A Pennsylvania federal judge has granted final approval of a class action RICO settlement estimated to be worth at least $184 million and possibly as much as $530 million to a class of mostly elderly investors who say they were lured by deceptive marketing practices to purchase long-term annuities that often had maturity dates far beyond their own life expectancies.
In her 75-page opinion in In re American Investors Life Insurance Co. Annuity Marketing and Sales Practices Litigation, U.S. District Judge Mary A. McLaughlin also awarded nearly $17.7 million in attorney fees and $550,000 in expenses to the team of plaintiffs lawyers led by Jerome M. Marcus and Jonathan Auerbach of Marcus & Auerbach in Wyncote, Pa., and John R. Hargrove of Hargrove Pierson & Brown in Boca Raton, Fla.
McLaughlin was assigned to preside over several class actions brought on behalf of more than 387,000 investors that accused AILI of conspiring with sales agents, trust attorneys and annuity marketing firms to entice older investors to purchase annuities that simply weren't suitable given the investors' ages and the substantial "surrender charges" incurred for early withdrawal.
The main thrust of the suits was that the investments were "highly illiquid," meaning that the investors' funds would be tied up for long periods. In approving the settlement, McLaughlin found that the plaintiffs lawyers had persuaded AILI to cure that problem by modifying the policies.
"The settlement relief liquifies the annuities and allows class members to receive immediate payments and bonuses," McLaughlin wrote.
Under the terms of the settlement, AILI denied any wrongdoing, but agreed to modify significant aspects of the annuity policies, most notably removing surrender charges for class members whose policies are in deferral while allowing them to obtain the accumulated value of their annuity over a period ranging between two and seven years.
Class members who can establish fraud can receive even greater relief by opting to pursue a claim that challenges the specific marketing practices used in their case.
In an expert report, Baylor University business professor William Reichenstein, who has studied annuities for 20 years, estimated that the settlement is worth at least $184 million and possibly as much as $530 million, depending on the reaction of the class to the policy changes.
In his first report, Reichenstein had supported the plaintiffs' RICO claims, opining that, given their features, illiquidity and possible rates of return, the annuities at issue in this case were "per se unsuitable" for their purchasers.
In a report filed along with the settlement papers, Reichenstein noted that 96 percent of the policy account values, totaling $17 billion, are in deferral. He then opined that a minimum of 10 percent and a maximum of 35 percent of the class would receive some form of relief offered by the settlement.
Reichenstein then calculated a range of potential value for the settlement based on predictions for the percentage of class members who would take advantage of the option to withdraw up to 10 percent of the value without penalty.
At a fairness hearing, plaintiffs lawyers told McLaughlin the settlement value would surpass Reichenstein's low estimate because, by the time of the hearing, the class participation was already higher than what the professor had anticipated.
In declaring the settlement to be fair, McLaughlin pointed to the low percentage of objections and exclusions, noting that only 12 of the 387,263 class members objected to the settlement, and that only 840 were excluded.
McLaughlin also noted that the plaintiffs faced significant risks if they pressed ahead and insisted on taking the case to trial.
"Even if this action survived summary judgment, the trial would be complex and risky. It would involve intricate actuarial and financial analysis of the defendants' annuities and an inevitable battle of the experts," McLaughlin wrote.
Turning to the issue of the fees, McLaughlin found that the plaintiffs lawyers had logged more than 16,000 hours over five years, racking up a lodestar of more than $7.9 million without any guarantee of payment.
The requested fee of $17.9 million was a reasonable one, McLaughlin found, because it amounted to just 3 to 9 percent of the estimated value of the settlement and resulted in a "multiplier" of 2.3 times the plaintiffs lawyers' ordinary billing rates.
Judges within the 3rd Circuit, McLaughlin noted, have approved fees ranging from 6.5 percent to 14.5 percent in cases where the settlements were valued between $90.1 million and $1.8 billion.
"Class counsel's sought fee award of 3 percent to 9 percent of the settlement amount fits comfortably within the range of approved fee amounts for similar cases," McLaughlin wrote.
Lead defense attorney James F. Jorden of Jorden Burt in Washington, D.C., could not be reached for comment.