Opposition Brief — Hendrickson v. American Skandia Life Assurance Corp.

L

Supreme Court of the United States

a lie <i

JAY HENDRICKSON, ROSE HENDRICKSON and KATHLEEN O’BRIEN,

on behalf of themselves and all others similarly situated,

Petitioners,

— |

AMERICAN SKANDIA LIFE ASSURANCE CORPORATION, AMERICAN

SKANDIA MARKETING, INCORPORATED, AMERICAN SKANDIA

INVESTMENT HOLDING CORPORATION, ABC Corp., INC. 1 through

ABC Corp., INC. 99, and LMN Corp., INC. 1 through LMN Corp.,

INC. 99,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

RESPONDENTS’ BRIEF IN OPPOSITION

LEIV H. BLAD, JR. JAMES N. BENEDICT

ROBERT G. HOUCK Counsel of Record

ANDREA GOLDBARG MILBANK, TWEED, HADLEY

CLIFFORD CHANCE US LLP & McCLoy LLP

31 West 52nd Street One Chase Manhattan Plaza

New York, New York 10019 New York, New York 10005

(212) 878-8000 (212) 530-5000

Attorneys for Respondents

i

QUESTIONS PRESENTED

I. Whether the United States Court of Appeals for

the Second Circuit correctly found that an issuer of a

variable annuities prospectus did not violate federal

securities laws by failing to include in the prospectus

non-mandatory language suggested in an NASD Notice

To Members directed to registered representatives at the

point of sale rather than the issuer of the security.

II. Whether the Second Circuit contravened this

Court’s precedent when it failed to consider a joint

report issued by SEC staff and the NASD that was not

published until after the Second Circuit’s decision and,

in any event, was addressed to registered representatives

and did not represent the opinion of the SEC itself.

III. Whether the Second Circuit contravened this

Court’s precedent when it found that, as a matter of law,

the variable annuities prospectus contained no material

omissions because the alleged omissions did not sig-

nificantly alter the total mix of information available to

the investor.

ii

RULE 14.1(B) STATEMENT

Petitioners “List of All Parties” (Pet. at iii) is accu-

rate.

RULE 29.6 STATEMENT

_ Pursuant to Supreme Court Rule 29.6, Defendants-

Respondents state that American Skandia Life Assurance

Corporation and American Skandia Marketing, Inc. are

wholly owned by American Skandia, Inc., a non-public

company. American Skandia Investment Holding Cor-

poration is the former name of American Skandia, Inc.

American Skandia, Inc., is wholly owned by Skandia

U.S. Inc., a non-public company. Skandia U.S. Inc. is

wholly owned by Prudential Financial, Inc., a public

company.

iil

TABLE OF CONTENTS

QUESTIONS PRESENTED ............-+-00+00555

RULE 14.1(B) STATEMENT..........-----+++++:-

RULE 29.6 STATEMENT ........-----+--eeeeeeeee

TABLE OF CONTENTS..........:-0eeeeeeeeeeeees

TABLE OF AUTHORITIES.........---+-+-+-+-++:

STATEMENT OF THE CASE .........-.--++++++::

REASONS FOR DENYING THE WRIT .........

I. The Petition Presents No

Important Question Of Federal Law....

Il. The Decision Of The Second Circuit

Did Not Contravene Supreme Court

Dc cca cunnedecessdsdndcncesseces

A. The Second Circuit Court Of

Appeals Did Not Contravene

Supreme Court Precedent When It

Did Not Give Judicial Deference

To A Joint SEC/NASD Report .....

B. The Second Circuit Court of

Appeals Did Not Contravene

Supreme Court Precedent When It

Dismissed the Complaint...........

CONCLUSION .......cccccccccccccccccccccccccccees

PAGE

13

13

17

iv

TABLE OF AUTHORITIES

Cases: PAGE

Air Brake Sys., Inc. v. Mineta, 357 F.3d 632

is Es bath dn cdnkenddeinencadnscnsanas 14

Alaska Dep't of Envtl. Conservation v. Envtl.

Prot. Agency, 540 U.S. 461 (2004) .......... 14

Basic, Inc. v. Levinson, 485 U.S. 224 (1988) .... 18

Chevron U.S.A., Inc. v. Natural Res. Def.

Council, Inc., 467 U.S. 837 (1984) .......... 12,14

Christensen v. Harris County, 529 U.S. 576

GRRE cchbacktabkudinisdnasedencapeowcevandas 12, 14, 15

Clackamas Gastroenterology Assocs., P.C.

v. Wells, 538 U.S. 440 (2003) ................ 14

Desiderio v. NASD, Inc., 191 F.3d 198

(2d Cir. 1999), cert. denied, 531 U.S. 1069

PRED ckabcchiuscebandaes ander eaiantcheias ous 11

Drnek v. Variable Annuity Life Ins. Co.,

No. CIV 01-242-TUC-WDB,

2004 WL 1098919 (D. Ariz. May 4, 2004).. 10

Echeverria v. Chicago Title & Trust Co.,

Bae ne Ge Cree Gals BOOED sa cccksiccdacncs: 14

Ganino vy. Citizens Utils. Co., 228 F.3d 154

See Ge EE Sh ds A canoe cbc dasnnkaesdbansnsucss 15, 18

Johnson v. Aegon USA, Inc.,

C.A. No. 1:01-CV-2617-CAP,

2004 U.S. Dist. LEXIS 20471

(N.D. Ga. Sept. 20, 2004) ...... Misasabidects 1]

Klitzman v. Bache Halsey Stuart Shields, Inc.,

499 F. Supp. 255 (S.D.N.Y. 1980) .....---- a

NASD Dep't of Enforcement v. Am. Express

Fin. Advisors Inc., No. CAF020057,

NASD Letter of Acceptance, Waiver

& Consent (Nov. 12, 2002) .......-+--eee eee

NASD Dep't of Enforcement v. Am. United

Life Ins. Co., No. CO5010011, NASD

Regulation, Inc. Office of Hearing Officers,

Order Accepting Offer of Settlement

(2OG2) onccsccscsacccqacaccuscaaanagenanensess ess

In re NBTY, Inc., Sec. Litig., 224 F. Supp.2d 482

(E.D.N.Y. 2002) .......eeeeeeeeeeseeeeseeereees

Nelson v. Pac. Life Ins. Co.,

No. Civ. A. CV 203-131, 2004 WL 1592617

(S.D. Ga. July 12, 2004)......---s sees cere eee:

Perez-Gonzales v. Ashcroft, 379 F.3d 783

(Oth Cir. 2004).........eeeeeeeeeeeeeeeeeeeec ees

SEC v. Geon Indus., Inc., 531 F.2d 39

(2d Cir. 1976) ......ceeeeeeeeeeeeeeneeeeeeenees

Stevelman v. Alias Research Inc., 174 F.3d 79

(2d Cir. 1999) .....ccceeeeeccccceceeccceeeeeees

TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438

(1DTG) ocnrscivcassvcnsacecsndsnexsecancascensans

In re Ultimate Corp. Sec. Litig.,

No. 85 CIV. 5944 (CSH), 1989 WL 79372

(S.D.N.Y. July 11, 1989) .....-..seee seer neers

United States v. Mead Corp., 533 U.S. 218

CQOOR) oan ccccnccsascnveccensaancanansennnsunasen

PAGE

10

11

10

14

17

18

vi

PAGE

STATUTES AND RULES

Code of Federal Regulations,

17 CPR, | Pe RORe cdcccccsvnveuscscsasanns 1,14

NASD Conduct Rule IM-2310.......... eeepnoania 7

NASD Notice to Members 99-35

(May 1999) acrcccccccsseccsvsccccvsesssnacsoncn passim

Second Circuit Local Rule 23.................... 19

Securities Act of 1933, 15 U.S.C. §§ 77(k),

FIG) & TIED) ccccsccacecouccccastscuakesseanams 1,12

Securities Exchange Act of 1934,

15 U.S.C. §§ 78j(b), 78t(a), 780-3(a)

Be TOWE) ccccccccvcscccccéesesecscessenasnnnanan 1,14

Supreme Court Rule 10(c)............-.2s0eceeeeee aoa

Vii

PAGE

OTHER AUTHORITIES

Joint SEC/NASD Report on Examination Findings

Regarding Broker-Dealer Sales of Variable

Insurance Products (June 2004) (available

at http://www.sec. gov/news/studies/

secnasdvip.padf) .......++eeeeeeseeeeeeneees 13, 15, 16

NASD News Release “NASD Proposes Specific

Requirements for Deferred Variable Annuity

Sales, Concern Over Suitability, Disclosure,

Supervision Cited” (Apr. 2004) (available

at http://www.nasd.com/stellent/

idcplg ?ldcService=SS_GET_

PAGE &ssDocName=NASDW_

002835 &ssSourceNodeld=553.) ......++++++: 16

NASD Respondent's Brief in Opposition On

Petition for Writ of Certiorari in

Desiderio v. NASD, Inc., Case No. 99-1285,

1999 WL 33640362 (U.S. 1999) ........-+--. 1]

SEC Release No. 34-36383 “Self-Regulatory

Organizations; Notice of Filing of

Proposed Rule Change by National

Association of Securities Dealers, Inc.

Relating to Application of the Rules of Fair

Practice to Transactions in Exempted

Securities and an Interpretation of its

Suitability Rule,” 1995 WL 625609, 4-5

(S.E.C. Release No. 34-36383,

Oct. 17, 1995) ..ccccccccccsccccccccsccccccccces 7

l

STATEMENT OF THE CASE

Respondents are American Skandia Life Assurance

Corporation (“ASLAC”), American Skandia Marketing,

Inc. (“ASM”) and American Skandia Investment Hold-

ing Corporation (“ASICH”) (now known as American

Skandia, Inc.) (collectively “American Skandia’). Amer-

ican Skandia issues and distributes variable annuities.

Petitioners are individuals who in early 2000 pur-

chased American Skandia tax-deferred variable annuities

—not from American Skandia—but from an independent

broker-dealer, World Marketing Alliance, Inc. (“WMA”),

and used the variable annuities to fund their tax-deferred

qualified retirement plans. WMA is not a party to this

action.

Petitioners allege that the American Skandia variable

annuities prospectuses and other unspecified documents

contained misstatements and omissions of material fact,

in violation of Section 10(b) of the Securities Exchange

Act of 1934 (“Exchange Act”), as amended, 15 U.S.C.

§§ 78j(b) and 78t(a), and Rule 10b-5 promulgated there-

under, 17 C.F.R. §240.10b-5; and Sections 11 and

12(a)(2) of the Securities Act of 1933 (“Securities Act”),

15 U.S.C. §§ 77(k), 77(1) and 77(0). The District Court

and a unanimous panel of the Second Circuit, however,

held that Petitioners failed to meet the threshold require-

ment of pleading facts establishing that American Skan-

dia made an untrue statement of material fact or made a

material omission. Rather than accept these unequivocal

and damning rejections of their argument, Petitioners

seek this Court’s review.

This action improperly attempts to litigate literally

thousands of individual suitability determinations on a

class-wide basis against American Skandia. However,

American Skandia was only the issuer of the securities.

2

It was not responsible for—and did not make—those

suitability determinations at the point of sale.

Petitioners’ argument is twofold. First, they contend

that the American Skandia’s variable annuities prospec-

tuses contained material misstatements in the form of

categorical recommendations that Petitioners should pur-

chase variable annuities to fund their qualified retire-

ment plans. Petitioners argue that using a variable

annuity to fund a qualified retirement plan is “virtually

never suitable.” (Pet. at 6.) The prospectuses, however,

clearly do not make any such recommendation. Second,

Petitioners contend that American Skandia’s variable

annuities prospectuses omitted certain language

allegedly mandated by the National Association of Secu-

rities Dealers (“NASD”) Notice to Members 99-35 (the

“Notice” or “NTM 99-35”). (Pet. at 6.) However, the

NASD Notice merely sets forth guidelines for registered

representatives at the point of sale and creates no duty to

disclose such material in American Skandia’s prospec-

tuses.

Petitioners’ claim relies on a misleading partial quote

of NTM 99-35, issued by the NASD in May of 1999.

Petitioners allege that NTM 99-35 dictates that it is

“never” suitable to fund a qualified retirement plan with

a tax-deferred variable annuity because the qualified

retirement plan is itself tax-deferred. The Notice itself

refutes this central premise of Petitioners’ claim. In fact,

NTM 99-35 specifically states that while it- provides

guidelines, they are not mandatory. Additionally, NTM

99-35 suggests only that the registered representative of

NASD broker-dealers should not recommend the use of

a variable annuity in a qualified retirement plan unless

its other features support the recommendation. A vari-

able annuity combines many important features having

nothing to do with the tax treatment of investment gains

3

(e.g., a guaranteed stream of payments, highly flexible

investment options and family protection through the

death benefit)—features unavailable in alternative

investment vehicles. Both Judge Pollack and a unani-

mous panel of the Second Circuit correctly recognized

the false conflict between a statement American Skandia

did not make, and a conclusion the NASD never reached.

Moreover, the Notice is directed to NASD broker-

dealers supervising registered representatives—the very

persons who, acting at the point of sale with the indi-

vidual investor, are charged with making the individu-

alized, multi-factor suitability analysis called for by the

NASD’s “know your customer” rule invoked by Peti-

tioners. The Notice is not directed to, or binding on,

variable annuities issuers responsible for the disclosure

in prospectuses.

Both the District Court and the Second Circuit cor-

rectly concluded that the American Skandia variable

annuities prospectuses contained no material misstate-

ments, and fully and fairly disclosed all required mate-

rial facts. These defects in Petitioners’ claim could not

be remedied by an amendment to the complaint, and

therefore the District Court and the Second Circuit prop-

erly dismissed the action with prejudice.

REASONS FOR DENYING THE WRIT

The Petition fails to satisfy any of the criteria for a

grant of certiorari. Supreme Court Rule 10(c). First,

Petitioners have pointed to no important question of fed-

eral law that this Court should resolve. Petitioners’ argu-

ment that NASD Rules deserve some level of judicial

deference has no relevance in a case such as this one

where there is no NASD Rule (or even Securities and

Exchange Commission (“SEC”) Rule) at issue. Peti-

a

4

tioners fundamentally mischaracterize this case. This

case is about whether an issuer of a prospectus violated

federal securities laws when it did not include within the

prospectus non-mandatory language suggested by the

NASD directed, not towards the issuer, but towards reg-

istered representatives responsible for the suitability

determinations at the point of sale. Both the District

Court and the Second Circuit, after painstakingly

reviewing the prospectus at issue, correctly found that it

did not contain any material misrepresentations or omis-

sions.

Despite Petitioners’ contention to the contrary, the

Second Circuit considered and specifically found that

NASD NTM 99-35 did not apply to the issuer of the

prospectus. Relying on the plain language of NTM 99-

35, the Second Circuit found it only applied to registered

representatives making recommendations at the point of

sale. Petitioners’ reliance on three district court cases to

demonstrate discordance among courts is unavailing and

meritless, as these cases are factually distinguishable.

Therefore, the issue of judicial deference to NASD

Rules is nothing more than a red herring. However, were

this Court to consider the issue, the NASD Notice is not

deserving of judicial deference.

Second, the decisions below are consistent with this

Court's precedent. Petitioners assert that the Second Cir-

cuit contravened this Court’s precedent when it failed to

give judicial deference to a June 2004 report issued

jointly by SEC staff and the NASD. (Pet. at 25-27.) It

must be noted that the Report was not published until

several weeks after the Second Circuit’s May 14, 2004

decision. Moreover, it is well-settled that letters or

reports, which do not express the opinion of an execu-

tive or administrative agency, do not merit judicial def-

erence. Additionally, Petitioners assert that the Second

5

Circuit’s decision went against this Court's jurispru-

dence by deciding the issue of materiality as a matter of

law, as opposed to allowing the trier of fact make this

determination. (Pet. at 27-29.) However, here again it is

well established that a court may determine materiality

as a matter of law if, as here, the information allegedly

omitted does not alter the total mix of information avail-

able to an investor.

Finally, even if the lower courts reached an erroneous

decision below, this is insufficient to warrant this

Court’s review. The unanimous, but unpublished opinion

of the Second Circuit has no binding or precedential

effect.

In sum, the Petition fails to satisfy any of the criteria

of Supreme Court Rule 10(c) meriting this Court's

review. As such, the Petition for Certiorari should be

denied.

I. THE PETITION PRESENTS NO IMPORTANT

QUESTION OF FEDERAL LAW

This case presents no important question of federal

law that this Court should address. Petitioners’ argument

that NASD Rules deserve some level of judicial defer-

ence mischaracterizes the facts of this case, and is noth-

ing more than a red herring because this case is not

about an NASD Rule (or even an SEC Rule, for that

matter). The issue in this case is whether the prospec-

tuses issued by American Skandia violated federal secu-

rities laws by failing to include language suggested in

NASD NTM 99-35.!

| Petitioners contend that American Skandia implicitly admit-

ted an NASD violation when it changed the wording of its prospec-

tuses in October of 2000 (Pet. at 7 n.2). This argument is meritless. It

is well-established that a revised disclosure does not necessarily ren-

der a previous statement or disclosure inadequate or fraudulent. See

6

The District Court, per Judge Milton Pollack, and the

Second Circuit fully considered and correctly decided

the issues in this case. Judge Pollack thoroughly

reviewed the prospectuses at issue, and found that the

prospectuses correctly and adequately disclosed the tax

nature of variable annuities and of qualified retirement

plans. Judge Pollack carefully reviewed the prospec-

tuses, and determined that they contained neither mate-

rial misstatements nor omissions. Specifically, he found:

Although the Prospectuses undeniably indicate

that a variable annuity may be used as an

investment vehicle for a qualified retirement

plan, it is not true, as Plaintiffs state, that this

is never appropriate. NASD Notice 99-35 itself

states that a registered representative may rec-

ommend a variable annuity for a tax-qualified

retirement account “when its other benefits,

such as lifetime income payments, family pro-

tection through the death benefit, and guaran-

teed fees” support the recommendation. (Pet.

App. B at 10a. (emphasis added).)

The Second Circuit unanimously concurred with Judge

Pollack’s analysis and decision. “As the district court

correctly observed, neither NASD Notice 99-35 nor SEC

Form N-4 imposes a duty on defendants to include in its

prospectuses the warning sought by plaintiffs” (Pet.

App. A at 5a.) These decisions are correct in light of the

plain language of the NASD Notice.

In May of 1999, the NASD issued NTM 99-35 which

“focuse[d] on deferred variable annuity sales and pro-

vide[d] a set of guidelines that [were] intended to assist

members in developing appropriate procedures relating

to variable annuity sales to customers.” (Pet. App. E at

SEC v. Geon Indus., Inc., 531 F.2d 39, 52 (2d Cir. 1976); Stevelman

v. Alias Research Inc., 174 F.3d 79, 84 (2d Cir. 1999).

18a (emphasis added).) The plain language of the Notice

states that “the specific procedures described are not

mandatory.” (Id. (emphasis added).) NASD NTM 99-35

relates to NASD Conduct Rule 2310, (i.e., the Suitabil-

ity Rule).”? (Pet. App. E 21a - 22a.) The Suitability Rule

explains the obligation to determine whether an invest-

ment is “suitable” for a particular investor, which is an

-inherently individualized inquiry. See NASD Conduct

Rule IM-23i0. It requires the registered representative

(i.e., the broker) to consider the investor’s wants, needs,

risk tolerance and financial situation, amongst other fac-

tors. See SEC Release No. 34-36383 “Self-Regulatory

Organizations; Notice of Filing of Proposed Rule

Change by National Association of Securities Dealers,

Inc. Relating to Application of the Rules of Fair Practice

to Transactions in Exempted Securities and an Inter-

pretation of its Suitability Rule,” 1995 WL 625609, at

*4-5 (S.E.C. Release No. 34-36383, Oct. 17, 1995) (stat-

ing that the two most important considerations in a suit-

ability determination are “the customer's capability to

evaluate investment risk independently, and the extent to

>

- NASD Conduct Rule 2310 states:

(a) In recommending to a customer the purchase, sale or exchange

of any security, a member shall have reasonable grounds for

believing that the recommendation is suitable for such customer

upon the basis of the facts, if any, disclosed by such customer as

to his other security holdings and as to his financial situation and

needs.

(b) Prior to the execution of a transaction recommended to a

non-institutional customer . . . a member shall make reasonable

efforts to obtain information concerning:

(i) the customer's financial status;

(i1) the customer's tax status;

(iii) the customer's investment objectives; and

(iv) such other information used or considered to be rea-

sonable by such member or registered representative in

making recommendations to the customer.

8

which the customer intends to exercise independent

judgment in evaluating a member’s recommendation”).

This obligation is imposed on the broker’s registered

representative at the point of sale (i.e., the point at

which the investor—and his or her individual investment

criteria—can be identified and considered).

Within the framework of the Suitability Rule, the

NASD Notice specifically states:

When a registered representative recommends

the purchase of a variable annuity for any tax-

qualified retirement account (e.g., 401(k) plan,

IRA), the registered representative should dis-

close to the customer that the tax deferred

accrual feature is provided by the tax-qualified

retirement plan and that the tax deferred accrual

feature of the variable annuity is unnecessary.

The registered representative should recommend

a variable annuity only when its other benefits,

such as lifetime income payments, family pro-

tection through the death benefit, and guaran-

teed fees, support the recommendation. (Pet.

App. E at 25a (emphasis added).)

Therefore, the plain language of NASD NTM 99-35 only

applies to registered representatives recommending the

variable annuity.

The Second Circuit considered the plain language of

NASD NTM 99-35, and specifically found that it did not

apply to this case:

As the district court correctly observed, neither

NASD Notice 99-35 nor SEC Form N-4 imposes

a duty on defendants to include in its prospec-

tuses the warning sought by plaintiffs. By its

terms, NASD Notice 99-35 applies only to reg-

istered representatives recommending the pur-

9

chase of a variable annuity; it does not require

annuity issuers to include a warning in a prospec-

tus or other offering documents. (Pet. App. A at

4a. (emphasis added).)

Thus, the Second Circuit held that NTM 99-35 did not

apply to American Skandia, but only to the registered

representatives working at the point of sale. Notwith-

standing, the Second Circuit further considered the rel-

evance of NASD NTM 99-35, and found that it did not

apply because the prospectuses did not recommend the

purchase of the variable annuities:

Even if the [NASD] Notice did apply to issuers,

the prospectus challenged in this case does not

recommend the purchase of annuities; it says

only that annuities “may be a suitable” invest-

ment. Indeed, the prospectus specifically advises

prospective investors to seek professional tax

advice before purchasing annuities for use in a

qualified plan. Prospectus at 41. (Pet. App. at

4a-5a (emphasis added).)

As Petitioners concede, and as Judge Pollack correctly

found, American Skandia did not recommend that Peti-

tioners purchase variable annuities for their retirement

accounts. This determination was made by an indepen-

dent broker-dealer, who Petitioners did not name as a

defendant in this action. As Judge Pollack noted: “Plain-

tiffs are not, however, bringing any charges against the

broker from whom they purchased the variable annuity.”

(Pet. App. B at 9a.)

Despite the plain language of NASD NTM 99-35,

Petitioners argue that every other court that has decided

the issue has disagreed with the Second Circuit. (Pet. 13-

14.) Petitioners cite to three district court cases in sup-

port of their argument. These cases, however, do not

warrant this Court’s review for two reasons.

10

First, alleged conflict between a court of appeals and

district court opinions are insufficient to warrant this

Court's review. Uniformity in federal matters is achieved

when this Court reviews various court decisions that are

otherwise final in the absence of Supreme Court review.

This is not the case.

Second, there is no conflict because the three district

court cases are factually distinguishable from this case.

In two of the cases, the courts found that the issuer was,

in effect, acting as the registered representative—thus

falling within the purview of NASD NTM 99-35. In

Drnek vy. Variable Annuity Life Ins. Co., No. CIV 01-

242-TUC-WDB, 2004 WL 1098919, at *3 (D. Ariz. May

4, 2004), the district court denied defendants’ motion to

dismiss, finding that because defendants sold the vari-

abie annuity directly to plaintiffs, this created a “rela-

tionship of trust between buyers and sellers. . . which

would create a duty to inform the buyers” of the infor-

mation contained in the NASD Notice. Similarly, in Nel-

son v. Pac. Life Ins. Co., No. Civ. A. CV 203-131, 2004

WL 1592617, at *4 (S.D. Ga. July 12, 2004), the district

court denied defendants’ motion to dismiss, highlighting

that plaintiffs alleged a principal-agency relationship

with the registered representative who sold the variable

annuity to plaintiffs. Petitioners have not alleged a prin-

cipal-agency relationship between American Skandia

and the registered representative who sold them the vari-

able annuities at issue; in fact, they are unable to do so

because Petitioners did not purchase the variable annu-

ities in question from American Skandia, but from an

independent broker-dealer.’

+ This same principle distinguishes the NASD enforcement

cases upon which Petitioner seek to rely. See NASD Dep't of Enforce-

ment v. Am. Express Fin. Advisors, Inc., No. CAFO020057, NASD

Letter of Acceptance, Waiver and Consent (Nov. 12, 2002) (finding

11

Finally, in Johnson v. Aegon USA, Inc., C.A. No. 1:01-

CV-2617-CAP, 2004 U.S. Dist. LEXIS 20471 (N.D. Ga.

Sept. 20, 2004), the district court made a factual deter-

mination regarding the disclosure in a prospectus dif-

ferent from the one at issue here. Petitioners have not

provided any evidence that there is any similarity

between American Skandia’s prospectuses and those at

issue in Johnson. The fact that the district court in John-

son denied defendants’ motion to dismiss after review-

ing a different prospectus does not conflict with the

Second Circuit’s opinion. That three district court opin-

ions, interpreting different prospectuses and under dif-

ferent factual circumstances, reached different

conclusions than the Second Circuit, does not call the

Second Circuit’s opinion into question.

In arguing that NASD Rules deserve judicial defer-

ence Petitioners mischaracterize this case, because there

is no NASD Rule at issue. Here, the document at issue is

simply an NASD Notice to Members, which the NASD

recognizes is not mandatory.

An NASD Notice to Members, which only suggests

guidelines, does not deserve judicial deference. In its

own words, the NASD is a private not-for-profit corpo-

ration chartered in Delaware. See NASD Respondent's

Brief in Opposition On Petition for Writ of Certiorari in

Desiderio v. NASD, Inc., Case No. 99-1285, 1999 WL

33640362, at *2 (U.S.); see also Desiderio v. NASD,

Inc., 191 F.3d 198, 206 (2d Cir. 1999), cert. denied, 531

U.S. 1069 (2001) (holding the NASD is a private—not

registered representative violated NASD Conduct Rules in enforce-

ment action arising out of registered representative's failure to make

certain oral disclosures at the point of sale); NASD Dep’t of Enforce-

ment v. Am. United Life Ins. Co., No. CO5010011, NASD Regulation,

Inc. Office of Hearing Offices, Order Accepting Offer of Settlement

(2002) (same).

12

state—actor). Although it is registered with the SEC as

a self-regulatory organization pursuant to 15 U.S.C.

§ 780-3(a), it was not created by statute. /d. Neither its

directors nor its executives are governmental officials or

appointees. /d. It receives no funding from any govern-

ment, federal or state. /d. It has the power to govern the

conduct of its members by virtue of the contractual rela-

tionship between it and its members. Klitzman v. Bache

Halsey Stuart Shields Inc., 499 F. Supp. 255, n.1

(S.D.N.Y. 1980). As such, neither NASD Rules nor

Notices are binding on parties that are not NASD mem-

bers.

As defined by this Court, judicial deference is due to

a governmental agency where there is an express con-

gressional authorization to engage in rulemaking or

adjudication process that produces a rule or regulation.

Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc.,

467 U.S. 837 (1984). This is known as Chevron defer-

ence. This Court has also extended a lower standard of

deference to a governmental agency's interpretations of

its own rules. United States v. Mead Corp., 533 U.S. 218

(2001). This is referred to as Skidmore deference. How-

ever, this Court has specifically found that interpreta-

tions contained in opinion letters, and particularly those

that were not arrived at after a formal adjudication or

notice-and-comment rulemaking process, do not deserve

judicial deference. Christensen v. Harris County, 529

U.S. 576, 587 (2000). No court, however, has extended

any level of judicial deference to non-mandatory sug-

gestions of a private corporation, such as the NASD.

Petitioners’ assertion that an NASD Rule deserves

judicial deference is nothing more than an academic

argument. In this case, the idea that an NASD Notice to

Members, which has no effect on non-members, should

carry the force of law is meritless, and does not deserve

13

this Court's attention. As such, Petitioners have failed to

raise an important question of federal law that this Court

should address.

Il. THE DECISION OF THE SECOND CIRCUIT

DID NOT CONTRAVENE SUPREME COURT

PRECEDENT

A. The Second Circuit Court Of Appeals Did

Not Contravene Supreme Court Precedent

When It Did Not Give Judicial Deference To

A Joint SEC/NASD Report

In a last ditch effort to revive their losing cause, Peti-

tioners implored the Second Circuit to consider a joint

report issued by SEC staff and the NASD entitled “Joint

SEC/NASD Report on Examination Findings Regarding

Broker-Dealer Sales of Variable Insurance Product”

(“Report”). See Office of Compliance Inspection and

Examinations, United States Securities and Exchange

Commission/NASD “Joint SEC/NASD Report on Exam-

ination Findings Regarding Broker-Dealer Sales of Vari-

able Insurance Product” (available at Attp://

www.sec. gov/news/studies/secnasdvip.pdf). Petitioners

argue that by failing to give the Report judicial defer-

ence, the Second Circuit contravened this Court's prece-

dent. (Pet. at 26-27.) However, Petitioners’ argument is

unavailing for three reasons. First, the Report was not

issued until June 9, 2004—almost four years after the

class period and some three weeks after the Second Cir-

cuit’s decision.* Second, a report that explicitly does not

4+ On May 14, 2004, the Second Circuit issued its unpublished

opinion. On May 28, 2004, Petitioners filed a Petition for Rehearing

and Petition for Rehearing En Banc. Subsequently, on July 15, 2004,

Petitioners filed a letter with the Clerk of Court for the Second Cir-

cuit asking the panel take into consideration the Report in question.

The Petition for Rehearing was denied on July 30, 2004. Therefore,

14

represent the views of the SEC is not entitled to judicial

deference. And third, contrary to Petitioners’ contention,

the Report does not support their position.

American Skandia does not dispute the fact that rules

promulgated by the SEC pursuant to its rulemaking

authority carry with it the force of law, i.e., Chevron

deference. Rule 10b-5, which is promulgated under 15

U.S.C. § 78w(a), is a prime example of such a rule

deserving judicial deference. However, as this Court has

clearly held, interpretations, such as opinion letters,

“which are not the result of a formal adjudication or

notice-and-comment process,” lack the force of law, and

therefore are not necessarily accorded judicial deference.

Christensen, 529 U.S. at 587; see also Alaska Dep't of

Envtl. Conservation v. Envtl. Prot. Agency, 540 U.S.

461, 487 (2004) (holding that an agency’s interpretation

contained in an internal guidance manual does not

deserve judicial deference); Clackamas Gastroenterol-

ogy Assocs., P.C. v. Wells, 538 U.S. 440, 449 n.9 (2003)

(holding that the EEOC’s compliance manuals are not

controlling); Perez-Gonzales v. Ashcroft, 379 F.3d 783,

793-96 (9th Cir. 2004) (finding that agency interpreta-

tion contained in a guidance memorandum that con-

flicted with immigration statutes did not deserve

deference); Air Brake Sys., Inc. v. Mineta, 357 F.3d 632,

642-43 (6th Cir. 2004) (finding that the opinion letters of

the chief counsel of the NHTSA are too informal to

merit judicial deference); Echeverria v. Chicago Title &

Trust Co., 256 F.3d 623, 630 (7th Cir. 2001) (holding

that judicial deference is not due to “unofficial inter-

pretations which the agency itself does not view as bind-

_ it was impossible for the Second Circuit panel that originally decided

the case to have disregarded a report that did not exist. Moreover, as

discussed infra, the Second Circuit in deciding a Petition for Rehear-

ing was not obligated to rely on a report which does not represent the

views of the SEC.

15

ing”); Ganino v. Citizens Utils. Co., 228 F.3d 154, 163

(2d Cir. 2000) (holding that, unlike an SEC rule pro-

mulgated pursuant to its rulemaking authority, an SEC

Staff Accounting Bulletin, “does not carry with it the

force of law”).

The Report specifically states that “[t]his report rep-

resents the findings of the Staff of the Commission and

NASD, and not the Commission itself.” Report at 3 n.1

(emphasis added). There is no basis to argue that a report

by the staff, not adopted by the SEC, carries with it the

same force of law as, for example, Rule 10b-S5. In the

words of this Court, it is a summary of findings, “not

one arrived at after, for example a formal adjudication or

notice-and-comment rulemaking. Interpretations such as

those in opinion letters, like interpretations contained in_

policy statements, agency manuals, and enforcement

guidelines, all of which lack the force of law—do not

warrant Chevron-style deference.” Christensen, 529 U.S.

at 587 (internal citation omitted). As such, this Report

does not merit judicial deference.

Moreover, Petitioners mischaracterize the content and

import of the Report. This Report does not mandate that

issuers of variable annuities prospectuses include any

specific language within their prospectus. The Report “is

not a comprehensive roadmap for compliance aid super-

vision with respect to the sale of variable insurance

products, but rather points out examples of common

problems that may be encountered, and some measures

that firms are using to ensure better compliance.” Report

at 3. The section Petitioners quote from is entitled “Dis-

closure” and states:

With regards to sales of annuities in tax-quali-

fied plans, the NASD states that when a regis-

tered representative recommends the purchase of

a variable annuity for any tax-qualified retire-

16

ment account (e.g., 401(k) plan, IRA), the reg-

istered representative should disclose to the cus-

tomer that the tax-deferred accrual feature is

provided by the tax-qualified retirement plan

and that the tax-deferred accrual feature of the

variable annuity is unnecessary. Report at 18

(emphasis added).

Notwithstanding Petitioners’ implication to the contrary,

the Report does not state that an issuer of a variable

annuities prospectus is mandated to include any lan-

guage within its prospectus. The Report simply states

that registered representatives should—not must—

inform their customers that if is unnecessary to purchase

a variable annuity for its tax-deferred feature for a tax-

qualified retirement plan. This is a far cry from man-

dating the issuer of the prospectus to set forth this

language in a prospectus that goes to all potential

investors irrespective of their individual investment con-

cerns.°

Petitioners’ argument that this Report deserves judi-

cial deference is not in accord with Supreme Court

precedent, and is not supported by the Report itself. As

such, Petitioners’ claim that the Second Circuit’s opin-

ion contravenes this Court’s precedent is meritless.

° Further detracting from Petitioners’ argument is the fact that

the NASD is in the process of proposing a new rule regarding variable

annuity sales. See April 26, 2004 NASD News Release “NASD Pro-

poses Specific Requirements for Deferred Variat!e Annuity Sales,

Concern Over Suitability, Disclosure, Supervision Cited” (available

at http://www.nasd.com/stellent/idcplg ?IdcService=SS_GET_PAGE

&ssDocName=NASDW_002835 &ssSourceNodeld=553). This release

highlights the key requirements of the proposed rule. Most tellingly,

there is absolutely no mention of any duty imposed on issuers of vari-

able annuities prospectuses. The proposed rule focuses exclusively on

registered representatives.

17

B. The Second Circuit Court of Appeals Did

Not Contravene Supreme Court Precedent

When It Dismissed the Complaint

As previously noted, both Judge Pollack and a unan-

imous panel of the Second Circuit found that the Amer-

ican Skandia prospectuses did not contain any material

omissions. Petitioners contend that the Second Circuit's

decision contravened this Court’s precedent by deter-

mining materiality as a matter of law, as opposed to

allowing the issue to go to the trier of fact. (Pet. at 27.)

However, as this Court has recognized time and again,

materiality can be determined as a matter of law if the

alleged omission is obviously unimportant in light of the

disclosures made. Moreover, even if the factual deter-

mination of the Second Circuit was incorrect, this

unpublished decision is not enough to merit this Court's

review.

It is well established by this Court that an “omitted

fact is material if there is a substantial likelihood that a

reasonable shareholder would consider it important in

deciding” how to act. TSC Indus., Inc. v. Northway, Inc.,

426 U.S. 438, 449 (1976). Stated another way: “there

must be a substantial likelihood that the disclosure of the

omitted fact would have been viewed by the reasonable

investor as having significantly altered the ‘total mix’ of

information made available.” /d.

It is equally well-settled that “only if the established

omissions are ‘so obviously important to an investor,

that reasonable minds cannot differ on the question of

materiality’ is the ultimate issue of materiality appro-

priately resolved ‘as a matter of law’. . ..” Id. at 450.

After carefully reviewing the prospectuses, Judge Pol-

lack aptly concluded:

18

Nor do the allegedly omitted facts significantly

alter the total mix of information made avail-

able. The Prospectuses clearly state that both

variable annuities and tax qualified retirement

plans are tax deferrable. That is enough to alert

all reasonable investors to the fact that it is

unnecessary, if solely for tax reasons, to use a

variable annuity to fund a tax-deferred retire-

ment account. See In re NBTY, Inc., Sec. Litig.,

224 F. Supp.2d 482, 495 (E.D.N.Y. 2002); Jn re

Ultimate Corp. Sec. Litig., No. 85 CIV. 5944

(CSH), 1989 WL 79372, at *5 (S.D.N.Y. July 11,

1989) (“Liability does not arise from the failure

to disclose that which should be obvious to the

average investor.”). The other benefits of the

variable annuities are also clearly set forth, as well

as the fee structure for purchase of the annuity.

The disclosures in the Prospectuses, taken in

context, conclusively disprove the materiality

of the alleged omissions and are thus fatal to

the Plaintiffs’ claims. (Pet. App. B at 10a-1 1a.

(emphasis in original).)

The Second Circuit conducted a de novo review of the

record and the prospectuses at issue, and likewise con-

cluded that the American Skandia prospectuses con-

tained no material omission:

Nor did the failure to include the warning sought

by plaintiffs constitute a material omission. An

Omission is material if there is a “substantial

likelihood that the disclosure of the omitted fact

would have been viewed by the reasonable

investor as having significantly altered the total

mix of information made available.” Basic, Inc.

v. Levinson, 485 U.S. 224, 231-32 (1988); accord

Ganino vy. Citizens Utils. Co., 228 F.3d 161-62.

19

Here the prospectus clearly states that the invest-

ment gains on annuities are not taxable “until an

amount is received (a ‘distribution’ ),” Prospec-

tus at 39, and that contributions to qualified

retirement plans are “not taxable until distribu-

tions are made,” Prospectus at 42. From this

information, the reasonable investor would know

that, since taxes on qualified retirement plans are

not assessed until a distribution is made, funding:

a replacement fund with deferred annuities

would provide no additional tax advantage.

Adding a warning stating that the tax-deferred

feature of a deferred annuity is “unnecessary”

when the annuity is to fund a qualified retire-

ment plan investments thus would not have “sig-

nificantly altered the total mix of information”

in the prospectus. (Pet. App. A at 5a-6a.)

Both Judge Pollack and the Second Circuit indepen-

dently reviewed the prospectuses with painstaking care

and correctly decided that the alleged omission was not

material as a matter of law. These factual determinations

do not contravene this Court’s precedents.

Even if, arguendo, the Second Circuit did erroneously

decide this case, it is still insufficient to warrant review

by this Court. The Second Circuit’s unanimous decision

was an unpublished summary order. Pursuant to Second

Circuit Local Rule 23, unpublished opinions cannot be

cited as precedential authority to any court, including to

the Second Circuit. See United State Court of Appeals

for the Second Circuit, Local Rule 23 (available at

http://www.ca2.uscourts.gov/). In other words, the deci-

sion of the Second Circuit has no binding effect on any

court. Thus, if confronted with a factually similar case,

the Second Circuit could reach a different decision.

20

The Second Circuit made a complex factual determi-

nation based on the specific facts of this case; it did not

conflict with this Court’s jurisprudence. Petitioners’

argument to the contrary is unavailing.

CONCLUSION

For the reasons set forth above, the Petition for a Writ

of Certiocari should be denied.

LEIV H. BLAD, JR. JAMES N. BENEDICT

ROBERT G. HOUCK Counsel of Record

ANDREA GOLDBARG MILBANK, TWEED, HADLEY

CLIFFORD CHANCE US LLP & MCCLoy LLP

31 West 52nd Street One Chase Manhattan Plaza

New York, NY 10019 New York, NY 10005-1413

(212) 878-8000 (212) 530-5000

Attorneys for Respondents