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OTTO v. VARIABLE ANNUITY LIFE INS. CO.

January 19, 1990

BEVERLY J. OTTO, Individually and on behalf of all others similarly situated, et al., Plaintiff,
v.
VARIABLE ANNUITY LIFE INSURANCE COMPANY, et al., Defendants



The opinion of the court was delivered by: ASPEN

 MARVIN E. ASPEN, UNITED STATES DISTRICT JUDGE:

 The named plaintiff, Beverly Otto, brings this class action against Variable Annuity Life Insurance Company and other affiliated companies (collectively referred to as "VALIC"). Otto seeks to recover for alleged violations of ยง 10(b) of the Securities Exchange Act of 1934 ("Act"), as well as pendent state law claims. There are several pending motions. Otto and VALIC have each moved for summary judgment. Otto seeks an order of default against the individual defendants on Count IV of the amended complaint. Otto also moves to expand the class and add additional named plaintiffs. Finally, Otto has filed a motion to approve class action notice. As explained below, these motions are resolved as follows; VALIC's motion for summary judgment is denied; Otto's motion for summary judgment is denied; the motion to expand the class and add additional named plaintiffs is denied; the motion to approve notice to the class is granted in part and denied in part.

 Background

 Beverly Otto represents a class of Illinois investors who participated in VALIC's fixed annuity plan between October 17, 1975 and August 2, 1982. Otto claims that VALIC *fn1" failed to disclose the method by which interest was calculated. According to Otto, this nondisclosure constitutes a violation of the Securities Act of 1934, breach of contract and common law fraud.

 Otto claims that VALIC should have disclosed that it used the "banding" or "new money" method of calculating interest. Under the banding method, the current rate of interest is paid only on deposits made during the current period. Prior contributions continue to earn the rate of interest declared during the period in which these contributions were made. An alternative to the banding method is the "portfolio" method. Under the portfolio method, the same rate of interest is paid on all contributions.

 On April 11, 1985, we granted VALIC's motion for summary judgment on the ground that the fixed annuity was not a security. Otto appealed to the Seventh Circuit. The Seventh Circuit initially affirmed this order. However, VALIC subsequently filed a petition to amend this order, and disclosed for the first time that it claimed the discretionary right to alter the interest rate paid on past bands. The Seventh Circuit then reversed our order and issued an opinion in which it held that the annuity is a security.

 Discussion

 A. VALIC'S Motion For Summary Judgment.

 "A motion for summary judgment should be granted only when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law." Checkers, Simon & Rosner v. Lurie Corp., 864 F.2d 1338 (7th Cir. 1989) (citation omitted). The moving party bears the burden of establishing the absence of any disputed facts. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S. Ct. 2548, 2553, 91 L. Ed. 2d 265 (1986). If, however, the nonmoving party bears the burden of proving an issue at trial, it also bears the burden of presenting sufficient facts on summary judgment from which a trier of fact could find in its favor, and the moving party need only "[point] out to the District Court . . . that there is an absence of evidence to support the nonmoving party's case." Id. at 2554; Beard v. Whitley County REMC, 840 F.2d 405, 410 (7th Cir. 1988). In deciding a motion for summary judgment, the court must read all facts in the light most favorable to the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S. Ct. 2505, 2513, 91 L. Ed. 2d 202 (1986); Richardson v. Penfold, 839 F.2d 392, 394 (7th Cir. 1988).

 VALIC argues that it is entitled to summary judgment on the securities fraud claim. It advances several arguments to support the motion. First, VALIC asserts that fixed annuity is not a security. Second, VALIC claims that the nondisclosure of banding caused no legally cognizable harm to Otto. Third, VALIC insists that Otto's claims are time barred. Finally, VALIC argues that the alleged fraud was not in connection with the purchase or sale of a security, as required by the Act. We find that these arguments do not warrant summary judgment in VALIC's favor.

 In addition, VALIC urges us to grant summary judgment in favor of AG and Separate Account, two of the corporate defendants. VALIC asserts that Otto has failed to demonstrate that they played any role in the alleged fraud. We also deny this portion of the motion.

 In Otto v. Variable Annuity Life Ins., 814 F.2d 1127 (7th Cir. 1986), the Seventh Circuit explicitly held that the fixed annuity involved in the present case was a security within the meaning of the Act. Nevertheless, Otto suggests that we reconsider this finding, and hold that the annuity is not a security. Otto claims that we have this authority because the Seventh Circuit's decision was ...


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