A federal appeals court yesterday reinstated a 2004 securities class-action against The Hartford that alleged stockholders were misled because the company did not disclose it paid insurance brokers kickbacks in the form of contingency fees to win business.

The decision by the 2nd U.S. Circuit Court of Appeals in New York throws out a ruling by U.S. District Court Judge Christopher F. Droney in Hartford, Conn., and remands the case for trial. Judge Droney dismissed the case in 2006, finding that the statute of limitations had run out for the plaintiffs to file an action.

Other grounds for dismissal raised by The Hartford were not ruled on by Judge Droney, and the appeals court also did decide on them.

Plaintiffs in the case–Staehr vs. The Hartford Financial Services Group Inc.–include the Alaska Laborers Employers Retirement Fund and The Communication Workers of America Plan for Employees' Pensions and Death Benefits.

Their action was brought against the insurer on Oct. 15, 2004–the day after New York's attorney general at the time, Eliot Spitzer, filed his lawsuit against the Marsh brokerage, charging brokers were fixing commercial insurance prices in exchange for kickbacks paid as contingency fees by major insurers including The Hartford and American International Group.

The Hartford immediately ceased paying contingency fees after the New York suit. It argued that the two-year time limit for a stockholders lawsuit had run out because prior legal actions and news accounts in National Underwriter and elsewhere years before should have alerted stockholders to the activity they complained about.

In a decision written by Judge Colleen McMahon, the appeals court said it agreed with the plaintiffs' argument that The Hartford material to support this claim was “too vague and non-specific to suggest to an investor of ordinary intelligence the probability of fraud by The Hartford.”

According to the Appeals Court, The Hartford admitted that in 2003 alone it had paid $145 million in contingency fee kickbacks.

Shareholders alleged they were misled because they believed they were investing in a company whose success and high stock price was premised on the strength of its business, when it was in fact the product of kickbacks and bid-rigging schemes that were not disclosed to investors.

Their complaint charged that The Hartford was able to report earned premium growth and high premium renewal retention rates directly as a result of Hartford's involvement with the brokers in the commission kickbacks and bid-rigging schemes.

The appeals court disagreed with Judge Droney's conclusion that the total mix of information before him was sufficient to rule, as a matter of law, that an investor of ordinary intelligence was on inquiry notice of The Hartford's allegedly fraudulent conduct by July 2001.

Among its evidence, the insurer submitted four articles from general news outlets and 13 from trade publications such as National Underwriter, which dealt with controversy over contingent commissions.

Among all the publications, only one article from National Underwriter actually mentioned The Hartford, and it was not specific enough to alert investors, the court found.

Nearly all of the stories in the record “are devoid of company-specific information,” thus “the argument that they constitute 'storm warnings' is far from compelling,” the court found. In addition, the court said a 2001 lawsuit filed in San Francisco, which made many of allegations later charged by the stockholders, was not “reasonably accessible to an ordinary investor.”

The Hartford, before the case was dismissed in District Court on statute-of-limitations grounds, had also argued that:

o The alleged omissions concerning its activities were immaterial.

o Loss causation could not be established.

o The complaint failed to allege the company had “scienter”–that is, requisite knowledge of the wrongness or illegality of an act.

o The suit could not establish control-person liability against individual defendants.

Special Reports /

Kickback Case Reinstated Against The Hartford

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