Court fines Cutter Financial $100,000, requires client notice of guilty verdict

A Massachusetts judge fined Jeffrey Cutter $50,000 and Cutter Financial Group $100,000 today for an Advisors Act violation involving the sale of fixed indexed annuities.

On April 23, a Massachusetts jury determined that Cutter and CFG violated Section 206(2) of the Investment Advisers Act of 1940. Section 206(2) bars advisors from engaging “in any transaction, practice or course of business which operates as a fraud or deceit upon any client or prospective client.”

Judge Denise J. Casper struck a balance with the fine amount. Cutter suggested a fine not to exceed $11,941 in total, while the Securities and Exchange Commission requested a $1 million fine.

Casper sided with the SEC on the second part of the civil penalty: a five-year injunction requiring CFG to provide every client with a copy of the April verdict.

Cutter and CFG could not be reached for immediate comment on the civil penalty.

One month after the split verdict, Cutter filed an appeal asking the judge to overturn the guilty verdict or give him a new trial. His legal team included a 41-page memorandum.

“Based on all the evidence presented to the jury, there is no legally sufficient basis for the jury to have found that Defendants acted negligently in their conflict-of-interest disclosures relating to selling FIAs,” the memo reads.

Casper denied the request in a late-December ruling. On Wednesday, the judge convened a hearing on the SEC's request for civil penalties.

Wearing different hats

The SEC’s case against Cutter has been closely watched in an industry that hopes to attract more old-school advisory firms to the annuity market. Cutter is both an advisor and a licensed insurance agent, and the SEC claims he was wearing the wrong hat for many annuity sales.

According to the SEC complaint, Cutter earned 7-8% commissions on annuity sales as an agent, compared to 1.5-2% fees while managing assets as a fiduciary advisor. Starting in 2014, Cutter generated more than  $9.3 million in commissions from the sale of 580 annuities to his investment advisory clients, the SEC said.

The jury found Cutter and CFG not guilty of any violations of Section 206(1) of the Investment Advisers Act.

The SEC had asked the judge for penalties of $300,000 against Cutter and $700,000 against CFG. The agency could not comment on the penalty handed down by Casper.

Due to "a lapse in appropriations," the SEC is operating in accordance with the agency's plan for operating during a shutdown, a spokesman for the agency said, and is only able to respond to limited inquiries from the press.

Casper gave the SEC until Feb. 9 to file a proposed judgment with the civil penalties announced Monday.

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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.