United States District Court, D. Kansas
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 ...