United States District Court, Southern District of New York
July 31, 2003
DIANE C. DONOVAN, ON BEHALF OF HERSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION, AMERICAN SKANDIA MARKETING, INCORPORATED, AMERICAN SKANDIA INVESTMENT HOLDING CORPORATION, ABC CORP., INC. 1 THROUGH ABC CORP., INC. 99 AND LMN CORP., INC. 1 THROUGH LMN CORP., INC. 99, DEFENDANTS.
The opinion of the court was delivered by: Milton Pollack, Senior District Judge
DECISION AND ORDER
Lead Plaintiffs are citizens and residents of the State of Utah who purchased deferred variable annuity products from the American Skandia Defendants in January and February of 2000. Plaintiffs seek to bring this action as members of a class consisting of all persons who, between December 13, 1997 and October 22, 2000, were parties to a deferred annuity contract issued, underwritten, marketed or sold by defendants.
Defendant American Skandia Life Assurance Corp. ("American Skandia") is one of the largest insurance and variable annuity companies in the United States and the world. The other defendants (together with American Skandia, the "American Skandia Defendants") are holding companies or subsidiaries of American Skandia which develop, market and underwrite fixed and variable annuities.
Plaintiffs bring this action individually and on behalf of all other persons similarly situated pursuant to the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) and 78t(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder; the Securities Act of 1933, 15 U.S.C. § 77(k), 77(l) and 77(o); and the Investment Company Act of 1940, 15 U.S.C. § 80a-33(b).
According to Plaintiffs, the American Skandia Defendants misled prospective customers into believing that deferred annuities would be appropriate investments for placement into qualified retirement plans, while failing to disclose the alleged inappropriateness and unsuitability of such a combination. Plaintiffs are not, however, bringing any charges against the broker from whom they purchased the variable annuity. Instead, Plaintiffs bring claims against the American Skandia Defendants allegedly involved in creating the Prospectuses through which the annuities were ultimately sold. Plaintiffs contend that as a result of defendants' misrepresentations, plaintiffs and other members of the class have incurred commissions, fees and charges in excess of what they would have paid for appropriate and suitable investments in an already tax qualified retirement plan.
Plaintiffs note specifically that National Association of Securities Dealers ("NASD") Notice to Members 99-35, issued in May of 1999, requires members to disclose to the customer that the tax deferred accrual feature of the variable annuity is unnecessary where it is otherwise provided by a tax-qualified retirement plan. NASD notices, however, are not law and noncompliance therewith cannot itself constitute a violation of the federal securities laws. See Max Marx Color & Chemical Co. Employees' Profit Sharing Plan v. Barnes, 37 F. Supp.2d 248, 253 (S.D.N.Y. 1999); Merit Ins. Co. v. Leatherby, 714 F.2d 673, 680 (7th Cir.), cert. denied, 464 U.S. 1009, 104 S.Ct. 529, 78 L.Ed.2d 711 (1983). No duty of disclosure will arise directly from a NASD notice. See e.g., Resnik v. Swartz, 303 F.3d 147 (2d Cir. 2002) ("omission of information . . . will violate these provisions if either the SEC regulations specifically require disclosure . . . or the omission makes other statements . . . materially false or misleading") (emphasis added). Plaintiffs do not contend that the SEC requirements call for NASD mandated disclosures. As for Plaintiffs' reference to SEC Form N-4, only variations in tax consequences need be disclosed. The Prospectuses are not required to state that certain uses are "unnecessary" or offer advice as to when, for tax purposes or otherwise, to use a variable annuity in a retirement plan.
To be actionable, therefore, the omissions complained of must make other statements in the prospectus misleading and there must be a substantial likelihood that the disclosure of the omitted facts would have been viewed by the reasonable investor to have significantly altered the total mix of information made available. See Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988).
Although the Prospectuses undeniably indicate that a variable annuity may be used as an investment vehicle for a qualified retirement plan, it is not true, as Plaintiffs state, that this is never appropriate. NASD Notice 99-35 itself states that a registered representative may recommend a variable annuity for a tax-qualified retirement account "when its other benefits, such as lifetime income payments, family protection through the death benefit, and guaranteed fees" support the recommendation.
Nor do the allegedly omitted facts significantly alter the total mix of information made available. The Prospectuses clearly state that both variable annuities and tax qualified retirement plans are tax deferrable. That is enough to alert all reasonable investors to the fact that it is unnecessary, if solely for tax reasons, to use a variable annuity to fund a tax-deferred retirement account.*fn1 See In re NBTY, Inc. Sec. Litig., 224 F. Supp.2d 482, 495 (E.D.N.Y. 2002); In re Ultimate Corp. Sec. Litig., No. 86 CIV. 5944 (CSH), 1989 WL 79372, at *5 (S.D.N.Y. July 11, 1989) ("Liability does not arise from the failure to disclose that which should be obvious to the average investor."). The other benefits of variable annuities are also clearly set forth, as well as the fee structure for purchase of the annuities.
The disclosures in the Prospectuses, taken in context, conclusively disprove the materiality of the alleged omissions and are thus fatal to the Plaintiffs' claims. Moreover, as the Prospectuses were issued more than two years before the filing of this suit, the disclosures therein also put the Plaintiffs on inquiry notice of their claims such that the statute of limitations bars their action.*fn2 And, having failed to allege a primary violation of the securities laws, Plaintiffs' claims of control person liability will also fail.
For the reasons set forth above, Defendants' motion to dismiss with prejudice is granted.