Annuity Investors Should Not Rely on Class Actions to Recover Their Losses

Thousands have lost in investments into annuities issued by AXA Equitable Life Insurance Co., Nationwide Life Insurance Co., AIG SunAmerica Life Assurance Co., and Variable Annuity Life Insurance Co. A class action was filed on these investors’ behalf, but, as has happened to millions of investors in the last decade, they have now also become victims of Congress and the courts.

Investors who do not “opt out” of class actions in securities cases can severely harm their chance of ever recovering. It may be best for those with small or weak claims to let the class action lawyers get rich, while only sending them a few “pennies on the dollar” (The average securities class action produces less than 10% net recovery to investors). It is better than nothing, but those who lost hundreds of thousands or millions of dollars should consult an attorney of their own. It is also best if they go to one who will not charge them to review their options.

State securities laws, along with claims for fraud, negligence, or breach of contract and fiduciary duty, are usually the best route to recovery for investors. However, Wall Street has managed to persuade Congress to confine securities class actions to the Federal Securities laws and to gut investors’ rights under these federal laws. Fortunately, investors can take action under state laws.

In an unpublished opinion, the U.S. Court of Appeals for the Fourth Circuit affirmed that the Securities Litigation Uniform Standards Act preempts the litigation of variable annuity investors who were allegedly harmed by market timing involving mutual funds that were part of their investment allocations. SLUSA closes a loophole that exists in the 1995 Private Securities Litigation Reform Act. The latter lets plaintiffs who file their lawsuits in state court avoid the securities fraud pleading requirements of the PSLRA.

According to the court, the plaintiffs bought variable annuities from the defendants.The court said the variable annuities at issue in this case involve mutual funds with foreign securities.

The policyholders of these annuities allocate their funds into different investment accounts offered by an annuity. Policyholders that decide to invest in a variable account then apportion funds into sub-accounts, each one corresponding with a mutual fund that the defendants have made investments in. The funds placed in these sub-accounts are entered into a pool of assets belonging to the defendants. This money is used to buy the designated mutual funds’ shares.

Rather than being given ownership of the mutual funds, policyholders are given sub-account accumulation units that are in proportion to the amount of money they’ve placed in the sub-account. The sub-account’s AU value is determined once a day when trading ends on the New York Stock Exchange. The defendants use each securities’ closing trade price in its home market to determine a mutual fund’s NAV. Because foreign securities markets close before 4p, their closing prices are a number of hours old by the time the NAV is calculated. Also, the NYSE’s value movements that happen after the close of the foreign securities markets frequently foreshadow movements that might occur in the markets the following day.

This allows short-traders to take advantage of “stale” foreign securities prices by selling or buying shares belonging to a mutual fund’s corresponding sub-account and then rapidly buying or selling the shares when the foreign market shows the most current value movement.

The court said market timing by annuity holders adversely affects sub-account holders’ interests. However, the court also said the class action was brought for variable annuity policyholders who invested in sub-accounts with corresponding mutual funds that had foreign securities and that no market timing had occurred.

The four actions were filed in Illinois state court. The defendants moved the actions to the U.S. District Court for the Southern District of Illinois and requested a motion to dismiss them because of SLUSA preemption. The plaintiffs sought to have the cases remanded due to lack of subject matter jurisdiction. Before a ruling could be made by the district court, the actions were sent to the U.S. District Court for the District of Maryland and consolidated with other market timing cases.

Plaintiffs then tried to avoid SLUSA preemption by amending their four cases to one assertion: that they were exposed by the defendants to market timing’s diluting effects. However, the district court granted the defendants’ motion to dismiss due to SLUSA preemption. The court said that since the plaintiffs were non-trading securities holders, the defendants could not have made misrepresentations connected to the sale or purchase of securities to the plaintiffs, as the latter party has alleged.

Please contact the investment fraud law firm of Shepherd Smith Edwards and Kantas, LLP. We would like to review your case for free.

Related Web Resources:

Nationwide Life Insurance Co.

Variable Annuity Life Insurance Co., Yahoo Finance