Court: District Court, S.D. New York; September 30, 2015; Federal District Court
A putative class action has been filed by Plaintiff Jessica Zweiman against Defendant AXA Equitable Life Insurance Co., claiming breach of contractual duties related to a volatility management strategy for variable annuity policies. The court is currently considering two motions: Plaintiff's motion to remand the case to New York State Supreme Court under the Securities Litigation Uniform Standards Act (SLUSA) and Defendant’s motion to dismiss based on SLUSA preclusion. The court finds that the Complaint is precluded by SLUSA as it involves a covered class action, asserts a state common law breach of contract claim, concerns covered securities, and includes allegations of misrepresentations or omissions regarding the variable annuities. Consequently, the court denies the remand motion and grants AXA's motion to dismiss.
This action follows a prior case, Zweiman v. AXA Equitable Life Insurance Co., filed in 2014, which was one of four related class actions concerning AXA's volatility management strategy for its variable annuities. AXA previously indicated its intention to seek dismissal of these cases based on lack of subject matter jurisdiction, asserting that the Class Action Fairness Act (CAFA) does not apply to actions involving covered securities as defined by SLUSA. The court had scheduled an initial pretrial conference to address these jurisdictional issues.
O'Donnell had a three-business-day window to respond to AXA's pre-motion letter but instead voluntarily dismissed his case on June 19, 2014. On the same day, other plaintiffs in related Annuity Cases also dismissed their claims. The plaintiff initiated a putative class action by filing a complaint in the New York State Supreme Court on June 19, 2014, which was served to AXA on June 24. AXA removed the case to federal court on July 3, 2014, and filed a Related Case Statement indicating its connection to ongoing Annuity Cases. A stipulation allowed AXA until August 29, 2014, to answer the complaint. On July 21, AXA submitted a pre-motion letter seeking a conference to discuss a motion to dismiss based on the assertion that the Securities Litigation Uniform Standards Act (SLUSA) barred the state law breach of contract claims. The case was accepted as related on that date. The plaintiff responded on July 24, indicating plans to file a motion to remand and arguing that AXA's request was duplicative. On July 30, the plaintiff filed the motion to remand, prompting a scheduled pre-motion conference on August 6. During the conference, the parties examined both the remand motion and AXA’s potential motion to dismiss. AXA opposed the remand motion and cross-moved to dismiss on September 5, with subsequent replies from both parties filed by September 25. The plaintiff, Zweiman, had purchased a Variable annuity from AXA in 2008, characterized as a tax-deferred retirement vehicle that combines elements of insurance and investment securities. Variable annuities must be offered through SEC-registered separate accounts under the Investment Company Act of 1940.
Plaintiff Zweiman's contract permitted her to select from various investment options within Separate Account No. 49, all linked to mutual fund portfolios. Initially, she opted for the Guaranteed Interest investment and subsequently reallocated her contributions to the AXA Conservative-Plus Allocation Portfolio over twelve months. This portfolio is a 'fund of funds' under AXA Premier VIP Trust, invested in multiple portfolios within the EQ Advisors Trust. The Guaranteed Interest option required Zweiman to pay a premium to ensure benefits would increase by a minimum percentage annually, with provisions preventing any decrease in value. AXA managed the Separate Accounts in compliance with New York law.
The contract granted AXA rights to modify investment options, including adding or removing funds and combining them, with a requirement to notify Zweiman of any substantial changes. In May 2009, AXA implemented a volatility management strategy aimed at managing equity exposure to S&P 500 companies based on market volatility levels, as disclosed in a prospectus. This strategy involved primarily holding long positions in the S&P 500 Index but could reduce exposure during heightened volatility, potentially leading to underperformance compared to the index. An August 2009 prospectus supplement noted that this volatility management strategy might also affect existing portfolios, including Zweiman's AXA Conservative-Plus Allocation Portfolio, which integrates passive index investments with an actively managed strategy to handle market volatility.
On February 19, 2010, Zweiman reallocated her account from the AXA Conservative-Plus Allocation Portfolio into seven other investment portfolios that were not subject to a volatility management strategy. On June 21, 2013, she further reallocated about one-third of her account into two different funds. Under New York Insurance Law Section 4240(e), AXA was required to file any changes to its separate accounts with the New York State Department of Financial Services (DFS) for approval. The superintendent's approval would consider the insurer's history, reputation, financial stability, and the qualifications of its leadership. If an amendment did not alter the investment policy, it would be deemed approved after thirty days if not acted upon. AXA submitted requests to amend its Plans of Operation in 2009, 2010, and 2011 for various separate accounts, including Separate Account No. 49.
In 2011, DFS investigated AXA's disclosures regarding its volatility management strategy, ultimately resulting in a Consent Order on March 17, 2014. The DFS found that AXA's Plans of Operation inadequately informed it that existing variable annuity policyholders who did not opt for the volatility management strategy could still be affected by it. Many policyholders had paid for guaranteed benefits to pursue more aggressive investments, but the volatility management strategy could restrict their potential gains during volatile market conditions, fundamentally altering the nature of the products purchased. DFS concluded that AXA's filings misled the Department regarding the true implications of the ATM Strategy, which were presented as routine changes. Had DFS been aware of the significant changes, it might have required policyholders to opt in to the volatility management strategy.
AXA was found by the DFS to have violated Section 4240(e) due to insufficient disclosure regarding changes to its insurance products in Plans of Operation filed with DFS, although AXA did not admit to wrongdoing in the Consent Order. Under this order, AXA agreed to pay a civil fine and provide DFS-approved communications to policyholders about revisions to fund choices related to its volatility management strategy, among other relief measures. Notably, DFS did not rescind its approvals of AXA’s prior Plans of Operation or mandate any specific actions regarding the volatility management strategy to inform existing policyholders.
Zweiman aims to represent a class of individuals who purchased variable annuities from AXA affected by the ATM Strategy and who incurred injuries as a result. The excerpt further outlines the significant federal interest in maintaining the integrity of the securities market, referencing the enactment of the Private Securities Litigation Reform Act of 1995 (PSLRA) and the Securities Litigation Uniform Standards Act of 1998 (SLUSA) to address abuses in securities litigation, particularly concerning class actions. The PSLRA established stricter standards for federal securities fraud class actions, while SLUSA aimed to prevent circumvention of those standards by allowing state law class actions alleging securities fraud to be removable to federal court for dismissal. A class action qualifies for removal under SLUSA if it meets specific criteria related to being a covered class action, concerning a covered security, and alleging misrepresentation or manipulative practices in the securities context. Courts may apply the "artful pleading rule" to assess whether complaints alleging securities fraud fall under SLUSA's jurisdiction, allowing for the consideration of materials beyond the complaint itself to establish jurisdiction.
Plaintiff acknowledges that the allegations in the Complaint pertain to a covered class action involving a covered security, thus meeting the initial requirements for SLUSA preclusion. The central dispute lies in whether AXA made material misrepresentations or omissions regarding its variable annuities. Plaintiff asserts that her claim is based solely on a breach of contract due to AXA's violation of New York Insurance Law Section 4240(e). Zweiman admits AXA made misstatements in its filings but contends that AXA erroneously introduces an additional theory of liability regarding failure to notify policyholders about material changes, which she argues is not a valid claim. However, the court finds that Zweiman's attempt to remove this allegation to avoid preclusion is unsuccessful. Citing the Second Circuit's standard from In re Kingate, the court emphasizes that allegations involving misrepresentation or omission, conduct by the defendant, and necessity to liability under state law claims cannot be evaded by rephrasing. The court will analyze the allegations in the current Complaint, prior iterations, and the underlying Contract. Zweiman's singular claim of breach of contract hinges on AXA's alleged failure to notify customers of material changes to the variable annuity products and to adequately explain these changes to the DFS. Under New York law, to establish a breach of contract claim, the plaintiff must demonstrate the existence of a contract, a breach, and resulting damages. Zweiman claims she suffered damages due to AXA's implementation of the ATM Strategy, which she argues violated her Contract.
The implementation of the ATM Strategy significantly altered the variable annuity products, negatively impacting the value of the plaintiff's and other Class members' accounts. AXA possesses some discretion over investment options; however, it is prohibited from making material changes without adhering to relevant laws. AXA's contracts with the plaintiff and Class members include a covenant to comply with applicable laws, including New York law. The plaintiff argues that Section 2.04 of the Contract can be interpreted as containing separate "Compliance" and "Notice Clauses," each supporting a distinct breach of contract claim. This interpretation is rejected as artificial and inconsistent with the law, as Section 2.04 is part of a single section titled “Changes With Respect To Separate Account” and is not divided into specific clauses.
Section 2.01 B specifies that Separate Accounts must comply with New York law. Section 2.04 allows AXA to make changes to the Separate Accounts but mandates notification to policyholders if such changes result in a material alteration. The provisions read together indicate that AXA's capacity to change the Separate Account is conditioned on its obligation to notify policyholders of material changes. The plaintiff's breach of contract claim hinges on the assertion that AXA failed to notify her of a material change, constituting a misrepresentation or omission. Any alternative interpretation would necessitate altering the plaintiff's allegations, which is impermissible.
Additionally, the plaintiff's earlier complaint (Zweiman I) indicates that AXA was required to notify policyholders of any material changes in the underlying investments. The current complaint appears to intentionally omit references to AXA's notification obligations, but a review of the earlier and current complaints shows that the alleged violation of law pertains to AXA's failure to notify the plaintiff of the material change, which is central to her claim.
Plaintiff argues that the term "material change" indicates a change that is not routine. However, AXA's obligation to notify her was triggered by a material change. The plaintiff's claims regarding AXA's alleged violations—failure to notify policyholders of a material change and failure to obtain proper DFS approval—are interrelated. Central to these allegations is AXA's failure to clarify to DFS how existing policyholders who did not opt for the ATM Strategy could inadvertently be invested in it, which constitutes a misstatement to policyholders leading to AXA's liability.
The plaintiff contends that the Complaint does not allege that AXA committed fraud “in connection with” the purchase or sale of a covered security, arguing that she purchased her securities before the ATM Strategy was implemented and that AXA’s misleading disclosures were not public. These arguments are deemed unpersuasive. The term “in connection with” has been interpreted broadly by the Supreme Court. In the Dabit case, it was established that fraud can preclude claims even when individuals are induced not to sell but to retain their securities. The Court noted that fraud need only coincide with a securities transaction and does not require deception of a specific buyer or seller. The Troice case further clarified that fraud is considered “in connection with” a covered security if it materially influences an individual's decision regarding that security. Both Dabit and Troice reinforce the broad interpretation of “in connection with” without narrowing its application.
In the context of Dabit and Troice, the "in connection with" doctrine requires that fraud must be material to someone other than the fraudster for it to be actionable in relation to a covered security transaction. Specifically, if the fraudster is the one making the investment decision, the fraud is considered "immaterial." Regarding the Plaintiff's holder claim against AXA, the argument that AXA’s fraud could not induce her securities transaction is addressed by the Troice ruling, which confirms that holder claims fall within the scope of SLUSA, meaning the timing of the Plaintiff’s purchase relative to the alleged fraud is irrelevant.
On the issue of materiality, the Plaintiff's assertions indicate that AXA's misrepresentations about its ATM Strategy significantly influenced her decision to hold her investment. The Complaint details that the Plaintiff paid for guaranteed benefits that were meant to shield her investment from market volatility risks, which AXA's ATM Strategy was designed to mitigate. The implementation of this strategy ultimately altered the nature and reduced the value of the variable annuity products held by the Plaintiff and other policyholders. Thus, the allegations of misrepresentation or omission related to the ATM Strategy are deemed material to the Plaintiff's decision to retain her covered securities, aligning with the assertions made in the Complaint.
AXA's misleading filings with the Department of Financial Services (DFS) are argued by the Plaintiff to be immaterial to her investment decisions since she did not rely on them. However, legal precedent, particularly from Troice and Dabit, establishes that fraud can be considered "in connection with" a securities transaction even if the plaintiff did not directly rely on the misrepresentation. The Dabit case clarifies that it is sufficient for the fraud to coincide with a securities transaction, focusing on the conduct of the defendants rather than the reliance of the plaintiff. Thus, the nature of the DFS filings (public or non-public) is irrelevant; the critical issue is whether the misleading filings influenced the investor's decision regarding her securities. The findings indicate that AXA's fraudulent actions allowed the introduction of the ATM Strategy to the Plaintiff's variable annuity, which had a materially negative impact on her investment. Consequently, the Plaintiff's claims of misrepresentation are deemed to fall under the Securities Litigation Uniform Standards Act (SLUSA), leading to the dismissal of her class action and the denial of her motion to remand the case to state court. AXA’s motion to dismiss is granted, and the case is to be closed.
Jessica Zweiman serves as the executrix for her mother Anne Zweiman's estate, and both are collectively referred to as Plaintiff in this legal context. The Class Action Complaint is denoted as "Compl." Under Rule 4.A of the Individual Rules, a party's submission of a pre-motion letter for a motion to dismiss stays their obligation to respond. Various documents are cited, including the Plaintiff's Memorandum in Support of her Motion to Remand (Doc. 17) and AXA Equitable Life Insurance Company's Memorandum in Support of its Motion to Dismiss (Doc. 28). The court assumes all allegations in the Complaint to be true for resolving the motions, without making findings on their veracity. The court may also reference documents incorporated into the Complaint and those publicly filed with the SEC.
The AXA Variable Annuity Contract is specified as Contract No. 3-0865884, dated October 16, 2008. The Consent Order refers to a document from the New York State Department of Financial Services, and the AXA Conservative-Plus Allocation Portfolio is identified as part of the AXA Allocation portfolios. The Complaint refers to the volatility management strategy as the ATM Strategy. Recent opinions from the Second Circuit, specifically In re Kingate, are relevant to the current case, and the parties have submitted letters regarding this supplemental authority, which the court has considered. Plaintiff's efforts to mitigate a particular admission are noted, referencing Mills v. Polar Molecular Corp.
A breach of contract claim does not imply fraud unless there is an allegation that the defendant had no intention to perform the contract. The Mills case, which assessed fraud claims under Rule 9(b) of the Federal Rules of Civil Procedure, predates the Securities Litigation Uniform Standards Act (SLUSA). The Second Circuit has confirmed that breach of contract claims can be dismissed under SLUSA if there is no allegation of the defendant's secret intent not to perform, as seen in Romano and Gray. The plaintiff's reliance on Dluhos, which addressed the superseding effect of amended complaints, is irrelevant because it did not involve preemption or the artful pleading doctrine. The plaintiff argues that her current complaint is distinct from a previous one, but it is inappropriate to compare complaints from different litigations for artful pleading analysis. The comparison must be confined to the previous complaint in the same action, confirming the existence of a valid contract. The plaintiff did not argue that Section 2.04 creates separate claims until her reply, which does not exempt her complaint from SLUSA's prohibition. The court finds that the complaint alleges misrepresentation or omission, thus not needing to determine if it also alleges manipulative devices. The case of Stephens is not applicable here, as it addressed a misrepresentation made after a purchase without considering its effect on the decision to hold the security. The plaintiff's assertion that the "in connection with" requirement is unmet, due to AXA being the sole purchaser of a covered security, is also noted.
Plaintiff purchased a covered security, which she held, and highlighted the Shuster case (2015 WL 4314378) after briefing concluded. Defendant acknowledged this in a subsequent letter. In Shuster, the court ruled that the plaintiff needed to prove AXA's misrepresentation for liability but found that AXA's fraud was not related to the plaintiff's security transaction. This ruling is deemed irrelevant to the current case because the Shuster plaintiff had not filed a prior complaint, and the securities discussed were insurance policies subject to a different Consent Order. Judge Kugler emphasized that both cases should be evaluated independently, noting that references to the Zweiman case were not beneficial and that any dismissal under SLUSA would depend on the specific allegations and legal considerations relevant to that case.
