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MALHOTRA v. EQUITABLE LIFE ASSURANCE SOCIETY OF U.S.

April 7, 2005.

SHAM MALHOTRA and MERVIN FISCHMAN, On Behalf of Themselves and All Others Similarly Situated, Plaintiffs,
v.
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, AXA ADVISORS, LLC and EQUITABLE DISTRIBUTORS, INC., Defendants.



The opinion of the court was delivered by: ARTHUR SPATT, District Judge

AMENDED MEMORANDUM OF DECISION AND ORDER

The plaintiffs Sham Malhotra ("Malhotra) and Mervin Fischman ("Fischman"), on behalf of themselves and a putative class of investors, commenced this action against the defendants The Equitable Life Assurance Society of the United States, AXA Advisors, LLC and Equitable Distributors, Inc. (collectively, "Equitable" or the "Defendants") alleging violations of section 10(b) ("Section 10(b)") of the Securities Exchange Act of 1934 (the "Exchange Act") and Securities and Exchange Commission ("SEC") Rule 10b-5 ("Rule 10b-5") promulgated thereunder.

Presently before the Court is a motion by Equitable to dismiss the Second Amended Complaint pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure ("Fed.R.Civ.P."). This Complaint alleges that Equitable made material omissions in the sale of deferred annuity contracts with respect to its point of sale representations and sales brochures. The Plaintiffs also allege that the Defendants are liable as a "controlling person" pursuant to section 20(a) of the Exchange Act.

  I. BACKGROUND

  Familiarity with the prior decisions in this case are presumed. See Malhotra v. The Equitable Life Assurance Soc'y of the United States, No. 00CV6386 (slip op.) (E.D.N.Y. Sept. 5, 2001); Malhotra v. The Equitable Life Assurance Soc'y of the United States, No. 00CV6386 (slip op.) (E.D.N.Y. Mar. 8, 2003); Malhotra v. The Equitable Life Assurance Soc'y of the United States, No. 00CV6386 (slip op.) (E.D.N.Y. Mar. 12, 2003); Malhotra v. The Equitable Life Assurance Soc'y of the United States, No. 00CV6386 (slip op.) (E.D.N.Y. Feb. 21, 2003). Only the facts central to the instant motion are provided.

  The Court takes the following allegations as true for purposes of this motion to dismiss:
The individual plaintiffs Malhotra and Fischman, seek to bring this action on behalf of:
All persons who purchased an individual variable deferred annuity contract or received a certificate to a group variable deferred annuity contract issued by [Equitable], or who made an additional investment through such a contract, on or after October 3, 1997, which contract was used to fund a contributory (not defined benefit) retirement plan or arrangement qualified for favorable income tax treatment pursuant to Internal Revenue Code sections 401, 403, 408, 408A or 457. The covered retirement plans include traditional IRAs, rollover IRAs, Roth IRAs, 401(k) plans, 403(b) plans, state government employee plans, and others.
Sec. Am. Compl. ΒΆ 1.

  The Court takes judicial notice that a variable annuity is an investment device similar to a mutual fund except, unlike a mutual fund, it offers (1) tax-deferred treatment of earnings; (2) a death benefit; and (3) annuity payout options that can provide guaranteed income for life. A variable annuity is considered to be "deferred" when the payments are delayed to the future. National Association of Securities Dealers ("NASD") Investor Alert dated May 27, 2003.

  As explained in the Second Amended Complaint, one of the advantages of investing in a deferred variable annuity is the deferral of the taxation of earnings. However, the tax advantage of a deferred variable annuity may be "unnecessary and redundant" to investors funding retirement plans such as an Individual Retirement Account ("IRA") or 401(k). Such is the case because these retirement plans are, by their very nature, automatically tax deferred. Id. Thus, because IRAs and 401ks are already tax-deferred, funding these retirement accounts with a variable annuity will provide no additional tax savings. See Patenaude v. Equitable Life Assurance Society of the United States; AXA Advisors, LLC, 290 F.3d 1020, 1023 n. 3, (9th Cir, 2002) ("Under the Internal Revenue Code, funds placed in variable annuity contracts are taxed only when the annuitant withdraws them from the account, which makes variable annuities a much more attractive investment from a tax perspective than mutual funds or other equities. However, this tax advantage of variable annuities is irrelevant to investors who are investing funds set aside through an investment vehicle that is already tax-deferred, such as an IRA or a 401(k).").

  Turning to the allegations of the individual representative plaintiffs, the Court notes that only two of the eighty-three paragraphs in the Second Amended Complaint are specific to the class representatives.

  A. As to Sham Malhotra

  Sham Malhotra is a citizen and resident of the State of New York and resides in Nassau County. In February 1992, Roger Malhotra, an Equitable Sales Agent of no relation to Plaintiff Malhotra, recommended to Malhotra that he re-invest his IRA in an "Equitable Equi-Vest deferred annuity." The Equitable Agent allegedly did not disclose that the tax deferral provided by an annuity was "redundant and unnecessary" if the investment was for an IRA. On or about February 13, 1992, Equitable issued contract number 92 931 779 to Malhotra. More than seven years later, on August 2, 1999, September 29, 1999, October 5, 1999, and December 21, 1999, Malhotra made additional purchases of units of interest in this same annuity product.

  In February 2000, Malhotra's accountant informed him that the "investment of his retirement monies in an annuity was inappropriate and injurious to him because of the redundant nature of the tax deferral provided by the product." Malhotra subsequently contacted the Equitable Agent for an explanation regarding the deferred annuity recommendation and was allegedly incorrectly told that Malhotra was not paying any insurance fees with the annuity product and that "there was `no problem' having the IRA funded with a deferred annuity."

  One month later, in March 2000, Malhotra read an article in Barron's magazine entitled "The $6.4 Billion Ripoff." This article described the deceptive practices by which some insurance companies were marketing deferred annuities to persons who did not need the tax deferral benefits of the product. Malhotra further asserts that if he had been told prior to purchasing the deferred annuity that the tax deferred aspect of the product was redundant and unnecessary for him, he would not have purchased the product in 1992, nor would he have made additional investments in 1999, as recommended by the Equitable agent. Malhotra alleges that he is currently unable to "exit" this investment strategy due to the significant surrender penalties associated with the product.

  B. As to Mervyn Fischman

  Dr. Mervin Fischman is a citizen and resident of the State of Florida. In or about February 1999, Michael Sandberg, an "investment professional" with PaineWebber Inc. ("PaineWebber") was recommended to Fischman. PaineWebber is one of the distribution channels for Equitable Life's annuity products, as developed by Equitable Distributors. When Fischman transferred his accounts to Paine Webber, he told Sandberg that his goal was to obtain more income from his investments. Sandberg recommended to Fischman that he purchase a variable annuity for his IRA account. However, Sandberg allegedly did not tell Fischman about the insurance fees associated with the annuity or that he was paying for tax deferral benefits that he did not need. Thereafter, Sandberg sold Fischman a $100,000 Equitable Life annuity, using funds from Fischman's existing IRA accounts. Thereafter, Equitable issued an "Accumulator (IRA)" annuity dated March 23, 1999.

  In November 1999, Fischman read an article in The Wall Street Journal that alerted him to the "deceptive practices" some insurers used to market deferred annuities to persons who do not benefit from the tax deferral feature of the product. Fischman then sought to "exit" the annuity product but was unable to do so without incurring a substantial surrender penalty.

  The first two causes of action arise under section 10(b) and SEC Rule 10b-5 allege that:
(1) "Defendants failed to disclose the tax deferral benefits of a variable annuity are unnecessary for qualified plan investors, and that any permissible investment funding the qualified plan will enjoy the tax benefits already provided by the qualified plan. . . . Had Plaintiff's . . . known the truth, they would not have purchased Equitable's variable annuity contracts; and
(2) "Defendants failed to disclose that a variable annuity is a suitable investment only when an insurance need supports Defendant's recommendation of the annuity. . . . Had Plaintiffs . . . known the truth, they would not have purchased Equitable Life's variable annuity contracts.
  The third cause of action alleges that because of Equitable Life's control of AXA Advisors and Equitable Distributors, as well as its own culpable participation, Equitable Life is liable as a controlling person within the meaning of Section 20(a) of the Exchange Act.

  II. DISCUSSION

  A. Pleading Requirements

  1. The Rule 12(b)(6) Motion to Dismiss

  A court may grant a Fed.R.Civ.P. 12(b)(6) motion to dismiss for failure to state a claim only when "`it appears beyond doubt that the plaintiff can prove no set of facts in support of [her] claim which would entitle [her] to relief.'" Tarshis v. Riese Org., 211 F.3d 30, 35 (2d Cir. 2000), abrogated on other grounds, Swierkiewicz v. Sorema N.A., 534 U.S. 506, 122 S. Ct. 992, 152 L. Ed. 2d 1 (2002), (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99 (1957)). The court must accept as true all of the factual allegations set out in the complaint, draw inferences from those allegations in the light most ...


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