O'Donnell v. AXA Equitable Life Insurance C
Filing
OPINION, the judgment of the district court is reversed and remanded with instructions to remand the case to Connecticut state court, by DJ, RDS, BDP, FILED.[2275324] [17-1085]
Case 17-1085, Document 53-1, 04/10/2018, 2275324, Page1 of 19
17-1085-cv
O’Donnell v. AXA Equitable Life Ins. Co.
1
In the
2
United States Court of Appeals
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
For the Second Circuit
________
August Term 2017
Argued: October 25, 2017
Decided: April 10, 2018
No. 17-1085-cv
RICHARD O ’DONNELL,
on behalf of himself and all others similarly
situated,
Plaintiff-Appellant,
v.
AXA EQUITABLE LIFE INSURANCE COMPANY,
Defendant-Appellee.
Appeal from the United States District Court
for the Southern District of New York
Vernon S. Broderick, District Judge, Presiding.
Before:
JACOBS, SACK, AND PARKER,
Circuit Judges.
________
A variable annuity policy holder brought a putative class
action in state court alleging a breach of contract by an insurance
company when it introduced a volatility management strategy to the
policies without full compliance with state law. The insurance
1
Case 17-1085, Document 53-1, 04/10/2018, 2275324, Page2 of 19
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
company, citing an alleged misrepresentation to a state regulator,
removed the case to federal court where it sought dismissal. The
United States District Court for the Southern District of New York,
(Broderick, J.), granted dismissal, concluding that the Securities
Litigation Uniform Standards Act (SLUSA) precluded the suit. The
variable annuity holder appeals. We conclude that a holder’s
passive retention of a security following a misrepresentation of
which the holder is unaware lacks the “in connection with”
requirement for SLUSA preclusion. Accordingly, we REVERSE the
judgment of the District Court and REMAND with instructions to
remand the case to Connecticut state court.
________
24
The Securities Litigation Uniform Standards Act of 1998
25
(“SLUSA”) precludes plaintiffs from bringing certain class actions in
26
state court that allege fraud in connection with the purchase or sale
27
of nationally traded securities.
28
putative class action, plaintiff-appellant Richard T. O’Donnell sues
29
on behalf of himself and other variable annuity holders as customers
30
of defendant-appellee AXA Equitable Life Insurance Co. (“AXA”).
31
O’Donnell alleges that AXA implemented a volatility management
JOEL C. FEFFER AND DANIELLA QUITT, Harwood
Feffer LLP, New York, NY, for PlaintiffAppellant.
JAY B. KASNER AND KURT WM. HEMR, Skadden,
Arps, Slate, Meagher & Flom LLP, New York, NY,
for Defendant-Appellee.
________
BARRINGTON D . PARKER,
Circuit Judge:
15 U.S.C. § 78bb(f)(1).
2
In this
Case 17-1085, Document 53-1, 04/10/2018, 2275324, Page3 of 19
1
strategy for its variable annuity policies in breach of its contractual
2
duties to him and the other variable annuity holders.
3
If SLUSA is applicable, then O’Donnell would be barred from
4
maintaining this class action in state court and the action would be
5
removable to federal court where it must be dismissed. 15 U.S.C. §
6
78bb(f)(1).
7
implementation of the volatility management strategy, AXA was
8
charged with misleading the New York State Department of
9
Financial Services (“DFS”), and eventually reached a settlement with
10
that department. On this ground, the Appellee removed this action
11
to federal court, arguing—solely for the purpose of SLUSA removal
12
and dismissal—that O’Donnell’s breach of contract action depends
13
on a misrepresentation (AXA’s alleged misrepresentation to the
14
New York state regulator). In this vein, AXA argues, the alleged
15
misrepresentation was made in connection with the purchase or sale
16
of a SLUSA-covered security, and, thus, SLUSA preclusion applies.
17
The action was eventually transferred to the United States District
18
Court for the Southern District of New York (Broderick, J.) which
19
dismissed it. See O'Donnell v. AXA Equitable Life Ins. Co., No. 15-CV-
20
9488 (VSB), 2017 WL 1194479 (S.D.N.Y. Mar. 30, 2017).
In
seeking
state
3
regulatory
approval
for
the
Case 17-1085, Document 53-1, 04/10/2018, 2275324, Page4 of 19
1
On this appeal, we are asked to determine whether a putative
2
class action complaint is precluded by SLUSA where the alleged
3
misrepresentation was made to a state regulator and unknown to the
4
holders of the security.
5
retention of a security following a misrepresentation of which the
6
holder is unaware fails the “in connection with” requirement for
7
SLUSA preclusion. Accordingly, we reverse the judgment of the
8
District Court and remand with instructions that this action be
9
remanded to Connecticut state court.
We conclude that a holder’s passive
I. BACKGROUND1
10
11
In November 2008 O’Donnell purchased a variable deferred
12
annuity policy from AXA. Briefly, a variable annuity contract is an
13
insurance contract that has an investment component under which
14
an individual makes a single payment (or a series of payments) to an
15
insurer who in return agrees to make periodic payments to the
16
individual beginning either immediately or at some future date. See,
17
e.g., Lander v. Hartford Life & Annuity Ins. Co., 251 F.3d 101, 104 (2d
18
Cir. 2001).
Variable annuities are “‘hybrid products,’ possessing
1
The following facts are taken from the Appellant’s complaint unless
otherwise noted. “JA” refers to the parties’ joint appendix.
4
Case 17-1085, Document 53-1, 04/10/2018, 2275324, Page5 of 19
1
characteristics
of
both
insurance
products
and
investment
2
securities.” Id. at 105 (citation omitted). Unlike the beneficiary of a
3
fixed annuity, the beneficiary of a variable annuity bears the
4
investment risk of the underlying securities. Id. Moreover, because
5
the level of benefits is not fixed, but will vary depending on the
6
investment portfolio, many consumers use variable annuities as a
7
tool for accumulating greater retirement funds by exposing
8
themselves to greater market risk. Id. Variable annuities are sold
9
primarily by insurance companies and must be offered through
10
“separate accounts” that are registered with the Securities and
11
Exchange Commission under the Investment Company Act of 1940.2
12
Id.
13
The policy that O’Donnell purchased allowed him to allocate
14
his premiums among various investment options with different risk-
15
reward characteristics.
16
AXA’s “Separate Account No. 49.”
Specifically, O’Donnell invested value in
2
JA 97.
When O’Donnell
The Investment Act of 1940 defines a “separate account” as “an account
established and maintained by an insurance company pursuant to the laws of any
State or territory of the United States, or of Canada or any province thereof, under
which income, gains and losses, whether or not realized, from assets allocated to
such account, are, in accordance with the applicable contract, credited to or charged
against such account without regard to other income, gains, or losses of the
insurance company.” 15 U.S.C. § 80a–2(37).
5
Case 17-1085, Document 53-1, 04/10/2018, 2275324, Page6 of 19
1
purchased his variable annuity, he agreed and acknowledged that if
2
he chose to invest his account value in Separate Account No.
3
49—rather than electing to receive interest at a rate declared by
4
AXA—he would incur investment risk and investment results
5
would not be guaranteed by AXA. Id. 419. However, O’Donnell’s
6
policy allowed him to purchase for an additional premium a
7
guarantee that certain benefits would increase by a minimum
8
percentage each year. This guarantee, combined with policy reset
9
provisions, effectively reduced the volatility risks to which he
10
otherwise would have been exposed.
11
O’Donnell’s policy provided that AXA may invest the assets
12
in the separate account in its discretion, as “permitted by applicable
13
law.” JA 110. Also “subject to compliance with applicable law,” the
14
policy permitted AXA to make certain material changes to the
15
accounts. Id. 113. For any changes that AXA planned to make to its
16
separate accounts,
17
required AXA to file with the DFS a request to amend and restate its
18
plans of operation. Id. Finally, the policy provided that “[i]f the
19
exercise of these rights results in a material change in the underlying
New York Insurance Law Section 4240(e)
6
Case 17-1085, Document 53-1, 04/10/2018, 2275324, Page7 of 19
1
investment of a Separate Account,” AXA was required to notify
2
policyholders that it had done so (as required by law). Id.
3
In 2009 AXA introduced a volatility management strategy
4
designed to tactically manage equity exposure to Standard & Poor’s
5
500 companies based on the level of volatility in the market.
6
Zweiman v. AXA Equitable Life Ins. Co., 146 F. Supp. 3d 536, 542
7
(S.D.N.Y. 2015). This strategy, labeled the “AXA Tactical Manager
8
Strategy,” (the “ATM Strategy”) reduced AXA’s risks by using
9
derivatives to hedge its own equity exposure to market volatility at
10
the expense of the variable annuity policyholders who purchased
11
their policies, in part, for the opportunity to benefit from market
12
volatility. JA 40. The ATM Strategy is designed to smooth a fund’s
13
returns during periods of high market volatility. However, the
14
application of the ATM Strategy may limit the gains that may
15
otherwise accrue to a policyholder’s account during periods of high
16
volatility. Id.
17
The New York insurance code requires AXA to file with the
18
DFS plans of operation which describe the investment options for
19
each of its separate accounts. See N.Y. Ins. Law § 4240(e). Prior to
20
introducing the volatility-managed investment options into AXA’s
7
Case 17-1085, Document 53-1, 04/10/2018, 2275324, Page8 of 19
1
separate accounts, AXA filed amended plans of operation. The DFS
2
subsequently approved the filings, but, as explained below, later
3
criticized AXA for misleading it as to the scope and potential effects
4
of the strategy. JA 40. AXA also made filings with the SEC before
5
introducing the ATM Strategy.
6
offerings, the investment options in AXA’s separate accounts are
7
offered pursuant to prospectuses filed with the SEC and provided to
8
annuity holders. See, e.g., Wilson v. Merrill Lynch & Co., Inc., 671 F.3d
9
120 (2d Cir. 2011). A May 2009 prospectus informed annuity holders
10
about the introduction of the volatility management strategy into
11
certain portfolios in which O’Donnell had invested.
12
Moreover, an August 2009 prospectus supplement, applicable to
13
O’Donnell’s investments, indicated that the ATM Strategy would be
14
“[e]ffective on or about September 1, 2009 . . . .” Id. 455.
As with many other securities
JA 447–49.
15
A.
Consent Order
16
In 2011, the DFS began investigating AXA’s implementation of
17
the ATM Strategy and, specifically, whether AXA had properly
18
disclosed to the DFS the scope of the changes. Id. 38. Following its
19
investigation, the DFS concluded that AXA failed to adequately
20
inform it that it was implementing its ATM Strategy “in a manner
8
Case 17-1085, Document 53-1, 04/10/2018, 2275324, Page9 of 19
1
that substantially changed its variable annuity products.” Id. In
2
March 2014, AXA settled with the DFS. Id. It entered into a Consent
3
Order in which, among other things, the DFS found that AXA
4
violated New York Insurance Law section 4240(e) by filing the plans
5
of operation without “adequately informing and explaining to the
6
Department the significance of the changes to the insurance
7
product.” Id. 42. The DFS also found that the implementation of the
8
ATM Strategy “effectively changed the nature of the product that
9
the policyholders purchased, yet AXA did not explain in its filings to
10
the Department that it was making such changes to its variable
11
annuity products.”
12
absence of detail and discussion in the filings regarding the
13
significance of the implementation of the ATM Strategy had the
14
effect of misleading the Department regarding the scope and
15
potential effects of the ATM Strategy . . . .” Id. The DFS noted that it
16
approved the filings because it was led to believe the changes were
17
simply routine additions of funds. Id. The DFS concluded that had
18
it been aware of the changes, “it may have required that the existing
19
policyholders affirmatively opt in to the ATM Strategy.” Id.
Id. 41.
The DFS further found that “[t]he
20
9
Case 17-1085, Document 53-1, 04/10/2018, 2275324, Page10 of 19
1
B.
Proceedings Below
2
After the entry of the Consent Order, many plaintiffs,
3
including O’Donnell, brought putative class action suits. O’Donnell
4
initiated this action in Connecticut state court. O'Donnell, 2017 WL
5
1194479, at *2. He alleged a breach of contract claim premised on
6
AXA’s alleged failure to comply with the terms of the policies that
7
AXA had sold to O’Donnell and other members of the putative class.
8
Specifically, O’Donnell alleged that, in violation of Section 4240,
9
AXA breached the terms of the policy when it implemented the
10
ATM Strategy without obtaining prior approval.
O’Donnell
11
purported to sue on behalf of himself and all other similarly situated
12
variable annuity policyholders who allocated funds into separate
13
accounts which implemented the ATM Strategy.
14
Citing, among other things, the alleged misrepresentations to
15
the DFS, AXA removed the action to federal court (the District of
16
Connecticut), where it successfully moved, over O’Donnell’s
17
objections, to transfer the case to the Southern District of New York.
18
There, O’Donnell moved to remand the action to state court and
19
AXA cross-moved to dismiss the complaint as precluded by SLUSA.
20
Id.
10
Case 17-1085, Document 53-1, 04/10/2018, 2275324, Page11 of 19
1
The District Court held that the putative class action
2
complaint was precluded by SLUSA and dismissed the action. In
3
doing so, the District Court construed the contract claim as being
4
essentially the same as the claim that it disposed of in a similar
5
action, Zweiman v. AXA Equitable Life Ins. Co., 146 F. Supp. 3d 536
6
(S.D.N.Y. 2015).
7
premised a breach of contract claim on the assertion that AXA
8
breached by implementing a material change to the variable annuity
9
policy without obtaining prior approval from state regulators.
In the Zweiman action, as here, the plaintiff
10
O’Donnell, 2017 WL 1194479, at *2.
11
plaintiffs’ framing, the District Court interpreted the complaints as
12
alleging a “misrepresentation or omission” on the part of AXA in
13
connection with a decision to hold securities and concluded that
14
SLUSA applied. Id. at *2–3. This appeal followed.
15
In both actions, despite the
II. STANDARD OF REVIEW
16
We review a district court’s grant of a Rule 12(b)(6) motion to
17
dismiss de novo, accepting all factual claims in the complaint as true
18
and drawing all reasonable inferences in the plaintiff’s favor. In re
19
Kingate Mgmt. Ltd. Litig., 784 F.3d 128, 135 n.11 (2d Cir. 2015). To
20
survive a motion to dismiss, a complaint must contain sufficient
11
Case 17-1085, Document 53-1, 04/10/2018, 2275324, Page12 of 19
1
factual matter, accepted as true, to state a claim to relief that is
2
plausible on its face. Id. (citing Ashcroft v. Iqbal, 556 U.S. 662, 678
3
(2009)).
4
We review a district court’s denial of a motion to remand de
5
novo. Cal. Pub. Emps.’ Ret. Sys. v. WorldCom, Inc., 368 F.3d 86, 100 (2d
6
Cir. 2004).
7
defendant bears the burden of demonstrating the propriety of
8
removal.” Id. (internal quotation marks and citation omitted)
9
In reviewing a denial of a motion to remand, “the
III. DISCUSSION
10
Under SLUSA, covered class actions that allege state law
11
securities fraud in connection with the purchase or sale of covered
12
securities are removable to federal court where they there must be
13
dismissed. Romano v. Kazacos, 609 F.3d 512, 517–18 (2d Cir. 2010); see
14
also Cyan, Inc. v. Beaver Cnty. Emps. Ret. Fund , 138 S.Ct. 1061, 1067 (
15
2018). Specifically, a class action is properly removed to federal
16
court and dismissed where the state action is:
17
(1) a “covered class action”;
18
(2) based on state statutory or common law;
19
(3) concerning a covered security; and
12
Case 17-1085, Document 53-1, 04/10/2018, 2275324, Page13 of 19
1
(4) alleging that defendants made a misrepresentation or
2
omission of a material fact . . . in connection with the purchase
3
or sale of that security.
4
See 15 U.S.C. § 78bb(f). When determining whether SLUSA applies
5
to a complaint, courts may apply the “artful pleading rule” and
6
“look beyond the face of the . . . complaint[] to determine whether
7
[it] allege[s] securities fraud in connection with the purchase or sale
8
of covered securities.” Romano, 609 F.3d at 519; see also In re Kingate
9
Mgmt. Ltd. Litig., 784 F.3d at 140 (observing that “plaintiffs should
10
not be permitted to escape SLUSA by artfully characterizing a claim
11
as dependent on a theory other than falsity when falsity nonetheless
12
is essential to the claim”).
13
Here, there is no dispute that the complaint meets three of
14
SLUSA’s requirements: (1) the action is a “covered class action,” (2)
15
the action is based on state common law, and (3) the action involves
16
a “covered security.”
17
fourth
18
misrepresentation or omission of material fact in connection with the
19
purchase or sale of a security. This inquiry breaks down into two
20
parts, both of which are required for preclusion under SLUSA: (i)
requirement:
Thus, the dispute before us involves
whether
13
the
complaint
alleges
the
a
Case 17-1085, Document 53-1, 04/10/2018, 2275324, Page14 of 19
1
whether the complaint alleges a misrepresentation or omission of a
2
material fact and (ii) if so, whether the misrepresentation or
3
omission was made in connection with the purchase or sale of a
4
SLUSA-covered security.
5
We conclude that the alleged misrepresentation was not made
6
in connection with the purchase or sale of a SLUSA-covered security.
7
Because we conclude that part two of this inquiry was not met, we
8
need not reach the first one.
9
A.
In Connection With
10
The District Court considered the language “in connection
11
with” the purchase or sale of covered securities in light of Merrill
12
Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006) and
13
Chadbourne & Parke LLP v. Troice, 134 S.Ct. 1058 (2014). The District
14
Court concluded that the fraud alleged must be material to the
15
decision to buy, sell, or hold a covered security, and if so, any claim
16
involving such a transaction is precluded by SLUSA. O'Donnell,
17
2017 WL 1194479, at *2–3.
18
We are in accord with this view. Moreover, we also agree
19
with the District Court that Dabit and Troice provide that so-called
20
“holder” claims—in which the victims were fraudulently induced to
14
Case 17-1085, Document 53-1, 04/10/2018, 2275324, Page15 of 19
1
retain or delay selling securities—are also precluded under SLUSA.
2
We note that in Dabit, however, the “holder” claim was express: the
3
plaintiffs alleged that the defendant’s “misrepresentations and
4
manipulative tactics caused [the plaintiffs] to hold onto overvalued
5
securities,” long after they would have otherwise sold them. 547
6
U.S. at 75–76. The Supreme Court explained that it is enough that
7
the fraud alleged ‘coincide’ with a securities transaction—whether
8
by the plaintiff or by someone else. Id. at 85 (citing United States v.
9
O’Hagan, 521 U.S. 642, 651 (1997)). In Troice, the Supreme Court
10
further clarified SLUSA preclusion, noting that in Dabit, SLUSA
11
precluded a suit in which the alleged fraud was “material to and
12
coincided with third-party securities transactions, while also
13
inducing the plaintiffs to hold their stocks long beyond the point
14
when, had the truth been known, they would have sold.” Troice, 134
15
S.Ct. at 1066–67 (internal quotation marks, alteration, and citation
16
omitted) (noting prior case law which involved a plaintiff who
17
“took, tried to take, or maintained an ownership position . . . induced
18
by the fraud” (emphasis added)). In short, both Dabit and Troice
19
indicate that an inducement to action or forbearance can satisfy the
20
“in connection with” requirement. See id.
15
Case 17-1085, Document 53-1, 04/10/2018, 2275324, Page16 of 19
1
Here, AXA invites us to conclude that O’Donnell has pled a
2
“holder” claim in a context where the alleged misrepresentation was
3
made to a regulator and unknown to the holders of the securities.
4
We decline this invitation. The complaint is bereft of any allegations
5
that an actual securities transaction ever occurred. Moreover, the
6
complaint does not plausibly allege—nor support a reasonable
7
inference—that any decision to hold by O’Donnell was made that
8
was related in any way to any misstatements to the DFS. See Troice,
9
134 S.Ct. at 1066–67 (highlighting materiality requirement).
10
AXA contends that O’Donnell alleges a breach of contract and
11
an actionable misrepresentation by AXA when, in violation of New
12
York law, in implementing the ATM strategy, it failed to properly
13
explain the nature of the changes to the DFS.
14
preclusion, however, the alleged misrepresentation here was by
15
AXA to the DFS, but not by AXA to O’Donnell, or other putative
16
class members.
17
O’Donnell and the putative class members were ever aware of the
18
misrepresentation that AXA made to the DFS.
Key for SLUSA
In fact, there is no allegation or indication that
19
Consequently, we see no link between the misrepresentation
20
(to a regulator) and the inaction of a securities holder following
16
Case 17-1085, Document 53-1, 04/10/2018, 2275324, Page17 of 19
1
misrepresentations of which the holder was unaware. Troice brings
2
this point home.
3
fraudulent misrepresentation or omission is not made ‘in connection
4
with’ such a ‘purchase or sale of a covered security’ unless it is
5
material to a decision by one or more individuals (other than the
6
fraudster) to buy or to sell a ‘covered security.” Troice, 134 S.Ct. at
7
1066.
8
could not have been made “in connection with” the purchase or sale
9
of a covered security because the misrepresentation could not have
10
been “material to a decision by one or more individuals . . . to buy or
11
sell a covered security,” for the simple reason that it was unknown
12
to the them. See id. In other words, there is no plausible allegation
13
in the complaint that any decision to hold a security occurred that
14
was related in any way to AXA’s disclosures to the DFS. Cf. Shuster
15
v. AXA Equitable Life Ins. Co., No. 14-8035 (RBK/JS), 2015 WL 4314378,
16
at *7 n.12 (D.N.J. July 14, 2015) (concluding no SLUSA preclusion
17
where “none of the facts indicate that a decision to purchase, sell, or
18
hold covered securities was incidental to AXA’s conduct”).
For these reasons we conclude that the misrepresentation
We recognize that in Dabit, the Court stated that “it is enough
19
20
There, the Supreme Court stated that “[a]
that
the
alleged
fraud
‘coincide’
17
with
a
securities
Case 17-1085, Document 53-1, 04/10/2018, 2275324, Page18 of 19
1
transaction—whether by the plaintiff or by someone else.” Dabit,
2
547 U.S. at 85 (observing that “[t]he requisite showing . . . is
3
deception in connection with the purchase or sale of any security,
4
not deception of an identifiable purchaser or seller.” (internal quotation
5
marks and citation omitted) (emphasis added)). Moreover, under
6
the artful pleading rule, as we explained in Romano, courts are to
7
look beyond the face of an “‘artfully pled’ complaint to determine
8
whether [a] plaintiff has ‘cloth[ed] a federal law claim in state garb’
9
by pleading state law claims that actually arise under federal law.”
10
609 F.3d at 518 (quoting Travelers Indem. Co. v. Sarkisian, 794 F.2d 754,
11
758 (2d Cir. 1986)); see also Rowinski v. Salomon Smith Barney Inc., 398
12
F.3d 294, 304 (3d Cir. 2005) (directing inquiry into whether a
13
“reasonable reading of the complaint evidences allegations of a
14
misrepresentation or omission of a material fact in connection with
15
the purchase or sale of a covered security” (internal quotation marks
16
omitted)).
17
misrepresentation to a regulator and the inaction of a securities
18
holder following a misrepresentation of which the holder is unaware
19
did not affect the holder’s decisions with respect to holding or
20
disposing of securities and, second, that the misrepresentation did
However, here, we are satisfied, first, that a
18
Case 17-1085, Document 53-1, 04/10/2018, 2275324, Page19 of 19
1
not “coincide” with a securities transaction where none is alleged to
2
have occurred or to have been forestalled, delayed or inhibited. A
3
contrary decision would be a bridge too far even for the artful
4
pleading rule.
5
Finally, we note that the implementation of the ATM strategy
6
was disclosed publicly in a May 2009 prospectus and in an August
7
2009 supplement. AXA’s argument, however, turns on the failure to
8
disclose changes to the DFS and not on these public disclosures.
9
Here there is no allegation (or a reasonable inference) that, in these
10
later disclosures, AXA misled O’Donnell or the market more
11
generally or that the market was aware of AXA’s misrepresentation
12
to the DFS.
IV. CONCLUSION
13
14
For the forgoing reasons, we REVERSE the judgment of the
15
District Court and REMAND with instructions to remand the case to
16
Connecticut state court.
19
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?