Judge sides with SEC in allowing disputed witnesses in Cutter case

A Massachusetts judge will allow the Securities and Exchange Commission to call five disputed witnesses in an upcoming trial over annuity sales by advisor Jeffrey Cutter.

Cutter had accused the SEC of trying to ambush his defense by adding five surprise witnesses and “entirely new theories of liability” just weeks before the April 14 trial date.

In March 2023, the SEC filed charges against Jeffrey Cutter and his advisory firm, Cutter Financial Group for "recommending that their advisory clients invest in insurance products that paid Cutter a substantial up-front commission without adequately disclosing Cutter's and CFG's financial incentive to sell the products."

Cutter is also a licensed insurance agent and the case attracted the attention of industry trade associations who oppose any fiduciary regulation of agent insurance product sales.

Judge Denise J. Casper did not find that Cutter "suffered unfair prejudice given the sequence of discovery, the timing of the supplement and the availability of the witnesses for depositions prior to trial."

Not so, SEC says

On Jan. 30, the SEC disclosed three potential witnesses "likely to have discoverable information," the Cutter memo reads. They are Janet Dover and Susan Walker, daughters of former and prospective clients; and Paul Prata, an SEC examiner who conducted examinations of Cutter Financial Group in 2019 and 2021.

In a Feb. 12 email, the SEC confirmed that it will call Dover and Walker at trial, and it disclosed two additional witnesses: John Hanson and Kim Webber, former Cutter clients.

In its response, the SEC noted that it never said it would not call Hanson or Webber, both of whom were listed on initial disclosures. Prata will be offered as a fact witness testifying to his "interactions with Cutter and his observations of Defendants’ disclosures and business practices," wrote Amy Harman Burkart, trial counsel for the SEC.

The daughters were not included on initial witness disclosures simply because they had not been identified at that point, she added.

"The SEC expects two Daughters will testify concerning the business practices they directly observed when they accompanied their parents to meetings with Defendant Cutter and particularly about Defendants’ failure to adequately disclose their economic incentives, which are the core allegations in the [complaint]," Harman Burkhart wrote.

Cutter failed to specify any "undue prejudice" from allowing the daughters to testify, she added, especially since the defendants had weeks to depose both.

Big commissions earned

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.

As of 2022, CFG claimed to manage approximately $215 million in client assets across 476 clients, court documents say, "most of whom were individual retail investors of retirement age."

In its memo, Cutter's attorneys say its experts include Ted Nickel, former Wisconsin insurance commissioner and ex-president of the National Association of Insurance Commissioners. He examined the financial situations of clients cited in the complaint, the annuities that Cutter sold them, and the paperwork that Cutter used to sell them the annuities, the memo explains.

"He opined, among other things, that each annuity purchased by Named Clients was suitable and that Mr. Cutter’s sales process was consistent with insurance industry standards," the memo says. "The SEC has not disclosed any expert to rebut Mr. Nickel’s opinions."

Likewise, defense attorneys retained Zawadi Lemayian, an MIT-trained economist. He examined the allegedly improper annuity replacements cited by the SEC and "opined, among other things, that at the time of the switch, Mr. Cutter could have reasonably expected that the replacement annuity would provide greater opportunity for growth (with no change in risk) and that the products ... performed consistently with that expectation."

Lemayian found that "Client G" made money on his annuity while "Client H" was financially better off with the fixed indexed annuity that Cutter sold her than if she had stayed with the variable annuity that she previously owned, the memo says.

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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.