Young v. Nationwide Life Ins. Co., Civil Action No. G-97-628.

CourtUnited States District Courts. 5th Circuit. United States District Courts. 5th Circuit. Southern District of Texas
Writing for the CourtKent
Citation2 F.Supp.2d 914
Decision Date27 April 1998
Docket NumberCivil Action No. G-97-628.
PartiesRobert YOUNG and David C. Distad v. NATIONWIDE LIFE INSURANCE COMPANY, American Century Mutual Funds, Inc., American Century Investment Services, Inc., American Century Variable Portfolios, Inc., American Century Investment Management, Inc., and American Century Investment Management International, Ltd.
2 F.Supp.2d 914
Robert YOUNG and David C. Distad
v.
NATIONWIDE LIFE INSURANCE COMPANY, American Century Mutual Funds, Inc., American Century Investment Services, Inc., American Century Variable Portfolios, Inc., American Century Investment Management, Inc., and American Century Investment Management International, Ltd.
Civil Action No. G-97-628.
United States District Court, S.D. Texas, Galveston Division.
April 27, 1998.

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Gregory N. Jones, Franklin Cardwell & Jones, Houston, TX, for Robert Young and David C. Distad.

B. Daryl Bristow, Bristow Hackerman Wilson & Peterson, Houston, TX, Charles C. Platt, Peter K. Vigeland, LeBoeuf Lamb Greene & MacRae, New York City, for Nationwide Life Ins.

Robin C. Gibbs, Gibbs & Bruns, Houston, TX, Kathy D. Patrick, Gibbs and Bruns, Houston, TX, James F. Moyle, Rogers & Wells, New York City, James N. Benedict, Rogers & Wells, New York City, Mark Holland, Rogers & Wells, New York City, for American Century Mutual Funds, Inc., American Century Inv. Services, Inc., American Century Variable Portfolios, Inc., American Century Inv. Management, Inc. and American Century Inv. Management Intern., Ltd.

ORDER GRANTING IN PART AND DENYING IN PART MOTIONS TO DISMISS AND CONDITIONAL STAY AND ADMINISTRATIVE CLOSURE

KENT, District Judge.


This is a class action in which the class member Plaintiffs assert securities violations in addition to various common law causes of action, including breach of contract, fraud, civil conspiracy, and gross negligence. Now before the Court are Defendant Nationwide Life Insurance Company's Motion to Dismiss Plaintiffs' First Amended Complaint,1 filed January 22, 1998, and the American Century Defendants' Motion to Dismiss the First Amended Complaint, filed January 15, 1998 and amended on January 22, 1998. For the following reasons, both Motions are GRANTED IN PART and DENIED IN PART.

I. BACKGROUND

Plaintiffs Robert Young and David C. Distad are representatives of an alleged class of

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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 fixed accounts. 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.2

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-accounts 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-account," they choose. Specifically, the plaintiff policy owners were told by Nationwide:

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 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. Distad 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.3 In November of 1996, Distad changed mutual fund options, allocating substantial portions of his investment to "Twentieth Cent Growth."4 Plaintiffs then began tracking their investments, and noticed that the performance of their portfolios differed substantially from the performance

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of the publicly traded funds which they believed they had purchased. For instance, in 1996, the TCI Growth Fund owned by Plaintiffs incurred a loss of over 5%, while the Twentieth Century Growth Fund posted a 15% increase. When Distad called Nationwide to inquire as to the differing results between the two funds, he was told that the Nationwide fund was a separate fund with different objectives than the public fund.

Plaintiffs brought this action on October 31, 1997. In their Second Amended Complaint, they allege the following causes of action: (1) violations of § 10(b)5 of the Securities Act of 1934; (2) violations of the § 35(d)6 of the Investment Company Act of 1940 ("ICA"); (3) violations of § 36(a)7 of the ICA; (4) violations of § 34(b)8 the ICA; (5) fraud; (6) civil conspiracy; (7) breach of contract (against Nationwide only); and (8) gross negligence.

II. STANDARD FOR MOTION TO DISMISS

When considering a Motion to Dismiss for failure to state a claim, the Court accepts as true all well-pleaded allegations in the complaint, and views them in the light most favorable to the plaintiff. See Malina v. Gonzales, 994 F.2d 1121, 1125 (5th Cir.1993). Such motions should be granted only when it appears without a doubt that the plaintiff can prove no set of facts in support of his claims that would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957); Tuchman v. DSC Communications Corp., 14 F.3d 1061, 1067 (5th Cir.1994).

III. FEDERAL SECURITIES LAW VIOLATIONS

A. Section 10(b) of the Securities and Exchange Act of 1934

Plaintiffs allege that Defendants violated § 10(b) of the Securities and Exchange Act of 1934 ("1934 Act") by knowingly making material misstatements or omissions about the relationship between the Nationwide fund and the publicly traded fund, with intent to mislead investors. Section 10(b), the anti-fraud provision of the 1934 Act, provides:

It shall be unlawful for any person, directly or indirectly, ... [t]o use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance....

15 U.S.C. § 78j(b). Rule 10b-5 "casts the proscription in similar terms." Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 172, 114 S.Ct. 1439, 1445, 128 L.Ed.2d 119 (1994). To state a claim under Rule 10b-5, a plaintiff must allege that (1) the defendant made a false misrepresentation or omission, (2) of a material fact, (3) knowing its falsity and intending that the plaintiff rely on it, (4) the plaintiff justifiably relied on the misrepresentation or omission, and (5) the plaintiff suffered damage resulting from this reliance. Oppenheimer v. Prudential Securities Inc., 94 F.3d 189, 194 (5th Cir.1996); Shores v. Sklar, 647 F.2d 462, 468 (5th Cir.1981).

American Century argues that Plaintiffs' Rule 10b-5 claim fails for two reasons: first, there is no allegation that American Century misrepresented or omitted material facts; and second, there is no allegation that American Century acted with scienter. By incorporation of American Century's Motion to Dismiss, Nationwide makes the same arguments on its own behalf. The Court finds otherwise.

1. Material Misrepresentations or Omissions

Plaintiff alleges that the Defendants made the following material misstatements. Viewing the evidence in the light most favorable to the Plaintiffs, the Court finds one or all of these allegations sufficient to state a cause of action under Rule 10b-5:

(a) The fact that the names of the Twentieth Century Investors ("TCI") Funds, as named in Nationwide's "Best of America" marketing literature, are very nearly identical to the names of the publicly traded Twentieth

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Century funds foreseeably gives rise to great confusion as to whether the insurance funds are clones. This factor alone gives rise to an actionable omission claim; that is, that despite the potential confusion, American Century never clarified that the Twentieth Century Investor funds were not clones or replicas of the Twentieth Century funds.9 Furthermore, Nationwide never clarified that the TCI funds were not Twentieth Century clones, despite the potential for confusion,...

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  • Kerr-Mcgee Corp. v. Farley, No. Civ. 95-0438MVRLP.
    • United States
    • United States District Courts. 10th Circuit. District of New Mexico
    • March 10, 2000
    ...whether Neztsosie deprived tribal courts of jurisdiction over PAA actions. 28 U.S.C. § 1292(b); see Young v. Nationwide Life Ins. Co., 2 F.Supp.2d 914, 930 (S.D.Tex.1998); Public Interest Research Group v. Hercules, Inc., 830 F.Supp. 1549, 1555 (D.N.J.1993); Lamont v. Schultz, 748 F.Supp. 1......
  • Cheromiah v. U.S., No. CIV 97-1418 MV/RLP.
    • United States
    • United States District Courts. 10th Circuit. District of New Mexico
    • June 29, 1999
    ...there is "substantial ground for difference of opinion" on this issue. 28 U.S.C. § 1292(b); see Young v. Nationwide Life Ins. Co., 2 F.Supp.2d 914, 930 (S.D.Tex.1998); Public Interest Research Group v. Hercules, Inc., 830 F.Supp. 1549, 1555 (D.N.J.1993); Lamont v. Schultz, 748 F.Supp. 1043,......
  • S.E.C. v. Treadway, No. 04 Civ. 3464(VM).
    • United States
    • U.S. District Court — Southern District of New York
    • May 9, 2006
    ..."to refer to misconduct that involves self-dealing by investment company or other insiders"), with Young v. Nationwide Life Ins. Co., 2 F.Supp.2d 914, 927 (S.D.Tex. 1998) (refusing "to limit § 36(a)'s scope to only those violations that involve self-dealing or personal impropriety"), Stroug......
  • Mevc Draper Fisher Jurvetson v. Millennium Part., No. 03 Civ. 862(LBS).
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • March 6, 2003
    ...§ 36(a) of the ICA, it never specifically mentioned the question of implied rights under § 12. Cf. Young v. Nationwide Life Ins. Co., 2 F.Supp.2d 914, 926 (S.D.Tex. 1998) (finding an implied right of action under § 36(a), in part on the basis of the 1980 Report). Moreover, the 1980 Act neit......
  • Request a trial to view additional results
10 cases
  • Kerr-Mcgee Corp. v. Farley, No. Civ. 95-0438MVRLP.
    • United States
    • United States District Courts. 10th Circuit. District of New Mexico
    • March 10, 2000
    ...whether Neztsosie deprived tribal courts of jurisdiction over PAA actions. 28 U.S.C. § 1292(b); see Young v. Nationwide Life Ins. Co., 2 F.Supp.2d 914, 930 (S.D.Tex.1998); Public Interest Research Group v. Hercules, Inc., 830 F.Supp. 1549, 1555 (D.N.J.1993); Lamont v. Schultz, 748 F.Supp. 1......
  • Cheromiah v. U.S., No. CIV 97-1418 MV/RLP.
    • United States
    • United States District Courts. 10th Circuit. District of New Mexico
    • June 29, 1999
    ...there is "substantial ground for difference of opinion" on this issue. 28 U.S.C. § 1292(b); see Young v. Nationwide Life Ins. Co., 2 F.Supp.2d 914, 930 (S.D.Tex.1998); Public Interest Research Group v. Hercules, Inc., 830 F.Supp. 1549, 1555 (D.N.J.1993); Lamont v. Schultz, 748 F.Supp. 1043,......
  • S.E.C. v. Treadway, No. 04 Civ. 3464(VM).
    • United States
    • U.S. District Court — Southern District of New York
    • May 9, 2006
    ..."to refer to misconduct that involves self-dealing by investment company or other insiders"), with Young v. Nationwide Life Ins. Co., 2 F.Supp.2d 914, 927 (S.D.Tex. 1998) (refusing "to limit § 36(a)'s scope to only those violations that involve self-dealing or personal impropriety"), Stroug......
  • Mevc Draper Fisher Jurvetson v. Millennium Part., No. 03 Civ. 862(LBS).
    • United States
    • United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
    • March 6, 2003
    ...§ 36(a) of the ICA, it never specifically mentioned the question of implied rights under § 12. Cf. Young v. Nationwide Life Ins. Co., 2 F.Supp.2d 914, 926 (S.D.Tex. 1998) (finding an implied right of action under § 36(a), in part on the basis of the 1980 Report). Moreover, the 1980 Act neit......
  • Request a trial to view additional results

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