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Carpenters Pension Trust Fund for Northern California v. The Allstate Corp.

United States District Court, N.D. Illinois, Eastern Division

February 27, 2018



          Robert W. Gettleman United States District Judge

         Plaintiffs Carpenters Pension Trust Fund for Northern California and Carpenters Annuity Trust Fund for Northern California, [1] individually and on behalf of others similarly situated, have brought a two count putative class action amended complaint against defendant Allstate Corporation (“Allstate”), its Chief Executive Officer (“CEO”), Chairman, and President from 2005 to 2015 Thomas Wilson, and the CEO and President of Allstate Financial Matthew Winter, who also took over for Wilson as President in 2015 (collectively “defendants”). Count I alleges that defendants violated Section 10(b) of the Securities Exchange Act (“Exchange Act”), 15 U.S.C. § 78j(b), and Securities and Exchange Commission (“SEC”) Rule 10b-5 promulgated thereunder, 17 C.F.R. ' 240.10b-5. Count II, brought only against Wilson and Winter, alleges control person liability under Section 20(a) of the Exchange Act. 15 U.S.C. § 78t(a). Defendants have moved to dismiss the complaint for failure to state a claim under Fed.R.Civ.P. 12(b)(6), and failure to meet the heightened pleading requirements of the Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u-4(b). For the reasons discussed below, the court denies defendants' motion to dismiss.


Plaintiffs bring this complaint on behalf of a class of investors that purchased Allstate common stock between October 29, 2014, and August 3, 2015 (“plaintiffs”). Plaintiffs claim that defendants are liable under Sections 10(b) and 20(a) for material false statements and omissions regarding the cause of an alleged spike in auto insurance claims frequency. According to plaintiffs, Allstate implemented a plan to attract more auto insurance customers starting in 2013. Plaintiffs further allege that an undisclosed element of that plan was to greatly reduce Allstate's underwriting standards to attract customers who would have previously been considered too risky, and would not have been approved for an Allstate auto insurance policy. Plaintiffs claim that this undisclosed strategy to attract more customers worked, and resulted in a significant increase in auto insurance claims frequency starting in October 2014.

         Plaintiffs further allege that, when asked about the increase in auto insurance claims frequency, defendants made several materially false statements attributing the increase to external factors rather than Allstate's undisclosed reduction in underwriting standards. According to plaintiffs, these misstatements convinced initially skeptical securities analysts to view Allstate's financial outlook favorably despite the fact that its competitors were not experiencing similar increases in auto insurance claims frequency.

         These misstatements, according to plaintiffs, were revealed in part when Allstate partially disclosed the negative impact of its reduced underwriting standards on February 4 and May 5, 2015. Plaintiffs claim that Allstate's stock remained artificially inflated until August 3, 2015, when Allstate issued a press release reporting its financial results for the second quarter of 2015, fully disclosing the negative impact of its reduced underwriting standards. Investors were allegedly shocked when the press release reported a claims frequency increase for the third consecutive quarter, an operating income drop of 57% from the previous quarter, and an operating earnings per share of 35% below analysts' consensus. Allstate's stock fell more than 10% that same day. Plaintiffs further allege that Winter connected the claims frequency to Allstate's reduced underwriting standards for the first time in that press release, and admitted that the impact was expected during an earnings call the following day.

         Additionally, plaintiffs allege that Wilson engaged in suspicious insider selling when he liquidated $33 million worth of Allstate stock, which represented 85% of his direct holdings, in November 2014. Then, in May 2015 Wilson allegedly sold another $6.2 million worth of his stock.


         A motion to dismiss under Fed.R.Civ.P. 12(b)(6) challenges the sufficiency of the complaint, not its merits. Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990). When evaluating a Rule 12(b)(6) motion, the court accepts as true all well-pleaded factual allegations and draws all reasonable inferences in plaintiff's favor. Sprint Spectrum L.P. v. City of Carmel, Indiana, 361 F.3d 998, 1001 (7th Cir. 2004). The complaint must allege sufficient facts that, if true, would raise a right to relief above the speculative level, showing that the claim is plausible on its face. Bell Atlantic Corp. v. Twombly, 550 U.S. 549, 555 (2007). To be plausible on its face, the complaint must plead facts sufficient for the court to draw the reasonable inference that the defendant is liable for the alleged misconduct. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

         Because plaintiffs' Section 10(b) claims sound in fraud, they are also subject to the heightened pleading requirements of Fed.R.Civ.P. 9(b). Rule 9(b) provides that in “alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” The complaint must provide “the who, what, when, where and how” of the alleged fraud. DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990).

         In addition to Rule 9(b), to check against pleading abuses in private securities fraud suits, the PSLRA has further heightened the pleading requirements. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314-15 (2007). Under the PSLRA, the plaintiff must “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1).

         The PSLRA also imposes a substantially higher standard of pleading scienter. The complaint must “with respect to each act or omission . . . state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2). The required state of mind is an “intent to deceive, manipulate or defraud.” Higginbotham v. Baxter Int.=l Inc., 495 F.3d 753, 756 (7th Cir. 2007). For an inference to be ‘strong, ” it must be “cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” Tellabs, 551 U.S. at 324.

         I.Count I - Section 10(b) and Rule 10b-5

         Count I alleges that defendants violated Section 10(b) of the Exchange Act and SEC Rule 10b-5. Section 10b, 15 U.S.C. § 78j(b), makes it unlawful:

To use or employ, in connection with the purchase or sale of any security registered as on a national securities exchange . . . any manipulative or deceptive device or contrivance in ...

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