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In re AIG Advisor Group Securities Litigation

April 25, 2007


The opinion of the court was delivered by: John Gleeson, United States District Judge



The named plaintiffs in this case purchased shares or like interests in certain mutual funds ("the Shelf-Space Funds").*fn1 Plaintiffs bring this putative class action*fn2 against (a) AIG Financial Advisors, Inc.,*fn3 Advantage Capital Corp., FSC Securities Corp., and Royal Alliance, Inc. (collectively, "the AIG Brokers"); and (b) AIG, Inc. ("AIG"), the corporate parent of the AIG Brokers. The AIG Brokers are registered broker-dealer entities. They employ financial advisors who, among other services, distribute mutual fund shares to would-be investors.

Plaintiffs allege that "AIG participated in a self-serving kickback scheme referred to as selling 'Shelf-Space,' whereby AIG used the AIG Brokers to direct AIG clients into the Shelf-Space Funds in exchange for illegal kickback payments through revenue sharing and other improper incentives that AIG received from the Shelf-Space Funds." Consolidated Amended Class Action Complaint ("Compl.") ¶ 2. Ultimately, plaintiffs seek to represent a class of "all persons or entities who purchased shares or like interests in any of the Shelf-Space Funds between April 8, 2001 and June 8, 2005, inclusive, and who were damaged thereby." Id. ¶ 82.*fn4

Plaintiffs advance six claims for relief under the federal securities fraud laws. Count I is brought against the AIG Brokers pursuant to Section 12(a)(2) of the Securities Act of 1933 ("the 1933 Act"), 15 U.S.C. § 77l(a)(2).*fn5 Count II is brought against AIG pursuant to Section 15 of the 1933 Act, 15 U.S.C. § 77o, alleging "control person" liability for the AIG Brokers' alleged violations of Section 12(a)(2). Count III is brought against all defendants pursuant to Section 10(b) of the Securities Exchange Act of 1934 ("the 1934 Act"), 15 U.S.C. § 78j(b), and Rule 10b-5(b) promulgated thereunder, 17 C.F.R. § 240.10b-5(b). Count IV is brought against all defendants pursuant to Section 10(b) and Rules 10b-5(a) and 10b-5(c), 17 C.F.R. §§ 240.10b-5(a), (c). Count V is brought against the AIG Brokers pursuant to Section 10(b) and Rule 10b-10, 17 C.F.R. § 240.10b-10. Finally, Count VI is brought against AIG pursuant to Section 20(a) of the 1934 Act, 15 U.S.C. § 78t(a), as a "control person" for the AIG Brokers' alleged liability under Counts III-V.

Defendants move to dismiss the complaint*fn6 pursuant to Fed. R. Civ. P. 12(b)(1) and Fed. R. Civ. P. 12(h)(3) for lack of subject matter jurisdiction, pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted, and pursuant to Fed. R. Civ. P. 9(b) and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4 et seq., ("PSLRA") for failure to adequately plead fraud. For the reasons stated below, the complaint is dismissed without prejudice to the filing of a second amended complaint on or before May 24, 2007. Specifically, the Rule 12(b)(1) and Rule 12(h)(3) motion is granted; the Rule 12(b)(6) motion is granted in part and denied in part; and the Rule 9(b) and PSLRA motion is granted.


Plaintiffs allege that "[d]efendants cultivated a clandestine, incentive-driven culture among AIG's brokerage arm to sell Shelf-Space Funds, regardless of the comparative value of the funds." Compl.¶ 41. Specifically, they contend that the AIG Brokers "implemented and managed" a system called the "Elite Partners" program, id. ¶ 36, in which participant funds would pay the AIG Brokers to "steer[]" their clients into investing in the funds, id. ¶¶ 23-26. According to the complaint, "Elite Partners" was something of a misnomer, because defendants refused to sell interests in any funds that did not participate in the payment system. Id. ¶ 43.

The alleged "steering" consisted, in part, of representations by the AIG Brokers that the Shelf-Space Funds "would perform better" than other funds. Id. ¶ 37. The AIG Brokers' financial advisors led their clients to believe that these representations were "based on objective analysis." Id. In addition, according to a "Letter of Acceptance, Waiver and Consent," written by the National Association of Securities Dealers ("NASD") and quoted at length in the complaint, the Elite Partners program offered participant funds "increased visibility on the firms' websites . . . ; increased access to the sales force . . . ; the inclusion of materials relating to the Elite Partner funds in . . . internal marketing publications and newsletters; ticket charge waivers; and participation in joint marketing programs between [participant broker-dealers] and Elite Partner fund complexes." Id. ¶ 36 (citing NASD Letter of Acceptance, Waiver and Consent (No. CE2050011) ("NASD Letter")).

The AIG Brokers' financial gain -- which plaintiffs repeatedly refer to as "kickbacks" -- took several forms. First, there was "revenue sharing," i.e., cash payments from the Shelf-Space Funds to the broker-dealers. Id. ¶ 32. Plaintiffs allege revenue-sharing payments of "up to a 0.25% (i.e., 25 basis points) charge on the sales of shares," and "[q]uarterly fees, of up to 0.11% (i.e., 11 basis points) per year, of the amount of assets under management." Id. ¶ 38 (citing NASD Letter).

Second, there was "directed brokerage," i.e., "allotting trades -- and the lucrative commissions that are a result of the trades -- in [fund] securities . . . to a particular brokerage . . . in exchange for that brokerage pushing the sale of those mutual funds onto investors." Id. ¶ 33. Plaintiffs allege that "[f]rom January 2001 through December 2003, twelve of the Shelf-Space Funds paid the AIG Brokers more than $41 million in kickback payments by directing brokerage commissions for portfolio transactions to the AIG Brokers." Id. ¶ 63 (citing NASD Letter).

Third, there were "other payments." Id. ¶ 35. For example, in addition to ordinary fees charged in connection with offering Shelf-Space Funds for sale, AIG Brokers were allegedly reimbursed "for expenses incurred . . . during 'top producer' meetings and educational and training seminars," and were partially reimbursed for "certain administrative costs such as record keeping." Id. ¶ 39. Defendants also "did not have to pay the usual 'ticket charge' of up to $12 per transaction when selling Shelf-Space Funds, raising the commission they received with each [such] sale." Id. ¶ 40.

The complaint also alleges "sponsorship" by participant funds "for company events, office parties, training and educational materials and conferences." Id. ¶ 42. Shelf-Space Fund representatives "were given greater access to branch offices and were invited to corporate training and marketing events." Id. The result: "increased opportunities" for Shelf-Space Fund representatives "to promote the sale of their mutual funds." Id.

In general, plaintiffs claim, "[t]he AIG Brokers gave the impression of providing the benefits of objective investment advice to investors." Id. ¶ 48. The complaint quotes an AIG Broker's website as stating that it "offer[s] unbiased financial information based solely on your financial agenda and no one else's." Id. (quoting Advantage Capital Corporation Overview, (last visited Apr. 17, 2007)). The complaint cites to another website for the same statement. See id. (citing FSC Securities Corp. Overview, (last visited Apr. 17, 2007)). In addition, plaintiffs allege, the AIG Brokers used Shelf-Space Fund prospectuses and Statements of Additional Information ("SAIs") to disclose mutual fund information, but did not disclose the Shelf-Space payment system in those documents. Id. ¶¶ 66, 68. As an example, plaintiffs quote extensively from the April 1, 2003 prospectus for the Massachusetts Financial Services Investors Growth Stock Fund,*fn7 which they claim is "identical in substance to all the other Shelf-Space Fund prospectuses issued during the Class Period." Id. ¶ 69. Plaintiffs also cite to four prospectuses from other funds. See id.

In reality, plaintiffs allege, the AIG Brokers' recommendations were "neither objective nor performance-based." Id. ¶ 42. The AIG Brokers "actively concealed" from plaintiffs the "conflicts of interest" generated by the Shelf-Space system of payments "with respect to the . . . investment advice given to their clients and the management of their client accounts." Id. ¶ 65. Plaintiffs claim that, as a result, the investment in Shelf-Space Funds resulted in below-average returns. See id. ¶¶ 54-58. Defendants' sale of Shelf-Space Funds also operated "to the detriment of investors" because of the "undisclosed kickbacks" of the Shelf-Space program. Id. ¶ 49. "Defendants took advantage of investors' reliance on their financial expertise and steered those investors into [investments] that incurred higher costs . . . ." Id. These costs, in their various forms, "were deducted from investors' principal" in the Shelf-Space Funds. Id. ¶ 60.


A. Standing

Defendants move pursuant to Fed. R. Civ. P. 12(b)(1) and Fed. R. Civ. P. 12(h)(3) to dismiss the complaint as to mutual funds of which the named plaintiffs did not own shares during the class period. Plaintiffs wish to represent investors in one or more mutual fund families set forth in an exhibit to the complaint. See Compl. Ex. A. That exhibit lists 19 families of funds. According to the next exhibit, however, the named plaintiffs owned shares in only 16 funds. See id. Ex B (listing details of named plaintiffs' transactions by fund). Defendants argue that I lack subject matter jurisdiction over causes of action relating to funds in which plaintiffs had no stake.

To invoke this Court's subject matter jurisdiction, plaintiffs must present a justiciable "Case[]" or "Controvers[y]." U.S. Const. art. III, § 2, cl. 1. See Raines v. Byrd, 521 U.S. 811, 818 (1997); Warth v. Seldin, 422 U.S. 490, 498 (1975). Plaintiffs present no such case or controversy if they lack standing to sue, i.e., if they allege no (a) injury-in-fact that is (b) fairly traceable to the defendants' allegedly unlawful conduct, and (c) likely to be redressed by a favorable decision. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992); Alliance for Envtl. Renewal, Inc. v. Pyramid Crossgates Co., 436 F.3d 82, 85 (2d Cir. 2006). That plaintiffs would represent a class of similarly situated claimants does not exempt them from the requirement that "[a]t the pleading stage" they must set forth some "general factual allegations of injury resulting from the defendant's conduct." Lewis v. Casey, 518 U.S. 343, 358 (1996) (citing Lujan, 504 U.S. at 561). In this securities fraud case, the named plaintiffs can allege no injury from the purchase or sale of funds they never invested in. See 15 U.S.C. § 77l(a) (limiting recovery under Section 12(a)(2) to purchasers or sellers of securities); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 749 (1975) (holding that recovery under Section 10(b) and Rule 10b-5 is limited to purchasers or sellers of securities). They therefore have no standing to ask me to remedy injuries related to those funds.

Plaintiffs warn that my consideration of their standing at the pleading stage is premature. They argue that I should delay my decision until I decide whether plaintiffs have satisfied the class-certification requirements of Fed. R. Civ. P. 23, because the question "whether Plaintiffs may represent persons who bought shares in the other Shelf-Space Funds is . . . intertwined with issues pertinent to class certification." Plaintiffs' Corrected Memorandum of Law in Opposition to Defendants' Motions To Dismiss the Consolidated Amended Class Action Complaint ("Pl. Br.") 28.

As support, plaintiffs invoke Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999). In Ortiz, the Supreme Court considered the validity of a class certification for a global settlement of asbestos-related tort claims. The Court held that the class certification issues before it were "logically antecedent to Article III standing concerns," following Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997). Ortiz, 527 U.S. at 831 (internal quotation marks omitted). Amchem, like Ortiz, reviewed a class action that attempted to settle a large fraction of "the elephantine mass of asbestos cases," the number, length, complexity, redundancy, and expense of which "defie[d] customary judicial administration and call[ed] for national legislation." Id. at 821. Indeed, the "class actions" in Amchem and Ortiz were not really actions at all -- they were applications for a court to approve a pre-negotiated global settlement of actual and potential claims. See id. at 824-26 (relating how two settlement agreements binding actual and potential claimants, the defendant, and defendant's insurers were negotiated and finalized before the filing of the class action); Amchem, 521 U.S. at 601 (the class action, in which the complaint, motion for certification, answer, and settlement agreement were all filed simultaneously, "was not intended to be litigated"). In those cases, the Supreme Court did not conduct a threshold analysis of the standing of so-called "exposure only" claimants, perhaps because its ultimate rejection of the class certification made that analysis unnecessary -- there could be no further litigation (or settlement) without court approval of the class. See In re Eaton Vance Corp. Sec. Litig., 220 F.R.D. 162, 166 (D. Mass. 2004) (in Amchem and Ortiz, "without class certification there would be no settlement; and without a global settlement, the case would not have proceeded as constituted"). It is in that way that the class certification question, being "dispositive" in the unique circumstance of a global settlement, was "logically antecedent to the existence of any Article III issues." Amchem, 521 U.S. at 612.

Class certification is not similarly dispositive in this case. No pre-negotiated settlement agreement has been filed indicating that the purpose of filing this case was to formalize a global agreement. Defendants do not challenge the named plaintiffs' standing with respect to funds in which they have owned shares, see Memorandum of Law in Support of Defendants' Motion to Dismiss the Consolidated Amended Class Action Complaint ("Def. Br.") 43, so the case can move forward on the plaintiffs' claims, whether or not similarly situated plaintiffs are brought into the action pursuant to Rule 23. See In re AllianceBernstein Mut. Fund Excessive Fee Litig., No. 04 Civ. 4885(SWK), 2005 WL 2677753, at *9 (S.D.N.Y. Oct. 19, 2005), vacated in part on other grounds, 2006 WL 74439 (S.D.N.Y. Jan. 11, 2006) ("[B]ecause Plaintiffs clearly have standing to sue on behalf of the . . . Funds in which they own shares, addressing class certification would not be outcome determinative."). Moreover, unlike the "exposure only" plaintiffs in Amchem and Ortiz, the question whether the named plaintiffs here have standing to litigate claims about funds of which they did not own shares would have to be answered whether or not the plaintiffs filed their claim as part of a class. See Rivera v. Wyeth-Ayerst Labs., 283 F.3d 315, 319 n.6 (5th Cir. 2002) ("In the instant case, in contrast to Ortiz and Amchem, the standing question would exist whether Rivera filed her claim alone or as part of a class; class certification did not create the jurisdictional issue.").

Courts in this circuit and elsewhere have rejected similar attempts to delay consideration of Article III standing until the class certification stage, concluding that Ortiz and Amchem are limited to the unique circumstances of global mass-tort settlements. See In re Salomon Smith Barney Mut. Fund Fees Litig., 441 F. Supp. 2d 579, 607 (S.D.N.Y. 2006) ("[T]he Article III standing determination should precede that of class certification. With regard to the sixty-eight funds of which Plaintiffs own no shares, Plaintiffs do not have standing to assert any claims because Plaintiffs cannot satisfy the standing requirements."); In re Merrill Lynch Investment Management Funds Sec. Litig., 434 F. Supp. 2d 233, 236 (S.D.N.Y. 2006) (denying plaintiffs' attempt to "assert claims on behalf of shareholders of all of the Shelf Space Funds" for want of standing); AllianceBernstein, 2005 WL 2677753, at *9 ("As a straighforward securities case, many of the concerns triggering the exception mentioned by the Supreme Court in Ortiz are noticeably absent here."); see also Rivera, 283 F.3d at 319 n.6; Pederson v. La. State Univ., 213 F.3d 858, 866 n.5 (5th Cir. 2000) (treating Article III standing as a threshold issue "[b]ecause the class certification issue presented here is not outcome determinative"); Eaton Vance, 220 F.R.D. at 166; Clark v. McDonald's Corp., 213 F.R.D. 198, 204 (D.N.J. 2003) ("[T]he Ortiz exception treating class certification as the antecedent consideration does not apply if the standing issue would exist regardless of whether the named plaintiff filed his claim alone or as part of a class.").*fn8

Plaintiffs' appeal to cases applying the juridical link doctrine does not alter my decision to consider plaintiffs' standing prior to class certification. The juridical link doctrine relates to whether, once class certification is at issue, named plaintiffs ought to be allowed to represent other claimants injured by other, related defendants. See Eaton Vance, 220 F.R.D. at 164-65; see also La Mar v. H & B Novelty & Loan Co., 489 F.2d 461, 466 (9th Cir. 1973). The doctrine provides an exception to the general rule that "a plaintiff who has been subject to injurious conduct of one kind [does not] possess by virtue of that injury the necessary stake in litigating conduct of another kind, although similar, to which he has not been subject." Blum v. Yaretsky, 457 U.S. 991, 999 (1982). But we are not yet at the point where I need to decide the validity of plaintiffs' proposed class. And nothing in the juridical link doctrine requires me to depart from the Supreme Court's longstanding instruction to decide Article III standing as a threshold issue.*fn9 See City of Los Angeles v. Lyons, 461 U.S. 95, 101 (1983); Warth, 422 U.S. at 498.

I therefore dismiss the complaint insofar as it relates to funds other than the ones in which plaintiffs allege they actually invested.

B. Legal Sufficiency Challenges

Defendants move under Fed. R. Civ. P. 12(b)(6) to dismiss the complaint for failure to state a claim upon which relief can be granted. Plaintiffs' core fraud claims -- Counts I and III -- are brought against the AIG Brokers pursuant to Section 12(a)(2) of the 1933 Act and Section 10(b) of the 1934 Act (and Rule 10b-5(b)) for alleged misrepresentations and omissions.

In pressing for dismissal with prejudice, defendants argue that (a) the statements and omissions, as alleged, are immaterial as a matter of law, and, in the alternative, (b) the alleged misconduct cannot have caused plaintiffs any cognizable economic loss. Defendants also argue,among other things, that (c) plaintiffs' claims are at least partially time-barred, and (d) plaintiffs seek certain remedies that are unavailable.*fn10

1. The Motion To Dismiss Standard of Review

A motion to dismiss pursuant to Rule 12(b)(6) tests the legal, not the factual, sufficiency of the complaint. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974) ("When a federal court reviews the sufficiency of a complaint, before the reception of any evidence either by affidavit or admissions, its task is necessarily a limited one. The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims."); Sims v. Artuz, 230 F.3d 14, 20 (2d Cir. 2000) ("At the Rule 12(b)(6) stage, '[t]he issue is not whether a plaintiff is likely to prevail ultimately, but whether the claimant is entitled to offer evidence to support the claims.'" (quoting Chance v. Armstrong, 143 F.3d 698, 701 (2d Cir. 1998)) (prior citations omitted)). Accordingly, I must accept the factual allegations in the complaint as true, and draw all reasonable inferences in plaintiffs' favor. See Sheppard v. Beerman, 18 F.3d 147, 150 (2d Cir. 1994), cert. denied, 513 U.S. 816 (1994). ...

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