Clinton v. Sec. Benefit Life Ins. Co.
| Decision Date | 12 February 2021 |
| Docket Number | Case No. 5:20-cv-04038-HLT-KGG |
| Citation | 519 F.Supp.3d 943 |
| Court | U.S. District Court — District of Kansas |
| Parties | Ella CLINTON, et al., Plaintiffs, v. SECURITY BENEFIT LIFE INSURANCE COMPANY, Defendant. |
Adam M. Moskowitz, Pro Hac Vice, Howard M. Bushman, Pro Hac Vice, Joseph M. Kaye, Pro Hac Vice, The Moskowitz Law Firm PLLC, Coral Gables, FL, Andrew S. Friedman, Pro Hac Vice, Francis J. Balint, Jr., Pro Hac Vice, Bonnett Fairbourn Friedman & Balint, PC, Phoenix, AZ, Eric D. Barton, Wagstaff & Cartmell, LLP, Kansas City, MO, for Plaintiffs.
Alexandra N.C. Rose, Holly A. Dyer, Foulston Siefkin LLP, Wichita, KS, Anthony F. Rupp, Sarah Elizabeth Stula, Foulston Siefkin LLP, Overland Park, KS, Gillian H. Clow, Pro Hac Vice, Samuel J. Park, Pro Hac Vice, Alston & Bird, LLP, Los Angeles, CA, Robert D. Phillips, Jr., Pro Hac Vice, Alston & Bird, LLP, San Francisco, CA, for Defendant.
Plaintiffs are several individuals who purchased annuities from Defendant Security Benefit Life Insurance Company. They have filed this class-action lawsuit alleging that the annuities they purchased were the result of a fraudulent scheme by Defendant and other organizations not a party to this case. Plaintiffs assert claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961 - 1968, as well as state-law claims under California, Illinois, Arizona, Nevada, and Florida law. Defendant moves to dismiss the case. Doc. 31.1 For the reasons discussed below, the Court finds that Plaintiffs’ allegations of fraud are neither particular nor plausible. The Court therefore grants the motion to dismiss and dismisses the case without prejudice.
The following facts are taken from the well-pleaded allegations of Plaintiffs’ first amended complaint. See Doc. 16. Consistent with the standards for evaluating motions to dismiss under Rule 12(b)(6), the Court assumes the truth of all well-pleaded factual allegations.
Both parties have also asked the Court to take judicial notice of various documents that are either appropriate for judicial notice or referenced or quoted in the first amended complaint. See Doc. 30; Doc. 49. Both requests are unopposed. See Doc. 49 at 1-2. Accordingly, the Court grants these motions and has considered these documents. See Hodgson v. Farmington City , 675 F. App'x 838, 840-41 (10th Cir. 2017) ; Ice Corp. v. Hamilton Sundstrand Inc. , 444 F. Supp. 2d 1165, 1169 n.8 (D. Kan. 2006) (). To the extent any judicially noticed documents contradict facts alleged in the first amended complaint, the Court does not accept those allegations as well-pleaded or as true. See GFF Corp. v. Associated Wholesale Grocers, Inc. , 130 F.3d 1381, 1385 (10th Cir. 1997) ().
This case is about a specific type of annuity issued by Defendant, a life-insurance company. Deferred annuities are contracts between the annuity holder and an insurance company. The holder purchases the annuity with an up-front payment, which is deposited into an account and invested for a certain number of years. During this deferral period, earnings grow tax-deferred on the premium payment.
For equity-indexed annuities,2 the premium can be allocated among several different crediting options, depending on the annuity holder's risk tolerance. It can be linked to an index tied to the prices of stocks, bonds, commodities, or other assets. Deferred annuities are long-term investments, meaning that premiums can be locked up for years. Thus, the investment option for that period can be a crucial investment decision.
Annuities linked to stock market indexes, like the S&P 500, typically come with caps. This means that the interest credited to the annuity account is capped at a certain percent no matter how much the index grows. These annuities can also carry a participation rate. This limits the annuity holder's "participation" in an index's performance. For example, if the participation rate is 70%, and the index increases 10%, the annuity account is only credited with 70% of that increase, or 7%. Thus, cap levels and participation rates are important features of an annuity. The higher the cap level and participation rate, the more the annuity can earn from the growth of the index.
Insurance companies issuing equity-indexed annuities do not actually purchase positions in the indexes. Rather, they develop options budgets and acquire options to hedge their obligations to credit the accounts linked to the equity-indexed annuities. The cost of these options is tied to the volatility of the index, which subsequently determines the cap level and participation rate offered. An index with a lower volatility carries lower option costs and allows an insurance company to offer higher caps and higher participation rates.
In 2010, a private-equity firm acquired Defendant. Shortly thereafter, Defendant began developing and marketing a series of equity-indexed annuities. Many of these annuities came with the option to be linked to certain proprietary indexes that claimed to protect annuity holders from market volatility. Defendant developed these products with independent marketing organizations and insurance-product design firms. Defendant first developed the Secure Income Annuity in 2011. In 2012, Defendant introduced the Total Value Annuity. Although these are distinct products, for purposes of this order the distinction is not significant, and the Court will generally refer to them as the "equity-indexed annuities" or "annuities" unless otherwise specified.
Both annuities are marketed and sold as retirement or investment vehicles. Both came with the option to select a Guaranteed Lifetime Withdrawal Benefit Rider ("GLWB Income Rider"), which provided an option for lifetime annual income during retirement. The charge for the rider was deducted each year from the annuity's account value. The annuities also contained a provision assessing an annual spread, which is a percentage amount deducted from the change in the applicable index. The annuities also included an initial participation rate, as well as a cap that applied to whatever portion of the annuity linked to the S&P 500. The annuities also paid a bonus to the annuity holder, which could be recaptured if the annuity was surrendered or a certain amount of withdrawals were made in the first 10 years.
At issue in this case are three indexes that were crediting options for these annuities. The first is the 5 Year Annuity Linked TV Index ("ALTV Index") for the Total Value Annuity. The ALTV Index is tied to the Trader Vic Index, with an added volatility overlay to reduce anticipated volatility. Annuities linked to the ALTV Index only credited interest at the end of a five-year period. Reallocation to a different index during this five-year period was prohibited. The second is the Morgan Stanley Dynamic Allocation Index Account ("MSDA Index") for the Secure Income Annuity. The third is the BNP Paribas High Dividend Plus Annual Point to Point Index Account ("BPHD Index") for the Total Value Annuity. The BPHD Index was composed of high-dividend stocks chosen though a "rules-based" strategy.
Plaintiffs allege that Defendant knew these indexes would generate "near-zero" returns. Plaintiffs also allege that Defendant presented annuities linked to these indexes as "uncapped" and with 100% participation, when in fact the annuities were more economically equivalent to traditional annuities with caps and lower participation rates.
To induce sales of these annuities, Defendant prepared and disseminated hypothetical illustrations and marketing materials. The hypothetical illustrations depicted projected future account values based on historical performances of the given index. To project future returns, Defendant relied on "backcasting." This involves relying on a historical period of performance to project potential future returns. In the case of the indexes at issue here, these time periods were for years that the indexes did not actually exist because they were only recently developed by Defendant and others. In other words, the hypothetical illustrations created projected future returns based on simulated historical performance, not actual. Plaintiffs allege the time periods used in these backcasted hypothetical illustrations were "cherry-picked ... to correspond with years when the index asset components exhibited non-representative gains." They claim that these "selectively engineered backcasting techniques" were misleading and misrepresented expected future performance. Plaintiffs allege that insurance groups have "recognized the potentially misleading nature" of backcasting. They cite a bulletin from the Iowa Insurance Commissioner stating that use of "hypothetical performance charts [are] misleading if they, directly, or indirectly through subsequent representations by producers, are used to project future performance and contribute to inflated consumer expectations." They also cite statements by certain insurance companies that "the hypothetical look back approach ... if used improperly, could be misleading to purchasers."
Similarly, marketing materials like brochures compared the hypothetical performance of the indexes to other more traditional crediting options like the S&P...
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