Security Benefit’s Index A ‘Fraudulent Scheme,’ Lawsuit Says

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

The lawsuit was filed last week in the U.S. District Court for the Southern District of Florida. Three of the plaintiffs were part of a class-action lawsuit filed Oct. 16 in California, then withdrawn a few weeks later.

The allegations remain the same: plaintiffs say Security Benefit manipulated clients to invest most of their fixed indexed annuity account values in the company's synthetic index, which performed far worse than portrayed.

"Security Benefit’s aggressive tactics and misleading sales scheme yielded immediate financial rewards for Security Benefit and its parent, Guggenheim Partners," the lawsuit reads.

What is new in the Florida class-action are charges of racketeering and violations of the federal Racketeer Influenced Corrupt Organizations Act. Nine plaintiffs from five states -- Florida, California, Illinois, Arizona and Nevada -- are listed in the lawsuit.

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.”

Misleading Returns Alleged

The lawsuit targets two of Security Benefit’s FIAs, the Total Value and Secure Income annuities, both of which were offered with proprietary indices that the company advertised as "capable of producing double-digit returns," the lawsuit alleged.

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.

"Once consumers purchased the annuities, they were locked into them by onerous surrender penalties, by bonus claw-back provisions, and by the very structure of the Synthetic Indices themselves, which were designed to credit interest only at the end of fixed periods ranging from two to five years," the lawsuit reads.

Plaintiffs assert claims for violations of respective unfair competition, consumer fraud, and/or deceptive business practices acts in California, Illinois, Arizona, and Nevada, and common law fraud under the laws of Florida, California, Illinois, Arizona, and Nevada.

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.

The plaintiffs in the new class action are Howard Rosen of California; Terri L. Stauffer-Schmidt of Arizona; and Michael A. Webber of Illinois, who comprised the October lawsuit. Joining them are Ella Clinton and William Carrick, both of Florida; Donald P. Cox and Martha E. Miller Cox of Arizona; Wai Hee Yuen of Arizona; and Jean P. Wright of Nevada.

Regulators Concerned

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.

Attorneys for the Florida plaintiffs allege that Security Benefit was able to perpetuate "a virtual shell game of misleading illustrations depicting unattainable future returns based on backcast modeling," the lawsuit reads.

The NAIC IUL Illustration subgroup is holding another conference call Tuesday afternoon to continue work on what it perceives to be misleading illustrations.

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.