Case 1:14-cv-00736-VEC Document 29 Filed 07/07/14 Page …securities.stanford.edu/filings-documents/1051/AFSI00_01/201477_r... · Michael Harris and Stuart Schapiro ) Individually

Case 1:14-cv-00736-VEC Document 29 Filed 07/07/14 Page 1 of 42

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

Michael Harris and Stuart Schapiro ) Individually and on Behalf of All Other ) Civil Action No.: 14-CV-736 (VEC) Persons Similarly Situated, )

) CONSOLIDATED AMENDED Plaintiff, ) COMPLAINT

) v. CLASS ACTION

AMTRUST FINANCIAL SERVICES, INC., BARRY D. ZYSKIND, and RONALD E. JURY TRIAL DEMANDED PIPOLY, JR.,

Defendants.

)

Lead Plaintiffs Michael Harris and Stuart Schapiro ("Plaintiffs"), individually and on

behalf of all other persons similarly situated, by their undersigned attorneys, for their complaint

against defendants, alleges the following based upon personal knowledge as to themselves and

their own acts, and information and belief as to all other matters, based upon, inter alia, the

investigation conducted by and through their attorneys, which included, among other things, a

review of the defendants' public documents, conference calls and announcements made by

defendants, United States Securities and Exchange Commission ("SEC") filings, wire and press

releases published by and regarding AmTrust Financial Services, Inc. (“AmTrust” or the

“Company”), analysts' reports and advisories about the Company, and information readily

obtainable on the Internet. Plaintiffs believe that substantial evidentiary support will exist for

the allegations set forth herein after a reasonable opportunity for discovery.

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NATURE OF THE ACTION

1. This is a federal securities class action under Sections 10(b) and 20(a) of the

Securities Exchange Act of 1934 (the “Exchange Act”) on behalf of all persons other than

defendants who purchased AmTrust common stock and preferred stock between February 15,

2011 and December 11, 2013, inclusive (the “Class Period”) and who did not sell such

securities prior to December 12, 2013, seeking damages against the Company and two of its

top officials.

2. In addition, lead plaintiff Stuart Schapiro brings claims against AmTrust under Section

11 of the Securities Act of 1933 on behalf of a sub-class of persons and entities who purchased

AmTrust Series A preferred stock in or traceable to the public offering on June 5, 2013 (the

“Preferred Offering”) and did not sell those shares prior to December 12, 2013.

3. AmTrust offers insurance coverage to policyholders including

property/casualty, workers’ compensation, special risk, and warranty insurance, and extended

service plans.

4. During the Class Period, AmTrust understated its losses from its insurance

operations for the fiscal years ended 2010 through 2012, in the amount of approximately

$289.9 million. Consequently, AmTrust also overstated its net income earned during the same

period by $289.9 million.

5. Using undisclosed accounting machinations, AmTrust gave investors the

misleading impression that its insurance operations were much more profitable than they really

were.

6. On December 12, 2013, a report by analyst firm Geoinvesting exposed AmTrust

as a “House of Cards”. Drawing on financial information AmTrust’s subsidiaries filed with

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State insurance commissioners in the U.S., and in Bermuda, Geoinvesting demonstrated that

from fiscal 2010 through 2012, AmTrust concealed $289.9 million of losses through an

unknown accounting manipulation. 1

7. AmTrust’s subsidiaries’ individual financial reports filed with insurance

regulators showed aggregate loss and loss adjusted expense for 2010 through 2012 that was

$289.9 million greater than the loss and loss adjusted expense that AmTrust reported in its

consolidated financial statements in its annual reports on Form 10-K filed with the SEC for

2010 through 2012.

8. The sum of the total loss and loss adjusted expense reported for AmTrust’s

subsidiaries should match the total loss and loss adjusted expense reported for AmTrust’s

consolidated operations. That AmTrust’s consolidated financial statements did not include all

of the loss and loss adjusted expense and was in fact missing $289.9 million of loss and loss

adjusted expense reported by its subsidiaries to insurance regulators proves that AmTrust’s

consolidated financial statements filed with the SEC understated losses and overstated net

income by $289.9 million from 2010 to 2012.

9. On this news, AmTrust securities declined $4.63 per share or 12%, to close at

$33.67 per share and its Series A preferred shares declined $2.55/share on December 12, 2013.

10. AmTrust understated these losses in order to conceal from investors that its

insurance underwriting practices are unprofitable.

1 Geoinvesting hypothesized that AmTrust hid the losses by having its U.S. subsidiaries cede the losses them to its Bermuda reinsurer, which then ceded them to its Luxembourg subsidiaries, while retaining the corresponding insurance premiums in its Bermuda subsidiary. It then consolidated its entire operations without ever recognizing or revealing to investors at least $276.9 million of losses ceded to its Luxembourg subsidiaries. It cannot be determined at this time whether or not this explanation really was the actual accounting manipulation that AmTrust utilized.

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11. As a result of Defendants’ wrongful acts and omissions, and the precipitous

decline in the market value of the Company's securities, Plaintiffs and other Class members

have suffered significant losses and damages.

JURISDICTION AND VENUE

12. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a)

of the Exchange Act (15 U.S.C. §78j(b) and 78t(a)) and Rule 10b-5 promulgated thereunder

(17 C.F.R. §240.10b-5) and under Sections 11 of the Securities Act (15 U.S.C. §§ 77k and

77o).

13. This Court has jurisdiction over the subject matter of this action pursuant to §27

of the Exchange Act (15 U.S.C. §78aa), Section 22 of the Securities Act (15 U.S.C. §77v) and

28 U.S.C. §1331.

14. Venue is proper in this District pursuant to §27 of the Exchange Act, 15 U.S.C.

§78aa, Section 22 of the Securities Act (15 U.S.C. §77v) and 28 U.S.C. §1391(b) as the

Company's executive offices are located in this District.

15. In connection with the acts, conduct and other wrongs alleged in this Complaint,

defendants, directly or indirectly, used the means and instrumentalities of interstate commerce,

including but not limited to, the United States mail, interstate telephone communications and

the facilities of the national securities exchange.

PARTIES

16. Lead Plaintiff Mark Harris purchased AmTrust common stock at artificially

inflated prices during the Class Period and has been damaged upon the revelation of the alleged

corrective disclosures. Mark Harris’s PSLRA certification has previously been filed with the

Court and is incorporated by reference herein.

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17. Lead Plaintiff Stuart Schapiro purchased AmTrust Series A preferred stock at

artificially inflated prices during the Class Period pursuant and traceable to the Preferred

Offering and was damaged upon the revelation of the alleged corrective disclosures. Stuart

Schapiro’s PSLRA certification has previously been filed with the Court and is incorporated by

reference herein.

18. Defendant AmTrust is a Delaware corporation with its headquarters located at

59 Maiden Lane, 6th Floor, New York, NY 10038. The Company's common stock is traded on

the NASDAQ Stock Market ("NASDAQ") under the ticker symbol “AFSI”.

19. During the Class Period the Company issued 4.6 million shares of Series A

preferred stock in the Preferred Offering. The Series A preferred stock traded on the New York

Stock Exchange under the ticker symbol “AFSI-PA” during the Class Period.

20. Defendant Barry D. Zyskind ("Zyskind") has served at all relevant times as the

Company's Chief Executive Officer, President and director.

21. Defendant Ronald E. Pipoly, Jr. ("Pipoly") has served at all relevant times as the

Company's Chief Financial Officer. Prior to AmTrust, Pipoly was the controller and an

executive officer at PRS Insurance Group, the parent company of Credit General, a property

and casualty insurer that was liquidated in 2001 by Ohio regulators after it was revealed that its

CEO, Robert Lucia, had committed fraud, and stolen $30.0 million through transactions with a

series of related party offshore entities. Lucia was federally indicted for his fraud at PRS, pled

guilty, and was sentenced to 10 months in prison and a fine of over $56,000. Another former

Credit General executive officer, Michael Saxon, serves as AmTrust’s Chief Operating Officer.

22. Mr. Pipoly’s knowledge of the fraud at Credit General, particularly the illegal

payments to Mr. Lucia, was recognized by the Bankruptcy Judge overseeing a proceeding to

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appoint a trustee to replace Mr. Pipoly’s stewardship of the company following Mr. Lucia’s

removal. In re PRS Insurance Group, Inc., 274 B.R. 381, 387 (Bkrtcy.D.Del. 2001) (“When

confronted with the Hradisky report evidencing over $3.5 million in transfers to Mr. Lucia and

his family, Mr. Pipoly did not pursue an investigation of those transfers. He did not even ask

Mr. Lucia for an explanation.”). Pipoly testified before the Court in an attempt to prevent

appointment of a trustee and the Court found his testimony not credible, as it was contradicted

by the evidence. Id. at 386-87. Interestingly, in the proceedings, Allstate Insurance accused

Lucia and Pipoly of selling assets of PRS Insurance Group to AmTrust at less than fair market

value to benefit themselves.

23. While Mr. Pipoly was CFO of AmTrust he also served as interim CFO of

Maiden Holdings, a public company founded and controlled by the same family that controls

AmTrust (Karfunkle and Zyskind). In the same time period that Pipoly was its CFO, Maiden

Holdings and PriceWaterHouseCoopers concurred that Maiden Holding “had deficiencies that

in combination represented a material weakness in [its] internal control over financial reporting

due to under-resourcing of the finance department and the concentration of duties in our Chief

Financial Officer.”2 These deficiencies included:

• failure to give appropriate consideration to U.S. GAAP accounting rules or to have

documentation of the basis for [the company’s] opinion and conclusion regarding the

application of U.S. GAAP;

• lack of an independent preparer and reviewer for various accounting tasks,

including the preparation of the financial statements and disclosures; and

• lack of formality regarding certain controls surrounding the control environment.

2 Maiden subsequently replaced PWC with BDO USA LPP, which also serves as AmTrust’s auditor.

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24. Defendants Zyskind and Pipoly are sometimes collectively referred to herein as

the “Individual Defendants.”

BACKGROUND

25. AmTrust underwrites and provides property and casualty insurance in the

United States and internationally. Its insurance business consists primarily of workers

compensation policies that it underwrites for businesses. Workers compensation insurance is

mandatory for nearly all employers in the United States. It is a highly competitive business.

26. AmTrust and Zyskind are relative newcomers to the insurance business.

AmTrust began in 1998 when it acquired a bankrupt computer warranty insurance business

from Wang Laboratories. Zyskind began working at AmTrust in 1998 and had no prior

insurance experience. He became AmTrust CEO in 2005 at the age of 34 after being in the

insurance business for seven years. Zyskind’s father-in-law, George Karfunkle, is one of the

major shareholders of AmTrust and serves as Chairman of its Board of Directors.

27. Pipoly became CFO of AmTrust after he assisted AmTrust in purchasing certain

assets from PRS Group (the parent of Credit General), which as stated earlier, Allstate alleged

were sold at less than fair market value.

AMTRUST’S CORPORATE STRUCTURE

28. AmTrust operates eleven domestic U.S. insurance subsidiaries that write

policies, take in insurance premiums and pay out losses incurred on those policies.

29. AmTrust owns a Bermuda reinsurance subsidiary, AmTrust International

Insurance, Ltd. (“AII”), which reinsures the bulk of its US insurance subsidiaries’ written

premiums.

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30. AmTrust also owns an Irish insurance subsidiary, AmTrust (“AIUL“) and a

United Kingdom insurance subsidiary (“AEL”).

31. AmTrust’s Luxembourg operations include AmTrust Capital Holdings Limited

(“ACHL”, a Luxembourg holding company). ACHL in turn, owns nine Luxembourg

insurance subsidiaries, each of which has substantial “equalization” balances. 3 Equalization

balances are essentially a balance sheet item that can be used to offset or absorb increases in

loss reserves occasioned by the incurrence of net losses on the income statement.

32. AmTrust bought ACHL in March 2009. Then AmTrust purchased 8 more

Luxembourg-domiciled captive reinsurance companies that became subsidiaries of ACHL. In

total, these Luxembourg subsidiaries had approximately $688 million of equalization reserves.

The equalization reserves are permitted under Luxembourg GAAP to offset or absorb losses so

that the losses do not affect earnings, thus “smoothing earnings”. These reserves are also tax-

deductible in Luxembourg so that ACHL will receive a tax benefit for the losses in

Luxembourg.

33. Pursuant to a stop-loss agreement, AII agrees to cede up to $100 million of

losses to AmTrust’s Luxembourg subsidiaries annually.

34. Under U.S. GAAP, when AmTrust consolidates the results of its Luxembourg

subsidiaries, these equalization reserves are not permitted to be used to absorb or offset the

losses. Thus, any losses incurred by or ceded to the Luxembourg subsidiaries must be

recognized as losses in AmTrust’s consolidated financial statements.

35. In its SEC reported financial statements, the eleven domestic subsidiaries, along

with the Irish, UK and Luxembourg subsidiaries financial statements are consolidated. Thus

3 Two of the Luxembourg subsidiaries were acquired in December 2012.


all of the revenue, losses and income from all AmTrust’s subsidiaries are consolidated and

reported in AmTrust’s Form 10-K annually.

MATERIALLY FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD

36. On February 15, 2011, the Company issued a press release announcing its

financial results for the year ended December 31, 2010. For the year, the Company reported

net income of $142.5 million and loss and loss adjustment expense of $471.5 million.

37. In an investor conference call that same day, Zyskind and Pipoly touted

AmTrust’s fiscal 2010 financial performance. In particular, Pipoly and Zyskind discussed the

amount of adverse development and incurred loss that AmTrust incurred in 2010, as well as its

loss ratios. Zyskind and Pipoly also made in depth statements about the reasons for AmTrust’s

losses, loss ratios and net income, and the trends it was experiencing for these key metrics.

38. On March 15, 2011, the Company filed its annual report for the year ended

December 31, 2010 on Form 10-K with the SEC signed by, among others, Defendants Zyskind

and Pipoly, and reported net income of $142.5 million and loss and loss adjustment expense of

$471.5 million.

39. In addition, the Form 10-K contained signed certifications pursuant to the

Sarbanes- Oxley Act of 2002 ("SOX") by Defendants Zyskind and Pipoly stating that the

financial information contained in the Form 10-K fairly presents, in all material respects, the

financial condition and results of operations of AmTrust, and that they were not aware of any

fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant’s internal control over financial reporting.

40. In the February 15, 2011 press release and the 10-K, AmTrust understated loss

and loss adjusted expense for fiscal 2010 by $70.97 million because it failed to report $70.97

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million of losses and loss adjusted expenses that were reported by its subsidiaries to State and

Bermuda insurance regulators, but were not included and recognized in AmTrust’s 2010 year-

end consolidated financial statements. As a result, AmTrust overstated fiscal 2010 net income

by $70.97 million.

41. On February 15, 2012 the Company issued a press release announcing its

financial results for the fiscal year ended December 31, 2011. For the year, the Company

reported net income of $170.4 million and loss and loss adjustment expense of $678.3 million.



amount of adverse development or insurance loss that AmTrust incurred in 2011, as well as its

loss ratios and net income. Zyskind and Pipoly also made in depth statements about the

reasons for AmTrust’s losses, loss ratios and net income, and the trends it was experiencing for

these key metrics.

43. On March 15, 2012, the Company filed an annual report for the period ended

December 31, 2011 on a Form 10-K with the SEC signed by, among others, Defendants

Zyskind and Pipoly. The 10-K reported net income of $170.4 million and net loss and loss

adjustment expense of $678.3 million.

44. In addition, the Form 10-K contained signed certifications pursuant to SOX by

Defendants Zyskind and Pipoly stating that the financial information contained in the Form 10-

K fairly presents, in all material respects, the financial condition and results of operations of

AmTrust, and that they were not aware of any fraud, whether or not material, that involves

management or other employees who have a significant role in the registrant’s internal control

over financial reporting.

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45. In the February 15, 2012 press release and the fiscal 2011 10-K, AmTrust

understated loss and loss adjusted expenses and overstated fiscal 2011 net income by $102.3

million because it failed to recognize $102.3 million of losses and loss adjusted expense that

were reported by its subsidiaries to State and Bermuda insurance regulators, but were not

included and recognized in its 2011 year-end consolidated financial statements.

46. On February 14, 2013, the Company issued a press release announcing its

financial results for the fiscal year ended December 31, 2012. For the year, the Company

reported net income of $178 million and loss and loss adjusted expense of $922.7 million.



amount of adverse development or insurance loss that AmTrust incurred in 2012, as well as its

loss ratios, and net income. Zyskind and Pipoly also made in depth statements about the

reasons for AmTrust’s losses, loss ratios and net income, and the trends it was experiencing for

these key metrics.

48. On March 1, 2013, the Company filed an annual report for the period ended

December 31, 2012 on a Form 10-K with the SEC signed by, among others, Defendants

Zyskind and Pipoly. The 10-K reported net income of $170.4 million and net loss and loss

adjustment expense of $922.7 million.

49. In addition, the Form 10-K contained signed certifications pursuant to SOX by

Defendants Zyskind and Pipoly stating that the financial information contained in the Form 10-

K fairly presents, in all material respects, the financial condition and results of operations of

AmTrust, and that they were not aware of any fraud, whether or not material, that involves

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management or other employees who have a significant role in the registrant’s internal control

over financial reporting.

50. In the February 14, 2013 press release and in the 10-K for fiscal 2012, AmTrust

understated loss and loss adjusted expenses and overstated fiscal 2012 net income by $116.7

million because it failed to recognize $116.7 million of losses and loss adjusted expense that

were reported by its subsidiaries to State and Bermuda insurance regulators, but were not

included and recognized in its 2012 year-end consolidated financial statements..

AMTRUST SELLS $115,000,000 OF PREFERRED STOCK

IN REGISTERED OFFERING

51. On June 5, 2013, AmTrust filed a registration statement and prospectus to offer

and sell 4,600,000 shares of Series A preferred stock at $25.00 per share. On June 10, 2013,

AmTrust completed the offering receiving net proceeds from the offering of $111,377,500.

52. The registration statement and prospectus incorporated by reference AmTrust’s

financial statements filed with the SEC on Form 10-K for fiscal years 2012.

53. The registration statement and prospectus also provided detailed income

statement and balance sheet items for fiscal years 2010 through 2012.

54. The registration statement and prospectus was false and misleading because it

understated loss and loss adjusted expense and overstated net income for fiscal years 2010

through 2012 by material amounts.

55. AmTrust’s individual subsidiaries reported to insurance regulators $289.9

million more loss and loss adjusted expense during fiscal years 2010, 2011 and 2012 than

AmTrust reported for those fiscal years on a consolidated basis in the registration statement

and prospectus for the Preferred Offering.

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56. The discrepancies between the loss and loss adjusted expense amounts in the

financial reports that AmTrust’s subsidiaries filed with State and Bermuda insurance regulators

and the loss and loss adjusted expense amounts AmTrust reported when it consolidated all of

those subsidiaries is shown in the following chart:

Loss and Loss Adjusted Expense (amounts in thousands) Total All Consolidated

Year US Subs AEL AIUL AII ACHL Subs in SEC 10K Difference

2010 174.31 29.0 27.5 249.5 62.1 542.4 471.5 (71.0)

2011 232.25 51.8 26.7 373.8 96.1 780.6 678.3 (102.3)

2012 291.05 95.0 31.3 535.1 86.9 1,039.4 922.7 (116.7) Source: AM Best AM BestAM BestAM BestC Sched N/A 10K N/A

57. The above chart shows that AmTrust understated loss and loss adjusted expense

by $71 million in 2010, $102.3 million in 2011 and $116.7 million in 2012 in the registration

statement and prospectus. As a result, AmTrust overstated its net income by the same amounts

in each year.

58. AmTrust also stated in the registration statement and prospectus that: “We

continue to carefully monitor and maintain appropriate levels of reserves ... .” This statement

was false because AmTrust consistently selected loss ratios and provided for loss reserves that

were materially lower than industry averages from 2007 through 2012.

THE TRUTH EMERGES

59. On December 12, 2013, Geoinvesting published a report entitled, “AmTrust

Financial Services: A House of Cards?” The Geoinvesting report is attached as Exhibit J to

this complaint and incorporated herein.

60. The report asserted in relevant part:

It seems suspicious that a company could take on so many different types of risk while beating consensus estimates for 14 consecutive quarters. We find it difficult to believe that AFSI could quickly enter areas where they had no

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previous experience and at such a pace without ever missing a step. This has led us to take a deeper look into AFSI’s books and accounting.

... it appears that management is ceding/sending losses to offshore captive reinsurance companies it has purchased since 2009, but not disclosing these losses in SEC financial statements as required.

We will show that AFSI appears to be inflating earnings/net equity via offshore entities, making it difficult for regulators to see the complete picture and/or get accurate information. We think that AFSI could be next in line to face regulatory scrutiny.

Summary of Findings

A cross section of public documents (AFSI SEC filings, Statutory financial filings by AFSI subsidiaries and Credit Rating information) shows that AFSI appears to be excluding losses of wholly-owned subsidiaries in its SEC filings.

• From 2009 to 2012 we believe that AFSI has not disclosed a total of $276.9 million in losses ceded to Luxembourg subsidiaries.

61. On this news, AmTrust’s common stock share price declined $4.63 per share or

12%, to close at $33.67 per share on December 12, 2013. That same day AmTrust’s Series A

preferred stock share price declined $2.55/share from $21.02/share to close at $18.47/share.

62. AmTrust immediately responded by denying the facts asserted by Geoinvesting.

Zyskind stated: “Recent negative articles that individuals have distributed are false and

misleading and are being distributed with the intention of manipulating the shares of AmTrust

in order to benefit those who own short position in our shares.”

63. George Karfunkle, AmTrust’s Chairman, major shareholder and father in law of

Zyskind, also attempted to shore investor confidence by purchasing $6.5 million of AmTrust

stock. Unfortunately, the market did not view Karfunkle’s gesture as significant relative to his

wealth (he’s reported to be a billionaire).

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64. On December 16, 2013, after the close of trading, AmTrust held an investor

conference call specifically to assuage investors’ concerns that it was concealing losses.

Zyskind and Pipoly denied the Geoinvesting report in a conclusory fashion, but failed address

Geoinvesting’s evidence showing that the sum of the losses reported by each AmTrust

subsidiary exceeded the consolidated losses reported in AmTrust’s 10K.

65. The market was convinced by AmTrust’s anemic response on December 16, to

the Geoinvesting report, and its failure to address Geoinvesting’s allegations meaningfully. As

a result, AmTrust’s share price dropped another $6.63/share or 20.2% on December 17 and

18.4

66. On January 2, 2014, AmTrust announced that it would repurchase $150 million

of its common stock in the open market in an effort to increase its stock price following the

share price drop caused by the Geoinvesting article.

67. AmTrust’s responses had the effect of maintaining the artificial inflation of its

share price resulting from its concealment of its incurred losses.

68. And while Zyskind and Pipoly vehemently denied in investor conference calls

held on December 16, 2013 and February 13, 2014 that AmTrust was concealing losses as

asserted by Geoinvesting, neither Zyskind, Pipoly, nor anyone else has ever attempted to

explain how it is even possible for the total losses incurred and reported by AmTrust’s

subsidiaries to be $289.9 million greater than the amount of incurred losses reported by

AmTrust in its consolidated financial statements filed with the SEC.

THE EVIDENCE SHOWING AMTRUST HAS CONCEALED LOSSES

No other significant AmTrust news was released between December 16 and December 18, 2013.

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69. Insurer companies authorized to do business in the United States and its territories are

required to prepare statutory financial statements in accordance with statutory accounting

principles (“SAP”) and file them annually with State insurance departments. Statutory

Accounting Principles are detailed within the National Association of Insurance

Commissioners (“NAIC”) Accounting Practices and Procedures Manual.

70. AII filed audited financial statements with the Bermuda Monetary Authority,

prepared in accordance with U.S. GAAP. AII is also required to file annual statutory financial

statements in Bermuda.

71. If an insurance company files false financial reports with a State insurance

department, including understating losses incurred, the insurance department may bring legal

proceedings against the company and its officers and directors, including seeking financial

sanctions and closure, liquidation or sale of the company. The same is true with Bermuda

regulators. Filing false financial reports with a State insurance department can be a crime.

72. The States maintain at the NAIC the world’s largest insurance financial

database, which provides a 30- year history of annual and quarterly filings on more than 5,200

insurance companies. Periodic financial examinations occur on a scheduled basis. 5 State

financial examiners investigate a company’s accounting methods, procedures and financial

statement presentation. These exams verify and validate what is presented in the company’s

annual statement to ascertain whether the company is in good financial standing. When an

examination of financial records shows the company to be financially impaired, the state

insurance department takes control of the company. Aggressively working with financially

troubled companies is a critical part of the regulator’s role. The examination by the state

5 Onsite exams usually occur at least once every three years.

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insurance department is much more detailed and comprehensive than is the scrutiny that the

SEC gives to a public company’s filings.

73. State and Bermuda insurance regulators scrutinize the statutory filings of

insurance companies very closely to ensure that the insurance companies are sufficiently

capitalized and capable of covering expected losses. If an insurer appears to a State insurance

department to be experiencing greater loss than it is financially capable of absorbing and

paying out, the State will take action to close down the insurer, liquidate it, appoint a receiver,

order it to obtain additional capital, find a sufficiently capitalized acquirer, or take such other

measure deemed appropriate to protect the insurance company’s policy holders, creditors and

other stakeholders.

74. Insurers who fail to comply with regulatory requirements are subject to license

suspension or revocation, and states may exact fines for regulatory violations. In a typical year

as many as 300 insurance companies have their licenses suspended or revoked.

75. A.M. Best is a US-based rating agency that focuses on the insurance industry.

Both the United States Securities and Exchange Commission and the National Association of

Insurance Commissioners have designated the company as a Nationally Recognized Statistical

Rating Organization (NRSRO) in the United States. A.M. Best issues financial-strength

ratings measuring insurance companies’ ability to pay claims. It also rates financial instruments

issued by insurance companies, such as bonds, notes, and securitization products

76. Geoinvesting obtained financial information as to the premiums written and

ceded by each of AmTrust’s subsidiaries for the years from 2009 through 2012.6 The reports

6 The regulatory filings include Schedule Y filed annually for AmTrust’s Technology Insurance Company – its largest domestic insurer and also audited 2010 financial statements for AII.

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also show the loss and loss adjusted expense incurred for each AmTrust subsidiary for fiscal

years 2010, 2011 and 2012.

77. The chart in ¶ 79 below shows the Net Premium Written (“NPW”), 7 the Net

Earned Premium (“NEP”) 8 and the Net Losses and Loss Adjusted Expense (“Net L/LAE”)

incurred for each of AmTrust’s insurance subsidiaries. The data for the US subsidiaries, AEL,

AIUL and AII were obtained from A.M. Best reports. The data for ACHL was obtained from

the Schedule Y that AmTrust’s Technology Insurance Company subsidiary files with the

National Association of Insurance Commissioners.

78. The loss and loss adjusted expense, as well as NPW and NEP, in the financial

reports AmTrust files with State and Bermuda insurance regulators are calculated in the

identical manner that loss and loss adjusted expense, NPW and NEP are calculated under U.S.

generally accepted accounting principles, which AmTrust is obligated to follow when it

consolidates and reports its financial statements with the SEC.

79. The NPW, NPE and Net L/LAE for each subsidiary is shown separately and

then totaled. The total amounts for NPW, NPE and Net L/LAE are then compared to the

amounts the totals for each item that AmTrust reports to the SEC in its annual financial

statements on Form 10-K. This comparison shows that AmTrust failed to report in its

consolidated financial statements $289.9 million of losses that it reported in its statutory

financial statements filed with State and Bermuda insurance regulators.

7 Net Written Premium is gross written premium less that portion of premium that AmTrust cedes to third party reinsurers under reinsurance agreements. 8 Net Earned Premium is the earned portion of net written premiums.

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Total per AM Best

and 10K 2012 NPE & LAE US Subs AEL AIUL AII ACHL Sched. Y Consolidated Difference NPW 487.20 190.08 40.95 934.67 - 1,652.90 1,648.04 (4.86)

NPE 403.10 163.91 34.64 821.37 - 1,423.02 1,418.85 (4.17)

Net L/LAE 291.05 95.03 31.30 535.08 86.91 1,039.37 922.68 (116.70)

Source: AM Best AM Best AM Best AM Best TIC Sched Y

N/A 10K N/A

Total per AM Best

and 10K 2011 NPE & LAE US Subs AEL AIUL AII ACHL Sched. Y Consolidated Difference NPW 361.63 172.32 33.09 701.40 - 1,268.44 1,276.60 8.15

NPE 302.05 128.05 29.08 568.70 - 1,027.88 1,036.86 8.98

Net L/LAE 232.25 51.78 26.72 373.83 96.06 780.63 678.33 (102.30)

Source: AM Best AM Best AM Best AM Best TICSched Y

N/A 10K N/A

2010 NPE & LAE USSubs NPW 289.04

NPE 255.37

Net L/LAE 174.31

AEL AIUL AII 95.23 29.72 412.03

67.55 25.47 395.04

28.97 27.52 249.53

ACHL ‐

62.12

Total per AM Best

& Sched. 10K Y Consolidated Difference

826.02 827.23 1.21

743.44 745.66 2.22

542.45 471.48 r (70.97)

80. For each fiscal year, the total NPW and NPE from A.M. Best and Schedule Y

match the total NPW and NPE that AmTrust reported in its consolidated financial statements in

its 10K.

81. However, in its 10-Ks for 2010 through 2012, AmTrust reported total Net

L/LAE that was materially lower than the total Net L/LAE that AmTrust’s subsidiaries

reported to State and Bermuda regulators as reported in AM Best and Schedule Y. 9

9 AII’s audited financial statements show $62.1 million of losses being ceded to ACHL and that no premiums were ceded to ACHL by AII. This matches and confirms the accuracy of the Net L/LAE figures reported in the Schedule Y. In addition, the NPW and NPE reported in AII’s audited financial statements, which do not consolidate ACHL, match the NPW and NPE reported by AM Best. This shows that AM Best used the same financial information in AII’s

19


82. Thus, AmTrust understated its Net L/LAE in its 10-K by approximately $70.97

million, $102.3 million and $116.7 million for fiscal years 2010, 2011 and 2012 respectively.

83. Had AmTrust reported Net L/LAE in its 10-K in the same amounts as it did in

its State and Bermuda filings, its net income would have been reduced by 49%, 54% and 61%

in 2010, 2011 and 2012 respectively – all very material reductions in net income.

84. Given that the NPW and NPE totals from AM Best and Schedule Y for

AmTrust’s subsidiaries match up to the 10-K consolidated totals almost exactly with only an

immaterial difference of between 0.1% and 0.9%, the Net L/LAE totals from AM Best and

Schedule Y should also match the 10-K consolidated totals. However, the Net L/LAE totals

differ by 15.1% in 2010 and 2011 and by 12.1% in 2012.

85. AmTrust therefore understated its Net L/LAE in its 10-K by material amounts.

86. A similar comparison of the balance sheet items Net L/LEA Reserves 10 and Net

Unearned Premium 11 reported in AmTrust’s fiscal 2010 10K against the figures reported for

each AmTrust subsidiary in AM Best and AII’s audited financial statements confirms that

AmTrust is understating the extent of its losses.

audited financial statements when preparing its reports and that it did not include ACHL’s financial statements when reporting the financial statements of AII. 10 Reserves for insurance losses and loss adjustment expenses are established for the unpaid cost of insured events that have occurred as of a point in time. More specifically, the reserves for insurance losses and loss adjustment expenses represent the accumulation of estimates for both reported losses and those incurred but not reported, including claims adjustment expenses relating to direct insurance and assumed reinsurance agreements. 11 Net Unearned Premium is the premium corresponding to the time period remaining on an insurance policy, less that portion ceded to reinsurers under reinsurance agreements. Unearned premiums are proportionate to the unexpired portion of the risk, for which coverage has been sought by the insured party. Thus, it is deemed to have not yet been earned by the insurer. It appears as a liability on the insurer's balance sheet, as it would have to be paid back upon cancellation of the insurance policy.

20


87. Net L/LEA Reserves are calculated as: [Loss and Loss Expense Reserves] +

[reinsurance payable] – [Reinsurance Recoverable]. 12

88. The following chart shows how the total of net loss reserves reported by

AmTrust’s subsidiaries are materially greater than the net loss reserves reported by AmTrust

when it consolidates those subsidiaries and reports the results in its Form 10-K filed with the

SEC.

2010 US Subs AEL AIUL AII ACIIL Net L/LAE Reserves 223.40 20.70 9.90 244.90 93.98 Net Unearned Premium 192.09 60.72 25.90 261.08 0.00

Source: AM Best AM Best AM Best AM Best & AII Financials

Total per AM Best

10K & AII Financials

Consolidated Difference

592.88

499.45 93.43

539.79 540.01 -0.22 10K

AII Financials

89. Given that the Net Unearned Premiums reported by each subsidiary match the

total Net Unearned Premiums reported in AmTrust’s consolidated financial statements, but the

Net loss and loss adjusted reserves are $93.43 million greater for the unconsolidated

subsidiaries, this provides further evidence that AmTrust is not recognizing the true amount of

its losses in its consolidated financial statement.

90. The amount of AmTrust’s loss and loss adjusted expense, its loss ratios, as well

as its loss and loss adjusted reserves are key financial performance metrics that are

fundamental to the core operations of the Company. Zyskind and Pipoly as CEO and CFO

knew of contemporaneous facts, and had access to and reviewed, the financial reports filed

with State and Bermuda insurance regulators showing that AmTrust’s loss and loss adjusted

12 The loss and loss adjusted reserves and net unearned premium amounts in the financial reports AmTrust files with State and Bermuda insurance regulators is calculated in the identical manner that loss and loss adjusted reserves is calculated under U.S. generally accepted accounting principles which AmTrust is obligated to follow when it consolidates and reports its financial statements filed with the SEC.

21


expense was $289.9 million greater for fiscal 2010-2012, than AmTrust reported in its

consolidated financial statements for that same period. 13

GEOINVESTING’S HYPOTHESIS AS TO THE MECHANISM OF AMTRUST’S

UNDERSTATEMENT OF LOSSES NEED NOT BE ESTABLISHED

91. Based on the discrepancies between the total Net L/LAE reported to State and

Bermuda insurance regulators and those totals reported in AmTrust’s 10K for fiscal 2010-

2012, Geoinvesting hypothesized that AmTrust was making these losses “disappear” by ceding

them to its Luxembourg subsidiaries. Geoinvesting believed that ACHL was using its

equalization reserves to absorb the losses which is permissible under Luxembourg GAAP, but

was not consolidating these losses as required under US GAAP in AmTrust’s consolidated

financial statements in its 10-K.

92. The reason Geoinvesting believed the Luxembourg subsidiaries accounting was

the source of the “disappearance” is that the losses ceded to ACHL represented 87.5%, 93.9%

and 74.5% of the discrepancy in 2010 through 2012 respectively, together with the fact that

ACHL has the equalization balances that are used to “smooth” or absorb losses.

93. AmTrust states that its Bermuda subsidiary, AII, cedes up to $100 million of

loss each year (without ceding associated premium) through a stop-loss agreement. The

$289.9 million of concealed losses from 2010 to 2012 nearly matches the $300 million of loss

that may be ceded to Luxembourg subsidiaries over the same three year period.

94. In addition, the aggregate amount of loss and loss adjusted reserves reported by

AmTrust’s individual subsidiaries to State and Bermuda insurance regulators was $93.43

13 Zyskind served as president of Technology Insurance Company and Rochdale Insurance Company, and reviewed and/or signed its statutory filings with State insurance departments.

22


million greater than the amount AmTrust reported in its consolidated financial statements on

Form 10-K filed with the SEC. The Schedule Y showed that nearly an identical amount of loss

and loss adjusted reserves ($93.98 million) was reported at ACHL – further pointing to the

Luxembourg subsidiaries as the source of the discrepancies.

95. Whether AmTrust engaged in accounting machinations in its Luxembourg

subsidiaries to conceal or eliminate these losses or whether it engaged in some different or

additional accounting machinations in its other subsidiaries does not change the fact that

AmTrust mislead its investors. Whatever accounting machinations AmTrust employed, the

end result is that AmTrust understated its losses in its insurance business in its consolidated

financial statements by $289.9 million from 2010 to 2012.

96. Whether or not AmTrust’s financial statements complied technically with

GAAP (and it isn’t clear yet) does not determine whether or not AmTrust misled investors.

AmTrust painted a false picture of its financial performance by understating its losses and

misrepresenting key financial performance metrics.

97. By concealing or eliminating $289.9 million of losses incurred in its

subsidiaries from 2010 to 2012, and not recognizing those same losses when consolidating its

financial statements, AmTrust misleadingly represented its insurance operations as highly

profitable, when in fact, they were not.

ADDITIONAL EVIDENCE THAT AMTRUST IS CONCEALING ITS TRUE LOSSES

98. AmTrust is a relative newcomer to the insurance industry, having been

incorporated in 1998. It has been run for the last 9 years by Barry Zyskind who today has a

total of 16 years of experience in the insurance industry.

23


99. AmTrust claims to miraculously have materially lower loss ratios than its

competitors – many who have been in the industry for fifty or more years.

100. Notwithstanding that AmTrust’s business is “green”, that is relatively new

compared to the rest of the industry, AmTrust has consistently claimed to materially out-

perform the industry by having a loss ratio substantially less than the industry average. A loss

ratio is the ratio of incurred losses to earned premium. It is an important metric as to whether

an insurer is underwriting risk profitably.

101. From 2007 through 2012, for its US subsidiaries, AmTrust has consistently had

a loss ratio well below that of the industry average, resulting in its reporting losses much lower

than had its loss ratio been at the industry average.

Year 2007 2008 2009 2010 2011 2012

Net Earned Premium 446,236 439,097 573,882 745,659

1,036,861 1,418,852

Industry AmTrust Loss Ratio Loss Ratio

67.8% 62.4%

77.1% 54.3%

72.0% 57.1%

73.7% 63.2%

79.5% 65.4%

74.3% 65.0%

Percentage Absolute % Difference Difference

8.0% 5.4%

29.6% 22.8%

20.7% 14.9%

14.2% 10.5%

17.7% 14.1%

12.5% 9.3%

Dollar difference

24,097 100,114 85,508 78,294

146,197 131,953

566,163

102. The above chart 14 shows that AmTrust has consistently reported much lower

loss as a percentage of net earned policy premium than its competitors. Exhibit F (attached

hereto) presents similar data for fiscal years 2008 through 2012. Exhibit G shows that when

one examines in isolation AmTrust’s domestic loss ratio, it has also been consistently and

suspiciously lower than the industry average.

14 Data from AM Best and SEC filings. Numbers in 000’s. Industry average loss ratios are for U.S. business only. Tower and AmTrust have non-U.S. exposure.

24


103. But given that insurance underwriting is based on the law of large numbers,

there is absolutely no basis to believe that the workers, products or property that AmTrust

insures will be injured less, break less or be damaged less than those that its competitors insure.

Nor is there any basis to suggest that AmTrust is able to charge more for its policies. On the

contrary, in order to achieve such spectacular growth in gross premiums written, in the last ten

years, AmTrust has consistently been underpricing its policies relative to its competitors.

104. The extent of AmTrust’s failure to select realistic actuarial loss estimates (loss

ratios) and book realistic reserves is quantified and fully appreciated by looking at its stated

reserves at year end 2012, which were $2,426,400,000. Had AmTrust calculated and reported

its loss reserves using the industry average loss ratio during the period 2007-2012, its loss

reserves would have been $2,992,563,000. This means that had AmTrust used the same

industry average loss ratios to calculate its reserves that most of its competitors use, it would

have reported an additional $566,163,000 in losses from 2007 to 2012.

105. The most logical explanation for AmTrust’s “too good to be true” loss

performance is that it is improperly concealing or eliminating incurred losses through

undisclosed accounting machinations.

106. One good example of another insurance company that had “too good to be true”

loss ratios is Tower Group International, Ltd., which recently collapsed like a house of cards

(stock down over 90%) and is headed towards bankruptcy. Tower reported that it would have

to take at least an additional $470 million of incurred net losses. Tower also consistently

reported much lower loss ratios than the industry in the same period, as the chart below

demonstrates.

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Tower Insurance Group

Net Earned Year Premium 2007 286,106 2008 314,551 2009 854,711 2010 1,292,669 2011 1,593,850 2012 1,721,542

Industry Loss Ratio

67.8% 77.1% 72.0% 73.7% 79.5% 74.3%

Tower Loss Percentage Absolute % Ratio Difference Difference

55.2% 18.6% 12.6%

51.7% 32.9% 25.4%

55.6% 22.8% 16.4%

60.6% 17.8% 13.1%

68.5% 13.8% 11.0%

72.8% 2.0% 1.5%

Dollar difference

36,049 79,896

140,173 169,340 175,324 25,823

626,605

107. Meadowbrook Insurance Group, Inc., another publicly traded insurance

company was blessed by similarly below industry average loss ratios for the period from 2007

through 2011. Meadowbrook ran into trouble in August 2013, when it was downgraded

several times and forced to take an impairment charge of $115.4 million. Meadowbrook

suffered an operating loss for fiscal 2013, and had adverse reserve development of $68.4

million. The following chart shows Meadowbrook’s loss ratios from 2007 through 2012.

Meadowbrook Insurance Group

Year 2007 2008 2009 2010 2011 2012

Net Earned Premium 268,197 369,721 539,602 659,840 747,635 854,259

Industry Meadowbrook Percentage Absolute % Loss Ratio Loss Ratio Difference Difference

67.8% 61.2% 9.7% 6.6%

77.1% 62.0% 19.6% 15.1%

72.0% 60.7% 15.7% 11.3%

73.7% 60.6% 17.8% 13.1%

79.5% 66.3% 16.6% 13.2%

74.3% 79.3% -6.7% -5.0%

Dollar difference

17,701 55,828 60,975 86,439 98,688

(42,713)

276,918

108. Thus, Tower and Meadowbrook are examples what will likely befall AmTrust.

109

When something seems too good to be true, it usually is. That is how and why

Harry Markopolos first detected and then alerted the SEC to Bernie Madoff’s Ponzi scheme in

May 2000. However, the SEC failed to appreciate this evidence and Madoff continued to

26


defraud investors for eight more years. Subsequently, Markopolos testified before Congress

that this was like a baseball player batting .966 for the season "and no one suspecting a cheat."

110. One of the reasons AmTrust must find a way to conceal its incurred losses is

because it selects such unreasonably generous actuarial assumptions as to the ultimate losses it

expects its policies to incur. As these unreasonable assumptions generate larger than

anticipated losses, AmTrust must find a way to conceal them.

111. “Incurred but not reported losses” known as “IBNR” is a balance sheet liability

that represents the estimated liability for future payments on losses which have already

occurred but have not yet been reported. In AmTrust’s case, IBNR reserves also include

aggregate changes in case incurred losses as well as the unpaid cost of recently reported claims

for which an initial case reserve has not yet been established.

112. To the extent IBNR loss reserves are understated, earnings are overstated.

113. AmTrust has consistently selected IBNR loss estimates that conceal its true

losses.

114. For example, analysis of the IBNR amounts AmTrust's Technology Insurance

Company (“TIC”) selects for its workers compensation policies shows that AmTrust selects

IBNR amounts at levels materially lower than industry data would indicate is appropriate. The

following chart shows TIC's IBNR, and what its IBNR would be if it utilized the US average

27


(countrywide) or California only IBNR factors. 15

IBNR Analysis (000's)

TIC Net Countrywide California

Year IBNR IBNR IBNR 2007 454 2,338 6,177 2008 934 3,078 8,405 2009 1,094 5,442 14,721 2010 1,974 7,232 19,348 2011 5,527 11,256 27,718

2012 14,717 22,298 50,072

2013 64,731 60,140 101,125

89,431 111,784 227,566

115. The chart shows that if AmTrust had selected industry average actuarial

estimates for its IBNR loss reserves, it would have reported at least $22.4 million greater loss

from 2007 through 2013. However, given that more than 25% of its worker’s compensation

business is in California, its additional IBNR losses would have been at least $52.4 million

greater.

116. AmTrust’s too good to be true performance is also shown by Exhibit A, which

visually shows that while the rest of the worker’s compensation insurance industry’s premium

revenue was shrinking materially from 2006 through 2013, AmTrust grew its premium revenue

by over 400%. AmTrust accomplished this incredible growth in a very “soft” or competitive

market, where the pricing for the same risk was dropping lower – meaning insurers’ were

insuring the same risk for less premium and less profit. Exhibits B and C show the industry

15 The TIC IBNR figures are reported in Schedule P, Part 1D, Workers Compensation part of its 2013 Annual Statement. Countrywide and California IBNR figures are derived by applying National Council on Compensation Insurance (“NCCI”) loss development factors to TIC’s stated ultimate net loss. For example, based upon TIC’s projected 2007 ultimate losses, NCCI (industry) data indicates TIC should have IBNR reserves equal to $2,338,000 vs. the $454,000 it actually reported.

28


average rate levels for new workers compensation and general lines insurance policies were

dropping from the 2006 base year, stabilized in 2006, but still remained materially lower than

the 2006 base year through 2013.

117. At the same time that its policies were being sold cheaper in the market

(insuring the same risk for less money) and AmTrust’s premium revenue was quadrupling,

AmTrust consistently reported materially lower losses per dollar of premium than the industry

average from 2006 to 2013.

118. Exhibits D (chart) and E (graph), show that AmTrust’s net loss ratio for its

worker’s compensation business was consistently and substantially lower than its competitors.

It is implausible to grow exponentially in a shrinking market without underpricing the

competition. And the competition reports that AmTrust has been consistently underpricing its

competitors to gain market share during this time frame. AmTrust’s lower revenue per

assumed risk cannot result in such consistently lower net loss ratios, particularly given its

400% growth in a shrinking market.

119. Not surprisingly, Tower Group also racked up tremendous premium growth,

while policy rate levels were shrinking during the same time frame. See Exhibit H. Tower

reported similarly miraculous below industry average loss ratios, while it racked up double

digit premium growth from 2006 to 2012. See Exhibit I. Tower’s miracle ended up badly with

its stock down 90%, insurance regulators threatening to take it over, and it desperately seeking

another insurer to acquire it.

120. AmTrust claims that in a market where it’s policies were being sold cheaper

each year, and total premium revenue in the market shrunk, it was nonetheless able to grow its

29


premium revenue 400%, while maintaining an annual loss ratio that was between 12% and

30% lower than the industry average.

121. AmTrust has represented to investors that it accomplished the impossible. Its

reported financial performance is just that.

AMTRUST HAD SUBSTANTIAL MOTIVE TO CONCEAL ITS LOSSES

122. AmTrust had a motive to conceal its losses and inflate its net income because it

completed a number of stock, note, and bond offerings during the Class Period.

123. In addition its bank borrowings and lines of credit required it to maintain

financial metrics that would have been violated had the losses not been concealed.

124. In December 2011, the Company issued $175,000,000 aggregate principal

amount of 5.50% convertible senior notes in a private placement.

125. During February 2011, AmTrust entered into a seven year secured loan

agreement in the aggregate amount of $10.8 million

126. During third quarter of 2011, AmTrust entered into a letter of credit facility for

$75.0 million

127. Also during 2011, AmTrust issued $298 million of new debt.

128. During 2012, AmTrust issued $25 million of new debt.

129. In September 2012, the Company entered into two promissory notes totaling

$8,000,000.

130. In June 2013, AmTrust offered and sold $115 million of Series A preferred

stock to investors in the Preferred Offering.

131. All told, during the Class Period, AmTrust obtained over $600 million of equity

and debt financing by understating its losses and overstating net income.

30


ZYSKIND AND PIPOLY HAD FINANCIAL MOTIVE TO CONCEAL LOSSES

132. Zyskind and Pipoly both receive bonuses and incentive compensation tied to

AmTrust’s reported profit levels creating a strong motive for them to conceal AmTrust’s

losses.

133. Mr. Zyskind is entitled to an annual profit bonus equal to two percent (2%) of

AmTrust’s pre-tax profit if certain financial goals are met, subject to a cap equal to four times

his salary.

134. Mr. Pipoly receives a similar annual profit bonus, though he has no specific

target or threshold.

135. A chart showing the incentive compensation earned by Zyskind and Pipoly

resulting from understating AmTrust’s losses is set forth below.

Barry D. Zyskind 2013 $ 2012 2011 2010 -

Total $

Incentive Plan Bonus Stock Awards Compensation

- $ - $ 3,900,000 - 14,177,500 2,925,000 - - 2,925,000 - - 2,925,000

- $ 14,177,500 $ 12,675,000

Total $ 3,900,000 $ 17,102,500 $ 2,925,000 $ 2,925,000

$ 26,852,500

Ronald Pipoly 2013 $ 200,000 2012 133,333 2011 - 2010 -

Total $ 333,333

$ 700,007 566,679 500,092 509,222

$ 2,276,000

$ 1,400,000 1,000,000 1,000,000

733,334

$ 4,133,334

$ 2,300,007 $ 1,700,012 $ 1,500,092 $ 1,242,556

$ 6,742,667

136. Zyskind earned $12.7 million cash in incentive plan compensation directly tied

to a percentage of AmTrust’s profits. In addition he earned $14.2 million of restricted stock

awards in 2012 based on AmTrust’s financial performance. This included 275,000

“performance shares”.

31


137. Pipoly earned $4.1 million of incentive plan compensation, though not

specifically tied to a percentage of AmTrust’s profits, it was directly related to, and dependent

on, AmTrust earning a profit in each of those years.

PLAINTIFFS’ CLASS ACTION ALLEGATIONS

138. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or

otherwise acquired AmTrust securities during the Class Period (the "Class"); and were

damaged thereby. Excluded from the Class are defendants herein, the officers and directors of

the Company, at all relevant times, members of their immediate families and their legal

representatives, heirs, successors or assigns and any entity in which defendants have or had a

controlling interest.

139. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, AmTrust securities were actively traded on the

NASDAQ and NYSE. While the exact number of Class members is unknown to Plaintiff at

this time and can be ascertained only through appropriate discovery, Plaintiff believes that

there are hundreds or thousands of members in the proposed Class. Record owners and other

members of the Class may be identified from records maintained by AmTrust or its transfer

agent and may be notified of the pendency of this action by mail, using the form of notice

similar to that customarily used in securities class actions.

140. Plaintiffs’ claims are typical of the claims of the members of the Class as all

members of the Class are similarly affected by defendants' wrongful conduct in violation of

federal law that is complained of herein.

32


141. Plaintiffs will fairly and adequately protect the interests of the members of the

Class and have retained counsel competent and experienced in class and securities litigation.

Plaintiffs have no interests antagonistic to or in conflict with those of the Class.

142. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

• whether the federal securities laws were violated by defendants’ acts as alleged herein;

• whether statements made by defendants to the investing public during the Class Period misrepresented material facts about the business, operations and management of AmTrust;

• whether the Individual Defendants caused AmTrust to issue false and misleading financial statements during the Class Period;

• whether defendants acted knowingly or recklessly in issuing false and misleading financial statements;

• whether the prices of AmTrust securities during the Class Period were artificially inflated because of the defendants’ conduct complained of herein; and

• whether the members of the Class have sustained damages and, if so, what is the proper measure of damages.

143. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as

the damages suffered by individual Class members may be relatively small, the expense and

burden of individual litigation make it impossible for members of the Class to individually

redress the wrongs done to them. There will be no difficulty in the management of this action

as a class action.

33


PRESUMPTION OF RELIANCE

144. Plaintiffs will rely, in part, upon the presumption of reliance established by the

fraud-on-the-market doctrine in that:

• AmTrust’s common and Series A preferred stock met the requirements for listing, and were listed and actively traded on the Nasdaq and NYSE respectively, both highly efficient markets;

• AmTrust’s common and Series A shares were liquid and traded with moderate to heavy volume during the Class Period: Its common shares’ average weekly trading volume as a percentage of the float was 5.3%, and its Series A shares’ average weekly trading volume as a percentage of the float was 3.2% during the Class Period;

• More than five analyst firms regularly issued research reports on AmTrust that were disseminated to investors in the market during the Class Period;

• As a regulated issuer, AmTrust filed periodic public reports with the SEC and was eligible S-3 registration statements during the Class Period;

• AmTrust regularly communicated with public investors via established market communication mechanisms, including through regular dissemination of press releases on the national circuits of major newswire services and through other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services;

• Unexpected material news about AmTrust was rapidly reflected in and incorporated into the its common stock and Series A preferred stock price during the Class Period; and

• There were several dozens of market makers for AmTrust’s common stock on the Nasdaq, and there was a Designated Market Maker for the Series A preferred stock on the NYSE at all times during the Class Period.

145. Based upon the foregoing, Plaintiffs and the members of the Class are entitled

to a presumption of reliance upon the integrity of the market.

COUNT I

(Against All Defendants For Violations of Section 10(b) And Rule 10b-5 Promulgated Thereunder)

146. Plaintiffs repeat and reallege each and every allegation contained above as if

fully set forth herein.

34


147. This Count is asserted against defendants and is based upon Section 10(b) of

the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the SEC.

148. During the Class Period, defendants made various untrue statements of material

facts and omitted to state material facts necessary in order to make the statements made, in

light of the circumstances under which they were made, not misleading in connection with the

purchase and sale of securities.

149. Defendants participated directly in the preparation and/or issuance of the annual

reports, SEC filings, press releases and other statements and documents described above,

including statements made to securities analysts and the media that were designed to influence

the market for AmTrust securities. Such reports, filings, releases and statements were

materially false and misleading in that they failed to disclose material adverse information and

inaccurately represented AmTrust's financial and business performance.

150. By virtue of their positions at AmTrust, defendants had actual knowledge of the

materially inaccurate and misleading statements and material omissions alleged herein, or, in

the alternative, defendants acted with reckless disregard for the truth in that they failed or

refused to ascertain and disclose such facts as would reveal the materially false and misleading

nature of the statements made, although such facts were readily available to defendants. Said

acts and omissions of defendants were committed with reckless disregard for the truth. In

addition, each defendant knew or recklessly disregarded that material facts were being

misrepresented or omitted as described above.

151. Information showing that defendants acted knowingly or with reckless

disregard for the truth is peculiarly within defendants' knowledge and control. As the senior

35


officers of AmTrust, the Individual Defendants had knowledge of the details of AmTrust's

internal financial affairs.

152. The Individual Defendants are liable both directly and indirectly for the wrongs

complained of herein. Because of their positions of control and authority, the Individual

Defendants were able to and did, directly or indirectly, control the content of the statements of

AmTrust. As officers of a publicly-held company, the Individual Defendants had a duty to

disseminate timely, accurate, and truthful information with respect to AmTrust's businesses,

operations, future financial condition and future prospects. As a result of the dissemination of

the aforementioned false and misleading reports, releases and public statements, the market

price of AmTrust securities was artificially inflated throughout the Class Period.

153. In ignorance of the adverse facts concerning AmTrust's business and financial

condition which were concealed by defendants, Plaintiffs and the other members of the Class

purchased AmTrust securities at artificially inflated prices and relied upon the price of the

securities, the integrity of the market for the securities and/or upon statements disseminated by

defendants, and were damaged thereby.

154. By reason of the conduct alleged herein, defendants knowingly or recklessly,

directly or indirectly, have violated Section 10(b) of the Exchange Act and Rule 10b-5

promulgated thereunder.

155. As a direct and proximate result of defendants' wrongful conduct, Plaintiffs and

the other members of the Class suffered damages in connection with their respective purchases

and sales of the Company's securities during the Class Period, upon the disclosure that the

Company had been disseminating inaccurate financial statements to the investing public.

36


156. This action was timely filed within two years of discovery of the inaccurate and

misleading financial statements and within five years of the dates of purchase of the subject

securities.

COUNT II

(Violations of Section 20(a) of the Exchange Act Against The Individual Defendants)

157. Plaintiffs repeat and reallege each and every allegation contained in the

foregoing paragraphs as if fully set forth herein.

158. During the Class Period, the Individual Defendants participated in the operation

and management of AmTrust, and conducted and participated, directly and indirectly, in the

conduct of AmTrust's business affairs. Because of their senior positions, they knew the adverse

non-public information about AmTrust's financial statements.

159. As officers and/or directors of a publicly owned company, the Individual

Defendants had a duty to disseminate accurate and truthful information with respect to

AmTrust's financial condition and results of operations, and to correct promptly any public

statements issued by AmTrust which had become materially false or misleading.

160. Because of their positions of control and authority as senior officers, the

Individual Defendants were able to, and did, control the contents of the various reports, press

releases and public filings which AmTrust disseminated in the marketplace during the Class

Period concerning AmTrust's results of operations.

161. Throughout the Class Period, the Individual Defendants exercised their power

and authority to cause AmTrust to engage in the wrongful acts complained of herein. The

Individual Defendants therefore, were "controlling persons" of AmTrust within the meaning of

37


Section 20(a) of the Exchange Act. In this capacity, they participated in the unlawful conduct

alleged which artificially inflated the market price of AmTrust securities.

162. Each of the Individual Defendants, therefore, acted as a controlling person of

AmTrust. By reason of their senior management positions and/or being directors of AmTrust,

each of the Individual Defendants had the power to direct the actions of, and exercised the

same to cause, AmTrust to engage in the unlawful acts and conduct complained of herein. Each

of the Individual Defendants exercised control over the general operations of AmTrust and

possessed the power to control the specific activities which comprise the primary violations

about which Plaintiff and the other members of the Class complain.

163. This action was timely filed within two years of discovery of the inaccurate and

misleading financial statements and within five years of the dates of purchase of the subject

securities.

164. By reason of the above conduct, the Individual Defendants are liable pursuant to

Section 20(a) of the Exchange Act for the violations committed by AmTrust.

COUNT III

(Violation of Section 11 of the 1933 Act

Against All Defendants)

165. Plaintiffs repeat and incorporate each allegation contained above as if fully set

forth herein.

166. This Count does not sound in fraud. Any proceeding allegations that might

imply fraud, fraudulent conduct, or improper motive are specifically excluded from this Count.

In this Count, Plaintiffs do not allege that Defendants had scienter or fraudulent intent, which

are not elements of this claim.

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167. This Count is brought by Schapiro against all Defendants, pursuant to Section

11 of the 1933 Act on behalf of a subclass of persons who acquired shares of the Company’s

Series A preferred stock in or traceable to the Preferred Offering pursuant to the false

prospectus and registration statement issued in connection with the Preferred Offering.

168. The prospectus and registration statement for the Preferred Offering contained

untrue statements of material facts, omitted to state other facts necessary to make the statement

made not misleading, and/or omitted to state material facts required to be stated therein.

169. The defendants named herein were responsible for the content of the prospectus

and registration statement for the Preferred Offering.

170. Zyskind and Pipoly signed the registration statement.

171. None of the defendants named herein made a reasonable investigation or

possessed reasonable grounds for the belief that the statements contained in the prospectus and

registration statement were true and without omissions of any material facts and were not

misleading.

172. By reasons of the conduct herein alleged, each defendant violated Section 11 of

the 1933 Act.

173. Schapiro and other purchasers of the Series A preferred shares sustained

damages in that the value of AmTrust shares declined substantially subsequent to and because

of defendants’ wrongful conduct and violations of the law.

174. At the time of their purchases of AmTrust’s Series A preferred stock, Schapiro

and other members of the Securities Act subclass were without knowledge of the facts

concerning the untrue statements or omissions herein and could not have reasonably

discovered those facts until just prior to the date of the filing of the initial complaint herein.

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175. By virtue of the foregoing, Schapiro and the other members of the Securities

Act subclass are entitled to damages from these defendants and each of them, jointly and

severally.

176. This claim is timely, as Plaintiffs’ Consolidated Complaint For Violations Of

The Federal Securities Laws was filed within one year after the Preferred Offering and within

one year after Schapiro discovered or reasonably could have discovered the untrue statements

and omissions in the Preferred Offering prospectus and registration statement, thereby tolling

and complying with the statute of limitations under Section 13.

PRAYER FOR RELIEF

A. Determining that the instant action may be considered a class action under Rule

23 or the Federal Rules of Civil Procedure, and certifying Plaintiffs as Class representatives;

B. Requiring defendants to pay damages sustained by Plaintiffs and the Class by

reason of the acts and transactions alleged herein;

C. Awarding Plaintiff and the other members of the Class prejudgment and post

judgment interest; and

D. Awarding such other and further relief as this Court may deem just and proper.

DEMAND FOR TRIAL BY JURY

Plaintiffs hereby demand a trial by jury.

Dated: July 7, 2014 THE ROSEN LAW FIRM P.A.

/s/ Laurence Rosen

Laurence Rosen Phillip Kim Sara Fuks 275 Madison Avenue, 34th Floor

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New York, NY 10016 Telephone: (212) 686-1060 Facsimile: (212) 202-3827 [email protected] [email protected] [email protected]

POMERANTZ LLP Marc I. Gross Jeremy A. Lieberman Michelle Carino 600 Third Avenue, 20th Floor New York, New York 10016 Telephone: (212) 661-1100 Facsimile: (212) 661-8665 [email protected] [email protected]

Lead Counsel for Plaintiffs and the Class

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PROOF OF SERVICE BY ELECTRONIC POSTING PURSUANT TO THE SOUTHERN DISTRICT OF NEW YORK ECF AND LOCAL RULES

I, the undersigned say:

I am a citizen of the United States and am a member of the Bar of this Court. I am over the age of 18 and not a party to the within action. My business address is 275 Madison Avenue, 34 th

Floor, New York, NY 10016.

On July 7, 2014 I caused to be served the following document:

CONSOLIDATED AMENDED CLASS ACTION COMPLAINT

By posting the document electronically to the ECF website of the United States District Court for the Southern District of New York, for receipt electronically by the parties registered to the Court’s CM/ECF system.

I certify under penalty of perjury under the laws of the United States of America that the foregoing is true and correct. Executed on July 7, 2014, at New York, New York.

/s/ Laurence M. Rosen

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Documents

Case 1:14-cv-00736-VEC Document 29 Filed 07/07/14 Page …securities.stanford.edu/filings-documents/1051/AFSI00_01/201477_r... · Michael Harris and Stuart Schapiro ) Individually