United States District Court, E.D. New York
June 22, 2004.
IN RE: METLIFE DEMUTUALIZATION LITIGATION.
The opinion of the court was delivered by: THOMAS PLATT, JR., Senior District Judge
MEMORANDUM AND ORDER
Defendant, Metropolitan Life Insurance Company ["MetLife"],
moves under Federal Rules of Civil Procedure 9 and 12 and
pursuant to the Private Securities Litigation Reform Act to
dismiss the Second Claim for Relief contained in the Second
Amended Complaint of the class action Plaintiffs in this
litigation. This claim by former MetLife policyholders is one of
securities fraud under Section 10(b) of the Securities Exchange
Act of 1934 and its correlative Rule 10b-5.
Oral argument was heard April 30, 2004. For the following
reasons, MetLife's motion to dismiss is DENIED.
The undersigned assumes familiarity with this Court's earlier
decision denying MetLife's initial motion to dismiss Plaintiffs'
original Complaint in this case, filed under Section § 12(a) of
the Securities Act of 1933, in In re: MetLife Demutualization
Litig., 156 F. Supp.2d 254 (E.D.N.Y. 2001), and with the
statement of facts set forth more fully therein, see id. at
A. Factual summary
Briefly, in 2000 MetLife changed from a mutual life insurance
company to a stock life insurance company. This demutualization
took place with the unanimous approval of the Board of Directors,
the permission of 93% of MetLife's 2,800,000 policy holders, and
the imprimatur of the New York State Insurance Commission. This
transaction converted MetLife's policy holdings into over
700,000,000 shares of stock valued at $14.25 per share, worth
over $10,000,000,000 at the time. MetLife compensated each former
policyholder with ten shares of MetLife stock in return for the
policyholders' relinquishing of, inter alia, their voting
membership interests in MetLife. Those termed "participating"
policyholders, who also possessed interests in MetLife's
then-$14,000,000,000 surplus, received further shares of stock
claimed to be commensurate with their policies' contributions to
the surplus. See id., Plaintiffs' Second Amended Complaint at
¶¶ 28-54; MetLife's Memorandum of Law in Support of their Motion
to Dismiss at 2-4; Policyholder Information Booklet at 6-7.
Plaintiffs are current MetLife shareholders and former MetLife
participating policyholders. They claim that the Policyholder
Information Booklet ["PIB"], which set forth the details of the
demutualization prior to the vote that approved the transaction,
contained material misrepresentations, made through misstatements
and omissions, and that MetLife made such misrepresentations with
the relevant scienter. Plaintiffs' Memorandum of Law in
Opposition to MetLife's Motion to Dismiss at 8-10.
Specifically, Plaintiffs allege four misrepresentations in the
PIB: (i) omitting to state that the actuarial method used to
calculate policyholders' contributions to MetLife's surplus
arrived at a value of $15,300,000,000, far higher than the
$8,400,000,000 in stock that these policyholders received as
compensation; (ii) omitting to state that MetLife's method of
reorganization, an exchange of policies for stock with the right
to elect cash, as opposed to an exchange of policies for cash
with the right to elect stock, was chosen for the benefit of
MetLife and not the policyholders, because Plaintiffs would
allegedly have received double the compensation under the latter
method; (iii) omitting to state that policyholders would
surrender their right to annual dividends from their
contributions to MetLife's surplus; and (iv) misstating that
reasonable dividends would "continue to be paid as declared,"
when in Plaintiffs' view the assets allocated to pay dividends
had been limited. See id.; Plaintiffs' Second Amended
Complaint at ¶¶ 28-54.
In sum and substance, Plaintiffs allege that PIB did not
explain that policyholders received only 54¢ on the dollar for
their policies, that dividends were reduced, and that MetLife
engaged in fraud by not stating this in the PIB.
B. Statutes, rules and regulations
Plaintiffs sue MetLife under Section 10(b) of the Securities
Exchange Act and Rule 10b-5; MetLife moves to dismiss the
Complaint under Rules 9 and 12 and the Private Securities
Litigation Reform Act [the "PSLRA"].
Section 10(b) and Rule 10b-5 provide in pertinent part that it
shall be unlawful for any person acting with scienter, directly,
by use of the mails, to use in connection with the sale of any
security any device in contravention of the rules of the
Securities and Exchange Commission, such as the making of false
statements or the omission of material facts in a prospectus.
See 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. (The parties
agree that the PIB shall be treated as a prospectus for the
demutualization transaction for the purposes of this litigation.)
Rule 9 provides that in all averments of fraud, the
circumstances surrounding the fraud shall be stated with
particularity. Rule 12 provides that a complaint may be dismissed
for failure to state a claim upon which relief may be granted.
And the PSLRA provides that when alleging material falsehoods or
omissions in an action for securities fraud, the complaint must
specify the falsehoods or omissions, why they are misleading, and
state facts strongly inferring fraudulent intent. See FED. RS.
CIV. P. 9(b) and 12(b)(6); 15 U.S.C. § 78u-4(b).
C. Standards of review
On their motion to dismiss Plaintiffs' Complaint of securities
fraud under Rule 12(b)(6), MetLife bears the burden of showing
that even if the Complaint's allegations are accepted as true,
and all reasonable inferences are drawn in Plaintiffs' favor,
Plaintiffs are still not entitled to the relief sought. Dismissal
is proper only if no relief could be granted under any set of
facts consistent with Plaintiffs' allegations. However, under the
heightened pleading standards of Rule 9(b) and the PSLRA,
Plaintiffs' claim of securities fraud must allege MetLife's
putative fraud with particularity, and demonstrate scienter of
fraudulent intent on the part of MetLife by showing either the
motive and opportunity to commit fraud, or strong circumstantial
evidence of conscious misbehavior or recklessness by MetLife.
See Kalnit v. Eichler, 264 F.3d 131, 138-39; In re:
Scholastic Corp. Secs. Litig., 252 F.3d 63, 69 (2d Cir. 2001).
Assuming that Plaintiffs allege particular misrepresentations
in the PIB, and also demonstrate strong evidence of MetLife's
scienter, MetLife must then show that if these allegations are
true, Plaintiffs are still not entitled to the relief sought.
Even under Rule 9(b) and after the passage of the PSLRA, the
standard for granting dismissal is still a high bar for
defendants to clear. MetLife has not done so here.
A. The parties' arguments
MetLife argues that "the documents cited by plaintiffs show
that plaintiffs have mischaracterized or misstated defendants'
representations [in the PIB], and that the actual representations
that defendants did make are true as a matter of law" (emphasis
in original). Further, "[e]ven if plaintiffs had pleaded a
misrepresentation, they have failed to plead scienter with the
specificity required for a Rule 10b-5 claim." MetLife's
Memorandum at 6, 11.
In response Plaintiffs narrow their argument to the four
alleged misrepresentations: (i) the omission regarding the
$15,300,000,000 value of the surplus as against $8,400,000,000 in
stock given policyholders as compensation; (ii) the omission
regarding the exchange of policies for stock with the right to
elect cash, and why this was MetLife's chosen method of
reorganization; (iii) the omission regarding policyholders'
rights to annual dividends from the surplus; and (iv) the
misstatement regarding reasonable dividends. See Plaintiffs'
Response at 8-10; see also April 30, 2004 transcript at
As for scienter, Plaintiffs argue that the "[a]llegations that
defendants had actual knowledge of access to non-public
information that contradicts the [PIB] establish strong
circumstantial evidence of conscious misbehavior or
recklessness," and specifically cite MetLife's internal
calculation of a $15,300,000,000 contribution to MetLife's
surplus by policyholders, which calculation was not disclosed to
policyholders in the PIB, in contrast to the $8,400,000,000 in
stock these policyholders received in the demutualization.
Plaintiffs specifically emphasize a presentation on this subject
by an actuary to MetLife's board of directors. And, as evidence
of a motive and opportunity to commit fraud, Plaintiffs allege as
a motive that "[f]or years Metropolitan secretly transferred $200
million of surplus on an annual basis to cover losses on certain
products," that the demutualization "diverted billions of dollars
away from participating policyholders," and that MetLife "hid
this effect of the demutualization through false statements and
omissions" in the PIB. Plaintiffs' Response at 10-12; see
also April 30, 2004 transcript at 25.
In reply and at oral argument, MetLife emphasizes that the four
statements singled out by Plaintiffs were either not made to
policyholders, or were demonstrably true. To wit: (i) as to the
alleged omission regarding the value of MetLife's surplus versus
the compensation given to policyholders, MetLife argues that "the
PIB makes clear that the variable component of consideration is
allocated in proportion to actuarial contributions, not in an
amount equal to those contributions" (emphasis in original),
that the difference between the $15 and $8 billion figures is
therefore not germane, and that the total compensation given
policyholders ultimately depended upon the performance of the
initial public offering of MetLife's stock; (ii) as to the
alleged omission regarding the exchange of policies for stock
with the right to elect cash instead of cash with the right to
elect stock, and the manner in which this would benefit MetLife
at the expense of policyholders, MetLife argues that the PIB
stated, accurately, that the form of consideration differed
between these two methods, and that while there are an endless
variety of possible methods of demutualization, the PIB made no
larger claims as to the comparative fairness and equity of
MetLife's chosen method; and (iii) and (iv) as to the alleged
omission and misstatement regarding dividends, MetLife argues
that as required by law, the demutualization plan expressly
preserved the policyholders' rights to dividends, making the
PIB's statements to this effect factually true, and that
Plaintiffs have alleged no facts suggesting that reasonable
dividends will not be paid in the future. See MetLife's Reply
Memorandum at 2-7; see also April 30, 2004 transcript at
Also in reply, MetLife argues regarding scienter that
Plaintiffs' motive-and-opportunity theory is too broadly
generalized, as a company's simple desire to raise capital is
insufficient evidence of fraudulent intent under Rule 9 and the
PSLRA. Furthermore, MetLife submits that none of the contested
statements were "likely to sway policyholders to vote
differently" regarding the demutualization, as the transaction
resulted in a windfall to many policyholders, thus obviating a
motive for MetLife to lie, because policyholders received
valuable stock in exchange for what MetLife describes as their
"ephemeral rights" to vote for MetLife's directors and to share
in the assets of MetLife in the unprecedented event of a solvent
liquidation of such a company. Also, MetLife avers that it had
little opportunity to deceive its policyholders, as the
demutualization transaction was scrutinized and approved by the
State insurance regulators and by their outside actuarial,
investment banking and law firms. See MetLife's Reply
Memorandum at 8-9; see also April 30, 2004 transcript at
Finally, regarding Plaintiffs' circumstantial evidence of
MetLife's scienter of conscious or reckless disregard for the
truth, MetLife argues that, as to the disputed valuation of the
contributions to the surplus, that the $15,300,000,000 dollar
figure was discussed throughout the PIB; that as to the differing
methods of demutualization, the only evidence suggesting the
viability of an alternative plan is a three year-old document;
and that as to the dividend issue, the document cited by
Plaintiffs discusses rights to the surplus beyond dividends, and
not dividend rights as they existed. MetLife's Reply Memorandum
at 8-9; see also April 30, 2004 transcript at 11-17.
B. The Policyholder Information Booklet
The Court has again conducted its own study of the PIB, for the
purpose of its decision on the instant motion only.
Regarding the issue of the surplus, the PIB states that, as to
the additional compensation of participating policyholders, such
persons "may be allocated additional shares. The number of
additional shares you will receive will be based on an actuarial
formula. The formula takes into account, among other things, the
Policy's past and estimated future contributions to MetLife's
surplus." Id. at 18. As to the calculation of this
compensation, the PIB states that the "compensation you will
receive in the demutualization will be calculated by multiplying
the total number of shares of MetLife common stock allocated to
you by the [initial public offering, or "IPO"] price . . .
Information concerning the number of shares allocated to you will
be available from Met Life . . . at a later date." Id. at
18-19. The $15,300,000,000 surplus figure is not, by the Court's
reading, discussed as such in the text of the PIB, and neither is
the $8,400,000,000 that would later be offered in compensation;
rather, the former sum may be deduced from the financial data
provided in the PIB.
Regarding the issue of the election of cash or shares, the PIB
states that if "you are eligible to receive shares . . . you may
elect to receive cash for your shares instead . . . The amount of
cash you receive will be equal to the number of shares that are
allocated to you under the terms of the [demutualization] Plan
multiplied by the IPO price." Id. at 10.
Regarding the issues surrounding dividends, the PIB states that
"dividends will continue to be paid as declared," id. at 8, and
that "[i]f you own a Participating Policy that provides for
Policy dividends, you will remain eligible to receive dividends . . .
after the demutualization," and that "the Plan establishes an
accounting mechanism known as a Closed Block," as "to ensure that
policyholders' reasonable dividend expectations will be met after
a mutual insurance company converts to stock form." Id. at 44.
Further, "MetLife will allocate assets to the Closed Block in an
amount that it reasonably expects will, together with revenue
from policies in the Closed Block, be sufficient to pay benefits
and certain taxes and expenses of the Closed Block," and "MetLife
will continue to pay guaranteed benefits, in accordance with
policy terms, on all policies." Id. at 45.
Applying Fed. Rs. Civ. P. 9(b) and 12(b)(6) and the PSLRA to
Plaintiffs' Section 10(b) and Rule 10b-5 claim, as these laws and
rules and regulations are interpreted within this jurisdiction,
the Court finds the following.
Plaintiffs point to specific statements within the PIB and to
internal MetLife documents such as the actuarial report and the
minutes of a Board of Directors meeting, that Plaintiff contends
contradict public statements in the PIB. See In re: Scholastic
Corp. Secs. Litig., 252 F.3d 63, 72 (2d Cir. 2001) (stating that
a "plaintiff needs to specify the internal reports, who prepared
them and when, how firm the numbers were or which company
officers reviewed them); Novak v. Kaskas, 216 F.3d 300, 309 (2d
Cir. 2000) (stating that "[w]here plaintiffs contend defendants
had access to contrary facts, they must specifically identify the
reports or statements containing this information").
Plaintiffs then allege that the PIB obscured the fact as
Plaintiffs would have it that under the actuarial plan chosen
for the demutualization, participating policyholders received
little more than one-half the dollar value of their policies in
compensatory stock, in contrast to compensation commensurate with
a policy's "past and estimated future contributions to MetLife's
surplus." Plaintiffs also allege that the frequency and value of
the policyholders' dividends have been or will be reduced, in
contrast to the PIB's promises that "reasonable dividend
expectations will be met" and that "MetLife will allocate assets
to the Closed Block in an amount that it reasonably expects will
. . . be sufficient to pay benefits and certain taxes and
expenses of the Closed Block." And Plaintiffs hold that contrary
to MetLife's assertions in the PIB, MetLife was not fair and
equitable in its treatment of policyholders. And these same
policyholders presumably relied upon the statements in the PIB
when they voted, to their supposed detriment, to approve the
And while Plaintiffs' evidence of a scienter of motive and
opportunity to commit fraud may not at this point be strong,
Plaintiffs make a strong enough circumstantial showing, at the
pleading stage, of a scienter of recklessness through MetLife's
failure to more adequately explain the disputed issues in the
PIB. And "securities fraud claims typically have sufficed to
state a claim based on recklessness when they have specifically
alleged defendants' knowledge of facts or access to information
contradicting their public statements. Under such circumstances,
defendants knew or, more importantly, should have known that they
were misrepresenting material facts related to the corporation."
Novak, 216 F.3d at 308.
If what is set forth in the preceding three paragraphs is true,
and in considering this motion to dismiss the Court is obliged to
assume that it is, Plaintiffs have set forth a valid complaint of
securities fraud under Section 10(b) and Rule 10b-5. And, as the
Court of Appeals stated in Kalnit v. Eichler, "dismissal is
upheld only if `it appears beyond doubt that the plaintiff can
prove no set of facts in support of his claim which would entitle
him to relief.'" 264 F.3d 131, 138 (2d Cir. 2001) (citing Ganino
v. Citizens Utilities Co., 228 F.3d 154, 161 (2d Cir. 2000).
Plaintiffs may, at the end of the day, be wrong about the
relative value of stock they received in exchange for their
policies compared to the value of MetLife's surplus, or about
what reasonable policyholders might have inferred from the phrase
"an actuarial formula" taking "into account, among other things,
the Policy's past and estimated future contributions to MetLife's
surplus." Perhaps Plaintiffs are also wrong about what
"reasonable dividend expectations" are, or about the way in which
dividends have been, or will be, effected by the demutualization.
Also, a fact finder might find that the way in which these issues
were discussed in the PIB was not misleading, or that Plaintiffs'
evidence of a scienter of recklessness on the part of MetLife is
Yet these issues are, at their core, factual issues. They are
better determined upon a motion for summary judgment, or
ultimately at trial, than upon a motion to dismiss. As
Plaintiffs' counsel put the matter at oral argument, "the purpose
of a complaint is to give notice to the defendants so they can
defend themselves," and MetLife's argument, while well taken by
the Court, "is really in the nature of a closing argument to a
jury or an impassioned plea for summary judgment." April 30, 2004
transcript at 18. MetLife's instant motion is, accordingly,
DENIED. Discovery may continue regarding, e.g., the
circumstances under which the decision on how to value
contributions to the surplus was arrived at, and how this
decision was explained to policyholders, and also as to the
funding of the "Closed Block" and the issuance of dividends.
For the foregoing reasons, MetLife's motion to dismiss the
Second Claim for Relief, of securities fraud, from the class
action Plaintiffs' Second Amended Complaint, is DENIED.
Plaintiffs allege particular misstatements and omissions in the
PIB, and attempt to demonstrate MetLife's scienter through strong
circumstantial evidence of recklessness. Accepting Plaintiffs
allegations as true and drawing reasonable inferences in their
favor, Plaintiffs may be entitled to the relief they seek, and
discovery in this case may therefore continue.
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