II. Plaintiffs Allege that Prudential Conducted a Scheme to Deceive Policyholders into Buying Prudential Life Insurance Products
IV. Stipulation of Settlement Terms
V. Class Counsel and Prudential Have Provided Class Members With Extremely Effective Individual and Published Notice of the Proposed Class and Proposed Settlement
VI. The Proposed Settlement Has Been Enhanced Since the Execution of the Stipulation of Settlement
VII. Class Response to the Proposed Class Certification and the Proposed Settlement Has Been Favorable
VIII. The Fairness Hearing Provided the Parties, Objectors Appearing Through Counsel, State Regulators, and All Individual Objectors an Opportunity to Express Their Positions to the Court
I. This Court Has Subject Matter Jurisdiction Over Plaintiffs' Claims Against Prudential
II. The Court's Jurisdiction over Plaintiffs' Claims Does Not Violate the Article III Case or Controversy Requirement
III. The Court Has Personal Jurisdiction over All Plaintiffs, Present and Absent
IV. The Predominance of Common Factual and Legal Issues, the Adequacy of Class Counsel and Class Representatives, and the Superiority of the Class Action Device as a Tool to Resolve the Current Controversy Require Class Certification
V. The Class Notice and Supplemental Materials Fulfill the Notice Requirements of Federal Rules of Civil Procedure 23(c)(2) and 23(e)
A. The Class Notice Adequately Describes the Allegations of the Complaint
B. The Class Notice Adequately Advises Class Members of the Consequences of Deciding Not to Opt Out
C. The Class Notice Need Not Describe Parallel State Court Proceedings or All Potential State Law Causes of Action
D. The Class Notice Need Not Identify Objectors to the Proposed Settlement
E. The Class Notice Accurately Describes the Interaction Between the Task Force Plan and the Proposed Settlement
F. The Class Notice Adequately Indicates Class Members' Waiver of Their Right to a Jury Trial
G. The Class Notice Adequately Indicates Prudential's Agreement Not to Oppose Attorneys' Fees
H. The Class Notice Was Not Required to Include an "Opt-Out Form"
I. The Class Notice Was Not Required to Include Individual Policy Illustrations
J. The Class Notice Adequately Informed policyholders About the Information Considered in the ADR Process and Need Not Have Informed Policyholders Individually of Available Evidence
K. The Class Notice is Not "Cumbersome" or Inadequate to Alert Policyholders
L. The Class Notice Adequately Indicated the Deadline to File Objections or Opt Out
M. The Class Notice Fairly Describes Basic Claim Relief and Alternative Dispute Resolution Provisions
N. Objections that Ostensibly Attack the Class Notice But Really Concern Proposed Settlement Terms Will Be Addressed in the Context of the Proposed Settlement's Fairness
O. Considering All of the Circumstances, Class Notice in the Present Case Comports with Rule 23 and with Due Process
VI. The Proposed Settlement Is Fair, Reasonable, and Adequate In Light of the Multifarious Factors that the Court Must Consider
A. The Proposed Settlement Provides Extraordinary Relief to Injured Policyholders
B. The Complexity of this Action and the Likely Lengthy Duration of the Litigation Warrant Approval of the Proposed Settlement
C. Class Reaction to the Proposed Settlement Has Been Overwhelmingly Favorable and Weighs in Favor of Class Approval
D. Approval of the Proposed Settlement at this Stage of the Proceedings Is Appropriate Because the Plaintiffs Have Completed Extensive Discovery and Settlement Now Would Save the Extensive Costs of Additional Discovery and Trial
E. The Significant Risks Attendant to Plaintiffs' Ability to Establish Prudential's Liability and Damages Weigh In Favor of Approving the Proposed Settlement
F. The Risks of Maintaining this Class Action Through Trial Weigh in Favor of Approving the Proposed Settlement
G. Prudential's Inability to Withstand a Greater Judgment Is a Factor Weighing in Favor of Approving the Proposed Settlement
H. The Proposed Settlement Is Reasonable in Light of the Best Possible Recovery and All of the Attendant Risks of Litigation
I. Plaintiffs Conducted Adequate Discovery Precedent to Agreeing to Settle
J. The Proposed Settlement is Reasonable In Light of the Plaintiffs' Preliminary Discovery
K. The Settlement Accounts for All Causes of Actions and Types of Relief Sought in the Second Amended Complaint
L. The Parties Completed Negotiations of the Proposed Settlement Before Negotiating Attorneys' Fees and the Attorneys' Fee Agreement Is Legal and Proper
M. Class Counsel's Approval of the Proposed Settlement Indicates Its Fairness
N. The Objectors' Panaloply of Other Concerns Fall Under Their Own Weight
1. The Proposed Settlement Improves Upon the Task Force Plan
2. ADR Review Is Impartial
3. The ADR Process is Simple
4. The ADR Process Provides Adequate Substantive Relief
5. The Proposed ADR Scoring Provisions Adequately Determine Whether Prudential Misled Individual Class Members
6. The ADR Process is an Appropriate Mechanism to Assess Whether Class Members Were Affected by Prudential's Deceptive Sales Practices
7. The ADR Process Adequately Identifies Churning Cases
8. The ADR Process Adequately Identifies Cases in Which Prudential Sold Life Insurance Policies as Investment Vehicles
9. The Proposed Presumptions for APP Claims Are Unnecessary and Inappropriate
10. No Additional Evidentiary Considerations Are Necessary
11. Agent Conduct Is an Appropriate Talisman of Prudential's Wrongful Conduct
12. A Presumption in Favor of the Policyholder Where the Policyholder's Statement Conflicts with an Agent's Statement Is Unnecessary and Undesirable
13. The Agent's Presence Before a Decisionmaker Is Unnecessary to Adjudicate Class Members' Claims
14. The Complaint History Factor is Adequate
15. The Proposed Settlement's Method of Assembling Associated Complaints is Adequate
16. Class Members Need Not Be Informed of Agents' Complaint Histories Prior to Choosing Relief
17. Unauthorized Execution as a Positive Consideration is Adequately Described and Effective
18. The ADR Process Fairly Addresses Document Destruction
19. Policyholders Receive Adequate Representation in the ADR Process
20. The Time Periods Allocated to Each Step in the ADR Process Are Fair, Reasonable, and Adequate
21. The ADR Procedures Properly Consider as Undermining Evidence that a Class Member Received a Clear Written Disclaimer at the Time of Sale
22. This Court's Role in Allocating the Additional Remediation Amount Is Appropriate and Does Not Undermine the Ability of Class Members to Evaluate the Proposed Settlement's Fairness
23. Basic Claim Relief Is a Valuable Remedy
24. The Settlement Does Not Discriminate Against Policyholders Who Cannot or Desire Not to Purchase Basic Claim Relief
25. The Proposed Release Is Pair and Appropriate
26. There Is No Basis to Appoint a Custodial Receiver or Special Fiscal Agent
27. The Proposed Settlement Does Not Violate State Law
28. The McCarren Ferguson Act Does Not Apply to the Proposed Settlement, Which Does Not Affect Policyholders' State Substantive State Law Rights
29. The Rules Enabling Act Does Not Apply to the Proposed Settlement, Which Does Not Affect Policyholders' State Substantive State Law Rights
30. This Court Properly Preliminarily Certified the Class for Settlement Purposes Only
31. The Fairness Hearing Format Was Fair
a. The Opt-Out and Objection Period Was Sufficient
b. Objectors Had Sufficient Opportunity to Conduct Discovery to Prepare for the Fairness Hearing
c. Objectors Had No Absolute Right to Present and Cross Examine Witnesses at the Fairness Hearing, and Under the Circumstances, These Activities Were Inappropriate
d. Krell and All Objectors Were Afforded an Adequate Opportunity to Present All of Their Factual and Legal Arguments
WOLIN, District Judge
The Prudential Insurance Company of America, the institution that for years has represented itself as the quintessence of stability, the Rock, used pervasive and systematic deceptive sales tactics to sell many of individuals a great number of life insurance policies, to the benefit of Prudential and its sales agents, but to the detriment of trusting consumers. The old adage resounds true: insurance is not bought; it is sold. And through selling consumers "a piece of the rock," Prudential ultimately crushed the hopes and expectations of many policyholders with the colossal weight of hidden fees and costs. Prudential forced many individuals to pay amounts that far exceeded their means, and caused others to lose the policies that they had worked so long and so hard to build.
The plaintiffs now ask the Court to help them alleviate the burdens that they allege Prudential has forced upon them. Plaintiffs seek class certification under Federal Rule of Civil Procedure 23(b)(3) and request this Court to approve the proposed class settlement as memorialized in the Stipulation of Settlement dated October 28, 1996, and amended by the Amendment to the Stipulation of Settlement dated February 22, 1997 ("Stipulation Amendment") and by this Court's Order of February 3, 1997 (collectively the "Proposed Settlement").
The Court finds that the facts at bar compel class certification. Unlike Georgine, the typicality, adequacy of representation, predominance, and superiority requirements are clearly met.
With regard to typicality and adequacy of representation, all class members allegedly were uniformly injured by Prudential's deceptive sales practices and there are no futures claimants." Additionally, Class Counsel have tenaciously represented all class members equally. With regard to predominance and superiority, Prudential's alleged common scheme to defraud its policyholders has created a plethora of common factual and legal issues, which dramatically-outweigh any individual issues. This is a commercial dispute involving purely economic damages and no personal injuries. And, as recommended by In re School Asbestos Litigation,3 Class Counsel have grouped potentially applicable state laws systematically into manageable patterns, completely obviating potential complications from choice of law differences.
Not only do the facts at bar compel class certification, but, beyond a doubt, the Proposed Settlement is fair, reasonable, and adequate in light of the many factors that this Court must consider. The Proposed Settlement's alternative dispute resolution process will provide many claimants the choice between obtaining (1) full rescission and restitution or (2) full benefit of the bargain relief. Importantly, the Proposed Settlement relief is uncapped; all class members may obtain full remediation, regardless of the benefits allocated to other class members. And substantial minimum payment guarantees secure Prudential's commitment to compensate policyholder claims. Indeed, the Proposed Settlement is extraordinary because class members have relatively modest individual claims that would be impracticable to redress individually.
The fairness of the Proposed Settlement is also confirmed by the fact that all fifty states and the District of Columbia have found that the Proposed Settlement, or the preceding plan, the Task Force Plan, is fair, reasonable, and adequate to compensate fairly, fully, and quickly their constituents whom Prudential misled.
Consequently, based upon the evidence of record,
the Court's findings of fact and conclusions of law,
and for the reasons stated herein, the Court concludes that all of the requirements of Federal Rule of Civil Procedure 23 have been met and that the Proposed Settlement of this class action is fair, reasonable, and adequate for the class and, therefore, should be approved. Today's Opinion and Order affirms, explains, and supplements the Court's Memorandum Opinion and Order issued on March 7, 1997.
FINDINGS OF FACT6
I. The Plaintiffs, the Defendants, the Objectors, and Various State Insurance Representatives Participated in These Proceedings
A. The Class Includes All Persons or Entities Who Owned Certain Life Insurance Products During the Class Period
1. The class encompasses, with some exceptions,
all persons or entities who owned one or more of Prudential's new or additional insurance policies between January 1, 1982 and December 31, 1995 (the "Class Period"). Stipulation of Settlement at 13, P A.1.at. Approximately eight million class members own approximately 10.7 million insurance policies.
B. The Plaintiff Representatives Are Typical Victims of Prudential's Deceptive Sales Practices During the Class Period
1. Carol Nicholson Was Victimized by of Churning, Vanishing Premium Tactics, and Investment Plan Tactics
2. Plaintiff Carol Nicholson, executrix of the estate of decedent Keith E. Nicholson is an Illinois citizen. Consolidated Second Amended Class Action Complaint and Jury Demand ("Second Am. Compl.") at P 13. Keith Nicholson was a brick mason, while Carol Nicholson is a retired K-Mart personnel manager. Second Am. Compl. at P 107. Carol and Keith Nicholson purchased four life insurance policies between 1966 and 1984 with death benefits totaling approximately $ 30,000 (the "original policies"). Second Am. Compl. at P 106. In 1986, Keith Nicholson purchased from Prudential a $ 100,000 whole life insurance policy (policy number 76460936), allegedly as a result of Prudential's common scheme. Second Am. Compl. at P 13. Carol Nicholson alleges churning, vanishing premium, and investment plan claims. Second Am. Compl. at PP 106-19.
3. In 1984, Prudential agent Homer Gernigan contacted the Nicholsons and advised them that they could use the dividends and earnings from the original policies to "work for them" in connection with their estate and retirement planning. Second Am. Compl. at P 108. Gernigan further advised the Nicholsons that they could acquire additional insurance by paying the premiums on the additional policy with the earnings from the original policies, with no additional out-of-pocket costs. Second Am. Compl. at P 108. Gernigan represented that the additional insurance would be needed for the Nicholsons' financial security during retirement or estate security for the Nicholsons in the event of Keith Nicholson's death. Second Am. Compl. at P 108.
4. In 1984, in reliance on Gernigan's misrepresentations, the Nicholsons agreed to acquire a $ 100,000 whole life insurance policy (the "additional policy"). Second Am. Compl. at P 110. Gernigan told the Nicholsons that to apply the earnings from the original policies to the premiums for the additional policy, Keith Nicholson had to sign certain Prudential forms in blank. Second Am. Compl. at P 112. Keith Nicholson did just that. Second Am. Compl. at P 112. Unknown to the Nicholsons, these forms authorized loans from the cash value of the Nicholsons' original policies. Second Am. Compl. at P 113.
5. Subsequently, the Nicholsons received notices from Prudential indicating that policy loans had been taken and the additional policy had lapsed. Second Am. Compl. at P 114. The Nicholsons contacted Prudential, which advised them to ignore the notices. Second Am. Compl. at P 115.
6. Keith Nicholson was diagnosed with leukemia in 1989 and died on August 26, 1994. Second Am. Compl. at P 117. At the time of Keith Nicholson's death, Carol Nicholson learned that, because of Prudential's misrepresentations and omissions, his $ 130,376 in insurance coverage had dwindled to $ 22,514.43. Second Am. Compl. at P 118. Carol Nicholson learned that Keith Nicholson's additional policy had lapsed and that unauthorized loans had substantially diminished the available death benefits of the other policies. Second Am. Compl. at P 118. Carol Nicholson also learned of Gernigan's material omissions and misstatements in selling the Nicholsons the additional policy: (1) that loans were made on the cash value of the original policies to pay the premiums on the additional policy; (2) that these loans would diminish the cash values and death benefits of the original policies; (3) that despite Gernigan's representations, the earnings and dividends on the original policies were insufficient to pay the Premiums and other charges of the additional policy; (4) that the earnings, dividends, and cash values of the original policies would dissipate; and (5) that without additional premium payments the additional policy would lapse. Second Am. Compl. at P 118. Carol Nicholson, as the executrix for the Estate of Keith Nicholson, sued Prudential on February 6, 1995. Second Am. Compl. at P 119.
2. Martin Dorfner Was Victimized of Churning and Vanishing Premium Tactics
7. Plaintiff Martin Dorfner is a Pennsylvania citizen. Second Am. Compl. at P 14. He and his wife operate a small grocery store. Second Am. Compl. at P 120. In April of 1991, Dorfner purchased from Prudential a $ 50,000 variable appreciable life insurance policy (policy number 97-522-008), allegedly as a result of Prudential's common scheme. Second Am. Compl. at P 14. Dorfner alleges damages from churning and his purchase of a vanishing premium policy. Second Am. Compl. at PP 120-46.
8. As of July of 1989, Martin and Audrey Dorfner had purchased several Prudential life insurance policies to insure Martin including a $ 100,000 term life policy (policy number 73-438-990), a $ 5,000 whole life policy (policy number 22-218-366), and an essentially paid-up policy having a death benefit of $ 3,000. Second Am. Compl. at P 124. Additionally, Audrey was insured by a Prudential $ 10,000 whole life policy (policy number 73-381-858) and the Dorfner's children were insured: Martin, Jr. for $ 5,000 (policy number 24-749-189), Brian for $ 5,000 (policy number 25-501-819), Donald for $ 5,000 (policy number 25-233-873), and Denise for $ 5,000 (policy number 25-233-872). Second Am. Compl. at P 124.
9. In July of 1989, Prudential agent Susan Sheldon met with the Dorfners to review their coverage. Second Am. Compl. at P 125. As trained by Prudential, Sheldon advised the Dorfners that Martin Dorfner would be entitled to a "free" insurance policy by using the dividends from his $ 3,000 policy. Second Am. Compl. at P 125. In reliance on Sheldon's misrepresentations, the Dorfners agreed to complete the paperwork for the free policy. Second Am. Compl. at P 126.
10. That month, Prudential issued another whole life policy in Martin Dorfner's name (policy number 73-831-273) (the "free policy"). Second Am. Compl. at P 127. The Dorfners never received any policy documents or other information regarding the amount of death benefits provided by the "free" policy. Second Am. Compl. at P 128.
11. The Dorfners later learned that in July of 1989, without authorization, Sheldon withdrew $ 300.50 from Martin's original $ 3,000 policy to pay for his "free policy." Indeed, Sheldon continued to withdraw funds each year thereafter until 1993. Second Am. Compl. at P 128. The Dorfners also discovered that in April of 1991 a living needs rider had been added to the "free policy" without their knowledge.
12. In the spring of 1991, Prudential's Vice-President of the District Agencies sent Martin Dorfner a form Notice marked "important" and a copy of the computer printout of policy information. Second Am. Compl. at P 129. The Notice stated that a Prudential representative would contact Dorfner to review the circled "convertible amount" of his term policy. Second Am. Compl. at P 129.
13. In March of 1991, Sheldon approached Martin Dorfner regarding conversion of the term policy and presented Martin Dorfner with an offer to convert his term policy to a "new" Prudential Variable Appreciable Life ("VAL") policy. Second Am. Compl. at P 130. Sheldon showed Martin Dorfner deceptive illustrations and explained that the VAL policy was superior to his term coverage, because the VAL was a whole life product. Second Am. Compl. at P 131. Sheldon also explained that the VAL was a financial savings because the premiums could be expected to be completely paid within eight years by using the dividends of the Dorfners' other policies. Second Am. Compl. at P 131. Sheldon told the Dorfners that the childrens' policies were essentially paid-up and that she would administer the dividend application to the new policy. Second Am. Compl. at PP 132-33. Relying on Sheldon's presentation, Martin Dorfner agreed to apply for a $ 50,000 VAL policy. Second Am. Compl. at P 135. As trained by Prudential, Sheldon did not leave copies of the illustrations or any prospectus for the new VAL with the Dorfners. Second Am. Compl. at P 134. In fact, Prudential never provided the Dorfners with a copy of the VAL policy. Second Am. Compl. at P 137.
14. In July of 1992, unknown to the Dorfners, without authorization, and contrary to Sheldon's earlier representations, Sheldon took a $ 680.61 loan against Martin Dorfner's $ 5,000 whole life policy (policy number 22-218-366). Second Am. Compl. at P 138. In 1993, Sheldon took another $ 300.50 loan, this time from policy number 73-831-273, the "free policy." Second Am. Compl. at P 139.
15. On March 8, 1994, Prudential advised Martin Dorfner that a new agent would be servicing his account. Second Am. Compl. at P 140. Soon thereafter, the new agent told Martin that an unauthorized loan had been made against his original policy and applied to the VAL policy. Second Am. Compl. at P 140. The agent also advised Martin that Audrey's policy and the childrens' policies were in danger of lapsing because the dividends and cash value had been applied to the premiums of the VAL. Second Am. Compl. at P 141. Prudential admitted in letters to Martin dated August 11, 1994 and September 13, 1994 that the loans taken to fund the VAL were not authorized. Second Am. Compl. at P 142. Martin Dorfner sued Prudential on January 19, 1995. Second Am. Comp. at P 146.
3. Vincent and Elizabeth Kuchas Were Victimized by Churning and Investment Plan Tactics
16. Plaintiffs Vincent and Elizabeth Kuchas (the "Kuchases") are Connecticut citizens. Second Am. Compl. at P 15. In 1987, Elizabeth Kuchas purchased a $ 100,000 variable appreciable life insurance policy (policy number R0147600) and Vincent Kuchas Purchased an $ 80,000 variable appreciable life insurance policy (policy number R0147606) from Prudential allegedly as a result of Prudential's common scheme. Second Am. Compl. at P 15. The Kuchases allege churning and investment plan based fraudulent sales practices. Second Am. Compl. at PP 147-59.
17. Vincent Kuchas has retired, after working for thirty-seven years as a roofer. Second Am. Compl. at P 147. Elizabeth Kuchas's occupation is unknown. On November 5, 1983, Vincent Kuchas purchased a variable life insurance policy from Prudential with a face amount of $ 46,908. Second Am. Compl. at P 148. On November 11, 1987, Elizabeth Kuchas purchased a variable life policy from Prudential with a face amount of $ 40,000. Second Ant. Compl. at P 148. These policies are the "initial policies." Second Am. Compl. at P 148.
18. In December of 1987, Prudential agent Richard Dings recommended that the Kuchases purchase new life insurance. Second Am. Compl. at P 149. The Kuchases told Dings that they wanted a retirement investment similar to an IRA, not just additional life insurance. Second Am. Compl. at P 149. The Kuchases also informed Dings that they could not afford an investment plan if they had to continue to pay premiums on the initial policies. Second Am. Compl. at P 149. Dings proceeded to conceal from the Kuchases all of the adverse information that agents commonly withheld from customers to churn them. Second Am. Compl. at P 150. On December 1, 1987, relying on Dings' representations, particularly as to financing terms, the Kuchases purchased two VAL policies (the "1987 VALs"). Second Am. Compl. at P 152. Prudential provided no prospectus at the time of sale. Second Am. Compl. at P 152.
19. In early 1988, the Kuchases began to receive information suggesting that further premiums would be due on the initial policies. Second Am. Compl. at P 154. Dings repeatedly assured the Kuchases that they need only pay what they could afford on the initial policies to keep up the 1987 VALs and that the 1987 VALs were still good "IRA investments." Second Am. Compl. at P 154. Relying on these false assurances, the Kuchases continued to make small monthly payments in amounts they could afford toward the premiums on the initial policies. Second Am. Compl. at P 155. Unknown to the Kuchases, however, Prudential did not credit these partial payments. Second Am. Compl. at P 155. In February of 1994, when the Kuchases discovered that Prudential had not accepted their partial payments, Dings told the Kuchases not to worry and that he would take care of it. Second Am. Compl. at P 155.
20. In September of 1994, the Kuchases learned that the initial policies had lapsed for non-payment of premiums, and that Dings had taken out loans against the initial policies to pay premiums on the 1987 VALs. Second Am. Compl. at P 156. Consequently, the Kuchases had to pay additional funds to have the initial policies reinstated and to keep the 1987 VALs in force. Second Am. Compl. at P 157. The Kuchases sued Prudential on February 28, 1995. Second Am. Compl. at P 157.
4. Norman Gassman Was Victimized by Vanishing Premium and Investment Plan Tactics
21. Plaintiff Norman Gassman is an Ohio citizen. Second Am. Compl. at P 16. He manages a women's shoe store. Second Am. Compl. at P 160. In August of 1992, Gassman purchased from Prudential a variable appreciable life insurance policy (policy number 98354001), allegedly as a result of Prudential's fraudulent scheme. Second Am. Compl. at P 16.
22. In August of 1992, Gassman had $ 20,000 invested in a certificate of deposit when Prudential agent Ben Schwartz, who held himself out as a "financial planner" or "financial consultant," contacted him. Second Am. Compl. at P 161. Schwartz misrepresented that a VAL policy was part of an "investment plan" that was "better than a CD," that it would pay a higher rate of interest at low risk, and that the earnings on this investment would be tax-free. Second Am. Compl. at P 162. Schwartz also misrepresented to Gassman that he would not be required to pay any premiums for the VAL policy because the VAL policy could reasonably be expected to yield enough dividend income to pay its own premiums in addition to providing a yield exceeding that which Gassman had earned on his Certificate of Deposit. Second Am. Compl. at P 162. Although Schwartz disclosed to Gassman that some life insurance would be included with the VAL policy, he failed to disclose that the product was not an investment plan and that a substantial portion of the funds Gassman was "investing" would not, in fact, be invested. Second Am. Compl. at P 165.
23. Relying on these misrepresentations, Gassman agreed to invest the money from his CD in the VAL policy. Second Am. Compl. at P 164. During the following months, Gassman received notices from Prudential that contradicted Schwartz's representations. Second Am. Compl. at P 166. When Gassman confronted Schwartz, he responded that Gassman should not worry because Gassman was being assessed special charges that would cease after the first two years. Second Am. Compl. at P 166.
24. In March of 1995, Gassman discovered that the VAL policy was not an investment plan, that he had paid undisclosed fees and commissions to Prudential and its agent, and that Prudential had concealed that its dividend scales would not perform as represented. Second Am. Compl. at P 167. Gassman sued Prudential on May 25, 1995. Second Am. Compl. at P 168.
C. The Court Has Granted the Requests of Several Class Members to Intervene
25. The Court granted the motions of objectors Treadway, Parnell, and Ginsberg to intervene in Scheduling Order No. 6, dated January 6, 1997 and the Court granted the motion of objectors Kathryn Johnson and Richard Johnson to intervene in the Court's Order of January 29, 1997.
D. Plaintiffs Sued Prudential, a Mutual Life Insurance Company and One of the Largest Life Insurance Companies in the Country
26. Prudential is a corporation organized under the laws of New Jersey, and has its principal office at 751 Broad Street, Newark, New Jersey. Second Am. Compl. at P 17. Prudential is a mutual life insurance company, meaning that it is owned by its policyholders by virtue of their ownership of Prudential products. Second Am. Compl. at P 19. Unlike other corporate forms, a mutual life insurance company has no shareholders. Prudential was formed in 1873 and is one of the oldest and largest life insurance and annuity companies in the United States. Second Am. Compl. at P 19. As such, Prudential does business in all fifty states and employs over 20,000 fulltime professional career agents in the United States and Canada. Second Am. Compl. at P 20. Prudential also uses other distribution networks to sell its financial products. Second Am. Compl. at P 20.
27. Prudential has invited public trust and confidence in its integrity and skills by using national advertising and standardized sales presentations that portray the Rock of Gibraltar as Prudential's service mark and that refer to Prudential products as a "piece of the Rock." Second Am. Compl. at P 20.
E. Plaintiffs Have Also Sued Several Individual Defendants Who Were Upper Echelon Prudential Managers
28. The individually named defendants include Robert A. Beck, Ronald D. Barbaro, and Robert C. Winters. Beck is a New Jersey citizen. He was Prudential's President from 1972 to 1979, and its Chairman and CEO from 1978 to 1987. Second Am. Compl. at P 18(a). Barbaro is a Canadian citizen. He was Prudential's President from 1990 to 1992. Second Am. Compl. at P 18(b). Winters is a New Jersey citizen. He was Prudential's Chairman and CEO from 1987 to 1993 and its Chairman, CEO, and President from 1993 to 1994. Second Am. Compl. at P 18(c).
F. Several State Government Representatives Have Contributed to These Proceedings
29. The Court has allowed several states to participate in these proceedings because the states have expressed strong interests in the outcome. The Court has permitted the California Insurance Commissioner and the Florida Insurance Commissioner to appear as amicus curiae. Order dated February 3, 1997. The Court has permitted the Massachusetts Insurance Commissioner, the Massachusetts Attorney General, and the Texas Insurance Commissioner to intervene pursuant to Federal Rule of Civil Procedure 24(b). Id. The Court has recognized that the Florida Attorney General has standing to appear before the Court as an objector to the Proposed Settlement. Id. And, although the Court has not formally addressed the status of the New Jersey Department of Insurance in these proceedings, the Court has permitted the department amicus curiae status, on behalf of the department itself and on behalf of the Multi-State Life Insurance Task Force. See infra section III.B.
30. California, Florida, Massachusetts, and Texas initially filed objections to the Proposed Settlement. Between February 20 and 22, 1997, all four of these states settled with Prudential, or signed letters of intent to do so, and withdrew their objections to the Proposed Settlement. At that time, Prudential agreed to additional enhancements (the "Final Enhancements") to the Proposed Settlement. Because of these additional enhancements, the four previously objecting states now find that the Proposed Settlement is fair, reasonable, and adequate and fully protective of the rights of their citizens.
These Final Enhancements have been incorporated into the Proposed Settlement to benefit class members in all states.
II. - Plaintiffs Allege that Prudential Conducted a Scheme to Deceive Policyholders into Buying Prudential Life Insurance Products
31. Prudential engaged in a systematic fraudulent marketing scheme in which its agents wrongfully induced policyholders to purchase certain Prudential life insurance policies. Second Am. Compl. at P 5. Prudential implemented its scheme through the use of false and misleading sales presentations, policy illustrations, marketing materials, and other information that Prudential approved, prepared, and disseminated to its nationwide sales force. Second Am. Compl. at P 5.
32. Prudential sells primarily three types of financial products: (1) life insurance policies (term, whole life, and combinations of these), (2) annuities, and (3) investments through its securities subsidiary. Second Am. Compl. at P 21. Prudential's whole life insurance products consist of both traditional whole life policies and VAL policies. Second Am. Compl. at P 21.
33. Prudential prepares, underwrites, and issues all of its products from Prudential's New Jersey headquarters. Second Am. Compl. at P 22. Prudential also provides or approves all sales presentations, policy illustrations, and other information used to sell insurance to the public. Second Am. Compl. at P 22. Prudential supplies its agencies with preapproved materials including product brochures, pre-call letters, computer-based sales and illustration systems, seminar materials, and newspaper advertisements. Second Am. Compl. at P 22. Prudential prohibits its agents from using any advertising or marketing materials that Prudential has not first approved. Second Am. Compl. at P 22-23.
34. Beginning in the early 1980's, Prudential used its centralized marketing system to implement a scheme to sell new insurance policies to existing and new customers through three deceptive sales tactics: "(churning," "vanishing premium," and "investment plan" techniques. Second Am. Compl. at P 25.
A. Prudential Used a Deceptive Sales practice Called "Churning" to Sell Policyholders Replacement Policies
35. Prudential agents used "churning"
tactics to induce policyholders with significant cash values in existing policies to purchase new policies, thereby depleting the cash values of existing policies and diverting these values to Prudential. Second Am. Compl. at PP 30-40.
36. In the life insurance context, the term "churning" refers to the removal, through misrepresentations or omissions, of the cash value, including dividends, of an existing life insurance policy or annuity to acquire a replacement insurance policy.
Second Am. Compl. at P 28. The value of the first policy may be reduced either by borrowing against the policy or by virtue of the policy's lapse. Second Am. Compl. at P 28. Churning often results in financial detriment to the policyholder, a financial benefit to the agent by virtue of a large commission on the first year premium, and administrative charges being paid to the insurer. Second Am. Compl. at P 29.
37. Prudential and the individual defendants trained Prudential's nationwide sales force to convince existing policyholders to use the cash values and/or dividends of existing policies to purchase replacement insurance policies with purportedly greater death benefits and cash values. Second Am. Compl. at P 30. Prudential carried out its scheme through informing agents of, among other policyholder information, the amount of accumulated cash values in existing policies. Second Am. Compl. at P 31. Prudential agents used this information to target elderly persons who had cash values in existing policies. Second Am. Compl. at P 32. On June 5, 1995, Prudential finally announced to its agents that they were not to use specialized software to determine current policyholders' cash values or dividends. Second Am. Compl. at P 51.
38. Prudential distributed to its agents software programs that contained numerous form letters to solicit business from then-existing customers. Second Am. Compl. at P 33. Prudential also gave new agents a "book of business," which listed existing Prudential policyholders and illustrated each policyholder's built-up cash values and accumulated dividends, instructed the new agents to sell the existing policyholders additional insurance and replacement policies, and provided its agents with audio tapes to teach the agents to churn. Second Am. Compl. at P 34.
39. The agents then used their knowledge of existing customers' cash values and their knowledge of how to churn to call on the existing customers and convince them to acquire new insurance policies. Second Am. Compl. at P 35. Agents misrepresented that the new insurance could be acquired through using only dividends from existing policies and that the policyholder would receive additional coverage for little or no additional premiums. Second Am. Compl. at P 36.
40. Additionally, Prudential trained its agents to ask the customer to sign one or more "disbursement request forms" in blank. Second Am. Compl. at P 37. Prudential printed the forms and distributed them to its agents. Second Am. Compl. at P 37. The forms allow policyholders to make policy loans, to execute dividend option changes, to surrender paid-up additional insurance, to withdraw accumulated dividends, or to cash surrender the policy. Second Am. Compl. at P 37.
41. Prudential trained its agents to complete the loan section of the disbursement request form to facilitate and conceal their churns. Second Am. Compl. at PP 38-40. The agent would indicate on the form that a loan would be used to pay premiums on other contracts and would, thereby, extend Prudential credit to the insured to cover the premiums to acquire a replacement policy. Second Am. Compl. at P 38. The insured, thereby, could be led to believe for several years that the replacement policy provided increased death benefits without additional premiums. Second Am. Compl. at P 40. When the existing policy cash values had been depleted by the loans, however, Prudential would then require the insured to pay the additional premiums. Second Am. Compl. at P 40. If the insured was unable or unwilling to pay, the policies would lapse. Second Am. Compl. at P 40.
42. Prudential compounded the injuries caused by its churning by classifying replacement policies as new policies. Second Am. Compl. at P 41. This classification allowed Prudential and its agents to exact significantly higher fees and commissions than would be permitted in the case of a legitimate replacement transaction. Second Am. Compl. at P 41.
43. Prudential was aware that replacement is rarely in the best interests of the policyholder because: (1) existing policy premiums are usually lower because a replacement takes place when the insured is in a less favorable underwriting class; (2) acquisition costs are charged in the early years of a policy and the policyholder incurs these costs again with the replacement policy; and (3) replacement renews the risk that an incontestability or suicide clause will be incorporated into a policy. Second Am. Compl. at P 44. Prudential's own corporate policy manuals purport to prohibit churning. Second Am. Compl. at P 46.
44. Prudential required agents to give prospective policy purchasers a replacement disclosure form explaining that replacement is not typically in the policyholder's best interests, but agents routinely failed to do so. Second Am. Compl. at P 47. Prudential repeatedly discouraged and inhibited its agents from providing adequate disclosures to the policyholders. Second Am. Compl. at P 47. Moreover, Prudential's agent compensation system, which caused rapid agent turnover and a "produce or die" atmosphere, exacerbated the pressure to churn. Second Am. Compl. at P 49.
45. Prudential trained its agents to extend the deception when they were contacted by policyholders who had received confusing paperwork from Prudential. Second Am. Compl. at P 50. Policyholders would call Prudential when they received notices indicating that loans had been taken against their policies. Prudential trained its agents to advise customers "not to worry," "that the notice was a mistake," or that the agent "would take care of it." Second Am. Compl. at P 50.
B. Prudential Misstated that the Premiums on Its Life Insurance Products, Including Abbreviated Payment Plan Policies, Would Vanish
46. Prudential agents used "Abbreviated Payment Plan" ("APP"), or "vanishing premium" policies, often in conjunction with churning, to sell permanent life insurance policies to class members; Prudential agents misrepresented that policyholders would have to pay no out-of-pocket premiums after a certain number of premium payments during the initial years of the policies. Second Am. Compl. at PP 52-61.
47. Prudential agents sold these APP policies to class members by using standardized sales presentations and written policy illustrations created from the hardware and software that Prudential distributed. Second Am. Compl. at PP 53, 55-56. Moreover, Prudential prepared and disseminated standardized sales presentations, scripts, and other materials to extol Prudential's APP policies. Second Am. Compl. at PP 52-56.
48. Prudential's standardized sales presentations and policy illustrations failed to disclose that the policy premiums would not vanish and that Prudential did not expect the policies to pay for themselves as illustrated. Second Am. Compl. at P 56. Prudential's illustrations also did not inform policyholders of the assumptions on which the policy illustrations were based, assumptions which had no reasonable basis in fact. Second Am. Compl. at P 56.
49. Agents frequently merged churning tactics and APP policies, forcing policyholders to pay the Premium cost of the APP policy by dissipating the cash value of an existing life insurance policy. Second Am. Compl. at P 57. Agents would intentionally conceal this dissipation from the policyholders. Second Am. Compl. at P 57.
50. Prudential failed to apprise policyholders of the enhanced risks that they assumed in purchasing Prudential life insurance policies in the 1980's. Second Am. Compl. at P 58. At that time, Prudential created new classes of dividend participating individual life policies sensitive to then-existing interest rates, policies based on the so-called Income Generation Approach ("IGA"). Second Am. Compl. at P 58. Prudential knowingly failed to disclose that these policies would suffer greater adverse consequences when interest rates declined and Prudential lowered its dividend rates to correspond with declining interest rates. Second Am. Compl. at P 59. Whereas in previously written policies dividends were pooled with premium proceeds from policies invested over many years, these new policies were invested in a smaller pool and risked greater exposure to declining returns on Prudential investments. Second Am. Compl. at P 59. Prudential agents used standardized illustrations that failed to disclose this enhanced risk. Furthermore, Prudential agents failed to explain the risk at the time of sale or afterward. Second Am. Compl. at P 59.
51. Prudential's senior management knew early in the Class Period that the assumptions underlying the APP illustrations were fundamentally flawed, but continued to approve the sale of these policies to class members without adequate disclosures. Second Am. Compl. at P 61.
C. Prudential Fraudulently Marketed Its Insurance Policies as Investment Vehicles
52. Prudential fraudulently marketed life insurance policies as "investment plans," "retirement plans," or similar investment vehicles. Second Am. Compl. at PP 62-71. Plaintiffs allege that Prudential agents failed to disclose that these Purported "investment plans" were really standard life insurance policies, which carried costs and other components that materially and adversely differed from true investment or retirement plans. Second Am. Compl. at PP 62-71. These misrepresentations and omissions violated many applicable regulations prohibiting the sale of life insurance as an investment plan. Second Am. Compl. at P 70.
53. Specifically, Prudential misrepresented to policyholders, through standard presentations and materials, that life insurance policies were equivalent to investment or savings accounts, pension maximization or retirement plans, college-tuition funding plans, mutual funds, or other investment or savings plans. Second Am. Compl. at P 62. Prudential's sales presentations did not even use the phrase "life insurance." Second Am. Compl. at P 63. For example, Prudential used mailers and promotional brochures entitled "Guaranteed Income for Life," which did not indicate that the product being sold was life insurance. Second Am. Compl. at P 63. Instead, these presentations labeled what were essentially premium payments as "deposits," "savings," "contributions," or "payments." Second Am. Compl. at P 63.
54. As with the APP plans, Prudential agents often used the investment plan scheme in conjunction with churning to persuade existing policyholders to replace their policies with "new" ones, misrepresenting the benefits that policyholders could achieve by transferring the accumulated cash values to the "investment plan." Second Am. Compl. at P 63. In particular, agents often misrepresented Prudential's VAL policy as a financial investment. Second Am. Compl. at P 64. Prudential encouraged or permitted these fraudulent sales by providing agents presentations and materials (including mailers, promotional brochures, and videotapes). Second Am. Compl. at PP 65-66.
55. Prudential knew that agents selling the VAL policies were required to be registered with the National Association of Securities Dealers ("NASD"), and that delivery of a prospectus was required, but nevertheless encouraged VAL sales by agents who were not NASD registered and who did not provide the appropriate prospectus. Second Am. Compl. at PP 67, 70. Thus, Prudential was aware of the widespread use of the "investment plan" sales tactic and encouraged it. Second Am. Compl. at P 71.
D. Prudential and the Individual Defendants Knew About the Fraudulent Marketing Scheme
56. Not only was Prudential aware of the fraudulent practices from its participation in the scheme, Prudential and the individual defendants were alerted to these practices early in the Class Period by internal investigators. Second Am. Compl. at P 79. In 1982 and 1983, internal investigations by Prudential's regional auditing directors uncovered serious patterns of abuse involving financed insurance at many Prudential offices. Second Am. Compl. at P 80.
57. When the auditing directors brought the abuse to the attention of Prudential's senior management, management dismissed the auditors' concerns as unimportant. Second Am. Compl. at P 82. At that time, management took remedial action only to achieve "damage control." Second Am. Compl. at P 82. Meanwhile, Prudential used public relations firms to handle the incidents. Second Am. Compl. at P 82. In some cases, Prudential refused to remediate claims even though an office manager confessed to churning and to forging loan applications. Second Am. Compl. at P 82.
58. Prudential also removed auditors who found churning evidence during their auditing projects and told them that "Marketing" would intercede. Second Am. Compl. at P 83. Prudential warned these auditors not to rock the boat. Second Am. Compl. at P 83. Moreover, Prudential demoted, or even terminated, district managers who complained to Prudential regarding the use of deceptive sales practices. Second Am. Compl. at P 83.
59. In 1984, Prudential's auditing department designed a computer system to detect churning. Second Am. Compl. at P 85. When Prudential tested the system in its Minneapolis office, sales plummeted. Second Am. Compl. at P 85. In 1986, Prudential expanded the monitoring and detection system. Second Am. Compl. at P 85. Thereafter, Prudential's senior management became aware that Prudential's Marketing group did not deter abusive sales practices and that Prudential needed a single uniform detection system. Second Am. Compl. at P 85. Prudential, however, did not remedy the abuse or implement a more comprehensive system, but instead transferred the individuals reporting deficiencies from their auditing positions. Second Am. Compl. at P 85. Prudential continued to refer abusive sales practice matters to Marketing, which took no steps to stop the fraud. Instead, Marketing avoided pursuing compliance issues, especially where top sales agents were involved. Second Am. Compl. at P 86.
60. Throughout the Class Period, Prudential affirmatively concealed its material omissions and misrepresentations from policyholders. Second Am. Compl. at P 89. Prudential agents failed to provide policyholders sample policies at the point of sale. Second Am. Compl. at P 90. Indeed, Prudential instructed its agents not to leave policy illustrations with prospective policyholders. Second Am. Compl. at P 90. Even when policyholders finally received the policies, the policies neither corrected any of the oral misrepresentations or omissions, nor disclosed any of the unrealistic assumptions behind the policy illustrations. Second Am. Compl. at P 90. Moreover, agents lied to policyholders and forged premium loans to conceal their wrongful conduct. Second Am. Compl. at PP 91-92.
61. Prudential also concealed its wrongdoing through its widespread, deliberate strategy to destroy documentary evidence. Second Am. Compl. at P 95. In the summer of 1994, Prudential directed its offices to destroy all sales literature, product brochures, and canvasing letters, except for "approved" materials. Second Am. Compl. at P 96. These documents included both regional and national documents. Second Am. Compl. at P 97.
E. Plaintiffs Allege Federal and State Causes of Action to Challenge Prudential's Deceptive Sales Practices
62. Plaintiffs assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (for the sale of VAL policies), common law fraud, breach of contract, breach of the duty of good faith and fair dealing, negligent misrepresentation, negligence, negligent training and supervision, and unjust enrichment. Second Am. Compl. at PP 181-237. III.
A. Plaintiffs Sued Prudential Throughout the Country Concerning Prudential's Deceptive Sales Practices and the Judicial Panel on Multi-District Litigation Consolidated the Actions and Transferred them to this Court
63. In February of 1995, various plaintiffs filed lawsuits in federal and state courts against Prudential concerning Prudential's sales and marketing practices. Weiss Aff. at P 23. The original class actions filed against Prudential included Nicholson v. The Prudential Insurance Co. of America, filed on February 6, 1995 in the Circuit Court of the Third Judicial Court in Madison County, Illinois, and removed on March 7, 1995 to the Southern District of Illinois; Kuchas v. The Prudential Insurance Co. of America, filed on February 28, 1995 in the District of Connecticut; Zoller v. The Prudential Insurance Co. of America, filed on March 2, 1995 in the District of New Jersey; Groth v. The Prudential Insurance Co. of America, filed on March 3, 1995 in the District of New Jersey; Dorfner v. The Prudential Insurance Co. of America, filed on March 3, 1995 in the District of New Jersey; and Toni Wachtler, Larry Wachtler and Norman Gassman v. The Prudential Insurance Co. of America, filed on May 25, 1995 in the District of New Jersey. Id. at P 23 n.4.
64. In addition to these class actions, dozens of policyholders across the country brought individual actions alleging similar misconduct by Prudential (the "individual actions") and many former Prudential agents sued Prudential, alleging that Prudential wrongfully terminated them for refusing to participate in the deceptive sales practices alleged by the policyholders (the "agent actions"). Id. at P 24.
65. On March 31, 1995, plaintiffs in the Zoller, Dorfner and Groth actions moved to consolidate those actions for pretrial purposes in this Court. Id. at P 23. This Court granted that motion on April 25, 1995. Id.
66. On April 26, 1995, Prudential motioned to the Judicial Panel on Multi-District Litigation (the "MDL Panel") to consolidate all litigation arising out of Prudential's allegedly deceptive sales practices and to transfer these cases to this Court for coordinated pretrial proceedings. Id. at P 24. Prudential then filed motions in the Kuchas Action, the Nicholson Action and others seeking a stay, or an extension of time to respond to the complaints and to plaintiffs' motions for class certification and intervention pending the multi-district consolidation. Id.
67. On August 3, 1995, the MDL Panel granted Prudential's motion for consolidation. August 3, 1995 Transfer Order (the "MDL Transfer Order") (finding that "these twelve actions involve common questions of fact, and that centralization under Section 1407 in the District of New Jersey will serve the convenience of the parties and witnesses and promote the just and efficient conduct of the litigation"). The actions that the MDL initially transferred included the Kuchas and Nicholson actions. Id. Since then, the MDL Panel has transferred many other class actions, individual actions, and agent actions to this Court.
68. After the MDL Transfer Order, Prudential removed plaintiffs' state court cases to federal court based on diversity of citizenship or supplemental jurisdiction, and requested that the MDL Panel transfer these cases to this Court as part of the MDL Proceedings.
69. Among the actions that the MDL panel so transferred were: Krell v. The Prudential Insurance Co. of America, Case No. 95-CV-282, a purported state-wide class action brought in the Court of Common Pleas, Erie County, Ohio, and removed to the Northern District of Ohio (transferred on November 27, 1995), and Kittle v. The Prudential Insurance Co. of America, Case No. 95-C-264, a purported state-wide class action brought in the Circuit Court of Monogalia County, West Virginia, and removed to the Northern District of West Virginia (transferred on August 22, 1995). Counsel for these actions, Michael P. Malakoff, has bombarded this Court with paper throughout these proceedings.
70. Kittle and Krell both moved to remand. Kittle moved to remand to the state court in West Virginia from which the case had been removed. This Court denied that motion on January 18, 1996. On January 30, 1996, Kittle moved to certify the Court's denial of his remand motion for interlocutory review pursuant to 28 U.S.C. § 1292(b). This Court denied that motion on March 15, 1996. Krell moved to remand to the state court in Ohio from which the case had been removed. This Court denied that motion on April 16, 1996. On August 6, 1996, Krell and Kittle filed Petitions for a Writ of Mandamus and a Writ of Prohibition concerning the Kittle and Krell Remand Orders, requesting the Court of Appeals for the Third Circuit to compel this Court to remand their cases to state courts in West Virginia and Ohio, respectively. On September 25, 1996, the Court of Appeals denied these petitions without opinion.
B. The New Jersey Insurance Commissioner Led Insurance Regulators Throughout the Country to Form a Task Force
71. On April 25, 1995, in response to the allegations that plaintiffs had raised in various complaints, the New Jersey Insurance Commissioner formed the Multi-State Life Insurance Task Force (the "Task Force") comprised of insurance regulators from thirty states. The Task Force endeavored to examine Prudential's sales practices and to determine whether Prudential engaged in abusive sales tactics or permitted these practices to occur. Task Force Report at 1-2, 25. The Task Force's objectives were:
. To examine allegations of churning, twisting, and misrepresentation in the sale of Prudential life insurance products;
. To determine the extent of possible improprieties in Prudential's sale of financed insurance from 1985 onward;
. To determine if Prudential's management "acted responsibly" with regard to its information regarding sales practices and agent misconduct;
. To develop an appropriate remediation plan to identify and recompense policyholders harmed by past unlawful financed insurance sales;
. To develop an appropriate plan design to minimize future financed insurance sales problems; and
. To impose sanctions if appropriate.
Id. at 1-3, 26-27.
72. During the course of its work, the Task Force reviewed and analyzed voluminous materials produced by Prudential, including computer based transaction information and electronic databases created by Prudential at the Task Force's request. Id. at 29. The Task Force interviewed over three hundred Prudential employees. Id. at 4. The Task Force also reviewed Prudential market conduct examinations that several individual states had undertaken. Id.
C. Connecticut Conducted its Own Investigation and Produced an Independent Report
73. In April of 1995, in addition to the Task Force Investigation, the Attorney General of the State of Connecticut initiated a separate investigation into Prudential's allegedly fraudulent life insurance sales practices, spurred by the announcement of a class action filed in the United States District Court, District of Connecticut.
Subsequently, the Connecticut Insurance Commissioner agreed to participate in the Task Force, but the Attorney General continued his own investigation, culminating in the Report of Investigation: Life Insurance Sales Practices of the Prudential Insurance Company of America, dated November 21, 1995 (the "Connecticut Report") Weiss App., Vol. 2, Ex. B.
D. Plaintiffs Organized and the Court Approved a Consolidated Team to Prosecute the Prudential Fraudulent Sales Practices Actions
74. On August 28, 1995, following the MDL Transfer Order, Plaintiffs' Counsel conducted an organizational meeting to create a coordinated team to prosecute the cases. Weiss Aff. at P 32. At the meeting, Plaintiffs' Counsel elected an Executive Committee headed by Co-Lead Counsel. Id.
75. On October 14, 1995, the Court ordered the plaintiffs in the pending policyholder actions to file one amended consolidated complaint, defining one purported class of Prudential policyholders and setting forth all claims which could be asserted on behalf of that class. Id. at 37. Additionally, the Court permitted plaintiffs to submit a list of core documents that they sought from Prudential.
76. On October 24, 1995, in Pretrial Order No. 1, this Court appointed Melvyn I. Weiss of Milberg Weiss Bershad Hynes & Lerach LLP, as Co-Lead Counsel for the plaintiffs and Chair of Plaintiffs' Executive Committee, and Michael B. Hyman of Much Shelist Freed Deneberg Ament Bell & Rubenstein, P.C. as Co-Lead counsel for the plaintiffs. Plaintiffs' Counsel elected an Executive Committee headed by Co-Lead Counsel, and including Perry & Windels; Bono, Goldenberg, Hopkins & Bilbrey, P.C. (now known as Hopkins Goldenberg, P.C.); and Arnzen, Parry & Wentz, P.S.C. The Executive Committee elected Goldstein Till & Lite (now Goldstein Lite & DePalma) as Liaison Counsel. Id.
77. Pretrial Order No. 1 designated the Executive Committee, Co-Lead Counsel, and Liaison Counsel (collectively "Class Counsel" or "Plaintiffs' Counsel") to act on behalf of the plaintiffs in the class actions and on behalf of the plaintiffs in a group of related individual actions for discovery purposes. Id.
78. Also, on October 24, 1995, plaintiffs filed the Consolidated Amended Class Action Complaint ("First Amended Complaint"). This complaint combined all of the claims made by class plaintiffs then before the Court. Id. at P 39. The First Amended Complaint alleged that Prudential had engaged in a fraudulent course of conduct to deceive and induce class members into purchasing Prudential life insurance products. Id. at P 40. The complaint asserted violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, common law fraud, breach of contract, bad faith, negligent misrepresentation, negligence, unjust enrichment, and breach of state consumer fraud statutes. Id. at P 41. The First Amended Complaint further alleged that Prudential had made material omissions and misrepresentations in sales presentations, policy illustrations, marketing materials, and other information that Prudential approved, prepared, and disseminated to its nationwide sales force. Id. at P 8. Finally, the First Amended Complaint alleged that Prudential had wrongfully churned policyholders, sold vanishing premium policies, and disguised life insurance as investment products. Id. at PP 29-43, 45-52, 53-55.
E. Plaintiffs Conducted Both Formal and Informal Discovery to Obtain Information Relating to, Prudential's Alleged Fraudulent Sales Practices
79. On October 24, 1995, Plaintiffs' Counsel submitted the core documents list requested by this Court at the October 10, 1995 meeting. Weiss Aff. at P 44. Plaintiffs sought, among other materials, documents that Prudential had provided to the Task Force, organization charts, documents concerning the manner in which Prudential agents and their supervisors were compensated, computer software relating to policy illustrations, Prudential's sales and training materials, customer complaint files, age and discipline files, documents concerning the setting of dividends and interest rates, and documents concerning Prudential's Ethics Hotline. Id.
80. At a status conference held on November 9, 1995, Prudential announced it was preparing motions to dismiss or stay the actions on the bases of "primary jurisdiction" and Rule 12(b)(6). November 9, 1995 Tr. at 32-33. At the November 9, 1995 status conference, the Court concluded, over plaintiffs' objection, that before any significant formal activity, including class certification, would occur, the Court would need to resolve the "primary jurisdiction" and Rule 12(b)(6) motions. Weiss Aff. at P 45. The Court required that Prudential make a limited document production, including organization charts, documents relating to the Task Force formation, and all documents that Prudential had previously produced to the Task Force and to regulatory authorities in Connecticut and Florida. Id. at P 46. Prudential argued to the Court at this meeting that New Jersey's Rule of Professional Conduct 4.2 ("RPC 4.2") prohibited Class Counsel from communicating with present or former Prudential employees regarding plaintiffs' claims. Id. at P 47.
81. On November 27, 1995, Prudential again argued its interpretation of New Jersey RPC 4.2, this time through a formal motion. Id. at P 50. Finding this reasoning unpersuasive, the Court permitted Class Counsel to develop a method to interview current and former Prudential employees. See In re: The Prudential Insurance Co. of America Sales Practices Litig., 911 F. Supp. 148 (D.N.J. 1995). On January 23, 1996, this Court allowed interviews of current and former Prudential employees to proceed in accord with the Court-approved script and guidelines. Weiss Aff. at P 51.
82. Meanwhile, on December 29, 1995, Co-Lead Counsel moved to stay the Krell and Kittle actions, arguing that the conduct of counsel for Krell and Kittle was obstructing Class Counsel's efforts to prosecute the consolidated class actions. Id. at P 55. On March 14, 1996, this Court denied the motion without prejudice. Id.
F. Plaintiffs Rebuffed Prudential's Early Settlement Overtures While Discovery and Motion Practice Continued
83. At this time, Prudential first raised the issue of settlement with plaintiffs' counsel. The settlement discussions abruptly ended, however, because plaintiffs would not discuss settlement absent significant discovery. Weiss Aff. at P 49. Accordingly, Fee Examiner Stephen M. Greenberg praised Plaintiffs' Counsel for elevating the class interest over Class Counsel's economic interest: "Plaintiffs' counsel acted in this regard with singular devotion to the interests of the class, putting aside their own economic interest in a potential early settlement without the expenditure of substantial assets." Report and Recommendation of Stephen M. Greenberg, Fee Examiner dated February 13, 1997 at 16 ("Fee Report").
84. From the outset, Class Counsel would not conduct settlement negotiations without certain ground rules: (i) plaintiffs would not discuss settlement terms before Class Counsel had a basis to evaluate Prudential's conduct; (ii) the financial and Alternative Dispute Resolution ("ADR") settlement terms would depend on Class Counsel's conclusions about the egregiousness and degree of Prudential management's participation in the wrongful practices; and (iii) plaintiffs would likely insist on funds in excess of compensatory payments based on Class Counsel's preliminary investigation. Weiss Aff. at P 46. Because Prudential rejected Class Counsel's ground rules, negotiations quickly ended.
85. On December 26, 1995, the defendants moved to dismiss the First Amended Complaint under Federal Rules of Civil Procedure 12(b)(6) and 9(b). In support of their motion, defendants claimed: (1) the securities law claims statute of limitations had run and that the claims lacked various elements; (2) the New Jersey Consumer Fraud Act claims were preempted by New Jersey's comprehensive regulation of the insurance industry; (3) the common law fraud allegations lacked particularity under Rule 9(b), failed to include allegations of requisite scienter, and improperly alleged plaintiffs' reliance based on Prudential agents' oral statements, which were contradicted by written Prudential documentation; (4) the negligent misrepresentation claim failed to include requisite allegations that specific Prudential agents knew or should have known of the falsity of the alleged misrepresentations; (5) the contract claims were barred by the plain language of the integrated written contracts; (6) no duty existed for the claim for breach of the fiduciary duty; and (7) the negligent supervision claims were not supported by the factual allegations. See generally Memorandum of Law in Support of Defendant's Motion to Dismiss the Consolidated Amended Class Action Complaint. Plaintiffs responded both to the primary jurisdiction and Rule 12(b)(6) motions with vast briefs and an array of supporting documents.
86. In early 1996, settlement negotiations renewed, because Prudential agreed to provide discovery. Weiss Aff. at P 57. By March 12, 1996, however, the negotiations broke down, because Class Counsel would not accept the conditions that Prudential sought to impose on plaintiffs' receipt of the discovery. Id. Prudential demanded that plaintiffs agree to use the produced discovery for settlement purposes only and that the discovery not be used to respond to the motions to stay or dismiss, to prepare the motions for class certification, or to amend the Complaint. Id. When the settlement negotiations faltered, Prudential immediately ceased producing documents. March 12, 1996 Letter from Melvyn Weiss to Reid Ashinoff (discussing the breakdown of negotiations), in Weiss App., Vol. 1, Ex. K. On March 13, 1996, the parties informed the Court that they were at loggerheads.
G. Motion Practice Continued and Plaintiffs Pursued Informal Discovery
87. On April 7, 1996, the Court made several key determinations. The Court denied Prudential's motion to stay or dismiss the class action based on primary jurisdiction and the Burford Abstention doctrine, the Court decided to postpone the class certification issue until the conclusion of the Task Force investigation, and the Court permitted limited discovery with prior Court approval.
88. While formal discovery was restricted, the Court permitted Class Counsel to interview, under RPC 4.2, former Prudential employees. See In re: The Prudential Ins. Co. of America Sales Practices Litig., 911 F. Supp. 148 (D.N.J. 1995). Thereafter, Plaintiffs' Counsel contacted hundreds of current and former Prudential agents from lists obtained from Prudential and from other sources. Weiss Aff. at P 61. Through the interviews, Plaintiffs' Counsel obtained critical information concerning fraudulent sales practices and document destruction; Plaintiffs' Counsel also acquired hundreds of Prudential documents, and video and audio tapes. Id. at P 64.
89. Plaintiffs' Counsel also contacted thousands of class members through interviews and questionnaires. Counsel's findings tend to support plaintiffs' claim that Prudential had engaged in a uniform scheme to defraud policyholders. Id. at P 72.
H. The Court Dismissed Many of the Claims in Plaintiffs' First Amended Complaint
90. On May 10, 1996, this Court concluded that while plaintiffs had alleged Prudential's scheme to defraud with adequate particularity, many of the individual plaintiffs' claims should be dismissed without prejudice. See generally Order and Opinion dated May 10, 1996, as amended on June 10, 1996. The Court dismissed three of the five named plaintiffs' claims without prejudice. The Court also dismissed plaintiffs' claims for breach of contract, breach of fiduciary duty, and violation of the New Jersey Consumer Fraud Act. The claims against the individual defendants Arthur F. Ryan, Ronald D. Barbaro, and Donald G. Southwell were voluntarily dismissed without prejudice.
91. The Court found that plaintiffs would not likely prevail on many of their claims, even if they survived Prudential's initial challenges to their pleadings:
The Court has found much of the Complaint to be deficient, and will dismiss several of plaintiff's claims without prejudice. On the other hand, the standard for dismissal under Rule 12(b)(6) is a high one, and the Court has allowed several claims to go forward, despite considerable doubt as to their ultimate merits. In sum, this opinion will likely not be the final word in framing the issues ultimately to be resolved in this case. Plaintiffs may successfully replead some of their claims, and Prudential may prevail on some of its arguments at the summary judgment stage.
I. The Task Force Found that Prudential Had Committed Widespread Sales Practice Abuse, Fined Prudential $ 35 Million, and Released the Task Force Plan
92. During the course of its proceedings, the Task Force reviewed numerous Prudential documents and electronic data bases and interviewed many Prudential agents and executives. Stipulation of Settlement at P 6. Prudential and the Task Force continued to negotiate a remediation plan to provide relief to policyholders who had been harmed by Prudential's misrepresentations. Id. at P 8. In July of 1996, in anticipation of the Task Force's release of the Task Force Report and Task Force Plan, the Court requested a "quiet period" during which the parties would review and study these documents but make no public comment. Weiss Aff. at P 75.
93. On July 9, 1996, the Task Force issued its report. The Task Force found that many Prudential policyholders had been misled to purchase life insurance and that Prudential's internal efforts to prevent these abuses were inadequate. Task Force Report at 13-17. The Task Force Report found, for example:
. "serious communication problems between Prudential and its sales force," id. at 8;
. "widespread violations by Prudential agents" of state replacement regulations, and that "some Prudential agents engaged in abusive sales practices" and "in some cases, agents caused additional premiums to be paid," id. at 14; and
. "Prudential failed to responsibly police and discipline its agents with regard to replacement activities," id. at 15.
The Task Force Report also noted that "in many instances, if the policyholder questioned the agent about why loans were being taken against the contract, he/she was told it was a Home Office mistake and were [sic] advised by the agent that he or she would take care of the problem." Id. at 189.
94. The Task Force also found, however, that not all replacement transactions or APP transactions were improper:
It is important to note that not all policyholders were dissatisfied and not all sales by Prudential agents were improper. Between 1990 and 1994, only 2.6 policyholders per 1,000 in-force policies filed sales complaints with the company or regulators. Replacements, financed insurance and APPs represented 14 percent, 16 percent and 14 percent of new sales, respectively, at their peak in 1990. There was a steady decline in all three types of sales between 1990 and 1994.
Id. at 11.
95. Additionally, the Task Force Report included a remediation plan, the Task Force Plan. The Task Force Plan provided policyholders the opportunity to participate in either an ADR process or Basic Claim Relief. Id. at 18. This plan essentially tracked a settlement that many of the counsel representing plaintiffs in this action had developed in litigation with New York Life Insurance Company. Id. at 31-33, 192-93. Forty-three states and the District of Columbia signed Consent Decrees adopting the Report, the Task Force Plan, and the associated fines.
J. The MDL Panel Continued to Transfer Actions to this Court and Some Individual Plaintiffs Filed a Consolidated Motion to Remand
96. Prior to July 23, 1996, the MDL Panel transferred approximately thirty additional policyholder actions, mostly individual actions, to this Court. The Court invited counsel for these actions to a conference on July 23, 1996. Only one representative attended. At the July 23, 1996 conference, the Court indicated that Lead and Liaison Counsel for the class action cases should also serve that function in the individual cases.
97. In October of 1996, many of these individual plaintiffs filed a Consolidated Motion for Remand. Under this Court's November 12, 1996 Order, the Consolidated Motion for Remand was to be heard on March 21, 1997. The motion since has been adjourned and will be heard in April.
K. While Class Counsel Continued to Pursue Discovery and to Amend the Complaint, Prudential Counsel and Class Counsel Resumed Settlement Negotiations, Which Resulted in the Settlement Agreement and Later in the Stipulation of Settlement
98. The release of the Task Force Report enlivened settlement negotiations. At this time, Prudential agreed to negotiate in accordance with plaintiffs' rules, the rules that Prudential had rejected in late 1995 and early 1996. Weiss Aff. at P 84; Ashinoff Aff. at P 5. Moreover, Prudential finally agreed to produce additional documents and witnesses for deposition. Weiss Aff. at P 84; Ashinoff Aff. at PP 8, 11-14.
99. Lead counsel indicates that the settlement negotiations proceeded in three stages: "The more fruitful settlement negotiations . . . can be divided into three phases: first, the period from July 6 through August 16, 1996 (the 'Preliminary Negotiations'); second, the period from August 17, through September 22, 1996 (the 'Settlement Agreement Negotiations'); and third, the period from September 23 through October 28, 1996 (the 'Stipulation of Settlement Negotiations')." Weiss Aff. at P 103.
100. Following the release of the Task Force Report and Plan on July 9, 1996, the preliminary negotiations began. Id. at P 104. On July 16, 1996, at the Court's direction, and after plaintiffs had studied the Task Force Report and Plan, the parties began conducting extensive discussions.
101. On July 18, 1996, plaintiffs prepared and served document requests on Prudential in an effort to ensure that plaintiffs had not missed any material information in their earlier efforts. Id. at P 48. By August 8, 1996, plaintiffs had received more than seventy boxes of documents in response to the July 18, 1996 request. Id.
102. Plaintiffs' repeated insistence on a rebuttable presumption that all replacements had been made through misrepresentations, entitling each policyholder claiming wrongful replacement to an automatic ADR score, was a major impediment to negotiations. Id. at P 107. Prudential would not concede this point, arguing that it had also refused to concede this point to the Task Force. Id.
103. On August 12, 1996, the Court met separately with Prudential and Class Counsel. Id. at P 108. In the next couple of days, August 15 and 16, 1996, Class Counsel and Prudential counsel met to overcome the hurdles. Id. As an alternative to the blanket rebuttable presumption that had previously stymied negotiations, Class Counsel developed the concept of the financial guarantees. Id. at P 109. These guarantees were a creative approach to achieving an eventual settlement.
104. August 16, 1996 marked the beginning of the second phase of settlement negotiations, the "Settlement Agreement Negotiations. " Id. at P 117. During this phase, the parties negotiated the many detailed ADR and Basic Claim Relief improvements. Id.
105. On September 20 and 21, 1996, the parties informed the Court of the few remaining unsettled issues. Id. at P 124. These open issues included: the appropriate cut-off date for the Complaint History factor, whether and when Prudential would be permitted to terminate the settlement based upon the number of class members requesting exclusion, whether the deadline for filing an election form should be increased from sixty to seventy-five days, the role of Plaintiffs' Counsel and the Court in fashioning an outreach program, and the allocation of the Additional Remediation Amount among remediated claimants. Id.
106. On September 22, 1996, after reviewing drafts of a joint press release, the parties executed the Settlement Agreement, which memorialized all of the terms of the parties' settlement. Id. at 128; Settlement Agreement in Weiss App., Vol. 2, Ex. M ("Settlement Agreement"). For the Settlement Agreement to become fully effective, however, three important conditions had to occur. First, the Settlement Agreement was not to apply to any policyholder living in one of the forty-three states and the District of Columbia that had adopted the Task Force Report and Plan through the entry of the Consent Order unless the policyholder's jurisdiction agreed to modify its Consent Order to conform to the Settlement Agreement. Settlement Agreement at P F.7. Second, the Settlement Agreement required the parties to execute a final Stipulation of Settlement by October 28, 1996. Id. at P F.3. Third, the Stipulation of Settlement would differ from the Settlement Agreement if the ongoing discovery revealed facts that were materially inconsistent with the information that Prudential had provided to plaintiffs before signing the Settlement Agreement. Id. at P F.2.
107. Importantly, the parties did not discuss attorneys' fees on or prior to September 22, 1996. Id. at P K.
108. During this general time frame, plaintiffs continued their discovery efforts. Weiss Aff. at P 83. In mid-August 1996, Prudential agreed to produce documents relating to three broad categories: actuarial documents, complaint documents (including policyholder complaints to Prudential and Prudential agent complaint files), and other documents such as training documents, marketing documents, internal publications, and internal communications. Id.
109. On September 19, 1996, plaintiffs compiled the evidence that they had accumulated through their investigations and through formal and informal discovery and filed the 237 paragraph Second Amended Complaint. The Second Amended Complaint contained legal claims similar to those asserted in the First Amended Complaint (common law fraud, breach of contract, breach of duty of good faith and fair dealing, negligent misrepresentation, negligent training and supervision, unjust enrichment, and imposition of a constructive trust), but significantly expanded plaintiffs' factual allegations.
110. Plaintiffs served Prudential with a formal discovery demand on September 30, 1996. Weiss App., Vol. 1, Ex. H. Prudential served its formal response to this demand on October 25, 1996. Id., Vol. 1, Ex. I. In total, Prudential produced over one million pages of documents, 160 computer diskettes and cartridges, and over 500 audio and video tapes. Weiss Aff. at P 85.
111. Class Counsel assembled a team of approximately thirty attorneys, with consulting actuaries and paralegals and data processing staff, to analyze and categorize these documents. Id. at P 86; Ashinoff Aff. at P 12. The team reviewed all of the produced information and conducted twenty depositions. Weiss Aff. at P 91.
112. Between September 23 and October 28, 1996, the parties conducted the final phase of settlement negotiations, the "Stipulation of Settlement" negotiations. Id. at P 130. These negotiations focused on:
. Creating a Mutual Fund Enhancement as an additional element to the Basic Claim Relief Package and other enhancements to the already expanded Basic Claim Relief package;
. Completing final discovery to ensure the validity of the assumptions underlying the settlement;
. Preparing the Stipulation of Settlement, sample claim forms, Class Notice, and other documents; and
. Harmonizing the Stipulation of Settlement with comments received from state regulators that had adopted the Task Force Plan.
Id. Plaintiffs anticipated that the forty-four jurisdictions with Consent Orders would agree to amend their Consent Orders to conform to the terms of the Settlement Agreement. Id.
113. The Task Force Plan, and the concomitant Consent Orders, provided generally that the Task Force Plan was to be implemented in October of 1996. Id. at P 131. The regulators' principal concern was to remediate claims quickly. The Settlement Agreement had contemplated implementation only if and when the Settlement were approved and all appeals, if any, were concluded. Id.
114. Plaintiffs' Counsel, Prudential, and the regulators agreed that the ADR process and Basic Claim relief package would be implemented by February 1, 1997, with certain exceptions.
Id.; Ashinoff Aff. at P 15.
115. Class Counsel ultimately succeeded in obtaining many terms which Prudential had previously rejected:
Plaintiffs' counsel insisted on, and obtained, an ADR Process that included a claimant representative, chosen by Lead Counsel, to monitor the ADR Process; a commitment by Prudential to make a minimum expenditure of at least $ 410 million for ADR remedies; a commitment by Prudential to make a payment of additional remediation amounts, above and beyond compensatory relief, to be distributed amongst eligible Class Members; and other financial guarantees, all points to which Prudential objected when the negotiations started.
Ashinoff Aff. at P 9.
116. On October 11, 1996, after all outstanding material provisions of the Stipulation of Settlement had been resolved, the Court granted the parties oral permission to negotiate attorneys' fees. The parties thereafter agreed on attorneys' fees and incorporated an appropriate provision in the Stipulation of Settlement P K. Weiss Aff. at P 132; Ashinoff Aff. at P 16. The parties executed the Stipulation of Settlement on October 28, 1996. Weiss Aff. at P 184.
L. The Court Ordered Conditional Certification of the Class and that the Parties Mail Class Members Notice of the Proposed Settlement
117. On October 28, 1996, the Court (1) approved the Form of Class Notice for dissemination to policyholders to advise them of the Proposed Settlement, and (2) set a date for a hearing on the fairness, reasonableness and adequacy of the Proposed Settlement; certification of the Settlement class, and plaintiffs' request for fees and reimbursement of expenses.
118. On October 28, 1996, the Court issued an Order that:
. conditionally certified the Class for settlement purposes,
. designated the law firms Milberg Weiss Bershad Hynes & Lerach LLP and Much Shelist Freed Denenberg Ament Bell & Rubenstein, P.C as Lead Counsel for the Class,
. designated additional counsel for the Class,
. designated the named plaintiffs in the Second Amended Complaint as Class Representatives,
. scheduled the Fairness Hearing for January 21, 1997,
. directed the form and timing of Class Notice, which provided an opportunity for class members to opt out or object, and
. imposed a preliminary injunction to effectuate the Proposed Settlement, enjoining policyholders or others acting on their behalf from excluding any other policyholders from the Class, from filing, commencing, continuing, litigating, intervening in or participating in any lawsuit in any jurisdiction based on facts and circumstances of the claims asserted here, unless that policyholder has opted out of the Class.
IV. Stipulation of Settlement Terms
119. Under the Proposed Settlement, each class member may choose between an ADR process or Basic Claim Relief.
A. The Proposed Settlement Provides an Alternative Dispute Resolution Process Through Which Policyholders May Obtain Full Remediation
120. Class members can elect to submit their claims to the ADR process, which is a fair and swift alternative to litigation. The ADR process allows a class member to attain claim resolution, more quickly and easily than would be possible through litigation. The ADR process also is less expensive than litigation, because there are no costs to the class member; Prudential has agreed to pay all costs. Class members need not retain counsel to participate in the ADR, although class members may retain counsel if they so choose.
121. The Prudential Alternative Dispute Resolution Guidelines (the "ADR Guidelines") provide detailed mechanisms to elicit complaints from policyholders, to gather relevant evidence from the claimant and Prudential's files and agents, to evaluate class member claims, to score claims properly based on the evidence gathered and the appropriate standards, to ensure adequate representation, and to offer appropriate relief based upon the claimant's score. Stipulation of Settlement, Ex. B.
1. The ADR Procedures Cast a Wide Net to Gather Evidence Relevant to Class Members' Claims
122. Before claims are scored, the claimants must complete a Claim Form questionnaire. The policyholder must sign the form under penalty of perjury, but the form need not be notarized. The claimant must attach all pertinent records to the Claim Form.
123. An "800" telephone number will provide claimants with assistance in completing their forms; Plaintiffs' Counsel will monitor the operators at the number to ensure that all advice given is accurate and adequate. If the claimant does not properly complete the form, Prudential will return the form and allow the claimant to correct the deficiency within thirty days.
124. Once the Claim Form has been properly submitted, Prudential must obtain its own internal records regarding the transaction and must contact the agent who sold the claimant the policy. Prudential may not discipline an agent solely based upon truthful representations that the agent made in a statement filed in response to a claim. Stipulation of Settlement, Ex. C, at 7, P II.G.2.c.
2. The ADR Process Contains Specific Claim Evaluation Procedures to Ensure that All Relevant Evidence Is Considered
125. The claim evaluation process involves comprehensive multi-tier reviews.
126. First, a claim is reviewed by a member of the Claim Evaluation Staff. This Staff is comprised of Prudential personnel not involved with the sale of individual insurance policies. A "Claimant Representative" appointed by Class Counsel and compensated by Prudential will monitor this Staff. The Claimant Representative or his assistants will continue to aid each claimant throughout the ADR process.
127. Second, if the Claim Evaluation Staff does not award the highest score available, a "3," an Independent Claim Evaluation Team (the "Claim Team") will automatically review the claim. The Claim Team members are not affiliated with Prudential. All members are appointed by Class Counsel and the Regulatory Oversight Staff.
Prudential pays the costs of Claim Team review. The Claim Team uses the same scoring criteria used by the Claim Evaluation Staff. If the Claim Team disagrees with the Claim Evaluation Staff's findings, the Claim Team will recommend in writing that the Claim Evaluation Staff increase the claimant's score.
128. Third, a member of the Claim Review Staff will review the Claim Team recommendation. The Claim Review Staff consists of Prudential employees who have not acted as licensed agents for the company and have not supported or supervised licensed agents. The final determination of the Claim Review Staff is monitored by the Claimant Representative. Prudential may not appeal this decision.
129. Fourth, if the claimant is dissatisfied with the Claim Review Staff determination, the claimant may obtain arbitration of the decision by the Appeals Committee. This Committee is comprised of individuals not affiliated with Prudential. These individuals are experienced in life insurance or in arbitration. Appeals Committee members are selected by Class Counsel and by the Regulatory Oversight Staff, from a list jointly agreed upon by Class Counsel, the Regulatory Oversight Staff, and Prudential.
130. The Appeals Committee uses the same criteria used by the Claim Evaluation Staff and Claim Team, but the Committee reviews a claimant's score de novo. At this stage, the claimant may obtain cost-free representation by a Representative who has been appointed by Class Counsel and approved by the Task Force. The claimant has a right to rehearing if the Claimant Representative determines that a "manifest injustice" has occurred in connection with the claim.
131. Class Counsel and the Regulatory Oversight Staff will act to ensure the fairness of the entire process. Moreover, Prudential will select, at its own expense, an independent public accounting firm, satisfactory to Lead Counsel and the Regulatory Oversight Staff, to serve as independent auditors and assess the consistent application of the ADR guidelines and procedures. Stipulation of Settlement, Ex. C, at 17-18, P IV.D.
3. The ADR Process Provides that Claims Are Scored Generously According to the Class Members' Claim and the Available Evidence
132. Under the Proposed Settlement, claims are scored depending on the type of claim. Three claim categories correspond to the deceptive sales categories described in the Second Amended Complaint: "Financed Insurance," "Abbreviated Payment Plan," and "Life Insurance Sold as an Investment, Savings or Retirement Vehicle." Id., Ex. B, at 16, 26, 34, PP II, III, IV. The Proposed Settlement also includes a fourth, miscellaneous category, "Other," for claims of misconduct, in the sale or servicing of a policy, that are not covered by the other categories. Id., Ex. B, at 307, P V.
133. Within each of the categories, the ADR Guidelines provide "Claims Resolution Factors" that scorers must use to assess the merits of a claim. For example, in a case involving Financed Insurance, or churning, Claim Resolution factors include: "A Misstatement in respect of loans [that] was made to the Policyholder as to whether, or to what extent, loans would be taken or charged against the Existing Policy to finance the New Policy." Id., Ex. B, at 16, P II.A.1.
134. To determine whether the claimant has demonstrated a Claims Resolution Factor, the scorer looks to a list of "Specific Evidentiary Considerations." In each of the four claims categories, the Guidelines provide Specific Evidentiary Considerations that are considered "supporting evidence" and "undermining evidence." The Specific Evidentiary Considerations provide the decision calculus that the scorers will use to determine a policyholder's score.
135. In cases involving Financed Insurance, for example, a policyholder's score may be increased if: (1) "the Policyholder was advised by the Agent, after the issuance of the New Policy, to disregard notices of the Company concerning loans," (2) if the agent engaged in a pattern of such transactions, or (3) if the policyholder had an annual income of less than $ 25,000. Id., Ex. B, at 17, P II.B.1.
136. In Abbreviated Payment Plan or Vanishing Premium claims, a policyholder's score could increase if a Prudential agent told the policyholder to disregard notices concerning loans or lapses, or if Prudential used the phrase "vanishing premium" or " vanish point" in writing. Id., Ex. B, at 26, P III.B.1.
137. In addition to the specific evidentiary considerations applicable to specific claims, there are other considerations that apply to all claims. For example, under the Proposed Settlement, a claimant's score can be increased if there is evidence that documents pertinent to the claim have been lost or destroyed. Similarly, a claimant's score can be increased if there is a record of disciplinary action against the agent who sold the policy, or if the agent does not cooperate with Prudential in responding to the claim. Id., Ex. B, at 11, P I.F.1.c-d.
138. Scorers give claims a score of "1," "2," or "3," with "3" being the highest score.
The highest score the policyholder receives in any claim category determines the relief that the policyholder will be entitled to.
139. The relief available through the ADR Process varies depending on the type of claim and the level of proof supporting it. Stipulation of Settlement at 17, P C.1. The various types of relief are designed to provide comprehensive compensation that addresses the type of claim and the harm associated with it. Under this system, scores of "3" will receive full compensatory relief.
140. The relief available depends not only on whether the claimant receives a score of "1," "2," or "3," but also on the type of claim that the claimant has asserted. The following paragraphs explain the types of relief available to different types of claims
. Financed Insurance--The policyholder may obtain a refund of the loans, dividends, or values improperly used, with interest in some cases. The policyholder also may be entitled to cancel the "new" policy and get back some or all of the premiums paid, with interest in some cases. February 1, 1997 Notice at 7.
. Abbreviated Payment--The policyholder may be permitted to cancel the policy and obtain a refund of some or all of the premiums paid, with interest in some cases. Alternatively, the policyholder may be permitted to keep the policy without having to make any additional out-of-pocket payments for some or all of the premiums due. Id. at 7-8.
. Investment Product--The policyholder may be allowed to cancel the policy and obtain a refund of some or all of the premiums paid, with interest in some cases. Alternatively, the policyholder may be able to exchange the policy for an annuity. Id. at 8.
. Other Claims--If a policyholder was misled in some other way, the policyholder may be allowed to cancel the policy and obtain a refund of some or all of the premiums paid, with interest in some cases, or may be able to use the refund to purchase another policy. Id.
B. Policyholders Who Do Not Desire to Participate in the ADR Process Receive Real and Valuable Benefits Through Basic Claim Relief
141. Class members who prefer not to participate in the ADR process, may receive the Basic Claim Relief benefits available to all class members.
Class members need provide no proof of injury to avail themselves of these benefits.
142. Four types of Basic Claim Relief are available to class members: Optional Premium Loans, Enhanced Value Policies, Enhanced Value Annuities, and Mutual Fund Enhancements. Arthur Andersen, LLP has valued this relief at $ 799.6 million. Hoyer Aff. at P 6 and Ex. B.
143. Optional Premium Loans are loans that defray the costs of out-of-pocket premiums due that are beyond what was initially illustrated to the policyholder. Stipulation of Settlement, Ex. D, at 3, at P I.B.11. These loans charge policyholders an interest rate equal to Prudential's unsecured short-term cost of borrowing. Id.
144. The Enhanced Value Policy is intended for class members who have borrowed heavily against their existing policies and desire to obtain a new policy in a comparable amount with liberalized underwriting. The Enhanced Value Policy is an insurance policy with features similar to the class member's existing or terminated policy, except that Prudential will contribute to the policy's cash value 50% of the Enhanced Value Policy's first year premium on the first annual premium due date, 25% on the third annual premium due date, 25% on the fifth annual premium due date, and 15% on the seventh annual premium due date. Id., Ex. D, at 5, P III.A.
145. The Enhanced Value Annuity is a currently issued, designated, nonqualified deferred annuity. Id., Ex. D, at 6, P IV.A. Where the first payment into the annuity is less than $ 25,000, Prudential will add 2% to the value of the annuity in the first year. Id., Ex. D, at 7, P IV.A.7. Where the initial payment is over $ 25,000 and not greater than $ 50,000, Prudential will add 3% to the value of the annuity in the first year. Id. In addition, Prudential will contribute 2% of the initial premium in the second policy year and 1% of the initial premium in the third policy year. Id.
146. The Mutual Fund Enhancement gives a policyholder a choice between certain mutual funds, where Prudential will contribute 4% of the initial purchase amount to the value of the funds, to a maximum of $ 2,000. Id., Ex. D, at 8, P V.A.
C. Financial Commitments Guarantee that Class Members Will Receive Substantial Relief Under Any Turn of Events
147. The Proposed Settlement contains three "Financial Commitments" to ensure that policyholders will receive the relief to which they are entitled.
148. First, the Proposed Settlement contains a "Minimum Payment" provision. This provision requires Prudential to spend at least $ 410 million in the ADR process, regardless of the number of remediated claims.
149. Second, the Proposed Settlement contains a "Financial Guarantee" of $ 780 million. During settlement negotiations, Prudential provided plaintiffs with various projections of anticipated spending under the Task Force Plan. Prudential indicated that it would likely spend $ 220 million for each 110,000 claims remediated and that many claims would receive high scores. Plaintiffs insisted that Prudential guarantee to spend these amounts; the plaintiffs eventually negotiated an increase in the guaranteed amount from $ 220 million to $ 260 million for each 110,000 (up to 330,000) claims, for a total of $ 780 million.
150. Third, the Proposed Settlement provides an "Additional Remediation Amount" on a sliding scale. This Amount is a fund in addition to the compensatory relief provided by the ADR process. Under the Proposed Settlement, the Court determines how to allocate the Additional Remediation Amount among claimants who have scored a "3" or a "2," unless the Court finds that the amount should be allocated more broadly. Stipulation of Settlement, Ex. B, at 39, P VI.A. The fund includes $ 150 million for the first 110,000 claims remediated; $ 250 million for 220,000 claims remediated; $ 300 million for 330,000 claims remediated; $ 250 million for 440,000 claims remediated; $ 150 million for 550,000 claims remediated; and $ 50 million for 660,000 or more claims remediated. The Additional Remediation Amount is calculated so that if Prudential remedies more than 330,000 claims, the economic effect on Prudential, i.e. the spending of over $ 1.0 billion in compensatory damages, reduces the additional remedial amounts that Prudential must pay. Although Prudential's additional remediation amount begins to decrease after 330,000 claims, Prudential's obligation to pay compensatory awards continues to increase. Thus, the net benefit to policyholders continues to increase. Indeed, the Proposed Settlement contains no cap.
D. The Unprecedented Outreach Program Will Ensure that All Class Members Are Aware of Their Rights and Will Encourage Injured Class Members to Participate in the Proposed Settlement Relief
151. The Proposed Settlement establishes an unparalleled outreach program to ensure that class members are adequately informed about the Proposed Settlement. The outreach program entails not only that each class member be provided individual notice of Proposed Settlement benefits, but also that Proposed Settlement benefits be publicized in all fifty states, through print, television, and radio. Stipulation of Settlement, at 29, PP G.5.a. to G.5.b. The outreach program includes a six-day-a-week toll-free "800" telephone number to answer class member questions. Id. at 30, P G.5.7(a). Plaintiffs monitor the "800" number operators.
E. The Proposed Settlement Substantially Improves the Task Force Plan
1. The Proposed Settlement Provides Significant Enhancements to the Task Force Plan
a. The Proposed Settlement Provides Valuable Financial Commitments
152. The Task Force Plan contained no minimum payments, financial guarantees, nor Additional Remediation Amount. The Proposed Settlement now provides these commitments to ensure that policyholders will receive meaningful relief in the ADR process, and receive an extra-compensatory award.
b. The Proposed Settlement Improves Claim Scoring and Evaluation Criteria for the Benefit of Claimants
153. The Proposed Settlement significantly improves the claim scoring and evaluation criteria contained in the Task Force ADR Plan:
. The Proposed Settlement provides that boilerplate statements contained in policy illustrations and contracts to the effect that the dividends, interest or investment returns are "not guaranteed" or "non-guaranteed," will not independently undermine a claim. Stipulation of Settlement, Ex. B, at 9, P I.D.
. The Proposed Settlement reduces from six complaints to three the number of policyholder complaints against an agent which would entitle a claimant to score of at least "2." Id., Ex. B, at 5, P I.C.
. The Proposed Settlement extends the period during which the complaints will be counted by nearly two and a half months, from July 9, 1996 to September 20, 1996. Id. The February 22, 1997 amendment extended the September 20, 1996 deadline further to February 1, 1997.
These changes greatly enhance the ability of a policyholder to establish the presumption that he or she was misled, thereby entitling the policyholder at minimum to a score of "2."
154. The Proposed Settlement also includes significant improvements in the factors and evidentiary considerations used to evaluate claims. These changes include:
. A claimant's score may be raised if documents originally kept by Prudential that could affect the scoring have improperly been destroyed and no copies can be located.
Id., Ex. B, at 11, P I.F.1.g.
. Under the Task Force ADR Plan, the score on "churning" claims can be raised if 15% of the selling agent's total sales were "financed insurance" sales. The Proposed Settlement lowers this threshold to 12% of total sales. Id., Ex. B, at 15, P II.B.1. (This change significantly increases the number of agents who engaged in a "pattern of financing activity" from 1987 through 1994.)
. Scores on churning claims may be raised if blank, unsigned disbursement forms were used without the policyholder's consent. Id., Ex. B, at 17, P II.B.1.f.
. Scores on "Abbreviated Payment" or "Vanishing Premium" claims may be raised if an agent used the phrases "vanishing premium" or "vanishing point" in writing in connection with the sale of the policy at issue. Id., Ex. B, at 27, P III.B.1.g.
. Under the Proposed Settlement, scores on "Abbreviated Payment" claims may no longer be lowered simply because the policy lapsed prior to the date in the illustration when the premiums were to "vanish", if it appears that the policyholder became aware, prior to the misrepresented "vanish" date, that the policy would not perform as illustrated. Id., Ex. B, at 28, P III.B.2.f.
. The Proposed Settlement requires Prudential to contact the agent who sold the policy at issue to obtain additional information about the sale of the policy. Id., Ex. C, at 6, P II.G.2.b. Because agents may fear that a truthful statement in response to a claim will put their job in jeopardy, the Proposed Settlement includes an explicit recognition that Prudential will not take disciplinary action against an agent based solely on truthful representations in the "Agent Statement." Id., Ex. C, at 7, P II.G.2.c.
. The Task Force ADR Plan provided that Prudential had a co-equal role with the regulators in the selection of a "Representative," who would advocate on behalf of the claimant at the arbitration level. It also limited the funding for this position to $ 10 million, regardless of the number of claims submitted. In the Proposed Settlement, the Representative is selected by plaintiffs' counsel, subject only to the approval of the regulators. Prudential has no role in that process. The Proposed Settlement also eliminates the cap on the funding for the Representative; under the Proposed Settlement ADR Plan, the Representative will be paid on a per claim basis. Id., Ex. C, at 19-20, P V.B.2.
. The Proposed Settlement creates an entirely new position, the "Claimant Representative," who is selected by Class Counsel and who will monitor the entire process on behalf of the Class Member, including the claim evaluation staff's initial claim review. Id., Ex. C, at 13-14, P IV.A.
c. The Proposed Settlement Includes Four Valuable ADR Remedies Not Included in the Task Force ADR Plan
155. First, the Proposed Settlement provides more interest to claimants scoring a "2." Under the Task Force ADR Plan, claimants receiving a score of "2" did not receive any interest as part of their award. Under the Proposed Settlement, as originally negotiated, claimants scoring a "2" would receive 50% of the interest that a claimant scoring a "3" would receive. Id., Ex. B, at 19, P II.C.1.b(ii). The Amended Stipulation dated February 22, 1997 increased the 50% interest rate to 100% for claimants who receive a score of "2" and allows rescission of the policy and a refund of the premiums, with interest. Stipulation Amendment at P 2.
156. Second, where a policy lapsed before the claimant died, the Proposed Settlement allows a claim receiving a "2" to receive relief. Under these circumstances, the Task Force ADR Plan provided that a death benefit would be paid only for claims that receive a score of "3." Under the Proposed Settlement, a claim receiving a score of "2" will receive 50% of the death benefit that would have been paid if the claim had been scored a "3." Stipulation of Settlement, Ex. B, at 13, P I.I.1.
157. Third, the Proposed Settlement provides full compensatory relief where a Prudential agent promised in an Abbreviated Payment or "vanishing premium" case that the claimant would have a "paid up" policy. Id., Ex. B, at 29, P III.C.1.c. Thus, under the Proposed Settlement, as promised, after the payment of a specified number of premiums, the policy will be fully "paid up", so that no further premiums will be due (the typical vanishing premium claim), and all dividends or interest credited to the policy will be applied to increase the cash value of the policy. Id. The Task Force ADR plan did not recognize this type of claim.
158. Fourth, the Proposed Settlement ADR process expressly permits claims on behalf of the decedent where the policyholder/decedent died while the policy was in force, even if a death benefit has already been paid. Id., Ex. B, at 15, P I.I.3. The Task Force Plan excluded policyholders who died while their policies were in force.
2. The Proposed Settlement Provides Significant Enhancements to Each Form of Basic Claim Relief and Creates a New Form of Basic Relief
159. First, the Proposed Settlement eliminates fifty basis points on Optional Premium Loans ("OPLs"). Id., Ex. D, at 2, P I.B.7. In the Task Force Plan, the interest rate was a short-term rate representative of Prudential's unsecured short-term cost of borrowing, plus fifty basis points.
160. Second, under the Proposed Settlement, Prudential will contribute toward Enhanced Value Policies ("EVPs") 50% of the first year's annual premium on the first annual premium due date, 25% on the third annual premium due date, 25% on the fifth annual premium due date and 15% on the seventh annual premium due date. Id., Ex. D, at 5, P III.A. In the Task Force Plan, Prudential contributed only 50% of the first-year annual premium toward the cash value of the EVP on the first annual premium due date.
161. Third, under the Proposed Settlement, Prudential increases its contributions to the Enhanced Value Annuities ("EVAs"). In the Task Force Plan, Prudential contributed 2% of the initial purchase price to the value of the EVA where the purchase price was less than $ 25,000, and 3% of the purchase price where the purchase price was between $ 25,000 and $ 50,000. Under the Proposed Settlement, in addition to these contributions, Prudential will credit 2% of the initial purchase price to the value of the EVA in the second policy year, and 1% of the initial purchase price to the value of the EVA in the third policy year. Id., Ex. D, at 6-7, P IV.A.2.
162. Under the Proposed Settlement, policyholders may participate in a new form of relief--Mutual Fund Enhancements. Prudential will contribute 4% of the initial purchase price to the fund, up to a maximum of $ 2,000. Id., Ex. D, at 9, P V.A.
3. The Proposed Settlement Provides an Elaborate Program to Inform Class Members of the Relief Available to Them
163. The Proposed Settlement provides for individual notices to class members, multiple publication notices in all fifty states, the use of a toll-free "800" telephone number, staffed by trained operators monitored by Class Counsel, and multiple radio and television notices, all subject to the agreement of Class Counsel, with any disputes to be resolved by the Court. The Task Force Report did not describe how its outreach program would be implemented.
E. The Proposed Settlement Offers Significant Value to The Class
164. Plaintiffs' actuarial expert, Robert L. Hoyer of the Life & Health Actuarial Services group of Arthur Andersen LLP, placed a value of $ 1.187 billion inclusive of the Financial Guarantees and Additional Remediation Amount, on the ADR relief if 330,000 claims are remedied. Hoyer Aff. at P 5. Hoyer states that the estimate of only 330,000 remediated claims (approximately three percent of the class) is a conservative estimate based on evaluations of likely effects of the numerous class action settlement improvements specifically designed to increase participation. Id. at PP 13-14. Tillinghast-Towers Perrin concluded that the ADR program compensates the policyholder in an amount equivalent to their financial loss. Guinn Aff. at P 5.
165. Plaintiffs' expert valued Basic Claim Relief at $ 799,600,000. Hoyer Aff. at P 16. This valuation assumes 1,080,000 participants. Prudential's actuarial expert, Daniel J. McCarthy of Milliman & Robertson, Inc., estimated the value of Basic Claim Relief to be $ 425 million. McCarthy Aff. at P 5. McCarthy's analysis also included a range of values from $ 272 million to $ 686 million. Id. (Plaintiffs' expert valued the enhancements to the Task Force Plan at $ 1.123 billion.) Hoyer Aff. at P 19.
166. All of the above expert valuations exclude the value to the class of having the requested $ 90 million attorneys' fee paid directly by Prudential and exclude the substantial costs of providing notice and administering the entire claims process, all of which costs are to be paid directly by Prudential.
167. In his Fee Report, Stephen Greenberg valued the Proposed Settlement at between $ 1,209,600,000 and $ 2,077,000,000, exclusive of the costs of notice, the administration of the ADR process, and Class Counsel's fee. Fee Report at 56-57 & n.10. The minimum figure is the sum of Mr. Hoyer's valuation of Basic Claim Relief ($ 799.6 million) and the minimum guaranteed amount to be paid in connection with the ADR process ($ 410 million). Id. at 56. The higher figure (which was not a maximum) was the sum of Mr. Hoyer's valuation of the total Settlement ($ 1.987 billion) and the maximum amount of counsel fees sought by class counsel ($ 90 million). Significantly, no opponent of the Proposed Settlement has proffered evidence disputing these analyses.
V. Class Counsel and Prudential Have Provided Class Members With Extremely Effective Individual and Published Notice of the Proposed Class and Proposed Settlement
168. This Court's October 28, 1996 Order required that individual notice be sent, by first-class mail, postage prepaid at Prudential's expense, no later than sixty days before the Fairness Hearing, to the last known addresses of all policyholders. October 28, 1996 Order. Pursuant to the Order, individual notice was sent to more than eight million present and former policyholders by first class mail on or before November 4, 1996.
Meade Aff. at P 11.
169. The October 28, 1996 Order also required that a summary notice be published, at Prudential's expense, in the national editions of The New York Times (business section), The Wall Street Journal, USA Today, and The Star Ledger. In addition to these publications, Prudential published the notice in the largest circulating newspapers in each of the fifty states and the District of Columbia. Burke Aff. at PP 3, 6. Of the sixty total newspapers utilized by Prudential, the notice appeared in thirteen newspapers on Wednesday, November 20, 1996, forty-one newspapers on Thursday, November 21, 1996, and six newspapers on Friday, November 22, 1996. Id.
170. The individual notice described in plain English the lawsuit, the settlement, and the options available to class members. The notice included (i) the caption; (ii) a description of the litigation; (iii) a description of the settlement class; (iv) the names of counsel for the class; (v) a description of the Proposed Settlement, including the relief available and the release to be given Prudential; (vi) the hearing date; (vii) a description of the ability to enter an appearance either individually or through counsel; (viii) the procedure and deadline for filing objections; (ix) the procedure and deadline for filing requests for exclusion; (x) the consequences of exclusion; (xi) the consequences of remaining in the settlement class; (xii) the full text of the release that would bind class members; (xiii) a description of Prudential's responsibility for plaintiffs' attorneys' fees and expenses and of its agreement to pay attorneys' fees awarded by the Court up to a maximum of $ 90 million; (xiv) a description of the preliminary injunction issued by the Court; and (xv) the procedure for obtaining additional information, including the toll-free "800" telephone number established to respond to class member inquiries.
171. In addition to the formal notice, the notice package sent to each class member included a six-page cover letter from Prudential's Chairman, Arthur Ryan, a twenty-one-page question-and-answer brochure, and a customized statement of eligibility. Stipulation of Settlement, Exs. F-1 to F-3. Each statement of eligibility included the class member's name and address and listed as best as practicable the class member's eligible policies and the relief available with respect to each policy.
172. The publication notice, also written in plain English, included (i) the caption; (ii) a description of the settlement class; (iii) a brief description of the settlement; (iv) the names of counsel for the class; (v) the hearing date; (vi) a description of the ability to appear at the hearing; (vii) a statement of the deadline for filing objections to the settlement; (viii) a statement of the deadline for filing requests for exclusion; (ix) the consequences of exclusion; (x) the consequences of remaining in the settlement class; (xi) a description of the preliminary injunction issued by the Court; and (xii) the procedure for obtaining further information, including a copy of the settlement notice.
173. The Court takes judicial notice of the fact that the Proposed Settlement also received press coverage, including articles put out by wire services carried in many other state, local, and trade newspapers nationwide.
174. The dates on which the individual notices were mailed and the summary notice published meant that class members had ample opportunity--approximately six to eight weeks--to consider their options before the December 19, 1996 deadline for exclusion requests and objections.
VI. The Proposed Settlement Has Been Enhanced Since the Execution of the Stipulation of Settlement
A. The Court Ordered Additional Remediation to Class Members in Response to Reported Document Destruction Incidents
175. On December 16, 1996, plaintiffs obtained an Order to Show Cause returnable on December 18, 1996 why this Court should not impose sanctions upon Prudential in connection with allegations of document destruction. On December 18, 1996, at the Order to Show Cause hearing, the Court directed Class Counsel to conduct an investigation into the alleged Cambridge office document destruction and "whether Prudential's notification on destruction of documents was or was not satisfactory." December 18, 1996 Tr. at 44. The Court directed Class Counsel to present a Report of Investigation to the Court by December 27, 1996.
176. Between December 19 and December 24, 1996, Plaintiffs' Counsel reviewed hundreds of Prudential documents, and between December 20 and 24, 1996, conducted 56 depositions of Prudential personnel. Those depositions included Prudential's Chairman and Chief Executive Officer, Arthur F. Ryan; Prudential's Chief Financial Officer, Mark Grier; its General Counsel, James R. Gillen; other senior management and employees located at the Cambridge office; and each person identified by Prudential as having knowledge of the incident. Moreover, approximately fifty randomly selected agents were requested to complete a questionnaire to ascertain the agents' knowledge and understanding of Prudential's document preservation guidelines. Plaintiffs' Counsel also learned that there might have been similar incidents of document destruction in Prudential's Syracuse, New York office and, therefore, deposed the general manager of that office. On December 27, 1996, plaintiffs provided the Report of Investigation to the Court.
177. On January 6, 1997, the Court, having reviewed the Report and Prudential's response, found that improper document destruction had occurred and issued its findings of fact and sanctions in a written Opinion and Order.
The Court found specifically that:
. Prudential's use of PROFS notes to preserve documents and to prevent their destruction was ineffective and failed to implement this Court's document preservation order;
. Various PROFS notes regarding document retention were circulated, but did not represent the systematic process necessary to preserve documents;
. Document destruction had occurred on at least four occasions: in Jacksonville, Florida; Cambridge, Massachusetts; Des Moines, Iowa; and Syracuse, New York;
. Document destruction in Cambridge was of particular concern because of its scope and because no index was prepared of the documents destroyed; the Court and the litigants had no way of knowing what documents were destroyed or from which files;
. Prudential's procedures to identify and report document destruction to senior management were unduly cumbersome and slow;
. Prudential's management had failed to establish a comprehensive document preservation policy;
. Prudential management's failure promptly to ascertain and notify the Court of the Cambridge incident was particularly inexcusable in light of the December 19, 1996 exclusion date that required Cambridge policyholders to decide whether to remain in the class action;
. While there was no proof that Prudential engaged in conduct intended to thwart discovery through purposeful document destruction, its haphazard and uncoordinated approach to document retention denied plaintiffs potential evidence to establish disputed facts;
. The destroyed materials were relevant and, if available, would lead to proof of a claim.
January 6, 1997 Opinion at 38-44.
178. The Court observed also that:
. Prudential's conduct explicitly violated the Court's mandate to preserve documents;
. Document destruction had been a recurring theme throughout the litigation;
. Accusations of document destruction threatened the integrity of the Court and the proceedings before it; and
. Document destruction caused plaintiffs substantial prejudice and the Court could not ascertain whether the provisions of the ADR process which contemplate nominal, routine destruction of documents can fully address the harm incurred.
Id. at 45-48.
179. The Court ordered:
(1) Prudential to mail each employee a copy of the Court's September 15, 1995 Order requiring document retention with a full explanation of the pending litigation and the civil and criminal sanctions that apply to the failure to follow a court order;
(2) Prudential to submit to the Court a written manual that embodies Prudential's document preservation policy;
(3) Prudential to dedicate a telephone hotline to facilitate reports of document destruction;
(4) Prudential to require each manager to certify that his or her office complies with the document retention manual;
(5) Prudential to be sanctioned $ 1 million; and
(6) Prudential to reimburse Plaintiffs' Counsel for fees and costs.
Id. at 49-51.
180. The Court also provided that these sanctions were "without prejudice to the subsequent imposition of additional sanctions as may be fair and appropriate to remedy unknown harm to individual party opponents caused by document destruction." Id. at 52.
181. Pursuant to this statement, Class Counsel and Prudential negotiated additional procedures and criteria for scoring claims where evidence indicates that relevant documents have been destroyed. See generally February 3, 1997 Order. Under the supervision of the Court, plaintiffs and the Regulatory Oversight Staff will undertake a nationwide investigation of document destruction in Prudential's offices. Id. at 1-2. Now, claimants will receive enhanced scores depending on whether the document destruction was improper, whether there is a known impact on a specific file, and whether the destroyed document was material:
. Where documents material to the claim under review were destroyed, the claimant will automatically receive a score of "3" if the destruction was improper or the documents impacted the claimant's file. Even if the destruction was not improper or there is no known impact on the specific file, the claimant will receive a score of not less than "2," and a score of "3" will be awarded if the claim otherwise would have been scored a "2."
. Where it cannot be determined whether the documents were material to the claim, the claimant will receive a score of "3" if the destruction was improper and the documents impacted the claimant's file. If documents of unknown materiality were destroyed and the destruction was either improper or impacted the claimant's file, the claimant will receive a score of not less than "2," and a score of "3" will be awarded if the claim otherwise would have been scored a "2."
. Where it cannot be determined whether the documents were material and the destruction was neither improper nor had any known impact on the file, the claimant's score will be increased by one point, to a maximum score of "3."
Id., Ex. A.
B. Through Negotiations with State Regulators Prudential Has Agreed to Several "Final Enhancements" to the Proposed Settlement
182. In the days before the Fairness Hearing, Prudential agreed with the remaining state objectors to add several meaningful enhancements to the Proposed Settlement. These included:
. The Complaint History cut-off was extended to February 1, 1997; Stipulation Amendment at P 1.
. The interest rate on scores of "2" was increased from 50% to 100%; id. at P 2.
. A non-specific evidentiary consideration was added to the ADR Guidelines to allow the claim evaluator to consider that the policyholder was age sixty years or older at the time of sale; id. at P 3.
. A claim-resolution factor was added to allow a claimant with a life insurance application containing an unauthorized signature to receive an automatic score of "3"; id. at P 4.
. Prudential must "provide claimants who so request with current information with respect to the existence of any outstanding loans, their most recent dividend payments, their dividend status, and, where applicable, their currently illustrated year of abbreviation;" id. at P 5.
VII. Class Response to the Proposed Class Certification and the Proposed Settlement Has Been Favorable
183. The Proposed Settlement has received overwhelming class support. The Court has received an opt-out list representing 23,421 policies, or about 19,000 policyholders. This represents about .24% of the class.
184. In addition to the exclusion requests, a total of approximately 295 written communications were served upon counsel and/or filed with the Court in compliance with, or in an apparent attempt to comply with, the procedures for objecting described in the Class Notice authorized by this Court in its October 28, 1996 Order. Pls. Certif. Reply, Ex. A.
185. The Class Action Administrator has received over 500,000 telephone inquiries on the "800" number provided for policyowners to obtain further information about the proposed settlement. Hegarty Supp. Decl. at P 2.
186. Regulators of all fifty states and the District of Columbia have endorsed the Proposed Settlement. Task Force participants have ordered Prudential to seek prompt approval of the Proposed Settlement, because the Proposed Settlement is in "the best interests of the policyholders." Biederman Aff. at P 7 (quoting Amended Consent Orders).
VIII. The Fairness Hearing Provided the Parties, Objectors Appearing Through Counsel, State Regulators, and All Individual Objectors an Opportunity to Express Their Positions to the Court
187. Pursuant to this Court's October 28, 1996 Order, Prudential mailed individual notices of the Proposed Settlement to approximately eight million policyholders who collectively own or owned approximately ten million policies. Additionally, Prudential published a summary notice in The New York Times, The Wall Street Journal, USA Today, and in major newspapers in all fifty states. The Class Notice directed class members who had objections to the Proposed Settlement to file their objections with the Court no later than December 19, 1996. October 28, 1996 Order at P 13.
188. Subsequently, the Court ordered that the Fairness Hearing be moved to February 24, 1997.
January 6, 1997 Order. Because of this adjournment, the Court extended the deadline by which objectors could file supplemental objections to January 14, 1997, provided that their materials referred to the issues already filed in the initial objections. Id. at P 4. The Court further ordered that Prudential and Class Counsel could speak for two hours each, states thirty minutes each, and objectors fifteen minutes each. Id. at P 12.
189. On February 21, 1997, the Court was advised that the state objectors were withdrawing their objections. Accordingly, the Court notified those individual objectors who had filed written objections that they would have additional time to speak.
190. On February 24, 1997, the Court held the Fairness Hearing to determine whether the class should be certified and whether the Proposed Settlement was fair, reasonable, and adequate.
191. Prior to the hearing, Class Counsel
had fully briefed and supported their positions with extensive affidavits and exhibits. At the hearing, both parties made substantial and informative presentations.
192. Objectors also briefed and provided support for their positions prior to the hearing. At the hearing, several objectors made presentations: Johnson, Beauvias, Treadway, Parnell, Ginsberg, Krell, Chin, Helton, the Gradys, and several hundred policyholders represented by UAW-Ford-General Motors-Chrysler Legal Services Plan.
193. Several state insurance regulators also provided the Court with their views of the Proposed Settlement. New Jersey filed papers in support of the Proposed Settlement on its own behalf and submitted letters of support from state insurance regulators across the nation. Massachusetts, Texas, California, and Florida had filed objections to various aspects of the Proposed Settlement, but all states withdrew their objections at or before the hearing. As a result, the Proposed Settlement was joined and supported by every insurance regulator in the nation.
194. The Court permitted any participant to submit proposed findings of fact and conclusions of law by Monday, March 3, 1997. Thereafter, Class Counsel, Prudential, intervenor Richard Johnson, the Krell objectors, objector Beauvias, and objectors Treadway, Parnell, and Ginsberg each submitted proposed findings of fact and conclusions of law.