An NASD arbitration panel has ordered Salomon Smith Barney to pay $1.8 million to a former Shearson life insurance specialist who claimed Shearson pushed him to sell the policies of an affiliated insurance company while lying about its shaky financial condition.
The panel in its March 31 decision also sanctioned the firm for intentionally violating the discovery process during the arbitration, ordering Salomon Smith Barney to pay an additional $10,000.
William Weller says he lost all but a few of his 433 clients when First Capital Life went bankrupt in 1991. Shearson then owned 28% of the company's parent, First Capital Holdings.
"I had been told to sell only First Capital policies," says Weller. Shearson provided a strong incentive as well, Weller admits: Insurance salespeople earned 20% to 40% more on First Capital sales, branch managers earned 42% more.
Weller says he became one of the firm's top insurance producers, working out of its Las Vegas branch. There were about 180 life insurance specialists at the firm. They had their own books of strictly insurance clients and helped brokers with clients' insurance needs.
By late 1989, Weller grew worried as press reports questioned First Capital's financial condition.
"They were saying that First Capital had invested 40% of policyholder premiums in junk bonds. S&P's, Moody's and Duff & Phelps all gave it poor ratings and clients were asking me a lot of questions," says Weller. "I'd go to firm meetings and ask what we should be telling our nervous clients. The firm kept saying it was all media hype, that First Capital only had about 15% to 18% in junk bonds. They told us repeatedly that even if something were to go wrong, that they would back us up, they had deep pockets."
Weller said he checked out First Capital on his own with A.M. Best, but was told its largely positive report relied on information supplied by the insurer. "When clients said they didn't trust the A.M. Best report, I went back to Shearson for their opinion and reassured my clients they could believe the firm," says Weller.
But by early 1991, the junk bond market was in trouble and First Capital had to sell off assets to cover a surge in policyholder surrenders. With over $1 billion in policy surrenders, First Capital was forced to declare bankruptcy.
Leaving the firm in late 1991 with only four remaining clients, Weller became an independent insurance contractor for Insurcorp, a Las Vegas employee benefits firm. He says none of his former clients ever threatened to sue him for the First Capital problems.
Two years later, a former colleague told him the firm had again begun paying renewal commissions from First Capital sales. Life insurance specialists like Weller had contracts that provided for payments to continue after leaving the firm. Weller says he repeatedly called the Shearson branch manager and national insurance director about his commissions, but was "stonewalled."
Weller filed his claim in late 1994 to recover the commissions, allegedly totaling nearly $40,000. It took Shearson, now merged with Smith Barney, close to six months to respond, he claims.
"It took a year and a half for the firm to respond to our first discovery request of my personnel file," says Weller. Under NASDR rules, parties must respond to discovery requests within 30 days.
"There was a clear pattern of withheld evidence," says Weller's attorney, Keith Galliher. "The panel warned them three times."
The panel only sanctioned Salomon Smith Barney near the end of the hearing when a Salomon Smith Barney witness made reference in his testimony to a report that Galliher had requested during discovery and never received. In its award, the panel chided Salomon Smith Barney for "intentional violation of discovery."
Regarding the rest of the award, the panel gave no explanation of its decision other than to say the $1.8 million was "in satisfaction of claimant's claims."
Galliher says the panel clearly recognized one of Weller's claims: Intentional misrepresentation about First Capital Life's financial condition. "The most compelling evidence was Shearson's own internal records that we got from a Los Angeles bankruptcy court proceeding that showed Shearson knew intimately First Capital's financial condition," Galliher says.
The document included the firm's fixed-income analysts declaring the insurer's bond holdings as "scary," says Weller. "Shearson said in it that the company probably would fail."
Neither Galliher nor Weller would disclose further details of the Shearson document, saying a court order allowed them to use it only during the arbitration.
A Salomon Smith Barney spokesperson says: "We want to make it clear that this case involved a predecessor firm and happened a long time ago. ... We disagree with the decision."
The spokesperson initially said the firm wouldn't seek to vacate the decision, news that also was reportedly passed along to Smith Barney's Las Vegas branch. But the spokesperson later claimed the firm hadn't made a decision on whether to appeal, saying, "We are evaluating all of our options."