3 second amended class action complaint for violation of the

Case 1:09-cv-06185-JFK Document 38 Filed 07/22/11 of 68

UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK xIn re MANULIFE FINANCIAL CORP. : Master File No. 1:09-cv-06185-JFKSECURITIES LITIGATION :

: CLASS ACTION:

This Document Relates To: : SECOND AMENDED CLASS ACTION: COMPLAINT FOR VIOLATION OF THE

ALL ACTIONS. : FEDERAL SECURITIES LAWS

x


Lead Plaintiffs Locals 302 and 612 of the International Union of Operating Engineers-

Employers Construction Industry Retirement Trust, Western Washington Laborers-Employers

Pension Trust and the California Ironworkers Field Pension Trust (“Lead Plaintiffs” or “Plaintiffs”)

allege the following based upon Plaintiffs’ individual and personal knowledge as to Plaintiffs’ own

acts, and the investigation undertaken by Plaintiffs’ counsel, which included a review of United

States Securities and Exchange Commission (“SEC”) filings by Manulife Financial Corporation

(“Manulife” or the “Company”), as well as regulatory filings and reports, securities analysts’ reports

and advisories about the Company, press releases and other public statements issued by the

Company, media reports about the Company, and discussions with industry experts. Plaintiffs

believe that substantial additional evidentiary support will exist for the allegations set forth herein

after a reasonable opportunity for discovery.

NATURE OF THE ACTION

1. This is a federal securities class action on behalf of all investors who purchased or

otherwise acquired the common stock of Manulife on the New York Stock Exchange (“NYSE”)

between March 28, 2008 and March 2, 2009, inclusive (the “Class Period”), seeking to pursue

remedies under the Securities Exchange Act of 1934 (the “Exchange Act”).

2. Defendant Manulife is a leading Canada-based financial services company with life

insurance and wealth management operations in Canada, the United States and Asia.

3. The Company’s variable annuities and segregated funds are investment products that

feature guaranteed future payments, allowing customers to purchase the equivalent of a personal

pension plan. Manulife, in turn, invests its customers’ money in, among other things, the stock

market and relies on the assumption that the future value of the invested funds will exceed the

guaranteed payment obligations. If not, Manulife is responsible for the shortfall.

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4. Thus, declines in the stock market increase the likelihood that the value of customers’

investment portfolios will fall below the minimum level of guaranteed payments, and that Manulife

will be obligated to make up the difference. The Office of the Superintendent of Financial

Institutions (the “OSFI”), which regulates insurance companies in Canada, requires Manulife to

maintain adequate capital reserves to support these guaranteed payment obligations.

5. Throughout the Class Period, in order to increase short-term profitability, Defendants

assumed great risk with Manulife’s variable annuity and segregated fund products by maintaining

the investment portfolios that funded those products in a volatile equity market, with little downside

protection. In other words, Defendants invested Manulife’s funds that were intended to support the

Company’s guaranteed payments in the stock market, with minimal protection in the event of a stock

market decline. That decision amounted to a risky bet that equity markets would continue to rise – a

bet that Defendants lost. Importantly, this exposure was never adequately disclosed to shareholders.

6. Indeed, unbeknownst to investors, as a result of Manulife’s massive and unmitigated

equity market exposure, a downturn in the markets would require the Company to bolster the capital

reserves backing its guaranteed payments to variable annuity and segregated fund policyholders –

since the funds used to support these guarantees would be reduced in value in a market downturn –

which would have a devastating impact on the Company’s balance sheet.

7. During the Class Period, as the stock market fell, Defendants concealed this

increasingly precarious situation from investors, by touting the Company’s supposedly prudent risk

management and the diversified nature of its investments, and by stating that Manulife was well-

positioned to weather equity market declines.

8. Defendants also misled investors into believing that the Company was taking steps to

effectively reduce its equity market exposure, by implementing and ramping up hedging programs

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for its variable annuity and segregated fund products. In reality, the Company had no meaningful

hedging during the Class Period, and its equity market exposure stemming from its variable annuities

and segregated funds continued to grow.

9. In October 2008, when the stock markets declined sharply, concerns surfaced about

the sufficiency of Manulife’s capital reserves backing its variable annuity and segregated fund

guarantees. Defendants told investors that such concerns were “ grossly exaggerated,” 1 and that the

Company was “well -positioned” to withstand a stock market downturn, and would not need to issue

equity to shore up its capital levels. At the very same time that Defendants were making these

assurances, however, the OSFI was raising identical concerns about Manulife’s market exposure,

had instituted a series of reviews of the Company’s financial condition, and was insisting that

Manulife increase its capital reserves immediately by engaging in a series of transactions to raise

capital.

10. Investors began to learn the truth on December 2, 2008, when, despite Defendants’

assurances just seven weeks earlier that an equity issuance would not be necessary, they announced

that Manulife was issuing over $2 billion 2 in common shares in order to strengthen its capital

reserves, thereby diluting the interests of existing shareholders. The Company also announced that it

anticipated increasing those reserves to $5 billion by the end of 2008, and as a result, anticipated a

fourth quarter loss of $1.5 billion.

11. On February 12, 2009, the Company disclosed that its variable annuity and

segregated fund guarantees totaled $27 billion more than the amount that Manulife actually had in

1 Emphasis is added unless otherwise noted.

2 Unless otherwise noted herein, Manulife’s reported financial results are in Canadian Dollars.The Company’s share price is the price of its common shares traded on the NYSE in U.S. dollars.

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its investment portfolio to back those guarantees, and the Company had needed to shore up its capital

reserves to $5.78 billion in order to narrow the deficit, which had resulted in an earnings charge of

more than $1.8 billion.

12. Then, on March 2, 2009, Defendant Peter Rubenovitch (“Rubenovitch”), the

Company’s Chief Financial Officer (“CFO”), gave a presentation which disclosed further details

about the impact that Manulife’s equity market exposure from its variable annuity and segregated

fund products had had on the Company’s 2008 earnings. The presentation also discussed Manulife’s

belated efforts to reduce that impact going forward, including by implementing more significant

hedging programs. After investors reacted to these adverse disclosures, Manulife’s stock closed at

$7.90 per share on March 3, 2009 – a dramatic 80% decline from the Class Period high of $40.11 per

share, reached on April 3, 2008.

JURISDICTION AND VENUE

13. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the

Exchange Act [15 U.S.C. §§78j(b) and 78t(a)] and Rule 10b-5 promulgated thereunder by the SEC

[17 C.F.R. §240.10b-5].

14. This Court has jurisdiction over the subject matter of this action pursuant to 28 U. S.C.

§1331 and Section 27 of the Exchange Act [15 U.S.C. §78aa].

15. Venue is proper in this District pursuant to Section 27 of the Exchange Act and

28 U. S. C. § 1391(b). The Company’s common stock is traded on the NYSE, which is based in this

District.

16. In connection with the acts alleged in this Complaint, Defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to,

the mails, interstate telephone communications, and the facilities of the national securities markets.

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PARTIES

17. Lead Plaintiffs Locals 302 and 612 of the International Union of Operating

Engineers-Employers Construction Industry Retirement Trust, Western Washington Laborers-

Employers Pension Trust and the California Ironworkers Field Pension Trust purchased Manulife

common stock during the Class Period, as detailed in the certification previously filed with the Court

and incorporated herein by reference, and were damaged thereby.

18. Manulife is a Canada-based financial services company with life insurance and

wealth management operations in Canada, the United States and Asia. Manulife common shares are

listed for trading on the Toronto Stock Exchange (“TSX”), and the NYSE under the symbol “MFC,”

and are also traded on the Stock Exchange of Hong Kong and the Philippine Stock Exchange.

19. Defendant Dominic D’Alessandro (“D’Alessandro”) served as President and Chief

Executive Officer (“CEO”) of Manulife at all relevant times herein, until the time of his retirement,

on May 7, 2009.

20. Defendant Rubenovitch served as the Senior Executive Vice President and CFO of

Manulife until the announcement of his departure on June 22, 2009.

21. Defendants D’Alessandro and Rubenovitch are collectively referred to herein as the

“Individual Defendants,” and Manulife and the Individual Defendants are collectively referred to

herein as “Defendants.”

22. As officers and controlling persons of a publicly-held company whose common stock

was, and is, registered with the SEC pursuant to the Exchange Act, and was, and is, traded on the

NYSE and governed by the provisions of the federal securities laws, the Individual Defendants each

had a duty to promptly disseminate accurate and truthful information with respect to the Company’s

financial condition and performance, growth, operations, financial statements, business, markets,

management, earnings and present and future business prospects, and to correct any previously-

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issued statements that had become materially misleading or untrue, so that the market price of the

Company’s publicly-traded common stock would be based upon truthful and accurate information.

The Individual Defendants’ misrepresentations and omissions during the Class Period violated these

specific requirements and obligations.

23. The Individual Defendants, by virtue of their positions of control and authority as

officers and/or directors of the Company, were able to and did control the content of the various SEC

filings, press releases and other public statements pertaining to the Company during the Class

Period. Each Individual Defendant was provided with copies of the documents alleged herein to be

misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to prevent

their issuance or cause them to be corrected. Accordingly, each of the Individual Defendants is

responsible for the accuracy of the public reports and releases detailed herein and is therefore

primarily liable for the representations contained therein.

24. Each of the Individual Defendants is liable as a participant in a fraudulent scheme and

course of business that operated as a fraud or deceit on purchasers of Manulife common stock by

disseminating materially false and misleading statements and/or concealing material adverse facts.

The scheme: (i) deceived the investing public regarding Manulife’s business, operations, risk

management and the intrinsic value of Manulife’s common stock; and (ii) caused Plaintiffs and other

members of the Class to purchase Manulife common stock at artificially inflated prices.

25. The Individual Defendants, who were the Company’s principal officers, controlled

Manulife and its public disclosures. The Individual Defendants made false and misleading

statements and/or failed to disclose material adverse information concerning the true risk to the

Company from its variable annuity and segregated fund products.

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26. It is appropriate to treat the Individual Defendants as a group for pleading purposes

and to presume that the false, misleading and incomplete information conveyed in the Company’s

public filings, press releases and other publications, as alleged herein, were the collective actions of

the narrowly defined group of Defendants identified above. Each of the above officers and/or

directors of Manulife, by virtue of their high level positions with the Company, directly participated

in the management of the Company, was directly involved in the day-to-day operations of the

Company at the highest levels, and was privy to confidential proprietary information concerning the

Company and its business, operations, products, growth, financial statements, and financial

condition, as alleged herein. Said Defendants were involved in drafting, producing, reviewing

and/or disseminating the false and misleading statements and information alleged herein, were aware

or deliberately disregarded that the false and misleading statements were being issued regarding the

Company, and approved or ratified these statements in violation of the federal securities laws.

CLASS ACTION ALLEGATIONS

27. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all persons who purchased or

otherwise acquired the common stock of Manulife on the NYSE between March 28, 2008 and March

2, 2009, inclusive (the “Class”) and who were damaged thereby. Excluded from the Class are

Defendants, the officers and directors of the Company, at all relevant times, members of their

immediate families and their legal representatives, heirs, successors or assigns and any entity in

which Defendants have or had a controlling interest.

28. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, Manulife common shares were actively traded on the

NYSE under the symbol “MFC.” While the exact number of Class members is unknown to

Plaintiffs at this time and can only be ascertained through appropriate discovery, Plaintiffs believe

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that there are thousands of members in the proposed Class. Record owners and other members of

the Class may be identified from records maintained by Manulife or its transfer agent and may be

notified of the pendency of this action by mail, using the form of notice similar to that customarily

used in securities class actions.

29. Plaintiffs’ claims are typical of the claims of the members of the Class as all members

of the Class are similarly affected by Defendants’ wrongful conduct in violation of federal law that is

complained of herein.

30. Plaintiffs will fairly and adequately protect the interests of the members of the Class

and have retained counsel competent and experienced in class and securities litigation.

31. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

(a) whether the federal securities laws were violated by Defendants’ acts as

alleged herein;

(b) whether statements made by Defendants to the investing public during the

Class Period misrepresented material facts about the business, operations and management of

Manulife;

(c) whether the price of Manulife common stock was artificially inflated during

the Class Period; and

(d) to what extent the members of the Class have sustained damages and the

proper measure of damages.

32. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the

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damages suffered by individual Class members may be relatively small, the expense and burden of

individual litigation make it impossible for members of the Class to individually redress the wrongs

done to them. There will be no difficulty in the management of this action as a class action.

SUBSTANTIVE ALLEGATIONS

The Company and Its Business

33. Manulife is headquartered in Toronto, Ontario, Canada and operates as Manulife

Financial in Canada and Asia, and primarily through John Hancock Financial Services, Inc. (“John

Hancock”) in the United States. 3 According to the Company, it offers a wide range of financial

protection and wealth management products and services, including individual life insurance, group

life and health insurance, long-term care insurance, pension products, variable annuities, and mutual

funds, to individual and group customers in 19 countries and territories. Manulife also offers

reinsurance services and provides investment management services with respect to the Company’s

general fund assets, segregated fund assets and mutual funds.

34. According to Manulife, its business is organized into four operating divisions: the

U.S. Division, the Canadian Division, the Asia and Japan Division, and the Reinsurance Division.

In addition, asset management services are provided by Manulife’s Investment Division, operating

as MFC Global Investment Management. The U.S. Division is comprised of two reporting

segments: U.S. Insurance and U.S. Wealth Management.

3 In April 2004, Manulife merged with John Hancock, headquartered in Boston,Massachusetts, to form Manulife’s corporate brand in the United States. Manulife owns all of theoutstanding shares of common stock of John Hancock.

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35. As the second largest North American life insurer, the Company generated revenues

of $33 billion in fiscal year 2008, and had $405.3 billion (US$321.7 billion) in funds under

management as of March 31, 2009.

Variable Annuities and Segregated Funds

36. At issue in this case is Manulife’s large and historically profitable business of selling

segregated fund and variable annuity investment products. Segregated funds and variable annuities

share the same features, and are essentially hybrids of mutual fund investments and insurance

contracts that limit investment risks for policyholders by guaranteeing a minimum level of future

benefits. They operate as personal pension or retirement plans, whereby Manulife invests a

customer’s money and guarantees certain future benefits. The guaranteed benefits take various

forms and are payable upon specified dates or events; for example, they may consist of periodic

payments or guaranteed withdrawal amounts when the policy holder reaches a specified retirement

age.

37. Segregated funds and variable annuities are attractive investment vehicles because

they offer the growth potential of equity market investments, while limiting the risk of loss to

investors by providing a guaranteed minimum level of structured payments. In exchange for these

guaranteed benefits, customers pay hefty fees and agree to hold the annuity for a specified period of

time. Manulife, in turn, relies on the assumption that the future value of the invested funds will

exceed the guaranteed payment obligations.

Manulife Is Required to Maintain Sufficient Capital ReservesBacking Its Variable Annuity and Segregated Fund Guarantees

38. As a life insurance company, Manulife is regulated by various authorities in the

jurisdictions in which it conducts business, including by the OSFI in Canada. The OSFI requires life

insurance companies, such as Manulife, to maintain adequate levels of capital – to support their

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ability to pay out, among other things, their guarantees – which it assesses by comparing available

capital to various risk metrics, to arrive at a percentage ratio called Minimum Continuing Capital and

Surplus Requirements (“MCCSR”). In the U.S., the Company’s John Hancock operations are

subject to similar Risk Based Capital (“RBC”) minimum capital requirements. According to

Manulife’s 2007 Annual Report, as of December 31, 2007, the Company’s Canadian operations

maintained an MCCSR ratio of 221%, above the OSFI’s minimum required ratio of 150%.

39. In addition to the MCCSR, the required capital reserves for Manulife’s variable

annuity and segregated fund products are also determined based upon the requirement under

Canadian Generally Accepted Accounting Principles that those reserves have a Conditional Tail

Expectation (“CTE”) level of between 60 and 80. CTE levels are based on accounting models

covering various adverse events. For example, a CTE reserve level of 60 represents the average cost

of the top 40% of the scenarios tested with the highest net cost; a CTE reserve level of 80 represents

the average cost of the top 20% of the scenarios tested with the highest net cost. Variable annuity

and segregated fund reserve requirements are also determined based on a “confidence level.” The

confidence level represents the percentage of the adverse scenarios tested that the booked reserve

covers. For example, a 90th percentile confidence level means that the booked reserve equals or

exceeds the scenario cost for 90% of the adverse scenarios tested.

40. During the Class Period, Defendant D’Alessandro repeatedly denounced – and sought

ways to get around – what he viewed as the onerous nature of these regulatory capital requirements.

Under D’Alessandro’s leadership, Manulife lobbied the OSFI and eventually obtained a relaxation of

the confidence level requirements for its variable annuity and segregated fund guarantees. The more

lenient requirements took effect on October 28, 2008. Similarly, on February 12, 2009, Manulife

disclosed that it had reduced the CTE level that it used to determine the amount of variable annuity

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and segregated fund reserves from 80 to 65, and admitted that the Company’s reserve increases

would have been billions more if Manulife had not changed its confidence level requirements.

41. Ultimately, those maneuvers could not save Manulife from its decision to retain the

risk of its variable annuity and segregated fund products, including by leaving those products largely

unhedged against equity market declines. As detailed herein, the downward turn in the stock market

that occurred during the Class Period created a massive $27 billion discrepancy between the amount

of future payments that Manulife had guaranteed to its variable annuity and segregated fund

customers, and the actual funds that Manulife had available to make those payments. Due to the

regulatory capital requirements that Manulife was subject to, including those pertaining to its

variable annuity and segregated fund guarantees, the Company was ultimately required to increase

its reserves backing those guarantees by nearly $5.8 billion. That, in turn, had dire consequences for

Manulife’s shareholders, leading to dilutive common equity issuances, as well as nearly $3 billion in

earnings charges.

Concerns About Manulife’s Capital Levels andRisk Management are Raised Internally and by the OSFI

Prior to the Making of Defendants’ Class Period Statements

42. According to a January 30, 2010 article published in Canada’s Financial Post , 4 in

April 2006, prior to the start of the Class Period, Manulife’s chief risk officer gave a presentation

warning Defendant D’Alessandro that the Company’s balance sheet “could not absorb the growing

equity risk” posed by its variable annuity and segregated fund products. Internal company

documents, reviewed by the Financial Post, indicated that Manulife had unusually high exposure to

stock markets because of its large segregated fund and variable annuity business. These internal

4 See Theresa Tedesco, Inside the fortress: Drama behind Manulife’s doors, Financial Post(Jan. 30, 2010), Dkt. No. 28, Exhibit A.

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documents also revealed that, by 2006, Manulife’s risk exposure had increased to the point where the

Company decided to engage in a small amount of hedging – a tactic that had long been disfavored by

Defendant D’Alessandro since hedging reduced the Company’s present profits. According to the

Financial Post, however, this hedging was “too little, too late” and by early 2008, the Company’s

exposure had widened.

43. It was then, around the start of the Class Period, that Manulife’s board members were

urging Defendant D’Alessandro to further hedge Manulife’s equity market exposure and curtail the

sale of its variable annuity and segregated fund products; in response, the Company engaged in some

additional hedging, but clearly not enough. Thus, upon information and belief, the extent of the

Company’s exposure from its variable annuity and segregated fund products was increasing; yet, no

disclosure of this increased risk was made to shareholders at this time.

44. After the stock markets began to decline rapidly in September 2008, the OSFI,

concerned about Manulife’s exposure from its variable annuity and segregated fund products, began

a series of intensive “activity reviews” of Manulife’s financial condition, which included reviewing

board minutes, scrutinizing presentations to the board of directors and management committees, and

monitoring the Company’s financial condition.

45. By October 2008, the OSFI was raising questions about Manulife’s risk controls, and

also was adamant that the Company shore up its capital position immediately – “insist[ing]” that

Manulife “do a series of transactions.”

46. At the very same time, Defendants were publicly denying that Manulife would need

to issue equity, and were assuring investors that Manulife’s capital reserves were “more than

adequate,” that the Company was “well-positioned” to withstand the market turmoil that was

occurring, and that any concerns to the contrary were “grossly exaggerated.” No disclosure was

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made at this time that, for months, board members at Manulife had been internally raising concerns

about the extent of the Company’s risk exposure.

47. According to the Financial Post article, on November 12, 2008, the OSFI issued a

“supervisory letter” informing Manulife that it had raised its “intervention stage rating” on the

Company, indicating that it had identified deficiencies that could lead to “material safety and

soundness concerns.”

48. Following a meeting with Manulife’s board of directors in early December 2008, and

consistent with earlier concerns raised by certain Manulife board members, the OSFI informed

Manulife that it continued to harbor concerns about the Company’s “growing exposure to equity

markets” and about “board approved risk-tolerance policies[.]”

49. The Financial Post reported that, at the OSFI’s request, Manulife retained accounting

firm Deloitte & Touche to conduct an independent examination of the Company’s risk-management

processes for its variable annuity and segregated fund products.

50. On February 3, 2009, based on its review of Manulife’s risk exposure that was

initiated no later than October 2008, the OSFI raised Manulife’s composite risk rating to “above

average,” the second-highest rating, meaning that the Company’s risk exposure was not sufficiently

mitigated by its capital and earnings. The OSFI cited Manulife’s “continued exposure to negative

movements in the equity markets and senior management’s failure to effectively control the risk.”

51. Shareholders of Manulife were also concerned. In assessing Defendants’

forthrightness regarding the Company’s risk exposure, the Financial Post notes the comments of

Len Racioppo, president at money manager Jarislowsky Fraser Ltd., an owner of more than $1-

billion worth of Manulife shares: “There’s a real credibility issue here . . . with past management and

the board itself.”

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Materially False and MisleadingStatements Made During the Class Period

52. The Class Period begins on March 28, 2008. On that date, Manulife filed with the

SEC its Annual Report for the fiscal year ended December 31, 2007 on Form 40-F. In the

“Management’s Discussion and Analysis” portion of Manulife’s 2007 Annual Report, Defendants

falsely assured the marketplace about the Company’s risk management and risk mitigation practices.

Under the heading “Risk Management,” the Annual Report stated, in pertinent part, as follows:

Overview[:] Manulife Financial’s goal in managing risk is to strategicallyoptimize risk taking and risk management to support long-term revenue andearnings growth, and shareholder value growth. We seek to achieve this bycapitalizing on business opportunities that are aligned with the Company’s risktaking philosophy, risk appetite and return expectations, by identifying, monitoringand measuring all key risks taken, and by proactively executing effective riskcontrol and mitigation programs.

Risks will only be assumed that are prudent in relation to the Company’s capitalstrength and earnings capacity, are aligned with our operational capabilities, meetour corporate ethical standards, allow us to remain diversified across riskcategories, businesses and geographies, and for which we expect to beappropriately compensated. Risk must be managed effectively to safeguard ourreputation and capital, and to meet the expectations of our shareholders, customersand regulators.

We employ an enterprise-wide approach to all risk taking and risk managementactivities globally. The enterprise risk management framework sets out policiesand standards of practice related to risk governance, risk identification andmonitoring, risk measurement, and risk control and mitigation. In order to ensurethat we can effectively execute our risk management we continuously invest toattract and retain qualified risk professionals, and to build and maintain thenecessary processes, tools and systems.

53. Manulife’s 2007 Annual Report also detailed the Company’s processes and

procedures for controlling and mitigating risk, in pertinent part, as follows:

Risk control activities are in place throughout the Company to mitigate risks towithin the approved risk limits for each specific risk. Controls, which includepolicies, procedures, systems and processes, are appropriate and commensuratewith the key risks faced at all levels across the Company and are a normal part ofday to day activity, business management and decision making.

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* * *

Risk mitigation activities, such as product and investment portfolio management,hedging, reinsurance and insurance protection are used to ensure our aggregate riskremains within our risk appetite and limits. Internal controls within the businessunits and corporate functions are in place to limit our exposure to operational risks.

The Company manages risk taking activities against an overall group appetite forassuming risk that reflects the financial condition, and the business strategies andrisk tolerances approved by the Board of Directors. The risk appetite is set inrelation to a variety of risk measures including economic capital and earnings at risk,as well as regulatory capital requirements. To ensure exposures to particular risksare appropriate and that the Company remains well-diversified across riskcategories, we manage specific risk exposures against enterprise-wide limitsestablished for each of these specific risks. These limits are set in relation to riskmeasures ranging from economic capital and earnings at risk to risk measures appliedonly to the particular risk.

54. Under the heading “Market and Liquidity Risk,” the Company’s 2007 Annual Report

stated, in pertinent part, as follows:

Risk Management Strategy Overview[:] Manulife Financial’s Global AssetLiability Committee, with the support of a network of business unit asset liabilitycommittees, establishes and oversees the execution of the Company’s market riskmanagement strategy including our asset liability management program. Theprograms cover the management of a variety of risks that arise in generatinginvestment returns to support product liabilities, as well as returns on assets in theshareholders’ equity account. These risks include performance of non-fixedincome investments, such as equities, commercial real estate, timberlands and oiland gas properties, interest rate changes, and foreign exchange rate changes, as wellas liquidity risk. These programs are designed to keep potential losses from theserisks within acceptable limits. Global investment policies establish enterprise-wideand portfolio level targets and limits, as well as delegated transaction approvalauthorities. The targets and limits are designed to ensure investment portfolios arewidely diversified across asset classes and individual investment risks, and aresuitable for the liabilities they support.

55. Under the heading “Market Price and Interest Rate Risk,” Manulife’s 2007 Annual

Report stated, in pertinent part, as follows:

Risk Management Strategy[:] We manage assets supporting products that generallypass through investment returns to policyholders, to achieve a target return designedto maximize dividends or credited rates, subject to established risk tolerances. Tosupport wealth management products with fixed credited rates, we invest in fixedincome assets that have a term profile generally matching the term profile of the

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liabilities, to the extent assets are available in the market at those terms. Severalinsurance and wealth management products have guaranteed benefits extending wellbeyond the term for which fixed income assets are generally available in the market.We manage assets supporting these long-dated benefits to achieve a target returnsufficient to support these obligations over their lifetime, subject to established risktolerances by investing a portion in a diversified basket of non-fixed income assets,with the balance invested in fixed income portfolios.

We evaluate market price and interest rate risk exposures using a variety oftechniques and measures that are primarily based on projecting asset and liabilitycash flows under a variety of future interest rate and market return scenarios.These measures include durations, key-rate durations, convexity, cash flow gaps,shareholders’ economic value sensitivity to specific stress scenarios, earnings at riskand economic capital.

* * *

We mitigate market price risk arising from our general account non-fixed incomeinvestments by investing in a diversified basket of assets consisting of public andprivate equities, commercial real estate, timberland, agricultural land and oil and gasproperties. We manage total non-fixed income asset investments against anestablished aggregate limit and against aggregate limits for each asset category.To diversify risk, we manage our public and private equity investments againstestablished targets and limits by industry type and corporate connection,commercial real estate investments to established limits by property type andgeography, and timber and agricultural land investments to limits by geography andcrop. We proactively manage allocations to non-fixed income assets, reflectingmanagement’s risk preferences.

We mitigate both market price and interest rate risk arising from off-balance sheetproducts through benefit guarantee design, limitations on fund offerings, use ofreinsurance and capital markets hedging. We design new product benefitguarantees and fund offerings to meet established extreme event risk exposurelimits, based on economic capital. We have reinsurance in place on existingbusiness that transfers investment return related benefit guarantee risk, whereappropriate. We also employ dynamic capital markets hedging for a portion of ourbusiness.

The Company’s aggregate exposure to equities is managed against enterprise-wideeconomic capital and earnings at risk based limits. These limits cover thecombined risk arising from off-balance sheet product death and living benefitguarantees, asset-based fees and general account investments.

* * *

Liabilities supported with target return mandates include guaranteed benefit andexpense obligations falling beyond the term for which fixed income assets are

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generally available in the market as well as liabilities for products where investmentreturns are generally passed through to policyholders. These liabilities representedapproximately half of our product liabilities as at December 31, 2007. Target returnmandate segments also include assets in our shareholders’ equity account. Theunderlying economic risk exposure arising from our long-dated guaranteedliabilities is the potential failure to achieve the assumed returns over the entirety oftheir long investment horizon. For products where investment returns aregenerally passed through to policyholders, the economic risk arises primarily fromembedded minimum guarantees and policyholder withdrawal options.

56. The foregoing statements in ¶¶52-55, which were contained in Manulife’s 2007

Annual Report, were each materially false and misleading when made because they misrepresented

the following material facts, which were known to Defendants or recklessly disregarded by them:

(a) that contrary to Defendants’ public statements, Manulife’s risk management

policies, practices and controls, including those with respect to its variable annuity and segregated

fund guarantees, were inadequate and ineffective;

(b) that, in order to increase its short-term profitability, Manulife had decided to

“self-insure” its variable annuity and segregated fund products, by retaining substantially all of the

risk associated with those products, including by largely leaving the investment portfolios that

funded those products’ guarantees unhedged;

(c) that Manulife’s risk management policies, practices and controls were not

prudent, but rather, unbeknownst to investors, were entirely dependent on the assumption that the

equity markets would continue to rise in the future, and that Manulife would not face an equity

market decline;

(d) that Manulife’s investments were not “diversified” because the Company’s

investment portfolio backing its variable annuity and segregated fund products was in fact highly

correlated to an equity market decline;

(e) that due to Manulife’s decision to retain the risk associated with its variable

annuities and segregated funds, including by leaving the investment portfolios that funded those

- 18 -


products’ guarantees unhedged, the Company had massive, unmitigated exposure to an equity

market downturn;

(f) that as a result of that exposure, an equity market decline would require

Manulife to shore up the capital reserves backing its guaranteed payments to variable annuity and

segregated fund policyholders, which in turn would have a devastating impact on the Company’s

balance sheet, causing Manulife to raise capital by taking out loans and issuing dilutive equity, and

also reducing earnings; and

(g) that as a result of the foregoing, Manulife’s risk exposure was much greater,

and its risk profile was much worse, than the Company represented publicly.

57. With respect to “Risk Measurement,” the 2007 Annual Report explained the

Company’s process for measuring its capital levels against market risk, as follows:

We measure consolidated internal risk-based capital using a combination ofeconomic capital and Canadian-based Minimum Continuing Capital and SurplusRequirements (“MCCSR” ).

* * *

We stress test our regulatory capital adequacy over a five year projected timeframe,incorporating both existing and projected new business activities, under a numberof significantly adverse but “plausible” scenarios through our Dynamic CapitalAdequacy Test.

58. The above-referenced statements in ¶57 were materially false and misleading

because, although Manulife did “stress test [its] regulatory capital adequacy” under the “‘plausible’

scenario[]” of equity market declines greater than 10%, the Company failed to disclose the results of

those tests to investors, and continued to build Manulife’s mostly unhedged equity market exposure,

despite the known and substantial risks posed by potential stock market declines.

59. The risk management discussion in Manulife’s 2007 Annual Report also contained

statements about the Company’s equity market exposure arising from its variable annuity and

- 19 -


segregated fund products, including the expected impact of a 10% decline in equity markets, stating,

in relevant part:

Exposures Arising from Variable Products and Other Managed Assets[:] Thefollowing table shows the potential impact on shareholders’ economic value, arisingfrom variable products and mutual funds, as well as institutional asset managementoperations, as a result of an immediate ten per cent decline and ten per cent increasein the market value of equity funds.

Table 2 1 Impact an Shareholders' Economic Value from Variable Products and Other Managed Assets

2007 2006

Change In Market Values as at December 31 10% 10% 10% 10%(Canadian S in millions) Increase Decrease Increase Decrease

Market-based fees $545 S(540) $543 $(567)Variable product guarantees S 99 S(209) $104 $(167)

Additional information related to investment related guarantees on variable annuitiesand segregated funds is shown in the table below.

Table 3 1 Variable Annuity and Segregated Fund Benefit Guarantees

2007 2006

Expected ExpectedAs atDgcernber3l Amount at guarantee Amount at guarantee(Canadian Sin millions) Fund value;risky cost, Fundvalue2 risk, cost,

Maturitylincomelwithdrawal benefits $60,737 $ 863 $51,188 $ 429Death benefits' 11,063 1,230 12,926 1,133

Total $71,800 $2,093 $(2,268) $64,114 $1,562 $(1,623)

r Death benefits include standalone guarantees and guarantees in excess of maturity or income guarantees where both are provided on a policy.2 Amount at risk is the excess of guaranteed values over fund values on all policies where the guaranteed value exceeds the fund value. Fund value and amount at risk are

net of amounts reinsured. This amount is not curren* payable and represents a theoretical value only.3 Expected guarantee cost is net of reinsuranoe and fee income allocated to support the guarantees.

60. The above-referenced statements were materially false and misleading because they

failed to adequately disclose to investors:

(a) that Manulife’s equity market exposure stemming from its variable annuity

and segregated fund guarantees had continued to grow, and going forward, the Company’s balance

sheet was even more vulnerable to the effects an equity market downturn; and

(b) that if equity markets declined by more than 10%, the additional decline

would have a disproportionately greater adverse impact on the Company’s balance sheet, including

on its capital levels and earnings than would a 10% decline.

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61. Finally, with respect to Manulife’s U.S. variable annuity products offered through

John Hancock, the 2007 Annual Report stated, in pertinent part, that, “ Throughout 2007, JH

Variable Annuities continued to develop its variable annuity portfolio with a clear focus on

meeting the needs of customers, maintaining competitiveness within the market and managing the

risk profile of the business.”

62. The above-referenced statement was materially false and misleading because

Manulife was not focused on “managing the risk profile” of its John Hancock variable annuity

business. Rather, in order to increase its short-term profitability, Manulife had made a deliberate

decision to retain substantially all of the risk associated with its variable annuities, including by

choosing to leave the investment portfolios that funded those products’ guarantees largely unhedged

– a decision that amounted to a risky wager that equity markets would continue to rise. However the

Company failed to adequately disclose the material risks associated with that decision to its

shareholders.

63. In response to Defendants’ positive statements, the price of Manulife’s common

shares rose steadily over the next four trading days, reaching a Class Period high of $40.11 per share

on April 3, 2008.

64. On May 8, 2008, Manulife held its ninth annual shareholders meeting during which

Defendant D’Alessandro, commenting on the Company’s full year 2007 financial results, reassured

investors that the Company’s supposedly diversified investment portfolio and prudent risk

management framework meant that Manulife was well-positioned to weather equity market

volatility, stating, in pertinent part, as follows:

The diversified nature of our company, combined with a prudent risk managementframework enabled Manulife to successfully weather a number of significantchallenges, which apart from currency included volatile equity markets, adverse

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interest rate movements and the much publicized subprime crisis, about which I willsay more later in my address.

* * *

Investments. As I noted previously, I am happy to report that our company’s long-standing philosophy of financial discipline and rigorous risk management ensurethat we have avoided the problems arising from subprime loans, third party assetbacked commercial paper, monoline insurance and other exposures that haveafflicted so many other financial services companies.

Using a disciplined approach to building our asset base and its blend of asset types,we have managed to keep our portfolio well diversified and of exceptionally highquality.

* * *

And despite widespread concern about a continued downturn in the U.S. economy,our company’s operations in Asia with its robust markets offer countervailingopportunities. And again, I want to mention that our diverse asset portfolio andvery, very stable funding base and strong liquidity position are all such that we canexpect to do well no mater what and how turbulent the financial markets may get.

65. Defendants’ above-referenced statements that Manulife had a “prudent risk

management framework” and employed “rigorous risk management” were materially false and

misleading because Manulife had decided to substantially reduce or eliminate its risk management

and retain the risk associated with its variable annuity and segregated fund products, by leaving the

investment portfolios that funded those products’ guarantees largely unhedged, in order to increase

short-term profitability – a decision that amounted to a risky wager that equity markets would

continue to rise. As a result, Manulife’s exposure to an equity market downturn was much greater,

and its risk profile was much worse, than the Company represented publicly.

66. Defendants’ above-referenced statements regarding the “diversified nature” of the

Company, and its “well diversified” asset portfolio were materially false and misleading because

Manulife’s investments were not diversified, since the Company’s investment portfolio backing its

variable annuity and segregated fund products was in fact highly correlated to an equity market

- 22 -


decline, and Manulife had minimal, if any, mechanisms in place (such as hedging programs) to

adequately mitigate its exposure.

67. Defendants’ above-referenced statement that, “we can expect to do well no matter

what and how turbulent the financial markets may get,” was lacking in a reasonable basis and was

materially false and misleading when made because, as Defendants knew or recklessly disregarded,

Manulife’s balance sheet could not absorb the growing equity risk posed by its variable annuity and

segregated fund products. Rather, Manulife’s massive, largely unhedged equity market exposure

meant that an equity market decline would require Manulife to shore up the capital reserves backing

its guaranteed payments to variable annuity and segregated fund policyholders, which in turn would

have a devastating impact on the Company’s balance sheet, forcing Manulife to raise capital by

taking out loans and issuing dilutive equity, and also reducing earnings.

68. Also on May 8, 2008, Manulife issued a press release announcing its financial results

for the first quarter of 2008, the period ended March 31, 2008. The press release stated, in relevant

part, as follows:

Toronto – Manulife Financial Corporation today reported shareholders’ net incomeof $869 million and fully diluted earnings per share of $0.57, compared to netincome of $986 million and fully diluted earnings per share of $0.63 in the prioryear.

* * *

“Except for the decline in equity markets, our quarter was highly satisfactory”, saidDominic D’Alessandro, President and Chief Executive Officer. “Strong sales levels,particularly in our insurance segments, contributed to an impressive increase in newbusiness embedded value. This reflects positively on the current performance of ourinsurance and wealth management businesses, and positions us well for futureearnings growth.”

* * *

“Worldwide equity markets were the most severe in 21 quarters with significantdeclines in the U. S., Asia and Japan,” said Peter Rubenovitch, Senior Executive VicePresident and Chief Financial Officer. “Actuarial practices require us to assume that

- 23 -


these declines are permanent and, accordingly, an after-tax charge of $265 millionwas recorded in the quarter. I would note that this is a non-cash charge which, in theabsence of further market declines, will not recur in future quarters.”

* * *

Net Income

The Company’s shareholders’ net income for the first quarter of 2008 was $869million, down 12 per cent from $986 million reported a year earlier, primarily due todeclines in equity markets. The impact of unfavourable equity markets onsegregated fund guarantee reserves, on equity investments supporting our non-experience adjusted policy liabilities and reduced fee income on our equity-linkedand variable universal life products reduced earnings by $275 million compared tothe first quarter of 2007.

69. Later that day, Manulife held a conference call with analysts and investors to discuss

the Company’s first quarter 2008 financial results. During the call, Defendant D’Alessandro

misleadingly told investors that, due to Manulife’s burgeoning equity market exposure from variable

annuity and segregated fund products, the Company was now implementing and ramping up its

hedging programs:

Defendant D’Alessandro:

Now the business that has this risk in it, our VA [variable annuity] business is notonly growing in the United States but it’s growing in Canada, we’re exporting itaround the world, and we see the day that the amounts of equity exposure that aregoing to accumulate are larger than we’re comfortable with.

And so at the end of last year or during last year we told all of you that we wereworking on developing an internal hedging capability of our own where we’d havedesks and measuring and monitoring the reporting and so on. And we started thatprogram the fourth quarter of last year, I think, and ramped it up to, I think wewere, in face amount we were doing about $3 billion in contracts. I think thisquarter that’s moved up to 3.3 or 3.5, modest growth. This is not a great quarter toramp up your hedging simply because the volatility’s so high and it costs you somuch more than it would in normal markets.

Again, these are exposures that are going to be discharged or satisfied over many –long periods of time. What we don’t like is the asset or the exposure is aggregatingto very important sums and we don’t want to expose our company to unreasonable– to unreasonable risk. And we don’t like the volatility. I mean, the accountingrules are such that with the mark to market of these things on a quarterly basis with

- 24 -


greater precision, it introduces an element of volatility that frankly wasn’t there a fewyears ago.

So we will probably be doing more hedging. We will be investigating other avenuesto reduce our volatility and exposure, but it’s not – it’s very much on the frontburner. We keep looking at this all the time.

70. The above-referenced statements made by Defendant D’Alessandro during the May 8,

2008 conference call regarding Manulife’s hedging policies and programs were materially false and

misleading because, at the time that those statements were made, Manulife did not have in place any

meaningful or effective hedging programs with respect to its variable annuity and segregated fund

guarantees, and the Company was not implementing or ramping up any hedging programs in a

significant manner that would materially reduce its equity market exposure. Further, Defendants

failed to disclose that any hedging that Manulife was undertaking was limited to new variable

annuity and segregated fund policies, which had a much lower risk profile and were less costly to

hedge (since their payment guarantees were more distant), whereas the overwhelming majority of

Manulife’s equity market exposure stemmed from its previously-issued variable annuity and

segregated fund guarantees. As a result, Manulife remained heavily exposed to equity market

volatility, and unbeknownst to investors, that exposure was continuing to grow unchecked. As a

result, an equity market decline would require Manulife to shore up the capital reserves backing its

guaranteed payments to variable annuity and segregated fund policyholders, which in turn would

have a devastating impact on the Company’s balance sheet, forcing Manulife to raise capital by

taking out loans and issuing dilutive equity, and also reducing earnings.

71. On August 7, 2008, Manulife issued a press release announcing its financial results

for the second quarter of 2008, the period ended June 30, 2008. For the quarter, the Company

reported shareholders’ net income of $1,008 million and fully diluted earnings per share of $0.66,

compared to net income of $1,102 million and fully diluted earnings per share of $0.71 for the same

- 25 -


period last year. Defendant D’Alessandro, commenting on the results, stated, in pertinent part, as

follows:

We are pleased with our performance particularly given the very volatile andunsettled markets that prevail. . . . Our strong balance sheet, excellent distributioncapabilities and leading market shares, position us well to compete in all marketconditions.

72. The above-referenced statements by Defendant D’Alessandro were materially false

and misleading because Manulife’s unmitigated, outsized equity market exposure from its variable

annuity and segregated fund guarantees meant that, if equity market volatility continued, Manulife

would incur massive earnings charges and capital strain in future quarters, and as a result, Manulife’s

balance sheet was not “strong” and the Company was not “position[ed] . . . well to compete” in

deteriorating “market conditions.”

73. Following the press release, Manulife held a conference call, during which an analyst

raised concerns about the Company’s declining capital levels:

Colin Devine – Citigroup – Analyst:

A couple of questions. First, one on capital – the MCCSRs are like up modestlyfrom the first quarter. It seems to me it’s probably at about the lowest level sinceyou took over, Dominic. . . . [I]t makes me wonder, are you starting to [be] a littlebit capital constrained? . . .


[T]he capital level is hovering around the 200 mark, which is a bit lower than ithas historically been. And part of that is driven by what you see in the marketswith equity values being where they are and the need to provide capital for some ofour business lines, particularly the variable annuities. As you may know, we don’tget capital relief [for] any hedging activity that we might undertake with respect tothat product. So it is a burdensome – it is a very capital-intensive product.

And we have looked at the issue in many ways, and we believe that we have themechanisms to monitor it and take appropriate action, come what may. In thecircumstances, given the tenure of the times, it is better for us to remain a little well-capitalized than to let our capital ratios decline too much.

- 26 -


74. The foregoing statements made by Defendant D’Alessandro were materially false and

misleading because they concealed and downplayed the significant risk that a continuing equity

market downturn would require Manulife to shore up the capital reserves backing its guaranteed

payments to variable annuity and segregated fund policyholders, which in turn would have a

devastating impact on the Company’s balance sheet, causing Manulife to raise capital by taking out

loans and issuing dilutive equity, and also reducing earnings.

75. In addition, Defendant D’Alessandro’s statement that, “we don’t get capital relief

[for] any hedging activity that we might undertake with respect to that product” was materially false

and misleading because it implied that Manulife did in fact did have adequate hedging programs for

its variable annuity and segregated fund products, when in truth the Company did not engage in any

significant hedging activities with respect to those products.

76. As a result of the foregoing, Defendant D’Alessandro had no reasonable basis for his

positive reassurance that, “we believe that we have the mechanisms to monitor” Manulife’s capital

levels “and take appropriate action, come what may,” and that statement was therefore materially

false and misleading when made.

77. In October 2008, when the stock markets plunged, concerns surfaced about the

impact that deteriorating equity market conditions could have on the Company. In response, on

October 13, 2008, Manulife issued a press release entitled, “Manulife Financial Corporation releases

key aspects of its financial position.” In the press release, Defendants made misleading reassurances

about the sufficiency of Manulife’s capital reserves backing its variable annuity and segregated fund

guarantees, and also misleadingly reassured investors that the Company would not need to issue

equity to shore up its capital levels:

“Manulife remains conservatively reserved, has a high quality balance sheet andstrong and leading business franchises around the world” noted Dominic

- 27 -


D’Alessandro, President and Chief Executive Officer. “ We are well positioned toweather these difficult times and continue to build for the future.”

* * *

In addition to the high level of assurance provided by these reserves, underManulife’s regulatory capital framework, the Company provides additional capital tosupport these future obligations. At the end of the third quarter, Manulife expects itsMCCSR regulatory capital ratio to be within its targeted operating range of 180% to200%.

Since quarter end, equity markets have deteriorated further which will have anunfavourable impact on Manulife’s capital ratios unless these markets recover. TheCompany will continue to manage its regulatory capital, however, it has no plansto issue common equity.

78. The above-referenced statements contained in the October 13, 2008 press release

were materially false and misleading because they concealed and downplayed the significant risk

that a continuing equity market downturn would require Manulife to shore up the capital reserves

backing its guaranteed payments to variable annuity and segregated fund policyholders, which in

turn would have a devastating impact on the Company’s balance sheet, causing Manulife to raise

capital by taking out loans and issuing dilutive equity, and also reducing earnings. In fact, at the

time these statements were made, the OSFI had begun a series of intensive “activity reviews” of

Manulife’s financial condition, was raising questions about Manulife’s risk controls, and was

adamant that the Company shore up its capital position immediately – “insist[ing]” that Manulife

“do a series of transactions.”

79. As a result of the foregoing, Defendants had no reasonable basis for their positive

reassurances that Manulife “remain[ed] conservatively reserved” and had “a high quality balance

sheet,” that the Company was “well positioned to weather these difficult times,” that its capital

reserves provided a “high level of assurance,” or that Manulife would be able to “continue to manage

its regulatory capital” without “issu[ing] common equity,” and those statements were therefore

materially false and misleading when made.

- 28 -


80. The following morning, on October 14, 2008, Manulife held a conference call, during

which Defendant D’Alessandro characterized investor concern about the Company’s capital position

as “grossly exaggerated,” and reiterated that Manulife would not raise capital by issuing equity,

stating, in pertinent part, as follows:

Last week we became aware of concerns swirling in the marketplace regardingManulife’s guarantees with respect to variable annuities, the condition of our creditportfolio, our investment portfolio generally and our overall capital position. Wethought that rather than let those concerns go unanswered, that we could issue a(inaudible) press release and also make ourselves available today to respond to thequestions and concerns that may exist out there and as you will – as I hope you willconclude, as we go through the items individually, that the concerns that exist asthey relate to Manulife are grossly exaggerated. We remain very well capitalizedand we have no intention to issue equity capital, contrary to speculation that was –that came to our attention. . . .

81. Later in the call, Defendant D’Alessandro made additional reassurances about the

Company’s capital position in the face of equity market volatility, stating, in pertinent part, as

follows:

We’ve got a wonderful book of business. We’ve got a portion of our operationswhich have been affected by – we’re trying to communicate to you that even in theseextreme situations, these books are structured and the payments will be and the feesand so on and what Simon was showing you, the CTE95 assumes that the September30 situation, which was already quite a bit affected by the decline in equity markets,that would suffer a further decline of some 20 to 30% which would persist and neverbe recovered and so we’re maintaining capital at that level and so the discussion thismorning was an attempt to clarify for you that the capital resources of the company,under almost any reasonable expectation of what’s going to happen, are more thanadequate today. Now, I can’t predict the future and the other thing we would like tocommunicate to you is if markets do deteriorate we’re a big, strong company andwe’ll go and do something else to re-establish our capital levels at acceptable – atan acceptable threshold.

* * *

[W]hen you see your stock drop 25% in two days, it sort of focuses your mind thatmaybe you ought to pay attention to reassuring and making your investorsunderstand your position. We think that Manulife was side-swiped by the meltdownin the markets in a way that grossly exaggerated any impact that they’re going tohave on us. I want to put that to rest. . . .

- 29 -


82. The above-referenced statements in ¶¶80-81 by Defendant D’Alessandro were

materially false and misleading because they concealed and downplayed the significant risk that a

continuing equity market downturn would require Manulife to shore up the capital reserves backing

its guaranteed payments to variable annuity and segregated fund policyholders, which in turn would

have a devastating impact on the Company’s balance sheet, causing Manulife to raise capital by

taking out loans and issuing dilutive equity, and also reducing earnings. In fact, at the time these

statements were made, the OSFI had begun a series of intensive “activity reviews” of Manulife’s

financial condition, was raising questions about Manulife’s risk controls, and was adamant that the

Company shore up its capital position immediately – “insist[ing]” that Manulife “do a series of

transactions.”

83. As a result of the foregoing, Defendant D’Alessandro had no reasonable basis for his

statements that the concerns about Manulife’s capital position were “grossly exaggerated,” that

Manulife was “very well capitalized” and had “no intention to issue equity capital,” and that “the

capital resources of the company, under almost any reasonable expectation of what’s going to

happen, [were] more than adequate,” but that “if markets [did] deteriorate” Manulife would “do

something else” besides issuing equity to re-establish its capital levels, and those statements were

therefore materially false and misleading when made.

84. During the call, Manulife’s Executive Vice President and Chief Actuary, Simon

Curtis, further discussed the adequacy of the capital and reserves backing the Company’s variable

annuity and segregated fund guarantees, stating, in pertinent part, as follows:

[L]ooking at the volatility that we’ve seen to date in the fourth quarter, we would stillexpect to be able to close the quarter above regulatory minimum target levels;however, probably slightly below our own target levels. If markets do respond andwhat we’ve seen in the last day continues, we could well be within our target range.In the fourth quarter, we’re anticipating continuing the number of capital initiativesthat we’ve already undertaken in the third quarter with capital repositioning such as

- 30 -


rebalancing capital requirements within our corporate structure and potentiallylooking at other transactions such as reinsurance to help manage our equity risk.External equity capital raising is not anticipated to be necessary to maintain ourfourth quarter capital ratios.

* * *

Our overall balance sheet is extremely strong. We have good organic growth in ourearnings and a diversified business so we’re well -positioned to cover existingexposures, even with market conditions at current levels and as they persist in thefuture and generally we have a very diversified earnings base of non-equity sensitivebusinesses, which will drive core earnings and offset a number of these exposures.

85. The above-referenced statements in ¶84 were materially false and misleading because

they concealed and downplayed the significant risk that a continuing equity market downturn would

require Manulife to shore up the capital reserves backing its guaranteed payments to variable annuity

and segregated fund policyholders, which in turn would have a devastating impact on the Company’s


also reducing earnings. In fact, at the time these statements were made, the OSFI had begun a series

of intensive “activity reviews” of Manulife’s financial condition, was raising questions about

Manulife’s risk controls, and was adamant that the Company shore up its capital position

immediately – “insist[ing]” that Manulife “do a series of transactions.”

86. As a result of the foregoing, Defendants had no reasonable basis for their statements

that Manulife’s balance sheet was “extremely strong,” that the Company was “well-positioned to

cover existing exposures, even with market conditions at current levels and as they persist in the

future,” and that “[e]xternal equity capital raising [was] not anticipated to be necessary” to maintain

the Company’s capital ratios, and those statements were therefore materially false and misleading

when made.

87. Defendants’ false and misleading reassurances on October 13 and 14, 2008 had the

intended effect of preventing a further decline in Manulife’s share price, and caused the Company’s

- 31 -


stock to rebound from a closing price of $23.34 per share on Friday, October 10, to close at $26.31

per share on October 14, 2008.

88. On November 6, 2008, Manulife issued a press release announcing its financial

results for the third quarter of 2008, the period ended September 30, 2008. The press release stated,

in pertinent part, as follows:

Toronto – Manulife Financial Corporation (“MFC”) today reported quarterlyshareholders’ net income of $510 million and fully diluted earnings per share of$0.33, compared to net income of $1,070 million and fully diluted earnings per shareof $0.70 for the same period last year.

* * *

“There was a significant decline in global equity markets in the third quarter and notsurprisingly, our financial results have been adversely affected by the volatility,” saidDominic D’Alessandro, President and Chief Executive Officer. “ We have a verystrong balance sheet with a portfolio of leading diversified businesses that continueto perform strongly. Given the market conditions, our sales and new businessembedded value growth were quite favourable.”

89. The press release also announced that, despite Manulife’s reassurances just three

weeks earlier that its capital levels were more than adequate, the Company had bolstered its capital

by obtaining a $3 billion loan, stating, in pertinent part, as follows:

MFC today also announced that it has executed a binding credit agreement withthe six largest Canadian banks to provide a 5-year term loan of $3 billion. Theloan will be fully drawn down by November 20, 2008, and will be deployed, asnecessary, to provide additional regulatory capital for its operating subsidiaries.

90. Defendant D’Alessandro denied that the loan was a sign of trouble, however, stating

that: “Even with the decline in global equity markets since September 30th, our capital position is

a very comfortable one. . . .”

91. The above-referenced statement in ¶90 was materially false and misleading because it

concealed and downplayed the significant risk that a continuing equity market downturn would

require Manulife to shore up the capital reserves backing its guaranteed payments to variable annuity

- 32 -


and segregated fund policyholders, which in turn would have a devastating impact on the Company’s


also reducing earnings. In fact, at the time these statements were made, the OSFI had begun a series

of intensive “activity reviews” of Manulife’s financial condition, was raising questions about

Manulife’s risk controls, and was adamant that the Company shore up its capital position

immediately – “insist[ing]” that Manulife “do a series of transactions.”

92. As a result of the foregoing, Defendants had no reasonable basis for their statement

that: “[e]ven with the decline in global equity markets since September 30th, our capital position is a

very comfortable one,” and that statement was therefore materially false and misleading when made.

93. The press release also discussed Manulife’s capital levels and the recent regulatory

changes relaxing capital requirements, stating, in relevant part, as follows:

Our principal Canadian operating company, The Manufacturers Life InsuranceCompany (“MLI”), is regulated by OSFI and is subject to OSFI’s MinimumContinuing Capital and Surplus Requirements (“MCCSR”). MLI’s MCCSR ratio asat September 30, 2008 remains strong at 193 per cent, a decrease of seven pointsfrom the 200 per cent as at June 30, 2008. The decrease is due to the impact of themarket declines on required capital levels for segregated fund and variable annuityguarantees. . . .

* * *

On October 28, 2008, OSFI announced revisions to the MCCSR guidelinespertaining to the calculation of required capital on segregated fund guarantees.The previous capital rules were based on a single confidence level, regardless of thedate on which an insurer was expected to make payments. The revised capital rules,effective October 1, 2008, increase capital required for short-term obligations andreduce capital required to support distant payment obligations.

MLI’s pro forma MCCSR after reflecting the new financing, the latest capitalrequirements for segregated fund guarantees, and market movements sinceSeptember 30th is estimated at a very robust 225 per cent, which is well above ourtarget range of 180 to 200 per cent.

94. Later that day, Manulife held a conference call with analysts and investors to discuss

the Company’s press release. During the call, Defendant D’Alessandro commented on the impact of

- 33 -


equity market declines and regulatory changes on Manulife’s capital levels, stating, in relevant part,

as follows:

I would like to comment on how the conditions in the global markets have affectedour Company. Equity markets declined sharply in the third quarter down 19% inCanada, 9% in the United States and 15 to 20% in Asia. Notwithstanding thesedeclines, our capital position at September 30 was very satisfactory with anMCCSR of 193%. Unfortunately the decline in equity markets continued intoOctober as indices fell further by about 15% in Canada and the United States andby more than 20% in Asia. This put enormous pressure on our capital ratios. Inview of all the interest in the subject, I would like to take a few minutes to explain.

The regulatory capital required to support guarantees arising from our variableannuities business is calculated using stochastic modeling techniques, and has to besufficient [to] absorb any adverse scenario to a very high confidence level, usuallyexpressed as CTE-95. CTE-95 is almost always described as the average of theworst 5% of the thousands of scenarios generated by the model. What is perhaps lesswell known is that CTE-95 is equivalent to an immediate market decline of about35% being 30% in the United States, 40% in Canada and 60% in Japan. Veryimportantly, with no growth for 10 years. Now given that to the end of October,markets had already declined on a year-to-date basis by more than 30% in NorthAmerica and by almost 50% in Asia to provide for further declines of themagnitude required by CTE-95 it seemed to be unreasonably punitive. So, wereviewed the matter with OSFI and they agreed that under the circumstances CTE-95 should appropriately be modified. The fact that any obligations due under ourvariable annuity guarantees only become payable over periods beginning seven yearsfrom now and extending for 30 years was also an important factor in their decision.

In October the capital requirements for segregated fund guarantees was modifiedby OSFI to require CTE-98 for payments due within one year grading down toCTE-90 for amounts due beyond five years. CTE-90, while providing us with somewelcome capital relief, remains a very robust standard. It is equivalent to animmediate market fall of about 20%, and again, no growth for 10 years. Sosubsequent to the quarter, as a prudent step to further solidify our capital base weexecuted a binding credit agreement with the six largest Canadian banks to providea five year term loan of $3 billion. The proceeds of this financing will be used asnecessary to provide additional regulatory capital to our operating subsidiaries.

Our pro forma MCCSR after reflecting this new financing, the latest capitalrequirements for segregated funds and the market declines since September 30th isestimated at a very robust 225% which is well above our target range of 180 to200%. As these ratios indicate, barring a very sizeable collapse in markets, weexpect to remain well capitalized at year end. . . .

- 34 -


95. Defendant Rubenovitch provided additional information about the sensitivity of

Manulife’s capital levels and earnings to equity market volatility (although he did not quantify the

earnings impact of further equity market declines), stating, in pertinent part, as follows:

A further 10% market correction from the October month end levels would resultin a decline of approximately 20 points in our MCCSR ratio. It would take amarket correction of 25% from the October 31st levels to reach the lower end ofour targeted MCCSR range of 180 to 200%.

Going forward, because the reserve methodology requires us to fully capitalize theimpact of current period market performance as if it is a permanent long-term impactand because under the conservative basis on which the reserves are calculated muchof our segregated funds guarantees are now considered to be “in the money,” we’llsee considerable volatility in net income both positive and negative from equitymarket performance. While the impacts may be material, I would emphasize theywill not represent crystallized amounts as the guarantees for which reserves are beingaccrued are generally payable many years into the future. Therefore, variableannuity related charges to earnings such as we are likely to book in the fourth quartershould markets fail to recover from the October month end levels we will reverse andgenerate positive income when the markets do eventually recover from the currentlow levels.

96. The above-referenced statements in ¶¶94-95 were materially false and misleading

because:

(a) Defendants failed to adequately disclose to investors that if equity markets

declined by more than 10%, the additional decline would have a disproportionately greater adverse

impact on the Company’s capital levels than a 10% decline would; and

(b) Defendants failed to quantify, and thus investors could not appreciate, the

impact that further equity market declines would have on Manulife’s earnings. In fact, an additional

equity market decline of even 10% would result in billions in earnings charges for the Company, and

a decline of more than 10% would have a disproportionately greater adverse impact on the

Company’s earnings than a 10% decline would.

- 35 -


97. In addition, as a result of the foregoing, Defendants had no reasonable basis for their

statement that: “barring a very sizeable collapse in markets, we expect to remain well capitalized at

year end,” and that statement was therefore materially false and misleading when made.

98. During the question and answer portion of the conference call, when an analyst asked

about the Company’s hedging strategy, Defendant Rubenovitch responded, in pertinent part, as

follows:

[W]e need a strategy that includes a range of things, and I think hedging does fit in.What we’re looking at is exchange-traded contracts, because we don’t want toexchange the long-term economic risk for short-term counterparty risk. We do havea program in place. It hedges a substantial portion, but not 100% of the product.There are some components that you can’t track and trade on an exchange-tradedinstrument. We are expanding that to include new business to try and slow thegrowth while we refine the product. . . .

99. In response to another analyst’s related question, “ [WJhat are you doing right now to

prevent yourself from being in another similar situation? Are you, for example, hedging more?”

Defendant Rubenovitch responded, in pertinent part, “ We are now hedging all the new business

originated in the US so that we don’t add to our existing position.”

100. The above-referenced statements regarding Manulife’s hedging policies and programs

were materially false and misleading because, at the time that those statements were made, Manulife

still did not have in place any meaningful or effective hedging programs with respect to its variable

annuity and segregated fund products, and the Company certainly did not “have a [hedging] program

in place” that hedged “a substantial portion” of those products. In truth, Manulife remained heavily

exposed to equity market volatility due to its largely unhedged variable annuity and segregated fund

guarantees. In addition, Defendant Rubenovitch’s reassurance that Manulife’s hedging of some of

its new variable annuity business would prevent similar earnings volatility in the future was

misleading, because the overwhelming majority of Manulife’s equity market exposure stemmed

from its previously-issued variable annuity and segregated fund guarantees, and hedging new

- 36 -


guarantees would have little impact. As a result of Manulife’s unchecked exposure to the sustained

and continuing equity market downturn, the Company was on the verge of having to shore up the

capital reserves backing its variable annuity and segregated fund guarantees by raising billions in

dilutive equity, and taking billions in earnings charges – an increasingly precarious situation that

Defendants continued to conceal from investors.

The Truth Begins to Emerge

101. On December 2, 2008, in direct contravention to Defendants’ previous adamant

reassurances only seven weeks earlier, in the October 13, 2008 press release and during the October

14, 2008 conference call that Manulife would not issue equity, the Company announced in a press

release that it would issue over $2 billion in common equity – one of the largest share issuances in

Canadian history. The press release stated, in pertinent part, as follows:

Toronto – Manulife Financial Corporation (MFC) will further strengthen itsfinancial and capital position by issuing $2.125 billion in common equity whichwould raise its regulatory capital ratio to one of the highest levels in the Company’shistory.

Specifically, $1.125 billion is being sold by way of private placement to eightexisting institutional investors and $1 billion to a syndicate of underwriters in a“bought deal” public offering. The purchase price of the shares acquired by theprivate placement investors and under the public offering is $19.40 per share. Theprivate placement investors will receive a commitment fee equal to 2.062% of theirindividual commitments. The private placement and the public offering are expectedto close on or about December 11, 2008. Concurrently, MFC will reduce its creditfacility with the Canadian banks that was announced on November 6, 2008 to $2billion.

* * *

“This issue of common shares along with the renegotiated credit facilities willnoticeably bolster our already strong capital position” said Dominic D’Alessandro.“These transactions provide us with the flexibility to absorb the accounting impactof future volatility in financial markets and, as importantly, will allow us to takeadvantage of acquisition opportunities that are emerging out of the current industryenvironment.”

- 37 -


102. The press release also announced a substantial anticipated increase in the capital

reserves backing Manulife’s variable annuity and segregated fund guarantees, to $5 billion by the

end of 2008, including a $2.7 billion increase in the fourth quarter alone, and an anticipated fourth

quarter 2008 earnings loss of $1.5 billion due largely to those reserve increases. The press release

stated, in pertinent part, as follows:

As a result of these market declines, MFC also expects to increase its reserves forvariable annuity guarantees to approximately $5.0 billion at December 31, 2008,up from $526 million at the beginning of the year, notwithstanding that potentialpayments under such guarantees would occur seven to 30 years in the future.

For the two months ended November 30, 2008, equity markets have declined by 21%in Canada, 23% in the U.S. and 24% in Japan. As a result, an estimated increase inreserves for variable annuities of approximately $2.7 billion is expected to berecorded in the fourth quarter if equity markets remain unchanged. Primarilybecause of this anticipated increase in reserves for variable annuities, and also dueto the effect on investment and other revenue of sharply lower equity markets, anestimated loss for the fourth quarter of approximately $1.5 billion is anticipated.

103. In response to Manulife’s announcements, the Company’s common shares fell from a

closing price of $16.39 per share on December 1, 2008, to close at $15.96 per share on December 2,

2008, on heavy trading volume. Manulife’s stock continued to decline over the next two trading

days, as the market absorbed the adverse news, closing at $15.34 per share on December 4, 2008.

104. On February 12, 2009, Manulife issued a press release announcing its financial results

for the fourth quarter and full year 2008, ended December 31, 2008. In the press release, Manulife

revealed that it had increased the reserves backing the Company’s variable annuity and segregated

fund guarantees from $526 million as of December 31, 2007, to $5.78 billion as of December 31,

2008, a substantially greater amount than the $5 billion anticipated increase that the Company had

projected on December 2, 2008. Manulife also announced a massive fourth quarter 2008 loss of

more than $1.8 billion, or $1.24 per share (fully diluted) – well above the $1.5 billion loss that the

- 38 -


Company had estimated on December 2, 2008, and its first quarterly loss since going public in 1999.

The press release stated, in pertinent part, as follows:

As a result of the sharp declines in equity markets, balance sheet reserves forsegregated fund guarantees were increased to $5,783 million as at December 31,2008 compared with $526 million at the prior year end.

* * *

The loss in the fourth quarter of 2008 amounted to $1,870 million or $1.24 pershare on a fully diluted basis and differed by $370 million from the estimate of$1,500 million announced on December 2, 2008. . . . The fourth quarter resultsinclude a number of non cash items totaling $2,727 million after tax, including$2,407 million for segregated fund guarantees, other equity related losses of $513million, accruals for credit impairments and downgrades of $128 million, partiallyoffset by changes in actuarial methods and assumptions.

105. The press release also discussed the various capital-raising initiatives that the

Company had undertaken in order to shore up the reserves backing its variable annuity and

segregated fund guarantees, stating, in relevant part, as follows:

During the quarter, the Company successfully raised $4,275 million of new capital,consisting of $2,275 million of common shares and $2,000 million of term loans.The common share issue included $1,125 million sold by way of private placementto eight existing institutional investors and $1,150 million, including a fullysubscribed over-allotment of $150 million, sold to a syndicate of underwriters in a“bought deal” public offering. The five year term loan was provided by leadingCanadian banks, is repayable at the Company’s option at any time, without penalty,and is priced on a floating rate basis at one month BAs plus 380 bps.

106. Later that day, after the close of the markets, Manulife held a conference call with

analysts and investors to discuss the Company’s announcements. During the call, Defendant

Rubenovitch disclosed that Manulife’s variable annuity and segregated fund guarantees were

underwater by a staggering $27 billion, meaning that Manulife had promised payments to

policyholders that totaled $27 billion more than the amount that Manulife actually had in its

investment portfolio to back those guarantees. Rubenovitch stated, in pertinent part, as follows:

“Due to the sharp global equity market declines in the fourth quarter, the reported amount at risk,

- 39 -


which represents the excess of guaranteed values over fund values, has increased to CAD27

billion, up from CAD 13 billion last quarter.”

107. Also during the call, when an analyst asked about Manulife’s reduction in the CTE

level used to determine the amount of its variable annuity and segregated fund reserves, the

Company revealed that the reserve increase to $5.78 billion would have been approximately $2.2

billion greater if Manulife had not changed its CTE assumptions:

Nigel Dally – Morgan Stanley – Analyst:

. . . [Y]ou have reduced your [CTE] level from 80 as of September down to 65.What would have the impact been if you had kept the CTE level unchanged at 80?

* * *

Simon Curtis – Executive Vice President and Chief Actuary:

Well the range is quite big now that the guarantees are well in the money. So if wesee CTE65 that result that we reported was about CAD5.8 billion. . . . CTE80would probably be more in the range of CAD8 billion. So there’s quite a big rangenow given that these are well in the money.

108. During his prepared remarks, Defendant Rubenovitch disclosed for the first time the

estimated impact that a further 10% equity market drop would have on Manulife’s earnings, stating,

in pertinent part:

A 10% equity market correction from year-end levels is estimated to result in adecline of approximately 20 points in our MCCSR ratio.

From a consolidated earnings perspective, we estimate that a one-time equitycorrection of 10%, followed by normal market growth, would reduce reportedearnings by about CAD1.6 billion.

109. Defendant Rubenovitch also disclosed that Manulife was finally implementing

measures to reduce its equity market exposure from its variable annuity and segregated fund

products, including by ramping up its hedging programs for those products:

We continue our comprehensive review of our variable annuity offerings and inJanuary, initiated product changes that reduce the risk profile of this line.

- 40 -


Additional product changes are being developed. As well, new VA business writtenin the U.S. is now being hedged as written; and we are planning to extend ourhedging programs to our key businesses in other geographies.

110. During the question and answer portion of the call, the following exchange took place

regarding Manulife’s equity market exposure:

Eric Berg – Barclays Capital – Analyst:

[F]or people who want to sort of get away from all this actuarial talk, it’s been veryfreighted this conversation in CTE this and CTE that, very, very heavy actuarial.People like myself who would like to understand why it is that there has been suchan enormous earnings hit again at Manulife because of the stock market, that weare not seeing to anywhere nearly the same degree in the United States at yourcompetitors, is this simply a matter ofthe fact that they hedged and you didn’t? Oris there more to this story?


. . . So we are giving you our facts. Our facts are that our contracts are underwaterby about CAD26 billion. We have set up, because of the mechanisms that we use,the formulas, our models, we set up CAD5.7 billion. I don’t know what theequivalent numbers are at our competitors.

* * *

We have a lot more equity risk. There’s no question about it. We’ve known wehave had this equity risk. It was almost intentional that we chose to take equityrisk in years gone by thinking that we were a logical repository given the nature ofour liabilities and the obligations we were taking on. We had to invest them in aportfolio of assets, and equities have performed very, very well.

And we had a different accounting regime when we had that approach. We livedwith it for a good long time and our exposures grew as they did. We were late inactivating our hedging program. We had it ready to go; we hired all the people, setup all the systems. But it took us a while – longer than we should have – to get itgoing.

And the markets got away from us. No one expected them as I said at the last call tocollapse quite as significantly as they have. . . .

We have equities that are not worth what we paid for them. Do you believe thatover time markets will recover and that shortfall will be made up? We do ouraccounts on the basis that the market will never recover; and therefore we need to setup an amount today which with just normal interest rates at 6% will grow over theperiod of time that the cash flows are going to be disbursed sufficient to satisfy thosecash flows.

- 41 -


111. As a result of these disclosures, Manulife’s stock fell from a closing price of $15.75

per share on February 11, 2009, to close at $14.81 per share on February 12, 2009, and at $14.15 per

share on February 13, 2009.

112. On February 27, 2009, Fitch Ratings downgraded Manulife’s ratings, reflecting the

adverse information that the market was then absorbing about the Company. The release explained

that:

The key driver of this heightened volatility is the combination of MFC’s outsized,unhedged equity market exposure and the potential for further equity marketdeclines in the next 12 to 18 months.

* * *

Fitch’s Negative Outlook reflects:

--Fitch’s view that near-term conditions in the financial markets will likely continuefor an extended period, which could cause the company to experience higher-than-expected volatility in its financial results and additional challenges in 2009;

* * *

--The potential need to further increase the capital supporting the variable annuitybusiness, driven by further declines in equity markets.

113. By citing the possibility of heightened earnings volatility and additional capital

reserve increases going forward, the Fitch Ratings downgrade enhanced the market’s understanding

of Manulife’s equity market exposure. After this news, Manulife’s stock closed at $10.15 per share.

114. On March 2, 2009, the last day of the Class Period, Defendant Rubenovitch gave a

presentation at the 34th Annual Conference of the Association of Insurance and Financial Analysts

in Scottsdale, Arizona, entitled “Variable Annuities: Significant Changes Ahead,” which disclosed

additional details about the damage that Manulife’s equity market exposure had inflicted on the

Company’s balance sheet.

- 42 -


115. The presentation revealed that Manulife’s variable annuity and segregated fund

products had reduced 2008 earnings by over $3.7 billion, and had it not been for the significant

earnings reduction due to the Company’s equity market exposure, Manulife’s disappointing 2008

earnings of just $517 million would have been $4.26 billion, in line with the Company’s 2007

earnings.

Equity Market Impact onEarnings

Equity Markets 31-Dec-07 31-Dec-08 Change

S&P TSX 13,833 8,988 -35.0010

S&P 500 1,468 903 -38.5010

Hang Seng 27,813 14,387 -48.3%

Nikkei 225 15,308 8,860 -42.1%

Impact on 2008 Earnings (CS millions):

Segregated Fund Guarantees 2,824

Equities supporting general account liabilities 443

Variable Life Reserves 203

Fee Income 78

Surplus segment equity impairments 199

Total Impact $3,747

® Manulife Financial

- 43 -


I Earnings Analysis(C5 Mfllfons^

2008 Reported Earnings 517

Equity Market Impact on Earnings 3,747

2008 Earnings excluding Equity Market Impact 4,264

2007 Reported Earnings 4,302

• Excluding equity market impact, 2008 earnings were in linewith the strong prior year levels

• Cash provided from operations was $7.9 billion in 2008, upfrom $7.2 billion in 2007, reflecting the non-cash nature ofthe equity market impact on earnings

® ManWife Financial

116. The presentation further revealed that the value of the funds associated with

Manulife’s variable annuity and segregated fund products totaled $74 billion, and the Company’s

guaranteed future payments exceeded that amount by nearly $27 billion, meaning that Manulife had

made payment guarantees totaling $101 billion. Despite this incredible amount of exposure, the

Company’s expected profit from its variable annuity and segregated fund products was only $135

million. Further, the Company’s significant increase in its capital reserves, to $5.78 billion, still only

covered 40% of the current amount at risk:

- 44 -


Segregated Fund Guarantees,,•,,,Reserves & Capita!

December 71, 2008(CS Millions)

Fund Value 74,422Net of amounts reinsured

Amount at Risk 26,809Excess of guaranteed values over fund values, net of amounts reinsured

Expected Profit 135PV of fees minus PV of costs based an average of all scenarios (CTEO)

Balance Sheet Reserves 5,783PV of costs minus PV of fees based on average of worst 35% of all scenanes (CTE65)

Total Reserve + 200% of Required Capital 10,681Balance sheet reserves plus 200% of MCCSR Required Capital

Balance Sheet Reserves increased by over $5 billion;Reserves + Capital up by almost $9 billion over 2007 levels

• Coverage of 40% of current amount at riskAssets supporting total reserves plus 200% of required capital exceedexpected result by over $10 billionEntire balance sheet reserve is a margin (PfAD) given expected result

® Manullfe Financial

117. The presentation also contained the following slides discussing Manulife’s belated

efforts to reduce its equity market exposure from its variable annuity and segregated fund products,

including by implementing more significant hedging programs for those products going forward:

- 45 -


.., Hedging Programx

^.YV^i7 Vii_ .̂ "1'r'N

Updaten Program operating effectively

n Mitigates approximately 75% of economic losses related tosubstantial market declines

n Program currently covers approximately $5 billion ofaccount value in the U.S.

n All new business written in the U.S. is currently beinghedged

n Planning to extend hedging program to all new businesswritten in Canada in 2nd quarter of 2009

® Manulife Financial

' Looking Forward ^ y7elra :_

^:.

Need to offer products that can be hedged:• Equity exposure key to hedging costs

• Lifestyle Growth equity exposure being reduced• Lifestyle Balanced equity exposure being reduced

• Basis risk needs to be manageable• Increasing passive management (index)• Lowering exposure to certain asset classes

• Natural Resources, High Yield, REIT etc...

Well positioned for future:• Revising product offerings• Diversifying product line-up• Track record of successful industry leading products

C Manulife Financial

118. Following these announcements, Manulife’s share price declined further, from a

closing price of $10.15 per share on February 27, 2009, to a closing price of $8.91 per share on

- 46 -


March 2, 2009. The Company’s stock continued to decline the following day, as the market digested

the adverse news, closing at $7.90 per share on March 3, 2009 – a decline of more than 50% from

the $16.39 per share closing price prior to the December 2, 2008 announcements.

Post-Class Period Events

119. On March 26, 2009, Manulife filed with the SEC its Annual Report for the fiscal year

ended December 31, 2008 on Form 40-F. The 2008 Annual Report discussed Manulife’s equity

market exposure arising from its variable annuity and segregated fund products and the Company’s

belated efforts to mitigate that exposure, including by strengthening its risk management practices

and controls:

2008 presented extraordinary challenges for the risk management function atManulife Financial. . . . [TJhe severe equity market declines had a material impacton the operations of our Company, in large part arising from our variable annuityand segregated fund guarantee exposures. While these potential obligations arelong term in nature and payable over a 30 year period beginning in several years, wemust account for the increase in liabilities currently. In the face of continuing marketinstability, measures were taken to strengthen our capital base to provide us with acapital position that we expect will provide the flexibility to absorb further marketdeclines.

With our significant balance sheet and earnings sensitivity to equity marketperformance, as well as exposures related to declining interest rates and heightenedcredit challenges, managing risk and capital will have even heightened priority.Plans are being implemented to stem the growth in equity exposure. Ourinvestment portfolio has been, and will continue to be, managed conservatively.Product designs and prices are being reviewed and modified to achieve a reducedrisk profile appropriate for the current market environment.

* * *

Variable annuity guarantees generate the largest component of our exposure riskrelated to equity markets. We are implementing a comprehensive plan that willallow us to economically achieve a reduced level of exposure to equity marketvolatility. We have already begun to review our variable annuity guarantee offeringsand modify product designs to better balance the features that have attractedcustomers to these products with the risk that they present to Manulife Financial. Wewill continue to provide variable annuity and segregated fund offerings, withpotential obligations payable over a long time period, generally deferred severalyears. However, recognizing increasing volatility in equity markets, we will offer

- 47 -


product designs and investment fund alternatives with reduced exposure to equitymarkets. We have also expanded our variable annuity hedging to encompass allnew business written in the U.S. and the majority of Canadian new business andwill look for opportunities to economically hedge existing business. We intend tocontinue to monitor market conditions and manage product features, fee levels,and our hedging program throughout 2009 to ensure an appropriate balancebetween risk and long-term profitability for the variable annuity product line. Wealso intend to prudently limit growth in our guaranteed variable annuitybusinesses.

120. On May 7, 2009, Manulife issued a press release announcing its financial results for

the first quarter of 2009, the period ended March 31, 2009, and reported an additional net loss of

nearly $1.1 billion for the quarter. The press release also provided information about Manulife’s

belated measures to reduce the Company’s substantial equity market exposure stemming from its

segregated fund guarantees, including through the implementation of new hedging programs, stating,

in pertinent part, as follows:

The quarter’s net loss was primarily driven by continued declines across all equitymarkets, particularly in the U.S. Reserve strengthening for segregated fundguarantees resulted in an accounting charge of $1,146 million and creditimpairments were $121 million.

* * *

In light of continued equity market volatility and sensitivity, the Companyconducted a strategic review of its segregated fund product portfolio and startedimplementing changes to its product offerings in the quarter. In the U.S., feeswere increased, deferral bonuses were reduced, additional features were withdrawn,and equity exposure was reduced in several key funds. In Canada, the hedgingprogram for new segregated fund business was successfully implemented at theend of March, and $1.5 billion of inforce business was hedged. New business inNorth America is now hedged on an ongoing basis.

“Going forward, the Company will focus on rebalancing its product portfolio todiversify its sources of income and its risk positions. . . .,” said John DesPrez, newlyappointed Chief Operating Officer.

121. Likewise, during a conference call held later that day, Mr. DesPrez made additional

comments about the Company’s new hedging initiatives, stating, in pertinent part, as follows:

- 48 -


There are a number of fronts on which to manage our equity exposure, but insummary, they involve eliminating VA expansion to new markets; hedging all newbusiness and opportunistic hedging of the in -force block in established markets;reducing the risk on the in -force block; and changing product features and marginson new products to ensure business is profitable after hedging costs.

[W]e have made significant progress on hedging our new business. In the US, allnew business has been hedged since November 2008. In Canada, we leveraged offour US infrastructure and hedging strategies, and effective April 1, all new GMWB[guaranteed minimum withdrawal benefits] business is being hedged, and we aretargeting to hedge other products starting in October 2009. As well, given recentmarket levels, we took the opportunity to hedge CAD1.6 billion of in -forceCanadian business written between November 2008 and March 2009.

In Japan, we intend to start hedging new business by the end of the year. All told,we are now hedging approximately CAD10 billion of guaranteed value at quarter-end. We have a fully dedicated hedge program team of over 20 people, plus anumber of dedicated resources in each of our VA seg fund businesses.

In light of continued equity market volatility and sensitivity, the Company hasconducted a strategic review of its segregated fundproduct portfolio, including bothfund offerings and product features, and started implementing changes in the last twoquarters. Features vary somewhat by geographic markets, but . . . our goal withrespect to fund offerings is to improve hedge effectiveness by reducing the equitycomponent, increasing the index component and eliminating components that aredifficult to hedge. This affects both the in -force and new business.

122. Also during the call, Defendant Rubenovitch told investors that the amount of

Manulife’s variable annuity and segregated fund guarantees at risk ( i. e., underwater) had continued

to grow, from CAD27 billion at the end of the previous quarter, to CAD30 billion at the end of the

first quarter of 2009.

123. In total, as of March 31, 2009, Manulife had guaranteed future payments to its

variable annuity and segregated fund policyholders of $103.7 billion, but the Company had only $74

billion in its investment portfolio to back those guarantees – a gaping shortfall of approximately $30

billion.

124. On June 19, 2009, Manulife issued a press release announcing that it had received an

enforcement notice from Canada’s primary stock market regulator, the OSC. The enforcement

- 49 -


notice stated that the OSC staff had reached a preliminary conclusion that, prior to March 2009,

Manulife had failed to adequately disclose to investors its exposure to market price risk arising from the

Company’s variable annuity and segregated fund guarantee business.

125. According to the press release, Manulife would have an opportunity to respond to the

enforcement notice before the OSC determined whether to commence proceedings. 5

126. Also on June 19, 2009, Manulife announced that it had replaced its CFO, Defendant

Rubenovitch, effective June 22, 2009.

127. The following day, on June 20, 2009, the Financial Post reported:

Bay Street began asking questions about Manulife’s risk-taking and failure tohedge its variable annuity products late last year, just after the giant insurer had toobtain a $3-billion, five-year loan from the major Canadian banks to bolster itscapital reserves.

* * *

Manulife has been busy in the capital markets since then, issuing $1.34 billion ofterm notes and preferred shares in June alone.

128. As the Toronto Star reported that day, “Some investors have complained that they

were not properly informed of the risk [related to segregated funds], particularly in a steep

stock market decline.”

129. An article appearing in The Globe and Mail on June 20, 2009 reported:

[Manulife] which has recorded two consecutive quarterly losses totaling about $3-billion, failed to fully inform investors about the damage that falling stock marketswould inflict on its balance sheet, securities regulators have told the company.

* * *

5 On April 21, 2011, Manulife announced that it had been informed by the OSC that“following its consideration of information obtained from Manulife and Manulife’s currentdisclosure practices and current disclosure,” the OSC would not seek any orders in connection withthe June 2009 enforcement notice.

- 50 -


“If more information would have been available, investors would have madedifference decisions earlier,” said Anthony Scilipoti, executive vice-president ofVeritas Investment Research Corp., and an expert in accounting and disclosureissues.

* * *

[Manulife] has suffered more than some competitors partly because the company wasnot hedging its stock exposure. . . .

130. On June 23, 2009 a Globe and Mail article noted that Manulife had only disclosed the

impact of a 10% stock market decline, although markets had dropped more than 20% in the fourth

quarter alone. The article also reported on investors’ concerns during the Class Period about the

undisclosed impact that Manulife’s variable annuity and segregated fund guarantees could have on

its capital levels in a declining stock market:

Senator Percy Downe, onetime chief of staff to former [Canadian] prime ministerJean Chrètien, said he began sending letters about Manulife to the country’sinsurance regulator after being contacted by a number of Prince Edward Islanderswho were worried about their investments. His concern was whether the insurer washolding sufficient capital.

131. Subsequently, on June 25, 2009, Reuters News reported on Manulife’s efforts to

recover and mentioned the Company’s past inadequate disclosures. The article stated:

Under the direction of its former CEO, Dominic D’Alessandro, the business offeredguaranteed pension-plan payouts to clients and funded the promise by investingclients’ money in stocks, some of which tanked last year. The company had nohedges in place to mitigate the damage.

Shares of Manulife tumbled as it recorded a C$1.07 billion loss in the first quarterand investors questioned its ability to cope. Some analysts say Manulife was in adeeper crisis than it admitted publicly.

“This risk position is not going away fast. I think you’ll find (CEO) Don (Guloien)spends a lot of this year shoring up the balance sheet, raising capital, trying to getthat horse back in the corral,” one analyst said on condition of anonymity.

Additional Scienter Allegations

132. As alleged herein, Defendants acted with scienter in that Defendants knew that the

public documents and statements issued or disseminated in the name of the Company were

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materially false and misleading; knew that such statements or documents would be issued or

disseminated to the investing public; and knowingly and substantially participated or acquiesced in

the issuance or dissemination of such statements or documents as primary violations of the federal

securities laws. As set forth elsewhere herein in detail, Defendants, by virtue of their receipt of

information reflecting the true facts regarding Manulife, their control over, and/or receipt and/or

modification of Manulife’s allegedly materially misleading misstatements and/or their associations

with the Company, which made them privy to confidential proprietary information concerning

Manulife, participated in the fraudulent scheme alleged herein.

133. Because of their executive and managerial positions with Manulife, the Individual

Defendants had access to the adverse undisclosed information about the Company’s business,

finances, operations, markets and present and future business risks particularized herein via access to

internal corporate documents, conversations and connections with other corporate officers and

employees, attendance at management and Board of Directors meetings and committees thereof

and/or via reports and other information provided to them in connection therewith.

134. In addition, Defendants had actual knowledge during the Class Period of information

that undermined and contradicted their public statements that Manulife’s balance sheet and capital

levels were “strong” and that the Company was “well-positioned” to withstand the stock market

declines that were occurring. Specifically, according to the Financial Post:

• Internal company documents, reviewed by the Financial Post, indicated thatManulife had unusually high exposure to stock markets because of its largesegregated fund and variable annuity business.

• Defendant D’Alessandro was warned as early as April 2006, in a presentation givenby the Company’s chief risk officer, that Manulife’s balance sheet “could not absorbthe growing equity risk” posed by its variable annuity and segregated fund products.

• These internal documents also revealed that, by 2006, Manulife’s risk exposure hadincreased to the point where the Company decided to engage in a small amount ofhedging – a tactic that had long been disfavored by Defendant D’Alessandro since

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hedging reduced the Company’s present profits. However, this hedging was “toolittle, too late” and by early 2008, the Company’s exposure had widened.

• By the start of the Class Period, in early 2008, Manulife’s board members wereurging Defendant D’Alessandro to further hedge Manulife’s equity market exposureand curtail the sale of its variable annuity and segregated fund products.

• After the stock markets began to decline rapidly in September 2008, the OSFI,concerned about Manulife’s exposure from its variable annuity and segregated fundproducts, began a series of intensive “activity reviews” of Manulife’s financialcondition, which included reviewing board minutes, scrutinizing presentations to theboard of directors and management committees, and monitoring the Company’sfinancial condition.

• By October 2008, the OSFI was adamant that the Company shore up its capitalposition immediately – “ insist[ing]” that Manulife “do a series of transactions.”

135. At the very same time, Defendants were publicly denying that Manulife may need to

issue equity, and were making false and misleading reassurances downplaying the impact that the

market turmoil would have on Manulife, including the following:

• “Manulife remains conservatively reserved [and] has a high quality balancesheet[,]” its capital reserves provide a “high level of assurance,” and the Company[is] well positioned to weather these difficult times[.]”

• Manulife would “continue to manage its regulatory capital” and Defendants had “noplans to issue common equity.”

• “We remain very well capitalized and we have no intention to issue equity capital,contrary to speculation . . . .”

• “[T]he capital resources of the company, under almost any reasonable expectationof what’s going to happen, are more than adequate today[,]” but “if markets dodeteriorate . . . we’ll go and do something else to re-establish our capital levels . . . .”

• “We think that Manulife was side-swiped by the meltdown in the markets in a waythat grossly exaggerated any impact that they’re going to have on us.”

136. Shortly after these reassurances, on November 12, 2008, the OSFI issued a

“supervisory letter” informing Manulife that it had raised its “intervention stage rating” on the

Company, indicating that it had identified deficiencies that could lead to “material safety and

soundness concerns.”

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137. Further, despite Defendants’ characterizations of the Company’s risk management as

“proactive[,]” “prudent[,]” “rigorous[,]” and “specifically designed to keep potential losses within

acceptable limits[,]” by October 2008, the OSFI was raising questions about the adequacy of

Manulife’s risk controls. In addition, according to the Financial Post:

• Following a meeting with Manulife’s board of directors in early December 2008, theOSFI informed Manulife that it continued to harbor concerns about the Company’s“growing exposure to equity markets” and about “board approved risk-tolerancepolicies[.]”

• The OSFI’s misgivings were so serious that, at the regulator’s behest, Manuliferetained Deloitte & Touche to conduct an independent examination of theCompany’s risk-management controls for its variable annuity and segregated fundproducts.

• On February 3, 2009, the OSFI raised Manulife’s composite risk rating, signalingthat the Company’s risk exposure was not sufficiently mitigated by its capital andearnings, and faulted “senior management’s failure to effectively control . . . [equitymarket] risk.”

138. In addition, Manulife’s 2007 Annual Report represented that the Company’s “risk

tolerances [were] approved by the Board of Directors.”

139. Under the heading “Risk Governance,” Manulife’s 2007 Annual Report represented

as follows:

Sound business decisions require a strong risk culture, and well-informed executivemanagement and Board of Directors. The Audit and Risk Management Committee(“ARMC') of the Board of Directors oversees our global risk taking activities andrisk management practices. The ARMC approves and periodically reviews ourenterprise risk management policy, risk taking philosophy, overall risk appetite,and approves and monitors compliance with all key risk policies and limits. TheARMC regularly reviews with management trends in material risk exposures andmajor risk taking activities, and the ongoing effectiveness of our risk managementpractices.

* * *

The Chief Executive Officer (“CEO') is directly accountable to the Board ofDirectors for all risk taking activities and risk management practices, and issupported by the Chief Financial Officer (“CFO') and Chief Risk Officer(“CRO') as well as by the Executive Risk Committee (“ERC'). Together, they

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shape and continuously promote our risk culture throughout our global operations.The ERC, along with other executive-level risk oversight committees, establish riskpolicy, guide risk taking activity, monitor material risk exposures, and sponsorstrategic risk management priorities throughout the organization.

140. According to the 2007 Annual Report, the Company’s Executive Risk Committee

performed the following functions:

• approves and oversees execution of our enterprise risk management framework;

• establishes risk taking philosophy and risk appetite;

• approves key risk policies and limits; and

• monitors risk exposures and reviews major risk taking activities.

141. In addition, the “Global Asset Liability Committee” was responsible for the

following:

• establishes and oversees market and liquidity risk management strategies, policiesand standards of practice, including our asset liability management program;

• monitors market and liquidity risk exposures and reviews major risk taking activities;and

• approves target investment strategies.

142. Manulife’s 2007 Annual Report contained the following description of the

Company’s “Risk Identification and Monitoring” processes and procedures:

The ERC and the ARMC each review a set of risk reports quarterly that present allkey elements of our risk profile and exposures across all risk categories enterprise-wide, incorporating both quantitative risk measures and qualitative assessments.The reports also highlight key risk management activities and facilitate monitoringof compliance with all key risk policy limits. The reports present informationgathered through a formal risk identification and assessment process involvingbusiness unit general managers and their executive teams, as well as corporateexecutives overseeing global risk management programs.

The Chief Actuary presents the results of the Dynamic Capital Adequacy Testing tothe Board of Directors annually. Our Internal Auditor independently reports theresults of internal audits of risk controls and risk management programs to theARMC semi-annually. Management reviews the implementation ofall global riskmanagement programs, and their effectiveness, with the ARMC annually.

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The Board considers all principal risks facing the Company, as well as themeasures either proposed or already implemented to manage these risks. TheAudit Committee ensures that comprehensive risk management policies andprocesses, internal controls and management information systems are in place andupdated regularly to mitigate the Company’s exposures.

143. If the above-referenced statements about Manulife’s risk management are true, then

the Company’s executive management, including the Individual Defendants, possessed knowledge

during the Class Period about Manulife’s risk exposure due to its largely unhedged variable annuity

and segregated fund guarantees, and the resulting impact that equity market declines would have on

the Company’s capital levels and earnings. Since the Company’s executive management had

responsibility for Manulife’s activities during the Class Period, their knowledge of the wrongful

conduct alleged herein can be imputed to Manulife.

144. In addition, the Individual Defendants were repeatedly queried about Manulife’s

exposure to adverse equity market conditions due to its variable annuity and segregated fund

guarantees, its programs to hedge that exposure, and the adequacy of its capital reserves backing the

guarantees. The Individual Defendants’ responses to such inquiries required them to be

knowledgeable about or recklessly ignore Manulife’s equity market exposure and the impact that

stock market declines would have on the Company’s balance sheet.

145. The Individual Defendants monitored and were aware of all significant business and

operational developments at the Company. The ongoing fraudulent schemes described in this

Complaint could not have been perpetrated over this extended period of time (during which concerns

about the adverse consequences associated with Manulife’s variable annuity and segregated fund

guarantees were repeatedly raised by securities analysts who followed the Company) without the

knowledge and complicity of the Individual Defendants. Nonetheless, Defendants failed to disclose

and misrepresented to the market the true impact that declining equity markets would have on the

Company’s capital reserves and earnings during the Class Period.

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146. Defendants had a duty to disseminate, or cause to be disseminated, accurate and

truthful information with respect to Manulife’s more significant risks and its risk related controls and

to promptly correct any previously disseminated information that was misleading to the market. As

a result of Defendants’ failure to do so, the price of Manulife’s securities was artificially inflated

during the Class Period, damaging Plaintiffs and the Class.

147. The Individual Defendants, because of their positions with Manulife, controlled the

contents of the Company’s public statements, press releases, and quarterly and annual reports

disseminated throughout the Class Period. Each Individual Defendant was provided with or had

access to copies of the reports and press releases alleged herein to be false and/or misleading prior to

or shortly after their issuance and had the ability and opportunity to prevent their issuance or cause

them to be corrected. Because of their positions and access to material non-public information, the

Individual Defendants knew or recklessly disregarded that the adverse facts specified herein had not

been disclosed to, and were being concealed from, the public and that the positive representations

that were being made were false and misleading. As a result, each Individual Defendant is

responsible for the accuracy of Manulife’s corporate statements and therefore responsible and liable

for the representations contained therein.

148. Each of the Defendants is liable as a primary violator in making false and misleading

statements, and for participating in a fraudulent scheme and course of business that operated as a

fraud or deceit on purchasers of Manulife’s securities during the Class Period.

149. As alleged herein, Defendants acted with scienter in that each such Defendant knew

or recklessly disregarded that the public documents and statements, issued or disseminated by or in

the name of the Company, were materially false and misleading, knew or recklessly disregarded that

such statements or documents would be issued to the investing public, and knowingly and

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substantially participated or acquiesced in the issuance of such statements or documents as primary

violators of the federal securities laws. Defendants, by virtue of their receipt of information

reflecting the true facts regarding Manulife, its true business risks and operations, their control over

and/or receipt of Manulife’s allegedly materially misleading statements, and/or their associations

with the Company which made them privy to confidential proprietary information concerning

Manulife, were active and culpable participants in the fraudulent scheme alleged herein. Defendants

knew and/or recklessly disregarded the false and misleading nature of the information that they

caused to be disseminated to the investing public.

Loss Causation/Economic Loss

150. At all relevant times, the material misrepresentations and omissions particularized in

this Complaint directly or proximately caused or were a substantial contributing cause of the

damages sustained by Plaintiffs and other members of the Class. During the Class Period, as

detailed herein, Defendants engaged in a scheme to deceive the market and a course of conduct

which artificially inflated the price of Manulife common stock and operated as a fraud or deceit on

Class Period purchasers of Manulife common stock by, inter alia, concealing the extent of the

Company’s exposure to an equity market downturn due to its variable annuity and segregated fund

products, and thereby presenting a false and misleading picture of the risks that the Company faced

and its true financial position. When Defendants’ prior misrepresentations and fraudulent conduct

were disclosed and became apparent to the market, the price of Manulife common shares fell

precipitously as the prior artificial inflation came out of the price of Manulife’s stock price. As a

result of their purchases of Manulife common stock during the Class Period, Plaintiffs and the other

Class members suffered economic loss, i.e., damages, under the federal securities laws.

151. By failing to disclose that, as a result of Manulife’s massive and largely unhedged

equity market exposure, a stock market downturn would require the Company to bolster the capital

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reserves backing its variable annuity and segregated fund guarantees, which in turn would have a

devastating impact on Manulife’s balance sheet – causing the Company to raise capital by taking out

loans and issuing dilutive equity, and also reducing earnings – Defendants presented a misleading

picture of Manulife’s business and risks. Thus, instead of truthfully disclosing the risks and

uncertainties facing Manulife, during the Class Period, Defendants repeatedly represented that

Manulife employed prudent risk management procedures and controls, that its investment portfolio

was well-diversified, and that the Company was well-positioned to withstand equity market declines.

These misrepresentations and omissions caused and maintained the artificial inflation in Manulife’s

stock price throughout the Class Period and until the truth was slowly revealed to the market.

152. Defendants’ false and misleading statements and omissions had the intended effect

and caused Manulife common stock to trade at artificially inflated levels throughout the Class

Period, reaching as high as $40.11 per share on April 3, 2008.

153. On October 13 and 14, 2008, in response to investor concern about the sufficiency of

Manulife’s capital levels backing its variable annuity and segregated fund guarantees, Defendants

falsely reassured the market that such concerns were “grossly exaggerated,” and that the Company

was “well-positioned” to withstand a stock market downturn, and would not need to issue equity.

Defendants’ misleading assurances maintained the artificial inflation in Manulife’s share price and

caused the Company’s stock to rebound from a closing price of $23.34 per share on Friday, October

10, 2008, to close at $26.31 per share, October 14, 2008.

154. Despite these reassurances, just seven weeks later, on December 2, 2008, Manulife

was forced to announce an anticipated increase in the capital reserves backing its variable annuity

and segregated fund guarantees, to $5 billion by the end of 2008. The Company also disclosed that,

as a result of these reserve increases, it would need to issue over $2 billion in common equity, and

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that it anticipated a fourth quarter earnings loss of $1.5 billion. This announcement was a partial

disclosure of the true impact of Manulife’s equity market exposure from its variable annuity and

segregated fund guarantees. In response to Manulife’s announcements, the Company’s common

shares fell from a closing price of $16.39 per share on December 1, 2008, to close at $15.96 per

share on December 2, 2008, on heavy trading volume. Manulife’s stock continued to decline over

the next two trading days, as the market absorbed the adverse news, closing at $15.34 per share on

December 4, 2008.

155. Then, on February 12, 2009, Manulife revealed that its variable annuity and

segregated fund guarantees totaled $27 billion more than the amount the Company actually had in its

investment portfolio to back those guarantees, and, as a result, Manulife had increased its reserves to

$5.78 billion, and was taking a fourth quarter 2008 earnings charge of more than $1.8 billion – even

greater amounts than the Company had projected on December 2, 2008. Manulife also told investors

that the reserve increase had caused the Company to raise over $4.2 billion in capital, including

through the dilutive equity issuance announced on December 2, 2008. As a result of these

disclosures, Manulife’s stock fell from a closing price of $15.75 per share on February 11, 2009, to

close at $14.81 per share on February 12, 2009 (following the press release), and at $14.15 per share

on February 13, 2009 (following the conference call).

156. After Fitch Ratings downgraded Manulife’s ratings on Friday, February 27, 2009,

citing the possibility of heightened earnings volatility and additional capital reserve increases going

forward due to the Company’s “outsized, unhedged equity market exposure,” Manulife’s stock

closed at $10.15 per share.

157. On March 2, 2009, the last day of the Class Period, Defendant Rubenovitch gave a

presentation which disclosed additional details about the damage that Manulife’s equity market

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exposure had inflicted on the Company’s balance sheet. The presentation revealed that: (i)

Manulife’s variable annuity and segregated fund products had reduced 2008 earnings by over $3.7

billion; (ii) had it not been for the significant earnings reduction due to the Company’s equity market

exposure, Manulife’s disappointing 2008 earnings of just $517 million would have been $4.26

billion, in line with the Company’s 2007 earnings; (iii) the value of the funds associated with

Manulife’s variable annuity and segregated fund products totaled $74 billion, and the Company’s

guaranteed future payments exceeded that amount by nearly $27 billion, meaning that Manulife had

made payment guarantees totaling $101 billion; (iv) despite this incredible amount of exposure, the

Company’s expected profit from its variable annuity and segregated fund products was only $135

million; and (v) the Company’s significant increase in its capital reserves, to $5.78 billion, still only

covered 40% of the current amount at risk. The presentation also discussed Manulife’s belated

efforts to reduce its equity market exposure from its variable annuity and segregated fund products

going forward, including by implementing more significant hedging programs.

158. Following the presentation, Manulife’s share price fell to a closing price of $8.91 per

share on March 2, 2009. The Company’s share price continued to decline the following day, as the

market digested these adverse announcements, closing at $7.90 per share on March 3, 2009, on

unusually high trading volume of over 8 million shares traded, thereby removing the last of the

artificial inflation from Manulife’s stock price. The closing price on March 3, 2009 represented a

decline of more than 50% from the $16.39 per share closing price prior to the December 2, 2008

announcements, and also represented a dramatic 80% decline from the Class Period high of $40.11

per share, reached on April 3, 2008.

159. The precipitous decline in the price of Manulife common stock after the adverse

undisclosed information came to light was a direct result of the nature and extent of Defendants’

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fraud finally being revealed to investors and the market. The timing and magnitude of the price

decline in Manulife common stock negates any inference that the loss suffered by Plaintiffs and the

other Class members was caused by changed market conditions, macroeconomic or industry factors

or Company-specific facts unrelated to the Defendants’ fraudulent conduct. The economic loss, i.e.,

damages, suffered by Plaintiffs and the other Class members was a direct result of Defendants’

fraudulent scheme to artificially inflate the prices of Manulife common stock and the subsequent

significant decline in the value of Manulife common stock when Defendants’ prior

misrepresentations and other fraudulent conduct were revealed.

Applicability of Presumption of Reliance:Fraud on the Market Doctrine

160. At all relevant times, the market for Manulife common stock was an efficient market

for the following reasons, among others:

(a) Manulife common stock met the requirements for listing, and was listed and

actively traded on the NYSE, a highly efficient and automated market;

(b) as a resulted issuer, Manulife filed periodic public reports with the SEC and

the NYSE;

(c) Manulife regularly communicated with public investors via established market

communication mechanisms, including through regular disseminations of press releases on the

national circuits of major newswire services and through other wide-ranging public disclosures, such

as communications with the financial press and other similar reporting services; and

(d) Manulife was followed by several securities analysts employed by major

brokerage firms who wrote reports which were distributed to the sales force and certain customers of

their respective brokerage firms. Each of these reports was publicly available and entered the public

marketplace.

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161. As a result of the foregoing, the market for Manulife common stock promptly

digested current information regarding Manulife from all publicly available sources and reflected

such information in Manulife’s stock price. Under these circumstances, all purchasers of Manulife

common stock during the Class Period suffered similar injury through their purchase of Manulife

common stock at artificially inflated prices and a presumption of reliance applies.

No Safe Harbor

162. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this Complaint.

Many of the specific statements pleaded herein were not identified as “forward-looking statements”

when made. To the extent there were any forward-looking statements, there were no meaningful

cautionary statements identifying important factors that could cause actual results to differ materially

from those in the purportedly forward-looking statements. Alternatively, to the extent that the

statutory safe harbor does apply to any forward-looking statements pleaded herein, Defendants are

liable for those false forward-looking statements because at the time each of those forward-looking

statements was made, the particular speaker knew that the particular forward-looking statement was

false, and/or the forward-looking statement was authorized and/or approved by an executive officer

of Manulife who knew that those statements were false when made.

COUNT I

Violation of Section 10(b) of the Exchange Actand Rule 10b-5 Promulgated Thereunder

Against All Defendants

163. Plaintiffs repeat and reallege each and every allegation contained above as if fully set

forth herein.

164. During the Class Period, Defendants disseminated or approved the materially false

and misleading statements specified above, which they knew or deliberately disregarded were

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misleading in that they contained misrepresentations and failed to disclose material facts necessary

in order to make the statements made, in light of the circumstances under which they were made, not

misleading.

165. Defendants: (a) employed devices, schemes, and artifices to defraud; (b) made untrue

statements of material fact and/or omitted to state material facts necessary to make the statements not

misleading; and (c) engaged in acts, practices, and a course of business which operated as a fraud

and deceit upon the purchasers of the Company’s common stock during the Class Period.

166. Plaintiffs and the Class have suffered damages in that, in reliance on the integrity of

the market, they paid artificially inflated prices for Manulife common stock. Plaintiffs and the Class

would not have purchased Manulife common stock at the prices they paid, or at all, if they had been

aware that the market prices had been artificially and falsely inflated by Defendants’ misleading

statements.

167. As a direct and proximate result of the Defendants’ wrongful conduct, Plaintiffs and

the other members of the Class suffered damages in connection with their purchases of Manulife

common stock during the Class Period.

COUNT II

Violation of Section 20(a) of the Exchange ActAgainst the Individual Defendants

168. Plaintiffs repeat and reallege each and every allegation contained above as if fully set

forth herein.

169. The Individual Defendants acted as controlling persons of Manulife within the

meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their positions as

officers and/or directors of Manulife, and their ownership of Manulife stock, the Individual

Defendants had the power and authority to cause Manulife to engage in the wrongful conduct

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complained of herein. By reason of such conduct, the Individual Defendants are liable pursuant to

Section 20(a) of the Exchange Act.

PRAYER FOR RELIEF

WHEREFORE, Plaintiffs pray for relief and judgment, as follows:

A. Declaring this action to be a proper Class Action pursuant to Rule 23 of the Federal

Rules of Civil Procedure;

B. Awarding compensatory damages in favor of Lead Plaintiffs and the Class against all

Defendants, jointly and severally, for all damages sustained as a result of Defendants' wrongdoing,

in an amount to be proven at trial, including interest thereon;

C. Awarding Lead Plaintiffs and the Class their reasonable costs and expenses incurred

in this action, including counsel fees and expert fees;

D. Awarding Lead Plaintiffs and the Class such other and further relief as the Court may

deem just and proper.

JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

DATED: July 22, 2011 ROBBINS GELLER RUDMAN& DOWD LLP

SAMUEL H. RUDMANDAVID A. ROSENFELDERIN W. BOARDMAN

OR------7

DAVID A. ROSENFELD

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58 South Service Road, Suite 200Melville, NY 11747Telephone: 631/367-7100631/367-1173 (fax)[email protected]@[email protected]

Lead Counsel for Plaintiff

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CERTIFICATE OF SERVICE

I, Erin W. Boardman, hereby certify that on July 22, 2011, I caused a true and

correct copy of the attached:

Second Amended Class Action Complaint for Violation of Federal SecuritiesLaws

to be: (i) filed by hand with the Clerk of the Court; and (ii) served by email and first-class

mail to the following counsel:

Edwin G. Schallert, Esq. Scott N. Auby, Esq.Gary W. Kubek, Esq. Debevoise & Plimpton, LLPDebevoise & Plimpton, LLP 555 13th Street, N.W.919 Third Avenue Washington, DC 20004New York, NY 10022 Telephone: 202/383-8053Telephone: 212/909-6000 202/383-9238 (fax)212/909-6836 (fax) Email: [email protected]: [email protected]: [email protected]

Erin W. Boardman

3 second amended class action complaint for violation of the

Documents