AXA Ruling Setting New Ground Rules for Investment Management

January 5, 2017 by Amy E. Martinez, Esq.

The United States District Court for the District of New Jersey ruled for the defendant, AXA Equitable Life, in a decision that followed a lengthy bench trial. In the case of Sivolella v. AXA Equitable Life Ins. Co., plaintiffs alleged they were charged excessive fees for investment in 12 mutual funds managed by AXA. In a 125-page ruling, Judge Peter G. Sheridan rejected the excessive fee claims and cleared the company of all allegations, while commending AXA’s transparency and cooperation during the trial.

The Case

Sivolella represented a group of eight investors who entered into annuity contracts with the defendant, AXA Equitable Life Insurance (“AXA”), and Equitable Funds Management Group LLC. Plaintiffs accused AXA of giving the bulk of management responsibilities to affiliate advisers while charging high fees for advisory services. AXA claimed its “manager of managers” strategy of board oversight provided an executive-level review of the investments at no cost, while procuring direct third-party adviser services for clients’ investment consultation.

According to plaintiffs, such an act violated Section 36(b) of the Investment Company Act, which imposes a legal obligation on mutual fund advisers to behave in an ethically acceptable manner relating to compensation received for services rendered. Plaintiffs further alleged that AXA advisers did not exhibit moral integrity by passing off the majority of their duties to sub-advisers while charging clients for advisory services and, therefore, violating Section 36(b). Essentially, plaintiffs alleged AXA was illegally charging excessive and unearned fees.

The trial ran from January 6 to February 25, with closing arguments being heard on June 1. After hearing lengthy arguments from both sides, Judge Sheridan issued his findings on August 25, rejecting the plaintiff’s theory and ruling in favor of AXA.

How AXA Won

Outside Experts Were Key

AXA was proactive and did not allow the Court to rely solely on the testimony of plaintiffs’ witnesses. Instead, AXA hired its own experts to analyze the intimate details of the lawsuit, and Judge Sheridan found that their testimony was “credible.”

Going Above and Beyond was Essential

Judge Sheridan deemed the plaintiffs’ observations of the services outlined in the adviser agreement as “essentially” correct, and being similar to those described in the sub-adviser contract. He recognized however, that AXA’s executive advisers went beyond the call of duty. AXA presented evidence and testimony of its employees going the extra mile to satisfy clients and maintain well-managed accounts. The evidence submitted by AXA’s counsel ultimately swayed the Court towards a decision for the defense.

Wording is Everything

During the 25-day trial, AXA discovered that its agreement form was not efficient. The company, at its sole discretion, revised its written structure to reflect present times, and Judge Sheridan gave credit to the business for its willingness to revamp documents and practices as necessary.

Tips for Others

Hire Outside Consultants

Outside consultants have a way of exhibiting transparency and credibility to both clients and the courts. Hiring an independent auditor or lawyer also presents a different perspective. An outside professional can shed light on unfair practices that internal employees may consider justified. From this approach, hiring independent consultants has more to do with improving an overall business structure and less to do with impressing the courts.

Always Look for Ways to Correct Deficiencies

It is in a corporation’s best interest to correct flaws when discovered. AXA did not wait for the plaintiff to point out flaws and suggest changes to their business practices. Instead, the company was proactive in correcting deficiencies that its independent contractors uncovered. Such action impressed Judge Sheridan, who based much on his ruling on AXA’s enterprising ideas and solutions to issues that could pose potential problems in the future.

Revisit Contract Agreements for Accuracy and Clarity

AXA reviewed and updated its contract during trial proceedings to make their client agreement more comprehensive and accurate. Such transparency convinced the courts that the indemnity company was not attempting to conceal facts or use deceptive practices to increase earnings.

Choose Independent Directors Whenever Possible

The diversity of the executive team impressed Judge Sheridan to the extent of commenting on such a dynamic. Hiring independent directors who do not have ulterior motives can improve a corporation’s image during an investigation, and help in their defense of a potential lengthy lawsuit.