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Paul M. Prusky, et al v. Allstate Life Insurance Company

May 19, 2011

PAUL M. PRUSKY, ET AL.,
PLAINTIFFS
v.
ALLSTATE LIFE INSURANCE COMPANY,
DEFENDANT



The opinion of the court was delivered by: Ditter, J.

MEMORANDUM A N D ORDER

Plaintiffs bought annuities from the defendant with the ability to direct the purchase and sale of the mutual funds in which the annuity contracts were invested. For several years, defendant honored the plaintiffs' market-timing trade orders, but then refused to do so. Plaintiffs contend that the defendant thereby breached the annuity contracts and seek lost-profit damages. The matter is now before me on the defendant's motion for partial summary judgment to limit the time frame during which the alleged damages were incurred.

For the reasons that follow, I will grant the defendant's motion.

RELEVANT FACTS

The plaintiffs purchased seven Variable Annuity II contracts from Allstate, but used just three policies to trade money among different sub-accounts: 325934, 325937, and 326039. (Jt. Stmt. Facts ¶ 4.) By the Spring of 2005, the sub-accounts were invested in the following mutual funds: Morgan Stanley Variable Investment Series, Putnam Variable Trust, Franklin Templeton Variable Product Trust, Alliance Bernstein Variable Products Annuity Fund, Inc., AIM Variable Insurance Funds, Inc., and Van Kampen Life Investment Trust (collectively "VA II Funds"). (Id. ¶ 3.)

The SEC adopted Rule 22c-2 (17 C.F.R. § 270.22c-2) on March 11, 2005. As accurately summarized by the parties, Rule 22c-2 "requires financial intermediaries that submit orders to mutual funds on behalf of their customers to enter into shareholder information agreements with the mutual fund companies and to follow instructions from the fund companies to restrict or prohibit purchases or exchanges of fund shares that violate policies established by the fund to eliminate or reduce any dilution of the value of the outstanding securities issued by the fund." (Jt. Stmt. Facts ¶ 7.) See also 17 C.F.R. § 270.22c-2(c)(5).

Allstate did not enter into any Shareholder Information Agreements, pursuant to Rule 22c-2, until April 2007. (Jt. Stmt. Facts ¶ 11; id. at Ex. E.)

In October of 2005, the VA II Funds "instructed Allstate to prohibit Plaintiffs from making further purchase payments or transfers using Policy numbers 325934, 325937, and 326039." (Jt. Stmt. Facts ¶ 8.) Allstate did not request that any of the VA II Funds permit short-term trading.

In 2005, there were mutual funds available that affirmatively permitted such trading, including ProFunds, Rydez Variable Trust, and Potomoc Insurance Trust. (Id. at ¶¶ 13-14.) Allstate did not make available to plaintiffs for investment in the annuity contracts any mutual funds that permitted short-term trading. (Id. at ¶ 15.)

DISCUSSION

Allstate asserts that the plaintiffs cannot recover damages after October 2005 because the the VA II Funds, pursuant to Rule 22c-2, barred the type of trading in which the plaintiffs were involved. As noted above, Rule 22c-2 requires intermediaries*fn1 to "[e]xecute any instructions from the fund to restrict or prohibit further purchases or exchanges of fund shares by a shareholder who has been identified by the fund as having . . . violate[d] policies established by the fund for the purpose of eliminating or reducing any dilution of the value of the outstanding securities issued by the fund." 17 C.F.R. § 270.22c-2(c)(5)(ii).

The Pruskys argue that they are entitled to damages to the present day because:

(1) Allstate was not obligated to follow the funds' instructions restricting plaintiffs' trades; (2) Allstate was prohibited from sharing information with the funds until the April 2007 Shareholder Information Agreements were signed; and (3) Allstate was obligated to provide mutual funds that allowed ...


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