Brooke’s Note: Playing devil’s advocate I have asked the compliance experts in the RIA business whether they are perhaps playing it way too careful in how they advise on such matters as testimonials and social media. After all, we don’t see people getting in trouble for these things. Their response is to tell me that that is not a constructive way to view the written rules and that when an enforcement action comes it can come swiftly, harshly and without warning. Kelly O’Mara’s well-researched article below drives home that point very effectively.

When Lake (Calif.) County insurance agent sold Fran Schuber, 83, an indexed annuity in February 2008, nothing seemed out of the ordinary. Neasham had sold the Allianz MasterDex 10 product, one of his most popular annuities, to countless individuals and says it was a logical choice for Schuber, who previously had a CD with Neasham and was looking for more return on her money.

But at the time Schuber bought the annuity she was in the early stages of dementia, and a state investigation later found her incapable of making that financial decision.

Neasham was arrested in late 2010 and charged with a felony count of theft from an elderly individual. This fall, he was found guilty, and at the end of February, was sentenced to 90 days in jail with three years probation. His insurance license was revoked, his income fell to just $20,000 annually, and his family — his wife and four kids — lost their house. It was the first time an agent has been sentenced to jail for a sale like this. See: How much should RIAs shake in their boots after the SEC punished three firms then put out a detailed press release?.

Neasham maintains, however, that he didn’t do anything wrong and that he never expected anything like this to happen.

“I always believed in taking care of my clients’ needs before my own,” Neasham says. “I didn’t do anything wrong.”

Making a sale

For Neasham, there was nothing odd about a client of his, Louis Jochim, then 80, coming into Neasham Insurance with his girlfriend, Schuber, in early February 2008. Jochim had previously bought an Allianz indexed annuity, was happy with the product, and was encouraging Schuber to move some of her money from the CD to the annuity to get a better return.

According to Insurance News Net, the Allianz MasterDex 10 has a five-year deferral and 10-year payout. The client can take out up to 10% annually during that period without penalty. Neasham says it is “very secure.”

Neasham says he talked extensively to Jochim and Schuber about the $175,000 annuity, which is approved to sell to clients up to 85 years old, and about what Schuber would be buying. He also had her fill out a questionnaire, as is common practice for advisors and agents. In it she indicated she was in good health.

“The client came to me twice and I didn’t notice anything,” Neasham says.

Neasham’s assistant, who was present during much of the discussion over two visits, later testified in court that Schuber appeared to understand what she was purchasing and did not seem confused.

Undue influence?

The alarm was sounded, though, by an employee of nearby Savings Bank of Mendocino [Calif.], when Schuber went to pull $175,000 out of her CD held there to purchase the annuity. The manager of the bank was concerned not that Schuber appeared confused, but that Jochim was exercising undue influence over her.

In fact, Neasham told Insurance News Net that he was also concerned by Jochim being named as the beneficiary on the annuity, but was shown a bank statement verifying that Jochim had been the beneficiary of Schuber’s CD for four years already.

Neasham was paid $14,000 — or an 8% commission — on the annuity after Allianz cleared Schuber as suitable for the sale based on a self-reported survey and her existing liquid assets.

“Our suitability review process is not intended to touch on health issues or diagnose dementia,” says Sara Thurin Rollin, the director of communications for Allianz. See: The ABCs of doing due diligence on fixed income annuities.

Felony count

At the prompting of the bank manager, state authorities began an investigation into the incident in 2008.

It turned out Schuber had been diagnosed in the early stages of Alzheimer’s-like dementia in 2003, according to her son Ted and documents from a doctor presented in court during the preliminary hearings. Neasham says he spoke with Ted at the time of the transaction and the son said he was generally concerned about his mother’s health. But, Neasham says, no one ever said anything about Alzheimer’s or dementia, and he never suspected a thing.

The investigation by state authorities determined that Schuber was incapable of making the decision to buy the annuity and that the purchase of the annuity had not been in her best interest. In December 2010, Neasham was arrested on a felony count of theft from an elderly individual.

At that point, Steve Poizner, then California’s insurance commissioner, released a statement decrying elder abuse and the shady tricks of insurance agents.

“Insurance agents or brokers who steal from vulnerable seniors will not get away with their shameful tricks,” said Poizner in the statement. “CDI investigators will continue working to track down any unscrupulous agent who preys on California’s seniors.”

Neasham’s original sentence of 300 days in jail was shortened by the judge to 90 days and three years’ probation. His insurance license was revoked in March.

There was “sufficient evidence presented to show that Fran Schuber was not capable of consenting to the transaction in question and evidence showed that [Neasham] knew that at the time,” Lake County Deputy District Attorney Rachel Abelson said in court documents.

Schuber’s condition has since deteriorated rapidly and her conservator surrendered the annuity this past January. Allianz wouldn’t comment on the specifics of the case, citing the fact that no representative of the company were present at the trial. But, Rollin says, “the litigation was not about the product.” The $175,000 annuity had $217,000 of annuitized value at the time of the surrender, according to Neasham’s wholesaler, who says Allianz returned a check for $197,640 to Schuber.

“Allianz returned the entire premium without a penalty, plus interest,” says Rollin.

Drawing the line

The case has left a bad taste in the mouths of many advisors and agents who feel that Neasham was targeted to set an example.

Pat Burns: If regulators want to ban indexed annuities or certain types of indexed annuities ... they ought to consider doing so rather than punish agents when they sell them.
Pat Burns: If regulators want to
ban indexed annuities or certain types
of indexed annuities … they ought
to consider doing so rather than
punish agents when they sell them.

“There is world of difference between doing something for which an insurance agent ought to be punished criminally rather than civilly or administratively, through, say, an insurance department sanction, says Pat Burns, a lawyer specializing in the securities industry. “Here, I think civil or administrative remedies would have been far more appropriate to explore.”

Burns also believes that if state agencies or regulators are concerned about certain products or worried about their suitability for seniors, then they should establish rules that require medical evaluations or ban the sale of those products to seniors. He emphasizes, however that right now indexed annuities — despite whatever concerns people have about them — are legal.

“Where is the line drawn on where criminal charges are filed or not filed? Is a $7K commission too much? What if the client was middle-aged and had dementia, but did not exhibit any outward signs? Would the agent still be pursued criminally?” Burns asks.

While advisors have typically had a love-hate relationship with annuities, concern over this incident may make them even more cautious — particularly when dealing with seniors.

“I think it’s going to make people think twice,” says Ken Kaltman, chief operating officer of National Compliance Services Inc..

Backlash

Kim O’Brien, chief executive of the National Association for Fixed Annuities, agrees with Allianz that it was not the product that was being called into question in this case.

“The product wasn’t at issue,” says O’Brien, who also notes that because Schuber was dealing with an insurance company, and not the vagaries of the market, she was able to have all her money returned when concerns came to light.

Larry Greenberg: This case also points to the ongoing backlash against the traditional annuity industry.
Larry Greenberg: This case also points
to the ongoing backlash against the
traditional annuity industry.

But, these assurances haven’t eased the minds of many advisors who are increasingly concerned about traditional annuities’ high withdrawal fees and low returns. See: Is Hartford Financial’s market exit a death knell for the annuity crowd or just more Hartford haplessness?.

“This case also points to the ongoing backlash against the traditional annuity industry because of scenarios where clients don’t understand what they’ve bought, and where clients have no idea that they’re locked in for years while the company recoups the steep commissions that it paid to its sales reps,” says Laurence Greenberg, president of Jefferson National Life Insurance Co., which offers less complex annuity products at low flat monthly fees.

In fact, Burns says, if concerns about variable and indexed annuities are so high, it is the products, themselves that should be the target of investigations.

“If regulators want to ban indexed annuities or certain types of indexed annuities, like those with long surrender periods and huge penalties, they ought to consider doing so rather than punish agents when they sell them,” he says.

Due diligence

Though this is the first time an agent has been sentenced to jail for a sale like this, concerns about meeting one’s fiduciary duty when dealing with seniors has been a hot topic in recent years.

A 2008 SEC report on practices with elderly investors argues that with over 50% of investment assets currently controlled by aging baby boomers, the number of elderly investors is going to skyrocket in the coming years. Firms and advisors are attempting to prepare for this with new products and services. There are also a number of elder profession designations out there for financial advisors. See: SEC’s heightened interest in the older set means advisors should pay heed.

“Some of these are legitimate; some are not legitimate at all,” says MarketCounsel attorney Scott Brown.

Kaltman argues that it’s important to have policies and procedures in place when dealing with elderly investors, and advisors should document any cases in which they think there might be diminished capacity. There should also, he says, be a “heightened review of certain products,” such as variable annuities. See: An inside look at why LPL Financial is leading the charge with fee-based variable annuities.

In addition, advisors should be aware of who has guardian or conservator rights and who can legally authorize actions.

“Advisors need to kind of heed this warning,” Kaltman says of the Neasham case.

Brown echoes the sentiment that advisors need to be particularly cautious and take note of a heightened concern around elder abuse.

None of the above should be new information for advisors well aware of increased fiduciary responsibilities.

“They always have a duty to make sure investments are appropriate and do due diligence,” says Brown.

'A good guy’

Neasham and his wife in happier times.
Neasham and his wife in happier
times.

At the height of his career in 2007, Neasham made more than $600,000. In the years since then, his income was in the $200,000 to $300,000 range. But, after Neasham’s arrest, that life fell apart. Last year, he made just $20,000. His family, which includes four kids — one of whom has special needs — has gone on food stamps. Neasham’s cars were repossessed, he says, and they lost their house in Lakeport, Calif. The story caught the attention of the Wall Street Journal which published an article about the turn of events.

It was only because the bail bondsman was a close friend and Neasham’s sister-in-law lent them money, that he was even able to meet the $20,000 bail and avoid being in jail, he says.

“We’re definitely struggling,” Neasham says.

He has worked as an insurance agent for 23 years. All that time, he’s lived in the Lakeport community, where he settled after a stint in the Navy. Neasham is involved in the community and his church, and the outcry around the verdict had been high.

Letters in the local Lake County Record Bee have been overwhelmingly in favor of Neasham, calling him “honest” and “a good guy.”

“Glenn Neasham is the victim of the new witch hunt,” wrote one Lakeport resident.

The case isn’t over

But, for Neasham, the case isn’t over. He is in the process of filing an appeal, which he is certain he will win.

His lawyer, Mitchell Hauptman, believes the prosecution never proved theft in the first place. The commission was paid by Allianz and didn’t come out of Schuber’s $175,000, none of which ever went into Neasham’s pocket, according to papers filed by Hauptman. In addition, Schuber’s annuity gained money during the time she held it — as confirmed by Allianz.

“They fundamentally failed to prove any element of the crime of theft by larceny. The resulting jury verdict of guilty was contrary to the evidence and contrary to reason,” Hauptman wrote in his motion for a new trial.

One of the jurors, Robert O’Briant, also came forward in November after the trial proceedings had ended and filed an official declaration with the court alleging possible juror misconduct. Two jurors, O’Briant says in his official statement alleging misconduct, failed to disclose that they had close family members with Alzheimer’s or dementia.

“Some jurors made the statement that in essence meant we should send a message to the insurance companies to be careful when selling to an 83-year-old. The jurors also felt they should send a message to insurance agents that they should be careful who they sell to,” says O’Briant in his official declaration.

Last-minute discovery

And, perhaps most significantly, on the last day of trial the prosecution unearthed an audio interview with Schuber from the spring of 2008, which wasn’t previously disclosed and of which Neasham wasn’t able to make use. In the audio interview, which was conducted during the state’s initial investigation, Schuber appears lucid and says she made the financial decision of her own free will.

Because of Schuber’s rapidly deteriorating state, she was incapable of testifying at the trial. A video of her from 2010 was played during the trial in which she clearly displayed signs of dementia, which Neasham and Hauptman believe prejudiced the jury. A previously recorded tape closer to the time of the actual transaction — over four years ago now — would more clearly demonstrate her capabilities at that time, says Neasham. Prosecutors say they believed the audio interview to be lost and only found it on that last day of trial.

All of this amounts to room for an appeal, Hauptman argues in his motion.

“We feel pretty confident,” Neasham says. But, then, he was pretty confident he would never be found guilty in the first place.