Download 1 Consolidated Class Action Complaint 05/13/2005 PDF

1 Consolidated Class Action Complaint 05/13/2005
Name: 1 Consolidated Class Action Complaint 05/13/2005
Pages: 84
Year: 2005
Language: English
File Size: 516 KB
Downloads: 0
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Court appointed Lead Plaintiffs, Robert Schimpf and James Dolan (collectively "Lead Plaintiffs"), and proposed class representative Kirk Durham ("Durham"), by their undersigned attorneys, bring this action as a class action individually and on behalf a class defined more specifically herein consisting of all persons and entities that purchased or otherwise acquired AXIS Capital Holdings Limited ("AXIS" or the "Company") publicly traded common stock on the open market during the period August 6, 2003 through and including October 14, 2004 (the "Class Period"), including those who purchased in the Company's Secondary Public Offering of 23 million shares at $27.91 per share on or about April 15, 2004 (the "Secondary Offering"), and were damaged thereby, and allege the following based upon personal knowledge as to themselves and their own acts, and upon information and belief as to all other matters. Lead Plaintiffs' and Durham's information and belief are based on, inter alia, an investigation made by and through their undersigned counsel, which included, among other things, a review of: (1) AXIS' public filings with the Securities and Exchange Commission ("SEC"); (2) public filings that other insurance industry participants made with the SEC; (3) publicly available documents and trade journals related to the insurance industry; (4) pleadings and exhibits filed in connection with various criminal, civil and administrative investigations and proceedings brought by the New York Attorney General ("NYAG"), the New York State Insurance Department and other enforcement agencies against certain insurance industry participants; (5) analyst research reports; (6) transcripts of investor conference calls regarding AXIS' financial results and business operations; (7) press releases and media reports related to AXIS and its subsidiaries; (8) interviews and consultation with former employees of AXIS; and (9) Lead Plaintiffs' and Durham's investigation into the facts and circumstances alleged herein. 1


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Lead Plaintiffs' and Durham's investigation into the factual allegations contained herein is continuing, as are investigations by the NYAG and enforcement agencies in other states, and therefore, it is possible that additional facts related to the allegations contained herein may be revealed during the course of these investigations. I. NATURE OF THE ACTION 1. AXIS provided insurance and reinsurance through wholly owned subsidiaries located in the United States and elsewhere and reported tremendous growth in revenue and net income throughout the Class Period. AXIS reported that its gross insurance premium revenue had skyrocketed to more than $2.2 billion in 2003, compared to $1.1 billion in 2002, and that its net income had more than doubled to $532.3 million in 2003, compared to $265.1 million in 2002. 2. Unfortunately, events that transpired over the past several months have shown that, throughout the Class Period, AXIS' financial results and the nature of its business operations were reliant upon and unsustainable at historical levels in the absence of its participation in a scheme to manipulate the insurance market through improper and illegal anticompetitive agreements under which AXIS paid certain insurance brokers to steer business to AXIS and away from AXIS' competitors. This scheme involved the participation of Marsh Inc. ("Marsh"), among others, the world's largest insurance broker and a wholly owned subsidiary of Defendant Marsh & McLennan Companies ("MMC"), one of AXIS' founders and largest shareholders. 3. The illicit scheme began to unravel on October 14, 2004, the last day of the Class Period, when Eliot Spitzer, the Attorney General of the State of New York ("NYAG"), filed a complaint (the "Spitzer Complaint") in the New York State Supreme Court, New York County, charging Marsh and MMC with violating state securities and antitrust laws. The Spitzer Complaint unveiled a scheme in which Marsh had entered anticompetitive agreements with insurance providers 2


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to steer insurance premiums to the providers in exchange for illegal, hidden payments, which have been generally referred to as kickbacks. 4. According to the Spitzer Complaint, "ince at least the late 1990s, Marsh ha designed and executed a business plan under which insurance companies agreed to pay Marsh so called 'contingent commissions' to steer them business and shield them from competition." Upon filing the Spitzer Complaint, the NYAG issued a press release entitled "Investigation Reveals Widespread Corruption in Insurance Industry," which described the illicit scheme as follows: For years Marsh received special payments from insurance companies that were above and beyond normal sales commissions. These payments known as "contingent commissions" were characterized as compensation for "market services" but were, in fact, rewards for the business that Marsh and its independent brokers steered and allocated to the insurance companies. Industry representatives defend this long standing practice as acceptable and even beneficial to clients, but the Attorney General's office has uncovered extensive evidence showing that it distorts and corrupts the insurance marketplace and cheats insurance customers. (Emphasis added.) 5. The NYAG, the Connecticut Attorney General Richard Blumenthal and Illinois Attorney General Lisa Madigan then filed a joint complaint charging Aon Corp. ("Aon"), the world's second largest insurance broker, with similar misconduct. In announcing the action against Aon, Connecticut Attorney General Blumenthal admonished that: This hidden 'pay to play' scheme severely hit both public and private purses, including ordinary consumers, towns and cities, taxpayers and major educational institutions. Aon demanded kickbacks from insurers in exchange for business, even as it was paid by customers. The scheme inflated prices and stifled competition. Today's action compels Aon to cease this illegal, unethical practice immediately and pay restitution. (Emphasis added.) 6. Illinois Attorney General Madigan detailed the fraud as follows: Our investigation revealed that Aon Corporation accepted secret payments from insurers for steering them business. Aon's acceptance of these secret payments was a direct conflict of interest that harmed Aon's clients. Aon's acceptance of 3


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kickbacks was not only unethical, but illegal. This settlement will guard against future conflicts of interest and help to return integrity to this industry. (Emphasis added.) 7. Marsh and Aon recently settled the enforcement actions brought by the NYAG and the Connecticut and Illinois Attorneys General and agreed to pay $850 million and $190 million, respectively. They also agreed to stop receiving what these Attorneys General had characterized as "illegal kickbacks." 8. The enforcement actions against Marsh and Aon are particularly material to AXIS' investors because AXIS attributed the vast majority of its Class Period growth to increased insurance premiums written by Marsh and Aon. Specifically, AXIS reported that Marsh wrote $765.2 million of its insurance premiums in 2003, compared to $419.9 million in 2002, and Aon wrote $438.6 million of its insurance premiums in 2003, compared to $229.3 in 2002. Insurance premiums from Marsh and Aon collectively accounting for more than 50% of AXIS' total $2.2 billion of insurance premiums in 2003, and more than 50% of AXIS' insurance premium growth in 2003. 9. Only after the NYAG and other enforcement authorities unveiled their investigations into the widespread corruption characterized by a "hidden pay to play scheme" that involved "illegal kickbacks" did AXIS finally divulge that it was directly involved in the scheme, having paid insurance brokers over $39.1 million in "incentive commissions" in fiscal 2003, including $18.1 million that AXIS paid to Marsh. AXIS also admitted that these payments continued through at least October 1, 2004. 10. Plaintiffs are alleging that by virtue of this misconduct defendants violated the federal securities laws by failing to disclose the amount and nature of the incentive commissions payments and the extent to which the illicit payments contributed to AXIS' revenue and, therefore, its income. The $39.1 million in incentive commissions that AXIS paid Marsh, Aon and others in 2003 4


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amounted to more than 17% of AXIS' acquisition costs. Even more, because Marsh and Aon accounted for more than $1.2 billion or 50% of AXIS' total insurance premiums in 2003, AXIS should have fully disclosed the extent to which its business operations and financial results were reliant upon and unsustainable in the absence of incentive commissions that AXIS paid to them. Further, AXIS produced its underwriting premiums almost entirely through insurance brokers, and thus the amount and nature of the total incentive commission payments to all insurance brokers was material for AXIS' investors to fully understand the Company's business operations and financial results. 11. In the wake of the investigation by the NYAG and other enforcement agencies, AXIS has ceased the payments, condemned the practice and publicly acknowledged that it should have been disclosed to investors. In a letter to shareholders included in the Company's 2004 Annual Shareholder Report, John R. Charman ("Charman"), the Company's President and Chief Executive Officer, acknowledged that "we have been dismayed by the findings of this industry wide investigation and do not in anyway condone this type of alleged behavior . . . . I believe the well being of the industry lies in eradicating all potential conflicts of interest, not merely disclosing them." (Emphasis added.) 12. Additionally, during an investor conference call on February 9, 2005, Charman confirmed that: As stated in last quarter's call, we have ceased entering into and have suspended making payments under incentive commission arrangements. At this time, both the outcome of regulatory guidance and the future structure of producer compensation are still uncertain . . . . We are in the course of reviewing the recent settlement between the New York Attorney General and Marsh, and its implications for AXIS, as well as the industry. 13. Throughout the Class Period, the defendants knew or recklessly disregarded the true nature of the incentive commission payments to Marsh, Aon and others, and deliberately chose to 5


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conceal their existence. In fact, on November 4, 2004, defendants Charman, Michael A. Butt ("Butt") and Andrew Cook ("Cook") participated in an investor conference during which Charman admitted that: "As a matter of fact, I have overseen negotiations of through AXIS since our inception." During the same call, Cook, the Company's Chief Financial Officer, divulged that, ". . . we have included these commission dollars in our overall acquisition costs since our inception." Furthermore, several entities related to MMC took advantage of this material adverse information and sold AXIS shares in the Company's Secondary Offering at artificially inflated prices. 14. AXIS is now embroiled in an ever expanding investigation by the NYAG and law enforcement and administrative agencies in other states. On August 26, 2004, AXIS Specialty U.S. Holdings Inc. ("AXIS U.S. Holdings") received a subpoena from the NYAG seeking information regarding "incentive commission agreements between its insurance companies and insurance brokers." On September 20, 2004, AXIS U.S. Holdings received two additional subpoenas from the NYAG seeking "information regarding fictitious and inflated quotes submitted by insurance companies to insurance brokers." On October 21, 2004, AXIS U.S. Holdings received yet another subpoena from the NYAG seeking "information regarding tying , or conditioning direct insurance on the placement of reinsurance." On December 7, 2004, AXIS announced that its United States operating subsidiaries had received even more subpoenas or requests for information from "various state insurance regulators regarding incentive commission agreements, fictitious and inflated quotes, tying and related issues." 15. Although state enforcement agencies are continuing their investigations into the illicit incentive commissions and other illegal conduct that pervaded the insurance industry, AXIS' investors, including Lead Plaintiffs, Durham and the proposed Class, already have been damaged. 6


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On October 14, 2004, when the NYAG announced its investigation into the wide spread corruption, the price of AXIS stock, which had traded as high as $32.95 during the Class Period, dropped from an opening price of $25.85 per share to close at $24.20 per share, and then on enormous trading volume dropped to $23.36 per share on October 15, 2004, a two day drop of approximately 10%. II. JURISDICTION AND VENUE 16. The Court has jurisdiction over the subject matter of this action pursuant to Section 22 of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. 77v, and Section 27 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. 78aa, and 28 U.S.C. 1331 and 1337. The claims arise under Sections 11, 12(a)(2) and 15 of the Securities Act, 15 U.S.C. 77j, 77l(a)(2) and 77o; under Sections 10(b), 20(a) and 20A of the Exchange Act, 15 U.S.C. 78j(b), 78t(a) and 78t 1, and the rules and regulations promulgated thereunder, including SEC Rule 10b 5, 17 C.F.R. 240.10b 5. 17. Venue is proper in this District pursuant to Section 22 of the Securities Act, Section 27 of the Exchange Act, and 28 U.S.C. 1391(b). Many of the acts and transactions giving rise to the violations of law complained of herein, including the preparation and dissemination to the public of materially false and misleading public filings, occurred in this District. Further, at all relevant times herein, AXIS US Reinsurance Company, a subsidiary of AXIS, maintained its principal executive offices in this District, at 430 Park Avenue, New York, NY, 10022. 18. In connection with the wrongful acts and conduct alleged herein, the defendants directly or indirectly, used the means and instrumentalities of interstate commerce, including the United States mails and the facilities of the national securities exchange. 7


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III. PARTIES A. Plaintiffs 19. Robert Schimpf ("Schimpf") is an individual who purchased AXIS shares during the Class Period as demonstrated by the certification that Schimpf previously filed with the Court. On April 22, 2004, Schimpf acquired 200 shares of AXIS common stock at a price of $28.22 per share, and suffered damages as a result of the violations of the federal securities laws alleged herein when the truth was revealed at the end of the Class Period and the value of his holdings dropped. 20. James Dolan ("Dolan") is an individual who purchased AXIS shares during the Class Period as demonstrated by the certification that Dolan previously filed with the Court. On May 7, 2004, Dolan acquired 175 shares of AXIS common stock at a price of $27.80 per share, and suffered damages as a result of the violations of the federal securities laws alleged herein when the truth was revealed at the end of the Class Period and the value of his holdings dropped. 21. Proposed class representative Kirk Durham ("Durham") is an individual who is still holding the 395 shares of AXIS common stock he purchased at a price of $27.91 per share in the Company's Secondary Offering on April 15, 2004, as set forth in more detail below, and suffered damages as a result of the violations of the federal securities laws alleged herein when the truth was revealed at the end of the Class Period and the value of his holdings dropped. 22. By Order of the Court dated April 13, 2005, Schimpf and Dolan were appointed Lead Plaintiffs in this action in accordance with Section 21D(a)(3)(B) of the Exchange Act, 15 U.S.C. 78u 4. 8


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B. Defendants (i) AXIS Capital Holdings Limited 23. AXIS Capital Holdings Limited ("AXIS" or the "Company") and its wholly owned operating subsidiaries provide insurance and reinsurance on a global basis. AXIS maintains its principal place of business at 106 Pitts Bay Road, Pembroke HM08, Bermuda. 24. AXIS U.S. Holdings is a wholly owned subsidiary of AXIS and was incorporated in Delaware on March 11, 2002. AXIS U.S. Holdings acts as a holding company for: (1) AXIS Reinsurance Company ("AXIS Reinsurance"), which is domiciled in New York and is licensed to write insurance and reinsurance in all 50 states in the United States, the District of Columbia and Puerto Rico; (2) AXIS Specialty Insurance Company Insurance ("AXIS Insurance"), which is domiciled in Connecticut and is licensed to write insurance in Connecticut and eligible to write surplus lines of insurance in 37 of the states in the United States and the District of Columbia; and (3) AXIS Surplus Insurance Company ("AXIS Surplus"), which is licensed to write insurance in Illinois, Alabama and Georgia and eligible to write surplus lines of insurance in 45 states and the District of Columbia. 25. AXIS Specialty Holdings Ireland Limited ("AXIS Ireland Holdings") is a wholly owned subsidiary of AXIS and was incorporated in Ireland on January 28, 2002, and, at all times relevant, acted as a holding company for AXIS Specialty Europe Limited ("AXIS Specialty Europe") and AXIS Re Limited ("AXIS Re"). AXIS Specialty Europe became licensed as an Irish insurer in May 2002, and is authorized to write surplus lines business in 20 states in the United States. AXIS Re also became entitled to carry on reinsurance business from Ireland in May 2002. AXIS Specialty London was established in June 2003 as a UK branch of AXIS Specialty Europe. The UK branch commenced underwriting business in September 2003. AXIS Re Europe was 9


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