Securities Fraud Blog | Find out if your broker is liable for your losses

TAG | life insurance fraud lawyer

Jun/11

6

Broker-Dealers Often Keep Insurance Licenses After Being Fired

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In an article from InvestmentNews.com, May 29, 2011, Bruce Kelly writes that Neal Smalbach was fired by a broker-dealer in 2008 for selling securities while he was unregistered, an infraction that got him suspended by the Financial Industry Regulatory Authority Inc. (FINRA) for six months, according to the organization’s BrokerCheck system. It was the second time that a securities firm had let him go. Though he no longer had a securities license, Mr. Smalbach still had a license to sell insurance, and made good use of it — at least for himself, authorities said.

Kelly writes that on April 29, Mr. Smalbach was arrested in Florida by the Pinellas County sheriff and charged with one count of insurance fraud and one count of organized fraud. Each count carries a maximum of five years in prison, along with a potential $5,000 fine. The charges of insurance fraud against Mr. Smalbach, who also has 37 pending customer disputes from his time as a broker, according to BrokerCheck, highlight a persistent problem in the investment advice business:

Registered representatives who permanently or temporarily lose their license to sell stocks, bonds and mutual funds often retain a license to sell insurance.

Although state agencies that regulate insurance agents and securities brokers try to work together to keep an eye on brokers who get fired from either side of the industry, regulators are sometimes limited in their authority because of a lack of information sharing about reps and agents, observers said.

A common criticism among registered reps is that insurance agents who lose a license to sell securities products often sell equity-indexed annuities, an insurance product that is nonetheless marketed as an investment that can compete with a mutual fund or variable annuity.

“It’s been an issue, and still is, among states,” said Joseph Borg, director of the Alabama Securities Commission. “If you’ve been kicked out of one end of the financial markets, you probably don’t need to be in another.”

According to the InvestmentNews.com article, Mr. Smalbach, 48, was selling mortgage insurance policies that promise to pay the balance of a policyholder’s mortgage in the event that he or she dies, according to Jeremy Powers, an assistant state attorney in Florida’s Fifth Judicial Circuit. But instead of mortgage insurance, Mr. Smalbach’s clients were, in fact, sold whole-life policies that were worth no more than $20,000.

“Somebody who’s had the level of problems that [Mr.] Smalbach appears to have had would create a risk for consumers,” Mr. Powers said. “The activities alleged in this case are pretty serious and had the potential to create multiple hundreds of thousands of dollars in victim losses.”

 Smalbach, whose sales practices were profiled last month by the St. Petersburg (Fla.) Times, serve as a backdrop to efforts by lawmakers in Washington and regulators across the country to create a single fiduciary standard for investment advisers, registered reps and insurance agents. This year, a law went into effect in Florida that gives the state’s Department of Financial Services the power to revoke an insurance agent’s license immediately if the agent has his or her securities license revoked.

“Fraud is fraud,” said Nina Ashley, a department spokeswoman.

Kelly reminds us that when confronted with a broker whose securities license had been pulled — but who maintained an insurance license — regulators’ hands are, at times, tied. To take actions against a broker’s insurance license, Ms. Ashley said a specific insurance violation has to be found. “That didn’t always exist,” she said.

Florida already has used the new law to revoke the insurance license of a broker who misrepresented information when selling securities to a senior citizen, Ms. Ashley said. In February, the Florida Office of Financial Regulation permanently barred Jeffrey Donner on charges that he failed to disclose to clients that their accounts would automatically be billed advisory fees of 30% annualized, according to a statement from the agency. Approximately $40,000 in management fees were deducted from clients’ accounts. While Mr. Donner neither admitted nor denied the findings, Florida regulators revoked his insurance license this month according to the InvestmentNews.com article.

THEY ARE FINDING LOOPHOLES

We’ve learned that Mr. Smalbach, however, still has a license to sell insurance products such as life and health policies, and variable annuities, according to the Florida Department of Financial Services’ website.

The broker in question exploited another loophole in the law when he sold stock in a firm called Transfer Technology International Corp., whose shares are currently listed at less than a penny a share. At least a dozen elderly investors, some in their 80s and 90s, bought nearly $1 million of the stock from Mr. Smalbach, according to the St. Petersburg Times. Although he didn’t have a securities license, Mr. Smalbach was an employee of Transfer Technology and could sell shares in the company to accredited investors legally, the newspaper reported.

THEY ARE SMOOTH OPERATORS

Bruce Kelly writes that one longtime client of Mr. Smalbach who invested in the Wesley Chapel, Fla.-based company was Bob Fox, 78, of Sebring, Fla. A client of Mr. Smalbach’s for over a decade, Mr. Fox said he has lost $100,000 in his Transfer Technology investment.

“He was a really smooth talker,” Mr. Fox said, adding that Mr. Smalbach often hurried him through paperwork when buying an investment.

Mr. Smalbach’s former accountant, Robert Ferreira, corroborated Mr. Fox’s statement said the ex-broker often rushed clients through the process of buying investment products, including variable annuities.

“His method was to say, “Sign here, fill in this and that — I’m in a hurry and will fill in the rest at the office,’” Mr. Ferreira said.

If you or a family member have purchased policies through Neal Smalbach or other brokers and experienced a similar situation, contact an insurance fraud attorney for a free consultation on how to potentially recover your investment losses.  To speak with an attorney, call 888-760-6552, or visit stockmarketlawsuit.com. 

We stand up and fight for the rights of consumers. Soreide Law Group, PLLC, representing Insurance Fraud Victims in Federal Court, State Court and before the Financial Industry Regulatory Authority (“FINRA”).

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May/11

20

Susan Mae Karn Fined and Suspended by FINRA

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Susan Mae Karn (CRD #5218398, Registered Representative, Wimbledon, North Dakota)

submitted a Letter of Acceptance, Waiver and Consent in which she was fined $5,000 and suspended from association with any FINRA member in any capacity for six months. The fine must be paid either immediately upon Karn’s reassociation with a FINRA member firm following her suspension, or prior to the filing of any application or request for relief from any statutory disqualification, whichever is earlier. Without admitting or denying the findings, Karn consented to the described sanctions and to the entry of findings that she allowed a customer to sign relatives’ names on life insurance applications, and before Karn submitted them for processing, she signed the insurance applications and certified that she had witnessed each of the proposed signatures on the insurance applications. The findings stated that Karn falsely certified on the Representative’s Information Supplement document for each insurance application that she had personally seen each proposed insured at the time the application was completed. The findings also stated that one of Karn’s clients completed an application to purchase a municipal bond fund by signing her name on an electronic signature pad, and later that same day, Karn signed the client’s name on the electronic signature pad and thereby affixed the client’s signature on an application without the client’s authorization, consent or knowledge.

The FINRA findings also included that the application Karn’s member firm processed and sent to the client reflected the signature Karn had affixed rather than the client’s authentic signature. FINRA found that when the firm questioned Karn about the authenticity of the client’s signature, Karn initially stated it was the client’s original signature, but when questioned further, admitted she had signed the client’s name and in doing so, Karn misled her firm during its internal investigation into a customer complaint.

The suspension is in effect from March 7, 2011, through September 6, 2011. (FINRA Case #2010022067901)

This information was obtained on FINRA’s website.

If you or a family member have become  victims of the alleged fraudulent schemes of Susan Mae Karn, or have experienced a similar situation, call a Securities Arbitration Lawyer for a free consultation on how you could potentially recover you losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com.

Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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May/11

19

Lawyer Pleads Guilty in Major Insurance Fraud Case

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In a May 18th., 2011 article in the Miami Herald,  Jay Weaver reports that a prominent attorney whose fortune rose with a Fort Lauderdale viatical insurance company at the center of a $1.25 billion investment fraud case pleaded guilty Wednesday to a single conspiracy charge, marking a major development in the long-running prosecution of executives and others at Mutual Benefits Corp.

Fort Lauderdale attorney Michael McNerney, 62, admitted that as its lawyer, he helped the now-defunct company lure thousands of investors worldwide into buying dubious life insurance policies held mostly in the names of people dying of AIDS.

Weaver goes on to say that McNerney’s role was part of an alleged investment scam lasting from 1995 to 2004 that authorities say rivals the $1.2 billion Ponzi scheme of disbarred Fort Lauderdale lawyer Scott Rothstein, convicted last year of selling fabricated legal settlements in a separate criminal case. The Mutual Benefits and Rothstein cases rank as Florida’s largest fraud prosecutions.

The McNerney guilty plea to mail-and-wire fraud conspiracy, which carries up to five years in prison, marks the 10th person to be convicted in the Mutual Benefits prosecution in Miami federal court. He will be sentenced Aug. 26 before U.S. District Judge Adalberto Jordan. With his plea, McNerney avoided a potential sentence of up to 20 years. As part of his deal, McNerney will cooperate with prosecutors on how the alleged life settlement racket was directed by Mutual Benefit’s senior executives

The Miami Hearld reports that the two top executives of the company, Joel Steinger and brother Steven Steiner, along with another Fort Lauderdale lawyer Anthony Livoti, are scheduled to stand trial in early 2013 — but that date could be moved up with McNerney’s plea. He was scheduled to go to trial by himself early next year. Steinger and Steiner were planning on using a defense based on their reliance on McNerney’s legal counsel for all their business decisions regarding Mutual Benefits’ sale of some 30,000 viatical insurance policies to investors who lost about $837 million. But that defense may be in danger now that he has pleaded guilty to being a player in the alleged conspiracy.

It was reported that McNerney, a 1973 graduate of the University of Florida College of Law, admitted that he not only encouraged investors to buy the questionable viatical policies, but he also provided “legal cover” for Steinger and others to perpetuate the alleged fraud, according to a “factual statement” filed with his plea agreement.

Wednesday, McNerney confessed that he schemed with other executives at Mutual Benefits by misleading investors about the life expectancy of insured beneficiaries; the use of funds raised from investors; the risks associated with the investments in viatical settlements; and the payments of insurance premiums on those policies.

“This is a major breakthrough in the prosecution’s case because it shows the defendants were not relying on the advice of an independent attorney,” said Ryan O’Quinn, a former federal prosecutor and Securities and Exchange Commission attorney, who had been involved in the case since 2004. “It shows Michael McNerney was a knowing participant in the fraud, standing side by side with the co-defendants.”

The Herald article goes on to say that in January 2009, the U.S. attorney’s office unsealed the sweeping 25-count fraud indictment against Steinger, identified as Mutual Benefits’ principal executive, brother Steiner, the company’s founder, as well as McNerney and Livoti. The indictment, alleging a conspiracy to commit wire fraud and money laundering, was filed nearly five years after state and federal regulators shut down Mutual Benefits. The company was placed in receivership.

The company, Mutual Benefits, bought life insurance policies of AIDS patients and the elderly and sold the policies to investors, who stood to collect benefits when the insured died. Mutual Benefits promised investors the investments were “safe.” But prosecutors alleged Steinger hired doctors to attest to life expectancies for the insured. By claiming the beneficiaries were near death, prosecutors alleged, Mutual Benefits could sell low-value policies at a higher price. But the longer the insured lived, the more premium payments had to be made to prevent the policy from lapsing and becoming worthless.

According to Jay Weaver of the Miami Herald, prosecutors further alleged that Mutual Benefits was a massive Ponzi scheme, using money from newer investors to pay premium obligations on older policies.

If you or a family member have purchased policies through Mutual Benefits, Corp, or other viatical companies, and become the victim of the life-expectancy predicitons, contact an insurance fraud attorney for a free consultation on how to recover your investment losses.  To speak with an attorney, call 888-760-6552, or visit stockmarketlawsuit.com. 

We stand up and fight for the rights of consumers. Soreide Law Group, PLLC, representing Insurance Fraud Victims in Federal Court, State Court and before the Financial Industry Regulatory Authority (“FINRA”).

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May/11

11

Deceptive Insurance Practices

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The following are some of the deceptive practices involving insurance sales:

*The definition of “twisting” insurance is when the insurance agent, for the purposes of generating his or her commission, persuades the client to lapse, surrender, or otherwise terminate an insurance product and replace it with another product that provides little or no economic benefit to the client. Often, the accumulated cash value of an older policy is used to mask the true cost of the new policy, allowing the agent to provide a favorable (but misleading) comparison.

*”Churning,” sometimes referred to also as twisting in the insurance industry, is an attempt by an unscrupulous agent from an insurance company to cancel your existing policy and replace it with a new one, drawing down your cash value (called “juice” in industry jargon) to pay for it. This activity generates additional commission for the agent and may result in your having to pay more down the line.

*”Vanishing premiums” refers to the inflated claims about the length of time a policyholder will need to pay premiums, such as “you only have to pay premiums for seven years, and then the policy will pay for itself.” Unfortunately, many consumers who were sold vanishing premium policies in the 1980s and 1990s later found they needed to pay more premium dollars to keep their policies from lapsing.

Before it was made illegal, some insurance agents used a sales pitch for universal life insurance that suggested the premiums could vanish.

The pitch went like this:

You start out by putting a large, lump sum into the universal life policy. The policy has the potential for making money, much like an investment (but it is illegal for an agent to sell life insurance by calling it an investment). The company may pay interest, if the company has a good year. If the company does have a good year, the percentage of interest could be very high. If you left the interest and dividends in your policy to build up with your cash value after a few years, you could have enough cash value in the policy to pay the premiums.

The “vanishing premiums” scenario depended on three big “IFs:”

Only if the company has very good years. Only if the company pays high dividends. Only if you do not withdraw cash value.

*The term “sliding” means an agent slips you extra coverage you didn’t ask for — but do pay for. This can easily add $100, $200 or more to your premium.  The agent says it’s part of a “package,” or won’t mention the coverage at all. The motor club memberships, accidental death coverages and guaranteed renewable life insurance are three policies that agents sometimes sell to policyholders without their knowlege.

The primary motive in these scenerios is financial profit.  These practices not only are misleading and unethical, but can be illegal.

If you or a family member have become victims of these alleged insurance frauds, contact an insurance fraud attorney for a free consultation on how to recover your investment losses.  To speak with an attorney, call 888-760-6552, or visit stockmarketlawsuit.com. 
We stand up and fight for the rights of consumers. Representing Insurance Fraud Victims in Federal Court, State Court and before the Financial Industry Regulatory Authority (“FINRA”).

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Apr/11

21

SEC Investigating Life Partner Holdings, Inc. Viaticals

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In a recent article from the Wall Street Journal we learn that the Securities and Exchange Commission (SEC) is investigating Life Partners Holdings Inc., a Waco, Texas, company that has arranged for investors to buy several billion dollars of life-insurance policies from their original owners, according to people who have been contacted recently by the agency.

The SEC’s enforcement division has been seeking experts to analyze the way Life Partners has estimated the life expectancies of the insured individuals, these people say. The estimates—projections of how long the people might have to live—are a crucial part of the investment equation.

The shorter an insured person’s expected life span, the more Life Partners generally can charge for that policy, because investors expect a faster payout. If the death comes later than anticipated, not only is the policy payout delayed, but investors who buy policies or parts of them must continue to pay premium bills while they wait to collect on a death benefit.

Questions about the accuracy of Life Partners’ life-expectancy estimates were the focus of a December Page One article in The Wall Street Journal. The article reported that many of the insured people are living well beyond the company’s estimates, suggesting that the 10% or 15% yearly returns promoted to Life Partners’ investor clients may prove elusive for many.

The article says that attractive projected returns for clients are a key part of Life Partners’ formula for success. One of the fastest-growing small companies in the U.S. in recent years, Life Partners reported earnings of $29.4 million on $113 million of revenue for its fiscal year ended Feb. 28, 2010.

Life Partners says it has sold 6,400 policies with a face value of $2.8 billion to 27,000 clients since its 1991 founding. Life Partners extracts often-hefty fees in the deals, averaging $308,000 apiece for the 201 policies sold in its most recent fiscal year. Investors often buy pieces of multiple policies.

The Journal article goes on to say that based on data Life Partners filed with the Texas Department of Insurance, the Journal found that, for policies sold from 2002 through 2005, insured people outlived Life Partners’ projections about 90% of the time.

If you or a family member have purchased policies through Life Partners Holdings, Inc. and become a victim of the life-expectancy predicitons, call a Securities Arbitration Lawyer for a free consultation on how to recover your investment losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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