Antitrust Law Daily Wrap Up, RICO—W.D. Mo.: McCarran-Ferguson Act barred annuity purchaser’s racketeering claims against insurer, (Feb 17, 2016)

By Linda O’Brien, J.D., LL.M.

The McCarran-Ferguson Act preempted racketeering claims by a purchaser of annuities against an insurance company for allegedly creating a fraudulent accounting scheme to hide the company’s liabilities and inflate its reported assets, the federal district court in Jefferson City, Missouri has decided. Thus, the insurer’s motion to dismiss was granted (Ludwick v. Harbinger Group, Inc., February 12, 2016, Kays, G.).

In April 2011, Dale Ludwick purchased several annuities from Fidelity & Guaranty Life Insurance Company (F&G). F&G was domiciled in Maryland in 2011. In 2013, it became a domiciliary of Iowa after its acquisition by Harbinger Group. In January 2015, Ludwick filed a putative class action suit against F&G, Harbinger, and a Harbinger subsidiary, alleging violations of the Racketeer Influenced and Corrupt Organizations Act (RICO). Ludwick claimed that F&G, Harbinger, and Harbinger’s chairman created a fraudulent accounting scheme to hide F&G liabilities and artificially inflate F&G’s reported assets by orchestrating a series of transactions using wholly-owned Harbinger subsidiaries. As a result of the scheme, she asserted that the annuities were riskier and less valuable than represented. The defendants moved to dismiss the complaint.

The court determined that the McCarran-Ferguson Act preempted the plaintiff’s claims. The McCarran-Ferguson Act provides that no act of Congress shall be construed to invalidate, impair, or supersede any state law enacted for the purpose of regulating the business of insurance unless such act specifically relates to the business of insurance, the court explained.

The plaintiff’s argument that her RICO claims would not require the court to intrude on the states’ insurance regulation schemes—since she was challenging the defendants’ false representation of compliance with NAIC Statutory Accounting Principles (SAP) standards—was rejected. The court noted that the standards were incorporated into state regulations and followed by state regulators in approving the types of reinsurance transactions at issue in the case. The company’s domicile serves as primary regulator in approving reinsurance transactions. In the court’s view, the plaintiff was asking the court to analyze the reinsurance transactions and F&G’s accounting of the transactions in its annual reports to determine if F&G misrepresented its financial condition. To do so would require the court to perform the same task as the state insurance regulators and intrude on the comprehensive regulatory schemes put in place by the states.

The plaintiff’s contention that the McCarran-Ferguson Act was inapplicable to defendants that were not subject to regulation under the Iowa and Missouri insurance codes also was rejected. According to the court, even if an insurance company was not subject to state insurance laws, the McCarran-Ferguson Act could apply to its activities governed by state insurance law. In this case, the defendants’ activities in furtherance of the alleged scheme were regulated by state insurance codes. Three of the challenged transactions were captive or affiliated reinsurance transactions. In Iowa and Maryland, captive transactions must be reviewed by the insurance commissioner of the ceding company’s state of domicile. Because the activities were governed by the insurance codes of the ceding insurer’s state of domicile, the McCarran-Ferguson Act preempted the plaintiff’s RICO claims against them, the court concluded.

The case is No. 4:15-cv-00011-DGK.

Attorneys: Charles J. Crueger (Hansen Reynolds Dickinson Crueger LLC) for Dale R. Ludwick. Jarrod L. Schaeffer (Debevoise & Plimpton LLP) and J. Michael Vaughan (Walters Bender Strohbehn & Vaughan PC) for Harbinger Group, Inc. Frank A. Taylor (Briggs and Moran PA) and Jarrod L. Schaeffer (Debevoise & Plimpton LLP) for Fidelity& Guaranty Life Insurance Co. and Raven Reinsurance Co.

Companies: Harbinger Group, Inc.; F&G Life Insurance Company; Raven Reinsurance Company

Cases: RICO MissouriNews