Class-Action Suit Targets Security Benefit’s Proprietary Index

Three consumers filed a class-action lawsuit alleging that Security Benefit Life Insurance Co. defrauded consumers by implementing a “fraudulent scheme” involving a proprietary index used in two fixed indexed annuities.

The plaintiffs, from Illinois, Arizona and California, where the suit was filed Oct. 16, claim the company misrepresented returns.

“Security Benefit’s fraudulent scheme included the development and marketing of a series of misleading and deceptive annuity products purporting to provide above-market returns through purported ‘uncapped’ 100% participation in the gains in certain ‘proprietary’ indexes artificially engineered specifically for use in these new annuity products,” the lawsuit reads.

Michael T. Castino, director of public relations for Security Benefit, sent InsuranceNewsNet a brief statement: “SBLIC believes that it has substantial defenses to the claims alleged and intends to vigorously defend itself in the action.”

The insurer has not yet been served with the complaint, the statement said.

Critics and regulators have been targeting proprietary indexes, saying they overstate performance in illustrations used to sell indexed annuities.

Two FIAs Targeted

The lawsuit targets two of Security Benefit’s FIAs, the Total Value and Secure Income annuities, both of which offer the Annuity Linked Trader Vic Index (ALTVI), which is based on commodities and currencies futures along with a volatility control. The index is offered as an option along with traditional indexes such as S&P 500.

“The ALTVI is among many proprietary indices created by indexed annuity sellers to help market more attractive-looking products during a low interest-rate environment," said Sheryl Moore, president and CEO of Moore Market Intelligence.

Generally, annuities are marketed with a cap or participation rate that leaves owners with less than 100% of the market gains. In exchange, the client is protected against market losses.

The plaintiffs say Security Benefit marketed its TVA products as “uncapped” and with a “100% participation” rate.

“Using uniformly misleading marketing materials and illustrations to implement the scheme, Security Benefit deceptively illustrated the performance of the Synthetic Indices as capable of producing double-digit returns to the purchasers of a Secure Income or Total Value Annuity,” the lawsuit reads.

Plaintiffs assert claims for violations of California’s Unfair Competition Law, violations of Illinois’ Consumer Fraud and Deceptive Business Practices Act, and common law fraud under the laws of California and Illinois.

Another lawsuit that was dismissed this summer claimed the company’s use of the proprietary index amounted to racketeering.

In July, a Kansas District Court judge dismissed a similar lawsuit brought by Albert Ogles. According to the lawsuit, Ogles purchased a TVA in Alabama in July 2012 for approximately $145,000 and allocated 100% of his funds to the ALTVI.

Ogles earned zero interest after five years. Although Ogles acknowledged he did not lose money, he claimed the product was misrepresented. Judge Holly Teeter ruled that Ogles failed to offer enough evidence that the annuity he bought was fraudulently designed.

Racketeering Claims

The Ogles lawsuit made racketeering claims against Guggenheim Partners, which purchased Security Benefit in 2010. His lawsuit claimed the company defrauded investors with risky annuities, and siphoned off cash for various purposes, including to help its billionaire chief executive Mark Walter buy the Los Angeles Dodgers.

The new lawsuit seeks a class action certification, which would open it to all affected customers who come forward. The suit asks for restitution and punitive relief on behalf of class members and asks the judge to enjoin Security Benefit from “misrepresenting or concealing the expected performance of the Synthetic Indices.”

The defendants are Howard Rosen of California, Terri L. Stauffer-Schmidt of Arizona and Michael A. Webber of Illinois. The lead attorney in the case, Manfred P. Muecke, of Bonnett Fairbourn Freidman & Balint, a Phoenix-based law firm, did not return phone and email messages seeking comment.

Proprietary indexes have been drawing attention from regulators and consumer groups. A National Association of Insurance Commissioners’ working group is trying to tighten up regulation of indexes based on components that haven’t been in existence for long enough to have a history.

“There are over 100 different indices being used to offer indexed interest on annuities today,” Moore said. The new lawsuit could be a “warning to other product manufacturers,” she added, because it mentions issues that are salient to many of those in the indexed insurance space.

As for Security Benefit, “when it comes to marketing indexed annuities,” Moore said, “they are not any better or worse than anyone else in this industry.

“However, they were one of the first to offer this type of index, it is limited in its distribution, and the product doesn’t credit interest until the end of five years. If the index is down, that means clients are getting no gain, which is a hard pill for many to swallow if not diversified in their allocation.”

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.