The law firm of Milberg Weiss Bershard Hynes and Lerach announced that a class action lawsuit was filed on August 31, 2000 in the United States District Court for the District of New Jersey on behalf of purchasers of The Chubb Corporation common stock during the period between April 27, 1999 and October 15, 1999 (the Class Period). Those purchasers include the former shareholders of Executive Risk Inc. who exchanged their Executive Risk shares for Chubb stock in the July 1999 merger.
Damages are sought for violations of Sections 10(b), 14 and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and Sections 11 and 15 of the Securities Act of 1933. The defendants are: The Chubb Corporation; Executive Risk Inc.; Dean R. O’Hare, chairman and CEO; Henry B. Schram, Chubb’s senior vice president and Chief Accounting Officer; David B. Kelso, Chubb’s executive vice president and CFO; Stephen J. Sills, president and CEO of Executive Risk; Robert H. Kullas, chairman of Executive Risk; and Robert V. Deutsch, executive vice President and CFO of Executive Risk.
The action arose out of an alleged scheme to make it appear that serious problems and increasingly large losses in Chubb’s standard commercial insurance business, which had badly hurt the company’s results in 1997-1998, were being overcome by a combination of rate increases and non-renewal of unprofitable standard commercial insurance business. This allegedly enabled Chubb to report better-than-expected first quarter 1999 earnings per share, thus artificially inflating Chubb’s stock in mid-1999.
As a result, the lawsuit alleges that Chubb was able to successfully complete its acquisition of Executive Risk, a highly profitable underwriter of directors’ and officers’ liability insurance. In addition, the plaintiffs charge that the inflation of Chubb’s stock price reduced the number of shares Chubb had to issue to acquire Executive Risk, saving Chubb at least $300-$400 million, while enabling the top three insiders of Executive Risk to receive millions in special benefits and payments upon the sale of Executive Risk to Chubb.
It is further stated by the plaintiffs that eight days after Chubb’s acquisition of Executive Risk, Chubb revealed a much worse-than-expected second-quarter 1999 EPS due to increasing losses in its standard commercial insurance business, later revealing that its “rate increase/policy non-renewal initiative” would have no positive impact on Chubb’s results until mid-2000 at the earliest. Chubb’s stock immediately declined and continued to fall as Chubb continued to report worsening results for its standard commercial insurance business, which caused Chubb’s 1999 EPS to decline sharply from its 1998 EPS.
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