Court Opinion

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Opinions of the United
2004 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

12-30-2004

CA Pub Empl Ret Sys v. Chubb Corp
Precedential or Non-Precedential: Precedential

Docket No. 03-3755

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                                              PRECEDENTIAL

          UNITED STATES COURT OF APPEALS
               FOR THE THIRD CIRCUIT

                         No. 03-3755

 CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT
SYSTEM, on behalf of itself and all others similarly situated;
 NEW YORK STATE COMMON RETIREMENT FUND;
    *THE BUTLER WICK TRUST COMPANY, THE
  EXECUTOR OF THE ESTATE OF JOHN N. TEEPLE,
                     DECEASED,

                         Appellants

                              v.

THE CHUBB CORPORATION; DEAN R. O’HARE; DAVID
B. KELSO; HENRY B. SCHRAM ; EXECUTIVE RISK INC.;
       STEPHEN J. SILLS; ROBERT H. KULLAS;
              ROBERT V. DEUTSCH

         *Pursuant to the Court’s Order of 10/5/04

      On Appeal from the United States District Court
               for the District of New Jersey
               (D.C. Civil No. 00-cv-04285)
         District Judge: Hon. Garrett E. Brown, Jr.

                   Argued October 7, 2004

 BEFORE: SLOVITER, VAN ANTWERPEN and COWEN,
                 Circuit Judges

                 (Filed December 30, 2004 )
William S. Lerach, Esq.
Eric A. Isaacson, Esq. (Argued)
Lerach, Coughlin, Stoia, Geller,
  Rudman & Robbins
401 B Street
Suite 1700
San Diego, CA 92101

Counsel for Appellants

Herbert Wachtell, Esq. (Argued)
Jonathan E. Pickhardt, Esq.
John F. Savarese, Esq.
Wachtell, Lipton, Rosen & Katz
51 West 52 nd Street
New York, NY 10019

Mary C. Roper, Esq.
Drinker, Biddle & Reath
18 th & Cherry Streets
One Logan Square
Philadelphia, PA 19103

Counsel for Appellees The Chubb Corporation;
Dean R. O’Hare; David B. Kelso;
Henry B. Schram; Executive Risk Inc.

William J. O’Shaughnessy, Esq. (Argued)
McCarter & English
100 Mulberry Street
Four Gateway Center
Newark, NJ 07102-0652

Counsel for Appellees Stephen J. Sills;
Robert H. Kullas; Robert V. Deutsch

                                   2
                    OPINION OF THE COURT

COWEN, Circuit Judge

        This is a securities class action lawsuit brought on behalf of
shareholders of the Chubb Corporation (“Chubb”) against Chubb,
Executive Risk, Inc. (“Executive Risk”), and several Chubb and
Executive Risk officers. Plaintiffs aver that Defendants defrauded
investors by artificially inflating the value of Chubb’s common
stock through accounting manipulations and false statements
designed to effectuate a stock-for-stock merger between Chubb and
Executive Risk, and avoid an alleged hostile takeover attempt. The
District Court granted Defendants’ motion to dismiss Plaintiffs’
Second Amended Complaint pursuant to Fed. R. Civ. P. 12(b)(6),
the Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C.
§§ 78u-4 et seq., and Fed. R. Civ. P. 9(b), and denied Plaintiffs
leave to file a Third Amended Complaint. We will affirm.

                                  I.

                                 A.
        In reviewing the factual background of this litigation, we
accept as true the well-pleaded allegations in the Second
Amended Complaint and consider the documents incorporated
by reference therein. See In re Burlington Coat Factory Sec.
Litig., 114 F.3d 1410, 1420, 1426 (3d Cir. 1997).

                   Background to Class Period

        Plaintiffs are investors who acquired Chubb common
stock between April 27, 1999 and October 15, 1999 (the “Class
Period”), including the former shareholders of Executive Risk
who exchanged their Executive Risk shares for shares of Chubb
stock pursuant to a merger of the companies that occurred on
July 20, 1999. The Defendants are Chubb, Executive Risk, and
their top former corporate officers, Chubb Chief Executive
Officer (“CEO”) Dean R. O’Hare, Chief Financial Officer

                                  3
(“CFO”) David B. Kelso, Chief Accounting Officer Henry B.
Schram, and Executive Risk CEO Stephen J. Sills, Board
Chairman Robert H. Kullas, and CFO Robert V. Deutsch.

       Chubb is a diversified insurance company headquartered
in Warren, New Jersey, with local branch and service offices
throughout North America and internationally. Chubb sells
personal, standard commercial and specialty commercial
insurance and is one of the largest national underwriters of
directors’ and officers’ liability insurance. The claims in this
securities class action concern Chubb’s standard commercial
insurance business, which accounts for approximately one-third
of Chubb’s total premiums.

        Beginning in 1995 and continuing through 1998, Chubb’s
financial performance deteriorated. Chubb consistently cited the
competitive standard commercial insurance market as the cause
of its poor performance during this period. On February 2, 1999,
Chubb reported disappointing fourth quarter 1998 and year-end
results. Defendant O’Hare assured investors that “[w]e are
taking aggressive steps to achieve adequate prices for this
business, and we expect to see the impact of these actions as we
move through the renewal cycle.” (Compl. ¶ 17.)

        O’Hare employed two strategies to address Chubb’s
flagging business. First, to combat the continuing diminution of
Chubb’s stock price and earnings-per-share (“EPS”) in the latter
half of 1998, O’Hare promulgated what Plaintiffs refer to as the
“rate increase/policy non-renewal initiative” (hereinafter referred
to as the “rate initiative”). Announced in October 1998
following the release of disappointing third quarter 1998 results,
the rate initiative sought to revamp the standard commercial
insurance operations by increasing premiums and refusing to
renew unprofitable business. Second, in an effort to counter the
difficulties in the standard commercial business and increase
profitability, Chubb sought to acquire a profitable specialty
insurance company. Accordingly, in 1998, Chubb targeted
Executive Risk, a profitable insurance carrier specializing in
directors’ and officers’ liability insurance, for acquisition. On
February 6, 1999, following negotiations which took place

                                4
between October and December 1998 and due diligence
investigations conducted in January 1999, Defendants O’Hare
and Sills publicly announced the merger agreement. The terms
included a stock-for-stock acquisition at a fixed exchange ratio
of 1.235 Chubb shares to each share of Executive Risk stock.
On February 5, 1999, the agreed-to-ratio represented a premium
of 63%, as Chubb stock was valued at $58 1/16 and Executive
Risk stock was valued at $44. In addition, Plaintiffs contend that
Executive Risk’s Board members, including Sills, Kullas, and
Deutsch, were given special benefits and payments for endorsing
the transaction to Executive Risk shareholders. Final approval
of the merger was subject to a vote of Executive Risk’s
shareholders.

        Plaintiffs claim that the impending Executive Risk
shareholder vote and fixed exchange ratio placed tremendous
pressure on Chubb, O’Hare, Kelso, and Schram to halt the
decline of Chubb’s stock price,1 because any further decline
would result in less consideration for Executive Risk
shareholders and thereby jeopardize the merger vote. As such,
Plaintiffs allege that the Chubb Defendants issued false and
misleading statements representing that the rate initiative was
ameliorating the problems in the standard commercial lines
business, and that it was doing so more quickly than anticipated.
This, Plaintiffs allege, artificially inflated the value of Chubb’s
stock and portrayed the merger as more beneficial to Executive
Risk shareholders than it truly was. Plaintiffs also claim that the
Chubb Defendants were motivated to continue to artificially
inflate the price of Chubb’s stock following consummation of
the acquisition because Chubb was threatened with a hostile
takeover.

  False Statements and False Financial Results: First Quarter
                            1999

       1
         Notably, however, immediately prior to the release of Chubb’s
first quarter 1999 results on April 27, 1999, Chubb’s share price closed
at $58 1/16, the same price at which it had closed on February 5, 1999,
the day before the announcement of the Executive Risk merger.

                                   5
       According to Plaintiffs, Defendants’ allegedly fraudulent
scheme to inflate the value of Chubb’s stock began with the
release of Chubb’s first quarter 1999 results via a press release
issued on April 27, 1999.

        The first quarter 1999 results were better than expected,
revealing an improved EPS and a combined ratio 2 of 117.9% in
the standard commercial insurance lines, down from 119.5% in
the fourth quarter 1998 report. Plaintiffs claim that the Chubb
Defendants intentionally falsified these results, including the
calculation of the combined ratio, by violating generally
accepted accounting principles (“GAAP”) and SEC rules. In
addition, Plaintiffs allege that in the days and weeks following
the release of the first quarter 1999 results, the Chubb
Defendants promulgated numerous statements falsely attributing
the favorable first quarter 1999 results to the success of the rate
initiative in turning around the standard commercial lines and
forecasting even further improvement.

       Plaintiffs assert that statements contained in Chubb’s
April 27, 1999 press release were false, as were statements made
by individual Chubb Defendants in follow-up conversations and
conference calls with analysts and investors. Chubb’s April 27,
1999 press release stated that

       [O]ur pricing strategy in standard commercial lines
       has begun to show the impact we are looking for in
       our renewal business. Month by month, renewal
       rate increases are building momentum, and we
       expect this trend to continue. Moreover, we have
       been successful in retaining business we want to
       keep at higher rates, while at the same time we are
       walking away from business where we can’t obtain
       adequate pricing. By maintaining this profit
       oriented discipline, standard commercial lines will
       likely show a decline in premiums throughout the

       2
        The “combined ratio” compares the incurred losses plus
operating expenses of an insurance business to its total earned premiums.
A ratio over 100% generally indicates an underwriting loss.

                                   6
       year and produce improved combined ratios. This
       decline in premiums should be offset by continued
       premium growth in personal and specialty
       commercial lines and by the benefits of a series of
       growth initiatives begun late last year.

It also represented that Chubb’s standard commercial insurance
combined ratio was 117.9%, down from the fourth quarter 1998
combined ratio of 119.5%. Plaintiffs claim that in a follow-up
conference call held on April 27, 1999, and in follow-up
conversations with individual analysts, money and portfolio
managers, institutional investors and large Chubb shareholders,
Defendants O’Hare and Schram maintained that

(a) the rate initiative was not only working, but was actually
exceeding management’s expectations, and this accounted in
large part for Chubb’s better-than-expected first quarter 1999
results;

(b) as a result of the successful turnaround of Chubb’s standard
commercial insurance operations, that part of Chubb’s business
would show 5 1/2% to 6% premium growth throughout 1999, as
Chubb’s rate increases for new or renewal standard commercial
insurance policies were sticking;

(c) the momentum of rate increases in Chubb’s standard
commercial insurance operations was growing month by month;

(d) Chubb was successful at retaining the higher priced standard
commercial insurance rate which it desired and was profitable;

(e) although Chubb was prepared to lose between $250 and $300
million in standard commercial insurance business, as this would
make that business more profitable, Chubb was not losing as
much of its standard commercial insurance business due to rate
increases as it had feared; and

(f) the combined ratio of Chubb’s standard commercial
insurance business would decline throughout 1999, to about
110% by year-end from 119.5% at year-end 1998, ultimately

                                7
producing an underwriting profit by 2000.

Furthermore, according to Plaintiffs, O’Hare stated that “[y]ou
guys are so bloody negative it’s disgusting. We’re trying to send
a strong signal to you that things are getting better. I don’t know
how else to say it . . . This god dam [sic] ship has turned faster
than I thought it was going to.” (Compl. ¶ 38.)

        The individual Chubb Defendants repeated these
statements several times, including in private conversations with
various analysts subsequent to the April 27, 1999 conference
call, and during the 1999 Annual Chubb Shareholders’ Meeting
on April 27, 1999. Moreover, the Chubb Defendants informed
analysts of Chubb’s decision to increase its forecasted 1999 EPS
to $4.10+ and its 2000 EPS to $4.50+ because of the better-than-
expected pace of the turnaround of Chubb’s standard
commercial insurance business.

        On May 12, 1999 in a private meeting with securities
analysts, institutional investors and money managers in Boston,
Defendant O’Hare allegedly maintained that premium rates were
rising in the standard commercial lines and forecasted a 1999
EPS of $4.28 and a 2000 EPS of $4.70.

        Chubb’s Form 10-Q Report for first quarter 1999, signed
by Schram and filed with the SEC on May 14, 1999, provided
that total premiums had decreased by 3.9% in the standard
commercial lines as a result of the rate initiative, but that on
renewed business “rates increased moderately in the first quarter
of 1999 and we expect this trend to continue.” (Id. ¶ 51.)

       In a June 2, 1999 conference attended by Chubb
shareholders, securities analysts, institutional investors and
money managers, O’Hare reiterated in a speech and in follow-up
private conversations his optimistic assessments of Chubb’s
standard commercial lines and his forecasts for improved EPS,
combined ratio, and premium growth throughout 1999. He
further predicted that “the standard commercial insurance
business would produce an underwriting profit by the year 2000
and a 6% total return on equity by 2001.” (Id. ¶ 52.)

                                 8
        On June 15, 1999, at a luncheon with several securities
analysts O’Hare expressed that he was “more optimistic than
usual” and added that Chubb would realize a 6% return on equity
in the standard commercial lines by late 2000. Based upon a
June 25, 1999 meeting between O’Hare and an analyst from
Bear Stearns, Bear Stearns reported O’Hare’s statement “that the
company’s repricing/underwriting project in the standard
commercial lines . . . continues to make progress” and “the
decline in retentions appears to have bottomed, and management
expects these figures to begin to move higher.” (Id. ¶ 61.)

        Plaintiffs contend that the falsified first quarter 1999
results and the Chubb Defendants’ subsequent representations
immediately caused the value of Chubb stock to rise.3

The Executive Risk / Chubb Registration Statement and Merger
                       Proxy Statement

       On June 17, 1999, Chubb and Executive Risk filed with
the SEC the Registration Statement and Merger Proxy related to
the proposed merger. The individual Chubb Defendants signed
the Registration Statement, and the individual Executive Risk
Defendants wrote the Merger Proxy.

       The Merger Proxy was mailed to Executive Risk
shareholders on June 18, 1999. The Merger Proxy unanimously
recommended approval of the merger to the company’s
shareholders and concluded that “the merger is in the best
interests of Executive Risk and its shareholders.” The Merger
Proxy also incorporated the opinions of certain securities
analysts that “the merger consideration is fair to Executive Risk
stockholders from a financial point of view.” The Merger Proxy
included Chubb’s first quarter 1999 results by reference to
Chubb’s first quarter 1999 Form 10-Q statement, and it detailed
the climb in Chubb stock value between February 5, 1999 and
June 15, 1999.

       3
        Chubb stock traded at $57 per share on April 26, 1999, $70 5/16
per share on May 7, 1999, $76 3/8 per share on May 14, 1999 (the Class
Period high) and closed at $70 9/16 on June 15, 1999.

                                  9
        Plaintiffs allege that the representations contained in the
Registration Statement and Merger Proxy were false and
misleading because they were based upon Chubb’s falsified first
quarter 1999 results, the Chubb Defendants’ false statements
regarding the standard commercial insurance business made
thereto, and the artificially inflated price of Chubb stock.
Plaintiffs further assert that the Executive Risk Defendants
recommended the merger to the shareholders in exchange for,
inter alia, millions of dollars in special benefits from Chubb.

       Executive Risk’s shareholders approved the merger on
July 19, 1999, and it was executed the following day.
Anticipating the release of lower-than-forecast second quarter
1999 results, Chubb’s stock price began to fall immediately
thereafter.

 False Statements and False Financial Results: Second Quarter
                             1999

        On July 27, 1999, approximately one week following
consummation of the merger, Chubb released its second quarter
1999 results. The second quarter had closed on June 30, 1999.
Plaintiffs allege that the EPS of $1.00 per share and reported
combined ratio of 120.8% were “well below expected results.”
(Compl. ¶ 64.) Although O’Hare admitted that he had previously
been “overly optimistic at the end of the first quarter” regarding
turnaround of the standard commercial lines, Plaintiffs contend
that the second quarter 1999 results were false and misleading,
and that the Chubb Defendants continued to conceal the true
extent of the rate initiative’s failure with purportedly false and
misleading statements.

       Chubb’s July 27, 1999 press release provided, in part:

               Standard commercial lines premiums in the second
       quarter declined 9% to $455.4 million and had a
       combined ratio of 120.8%. “We made continued progress
       in improving pricing in our standard commercial lines
       during the quarter,” said Mr. O’Hare. “Our pricing
       initiative is building momentum, with rates on renewal

                                10
       business continuing to accelerate. We have retained
       business we want to keep at more attractive rates, while
       walking away from unprofitable or under-priced renewals
       . . . .”

               “Given the moderate magnitude of rate increases
       in the early stages of the repricing program,” said Mr.
       O’Hare, “it will take at least two renewal cycles to
       adequately reprice the entire standard commercial book,
       and during that time we will continue to have losses from
       non-renewed policies. Thus . . . it will be mid-2000
       before the benefits of these actions significantly flow to
       the bottom line.”

(Id.) In a follow-up conference call and in subsequent
conversations with analysts, O’Hare and Kelso allegedly stated:

(a) Management’s actions to turn around Chubb’s standard
commercial insurance operations by raising prices and not
renewing unprofitable policies were in fact working, but would
take longer than expected to benefit Chubb’s EPS;

(b) the rate increases in Chubb’s standard commercial insurance
operations were still growing;

(c) the combined ratio of Chubb’s standard commercial
insurance business would decline during the balance of 1999;
and

(d) the changes in Chubb’s standard commercial insurance
business would produce an underwriting profit by 2000 and a
6% total return on equity by 2001.

       Defendants O’Hare and Kelso repeated this information
in private conversations with various analysts, and indicated that
Chubb still expected a 1999 EPS of over $4.00 and a 2000 EPS
of over $4.50.

       In response to these disappointing results, Chubb’s stock
continued to drop to as low as $58 5/8 on July 30, 1999.

                                11
Plaintiffs maintain, however, that Chubb’s stock traded at
artificially inflated levels throughout the remainder of the Class
Period because of the Chubb Defendants’ refusal to completely
disclose the failure of the rate initiative and its financial impact,
their use of falsified second quarter 1999 data, and their
continued circulation of false and misleading statements. In
addition, Plaintiffs aver that Chubb failed to disclose the adverse
effects of its integration with Executive Risk.

       Chubb’s purportedly fraudulent second quarter 1999
statements were included in second quarter Form 10-Q report,
filed with the SEC in August 1999. This report stated:

               Premiums from standard commercial
       insurance, which represent 34% of our total
       writings, decreased by 6.4% in the first six months
       of 1999 and 9.1% in the second quarter compared
       with the similar periods in 1998. The decreases
       were the result of the strategy we put in place in
       late 1998 to renew good business at adequate
       prices and not renew underperforming accounts
       where we cannot attain price adequacy. On the
       business that was renewed, rates have increased
       modestly yet steadily in the first six months of
       1999 and we expect this trend to continue.
       Retention levels were lower in the first six months
       of 1999 compared with the same period in 1998.
       Approximately half of the non-renewals were the
       result of business we chose not to renew and half
       were the result of customers not accepting the
       price increases we instituted. It will take at least
       two renewal cycles to adequately reprice the entire
       standard commercial book and during that time we
       will continue to have losses from non-renewal
       policies. Thus, it will be mid-2000 before these
       actions have a significant positive effect on our
       results.

(Id. ¶ 74.)

                                 12
       Close of Class Period: Third Quarter 1999 Results

        On October 15, 1999, the close of the Class Period,
Chubb revealed its third quarter 1999 results. Chubb reported a
lower-than-forecast EPS of $.40 to $.45 per share, in part caused
by losses attributable to Hurricane Floyd.4 Chubb’s reported
standard commercial insurance combined ratio increased to
130%. Several analysts, while recognizing the negative impact
of Hurricane Floyd on these results, maintained that the poor
performance of the standard commercial lines contributed to the
earnings shortfall. Chubb’s October 15, 1999 press release
stated:

               Chubb said its aggressive initiative to
       reprice standard commercial business and to prune
       unprofitable accounts continues to meet with
       success. The average price increase on policies
       renewed was higher in each successive month of
       the third quarter, and unprofitable business is not
       being renewed.

               “We are headed in the right direction in
       fixing the standard commercial business,” said
       Dean O’Hare, chairman and chief executive
       officer. “However, it will take time for the
       benefits of the pricing initiative to reverse the
       losses from underpriced business written in the
       extremely competitive market of the past few
       years.”

(App. at 538.)

       Chubb’s 1999 Form 10-K, signed by O’Hare and Schram,
provided in part that “[t]he decrease in earnings in 1999 was due
to deterioration in underwriting results caused in large part by
the continued weakness in the standard commercial classes” and

       4
        Chubb’s press release explained that the third quarter results
were down “primarily as a result of catastrophe losses from Hurricane
Floyd.” (App. at 538.)

                                 13
that “net premiums from standard commercial insurance
decreased 8% in 1999 compared with a 1% decrease in 1998.”
Moreover, “[i]t will take at least two annual renewal cycles to
adequately reprice the entire standard commercial book, and
during that time we will continue to have losses from
underpriced business. Thus, it will be the latter part of 2000
before our pricing initiative is expected to have a noticeable
effect on our standard commercial results.” (Compl. ¶ 83.)

The “True Facts” and Alleged Fraudulent Accounting Practices

        Plaintiffs maintain that Defendants knew that the rate
initiative was failing throughout the Class Period, and
consequently falsified the first and second quarter 1999 results
and issued false statements thereto to effect an artificial inflation
of Chubb stock value. Furthermore, Plaintiffs assert that the
Chubb Defendants knew at the outset that even if the initiative
was ultimately successful, it would not manifest any significant
positive impact until at least mid-2000 because “it would take ‘at
least two annual renewal cycles’ for Chubb to reprice the
standard commercial lines premiums and after the premiums
were repriced it would take another year for the higher premiums
to be earned into income.” (Id. ¶¶ 24(h), 48(h).)

        The supposed “true facts” asserted by Plaintiffs can be
summarized as follows: (1) Chubb’s attempts to raise premiums
were causing it to lose profitable business resulting in increasing
losses in the standard commercial lines because of an extremely
competitive market in which the competition was lowering
rates;5 (2) the rate increases that actually were obtained from
new and renewal standard commercial insurance policies were
too small to compensate for the growing underwriting losses in

       5
        While the Second Amended Complaint acknowledges that
Chubb disclosed that the rate initiative resulted in losses of hundreds of
millions of dollars of “good” business, Plaintiffs aver that Chubb lost
“additional undisclosed hundreds of millions of dollars in profitable
business that Chubb wanted to retain.” (Compl. ¶¶ 24(a), 48(a).)

                                   14
the standard commercial insurance business;6 (3) Chubb was
keeping approximately 60% of its high-risk, unprofitable
customers that the rate initiative was supposed to eliminate; (4) it
was too soon for the rate initiative to have any significant impact
on Chubb’s financial results; and (5) the financial results and
combined ratio percentages were based on fraudulent
accounting.7

        Plaintiffs charge the Chubb Defendants with deliberately
falsifying Chubb’s first and second quarter 1999 results by
flouting GAAP and SEC rules governing calculation of its
earnings for the purposes of concealing the failure of the rate
initiative and boosting Chubb’s stock. Specifically, Chubb
allegedly manipulated reserve levels in its standard commercial
and property and marine specialty insurance lines, failed to
properly report losses and expenses associated with its standard
commercial business, and prematurely recognized revenue for
premiums on policies which were not up for renewal until some
future point and on policies that had not yet been written.
According to Plaintiffs, Chubb’s falsified results enabled the
Chubb Defendants to render false EPS projections for 1999 and
2000, false combined ratios for the first and second quarter
1999, and false premium growth.

                                   B.

                         Procedural History

      Plaintiff California Public Employees’ Retirement System
(“Calpers”) filed a putative class action complaint on August 31,

       6
         Plaintiffs allege that Chubb was renewing the policies of 50%
of its customers either at flat rates or even at reduced premiums to keep
these customers.
       7
        Plaintiffs assert that the combined ratio of the standard
commercial lines reached 130% during the first quarter 1999 and
climbed even higher thereafter, far above the 117.9% stated in the first
quarter 1999 report and the 120.8% stated in the second quarter report
and the further decline forecast by the Chubb Defendants.

                                   15
2000, asserting violations of §§ 10(b), 14, and 20(a) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq.,
(“1934 Act”), SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, and §§
11 and 15 of the Securities Act of 1933, 15 U.S.C. § 77a, et seq.,
(“1933 Act”). After appointing the lead plaintiffs and approving
their choice of counsel, the District Court granted Plaintiffs
leave to file an Amended Class Action Complaint by September
3, 2001. On June 26, 2002, the District Court granted
Defendants’ motion to dismiss the Amended Complaint, but
permitted Plaintiffs leave to file a Second Amended Class
Action Complaint. Plaintiffs filed the Second Amended
Complaint on August 9, 2002. The District Court dismissed the
Second Amended Complaint with prejudice on August 12, 2003.

        The gravamen of Plaintiffs’ action alleges that
Defendants defrauded investors in Chubb and Executive Risk by
artificially inflating the value of Chubb’s stock with false
statements regarding Chubb’s standard commercial insurance
business for the purpose of effecting a stock-for-stock merger
between Chubb and Executive Risk. Plaintiffs aver three causes
of action. Count 1 asserts violations of § 10(b) of the 1934 Act
and Rule 10b-5 promulgated thereunder against all Defendants
on behalf of purchasers of Chubb stock during the Class Period.
Defendants allegedly defrauded purchasers by making materially
false and misleading statements regarding the financial condition
and future performance of Chubb’s standard commercial
insurance business. Count II asserts claims under § 11 of the
1933 Act against Defendants Chubb, O’Hare, Schram and Kelso
on behalf of shareholders of Executive Risk alleging that the
June 17, 1999 Registration Statement filed by Chubb for shares
issued to Executive Risk shareholders in the stock-for-stock
merger of the companies was false and misleading. Count III,
also alleging a cause of action on behalf of Executive Risk
shareholders, asserts that the proxy materials provided to
Executive Risk shareholders included false and misleading
statements in violation of § 14(a) of the 1934 Act, thereby
causing the Executive Risk shareholders to approve the merger
of the companies.

       The Chubb Defendants advanced various arguments in

                                16
support of their motion to dismiss the Second Amended
Complaint. First, that the Second Amended Complaint fails to
allege with particularity facts sufficient to demonstrate the falsity
of the statements claimed to be false and/or misleading. Second,
that Plaintiffs fail to adequately plead scienter. Third, that the
statements alleged to be false and/or misleading are not
actionable as a matter of law. The Executive Risk Defendants
further argued that even if Plaintiffs sufficiently pled causes of
action against the Chubb Defendants, the claims nonetheless fail
as averred against the Executive Risk Defendants.

        The District Court dismissed all Plaintiffs’ claims with
prejudice. The District Court dismissed Plaintiffs’ 1934 Act
section 10(b) securities fraud claims, finding that Plaintiffs
failed to satisfy the heightened pleading requirements imposed
by the PSLRA. Specifically, employing the approach fashioned
by the Second Circuit in Novak v. Kasaks, 216 F.3d 300 (2d
Cir.), cert. denied, 531 U.S. 1012 (2000), the District Court
found that Plaintiffs failed to plead the falsity of the Defendants’
statements and accounting fraud with the requisite particularity,
i.e. that they failed to plead with particularity the “true facts”
purporting to show how or why those statements are false. In
addition, the District Court determined that many of the
purported “true facts” are actually consistent with Defendants’
public statements throughout the Class Period, implying that
these unsupported allegations did not state a claim for relief.
Because the District Court determined that the section 10(b) and
Rule 10b-5 claims asserted against the Executive Risk
Defendants were essentially derivative of the claims asserted
against the Chubb Defendants, it dismissed them for a lack of
particularity as well. It further noted that Plaintiffs failed to
properly allege the falsity of the Executive Risk Defendants’
conclusion that the merger was in the best interest of Executive
Risk shareholders, even assuming that the value of Chubb’s
stock was artificially inflated. Given these dispositions, the
District Court did not consider Defendants’ additional arguments
that Plaintiffs failed to plead scienter with sufficient
particularity, and that many of the allegedly false statements
were nothing more than statutorily protected forward looking
statements of optimism. Regarding Plaintiffs’ 1933 Act section

                                 17
11 and 1934 Act section 14(a) claims, the District Court
determined that those claims “sound in fraud” and thus are
subject to the heightened pleading standards of Fed. R. Civ. P.
9(b). In accordance with its prior finding that Plaintiffs had
failed to plead the falsity of the Defendants’ representations with
the requisite particularity, the District Court dismissed Plaintiffs’
claims under section 11 of the 1933 Act and section 14(a) of the
1934 Act for failure to state a claim. Because control person
liability under section 20(a) of the 1934 Act and section 15 of
the 1933 Act is premised upon a predicate violation of the 1934
Act and 1933 Act, respectively, those claims were dismissed as
well. Finally, the District Court denied Plaintiffs leave to file a
Third Amended Complaint because Plaintiffs were already
provided ample opportunity to state a cognizable cause of action,
and because of undue prejudice to Defendants.

                                 II.

       The District Court properly exercised jurisdiction under
28 U.S.C. § 1331, and 15 U.S.C. §§ 77v, 78aa. We have
appellate jurisdiction pursuant to 28 U.S.C. § 1291. We exercise
plenary review over the District Court’s decision to grant
Defendants’ motion to dismiss. See In re Rockefeller Ctr.
Props., Inc. Sec. Litig., 311 F.3d 198, 215 (3d Cir. 2002). We
also exercise plenary review over the District Court’s
interpretation of the federal securities laws. Oran v. Stafford,
226 F.3d 275, 281 n.2 (3d Cir. 2000). In reviewing the dismissal
of the Second Amended Complaint, we apply the same standards
applied by the District Court.

       As Plaintiffs’ claims arise under the federal securities
laws, we review the relevant standards applicable to motions to
dismiss in that particular context. This requires an overview of
conventional motion to dismiss standards and how they interact
with the appropriate heightened pleading requirements.

       A motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6)
may be granted only if, accepting all well pleaded allegations in
the complaint as true, and drawing all reasonable factual
inferences in favor of the plaintiff, it appears beyond doubt that

                                 18
the plaintiff can prove no set of facts in support of the claim that
would warrant relief. Oran, 226 F.3d at 279. In making this
determination, we need not credit a complaint’s “bald
assertions” or “legal conclusions.” Morse v. Lower Merion Sch.
Dist., 132 F.3d 902, 906 (3d Cir. 1997).

         In the Second Amended Complaint, Plaintiffs allege three
separate violations of the federal securities law. Count 1 alleges
violations of section 10(b) of the Securities and Exchange Act of
1934 and Rule 10b-5 promulgated thereunder. Section 10(b)
makes it unlawful for any person to “use or employ, in
connection with the purchase or sale of any security registered
on a national securities exchange or any security not so
registered, any manipulative or deceptive device or contrivance
in contravention of such rules and regulations as the
Commission may prescribe as necessary or appropriate in the
public interest or for the protection of investors.” 15 U.S.C. §
78j(b). Rule 10b-5 renders it illegal to “make any untrue
statement of a material fact or to omit to state a material fact
necessary in order to make the statements made in the light of
the circumstances under which they were made, not misleading .
. . in connection with the purchase or sale of any security.” 17
C.F.R. § 240.10b-5(b). To state a claim for relief under section
10(b), a plaintiff must plead facts demonstrating that (1) the
defendant made a materially false or misleading statement or
omitted to state a material fact necessary to make a statement not
misleading; (2) the defendant acted with scienter; and (3) the
plaintiff’s reliance on the defendant’s misstatement caused him
or her injury. In re Burlington Coat Factory Sec. Litig., 114
F.3d 1410, 1417 (3d Cir. 1997). In addition, the claim being
asserted must satisfy the heightened pleading requirements of
Rule 9(b), see id., and the PSLRA. In re Rockefeller, 311 F.3d
at 217.

      Count III asserts a violation of section 14(a) of the 1934
Act against all Defendants. In pertinent part, section 14(a) states
that
      [i]t shall be unlawful for any person . . . in
      contravention of such rules and regulations as the
      Commission may prescribe as necessary or

                                 19
       appropriate in the public interest or for the
       protection of investors, to solicit . . . any proxy or
       consent or authorization in respect of any security
       (other than an exempted security) registered
       pursuant to Section 781 of the Act.

15 U.S.C. § 78n(a). In contrast to section 10(b) and Rule
10(b)(5), scienter is not a necessary element in alleging a section
14(a) claim. See Gen. Elec. Co. v. Cathcart, 980 F.2d 927, 932
(3d Cir. 1992). To state a claim under section 14(a), a plaintiff
must aver that (1) a proxy statement contained a material
misrepresentation or omission which (2) caused the plaintiff
injury and (3) that the proxy solicitation itself, rather than the
particular defect in the solicitation materials, was an essential
link in the accomplishment of the transaction. Id.

       Count II alleges that Defendants Chubb, O’Hare, Schram
and Kelso violated section 11 of the 1933 Act. Under section
11, any person acquiring a security issued pursuant to a
materially false or misleading registration statement may recover
damages. See 15 U.S.C. § 77k.

        Independent of the standard applicable to Rule 12(b)(6)
motions, Fed. R. Civ. P. 9(b) requires that “[i]n all averments of
fraud or mistake, the circumstances constituting fraud or mistake
shall be stated with particularity.” This particularity requirement
has been rigorously applied in securities fraud cases. In re
Burlington, 114 F.3d at 1417. As such, plaintiffs asserting
securities fraud claims must specify “‘the who, what, when,
where, and how: the first paragraph of any newspaper story.’” In
re Advanta Corp. Sec. Litig., 180 F.3d 525, 534 (3d Cir. 1999)
(quoting DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.
1990)). “Although Rule 9(b) falls short of requiring every
material detail of the fraud such as date, location, and time,
plaintiffs must use ‘alternative means of injecting precision and
some measure of substantiation into their allegations of fraud.’”
In re Rockefeller, 311 F.3d at 216 (quoting In re Nice Systems,
Ltd. Sec. Litig., 135 F.Supp.2d 551, 577 (D.N.J. 2001)). Rule
9(b) governs Plaintiffs’ 1934 Act claims. As explained below,
Rule 9(b) also applies to Plaintiffs’ section 11 1933 Act claims,

                                 20
because those claims are based on averments of fraud. See
Shapiro v. UJB Fin. Corp., 964 F.2d 272, 288 (3d Cir. 1992)
(“[W]e hold that when § 11 and § 12(2) claims are grounded in
fraud rather than negligence, Rule 9(b) applies.”).

       In addition to Rule 9(b), plaintiffs alleging securities
fraud pursuant to the 1934 Act must also comply with the
heightened pleading requirements of the PSLRA, 15 U.S.C. §§
78u-4(b)(1), (b)(2). Significantly, the PSLRA “imposes another
layer of factual particularity to allegations of securities fraud.”
In re Rockefeller, 311 F.3d at 217. It requires any securities
fraud claim brought under the 1934 Act to

        specify each statement alleged to have been
        misleading, the reason or reasons why the
        statement is misleading, and, if an allegation
        regarding the statement or omission is made on
        information and belief, the complaint shall state
        with particularity all facts on which that belief is
        formed.8

15 U.S.C. § 78u-4(b)(1). If this requirement is not met, “the
court shall . . . dismiss the complaint.” 15 U.S.C. § 78u-
4(b)(3)(A). While claims brought pursuant to section 14(a) of
the 1934 Act do not require that scienter be pleaded, any claims
brought under the 1934 Act must meet the PSLRA particularity
requirements quoted above if a plaintiff elects to ground such
claims in fraud. See In re NAHC Sec. Litig., 306 F.3d 1314,
1329 (3d Cir. 2002) (applying PSLRA particularity standards to

        8
         In addition, with respect to securities fraud claims in which
recovery of monetary damages is contingent on proof that the defendant
acted with a particular state of mind, the PSLRA requires that “the
complaint shall, 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). In dismissing the Second Amended Complaint, the District
Court did not address whether Plaintiffs’ scienter allegations met this
heightened burden, instead confining its analysis to the particularity
requirement of 15 U.S.C. § 78u-4(b)(1), quoted above.

                                     21
section 14(a) claims). As fully discussed in this Court’s past
jurisprudence, in enacting the current version of the PSLRA,
“Congress expressly intended” to “substantially heighten” the
existing pleading requirements. In re Rockefeller, 311 F.3d at
217.

        The interplay between Rule 12(b)(6), and Rule 9(b) and
the PSLRA is important. Failure to meet the threshold pleading
requirements demanded by the latter provisions justifies
dismissal apart from Rule 12(b)(6). Accordingly, “unless
plaintiffs in securities fraud actions allege facts supporting their
contentions of fraud with the requisite particularity mandated by
Rule 9(b) and the Reform Act [PSLRA], they may not benefit
from inferences flowing from vague or unspecific allegations--
inferences that may arguably have been justified under a
traditional Rule 12(b)(6) analysis.” In re Rockefeller, 311 F.3d at
224. In other words, pursuant to this “modified” Rule 12(b)(6)
analysis, “catch-all” or “blanket” assertions that do not comply
with the particularity requirements are disregarded. See Fl. State
Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d 645, 660 (8th
Cir. 2001).

                                  III.

                                   A.

            Failure To Plead Fraud With Particularity

       Plaintiffs appeal the Disriict Court’s decision to dismiss
with prejudice the Second Amended Complaint for failure to
allege fraud with particularity. 9 We agree with the District Court

       9
         In addition to Plaintiffs’ section 10(b) and Rule 10b-5 claims,
Plaintiffs’ section 14(a) claims must meet the PSLRA particularity
requirements because they are grounded in fraud. See In re NAHC, 306
F.3d at 1329. Thus, a ruling that the PSLRA particularity requirements
have not been satisfied compels dismissal of claims made pursuant to
both of these provisions. Similarly, as explicated in part III.B. below,
Plaintiffs’ section 11 1933 Act claims are grounded in fraud and, for the
same reasons discussed here, fail to meet the heightened pleading

                                   22
that the facts alleged by Plaintiffs fail to meet the applicable
pleading requirements. Our analysis focuses primarily upon
Plaintiffs’ “true facts” allegations, which purportedly
demonstrate why Defendants’ various Class Period disclosures
and financial results were materially false and misleading. As
illustrated below, Plaintiffs’ allegations are insufficient to satisfy
either Fed. R. Civ. P. 9(b)’s particularity requirement or the
PSLRA’s information and belief pleading requirement.

        Undoubtedly, Plaintiffs identify Defendants’ allegedly
false and misleading statements with particularity. In addition to
requiring plaintiffs to specify each statement alleged to have
been misleading, however, the PSLRA directs plaintiffs to
specify “the reason or reasons why the statement is misleading.”
15 U.S.C. § 78u-4(b)(1). As such, it is the “true facts” recited in
the Second Amended Complaint that are of paramount
importance in this inquiry because they provide the exclusive
basis for Plaintiffs’ claims that the various statements made
throughout the Class Period were materially false and
misleading, that the first and second quarter 1999 results were
falsified, and that Defendants knew of the falsity of the
statements and financial results. Accordingly, with respect to the
“true facts” allegations, which are pled on information and
belief,10 the PSLRA requires Plaintiffs to “state with particularity
all facts on which that belief is formed.” 15 U.S.C. § 78u-
4(b)(1). In an effort to meet this pleading burden, Plaintiffs rely
primarily on confidential personal sources, as well as an internal
memorandum.

       This Circuit has not yet addressed the dimensions of the
PSLRA’s criterion for pleadings made on information and belief.
The District Court below elected to follow the moderate
interpretation of section 78u-4(b)(1) espoused by the Second

requirements of Rule 9(b).
       10
         Plaintiffs admit that the allegations comprising the “true facts”
are based upon the investigation of counsel, and do not challenge on
appeal the District Court’s conclusion that such allegations are therefore
based on “information and belief.”

                                   23
Circuit in Novak v. Kasaks, 216 F.3d 300 (2d Cir.), cert. denied,
531 U.S. 1012 (2000), and subsequently found persuasive by the
First and Fifth Circuits. See ABC Arbitrage Plaintiffs Group v.
Tchuruk, 291 F.3d 336, 351-54 (5th Cir. 2002); In re Cabletron
Systems, Inc., 311 F.3d 11, 29-31 (1st Cir. 2002). See also Fla.
State Bd. of Admin v. Green Tree Fin. Corp., 270 F.3d 645, 667-
68 (8th Cir. 2001). 11 Pursuant to this view:

        [O]ur reading of the PSLRA rejects any notion that
        confidential sources must be named as a general
        matter. In our review, notwithstanding the use of
        the word “all,” paragraph (b)(1) does not require
        that plaintiffs plead with particularity every single
        fact upon which their beliefs concerning false or
        misleading statements are based. Rather, plaintiffs
        need only plead with particularity sufficient facts to
        support those beliefs. Accordingly, where
        plaintiffs rely on confidential personal sources but
        also on other facts, they need not name their
        sources as long as the latter facts provide an
        adequate basis for believing that the defendants’
        statements were false. Moreover, even if personal
        sources must be identified, there is no requirement
        that they be named, provided they are described in
        the complaint with sufficient particularity to
        support the probability that a person in the position

        11
          There may be a circuit split on the appropriate meaning of this
provision. The Ninth Circuit’s decision in In re Silicon Graphics Sec.
Litig., 183 F.3d 970, 984-85 (9th Cir. 1999), has been cited for the
proposition that anonymous sources must be named at the pleading stage
to satisfy the heightened pleading requirement for pleading on
information and belief. But it is the opinion of the district court in In re
Silicon Graphics that sets forth a strong per se rule requiring
identification of confidential sources. While not entirely clear, the Ninth
Circuit’s interpretation of the statutory command, which requires
plaintiffs to “provide a list of all relevant circumstances in great detail,”
id. at 984, can be read as stopping short of endorsing the district court’s
per se rule.

                                     24
       occupied by the source would possess the
       information alleged.

216 F.3d at 314 (emphasis in original).

       We join the Second Circuit and adopt this standard as the
appropriate standard for courts to employ when assessing the
sufficiency of allegations made on information and belief
pursuant to 15 U.S.C. § 78u-4(b)(1). We agree with Novak’s
observation that

       [p]aragraph (b)(1) is strangely drafted. Reading
       “all” literally would produce illogical results that
       Congress cannot have intended. Contrary to the
       clearly expressed purpose of the PSLRA, it would
       allow complaints to survive dismissal where “all”
       the facts supporting the plaintiff’s information and
       belief were pled, but those facts were patently
       insufficient to support that belief. Equally
       peculiarly, it would require dismissal where the
       complaint pled facts fully sufficient to support a
       convincing inference if any known facts were
       omitted. Our reading of the provision focuses on
       whether the facts alleged are sufficient to support a
       reasonable belief as to the misleading nature of the
       statement or omission.

216 F.3d at 314 n.1.

Far from commanding that confidential sources be named as a
general matter, the PSLRA is silent regarding the sources of a
plaintiff’s facts. Thus, so long as plaintiffs supply sufficient
facts to support their allegations, there is no reason to inflict the
obligation of naming confidential sources. Indeed, “[i]mposing
a general requirement of disclosure of confidential sources
serves no legitimate pleading purpose while it could deter
informants from providing critical information to investigators in
meritorious cases or invite retaliation against them.” Id. at 314.
Accordingly, a complaint can meet the pleading requirement
dictated by paragraph (b)(1) by providing sufficient documentary

                                 25
evidence and/or a sufficient description of the personal sources
of the plaintiff’s beliefs.

       The Novak approach to assessing the particularity of
allegations made on information and belief necessarily entails an
examination of the detail provided by the confidential sources,
the sources’ basis of knowledge, the reliability of the sources,
the corroborative nature of other facts alleged, including from
other sources, the coherence and plausibility of the allegations,
and similar indicia.

        Applying these standards, Plaintiffs’ Second Amended
Complaint does not meet the PSLRA’s particularity standards
for allegations made on “information and belief.”

Documentary Source

        We begin by ascertaining whether Plaintiffs’ documentary
evidence “provide[s] an adequate basis for believing that the
defendants’ statements [regarding the success of the rate
initiative] were false.” Novak at 314. It does not. Plaintiffs
attempt to particularize the allegations regarding the “true facts”
with a single internal memorandum. “According to a former
property and casualty underwriter for small business accounts in
Chubb’s Pittsburgh, Pennsylvania branch, and a former vice
president of personal lines in Chubb’s Warren, New Jersey
headquarters, at the end of 1stQ 99 a memo went to the Chubb
branch and commercial managers admitting the rate
increase/policy non-renewal initiative had not worked and the
targeted 10% -15% premium increases had not been achieved.”
(Compl. ¶ 109.) This is plainly insufficient. Plaintiffs fail to
identify who authored the alleged report, when it was authored,
who reviewed the report, and what data its conclusions were
based upon. The statement that the initiative was a failure is
wholly conclusory and lacks data to support it. Buttressing this
conclusion of inadequacy is the Second Circuit’s post-Novak
decision in In re Scholastic Corp. Securities Litigation, 252 F.3d
63, (2d Cir.), cert. denied sub nom., Scholastic Corp. v.
Truncellito, 534 U.S. 1071 (2001). Scholastic instructs that a
plaintiff relying on internal reports must “specify the internal

                                26
reports, who prepared them and when, how firm the numbers
were or which company officers reviewed them.” Id. at 72-73.
The Fifth Circuit in ABC Arbitrage found this to be a sensible
standard in the context of the PSLRA and Rule 9(b)’s
heightened pleading requirements. 291 F.3d at 356. Indeed, the
level of detail provided by the plaintiffs in ABC Arbitrage in
describing the internal reports relied upon in that case stands in
stark contrast to what Plaintiffs here furnish. See id. at 357. Far
from requiring the pleading of detailed evidentiary matter,
Plaintiffs’ barebones sketch of this internal memo utterly fails to
meet this standard in any respect.12

Confidential Sources: General Characteristics

       Plaintiffs’ reliance on confidential sources to supply the
requisite particularity for their fraud claims thus assumes a
heightened importance given the inadequacy of their
documentary source. An analysis of the confidential sources
cited by Plaintiffs for the purpose of pleading the “true facts”
with the requisite statutory particularity reveals, however, that,
with few exceptions, they are not “described . . . with sufficient
particularity to support the probability that a person in the
position occupied by the source would possess the information
alleged.” Novak, 216 F.3d at 313-14.

       As a general matter, almost all of the anonymous sources
are former Chubb employees. Plaintiffs fail to aver, however,
when any of them were employed by Chubb. Nor do Plaintiffs

       12
          Plaintiffs attempted to add particulars regarding the internal
memorandum by submitting a “Notice of Recently Discovered Evidence
in Opposition to Motions to Dismiss Second Amended Complaint” to
the District Court on December 20, 2002, following the conclusion of
briefing and oral argument. Construing this submission as an
amendment to Plaintiffs’ Second Amended Complaint, the District Court
did not consider the submission in its Memorandum and Order
dismissing Plaintiffs’ Second Amended Complaint, although it noted
that consideration of the submission would not have altered its decision.
Plaintiffs do not argue that the District Court erred in refusing to
entertain the submission. We likewise do not consider it here.

                                   27
allege the dates that these sources acquired the information they
purportedly possess, or how any of these former employees had
access to such information. The lack of allegations regarding
how or why such employees would have access to the
information they purport to possess is problematic because, as
illustrated below, Plaintiffs heavily rely on former employees
who worked in Chubb’s local branch offices for information
concerning Chubb’s business on a national scale. Moreover,
many of these sources were branch employees who worked in
departments other than standard commercial. Plaintiffs’ failure
to make these allegations is also significant because we are left
to speculate whether the anonymous sources obtained the
information they purport to possess by firsthand knowledge or
rumor.

Confidential Sources: Losing Profitable Customers

       First, Plaintiffs contend that the rate initiative was not
working, in part because the rate increases were not sticking and
Chubb’s standard commercial insurance underwriting losses
were increasing. More specifically, the raising of rates in a
competitive insurance market caused Chubb to lose “numerous”
profitable customers that it wanted to keep. In support of this
contention, Plaintiffs cite to:

       A former commercial lines marketing underwriter
       in Seattle; a former umbrella and excess insurance
       manager in Englewood, Colorado; an independent
       insurance broker for A.O.N. Risk Services in
       Southfield Michigan who did business with
       Chubb; a former senior customer services team
       leader in Los Angeles and Seattle who worked in
       operations supervising employees who entered
       premiums and claims and coded policies into
       Chubb’s computer system; a former commercial
       lines customer service representative/rater in
       Seattle; a former multi-national account specialist
       in Chubb’s Warren, New Jersey headquarters, and
       a former renewal underwriter in the account
       service center in Florham Park, New Jersey.

                                28
(Compl. ¶ 48(a).)

       All except one of these sources were employed in branch
offices. Only two of the sources appear affiliated with the
standard commercial business, and those sources were employed
in marketing and customer service capacities. It is not apparent
from these brief descriptions that these sources--which
noticeably include an insurance broker for another company--
would possess information that the standard commercial
business was succeeding or failing on a national level, or that
Chubb was losing “numerous” and “profitable” customers
nationwide, or whether Chubb expected to retain those
customers, and the Second Amended Complaint is devoid of any
further explanation. Similarly, it is not intuitively probable that
“an independent insurance broker for A.O.N. Risk Services in
Southfield Michigan” would know that “independent brokers
moved up to 80% of their clients from Chubb to lower-priced
insurers.” (Compl. ¶ 48(a).)

        In the same vein, Plaintiffs cite to low-level, locally sited
former employees without alleging how or why such employees
would have knowledge that expanded beyond what the vague
descriptions suggest to substantiate the claim that, as a general
matter, Chubb “lost additional undisclosed hundreds of millions
of dollars in profitable business that Chubb wanted to retain.”
(Id.) Plaintiffs rely on a former senior customer services team
leader in Los Angeles and Seattle; an independent insurance
broker for A.O.N. Risk Services in Southfield, Michigan who
did business with Chubb; a former energy resources underwriter
in the Commercial Lines Department of Chubb & Son, Inc., in
Cincinnati and Pittsburgh; a former commercial lines marketing
underwriter in Seattle; and a former multi-national account
specialist in Chubb’s W arren, New Jersey, headquarters. (Id.)
Plaintiffs do not allege when the employees left Chubb.

       It appears, however, that by virtue of their former
positions at Chubb, a person in the position of several of the
confidential sources Plaintiffs depend upon to support the
overall assertion that Chubb was losing good business it wanted

                                 29
to retain as a result of the rate initiative may possess the
information alleged.13 We hesitate to conclude that the Novak
standard has been met with respect to these sources because
Plaintiffs fail to allege when these sources were employed by
Chubb, when they obtained the information they allegedly
possess, and whether their supposed knowledge is first or second
hand.14 Nevertheless, even if the heightened pleading standards

       13
         These sources include:
•      A former renewal underwriter (who processed renewed policies
       on established accounts) in Florham Park, New Jersey who
       alleges that “an independent insurance agency named NIA
       Insurance Group systematically refused to go along with Chubb’s
       rate increases and moved many customers to other insurers.”
       (Compl. ¶ 48(a).)
•      A former commercial lines marketing underwriter for Chubb
       based in Seattle who claims that “in the states of Washington and
       Oregon, Chubb lost all of its profitable customers who paid
       annual premiums of $500,000 to $1 million because of rate
       increases.” (Id.)
•      A former commercial lines customer service representative/rater
       for Chubb in Seattle who alleges that Chubb lost Western
       Wireless, which had provided Chubb with a $400,000-$500,000
       annual premium. (Id.)
•      A former manager of Chubb’s customer care unit in Troy,
       Michigan who alleges that the rate initiative caused Chubb to
       lose Burger King restaurants in the area, “which represented a
       large loss to Chubb.” (Id.)
•      A former Chubb underwriting technical assistant in Englewood,
       Colorado who states that the rate initiative caused Chubb to lose
       the profitable policy provided to Echo-Star, “as well as four to
       five other customers with annual premiums equal to Echo-
       Star’s.” (Id.)
•      A former multi-national account specialist for Chubb in its
       Warren, New Jersey headquarters who claims that Chubb “also
       lost the account of Mary Kay Cosmetics, various large, high-
       technology firms and a huge multi-national account from
       Chubb’s Washington, D.C. area office because of the rate
       increase/policy non-renewal initiative.” (Id.)
       14
         A comparison with the allegations held sufficient for pleading
on “information and belief” under the PSLRA in In re Cabletron, 311

                                  30
have been met with respect to these sources, Plaintiffs’ claims
fail under Rule 12(b)(6) because the information these sources
purportedly possess is not inconsistent with Chubb’s allegedly
false and misleading statements. This is discussed below.

Confidential Sources: Renewing at Inadequate, Flat, and
Reduced Rates

       Next, Plaintiffs plead on information and belief the
proposition that “[t]he rate increases that were, in fact being
obtained on new and renewal standard commercial insurance
policies were very small and well below the levels necessary to
have any materially favorable impact on Chubb’s 99 results, or
even to lessen the growing underwriting losses in Chubb’s
standard commercial business.” (Compl. ¶ 48(b).) Plaintiffs’
reliance on confidential sources in its effort to state this claim
with particularity poses many of the same problems listed above.
The Second Amended Complaint defers to:

        (a) A former property and casualty and director’s
        and officer’s underwriter in the financial
        institutions section in Chicago (“and . . . other

F.3d at 21, 24, 30-31, is instructive. In that case, the First Circuit noted
that Plaintiffs pled that the former Cabletron employees on whom they
rely worked at the Company during the Class Period and had personal
knowledge of the practices they described. Moreover, the Court of
Appeals found that the sources provided specific descriptions of the
means through which the alleged fraud occurred, that their consistent
accounts reinforced one another, that it was clear from the complaint that
the employees were familiar with the activities discussed, that the
sources provided an abundant level of detail, and, significantly, that the
sources have a strong basis of knowledge for the claims they make.
Detailed pleadings regarding the Cabletron’s system for inputting returns
bolstered the basis of the anonymous sources’ knowledge. As is
apparent from the discussion thus far and what follows, Plaintiffs here
have not pled nearly the level of detail as the plaintiffs in In re
Cabletron. Conspicuously absent are allegations that would support the
anonymous sources’ basis of knowledge. In addition, the Cabletron
plaintiffs also provided adequate supporting documentation. Id. at 27,
31-32. Plaintiffs’ reliance on In re Cabletron is misplaced.

                                    31
      former Chubb employees who provide specific
      examples as such”) for the blanket claim that “[t]o
      keep the customers that had not already left Chubb
      for lower-priced insurers, Chubb began to give
      their remaining customers either no rate increase
      or much smaller ones than it had planned under the
      . . . initiative.” (Id.)

      (b) A former underwriting manager for Executive
      Risk/Chubb in Simsbury Connecticut for the
      allegation that “Chubb was renewing the policies
      of 50% of its customers either at flat rates or even
      at reduced premiums.” (Id.)

      (c) A former underwriting technical assistant in
      Englewood, Colorado for the allegation that
      “Chubb was keeping approximately 60% of its
      high-risk, unprofitable customers that the rate
      increase/policy non-renewal initiative was
      purportedly eliminating.” (Id. ¶ 48(c).)

       The Second Amended Complaint fails to explain how
local employees who specialize in lines other than standard
commercial would have obtained specific nationwide statistics
regarding the standard commercial business. Furthermore, it is
far from clear how an Executive Risk/Chubb employee would
have access to information that Chubb was renewing the policies
of half of its customers at flat or reduced rates, given that
Executive Risk/Chubb did not exist until the consummation of
the merger on July 20, 1999.

        Plaintiffs also rely on a former customer service
supervisor in Pleasanton, California, a former regional
supervisor for Chubb in Denver, Colorado, and a former
commercial lines customer service representative/rater in Seattle
as the basis for naming specific customers who were not given
rate increases regardless of their profitability. According to a
former property claims adjuster in Boston, “underwriters had the
incentive to resist rate increases because their own compensation
was dependent on keeping customers.” (Id.) Again, with the

                               32
possible exception of the commercial lines customer service
representative, we are left to speculate on a local customer
service worker’s and regional supervisor’s basis of knowing the
precise terms of renewal of commercial lines policies between
Chubb and the specific customers. Moreover, Plaintiffs failed to
plead the dates in which these policies were renewed at flat
prices, rendering it impossible to determine the relationship
between these policies and the success of the rate initiative.15
Once again, as explicated in the next section, even if these
limited allegations meet the PSLRA’s strict requirements for
pleading on information and belief, they do not contradict
Defendants’ Class Period statements.

Confidential Sources: Renewing Unprofitable Business

         Third, Plaintiffs aver that Chubb “was renewing hundreds
of millions of dollars of standard commercial insurance policies
at premium levels Chubb knew were unprofitable and thus
would adversely impact Chubb’s results going forward.”
(Compl. ¶ 48(c).) In support of this extremely broad assertion,
Plaintiffs rely upon a former umbrella and excess insurance
manager in Eaglewood, Colorado; a former customer service
supervisor in Pleasanton, California; a former underwriting
technical assistant in Englewood, Colorado; a former energy
resources underwriter in the Commercial Lines Department in
Cincinnati and Pittsburgh; and a former property and casualty
and director’s and officer’s underwriter in the financial
institutions section in Chicago. According to these sources,
although these unnamed unprofitable customers renewed with
Chubb and agreed to pay higher premiums, the premiums “were
still far too low to make these customers profitable to Chubb
because the customers were such bad insurance risks.” (Id.)
Plaintiffs cite only two specific accounts--McDonald’s

       15
         The District Court shrewdly observed that if Plaintiffs claim
that customers left as a result of the rate increases during first quarter
1999, and/or claim that policies renewed during that period were
renewed at flat rates, this would appear to conflict with Plaintiffs’
assertion that the initiative would, in fact, have little effect in 1999
because policies were not up for renewal until January or July 1.

                                   33
Corporation and Langenscheidt Publishing Group--as examples
of unprofitable customers whose respective policies were
renewed at a flat, and lower rate respectively. Notably, the
source of information about the Langenscheidt Publishing Group
is a former customer service representative in Washington, D.C.
(Id.) The use of these sources to satisfy particularity is
problematic for the same reasons detailed above.

Confidential Sources: Timing of Rate Initiative’s Impact

        Fourth, Plaintiffs contend that, contrary to Defendants’
representations, the rate initiative, even if successful, “would not
have any significant positive impact on Chubb’s financial results
during 99 and, in fact, Chubb’s standard commercial insurance
problems would continue to very adversely impact Chubb’s
results throughout most of 99.” (Compl. ¶ 48(d).) In an effort to
particularize, Plaintiffs cite a “former vice president in personal
lines insurance” for the proposition that because “a vast majority
of Chubb policies” (implicitly including commercial lines
policies) only came up for renewal a couple times a year, the rate
initiative “would take two to three years [to show] significant
positive impact.” (Id.) Again, without more, it is not sufficiently
probable that an employee working in personal lines would
possess information regarding commercial lines policies and
their impact on the rate initiative. Similarly, it is not sufficiently
probable that a former commercial lines underwriter in Newport
Beach, California, would know that “almost none of the policies
[nationwide] renewing on January 1, 1999, were renewed in
accordance with the rate increase/policy non-renewal initiative.”
(Id. (emphasis in original).)

Confidential Sources: Accounting Fraud

      Fifth, Plaintiffs attempt to substantiate claims of
accounting fraud by reference to a number of former employees
who held positions that would not appear to render them privy to
the company’s bookkeeping practices, let alone the specific
accounting that went into the company’s financial reporting.

       Plaintiffs claim that the first and second quarter 1999

                                 34
combined ratios were grossly overstated as a result of improper
accounting practices. In support of their assertion that the first
quarter 1999 combined ratio was in fact 130%, and not 117.9%
as Defendants represented, Plaintiffs cite only two former
employees--a former branch manager in Grand Rapids,
Michigan, and a former Chubb commercial lines marketing
underwriter in Seattle. This is unquestionably lacking in
particularity, as Plaintiffs have not provided any facts indicating
any probability that the two branch employees would have
access to this type of national statistical information. Nor do
Plaintiffs plead the data that was used to arrive at this figure.

        Plaintiffs also maintain that the combined ratio was
improperly inflated as a result of reserve manipulations
occurring in the standard commercial and property and marine
lines, contrary to GAAP. 16 Plaintiffs, however, neglect to plead
these purported GAAP violations with the requisite particularity.
Again, Plaintiffs do not allege enough to support a probability
that their sources would possess the information they claim to
possess. Plaintiffs rely on a former general claims adjuster in
Boston and a former senior customer services team leader in Los
Angeles and Seattle for the proposition that, “upper management
pressured branch managers to improperly reduce reserves, and
ordered adjusters to refrain from recording reserves until after
the Executive Risk acquisition was complete.” (Id. ¶ 48(e)
(emphasis added).) Plaintiffs refer to this same customer services
team leader for the bold assertion that “the majority of Chubb’s
branch offices were manipulating reserves,” (Id. (emphasis
added)) and for the nationwide statistic that “up to 25% of
Chubb’s reserves were manipulated downward.” (Id. ¶ 143.) The
sole basis provided for this source’s knowledge of the latter
assertion is that he “worked for Chubb for nearly six years, and
was thus very familiar with Chubb and how it operated.” (Id.) It
cannot be disputed that this description is wholly insufficient to
demonstrate how a former employee working in a customer
service capacity would know that, nationally, 25% of Chubb’s
reserves were manipulated downward or that the majority of

       16
        Financial results reported in violation of GAAP are
presumptively misleading. See 17 C.F.R. § 210.10-01(a).

                                35
branch offices nationwide were manipulating reserves.
Remarkably, Plaintiffs cite to a former branch manager in West
Michigan for the contrary speculation that “I guarantee you they
[defendants] padded loss reserves.” (Id.) Plaintiffs further
attribute the grandiose assertion that the first quarter 1999 results
were deliberately falsified to the former customer services team
leader in Los Angeles and Seattle. As a result of the accounting
fraud, according to a former branch manager in Grand Rapids,
“defendants knew . . . that Chubb’s forecasts of 5-1/2%-6%
premium growth for its standard commercial insurance business
during 99 and a falling combined ratio for its standard
commercial business were false and could not be obtained” (Id. ¶
48(j).) It is far from clear how a branch manager would have
knowledge of what senior Chubb executives knew. Plaintiffs’
reliance on other confidential sources to provide the particularity
for their claim of reserve manipulations fails for the same
reasons.17

       17

•      Plaintiffs rely on a “former marketing vice president” for the
       observation that “reserves can be ‘conveniently manipulated’ in
       the insurance industry” and that Chubb therefore must have been
       “‘managing’ its reserves to artificially boost its earnings in 99.”
       (Compl. ¶ 143.)
•      Plaintiffs attribute the claim that Chubb was “stair stepping” its
       reserves to a former manager in Florham Park, New Jersey, and
       a property claims manager in Troy, Michigan. (Id. ¶ 144.)
       Plaintiffs have provided no information which would indicate
       that these employees had personal knowledge of reserve
       manipulations in the standard commercial lines.
•      According to a former general claims adjuster in Boston, “the
       reserve freeze was occurring Company-wide.” (Id. ¶ 145.)
•      With respect to Plaintiffs’ averments of improper revenue
       recognition, they cite to the former senior customer services team
       leader in Seattle and Los Angeles, and a former personal lines
       underwriter in Chicago for the claim that, in violation of GAAP,
       “defendants caused Chubb to record the premium for the renewal
       policy as revenue . . . 90 days before the policy was even up for
       renewal.” (Id. ¶ 154.)
•      Incredulously, without providing any further description,
       Plaintiffs attribute to these same former employees the bald
       assertion that “this conduct occurred throughout the Company,

                                   36
        Plaintiffs fail to identify with particularity any source for
their accounting fraud claims that would reasonably have
knowledge supporting the allegations that Chubb’s financial
statements were false. Nor does the Second Amended
Complaint identify the data, or source of data, used to arrive at
its calculations. Nor do Plaintiffs provide any particulars
regarding the amount by which reserves were distorted, or how
much revenue was improperly recognized.18 See In Re
Burlington, 114 F.3d at 1417-18 (“[W]here plaintiffs allege that
defendants distorted certain data disclosed to the public by using
unreasonable accounting practices, we have required plaintiffs to
state what the unreasonable practices were and how they
distorted the disclosed data.”). Plaintiffs’ allegations do not
suffice.

Confidential Sources: Duty to Disclose

        Sixth, Plaintiffs contend that Defendants had an obligation
to disclose Chubb’s disappointing second quarter 1999 results to
the Executive Risk shareholders in advance of the merger vote
that occurred on July 19, 1999. Defendants’ failure to disclose
this information, Plaintiffs allege, rendered the statements
contained in the Registration and Proxy Statements false and
misleading. Plaintiffs fail to allege with any particularity,
however, that Defendants knew of the final second quarter 1999
results at the time the merger vote took place. The conclusory
assertion that “O’Hare and the other defendants had access to
these financial results far in advance of when they were
announced, and before the Executive Risk shareholders voted”
(Compl. ¶ 126) is patently insufficient, as is the speculation that
“[i]f defendants were paying any attention . . . any serious

       in all lines of business.” (Id.)
       18
          Again, comparison to the allegations held sufficient in In re
Cabletron is revealing. Contrary to the lack of allegations in this case,
the Cabletron plaintiffs pled estimates of the actual amount of
improperly recognized revenue. 311 F.3d at 24. The Cabletron
plaintiffs also provided adequate supporting documentation. Id. at 27,
31-32.

                                    37
problems in the second quarter should have been glaringly
apparent to them by the time of the July 19 shareholder vote.”
Pls.’ Br. at 34; see In re Advanta Corp. Sec. Litig., 180 F.3d 525,
539 (3d Cir. 1999). Plaintiffs’ attempt to claim that the release
of the second quarter 1999 results just eight days following the
vote supports an inference that Defendants’ knew of them prior
to the vote is unwarranted given the consistency of the timing of
this release with the timing of Chubb’s prior releases. Plaintiffs’
resort to confidential sources to provide the requisite particularity
is once again ineffectual.

       According, [sic] to a former Chubb senior vice-
       president and managing director of surety business,
       who was based in Chubb’s Warren, New Jersey
       headquarters . . ., Chubb held quarterly meetings,
       with O’Hare and Kelso present - where the heads
       of each Chubb business unit gave detailed reports
       on the status of their business. According to this
       same [source] . . . these meetings were held two
       weeks after the close of each quarter. As such,
       because the 2nd Q 99 ended on 6/30/99, the 2Q 99
       meeting at Chubb was held on approximately
       7/14/99 - five full days before the merger vote on
       7/19/99. Given that at each of these meetings,
       according to the same former vice president, the
       reports presented to O’Hare and Kelso included
       ‘detailed numbers, figures and graphs’ analyzing
       current results of each Chubb business unit,
       defendants O’Hare, Kelso and Schram were fully
       aware that Chubb’s 2Q 99 results would be far
       worse than expected, but defendants purposely
       withheld disclosing Chubb’s worse-than-expected
       2ndQ 99 financial results until after Executive
       Risk’s shareholders voted in favor of Chubb’s
       acquisition of Executive Risk because they feared
       that announcing these results beforehand would
       cause the shareholders to vote against the
       acquisition.

(Compl. ¶ 126 (emphasis in original).)

                                 38
       Plaintiffs do not allege that this former vice president was
employed at the appropriate time. Indeed, it appears that he was
not, given the conspicuous absence of an allegation regarding
whether or not a meeting actually was held on or about July 14,
1999 to discuss the second quarter results. This general
allegation says nothing with particularity about whether a
meeting was in fact held prior to the Executive Risk shareholder
vote, whether any Defendants were in fact present at such a
meeting, or whether the second quarter 1999 results were even
available at that time.

Confidential Sources: Rumors and Speculation

       In addition, interspersed throughout the Second Amended
Complaint’s discussion of the “true facts” are a number of
statements that are attributed to no source and are based on
nothing more than speculation. Plaintiffs claim particularity on
the basis of such statements as:

       (a) “It was well known within Chubb that this
       [renewing policies of unprofitable customers at flat
       or reduced rates] was occurring throughout the
       Company because management was pressuring
       employees to meet certain revenue targets which
       were impossible to achieve under the rate
       increase/policy non-renewal initiative, and so the
       initiative was simply being ignored, not complied
       with, and/or applied in a haphazard fashion.” (Id. ¶
       48(c).)

       (b) “It was well known within Chubb that the rate
       increase/policy non-renewal initiative did not have
       the immediate impact defendants represented it did
       and would have very little positive effect in 99 . . .
       .” (Id. ¶ 48(d).)

       (c) “[R]umors circulated within the Company that
       Chubb had artificially boosted its reported financial
       performance with accounting tricks . . . .” (Id. ¶
       48(I).)

                                 39
       (d) “Chubb’s operations employees openly
       discussed reserve manipulations at Company
       meetings.”

       (e) “[I]t was well known within Chubb during the
       Class period that the rate increase/policy non-
       renewal initiative was failing.” (Id. ¶ 48(g).)

Generic and conclusory allegations based upon rumor or
conjecture are undisputedly insufficient to satisfy the heightened
pleading standard of 15 U.S.C. § 78u-4(b)(1).

Confidential Sources: Summary

        In sum, Plaintiffs repeatedly attribute allegations about the
rate initiative in Chubb’s commercial lines business to former
employees who worked in other business segments, or who did
not work for the company at all, without furnishing any
explanation as to how such sources would have knowledge
regarding an initiative confined to a particular division of the
company for which they apparently had no responsibility.
Furthermore, Plaintiffs repeatedly attribute specific nationwide
information and statistics regarding Chubb’s performance to
former employees who worked in local branch offices. These
sources have not been described with sufficient particularity to
support the probability that a person in the position occupied by
the source would possess the information alleged. Consequently,
Plaintiffs have failed to plead the falsity of the Defendants’
statements and accounting fraud with the particularity demanded
by the PSLRA.

       The sheer volume of confidential sources cited cannot
compensate for these inadequacies. Citing to a large number of
varied sources may in some instances help provide particularity,
as when the accounts supplied by the sources corroborate and
reinforce one another. In this case, however, the underlying
prerequisite--that each source is described sufficiently to support
the probability that the source possesses the information alleged--
is not met with respect the overwhelming majority of Plaintiffs’
sources. Cobbling together a litany of inadequate allegations

                                 40
does not render those allegations particularized in accordance
with Rule 9(b) or the PSLRA. Consequently, Plaintiffs’
argument that particularity is established by looking to the
“accumulated amount of detail” that their unparticular source
allegations provide when considered as a whole is unavailing.
See In re Rockefeller, 311 F.3d at 224 (rejecting similar
argument because “fraud allegations should be analyzed
individually to determine whether each alleged incident of fraud
has been pleaded with particularity. If, after alleging a number
of events purportedly substantiating a claim of fraud, none of
those events independently satisfies the pleading requirement of
factual particularity, the complaint is subject to dismissal under
15 U.S.C. § 78u-(b)(3)(A)”) (internal citations omitted). Finally,
Plaintiffs charge that, even foregoing its “true facts” allegations
and anonymous former employee allegations, they have
adequately pled why Defendants’ various statements were
misleading in accordance with the PSLRA by demonstrating that
Defendants’ own public statements contradict Defendants’
earlier representations, made prior to the July 19, 1999 Executive
Risk shareholder vote and merger, that Chubb’s standard
commercial business was turning around so quickly that it was
already contributing to a stronger-than-expected bottom line in
the first quarter 1999. As explained in detail below, Plaintiffs
distort Defendants’ “admissions” by taking Defendants’
statements out of context. Moreover, Defendants’ public
statements do not, in fact, contradict the purportedly false and
misleading statements made throughout the Class Period.

                   Failure To State A Claim

       Plaintiffs’ failure to meet the threshold pleading
requirements mandated by Rule 9(b) and PSLRA support
dismissal apart from Rule 12(b)(6). Even if the“true facts” were
pled with the requisite particularity, however, they fail to
demonstrate the falsity of Defendants’ allegedly false and
misleading Class Period disclosures.

       Keeping in mind that Plaintiffs may not benefit from
inferences stemming from unparticularized allegations that may
have otherwise been warranted under a traditional Rule 12(b)(6)

                                41
analysis, even assuming that Plaintiffs’ confidential source
allegations meet their statutory pleading burden, or taking into
consideration those meager allegations that arguably meet this
standard, anecdotal examples of profitable customers lost or
policies renewed at flat or slightly raised rates does not
demonstrate that the rate initiative was failing, especially in light
of Defendants’ Class Period disclosures.19 Plaintiffs’ argument
that Defendants’ own disclosures and the confidential source
information demonstrate the falsity of Defendants’ earlier Class
Period representations is utterly without merit, as Plaintiffs
repeatedly take Defendants’ statements out of context and draw
unreasonable inferences. Indeed, Defendants’ supposed
“admissions,” and the information provided by the confidential
sources are, in fact, generally consistent with what Plaintiffs
deem were Defendants’ false statements and disclosures.

        First, in accordance with those confidential source
allegations that reference specific customers that Chubb lost as a
result of the rate initiative, Defendants fully disclosed before and
throughout the Class Period that the initiative was expected to
and was indeed causing the loss of profitable business.

       (a) According to Chubb’s 1998 Form 10K, “[o]ur
       priorities for 1999 are to renew good business at
       adequate prices and not renew underperforming
       accounts where we cannot attain price adequacy.
       This aggressive pricing strategy could cause us to
       lose some business. Therefore, we expect overall
       premium growth to be flat in 1999.” (App. at
       212a.)

       (b) In the April 27, 1999 Earnings Release
       Conference Call, Chubb stated, “I did say that we’d
       lost 50% of the business . . . due to the fact that we

       19
          Cf. GSC Partners CDO Fund v. Washington, 368 F.2d 228,
241-42 (3d Cir. 2004) (finding plaintiffs have not adequately alleged that
defendants had actual knowledge of the falsity of a particular statement
because, inter alia, plaintiffs’ reliance on one specific example was
insufficient to contradict allegedly false assertion).

                                   42
      really didn’t want to renew the goddamn business. .
      . . The other half, that which left us for price, . . . it
      would have been good business. . . . lost business is
      accelerating.” (Id. at 261a.) O’Hare and Schram
      further stated in this call that Chubb “was,
      however, prepared to lose $250-$300 million in
      standard commercial business.” (Compl. ¶ 38.)

      (c) The second quarter 1999 Form 10-Q report,
      which includes Chubb’s allegedly fraudulent
      second quarter 1999 results, reveals, “[r]etention
      levels were lower in the first six months of 1999
      compared with the same period in 1998.
      Approximately half of the non-renewals were the
      result of business we chose not to renew and half
      were the result of customers not accepting the price
      increases we institute.” (Id. ¶ 74.)

      (d) Painewebber’s July 27, 1999 report on Chubb,
      which was based upon information provided by
      O’Hare, Kullas, and Sills in the July 27, 1999
      Conference Call and follow-up conversations
      quotes O’Hare: “[W]e are losing more business
      than we did in the first quarter and we’re writing
      less new business than we did in the first quarter.”
      (Id. ¶ 67.)

       Far from suggesting contradiction, that some particular
accounts chose not to renew with Chubb, as alleged by various
confidential sources, is completely consistent with Chubb’s
public statements.

        Second, with regard to the Second Amended Complaint’s
illustrations of specific customers where the rate increases were
supposedly not “sticking,” Plaintiffs ignore Defendants’
contemporaneous public statements acknowledging that Chubb’s
reported price increases were only averages:

      (a) In an April 27, 1999 Bloomberg News
      Interview, O’Hare emphasized that the expected

                                 43
       rate increases are only averages: “I fully expect that
       [commercial lines price increases will] build rather
       rapidly to 5-1/2%-6%. Now those are averages . . .
       .” (App. at 268a.)

       (b) The second quarter 1999 Form 10-Q states:
       “On the business that was renewed, rates have
       increased modestly yet steadily in the first six
       months of 1999 and we expect this trend to
       continue.” (Comp. ¶ 74.)

Plaintiffs’ assertions that specific policies were renewed at flat or
reduced rates does not indicate that the reported average rate
increases were false.

        Third, Plaintiffs’ reference to the internal memorandum
that allegedly states that “the targeted 10%-15% premium
increases had not been achieved” does not support the alleged
falsity of any of Defendants’ public statements. The Second
Amended Complaint contains no allegation that Defendants
reported 10% to 15% rate increases to the public, and it simply
does not follow that the rate initiative was failing because such
rate increases were not achieved. As mentioned above, Chubb
projected to the public average premium growth of 5.5% to 6.5%
throughout 1999. On appeal, in an effort to show falsity,
Plaintiffs theorize that “the nature of Chubb’s renewal cycle,
with two and three-year policies, to achieve 5-1/2% to 6%
premium growth in 1999 would require Chubb to make its
targeted increases of 10%-15% on the policies coming up for
renewal.” Pls.’ Br. at 47-48. This theory requires acceptance of
the unsupported inference that when the memorandum referred
to “10%-15% premium increases” it was referring only to rate
increases on the particular policies up for renewal, as opposed to
the average increase in premiums across all policies, whether up
for renewal or not. Given the paucity of allegations describing
this memorandum, it is not reasonable to draw this inference.

      Fourth, Plaintiffs contend that O’Hare’s “admission,”
made in the July 27, 1999 conference call and included in the
second quarter Form 10-Q report, that “[i]t will take at least two

                                 44
renewal cycles to adequately reprice the standard commercial
book and during that time we will continue to have losses from
non-renewed policies. Thus, . . . it will be mid-2000 before the
benefits of these actions significantly flow to the bottom line”
(Compl. ¶¶ 25, 64, 67) contradicts his earlier representation made
on April 27, 1999, that “[t]his god dam [sic] ship has turned
faster than I thought it was going to” i.e., that the rate initiative
was exerting a positive impact in the first quarter 1999.
Plaintiffs conveniently ignore the remainder of O’Hare’s
statement, his later statements made during the Class Period, and
his qualification that it would be mid-2000 before significant
effects would be felt. The entirety of O’Hare’s statement is as
follows: “I think what we’re all concerned about, putting it very
bluntly, this god damn ship has turned around faster than I
thought it was going to. But it is a big ship.” He further
qualified: “We all know that you can’t turn a business of this
size around in one quarter, but the signs bode well for the
future.” (App. at 249a, 263a.) In another April 27, 1999
interview cited by Plaintiffs, O’Hare again emphasized, “it is a
big ship and it does take a while to turn.” (Id. at 267a.) Plaintiffs’
attempt to characterize these statements as amounting to a
representation that the initiative was already “contributing to a
strong bottom line in the first quarter” is not reasonable. Fraud
cannot be manufactured from these statements. After the second
quarter 1999 results were released, O’Hare explained in a
conference call with analysts that “I think the second quarter has
brought me back to where I started because really the first half of
the year is sort of flowing out exactly as our original models had
assumed. The first quarter, as I think I might have said, the ship
was turning faster than I thought it was. I would say we are now
right on course. I’m not in any way discouraged, but I admit to
being somewhat overly optimistic at the end of the first quarter.”
(Id. at 493a-494a.) We have been clear that fraud cannot be
inferred merely because “‘[a]t one time the firm bathes itself in a
favorable light’ but ‘later the firm discloses that things are less
than rosy.’” In re Advanta, 180 F.3d at 538 (quoting DiLeo, 901
F.2d at 627.) We have long rejected attempts to plead fraud by
hindsight.

       Neither the adequately pled “true facts” nor Defendants’

                                 45
public statements demonstrate the alleged falsity of Defendants’
Class Period disclosures.20

               Individual Executive Risk Defendants

       Plaintiffs’ claims against Defendants Sills, Kullas, and
Deutsch arise exclusively under section 10(b) and section 14(a)
of the 1934 Act.21 Specifically, Plaintiffs contend that the
Executive Risk Defendants’ opinion that the merger was “fair”
and “in the best interests” of Executive Risk shareholders was
false when made. This “fairness” opinion was imparted to
Executive Risk shareholders via the Executive Risk Proxy
Statement.

       It is significant to note at the outset that while the fraud
allegations in this case focus exclusively on problems associated
with Chubb’s standard commercial business, Executive Risk, a
specialty insurance company, is not involved with the standard
commercial insurance business. Plaintiffs aver, however, that the

       20
         The disclosures made in connection with the release of Chubb’s
third quarter 1999 results at the close of the Class Period are also
consistent with representations made throughout the Class Period. For
example, Defendants reiterated that “it will take time for the benefits of
the pricing initiative to reverse the losses from underpriced business”
(App. at 538a) and that “[i]t will take at least two annual renewal cycles
to adequately reprice the entire standard commercial book, and during
that time we will continue to have losses from underpriced business.
Thus, it will be the latter part of 2000 before our pricing initiative is
expected to have a noticeable effect on our standard commercial results”
(Id. at 733a). Moreover, it is not reasonable to infer that Chubb’s
reported prior combined ratios were fraudulent from the fact that
Chubb’s reported combined ratio increased to 130% in the third quarter,
especially in light of the recognized impact of Hurricane Floyd on this
number. Furthermore, such an allegation constitutes an unacceptable
attempt to plead fraud by hindsight.
       21
        Plaintiffs also alleged control person liability claims against
Defendants Sills and Kullas pursuant to section 20(a) of the 1934 Act.
The lack of any predicate violation of the Securities Exchange Act of
1934 compels dismissal of control person claims.

                                   46
individual Executive Risk Defendants must have become aware
of the alleged internal fraud at Chubb while conducting due
diligence in preparation for the merger. It is further alleged that,
in spite of their purported knowledge, these individual
Defendants misrepresented the merger as “fair” from a financial
point of view and “in the best interests” of Executive Risk
shareholders to facilitate a favorable vote, and thereby reap the
special benefits and payments accompanying consummation of
the merger.22

       As lodged against the individual Executive Risk
Defendants, Plaintiffs’ section 10(b) claims must fail. The
District Court properly observed that these claims are essentially
derivative of the section 10(b) and Rule 10b-5 claims Plaintiffs
asserted against the Chubb Defendants. As such, our holding
that Plaintiffs’ allegations regarding the falsity of Chubb’s first
and second quarter 1999 results and affirmative statements made
thereto do not pass muster under the PSLRA a fortiori
necessitates dismissal of the claims as leveled against the
individual Executive Risk Defendants to the extent they are
based on incorporating that same information in the merger
proxy materials and in recommending approval of the merger.
Likewise, Plaintiffs’ sparse allegations regarding why the
Executive Risk Defendants’ position that the merger was in the
best interest of and fair to Executive Risk shareholders was false
are not sufficiently particularized.23 Plaintiffs have not offered

       22
       The Proxy Statement disclosed all benefits to be received by
Defendants Sills, Kullas, and Deutsch upon completion of the merger.
       23
         Indeed, the available information suggests that the merger was
fair for Executive Risk shareholders. Executive Risk retained
Donaldson, Lufkin & Jenrette Securities Corporation and Salomon
Smith Barney Incorporated to opine on the fairness of the potential
merger with Chubb. Each financial advisor independently reviewed
public financial information and information provided by both
companies and expressly concluded that the merger was “fair” to
Executive Risk shareholders. The Second Amended Complaint does not
include any allegation that any of the individual Executive Risk
Defendants were reckless in concluding that the valuations furnished by
the investment bankers were fair, or that they intentionally issued this

                                  47
particularized allegations that the value of Chubb’s stock was
artificially inflated. Nor have Plaintiffs sufficiently
particularized how the individual Executive Risk Defendants
became aware of Chubb’s purportedly false financial results and
the supposed failure of Chubb’s rate initiative. A vague,
conclusory allegation that the individual Executive Risk
Defendants must have been aware of Chubb’s falsified financials
through partaking in due diligence does not suffice. Moreover,
Plaintiffs’ assertions that Defendants Sills and Kullas made
misstatements to securities analysts by participating with
Defendant O’Hare in conference calls to securities analysts on
July 27, 1999 is not particularized and is baseless in light of the
fact that Second Amended Complaint attributes all those July 27,
1999 alleged misstatements exclusively to O’Hare.

        The particularity requirements of the PSLRA also govern
the allegations surrounding Plaintiffs’ section 14(a) claims
because they sound in fraud. See In re NAHC 306 F.3d at 1329.
As discussed in detail above, Plaintiffs’ allegations made in
connection with the Proxy Statement are insufficiently
particularized. Accordingly, the District Court appropriately
dismissed these claims as to the Executive Risk Defendants as
well.

                                     B.

                    Section 11 1933 Act Claims

        Plaintiffs next contest the District Court’s dismissal of
their section 11 1933 Act claims for failure to meet the
particularity requirement of Fed. R. Civ. P. 9(b). The District
Court found that Plaintiffs’ section 11 allegations “sound in
fraud” and accordingly dismissed those allegations for failure to
comply with Rule 9(b). Plaintiffs assert that the District Court
erred in imposing heightened pleading requirements on claims
that do not predicate recovery on a showing of fraud. They also
argue that their section 11 claims are in fact strict liability claims
that do not “sound in fraud.” The question of whether the

conclusion knowing of its falsity.

                                     48
heightened pleading standard articulated in Rule 9(b) applies to
claims brought under section 11 of the 1933 Act that sound in
fraud is a question of law subject to plenary review. See Planned
Parenthood of Cent. N.J. v. Attorney General of N.J., 297 F.3d
253, 259 (3d Cir. 2002). We affirm the District Court.

        First, an examination of the factual allegations that
support Plaintiffs’ section 11 claims establishes that the claims
are indisputably immersed in unparticularized allegations of
fraud. The one-sentence disavowment of fraud 24 contained
within Plaintiffs’ section 11 Count--Count II of the Second
Amended Complaint--does not require us to infer that the claims
are strict liability or negligence claims, and in this case is
insufficient to divorce the claims from their fraudulent
underpinnings. We noted in Shapiro that because “Rule 9(b)
refers to ‘averments’ of fraud,” we must “examine the factual
allegations that support a particular legal claim.” Shapiro v. UJB
Fin. Corp., 964 F.2d 272, 288 (3d Cir. 1992).

        Such inquiry reveals that a core theory of fraud permeates
the entire Second Amended Complaint and underlies all of
Plaintiffs’ claims. The linchpin of Plaintiffs’ action is their
allegations that Defendants knowingly and intentionally
committed accounting violations, issued a series of false and
misleading statements regarding improvements in Chubb’s
standard commercial insurance business, and omitted critical
information that would tend the negate the representations of
continued improvement for the purposes of effectuating a stock-
for-stock merger between Chubb and Executive Risk, and
avoiding a hostile takeover attempt. The Second Amended
Complaint is completely devoid of any allegations that
Defendants acted negligently. The language Plaintiffs employ
within Count II itself further belies their contention that their
1933 Act claims are strict liability claims. Count II of the
Second Amended Complaint expressly incorporates by reference
all of the preceding allegations, including the sections entitled

       24
          Paragraph 166 of the Second Amended Complaint states:
“Plaintiffs incorporate ¶¶ 1-161. Plaintiffs expressly disclaim any
allegations of fraud, knowledge, intent, or scienter.”

                                49
“scienter and scheme allegations,” (Compl. ¶¶ 166, 172-177) and
the “true facts” (Id. ¶¶ 24, 28). Count II describes the
Registration Statement as “false and misleading,” (Id. ¶ 169), and
repeatedly relies upon the “false statements and accounting
manipulations detailed herein” as well as the “artificial[]
inflat[ion]” of Chubb’s stock to support this characterization.
(Id.) It speaks of Defendants “conceal[ing] key facts from its
public disclosures until after the merger closed,” and “concealing
the continued serious deterioration in Chubb’s standard
commercial insurance business.” (Id.) It further describes
Defendants’ EPS forecasts, premium growth forecasts, and
combined ratio predictions as “false when made.” (Id.) As in
Shapiro, Plaintiffs’ claims “brim[] with references to defendants’
intentional and reckless misrepresentation of material facts.”
Shapiro, 964 F.2d at 288.

        Second, past precedent from this Circuit makes evident
the proposition that section 11 1933 Act claims that are grounded
in allegations of fraud are subject to Fed. R. Civ. P. 9(b). This is
correct despite that neither fraud, mistake, or negligence is
required to plead a prima facie section 11 claim. It does not
logically follow from the fact that fraud is not a necessary
element of a section 11 claim that a section 11 claim cannot
hinge on an allegation of fraud. Rule 9(b) does not discriminate
between various allegations of fraud. Instead, it applies to any
claim that includes “averments of fraud or mistake.” Recognizing
that neither fraud nor mistake is a necessary element of a cause
of action under section 11, we nonetheless held in Shapiro that
“when § 11 and § 12(2) claims are grounded in fraud rather than
negligence, Rule 9(b) applies.” 964 F.2d at 288.

        Plaintiffs counter that Shapiro does not survive passage of
the PSLRA in light of Congress’ apparently deliberate choice
not to impose heightened pleading requirements on claims
brought pursuant to the 1933 Act. Plaintiffs’ position is
tantamount to claiming that Congress implicitly abrogated
application of Rule 9(b) in securities suits brought under the
1933 and 1934 Acts. This argument cannot be reconciled with
our view that “[a]brogation of a rule of procedure is generally
inappropriate in the absence of a direct expression by Congress

                                50
of its intent to depart from the usual course of trying ‘all suits of
a civil nature’ under the Rules established for that purpose.”
Weiss v. Temporary Investment Fund, 692 F.2d 928, 936 (3d Cir.
1982) (internal citation omitted), judgment vacated on other
grounds, 465 U.S. 1001 (1984). Moreover, Plaintiffs’ argument
disregards the fact that Rule 9(b) and the PSLRA impose distinct
and independent pleading standards. This Circuit has recognized
the continued independent vitality of Rule 9(b) in securities suits.
See Oran v. Stafford, 226 F.3d 275, 288 (3d Cir. 2000) (“Both
the PSLRA and the Federal Rule of Civil Procedure 9(b) impose
heightened pleading requirements on plaintiffs who allege
securities fraud.”). Significantly, this Court has recently
reaffirmed its reasoning in Shapiro.25 See In re Digital Island

       25
          Other Courts of Appeals to consider the issue both pre and post
passage of the PSLRA have also concluded that Rule 9(b) applies to
section 11 claims sounding in fraud. See, e.g., Rombach v. Chang, 355
F.3d 164, 171 (2d Cir. 2004) (“We hold that the heightened pleading
standard of Rule 9(b) applies to Section 11 and Section 12(a)(2) claims
insofar as the claims are premised on allegations of fraud.”); Lone Star
Ladies Inv. Club v. Schlotzsky’s, Inc., 238 F.3d 363, 368 (5th Cir. 2001)
(approving district court’s reliance on Melder v. Morris, 27 F.3d 1097,
1100 n.6 (5th Cir. 1994) for proposition that Rule 9(b) is applicable to
1933 Securities Act claims that are grounded in fraud); In re Stac Elecs.
Sec. Litig., 89 F.3d 1399, 1404 (9th Cir. 1996) (“We now clarify that the
particularity requirements of Rule 9(b) apply to claims brought under
section 11 when, . . . they are grounded in fraud.”); Sears v. Likens, 912
F.2d 889, 893 (7th Cir. 1990) (plaintiffs “fail[ed] to satisfy this 9(b)
standard” applicable to their Securities Act claims sounding in fraud
where “their complaint [was] bereft of any [particularity]”); accord
Schwartz v. Celestial Seasonings, Inc., 124 F.3d 1246, 1252 (10th Cir.
1997) (“[a]ssuming without deciding” that the approach set out by the
Third Circuit in Shapiro applies, and holding that “the § 11 claim in the
case at bar . . . does not trigger Rule 9(b) scrutiny” because “it is not
premised on fraud.”); Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1223
(1st Cir. 1996) (dictum) (“[I]f a plaintiff were to attempt to establish
violations of Sections 11 and 12[a](2) as well as the anti-fraud
provisions of the Exchange Act though allegations in a single complaint
or a unified course of fraudulent conduct . . . the particularity
requirements of Rule 9(b) would probably apply to the Sections 11,
12[a](2), and Rule 10b-5 claims alike.”). But see In re NationsMart
Corp. Sec. Litig., 130 F.3d 309, 314 (8th Cir. 1997) (holding that “the

                                   51
Sec. Litig., 357 F.3d 322 (3d Cir. 2004) (explicitly relying upon
reasoning of Shapiro in holding that Rule 9(b) heightened
pleading requirements apply to claims brought under the tender
offer “best price rule” of the 1934 Act, 15 U.S.C. § 78n(d)(7); 17
C.F.R. § 240.14d-10(a), when those claims are grounded in
fraud); see also In re Adams Golf, Inc. Sec. Litig., 381 F.3d 267,
274 n.5 (3d Cir. 2004) (“[C]laims under the 1933 Act that do not
sound in fraud are not held to the heightened pleading
requirements of Fed. R. Civ. P. 9(b).”).

        Equally unavailing is Plaintiffs’ contention that Shapiro
cannot be squared with the Supreme Court’s subsequent
decisions in Leatherman v. Tarrant County Narcotics
Intelligence & Coordination Unit, 507 U.S. 163 (1993), and
Swierkiewicz v. Sorema N.A., 534 U.S. 506 (2002). Leatherman
and Swierkiewicz rejected judicially created heightened pleading
standards. In the case sub judice, we are faced with a
straightforward application of a procedural rule.

        Finally, Plaintiffs’ reliance on Lone Star Ladies Inv. Club
v. Schlotzsky’s, Inc., 238 F.3d 363 (5th Cir. 2001), for the notion
that the District Court should strip the section 11 claims of their
fraudulent elements and construct a claim based on negligence
and/or innocent misrepresentation is inapposite. In Lone Star
Ladies, it was the plaintiffs, not the district court, who, in light of
a dismissal under Rule 9(b), submitted an amended complaint
that dropped all 1934 Act fraud claims and instead relied solely
on non-fraud 1933 Act claims. Indeed, while the Fifth Circuit
held that under the circumstances the district court should have
allowed the amendment, it made abundantly clear that “a district
court is not required to sift through allegations of fraud in search
of some ‘lesser included’ claim of strict liability. It may
dismiss.” Id. at 368. It is not the responsibility of the District
Court to serve as Plaintiffs’ advocate.

       Plaintiffs’ entire Second Amended Complaint, including

particularity requirement of Rule 9(b) does not apply to claims under §
11 of the Securities Act, because proof of fraud or mistake is not a
prerequisite to establishing liability under § 11.”).

                                  52
the section 11 claims, is grounded in allegations of fraud.
Plaintiffs’ section 11 claims are accordingly subject to Rule 9(b).
As detailed exhaustively in the preceding section, Plaintiffs have
not met their burden of pleading fraud with particularity. As
such, the District Court appropriately dismissed Plaintiffs’
section 11 claims.

                                C.

                          Leave to Amend

        Finally, Plaintiffs challenge the District Court’s refusal to
grant them leave to file a Third Amended Complaint. The
District Court denied Plaintiffs leave to amend because Plaintiffs
had already been given “ample opportunity [three complaints] to
state a cognizable cause of action” and “continu[ing] to require
defendants to defend the action, and to ultimately incur the effort
and expense of a third motion to dismiss after two successful
dismissal motions, would clearly constitute undue prejudice to
the defendants.” (App. at 896.) We review the denial of leave for
abuse of discretion. In re Adams Golf Inc. Sec. Litig., 381 F.3d
267 (3d Cir. 2004). We hold that the District Court’s denial of
leave did not constitute an abuse of discretion.

       To effectively evaluate the propriety of the District
Court’s decision to deny Plaintiffs leave to amend their Second
Amended Complaint, it is vital to outline the reasons provided by
the District Court for dismissing the Amended Complaint, the
guidance it provided to Plaintiffs regarding the Amended
Complaint’s deficiencies, and Plaintiffs’ efforts to address the
District Court’s concerns in its Second Amended Complaint.

        The District Court granted Defendants’ motion to dismiss
the Amended Complaint for failure to meet the particularity
standards dictated by Rule 9(b) and the PSLRA, and for failure
to state a claim under Rule 12(b)(6). First, the District Court
determined that Plaintiffs failed to plead their fraud claims in
accordance with the mandates of Rule 9(b) and the PSLRA.
Specifically, Plaintiffs neglected to plead with particularity the
“who, what, when, and how” of each statement alleged to be

                                 53
false as required by Rule 9(b), and failed to satisfy the strict
standard provided by the Second Circuit’s decision in Novak v.
Kasaks, 216 F.3d 300 (2d Cir.), cert.denied, 531 U.S. 1012
(2000), for pleading 1934 Act fraud claims made upon
“information and belief.” In addition to Plaintiffs’ failure to offer
either adequate documentation or any sources who would likely
have knowledge of the allegations set forth in the Amended
Complaint, the District Court found that Plaintiffs did not plead
with particularity the data used to calculate, or simply the source
of, financial calculations that further supply the groundwork of
Plaintiffs’ fraud claims. Next, the District Court held that
Plaintiffs’ 1933 Act section 11 and 1934 Act section 14(a) claims
fall within the purview of the heightened pleading requirements
of Rule 9(b) and the PSLRA, respectively. While such claims
can be asserted without pleading scienter, they are subject to
heightened particularity requirements when plaintiffs nonetheless
elect to ground them in fraud. The District Court observed that
Plaintiffs’ claims here “sound in fraud” and found their attempt
to insulate their section 11 and 14(a) counts through a one-
sentence disavowal of fraud allegations unavailing. Third, The
District Court found that Plaintiffs’ scienter allegations were
insufficient. Finally, the District Court characterized many of the
statements Plaintiffs alleged to be false as inactionable forward
looking statements of optimism.

        The District Court’s decision to dismiss the Amended
Complaint thus provided Plaintiffs with a detailed blueprint of
how to remedy the defects in their claims. Plaintiffs were
effectively instructed to support fraud claim allegations with
particularity, either by adequately describing a source that
occupied a position such that the source would probably possess
the information alleged, and/or providing documentation.
Plaintiffs were further admonished to either plead section 11 and
section 14(a) claims without averring fraud or to meet the
requisite particularity requirements. As illustrated in our analysis
above, however, Plaintiffs’ Second Amended Complaint utterly
failed to comply with the District Court’s directives.

      An examination of the changes--or lack thereof--instituted
between the Amended Complaint and Second Amended

                                 54
Complaint is illuminating. With respect to those false statement
and accounting fraud allegations made on “information and
belief,” Plaintiffs neglected to supplement the existing
allegations of the Amended Complaint with sufficiently
particularized confidential source descriptions. Instead, as
discussed above, Plaintiffs chose to repeat the same allegations
from the Amended Complaint and attach a deluge of vague
confidential source allegations. With respect to their section 11
claims, the District Court explicitly informed Plaintiffs of the
reasons why their section 11 claims sound in fraud, including
that Count II of the Amended Complaint expressly incorporates
by reference all prior factual allegations of the complaint,
including the “scienter and scheme allegations.” Moreover, the
District Court cautioned that its assessment “is not altered by
plaintiffs’ attempt at transforming an action in fraud into a
negligence cause of action by adding a boilerplate assertion
under counts II and III ‘expressly disclaim[ing] any allegations
of fraud, knowledge, intent or scienter.’” (App. at 656.) Yet
notwithstanding this evident direction, Plaintiffs neglected to
make even a single adjustment to the Amended Complaint to
avoid having their section 11 claims subjected to Rule 9(b). 26
Instead, Plaintiffs regurgitated the exact same one-sentence
disavowal of fraud that the District Court had already rejected as
insufficient.

       Fed. R. Civ. P. 15(a) provides that leave to amend “shall
be freely given” by the court “when justice so requires.” We have
previously acknowledged and discussed the PSLRA’s unique
impact of narrowing application of this standard in securities
fraud cases. Allowing leave to amend where “‘there is a stark
absence of any suggestion by the plaintiffs that they have
developed any facts since the action was commenced, which
would, if true, cure the defects in the pleadings under the
heightened requirements of the PSLRA,’” would frustrate

       26
         Actually, Count II’s incorporation of allegations located
elsewhere in the Complaint, including the scienter and scheme
allegations, was amended to reflect the paragraph renumbering that
occurred as a result of other amendments made to the Amended
Complaint.

                                55
Congress’s objective in enacting this statute of “‘provid[ing] a
filter at the earliest stage (the pleading stage) to screen out
lawsuits that have no factual basis.’” GSC Partners CDO Fund v.
Washington, 368 F.3d 228, 246 (3d Cir. 2004) (quoting In re
NAHC, 306 F.3d at 1332, 1333). Plaintiffs here have proffered
no additional facts that would cure the pleading deficiencies of
the Second Amended Complaint. 27 In light of the clear guidance
the District Court afforded to Plaintiffs, Plaintiffs’ disregard of
that advice, and Plaintiffs’ failure to propose additional
amendments that would remedy the pleading deficiencies of the
Second Amended Complaint, the District Court did not abuse its
discretion in denying Plaintiffs leave to amend their deficient
complaint.

        Plaintiffs nonetheless argue that they should at least be
permitted to strip their 1933 Act section 11 claims of fraud
allegations and replead these claims pursuant to a theory of strict
liability or negligence. Ordinarily, leave to amend is granted
when a complaint is dismissed on Rule 9(b) particularity grounds
alone. See In re Burlington, 114 F.3d at 1435. Leave to replead,
however, is often properly denied on other grounds, such as
undue delay, bad faith, dilatory motive, prejudice and futility. Id.
at 1434. Significant to the District Court’s decision to deny
leave to amend is the fact that it had set forth in detail the
applicable heightened pleading standards and the deficiencies in
Plaintiffs’ Amended Complaint. Indeed, as described above,

       27
         Plaintiffs did present the District Court with a new source to
provide further detail regarding the alleged internal memo cited in the
Second Amended Complaint. The new source, a former underwriter in
Chubb’s Southern Zone, asserts that Defendant O’Hare was the author
of the memo and that the memo merely stated that the targeted 10% to
15% premium increases were not being achieved. While this
amendment may resolve some of the particularity concerns regarding the
alleged internal memo, it does not address its primary deficiencies,
including when the memo was authored, the basis for the opinion
contained within, the data upon which that opinion relies, and who, if
anyone, reviewed the memo. Although the Second Amended Complaint
alleges that this internal memo was sent to branch and commercial
managers, the new source is not identified as a branch or commercial
manager.

                                 56
with respect to the section 11 claims, Plaintiffs were explicitly
warned to either plead those claims in accordance with Rule 9(b),
or strip them of all averments of fraud. Plaintiffs chose at their
peril not to heed the District Court’s guidance and avail
themselves of an opportunity to rectify the deficiencies of the
Amended Complaint. Under this scenario, justice does not
require that leave to amend be given.28 See Fed. R. Civ. P. 15(a).
The reasons provided by the District Court for its decision have
been previously recognized as proper grounds for denying leave
to amend a complaint, even when the complaint was dismissed
for lacking particularized pleadings. See, e.g., In re NAHC, 306
F.3d at 1332 (recognizing “undue delay, bad faith, dilatory
motive, prejudice, and futility” as proper grounds for denying
leave to amend claims dismissed under the PSLRA); Krantz v.
Prudential Invs., 305 F.3d 140, 144 (3d Cir. 2002) (“A District
Court has discretion to deny a plaintiff leave to amend where the
plaintiff was put on notice as to the deficiencies in his complaint,
but chose not to resolve them.”). We recognized the validity of
the District Court’s reasoning in In re Burlington Coat Factory
where we stated that “[o]rdinarily where a complaint dismissed
on Rule 9(b) . . . grounds alone, leave to amend is granted,” but
because “the Complaint in this case was plaintiffs’ second . . . it
is conceivable that the district court could have found undue
delay or prejudice to the defendants.” 114 F.3d at 1435. We

       28
          Plaintiffs’ contention that the District Court’s dismissal with
prejudice somehow ran afoul of the Supreme Court’s decision in Foman
v. Davis, 371 U.S. 178 (1962), is similarly unpersuasive given Foman’s
holding that

       [i]n the absence of any apparent or declared reason --
       such as undue delay, bad faith or dilatory motive on the
       part of the movant, repeated failure to cure deficiencies
       by amendments previously allowed, undue prejudice to
       the opposing party by virtue of allowance of the
       amendment, futility of amendment, etc. --the leave
       sought should, as [Rule 15(a)] require[s], be “freely
       given.”

371 U.S. at 182 (emphasis added). In this case, the District Court clearly
declared valid reasons for denying leave.

                                   57
allowed plaintiffs to replead in that case only because “the
[district] court made no such determination, and we cannot make
that determination on the record before us.” Id.

       The District Court provided Plaintiffs with a detailed
roadmap for curing the deficiencies in their claims. Plaintiffs’
Second Amended Complaint did not cure these deficiencies.
Defendants have already been forced to defend against three
complaints. The District Court’s decision to prevent Plaintiffs
from having yet another chance to revise their complaint was
properly within its discretion.

                              IV.

       For the foregoing reasons, the judgment of the District
Court entered on August 12, 2003 will be affirmed.

                                58
Calpers v. The Chubb Corporation, No. 03-3755.

SLOVITER, Circuit Judge, Dissenting in part.

       I join Parts I, II and III.A of the majority’s thorough

opinion. I can certainly understand why the District Judge,

presented with a complaint of 125 pages which, even after

amendment, failed to correct the inadequacies previously noted

by the court, decided that Plaintiffs should be given no further

opportunities to state a claim. I believe, however, that Plaintiffs

may have colorable claims under § 11 of the Securities Act and §

14(a) of the Exchange Act and that the dismissal with prejudice

as to these specific claims was not in the proper exercise of the

court’s discretion. Accordingly I respectfully dissent, in part,

from Parts III.B and III.C of the majority opinion.

                                 I.

       On June 17, 1999, Chubb and Executive Risk filed their

registration statement and merger proxy pursuant to the proposed

merger. The second quarter 1999 closed on June 30, 1999.
Executive Risk shareholders approved the proposed merger on

July 19, 1999. Only eight days later, on July 27, Chubb released

its second quarter results, which fell short of earnings projections

by four cents per share. Although this may not appear significant

to a lay person, these results were described by securities analysts

as a “shocking disappointment.” 29

       29
          Plaintiffs’ complaint quotes PaineWebber’s July 27, 1999
report as stating:

       [i]n what was perceived as a shocking disappointment,
       Chubb reported flat premiums for the second quarter
       with earnings . . . short of the Street consensus . . . .
       Management dampened its earlier enthusiasm for
       improving market conditions, which had ratcheted up
       expectations early in the second quarter. . . . Total
       standard commercial business shrank 9.0%, more than
       expected. The combined ratio remained unacceptably
       high at 120.8%. Commercial multiperil results were
       terrible. . . . Premiums in total were flat rather than up
       about 5% as expected.

App. at 727 (ellipses in original).

        Prudential Securities issued a report on July 27, 1999 stating that
the “[s]tandard commercial results were awful. . . . The total standard
commercial book reported a combined ratio of 120.8% slightly better
than a year ago but deteriorated from the 117.9% reported in the first
quarter.” App. at 728 (ellipse in original).

                                      60
       Plaintiffs argue that Defendants had a duty to disclose the

disappointing mid-second quarter results in their June 17, 1999

registration statement and merger proxy materials. Failure to do

so allegedly rendered them false and misleading, and gave rise to

a private cause of action not only under § 10(b) of the Exchange

Act but also under § 14(a) of the same Act and § 11 of the

Securities Act. See, e.g., Herman & M acLean v. Huddleston,

459 U.S. 375, 382-83 (1983) (holding that action under sections

11 and 10(b) may arise from same disclosure).

       Despite the fact that averments under § 11 and § 14(a)

need not allege scienter, I do not disagree with the majority that

these claims as pled were “grounded in fraud” and therefore,

subject to the heightened pleading requirements of Fed. R. Civ.

P. 9(b) and the Private Securities Litigation Reform Act

(PSLRA). See In re NAHC, Inc. Sec. Litig., 306 F.3d 1314,

1329 (3d Cir. 2002); Shapiro v. UJB Fin. Corp., 964 F.2d 272,

288-89 (3d Cir. 1992). The majority thus applies the same

                                61
sweeping particularity analysis applicable under the PSLRA and

Rule 9(b) to Plaintiffs’ § 10(b) claims as it does to Plaintiffs’ §

11 and § 14(a) claims. It then concludes that the “‘true facts’

allegations, which purportedly demonstrate why Defendants’

various . . . disclosures . . . were materially false” were not pled

by Plaintiffs with the requisite particularity. See Majority

typescript op. at 27. Accordingly, the majority affirms the

District Court’s dismissal under Fed. R. Civ. P. 12(b)(6) and its

denial of leave to amend.

       While I agree with the majority’s decision to dismiss the

Second Amended Complaint on particularity grounds, the

majority fails to discuss whether Plaintiffs may have colorable

claims under § 11 and § 14(a).

                                 II.

              A Colorable Claim Exists Under § 11

      of the Securities Act and § 14(a) of the Exchange Act

       It is well established that a statutory duty exists to disclose

                                 62
all material information in connection with a registered stock

offering, proxy solicitation or shareholder vote. Section 11 of

the Securities Act provides that a private action for damages may

be brought “by any person acquiring such security” if a

registration statement, as of its effective date: (1) “contained an

untrue statement of material fact”; (2) “omitted to state a material

fact required to be stated therein”; or (3) omitted to state a

material fact “necessary to make the statements therein not

misleading.” 15 U.S.C. § 77k(a). Liability attaches to, inter alia,

all persons who sign the registration statement, including the

“issuer, its principal executive officer or officers,” and pursuant

to § 15 of the Securities Act, every control person of a party

liable under § 11. See 15 U.S.C. §§ 77k(a); 78f(a).

       Likewise, the Exchange Act’s provision governing proxy

solicitations, § 14(a)30 , and Rule 14a-9 promulgated pursuant

       30
            § 14(a) of the Exchange Act states:

       It shall be unlawful for any person, by the use of the

                                    63
thereto,31 provide a private cause of action for the solicitation of

proxies that contain any materially false or misleading

information. See 15 U.S.C. § 78n; 17 C.F.R. § 240.14a-9; see

also J.I. Case Co. v. Borak, 377 U.S. 426 (1964). Section 14(a)

       mails or by any means or instrumentality of interstate
       commerce or of any facility of a national securities
       exchange or otherwise, in contravention of such
       rules and regulations as the Commission may
       prescribe as necessary or appropriate in the public
       interest or for the protection of investors, to solicit or
       to permit the use of his name to solicit any proxy or
       consent or authorization in respect of any security
       (other than an exempted security) registered pursuant
       to section 781 of this title.

15 U.S.C. § 78n(a).
       31
            Rule 14a-9 provides:

       No solicitation subject to this regulation shall be
       made by means of any proxy statement ... containing
       any statement which, at the time and in the light of
       the circumstances under which it is made, is false or
       misleading with respect to any material fact, or
       which omits to state any material fact necessary in
       order to make the statements therein not false or
       misleading . . . .

17 C.F.R. § 240.14a-9(a).

                                   64
liability attaches to all parties who negligently execute a proxy

statement, and pursuant to § 20(a) of the Exchange Act, any

person “who directly or indirectly, controls any person” who

negligently executes a proxy statement. 15 U.S.C. § 78t(a).

       Significantly, an action under § 11 or § 14(a) does not

require any allegation that a defendant acted with scienter. See

Herman & M acLean v. Huddleston, 459 U.S. 375, 382 (1983); In

re Adams Golf, Inc. Sec. Litig., 381 F.3d 267, 274 n.7 (3d Cir.

2004) (“Section[] 11 . . . [is a] virtually absolute liability

provision[ ], which do[es] not require plaintiffs to allege that

defendants possessed any scienter.”); Gould v. American-

Hawaiian S.S. Co., 535 F.2d 761, 777 (3d Cir. 1976) (in

imposing negligence standard, we stated “[t]he language of

section 14(a) and Rule 14a-9(a) contains no suggestion of a

scienter requirement, merely establishing a quality standard for

proxy material”). Their “primary purpose . . . is to protect

investors by requiring publication of material information

                                  65
thought necessary to allow them to make informed . . . decisions

concerning public offerings of securities.” Pinter v. Dahl, 486

U.S. 622, 638 (1988); see also Sec. & Exch. Comm’n v. Ralston

Purina Co., 346 U.S. 119, 124 (1953); Desaigoudar v.

Meyercord, 223 F.3d 1020, 1024 (9th Cir. 2000).

       In Shaw v. Digital Equip. Corp., 82 F.3d 1194 (1st Cir.

1996), superseded by statute on other grounds, the Court of

Appeals for the First Circuit held that a legally cognizable claim

under § 11 could be made for failure to disclose mid-quarter

results in a registration statement, which “indicat[e] some

substantial likelihood that the quarter would turn out to be an

extreme departure from publicly known trends and

uncertainties.” Id. at 1211. The defendant’s registration

statement in that case became effective and its stock offering

took place “11 days prior to the close of the quarter then in

progress, and about three weeks prior to the company’s

announcement of an unexpectedly negative earnings report for

                                66
that quarter.” Id. at 1199. The court reasoned that the “corporate

issuer in possession of material nonpublic information, must, like

other insiders in the same situation, disclose that information to

its shareholders or refrain from trading with them.” Id. at 1203-

04 (internal quotations and citation omitted). Such disclosure is

especially

       crucial in the context of a public offering, where
       investors typically must rely . . . on an offering
       price determined by the issuer and/or the
       underwriters of the offering. . . . Accordingly the
       disclosure requirements associated with a stock
       offering are more stringent than, for example, the
       regular periodic disclosures called for in the
       company’s annual Form 10-K or quarterly Form
       10-Q filings under the Exchange Act.

Id. at 1208 (internal citation omitted).

       Shaw rejected “any bright-line rule” as to when mid-

quarter disclosures must be made, stating that in “many

circumstances, the relationship between the nonpublic

information that plaintiffs claim should have been disclosed and

the actual results or events that the undisclosed information

                                 67
supposedly would have presaged will be so attenuated that the

undisclosed information may be deemed immaterial as a matter

of law.” Id. at 1210-11. The situation before us is not one of

those instances.

       Akin to the factual circumstances in Shaw, Chubb filed its

registration statement thirteen days prior to the close of a

disappointing second quarter, the results of which, by all

accounts, were the product of more than a mere “minor business

fluctuation.” Id. at 1211. Analysts’ reports stated that these

results were a “shocking disappointment” and that the “standard

commercial results were awful.” See supra, note 1. Surely,

“there is a substantial likelihood that a reasonable shareholder

would consider [such information] important in deciding how to

vote.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449

(1976) (defining element of materiality as “a substantial

likelihood that the disclosure of the omitted fact would have been

viewed by the reasonable investor as having significantly altered

                                 68
the ‘total mix’ of information made available”); see also Basic,

Inc. v. Levinson, 485 U.S. 224, 232 (1988).

       Furthermore, following the First Circuit in Shaw, I see no

reason not to accept Plaintiffs’ allegations that Chubb was in

possession of information concerning the Company’s quarter-to-

date performance at the time it issued its registration statement.

Shaw, 82 F.3d at 1211 (accepting assumption that corporations

regularly monitor their financial performance). Thus, at this

early pleading stage, I conclude that Plaintiffs may entertain an

actionable claim under § 11 of the Securities Act against

Defendants Chubb, O’Hare, Schram and Kelso.32

       For the same reasons, it appears that failure to disclose

Chubb’s mid-second quarter results in the proxy materials would

       32
         See also In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 70-71
(2d Cir. 2001) (holding that material decline in sales or earnings is
information that must be disclosed); In re Campbell Soup Co. Sec. Litig.,
145 F. Supp. 2d 574, 590-91 (D. N.J. 2001) (same); see also Steckman
v. Hart Brewing, Inc., 143 F.3d 1293 (9th Cir. 1998) (noting that
material mid-quarter “slowdown” in business or orders would need to be
disclosed).

                                  69
be actionable under § 14(a) of the Exchange Act. “Only when

the proxy statement fully and fairly furnishes all the objective

material facts as to enable a reasonable prudent stockholder to

make an informed investment decision is the federal purpose in

the securities law served.” Mendell v. Greenberg, 927 F.2d 667,

674 (2d Cir. 1991); see TSC Indus., Inc. v. Northway, Inc., 426

U.S. 438, 448 (1976). Furthermore, Rule 14a-9 “specifically

requires that solicitation material which has become false or

misleading must be corrected by subsequent materials.” Gould v.

American-Hawaiian S.S. Co., 351 F. Supp. 853, 868 (D. Del.

1972), rev’d and remanded on different grounds, 535 F.2d 761

(3d Cir. 1976). Thus, even assuming that the proxy materials

were accurate when initially prepared by Defendants, Rule 14a-9

mandates that they be amended to reflect the disappointing

second quarter results at some point prior to the Executive Risk

shareholder vote, a vote which incidently occurred nearly three

weeks after the second quarter ended.

                                70
       Although this court has imposed a slightly higher standard

of materiality in the § 14(a) and rule 14a-9 context than in the §

11 context, 33 I cannot conclude, as a matter of law, that these

non-disclosures were immaterial. Therefore, in my opinion,

Plaintiffs also appear to have a facially valid claim under § 14(a)

and Rule 14a-9 against all Defendants.

                                 III.

Leave to Amend the § 11 and §14(a) Claims Should be Granted

       Fed. R. Civ. P. 15 provides that a party may amend its

pleading once before a responsive pleading is served, or

thereafter “by leave of court or by written consent of the adverse

party.” Such “leave shall be freely given when justice so

requires.” Id.

       33
         See Gould v. American-Hawaiian S.S. Co., 535 F.2d 761, 771
(3d Cir. 1976) (holding that “the basic test of materiality in a section
14(a) setting is whether it is probable that a reasonable shareholder
would attach importance to the fact falsified, misstated or omitted in
determining how to cast his vote on the question involved”) (emphasis
added).

                                  71
       In affirming the District Court’s dismissal of Plaintiffs’

Second Amended Complaint with prejudice, the majority

implicitly approves the District Court’s conclusion that “[i]n the

context of securities fraud actions . . . Rule 15 must be viewed

more strictly so as not to vitiate the heightened pleading

requirements of the Reform Act by providing plaintiffs unlimited

opportunities to amend.” App. at 895 (citing In re

Cybershop.com Sec. Litig., 189 F. Supp. 2d 214, 237 (D. N.J.

2002)).

       The tension between the liberal amendment approach of

Fed. R. Civ. P. 15 and the strict pleading requirements of the

PSLRA has been noted by the courts. Our court seems to have

given inconsistent signals. Compare In re NAHC, Inc. Sec.

Litig., 306 F.3d 1314, 1333 (3d Cir. 2002) (stating in dictum that

goals of PSLRA “would be thwarted if, considering the history

of this case, plaintiffs were liberally permitted leave to amend

again”), with Werner v. Werner, 267 F.3d 288, 297 (3d Cir.

                                72
2001) (“we will not add to the strict discovery restrictions in the

. . . PSLRA . . . by narrowly construing Rule 15 in this case, even

at this late stage in the litigation. Given the high burdens the

PSLRA placed on plaintiffs, justice and fairness require that the

plaintiffs before us be allowed an opportunity to amend their

complaint to include allegations relating to the newly discovered

Board meeting minutes.”).

       The same differences also appear in the decisions of other

circuit courts. Compare Miller v. Champion Enters., Inc., 346

F.3d 660, 690-92 (6th Cir. 2003) (stating in dictum that “to

prevent harassing strike suits filed the moment a company’s

stock price falls . . . would be frustrated if district courts were

required to allow repeated amendments to complaints filed under

the PSLRA”) (internal quotations and citation omitted), with

Morse v. McWhorter, 290 F.3d 795, 800 (6th Cir. 2002)

(reasoning that “leave to amend is particularly appropriate where

                                  73
the complaint does not allege fraud with particularity”); see also

Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048, 1052

(9th Cir. 2003) (per curiam) (“Adherence to these principles

[governing leave to amend] is especially important in the context

of the PSLRA. . . . In this technical and demanding corner of the

law, the drafting of a cognizable complaint can be a matter of

trial and error.”).

       We need not resolve the issue raised in the above cases

because Plaintiffs should be able to file an amended complaint

based on § 11 and § 14(a) that, if divorced from any allegations

of fraud, would not be subject to heightened pleading

requirements of the PSLRA. Whereas allowing any further

amendment to Plaintiffs’ § 10(b) claims would be an abuse of

discretion because, as the majority states, “Plaintiffs here have

proffered no additional facts that would cure the pleading

deficiencies of [such claims],” see Maj. typescript op. at p. 65,

the same cannot be said for Plaintiffs’ § 11 and § 14(a) claims.

                                74
       Stated otherwise, if given leave to amend, these claims

may be pled in a manner which would survive a motion to

dismiss under Rule 12(b)(6). See Lone Star Ladies Inv. Club v.

Schlotzky’s Inc., 238 F.3d 363 (5th Cir. 2001) (holding that

district court’s dismissal with prejudice of complaint alleging

both § 10(b) and § 11 claims was abuse of discretion because

plaintiffs had colorable § 11 claim and could plead it in amended

complaint, absent any allegation of fraud).

       This court has adopted a liberal approach to the

amendment of pleadings to ensure that “a particular claim will be

decided on the merits rather than on technicalities.” Dole Arco

Chem. Co., 921 F.2d 484, 487 (3d Cir. 1990). The Supreme

Court’s holding in Foman v. Davis, 371 U.S. 178 (1962), is

axiomatic:

       [i]n the absence of any apparent or declared reason
       – such as undue delay, bad faith or dilatory motive
       on the part of the movant, repeated failure to cure
       deficiencies by amendments previously allowed,

                                75
       undue prejudice to the opposing party by virtue of
allowance of the amendment, futility of amendment, etc. – the
leave sought should, as the rules required “be freely given.”

Id. at 182; see also Oran v. Stafford, 226 F.3d 275, 291 (3d Cir.

2000); Lorenz v. CSX Corp., 1 F.3d 1406, 1414 (3d Cir. 1993).

       The majority affirms the District Court’s order denying

leave to amend the Second Amended Complaint, stating that

“with respect to the section 11 claims, Plaintiffs were explicitly

warned to either plead those claims in accordance with Rule 9(b),

or strip them of all averments of fraud. Plaintiffs chose at their

peril not to heed the District Court’s guidance and avail

themselves of an opportunity to rectify the deficiencies of the

Amended Complaint.” See Maj. typescript op. at 66-67 (citing

Krantz v. Prudential Invs. Fund Mgmt., LLC, 305 F.3d 140, 144

(3d Cir. 2002)).

       We have repeatedly held that “prejudice to the non-

moving party is the touchstone for the denial of an amendment.”

                                 76
Bechtel v. Robinson, 886 F.2d 644, 652 (3d Cir. 1989) (internal

citations and quotations omitted); see also Cornell & Co. v.

Occupational Safety & Health Review Comm’n, 573 F.2d 820,

823 (3d Cir. 1978). For purposes of Rule 15, the term prejudice

“means undue difficulty in [defending] a lawsuit as a result of a

change in tactics or theories on the part of the other party.”

Deakyne v. Comm’rs of Lewes, 416 F.2d 290, 300 (3d Cir.

1969). In the absence of substantial prejudice, denial instead

must be based on “truly undue or unexplained delay . . . or

futility of amendment.” Lorenz, 1 F.3d at 1414; see also In re

Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1434-35 (3d

Cir. 1997).

       The District Court concluded that “to require defendants

to defend the action, and ultimately to incur the effort and

expense of a third motion to dismiss after two successful

dismissal motions, would clearly constitute undue prejudice to

the defendants.” App. at 896.

                                 77
       The District Court’s determination that leave to amend

would cause undue prejudice was made in connection with the

complaint as a whole, which included Plaintiffs’ essentially futile

§ 10(b) claims. If Plaintiffs were given leave to amend to assert

only their colorable § 11 and § 14(a) claims, it is difficult to see

why Defendants would suffer undue prejudice in being required

to respond to a Third Amended Complaint. Defendants have

been on notice of such claims since the inception of the present

action and thus any amendment would not require them to

respond to any novel or unrelated tactics or theories. In fact,

elimination of the § 10(b) fraud claims from any future complaint

would materially limit the scope and complexity of the present

action. While Plaintiffs may have been obtuse, they have not

exhibited any showing of bad faith or caused Defendants to

suffer undue delay. “Limited delays and the prejudice to a

defendant from the pendency of a lawsuit are realities of the

system that have to be accepted.” See Ash v. Cvetkov, 739 F.2d

                                 78
493, 496 (9th Cir. 1984).

       I am not persuaded by the majority’s heavy reliance on the

fact that Plaintiffs failed to heed the advice of the District Court.

We have stated that in complex litigation, the mere fact that a

claimant has had several attempts to comply with pleading

requirements is not itself a sufficient basis to dismiss a complaint

with prejudice. Worldcom, Inc. v. Graphnet, Inc., 343 F.3d 651,

657 n.3 (3d Cir. 2003); accord Eminence Capital, LLC v.

Aspeon, Inc., 316 F.3d 1048, 1053 (9th Cir. 2003) (Reinhardt, J.,

concurring) (noting that “the undeservedly common ‘three bites

at the apple’ cliche . . . too often provides a substitute for

reasoned analysis”).

       This would not be a third effort, although the majority so

implies. Plaintiffs’ Second Amended Complaint, at issue in this

appeal, was only the first attempt at a substantive amendment;

the First Amended Complaint was merely a re-filing of the

                                  79
original complaint after the District Court appointed lead

Plaintiffs. Thus, Plaintiffs have been given only one opportunity

to properly amend their complaint.

       Of course, if Plaintiffs were given the opportunity to

replead the § 11 and § 14(a) claims, they would need to comply

with the requirement that they do so in “a short and plain

statement” of the claims. See Fed. R. Civ. P. 8(a)(2).

Admittedly, Plaintiffs’ counsel has not shown either the ability or

disposition to do so. Their brief was as wordy as their complaint.

Nonetheless, I would not preclude them the opportunity to assert

a possibly meritorious claim because of defects in the pleadings.

See In re Burlington Coat Factory Sec. Litig., 114 F.3d at 1435

(stating that where complaint is dismissed on particularity

grounds, leave to amend is ordinarily granted); Shapiro, 964 F.2d

at 278; Luce v. Edelstein, 802 F.2d 49, 56-57 (2d Cir. 1986);

Yoder v. Orthomolecular Nutrition Inst., Inc., 751 F.2d 555, 562

n.6 (2d Cir. 1985). In my opinion, Plaintiffs should be given a

                                80
final opportunity to assert their § 11 and § 14(a) claims with

instructions to plead such claim absent any allegations of fraud.