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From Securities Regulation Daily, April 11, 2018

Annuity holder unaware of misrepresentation, so no connection for SLUSA preclusion

By Rodney F. Tonkovic, J.D.

An annuity holder's passive retention of a security following a misrepresentation of which the holder is unaware does not meet the "in connection with" requirement for SLUSA preclusion, a Second Circuit panel has held. The district court had dismissed the complaint as precluded after concluding that it alleged a misrepresentation in connection with the plaintiff's decision to hold the annuity. The panel reversed the district court's judgment and instructed that the case be remanded to the Connecticut state court (O'Donnell v. AXA Equitable Life Insurance Company, April 10, 2018, Parker, B.).

The holder of a variable annuity brought this action in state court alleging that issuer AXA Equitable Life Insurance Co. breached contractual duties in implementing a volatility management strategy. AXA argued that the breach of contract action depended on a misrepresentation: AXA had earlier settled with a state regulator for making misrepresentations when seeking regulatory approval for implementing the volatility management strategy. The breach of contract claim, filed after the entry of the consent order, was premised on an alleged material change to the terms of the policies that AXA had sold to the variable annuity holders.

Removed and dismissed. AXA removed this action to federal court on this ground, arguing that SLUSA preclusion applied because the alleged misrepresentation was made in connection with the purchase or sale of a covered security. The case was then transferred to the Southern District of New York, which dismissed the complaint after finding that it was precluded by the SLUSA. The court interpreted the complaint as alleging a misrepresentation or omission on the part of AXA that was in connection with the plaintiff's decision to hold the annuity.

Fails "in connection with" requirement. The question before the court on appeal was whether a complaint is precluded by SLUSA where the alleged misrepresentation was made to a regulator and unknown at the time to the holders of the security. The panel concluded that a holder's passive retention of a security following a misrepresentation of which the holder is unaware fails the "in connection with" requirement for SLUSA preclusion.

There was no question that the complaint met three of the SLUSA's requirements: it was a covered class action, based on state law, that involved a covered security. At issue was whether the complaint alleged a misrepresentation or omission in connection with the purchase or sale of a security. In this case, the panel determined, there were no allegations that an actual securities transaction ever occurred. And, there was no allegation, or reasonable inference, that the plaintiff's decision to hold was related in any way to the misstatements AXA made to the regulator. In short, there was no link between the misrepresentation and the plaintiff's inaction decision to hold for the simple reason that it was unknown to him.

The case is No. 17-1085-cv.

Attorneys: Joel C. Feffer (Harwood Feffer LLP) for Richard O'Donnell. Jay B. Kasner (Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates) for AXA Equitable Life Insurance Co.

Companies: AXA Equitable Life Insurance Co.

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