Yale M. Fishman 1998 Ins. Trust v. Phila. Fin. Life Assurance Co., 11-cv-1283

YALE M. FISHMAN 1998 INSURANCE TRUST, Plaintiff, v. PHILADELPHIA FINANCIAL LIFE ASSURANCE COMPANY F/K/A AGLLIFE ASSURANCE COMPANY, et al., Defendants.

11-cv-1283

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

May 3, 2016

OPINION

Plaintiff, the Yale M. Fishman 1998 Insurance Trust, brings this putative class action on behalf of itself and others who held certain insurance products sold by Philadelphia Financial Life Assurance Company f/k/a AGL Life Assurance Company ("PFLAC"). These insurance products lost value due to exposure to the Ponzi scheme perpetrated by Bernard Madoff. Against PFLAC, plaintiff brings claims of breach of fiduciary duty, common law fraud, breach of contract, breach of the implied covenant of good faith and fair dealing, violation of New York General Business Law ("GBL") § 349, gross negligence, negligent misrepresentation, unjust enrichment, and promissory estoppel.

Plaintiff also brings derivative claims against numerous corporate and individual defendants on behalf of certain funds in which its money was ultimately invested.

Defendants move to dismiss plaintiff's Consolidated Amended Direct and Verified Derivative Complaint (the "Complaint"). For the reasons detailed below, the motions to dismiss are granted.

Background

Plaintiff purchased variable universal life insurance policies ("VULs") from PFLAC. One feature of a VUL is that policyholders are able to choose how their premiums are to be invested from among the various investment options offered by the issuer of the policy.

PFLAC provided plaintiff the option of investing its premiums with what is now known as the Tremont Opportunity Fund. The Tremont Opportunity Fund is itself a "fund of funds" that invested its assets with other Tremont-managed funds known as the Rye Select Funds. Tremont Partners served as General Partner of both the Tremont Opportunity Fund and each of the Rye Select Funds (the Tremont Opportunity Fund and the Rye Select Funds are collectively known as the "Nominal Defendants").

Assets managed by the Rye Select Funds were ultimately entrusted to Madoff. The fate of plaintiff's funds once in Madoff's hands is well known. Much of plaintiff's money was lost to Madoff's fraud.

Plaintiff also seeks to represent class members who purchased deferred variable annuities ("DVAs") from PFLAC, the assets of which were exposed and ultimately lost to Madoff's Ponzi scheme through a similar route.

Plaintiff alleges that PFLAC caused these losses by, in essence, failing to perform the promised—or in any event, a reasonable amount of—due diligence on the Tremont Opportunity Fund.

Plaintiff also brings derivative claims on behalf of the Nominal Defendants. These derivative claims are brought against (1) the general partner of the Nominal Defendant funds, Tremont Partners; (2) Tremont Partners' corporate parent, Tremont Group Holdings, Inc. ("TGH"); and (3) a division of TGH, Rye Investment Management ("Rye") (Tremont Partners, TGH, and Rye are collectively known as the "Tremont Defendants"). Plaintiff also brings derivative claims against the corporate parents of TGH: Oppenheimer Acquisition Corp. ("Oppenheimer"), MassMutual Holding LLC ("MassMutual"), and Massachusetts Mutual Life Insurance Co. ("MMLI") (Oppenheimer, MassMutual, and MMLI are collectively known as the "Control Defendants"). Finally, plaintiff brings derivative claims against several individual directors and officers of Tremont Partners and TGH (the "Individual Defendants").

In its derivative claims, plaintiff argues that its losses would have been avoided had the Tremont Defendants not misled the Nominal Defendants about the steps being taken to safeguard their assets and had they managed the assets with a reasonable level of care.

I. The Parties

The named plaintiff is a trust holding VULs issued by PFLAC, the funds of which were invested in the Tremont Opportunity Fund. It seeks relief both for itself and others who purchased either VULs or DVAs from PFLAC which lost value through exposure to Madoff's fraud.

Plaintiff brings direct claims against PFLAC, and derivative claims against the Tremont Defendants, Control Defendants, and Individual Defendants.

PFLAC is an insurance company organized under the laws of Pennsylvania. It has its principal place of business in Philadelphia, Pennsylvania.

The Tremont Defendants consist of TGH, Tremont Partners, and Rye. TGH is an investment management firm organized under the laws of Delaware, with its principal place of business in Rye, New York. It is the parent company of Tremont Partners and has also been known as Tremont Advisers, Inc., and Tremont Capital Management. Tremont Partners is a wholly-owned subsidiary of TGH organized under the laws of Connecticut, with its principle place of business in Rye, New York. Tremont Partners is the general partner and investment manager of the Nominal Defendants. Rye is a division of TGH with its principal place of business in Rye, New York. Rye managed the Rye Select Funds.

The Control Defendants—Oppenheimer, MassMutual, and MMLI—are the various corporate parents of the Tremont Defendants. Oppenheimer is the direct corporate parent of TGH. It is a Delaware corporation with its principal place of business in New York, New York. MassMutual, in turn, is the corporate parent of Oppenheimer with its principal place of business in Springfield, Massachusetts. Finally, MMLI is the corporate parent of MassMutual (and, therefore, the corporate great-grandparent of TGH) and also has its principal place of business in Springfield, Massachusetts.

Individual Defendants Sandra L. Manzke, Robert Schulman, Rupert A. Allan, Suzanne Hammond, Stephen Clayton, Mark Santero, and Timothy Birney are all former officers and directors of various Tremont Defendants.

The Nominal Defendants—the Tremont Opportunity Fund and the Rye Select Funds—are investment funds organized under the laws of Delaware.

II. Substantive Allegations

The Complaint details Madoff's fraud, the red flags that defendants allegedly could have detected but did not, the control relationships between defendants, and defendants' alleged financial incentive to turn a blind eye to the fraud.

Plaintiff alleges that PFLAC distributed to plaintiff various materials describing the Tremont Opportunity Fund. In 2000, PFLAC provided a Private Placement Memorandum ("PPM") in connection with plaintiff's purchase of its VUL policies. In a supplement to that PPM ("PPM Supplement"), the TremontOpportunity Fund was said to have the objective of providing above-average returns over a market cycle. Certain risk factors associated with investing in the Tremont Opportunity Fund were also listed. In 2008, PFLAC provided plaintiff a Second Amended and Restated PPM ("2008 PPM") that stated that Tremont Partners (as the general partner of the Tremont Opportunity Fund) would be able to obtain sufficient information about its investment managers to select them effectively, and reiterated the fund's investment goals as summarized in the PPM Supplement.

Plaintiff alleges that it was misled by these documents in numerous ways. First, plaintiff's funds were not invested in accordance with the stated objectives of the Tremont Opportunity Fund—rather, plaintiff's funds were not invested at all. Second, the risk factors included in the PPM Supplement did not include the possibility that plaintiff's funds would be lost in a Ponzi scheme. Third, although the documents created the impression that PFLAC had vetted the Tremont Opportunity Fund by listing it as an investment option under its VUL policies, plaintiff alleges that PFLAC did none of the diligence that it represented it would do.

As for the Tremont Defendants, plaintiff alleges that they had a close relationship with Madoff, based largely upon a close personal relationship for much of the time period at issue between Madoff and Schulman (CEO of the Tremont Defendants). However, despite this close relationship, and the Tremont Defendants' representations that they would closely monitor all of thefunds in which they invested, plaintiff alleges that they failed to notice numerous, conspicuous red flags. They failed to notice these red flags, plaintiff alleges, because they did not perform the due diligence the way they said they would. Plaintiff ascribes this lack of oversight to the Tremont Defendants' desire to continue collecting management fees from the ever growing pool of investment assets that they were attracting due to their affiliation with Madoff.

Finally, plaintiff argues that liability flows to the Control Defendants because of their control over the Tremont Defendants. Plaintiff alleges that Oppenheimer controlled the Tremont Defendants through its acquisition of TGH as well as through common directors and executives. Oppenheimer, in turn, was controlled by MassMutual and MMLI by virtue of their majority ownership of Oppenheimer and through common officers and directors.

Legal Standard

To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), a complaint must plead sufficient facts to state a claim to relief that is plausible on its face. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). In deciding such a motion, a court must accept as true the facts alleged in the complaint, but it should not assume the truth of its legal conclusions. Iqbal, 556 U.S. at 678-79. A court must also draw all reasonable inferences in the plaintiff's favor, and it may consider documents attached to the complaint, incorporated by reference intothe complaint, or known to and relied on by the plaintiff in bringing the suit. ATSI Commc'ns, Inc. v. Shaar Fund. Ltd., 493 F.3d 87, 98 (2d Cir. 2007).

Discussion

I. Derivative Claims

Plaintiff brings derivative claims on behalf of the Nominal Defendants against the Tremont Defendants, Control Defendants, and Individual Defendants. For the reasons set forth below, the court holds that plaintiff does not...