ORDER DENYING PLAINTIFFS’ MOTION TO STRIKE EXPERT REPORTS, GRANTING PLAINTIFFS’ MOTION TO LIFT PAGE LIMIT FOR REPLY, AND DENYING PLAINTIFFS’MOTION FOR CLASS CERTIFICATION
This is a class action in which the class member Plaintiffs assert violations of Rule 10b-5 of the 1934 Federal Securities Exchange Act, 15 U.S.C. § 78 and 17 C.F.R. § 240.10b-5. In addition, Plaintiffs assert various common law causes of action including breach of contract, fraud, and civil conspiracy. Now before the Court are Plaintiffs’ Motion to Strike Undesignated Experts’ Reports and Opinions and Motion to Lift Page Limit for Reply, and Plaintiffs’ Motion for Class Certification and for Immediate Class Notification of Nationwide’s Settlement with Putative Class Members. For the reasons set forth below, Plaintiffs’ Motion to Strike is DENIED, the Motion to Lift Page Limit is GRANTED, and the Motion for Class Certification is DENIED.
I. BACKGROUND
Plaintiffs Robert Young and David C. Dis-tad are representatives of an alleged class of purchasers of variable life insurance policies from Defendant Nationwide Life Insurance Company (“Nationwide”). Through its “Best of America Life Planning Series,” Nationwide offers variable policies which allow the policy owner to allocate net premiums and cash value to one or more, “sub-accounts” of certain variable and fixedmccounts. The assets allocated to the sub-account are then used to purchase shares of a designated underlying mutual fund. .The variable account mutual fund options offered by Nationwide are managed by, inter alia, the following well known mutual fund investment advisors: Dreyfus Corp., Fidelity Management & Research Company, Nationwide Financial Services, Neuberger & Berman Management Inc., Oppenheimer Management Corp., Strong/Corneliuson Capital Management, Inc., Twentieth Century, and Van Eck Associates Corp. The variable account at issue here is “TCI Portfolios, Inc.,” which includes the sub-accounts “TCI Growth,” “TCI Balanced,” and “TCI International.” Nationwide advertises these accounts as a part of “the Twentieth Century Family of Mutual Funds,” and all of the Twentieth Century funds are managed by the same investment advisor, Investors Research Corporation, now American Century Investments.
The sub-accounts offered by Nationwide through its Best of America program are mutual funds that offer their shares only to insurance companies. Although the policy owners do not invest directly in the mutual fund, they can allocate their investment to a variable account, and choose the sub-ac-eounts in which they want their premiums invested. The value of their investment is then dependent upon the performance of the particular insurance mutual fund, or “sub-
As a contract holder, you invest in the mutual funds offered in your life insurance contract. However, you do not buy shares of the mutual fund. Instead, the Account buys shares of the fund and you in turn purchase units of the Account____ The value of your contract can change based on the value of the units you own.
The crux of Plaintiffs’ complaint arises from their allegations that the Defendants made material misrepresentations and/or omissions in connection with the marketing and sale of the variable contracts. Specifically, although Plaintiffs acknowledge that they knew they were not investing in publicly traded mutual funds, they claim that the Defendants represented the sub-accounts, or underlying mutual funds, to be “clones” or replicas of well known, publicly traded mutual - funds with the same or similar names. Plaintiffs claim that it was their understanding that the “TCI Portfolios” were insurance funds which tracked the investments of the publicly traded “Twentieth Century” Funds. For instance, Plaintiffs claim that Defendants represented the TCI insurance funds “TCI Growth Fund” and “TCI International Fund” to be clones of the publicly traded Twentieth Century Funds with the names “Twentieth Century Growth Investors Fund” and “Twentieth Century International Fund,” respectively.
Young, who purchased his policy on December 14, 1992, requested that 100% of his payments be allocated to TCI Growth. Dis-tad purchased two policies on April 17, 1996, and requested that 20% of his payments on each of the policies be allocated to the “20th Century International” fund.
Plaintiffs brought this action on October 31, 1997. In their Fourth Amended Complaint, they allege the following causes of action: (1) violations of § 10(b)
II. MOTION TO STRIKE UNDESIG-NATED EXPERT REPORTS AND TO LIFT PAGE LIMIT FOR REPLY
Before considering the class certification issue, the Court will dispense with housekeeping matters raised by Plaintiffs’ Motion to Strike Undesignated Expert Reports and to Lift Page Limit for Reply. On June 29, 1998, this Court issued a Scheduling Order which allowed Plaintiffs until Au
III. STANDARD FOR CLASS CERTIFICATION
The party seeking class certification has the burden of showing that the requirements for a class action have been met. See, e.g., Applewhite v. Reichhold Chem., Inc.,
In the instant case, Defendants contest only Plaintiffs’ failure to satisfy the class certification requirements of predominance, typicality, and adequacy; numerosity, commonality, and efficiency are thus conceded. The Court is persuaded by Defendants’ argument that Plaintiffs have not carried their burden of demonstrating that common questions of law and fact predominate over individual issues among putative class members; consequently, Plaintiffs’ Motion for Class Certification is DENIED, and this Order will address only the determinative issue of predominance.
IV. ANALYSIS
Plaintiffs argue that Defendants have intentionally engaged in a broad-ranging scheme to defraud investors. The scheme began with IRS Ruling 81-225 which determined that ownership of a retail mutual fund in a Variable Contract would eliminate any tax-deferral on the growth in the underlying mutual fund investments. As a result, Na
American Century joined Nationwide’s new venture in 1987, and agreed to create its first insurance-only mutual fund, TCI Growth. It appears from the evidence that TCI-Growth was originally conceived of as a “clone” fund, but on advice from the SEC American Century instead developed TCI-Growth, without changing its name, as an independent fund. By 1993, Nationwide’s Best of America product offered ten to twelve mutual fund options each of which— other than the Nationwide proprietary funds and apparently TCI Growth — -were clones of corresponding mutual funds. The two other Twentieth Century insurance-only mutual funds — TCI International and TCI Balanced — were clones of retail Twentieth Century International and Twentieth Century Balanced. The three TCI fund options were grouped together as TCI-Portfolios and the Twentieth Century Oaktree logo, which represents the Twentieth Century retail mutual funds, was used in connection with TCI-Portfolios. Despite the foreseeable potential for misleading investors, Nationwide and American Century took no affirmative steps to disabuse potential investors and their investment advisors of the notion that TCI Growth was a clone of Twentieth Century Growth Investors. Indeed, even some of Defendants’ employees apparently confused the funds which is demonstrated by a performance update for TCI Growth, sent to brokers and dealers, that mistakenly referred to the fund as Twentieth Century Growth Fund. Confusion among investors became evident in 1996 when the Defendants began receiving complaints referring to TCI Growth’s failure to track its much more successful namesake retail fund, but it was not until May 1997 that the name of TCI Growth was changed to VP Capital Appreciation.
The Court is appalled by what appears on the undisputed facts to be an extensive and manipulative scheme to defraud investors. Furthermore, the Court is mindful of the fact that, absent class certification, Defendants’ egregious behavior may go essentially unpunished because of the prohibitive expense of prosecuting small claims individually. Unfortunately, however, the Court finds that it cannot grant Plaintiffs the relief they request. Controlling precedent from the United States Court of Appeals for the Fifth Circuit ties the hands of this Court on the issue of class certification. As Defendants correctly point out, individual reliance is an essential element of Plaintiffs’ claims. The disparate circumstances of the two named class representatives alone demonstrate that this element will vary substantially from Plaintiff to Plaintiff, thus precluding class certification for failure to satisfy the predominance requirement of Rule 23. The Court must, in this instance reluctantly, carry out its obligation to follow the Fifth Circuit precedent discussed below. Plaintiffs’ Motion for Class Certification is accordingly DENIED.
To prevail on a 10b-5 claim Plaintiffs must prove that, in deciding to invest in TCI Growth, they relied on what defendants purportedly represented — that TCI Growth was a clone of the retail fund Twentieth Century Growth Investors and would track its performance. “Reliance is one of the cornerstones of a Rule 10b-5 claim.” Finkel v. Docutel/Olivetti Corp.,
Furthermore, in Simon, which was an action based upon alleged securities fraud and is thus even more factually on point than Castano, the Fifth Circuit stated: “[i]f there is any material variation in the representations made or in the degrees of reliance thereupon, a fraud case may be unsuited for treatment as a class action ... [I]f the writings contain material variations, emanate from several sources, or do not actually reach the subject investors, they are no more valid a basis for a class action than dissimilar oral representations.” Simon,
An examination of the experience of the two named class representatives demonstrates the potentially wide variety of individual circumstances which may have led potential investors to confuse the funds. In fact, the first proposed class representative, Robert Young, an associate professor of economics at the College of the Mainland, did- not personally rely on any of the documents Plaintiffs allege was misleading. His decision to invest in TCI Growth grew primarily out of conversation with friends and colleagues at the college who recommended Nationwide and TCI Growth. He suggests he may also have heard of retail Twentieth Century Growth Investors Fund and confused the names. He could not specifically remember whether he had ever seen the Oaktree logo used in conjunction with Twentieth Century Growth Investors. Young met with the local Nationwide representative and received various documents pertaining to the “Best of America” annuities, but none of them were marketing materials Plaintiffs now argue contain misrepresentations. He also confirmed that his broker never said TCI Growth was a “clone fund” or that it would clone or track the performance of Growth Investors Fund. Indeed, he had never even heard of the term clone in connection with mutual funds and was not aware of any industry practice of cloning funds.
The second proposed class representative, David Distad, is a chartered financial analyst who works as a consultant in financial and security analysis. His curriculum vitae in-
In essence, the named Plaintiffs’ assumptions that TCI Growth would clone Twentieth Century Growth Investors Fund was premised upon circumstances unique to each of them. Furthermore, the results of a survey conducted at Nationwide’s behest by an independent market research expert indicate that reliance would be a significant issue class-wide. The survey included approximately 300 customers randomly selected from among the approximately 50,0000 holders of either the variable annuity contract or variable life policy at issue, who had invested in TCI Growth prior to the date Plaintiffs filed suit. The survey indicated that less than half of the investors had ever heard of Twentieth Century Growth Investors and that less than one percent of the investors chose TCI Growth because they thought it would track the performance or have the same return as Twentieth Century Growth Investors. Only seven percent had heard of cloning in connection with the insurance or mutual fund industry and only eleven percent had heard of something called “separate accounts” in connection with the insurance or mutual fund industry. While these statistics and the individualized circumstances of the named Plaintiffs do not dispel Plaintiffs’ allegations that Defendants’ practices were • misleading (and the Court recognizes that 1% of 82,000 is no small number of potentially defrauded investors), they do indicate that reliance would be a key issue likely necessitating individual trials.
Plaintiffs’ arguments in favor of predominance fail, as they must on the facts of this case. In their Motion for Class Certification, Plaintiffs argue that the facts alleged show common issues predominate because predominance is a “relatively easy standard” to meet and thus, “without a doubt,” they have alleged facts which meet it. In reaching this conclusion, they rely primarily upon the language of Amchem Prods., Inc. v. Windsor,
Plaintiffs next cite the Castano decision for the proposition that predominance is a “relatively easy standard” to meet. This is quite surprising in light of the Castano Court’s nineteen page opinion, discussed above, which was primarily addressed to reversing the district court on its finding of predominance. See Castano v. American Tobacco Co.,
In their Reply to Defendants’ Response, Plaintiffs futilely attempt, to avoid the holding of Castano and Simon. They point to the holding of Affiliated Ute Citizens of Utah v. United States,
Plaintiffs also urge, without supporting argument, that Defendants committed a “fraud on the market,” and thus reliance should be presumed. Under a fraud-on-the-market theory, an investor who buys or sells stock at the price set by the market does so in reliance upon the integrity of that price. Basic, Inc. v. Levinson,
The same reasoning applicable to plaintiffs federal and common law fraud claims applies to preclude certification on the breach of contract issue. To prove liability, Plaintiffs must show that Nationwide somehow breached extra-contractual promises made orally by Nationwide agents or arising from some common interpretation of Nationwide’s materials. This theory would also require a particularized inquiry thus rendering the claim unsuitable for class treatment.
Plaintiffs last ditch effort to save its request for class certification by citing Longden v. Sunderman,
Y. CONCLUSION
For the reasons set forth above, Plaintiffs Motion for Class Certification is DENIED. Plaintiffs’ Motion to Strike Undesignated Expert Reports is also DENIED, and Plaintiffs’ concurrent Motion to Lift Page Limit for Reply is GRANTED. The parties are ORDERED to file no further pleadings before this Court on the issue of Class Certification, particularly including motions to reconsider and the like, unless supported by compelling new evidence not available at the time of
IT IS SO ORDERED.
Notes
. Although the names of the investment manager and the funds have changed from "Twentieth Century” to "American Century," the Court will use the former names in order to avoid confusion.
. As stated in Distad’s contracts. Nationwide actually allocated the payments to the "TCI International" fund, presuming this was Mr. Dis-tad’s intention.
. According to Distad, he decided to make this change based on the performance data of the publicly traded "Twentieth Century Growth” fund, which he acquired by reading the Wall Street Journal, "primarily because of the paucity of timely printed returns results coming from Nationwide.”
. 15 U.S.C. § 78j(b); see 17 C.F.R. § 240.10b-5 ("Rule 10b-5”).
. Plaintiffs select May 1, 1998, as the cut-off date because Nationwide’s "Best of America” Prospectus issued on that date states that the funds offered are not replicas of retail mutual funds. Plaintiffs allege this was the first public disclosure made by Defendants which arguably disclaimed that TCI Growth was a clone fund.