United States: Rulings On Class Certification, Expert Testimony And Summary Judgment In Case Involving Sales Of Annuities For Qualified Retirement Plans

Originally published February 18, 2008

A federal Magistrate Judge in Texas has issued three rulings in a putative class action alleging that the defendant insurer omitted material information in its disclosures in connection with the sale of variable deferred annuities for use in tax-deferred qualified retirement arrangements such as Individual Retirement Accounts ("IRAs"), 401(k) and 403(b) plans. A.C. Brooks v. The Lincoln Nat’l Life Ins. Co., No. 5:03CV256 (E.D. Tex. Feb. 12, 2008). One ruling recommended denial of class certification; a second ruling excluded plaintiffs’ expert from offering testimony regarding allegedly hidden "implicit charges;" and a third ruling recommended denial of the insurer’s motion for summary judgment.

Plaintiffs’ Allegations

Plaintiffs alleged that they had purchased the defendant’s variable annuities, through registered representatives of broker-dealers and employer-sponsored plans, to fund retirement accounts. Plaintiffs contended that "the main economic value of a deferred annuity is to act as a wealth accumulation device that confers tax advantages, including tax deferral earnings." Plaintiffs alleged that they were not told that the tax deferral feature was "unnecessary" or redundant when a variable annuity was used in a tax-qualified retirement arrangement. Plaintiffs offered expert testimony that the defendant insurer did not disclose an "implicit charge" for tax deferral which plaintiffs argued would "erode any ‘other reason’ to purchase the variable annuity inside a qualified plan." Plaintiffs further asserted that they were damaged because the annuity products sold to them were "unsuitable" by virtue of the alleged undisclosed "implicit charge" and other fees associated with the products.

Plaintiffs (i) claimed material omissions by the defendant insurer and its agents in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5; (ii) claimed controlling person liability under Section 20(a) of the Exchange Act; and (iii) sought to void the annuity contracts under Section 29(b) of the Exchange Act. The proposed class included all persons who had purchased an individual variable annuity contract by the defendant insurer, or who had made an additional separate account investment under such a contract, from December 10, 1998, to the present, where the variable annuity contract was used to fund a retirement arrangement for favorable income tax treatment under Sections 401, 403, 408, 408A, or 457 of the Internal Revenue Code.

Class Certification Ruling

Magistrate Judge Caroline Craven’s 63-page report and recommendation (click here for report) made extensive findings of fact, including that the defendant insurer’s control over the content of the disclosures was limited because the defendant did not directly sell its annuities to the proposed class and that the proposed class members presumably had knowledge that variable annuities do not offer any additional tax deferral when used to fund a qualified plan because the securities rules and regulations require that broker-dealers and plan administrators make this disclosure at the point-of-sale. She recommended denying plaintiffs’ request for class certification on the grounds that, inter alia, individual rather than common issues predominated:

Judge Craven also found that "[b]ecause individual issues would overwhelm the issues common to the class, a class action would not be a superior forum in which to adjudicate the unique claims of each member of the proposed class."

Expert Testimony Exclusion

The Court also granted defendant’s motion to exclude plaintiffs’ expert, Tom Bakos, who submitted a report based on his theory that the insurer’s "actuaries imposed a uniform ‘implicit charge’ for tax deferral when pricing its variable annuities." (Click here for the opinion.) While finding Mr. Bakos to be qualified as an expert, the Court held that Mr. Bakos had not "identified any reliable actuarial method that he has used to form his opinions," explaining:

The Court rejected Bakos’ opinions on the further grounds that they were not supported by sufficient facts, noting that while "Bakos indicated the kinds of materials he would like to see," he erred in relying on "Plaintiff’s attorneys to select and provide to him the Lincoln documents necessary to form his opinions."

Summary Judgment Ruling

In moving for summary judgment, the defendant insurer had argued that plaintiff could not demonstrate that the alleged omissions caused him to purchase the annuities at issue because he had been informed verbally and in writing prior to his purchase that it was not necessary to purchase a variable annuity to obtain tax deferral within a qualified plan. Defendant also argued that the claims were time-barred. Plaintiff contended in response that the defendant insurer had a non-delegable disclosure duty to make disclosures itself and to conduct its own suitability analysis.

Judge Craven’s report recommended denying the summary judgment motion on the grounds that (a) with respect to the disclosures, "a genuine issue of material fact exists regarding whether Lincoln owed a duty to disclose the redundancy of the tax deferral feature and failed to do so"; and (b) with respect to suitability, the insurer, in Judge Craven’s view, had a duty based on SEC and NASD statements and guidance to conduct suitability reviews, and there remained an issue of fact as to whether it fulfilled that duty. Judge Craven also concluded that there were issues of fact as to when Mr. Brooks was on inquiry notice, and therefore, when the statute of limitations began to run. (Click here for the report.)

The parties have until March 3, 2008, to file any objections to Judge Craven’s recommendations with respect to class certification and summary judgment.

© 2008 Sutherland Asbill & Brennan LLP. All Rights Reserved.

This article is for informational purposes and is not intended to constitute legal advice.