The United States District Court for the Southern District of New York dismissed a class action complaint for securities fraud for failure to meet the heightened pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act (PSLRA). Plaintiffs alleged that the defendant insurance company issued false and misleading statements regarding the financial performance of a certain segment of its business as part of an alleged scheme to allow insiders to sell their shares while the shares were artificially inflated.

Plaintiffs did not allege that any of the reported financial results were false but rather asserted that defendants’ statements accompanying the financial reports painted an overly optimistic and misleading portrait of the business segment. As a result, plaintiffs claimed they purchased inflated common stock that dropped in value after the company announced a decline in net income in October 2005.

On defendants’ motion to dismiss, the Court held that the alleged false and misleading statements were not actionable because they were: (i) protected by the judicially-created “bespeaks caution” doctrine, under which alleged misrepresentations are immaterial as a matter of law if a reasonable investor would not consider them important in light of adequate cautionary language; (ii) “forward-looking statements” falling within the safe harbor provisions of the PSLRA because they were made without actual knowledge that the statements were false and misleading; (iii) mere projections that proved erroneous; (iv) immaterial, forward-looking expressions of generic optimism or puffery; or (v) too vague to be actionable. In addition, the Court ruled that the complaint did not allege loss causation adequately.

Similarly, the Court found that the complaint’s allegations could not support claims for market manipulation or aiding and abetting, and that the control person liability claim failed because the underlying claims were not properly pleaded. (Kemp v. Universal American Financial Corp., No. 05 Civ. 9883 (JFK), 2007 WL 86942 (S.D.N.Y. Jan. 10, 2007))