Transfer Restrictions on Plan Investment Did not Breach Contract

April 7, 2008 ( - The U.S. District Court for the Eastern District of Pennsylvania has ruled that The Prudential Insurance Company of America did not breach terms of a variable insurance contract when it changed provisions for making transfers between contract investments.

The court determined that the provisions of the contract – one of many used to invest assets of a Profit Sharing Plan trusteed by Dr. Paul M. Prusky and his son Steven G. Prusky – that are relevant to the case are clear. Additionally, the court said, the transfers section of the contract gives Prudential “complete discretion to define the manner in which transfer requests are to be submitted.”

The Pruskys used a market-timing investment strategy and being aware that market timing was frowned upon, decided variable insurance contracts would be investments for which they could negotiate contract terms that would facilitate their practice of market-timing, the court opinion said. They had successfully negotiated contracts with other insurance carriers that allowed them to trade frequently, trade by telephone or facsimile, and trade until 4:15 p.m. each day.

The Pruskys felt Prudential’s new policy on transfers, effective January 1, 2004, and instituted to deter market timing, mandating that any transfer after the 20th in a calendar year must submitted by mail and bear an original signature in ink, violated the negotiated terms of their contract allowing them to make daily transfers.

The court determined the new policies were “fully consistent” with a promise in a contract negotiation letter between the Pruskys’ brokers and Prudential that daily transfers would be allowed throughout the life of the contract. The court pointed out that Prudential repeatedly refused during the negotiations to give the Pruskys the right through the life of the contract to make transfers through an instantaneous means of communication.

The Pruskys also argued that, as investors in class one investments, they are not subject to any form of transfer restrictions, but the court noted that it previously held in a prior suit by the Pruskys that their argument is refuted by the terms of the contract.

The opinion in The Prudential Insurance Company of America v. Paul M. Prusky, is here .