United States District Court, E.D. New York
April 7, 2005.
SHAM MALHOTRA and MERVIN FISCHMAN, On Behalf of Themselves and All Others Similarly Situated, Plaintiffs,
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
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.
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,
Sec. Am. Compl. ¶ 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
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.
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 favorable to the plaintiff, and construe the complaint
liberally. See id. (citing Desiderio v. National Ass'n of Sec.
Dealers, Inc., 191 F.3d 198, 202 (2d Cir. 1999)).
In applying these principles, the court "must confine its
consideration to facts stated on the face of the complaint, in
documents appended to the complaint or incorporated in the
complaint by reference, and to matters of which judicial notice
may be taken." Tarshis, 211 F.3d at 39 (citing Allen v.
WestPoint-Pepperell, Inc., 945 F.2d 40, 44 (2d Cir. 1991)).
2. The Rule 9(b) Particularity requirements
Fed.R.Civ.P. 9(b) sets forth additional pleading
requirements with respect to allegations of fraud, including
actions involving securities fraud. See Shields v. Citytrust
Bancorp, Inc., 25 F.3d 1124, 1127 (2d Cir. 1994). This rule,
requires that "[i]n all averments of fraud or mistake, the
circumstances constituting fraud or mistake shall be stated with
particularity." Fed.R.Civ.P. 9(b). However, "[m]alice, intent,
knowledge and other condition of mind of a person may be averred
generally." Id. To state a claim with the required
particularity, a complaint "must: (1) specify the statements that
the plaintiff contends were fraudulent, (2) identify the speaker,
(3) state where and when the statements were made, and (4)
explain why the statements were fraudulent." Stevelman v. Alias Research Inc.,
174 F.3d 79, 84 (2d Cir. 1999) (quoting Acito v. IMCERA Group,
Inc., 47 F.3d 47, 52 (2d Cir. 1995).
With regard to allegations of scienter, however, the Private
Securities Litigation Reform Act of 1995 (the "Reform Act")
heightened Rule 9(b)'s pleading requirement. See
15 U.S.C. § 78u-4(b)(3)(A); see also Press v. Chemical Inv. Servs. Corp.,
166 F.3d 529, 537-38 (2d Cir. 1999). Thus, in securities fraud
actions, scienter may not be averred generally. Rather, a
plaintiff must "state with particularity facts giving rise to a
strong inference that the defendant acted with the required state
of mind." Press, 166 F.3d at 538 (quoting
15 U.S.C. § 78u-4(b)(3)(A)); see also Chill v. General Elec. Co.,
101 F.3d 263, 268-69 (2d Cir. 1996).
B. Statute of Limitations as to Malhotra
With respect to Malhotra, the Defendants argue that the
Malhotra's claims should be dismissed because more than three
years have passed since the alleged material omission. The Court
Section 9(e) of the Exchange Act sets forth the relevant
statute of limitations for claims brought pursuant to Section
10(b) and Rule 10b-5. This section states, "[n]o action shall be
maintained to enforce any liability created under this section
unless brought within one year after the discovery of the facts
constituting the violation and within three years after such
violation." 15 U.S.C. § 78i(e); Lampf, Pleva, Lipkind, Prupis &
Pettigrew v. Gilbertson, 501 U.S. 350, 363, 111 S. Ct. 2773, 115 L. Ed. 2d 321 (1991).
Equitable argues that Malhotra's claims are barred by the
three-year prong of the statute of limitations. Under this prong,
known as the "three-year statute of repose," "a claimaint has `no
more than three years after the occurrence' of the conduct
inducing the Plaintiff to make its securities purchase to file a
section 10(b) or Rule 10b-5 claim." Isanaka v. Spectrum
Technologies USA Inc., 131 F. Supp. 2d 353, 356 (N.D.N.Y. 2001)
(citing Ceres Partners v. GEL Assocs., 918 F.2d 349, 364 (2d
Cir. 1990); see also In re: Prudential Ins. Co. of Amer. Sales
Practices Litigation, 975 F. Supp. 584, 605 (D.N.J. 1996)
(holding that "the three-year limitations period for section
10(b) and Rule 10b-5 claims begins to run upon the date a
defendant makes an affirmative misrepresentation or, in the case
of an omission, upon the date a duty to disclose the withheld
information arises."); Northwestern Human Servs., Inc., 2004 WL
2166293, at *19 (E.D. Pa. Sept. 24, 2004) ("[t]he relevant date
for accrual of a section 10(b) claim is the date of a
misrepresentation or omission, not the date of sale."); Antell
v. Arthur Andersen LLP, No. 97 C 3456, 1998 U.S. Dist. LEXIS
7183 (N.D. Ill. May 4, 1998) (holding that a Rule 10b-5 claim
begins to run when a defendant makes an affirmative
Here, Malhotra made his initial investment in the annuity in
1992, well outside of the three-year statute of repose. Thus,
even assuming, for purposes of this analysis only, that Roger
Malhotra's representations in 1992 contained actionable omissions under Exchange Act, any claim arising from Malhotra's original
purchase in 1992 or from a subsequent purchase that was based on
that omission is barred by the three-year statute of repose from
the date of the alleged omission in 1992.
Malhotra claims that "had [he] been told before his purchases
that the reason for the insurance fees in the product was to
secure a tax deferral benefit that he did not need, he would not
have agreed to purchase the product, nor made additional
investments as recommended by the Equitable agent," Sec. Am.
Compl. ¶ 13. Absent allegations that Malhotra's 1999 purchases
were triggered by a new and materially different omission,
Malhotra's claims arising out the 1999 purchases would similarly
be time barred. In re Prudential, 975 F. Supp. at 605 ("[T]o
the extent [the plaintiff] seeks relief for misrepresentations or
omissions that occurred in connection with his initial purchase,
his claims are time-barred. He may, however, pursue claims for
misrepresentations or omissions that occurred after [the initial
purchase], so long as he can demonstrate that he subsequently
made further payments on the policy in reliance thereon."); see
also Isanaka, 131 F. Supp. 2d at 359 ("Reading Plaintiff's
complaint liberally, defendants made their first allegedly false
statements to Plaintiff prior to his purchase and continued
making these false statements to him . . . However, once
plaintiff made his investment with Defendants in reliance upon
these statements, the statute of limitations applicable to
section 10(b) and Rule 10b-5 began to run and any statements made
thereafter by [d]efendants are inapplicable to the Court's
statute of limitations analysis.").
Malhotra has not asserted any new or materially different
omissions upon which he relied with respect to the 1999
investments. Therefore, it does not follow that Malhotra's
investments in 1999 started the statute of repose anew.
Malhotra's allegations that Equitable's failure to remedy the
prior material omission is actionable because it caused him to
make subsequent purchases is without merit. Such a holding would
eviscerate the three-year statute of limitations because a
potential plaintiff would be able to revive a time-barred claim
simply by purchasing the same securities at a later date and
claim a "continued omission." Here, more than seven years passed
since the date Malhotra initially purchased the annuity. Thus,
the Court finds that a reasonable investor such as Malhotra
should have consulted his tax advisor and/or accountant during
that time regarding his IRA. Isanaka, 131 F. Supp. 2d at 358
(stating that a plaintiff "bears an affirmative duty of diligent
inquiry into the facts of the alleged securities fraud and is not
entitled to `leisurely discovery of the full details of the
alleged scheme.'") (quoting Klein v. Bower, 421 F.2d 338, 343
(2d Cir. 1970)).
Accordingly, the Defendants' motion to dismiss Malhotra's
claims for failing to comply with the three-year statute of
limitations is granted.
C. Motion to Dismiss as to Fischman Turning to the remaining causes of action relating to
Fischman's annuity purchase in March of 1999, Fischman claims
that Equitable omitted material information which induced him to
purchase Equitable's annuity. In particular, Equitable allegedly:
had a duty to disclose to prospective purchasers of
Equitable variable annuities for placement in
qualified retirement plans that the main economic
benefit of the product, tax deferral, was unnecessary
and redundant in their situation, and that such
annuities could be a suitable investment only when a
specific insurance need supports the purchase.
Sec. Am. Compl. ¶ 42.
Thus, Fischman contends that Equitable, as a seller of variable
annuities, has "a legal duty to affirmatively disclose to
qualified retirement plan investors (customers) that the tax
deferral feature of the product is unnecessary." Plfs. Mem. in
Opp. at 5. The Defendants contend that Fischman fails to satisfy
the pleading requirements of Section 10(b) and Rule 10b-5.
Section 10(b) of the 1934 Securities and Exchange Act makes it
unlawful for one "[t]o use or employ, in connection with the
purchase or sale of any security . . . any manipulative or
deceptive device or contrivance in contravention of such rules
and regulations as the Commission may prescribe as necessary or
appropriate in the public interest or for the protection of
investors." 15 U.S.C. § 78j. Pursuant to this Section, the SEC
promulgated Rule 10b-5, which provides: It shall be unlawful for any person, directly or
indirectly, by use of any means or instrumentality of
interstate commerce, or of the mails or of any
facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to
(b) To make any untrue statement of material fact or
to omit to state a material fact necessary in order
to make the statements made, in the light of the
circumstances under which they were made, not
(c) to engage in any act, practice, or course of
business which operates or would operate as a fraud
or deceit upon any person, in connection with the
purchase or sale of any security.
17 C.F.R. § 240.10b-5.
Therefore, to state a cause of action under Section 10(b) of
the Exchange Act and Rule 10b-5, Fischman must prove that
Equitable "(1) made a material misrepresentation or a material
omission as to which he had a duty to speak, or used a fraudulent
device; (2) with scienter; (3) in connection with the purchase or
sale of securities." SEC v. Monarch Funding Corp.,
192 F.3d 295, 308 (2d Cir. 1999).
In support of its motion to dismiss, Equitable first argues
that Fischman failed to allege a material omission that the
Defendants failed to reveal that induced him to purchase the
"Accumulator" annuity. Cases in the Second Circuit have found
actionable omissions in two situations. First, when securities
law impose a duty to disclose the omitted information. Resnik v.
Swartz, 303 F.3d 147 (2d Cir. 2002) (citing In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 267 (2d
Cir. 1993). Second, when the omitted information is required to
make other information presented not materially false or
1. As to the Alleged Affirmative Duty to Disclose
Fischman alleges that Equitable's duty to disclose arises from:
(1) National Association of Securities Dealers ("NASD") Conduct
Rules, in particular NASD Conduct Rule 2310, and NASD Notice to
Members 99-35 issued May 1999 ("NTM 99-35"). Sec. Am. Compl. ¶
43; and (2) "[U]nfair insurance trade practices statutes enacted
in each of the 50 states." Sec. Am. Compl. ¶ 46.
a. As to NASD Conduct Rule 2310
Fischman claims that NASD Conduct Rule 2310 created an
affirmative duty on behalf to Equitable to advise the Plaintiff
of the alleged redundancy and irrelevance of the tax deferral
benefit of the annuity when it is being used to fund an IRA. This
rule states in part that
a member shall have reasonable grounds for believing
that the recommendation is suitable for such customer
upon the basis of the facts, if any, disclosed by
such customer as to his other security holdings and
as to his financial situation and needs.
NASD Conduct Rule 2310(a). To the extent that the Plaintiff
alleges that this rule, in and of itself, creates a duty to
disclose the above mentioned information, the Court finds that
there is "no right of action simply for a violation of NASD
rules." GMS Group, LLC v. Benderson, 326 F.3d 75
, 82 (2d Cir. 2003)
(internal citations omitted).
If, however, Fischman seeks to use this Conduct Rule in support
of his Section 10(b) claim, the Court notes that such "violations
may be considered relevant for purposes of § 10(b) unsuitability
claims." Id. The Court finds that the Second Amended Complaint
fails to satisfy the heightened pleading requirements of Rule
10b-5. The Second Amended Complaint states very little about what
was specifically said to Fischman by the PaineWebber investment
professional and conversely which specific statements were
rendered misleading because of the alleged omitted information.
With respect to the point of sale representations, the
Complaint merely alleges that "[Fischman] told Mr. Sandberg that
he wanted to obtain more income from his investments. Mr.
Sandberg told Dr. Fischman that he should purchase a variable
annuity for his IRA account." Sec. Am. Compl. ¶ 7. These lone
allegations are insufficient to meet the pleading requirements
enunciated above. See Mills v. Polar Molecular Corp.,
12 F.3d 1170, 1175 (2d Cir. 1993) (Stating that a "complaint must: (1)
specify the statements that the plaintiff contends were
fraudulent, (2) identify the speaker, (3) state where and when
the statements were made, and (4) explain why the statements were
fraudulent."); see also Rombach v. Chang, No. 00 Civ. 0958,
2002 U.S. LEXIS 15754, at * 6 (S.D.N.Y. June 7, 2002) ("[T]he
PSLRA requires that allegations of misrepresentation or omissions
of material fact must specify the statement alleged to be misleading, the reason why the statement
was misleading, and the facts that form the basis for the belief
that the statement is misleading." (citing
15 U.S.C. 78u-4(b)(1)). In addition, the Complaint fails to set forth any
allegations with respect to the relationship between Sandberg and
PaineWebber and Equitable, except that "PaineWebber is one of the
distribution channels for Equitable Life's] annuity products, as
developed by defendant Equitable Distributors." Again, this
allegation is so lacking in particularity that it cannot impute
liability to Equitable
Without particular pleadings as required by Fed.R.Civ.P.
9(b), even if NASD Conduct Rule 2310 establishes an affirmative
duty to disclose the alleged omission, the Court finds that no
Section 10(b) or Rule 10b-5 claim was sufficiently alleged. See
Burekovitch v. Hertz, No. 01 CV 1277 (ILG), 2001 U.S. Dist.
LEXIS 12173, at *27 (E.D.N.Y. July 24, 2001) (holding that an
omission claim could not be maintained where plaintiff did not
point to previous statements that were misleading without further
disclosures); see also Rombach, 2002 U.S. Dist. LEXIS 15754, at
*12 (dismissing claims pursuant to Rule 9(b) in case where
plaintiffs failed to "state with particularity the specific facts
in support of their belief that these statements were false when
b. As to NTM 99-35
The Plaintiff also argues that NTM 99-35 also established an
affirmative duty of disclosure. The Court disagrees. This Notice states in
pertinent part that
when a registered representative recommends the
purchase of a variable annuity for any tax-qualified
retirement account (e.g., 401(k) plan, IRA), the
registered representative should disclose to the
customer that the tax deferred accrual feature of the
variable annuity is unnecessary.
NTM 99-35 (emphasis added).
At the outset, NTM 99-35 is inapplicable to Fischman's
transaction because it was issued in May 1999, more than one
month after the alleged transaction. Second, "NASD Notices . . .
are not law and noncompliance therewith cannot itself constitute
a violation of the federal securities laws." Donovan v. Amer.
Skandia Life Assur. Corp., No. 02 Civ. 9859, 2003 WL 21757260,
at * 1 (S.D.N.Y. July 31, 2003) aff'd 96 Fed. Appx 779 (2d Cir.
2004) (citing Resnik v. Swartz, 303 F.3d 147 (2d. Cir. 2002);
but see Drnek v. Variable Annuity Life Assur., No. 01 Civ.
0242, 2004 WL 1098919, at *3 (D. Ariz. May 4, 2004) (Finding that
if a relationship is established between the buyer and seller, "a
duty to inform the buyers of material information including the
information described in [NTM 99-35]."). Third, this Notice
applies to "registered representatives" who recommend a variable
annuity in a point of sale transaction and does not apply to
issuers of annuities. Here, the "registered representative"
involved in the point of sale transaction was Sandberg, who is
not named as a defendant in this action. Therefore, based on the
allegations in the Complaint, this Notice is inapplicable to
Equitable. Fourth, NASD Notice 99-35 expressly 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. NTM
99-35 at ¶ 11. Thus, according to NTM 99-35, in certain
circumstances, a variable annuity may properly be recommended
such as in a case where an insurance need supports the
recommendation. However, because the Complaint lacks
particularity with respect to Fischman's personal financial
situation and potential insurance needs, the Court finds that
Fischman does not sufficiently allege that Equitable breached its
duty to disclose this information.
c. As to State Insurance Statutes
With respect to this alleged duty to disclose, the Complaint
states that "the unfair insurance trade practices statutes
enacted in each of the 50 states requires fair dealing in the
sale of insurance products, including full disclosure of material
information in connection with the sale of variable annuities."
Sec. Am. Compl. ¶ 46. However, nowhere in the 83 paragraph
complaint, does the Plaintiff cite the relevant New York statute.
As such the Court is not able to analyze this allegation.
2. As to the alleged material omissions
Under Section 10(b) and Rule 10b-5, a misrepresentation or
omission is material if there is a "substantial likelihood that
the disclosure of the omitted fact would have been viewed by the reasonable investor as having
significantly altered the `total mix' of information made
available." TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438,
449, 96 S. Ct. 2126, 48 L. Ed.2d 757 (1976); SEC v. First Jersey
Secs., 101 F.3d 1450, 1466 (2d Cir. 1996). The "total mix" of
information include information "reasonably available" to the
plaintiff. See e.g., United Paperworkers Int'l Union v.
International Paper Co., 985 F.2d 1190, 1198 (2d Cir. 1993).
A statement or omission will be considered material if there is
a substantial likelihood that a reasonable investor would
consider it important in making an investment decision. Basic
Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S. Ct. 978,
99 L.Ed.2d 194 (1988); ZVI Trading Corp. Employees' Money Purchase
Pension Plan & Trust v. Ross (In re Time Warner Sec. Litig.),
9 F.3d 259, 267-68 (2d Cir. 1993). Thus, "[d]isclosure of an item
of information is not required, however, simply because it may be
relevant or of interest to a reasonable investor." Resnik,
303 F.3d at 154. Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir.
1985) ("[complaint may not properly be dismissed pursuant to Rule
12(b)(6) . . . on the ground that the alleged misstatements or
omissions are not material unless they are so obviously
unimportant to a reasonable investor that reasonable minds could
not differ on the question of their importance.").
Here, Fischman attempts to plead that Equitable omitted
information relating to the redundancy of the tax benefit when
funding an IRA in its agent educational materials, customer sales presentations, and statements made
during the point of sale. The Second Amended Complaint contains
many statements about the various products offered by Equitable.
However, because Fischman purchased the Accumulator (IRA), the
Court will restrict its analysis to the allegations relating to
With respect to the "Accumulator (IRA)" the Plaintiff cites to
one promotional piece that refers to the tax-deferral benefits of
the Accumulator IRA. Not only does the Complaint fail to allege
that Fischman received or relied upon any advertising brochure in
any manner, but, in the Court's view, the excerpted language
included in the Complaint, in and of itself, does not rise to the
level of a material omission. For example, the advertising
brochure quoted in the Second Amended Complaint states in part:
Tax Deferral. GETTING THE MOST OUT OF YOUR MONEY.
Whether you're retiring today or several years from
now, tax-deferred investing is one of the best ways
to accumulate funds. That's because with a
tax-deferred investment you pay no taxes on any
dividends, interest, or capital gains until you
withdraw your money. This allows your money to
potentially grow faster tan if it were invested in a
similar, but taxable investment.
Sec. Am. Compl. ¶ 52. The Court finds that this information is
not misleading to the Plaintiff because it apparently accurately
explains the tax deferral benefits of the annuity. Without more
detailed allegations, the Court is left with the conclusion that
a reasonable investor, especially an individual such as Fischman
who at the time in question had already accumulated at least
$100,000 in his IRA, should be aware of the inherent tax deferral benefits of his investment account.
Presumably, the tax deferral nature of such an account was a
significant reason why Fischman opened an IRA in the first place.
Thus, in light of the language included in the promotional
material, the addition of language stating that funding an IRA or
similar account with an annuity does not alter the "total mix" of
information include information "reasonably available" to the
plaintiff. See e.g., United Paperworkers Int'l Union,
985 F.2d at 1198 (2d Cir. 1993).
As to the Plaintiff's allegation regarding the statements made
at the point of sale, for the reasons set forth in Section
II(C)(1)(a) supra, the Court finds that these allegations fail
to meet the heightened pleading requirements of Section 9(b).
Accordingly, Fischman failed to sufficiently allege actionable
omissions. Thus, his first two causes of action are dismissed.
D. As to Section 20(a)
Section 20(a) provides that a control person is secondarily
liable for violations of section 10(b) of the Securities Act. In
order to find secondary liability, plaintiffs must show a primary
violation by the controlled person whom the controlling persons
control. Because the Court dismissed the Section 10(b) and Rule
10b-5 claims pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b), the
section 20(a) claims must be dismissed as well. In re Symbol
Technologies Class Action Litig., 950 F. Supp. 1237, 1246
(E.D.N.Y. 1997) ("If there is no § 10(B) securities fraud claim,
there can be no related claim under § 20); Rombach, 2002 U.S. Dist. LEXIS, at
*29 (Dismissing Section 20(a) claim where underlying Section
10(b) was dismissed for failing to state a claim.). Accordingly,
this cause of action is dismissed.
E. Leave to Amend
Rule 15(a) of the Federal Rules of Civil Procedure states that
a party shall be given leave to replead when justice so requires.
Branum v. Clark, 927 F.2d 698, 705 (2d Cir. 1991); see also
Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 48 (2d
Cir. 1991) (it is the usual practice upon granting a motion to
dismiss to allow leave to replead). Leave to amend should be
freely granted, "especially where dismissal of the complaint [is]
based on Rule 9(b)." Acito v. IMCERA Group, Inc., 47 F.3d 47,
54-55 (2d Cir. 1995); Luce v. Edelstein, 802 F.2d 49, 56-57 (2d
Cir. 1986) ("Complaints dismissed under Rule 9(b) are `almost
always' dismissed with leave to amend." (citation omitted)).
Here, the Plaintiffs had the opportunity to amend the complaint
three times. However, because the Court never addressed the
adequacy of the pleadings with respect to Rules 12(b)(6) and Rule
9(b), the Court will grant Fischman leave to amend so he may
address the pleading deficiencies set forth in this Memorandum.
Based on the foregoing, it is hereby ORDERED, that Equitable's motion to dismiss the second
amended complaint is GRANTED; and it is further
ORDERED, that the claims of Malhotra are barred by the
statute of limitations and are dismissed in their entirety with
prejudice; and it further
ORDERED, that the claims of Fischman are dismissed without
prejudice pursuant to Rules 9(b) and 12(b)(6) of the Fed.R. Civ.
P.; and it is further
ORDERED, that Fischman is granted leave to file a third
amended complaint within thirty days from the date of this order
and that the failure to file within this time period will render
the dismissal of the complaint with prejudice; and it is further
ORDERED, that the Clerk of the Court is directed to amend the
caption to read as follows:
MERVIN FISCHMAN, On Behalf of himself
and All Others Similarly Situated, Plaintiffs,
THE EQUITABLE LIFE ASSURANCE
SOCIETY OF THE UNITED STATES,
AXA ADVISORS, LLC and
EQUITABLE DISTRIBUTORS, INC.,
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