Beary v. Ing Life Ins. and Annuity Co., 3:07CV35MRK.

Citation520 F.Supp.2d 356
Decision Date05 November 2007
Docket NumberNo. 3:07CV35MRK.,3:07CV35MRK.
CourtUnited States District Courts. 2nd Circuit. United States District Court (Connecticut)
PartiesKevin BEARY, Sheriff of Orange County, Florida, in his official capacity individually, and on behalf of all others similarly situated, Plaintiff, v. ING LIFE INSURANCE AND ANNUITY COMPANY and Ing Financial Advisers, LLC, Defendants.

Allen C. Engerman, Law Offices of Allen C. Engerman, PA, Boca Raton, FL, Edward A.H. Siedle, Ocean Ridge, FL, James F. Sullivan, Howard, Kohn, Sprague & Fitzgerald, Hartford, CT, Jeffrey C. Engerman, Law Offices Of Jeffrey C. Engerman, Los Angeles, CA, Roger L. Mandel, Stanley, Mandel & Iola, Dallas, TX, for Plaintiff.

Brett B. Williams, Landon K. Clayman, Markham R. Leventhal, Jorden Burt LLP, Miami, FL, James F. Jorden, Jorden Burt, Washington, DC, James M. Sconzo, Michael G. Petrie, Jorden Burt, Simsbury, CT, for Defendants.

MEMORANDUM OF DECISION

MARK R. KRAVITZ, District Judge.

In response to perceived abuses of, the federal class-action system in the securities law area, Congress in 1995 passed the Private Securities Litigation Reform Act ("PSLRA"), Pub.L. 104-67. The PSLRA imposed procedural requirements on securities class actions, see 15 U.S.C. § 78u-4, and also raised the pleading standards plaintiffs must satisfy in order to bring certain kinds of securities class-action lawsuits in federal court. Id. Some plaintiffs responded to the restrictions imposed by the PSLRA by filing their securities class actions in state court. As the Supreme Court observed in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 126 S.Ct. 1503, 164 L.Ed.2d 179 (2006), "The evidence presented to Congress during a 1997 hearing to evaluate the effects of the Reform Act suggested that this phenomenon was a novel one; state-court litigation of class actions involving nationally traded securities had previously been rare." Id. at 82, 126 S.Ct. 1503 (citing H.R.Rep. No. 105-640, at 10 (1998)). In enacting the Securities Litigation Uniform Standards Act of 1998 ("SLUSA"), Pub.L. 105-353, Congress aimed to foreclose that tactic by providing that, under certain circumstances in securities class-action lawsuits brought under state statutory or common law, defendants could remove the suits to federal court. Also, the law required federal judges to dismiss the state-law claims if they alleged misrepresentation or non-disclosure of material information concerning the purchase or sale of a covered security, or that the defendant used any manipulative or deceptive practices in connection with the purchase or sale of a covered security. See 15 U.S.C. § 77p(b). This aspect of the law is known as "SLUSA preemption."

The claims of Plaintiff, Sheriff Kevin Beary, will be discussed in greater detail below, but the essence of his class-action lawsuit is that ING Life Insurance & Annuity Company ("ING"), which managed investments in mutual funds on behalf of participants in the Orange County, Florida Sheriff's Office Deferred Compensation Plan (the "Sheriff's Plan" or "Plan"), improperly accepted "revenue-sharing payments" from mutual funds and mutual fund advisers. These payments are called "revenue sharing" because they were calculated based on how much money Sheriff's Plan participants had invested in a given mutual fund at the time the revenue-sharing payment came due.

In his original Complaint, Sheriff Beary alleged that ING had committed fraud and engaged in a deceptive scheme in connection with the revenue-sharing payments. As the Sheriff has come to recognize, however, many courts have dismissed similar claims as preempted under SLUSA. See, e.g., In re Edward Jones Holders Litig., 453 F.Supp.2d 1210 (C.D.Cal.2006); In re Dreyfus Mut. Funds Fee Litig., 428 F.Supp.2d 342 (W.D.Pa.2005); In re Franklin Mut. Funds Fee Litig., 388 F.Supp.2d 451 (D.N.J.2005). In fact, a class-action lawsuit brought by Sheriff Beary in an Ohio federal district court, raising almost identical claims of fraudulent revenue-sharing payments, was recently dismissed for just that reason. See Beary v. Nationwide Ins. Co., No. 2:06-CV-967 (S.D.Ohio Sept. 17, 2007).

Therefore, Sheriff Beary amended his Complaint in this action and made several concessions at oral argument specifically designed to avoid dismissal under SLUSA. As is discussed below, the Court concludes that considering his concessions and amended pleadings, Sheriff Beary has successfully pled around SLUSA. But in his efforts to evade SLUSA preemption at all costs, he has conceded away any viable claim and ended up with a lawsuit that does not state a valid cause of action. Because the Court agrees that the Amended Complaint fails to state a claim under Federal Rule of Civil Procedure 12(b)(6), the Court GRANTS Defendants' Motion to Dismiss Plaintiff's First Amended Class Action Complaint [doc. # 19].

I.

Sheriff Beary is the sponsor of the Sheriff's Plan, which was established in 2001 to provide retirement benefits to employees of the Sheriff's Office.1 The Sheriff's employees had previously participated in the Orange County, Florida Plan (the "County Plan"), which was itself formally adopted in June, 1977. When the Sheriff's Office separated from the County Plan, the Sheriff alleges that "[b]y implied or express mutual agreement between ING (and/or its subsidiaries and affiliates) and the Sheriff's Office," the current and all prior versions of the County Plan were deemed also to be part of the new Sheriff's Plan. Plaintiff's First Amended Class Action Complaint [doc. # 9] [hereinafter Am. Compl.] at 7. ING denies that the Sheriff's Plan existed, either independently or as a continuation of the County Plan, before 2001. See Defendants' Memorandum in Support [doc. # 20], at 1-2. Happily, that is not a dispute that this Court can or need resolve at this stage.

As was true under the County Plan, the Sheriff's Plan designated ING as an approved institution to provide investment products to the Plan.2 See Contract, Am. Compl., Ex. C. ING remains an investment provider to the Plan, although the Sheriff transferred part of the Plan's assets to another investment provider in late 2006. Sheriff Beary filed this lawsuit as a putative class action in January, 2007, although there has been no motion to certify the class as of yet.

Generally speaking, employees participating in the Sheriff's Plan could choose to allot their investment in various ways. One possibility was the Separate Account, a group variable annuity contract that offered employees the opportunity to invest, albeit indirectly, in mutual funds selected from a list provided by ING. Am. Compl. at 4. The Separate Account is defined in the Contract as follows:

An account which buys and holds shares of the Fund(s). Income, gains or losses, realized or unrealized are credited or charged to this account without regard to other income, gains or losses of [ING]. [ING] owns the assets held in a separate account and is not a trustee as to such amounts. These accounts generally are not guaranteed and are held at market value. The assets of such accounts, to the extent of reserves and other contract liabilities of the account, shall not be charged with other [ING] liabilities.

Contract, Am. Compl., Ex. C, Endorsement EGISA-IA. The parties agree that the Separate Account is, and has been at all relevant times, registered as an investment company under the Investment Company Act of 1940, making it a "covered security" for purposes of SLUSA. See 15 U.S.C. § 77p(f)(3) (referencing 15 U.S.C. § 77r(b)).

Investment through the Separate Account was indirect because ING, rather than the Plan participants, actually owned the shares of the underlying mutual funds; the participants would designate what percentage of their monthly investment they wanted to allot to any of a number of "sub-accounts" of the Separate Account, each of which invested in a particular mutual fund. See Am. Compl. at 6-7. ING used the current value of the underlying mutual fund shares to determine how many "record units" the participant's investment would purchase, with the record units reflecting the amount ING would eventually owe to the participant, based on the performance of the underlying mutual fund.3

In his original Complaint, the Sheriff alleged that "[a]t some time, ING began investigating and ultimately implemented and maintained a scheme whereby Investment Advisors made revenue sharing payments to it based upon a percentage of the plan participants' assets invested in the mutual funds through ING." Plaintiff's Class Action Complaint [doc. # 1], at 12. He further alleged that "ING implicitly or explicitly made it a condition to including a mutual fund family's funds in the platform of investments offered to plan participants that the mutual fund family pay ING revenue sharing on a majority or all of its funds offered by ING." Id. Sheriff Beary claimed that the payments were fraudulent because the "amounts bear no relationship whatsoever to the cost of providing the services or a reasonable fair market value for the services.... [I]n an open market, those services should be provided between unrelated parties on an annual per plan participant basis, not on a percentage of assets basis." Id. at 13-14. Finally, he argued that a class action was necessary because "[c]lass members are almost entirely unaware of ING's breaches of fiduciary duty, such that they will never bring suit individually." Id. at 16.

Faced with a recently filed motion to dismiss based on SLUSA preemption in the Sheriff's case in Ohio, Sheriff Beary took the opportunity preemptively to amend his Complaint in this action for the avowed purpose of avoiding SLUSA preemption. To that end, the Sheriff removed all references to a fraudulent "scheme"; to the fact that the services for which ING allegedly received the revenue-sharing payments purportedly had little or no fair market value; to the inference that increased charges to the mutual funds by ING...

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