Insurance Provider Couldn't Agree to Illegal Late Trading

December 15, 2004 ( - A federal judge has refused to force the issuer of flexible premium variable life insurance policies to allow trustees of a profit-sharing plan to market time mutual funds because their contract with the issuer also provided for illegal fund late trading.

>Senior US District Judge Herbert Hutton of the US District Court for the Eastern District of Pennsylvania said the inclusion of the late-trading provision rendered the entire contract between Reliastar Life Insurance Co. and trustees Paul and Steven Prusky unenforceable.

“The Contracts at issue in this case are partially illegal because they contain both legal and illegal provisions: while market timing is not per se illegal, late trading is, and both practices are allowed… ,” Hutton wrote. “Although Plaintiffs ask this Court to enforce only the market timing provision of the Contracts, Plaintiffs’ consideration was not apportioned between legal and illegal promises; therefore, the presence of the late trading provision in the Contracts renders all of the Contracts void.”

>According to the background in Hutton’s ruling, Paul Prusky and Steven Prusky purchased life insurance contracts with Reliastar as trustees of the Windsor Securities Inc. Profit Sharing Plan. The contracts were were divided into several sub-accounts that allowed the trustees to choose among a variety of mutual funds and tell Reliastar how they wanted plan premiums to be invested.

>Under the contracts’ terms, the trustees could transfer funds among the sub-accounts four times per year so long as the request to transfer was made in writing. Each of the contracts was later amended by a separate memorandum from Reliastar vice president M.C. Peg Stierk. The memorandum gave the trustees the ability to make daily transfers and to make trades up until 4 p.m. Central Standard Time. Hutton said the trustees made frequent transfer requests by telephone or fax as often as once per day. In addition, the trustees submitted their requests up until 4 p.m. CST, which was one hour after the markets closed.

>That arrangement changed in October 2003 when, according to Hutton, Reliastar informed the trustees that it wouldn’t allow them any longer to trade by telephone, fax, or any other electronic means and that all requests would have to be mailed to Reliastar’s customer service center in Minot, North Dakota. According to Hutton, the letter stated that the trustees had been identified as engaging in excessive market timing activities.

>Paul and Steven Prusky then sued Reliastar, asking for an injunction forcing Reliastar to accept the trustees’ transfer requests by telephone, fax, or other electronic means as often as once per day, as specified in the Sierk memorandum.

>Ruling in favor of Reliastar, Hutton  noted that the Sierk memorandum was illegal because it allowed the trustees to engage in late trading by allowing the trustees to submit trades for one hour after the close of the markets at 4 p.m. EST and receive same day pricing.

>Market timing and late trading practices have been key focal points of an ongoing federal/state investigation of the mutual fund industry.

>The ruling in Prusky v. Reliastar Life Insurance Co., E.D. Pa., No. 03-6196, 12/7/04, is at .