Appeals panel voids $27M for ex-Allstate portfolio analysts who said were maligned in Allstate SEC filings

By Scott Holland | Oct 31, 2018


A federal appeals panel in Chicago has vacated a $27 million award previously given to former Allstate portfolio security analysts who accused the company of ruining their careers by allegedly incorrectly reporting to federal regulators the analysts had padded their bonus pay while pension funds were shorted.

On Oct. 31, the judges of the U.S. Seventh Circuit Court of Appeals found the damages award was out of bounds, particularly as the fired analysts never demonstrated their chances at future employment were harmed in any real way by Allstate’s actions.

A federal jury ordered Allstate in June 2016 to pay $27 million to plaintiffs Daniel Rivera, Stephen Kensinger, Deborah Joy Meacock and Rebecca Scheuneman, all of whom worked for Allstate as investment portfolio analysts until they were fired in December 2009. In January 2017, U.S. District Judge William T. Hart rejected a motion by Northbrook-based Allstate to order a new trial or reduce the jury’s damages award.

The terminations, according to court documents, followed a six-month investigation that included an outside examination by a law firm hired by Allstate. The investigation revealed trading activity that could have cost certain pension funds as much as $91 million, while earning the security analysts bonuses of about $1.2 million. Court documents, however, noted Allstate’s analysis failed to account for other activity that offset much of those losses and all but wiped out the allegedly improperly boosted bonuses.

U.S. Seventh Circuit Judge Diane Sykes  

After the analysts were fired, in February 2010, Allstate filed a public report, known as a 10-K, with the federal Securities and Exchange Commission about the alleged improper activity, and discussed the activity in a memo to company employees. The filing and memo did not name the security analysts individually.

However, Judge Hart found the case showed “ample evidence” the company ruined the analysts’ careers by incorrectly reporting to federal regulators that pension funds the analysts helped manage were shorted by fund managers seeking to time trades to boost their own bonuses.

After Allstate appealed, Seventh Circuit judges Diane Sykes and Michael Kanne heard arguments Oct. 25, 2017, along with U.S. District Judge Sara Darrow, a Central District of Illinois judge sitting by designation. Sykes wrote the opinion.

Allstate argued the defamation awards were inappropriate because statements in its SEC 10-K report were substantially true and neither that report nor a company memo named or substantially referred to the plaintiffs. It also said the statements in those documents were privileged and the analysts “failed to prove special damages are required for recovery for defamation per quod,” the latter of which is the only challenge the panel needed to address, according to Sykes.

To prove special damages, Sykes explained, the analysts would have to identify a third party that refused to work with them based on the 10-K and memo. And while the panel observed circumstantial evidence of damage to the analysts’ careers, “the plaintiffs failed to present the testimony of even a single prospective employer who declined to hire them because of the statements,” Sykes wrote.

The analysts maintained other plaintiffs have been awarded special damages based on circumstantial evidence, but the panel differentiated this case because the analysts work in a “highly specialized” field with a “small and close-knit” talent pool. Since the plaintiffs declined to say which firms they applied to or which declined to hire them based on the statements in question, the panel vacated the defamation awards and sent the case back to Hart with instructions for Hart to enter judgment for Allstate.

The panel also vacated awards under the Fair Credit Reporting Act, saying the analysts failed to allege a concrete injury that would give them standing to sue under that provision. The analysts argued they were entitled to a summary of the law firm investigation that predicated their termination, allowing them to defend themselves before Allstate or potential employers.

The panel disagreed, saying the law at most “serves a minimal notice function,” and further stating the plaintiffs neither showed how they could possibly have defended themselves against Allstate nor, again, which employers declined to hire them based on the 10-K or internal memo. The panel vacated the FRCA awards and remanded with instruction for dismissal for lack of standing.

The plaintiffs are represented in the action by attorneys Robert D. Sweeney, of the firm of Sweeney & Scharkey LLC, of Chicago, and Joanne Hannaway Sweeney, of RDS Law LLC, of Chicago.

Allstate is represented by attorneys Gerald L. Pauling, John W. Drury, Shomari D. Dailey and Uma Chandrasekaran, of Seyfarth Shaw LLP, of Chicago. 

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Securities and Exchange Commmission Seyfarth Shaw, LLP The Allstate Corporation U.S. Court of Appeals for the Seventh Circuit U.S. District Court for the Northern District of Illinois

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