Top Tales Of Annuity Advisors Gone Wrong

As we wind down 2016, we take a look back at annuity advisors who did no favors for their clients and found themselves in trouble with the law.

Churning Up Trouble

A practice known as "churning" led to a 10-year state prison sentence for Joseph Anthony Mele, 31, of Ventura, Calif. Mele pleaded no contest to multiple felony counts including financial elder abuse, grand theft and embezzlement, authorities said.

Mele gained the trust of two elderly victims, ages 93 and 74, and acted as their “financial planner,” according to the California Department of Insurance. Then he bought, sold and repurchased long-term annuities without their knowledge.

Mele rewrote his victims' annuities in exchange for the promise of higher returns. But he collected additional commission in the process, an illegal industry practice known as “churning.”

His victims lost more than $2 million. But Mele earned hundreds of thousands of dollars in commissions and caused the victims to incur over $650,000 in surrender fees, penalties and lost premiums, CDI said.

Mele was arrested in June 2015 after he advised one of his two victims to sign blank checks totaling more than $800,000 so he could invest the funds for her. The money was never invested, but instead deposited into Mele's personal bank account and used for entertainment, vacations, gambling and plastic surgery, authorities said.

In a rare bit of good news, the victims received all of the surrender fees, penalties and interest back from the insurance companies. One victim, who feared she might lose her home, kept her home with the help of the recovered funds.

Illiquid VAs Land Advisor in Hot Water

A Massachusetts advisor was so set on switching his elderly client to a variable annuity that he arranged to meet the client in a subway station to sign paperwork. That VA had a new seven-year surrender period, and was wholly unsuitable for the client’s personal circumstances, which was one of financial straits, authorities allege.

This was one example of the type of dealing that led to Massachusetts regulators filing charges against financial advisor Roger S. Zullo, a top annuity producer, and his sponsoring broker/dealer, LPL Financial. They were charged with defrauding clients by selling them illiquid and unsuitable high-commission variable annuities through which Zullo and LPL profited with big commissions.

Zullo is alleged to have lied to his supervisors and concocted client financial suitability profiles to switch clients out of their existing annuities. This triggered surrender charges for no reason and without regard for the clients' personal financial circumstances, authorities said.

Over a three-year period, Zullo and LPL pocketed more than $1.8 million in commissions. Nearly all of those commissions came from the sale of B-shares of the Polaris Platinum III, a variable annuity issued by AIG, said William F. Galvin, secretary of the Commonwealth of Massachusetts.

Authorities said LPL’s “paper-thin compliance review “ made it easy for Zullo to lie with regard to client suitability information.  LPL rewarded Zullo with a place on the company’s “Chairman’s Club,” the company’s in-house honor rule for top annuity producers.

Massachusetts regulators also took LPL to task for a “fundamentally flawed” annuity supervision framework.

Even with “countless opportunities” to take corrective action, LPL “repeatedly failed to do so,” the complaint alleged.

For every sale of a Polaris Platinum III variable annuity, Zullo and LPL received an upfront commission equaling 7 percent of the premium paid by the client. Zullo retained 90 percent of that commission while LPL retained 10 percent.

Regulators are seeking restitution to the victims, to bar Zullo from doing business in the state, and for LPL to tighten compliance procedures and hire an independent compliance consultant.

Defrauding a Client of 20 Years

John Vernon Heath, 45, was charged stealing more than $220,000 from an 88-year-old client who suffers from Alzheimer's disease and had been a client for 20 years.

Heath is the sole proprietor of JVH Wealth Management in Bloomington, Minn. He admitted to taking the money from his client’s Jackson National annuity to pay for a shopping spree, cell phone bills, airport shopping and credit card reimbursements, the criminal complaint indicates.

The fraud began in 2008 when Heath was working for Amiot Financial Group. At that time, he along with his client signed off on the Jackson National annuity. The client paid an initial premium of $67,926, and paid additional premiums in 2009 and 2014.

By the end of 2014, the premium value of the annuity had reached $180,000, according to state officials.

But on Jan. 29, 2015, Jackson National received a request to update the information on the annuity with Heath’s home address. Heath later admitted he initiated this without his client's  consent or knowledge.

Heath opened a bank account at Wings Financial in the client’s name in September 2015, and drew down on the Jackson annuity, again without the client’s knowledge.

On Oct. 30, the “full contract surrender” value of the annuity — $194.172 — was wired into the Wings account.

Over a six-week period last fall, Heath stole $224,652. By Jan. 20, 2016, he had spent the funds on credit cards, ATM withdrawals and retail purchases, authorities said.

When bank officials tried to alert the client, caller ID revealed Heath returned the call. Heath lied and identified himself as the victim’s grandson with permission to use the victim’s bank card, investigators said.

When Wings Financial froze the account, Heath claimed he had power of attorney.

The client, during a follow-up investigation, denied granting any powers to Heath, saying only that his daughter held power of attorney, according to the complaint.

JVH Wealth Management offers securities and advisory services through the registered broker-dealer Independent Financial Group, JVH’s website indicates.

Independent Financial Group terminated Heath on March 1, after he admitted to “wrongful taking of funds,” in the wake of an investigation by the Minnesota Department of Commerce on Feb. 19, the Financial Regulatory Authority’s (FINRA) BrokerCheck records indicate.

An 'Investment Opportunity' That Wasn't

Paul M. Bardine, 54, a former insurance agent from Minnetrista, Minn., convinced the widow of a deceased client, along with other clients, to cash in their annuities to fund an “investment opportunity” in 2013 and 2014. He ended up charged with three counts of insurance fraud and three counts of theft after allegedly stealing more than $270,000 from a 79-year-old woman and a couple in their 70s, state investigators said.

Bardine's insurance license expired in 2012.

In the case of one client, Bardine convinced her to transfer funds out of her Allianz annuity into an American Equity annuity in the summer of 2013. Then he requested a withdrawal of the funds out of the American Equity annuity later that year so that the proceeds — $85,000 — could be invested through Bardine’s company, the O.B. Investment Group, the complaint said.

The client, 52, consented after Bardine promised her a return of 8 percent on her investment and that the investment was secured by property Bardine said he owned.

In January 2014, Bardine transferred $5,000 from the O.B. Investment Group’s account to his personal checking account, officials allege.

He withdrew another $32,525 in the form of a cashier’s check from the O.B. Investment account payable to My Bridge Loan, and an additional $8,099 payable to the Renville County Auditor Treasurer to pay for a property tax judgment, officials said.

Bardine allegedly spent the rest on bills, utilities, a health club and retail purchases.

A second transaction, this time in April 2014, transferred $15,000 from the American Equity annuity to O.B. Investment and into his personal bank account.

In the end, the client received only $3,000 in January 2015 for the $100,000 transferred to O.B. Investment.

Other victims, a retired married couple in their late 70s, lost $105,000, and a 79-year-old retiree lost $67,000 in similar scams, authorities allege.

The victims were persuaded to cash in their annuities, deposit the proceeds into an O.B. Investment Group account, only to have the money transferred into Bardine’s personal bank account to pay for personal debts and expenses, the complaint said.

He faces a maximum sentence of 20 years in jail and or a $100,000 fine.

A Client's Suspicions Led to Arrest

A former Orlando insurance agent found guilty of stealing annuity payments from clients was sentenced to seven years in jail and ordered to return nearly $1.3 million in restitution, authorities announced in May.

Mario Ferreri was arrested in 2014 and charged with several counts of fraud after Lincoln Life filed a complaint against him with the Florida Department of Financial Services Division of Insurance Fraud.

The Windermere, Fla., resident faced up to 30 years in prison.

Operating out of his Winter Park-based firm, Financial Management Resources, Ferreri allegedly bilked one client out of $750,000 and another out of $427,000, between July 2009 and March 2014, authorities said.

A third victim came forward in January 2016 with suspicions — later confirmed by the investigation — that a $95,000 annuity payment had also disappeared at the hands of Ferreri.

Ferreri was slapped with a separate charge of grand theft in connection with the missing $95,000, authorities said.

He was able to swindle clients by gaining their trust and asking them to make checks payable to one or more of his companies instead of to the insurance company on the grounds that he would be able to manage the funds more efficiently, Florida authorities said.

But it wasn’t until the clients contacted their insurance carriers that they realized their payments had not been received.

A $700K Theft

Texas insurance agent Joseph Allen Gaines was indicted June 24 in Swisher County in connection with the theft of $700,000 from one or more elderly clients, the Texas Department of Insurance (TDI) announced earlier this year.

Gaines was arrested in May by TDI investigators and the Lubbock Police Department after investigators discovered he was allegedly diverting annuity premiums for his personal use.

Details of the case weren’t available as Swisher Country legal documents are not yet available online, Swisher County authorities said.

TDI and police investigators were alerted to the alleged crime when the family of a 94-year-old women called the insurance company, which could find no record of the investment, the Lubbock Avalanche-Journal reported.

“We believe the Mr. Gaines had been a financial adviser for this woman’s family for decades,” said TDI Sgt. Steve Richardson, in a statement to the Avalanche-Journal. “He took advantage of her trust and encouraged her to invest in a fraudulent annuity.”

A Phantom Company Comes Back To Haunt

A 38-year-old Bradenton, Fla., insurance agent was arrested for allegedly stealing $224,600 designated toward the purchase of a Bankers Life annuity, the Florida Division of Insurance Fraud announced in January.

The agent, Timothy T. Rush, allegedly diverted four checks from his Port Charlotte, Fla., victim into the bank account of a phantom company he set up instead of sending the funds to the annuity company, Division of Insurance Fraud investigators also allege.

Rush had previously worked with his victim to secure Medicare Supplement insurance, after which he gained her trust and was able to perpetrate his alleged annuity scam.

A Linked In profile of insurance agent Tim Rush in Bradenton lists him as working as an insurance agent since 2009 and his previous work experience as the finance director and manager of auto dealerships.

Rush was arrested on Dec. 30, 2015.

An 'Especially Insidious' Case

A Houston insurance agent and former bank employee was sentenced to 20 years in prison for stealing more than $3 million from elderly clients in a multiyear annuity scam, authorities said.

The agent, Celia Castillo, accepted the prison term rather than face trial in a case that Texas Insurance Department authorities have called “especially insidious,” given the sums involved in the alleged scam which ensnared almost a dozen elderly clients.

Castillo did business as FTS Life Gibraltar out of the FTS Life Insurance Agency with offices in an around Dallas. She allegedly cheated at least three separate victims of sums ranging from $232,000 to more than $1 million, authorities also said.

TDI investigator Geneva Titus said Castillo would ingratiate herself with her clients and “really become part of their lives, carefully building relationships with each of these folks.”

“She would visit with them, give them rides, have dinner with them all with the goal of gaining their trust and eventually stealing their life savings,” Titus said in a news release.

One of the plaintiffs, Diane Crumley, with whom Castillo had done business for 25 years, lost more than $1 million after following Castillo’s instructions to write three separate checks in amounts ranging from 200,000 to $600,000 in 2006, 2008 and 2011, legal documents show.

When Crumley found discrepancies in the annuity contracts and brought them to Castillo’s attention, Castillo said she could document the purchases.

But when Crumley called the insurance companies to check, the insurers had no record of the annuities, according to the complaint.

In another case, Castillo bilked a Puerto Rican immigrant couple in their 70s of $390,000. This  only became apparent years after the initial purchase, when the victims received notice that dividend checks for the annuities were returned for insufficient funds.

Annuities issued by Sentinel, Dearborn and Athene were subsequently found to be fakes and that no such polices existed, court records show.

A third victim, 91-year-old Doris Leaman, paid as much as $232,000 for annuity contracts that were later found to be bogus, legal documents indicate.

Leaman befriended Castillo when Castillo was a bank employee, years before she became an insurance agent and went rogue and turned into a thief.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].