Ogles v. Security Benefit Life Insurance Co.

          MEMORANDUM AND ORDER

          HOLLY L. TEETER UNITED STATES DISTRICT JUDGE.

         Plaintiff Albert Ogles filed this civil action alleging violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961-1968, and a state-law claim for unjust enrichment. Defendants Security Benefit Life Insurance Company, Security Benefit Corporation (collectively “Security Benefit”), Guggenheim Partners, LLC, and Guggenheim Investments (collectively “Guggenheim”) have filed motions to dismiss the operative second amended complaint. Docs. 67, 69.^[1] Both Security Benefit and Guggenheim argue that Ogles's RICO claim is reverse-preempted under the McCarran-Ferguson Act, 15 U.S.C. § 1012, and that Ogles has failed to state a claim under either RICO or for unjust enrichment. The Court heard oral argument on May 16, 2019.^[2]

         For the reasons discussed below, the Court grants both motions to dismiss. Specifically, the Court holds that Ogles's RICO theory involving the financial strength of Security Benefit is reverse-preempted under the McCarran-Ferguson Act. Ogles's RICO theory alleging the fraudulent design of the annuity at issue is dismissed for failure to state a claim under Rule 12(b)(6). The Court declines to exercise supplemental jurisdiction over Ogles's claim for unjust enrichment, and that claim is therefore dismissed without prejudice.

         I. BACKGROUND

         The following facts are taken from the well-pleaded allegations of the second amended complaint, Doc. 61, and, consistent with the standards for evaluating motions to dismiss under Rule 12(b)(6), the Court assumes the truth of these facts for purposes of analyzing the motions to dismiss.

         Security Benefit is an insurance company based in Topeka, Kansas. Doc. 61 at 19. Guggenheim bought Security Benefit in 2010 and went to work making Security Benefit into a competitive player in the fixed-index annuity market. Id. at 17-18. This dispute stems from Ogles's purchase of an annuity from Security Benefit in July 2012-in particular his purchase of a Total Value Annuity (“TVA”), which is a type of fixed-index annuity. Id. at 8. The TVA has been very profitable for Security Benefit. Id. at 20.

         A fixed-index annuity is something of a hybrid. It combines the generally low-risk features of a traditional fixed annuity, which provides principal security but a typically modest rate of return, with the ability to link interest growth to a particular financial index. Doc. 66-5 at 3.^[3] The return on investment for a fixed-index annuity-called the crediting option-is often linked to an equity-based index like the S&P 500, Dow Jones, or Nasdaq. Doc. 61 at 21. Many fixed-index annuities are capped in terms of how much they can earn. But the TVA was uncapped, meaning it had, theoretically, unlimited potential. Id. The crediting option for the TVA was the Annuity Linked TVI Index (“ALTVI”). Id. at 22.

         The ALTVI combines the Trader Vic Index with a proprietary volatility overlay. Id. at 22-24; Doc. 66-5 at 4. The Trader Vic Index is based on commodities, currencies, and interest rates and was developed and is managed by the Royal Bank of Scotland. The Trader Vic Index is generally thought to perform inversely to equities-based indices, like the Dow Jones. Doc. 61 at 22-24; Doc. 66-5 at 4. The selling point of the TVA, then, with its ALTVI crediting option, was that it might perform favorably when annuities linked to indices based on stocks might not, and its potential was uncapped. Id.; see also Doc. 66-5 at 2-4.

         A brochure explaining the ALTVI stated that it was “developed and is owned” by the Royal Bank of Scotland. Doc. 66-5 at 5. The TVA contract Ogles signed also noted that the ALTVI is trademarked by the Royal Bank of Scotland, but that Security Benefit's annuity products “are not sponsored, endorsed, sold or promoted by The Royal Bank of Scotland, ” and that the “Royal Bank of Scotland . . . make[s] no representation and offer[s] no advice with regard to purchasing any Security Benefit annuity.” Doc. 61 at 23; Doc. 66-1 at 7. Ogles claims that the Royal Bank of Scotland was just a “front” and that, in reality, the ALTVI was developed by third-party companies partnered with Security Benefit and Guggenheim, and thus it was not “external” as advertised. Doc. 61 at 32-33. Ogles also alleges that historical simulations of the ALTVI's performance- needed because the ALTVI was a recent creation-were misleading. Specifically, historical performance simulations showed an upward trend in past years-a trend that did not hold up after Ogles purchased his annuity. The historical simulations were used in marketing materials to tout the potential of the ALTVI, though those materials stated that this simulated past performance “does not reflect what will happen in the future.” Id. at 25-26.

         Ogles purchased the TVA in Alabama in July 2012 for approximately $145, 000 and allocated 100% of his funds to the ALTVI, which was one of the available crediting options. Id. at 45. Under the terms of the TVA, the annuity would be held for five years before any crediting occurred, presuming the index's performance warranted crediting. Id. at 7. But at the end of that period, Ogles “learned that the Five Year Annuity Linked TVI Index Account Rider failed to produce any interest credits or to otherwise perform consistent with the uniform representations made . . . .” Id. at 46. The failure to produce interest credits is the source of Ogles's alleged damages. There are no allegations that Ogles's initial investment of $145, 000 was depleted. The claims center on whether the TVA had an inherently diminished value due to an allegedly fraudulent design, and thus was not worth the $145, 000 investment. Tr. at 96:8-18. Ogles also received a 10% bonus allocation on his principal, though at oral argument Ogles counsel stated that the bonus would be forfeited if the annuity funds were withdrawn within the first ten years.^[4]Doc. 66-1 at 5; Tr. at 100:21-101:2.

         Ogles has now sued under RICO alleging that the true nature, development, and potential of the TVA and ALTVI were misrepresented, as was Security Benefit's true financial condition, and therefore he was damaged in that the annuity he purchased was worth less than the premium he paid for it. Doc. 61 at 43-44.^[5]

         II. STANDARD

         To survive a motion to dismiss under Rule 12(b)(6), “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is plausible if it is accompanied by sufficient factual content to allow a court “to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. The plausibility standard requires “more than a sheer possibility that a defendant has acted unlawfully, ” but it “is not akin to a ‘probability requirement.'” Id. “Where a complaint pleads facts that are merely consistent with a defendant's liability, it stops short of the line between possibility and plausibility of entitlement to relief.” Id. (quoting Twombly, 550 U.S. at 557) (internal quotations omitted).

         In undertaking this analysis, the Court accepts as true all well-pleaded allegations in the second amended complaint, though it need not accept legal conclusions. Id. Likewise, conclusory statements are not entitled to the presumption of truth. Id. at 678-79. Additionally, where a plaintiff asserts a RICO claim, certain heightened pleading standards apply. Specifically, predicate acts of mail or wire fraud must be pleaded with particularity under Federal Rule of Civil Procedures 9(b). George v. Urban Settlement Servs., 833 F.3d 1242, 1254 (10th Cir. 2016). This means that “plaintiffs must ‘set forth the time, place and contents of the false representation, the identity of the party making the false statements and the consequences thereof.'” Id. (quoting Koch v. Koch Indus., 203 F.3d 1202, 1236 (10th Cir. 2000)).

         III. ANALYSIS

         Ogles's second amended complaint asserts RICO claims against all Defendants, alleging violations of 18 U.S.C. § 1962(c) and (d). Doc. 61 at 49-63. Ogles also asserts of claim of unjust enrichment against Guggenheim. Id. at 64. Each claim is discussed in turn.

         A. Ogles asserts two theories of relief under RICO.

         Because of the complex subject matter and the lengthy complaint-and because the precise nature of the claim bears on the analysis-a somewhat detailed description of Ogles's claims is necessary. Specifically, Ogles alleges that Defendants “fraudulently duped Plaintiff and members of the proposed Class into buying annuity products based on false assurances of safety and financial strength, and through the fraudulent concealment of the truth about the design of the Total Value Annuity and the 5 Year Annuity Linked TVI Index Account.” Doc. 61 at 44 (¶ 127). Based on this, it appears Ogles's RICO claim has two theories of relief. Tr. at 56:5-57:2.

         The first theory-regarding the financial strength of Security Benefit-is that certain financial transactions involving Guggenheim, Security Benefit, and other related entities misled Ogles regarding Security Benefit's true financial condition, and that he would not have purchased the annuity had he known that Security Benefit's financial picture was far more tenuous than it appeared to be.^[6] The Court refers to this as the “financial strength” theory. Ogles alleges that these transactions made the purchase of the annuity “far riskier . . . than comparable products issued by financially sound issuers.” Doc. 61 at 44. Ogles details the transactions he contends are suspicious or improper in the second amended complaint. Id. at 39-43 (¶¶ 111-124). Notably, many of these transfers all occurred after Ogles bought his annuity in July 2012, though he does not explain how those post-purchase transactions could have plausibly impacted his decision or misled him into purchasing his annuity. See id.

         The second theory is that the annuity product itself (the TVA) and the index it was linked to (the ALTVI) were fraudulently designed, marketed, and sold. This will be referred to as the “fraudulent design” theory. Ogles alleges that Guggenheim and Security Benefit “rigged” the TVA to underperform. See Doc. 75 at 44; Doc. 61 at 43-44 (¶ 125, asserting that Ogles was damaged when he purchased the annuity that was worth less than the premiums paid “attributable to the fraudulent design of the Total Value Annuity and its ALTVI Account . . .”). At oral argument, Ogles's counsel conceded that the precise way in which the TVA and ALTVI was “rigged” was not yet known-he described it as a “black box” at this stage, presumably meaning it was something of a mystery. Tr. at 116:19-21.

         Both Guggenheim and Security Benefit have moved to dismiss Ogles's RICO claim on grounds that it is reverse-preempted under the McCarran-Ferguson Act, 15 U.S.C. § 1012(b). This argument is focused on Ogles's financial-strength RICO theory. Defendants also argue that Ogles's RICO claim has not been pleaded with the requisite particularity under Rule 9(b). The Court will apply that argument to Ogles's fraudulent-design theory.

         1. Ogles's financial-strength RICO theory is reverse-preempted under the McCarran-Ferguson Act.

         The McCarran-Ferguson Act states that “[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance.” 15 U.S.C. § 1012(b). It bars application of a federal statute if three conditions are met: first, the federal statute relied on must not relate to the business of insurance; second, a state statute regulates the business of insurance; and third, “the federal statute would invalidate, impair, or supersede the state statute.” BancOklahoma Mortg. Corp. v. Capital Title Co., 194 F.3d 1089, 1098 (10th Cir. 1999). When the McCarran-Ferguson Act applies, the federal claim is said to be reverse-preempted, meaning it is preempted in favor of state regulation.

         The parties all agree that RICO-the federal statute Ogles seeks to proceed under-does not specifically relate to the business of insurance. See Humana Inc. v. Forsyth, 525 U.S. 299, 307 (1999). The parties also agree that Kansas and Alabama have enacted laws to regulate insurance. See K.S.A. § 40-102; K.S.A. § 40-103; see also Steele v. First Deposit Nat'l Bank, 732 So.2d 301, 303 (Ala. Civ. App. 1999) (“It is undisputed that Alabama's insurance code . . . [was] enacted for the purpose of regulating the business of insurance.”).^[7] There is likewise no argument that RICO is in direct conflict with state law or any argument that RICO would invalidate or supersede state law. See Humana, 525 U.S. at 307 (defining invalidate to mean “render ineffective” and supersede to mean “displace (and thus render ineffective) while providing a substitute rule” (internal citations omitted)). Where the parties diverge is whether RICO would impair state insurance laws in this context.

         In Humana, Inc. v. Forsyth, the Supreme Court considered what the McCarran-Ferguson Act meant by “impair.” The Supreme Court rejected the extremes, concluding that Congress did not intend to “cede the field of insurance regulation to the States” completely, nor did it “intend[] a green light for federal regulation whenever the federal law does not collide head on with state regulation.” Id. at 308-09. Instead, the Supreme Court turned to the dictionary definition of “impair” and held that “[w]hen federal law does not directly conflict with state regulation, and when application of the federal law would not frustrate any declared state policy or interfere with a State's administrative regime, the McCarran-Ferguson Act does not preclude its application.” Id. at 310.

         Security Benefit and Guggenheim argue that Ludwick v. Harbinger Group, Inc. is directly on point and controls whether Ogles's financial-strength RICO theory is reverse-preempted by the McCarran-Ferguson Act. In Ludwick, the plaintiff brought a RICO claim against an insurance company alleging that it misled her into paying too much for an annuity “by disseminating reports and marketing materials that did not properly reflect sham transactions [that the insurance company] undertook to hide its true financial state.” Ludwick v. Harbinger Group, Inc., 854 F.3d 400, 402 (8th Cir. 2017). This is very similar to Ogles's allegations. Doc. 61 at 44 (¶ 127: “Defendants . . . fraudulently duped Plaintiff and members of the proposed Class into buying annuity products based on false assurances of safety and financial strength . . .”); id. at 53 (¶ 155, stating that defendants “created the false impression of positive surplus and financial stability . . .”); id. at 39-43 (¶¶ 111-124, detailing the supposedly “many transactions” evidencing the “fraudulent intent behind the scheme”).^[8]

         The Eighth Circuit in Ludwick noted that “[q]uestions about insurance companies' solvency are, no surprise, squarely within the regulatory oversight by state insurance departments.” Ludwick, 854 F.3d at 404 (citing applicable state law). Accordingly, deciding the RICO claim based on an insurance company's financial strength and solvency “would mean asking the same questions as state insurance regulators . . . and effectively double-checking their work.” Id. at 405. The court held that such “intrusion and interference” with state regulators was precisely the conduct forbidden by the McCarran-Ferguson Act. Id. The Eighth Circuit thus affirmed the district court's dismissal under Rule 12(b)(6), finding the RICO claim was reverse-preempted. Id. at 407; see also Hudson v. Athene Annuity & Life Co., 2017 WL 3477745, at *1-*3 (S.D. Iowa May 11, 2017) (citing Ludwick and finding RICO claim reverse-preempted where the plaintiff similarly alleged “a fraudulent scheme to mislead consumers into purchasing annuities based on material misrepresentations regarding [the defendant's] financial strength”).

         The Court finds the reasoning of Ludwick persuasive and applicable to Ogles's financial-strength RICO theory. As explained above, Ogles's allegations are starkly similar to those in Ludwick to the extent he alleges that certain financial transactions decreased or limited Security Benefit's financial strength and solvency and thus devalued his annuity. And like in Ludwick, these transactions are very much the concern of state insurance regulators in Kansas and Alabama. As Security Benefit explains in great detail in its motion, Doc. 68 at 20-22, many of the transactions that Ogles highlights are heavily regulated by both Kansas and Alabama insurance law. See K.S.A. §§ 40-2c01 through 40-2c29 (setting reporting requirements and authorizing corrective action by the Kansas Insurance Department regarding insurance companies' risk-based capital); K.S.A. § 40-222b (stating that upon a finding that “a condition such that the continued operation of the company might be hazardous to the insuring public, ” the Kansas Insurance Commissioner is authorized “to take such action as may be reasonably necessary to rectify the existing condition”); K.S.A. §§ 40-2b01 through 40-2b29 (regulating investments by insurance companies); K.S.A. § 40-409 (regulating reserve requirements); K.S.A. § 40-222 (authorizing the Kansas Insurance Commissioner to make “a financial examination of any insurance company” doing business in Kansas); K.S.A. §§ 40-3602 through 40-3659 (regulating impaired or insolvent insurers); see also Ala. Code § 27-3-7 (setting minimum surplus requirements for foreign insurance companies doing business in Alabama); Ala. Code § 27-3-4 (setting reserve requirements for foreign insurance companies).

         Given these state regulations, asking the Court to decide whether Defendants defrauded annuity purchasers based on the cited transactions-which by all accounts have never been questioned by state regulators-“would mean asking the same questions as state insurance regulators . . . and effectively double-checking their work.” Ludwick, 854 F.3d at 405. And double-checking the work of state regulators would impair state insurance regulation because it would “interfere with a State's administrative regime.” Humana, 525 U.S. at 310. Accordingly, the Court concludes that Ogles's RICO theory regarding the financial strength of Security Benefit is reverse-preempted.

         Notably, although Ogles disputes that Ludwick should apply, he does not explain how his financial-strength RICO theory-premised on a claim that various reinsurance transactions between Security Benefit and related entities were improper-could be evaluated without interfering with, or at least second-guessing, the decisions of state insurance regulators, who have already signed off on those transactions. Instead, he claims that the Court “could absolutely determine that Mr. Ogles and other class members were defrauded based on false representations that induced them into purchasing the fixed index annuities at issue without passing any judgment on the Kansas insurance regulators.” Doc. 75 at 44 (citing Secs. & Exch. Comm'n v. Nat'l Secs., Inc., 393 U.S. 453 (1969)). The Court first notes that Ogles's argument on this point consists of one case cite and no elaboration. Second, the court in Ludwick rejected a similar argument. Ludwick, 854 F.3d at 405.

         In National Securities, the sole case cited by Ogles on this point, the SEC sought to unwind a fraudulent merger of insurance companies that had been approved by state insurance regulators. Nat'l Secs., 393 U.S. at 455-56. The Supreme Court rejected an argument that the SEC's claims were reverse-preempted by the McCarran-Ferguson Act because the state law at issue was primarily focused on protecting shareholders, not policyholders, and thus was not regulating “the business of insurance.” Id. at 460-61. Although state law did require consideration of the effects of ...