McCarran-Ferguson Act. Reverse Preemption Bars RICO Claims Alleging That Reinsurance Transactions by an Annuity Issuer with Affiliates Were a Sham, Resulting in the Material Misrepresentation of its F

Reinsurance   |   June 22, 2017
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Ruling in Plaintiff’s Favor Would Interfere with State Regulation of Insurance

Ludwick v. Harbinger Group, Inc. et al., 854 F.3d 400 (8th Cir. 2017)

Case at a Glance

Plaintiff sued an annuity issuer and other companies, alleging violation of RICO as a result of alleged “sham” reinsurance transactions with affiliates that resulted in a material and serious misstatement    of the financial condition of the annuity issuer, and in the value of an annuity purchased from that annuity issuer being less than represented and paid for. A federal district court dismissed the RICO claims as barred by the McCarran-Ferguson Act, and the United States Court of Appeals for the Eighth affirmed, holding that a ruling by a court in plaintiff ’s favor would constitute intrusion and interference with the state  regulation  of insurance.

Summary of Decision

Plaintiff bought an annuity from Fidelity & Guaranty Insurance Company (“F&G”), allegedly based in part on F&G’s apparent financial good health. It is alleged that F&G’s financial condition was much weaker than portrayed in its financial reports and marketing materials due to allegedly “sham” reinsurance transactions it entered into with affiliated companies that were accounted for in a manner that did not comply with the accounting principles promulgated by the National Association of Insurance Commissioners. It is alleged that had the transactions been accounted for properly, instead of reporting billion-dollar surpluses in 2011-2013, F&G would have had to report that its liabilities exceeded its assets. It was further alleged that F&G and the other defendants committed numerous acts of mail and wire fraud, and violated the Racketeer Influenced and Corrupt Organizations Act (“RICO”), by distributing paper and electronic copies of deceptive financial reports and marketing materials.

The defendants moved to dismiss on the basis that the RICO claims were barred by the McCarran- Ferguson Act (15 U.S.C. §1012), which provides in part: “No 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.” The district court granted the motion to dismiss and the United States Court of Appeals for the Eighth Circuit affirmed.

The Eighth Circuit stated that the only question before it was whether the alleged RICO claims would “impair” state insurance regulation. In evaluating this question the court looked to the specific allegations of the Complaint and the responsibilities of state insurance regulators. The Complaint alleged not just that a “proper” accounting for the reinsurance transactions would have shown that F&G’s financial condition was weaker than publicly portrayed, but that it would have shown that F&G’s liabilities exceeded its assets. The court noted that questions about the solvency of insurance companies are squarely within the regulatory oversight by state insurance departments and that reinsurance transactions with affiliates, the type of transactions attacked by the Complaint, must be submitted to the insurance commissioners of many states before they can be consummated.

The Court of Appeals concluded that no court could rule in plaintiff ’s favor “without holding, more or less explicitly, that state insurance regulators were wrong to let the transactions proceed,” and that such an inquiry “would drag the court right back into second-guessing state regulators’ oversight of F&G’s solvency and stability.” The court found that this type of activity would constitute “intrusion and interference” with the state regulation of insurance companies, and was prohibited by the McCarran- Ferguson Act.

The Court of Appeals emphasized that plaintiff ’s loss in this case reflects Congress’ deference to the state regulation of the business of insurance, and was not a ruling on the truth or falsity of the allegations of the alleged “financial machinations” by F&G. According to the opinion, plaintiff did not ask for leave to amend the Complaint until oral argument in the Court of Appeal, which was too late. Therefore, the Complaint was dismissed with prejudice.

Reprinted with permission of Thomson Reuters, Inc. All rights reserved.

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