As the industry keeps changing, it's important to know a company's "pedigree."
By Steven A. Morelli
Alan S. Lewis had to speak up on the phone as he described his former annuity business, because jail is very noisy.
Lewis sold annuities in Riverside County, Calif., until the economic crash and personal issues moved him along to Tennessee in 2009. He returned to California in 2014 in handcuffs to face 36 felony counts of embezzlement, grand theft and burglary.
“The first public defender I had didn’t look at the case, but she said, ‘You’re looking at close to 40 years in prison,’ ” Lewis said. “‘The DA wants 20 years prison time out of you, and they may be willing to do that if we can negotiate that.’ I said, ‘For what?’ ”
He is accused of selling fixed index annuities with a surrender charge.
Specifically, the prosecutor alleged Lewis induced 12 seniors into surrendering individual retirement accounts or annuities for a “less favorable” annuity, according to court documents. The clients incurred a surrender charge that Lewis promised would be offset by the bonus of a replacement annuity.
“Defendant Lewis was aware that the bonus was elusive, but misrepresented the same to the victims,” according to the preliminary hearing brief. “In any event, in a mere three years after replacing the last annuity, defendant would return to the annuitant and persuade him or her by false pretenses to replace the existing annuity.”
The brief alleged Lewis committed “twisting” and caused seniors to lose more than $300,000 in surrender penalties. He was charged with 36 felony counts of willfully embezzling from an elder for an amount exceeding $950, grand theft in excess of $400 and burglary. The prosecutor argued that the surrender penalties constituted embezzlement and theft, and because Lewis did some of the transactions at the clients’ homes, he also committed burglary.
Superior Court Judge Bernard J. Schwartz allowed 29 of the felony counts and one misdemeanor to go to trial and dismissed the others for jurisdictional reasons. Lewis is in jail in lieu of $600,000 bail and scheduled to go to trial on June 23 to face 19 felony counts and one misdemeanor count of embezzlement, eight felony counts of burglary and two felony counts of grand theft.
Even after a preliminary hearing that lasted several days, Lewis said he still doesn’t understand the case against him. He said he thought the new annuities were a better deal for his clients. He even agrees that the bonus in the second annuity wasn’t as attractive as it initially appeared. So, he advised some clients to move to a third annuity.
As Lewis sees it: The annuities were approved by the state. The sales were overseen by wholesalers and the insurance companies. Clients were sent notices advising them of the surrender charges. Lewis did not pocket money he was not entitled to. So, if anybody had any questions about the sales, why wouldn’t that be a complaint that included all the entities involved and why would it not be an administrative case for the state Department of Insurance?
That is a question some industry observers share about the criminal charges. While not speaking to the details of the case or defending all of Lewis’ actions, they are concerned about the precedent of a felony conviction for what would usually be an insurance department matter. If Lewis is convicted of embezzlement, theft and burglary, would that put any agent in jeopardy?
Kim O’Brien, president and chief executive officer of the National Association of Fixed Annuities (NAFA), said not only are agents at the risk of prison for selling annuities, the public would be deprived of products designed to protect their retirement.
“A determination by the court that selling an annuity with a surrender charge is tantamount to embezzlement or common theft – and if the sale occurs at the client’s home, with burglary – would have a chilling effect on the ability of consumers to have access to fixed annuities,” O’Brien said in a statement from the association of fixed index annuity companies.
Lewis is not terribly hopeful about his chances after a particular comment he heard from the judge during the preliminary hearing. “He said, ‘This was a clever scheme by Mr. Lewis. If June Arago [the state insurance department investigator] hadn’t caught this through one of the clients then he would have never gotten caught in this crime.’”
Arago had testified during the hearing, but it was not Lewis’ first encounter with the investigator. That happened during one of the worst periods of Lewis’ life.
Down and Out, then Down Again
Lewis had a good life as an annuity producer in Southern California.
“I was in business from 2002 until February of 2009,” Lewis said. “I transferred, over a six-year period, about $30 million into annuities. I wasn’t a huge producer, but I was medium to good. I had 300 to 400 annuity cases. I had three official complaints over that timeframe with that many clients, and they were all settled without any finding of wrongdoing on my part. So, I have a very good record.”
But, even so, Lewis’ business hit the skids in 2009 along with the economy. His mental state was not faring well, either, with a severe case of depression flaring up.
He left the annuity business and the state to start over in Spring Hill, Tenn. He said it took him a year to recover from that bout of depression but during that time he started getting calls from Arago.
Arago started asking Lewis about reverse mortgages: “I had done probably five to seven reverse mortgages. He was asking me about commissions on those. He was really putting his nose in places I didn’t think it belonged. I didn’t even respond to those questions, but to the annuity questions I did.”
Lewis didn’t think anything more of the interview in the next difficult stage of his life. “Then I went through some horrible things. I went through a divorce in Tennessee, and ultimately wound up homeless for 12 months on the streets of Nashville.”
Lewis said he has been battling clinical depression since he was 16 and this episode was one of the worst.
“You can’t get yourself out of those things,” Lewis said of the down cycles. “It’s a place where people that don’t understand it say, ‘Why don’t you just get out of it?’ You can’t and it takes you to bad places. So, it led to homelessness for me.”
The period was October 2012 to October 2013, the same month his arrest warrant was issued. The Riverside County district attorney requested it three days before the statute of limitations ran out. The warrant listed the address of his former life in Spring Hill, Tenn. But at the end of 2013, Lewis was in Texas rebuilding his life, unaware that he was a wanted man.
At 50 years old, Lewis moved in with his parents in Houston.
“That in itself is extremely humbling, but it’s what I had to do,” Lewis said. “I found a job in sales within a month. We were selling things like Tasers, books, just things that are manufactured in China. I don’t have a lot of pride at this point in my life. It was just something that I did to get myself moving again. And I’m glad I did. It was a great experience. I did well and I was asked to become a partner in that business.”
As his depression receded and his business prospects grew, his older son was enduring his own down cycle. His wife and sons had located in Tulsa, Okla. His older son moved to Houston in December.
“He had a wonderful chef position at a restaurant in Houston,” Lewis said of his 18-year-old son. “Then he came to me and he said, ‘Dad, I’m hooked on Xanax and I need help.’ It turned him into a zombie. It was horrible. My son is a bright, brilliant young man.”
Lewis checked him into a detox unit and shifted his entire focus to saving his son, who was in and out of rehab for the next few weeks. So, Lewis quit his job and stayed with his son as he spiraled into severe withdrawal.
Lewis took his son back to Tulsa and stayed for a week. His son attempted suicide by the end of the week, and was admitted to a hospital.
With his son in treatment, Lewis returned to Houston at the end of February. He wanted to give Al-Anon a try to help him cope with his son’s issues. A few days after his return to Houston, Lewis was racing to an Al-Anon meeting when police pulled him over for speeding.
“It took a little while for the ticket to be written up,” Lewis said. “Then another squad car showed up, and I’m just thinking to myself, ‘This isn’t good.’”
Lewis signed his ticket, then was asked to step out of his car when he was handcuffed.
“They said, ‘You’re under arrest for embezzlement in Southern California.’ ”
In Jail and In Purgatory
Lewis spent 10 days in a Texas jail until two people from the Riverside County Sheriff’s Department took him to California, where he faced an initial arraignment on March 10 and was assigned a public defender.
Lewis’ attorney told him he was facing 40 years, but the prosecutor might settle for 20. Lewis looked at the thick brief of about 30 pages and asked if she had reviewed it. She said she had not. “And I said, ‘This is a complicated case. It’s not possession. It’s not sales of drugs or DUI. This is business. It’s complicated.’ She looked at it and said, ‘Oh, you’re right.’ ”
The arraignment was postponed for 10 days to be assigned a trial attorney, Anthony C. “A.C.” Jones. Their first meeting gave Lewis a glimpse of what he was up against: “The first words after introducing himself were, ‘Unfortunately, Mr. Lewis, you’re caught up in a political quagmire. The DA wants to use your case to score political points. They want to use your case as a poster child for elder abuse.’ ”
Elder abuse was the subject of a series of workshops Riverside County District Attorney Paul Zellerbach’s office sponsored in April to educate the community. Zellerbach is in a bitter fight for re-election this year and is campaigning under the slogan, “One Tough District Attorney!”
Zellerbach has been accused of knocking down his opponent’s signs, prompting the state attorney general to review whether to file criminal charges at the request of the Indio Police Department, according to local media. Police organizations have pulled their endorsements of Zellerbach’s candidacy and several of those organizations have called for Zellerbach’s resignation.
Zellerbach’s election prospects would benefit from what he would consider a victory against elder abuse. (UPDATE: Zellerbach lost the election on June 3.)
Facing the Facts
Deputy District Attorney Sheronda Edwards outlined her case in several days of the preliminary hearing, calling two witnesses, according to court records. They were Arago, the insurance department investigator, and Vincent Patrick Gallagher, a consulting actuary.
Most of the hearing was spent reviewing Arago’s findings. The investigation had focused on a dozen clients. Lewis said he believed Arago led the clients to believe they were victims.
The investigator established that the clients knew there were surrender charges but didn’t know how much they were. After telling them the amount, Arago asked if they would have made the deal knowing that. “Then everybody of course said no,” Lewis said, adding that clients are sent written notice on the amount. Some carriers are explicit about the charge, apparently in an effort to dissuade the surrender and his clients signed documents that informed them of the charges.
(The Department of Insurance declined to comment on the case. Lewis’s attorney, A.C. Jones, and prosecutor Sheronda Jones did not return calls to discuss the case.)
Judge Schwartz allowed the fourth day of the preliminary hearing to be postponed so the prosecutor could attend a daylong class on annuities, over the objection of Lewis’ attorney. “He said, ‘Your Honor, we vehemently reject this. The DA actually wants to go take a class on how to better prosecute my client.’”
After six days of testimony and evidence, the judge dismissed six felonies and reduced one felony to a misdemeanor from the 36 felonies originally filed against Lewis. A trial readiness conference is slated for May 29 and trial is scheduled for June 9.
Replacing the Replacements
The case focuses on annuities or certificates of deposit that were replaced by other annuities twice, which the prosecutor called twisting or churning. Documents show that clients were told their surrender charges would be covered by a bonus from the new annuity, but they lost that bonus when the second annuity was surrendered to purchase a third annuity.
Lewis acknowledges that the annuities were surrendered twice but he argues that it was in the clients’ best interest.
From 2002 to 2005, Lewis worked at Family First Insurance Services, based in Woodland Hills and having 11 regional offices in California. The first fixed index annuities were with AmerUs. Clients were anxious about letters informing them of a pending class-action lawsuit against the company over sales practices. That lawsuit was eventually filed in 2005. AmerUs, which was acquired by Aviva in 2006, eventually was targeted by a massive consolidated class-action.
“We were talking with the clients about what their options were, and at that time, Allianz had rolled out the MasterDex 10 annuity,” Lewis said.
The MasterDex 10, which Allianz no longer offers, was a complicated, two-tiered annuity with generous interest crediting and a 10 percent bonus. The second tier in the product was the higher value that clients would receive if they annuitize. Allianz and other companies said they could afford generous benefits only if people held onto their annuities full term.
The client had to defer annuitization for five years and then annuitize – take an income stream -- for 10 years to get the full value, including the bonus. If clients did not hold onto the annuity for 15 years, they received the lower tier value. This is why some described it as having a surrender charge period of 15 years and therefore highly unsuitable for elderly clients. Two-tiered products were subject to intense regulatory scrutiny and lawsuits.
But California had approved the MasterDex 10 for sale to clients up to 85 years old when Lewis sold the products.
California had taken another look at the MasterDex 10 in a 2006 market conduct exam of Allianz. Eventually, 43 states joined a class-action suit against Allianz over its two-tiered products. The company settled in 2012 and agreed to refund $10 million and “re-review” complaints.
Here is how the California DOI explained the product in its 2006 report:
“In the case of the two-tiered MasterDex 10 and 10% Bonus PowerDex Elite, there is a cash value account and an annuitization account. Regarding the annuitization account, the insured has a choice of allocating his/her assets to three different accounts: a fixed interest and/or two equity indexed accounts, one of which is tied to changes in the S&P 500 and the other to Nasdaq-100 indexes. The bonus is credited to the annuitization account and never to the cash account. If the policy is held in deferral for a period of no less than 5 years and then annuitized for a period of at least 10 years, the bonus and the higher fixed interest rate and/or index credits will be applied. If the policyholder decides not to annuitize the policy, the policyholder will: 1) forfeit the bonus; 2) receive a lower interest rate of 1.5% on the premiums paid; and 3) a 12.5% surrender charge will be assessed.”
Lewis admits he didn’t comprehend all that and assumed the bonus would work as it did in a single-tier annuity.
“I didn’t understand it and I know that there are other agents who didn’t understand what the two-tier annuity thing was,” Lewis said, adding that he doesn’t believe it was adequately explained to agents. “We thought it was a 10 percent bonus and we sold 10 percent annuity, which it turned out not to be.”
Lewis then went back to some of the clients and persuaded them to move to a third annuity from North American Life. He sees what he did as protecting clients, but the DOI and prosecutors call it twisting to rake in commissions at the expense of seniors’ limited assets.
In 2005, the California attorney general sued Family First for $110 million, alleging the firm used estate planning and living will advising to discover clients’ assets and then sell them annuities without fully informing them of the products’ drawbacks. The suit was settled in 2007 for $7.2 million and the closure of Family First.
Of that settlement, $5.5 million was to be distributed to clients who incurred surrender penalties. Court records in Lewis’ case do not indicate if his clients were compensated.
In all the legal action against insurance companies and marketing companies, it does not appear anyone had been charged criminally at the company level. But California has charged at least two agents criminally in cases involving fixed index annuities.
Before Lewis, there was Glenn Neasham in Lake County. He was convicted in 2011 of grand theft for selling a MasterDex 10 annuity to an 83-year-old. The prosecutor said the client had dementia at the time but never proved that Neasham knew about the dementia. Neasham and two assistants said they did not see any evidence of impairment.
The conviction was overturned and his license restored this year, but in the meantime, he lost his business and his home. He, his wife and four children moved into a house rented from his in-laws and had to rely on food stamps.
After the trial, California advisor Richard Weber got involved to help Neasham get new counsel to appeal the conviction. Weber was then president of the Society of Financial Services Professionals and was able to enlist the aid of the association and members along with others in the industry, such as NAFA, to rally around Neasham. Eventually the conviction was overturned and removed as a precedent.
As in the Neasham case, Weber said he is not in a position to judge the suitability of Lewis’ actions, but he is concerned about the broader implications if Lewis is convicted. From what he has heard about the case, it appears the prosecution knows little about annuities and the insurance business.
“The prosecution intends to criminalize entering a senior’s home with the intent to sell an annuity that has a surrender charge,” Weber said. “They are saying the amount of the surrender charge is the amount the agent embezzled from the client. They know absolutely nothing about how annuities work, yet are trying to criminalize their sale.”
The embezzlement charge perplexes him also because agents are not paid directly by the client.
“Compensation is not paid out of the contract,” Weber said. “Compensation is paid out of the reserves of the insurance company. The surrender charge exists so that the customer can’t adversely select against the insurance company by immediately leaving and having this company on the hook for a lot of expenses. Even more importantly, it’s the only way they can invest appropriately to support the promises of the contract. You can’t invest long if you’re going to get a short call.”
If Lewis’ sales practices were unsuitable, that should be handled by the state Departmet of Insurance, Weber said. But putting this case into the court system endangers any agent not just in California. Other states were looking at the Neasham case as a model.
In Jail, Biding Time
In the meantime, Lewis is in Larry D. Smith Correctional Facility in Banning, where he is awaiting trial in the constant fear of violence in a cellblock with 64 other men. He said he does not begrudge the insurance department but is baffled by how he ended up where he is.
“I’m not against the DOI,” Lewis said. “They go out and catch people that truly do embezzlement. There are shadow companies that people pay premiums into that are wrong. They catch people doing fake claims on car accidents.”
This is not embezzlement, Lewis said, rather it is a case of misunderstanding annuities and scoring political points.
But he said what really bothers him is being away from his family.
“I have a son who tried to commit suicide five days before this crap,” Lewis said with an apology. “If I cuss I’m sorry. I’m not that much of a cusser. But this stuff, I am fed up with it. My family needs me. This is a horrible thing.”
He doesn’t know how his son is doing or what his son thinks about all that’s happened.
“I don’t have direct contact to him now because my ex-wife doesn’t know what the heck is going on,” Lewis said. “And when you’re stuck in these situations and you can’t get out of jail, people assume you’re guilty, period.”
Steven A. Morelli is editor-in-chief for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers, magazines and insurance periodicals. He was also vice president of communications for an insurance agents’ association. Steve can be reached at firstname.lastname@example.org.
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