17-1085-cv
O’Donnell v. AXA Equitable Life Ins. Co.
1 In the
2 United States Court of Appeals
3 For the Second Circuit
4
5 ________
6
7 August Term 2017
8
9 Argued: October 25, 2017
10 Decided: April 10, 2018
11
12 No. 17-1085-cv
13
14 RICHARD O ’DONNELL, on behalf of himself and all others similarly
15 situated,
16 Plaintiff-Appellant,
17
18 v.
19
20 AXA EQUITABLE LIFE INSURANCE COMPANY,
21 Defendant-Appellee.
22
23
24 Appeal from the United States District Court
25 for the Southern District of New York
26 Vernon S. Broderick, District Judge, Presiding.
27
28
29 Before: JACOBS, SACK, AND PARKER, Circuit Judges.
30 ________
31
32 A variable annuity policy holder brought a putative class
33 action in state court alleging a breach of contract by an insurance
34 company when it introduced a volatility management strategy to the
35 policies without full compliance with state law. The insurance
1
1 company, citing an alleged misrepresentation to a state regulator,
2 removed the case to federal court where it sought dismissal. The
3 United States District Court for the Southern District of New York,
4 (Broderick, J.), granted dismissal, concluding that the Securities
5 Litigation Uniform Standards Act (SLUSA) precluded the suit. The
6 variable annuity holder appeals. We conclude that a holder’s
7 passive retention of a security following a misrepresentation of
8 which the holder is unaware lacks the “in connection with”
9 requirement for SLUSA preclusion. Accordingly, we REVERSE the
10 judgment of the District Court and REMAND with instructions to
11 remand the case to Connecticut state court.
12 ________
13
14 JOEL C. FEFFER AND DANIELLA QUITT, Harwood
15 Feffer LLP, New York, NY, for Plaintiff-
16 Appellant.
17
18 JAY B. KASNER AND KURT WM. HEMR, Skadden,
19 Arps, Slate, Meagher & Flom LLP, New York, NY,
20 for Defendant-Appellee.
21 ________
22
23 BARRINGTON D . PARKER, Circuit Judge:
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. 15 U.S.C. § 78bb(f)(1). In this
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
2
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). In seeking state regulatory approval for the
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).
3
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. We conclude that a holder’s passive
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.
10 I. BACKGROUND1
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
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. Specifically, O’Donnell invested value in
16 AXA’s “Separate Account No. 49.” JA 97. When O’Donnell
2
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
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, New York Insurance Law Section 4240(e)
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
6
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
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. As with many other securities
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. JA 447–49.
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.
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
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.” Id. 41. The DFS further found that “[t]he
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.
20
9
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
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). In the Zweiman action, as here, the plaintiff
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.
10 O’Donnell, 2017 WL 1194479, at *2. In both actions, despite the
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 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
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). In reviewing a denial of a motion to remand, “the
7 defendant bears the burden of demonstrating the propriety of
8 removal.” Id. (internal quotation marks and citation omitted)
9 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
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.” Thus, the dispute before us involves the
17 fourth requirement: whether the complaint alleges a
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)
13
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
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
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. Key for SLUSA
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. In fact, there is no allegation or indication that
17 O’Donnell and the putative class members were ever aware of the
18 misrepresentation that AXA made to the DFS.
19 Consequently, we see no link between the misrepresentation
20 (to a regulator) and the inaction of a securities holder following
16
1 misrepresentations of which the holder was unaware. Troice brings
2 this point home. There, the Supreme Court stated that “[a]
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. For these reasons we conclude that the misrepresentation
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”).
19 We recognize that in Dabit, the Court stated that “it is enough
20 that the alleged fraud ‘coincide’ with a securities
17
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)). However, here, we are satisfied, first, that a
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
18
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.
13 IV. CONCLUSION
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