A federal appeals court yesterday reinstated a 2004 securitiesclass-action against The Hartford that alleged stockholders weremisled because the company did not disclose it paid insurancebrokers kickbacks in the form of contingency fees to winbusiness.

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

Other grounds for dismissal raised by The Hartford were notruled on by Judge Droney, and the appeals court also did decide onthem.

Plaintiffs in the case–Staehr vs. The Hartford FinancialServices Group Inc.–include the Alaska Laborers EmployersRetirement Fund and The Communication Workers of America Plan forEmployees' 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, EliotSpitzer, filed his lawsuit against the Marsh brokerage, chargingbrokers were fixing commercial insurance prices in exchange forkickbacks paid as contingency fees by major insurers including TheHartford and American International Group.

The Hartford immediately ceased paying contingency fees afterthe New York suit. It argued that the two-year time limit for astockholders lawsuit had run out because prior legal actions andnews accounts in National Underwriter and elsewhere years beforeshould have alerted stockholders to the activity they complainedabout.

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

According to the Appeals Court, The Hartford admitted that in2003 alone it had paid $145 million in contingency feekickbacks.

Shareholders alleged they were misled because they believed theywere investing in a company whose success and high stock price waspremised on the strength of its business, when it was in fact theproduct of kickbacks and bid-rigging schemes that were notdisclosed to investors.

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

The appeals court disagreed with Judge Droney's conclusion thatthe total mix of information before him was sufficient to rule, asa matter of law, that an investor of ordinary intelligence was oninquiry notice of The Hartford's allegedly fraudulent conduct byJuly 2001.

Among its evidence, the insurer submitted four articles fromgeneral news outlets and 13 from trade publications such asNational Underwriter, which dealt with controversy over contingentcommissions.

Among all the publications, only one article from NationalUnderwriter actually mentioned The Hartford, and it was notspecific enough to alert investors, the court found.

Nearly all of the stories in the record “are devoid ofcompany-specific information,” thus “the argument that theyconstitute 'storm warnings' is far from compelling,” the courtfound. In addition, the court said a 2001 lawsuit filed in SanFrancisco, which made many of allegations later charged by thestockholders, was not “reasonably accessible to an ordinaryinvestor.”

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

o The alleged omissions concerning its activities wereimmaterial.

o Loss causation could not be established.

o The complaint failed to allege the company had “scienter”–thatis, requisite knowledge of the wrongness or illegality of anact.

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