First Lincoln Holdings v. Equitable Life Assurance, 01 CIV 4455 RO.

• Decision Date: 21 September 2001
• Docket Number: No. 01 CIV 4455 RO.,01 CIV 4455 RO.
• Citation: 164 F.Supp.2d 383
• Parties: FIRST LINCOLN HOLDINGS, INC. Plaintiff, v. THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, Defendant.
• Court: U.S. District Court — Southern District of New York

164 F.Supp.2d 383

FIRST LINCOLN HOLDINGS, INC. Plaintiff, v. THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, Defendant.

No. 01 CIV 4455 RO.

United States District Court, S.D. New York.

September 21, 2001.

COPYRIGHT MATERIAL OMITTED

Jeffrey I. Zuckerman, Esq., Curtis, Mallet-Prevost, Colt & Mosle, LLP, New York, New York, for plaintiff.

Sidney S. Rosdeitcher, Esq., Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York, for defendant.

OPINION & ORDER

OWEN, District Judge.

Plaintiff First Lincoln Holdings, Inc., a Delaware company engaged in real estate and investment banking, charges the defendant Equitable Life Assurance Society of the United States with breach of contract and violations of the federal securities laws and moves by order to show cause for a preliminary injunction compelling Equitable, one of the largest insurance companies in the United States and a New York corporation which administers myriad number of significant investment funds, to accept transfer requests in large amounts from one fund to another from First Lincoln via telephone, fax and other electronic means so that it may engage in a trading practice known as "market timing," a method of securities trading which involves major transfers into and out of the various investment portfolios sometimes within hours, spelled out in greater detail hereafter.¹ Equitable opposes the preliminary injunction, contending that First Lincoln cannot show irreparable harm and is unlikely to succeed on the merits, and, by cross-motion, moves to dismiss the complaint for failure to state a claim upon which relief can be granted.

Equitable's annuity products allow contract owners, investors therein, to explore various investment options or portfolios, such as the Emerging Growth Companies and MFS Research portfolios, involving U.S. equity securities, or the T. Rowe Price International Stock Portfolio and Alliance International Portfolio, invested substantially in non-U.S. equity securities. The Equitable investment product at issue is called the "Accumulator Select" and contains approximately 35 different investment portfolio options.² The Accumulator Select Prospectus states that it is a "deferred annuity contract" which "provides for the accumulation of retirement savings and for income." The product, by all accounts, is designed for long-term investors. Plaintiff First Lincoln is operated by its President, Martin Oliner, a canny and sophisticated investor who, on the record in another matter in federal court in Delaware, stated he has historically way out-performed certain other mutual funds.

Equitable's documentation of the relationship comes from a very clear and undisputed paper trail which includes the Prospectus, the deferred annuity contract and correspondence between the parties. The dispute arises from alleged oral statements which First Lincoln claims Equitable officials made to Oliner. For the purposes of plaintiff's injunction application, I consider the totality of the submissions by the parties, but as to defendant's Rule 12(b)(6) motion to dismiss, I accept all of the allegations in the complaint as true and draw all reasonable inferences in favor of First Lincoln.³ See In re Scholastic Corp. Secs. Lit., 252 F.3d 63, 69 (2d Cir. 2001).

In August 2000, Oliner met with Michael Kerstein, an Equitable Sales Agent, and the two discussed a possible investment in an Equitable annuity product. Apparently due to Kerstein's lack of experience with deferred annuity contracts, Oliner later met with Kerstein and another more senior Equitable salesman, Sidney Smith, in or about September and October 2000. Oliner unambiguously indicated that he sought to invest approximately $10 million in an annuity product. Oliner informed Smith and Kerstein that he wished to actively trade on the account and Equitable took this as a sign that Oliner wished to engage in market timing, a practice which fund managers generally dislike.

Equitable states that it advised Oliner that "round-trip" transfers of funds — investments into and out of the fund taking place within 24 hours — would be prohibited and informed Oliner that all trades were subject to a "five-day" rule, meaning that transferring funds into and out of a particular investment option within a five day period was not permitted. Oliner and First Lincoln assert that by the terms of the Prospectus advertising the annuity product and the contract, incorporating certain Prospectus terms, there was no five-day rule and that plaintiff was never orally informed of such a trading restriction.

Prior to purchasing the annuity contract, Oliner read the Prospectus, which states:

Market Timing — You should note that the product is not designed for professional "market timing" organizations, or other organizations or individuals engaged in market timing strategy, making programmed transfers, frequent transfers or transfers that are large in relation to the total assets of the underlying mutual fund portfolios in which the variable investment options invest. Market timing strategies are disruptive to the underlying mutual fund portfolios in which the variable investment options invest. If we determine that your transfer patterns among the variable investment options reflect a market timing strategy, we reserve the right to take action including but not limited to: restricting the availability of transfers through telephone requests, facsimile transmissions, automated telephone services, Internet services or any electronic transfer services.

(Equitable Accumulator Select Prospectus, at 30, Decl. of Brian O'Neil, dated June 11, 2001, ¶ 34, attached as Ex. 1.) The Prospectus also recited the prohibition of market timing trading practices in its discussion of the various electronic trading mechanisms such as the telephone, fax and internet, stating, "We reserve the right to limit access to these services if we determine that you are engaged in a market timing strategy ... [.]"

On October 30, 2000, Oliner submitted an application for the Accumulator Select annuity contract to Equitable.⁴ On the questionnaire accompanying the application, it is written that he wished to invest as a "short-term market timer." He also stated therein that he anticipated making approximately sixty transfers of funds (trades) each year and requested "same-day settlement" and a "4 p.m. cut off."⁵ In response, on November 3, 2000, Alfred Akbar, Assistant Vice President of Equitable, sent Oliner a letter stating:

We have approved your application for an annuity contract. The certificate is enclosed, along with other helpful information.

The information you provided in the application suggests that you may intend to engage in market timing. Please review page 30 of the prospectus, dated May 1, 2000, which explains our prohibition against market timing. We routinely monitor transfer activity in our funds, and as explained in the prospectus we will take steps to prevent market timing.

Let me remind you that your contract gives you the opportunity to cancel the contract for any reason, without penalty, during the applicable time period stated on the contract's data pages.

(Decl. of Martin Oliner, sworn to May 23, 2001, at ¶ 30, attached as Ex. D.) Oliner states that he spoke with other Equitable sales agents who informed him that this was merely a "form letter,"⁶ and, to the contrary, Equitable's sales agents claim that Oliner's statements as to this are false.

Beyond the explicit written prohibition on market timing set forth in the Prospectus, the annuity contract itself vests Equitable with considerable discretion in taking action along the way to restrict certain trading practices. For example, certain provisions explicitly contemplate Equitable's imposition of rules and policies consistent with the Prospectus:

Section 4.01 Transfer Requests

You may request to transfer all or part of the amount held in an Investment Option to one or more of the other Options. The request must be in a form we accept. All transfers will be made on the Transaction Date. Transfers are subject to the terms of Section 4.02 and to our rules in effect at the time of transfer ... [.]

Section 4.02 Transfer Rules

The transfer rules which apply are described in the Data pages. A transfer request will not be accepted if it involves less than the minimum amount, if any, stated in the Data pages ... [.]

(Annuity Contract, Decl. of Brian O'Neil, sworn to June 11, 2001, at ¶ 41, attached as Ex. 5) (emphasis added).

The trouble began shortly after Equitable's approval of First Lincoln's application for the annuity contract. On November 6, 2000, First Lincoln transferred approximately $10 million into an equity fund, only to transfer it back out the next day. A week later, on November 14 and 15, 2000, another round-trip transfer occurred. On November 21, 2001, Steven M. Joenk, a senior vice president of AXA Client Solutions (Equitable's parent company), sent a letter to First Lincoln advising that such market timing activity did not comply with the terms of the Accumulator Select policy and stating that all further transfers would have to be made by regular mail (a format which is obviously too slow to engage in market timing). This letter resulted in a subsequent meeting where Oliner and several Equitable representatives, including Kenneth Kozlowski of the funds management group, gathered to discuss the restrictions and trading practices on the annuity contract. The timing of this meeting is the subject of conflicting affidavits: Oliner states January 2001 and Kozlowski says November 2000. Regardless of the date, Oliner states that the net of the meeting was that he was given oral assurances that his market timing trading strategies would be permitted if First Lincoln would "not trade the entire value of its account [$10 million] in any single mutual fund, and divide its account among at least three mutual funds." Equitable contends that what...