VERNON S. BRODERICK, United States District Judge:
This is a putative class action commenced by Plaintiff Jessica Zweiman on behalf of herself and other variable annuity policy holders as customers of Defendant AXA Equitable Life Insurance Co. ("AXA") alleging that AXA breached its contractual duties to them by implementing a volatility management strategy for its variable annuity policies. Presently pending before me are: (1) Plaintiffs motion to remand the Complaint to New York State Supreme Court, Westchester County under the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), Pub L. No. 105-353, 112 Stat. 3227 (codified at 15 U.S.C. §§ 77p, 78bb(f)); and (2) Defendant's motion to dismiss the Complaint as precluded by SLUSA. Plaintiffs Complaint is precluded by SLUSA because it: (1) involves a covered class action; (2) asserts a state common law breach of contract cause of action; (3) concerns covered securities; and (4) contains allegations when viewed realistically assert misrepresentations or omissions of a material fact in connection with the purchase or sale of its variable annuities.
Therefore, Plaintiffs motion to remand is DENIED, and AXA's motion to dismiss is GRANTED.
This is the second putative class action commenced by Plaintiff Jessica Zweiman.
On June 5, 2014, AXA filed a letter in the O'Donnell case indicating: (1) its intention to seek to dismiss each of the Annuity Cases based on lack of subject matter jurisdiction; (2) asking for the briefing of the motions to be phased so that the subject matter jurisdiction issue could be considered first; and (3) suggesting that the initial pretrial conference scheduled for July 11, 2014 in O'Donnell also serve as the initial pretrial conference in the other Annuity Cases. (No. 14-CV-2209, Doc. 14.) At the time of AXA's June 5th letter AXA had not been served in two of the other Annuity Cases. (Id.) The letter also indicated that on or before June 16, 2014, in accordance with my Individual Rules & Practices In Civil Cases ("Individual Rules"), AXA would submit in the O'Donnell action a letter requesting a pre-motion conference in connection with its anticipated motion to dismiss the complaint in that action for lack of subject matter jurisdiction. (Id.) I issued an order scheduling the initial conference in the Annuity
On June 16, 2014, AXA submitted a pre-motion letter in O'Donnell requesting a premotion conference concerning its proposed motion to dismiss for lack of subject matter jurisdiction. (No. 14-CV-2209, Doc. 16.) In its letter, AXA pointed out that the sole basis for jurisdiction asserted by Plaintiff in O'Donnell was the Class Action Fairness Act of 2005 ("CAFA"), 28 U.S.C. §§ 1332(d) and 1453. (Id.) AXA argued that CAFA "excludes from its scope any class action that solely involves a claim ... concerning a covered security" as defined in SLUSA. (Id. 1-2 (internal quotation marks omitted).) Since there was no other bases of jurisdiction AXA argued that the O'Donnell complaint must be dismissed. (Id. at 2.) Under Rule 4.A of my Individual Rules, O'Donnell had three business days within which to file his opposition to AXA's pre-motion letter. On June 19, 2014, rather than file his opposition to AXA's pre-motion letter, O'Donnell voluntarily dismissed his action. (No. 14-CV-2209, Doc. 17.) On that same day, the plaintiffs in the other Annuity Cases also voluntarily dismissed their claims. (No. 14-CV-3128, Doc. 12; No. 14-CV-3505, Doc. 7; No. 14-CV-3715, Doc. 11.)
Plaintiff commenced this putative class action by filing a complaint in the Supreme Court of the State of New York, County of Westchester, Index No. 59638/2014, on June 19, 2014. (Compl.)
On July 30, 2014, Plaintiff filed her motion to remand this action back to the Supreme Court of New York, (Doc. 16), and memorandum of law, (Pl.'s Remand Mem.)
Plaintiff Zweiman purchased a variable annuity contract from AXA with an initial contribution of $245,044.40, pursuant to a contract dated October 16, 2008 (the "Contract").
Plaintiff Zweiman's Contract permitted her to choose among several investment options, which were maintained in Separate Account No. 49. (Contract 7-9, 24; Prospectus 1.)
AXA established and maintained the Separate Accounts in accordance with the laws of New York State. (Contract 24.) Section 2.04 of Plaintiff's Contract provided, in part, that AXA had the right, "subject to compliance with applicable law:"
(Contract 26.) Section 2.04 further provided that "[i]f the exercise of these rights results in a material change in the underlying investment of a Separate Account," AXA was required to notify Zweiman that it had exercised its right, as required by law. (Id. at 27.)
In May of 2009, AXA introduced a volatility management strategy designed to tactically manage equity exposure to Standard & Poor's ("S & P") 500 companies based on the level of volatility in the market. Specifically, AXA disclosed through the EQ Advisors Trust Prospectus dated May 27, 2009, that it was introducing this volatility management strategy
(5/27 Prospectus 6, 7.)
By prospectus supplement dated August 12, 2009, AXA made a similar disclosure indicating that its volatility management strategy may apply to existing portfolios, such as the AXA Allocation Portfolio group
On February 19, 2010, Zweiman decided to reallocate all of her account value out of the AXA Conservative-Plus Allocation Portfolio and into seven separate investment portfolios. (Hemr Decl. Ex. 8.) The volatility management strategy did not apply to these portfolios. (Def.'s Remand Opp. & MTD 7.) Zweiman then reallocated approximately one-third of her account into two different investment funds on June 21, 2013. (Hemr Decl. Ex. 10.)
New York Insurance Law Section 4240(e) required AXA to file with the New York State Department of Financial Services ("DFS")
N.Y. Ins. Law § 4240(e). In accordance with Section 4240(e), AXA filed requests to amend and restate its Plans of Operation in 2009, 2010, and 2011 for various separate accounts — including Separate Account No. 49 — with DFS. (Consent Order ¶ 2.)
In 2011, DFS investigated AXA's disclosure to DFS of its volatility management strategy. (Id. at 1.) At the conclusion of that investigation, AXA and DFS entered into a Consent Order on March 17, 2014. (Id.)
According to the Consent Order, DFS determined that AXA's Plans of Operation failed to adequately inform and adequately explain to DFS that existing variable annuity policyholders (like Plaintiff) who had not elected to participate in the volatility management strategy could nevertheless have this strategy applied to their policies. (Id. ¶ 3.) Many variable annuity policyholders paid a premium for guaranteed
(Id. ¶¶ 8, 9.)
Although AXA did not affirmatively admit to any wrongdoing as part of the Consent Order, DFS found that AXA violated Section 4240(e) "by filing the Plans of Operation with ... DFS without adequately informing and explaining to the Department the significance of the changes to the insurance product." (Id. ¶¶ 10, 11.) As part of the Consent Order, AXA agreed to pay a civil fine, provide DFS-approved communications to policyholders when AXA revises fund choices relating to its volatility management strategy, and certain other relief. (Consent Order 12-16.) DFS did not, however, withdraw its approvals of AXA's 2009, 2010, and 2011 amended and restated Plans of Operation, order AXA to cease its volatility management strategy, or otherwise order AXA to take steps to inform existing policyholders of the strategy. (See id.)
Zweiman seeks to represent a class of individuals who purchased variable annuities from AXA, which subsequently became subject to the ATM Strategy, and who suffered injury as a result. (Compl. ¶ 16.)
"The magnitude of the federal interest in protecting the integrity of efficient operation of the market for nationally traded securities cannot be overstated." Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 78, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006). Congress has therefore enacted the Private Securities Litigation Reform Act of 1995 ("PSLRA") and SLUSA to regulate the purchase and sale of securities and the securities industry. Congress intended for the PSLRA to curb abuses of the class-action vehicle in litigation involving nationally traded securities — abuses that Congress perceived to be harming the U.S. economy. Id. at 81, 126 S.Ct. 1503; see also 15 U.S.C. § 78u-4(b). The House Conference Report related to the PSLRA noted that "nuisance filings, targeting deep-pocket defendants, vexatious discovery requests, and `manipulation by class action lawyers of the clients whom they purportedly represent' had become rampant in recent years." Dabit, 547 U.S. at 81, 126 S.Ct. 1503. To remedy these harms, the PSLRA imposed uniform standards on federal securities fraud class actions, including a limitation on damages and attorney's fees, a "safe harbor" for
To avoid the restrictions of the PSLRA, members of the plaintiffs' bar increasingly sought to bring class actions under state law in state court. Id. at 82, 126 S.Ct. 1503. As a consequence, Congress enacted SLUSA in 1998 to stem the tidal wave of state private securities class action lawsuits alleging fraud, which was frustrating the objectives of the PSLRA. Id. Under SLUSA, covered class actions involving covered securities that allege securities fraud under state law are removable to federal court where they must be dismissed. Romano v. Kazacos, 609 F.3d 512, 518 (2d Cir.2010). A class action is properly removed to federal court if the state action is: (1) a "covered class action," (2) based on state statutory or common law; (3) concerning a covered security; and (4) alleging that defendants made a misrepresentation or omission of a material fact or used or employed any manipulative device or contrivance in connection with the purchase or sale of that security. 15 U.S.C. § 78bb(f)(l); see also Romano, 609 F.3d at 517-18. When determining whether a complaint is covered by SLUSA, courts may apply the "artful pleading rule" and "look beyond the face of the ... complaint[] to determine whether [it] allege[s] securities fraud in connection with the purchase or sale of covered securities." Romano, 609 F.3d at 519; accord In re Kingate Mgmt. Ltd. Litig., 784 F.3d 128, 140 (2d Cir.2015)
Plaintiff concedes that the Complaint's allegations involve a covered class action, based on state statutory or common law, and concern a covered security thereby satisfying the first three requirements for SLUSA preclusion. (Pl.'s Remand Mem. 6-7.) However, the parties disagree regarding whether AXA made a misrepresentation or omission of a material fact or used or employed any manipulative device or contrivance in connection with the purchase or sale of its variable annuities.
Plaintiff contends that her Complaint alleges a single straightforward breach of contract claim based upon AXA's violation of New York Insurance Law Section 4240(e). (See generally Pl.'s Remand Mem. 7-10.) Zweiman concedes that AXA made misstatements and/or omissions in its DFS filings, (Pl.'s Remand Reply & MTD Opp. 20 ("AXA's alleged misconduct relating to the DFS involved misstatements and omissions in AXA's filings").)
In its recent decision, In re Kingate, 784 F.3d 128, the Second Circuit set forth the following standard governing whether an allegation is precluded by SLUSA: first, there is an allegation of a misrepresentation or omission; second, the allegation is of conduct by the defendant; and third, the allegation is necessary to liability under the state law claims. See id. at 142. In applying this standard, the Second Circuit reemphasized that a plaintiff may "not evade SLUSA by camouflaging allegations that satisfy this standard in the guise of allegations that do not." Id. at 149. Courts must therefore look to the substance of a complaint's allegations rather than conduct "a formalistic search through the pages of the complaint for magic words" to determine whether a complaint sounds in fraud. See Romano, 609 F.3d at 520. As such, a plaintiff cannot avoid the application of SLUSA by removing covered words from its complaint but leaving in the covered concepts. See Segal v. Fifth Third Bank, N.A., 581 F.3d 305, 310-11 (6th Cir.2009). In this regard, courts have utilized prior iterations of a plaintiff's complaint to serve as an interpretive tool.
To state a breach of contract claim under New York law, a plaintiff must plead: "`(1) the existence of a contract; (2) a breach of that contract; and (3) damages resulting from the breach.'"
If an effort to save her Complaint, Plaintiff urges that I view portions of Section 2.04 of the Contract in isolation such that two separate clauses are created — a so-called "Compliance Clause" and "Notice Clause."
As an initial matter, Section 2.04 is one section of the Contract entitled "Changes With Respect To Separate Account." (Contract 26-27.) It is not divided into specific clauses called a compliance clause and a notice clause. In any event, Section 2.01 B of the Contract sets forth that the Separate Accounts are established and maintained in accordance with New York law. (Id. at 24.) Section 2.04 states that AXA has the right to make changes to the Separate Accounts "subject to compliance with applicable law." (Id. at 27.) And Section 2.04 goes on to state that "[i]f the exercise of these rights results in a material change in the underlying investment of a Separate Account, you will be notified of such exercise, as required by law. (Id. (emphasis added).) In reading these provisions together, it is clear that AXA's ability to make changes to the Separate Account was limited by its obligation under
A review of the Zweiman I complaint confirms my reading of the instant Complaint, and reveals that Plaintiff selectively edited her current Complaint to delete "magic words" or "red flags" identifying her claim to be a securities fraud claim precluded by SLUSA. Paragraph 52 of the Zweiman I complaint states that: "If the exercise of these rights resulted in a material change in the underlying investment of a separate account, AXA was obligated under [Section 2.04] to notify policyholders, as required by law." (Zweiman I Compl. ¶ 52 (alterations omitted; internal quotation marks omitted).)
Plaintiff fights against this interpretation by positing that the term "material change" merely emphasizes that the change was not "routine." (Pl.'s Remand Reply & MTD Opp. 10.) However, the problem for Plaintiff is that AXA's contractual obligation to notify her in accordance with the law was triggered by a "material" change. Indeed, this analytical roadblock underscores that the purported two AXA violations of law — failure to notify its policyholders of a material change and failure to obtain proper DFS approval — are intertwined. The sine qua non of DFS's determination (and Plaintiffs allegation) that AXA's filing was misleading is that AXA did not explain to DFS how "existing policyholders who had not elected to invest in the ATM Strategy could end up invested in such funds." (Consent Order ¶ 3 (emphasis added).) Stated differently, AXA's purported violation of Section 4240(e) began with, and is based upon,
Plaintiff posits that the Complaint does not allege that AXA committed a fraud "in connection with" the purchase or sale of a covered security because: (1) Plaintiff purchased her securities before AXA implemented the ATM Strategy; and (2) AXA's misleading disclosure to DFS was not public and therefore could not have induced Plaintiff to buy, sell, or hold her securities. I consider each of these arguments in turn and find them to be unpersuasive.
SLUSA does not define the "in connection with" requirement. However, the Supreme Court provided clarity as to its meaning in two important cases-Dabit and Troice. An overview of these cases will be helpful in considering the term "in connection with" as it relates to the present matter.
In Dabit, the Supreme Court considered whether or not SLUSA precluded so-called "holder" claims where the victims were fraudulently induced — not to sell or purchase — but to retain or delay selling their securities. 547 U.S. at 85-86, 126 S.Ct. 1503. The Court held that it did. Id. In so doing, Dabit articulated three principles. First, the "in connection with" requirement must be construed broadly. Id. at 85, 126 S.Ct. 1503. Second, "it is enough that the fraud alleged `coincide' with a securities transaction." Id. And third, the requisite showing turns on a defendant's "deception in connection with the purchase or sale of any security, not deception of an identifiable purchaser or seller." Id. (internal quotation marks omitted).
The Supreme Court recently refined and added to this legal landscape in Troice, holding that fraud is "in connection with" a covered security if it is "material" to an individual's (other than the fraudster) decision to buy, sell, or hold a covered security. ___ U.S. ___, 134 S.Ct. 1058, 1066, 188 L.Ed.2d 88 (2014). Troice did not modify Dabit. Id. ("We do not here modify Dabit."). Rather, it clarified the boundaries and meaning of "coincide." Troice was careful to emphasize that its formulation of the "in connection with" requirement was not "new" or "narrow." See id. at 1067, 1069-70. Each of the Court's prior articulations of the "in connection with" concept, see Superintendent of Ins. of St. of N.Y. v. Bankers Life & Cas. Co., 404 U.S. 6, 12-13, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971) ("touching" upon); United States v. O'Hagan, 521 U.S. 642, 683, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997) ("coincides"); Dabit, 547 U.S. at 85, 126 S.Ct. 1503 ("coincides"), "involved a victim who took, tried to take, or maintained an ownership position in the statutorily relevant
In light of Troice and Dabit, the "in connection with" doctrine can be articulated as follows: the fraud must be of the type that is material to someone other than the fraudster to buy, sell, or hold a covered security; and, if so, any claim involving that transaction (or lack thereof) — regardless of whether the plaintiff herself was induced to take a position — is precluded. Armed with these controlling principles, I turn to the merits of Plaintiff's arguments.
Plaintiff's proposition that AXA's fraud could not induce her securities transaction because she purchased her covered security long before the ATM Strategy barely warrants any discussion. The Troice Court expressly held that holder claims fall within SLUSA's parameters. Troice, 134 S.Ct. at 1066 (stating SLUSA continues to preclude fraud that induced plaintiffs to hold stock). The temporal relationship between Plaintiff's purchase of her securities and AXA's fraud therefore is of no consequence.
Turning to materiality — Plaintiff cannot plausibly assert that AXA's fraud concerning its ATM Strategy did not make a significant difference to her decision to hold. Indeed, the Complaint is rife with statements that AXA's failure to notify her of the volatility management strategy was crucial to her investment decision:
On the bases of these statements, I conclude that Plaintiff's allegations that AXA misrepresented or omitted information concerning the application of the ATM Strategy to Plaintiff "coincided" with and were material to her decision to hold her covered securities. Any other construction would be contrary to the Complaint.
Plaintiff argues that AXA's misleading DFS filings were not material to her investment decision because she did not "receive, read, or rely" on them. (Pl.'s Remand Mem. 11; Pl.'s Remand Reply & MTD Opp. 16.) Plaintiff's formulation, however, is not the law.
In articulating "in connection with" as a "material" connection, Troice plainly stated that "the scope of this language does not extend further." Troice, 134 S.Ct. at 1066. Troice went so far as to add color to the meaning of "material" as a "connection that matters" or one that "makes a significant difference" to someone's investment decision. Id. Troice did not state that fraud only matters to one who relies on the fraud — which is not surprising because Dabit expressly rejected the approach Plaintiff now espouses:
Dabit, 547 U.S. at 85, 126 S.Ct. 1503; cf. In re LIBOR-Based Fin. Instruments Antitrust Litig., 935 F.Supp.2d 666, 727 (S.D.N.Y.2013) ("[A]lthough showing that the plaintiff purchased a security in reliance on a misrepresentation or omission by the defendant regarding the security's value would likely be sufficient to satisfy the `in connection with' element, such a showing would not be necessary."). Indeed, Dabit makes clear that the fraud need not be directed to the plaintiff to satisfy the "in connection with" requirement. Instead, the focus is "on the conduct of the defendants rather than the identity of the plaintiffs." See Rabin v. JPMorgan Chase Bank, N.A., No. 06-CV-5452, 2007 WL 2295795, at *7 (N.D.Ill. Aug. 3, 2007).
The public versus non-public nature of the DFS filing is therefore of no moment. Rather, the key question is whether or not the misleading DFS filing made a difference to an investor's decision regarding her covered security. I find that it did.
Absent valid DFS approval, AXA would not have been legally permitted to introduce the ATM Strategy to Plaintiff's variable annuity policy. (Compl. ¶¶ 10-13; Pl.'s Remand Reply & Opp. 1.) Therefore, AXA's fraud on DFS — the misleading DFS filing — enabled it to introduce this strategy to Plaintiff's investment portfolio. And as explained at length, Plaintiff complains that the introduction of the ATM Strategy had a material and negative impact on her covered security. The direct connection between AXA's fraud on DFS and the harm Plaintiff claims belies any notion that AXA's misleading DFS filing did not "coincide" with, and made no difference to, Plaintiff's decision to hold, (see Pl.'s Remand Reply & Opp. 17). See In re LIBOR-Based Fin. Instruments, 935 F.Supp.2d at 729-730 (finding RICO claim barred by PSLRA, and "in connection with" requirement met, where the defendants' sale of securities to the plaintiffs was closely dependent on false statements
Plaintiff's Complaint therefore alleges misrepresentations or omissions by AXA "in connection with" covered securities transactions.
For the reasons discussed above, Plaintiffs putative class action falls within the purview of SLUSA, and must therefore be DISMISSED. Accordingly, Plaintiffs motion to remand this action to state court is DENIED, and AXA's motion to dismiss is GRANTED. The Clerk of the Court is respectfully directed to terminate the pending motions and close this case. (Docs. 16, 27.)
SO ORDERED.
