Reinsurance Focus

An insurance broker’s bid to dismiss a federal securities lawsuit failed when a federal district court in Illinois denied its motion to reconsider its earlier motion to dismiss. The lawsuit arose out of the New York Attorney General’s investigation into the insurance brokerage industry’s use of so-called “contingent commission” practices, wherein brokers would allegedly direct or steer business to insurers willing to use their services when buying reinsurance in order to generate revenues in the form of commission payments. The broker, Aon, originally sought dismissal of the case in 2005, which the district court denied in 2006, relying on the pleading requirements set forth in the Seventh Circuit’s decision in Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588 (7th Cir. 2006). After the United States Supreme Court vacated the Seventh Circuit’s decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499 (2007), articulating the standard courts must apply in determining whether a securities plaintiff has pled a “strong inference of scienter” as required by the Private Securities Litigation Reform Act of 1995, the broker reasserted its argument that the plaintiffs had not adequately pled scienter.

The district court disagreed with the broker once again, however, and denied the motion to reconsider. The court found that, even under the new Tellabs decision, the complaint supported an inference of the defendants’ knowledge, awareness and involvement in the alleged steering scheme. It also found that the complaint adequately alleged that the defendants either knew, or would have realized under the circumstances, that a failure to reveal potentially material facts would likely mislead investors. Among other things, the court found a financial motive to conceal the contingent commission practices, that it had been alleged that defendants failed to comply with GAAP and substantially inflated their reported earnings, and that company executives had admitted violating the internal code of ethics. Thus, the court found that a “strong inference of scienter” had been pled. Roth v. Aon Corp., Case No. 04-C-6835 (USDC N.D. Ill. Mar. 7, 2008).

This post written by Brian Perryman.