Opinion
96 Civ. 6820 (JFK), 97 Civ. 4757 (JFK)
March 5, 2001
For Plaintiffs: GOODKIND LABATON RUDOFF SUCHAROW LLP 100 Park Avenue New York, New York. Of Counsel: Joel Bernstein, Esq. James W. Johnson, Esq. HANZMAN CRIDEN CHAYKIN ROLNICK, P.A. 200 South Biscayne Boulevard Miami, Florida. KEITEL AND KEITEL Seminole Building 238 Royal Palm Way Palm Beach, Florida. RODRIGUEZ RICHARDS, LLC The Penthouse 226 West Rittenhouse Square Philadelphia, Pennsylvania. HOFFMAN EDELSON 45 West Court Street Doylestown, Pennsylvania.
For Defendant: WACHTELL, LIPTON, ROSEN KATZ 51 West 52nd Street New York, New York. Of Counsel: Steven M. Barna, Esq. Dhananjai Shivakurnar, Esq. Hannah Berkowitz, Esq. Jacqueline O. LiCaizi, Esq.
OPINION AND ORDER
Before the Court are the Plaintiffs' motions (1) for reconsideration with respect to the Amended Reply Affidavit of James W. Johnson, Esq., and (2) for certification of a class pursuant to Fed.R.Civ.P. 23(b)(3). For the reasons that follow in this Opinion and Order, the Court grants the Plaintiffs' motion for reconsideration, but denies the Plaintiffs' motion for class certification.
BACKGROUND
The Plaintiffs Robert L. Moore ("Moore") and Jeanette S. Parry ("Parry") originally brought this purported class action against the Defendant PaineWebber, a national broker-dealer ("PaineWebber"), for common-law fraud and violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. Subject matter jurisdiction in this action is premised on the existence of a federal question, pursuant to 28 U.S.C. § 1331, and on principles of supplemental jurisdiction, pursuant to 28 U.S.C. § 1367(a). The Court shall only discuss the facts relevant to this motion, as the background to this case has been set forth fully in this Court's Opinion and Order of September 24, 1997, see Moore v. PaineWebber, Inc., No. 96 Civ. 6820, No. 97 Civ. 4757 (JFK), 1998 WL 661486 (S.D.N Y Sept. 24, 1998), and in a decision of the Second Circuit Court of Appeals, see Moore v. PaineWebber. Inc., 189 F.3d 165 (2d Cir. 1999).
The Plaintiffs claim that PaineWebber violated RICO § 1962(b), (c), and (d) by committing predicate acts of mail fraud in violation of 18 U.S.C. § 1341 and wire fraud in violation of 18 U.S.C. § 1343.
A. The Amended Complaint
In their amended consolidated complaint, the Plaintiffs allege that PaineWebber sold them life-insurance policies that were fraudulently packaged as "retirement and/or savings plans" suitable as alternatives to Individual Retirement Accounts ("IRAs"). (Compl. ¶ 1) They further allege that PaineWebber engaged in a nationwide scheme to induce investors like themselves to buy these policies, titled the Provider, by concealing the fact that the Provider was "nothing more than a universal life insurance policy." (See id. ¶ 3)
All citations to "Compl." in this Opinion and Order refer to the Amended Consolidated Complaint filed in this action on October 15, 1997.
The Court will use the term "Provider" to refer to the Provider and its variations, Provider 1000, Provider Plus, Provider One Pay.
According to the Plaintiffs, PaineWebber trained its securities brokers throughout the country to contact existing or previous securities customers and deliver a "scripted" sales presentation. The Plaintiffs allege that pursuant to that training, PaineWebber brokers concealed the fact that the Provider was nothing more than a universal life-insurance policy, instead describing it as an investment that would provide for "retirement," "savings," or the "deferral of taxes," and referring to its life-insurance premiums as "deposit[s]," "contribution[s]," or "investment[s]." (Id. ¶¶ 27-39). The Plaintiffs both purchased Provider policies in March 1989.
B. Prior Proceedings
This Court granted PaineWebber's motion to dismiss this action pursuant to Fed.R.Civ.P. 12(b)(6) in an Opinion and Order dated September 24, 1997. See Moore, 1998 WL 661486. The Court found that the Plaintiffs had sufficiently alleged (1) that PaineWebber had materially misrepresented the Provider to them as an IRA-substitute with a life-insurance component rather than life-insurance only, and (2) that the Plaintiffs would not have purchased Provider but for that misrepresentation. Id. at 4-6 Nevertheless, the Court ruled that on the facts alleged in this case, the Plaintiffs could not show (3) loss causation. Id. at 7-8.
The Court found that despite PaineWebber's alleged misrepresentation of the Provider's nature as an investment, PaineWebber had disclosed accurate financial data about the Provider to the Plaintiffs. Id. at 7 The Court ruled that an examination of those disclosures would have revealed the type of losses alleged by the Plaintiffs. Id. Therefore, the Court ruled that the Plaintiffs could not show that their alleged losses were caused by PaineWebber's alleged misrepresentations. Id. at 7-8.
The Second Circuit Court of Appeals reversed this Court's dismissal of the Plaintiffs' action and remanded the case to this Court. See Moore v. PaineWebber, Inc., 189 F.3d 165 (2d Cir. 1999). The Second Circuit ruled that PaineWebber's alleged misrepresentations about the Provider's nature as an investment, i.e., that it was an IRA substitute with a life-insurance component, rendered PaineWebber's financial disclosures about the Provider misleading as well. Id. at 170-71.
The Second Circuit ruled that because PaineWebber had allegedly misrepresented the Provider as an IRA, the Plaintiffs could have reasonably believed that the value of their Provider accounts would be at least as great as the sum of their annual contributions, as in an IRA.Id. Moreover, the Plaintiffs could have believed that PaineWebber's disclosures about the growth of their "flexible premium adjustable benefit life insurance policy" applied only to the life-insurance component that their Provider account allegedly contained, rather than to the value of the entire account. Id.
The Second Circuit ruled that a sufficient nexus existed between the alleged misrepresentations and the Plaintiffs' alleged losses, i.e., losses in the form of funds deducted from their accounts as insurance premiums as well as foregone returns on an IRA-type investment over the relevant period. Id. at 171-72. The court ruled that those losses were a foreseeable consequence of the alleged misrepresentations. Id. The court also concluded that the Plaintiffs had pled fraud with sufficient particularity to satisfy the requirements of Fed.R.Civ.P. 9(b). Id. at 172-73.
DISCUSSION
The Plaintiffs now seek certification of a class of "all persons who purchased the PaineWebber Provider policy . . . during the period from January 1, 1989 to the date of final judgment herein," pursuant to Fed.R.Civ.P. 23(b)(3). (Plaintiffs' Br. at 1). Plaintiffs seeking class certification pursuant to Rule 23(b)(3) must meet a two-tier test. See Amchem Prods. v. Windsor, 521 U.S. 591, 613-15 (1997); Morel v. Giuliani, 927 F. Supp. 622, 62333 (S.D.N.Y. 1995). Plaintiffs should meet the requirements of that test by showing more than just the allegations in the pleadings. See Sirota v. Solitron Devices, 673 F.2d 566, 571 (2d Cir. 1982).
First, the Plaintiffs must satisfy the definitional requirements for a class as contained in Rule 23(a): (1) the class is so numerous that joinder is impracticable; (2) questions of law or fact are common to the class; (3) the interests of the named parties are typical of the class; and (4) the class representatives will provide fair and adequate representation for absent classmembers. See Fed.R.Civ.P. 23(a). Second, the Plaintiffs must show (1) that the questions of law or fact common to the class predominate and (2) that a class action is superior to other available methods for the fair and efficient adjudication of the controversy. See Fed.R.Civ.P. 23(b)(3).
In this case, PaineWebber contests the Plaintiffs' ability to show (1) that the questions of law or fact common to the class predominate, or (2) that the Plainitffs are typical classmembers and will provide fair and adequate representation for absent classmembers. Accordingly, it urges this Court to deny the Plaintiffs' motion for class certification. The Court agrees that individual factual issues regarding PaineWebber's alleged misrepresentations predominate over issues common to the class, and therefore the Court need not address the Plaintiffs' qualifications as class representatives.
Predominance
After meeting the threshold requirements of Rule 23(a), a plaintiff must show pursuant to Rule 23(b)(3) that "questions of law or fact common to the members of the class predominate over any questions affecting only individual members." Fed.R.Civ.P. 23(b)(3) A court evaluating that showing "must determine whether the efficiencies gained by class resolution of the common issues are outweighed by individual issues presented for adjudication." In re Prudential Ins. Co. of Am. Sales Practices Litig., 962 F. Supp. 450, 511 (D.N.J. 1997).
PaineWebber states that because individual factual questions predominate over questions of fact or law common to the class, this case is not suitable for class adjudication. PaineWebber argues that this case is not similar to a securities class action involving uniform written misrepresentations. Instead, according to PaineWebber, class adjudication of this case would require evidence of the alleged oral misrepresentations made by each PaineWebber broker to each of the 6, 840 putative classmembers.
Courts have permitted class resolution of claims based upon oral misrepresentations where those misrepresentations were made pursuant to a uniform written "script." See Prudential, 962 F. Supp. at 515-16. In such cases, a uniform written script serves to "further guarantee the consistency of accompanying oral misrepresentations." Id. at 515-16.
The Prudential court found that the defendant had disguised a common life-insurance and churning scheme by the use of oral misrepresentations that were based upon uniform written materials and "did not vary appreciably among classmembers." Id. at 513-14. The court noted that the defendant had trained its sales agents to make uniform sales pitches, had provided them with uniform scripts, and had required that they use pre-approved written marketing materials that contained identical misrepresentations and omissions. Id. at 515-16. The court ruled that these uniform written materials served to "further guarantee the consistency of accompanying oral misrepresentations," and certified the class for settlement purposes. Id.
In re Hartford Sales Practices Litigation, on the other hand, involved oral misrepresentations that were not made pursuant to a uniform script. 192 F.R.D. 592 (D. Minn. 1999). There, the court refused to certify a putative class of plaintiffs who alleged, as in this case, that the defendant had fraudulently sold them life-insurance policies masquerading as "retirement/investment plans." Id. at 594-95.
The plaintiffs, in fact, alleged that the defendant had marketed and sold the life-insurance policies to them under either one of three fraudulent schemes: (1) a "vanishing premium scheme"; (2) a churning scheme; (3) and a "retirement/investment plan" scheme. Hartford, 192 F.R.D. at 594-95.
The Plaintiffs in Hartford submitted materials showing that the defendant promoted its insurance policies as retirement plans, and the defendant did not deny producing those materials. Id. at 605. Nevertheless, the defendant stated that it never produced any uniform script, presentation, or marketing materials. Id. The defendant argued that the plaintiffs had purchased the policies in reliance on the brokers' representations, rather than on any materials produced by the defendant. Id.
The Hartford court noted that "the existence of common misrepresentations [generally] obviates the need to elicit testimony as to each element of a fraud or misrepresentation claim, especially where written misrepresentations are involved." Id. at 605-06 (quoting Cone v. Metropolitan Life Ins. Co., 696 N.E.2d 1001, 1004 (Ohio 1998). The court nevertheless concluded that individual issues regarding each plaintiff's reliance on the oral representations made to him rendered class resolution of the claims "impracticable." Id. The court found that the brokers' oral representations and the plaintiffs' reliance on those representations could vary from incident to incident. Id. at 606-07; see also Rothwell v. Chubb Life Ins. Co., 191 F.R.D. 25, 31 (D.N.H. 1998) (denying class certification where the plaintiffs conceded that the materials upon which the alleged misrepresentations were based were not uniform, but instead were tailored to the financial status of the customer by one of five computer programs).
The Hartford court compared its case to Peoples v. American Fidelity Life Insurance Co., 176 F.R.D. 637 (N.D. Fl. 1998), aff'd in part and rev'd in part, 184 F.3d 822 (11th Cir. 1999) (unpublished table decision) (discussed in Hartford, 192 F.R.D. at 606-07).
Peoples involved allegations that the defendant trained sales agents to sell life-insurance policies based upon a "canned" uniform sales pitch that contained fraudulent misrepresentations. 176 F.R.D. at 639. The magistrate judge found that although the defendant urged sales agents not to stray from the "canned" sales pitch, there was no proof of nationwide consistency among individual sales pitches. Id. In fact, there was evidence of inconsistencies in the representations made to the putative classmembers. Id. at 644.
Peoples was subsequently affirmed in part and reversed in part by the Eleventh Circuit. Peoples v. American Fidelity Life, 184 F.3d 822 (11th Cir. 1999). Although the Eleventh Circuit reported its ruling in a table decision without publishing its opinion, the unpublished opinion itself did not address the class certification issue.
In the case before this Court, the Plaintiffs have submitted two alleged sales scripts used by PaineWebber brokers to sell the Provider.See Johnson Reply Aff. Exs. C, D) Both scripts describe the Provider as a retirement program similar to an IRA. However, the two scripts are not identical.
These two scripts are set forth in the Amended Reply Affidavit submitted by the Plaintiffs' attorney, James W. Johnson, Esq. PaineWebber opposes this Court's acceptance of the exhibits in that affidavit for lack of foundation. The Court accepts the Amended Reply Affidavit of James W. Johnson, Esq. for filing in connection with the Plaintiffs' motion for class certification.
One script briefly introduces the Provider to the prospective buyer, describing it as a "systematic savings program" that "will compound under a tax umbrella just like IRA." (See id. Ex. D). In the script, the sales agent asks the prospective buyer if the Provider program is something he would like to know more about, asks whether the prospective buyer uses tobacco, and schedules a follow-up explanatory meeting. (See id.).
The other script, labeled "New York Version," is more detailed, but it also expressly offers to provide additional information to prospective buyers. (See id. Ex. C). It describes the Provider as a "supplemental retirement program" to which one contributes $2000 annually, "just like the contribution [one makes] to an IRA." (See id.). It also states that the Provider "offers" "one other important benefit . . . an income tax-free death benefit." (See id.). It concludes by asking permission to send the prospective buyer a written illustration of the program, tailored to her age, and it instructs the sales agent to "[s]end personalized overview illustrations and applications." (See id.)
PaineWebber has submitted still other scripts and solicitation materials. PaineWebber submitted a sales kit it had produced for the Provider that included a sample phone script for its sales agents. (See Norris Aff. Ex. A at 20, Ex. C). The script describes the Provider as a "retirement product" that "featur[es] a universal life insurance policy from First Capital Life." (See id.). It, too, requests permission to send the prospective buyer additional information about the Provider. (See id.). For potential buyers who initially decline the offer for more information, it further states that "Provider is a universal life insurance policy that offers a competitive rate of return plus tax-free income before and after you retire." (See id.)
In addition to the phone script, the PaineWebber Provider sales kit included two sample letters for potential customers. One letter briefly introduces the Provider's features and requests that the customer call a printed phone number for more information. (See id. Ex. A at 19) The other letter also briefly introduces the Provider's features, and then invites the customer to return an enclosed coupon or to call a printed number in order to attend a free informational seminar. (See id. at 18)
Moreover, PaineWebber has submitted sworn affidavits from five brokers (including the broker who sold Parry her Provider, see Franken Aff. ¶ 3) who state that they "did not follow or use any suggested sales scripts or telephone scripts when discussing the Provider with customers," (see Awad Aff. ¶ 5; Franken Aff. ¶ 5; Jacquinot Aff. ¶ 5; Sabota Aff. ¶ 5; Yochum Aff. ¶ 5), and further state that they were not required to do so by PaineWebber. (See Awad Aff. ¶ 6; Franken Aff. ¶ 5; Jacquinot Aff. ¶ 6; Sabota Aff. ¶ 6; Yochum Aff. ¶ 6). One broker, in a sworn affidavit, stated that although he could not remember whether he used a sales script in connection with the Provider, he "certainly would not have followed fit] word-for-word" because he "never follow[s] suggested sales scripts word-for-word." (See Connolly Aff. ¶ 5).
Unlike Prudential, the representations about the Provider were not made pursuant to a uniform sales script and training program. In all, the parties have submitted three different phone scripts and two solicitation letters. These variously describe the Provider as a "savings program," as a retirement program," as a "retirement product" "featuring a universal life insurance policy," and as, simply, a "universal life insurance policy." They all contemplate the provision of additional information before purchase, either by telephone, by mail, in a meeting, or in a seminar. At least five Provider sales agents have sworn that they did not use any script at all.
In the amended complaint, the Plaintiffs referenced two PaineWebber training videotapes, both of which were made after Moore and Parry purchased their Provider policies. (See Complt. ¶¶ 41-48; Def.'s Opp. Mem. at 7-8; Tr. 7-8). According to the Plaintiffs at oral argument, these training videos show "top selling PaineWebber agents . . . telling other brokers how they've already sold the [P]rovider . . . by misrepresenting the nature of the product." See Tr. 7-8). The Plaintiffs state that the brokers "encourag[ed] other brokers to deceive their customers for purposes of selling the [P]rovider." (See id.) Nevertheless, PaineWebber brokers have stated under oath that they do not recall seeing either of these videos, but that if they had, they "would have taken from them suggestions that [they] considered helpful and rejected others" that were not helpful. (See, e.g., Awad Aff. ¶ 8).
The Court finds that these videotapes do not make up for the lack of uniform written materials in this case. They were made after both Plaintiffs purchased their Provider policies, and so could not have served as a uniform basis for any misrepresentations allegedly made to the Plaintiffs. Indeed, those videotapes apparently served as yet another information source for many PaineWebber sales agents, further demonstrating the lack of uniform sales and training materials in this case.
In light of these circumstances, it would be difficult for this Court to conclude, as in Prudential, that PaineWebber's representations about the Provider "did not vary appreciably among classmembers." Instead, this case would require proof of each classmember's reliance on misrepresentations by PaineWebber brokers, which could vary significantly from conversation to conversation, meeting to meeting, and seminar to seminar. This predominance of individual proof issues and the difficulties that it would create from a case-management perspective render this case unsuitable for class resolution.
CONCLUSION
The Court grants the Plaintiffs' motion for reconsideration with respect to the Amended Reply Affidavit of James W. Johnson, Esq., but denies the Plaintiffs' motion for class certification pursuant to Fed.R.Civ.P. 23(b)(3).