Lawyer: Annuity scams a local growth industry

South Florida Business Journal - July 29, 2005

Attorney John Hargrove is known best for representing the elderly, not those who prey on them.

That's why the Fort Lauderdale-based attorney with Chicago roots is spending so much time currently practicing in central Florida.

His latest case, a class action filed July 18 in Middle District Court in Orlando, targets AmerUs Life Insurance Co., a subsidiary of Des Moines, Iowa-based AmerUs Group (NYSE: AMH), on behalf of Dorothy L. Eddy and other Florida senior citizens. Many have lost their life savings in a scheme to manipulate citizens into purchasing equity-indexed annuities, Hargrove said.

Eddy, a Brevard County resident, and other seniors purchased equity-indexed annuities, believing the products would provide retirement income and other benefits. But in many cases, the maturity dates of the annuities were well beyond the seniors' life expectancies.

Fixed-rate - or equity-indexed - annuities are often pitched as better than variable annuities, which operate a lot like mutual funds in that most of the investment return and risk is passed on to the investor.

Fixed-rate annuities operate more like an account at a bank, paying a stated rate of interest. They pay a minimum rate and offer the potential for more interest, depending on the performance of an independent equity or bond index.

At the heart of the alleged scheme bilking Eddy out of her retirement money, according to court documents, are "key sociological demographics of the elderly show that they have a retirement next egg and they are vulnerable, making them susceptible to undue influence and deception." With annuities, the first dime of income is deferred for many years, but that isn't disclosed upfront to consumers, the lawsuit said.

Hargrove characterized such sales tactics as unscrupulous, and said this type of fraud is growing.

"This is a financial epidemic affecting the elderly. The scope would make your head spin. Sadly, the insurance company knows, in these cases, that this is happening. The application discloses age and the purchasers, and they are not training and supervising their agents in the process. The only approval process is if your check clears."

Hargrove said neither the SEC nor any other oversight body governs the abbreviated disclosure form signed by clients. While the Florida Department of Financial Services fields complaints for the industry - covering both agent and company activity - results often come too late for elderly victims.

The Eddy case is the second class-action lawsuit filed in Florida by Gordon Hargrove & James against a national annuity producer alleging wrongful annuity sales and marketing practices involving seniors. Hargrove has many more on his desk, waiting for consideration, he said.

"Eddy has $155,000 in premium invested," he said, adding that, while an amount has not been set, there is no limitation to damages that can be sought in court.

AmerUs, which was just added to the Russell 1000 index of public companies in July, declined comment for the story.

Hargrove, senior shareholder of Gordon Hargrove & James, said equity-indexed annuities tie up retirees' nest eggs for 10, 15 and, in some cases, 20 years, and carry high penalties and forfeitures for early withdrawal.

"There's a sliding scale of surrender charges starting the first year," said Barry Lanier, assistant chief of investigations for the Florida Department of Financial Services. "Any time you move before the maturity date, you get an assessment penalty. That eats into their wealth."

But free meals and free seminars easily draw lonely, unsuspecting seniors, whose own circle of friends and family has diminished, to annuity products, Hargrove said.

The target market for equity-indexed annuity sales, the complaint alleges, is Florida. Here, seniors, considered to be the economic engine of the state's economy, migrate to retire.

"We are starting to see cases in South Florida, but more in Largo and St. Petersburg," Lanier said. "The west coast is more blue collar. It's unconscionable what some of these people do."

The problem is so widespread that, in 2004, the state Legislature enacted Florida statute 627.4554, requiring insurers and insurance agents to determine suitability of annuity sales to senior consumers over 65 years of age.

Fern Wakulich, a senior citizen in Clearwater and a client of Hargrove's, found she had invested more than $129,000 in an annuity.

"After hearing the agent on a radio show, I sought help on how to invest my life savings," she said. "I told the agent I was on a fixed income, was collecting money from a prior annuity and did not want to invest in another one. I later found out that the agent signed me up for an annuity that would not mature until I was 92."