RICHARD O‘DONNELL, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. AXA EQUITABLE LIFE INSURANCE COMPANY, Defendant-Appellee.
No. 17-1085-cv
United States Court of Appeals For the Second Circuit
April 10, 2018
August Term 2017
Argued: October 25, 2017
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 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 hоlder‘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.
JOEL C. FEFFER AND DANIELLA QUITT, Harwood Feffer LLP, New York, NY, for Plaintiff-Appellant.
JAY B. KASNER AND KURT WM. HEMR, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY,
BARRINGTON D. PARKER, Circuit Judge:
The Securities Litigation Uniform Standards Act of 1998 (“SLUSA“) precludes plaintiffs frоm bringing certain class actions in state court that allege fraud in connection with the purchase or sale of nationally traded securities.
If SLUSA is applicable, then O‘Donnell would be barred from maintaining this class action in state court and the action would be removable to federal court where it must be dismissed.
The action was eventually transferred to the United States District Court for the Southern District of New York (Broderick, J.) which dismissed it. See O‘Donnell v. AXA Equitable Life Ins. Co., No. 15-CV-9488 (VSB), 2017 WL 1194479 (S.D.N.Y. Mar. 30, 2017).
On this appeal, we are asked to determine whether a putative class action complaint is precludеd by SLUSA where the alleged misrepresentation was made to a state regulator and unknown to the holders of the security. We conclude that a holder‘s passive retention of a security following a misrepresentation of which the holder is unaware fails the “in connection with” requirement for SLUSA preclusion. Accordingly, we reverse the judgment of the District Court and remand with instructions that this action be remanded to Connеcticut state court.
I. BACKGROUND1
In November 2008 O‘Donnell purchased a variable deferred annuity policy from AXA. Briefly, a variable annuity contract is an insurance contract that has an investment component under which an individual
The policy that O‘Donnell purchased allowed him to allocate his premiums among various investment options with diffеrent risk-reward characteristics. Specifically, O‘Donnell invested value in AXA‘s “Separate Account No. 49.” JA 97. When O‘Donnell purchased his variable annuity, he agreed and acknowledged that if he chose to invest his account value in Separate Account No. 49—rather than electing to receive interest at a rate declared by AXA—he would incur investment risk and investment results would not be guaranteed by AXA. Id. 419. However, O‘Donnell‘s policy allowed him to purchase for an additional premium a guarantee that certain benefits would increase by a minimum percentage each year. This guarantee, combined with policy reset provisions, effectively reduced the volatility risks to which he otherwise would have been exposed.
O‘Donnell‘s policy provided that AXA may invest the assets in the separate accоunt in its discretion, as “permitted by applicable law.” JA 110. Also “subject to compliance with applicable law,” the policy permitted AXA to make certain material changes to the accounts. Id. 113. For any changes that AXA planned to make to its separate accounts,
In 2009 AXA introduced a volatility management strategy designed to tactically manage equity exposure to Standard & Poor‘s 500 companies based on the level of volatility in the market. Zweiman v. AXA Equitable Life Ins. Co., 146 F. Supp. 3d 536, 542 (S.D.N.Y. 2015). This strategy, labeled the “AXA Tactical Manager Strategy,” (thе “ATM Strategy“) reduced AXA‘s risks by using derivatives to hedge its own equity exposure to market volatility at the expense of the variable annuity policyholders who purchased their policies, in part, for the opportunity to benefit from market volatility. JA 40. The ATM Strategy is
The New York insurance code requires AXA to file with the DFS plans of operation which describe the investment options for each of its separate accounts. See
A. Consent Order
In 2011, the DFS began investigating AXA‘s implementation of the ATM Strategy and, specifically, whether AXA had properly disclosed to the DFS the scope of the changes. Id. 38. Follоwing its investigation, the DFS concluded that AXA failed to adequately inform it that it was implementing its ATM Strategy “in a manner that substantially changed its variable annuity products.” Id. In March 2014, AXA settled with the DFS. Id. It entered into a Consent Order in which, among other things, the DFS found that AXA violated
B. Proceedings Below
After the entry of the Consent Order, many plaintiffs, including O‘Donnell, brought putative class action suits. O‘Donnell initiated this action in Connecticut state court. O‘Donnell, 2017 WL 1194479, at *2. He alleged a breach of contract claim premised on AXA‘s alleged failure to comply with the terms of the policies that AXA had sold to O‘Donnell and other members of the putative class. Specifically, O‘Donnell alleged that, in violation of
Citing, among other things, the alleged misrepresentations to the DFS, AXA removed the action to federal court (the District of Connecticut), where it successfully moved, over O‘Donnell‘s objections, to transfer the case to the Southern District of New York. There, O‘Donnell moved to remand the action to state court and AXA cross-moved to dismiss the complaint as precluded by SLUSA. Id.
The District Court held that the putative class action complaint was precluded by SLUSA and dismissed the action. In doing so, the District Court construed the contract claim as being essentially the same as the claim that it disposed of in a similar action, Zweiman v. AXA Equitable Life Ins. Co., 146 F. Supp. 3d 536 (S.D.N.Y. 2015). In the Zweiman action, as here, the plaintiff premised a breach of contract claim on the assertion that AXA breached by implementing a material change to the variable annuity policy without obtaining prior approval from state regulators. O‘Donnell, 2017 WL 1194479, at *2. In both actions, despite the plaintiffs’ framing, the District Court interpreted the complaints as alleging a “misrepresentation or omission” on the part of AXA in connection with a decision to hold securities and concluded that SLUSA applied. Id. at *2–3. This appeal followed.
II. STANDARD OF REVIEW
We review a district court‘s grant of a Rule 12(b)(6) motion to dismiss de novo, accepting all factual claims in the complaint as true and drawing all reasonable inferences in the plaintiff‘s favor. In re Kingate Mgmt. Ltd. Litig., 784 F.3d 128, 135 n.11 (2d Cir. 2015). To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. Id. (citing Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).
We review a district court‘s denial of a motion to remand de novo. Cal. Pub. Emps.’ Ret. Sys. v. WorldCom, Inc., 368 F.3d 86, 100 (2d Cir. 2004). In reviewing a denial of a motion to remand, “the defendant bears the burden of demonstrating the propriety of removal.” Id. (internal quotation marks and citation omitted)
III. DISCUSSION
Under SLUSA, covered class actions that allege state law securities fraud in connection with the purchase or sale of covered securities are removable to federal court where they there must be dismissed. Romano v. Kazacos, 609 F.3d 512, 517–18 (2d Cir. 2010); see also Cyan, Inc. v. Beaver Cnty. Emps. Ret. Fund, 138 S.Ct. 1061, 1067 (2018). Specifically, a class action is properly removed to fеderal court and dismissed where the state action is:
- a “covered class action“;
- based on state statutory or common law;
- concerning a covered security; and
- alleging that defendants made a misrepresentation or omission of a material fact . . . in connection with the purchase or sale of that security.
See
Here, there is no dispute that the complaint meets three of SLUSA‘s requirements: (1) the action is a “covered class action,” (2) the action is bаsed on state common law, and (3) the action involves a “covered security.” Thus, the dispute before us involves the fourth requirement: whether the complaint alleges a misrepresentation or omission of material fact in connection with the purchase or sale of a security. This inquiry breaks down into two parts, both of which are required for preclusion under SLUSA: (i) whether the complaint alleges a misrepresentation or omission of a material fact and (ii) if so, whether the misrepresentation or omission was made in connection with the purchase or sale of a SLUSA-covered security.
We conclude that the alleged misrepresentation was not made in connection with the purchase or sale of a SLUSA-covered security. Because we conclude that part two of this inquiry was not met, we need not reach the first one.
A. In Connection With
The District Court considered the language “in connection with” the purchase or sale of covered securities in light of Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71 (2006) and Chadbourne & Parke LLP v. Troice, 134 S.Ct. 1058 (2014). The District Court concluded that the fraud alleged must be material to the decision to buy, sell, or hold a covered security, and if so, any claim involving such a transaction is precluded by SLUSA. O‘Donnell, 2017 WL 1194479, at *2–3.
We are in accord with this view. Moreover, we also agree with the District Court that Dabit and Troice provide that so-called “holder” claims—in which the victims were fraudulently induced to retain or delay selling securities—are also precluded under SLUSA. We note that in Dabit, however, the “holder” claim was express: the plaintiffs alleged that the defendant‘s “misrepresentations and manipulative tactics caused [the plaintiffs] to hold onto overvalued securities,” long after they would have otherwise sold them. 547 U.S. at 75–76. The Supreme Court explained that it is enough that the fraud alleged ‘coincide’ with a securities transaction—whether by the plaintiff or by someone else. Id. at 85 (citing United States v. O‘Hagan, 521 U.S. 642, 651 (1997)). In Troice, the Supreme Court further clarified SLUSA preclusion, noting that in Dabit, SLUSA precluded a suit in which the alleged fraud was “material to and coincided with third-party securities transactions, while also inducing the plaintiffs to hold their stocks long beyond the point when, had the truth been known, they would havе sold.” Troice, 134 S.Ct. at 1066–67 (internal quotation marks, alteration, and citation omitted) (noting prior case law which involved a plaintiff who “took, tried to take, or maintained an ownership position . . . induced by the fraud” (emphasis added)). In short, both Dabit and Troice indicate that an inducement to action or forbearance can satisfy the “in connection with” requirement. See id.
Here, AXA invites us to conclude that O‘Donnell has pled a “holder” claim in a contеxt where the alleged misrepresentation was made to a regulator and unknown to the holders of the securities. We decline this invitation. The complaint is bereft of any allegations that an actual securities
AXA contends that O‘Donnell alleges a breach of contract and an actionable misrepresentation by AXA when, in violation of New York law, in implementing the ATM strategy, it failed to properly explain the nature of the changes to the DFS. Key for SLUSA preclusion, however, the alleged misrepresentation here was by AXA to the DFS, but not by AXA to O‘Donnell, or other рutative class members. In fact, there is no allegation or indication that O‘Donnell and the putative class members were ever aware of the misrepresentation that AXA made to the DFS.
Consequently, we see no link between the misrepresentation (to a regulator) and the inaction of a securities holder following misrepresentations of which the holder was unaware. Troice brings this point home. There, the Supremе Court stated that “[a] fraudulent misrepresentation or omission is not made ‘in connection with’ such a ‘purchase or sale of a covered security’ unless it is material to a decision by one or more individuals (other than the fraudster) to buy or to sell a ‘covered security.‘” Troice, 134 S.Ct. at 1066. For these reasons we conclude that the misrepresentation could not have been made “in connection with” the purchase оr sale of a covered security because the misrepresentation could not have been “material to a decision by one or more individuals . . . to buy or sell a covered security,” for the simple reason that it was unknown to the them. See id. In other words, there is no plausible allegation in the complaint that any decision to hold a security occurred that was related in any way to AXA‘s disclosures to thе DFS. Cf. Shuster v. AXA Equitable Life Ins. Co., No. 14-8035 (RBK/JS), 2015 WL 4314378, at *7 n.12 (D.N.J. July 14, 2015) (concluding no SLUSA preclusion where “none of the facts indicate that a decision to purchase, sell, or hold covered securities was incidental to AXA‘s conduct“).
We recognize that in Dabit, the Court stated that “it is enough that the alleged fraud ‘coincide’ with a securities transaction—whether by the plaintiff or by someone else.” Dabit, 547 U.S. at 85 (observing that “[t]he requisite showing . . . is deception in connection with the purchase or sale of any security, not deception of an identifiable purchaser or seller.” (internal quotation marks and citation omitted) (emphasis added)). Moreover, under the artful pleading rule, as we explained in Romano, courts are to look beyond the face of an “‘artfully pled’ complaint to determine whether [a] plaintiff has ‘cloth[ed] a federal law claim in state garb’ by pleading state law claims that actuаlly arise under federal law.” 609 F.3d at 518 (quoting Travelers Indem. Co. v. Sarkisian, 794 F.2d 754, 758 (2d Cir. 1986)); see also Rowinski v. Salomon Smith Barney Inc., 398 F.3d 294, 304 (3d Cir. 2005) (directing inquiry into whether a “reasonable reading of the complaint evidences allegations of a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security” (internal quotation marks omitted)).
However, here, we are satisfied, first, that a misrepresentation to a regulator and the inaction of a securities holder following a misrepresentation of which the holder is unaware did not affect the holder‘s decisions with respect to holding or disposing of securities and, second, that the misrepresentation did not “coincide” with a securities transaction where none is alleged to have occurred or to have been
Finally, we note that the implementation of the ATM strategy was disclosed publicly in a May 2009 prospectus and in an August 2009 supplement. AXA‘s argument, however, turns on the failure to disclose changes to the DFS and not on these public disclosures. Here there is no allegation (or a reasonable inference) that, in these later disclosures, AXA misled O‘Donnell or the market more generally or thаt the market was aware of AXA‘s misrepresentation to the DFS.
IV. CONCLUSION
For the forgoing reasons, we REVERSE the judgment of the District Court and REMAND with instructions to remand the case to Connecticut state court.