Malone v. Addison Ins. Marketing, Inc.

• Decision Date: 27 September 2002
• Docket Number: No. Civ.A 3:01-CV-259(H).,Civ.A 3:01-CV-259(H).
• Citation: 225 F.Supp.2d 743
• Parties: Beverly S. MALONE, Plaintiff, v. ADDISON INSURANCE MARKETING, INC., et al., Defendants.
• Court: U.S. District Court — Western District of Kentucky

225 F.Supp.2d 743

Beverly S. MALONE, Plaintiff, v. ADDISON INSURANCE MARKETING, INC., et al., Defendants.

No. Civ.A 3:01-CV-259(H).

United States District Court, W.D. Kentucky at Louisville.

September 27, 2002.

William Fletcher McMurry, Hans G. Poppe, McMurry & Talbot, Louisville, KY, Paul D. Young, Kim Levy, Milberg, Weiss, Bershad, Hynes & Lerach, New York City, for Plaintiff.

John K. Bush, Greenebaum, Doll & McDonald, Louisville, KY, Christopher K. Williams, Seth T. Taube, Richard B. Harper, McCarter & English, Newark, NJ, for Addison Insurance Marketing, Inc., ALMS Holdings, Inc., ALMS Ltd., Terry J. Ciotti, Michael P. MacIntyre, Joel L. Miller, Douglas J. Van Meter.

Cornelius E. Coryell, II, Christopher Tyson Gorman, Wyatt, Tarrant & Combs, Louisville, KY, Charles F. Smith, Donna L. McDevitt, Skadden, Arps, Slate, Meagher & Flom, Chicago, IL, for American Equity Investment Life Ins. Co. and David J. Noble.

Douglas C. Ballantine, John T. Ballentine, Jr., Ogden, Newell & Welch, Louisville, KY, Lori S. Blitsen, Randall A. Miller, Sedgwick, Detert, Moran & Arnold, for Financial West Investment Group.

Joseph Lee Hamilton, Marc S. Murphy, Marjories Ann Faris, Stites & Harbison, Louisville, KY, Peter B. King, Burton W. Wiand, Fowler, White, Gillen, Boggs, Villareal & Banker, Tampa, FL, Jonathan Schwartz, Marina Dle Ray, for Sentra Securities, Sidney Mondschein.

Patrick W. Michael, Angela L. Edwards, Mark B. Wallace, Woodward, Hobson & Fulton, Louisville, KY, for Victor E. Tackett, Jr.

F. Larkin Fore, Stephen H. Miller, Fore, Miller & Schwartz, Louisville, KY, David B. Dyer, Randall M. Foret, Secore & Waller, Dallas, TX, for Williams Financial Group.

MEMORANDUM OPINION

HEYBURN, Chief Judge.

Plaintiff, a 73-year old widow and Kentucky resident, brought this class action under the Securities and Exchange Act of 1934 to recover for the harm caused to her and members of the class by Defendants' fraudulent sale of living trusts and other investments.¹ Defendants are seven corporations and seven individuals who sold Plaintiff these products as well as provided her with legal, investment, and insurance advice.² The Court appointed Malone as the Lead Plaintiff, but has yet to certify a class of plaintiffs. All Defendants have now moved to dismiss the complaint pursuant to Rule 12(b)(6).

I.

Plaintiff charges an intricate scheme to wrongfully market living trusts, annuities, and other securities. Because Plaintiff's complaint details a lengthy pattern, the facts in this case are best described in four phases: (1) the sale of the living trusts, (2) the transfer of Plaintiff's stocks to a new broker, (3) Plaintiff's decision to purchase two annuity contracts, and (4) Plaintiff's decisions to transfer her remaining assets to new brokerage firms and sell two life insurance policies. However, the Court's analysis of Plaintiff's claims solely concerns the sale of annuity contracts.

In 1999, Defendant Victor E. Tackett, a practicing attorney admitted to the Kentucky bar mailed out to senior citizens, a letter advertisement entitled "How to Avoid Probate" which discussed the advantages of forming a living trust. Defendant Joel Miller is an employee of Defendant ALMS, serves as a client service representative for Tackett, and is a registered agent for Defendant American Equity. After Plaintiff responded to one of Tackett's advertisements, Miller, acting on behalf of Tackett, met the Plaintiff and her husband at their home. During that meeting, Miller counseled the couple to purchase a living trust and collected detailed financial information. Based on Defendants' advice, Plaintiff paid Tackett $1995.00 to set up and administer her living trust. Following this sale, Plaintiff received a package of materials labeled from the "Law Office of Victor E. Tackett, Jr."

Next, Plaintiff's Complaint alleges that, "in furtherance of Defendants' scheme and course of conduct," Defendant Terry J. Ciotti met with the Plaintiff on multiple occasions. Ciotti is licensed under the Kentucky Department of Insurance to sell life insurance and has been an agent for American Equity, Addison insurance Marketing, Inc., and Midland Life Insurance Company. At the first meeting, Ciotti reviewed a Tackett brochure and circled the advantages of a living trust. In the course of her meetings with Ciotti and Miller, Plaintiff says she was falsely misled into believing a living trust was in her best financial interest when, in fact, it proved to be financially devastating. Ciotti delivered the trust documents to Plaintiff around early October of 1999.

In the second phase of the scheme, Plaintiff's complaint alleges that Ciotti advised Plaintiff to transfer her stock portfolio to Defendant Sidney Mondschein "who could do a better job managing the portfolio." At the time, Mondschein was a broker employed by the Defendant security brokerage firms Financial West Group, Sentra Securities, and Williams Financial. While at Plaintiff's home, Ciotti called Mondschein who spoke with the Plaintiff and assured her he would take good care of her assets. On the advice of Ciotti and believing him to be a representative of Tackett, Plaintiff's complaint states that she "signed other documents allowing Ciotti to `sweep' her investment account and all of its assets."

Plaintiff claims that Ciotti then pressured her "into surrendering an equitable annuity and placing money from that annuity in Ciotti's control." Additionally, she alleges that Defendants engaged in "churning" whereby they bought and sold in rapid succession dividends from her existing life insurance policies or annuities to purchase replacement policies. Defendants explained that these new policies provided greater death benefits, cash values and surrender values although they charged her exorbitant commissions and other administrative charges, costing Plaintiff thousands of dollars.

In phase three, Plaintiff alleges that Ciotti, acting as a licensed agent of American Equity, helped Plaintiff purchase two annuities from American Equity. Plaintiff purchased the first annuity contract, dated September 23, 1999, for a lump sum premium of $64,214.32. She designated her children as the intended beneficiaries of this annuity. On October 27, 1999, Plaintiff purchased her second annuity contract for a lump sum premium of $216,289.53.³ The intended beneficiary of this second annuity was "The Dr. Harold G. Malone and Beverly S. Malone Revocable Living Trust." It is these two annuities which Plaintiff claims are securities and which, therefore, become the focus of the motion to dismiss.

According to the annuity contract, Plaintiff purchased an American Equity product known as "The Ultimate Equity Index." The contracts state that the Ultimate Equity Index is a single-premium deferred annuity. In effect, the Index operated as an insurance plan with an investment aspect through which Plaintiff purchased a contract backed by American Equity. Under the contract terms, American Equity guaranteed Plaintiff a minimum return of 100 percent of her premium plus at least 3 percent interest annually, depending on how the S & P 500 Index fared. Specifically, American Equity agreed to pay Plaintiff an annual interest credit based on a formula tied to the performance of the S & P 500 Index during the contract year. American Equity promised Plaintiff she would always get at least a 3 percent return annually and was guaranteed more if the S & P 500 Index produced a higher rate of return. This amounted to a guarantee of 134 percent of her premium at the end of her ten-year contract term.

In phase four, the complaint alleges that the remains of Plaintiff's assets went in two directions. First, on the advice of Ciotti and other unspecified Defendants, Plaintiff transferred the remainder of her money to Financial West, a California brokerage firm which employed Mondschein. Thereafter, Mondschein advised Plaintiff to move her account to two additional brokerage houses, Sentra and Williams Financial. Second, Plaintiff alleges that in furtherance of Defendants' scheme, Defendant Van Meter, Defendant ALMs, and the other Defendants advised Plaintiff and her husband to cash in two life insurance policies. The life insurance policies had a face value of $100,000, but a cash out value of less than $10,000. Plaintiff followed this advice.

In all, Plaintiff's complaint asserts two federal causes of action and eight state law claims. The first count, asserted against twelve of the defendants,⁴ alleges that Defendants violated Section 10(b) of the Securities and Exchange Act and Rule 10b-5 by making false and misleading representations of material facts both in person and through instrumentalities of interstate commerce. The second count alleges that Noble, McIntyre, and Tackett violated Section 20(a) of the Exchange Act by serving as "controlling persons" of the Defendant corporations.

II.

On a motion pursuant to Rule 12(b)(6), dismissal of the complaint is proper only if it is clear that the plaintiff can prove no set of facts in support of her claim which would entitle her to relief. See Mayer v. Mylod, 988 F.2d 635, 638 (6th Cir.1993). Counts I and II of Plaintiff's Complaint are grounded in the Securities and Exchange Act of 1934. The threshold question in any action brought pursuant to the Securities Acts is whether a "security" exists. Union Planters Nat'l Bank of Memphis v. Commercial Credit Bus. Loans, Inc., 651 F.2d 1174, 1179 (6th Cir.1981). To meet this threshold, Plaintiff claims that the annuity contracts she purchased from American Equity were securities.⁵ This case therefore requires the Court to decide whether a fixed indexed deferred annuity is a "security" within the meaning of the 1934 Act. Neither side has identified any disputed material fact which might prevent the Court from resolving this discreet issue.

The text of the 1934 Act coupled with the SEC's Safe Harbor provision provide the Court with two guideposts...