SIVOLELLA v. AXA EQUITABLE LIFE INSURANCE COMPANY et al

Filing 27

MEMORANDUM & ORDER that 19 Defendants' motion to dismiss Counts I and II is DENIED; that Defendants' motion to dismiss Count IV is GRANTED. Signed by Judge Peter G. Sheridan on 9/21/2012. (mmh)

NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY

MARY ANN SIVOLELLA, for the use and
benefit of the EQ/Common Stock Index
Portfolio, the EQ/Equity Growth PLUS
Portfolio, the EQ/Equity 500 Index Portfolio,
the EQ/Large Cap Value PLUS Portfolio, the
EQ/Global Multi-Sector Equity Portfolio, the
EQ/Mid Cap Value PLUS Portfolio.,

Civil Action No. 11-4194 (PGS)

MEMORANDUM & ORDER

Plaintiff,
v.
AXA EQUITABLE LIFE INSURANCE
COMPANY and AXA EQUITABLE FUNDS
MANAGEMENT GROUP, LLC,
Defendant.

SHERIDAN, U.S.D.J.
This action is brought by Plaintiff Mary Ann Sivolella on behalf of eight mutual
funds1 (collectively, the “AXA Funds”), EQ Advisors Trust (the entity that contains the
AXA Funds), and any person or entity that paid to Defendants, AXA Equitable Life
Insurance Company (“AXA Equitable”) and AXA Equitable Funds Management Group,
LLC (collectively “AXA”), any investment management fees on their investments into
any AXA Fund. Plaintiff’s claims are for excessive management fees pursuant to the

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EQ/Common Stock Index Portfolio, the EQ/Equity Growth PLUS Portfolio, the
EQ/Equity 500 Index Portfolio, the EQ/Large Cap Value PLUS Portfolio, the EQ/Global
Multi-Sector Equity Portfolio, the EQ/Mid Cap Value PLUS Portfolio, the EQ/GAMCO
Small Company Value Portfolio and the EQ/Intermediate Government Bond Index
Portfolio.
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Investment Company Act of 1940 (“ICA”) § 36(b), and unjust enrichment. Defendants
move to dismiss. For the following reasons, Defendant’s motion is denied in part and
granted in part.
I.

FACTUAL BACKGROUND
A.

The Excessive Fees Allegation

The Amended Complaint (“AC”) alleges the following. AXA serves as the
investment adviser to the AXA Funds, each of which is advised by a sub-adviser. AC ¶¶
82-83. AXA has entered into contracts with the sub-advisers pursuant to which the latter,
with minor exceptions, perform all of the investment management services for the AXA
Funds. AC ¶ 84. AXA’s role is generally limited to providing supervisory input. AXA
charges the AXA Funds an investment management fee, which is deducted from the fund
balance and thus reduces the value of Plaintiff’s investment. AC ¶¶ 6, 77-85. AXA
remits a portion of the investment management fees that it collects to each funds’
respective sub-adviser. AC ¶¶ 84-85. Despite the alleged disparity between the services
performed by AXA and the services performed by the sub-advisers, AXA retains most of
the fees. See e.g., AC ¶¶ 85-86, 150.
B.

Plaintiff’s Variable Annuity Contract

Plaintiff purchased a certificate under a group variable annuity contract issued by
AXA Equitable. See AC ¶ 49. A variable annuity is “a contract between an investor and
an insurance company,” pursuant to which the insurance company “promises to make
periodic payments to the contract owner or beneficiary, starting immediately or at some
future time.” See Joint SEC/NASD Report on Examination Findings Regarding BrokerDealer Sales of Variable Insurance Products, at 5 (June 2004), available at

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http://www.sec.gov (“SEC/NASD Report”). The insurance company typically places
premiums paid by a variable annuity investor in a segregated account (referred to as a
“separate account”) owned by the insurance company. See id. The separate account then
invests in the securities markets or in underlying mutual funds. Id. Under the terms of
the variable annuity contract, the value of the benefits under the contract will generally
reflect the performance of the investments in the separate account. See SEC/NASD
Report at 5.
Here, Plaintiff enrolled in the EQUI-VEST Deferred Variable Annuity Program
(the “EQUI-VEST Program”), a variable annuity program offered by her employer,
Newark School System. See Ex. A2 (Plaintiff’s Certificate, dated March 26, 1999
(together with the applicable policy, the “Certificate”); Ex. B (EQUI-VEST Annuity
Enrollment Application, dated March 22, 1999 (“Enrollment Form”)).3 Plaintiff’s
employer offered the program to its employees in connection with a group annuity
contract that it had entered into with AXA Equitable. In connection with her
participation in the EQUI-VEST Program, Plaintiff received a “Certificate” that set forth
in substance the benefits to which she was entitled. The Certificate provides that in
exchange for Plaintiff’s contributions to the EQUI-VEST Program, Plaintiff was entitled
to receive a “variable annuity benefit.” Certificate at 12-15.

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Citations in the form of “Ex. __” are to the exhibits annexed to the Declaration of
Jonathan M. Korn in Support of Defendants’ Motion to Dismiss the Amended Complaint.
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These documents, which memorialize Plaintiff’s variable annuity benefit with AXA
Equitable, are considered on this motion to dismiss because they are essential to
Plaintiff’s claims. See e.g., Green v. Potter, 687 F. Supp. 2d 502, 509 n.5 (D.N.J. 2009).
A document is essential if it creates the rights or duties that are the basis for the
Complaint. Pension Benefit Guar. Corp. v. White Consol. Indus., 998 F.2d 1192, 1196
(3d Cir. 1993).
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Consistent with the typical structure of a variable annuity, AXA Equitable placed
Plaintiff’s contributions to the EQUI-VEST Program, along with contributions from other
investors, in an account called “Separate Account A.” See AC ¶¶ 8, 31, 33, 218, 277;
Certificate at 5. Separate Account A, which is registered as a “unit investment trust”
under the ICA, is used by AXA Equitable to maintain the structure required under the
federal tax law to ensure treatment of variable contracts as “annuities” for tax purposes.
Ex. C (Prospectus for EQUI-VEST Employer-Sponsored Retirement Plans, dated May 1,
2011 (“EQUI-VEST Product Prospectus”), at 65). The EQUI-VEST Product Prospectus
states: “We [AXA Equitable] are the legal owner of all of the assets in Separate Account
A and may withdraw any amounts that exceed our reserves and other liabilities with
respect to variable investment options under our contracts.”
As a participant in the EQUI-VEST Program, Plaintiff is permitted to allocate the
contributions to her variable annuity certificate among a number of investment options,
including the AXA Funds. EQUI-VEST Product Prospectus at 1; see AC ¶¶ 31-33.
These investment options are “portfolios,” the majority of which are offered through
certain trusts created by AXA Equitable, including the EQ Trust. See AC ¶¶ 3-4; Ex. D
(Form N-1A, EQ Trust Prospectus, dated May 1, 2011 (“Trust Prospectus”), at 1). The
EQ Trust is a registered investment company under the ICA (also known as a mutual
fund) and issues shares of beneficial interests that are divided among its various
portfolios. See AC ¶¶ 3-4; Trust Prospectus at 176. The eight AXA Funds at issue in this
case are offered through the EQ Trust and are among the portfolios that are available to
Plaintiff as investment options in the EQUI-VEST Program. See AC ¶¶ 3-4; EQUIVEST Product Prospectus at 1; Trust Prospectus at 1.

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The EQ Trust’s Prospectus explains that “shares are currently sold only to
insurance company separate accounts” and are “not sold directly to the general public.”
Trust’s Prospectus at 30, 36, 40, 49-50, 54, 86, 102, 144. AXA Equitable caused
Separate Account A to purchase shares of the EQ Trust corresponding to the Funds that
Plaintiff selected as investment options. AC ¶ 33. Plaintiff was credited with “units” of
Separate Account A that corresponded to her selected investments, including the AXA
Funds. AC ¶ 8; EQUI-VEST Product Prospectus at 30 (“Each variable investment option
invests in shares of a corresponding portfolio” and the “value in each variable investment
option is measured by ‘units.’”). The overall value of Plaintiff’s units of Separate
Account A fluctuated according to the value of the underlying securities. AC ¶ 8.
However, the value of Plaintiff’s units did not correspond directly to the Funds’
investment performance. The value of Plaintiff’s units of Separate Account A is reduced
by certain “product level” fees that AXA Equitable charges, including, for example,
charges for mortality and expense risks associated with the annuity. EQUI-VEST
Product Prospectus at 30.
C.

Procedural History

On July 21, 2011, Plaintiff filed a complaint against Defendants alleging that
AXA charges excessive management fees to the Funds in violation of Section 36(b) of
the ICA. In response, Defendants filed a motion to dismiss the complaint for lack of
statutory standing. On November 4, 2011, Plaintiff filed the Amended Complaint, in
which Plaintiff re-asserts her claim for excessive fees and asserts two new claims: (1) a
claim under Sections 26(f) and 47(b) of the Investment Company Act, which alleges that
because AXA allegedly charges excessive management fees, the fees charged under

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Plaintiff’s variable annuity contract are, in the aggregate, unreasonable, AC ¶¶ 31-43,
272-79; and (2) a claim for unjust enrichment, AC ¶¶ 44-48, 280-86. By letter dated May
16, 2012, Plaintiff’s counsel voluntarily dismissed Count III of the Amended Complaint,
the 26(f) and 47(b) claim, in light of the Third Circuit Court of Appeals decision,
Santomenno ex rel. John Hancock Trust v. John Hancock Life Ins. Co. (U.S.A.), 677 F.3d
178 (3d Cir. 2012), which affirmed the dismissal of a claim under the ICA where
plaintiffs contended, as in this matter, that a private right of action existed under ICA §
47(b) for a violation of ICA § 26(f). Counts I and II, the excessive fees claims, and
Count IV, the unjust enrichment claim, remain.
II.

DISCUSSION
A. Standard of Review
On a motion to dismiss for failure to state a claim pursuant to Fed. R. Civ. P.

12(b)(6), the Court is required to accept as true all allegations in the Complaint and all
reasonable inferences that can be drawn there from, and to view them in the light most
favorable to the non-moving party. See, e.g., Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949-50
(2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007); Oshiver v. Levin, Fishbein,
Sedran & Berman, 38 F.3d 1380, 1384 (3d Cir. 1994). A complaint should be dismissed
only if the alleged facts, taken as true, fail to state a claim. Iqbal, 129 S. Ct. at 1950. The
question is whether the claimant can prove any set of facts consistent with his or her
allegations that will entitle him or her to relief, not whether that person will ultimately
prevail. Semerenko v. Cendant Corp., 223 F.3d 165, 173 (3d Cir. 2000), cert. denied,
Forbes v. Semerenko, 531 U.S. 1149, 121 S.Ct. 1091 (2001). While a court will accept
well-pled allegations as true for the purposes of the motion, it will not accept bald

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assertions, unsupported conclusions, unwarranted inferences, or sweeping legal
conclusions cast in the form of factual allegations. Iqbal, 129 S. Ct. at 1949; Morse v.
Lower Merion School District, 132 F.3d 902, 906 (3d Cir.1997). “The pleader is required
to ‘set forth sufficient information to outline the elements of his claim or to permit
inferences to be drawn that these elements exist.’” Kost v. Kozakewicz, 1 F.3d 176, 183
(3d Cir.1993) (quoting 5A Wright & Miller, Fed. Practice & Procedure: Civil 2d § 1357
at 340). The Supreme Court has recently held that “[w]hile a complaint attacked by a
Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff’s
obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than
labels and conclusions, and a formulaic recitation of the elements of a cause of action will
not do, . . . . Factual allegations must be enough to raise a right to relief above the
speculative level, . . . on the assumption that all the allegations in the complaint are true
(even if doubtful in fact), . . . .” Twombly, 550 U.S. at 555 (internal citations and
quotations omitted); see also Iqbal, 129 S. Ct. at 1949-50.
B.

Statutory Standing to Assert the Excessive Fees Claims

AXA does not contest the truth of Plaintiff’s allegations that Section 36(b) was
violated, nor does it dispute that it was unjustly enriched. Rather, AXA claims that
Plaintiff cannot pursue her claims because she is not a “security holder” under the ICA,
and therefore does not have statutory standing. For a federal court to have subject-matter
jurisdiction over an action, the plaintiff must have standing to bring the action in the first
instance. As a general matter, “the question of standing is whether the litigant is entitled
to have the court decide the merits of the dispute or of particular issues.” Warth v. Seldin,
422 U.S. 490, 498, 95 S. Ct. 2197, 45 L. Ed. 2d 343 (1975). The question at issue here

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involves statutory standing. “Statutory standing is simply statutory interpretation: the
question it asks is whether Congress has accorded this injured plaintiff the right to sue the
defendant to redress his injury.” Graden v. Conexant Systems Inc., 496 F.3d 291, 295 (3d
Cir. 2007) (emphasis in original). A plaintiff’s statutory standing is a threshold question
that implicates the Court’s subject matter jurisdiction to hear this action. See United
States v. $487,825.00 in U.S. Currency, 484 F.3d 662, 664 (3d Cir. 2007). Plaintiff, as
the party invoking the jurisdiction of this Court, bears the burden of establishing that she
has standing. Common Cause of Penn. v. Commonwealth of Penn., 558 F.3d 249, 257
(3d Cir. 2009).
Section 36(b) of the ICA provides that investment advisers have a “fiduciary duty
with respect to the receipt of compensation for services” that they provide to mutual
funds. 15 U.S.C. § 80a-35(b). However, Section 36(b) limits those who may pursue a
claim, stating that an action may be brought only “by the [SEC], or by a security holder
on behalf of” a mutual fund that is allegedly charged excessive fees. Id. The term
“security holder” is not defined in the ICA. In the Amended Complaint, Plaintiff asserts
that she is a “security holder” of the Funds (or in the alternative, the EQ Trust). AC ¶¶ 6,
7. Defendants argue, however, that the Complaint contains few, if any, facts to support
Plaintiff’s allegation.
The Defendants’ basic position is that the term “security holder,” as used in
Section 36(b), refers to the legal or record owner of a security. Plaintiff’s position is that
the term refers to the equitable or beneficial owner of a security. In support of
Defendants’ position, they primarily point to the statutory text. However, here the
statutory text is ambiguous, as the term “security holder” is undefined.

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The purpose that underlies the ICA, and particularly Section 36(b) is to “create[]
protections for mutual fund shareholders.” Jones v. Harris Assocs. L.P., 130 S.Ct. 1418,
1422 (2010). The ICA “must be broadly construed in order to insure the investing public
a full measure of protection.” Prudential Ins. Co. of Am. v. S.E.C., 326 F.2d 383, 386 (3d
Cir. 1964). Congress intentionally drafted the statutory definition in general terms in
order to control situations regardless of the legal form or structure of the investment. Id.
at 287-88. In analyzing the nearly identical definition of “security holder” under the
Securities Exchange Act, the United States Supreme Court, in light of the broad
definition of the term “security,” said, “we are not bound by legal formalisms, but instead
take account of the economics of the transaction under investigation.” Reves v. Ernst &
Young, 494 U.S. 56, 60-61 (1990). The Court added:
The Court will consider instruments to be ‘securities’ on
the basis of such public expectations, even where an
economic analysis of the circumstances of the particular
transaction might suggest that the instruments are not
‘securities.’
Id. at 66. Given the above, it seems to make little sense to broadly construe the word
“security,” and limit the reach of “holders” to entities that lack any economic interest or
stake in the transaction. Here, it would make no sense to limit standing to enforce ICA §
36(b) to AXA or any other entity that did not pay the allegedly excessive compensation.
Neither Separate Account A nor the EQ Trust – the two entities AXA suggests are the
“security holders” – has any economic stake in the transactions.
On the other hand, Plaintiff and similarly situated investors are responsible for
and paid all of the challenged fees. Plaintiff and other investors bear the full risk of poor
investment performance. Plaintiff and other investors have the right to instruct AXA how

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to vote their shares.4 Assets held in a separate account are immune from claims of
AXA’s creditors, while being vulnerable to claims of the investors’ creditors. And when
Plaintiff decides to withdraw her investment in the AXA Funds, she, not AXA, pays the
taxes on that investment. Given that, Plaintiff has all of the economic stake in these
transactions.
Defendants cite Curran v. Principal Mgmt. Corp., No, 00433, 2011 WL 223872
(S.D. Iowa Jan. 24, 2011), as the “most analogous” case to the matter before this Court.
In Curran, the Court held that, for the purposes of Section 36(b), an investor in a “fund of
funds” is not a “security holder” in the mutual funds invested in by the fund of funds.
Curran is distinguishable for a number of reasons, most notably, that in Curran, plaintiffs
did not have standing with respect to the underlying funds because they “d[id] not enjoy
any of the incidents of ownership or possession of any security in the Underlying Funds
because they d[id] not have the privilege of voting, they d[id] not receive dividends and
they d[id] not receive liquidations with regard to the Underlying Funds.” Id. at *4
(internal quotation marks omitted). As previously stated, here, Plaintiff has the right to
instruct AXA how to vote, dividends enhance the value of her investments, and when she
withdraws her investment in the AXA Funds, she will receive those proceeds, as well as
any dividends.

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The EQUI-VEST Product Prospectus says that when a shareholder vote is required on
certain matters affecting the Funds, AXA Equitable votes the shares. At 65-67.
However, Plaintiff points out that AXA’s SEC filings say that variable annuity contract
owners will have the opportunity to instruct AXA how to vote the number of shares
attributable to their contracts. Plaintiffs’ allegations are accepted as true on this motion
to dismiss.
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For the reasons stated above, Defendants’ motion to dismiss the excessive fees
claims is denied.
C.

Unjust Enrichment

Plaintiff asserts an unjust enrichment claim under the federal common law.
Plaintiff’s claim is premised on the fact that, while the sub-advisers to the AXA Funds
performed most of the investment management services for these funds, AXA’s
investment management fees, which were paid by Plaintiff, greatly exceeded the subadvisers’ fees and were excessive. However, Plaintiff has not shown that this Court
should allow its claim to proceed. The Third Circuit has held that federal common law
causes of action are warranted when they are “necessary to fill in interstitially or
otherwise effectuate the statutory pattern enacted in the large by Congress.” Jordan v.
Federal Express Corp., 116 F.3d 1005, 1017-1018 (3d Cir. 1997) (quoting Plucinski v.
I.A.M. Nat'l Pension Fund, 875 F.2d 1052, 1056 (3d Cir. 1989)). Furthermore, the Court
has held that district courts “should not easily fashion” additional claims “under the guise
of federal common law.” Id. (quoting Curcio v. John Hancock Mut. Life Ins. Co., 33
F.3d 226, 239 (3d Cir. 1994)). Because Plaintiff brings a claim under ICA § 36(b), the
federal common law “unjust enrichment” claim is dismissed, as it is not needed to fill in
interstices of the ICA.

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ORDER
IT IS on this 21st day of September, 2012:
ORDERED that Defendants’ motion to dismiss Counts I and II is hereby
DENIED (ECF No. 19); and it is further
ORDERED that Defendants’ motion to dismiss Count IV is hereby GRANTED
(ECF No. 19).

s/Peter G. Sheridan
PETER G. SHERIDAN, U.S.D.J.

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