Beware Variable Annuities - Cases in the News

This page will highlight some of the cases of variable annuity abuse in the news:

Retiree who bought variable annnuity in IRA granted recovery of losses, costs and attorneys' fees.

BellSouth retiree Gwen Sims was convinced by a financial planner who conducted a  retirement planning class she attended  at a local university to invest her pension assets in a variable annuity. Partners  Brian Smiley and Steve Gard convinced a  panel of NASD arbitrators to grant her an award of her losses , plus attorneys' fees and costs. Evidence in the case established  that the investment was unsuitable for a retiree's rollover IRA. It was also established that  the insurance company which issued the variable annuity was the parent of both the broker-dealer firm which sold it as well as the company which conducted the seminar .The seminar course book was notable for  its subtle  effort to paint variable annuities in the most favorable light, while largely overlooking their many flaws such as high costs and commissions and likelihood of losing money in declining markets.

Ms. Sims’ victory in the case  and the perils of purchasing variable annuities in retirement accounts were the subject of an article in the Communications Workers of America magazine, CWA News, May 2005, " CWA Retiree's Investment Nightmare; A Cautionary Tale for Retirees Taking Lump Sum Pensions."

Citizens Bank settles annuity case

Elderly customers to receive refund; bank to pay $3m fine

By Andrew Caffrey,  Boston Globe Staff  |  July 23, 2005

Citizens Financial Group agreed to offer refunds to all its elderly customers who bought variable annuities in the last two years, becoming the second financial firm in two weeks to concede to Massachusetts regulators that such investments may not have been appropriate to sell to senior citizens.

The settlement goes beyond the one that Secretary of State William F. Galvin struck with Bank of America Corp. July 14: In addition to offering the refund, without penalty, to customers who were 75 or older when they bought a variable annuity in 2003 and 2004, Citizens' securities brokerage also agreed to pay a $3 million fine and admitted to Galvin's findings that it engaged in ''unethical or dishonest conduct."

''It's an acknowledgment on the part of the bank that there was wrongdoing and that it was deliberate," Galvin said.

Citizens chief executive Lawrence K. Fish said in a short statement yesterday, ''On behalf of the company, I regret mistakes made by our broker dealer. I want to assure our customers, particularly senior citizens, that we have taken prompt and corrective action."

As part of that action, Galvin said at least several employees involved in the variable annuities matter have left Citizens. The company refused to comment. But Citizens did agree to adopt restrictions on the sale of variable annuities to elderly customers and to have an independent consultant review its sales practices.

Providence-based Citizens Financial Group, the parent of Citizens Bank, is owned by Royal Bank of Scotland Group PLC, of Edinburgh.

Variable annuities are insurance products that provide investors with regular income payments, but the value of the underlying account can rise and fall depending on where the money is invested, such as in mutual funds.

Because of the risk of losing money and steep fees for early withdrawal, Galvin and other critics contend variable annuities are unsuitable for many elderly investors, who may have sudden needs to tap into savings. And unlike certificates of deposit, for example, variable annuities are not insured by the government.

The insurance products garner high fees to those who sell them. And Citizens, Galvin said, made a concerted effort to sell variable annuities to the elderly. Bank personnel would stage ''cold-calling" sessions in which they would try to persuade customers to switch money out of CDs, for example, and employees would sometimes ignore company policies about checking whether the investments were suitable for older investors, Galvin said.

Top-selling investment consultants were eligible for company-paid trips to the Caribbean. Sales personnel from insurance companies would lavish Citizens' investment personnel with choice tickets for concerts and sporting events, and trips to casinos and golf clubs.

''There were some very egregious cases here," said Galvin. ''We found a pattern of Citizens deliberately targeting elderly customers. In this case the bank that [those customers] thought was on their side, wasn't."

The extravagant entertainment echoes the federal investigation of mutual fund giant Fidelity Investments, in which authorities are trying to determine whether traders steered business to brokers who provided them with the best goodies and not the best deals on stocks. The Securities and Exchange Commission also is conducting an investigation of Citizens over the sale of variable annuities.

Galvin said Citizens' standing in his investigation was weakened in recent weeks, first, after Bank of America struck its settlement, and secondly after Citizens admitted it could not produce certain employee e-mails he had subpoenaed.

As in the Bank of America deal, Citizens' customers will have six months to decide whether to get their money back. Citizens has also established a toll-free number for eligible customers to call for more information: 866-977-1212.

The refund is available to eligible customers anywhere, not just those who live in the 13 states in which Citizens has local branches. Galvin estimated there are about 700 such eligible customers in Massachusetts. Citizens declined to estimate the total number of eligible customers. It also declined to say how much money was involved in such accounts.