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In re Tremont Securities Law, State Law, and Insurance Litigation

United States District Court, Second Circuit

August 23, 2013

IN RE TREMONT SECURITIES LAW, STATE LAW, AND INSURANCE LITIGATION.
v.
NEW YORK LIFE INSURANCE COMPANY, TREMONT PARTNERS, INC., ET AL., Defendants. F. DANIEL PRICKETT, Plaintiff,

OPINION

THOMAS P. GRIESA, District Judge.

This is an action brought by F. Daniel Prickett to recover assets lost in the now-infamous Ponzi scheme perpetrated by Bernard Madoff. Prickett alleges that, through various misrepresentations about the due diligence performed by Tremont on its fund managers, defendants induced him to invest approximately $1.1 million, through a variable universal life insurance policy, in Tremont Opportunity Fund III, L.P. More than 22% of this $1.1 million was lost was lost when it was revealed that the ultimate manager of these assets, Bernard Madoff, was using the assets to fund his Ponzi scheme instead of investing them.

Defendants move to dismiss Prickett's second amended complaint. The motion is granted.

The Complaint

Prickett is the policyholder of a variable universal life insurance policy, or "VUL, " issued by New York Life. A VUL is a type of life insurance that, in essence, permits the policyholder to engage in some degree of investment activity while enjoying the tax advantages afforded a life insurance policy. On one hand, this policy allows the policyholder to direct, among the options provided by the insurance carrier, how the funds paid into that account are to be invested. The proceeds from those investments are paid out through the policy's eventual death benefit and also, in the meantime, may be borrowed against and put towards the policy premiums and other ongoing policy expenses. On the other hand, however, this arrangement is structured so that the assets held in the policy are considered to be those of the insurance carrier and not of the policyholder. This ensures that the transactions carried on within the VUL benefit from the relatively generous tax advantages afforded life insurance benefits.

NEW YORK LIFE'S REPRESENTATIONS

Prickett alleges that he initially purchased the VUL policy in May of 2003 in reliance upon certain representations made by New York Life about its oversight of the investments made through the policy.

The specific representations are numerous but, in summary, the complaint alleges that New York Life represented that Prickett's assets would be invested in diversified portfolios of securities, managed by one or more fund managers. New York Life allegedly represented that, to ensure continued compliance with certain requirements in the Internal Revenue Code, it would monitor the portfolios of the funds it offered for investment to ensure that they remained adequately diversified.

New York Life's offering memorandum and the policy itself also provided that New York Life maintained the "exclusive right" to determine where a policy's assets would be invested and "reserved the right" to change the investments available for investment through VUL policies or to alter the securities held under a VUL policy when investment conditions warranted it. It laid out a number of specific types of changes that could be made (such as the substitution of one investment for another, or the liquidation of a position) and the reasons for which it would make such a change ("if marketing, tax, or investment conditions so warrant"). It represented that it would notify the policyholder if any of these things occurred.

In reliance on these representations, Prickett alleges, he purchased a VUL policy from New York Life with a face value of $6.4 million.

Prickett also alleges that, once he bought the policy, New York Life exaggerated the value of his investments for more than four years. Up until the month Madoff's Ponzi scheme was unmasked, New York Life issued periodic account statements that failed to reflect the fact that 22% of his investment with Tremont had actually been funneled into a Ponzi scheme. Thus, the amounts disclosed in the account statements were, Prickett argues, 22% higher than the actual value of Prickett's Tremont investment.

TREMONT'S REPRESENTATIONS

Of that $6.4 million, Prickett alleges that he directed New York Life to invest $1.1 million in Tremont Opportunity Fund III, more than 22% of which was ultimately lost when Madoff's Ponzi scheme was unmasked. As with New York Life, Prickett alleges that he relied on a number of representations made by the Tremont defendants, and Tremont Partners in particular, in making this investment decision, but which ultimately proved to be false.

Tremont Partners represented that the fund had a "general policy" of choosing managers who employed an opportunistic style or strategy, and provided a number of examples of what it meant by an "opportunistic strategy." Suffice it to say that its list of examples did not include "Ponzi schemes." Tremont also represented that it employed an investment strategy that relied on multiple managers to ensure that it maintained a diversified portfolio, the investments of which provided returns that were not correlated with one another. These ...


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