Variable annuities get a bad rap for a reason: they're so often used to abuse seniors. Despite a big coordinated effort among regulators to stamp out such abuse in recent years, plenty of fraudsters still manage to fly under the radar. Take one recent case: On May 10, a FINRA arbitration panel ruled that Raymond James Financial Services must pay $1.7 million to an elderly Texan named Hershel Tyler and the estate of his deceased wife, Mildred Tyler, for its failure to supervise former independent contractor Paul Davis.
Davis allegedly sold the Tylers' $3.8 million portfolio, which was heavily invested in municipal bonds, replacing those investments with variable annuities and life insurance. He then began exchanging one annuity for another to rack up commissions. The funny thing is, though, Davis actually made an $800,000 profit for the Tylers with his investments at Raymond James, and the Tylers followed him to LPL when he moved in 2006.
Subsequent trading at LPL and “market forces” resulted in the losses that formed the basis of the Tylers' complaint, according to Raymond James. LPL settled with the Tylers before the arbitration took place. Raymond James plans to appeal, though successful appeals are rare.
The SEC charged UBS Financial Services last month with fraudulently rigging at least 100 municipal bond reinvestment transactions in 36 states and generating millions of ill-gotten dollars in the process. To settle the charges, UBS agreed to pay $42.7 million, which will go to the affected municipalities. UBS and its affiliates also agreed to pay $113 million to settle parallel cases brought by other federal and state authorities.
This is the SEC's second settlement with a major bank in an ongoing investigation into corruption in the municipal reinvestment industry. In December 2010, Banc of America Securities agreed to pay over $137 million to settle charges of securities fraud for similar misconduct.
Municipalities usually temporarily re-invest the proceeds of municipal bond sales before the money is used for the intended purposes. Under relevant IRS regulations, the proceeds must generally be invested at fair market value. The most common way of establishing fair market value is through a competitive bidding process carried out by bidding agents.
The SEC alleges that between 2000 and 2004, UBS undermined the competitive bidding process through misrepresentation and other practices. The business unit involved in the misconduct closed in 2008 and its employees are no longer with the company.