Jeffrey A. Cochran v. The Penn Mutual Life Insurance Company ( 2022 )

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[PUBLISH]
In the
United States Court of Appeals
For the Eleventh Circuit
____________________
No. 20-13477
____________________
JEFFREY A. COCHRAN,
Individually and on Behalf of All Others Similarly
Situated,
Plaintiff-Appellant,
versus
THE PENN MUTUAL LIFE INSURANCE COMPANY,
HORNOR, TOWNSEND & KENT, LLC,
Defendants-Appellees.
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2 Opinion of the Court 20-13477
____________________
Appeal from the United States District Court
for the Northern District of Georgia
D.C. Docket No. 1:19-cv-00564-JPB
____________________
Before WILSON, LAGOA, and ED CARNES, Circuit Judges.
ED CARNES, Circuit Judge:
Jeffrey Cochran appeals the district court’s dismissal of his
putative class action claims against the brokerage firm Hornor,
Townsend & Kent (HTK) and its parent company The Penn Mu-
tual Life Insurance Company.1 The complaint alleges that HTK
breached its fiduciary duties under Georgia law and that Penn Mu-
tual aided and abetted that breach. The district court concluded
that the Securities Litigation Uniform Standards Act barred
1 The court granted the defendants’ motion to compel arbitration on
Cochran’s individual claims, but he does not challenge that part of the judg-
ment. The court’s Rule 12(b)(1) dismissal of the remaining claims had the
practical effect of ending the litigation on the merits, making the judgment
final. See 9 U.S.C. § 16(a)(3); Green Tree Fin. Corp. Ala. v. Randolph, 531
U.S. 79, 89 (2000) (“We therefore conclude that where, as here, the District
Court has ordered the parties to proceed to arbitration, and dismissed all the
claims before it, that decision is ‘final’ within the meaning of § 16(a)(3), and
therefore appealable.”); see also Martinez v. Carnival Corp., 744 F.3d 1240,
1243–44 (11th Cir. 2014) (“The Supreme Court has adopted a functional test
for finality, examining what the district court has done, and has reiterated that
a decision is final if it ends the litigation on the merits and leaves nothing for
the court to do but execute the judgment.”) (quotation marks omitted).
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20-13477 Opinion of the Court 3
Cochran from using a class action to bring those state law claims.
And the court was right.
I.
The district court dismissed Cochran’s class allegations un-
der Rule 12(b)(1), accepting as true the facts alleged in Cochran’s
amended complaint, which is the operative one and which we will
refer to simply as the complaint. See Lord Abbett Mun. Income
Fund, Inc. v. Tyson, 671 F.3d 1203, 1205 (11th Cir. 2012). We ac-
cept the facts as alleged, just as the district court did. See id.After the company where Jeffrey Cochran worked was ac-
quired and his 401(k) plan was terminated, he transferred his 401(k)
funds into a rollover individual retirement account. He opened
that account with HTK, a brokerage firm and investment adviser
that is a wholly owned subsidiary of Penn Mutual. The account
was a “tax-qualified” or “tax deferred” one, meaning it had the tax
advantage of allowing for deferral of taxes on the earnings made by
investments held in the account. After Cochran opened the ac-
count, an HTK advisor “urged and directed” him “to invest his re-
tirement funds in a Penn Mutual variable annuity.” He followed
that advice and did so.
A variable annuity is a “hybrid insurance and investment
product.” One benefit of a variable annuity is that it offers the
same kind of tax deferral as an individual retirement account. But
those tax benefits are “unnecessary and redundant” when the vari-
able annuity is held within an account that is itself already tax
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4 Opinion of the Court 20-13477
advantaged. According to the complaint, a variable annuity is not
a suitable investment choice for a tax advantaged account because
it causes the investor to pay high fees without getting an extra tax
benefit. An account that is tax deferred in two different ways is
no better than an account that is tax deferred in only one way.
Cochran’s choice to invest in a variable annuity has not
caused him to lose any of his investment, but he alleges that he has
not gained as much as he might have if he had invested in some-
thing else. According to the complaint, Cochran’s initial invest-
ment in February 2013 of $365,274.83 had grown to $498,313.63 by
September 2018. Based on Cochran’s estimation, if he had in-
vested in something different during that time period, like a low-
cost S&P 500 index, he could have avoided paying HTK fees and
grown his investment to $712,435.99.
II.
Cochran filed a putative class action lawsuit alleging that
HTK breached its fiduciary duties to him and its other Georgia cli-
ents who invested in Penn Mutual’s variable annuity. He also al-
leged that Penn Mutual, HTK’s parent company, aided and abetted
the breach. Those claims are based solely on Georgia state law.
The complaint alleges that “brokerage firms make more
money selling variable annuities than they make selling other prod-
ucts,” giving them a “true conflict of interest” that leads them to
“target sales of variable annuities to persons seeking to invest [in]
tax-qualified retirement funds.” The complaint asserts that the
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20-13477 Opinion of the Court 5
asserted cause of action derives from Georgia state law. It points
specifically to Holmes v. Grubman, 691 S.E.2d 196 (Ga. 2010), as
setting out the “applicable standard.” According to the com-
plaint, Holmes holds that a brokerage firm owes a duty to holders
of nondiscretionary accounts, like the one Cochran had, which are
accounts that require the broker to get the client’s authorization
before making any transaction. The complaint quotes Holmes as
stating that the fiduciary duty is “heightened” when a broker is
“recommending an investment which the holder has previously re-
jected or as to which the broker has a conflict of interest.”
Also according to the complaint, “HTK’s uniform practice
of recommending that its clients use tax-qualified funds to purchase
variable annuities constitutes just such a conflict of interest” be-
cause it ensured that higher fees will be paid to the firm out of the
client’s pocket (or account). The complaint alleges that the bro-
kerage account agreement assures clients that HTK will make rec-
ommendations based on product suitability and the client’s invest-
ment objectives and needs. But “[i]nstead of recommending ap-
propriate investments for [Cochran’s] IRA, HTK steered that
money to variable annuities that would generate larger fees for
HTK and Penn Mutual.” The complaint further alleges that “bro-
kers are paid more for selling annuities than other products” which
is “the conflict that is at the heart of this case.” It insists that the
lawsuit “does not challenge the disclosures at issue here, but in-
stead that this practice is a breach of the fiduciary duties that bro-
kerage firms owe to their customers under Georgia law.”
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6 Opinion of the Court 20-13477
The complaint defines the members of the putative class as
having all four of these characteristics: (1) Georgia residents,
(2) who were HTK customers, and (3) who purchased a variable
deferred annuity issued by Penn Mutual (4) for use in a tax qualified
account.
HTK moved to dismiss Cochran’s class action allegations,
arguing among other things that the use of a class action is barred
by federal law. 2 The district court granted the motion, conclud-
ing that federal law did bar the class action. It pointed to the Se-
curities Litigation Uniform Standards Act, commonly called
SLUSA, which generally prohibits class actions based on state law
claims that allege material misrepresentations or omissions in con-
nection with the purchase or sale of a security.
The district court concluded that SLUSA applies because
Cochran alleges that HTK misrepresented or omitted a material
fact when selling him the variable annuity. It reached that con-
clusion because “the essence of the Complaint is HTK’s overall
fraudulent practice of recommending variable annuities in order to
make more money on fees and commissions.” The court empha-
sized that the complaint “repeatedly references HTK’s advice, as-
sistance and recommendations,” and that it alleges Cochran
bought the variable annuity “because of what HTK represented
2 HTK also moved to compel arbitration on Cochran’s individual claims,
which Cochran did not challenge. As we’ve already noted, the district court
granted the motion, which Cochran does not challenge.
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20-13477 Opinion of the Court 7
when providing its advice and recommendations.” That made
the essence of the complaint “the unlawful marketing of tax-de-
ferred annuities, either by misrepresenting their suitability for tax-
deferred retirement plans, or by failing to disclose their unsuitabil-
ity for such accounts.” It was on that basis the court dismissed
Cochran’s class action allegations.
III.
We review de novo the court’s conclusion that SLUSA’s bar
applies. See Brink v. Raymond James & Assocs., Inc., 892 F.3d
1142, 1145 (11th Cir. 2018).
SLUSA’s background and purpose are well-trod territory.
The first steps start with the Private Securities Litigation Reform
Act, or PSLRA. That act “institut[es] heightened pleading re-
quirements for class actions alleging fraud in the sale or purchase
of national securities” and requires a “mandatory stay of discovery
until the district court [can] determine the legal sufficiency of the
class action claims.” Behlen v. Merrill Lynch, 311 F.3d 1087, 1091
(11th Cir. 2002). Congress passed the PSLRA to deal with strike
suits, which are meritless lawsuits filed to justify burdensome dis-
covery and extort nuisance settlements. See id. Many plaintiffs
responded by seeking to circumvent the PSLRA by abandoning
federal law altogether and basing their securities fraud class actions
solely on state law. Id.; see also Merrill Lynch, Pierce, Fenner &
Smith Inc. v. Dabit, 547 U.S. 71, 82 (2006). Apparently displeased
with the attempts to undermine its objectives, Congress reacted by
enacting SLUSA. That legislation provides in relevant part:
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8 Opinion of the Court 20-13477
(b) Class action limitations
No covered class action based upon the statutory or
common law of any State or subdivision thereof may
be maintained in any State or Federal court by any
private party alleging —
(1) an untrue statement or omission of a material fact
in connection with the purchase or sale of a covered
security; or
(2) that the defendant used or employed any manipu-
lative or deceptive device or contrivance in connec-
tion with the purchase or sale of a covered security
15 U.S.C. § 77p(b).
The Supreme Court has instructed us that SLUSA’s text is to be
broadly construed. See Dabit, 547 U.S. at 84–86. 3
SLUSA’s bar applies when “(1) the suit is a ‘covered class ac-
tion,’ (2) the plaintiffs’ claims are based on state law, (3) one or
more ‘covered securities’ has been purchased or sold, and (4) the
3 SLUSA’s effect is sometimes called “preemption,” but “SLUSA does not ac-
tually pre-empt any state cause of action” and it “does not deny any individual
plaintiff, or indeed any group of fewer than 50 plaintiffs, the right to enforce
any state-law cause of action that may exist.” Dabit, 547 U.S. at 87. Instead,
it “simply denies plaintiffs the right to use the class-action device to vindicate
certain claims.” Id. For that reason we will refer to SLUSA’s effect as “bar-
ring” instead of “preempting.” Cf. Hampton v. Pacific Investment Mgmt.
Co., 869 F.3d 844, 845–46 (9th Cir. 2017) (explaining reasons for doing the
same).
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20-13477 Opinion of the Court 9
defendant [allegedly] misrepresented or omitted a material fact ‘in
connection with the purchase or sale of such security.’” Behlen,
311 F.3d at 1092. The only disputed issue in this case is whether
Cochran’s complaint alleges a misrepresentation or omission. If
it does, then it is barred; if it doesn’t, then it isn’t barred.
To determine whether a complaint alleges a misrepresenta-
tion or omission, we look to its “gravamen” or the essence of it.
See, e.g., id. at 1094. Our focus is on the substance of the com-
plaint, not on the labels the plaintiff chooses to give his claims, and
not on the artful way a plaintiff words his allegations. Because
substance is what counts, SLUSA’s bar might apply even if a com-
plaint doesn’t label a claim as “fraud” or “misrepresentation” and
even if it studiously avoids referring to misrepresentations, omis-
sions, deception, fraud, and so on. As the Sixth Circuit has put it,
the SLUSA determination is not “a formalistic search through the
pages of the complaint for magic words” but a search to see
“whether the complaint covers the prohibited theories, no matter
what words are used (or disclaimed) in explaining them.” Segal
v. Fifth Third Bank, N.A., 581 F.3d 305, 310–11 (6th Cir. 2009).
Although we have not previously articulated all those prin-
ciples explicitly, several other circuits have. In addition to the
Sixth Circuit’s Segal decision, there are these: Northstar Financial
Advisors, Inc. v. Schwab Investments, 904 F.3d 821, 829 (9th Cir.
2018) (noting that “[c]ourts must look to the substance of the alle-
gations, so that plaintiffs cannot avoid [SLUSA] through artful
pleading that removes the covered words but leaves in the covered
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10 Opinion of the Court 20-13477
concepts”) (quotation marks and ellipsis omitted); Freeman Invest-
ments, L.P. v. Pacific Life Ins. Co., 704 F.3d 1110, 1115 (9th Cir.
2013) (“As our sister circuits have recognized, [SLUSA] operates
wherever deceptive statements or conduct form the gravamen or
essence of the claim.”); Rowinski v. Salomon Smith Barney Inc.,
398 F.3d 294, 301 (3d Cir. 2005) (“Other courts have similarly scru-
tinized the pleadings to arrive at the ‘essence’ of a state law claim,
in order to prevent artful drafting from circumventing SLUSA[’s
bar].”); Miller v. Nationwide Life Ins. Co., 391 F.3d 698, 702 (5th
Cir. 2004) (“The issue of [SLUSA’s bar] thus hinges on the content
of the allegations — not on the label affixed to the cause of ac-
tion.”); Dudek v. Prudential Securities, Inc., 295 F.3d 875, 879–80
(8th Cir. 2002) (agreeing that the “gravamen” of the complaint is
what matters and holding that “the essence of both complaints is
the unlawful marketing of tax-deferred annuities, either by misrep-
resenting their suitability for tax-deferred retirement plans, or by
failing to disclose their unsuitability for such accounts”).
The essence of Cochran’s complaint is that through its in-
vestment advice and recommendations, HTK affirmatively made
false statements, or failed to disclose material facts, about the suit-
ability of the variable annuity investment for the type of account
that the plaintiff had, and in that way made misrepresentations to
the plaintiff. The complaint makes at least 11 references to rec-
ommendations, advice, or other communications:
• “This is a class action seeking to challenge De-
fendant HTK’s self-serving practice of
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recommending . . . .” Doc. 27 at ¶ 1 (empha-
sis added).
• “[T]he Justices [of the Supreme Court of Geor-
gia] answered in the affirmative, concluding
that ‘[t]he broker will generally have a height-
ened duty, even to the holder of a non-discre-
tionary account, when recommending an in-
vestment which the holder has previously re-
jected or as to which the broker has a conflict
of interest.’” Id. at ¶ 4 (emphasis and third
bracket in original).
• “HTK’s uniform practice of recommending
that its client use tax-qualified funds to pur-
chase variable annuities constitutes just such a
conflict of interest . . . .” Id. at ¶ 5 (emphasis
added).
• “Mr. Cochran was urged and directed by his
HTK retirement advisor/fiduciary to invest his
retirement funds in a Penn Mutual variable an-
nuity, which he did on February 4, 2013. Be-
cause Mr. Cochran followed that advice, his fi-
duciary has raked significant unnecessary
fees . . . .” Id. at ¶ 8 (emphasis added).
• “He was sold a Penn Mutual deferred variable
annuity based on the recommendation of his
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12 Opinion of the Court 20-13477
HTK advisor . . . .” Id. at ¶ 16 (emphasis
added).
• “Mr. Rowell convinced Mr. Cochran . . . to in-
vest those tax-qualified IRA funds in a Penn
Mutual deferred variable annuity.” Id. (em-
phasis added).
• “At all times relevant hereto, HTK was and is
in the business of offering investment advice in
exchange for fees. Plaintiff and the Class
members entered into a contractual relation-
ship with HTK whereby HTK would advise
and assist Plaintiff in making appropriate in-
vestments, and Plaintiff would pay a fee for
such advice and assistance. Plaintiff and the
Class members carried out their end of that ar-
rangement, but HTK did not. Instead of rec-
ommending appropriate investments for Plain-
tiff’s IRA, HTK steered that money to variable
annuities . . . .” Id. at ¶ 27 (emphasis added
and citation omitted).
• “HTK knew that Plaintiff and the Class mem-
bers trusted HTK to recommend appropriate
investments and to put its customers’ interests
ahead of its own.” Id. at ¶ 56 (emphasis
added).
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• “Under the terms of the HTK account contract
and Georgia law, HTK owed to Plaintiff and
the Class members a duty to recommend ap-
propriate investments for funds they entrusted
to HTK.” Id. at ¶ 60 (emphasis added).
• Listing as a question of law and fact common
to the class: “whether Defendants have fa-
vored their own interests over those of Plaintiff
and the Class members by recommending that
customers’ tax-qualified accounts be used to
fund high-fee variable annuities[.]” Id. at ¶ 67
(emphasis added).
• “HTK has violated its fiduciary duties to the
Class members by providing investment ad-
vice that was not in customers’ best interests in
an effort to steer Class members’ money into
variable annuities . . . .” Id. at ¶ 72 (emphasis
added); see also id. at ¶ 79.
The substance of Cochran’s complaint is that variable annu-
ities were unsuitable investments for tax deferred accounts, but
HTK recommended that clients invest in them anyway. And the
complaint alleges that Cochran bought the variable annuity be-
cause of HTK’s recommendations. If those recommendations
had fully disclosed all material facts, including that a variable annu-
ity would not have tax benefits and would be an unsuitable
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14 Opinion of the Court 20-13477
investment, Cochran would have no cause of action. If there
were no false statement or omission, there is no cause of action
unless HTK breached its fiduciary duty simply by selling the Penn
Mutual variable annuity, regardless of disclosure, regardless of con-
sent, and even regardless of the client’s own desire and direction to
the fiduciary to make the purchase.
Cochran sees it differently. His position is that the conflict
of interest HTK had cannot ever be consented to because no
amount of disclosure can ever cure the breach of the duty caused
by the conflict. If he’s right, the duty could be breached and the
claim established without any false statement or failure to disclose
a material fact. But Cochran is not right. Georgia law does not
recognize the cause of action that his position posits. Instead, the
Georgia Supreme Court’s Holmes decision rejects Cochran’s posi-
tion and in doing so scuttles his attempt to slip the grip of SLUSA.
See Holmes, 691 S.E.2d at 201–02.
In Holmes the court held that under Georgia law a broker-
age firm owes a fiduciary duty to the holder of a non-discretionary
account. See id. at 198, 201–02. That type of account, which is
what Cochran had, allows the broker to carry out only transactions
that the client authorizes. See id. at 201. The Holmes court also
held that the duty a broker owes to a client who has a nondiscre-
tionary account includes “the duty to transact business only after
receiving prior authorization from the client and the duty not to
misrepresent any fact material to the transaction.” Id. (quotation
marks omitted and emphasis added). Not only that, the court
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explained, but the “broker will generally have a heightened duty”
to a nondiscretionary account holder “when recommending an in-
vestment . . . as to which the broker has a conflict of interest.” Id.at 201–02 (emphasis added).
That a broker with a conflict of interest has a heightened
duty not to misrepresent by statement or omission any material
fact necessarily means that a conflicted broker can nonetheless ad-
vise and recommend with full disclosure and without misrepresen-
tation. Which necessarily means that a conflict of interest alone
is not enough for a cause of action under Georgia law. There
must be both a conflict of interest and a material misrepresentation
or omission.
While the conflict of interest heightens the amount of dis-
closure and accuracy required, and thereby lessens a plaintiff’s bur-
den, it does not dispense entirely with the element of misrepresen-
tation or omission. Without that element, there is no cause of
action. And that is Cochran’s central problem. To be viable un-
der Georgia law, his claims against HTK must and do involve alle-
gations of misrepresentation or omission, and because they do, his
class action allegations are SLUSA-barred. Persuading us that he
is not claiming that HTK made any misrepresentation or omission
would earn Cochran only the right to have his entire complaint
dismissed for failure to state a claim.
Because the complaint does allege “an untrue statement or
omission of material fact in connection with the purchase or sale of
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16 Opinion of the Court 20-13477
a covered security,” 15 U.S.C. § 77p(b), the district court correctly
dismissed the class action allegations of it.
AFFIRMED.