United States District Court, D. Minnesota.
In re: E.W. BLANCH HOLDINGS, INC. SECURITIES LITIGATION.
Civ. No. 01-258 (MJD/JGL)
July 26, 2001.
Second Amended Consolidated Class Action Complaint for Violations of the Federal
Securities Laws
SECOND AMENDED CONSOLIDATED CLASS ACTION COMPLAINT FOR
VIOLATIONS OF THE FEDERAL SECURITIES LAWS
Lead Plaintiffs, on behalf of themselves and all others similarly situated, for their
complaint against defendants, allege the following based upon the investigation of
plaintiffs' counsel, which included a review of E.W. Blanch Holdings, Inc.'s (“EWB or
the “Company”) filings with the Securities Exchange Commission (“SEC”), securities
analysts' reports about EWB, EWB press releases and conference calls, state insurance
commissioner's orders, various court files, documents and other investigatory efforts.
SUMMARY OF THE CASE
1. This is a class action on behalf of Lead Plaintiffs (“plaintiffs”) and all other persons
similarly situated, other than defendants and their affiliates, who purchased the common
stock of defendant EWB during the period of April 20, 1999, through March 20, 2000,
inclusive (the “Class Period”), and who sustained damage as a result of those purchases
(the “Class”). On behalf of themselves and the other members of the Class, plaintiffs seek
to recover damages caused by defendants' violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated by
the SEC pursuant to the Exchange Act.
2. As detailed below, during the Class Period, EWB and its senior officers issued a series
of false and misleading positive statements concerning the Company's business practices,
revenues and profits. The Individual Defendants, however, were aware of the Company's
true state of affairs and benefitted from this knowledge by selling 498,426 shares of EWB
common stock at inflated prices for approximately $27.5 million in illegal proceeds. It
was not until March 20, 2000, having already reaped millions in proceeds from insider
sales, that the Company revealed its true revenues, profits and financial position.
Specifically, the Company, in sharp contrast to statements made during the Class Period,
stated that actual earnings would be materially below prior estimates. The market's
response to these revelations was punishing. On March 21, 2000, the first day of trading
subsequent to the disclosure, EWB common stock plummeted over 60%, from $55 per
share to $20.34 per share on volume of 4.6 million shares. The price of the Company's
common stock has not recovered and, instead, has declined further and now trades below
$14.00 per share.
JURISDICTION AND VENUE
3. This action arises under Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§
78j(b), 78t(a); and Rule 10b-5, 17C.F.R. § 249.10b-5, promulgated under the Exchange
Act. This court has jurisdiction under Section 27 of the Exchange Act, 15 U.S.C. § 78aa;
and Sections 1331 and 1337 of the Judicial Code, 28 U.S.C. §§ 1331, 1337.
4. Venue is proper in this district pursuant to Section 27 of the Exchange Act, 15 U.S.C. §
78aa, and Section 1391(b) of the Judicial Code, 28 U.S.C. § 1391(b). The wrongs alleged
occurred in part in this district. At least two defendants reside in this district. Persons who
have personal knowledge of the matters complained of herein reside in this district.
Moreover, the Company has one of its corporate offices in this district and transacts
business in this district. EWB is also involved in other related litigation in this district.
5. In connection with the acts and conduct alleged in this complaint, defendants directly
or indirectly used the means and instrumentalities in interstate commerce, including
interstate telephone facilities, the United States mail, and the facilities of a national stock
exchange to accomplish their wrongdoing.
THE PARTIES
Chris Osheroff, William Hauenstein, and Ravi Bhola
6. Plaintiffs Chris Osheroff, William Hauenstein and Ravi Bhola purchased shares of
EWB common stock during the Class Period, as set forth in their certifications attached
to the motion for appointment of lead plaintiffs. Plaintiffs were appointed Lead Plaintiffs
by Order of the Court dated May 1, 2001. Each was damaged by his purchase of EWB
shares.
7. Defendant EWB is a Delaware corporation with its headquarters at 500 North Akard,
Suite 4500, in Dallas, Texas. The common stock of EWB - under the New York Stock
Exchange trading symbol, EWB - was traded in an efficient market at all times during the
Class Period. E.W. Blanch Co. is a subsidiary of the Company.
8. EWB is a leading provider of integrated risk management and distribution services,
including reinsurance intermediary services, risk management consulting and
administration services, and provides a broad range of risk management services to a
wide variety of entities, including Fortune 100 companies, government entities and
financial institutions. The Company has domestic offices in California, Delaware,
Florida, Georgia, Illinois, Minnesota, Massachusetts, New York, Ohio, Pennsylvania,
Texas and New Jersey. The Company has international offices in Argentina, Australia,
Brazil, Chile, China, Denmark, Hong Kong, Malaysia, Mexico, Paraguay, Singapore, the
United Kingdom, and Vietnam. On May 29, 2001, Benfield Grieg Group PLC announced
that its tender offer for all EWB shares had been successful. As a result, EWB is now
know as Benfield Blanch Holdings, Inc.
9. Defendant Edgar W. Blanch, Jr. (“Ted Blanch”) was Chairman and Chief Executive
Officer (“CEO”) of EWB until January 26, 2001, on which date his employment was
terminated. Because of his positions, Ted Blanch knew the adverse non-public
information about the Company's business, services, and financial condition via access to
internal corporate documents (including the Company's operating plans, budgets, and
forecasts and reports of actual operations), conversations and contacts with other
corporate officers and employees, attendance at management and Board of Directors
meetings and its committees, and via reports and other information routinely prepared
and provided in the ordinary course of business to him in connection with the operations
of the Company. During the Class Period, while in possession of material adverse nonpublic information about the Company, Ted Blanch engaged in insider trades, as detailed
in ¶ 138, infra, realizing gross proceeds of approximately $4,178,304.
10. Defendant Chris L. Walker (“Walker”) was President and Chief Operating Officer
(“COO”) of EWB until January 26, 2001. He is now CEO, COO, and Chairman of the
Board. He also has been a member of the Board of Directors of EWB since 1994.
Because of his positions, Walker knew the adverse non-public information about the
Company's business, services, and financial condition via access to internal corporate
documents (including the Company's operating plans, budgets, and forecasts and reports
of actual operations), conversations and contacts with other corporate officers and
employees, attendance at management and Board of Directors meetings and its
committees, and via reports and other information routinely prepared arid provided in the
ordinary course of business to him in connection with the operations of the Company.
During the Class Period, while in the possession of material adverse non-public
information about the Company, Walker engaged in insider trades, as detailed in ¶ 138,
infra, realizing gross proceeds of approximately $1,750,450.
11. Defendant Frank S. Wilkinson, Jr. (“Wilkinson”) was Executive Vice President and a
member of the Board of Directors of EWB. Because of his positions, Wilkinson knew the
adverse non-public information about the Company's business, services, and financial
condition via access to internal corporate documents (including the Company's operating
plans, budgets, and forecasts and reports of actual operations), conversations and contacts
with other corporate officers and employees, attendance at management and Board of
Directors meetings and its committees, and via reports and other information prepared
and provided in the ordinary course of business to him in connection with the operations
of the Company. During the Class Period, while in the possession of material adverse
non-public information about the Company, Frances and Frank S. Wilkinson, Jr. and the
Francis and Frank Wilkinson Foundation (which is controlled by Wilkinson) engaged in
insider trades, as detailed in ¶ 138, infra, realizing combined gross proceeds of
$17,369,480.
12. Defendant Ian D. Packer (“Packer”) was Executive Vice President and Chief
Financial Officer of EWB as of the beginning of the Class Period. Because of his
positions, Packer knew the adverse non-public information about the Company's
business, services, and financial condition via access to internal corporate documents
(including the Company's operating plans, budgets, and forecasts and reports of actual
operations), conversations and contacts with other corporate officers and employees,
attendance at management and Board of Directors meetings and its committees, and via
reports and other information prepared and provided in the ordinary course of business to
him in connection with the operations of the Company. During the Class Period, while in
the possession of material adverse non-public information about the Company, Packer
engaged in insider trades as detailed in ¶ 138, infra, realizing gross proceeds of
approximately $4,251,549.
13. Rodman Fox (“Fox”), at all relevant times herein, was a director and/or a senior
executive officer of E. W. Blanch Holdings. Because of his positions, Fox knew the
adverse nonpublic information about the Company's business, services, and financial
condition by virtue of his access to internal corporate documents (including the
Company's operating plans, budgets, forecasts and reports of actual operations),
conversations and contacts with other corporate officers and employees, conversations
with persons associated with Benfield Grieg Group, PLC (herein “Benfield Grieg”),
attendance at management and board of directors meetings and by reports and other
information prepared and provided in the ordinary course of business to him in
connection with the operations of the Company. At the same time, Fox was acting as a
director and senior executive officer of EWB, he had been engaging in clandestine
discussions with Benfield Grieg concerning a business alliance between Benfield Grieg,
himself and Paul Karon (“Karon”). During that same time, Fox was privy to inside
information concerning the operations and future prospects of EWB and the public
pronouncements of EWB as detailed in this complaint. He also planned to leave the
Company with significant clients of EWB, thereby precluding EWB's ability to meet
revenue forecasts given by the Company to the investing public.
14. The Individual Defendants signed various SEC filings during the Class Period. Packer
signed the 10-Q for the second and third quarters of 1999. Ted Blanch signed the 1999
10-K form, and signed it as attorney-in-fact for Wilkinson and Walker. Walker signed the
2000 10-K form, and signed it as attorney-in-fact for Ted Blanch.
15. Defendants identified in ¶M¶ 9-13, supra are referred to collectively as the
“Individual Defendants.”
CONTROLLING PERSONS
16. The Individual Defendants, by reason of their executive and board positions, were
controlling persons of EWB during the Class Period and had the power and influence,
and exercised the same, to cause the Company to engage in the conduct described in this
complaint.
17. During the Class Period, each Individual Defendant occupied a position that made
him privy to non-public information concerning EWB. Because of this access, each of
these defendants knew of the adverse material facts specified in this complaint and knew
that they were being concealed.
18. Each of the Individual Defendants is liable for making false and misleading
statements, and/or for wilfully participating in a scheme and course of business that
operated as a fraud on purchasers of EWB common stock and damaged members of the
Class in violation of the federal securities laws. All defendants pursued a common goal,
i.e., artificially inflating the price of EWB common stock by making false and misleading
statements and concealing material adverse information. The scheme and course of
business was designed to and did: (1) deceive the investing public, including plaintiffs
and other Class members; (2) artificially inflate the price of EWB common stock during
the Class Period; and (3) cause plaintiffs and other members of the Class to purchase
EWB common stock at inflated prices and to sustain damages.
19. Each defendant had the opportunity to commit and participate in the violations of the
federal securities laws as described in this complaint. The Individual Defendants were top
officers and members of the Board of Directors of EWB and they had authority to control
and did control its press releases, corporate reports, SEC filings and communications with
analysts. Thus, defendants controlled the public dissemination of, and could misrepresent,
the information about EWB's business, products and finances that reached the public and
caused the inflation in the price of EWB's common stock. Defendants also had the
authority and the control to prevent the unlawful dissemination of materially false
statements.
CLASS ALLEGATIONS
20. Plaintiffs bring this action as a class action pursuant to Fed. R. Civ. P. 23(a) and
23(b)(3) on behalf of a Class defined in ¶ 1, supra. Excluded from the Class are
defendants, members of the immediate families of the Individual Defendants, any entity
in which any defendant has a controlling interest, and the legal affiliates, representatives,
heirs, controlling persons, successors, and predecessors in interest or assigns of any such
excluded party.
21. The members of the Class are so numerous that joinder of all members is
impracticable. As of March 23, 2000, the Company had about 13,200,000 outstanding
shares of common stock. Throughout the Class Period, the Company's common stock
was actively traded on the New York Stock Exchange (“NYSE”) under the symbol
“EWB.” While the exact number of Class members can only be determined by
appropriate discovery, plaintiffs believe that the Class members number at least in the
hundreds and that they are geographically disbursed throughout the United States. Record
owners and members of the Class may be identified from the records maintained by the
Company or its transfer agent and may be notified of the pendency of this action by mail,
using the form of notice customarily used in federal securities actions.
22. Plaintiffs' claims are typical of the claims of the members of the Class because each
plaintiff and all Class members purchased shares of common stock of EWB during the
Class Period in an artificially inflated market and sustained injury as a result. Plaintiffs
and each member of the Class relied on the integrity of the market for EWB stock in
making those purchases.
23. Plaintiffs will fairly and adequately protect the interests of the Class members and
have retained counsel who are experienced and competent in class and securities
litigation. Plaintiffs have no interests that are contrary to or in conflict with members of
the Class that plaintiffs seek to represent.
24. A class action is superior to all other available methods of fair and efficient
adjudication of this controversy since joinder of all Class members is impracticable.
Furthermore, as the damages suffered by individual members of the Class may be
relatively small, the expense and burden of individual litigation make it impossible for
the members of the Class to individually address the wrongs done to them. There will be
no difficulty in the management of this class action.
25. Common questions of law and fact exist as to all members of the Class and these
common questions predominate over any questions affecting solely individual members
of the Class because defendants have acted on grounds generally applicable to the entire
Class. Among the questions of law and fact common to the Class are:
a. Whether the federal securities law were violated by defendants' acts as alleged in this
complaint;
b. Whether the Company's and the Individual Defendants' publicly disseminated releases
and statements during the Class Period omitted and/or misrepresented material facts and
whether defendants breached any duty to convey material facts or to correct material
facts previously disseminated;
c. Whether defendants participated in and pursued the fraudulent scheme and common
course of business complained of;
d. Whether defendants acted wilfully and/or recklessly in omitting and/or misrepresenting
material facts;
e. Whether the market prices of EWB common stock during the Class Period were
artificially inflated due to the material omissions and/or misrepresentations as stated in
this complaint;
f. Whether the members of the Class have sustained damages and, if so, the extent and
measure of damages sustained by the Class.
SUBSTANTIVE ALLEGATIONS
Background of EWB's Business
26. EWB is the holding company for E.W. Blanch Co., which provides reinsurance
brokerage, risk management, and consulting services through several subsidiaries. The
Company's core business historically has been and continues to be arranging for
reinsurance coverage as an intermediary between insurers and reinsurers.
27. Reinsurance is a transaction in which an insurance company, known as a “reinsurer,”
in exchange for a premium, agrees to indemnify or reimburse another insurance
company, known either as the ceding company, cedent or reinsured, against all or part of
a loss that the reinsured may sustain under insurance policies the reinsured has issued.
For its efforts in arranging for reinsurance, EWB earns brokerage fees.
Background of Unicover Managers. Inc. and Its Relation to EWB
28. Unicover Managers, Inc. (“Unicover”) was a Bermuda based managing general
underwriter (“MGU”). Beginning in 1995, Unicover and others underwrote a reinsurance
program for primary workers compensation (property casualty) insurance carriers. This
reinsurance was placed with a pool of domestic life (not property casualty) reinsurance
companies assembled by Unicover and others. The pools, commonly known in the
reinsurance industry as “Unicover pools,” are a group of reinsurers that combine capital
and appoint a manager to assume risk and manage claims on their behalf. Pools are
commonly used in workers compensation reinsurance. To attract business to its pools,
Unicover agreed to pay reinsurance broker's commissions at a level materially higher
than previous industry standards. Unicover also priced its policies well below expected
losses, and then passed the bulk of the risk for the health-only portions of the workers
compensation pool to reinsurers. At the same time, the reinsurers lowered their prices to
attract more business. Then reinsurers passed business along to retrocessionaires, which
cover reinsurers against losses.
29. Under the program established by Unicover, a primary workers compensation insurer
such as AIG or Orion Capital's subsidiary, EBI Companies, would retain a reinsurance
broker such as EWB to place reinsurance underwritten by Unicover with a fronting
company such as ReliaStar Life Reinsurance (“ReliaStar”). The other brokers who
produced business into Unicover's workers compensation pool included Aon Re,
Sedwgick and Guy Carpenter & Co. The fronting company would then cede the
reinsurance to the Unicover pool. The main Unicover pool was comprised of Phoenix
Home Life Reinsurance, Lincoln National Life Reinsurance, Connecticut General Life
Reinsurance (“CG”), ReliaStar and Cologne Re. Unicover also operated subsidiary pools.
30. The workers compensation insurance industry is a highly regulated, cyclical, property
casualty insurance business. Workers compensation insurance has a number of
components: life, accident, health, occupational disease trauma, cumulative trauma and
employer liability. Moreover, the accident, life and health components of comp insurance
differ from traditional life and health in that the exposures are limited to life and health
problems arising “on the job.”
31. Unicover created a program which in effect separated the life, accident and health
risks from the other components of the workers compensation exposure and reinsured
those liabilities with life reinsurers through what's known as the “workers compensation
carve out.” The Unicover pools wrote reinsurance business with reinsurance premiums of
approximately $2.5 billion that would generate a combined ratio (losses and expenses as
a percentage of premium) of 150%-200% and underwriting losses of $1.25-S2.5 billion
for the life reinsurance industry, a potentially catastrophic event. Specifically, Unicover
underwrote treaty reinsurance on behalf of a pool of insurance and reinsurance companies
in approximately the following percentages: 35 percent, Connecticut General Life
Insurance Company (“CG”); 23.75 percent, Phoenix Home Life Mutual Insurance
Company; 18.75 percent, Lincoln National Life Insurance Company; 17.5 percent,
Cologne Life Reinsurance Co. (“Cologne Re”); and 5 percent, ReliaStar Life Insurance
Company.
32. The Connecticut Department of Insurance, which has a duty to assure the solvency of
insurance companies domiciled in Connecticut, entered an order on February 25, 1999,
subsequently amended, that provided that “Connecticut domestic life, accident and health
insurers shall not accept any new or renewal exposures under existing contracts of
reinsurance.” In effect, the February 1999 order meant that over 50% of the Unicover
pool, CG and Cologne Re, were blocked from taking on additional exposure.
Additionally, since the Commissioner of Connecticut's Insurance Department, George
Reider, was also chair of the National Association of Insurance Commissioners, the
industry assumed that similar orders would soon be adopted in states in which the other
Unicover pool participants were domiciled. In other words, as of the end of February
1999, the Unicover program was over, as were brokerage commissions to EWB from that
program.
33. When the Unicover pool began to unravel in February 1999, Cologne Re, as both a
client of Unicover and a supplier of retrocessionaire reinsurance to the pool, announced it
expected $225 million in losses, later increased to $275 million, from its participation as
a retrocessionaire in the Unicover pool. By March 1999, Cologne Re terminated
Unicover's authority as a pool manager and its retrocessional contracts with Unicover.
34. Analysts ultimately estimated that the business generated by the Unicover pool would
result in an industry-wide loss of between $1.65 and $2 billion. EWB was one of the only
reinsurance broker placing business into the Unicover pools that did not take an
immediate charge in connection with that line of business.
Revenue Recognition
35. EWB has published its revenue recognition policies. The most recent publication of
these policies was in the 2000 Annual Report of the Company. The same revenue
recognition policies are also articulated in earlier annual reports, which cover the Class
Period.
36. According to the policy of EWB, revenue is recognized for reinsurance brokerage at
the later of the billing or effective date of the reinsurance contract.
37. Pursuant to the EWB announced policies, consultant fees are recognized during the
period when the services are provided or according to the terms specified in the contract.
38. Pursuant to EWB's policies, revenue for the sale of software and upgrades in software
is recognized only upon delivery to the end user. If there are continuing obligations, a
portion or all of the revenue will be deferred until the obligations have been fulfilled.
EWB has Wrongfully Recognized Unicover Related Revenues
39. Beginning in July and August 1998, American International Group (“AIG”), a United
States based international insurance company and the largest underwriter of commercial
and industrial insurance in the United States, sought placement of reinsurance business
for AIG's workers compensation policies using EWB as its broker.
40. In July 1998, AIG issued a firm order for reinsurance but required of any reinsurance
provider, such as Unicover, certain security and written confirmations from the company
or companies represented by Unicover. That is, before coverage would be accepted, AIG
required what was known as a “MGA security letter” from the company or companies
that would be providing reinsurance. The purpose of this letter was for each reinsurer to
confirm directly to AIG that it will stand behind the agreements made with AIG for the
provision of reinsurance. EWB stood to earn millions of dollars in fees if the AIG deal
took place.
41. Although the signed security letters were required for consummation of a contract for
the providing of reinsurance for AIG, those letters were never provided.
42. On September 11, 1998, AIG told EWB of the failure of the reinsurers to provide the
security letters required for the reinsurance to become effective. Without the security
letters, there would be no fees paid to EWB.
43. In October 1998, AIG again informed EWB of the continuing necessity of
documentation without which the deal for providing reinsurance would not be closed.
44. In December 1998, EWB was again informed of the failure to provide necessary
documentation with which to consummate the reinsurance deal on behalf of AIG. It was
also informed that the failure to provide the necessary documentation would mean that
AIG would not pay any premiums. The failure to pay premiums would result in the
failure of EWB to earn fees related to the placement of reinsurance. By February 1999,
neither EWB nor AIG had issued any confirmation indicating that the reinsurance
placements were bound.
45. Perhaps recognizing the likely collapse of Unicover and the consequent inability to
purchase reinsurance, AIG sued Unicover and ReliaStar in New York Supreme Court on
February 16, 1999, claiming that defendants were responsible to reinsure $900 million of
AIG's workers compensation business. E.W. Blanch Co., as subsidiary of EWB, was
added as a third-party defendant to that action on March 23, 1999. E.W. Blanch Co. had
acted as an insurance broker between AIG and ReliaStar - Unicover and would earn
substantial fees if the reinsurance contracts were put in place. By Order dated July 7,
2000, the Supreme Court of the State of New York determined, because of the
deficiencies noted above, that the reinsurance was never put in place. That is, required
documentation and signatures had never been obtained. The Supreme Court's decision
was affirmed on appeal. See AIU Ins. Co. v. Unicover Managers. Inc.,
724N.Y.S.2d_____, Nos. 3784,3785 2001 WL 361714 (N.Y. App. Div. Apr. 10, 2001),
aff'g AIU Ins. Co. v. Unicover Managers. Inc., Index No. 600 744/99 (N.Y. Sup. Ct. July
7, 2000). The Supreme Court and Appellate Court decisions are incorporated into this
complaint.
46. Notwithstanding the failure to put in place a contract for reinsurance from which the
Company would derive brokerage fees, the Company proceeded to recognize revenue
related to the AIG/Unicover arrangement. As a consequence, it was not until the third
quarter of 2000 that the Company established a reserve against the amount of reinsurance
brokerage fees it had recognized in prior years as a result of the never completed AIG
placements of reinsurance.
47. The Company assisted another client, EBI Companies, in procuring workers
compensation reinsurance coverage through Unicover. Notwithstanding the failure of
Unicover to provide the required reinsurance coverage, the Company booked revenues
with respect to the placement of reinsurance coverage for EBI. As a result of a settlement
between the reinsurance companies represented by Unicover and EBI, the Company
established a reserve in the third quarter of 2000 for the difference between what it will
receive under the EBI agreement and what had been previously recognized.
48. The total reserves recorded in the third quarter 2000 related to AIG and EBI matters
is approximately $3.2 million; These reserves resulted from recognizing revenue without
a contractual basis for doing so. They reflect revenues defendants claimed existed during
the Class Period, which in fact did not exist.
49. At the same time defendants were assuring the market of little or no exposure to the
Unicover debacle, the Company and the Individual Defendants knew that the Company
was recognizing revenue related to Unicover without contracts in place necessary to
create brokerage revenues for EWB.
IHA and Its Relationship to EWB
50. In addition to providing reinsurance brokerage services, EWB had a license to use
certain insurance sales processing software through a license agreement with a company
called Insurance Technology Services of America, Inc. (“ITSA”). ITSA was in turn
owned by Insurance Holdings of America (“IHA”), a company that has since gone out of
business. EWB had been a significant investor in IHA and Defendant Ian Packer served
on IHA's board of directors. He was personally knowledgeable about IHA's business
circumstances and made periodic reports about IHA to EWB and the Individual
Defendants, particularly Ted Blanch. EWB also had certain employees serving in a
management roll at IHA. IHA is currently in bankruptcy and EWB wrote off its multimillion dollar investment in IHA mainly during the Class Period.
51. As licensee of ITSA software, EWB sought to utilize such software in the marketing
of insurance products. In that regard, EWB negotiated a contract with HomePlus
Insurance Agency, Inc. (“HPA”), which is a subsidiary of Securian Financial Group, Inc.
and a sister corporation of Minnesota Life Insurance Company. The contract was
effective April 1, 1999 (although it was actually executed in June 1999), and is known as
the “Master Agreement.” In the Master Agreement, EWB agreed to arrange for HPA to
license the ITSA software and, among other things, adapt the software in order to
enhance HPA's ability to market insurance products. Among other things, EWB was
going to enable the ITSA software to connect with insurance carriers which it would
recruit to participate in the HPA sales program. A key feature of the ITSA software was
that it was supposed to offer a Single Entry Multiple Carrier Interface (SEMCI). SEMCI,
as envisioned, would permit an agent to generate quotes from multiple insurance
companies and discuss them with a consumer on the phone, thus offering greater
consumer choice of price and coverage. The Master Agreement also called for EWB to
develop a new, so-called “Breakthrough” homeowners insurance policy which could be
efficiently written using the modified ITSA software.
52. By virtue of EWB's insistence on “back dating” the HPA agreement to reflect an
April 1, 1999 effective date, it was able to recognize revenue earlier than it otherwise
could.
53. Pursuant to the terms of the Master Agreement, HPA paid EWB a $500,000 initial
payment on January 22, 1999, and a $1 million “installment payment” on June 1, 1999.
All subsequent HPA installment payments were explicitly contingent upon EWB's
meeting scheduled deliveries set forth in detail in Exhibit E to the Master Agreement. No
additional payments were made after the June 1, 1999 payment because EWB was not
able to provide software and related services as required by the contract.
54. HPA sued EWB in the United States Federal District Court for the District of
Minnesota on May 1, 2000, for breach of contract related to the sale of ITSA software
and related services to HPA. See HomePlus Ins. Agency, Inc. v. E.W. Blanch Holdings.
Inc., No. 00-1099 DWF/AJB (D. Minn.).
55. In the HomePlus action, EWB maintains that its obligations under the contract are in
the nature of the sale of software. Pursuant to EWB's Revenue Recognition Policy.
[r]evenue from the sale of software and specified upgrades is recorded upon delivery of
the software product or specified upgrade to the end user. If there is a significant
continuing obligation, then a portion or all of the revenue is deferred until the obligation
has been fulfilled.
56. Although HPA has paid $1.5 million pursuant to the terms of the contract, it has
refused to make subsequent payments by virtue of EWB's breach. EWB has been unable
to deliver functional software as required by the contract and as a consequence,
recognition of at least $4.1 million in revenue by EWB violated its own revenue
recognition policies. Had EWB performed, said payments would have been due in
August 1999 ($1,250,000), October 1999 ($1,250,000), January 2000 ($1,500,000),
February 2000 ($1,500,000), April 2000 ($500,000), July 2000 ($500,000), October 2000
($500,000), January 2001 ($500,000), and an additional $3 million to be paid over the
next six quarters.
57. Notwithstanding the fact that EWB had been unable to make deliveries under the
Master Agreement, it recognized additional revenue in the amount of $4.1 million under
the contract in violation of its Revenue Recognition Policy.
58. The contract between EWB and HPA allowed HPA to terminate the contract if EWB
failed to deliver applicable software and services and such failure continued for a period
of six or more months. Because EWB's failure continued for six months, the contract has
been terminated.
Revenue Recognition of Reinsurance Brokerage
59. When an individual EWB broker arranges for a reinsurance contract, that broker is
required to input data into what is known as the “Resolution” system. The data includes
relevant information about the placement of reinsurance, the reinsurance rate, special
directions, the amount of brokerage (i.e., fees) EWB would earn and when brokerage
would be received. The data would then be shared with the contract drafting department,
the claims department and the accounting department.
60. Reinsurance premiums are billed monthly or quarterly. EWB bills the ceding
company a premium for the reinsurance. It is from the premiums paid on a monthly or
quarterly basis that EWB derives reinsurance brokerage revenue.
61. Regardless of the billing cycle when premiums are billed and paid, EWB has a
practice recognizing the predicted brokerage fees immediately.
62. The foregoing revenue recognition practice with respect to reinsurance brokerage
commissions is inconsistent with the stated revenue recognition policies of the company.
Fox's Violation of the Securities Laws
63. Fox (and his confidant Paul Karon) resigned from EWB on March 20, 2000. They
were initial stockholders in EWB when the Company went public in 1993 and as a result
of their status, they received significant shares in the Company. At the time they became
shareholders in the publicly traded Company, each entered into employment agreements
containing various restrictive covenants.
64. Fox resigned from the Company on March 20, 2000 to join Benfield Grieg Group
PLC. That resignation and the related conduct of Fox led to the initiation of a lawsuit in
Dallas County, Texas (Court File No. 00-3215-C).
65. Since the Benfield Grieg acquisition of EWB, the new entity is now known as
Benfield Blanch Holdings, Inc. Fox is the chief executive officer of the United States
Benfield Blanch operation and Karon is its president.
66. Sometime prior to February of 1999, Fox and Benfield Grieg began discussions about
Fox's possible employment at Benfield Grieg. Those discussions resulted in a meeting in
New York city in February of 1999 attended by Fox, Karon and senior personnel from
Benfield Grieg. The February 1999 discussions were serious and concrete.
67. As discussions became more serious in March and April in 1999, code names were
given to Fox and Karon (“Quarry” and “Hunter” respectively). A further meeting was
held in New York city in April of 1999. At about the same time, documents were
circulated which reflected the basic structure of the proposed deal that was ultimately
agreed to. That deal involved Fox and Karon receiving multi-million dollar signing
bonuses, a 49% interest in Benfield Grieg's entire United States operation and substantial
equity in the international London based parent company, Benfield Grieg Group, PLC.
68. Fox and Karon received an indemnification agreement from Benfield Grieg
indemnifying the two of them from potential liability to EWB for their conduct. They
also received an agreement from Benfield Grieg to hire attorneys on their behalf,
apparently in anticipation of litigation with EWB.
69. At the same time Fox and Karon were engaged in negotiations with Benfield Grieg,
they were employed by EWB, which compensated them in the “seven figure range.”
70. In order to negotiate the best possible financial deal with Benfield Grieg, Fox
misrepresented to Benfield Grieg that he and Karon had options worth $30 million and
they would lose those if they moved to Benfield Grieg. This misrepresentation to a
proposed new employer formed the basis for substantial cash bonuses and equity interests
each would receive upon resigning with E.W. Blanch and becoming employed at
Benfield Grieg.
71. While Fox was negotiating with Benfield Grieg, he accepted an appointment to the
board of directors of EWB. As a result of his board membership, he became privy to
every secret and confidence in the Company and had an active and critical hand in all
important strategic and tactical decisions at the Company.
72. From mid-1999 through the end of 1999, EWB engaged in highly confidential
discussions with a potential suitor about the possible sale of the Company. Fox was
intimately involved in the negotiations from the outset. Karon became involved in those
discussions toward the fall of 1999. Both individuals would have profited from the
acquisition. Nevertheless, from the outset of negotiations amongst Fox, Karon and
Benfield Grieg, until the date of the resignations of Fox and Karon, discussions never
broke off. Further formal negotiations occurred between Fox and Benfield Grieg in New
York City. Karon was advised of the discussions.
73. During the later part of 1999, Fox was assisting Benfield Grieg in obtaining what had
thereto for been EWB customers. In particular, the Tower Hill account was being
solicited by Benfield Grieg at the same time Fox and Karon had assumed responsibility to
attempt to preserve the Tower Hill business for EWB.
74. In early January 2000, Fox went to London for a celebration gathering with Benfield
board members. The assumption at that meeting was that Fox was or would be on the
board of Benfield Grieg.
75. Also in January 2000, the transaction documents relating to employment of Fox and
Karon were finalized. By January 2000, the decision to move to Benfield Grieg had been
sealed.
76. As of January 2000, EWB had met or exceeded earnings projections for 15 straight
quarters and the stock price had risen accordingly. Fox and Karon had the lead
responsibility to assure that EWB met its first quarter revenue projections. At about the
same time, Fox joined a four-person “office of the chairman” which was the four most
senior executive office in EWB. This small group was responsible for all significant
strategic decisions, and of course was privy to - indeed, in many, incidences they
generated - the most sensitive strategic and tactical information in EWB.
77. In February, a final meeting was held amongst Fox, Karon and Benfield Grieg. The
meeting took place at the offices of Benfield Grieg's New York lawyers. Fox and Karon's
lawyers (paid for by Benfield Grieg) were present and reviewed documents.
Notwithstanding their responsibility for closing transactions in order to allow EWB to
earn first quarter revenue in the year 2000, Fox and Karon, not surprisingly, were not
interested in doing so. Rather, they were interested in benefitting Benfield Grieg, which
was to be their new employer. On the evening of March 9, 2000, Fox and Karon met with
their litigation attorneys about their anticipated resignations.
78. On the following day, Friday, March 10, 2000, Fox and Karon attended a series of
pivotal meetings at EWB to discuss among other things, EWB's increasingly negative
first quarter revenue outlook. In this meeting, Fox remained outwardly optimistic in
indicating that he would personally close certain large revenue deals that would be
necessary to achieve projected first quarter revenues. Both Fox and Karon indicated they
would be working diligently to close various pipeline deals in the remainder of the
quarter.
79. While Fox and Karon were negotiating their deal with Benfield Grieg, they were also
absconding with EWB sensitive information, including information about salaries and
bonuses, lists of EWB clients and revenue figures for each client.
80. On March 20, 2000, Fox and Karon submitted their resignations to EWB. When they
left, not a single item of significance in the first quarter pipeline had closed despite their
assurances that they would assume responsibility for accomplishing such closings. On
March 20, 2000, when EWB issued its press release, EWB stock immediately fell but
both Fox and Karon had protected themselves from the impact of the stock price fall
through their deal with Benfield Grieg.
81. During the class period, Fox knew of the public statements being made by EWB to
the investing public and knew that statements about future earnings would not be realized
by virtue of his very specific conduct in leaving EWB and joining Benfield Grieg (in
violation of his employment contract) and taking substantial business with him in the
process.
Defendants' Materially False and Misleading Public Statements During the Class
Period
82. Despite the Unicover fall-out that began in early 1999, EWB announced rosy firstquarter 1999 results on April 20, 1999, the beginning of the Class Period. In a press
release issued on that date, EWB advised the investing public that its first quarter
revenues were 32 percent higher than the same quarter in 1998, growing to $62 million
from $47 million in 1998. EWB also stated that its net income rose 34 percent to $9.5
million versus $7.1 million for the same quarter in 1998. The press release further stated
that basic earnings per share grew 32 percent to $0.74 and concurrently diluted earnings
per share increased 32 percent to $0.70. Ted Blanch stated in the press release as follows:
We continue to be pleased with our progress, and especially with the growth in our
primary insurance and capital markets activities. Despite relatively poor market
conditions within the insurance industry, our core reinsurance brokerage business
continues to show growth both domestically and abroad.
83. On the day of the April 20, 1999 press release in which the Company announced its
earnings, EWB also conducted a conference call with securities industry professionals.
During the question and answer phase with investment brokers, Ted Blanch was asked
whether there was any reversal of AIG revenue in the first quarter. Ted Blanch responded
that “in the first quarter we did not take any revenue. In the first quarter we did take a
reserve for prior revenues taken in ‘98.” In a follow up question, Ted Blanch was asked
to quantify the revenue reserve for the AIG business. He stated, “I suppose that I could
[quantify the revenue reserve] but I'm not going to. The fact of the matter is, I stated that
we think that AIG is right, but if the thing ends up going to trial, I mean hell, with the
vagaries of juries and so on and so forth nobody ever knows exactly what's going to
happen. We took a significant reserve.” When pushed further to explain “significant,”
Ted Blanch vaguely replied:
All I'm trying to tell you is that one thing I found out over the years in dealing with the
Street is that there are two kinds of surprises, good surprises and bad surprises. It's much
more pleasurable to work with you when the only surprises we have are good ones.
84. In the same April 20, 1999 conference call, Ted Blanch said that EWB was trying to
get “into a position where when the surprise comes it will be a good one.” In an effort to
avoid unpleasant surprises, EWB did not recognize any income from AIG in the first
quarter “with respect to certain aspects of that transaction.” When questioned about
whether EWB has taken any significant action with regard to the Unicover situation as a
whole, Ted Blanch stated:
We went through a period of time where it seemed like everyday there was a new, what
could probably be reasonably categorized as unpleasant surprises that seemed to be
corning out as that situation was unfolding. It now seems as if the surprises are not over,
but the news that's coming out is considerably more affirmative. I think I saw the day
before yesterday, I believe that's correct. Maybe it was Friday, that the Cologne Life Re
situation has been pumped up. And the state of Connecticut is satisfied with their
solvency. So it appears that everything is pretty well intact. I have not seen or heard
anything or been involved in any discussion where there has been any inference that the
Unicover pool and the other companies that Unicover wrote on behalf of will be doing
anything other than responding appropriately [financially] to the reinsurance contracts
that were placed.
85. The April 20, 1999, conference call also discussed pricing in the reinsurance market.
Defendant Walker, who was then the President and Chief Operating Officer of EWB,
explained that the reinsurance market pricing had not changed much, although there is
more pressure and competition. More changes were noted in the retrocessional placement
market, particularly some “tightening,” but EWB did not see “anything that's of great
substance that's caused us to stand up and raise the flag.”
86. On May 4, 1999, EWB filed its 10-Q form for the quarter ended March 31, 1999,
which discussed the AIG litigation against Unicover and ReliaStar, in which ReliaStar
added E.W. Blanch Co. as a third-party defendant, as follows:
In this lawsuit, AIG as a plaintiff alleges that ReliaStar, through its agent Unicover,
agreed to provide certain reinsurance protection to AIG, relating to workers
compensation insurance policies issued by the plaintiff AIG companies in California and
elsewhere in the United States. Defendants assert that the reinsurance coverages in issue
never were bound, and defendant ReliaStar further asserts that if defendant Unicover in
fact did bind those coverages, it acted beyond the authority granted to it by ReliaStar.
In ReliaStar's third party complaint against Blanch, ReliaStar alleges that Blanch, as
AIG's reinsurance broker on the reinsurance replacements in issue, knew or should have
known that the reinsurance coverages were not bound and knew or should have known
that Unicover did not have the authority to bind ReliaStar to those coverages.
The relief being sought by ReliaStar in its third party complaint against Blanch is that, in
the event ReliaStar is found to be liable to AIG, Blanch be required to indemnify and
hold ReliaStar harmless for that liability, or in the alternative Blanch be required to make
a contribution for a portion of that liability in an amount to be determined by the Court.
Blanch in turn has filed a counterclaim back against ReliaStar and Unicover. The
counterclaim alleges that ReliaStar and Unicover in fact did bind the reinsurance
coverages in issue, and therefore they owe Blanch the reinsurance brokerage to which
Blanch is entitled under those reinsurance contracts, and, alternatively, if it is determined
that Unicover misrepresented its authority to bind ReliaStar, that Blanch be awarded
money damages resulting from its reliance on those misrepresentations.
The Form 10-Q noted that the lawsuit was in preliminary stages, but that “[m]anagement
believes, based on current information, that these actions will not have a material adverse
effect upon the financial positions or results of operations of the Company.”
87. EWB continued to issue favorable reports to the investing public for its second
quarter 1999 operations. In a press release dated July 21, 1999, EWB advised the
investing public that its second quarter revenues were 23 percent higher than the same
quarter in 1998, growing to $58.4 million. EWB also stated that its net income rose 41
percent to $7.9 million versus $5.6 million for the same quarter in 1998.
88. The July 21, 1999 press release also noted that basic earnings per share grew 39
percent to $0.61 and diluted earnings per share increased 38 percent $0.58, compared to
$0.42 for the second quarter of 1998. The press release also reported revenues, net
income, and earnings for the first six months of 1999. Revenues increased 28 percent to
$120.4 million compared to $94.3 million during the same period in 1998. Net income
for the six months ended June 30, 1999, increased 37 percent to $17.4 million. Basic
earnings per share for the six months ended June 30, 1999, rose 35 percent to $1.35.
Diluted earnings per share for the six months ended June 30, 1999, likewise rose 35
percent to $1.28.
89. In the same press release, Ted Blanch informed the investing public that he was
pleased with the quarterly results:
We are pleased with EWB's performance during the first half of 1999 despite the difficult
market conditions we are faced with. During the second quarter we continued to develop
consulting and advisory businesses while creating production in our core domestic
reinsurance brokerage unit.
90. The 10-Q form for the quarter ended June 30, 1999, discussed EWB's involvement in
Unicover-related litigation:
It has been publicly reported that certain lawsuits and arbitrations have been commenced
that relate directly or indirectly to one or more reinsurance pools managed by Unicover
Managers, Inc.... The Company has been named as a third-party defendant in one such
lawsuit, as described in more detail under “Legal Proceedings” on page 16. Management
of the Company believes, based on current information, that this proceeding will not have
a material effect upon the financial position or results of the company.
91. The June 30, 1999 10-Q further stated:
The Company is not currently a party to any other proceedings that relate directly or
indirectly to the Unicover reinsurance pool, nor, to the Company's knowledge, do these
proceedings place in issue the validity of the reinsurance programs the Company has
placed through Unicover on behalf of its clients. Nonetheless, these proceedings, and the
negative publicity concerning Unicover generally, could impact those reinsurance
programs and thereby could have a material adverse impact on the Company's revenues,
both prospectively and retroactively. The Company intends to monitor developments
relating to Unicover closely and to review on a regular basis whether circumstances
warrant changes in how the Company is accounting for those transactions.
The 10-Q thereafter provided the identical information about the AIG lawsuit as
described in the 10-Q report for the first quarter of 1999.
92. On July 21, 1999, EWB also conducted a conference call. In the call, Ian Packer and
Walker reported the financial results for the second quarter. Walker noted that EWB
“remain[s] very optimistic and bullish on the opportunities that exist in the marketplace.”
93. Ted Blanch said during the July 21, 1999 conference call in discussing the ITSA
software, “So, it's not like we're just working with an agent who thinks they have an idea
and we think we have an idea. We have the technology, they have the customers. We're
merging the technology with the customers in order to try to move the thing forward. It is
- it really isn't any sort of start up operation. It's more trying to maximize on the fly.”
94. Similarly, in the October 11, 1999, conference call, Packer stated,“…the one thing
that is really remarkable and continues to be remarkable is when we put the kiosks in the
Sam's stores and when we turn oh the system the people are buying insurance at a greater
volume than we had ever anticipated and from that perspective I think the future for IHA
and for their product offering, not just in Sam's but also through Ford and in our
Bancassurance program, it's looking increasingly positive.”
95. In its website during the Class Period, EWB continued to advise the public that its
ITSA based product was viable. It stated on the web pages denominated “Distribution Internet” and “Distribution - Kiosks” that:
Through our partnership with Insurance Holdings of America, Inc. (IHA), we are able to
deliver the first internet-based sales and service platform for the property/casualty
industry. For more information contact EWB.
96. On October 19, 1999, EWB issued a press release reporting its third quarter 1999
results and results for the nine months ended September 30, 1999. Defendants again
painted an optimistic picture of EWB and its financial performance and outlook. EWB
advised the investing public that its third quarter revenues were 7 percent higher than the
same quarter in 1998, growing to $59.0 million. EWB also stated that its net income also
rose 25 percent to $10.8 million versus $8.6 million for the same quarter in 1998.
97. The October 19, 1999 press release also noted that basic earnings per share grew 24
percent to $0.83 and diluted earnings per share increased 20 percent to $0.78, compared
to $0.42 for the second quarter of 1998. The press release also reported revenues, net
income, and earnings for the first nine months of 1999. Revenues increased 20 percent to
$179.4 million compared to $149.4 million during the same period in 1998. Net income
for the nine months ended September 30, 1999, increased 32 percent to $28.1 million.
Basic earnings per share for the nine months ended September 30, 1999, rose 31 percent
to $2.18. Diluted earnings per share for the nine months ended September 30, 1999, rose
27 percent to $2.05.
98. In the press release, Walker informed the investing public he was pleased with the
quarterly results, as follows:
EWB continued to perform during the third quarter, despite the worsening market
conditions which continued to adversely impact our revenues. We are pleased with
EWB's performance during the first half of 1999 despite the difficult market conditions
we are faced with. During the second quarter we continued to develop consulting and
advisory businesses while creating production in our core domestic reinsurance brokerage
unit.
99. The 10-Q form for the quarter ended September 30, 1999, discussed EWB's
involvement in Unicover-related litigation:
It has been publicly reported that certain lawsuits and arbitrations have been commenced
that relate directly or indirectly to one or more reinsurance pools managed by Unicover
Managers, Inc.... The Company has been named as a third-party defendant in one such
lawsuit, as described in more detail under “Legal Proceedings” on page 16. Management
of the Company believes, based on current information, that this proceeding will not have
a material effect upon the financial position or results of the company.
The Company is not currently a party to any other proceedings that relate directly or
indirectly to the Unicover reinsurance pool, nor, to the Company's knowledge, do these
proceedings place in issue the validity of the reinsurance programs the Company has
placed through Unicover on behalf of its clients. Nonetheless, these proceedings, and the
negative publicity concerning Unicover generally, could impact those reinsurance
programs and thereby could have a material adverse impact on the Company's revenues,
both prospectively and retroactively. The Company intends to monitor developments
relating to Unicover closely and to review on a regular basis whether circumstances
warrant changes in how the Company is accounting for those transactions.
The 10-Q for the third quarter provided the same information about the AIG lawsuit, as
described in the 10-Q report for the second quarter of 1999.
100. On October 19, 1999, EWB also conducted a conference call. Before the question
and answer phase with investment brokers, defendant Walker provided information on
three subjects: (1) Unicover workers compensation pool; (2) revenue production; and (3)
insurance/reinsurance marketplace conditions. As to Unicover, a subject that “continues
to receive a fair amount of attention” in EWB's industry, Walker stated:
There's a lot of talk about a global settlement and while such a settlement may occur, our
view is that there are simply too many parties involved with their own interests to protect
to make such a global settlement a reality in any reasonable time frame. For that reason,
our approach is to continue to actively work with our customers on a one-by-one basis on
solutions that make sense for the parties involved. Each of our customers has different
requirements so we fully expect the solutions to have different looks. Clearly, this is not a
cookie cutter approach. We continue to have active dialogue with our customers to design
solutions that will work.
Now, let me talk about some of our third quarter performance. It's very strong. We're
very proud of it, especially considering the market conditions. Let me share some specific
figures. We have 86 new client contracts thus far in 1999, representing approximately
$13.5 million in revenues. Let me stress, these are contracts. We have 101 new contracts
generated from existing relationships, which are worth about $29 million. On the flip
side, we have lost about 45 contracts worth about $8.5 million. We've produced these
results in a very difficult, competitive market; however that being said we are seeing
some signs that a change, may be upon us. If the market does - if market pricing does in
fact go up we should begin to see the impact on our revenues in the later stages of the
year 2000.
101. During the question and answer phase with investment brokers, Ted Blanch was
asked whether EWB anticipated any Unicover liability in its negotiations with customers
and whether EWB was threatened with any Unicover lawsuits, to which he, and Dan
O'Keefe, the general counsel of EWB, answered:
Well, I'll tell you what - that's always a tricky subject because one never knows what's
around the corner. Our general counsel is here and I'll let him respond.... Well, we are
parties to one lawsuit, the AIG ReliaStar lawsuit in which we are a third party defendant
and a cross claimant. We have an affirmative claim in that case. Other than that, I think it
is our company policy not to comment on any pending or threatened litigation of any
type. So I'd just invoke the general company policy.
As to the AIG lawsuit, O'Keefe explained that it was generally old news, that EWB was
on the “right side” of the lawsuit” and “to the extent there were any liabilities, we think
we're adequately insured.”
102. In an October 28, 1999, press release, EWB announced that its board of directors
had approved an increase in the Company's quarterly cash dividend from $0.12 to $0.14
for shareholders of record as of November 12, 1999.
103. According to SEC filings, on December 14, 1999, Ted Blanch entered into two zerocost collar contracts, each with 150,000 shares, which are designed to limit his losses
should EWB's stock fall dramatically by locking in gains. Ted Blanch sold “call” options
obliging him, if called upon, to sell shares at $79.82. He used the proceeds to buy “put”
options. The put options gave him the right to sell shares at $51.32. While Ted Blanch
gave up any possible stock appreciation above $79.82 in exchange for protection against
losses below $51.32 and the options are not exercisable until 2002, this collar has
produced a paper gain for Ted Blanch in the amount of approximately $4.7 million.
104. On December 19, 1999, in a press release to the investing public, EWB announced
that three employees would leave the Company in early 2000 to form Tobat Capital. The
three included defendant Packer, then Chief Financial Officer, Scott T. Brock and Cory
Moulton. Tobat Capital planned to make equity investments in early- and developmentstage e-commerce companies, particularly in the financial services industry. EWB
announced it would have a close relationship with Tobat as a limited partner, strategic
advisor and user marketing arm.
105. On January 25, 2000, EWB released its fourth quarter 1999 results and 1999 yearend results. In a press release dated January 25,2000, defendants again painted an
optimistic picture of EWB and its financial performance and outlook. EWB advised the
investing public that its fourth quarter revenues were 3 percent higher than the same
quarter in 1998, growing to $65.1 million. EWB also stated that its net income rose 11
percent to $11.6 million versus $10.5 million for the same quarter in 1998. The press
release also noted that basic earnings per share grew 9 percent to $0.89 and diluted
earnings per share increased 6 percent $0.84, compared to $0.79 for the second quarter of
1998. The press release also reported revenues, net income, and earnings for year-end
1999. Revenues increased 15 percent to $244.5 million compared to $212.7 million for
1998. Net income for 1999 increased 25 percent to $39.7 million. Basic earnings per
share for the nine months ended September 30, 1999, rose 31 percent to $2.18. Diluted
earnings per share for the nine months ended September 30, 1999, rose 27 percent to
$2.05.
106. In the January 25, 2000, press release, Ted Blanch also informed the investing
public he was very pleased with the 1999 results:
Despite the turmoil in the marketplace, in particular around Unicover, we are very
pleased to have achieved our 1999 earnings goals. At the same time we continued to
strengthen our global position through the acquisition of Crawley Warren and continue to
be one the leading edge in providing technology tools to manage catastrophic
exposures.... We are very please that during the later part of the year Kaj Ahlmann joined
us as Vice Chairman and Director and Gerry Isom joined us as a Director.
107. The 10-Q form for the quarter ended December 31, 1999, like the 10-Q report for
the third quarter, discussed EWB's involvement in Unicover-related litigation. Generally,
the same information was provided.
108. Although in the third quarter reports EWB refused to discuss possible Unicover
litigation, Ted Blanch finally acknowledged Unicover problems in the January 25, 2000
conference call:
For EWB, there are several specific identifiable groups of covers, some continue, some
are being settled and some are in or may go into litigation. From our perspective, the
largest number of covers can be identified as Reliance. Reliance has announced that their
covers have been settled. We have compromised our revenue significantly as part of these
settlements as our contribution to our ongoing relationship with Reliance who
incidentally has on behalf of the industry, undertaken a Herculean task and performed it
admirably. Our deal with Reliance has been agreed to so we can put that behind us. All
revenue readjustments are reflected in 1999.
Despite these problems, Ted Blanch assured the investing public that 1999 was a “very
good” year that beat expectations despite elimination of Unicover revenue and
“apprehension that there is another shoe to drop.”
109. In the January 25, 2000 conference call, Ted Blanch also indicated he was
“optimistic” about EWB for 2000 because “new business in progress is at historic high
levels.” He stated that the Company was “dealing with a number of large transactions and
several of these are periodic and recurring revenue deals.”
110. The Company also explained in the conference call of January 25, 2000, that its
executives would not take their year-end bonus. The decision not to take bonuses was a
“shock absorber” to ensure that the Company met the estimates of the street.
111. During the question and answer phase with investment analysts, Ted Blanch said
that while EWB had work to do, “we're as comfortable as we can be at this point with our
ability to perform to levels that will not disappoint the street.” He also disregarded some
reports from reinsurance industry executives who do not find the future “terribly
exciting”:
We don't share that view. Our view is that the future, it looks extremely bright. That there
are all kinds of opportunities out there and we expect to have a very significant success in
the coming years as a result of who we are, how we are organized, the people that we
have, the way we go after business, but most importantly, the business is there to be
gotten.
112. Walker and Ted Blanch shared the same enthusiasm for the future. For Walker, his
“enthusiasm is probably the greatest it's ever been.” He continued:
We have … just a tremendous amount of activity, there are a lot of very large
transactions in the pipeline, a lot of solid situations where the, we have a very, very high
probability of success on those because we no only just, we don't just have a pipeline, but
we also attach probabilities to those things. So it's tremendously large number plus in
terms of not only number of transactions but large deals and the probability on most of
those is very, very high so we're, we're very very optimistic and gee I hate to use the
word very confident but we are very confident about what we have in that pipeline.
113. When questioned more specifically about the AIG/ReliaStar litigation, Ted Blanch
acknowledged that EWB is recognizing only “very small parts of the revenue.” Because
of the litigation expense, “practically no part of that revenue finds its way to the bottom
line.” He continued:
[I]f AIG wins, it will have a very, very, very, very large transaction and I have every
reason to expect that if they win we will get paid and if we get paid there's a good upside.
If we, if the only issue that we had on all of the workers compensation things was in fact,
AIG, I suspect that we might be under some pressure to show more than we're taking but
I think when you mix that together with the other issues like Superior National, EBI, and
up until a few days ago, the Reliance situation, there was to be some judgment used with
regard to how you balance all these things out so that you come up with a reasonable
presentation of where you are so that people aren't mislead either direction. That's what
we've been trying to do.
114. Ted Blanch was specifically asked to paint the worst case scenario in terms of the
workers compensation cover issue. He said:
What I am trying to tell you is that if we thought there was a reasonable potential need at
some point in the future to write off revenues that we have recorded then I think we
would have a responsibility to not be waiting around to do it. We'd have a responsibility
to be doing it right now. Or to have already done it. So, our position is and it's not 100%
percent, …we're not clairvoyant. But we have a business responsibility to try to do what
we think is right and to record and report numbers, which we feel, are accurate relative to
the facts, as we know them. That's what we've done.
115. Questioning during the conference call also addressed pricing, renewal and revenue
generation. EWB acknowledged that it did not bring in as much revenue in December
1999 as it had hoped, which was “a little disappointing for us.” Ted Blanch, however,
explained that he was “looking forward to having a strong first quarter” leaving the
Unicover situation and all of its implications from 1999 behind. The Company stated
with a “reasonable degree of confidence” that it could replace all the Unicover revenue.
116. Also in the January 25, 2000 conference call, Ted Blanch talked about trying to
bring in revenue (unsuccessfully) in the fourth quarter of 1999 and instead having to push
it into first quarter 2000. Ted Blanch stated the following:
I would say early December with regard to what we might bring during the last thirty
days of the year. Without getting into the specifics, let's just say that that quantity of
business, that the quantity of revenues as X. That was, X was the amount we thought that
there was a reasonable shot to bring home. Actually, we only brought home about thirty
to thirty five percent of X. That was a little disappointing to us for the fourth quarter but I
kind of chuckled when I thought about it because what that really does is it throws it all
into the first quarter and frankly, I'm looking forward to having a strong first quarter
because I think it's, I think it in the end, important that we do that particularly since we as
well as others and frankly you as well as others I think would like to try to get the aspects
of the Unicover situations and all of it's implications from ‘99 well behind the scene.
An analyst asked a follow-up question later in the conference call about the outlook for
the first quarter. Ted Blanch was specifically asked whether the 35% of X was reflective
of the type of renewal period that it was. Ted Blanch answered that none of the “X” was
renewals, “[i]t was all new business”:
This was not a problem at all with the placing of business. It was an issue around actually
getting the orders and getting them so that the were a fourth quarter business as opposed
to first quarter business. I mean, this wasn't the situation in every case but the way it
works is that if you do something and it's effective December 31st, it's a fourth quarter
thing. If it's effective January 1st, it's a fourth quarter thing … Just a matter of getting
them closed.
Contrary to EWB's Statement that the Shoe Would Not Drop, the Shoe Drops
117. The shoe fell late on March 20, 2000, when EWB issued a press release that its
earnings for the first quarter 2000 were expected to fall well below those for the same
quarter of 1999 and below analyst's consensus estimates. The revenue which did not
materialize in the 1999 fourth quarter and about which Ted Blanch “chuckled” (because
it would come in the first quarter of 2000) did not exist. EWB finally acknowledged that
the Unicover debacle did have a major impact on the Company and the impact would be
continuing. The first quarter diluted earning were expected to be between $0.10 and
$0.35, compared to the $0.70 from the first quarter of 1999, depending on whether certain
deals closed before the end of the quarter.
118. Less than two months before the Company had said it did not anticipate problems
replacing revenue and in fact expected “all” of the revenue which had been anticipated in
the fourth quarter of 1999 to come in the first quarter of 2000. One of the principal
reasons cited for the earnings decline was “reduction in domestic revenues, as compared
to 1999, from workers compensation reinsurance placements and large non-recurring
transactions.”
119. Also on March 20, 2000, EWB announced that Rodman Fox, a member of the Board
of Directors and president and Chief Operating Officer of EWB's subsidiary, E.W.
Blanch Co., had resigned.
120. The market responded negatively as a result of these adverse disclosures. On March
21, 2000, the day following the press release, shares of EWB fell from the price of the
mid-$50s down to $20.75 per share, a plummet of nearly 62 percent on huge volume.
121. In its first quarter conference call on March 21, 2000, the Company's
representatives, including Walker and Kaj Ahlmann, were questioned extensively about
the performance of EWB and the hit the stock was taking based on the Company's
announcements. When questioned about lost revenue from Unicover, the Company stated
it has not disclosed those numbers and was hesitant to do so now. “
122. During the conference call, it was also revealed that EWB had repurchased shares on
the open market and internally from Ted Blanch. The board of directors of EWB allowed
for repurchase of 35,000 shares of common stock on the open market and 15,798 shares
from Ted Blanch. The conference call noted that it was not a recurring transaction.
123. EWB also told the investing public that the very first indication it had that it would
miss the first quarter estimates was Monday, March 20, 2000, the day before the stock
plummeted. The Company claimed even it was surprised to have missed the estimates.
Undisclosed Adverse Information
124. As a result of the materially false and misleading statements and failures to disclose
certain information, EWB's common stock traded at artificially inflated prices during the
class period. The artificial inflation continued until the time EWB admitted that revenues
were not being earned at the levels defendants had stated. Plaintiffs and other members of
the Class purchased or otherwise acquired EWB common stock relying upon the integrity
of the market price of EWB's common stock and market information relating to EWB
and have been damaged as a result.
125. Notwithstanding the numerous statements made by defendants to the market touting
rising income and the general absence of problems related to Unicover, defendants had
been engaging in a practice of recognizing revenue with respect to the Company's
Unicover-related brokerage business notwithstanding the fact that the contracts that
would have resulted in revenue and profit for the Company had never been executed. (
See ¶¶ 39-49. supra.)
126. Recognition of revenue arising from the AIG and EBI agreements discussed above
was inconsistent with the announced revenue recognition policies of the Company ( see
¶¶ 35-38, supra.) That is, reinsurance brokerage revenue was to be recognized only upon
the later of the billing or the effective date of the reinsurance contract. Because revenue
was recognized in advance of the contract being agreed to, the market was led to believe
that material revenues were being earned by the Company. The contrary was true.
127. During the Class Period, defendants materially misled the investing public, thereby
inflating the price of EWB's common stock, by publicly issuing false and misleading
statements and omitting to disclose material facts necessary to make defendants'
statements not false and not misleading. These statements and omissions were materially
false and misleading in that they failed to disclose material adverse information and
misrepresented the truth about EWB, its business and its operations:
a. defendants knew or recklessly disregarded the impact Unicover would have on the
operations of EWB and its revenues and earnings;
b. defendants knew EWB was recognizing brokerage revenue inconsistent with its stated
Revenue Recognition Policy.
c. defendants recognized revenue related to Unicover which was based on one or more
non-existent contracts.
d. defendants knew or recklessly disregarded the fact that ITSA software was untested
and unproven and was indeed a “start up operation.” Nevertheless, EWB advised the
investing public that utilization of that licenced software was a merger of a customer base
with established technology allowing the Company to “maximize on the fly.”
e. defendants knew or recklessly disregarded that they had recognized, inconsistently
with their announced revenue recognition policies, significant revenue related to the
marketing of ITSA software in the HPA contract notwithstanding the fact that the
Company had failed to comply with the terms of the HPA contract, thereby precluding
revenue recognition.
f. throughout the Class Period, defendants knew or recklessly disregarded that the
statements in EWB's website were false and misleading insofar as they claimed EWB
was able to deliver the first internet-based sales and service platform for the
property/casualty industry. It never could.
128. At all relevant times, the material misrepresentations and omissions particularized in
this Complaint directly or proximately caused or were a substantial contributing cause of
the damages sustained by plaintiffs and other members of the Class. As detailed above,
during the Class Period, defendants made or caused to be made a series of materially
false or misleading statements about EWB's business, prospects and operations. These
material misstatements and omissions had the cause and effect of creating in the market
an unrealistically positive assessment of EWB and its business, prospects and operations,
thus causing the Company's common stock to be overvalued and artificially inflated at all
relevant times. Defendants' materially false and misleading statements during the Class
Period resulted in plaintiffs and other members of the Class purchasing the Company's
common stock at artificially inflated prices, thus causing damages.
Sales by EWB's Top Management
129. At around the times that defendants were issuing false favorable statements about
EWB's business, the impact of Unicover and its overall financial condition, the Individual
Defendants and others benefitted from the illegal course of conduct described above by
selling shares of the Company's stock without disclosing the material adverse facts about
the Company to which they were privy. Such sales were unusual in their amount and
timing. A summary of the transactions is provided below at ¶ 138, infra. The Individual
Defendants and the Frances and Frank Wilkinson Foundation, a foundation controlled by
defendant Wilkinson, sold a total of approximately 498,426 shares for total proceeds of
approximately $27.5 million.
NO SAFE HARBOR
130. The statutory safe harbor provided for forward-looking statements under certain
circumstances does not apply to any of the allegedly false statements alleged in this
complaint. Many of the specific statements pleaded were not identified as “forwardlooking statements” when made. To the extent there were any forward-looking statements
identified as such, there were no meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from those in the purportedly
forward-looking statements. Alternatively, to the extent that the statutory safe harbor
does not apply to any forward looking statement pleaded, defendants are liable for those
false forward-looking statements because at the time each of those statements were made,
the particular speaker knew that the particular forward-looking statement was false,
and/or the forward-looking statement was authorized and/or approved by an executive
officer of EWB who knew that those statements were false when made.
APPLICABILITY OF PRESUMPTION OF RELIANCE FRAUD-ON-THE-MARKET
DOCTRINE
131. At all relevant times, the market for EWB common stock was an efficient market for
the following noninclusive reasons:
a. EWB's common stock met the requirements for listing, and was listed and actively
traded on the NYSE, a highly efficient and automated market;
b. As a regulated issuer, EWB filed periodic public reports with the SEC and NYSE;
c. EWB regularly communicated with public investors via established market
communication mechanisms, including regular disseminations of press releases on the
national circuits of major news wire services and other wide-ranging public disclosures,
such as communications with the financial press, conference calls, and other similar
reporting services; and
d. EWB was followed by several securities analysts employed by major brokerage firms
who wrote reports which were distributed to the sales force and certain customers of their
respective brokerage firms. Each of these reports was publicly available and entered the
public marketplace.
132. As a result of the foregoing, the market for EWB's stock promptly digested current
information regarding the Company from all publicly available sources and reflected
such information in EWB's stock price. Under these circumstances, all purchasers of
EWB common stock during the Class Period suffered similar injury through their
purchase of EWB's common stock at artificially inflated prices and a presumption of
reliance applies.
ADDITIONAL SCIENTER ALLEGATIONS.
133. At the same time defendants were refusing to tell the truth about Unicover exposure
as explained above, the Company was involved in merger and/or sale discussions with
Benfield Grieg Group PLC (“Benfield”). Ultimately, Benfield agreed to purchase EWB
as announced on April 16, 2001. As such, the management of the Company had an
extraordinary motivation to keep the price of EWB stock artificially inflated so as to reap
the highest possible price for EWB stock in the event of a merger and/or purchase by
Benfield.
134. As noted previously, EWB was recognizing significant brokerage revenue related to
AIG and others even though it was fully aware that the contracts necessary to generate
brokerage fees for the Company were not signed or otherwise effectuated and that such
recognition of revenue was inconsistent with its announced recognition policies.
135. As noted previously, EWB was recognizing significant software sales related to
HPA notwithstanding the fact that the contract on which said revenue was based
(backdated to be effective April 1, 1999) had been breached by EWB and as a result, the
recognition of $4.1 million in receivables pursuant to that contract was inconsistent with
the announced revenue recognition policies of the company.
136. As noted previously, rather than recognizing reinsurance brokerage in accordance
with its announced revenue recognition policies, brokerage revenue was recognized upon
the earlier of the billing or effective date of the insurance contract.
137. In view of the foregoing, defendants acted with scienter in that defendants knew that
the public documents and statements issued or disseminated in the name of the Company
were materially false and misleading; knew that such statements or documents would be
issued or disseminated to the investing public; and knowingly and substantially
participated or acquiesced in the issuance or dissemination of such statements or
documents as primary violations of the federal securities laws.
138. While falsely misrepresenting that EWB had absorbed the impact of Unicover in
earlier quarters and while recognizing revenue inconsistent with the announced revenue
recognition policies, the Individual Defendants, the executives and senior officers of the
Company, sold over 498,000 shares of EWB stock, for a total of approximately $27.5
million, to profit personally from the artificial inflation in EWB stock that defendants'
fraudulent scheme had created. Notwithstanding the Individual Defendants' access to
confidential corporate information as a result of their status as directors, officers, and
insiders of the Company, and their corresponding duty to disclose adverse material facts
before trading in EWB stock, the Individual Defendants named below sold significant
amounts of EWB stock at artificially inflated prices in order to profit from the fraud, and
did so while in possession of material, non-public information, as follows:
Name
Date
Stock Trans.
Sold
Price
Total
47.50
$ 3,420,000
Edgar W. 3/2/00
Blanch, Jr.
72,000 144
Edgar W. Qtr. 1
Blanch, Jr.
15,798 Repurch. 48.00[FN1] $ 758,304
Frank S.
3/1-8/00
Wilkinson
25,000 Open
mkt.
47.1250.00
$ 1,220,000
5,000 Open
mkt.
50.00
$ 250,000
50.0950.00
$ 500,450
Frank S.
3/6/00
Wilkinson
Chris L.
Walker
3/8-9/00
10,000 Open
mkt.
Chris L.
Walker
3/8/00
25,000 144
$ 1,250,000
Frank S.
2/22/00
Wilkinson
54,788 Open
mkt.
48.92
$ 2,680,000
Wilkinson 2/4/00
Foundation
6,103 144
48.92
$ 300,000
Wilkinson 2/24/00
Foundation
5,000 144
48.00
$ 240,000
Frank S.
2/2Wilkinson 28/00
11,130 Open
mkt.
49.0047.07
$ 530,000
Ian D.
Packer
74,607 Open
mkt.
57.9456.04
$4,251,549
Frank S.
11/1/99- 46,500 Open
Wilkinson 11/10/99
mkt.
64.24 61.00
$2,911,830
Frank S.
11/1Wilkinson 2/99
10,000 Open
mkt.
64.00[FN2] $ 640,000
Wilkinson 11/1/99
Foundation
12,500 144
$ 800,000
Frank S.
75,000 144
$ 4,800,000
12/67/99
11/1/99
Wilkinson
Frank S.
5/3/99
Wilkinson
5,000 Open
mkt.
60.25
$ 301,250
Frank S.
4/27Wilkinson 28/99
10,000 Open
mkt.
59.9459.51
$ 597,500
Francis & 4/27/99
Frank S.
Wilkinson
25,000 144
Frank S.
4/27/99
Wilkinson
10,000 Open
mkt.
TOTAL
$ 1,500,000
59.89
498,426
$ 598,900
$27,549,783
1. Estimated based on the approximate share price during the first quarter.
2. Estimated based on the average of prices over these dates.
COUNT I
(Against All Defendants Under Section 10(b) of the Exchange Act)
139. Plaintiffs incorporate ¶¶ 1 through 138 of this complaint as if fully set forth here.
140. Each of the defendants: (a) knew or had access to material adverse non-public
information about EWB's financial results and then-existing business conditions, which
was not disclosed; and (b) participated in drafting, reviewing and/or approving the
misleading statements, releases, conference class, reports and other public representations
of and about EWB.
141. During the Class Period, defendants, with knowledge of or reckless disregard for the
truth, disseminated or approved the false statements specified above, which were
misleading in that they contained misrepresentations and failed to disclose material facts
necessary in order for the statements made, in the circumstances in which they were
made, not to be misleading.
142. Except as alleged in this complaint, the underlying information relating to
defendants' misconduct are not available to plaintiffs and the public and lie exclusively
within the possession and control of defendants and other insiders of EWB, thus
preventing plaintiffs from further detailing defendants' misconduct at this time.
143. Defendants violated § 10(b) of the Exchange Act and Rule 1 Ob-5 in that they:
a. Employed devices, schemes and artifices to defraud;
b. Made untrue statements of material facts or omitted to state material facts necessary in
order to make the statements made, in light of the circumstances under which there were
made, not misleading; or
c. Engaged in acts, practices and a course of business that operated as a fraud or deceit
upon plaintiffs and others similarly situated in connection with their purchase of EWB
common stock during the Class Period; and
d. Plaintiffs and the Class have suffered damages in that, in reliance on the integrity of
the market, they paid artificially inflated prices to acquire EWB common stock. Plaintiffs
and the Class would not have purchased EWB common stock at the price they paid, or at
all, if they had been aware that the market prices had been artificially inflated by
defendants' materially misleading statements.
COUNT II
(Against Edgar W. Blanch, Jr., Chris Walker, Frank Wilkinson, Rodman Fox and
Ian D. Packer Under Section 20(a) of the Exchange Act)
144. Plaintiffs incorporate ¶¶ 1 through 143 of this complaint as if fully set forth here.
145. The claim asserted against the Individual Defendants is based on § 20(a) of the
Exchange Act, 15 U.S.C. § 78t(a).
146. The Individual Defendants each acted as controlling persons of EWB within the
meaning of § 20(a) of the Exchange Act. By reasons of their positions as directors and
officers of EWB, the Individual Defendants had the power and authority to cause EWB to
engage in the wrongful conduct described in this complaint.
147. By reason of such wrongful conduct, the Individual Defendants are liable pursuant
to § 20(a) of the Exchange Act. As a direct and proximate result of the Individual
Defendants' wrongful conduct, plaintiffs and other members of the Class were damaged
in connection with their purchase of EWB stock during the Class Period.
148. The Individual Defendants are jointly and severally liable with and to the same
extent as EWB's violations of § 10(b) of the Exchange Act and Rule 10b-5.
PRAYER FOR RELIEF
WHEREFORE, plaintiffs, on behalf of themselves and the Class, pray for judgment as
follows:
(1) Declaring this action to be a proper class action within the meaning of Fed. R. Civ. P.
23(a) and 23(b)(3) and declaring plaintiffs to be proper class representatives;
(2) Awarding plaintiffs and all members of the Class compensatory damages in an
amount to be determined at trial, together with pre-judgment and post-judgment interest;
(3) Awarding plaintiffs and all members of the Class their costs and expenses incurred in
this action, including reasonable attorney fees, together with expert witness fees and other
costs; and
(4) Granting plaintiffs and the Class such other and further relief as the court deems just
and proper.
JURY DEMAND