MetLife Board Dodges Lawsuit Over $500 Million Annuity Error

MetLife Inc.'s board doesn’t have to face oversight claims over the insurer’s practice of downplaying its liabilities by wrongly counting pensioners as dead if they didn’t respond to its letters, instead of consulting official records, a Delaware Chancery Court judge ruled.

The shareholder derivative lawsuit “supports an inference of failure of prudence on the part of the defendants; and a lack of imagination perhaps,” Vice Chancellor Sam Glasscock III wrote Monday.

But “the plaintiffs require too many attenuated inferences to traverse from regulatory guidance and settlements on the part of the company, to bad faith on the part of any director,” Glasscock said.

The case concerned Metlife’s “pension risk transfer” operations, a long-running business line that involves managing pension obligations for employers.

The insurer for decades based its annuity payments on letters to sent to beneficiaries around their 65th and 70th birthdays notifying them of their eligibility. If a pensioner failed to respond, the company marked them down as dead, avoided the payment, and released the money into its general earnings.

That method of determining pension liability persisted even after more accurate tools became available, such as the Social Security Administration’s “master death file.” The company ultimately acknowledged the errors in December 2017, adjusting its cash reserves downward by more than $500 million.

The suit accused its directors of ignoring red flags related to the pension errors by looking the other way despite mounting audits and investigations.

‘Among the Hardest’ to Prove

Dismissing the case, Glasscock said the shareholder plaintiffs failed to show that conflicts of interest stemming from the board’s own legal exposure would have made it futile for the plaintiffs to demand an internal investigation before bringing their derivative claims.

He referred to the “oft-repeated” axiom that board oversight claims are “among the hardest to plead and prove” under the Delaware Supreme Court’s landmark ruling in In re Caremark. Caremark requires a plaintiff to show that a majority of directors consciously disregarded known risks to the company in bad faith.

Although the suit shows that a few board members knew about certain investigations, and others were aware of audit irregularities, it falls short of establishing knowledge by a majority, the judge found.

The ruling comes about three weeks after a federal magistrate judge recommended the dismissal of parallel securities claims from the U.S. District Court for the District of Delaware.

An earlier proposed class action on behalf of MetLife annuity beneficiaries was booted from Manhattan federal court in January 2019. The company also faced enforcement actions by New York and Massachusetts, and paid a $10 million fine in December to resolve related Securities and Exchange Commission charges.

MetLife and its board are represented by Richards, Layton & Finger PA and Debevoise & Plimpton LLP. The plaintiffs are represented by Heyman Enerio Gattuso & Hirzel LLP, Pomerantz LLP, Cooch & Taylor PA, Squitieri & Fearon LLP, and Gardy & Notis LLP.

The case is In re MetLife Inc. Deriv. Litig., Del. Ch., No. 2019-0452, 8/17/20.