U.S. District Judge Stewart Dalzell of the U.S. District Court for the Eastern District of Pennsylvania ordered ReliaStar Life Insurance Co. to pay $107,000 to the MFI Associates Ltd. Profit Sharing Plan to compensate it for the contract breach.
Dalzell found that ReliaStar’s contract breach caused the trustees to lose over $1 million in profits they would have received if ReliaStar had complied with their frequent trading requests over a nearly three-year period. However, Dalzell also ruled that the trustees did not do enough to mitigate their damages so they weren’t entitled to recover $912,000 of the damages they incurred,
According to the court opinion, Paul Prusky and Steven Prusky purchased life insurance contracts with ReliaStar as plan trustees. The contracts were divided into several subaccounts that gave the Pruskys, as plan trustees, the ability to choose among a variety of mutual funds and inform ReliaStar how they wanted plan premiums to be invested.
The contracts permitted the trustees to move money among the subaccounts four times per year if they requested the moves in writing. Each of the contracts was later amended by a separate memorandum from a vice president of ReliaStar. The memorandum gave the trustees the ability to make daily transfers and allowed the trustees to make trades up until 4 p.m. Central Standard Time, according to the court.
Dalzell said the Pruskys made frequent transactions transfers daily often up until 4 p.m. CST – an hour after the markets closed.
In October 2003, ReliaStar told the trustees it would no longer allow them carry out the transfers by telephone, fax, or any other electronic means. From that point on, all requests for transfers would need to be submitted by U.S. mail, the company told the trustees.
The Pruskys sued ReliaStar seeking an injunction that would require ReliaStar to accept the trustees’ daily transfer requests by telephone, fax, or other electronic means. The district court ruled in favor of ReliaStar in 2004, finding that the life insurance contracts that permitted the trustees to engage in market timing were void because, although the market timing provisions were legal, the contracts allowed the trustees to engage in late trading, which is prohibited by federal law (SeeInsurance Provider Couldn’t Agree to Illegal Late Trading ).
Two years after that, the 3 rd U.S. Circuit Court of Appeals reversed the district court, finding that lower court mistakenly determined that the illegal late trading provisions of the life insurance contracts were an essential and nonseverable part of the contracts that voided the whole contracts.
After getting the case back from the appellate court, Dalzell ruled that ReliaStar was in breach of contract by refusing to honor the Pruskys’ frequent trading requests. After the court issued its ruling, ReliaStar on January 31 allowed the Pruskys to again make frequent trades.
In its most recent ruling addressing the measure of damages, the court noted that on the day ReliaStar imposed the first restrictions on the trustees’ trading in October 2003, the combined value of the plan’s life insurance contracts was $7,240,882. The court also noted that when ReliaStar lifted the trading restrictions on January 31, 2007, the cash value of the policies was $7,045,349. According to the court, the parties stipulated that, had all of the proposed trades been executed, the cash value of the policies on January 31, 2007, would have been $8,064,642, a difference of $1,019,293.
Dalzell was critical of the Pruskys’ move to lessen the impact of ReliaStar’s market timing cutoff. According to the court, the Pruskys moved the balance of the life insurance policies into ReliaStar’s money market subaccount. The trustees insisted that was the safest move because it helped guard against loss of principal.
However, the court found that the decision to place the $7 million in a money market fund for over three years was not reasonable. “The Pruskys had previously invested those funds in vehicles with substantial exposure to the equity markets and had produced double-digit returns. Placing such a large sum of money in an investment vehicle that has often underperformed inflation (much less the general markets) is not a reasonable mitigation strategy under these circumstances,” Dalzell ruled.
The case is Prusky v. ReliaStar Life Insurance Co.,E.D. Pa., No. 03-6196, 2/22/07.