City of Warren Police and Fire v. Prudential Financial Inc

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
No. 21-1147
____________
CITY OF WARREN POLICE AND FIRE RETIREMENT
SYSTEM, Individually and on behalf of all
others similarly situated,
Appellant
v.
PRUDENTIAL FINANCIAL, INC.; CHARLES F.
LOWREY; KENNETH Y. TANJI; ROBERT M. FALZON
____________
On Appeal from the United States District Court
for the District of New Jersey
(D.C. No. 2-19-cv-20839)
District Judge: Honorable Stanley R. Chesler
____________
Argued: October 27, 2021
Before: GREENAWAY, JR., KRAUSE, and PHIPPS,
Circuit Judges.
(Filed: June 13, 2023)
____________
Joseph D. Daley
ROBBINS GELLER RUDMAN & DOWD
655 West Broadway, Suite 1900
San Diego, CA 92101
Peter S. Pearlman
COHN LIFLAND PEARLMAN HERRMANN & KNOPF
Park 80 West, Plaza One
250 Pehle Avenue, Suite 401
Saddle Brook, NJ 07663
Daniel J. Pfefferbaum [Argued]
Shawn A. Williams
ROBBINS GELLER RUDMAN & DOWD
One Montgomery Street, Suite 1800
San Francisco, CA 94104
Douglas Wilens
ROBBINS GELLER RUDMAN & DOWD
225 North East Mizner Boulevard, Suite 720
Boca Raton, FL 33432
Counsel for City of Warren Police and Fire
Retirement System
2
David D. Cramer
Tricia B. O’Reilly
WALSH PIZZI O’REILLY & FALANGA
Three Gateway Center
100 Mulberry Street, 15th Floor
Newark, NJ 07102
Maeve L. O’Connor [Argued]
Susan R. Gittes
Aasiya F.M. Glover
DEBEVOISE & PLIMPTON
66 Hudson Boulevard
New York, NY 10001
Counsel for Prudential Financial, Inc.;
Charles F. Lowrey; Kenneth Y. Tanji; and
Robert M. Falzon
_______________________
OPINION OF THE COURT
_______________________
PHIPPS, Circuit Judge.
Insurance companies typically set aside funds, known as
reserves, to pay for anticipated benefit claims by their
policyholders. As an exercise of actuarial judgment, a wide
range of considerations bear on the determination of the
amount to hold in reserves. And because circumstances
change, an insurer’s reserves may vary over time. But in this
case, one of the country’s largest publicly traded life insurance
companies suddenly announced that it would need to increase
3
its reserves by $208 million and that, in addition to a one-time
charge in that amount, its earnings would be reduced by $25
million per quarter for the foreseeable future. After that news,
the company’s stock price dropped by more than twelve
percent over two days.
A municipal retirement system that had purchased the
company’s common stock before the announcement now
alleges that the company knew beforehand of problems with
its reserves and misled investors about those issues. On that
premise, the retirement system filed this putative class action
against the company and three of its corporate executives,
alleging securities fraud under § 10(b) and § 20(a) of the
Securities Exchange Act of 1934.
In response to the retirement system’s amended complaint,
the insurance company and the executives moved to dismiss
for failure to state a claim for relief. They argued that, under
the heightened pleading standard for securities-fraud claims,
the retirement system’s complaint failed to plausibly allege
three necessary elements of its claims: false or misleading
statements; loss causation; and scienter.
The District Court granted that motion and dismissed the
complaint with prejudice. It determined that the retirement
system did not adequately plead falsity, and for that reason, it
did not evaluate the sufficiency of the complaint’s loss
causation or scienter allegations. The retirement system then
brought this appeal.
While most of the District Court’s judgment holds up on de
novo review, the retirement system’s amended complaint does
contain particularized and plausible allegations of falsity with
respect to one set of statements by the insurance company. On
a conference call with investors eight weeks before the
company adjusted its reserves, its Chief Financial Officer
stated that the recent mortality experience of the company’s
life insurance business was within the “normal” range of
4
volatility or, at worst, only “slightly negative.” App. at 76–77
(Am. Compl. ¶ 54 (emphasis removed)). But based on
information from a confidential former employee, who
qualifies as credible at the pleading stage, the complaint alleges
that the insurance company was already contemplating a
significant increase in reserves due to negative mortality
experience at the time of the CFO’s statements. And the
magnitude of the company’s reserve charge and its temporal
proximity to the CFO’s statements further undercut the CFO’s
assertion that recent mortality experience was within a normal
range. Those particularized allegations satisfy the heightened
standard for pleading falsity, and they plausibly allege the
falsity of the CFO’s statement.
Accordingly, we will partially vacate the District Court’s
judgment and remand the case to the District Court to consider
in the first instance the adequacy of the amended complaint’s
allegations of loss causation and scienter with respect to the
CFO’s statement.
I. FACTUAL BACKGROUND
(AS ALLEGED IN THE AMENDED COMPLAINT)
Founded over 140 years ago in Newark, New Jersey,
Prudential Financial, Inc. offers a wide range of financial
products and services. Those products and services include
mutual funds, annuities, investment management, and life
insurance. About ten percent of Prudential’s revenue comes
from its Individual Life business segment, which offers term,
variable, and universal life insurance policies.
As part of its life insurance business, Prudential sets aside
funds – reserves – to pay death-benefit claims under its
policies. The amount of those reserves represents a liability for
future policy benefits on its balance sheet, which Prudential
publishes in its annual and quarterly reports with the Securities
and Exchange Commission. To determine the amount to hold
in reserves, Prudential exercises actuarial judgment in
consideration of many factors, including policyholder
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mortality rates. Typically, during the second quarter of each
fiscal year, Prudential reevaluates and, if necessary, updates
the actuarial assumptions underlying those calculations. If the
amount held in reserves will not cover anticipated death
benefits, then Prudential increases that amount, and the
corresponding charge reduces its income.
In January 2013, Prudential expanded its life insurance
portfolio by acquiring 700,000 life insurance policies that were
underwritten by another insurance company, The Hartford.
Prudential paid $615 million for those policies, referred to as
the ‘Hartford Block.’ Prudential was then able to collect
premiums from the Hartford Block’s policyholders, but it also
assumed the obligation to pay the approximately $141 billion
in death benefits owed under the policies as they came due. By
2015, Prudential had fully integrated the Hartford Block into
its Individual Life business segment.
The Hartford Block proved problematic for Prudential.
Those policies experienced negative mortality development,
meaning that policyholders were not living as long as
predicted, obligating Prudential to pay death benefits sooner
than expected. As a result of that negative mortality
development, the Hartford Block “regularly missed internal
performance expectations” from the time Prudential acquired
it in 2013. App. at 73 (Am. Compl. ¶ 53(a)). In 2016 and 2017,
Individual Life reported poor results due in large part to one-
time adjustments made to integrate the Hartford Block. And,
following its annual assumptions review in the second quarter
of 2018, Prudential announced a $65 million reserve increase
(and corresponding charge against Individual Life’s income),
which the company attributed, in part, to updated mortality-
rate assumptions.
The following year, Prudential made several public
statements that disavowed any serious problems with
Individual Life. In its 2018 Form 10-K annual report, filed
with the SEC on February 15, 2019, Prudential explained its
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general methodology and procedure for calculating reserves.
That annual report further suggested that the amount of its
reserves was adequate, if not excessive, in light of low interest
rates. The Form 10-K also reported Prudential’s liability for
future policy benefits as well as its net income. The next
month, in a meeting with analysts from the Credit Suisse
investment bank, the Vice Chairman of Prudential Financial
and Prudential Insurance, Robert M. Falzon, similarly assured
investors that there were no systemic issues with underwriting
or mortality assumptions in Individual Life. On May 3,
Prudential filed its Form 10-Q for the first quarter of 2019 with
the SEC, and that document, in reporting the company’s net
income and providing its end-of-quarter balance sheets,
disclosed no problems with the reserves for Individual Life.
And on June 5, during an Investor Day conference call,
Prudential’s CFO, Kenneth Y. Tanji, described Individual
Life’s recent mortality experience as within the range of
“normal volatility” or, at worst, only “slightly negative.” Id. at
76–77 (Am. Compl. ¶ 54 (emphasis removed)).
But eight weeks after that Investor Day call, Prudential
disclosed a significant adjustment to its reserves. In a July 31
press release – issued after the stock market had closed –
Prudential announced that, due to unfavorable updates to its
mortality assumptions, it would charge $208 million to
Individual Life’s income to supplement its reserves. By
Prudential’s own benchmarks, a reserve charge of that size was
unusual. In a Form 8-K that Prudential had previously filed
with the SEC in December 2018, the company reported that
negative mortality within one standard deviation from
expectation would reduce Individual Life’s annual pre-tax
adjusted operating income by a comparatively smaller amount
– between $55 million and $80 million. The $208 million
adjustment to reserves, along with other unfavorable
developments, drove Individual Life to report an adjusted
operating loss of $135 million for the second quarter of 2019 –
far below the company’s expected quarterly income of $108
million.
7
The analyst community immediately criticized the timing
of Prudential’s announcement. In a report issued the evening
of July 31, one investment bank opined that Prudential “should
have used its June investor day to lay out the new disclosure
and reset the bar at that point.” Id. at 81–82 (Am. Compl. ¶ 61
(emphasis removed)). Another report issued that same night
predicted that “investors will most likely be surprised since this
came so close to [Prudential’s] investor day in June.” Id. at 82
(Am. Compl. ¶ 62 (emphasis removed)).
The next day, three of Prudential’s officers held a
conference call with analysts to discuss the company’s
quarterly results. Those officers explained that the company’s
revised mortality assumptions “related to the longer-dated
vintages” in Individual Life, a seeming reference, at least in
part, to the Hartford Block. Id. at 84 (Am. Compl. ¶ 66
(emphasis removed)). They also previewed that the updated
mortality assumptions, which led to the $208 million charge,
would continue to reduce Individual Life’s earnings by “about
$25 million a quarter . . . for the foreseeable future.” Id. (Am.
Compl. ¶ 65 (emphasis removed)).
On August 2, in its Form 10-Q for the second quarter of
2019, Prudential also commented on the reserve charge.
Specifically, it stated that the reserve charge was “mainly
driven by unfavorable impacts related to mortality rate
assumptions.” Id. at 88 (Am. Compl. ¶ 72 (emphasis
removed)).
In line with the analyst community’s reaction, the market
did not respond favorably to Prudential’s announcements. On
July 31, the price of Prudential’s common stock closed at
$101.31 per share. But on August 1, following Prudential’s
after-hours press release the evening before, the stock closed at
$91.09 per share on heavy trading volume. The stock
continued to drop the next day, closing at $88.56 per share on
August 2. In those two days of trading, Prudential lost about
one-eighth of its market capitalization.
8
II. PROCEDURAL HISTORY
After the drop in stock price, two of Prudential’s
shareholders – the City of Warren Police and Fire Retirement
System (the ‘Warren Retirement System’) and Donald P.
Crawford – separately initiated class actions against Prudential
for making false or misleading statements related to the
company’s life insurance reserves. They sued under the
Securities Exchange Act of 1934, which regulates the trading
of securities on the secondary market. See Pub. L. No. 73-291,
48 Stat. 881 (codified as amended at 15 U.S.C. § 78a et seq.).
The centerpiece of the 1934 Act’s antifraud framework,
§ 10(b), prohibits the use of “any manipulative or deceptive
device or contrivance” in violation of regulations promulgated
by the SEC. 15 U.S.C. § 78j(b). And under one of the SEC’s
regulations, Rule 10b-5, it is illegal “[t]o 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.” 17 C.F.R. § 240.10b-5(b).
Together, § 10(b) and Rule 10b-5 imply a private cause of
action for securities fraud. See Basic Inc. v. Levinson, 485 U.S.
224, 230–31 (1988) (“Judicial interpretation and application,
legislative acquiescence, and the passage of time have removed
any doubt that a private cause of action exists for a violation of
§ 10(b) and Rule 10b-5 . . . .”). That claim has six elements:
(i) a misrepresentation or omission of material fact;
(ii) scienter; (iii) a connection with the purchase or sale of a
security; (iv) reliance; (v) economic loss; and (vi) loss
causation. See Dura Pharms., Inc. v. Broudo, 544 U.S. 336,
341–42 (2005); Fan v. StoneMor Partners LP, 927 F.3d 710,
714 (3d Cir. 2019). Both the Warren Retirement System and
Crawford pursued such a claim against Prudential, as well as
against its Chief Executive Officer, Charles F. Lowrey, and its
Chief Financial Officer, Kenneth Y. Tanji. They also brought
claims under § 20(a) of the 1934 Act, which imposes joint and
several liability on persons who control an individual or entity
that violates § 10(b) and Rule 10b-5. See 15 U.S.C. § 78t(a);
9
Williams v. Globus Med., Inc., 869 F.3d 235, 246 (3d Cir.
2017) (“Section 20(a) of the Securities Exchange Act permits
plaintiffs to bring a cause of action against individuals who
control a corporation that has violated Section 10(b).” (citing
15 U.S.C. § 78t(a))).
Exercising jurisdiction over those suits, see 15 U.S.C.
§ 78aa(a), the District Court consolidated the actions and
appointed the Warren Retirement System as lead plaintiff, see
id. § 78u-4(a)(3). After that appointment, the Warren
Retirement System filed an amended complaint, which, among
other things, added § 10(b) and § 20(a) claims against
Prudential’s Vice Chairman, Robert M. Falzon. The Warren
Retirement System also sought to represent a class of persons
who, like it, bought Prudential’s common stock between
February 15, 2019, the date of the first alleged
misrepresentation, and August 2, 2019, the second day that the
company’s stock price dropped following Prudential’s
corrective disclosures.
In response, Prudential and the individual defendants
moved to dismiss the amended complaint for failure to state a
claim for relief. In that motion, they argued that the Warren
Retirement System failed to adequately allege three essential
elements of its securities-fraud claims: a misrepresentation or
omission of material fact, scienter, and loss causation.
The District Court granted the motion on the ground that
the complaint did not plausibly allege that any of Prudential’s
class-period statements were false or misleading. See In re
Prudential Fin., Inc. Sec. Litig., 2020 WL 7706860, at *15
(D.N.J. Dec. 29, 2020). Reasoning that any attempt to further
amend would be futile, the District Court dismissed the
amended complaint with prejudice without addressing scienter
or loss causation. See id. The Warren Retirement System
timely appealed the resulting order of dismissal, bringing the
case within this Court’s appellate jurisdiction. See 28 U.S.C.
§ 1291.
10
III. DISCUSSION
By virtue of Civil Rule 9(b) and the Private Securities
Litigation Reform Act of 1995 (the ‘PSLRA’), heightened
pleading standards govern securities-fraud claims brought
under § 10(b) and Rule 10b-5. See Fed. R. Civ. P. 9(b); Pub.
L. No. 104-67, 109 Stat. 737 (codified as amended in various
sections of Title 15 of the United States Code). These
heightened standards share a common foundation with the
ordinary pleading standards in that speculative or threadbare
allegations along with legal conclusions are disregarded, and
the remaining allegations are generally taken as true. See
Tellabs, Inc. v. Makor Issues & Rts., Ltd., 551 U.S. 308, 322
(2007); Lutz v. Portfolio Recovery Assocs., LLC, 49 F.4th 323,
327–28 (3d Cir. 2022). But due to Rule 9(b) and the PSLRA,
a securities-fraud complaint must contain more than “a short
and plain statement of the claim showing that the pleader is
entitled to relief,” Fed. R. Civ. P. 8(a)(2); it must include
particularized allegations of fraud. See Tellabs, 551 U.S. at
319; Fed. R. Civ. P. 9(b); 15 U.S.C. § 78u-4(b)(1)–(2).
To plead falsity, Rule 9(b) and the PSLRA each demand
specificity. Rule 9(b) requires that a fraud plaintiff “state with
particularity the circumstances constituting fraud.” Fed. R.
Civ. P. 9(b). Under that standard, the complaint must describe
the time, place, and contents of the false representations or
omissions, as well as the identity of the person making the
statement and the basis for the statement’s falsity. See
Institutional Invs. Grp. v. Avaya, Inc., 564 F.3d 242, 253 (3d
Cir. 2009) (explaining the Rule 9(b) pleading standard as
requiring “the who, what, when, where and how” (quoting In
re Advanta Corp. Sec. Litig., 180 F.3d 525, 534 (3d Cir. 1999),
abrogated on other grounds by Tellabs, 551 U.S. at 323–34));
5A Charles Alan Wright, Arthur R. Miller & A. Benjamin
Spencer, Federal Practice & Procedure § 1297 (4th ed. 2022).
Like Rule 9(b), the PSLRA requires the pleadings to identify
“each statement alleged to have been misleading” and to
specify “the reason or reasons why the statement is
misleading.” 15 U.S.C. § 78u-4(b)(1); see also City of
11
Cambridge Ret. Sys. v. Altisource Asset Mgmt. Corp., 908 F.3d
872, 881 n.7 (3d Cir. 2018) (“In general, a complaint that
satisfies the PSLRA’s heightened pleading standards will also
satisfy Rule 9(b)’s requirements.”). And if allegations of
falsity are based on information and belief, instead of on
“evidentiary support,” Fed. R. Civ. P. 11(b)(3), the PSLRA
requires the complaint to plead, with particularity, facts
“sufficient to support a reasonable belief as to the misleading
nature of the statement or omission” before the allegations can
be accepted as true. Cal. Pub. Emps.’ Ret. Sys. v. Chubb Corp.,
394 F.3d 126, 147 (3d Cir. 2004) (quoting Novak v. Kasaks,
216 F.3d 300, 314 n.1 (2d Cir. 2000)); see also 15 U.S.C.
§ 78u-4(b)(1). For example, even at the pleading stage,
information provided by confidential witnesses is subject to a
steep discount when the source is not credible or reliable. See
Rahman v. Kid Brands, Inc., 736 F.3d 237, 244 (3d Cir. 2013);
Chubb, 394 F.3d at 147; see also Avaya, 564 F.3d at 263(recognizing that anonymity alone is not a basis for rejecting
allegations by confidential witnesses that are otherwise
reliable). 1
Upon a motion by any defendant, a claim for securities
fraud under § 10(b) and Rule 10b-5 that lacks particularized
allegations of falsity must be dismissed. See 15 U.S.C. § 78u-
4(b)(3)(A) (requiring the dismissal of a complaint that fails to
1
Although the pleading standards in Rule 9(b) and the PSLRA
can be generally reconciled harmoniously for allegations of
falsity, the PSLRA’s requirements for allegations of scienter
control over the more lenient standard in Rule 9(b) for mental-
state allegations. See Avaya, 564 F.3d at 253 (“The PSLRA’s
requirement for pleading scienter . . . marks a sharp break with
Rule 9(b).”); Tellabs, 551 U.S. at 323–24. Compare Fed. R.
Civ. P. 9(b) (permitting “[m]alice, intent, knowledge, and other
conditions of a person’s mind [to] be alleged generally”), with
15 U.S.C. § 78u-4(b)(2)(A) (requiring a particularized
statement of the “facts giving rise to a strong inference that the
defendant acted with the required state of mind”).
12
satisfy the PSLRA’s pleading rules); In re Rockefeller Ctr.
Props., Inc. Sec. Litig., 311 F.3d 198, 224 (3d Cir. 2002)
(recognizing that Rule 9(b) and the PSLRA “impose
independent, threshold pleading requirements that, if not met,
support dismissal apart from Rule 12(b)(6)”). But even if
falsity is pleaded with the requisite particularity, those factual
allegations must still satisfy the plausibility standard, which
requires a “reasonable expectation that discovery will reveal
evidence” of the necessary elements of the claim. Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 556 (2007); see also In re
Synchrony Fin. Sec. Litig., 988 F.3d 157, 161, 169 (2d Cir.
2021) (examining whether the complaint’s “particularized
allegations plausibly allege” a false or misleading statement);
United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 186
(5th Cir. 2009) (“Rule 9(b) . . . requires only ‘simple, concise,
and direct’ allegations of the ‘circumstances constituting
fraud,’ which after Twombly must make relief plausible . . . .”);
see generally 5A Charles Alan Wright, Arthur R. Miller &
A. Benjamin Spencer, Federal Practice & Procedure § 1298
(4th ed. 2022) (explaining that the requirement in Rule 9(b) to
plead with particularity “must be read in conjunction with” the
plausibility pleading standard). Thus, Rule 9(b) and the
PSLRA do not insist upon irrefutable evidence of a statement’s
falsity at the pleading stage; rather, a complaint must contain
particularized factual allegations that plausibly allege that a
statement was misleading.
On appeal, the Warren Retirement System argues that the
District Court erred in dismissing its securities-fraud claims for
failing to plead falsity. It identifies four sets of statements that
it contends are pleaded with particularity and are plausibly
false or misleading: (i) the statements in Prudential’s 2018
Form 10-K regarding company’s methodology for updating its
reserves, (ii) the statements about the adequacy of Prudential’s
reserves, which render false or misleading the financial
disclosures in its 2018 Form 10-K and in its first-quarter 2019
Form 10-Q, (iii) the statement by Prudential’s Vice Chairman,
Robert M. Falzon, to Credit Suisse analysts in March 2019,
13
which declared that there were no “systemic issues” with the
company’s underwriting practices or mortality assumptions,
App. at 67–68 (Am. Compl. ¶ 43), and (iv) the statements by
Prudential’s CFO, Kenneth Y. Tanji, on June 5, 2019, during
the company’s Investor Day conference regarding Prudential’s
recent mortality experience being within a normal range or at
worst, only slightly negative. As a fallback, the Warren
Retirement System argues that the District Court abused its
discretion by not permitting it to amend its complaint for a
second time to augment its allegations of falsity.
A. Statements Regarding Prudential’s Reserve-
Setting Methodology
The Warren Retirement System argues that it adequately
pleaded the falsity of two statements concerning Prudential’s
methodology for determining and updating its reserves. While
the amended complaint identifies the statements with
particularity and provides reasons for their falsity, those
allegations fail to plausibly demonstrate that Prudential
misrepresented its methodology for setting reserves.
In satisfaction of Rule 9(b) and the PSLRA, the amended
complaint alleges with particularity the circumstances
surrounding the statements about Prudential’s reserve-setting
methodology. Prudential made the two statements in its 2018
Form 10-K, which was filed with the SEC on February 15,
2019. One of the statements in that annual report disclosed that
Prudential’s actuarial “assumptions used in establishing
reserves are generally based on [its] experience, industry
experience, and/or other factors, as applicable.” App. at 64
(Am. Compl. ¶ 37 (emphasis removed)). Another statement
was an assurance that although Prudential typically updates its
actuarial assumptions (including those relating to mortality)
once a year, the company would make an earlier adjustment if
“a material change is observed in an interim period that [it]
feel[s] is indicative of a long-term trend.” Id. at 65 (Am.
Compl. ¶ 38 (emphasis removed)).
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The Warren Retirement System also articulates the reason
for each statement’s falsity. The amended complaint alleges
that Prudential’s description of its reserve-setting methodology
was misleading because Prudential ignored the negative
mortality experience in the Hartford Block when setting its
reserves. Similarly, the amended complaint alleges that
Prudential’s assurance that it would revisit its mortality
assumptions in an interim period to reflect any material
changes created the false impression that no such changes had
occurred since its 2018 annual review.
Although the Warren Retirement System identifies the
allegedly false statements with particularity, that is not enough
to survive a motion to dismiss. The allegations in the amended
complaint must still be plausible. See City of Cambridge Ret.
Sys., 908 F.3d at 879 n.6; In re Synchrony, 988 F.3d at 161,
169. Under that standard, the Warren Retirement System must
demonstrate that discovery would be reasonably likely to
reveal evidence of the falsity of the two statements. See
Twombly, 550 U.S. at 556; Lutz, 49 F.4th at 328. And the
allegations in the amended complaint fail to do so.
The first statement was that Prudential’s assumptions are
generally based on a variety of factors, one of which is its
applicable experience. To allege the plausible falsity of this
statement, the Warren Retirement System must provide facts
showing that Prudential did not generally consider a variety of
factors, including its applicable experience, in updating its
mortality assumptions. But by its own terms, the amended
complaint undermines that effort. It alleges that Prudential
used its experience – including with the Hartford Block – to
update mortality assumptions. See App. at 74 (Am. Compl.
¶ 53(c)) (“Prudential evaluated mortality experience at least
quarterly as it was a key component of Individual Life’s
business performance.” (emphasis added)); id. at 64, 73–74
(Am. Compl. ¶¶ 36, 53(a), (d)) (alleging that the “Hartford
[B]lock was closely monitored,” separately forecasted, and that
updates to mortality assumptions had prompted a $65 million
15
reserve charge following Prudential’s 2018 annual review).
The pleading also alleges that Prudential “was particularly
focused on the financial impact of quarterly mortality
experience,” including the Hartford Block’s experience, and
was willing to update its mortality assumptions, and by
extension its reserves, based on that experience. Id. at 74 (Am.
Compl. ¶ 53(c)). These allegations undercut any reasonable
likelihood that discovery would reveal that Prudential did not
consider its experience with the Hartford Block, or its
experience generally, in calibrating its mortality assumptions.
The amended complaint likewise fails to allege the
plausible falsity of Prudential’s assurance about updating its
mortality assumptions on an interim basis. By its terms, that
statement conditioned the promise of interim updates on
Prudential’s observation of a “material change” that it
perceived as “indicative of a long-term trend.” Id. at 65 (Am.
Compl. ¶ 38 (emphasis removed)). The Warren Retirement
System, however, does not allege that between mid-2018
(when Prudential took a $65 million reserve charge based on
updated mortality assumptions) and February 2019 (when it
filed the Form 10-K), the company observed additional
negative mortality developments within the Hartford Block
that were so severe as to constitute a material change in the
assumptions about Individual Life’s reserves, which had been
increased less than a year earlier. The amended complaint
contains even less support for the proposition that Prudential
perceived the pre-February 2019 mortality experience within
the Hartford Block as indicative of a long-term trend in
Individual Life requiring an immediate assumptions update.
Instead, as the District Court succinctly observed, the Warren
Retirement System’s theory of falsity “elides the difference
between short-term mortality experience in one group of
policies and long-term trends for Individual Life as a whole.”
In re Prudential, 2020 WL 7706860, at *13.
For these reasons, the amended complaint does not
plausibly allege falsity with respect to Prudential’s statements
16
about its reserve-setting methodology. And because the
Warren Retirement System did not propose any additional
facts that would demonstrate the plausible falsity of
Prudential’s stated methodology, either before the District
Court or on appeal, the District Court did not abuse its
discretion in denying leave to amend this part of the claim. See
City of Cambridge Ret. Sys., 908 F.3d at 879 n.6 (explaining
that denial of leave to amend is proper when “the complaint
‘would not survive a Rule 12(b)(6) motion even if pled with
more particularity’” (quoting In re Burlington Coat Factory
Sec. Litig., 114 F.3d 1410, 1435 (3d Cir. 1997))); In re
Allergan ERISA Litig., 975 F.3d 348, 357 (3d Cir. 2020)
(affirming a denial of leave to amend because the plaintiffs
gave the district court “no hint as to how they would further
amend their complaint”); In re Adams Golf, Inc. Sec. Litig.,
381 F.3d 267, 280 (3d Cir. 2004) (affirming a denial of leave
to amend because the “proposed amendments would not have
remedied the pleading deficiencies”).
B. Prudential’s Statements Regarding the
Adequacy of its Reserves
The Warren Retirement System also contends that it
properly pleaded the falsity of a group of Prudential’s
statements related to the adequacy of its reserves. Although
the amended complaint provides the particularity required by
Rule 9(b) and the PSLRA about the circumstances of those
statements, the challenged statements are opinions that also are
not actionable.
The Warren Retirement System identifies with particularity
Prudential’s statements about the adequacy of its reserves.
Prudential made those statements in two public filings with the
SEC: its 2018 Form 10-K, filed on February 15, 2019, and its
Form 10-Q for the first quarter of 2019, filed on May 3, 2019.
Those reports disclosed, among other things, the company’s
earnings per share and net income for the prior quarter, and
they included the company’s end-of-period balance sheets.
The balance sheets reported the company’s liabilities, which
17
included the amount held in reserves. Without any qualifiers
or annotations, the identification of those amounts implied
their adequacy as reserves. And in its Form 10-K, Prudential
stated that in light of low interest rates, there was “an increased
likelihood that the reserves determined based on best estimate
assumptions may be greater than the net liabilities.” App. at
66 (Am. Compl. ¶ 39 (emphasis removed)).
As far as the basis for the falsity of those statements, the
amended complaint relies on information from confidential
former employees. Those sources report that at the same time
as Prudential made those filings with the SEC, the Hartford
Block was experiencing consistently negative mortality. On
that ground, the Warren Retirement System postulates that
Prudential’s reserves were inadequate. At the very least, the
Warren Retirement System contends, Prudential’s omission of
the Hartford Block’s negative mortality gave investors false
confidence in the company’s reserves and rendered misleading
the suggestion in its Form 10-K that it was over-reserved.
Those particularized statements about the adequacy of
Prudential’s reserves are opinions. As the Supreme Court has
explained, “[a]n opinion is ‘a belief[,] a view,’ or a ‘sentiment
which the mind forms of persons or things,’” whereas a fact is
a “‘thing done or existing’ or ‘[a]n actual happening.’”
Omnicare, Inc. v. Laborers Dist. Council Const. Indus.
Pension Fund, 575 U.S. 175, 183 (2015) (quoting Webster’s
New International Dictionary 782, 1509 (1927)). And the
setting of reserves reflects an insurer’s actuarial judgment,
based on a variety of complex assumptions and considerations,
of the amount that it must set aside to pay claims by
policyholders. See Shapiro v. UJB Fin. Corp., 964 F.2d 272,
281 (3d Cir. 1992) (observing that there is “no single method
of evaluating and setting loan loss reserves” and cautioning
that “the economic judgments made in setting [such] reserves
can be validated only at some future date”). Thus, when the
stated amount of reserves is challenged, not on the factual
ground that the indicated amount is not actually set aside, but
18
for the sufficiency of that set-aside to pay claims by
policyholders, the stated reserve amount, as a manifestation of
actuarial judgment, functions as an opinion. See Fait v.
Regions Fin. Corp., 655 F.3d 105, 112–13 (2d Cir. 2011)
(analyzing statements regarding the adequacy of loan loss
reserves as opinions), abrogated on other grounds by
Omnicare, 575 U.S. at 184–89. Similarly, when a claim
against an insurance company for false or misleading financial
statements hinges on an opinion about the adequacy of
reserves, those financial statements should be treated as
opinions too.
1. Opinion Falsity Under § 10(b) and
Rule 10b-5.
Although the challenged statements are opinions, they may
still be false or misleading. In a case arising under § 11 of the
Securities Act of 1933, 2 Omnicare, Inc. v. Laborers District
Council Construction Industry Pension Fund, 575 U.S. 175(2015), the Supreme Court identified three scenarios in which
an opinion may be false or misleading. First, because every
statement of opinion “explicitly affirms one fact: that the
speaker actually holds the stated belief,” an insincere statement
of the speaker’s opinion qualifies as a misrepresentation. Id. at
184. Second, opinion statements that contain expressly
“embedded” factual assertions are misleading if any of the
embedded factual assertions are untrue. Id. at 185–86. The
third scenario involves omissions that render opinion
statements misleading: if, under the circumstances in which it
is given, an opinion reasonably implies facts that are untrue,
then, without a qualifying statement regarding those facts, the
opinion is misleading. See id. at 188–89.
Unlike Omnicare, this case involves claims under § 10(b)
of the 1934 Act and Rule 10b-5. And this Circuit has not
2
Pub. L. No. 73-22, 48 Stat. 74 (codified as amended at
15 U.S.C. § 77a et seq.).
19
precedentially addressed the applicability of Omnicare’s
opinion-falsity framework to claims under § 10(b) for
violations of Rule 10b-5. But this Court has assumed that
Omnicare applies to proxy-fraud claims under § 14(a) of the
1934 Act. See Jaroslawicz v. M&T Bank Corp., 962 F.3d 701,
717 & n.16 (3d Cir. 2020) (observing that “[t]he Supreme
Court’s decision in Omnicare provides the relevant
framework” for assessing the falsity of opinion statements
under § 14(a)). More broadly, every other Court of Appeals to
encounter the issue has applied the Omnicare framework for
opinion falsity to claims for Rule 10b-5 violations. See Emps.’
Ret. Sys. of the City of Baton Rouge & Par. of E. Baton Rouge
v. MacroGenics, Inc., 61 F.4th 369, 386–91 (4th Cir. 2023);
Constr. Indus. & Laborers Joint Pension Tr. v. Carbonite, Inc.,
22 F.4th 1, 7 (1st Cir. 2021); Carvelli v. Ocwen Fin. Corp.,
934 F.3d 1307, 1322 n.7 (11th Cir. 2019); City of Dearborn
Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc.,
856 F.3d 605, 616 (9th Cir. 2017); Tongue v. Sanofi, 816 F.3d
199, 209–10 (2d Cir. 2016); Nakkhumpun v. Taylor, 782 F.3d
1142, 1159 (10th Cir. 2015).
We join that consensus: Omnicare’s framework for
evaluating opinion falsity applies to claims under § 10(b) for
violations of Rule 10b-5. Although differences exist between
§ 11 and Rule 10b-5, 3 the two provisions use almost identical
language in prohibiting misrepresentations and omissions.
Compare 15 U.S.C. § 77k(a) (creating liability for registration
statements that “contained an untrue statement of a material
fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading”), with 17 C.F.R. § 240.10b-5(b) (making it illegal
3
Unlike Rule 10b-5, § 11 applies only to registration
statements, and it lacks scienter and loss-causation
requirements. See Obasi Inv. LTD v. Tibet Pharms., Inc.,
931 F.3d 179, 182 (3d Cir. 2019) (observing that § 11
“imposes near-strict liability for untruths and omissions made
in a registration statement”).
20
“[t]o 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”). That textual congruence strongly
suggests that the SEC, in promulgating Rule 10b-5, intended
to employ the same standard for falsity as Congress used when
enacting § 11. Cf. Antonin Scalia & Bryan A. Garner, Reading
Law: The Interpretation of Legal Texts 323 (2012) (“[W]hen a
statute uses the very same terminology as an earlier statute –
especially in the very same field, such as securities law . . . – it
is reasonable to believe that the terminology bears a consistent
meaning.” (emphasis added)).
Relatedly, this Circuit has already held that § 11 and Rule
10b-5 share the same standard of materiality for misleading
statements. See In re Merck & Co., Inc. Sec. Litig., 432 F.3d
261, 273–75 (3d Cir. 2005) (reaffirming that “[s]ections 11 and
10(b) share the materiality element and the [same] materiality
definition”); In re Donald J. Trump Casino Sec. Litig.-Taj
Mahal Litig., 7 F.3d 357, 369 (3d Cir. 1993) (observing that
§ 10(b), Rule 10b-5, § 11, and § 12(2) all share the same
standard of materiality). And in prior precedent, this Circuit
prefigured the Omnicare framework by recognizing that, for
purposes of Rule 10b-5 violations, opinion statements are
misleading when “issued without a genuine belief or
reasonable basis.” In re Merck & Co., Inc. Sec., Derivative &
“ERISA” Litig., 543 F.3d 150, 166 (3d Cir. 2008) (quoting
Herskowitz v. Nutri/System, Inc., 857 F.2d 179, 185 (3d Cir.
1988)); see also City of Edinburgh Council v. Pfizer, Inc.,
754 F.3d 159, 170 (3d Cir. 2014).
In sum, Omnicare is best viewed as a more developed
articulation of that principle so that for claims under § 10(b)
and Rule 10b-5, an opinion statement is misleading if it: (i) was
not sincerely believed when made; (ii) contains an expressly
embedded, untrue factual assertion; or (iii) reasonably implies
untrue facts and omits appropriate qualifying language.
21
2. None of the challenged opinion
statements in this case fit within any of
Omnicare’s categories of false or
misleading opinions.
For the first Omnicare category, the amended complaint
does not contain plausible allegations that Prudential did not
sincerely hold its opinion about the adequacy of its reserves.
At most, the amended complaint relies on reports by three
confidential former employees for the proposition that one
subset of Individual Life’s portfolio, the Hartford Block,
experienced negative mortality during 2018 and 2019. But
even assuming, for the sake of argument, the credibility of
those sources, see Avaya, 564 F.3d at 263, their accounts fail
to show that Prudential, at least prior to conducting its second-
quarter actuarial assumptions review, believed the Hartford
Block’s problems had affected Individual Life to the point that
the reserves for that entire business segment were deficient.
See Williams, 869 F.3d at 246 (“[A]ctual knowledge that sales
from one source might decrease is not the same as actual
knowledge that the company’s overall sales projections are
false.” (emphasis added)). And because the challenged
statements were made before the alleged second-quarter
review of actuarial assumptions could be reasonably inferred
to have discovered any problems, the Warren Retirement
System does not provide a basis for plausibly concluding that
Prudential did not sincerely believe the adequacy of its reserve
amounts as it reported them on its SEC filings.
For the second Omnicare scenario, the challenged
statements have no expressly embedded factual assertions that
are untrue. The statement of a likelihood of being over-
reserved has only two embedded factual statements: that
interest rates were low, and that Prudential held reserves at all.
The truthfulness of both of those statements is undisputed.
Nor are the challenged statements misleading under the
falsity-by-omission scenario described in Omnicare. The
Warren Retirement System’s omission argument rests on
22
information from confidential former employees that the
Hartford Block had a consistently negative mortality
experience, and the Warren Retirement System contends that
Prudential should have disclosed that issue. Even without
examining whether that confidential-source information
should be discounted, the recognition that the alleged negative
mortality in the Hartford Block would tend to increase the
amount of needed reserves would be, at most, only one of many
factors that Prudential considered in setting its reserves. And
because “[r]easonable investors understand that opinions
sometimes rest on a weighing of competing facts,” an opinion
statement is “not necessarily misleading when an issuer knows,
but fails to disclose, some fact cutting the other way.”
Omnicare, 575 U.S. at 189–90. Thus, without an
accompanying allegation that the negative mortality in the
Hartford Block was so great that it would, for a reasonable
investor, eclipse the balance of the numerous other
considerations used to set reserves for all of Individual Life,
the omission of that fact from Prudential’s Forms 10-K and
10-Q does not make the challenged opinions in those filings
misleading. See id. at 190 (“A reasonable investor does not
expect that every fact known to an issuer supports its opinion
statement.”); Chubb, 394 F.3d at 156 (explaining that
“anecdotal examples” of individual policies’ poor performance
did not demonstrate that the broader business was failing).
For these reasons, the Warren Retirement System does not
allege circumstances under which Prudential’s statements
concerning the adequacy of its reserves were plausibly false or
misleading opinions under any of the scenarios identified in
Omnicare. Because the Warren Retirement System does not
propose any allegations that would bring the company’s
statements regarding the adequacy of its reserves within any of
the three Omnicare scenarios, the District Court did not abuse
its discretion in denying a second opportunity to amend the
complaint in this respect.
23
C. The Reference to Falzon’s No-Systemic-Issues
Statement in the Credit Suisse Analyst Report
The Warren Retirement System also premises its securities-
fraud claims upon a statement allegedly made by Prudential’s
Vice Chairman, Robert M. Falzon. As required by Rule 9(b)
and the PSLRA, the amended complaint identifies the
circumstances surrounding that statement with particularity.
According to a March 31 analyst report from the Credit Suisse
investment bank, Falzon stated three days earlier, at a meeting
with analysts, that “there are no systemic issues with
underwriting or mortality assumptions.” App. at 67–68 (Am.
Compl. ¶ 43) (emphasis removed). The amended complaint
also provides the Warren Retirement System’s reason for the
falsity of Falzon’s statement. That rationale depends on
information from three confidential witnesses, who as former
Prudential employees, assert that the Hartford Block was “not
priced to cover the adverse mortality trends being experienced”
and that Prudential was powerless to increase the premiums on
those policies. Id. at 73–74 (Am. Compl. ¶ 53(b)). Based on
that information, the Warren Retirement System contends that,
contrary to Falzon’s assurances, there were systemic issues
with Prudential’s underwriting practices and mortality
assumptions.
The District Court rejected Credit Suisse’s report of
Falzon’s statement as a basis for a Rule 10b-5 claim against
Prudential. See In re Prudential, 2020 WL 7706860, at *14. It
reasoned that because the statement, which was a paraphrasing,
not a direct quotation, appeared in an analyst report, it was not
‘made’ by Falzon or Prudential for purposes of Rule 10b-5.
See id.; see also 17 C.F.R. § 240.10b-5(b) (“It shall be
unlawful for any person, directly or indirectly, . . . [t]o make
any untrue statement of a material fact . . . .” (emphasis
added)). In reaching that conclusion, the District Court relied
on Janus Capital Group, Inc. v. First Derivative Traders,
564 U.S. 135 (2011), for the proposition that Falzon could not
have made the statement because he did not “control[] the
content of the report.” In re Prudential, 2020 WL 7706860, at
24
*14 (citing Janus, 564 U.S. at 142 (“Without control, a person
or entity can merely suggest what to say, not ‘make’ a
statement in its own right.”)). That reasoning is incorrect, but
inconsequential here. See TD Bank N.A. v. Hill, 928 F.3d 259,
270 (3d Cir. 2019) (recognizing that this Court “may affirm on
any basis supported by the record, even if it departs from the
District Court’s rationale”).
Janus announced two important points of law regarding the
maker of a statement for purposes of Rule 10b-5. First, it held
that for a person or entity to ‘make’ a statement, that person or
entity must have “ultimate authority over the statement,
including its content and whether and how to communicate it.”
Janus, 564 U.S. at 142. Second, Janus emphasized the role of
attribution in determining a statement’s maker: “attribution
within a statement or implicit from surrounding circumstances
is strong evidence that a statement was made by – and only by
– the party to whom it is attributed.” Id. at 142–43. Applying
those principles to allegedly false statements in a mutual fund’s
prospectuses, the Supreme Court concluded that an investment
advisor for the mutual fund – even if it were “significantly
involved in preparing the prospectuses” – did not ‘make’ the
challenged statements because the prospectuses did not
attribute the statements to the fund advisor and because only
the mutual fund, not the advisor, had the statutory obligation to
issue the prospectuses. See id. at 146–48.
Those two Janus principles lead to a different conclusion
here: Prudential, through Falzon, made the no-systemic-issues
statement. The allegations about the contents of Falzon’s
statement and its attribution to him are not based on
information and belief, and they do not rely on confidential
sources. So even under the PSLRA’s heightened pleading
standard for falsity, see 15 U.S.C. § 78u-4(b); Avaya, 564 F.3d
at 252–53, nothing more is needed to accept those allegations
as true at this stage. From that perspective, the challenged
statement is sufficiently attributed to Falzon – Credit Suisse
identifies him by name as the speaker. See ESG Cap. Partners,
25
LP v. Stratos, 828 F.3d 1023, 1033 (9th Cir. 2016) (explaining
that “attributing a statement to another party generally
indicates that party as the ‘maker’ of the statement” for Rule
10b-5 purposes under Janus). And with Falzon’s position as
Vice Chairman and the surrounding context of the statement –
that it was made at a meeting where Prudential’s management
discussed the company’s financial condition with outside
analysts – the amended complaint allows the reasonable
inference that Falzon (not Credit Suisse’s analysts) had
“ultimate authority” on behalf of Prudential to speak about the
company’s underwriting practices and mortality assumptions.
Janus, 564 U.S. at 142. Under Janus, then, the amended
complaint plausibly pleads that Prudential, through Falzon,
made the challenged statement. See id. at 147 n.11; see also
Basic, 485 U.S. at 227 & n.4 (treating a paraphrased statement
by a company’s president that was published in a newspaper as
having been “made” by the company for purposes of Rule
10b-5); Nursing Home Pension Fund, Loc. 144 v. Oracle
Corp., 380 F.3d 1226, 1235 (9th Cir. 2004) (explaining, pre-
Janus, that “when statements in analysts’ reports clearly
originated from the defendants, and do not represent a third
party’s projection, interpretation, or impression, the statements
may be held to be actionable even if they are not exact
quotations”).
In reaching a contrary conclusion, the District Court
misapplied Janus. It examined Credit Suisse’s control over the
analyst report and not Prudential’s ultimate authority over the
statements within the report that were attributed to Falzon. But
Janus distinguishes between the act of ‘making’ a statement
and the act of republishing it, such that “publishing another’s
statement does not make someone the ‘maker’ of the
statement.” Stratos, 828 F.3d at 1033 (quoting Janus, 564 U.S.
at 142–43); see also Janus, 564 U.S. at 147 n.11 (“[A]s long as
a statement is made, it does not matter whether the statement
was communicated directly or indirectly to the recipient.”);
Basic, 485 U.S. at 227 & n.4. In this case, because the report
attributed the statement to Falzon and the context of the
26
statement indicates that he exercised control over its content
and the decision to communicate it to Credit Suisse, the
statement cannot, at least at the pleading stage, be considered
to have been ‘made’ by Credit Suisse for purposes of Rule
10b-5.
Nevertheless, the amended complaint does not plausibly
allege the falsity of Falzon’s statement. The information used
to justify its falsity – underwriting problems and negative
mortality in the Hartford Block – comes from confidential
former employees. Even without accounting for any potential
discounting of that information, see Avaya, 564 F.3d at 263,
the statements support, at most, the conclusion that there were
flaws in the underwriting practices and mortality assumptions
for the Hartford Block that could not be remedied by raising
premiums for the Hartford Block. But Falzon’s no-systemic-
issues statement concerned Individual Life as a whole – not
just the Hartford Block. Thus, his statement cannot be
interpreted as disavowing any issues related to underwriting or
mortality assumptions in the Hartford Block. Rather, the
statement communicated that there were no problems with
underwriting or mortality assumptions that would jeopardize
the performance of all of Individual Life. And without
allegations about the relative size of the Hartford Block
compared to all of Individual Life, or about the magnitude of
the problems in the Hartford Block relative to the full
Individual Life portfolio, the amended complaint does not
allow the inference that any problems with the Harford Block
were systemic when Falzon made his statement.
Accordingly, Falzon’s alleged statement reproduced in the
Credit Suisse analyst report is not plausibly false or
misleading. Also, because the Warren Retirement System did
not identify any additional information that would change this
conclusion, the District Court did not abuse its discretion in
denying leave to amend the complaint in this respect.
27
D. Tanji’s Investor Day Comments
The most recent of the allegedly misleading statements
were made on June 5, 2019, at Prudential’s Investor Day
conference. The amended complaint identifies those
statements and the circumstances surrounding them with the
particularity required by Rule 9(b) and the PSLRA. During a
presentation, Prudential’s CFO, Kenneth Y. Tanji, assured
investors that Individual Life’s “recent [mortality] experience
has been in between [the] range of what we’d expect[,] normal
volatility, but net it has been below our experience.” App. at
76–77 (Am. Compl. ¶ 54 (emphasis removed)). Then, in
response to a follow-up question from an analyst, Tanji further
described Individual Life’s mortality experience as “very
quarter-to-quarter, both positive and negative,” or, at worst,
only “slightly negative.” Id. (emphasis removed).
The amended complaint also specifies two reasons for
those statements’ falsity. The first rationale relies entirely on
information from a confidential former employee, referred to
as ‘FE1.’ According to FE1, Prudential discussed in May 2019
that its reserves would need to be significantly increased as a
result of negative mortality experience in the Hartford Block:
[A]s early as May 2019, it was discussed in
forecast meetings that Individual Life was
performing poorly due to negative mortality
experience in the legacy Hartford [B]lock and
that [Prudential] would need to take a significant
charge to Individual Life adjusted operating
income.
Id. at 79 (Am. Compl. ¶ 59). Tanji’s statement on June 5 that
Prudential’s recent mortality experience had been within a
normal range (or perhaps slightly negative) does not reconcile
easily with these allegations that the company, the month
before, discussed taking a significant reserve charge as a result
of negative mortality experience. If credited, the information
28
from FE1 would go a long way toward establishing the
plausible falsity of Tanji’s statement.
The second rationale for falsity is the combined effect of
the temporal proximity of Tanji’s assurances, made eight
weeks before Prudential’s corrective disclosures, and the
magnitude of the corrective actions – a one-time $208 million
reserve charge followed by a $25 million per-quarter reduction
in earnings for the foreseeable future. Those allegations
increase the likelihood that, contrary to Tanji’s statements,
Individual Life’s recent mortality experience could not have
been within a normal range, or at worst slightly negative, on
Investor Day. 4 Consistent with that conclusion, the amended
complaint alleges that a sensitivity analysis published by
Prudential in a Form 8-K on December 6, 2018, indicated that
a one-standard-deviation change in expected mortality would
decrease Individual Life’s income by $55 million to $80
million. From that reference point, it is a reasonable inference
from a reserve charge of $208 million that the company’s
mortality experience was not in the normal range, or at worst
slightly negative, eight weeks before the charge.
These allegations, if credited, along with the reasonable
inferences that may be drawn from them, plausibly plead that
the mortality experience for Individual Life was not within a
normal range or just slightly negative as of June 5. Indeed,
analysts were surprised by Prudential’s disclosure of the $208
million reserve charge so close in time to the company’s
4
Tanji’s Investor Day comments related to mortality
experience, and Prudential’s corrective disclosures attributed
the reserve charge to updated mortality assumptions. Those
concepts are not the same, and unexpected mortality
experience does not always compel updated mortality
assumptions. But here, it is a reasonable inference, in light of
the magnitude of the reserve charge and the information from
FE1, that Prudential’s updated mortality assumptions resulted
from negative mortality experience.
29
Investor Day conference. See id. at 81 (Am. Compl. ¶ 61
(citing a UBS report questioning why Prudential failed to
“reset the bar” during Investor Day (emphasis removed))); id.
at 82 (Am. Compl. ¶ 62 (citing a Wells Fargo report predicting
investor surprise because the announcement was “so close” in
time to the Investor Day conference)). Thus, FE1’s account of
Prudential’s internal discussions, combined with the
magnitude of the reserve charge and its close temporal
proximity to Investor Day, suffice to plead that Tanji’s
statements regarding the company’s recent mortality
experience were plausibly false or misleading when made. 5
To avoid that outcome, Prudential attacks both alleged
rationales. It contends that the confidential-source information
from FE1 is unreliable and should be steeply discounted. It
also disputes the inference of falsity from the combination of
the temporal proximity and the magnitude of the reserve
adjustment. Neither of those contentions has merit, so we will
vacate and remand the dismissal of the claims, including the
companion claims under § 20(a), predicated on Tanji’s
Investor Day remarks. See Avaya, 564 F.3d at 252, 280 (noting
that “liability under Section 20(a) is derivative of an underlying
violation of Section 10(b)”).
5
Because, when taken together, the information from FE1 and
the circumstances of the reserve charge demonstrate the
plausible falsity of Tanji’s statements, it is not necessary to
assess whether either allegation would, on its own, cross the
plausibility threshold. By contrast, the allegedly misleading
statements made earlier in the class period lack the same close
temporal connection to the reserve charge. That attenuation,
along with the lack of “mutually reinforcing” allegations and
the other shortcomings identified above, makes unreasonable
any inference that those prior statements were false. Avaya,
564 F.3d at 266.
30
1. The Information Supplied by the
Confidential Former Employee,
‘FE1,’ Should Not Be Discounted.
Prudential argues that the information provided by FE1
should be discounted to the point of insignificance. Under this
Circuit’s PSLRA jurisprudence, allegations based on
information from a confidential witness must be “steeply
discounted” if the source is not credible or if the information is
unreliable. Avaya, 564 F.3d at 262–63. Several factors guide
that determination: the dependability of a confidential
witness’s basis of knowledge; the level of detail provided by
the witness; the degree to which other testimony or evidence
corroborates the witness’s account; and the internal
consistency of the information provided. See Chubb, 394 F.3d
at 147; Rahman, 736 F.3d at 244. Under those factors, the
information from FE1 related to Prudential’s discussions in
May 2019 about taking a significant reserve charge cannot be
discounted at the pleading stage.
As to the dependability of FE1’s basis of knowledge, the
amended complaint provides “sufficient particularity to
support the probability that a person in the position occupied
by the source would possess the information alleged.”
Rahman, 736 F.3d at 244 (quoting Novak, 216 F.3d at 314).
Such a showing – that a confidential source, by virtue of his or
her position, would have access to the information alleged –
can be made through a description of the duration of the
confidential witness’s employment along with explanations of
how and when the confidential witness learned the
information. See Avaya, 564 F.3d at 263; Chubb, 394 F.3d at
148 (requiring “allegations regarding how or why [the
confidential sources] would have access to the information
they purport to possess”). The amended complaint describes
FE1’s basis of knowledge in the required degree of detail. FE1
was an Associate Manager in Prudential’s Planning and
Analysis group between November 2016 and February 2020.
In that position, FE1 regularly attended Individual Life forecast
meetings with the actuarial, capital, and financial teams. And,
31
as early as May 2019, FE1 learned that Prudential was
discussing, at those forecast meetings, taking a significant
reserve charge due to the Hartford Block’s negative mortality
experience.
The amended complaint also provides an appropriate
degree of detail about the information provided by FE1. FE1
explained that, internally, Prudential understood that
Individual Life as a whole was “performing poorly” and that
the company attributed that poor performance to “negative
mortality experience in the legacy Hartford [B]lock.” App. at
79 (Am. Compl. ¶ 59). Also according to FE1, those
developments caused Prudential to discuss as early as May
2019 that it “would need to take a significant charge to
Individual Life adjusted operating income.” Id. This
information contains enough detail to call into question the
veracity of Tanji’s Investor Day remarks that Prudential’s
mortality experience was within a normal range, or at worst
only slightly negative. Cf. Rahman, 736 F.3d at 245(discounting information from a confidential witness that
consisted of “little more than generalized allegations with few
specifics”).
In addition, other allegations in the amended complaint
corroborate the information from FE1. The explanation
reported by FE1 for Prudential’s internal discussions aligns
with the company’s own justification for the $208 million
reserve charge – updated mortality assumptions related to
Individual Life’s longer-dated vintages. See Avaya, 564 F.3d
at 264; cf. generally Illinois v. Gates, 462 U.S. 213, 244–45
(1983) (noting “that corroboration through other sources of
information reduce[s] the chances of a reckless or
prevaricating tale” (quoting Jones v. United States, 362 U.S.
257, 271 (1960))). Similarly, FE1’s report that the relevant
discussions began as early as May 2019 is consistent with the
timing of Prudential’s annual, actuarial assumptions review,
which occurs during the second quarter of each fiscal year.
And although they did not attend the forecast meetings, two
32
other confidential witnesses with dependable bases for their
more limited knowledge 6 corroborate FE1’s report of negative
mortality experience in the Hartford Block. See Avaya,
564 F.3d at 266 (examining the dependability of a confidential
witness’s basis of knowledge before relying on information
from the witness for corroboration at the pleading stage).
Consistent with FE1’s information, those witnesses reported
that the Hartford Block was not adequately priced to cover its
negative mortality experience and that its actuarial and data
administration systems were subpar.
For similar reasons, the information from FE1 fits within a
coherent narrative. FE1’s report that the Hartford Block had
problems with underwriting and with consistently negative
mortality does not undermine the plausibility of other
allegations in the amended complaint. To the contrary, FE1’s
information reconciles with the possibility that Prudential
initially viewed the underwriting and negative mortality issues
as localized to the Hartford Block, but that by the time of the
company’s second-quarter assumptions review in May 2019,
the problems with the Hartford Block began to affect
Individual Life as a whole, prompting Prudential to take the
$208 million reserve charge.
In sum, the factors used to evaluate the overall reliability of
information from confidential sources do not reveal a basis to
steeply discount the information from FE1. Consequently, the
6
As alleged, one of the confidential former employees,
referred to as ‘FE2,’ worked at Prudential from April 2001 to
July 2019. During that time, FE2 worked as a manager in the
company’s Actuarial Project Management Office with
responsibility for assessing model risks. Another confidential
former employee, referred to as ‘FE3,’ worked at Prudential
from 2011 to June 2018. During that time, FE3 served as an
associate manager in Individual Life Insurance Financial
Planning and Analysis and was responsible for financial
forecasting.
33
allegations premised on the information from FE1 must be
taken as true at the pleading stage. See id. at 263.
2. Inferences About the Falsity of Tanji’s
Investor Day Statements Are Not
Impermissible Fraud by Hindsight.
Prudential separately argues that reliance on the $208
million reserve charge eight weeks after Tanji’s statements is
an impermissible attempt to plead fraud by hindsight, and
therefore those allegations should not receive any weight in the
plausibility analysis. The fraud-by-hindsight prohibition has
its greatest potency in the context of otherwise deficient
allegations of scienter, 7 but for purposes of allegations of
falsity, it operates as a corollary of the rule that “[t]o be
actionable, a statement or omission must have been misleading
at the time it was made.” In re NAHC, Inc. Sec. Litig., 306 F.3d
1314, 1330 (3d Cir. 2002); see also Williams, 869 F.3d at 244(noting that allegations of falsity “must be sufficient to show
that the challenged statements were ‘actionably unsound when
made’” (quoting In re Burlington Coat Factory, 114 F.3d at
1430)). Thus, while the PSLRA forbids reliance on
“speculative fraud by hindsight” allegations, In re Rockefeller,
311 F.3d at 225 (emphasis added), later developments may
allow a reasonable inference that prior statements were untrue
or misleading when made. See In re Merck, 432 F.3d at 272(“[A]ny information that sheds light on whether class period
statements were false or materially misleading is relevant.”
(quoting In re Scholastic Corp. Sec. Litig., 252 F.3d 63, 72 (2d
7
See 15 U.S.C. § 78u-4(b)(2)(A) (requiring particularized
allegations “giving rise to a strong inference that the defendant
acted with the required state of mind” (emphasis added)); see
also Tellabs, 551 U.S. at 320 (“The ‘strong inference’ [of
scienter] formulation was appropriate, the Second Circuit said,
to ward off allegations of ‘fraud by hindsight.’” (quoting
Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1129 (2d Cir.
1994))).
34
Cir. 2001))); Plotkin v. IP Axess Inc., 407 F.3d 690, 698 (5th
Cir. 2005) (recognizing that “allegations of later-emerging
facts can, in some circumstances, provide warrant for
inferences about an earlier situation”). And an inference of
falsity is easier to justify for statements that are followed
shortly by corrective disclosures of significant dimension. See
Neiman v. Bulmahn, 854 F.3d 741, 751 (5th Cir. 2017) (“[T]he
fact that a business files for bankruptcy on ‘Day Two,’ may,
under the right surrounding circumstances, provide grounds for
inferring that the business was performing poorly on ‘Day
One.’” (quoting Plotkin, 407 F.3d at 698)); see also Emps.’
Ret. Sys. of Gov’t of the V.I. v. Blanford, 794 F.3d 297, 307 (2d
Cir. 2015) (reasoning that “a significant gap in fourth quarter
sales tends to support [a] claim that inventory was misleadingly
characterized throughout the Class Period”); Novak, 216 F.3d
at 312–13 (inferring from a company’s “significant write-off
of inventory directly following the Class Period . . . that
inventory was seriously overvalued at the time the purportedly
misleading statements were made”).
This case illustrates the application of those principles.
Prudential’s corrective disclosures were momentous (a $208
million charge plus a $25 million quarterly impact on earnings
for the foreseeable future) and close in time (eight weeks later)
to Tanji’s statements. Thus, at least at the pleading stage, when
Prudential has not yet had an opportunity to present its own
evidence, the conclusion that Tanji’s statements were untrue is
not impermissible fraud by hindsight, but instead a reasonable
inference. See Plotkin, 407 F.3d at 697–98 (finding that events
occurring months after the challenged statements were “so
temporally connected that they shed light on the financial
condition of the companies at the time” the statements were
made).
IV. CONCLUSION
For these reasons, the Warren Retirement System plausibly
pleaded falsity only with respect to CFO Tanji’s statements on
June 5, 2019, regarding Prudential’s mortality experience.
35
Accordingly, we will affirm the District Court’s judgment
except for a vacatur with respect to the claims premised on
those statements, recognizing that this “disposition entails a
shorter class period” that can begin no earlier than the date of
Tanji’s statements. Avaya, 564 F.3d at 280.
36