AmTrust and its former CFO settle SEC charges for $10.5 million

uBiome founders face fraud charges

The Securities and Exchange Commission (SEC) announced that AmTrust Financial Services Inc. and its former CFO Ronald E. Pipoly Jr. agreed to pay a combined $10.5 million to settle its lawsuit against them.

The SEC sued AmTrust and Pipoly for allegedly failing to properly disclose material facts related to its process of estimating of insurance losses and reserves.

AmTrust Financial, LLC is a New York-based insurance company that focuses on providing insurance for small businesses. Pipoly was named CFO in 2005 and was replaced as CFO in 2017 by Adam Karkowsky, now President of AmTrust.

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Complaint against AmTrust and its former CFO

The Commission alleged that between March, 2010, and February, 2016, the defendants “failed to disclose the Company’s process for reporting management’s best estimate of
loss reserves — a process performed by Pipoly.”

Pipoly failed to reveal that he made consolidating adjustments, which did not consider the actuarial analyses. His accounting adjustments also deviated from AmTrust’s actuarial estimates.

Additionally, the SEC alleged that AmTrust did not disclose the specific factors or assumptions supporting Pipoly’s decision to make accounting adjustments. The insurance company also failed to maintain a sufficient system of internal accounting controls and documentation supporting management’s best estimate.

Furthermore, the Commission accused AmTrust and Pipoly of failing to disclose the loss contingencies created by its former CFO’s judgmental adjustments to the insurance company’s historical experience.

Pipoly’s total adjustments were more than $300 million by the end of 2015. It affected all of AmTrust’s reporting segments, noted the SEC in the complaint.

According to the SEC, “AmTrust and Pipoly were negligent in their conduct…” and they violated certain antifraud Sections 17(a)(2) and (3) of the Securities Act of 1933 and Sections 21(d), 21(e) and 27 of the Securities Exchange Act of 1934.

The SEC also alleged violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-13, and 13a-15(a), which pertain to reporting, record-keeping, and internal controls.

In a statement, SEC Fort Worth Regional Office Director David Peavler said, “Disclosures regarding an insurance company’s loss reserve process allow investors to judge the reliability of the company’s numbers. As we allege, AmTrust never disclosed that Pipoly repeatedly deviated from the reserving processes described in the company’s filings, and changed the company’s actuarially determined reserves estimates.”

The SEC filed its case against the defendants in the federal court in the Southern District of New York.

Details of the settlement with the SEC

The defendants agreed to settle the Commission’s allegations without admitting or denying wrongdoing. AmTrust and Pipoly agreed to pay penalties of $10.3 million and $75,000, respectively. They also agreed to stop future violations of the federal securities laws. Settlements are subject to court approval.

In addition, Pipoly agreed to disgorge $140,000 and $22,400 in prejudgment interest.