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AmTrust Must Restate 2012-2016 Financial Reports Securities Class Action

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AmTrust Financial Services Building

The complaint for this class action claims that AmTrust Financial Services, Inc. violated (1) the Securities Act of 1933, for inaccurate materials for its public offerings, and (2) the Securities Exchange Act of 1934, for “a multi-year accounting fraud.” At issue are financial statements for fiscal years 2012, 2013, 2014, 2015, and 2016, which the company has admitted “should no longer be relied upon.”

The class for this action is all purchasers of (1) AmTrust common stock pursuant or traceable to the company’s IPO of November 11, 2015, or (2) AmTrust’s Non-Cumulative Preferred Stock, Series F issued pursuant or traceable to the public offering of September 27, 2016.

AmTrust, an American multinational special property and casualty insurer, has said that the need to restate its financial is “largely relate[d] to the timing of recognition of revenue [on] the company’s service and fee business.” The complaint believes that the revenue comes from Warrantech, a 2010 acquisition.  

According to the complaint, before the acquisition, Warrantech was a public company. Originally, the complaint says, Warrantech recognized revenues from service contracts when a sale was made, but the Securities and Exchange Commission (SEC) required it to record it over the life of the contract.

Warrentech did change its reporting of revenue, but the complaint claims that after the acquisition, AmTrust changed it back. Since Warrantech’s Chairman and CEO at the time of the SEC requirement became Chairman of the AmTrust subsidiary that incorporated Warrentech, the complaint claims that the company must have known that the change back was improper.

The complaint says that this improper reporting let AmTrust “post exceptional operating results” during the class period. The complaint claims that the company’s CFO said that its income differentiated AmTrust’s business model from its peers.

On February 27, 2017, the complaint says, the company announced that it had to make some “immaterial corrections” to its financial statements in a number of areas. Two weeks later, the company admitted that several years of its financial statements should “no longer be relied upon.” The complaint says the company now admits that it overstated its income by, cumulatively, more than $214 million during the class period.

Finally, in April, The Wall Street Journal (WSJ) said in article that the SEC, the FBI, and the New York Department of Financial Services. The FBI investigation, it reported, had the assistance of a whistleblower who had formerly worked for the company’s auditor.

At each of these revelations, the company’s stock price suffered, falling in total from $27.66 per share before the February 27 revelation to $15.30 per share after the WSJ article.

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