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Rogue Advisors on Parade: 2018

A former Michigan life insurance agent will be taking an extended vacation behind bars for stealing $800,000 from his senior clients. According to state authorities, Paul Garceau, Jr., 51, of Grosse Point Park, pleaded guilty to perpetrating a Ponzi scheme against his mostly elderly customers. For his role embezzling money from a dozen Detroit-area clients, he was sentenced to a minimum of six years jail time and ordered to pay more than $600,000 in restitution.  A single complaint of embezzlement and forgery in October 2014 sparked a Michigan State Police investigation that uncovered a larger pattern of crime. Following the Ponzi template, Garceau approached his clients with promises of higher returns. After convincing them to cash out their legitimate investments, he pocketed the proceeds rather than invested them as promised.

A former University of Virginia athlete graduated from defending against opposing teams’ ground games to perpetrating a Ponzi scheme that won him a 40 year-prison term. According to federal prosecutors, Merrill Robertson, Jr., a former college linebacker, defrauded more than 60 investors to the tune of $10 million. His victims included his former coaches, fellow college alumni, and people he knew at his church and in his community. His scam took shape in the spring of 2016, when he began telling investors he could provide them with returns of between 10 to 20 percent in low-risk unregistered debt securities. He backed up his claims by publishing a website that displayed sham investments. He also convinced them to buy shares in a fake public energy company that purported to own technology that energized water and in a minority-owned investment firm that didn’t exist. After amassing $10 million in investor funds, Robertson and his co-conspirator Carl Vaughn, spent $6 million on expensive cars, residences, college tuition, shopping extravaganzas, and spa treatments. When earlier investors requested their money back, he used new-client money to cover the redemptions.

A former Pennsylvania life insurance agent was arrested for submitting 29 fraudulent life applications to three insurance companies. As a result of his crimes, Keynan Kinard received approximately $8,000 in commissions. After receiving insurer complaints, the Pennsylvania Criminal Law Division pulled Kinard’s license and referred the matter to Pennsylvania’s Criminal Law Division. According to its complaint, the agent used the personal information of friends, acquaintances, and former clients to produce applications he then sent to life insurers. He also included phony bank account information on the applications to make sure the policies would not be issued or would lapse when premium-payments failed to go through. Kinard was charged with one count each of identity theft, theft by deception, criminal solicitation, insurance fraud, and forgery.

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Rogue Advisors on Parade: Blind-Widow Bilker, California Trust Fraudster, New Jersey Securities Scammer

FINRA has fined a Northport, N.Y. stock broker for slamming a blind, elderly widow’s account with excessive fees. According to regulators, Hank Mark Werner convinced the woman to buy an unsuitable variable annuity and then used the account to generate excessive trades and fees for himself. Werner began churning the widow’s account in 2012 after her husband, who was also blind, died. Werner had served both clients until that point. Regulators say the broker bought and sold securities every week or so, generating more than 700 trades from October 2012 to December 2015. His churning produced $210,000 in commissions for himself and $175,000 in losses for the widow.

A California insurance broker has been sentenced to 60 months in jail for stealing $1 million from a widow’s trust account.  The broker, Gary Thornhill, of Santa Clara, was convicted of wire and mail fraud, according to U.S. attorneys on the case. Prosecutors say Thornhill sold life insurance to a married couple in 1998. The husband died seven years later, leaving the wife as the only insured on the policy. In 2008, the agent was named trustee of the entity that became legal owner of the policy. Using that position, Thornhill withdrew $1.5 million from the policy’s cash value without securing the widow’s permission. As part of his punishment, Thornhill was ordered to pay $1.4 million in restitution and serve three years of supervised release after completing a 60-month jail term.

A New Jersey financial advisor has been arrested for selling clients more than $1.8 million in fake securities, annuities, and life insurance. According to federal authorities, the advisor, William E. Fitzpatrick, was charged with one count each of mail, wire, and securities fraud. The advisor’s crime was long-standing in nature. Starting in 2007, he owned and operated at least three financial advisor and tax-return firms. After persuading clients to invest with him, typically in non-traditional investments such as a video-game production company and a movie financing firm, as well as in traditional mutual funds, annuities, life insurance, and money market funds, he failed to invest their money as promised, Fitzpatrick used their checks, which were made out to him personally, for his own purposes. The advisor is currently facing a maximum jail term of 30 years and a $1 million fine for the mail and wire fraud counts. He’s also facing a maximum penalty of 20 years in prison and a $5 million fine for the securities fraud count.

 

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Advisor Alert: 10 Mistakes to Avoid When Advertising Your RIA

As a Registered Investment Advisor (RIA), you know how important it is to differentiate your firm from its competitors. You also know that advertising is a great way to convey those differences to the marketplace. However, if you get too aggressive with your promotions, you can also get into hot water with the Securities and Exchange Commission (SEC). A recent SEC notice provides a cautionary tale.

According to a National Exam Program Risk Alert from the SEC’s Office of Compliance Inspections and Examinations, some RIAs are violating the SEC’s Advertising Rule (Rule 206[4]-1 of the Investment Advisers Act of 1940). According to recent field examinations and results from its “Touting Initiative,” RIAs are publishing, circulating, and/or distributing ads with untrue or misleading statements. This finding applies to advisors using online, print, or broadcast advertising or sending out promotions directly to clients.

The SEC risk alert identified 10 common RIA advertising violations, including:

  • Misleading prospects and clients about a firm’s investment performance by not deducting advisory fees from investment gains. This deceptively inflates performance.
  • Comparing firm performance to an investment benchmark without disclosing any limitations that might apply to that comparison.
  • Referring to an index whose composition does not relate to the RIA’s advertised investment approach.
  • Highlighting gross investment performance in one-on-one sales presentations without disclosing that client gains were in fact lower because of fees.
  • Making misleading claims of compliance with voluntary performance standards.
  • Touting high-performing individual stocks or investment strategies without mentioning the stocks or strategies that fared less positively.
  • Failing to maintain compliance policies and procedures to prevent deficient advertising practices.
  • Using third-party rankings or awards in a deceptive manner (i.e., without disclosing material facts).
  • Mentioning professional designations in a firm’s Form ADV Part 2B (brochure supplements) that have lapsed and/or failing to explain the minimum qualifications required to attain those designations.
  • Publishing client testimonials on firm websites, social media pages, and in third-party articles or pitch books, all of which are violations of the SEC’s Advertising Rule.

If your firm has engaged in the above practices, now would be a good time to stop. Why? Because the last thing you need is an SEC black mark on your record or a client who thinks you lied and sues as a result. By competing fairly, your prospects will trust you more, your clients will be more satisfied and loyal, and you’ll have less need to use your E&O insurance in a legal dispute. Sounds like a winning strategy, right?

To review the SEC’s Advertising Rule, go here. To learn more about other ethics and compliance issues facing financial professionals, visit the EOforLess E&O HQ.

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Advertising Compliance Basics: 25 Ways to Avoid Nasty Outcomes

We’ve often said the vast majority of financial advisors are ethical and would no sooner rip off Grandma or Grandpa than lop off their own right arm. However, it’s also fair to say a much larger percentage of advisors have ethical or compliance lapses through ignorance, inattention, or just sheer sloppiness. This is especially true regarding the development and use of advertising materials.

In fact, the use of non-compliant advertising is the regulatory issue that never dies. Every few months, staffers at the National Ethics Association read of a state regulator reminding licensees of basic advertising requirements. Yet despite these insistent bulletins, the use of problematic advertising goes on, misleading consumers and setting the stage for future errors-and-omissions insurance claims.

In response, we’ve compiled some basic rules for insurance advertising. If you know these already, please click on another EOHQ article. However, we urge you to quickly scan the list to make sure you aren’t missing anything. This is important because advertising is a powerful tool for establishing initial prospect (and ultimately client) expectations. If your content misleads them into expecting something other than what they’ll receive, you’ll set yourself up for complaints, lawsuits, and errors-and-omissions insurance claims. Life’s too short to deal with such problems!

With that, let’s get started.

  1. Remember that advertising is a broad concept. According to the National Association of Insurance Commissioners, it’s any communication “designed to create public interest in life insurance or annuities, or in any insurer, or in an insurance producer; or to induct the public to purchase, increase, modify, reinstate, borrow on, surrender, replace, or retain a policy.” Bottom line: if you’re trying to get someone to think something or do something, it’s advertising.
  2. The types of advertising are equally expansive. They range from brochures, flyers, and lead cards to newspapers ads, telephone scripts, and seminar invitations and everything in between. Again, if your content is trying to persuade someone to do something or think a certain way, especially leading to a sale, it’s advertising.
  3. If your ad content references a company’s products, even without naming the company, you must submit the content for company review before actually using it in the field.
  4. If a piece is approved, but you end up changing the copy, you need to get another approval.
  5. It’s best to seek company approval early in the production process. For example, you’re better off submitting a script for a TV ad than the actual produced spot, since changing the script will be much less expensive than reshooting the spot.
  6. The NAIC Model Advertising Regulation does not distinguish between consumer advertising and advertising targeting producers. Consequently, you should also file advisor recruitment ads, along with sales concepts and visuals used in sales training, for company review.
  7. The content of your ads must be completely accurate, objective, and free of misleading information.
  8. Your ads should not omit material facts the consumer needs to understand how a product works or whether it’s suitable for his or her needs. In this regard, it’s important not to omit key conditions that must exist for someone to receive benefits under the policy.
  9. Always fully identify the product you’re promoting, including the company underwriting it, the product type (annuity) and the product sub-type (variable annuity).
  10. If you use a company’s trade name in an ad, always include the full legal name somewhere else in the ad.
  11. Never suggest that the company or product being promoted is related to any government agent or benefit program.
  12. When citing facts about a company’s financial condition, size, or investment portfolio, double check to make sure all data is correct and up-to-date. The same is true for all discussions of company ratings.
  13. In prospecting, always fully identify yourself as a “licensed insurance agent” or “licensed insurance professional” and state the reason for your approach (to discuss the sale of life insurance, annuities, etc.). Avoid titles such as “investment advisor” or “securities representatives” unless you are properly licensed to sell such products and offer services.
  14. Statistical data used to trigger interest or strengthen arguments must be fully sourced, including the origin of the information (researcher, author), name of publication, and issue date.
  15. Avoid statements of opinion or if you must express one, clearly label it as such.
  16. Avoid using language or charts or graphs that lead a prospect to draw an incorrect conclusion.
  17. The product you’re promoting must be insurance-department-approved in the state in which you’ll run the ad. If the ad will be used in multiple states and it isn’t approved in all states, then state that in the ad.
  18. Advertising that discusses non-guaranteed policy elements such as interest rates must make clear the element isn’t guaranteed and must also state the guaranteed value for that element.
  19. All charts or illustrations that project future values must explicitly state they do not represent actual amounts to be paid in the future. Content must also describe all elements that might impact such values such as surrender charges, cap rates, and market value adjustments.
  20. When discussing the tax implications of purchasing or holding an insurance product, explain the basis of for such statements. Also provide a caveat stating that the discussion doesn’t constitute legal or tax advice and that the consumer should consult with his or her own attorney.
  21. In promoting the sale of annuities, refrain from using terms such as “CD annuity,” “certificate of annuity,” “investment account,” or “savings plan.”
  22. Never say “deposits” or “contributions” when you mean to say “premiums.”
  23. Avoid words that suggest the best or ultimate value, including “highest,” “lowest,” “safest,” “unique,” unless you can factually support your claim.
  24. Avoid disparaging your competitors, either companies or other financial professionals, in your advertising.
  25. Finally, when it comes to developing insurance advertising content, always remember that less is more. The more you stretch to make a point or engage in hyperbole, the harder it will be to get your ad produced. And if by chance it does get produced, the more likely it will generate complaints or errors-and-omissions problems.

For further information about advertising compliance, please consult with your firm, FMO, or insurance-company compliance department.

For more information on affordable errors and omissions insurance for low-risk financial advisors, visit E&OforLess.com. For information on ethical sales practices, please visit the National Ethics Association’s Ethics Center

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