circuit has also repeatedly endorsed the efficient market hypothesis. See, e.g., Oran, 226 F.3d 

at 282; In re Merck & Co., Inc. Sec. Derivative & ERISA Litig., No. 07-2431, 2008 U.S. App. LEXIS 

19230, at *45 (3d Cir. Sept. 9, 2008); Pinker v. Roche Holdings, Ltd., 292 F.3d 361, 373-74 (3d Cir. 

2002). As the Third Circuit remarked in its post-PSLRA decision in Merck, “[o]ur Court . . . has one 

of the ‘clearest commitments’ to the efficient market hypothesis.” In re Merck & Co. Sec. Litig., 432 

F.3d 261, 269 (3d Cir. 2005). 

Question 3: Has application of the efficient market hypothesis been questioned by any 

court or commentator? 

Yes, Plaintiffs’ counsel are aware that certain attorneys for corporate defendants and 

associated commentators have, both before and after passage of the PSLRA, occasionally questioned 

the efficient market hypothesis. See, e.g., Nathaniel Carden, Comment: Implications of the Private 

Securities Litigation Reform Act of 1995 for Judicial Presumptions of Market Efficiency, 65 U. Chi. 

L. Rev. 879, 898 (1998) (arguing that “courts should be reluctant to use the [efficient market 

hypothesis] as the foundation for analyzing securities actions, because they lack the institutional 

competence to make such judgments”). As discussed in response to Question 2, however, in 

enacting the PSLRA Congress chose not to invalidate the presumption of fraud-on-the-market and 

the Supreme Court, as well as the Third Circuit and every other Circuit Court of Appeal, has 

continued to rely on the efficient market hypothesis in securities fraud actions. 

Question 4: Can a court, at the motion to dismiss stage, assess the allegations of the 

financial impact of the alleged fraud against the company’s total financial picture? 

Historically, one of many means to assess the materiality of an alleged misstatement or 

omission was whether the omitted or misstated information would impact 5% of net income. This 

purported rule-of-thumb has, however, been rejected by both courts and accounting guidelines. See, 

e.g., Westinghouse, 90 F.3d at 714 n.14 (rejecting “defendants’ similarly categorical assertion that 

materiality must be quantified at a specified percentage of income or assets”); Securities and 

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Exchange Staff Accounting Bulletin No. 99 (“SAB 99”) on materiality (recognizing that a 5% rule 

“cannot appropriately be used as a substitute for a full analysis of all relevant considerations,” 

confirming that “[q]ualitative factors may cause misstatements of quantitatively small amounts to be 

material” and adopting the Supreme Court’s holding that “[a] matter is “material” if there is a 

substantial likelihood that a reasonable person would consider it important”); see also Request for 

Comments, Subcommittee Reports of the SEC Advisory Committee on Improvements to Financial 

Reporting, 73 Fed. Reg. 29808, 29819-20 (May 22, 2008) (noting that a bright-line 5% rule is “not 

consistent with the total mix standard established by the Supreme Court”). 

Rather than establishing any test or threshold of total income, the Supreme Court and Third 

Circuit recognize that materiality is a mixed question of law and fact and, accordingly, is generally 

left to the trier of fact. TSC Indus., 426 U.S. at 450; Semerenko v. Cendant Corp., 223 F.3d 165, 178 

(3d Cir. 2000) (“[t]he district court should decide the issue of materiality as a matter of law only if 

the alleged misrepresentations are so clearly and obviously unimportant that reasonable minds could 

not differ in their answers to the question”). As discussed above, in Burlington the Third Circuit 

fashioned a means of determining those instances where information is immaterial that does not rely 

on estimating or assessing the potential financial impact of an alleged fraud: “to the extent that 

information is not important to reasonable investors, it follows that its release will have a negligible 

effect on the stock price.” 114 F.3d at 1425. 

In this case, ACE’s stock price plummeted $7.05 per share following the disclosure of 

Defendants’ contingent commission and bid-rigging schemes, demonstrating that the information 

was critically important to investors. Consolidated Complaint, ¶¶3, 68. On this basis alone, and 

regardless of what percentage of ACE’s net income was impacted by the schemes, Plaintiffs have 

adequately alleged that the Defendants’ misstatements and omissions were material. Moreover, 

Plaintiffs have identified that ACE paid over $60 million in contingent commission kickbacks in 

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2003 alone, which not only guaranteed new and renewed insurance policies, but, with the bid-rigging 

schemes, inflated underwriting rates as well. Thus, Defendants’ undisclosed schemes touched on the 

heart of ACE’s business practices.4 Consolidated Complaint, ¶¶24-35; see also Opposition to 

Motion to Dismiss at 19-23, 26. Defendants themselves have conceded that the contingent 

commission and bid-rigging schemes were material, acknowledging in ACE’s post-Class Period 

SEC filing that the end of the schemes “‘could potentially impact ACE’s future premium volume.’” 

Opposition to Motion to Dismiss at 21-22 (citing Ex. K to Defendants’ Motion to Dismiss). 

Question 5: If the amounts involved in the contingent commissions and bid-rigging 

schemes are insignificant, are they material? 

As discussed in response to Question 4, materiality is measured by whether there is a 

substantial likelihood that a reasonable person would consider the misstated or omitted information 

important. In this case, investors (along with state Attorneys General, analysts and media 

commentators) plainly expressed that the contingent commission and bid-rigging schemes were 

material to them when Defendants’ schemes were disclosed in October 2004. Consolidated 

Complaint, ¶¶67-72. 

Additionally, the contingent commission and bid-rigging schemes were far from 

insignificant. These were illicit and illegal schemes that were central to ACE’s business practices 

and designed to generate both more and higher premiums. Consolidated Complaint, ¶¶24-35. 

Indeed, ACE paid over $60 million in kickbacks to insurance brokers in just one year to guarantee 

the flow of business. For example, Plaintiffs have identified a $50,000 contingent commission 

kickback to Marsh that allowed ACE to secure an $80 million contract with the State of Connecticut. 

Consolidated Complaint, ¶27. Internally, senior ACE executives acknowledged that there were 

 

4

 At the motion to dismiss stage, the Court “must accept as true all facts alleged in the 

complaint and view them in the light most favorable to” Plaintiffs. Merck, 432 F.3d at 266. 

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“‘concerns about potential legal issues for ACE’” and externally the Connecticut Attorney General 

later described “‘the effect of these kickbacks is to steer contracts, corrupt competitive bidding, 

inflate costs and deceive customers.’” Consolidated Complaint, ¶¶32, 72. As the First Circuit held 

in Roeder v. Alpha Indus., 814 F.2d 22, 26 (1st Cir. 1987), even “[i]llegal payments that are so small 

as to be relatively insignificant to the corporation’s bottom line can still have vast economic 

implications. . . . Disclosure of the illegal conduct in obtaining [contracts], therefore, could have had 

a very significant impact on the “‘“total mix” of information made available’” to . . . investors.” See 

also Galati v. Commerce Bancorp, Inc., No. 04-3252, 2005 U.S. Dist. LEXIS 26851, at *17 (D.N.J. 

Nov. 7, 2005), aff’d, 220 Fed. Appx. 97 (3d Cir. 2007) (“Information about a corporation’s illegal 

conduct is inherently material for purposes of Rule 10b-5.”). 

Question 6: What is the economic loss if the stock price rebounded within six weeks? 

The economic loss, or damages, suffered by ACE investors is measured at the time the 

artificial inflation is removed from the stock and adjusted in accordance with the PSLRA’s provision 

for limitation on damages. 15 U.S.C. §78u-4(e). In this case, assuming that all of ACE’s stock price

decline during the period October 14-19, 2004 was related to the fraud, Class Period purchasers 

suffered approximately $7.05 per share of economic loss as a result of the artificial inflation caused

by Defendants’ false statements and omissions. See Consolidated Complaint, ¶¶3, 104 and 

Opposition to Motion to Dismiss at 42-47. The PSLRA’s provision for limitation on damages works 

as follows: 

For investors who held the subject security for 90 or more days after the end of the 

class period, “the award of damages to the plaintiff shall not exceed the difference 

between the [purchase price paid] by the plaintiff for the subject security and the 

mean trading price of that security during the 90-day period beginning on the date on 

which the information correcting the misstatement or omission that is the basis for 

the action is disseminated to the market.” 

For investors who sold the subject security during the 90-day period following the 

end of the class period, “the plaintiff’s damages shall not exceed the difference 

between the [purchase price paid] by the plaintiff for the security and the mean 

trading price of the security during the period beginning immediately after 

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dissemination of information correcting the misstatement or omission and ending on 

the date on which the plaintiff sells or repurchases the security.” 

15 U.S.C. §78u-4(e). 

As a result of the increase in ACE’s stock price during the 90-day period following the 

revelation of Defendants’ contingent commission and bid-rigging schemes, the PSLRA would limit 

damages (economic loss) for certain investors. The following hypotheticals, using ACE’s actual 

stock price for the relevant dates, demonstrate both the economic loss suffered by investors, even 

when ACE’s stock price “rebounds,” and the impact of the PSLRA damages provision: 

Hypothetical 1 (sale immediately after the Class Period): The Alaska 

Ironworkers Pension Trust (“Alaska Ironworkers”) purchased 8,273 shares of ACE 

stock on February 13, 2004 for $44.29/share and sold those shares on October 22, 

2004, promptly after the end of the Class Period, for $34.50/share. The mean trading 

price for the period October 14-22, 2004 was $32.11 per share. The Alaska 

Ironworkers’ economic loss would be the lesser of $7.05 per share or the purchase 

price minus the mean trading price for October 14-22, 2004 ($44.29-$32.11= 

$12.18/share). Accordingly, the Alaska Ironworkers suffered an economic loss of 

$58,325 on its February 13, 2004 purchase of ACE securities (8,273 shares x 

$7.05/share); 

Hypothetical 2 (sale during the 90-day period following the end of the Class 

Period): An individual investor purchased 10,000 shares of ACE stock on March 8, 

2004 for $44.80/share and sold those shares on December 16, 2004 for $38.65/share. 

The mean trading price for the period October 14-December 16, 2004 was $38.79 per 

share. The individual investor’s economic loss would be the lesser of $7.05 per share 

or the purchase price minus the mean trading price for October 14-December 16, 

2004 ($44.80-$38.79= $6.01/share). Accordingly, the individual investor suffered an 

economic loss of $60,100 on his March 8, 2004 purchase of ACE securities (10,000 

shares x $6.01/share). 

Hypothetical 3 (shares held through the 90-day period following the end of 

the Class Period): The Sheet Metal Workers’ National Pension Fund (“Sheet Metal 

Workers”) purchased 23,800 shares of ACE stock on February 13, 2004 for 

$45.09/share and held those shares for more than 90 days after the end of the Class 

Period. The mean trading price for the 90-day period after the end of the Class 

Period (October 14, 2004-January 12, 2005) was $39.73 per share. The Sheet Metal 

Workers’ economic loss would be the lesser of $7.05 per share or the purchase price 

minus the mean trading price for the 90-day period after the end of the Class Period 

($45.09-$39.73= $5.36/share). Accordingly, the Sheet Metal Workers suffered an 

economic loss of $127,568 on its February 13, 2004 purchase of ACE securities 

(23,800 shares x $5.36/share). 

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Notably, the mere fact that a stock price increases, or rebounds, during the 90-day period 

after the end of the Class Period does not mean that the actual damages per share as a result of the 

fraudulent conduct is reduced, or that investors overreacted to the disclosure of the fraud. Just as the 

continued decline of a company’s stock price in the months after a corrective disclosure may be 

unrelated to an alleged fraud, so to could any increase in a company’s stock price be driven by 

factors unrelated to a corrective disclosure. Indeed, in this case, while ACE’s stock price did 

increase approximately 15% in the 90 days after the end of the Class Period, during the same period 

the S&P 500 also increased, by nearly 10%, in value. Obviously, the upward movement in the S&P 

500 had nothing to do with any purported “overreaction” to the disclosure of ACE’s contingent 

commission and bid-rigging schemes and there is no basis to assume that ACE’s rising stock price 

during this period did either. 

Question 7: How is the $500,000 advance to Willis fraudulent? 

Plaintiffs allege that Defendants engaged in contingent commission and bid-rigging schemes 

with insurance brokers to ensure that those brokers funneled increased business, and at higher 

premiums, to ACE. As part of these schemes, ACE paid contingent commission kickbacks to 

brokers, such as Willis. The allegations regarding the advance payment of a $500,000 kickback to 

Willis in December 2003 are a specific example of Defendants’ undisclosed business practices and 

reliance on kickbacks to ensure new and continued business. Consolidated Complaint, ¶28 (in 

exchange for the $500,000 kickback, ACE was promised “‘more opportunity’” and Willis’s “‘focus 

on writing January 1st [2004] business’”). 

Standing alone, the Willis kickback evidences undisclosed, illegal conduct relied upon by 

Defendants to boost ACE’s business and financial results. See Roeder, 814 F.2d at 26 (even 

relatively insignificant illegal payments “can still have vast economic implications”). More 

importantly, the Willis kickback is just one example – representing just a fraction of the more than 

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$60 million in kickbacks ACE made in 2003 alone – of a pervasive business practice that Defendants 

engaged in at ACE. Defendants’ failure to disclose these illegal activities and sordid business 

practices is what rendered their statements false and misleading under the federal securities laws. 

Question 8: Is the loss causation element satisfied when there is a drop in stock price on 

the basis of allegations of wrongdoing that soon proved insignificant or without 

foundation? 

As set forth by the Supreme Court in Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 346-47 

(2005), in order to plead the loss causation element of a securities fraud claim, Plaintiffs are only 

required to give a “‘short and plain statement’” in accordance with Fed. R. Civ. P. 8(a)(2) that 

provides Defendants with “‘fair notice’” of the alleged loss. See also Marsden v. Select Med. Corp., 

No. 04-4020, 2007 WL 1725204, at *2 (E.D. Pa. June 12, 2007) (Dura does not require a securities 

plaintiff to plead loss causation with particularity.). The Supreme Court held in Dura that a plaintiff 

need only “provide a defendant with some indication of the loss and the causal connection that the 

plaintiff has in mind.” Dura, 544 U.S. at 347. As stated by the Third Circuit, a plaintiff must allege 

that “the drop in the value of a security is related to the alleged misrepresentation.” Berckeley Inv. 

Group, Ltd. v. Colkitt, 455 F.3d 195, 223 (3d Cir. 2006). Plaintiffs’ allegations easily meet these 

standards, regardless of whether Defendants contend the allegations of wrongdoing proved 

insignificant or without foundation. See Consolidated Complaint, ¶¶100-105; Opposition to Motion 

to Dismiss at 42-47. 

Whether or not “the basis of allegations of wrongdoing . . . proved insignificant or without 

foundation” is, inherently, a factual question not properly decided on a motion to dismiss and, in any

event, related to the elements of falsity and materiality. As an initial matter, the contingent 

commission and bid-rigging schemes have been admitted by Defendants (i.e., Defendants do not 

deny the basis of the allegations of wrongdoing) and were certainly significant to ACE’s business 

(e.g., Defendants paid more than $60 million in contingent commission kickbacks in 2003 alone and, 

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according to CBS Marketwatch, engaged in “‘sordid business practices involving payoffs and rigged 

bids.’” Consolidated Complaint, ¶67). Far from being insignificant or without foundation, following 

the end of the Class Period ACE cancelled its contingent commission and bid-rigging schemes and 

settled suits brought by various Attorneys General for more than $93 million. See Exhibit A 

attached hereto.5

Even absent the factually specific allegations here establishing the significance of ACE’s 

contingent commission and bid-rigging schemes, any argument that the loss suffered by Plaintiffs 

was unrelated to Defendants’ fraud, or that investors’ concerns about the fraud “soon proved to be 

insignificant” is a factual determination that is not a proper basis for dismissal under Fed. R. Civ. 

P.12(b)(6). Tellabs, Inc. v. Makor Issues & Rights, Ltd., __ U.S. __, 127 S. Ct. 2499, 2509 (2007) 

(“courts must, as with any motion to dismiss for failure to plead a claim on which relief can be 

granted, accept all factual allegations in the complaint as true”); Register v. PNC Fin. Servs. Group, 

Inc., 477 F.3d 56, 61 (3d Cir. 2007) (on a motion to dismiss, “‘[t]he issue is not whether a plaintiff 

will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims’”); 

see also In re Comverse Tech., Inc., No. 06 CV 1825 NGG RER, 2006 WL 2792757, at *3 

(E.D.N.Y. Sept. 27, 2006) (“[A] court must conduct a loss causation analysis based solely on the 

allegations in the complaint.”). 

Hypothetically, assuming there is a Class Period-ending disclosure (which resulted in a 

significant stock price decline) that a Company falsely reported earnings which soon turned out to be 

incorrect or insignificant, an investor’s suit would be dismissed for failure to plead the falsity or 

materiality of any misstatement, not for failure to plead loss causation. If, in fact, there was no basis 

 

5

 In accordance with Fed. R. Evid. 201, the Court can take judicial notice of ACE’s SEC filing 

attached as Exhibit A (relevant portions of ACE’s annual report on Form 10-K for 2007) for the 

purpose of determining what is stated in the documents (but, not to prove the truth of their contents). 

Oran, 226 F.3d at 289. 

Case 2:05-md-01675-TJS Document 29 Filed 10/31/2008 Page 15 of 24
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for the claim that earnings were falsely reported, the investor would be unable to plead that the 

company’s financial statements were materially false or misleading in accordance with Fed. R. Civ. 

P.9(b) and the PSLRA. Indeed, this would be true whether or not the company’s stock price 

recovered after it was determined that the Class Period-ending disclosure was incorrect or 

insignificant. In this case, however, the October 2004 disclosures were not incorrect, have not been 

withdrawn or proven false and, as alleged by Plaintiffs, uncovered a highly material aspect of ACE’s 

business. 

Question 9: Has the Tellabs decision affected the application or the viability of the efficient 

market theory? 

No. The Supreme Court’s decision in Tellabs is limited to the standards for pleading scienter 

under the PSLRA.6 The Supreme Court did not mention or discuss the efficient market hypothesis 

or in any way alter the Court’s prior holding in Basic that there is a presumption that “publicly 

available information is reflected in [the] market price” of a security. Basic, 485 U.S. at 247. 

Question 10: What facts, if any, can the plaintiffs add in an amended complaint relating to 

the elements of scienter, loss causation and economic GAAP violations? 

Plaintiffs maintain that the Consolidated Complaint satisfies the pleading requirements of 

Fed. R. Civ. P. 9(b) and the PSLRA and that no additional facts are necessary to meet those pleading 

requirements. Specifically, with regard to scienter, given that Defendants do not deny that they were

aware of and approved the contingent commission and bid-rigging schemes, Plaintiffs have provided 

 

6

 In Tellabs, the Supreme Court held that in determining whether a plaintiff has adequately 

alleged scienter, “courts must consider the complaint in its entirety . . . . The inquiry . . . is whether 

all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any 

individual allegation, scrutinized in isolation, meets that standard” (emphasis added and in original). 

See also Tellabs, 127 S. Ct. at 2509, 2511 (reiterating that “the court’s job is not to scrutinize each 

allegation in isolation but to assess all the allegations holistically”). A strong inference of scienter 

arises if, “[w]hen the allegations are accepted as true and taken collectively,” a reasonable person 

would “deem the inference of scienter at least as strong as any opposing inference[.]” Id. “The 

inference that the defendant acted with scienter need not be irrefutable, i.e., of the ‘smoking gun’ 

genre, or even the ‘most plausible of competing inferences.’” Id. at 2510. 

Case 2:05-md-01675-TJS Document 29 Filed 10/31/2008 Page 16 of 24
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Defendants’ knowledge of the undisclosed business practices and accounting manipulations at issue. 

See Consolidated Complaint, ¶¶10, 13, 16, 27-29, 32-34, 40, 48, 56, 64; Opposition to Motion to 

Dismiss at 35-38. See GSC Partners v. Washington, 368 F.3d 228, 239 (3d Cir. 2004) (“It is 

certainly true that ‘in a non-disclosure situation, any required element of scienter is satisfied 

where . . . the defendant had actual knowledge of the material information.’”). Plaintiffs have also 

provided specific facts about the concrete benefits Defendants derived from their fraudulent conduct 

(e.g., $48 million in incentive compensation, boosting ACE’s credit rating and staving off debt 

covenants and completing a $500 million offering). See Consolidated Complaint, ¶¶79-88; 

Opposition to Motion to Dismiss at 39-42. These facts demonstrate that Defendants “had both 

motive and opportunity to commit fraud.” In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 

276 (3d Cir. 2006). As the Supreme Court held in Tellabs, a plaintiff’s allegations need only be 

“cogent and at least as compelling as any opposing inference of nonfraudulent intent.” 127 S. Ct. at 

2505. Plaintiffs’ allegations here are cogent and compelling and Plaintiffs are unaware of any 

additional facts that would significantly bolster those allegations. To the extent, however, that there 

is any specific information that the Court believes is lacking from the scienter allegations, Plaintiffs 

would be prepared to address those concerns. 

With regard to loss causation, as discussed above in response to Question 8, Plaintiffs 

maintain that they have easily exceeded the Supreme Court’s mandate in Dura and provided 

Defendants with far more than the requisite “indication of the loss and causal connection that the 

plaintiff has in mind.” 544 U.S. at 347. See Consolidated Complaint, ¶¶100-105. No more is 

needed to adequately plead loss causation. To the extent the Court believes that additional facts 

Case 2:05-md-01675-TJS Document 29 Filed 10/31/2008 Page 17 of 24
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regarding market efficiency (e.g., ACE’s weekly trading volume, institutional ownership or analyst 

coverage) must be pled, Plaintiffs can and are prepared to do so.7

With regard to violations of Generally Accepted Accounting Principles (“GAAP”), Plaintiffs 

again maintain that they have made their allegations with the specificity required by Fed. R. Civ. P. 

9(b) and the PSLRA. Plaintiffs have alleged which of ACE’s financial statements were false and 

misleading, identified Defendants’ specific violations of GAAP and quantified the impact of those 

violations. Consolidated Complaint, ¶¶90-99; Opposition to Motion to Dismiss at 31-34. To the 

extent, however, that there is any specific information that the Court believes is lacking from the 

allegations regarding Defendants’ GAAP violations, Plaintiffs would be prepared to address those 

concerns. 

Question 11: Can a court consider pre- and/or post-class period admissions/proofs about 

the schemes? 

Yes. In Merck, 432 F.3d at 271-72, the Third Circuit expressly held that on a motion to 

dismiss, a court can consider pre- and post-class period information in evaluating a plaintiff’s 

scienter allegations.8

 Specifically, the Third Circuit rejected the district court’s finding that allegedly 

false statements were not actionable because the allegations supporting a strong inference of scienter

 

7

 Plaintiffs have already pled that ACE traded on the New York Stock Exchange and traded in 

an efficient market during the Class Period. Consolidated Complaint, ¶7. See In re DVI Inc. Sec. 

Litig., 249 F.R.D. 196, 208 (E.D. Pa. 2008) (“Courts have routinely held that securities traded on the 

NYSE . . . trade in an efficient market.”) (citing Oran, 226 F.3d at 282 (describing the NYSE as 

“open and developed [where] the price of a company’s stock is determined by all available material 

information regarding the company and its business”)). 

8

 Courts routinely find that pre- or post-class period information is relevant in assessing 

scienter. See, e.g., Greebel v. FTP Software, Inc., 194 F.3d 185, 202 (1st Cir. 1999) (“evidence of 

past practice may indeed be probative of present practice”); Nathenson v. Zonagen, Inc., 267 F.3d 

400, 425 (5th Cir. 2001) (defendant’s post-class period concession amount to “special 

circumstances” supporting scienter); RMED Int’l, Inc. v. Sloan’s Supermarkets, Inc., No. 94 Civ. 

5587 (PKL) (RLE), 2002 U.S. Dist. LEXIS 23829, at *6-*7 (S.D.N.Y. Dec. 11, 2002) (“simply 

stating that materiality and scienter are determined based on the facts at the time of the alleged 

misstatement does not mean that later occurring evidence is irrelevant”). 

Case 2:05-md-01675-TJS Document 29 Filed 10/31/2008 Page 18 of 24
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were based upon information from outside the class period. Merck, 432 F.3d at 271. The Court 

adopted the reasoning of two cases from the Second Circuit, Novak v. Kasaks, 216 F.3d 300 (2d Cir. 

2000) and In re Scholastic Corp. Sec. Litig., 252 F.3d 63 (2d Cir. 2001). In Novak, the Second 

Circuit rejected the district court’s disregard of information from outside the class period and found

that inventory write-offs taken six months after the class period supported the inference that similar

inventory problems existed during the class period as alleged by the plaintiff. 216 F.3d at 313. In 

Scholastic, the Second Circuit reasoned that allegations of what a defendant knew prior to the class 

period were relevant to infer what defendant’s knowledge was at the beginning of the class period. 

252 F.3d at 72. Applying the reasoning from those cases, the Merck court held that the district court 

erred in disregarding pre-class period data relevant to the defendant’s scienter. 432 F.3d at 272. 

District courts within the Third Circuit have followed Merck and utilized both pre- and postclass period information in evaluating the sufficiency of a plaintiff’s allegations. See, e.g., Aviva 

Partners LLC v. Exide Techs., No. 05-3098 (MLC), 2007 U.S. Dist. LEXIS 17347, at *51-*55 

(D.N.J. Mar. 13, 2007) (citing Merck and finding that both pre- and post-class period information 

contributed to a strong inference of scienter); Glover v. DeLuca, et al., No. 2:03-CV-0288, 2006 U.S. 

Dist. LEXIS 76093, at *17-*19 (W.D. Pa. Sept. 29, 2006) (rejecting defendants’ argument that 

conduct before and after the class period should be “rejected categorically” in considering whether a 

strong inference of scienter is pleaded). 

Here, Plaintiffs have alleged both pre- and post-Class Period information that should be 

considered by the Court in determining if the claims are sufficiently pled. See Consolidated 

Complaint, ¶¶23, 30, 34, 69-72. For instance, Plaintiffs allege that as early as March 2003 – seven 

months before the beginning of the Class Period – internal ACE e-mails evidence that Defendants 

were providing inflated bids to Marsh & McLennan, an insurance broker, run by defendant Evan 

Greenberg’s brother, in an effort to help AIG, the insurer run by Greenberg’s father, to secure certain 

Case 2:05-md-01675-TJS Document 29 Filed 10/31/2008 Page 19 of 24
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insurance business. Consolidated Complaint, ¶34. The e-mails describe the quid pro quo business 

practices Defendants were engaged in – if ACE provided an inflated quote on one set of business, it 

would be the winner of a different set of business for which a different insurer would provide the 

inflated quote. Id. Additionally, Plaintiffs allege that, immediately after the Class Period, 

Defendants admitted to participating in the illicit kickback and bid-rigging practices and quickly 

fired two low level executives that warned Defendants, and other senior executives at ACE, that the 

contingent commission and bid-rigging practices were wrong. Id., ¶¶69-70. These allegations, 

considered in conjunction with the totality of Plaintiffs’ allegations, support the strong inference of 

Defendants’ scienter. 

Question 12: Can the class be limited to those who purchased and sold shares during the 

class period? 

No, the class in this case would include all investors who purchased ACE securities during 

the Class Period and sold or held those securities after the Class Period. See Consolidated 

Complaint, ¶¶1, 108. Plaintiffs are not aware of any authority that would limit a securities fraud 

class action to only those shareholders who purchased and sold shares during the Class Period. 

Question 13: Does 15 U.S.C. §78u-4(e), which governs limitations on damages, affect the 

maximum amount of damages the plaintiffs can recover? 

Yes, as described above in response to Question 6, depending on whether and when ACE 

shares purchased during the Class Period were eventually sold, the PSLRA’s provision for 

limitations on damages, 15 U.S.C. §78u-4(e), would affect the maximum damages that Plaintiffs and 

ACE investors would recover in this litigation. 

Case 2:05-md-01675-TJS Document 29 Filed 10/31/2008 Page 20 of 24
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Plaintiffs will be prepared to further address these issues, as well as other issues related to 

Defendants’ pending Motion to Dismiss, at the hearing scheduled for November 10, 2008. 

DATED: October 31, 2008 Respectfully submitted, 

COUGHLIN STOIA GELLER 

 RUDMAN & ROBBINS LLP 

TOR GRONBORG 

DEBRA J. WYMAN 

s/ TOR GRONBORG 

TOR GRONBORG 

655 West Broadway, Suite 1900 

San Diego, CA 92101 

Telephone: 619/231-1058 

619/231-7423 (fax) 

LAW OFFICES OF MARC S. HENZEL 

MARC S. HENZEL (MSH 2062) 

273 Montgomery Avenue, Suite 202 

Bala Cynwyd, PA 19004 

Telephone: 610/660-8000 

610/660-8080 (fax) 

Attorneys for Lead Plaintiffs 

S:\CasesSD\ACE Limited\MIS00055210.doc 

Case 2:05-md-01675-TJS Document 29 Filed 10/31/2008 Page 21 of 24
CERTIFICATE OF SERVICE

I hereby certify that on October 31, 2008, I electronically filed the foregoing with the Clerk 

of the Court using the CM/ECF system which will send notification of such filing to the e-mail 

addresses denoted on the attached Electronic Mail Notice List, and I hereby certify that I have 

mailed the foregoing document or paper via the United States Postal Service to the non-CM/ECF 

participants indicated on the attached Manual Notice List. 

I certify under penalty of perjury under the laws of the United States of America that the 

foregoing is true and correct. Executed on October 31, 2008. 

s/ TOR GRONBORG 

TOR GRONBORG 

COUGHLIN STOIA GELLER 

 RUDMAN & ROBBINS LLP 

655 West Broadway, Suite 1900 

San Diego, CA 92101-3301 

Telephone: 619/231-1058 

619/231-7423 (fax) 

E-mail: torg@csgrr.com 

Case 2:05-md-01675-TJS Document 29 Filed 10/31/2008 Page 22 of 24
Mailing Information for a Case 2:05-md-01675-TJS 

Electronic Mail Notice List 

The following are those who are currently on the list to receive e-mail notices for this case. 

 STEPHEN A. COZEN 

scozen@cozen.com,cwilliams@cozen.com 

 GEORGE M. GOWEN , III

ggowen@cozen.com 

 TOR GRONBORG 

torg@lerachlaw.com,christina@lerachlaw.com,e_file_sd@lerachlaw.com 

 MARC S. HENZEL 

mhenzel182@aol.com 

 NEAL S. MANNE 

nmanne@susmangodfrey.com,mreeves@susmangodfrey.com 

 UDOKA NWANNA 

udokan@lerachlaw.com 

 DEBRA J. WYMAN 

debraw@lerachlaw.com 

Manual Notice List 

The following is the list of attorneys who are not on the list to receive e-mail notices for this case (who 

therefore require manual noticing). You may wish to use your mouse to select and copy this list into 

your word processing program in order to create notices or labels for these recipients. 

JOHNNY W. CARTER 

SUSMAN GODFREY LLP 

1000 LOUISIANA 

SUITE 5100 

HOUSTON, TX 77002-5096 

MICHAEL GEISER 

SUSMAN GODFREY LLP 

1000 LOUISIANA 

SUITE 5100 

HOUSTON, TX 77002-5096 

H. LEE GODFREY 

SUSMAN GODREY LLP 

1000 LOUISIANA 

SUITE 5100 

HOUSTON, TX 77002-5096 

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JEFFREY SEELY 

SUSMAN GODFREY LLP 

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