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June 23, 2004.


The opinion of the court was delivered by: ROBERT SWEET, Senior District Judge


Defendants Aegon N.V. ("Aegon"), Donald J. Shepard ("Shepard"), Kees Storm ("Storm") and Jos B.M. Streppel ("Streppel") (collectively the "Individual Defendants") (Aegon and the Individual Defendants collectively the "Defendants"), have moved pursuant to Fed.R.Civ.P. Rules 9(b) and 12(b)(6) to dismiss the consolidated amended complaint ("CAC") filed on behalf of shareholders of Aegon during the period of August 9, 2001 to July 22, 2002 (the "Class Period"). For the reasons set forth below, the motion is granted.

Prior Proceedings

  On January 24, 2003, a class action complaint was filed in this action, additional actions were filed and by stipulation and order of April 15, 2003, the actions were consolidated and lead plaintiffs and their counsel were selected. On July 14, 2004, the CAC was filed.

  The CAC alleged violations of Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. § 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder by the SEC, 17 C.F.R. § 240.10b-5, arising out of Aegon's inadequate reserves for bond defaults (CAC ¶¶ 35-40), its failure to accelerate deferred policy acquisition costs ("DPAC") (CAC ¶ 41-46), its inadequate provisions for guaranteed minimum benefits (GMB) (CAC ¶¶ 47-48) which resulted in the making of materially false and misleading statements during the Class Period (CAC ¶¶ 49-78, 89-97), resulting in two claims, one against the Defendants for violation of Section 10(b) of the Exchange Act and Rule 10(b)5 and against the Individual Defendants for violation of Section 20(a) of the Exchange Act.

  The instant motion to dismiss by the Defendants was heard and marked fully submitted on February 4, 2004.

  The Parties

  The Lead Plaintiffs and additional Plaintiffs (collectively, the "Plaintiffs") purchased stock of Aegon during the Class Period.

  Aegon is a corporation organized under Dutch law that is domiciled in the Netherlands. It is managed by an executive board whose members are appointed and overseen by a supervisory board. Aegon is the holding company of one of the world's ten largest listed life insurance groups ranked by market capitalization and assets and is active in three major markets: the Americas, including the United States, Canada and, until year-end 2001, Mexico (collectively Aegon USA), the Netherlands and the United Kingdom. During the Class Period Aegon derived approximately two-thirds of its profits from its North American business. Aegon's common shares are listed and traded on Euronext Amsterdam, and the Frankfurt, London, Tokyo, Zurich and New York stock exchanges.

  Shepard became chairman of the executive board of Aegon following Aegon's annual general meeting of shareholders on April 18, 2002. Shepard was previously a member of Aegon's executive board since 1992 and chairman, president and chief executive officer of Aegon USA.

  Streppel was at all relevant times Aegon's chief financial officer and a member of the executive board.

  Storm was chairman of Aegon's executive board until April 18, 2002. At the annual general meeting of shareholders on April 18, 2002, the appointment of defendant Shepard as chairman of the executive board and the appointment of defendant Storm to the supervisory board effective upon his retirement on July 1, 2002 were approved.

  As members of the executive board, the Individual Defendants attended audit committee meetings.

  According to the CAC, because of their senior executive positions with Aegon, the Individual Defendants had access to the adverse undisclosed information about Aegon's business, operations, products, operational trends, financial statements, markets and present and future business prospects via access to internal corporate documents (including Aegon's operating plans, budgets, forecasts and reports of actual operations), communications with other corporate officers and employees, attendance at management and executive board meetings and via reports and other information provided to them in connection with their positions.

  The Allegations of the CAC

  During the Class Period, Aegon, under the direction of the Individual Defendants, falsely represented that Aegon was on track to achieve earnings growth of 10% to 15% in 2001 and 2002. (¶¶ 2, 33). When Defendants realized that this expected growth could not be obtained because of the sharp declines in equity markets, deteriorating credit markets and significant increases of default by issuers of corporate debt held, Aegon (i) inflated the carrying value of Aegon's investments in bonds and other fixed income securities; (ii) understated its liabilities for minimum benefit guarantees and provisions for bond defaults; and (iii) understated its amortization of deferred policy acquisition costs (DPAC) (¶ 15), resulting in materially overstating its reported net income and earnings per share throughout the Class Period. (¶¶ 2, 5).

  Prior to and during the Class Period, as the stock markets suffered substantial declines, increasing numbers of investors looked to invest in fixed products rather than variable products. Aegon claimed publicly that its balanced mix of fixed and variable rate products would allow it to prosper during these difficult economic times, (¶ 31), stating that it was less vulnerable to the vicissitudes of the equity and credit markets than competitors, because, inter alia, Aegon matched "high quality investment assets . . . in an optimal way to the corresponding insurance liability, taking into account currency, yield and maturity characteristics." (¶ 32.)

  Throughout the Class Period, Aegon's bond portfolio contained a significant amount of low quality debt securities and its provisions for bond defaults were inadequate. (¶ 35.) By early 2000, well before the beginning of the Class Period, the risk of low quality debt securities was heightened as equity and credit markets began to decline precipitously. The Aegon bond portfolio contained a significant amount of low quality debt securities: 40% of Aegon's U.S. fixed income portfolio, which was 78% of Aegon's general account investments, was rated BBB or lower in 2001, (¶ 35). The bond portfolio also included substantial corporate bond holdings which were significantly impaired in value and were at significant risk of default, including Adelphia, Enron, Global Crossing, Qwest and WorldCom. (¶ 38.) During the Class Period, Aegon had $300 million in exposure to Enron and $200 million in exposure to WorldCom. Aegon held bonds in default (net of write-downs) of $328 million (approximately EUR 368 million) at December 31, 2001, an amount that exceeded the provision for bond defaults by EUR 130 million. By failing to establish adequate provisions for these bond defaults and/or failing to write down the value of these impaired debt securities, Aegon's reported net income and earnings per share were materially overstated. (¶ 40.)

  During the Class Period, in order to match income and expenses, deferred policy acquisition costs ("DPAC") such as commissions related to insurance contracts with fixed premiums were amortized as a percentage of premiums over the life of the contract. With respect to flexible insurance contracts, variable annuities, unit-linked products and fixed annuities, Aegon represented that the amortization of DPAC was generally in proportion to the expected gross profit stream over the entire life of the underlying contracts. (¶ 41.)

  If the equity market performed worse than expected, the value of assets under management would decline and Aegon's actual and future earnings from these products would be less than estimated. (¶ 42.) Aegon falsely represented that in such an event, the DPAC amortization would be accelerated to maintain the matching principle and that the difference between the original DPAC amortization schedule and the revised schedule would be charged to the income statement, a process referred to as DPAC "unlocking." (Id.) Guaranteed minimum benefits ("GMBs") were contained in certain products sold by Aegon in the U.S., Canada and the Netherlands. In the U.S., a common feature of variable annuities was a guaranteed minimum death benefit under which beneficiaries would receive the greater of the account balance or the guaranteed amount when the insured died. (¶ 47.) During the Class Period, Aegon purported to record a technical provision in the income statement to the extent that its products contained guaranteed minimum death benefits ("GMDB") or guaranteed minimum income benefits ("GMIB"). (Id.)

  On May 3, 2001, Aegon issued a press release announcing its results for the first quarter of 2001 in which it reaffirmed its forecast of 10% to 15% growth in earnings and earnings per share for 2001, notwithstanding the negative impact of the overall stock market decline. (¶ 34.)

  On August 9, 2001, Aegon announced in a press release a 25% increase in net income for the second quarter of 2001 and the fact that an increase in 2001 earnings and earnings per share of between 12% to 17% (formerly between 10% to 15%) was now expected. (¶ 49.) As a result of Aegon's positive second quarter earnings announcement, Aegon shares on the NYSE rose from $28.06 at the cost of trading the day before the announcement to $29.46 at the close of trading on August 9, 2001. (¶ 52.) On November 8, 2001, Aegon issued another press release in which it announced a 14% increase in its net income for the third quarter ended September 30, 2001, and also reiterated its forecast for an increase in full-year net income and earnings per share of between 12% and 17% in 2001. (¶ 55.) The press release stated that the earnings per share increase was expected to be in the low end of this range due to the issuance of shares in connection with the acquisition of the direct marketing services operations of J.C. Penney just prior to the starting of the Class Period.

  On March 7, 2002, Aegon issued a press release announcing its results for the fourth quarter and year ended December 31, 2001. The March 7, 2002 press release was included in a form 6-K dated the same day, which was filed with the SEC on April 4, 2002. (¶ 59.) For the full year 2001, the press release reported that net income and net income per share increased 16% and 12% respectively. (¶ 61.) In contrast, Aegon's direct competitors — Skandia AB and ING Groep NV — reported losses for the year 2001. (Id.)*fn1

  On May 7, 2002, Aegon issued a press release announcing that its net income for the first quarter ended March 31, 2002 had increased by 15% per share in the same period a year earlier, (¶ 72), and reiterated its outlook that 2002 net income and earnings per share would be "at least equal" to the previous year's level. (Id.)

  Aegon did not record a DPAC unlocking amortization adjustment until the second quarter of 2002. The S&P 500 decline, which began in April 2000 and continued throughout the Class Period, reached 45% by the second quarter. Aegon's calculations with respect to DPAC amortization during the Class Period assumed equity market returns in excess of 14% the near term (5 years) and 9.5% thereafter. (¶ 87.) By failing to accelerate DPAC amortization until the second quarter of 2002, Aegon avoided taking significant charges that would have significantly reduced its net income and earnings per share during the Class Period, thus allowing Aegon to report earnings and earnings per share which were materially overstated and consistent with its publicly stated projections for earnings growth. (¶ 46.) In 2002, Aegon belatedly took EUR 450 million in charges related to DPAC amortization unlocking that should have been taken in prior quarters. Id.

  Notwithstanding the severe decline in the equity markets during the Class Period, Aegon failed to increase its technical provisions for minimum benefit guarantees until the second quarter of 2002, thereby understating liabilities and expenses and overstating net income throughout the Class Period. In 2002, Aegon belatedly took EUR 482 million in charges related to minimum benefit guarantees. (¶ 48.) Aegon's statements and financial numbers were false and misleading because Defendants failed to disclose that earnings growth of 12% could only be achieved by implementing the accounting described above and that the disclosed earnings and earnings per share were materially overstated as a result of these accounting manipulations. (¶ 71.)

  The Defendants had actual knowledge of, or recklessly disregarded, the deteriorating financial markets, increasing incidents of default in the corporate bond market, and Aegon's inadequate provisions for bond defaults and guaranteed minimum benefits and failure to accelerate DPAC amortization. (¶ 111.)

  On July 22, 2002, Aegon announced that it expected its full year 2002 earnings to be 30% to 35% lower than the previous year, as a result of (1) the deterioration of the stock markets which had lowered the fee revenue and, therefore, required Aegon to accelerate amortization of deferred policy acquisition costs and strengthen reserves for guarantee minimum benefits; and (2) the further deterioration in the U.S. credit markets and related continuing series of defaults, which had resulted in hundreds of millions of dollars in write-offs and required Aegon to strengthen its bond default provisions. (¶ 76.)

  Upon these disclosures, the price of Aegon's shares declined 22% from a closing price of $16.99 on Friday, July 19, 2002 to a closing price of $13.25 on ...

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