In re Genworth Fin. Sec. Lit.: District Court Denies Motion to Dismiss in Securities Fraud Case
In In re Genworth Fin. Sec. Lit., 14 Civ. 2392 (S.D.N.Y. June 15, 2015), the United States District Court for the Southern District of New York denied Genworth Financial, Inc. (“Genworth”), Michael D. Fraizer, and Martin P. Klein’s (collectively, “Defendants”) motion to dismiss a second amended complaint filed by lead plaintiff, Ashley M. Price, and other purchasers of Genworth securities (collectively, “Plaintiffs”) in a class action suit alleging violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The court found the complaint adequately alleged claims for securities fraud.
According to the complaint, Genworth, through subsidiaries, provided insurance and wealth management services in twenty-five countries. In 2011, Genworth suffered increasing losses and mounting claims, resuting in an increase in loss reserves. In April 2012, Genworth disclosed this information, causing share prices to drop 23%. [I took out the repeating words, such as disclose] Plaintiff alleged that the company “suppressed the information” concerning the increase.
Plaintiffs filed a class action complaint, focusing on Genworth’s Australian subsidiary and alleging violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Specifically, Plaintiffs alleged they purchased shares of Genworth common stock at an inflated price because Defendants purposefully and willfully misstated Genworth’s income and assets.
To prove securities fraud, a party must show: (1) a material misrepresentation (or omission); (2) scienter; (3) a connection with the sale of purchase of a security; (4) reliance; (5) economic loss; and (6) loss causation.
In a conclusory fashion, the court found that Plaintiffs had adequately alleged the elements of a securities claim. The company allegedly misstated that:
- the 2011 flood events in Queensland, and higher interest rates and living costs, an elevated currency, and lower consumer spending are being absorbed in Genworth's loss ratios; housing markets in Canada and Australia are sound overall; and in Australia, "the loss ratio remained flat at 48% sequentially, reflecting the slower recovery in Queensland from flooding earlier in the year and continued pressure from higher interest rates, increased living costs, lower consumer spending, and a strong Aussie dollar, which impacts tourism and exports."
The court also found sufficient evidence of the “personal and wrongful knowledge” of the individual defendants who, “as ‘high-level executives and/or directors’” and "by virtue of [the] responsibilities and activities as a senior officer” were “’privy to and participated in the creation, development and reporting’ of Genworth's false and misleading statements.” Moreover, the court acknowledged that while some statements contained forward-looking language, “they are statements of current condition, and are therefore not protected by the safe-harbor defense.”
Accordingly, the court denied Genworth’s motion to dismiss.
The primary materials for this case can be found on the DU Corporate Governance website.