Florida Securities Fraud Lawyer Blog

Sales of equity-indexed annuities (EIAs) have grown recently. A confusing aspect of EIAs is the method to calculate the gain in the index linked to the annuity. The variety of methods used to credit interest make it difficult to compare EIAs.

Annuities come in two types: fixed and variable. With a fixed annuity, the insurance company guarantees both the rate of return and the payout. A variable annuity's rate of return is not stable, but varies with the performance of the stock, bond, and money market investment options that you choose.

EIAs are complex financial instruments that have characteristics of both fixed and variable annuities. Their return varies more than a fixed annuity, but not as much as a variable annuity. As such, EIAs pose more risk (but have more potential return) than a fixed annuity, but less risk (and less potential return) than a variable annuity.

EIAs offer a minimum guaranteed interest rate combined with an interest rate linked to a market index. Because of the guaranteed interest rate, EIAs have less market risk than variable annuities. EIAs also have the potential to earn better returns than traditional fixed annuities when the stock market is rising.

There are several methods for determining the change in the relevant index over the period of the annuity. These varying methods impact the calculation of the amount of interest to be credited to the contract based on a change in the index.

Beware that EIAs are long-term investments and withdrawing funds early may mean taking a loss. Many EIAs have surrender charges. The surrender charge can be a percentage of the amount withdrawn or a reduction in the interest rate credited to the EIA. Further, any withdrawals from tax-deferred annuities before you reach the age of 59½ are generally subject to a 10% tax penalty in addition to any gain being taxed as ordinary income.

Be careful that you also can lose principal in EIAs. Many insurance companies only guarantee that you'll receive 90% of the premiums you paid, plus at least 3% interest. Therefore, if you don't receive any index-linked interest, you could lose money on your investment.

March 30, 2009 - The law firm of McCabe Rabin, P.A. (www.McCabeRabin.com) has announced that it is investigating possible fraud and misrepresentation in connection with the sale and marketing of certain equity indexed annuities offered by North American Company for Life and Health Insurance. In particular, the firm is investigating the "Guaranteed Income Advantage" rider offered with the "North American Precision Series" and possibly several other annuity products sold by the company. This rider purportedly offered a lifetime income based upon a balance that was guaranteed to grow at 8% per year. Upon information and belief, however, sales agents used marketing materials and brochures that materially misrepresented how the rider worked to investors. As a result, investors may not have received what was represented to them.

Equity-indexed annuities are complicated insurance products that usually pay a high commission to the sales agent and the insurance company. The Financial Industry Regulatory Authority (FINRA) and state insurance commissioners have repeatedly warned of the dangers of these complicated products and the possibility of sales abuses.

If you purchased an annuity from the North American Company for Life and Health Insurance that included a "Guaranteed Income Advantage" rider and you would like a free evaluation of your case, please contact Ryon McCabe at (561) 659-7878 or rmccabe@mccaberabin.com.

The sales efforts used by some brokerage firms to sell variable annuities merit scrutiny, particularly when elderly investors are the buyers. Hard-core sales pitches often scare or confuse investors. One such tactic is to claim that a variable annuity will protect investors from their creditors.

While variable annuities may be appropriate in limited circumstances, investors need to be aware of their restrictive features. This includes understanding that substantial taxes and charges may apply if the investor withdraws his or her money early.

Variable annuities offer investment features similar in many respects to mutual funds, a typical variable annuity offers three basic features not commonly found in mutual funds:

- Tax-deferred treatment of earnings;
- A death benefit; and
- Annuity payout options that can provide guaranteed income for life.

The variety of features offered by variable annuity products can be confusing. Here are seven factors an investor should consider before investing:

1. Liquidity and Early Withdrawals
2. Sales and Surrender Charges
3. Fees and Expenses
4. Taxes
5. Bonus Credits
6. Guarantees
7. Variable Annuities within IRAs

Variable annuities can be incredibly complicated products with huge front-loaded commissions for a broker. An investor broker should not buy a variable annuity without understanding the factors above, including getting any material representations in writing. Further, an investor needs to make sure the investments in the underlying sub-accounts are suitable.

The Securities and Exchange Commission recently obtained an emergency court order shutting down a Ponzi scheme that centered on inviting retirees in California and Illinois to estate planning seminars and luring them to buy promissory notes for purported foreign investments.

The SEC alleges that USA Retirement Management Services (USARMS) and its managing partners, Francois E. Durmaz and Robert C. Pribilski, sent mass promotional materials to retirees and invited them to estate planning seminars held at country clubs and banquet halls. They then held follow-up meetings where they sought and gained the retirees' trust, portraying themselves as educated and knowledgeable in the area of foreign investments specifically tailored to the needs of seniors.

Durmaz and Pribilski sold the retirees what they claimed were safe, guaranteed investments in "Turkish Eurobonds," through the purchase of USARMS promissory notes earning annual returns between 8 and 11 percent.

The SEC alleges that USARMS' scheme raised approximately $20 million from over 120 investors, but that it did not invest the money as promised in Turkish Eurobonds. Instead, the Company distributed returns to earlier investors with funds received from new investors in Ponzi-like fashion.

"Durmaz and Pribilski used estate planning seminars as a means to elicit investor trust and lure retirees into investing in a classic Ponzi scheme," said Rosalind R. Tyson, Director of the SEC's Los Angeles Regional Office.

USARMS' plan centered on giving a general presentation on estate planning to the seminar attendees and later inviting them to their offices for a personal meeting "to explain the amazing steps you must take when you set up a Living Trust or Will," according to the SEC's complaint.

The SEC alleges that once seminar attendees attended their "personal meetings," Durmaz analyzed their personal financial information and informed them that the company had issued hundreds of millions of dollars in USARMS promissory notes. In addition, Durmaz misrepresented to the retirees that he had a Masters of Business Administration and was a Certified Senior Advisor. Thus, prospective investors were led to believe that Durmaz was educated and knowledgeable in investments specifically tailored to the needs of seniors and retirees.

The Financial Industry Regulatory Authority (FINRA) has expelled Provident Asset Management, LLC, for marketing a series of fraudulent private placements offered by its affiliate, Provident Royalties, LLC, in a massive Ponzi scheme.

FINRA is looking at broker-dealers' compliance with suitability, supervision and advertising rules, as well as potential instances of fraud. The initiative was undertaken in response to an increase in investor complaints involving private placements and Securities and Exchange Commission actions halting sales of certain private placement offerings.

Provident Asset Management misrepresented to investors that the funds raised through the offerings would be used to purchase interests in the oil and gas business, including exploration activity and the acquisition of real estate, oil and gas leases and mineral rights. Investors' funds were commingled and used by an affiliated issuer to make dividend and principal payments to other investors.

"Provident facilitated the sale of a series of fraudulent private placements that were marketed to unsuspecting customers as income-producing investments, when it was simply using new investors' money to pay previous investors the promised dividends - a classic Ponzi scheme," said Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement.

FINRA found that from September 2006 through January 2009, Provident Asset Management marketed and sold preferred stock and limited partnership interests in a series of 23 private placements offered by Provident Royalties, LLC. Provident Asset Management's only business line was acting as the wholesaling broker-dealer for the Provident Royalties' offerings, which were sold to customers through more than 50 retail broker-dealers.

In an effort to market the Provident Royalties offerings, the firm falsely represented that: investors' funds would be used by each individual Provident Royalties offering to purchase interests in the oil and gas business for that offering; the subscription proceeds of each offering would be deposited into an account for that offering and become assets for that offering; approximately 86 percent of the subscription proceeds would be allocated to acquiring interests in the oil and gas business; and, dividends paid to investors would be derived from revenues, primarily from the sale of oil and gas assets. Provident Asset Management neither admitted nor denied the charges, but consented to the entry of FINRA's findings and penalties.

The SEC recently charged a prominent Miami-based business leader and his wife with fraud for conducting a $135 million Ponzi scheme with real estate investments from hundreds of elderly Cuban-American investors living in South Florida.

The SEC claims that Gaston E. Cantens and Teresita Cantens, the co-owners of a real estate development company named Royal West Properties Inc., sold promissory notes to investors after acquiring properties and financing their sale. The Cantens lured investors by promising the investments in their real estate business were safe and secure with annual returns between 9 and 16 percent.

But when property owners defaulted on their mortgages, Royal West's financial condition deteriorated and the Cantens used new investor money to repay earlier investors and afford the firm's operating costs. The Cantens misappropriated more than $20 million from investors to fund unrelated personal business ventures, pay themselves high salaries, and divert money to their children and grandchildren.

"The Cantens used their prominent standing in a close-knit Cuban-American community to ruthlessly exploit vulnerable elderly investors who trusted them with their life savings," said Eric I. Bustillo, Director of the SEC's Miami Regional Office.

The Cantens gained the trust of prospective investors in typical affinity fraud fashion by cultivating an impression within their community that it was a privilege to invest with them. The Cantens emphasized that Jesuit priests and other well-known leaders in the Cuban-American community had invested with Royal West.

The SEC alleges that the Cantens made numerous material misrepresentations and omissions about the safety and security of investors' principal and returns and the use of investor funds. The SEC further alleges that the Cantens falsely represented that the promissory notes were collateralized by mortgages or mortgage obligations, where Royal West did not record as many as one-third of the assignments of mortgage receivables that served to collateralize investors' promissory notes. Royal West also assigned the same mortgage receivables to multiple investors at the same time.

The Cantens were not registered with the SEC under the federal securities laws to make securities offerings to investors.

First Allied Securities, Inc. recently agreed to settle for $1.95 million with the SEC where the SEC had previously charged the firm's broker, Harold Jaschke. Supervising registered representatives is a job that must be taken seriously by broker-dealers," said Rosalind Tyson, Director of the SEC's Los Angeles Office. "By failing to establish reasonable systems to prevent Jaschke's misconduct, First Allied did not fulfill its obligation to reasonably supervise its registered representatives."

The SEC charged that that between May 2006 and March 2008, Jaschke executed numerous unauthorized transactions, made unsuitable recommendations, and churned the accounts of the City of Kissimmee, Fla., and the Tohopekaliga Water Authority. The SEC also charged that First Allied failed reasonably to supervise Jaschke because it did not establish reasonable systems to direct follow-up action in response to red flags regarding churning and suitability.

The SEC's order found that First Allied had no system in place to monitor compliance with its rule prohibiting its brokers from using personal e-mail accounts to conduct business. This enabled Jaschke to use his personal e-mail account to send and receive business-related e-mails that were neither reviewed nor retained by the firm. The SEC's order found that First Allied failed to retain certain business-related e-mails (spoliation of evidence) sent to and from its employees, as required under law.

First Allied consented to the issuance of the order without admitting or denying the SEC's findings.