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Prickett v. New York Life Ins. Co.

United States District Court, S.D. New York

September 12, 2012

F. Daniel PRICKETT, Plaintiff,

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William H. Narwold, Motley Rice LLC, Hartford, CT, for Plaintiff.

Maria T. Galeno, Pillsbury Winthrop Shaw Pittman, LLP, Seth M. Schwartz, Skadden, Arps, Slate, Meagher & Flom LLP, Ralph A. Siciliano, New York, NY, for Defendants.

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THOMAS P. GRIESA, District Judge.

This case arises out of the Ponzi scheme perpetrated by Bernard L. Madoff and Bernard L. Madoff Investment Securities. Plaintiff F. Daniel Prickett is a holder of a variable universal life insurance policy issued by New York Life Insurance Company. The policy allowed plaintiff to select various tax free investments for New York Life to make on his behalf in certain " Separate Accounts" set up under the policy. At Prickett's request, New York Life invested some of his premiums in the Tremont Fund, a hedge " fund of funds" operated by Tremont Partners, which subsequently invested 22% of its assets in three other hedge funds (the " Rye Funds" ) also operated by Tremont Partners. The Rye Funds invested with Madoff. A portion of Prickett's premiums which were invested in the Tremont Fund was lost when Madoff's Ponzi scheme became public.

Prickett brings this diversity action alleging eight state law claims. Defendants move to dismiss for failure to state a claim.

The motion is granted without leave to re-plead, except that Count 2 may be restated in accordance with directions in this opinion.


The following allegations are taken from the complaint and the documents on which it relies. For purposes of these motions, the following allegations are assumed to be true.


The court has diversity jurisdiction over this action. Prickett is a citizen of South Carolina, and from a review of the record, it appears that none of the defendants are citizens of South Carolina. Prickett seeks more than $75,000 in damages.

The Parties

Plaintiff F. Daniel Prickett purchased a variable life insurance policy (" VUL" ) from defendant New York Life Insurance Company in 2003. According to the language of the policy, the policy was only available to " Accredited Investors" and " Qualified Purchasers" within the meaning of the federal securities laws, designations which apparently only apply to investors with high income and net worth, and significant investment experience.

Defendants New York Life Insurance Company and New York Life Insurance and Annuity Corporation (" NYLIAC" ) are corporations offering various insurance products, such as the VUL at issue here. NYLIAC is a wholly-owned subsidiary of New York Life Insurance Company. Collectively, these companies will be referred to as " New York Life."

Defendant Tremont Capital Management Inc. (" Tremont Capital" ) was formerly known as Tremont Advisors, Inc. Defendant Tremont (Bermuda) Ltd. (" Tremont Bermuda" ) is wholly-owned by Tremont Capital. Defendant Tremont Group Holdings (" Tremont Group" ) is an investment manager of " fund-of-funds" products and multi-manager portfolios. Defendant Tremont Partners, Inc. (" Tremont Partners" ) is a subsidiary of Tremont Group. Defendant Rye Investment Management (" Rye" ) is a division of Tremont Group that manages, sells, and administers Tremont Group's " select manager funds." Tremont Capital, Tremont Bermuda, Tremont Group, Tremont Partners, and Rye will sometimes be collectively referred to as " Tremont."

Defendant American Masters Opportunity Insurance Fund, L.P. (" Tremont Fund" ) is a Delaware limited partnership managed by Tremont. This is the hedge fund in which Prickett directed New York Life to invest a portion of his premiums.

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Tremont Partners is the general partner of the Tremont Fund. By virtue of its investment, New York Life became a limited partner in the Tremont Fund.

Defendants Rye Select Broad Market Prime Fund, L.P. (" Prime Fund" ) and Rye Select Broad Market XL Fund L.P. (" XL Fund" ) are Delaware limited partnerships managed by Rye. Tremont Partners is the general partner of each of these funds. Defendant Rye Select Broad Market Insurance Portfolio, LDC (" Rye Insurance Portfolio" ) is a Bermuda-incorporated " limited duration company," managed by Tremont Bermuda. Collectively, these three hedge funds will sometimes be referred to as the " Rye Funds."

Defendant Oppenheimer Acquisition Corporation (" Oppenheimer" ) is the parent company of Tremont Group, which is in turn the parent company of Tremont Partners. Oppenheimer owns more than 75% of Tremont Partners and is listed as a " control person" on Tremont Partners' Form ADV, a document that investment managers such as Tremont Partners file with the SEC. Defendant MassMutual Holding LLC (" MassMutual I" ) is Oppenheimer's parent company. Defendant Massachusetts Mutual Life Insurance Company (" MassMutual II" ) is MassMutual I's parent company. Collectively, these two companies will sometimes be referred to as " MassMutual" or the " MassMutual Defendants." They are both listed as " control persons" on Tremont Partners' Form ADV.

The Dispute

As indicated above, Prickett purchased a VUL Policy from New York Life in May 2003. The policy had a " face amount" of over $6 million dollars and Prickett paid an initial premium of $928,044.90.

A VUL policy is a type of life insurance policy that enjoys special tax advantages under the United States Internal Revenue Code, allowing a policy holder to build a " cash value" that can be invested in a choice of " Separate Accounts," similar to mutual funds. These Separate Accounts can be invested in underlying portfolios of securities. The investment returns on these Separate Accounts remain tax free so long as certain requirements of the Internal Revenue Code are met, which generally require that the investments be sufficiently diversified and that the insurance company, not the policyholder, retain control over and ownership of the investments. For example, if the policyholder wishes to invest in a hedge fund, the policyholder directs the insurer, New York Life, to invest some of the cash value in the hedge fund, and New York Life then becomes a limited partner in the hedge fund.

In May 2004, Prickett directed New York Life to invest in the Tremont Fund. The initial investment was approximately $400,000; this investment grew to over $1 million dollars by October 2008. New York Life became a limited partner in the Tremont Fund pursuant to a limited partnership agreement. As described above, the Tremont Fund, with Tremont Partners serving as its general partner, allocated 22% of its assets to the Rye Funds. Substantially all of this money went to Madoff and has been lost. Prickett has lost the portion of his investment which Tremont Fund entrusted to the Rye Funds.

Prickett alleges that all of the defendants violated duties owed to him in their conduct in this transaction.

With respect to New York Life, Prickett alleges that, as Prickett's insurer under the Policy, New York Life owed him duties, including fiduciary duties, " duties under the implied covenant of good faith and fair dealing and the duty not to misrepresent the appropriateness of the investments

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it offered through the Policy." The Policy gave New York Life discretion to " deem investments inappropriate for its policyholders." Plaintiff alleges that, given the " numerous red flags concerning Madoff's fraudulent scheme," (which are detailed below) New York Life breached its duties to Prickett by " fail[ing] to perform even the most rudimentary analysis of the suitability of the investment funds [such as the Tremont Fund] that it offered to policyholders."

In a Private Placement Memorandum, pursuant to which New York Life solicited Prickett to purchase his VUL policy, New York Life informed Prickett that it retained the " exclusive right to select the investments of the Separate Account Subaccounts." This right included the rights to, inter alia, make transfers of assets from one Separate Account to another, manage a Separate Account, substitute the underlying portfolios from any Separate Account, and change the " investment policy" of a Subaccount. Prickett's VUL Policy itself set forth similar rights. New York Life also promised to notify Prickett of any " material change" in his " underlying portfolio." Prickett also alleges that New York Life issued periodic statements that misrepresented the value of Prickett's investment in the Tremont Fund.

New York Life's PPM also incorporated by reference the Tremont Fund's PPM. Prickett seeks to hold New York Life not only responsible for the representations in its own PPM, but for the representations in the incorporated Tremont PPM. The Tremont PPM represented that the Tremont Fund would utilize an " opportunistic," " multi-manager" approach to achieve a " diversified" portfolio of securities, which would be achieved by use of a " broad range of investment strategies," which are detailed at length in the PPM. The " multi-manager" approach was that Tremont would select a number of different managers to manage portions of the money invested in the Tremont Fund. These managers would utilize different investment strategies, in the hope that such strategies would complement each other and offset risks of each strategy. The Tremont PPM represented that Tremont would actively manage and monitor the diversified portfolio of the Tremont Fund.

Prickett alleges that many of these statements were false. For instance, he alleges that the representations about the " opportunistic, multi-manager" approach and the " diversified portfolio" were belied by the fact that the Tremont Fund invested, through the Rye Funds, with Madoff— who did not invest in any securities, much less a diversified portfolio of securities. Prickett also asserts that the representations about Tremont " actively managing" and monitoring the Tremont Fund's investments must have been false, as it was in reality Madoff who was managing 22% of the investment.

Tremont also represented that it would conduct due diligence and prudently select managers, including on-site interviews of managers and evaluations of their back office operations and internal staff, as well as ongoing performance monitoring of the investment managers. Prickett alleges that Tremont did not do these things, and that if Tremont had done the diligence, monitoring and managing it promised to do, it would have discovered that Madoff was not making any trades with the money Tremont entrusted to him. Absent such due diligence and monitoring, Prickett also alleges that New York Life's representation that it would promptly notify him of " material changes" in the underlying portfolio of securities was false because the investment was not subject to sufficient oversight to allow New York Life to do this.

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Prickett alleges that defendants failed to live up to their representations out of a desire to collect their fees. However, Prickett acknowledges that only New York Life and Tremont Partners obtained fees from Prickett. According to Prickett, this desire to earn fees resulted in defendants' ignoring or not noticing a host of " red flags" that are detailed at length in the complaint, which Prickett alleges should have put defendants on notice of Madoff's fraud.

The " red flags" described by Prickett include the following:

• The lack of transparency in Madoff's operation;

• Madoff's abnormally high and consistent returns;

• The inconsistency between BMIS's publicly available financial information and the purported amounts that ...

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