New York Life, MassMutual Sued Over Madoff Losses

New York Life Insurance Co. and Massachusetts Mutual Life Insurance Co. are being sued over $27 million in investment losses linked to Bernard L. Madoff , the New York investment adviser who admitted to losing about $50 billion of clients' money in a massive Ponzi scheme.

Cummins Inc., an Indiana-based corporation, claims part of the premium contributions it made to variable universal life insurance policies issued by New York Life were allocated to Bernard Madoff Investment Securities LLC, according to the suit filed in the U.S. District Court for the Southern District of New York.

Over the course of about a year, from September 2007 through November 2008, Cummins made premium contributions to New York Life of $122,590,638, Kevin M. Flynn , the Chicago-based lead counsel for Cummins, said in an e-mail. New York Life, in turn, invested Cummins' premium contributions into a Tremont fund that allocated about 22% of its assets to BMIS, he said.

That roughly $27 million investment was lost as a result of BMIS' "massive Ponzi scheme," Flynn said. The suit seeks that amount in damages.

Tremont is a subsidiary of Oppenheimer Funds, which is a subsidiary of Massachusetts Mutual Life.

William Werfelman , a spokesman for New York Life, said in an e-mail the company "has strong legal and factual defenses to the lawsuit."

"These claims are related to a very small part of New York Life's overall business where, within a certain type of life insurance policy, sophisticated individual and institutional investors can direct investments to funds they select," he said. "New York Life has no advisory role whatsoever."

The Tremont Funds is a fund-of-funds, in which the general partner, Tremont Partners Inc., was responsible for selecting and monitoring the managers or sub-advisers of the underlying funds, Werfelman said. "New York Life had no role in the selection or monitoring of sub-advisers chosen by Tremont," he said. "Any of the policyholders who selected these investments were clearly advised of this arrangement."

The policies at issue were purchased through independent insurance brokerage firms that were affiliated with outside broker-dealers, Werfelman said.

The plaintiff, however, claims New York Life and other defendants represented to Cummins that extensive due diligence on BMIS had been conducted and that they had determined that investing with BMIS was suitable for Cummins, Flynn said.

The evidence "will show that the defendants did not conduct adequate due diligence on BMIS," Flynn said.

The variable universal life policies were intended to serve as a source for funding benefits payable under multiple nonqualified retirement and deferred compensation plans created for the benefit of Cummins' employees and their beneficiaries worldwide, said Flynn.

Mark Cybulski , a spokesman for MassMutual, said in a telephone message that the company has no comment. Montieth Illingworth , a spokesman for Tremont Capital Management, said the company also is not commenting on the case.

Defendants in the suit include New York Life; New York Life Insurance and Annuity Corp.; Massachusetts Mutual Life; Oppenheimer Acquisition Corp.; Tremont Capital Management; Tremont Group Holdings; Tremont Partners; Rye Investment Management, a division within Tremont; Rye Select Broad Market Prime Fund and Rye Select Broad Market XL Fund.

This isn't the first time MassMutual and its affiliates have been caught in lawsuits over alleged Madoff-linked investment losses.

In December 2008, the life insurer, its hedge-fund subsidiary and affiliates were facing a class-action suit filed in the same New York federal court. The plaintiffs were Arthur E. Lange of Connecticut</location> and Arthur C. Lange of New York, who sought to represent a group of all investors who allegedly lost $3.1 billion dollars as a result of the hedge fund investing their assets with Madoff's firm (BestWire, Dec. 23. 2008).

In October 2009, they were facing another suit in New York Supreme Court. The named plaintiff in the amended complaint was Jay Wexler , who allegedly invested "hundreds of thousands of dollars" in the Rye Select Broad Market Prime Fund in 2007 and 2008 (BestWire, Oct. 21, 2009).

New York Life Insurance Co., New York Life Insurance and Annuity Corp. and Massachusetts Mutual Life Insurance Co. each currently have a Best's Financial Strength Rating of A++ (Superior).

(By Fran Matso Lysiak , senior associate editor, BestWeek: fran.lysiak@ambest.com)