Secretary of the Commonwealth of Massachusetts William Galvin has filed charges against LPL Financial (LPLA) for its alleged failure to supervise one of its brokers. Roger Zullo is accused of bilking clients for years by selling variable annuities to retirees even though the investments were not suitable for them.
In his complaint, Galvin contends that Zullo lied to supervisors and generated false client financial suitability profiles so he could sell scores of high-commission, illiquid VAs to make money for himself and the firm. Because of these investments, said the state regulator, many older clients were unable to access their funds for years.
The complaint notes that for three years, Zullo and LPL received over $1.8M in VA commissions from sales. The Polarius Platinum III (B Shares) VA appeared to be the source of a large chunk of the commissions. Galvin said that of the more than $1.8M in VA annuity commissions that Zullo was able to generate, over $1.7M of it came from this particular variable annuity, which paid a 7% commission. 90% of this went to Zullo, while his firm received the rest. Also, clients whom Zullo could convince to move to the Polaris Platinum variable annuity usually had to pay surrender charges.
According to Galvin’s complaint, in 2014 Zullo’s supervisor asked about why the broker appeared to switch people out of their VAs every several years, which allowed him to receive commissions a number of times from these clients. This same supervisor purportedly told firm managers and others that he felt that Zullo’s business was problematic. However, LPL allegedly continued to disregard such red flags.
In another example cited, Zullo sold an elderly client a variable annuity that paid her what became her main source of income. Seven years later, when the client, now in her eighties and was suffering from cognitive impairment, Zullo told her to meet him at a subway station where he had her sign paperwork. The documents authorized an investment move to a new VA that came with a seven-year surrender schedule. Galvin believes that not only was the move to the new VA “unnecessary, unsuitable, and unwanted,” but also it cost the elderly investor nearly $1400 in surrender charges and prevented her from being able to use the income she’d depended on to cover her basic living expenses.
The state contends that despite knowing that the woman depended on the previous VA for income, Zullo proceeded to move her to the same VA that he had sold to his other clients—a variable annuity that did not provide income for at least two years—generating money from him and LPL.
Meantime, on the client’s annuity application paperwork, Zullo misrepresented her to be 10 years younger than her actual age and lied that her liquid net worth was 10 times greater than what it was in reality. Galvin contends that rather than seeking to make the client whole and investigate Zullo after the misrepresentations were brought to LPL’s attention, the firm denied the complaint. Instead, it claimed, purportedly without due diligence, that it was the client who had falsely indicated her liquid net worth as greater than $1 million.
The Massachusetts regulator claims that even though the broker-dealer was given “countless chance” to investigate or correct Zullo’s actions involving his VA sales, LPL Financial “repeatedly failed” to act and disregarded Zullo’s fraudulent activities.
LPL Accused Multiple Times of Supervisory Violations
This is not the first time Galvin has gone after LPL for alleged supervisory violations. A few years ago, LPL agreed to pay $2M in restitution in $500K in fines to settle allegations that the brokerage firm had failed to supervise registered representatives who sold nontraded REITs. Galvin said this violated not just the company’s rules but also Massachusetts limits regarding real estate investment trusts.
Last year, LPL agreed to settle for $1.4M allegations by Galvin and other state securities regulators accusing the broker-dealer of not putting in place a supervisory system that was adequate enough to oversee the sale of non-traded real estate investment trusts and not enforcing written procedures related to the securities’ sales.
Like variable annuities, nontraded REITs tend to generate high commissions for the brokers who sell them. Because brokers and their clients must fill out a lot of paperwork for the sale of nontraded REITs and VAs to go through, there are those in the industry who worry that this makes mistakes easier and oversight harder.
Elder Financial Fraud
At Shepherd Smith Edwards and Kantas, LTD LLP, our variable annuities fraud lawyers and nontraded REIT fraud attorneys help investors in trying to recover their losses. Contact our elder financial fraud law firm today. We represent older investors and their families throughout the US.