O'Donnell v. AXA Equitable Life Ins. Co.
887 F.3d 124
2d Cir.2018Background
- Plaintiff Richard T. O’Donnell purchased a variable annuity from AXA and invested in AXA’s Separate Account No. 49, which exposes holders to market risk but is governed by a contract that permits AXA to make changes "subject to compliance with applicable law."
- In 2009 AXA implemented an "AXA Tactical Manager" (ATM) volatility-management strategy in certain separate accounts, disclosed in public prospectuses but not fully described to the New York Department of Financial Services (DFS).
- The DFS investigated and concluded AXA’s filings misled the Department about the scope and effect of the ATM strategy; AXA entered into a Consent Order with DFS admitting it failed to adequately inform the DFS and possibly should have required policyholders to opt in.
- O’Donnell filed a putative class action in Connecticut state court alleging breach of contract for AXA’s implementation of the ATM strategy without required regulatory approval and notice to policyholders.
- AXA removed to federal court asserting SLUSA preclusion (15 U.S.C. § 78bb(f)) on the theory the DFS misrepresentation is a misstatement "in connection with" the purchase, sale, or holding of covered securities; the district court dismissed under SLUSA.
- The Second Circuit reversed, holding that an undisclosed misrepresentation made to a regulator and unknown to holders does not meet SLUSA’s "in connection with" requirement for preclusion and remanded with instructions to return the case to state court.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether SLUSA precludes this putative class action by alleging a misrepresentation "in connection with" purchase/sale of covered securities | O’Donnell contends the claim is a state-law breach of contract; he did not rely on any misstatement by AXA to the DFS and frames the claim as regulatory/non-securities | AXA argues its misrepresentation to DFS about the ATM strategy was material and relates to the purchase/sale/holding of covered securities, invoking SLUSA removal/dismissal | The court held SLUSA does not apply: an undisclosed misrepresentation to a regulator, unknown to holders, is not "in connection with" their purchase/sale/holding of securities; remand to state court required |
| Whether a holder-style claim (inducement to hold) is precluded when plaintiffs were unaware of the fraud | O’Donnell argues no inducement because class members did not know of the alleged misstatements | AXA contends Dabit and Troice permit preclusion of "holder" claims where fraud coincides with securities transactions | The court held holder claims require a plausible link between the fraud and a holder's buy/sell/hold decision; absent awareness, no such link exists and SLUSA fails |
| Whether the artful pleading doctrine permits recharacterization of the breach claim as securities fraud for SLUSA | O’Donnell maintains the complaint is a contract/regulatory claim, not securities fraud | AXA urges courts to look beyond the complaint to the DFS misrepresentation to find SLUSA preclusion | The court applied artful pleading limits and concluded recharacterization would be too attenuated where no transactions or reliance by holders are alleged |
| Whether public prospectus disclosures cured or supplied actual notice to the market of the DFS misstatements | O’Donnell notes prospectuses disclosed ATM strategy; no allegation that prospectuses misled holders | AXA relies on DFS findings about misleading filings to support preclusion | The court found prospectus disclosures (and lack of allegations that market was misled) undermine any inference that the DFS misstatement influenced holders’ decisions; SLUSA not satisfied |
Key Cases Cited
- Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (fraud that "coincides" with securities transactions can satisfy SLUSA)
- Chadbourne & Parke LLP v. Troice, 134 S. Ct. 1058 (clarifies that misrepresentation must be material to individuals' buy/sell decision; holder claims precluded when fraud induced holding)
- Romano v. Kazacos, 609 F.3d 512 (2d Cir. 2010) (artful pleading rule applied when determining SLUSA applicability)
- United States v. O’Hagan, 521 U.S. 642 (fraud coinciding with securities transactions may meet certain securities-law predicates)