The opinion of the court was delivered by: JOHN GRADY, Senior District Judge
Before the court are defendants' motions to dismiss the Third
Amended Complaint pursuant to Federal Rules of Civil Procedure
12(b) (6) and 9(b), and the pleading requirements of the Private
Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b).
For the reasons set forth below, the motions are denied.
This action arises out of the 2001 purchase of a variable life insurance policy ("the 2001 Policy" or "the Policy")
insuring plaintiff Richard J. Stephenson. In addition to
Stephenson, plaintiffs are several of his related partnerships
and corporations: Stephenson Master LP, an Illinois limited
partnership of which Stephenson is the limited partner;
Stephenson/Zion Insurance Trust, an Illinois trust and owner and
beneficiary of a 1998 life insurance policy covering Stephenson;
Midwestern Regional Medical Center, Inc., an Illinois corporation
of which Stephenson is the Chairman and a shareholder ("MRMC"),
and Cancer Treatment Centers of America, Inc., another Illinois
corporation, of which Stephenson is the Chairman and sole
shareholder ("CTCA").
Defendant Hartford Life and Annuity Insurance Co., a
Connecticut company and subsidiary of defendants Hartford Life,
Inc. and Hartford Life Insurance Co., Inc. (collectively,
"Hartford"), issued the 2001 Policy. Defendant Michael Kohn is a
Missouri lawyer, specializing in tax law, and served as
plaintiffs' tax lawyer from 1997 through May 2002. Defendant
Gerald Ricken is an insurance salesman, licensed in Illinois and
Colorado, who had an agency agreement with Hartford. Defendant
Applied Innovative Monetary Solutions, LLC ("AIMS") is a Missouri
company through which Kohn and Ricken conducted business. On
information and belief, Kohn was the Chairman and founder of
AIMS, and Ricken was its President and CEO. On information and
belief, Kohn and Ricken shared the costs of, and income generated
by, AIMS. Kohn and Ricken are brothers-in-law and shared office
space. Defendant Ogilvie Security Advisors Corp. is an Illinois
broker-dealer and member firm of the National Association of
Securities Dealers ("NASD"). Ricken was a NASD-registered
representative and broker of Ogilvie. Thus, Ricken conducted his
business as a broker of Ogilvie, through AIMS, and, on
information and belief, contributed his commissions from the sale
of Hartford variable life insurance policies to AIMS.
In 1998, Stephenson Master, Stephenson/Zion, MRMC and CTCA
purchased two variable life insurance policies insuring
Stephenson. The first policy, issued by Hartford, insured
Stephenson in the amount of $13 million ("the 1998 Hartford
Policy"). The second policy, issued by American General Life
Insurance Company, insured Stephenson in the amount of $27
million ("the American General Policy"). Together, then, the 1998
policies provided Stephenson with $40 million in coverage.
Stephenson/Zion is the owner and beneficiary of the 1998 Hartford
Policy and Stephenson Master is the owner and beneficiary of the
American General Policy.
Based on Kohn's advice, plaintiffs structured split-dollar and
collateral assignment agreements for each of the 1998 policies,
under which MRMC is the assignee of the 1998 policies and MRMC,
CTCA, Stephenson/Zion and/or Stephenson Master pay the
premiums.*fn2 C. The 2001 Policy
On January 27, 2001, the Internal Revenue Service clarified its
prior rulings regarding the taxation of split-dollar life
insurance arrangements and provided taxpayers with interim
guidance on the requirements for such tax treatment in IRS Notice
2001-10, 2001-5 I.R.B. 459 ("the IRS Notice" or "the Notice").
The Notice provided, inter alia, that an employer's payments
under a split-dollar arrangement could be characterized as loans
for tax purposes, and set forth guidelines for determining the
characterization and tax treatment of such loan split-dollar
arrangements.
Shortly after issuance of the IRS Notice, Hartford, Kohn,
Ricken and AIMS approached plaintiffs and represented that the
IRS Notice required the purchase of a new universal variable life
insurance policy, and further, that plaintiffs could achieve
substantial cost savings by replacing the 1998 policies with a
new policy.
In May 2001, Kohn, Ricken and AIMS arranged with Hartford and Ogilvie for the issuance and sale of the 2001 Policy, another
Hartford policy, which insured Stephenson in the amount of $42
million. Hartford issued the 2001 Policy as a Colorado policy on
or about May 22, 2001. Ricken sold the 2001 Policy to plaintiffs
through AIMS as a registered representative and broker of
Ogilvie, after signing Hartford's Policy Application for the 2001
Policy as Hartford's "Licensed Agent."
D. Alleged Misrepresentations
Between February and June 2001, Hartford, Kohn, Ricken and AIMS
engaged in oral and written communications with each other
relating to the 2001 Policy. Through their communications,
Hartford representatives including one or more "high-level"
executives, product designers, internal actuaries, and attorneys
made the following representations to Kohn, Ricken and/or AIMS:
(i) plaintiffs had to purchase a new universal variable life
insurance policy with $42 million in coverage to meet their "life
insurance, tax, and investment objectives under the IRS Notice;
(ii) the total costs (including sales charges and premium tax
costs) of the 2001 Hartford Policy would be 60% less than the
costs that plaintiffs were incurring under the 1998 policies;
(iii) plaintiffs could make up to $4 million in annual
"unscheduled premium payments" and then withdraw or "pass
through" up to $4 million without payment of any costs under the
2001 Policy; and (iv) plaintiffs were required to reduce the
coverage on Stephenson under the American General Policy from $27 million to $3 million, and cancel the 1998 Hartford
Policy, as preconditions to issuing the 2001 Policy. According to
plaintiffs, Hartford knew or should have known that Kohn, Ricken,
and/or AIMS would communicate these representations to
plaintiffs. Alternatively, plaintiffs allege, on information and
belief, that Hartford directed them to do so.
Kohn, Ricken and/or AIMS did convey Hartford's representations
to plaintiffs in numerous in-person meetings, correspondence and
telephone conversations between February and June 2001. During
these discussions, Kohn, Ricken and/or AIMS attributed the
statements to Hartford. In addition, Kohn, Ricken and/or AIMS
made further representations of their own. Specifically, on
either February 1 or 2, 2001, at the AIMS office in St. Louis,
Missouri, Kohn described the proposed 2001 Policy to Phillip
Picchietti, CFO of MRMC and CTCA and a financial adviser to
Stephenson and his family, and to Stephen Bonner, CEO of CTCA,
who joined in the meeting by telephone. Then, on February 2,
2001, Kohn presented the 2001 Policy proposal to Stephenson in a
face-to-face meeting. Others present at the February 2 meeting
included Picchietti, Dennis Lynde, "Tax Director of MRMC and
CTCA," and Michael Coulter Smith, an MRMC boardmember and Trustee
of Stephenson/Zion and Stephenson Master. Ricken attended a
portion of these meetings.
At these meetings, it was represented to plaintiffs that: (i) the IRS Notice required plaintiffs to purchase a new life
insurance policy to obtain the tax treatment authorized by the
Notice, and to achieve their other investment and life insurance
objectives; (ii) Hartford offered such a policy; and (iii)
plaintiffs "could not use their existing 1998 policies under the
IRS Notice." Kohn repeated these representations during a
February 16, 2001 telephone conference with Picchietti, Lynde and
Bonner and others. Then, at a March 1, 2001 meeting with
Picchietti, Lynde and Smith, again at AIMS's office, Kohn and
Ricken made the following representations: (i) the Notice
required plaintiffs to purchase a new policy, with approximately
$40 million in coverage, for plaintiffs to obtain the tax
treatment authorized by the Notice, and to achieve their other
investment and life insurance objectives, including the ability
make up to $4 million in annual "unscheduled premium payments"
and then withdraw or "pass through" up to $4 million without
payment of any costs; (ii) the policy terms and tax benefits
including the absence of costs on unscheduled premiums were
possible only "because of the tax treatment recently approved in
the IRS Notice and because of a new type of policy being offered
by Hartford"; (iii) plaintiffs would have to reduce the coverage
under the American General Policy and cancel the 1998 Hartford
Policy; and (iv) the total costs of purchasing the 2001 Policy
would be "much lower" than ...